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CHAPTER 2Asset Classes and FinancialAsset Classes and FinancialInstrumentsINVESTMENTS|BODIE, KANE, MARCUSAsset Classes•Money market instrumentsp•Capital market instruments–Bonds–Equity SecuritiesEquity Securities–Derivative SecuritiesINVESTMENTS|BODIE, KANE, MARCUSThe Money Market•Subsector of the fixed-income market: Secu t es a e s o t te,qu d,o Securities are short-term, liquid, lowrisk, and often have largedenominations•Money market mutual funds allow individuals to access the money market. individuals to access the money marketINVESTMENTS|BODIE, KANE, MARCUSTable 2.1 Major Components ofthe Money MarketINVESTMENTS|BODIE, KANE, MARCUSMoney Market Securities •Treasury bills: Short-term debt of U.S.ggovernment–Bid and asked price–Bank discount methodBank discount method•Certificates of Deposit: Time deposit with a bankCommercial Paper: Short term, unsecured •Commercial Paper:Short-term unsecured debt of a companyINVESTMENTS|BODIE, KANE, MARCUSMoney Market Securities •Bankers’ Acceptances: An order to a bank B k’A t A d t b k by a bank’s customer to pay a sum of money on a future date•Eurodollars: dollar-denominated time deposits in banks outside the U.S.Repos and Reverses:Short-term loan •Repos and Reverses: Short-term loan backed by government securities.•Fed Funds: Very short-term loans between Fed F nds Ver short term loans bet een banksINVESTMENTS|BODIE, KANE, MARCUSYields on Money Market Instruments•Except for Treasury bills, money marketE t f T bill k t securities are not free of default risk•Both the premium on bank CDs and thep gTED spread have often become greater during periods of financial crisisDuring the credit crisis of2008the federal •During the credit crisis of 2008, the federal government offered insurance to money market mutual funds after some funds market mutual funds after some funds experienced lossesINVESTMENTS|BODIE, KANE, MARCUSThe Bond Market•Treasury Notes and Bonds •Inflation-Protected TreasuryBondsg y•Federal Agency Debt •International BondsINVESTMENTS|BODIE, KANE, MARCUSThe Bond Market•Municipal BondsCorporate Bonds•Corporate Bonds•Mortgages and Mortgage-Backed SecuritiesS itiINVESTMENTS|BODIE, KANE, MARCUSTreasury Notes and Bonds•Maturities–Notes –maturities up to 10 years–Bonds –maturities from 10 to 30years•Par Value -$1,000•Interest paid semiannuallyI id i llp g p•Quotes –percentage of parINVESTMENTS|BODIE, KANE, MARCUSThe Bond Market•Inflation-Protected Treasury Bondsp–TIPS: Provide inflation protection •Federal Agency Debt–Debt of mortgage-related agencies such asD bt f t l t d i hFannie Mae and Freddie Mac •International BondsEurobonds and Yankee bonds–Eurobonds and Yankee bondsINVESTMENTS|BODIE, KANE, MARCUSMunicipal BondsIssued by state and local governments •Issued by state and local governments •Interest is exempt from federal incometax and sometimes from state and localtaxINVESTMENTS|BODIE, KANE, MARCUSMunicipal Bonds•TypesGeneral obligation bonds: Backed by taxing–General obligation bonds:Backed by taxingpower of issuer–Revenue bonds: backed by project sRevenue bonds:backed by project’srevenues or by the municipal agencyoperating the project.operating the projectINVESTMENTS|BODIE, KANE, MARCUSFigure 2.4 Tax‐exempt DebtOutstandingINVESTMENTS|BODIE, KANE, MARCUSMunicipal Bond YieldsTo choose between taxable and tax-exempt •To choose between taxable and tax-exempt bonds, compare after-tax returns on each bond.•Let t equal the investor’s marginal taxbracket •Let r equal the before-tax return on the taxable bond and r denote the municipal m pbond rate.