Finance Notes
Slide Set 1 – Investment Alternatives
An investor aims to maximise their expected welfare * Return is good * Risk is bad * However, to get higher returns investors must take on more risk – the reason for this is because there is a premium for risk (risk return trade off) * No free lunches on wall street * Portfolios * Different asset classes * Financial assets * Paper or electronic * E.g. Stocks, bonds etc. * Non-tangible * Real assets * E.g. property, land, gold, silver, wheat etc. * Tangible * Decision process * Security analysis * Portfolio management
Investment alternatives * Two main types of investment – direct and indirect
Direct Investment – You invest straight in to firms
Alternatives:
Money market – treasury bills (t-bills), commercial bills
Market for the purchase of short term debt securities * Short term – generally less than 12 months * Low risk * Highly liquid
T-bill
* Sold by the treasury at a discount from face value (par) * T-bill yield used as risk free rate * In NZ * Maturities typically 3,6,12 months (quarterly, semi-annually, annually) * Trades in parcels of $1million
T-bill yield – both formulas give an annualised rate
Actual Annualised Yield=face value-market valuemarket value×365# of days (actual annualised yield also known as investment yield)
Quoted Yield=face value-market valueface value×360# of days (quoted yield also known as discount yield)
Prices move inversely to yields – as yields increase price goes down and vice versa (much like bonds)
Commercial Bill (NZ)/Commercial Paper (US)
Promise to repay the lender * Sold at a discount to face value * Short term form of borrowing for companies, financial institutions, local bodies (city council etc.) * Usually 90 days * Bank bills – similar but repayment is
An investor aims to maximise their expected welfare * Return is good * Risk is bad * However, to get higher returns investors must take on more risk – the reason for this is because there is a premium for risk (risk return trade off) * No free lunches on wall street * Portfolios * Different asset classes * Financial assets * Paper or electronic * E.g. Stocks, bonds etc. * Non-tangible * Real assets * E.g. property, land, gold, silver, wheat etc. * Tangible * Decision process * Security analysis * Portfolio management
Investment alternatives * Two main types of investment – direct and indirect
Direct Investment – You invest straight in to firms
Alternatives:
Money market – treasury bills (t-bills), commercial bills
Market for the purchase of short term debt securities * Short term – generally less than 12 months * Low risk * Highly liquid
T-bill
* Sold by the treasury at a discount from face value (par) * T-bill yield used as risk free rate * In NZ * Maturities typically 3,6,12 months (quarterly, semi-annually, annually) * Trades in parcels of $1million
T-bill yield – both formulas give an annualised rate
Actual Annualised Yield=face value-market valuemarket value×365# of days (actual annualised yield also known as investment yield)
Quoted Yield=face value-market valueface value×360# of days (quoted yield also known as discount yield)
Prices move inversely to yields – as yields increase price goes down and vice versa (much like bonds)
Commercial Bill (NZ)/Commercial Paper (US)
Promise to repay the lender * Sold at a discount to face value * Short term form of borrowing for companies, financial institutions, local bodies (city council etc.) * Usually 90 days * Bank bills – similar but repayment is