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FIN204

Investments Analysis &


Decision Making

Hassan,
Email: hassanudinmtt@help.edu.my

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FIN204
ASSESSMENT

Assignment 1 20%

Assignment 2 20%

Final Exam (20 MCQs + 4 Questions) 60%

To gain a PASS:

Achieve a passing grade in the final examination: To score a minimum


of 30 marks out of 60 marks.

Attempt ALL the two assignment areas of assessment; and achieve a


total result of 50% or better overall.

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Chapter 1

Introduction to
Investing

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Objectives
To understand the investments field as
currently practiced
To help you make investment decisions
that will enhance your economic
welfare
To create realistic expectations about
the outcome of investment decisions

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Investments Defined

Investments is the study of the process


of committing funds to one or more
assets
Emphasis on holding financial assets and
marketable securities
Concepts also apply to real assets
Foreign financial assets should not be
ignored

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Why Study Investments?

Most individuals make investment


decisions sometime
Need sound framework for managing and
increasing wealth
Essential part of a career in the field
Security analyst, portfolio manager,
registered representative, Certified
Financial Planner, Chartered Financial
Analyst

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Investment Decisions

Underlying investment decisions: the


tradeoff between expected return and
risk
Expected return is not usually the same as
realized return
Risk: the possibility that the realized
return will be different than the
expected return
Investor risk tolerance affects expected
return

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The Tradeoff Between
Expected Return and Risk
Investors manage
risk at a cost -
lower expected
Stocks
returns (ER)
ER
Any level of Bonds
expected return
and risk can be
attained Risk-free Rate
Risk

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The Investment Decision Process

Two-step process:
Security analysis and valuation
Necessary to understand security characteristics
Portfolio management
Selected securities viewed as a single unit
How efficient are financial markets in processing
new information?
How and when should it be revised?
How should portfolio performance be measured?

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Factors Affecting the Process

Uncertainty in future returns dominates


decision process
Future unknown and must be estimated
Foreign financial assets: opportunity to
enhance return or reduce risk
Quick adjustments needed to a
changing environment
The Internet and investment
opportunities

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Chapter 2

Financial Assets
Available to Investors

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Types of Investment

Non Marketable Marketable

Money Market Derivative Market


Capital Market

Fixed Income Equity

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Nonmarketable Financial Assets

Commonly owned by individuals


Represent direct exchange of claims
between issuer and investor
Usually very liquid or easy to convert to
cash without loss of value
Examples: Savings accounts, certificates
of deposit, amanah saham

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Money Market Securities

Marketable: claims are negotiable or


salable in the marketplace
Short-term, liquid, relatively low risk
debt instruments
Issued by governments and private
firms
Examples: Money market mutual funds,
T-Bills, Commercial paper

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Capital Market Securities

Marketable debt with maturity greater


than one year and ownership shares
More risky than money market
securities
Fixed-income securities have a
specified payment schedule
Dates and amount of interest and principal
payments known in advance

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Bond Characteristics

Buyer of a newly issued coupon bond is


lending money to the issuer who agrees
to repay principal and interest
Bonds are fixed-income securities
Buyer knows future cash flows
Known interest and principal payments
If sold before maturity price will depend
on interest rates at that time

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Bond Characteristics

Prices quoted as a % of par value


Par value is usually 1,000
If a price of the bond is said to be selling at
90. That means it is selling at 90% of the
par value ($1,000) $900.
Each point in bond price means 1%
Premium: amount above par value
Discount: amount below par value

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Innovation in Bond Features

Callable Bonds
Call provision gives the issuer the right to
call in the bonds.
Exercise the call provision is attractive for
the issuer of the bonds when market
interest drop substantially below the
coupon rate.

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Innovation in Bond Features

Zero-coupon bond
Sold at a discount and redeemed for face
value at maturity
Locks in a fixed rate of return, eliminating
reinvestment rate risk
Responds sharply to interest rate changes
May have call feature

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Corporate Bonds
Usually long term unsecured debt,
paying semi-annual interest, callable,
with par value of $1,000
Convertible bonds may be exchanged for
the companys share at the bond holders
discretion
Risk of bond is that issuer may default on
payments

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Bond Ratings

Rate relative probability of default


Rating organizations
Standard and Poor Corporation (S&P)
Moodys Investors Service Inc
Malaysia: Rating Agency Malaysia (RAM)
Rating firms perform the credit analysis
for the investor
Emphasis on the issuers relative
probability of default

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Bond Ratings
Investment grade securities
Rated AAA, AA, A, BBB
Typically, institutional investors are confined
to bonds in these four categories
Speculative securities
Rated BB, B, CCC, C
Significant uncertainties
C rated bonds are not paying interest

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Securitization

Transformation of various types of


illiquid contractual debt such as
mortgages, auto loans or credit card
debt obligations and selling said
consolidated debt as assets backed
bonds.
Mortgage securitization is believed to
have played an important role in the
U.S. subprime crisis.

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Equity Securities

Denote an ownership interest in a


corporation
Denote control over management, at
least in principle
Voting rights important
Denote limited liability
Investor cannot lose more than their
investment should the corporation fail

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Preferred Stocks

Hybrid security because features of


both debt and equity
Preferred stockholders paid after debt
but before common stockholders
Dividend known, fixed in advance
May be cumulative if dividend omitted
May be convertible into common stock
May carry variable dividend rate

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Common Stocks
Common stockholders are residual claimants
on income and assets
Par value is face value of a share
Usually economically insignificant
Genting Par Value RM0.10
BAT Par Value RM0.50
Lion Corp Par Value RM1.00
Book value is accounting value of a share
Total stock holders equity divided by total number of
shares issued
Market value is current market price of a
share

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Common Stocks - Dividend

Dividends are the only cash payments


made regularly directly from the
company to its shareholders
Dividend yield
= Dividend Per Share / Price Per Share
Payout Ratio is ratio of dividends to
earnings
= Dividend Per Share / Earnings Per Share
However, company does not guarantee
that dividend will be declared

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Common Stocks - Dividend

Dividend has to be declared before it is paid.


On the record date, the company will look at its
shareholder registry and distribute the dividends to
all of the shareholders on the list.
The day BEFORE the Ex-Dividend date is simply the
last date that you can buy shares and get on the
companys registry for their record date.

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Common Stocks

Stock dividend is payment of dividend


to owners in the form of stock instead
of cash
Stock split is the issuance of additional
shares in proportion to the shares
outstanding
The book and par values are changed

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Common Stocks P/E Ratio

P/E ratio (earnings multiplier)


= current market price / earnings per share
Very important indicator for equity
investment
Indicate how much the investors are
willing to pay for per dollar of annual
earnings.
Growth stock usually has high P/E

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Common Stocks Example of P/E
HELP
Price: 1.97

Sunway
Price: 3.50

Which is more expensive ?

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Common Stocks Example of P/E
HELP
Price: 1.97
EPS: RM 0.095
P/E = 1.97/0.095= 20.74
Sunway
Price: 3.50
EPS: 0.432
P/E = 3.5/0.432= 8.10
Now, which is more expensive ?

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Derivative Securities

Securities whose value is derived from


the value of another securities such as
an asset, index, or interest rate
It has no intrinsic value in itself.
Examples: Futures, options, warrants

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The End

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Tutorial Questions

Chapter 1
Questions:
1, 2, 4, 5, 7, 9, 10, 11

Chapter 2
Questions:
1,2, 4, 11, 12

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