Fundamentals of Financial Instruments 2nd Edition by Sunil K Parameswaran ISBN 9781119816614 1119816610

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ISBN 10: 1119816610
ISBN 13: 9781119816614
Author: Sunil K Parameswaran

In the newly revised Second Edition of Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives, renowned finance trainer Sunil Parameswaran delivers a comprehensive introduction to the full range of financial products commonly offered in the financial markets.

Using clear, worked examples of everything from basic equity and debt securities to complex instruments–like derivatives and mortgage-backed securities – the author outlines the structure and dynamics of the free-market system and explores the environment in which financial instruments are traded. This one-of-a-kind book also includes:

• New discussions on interest rate derivatives, bonds with embedded options, mutual funds, ETFs, pension plans, financial macroeconomics, orders and exchanges, and Excel functions for finance
• Supplementary materials to enhance the reader’s ability to apply the material contained within
• A foundational exploration of interest rates and the time value of money

Fundamentals of Financial Instruments is the ideal resource for business school students at the undergraduate and graduate levels, as well as anyone studying financial management or the financial markets. It also belongs on the bookshelves of executive education students and finance professionals seeking a refresher on the fundamentals of their industry.

Fundamentals of Financial Instruments 2nd Edition Table of contents:

CHAPTER 1: An Introduction to Financial Institutions, Instruments, and Markets

THE ROLE OF AN ECONOMIC SYSTEM

A COMMAND ECONOMY

A MARKET ECONOMY

CLASSIFICATION OF ECONOMIC UNITS

AN ECONOMY’S RELATIONSHIP WITH THE EXTERNAL WORLD

THE BALANCE OF TRADE

THE CURRENT ACCOUNT BALANCE

FINANCIAL ASSETS

MONEY

MONEY AS A UNIT OF ACCOUNT OR A STANDARD OF VALUE

MONEY AS A MEDIUM OF EXCHANGE

MONEY AS A STORE OF VALUE

MONEY IS PERFECTLY LIQUID

EQUITY SHARES

DEBT SECURITIES

PREFERRED SHARES

FOREIGN EXCHANGE

DERIVATIVES

FORWARD AND FUTURES CONTRACTS

OPTIONS CONTRACTS

SWAPS

MORTGAGES AND MORTGAGE-BACKED SECURITIES

HYBRID SECURITIES

PRIMARY MARKETS AND SECONDARY MARKETS

EXCHANGES AND OVER-THE-COUNTER (OTC) MARKETS

BROKERS AND DEALERS

THE NEED FOR BROKERS AND DEALERS

TRADING POSITIONS

THE BUY-SIDE AND THE SELL-SIDE

INVESTMENT BANKERS

DIRECT AND INDIRECT MARKETS

MUTUAL FUNDS

MONEY AND CAPITAL MARKETS

THE EUROCURRENCY MARKET

THE INTERNATIONAL BOND MARKET

GLOBALIZATION OF EQUITY MARKETS

DUAL LISTING

FUNGIBILITY

ARBITRAGE

ARBITRAGE WITH ADRs

GDRs

RISK

AFTER THE TRADE – CLEARING AND SETTLEMENT

DEMATERIALIZATION AND THE ROLE OF A DEPOSITORY

CUSTODIAL SERVICES

GLOBALIZATION – THE NEW MANTRA

NOTES

CHAPTER 2: Mathematics of Finance

INTEREST RATES

THE REAL RATE OF INTEREST

THE FISHER EQUATION

SIMPLE INTEREST & COMPOUND INTEREST

PROPERTIES

A SYMBOLIC DERIVATION

PRINCIPLE OF EQUIVALENCY

CONTINUOUS COMPOUNDING

FUTURE VALUE

PRESENT VALUE

HANDLING A SERIES OF CASH FLOWS

THE INTERNAL RATE OF RETURN

EVALUATING AN INVESTMENT

ANNUITIES: AN INTRODUCTION

ANNUITY DUE

PERPETUITIES

THE AMORTIZATION METHOD

AMORTIZATION WITH A BALLOON PAYMENT

THE EQUAL PRINCIPAL REPAYMENT APPROACH

TYPES OF INTEREST COMPUTATION

LOANS WITH A COMPENSATING BALANCE

TIME VALUE OF MONEY–RELATED FUNCTIONS IN EXCEL

