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? 1. debts 2. equities 3. currencies 4. derivatives (contracts) 5. commodities 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 4. Options

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.