Description. Investment Project. Common Stock. Some Portfolio Assets for Investment Project. Econ 422 Summer 2007 Eric Zivot July 25, 2007
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1 Investment Project Econ 422 Summer 2007 Eric Zivot July 25, 2007 Description Objectives: learn financial institutions and conventions Essential features:» Create a $100,000 portfolio, describe it in Report 1» Value the portfolio at term end, report performance in Report 2» Intermediate trading is allowed by not required Some helpful hints:» Start early» Read the detailed instructions carefully!» Reread the instructions, list questions» Work with your study partner (but the portfolio and write up must be your own)» Ask questions ECON 422:Intro 1 ECON 422:Intro 2 Some Portfolio Assets for Investment Project U.S. Treasury Bills Treasury, corporate, and agency bonds» Zero coupon bonds» Coupon bonds» Inflation protected bonds Mutual Funds Options ECON 422:Intro 3 represents a fraction or share in the ownership of a corporation. Share owners are normally entitled to» dividends distributed by the corporation» rights to vote for the corporation s directors and on certain other matters. ECON 422:Intro 4 1
2 Finding Financial Data: Finding Financial Data: Daily data in WSJ or NYT: prices, volumes, etc. Detailed dividend data from Barrons, a weekly newspaper available in Foster Business Library» Find the last dividend date» Predict the next dividend date. Current price information» Historical price information» Dividends, capital structure, betas etc. Education version of Standard and Poor s Market Insight Product based on Compustat Database ECON 422:Intro 5 ECON 422:Intro 6 : Commissions Treasury Bills (T-Bills) Fidelity Silver commission schedule See website file for online sources.» /content/brokeragecommission.shtml» $10.95 for up to 1000 shares for online trading Note: commission for mutual funds may depend on fund Short term debt of US government Maturity: up to 1 year. $1,000 min. Sold at discount to face value» no coupon interest payments Ways to purchase» Direct: competitive and noncompetitive auction (free through Treasury direct)» Secondary market (small commission fee) ECON 422:Intro 7 ECON 422:Intro 8 2
3 Treasury Notes and Bonds Treasury Notes and Bonds: Prices Maturities (at time of issue):» Notes: One to ten years» Bonds: Ten to thirty years» [ Seasoned bonds can have short times to maturity as they approach maturity.] Minimum Face Value: $1,000 Coupon interest payments every 6 mo.» coupon pmt =coupon rate*face value/2 Initially sold at auction Active secondary market Price quoted as a % of face value» Fractional part of price is in 32nds» e.g. 101:5=101 5/32= Buyer pays price plus Accrued Interest (details given later) ECON 422:Intro 9 ECON 422:Intro 10 Treasury Bonds and Notes: Accrued Interest Buyer pays and seller receives accrued interest. Accrued interest assumes that interest is earned continually (although paid only every six months) Accrued interest=((#days since last pmt)/(number of days in 6 month interval))*semiannual coupon pmt ECON 422:Intro 11 Treasury STRIPs Coupon bonds represent a collection of claims: claims to each of the scheduled interest payments and a claim to the face value of the bond at expiration. These claims can now be traded separately in packages called STRIPs.» Each STRIP represents a claim to a payment at a future date of $1000 in interest or principal.» Essentially these are long maturity pure discount bonds ECON 422:Intro 12 3
4 U.S. Agency Bonds Bonds issued by Federal and State agencies» Federal Home Loan Bank» Federal National Mortgage Association (FNMA)» Federal Housing Association (FHA)» Federal Student Loan Marketing Association» Municipal Bonds These bonds are similar to Treasury bonds re. interest payments, pricing etc.» They may differ in the dating conventions, Treasury Inflation Protected Securities: TIPS Pure discount bonds that promise a real (inflation adjusted) rate of return The US Treasury website offers a good explanation of these securities» sec/seciis.htm ECON 422:Intro 13 ECON 422:Intro 14 Corporate Bonds Corporate Bonds are not risk-free» Corporations will default on bonds if they become insolvant» Interest rates are higher due to higher risk WSJ price quotes for corporate bonds. c.f. Moody's Industrial Manual and Moody's Bond Record for information on terms of corporate bonds. Options See chapters 20 and 21 in BM See Option commissions are similar to the stock commissions. See the Fidelity schedule ECON 422:Intro 15 ECON 422:Intro 16 4
5 Mutual Funds Mutual Fund Data You buy a share of a professionally managed portfolio» Open vs. closed end» Load vs. no load Quote price = NAV = net asset value determined at end of day No. of shares=$investment/$nav(buy) $Proceeds=No. of shares*$nav(sell) Great site that gives current prices (NAV), historical performance, fees, loads, expense ratios, etc. Lots of free mutual fund information Most funds have their own sites Fidelity commission depends on fund» Can be expensive!! ECON 422:Intro 17 ECON 422:Intro 18 Portfolio Analysis finance.yahoo.com» Register (free) to create and track portfolios finportfolio.com» Register (free) to create and analyze small portfolios using modern portfolio theory ECON 422:Intro 19 5
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