Summary Investments
Chap 1 – 7, 9, 12 – 16, 18, 24, and 27
Chapter 1
1.1 Real Assets versus Financial Assets
Financial assets stocks and bonds, claims to the income generated by real assets
1.2 Financial Assets
Fixed income or debt securities promise either a fixed stream of income or a stream of income determined
by a specific formula
Unlike debt securities, common stock, or equity, represents an ownership share in the corporation
Equity holders are not promised any particular payment – only dividends, the firm might pay
Derivative securities options and futures contracts provide payoffs that are determined (derive) by the
prices of other assets such as bond or stock prices. Other ones are future and swap contracts
1.3 Financial Markets and the Economy
The stock market encourages allocation of capital to those firms that appear at the time to have the best
prospects
Consumption timing Thus, financial markets allow individuals to separate decisions concerning current
consumption from constraints that otherwise would be imposed by current earnings.
Allocation of risk Capital markets allocate risk to investors according to their risk tolerance, enabling firms
to raise capital more efficiently and supporting the growth of the economy’s stock of real assets.
Stakeholder capitalism While traditional business orthodoxy focused on maximizing shareholder value,
growing support for stakeholder capitalism argues that long-term corporate success depends on balancing
profit with ethical, social, and environmental responsibilities—though this balance remains complex and
often requires government intervention to align private incentives with public good.
Agency problems – when managers, who are hired as agents of the shareholders, may pursue their
own interests instead. To mitigate this, top managers are given shares of the company, board of
directors, can force top management out.
Proxy contest – Unhappy shareholders in principle elect a different board by launching a proxy
contest. They have to seek enough proxies (rights to vote the shares of other shareholders) to take
control. This threat is used minimally.
1.4 The investment process
Asset allocation decision is the choice among these broad asset classes, while the security selection decision
is the choice of which particular securities to hold within each asset class.
Security analysis involves the valuation of securities that might be included in the portfolio
Top-down portfolio management begins with asset allocation based on macro-level factors before selecting
individual securities, while bottom-up focuses on identifying and investing in undervalued individual
securities, regardless of their asset class or broader market trends.
,1.5 Markets are competitive
The risk-return trade off if you want higher expected returns, you will have to pay a price in terms of
accepting higher investment risk.
Diversification means that many assets are held in the portfolio so that the exposure to any particular asset is
limited.
Efficient market hypothesis all available information about securities is processed quickly and efficiently.
This means that usually the security price equals the market consensus estimate of the value of the security.
Passive management involves holding a diversified portfolio without trying to outperform the market, while
active management seeks to boost returns through security selection or market timing.
1.6 The players
From a high-level view, financial markets involve firms demanding capital, households supplying it,
governments acting as borrowers or lenders, and financial intermediaries—like institutions and investment
bankers—facilitating the flow of funds between issuers and investors.
Financial intermediaries want to bring the suppliers of capital (investors) together with the demanders of
capital (primarily corporations and the federal government). – Such as banks, investment companies,
insurance companies & credit unions.
Investment bankers, as underwriters, provide specialized services for firms issuing securities, offering
expertise in pricing, marketing, and managing securities in primary and secondary markets, often at lower
costs than in-house divisions.
Venture capital an equity investment in young companies. Often take an active role in the management of
a start-up firm
1.7 The Financial Crisis of 2008-2009
The spread between the LIBOR rate (at which banks borrow from each other) and the Treasury-bill rate (at
which the U.S. government borrows), is a common measure of credit risk in the banking sector and often
referred to as the TED spread.
Changes in housing when Fannie Mae and Freddie Mac began buying mortgage loans from originators and
bundling them into large pools that could be traded like a financial asset – Mortgage-backed securities
process is called securization.
,Subprime loans loans with higher default risk
Adjustable-rate mortgages (ARMs) these loans offered borrowers low initial interest rates, but these rates
eventually would reset to current market interest yields.
