TopicΠ

1. TopicΠ Financial Instruments and Markets

2. Financial Instruments

3. Money market instruments • Bonds • Preferred Stock • Futures, • Options • Mutual Funds • Hedge Funds • Fixed-Income Investments Global Investment Choices • Equities • Derivatives • Indirect, Managed Investments

4. Fixed Income Investments • Most fixed income instruments specify a number of features including the following: • The maturity date • The coupon • The par value

5. 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

6. (I) Fixed Income Securities─Capital Market • Government Bonds • Treasury notes • Treasury bonds • Government agency bonds • Municipal Bonds • General obligation bonds (GOs) • Revenue bonds

7. (II) Fixed Income Securities─Capital Market • Corporate Bonds • Debentures • Senior secured bonds • Subordinated debentures • Income bonds • Convertible bonds • Callable bonds • Bonds with Warrants

8. (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

9. Equity Securities • Common Stock • Foreign Equities • American Depository Receipts(ADRs) • American Shares • Direct purchase • International or global mutual funds

10. 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

11. 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

12. Derivatives: Options • Warrants • Puts and calls

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

14. Managed Investments • Closed-end investment companies • Open-end investment companies (Mutual funds) • Hedge Funds: • Venture capital pools: • Real Estate Investment Trusts (REITs):

15. Historic Return and Risk

16. Exhibit 3.1 Exhibit 3.2

17. 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)

18. Return/Risk: focuses • Consider: Exhibit 3.15

19. Summarizing the Historic Data • Average premiums earned: • Equity risk premium • Small-stock premium • Horizon premium • Default premium

20. Exhibit3.3 Exhibit3.4 Exhibit3.6 Exhibit3.9 Exhibit3.7 Exhibit3.8 Exhibit3.10

21. World Portfolio Performance Exhibit3.16 Exhibit3.17 Exhibit3.18 Exhibit3.11 Exhibit3.12

22. Financial Markets and Market Structures

23. Types of markets Direct Search Markets Brokered Markets Dealer Markets Auction Markets

24. Characteristics of A Good Market • Availability of info (timely & accurate) • Liquidity • Low TCs (Internal efficiency) • External efficiency

25. Primary Capital Markets • Underwriting Functions • Relationships with Investment Bankers • Negotiated • Competitive bids • Best-efforts Exhibit6.1

26. 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

27. 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

28. Private Placements and Rule 144A • Firms sells to a small group of institutional investors, with some assistance of an investment banker

29. 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

32. Primary Markets: Corporate Bond • Negotiated arrangement • 我國公司債發行實務

34. Secondary Markets • Provide liquidity to investors who acquire • securities in the primary market • An active secondary market

35. Secondary Bond Markets • Stock Exchanges (First Market) • Over-the-counter market (Second Market) • Third Market • Fourth Market

36. Secondary Market Trading Systems • Pure auction market • Dealer market p.190下表Dealer Bid Ask

37. Call Versus Continuous Markets • Call markets(集合競價) • Continuous markets(連續競價 )

38. Exchange Membership • Four categories of membership: • Specialists • Commission brokers • Floor brokers • Registered traders

39. Major Types of Orders • Market orders • Limit orders • Special Orders • Stop loss • MIT (Market-if-touched)

40. Margin Trading :Example (I) P0=$50,#200 shares, IM=50% I0=$5000  leverage factor=1/0.5=2

41. Margin Trading :Example (II) • If MM=25% • If P =$30 • Investor’s Margin = Margin call for

42. Suppose bearish on Xerox when P = $100 Short 1,000 shares IM = 50%, MM = 30% Short Sales : Example (I)

43. Short Sales : Example II

44. 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

45. 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)

46. New Trading Systems • Super DOT • Display Book • Opening Automated Report Service (OARS) • Market Order Processing • Limit Order Processing

47. Global Market Changes (I) • NYSE Off-hours trading • Listing foreign stocks on the NYSE

48. Global Market Changes (II) • London Stock Exchange “Big Bang” • Tokyo Stock Exchange “Big Bang”

49. Future Developments • Creation and consolidation of stock exchanges • More specialized investment companies • Changes in the financial services industry • Trading in Cybermarkets

50. SECURITY MARKET INDICATOR SERIES