BKM 9e Chap002
CHAPTER 2
ASSET CLASSES AND FINANCIAL INSTRUMENTS
1. Common stock is an ownership share in a publicly held corporation. Common shareholders have voting rights and may receive dividends. Preferred stock represents nonvoting shares in a corporation, usually paying a fixed stream of dividends. While corporate bonds are long-term debt issued by corporations, the bonds typically pay semi-annual coupons and return the face value of the bond at maturity.
2. While the DJIA has 30 large corporations in the index, it does not represent the overall market nearly as well as the more than 5000 stocks contained in The Wilshire index. The DJIA is simply too small.
3. Money market securities are short-term, relatively low risk, and highly liquid. Also, their unit value almost never changes.
4. The major components of the money market are Treasury bills, certificates of deposit, commercial paper, bankers’ acceptances, Eurodollars, repos, reserves, federal funds, and brokers’ calls.
5. American Depository Receipts, or ADRs, are certificates traded in U.S. markets that represent ownership in shares of a foreign company. Investors may also purchase shares of foreign companies on foreign exchanges. Lastly, investors may use international mutual funds to own shares indirectly.
6. The coupons paid by municipal bonds are exempt from federal income tax and from state tax in many states. Therefore, the higher the tax bracket that the investor is in, the more valuable the tax-exempt feature to the investor.
7. The London Interbank Offer Rate (LIBOR) is the rate at which large banks in London are willing to lend money among themselves. The Fed funds rate is the rate of interest on very short-term loans among financial institutions in the U.S.
8. General obligation bonds are backed by the taxing power of the local governments, while revenue bonds have proceeds attached to specific projects. A revenue bond has fewer guarantees, it is riskier in terms of default, and, therefore,
ASSET CLASSES AND FINANCIAL INSTRUMENTS
1. Common stock is an ownership share in a publicly held corporation. Common shareholders have voting rights and may receive dividends. Preferred stock represents nonvoting shares in a corporation, usually paying a fixed stream of dividends. While corporate bonds are long-term debt issued by corporations, the bonds typically pay semi-annual coupons and return the face value of the bond at maturity.
2. While the DJIA has 30 large corporations in the index, it does not represent the overall market nearly as well as the more than 5000 stocks contained in The Wilshire index. The DJIA is simply too small.
3. Money market securities are short-term, relatively low risk, and highly liquid. Also, their unit value almost never changes.
4. The major components of the money market are Treasury bills, certificates of deposit, commercial paper, bankers’ acceptances, Eurodollars, repos, reserves, federal funds, and brokers’ calls.
5. American Depository Receipts, or ADRs, are certificates traded in U.S. markets that represent ownership in shares of a foreign company. Investors may also purchase shares of foreign companies on foreign exchanges. Lastly, investors may use international mutual funds to own shares indirectly.
6. The coupons paid by municipal bonds are exempt from federal income tax and from state tax in many states. Therefore, the higher the tax bracket that the investor is in, the more valuable the tax-exempt feature to the investor.
7. The London Interbank Offer Rate (LIBOR) is the rate at which large banks in London are willing to lend money among themselves. The Fed funds rate is the rate of interest on very short-term loans among financial institutions in the U.S.
8. General obligation bonds are backed by the taxing power of the local governments, while revenue bonds have proceeds attached to specific projects. A revenue bond has fewer guarantees, it is riskier in terms of default, and, therefore,