Collateralized debt obligations (CDOs) designed to concentrate the credit risk of a bundle of loans on one
class of investors, leaving the other investors in the pool relatively protected from that risk
The claims on the loan repayments were divided in tranches
Credit Default Swaps in essence, an insurance contract against the default of one or more borrowers. The
purchaser of the swap pays an annual premium.
The Dodd-Frank Reform Act (small to medium-sized banks are exempt) calls for stricter rules for bank
capital, liquidity, and risk management practices. It requires large banks to undergo annual stress tests, to see
if the bank has enough capital to withstand specific episodes of economic duress. Also, attempt to limit the
risky activities in which banks can engage
Chapter 2
2.1 The Money Market
Treasury Bills (T-bills) the government borrows money by selling bills to the public. You buy them at a
discount from the statement maturity value, at maturity, they pay back the face value. The difference is
considered interest.
The ask price is the price you would have to pay to buy a T-bill from a securities dealer. The bid price is the
slightly lower price you would receive if you wanted to sell a bill to a dealer. The bid–ask spread is the
difference in these prices, which is the dealer’s source of profit.
Certificates of deposit a time deposit with a bank. May not be withdrawn on demand
Commercial paper Large companies issue their own short-term unsecured debt notes. Is backed by a bank
line of credit, giving the borrower access to cash that can be used to pay off the paper at maturity
Bankers acceptances start as an order to a bank by a bank's customer to pay a sum of money at a future
date. Similar to a post-dated check.
Eurodollars dollar-denominated deposits at foreign banks or foreign branches of American banks. Does
not need to be in European banks
Repos and Reverses Repurchase agreements are used as a short-term borrowing. Usually overnight –
basically a one day loan. Reverse repo the dealer finds an investor holding government securities and buys
them, agreeing to sell them back at a specified higher price on a future date
Federal funds Funds in the banks reverse accounts – required by the federal reserve system
, LIBOR (London Interbank Offer Rate) – was the premier short-term interest rate quoted in the European
money market and served as a reference rate for a wide range of financial contracts. Currently, the SOFR is
used more because LIBOR was not reliable.
Money market funds mutual funds that invest in money market instruments
Difference between government funds & prime funds Government funds hold short-term U.S. Treasury or
agency securities. Prime funds also hold other money market instruments, for example, commercial paper or
CDs.
2.2 The Bond Market
Treasury notes & Treasury bonds T-notes have maturities ranging up to 10 years, while bonds range from
10 to 30 years. Mostly traded in 1000, semiannual interest payments are called coupon payments
Yield to maturity calculated by doubling the semiannual yield, rather than compounding it for two half-
year periods
TIPS (Treasury Inflation Protected Securities) inflation protected treasury bonds – adjusted to the
consumer price index
Municipal bonds issued by state and local governments, interest income is exempt from federal income
taxation
Equivalent taxable yield is the rate a taxable bond must offer to match the after-tax yield on the tax-free
municipal
Corporate bonds the means by which private firms borrow money directly from the public. These bonds
are similar in structure to Treasury issues—they typically pay semiannual coupons over their lives and return
the face value to the bondholder at maturity
Secured bonds have specific collateral backing them in the event of firm bankruptcy
Unsecured bonds (debentures) have no collateral
Subordinated debentures have a lower priority claim to the firm’s assets in the event of bankruptcy
Callable bonds give the firm the option to repurchase the bond from the holder at a call time
Convertible bonds give the bondholder the option to convert each bond into shares of stock
Mortgage and Asset-backed securities either an ownership claim in a pool of mortgages or an obligation
that is secured by such a pool.