•If r (1 -t ) > r then the taxable bond gives ()m g a higher return; otherwise, the municipal bond is preferred.INVESTMENTS |BODIE, KANE, MARCUS22 Tax‐Table 2.2Exempt Yield TableThe equivalent taxable yield is simply the tax-free q y p y, divided by (1-t).rate, rmINVESTMENTS|BODIE, KANE, MARCUSCorporate Bonds•Issued by private firmsIssued by private firmsp y•Semi-annual interest payments•Subject to larger default risk than government securitiest itiOp p•Options in corporate bonds–Callable–ConvertibleINVESTMENTS|BODIE, KANE, MARCUSMortgage‐Backed Securities •Proportional ownership of a mortgagepool or a specified obligation secured bya pool•Produced by securitizing mortgages Produced by securitizing mortgages–Mortgage-backed securities are calledpass-throughs because the cash flowsproduced by homeowners paying off theirmortgages are passed through toinvestors.INVESTMENTS|BODIE, KANE, MARCUSMortgage‐Backed Securities •Most mortgage-backed securities were issued by Fannie Mae and Freddie Mac.i d b F i M d F ddi M•Traditionally, pass-throughs were comprised of conforming mortgages, comprised of conforming mortgageswhich met standards of credit worthiness.INVESTMENTS|BODIE, KANE, MARCUSMortgage‐Backed Securities •Eventually, “Private-label” issuersE t ll “P i t l b l”isecuritized large amounts of subprime mortgages, made to financially weakbo o e sborrowers.•Finally, Fannie and Freddie were allowed and e en enco raged to b s bprimeand even encouraged to buy subprime mortgage pools.•September, 2008: Fannie and Freddie got taken over by the federal government taken over by the federal government.INVESTMENTS|BODIE, KANE, MARCUSFigure 2.6 Mortgage‐backed securitiesoutstandingINVESTMENTS|BODIE, KANE, MARCUSEquity Securities•Common stock: Ownership–Residual claim–Limited liability•Preferred stock: PerpetuityPreferred stock:Perpetuity–Fixed dividends–Priority over common–Tax treatment•American Depository ReceiptsINVESTMENTS|BODIE, KANE, MARCUSStock Market IndexesDow Jones Industrial Average•Dow Jones Industrial Average–Includes 30 large blue-chipcorporationstip–Computed since 1896–Price-weighted averageINVESTMENTS|BODIE, KANE, MARCUSExample 2.2‐Weighted Average22 PricePortfolio: Initial value $25 + $100 = $125Final value$30+$90=$120Final value $30 $ 90 $120Percentage change in portfolio value= 5/125 = -.04 = -4%Index: Initial index value (25+100)/2 = 62.5()Final index value (30 + 90)/2 = 60Percentage change in index -2.5/62.5P t h i i d25/625= -.04 = -4%INVESTMENTS|BODIE, KANE, MARCUSPoor’s Indexes S&P 500Standard & Poor s •S&P 500–Broadly based index of 500firmsBroadly based index of 500 firms –Market-value-weighted index•Investors can base their portfolios i don an index:–Buy an index mutual fundBuy an index mutual fund –Buy exchange traded funds (ETFs)INVESTMENTS |BODIE, KANE, MARCUSOther IndexesU.S. Indexes•NYSE Composite Foreign Indexes •Nikkei (Japan)p•NASDAQ Composite•Wilshire 5000(p )•FTSE (U.K.; pronounced “footsie”)•DAX (Germany),•Hang Seng (Hong Kong)•TSX (Canada)INVESTMENTS |BODIE, KANE, MARCUSDerivatives Markets•Options and futures provide payoffs that pdepend on the values of other assets such as commodity prices, bond and stock prices, or market index values.prices or market index values•A derivative is a security that gets its value from the values of another asset.from the values of another asset.INVESTMENTS|BODIE, KANE, MARCUSOptions•Call: Right to buy underlying asset at thepstrike or exercise price.–Value of calls decrease as strike priceincreases•Put: Right to sell underlying asset at the t ik i istrike or exercise price.–Value of puts increase with strike price •Value of both calls and puts increase with time until expirationtime until expiration.INVESTMENTS|BODIE, KANE, MARCUSFutures Contracts•A futures contract calls for delivery of an(,) asset (or in some cases, its cash value) ata specified delivery or maturity date for anagreed upon price, called the futures price, agreed-upon price called the futures priceto be paid at contract maturity.•Long position: Take delivery at maturity •Short position: Make delivery at maturityINVESTMENTS|BODIE, KANE, MARCUSComparisonOption•Right, but not obligation, Futures Contract •Obliged to make or takeg gto buy or sell; option is exercised only when it is fit blgdelivery. Long position must buy at the futures i h t iti tprofitable •Options must be price, short position must sell at futures price Futures contracts arepurchased•The premium is the price of the option itself •Futures contracts are entered into without costof the option itself.INVESTMENTS|BODIE, KANE, MARCUS。
