FIN302 Week 2
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This 7 page Class Notes was uploaded by Rachel Grunert on Monday January 25, 2016. The Class Notes belongs to FIN302 at University of Miami taught by Stuart Webb in Fall 2015. Since its upload, it has received 37 views. For similar materials see Fundamentals of Finance in Finance at University of Miami.
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Date Created: 01/25/16
January 19th 2016 The longer you hold stocks the better your chances for a positive return Bankruptcy Order of payments government government always gets paid employees wages bondholders preferred stock holders 5 common stock voting rights junior PWNT NOT guaranteed that everyone gets paid Derivatives securities whose cash flows depends on values of other assets ie options futures swaps Call Put Option right to buy sell the underlying asset at a specified price strike price on a specified date maturity Ex Owner of call option has right to buy the underlying asset for 200 in 1 year Let s say underlying asset share of tesla stock 200 strike price 1 year maturity They have the right to either buy the stock or do nothing If asset price increasesgood for owner they get the buy the asset for a cheaper price Options can be an insurance measure Ex Owner of put option has right to sell the underlying asset for 200 in 1 year you are insuring the lowest you can sell it for CALL BUY PUT SELL Long Short Futures obligation to buy sell the underlying asset no choice to do nothing it s a contract at a specified price on a specified date 2 types 1 Commodities real asset ie farmers locking in price for corn 2 Financial stock and bonds Because it s a contract there is no initial price paid Long Buy Short Sell Mutual Funds 0 Financial intermediaries that pool funds from investors and buy assets 0 Advantages 0 record keeping and administration 0 diversification and divisibility small amounts of money in many companies 0 professional management and analysis chances for better investments 0 lower transaction costs only have to pay 1 commission 0 competition from Exchangetraded funds ETF Mutual Funds Exchange Traded Funds trade once per day at the end of 0 only been around for about 25 the day years 0 O1 o up to 2 or 3 0 grown rapidly have been around longer trade throughout the day 0 lower fees l 05 o to 1 Asset Backed Securities bundling of existing securities 0 Le mortgages loans corporate bonds credit card receivables 0 Securitization example of financial engineering 0 selling shares of assets 0 only good if people can pay back 0 people who buy shares get portion of loan payments How Securities Are Traded Primarv Markets floated sold in primary market securities sold for the first time o to raise capital 0 government securities typically auctioned corporate securities fed agencies debt municipal bonds mortgage backed securities typically underwritten by investment banks 0 equity through initial public offering IPO What does an Investment Bank do 1 Consultant 2 Road show marketing build the book figuring out demand amp what the price should be 3 Take position in securities themselves allows company to get known lnvestment bank holds risk Secondarv Markets investors usually trade through brokers 0 brokers help investors trade without taking positions themselves no inventory 0 Broker guarantees counterparty that 0 an investor can pay for security 0 a company can sell security How do brokers trade exchanges ie New York Stock Exchange 0 traditional floor trading 0 electronic limit order book 0 over the counter OTC markets o trade with dealers electronic communication networks 0 direct trade among investors o regulation National Market System NMS l essentially created one big electronic communication network Dealors facilitate liquidity if someone wants to sell shares dealor is there to buy 0 if someone wants to buy shares dealor is there to sell investors who want to sell shares D dealor D investors wants to buy shares Limit Order Book 0 Buy order gets matched with a sell order and sell order gets matched with buy order 0 buyer wants lowest price 0 seller wants highest price January 213 2016 Broker Trades Types of orders limit order market order stoploss order stopbuy order can search for other broker What is the trade off between Market order Limit order sellbuy immediately 0 chance trade won t happen at all 0 risking price fluctuation 0 Le limit sell 9975 I not willing to sell for any price less than 9975 0 if all price are below 9975 it won t trade Tradind Costs Explicit cost Commission 0 fee paid to broker for making the transaction implicit cost bidask spread bidbuy asksell depth Buv on Marqin borrowing money to buy securities borrowing from broker who charges interest 0 must leave in that brokerage if price is too low they might force you to sell essentially forfeiting some control over you re account 0 higher expected return Short Sales borrowing securities from firm to sell and buy back later to return to firm 0 want the price to go down sell high buy low bearish investment or as a hedge Time Value of Monev If you receive 1 today you can invest it and end up with more than 1 at any time in the future You would prefer to receive 1 today than 1 at some point in the future time value of time value of consumption would rather consume today not tomorrow Future Value of a dollar invested today 0 interest rate exchange rate between money in different time periods Ex Receive 500 which you put in a bank for 4 years interest 10 compounded annually t0 I 500 t1 a 500 10500 n 50011 n 50011 t2 n 5001111 t3 a 500 111111 FVN C x 1 rN for interest compounded annually C dollar value today r interest rate N number of years FVN C x 1 rmmN C dollar value today r interest rate N number of years m how many times its compounded per year ie compounded daily l m365 compounded monthly l m12 You receive more money in the long run with daily compounding
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