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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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topic

TopicΠ

Financial Instruments and Markets

global investment choices

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

Fixed Income Investments

  • Most fixed income instruments specify a number of features including the following:
    • The maturity date
    • The coupon
    • The par value
money market instruments

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

fixed income securities capital market

(I)

Fixed Income Securities─Capital Market

  • Government Bonds
  • Treasury notes
  • Treasury bonds
  • Government agency bonds
  • Municipal Bonds
  • General obligation bonds (GOs)
  • Revenue bonds
fixed income securities capital market1

(II)

Fixed Income Securities─Capital Market

  • Corporate Bonds
  • Debentures
  • Senior secured bonds
  • Subordinated debentures
  • Income bonds
  • Convertible bonds
  • Callable bonds
  • Bonds with Warrants
fixed income securities capital market2

(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

Equity Securities

  • Common Stock
  • Foreign Equities
  • American Depository Receipts(ADRs)
  • American Shares
  • Direct purchase
  • International or global mutual funds
american depository receipts

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

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

Derivatives: Options

  • Warrants
  • Puts and calls
derivatives futures

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

Managed Investments

  • Closed-end investment companies
  • Open-end investment companies (Mutual funds)
  • Hedge Funds:
  • Venture capital pools:
  • Real Estate Investment Trusts (REITs):
slide16

Exhibit 3.1

Exhibit 3.2

return risk characteristics

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

Return/Risk: focuses

  • Consider:

Exhibit 3.15

summarizing the historic data

Summarizing the Historic Data

  • Average premiums earned:
    • Equity risk premium
    • Small-stock premium
    • Horizon premium
    • Default premium
slide20

Exhibit3.3

Exhibit3.4

Exhibit3.6

Exhibit3.9

Exhibit3.7

Exhibit3.8

Exhibit3.10

world portfolio performance

World Portfolio Performance

Exhibit3.16

Exhibit3.17

Exhibit3.18

Exhibit3.11

Exhibit3.12

types of markets

Types of markets

Direct Search Markets

Brokered Markets

Dealer Markets

Auction Markets

characteristics of a good market

Characteristics of A Good Market

  • Availability of info (timely & accurate)
  • Liquidity
  • Low TCs (Internal efficiency)
  • External efficiency
primary capital markets

Primary Capital Markets

  • Underwriting Functions
  • Relationships with Investment Bankers
  • Negotiated
  • Competitive bids
  • Best-efforts

Exhibit6.1

primary markets common stock

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
rule 415 shelf regis tration

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

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

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

Primary Markets: Corporate Bond

  • Negotiated arrangement
  • 我國公司債發行實務
secondary markets

Secondary Markets

  • Provide liquidity to investors who acquire
  • securities in the primary market
  • An active secondary market
secondary bond markets

Secondary Bond Markets

  • Stock Exchanges (First Market)
  • Over-the-counter market (Second Market)
  • Third Market
  • Fourth Market
secondary market trading systems

Secondary Market Trading Systems

  • Pure auction market
  • Dealer market

p.190下表Dealer Bid Ask

call versus continuous markets

Call Versus Continuous Markets

  • Call markets(集合競價)
  • Continuous markets(連續競價 )
exchange membership

Exchange Membership

  • Four categories of membership:
  • Specialists
  • Commission brokers
  • Floor brokers
  • Registered traders
major types of orders

Major Types of Orders

  • Market orders
  • Limit orders
  • Special Orders
  • Stop loss
  • MIT (Market-if-touched)
margin trading example i

Margin Trading :Example (I)

P0=$50,#200 shares, IM=50% I0=$5000

 leverage factor=1/0.5=2

margin trading example ii

Margin Trading :Example (II)

  • If MM=25%
  • If P =$30
  • Investor’s Margin =

Margin call for

slide44

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

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

New Trading Systems

  • Super DOT
  • Display Book
  • Opening Automated Report Service (OARS)
  • Market Order Processing
  • Limit Order Processing
global market changes i

Global Market Changes (I)

  • NYSE Off-hours trading
  • Listing foreign stocks on the NYSE
global market changes ii

Global Market Changes (II)

  • London Stock Exchange “Big Bang”
  • Tokyo Stock Exchange “Big Bang”
future developments

Future Developments

  • Creation and consolidation of stock exchanges
  • More specialized investment companies
  • Changes in the financial services industry
  • Trading in Cybermarkets
what is an 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

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

factors in constructing market indicator series

Sample

Factors in Constructing Market Indicator Series

Weighting

  • price weighted
  • value-weighted
  • unweighted

Computational procedure

stock market indicator series

Stock-Market Indicator Series

  • Price-Weighted Series
  • Value-Weighted Series
  • Equal-Weighted Series
dija computation

DIJA: Computation

股價總和/固定除數

Exhibit b7.2

Exhibit 7.1

value weighted series

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

slide57

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

unweighted price indicator series

Unweighted Price Indicator Series

Arithmetic and Geometric Means

GM Index:

AM Index:

slide64

Stock Split

If Stock A splits 2:1 on 4/1

slide65

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

slide66

Stock

4/1

4/2

Price

A

$40

$20

B

$35

$37

C

$50

$51

style indexes

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

global equity indexes

FT/S&P Actuaries World Indexes

  • Morgan Stanley Capital International (MSCI) World Indexes
  • Dow Jones World Stock Index

Global Equity Indexes

slide69

Exhibit7.9

Exhibit7.10

Exhibit7.12

bond market indicator series

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

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

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

Comparison of Indexes Over Time

Exhibit7.15

Exhibit7.16