Professional Documents
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C03 Reilly1ce
C03 Reilly1ce
Management
Chapter 3
Selecting Investments in a Global Market
The Case for Global Investments
Global Investment Choices
Historical Risk-Returns on Alternative
Investments
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Low positive
correlations among
returns indicates
substantial
opportunities for risk
reduction
Why? International
trade patterns,
economic growth &
fiscal & monetary
policies differ between
countries
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Equity Instruments
Special Equity Instruments
Warrants and options
Futures Contracts
Investment Companies
Real Estate
Low-Liquidity Investments
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Fixed-Income Investments
Basic concepts of fixed-income investments
Contractual payment schedule
Recourse varies by instrument
Bonds
Investors are lenders
Expect interest payment and return of principal
Preferred stocks
Dividends require board of directors approval
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Fixed-Income Investments
Savings Accounts
Fixed earnings
Convenient
Liquid and low risk
Low rates
Certificates of Deposit (CDs)
Usually less than 1 year in maturity
Usually insured by CDIC
Guaranteed Investment Certificates (GICs)
Usually issued with terms greater than 1 year
Usually insured by CDIC
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Fixed-Income Investments
Fixed income obligations that trade in secondary
market
Corporate bonds issued by corporations to fund
long-term commitments
Bankers Acceptances issued by banks to fund
short term (less than 1 year) obligations
Government of Canada bonds & T-bills
Provincial government bonds
Agency bonds are issued by Crown corporations
Example: Canada Mortgage and Housing Corporation
(CMHC)
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Corporate Bonds
Issued by a corporation
Fixed income
Credit quality measured by ratings
Maturity
Features:
Indenture legal agreement stating obligations of issue
Call provision specify when bonds can be called away
from investors before maturity
Sinking fund provision for payments to pay down bond
debt
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Equity Instruments
Common Stock
Represents ownership of a firm
Investors return tied to the performance
of the company and may result in loss or
gain
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Equity Instruments
Common Stock Classifications
Industrial: manufacturers of automobiles,
machinery, chemicals, beverages
Utilities: electrical power companies, gas
suppliers, water industry
Transportation: airlines, truck lines, railroads
Financial: banks, savings and loans, credit unions
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Futures Contracts
Exchange of a particular asset at a specified
delivery date for a stated price paid at the
time of delivery
Deposit (10% margin) is made by buyer at
contract to protect the seller
Commodities trading is largely in futures
contracts
Current price depends on expectations
Example: Corn, soybeans, oil
Copyright 2010 by Nelson Education Ltd.
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Financial Futures
Recent development of contracts on financial
instruments such as T-bills, Treasury bonds, and
Eurobonds
Traded mostly on Chicago Mercantile Exchange
(CME) and Chicago Board of Trade (CBOT)
Allow investors and portfolio managers to protect
against volatile interest rates
Currency futures allow protection against changes
in exchange rates
Various stock futures on market indexes such as
the S&P 500 and Value Line Index
Copyright 2010 by Nelson Education Ltd.
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Investment Companies
Mutual Funds
Rather than buy individual securities directly from
the issuer they can be acquired indirectly through
shares in an investment company
Investment companies sell shares in itself and
uses proceeds to buy securities
Investors own part of the portfolio of investments
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Investment Companies
Money-Market Funds
Acquire high-quality, short-term investments
Yields are higher than normal bank CDs or GICs
Typical minimum investment is $1,000
No sales commission charges
Withdrawal is by cheque with no penalty
Investments usually are not insured
Total value reached more than $2.5 trillion in
2007
Copyright 2010 by Nelson Education Ltd.
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Investment Companies
Bond Funds
Invest in long-term government or
corporate bonds
Vary in bond quality from risk-free
government bonds to high-yield or junk
bonds
Expected returns also differ reflecting the
risk level of bonds in the fund
Copyright 2010 by Nelson Education Ltd.
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Investment Companies
Bond Funds
Invest in a combination of stocks and
bonds depending on their stated objectives
Numerous non-stock indexes including
various bond indexes have been created
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Investment Companies
Index Funds
These are mutual funds created to track the
performance of a market index like the S&P/TSX
Composite
Appeal to passive investors who want to simply
experience returns equal to some market index
Lower costs to investors as management expense
fees are lower than actively managed mutual
funds
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Real Estate
Real Estate Investment Trusts (REITs)
Investment fund that invests in variety of real
estate properties, similar to stock or bond mutual
fund
Construction and development trusts provide
builders with construction financing
Mortgage trusts provide long-term financing for
properties
Equity trusts own various income-producing
properties
Copyright 2010 by Nelson Education Ltd.
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Real Estate
Direct Real Estate Investment
Purchase of a home
Purchase of raw land
Intention of selling in future for a profit
Ownership provides a negative cash flow due to mortgage payments,
taxes, and property maintenance
Land Development
Divide the land into individual lots
Build houses or a shopping mall on it
Requires capital, time, and expertise
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Correlations Between
Various Capital Markets
A good hedge
should have a
strong positive
correlation with
inflation
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