Introduction

Javied Karim
8/2/2011
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Assets are economic resources that are owned by an
individual or corporation, especially that which could be
converted to cash. Examples are cash, securities,
accounts receivable, inventory, and other property.
On a balance sheet, assets are equal to the sum of
liabilities, common stock, preferred stock, and retained
earnings.
From an accounting perspective, assets are divided into
the following categories: current assets (cash and other
liquid items), long-term assets (real estate, plant,
equipment), so asset can be classified as tangible or
intangible

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Tangible Assets
Value is based on physical properties
Examples include buildings, land, machinery

Intangible Assets
Something of value that cannot be physically
touched, such as a brand, franchise,
trademark, or patent. opposite of tangible
asset


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Bank loans
Government
bonds
Corporate bonds
Municipal bonds
Foreign bond

Common stock
Preferred stock
Foreign stock
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Debt Instruments
A written promise to repay a debt. Examples
include bills, bonds, notes, CDs, commercial
paper, and banker's acceptances.
Equity Claims
The share of earnings that can be claimed once
all debts have been repaid. also called residual
claim.
Examples include common stock, partnership
share

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The price or value of a financial asset is
equal to the present value of all expected
future cash flows.
For example if a U.S government bond
promises to pay $30 every six month for
the next 30 years and $1000 at the end of
30 years then this is its cash flow.
Expected rate of return
Risk of expected cash flow
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Investment Risk
Probability that an actual return on an investment will be
lower than the investor's expectations. All investments have
some level of risk associated it due to the unpredictability
of the market's direction
Types of Risks
Purchasing power risk or inflation risk
Default or credit risk
Exchange rate or currency risk
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Financial asset have two principal
economic functions.
Transfer funds from surplus units to deficit
units.
Transfer funds so as to redistribute
unavoidable risk associated with cash
flows generated from both tangible and
intangible assets.
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A market for the exchange of capital and credit, including
the money markets and the capital markets.

Money Market for short-term debt securities, such as
banker's acceptances, commercial paper, negotiable
certificates of deposit, and Treasury Bills with a maturity
of one year or less and often 30 days or less. Money
market securities are generally very safe investments
which return a relatively low interest rate.

Capital market a market where debt or equity securities
are traded




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The role of financial intermediaries and financial markets
providing the capital is :
channelling of funds from economic units that have saved
surplus of funds to those that have shortage of funds
promote efficiency by producing an efficient allocation of
capital, which increases production
mobilization of funds and converting the unproductive and
liquid savings into the productive investments
the intersections of buyers and sellers in a financial market
determine price or required rate of return of asset.
financial markets provide a mechanism for an investor to
sell a financial asset.
reduce transactions costs, which consists of search costs
and information costs.
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Debt vs. equity markets

Money market vs. capital market

Primary vs. secondary market

Cash or spot vs. derivatives market

Auction vs. over-the-counter vs.
intermediated market
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Households
Business units
Federal, state, and local governments
Government agencies
Supranational (such as World bank and
Asian development bank.)
Regulators
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Deregulation or liberalization of financial
markets

Technological advances

Increased institutionalization
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Internal Market
(also called national
market)
External Market
(also called international
market, and Euromarkets)

Domestic Market
Foreign Market
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Limited fund availability in internal market
Reduced cost of funds
Diversifying funding sources
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Futures/forward contracts are obligations
that must be fulfilled at maturity.

Options contracts are rights, not
obligations, to either buy (call) or sell (put
the underlying financial instrument.
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The two basic types of derivative instruments are
futures/forward contracts and options contracts.

A futures/forward contract is an agreement whereby two
parties agree to transact with respect to some financial
asset at a predetermined price at a specified future date.
One party agree to buy the financial asset; the other agree
to sell the financial asset. Both parties are obligated to
perform, and neither party charge a fee.

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An options contract gives the owner of the contract the
right, but the obligation, to buy (or sell) a financial asset as
a specified price from (or to) another party. The buyer of
the contract must pay the seller a fee, which is called an
option price. when the option grants the owner of the
option the right to buy a financial asset from the other
party, the option is called a call option. If, instead, the
option grants the owner of the option the right to sell a
financial asset to the other party, the option is called a put
option.

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Protect against different types of
investment risks, such as purchasing
power risk, interest rate risk, exchange
rate risk.

Advantages:
Lower transactions costs
Faster to carry out transaction
Greater liquidity
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