book

Fundamentals of Financial Instruments, 2nd Edition

by Sunil K. Parameswaran

March 2022

Beginner

560 pages

17h 49m

English

Wiley

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THE ROLE OF AN ECONOMIC SYSTEMA COMMAND ECONOMYA MARKET ECONOMYCLASSIFICATION OF ECONOMIC UNITSAN ECONOMY'S RELATIONSHIP WITH THE EXTERNAL WORLDTHE BALANCE OF TRADETHE CURRENT ACCOUNT BALANCEFINANCIAL ASSETSMONEYMONEY AS A UNIT OF ACCOUNT OR A STANDARD OF VALUEMONEY AS A MEDIUM OF EXCHANGEMONEY AS A STORE OF VALUEMONEY IS PERFECTLY LIQUIDEQUITY SHARESDEBT SECURITIESPREFERRED SHARESFOREIGN EXCHANGEDERIVATIVESFORWARD AND FUTURES CONTRACTSOPTIONS CONTRACTSSWAPSMORTGAGES AND MORTGAGE-BACKED SECURITIESHYBRID SECURITIESPRIMARY MARKETS AND SECONDARY MARKETSEXCHANGES AND OVER-THE-COUNTER (OTC) MARKETSBROKERS AND DEALERSTHE NEED FOR BROKERS AND DEALERSTRADING POSITIONSTHE BUY-SIDE AND THE SELL-SIDEINVESTMENT BANKERSDIRECT AND INDIRECT MARKETSMUTUAL FUNDSMONEY AND CAPITAL MARKETSTHE EUROCURRENCY MARKETTHE INTERNATIONAL BOND MARKETGLOBALIZATION OF EQUITY MARKETSDUAL LISTINGFUNGIBILITYARBITRAGEARBITRAGE WITH ADRsGDRsRISKAFTER THE TRADE – CLEARING AND SETTLEMENTDEMATERIALIZATION AND THE ROLE OF A DEPOSITORYCUSTODIAL SERVICESGLOBALIZATION – THE NEW MANTRANOTES
INTEREST RATESTHE REAL RATE OF INTERESTTHE FISHER EQUATIONSIMPLE INTEREST & COMPOUND INTERESTPROPERTIESA SYMBOLIC DERIVATIONPRINCIPLE OF EQUIVALENCYCONTINUOUS COMPOUNDINGFUTURE VALUEPRESENT VALUEHANDLING A SERIES OF CASH FLOWSTHE INTERNAL RATE OF RETURNEVALUATING AN INVESTMENTANNUITIES: AN INTRODUCTIONANNUITY DUEPERPETUITIESTHE AMORTIZATION METHODAMORTIZATION WITH A BALLOON PAYMENTTHE EQUAL PRINCIPAL REPAYMENT APPROACHTYPES OF INTEREST COMPUTATIONLOANS WITH A COMPENSATING BALANCETIME VALUE OF MONEY–RELATED FUNCTIONS IN EXCELCOMPUTING THE PRESENT AND FUTURE VALUES OF ANNUITIES AND ANNUITIES DUE IN EXCELAMORTIZATION SCHEDULES AND EXCELNOTE

