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111 Cards in this Set

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Security
- an investment that represents ownership or debt in a company
- a debt investment is a loan in exchange for interest income
OTC
- stocks and bonds are purchased and sold over the counter - the NYSE is an example - it is an auction market where buyers and sellers are matched by a specialist
- no physical location
Balance Sheet
- summarizes the companies assets (investments, property, ect.), liabilities (debts), and equity (net worth; excess of assets over liabilities)
common stock
- authorized
- issued
- outstanding
- treasury
authorized stock
- specific number of shares the company has authorization to issue or sell
Issued stock
- authorized and distrubuted to investors
- if a corp doen'st issue all authorized stock, it reserves them to raise new capital for expansion, pay stock dividends, provide stock purchase plans for employees, exchange common stock for convertible bonds or preferred stock, or to satisy the exercise of warrants
outstanding stock
any issued shares that have not been repurchased - stock that is investor owned
treasury stock
- issued stock that has been repurchsed from the public
- the corp can hold the stock or reissue or retire it
- corp can reissue treasury stock to fund employee bonus plans, distribute stock options, to increase earnings per share, or to use for future acquisitions
- does not carry voting or dividend rights
par value
- arbitrary value for the company's articles of incorporation
- has no affect on market price
when the corp sells stock, the money exceeding par is recorded as capital in excess of par or paid in surplus (paid in capital)
book value
- measure of how much a common stock holder receives per share if the corp were liquidated
- can and usually does differ substantially from market value
market value
- price investors must pay to buy the stock
- supply and demand value of stock
voting rights
- allow common stock holders to exercise control by:
- electing board of directors
- voting on issuance of convertible securities
- voting on changes in business
- voting on declarations of stock splits
- they do not vote on dividend related matters
Statutory voting
- allows a stockholder to cast one vote per share for each idem on a ballot
cumulative voting
- allows stockholders to allocate their total votes in any manner they choose
proxy
- an absentee ballot
- a company usually sends proxies to shareholders for a specific meeting - known as a proxy solicitation
preemptive rights
- stock holders have this right to purchase enough newly issued shares to maintain their proportionate ownership in the corporation
- known as antidilution provision
stock split
- high market prices may inhibit trading of the stock and corps will do this to make the stock price attractive to a wider base of investors
forward stock split
increases the number of shares and reduces the price without affecting the total market value
reverse splits
- investors own fewer shares worth more per share
- if operating income remains the same the earnings per share increase
short sale
- when an investor sells shares before he owns them so that he can buy them back at a lower price
dividends
- cash dividends - regular quarterly dividends
- stock dividends - additional shares in the issuing company
- property dividends - shares in the subsidiary
preferred stock
- an equity security that represents ownership but doens't offer the appreciation potential in common stock
- issued as a fixed income security
- price fluctuates with changed in interest rates rather than with the company's business prospects
- most is nonvoting
- receive dividends before common stockholders
- take priority claim over common stockholders during bankruptcy after creditors have been paid
- par value is meaningful
- dividends not guaranteed - usually paid semiannually
Straight preferred stock
- noncumulative - has no special features beyond the stated dividend payment
cumulative preferred stock
- when the company can resume full payment of dividends, cumulative preferred stockholders receive their dividends plus total accumulated dividends before any dividends may be distributed to common stockholders
convertible preferred stock
- often issued with a lower stated dividend rate than nonvonvertible
- the conversion of preferred stock into shares of common increases the total number of common shares outstanding and will decrease the earnings per share and may decrease the market value
participating preferred
- offers its owners a share of corporate profits that remain after all dividends and interest due are paid
callable preferred
- company can buy back from investors at a stated price after a specified date
- allows the company to replace a high fixed dividend obligation with a lower one
- if a call is activated, dividend rights and conversion priviledges no longer exist and the corp will pay a premium exceeding the stock's par value
street name
- shares held in a brokerage account in the firm's name to facilitate payments and delivery
stock dividends
- company issues shares of its common stock as a dividend to its current stockholders
- the only tax effect of a stock dividend or split is to reduce the investor's cost basis per share
