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The Handbook of Financial Instruments

Book Description

An investor's guide to understanding and using financial instruments

The Handbook of Financial Instruments provides comprehensive coverage of a broad range of financial instruments, including equities, bonds (asset-backed and mortgage-backed securities), derivatives (equity and fixed income), insurance investment products, mutual funds, alternative investments (hedge funds and private equity), and exchange traded funds. The Handbook of Financial Instruments explores the basic features of each instrument introduced, explains their risk characteristics, and examines the markets in which they trade. Written by experts in their respective fields, this book arms individual investors and institutional investors alike with the knowledge to choose and effectively use any financial instrument available in the market today.

John Wiley & Sons, Inc. is proud to be the publisher of the esteemed Frank J. Fabozzi Series. Comprising nearly 100 titles-which include numerous bestsellers—The Frank J. Fabozzi Series is a key resource for finance professionals and academics, strategists and students, and investors. The series is overseen by its eponymous editor, whose expert instruction and presentation of new ideas have been at the forefront of financial publishing for over twenty years. His successful career has provided him with the knowledge, insight, and advice that has led to this comprehensive series.

Frank J. Fabozzi, PhD, CFA, CPA, is Editor of the Journal of Portfolio Management, which is read by thousands of institutional investors, as well as editor or author of over 100 books on finance for the professional and academic markets. Currently, Dr. Fabozzi is an adjunct Professor of Finance at Yale University's School of Management and on the board of directors of the Guardian Life family of funds and the Black Rock complex of funds.

