Professional Documents
Culture Documents
Chapter 3
Selecting Investments in a Global Market
The Case for Global Investments Global Investment Choices Historical Risk-Returns on Alternative Investments
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The performance of the Canadian bond market ranked higher than the U.S. bond market due to the weaker Canadian dollar during the period.
Copyright 2010 by Nelson Education Ltd.
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Investors that limit themselves to domestic markets may experience below average ROI. Notice that Canadian and Mexican equity markets produced comparatively high returns in the 2003-06 period.
Copyright 2010 by Nelson Education Ltd.
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The Case for Global Investment: Global Equity Portfolio & Risk Reduction
Opportunities to reduce risk of a stock portfolio by including foreign stocks
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Equity Instruments Special Equity Instruments Warrants and options Futures Contracts Investment Companies Real Estate Low-Liquidity Investments
Copyright 2010 by Nelson Education Ltd.
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Fixed-Income Investments
Basic concepts of fixed-income investments Contractual payment schedule Recourse varies by instrument Bonds Investors are lenders Expect interest payment and return of principal Preferred stocks Dividends require board of directors approval
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Fixed-Income Investments
Savings Accounts Fixed earnings Convenient Liquid and low risk Low rates Certificates of Deposit (CDs) Usually less than 1 year in maturity Usually insured by CDIC Guaranteed Investment Certificates (GICs) Usually issued with terms greater than 1 year Usually insured by CDIC
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Fixed-Income Investments
Fixed income obligations that trade in secondary market Corporate bonds issued by corporations to fund long-term commitments Bankers Acceptances issued by banks to fund short term (less than 1 year) obligations Government of Canada bonds & T-bills Provincial government bonds Agency bonds are issued by Crown corporations
Example: Canada Mortgage and Housing Corporation (CMHC)
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Corporate Bonds
Issued by a corporation Fixed income Credit quality measured by ratings Maturity Features:
Indenture legal agreement stating obligations of issue Call provision specify when bonds can be called away from investors before maturity Sinking fund provision for payments to pay down bond debt
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Equity Instruments
Common Stock
Represents ownership of a firm Investors return tied to the performance of the company and may result in loss or gain
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Equity Instruments
Common Stock Classifications Industrial: manufacturers of automobiles, machinery, chemicals, beverages Utilities: electrical power companies, gas suppliers, water industry Transportation: airlines, truck lines, railroads Financial: banks, savings and loans, credit unions
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Exchange-traded funds (ETFs) are a recent innovation in the world of index products
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Futures Contracts
Exchange of a particular asset at a specified delivery date for a stated price paid at the time of delivery Deposit (10% margin) is made by buyer at contract to protect the seller Commodities trading is largely in futures contracts Current price depends on expectations Example: Corn, soybeans, oil
Copyright 2010 by Nelson Education Ltd.
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Financial Futures
Recent development of contracts on financial instruments such as T-bills, Treasury bonds, and Eurobonds Traded mostly on Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) Allow investors and portfolio managers to protect against volatile interest rates Currency futures allow protection against changes in exchange rates Various stock futures on market indexes such as the S&P 500 and Value Line Index
Copyright 2010 by Nelson Education Ltd.
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Investment Companies
Mutual Funds
Rather than buy individual securities directly from the issuer they can be acquired indirectly through shares in an investment company Investment companies sell shares in itself and uses proceeds to buy securities Investors own part of the portfolio of investments
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Investment Companies
Money-Market Funds
Acquire high-quality, short-term investments Yields are higher than normal bank CDs or GICs Typical minimum investment is $1,000 No sales commission charges Withdrawal is by cheque with no penalty Investments usually are not insured Total value reached more than $2.5 trillion in 2007
Copyright 2010 by Nelson Education Ltd.
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Investment Companies
Bond Funds
Invest in long-term government or corporate bonds
Vary in bond quality from risk-free government bonds to high-yield or junk bonds Expected returns also differ reflecting the risk level of bonds in the fund
Copyright 2010 by Nelson Education Ltd.
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Investment Companies
Bond Funds
Invest in a combination of stocks and bonds depending on their stated objectives Numerous non-stock indexes including various bond indexes have been created
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Investment Companies
Index Funds
These are mutual funds created to track the performance of a market index like the S&P/TSX Composite Appeal to passive investors who want to simply experience returns equal to some market index Lower costs to investors as management expense fees are lower than actively managed mutual funds
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Real Estate
Real Estate Investment Trusts (REITs)
Investment fund that invests in variety of real estate properties, similar to stock or bond mutual fund Construction and development trusts provide builders with construction financing Mortgage trusts provide long-term financing for properties Equity trusts own various income-producing properties
Copyright 2010 by Nelson Education Ltd.
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Real Estate
Direct Real Estate Investment
Purchase of a home Purchase of raw land
Intention of selling in future for a profit Ownership provides a negative cash flow due to mortgage payments, taxes, and property maintenance
Land Development
Divide the land into individual lots Build houses or a shopping mall on it Requires capital, time, and expertise
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Individuals buying a few pieces to decorate a home may have difficulty overcoming transaction costs to ever enjoy a profit them more as hobbies than investments
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Market is more fragmented than stock market, but more liquid than art and antiques markets
Price lists are published weekly and monthly Grading specifications aid sales Widespread between bid and ask prices
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