1. Negotiable Certificates of Deposit - A negotiable certificate of deposit (NCD), also known as a jumbo CD, is a certificate of deposit (CD) with a minimum face value of $100,000, though NCDs are typically $1 million or more. They are guaranteed by the bank and can usually be sold in a highly liquid secondary market, but they cannot be cashed in before maturity. Because of their large denominations, NCDs are bought most often by large institutional investors that typically use them as a way to invest in a low-risk, low-interest security. A Yankee CD is one example of an NCD. 2. Commercial Papers - Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities. Maturities on commercial paper typically last several days, and rarely range longer than 270 days.1 Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates. 3. Banker’s Acceptances - The banker's acceptance is a negotiable piece of paper that functions like a post-dated check, although the bank rather than an account holder guarantees the payment. Banker's acceptances are used by companies as a relatively safe form of payment for large transactions. The BA also is a shortterm debt instrument, similar to a U.S. Treasury bill, and is traded at a discount to face value in the money markets. They also are known as bills of exchange. 4. Treasury Bills, Notes and Bonds Treasury bonds, Treasury bills, and Treasury notes are all government-issued fixed income securities that are deemed safe and secure. T-bonds mature in 30 years and offer investors the highest interest payments biannually. T-notes mature anywhere between two and 10 years, with bi-annual interest payments, but lower yields. T-bills have the shortest maturity terms—from four weeks to a year. These investments are auctioned off regularly on the U.S. Treasury's website. 5. Repurchase Agreement A repurchase agreement, or 'repo', is a short-term agreement to sell securities in order to buy them back at a slightly higher price. The one selling the repo is effectively borrowing and the other party is lending, since the lender is credited the implicit interest in the difference in prices from initiation to repurchase. Repos and reverse repos are thus used for short-term borrowing and lending, often with a tenor of overnight to 48 hours. The implicit interest rate on these agreements is known as the repo rate, a proxy for the overnight risk-free rate. 6. Debt Security - A debt security is a debt instrument that can be bought or sold between two parties and has basic terms defined, such as the notional amount (the amount borrowed), interest rate, and maturity and renewal date. a. Types of long-term securities A long-term investment is an account a company plans to keep for at least a year such as stocks, bonds, real estate, and cash. The account appears on the asset side of a company's balance sheet. Long-term investors are generally willing to take on more risk for higher rewards. These are different from short-term investments, which are meant to be sold within a year. b. Strategies and Challenges in Bond Market Initiatives to develop bond markets in East Asia should focus on: (i) sustaining a stable macroeconomic environment with low inflation and stable interest rates, (ii) developing a healthy government bond market that would serve as a benchmark for the corporate bond market, (iii) completing the postcrisis agenda of banking sector restructuring, (iv) improving corporate governance, (v) strengthening the regulatory framework for bond market, (vi) rationalizing tax treatment of bonds, (vii) broadening the investor base, and (viii) promoting the growth of regional bond market centers. Since at present there is a great diversity in the levels of bond market development across countries, significant country-specific deciphering of these requirements will be needed for developing country strategies for bond market development. c. Assessing Bond Value There are four key variables to be considered when evaluating a bond's potential performance. The bond's current price vis-a-vis its face value is one. The bond's maturity (the number of years or months the issuer is borrowing money for) is another variable. The bond's interest rate and its yield—its effective return, based on its price and face value—is a third factor. A final factor is redemption—whether the issuer can call the bond back in before its maturity date. Equity Securities Market 1. Types of stock a. Common stock - Common stock is, well, common. When people talk about stocks in general they are most likely referring to this type. In fact, the majority of stock issued is in this form. We basically went over features of common stock in the last section. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. b. Preferred stock- Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). 2. Rights Vs. Warrants a. Stock rights -Stock rights are instruments issued by companies to provide current shareholders with the opportunity to preserve their fraction of corporate ownership. A single right is issued for each share of stock, and each right can typically purchase a fraction of a share, so that multiple rights are required to purchase a single share. b. Stock Warrants - Warrants are long-term instruments that also allow shareholders to purchase additional shares of stock at a discounted price, but they are typically issued with an exercise price above the current market price. A waiting period of perhaps six months to a year is thus assigned to warrants, which gives the stock price time to raise enough to exceed the exercise price and provide intrinsic value. Warrants are usually offered in conjunction with fixed income securities and act as a "sweetener," or financial enticement to purchase a bond or preferred stock. 