Financial Management - Lecture 06

this is the bond market the bond market is for long-term instruments it is on for capital market so these are the instruments Treasury Treasury notes and bonds technically Treasury note it has a maturity from one to ten years and we talked about the Treasury bond the Treasury bond has a maturity of more than ten years most and bonds have exactly the same characteristics coupon interest rate and everything else except young differences to maturity we make the difference to make clear we call this intermediate term we call these long term and one are built so a very nice question for the quiz will be what's difference between identified okay that's a simple easy straightforward question they're all the other characteristics that we discussed about Treasury bills the difference is the maturity next one we'll be making a little bit reshuffling a little bit from the table to fit these into the bond market so next one will be municipal bonds ah bonds issued by state and local governments now very important to take another municipal bond is not issued by a municipality yes is a local government [Music] minister will include a state it will also include County so it could be a very small school district County it could be issued by city okay so it is issued by any type of local government except for the central is a municipal number nothing we call these agency debts or agency agency that most commonly the agency bonds these are issued by federal agencies a federal agency is a government part government institution that has specific purpose the purpose may be to stimulate housing provide affordable housing it may be to industrialized economy or it may be to stimulate if your industry education industry healthcare industry in general it's an agency created by the government it is a government agency with any particular purpose like social purpose and they will issue their own laws and the agency will be responsible for the payments but time is thought or belief that it has the visible backing of the central government so they're almost as good as government knows advance but not exact just slightly worse let's see the next one's called corporate corporate these are bonds issued by corporations including commercial banks so commercial banks will have short term instruments like seaweed or commercial paper but the long term insulins of the commercial bank is still a corporate bond so these are issued by corporations or other financial institutions including insurance companies and so so these or these [Music] and there will be a special mark khalsa mortgage market a mortgage is a loan secured by real estate secured by real estate now it is not as most people think incorrectly that it is a loan for the purchase of real estate no not true a mortgage is a loan secured by real estate you can go in on vacation you borrow my on vacation is security for the house or it may be medical law is going to be made of hospital for your liver or kidney or whatever medical procedure you need to do maybe you need ten thousand a lot of money and you're gonna have a mortgage loan in gonna mortgage the house okay so mortgages are secured with real estate real estate is usually the Walton houses so that's the mortgage mortgages are traded on the mortgage markets occasionally mortgages may be packaged together in a mortgage applause [Music] and mortgage bond is a bond secured with mortgage loans could be part of the securitization you don't need in this clause just means understand the fundamental idea of a mortgage okay now lows can be let's go back here acid we called let's do this is called collateral collateral is an asset which secures below the collateral could be financial ticket for the dollar yes you can secure along you can secure it [Music] so go now gold is considered a financial instrument than a financial asset so you can say financial it could be with real assets real assets will be machines equipment laptop taxi special train something else which is different and again don't confuse real assets with real estate the difference between real asset in real estate is whether you can move it or not machine you can move truck you can move crane you can move blame you cannot move now the technical definition of real estate is whether you can move it without structurally breaking it yes you can move your house from this place when you have to under the house have to bring the house so real estate is you cannot move it without real assets you can so these all and when the Corrado is [Music] let's see anything else so this for these stocks common and 13 prefer preferred stock these are jointly traded on the stock market all right so what is it common stock Carmen stop refers to the pure ownership of a corporation it is a claim on the burnings in assets of the corporation the key I was explaining residual claim stock gives you a residual claim residual pain means a claim on assets and in good after all our publications have been paid in other words it's a residual whatever is left over after you get paid like everything else so it's a residual thing so that's the boost trying of a stock the second very important characteristic is Fulton as a halting price a stock owner as for each share the right to vote in fact if the shares have 50 voting rights mm mm voting rights and usually you both look all extremely important decisions making merger acquisition whatever else but the most common use for these are the people with the supreme authority in your company which act on behalf of shareholders and make all the strategic acquisition make major investments now the representatives so corporate executive executives a high-ranking officer in the corporation so these so okay so these are the two primary characteristic there are others but that's not import stock is also known I explained as we can get back forward let's see what else we have here Carlos stop is very kind to get that very very very risky okay you can lose a lot of money in common stock you can technically lose all of your money whose mortgages are as risky as real estate until recently most people believe for some reason stranded that real estate is safe and always goes up it never goes down well reality has always ruled is to be wrong the United States all the way four hundred years in the nineteen and tended to eleven really state crashes during the 20th century had five or six major real estate crash real estate crashes regularly in China