Chapter 1 The Investment Environment

Chapter 1
The Investment Environment

INVESTMENTS (ASIA GLOBAL EDITION) | BODIE, KANE, MARCUS,
McGraw-Hill/Irwin

JAIN

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Real Assets Versus Financial
Assets

1-2

• Real Assets
– Determine the productive capacity and net income of the economy
– Examples: Land, buildings, machines, knowledge used to produce goods and services • Financial Assets
– Claims on real assets
INVESTMENTS (ASIA GLOBAL EDITION) | BODIE, KANE, MARCUS,
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Financial Assets
• Three types:
1. Fixed income or debt
2. Common stock or equity
3. Derivative securities

INVESTMENTS (ASIA GLOBAL EDITION) | BODIE, KANE, MARCUS,
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Fixed Income
• Payments fixed or determined by a formula • Money market debt: short term, highly marketable, usually low credit risk
• Capital market debt: long term bonds, can be safe or risky
INVESTMENTS (ASIA GLOBAL EDITION) | BODIE, KANE, MARCUS,
JAIN

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Common Stock and Derivatives
• Common Stock is equity or ownership in a corporation.
– Payments to stockholders are not fixed, but depend on the success of the firm

• Derivatives
– Value derives from prices of other securities, such as stocks and bonds
– Used to transfer risk

INVESTMENTS (ASIA GLOBAL EDITION) | BODIE, KANE, MARCUS,
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Financial Markets and the
Economy

1-6

• Information Role: Capital flows to companies with best prospects
• Consumption Timing: Use securities to store wealth and transfer consumption to the future

INVESTMENTS (ASIA GLOBAL EDITION) | BODIE, KANE, MARCUS,
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Financial Markets and the
Economy (Ctd.)
• Allocation of Risk: Investors can select securities consistent with their tastes for risk
• Separation of Ownership and
Management: With stability comes agency problems
INVESTMENTS (ASIA GLOBAL EDITION) | BODIE, KANE, MARCUS,
JAIN

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Financial Markets and the
Economy (Ctd.)
• Corporate Governance and Corporate Ethics
– Accounting Scandals
• Satyam (India), Olympus (Japan), Longtop