Today Why Investments Types of Financial Securities

Lecture 1.2: Major Types of Publicly Traded

Securities
Investment Analysis
Fall, 2012
Anisha Ghosh
Tepper School of Business
Carnegie Mellon University
November 1, 2012
Today Why Investments Types of Financial Securities
Readings and Assignment
Readings:
Chapter 2 of the course textbook (EGBG)
Lecture slides
Assignment:
Homework 1 is available on the "Courses Wall"
Today Why Investments Types of Financial Securities
Readings and Assignment
Readings:
Chapter 2 of the course textbook (EGBG)
Lecture slides
Assignment:
Homework 1 is available on the "Courses Wall"
Today Why Investments Types of Financial Securities
Agenda
1
The major types of marketable nancial securities:
1
Money market instruments
2
Capital market instruments: Fixed income and Equity
3
Derivative Instruments
2
Direct vs Indirect Investing
Today Why Investments Types of Financial Securities
Why do we have investments?
Financial Securities
Financial securities are claims on future cash ows of a private
or government entity: bonds, stocks, options, futures...
Allow investors to move spending from today to the future.
Allow real assets to be nanced.
Financial markets channel savings to investments and
allow risk sharing.
Today Why Investments Types of Financial Securities
Why do we have investments?
Financial Securities
Financial securities are claims on future cash ows of a private
or government entity: bonds, stocks, options, futures...
Allow investors to move spending from today to the future.
Allow real assets to be nanced.
Financial markets channel savings to investments and
allow risk sharing.
Today Why Investments Types of Financial Securities
Why do we have investments?
Financial Securities
Financial securities are claims on future cash ows of a private
or government entity: bonds, stocks, options, futures...
Allow investors to move spending from today to the future.
Allow real assets to be nanced.
Financial markets channel savings to investments and
allow risk sharing.
Today Why Investments Types of Financial Securities
Why do we have investments?
Financial Securities
Financial securities are claims on future cash ows of a private
or government entity: bonds, stocks, options, futures...
Allow investors to move spending from today to the future.
Allow real assets to be nanced.
Financial markets channel savings to investments and
allow risk sharing.
Today Why Investments Types of Financial Securities
Types of Financial Securities
Direct Investing: Investor purchases directly any one of a number of
different securities
Indirect Investing: Investor invests in an intermediary (e.g., mutual
fund), which bundles together a set of direct investments and then sells
shares in the portfolio of nancial instruments it holds.
Today Why Investments Types of Financial Securities
Money Market Securities
Money Market Securities
These are short term debt instruments issued by governments, nancial
institutions, and corporations.
Properties:
They have maturities of one year or less.
The minimum size of a transaction in a money market instrument
is typically large, usually exceeding $100, 000.
Some of them are not actively traded on the exchanges.
individuals who wish to hold these instruments typically do so
by holding a mutual fund (money market fund).
We will discuss next the major money market instruments.
Today Why Investments Types of Financial Securities
Money Market Securities
Money Market Securities
These are short term debt instruments issued by governments, nancial
institutions, and corporations.
Properties:
They have maturities of one year or less.
The minimum size of a transaction in a money market instrument
is typically large, usually exceeding $100, 000.
Some of them are not actively traded on the exchanges.
individuals who wish to hold these instruments typically do so
by holding a mutual fund (money market fund).
We will discuss next the major money market instruments.
Today Why Investments Types of Financial Securities
Money Market Securities
Money Market Securities
These are short term debt instruments issued by governments, nancial
institutions, and corporations.
Properties:
They have maturities of one year or less.
The minimum size of a transaction in a money market instrument
is typically large, usually exceeding $100, 000.
Some of them are not actively traded on the exchanges.
individuals who wish to hold these instruments typically do so
by holding a mutual fund (money market fund).
We will discuss next the major money market instruments.
Today Why Investments Types of Financial Securities
Money Market Securities
Money Market Securities
These are short term debt instruments issued by governments, nancial
institutions, and corporations.
