Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives

Table of contents

1. Cover Page
2. Title Page
3. Copyright
4. Contents
5. Preface
6. Acknowledgments
7. CHAPTER 1: An Introduction to Financial Institutions, Instruments, and Markets
   1. The Role of an Economic System
   2. A Command Economy
   3. A Market Economy
   4. Classification of Economic Units
   5. An Economy's Relationship with the External World
   6. The Balance of Trade
   7. The Current Account Balance
   8. Financial Assets
   9. Primary Markets and Secondary Markets
   10. Exchanges and OTC Markets
   11. Brokers and Dealers
   12. The Need for Brokers and Dealers
   13. Trading Positions
   14. The Buy Side and the Sell Side
   15. Investment Bankers
   16. Direct and Indirect Markets
   17. Mutual Funds
   18. Money and Capital Markets
   19. The Eurocurrency Market
   20. The International Bond Market
   21. Globalization of Equity Markets
   22. Dual Listing
   23. Fungibility
   24. Risk
   25. After the Trade: Clearing and Settlement
   26. Dematerialization and the Role of a Depository
   27. Custodial Services
   28. Globalization: The New Mantra
8. CHAPTER 2: Mathematics of Finance
   1. Interest Rates
   2. The Real Rate of Interest
   3. The Fisher Equation
   4. Simple Interest
   5. Compound Interest
   6. Properties
   7. A Symbolic Derivation
   8. Principle of Equivalency
   9. Continuous Compounding
   10. Future Value
   11. Present Value
   12. Handling a Series of Cash Flows
   13. The Internal Rate of Return
   14. Evaluating an Investment
   15. Annuities: An Introduction
   16. Perpetuities
   17. The Amortization Method
   18. Amortization with a Balloon Payment
   19. The Equal Principal Repayment Approach
   20. Types of Interest Computation
   21. Loans with a Compensating Balance
9. CHAPTER 3: Equity Shares, Preferred Shares, and Stock Market Indexes
   1. Introduction
   2. Par Value versus Book Value
   3. Voting Rights
   4. Statutory versus Cumulative Voting
   5. Proxies
   6. Dividends
   7. Dividend Yield
   8. Dividend Reinvestment Plans
   9. Stock Dividends
   10. Treasury Stock
   11. Splits and Reverse Splits
   12. Costs Associated with Splits and Stock Dividends
   13. Preemptive Rights
   14. Interpreting Stated Ratios
   15. Handling Fractions
   16. Physical Certificates versus Book Entry
   17. Tracking Stock
   18. Report Cards
   19. Types of Stocks
   20. Risk and Return and the Concept of Diversification
   21. Preferred Shares
   22. Callable Preferred Stock
   23. Convertible Preferred Shares
   24. Cumulative Preferred Shares
   25. Adjustable Rate Preferred Shares
   26. Participating Preferred Shares
   27. Dividend Discount Models
   28. A General Valuation Model
   29. The Constant Growth Model
   30. The Two-Stage Model
   31. The Three-Stage Model
   32. The H Model
   33. Stock Market Indexes
   34. Price-Weighted Indexes
   35. Changing the Divisor
   36. The Importance of Price
   37. Value-Weighted Indexes
   38. Changing the Base-Period Capitalization
   39. Equally Weighted Indexes
   40. Tracking Portfolios
   41. The Free-Floating Methodology
   42. Well-Known Global Indexes
   43. Margin Trading and Short Selling
   44. Terminology
   45. Maintenance Margin
   46. Regulation T and NYSE and NASD Rules
   47. Short Selling
   48. Endnotes
10. CHAPTER 4: Bonds
    1. Valuation of a Bond
    2. Par, Premium, and Discount Bonds
    3. Evolution of the Price
    4. Zero-Coupon Bonds
    5. Valuing a Bond in between Coupon Dates
    6. Day-Count Conventions
    7. Actual–Actual
    8. The Treasury's Approach
    9. Corporate Bonds
    10. Accrued Interest
    11. Yields
    12. Taxable-Equivalent Yield
    13. Credit Risk
    14. Bond Insurance
    15. Equivalence with Zero-Coupon Bonds
    16. The Yield Curve and the Term Structure
    17. Bonds with Embedded Options
    18. Price Volatility
    19. Duration and Price Volatility
    20. Dollar Duration
    21. Convexity
