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1
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Chapter 1
Investments – The investment
environment
Asst.Prof.Ph.D Julijana
Angelovska
[email protected]
September 2012
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
Bodie • Kane • Marcus
2
Essentials of Investments
Fourth
Edition
Today’s Agenda
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Administrative Details
Review Syllabus
Investment?
Real assets versus financial assets.
The three broad types of financial
assets.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
3
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Schedules-Fall semester (B2)
 Friday
- Lecture
 08:15-09:00
09:15-10:00
Exercise
10:15-11:00
Attendance: Attendance at lectures and
exercises is compulsory. If there is less than
72% attendance the student is not allowed to
take the exam. (max,4 weeks missed)
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
Bodie • Kane • Marcus
4
Essentials of Investments
Fourth
Edition
Class Structure
Lectures: Begin 15 minutes after the hour and end on the
hour. There will be a 15 minutes break midway.
Determination of Grades:
1)
2)
3)
4)
5)
6)
Research Requirement
Homework
20%
Term Project Presentation
Term Project Final Write-up
Midterm Exam
40%
Final Exam
40%
Text: Investment 5th edition ,Bodie, Cane, Marcus, Mc
Graw Hill, 2003
Review Syllabus
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
5
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Midterm & Final: 40% and 40%
Midterm:
• 40-60% multiple choice.
• The rest of it will be short answer and short
essay questions.
• No make-up midterm test.
Final:
• Similar format.
• Focus on materials after the mid-term
Review Syllabus
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
6
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Class Etiquette
• Come to class on time and don’t walk out
early.
• Turn off your cell phone.
• Don’t talk amongst yourselves, read the
newspaper, or eat during lecture.
• Do ask questions and ask me to slow down if
I am going too fast or the material is not clear.
• Do help out the class by initiating and
participating in class discussion.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
7
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Quick Review of Topics
Weekly Study Plan
Weeks
Topics
1
The Investment Environment
2
Financial Markets and Instruments
3
Security Trade
4
Time Value of Money
5
Interest
6
Securities (Fixed-Income)
7
Securities (Fixed-Income) Valuation
Mid-Term Exam Week
8
Equity
9
Equity Valuation Models
10
Risk
11
Portfolio Theory
12
Capital Allocation Between Instruments
13
Optimal Risk Portfolio Selection
14
Cyclical Review
Final Exam Week
Review Syllabus
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
8
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
You got money
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
9
Bodie • Kane • Marcus
Irwin / McGraw-Hill
Essentials of Investments
Fourth
Edition
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
10
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Investment
An investment is the current commitment
of money or other resources in the
expectation of reaping future benefits.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
11
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Investing
• Putting your money to use in order to
make money on it.
• Simple Interest vs. Compound Interest
– Simple – interest that is computed only on the
amount saved.
– Compound – interest that is computed on the
amount saved plus interest previously earned.
• Securities refers to bonds, stocks, and
other documents sold by corporations
and governments to raise large sums of
money.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
12
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Investing Through Banks
•Savings Account
–Simplest form of saving
–Offered by all institutions (banks, credit unions, etc.)
–Generally, a low minimum deposit is required
–Interest is low and varies from institution to institution
•Certificate of Deposit
–Requires a minimum deposit for a minimum amount of time
–Interest rates are higher than a savings account
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
13
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Investing Through Banks
Continued
• Money Market Fund
–Kind of mutual fund, or pool of money, put into a
variety of short-term debt by business and
government.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
14
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
REAL ASSETS VERSUS FINANCIAL
ASSETS
The material wealth of society is determined by
the productive capacity of its economy, that is,
the goods and services its members can
create.
This capacity is a function of the real assets of
the economy:
the land, buildings, machines, and knowledge
that can be used to produce goods and
services (together physical and “human”
assets).
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
15
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
REAL ASSETS VERSUS FINANCIAL
ASSETS
What about financial assets?
as stocks and bonds.
