代写留学生作业投资作业Investments
Chapter 2: Bonds, Stocks and other Securities
What is an Asset?
An asset is something that is owned by a business, institution, partnership, or individual that has MONETARY VALUE.
Two Types of Assets
Key distinction:
Physical assets are income-generating assets (producing goods or services).
Financial assets represent claims against the income generated by physical assets.
Physical Assets vs. Financial Assets: Nature of securities
Divisibility
Financial assets are divisible, whereas most physical assets are not.
Marketability (or Liquidity)
Marketability is a characteristic of financial assets that is not shared by physical assets.
Holding Period
The planned holding period of financial assets can be much shorter than the corresponding holding period of most physical assets.
Physical Assets vs. Financial Assets: II
Information Availability
Information about financial assets is often more abundant, and less costly to obtain, than information about physical assets.
Fixed Income Securities (Bonds)
When an investor buys a bond he/she becomes a creditor of the issuer.
Bonds usually pay fixed (sometimes floating) periodic interest installments, called coupon payments.
At maturity the bond becomes due for payment and the par value is returned to the investor.
The price of a bond today is the present value of future coupons and par value.
Fixed Income Securities (Bonds)
When an investor buys a bond he/she becomes a creditor of the issuer.
Bonds usually pay fixed (sometimes floating) periodic interest installments, called coupon payments.
At maturity the bond becomes due for payment and the par value is returned to the investor.
The price of a bond today is the present value of future coupons and par value.
Two Groups of Fixed Income Securities (Bonds)
Money Market Securities Capital Market Securities
Treasury bills/ gilts Treasury notes
Commercial paper Treasury bonds/gilts
Bankers’ acceptances Federal agency bonds
Negotiable certificates of deposit Municipal bonds
Repurchase agreements Corporate bonds
Federal funds Mortgages and mortgage-backed Eurodollars securities
Special Bonds
Callable Bond
Contains a call provision that allows the issuing firm to repurchase its bond prior to the initial maturity date.
Convertible Bond
A corporate bond with an option to convert the bond in a fixed number of stocks (in essence an ordinary bond with a call option added).
Special BondsCallable Bond
Contains a call provision that allows the issuing firm to repurchase its bond prior to the initial maturity date.
Convertible Bond
A corporate bond with an option to convert the bond in a fixed number of stocks (in essence an ordinary bond with a call option added).
Common Stocks/equities/shares
Represent part-ownership in a firm.
This ownership is residual in nature; that is, the common shareholders receive what is left over after all other claims on the firm have been satisfied (most noteworthy being bondholders’ claims).
These residual benefits are received in the form of dividends and/or capital gains.
Classification of Common Stocks
Growth stocks.
Income stocks (also known as value stocks).
Blue-chip stocks.
Speculative stocks.
Cyclical stocks.
Defensive stocks.
Special Stocks
Preferred Stocks
Preferred stocks typically pay fixed dividend and have preference over the payments to common shareholders.
But, preferred stocks also have an additional risk compared to common stocks: their price gains are limited, because the dividends are fixed.
Comparisons- Bonds & Equities
Carry no voting rights
Their claims rank ahead of those of ordinary shares
May impose specific covenants restriction on the corporation
Exposed to interest –rate risk and credit risk
Government bonds are risk-free-have lower returns than other riskier investments
Less liquid than stocks/ shares
Advantages of bonds
Good source of current income
Investment in bonds is relatively safe from large losses
In case of insolvency, they receive payment before shareholders
Disadvantage
Potential profit is limited
Characteristics of equitiesVoting rights
Might offer higher average returns than bonds (reward for higher risk)
Potential profit unlimited
Derivative SecuritiesValue of the security depends directly on, or is derived from, / the value of another asset (see also Chapter 19 and Chapter 20).
Market Risk
Results from unexpected movements of general market prices include:
1. Interest rate risk.
2. Equity risk.
3. Exchange rate risk.
4. Commodity risk.
5. Market liquidity risk.
Credit RiskRisk that a counterparty will default on its obligation or the risk that the creditworthiness will change. It includes:
1. Default risk.
2. Credit migration risk.
Operational RiskThe least-well defined of all types of risk. It is in fact an umbrella term for all investment risks other than market risk and credit risk.