1 Types of securitized assets Theoretically any asset that has a revenue stream can be transformed into a marketable debt security In practical terms the vast majority of ABS are collateralized by loans and other financial assets Home equity loans car loans credit card debt student loans Fannie Mae federal national mortgaged association Freddie Mae federal home loan mortgaged corporation 2 Shareholder influence Shareholders can influence management with their voting power Elect a board of directors that in turns hires and supervises management Unhappy shareholders can elect a different board by launching a proxy contest in which they seek to obtain enough proxies rights to vote the shares of other shareholders to take control of the firm and elect a new board this process is costly and almost never effective 3 Investment bank Analyst interaction Investment bank is a financial intermediary that helps borrowers and lenders come together in the market using economies of scales Serve as underwriters Investment bankers advise an issuing corporation on the prices it can charge for the securities issued In a typical underwriting agreement the banker purchases the securities from the issuing firm and then resell them to the public Investment banker might receive shares of stocks or other securities of the firm 4 Bundling unbundling p 16 new securities Bundling breaking up and allocating the cash flows from one security to create several Unbundling combining more than one security into a composite security Used in financial engineering to create custom tailored risk attributes 5 Taxable tax free equivalent calculation r 1 t Rm or r Rm this is the rate a taxable bond will have to yield in order to match 1 t the after tax yield on the tax free municipal t investors tax rate r total return before tax rate of return available on taxable bonds Rm rate on municipal bonds If this value exceeds the rate on municipal bonds the investor does better holding the taxable bonds 6 Value weighted price weighted Price weighted computed by adding the prices of the stocks and diving it by the divisors The dow measures the return on a portfolio that holds one share of each stock The amount of money invested in each company in that portfolio is therefore proportional to the shares prices buy equal shares if the firm as they appear on the S P 500 Value weighted computed by calculating a weighted average of the returns of each security in the index with weights proportional to outstanding market The S P 500 is computed by calculating the total market value of those 500 firms in the index and the total market value of those firms on the previous day of trading the percentage increase in market value represents an increase on the index Proportional to the value of the equity in each stock Buy stocks for your portfolio proportional to the weighted amount in the index 7 Roles of federal reserve securities market participants new securities Sets margin requirements on stocks and stock options and regulates bank lending to With the SEC it requires full disclosure of relevant information regarding to the issue of 8 Dividend yield price per share calculation Dividend yield is the annual dividend per dollar paid for the stock Dividend yield Annual dividend price of stock Price per share total dividend paid out of shares 9 Treasury securities maturity classification T bills are the most marketable of all money market instruments Investors buy the bills at a discount from the stated maturity value T bills are issued with initial maturities of 4 13 26 or 52 weeks Sell at bid price willing to buy and buy at asked price dealer is willing to sell Principal is paid at maturity 10 OTC markets p 61 An informal network of brokers and dealers who negotiate sales of securities a trading Dealers quote prices at which they are willing to buy or sell securities and the broker mechanism executes the trade Brokers representing the clients would examine quotes over the computer network contact the dealer with the best quote and execute the trade NASDAQ was created to link brokers and dealers in a computer where price quotes could be displayed and reviewed Dealers can use network to display the bid price at which they were willing to purchase a security and the ask price at which they are willing to sell It was first design to simply be a display of prices NASDAQ has progressed far beyond that allowing for electronic execution SIPC securities investor protection corporation 11 Established to protect investors from losses if their brokerage firm fails Provides depositors with federal protection against bank failure It ensures that investors will receive securities held for their account in street name by a failed brokerage firm up to a limit of 500 00 per costumer Is financed by levying an insurance premium on its participating or member brokerage firm 12 Types of market transactions Block transactions large transactions in which at least 10 000 shares of stock are bought and sold too large for specialist to handle as they do not which to hold that many transactions on their inventory 13 Broker dealer buy sell spread Asked price price you would have to pay to buy a T bill from a securities dealer The dealers selling price Bid price is the slightly lower price you would receive if you wanted to sell a bill to a dealer the price the dealer buys at 14 Components of mutual funds returns The return on an investment in a mutual funds is measured as the increase or decrease in net asset value plus income distributions such as dividends or distributions of capital gains Rate of return NAV 1 NAV Income and capital gain distributions 0 NAV0 NAV1 is on year one The rate of return on the funds equals the gross return on the underlying portfolio minus the total expense ratio 15 Mutual funds per share dividend yield calculation A mutual fund s dividend yield shows how much a company pays in each year relative to its share price You can calculate the dividend yield by dividing the annual dividend by the current stock price Direct Search Markets buyers and sellers must seek each other out directly craigslist Brokered markets economies of scale make it worth while for people to pay Real state 16 Trading activity market o In the primary market Dealer markets trading activity in a particular asset increases They specialized on those assets buy them for their own account and later sell them for a profit The spreads are their source of profit OTC Auction