Properties:
They have maturities of one year or less.
The minimum size of a transaction in a money market instrument
is typically large, usually exceeding $100, 000.
Some of them are not actively traded on the exchanges.
individuals who wish to hold these instruments typically do so
by holding a mutual fund (money market fund).
We will discuss next the major money market instruments.
Today Why Investments Types of Financial Securities
Money Market Securities
Money Market Securities
These are short term debt instruments issued by governments, nancial
institutions, and corporations.
Properties:
They have maturities of one year or less.
The minimum size of a transaction in a money market instrument
is typically large, usually exceeding $100, 000.
Some of them are not actively traded on the exchanges.
individuals who wish to hold these instruments typically do so
by holding a mutual fund (money market fund).
We will discuss next the major money market instruments.
Today Why Investments Types of Financial Securities
Money Market Securities
Money Market Securities
These are short term debt instruments issued by governments, nancial
institutions, and corporations.
Properties:
They have maturities of one year or less.
The minimum size of a transaction in a money market instrument
is typically large, usually exceeding $100, 000.
Some of them are not actively traded on the exchanges.
individuals who wish to hold these instruments typically do so
by holding a mutual fund (money market fund).
We will discuss next the major money market instruments.
Today Why Investments Types of Financial Securities
Money Market Securities
Money Market Securities
These are short term debt instruments issued by governments, nancial
institutions, and corporations.
Properties:
They have maturities of one year or less.
The minimum size of a transaction in a money market instrument
is typically large, usually exceeding $100, 000.
Some of them are not actively traded on the exchanges.
individuals who wish to hold these instruments typically do so
by holding a mutual fund (money market fund).
We will discuss next the major money market instruments.
Today Why Investments Types of Financial Securities
Treasury Bills or T-bills
U.S. Treasury bills are the least risky and the most marketable of all
money market instruments.
T-bills are issued by the federal government with initial maturities of 28
days to 52 weeks.
The holder of a T-bill receives a cash payment at maturity equal to the
face value of the bill and no explicit interest payments in intermediate
periods.
The bills sell at a discount from the face value the difference between
the purchase price and the face value constitutes the return the investor
receives.
T-bills are the closest approximations that exist to a riskless investment
the rate of return on 30-day T-bills are often used to approximate the
monthly riskless rate of interest.
Today Why Investments Types of Financial Securities
Treasury Bills or T-bills
U.S. Treasury bills are the least risky and the most marketable of all
money market instruments.
T-bills are issued by the federal government with initial maturities of 28
days to 52 weeks.
The holder of a T-bill receives a cash payment at maturity equal to the
face value of the bill and no explicit interest payments in intermediate
periods.
The bills sell at a discount from the face value the difference between
the purchase price and the face value constitutes the return the investor
receives.
T-bills are the closest approximations that exist to a riskless investment
the rate of return on 30-day T-bills are often used to approximate the
monthly riskless rate of interest.
Today Why Investments Types of Financial Securities
Treasury Bills or T-bills
U.S. Treasury bills are the least risky and the most marketable of all
money market instruments.
T-bills are issued by the federal government with initial maturities of 28
days to 52 weeks.
The holder of a T-bill receives a cash payment at maturity equal to the
face value of the bill and no explicit interest payments in intermediate
periods.
The bills sell at a discount from the face value the difference between
the purchase price and the face value constitutes the return the investor
receives.
T-bills are the closest approximations that exist to a riskless investment
the rate of return on 30-day T-bills are often used to approximate the
monthly riskless rate of interest.
Today Why Investments Types of Financial Securities
Treasury Bills or T-bills
U.S. Treasury bills are the least risky and the most marketable of all
money market instruments.
T-bills are issued by the federal government with initial maturities of 28
days to 52 weeks.
The holder of a T-bill receives a cash payment at maturity equal to the
face value of the bill and no explicit interest payments in intermediate
periods.
The bills sell at a discount from the face value the difference between
the purchase price and the face value constitutes the return the investor
receives.
