Bài giảng Essentials of Investments - Chapter 2 Financial Markets and Instruments

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus1 Chapter 2 Financial Markets and Instruments Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus2 Major Classes of Financial Assets or Securities • Debt – Money market instruments – Bonds • Common stock • Preferred stock • Derivative securities Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus3 Markets and Instruments • Money Market – Debt Instruments – Derivatives • Capital Market – Bonds – Equity – Derivatives Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus4 Money Market Instruments • Treasury bills • Certificates of deposit • Commercial Paper • Bankers Acceptances • Eurodollars • Repurchase Agreements (RPs) and Reverse RPs • Federal Funds Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus5 Money Market Instrument Yields • Yields on Money Market Instruments are not always directly comparable Factors influencing yields • Par value vs. investment value • 360 vs. 365 days assumed in a year (366 leap year) • Bond equivalent yield Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus6 Interest rates that arise in connection with money market securities .Bank discount rate (rBD ) .This is a rate that is used solely for determining the price of a MM security for trading purposes. .Bond equivalent yield (rBEY ) .In general, a yield is an interest rate that (under very specific, sometimes unrealistic, assumptions) represents a rate of return. .rBEY is such a rate of return. It is an annual percentage rate (APR) .For comparing different MM instruments, we often use the effective annual rate (EAR) of the rBEY . Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus7 Bank Discount Rate (T-Bills) rBD = bank discount rate P = market price of the T-bill n = number of days to maturity rBD = 10,000 - P 10,000 x 360 n 90-day T-bill, P = $9,875 rBD = 10,000 - 9,875 10,000 x 360 90 = 5% Example Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus8 Bond Equivalent Yield • Can’t compare T-bill directly to bond – 360 vs 365 days – Return is figured on par vs. price paid • Adjust the bank discounted rate to make it comparable Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus9 Bond Equivalent Yield P = price of the T-bill n = number of days to maturity rBEY = 10,000 - P P x 365 n rBEY = 10,000 - 9,875 9,875 x 365 90 rBEY = .0127 x 4.0556 = .0513 = 5.13% Example Using Sample T-Bill Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus10 Capital Market - Fixed Income Instruments Publicly Issued Instruments • US Treasury Bonds and Notes • Agency Issues (Fed Gov) • Municipal Bonds Privately Issued Instruments • Corporate Bonds • Mortgage-Backed Securities Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus11 Capital Market - Equity • Common stock – Residual claim – Limited liability • Preferred stock – Fixed dividends - limited – Priority over common – Tax treatment Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus12 Uses • Track average returns • Comparing performance of managers • Base of derivatives Factors in constructing or using an Index • Representative? • Broad or narrow? • How is it constructed? Stock Indexes Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus13 Examples of Indexes - Domestic • Dow Jones Industrial Average (30 Stocks) • Standard & Poor’s 500 Composite • NASDAQ Composite • NYSE Composite • Wilshire 5000 Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus14 Examples of Indexes - Int’l • Nikkei 225 & Nikkei 300 • FTSE (Financial Times of London) • Dax • Region and Country Indexes – EAFE – Far East – United Kingdom Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus15 Construction of Indexes • How are stocks weighted? – Price weighted (DJIA) – Market-value weighted (S&P500, NASDAQ) – Equally weighted (Value Line Index) Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus16 Example .Suppose we have two stocks #Shares Stock Pr 9/19/01 Pr 9/20/01 Return Outstand A 100 120 20% 10M B 10 9 –10% 500M .Computation of a price-weighted index (like the Dow) .Index on 9/19/01 (100+10)/2 = 55 Index on 9/20/01 (120+9)/2 = 64.5 Return on index 17.27% .This is called a price-weighted index because the index return is the price-weighted average of the component (100/110) x 20% + (10/110) x –10% = 17.27% .Portfolio: one share in each stock. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie • Kane • Marcus17 Market-value weighted index .A market-value weighted average (like the S&P). .Index on 9/19/01 = “100” (an arbitary base level) .Market value of A = $100 x 10M = $1,000M Market value of B = $10 x 500M = $5,000M .Return on index is (1,000/6,000) x 20% + (5,000/6000) x –10% = –5% .Index on 9/20/01 = 100 x (1–5%) = 95 .Portfolio: 1/6 in A; 5/6 in B .An equally-weighted index (like the Wilshire 5000) .Index on 9/19/01 = “100” (an arbitary base level) .Return on index is (20% + –10%)/2 = +5% .Index on 9/20/01 = 100 x (1+5%) = 105 .Portfolio: equal amounts in A and B