Handbook of finance financial markets and instruments pdf


    Volume I: Financial Markets and Instruments skillfully covers the general characteristics of different asset classes, derivative instruments, the markets in which. View Table of Contents for Handbook of Finance Volume 1: Financial Markets and Instruments skillfully covers the general characteristics of. and fixed-income securities, the properties of financial markets, the gen- . The Handbook of Financial Instruments provides the most compre- hensive coverage ital Asset Prices,” Journal of Finance (September ), pp.

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    Handbook Of Finance Financial Markets And Instruments Pdf

    Dr. Frank J. Fabozzi, PhD, CFA (New Hope, PA) is Professor in the Practice of Finance at Yale University's School of Management and the Editor of the Journal . June 25, HANDBOOK OF FINANCE VOLUME I Financial Markets and Instruments Frank J. Fabozzi Editor John Wiley & Sons. The Handbook of Fixed Income Securities - Frank diadurchgakiddto.gq . Financial Analysis Indenture Provisions Utilities Finance Companies . Part 3 covers bonds (domestic and foreign), money market instruments, and structured.

    The holder of a zero-coupon instrument realizes interest income by downloading it substantially below its par value. Interest then is paid at the maturity date, with the interest earned by the investor being the difference between the par value and the price paid for the debt instrument. So, for example, if an investor downloads a zero-coupon instrument for 70, the interest realized at the maturity date is This is the difference between the par value and the price paid There are bonds that are issued as zero-coupon instruments. Moreover, in the money market there are several types of debt instruments that are issued as discount instruments. There is another type of debt obligation that does not pay interest until the maturity date.

    Philip Giles First Published: Monetary Policy: Jones Ellen J.

    Rachlin First Published: Thompson Edward E. Williams M. Chapman Findlay First Published: Investment Banking K. Thomas Liaw First Published: Tools License this reference work. Email or Customer ID. Forgot password? Old Password. New Password. Your password has been changed. Feibel Frank J. Fabozzi Derivatives Valuation Mathematics of Finance Filippo Stefanini Robust Portfolio Optimization Koray D.

    Simsek Dessislava A. Pachamanova, Petter N. William S. Bernstein President, Peter L. Bernstein Inc. Chris P. Mahmoud A. Dorsey D. George P. Christian Menn, Dr. Associate, Sal. Oppenheim Jr.

    Schwartz, PhD Marvin M. Lee R. Bruce W. Structured Finance Ltd.

    There are handbooks on corporate financial management, financial instruments, portfolio strategies, structured finance, capital budgeting, derivatives, and the list goes on. But to truly understand financial markets throughout the world, it is necessary to understand how financial decision makers— such as corporate treasurers, chief financial officers, portfolio managers, traders, and security analysts—make decisions and the tools that they employ in doing so.

    From that perspective, the idea for this handbook was conceived. Finance is the application of economic principles and concepts to business decision making and problem solving. The field of finance can be considered to comprise three broad categories: The field of financial markets and instruments deals with the role of financial markets in an economy, the structure and organization of financial markets, the efficiency of markets, the role of the various players in financial markets i.

    Financial management, sometimes referred to as business finance, is the specialized field in finance that is concerned primarily with financial decision-making within a business entity and encompasses many different types of decisions. While financial management is sometimes referred to as corporate finance, the principles are applied to the management of municipalities and nonprofit profit entities. We can classify financial management decisions into two groups: Investment decisions are concerned with the use of funds— the downloading, holding, or selling of all types of assets.

    Basically, the types of assets acquired are either working capital, such as inventory and receivables, or long-term assets. Decisions involving the former are called working capital decisions and those involving the latter are called capital budgeting decisions.

    Financing decisions are concerned with the acquisition of funds to be used for investing and financing day-to-day operations. This decision is referred to as the dividend decision. Whether a financial decision involves investing or financing, the core of the decision will rest on two specific factors: Expected return is the difference between potential benefits and potential costs. Risk is the degree of uncertainty associated with the expected returns.

    Investment management is the area of finance that focuses on the management of portfolios of assets for institutional investors and individuals.

    The activities involved in investment management, also referred to as asset management, include working with clients to set investment objectives and an investment policy to accomplish those objectives, the selection a portfolio strategy consistent with the investment objectives and investment policy, and the construction of the specific assets to include in a portfolio based on the portfolio strategy. Investment management begins with the decision as to how to allocate funds across the major asset classes e.

