十
二
Asset
Valuation: Market and Instruments
1: Preliminary Reading Selecting Investments in Global Market
a: Discuss the characteristics of fixed-income securities available to investors, including US
Treasury securities, corporate bonds, and Eurobonds.
Fixed income investments have a contractual repayment schedule. By purchasing a fixed-
income security, you are lending money to the issuer. The money lent out is called the
principal. In return, the borrower promises to make periodic interest payments and, at
maturity, pay back the principal.
U.S. Treasury securities are bills, notes, and bonds. Government obligations are considered
riskless because there is little chance of default, and they are very liquid.
Corporate bonds are fixed-income securities issued by businesses. The bond’s indenture
lists the terms of the loan, which includes the payment schedule and any call or refunding
provisions that allow the bond to be redeemed prior to maturity. The indenture also specifies
sinking fund provisions. These require the issuer to redeem a given percentage of the
outstanding issue prior to maturity to protect the bondholders. Bonds are generally
categorized by the type of security they offer their holders.
A Eurobond is an international bond denominated in a currency other than that of the country
where the bond is issued. Eurobonds include Eurodollar bonds and Euroyen bonds. A
Eurodollar bond is denominated in U.S. dollars and sold outside the U.S. to non-U.S.
investors.
b: Discuss the characteristics of equity securities available to investors, including classes of stock
and American Depository Receipts.
Common stock represents ownership of the firm. Owners of the common stock of a firm
share in the company’s successes and failures. Investing in common stock is a relatively risky
investment compared with fixed-income securities.
Common stock classifications:
1.
By industry: Industrial, utilities, transportations, and financial institutions.
2.
By domestic versus foreign.
Buying foreign equities:
1.
Purchase of American Depository Receipts (ADRs). ADRs are shares issued by U.S.
banks representing an ownership interest in the actual shares, which are held in
deposit in a bank in the issuing firm’s country.
2.
Purchase of American shares. American shares are securities issued in the U.S. by a
transfer agent acting on behalf of a foreign firm.
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