Chapter 1: Characteristics of Securities & Other Financial Instruments Flashcards
Equity Securities
Represent an ownership interest in the company
Common Stock
Most common equity security.
Subordinate to all debt and preferred stock.
Rights of Common Holders
Voting
Optional dividends
Limited liability
Preemptive rights
Preferred Stock
Acts similar to debt instruments.
Rights to dividends
Non-voting
Senior to common stock
Preferred Stock Dividends
Not guaranteed.
If cumulative, must be paid in full before dividends to common stock.
Convertible Preferred Stock
Can be converted to common.
Favored by pre-IPO investors.
Included in the calculation of fully diluted EPS.
Callable Preferred Stock
Issuer can redeem the stock
Participating Preferred
Holders share in the issuer’s profits.
Putable Preferred
Holder can force issuer to redeem the stock.
Hybrid Preferred (Trust Preferred Security)
Issuer creates a trust.
Trust purchases L-T debt of issuer.
Interest on debt is paid as dividends to Trust shareholders.
This is really a debt instrument.
Rights (Subscription Rights)
Limited duration privilege granted to existing shareholders to participate in a new issue before it is offered to the public.
Offered at a price below the public offer price.
Usually a 1:1 subscription ratio.
Transferrable and tradable.
Warrants
L-T (min. 5 year) securities that allow the holder to purchase company stock at a predetermined price.
Typically sold with bonds and preferred stock.
Exercise price is significantly higher than the market price at issuance.
Stock Appreciation Rights (SARS)
Holders benefit from the difference between the current market price and the grant price of the stock.
Paid in any combination of cash and stock.
Taxable as ordinary income.
Employee Stock Options
Non-cash form of compensation.
Employee pays the grant price for the stock when exercising.
Generally non-transferable.
Depositary Receipts (DRs)
Popular way for companies to raise capital in foreign markets.
American Depositary Receipts (ADRs)
DRs that are traded on U.S. exchanges.
Priced in U.S. Dollars.
Sponsored ADRs
Issued at the request of the foreign company.
Hold the same rights as the regular shareholders.
Level I ADR Sponsorship
Fewest barriers to entry.
Trade OTC.
Level II ADR Sponsorship
Requires GAAP accounting.
Subject to SEC registration and reporting.
Trades on the Big Boards.
Level III ADR Sponsorship
Applies to foreign companies that are planning a U.S. public offering.
Has the most stringent requirements.
Un-sponsored ADRs
Issued without the cooperation of the foreign company.
No reporting obligation.
Trades OTC.
Global Depositary Receipts (GDRs)
DRs that are not issued in the U.S.
Bond Indenture
The terms that apply to a bond
The Trust Indenture Act of 1939
Requires the use of indentures & mandates certain disclosures and provisions that protect bondholders.
Requires issuer to appoint trustee that has liquidation power.
Requires periodic financial reporting.
SEC exempted issues with a total value of less than $5.0 million.