T-bills are the closest approximations that exist to a riskless investment
the rate of return on 30-day T-bills are often used to approximate the
monthly riskless rate of interest.
Today Why Investments Types of Financial Securities
Treasury Bills or T-bills
U.S. Treasury bills are the least risky and the most marketable of all
money market instruments.
T-bills are issued by the federal government with initial maturities of 28
days to 52 weeks.
The holder of a T-bill receives a cash payment at maturity equal to the
face value of the bill and no explicit interest payments in intermediate
periods.
The bills sell at a discount from the face value the difference between
the purchase price and the face value constitutes the return the investor
receives.
T-bills are the closest approximations that exist to a riskless investment
the rate of return on 30-day T-bills are often used to approximate the
monthly riskless rate of interest.
Today Why Investments Types of Financial Securities
Other Money Market Instruments
Repurchase Agreement (Repo): an agreement between a borrower
and a lender to sell and repurchase a U.S. government security.
Certicates of Deposit (CDs): are time deposits with a bank.
Commercial Paper: is a short-term debt instrument issued by large
well-known corporations.
The rates at which CDs sell depend on the credit rating of the bank that
backs them. The Commercial Paper rates are determined in part by the
creditworthiness of the corporations.
Today Why Investments Types of Financial Securities
Other Money Market Instruments
Repurchase Agreement (Repo): an agreement between a borrower
and a lender to sell and repurchase a U.S. government security.
Certicates of Deposit (CDs): are time deposits with a bank.
Commercial Paper: is a short-term debt instrument issued by large
well-known corporations.
The rates at which CDs sell depend on the credit rating of the bank that
backs them. The Commercial Paper rates are determined in part by the
creditworthiness of the corporations.
Today Why Investments Types of Financial Securities
Other Money Market Instruments
Repurchase Agreement (Repo): an agreement between a borrower
and a lender to sell and repurchase a U.S. government security.
Certicates of Deposit (CDs): are time deposits with a bank.
Commercial Paper: is a short-term debt instrument issued by large
well-known corporations.
The rates at which CDs sell depend on the credit rating of the bank that
backs them. The Commercial Paper rates are determined in part by the
creditworthiness of the corporations.
Today Why Investments Types of Financial Securities
Other Money Market Instruments
Repurchase Agreement (Repo): an agreement between a borrower
and a lender to sell and repurchase a U.S. government security.
Certicates of Deposit (CDs): are time deposits with a bank.
Commercial Paper: is a short-term debt instrument issued by large
well-known corporations.
The rates at which CDs sell depend on the credit rating of the bank that
backs them. The Commercial Paper rates are determined in part by the
creditworthiness of the corporations.
Today Why Investments Types of Financial Securities
Types of Financial Securities
Direct Investing: Investor purchases directly any one of a number of
different securities
Indirect Investing: Investor invests in an intermediary (e.g., mutual
fund), which bundles together a set of direct investments and then sells
shares in the portfolio of nancial instruments it holds.
Today Why Investments Types of Financial Securities
Capital Market Securities
Capital Market Securities
These include instruments with maturities greater than 1 year and those
with no designated maturity at all.
Divided into two sectors:
Fixed Income Market
Equity Market
Today Why Investments Types of Financial Securities
Capital Market Securities
Capital Market Securities
These include instruments with maturities greater than 1 year and those
with no designated maturity at all.
Divided into two sectors:
Fixed Income Market
Equity Market
Today Why Investments Types of Financial Securities
Capital Market Securities
Capital Market Securities
These include instruments with maturities greater than 1 year and those
with no designated maturity at all.
Divided into two sectors:
Fixed Income Market
Equity Market
Today Why Investments Types of Financial Securities
Capital Market Securities
Capital Market Securities
These include instruments with maturities greater than 1 year and those
with no designated maturity at all.
Divided into two sectors:
Fixed Income Market
Equity Market
Today Why Investments Types of Financial Securities
Fixed Income Securities
The Fixed Income Market includes instruments that offer a promised
set of cash ows over time.
