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b2

VIEWS: 7 PAGES: 30

									Chapter 2
Markets and
Instruments




 Slide 2-1
                Chapter Summary

 Objective: To introduce the features of
  various security types, necessary for the
  understanding of the coming material

           Money markets and how yields are measured
           Fixed Income
           Stocks and Indexes
           Derivative Securities


Slide 2-2
            Major Classes of Financial
              Assets or Securities

 Debt
           Money market instruments
           Bonds
 Common stock
 Preferred stock (“fixed-income stock”)
 Derivative securities



Slide 2-3
                    Markets and
                    Instruments

 Money Market (short-term, liquid,
  marketable, low-risk)
           Debt Instruments
           Derivatives
 Capital Market (longer-term, riskier)
           Bonds (fixed-income)
           Equity (stocks)
           Derivatives


Slide 2-4
               Summary Reminder

 Objective: To introduce the features of
  various security types, necessary for the
  understanding of the coming material

           Money markets and how yields are measured
           Fixed Income
           Stocks and Indexes
           Derivative Securities


Slide 2-5
            Money Market
             Instruments

 Treasury bills (3, 6, 12 months)
 Certificates of Deposit (U.S.) and Bearer
  Deposit Notes (BDNs) – for amounts larger
  than $100k can be traded
 Commercial Paper (firms)
 Bankers Acceptances (“postdated cheque”)
 Euro (Can) dollars ($US –Can- deposits
  outside the U.S.)
 Repurchase Agreements (REPOs) and
  Reverse REPOs – overnight borrowing by
  dealers (backed by Gov securities).
Slide 2-6
                  Money Market
                Instrument Yields

 Yields on Money Market Instruments are
  not always directly comparable
 Factors influencing yields
           Par value vs. investment value
           360 vs. 365 days assumed in a year (366
            leap year)
           Bond equivalent yield


Slide 2-7
            Bond Equivalent Yield

                       1,000  P 365
            rBE Y              
                           P      n
   P = price of the T-bill
   n = number of days to maturity
   Example: Using Sample T-Bill
                       1, 000  980 365
              rBEY                
                            980      90
 rBEY = .0204 x 4.0556 = .0828 = 8.28%
Slide 2-8
            Effective Annual Yield

 90-day holding period
  return=20/980=2.04%
 Effective annual yield (compound
  interest): (1.0204)4-1=8.416%
 B.E.Y. – no compounding!




Slide 2-9
             Bank Discount Rate (T-
                   Bills)-U.S.
                      1,000  P       360
             rBD                   
                        1,000            n
      rBD            = bank discount rate
      P              = market price of the T-bill
      n              = number of days to maturity
  Example
      90-day T-bill, P = $980
                     1,000  980 360
             rBD                    8%
                        1,000     90
Slide 2-10
              Bond Equivalent Yield


 Impossible to compare T-bill directly to
  bond
            360 vs 365 days
            Return is figured on par vs. price paid
 Adjust the bank discount rate to make it
  comparable


Slide 2-11
              Equivalence of yields

 US T-bills are quoted in bank discount
  yields
 Canadian T-bills are quoted in bond
  equivalent yields
                                 365  rBD
 Equivalence formula: rBE Y 
                                         360  (rBD  n)
 Also note that the effective annual yield is:
                                     365
                              rBE Y
               reff    (1          )n
                                            1
                             365 / n
 Slide 2-12
               Summary Reminder

 Objective: To introduce the features of
  various security types, necessary for the
  understanding of the coming material

            Money markets and how yields are measured
            Fixed Income
            Stocks and Indexes
            Derivative Securities


Slide 2-13
               Capital Market -
          Fixed Income Instruments

 Publicly Issued Instruments
            Canada Bonds (up to 40 years)
            Provincial Government Bonds
            Municipal Bonds
 Privately Issued Instruments
            Corporate Bonds
            Mortgage-Backed Securities (ownership claim in a pool
             of mortgages or an obligation secured by such a pool)




Slide 2-14
Slide 2-15
               Summary Reminder

 Objective: To introduce the features of
  various security types, necessary for the
  understanding of the coming material

            Money markets and how yields are measured
            Fixed Income
            Stocks and Indexes
            Derivative Securities


Slide 2-16
             Capital Market - Equity


  Common stock (ownership: vote, dividends)
            Residual claim (“last in line”)
            Limited liability (“investors only lose money”)
            Corporate governance and restricted shares (no vote)
  Preferred stock
            Fixed dividends – limited (no voting)
            Priority over common
            Tax treatment (dividends are not interest– not tax
             deductible expenses for the firm)


Slide 2-17
Slide 2-18
                    Stock 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?
Slide 2-19
             Weighting: Example




Slide 2-20
             Examples of Indexes –
                  Canadian


 TSE 300 Composite Index
 TSE 35 (also known as Toronto 35 or
  T35)
 TSE 100 (largest 100 firms’ in TSE 300)
 S&P/TSE 60



Slide 2-21
             Examples of Indexes -
                     US


 Dow Jones Industrial Average (30 Stocks-
  PWI)
 Standard & Poor’s 500 Composite
 NASDAQ Composite (4000 companies)
 NYSE Composite
 Wilshire 5000 (NYSE+AMEX+active OTC)


Slide 2-22
              Examples of Indexes -
                  International

   TSE (Tokyo) - Nikkei 225 & Nikkei 300
   FTSE (Financial Times of London)
   Dax
   Region and Country Indexes
            EAFE
            Far East
            United Kingdom


Slide 2-23
             Construction of Indexes

 How are stocks weighted?
            Price weighted (DJIA)
            Market-value weighted (S&P500, NASDAQ,
             TSE 300)
            Equally weighted (Value Line Index)
 How returns are averaged?
            Arithmetic (DJIA and S&P500)
            Geometric (Value Line Index)


Slide 2-24
               Averaging Methods

Component Return
  rA=10%       rB= (-5%)                    rC = 20%
Arithmetic Average:
          rA  rB  rC .10  (.05)  .2
     ra                                 8.33%
               3               3
Geometric Average:
              rg  3 (1  rA)(1  rB)(1  rC)  1 
                  3 (1.1)(.95)(1.2)  1  7.84%
 Slide 2-25
                     Bond Indexes


   Lehman Brothers
   Merrill Lynch
   Salomon Brothers
   Scotia Capital (Canada)
   Specialized Indexes
            Merrill Lynch Mortgage



Slide 2-26
               Summary Reminder

 Objective: To introduce the features of
  various security types, necessary for the
  understanding of the coming material

            Money markets and how yields are measured
            Fixed Income
            Stocks and Indexes
            Derivative Securities


Slide 2-27
              Derivatives Securities


Options                          Futures
 Basic Positions                 Basic Positions
            Call (Buy)               Long (Buy)
            Put (Sell)               Short (Sell)
 Terms                           Terms
            Exercise Price           Delivery Date
            Expiration Date          Underlying Assets
            Underlying Assets



Slide 2-28
             Illustration




Slide 2-29
             Derivative Securities-
                    Quotes

Options                  Futures
 Bid price               Settlement price
 Ask price               Change
 Last price              Open interest
 Open interest
                          Underlying asset
 Underlying asset         price
  price
 Cash settlement         Cash settlement
 Physical delivery       Physical delivery
Slide 2-30

								
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