regularly in Japan regularly in Europe in general real estate crash is practically anywhere in the world on a regular basis and sometimes it may recover through year sometimes may take ten years to recover sometimes it may take hundred years to recover occasionally but bro were Italian real estate which was very expensive you know two thousand years ago as the Roman Empire crashed it couldn't recover for another thousand years again mortgages aren't just as risky as the real ways death in real estate that that's all of these the risk depends on the we call it credit worthiness of the issue Treasury supposed to be extremely low to no purpose municipal are sometimes very low risk a lot of times they're very tiring sometimes states and local governments they go back with it sometimes they get bailed out so investors could lose money parties angels event is considered to be very low because it's presumed that there is some guarantee by the central government if they go that the central government will bail them out with corporate bonds it's a little trickier usually it depends of the companies standing position in alcohol financial position but it will depend on whether the government will be willing to bail out the company like Ford or GM if the corporation is strategic or considered to be strategic for jobs employment national security or military ambassador contracts the government will so all of this is factored into the risk of default and there are other restaurants tourism risk all other risk all of the discussed is the one Rezac which I introduced out there which is Balthus let's see what else preferred stock as a dividend now here okay not let me write this one free is dividend the stockholder the share color is in only in the morning of directors declared them but the Board of Directors does not have to be clear if they got sufficient profits in their sufficient amount of money left over they're distributed as a dividend but the dividend is not required in the dividend is not guaranteed just because you bought a company so think that in a workday the dividend before that they will continue to pay you to the company desires and wants to keep the money all right so going back to pretty common which is easier than the vein to common stock and they prefer prefer that which is dividend and preferred dividend is usually stated or declare it's given preferred dividend will be let's say 7% so preferred dividend or preferred stock as a somewhat guaranteed percentage and here's the trick sometimes the company may sometimes so if the company has money it will have to pay but here's the trick is where the prefer this is the people prefer preferred dividend means that all preferred dividend must be paid in full before a common dividend so long has a higher develop must be and usually preferred said for all stevie has the property of being to you'll addition the following if it is humility in the sense of everything that wasn't me in the past must be eventually made before when when the dividend is not think we say that you skip but then skip means one so skipping preferred dividend the payments accumulate be and they must be eventually now preferred stock is called a remember where all right somewhere here I will depth and some instruments will have characteristics both at the same time preferred stock is such it is an equity if the residual plane but at the same time they may get the imminent they may not get the dividend okay so it's just like the stock but at the same time it's got a 7% in with single water or a quarter of 70% so it's that characteristics of a fixed same as Nutella characteristic of equity we call this security hybrid hi so hybrid security or hybrid instrument is instrument wind characteristics of so it's kind of like in between as a characteristic alright so preferred stock going that is usually usually even in the next book written above and these are in terms of liquidity in terms of maturity these are the shorter term these are the longer term the notes may be considered intermediate and these have typically no maturity so I can write extra no maturity and we call this the stock on this a stock market now notice that we also call it equity market and these you are exactly the same thing they are just two different words in two different names for exactly the same thing so don't think that stock market is different from the equity market just a different name okay usually supposedly one was more of a British the other one was more of an American okay just like stock is sometimes called share both represent let's see what else I have for today so far when there is a default when there is a default and the borrower cannot be the borrower cannot be the procedure for creditors to get their money back you go to the court okay and there is a special type of form called bankruptcy and the procedure is called a bankruptcy bankruptcy is the company in default for inability to service your debt so that's the one leading of bankers a second meaning of bankruptcy is a claim in the court on default or in a minute so the bankruptcy can be considered is in the returns these are short disturbed and highest liquidity so the return of these is the lowest these have a relatively low return because they have relatively low risk this is with one of the basic principles that we discussed in Chapter one that there's a direct correlation between risk and return though the risk the lower the return so these are lower default risk and lower liquidity risk and they fall they have the lowest returns their bonds are somewhat higher somewhat higher price changes some up higher risk of default you don't know whether the government let's say the state of California 3 or 10 years will be bankrupt or not you don't know if they'll be President next week or this week so a lot of times they may be political situations where the government may decide not to pay or the local government has no ability to pay the central common-sense novela so these are relatively higher and higher risk and therefore the highest risk is which stocks equity presents significantly high risk and the expected return is also higher and there will be times we're going to make a lot more money meaning about high return times you have business in business where you have an economic business when you make money the money that you make is called profit profit is associated with business operation is associated with buy and [Music] for increase in