Most xed income securities are traditional bonds that entitles the
holder to a xed set of cash payoffs:
Regular (usually annual or semiannual) interest payments called
the bonds coupon until the bond matures;
The face value of the bond (the bonds principal) at maturity.
Fixed income instruments differ from each other in promised return
because of differences which include:
1
the maturity of the bonds
2
the creditworthiness of the issuer
3
the taxable status of the bond.
Today Why Investments Types of Financial Securities
Fixed Income Securities
The Fixed Income Market includes instruments that offer a promised
set of cash ows over time.
Most xed income securities are traditional bonds that entitles the
holder to a xed set of cash payoffs:
Regular (usually annual or semiannual) interest payments called
the bonds coupon until the bond matures;
The face value of the bond (the bonds principal) at maturity.
Fixed income instruments differ from each other in promised return
because of differences which include:
1
the maturity of the bonds
2
the creditworthiness of the issuer
3
the taxable status of the bond.
Today Why Investments Types of Financial Securities
Fixed Income Securities
The Fixed Income Market includes instruments that offer a promised
set of cash ows over time.
Most xed income securities are traditional bonds that entitles the
holder to a xed set of cash payoffs:
Regular (usually annual or semiannual) interest payments called
the bonds coupon until the bond matures;
The face value of the bond (the bonds principal) at maturity.
Fixed income instruments differ from each other in promised return
because of differences which include:
1
the maturity of the bonds
2
the creditworthiness of the issuer
3
the taxable status of the bond.
Today Why Investments Types of Financial Securities
Types of Fixed Income Securities
1
Treasury Notes and Bonds:
Issued by the federal govt over a broad range of the maturity
spectrum
Pay interest twice a year and repay principal on the maturity date
Generally considered to be safe from default and, thus,
differences in returns are due to differences in maturity, liquidity,
and the presence or absence of a call provision.
2
Federal Agency Securities
3
Municipal Securities
4
Corporate bonds
Today Why Investments Types of Financial Securities
Types of Fixed Income Securities
1
Treasury Notes and Bonds:
Issued by the federal govt over a broad range of the maturity
spectrum
Pay interest twice a year and repay principal on the maturity date
Generally considered to be safe from default and, thus,
differences in returns are due to differences in maturity, liquidity,
and the presence or absence of a call provision.
2
Federal Agency Securities
3
Municipal Securities
4
Corporate bonds
Today Why Investments Types of Financial Securities
Types of Fixed Income Securities
1
Treasury Notes and Bonds:
Issued by the federal govt over a broad range of the maturity
spectrum
Pay interest twice a year and repay principal on the maturity date
Generally considered to be safe from default and, thus,
differences in returns are due to differences in maturity, liquidity,
and the presence or absence of a call provision.
2
Federal Agency Securities
3
Municipal Securities
4
Corporate bonds
Today Why Investments Types of Financial Securities
Types of Fixed Income Securities
1
Treasury Notes and Bonds:
Issued by the federal govt over a broad range of the maturity
spectrum
Pay interest twice a year and repay principal on the maturity date
Generally considered to be safe from default and, thus,
differences in returns are due to differences in maturity, liquidity,
and the presence or absence of a call provision.
2
Federal Agency Securities
3
Municipal Securities
4
Corporate bonds
Today Why Investments Types of Financial Securities
Equity Securities
Common stocks, also known as equity securities or equities, represents
an ownership claim on the earnings and assets of a corporation.
After holders of debt claims are paid, the management of the rm can
either pay out the remaining earnings to stockholders (e.g., in the form
of dividends) or reinvest part or all of the earnings in the business.
Equity is a proportional claim: if you own a fraction of the shares,
you receive that fraction of any cash ows the rm distributes.
Because of the residual nature of its claims to earnings and assets,
common stock is a risky asset class.
Today Why Investments Types of Financial Securities
Equity Securities
Common stocks, also known as equity securities or equities, represents
an ownership claim on the earnings and assets of a corporation.
