Professional Documents
Culture Documents
Chapter 1
Real Assets
Productive capacity is a function of the real assets of the economy: the land, buildings, knowledge and machines that are used to produce goods and the workers whose skills are necessary to use those resources So, Real assets are used to produce goods and services Financial assets are claims on real assets The money a firm receives when it issues securities (sells them to investors) is used to purchase real assets. Ultimately, then, the returns on a financial asset come from the income produced by the real assets that are financed by the issuance of the security.
FIN 435 (Instructor- Saif Rahman)
Financial Assets
income or debt
certificates of deposit
Common
Derivative
allocation Choice among broad asset classes Security selection Choice of which securities to hold within asset class Security analysis
Investment Psychology
Risk-Return
Trade-Off Efficient Markets Active Management Finding mispriced securities Timing the market Passive Management No attempt to find undervalued securities No attempt to time the market Holding a highly diversified portfolio
FIN 435 (Instructor- Saif Rahman)
The Players
Business Firms net borrowers Households net savers Governments can be both borrowers and savers Non-residents: Specifically for a remittance dependent country such as Bangladesh Financial Intermediaries Investment Companies Banks Insurance companies Credit unions Investment Bankers FIN 435 (Instructor- Saif Rahman)
Financial Markets
Primary Market
Markets that involve the issue of new securities by the borrower in return for cash from investors (Capital formation occurs)
Secondary Market
Markets that involve buyers and sellers of existing securities. Funds flow from buyer to seller. Seller becomes the new owner of the security. (No capital formation occurs)
FIN 435 (Instructor- Saif Rahman)
relationship
Principal hires an agent to represent their interest Stockholders (principals) hire managers (agents) to run the company
Agency
problem
Management
8
Managing Managers
Managerial
compensation
The incentives need to be structured carefully to make sure that they achieve their goal
Corporate
control
Other
9
stakeholders
American Depository Receipts (ADRs) Foreign securities offered in dollars Mutual funds that invest internationally Instruments and vehicles continue to develop (WEBs) Exchange Traded Funds (ETFs)
pass-through securities
pass-through arrangements student, home equity, credit card loans opportunities for investors and originators
Car, Offers
Information
to the public
Automated Direct
trade crossing