Financial Modelling 2557A/B Lecture 1: Chapter 1 Lecture Part 1

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Financial Modelling
Course Code
Financial Modelling 2557A/B
Xiaoming Liu

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Security: A document that confers upon its owner a financial claim 3 categories of securities: 1. Debt Securities - bonds, bank notes, etc. 2. Equity Securities - common stock 3. Derivative Contracts - forwards, futures, options, and swaps Bond: A document that gives its owner the right to a fixed, predetermined payment at the maturity date  Nominal Value/Face Value/Par Value/Principal: Amount of payment at maturity  Specifics of bond are timing, amount, paying/receiving, counterparties Coupon Bonds: Bonds for which the debtor makes periodic payments to the creditor  Period payments = coupons  At maturity, last coupon and nominal value is paid  Zero-coupon bonds: Pure discount bonds  Equivalent to basket of pure discount bonds with nominal values = coupons o If bond price = nominal value, at par o If bond price > nominal value, above par o If bond price < nominal value, below par Why trade bonds? 1. Delay purchase power or spending o Save for retirement o Cover future liabilities - like insurance claism 2. Advance consumption o Through mortgages, car loans, credit card purchases o Corporations borrow regularly to finance business opportunities  Bonds issued by corporation are called deb o Governments and other entities issue bonds to fund public work projects Stock: Gives owner right to a proportion of profits distributed, and a part of the firm in case of liquidation  Owner = stockholder Stock dividends are profits the firm distributes to the stockholders  Random  Depend on firm's profit and policy  Dividend yield = ratio of annual dividends per share over the stock price per share Why buy stock? 1. Make money by investing in companies you believe will make money o Seeking a positive return 1. Dividend received while owning the stock 2. Capital gain/loss = purchase price - selling price Stocks Bonds Random Dividend Predetermined Coupon No Guaranteed Nominal Value Gua
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