investment
current commitment of money or other resources in the expectation of future benefits
real assets
land, machinery, buildings, and
... [Show More] knowledge that can be used to produce goods
financial assets
the means by which individuals hold their claims on real assets (stocks and bonds). they are liabilities of the issuers of securities
three types of financial assets
fixed income, equity, and derivatives
fixed income
promise a fixed stream of income or a stream of income determined by a specific formula
equity
ownership share of a corporation receiving dividends and ownership of real assets
derivative securities
options and future contracts provide payoffs that are determined by the prices of other assets such as bond or stock prices
portfolio
an investor's collection of investment assets
asset allocation
choice among broad asset classes
security selection
choice of which particular securities to hold within each asset class
security analysis
involves the valuation of particular securities that might be included in the portfolio
risk-return tradeoff
higher-risk assets priced to offer higher expected returns than low-risk assets
passive management
calls for holding highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis
active management
the attempt to improve performance either by identifying mispriced securities or by timing the performance of broad asset classes
three major players in financial markets
1)firms are net demanders of capital
2)households typically are net suppliers of capital
3)governments can be borrowers or lenders
financial intermediaries
brings together the suppliers of capital and the demanders of capital
investment bankers
advise the issuing corporation on the prices it can charge for the securities issued, appropriate interest rates, and so forth
venture capital
small companies rarely rely on bank loans or investors, instead they rely on wealthy individuals known as angel investors
LIBOR rate
banks borrow from each other
treasury-bill rate
U.S. government borrows (TED spread)
tranches
prioritizing claims on loan repayments by dividing pool into senior and junior slices
senior tranches
had first claim on repayments from the entire pool
junior tranches
would be paid only after the senior ones had received their cut
systemic risk
potential breakdown of the financial system when problems in one market spill over and disrupt others
bank-discount method for a treasury bill
ask rate * (days to maturity/days in a year) = X
face value of treasury bill * (1-X)
bond equivalent yield
gain * 365/days to maturity
certificate of deposit
time deposit with a bank
commercial paper
short-term unsecured debt notes rather than borrowing directly from bank
banker's acceptance
an order to a bank by the bank's customer to pay a sum of money at a future date. when a payment is accepted the bank assumes responsibility for ultimate payment to the holder of acceptance
repurchase agreements
short-term, usually overnight, borrowing
federal reserve banks
banks maintain deposits of their own at this bank. funds are called federal funds
municipal bonds
similar to treasury and corporate bonds except their interest income is exempt from federal income taxation. capital gains taxes must be paid
residual claim
means that the stockholders are last in line of all those who have a claim on the assets or income of a company
limited liability
the most shareholders can lose in the event of failure of a corporation is their initial investment
dow jones
averages all stocks
standard and poor's index
averages stocks, but gives higher stocks a higher weight
call option
gives the option to purchase an asset for a specific price (exercise or strike price)
put option
gives the option for an owner to sell an asset for a specific price
future contract
calls for delivery of an asset at a specified delivery or maturity date for an agreed upon price [Show Less]