Subprime mortgages riskier loans made to financially weaker borrowers, bundled and sold
2.3 Equity Securities
Common stock also known as equity securities, represents ownership shares in a corporation. The
corporation is controlled by a board of directors elected by shareholders
Residual claim means that stockholders are the last in line of all those who have a claim on the assets
and income of the corporation
Limited liability means that most shareholders can lose in the event of failure of the corporation, is
their original investment
P/E ratio, or price-earnings ratio the ratio of the current stock price to last year's earnings per share
Chap 1 – 7, 9, 12 – 16, 18, 24, and 27
Chapter 1
1.1 Real Assets versus Financial Assets
Financial assets stocks and bonds, claims to the income generated by real assets
1.2 Financial Assets
Fixed income or debt securities promise either a fixed stream of income or a stream of income determined
by a specific formula
Unlike debt securities, common stock, or equity, represents an ownership share in the corporation
Equity holders are not promised any particular payment – only dividends, the firm might pay
Derivative securities options and futures contracts provide payoffs that are determined (derive) by the
prices of other assets such as bond or stock prices. Other ones are future and swap contracts
1.3 Financial Markets and the Economy
The stock market encourages allocation of capital to those firms that appear at the time to have the best
prospects
Consumption timing Thus, financial markets allow individuals to separate decisions concerning current
consumption from constraints that otherwise would be imposed by current earnings.
Allocation of risk Capital markets allocate risk to investors according to their risk tolerance, enabling firms
to raise capital more efficiently and supporting the growth of the economy’s stock of real assets.
Stakeholder capitalism While traditional business orthodoxy focused on maximizing shareholder value,
growing support for stakeholder capitalism argues that long-term corporate success depends on balancing
profit with ethical, social, and environmental responsibilities—though this balance remains complex and
often requires government intervention to align private incentives with public good.
Agency problems – when managers, who are hired as agents of the shareholders, may pursue their
own interests instead. To mitigate this, top managers are given shares of the company, board of
directors, can force top management out.
Proxy contest – Unhappy shareholders in principle elect a different board by launching a proxy
contest. They have to seek enough proxies (rights to vote the shares of other shareholders) to take
control. This threat is used minimally.
1.4 The investment process
Asset allocation decision is the choice among these broad asset classes, while the security selection decision
is the choice of which particular securities to hold within each asset class.
Security analysis involves the valuation of securities that might be included in the portfolio
Top-down portfolio management begins with asset allocation based on macro-level factors before selecting
individual securities, while bottom-up focuses on identifying and investing in undervalued individual
securities, regardless of their asset class or broader market trends.
,1.5 Markets are competitive
The risk-return trade off if you want higher expected returns, you will have to pay a price in terms of
accepting higher investment risk.
Diversification means that many assets are held in the portfolio so that the exposure to any particular asset is
limited.
Efficient market hypothesis all available information about securities is processed quickly and efficiently.
This means that usually the security price equals the market consensus estimate of the value of the security.
Passive management involves holding a diversified portfolio without trying to outperform the market, while
active management seeks to boost returns through security selection or market timing.
1.6 The players
From a high-level view, financial markets involve firms demanding capital, households supplying it,
governments acting as borrowers or lenders, and financial intermediaries—like institutions and investment
bankers—facilitating the flow of funds between issuers and investors.
Financial intermediaries want to bring the suppliers of capital (investors) together with the demanders of
capital (primarily corporations and the federal government). – Such as banks, investment companies,
insurance companies & credit unions.
Investment bankers, as underwriters, provide specialized services for firms issuing securities, offering
expertise in pricing, marketing, and managing securities in primary and secondary markets, often at lower
costs than in-house divisions.
Venture capital an equity investment in young companies. Often take an active role in the management of
a start-up firm
1.7 The Financial Crisis of 2008-2009
The spread between the LIBOR rate (at which banks borrow from each other) and the Treasury-bill rate (at
which the U.S. government borrows), is a common measure of credit risk in the banking sector and often
referred to as the TED spread.
Changes in housing when Fannie Mae and Freddie Mac began buying mortgage loans from originators and
bundling them into large pools that could be traded like a financial asset – Mortgage-backed securities
process is called securization.
,Subprime loans loans with higher default risk
Adjustable-rate mortgages (ARMs) these loans offered borrowers low initial interest rates, but these rates
eventually would reset to current market interest yields.
