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- Money market (cash) - Bonds (fixed income) - Stocks (equities) - Derivatives |
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- Short-term (< 1 year maturity) - Little or no default risk - Very liquid / marketable - Subsector of the debt market - Many trade in large denominations and are out of reach of individual investors |
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- $1,000 and up - 28, 91, 182 days (1,3,6 months) - State and local tax exemption - Short-term government securities issue at a discount from face value and returning the face amount at maturity - Most marketable of all money market instruments - Highly liquid |
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Certificates of Deposit (CDs) |
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- FDIC insurance (up to $100K) - Secondary market trading (>$100K) - Time deposit - bank time deposit - May not be withdrawn on demand - Bank pays interest and principal to the depositor only at the end of the fixed term of the CD - Short-term are highly marketable, but maturities of 3 months or more have less market |
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- Less than 270 Days (avoid SEC registration) - Secondary market trading - Short-term unsecured debt issued by large corporations - Considered a fairly safe asset because a firm's condition presumable can be monitored and predicted over such a short term - Very liquid - trades in secondary markets |
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- an order to a bank by a customer to pay a sum of money at a future date - Usually within 6 months |
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- $US-denominated foreign deposit - Dollar-denominated deposits at foreign banks or foreign branches of American banks - Most are for large sums - Usually less than 6 months |
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- Typically overnight - Repo: sell securities w/ agreement to buy back (borrow) - Reverse repo: buy securities w/ agreement to sell back (lend) - Repurchase agreements - Short-term sales of government securities with an agreement to repurchase the securities at a higher price - Reverse repo - dealer finds an investor holding government securities and buys them with an agreement to resell them at a specified higher price on a future date |
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- Overnight loan between banks - Funds in the accounts of commercial banks at the Federal Reserve Bank |
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- London Interbank Offer Rate - Lending rate between large British banks - Quoted in dollars and other currencies - 1,3,6,12 month - Widely used as a reference rate (swaps, ARMs, etc.) - Become the premier short-term interest rate quoted in the European money market - Reference rate |
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- Mortgages: GNMA and FHLB - Quasi-agency: FNMA and FHLMC - SLMC privatized over 1997-2004 to become Sallie Mae |
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- Sovereign debt - Eurobond - different currency than country in which issued - Other bonds are issued in foreign country and currency - Yankee bond: issued in US in $US by non-US issuer |
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- Munis - Issued by state and local governments - Revenue vs. general obligation bonds - Interest free from federal taxation (and state/locale of issue) - Tax-exempt bonds issued by state and local governments - Capital gains taxes must be paid if the bonds mature or are sold for more than the investor's purchase price - General obligation bonds - backed by the "full faith and credit" of the issuer - Revenue bonds - issued to finance particular projects and are backed either by the revenues from that project or by the municipal agency operating the project (riskier than general obligation bonds) - Industrial development bond - revenue bond that is issued to finance commercial enterprises, such as the construction of a factory that can be operated by a private firm |
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- Typically structured like treasuries - Most commonly: subordinated debentures (general obligation) - Default risk concerns - Other features: call provisions, convertibility, etc. - Long-term debt issued by private corporations typically paying semi-annual coupons and returning the face value of the bond at maturity |
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Asset Backed Securities (ABS) |
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- Pool of financial assets used to back new security (great flexibility on structure) - Mortgage-backed securites (MBS) most common |
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- Limited rights (voting rights at annual meetings and possibly other major issues, pro rata share of dividends) - Residual claim (equity = assets - liabilities; going concern vs. liquidation value) - Limited liability - Double taxation of dividends - Preferential tax treatment of capital gains - Ownership shares in a publicly held corporation; shareholders have voting rights and may receive dividends - Elect a board of directors to control the corporation - select managers to run the corporation on a daily basis - Residual claim - stockholders are the last in line of all those who have a claim on the assets and income of the corporation - Limited liability - the most shareholders can lose in event of the failure of the corporation is their original investment |
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- Defined dividends (no guarantee, cumulative - must be paid before any common stock dividends) - No voting rights - Held only by other corporations (70% dividend exclusion rule) - Nonvoting shares in a corporation, usually paying a fixed stream of dividends |
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- ADRs trade foreign shares on US exchanges - Not common now that foreign markets are more accessible |
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- Value derivers from changes in the value of the underlying asset - Used to manage risk - Used to speculate (leveraged investment) - Three major types (options, futures/forwards, swaps) - A security with a payoff that depends on the prices of other securities |
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- Call Option - the rights to buy an asset at a specified price on or before a specified expiration date - Put option - the right to sell an asset at a specified exercise price on or before a specified expiration date - fixed exercise or strike price - Specific quantity or volume of asset (contract size) - Maturity / expiration date - Used to speculate or to manage risk (calls gain in value as prices rise, puts gain in value as prices fall) |
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- Promise to buy/sell an asset at a future date (long position - promise to buy, short position - promise to sell) - Fixed price - Specific quantity or volume of asset (contract size) - Maturity / Expiration date - Used to speculate or to manage risk (long positions gain in value as prices risk, short positions gain in value as prices fall) - Exchange traded - Forwards are over-the-counter (OTC) or broker/dealer market - Obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date |
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- Most indexes - Based on market cap (# shares x price per share) - S&P 500: 500 large corporations - Wilshire 5000: all NYSE, AMEX and NASDAQ (actively traded) |
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Dow Jones Industrial Average (DJIA) |
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- Holdover from ancient times (1896) - Price-weighted index |
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- Matches many investor's behavior (split money evenly across investments) - Problem with rebalancing |
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- try to capture/represent a market - some capture a large part of the market and some only a small part - competing indexes - attempt to define and track some segment of the securities market - most are value-weighted |
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- worse way to measure markets than value-weighted indexes - created in 1896, only knew the price each stock traded at |
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- Fixed income - Government - Corporate - ABS - now known as Barclays Capital Aggregate Index |
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- Morgan Stanley Capital International - World index - EAFE (Europe, Australia, Far East) |
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Debt obligations of the federal government with original maturities of one year or more |
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An average computed by adding the prices of the stocks and dividing by a "divisor" |
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