    22. Treasury Auctions
    23. When Issued Trading
    24. Price Quotes
    25. Bond Futures
    26. STRIPS
    27. Endnotes
11. CHAPTER 5: Money Markets
    1. Introduction
    2. Market Supervision
    3. The Interbank Market
    4. Interest-Computation Methods
    5. Term Money Market Deposits
    6. Federal Funds
    7. Correspondent Banks: Nostro and Vostro Accounts
    8. Payment Systems
    9. Fed Funds and Reserve Maintenance
    10. Treasury Bills
    11. Yields on Discount Securities
    12. Discount Rates and T-Bill Prices
    13. Primary Dealers and Open-Market Operations
    14. Commercial Paper
    15. Letters of Credit and Bank Guarantees
    16. Yankee Paper
    17. Credit Rating
    18. Bills of Exchange
    19. Eurocurrency Deposits
    20. Money Market Futures
12. CHAPTER 6: Forward and Futures Contracts
    1. Introduction
    2. Spot–Futures Equivalence
    3. Cash-and-Carry Arbitrage
    4. Synthetic Securities
    5. The Case of Assets Making Payouts
    6. Physical Assets
    7. The Case of Multiple Deliverable Grades
    8. Trading Volume and Open Interest
    9. Cash Settlement
    10. Hedging and Speculation
    11. Estimation of the Hedge Ratio and the Hedging Effectiveness
    12. Speculation
    13. Leverage
    14. Contract Value
    15. Forward versus Futures Prices
    16. Locking in Borrowing and Lending Rates
    17. Hedging the Rate of Return on a Stock Portfolio
    18. Changing the Beta
    19. Program Trading
    20. Stock Picking
    21. Portfolio Insurance
    22. The Importance of Futures
13. CHAPTER 7: Options Contracts
    1. Moneyness
    2. Exchange-Traded Options
    3. Speculation with Options
    4. The Two-Period Model
    5. Valuation of European Put Options
    6. Valuing American Options
    7. Implementing the Binomial Model in Practice
    8. The Black-Scholes Model
    9. The Greeks
    10. Option Strategies
14. CHAPTER 8: Foreign Exchange
    1. Introduction
    2. Currency Codes
    3. European Terms and American Terms
    4. Appreciating and Depreciating Currencies
    5. Converting Direct Quotes to Indirect Quotes
    6. The Impact of Spreads on Returns
    7. Arbitrage in Spot Markets
    8. Cross Rates
    9. Value Dates
    10. The Forward Market
    11. Outright Forward Rates
    12. Swap Points
    13. Broken-Dated Contracts
    14. A Perfect Market
    15. The Cost
    16. Interpretation of the Swap Points
    17. Short-Date Contracts
    18. Option Forwards
    19. Nondeliverable Forwards
    20. Futures Markets
    21. Hedging Using Currency Futures
    22. Exchange-Traded Foreign Currency Options
    23. The Garman-Kohlhagen Model
    24. Put-Call Parity
    25. The Binomial Model
15. CHAPTER 9: Mortgages and Mortgage-Backed Securities
    1. Introduction
    2. Market Participants
    3. Government Insurance and Private Mortgage Insurance
    4. Risks in Mortgage Lending
    5. Other Mortgage Structures
    6. Negative Amortization
    7. Graduated-Payment Mortgage
    8. WAC and WAM
    9. Pass-Through Securities
    10. Extension Risk and Contraction Risk
    11. Accrual Bonds
    12. Floating-Rate Tranches
    13. Notional Interest Only Tranche
    14. Interest-Only and Principal-Only Strips
    15. PAC Bonds
    16. Agency Pass-Throughs
    17. Endnotes
16. CHAPTER 10: Swaps
    1. Introduction
    2. Contract Terms
    3. Market Terminology
    4. Inherent Risk
    5. The Swap Rate
    6. Illustrative Swap Rates
    7. Determining the Swap Rate
    8. The Market Method
    9. Valuation of a Swap During Its Life
    10. Terminating a Swap
    11. The Role of Banks in the Swap Market
    12. Comparative Advantage and Credit Arbitrage
    13. Swap Quotations
    14. Matched Payments
    15. Currency Swaps
    16. Cross-Currency Swaps
    17. Currency Risks
    18. Hedging with Currency Swaps
    19. Endnotes
17. APPENDIX 1: Partial Derivative of the Price with Respect to the Yield
18. APPENDIX 2
19. Bibliography
20. Web Sites
21. Index