Chapter 1 the Investment Environment
Chapter 1
The Investment Environment
1.1. Real Assets versus Financial Assets
(Page 30)
Real Assets
Determine the productive capacity and net income of the economy
Examples: Land, buildings, machines, and knowledge used to produce goods and services
Financial Assets
Claims on real assets
1-2
1.2.Financial Assets
(Page 32)
Three types:
1.
Fixed income or debt
Common stock or equity
Derivative securities
2.
3.
1-3
Fixed Income
1-4
Payments fixed or determined by a formula
Money market debt: short term, highly marketable, usually low credit risk (T-bills, certificates of deposits etc) Capital market debt: long term bonds, can be safe or risky (Treasury bonds, municipal bonds, corporate bonds, etc)
Bond ratings: in terms of default risk, from very safe to junk
Common Stock and Derivatives
Common Stock is equity or ownership in a corporation.
Derivatives
1-5
Payments to stockholders are not fixed, but depend on the success of the firm
Value derives from prices of other securities such as stocks and bonds
Used to transfer risk (hedge)
1.3. Financial Markets and the Economy
(page 33-36)
1-6
Information Role: Capital flows to companies with best prospects
Consumption Timing: Use securities to store wealth and transfer consumption to the future
Allocation of Risk: Investors can select securities consistent with their tastes for risk
Separation of Ownership and Management: minimize the famous agency costs and maximize firm value
Corporate Governance and Corporate Ethics
How to reduce the agency problems
(Page 34-35)
1-7
Compensation plans: bonus, stock options, etc.
The power of the board of directors
Outsiders’ monitor
Threat of takeover: proxy contest, mergers, etc.
1.4.The Investment Process
(page 36)
When constructing a portfolio, investors need to decide:
The Investment Environment
1.1. Real Assets versus Financial Assets
(Page 30)
Real Assets
Determine the productive capacity and net income of the economy
Examples: Land, buildings, machines, and knowledge used to produce goods and services
Financial Assets
Claims on real assets
1-2
1.2.Financial Assets
(Page 32)
Three types:
1.
Fixed income or debt
Common stock or equity
Derivative securities
2.
3.
1-3
Fixed Income
1-4
Payments fixed or determined by a formula
Money market debt: short term, highly marketable, usually low credit risk (T-bills, certificates of deposits etc) Capital market debt: long term bonds, can be safe or risky (Treasury bonds, municipal bonds, corporate bonds, etc)
Bond ratings: in terms of default risk, from very safe to junk
Common Stock and Derivatives
Common Stock is equity or ownership in a corporation.
Derivatives
1-5
Payments to stockholders are not fixed, but depend on the success of the firm
Value derives from prices of other securities such as stocks and bonds
Used to transfer risk (hedge)
1.3. Financial Markets and the Economy
(page 33-36)
1-6
Information Role: Capital flows to companies with best prospects
Consumption Timing: Use securities to store wealth and transfer consumption to the future
Allocation of Risk: Investors can select securities consistent with their tastes for risk
Separation of Ownership and Management: minimize the famous agency costs and maximize firm value
Corporate Governance and Corporate Ethics
How to reduce the agency problems
(Page 34-35)
1-7
Compensation plans: bonus, stock options, etc.
The power of the board of directors
Outsiders’ monitor
Threat of takeover: proxy contest, mergers, etc.
1.4.The Investment Process
(page 36)
When constructing a portfolio, investors need to decide: