2. Assets and Contracts
b. describe classifications of assets and markets;
c. describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes;
What are the six categories of assets and contracts?
4. derivatives (contracts)
6. real estate
What is a fixed-income investment?
These have a contractually mandated payment schedule. Their investment contacts promise specific payments at predetermined times.
What is a preferred stock security?
Preferred stock is classified as a fixed-income security because its yearly payment is stipulated as either a coupon (e.g., 5% of the face value) or a stated dollar amount.
What are equities?
Equities represent residual ownership in companies after all claims-including any fixed-income liabilities of the company - have been satisfied.
What are common stocks?
Common stocks represent ownership of a firm. Owners of the common stock of a firm share in the company's successes and problems.
What is a warrant?
A warrant allows the holder to purchase a firm's common stock from the firm at a specified price for a given time period.
What is a pooled investment?
Rather than directly buying an individual stock or bond, you may choose to acquire these investments indirectly by buying shares in an investment company that owns a portfolio of individual stocks, bonds, or a combination of the two.
What are the four types of financial contracts?
1. Forward contract
2. Futures contract
3. Swap contracts
What is a forward contract?
Forward contracts allow buyers and sellers to arrange for future sales at pre-determined prices. They represent a commitment to buy or sell.
What is a futures contract?
Futures contracts are standardized forward contracts guaranteed by clearing houses. They are traded on a futures exchange.
What is a swap contract?
Swap contracts are derivative securities in the form of agreements between two counterparties to exchange cash flows over a period of time, depending on the values of specified market variables.
What is an Option contract?
Options are rights to buy or sell an underlying instrument at a specified price within a designated time period.
What is a commodity?
Commodities include agricultural products, energy, metals, etc. Commodities complement investment opportunities offered by shares of corporation that extensively use these raw materials in their production processes.
What is a Real Asset?
Real assets include tangible assets such as real estate, airplanes, machinery, or lumber stands. They are often illiquid and have high transaction costs compared to stocks and bonds.