Jack Clark Francis - Schaums Outline of Investments (Schaums Outlines)

JACK CLARK FRANCIS, Ph.D., received his Bachelors and M.B.A. degrees from Indiana University and obtained his Ph.D. from the University of Washington in Seattle. Dr Francis has been a Professor of Economics and Finance at the Bernard M. Baruch College in New York City since leaving the Federal Reserve. Before that he was at the Wharton School of Finance. He has authored five editions of Investments: Analysis and Management and three editions of Management of Investments, both published by McGraw-Hill, Inc., among other titles.

RICHARD W. TAYLOR, Ph.D., is Professor of Finance at Arkansas State University in Jonesboro. He received his Ph.D. from Louisiana Tech University and is a chartered financial analyst (C.F.A.). Dr. Taylor has published papers in such journals as The Financial Review, Financial Analysts Journal, and The Journal of Portfolio Management. In addition, he has served as a referee for several business and finance journals.

Copyright 2000, 1992, by The McGraw-Hill Companies, Inc. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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Dedicated to the memory of my late father-in-law,
M. James Moss, M.D.

JACK CLARK FRANCIS

Dedicated to the memory of my grandparents,
Clyde and Ida Woodring.

RICHARD W. TAYLOR

This INVESTMENTS book is designed to aid investors, students of financial investing, and those studying for the Chartered Financial Analysts (CFA) exam. The book may be used as a textbook, a supplement to a textbook, a reference book, or a self-study tool.

In the Schaums tradition, this book emphasizes solved problems. Many definitions, explanations, graphs, and realistic examples are provided too. But question and answer sets and solved problems are the backbone of all Schaums books. Oftentimes the answers to the solved problems cannot be determined from material covered in the preceding pages. The reader is expected to learn by reading the question and its solution.

This book has many numerical examples and problems that have quantitative answers. There are not as many essay questions and answers. This is in keeping with the Schaums emphasis on solved problems. It is also appropriate because investment decision-making largely involves quantitative theories, financial planning that is denominated in dollars, and choices between quantitative alternatives.

We wrote INVESTMENTS to be a comprehensive monograph that does not favor any particular approach to investment analysis. At least one complete chapter is devoted to every major investments theory or school of thought.

We have labored to create a unique and valuable learning tool. But we have not done it all ourselves. Barbara Gilson, editorial director of Schaums Publications; and John M. Morriss, editing manager; and some expert reviewers who read earlier drafts of the book and made valuable criticisms and suggestions contributed significantly to this final product.

JACK CLARK FRANCIS
RICHARD W. TAYLOR

The money market is a large, wholesale market where billions of dollars of low-risk, unsecured, short-term, zero coupon debt instruments that are highly liquid are issued and actively traded every day. The money markets in the United States are largelarger than the New York Stock Exchange, for example.

Investors buy money market securities at discount from their face values and reap whatever income they may earn from price appreciation that typically occurs as the maturity date of the security draws near. At maturity the face value (or principal) is repaid to the investor owning the security on that date. If market interest rates rise, then the market prices of almost all debt securities fall in response, so investor losses that result from changes in the market interest rates are a possibilitythis is called interest-rate risk. Most issues of money market securities have such high credit ratings that risk of default is almost nonexistent.

Brokers are salespeople who work for a commission, and they have no money of their own invested in the securities they sell.