associated with financial purchasable is associated with business and economic activity traffic is strictly associated with revenue which is a sale to a customer you can sell any product organ selling service and revenues and expenses okay let's see what else I have so that we finish birth today I want to complete very this chapter alright [Music] there's a little section here I will [Music] let's discuss the next part of this conversation securitisation is the process of bundling a number of financial instruments together and then slicing it into pieces so securitization is you get one two mortgages you put them together more mortgages that say take mortgages you pull them together and then you slice them so you get okay well you can do like this okay we pull this together and you get one slice two three so if you get 1/8 of a slice you invest in this particular slice but this life is all these eight together / / is what's the difference the difference is that here this may warm up is one risk okay but if you pulled it all together now you pull these risks together it's not very likely but all eight or seven four six will be so you pull the risk together please sometimes they like to call this is it's a strength not a financial term if the common slice-and-dice just slicing and dicing securities but you first have to pull them together before you slice them in dice okay so that's the process of securitisation let's see what else I have financial instruments financial crisis or when your slice and nice mortgages we call these and so I can add these here but I can do separately mvs standing for mortgage mortgage balance mortgage-backed security so you usually secure this you pull them together and then you slice them into thousand dollar pieces and they become a mortgage back securities okay it could be the particular security could be mortgage back which is a financial crisis global financial crisis was related to real estate mortgages in real estate mortgage loans where everybody went crazy about buying real estate because they all believe that real estate prices go up up forever which was totally they all believe that real estate was safe and secure that it never goes down but historically you know all this goes down after and 20 or so many years and really stick like any other business has any people decided to borrow so they borrowed too much and financial institution is basically decided to land wealth when people default the financial institution goes literally bankrupt and it's as simple as that again the problem is that the story is extremely complicated takes you about one or two weeks to teach the whole subject properly to understand then to understand the crisis to understand the consequences and see why and why and how they put it here early on in Chapter two so I will not be asking anything related to the global financial crisis except the part of the chapter which is related to financial instruments such as well as securities you are expected for this chapter the financial institutions then maybe other markets all right the new red you're not expected to learn now they call them derivative markets and derivative markets are associated with financial financial instruments called derivatives [Music] so now 15 peas will be all the names are not expected to know for this examine for this course most likely they will come a lot later in the second part and maybe maybe not options 16 is called futures 17 is called swaps given a commodity swaps commodity interest currency futures currency objects currency swaps markets top story derivative instruments in these derivative instruments are so again if I have to summarize the most important part list of financial instruments when you know the financial instruments the markets are simply where the instruments are traded and the financial institutions are usually associated with these instruments especially those here the investment time let's see what else I had so we complete for today that's it that's everything your is so before within all the material up until it's article including chapter one and including chapter two will be on the quiz where's number one so where's number one will include these two chapters next time next week I'll continue with number one will be what these do we have we start testing so so it's a web classes on Tuesdays Tuesdays and Thursdays in what this week for week four is like the week after and the molasses or 21st 22nd a second 22nd [Music] [Music] my face again that's very important to report so November 22nd Tuesday which is one chapter 110 percent okay that should be about seven eight possibly they're all questions like what are the common characteristics of money market instruments and that's a harder question the simpler question is what is commercially explained commercially what is a corporate law which bar the main types of laws in that the city's Treasury it may define and explain the main types of private equity firms they say venture capital and explain to leveraged buyout on display so most of the questions will ask for only you want simple explanations but some of the carbon but yes two or possibly three okay I may ask a little trickier question what's the difference between mutual funds and henchman okay but what's the difference yet where there collect alms this one skip trickier question is now I could have added over here now but then looked required in this class no questions about it central ok so these are the types of questions that you should expect from number two now let's go back to number surah chapter somewhere one is okay whoa what is my waist my side okay what's the benefit of studying items all right explain the three main types of business organizations so you got okay okay and probably most questions from chapter one will come on section four the five basic principle what does it mean what is the risk return trade-off if you have real estate the only better real estate passivist the cash flow statement with entire defied the rest which the property can generate in rats go up in breaths go down and they go down with economy they can go down with the neighborhood they can go down with cry you know there are ten four hundred reasons why cash flows of property can fall campaign and yes individual response to investors as pretty much in all right [Music]

Channel: Krassimir Petrov

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Length: 46min 14sec (2774 seconds)

Published: Mon Nov 07 2016