| A | B |
|---|
| real assests | assests used to produce goods and services. land, buildings, machines, and knowledge. generate net income to the economy |
| financial assests | claims on real assests or the income generated by them. define the allocation of income or wealth amoung investors. Allows us to make the most of the economy's real assests. |
| my financial assests | are company's liabilities. these claims cancel out, leaving real assests as the net worth of the economy |
| fixed-income securities | pay a specified cash flow over a specific period of time. ex. corp. bond gives a fixed amount of interest each year. |
| money market | refers to fixed-income securities that are short term, highly marketable/liquid, usually last about a year, and generally very low risk. Ex. US treasury bill or CDs. Bonds from FED, State Corps. |
| equity securities | an ownership share in a corporation. usually do not promise any particular payment. Common and Preferred Stock. riskier because the performance of the equity is tied directly to the sucess of the firm and its real assests. |
| common stock | ownership shares of a corp. expect dividends, have voting rights |
| preferred stock | no voting rights, recieve a fixed stream of dividend payments |
| derivitive securities | Futures, Options, SWAPS. Provide payoffs that depend on the values of other assests. |
| financial assests | provide for consumption timing, allocation of risks to investors who are most willing to take on the risk, seperation of ownership and control |
| seperation of ownership and control | corporation are owned by shareholders and shareholders elect the BOD, which then hire the managment. Shareholders want managment to maximize shareholder wealth, firm's value, and share price |
| agency problems | conflicts of interest between managers and stockholders. because managers, who are hired as agents of the shareholders, may pursue their own interest instead. management can pursue own interest such as empire building, avoid risky projects, consumption of perquisites(jets, carpet) |
| mitigating/reducing the potential agency problems | compenstation plans tied to performance, stock options- so when price of stock goes up they benefit as well and will not spend as much money b/c they are now shareholders themselves. BOD fires for underperformance. Pressure/Monitoring by outsiders- large pension funds, security analysis, financial press |
| takeover threats | proxy fight- shareholders vote against the BOD and new BOD fires existing managment. very unlikely <1% work. The real takeover threat is from other firms |
| assest allocation | allocation of an investment portfolio across broad assest classes. Top Down protfolio building starts here. what propotion in stocks, bonds, etc. |
| Security selection | choice of specific securities in each assest class. |
| security analysis | analysis of the values of securities |
| risk-return trade-off | Formed by competition. assests with higher expected returns entail greater risk. actual returns will almost always deviate from expected returns. |
| passive management | buying and holding a diversified portfolio without attempting to identify mispriced securities. |
| active management | attempting to identify mispriced securities or to forecast broad market trends. |
| business firms | net borrowers. raise capital now to pay for investments in plant and equipment. |
| households | net savers. purchase securities issued by firms that need to raise capital |
| governments | borrowers or lenders depending on the relationship between tax revenue and governent expenditures. tax rev < gov't expend = deficit and borrow money by issuing T-Bills, notes, and bonds. In time of surplus they buy back bonds |
| financial intermediaries | Connect borrowers and lenders. where firms and gov't sell most of their stock. held in financial institutions such as penion funds, mutual funds, insurance companies, and banks. They stand between the issuer(firm) and the owner of the security (individual). Issue their own securities to raise funds to purchase the securities of other firms |
| advantages of financial intermediaries | lenders and borrowers do not need to contact each other directly and they are more easily matched. By pooling the resources of many small investors, they are able to lend considerable sums to large borrowers. Then by lending to borrowers, intermediaries achieve significant diversification, so they can accept loans that individually might be too risky. Third, they build expertise through the volume of business they do and can use economies of scale and scope to assess and monitor risk. |
| investment bankers | advise the issuing corporation on the prices it can charge for the securities issued, appriate interest rates, etc. Firms specializing in the sale of new securities to the public, typically by underwriting the issue. Handles marketing of the securities in the primary market. |
| primary market | market in which new issues of securities are offered to the public. |
| investment bankers | Can provide more than expertise to security issuers. They invest in their own reputation in order to obtain more business. Will suffer along with investors if the securities it underwrites are marketed to the public with over-exaggerated claims. |
| trends that have changed the investment environment | Globalization, Securitization, Financial Engineering, and Info and Computer Networks |
| globalization | participate in a few ways: 1) Purchase ADRs- domestically traded that represent foreign stock 2) Purchase foreign securities offered in dollars 3) buy mutual funds that invest internationally 4) buy derivitives with payoffs that depends on prices in foreign security markets. WEBS |
| WEBS | variation on ADRs. use same depositary structure to allow investors to trade portfolios of foreign stocks. |
| pass-through securities | pools of loans, such as home mortg. loans, sold in one package. Owners recieve all of the principal and interest payments made by the borrowers. |
| securitization | pooling loans into standardized securities backed by those loans, which can then be traded like any other security. Also been used to all US banks to unload their portfolios of shaky loans to developing nations. Brady Bonds |
| bundling, unbundling | creation of new securities either by combining primitive and derivitive securities into one composite hybrid or by seperating returns on an assest into classes. |
| financial engineering | the process of bundling/unbundling. refers to the creation and design of securities with custom-tailored characteristics, often regarding various exposures of risk. |
| computer networks | change the investment market through online trading, online information dissemination, and automated trade crossing. |
