investment alternatives.ppt

8/19/2019 Investment Alternatives.ppt

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Investment Alternatives


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Organizing Financial AssetsBasically, households have three choices with

regard to savings options:

1. Holding savings accounts and other nancialassets in the traditional intermediaries, such as

!an"s and insurance companies.#.Hold securities directly, such as stoc"s and

!onds, purchased directly through !ro"ers andother intermediaries.

$.Hold securities indirectly, through mutual %unds

and pension %unds. In this case, householdsleave the investing decisions to others !yinvesting indirectly rather than directly.


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Indirect Investing• &he !uying and selling o% the shares o%

investment companies which, in turn,hold port%olios o% securities

'irect Investing• Investors !uy and sell securities

themselves, typically through !ro"erageaccounts


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(onmar"eta!le FinancialAssetsA distinguishing characteristic o% these assets

is that they represent personal transactions!etween the owner and the issuer.

In contrast, )ar"eta!le securities trade in

impersonal mar"ets * the !uyer +seller doesnot "now who the seller +!uyer is, and doesnot care.

&hese are -a%e Investments. At least some o%

these assets oer the li/uidity, which can !edened as the ease with which an asset can!e /uic"ly converted to cash.


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Important (onmar"eta!le FinancialAssets

(onnegotia!le certicates o% deposit.6ommercial !an"s and other institutions oera variety o% savings certicates "nown ascerticates o% deposit +6's. &hese

certicates are availa!le %or any amount and%or various maturities, with higher ratesoered as maturity increases. +2argerdeposits may also command higher rates,

holding maturity constant. &hese 6's aremeant to !e a !uyandhold investment.Although some 6' issuers have now reducedthe stated penalties %or early withdrawal.


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)oney mar"et deposit accounts +))'As. Asavings account which shares some o% thecharacteristics o% a money mar"et %und. 2i"eother savings accounts, money mar"etdeposit accounts are insured !y the Federalgovernment. )oney mar"et depositaccounts oer many o% the same servicesas chec"ing accounts although transactions may

!e somewhat more limited. &hese accounts are

usually managed !y !an"s or !ro"erages, and can!e a convenient place to store money that is to !eused %or upcoming investments


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)oney )ar"et -ecurities

)oney mar"ets include shortterm, highly li/uid,relatively lowris" de!t instruments sold !ygovernments, nancial institutions, andcorporations to investors with temporary e8cess

%unds to invest. &his mar"et is dominated !y nancial institutions,

particularly !an"s, and governments.

&he size o% the transactions in the money mar"ettypically is large +91, or more.

&he maturities o% money mar"et instrumentsrange %rom 1 day to 1 year and are o%ten lessthan ; days.


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Important )oney )ar"et -ecurities

Tbills are shortterm securities thatmature in one year or less %rom their issuedate. &hey are issued with threemonth,si8month and oneyear maturities. Tbills are purchased %or a price that is lessthan their par +%ace value< when theymature, the government pays the holderthe %ull par value.


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(egotia!le certicates o% deposit +6's.Issued in e8change %or a deposit o% %unds!y most !an"s. &he deposit is maintainedin the !an" until maturity, at which time

the holder receives the deposit plusinterest. However, these 6's arenegotia!le, meaning that they can !e soldin the open mar"et !e%ore maturity. 'ealers

ma"e a mar"et in these unmatured 6's.)aturities typically range %rom 1= days +theminimum maturity permitted to one year.

&he minimum deposit is 91,.


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6ommercial 4aper. A shortterm, unsecuredpromissory note issued !y large, well"nown, andnancially strong corporations. 'enominationsstart at 91,, with a maturity o% #> days or

less +average maturity is a!out $ days.6ommercial paper is usually sold at a discounteither directly !y the issuer or indirectly througha dealer, with rates compara!le to 6's. Althougha secondary mar"et e8ists %or commercial paper,

it is wea" and most o% it is held to maturity.6ommercial paper is rated !y a rating service asto /uality +relative pro!a!ility o% de%ault !y theissuer.


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A 3epurchase agreement +repo is a %orm o%shortterm !orrowing %or dealers in governmentsecurities. &he dealer sells the governmentsecurities to investors, usually on an overnight

!asis, and !uys them !ac" the %ollowing day.For the party selling the security +and agreeing

to repurchase it in the %uture it is a repo< %orthe party on the other end o% the transaction,+!uying the security and agreeing to sell in the%uture it is a reverse repurchase agreement.


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Ban"er ?s acceptance. A time dra%t drawn on a!an" !y a customer, where!y the !an" agreesto pay a particular amount at a specied %uturedate. Ban"er?s acceptances are negotia!le

instruments !ecause the holder can sell them%or less than %ace value +i.e., discount them inthe money mar"et. &hey are normally used ininternational trade. Ban"er?s acceptances aretraded on a discount !asis, with a minimumdenomination o% 91,. )aturities typicallyrange %rom $ to 1@ days, with ; days !eingthe most common.


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6apital )ar"et -ecurities6apital )ar"ets encompass 8edincome

and e/uity securities with maturitiesgreater than 1 year. 3is" is generally muchhigher than in the money mar"et !ecause

o% the time to maturity and the very natureo% the securities sold in the capital mar"ets.)ar"eta!ility is poorer in some cases.

