PHYSICAL REAL ASSETS VS' FINANCIAL ASSETS

1
PHYSICAL (REAL) ASSETS VS. FINANCIAL ASSETS

• Divisibilityfinancial assets generally have
  greater divisibility than real assets
• Marketability (Liquidity)financial assets
  generally are more marketable than real assets
• Holding Periodholding periods vary for both type
  of assets some financial assets have no specific
  maturity, but they do not have to be held forever
• Information Availabilityin many cases,
  information concerning financial assets is more
  readily available than for real assets

2
FINANCIAL MARKETS AND THE ECONOMY

• Consumption timingmarkets permit income to be
  transferred from one period to another
• Allocation of riskdiversification
• Separation of Ownership and Managementfunds
  providers generally do not run firms

3
MARKETS AND MARKET STRUCTURE

• Direct search marketsno agent, or middleman
• Brokered marketsbrokers, or agents, offer
  services to help search for buyers and sellers
• Dealer marketsdealers buy and sell for their own
  accounts dealers make markets in assets
• Auction marketsbuyers and sellers get together
  at specific locations to bid on assets prices
  are set by an auction process
• Call marketstrades are carried out
  sequentially--traders must wait until it is time
  for the security to be traded not continuous
  trading

4
TRENDS

• Globalization
• Securitizationinvestments (pass-through
  securities) are backed by pools of assets, such
  as mortgages, or collateral, such as automobiles
• Financial Engineeringbundling and
  unbundlingtrading security traits
• TechnologyElectronic Commerce Networks
  (ECNs)electronic markets

5
INVESTMENT VEHICLES

• Money Marketshort term
• T-billsdiscounted security
• Certificates of Deposit
• Bankers Acceptances
• Eurodollars
• Repurchase Agreements
• Federal Funds
• London Interbank Offered Rate

6
INVESTMENT VEHICLES

• Capital Marketslong term
• Debt/Bonds
• T-Notes and Bonds
• Federal Agency Debt
• International BondsEurbonds
• Municipal Bonds
• Corporate Bonds

7
Bond Characteristics

• coupon - annual interest stated as a percent of
  par
• par, face, maturity, principal - the amount
  repaid by the borrower at maturity
• indenture - debt contract
• provisions
• call provision - issuer can recall the bond prior
  to maturity
• conversion feature - investor can convert the
  debt into equity
• covenants - restrictions imposed by the indenture

8
Equity/Stock

• types of equity
• preferred stock - dividend generally is fixed
  nonvoting
• common stock - variable dividend generally
  voting stock
• classes of common - voting, nonvoting, founders'
  shares, etc.

9
Equity/Stock Characteristics

• dividends
• declaration date - date dividend is declared date
  of record - date the corporate record books are
  opened
• ex-dividend date - when the stock begins to sell
  without the right to receive the dividend
• cumulative preferred - dividends in arrears
  accumulate capital gains - change in value of an
  asset
• voting
• preemptive right
• proxy

10
Derivatives

• options - provide the investor with a choice
  (option) whether to behave in a particular manner
  (buy or sell), given certain predetermined
  conditions
• convertibles - financial assets that can be
  converted into other financial assets, such as
  equity
• futures - contract for future delivery of an item
• swaps - agreement to exchange cash flows
  associated with assets that have identical
  principals