current yield
- also called dividend yield
- the annual dividend divided by the current market value of the stock
stock certificate
- indicates the shares of a corporation a person owns - most are share ammounts evenly divisible by 100
- an investor who buys 100 shares receives on ertificate for 100 shares
- they generally identify the company's name, number of shares, the investors name, and a CUSIP number
CUSIP number
- A committee on Uniform Securities Identification Procedures number is a universal security identification number. All stocks contian this number and is used to track certificates
stock power
- must be signed to transfer ownership of stock
- once stock power has been signed the NYSE must guarantee the signature
transfer agent
- responsible for :
- confirming the correct owner's name
- canceling old and issuing new certificates
- maintaining records of ownership
- handling problems relating to lost, stolen, or destroyed certificates
registrar
- ensures that a corporation does not have more shares outstanding than have been authorized
- also responsible for certifying that a bond represents a legal debt of the issuer
- must be independant of the issuing corporation and is usually a bank or trust company
Nasdaq
- National Associate of Securities Dealers Automated Quotation system
- can be placed in three distinct market tiers:
1) nasdaq global select market - newest - stringent listing requirements
2) nasdaq global market - largest - relaxed listing requirements
3) Nasdaq capital market - formerly the nasdaq smallcap market
Dividend department
- collects and distributes cash dividends for stocks held in a street name
- handles interest payments, stock dividends, stock splits, rights and offerings, warrants, and any special distributions to stockholders or bondholders
Dividend Disbursing Process
DERP
- Declaration Date - corp notifies the NASD at least 10 business days before record date
- ex-date - is two business days before the record date
- record date - stockholders receive the dividend distribution - a customer must purchase the stock three business days before the record date to qualify for the dividend
- payable date - dividend disbursing agent sends dividend checks to all stockholders
- all of these dates are determined by the BOD or the NASD
due bill
printed statement showing a buyer's right to a dividend. if the dividend goes to the wrong party the firm will send this as a demand for the dividend
rights offering
allows stockholders to purchase common stock below the market price
- stockholders may exercise the rights to buy stock, may sell the rights as a profit, or may let the rights expire and lose their value
subscription right
certificate representing a short term (30 to 45 days) privilege to buy additional shares
- one right is issued for each common stock share outstanding
terms of an offering
describe how many new shares a stockholder may buy, the price, the date the new stock will be issued, and the final date for exercising the rights
cum rights vs. ex rights
an investor who buys stock cum rights receives the right. an investor who buys stock ex rights does not
cum right and ex right formula
market price minus subscription price divided by the number of rights to purchase 1 share plus 1
- if you are asked the value of a right before the ex date use the 1 if you are asked the value of a right on or after the exdate don't use the 1
warrant
- certificate granting its owner the right to purchase securities from the issuer at a specified price normally higer than the market value
- usually a long term instrument
- also allow issuers to offer stock at a lower rate because of the added benefit
- are detachable and can be sold separately from stock
rights vs. warrants
Rights - short term - exercise price below market price - may trade with or separate from common stock - offered to existing shareholders with preemptive rights
- warrants - exercise price higher than market price - may trade with or separate from the units - offered as a sweetner for a security
ADR
American Depositary Receipt
- facilitate the trading of foreign stocks in US market
- ADR holders have the same rights except no preemptive rights
- have currency risk
custodian bank
- banks that issue ADRs
- it holds the shares of foreign stock that the ADRs represent
REIT
Realestate investment trust
- serve as a source of long-term financing for real estate projects
- can avoid being taxed as a corporation by having at least 75% of total investment assets in real estate and distributing at least 90% or more of its net investment income to its shareholders
- trade or exchange on OTC
- Dividends taxed as Ordinary Income
Funded Debt
corporate bonds with maturities of fibve years or more
An investor purchases 5M ABC J&J 15 8s of 09. What will the investor receive at maturity of the bond
5M: 5 $1,000 bonds
ABc - issuer
J&J 15 - pays interest on January and July 15th - if there is no 15 assume interest is paid on the first of the month
8s - pays states rate of 8% annually - cupon or nominal rate
09 - receive principal in 2009
three types of bond maturities
term maturity - term bond is structured so that the principal of the whole issue matures at once - issuers may establish a sinking fund account to accumulate money to retire the bond at maturity