Collateralized debt obligations (CDOs) designed to concentrate the credit risk of a bundle of loans on one
class of investors, leaving the other investors in the pool relatively protected from that risk
The claims on the loan repayments were divided in tranches
Credit Default Swaps in essence, an insurance contract against the default of one or more borrowers. The
purchaser of the swap pays an annual premium.
The Dodd-Frank Reform Act (small to medium-sized banks are exempt) calls for stricter rules for bank
capital, liquidity, and risk management practices. It requires large banks to undergo annual stress tests, to see
if the bank has enough capital to withstand specific episodes of economic duress. Also, attempt to limit the
risky activities in which banks can engage
Chapter 2
2.1 The Money Market
Treasury Bills (T-bills) the government borrows money by selling bills to the public. You buy them at a
discount from the statement maturity value, at maturity, they pay back the face value. The difference is
considered interest.
The ask price is the price you would have to pay to buy a T-bill from a securities dealer. The bid price is the
slightly lower price you would receive if you wanted to sell a bill to a dealer. The bid–ask spread is the
difference in these prices, which is the dealer’s source of profit.
Certificates of deposit a time deposit with a bank. May not be withdrawn on demand
Commercial paper Large companies issue their own short-term unsecured debt notes. Is backed by a bank
line of credit, giving the borrower access to cash that can be used to pay off the paper at maturity
Bankers acceptances start as an order to a bank by a bank's customer to pay a sum of money at a future
date. Similar to a post-dated check.
Eurodollars dollar-denominated deposits at foreign banks or foreign branches of American banks. Does
not need to be in European banks
Repos and Reverses Repurchase agreements are used as a short-term borrowing. Usually overnight –
basically a one day loan. Reverse repo the dealer finds an investor holding government securities and buys
them, agreeing to sell them back at a specified higher price on a future date
Federal funds Funds in the banks reverse accounts – required by the federal reserve system
, LIBOR (London Interbank Offer Rate) – was the premier short-term interest rate quoted in the European
money market and served as a reference rate for a wide range of financial contracts. Currently, the SOFR is
used more because LIBOR was not reliable.
Money market funds mutual funds that invest in money market instruments
Difference between government funds & prime funds Government funds hold short-term U.S. Treasury or
agency securities. Prime funds also hold other money market instruments, for example, commercial paper or
CDs.
2.2 The Bond Market
Treasury notes & Treasury bonds T-notes have maturities ranging up to 10 years, while bonds range from
10 to 30 years. Mostly traded in 1000, semiannual interest payments are called coupon payments
Yield to maturity calculated by doubling the semiannual yield, rather than compounding it for two half-
year periods
TIPS (Treasury Inflation Protected Securities) inflation protected treasury bonds – adjusted to the
consumer price index
Municipal bonds issued by state and local governments, interest income is exempt from federal income
taxation
Equivalent taxable yield is the rate a taxable bond must offer to match the after-tax yield on the tax-free
municipal
Corporate bonds the means by which private firms borrow money directly from the public. These bonds
are similar in structure to Treasury issues—they typically pay semiannual coupons over their lives and return
the face value to the bondholder at maturity
Secured bonds have specific collateral backing them in the event of firm bankruptcy
Unsecured bonds (debentures) have no collateral
Subordinated debentures have a lower priority claim to the firm’s assets in the event of bankruptcy
Callable bonds give the firm the option to repurchase the bond from the holder at a call time
Convertible bonds give the bondholder the option to convert each bond into shares of stock
Mortgage and Asset-backed securities either an ownership claim in a pool of mortgages or an obligation
that is secured by such a pool.
Subprime mortgages riskier loans made to financially weaker borrowers, bundled and sold
2.3 Equity Securities
Common stock also known as equity securities, represents ownership shares in a corporation. The
corporation is controlled by a board of directors elected by shareholders
Residual claim means that stockholders are the last in line of all those who have a claim on the assets
and income of the corporation
Limited liability means that most shareholders can lose in the event of failure of the corporation, is
their original investment
P/E ratio, or price-earnings ratio the ratio of the current stock price to last year's earnings per share
