Series 6 Stocks And Debt Security

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Security

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Any investment of money in a common enterprise, with the expectation of profits to be derived primarily from the efforts of a person other than an investor

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Examples of Securities

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Notes, stock bond, investment contract, variable annuity, profit-sharing or partnership of agreement , certificate of deposit, option on a security

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Equity security

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Represents ownership. Conservative for the issuer but risker for investors bc of no obligation to pay back

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Common Stock

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Used to raise capital. All corporations issue this. Each share entitles a portion of companies profits distributed usually quarterly dividends. The price of it is based on supply and demand. They are sold in full shares. Ex dividend date is 2 days before record date as set by SRO. Trade in secondary market

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Authorized Stock

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When the company receives authorization to sell a specific amount of shares.

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Issued stock

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Once authorized, it can be distributed to investors

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Outstanding Stock

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Issued Stock-treasury stock= outstanding stock

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Equation

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Treasury Stock

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Type of common stock. Is stock a corporation has issued and subsequently repurchased from the public. It can be reissued. Has no voting rights

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Types of common stock

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Authorized, issued, treasury, outstanding

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Treasury Stock characteristics

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No voting rights, no dividends, can be reissued or retired

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Three methods of common stock valuation

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Market Value, Book Value, Par Value

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Market Price

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The price investors must pay to buy the stock

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Book Value

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The measure of how much you get when you liquidate the share of stock. This does differ from the market value.

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Par Value

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A meaningless arbitrary number for accounting purposes

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Privileges of Common Stock

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Voting Rights, election of BOD, preemptive right to buy and maintain share proportion

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Limited Liability

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Protects the stockholdera from having to pay a corporatiom's debt in bankruptcy. The stockholder cannot lose more than the principal

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Bullish

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The investor thinks the price of the stock is going to go up so they want the right to buy the shares at this current price. They are a call buyer and a put writer. Call=buy

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Bearish

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Believes that the price of the stock is going to go down so they want the right to be able to sell at a specific price. They have the right to sell. Put buyer and call writer. Put=sell

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Preferred Stock

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Purchased for Income. Dividends are fixed but not guaranteed. Does not have voting rights

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Types of preferred stock

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Straight (noncumulative)

Cumulative

Convertible

Callable (Redeemable)

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Priority of Dividend Payments

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1. Dividends

2. All other preferred dividend

3. Common Stock

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Cash Dividends

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Distributed by check or deposited in brokerage account. They are paid quarterly and taxed as dividend income in the year that they are received

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Stock dividend

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When a business uses its cash to pay for business purposes other than Paying cash dividends. A stock's market price per share declines after a stock dividend but the value remains the same

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Bond Registration

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All bonds issued today must be fully registered or book entry. The interest and the principal must be payable to one investor.

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Liquidation Priority

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1. Unpaid Wages

2.IRS taxes

3.Secured Debt (bonds and mortgages)

4. Unsecured debt (debentures) and general creditors

5. Subordinated debt

6. Preferred Stock

7. Common Stock

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Bond Par Value

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$1000

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Bond Points

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1 point=$10

1/4 point =$2.50

1/8 point=$1.25

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Stock point

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1 stock point=$1

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Basis point

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Is 1/100 of 1%. 100 basis points=1%. 75 basis points=.75%

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Bond Ratings

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AAA-BBB (S&P) Aaa-Baa (Moodys) is Bank grade investment bonds

BB-D and Ba-D is speculative bonds

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Under what circumstances do issuers call bonds

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When interests rates are declining

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A 6% Coupon (nominal yield) for a bondholder means

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The bondholder is paid $60 in interest annually or $30 every 6 months until the bond matures

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Current Yield for Bonds

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Annual interest/ market price

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Debt securities backed by govt

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US t bills, notes bonds, series EE, HH and I bonds

NEW Housing Authority bonds

GNMA (Ginnie Mae)

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Level of Safety with Bonds

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1.US govt and Agency

2. Issues of Agency Like orga

3. Municipal Issues (GO bonds)

4. Corporate Debt

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T Bill

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Maturies are expressed in weeks or one year. They are sold at a discount from par. They are sold in the secondary market. ARE NOT REDEEMABLE

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T bonds

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Are long term securities that pay interest every 6 months. They mature in more than 10 years

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T notes

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Pay interest every 6 months. Matures in 2-10 years

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TIPS

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Treasury Inflation Protection Securities. They are issued with fixed interest rate but the principal amount is adjusted semi annually based on the CPI. Subject to federal taxes

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STRIPS

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A zero coupon created from the U.S. Treasury. Cannot be bought or sold to regular investors. Can only be held and purchased through financial institutions and govt security brokers/dealers. Principal payments only. Subject to annual taxation on the per year accreted amount

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Stock splits

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An increase in the # of outstanding shares which decrease stock's par value but the market value remains the same.

