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82 Cards in this Set
- Front
- Back
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IPO (primary market)
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When firms sell securities for the very first time
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primary market transactions (primary market)
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subsequent sales of a firm's new stock or bonds to the public
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organized exchange (secondary market)
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a building where securities trade (NYSE)
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over-the-counter-market (secondary market)
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dealers at different locations who have an inventory of securities stand ready to buy and sell securities 'over the counter' to any willing customer (US government bond market, NASDAQ))
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bond
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securities that represent debt owed by the issuer to the investor, and typically have specified payments on specific debts
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Treasury Inflation Protection Securities (TIPS)
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*the principle amount is tied to the current rate of inflation
*designed to protect investor purchasing power |
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Separate Trading of Registered Interes and Principle Securities (STRIPS)
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*the coupon payments are "stripped" from a T-bond and sold as individual zero-coupon bonds
*each can be held or treated separately |
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Agency Bonds
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*issued by government-sponsored entities, such as the Student Loan Marketing Association, Federal Housing Administration, and Fannie Mae
*carry little risk since the US government provides an "implicit" guarantee that they will not let the debt default |
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Municipal Bonds
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*issued by local, county, and state governments
*used to finance public interest projects *tax-free municipal interest rate = taxable interest rate x (1-marginal tax rate) |
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general obligation bond (muni bond)
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*backed by the "full faith and credit" of the issuer
*does not have specific assets pledged as security or a specific source of revenue allocated for their repayment |
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revenue bond (muni bond)
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backed by the cash flow of a particular revenue-generating project (toll road)
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Corporate Bonds
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*typically have 1000 face value
*pay interest semi-annually |
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bearer bonds
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in the past were sold with attached coupons that the owner of the bond clipped and mailed to the firm to receive interest payments
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registered bonds
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used to facilitate better tracking of interest payments for IRS reporting putposes
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degree of risk
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varies with each bond, even with the same issuer
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restrictive covenants
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impose rules and restrictions on managers designed to protect the bondholder's interests (limit the mount of dividends the firm can pay)
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call provisions
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state that the issuer has the right to force the holder to sell the bond back (require a waiting period between when the bond is sold and when the bond can be called)
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sinking fund
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requires the firm to pay off a portion of the bond issue each year
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conversion
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*some bonds may be converted to equity
*convertible bonds are similar to stock options but are typically more limited |
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secured bonds (corporate bonds)
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*bonds with collateral attached
*less risky than comparable unsecured bonds and as a result, have a lower interest rate *(mortgage bonds, equipment trust certificates) |
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unsecured bonds (corporate bonds)
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debentures: long-term unsecured debt that are backed only by the general credit-worthiness of the issuer
subordinated debentures: similar to debentures except that they have a lower priority claim |
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variable-rate bond (can be secure or unsecured)
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feature an interest rate that is tied to another interest rate, such as the rate on treasury bonds, and is adjusted periodically
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junk bonds (aka speculative or non-investment grade bonds)
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bonds rated below S&P's BBB rating
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investment grade scale
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Moody's: Aaa-Baa
S&P's: AAA-BBB |
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non-investment grade scale
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Moody's: Ba-C
S&P's: BB-D |
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financial guarantee
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ensures that the lender will be paid both principle and interest in the event the issuer defaults
*lower risk of bonds *usually backed by large insurance companies |
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credit default swap (CDS)
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provides insurance against default in the principle and interest payments of a credit instrument
*introduced by JP Morgan in 1995 *$62 trillion at their peak *$25 trillion in CDS outstanding atm |
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coupon interest rate
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stated annual interest rate on the bond, usually fixed for the life of the bond
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current yield
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coupon interest payment divided by the current market price of the bond
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face amount
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*maturity value of the bond
*holder of the bond will receive the face value amount from the issuer when the bond matures * synonymous with par value |
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indenture
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*contract that accompanies a bond and specifies the terms of the loan agreement
*includes management restrictions called convenants |
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market rate
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*interest rate currently in effect in the market for securities of like risk and maturity
*the market rate is used to value bonds |
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maturity
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the number of years or periods until the bond matures and the holder is paid the face amount
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yield to maturity
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yield an investor will earn if the bond is purchased at the current market price and is held until maturity
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investing in stocks
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*represents ownership in the firm
*stockholders have claim on all assets *stockholders have right to vote for directors and on certain issues *can earn return through dividends and stock appreciation |
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preferred stock
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*has features of debt(determinable cash flows) and equity(no maturity, dividends are not deductible, bankruptcy will not result in non-payment of dividends)
*firms may issue series of preferred stock with differing features *claim on assets and income *safer than common stock (and has a lower return), riskier than bonds (and has a higher return) |
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common stock
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*stockholders may only lose what they've invested (limited liability)
*claim on assets and income after ps and debtholders have been paid *voting rights |
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Electronic Communication Network (ECN)
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*allow brokers and traders to trade without middlemen
*advantages: transparency, faster execution *disadvantages: work well only for high-volume stocks |
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Exchange Traded Funds (ETFs)
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*recent innovation where a basket of securities is purchased and a stock is created based on the basket, it is then traded on an exchange (ex: ETF that tracks the performance of the S&P 500)
*advantage: certain valuation *disadvantage: requires a commission * |
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Dow Jones Industrial Average (DJIA)
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*includes 30 large industrial stocks
*price-weighted average |
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S&P 500
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*includes 500 large capitalization stocks
*market-value weighted |
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NASDAQ Composite
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*includes over 3,000 stocks
*commonly tracked as an indicator of how high-tech and growth companies are performing *market-value weighted (DAO is price-weighted) |
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Division of Corporate Finance (SEC branch)
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*responsible for collecting, reviewing, and making available documents that public companies are required to file such as annual reports and registration statements
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Division of Market Regulation (SEC branch)
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establishes and maintains rules for orderly and efficient markets
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Division of Investment Management (SEC branch)
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oversees and regulates the investment management industry
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Division of Enforcement (SEC branch)
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investigates violations of the rules and regulations established by other divisions
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Why might a firm want to go public?
