CHAPTER 2
Asset Classes
and Financial
Instruments
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.
Major Classes of Financial Assets or
Securities
•
•
•
•
•
Money market
Bond market
Equity Securities
Indexes
Derivative markets
2-2
The Money Market
• Treasury bills
– Bid and asked price
– Bank discount method
• Certificates of Deposits
• Commercial Paper
• Bankers Acceptances
2-3
The Money Market Continued
• Eurodollars
• Repurchase Agreements (RPs) and Reverse
RPs
• Brokers’ Calls
• Federal Funds
• LIBOR Market
2-4
Figure 2.1 Rates on Money Market Securities
2-5
Table 2.1 Major Components of the
Money Market
2-6
Figure 2.2 Treasury Bill Yields
2-7
Figure 2.3 The Spread between 3-month
CD and Treasury Bill Rates
2-8
The Bond Market
•
•
•
•
•
•
•
Treasury Notes and Bonds
Inflation-Protected Treasury Bonds
Federal Agency Debt
International Bonds
Municipal Bonds
Corporate Bonds
Mortgages and Mortgage-Backed Securities
2-9
Treasury Notes and Bonds
• Maturities
– Notes – maturities up to 10 years
– Bonds – maturities in excess of 10 years
– 30-year bond
• Par Value - $1,000
• Quotes – percentage of par
2-10
Figure 2.4 Lisiting of Treasury Issues
2-11
Federal Agency Debt
• Major issuers
– Federal Home Loan Bank
– Federal National Mortgage Association
– Government National Mortgage
Association
– Federal Home Loan Mortgage Corporation
2-12
Municipal Bonds
• Issued by state and local governments
• Types
– General obligation bonds
– Revenue bonds
• Industrial revenue bonds
• Maturities – range up to 30 years
2-13
Figure 2.5 Tax-exempt Debt Outstanding
2-14
Municipal Bond Yields
• Interest income on municipal bonds is not
subject to federal and sometimes not to state
and local tax
• To compare yields on taxable securities a
Taxable Equivalent Yield is constructed
2-15
Table 2.2 Equivalent Taxable Yields
Corresponding to Various Tax-Exempt
Yields
2-16
Figure 2.6 Ratio of Yields on Tax-Exempt
to Taxable Bonds
2-17
Corporate Bonds
• Issued by private firms
• Semi-annual interest payments
• Subject to larger default risk than government
securities
• Options in corporate bonds
– Callable
– Convertible
2-18
Mortgages and Mortgage-Backed
Securities
• Developed in the 1970s to help liquidity of
financial institutions
• Proportional ownership of a pool or a
specified obligation secured by a pool
• Market has experienced very high rates of
growth
2-19
Figure 2.7 Mortgage-backed Securities
Outstanding, 1979-2007
2-20
Equity Securities
• Common stock
– Residual claim
– Limited liability
• Preferred stock
– Fixed dividends -limited
– Priority over common
– Tax treatment
• Depository receipts
2-21
Figure 2.8 Listing of Stocks Traded on
the NYSE
2-22
Stock Market Indexes
• There are several broadly based indexes
computed and published daily
• There are several indexes of bond market
performance
• Others include:
– Nikkei Average
– Financial Times Index
2-23
Dow Jones Industrial Average
• Includes 30 large blue-chip corporations
• Computed since 1896
• Price-weighted average
2-24
Example 2.2 Price-Weighted Average
Portfolio: Initial value $25 + $100 = $125
Final value $30 + $ 90 = $120
Percentage change in portfolio value
= 5/125 = -.04 = -4%
Index: Initial index value (25+100)/2 = 62.5
Final index value (30 + 90)/2 = 60
Percentage change in index -2.5/62.5
= -.04 = -4%
2-25
Standard & Poor’s Indexes
• Broadly based index of 500 firms
• Market-value-weighted index
• Index funds
• Exchange Traded Funds (ETFs)
2-26
Other U.S. Market-Value Indexes
• NASDAQ Composite
• NYSE Composite
• Wilshire 5000
2-27
Figure 2.9 Comparative Performance of
Several Stock Stock Indexes, 2001-2006
2-28
Foreign and International
Stock Market Indexes
• Nikkei (Japan)
• FTSE (Financial Times of London)
• Dax (Germany)
• MSCI (Morgan Stanley Capital International)
• Hang Seng (Hong Kong)
• TSX (Canada)
2-29
Derivatives Markets
Options
• Basic Positions
– Call (Buy)
– Put (Sell)
• Terms
– Exercise Price
– Expiration Date
– Assets
Futures
• Basic Positions
– Long (Buy)
– Short (Sell)
• Terms
– Delivery Date
– Assets
2-30
Figure 2.10 Trading Data on GE Options
2-31
Figure 2.11 Listing of Selected
Futures Contracts
2-32