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Dividend yield (current yield)

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Annual dividend/current market value of stock. Convert to percentage

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Exchanges

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Have physical locations and are considered an auction market. There is a trading floor where buyers and sellers trade

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Over the Counter

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Third Market. Dont meet the listed securities requirements. NASDAQ provides price. Trading btw broker and dealer. It is a negotiated market

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Fourth Market

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Negotiated Markwt. Trading btw institutions

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Spread

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The difference between the security's bid and ask price

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Ask

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The price at which an investor can buy from a broker/dealer. CUSTOMERS BUY AT ASK

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Bid

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The price at which an investor can sell to a broker/dealer

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American Depository Receipts

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Facilitate the trading of foreign stock in U.S. markets. It allows investors to buy foreign more easily. No preemptive rights or voting rights

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Pricing of Bonds

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Once issued bonds are sold in secondary market. The two primary factors that affect price is the issuer's financial stability and overall trends in interest rates. If interest rates fall, bond price increase. Generally, the higher the bond rating the lower the yield

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Nominal yield/coupon yield/fixed rate/ stated yield

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A fixed percentage of bond's par value. It is set at issuance of bond.

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Income (adjustment) bonds

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Bonds issued by companies emerging from bankruptcy. Imterest will only be paid if the issuer has the money. Never recommend this to investors who seek income

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General Obligation Bonds (GOs)

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Are backed full faith by the issuer. Used to raise funds for municipal capital improvements. These are tge safest bonds! Voter approval is required prior to use

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Revenue Bonds

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Can be used to finance any municipal facility. They fet their money from utilities, housing, transportation, education, etc. Not backed by full faith of issuer. Does not include real estate taxes!

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Industrial Development Revenue Bonds

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Are issued by a municipality for the benefit of a private sector corporation. It used to attract corporations to the city/state

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Guaranteed bonds

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Are backed by a company other than the issuer, like a parent company.

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Zero Coupon Bonds

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Debt obligations that DONT make interest payments. You get the bond for a discount and it matures to face amount.

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Recession

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Two consecutive quarters of contraction

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Depression

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6 consecutive quarters of contraction

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The 4 phase business cycle

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Expansion

Peak

Contraction

Trough and Recovery

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Tools the Federal Reserve use to fight inflation

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Reserve Requirement (least used)

Discount Rate

Federal Open Market Committee

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Antidilution provision

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Allows the investor to maintain the same conversion ratio in the event of a stock split or stock dividend

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Warrants

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A certificate granting its owner the right to buy securities from an issuer at a specified price usually above market price. Allows an investor to buy shares at a specified price in the future. Long term . Are not entitled dividends

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Rights

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allows stockholders to purchase common stock below the current market price. The rights may be sold in the secondary market. Only offered to existing shareholders

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Bond Yield Relationship

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If the coupon is higher than YTM (Yield to maturity) then bond is trading at premium. If at they are the same number then its par. Discount if coupon is less than YTM

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Long term debt prices

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Fluctuate more with a change in interest rates than does short term debt

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CMO

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Securities from pools of mortgages. Associated risk are prepayment, extension, and interest rate risk. Unsuitable for small unsophisticated investors

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Prime Rate

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Interest Rate commercial banks charge their prime or most creditworthy customers, generally large corporations.

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The current yield of a bond with a coupon of 7.5% currently selling at 105 1/2 is approximately...

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7.5%=$75. (1000/7.5)

105 1/2= $1055

CY=interest/current market price

75/1055=7.1%

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Refunding/Refinancing

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When we refinance, we take out a new debt and use the proceeds of that debt to pay off the old debt. Refunding is associated with callable bonds, callable at premium

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Minority Stockholders Voting

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They are more likely to be able to elecr representatives to the BOD through cumulative voting. Small stockholders may cast all of their votes on one position rather than spread them out and thus dilute them over two or three positions

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Commercial Paper

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An unsecured, short term promissory note issued by a corporation for financing accounts receivable and inventories. Usually issued a discount. Up to 270 days maturity

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Bankers Acceptance

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A money market instrument used to finance international and domestic trade. The importer/exporter of goods promise to pay face amount of note at maturity. Normally less than 3 months.

