The essential guide to financial instruments, logically presented Fundamentals of Financial Instruments deals with the global financial markets and the instruments in which they trade. While most books on finance tend to be heavily mathematical, this book emphasizes the concepts in a logical, sequential fashion, introducing mathematical concepts only at the relevant times. As a result, the reader gains conceptual clarity reinforced by just the right level of technical detail to ensure a comprehensive exposure to the skills needed in the financial world.* Establishes a strong foundation for understanding global markets* Acts as an invaluable resource for those considering a career in the financial markets* Offers an accessible yet in-depth treatise on modern financial instruments* Presents a logical navigational path for a typical student of finance who is attempting to come to terms with the intricacies of the subject Covering the fundamentals of various types of assets in a single volume, Fundamentals of Financial Instruments is a compact yet comprehensive one-stop reference for students and professionals in finance and economics.
Preface xiii Acknowledgments xv Chapter 1 An Introduction to Financial Institutions, Instruments, and Markets 1 The Role of an Economic System 1 A Command Economy 2 A Market Economy 3 Classification of Economic Units 4 An Economy's Relationship with the External World 7 The Balance of Trade 9 The Current Account Balance 9 Financial Assets 10 Primary Markets and Secondary Markets 22 Exchanges and OTC Markets 24 Brokers and Dealers 27 The Need for Brokers and Dealers 29 Trading Positions 31 The Buy Side and the Sell Side 31 Investment Bankers 32 Direct and Indirect Markets 33 Mutual Funds 36 Money and Capital Markets 40 The Eurocurrency Market 41 The International Bond Market 43 Globalization of Equity Markets 45 Dual Listing 46 Fungibility 49 Risk 51 After the Trade: Clearing and Settlement 54 Dematerialization and the Role of a Depository 54 Custodial Services 55 Globalization: The New Mantra 56 Chapter 2 Mathematics of Finance 59 Interest Rates 59 The Real Rate of Interest 60 The Fisher Equation 60 Simple Interest 64 Compound Interest 66 Properties 68 A Symbolic Derivation 71 Principle of Equivalency 72 Continuous Compounding 73 Future Value 74 Present Value 76 Handling a Series of Cash Flows 77 The Internal Rate of Return 79 Evaluating an Investment 79 Annuities: An Introduction 82 Perpetuities 87 The Amortization Method 88 Amortization with a Balloon Payment 91 The Equal Principal Repayment Approach 92 Types of Interest Computation 93 Loans with a Compensating Balance 94 Chapter 3 Equity Shares, Preferred Shares, and Stock Market Indexes 97 Introduction 97 Par Value versus Book Value 99 Voting Rights 100 Statutory versus Cumulative Voting 101 Proxies 101 Dividends 102 Dividend Yield 104 Dividend Reinvestment Plans 105 Stock Dividends 106 Treasury Stock 107 Splits and Reverse Splits 108 Costs Associated with Splits and Stock Dividends 110 Preemptive Rights 110 Interpreting Stated Ratios 113 Handling Fractions 113 Physical Certificates versus Book Entry 114 Tracking Stock 115 Report Cards 115 Types of Stocks 115 Risk and Return and the Concept of Diversification 116 Preferred Shares 119 Callable Preferred Stock 120 Convertible Preferred Shares 121 Cumulative Preferred Shares 122 Adjustable Rate Preferred Shares 124 Participating Preferred Shares 125 Dividend Discount Models 125 A General Valuation Model 125 The Constant Growth Model 126 The Two-Stage Model 127 The Three-Stage Model 128 The H Model 130 Stock Market Indexes 131 Price-Weighted Indexes 131 Changing the Divisor 133 The Importance of Price 135 Value-Weighted Indexes 136 Changing the Base-Period Capitalization 139 Equally Weighted Indexes 140 Tracking Portfolios 141 The Free-Floating Methodology 149 Well-Known Global Indexes 150 Margin Trading and Short Selling 150 Terminology 150 Maintenance Margin 156 Regulation T and NYSE and NASD Rules 157 Short Selling 157 Chapter 4 Bonds 167 Valuation of a Bond 170 Par, Premium, and Discount Bonds 172 Evolution of the Price 173 Zero-Coupon Bonds 175 Valuing a Bond in between Coupon Dates 176 Day-Count Conventions 177 ActualActual 177 The Treasury's Approach 179 Corporate Bonds 180 Accrued Interest 181 Yields 183 Taxable-Equivalent Yield 192 Credit Risk 194 Bond Insurance 195 Equivalence with Zero-Coupon Bonds 195 The Yield Curve and the Term Structure 199 Bonds with Embedded Options 206 Price Volatility 211 Duration and Price Volatility 214 Dollar Duration 215 Convexity 215 Treasury Auctions 219 When Issued Trading 223 Price Quotes 223 Bond Futures 224 STRIPS 225 Chapter 5 Money Markets 227 Introduction 227 Market Supervision 231 The Interbank Market 234 Interest-Computation Methods 238 Term Money Market Deposits 240 Federal Funds 240 Correspondent Banks: Nostro and Vostro Accounts 242 Payment Systems 243 Fed Funds and Reserve Maintenance 244 Treasury Bills 245 Yields on Discount Securities 246 Discount Rates and T-Bill Prices 247 Primary Dealers and Open-Market Operations 257 Commercial Paper 271 Letters of Credit and Bank Gu
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