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*raise capital
*diversifying ownership (risk) *can always issue more shares (enhances liquidity) |
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Steps to an IPO
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1) choose an investment bank
2) file registration statement with the SEC 3) select a price range for the preliminary prospectus (red herring) 4) go on a road show 5) set a final price offer for the final prospectus, filed with the SEC |
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investment bank
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known as the underwriter, assists the company by pricing and marketing the initial offering of stock (syndicate: when a firm hires more than one investment bank)
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road show
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company promotes its business plan and attempts to gauge demand for the upcoming IPO (institutional investors, ie mutual funds, are the most common investor types in attendance at such meetings)
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oversubscribed
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an IPO where the demand for shares exceed their supply
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underpricing
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IPO is well below the closing stock price on the first day of trading, this price differential is known as a "pop"
underpricing = (1st day closing price - offering price) / offering price |
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money left on the table
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money that the firm loses out on to investors due to underpricing
MLOT = (1st day closing price - offering price) x # of shares issued |
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hot issue IPO market
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market where IPOs are in hot demand, associated with large pops and substantial underpricing. (eBay)
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after-market
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begins on the first day of trading and usually ends several months to a year after the IPO
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silver deal
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when an underwriter intends for there to be oversubscription and designed to pop, usually when a firm makes only 10% of their shares available (Groupon)
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IPO notes
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*common for IPOs to underperform in the long run
*firm can also raise capital through private placement rather than an IPO (venture capital) |
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S-1
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known as the registration statement
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424b4
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known as the prospectus
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Efficient Market Hypothesis (EMH)
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efficient market is one where prices quickly and accurately reflect all available info
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3 forms of market efficiency
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*weak-form: current prices reflect past prices
*semi-strong form: current prices reflect all publicly available information *strong-form: current prices reflect all information including insider info |
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random walk theory
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indicates that there is no predictability in stock market returns
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hedging
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engaging in a financial transaction that reduces or eliminates risk
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forward contracts
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*agreement between two parties to engage in a financial transaction at a future point in time
*usually specify: what, where, when, how much *advantages: flexible *disadvantages: lack liquidity, subject to default risk |
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financial futures contracts
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*legally binding agreement between two parties to engage in a financial transaction in the future
*specifies delivery at future date *price of the contract equals the price of the asset delivered, at expiration |
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interest rate swaps
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exchange of one set of interest payments for another set of interest payments denominated in the same currency
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plain vanilla swap (interest rate swap)
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*amount
*rates being exchanged *type of payments *advantage: reduces interest rate risk *disadvantage: lacks liquidity |
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writer (options)
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issuer/seller
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owner/holder (options)
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chooses whether to exercise the option
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clearinghouse
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settles option transactions if they are exercised and guarantees the performance of the writer
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options
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financial instruments that trade on exchanges
American options may be exercised before expiration, Euro options may only be exercised at expiration |
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call option
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holder of a call option has the right to purchase the "underlying" stock from the writer at a specified price for a specified time (for American) or on a specified date (for Euro)
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put option
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holder of a put option has the right to sell the "underlying" stock to the writer at a specified price for a specified time or on a specified date
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strike price
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specified price at which stock is purchased (sold) with a call (put) option, (exercise price, denoted "X")
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option period
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specified time period an american option may be exercised
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expiration date
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specified date which Euro options may be exercised
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premium
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price paid by the holder to the seller to purchase an option
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exercise (intrinsic) value
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immediate profit earned from exercising the option
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hedger
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option trader who has or wil have a position in the underlying asset
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speculator
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option trader who has no position in the underlying asset
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risks corporations might wish to mitigate
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*interest rates
*exchange rates *default risk *liquidity risk *political risk *natural disasters |
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margin requirement
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deposit required by the clearinghouse in order to prevent defaults on futures
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