Chapter - 001 Manives - Updated
Chapter - 001 Manives - Updated
Environment
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Real Assets Versus Financial 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
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
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
1-14
Figure 1.1 Globalization: A Debt Issue
Denominated in Euros
1-15
Recent Trends—Securitization
1-16
Figure 1.2 Asset-backed Securities
Outstanding
1-17
Recent Trends—Financial Engineering
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
1-21