3. Types of market capitalization - Mega-cap - This category includes companies that have a market cap of $200 billion or higher. They are the largest publicly traded companies by market value, and typically represent the leaders of a particular industry sector or market. A limited number of companies qualify for this category. - Large-cap - Companies in this category have a market cap between $10 billion to $200 billion. - Both mega and large-cap stocks are referred to as blue chips and are considered to be relatively stable and secure. However, there is no guarantee of these companies maintaining their stable valuations as all businesses are subject to market risks. - Mid-cap - Ranging from $2 billion to $10 billion worth of market cap, this group of companies is considered to be more volatile than the large-cap and mega-cap companies. Growth stocks represent a significant portion of the mid-caps. Some of the companies might not be industry leaders, but they may be on their way to becoming one. - Small-cap - Small-cap companies have a market cap between $300 million to $2 billion. While the bulk of this category is comprised of relatively young companies that may have promising growth potential, a few established old businesses which may have lost value in recent times for a variety of reasons also figure in the list. - Micro-cap - Mainly consisting of penny stocks, this category denotes companies with market capitalizations between $50 million to $300 million. - Nano-cap – Adding another high-risk, high-reward layer beyond the microcaps, the companies having market caps below $50 million are classified as nano-caps. These companies are considered to be the riskiest lot, and the potential for gain varies widely. These stocks typically trade on the pink sheets or OTCBB. 4. Stock Valuation Market value ratios are used to evaluate the current share price of a publicly-held company's stock. These ratios are employed by current and potential investors to determine whether a company's shares are over-priced or under-priced. The most common market value ratios are as follows: Book value per share. Calculated as the aggregate amount of stockholders' equity, divided by the number of shares outstanding. This measure is used as a benchmark to see if the market value per share is higher or lower, which can be used as the basis for decisions to buy or sell shares. Dividend yield. Calculated as the total dividends paid per year, divided by the market price of the stock. This is the return on investment to investors if they were to buy the shares at the current market price. Earnings per share. Calculated as the reported earnings of the business, divided by the total number of shares outstanding (there are several variations on this calculation). This measurement does not reflect the market price of a company's shares in any way, but can be used by investors to derive the price they think the shares are worth. Market value per share. Calculated as the total market value of the business, divided by the total number of shares outstanding. This reveals the value that the market currently assigns to each share of a company's stock. Price/earnings ratio. Calculated as the current market price of a share, divided by the reported earnings per share. The resulting multiple is used to evaluate whether the shares are over-priced or under-priced in comparison to the same ratio results for competing companies A. Optimizing Transaction Cost B. Hedge Fund Hedge funds are actively managed alternative investments that may also utilize non-traditional investment strategies or asset classes. Hedge funds are more expensive compared to conventional investment funds, and will often restrict investment to high net-worth or other sophisticated investors. The number of hedge funds has had an exceptional growth curve in the last twenty years and has also been associated with several controversies. While the performance of hedge funds as beating the market was lauded in the 1990s and early 2000s, since the financial crisis, many hedge funds have underperformed (especially after fees and taxes). C. Exchange traded funds Briefly, an ETF is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange. ETFs are offered on virtually every conceivable asset class from traditional investments to so-called alternative assets like commodities or currencies. In addition, innovative ETF structures allow investors to short markets, to gain leverage, and to avoid short-term capital gains taxes. D. Purchasing Power - - Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase. In investment terms, purchasing power is the dollar amount of credit available to a customer to buy additional securities against the existing marginable securities in the brokerage account. Purchasing power may also be known as a currency's buying power. E. Inflation Rate - Inflation is the rate at which the the value of a currency is falling and consequently the general level of prices for goods and services is rising. F. How to calculate inflation rate - Flation rate is typically calculated using the inflation rate formula. The formula requires the starting point (a specific year or month in the past) in the consumer price index for a specific good or service and the current recording for the same good or service in the consumer price index. Subtract to find the difference between the two numbers. This difference indicates how much the consumer price index for the specific good or service has increased. Divide those results by the starting price (the price reported for the date in the past rather than the current date). This will give you a decimal. To convert this number to a percentage multiply by 100. This will give you the rate of inflation. - The formula is: B-A/A x 100 where A is the starting number and B is the ending number. The consumer price index, which measures the variations in price for retail goods and services, is used to help calculate inflation rate. Inflation rate represents the price increase or decrease of consumer purchased products over a period of time. In addition to the CPI, you may also use historical price records. The following steps can be applied to calculate inflation rate for any given or chosen period of time. 1. Gather information Determine the goods you will be evaluating and gather information on prices during a period of time. You can get this information from BLS or do your own research. Keep in mind that the CPI is an average of the price of the goods or services over a period of time. The number represents an average. 