Chap 1 Flashcards
Real asset
assets used to produce goods/services; utimately determine the productivity capacity
Financial asset
incomes generated by real asset; not contribute to the productive capacity
securities
financial assets of individuals; liabilities of issuer to pay interest and principal
3 types of financial assets
debt, equity and derivatives
debt securities (fixed income)
pay specific cash flows over specific period;
coming in a variety of maturities (Money market - short term; capital market - long term)
coming in variety of risk
proxy contest
shareholders seek to obtain enough proxies to take control of the company and vote for new board
activist investors
large investor
company raises fund
sells both stocks and bonds to the public
optimistic investor buy share
conservative investors buy bonds
Investment portfolio
collection of investment assets
asset classes
Categories of investment assets
asset allocation
allocate asset classes in a portfolio
security selection
choice of which securities to hold within each asset class
top-down portfolio construction
start with asset allocation: decide portion for stocks and bonds in portfolio and ramification for both risk and return the portfolio could have
then valuing particular securities
bottom up construction
starting with securities that seem to be attractive, without concern much about allocation
Players in financial market
Firms: net demanders of capital to pay for investment in plans and equipments
Households: net supplier (by purchasing securities issued by firms)
Governments: both lender and borrower (depends on budget surplus/deficit)
financial intermediaries
connect borrowers and lenders
investment companies
firms managing funds for investors
Mutual funds: large scale trading and portfolio management
Hedge funds: pools and invest money of many investors (only for institutional)
Investment banker
advisory role on prices and interest rate
Venture capital
money invested to finance a new firm
Private equity
investment companies whose shares are not traded in public stock markets
LIBOR rate
rate bank borrows
T-bill rate
US government borrowing rate
securitization
pooling loans into a standardized securities backed by those loans
underwater
house worth less than the loan balance
equity (common stock)
ownership share of corporation
holders are not promised any particular payment except dividends the firm may pay
performance are tied to success of the firm
-> riskier
derivatives
securities providing payoffs depending on the success of other assets
integral part of investment environment
used to hedge; take highly speculative positions
proxy contest
shareholders seek to obtain enough proxies -> take control of the firm and vote for new board
activist investor
large investor