COMPUTING THE PRESENT AND FUTURE VALUES OF ANNUITIES AND ANNUITIES DUE IN EXCEL

AMORTIZATION SCHEDULES AND EXCEL

NOTE

CHAPTER 3: Equity Shares, Preferred Shares, and Stock Market Indices

INTRODUCTION

PAR VALUE VERSUS BOOK VALUE

ACCOUNTING FOR A STOCK ISSUE

VOTING RIGHTS

DIVIDENDS

TREASURY STOCK

ACCOUNTING FOR TREASURY STOCK

SPLITS AND REVERSE SPLITS

PREEMPTIVE RIGHTS

INTERPRETING STATED RATIOS

HANDLING FRACTIONS

PHYSICAL CERTIFICATES VERSUS BOOK ENTRY

TRACKING STOCK

REPORT CARDS

TYPES OF STOCKS

RISK AND RETURN AND THE CONCEPT OF DIVERSIFICATION

PREFERRED SHARES

DIVIDEND DISCOUNT MODELS

A GENERAL VALUATION MODEL

THE CONSTANT GROWTH MODEL

THE TWO-STAGE MODEL

THE THREE-STAGE MODEL

THE H MODEL

STOCK MARKET INDICES

PRICE-WEIGHTED INDICES

THE IMPORTANCE OF PRICE

VALUE-WEIGHTED INDICES

CHANGING THE BASE PERIOD CAPITALIZATION

EQUALLY WEIGHTED INDICES

TRACKING PORTFOLIOS

HANDLING A RIGHTS ISSUE

THE FREE-FLOATING METHODOLOGY

WELL-KNOWN GLOBAL INDICES

MARGIN TRADING AND SHORT-SELLING

TERMINOLOGY

CASE A: THE MARKET RISES

CASE B: THE MARKET DECLINES

CASE A: THE MARKET RISES

CASE B: THE MARKET DECLINES

INTEREST AND COMMISSIONS

CASE A: THE MARKET RISES

CASE B: THE MARKET DECLINES

MAINTENANCE MARGIN

SHORT-SELLING

MAINTENANCE OF A SHORT POSITION

SHORTING AGAINST THE BOX

THE RISK FACTOR

THE ECONOMIC ROLE OF SHORT SALES

THE UPTICK RULE

NOTES

CHAPTER 4: Bonds

INTRODUCTION

TERMS USED IN THE BOND MARKET

VALUATION OF A BOND

PAR, PREMIUM, AND DISCOUNT BONDS

EVOLUTION OF THE PRICE

ZERO-COUPON BONDS

VALUING A BOND IN BETWEEN COUPON DATES

DAY-COUNT CONVENTIONS

ACTUAL-ACTUAL

THE TREASURY’S APPROACH

CORPORATE BONDS

ACCRUED INTEREST

NEGATIVE ACCRUED INTEREST

YIELDS

THE CURRENT YIELD

SIMPLE YIELD TO MATURITY

YIELD TO MATURITY

APPROXIMATE YIELD TO MATURITY

ZERO-COUPON BONDS AND THE YTM

ANALYZING THE YTM

THE REALIZED COMPOUND YIELD

REINVESTMENT AND ZERO-COUPON BONDS

THE HOLDING PERIOD YIELD

TAXABLE EQUIVALENT YIELD

CREDIT RISK

BOND INSURANCE

EQUIVALENCE WITH ZERO-COUPON BONDS

SPOT RATES

THE COUPON EFFECT

BOOTSTRAPPING

FORWARD RATES

THE YIELD CURVE AND THE TERM STRUCTURE

SHAPES OF THE TERM STRUCTURE

THEORIES OF THE TERM STRUCTURE

THE LIQUIDITY PREMIUM HYPOTHESIS

THE MONEY SUBSTITUTE HYPOTHESIS

THE MARKET SEGMENTATION HYPOTHESIS

THE PREFERRED HABITAT THEORY

THE SHORT RATE

FLOATING RATE BONDS

SIMPLE MARGIN

BONDS WITH EMBEDDED OPTIONS

CALLABLE BONDS

YIELD TO CALL

PUTABLE BONDS

CONVERTIBLE BONDS

USING SHORT RATES TO VALUE BONDS

PRICE VOLATILITY

A CONCISE FORMULA

DURATION AND PRICE VOLATILITY

PROPERTIES OF DURATION

DOLLAR DURATION

CONVEXITY

A CONCISE FORMULA

DOLLAR CONVEXITY

PROPERTIES OF CONVEXITY

IMMUNIZATION

TREASURY AUCTIONS

WHEN ISSUED TRADING

PRICE QUOTES

STRIPS

INFLATION INDEXED BONDS

COMPUTING PRICE GIVEN YIELD AND VICE VERSA IN EXCEL

COMPUTING DURATION IN EXCEL

NOTES

CHAPTER 5: Money Markets

INTRODUCTION

MARKET SUPERVISION

THE FEDERAL RESERVE SYSTEM

KEY DATES IN THE CASE OF CASH MARKET INSTRUMENTS

THE MODIFIED FOLLOWING BUSINESS DAY CONVENTION

THE END/END RULE

THE INTERBANK MARKET

TYPES OF LOANS

LIBOR

LIBID

SONIA

TRANSITIONING FROM LIBOR

INTEREST COMPUTATION METHODS

TERM MONEY MARKET DEPOSITS

MONEY MARKET FORWARD RATES

FEDERAL FUNDS

FEDERAL FUNDS VERSUS CLEARINGHOUSE FUNDS

CORRESPONDENT BANKS: NOSTRO AND VOSTRO ACCOUNTS

TREASURY BILLS

REOPENINGS

YIELDS ON DISCOUNT SECURITIES

NOTATION

DISCOUNT RATES AND T-BILL PRICES

THE BOND EQUIVALENT YIELD (BEY)

