Stocks, Bonds, and other Investments

Question 1

Equities

Answer 1

Securities representing ownership. A claim to a company’s assets and earnings.

Question 2

Market Cap

Answer 2

How “big” a company is. Equal to # shares outstanding x share price.

Question 3

Dividends

Answer 3

• Distribution of earnings to shareholders. Blue chip stocks are “dividend stocks.”
• Returns either in the form of cash payments (dividends) or stock price going up (capital gains).
• Most ppl think dividends should only occur when a stock price is stable and not reinvest earnings in itself if price goes up.

Question 4

Dividend Yield

Answer 4

Percent of the current market price that annually goes to shareholders.

Ex: AAPL dividend is $0.52, price is $112.24. Annual dividend is [(4 x $0.52) / $112.24] x 100% –> 1.82%

Question 5

Rates of Return

Answer 5

• Single Period: (Final V - Initial V)/Initial V
• Annualized Return: (1+r_n)ⁿ - 1
• CAGR (Compound Annualized Growth Rate):
  
  • (Final Value ÷ Initial Value)^1/n-1

Question 6

Bonds

Answer 6

• Investor loans money for a fixed period of time at a specified interest rate.
• Useful for raising capital: sell bonds for $.
• Whoever owns them will receive interest payments on the money lent.

Question 7

Face Value/Par Value

Answer 7

How much you get back from the bond at maturity.

Question 8

Coupon

Answer 8

A generally fixed interest payment based on a % of par. Coupon payment determines the bond yield.

Question 9

Bond Yield

Answer 9

• Coupon Payment / Price.
• Inverse relationship between yield and price!

Question 10

How to make money off of bonds

Answer 10

1. Hold until maturity, collecting coupon payments, getting the principal back when the bond matures.
2. Sell for more than you paid. Ex: Buy at 93% of the par value, sell at 95% of the par value.

Question 11

Relationship between bond yield and risk

Answer 11

High-yield bonds are more risky, often “junk” bonds. Just like loans, because there is less of a likelihood that they will be paid back, the interest rate is higher.

Question 12

Liquidation

Answer 12

Selling everything the company owns and taking cash to pay off debts.

Question 13

Debt or Equity?

Answer 13

• Bull Market Case: Equity better for raising capital because shareholders want the company to do well, while bondholders don’t care as long as they get paid.
• Bear Market Case: Debt better because as a company sells assets in bankruptcy, bondholders get paid first (not those who own common stock!)

Question 14

Stock Option

Answer 14

Derivative security: Option to buy/sell something in the future.

Question 15

Warrants

Answer 15

Like options, but long-term. Usually issued by the company on which it would be exercised; illiquid.

Question 16

Asset-Backed Securities

Answer 16

Generally fixed-income assets which derive their value from a pool of underlying (securitized) loans.

Examples: Mortgages, auto-loans, credit cards.

Question 17

Forwards / Futures

Answer 17

Speculate on or hedge against future price movements. Example: Farmer wants to lock in the price at which he can sell wheat in the future.

Question 18

Swaps

Answer 18

Trading risk exposure.

Example: Exchanging a fixed interest rate for a variable rate.

Question 19

Complex Derivatives

Answer 19

Specialized products in the OTC (over the counter) derivatives market.

Example: Credit default swaps.

**Contributed to 2008 financial crisis.

Question 20

Futures

Answer 20

Financial contract obligating the buyer (seller) to purchase (sell) an asset at a predetermined future date and price.

Contracts don’t necessarily trade at the price that a spot is at.

EX: A 6-month future today will in 3 months only be a 3-month future, etc.