REVISION CHAPTERS

INTRODUCTION TO INVESTMENT (DII 5018)

CHAPTER 1
INVESTMENT
RETURN
Income from
investment
Increase in
value
Types of
securities
1. Securities/
Property
2. Direct/ Indirect
3. Debt, equity /
derivatives
4. Low/ high risk
5. Short/ long
term
6. Domestic/
foreign
Supplier/
demander of
fund
Supplier:
Individuals
Demanders:
Government
business
Types of
investors
Institutional Individuals
Steps of
investing
Meet investment
prerequisites
Establish
investment goals
Adopting an
investment plan
Evaluate
investment
vehicles
Select suitable
investments
Construct
diversified
portfolio
Managing
portfolio
Investing over
the life cycle
Growth
oriented
Middle age
consolidation
Retirement
stages
Short tem
investment
Advantages
1. High liquidity
2. Low risk
Disadvantages:
1. Low return
2. Loss purchasing
power from
inflation
1. Commercial
banking
2. Corporate
finance
3. Financial
planner
4. Insurance
5. Investment
banking
6. Investment
management
Career in
finance
CHAPTER 2
Types of
markets
Money
market
Capital
market
Primary
Secondary
Primary
market
3 choices
to market
securities
1. Public offering
2. Rights offering
3. Private
placement
IPO
process
Steps:
1. Underwriting the
offering
2. Prospectus
3. Red herring
4. Quiet period
5. Road show
Roles of
investment
bank
1. Underwriting the
issues
2. Underwriting
syndicate
3. Selling group
4. Tombstone
5. Investment banker
compensation
Secondary
market
Broker
Dealer
1. Nasdaq
market
2. OTC
market
1. National
exchanges
2. Regional
exchange
Alternative
Trading
System
3
rd
market
4
th
market
Market
condition
Bull
market
Bear
market
Globalization
of securities
market
Uses of
international
securities
Performance
of
investment
Direct/
indirect
foreign
investment
Basic types
of
transaction
Long
purchase
Short
selling
M = (V-D)/ V
V= P x no of shares
D = (100%- %margin)(V)
Cash equity = %margin x V
Margin
trading
CHAPTER 4
Concept
of return
1. Income
2. Capital
gain/loss
Factors in return
Internal
characteristic
1. Risk/ type
investment
2. Issuer
management
3. Issuer financing
External forces
1. Political
2. Business
3. Economic
4. Inflation
5. Deflation
Measuring
of return
Risk free rate:
real rate of return + inflation
premium
Required return:
risk free rate + risk premium
Holding
period
return
Capital gain/loss:
End value Beginning value
HPR:
(current income + capital
gain/loss) / Beginning value
Advantages:
1. Easy to calculate
2. Easy to understand
3. Consider income n
growth
Disadvantages:
1. not consider time
value of money
2. Inaccurate for long
term investment
Internal Rate
of Return
(Yield)
FV = PV (1+r)^n
Advantages:
1. Use time value of
money
2. Allows to compare
different investment
period
3. Y>required return =
accept investment
Disadvantages:
1. Calculation complex
Interest on
interest
Reinvestment
rate
Fully
compounded
rate
Growth
rate
Sources of
risk
1. Currency risk
2. Business risk
3. Financial risk
4. Purchasing
power risk
5. Interest rate
risk
6. Liquidity risk
7. Tax risk
8. Market risk
9. Event risk
Steps in
decision
process
1. Estimate the
expected
return
2. Assess the
risk of
investment
3. Evaluate
risk-return
4. Select
investment
vehicles
CHAPTER 5
Types of
Modern
portfolio
1. Growth
Oriented
2. Income
Oriented
Return on
portfolio
Rn = Wn x Rn
Correlation
1. Positive
2. Negative
3. Perfectly
positive
4. Perfectly
negative
5. No correlated
International
diversification
Advantages :
-More choices
-Greater return
-Reduce risk
Disadvantages :
- Currency risk
- Less convenient
- Risky
- Expensive
Method
International
diversification
1. Company stock listed
2. Corporate bond
3. Government bond
4. Mutual funds
5. Multinational companies
Component
of risks
1. Unsystematic
2. Systematic
Capital Assets
Pricing Models
(CAPM)
Approaches in
Constructing
Portfolio
Modern
Portfolio
Traditional
portfolio
CHAPTER 6
Residual
Owner
Stockholders
who are
entitled for
dividend
income.
Stock Return
Take into
account both
price changes
and dividend
income.
