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FIN 355 Week 1 Notes

by: Gabby Greenberg

FIN 355 Week 1 Notes FIN 355

Marketplace > Colorado State University > Finance > FIN 355 > FIN 355 Week 1 Notes
Gabby Greenberg
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Principles of Investments
Tianyang Wang
Class Notes




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This 3 page Class Notes was uploaded by Gabby Greenberg on Monday September 5, 2016. The Class Notes belongs to FIN 355 at Colorado State University taught by Tianyang Wang in Fall 2016. Since its upload, it has received 8 views. For similar materials see Principles of Investments in Finance at Colorado State University.


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Date Created: 09/05/16
ASSETS  Assets cost money today and yield returns later  Real assets have productive capacity (land, building, equipment, knowledge)  Financial assets are claims on the cash flows generated by real assets (bonds, stocks, derivatives)  Asset Housing - o Real Asset - Land, Building, Foundation o Financial Asset - Debt or Equity o Derivative  Properties of Financial Assets o Financial assets generally generate cash o They primarily differ with respect to their cash flow structure and the risk level.  Cash Flow: Fixed or Variable  Risk Level: Low (riskless asset) to high (risky asset)  Holding Period: Low (minute, hour, day) to high (years) or uncertain (contingent on certain event) Types of Financial Markets  Financial assets are traded in different financial markets o Money Markets o Capital Markets Money Markets o Very short term financial assets o Highly liquid, lower risk - cash or cash equivalents T-bills - issued by federal government (less than 1 year)   CDs (Certificate of deposit) - time deposit with bank  Commercial paper - issued by firms  Repos  LIBOR (London Interbank Offer Rate) Capital Markets o Liquidity and risk level varies, long term holdings o Usually less liquid and entail higher risk  T-notes (1-10 years), t-bonds (10 or more)  Inflation Protected Treasury Bonds - if your bond has a 3% rate, but the inflation rate up to 5%, they are going to increase your principal to 5% but your interest rate is kept at 3%  Municipal bonds  Corporate Bonds  Mortgage and MBS o Bonds  Fixed income securities or long-term debt instruments  Cash Flow: Fixed, Risk Level: Low  Ex. T-bills, corporate bonds, junk bonds o Stocks  Two notable features of common stock  Limited liability  What is the maximum loss on a stock purchase?  Capped to what investors have put in  Residual claim  Always last in line to claim firm's profits  What will they get if the firm went bankrupt o Derivative  The first documented options  Options (Financial Options)  A financial contract that gives you the right, but not the obligation to buy or sell a financial asset at a fixed price in the future.  Call Option: Buying the right to buy an asset at a predetermined price (i/e/ strike price) on or before expire date. Expecting the stock to go up, so you want to secure yourself a low strike (or buy in) price.  Put Option: Buying the right to sell an asset at a predetermined price on or before expiration date. Expecting it to go down, therefore you are securing the higher selling price.  When will you get a call option?  European: exercised on the expiration date only  American: Exercised on OR before expiration Major differences between Stocks and Bonds Stocks Bonds Voting Rights Yes No Status to Firm Owner Creditor Claim Priority when firm goes Lower Higher bankrupt Timing of cash distribution Uncertain Fixed Schedule Maximum Price Unlimited Usually limited to the stream of cash to be received Do Financial Markets Benefit Society?  Lessons from financial crisis o They don't produce anything!  But capital markets do benefit society o Allow the pooling of resources o Direct resources to their best uses o Allow consumption smoothing o Allow risk allocation o Separation of ownership and management o Corporate governance and corporate ethics  A prosperous economy needs efficient capital markets Major Players in Financial Markets  Borrowers with plans for production o Entrepreneurs, who need money for projects  Lenders with funds to invest o Households, who want to save for retirement  Government, who may be a borrower or lender o Borrower: selling treasuries (gov't bonds) o Lender: Buying treasuries Commercial Banks  The banking sector is split into two fundamental divisions: investment and commercial banking  Commercial manages deposit accounts, such as checking and savings accounts, for individuals and businesses. They make loans to the public. Investment Banks  Investment banking is a form of banking which finances major capital requirements of a business enterprise.  Investment banking provides service and financial advice to corporations. They help in M&A transactions, issuing securities, and providing any other advice to corporations related to their financing. They earn money through charging fees and commissions for their business. Investment Concern  Objectives - Target return o Retire at 75% of salary; college for 2 kids.  Risk Tolerance  Constraints o Income requirements? o Liquidity, time horizon, taxes, unique, legal/regulatory Investment Process  Asset Allocation o Choosing the percentage of funds in asset classes Stocks 60%   Bonds 30%  Alternative Assets 6%  Money market securities 4%  Security Selection & Analysis o Choosing specific securities within an asset class Recent Trends  Global Financial Integration of Markets o Managing FX; Diversification  Information Technology o More complete and timely information  Securitization o Pooling assets into standardized securities. Then trade. o Mortgages, student loans, credit receivables, auto loans.  Financial Engineering o Repacking cash flows (combining or separating) o Collateralized Mortgages Obligations


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