Investment Analysis - Exam 1 ~ Part 1 and 2

Types of financial assets

1) Debt (investors seek stability)

2) Equities (investors are willing to take more risk due to partial ownership)

3) Derivatives

Real assets vs financial assets

Real assets:

• land

• buildings

• machines

anything used to produce goods and services

Financial assets”

• stocks

• bonds

Income generated by real assets

Notes of financial Markets

• Different investors are willing to take on different risks (e.g younger investors vs older more established investors)

• Shift the timing of consumption to store and grow wealth (e.g credit card debt and their intrests rates)

Notes on Agency problems

• Large investors have a higher stake in a company and will likely butt in to correct any agency issues to avoid losing money

• The threat of take over due to poor performance will likely ensure people are seeking the success of the company so they will not lose their jobs (e.g managers and their performance)

Portfolio

a collection of investment assets

asset allocation

deciding where to put your money across different types of investments (e.g stocks, bonds, real estate)

security selection

The specific investments within the different types of investments (e.g using stocks but specifically looking into an apple stock)

security analysis

involves the valuation of particular securities that might be included in the portfolio

top - down approach

an approach that starts with the overall goal and works downward to define the smaller components headed to achieve it

bottom- up approach

decisions start from smaller components and build upward to a complete strategy

efficient market hypothesis

financial markets process all available information about securities quickly and efficiently, so security prices should reflect all information available to investors concerning its value at all times

risk/ return tradeoff

assets that are expected to be higher risk are generally priced to offer higher expected returns than assets that are considered to be lower risk

• most investors are open to risk

Passive management

assumes markets are somewhat efficient, makes a broad investment in stock market, following the market rather than beating it

active management

improve portfolio performance by finding mispriced securities, trying to outperform the market

financial intermediaries

brining the suppliers of capital together with the demander of capital

e.g: essentially what banks do when they deposit your money at a low rate and they lend or invest at a higher rate

primary market

U.S Treasury auctions debt to the public

secondary market

Trading through brokers or dealers

Venture capital

refers to money invested to finance a new, not yet publicly traded company

private equity

refers to investments in companies whose shares are not yet publicly traded in a stock market

Money market instruments

• Treasury Bills

• Certificates of deposit (CD’s)

• Bankers Acceptances (BA’s)

• Fed Funds

• Etc.

Treasury Bills

• one of the safest securities, government guaranteed

• can be traded in the secondary market

T- bills maturity periods

in weeks:

• 4

• 6

• 8

• 13

• 17

• 26

• 52

T-bills auction terminology

announcement date: when auction is announced

auction date: day it is sold

settlement date: day people pay

Bank Discount Yield (BDY)

way to calculate return on a short term security

(will be given the formula)

Purchase Price

Face Value * (1-BDY * (# of days until maturity/ 360)

(not sure if we will be given this formula first)

Holding Period Yield (HPY)

measures the return over the holding period of the investment

(will be given formula)

Effective Annual Yield (EAY)

is annualized holding period yield.

Money Market Yield (MMY)

return on a money market instrument

Bond equivalent yield (BEY)

a way to convert short-term investments return into annual rate that can be comparable to bonds

Commercial Paper (CP’s)

similar to CD’s but issued by a corporation, unsecured, and event shorter-term

Bankers Acceptances (BA)

order to a bank to pay a sum of money at a future date

Broker’s Calls

Interest rate charged by banks on loans made to brokage firms in order to finance margin loans for their clients

Federal Funds

Funds in the banks serve account at the Federal Reserve

Repos

transaction where one party sells a security to another with the commitment to buy it back at a later date for a higher price

Reverse Repo

Same transaction as Repo but from the other perspective, this is if you are the person lending out the cash

Money Market Funds (MMF’s)

mutual funds that invest in money market instruments

Government MMF’s

hold almost only short term Treasury and/or agency securities and repos collateralized by them

Prime MMF’s

May hold many types of money market instruments such as CP

LIBRO (London Interbank Offered Rate)

The interest rate that represented the rate at which banks could borrow money from other banks for a specific period of time, used as a benchmark interest rate

Problem with it:

It was based off of an estimate instead of enough actual transactions and so it created room for manipulation

“.com” bubble

Valuations of companies were overstated just because they had placed “.com” behind the name of their company