Serial Maturity - a serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid
Balloon maturity - elements of serial and term - issuer repays part of the bond's principal before the final maturity date bubt pays off the major portion of the bond at maturity
cupon bonds
- bearer bonds
- cupons are payable to the bearer
when bond matures, the bearer delivers it to the paying agend and receives principal
- no proof of ownership is needed to sell a bearer bond
types of registered bonds
1) registered bonds - buyers name appears on the bond certificate and owner recieves the certificate
2)fully registered - transfer agent maintains list and updates list as bond ownership changes
3)registered as to principal only - owners name printed on the certificate - cupons are in bearer form - when sold the names of the new owners are recorded on the bond certificates and on issuers record - these are no longer issued
4) book entry bonds - owners do not receive certificates, the transfer agent maintains the security ownership records
Corporate bond quotes
- usually stated as percentages of par in increments in 1/8
- bid of 100 means 100% of par or 1,000
- bond quote of 98 1/8 means 98 and 1/8% (98.125) of 1,000
- one point is 1% or 1,000 or 10.00 - there are 100 basis points in each point, standa & rdpoors, and fitch
specific creteria used ot rate corporate and municipal bonds
- ammount and composition of debt
- stability of the issuer's cash flow
- issuers ability to meet payments of interest and principal
- asset protection
- management capability
- the three major rating agencies are moody's
investment grade
- a municipal bond must be investment grade to be suitable for purchase by banks
- these bonds are also known as bank grade bonds
US Government securities
- Treasury bills
- treasury notes
- treasury bonds
- savings bonds - series EE ahd HH bonds
municipal issues
- 3rd safest security next to government securities
- General obligation bonds are backed by the taxing power of the issuer - safer than revenue bonds
what is the order safe to risky in corporate bonds
1)secured bonds
2) debentures
3) subordinated dedbentures
4) income bonds
redemption
when a bonds principal is repaid the bond is redeemed - occurs on the maturity date
sinking fund
- facilitates the retirement of bonds - operated by the bond's trustee
- often required by the trust indenture - used to call bonds, redeem bonds, or buy them back
- to establish, the issuer deposits cash in an account with the trustee
- can aid the bonds marketability(liquidity)
- highly rates issuers do not usually establish sinking funds
calling bonds
- term bonds are generally called by random drawing
- serial bonds are usually calld in inverse order of their maturities because longer maturities have higher interest rates
- bonds are called when rates are lower than when bonds were issued - involves call risk
- a new bond usually has a noncallable period of five or 10 years
refunding bonds
- practice of raising mone to call a bond
- issuer sells a new bond to generate funds to retire an existing issuer
- a type of refinancing
pre-refunding
- a new issue is sold at a lower coupon before the original bond can be called
- an issuer will do this to lock in a favorable interest rate
- form of terminatino of the issuers obligation
- also called advance refunding
- usually occurs where there is a call protection period but if interest rates are low a low rates can be locked in by issuing the new bonds
- pre-refunded bonds are AAA rates, considered defeased, are escrowed in government securities, has increased marketability, once issued is no longer considered part of the outstanding debt of the issuer
put options
- in return for accepting a slightly lower interest rate, an investor receives the right to put or sell the bond to the issuer at full face value
- most commonly found in municipal bonds
nominal yield
- coupon yield
- a fixed percentage of the bonds par value
- coupon of 6% means the bondholder is paid 6% of par - 60.00
current yield
measures bonds coupon payment relative to its market price
- current yield = annual income divided by current market price
- bond prices and yields move in opposite directions
Yield to maturity
- reflects the annualized return of the bond if held to maturity
- annual interest minus (premium divided by years to maturity) divided by the average price of the bond
- the average price is the price midway between the purchase price and par
- another term for YTM is Basis
yield to call
reflects the early redeption date and consequent acceleration of the discount gain or premium loss from the purchase price
- YTC for a premium bond called at par is lower than the nominal , current and YTM
- for a bond bought at a discount, YTC is always higher
Ranking yields from lowest to highest
for disounts it is Nominal, CY, YTM, YTC - for premiums it is exact opposite
yeild curves
- a normal or ascending yield curve occurs during expansion - predicts rates will rise
- flat yield is when economy is peaking - no change expected
- inverted or descending is when the federal reserve has tightened credit - rates will fall
secured bonds
- mortgage bonds
- open-end indentures
- closed-end indentures
- prior lien bonds
- collateral trust bonds - issued by corporations that own securities of other companies as investment - are backed by another company's stocks or bonds