1.Fi8ed Income -ecurities

#./uities


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Fi8ed Income -ecuritiesFi8ed income securities have a specied

payment schedule. -uch as with a traditional!ond. &he amount and date o% each paymentare "nown in advance. All 8ed income

securities have a specied payment orrepayment schedulethey must mature atsome %uture date.

&echnically, 8ed income securities include:a &reasury !onds

! )unicipal !onds

c 6orporate !onds

d Asset!ac"ed securities

e )ortgagerelated !onds

% )oney mar"et securities


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BondsA de!t instrument issued %or a period o% more than

one year with the purpose o%raising capital !y !orrowing.

&he Federal government,states, cities, corporations, and manyother types o% institutions sell !onds. Cenerally, a!ond is a promise to repay the principal along withinterest +coupons on a specied date +maturity.

-ome !onds do not pay interest, !ut all

!onds re/uire a repayment o% principal. Dhenan investor !uys a !ond, heEshe !ecomes acreditor o% the issuer. However, the !uyer does notgain any "ind o% ownership rights to the issuer,unli"e in the case o% e/uities.


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6haracteristics o% Bonds Set Maturity Dates * !onds have set maturity dates that can range %rom

one to $ years * shortterm !onds +mature in three years or less,intermediate !onds +mature in three to ten years and longterm !onds+mature in ten years or more

Interest Payments * !onds typically oer some %orm o% interest payment<however, this depends on their structure: "Fixed Rate Bonds" provide 8edinterest payments on a regular schedule %or the li%e o% the !ond< "FloatingRate Bonds" have varia!le interest rates that are periodically adusted< and,

"Zero Coupon Bonds" do not pay periodic interest at all, !ut oer anadvantage in that they are can !e !ought at a discounted price o% the %acevalue and can !e redeemed at the %ace value at maturity

Principal Inestment Repayment * !ond issuers are o!ligated to repaythe %ull principal amount o% a !ond in a lump sum when the !ond reachesmaturity

Credit Ratings * 5ou can evaluate the Gde%ault ris"G +the ris" that theissuers wont !e a!le to ma"e interest or principal payments o% a !ond !ychec"ing the rating it has !een given !y a !ond rating agency suchas Moody's Investors Service or Standard and Poor's

Callable Bonds * I% the !ond has a Gcall %eatureG, the issuer is allowed toredeem the !ond !e%ore its maturity date, repay the loan and thus, stoppaying interest on it

Minimum Inestment * Bonds are usually issued in 91, or 9,denominations


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&reasuryECovernment BondsCovernment !ond is a de!t security loaned

!y a government to assist governmentspending, most o%ten issued in the country?slocal interest.

&he various types o% Covernment !ondsissued !y the Covt. o% 4a"istan are as %ollows:

4a"istan Investment Bonds

0- -pecial 'ollar Bonds

Dapda Bonds

(ational -aving Bonds

and -u"u"


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)unicipal BondsA municipal !ond is a de!t security issued !y a

state, municipality or county to nance its capitale8penditures. )unicipal !onds are e8empt %rom%ederal ta8es and %rom most state and local

ta8es, especially i% you live in the state in whichthe !ond is issued.

)unicipal !onds may !e used to %unde8penditures such as the construction o%highways, !ridges or schools. G)unisG are !ought

%or their %avora!le ta8 implications, and arepopular with people in high income ta8 !rac"ets.


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6orporate Bonds6orporate Bond is a de!t security which is issued !y company

and sold to investors to meet its nancial re/uirements. In4a"istan this is commonly "nown as &erm Finance 6erticate+&F6. 6orporate Bonds are normally issued %or a speciedtime period with an assurance to return the principal amounto% the !ond money including interest to the !ondholder.

Dhen someone !uys a !ond, heEshe is lending money to thecompany that issued it. &he company ensures to return themoney, on a specied maturity date. &ill that time, it alsopays a stated rate o% return, which usually occurssemiannually. &he interest payments collected %rom corporate

!onds are ta8a!le. 0nli"e shares, !onds do not provide anownership interest in the issuing company


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6orporate Bonds &he most common type o% unsecured !ond is the

Debenture, a !ond !ac"ed only !y the issuer?s overallnancial soundness and general worthiness o% !usiness.

Conertible Bonds!

-ome !onds have a !uiltin conversion %eature. &he holders

o% these !onds have the option to convert the !onds intocommon stoc" whenever they choose. &ypically, the !ondsare turned in to the corporation in e8change %or a speciednum!er o% common shares, with no cash payment re/uired.

&he term un# Bonds re%ers to highris", highyield !onds

that carry ratings o% BB +-4 or lower, withcorrespondingly higher yields.


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AssetBac"ed -ecuritiesAn asset!ac"ed security +AB- is a nancial security

!ac"ed !y a loan, lease or receiva!les against assetsother than real estate and mortgage!ac"edsecurities. For investors, asset!ac"ed securities arean alternative to investing in corporate de!t.