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Nonmarketable Govt Securities

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Are savings bonds that cannot trade in the secondary market. Series EE HH and I bonds. They are purchased from the Treasury Department and be redeemed with the Treasury Department only by the purchaser or a beneficiary. No longer sold in financial institutions but online

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Series EE bonds

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Sold at face value and gives interest monthly. If an investor redeems bond within the first 5 years they will give up 3 months of interest

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Secured Bonds

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1. Mortgage Bonds

2. Collateral Trust Bonds

3. Equipment Trust Certificates

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Unsecured Bonds

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Debentures

Subordinated debentures

CD's over $250,000

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Calculating Conversion Pairity of common stock

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Market price of bond/number of shares=pairity price of common stock

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Conversion Pairity of Convertible Bond

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Market Price of common stock X #of shares = pairity of convertible bond

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Pairity

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Is the state of a convertible bond or preferred stock when its price is equal to the market price of the underlying stock

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Negotiable Certificates of Deposit

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Are time deposits that banks offer. Min face value of $100,000. They can mature in one year or less

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Municipal Revenue Bonds

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Are backed by revenues generated from the use of the facility that was built with the bonds. Revenue bonds do not need voter approval

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Maturity of Bond Payment

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At maturity the bondholder will receive the face amount plus the final semiannual payment. So half of the coupon

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Current yield for stock

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Annual Dividend/ POP

DONT INCLUDE CAPITAL GAINS

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Contingent Deffered Sales Charge

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Is assessed with Class B shares, is a back-end load that decreases over time.

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Standby underwriting

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Allows a corporation to sell as much of a new issue to current stockholders as possible, backed by the underwriter's promise to purchase any unsold rights. It is associated with a rights offering.

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Capital Risk from least to most

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1.Treasury Bill

2. GNMA

3. ZERO COUPON

4. ADJUSTABLE PREFERRED STOCK

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Ex-dividend Date for Mutual Funds is normally

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Is normally the business day following the record date.

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The ex dividend date for corporate stocks in the secondary market

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Is two business days before the the record date

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Ex dividend date

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When investors can no longer recieve the dividend but the sellwr recieves it

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Mutual funds and separate accounts are similar bc

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1.May have diversified portfolios of common stock

2. Give investors voting rights

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NAV changes when

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When the fund pays a dividend

The portfolio changes in value

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Warrants

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A security that allows the holder to purchase shares of the underlying issue at a fixed price (above the current market price when issued) for an extended period of time 2-10 years. Call options are similar but are short term 9 months at issue.

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If interest rates increase in the United States, this will tend to...

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Result in a surplus balance of payments. It will strengthen the us dollar

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Bearer bonds (coupon bonds)

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A debt obligation with attached coupons representing semiannual interest payments. They are not registered to a specific holder, must have the interest coupons attached to the bonds

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Ginnie Mae (GNMA)

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Backed by the govt

Minimum purchase amount of $25K

Pays interest every month and principal on a monthly basis.

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Municipal bonds can be issued by

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States and cities

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Participating preferred stock

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Allows shareholders to participate in the common dividend in addition to receiving their fixed dividend

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When an option is trading

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The premium is variable-determined by supply and demand in the market. The other choices are characteristics of the option when issued.

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The best time to purchase shares in a long term bond fund is

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When long term interest are falling after a period of high interest rates. The bonds already in the fund will continue to pay a hugh ROR, and if rates continue to fall, the market value of the fund portfolio will rise.

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Preferred stock is sensitive to

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Interest rates. As rates fall, prices tend to rise and vice versa

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Stripped bond

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A bond that has had its coupon payments and principal repayment stripped into two separate components and sold individually

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Phantom income

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Where earnings are taxed but not received, and zero coupons bonds, which are issued at a discount and mature at par

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Corporate Zero Coupon Bonds

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The discount is in lieu of periodic interest payments and the discount is taxed annually as phantom income.

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Duration of bonds

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-Zero coupon bonds have duration equal to maturity.

-A bond that makes interim payments has a duration that is shorter than its maturity.

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Duration

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It is a measurement of how long in years it takes for the price of the bond to be repaid by its internal cash flows (interest).

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What documents must a RR have to open up both a cash and margin account for a corporation?

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Cash: require a copy of the corporate resolution naming the authorized person(s) and account trading limits (if any)

Margin: A copy of the corporate charter and a signed agreement are also required.

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Contractual Plan

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No longer sold but the spread load over 4 years can be 16%

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Pays interest semi annually

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Municipal revenue bonds

Industrial development bonds

Municipal GO bonds

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Bonds affected by Money Market

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Commerical paper

Bankers Acceptance

US treasury bills

(Short term debt obligations)

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Bonds affected by capital market

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Long term bonds

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If the YTM is less than nominal yield or current yield the bond is trading at

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Premium

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Income Bond

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Is issued by a company coming out of bankruptcy and pays interest only if the corporation has enough income

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Contractual plans

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The max load over the life of the contract is 9%.