Chapter 3 DIRECT INVESTMENT ALTERNATIVES

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Chapter 3DIRECT INVESTMENT ALTERNATIVES

• What are money market instruments?
• What are bonds and other long-term fixed income
  securities?
• Why invest in common stocks?
• What are derivative securities?
• How is investing in real assets different from
  investments in paper assets?

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Categorizing investment alternatives

• Major categories of investments
• Direct versus indirect
• financial assets
• real assets
• The composition of household assets in the U.S.

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Figure 3.1Contemporary Investment Alternatives
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Money market instruments

• Characteristics
• Short maturity (one year or less)
• High quality
• Large denominations
• Discount securities
• Short term U.S. government securities
• Treasury bills

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T-bill prices

• Bank discount yield
• Bond equivalent yield
• Short-term federal agency securities
• Commercial paper
• Maturity
• Dealer versus direct placed paper

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Bankers acceptances

• Large certificates of deposit
• Repurchase agreements
• Short-term municipals
• Taxable equivalent yield
• Foreign money market instruments
• Eurodollars and Euro CDs
• LIBOR

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Long-term fixed income securities (bonds)

• Investment characteristics
• Interest bearing instruments
• Varying quality (credit and default risk)
• Callable
• Government bonds
• T-notes and T-bonds
• Inflation indexed securities

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Federal agency securities

• Municipal bonds
• General obligation bonds
• Revenue bonds
• Serial versus term bonds
• Corporate debt issues

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Bond ratings

• Collateral provisions
• Mortgage pass-through securities
• Foreign bonds
• Preferred stock

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Common stock

• Why invest in stock
• Price appreciation versus income
• Relationship between stock prices and earnings

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Figure 3.2 The Long-Term Relationship Between
Stock Prices and Earnings for Johnson Johnson
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Rights of shareholders

• Voting rights
• Preemptive rights
• Foreign stocks
• Direct ownership
• ADRs

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Derivative securities

• What is a derivative security
• Stock options
• Calls
• Puts
• Leaps

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Derivative securities

• Corporate created derivatives
• Convertibles
• Warrants
• Futures contracts

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Real assets

• Characteristics of real asset investments
• Real estate
• Precious metals, gems, collectibles