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Investment Alternatives

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					            Cleary / Jones
      Investments: Analysis and
            Management




    CHAPTER TWO

Investment Alternatives
         Learning Objectives

   To describe the major types of financial
    assets and how they are organized
   To explain what non-marketable financial
    assets are
   To describe the important features of
    money market and capital market
    securities
       Learning Objectives

   To distinguish between preferred stock
    and common stock
   To understand the basics of options and
    futures
    Non-Marketable Financial
            Assets
   Examples: Savings accounts, Canada Savings
    Bonds (CSBs), Guaranteed Investment
    Certificates (GICs)

   Commonly owned by individuals

   Represent direct exchange of claims between
    issuer and investor

   Usually “safe” investments which are easy to
    convert to cash without loss of value
    Money Market Securities
   Examples: Treasury bills, commercial paper,
    Eurodollars, repurchase agreement, banker’s
    acceptance (B/A)

   Marketable: claims are negotiable or saleable
    in the marketplace

   Short-term, liquid, relatively low risk debt
    instruments

   Issued by governments and private firms
    Fixed-Income Securities

 Marketable debt with maturity greater
  than one year
 More risky than money market
  securities
 Fixed-income securities have a specified
  payment schedule
    – Dates and amount of interest and principal
      payments known in advance
    Fixed-Income Securities

   Major bond types:
    – Government of Canada bonds
    – U.S. Treasury bonds
    – Provincial bonds
    – Provincially-guaranteed bonds - Ontario
      Hydro
    – U.S. federal agency securities - GNMAs
      (Ginnie Maes), FNMAs (Fannie Maes)
    Fixed-Income Securities

   Major bond types (continued):
    – Corporate bonds
        Usually pay semi-annual interest, are
         callable, carry a sinking fund provision,
         and have a par value of $1,000
        Convertible bonds may be exchanged for
         another asset
        Risk that issuer may default on payments

    – Securitized assets: Mortgage-backed
            Equity Securities
 Represent an ownership interest
 Preferred stockholders paid after
  bondholders but before common
  stockholders
    – Dividend known, fixed in advance
    – May be cumulative if dividend omitted
   Common stockholders are residual
    claimants on income and assets
    – Voting rights important
      Derivative Securities

   Securities whose value is derived from
    some underlying security
   Futures and options contracts are
    standardized and performance is
    guaranteed by a third party
    – Risk management tools

   Warrants are options issued by firms
                Options

 Exchange-traded options are created by
  investors, not corporations
 Call (Put): Buyer has the right but not
  the obligation to purchase (sell) a fixed
  quantity from (to) the seller at a fixed
  price before a certain date
    – Options can be sold in the market at a
      price
   Increases return possibilities
                Futures

   Futures contract: A standardized
    agreement between a buyer and seller
    to make future delivery of a fixed asset
    at a fixed price
    – A “good faith deposit,” called margin, is
      required of both the buyer and seller to
      reduce default risk
    – Used to hedge the risk of price changes

				
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