E11 Types of Securities

Question 1

How to Coporations raise capital?

Answer 1

There are two ways for corporations to raise capital:
1. Issue Debt
– loan from investors
– bond is most common
2. Issue Equity
– investment in the company
– no guaranteed return
– stock is most common

Question 2

what are the types of bonds?

Answer 2

Fixed-rate – interest rate is fixed over life of the bond

Floating-rate – interest rate is allowed to fluctuate

Zero-coupon – all interest paid at maturity (no coupon
payments)

Callable – gives bond-issuer right to redeem bond before
maturity

Putable – gives bondholder right to redeem bond before
maturity

Convertible – gives bondholder option to convert to fixed
number of shares of common stock

Question 3

what is default risk?

Answer 3

risk that bond issuer is not able to make coupon or principal payments.

Companies with more money have lower default risk

Question 4

what is preferred stock?

Answer 4

Hybrid between debt and equity:
– Fixed dividends (like bond coupons), but paid at discretion
of the company.
– Preferred dividends must be paid before common stock
dividends.

No maturity date, but sometimes callable.

Paid after bondholders, but before common stockholder.

Question 5

what is common stock?

Answer 5

Represents an ownership share in the issuing company.
Capital investment with no guarantee of return

Sometimes called just “stock” or “equity”.

Question 6

are are treasury bills and the eqn?

Answer 6

Short-term debt (one year or less) issued by US government

Face amounts are in round values (100, 1000, 10,000, etc.).

Price = Face Amount [1 - discount yield *
n/360]

Question 7

what is a certificate of deposit?

Answer 7

Time deposit with bank that cannot be withdrawn.

Principal plus interest returned at end of term.

Interest rate can be fixed or may vary over term of deposi

Question 8

what is a Commericial Paper

Answer 8

Short-term unsecured debt note issued by a corporation.

Term less than 270 days, usually 1 to 2 months.

Large companies sometimes prefer to raise money this way vs. borrowing from a bank.

Question 9

what are mutual funds

Answer 9

Pools together deposits of many investors and places those
deposits under the control of a professional money manager.

Each investor receives a pro-rata share of the fund’s income and
capital gains and losses

Question 10

Brandon Theobalds Soccer Goods issues common stock, preferred stock and bonds. Rank the degree of secutirty most to least b/w bonds, preferred stock and common stock.

Answer 10

1. Bonds
2. Preferred Stock
3. Common Stock