Chapter 2
Investment
Alternatives (Assets)
Learning Objectives
• types of financial assets
• non-marketable financial assets
• money market and capital market securities.
• options and futures.
Non-Marketable Financial Assets
• Savings deposits
• Canada Savings Bonds (CSBs) Guaranteed
Investment Certificates (GICs)
Money Market Securities
• Treasury bills, commercial paper,
Eurodollars, repurchase agreements,
banker’s acceptances (B/As)
Capital Market Securities
Fixed-income securities
• Marketable debt with maturity greater than one
year
• More risky than money market securities
• Fixed-income securities have a specified
payment schedule
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Dates and amount of interest and principal
payments known in advance
Fixed-Income Securities
• Bonds – long-term debt instruments
• Major bond types:
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Government of Canada bonds
U.S. Treasury bonds
Provincial bonds
Provincially-guaranteed bonds – Ontario Hydro
U.S. federal agency securities – GNMAs
(Ginnie Maes), FNMAs (Fannie Maes)
Fixed-Income Securities
• Major bond types (cont’d):
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Corporate bonds
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Usually pay semi-annual interest, are callable,
carry a sinking fund provision, and have a par
value of $1,000
Convertible bonds may be exchanged for
another asset
Risk that issuer may default on payments
Asset-Backed Securities
• Asset-backed securities are “securitized” assets
• E.g. mortgage-backed securities
 Investors assume little default risk as most
mortgages are guaranteed by a federal
government agency
Equity Securities
• Represent an ownership interest
• Preferred stock
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Preferred shareholders are paid after
bondholders but before common
shareholders
Dividend known, fixed in advance
May be cumulative if dividend omitted
Derivative Securities
• Securities whose value is derived from some
underlying security
• Futures and options contracts are
standardized and performance is guaranteed
by a third party
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Risk management tools
• Warrants are options issued by firms
Options
• Exchange-traded options are created by
investors, not corporations
• Call (Put) gives the buyer the right but not the
obligation to purchase (sell) a fixed quantity of
shares at a a fixed price before a certain date
• Options can be sold in the market at a price
• Increases return possibilities
Futures
• Futures contract: A standardized agreement
between a buyer and seller to make future
delivery of a fixed asset at a fixed price
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A “good faith deposit” called margin, is required
of both the buyer and seller to reduce default
risk
Used to hedge the risk of price changes