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Investments - Background and Issues
McGraw-Hill/Irwin
2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Investments & Financial Assets
Essential nature of investment Reduced current consumption Planned later consumption Real Assets Assets used to produce goods and services Financial Assets Claims on real assets
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Balance Sheet U.S. Households
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Domestic Net Worth
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Major Classes of Financial Assets or Securities
Debt Money market instruments Bonds Common stock Preferred stock Derivative securities
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Financial Markets and the Economy
Consumption Timing Allocation of Risk Separation of Ownership and Management Agency Issues
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Large Option Exercises
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Crisis in Corporate Governance
Accounting Scandals Examples Enron and WorldCom Analyst Scandals Example Citigroups Salomon Smith Barney Initial Public Offerings Credit Swiss First Boston
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The Investment Process
Asset allocation Security selection Risk-return trade-off Market efficiency Active vs. passive management
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Active vs. Passive Management
Active Management Finding undervalued securities Timing the market Passive Management No attempt to find undervalued securities No attempt to time Holding an efficient portfolio
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Players in the Financial Markets
Business Firms net borrowers Households net savers Governments can be both borrowers and savers Investment Bankers
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Key Trends - Globalization
International and Global Markets Continue Developing Managing foreign exchange Diversification to improve performance Instruments and vehicles continue to develop (WEBs) Information and analysis improves
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Global Debt Issue
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Key Trends - Securitization
Securitization & Credit Enhancement Offers opportunities for investors and originators Changes in financial institutions and regulation Improvement in information capabilities Credit enhancement and its role
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Asset-backed Securities
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Key Trends Financial Engineering
Repackaging Services of Financial Intermediaries Bundling and unbundling of cash flows Slicing and dicing of cash flows Examples: strips, CMOs, dual purpose funds, principal/interest splits
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Building a Complex Security
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Unbundling Mortgage Security
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