CASE A: TM < 182 DAYS

THE MONEY MARKET YIELD

CASE B: TM > 182 DAYS

HOLDING PERIOD RETURN

VALUE OF AN 01

CONCEPT OF CARRY

CONCEPT OF A TAIL

T-BILL RELATED FUNCTIONS IN EXCEL

TBILLPRICE

TBILLYIELD

TBILLEQ

DISC

TREASURY AUCTIONS

TYPES OF AUCTIONS

RESULTS OF AN AUCTION

PRIMARY DEALERS AND OPEN MARKET OPERATIONS

REPURCHASE AGREEMENTS

REVERSE REPOS

GENERAL COLLATERAL VERSUS SPECIAL REPOS

MARGINS

SALE AND BUYBACK

COLLATERAL

REPOS AND OPEN MARKET OPERATIONS

NEGOTIABLE CDs

NOTATION

COST OF A CD FOR THE ISSUING BANK

TERM CDs

CDs VERSUS MONEY MARKET TIME DEPOSITS

COMMERCIAL PAPER

LETTERS OF CREDIT AND BANK GUARANTEES

YANKEE PAPER

CREDIT RATING

MOODY’S RATING SCALE

S&P’S RATING SCALE

FITCH’S RATING SCALE

BILLS OF EXCHANGE

DOCUMENTS AGAINST PAYMENT (DAP) VERSUS DOCUMENTS AGAINST ACCEPTANCE (DAA) TRANSACTIONS

ELIGIBLE AND NONELIGIBLE BANK BILLS

BUYING AND SELLING BILLS

BANKERS’ ACCEPTANCE

ACCEPTANCE CREDITS

EUROCURRENCY DEPOSITS

APPENDIX

NOTES

CHAPTER 6: Forward and Futures Contracts

INTRODUCTION

MARKING TO MARKET FOR A TRADER IN PRACTICE

DELIVERY OPTIONS

PROFIT DIAGRAMS

VALUE AT RISK

THE EXPECTED SHORTFALL

SPOT-FUTURES EQUIVALENCE

PRODUCTS AND EXCHANGES

CASH-AND-CARRY ARBITRAGE

REVERSE CASH-AND-CARRY ARBITRAGE

REPO AND REVERSE REPO RATES

SYNTHETIC SECURITIES

VALUATION

THE CASE OF ASSETS MAKING PAYOUTS

PHYSICAL ASSETS

NET CARRY

BACKWARDATION AND CONTANGO

THE CASE OF MULTIPLE DELIVERABLE GRADES

RISK ARBITRAGE

THE CASE OF MULTIPLICATIVE ADJUSTMENT

THE CASE OF ADDITIVE ADJUSTMENT

TRADING VOLUME AND OPEN INTEREST

DELIVERY

CASH SETTLEMENT

HEDGING AND SPECULATION

ROLLING A HEDGE

TAILING A HEDGE

THE MINIMUM VARIANCE HEDGE RATIO

ESTIMATION OF THE HEDGE RATIO AND THE HEDGING EFFECTIVENESS

CROSS-HEDGING

SPECULATION

LEVERAGE

CONTRACT VALUE

FORWARD VERSUS FUTURES PRICES

HEDGING THE RATE OF RETURN ON A STOCK PORTFOLIO

CHANGING THE BETA

PROGRAM TRADING

STOCK PICKING

PORTFOLIO INSURANCE

IMPORTANCE OF FUTURES

NOTES

CHAPTER 7: Options Contracts

INTRODUCTION

NOTATION

EXERCISING OPTIONS

MONEYNESS

EXCHANGE-TRADED OPTIONS

OPTION CLASS AND OPTION SERIES

FLEX OPTIONS

CONTRACT ASSIGNMENT

ADJUSTING FOR CORPORATE ACTIONS

NONNEGATIVE OPTION PREMIA

INTRINSIC VALUE AND TIME VALUE

TIME VALUE OF AMERICAN OPTIONS

TIME VALUE AT EXPIRATION

PUT-CALL PARITY

IMPLICATIONS FOR THE TIME VALUE

PUT-CALL PARITY WITH DIVIDENDS

IMPLICATIONS FOR THE TIME VALUE

A VERY IMPORTANT PROPERTY FOR AMERICAN CALLS

EARLY EXERCISE OF OPTIONS: AN ANALYSIS

PROFIT PROFILES

