Investments Background and Issues

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CHAPTER 1

• Investments - Background and Issues

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Investments Financial Assets

• Essential nature of investment
• Reduced current consumption
• Planned later consumption
• Real Assets
• Assets used to produce goods and services
• Financial Assets
• Claims on real assets

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Balance Sheet U.S. Households
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Major Classes of Financial Assets or Securities

• Debt
• Money market instruments
• Bonds
• Common stock
• Preferred stock
• Derivative securities

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Financial Markets and the Economy

• Consumption Timing
• Allocation of Risk
• Separation of Ownership and Management
• Agency Issues

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Large Option Exercises
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Crisis in Corporate Governance

• Accounting Scandals
• Examples Enron and WorldCom
• Analyst Scandals
• Example Citigroups Salomon Smith Barney
• Initial Public Offerings
• Credit Swiss First Boston

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The Investment Process

• Asset allocation
• Security selection
• Risk-return trade-off
• Market efficiency
• Active vs. passive management

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Active vs. Passive Management

• Active Management
• Finding undervalued securities
• Timing the market
• Passive Management
• No attempt to find undervalued securities
• No attempt to time
• Holding an efficient portfolio

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Players in the Financial Markets

• Business Firms net borrowers
• Households net savers
• Governments can be both borrowers and savers
• Investment Bankers
• Brokers and Mutual Funds

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Key Trends - Globalization

• International and Global Markets Continue
  Developing
• Managing foreign exchange
• Diversification to improve performance
• Instruments and vehicles continue to develop
  (WEBs)
• Information and analysis improves

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Global Debt Issue
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Key Trends - Securitization

• Securitization Credit Enhancement
• Offers opportunities for investors and
  originators
• Changes in financial institutions and regulation
• Improvement in information capabilities
• Credit enhancement and its role

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Asset-backed Securities
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Key Trends - Financial Engineering

• Repackaging Services of Financial
  Intermediaries
• Bundling and unbundling of cash flows
• Slicing and dicing of cash flows
• Examples strips, CMOs, dual purpose funds,
  principal/interest splits