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TopicΠ. Financial Instruments and Markets. Financial Instruments. Money market instruments. Bonds. Preferred Stock. Futures,. Options. Mutual Funds. Hedge Funds. Fixed-Income Investments. Global Investment Choices. Equities. Derivatives. Indirect, Managed Investments.

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TopicΠ

Financial Instruments and Markets


Financial Instruments


  • Money market instruments

  • Bonds

  • Preferred Stock

  • Futures,

  • Options

  • Mutual Funds

  • Hedge Funds

  • Fixed-Income Investments

Global Investment Choices

  • Equities

  • Derivatives

  • Indirect, Managed Investments


Fixed Income Investments

  • Most fixed income instruments specify a number of features including the following:

    • The maturity date

    • The coupon

    • The par value


Treasury Bills

Certificate of Deposits(CD)

Commercial Paper(CP)

Bankers’ Acceptances(BA)

Eurodollars

Repos and Reverses Repos

Brokers’ Calls

Federal Funds

the LIBOR Market

Money Market Instruments


(I)

Fixed Income Securities─Capital Market

  • Government Bonds

  • Treasury notes

  • Treasury bonds

  • Government agency bonds

  • Municipal Bonds

  • General obligation bonds (GOs)

  • Revenue bonds


(II)

Fixed Income Securities─Capital Market

  • Corporate Bonds

  • Debentures

  • Senior secured bonds

  • Subordinated debentures

  • Income bonds

  • Convertible bonds

  • Callable bonds

  • Bonds with Warrants


(Ш)

Fixed Income Securities─Capital Market

  • International Bond Investment

  • Eurobond market

  • Yankee bonds, Bulldog market, Samurai Market

  • International domestic bonds

  • Other Fixed Income Instruments

  • Asset backed securities

CMOs

CARs

  • Zero coupon bonds

  • Preferred Stocks


Equity Securities

  • Common Stock

  • Foreign Equities

  • American Depository Receipts(ADRs)

  • American Shares

  • Direct purchase

  • International or global mutual funds


American Depository Receipts

  • Easiest way to acquire foreign shares

  • Certificates issued by a U.S. bank

  • Buy and sell in U.S. dollars

  • Dividends in U.S. dollars

  • May represent multiple shares

  • Very popular, over 1500 ADR programs available in 2002


Derivative Securities

There are many types of derivative investments, including financial derivative securities whose payoffs are tied to various financial assets.

  • Options

    • Warrants

    • Puts and calls

  • Futures contracts


Derivatives: Options

  • Warrants

  • Puts and calls


Derivatives: Futures

  • Standardized contracts to make or take delivery of some financial (or other) asset in exchange a specified payment at a future date.


Managed Investments

  • Closed-end investment companies

  • Open-end investment companies (Mutual funds)

  • Hedge Funds:

  • Venture capital pools:

  • Real Estate Investment Trusts (REITs):


Historic Return and Risk


Exhibit 3.1

Exhibit 3.2


Return/Risk: Characteristics

  • Major classes of assets

  • large company common stocks

  • small capitalization common stocks

  • long-term U.S. government bonds

  • long-term corporate bonds

  • Intermediate-term U.S. T-bonds

  • U.S. T-bills

  • consumer goods (measure inflation)


Return/Risk: focuses

  • Consider:

Exhibit 3.15


Summarizing the Historic Data

  • Average premiums earned:

    • Equity risk premium

    • Small-stock premium

    • Horizon premium

    • Default premium


Exhibit3.3

Exhibit3.4

Exhibit3.6

Exhibit3.9

Exhibit3.7

Exhibit3.8

Exhibit3.10


World Portfolio Performance

Exhibit3.16

Exhibit3.17

Exhibit3.18

Exhibit3.11

Exhibit3.12


Financial Markets and Market Structures


Types of markets

Direct Search Markets

Brokered Markets

Dealer Markets

Auction Markets


Characteristics of A Good Market

  • Availability of info (timely & accurate)

  • Liquidity

  • Low TCs (Internal efficiency)

  • External efficiency


Primary Capital Markets

  • Underwriting Functions

  • Relationships with Investment Bankers

  • Negotiated

  • Competitive bids

  • Best-efforts

Exhibit6.1


Primary Markets:Common Stock

  • Types of new issues

  • Forms of Underwriting

  • Negotiated

  • Competitive bids

  • Best efforts

  • Introduction of Rule 415 (Shelf Registration)

  • Private Placement and Rule 144A


Allows firms to register securities and sell them piecemeal over the next two years

Rule 415: Shelf Regis tration

  • Pros:

  • Cons:

  • Used for straight debentures rather than CS or CB


Private Placements and Rule 144A

  • Firms sells to a small group of

institutional investors, with some assistance of an investment banker


Primary Markets:Government Bond

  • “Federal Reserve System” Auction

  • Competitive bids vs. non-competitive bids

  • 我國公債發行實務

  • 中央公債原則採標售方式發行

  • 標售方式

  • 1.複數利率(價格)標

  • 2.單一利率(價格)標,即荷蘭標


Primary Markets: Corporate Bond

  • Negotiated arrangement

  • 我國公司債發行實務


Secondary Markets

  • Provide liquidity to investors who acquire

  • securities in the primary market

  • An active secondary market


Secondary Bond Markets

  • Stock Exchanges (First Market)