Advantages of
stock
ownership
1. Opportunity higher
return
2. Good inflation hedge
3. Easy to buy and sell
4. Easy to get information
5. Low cost of investment
Disadvantages
of stock
ownership
1. Subject to many different risk
2. Hard to predict the stock
prices
3. Low current income
Characteristic
of common
stock
1. Equity capital
2. Publicly traded
3. Public offering
4. Rights offering
5. Stock spin off
6. Stock split
7. Treasury stock
8. Classified
stock
Transaction
Cost
1. Lot
2. Board/ round
lot
3. Odd lot
Transaction
Cost
1. Par value
2. Book value
3. Market value
4. Market
capitalization
5. Investment
values
Types of
stock
1. Blue-chip
2. Income
3. Growth
4. Tech
5. Speculative
6. Cyclical
7. Defensive
8. Large cap.
9. Medium cap.
10. Small cap.
Stock
investment
strategies
1. Buy and hold
2. Current income
3. Quality-long term growth
4. Aggressive stock management
5. Short term trading
CHAPTER 7
Security
Analysis
process of
gathering and
organizing
information and
then using it to
determine the
intrinsic value
Top down
approaches
Step 1: economic
analysis
Step 2: industry
analysis
Step 3: fundamental
analysis
Economic
analysis
Key measures:
- GDP
- Industrial
production
Industry
analysis
Growth cycles stages:
- Initial development
- Rapid expansion
- Mature Growth
- Decline
Fundamental
analysis
CHAPTER 10
Interest rate
& Bond price
Interest BP
Interest BP
Bond Market
Interest
(Bearish)
Interest
(Bullish)
Benefits
1. Low risk
2. High level of
stability
3. High level of
current income
4. diversification
Risks
1. Interest rate
2. Purchasing power
3. Financial/ business
4. Liquidity
5. Call
Features
1. Coupon
2. Current yield
3. Par value
4. Maturity date
5. Term bond
6. Serial bond
7. Note
8. Call premium
9. Call price
10. Call features
11. Sinking fund
12. Refunding
Provision
Bond price
behavior
Premium bond
Discount bond
Types of debt
Secured- backed
by collateral
Unsecured-
without collateral
Debt
securities
1. Govt bond
2. Agency bond
3. Municipal
4. Corporate
5. Mortgage
backed
6. Zero-coupon
7. Collateralized
8. Asset backed
9. Junk bond
10. Global
11. Dollar
denominated
12. Foreign pay
13. Convertibles
securities
Yield to call
YTC = PMT + (Call price Bond price)/ years to called
(Call price+ Bond Price)/2
Yield to
maturity
CHAPTER 11
Required return: Real
rate of return +
inflation premium + risk
premium
Factors affect
yield spread
1. Municipal- tax
exempt
2. Treasury- lowest
risk & return
3. Junk bond- high
interest
4. Discount bond-
high interest
5. Freely callable
bond- high interest
6. Longer maturities-
high interest
Theories on
yield curve
Liquidity
-invest in l/term bond :
demand for high interest :
upward
-Invest in s/term bond:
demand for low interest:
downward
Expectation inflation
-expect inflation increase:
demand for high interest :
upward
-expect inflation decrease:
demand for low interest:
downward
Demand and supply
Demand for l/term bond
> investor to invest for
l/term : upward
Demand in l/term bond<
investor to invest for
l/term: downward
Bond prices
PMT 1-(1+i)^-n + PV
i (1+i)^n
Current yield
YTM = PMT + (Par Value Bond price)/n
(Par Value + Bond Price)/2
Bond
investment
strategies
1. Conservative
2. Aggressive
3. Buy and hold
4. Bond ladder
5. Tax swap
Type of bond
funds
Open end
investment
CHAPTER 12
Attractions
and
drawbacks
Attraction
1. Diversification
2. Professional mgt
3. Invest in small amt
4. Multiple services
offered
5. Convenience
Drawbacks
1. Transaction cost
2. Lower than market
performance.
Buy and sell directly
Unlimited no of
shares
Purchase and sale
daily basis
Close end
investment
Buy and sell through
broker
limited no of shares
Purchase and selling
prices determined
by demand and
supply
Exchange
traded fund
Basket of
securities
Traded like stock
Sell and buy at any
time
Low mgmt. fee
Types of load
fund
Load
No- load
Low load
Back end
Hidden
Management
administrative
Unit
investment
trust
Fixed pool of
securities normally
bonds
Portfolio more
stable
Not actively
managed.
Real Estate
investment
trust
Types of REITs:
1. Properties/ equity
2. Mortgage
3. Hybrid
Type of
mutual funds
1. Growth
2. Aggressive growth
3. Value
4. Equity-income
5. Balanced
6. Growth-income
7. Socially responsible
8. Asset allocation
9. International
1. Government
2. Mortgage
backed
3. High grade
corporate bond
4. High yield
corporate bond
5. Intermediate
bond
6. Short tem bond
7. Municipal
8. Convertibles