CHAPTER 2

Asset Classes and Financial Instruments

 ASSET CLASSES

• Money market instruments

• Capital market instruments

• Bonds
• Equity Securities
• Derivative Securities

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 THE MONEY MARKET

• Characteristics
• Maturity: Short-term (one year of less)
• Type: debt instrument
• Liquidity: more liquid
• Discount pricing: issued less than its face value
• Often have large denominations
 COMMON MONEY MARKET
ASSETS
• Treasury bills
• Commercial paper
• Certificates of deposit
• Repurchase agreements
• Money Market Mutual Funds
 TREASURY BILLS
• Maturity: a few days up to the maximum of 52 weeks, but common
maturities are one month, three months or six months.
• Issuer: Central Bank (on behalf of Department of the Treasury)
• Liquidity: highly liquid
• Discount pricing: issued less than its face value
• Default risk: Almost zero
• Denomination: $1000 - $5,000,000
• Purpose:
• To fund part of the government budget deficit
• To control money supply
 COMMERCIAL PAPER

• Maturity: one day to 270 days

• Issuer: creditworthy corporations
• Liquidity: moderately liquid
• Discount pricing: issued less than its face value
• Default risk: not as low as T-Bills; unsecured debt (not backed by
collateral)
• Denomination: High ($100,000 or more)
• Purpose: to buy inventories; to meet short-term liabilities
 CERTIFICATES OF DEPOSIT

• Maturity: between one month and one year

• Issuer: large commercial banks
• Liquidity: Can’t be withdrawn before maturity
• Discount pricing: N/A
• Default risk: well secured
• Denomination: No specific denomination
• Purpose: Collect deposits to finance working capital of
corporations
 EURODOLLAR CD

• CD for a U.S. dollar deposit at a bank located outside the

United States
• Major corporations use the Eurodollar market to settle
international transactions, to finance import and export activity,
to make short-term loans and as a place to invest excess cash.
• London Interbank Offered Rate(LIBOR): the rate at which major
international banks are willing to offer term Eurodollar
deposits to each other.
 REPURCHASE AGREEMENT

• A bank will agree to buy securities from a dealer and

• Then resell them a short time later at a preset price.
• The difference between the purchase and sale prices
represents the interest paid for the agreement.
• Thus the goals of both parties, secured funding and liquidity are
met.
 THE CAPITAL MARKET

• Characteristics
• Maturity: Long-term (more than one year)
• Type: both debt and equity instrument
• Liquidity: not as liquid as money market instruments
• Discount pricing: available; selling at face value is available too
 COMMON CAPITAL MARKET
ASSETS
• Treasury Bond
• Corporate Bond
• Common Stock
• Preferred Stock
 TREASURY BOND
• Maturity: more than 10 years and up to 30 years
• Issuer: Central Bank (on behalf of Department of the Treasury)
• Liquidity: highly liquid
• Semi-annual interest payment
• Discount pricing: available
• Default risk: Almost zero
• Denomination: Minimum $1000
• Purpose: to meet govt. expenditure; to control money supply
 CORPORATE BOND
• Maturity: 5 years of more
• Issuer: Corporation
• Liquidity: liquidity depends on the creditworthiness

• Discount pricing: available; par value; premium price

• Default risk: exists
• Callable; Convertible
• Denomination: $1000; $5000; $10000
• Purpose: to finance long-term capital expenditure
MORTGAGE-BACKED
SECURITIES
 RELEVANT ISSUES

• Collateral
• Mortgage
• Asset-backed security
• Securitization
• Pass-through security
 COLLATERAL

• Collateral is a property or other asset that a borrower offers as

a way for a lender to secure the loan.
• If the borrower stops making the promised loan payments, the
lender can seize the collateral to recoup its losses.
 MORTGAGE
• A mortgage is a debt instrument, secured by the collateral of
specified real estate property, that the borrower is obliged to pay
back with a predetermined set of payments.
• Over a period of many years, the borrower repays the loan, plus
interest, until he/she eventually owns the property free and clear.
• Mortgages are also known as "liens against property" or "claims on
property."
• If the borrower stops paying the mortgage, the bank can foreclose.
 ASSET-BACKED SECURITY

• An asset-backed security (ABS) is a financial security

collateralized by a pool of assets such as loans, leases, credit
card debt, etc.
 SECURITIZATION

• Securitization is the process through which an issuer creates a

new financial instrument by combining other financial assets
and then marketing different tiers of the repackaged
instruments to investors.
 PASS-THROUGH SECURITY

• A pass-through security is a pool of fixed-income securities

backed by a package of assets.
• A servicing intermediary collects the monthly payments from
issuers and, after deducting a fee, remits or passes them
through to the holders of the pass-through security.
 MORTGAGE-BACKED
SECURITIES
• A type of asset-backed security that is secured by a mortgage
or collection of mortgages.
• Used to redirect the interest and principal payments from the
pool of mortgages to shareholders.
 MORTGAGE-BACKED
SECURITIES
• A mortgage-backed security is a way for a smaller regional bank
to lend mortgages to its customers without having to worry about
whether the customers have the assets to cover the loan.
• Instead, the bank acts as a middleman between the home buyer
and the investment market participants.
• When an investor invests in a mortgage-backed security, he is
essentially lending money to a home buyer or business.

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STOCK MARKET INDEXES
DAILY PERFORMANCE OF THE
STOCK MARKET
STOCK DATA (ACI)
EPS AND P/E RATIO
EPS AND P/E RATIO
 CRITERIA FOR PUBLIC
OFFER/LISTING IN DSE
• It has minimum existing paid up capital of Tk. 15 crore.
• It has been regular in holding annual general meeting (AGM).
• It has complied with the provisions of Corporate Governance
Guidelines.
• It has no accumulated retained loss at the time of application.
• The issuer or any of its directors is not a bank defaulter.
• It has positive net profit after tax and net operating cash flow at
least for the latest financial year
STOCK MARKET INDEX (DSE)
 INDEX CALCULATION
(PRICE-WEIGHTED AVERAGE)
 INDEX CALCULATION
(MARKET-VALUE-WEIGHTED INDEX)
 INDEX CALCULATION
(MARKET-VALUE-WEIGHTED INDEX)
 INDEX CALCULATION
(MARKET-VALUE-WEIGHTED INDEX)
DSE INDEX BASE