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Chapter 1

The Investment Environment. Chapter 1. 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. Role of Financial Assets and Markets.

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Chapter 1

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  1. The Investment Environment Chapter 1

  2. 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

  3. Role of Financial Assets and Markets • Consumption Timing • Allocation of Risk • Separation of Ownership

  4. Crisis in Corporate Governance • Accounting Scandals • Enron • Global Crossing • Analyst Scandals • Merrill Lynch • Initial Public Offerings • CSFB

  5. Financial System Clients and Their Needs • Household Sector • Primary Need: Invest Funds • Business Sector • Primary Need: Raise Funds • Government Sector • Primary Need: Raise Funds

  6. Meeting the Needs of Participants • Financial Intermediation • Investment Banking • Financial Innovation & Derivatives • Responding to Regulation & Taxes

  7. Investments and Innovation Technology and Delivery of Service • Computer advancements • On-line trading • More complete and timely information Globalization • Domestic firms compete in global markets. • Performance in regions depends on other regions. • Causes additional elements of risk

  8. Key Trends - Globalization Developments in Global Markets • Managing foreign exchange • Diversification to improve performance • Instruments and vehicles continue todevelop. • Information and analysis improves.

  9. Key Trends - Securitization Securitization & Credit Enhancement • Offers opportunities for investors and originators • Changes in financial institutions and regulation • Improvement in information capabilities • Credit enhancement and its role

  10. Key Trends - Financial Engineering Services of Financial Intermediaries • Bundling and unbundling of cash flows • Slicing and dicing of cash flows • Examples: strips, CMOs, dual purpose funds, principal/interest splits • Collateralized Loans

  11. The Future • Globalization continues and offers more opportunities. • Securitization continues to develop. • Continued development of derivatives and exotics. • Strong fundamental foundation is critical. • Integration of investments & corporate finance.

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