    This decision, referred to as the asset allocation decision, requires a thorough understanding of the expected returns and risks associated with investing in a specific asset class.

    Again, we see the importance of understanding expected return and risk. These three general areas use theories and analytical tools developed in other disciplines. For example, theories about the pricing of assets and the determination of interest rates draw from theories in economics.

    In fact, many academics refer to finance as financial economics. The complex nature of financial markets requires a finance professional to draw from the fields of statistics and econometrics in order to describe the movement in asset prices and returns, as well as to obtain meaningful measures of risk. The field of financial risk management, used both in financial management and investment management, employ these tools.

    These same tools are used by investment managers in formulating and testing potential strategies and in the valuation pricing of complex financial instruments known as derivatives. Managers also use simulation models, a tool of operations research, in a variety of activities that involve corporate and investment decisions. Financial engineering, sometimes referred to as mathematical finance, is the relatively new specialized field in finance that uses statistical and mathematical tools to deal with problems in all areas of finance and risk management.

    While there are handbooks that address specialized areas within finance, the purpose of this three-volume handbook is to cover all of the areas mentioned above and is intended for professionals involved in finance, as well as the student of finance. This three-volume handbook offers coverage of both established and cutting-edge theories and developments in finance. It contains chapters from global experts in industry and academia, and offers the following unique features: This diverse collection of expertise has created the most definitive coverage of established and cutting-edge financial theories, applications, and tools in this ever-evolving field.

    The series emphasizes both technical and managerial issues. This approach provides researchers, educators, students, and practitioners with a balanced understanding of the topics and the necessary background to deal with issues related to finance. Each chapter follows a format that includes the author, chapter abstract, keywords, introduction, body, summary, and references.

    This enables readers to pick and choose among various sections of a chapter and creates consistency throughout the entire handbook. Each chapter provides extensive references for additional readings, enabling readers to further enrich their understanding of a given topic. Numerous illustrations and tables throughout the work highlight complex topics and assist further understanding. Each chapter provides cross-references within the body of the chapter.

    This helps readers identify other chapters within the handbook related to a particular topic, which provides a one-stop knowledge base for a given topic. Preface r Each volume includes a complete table of contents and index for easy access to various parts of the handbook. There was no simple formula. The decision involved feedback from practitioners, academics, and graduate students.

    The final allocation to the three volumes was as follows. Volume I Financial Markets and Instruments covers the general characteristics of the different asset classes, derivative instruments, the markets in which financial instrument trade, and the players in the market. Topics include: This reference work consists of three separate volumes and chapters. Each chapter provides a comprehensive overview of the selected topic intended to inform a broad spectrum of readers ranging from finance professionals to academicians to students to the general business community.

    To derive the greatest possible benefit from the Handbook of Finance, we have provided this guide. It explains how the information within the handbook can be located. The material is broken down into three distinct volumes: This list of titles represents topics that have been carefully selected by the editor, Frank J.

    The Preface includes a more detailed description of the volumes and parts the chapters are grouped under. The subjects in the index are listed alphabetically and indicate the volume and page number where information on this topic can be found.

    All chapters in the handbook are organized according to a standard format, as follows: The outline is intended as an overview and thus lists only the major headings of the chapter. Lower-level headings also may be found within the chapter. Abstract The abstract for each chapter gives an overview of the topic, but not necessarily the content of the chapter. This is designed to put the topic in the context of the entire handbook, rather than give an overview of the specific chapter content.

    Keywords The keywords section contains terms that are important to an understanding of the chapter. Introduction The text of each chapter begins with an introductory section that defines the topic under discussion and summarizes the content. By reading this section, the reader gets a general idea about the content of a specific chapter. Summary The summary section provides a review of the materials discussed in each chapter.

    It imparts to the reader the most important issues and concepts discussed. References The references section lists both publications cited in the chapter and secondary sources to aid the reader in locating more detailed or technical information. Review articles and research papers that are important to an understanding of the topic are also listed. The references provide direction for further research on the given topic.

    Broadly speaking, an asset is any possession that has value in an exchange. Assets can be classified as tangible or intangible. A tangible asset is one whose value depends on particular physical properties—examples are buildings, land, and machinery. Assets, by contrast, represent legal claims to some future benefit.

    Their value bears no relation to the form, physical or otherwise, in which these claims are recorded. Financial assets, also referred to as financial instruments, are intangible assets.

