Bài giảng Investment - chapter 2: Asset Classes and Financial Investments

CHAPTER 2Asset Classes and Financial InvestmentsMajor Classes of Financial Assets or SecuritiesMoney marketBond marketEquity SecuritiesIndexesDerivative marketsThe Money Market Treasury bills (Tín phiếu)Bid and asked priceCertificates of Deposits (Chứng chỉ tiền gởi)Commercial Paper (Thương Phiếu)Bankers Acceptances (Hối phiếu)The Money Market ContinuedEurodollarsRepurchase Agreements (RPs) and Reverse RPsBrokers’ CallsFederal Funds (TT Liên ngân hàng)LIBOR MarketFigure 2.1 Rates on Money Market SecuritiesTable 2.1 Major Components of the Money MarketFigure 2.2 Treasury Bill YieldsFigure 2.3 The Spread between 3-month CD and Treasury Bill RatesThe Bond MarketTreasury Notes and BondsInflation-Protected Treasury BondsFederal Agency DebtInternational BondsMunicipal BondsCorporate BondsMortgages and Mortgage-Backed SecuritiesTreasury Notes and BondsMaturitiesNotes – maturities up to 10 yearsBonds – maturities in excess of 10 years30-year bondPar Value - $1,000Quotes – percentage of parFigure 2.4 Lisiting of Treasury IssuesFederal Agency DebtMajor issuersFederal Home Loan BankFederal National Mortgage AssociationGovernment National Mortgage AssociationFederal Home Loan Mortgage CorporationMunicipal BondsIssued by state and local governmentsTypesGeneral obligation bondsRevenue bondsIndustrial revenue bondsMaturities – range up to 30 yearsFigure 2.5 Tax-exempt Debt OutstandingMunicipal Bond YieldsInterest income on municipal bonds is not subject to federal and sometimes not to state and local taxTo compare yields on taxable securities a Taxable Equivalent Yield is constructedTable 2.2 Equivalent Taxable Yields Corresponding to Various Tax-Exempt YieldsFigure 2.6 Ratio of Yields on Tax-Exempt to Taxable Bonds Corporate BondsIssued by private firms Semi-annual interest paymentsSubject to larger default risk than government securitiesOptions in corporate bondsCallableConvertibleDeveloped in the 1970s to help liquidity of financial institutionsProportional ownership of a pool or a specified obligation secured by a pool Market has experienced very high rates of growthMortgages and Mortgage-Backed SecuritiesFigure 2.7 Mortgage-backed Securities Outstanding, 1979-2007Equity SecuritiesCommon stockResidual claimLimited liabilityPreferred stockFixed dividends -limitedPriority over commonTax treatmentDepository receiptsFigure 2.8 Listing of Stocks Traded on the NYSEThere are several broadly based indexes computed and published dailyThere are several indexes of bond market performanceStock Market IndexesDow Jones Industrial AverageIncludes 30 large blue-chip corporationsComputed since 1896Price-weighted averageExample 2.2 Price-Weighted AveragePortfolio: Initial value $25 + $100 = $125 Final value $30 + $ 90 = $120 Percentage change in portfolio value = 5/125 = -.04 = -4%Index: Initial index value (25+100)/2 = 62.5 Final index value (30 + 90)/2 = 60 Percentage change in index -2.5/62.5 = -.04 = -4%Broadly based index of 500 firmsMarket-value-weighted indexIndex fundsExchange Traded Funds (ETFs)Standard & Poor’s IndexesOther U.S. Market-Value IndexesNASDAQ CompositeNYSE CompositeWilshire 5000Figure 2.9 Comparative Performance of Several Stock Stock Indexes, 2001-2006Foreign and International Stock Market IndexesNikkei (Japan)FTSE (Financial Times of London)Dax (Germany)MSCI (Morgan Stanley Capital International)Hang Seng (Hong Kong)TSX (Canada)Derivatives MarketsOptionsBasic PositionsCall (Buy)Put (Sell)TermsExercise PriceExpiration DateAssetsFutures Basic PositionsLong (Buy)Short (Sell)TermsDelivery DateAssetsFigure 2.10 Trading Data on GE OptionsFigure 2.11 Listing of Selected Futures ContractsPortfolio Analysis*Mutual Fund IndustryNet Asset ValueOwnership in assets are divided into shares and the value of each share is measured by its net asset value (NAV)NAV = Market value of assets minus liabilities / shares outstandingExampleAssets: $14,754 millionLiabilities: $ 1,934 millionShares: 419.4 millionNAV = (14754 - 1934) / 419.4 = $ 30.57 per sharePortfolio Analysis*Unit Investment TrustsMoney pooled from investors that is invested in a portfolio fixed for the life of the trustuniformity of