After holders of debt claims are paid, the management of the rm can
either pay out the remaining earnings to stockholders (e.g., in the form
of dividends) or reinvest part or all of the earnings in the business.
Equity is a proportional claim: if you own a fraction of the shares,
you receive that fraction of any cash ows the rm distributes.
Because of the residual nature of its claims to earnings and assets,
common stock is a risky asset class.
Today Why Investments Types of Financial Securities
Equity Securities
Common stocks, also known as equity securities or equities, represents
an ownership claim on the earnings and assets of a corporation.
After holders of debt claims are paid, the management of the rm can
either pay out the remaining earnings to stockholders (e.g., in the form
of dividends) or reinvest part or all of the earnings in the business.
Equity is a proportional claim: if you own a fraction of the shares,
you receive that fraction of any cash ows the rm distributes.
Because of the residual nature of its claims to earnings and assets,
common stock is a risky asset class.
Today Why Investments Types of Financial Securities
Equity Securities
Common stocks, also known as equity securities or equities, represents
an ownership claim on the earnings and assets of a corporation.
After holders of debt claims are paid, the management of the rm can
either pay out the remaining earnings to stockholders (e.g., in the form
of dividends) or reinvest part or all of the earnings in the business.
Equity is a proportional claim: if you own a fraction of the shares,
you receive that fraction of any cash ows the rm distributes.
Because of the residual nature of its claims to earnings and assets,
common stock is a risky asset class.
Today Why Investments Types of Financial Securities
Types of Financial Securities
Direct Investing: Investor purchases directly any one of a number of
different securities
Indirect Investing: Investor invests in an intermediary (e.g., mutual
fund), which bundles together a set of direct investments and then sells
shares in the portfolio of nancial instruments it holds.
Today Why Investments Types of Financial Securities
Derivative Instruments
These provide payoffs that depend on the value of an
underlying security or basket of securities, e.g. commodity
prices, bond and stock prices, or market index values
they are also called derivative assets or contingent
claims
The most common contingent claims are options and
futures
Today Why Investments Types of Financial Securities
Derivative Instruments
These provide payoffs that depend on the value of an
underlying security or basket of securities, e.g. commodity
prices, bond and stock prices, or market index values
they are also called derivative assets or contingent
claims
The most common contingent claims are options and
futures
Today Why Investments Types of Financial Securities
Derivative Instruments
These provide payoffs that depend on the value of an
underlying security or basket of securities, e.g. commodity
prices, bond and stock prices, or market index values
they are also called derivative assets or contingent
claims
The most common contingent claims are options and
futures
Today Why Investments Types of Financial Securities
Major Types Derivative Instruments
Option: An option on a security gives the holder the right
to either buy (a call option) or sell (a put option) a particular
asset or bundle of assets at a future date for a specied
price.
Future: A futures contract is the obligation for the delivery
of an asset (or in some cases, its cash value) at a specied
delivery date for an agreed upon price, called the futures
price, to be paid at contract maturity.
Warrant: Similar to an option but is issued by a
corporation.
Today Why Investments Types of Financial Securities
Major Types Derivative Instruments
Option: An option on a security gives the holder the right
to either buy (a call option) or sell (a put option) a particular
asset or bundle of assets at a future date for a specied
price.
Future: A futures contract is the obligation for the delivery
of an asset (or in some cases, its cash value) at a specied
delivery date for an agreed upon price, called the futures
price, to be paid at contract maturity.
Warrant: Similar to an option but is issued by a
corporation.
Today Why Investments Types of Financial Securities
Major Types Derivative Instruments
Option: An option on a security gives the holder the right
to either buy (a call option) or sell (a put option) a particular
asset or bundle of assets at a future date for a specied
price.
Future: A futures contract is the obligation for the delivery
of an asset (or in some cases, its cash value) at a specied
delivery date for an agreed upon price, called the futures
price, to be paid at contract maturity.
Warrant: Similar to an option but is issued by a
corporation.