Econ 122 Reviewer Midterms

• Asset Classes


  • Equities
  • Bonds
  • Others
  • Indices
• Common stocks


  Ownership, dividends, residual claim, and limited liability
• Voting rights


  One vote per share; multiple votes per share; no voting right, only dividend
• Preferred stocks


  Priority over common stocks; often have lower tax on dividends
• Fixed dividends


  Missing dividends are paid later
• Depository receipts


  American (ADR), European (EDR), and global (GDR)
• ADR


  A US investment bank receives shares from Philippines-listed firms and sells ADRs of this firm to US investors
• There are 28 Philippines ADRs
• Bonds


  • Loan
  • Bond
  • Treasury
  • Corporate
  • Money market
• Debt


  Issuer borrows from bond investors; borrower issues bonds
• Face or par value


  e.g. $1000
• Maturity/Expiration date


  Par value and a coupon are paid on the expiration date
• Coupon rate


  Percentage of the par value
• Coupon payment period


  Annual or semi-annual
• Coupons are paid (semi-) annually backward from the expiration date
• Others


  • Real estate
  • Currency
  • Commodity
  • Gold
• Indices


  • Equity
  • Bond
  • Commodity
  • Real estate
  • Sector
  • Industry
  • Green/ESG

  
• Indices tend to have a small number of stocks
• Price weighted


  Stocks with higher prices have greater weights
• Market-value weighted


  Stocks with higher market values have greater weights
• Equally weighted


  All stocks have the same weights
• Derivative securities


  • Options
  • Futures
• Differences between Bonds and Equity

  • Risk
  • Corporate control
  • Tax
  • Flotation costs
• Short-term Debt: Money Market Instruments

  • Treasury bills
  • Commercial papers
  • Repurchase agreements (repos) and reverse repos
• Maturity


  Less than or equal to 1 year
• Face (par) value


  Traded at a discount from the par value; no coupon payment, receive par value at maturity
• Repurchase agreements (repos) and reverse repos represent an overnight interest rate</b>
• Repo transaction


  1. Bank A makes a repo transaction

  2. Bank B makes a reverse repo transaction

  3. Bank A borrows from Bank B, using T-bills as collateral
• Other collaterals may have higher risk than T-bills
• Risk-free assets


  No default risk; price risk is present; interest rate/return is known at the time of investment
• Longer-term Debt: Notes and Bonds

  • Government: Treasury bonds and notes, Agency bonds, Municipal bonds
  • Private: Corporate bonds, Asset-backed securities
• Default


  Borrower/bond issuer fails to pay coupon or the par value
• Treasuries have no default risk. Why?
• Do other government bonds have default risk?
• Bond Quotes


  Quotes are in % of the face value
• Asset-Backed Securities (ABS)


  Bonds collateralized by a pool of assets (i.e. mortgages, car loans, credit card payments, leases, movie proceeds)

  
• Mortgage-backed securities (MBS)


  A mortgage lender (M) sells bonds to bondholders (B) with coupon C and face value F; M lends the bond proceeds to homebuyers (H) and receives mortgage payments P; P is used to pay M (fee for securitizing the mortgage) and B (C, F, and mortgage insurance I), and other expenses (e.g. accounting and legal)

  
• Bond Indices


  A broad portfolio of bonds representing different coupon, rating, maturity (number in thousands); Market-value weighted; Track the average return of bonds in a particular character or sector

  
• Major Bond Indices


  • Global
  • US
  • Europe
  • Asia
• Currencies


  Risk-free assets denominated in foreign currencies (i.e USD cash or treasury bills); Spot, forward, futures, and options: Over-the-counter (OTC) trading and Exchange trading