Investment
1. Commitment of current resources in the expectation of deriving greater resources in the future.
Real assets
1. Assets used to produce goods and services.
2. The material wealth of a society is ultimately determined by the productive capacity of its economy, that is, the goods and services its members can create.
3. The land, buildings, equipment, and knowledge
Financial assets
1. Claims on real assets or the income generated by them.
2. Stocks and bonds.
3. Do not contribute directly to the productive capacity of the economy.
4. These assets are the means by which individuals in well-developed economies hold their claims on rea
National wealth
1. Consists of structures, equipment, inventories of goods, and land.
Fixed-Income (debt) securities
1. Pay a specified cash flow over a specific period.
2. Least closely tied to the financial condition of the issuer, because of fixed stream.
Money Market
1. Fixed income securities that are short term, highly marketable, and generally of very low risk.
Composition of money market
1. U.S. Treasury bills
2. Bank certificates of deposit (CDs)
Fixed income capital market
1. Includes long-term securities such as Treasury bonds, as well as bonds issued by federal agencies, state and local municipalities, and corporations.
Treasury securities
1. Very safe in terms of default risk.
High yield or junk bond
1. Very risky bonds.
Equity
1. An ownership share in a corporation.
Derivative securities
1. Options and futures contracts provide payoffs that are determined by the prices of other assets such as bond or stock prices.
2. Used to hedge risks or transfer them to other parties.
Agency problems
Conflicts of interest between managers and stockholders.
Proxy contest
1. A way to elect a different board of directors.
Sarbanes-Oxley act of 2002
1. Required corporations to have more independent directors (directors who are not themselves managers or affiliated with managers.
2. Requires each CFO to personally vouch for the corporations accounting statements.
3. Created a new oversight board to ov
Asset allocation
1. Allocation of an investment portfolio across broad asset classes.
Security Selection
1. Choice of specific securities within each asset class.
Security analysis
1. Analysis of the value of securities.
Risk-return trade-off
1. Assets with higher expected returns entail greater risk.
Passive management
1. Buying and holding a diversified portfolio without attempting to identify mispriced securities.
Active management
1. Attempting to identify mispriced securities or to forecast broad market trends.
The players
1. Firms are the net borrowers
2. Households typically are net savers.
3. Governments can be borrowers or lenders.
Financial Intermediaries
1. Institutions that connect borrowers and lenders by accepting funds from lenders and loaning funds to borrowers.
2. Includes banks, investment companies, insurance companies, and credit unions.
3. Assets and liabilities are financial
4. Channel househol
Investment companies
1. Firms managing funds for investors. An investment company may manage several mutual funds.
Investment bankers
1. Firms specializing in the sale of new securities to the public, typically by underwriting the issue.
Primary market
1. A market in which new issues of securities are offered to the public.
Secondary market
1. Previously issued securities are traded among investors.
Globalization
1. Tendency toward a worldwide investment environment, and the integration of international capital markets.
How can U.S. investors participate in foreign investment opportunities?
1. ADR's (domestically traded securities that represent claims to shares of foreign stocks.
2. Purchase foreign securities offered in dollars
3. Buy Mutual funds that invest internationally.
4. Buy derivative securities with payoffs that depend on prices
Pass-through securities
1. Pools of loans (such as hoe mortgage loans) sold in one package. Owners of pass-throughs receive all of the principal and interest payments made by the borrowers.
Securitization
1. Pooling loans into standardized securities backed by those loans, which can then be traded like any other security.
Bundling, unbundling
1. Creation of new securities either by combining primitive and derivative securities into one composite hybrid or by separating returns on an asset into clases.
Financial engineering
1. The proces of creating and designing securities with custom-tailored characteristics.