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Chapter 2. Real and Financial Assets. Real Assets —Tangible assets such as houses, equipment and inventories Financial Assets —Claims for future payment on other economic units—common and preferred stocks. Q: What are SECURITIES?.
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Real and Financial Assets • Real Assets—Tangible assets such as houses, equipment and inventories • Financial Assets—Claims for future payment on other economic units—common and preferred stocks
Q: What are SECURITIES? A: Financial Assets that Investors purchase hoping to earn a high rate of return.
Types of Securities • Treasury Bills and Treasury Bonds • Municipal Bonds • Corporate Bonds • Preferred Stocks • Common Stocks Which of these are RISKY? Which promise HIGH RETURNS? Is there a relationship betweenRISK and RETURN?
Corporate FinancingSources • From 1998-2000, over $1.1trillion in external corporate financing was raised. • From 1998 through 2000, capital has been raised through the following sources: • Corporate Bonds and Notes 73.6% • Equities (Preferred & 26.4% Common Stock) (Interest is deductible and dividends are not)
cash firm saver securities Movement of Savings • Direct Transfer of Funds
funds funds saver investment banker firm securities securities Movement of Savings • Indirect Transfer using Investment Banker
funds funds financial intermediary saver firm intermediary securities firm securities Movement of Savings • Indirect Transfer using a Financial Intermediary
Financial Market Components • Public Offering • Firm issues securities, which are made available to both individual and institutional investors. • Private Placement • Securities are offered and sold to a limited number of investors.
Financial Market Components • Primary Market • Market in which new issues of a security are sold to initial buyers. • Secondary Market • Market in which previously issued securities are traded.
Financial Market Components • Money Market • Market for short-term debt instruments (maturity periods of one year or less). • Capital Market • Market for long-term securities (maturity greater than one year). FedFundsRate
Financial Market Components • Organized Exchanges • Buyers and sellers meet in one central location to conduct trades. • Over-the-Counter (OTC) • Securities dealers operate at many different locations across the country. • Connected by Nasdaq system (National Association of Securities Dealers Automated Quotation system).
Investment Banking How do investment bankers help firms issue securities? Underwriting the issue. Distributing the issue. Advising the firm.
Interest Rates Interest Rate Determinants
INFERRED REAL RATE OF INTEREST (Nominal less inflation = Real Rate) Nom. Infl. Real Yld Rate Rate Treasury Bills 4.5% 3.0% 1.5% Treasury Bonds 7.0% 3.0% 4.0% Corporate Bonds 9.0% 3.0% 6.0%