class 1: intro Flashcards
do pension funds pay taxes?
nah bruv
do pension funds have a finite life?
nah bruv
investment process
- understand the client
- asset allocation
- security selection
- Portfolio execution
- perfomance evaluation
asset class
a group of assets that:
have similar features
have similar behavior
are subject to same laws and regulations
are investable (easily buy them and easily sell them)
asset classes
money market
fixed income
equites
alternatives
money markets
any marketable instrument that has a maturity of less than a year
not to seek profits usually
to park money
for safekeeping
just to play it safe
money market instruments
treasury bills
CDs
commercial paper
bankers acceptances
repos and reverses
fixed income class (bonds) instruments
bonds
debentures
mortgages
other
difference between bonds and debentures
debentures have no claim to assets in case of bankruptcy
fixed income (definition)
should be the core of our portfolio
cash flow
equities
where we make additional money
equities sectors
financials
energy
industrials
technology
consumer staples
consumer discretionary
health
utilities
(2 extra)
alternative investments
real estate
private equity
commodities
hedge funds
infrastructure
etc
why invest in alternatives?
to make super super profits
Capital markets
include longer-term and riskier securities
much more diverse than those found within the money market
the two so-called derivative markets
options and futures
Treasury bills (T-bills)
the most marketable of all Canadian money market instruments
represent the simplest form of borrowing: the government raises money by selling bills to the public
Investors buy the bills at a discount from the stated maturity value
–> At the bill’s maturity, the holder receives from the government a payment equal to its face value
can only be bought through competitive auction
highly liquid
because T bills can only be bought through competitive auction, what are dinger buyers face
they may bid too high and overpay for the bills
they may bid too low and be shut out of the auction
who is the primary purchaser of t bills
chartered banks
investment dealers
the Bank of Canada (as part of its monetary policy)
individuals who obtain them on the secondary market from a government securities dealer
A certificate of deposit (CD)
a time deposit with a chartered bank
may not be withdrawn on demand
The bank pays interest and principal to the depositor only at the end of the fixed term of the deposit
a similar time deposit to CDs but for smaller amounts
guaranteed investment certificate (GIC)
bearer deposit notes (BDNs)
time deposit sold to another investor if the owner needs to cash in the deposit before its maturity date
commercial paper
short-term unsecured debt notes
issues by large, well-known companies
Very often backed by a bank line of credit, which gives the borrower access to cash that can be used (if needed) to pay off the paper at maturity
maturities range up to one year
considered to be a fairly safe asset
why are commercial papers considered to be a fairly safe asset?
because a firm’s condition presumably can be monitored and predicted over a term as short as one month
A bankers’ acceptance
starts as an order to a bank by a bank’s customer to pay a sum of money at a future date
–> typically within six months
–> similar to a postdated cheque
second only to T-bills in terms of default security
why are bankers’ acceptances considered very safe assets
because traders can substitute the bank’s credit standing for their own
Eurodollars
U.S. dollar–denominated deposits at foreign banks or foreign branches of American banks
repurchase agreements (repos or RPs)
a form of short-term, usually overnight, borrowing
The dealer sells government securities to an institutional investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price
A term repo
same as repurchase agreements but the term of the implicit loan can be 30 days or more
why are repurchase agreements (repos or RPs) considered very safe assets?
because the loans are backed by the government securities
reverse repos
the mirror image of a repo
the dealer finds an investor holding government securities and buys them, agreeing to sell them back at a specified higher price on a future date
federal funds
Funds in the bank’s reserve account
which banks usually have a shortage of federal funds
primarily big banks in New York and other financial centers
In the federal funds market, what do banks with excess funds do?
they lend to those with a shortage
–> usually overnight transactions
–> arranged at a rate of interest called the federal funds rate
Brokers’ Call Loans
Individuals who buy stocks on margin borrow part of the funds to pay for the stocks from their broker
–> The broker in turn may borrow the funds from a bank, agreeing to repay the bank immediately (on call) if the bank requests it
The LIBOR Market (London Interbank Offered Rate)
the rate at which large banks in London are willing to lend money among themselves
what do we use for t bill yields?
the bond equivalent yield
how do we find the bond equivalent yield?
Rbey = ((1000 - P)/P) · 365/n
effective annual yield
The compound interest annualized rate of return
((1000 - P)/P)^2 - 1
the bank discount yield
The quoted yields for U.S. T-bills
a 360-day year and the par value of 1,000 in the denominator instead of P
d = ((1000 - P)/1000) · 360/n
how can we find the bond equivalent yield from the bank discount yield
Rbey = (365 · d) / (360 - (d · n))
d: the discount yield
The bond market
composed of longer-term borrowing instruments than those that trade in the money market
said to make up the fixed-income capital market, because most of them promise either a fixed stream of income or a stream of income determined according to a specific formula
how does the Canadian government mainly borrow funds ?
