01-course introduction and overviewc of debt and equity securities_2014

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Course Introduction and

Overview of Financial Assets

Fin 410 - Investments

Fall 2014

Rob Schonlau

Last updated Aug 19, 2014


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Lecture 1 Outline

Course introduction:

Introduction to professor, course policies, and coursepreview

Financial assets, markets, and players: What are some of the common financial assets traded in

financial markets? How are debt and equity securitiessimilar and how do they differ? Who are the large players inthe financial markets?

Introduction to debt markets and equity markets

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Introduction to professorEducation:

Undergraduate and MBA degrees from BYU

MSBA and PhD degrees from the University of Washington

Professional Experience:

University of Washington(2007-2010), BYU (2010-Present)

IBM (1998-2002)

GradPrep (2001)

NetSchools (1997-1998)

Personal:

Married with four children

Mission in Ribeirao Preto, Brazil

I love books, hiking, ultimate, racquetball, and piano

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Course workload

Expectation: Six - eight hours per week out of class

Be prepared to use basic math skills throughout the semester.

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Your grade will be based

on the following:

Weight in final grade

2 Midterms 30%

Final exam(comprehensive)

15%

13 Homework assignments 25%

7 Quizzes 15%

2 Group Cases 10%

Participation 5%


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Required course materials Essentials of Investments, Bodie, Kane, and Marcus, 9th Edition

Access to a computer with Excel

Case packet (only 2 cases)

Calculator for quizzes and exams

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Suggestions for success in this course Attend the lectures on Monday and Wednesday. Use the slides

to help you take notes.

Read the assigned reading from the textbook. Keep current

with the reading. Be a contributing member of your group when doing the cases

and homework.

Go to the office hours if you need help.

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If you need helpOffice hours with professor:

Tues and Thurs 9:3010:45am, or by appointment

Office hours with TAs: To-be-announced

TA email contact information:

David Hinckley ([email protected])

Michael Moss ([email protected])

Trevor Findlay ([email protected])

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mailto:[email protected]:[email protected]:[email protected]:[email protected]


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What subjects and questions do we cover in 410?To set the stage for this course, assume that yesterday 100 of yourclosest friends heard you were taking this class and spontaneouslyentrusted to you a sum total of $2 million for you to invest. Theyasked you to invest it in the best possible manner over the next 5

years.

You see this as a chance to build your resume as a fund managerand you feel obligated due to your friendship to invest the money asbest you can.

At the end of the 5 years you will need to be able to justify yourapproach to picking assets and to make a convincing argument thatyour investment choices did well compared with reasonablebenchmarks.

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Bigpicture

questions (course preview): What securities are traded in financial markets? How do you trade

these securities? What other players actively trade in thesemarkets? (lectures 1 & 2)

There are thousands of stocks and bonds available for investing.

How do we decide which securities, or combinations of securities, toinvest in? (lectures 5-7, 14, 17,19, & 20)

How do we measure risk and performance? (lectures 3, 4, 9, 15, & 17)

How do we formalize the relation between risk and return?

(lectures 4-11)

Can we predict stock performance? (lectures 12, 13, & 18)

Given market conditions, what is the best way to combine financialassets in a portfolio? I.e. what is the optimal portfolio allocation?

(lectures 6,7, & 11)

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How can this course help you? For those of you who plan to work with investments this course

will provide a foundation for investment ideas and terminologythat will help you in your career.

For those of you who dont plan to work in investments, this

course will still provide insight and understanding for the actionsthat the movers and shakers in the financial markets take.

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Other suggestions for how to pursue a career in

investments: Do well in this course

Join the investment banking/capital markets club

Go on the organized recruiting trips

Take the CFA level 1 exam prior to sending out applications ifpossible. In the past, if you pass the exam the Peery Institute hasbeen willing to reimburse you for the exam. Talk to Peery Instituteabout this possibility.

Be sure to get an internship in your area of interest during your

undergraduate experience.

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Lecture 1 Outline






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What are financial assets?

Real assets: assets used to produce goods and services.(E.g., land, buildings, equipment, etc.)

