Revision Notes for Investments , Ninth Canadian Edition

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Bodie et al.Investments9th Canadian EditionInstructor’s Manual1-1CHAPTER ONETHE INVESTMENT ENVIRONMENTCHAPTER OVERVIEWThestudent is introduced to the general concept of investing—to forego spending cash today in the hopesof increasing wealth in the future.Real assets are differentiated from financialassets, and the majorcategories of financial assets are defined.The risk/return tradeoff and the reality that most assets areefficiently priced most of the time are introduced. The role of financial intermediaries is discussed.Thechapter concludes with a presentation of the financial crisis of 2008, itscauses and its implications, as wellas regulatory attempts to address those consequences.LEARNING OBJECTIVESAfter studying this chapter, students should have an understanding of the overall investment processknowsomeof thekey elements involved in the investment process.Students should understand differences infinancial and real assets and be able to identify the major components of the investment process. Studentsshould be able to describe a derivative security and understand how it isused.Finally, students shouldunderstand the causes and effects of the financial crisis of 2008.PRESENTATION OFCHAPTERMATERIAL1.1 RealAssetsversus Financial AssetsThemainelements of the chapter are presentedhere. The concept of giving up current consumption toinvest in assets that allow greater consumption in the future is the key notion to start discussion of thechapter material. The discussion of real and financial assets can be used to discuss key differences in theassets and their appropriateness as investment vehicles.The instructor might want to elucidate the materialusing updatedbalance sheets and net worth forCanadian households from the Statistics Canada website:https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610058001&pickMembers%5B0%5D=2.4&pickMembers%5B1%5D=3.11.2Financial AssetsFixed income securities include both long-termand short-term instruments. The essential element of debtsecurities and the other classes of financial assets is the fixed or fixed formula payments that are associatedwith these securities. Common stock that features residual payments to the owners can be contrasted withthe relatively certain debt claims. A derivative security is a security whose performance is based on or tiedto another asset or financial security. The discussion of derivative securities presentedhereshould be briefand used to highlight the discussion of innovation in our markets.Students may find interest inkeyelements of each derivative andhow theyrelate the properties to debt and equity securities.1.3Financial Markets and the EconomyFinancial assets (and hence markets where they are traded) play a big role in developed economies byallowing to make the most of the economy's real assets.Markets encourage allocation of capital to firmsthat have the best prospects in the view of the market participants.Markets allow participants to adjustconsumption and to choose levels of risk that are appropriate. Financial markets also allow for separation

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