1、CHAPTER 2Asset Classes and Financial InstrumentsAsset ClassesMoney market instrumentsCapital market instrumentsBondsEquity SecuritiesDerivative Securities2The Money MarketSubsector of the fixed-income market: Securities are short-term, liquid, low risk, and often have large denominationsMoney market

2、 mutual funds allow individuals to access the money market.3Table 2.1 Major Components ofthe Money Market4Money Market SecuritiesTreasury bills: Short-term debt of U.S. governmentBid and asked priceBank discount methodCertificates of Deposit: Time deposit with a bankCommercial Paper: Short-term, uns

3、ecured debt of a company5Money Market SecuritiesBankers Acceptances: An order to a bank by a banks customer to pay a sum of money on a future dateEurodollars: dollar-denominated time deposits in banks outside the U.S.Repos and Reverses: Short-term loan backed by government securities.Fed Funds: Very

4、 short-term loans between banks6Yields on Money Market InstrumentsExcept for Treasury bills, money market securities are not free of default riskBoth the premium on bank CDs and the TED spread have often become greater during periods of financial crisisDuring the credit crisis of 2008, the federal g

5、overnment offered insurance to money market mutual funds after some funds experienced losses7The Bond MarketTreasury Notes and BondsInflation-Protected Treasury BondsFederal Agency DebtInternational Bonds8The Bond MarketMunicipal BondsCorporate BondsMortgages and Mortgage-Backed Securities9Treasury

6、Notes and BondsMaturitiesNotes maturities up to 10 yearsBonds maturities from 10 to 30 yearsPar Value - $1,000Interest paid semiannuallyQuotes percentage of par10The Bond MarketInflation-Protected Treasury BondsTIPS: Provide inflation protectionFederal Agency DebtDebt of mortgage-related agencies su

7、ch as Fannie Mae and Freddie MacInternational BondsEurobonds and Yankee bonds11Municipal BondsIssued by state and local governmentsInterest is exempt from federal income tax and sometimes from state and local tax12Municipal BondsTypesGeneral obligation bonds: Backed by taxing power of issuerRevenue

8、bonds: backed by projects revenues or by the municipal agency operating the project.13Figure 2.4 Tax-exempt Debt Outstanding14Municipal Bond YieldsTo choose between taxable and tax-exempt bonds, compare after-tax returns on each bond.Let t equal the investors marginal tax bracketLet r equal the befo

9、re-tax return on the taxable bond and r m denote the municipal bond rate.If r (1 - t ) r m then the taxable bond gives a higher return; otherwise, the municipal bond is preferred.15Table 2.2 Tax-Exempt Yield TableThe equivalent taxable yield is simply the tax-free rate, rm , divided by (1-t).16Corpo

10、rate BondsIssued by private firms Semi-annual interest paymentsSubject to larger default risk than government securitiesOptions in corporate bondsCallableConvertible17Proportional ownership of a mortgage pool or a specified obligation secured by a pool Produced by securitizing mortgagesMortgage-back

11、ed securities are called pass-throughs because the cash flows produced by homeowners paying off their mortgages are passed through to investors.Mortgage-Backed Securities18Mortgage-Backed SecuritiesMost mortgage-backed securities were issued by Fannie Mae and Freddie Mac.Traditionally, pass-throughs

12、 were comprised of conforming mortgages, which met standards of credit worthiness. 19Mortgage-Backed SecuritiesEventually, “Private-label” issuers securitized large amounts of subprime mortgages, made to financially weak borrowers.Finally, Fannie and Freddie were allowed and even encouraged to buy s

13、ubprime mortgage pools.September, 2008: Fannie and Freddie got taken over by the federal government.20Figure 2.6 Mortgage-backed securities outstanding21Equity SecuritiesCommon stock: OwnershipResidual claimLimited liabilityPreferred stock: PerpetuityFixed dividendsPriority over commonTax treatmentA

14、merican Depository Receipts22Stock Market IndexesDow Jones Industrial AverageIncludes 30 large blue-chip corporationsComputed since 1896Price-weighted average23Example 2.2 Price-Weighted AveragePortfolio: Initial value $25 + $100 = $125 Final value $30 + $ 90 = $120 Percentage change in portfolio va

15、lue = 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%24S&P 500Broadly based index of 500 firmsMarket-value-weighted indexInvestors can base their portfolios on an index:Buy an index mutual fundBuy exc

16、hange traded funds (ETFs)Standard & Poors Indexes25Other Indexes U.S. IndexesNYSE CompositeNASDAQ CompositeWilshire 5000Foreign IndexesNikkei (Japan)FTSE (U.K.; pronounced “footsie”)DAX (Germany),Hang Seng (Hong Kong)TSX (Canada)26Derivatives MarketsOptions and futures provide payoffs that depend on

17、 the values of other assets such as commodity prices, bond and stock prices, or market index values.A derivative is a security that gets its value from the values of another asset.27OptionsCall: Right to buy underlying asset at the strike or exercise price.Value of calls decrease as strike price inc

18、reasesPut: Right to sell underlying asset at the strike or exercise price.Value of puts increase with strike priceValue of both calls and puts increase with time until expiration.28Futures ContractsA futures contract calls for delivery of an asset (or in some cases, its cash value) at a specified delivery or maturity date for an agreed-upon price, called the futures price, to be paid at contract maturity.Long position: Take delivery at maturityShort position: Make delivery at maturity29ComparisonOptionRight, but not obligation, to buy or sell; option