Class 2 Financial Instruments Money market. T-bills. Bond market. Bond characteristics and yields. Stock market. Stock indexes. Study materials: Zvi Bodie, Investments, 8 th ed: Ch. 2. 1. - 2. 4. , Ch. 3. 3. -3. 4. BBA BF-I, Fall 2014, A. Zaporozhetz 1
Major Classes of Financial Assets (Securities) Asset allocation vs. Security selection Financial markets: Money markets vs. Capital markets MM instruments: Cash, Cash equivalents, T-bills, etc CM instruments: Bonds, Common stock, Preferred stock, Derivatives: options, futures, swaps. BBA BF-I, Fall 2014, A. Zaporozhetz 2
1. Money Market Instruments Treasury bills Certificates of deposit (CD) Commercial Paper Bankers’ Acceptances Eurodollars Repurchase Agreements (RPs) Federal Funds Brokers’ Calls BBA BF-I, Fall 2014, A. Zaporozhetz 3
Treasury bills (T-bills) BBA BF-I, Fall 2014, A. Zaporozhetz 4
Bank Discount Rate (T-Bills) Rbd = bank discount rate P = market price of the bill n = number of days to maturity BBA BF-I, Fall 2014, A. Zaporozhetz 5
Bond Equivalent Yield (T-Bills) n Can’t compare T-bill directly to a bond because: (1) 360 vs 365 days; (2) Return is figured on par vs. price paid n Adjust the bank discounted rate (“ASKED”) to “bond equivalent yield (ASK YLD”) make it comparable. BBA BF-I, Fall 2014, A. Zaporozhetz 6
Shortcut: BEY vs. BDY n Mind the leap year of 366 days. BBA BF-I, Fall 2014, A. Zaporozhetz 7
2. Capital Markets: Bond Markets • Publicly Issued Instruments US Treasury Notes US Treasury Bonds Federal Agency Debt Municipal Bonds • Privately Issued Instruments Corporate Bonds BBA BF-I, Fall 2014, A. Zaporozhetz 8
Bonds A bond is a contract or a promissory note issued by a corporation or government promising to pay the owner of the bond a predetermined amount of interest each year. Par Value (Face Value, F) - The principal amount of a bond that is repaid to the lender at the end of the bond’s term. Coupon Payment -The periodic interest payment (in dollars) made on a bond. Coupon Rate - The annual coupon payment expressed as a percent of face value. Maturity Date - The specified date at which the principal amount of the bond is paid. Market Value (Price, P) - The value of a bond based on its market price. Current Yield, % = $C/$P. Yield to maturity (YTM) = the rate of return that equates the market price of a bond to its intrinsic value. Implicit rate of return the market has in mind when setting the market price of the bond, i. e. , the implicit rate being used by the market to price the bond. BBA BF-I, Fall 2014, A. Zaporozhetz 9
US Treasury Notes and Bonds BBA BF-I, Fall 2014, A. Zaporozhetz 10
Corporate Bonds http: //reports. finance. yahoo. com/z 1? is=caterpillar BBA BF-I, Fall 2014, A. Zaporozhetz 11
3. Capital Market: Equity • Common stock: features Residual claim Limited liability • Preferred stock: features Fixed dividends Priority over common Cumulative and non-cumulative stocks BBA BF-I, Fall 2014, A. Zaporozhetz 12
How to Read a Stock Table / Quote BBA BF-I, Fall 2014, A. Zaporozhetz 13
Stock Indexes • Uses Track average returns Comparing performance of portfolios Base of derivatives • Factors in constructing or using an Index Representative? Broad or narrow? How is it constructed? • How are stocks weighted? Price-weighted (DJIA) Market-value weighted (S&P 500, NASDAQ) Equally weighted (Value Line Index) BBA BF-I, Fall 2014, A. Zaporozhetz 14
Averaging Methods n. How returns are averaged? -Arithmetic (DJIA and S&P 500) -Geometric (Value Line Index) Component Return X 1=10%, X 2= (-5%), X 3 = 20% Arithmetic Average [. 10 + (-. 05) +. 20] / 3 = 8. 33% Geometric Average [(1. 10) (. 95) (1. 20)]1/3 - 1 = 7. 84% BBA BF-I, Fall 2014, A. Zaporozhetz 15
World Stock Markets Americas: Stock Exchanges: Major Indices: USA: NYSE DJIA, S&P 500 NASDAQComposite Canada: Toronto stock exchange (TSX) TSX Comp (210) Brazil: Sao Paolo stock exchange Bovespa (67) UK: London stock exchange (LSE/AIM) FTSE-100 Germany: Frankfurt stock exchange (DB) DAX France: Paris Bourse CAC-40 Europe: Euronext (belongs to NYSE) BBA BF-I, Fall 2014, A. Zaporozhetz Euro. Top 100 16
World Stock Markets Countries: Stock Exchanges: Major Indices: Russia: Moscow Interbank Currency Exchange (MICEX) MICEX (50) Russian Trading System (RTS) RTSI (50) Merged to MOEX in 2012 RTS 2 (70) RTSSTD (15) Ukraine: PFTS (20) Ukrainian Exchange (UX) UX (10) (opened: March 26, 2009) Kazakhstan: Kazakhstan Stock Exchange BBA BF-I, Fall 2014, A. Zaporozhetz KASE (20) 17
World Stock Markets Asia: Stock Exchanges: Major Indices: Japan: Tokyo stock exchange (TSE) Nikkei-225 China: Hong Kong stock exchange (HKSE) Hang Seng (49) Shanghai stock exchange (SSE) SSE Comp (>850) Shenzhen Stock Exchange (SZSE) India: Bombay stock exchange (BSE) BSE-30 South Korea: Korea Exchange (KRX) KOSPI (775) Taiwan: TWII (762) Taiwan Stock Exchange (TAIEX) BBA BF-I, Fall 2014, A. Zaporozhetz 18
World Stock Markets BBA BF-I, Fall 2014, A. Zaporozhetz 19
Ukrainian Stock Markets: UX index (before June 2012) BBA BF-I, Fall 2014, A. Zaporozhetz 20
Скачать презентацию Class 2 Financial Instruments Money market T-bills Bond
BF1_Fall2014_Instruments.ppt