INTRODUCTIONPAR VALUE VERSUS BOOK VALUEACCOUNTING FOR A STOCK ISSUEVOTING RIGHTSDIVIDENDSTREASURY STOCKACCOUNTING FOR TREASURY STOCKSPLITS AND REVERSE SPLITSPREEMPTIVE RIGHTSINTERPRETING STATED RATIOSHANDLING FRACTIONSPHYSICAL CERTIFICATES VERSUS BOOK ENTRYTRACKING STOCKREPORT CARDSTYPES OF STOCKSRISK AND RETURN AND THE CONCEPT OF DIVERSIFICATIONPREFERRED SHARESDIVIDEND DISCOUNT MODELSA GENERAL VALUATION MODELTHE CONSTANT GROWTH MODELTHE TWO-STAGE MODELTHE THREE-STAGE MODELTHE H MODELSTOCK MARKET INDICESPRICE-WEIGHTED INDICESTHE IMPORTANCE OF PRICEVALUE-WEIGHTED INDICESCHANGING THE BASE PERIOD CAPITALIZATIONEQUALLY WEIGHTED INDICESTRACKING PORTFOLIOSHANDLING A RIGHTS ISSUETHE FREE-FLOATING METHODOLOGYWELL-KNOWN GLOBAL INDICESMARGIN TRADING AND SHORT-SELLINGTERMINOLOGYCASE A: THE MARKET RISESCASE B: THE MARKET DECLINESCASE A: THE MARKET RISESCASE B: THE MARKET DECLINESINTEREST AND COMMISSIONSCASE A: THE MARKET RISESCASE B: THE MARKET DECLINESMAINTENANCE MARGINSHORT-SELLINGMAINTENANCE OF A SHORT POSITIONSHORTING AGAINST THE BOXTHE RISK FACTORTHE ECONOMIC ROLE OF SHORT SALESTHE UPTICK RULENOTES
INTRODUCTIONTERMS USED IN THE BOND MARKETVALUATION OF A BONDPAR, PREMIUM, AND DISCOUNT BONDSEVOLUTION OF THE PRICEZERO-COUPON BONDSVALUING A BOND IN BETWEEN COUPON DATESDAY-COUNT CONVENTIONSACTUAL-ACTUALTHE TREASURY'S APPROACHCORPORATE BONDSACCRUED INTERESTNEGATIVE ACCRUED INTERESTYIELDSTHE CURRENT YIELDSIMPLE YIELD TO MATURITYYIELD TO MATURITYAPPROXIMATE YIELD TO MATURITYZERO-COUPON BONDS AND THE YTMANALYZING THE YTMTHE REALIZED COMPOUND YIELDREINVESTMENT AND ZERO-COUPON BONDSTHE HOLDING PERIOD YIELDTAXABLE EQUIVALENT YIELDCREDIT RISKBOND INSURANCEEQUIVALENCE WITH ZERO-COUPON BONDSSPOT RATESTHE COUPON EFFECTBOOTSTRAPPINGFORWARD RATESTHE YIELD CURVE AND THE TERM STRUCTURESHAPES OF THE TERM STRUCTURETHEORIES OF THE TERM STRUCTURETHE LIQUIDITY PREMIUM HYPOTHESISTHE MONEY SUBSTITUTE HYPOTHESISTHE MARKET SEGMENTATION HYPOTHESISTHE PREFERRED HABITAT THEORYTHE SHORT RATEFLOATING RATE BONDSSIMPLE MARGINBONDS WITH EMBEDDED OPTIONSCALLABLE BONDSYIELD TO CALLPUTABLE BONDSCONVERTIBLE BONDSUSING SHORT RATES TO VALUE BONDSPRICE VOLATILITYA CONCISE FORMULADURATION AND PRICE VOLATILITYPROPERTIES OF DURATIONDOLLAR DURATIONCONVEXITYA CONCISE FORMULADOLLAR CONVEXITYPROPERTIES OF CONVEXITYIMMUNIZATIONTREASURY AUCTIONSWHEN ISSUED TRADINGPRICE QUOTESSTRIPSINFLATION INDEXED BONDSCOMPUTING PRICE GIVEN YIELD AND VICE VERSA IN EXCELCOMPUTING DURATION IN EXCELNOTES
