Professional Documents
Culture Documents
Chapter 3 Selecting Investments in A Global Market
Chapter 3 Selecting Investments in A Global Market
Management
First Canadian Edition
Opportunities to
reduce risk of a
stock portfolio by
including foreign
stocks
Fixed-Income Investments
Bonds and preferred stocks
International Bond Investing
Eurobond, Maple bonds, international domestic bonds
Equity Instruments
Special Equity Instruments
Warrants and options
Futures Contracts
Investment Companies
Real Estate
Low-Liquidity Investments
Copyright 2010 by Nelson Education Ltd. 3-16
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
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
Hybrid security
Fixed dividends
Dividend obligations are not legally binding, but
must be voted on by the board of directors to be
paid
Most preferred stock is cumulative
Credit implications of missing dividends
Eurobonds
An international bond denominated in a
currency other than the country where it
is issued
Example: Eurodollar bond is issued in USD but
sold outside of the U.S. to non-U.S. investors
Maple bonds
A Canadian dollar denominated bond sold
in Canada by a foreign corporation or
government
Interest payments are made in CAD$
Example: Maple bond issued by British Airways
in Canada to Canadian investors
Yankee bonds
Sold in the United States and denominated
is US$, but issued by foreign corporations
or governments
Eliminates exchange risk to U.S. investors
Common Stock
Represents ownership of a firm
Investors return tied to the performance
of the company and may result in loss or
gain
Warrants
An options issued by a company giving the
holders the right to buy its common stock
Normally issued with bonds
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
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
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. 3-38
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
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
Land Development
Divide the land into individual lots
Build houses or a shopping mall on it
Requires capital, time, and expertise
Antiques
Dealers buy at estate sales, refurbish, and sell
at a profit
Serious collectors may enjoy good returns
Individuals buying a few pieces to decorate a
home may have difficulty overcoming
transaction costs to ever enjoy a profit them
more as hobbies than investments
Art
Investment requires substantial knowledge of
art and the art world
Acquisition of work from a well-known artist
requires large capital commitments and
patience
High transaction costs
Uncertainty and illiquidity
Diamonds
Can be illiquid
Grading determines value, but is subjective
Investment-grade gems require substantial
investments
No positive cash flow until sold
Costs of insurance, storage, and appraisal
The expected
relationship
between annual
rates of return
and total risk
(standard
deviation) of
these securities
was confirmed
A good hedge
should have a
strong positive
correlation with
inflation