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Chapter - 001 Manives - Updated

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0% found this document useful (0 votes)
26 views21 pages

Chapter - 001 Manives - Updated

Uploaded by

brian Limanjaya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 1 The Investment

Environment

Investments, 8th edition


Bodie, Kane and Marcus

Slides by Susan Hine

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Real Assets Versus Financial Assets

• Essential nature of investment


– Reduced current consumption
– Planned later consumption
• Real Assets
– Assets used to produce goods and
services
• Financial Assets
– Claims on real assets

1-2
Table 1.1 Balance Sheet of U.S.
Households, 2007

1-3
Table 1.2 Domestic Net Worth

1-4
A Taxonomy of Financial Assets
• Fixed income or debt
– Money market instruments
• Bank certificates of deposit
– Capital market instruments
• Bonds
• Common stock or equity
• Derivative securities (options, futures)
→ depends on the value of other assets

1-5
Financial Markets and the Economy
• Informational Role
stock price reflects collective assessment of company’s value; higher
price attract more investments and result in higher economic growth

• Consumption Timing
Investors can “store” their wealth in financial assets to prepare for low-
earning periods, and result in higher economic welfare

• Allocation of Risk
Allow the risk that is inherent to all investments to be borne by the
investors most willing to bear that risk

• Separation of Ownership and Management


ability to buy and sell assets in financial markets enable easy separation
of ownership and management; potentially create agency issue

1-6
Financial Markets and the
Economy Continued
• Corporate Governance and Corporate Ethics
– Accounting Scandals
• Examples – Enron, Rite Aid, HealthSouth
– Auditors—watchdogs of the firms
– Analyst Scandals
• Arthur Andersen
– Sarbanes-Oxley Act
• Tighten the rules of corporate governance

1-7
The Investment Process

• Asset allocation
– Choice among broad asset classes
• Security selection
– Choice of which securities to hold within asset
class
• Security analysis

Top-down vs Bottom-up strategy

1-8
Markets are Competitive
(no free lunch!)
• Risk-Return Trade-Off
• Efficient Markets
– Active Management
• Finding mispriced securities
• Timing the market
– Passive Management
• No attempt to find undervalued securities
• No attempt to time the market
• Holding a highly diversified portfolio

1-9
The Players
• Business Firms– net borrowers/demanders of
capital
• Households – net savers/suppliers of capital
• Governments – can be both borrowers and
savers/lenders
• Financial Intermediaries
– Investment Companies
– Banks
– Insurance companies
– Credit unions
1-10
The Players Continued

• Investment Bankers
– Perform specialized services for businesses
by helping them to issue securities
– Markets in the primary market
• Venture Capital & Private Equity
– Help companies fund their businesses when
issuing securities to the public is not an option

1-11
Table 1.3 Balance Sheet of
Commercial Banks, 2007

1-12
Table 1.4 Balance Sheet of Nonfinancial
U.S. Business, 2007

1-13
Recent Trends—Globalization

• American Depository Receipts (ADRs)


• Foreign securities offered in dollars
• Mutual funds that invest internationally
• Instruments and vehicles continue to develop
(WEBs → World Equity Benchmark Series)
• Exchange Traded Funds (ETFs)

1-14
Figure 1.1 Globalization: A Debt Issue
Denominated in Euros

1-15
Recent Trends—Securitization

• Mortgage pass-through securities


• Other pass-through arrangements
– Car, student, home equity, credit card
loans
• Offers opportunities for investors and
originators

1-16
Figure 1.2 Asset-backed Securities
Outstanding

1-17
Recent Trends—Financial Engineering

• Use of mathematical models and computer-


based trading technology to synthesize new
financial products
• Bundling and unbundling of cash flows

1-18
Figure 1.3 Building Creates a Complex
Security

1-19
Figure 1.4 Unbundling of Mortgages into
Principal- and Interest-Only Securities

1-20
Recent Trends—Computer Networks

• Online information dissemination


• Information is made cheaply and widely
available to the public
• Automated trade crossing
– Direct trading among investors

1-21

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