FIN206-Securities Markets

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FIN206-Securities Markets

• Lecture1-Asset Classes and Money Market
  • Real versus Financial Assets
    • Real assets: Assets used to produce goods and services.
    • Financial assets: Claims(债权） on real assets or the income generated by them.
  • Financial Asset Classes
    • Fixed-income (debt) securities（固定收益证券，债券）: Pay a specified cash flow over a specific period
      • Money Markets
      • Capital Markets
    • Equity（股本）: An ownership share in a corporation
    • Derivatives（衍生证券）: Securities providing payoffs that depend on the values of other assets
  • The Players ( The participants in market)
    • Business Firms (net borrowers): Raise capital now to pay for investments
    • Households (net savers): Purchase securities issued by firms
    • Governments (can be both borrowers and savers): Depends on the relationship between tax revenue and government expenditures
    • Financial Intermediaries( Connectors of borrowers and lenders)
      • Commercial banks
      • Investment companies
      • Insurance companies
      • Pension funds
      • Hedge funds
      • Investment Bankers
        • Specialize in primary market transactions
        • Primary market (firms go IPO)
          • Newly issued securities offered to public
          • Investment banker“underwrites”（承销） issue
        • Secondary market
          • Preexisting securities（既有的） traded among investors
  • Financial Assets = Financial Liabilities
    • Financial Assets and Liabilities must balance
    • Aggregated balance sheets → only real assets remain
    • Domestic Net Worth = Sum of real assets
  • The Investment Process
    • Asset Allocation
      • Primary determinant of a portfolio's return
      • Percentage of fund in asset classes, e.g. equity、 bonds、bills
      • Top Down Investment Strategies starts with Asset Allocation
    • Security Selection
      • Choice of particular securities within asset class
      • Bottom up Investment strategies starts with security selection
      • Security Analysis: Analysis of the value of securities
  • Markets Are Competitive
    • Risk-Return Trade-Off
      • Assets with higher expected returns have higher risk
    • Efficient Markets
      • Passive management
        • Buying and holding a diversified portfolio
        • No attempt to identify mispriced securities
      • Active management
        • Identify mispriced securities
        • or Forecast broad market trends (stock and bond market indices)
  • The Money Market
    • Subsector of the fixed-income market
      • Short-term
      • Highly liquid
      • Low risk
      • Often have large denominations
      • Investment through MMMF (Money Market Mutual Fonds)
      • * 了解谁是borrewer,谁是lender在 Money Market中的不同机构中
    • Treasury Bills (短期无息国库券，美）
      • • issuer，发行者，就是borrower
      • • in Money Market, use 360 days to calculate a year; in Bond Market, use 365 days
    • Certificates of Deposit (CDs)
    • Commercial Paper
    • Instruments
      • Bankers' Acceptances
        • Purchaser authorizes a bank to pay a seller for goods at later date (time draft)
        • When purchaser’s bank “accepts” draft, it becomes contingent liability of the bank (and marketable)
      • Eurodollars
        • Dollar-denominated time deposits held outside U.S.
        • Pay higher interest rate than U.S. deposits
      • Federal Funds
        • Trading in reserves held at the Federal Reserve
        • Key interest rate for economy
        • *Depository institutions must maintain deposits with Federal Reserve Bank
      • LIBOR (London Interbank Offer Rate)
        • Rate at which large banks in London (and elsewhere) lend to each other
        • Base rate for many loans and derivatives
    • Repurchase Agreements
      • Repurchase Agreements (RPs): borrow
        • Short-term sale of securities + promise to repurchase at higher price
        • RP is a collateralized loan
        • Many RPs are overnight
        • “Term” RPs may have a 1-month maturity
      • Reverse RPs: lending
        • Lending money; obtaining security title as collateral (抵押品）
    • Credit Crisis
      • MMMF and the Credit Crisis of 2008
        • 2005-2008: Money market mutual funds (MMMFs) grew 88%
        • MMMFs had their own crisis in 2008: Lehman Brothers filed for bankruptcy protection on 15 Sep. 2008
        • Reserve Primary Fund (the oldest MMMF)“broke the buck”
        • U.S. Treasury temporarily offered to insure all money market funds