- equipment trust certificates - used by railroads, airlines, trucking companies, and oil companies - used to finance purchase of equipment
unsecured bonds
- no specific collateral backing - classified as subordinated debentures or debentures
- debentures are backed by the credit of the issuing company
- subordinated debentures - subordinated to the claims of other creditors - usually offer higher yields because of their subordinate (riskier) status
heirarchy of claims in liquidity
- unpaid wages
- IRS
- secured debt
- unsecured liabilities and creditors
- subordinated debt
- preferred stockholders
- common stockholders
guaranteed bonds
- backed by a company other than the issuing company
income bonds
- adjustment bonds
- used when a company is reorganizing and coming out of bankruptcy
zero coupon bonds
- an issuer's debt obligation that do not make regular interest payments
- they are issued at a deep discount to their face value and mature at par
- advantages - offer investors a way to speculate on interest rate moves
- disadvantage - more volatile than traditional bonds - the longer the time to maturity
- investors owe income tax each year on the amount by which the bonds have increased just as if the investor received it in cash
- no reinvestment risk
trust indenture act of 1939
- requires corporate bond issues of 5 mil or more to be issued under a trust indenture - a legal contract b/w bond issuer and trustee - specifies the issuer's obligation and bondholder's rights and identifies the trustee
- requires a corporation to appoint a trustee for its bonds - usually a commercial bank or trust company
- the trustee monitors compliance with the covenants of the indenture and may act on behalf of the bondholders
- federal and municipal governments are exempt from the act but they can be issued with the indenture to make them more marketable
in a trust indenture for a mortgage bond the debtor corporation agrees to
-pay the interest and principal of its bonds
- specify where bonds can be presented for payment
- defend the legal title to the property
- maintain the property to ensure business
- insure property against losses
- pall all taxes and assessments
- maintain corporate structure and right to do business
closed and open end covenants
- bonds with closed end covenants have senior claim on the underlying assets - called senior lien bonds
- an open end premits subsequent issues to be secured by the same property and have equal liens on it
bond brokers
- brokerage firms enlist them to execute the orders on their behalf
- they charge a small fee for each order executed
conversion price and ratio
- only a factor of parity not market price
conversion parity
- parity means taht two securities are of equal dollar value
- formula - market price of the bond divided by number of shares = parity price of common stock
antidulition
- dilution of an investors ownership interest occurs when the percentage of ownership is lessened
- convertible bondholders are protected by an antidilution covenant found in the trust indenture
treasury securities
1)treasury bills - short term - issued at a discount - return is the difference b/w price and par value - issued in denominations of 1,000 to 1 mil. - maturities of 4,13, and 26 weeks
2) t-notes - pay interest every 6 mths - intermediate term at 2 to 10 years - mature at par or can be refunded - quotes as a percentage of par in 1/32s
3) t-bonds - long term securities - 10 to 30 years - pay every 6 mths - quotes like t-notes
treasury receipt
- created from notes and bonds
- broker dealers buy treasury securities and place them in a trust to be used as collateral
STRIPS
- Separate trading of registered interest and principal of securities
- zero coupon bond issued and backed by the treasury department - treasury receipts are not backed by the government
TIPS
- treasury inflation protection osecurities
- help protect investors agains purchasing power risk
- these notes are issued at a fixed rate but the principal amt is adjusted semiannually equal to the change in teh consumer price index (the standard measurement of inflation)
- exempt from state and local income tax
Government agencies
- the second highest level of safety
- government does not back the issues except for GNMA
1) Farm credit administration
2) GNMA
3) FHLMC
4) FNMA
5) SLMA
- usually have higher yields than government issues but lower than corporate bonds
GNMA
- Government national mortgage association
- government owned - supports the dept of housing and urban development
- buys FHA and VA mortgages and autions them to private lenders who pool the mortgages and create pass-through certificates for sale
- guarantees timely payment of interest and principal
- minimum denominations of 25k
- they are taxed at all levels
- significant reinvestment risk
- also prepayment risk - that mortgages will be paid off earlier than anticiapted (people refinancing if interest rates fall)
- extended maturity risk - mtgs will remain longer than anticipated - interest rates rise
FCS
- Farm credit system
- privide agricultural financing and credit
- funds are made available to farmers through a nationwide network of eight banks and 225 farm credit lending institutions
- exempt from state and local taxes
