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Transcript
Financial Instruments Professor Lasse H. Pedersen Prof. Lasse H. Pedersen 1 Overview Real and financial assets Use of financial assets Important examples of financial assets Prof. Lasse H. Pedersen Real Versus Financial Assets Real Assets – Assets used to produce goods and services – Examples: factories, land, human capital, etc. Financial Assets – Claims on real assets such as stocks bonds – Derivatives Prof. Lasse H. Pedersen 2 Use of Financial Instruments Allocation of Capital – Financing of projects Consumption Smoothing: – saving and borrowing Allocation of Risk – Diversification – Hedging – Insurance Meeting place for investors with different (not necessary opposite) investment needs Prof. Lasse H. Pedersen Important Financial Assets Fixed Income Securities – ‘Borrowing instruments’ – Treasury bonds – Municipal bonds – Corporate bonds Equity – ‘Ownership in a firm’ – A stock is a ‘claim to funds after all debts have been paid’ Prof. Lasse H. Pedersen Important Financial Assets Derivatives – Definition: ‘securities whose payoff depends on values of other assets’ – Examples Options Futures Swaps Investment Companies – Mutual Funds Prof. Lasse H. Pedersen Treasury Bonds Types of Treasury bonds – Treasury Bills (less than 1 year maturity) – Treasury Notes (1-10 year maturity) – Treasury Bonds (10-30 year maturity) Semi-annual coupon payments Prof. Lasse H. Pedersen 7 Municipal Bonds Issued by state and local governments – Exempt from federal income tax – Exempt from (issuing) state local tax Types of ‘munis’ – General obligation bonds: baked by the ‘full faith of credit’ of the issuer (taxing power) – Revenue bonds (riskier): issued to finance specific projects (airports, hospital, etc.) Prof. Lasse H. Pedersen 8 Corporate Bonds Default Risk Commercial paper – Short term Corporate bond – Longer term – Typically pays semi-annual coupons – Different “seniority” classes senior junior or subordinated Prof. Lasse H. Pedersen 9 Equity Equity – Future cash-flows are uncertain. – Maturity is indefinite. – Involves risk, variable liquidity. Two main classes of equities – Common Stock – Preferred Stock Prof. Lasse H. Pedersen 10 Equity, Continued Common Stock – Voting rights (“ownership”) – Right to dividends – Limited liability – In case of default, last in line Preferred Stock – Non-voting – Usually receive fixed stream of dividends – Receive dividends before common – More like debt than equity Prof. Lasse H. Pedersen 11 Derivatives Examples: options and futures Motivation: Hedging – Farmer (price risk associated with selling) – Gas company (price risk from buying) – Multinational firm (exchange rate risk) Motivation: Speculation – High leverage and high risk Prof. Lasse H. Pedersen 12 Futures A contract to purchase/ sell an asset (commodities or financial) – At a specified price – On a specified date Prof. Lasse H. Pedersen 13 Options Call option – The right to buy an asset at a specified price (the “strike price”) before a specified date Put option – The right to sell an asset at a specified price before a specified date Prof. Lasse H. Pedersen 14 Mutual Funds Markets Financial intermediaries that pool funds from investors and buy assets Advantages: – Record keeping and administration – Diversification and divisibility – Professional management and analysis – Lower transactions costs Prof. Lasse H. Pedersen 15 AssetAsset-Backed Securities Bundling of existing securities such as – mortgages – auto loans – corporate bonds – credit card receivables An example of financial engineering Prof. Lasse H. Pedersen 16