Table of Contents

  1. Preface
  2. Contributing Authors
  3. Chapter 1 Overview of Financial Instruments
    1. DEBT VERSUS EQUITY INSTRUMENTS
    2. CHARACTERISTICS OF DEBT INSTRUMENTS
    3. VALUATION OF A FINANCIAL INSTRUMENT
    4. FINANCIAL MARKETS
    5. BORROWING FUNDS TO PURCHASE FINANCIAL INSTRUMENTS
    6. Note
  4. Chapter 2 Fundamentals of Investing
    1. SETTING INVESTMENT OBJECTIVES
    2. ESTABLISHING AN INVESTMENT POLICY
    3. Notes
  5. Chapter 3 Calculating Investment Returns
    1. SINGLE PERIOD RATE OF RETURN
    2. PERFORMANCE OF AN INVESTMENT: MONEY WEIGHTED RETURNS
    3. PERFORMANCE OF THE INVESTMENT MANAGER: TIME WEIGHTED RETURNS
    4. MULTIPLE PERIOD RETURN CALCULATION
    5. SUMMARY
  6. Chapter 4 Common Stock
    1. COMMON STOCK VERSUS PREFERRED STOCK
    2. WHERE STOCK TRADING OCCURS
    3. TRADING MECHANICS
    4. TRADING COSTS
    5. TRADING ARRANGEMENTS FOR RETAIL AND INSTITUTIONAL INVESTORS
    6. PRICE LIMITS AND COLLARS
    7. STOCK MARKET INDICATORS
    8. PRICING EFFICIENCY OF THE STOCK MARKET
    9. OVERVIEW OF COMMON STOCK PORTFOLIO MANAGEMENT
    10. Notes
  7. Chapter 5 Sources of Information for Investing in Common Stock
    1. SOURCES OF FINANCIAL INFORMATION
    2. INFORMATION PREPARED BY THE COMPANY
    3. INTERVIEWING COMPANY REPRESENTATIVES
    4. INFORMATION PREPARED BY GOVERNMENT AGENCIES
    5. INFORMATION PREPARED BY FINANCIAL SERVICE COMPANIES
    6. SUMMARY
    7. Notes
  8. Chapter 6 Money Market Instruments
    1. U.S. TREASURY BILLS
    2. GOVERNMENT SPONSORED AGENCY INSTRUMENTS
    3. COMMERCIAL PAPER
    4. ASSET-BACKED COMMERCIAL PAPER
    5. MEDIUM-TERM NOTES
    6. LARGE-DENOMINATION NEGOTIABLE CDS
    7. FEDERAL FUNDS
    8. BANKERS ACCEPTANCES
    9. REPURCHASE AGREEMENTS
    10. Notes
  9. Chapter 7 U.S. Treasury Securities
    1. TYPES OF SECURITIES
    2. THE PRIMARY MARKET
    3. THE SECONDARY MARKET
    4. ZERO-COUPON TREASURY SECURITIES
    5. SUMMARY
    6. Notes
  10. Chapter 8 Inflation-Indexed Bonds
    1. MECHANICS AND MEASUREMENT
    2. DURATION
    3. QUOTATION AND SETTLEMENT
    4. Notes
  11. Chapter 9 Federal Agency Securities
    1. FEDERALLY RELATED INSTITUTIONS
    2. GOVERNMENT-SPONSORED ENTERPRISES
    3. Notes
  12. Chapter 10 Municipal Securities
    1. TAX-EXEMPT AND TAXABLE MUNICIPAL SECURITIES
    2. TAX PROVISIONS AFFECTING MUNICIPALS
    3. TYPES OF MUNICIPAL SECURITIES
    4. DEBT RETIREMENT STRUCTURE
    5. CREDIT RISK
    6. TAX RISK
    7. SECONDARY MARKET
    8. YIELDS ON MUNICIPAL BONDS
    9. Notes
  13. Chapter 11 Corporate Bonds
    1. CORPORATE BANKRUPTCY AND CREDITOR RIGHTS
    2. SECURED DEBT1
    3. UNSECURED DEBT
    4. INDENTURES
    5. CORPORATE BOND RATINGS
    6. SPECULATIVE-GRADE BONDS
    7. CORPORATE BOND INDEXES
    8. MEDIUM-TERM NOTES
    9. YIELD AND YIELD SPREADS
    10. CONVERTIBLE BONDS
    11. Notes
  14. Chapter 12 Preferred Stock
    1. PREFERRED STOCK ISSUANCE
    2. PREFERRED STOCK RATINGS
    3. CONVERTIBLE PREFERRED STOCK
    4. Notes
  15. Chapter 13 Emerging Markets Debt
    1. EMERGING MARKETS DEBT INSTRUMENTS
    2. ANALYTICS/MARKET CONVENTIONS
    3. SOVEREIGN CREDIT ANALYSIS
    4. PORTFOLIO CONSIDERATIONS
    5. ACTIVE MANAGEMENT OPPORTUNITIES
    6. CONCLUSION
    7. Notes
  16. Chapter 14 Agency Mortgage-Backed Securities
    1. WHY IT IS IMPORTANT TO UNDERSTAND REAL ESTATE-BACKED SECURITIES
    2. MORTGAGES
    3. MORTGAGE PASSTHROUGH SECURITIES
    4. AGENCY PASSTHROUGHS
    5. STRIPPED MORTGAGE-BACKED SECURITIES
    6. AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS
    7. SUMMARY
  17. Chapter 15 Nonagency MBS and Real Estate-Backed ABS
    1. COLLATERAL FOR RESIDENTIAL REAL ESTATE-BACKED SECURITIES
    2. PREPAYMENT CONVENTIONS
    3. NONAGENCY MBS
    4. REAL ESTATE-BACKED ASSET-BACKED SECURITIES
    5. OTHER PRODUCTS BACKED BY REAL ESTATE MORTGAGES
    6. Notes
  18. Chapter 16 Commercial Mortgage-Backed Securities
    1. HISTORY
    2. TYPES OF CMBS IN TODAY’s MARKET