Financial assets: a legal claim to a stream of cash flows thatare generated from the use of the real assets. In the next fewslides we will talk about debt and equity-based financial assets.

Financial assets are often classified into three groups:

Debt or fixed-income securities Equity securities Derivative securities

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How are debt and equity claims similar? How do

they differ?

Nature of claim on cash flows (fixed vs residual)

Priority of claim on cash flows (primary vs secondary)

Maturity (finite vs on-going)

Managerial control (ownership?) Expected return (high return vs low return)

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Who participates in financial decisions?


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Who are the major participants in the financial

markets?

Examples of financial market participants:

Hedge fund managers Pension fund managers Mutual fund managers Banks Wealthy individuals University endowments Average individuals

Front row players have millions, if not billions, of dollars undermanagement.

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Front row players


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Why might the size of investment matter?

Spread the costs of research, infrastructure

Dollar size of returns is a function of size of investment

Benefits vs costs of activism

Example: Suppose research will yield an almost guaranteed increasein return of 0.1% over the next year. The research costs $10,000.

If the average individual has $14,000 invested($14,000 - $10,000)*1.01 = $4,040 (vs $14,000 starting point).

Suppose you have $10 billion invested($10 billion - $10,000) = $10,099,989,900

(almost $100 million gain)

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Lecture 1 Outline






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Debt market

The debt market can be broadly divided into short-term(money-market) and long-term segments (bond market).

Money market instruments are generally highly liquid and low-risk.

In this lecture we will go over the different kinds of debtinstruments. Later in the course we will discuss how to value

them.

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Money Market

Debt Instrument Comment

T-Bills Highly liquid. You can buy directly from theTreasury or on the secondary market.

Certificates of deposit Issued from bank.Commercial paper Issued from large corporations. Sold directly

to investors or via dealers.

Bankers acceptance Often used when creditworthiness of tradingpartner is in question.

Eurodollars Dollar denominated deposits at foreign banks.Repos and Reverses Dealers use repos as a form of short term

borrowing

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See the textbook for more detailed descriptions of these instruments.


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Bond Market (Fixed Income)

Treasury notes and bonds

TIPs

Federal agency debt (government sponsored enterprises)

International bonds Municipal bonds

Corporate bonds

Mortgage-backed securities

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Review: What is a bond?

A bond is a long-term loan to a company or government that ismade by investors (bondholders).

The borrower (company or government) receives funds today andin exchange agrees (enters into a contractual promise) to make aseries of coupon payments until the maturity date of the bond.


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How large is the US bond market?

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A few important rates

Fed Funds Rate

LIBOR

1 and 10 year Treasury rates

Prime rate

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Equity securities: Common shares, preferred

shares, ADRs

Common stock represents ownership shares in a corporation.Common shareholders typically have voting rights and mayreceive periodic dividends.

Preferred stock shares features of equity and debt in thatpreferred shareholder are residual claimants but enjoy a fixedstream of payments. Generally preferred shareholders dont

vote.

American Depository Receipts (ADRs) are certificates traded inUS markets that represent ownership shares in foreigncompanies.

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Major types of financial assets

Direct Investing

Nonmarketable: Savings deposits CDs

Money market accounts US savings bonds

Money Market: Treasury Bills Negotiable CDs

Commercial Paper Eurodollars

Repurchase agreements Bankers acceptances

Capital Market: Fixed IncomeTreasuries, Agencies, Municipals,

Corporate

EquitiesPreferred and Common stock

ADRs

Derivatives Market: Options Futures Contracts

Indirect InvestingMisc: Unit Investment Trusts Indexes

Open End FundsMoney market, stock, bond, andincome funds

Closed End Funds Exchange Traded Funds

This table is based off of Exhibit 2-1 in Investments Analysis by Charles Jones


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For next time

Be sure to learn the terminology in chapters 1 and 2 of thetextbook. The next lecture will draw on concepts from BKMchapter 3.

For practice do end-of-chapter problems chapter 2 questions 1-11.

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01-course introduction and overviewc of debt and equity securities_2014

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