2. Complete a chart with CPI information Input the information you gathered into a chart that is easy to read. Because the averages are taken monthly and yearly, your chart might reflect that information. You can also use charts and calculators available through the Bureau of Labor Statistics. 3. Determine the time period Decide how far back you will be going, or how far into the future. You can also calculate the information across any given number of months, years or decades. You may want to try to determine inflation rates for when you retire to calculate how much you want to save. Conversely, you may want to see the rate of inflation since you graduated, or over the past ten years. 4. Locate CPI for an earlier date On your data chart, or on the one from the BLS, locate the CPI for the good or service you are analyzing for your starting point. This number is represented in the formula by the letter A. 5. Identify CPI for a later date Next, focusing on the same good or service, locate the CPI for the later date, often the current year or month. This number is represented in the formula by the letter B. 6. Utilize inflation rate formula Subtract the starting date CPI from the later date CPI and divide your answer by the starting date CPI. Multiply the results by 100. Your answer is the inflation rate as a percentage. - Inflation rate indicates an increase in prices. When the average inflation rate reaches 100, it means that prices for the analyzed goods or services have doubled. When it goes above 100, prices have more than doubled. To help keep information clear, when rates escalate over 100, the BLS typically selects a new base year. However, when CPI index is over 100, subtract 100 to determine how much prices inflated in that period of time. Remember that the data is reflecting an increase on top of the originating price. G. Annualized Discount Rate - - The annual effective discount rate expresses the amount of interest paid or earned as a percentage of the balance at the start of the annual period. This is in contrast to the effective rate of interest, which expresses the amount of interest as a percentage of the balance at the end of the period. The discount rate is commonly used for U.S. Treasury bills and similar financial instruments. Discount Rate = (Future Cash Flow / Present Value) 1/ n – 1 Discount Rate = ($3,000 / $2,200) 1/5 – 1. Discount Rate = 6.40% H. How to compute annualized investment rate - Calculating the annualized performance of an investment or index using yearly data uses the following data points: P = principal, or initial investment G = gains or losses n = number of years AP = annualized performance rate The generalized formula, which is exponential to take into account compound interest over time, is: AP = ((P + G) / P) ^ (1 / n) - 1 I. Payment System - A payment system is any system used to settle financial transactions through the transfer of monetary value. This includes the institutions, instruments, people, rules, procedures, standards, and technologies that make its exchange possible.[1][2] A common type of payment system is called an operational network that links bank accounts and provides for monetary exchange using bank deposits.[3] Some payment systems also include credit mechanisms, which are essentially a different aspect of payment. J. Commercial banks vs savings banks - There are commercial banks and savings banks. The primary difference is the way each is regulated, which determines the type of banking products they offer. The term "bank" seems interchangeable today given that there are commercial banks and savings banks, which are also called savings & loans. Commercial banks and savings and loans issue loans to consumers for mortgages, cars, personal loans and credit cards. Both commercial banks and S&Ls also make loans to businesses and government agencies. These institutions operate under a federal charter, a state charter or both. K. Thrift banks vs rural banks - - - Thirft banks, meanwhile, are composed of savings and mortgage banks, private development banks, stock savings and loan associations, and microfinance thrift banks. They are essentially engaged in accumulating savings of depositors and investing them, providing short-term working capital and medium- and long-term financing to businesses engaged in agriculture, services, industry and housing, and diversified financial and allied services, and to their chosen markets, especially small- and medium- enterprises and individuals. rural and cooperative banks are most familiar to thos eliving in rural or provincial areas. Their role is to “promote and expand the rural economy in an orderly and effective manner” by providing basic financial services. Many rural and cooperative banks help farmers through the stages of production, from buying seedlings to marketing of their produce. These banks are also differentiated from each other by ownership; while rural banks are privately owned and managed, cooperative banks are organized/owned by cooperatives or federation of cooperatives.
