Volume I: Financial Markets and Instruments skillfully covers the general characteristics of different asset classes, derivative instruments, the markets in which. View Table of Contents for Handbook of Finance Volume 1: Financial Markets and Instruments skillfully covers the general characteristics of. and fixed-income securities, the properties of financial markets, the gen- . The Handbook of Financial Instruments provides the most compre- hensive coverage ital Asset Prices,” Journal of Finance (September ), pp.
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Dr. Frank J. Fabozzi, PhD, CFA (New Hope, PA) is Professor in the Practice of Finance at Yale University's School of Management and the Editor of the Journal . June 25, HANDBOOK OF FINANCE VOLUME I Financial Markets and Instruments Frank J. Fabozzi Editor John Wiley & Sons. The Handbook of Fixed Income Securities - Frank nvrehs.info . Financial Analysis Indenture Provisions Utilities Finance Companies . Part 3 covers bonds (domestic and foreign), money market instruments, and structured.
A floating-rate debt instrument may have a restriction on the maximum coupon rate that will be paid at a reset date. The maximum coupon rate is called a cap. Because a cap restricts the coupon rate from increasing, a cap is an unattractive feature for the investor.
In contrast, there could be a minimum coupon rate specified for a floating-rate security.
The minimum coupon rate is called a floor. If the coupon reset formula produces a coupon rate that is below the floor, the floor is paid instead.
Thus, a floor is an attractive feature for the investor. Such bonds are said to have a bullet maturity.
An issuer may be required to retire a specified portion of an issue each year. This is referred to as a sinking fund requirement. There are loans that have a schedule of principal repayments that are made prior to the final maturity of the instrument.
Such debt instruments are said to be amortizing instruments. The same is true for mortgage-backed and most asset-backed securities because they are backed by pools of loans. There are debt instruments that have a call provision. Some issues specify that the issuer must retire a predetermined amount of the issue periodically.
Various types of call provisions are discussed below. Call and Refunding Provisions A borrower generally wants the right to retire a debt instrument prior to the stated maturity date because it recognizes that at some time in the future the general level of interest rates may fall sufficiently below the coupon rate so that redeeming the issue and replacing it with another debt instrument with a lower coupon rate would be economically beneficial.
This right is a disadvantage to the investor since proceeds received must be reinvested at a lower interest rate.
As a result, a borrower who wants to include this right as part of a debt instrument must compensate the investor when the issue is sold by offering a higher coupon rate. The price that the borrower must pay to retire the issue is referred to as the call price. Prepayments For amortizing instruments—such as loans and securities that are backed by loans—there is a schedule of principal repayments but individual borrowers typically have the JWPRFabozzi.
We then review the Federal Reserve System and the role of monetary policy. As we point out, there is not one interest rate in an economy; rather, there is a structure of interest rates.
We explain that the factors that affect interest rates in different sectors of the debt market, with a major focus on the term structure of interest rates i. As we explain in Chapter 6, derivative instruments play an important role in finance because they offer financial managers and investors the What Is Finance?
In this chapter, we explain the basic features of derivative instruments and how they are priced. We detail the well-known Black-Scholes option pricing model in the appendix of this chapter. We wait until later chapters, however, to describe how they are employed in financial management and investment management.
Valuation is the process of determining the fair value of a financial asset.
We explain the basics of valuation and illustrate these through examples in Chapter 7. The fundamental principle of valuation is that the value of any financial asset is the present value of the expected cash flows. Thus, the valuation of a financial asset involves 1 estimating the expected cash flows; 2 determining the appropriate interest rate or interest rates that should be used to discount the cash flows; and 3 calculating the present value of the expected cash flows using the interest rate or interest rates.
In this chapter, we apply many of the financial mathematics principles that we explained in Chapter 2. We apply the valuation process to the valuation of common stocks and bonds in Chapter 7 given an assumed discount rate. In Chapter 8, we discuss asset pricing models.
The purpose of such models is to provide the appropriate discount rate or required interest rate that should be used in valuation. We present two asset pricing models in this chapter: the capital asset pricing models and the arbitrage pricing theory. Often, we refer to financial management as corporate finance. However, the principles of financial management also apply to other forms of business and to government entities. Moreover, not all non-government business enterprises are corporations.
Financial managers are primarily concerned with investment decisions and financing decisions within business organizations, whether that organization is a sole proprietorship, a partnership, a limited liability company, a corporation, or a governmental entity. In Chapter 9, we provide an overview of financial management.
Investment decisions are concerned with the use of funds—the downloading, holding, or selling of all types of assets: Should a business download a new machine? Should a business introduce a new product line? Sell the old production facility?
Acquire another business? Build a manufacturing plan? Maintain a higher level of inventory? Should financial managers seek money from outside of the business? Because each method of financing obligates the business in different ways, financing decisions are extremely important. Budgets are employed to manage the information used in this planning; performance measures, such as the balanced scorecard and economic value added, are used to evaluate progress toward the strategic goals.
The capital structure of a firm is the mixture of debt and equity that management elects to raise in funding itself. In Chapter 11, we discuss this capital structure decision.
The first economic theory about firm capital structure was proposed by Franco Modigliani and Merton Miller in the s.
We explain this theory in the appendix to Chapter There are times when financial managers have sought to create financial instruments for financing purposes that cannot be accommodated by traditional products. Chapter 12 explains how this is done through what is referred to as financial engineering or as it is more popularly referred to as structured finance. In Chapters 11 and 12, we cover the financing side of financial management, whereas in Chapters 13, 14, and 15, we turn to the investment of funds.
We refer to these decisions as capital budgeting decisions. These decisions play a prominent role in determining the success of a business enterprise. What Is Finance? Current assets are those assets that could reasonably be converted into cash within one operating cycle or one year, whichever takes longer. Current assets include cash, marketable securities, accounts receivable and inventories, and support the long-term investment decisions of a company.
In Chapter 16 we look at the risk management of a firm. The process of risk management involves determining which risks to accept, which to neutralize, and which to transfer. After providing various ways to define risk, we look at the four key processes in risk management: 1 risk identification, 2 risk assessment, 3 risk mitigation, and 4 risk transferring. The traditional process of risk management focuses on managing the risks of only parts of the business products, departments, or divisions , ignoring the implications for the value of the firm.
Today, some form of enterprise risk management is followed by large corporation. Other terms commonly used to describe this area of finance are asset management, portfolio management, money management, and wealth management.
We describe these activities in Chapter Setting investment objectives starts with a thorough analysis of what the entity wants to accomplish. This task begins with the asset allocation decision i. Next, a portfolio strategy that is consistent with the investment objectives and investment policy guidelines must be selected. In general, portfolio strategies are classified as either active or passive.
Selecting the specific financial assets to include in the portfolio, which is referred to as the portfolio selection problem, is the next step. The theory of portfolio selection was formulated by Harry Markowitz in The latter parameter is a measure of risk. An important task is the evaluation of the performance of the asset manager.