FIN 3300 Chapter Notes - Chapter 2: United States Treasury Security, Tax Bracket, Corporate Bond
CH 2 Asset Classes and Financial Instruments (Essentials of Investments)
• Money Markets: (fixed income)
o Short term
o Marketable
o Liquid
o Low-risk debt securities
o Minimal gains/losses
o Ex:
▪ Treasury bills
▪ Certificates of deposit: time deposit with a bank
▪ Commercial paper: bigger investments
• Bond market: (not exactly fixed income) leverage financing
o Treasury notes (2-10 yrs) and Treasury bonds (10+ yrs)
▪ Semiannual interest payments (coupon payments) issued at or near par
value
o Non-treasury (less liquid than treasuries) (calculating after-tax yield)
▪ Municipal bonds: issued by state and local governments
• Interest tax exempt from federal and state
• Willing to accept lower yields
o General obligation bonds
o Revenue bonds (specific projects)
o Industrial development bonds
• Equivalent taxable yield
o R(1-t) =rm
o R = before tax rate of return
o T = tax bracket
▪ Corporate bonds: private firms borrow $ directly from the public (offer
higher yields to count for no tax munis)
• Secured bonds – collateral backing
• Debentures – no collateral
• Subordinated debentures – lower claim
• Mortgage and Mortgage-backed Securities
o MBS: an ownership claim in a pool of mortgages or an obligation that is secured
by a pool
▪ “conforming mortgages” – must pass guidelines before purchased by
Fannie Mae/Freddie Mac
• Capital Market – Equity Securities
o Common stock: ownership in a corporation
▪ Residual claim – last in line to claim assets and income
▪ Limited liability – most shareholders can lose is their investment
▪ Capital gains/losses – price increases/decreases
▪ Price-earnings ratio: ratio of the current stock price to last year’s earnings
per share
o Preferred stock:
▪ Fixed amount of income per year
▪ Not tax-deductible expenses for the firm
find more resources at oneclass.com
find more resources at oneclass.com
