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The Investment Environment (1, Purpose of the Financial system at large…
The Investment Environment
1, Purpose of the
Financial system
at large
Purpose of financial system
The engine room of the real Economy; Channel funds from savers to borrowers; Ensure the efficient dissemination of capital
The Main players
Businesses--Net borrowers; Productive investment to drive economic growth
Households--Net savers; households willing to defer consumption; "rainy day"/retirement
Governments--can be both borrowers and savers; Fiscal deficit vs fiscal surplus; depend on economic cycle
Purpose of financial intermediaries
Pool and Invest Funds
reduce transactions costs; economies of scale; expertise to mitigate information problems
Investment companies--e.g. mutual and hedge funds
Banks
Insurance companies
Credit unions
Purpose of the financial markets
Information role
Consumption timing
Efficient allocation of risk
Real vs Financial Assets
Real Assets: determine productive capacity of economy; land, buildings, machines, knowledge; used to produce goods and services
Financial Assets: Give
claims
on real assets
2, Identify similarities and differences between the primary asset classes
Key financial asset classes
Equity (stocks)
Equity vs Debt
types of equity
Common stock (Equity)
Preferred Stock (Equity)
hybrid of debt and equity
pay a fixed dividend (like a bond coupon)
no voting rights
has priority over common stock but not debt
American Depositary Receipts (ADRs)
Equity indices
Derivatives
trade RISK
Options
Call Option
Put Option
Futures
Long position
Short position
Debt (Fixed income)
The money market
Definition and purposes
Examples
Treasury bills
Commercial paper
certificates of deposit
Fed funds
The bond market
Definition and purposes
Examples
Treasury Notes & Bonds
Inflation protected treasury bond
Federal agency debt
municipal bonds
Bond market securities: Corporate Bonds
The Asset backed market
e.g. Mortgage Banked securities
3, Central ways in which firms raise equity capital
Primary market vs Secondary market
Venture Capital
Private equity investing
Initial Public Offerings (IPOs)
Hot new issue periods
Process
IPO Underpricing
Long run performance of IPOs
Seasoned Equity Offerings (SEOs)