SPECULATION WITH OPTIONS

HEDGING WITH OPTIONS

VALUATION

THE BINOMIAL OPTION PRICING MODEL

THE TWO-PERIOD MODEL

VALUATION OF EUROPEAN PUT OPTIONS

VALUING AMERICAN OPTIONS

IMPLEMENTING THE BINOMIAL MODEL IN PRACTICE

THE BLACK-SCHOLES MODEL

PUT-CALL PARITY

INTERPRETATION OF THE BLACK-SCHOLES FORMULA

THE GREEKS

OPTION STRATEGIES

FUTURES OPTIONS

PUT-CALL PARITY

THE BLACK MODEL

NOTES

CHAPTER 8: Foreign Exchange

INTRODUCTION

CURRENCY CODES

BASE AND VARIABLE CURRENCIES

DIRECT AND INDIRECT QUOTES

EUROPEAN TERMS AND AMERICAN TERMS

BID AND ASK QUOTES

APPRECIATING AND DEPRECIATING CURRENCIES

CONVERTING DIRECT QUOTES TO INDIRECT QUOTES

POINTS

RATES OF RETURN

THE IMPACT OF SPREADS ON RETURNS

ARBITRAGE IN SPOT MARKETS

ONE-POINT ARBITRAGE

TWO-POINT ARBITRAGE

TRIANGULAR ARBITRAGE

CROSS RATES

MARKET RATES AND EXCHANGE MARGINS

VALUE DATES

THE FORWARD MARKET

OUTRIGHT FORWARD RATES

SWAP POINTS

BROKEN-DATED CONTRACTS

COVERED INTEREST ARBITRAGE

A PERFECT MARKET

FOREIGN EXCHANGE SWAPS

THE COST

THE MOTIVE

INTERPRETATION OF THE SWAP POINTS

A CLARIFICATION

SHORT-DATE CONTRACTS

OPTION FORWARDS

NONDELIVERABLE FORWARDS

RANGE FORWARDS

FUTURES MARKETS

HEDGING USING CURRENCY FUTURES

A SELLING HEDGE

A BUYING HEDGE

EXCHANGE-TRADED FOREIGN CURRENCY OPTIONS

SPECULATING WITH FOREX OPTIONS

EXCHANGE RATES AND COMPETITIVENESS

NOTES

CHAPTER 9: Mortgages and Mortgage-backed Securities

INTRODUCTION

MARKET PARTICIPANTS

MORTGAGE ORIGINATION

RISKS IN MORTGAGE LENDING

OTHER MORTGAGE STRUCTURES

PSA PREPAYMENT BENCHMARK

ANALYSIS

EXTENSION RISK AND CONTRACTION RISK

ACCRUAL BONDS

FLOATING RATE TRANCHES

NOTIONAL INTEREST-ONLY TRANCHE

INTEREST-ONLY AND PRINCIPAL-ONLY STRIPS

PAC BONDS

NOTES

CHAPTER 10: Swaps

INTRODUCTION

MARKET TERMINOLOGY

KEY DATES

INHERENT RISK

THE SWAP RATE

ILLUSTRATIVE SWAP RATES

DETERMINING THE SWAP RATE

THE MARKET METHOD

VALUATION OF A SWAP DURING ITS LIFE

TERMINATING A SWAP

THE ROLE OF BANKS IN THE SWAP MARKET

MOTIVATION FOR THE SWAP

COMPARATIVE ADVANTAGE AND CREDIT ARBITRAGE

SWAP QUOTATIONS

MATCHED PAYMENTS

AMORTIZING SWAPS

EXTENDABLE AND CANCELABLE SWAPS

SWAPTIONS

CURRENCY SWAPS

CROSS-CURRENCY SWAPS

VALUATION

CURRENCY RISKS

HEDGING WITH CURRENCY SWAPS

NOTES

CHAPTER 11: Mutual Funds, ETFs, and Pension Funds

INTRODUCTION

PROS AND CONS OF INVESTING IN A FUND

SHARES AND UNITS

OPEN-END VERSUS CLOSED-END FUNDS

PREMIUM/DISCOUNT OF A CLOSED-END FUND

UNIT TRUSTS

CALCULATING THE NAV

COSTS

SALES CHARGES

PRICE QUOTES

ANNUAL OPERATING EXPENSES

SWITCHING FEES

