-
money market instruments
- Interest bearing money market instruments are short-term debt obligations of largecorporations and governments.–These securities promise to make one futurepayment.–When they are issued, their lives are less than one year.
- -very liquid
- -treasury bill
- •Potential gains/losses: A known future
- payment, except when the borrower defaults (i.e., does not pay).
- •Price quotations: Usually, the
- instruments are sold on a discount basis, and only the interest rates are quoted.
- •Therefore, investors
- must be able to calculate prices from the quoted rates.
-
Fixed Income Securities
- Fixed-income securities are longer-term debt
- obligations of corporations and governments.
- These securities promise to make fixed payments according to a pre-set schedule.
- When they are issued, their lives exceed one year.
- •Examples: U.S. Treasury notes,corporate bonds, car loans, student loans.
- •Potential gains/losses:–Fixed coupon payments and final payment at maturity, except when the borrower defaults.
- –Possibility of gain (loss) from fall (rise) in interest rates
- –Depending on the debt issue, illiquidity can be a problem.
- Current yield =annual coupon/price and changes with price of bond
- while coupon rate=semiannual rate usually. always stays the same.
-
-
Equities Common stock:
- Represents ownership in a corporation. A
- part owner receives a pro rated share of whatever is left over after all obligations have been met in the event of a liquidation.
- –Many companies pay cash dividends to their shareholders. However, neither the timing nor the amount of any dividend is guaranteed.
- –The stock value may rise or fall depending on the prospects for the company and market-wide circumstances.
-
Prefered Stock
- • The dividend is usually fixed and must be paid before any dividends for the common shareholders. In the event of a liquidation, preferred shares have a particular face value.
- -harder to find
- –Dividends are “promised.” However, there is no legal requirement that the dividends be paid, as long as no common dividends are distributed.
- –The stock value may rise or fall depending on the prospects for the company and market-wide circumstances.
-
Primary asset
Security sold by a business or government to raise money
-
Derivative Asset
•Derivativeasset: A financial asset that is derived from an existing traded asset, rather than issued by a business or government to raise capital. More generally, any financial asset that is not a primary asset.
-
Derivatives- Futures
- •Futures contract: An agreement made today regarding the
- terms of a trade that will take place later.
- •Examples: financial futures
- (i.e., S&P 500, T-bonds, foreign currencies, and others), commodity futures
- (i.e., wheat, crude oil, cattle, and others).
- •Potential
- gains/losses:
- –At maturity, you gain if your contracted price is better than the market price of the underlying asset, and vice versa.
- –If you sell your contract before its maturity, you may gain or lose depending on the market price for the contract.
- –Note that enormous gains and losses are possible.
-
Options
- •A call option gives the owner the right, but not the obligation, to buy something, while a put option gives the owner the right, but not the obligation, to sell something.
- •The “something” can be an asset, a commodity, or an index.
- •The price you pay today to buy an option is called the option premium.
- The specified price at which the underlying asset can be bought or sold is called the strike price, or exercise price
- •An American option can be exercised anytime up to and including the expiration date, while a European option can be exercised only on the expiration date.
- •Options differ from futures in two main ways:
- –Holders of call options have no obligation to buy the underlying asset.
- –Holders of put options have no obligation to sell the underlying asset.
- –To avoid this obligation, buyers of calls and puts must pay a price today. Holders of futures contracts do not pay for
- the contract today.
- •Potential gains and losses
- from call options:
- –Buyers:
- •Profit when the market price minus the strike price is
- greater than the option premium.
- •Best case, theoretically unlimited profits.
- •Worst case, the call buyer loses the entire premium.
- –Sellers:
- •Profit when the market price minus the strike price is less
- than the option premium.
- •Best case, the call seller collects the entire premium.
- •Worst case, theoretically unlimited losses.
- –Note that, for buyers, losses are limited, but gains are not.
-
Strike price
price specified in an option contract at which the underlying asset can be bought(call) or sold (put).
|
|