Textbook Notes (362,796)
Canada (158,054)
Finance (361)
FIN 501 (31)
Chapter 4

CFIN501- Chapter 4- Overview of Security Types.docx

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Ryerson University
FIN 501
Edward Blinder

CFIN501 Chapter 4 Overview of Security TypesClassifying SecuritiesEach categories can be further subdivided into a few broad subtypesClassification is not exhaustivecovers major types of financial assetsDistinctions can become a little blurredsome financial assets are hard to classifyoSome instruments are hybrids combinations of basic typesInterest Bearing AssetsPay interest they all begin life as a loan of some sortdebt obligations of some issuerSome pay interest implicitly and some pay it explicitlyoCommon denominatorvalue of these assets depends on interest ratesMoney Market InstrumentMoney market instrumentsdebt obligations of large corporations and governments with an original maturity of one year or less Simplest form of interestbearing asset two propertiesoIOUs sold by large corporations or governments to borrow moneyoMature in less than one year from the time they are sold meaning that the loan must be repaid within one yearTrade in very large denominationsnot all are quite liquidTreasury bills bank of Canada borrows billions of dollars by selling tbills to the public by weeklyoSold at a discount basis sold at a price that is less than their stated face valueoInvestor buys a Tbill at one price as it matures receives full face valueoDifferenceinterest earnedoMost liquid type of money market instrumenttype with the largest and most active marketTraded in active marketsbank certificates of deposits and corporate provincial and municipal money market instrumentsPotential gain from buying a money market instrument is fixedowner is promised a fixed future paymentMost important riskrisk of default possibility that the borrower will not repay the loan as promisedPrices for different money market instruments are quoted in the financial press in different waysoInterest rates are quoted not pricescalculations are necessary to convert rates to pricesFixedIncome SecuritiesFixedIncome Securitieslongerterm debt obligations often of corporations and governments that promise to make fixed payments according to present scheduleBegins life as a loan of some sortdebt obligationsIssued by corporations and governmentsLives that exceed 12 months at the time they are issuedUsed for frequentlysecurities are increasingly being created that dont fit within traditional not or bond frameworksPrice quotesoDifferent waysdepending on what type od security is being pricedoPotential gains from owning a fixed income securityFixed payments promisedFinal payment at maturityoPrices of most fixed income securities rise when interest rates fallpossibility of a gain from a favorable moment in ratesUnfavorable change in interest rates will produce a lossoRiskpossibility that the issuer will not make the promised paymentsRisk depends on the issuerDoesnt exist for Canadian government bonds1
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