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Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives

Book Description

The essential guide to financial instruments, logically presented

Fundamentals of Financial Instruments deals with the global financial markets and the instruments in which they trade. While most books on finance tend to be heavily mathematical, this book emphasizes the concepts in a logical, sequential fashion, introducing mathematical concepts only at the relevant times. As a result, the reader gains conceptual clarity reinforced by just the right level of technical detail to ensure a comprehensive exposure to the skills needed in the financial world.

  • Establishes a strong foundation for understanding global markets

  • Acts as an invaluable resource for those considering a career in the financial markets

  • Offers an accessible yet in-depth treatise on modern financial instruments

  • Presents a logical navigational path for a typical student of finance who is attempting to come to terms with the intricacies of the subject

Covering the fundamentals of various types of assets in a single volume, Fundamentals of Financial Instruments is a compact yet comprehensive one-stop reference for students and professionals in finance and economics.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Contents
  5. Preface
  6. Acknowledgments
  7. CHAPTER 1: An Introduction to Financial Institutions, Instruments, and Markets
    1. The Role of an Economic System
    2. A Command Economy
    3. A Market Economy
    4. Classification of Economic Units
    5. An Economy's Relationship with the External World
    6. The Balance of Trade
    7. The Current Account Balance
    8. Financial Assets
    9. Primary Markets and Secondary Markets
    10. Exchanges and OTC Markets
    11. Brokers and Dealers
    12. The Need for Brokers and Dealers
    13. Trading Positions
    14. The Buy Side and the Sell Side
    15. Investment Bankers
    16. Direct and Indirect Markets
    17. Mutual Funds
    18. Money and Capital Markets
    19. The Eurocurrency Market
    20. The International Bond Market
    21. Globalization of Equity Markets
    22. Dual Listing
    23. Fungibility
    24. Risk
    25. After the Trade: Clearing and Settlement
    26. Dematerialization and the Role of a Depository
    27. Custodial Services
    28. Globalization: The New Mantra
  8. CHAPTER 2: Mathematics of Finance
    1. Interest Rates
    2. The Real Rate of Interest
    3. The Fisher Equation
    4. Simple Interest
    5. Compound Interest
    6. Properties
    7. A Symbolic Derivation
    8. Principle of Equivalency
    9. Continuous Compounding
    10. Future Value
    11. Present Value
    12. Handling a Series of Cash Flows
    13. The Internal Rate of Return
    14. Evaluating an Investment
    15. Annuities: An Introduction
    16. Perpetuities
    17. The Amortization Method
    18. Amortization with a Balloon Payment
    19. The Equal Principal Repayment Approach
    20. Types of Interest Computation
    21. Loans with a Compensating Balance
  9. CHAPTER 3: Equity Shares, Preferred Shares, and Stock Market Indexes
    1. Introduction
    2. Par Value versus Book Value
    3. Voting Rights
    4. Statutory versus Cumulative Voting
    5. Proxies
    6. Dividends
    7. Dividend Yield
    8. Dividend Reinvestment Plans
    9. Stock Dividends
    10. Treasury Stock
    11. Splits and Reverse Splits
    12. Costs Associated with Splits and Stock Dividends
    13. Preemptive Rights
    14. Interpreting Stated Ratios
    15. Handling Fractions
    16. Physical Certificates versus Book Entry
    17. Tracking Stock
    18. Report Cards
    19. Types of Stocks
    20. Risk and Return and the Concept of Diversification
    21. Preferred Shares
    22. Callable Preferred Stock
    23. Convertible Preferred Shares
    24. Cumulative Preferred Shares
    25. Adjustable Rate Preferred Shares
    26. Participating Preferred Shares
    27. Dividend Discount Models
    28. A General Valuation Model
    29. The Constant Growth Model
    30. The Two-Stage Model
    31. The Three-Stage Model
    32. The H Model
    33. Stock Market Indexes
    34. Price-Weighted Indexes
    35. Changing the Divisor
    36. The Importance of Price
    37. Value-Weighted Indexes
    38. Changing the Base-Period Capitalization
    39. Equally Weighted Indexes
    40. Tracking Portfolios
    41. The Free-Floating Methodology
    42. Well-Known Global Indexes
    43. Margin Trading and Short Selling
    44. Terminology
    45. Maintenance Margin
    46. Regulation T and NYSE and NASD Rules
    47. Short Selling