assetsunmanagedFixed-Income UITGovernment securitiesCorporate bondMunicipal bondInternational bondEquity UITPortfolio Analysis*Mutual FundsManaged Investment Companiesopen-end: Funds can redeem or issue shares at NAV. Namely, investors can sell shares back to the fund at NAV.closed-end: do not redeem or issue shares. Investors who want to cash out must sell to other investors. Shares of closed-end funds can be traded like common stocks;prices may deviate from their NAV (often at a discount)Fund “Families”Fidelity VanguardPortfolio Analysis*Types of Mutual FundsEquity FundsFixed-Income FundsMoney Market FundsBalanced FundsAsset Allocation FundsIndex FundsSpecialized sector FundsPortfolio Analysis*Equity Mutual FundsAggressive Growth/Capital AppreciationSmall companies/Narrow market sectorsGrowthFirms with good revenue & earnings potentialBlend (Growth and Income)Combination of Growth and Value StocksValue Profitable, Dividend-paying stocksStocks with low P/E ratiosPortfolio Analysis*Balanced FundsInvests in both equities and fixed income securitiesProportion of stocks and bonds fairly stable over timeDesigned to be an investor’s entire portfolioPortfolio Analysis*Asset Allocation FundLike Balanced Funds, hold both stocks and bondsProportion of stocks vs. bonds varies substantially over timeManager tries to increase returns by timing the marketPortfolio Analysis*Index FundsPassive ManagementGoal is to match the performance of a benchmark indexLow expensesMost Popular Benchmark: S&P 500 IndexPortfolio Analysis*Specialized Sector FundsFocus on a particular sector or industryReal EstateTechnologyHealth CareUtilitiesFinancial ServicesPortfolio Analysis*Hedge FundsLimited partnership of investorsmainly for wealthy/institutional investors unconventional investment strategiesheavy use of derivativesshort saleshigh leverageLess regulated than mutual fundsfewer reporting requirementsPortfolio Analysis*Exchange-traded FundsLike closed-end funds, they trade on an exchange (continuously)Like index funds, they tend to be passively managedlow expensePortfolio Analysis*Mutual Fund FeesFront-end loadBack-end load12b-1 chargesOperating ExpensesBroker CommissionsPortfolio Analysis*Front-end LoadThis is a sales charge, or “commission” charged to enter a fundPaid as a percentage of investmentRarely higher than 6%Often much lower, down to zero“No Load Fund” means no front-end loadPortfolio Analysis*Back-end LoadAlso called: Redemption FeeContingent Deferred Sales ChargeThis is a fee charged when you exit the fundCharged in percentage termsDiscourages investors with short horizonsPortfolio Analysis*12b-1 chargesManagers can use up to 1% of the fund’s assets each year to pay for...AdvertisingAnnual reports and prospectusesCommissions paid to brokersBecause these fees come straight from the fund’s assets, they are “hidden” costs to the investorPortfolio Analysis*Operating ExpensesAdministrative ExpensesAdvisory fees paid to managerShould be less than 2% per yearMeasured by “expense ratio”Portfolio Analysis*Brokerage CommissionsIf your broker does not have an arrangement with the mutual fund management company, they will charge you a commission to invest for you.But, you do not need to go through a broker at all. You can buy (and redeem) shares directly from the mutual fund.Portfolio Analysis*Fund ReturnsRate of return before fund expenses= (NAV1 – NAV0 + Dividend and capital gain distributions) / NAV0Fund expenses affect the returnsFront-end or back-end loads, operating expenses, and 12b-1 charges are periodically deducted from fund assets, having substantial negative effects on the rate of returnCosts incurred in “soft dollars” are difficult to measurePortfolio Analysis*Fund PerformanceA simple comparison with Wilshire 5000 index (Fig 4.3)The index has often outperformed the median managersThe average difference is 1% Thus a typical low-cost index fund would have outperformed an average actively managed fundRepeated winners?Reading: Bill Miller’s reflection on “the streak”Portfolio Analysis*Review QuestionsChapter 2:2, 5, 6, 9, 10, 11 Chapter 4:4, 5, 10, 20Find out the ticker symbols for ETFs that track the performance of DJIA, S&P 500 index, Short DJIA, Crude Oil, Gold, Silver, Euro.