stocks bonds – Derivatives Prof. Lasse H. Pedersen Use of Financial Instruments Allocation of Capital – Financing of projects Consumption Smoothing: – saving and borrowing Allocation of Risk – Diversification – Hedging – Insurance Meeting place for investors with different (not necessary opposite) investment needs Prof. Lasse H. Pedersen Important Financial Assets Fixed Income Securities – ‘Borrowing instruments’ – Treasury bonds – Municipal bonds – Corporate bonds Equity
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through a bond issue. A lot of disagreement was made by several company directors that instead wanted the firm to issue common stock. In the end‚ the argument is about whether to raise debt or equity. What are the annual cash expenses associated with the (a) bond issue? (b) common stock issue? Analysis of issuing stock The cost of issuing stock is lower than bond. The bond has a principal repayment of an additional $6.25 million cash expenses annually and that is over 9% of the bond issue.
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Topic 8 Retirement Planning 1. Defined benefit pension plans- determines benefit at retirement. The amount that an employer is supposed to give a yr in order to give what is promised is unknown. It aint my fault. 2. Defined contribution plans- the employee contributes a certain percentage for their retirement. You nigga! • Advantages: you see the exact balance at all times‚ easy to move accounts Retirement Ages • Normal retirement age – earliest age you can retire and receive full benefits
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versus Financial Asset Markets: a) Physical Assets Markets are also called‚ “Tangible‚” or‚ “Real‚” asset market because are for products such as wheat‚ autos‚ real estate‚ computers‚ and machinery. b) Financial Asset Markets deal with stocks‚ bonds‚ notes‚ mortgages‚ and derivative securities. An example of a‚ “Pure Financial Asset‚” is a share of Ford stock‚ while an option to buy a Ford shares is a derivative security whose value depends on the price of Ford stock. 2. Spot
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different classes with different maturities and risks). risk and return are the most important characteristics of financial assets. Another is tax. (high tax-bracket investors would‚ other things equal‚ would prefer tax-exempt securities [municipal bonds]). brokered markets (when a bank seeks out investors to purchase an issue directly from the issuing firm‚ it is acting as a broker) and dealer markets (when an inv. bank purchased and sold a security issue‚ it is acting as a dealer – profit is the
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Problem Set 3 - FINA 4200 Spring 2013 Due Wednesday February 26th before class I. Multiple Choices Chapter 2 1. According to the Capital Asset Pricing Model‚ investors are primarily concerned with portfolio risk‚ not the isolated risks of individual stocks. Thus‚ the relevant risk is an individual stock’s contribution to the overall riskiness of the portfolio. a. True b. False 2. Diversifiable risk‚ which is measured by beta‚ can be lowered by adding more stocks to a portfolio.
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Securities: Any debt instrument that can be bought or sold between two parties and has basic terms defined‚ such as notional amount (amount borrowed)‚ interest rate and maturity/renewal date. Debt securities include government bonds‚ corporate bonds‚ CDs‚ municipal bonds‚ preferred stock‚ collateralized securities (such as CDOs‚ CMOs‚ GNMAs) and zero-coupon securities. The interest rate on a debt security is largely determined by the perceived repayment ability of the borrower; higher risks of
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in 30-year‚ 10% coupon Treasury bonds selling at par and whose duration is 9.94 years. It has liabilities of $900‚000 financed through a two-year‚ 7.25% coupon note selling at par. Using the information above‚ what is the impact on equity values if all interest rates rise by 20bps; i.e.‚ R/(1+R) = +.002? (10 points) 2. This bank wishes to hedge its interest rate risk exposure with 10-year Treasury bond futures. A 10-year‚ 5% coupon Treasury bond (basis for the futures contract)
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as whether to consume or save‚ whether to buy a house and whether to purchase bonds or put funds into a savings account. Interest rates also affect the economic decisions of households or businesses such as whether to put their money in the bank or invest in new equipments for factories. Before continuing‚ we must understand exactly what interest rates mean. By holding financial instruments ‚ such as loans or bonds. Savers and financial institutions extend credits to those individuals or firms
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to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into discussion with Kim McKenzie‚ an underwriter from the firm of Raines and Warren‚ about which bond features S&S Air should consider and what coupon rate the issue will likely have. Although Chris is aware of the bond features‚ he is uncertain about the costs and benefits of some features‚ so he isn’t sure how each feature would affect the coupon rate of the bond issue. You are Kim’s assistant‚ and she
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