  • Over-the-counter market (Second Market)

  • Third Market

  • Fourth Market


Secondary Market Trading Systems

  • Pure auction market

  • Dealer market

p.190下表Dealer Bid Ask


Call Versus Continuous Markets

  • Call markets(集合競價)

  • Continuous markets(連續競價 )


Exchange Membership

  • Four categories of membership:

  • Specialists

  • Commission brokers

  • Floor brokers

  • Registered traders


Major Types of Orders

  • Market orders

  • Limit orders

  • Special Orders

  • Stop loss

  • MIT (Market-if-touched)


Margin Trading :Example (I)

P0=$50,#200 shares, IM=50% I0=$5000

 leverage factor=1/0.5=2


Margin Trading :Example (II)

  • If MM=25%

  • If P =$30

  • Investor’s Margin =

Margin call for


Suppose bearish on Xerox when P = $100

Short 1,000 shares IM = 50%, MM = 30%

Short Sales : Example (I)


Short Sales : Example II


融資擔保品市值+原融券擔保品及保證金

擔保維持率=

原融資金額+融券標的證券市價

擔保維持率


Changes in the Securities Markets

  • In recent years, major changes in securities markets have largely been driven by the influence of large financial (institutional) investors.

  • Among the impacts:

    • Negotiated (competitive) commission rates

    • Influence of block trades

    • Impact on stock price volatility

    • Development of National Market System (NMS)


New Trading Systems

  • Super DOT

  • Display Book

  • Opening Automated Report Service (OARS)

  • Market Order Processing

  • Limit Order Processing


Global Market Changes (I)

  • NYSE Off-hours trading

  • Listing foreign stocks on the NYSE


Global Market Changes (II)

  • London Stock Exchange “Big Bang”

  • Tokyo Stock Exchange “Big Bang”


Future Developments

  • Creation and consolidation of stock exchanges

  • More specialized investment companies

  • Changes in the financial services industry

  • Trading in Cybermarkets


SECURITY MARKET INDICATOR SERIES


What is an indicator series?

It is an index that answers the question: What happened in the market today?


Uses of Security Market Index

Performance benchmark

Develop an index portfolio

Measure(or examine factors of) market movements

Technical Analysis,to predict future price move

Proxy for mkt portfolio to compute


Sample

Factors in Constructing Market Indicator Series

Weighting

  • price weighted

  • value-weighted

  • unweighted

Computational procedure


Stock-Market Indicator Series

  • Price-Weighted Series

  • Value-Weighted Series

  • Equal-Weighted Series


DIJA: Computation

股價總和/固定除數

Exhibit b7.2

Exhibit 7.1


Value Weighted Series

計算期市值總合

× 基期指數

=

基期市值總合

(固定除數)

Exhibit 7.3

Exhibit7.4


台灣發行量加權股價指數

 基期:55年指數為100

 採樣:所有上市普通股,但不含變更交易方式股票,基金受

益憑證,各類憑證、上市未滿月之股票。

 固定權數隨採樣異動、現金增資、轉換公司債轉換為股票及

公司合併而調整(無償配股除權則不調整),理論上除權前後

總市值無變化。

新除固定除數 =

變動後總市值

×基期指數

變動前指數


Taiwan TAIEX : Example


Unweighted Price Indicator Series

Arithmetic and Geometric Means

GM Index:

AM Index:


Exhibit7.8


Unweighed Index:Example


Value Line Index


Stock Split

If Stock A splits 2:1 on 4/1


Price

#shares

Stock

4/1

4/2

4/1

4/2

A

$40

$20

100

200

B

35

37

100

100

C

50

51

100

100


Stock

4/1

4/2

Price

A

$40

$20

B

$35

$37

C

$50

$51


value

Small-cap

midcap

value

Large-cap

value

Style Indexes

  • Measure the performance of various investment styles or sectors

    • Size indexes

    • type indexes

  • Small-cap

growth

midcap

growth

Large-cap

growth


  • FT/S&P Actuaries World Indexes

  • Morgan Stanley Capital International (MSCI) World Indexes

  • Dow Jones World Stock Index

Global Equity Indexes


Exhibit7.9

Exhibit7.10

Exhibit7.12


Comparison of World Stock Indexes

Exhibit7.13


Bond-Market Indicator Series

  • Relatively new and not widely published

  • Growth in fixed-income mutual funds increase need for reliable benchmarks for evaluating performance

  • Increasing interest in bond index funds, which requires an index to emulate


Difficulties in Creating a Bond-Market Index

  • bond quality

  • Bond market changes

  • Bond prices are affected differently

  • without current and continuous transaction

  • prices


Bond Market Index Series

  • Investment-Grade Bond Indexes

  • High-Yield Bond Indexes

  • Global Government Bond Market Indexes

  • Composite Stock-Bond Indexes

  • Merrill Lynch-Wilshire U.S. Capital Markets Index

  • (ML-WCMI)

  • Brinson Partners Global Security Market Index (GSMI)


Comparison of Indexes Over Time

Exhibit7.15

Exhibit7.16


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