Opportunity set - What can we invest in? Flashcards
what is an asset class
a group of financial instruments which have similar financial characteristics and behave in a similar way in the marketplace
what are the traditional asset classes
cash or cash equivalents
stocks or equities
bonds or other fixed income investments
what are cash products also known as
money market instruments
examples of money market instruments
treasury bills
repurchase agreements
commercial paper, commercial deposits
what is the maturity date on the money market
less than 1 year
how does all debt end up being a money market instrument at some point
when maturity date reaches less than 1 year
why is equity always a capital market product and never cash
it will never expire
in theory a business can run forever
what are repurchase agreements
short term lending between banks
what are treasury bills
short term US Government bonds
what are commerical paper and commercial deposit
short term borrowing that banks use
why are cash products low risk
liquid
short term so predictable
which type of bonds are the most liquid
government bonds
which has more credit risk:
- government bonds
- corporate and bank bonds
corporate and bank
example of an asset backed bond
mortgage
what are green bonds / sustainable bonds
proceeds must e used for something environmental or social
the coupon of the bond is linked to KPI, steps up if the company fails to meet them
benefits of green bonds
linking progress on sustainable development goals to the cost of borrowing
keeps companies accountable for their actions
what is a bond with an embedded option
the person who has borrowed can pay back early or the lender is able to ask for the borrower to pay back early
what are supernational government bonds
not tied to any one government
what are municipal government bonds
local government borrowing
what are sovereign government bonds
national borrowing
what are the 3 types of government bonds
supranational
sovereigns
municipal
what are the two types of corporate bonsd
secured
unsecured
what bond ratings are of investment grade
BBB- and above
what is a floating rate bond
where the coupon is tied to a benchmark rate
what does residual claim mean
after the wind up of a business, the equity holder will not get a penny until all of the other debts of the business are paid off
what is a hybrid security
preference share
examples of companies which are still private
lidl
aldi
ikea
dunnes stores
what are angel or seed investors
invest in business in a very early stage - just as the idea is forming, with few to no customers
what is venture capital
investment at the early stage of growth
venture capitalists put small amounts in lots of companies hoping that some of them succeed
what are private equity firms
invest when the company has a stable cash flow
these firms advise management and at exit time tend to sell on to other private investors
how to judge investments in terms of risk
- equity is the last in the queue - most risky
- creditworthiness
- maturity - long is more risky
- convertibility - how liquid and can you trade it, which markets can you trade it in (eg limited by countries or currencies?)
examples of alternative investments
derivates
venture capital
private equity
currencies
real assets eg real estate
crypto currency
hedge funds
what is a future or a forward in the derivate market
delayed purchase of an asset with an agreed price now
what is an option in the derivate market
like an insurance contract, you may or may not use it
the buyer has the right to buy or sell and asset in the future at a certain price
examples of how ryanair use deriviates
they don’t know now what they will pay for oil in 3 months time
they don’t buy oil and store it as their planes need to top up everywhere and the storage would be expensive
how are derivates like bets
they allow transfer of risk
you can make exposure to anything so long as someone is willing to take up the other side of the bet eg. amount of rainfall in a year
reasons not to invest as an individual and to instead use investment funds
-> professionals may be able to make better returns
-> economies of scale eg lower transaction costs (buying in bulk etc)
-> increase asser diversification
-> more companies can be analysed
what does EFT stand for
Exchange Traded Fund
Types of investment funds
Investment funds investing in a mixture of stocks and bonds
EFTs - bought and sold like shares
Hedge Funds
Are hedge funds available to retail investors
no only to large, sophisticated investors
what types of assets do hedge funds invest in
more risky assets
are hedge funds regulated
no
are EFTs regulated
yes
what is the bid price
the price a dealer is willing to buy at
what is the ask priec
the price the dealer is willing to sell at
what is the bid ask spread
the difference between a dealer’s bid and ask price
what is a market order
a buy or sell order that is to be executed immediately
what is a price contingent order
traders specify buying or selling price
what does buying on margin mean
the investor borrows part of the purchase price on stock
what is the maintenance margin
minimum equity that must be kept in the margin account
what is the initial margin requirement
50%
how do short sales work
investor borrow stock from a broker and sells it
when the price is lower buy them back and return to broker
keep the profit
why might private trading outperform public
according to The Economist, Privacy and its limits, Jan 20th 2020
Private capital reduces agency costs (not constantly monitored by the public but instead held closely by a few hands)
what do private equity investors investors eg angel and venture add to the firms
- raise efficiency
- raise growth
- raise profitability
- if its a family owned or smaller business, the private firm has better management habits and skills
- they back innovation, speedier product launces
