Unit 1: Securities Markets, Investment Securities & Economic Factors Flashcards
1
Q
Security
A
an investment of money, in a common enterprise, with the expectation of profits to be derived primarily from the efforts of a person other than the investor
Two types: Equity or Debt
2
Q
Equity
A
stock
an ownership interest in a company
income purposes
conservative for the issuer and risky for investors
Common stock, Preferred Stock
3
Q
Debt
A
represented by bonds and notes
creditor relationship with a company through a debt obligation
secured (backed by some collateral) or not secured
risky for the issuer and conservative for investors
4
Q
SEC
A
Securities and Exchange Commission that regulate securities markets within the United States
5
Q
FINRA
A
Financial Industry Regulatory Authority, a Registered Securities Association, a SRO (self-regulatory organizations) that regulates participants in the OTC in securities and NYSE
6
Q
Primary Market/Primary Offering
A
the initial sale of a security
7
Q
Secondary Market
A
trade between investors after the primary offering
typically take place on stock exchanges, in the over-the-counter market or both
8
Q
Stock Exchanges
A
exchange-listed securities, like those on NYSE are priced by auction on the trading floor
brokerage houses purchase the securities for their customers at the lowest available asked or offering price or at the highest available bid price
9
Q
OTC
A
Over-The-Counter
no centralized trading location
priced by negotiation
market makers (brokers/dealers) maintain inventories of OTC securities and sell to other broker/dealers out of their inventory for their asked or overing price or at their bid price
10
Q
Market Makers & Buy/Sell
A
broker/dealers that customer’s can use as a resource for buy/selling securities
market makers buy & customer’s sell at bid price
market makers sell & customer’s buy at ask price
competition among market makers ensure the customer of the lowest ask/bid price available
11
Q
Associated Person (AP) of a Member
A
any employee, manager, director, officer, or partner of a member broker/dealer or another entity (issuer, bank, etc.)
12
Q
Broker
A
an individual or firm that charges a fee or commission for executing buy and sell orders submitted by another individual or firm
13
Q
Dealer
A
any person engaged in the business of buying and selling securities for their own account, either directly or through a broker, that is not a bank
charges the customer a markup or markdown
14
Q
Prospectus
A
any notice, circular, advertisement, letter, or communication, written or by radio or TV, which offers any security for sale or confirms the sale of any security
15
Q
Balance Sheet
A
discloses the composition of its total capitalization
summarizes assets (what company owns), liabilities (what company owes), and net worth (shareholder’s equity)
Assets = Liabilities + Net Worth
16
Q
Net Worth Formula
A
Assets - Liabilities
17
Q
Assets Formula
A
Liabilities + Net Worth
18
Q
Total Capitalization Formula
A
Net Worth + Long-Term Debt
19
Q
Common Stock
A
equity security
primary means of raising capital
Authorized, Issued, Treasury and Outstanding
dividends distributed quarterly
all corporations issue common stock
most junior security
purchased for growth, income, or growth and income
20
Q
Authorized Stock
A
A type of Common Stock (Equity)
the number of shares that a corporation is permitted to issue or sell by the state
often a company sells only a portion of the authorized shares, raising enough capital for its foreseeable needs then sell the remaining in the future or use them for other purposes
if they want to sell more shares than authorized, it must amend its charter through a stockholder vote that approves more shares
21
Q
Issue Stock
A
A type of Common Stock (Equity)
once authorized, issued stock can be distributed to investors
issued shares have voting rights and the right to receive dividends and are considered determining a company’s total capitalization
22
Q
Treasury Stock
A
A type of Common Stock (Equity)
stock a corporation has issued and then repurchased from the public
was outstanding stock before it was repurchased by the issuer
repurchase to increase earnings per share, to have an inventory of stock available to distribute as stock options to fund an employee pension plan, etc. or to use of future acquisitions
can hold this stock indefinitely or can reissue or retire it
does not carry the rights of outstanding common shares such as voting rights and the right to receive dividends
23
Q
Outstanding Stock
A
A type of Common Stock (Equity)
includes any shares that a company has issued but has not repurchased - investor-owned stock
Equity securities in the hands of the public
Issued stock - Treasury stock = Outstanding Stock
24
Q
CMV
A
current market value
supply and demand price (most familiar to investors)
25
Stock Book Value
current hypothetical liquidation value of a share
26
Stock Par Value
meaningless for investors of common stock (not of preferred stock)
an arbitrary accounting value
27
Statutory voting
allows a stockholder to cast one vote per share owned for each item on a ballot, such as seats on the board of directors.
A board candidate needs a simple majority to be elected.
28
Cumulative voting
allows stockholders to allocate their votes in any manner they choose.
May be advantageous for small shareholders by giving them a greater opportunity to offset the votes of large shareholders by combining all their shares on a single seat.
