Investments – Comprehensive Summary 2024_2025 KUL

Investments summary
Topic 1: Capital Markets and products
1. Financial markets
a. Function
i. Informational role: allow to allocate resources efficiently
ii. Consumption timing: separate timing of income and consumption
iii. Allocation of risk: share or transfer risk
iv. Separate management and ownership (agency problems)

b. Asset classes
i. Money market instruments (allow “to save”)
 Treasury bill: government debt obligation, maturity < 1 year
 Certificate of deposit (CD): time deposit at a bank
 Commercial paper (CP): ST unsecured debt issued by large corporation
 Bankers’ acceptance: a bank promise to pay a prespecified amount
 Repurchase agreement: a ST loan using other securities as collateral
 reverse repo’s
 Interbank loans: ST loans among banks  reference rates
 Central bank deposits and loans: ST deposit/ loan of a bank by its CB
 Call loans: loans that need to be repaid, on demand at any time

ii. Capital market instruments (allow “to invest”)
1) Bonds:
 Characteristics:
o Longer term debt instruments, wide range of maturity
o Various credit qualities
o Various liquidity
o Smaller denominations  can be held by retail investors
o Traded over the counter (OTC) via dealers
o Price: % of par value
o Coupon interest (=payments)  annual or semi-annual
o Performance measurement: HPR or yield




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,  Types
o Treasury notes: government debt, 1y < maturity < 10y
o Treasury bonds: government debt, maturity > 10y
o Treasury inflation-protected securities (TIPS): principal and
coupons adjusted for inflation
o Federal agency/ municipal bonds: issued or guaranteed by a
federal agency, state or local government
o Corporate bonds: issued by large corporation, options included
o Asset backed debt (cfr. Securization): proportional ownership claim
in an asset pool
o International bonds (e.g. Eurobond)

2) Stocks (equity)
 Issued by corporations, represent ownership in a firm
o Share the distribution of profits
o Voting power at shareholders’ meeting
 Residual claim: only receive payout if all other claims are met
 Limited liabilities: minimum share price = 0
 Performance measurement: return
 Preferred shares: have both equity and bond features
o Share of ownership
o No voting power
o Promise a fixed dividend

2. Investment funds
a. Functions for the investors
i. Diversification & divisibility
ii. Lower transaction costs
iii. Professional management
iv. Record keeping & administration

b. Net asset value (and turnover rate)
market value of assets−liabilities
NAV =
shares outstanding
market value of assets sold
Turnover rate=
market value of assets




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, c. Investment companies
i. Open-end fund (“mutual fund”)
 Issues new shares when investors buy, redeem when investors cash out
 Priced at NAV
 Traded at day-end only

ii. Closed-end fund
 Fixed number of shares
 Trade intra-day on an organized exchange
 Priced at market determined prices (premium/discount to NAV)

iii. Unit trusts:
 Collective investment established under a trust deed
 Investors = beneficiaries

iv. Exchange traded fund (ETF): hybrid format, legally structured as open-end but
traded intra-day very close to NAV on organized exchange
 Physical ETF and Synthetical ETF

d. Other investment organizations (not formally organized or regulated)
i. Commingled funds: partnerships of investments for large investors, not
regulated as mutual funds

ii. Real estate investment trust (REIT): investment vehicle to invest in real estate
 Equity REIT (own or operate income-producing real estate)
 Mortgage REIT (buy or originate mortgages & MBS)

iii. Hedge funds: private partnerships of investments with limited regulation




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, 3. Mutual funds
a. Organization
i. Parties involved
 Sponsors: set up fund
 Fund: manages fund operations (MANCO)
 Board of directors: oversees management
of fund in interest of shareholders
 Shareholders:
o entitled to financial proceeds of fund
o have voting power
 Advisors:
o manage fund’s portfolio in line with investment policy
o perform some administrative tasks
 Administrator: back-off administration
 Principal underwriter/ distributor:
o Acts as sales agreement agent between fund &broker-dealers
o Distributes the fund
 Transfer agent: maintains records of shareholders’ accounts
 Custodian: (independent)
o Safe keeps assets
o Assesses the conduct of the fund & quality of info it receives
 Auditor: certifies the statements of the fund

ii. Expense ratio, brokerage costs and front-end/back-end costs
 ESMA: focused on “value-for-money”
 Investment policy & strategy: key determinant of expense ratio

iii. Mutual fund income: taxed
 2 Distributions that can be taxed at differential rate:
o Ordinary dividends
o Capital gains
 Differential tax treatment explains existence of:
o Distribution funds
o Accumulation funds (capitalization funds)

b. Investment policies (described in the prospectus)
i. Equity funds
 Size dimension
 Capital appreciation dimension
 Sectoral focus
 Geographical focus

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