Fundamentals of Financial Management (Concise 6th Edition)

Summary

of

Major

Market

Instruments,

Market

Participants,

and

Security

Characteristics

T

a

b

le

2

-

1

SECURITY

CHARACTERISTICS

Instrument

(1)

Market

(2)

Major

Participants

(3)

Riskiness

(4)

Original Maturity

(5)

Interest

Rate

on

2/5/08

a

(6)

U.S.

Treasury

bills

Money

So

ld

b

y^

U.

S.

T

re

as

ur

y^

to

fi

na

nc

e^

fe

de

ra

l^

ex

pe

nd

itu

re

s

Default-free,

close

to

riskless

91

days

to

1

year

2.23%

Ba

nk

er

s’^

ac

ce

pt

an

ce

s

M

on

ey

A^

fir

m

’s^

no

te

,^ b

ut

o

ne

g

ua

ra

nt

ee

d^

by

a

b

an

k

Lo

w

d

eg

re

e^

of

ri

sk

if

g

ua

ra

nt

ee

d^

by

a

st

ro

ng

b

an

k

Up

to

180

days

3.11%

Dealer

commercial

paper

Money

Issued

by

financially

secure

firms

to

large

investors

Low

default

risk

Up

to

270

days

3.05%

Negotiable

certificates

of

deposit

(CDs)

Money

Issued

by

major

money-center

commercial

banks

to

large

investors

Default

risk

depends

on

the

strength

of

the

issuing

bank

Up

to

1

year

3.10%

Money

market

mutual

funds

Money

In

ve

st

in

T

re

as

ur

y^

bi

lls

,^ C

Ds

,^ a

nd

c

om

m

er

cia

l^

pa

pe

r;^

he

ld

b

y^

in

di

vi

du

al

s^ a

nd

b

us

in

es

se

s

Low

degree

of

risk

No

specific

maturity

(instant

liquidity)

2.84%

Eurodollar

market

time

deposits

Money

Issued

by

banks

outside

the

United

States

D

ef

au

lt^

ris

k^ d

ep

en

ds

o

n^

th

e^

st

re

ng

th

o

f^ t

he

iss

ui

ng

b

an

k

Up

to

1

year

3.10%

Co

ns

um

er

c

re

di

t,^

in

cl

ud

in

g^

cr

ed

it^

ca

rd

d

eb

t

Money

Issued

by

banks,

credit

unions,

and

finance

companies

to

individuals

Risk

is

variable

Variable

Variable,

but

goes

up

to

20%

or

more

U.S.

Treasury

notes

and

bonds

Capital

Issued

by

U.S.

government

N

o^

de

fa

ul

t^ r

isk

,^ b

ut

p

ric

e^

w

ill

d

ec

lin

e^

if^

in

te

re

st

ra

te

s^ r

ise

;^ h

en

ce

,^ t

he

re

is

s

om

e^

ris

k

2

to

30

years

1.^9

19

%

o

n^

2 -

ye

ar

to

4.

32

7 %

o

n^

30

• y
  ea

r^

bo

nd

s

Mortgages

Capital

Loans

to

individuals

and

businesses

secured

by

real

estate;

bought

by

banks

and

other

institutions

Risk

is

variable;

risk

is

high

in

the

case

of

subprime

loans

Up

to

30

years

5.^1

4 %

a

dj

us

ta

bl

e^

5 -

ye

ar

ra

te

,^5

.^6
2 %

3

0 -

ye

ar

fix

ed

ra

te

State

and

local

government

bonds

Capital

Issued

by

state

and

local

governments;

held

by

individuals

and

institutional

investors

Riskier

than

U.S.

government

securities

but

exempt

from

most

taxes

Up

to

30

years

4.63%

to

5.03%

for

A-rated,

20-

to

40-year

bonds

Corporate

bonds

Capital

Issued

by

corporations;

held

by

individuals

and

institutional

investors

Ri

sk

ie

r^ t

ha

n^

U.

S.^

go

ve

rn

m

en

t^ s

ec

ur

iti

es

b

ut

le

ss

ris

ky

th

an

p

re

fe

rre

d^

an

d^

co

m

m

on

st

oc

ks

;^

va

ry

in

g^

de

gr

ee

o

f^ r

isk

w

ith

in

b

on

ds

d

ep

en

ds

o

n^

st

re

ng

th

o

f^ is

su

er

Up

to

40

years

b

5.38%

on

AAA

bonds,

6.63%

on

BBB

bonds

Leases

Capital

Si

m

ila

r^ t

o^

de

bt

in

th

at

fir

m

s^ c

an

le

as

e^

as

se

ts

ra

th

er

th

an

b

or

ro

w

an

d^

th

en

b

uy

th

e^

as

se

ts

Risk

similar

to

corporate

bonds

Generally

3

to

20

years

Similar

to

bond

yields

Preferred

stocks

Capital

Issued

by

corporations

to

individuals

and

institutional

investors

Generally

riskier

than

corporate

bonds

but

less

risky

than

common

stock

Unlimited

5.5%

to

9%

Common

stocks

c

Capital

Issued

by

corporations

to

individuals

and

institutional

investors

Ri

sk

ie

r^ t

ha

n^

bo

nd

s^ a

nd

p

re

fe

rre

d^

st

oc

k;^

ris

k^ v

ar

ies

fro

m

co

m

pa

ny

to

co

m

pa

ny

Unlimited

NA

a The

yields

reported

are

from

the

web

site

of

The

Wall

Street

Journal

on

February

5,

2008,

http://online.wsj.com.

Money

market

rates

assume

a 3-month

maturity.

b A

few

corporations

have

issued

100-year

bonds;

however,

the

majority

have

issued

bonds

with

maturities

that

are

less

than

40

ye

ars.

c^ W

hi

le

co

m

m

on

st

oc

ks

d

o^

no

t^ p

ay

in

te

re

st

,^ t

he

y^ a

re

e

xp

ec

te

d^

to

p

ro

vi

de

a^

“re

tu

rn

”^ i

n^

th

e^

fo

rm

o

f^ d

ivi

de

nd

s^ a

nd

ca

pi

ta

l^ g

ain

s.^

As

yo

u^

w

ill^

se

e^ i

n^

Ch

ap

te

r^8

,^ h

ist

or

ica

lly

,^ s

to

ck

re

tu

rn

s^ h

av

e^

av

er

ag

ed

b

et

w

ee

n^

9 %

an

d^

12

%

a^

ye

ar

,^ b

ut

th

ey

ca

n^

be

m

uc

h^

hi

gh

er

o

r^ l

ow

er

in

a^

gi

ve

n^

ye

ar

.^ O

f^ c

ou

rse

,^ if

y

ou

p

ur

ch

as

e^ a

st

oc

k,^

yo

ur

a

ct

ua

l^ r

et

ur

n^

m

ay

b

e^ c

on

sid

er

ab

ly^

hi

gh

er

o

r^ l

ow

er

th

an

th

es

e^

hi

sto

ric

al

av

er

ag

es

.

32