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Financial Assets (Instruments) Chapter 2 Assets Tangible asset a physically observable, or touchable, item Promissory Note Assets Financial asset an asset that represents a promise to distribute cash flows some time in the future Treasury notes/bonds Municipal bonds Term loans

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Financial Assets (Instruments)


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assets
Assets
  • Tangible asset
    • a physically observable, or touchable, item
assets3

Promissory Note

Assets
  • Financial asset
    • an asset that represents a promise to distribute cash flows some time in the future
major financial instruments
Treasury notes/bonds

Municipal bonds

Term loans

Mortgages

Corporate bonds

Preferred stock

Common stock

Major Financial Instruments
  • Treasury bills
  • Repurchase agreements
  • Federal funds
  • Bankers’ acceptances
  • Commercial paper
  • Negotiable CDs
  • Eurodollars
  • Money market funds
financial instruments and the firm s balance sheet
Financial Instruments and the Firm’s Balance Sheet
  • Firm issues financial instruments so it can purchase the tangible assets necessary to produce income
balance sheet equity
Balance Sheet - Equity
  • Common equity
    • stockholder’s total investment in the firm
  • Par value
    • nominal or face value of a stock or bond
  • Retained earnings
    • earnings the firm has not paid out as dividends throughout its history
  • Additional paid-in capital
    • difference between the value of newly issued stock and its par value
slide7
Debt
  • A loan to an individual, company, or government
  • Debt features
    • Principal value
    • Face value
    • Maturity value
    • Par value
more debt features
More Debt Features
  • Interest payments or discounted securities
  • Maturity date
  • Priority to assets and earnings
  • Control of the firm (voting rights)
short term debt
Short-Term Debt
  • Treasury Bills (T-bills)
  • Repurchase Agreement (Repo)
  • Federal Funds
  • Banker’s Acceptance
  • Commercial Paper
  • Certificate of Deposit
  • Eurodollar Deposit
  • Money Market Mutual Funds
long term debt
Long-Term Debt
  • Term Loans
  • Bonds
    • Government bonds
      • Treasury bonds
      • Municipal bonds
        • Revenue bonds
        • General obligation bonds
    • Corporate bonds
    • Mortgage bonds
bonds
Bonds
  • Debenture
  • Subordinated debenture
  • Income bond
  • Putable bond
  • Indexed (purchasing power) bond
  • Floating rate bond
  • Zero coupon bond
  • Junk bond
bond contract features
Bond Contract Features
  • Bond Indenture
  • Trustee
  • Restrictive covenant
  • Call provision
  • Sinking fund
    • call for redemption by annual lottery
    • buy bonds on the open market
  • Convertible
bond ratings
Bond Ratings
  • Moody’s Investors Service (Moody’s)
  • Standard & Poor’s Corporation (S&P)
  • Investment grade bonds
    • triple B or better
  • Criteria for rating bonds
  • Importance of bond ratings
  • Changes in ratings
stock equity
Stock (Equity)
  • Preferred stock has preference over common stock in distribution of dividends and assets; dividend payments are fixed
  • Preferred stock may provide for cumulative dividends, conversion into common stock, voting rights, dividend participation, sinking funds, call provisions, and even maturity
stock equity15
Stock (Equity)
  • Common stock
    • represents ownership in a corporation
    • common stockholders vote for members of the board of directors
    • has last claim on distribution of earnings and assets
    • may have preemptive rights to purchase any additional shares sold by the firm
stock equity16
Stock (Equity)
  • Classified stock
    • special purpose stock
  • Closely held corporations
  • Publicly owned corporations
derivatives
Derivatives
  • Value depends on some underlying asset such as a stock or bond
  • Option - contract that gives the right to buy or sell an asset at a set price within a specified period of time
    • Call: holder has the right to buy
    • Put: holder has the right to sell
    • Striking price: exercise price of the option
derivatives18
Derivatives
  • Covertibles - bonds or preferred stocks that can be exchanged for common stock at the option of the holder
    • Conversion ratio defines the number of shares of stock the convertible holder receives upon conversion
  • Futures - arrangement for delivery of an item at a set future date at a set price
derivatives19
Derivatives
  • Swaps - an agreement to exchange cash flows or assets at a set time in the future
rationale for using different types of securities
Rationale for Using Different Types of Securities
  • Differences in trade-off between risk and expected after tax return
  • Appeal to broad market and different investment needs
  • Differences in popularity through time
which financial instrument is best
Which Financial Instrument is Best?
  • Issuer’s or investor’s viewpoint ?
  • Bonds
    • fixed interest payments
    • does not represent ownership
    • may have restrictions on dividends
    • interest expense is deductible
which financial instrument is best22
Which Financial Instrument is Best?
  • Preferred stock
    • fixed payment - but not obligated
    • no voting rights
    • higher after-tax cost since dividends are not deductible expenses
which financial instrument is best23
Which Financial Instrument is Best?
  • Common Stock
    • no obligation of dividend payments
    • no maturity date for “repayment”
    • sales increases creditworthiness
    • prospects affect terms
    • gives control to stockholders
    • shares the income of the firm
    • higher costs of distribution than debt
    • dividends are not deductible
financial instruments in international markets
Financial Instruments in International Markets
  • American Depository Receipts (ADRs)
    • represent ownership in stocks of foreign countries that are held in trust by a bank located in the country the stock is traded
  • Foreign debt
    • sold by a foreign borrower but denominated in the currency of the country in which it is sold
financial instruments in international markets25
Financial Instruments in International Markets
  • Eurodebt
    • debt sold in a country other than the one in whose currency the debt is denominated
    • Eurobonds
    • Eurocredits: usually tied to London InterBank Offer Rate (LIBOR)
    • Euro-commercial paper (Euro-CP)
    • Euronotes
financial instruments in international markets26
Financial Instruments in International Markets
  • Equity instruments
    • Euro stock is traded in countries other than the “home” country of the company, not including the United States
    • Yankee stock is stock issued for foreign companies that is traded in the United States
end of chapter 2
End of Chapter 2

Financial Assets(Instruments)