DIVIDEND OPTIONS

TYPES OF MUTUAL FUNDS

MONEY MARKET FUNDS

GILT FUNDS

DEBT FUNDS

DIVERSIFIED DEBT FUNDS

FOCUSED DEBT FUNDS

HIGH YIELD DEBT FUNDS

DEBT FUNDS AND BOND DURATION

EQUITY FUNDS

AGGRESSIVE GROWTH FUNDS

GROWTH FUNDS

SPECIALTY FUNDS

SECTOR FUNDS

OFFSHORE FUNDS

SMALL CAP EQUITY FUNDS

OPTION INCOME FUNDS

FUND OF FUNDS

EQUITY INDEX FUNDS

VALUE FUNDS

EQUITY INCOME FUNDS

BALANCED FUNDS

ASSET-ALLOCATION FUNDS

COMMODITY FUNDS

REAL ESTATE FUNDS

TAX-EXEMPT FUNDS

RISK CATEGORIES

THE PROSPECTUS

STRUCTURE OF A MUTUAL FUND

SERVICES

INVESTMENT TECHNIQUES

THE TOTAL RETURN

COMPUTATION OF RETURNS

TAXATION ISSUES

ALTERNATIVES TO MUTUAL FUNDS

TYPES OF PLANS

IRAs

CASH BALANCE PLANS

NOTE

CHAPTER 12: Orders and Exchanges

IMPORTANT ACRONYMS

MARKET ORDERS AND LIMIT ORDERS

THE LIMIT PRICE

THE LIMIT ORDER BOOKS

ILLUSTRATION OF A LIMIT ORDER BOOK

LIMIT ORDERS VERSUS MARKET ORDERS

MARKETABLE LIMIT ORDERS

TRADE PRICING RULES

STOP-LOSS AND STOP-LIMIT ORDERS

TRAILING STOP-LOSS ORDERS

MARKET TO LIMIT ORDERS

EQUIVALENCE WITH OPTIONS

VALIDITY CONDITIONS

GOOD TILL CANCELED (GTC) ORDERS

GOOD TILL DAYS ORDERS

ORDERS WITH QUANTITY RESTRICTIONS

A POINT ON ORDER SPECIFICATION

OPEN-OUTCRY TRADING SYSTEMS

ELECTRONIC MARKETS VERSUS OPEN-OUTCRY MARKETS

CALL MARKETS

NOTES

CHAPTER 13: The Macroeconomics of Financial Markets

ECONOMIC GROWTH

GROSS DOMESTIC PRODUCT

GDP VERSUS GNP

INFLATION ADJUSTMENT

TRANSNATIONAL COMPARISONS

THE BIG MAC INDEX

INFLATION

TYPES OF INFLATION

INTEREST RATES

THE FEDERAL BUDGET DEFICIT

MEASURES OF BUDGET DEFICITS

THE PRIMARY DEFICIT

FISCAL POLICY

BUDGET DEFICITS AND THE CAPITAL MARKET

THE ROLE OF THE CENTRAL BANK

BUDGET DEFICITS AND MONETARY POLICY

CROSS-BORDER BORROWING

CENTRAL BANKS AND FOREIGN EXCHANGE MARKETS

STERILIZED AND UNSTERILIZED INTERVENTIONS

EXCHANGE RATES

ISSUES WITH A RESERVE CURRENCY

CROSS-BORDER IMPLICATIONS OF CENTRAL BANK ACTIONS

QUANTITATIVE EASING

QUANTITATIVE EASING VERSUS OPEN-MARKET OPERATIONS

CHAPTER 14: Interest Rate Derivatives

FORWARD RATE AGREEMENTS (FRAs)

SETTLING AN FRA

DETERMINING BOUNDS FOR THE FRA RATE

EURODOLLAR FUTURES

CALCULATING PROFITS AND LOSSES ON ED FUTURES

LOCKING IN A BORROWING RATE

LOCKING IN A LENDING RATE

THE NO-ARBITRAGE PRICING EQUATION

CREATING A FIXED-RATE LOAN

30-YEAR T-BOND FUTURES CONTRACTS

CONVERSION FACTORS

INTEREST RATE OPTIONS

STATE PRICES

CALLABLE AND PUTABLE BONDS

CAPS, FLOORS, AND COLLARS

CAPTIONS AND FLOORTIONS

NOTES

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