INTRODUCTIONMARKET SUPERVISIONTHE FEDERAL RESERVE SYSTEMKEY DATES IN THE CASE OF CASH MARKET INSTRUMENTSTHE MODIFIED FOLLOWING BUSINESS DAY CONVENTIONTHE END/END RULETHE INTERBANK MARKETTYPES OF LOANSLIBORLIBIDSONIATRANSITIONING FROM LIBORINTEREST COMPUTATION METHODSTERM MONEY MARKET DEPOSITSMONEY MARKET FORWARD RATESFEDERAL FUNDSFEDERAL FUNDS VERSUS CLEARINGHOUSE FUNDSCORRESPONDENT BANKS: NOSTRO AND VOSTRO ACCOUNTSTREASURY BILLSREOPENINGSYIELDS ON DISCOUNT SECURITIESNOTATIONDISCOUNT RATES AND T-BILL PRICESTHE BOND EQUIVALENT YIELD (BEY)CASE A: TM < 182 DAYS < 182 DAYSTHE MONEY MARKET YIELDCASE B: TM > 182 DAYSHOLDING PERIOD RETURNVALUE OF AN 01CONCEPT OF CARRYCONCEPT OF A TAILT-BILL RELATED FUNCTIONS IN EXCELTBILLPRICETBILLYIELDTBILLEQDISCTREASURY AUCTIONSTYPES OF AUCTIONSRESULTS OF AN AUCTIONPRIMARY DEALERS AND OPEN MARKET OPERATIONSREPURCHASE AGREEMENTSREVERSE REPOSGENERAL COLLATERAL VERSUS SPECIAL REPOSMARGINSSALE AND BUYBACKCOLLATERALREPOS AND OPEN MARKET OPERATIONSNEGOTIABLE CDsNOTATIONCOST OF A CD FOR THE ISSUING BANKTERM CDsCDs VERSUS MONEY MARKET TIME DEPOSITSCOMMERCIAL PAPERLETTERS OF CREDIT AND BANK GUARANTEESYANKEE PAPERCREDIT RATINGMOODY'S RATING SCALES&P'S RATING SCALEFITCH'S RATING SCALEBILLS OF EXCHANGEDOCUMENTS AGAINST PAYMENT (DAP) VERSUS DOCUMENTS AGAINST ACCEPTANCE (DAA) TRANSACTIONSELIGIBLE AND NONELIGIBLE BANK BILLSBUYING AND SELLING BILLSBANKERS' ACCEPTANCEACCEPTANCE CREDITSEUROCURRENCY DEPOSITSAPPENDIXNOTES
INTRODUCTIONMARKING TO MARKET FOR A TRADER IN PRACTICEDELIVERY OPTIONSPROFIT DIAGRAMSVALUE AT RISKTHE EXPECTED SHORTFALLSPOT-FUTURES EQUIVALENCEPRODUCTS AND EXCHANGESCASH-AND-CARRY ARBITRAGEREVERSE CASH-AND-CARRY ARBITRAGEREPO AND REVERSE REPO RATESSYNTHETIC SECURITIESVALUATIONTHE CASE OF ASSETS MAKING PAYOUTSPHYSICAL ASSETSNET CARRYBACKWARDATION AND CONTANGOTHE CASE OF MULTIPLE DELIVERABLE GRADESRISK ARBITRAGETHE CASE OF MULTIPLICATIVE ADJUSTMENTTHE CASE OF ADDITIVE ADJUSTMENTTRADING VOLUME AND OPEN INTERESTDELIVERYCASH SETTLEMENTHEDGING AND SPECULATIONROLLING A HEDGETAILING A HEDGETHE MINIMUM VARIANCE HEDGE RATIOESTIMATION OF THE HEDGE RATIO AND THE HEDGING EFFECTIVENESSCROSS-HEDGINGSPECULATIONLEVERAGECONTRACT VALUEFORWARD VERSUS FUTURES PRICESHEDGING THE RATE OF RETURN ON A STOCK PORTFOLIOCHANGING THE BETAPROGRAM TRADINGSTOCK PICKINGPORTFOLIO INSURANCEIMPORTANCE OF FUTURESNOTES
INTRODUCTIONNOTATIONEXERCISING OPTIONSMONEYNESSEXCHANGE-TRADED OPTIONSOPTION CLASS AND OPTION SERIESFLEX OPTIONSCONTRACT ASSIGNMENTADJUSTING FOR CORPORATE ACTIONSNONNEGATIVE OPTION PREMIAINTRINSIC VALUE AND TIME VALUETIME VALUE OF AMERICAN OPTIONSTIME VALUE AT EXPIRATIONPUT-CALL PARITYIMPLICATIONS FOR THE TIME VALUEPUT-CALL PARITY WITH DIVIDENDSIMPLICATIONS FOR THE TIME VALUEA VERY IMPORTANT PROPERTY FOR AMERICAN CALLSEARLY EXERCISE OF OPTIONS: AN ANALYSISPROFIT PROFILESSPECULATION WITH OPTIONSHEDGING WITH OPTIONSVALUATIONTHE BINOMIAL OPTION PRICING MODELTHE TWO-PERIOD MODELVALUATION OF EUROPEAN PUT OPTIONSVALUING AMERICAN OPTIONSIMPLEMENTING THE BINOMIAL MODEL IN PRACTICETHE BLACK-SCHOLES MODELPUT-CALL PARITYINTERPRETATION OF THE BLACK-SCHOLES FORMULATHE GREEKSOPTION STRATEGIESFUTURES OPTIONSPUT-CALL PARITYTHE BLACK MODELNOTES