Canada Savings Bonds (CSBs) or Canada Premium Bonds (CPBs)
Government of Canada bonds
Canada Savings Bonds (CSBs) or Canada Premium Bonds (CPBs)
nonmarketable securities
ssued every year starting November 1, with a sale period of a few months
perfectly liquid, since they can be cashed any time prior to maturity at face value plus accrued interest
Government of Canada bonds
longer-term marketable debt securities
have varying maturities at issue date, ranging up to 40 years
considered part of the money market when their term becomes less than three years
The yield to maturity
calculated by determining the semiannual yield and then doubling it
the yield is quoted on an annual percentage rate (APR) basis, rather than as an effective annual yield
also called the bond equivalent yield
current yield
payment / P
Provincial and Municipal Bonds
similar in their characteristics to federal government issues, with a variety of maturities and coupon rates, and are available to investors at any given time
considered extremely safe assets, even though not as safe as comparable Canada bonds
a small yield spread can be observed in the figure between Canada bonds and provincial bonds, as well as between the bonds of the various provinces
are U.S. municipal bonds exempt from federal income tax?
yeee
Corporate bonds
enable private firms to borrow money directly from the public
similar in structure to government issues
–> typically pay semiannual coupons over their lives and return the face value to the bondholder at maturity
differ most importantly from government bonds in degree of risk
–> Default risk is a real consideration in the purchase of corporate bonds,
debentures
unsecured bonds
subordinated debentures
have a lower-priority claim to the firm’s assets in the event of bankruptcy
Callable bonds
give the firm the option to repurchase the bond from the holder at a stipulated call price
Retractable and extendible bonds
give the holder the option, respectively, to redeem the bonds earlier and later than the stated maturity date
Convertible bonds
give the bondholder the option to convert each bond into a stipulated number of shares of stock
A Eurobond
a bond denominated in a currency other than that of the country in which it is issued
For example, a dollar-denominated bond sold in Britain would be called a Eurodollar bond
Home mortgages
usually written with a long-term (25-to-30-year maturity) amortization of the principal
renewable at one-to-five-year intervals, at which point their interest rates may be renegotiated
why do Fixed-rate mortgages pose difficulties to banks in years of increasing interest rates?
because of the mismatching of the maturities of assets and liabilities
hold long-term assets such as fixed-rate mort- gages
–> Hence, they suffer losses when interest rates increase: the rates they pay on deposits increase while their mortgage income remains fixed
–> The five-year renewal period helps to alleviate this problem
the variable-rate mortgage
require the borrower to pay an interest rate that varies with some measure of the current market interest rate
A mortgage-backed security (MBS)
either an ownership claim in a pool of mortgages or an obligation secured by such a pool
represent securitization of mortgage loans
why are mortgage backed securities called pass throughs?
cause originator can sell it to someone else and he will give him the payments he receives
Common stocks
also known as equity securities or equities
represent ownership shares in a corporation
entitles its owner to one vote on any matters of corpo- rate governance that are put to a vote at the corporation’s annual meeting, as well as to a share in the financial benefits of ownership
restricted shares
no voting rights, or only restricted voting rights, but otherwise participates fully in the financial benefits of share ownership
A corporation whose stock is not publicly traded is said to be what?
is said to be closely held
The two most important characteristics of common stock
residual claim and limited liability features
residual claim
shareholders are last in line of all those who have a claim on the assets and income of the corporation
limited liability
the greatest amount shareholders can lose in event of failure of the corporation is their original investment
board lots
bundles of stocks that are bought in one transaction
Preferred stock
has features similar to those of both equity and debt
–> promises to pay to its holder a fixed amount of income every year
–> similar to an infinite-maturity bond, that is, a perpetuity
–> does not convey voting power regarding the management of the firm
–> an equity investment, however, in the sense that failure to pay the dividend does not precipitate corporate bankruptcy
–> preferred dividends are usually cumulative; that is, unpaid dividends cumulate and must be paid in full before any dividends may be paid to holders of common stock
—-> dividends they are not tax-deductible expenses for the firm
Income trusts
instruments with debt and equity features
holds an underlying asset or group of assets that generate income, most of which is distributed to unitholders
–> a variation on the structure of an REIT or a royalty trust
Depository Receipts (ADRs)
certificates traded in U.S. markets that represent ownership in shares of a foreign company
most common way for U.S. investors to invest in and trade the shares of foreign corporations
Toronto Stock Exchange Indices
Canada’s best-known stock market indicator
contains over 270 of the largest securities (in terms of market value) traded on the TSX, regardless of industry group, but excluding control blocks composed of more than 20 percent of outstanding shares
a market-value-weighted index based on a very broad set of companies
The percentage increase in the total market value from one day to the next represents the increase in the index
index funds
shares of mutual funds that invests in all stocks in an index
Dow Jones Averages
price- weighted average
30 large blue-chip corporations
The ultimate U.S. equity index so far computed
the Wilshire 5000 index