    3. STRUCTURE OF CMBS
    4. OPTIONALITY
    5. EVALUATING CREDIT QUALITY IN COMMERCIAL MORTGAGE-BACKED SECURITIES
    6. THE UNDERLYING COMMERCIAL REAL ESTATE MORTGAGES
    7. UNDERWRITING CRITERIA
    8. STRUCTURING—TRANSFERRING RISKS AND RETURNS
    9. CONCLUSION
    10. Notes
  19. Chapter 17 Non-Real Estate Asset-Backed Securities
    1. FEATURES OF AN ABS
    2. CREDIT RISKS ASSOCIATED WITH INVESTING IN ABS
    3. Notes
  20. Chapter 18 Credit Card ABS
    1. SECURITIZATION OF CREDIT CARD RECEIVABLES
    2. THE CREDIT CARD ABS MARKET
    3. CONCLUSION
    4. Notes
  21. Chapter 19 Leveraged Loans
    1. WHAT IS A SYNDICATED LOAN?
    2. STRUCTURING AND SYNDICATING LOANS
    3. WINNING A MANDATE
    4. TYPES OF SYNDICATED LOAN FACILITY
    5. SYNDICATING A LOAN BY FACILITY
    6. SECONDARY SALES
    7. PRICING
    8. VOTING RIGHTS
    9. COVENANTS
    10. Notes
  22. Chapter 20 Collateralized Debt Obligations
    1. STRUCTURE OF A CDO
    2. ARBITRAGE TRANSACTIONS
    3. CASH FLOW TRANSACTIONS
    4. MARKET VALUE TRANSACTIONS
    5. SYNTHETIC CDOS
    6. MANAGING A CDO PORTFOLIO
    7. Notes
  23. Chapter 21 Investment Companies
    1. TYPES OF INVESTMENT COMPANIES
    2. FUND SALES CHARGES AND ANNUAL OPERATING EXPENSES
    3. ADVANTAGES OF INVESTING IN MUTUAL FUNDS
    4. TYPES OF FUNDS BY INVESTMENT OBJECTIVE
    5. THE CONCEPT OF A FAMILY OF FUNDS
    6. STRUCTURE OF A FUND
    7. RECENT CHANGES IN THE MUTUAL FUND INDUSTRY
    8. ALTERNATIVES TO MUTUAL FUNDS
    9. Notes
  24. Chapter 22 Exchange-Traded Funds and Their Competitors
    1. ETFS AND OTHER TRADABLE BASKET PRODUCTS
    2. TAXES AND TAX EFFICIENCY IN ETFS AND THEIR COMPETITORS
    3. Notes
  25. Chapter 23 Stable-Value Pension Investments
    1. STABLE-VALUE PRODUCTS
    2. THE EVOLUTION OF STABLE VALUE
    3. STABLE-VALUE PORTFOLIO MANAGEMENT
    4. THE FUTURE OF STABLE VALUE
  26. Chapter 24 Investment-Oriented Life Insurance
    1. INSURANCE
    2. INVESTMENT-ORIENTED LIFE INSURANCE
    3. SUMMARY
    4. Notes
  27. Chapter 25 Hedge Funds
    1. HEDGE FUND REGULATION
    2. HEDGE FUND STRATEGIES
    3. SHOULD HEDGE FUNDS BE PART OF AN INVESTMENT PROGRAM?
    4. IS HEDGE FUND PERFORMANCE PERSISTENT?
    5. A HEDGE FUND INVESTMENT STRATEGY
    6. SELECTING A HEDGE FUND MANAGER
    7. DUE DILIGENCE FOR HEDGE FUND MANAGERS
    8. RISK REVIEW
    9. ADMINISTRATIVE REVIEW
    10. LEGAL REVIEW
    11. REFERENCE CHECKS
    12. Notes
  28. Chapter 26 Private Equity
    1. VENTURE CAPITAL
    2. LEVERAGED BUYOUTS
    3. DEBT AS PRIVATE EQUITY
    4. Notes
  29. Chapter 27 Real Estate Investment
    1. TWO DISTINGUISHING CHARACTERISTICS OF REAL ESTATE INVESTMENTS
    2. THE NATURE OF THE INVESTORS
    3. THE INVESTMENT CHARACTERISTICS OF EACH QUADRANT
    4. REAL ESTATE IN THE MIXED ASSET PORTFOLIO
    5. LEVERAGE
    6. INVESTMENT EXECUTION
    7. OVERVIEW OF ADDITIONAL ISSUES
    8. CONCLUSION
    9. Notes
  30. Chapter 28 Equity Derivatives
    1. THE ROLE OF DERIVATIVES
    2. EQUITY DERIVATIVES MARKET
    3. LISTED EQUITY OPTIONS
    4. FUTURES CONTRACTS
    5. OTC EQUITY DERIVATIVES
    6. Notes
  31. Chapter 29 Interest Rate Derivatives
    1. INTEREST RATE OPTIONS
    2. INTEREST RATE SWAPS
    3. INTEREST RATE CAPS AND FLOORS
  32. Chapter 30 Mortgage Swaps
    1. FEATURES OF MORTGAGE SWAPS
    2. INDEX AMORTIZING SWAP
    3. TOTAL RETURN INDEX SWAPS
    4. APPLICATIONS OF MORTGAGE AND TOTAL RETURN INDEX SWAPS
    5. DISADVANTAGES OF MORTGAGE SWAPS
    6. Notes
  33. Chapter 31 Credit Derivatives
    1. ClEDIT RISK
    2. CREDIT DERIVATIVE INSTRUMENTS
    3. APPLICATIONS FOR PORTFOLIO MANAGERS
    4. RISKS IN CREDIT DEFAULT SWAPS
    5. CONCLUSIONS
    6. Notes
  34. Chapter 32 Managed Futures
    1. INDUSTRY BASICS
    2. HISTORY OF MANAGED FUTURES
    3. PRIOR EMPIRICAL RESEARCH
    4. RETURN DISTRIBUTIONS OF MANAGED FUTURES
    5. MANAGED FUTURES AS DOWNSIDE RISK PROTECTION FOR STOCKS AND BONDS
    6. CONCLUSION
    7. Notes
  35. Index
  36. EULA