Financial Instruments - PowerPoint PPT Presentation

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Financial Instruments

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Bank accepts responsibility for payment. Eurodollars ... Dow Jones Industrial Average (30 Stocks) Standard & Poor's 500 Composite. NASDAQ Composite ... – PowerPoint PPT presentation

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Title: Financial Instruments


1
Chapter 2
  • Financial Instruments

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
  • Derivatives

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
T- Bill Pricing From dealer point of view Ask
Selling price Bid -- Purchase price
7
Certificate of Deposit Fixed term
8
Commercial paper Unsecured debt Backed by
line of credit
9
Bankers acceptance Post dated check
Bank accepts responsibility for payment
10
Eurodollars Dollar denominated deposits at
foreign banks No Fed regulations
11
Repos Short term overnight borrowing Investor
buys securities and then sells back at higher
price price difference is interest
12
Reverse Repo Dealer buys securities and then
sells back at a higher price
13
Fed Funds Overnight loans of reserves between
banks
14
Bond Markets
  • US Treasury Bonds and Notes
  • Agency Issues (Fed Gov)
  • International Bonds
  • Municipal Bonds
  • Corporate Bonds
  • Mortgage-Backed Securities

15
Treasury Notes / Bonds Notes 10 yearsBonds
10 30 years
16
Treasury Notes / Bonds 1,000
denominationsSemi-annual coupon payments
Coupon payment is interest Based value
coupon rate .5
17
Federal Agency Debt Fannie Mae Federal
National Mortgage Association Ginnie Mae
Government national mortgage association
18
Federal Agency Debt Freddie Mac Federal Home
Loan Mortgage Corporation Implicit government
guarantee Lower risk Lower interest
19
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)

20
Capital Market - Equity
  • Common stock
  • Residual claim
  • Limited liability
  • Preferred stock
  • Fixed dividends - limited
  • Priority over common
  • Tax treatment

21
Stock Market Indexes
  • Uses
  • 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?

22
Examples of Indexes - Domestic
  • Dow Jones Industrial Average (30 Stocks)
  • Standard Poors 500 Composite
  • NASDAQ Composite
  • NYSE Composite
  • Wilshire 5000

23
Bond Indexes
  • Lehman Brothers
  • Merrill Lynch
  • Salomon Brothers
  • Specialized Indexes
  • Merrill Lynch Mortgage

24
Construction of Indexes
  • How are stocks weighted?
  • Price weighted (DJIA)
  • Market-value weighted (SP500, NASDAQ)
  • Equally weighted (Value Line Index)
  • How returns are averaged?
  • Arithmetic (DJIA and SP500)
  • Geometric (Value Line Index)

25
Stock Indices
26
Stock Indices
27
Stock Indices
28
Stock Indices
29
Stock Indices
30
Stock Indices
31
Value Index
32
Value Index
33
Equally Weighted Index
34
Averaging Methods
  • Component Return
  • A10 B (-5) C 20
  • Arithmetic Average
  • .10 (-.05) .2 / 3 8.33
  • Geometric Average
  • (1.1) (.95) (1.2)1/3 - 1 7.84

35
Construction of Indexes
  • How returns are averaged?
  • Arithmetic (DJIA and SP500)
  • Geometric (Value Line Index)

36
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

37

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