    For financial assets, the typical benefit or value is a claim to future cash. Financial markets play a key role in the financial system of all economies. In most economies financial instruments are created and subsequently traded in some type of financial market. In this chapter, an overview of the instruments both cash and derivative instruments , issuers, and investors is provided. The role of financial assets and financial markets are also explained. Here are seven examples of financial instruments: A bond issued by the U.

    Department of the Treasury. A bond issued by Nike Inc. A bond issued by the city of San Francisco. A bond issued by the government of Australia. A share of common stock issued by Caterpillar, Inc. A share of common stock issued by Toyota Motor Corporation, a Japanese company. The payments include repayment of the amount borrowed plus interest. The cash flow for this asset is made up of the specified payments that the borrower must make.

    In the case of a U. Treasury bond, the U. The same is true for the bonds issued by Nike Inc. In the case of Nike, Inc. In the case of the city of San Francisco, the issuer is a municipal government.

    The issuer of the Australian government bond is a central government. The common stock of Caterpillar, Inc.


    The investor in this case also has a claim to a pro rata share of the net asset value of the company in case of liquidation of the company. The same is true of the common stock of Toyota Motor Corporation. There are features of debt instruments that are common to all debt instruments and they are described below. In later chapters, there will be a further discussion of these features as they pertain to debt instruments of particular issuers.

    Maturity The term to maturity of a debt obligation is the number of years over which the issuer has promised to meet the conditions of the obligation. At the maturity date, the issuer will pay off any amount of the debt obligation outstanding. The market for debt instruments is classified in terms of the time remaining to its maturity. A money market instrument is a debt instrument which has one year or less remaining to maturity. Debt instruments with a maturity greater than one year are referred to as a capital market debt instrument.

    When the contractual arrangement is one in which the issuer agrees to pay interest and repay the amount borrowed, the financial instrument is said to be a debt instrument. The car loan, the U. Treasury bond, the Nike Inc. In contrast to a debt obligation, an equity instrument obligates the issuer of the financial instrument to pay the holder an amount based on earnings, if any, after the holders of debt instruments have been paid.

    Common stock is an example of an equity claim. A partnership share in a business is another example. Some securities fall into both categories in terms of their attributes. Preferred stock, for example, is an equity instrument that entitles the investor to receive a fixed amount. This payment is contingent, however, and due only after payments to debt instrument holders are made. Both debt instruments and preferred stock are called fixed-income instruments. Debt instruments include loans, money market instruments, bonds, mortgage-backed securities, and asset-backed securities.

    In the chapters that follow, each The par value of a bond is the amount that the issuer agrees to repay the holder of the debt instrument by the maturity date. This amount is also referred to as the principal, face value, or maturity value. Bonds can have any par value. Because debt instruments can have a different par value, the practice is to quote the price of a debt instrument as a percentage of its par value.

    The dollar amount of the payment, referred to as the coupon interest payment or simply interest payment, is determined by multiplying the coupon rate by the par value of the debt instrument. The frequency of interest payments varies by the type of debt instrument. In the United States, the usual practice for bonds is for the issuer to pay the coupon interest in two semiannual installments.

    Mortgage-backed securities and asset-backed securities typically pay interest monthly. For bonds issued in some markets outside the United States, coupon payments are made only once per year. Loan interest payments can be customized in any manner. Zero-Coupon Bonds Not all debt obligations make periodic coupon interest payments.

    Debt instruments that are not contracted to make periodic coupon payments are called zero-coupon JWPRFabozzi c01 June 24, 9: The holder of a zero-coupon instrument realizes interest income by downloading it substantially below its par value. Interest then is paid at the maturity date, with the interest earned by the investor being the difference between the par value and the price paid for the debt instrument. So, for example, if an investor downloads a zero-coupon instrument for 70, the interest realized at the maturity date is This is the difference between the par value and the price paid There are bonds that are issued as zero-coupon instruments.

    Moreover, in the money market there are several types of debt instruments that are issued as discount instruments. There is another type of debt obligation that does not pay interest until the maturity date. This type has contractual coupon payments, but those payments are accrued and distributed along with the maturity value at the maturity date.

    Handbook of Finance

    These instruments are called accrued coupon instruments or accrual securities or compound interest securities. Floating-Rate Securities The coupon rate on a debt instrument need not be fixed over its life. Floating-rate securities, sometimes called floaters or variable-rate securities, have coupon payments that reset periodically according to some reference rate.