An AB- is essentially the same thing as a mortgage!ac"ed security, e8cept that the securities !ac"ing itare assets such as loans, leases, credit card de!t, acompanys receiva!les, royalties and so on, and notmortgage!ased securities.


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)ortgageBac"ed -ecurities)ortgageBac"ed -ecurities +)B-s -ecurities

whose value depends upon some set o% mortgages

&hese securities are simply shares o% home loans+mortgages sold to investors in various security

%orms. &raditionally, investors in mortgage!ac"edsecurities e8pected to minimize de%ault ris"!ecause most mortgages were guaranteed !y oneo% the government agencies.

(evertheless, these securities present investors

with uncertainty, !ecause they can receive varyingamounts o% monthly payments depending on how/uic"ly homeowners pay o their mortgages.


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/uity -ecurities4re%erred -toc": An e/uity security with an

intermediate claim +!etween the !ondholders andthe stoc"holders on a rm?s assets and earnings.It is "nown as a hy!rid security !ecause itresem!les !oth e/uity and 8edincomeinstruments. As an e/uity security, pre%erredstoc" has an in nite li%e and pays dividends.4re%erred stoc" resem!les 8edincome securitiesin that the dividend is 8ed in amount and "nown

in advance, providing a stream o% income verysimilar to that o% a !ond. &he dierence is that thestream continues %orever, unless the issue iscalled or otherwise retired +most pre%erred iscalla!le.


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4re%erred -toc"4re%erred stoc"holders are paid a%ter the

!ondholders !ut !e%ore the common stoc"holders in terms o% priority o% payment o% incomeand in case the corporation is li/uidated.

However, pre%erred stoc" dividends are not legally!inding, !ut must !e voted on each period !y a

corporation?s !oard o% directors. I% the issuer %ailsto pay the dividend in any year, the unpaiddividend will have to !e paid in the %uture !e%orecommon stoc" dividends can !e paid i% the issue

is cumulative. +I% noncumulative, dividends inarrears do not have to !e paid.

Types o$ Pre$erred Stoc#s

Jaria!le3ate 4re%erred -toc"

6onverti!le into 6ommon -toc"


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6ommon -toc"

An e/uity security representing the ownershipinterest in a corporation. As a purchaser o% 1shares o% common stoc", an investor owns

1En percent o% the corporation +where Kn? isthe num!er o% shares o% common stoc"outstanding.

As owners, the holders o% common stoc" are

entitled to elect the directors o% the corporationand vote on maor issues.

-toc"holders also have limited lia!ility, meaningthat they cannot lose more than theirinvestment in the corporation.


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6haracteristics o% 6ommon-toc"s

&he par value +stated or %ace value o% commonstoc"

&he !oo" value o% a corporation is the accountingvalue o% the e/uity as shown on the !oo"s +i.e.,

!alance sheet. &he mar"et value +price o% the stoc" is o% concern

to investors. &he aggregate mar"et value %or acorporation, calculated !y multiplying the mar"etprice per share o% the stoc" !y the num!er o%

shares outstanding, represents the total value o%the rm as determined in the mar"etplace.

)ar"et value o% a Firm L m.".t price per share M no.o% shares outstanding


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6ash 'ividends &he only cash payments regularly made !y

corporations directly to their stoc"holders aredividends. &hey are decided on and declared !ythe !oard o% directors and can range %rom zero tovirtually any amount the corporation can aord topay.

&he common stoc"holder has no specic promisesto receive any cash %rom the corporation.'ividends are e8tremely important to investors.

# dividend terms are important:'ividend 5ield: 'ividend divided !y current stoc"

price 'E4

4ayout 3atio: 'ividends divided !y earnings 'E

" i id d d "


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-toc" 'ividends and -toc"-plits

A stoc" dividend is a payment !y thecorporation in shares o% stoc" instead o%cash.

A stoc" split is the issuance !y a corporation

o% shares o% common stoc" in proportion tothe e8isting shares outstanding.

4E 3atio: &he price o% a stoc", which isdetermined in the mar"etplace, is divided !y

its earnings, the 4E ratio shows andinterprets that how much the mar"et as awhole is willing to pay per dollar o% earnings.


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'erivative -ecurities

-ecurities that derive their value in whole or inpart !y having a claim on some underlyingsecurity.

1. Options

a 4uts! 6alls#.Futures• Options and %utures contracts have important

dierences perhaps the !iggest dierence is

that a %utures contract is an o!ligation to !uy orsell, !ut an options contract is only the right todo so, as opposed to an o!ligation. &he !uyer o%an option has limited lia!ility, !ut the !uyer o% a

%utures contract does not.


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Options Futures

Options are rights to !uy or sell a stated num!er o%shares o% a security within a specied period at aspecied price.

4uts: An option to sell a specied num!er o% shareso% stoc" at a stated price within a specied period.

6alls: An option to !uy a specied num!er o%shares o% stoc" at a stated price within a speciedperiod.

A %utures contract is an agreement that provides

%or the %uture e8change o% a particular asset!etween a !uyer and a seller. &he seller contractsto deliver the asset at a specied delivery date ine8change %or a specied amount o% cash %rom the!uyer.

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