FHLMC
- Federal Home loan Mortgage corporation - Freddie Mac
- stock trades on NYSE
- promotes the development of secondary market in mortgages by buying residential mortgages and turning them into mortgage backed securities
- also form pass-throughs - sell two types:
1) mortgae participating certificates (pc) - make principal and interest payments once a month
2) Guaranteed mortgage certificates (GMC) - make payments 2 times a year and principal payments once a year
- federal, state and local tax
FNMA
- Federal National Mortgage Association - Fannie Mae
- publically traded corporation
- purchases conventional and insured mortgages from FHA and VA
- issues debentures and notes and mortgage backed securities
- issued in book entry form only - interest paid semiannually
SLMA
- Student loan marketing association - Sallie Mae
- issues discount notes and short term floating rate notes
- proceeds from securities sales are used to provide student loans for higher education
- exempt from state tax
treasury auction bids
- competitive bids - placed by primary dealers in US gov. securities
- noncompetitive bids - placed by market participants - smaller banks, broker/dealers, insurance companies and individuals - these bids are always filled because the price is the lowest accepted price called the stop out price
dated date
- the date from which interest accural begins
accrued interst calculation
- corporate and municipal bonds use 30 day month (360 days a year) calculation - regular way settlement is 3rd business day from trade date
- US government bonds use actual calendar days (365) - settlemnt is the next business day after trade date
CMOs
- Collateralized mortgage obligations
- mortgage-backed securieits like the pass-throughs
- they pool a large number of mortgages and they are structured into maturity classes called tranches
- are rated AAA because they are backed by GNMA, FNMA, and FHLMC
- pays principal and interest bue it repays principal to only one tranche at a time
- plain vanilla CMO pays interest on all tranches simultaneously
- are not backed by the government
- taxable at all levels
- issued in 1,000 denominations and trade OTC
-
classes of CMOs
1) principal only - income stream comes from principal payments on the underlying mortgages - ultimately repays entire face value - sells at a discount from par
2)interest only - sells at a discount and cash flow declines - increase when interest rates rise whereas POs do not
3) planned amortization class - PAC - targeted maturity dates - protected from prepayment risk and extension risk because it is transferred to companion tranches
4) target amortization class - TACs - transfers prepayment risk only - slightly higher interst rate
5) zero tranche com - Z-tranche - receives no payment until all preceding cmo tranches are retired - most volatile
Series EE bonds
- issued at 50% of face value and reach final maturity 30 years from issuance
- interest paid semi-annually and is added to face value of bond
- designed to reach face value in 17 years but can be held up to 30 years
- taxable at federal level only
Series HH bonds
- no lonerger being issued
- issued at face value and paid interest every six months at fixed rate
Series I bonds
- designed for investors seeking to protect the purchasing power of their investment and earn a return
- the interst is a combination of a fixed rate and a variable semiannual inflation rate based on the consumer price index
capital market vs money market
- capital market - intermediate to long term financing in the form of equity or debt securieites with maturites of more than one year
- money markt - very short term funds - 1 year or less - examples are treasury bills, repos, reverse repos, bankers acceptances, commercial paper, cd's
repurchase agreement
- repo - institution raises cash by selling securities with an agreement to buy back the securities
bankers acceptance
- short term time draft with a specific payment date - usually between 1 and 270 days
- often finance international trade
- often used as collateral against federal reserve bank loans
- sold at a discount and mature at par - quoted in yield
commercial paper
- promissory notes
- issued to rais cash to finance accounts receivable and seasonal inventory gluts
- lower than bank loan rates
- maturities range fron 1 to 270 days but most within 90 days - issued in book entry form
- companies with excellent credit ratings issue these
interst rates
- federal funds rate - charged on reserves traded among member banks for overnight use in amounts of 1 mil or more
- cd rate - bank rate on nonnegotiable cds - least volatile of rates
- prime rate - base rate on corporate longs at large commercial banks
- discount rate - charge on loans to depository institutions by the federal reserve
- call money rate - charge on loans to broker/dealers
Eurobonds and eurodollar bonds
- both are issued outside the US
- eurodollar bonds pay in US dollars - issued in bearer form and interest paid once a year
- eurobonds pay in foreign currency
interbank market
- developed as a means of transacting business and trading, lending and consolidating foreign currency deposits
two types of trades
- spot trades - settle and are delivered in one to two business days - cash market
- forward trades - settle months later than spot trades