    The typical formula for the coupon rate on the dates when the coupon rate is reset is: The quoted margin is expressed in terms of basis points. A basis point is equal to 0. Suppose that the quoted margin is basis points. Then the coupon reset formula is: The reference rate for most floating-rate securities is an interest rate or an interest rate index.

    There are some issues where this is not the case. Instead, the reference rate is the rate of return on some financial index such as one of the stock market indexes. There are debt obligations whose coupon reset formula is tied to an inflation index.

    Typically, the coupon reset formula on floating-rate securities is such that the coupon rate increases when the reference rate increases, and decreases when the reference rate decreases.

    There are issues whose coupon rate moves in the opposite direction from the change in the reference rate. Such issues are called inverse floaters or reverse floaters. The maximum coupon rate is called a cap. Because a cap restricts the coupon rate from increasing, a cap is an unattractive feature for the investor.

    In contrast, there could be a minimum coupon rate specified for a floating-rate security. The minimum coupon rate is called a floor. If the coupon reset formula produces a coupon rate that is below the floor, the floor is paid instead. Thus, a floor is an attractive feature for the investor. Such bonds are said to have a bullet maturity.

    An issuer may be required to retire a specified portion of an issue each year. This is referred to as a sinking fund requirement. There are loans that have a schedule of principal repayments that are made prior to the final maturity of the instrument.

    Such debt instruments are said to be amortizing instruments. The same is true for mortgage-backed and most asset-backed securities because they are backed by pools of loans. There are debt instruments that have a call provision. Some issues specify that the issuer must retire a predetermined amount of the issue periodically. Various types of call provisions are discussed below. Call and Refunding Provisions A borrower generally wants the right to retire a debt instrument prior to the stated maturity date because it recognizes that at some time in the future the general level of interest rates may fall sufficiently below the coupon rate so that redeeming the issue and replacing it with another debt instrument with a lower coupon rate would be economically beneficial.

    This right is a disadvantage to the investor since proceeds received must be reinvested at a lower interest rate. As a result, a borrower who wants to include this right as part of a debt instrument must compensate the investor when the issue is sold by offering a higher coupon rate. The price that the borrower must pay to retire the issue is referred to as the call price. Prepayments For amortizing instruments—such as loans and securities that are backed by loans—there is a schedule of principal repayments but individual borrowers typically have the JWPRFabozzi 6 c01 June 24, 9: Any principal repayment prior to the scheduled date is called a prepayment.

    The right of borrowers to prepay is called the prepayment option. Basically, the prepayment option is the same as a call option. The most common type of embedded option is a call feature, which was discussed earlier. This option is granted to the issuer. There are two options that can be granted to the owner of the debt instrument: A debt instrument with a put provision grants the investor the right to sell the issue back to the issuer at a specified price on designated dates.

    The specified price is called the put price. A convertible debt instrument is one that grants the investor the right to convert or exchange the debt instrument for a specified number of shares of common stock. Although the existence of a financial market is not a necessary condition for the creation and exchange of a financial instrument, in most economies financial instruments are created and subsequently traded in some type of financial market.

    The market in which a financial asset trades for immediate delivery is called the spot market or cash market. The other type of financial market is called a derivatives market. Role of Financial Markets Financial markets provide three major economic functions. First, the interactions of downloaders and sellers in a financial market determine the price of the traded asset. Or, equivalently, they determine the required return on a financial instrument. Because the inducement for firms to acquire funds depends on the required return that investors demand, it is this feature of financial markets that signals how the funds in the financial market should be allocated among financial instruments.

    This is called the price discovery process. Second, financial markets provide a mechanism for an investor to sell a financial instrument. If there were not liquidity, the owner would be forced to hold a financial instrument until the issuer initially contracted to make the final payment that is, until the debt instrument matures and an equity instrument until the company is either voluntarily or involuntarily liquidated.

    Capital Markets, Financial Management, and Investment Management - PDF Drive

    While all financial markets provide some form of liquidity, the degree of liquidity is one of the factors that characterize different markets. The third economic function of a financial market is that it reduces the cost of transacting. There are two costs associated with transacting: The presence of some form of organized financial market reduces search costs.

