Chapter Two

Asset Classes and Financial

Instruments

INVESTMENTS | BODIE, KANE, MARCUS

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter Overview

Asset allocation → Asset classes

•Money markets vs. capital markets
•Types of money market instruments
•Capital market securities:
• Bonds
• Equity
• Derivatives

2-2 INVESTMENTS | BODIE, KANE, MARCUS

 The Money Market

• Subsector of the fixed-income market:

Securities are short-term, liquid, low risk, and
often have large denominations
• Money market mutual funds allow individuals
to access the money market

2-3 INVESTMENTS | BODIE, KANE, MARCUS

 Money Market Securities

• Treasury bills: Short-term debt of U.S.

government

2-4 INVESTMENTS | BODIE, KANE, MARCUS

 Money Market Securities

• Certificate of Deposits (Chứng chỉ tiền gửi): a

time deposit with a bank.
Risk free investment asset Low liquidation
Higher interest rate Lower interest rate
Transferable compared to long term
corporate bond

2-5 INVESTMENTS | BODIE, KANE, MARCUS

 Money Market Securities

• Commercial paper (Thương phiếu): Short-

term, unsecured debt of a company
• Maturities of less than 1 or 2 months
• Fairly safe asset.

2-6 INVESTMENTS | BODIE, KANE, MARCUS

 Money Market Securities

• Bankers’ Acceptances (chấp phiếu ngân

hàng): An order to a bank by a bank’s
customer to pay a sum of money on a future
date
• Eurodollars: Dollar-denominated time
deposits in banks outside the U.S.

2-7 INVESTMENTS | BODIE, KANE, MARCUS

 Money Market Securities

• Repos and reverses (Hợp đồng mua lại):

Short-term loan backed by government
securities. The dealer sells government
securities to an investor on an overnight basic,
with an agreement to buy back those in the
next day.
• Fed funds: Very short-term loans between
banks

2-8 INVESTMENTS | BODIE, KANE, MARCUS

 The Bond Market

• Treasury Notes and Bonds

• Inflation-Protected Treasury Bonds
• Federal Agency Debt
• International Bonds
• Municipal Bonds
• Corporate Bonds
• Mortgages and Mortgage-Backed Securities

2-9 INVESTMENTS | BODIE, KANE, MARCUS

 Bond Market Securities

• Treasury Notes and Bonds

• Maturities
• Notes – Maturities up to 10 years
• Bonds – Maturities from 10 to 30 years
• Par Value - $1,000
• Interest paid semiannually
• Quotes – Percentage of par
• 2016, Vietnam: VND 281,750 billions

2-10 INVESTMENTS | BODIE, KANE, MARCUS

 Bond Market Securities

2-11 INVESTMENTS | BODIE, KANE, MARCUS

 Bond Market Securities

• Inflation-Protected Treasury Bonds

• TIPS: Provide inflation protection
• Federal Agency Debt
• Debt of mortgage-related agencies such as Fannie
Mae and Freddie Mac
• International Bonds
• Eurobonds and Yankee bonds

2-12 INVESTMENTS | BODIE, KANE, MARCUS

 Bond Market Securities

• Municipal Bonds (Trái phiếu chính quyền địa

phương)
• Issued by state and local governments
• Interest is exempt from federal income tax and
sometimes from state and local tax
• Types
• General obligation bonds: Backed by taxing power of
issuer
• Revenue bonds: backed by project’s revenues or by the
municipal agency operating the project.

2-13 INVESTMENTS | BODIE, KANE, MARCUS

 Bond Market Securities

• Corporate Bonds
• Issued by private firms
• Semi-annual interest payments
• Subject to larger default risk than government
securities
• Options in corporate bonds
• Callable
• Convertible
2-14 INVESTMENTS | BODIE, KANE, MARCUS
 Bond Market Securities

• Corporate Bonds
• Securities companies
• Corporate bonds was VND 129,636 million, increased
203.1% in comparison to 2015.

???WHY FIRMS CHOOSE TO ISSUE BOND INSTEAD

OF ISSUING STOCK AND LOAN ????

2-15 INVESTMENTS | BODIE, KANE, MARCUS

 Bond Market Securities

• Corporate Bonds
???WHY FIRMS CHOOSE TO ISSUE BOND INSTEAD
OF ISSUING STOCK AND LOAN ????

- Disburse immediately
- Fixed interest
- Impossible to issue stock, under market risk
- Capital structure

2-16 INVESTMENTS | BODIE, KANE, MARCUS

 Equity Securities

• Common stock: Ownership

• Residual claim
• Limited liability
• Preferred stock: Perpetuity
• Fixed dividends
• Priority over common
• Tax treatment
• American Depository Receipts
• Certificates traded in U.S. markets that represent
ownership in shares of a foreign company

2-17 INVESTMENTS | BODIE, KANE, MARCUS

 Stock Market Indexes

• Dow Jones Industrial Average

• Includes 30 large blue-chip corporations
• Computed since 1896
• Price-weighted average

2-18 INVESTMENTS | BODIE, KANE, MARCUS

 Stock Market Indexes

• Standard & Poor’s 500

• Broadly based index of 500 firms
• Market-value-weighted index
• Investors can base their portfolios on an index
• Buy an index mutual fund
• Buy exchange traded funds (ETFs)

2-19 INVESTMENTS | BODIE, KANE, MARCUS

 Other Indexes

U.S. Indexes Foreign Indexes

• NYSE Composite • Nikkei (Japan)
• NASDAQ Composite • FTSE (U.K.; pronounced
• Wilshire 5000 “footsie”)
• DAX (Germany),
• Hang Seng (Hong Kong)
• TSX (Canada)

2-20 INVESTMENTS | BODIE, KANE, MARCUS

 Vietnamese Stock Indices
• HNX Index and VN Index
• HNX30 and VN30
• UPCOM Index
• VNX- All shares

http://banggia2.ssi.com.vn/Hose30.aspx
https://www.hsx.vn/Modules/Listed/Web/StockIndexVi
ew/1964531007

2-21 INVESTMENTS | BODIE, KANE, MARCUS

 Derivatives Markets

• A derivative is a security that gets its value

from the values of another asset, such as
commodity prices, bond and stock prices, or
market index values

2-22 INVESTMENTS | BODIE, KANE, MARCUS

 Derivatives Markets

• Options
• Call: Right to buy underlying asset at the strike or
exercise price
• Value of calls decreases as strike price increases
• Put: Right to sell underlying asset at the strike or
exercise price
• Value of puts increase with strike price
• Value of both calls and puts increases with time
until expiration

2-23 INVESTMENTS | BODIE, KANE, MARCUS

 Derivatives Markets

• Futures Contracts
• An agreement made today regarding the delivery
of an asset (or in some cases, its cash value) at a
specified delivery or maturity date for an agreed-
upon price, called the futures price, to be paid at
contract maturity
• Long position: Take delivery at maturity
• Short position: Make delivery at maturity

2-24 INVESTMENTS | BODIE, KANE, MARCUS

 Comparison
Option Futures Contract
• Right, but not obligation, • Obliged to make or take
to buy or sell; option is delivery; long position
exercised only when it is must buy at the futures
profitable price, short position must
• Options must be sell at futures price
purchased • Futures contracts are
• The premium is the price entered into without cost
of the option itself.

2-25 INVESTMENTS | BODIE, KANE, MARCUS