Such securities are no more than sheets of
paper or, more likely, computer entries and do
not contribute directly to the productive
capacity of the economy.
These assets are the means by which
individuals in well-developed economies hold
their claims on real assets.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
16
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
REAL ASSETS VERSUS FINANCIAL
ASSETS
What is asset?
Broadly speaking, an asset is any possession
that has value in an exchange. Assets can be
classified as tangible or intangible.
A tangible asset is one whose value depends
on particular physical properties—examples
are buildings, land, or machinery.
Intangible assets, by contrast, represent legal
claims to some future benefit.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
17
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
REAL ASSETS VERSUS FINANCIAL
ASSETS
The entity that has agreed to make future cash payments is
called the issuer of the financial instrument;
the owner of the financial instrument is referred to as the
investor.
examples of financial instruments:
■ A loan by HALK Bank (investor/commercial bank) to an
individual (issuer/borrower) to purchase a car
■ A bond issued by the U.S. Department of the Treasury
■ A bond issued by Ford Motor Company
■ A bond issued by the government of France
■ A share of common stock issued by Toyota Motor
Corporation, a Japanese company
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
18
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
REAL ASSETS VERSUS FINANCIAL
ASSETS
real assets
Assets used to
produce goods and
services.
Irwin / McGraw-Hill
financial assets
Claims on real
assets or the
income
generated by
them.
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
19
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Investments & Financial Assets
• Essential nature of investment
– Reduced current consumption
– Planned later consumption
• Real Assets
– Assets used to produce goods and
services
• Financial Assets
– Claims on real assets
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
20
Bodie • Kane • Marcus
Irwin / McGraw-Hill
Essentials of Investments
Fourth
Edition
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
21
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Are the following assets real or
financial?
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•
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•
•
a. Patents
b. Lease obligations
c. Customer goodwill
d. A college education
e. A $5 bill
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
22
Bodie • Kane • Marcus
Essentials of Investments
A TAXONOMY OF FINANCIAL
ASSETS
Fourth
Edition
• Fixed-income securities promise either a fixed
stream of income or a stream of income that is
determined according to a specified formula.
fixed-income securities come in a tremendous
variety of maturities and payment provisions. At
one extreme, the money market refers to fixedincome securities that are short term, highly
marketable, and generally of very low risk. In
contrast, the fixed income capital market includes
long-term securities such as Treasury bonds, as
well as bonds issued by federal agencies, state
and local municipalities, and corporations.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
23
Bodie • Kane • Marcus
Essentials of Investments
A TAXONOMY OF FINANCIAL
ASSETS
Fourth
Edition
• Common stock, or equity, in a firm represents
an ownership share in the corporation. Equity
holders are not promised any particular payment.
They receive any dividends the firm may pay and
have prorated ownership in the real assets of the
firm. If the firm is successful, the value of equity
will increase; if not, it will decrease. The
performance of equity investments, therefore, is
tied directly to the success of the firm and its real
assets.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
24
Bodie • Kane • Marcus
Essentials of Investments
A TAXONOMY OF FINANCIAL
ASSETS
Fourth
Edition
• Derivative securities such as options and futures
contracts provide payoffs that are determined by
the prices of other assets such as bond or stock
prices. For example, a call option on a share of
Intel stock might turn out to be worthless if Intel’s
share price remains below a threshold or
“exercise” price such as $30 a share, but it can be
quite valuable if the stock price rises above that
level. Derivative securities are so named because
their values derive from the prices of other assets.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.
25
Bodie • Kane • Marcus
Essentials of Investments
Fourth
Edition
Questions?
1. Define an investment.
2. Distinguish between real assets and
financial assets.
3. List and explain the three broad types of
financial assets.
Homework
Make a search about the history of joint stock
companies and come up with interesting PPT
or essay.
Irwin / McGraw-Hill
© 2001 The McGraw-Hill Companies, Inc. All rights reserved.