    Information costs are costs associated with assessing the investment merits of a financial instrument, that is, the amount and the likelihood of the cash flow expected to be generated. In a price efficient market, prices reflect the aggregate information collected by all market participants. Classification of Financial Markets There are many ways to classify financial markets. One way is by the type of financial claim, such as debt markets and equity markets. Another is by the maturity of the claim.

    For example, the money market is a financial market for short-term debt instruments; the market for debt instruments with a maturity greater than one year and equity instruments is called the capital market. Financial markets can be categorized as those dealing with financial claims that are newly issued, called the primary market, and those for exchanging financial claims previously issued, called the secondary market or the market for seasoned instruments.

    Markets are classified as either cash markets or derivative markets. The latter is described later in this chapter. A market can be classified by its organizational structure: It may be an auction market or an over-the-counter market. With some financial instruments, the contract holder has either the obligation or the choice to download or sell a financial instrument at some future time. The price of any such contract derives its value from the value of the underlying financial instrument, financial index, or interest rate.

    Consequently, these contracts are called derivative instruments. The primary role of derivative instruments is to provide an inexpensive way of protecting against various types of risk encountered by investors and issuers. Unfortunately, derivative instruments are too often viewed by the general public—and sometimes regulators and legislative bodies—as vehicles for pure speculation that is, legalized JWPRFabozzi c01 June 24, 9: Without derivative instruments and the markets in which they trade, the financial systems throughout the world would not be as efficient or integrated as they are today.

    A May report published by the U. Actions Needed to Protect the Financial System recognized the importance of derivatives for market participants. Page 6 of the report states: Derivatives serve an important function of the global financial marketplace, providing end-users with opportunities to better manage financial risks associated with their business transactions. The rapid growth and increasing complexity of derivatives reflect both the increased demand from end-users for better ways to manage their financial risks and the innovative capacity of the financial services industry to respond to market demands.

    Some debt instruments may have call, put or conversion provisions. An equity instrument obligates the issuer of the financial instrument to pay the holder an amount based on earnings, if any, after the holders of debt instruments have been paid.

    Financial markets provide three major economic functions: Financial markets are classified as cash spot markets and derivative markets. A futures contract or forward contract is an agreement whereby two parties agree to transact with respect to some financial instrument at a predetermined price at a specified future date. One party agrees to download the financial instrument; the other agrees to sell the financial instrument. Both parties are obligated to perform, and neither party charges a fee.

    An option contract gives the owner of the contract the right, but not the obligation, to download or sell a financial instrument at a specified price from or to another party. The downloader of the contract must pay the seller a fee, which is called the option price. When the option grants the owner of the option the right to download a financial instrument from the other party, the option is called a call option. If, instead, the option grants the owner of the option the right to sell a financial instrument to the other party, the option is called a put option.

    Derivative instruments are not limited to financial instruments. In this handbook we will describe derivative instruments where the underlying asset is a financial asset, or some financial benchmark such as a stock index or an interest rate, or a credit spread. These include swaps, caps, and floors. SUMMARY Financial instruments can be classified by the type of claim that the holder has on the issuer debt and equity and cash and derivative instruments.

    With debt instruments there is an interest rate that is specified by contract. It could be a fixed interest rate or a floating interest rate. Handbook of Inflation Indexed Bonds. Hoboken, NJ: Fabozzi, F. Investing in Asset-Backed Securities. Investing in Commercial MortgageBacked Securities. The Handbook of Financial Instruments. The Handbook of Fixed Income Securities, 7th edition.

    New York: The Handbook of Mortgage-Backed Securities, 6th edition. Capital Markets: Institutions and Instruments, 3rd edition. Upper Saddle River, NJ: Prentice Hall. Foundations of Financial Markets and Institutions, 3rd edition. Investing in Emerging Fixed Income Markets. The investment management process involves five steps: The investment process involves the analysis of the investment objectives of the entity whose funds are being invested. Given the investment objectives, an investor must then establish policy guidelines to satisfy the investment objectives.

    This phase begins with the decision as to how to allocate funds across the major asset classes and requires a thorough understanding of the risks associated with investing in each asset class.

    Incorporating timely research and in-depth analysis, the Handbook of Finance is a comprehensive 3-Volume Set that covers both established and cutting-edge theories and developments in finance and investing.

    Other volumes in the set: Handbook of Finance Volume II: Valuation, Financial Modeling, and Quantitative Tools. This item: Undetected country. NO YES.

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