    48. Endnotes
  10. CHAPTER 4: Bonds
    1. Valuation of a Bond
    2. Par, Premium, and Discount Bonds
    3. Evolution of the Price
    4. Zero-Coupon Bonds
    5. Valuing a Bond in between Coupon Dates
    6. Day-Count Conventions
    7. Actual–Actual
    8. The Treasury's Approach
    9. Corporate Bonds
    10. Accrued Interest
    11. Yields
    12. Taxable-Equivalent Yield
    13. Credit Risk
    14. Bond Insurance
    15. Equivalence with Zero-Coupon Bonds
    16. The Yield Curve and the Term Structure
    17. Bonds with Embedded Options
    18. Price Volatility
    19. Duration and Price Volatility
    20. Dollar Duration
    21. Convexity
    22. Treasury Auctions
    23. When Issued Trading
    24. Price Quotes
    25. Bond Futures
    26. STRIPS
    27. Endnotes
  11. CHAPTER 5: Money Markets
    1. Introduction
    2. Market Supervision
    3. The Interbank Market
    4. Interest-Computation Methods
    5. Term Money Market Deposits
    6. Federal Funds
    7. Correspondent Banks: Nostro and Vostro Accounts
    8. Payment Systems
    9. Fed Funds and Reserve Maintenance
    10. Treasury Bills
    11. Yields on Discount Securities
    12. Discount Rates and T-Bill Prices
    13. Primary Dealers and Open-Market Operations
    14. Commercial Paper
    15. Letters of Credit and Bank Guarantees
    16. Yankee Paper
    17. Credit Rating
    18. Bills of Exchange
    19. Eurocurrency Deposits
    20. Money Market Futures
  12. CHAPTER 6: Forward and Futures Contracts
    1. Introduction
    2. Spot–Futures Equivalence
    3. Cash-and-Carry Arbitrage
    4. Synthetic Securities
    5. The Case of Assets Making Payouts
    6. Physical Assets
    7. The Case of Multiple Deliverable Grades
    8. Trading Volume and Open Interest
    9. Cash Settlement
    10. Hedging and Speculation
    11. Estimation of the Hedge Ratio and the Hedging Effectiveness
    12. Speculation
    13. Leverage
    14. Contract Value
    15. Forward versus Futures Prices
    16. Locking in Borrowing and Lending Rates
    17. Hedging the Rate of Return on a Stock Portfolio
    18. Changing the Beta
    19. Program Trading
    20. Stock Picking
    21. Portfolio Insurance
    22. The Importance of Futures
  13. CHAPTER 7: Options Contracts
    1. Moneyness
    2. Exchange-Traded Options
    3. Speculation with Options
    4. The Two-Period Model
    5. Valuation of European Put Options
    6. Valuing American Options
    7. Implementing the Binomial Model in Practice
    8. The Black-Scholes Model
    9. The Greeks
    10. Option Strategies
  14. CHAPTER 8: Foreign Exchange
    1. Introduction
    2. Currency Codes
    3. European Terms and American Terms
    4. Appreciating and Depreciating Currencies
    5. Converting Direct Quotes to Indirect Quotes
    6. The Impact of Spreads on Returns
    7. Arbitrage in Spot Markets
    8. Cross Rates
    9. Value Dates
    10. The Forward Market
    11. Outright Forward Rates
    12. Swap Points
    13. Broken-Dated Contracts
    14. A Perfect Market
    15. The Cost
    16. Interpretation of the Swap Points
    17. Short-Date Contracts
    18. Option Forwards
    19. Nondeliverable Forwards
    20. Futures Markets
    21. Hedging Using Currency Futures
    22. Exchange-Traded Foreign Currency Options
    23. The Garman-Kohlhagen Model
    24. Put-Call Parity
    25. The Binomial Model
  15. CHAPTER 9: Mortgages and Mortgage-Backed Securities
    1. Introduction
    2. Market Participants
    3. Government Insurance and Private Mortgage Insurance
    4. Risks in Mortgage Lending
    5. Other Mortgage Structures
    6. Negative Amortization
    7. Graduated-Payment Mortgage
    8. WAC and WAM
    9. Pass-Through Securities
    10. Extension Risk and Contraction Risk
    11. Accrual Bonds
    12. Floating-Rate Tranches
    13. Notional Interest Only Tranche
    14. Interest-Only and Principal-Only Strips
    15. PAC Bonds
    16. Agency Pass-Throughs
    17. Endnotes
  16. CHAPTER 10: Swaps
    1. Introduction
    2. Contract Terms
    3. Market Terminology
    4. Inherent Risk
    5. The Swap Rate
    6. Illustrative Swap Rates
    7. Determining the Swap Rate
    8. The Market Method
    9. Valuation of a Swap During Its Life
    10. Terminating a Swap
    11. The Role of Banks in the Swap Market
    12. Comparative Advantage and Credit Arbitrage
    13. Swap Quotations
    14. Matched Payments
    15. Currency Swaps
    16. Cross-Currency Swaps
    17. Currency Risks
    18. Hedging with Currency Swaps
    19. Endnotes
  17. APPENDIX 1: Partial Derivative of the Price with Respect to the Yield
  18. APPENDIX 2
  19. Bibliography
  20. Web Sites
  21. Index