1. Securities Markets, Investment Securities, and Economic Factors
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1 1. Securities Markets, Investment Securities, and Economic Factors What is a Security Investment of Money In pooled interest With expectation of Profit Managed by third party 2 primary types, and a third major; Equity (Ownership) Bonds (Debt) Money Markets (specific short term debt) There are others, those are the biggies, including Variable Insurances.
2 Equity Common Stock Primarily capital appreciation Voting rights Potential dividends Lowest liquidation claims in bankruptcy Preemptive Rights Round Lots (100)
3 Cumulative Voting Allocate all votes any way, including all for 1, benefits small owners. Statutory Voting Can allocate 1 vote per share per seat, benefits large owners.
4 Preferred stock Stated interest rate on certificate Higher liquidation claims in bankruptcy than common stock No voting No proportional ownership rights Attachments; Straight Preferred: Nothing other than stated rate if BOD declares dividend. Callable: Issuer can force investor to sell the security to them. Higher stated return than straight. Convertible: Investor can convert the security into common shares. Lower stated return than straight. 1000/(Conversion Factor)=(Number of Shares). Participating: If BOD declares larger dividend, this preferred gets larger dividend. Lower stated return than straight Cumulative: If dividends missed, all missed dividends must be paid to cumulative preferred owners before anyone else gets new dividend. Lower stated return than straight.
5 Broker/Dealer
6 Bonds/Debt Needed Definitions Par Face amount, amount paid on maturity, for bonds is $1000. ($100 for preferred stock) Coupon Stated interest rate, or nominal yield printed on the Certificate. Interest paid every six months. Annual income is the coupon times par, or coupon times $1000. Take the decimal, move it two places to the left, that is annual income. Maturity The date when interest payments stop. Stated at issue of the bond. On maturity date, last interest payment and $1000 is paid. Also known as Redemption.
7 Yields Current Yield is (Annual Income) (Cost to Purchase). The annual income is the coupon times Bond Quotations Given as percentage of Par. Be careful with decimals, if it says.08,.16, or.24 that is in 32nds. If.08 take percentage and add 2.50, if.16 add 5.00, and if.24 add 7.50.
8 Direct US Government Debt Treasury Bills <1 year maturity No interest, sold for less than par, matures at par Treasury Notes 2-10 year maturity Sold at par Semiannual interest Treasury Bonds 10+ years Sold at par Semiannual interest U.S. Government Securities Marketable US Bonds Maturity Minimum Denominations Interest Price T-Bills ( ) weeks or $1,000 At Maturity Discount (3-6-12) months T-Notes 2-10 Years $1,000 ½ Year Par T-Bonds Years $1,000 ½ Year Par
9 US Agency Debt GNMA Monthly Income Backed by full faith and credit of US Government Other Agency s are not backed by full faith and credit and have semi-annual instead of monthly income Municipal Bonds Issued by municipalities General Obligation Backed by taxing authority Revenue Bonds Backed by specific revenue stream Federally tax exempt, if from same state generally state and local exempt as well. Generally, for high income (high tax bracket) individuals
10 Corporate Bonds Issued by corporations Credit Ratings (Investment vs Junk) Stated interest on the certificate, paid semi-annually Attachments; Callable o o o o The issuer can force the investor to sell the bond back before maturity, thus ending the expected interest payments. Allows issuer to pay off debt early, and refinance to lower interest rate. Can t be called for at least 5 years Higher than normal coupons. Convertible o Investor can convert the bonds into common stock. (Number of Shares)=(1000)/(Conversion Price). o Lower than normal coupons. Municipal and Corporate Equivalence Municipal lower than Corporate at equivalence
11 Zero Coupon Bonds (Zeroes) Pay no interest Bought at steep discount, matures at par, difference is the income Taxable each year as phantom income Duration = Maturity Traditional US Gov t EE Savings Bonds, buy for $25, matures at $50. Treasury Inflation Protected Securities (TIPS) Risks Money Markets Semiannual adjust par value to reflect inflation. Interest based on par so increases as well. Interest Rate The risk that changes in the interest rate will affect the value of the security. Present in all fixed income securities. Purchasing Power The risk that due to inflation, the value of the money will not be what it was when maturity reached. Cash Equivalents Short term debt: Maturity less than 270 days. Treasury Bills, Commercial Paper, Banker s Acceptances, Jumbo CDs (>$100k, negotiable)
12 American Depository Receipts US trading of foreign companies in US dollars Issued by US banks to allow trading of foreign companies Purchased and payed in US dollars Mortgage Bonds Most common type of Secured Bond Backed by real Property that the issuer owns Equipment Trust Certificate Backed by specific piece of equipment Example: Airplanes or Railroad cars Not backed by issuer Collateral Trust Certificate Issued by corporations that own subsidiaries companies Stock of the subsidiary company pledged as collateral for their bond issue Example: Pepsi... Yum! Brands
13 Other Important Information Liquidation From first to get paid to last; 1. Wages. 2. Taxes. 3. Secured Bonds. 4. General Creditors. 5. Debentures. 6. Subordinated Debentures. 7. Preferred Stock. 8. Common Stock.
14 Derivatives Puts Calls Rights Warrants The buyer bets stock will go down. Seller believes it will stay the same or go up. The buyer bets stock will go up Seller believes it will stay the same or go down. Max 60 days. Issued with purchase price below current market value. Preexisting shareholders given first right to buy new issue, they can sell them. Long term Issued with purchase price above current market value. Generally attached as sweetener to bond or other security issue.
15 Monetary Policy Controlled by the Federal Reserve Board FOMC Discount Rate (Prime is based on discount) Reserve Requirement Regulation T o o o o Margin Requirements Currently 50% must be down payment Must pay BD within 5 business days or account frozen for 90 days Only cash trades, no borrowing No mutual funds on margin Primary focus to control inflation Supervises and regulates banks Maintains stable financial system Tighten/Loosen money policy Fiscal Policy Controlled by President and Congress Primary focus to stabilize economic growth and high levels of employment
16 Strong/Weak Dollar When dollar is strong (goes up), exports become less competitive (go down), and imports become more competitive (go up) When dollar is weak (goes down), exports become more competitive (go up), and imports become less competitive (go down)
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