Investments Final Study Guide Essay

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Money Markey
Subsector of the debt markets. Consists of very short term debt securities that are highly marketable.

Treasury Bills
Most marketable of money market instruments. Short term government securities issued at a discount from face value and returning the face amount at maturity
Bid ask spread is the dealers source of profit
Higher the bid yield the lower the bid price
Method for valuation is flawed
1. Assumes only 360
2. Computes yield as a fraction of fv rather than price paid to acquire bond

Certificate of Deposit
Bank time deposit where the bank pays you interest to hold money in their accounts for a certain period of time.
The difference between the US Treasury and the CD tell you how liquid the markets are

Commercial Paper
Short term unsecured debt issued by large corporations
Sometimes backed by a bank line of credit
Yield depends on time to maturity and credit rating
Trades in the secondary markets and could be quite liquid
Ie subprime mortgages

Bankers Acceptance
Order to a bank by a banks customer to pay a sum of money at a future date, typically within six months
Can be traded in the secondary markets after accepted by the bank
Used widely in foreign trde where the creditworthiness of one trader is unknown to the trading partner
Sell at discount from face

Dollar denominated deposits at foreign banks or foreign branches of American banks
Advantage of Eurodollar CD vs Eurodollar Time Deposit is that the holder can sell the asset to realize cash before maturity
Considered riskier, offer higher yields and are often less liquid

Repurchase Agreement (REPOS)
Overnight borrowing
Reverse REPO – dealer find an investor holding gov securities and buys them with an agreement to resell them at a specified higher price on a future date

Yields on Money Market Instruments
Although low risk they’re not risk free bc they offer a greater return than those on default-free T-bills

Municipal Bonds
Tax exempt bonds issued by state and local governments. r(1-t) = r(m)

Corporate Bonds
Long term debt issued by private corporations typically paying semiannual coupons and returning the face value at maturity
Debentures – unsecured bonds that no collateral
Callable bonds – give firms option to repurchase bond from a stipulated call price
Convertible bonds – give bond holder option to convert bonds into stock

Futures Contracts
Calls for the delivery of some asset at a future point in time

Splits and Price Weighted Averages
Rather than using the # of stocks to calculate averages you should used the divisor, which you calculate by taking the initial average value
Splits can change the value of the portfolio because it changes the weight of a given stock relative to the other.
The implicit weighting scheme of a price-weighted average is somewhat arbitrary, being determined by the prices rather than by the outstanding market values (price per share times # of shares)

A major problem with price and value weighted indexes is that true rates of return on many bonds are difficult to compute because bonds trade infrequently, which makes it hard to get reliable and up to date prices

Privately Held Firms
Less obligation to release financial info which givesthem the flexibility to pursue long term interests without worrying about the shareholders interest
May only have up to 499 shareholders
To get around the 499 rule middlemen form partnerships to buy a share

Seasoned Equity Offering – the sale of additional shares in firms that have already been publicly traded

Rule 415 – allows firms to register securities and gradually sell them to the public for two years following the initial registration.
This allows the company to sell ‘new’ shares on short notice without having to do any of the paperwork `

Types of Markets
Direct Market – Craigslist
Brokered Market  real estate agent making a flip
Dealer Markets  bid-ask spread as