INTRODUCTIONCURRENCY CODESBASE AND VARIABLE CURRENCIESDIRECT AND INDIRECT QUOTESEUROPEAN TERMS AND AMERICAN TERMSBID AND ASK QUOTESAPPRECIATING AND DEPRECIATING CURRENCIESCONVERTING DIRECT QUOTES TO INDIRECT QUOTESPOINTSRATES OF RETURNTHE IMPACT OF SPREADS ON RETURNSARBITRAGE IN SPOT MARKETSONE-POINT ARBITRAGETWO-POINT ARBITRAGETRIANGULAR ARBITRAGECROSS RATESMARKET RATES AND EXCHANGE MARGINSVALUE DATESTHE FORWARD MARKETOUTRIGHT FORWARD RATESSWAP POINTSBROKEN-DATED CONTRACTSCOVERED INTEREST ARBITRAGEA PERFECT MARKETFOREIGN EXCHANGE SWAPSTHE COSTTHE MOTIVEINTERPRETATION OF THE SWAP POINTSA CLARIFICATIONSHORT-DATE CONTRACTSOPTION FORWARDSNONDELIVERABLE FORWARDSRANGE FORWARDSFUTURES MARKETSHEDGING USING CURRENCY FUTURESA SELLING HEDGEA BUYING HEDGEEXCHANGE-TRADED FOREIGN CURRENCY OPTIONSSPECULATING WITH FOREX OPTIONSEXCHANGE RATES AND COMPETITIVENESSNOTES
INTRODUCTIONMARKET PARTICIPANTSMORTGAGE ORIGINATIONRISKS IN MORTGAGE LENDINGOTHER MORTGAGE STRUCTURESPSA PREPAYMENT BENCHMARKANALYSISEXTENSION RISK AND CONTRACTION RISKACCRUAL BONDSFLOATING RATE TRANCHESNOTIONAL INTEREST-ONLY TRANCHEINTEREST-ONLY AND PRINCIPAL-ONLY STRIPSPAC BONDSNOTES
INTRODUCTIONMARKET TERMINOLOGYKEY DATESINHERENT RISKTHE SWAP RATEILLUSTRATIVE SWAP RATESDETERMINING THE SWAP RATETHE MARKET METHODVALUATION OF A SWAP DURING ITS LIFETERMINATING A SWAPTHE ROLE OF BANKS IN THE SWAP MARKETMOTIVATION FOR THE SWAPCOMPARATIVE ADVANTAGE AND CREDIT ARBITRAGESWAP QUOTATIONSMATCHED PAYMENTSAMORTIZING SWAPSEXTENDABLE AND CANCELABLE SWAPSSWAPTIONSCURRENCY SWAPSCROSS-CURRENCY SWAPSVALUATIONCURRENCY RISKSHEDGING WITH CURRENCY SWAPSNOTES
INTRODUCTIONPROS AND CONS OF INVESTING IN A FUNDSHARES AND UNITSOPEN-END VERSUS CLOSED-END FUNDSPREMIUM/DISCOUNT OF A CLOSED-END FUNDUNIT TRUSTSCALCULATING THE NAVCOSTSSALES CHARGESPRICE QUOTESANNUAL OPERATING EXPENSESSWITCHING FEESDIVIDEND OPTIONSTYPES OF MUTUAL FUNDSMONEY MARKET FUNDSGILT FUNDSDEBT FUNDSDIVERSIFIED DEBT FUNDSFOCUSED DEBT FUNDSHIGH YIELD DEBT FUNDSDEBT FUNDS AND BOND DURATIONEQUITY FUNDSAGGRESSIVE GROWTH FUNDSGROWTH FUNDSSPECIALTY FUNDSSECTOR FUNDSOFFSHORE FUNDSSMALL CAP EQUITY FUNDSOPTION INCOME FUNDSFUND OF FUNDSEQUITY INDEX FUNDSVALUE FUNDSEQUITY INCOME FUNDSBALANCED FUNDSASSET-ALLOCATION FUNDSCOMMODITY FUNDSREAL ESTATE FUNDSTAX-EXEMPT FUNDSRISK CATEGORIESTHE PROSPECTUSSTRUCTURE OF A MUTUAL FUNDSERVICESINVESTMENT TECHNIQUESTHE TOTAL RETURNCOMPUTATION OF RETURNSTAXATION ISSUESALTERNATIVES TO MUTUAL FUNDSTYPES OF PLANSIRAsCASH BALANCE PLANSNOTE
IMPORTANT ACRONYMSMARKET ORDERS AND LIMIT ORDERSTHE LIMIT PRICETHE LIMIT ORDER BOOKSILLUSTRATION OF A LIMIT ORDER BOOKLIMIT ORDERS VERSUS MARKET ORDERSMARKETABLE LIMIT ORDERSTRADE PRICING RULESSTOP-LOSS AND STOP-LIMIT ORDERSTRAILING STOP-LOSS ORDERSMARKET TO LIMIT ORDERSEQUIVALENCE WITH OPTIONSVALIDITY CONDITIONSGOOD TILL CANCELED (GTC) ORDERSGOOD TILL DAYS ORDERSORDERS WITH QUANTITY RESTRICTIONSA POINT ON ORDER SPECIFICATIONOPEN-OUTCRY TRADING SYSTEMSELECTRONIC MARKETS VERSUS OPEN-OUTCRY MARKETSCALL MARKETSNOTES
