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Financial Instruments

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Presentation on theme: "Financial Instruments"— Presentation transcript:

1 Financial Instruments
Chapter 2

2 Major Types of Securities
Debt Money market instruments Bonds Common stock Preferred stock Derivative securities

3 Markets and Instruments
Money Market Debt Instruments Derivatives Capital Market Bonds Equity

4 Money Market Instruments
Treasury bills Certificates of deposit Commercial Paper Bankers Acceptances Eurodollars

5 Money Market Instruments (Cont.)
Repurchase Agreements (RPs) and Reverse RPs Federal Funds Brokers’ Calls LIBOR Market

6 Bond Markets US Treasury Bonds and Notes Agency Issues (Fed Gov)
International Bonds Municipal Bonds Corporate Bonds Mortgage-Backed Securities

7 Municipal Bond Yields Interest income on most municipals is not subject to tax To compare the yields on municipals to other bonds use equivalent taxable yield (municipal return) / (1 – tax rate) Or solve for the tax rate that equates the two yields Tax rate = 1 – (municipal rate/taxable rate)

8 Capital Market - Equity
Common stock Residual claim Limited liability Preferred stock Fixed dividends - limited Priority over common Tax treatment

9 Stock Market Indexes Uses Factors in constructing or using an Index
Track average returns Comparing performance of managers Base of derivatives Factors in constructing or using an Index Representative? Broad or narrow? How is it constructed?

10 Examples of Indexes - Domestic
Dow Jones Industrial Average (30 Stocks) Standard & Poor’s 500 Composite NASDAQ Composite NYSE Composite Wilshire 5000

11 Examples of Indexes - International
Nikkei 225 & Nikkei 300 FTSE (Financial Times of London) Dax Region and Country Indexes EAFE Far East United Kingdom

12 Bond Indexes Lehman Brothers Merrill Lynch Salomon Brothers
Specialized Indexes Merrill Lynch Mortgage

13 Construction of Indexes
How are stocks weighted? Price weighted (DJIA) Market-value weighted (S&P500, NASDAQ) Equally weighted (Value Line Index) How returns are averaged? Arithmetic (DJIA and S&P500) Geometric (Value Line Index)

14 Averaging Methods Component Return A=10% B= (-5%) C = 20%
Arithmetic Average [.10 + (-.05) + .2] / 3 = 8.33% Geometric Average [(1.1) (.95) (1.2)]1/3 - 1 = 7.84%

15 Derivatives Securities
Options Basic Positions Call (Buy) Put (Sell) Terms Exercise Price Expiration Date Assets Futures Basic Positions Long (Buy) Short (Sell) Terms Delivery Date Assets


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