ECONOMIC GROWTHGROSS DOMESTIC PRODUCTGDP VERSUS GNPINFLATION ADJUSTMENTTRANSNATIONAL COMPARISONSTHE BIG MAC INDEXINFLATIONTYPES OF INFLATIONINTEREST RATESTHE FEDERAL BUDGET DEFICITMEASURES OF BUDGET DEFICITSTHE PRIMARY DEFICITFISCAL POLICYBUDGET DEFICITS AND THE CAPITAL MARKETTHE ROLE OF THE CENTRAL BANKBUDGET DEFICITS AND MONETARY POLICYCROSS-BORDER BORROWINGCENTRAL BANKS AND FOREIGN EXCHANGE MARKETSSTERILIZED AND UNSTERILIZED INTERVENTIONSEXCHANGE RATESISSUES WITH A RESERVE CURRENCYCROSS-BORDER IMPLICATIONS OF CENTRAL BANK ACTIONSQUANTITATIVE EASINGQUANTITATIVE EASING VERSUS OPEN-MARKET OPERATIONS
FORWARD RATE AGREEMENTS (FRAs)SETTLING AN FRADETERMINING BOUNDS FOR THE FRA RATEEURODOLLAR FUTURESCALCULATING PROFITS AND LOSSES ON ED FUTURESLOCKING IN A BORROWING RATELOCKING IN A LENDING RATETHE NO-ARBITRAGE PRICING EQUATIONCREATING A FIXED-RATE LOAN30-YEAR T-BOND FUTURES CONTRACTSCONVERSION FACTORSINTEREST RATE OPTIONSSTATE PRICESCALLABLE AND PUTABLE BONDSCAPS, FLOORS, AND COLLARSCAPTIONS AND FLOORTIONSNOTES
CHAPTER 1CHAPTER 2CHAPTER 3CHAPTER 4CHAPTER 5CHAPTER 6CHAPTER 7CHAPTER 8CHAPTER 9CHAPTER 10CHAPTER 11CHAPTER 12CHAPTER 14

Content preview from Fundamentals of Financial Instruments, 2nd Edition

CHAPTER 11Mutual Funds, ETFs, and Pension Funds

INTRODUCTION

What is a mutual fund? A mutual fund can be defined as a collection of stocks, bonds, or other securities such as precious metals and real estate that is purchased by a pool of individual investors and managed by a professional investment company.

When investors make an investment in a mutual fund, their money is pooled with that of other investors who have chosen to invest in the fund. The pooled sum is used to build an investment portfolio if the fund is just commencing its operations, or to expand its portfolio if it is already in business. All investors receive shares of the fund in proportion to the amount of money they have invested. Every share that an investor owns represents a proportional interest in the portfolio of securities managed by the fund.

When a fund is offering shares for the first time, known as an IPO, the shares will be issued at par. Subsequent issues of shares will be made at a price that is based on what is known as the Net Asset Value (NAV) of the fund. The Net Asset Value of a fund at any point in time is equal to the total value of all securities in its portfolio less any outstanding liabilities, divided by the total number of shares issued by the firm.

The NAV will fluctuate from day to day as the value of the securities held by the fund changes. On a given day, from the perspective of shareholders, the NAV may be higher or lower than the price that they paid per share at the time of ...