29
Proxy
a form of absentee ballot for stockholder's whoa re not able to attend the annual stockholder's meeting
30
Antidilution Provision
offering securities to its common stockholders before the general public
gives the owner of convertible securities such as convertible preferred stock or bond, the right of the owner to maintain the same conversion ration in the event of a stock split or stock dividend
sometimes required by law or its corporate charter
*Preemptive right
31
Preemptive right
Stockholder's right to buy enough newly issued shares in a company to maintain their proportionate ownership in the corporation
to maintain a proportionate interest in a company's stock
*Antidilution provision
32
Limited Liability
protects stockholders form having to pay a corporation's debts in bankruptcy. Cannot lose more than the amount they have paid for a corporation's stock
33
Non-assessable
Common Stock
no such thing as assessable common stock
34
Inspection of Corporate Books
stockholders have the right to receive annual financial statements and obtain lists of stockholders
do not include detailed financial records or the minutes of directors' meetings
35
Residual Claims to Assets
If a corporation is liquidated, the common stockholder, as owner, has a residual right to claim corporate assets after all debts and holders of more senior securities have been satisfied
common stockholder is at the bottom of liquidation priority list making them most junior security
36
Long/Bullish
an investor who buys shares is considered long (act of buying) the stock
and is bullish: expects the stock to increase in price
37
Short Sale
selling shares borrowed with the intent of buying them back at a lower price in the future for return to the owner (sell high now, buy back low later)
38
Short/Bearish
an investor who sells borrowed shares is short (act of selling) the stock
and is bearish: expects the stock to go down in price
39
Capital Appreciation
increase in the market price of shares
40
Privileges of Common Stock Ownership
vote on splits, membership of Board of Directors, and issuance of additional securities like common stock and convertible bonds
can cast one vote for each share of stock owned for each item on the ballot (Statutory voting or Cumulative voting)
cannot vote on anything that has to do with dividends
41
Capital Gain
when an investor sells a security for more than it was purchased for
42
Capital Loss
when money is lost on the sale of a security
43
Market Risk
the chance that a stock will decline in price at a time that the investor needs the money
limited to his total investment in a stock
44
Business Risk
uncertainty of operating income
relates to the activities of the company (management, philosophy, etc.)
45
Points
whole dollars the stock market's price is quoted in
46
Round Lot
100 Shares
determine cost of round lot by multiplying trading day low price by 100
$71 x 100 = $7,100
47
Listed Securities
securities that meet the requirements of the exchange such as maintaining a certain price and trading activity and are able to trade on the exchange
48
Auction Market
physical locations you can buy securities like the New York Stock Exchange location, there is a trading floor where buyers and sellers compete for trades
49
Nasdaq
National Association of Securities Dealers Automated Quotation system
electronic stock market originated in 1971
no physical floor, computerized information system that provides price and inventory info for market makers of securities traded OTC
50
Unlisted Securities
Nasdaq stocks that don't meet the listing requirements of an exchange or choose not to trade OTC
51
OTCBB or Pink Sheets
trade securities termed non-Nasdaq, tend to be the most speculative of all equity securities
OTC Bulletin Board
52
Preferred Stock
issued with a fixed rate of return (like a bond)
purchased for income
higher dividends than commons stock
nonvoting and maintains no preemptive rights
has preference over commons stock in payment of dividends and claim assets in event of issuing co going bankrupt
price sensitive to interest rates
does not normally offer the appreciation potential associated w common stock
identified by its percentage of its par value, a preferred stock with par value of $100 that pays $6 in annual dividends is known as a 6% preferred
53
Adjustable rate preferred stock
preferred stock issued with a variable dividend payout
54
Straight (noncumulative) Preferred
A type of Preferred Stock (Equity)
no special features beyond the stated dividend payment
missed dividends are not paid to the holder
55
Cumulative Preferred
A Type of Preferred Stock (Equity)
fixed dividend payments
any dividends owed must be paid prior to paying a common dividend, stockholders receive their current dividends plus the total accumulated dividends owed
safer than straight preferred because of above
price for cumulative feature meaning less dividend income than straight preferred
56
Convertible Preferred
A type of Preferred Stock (Equity)
owner can change each preferred share for shares of common sock
price is a preset amount noted on the stock certificate
lower stated dividend rate than nonconvertible because the investor may have the opportunity to covert to common shares and enjoy capital gains
par value/conversion price = number of exchanged shares available to purchase
conversion increases the total # of commons hares outstanding, which decreases earnings per common share and may decrease the common stock's market value
57
Parity Price
state of a convertible bond or preferred stock when its price is equal to the market price of the underlying stock. It means two securities are of equal dollar value
CMV/Conversion Ratio (# of shares) = Parity price of common stock
CMV of common stock x conversion ration = Parity price of convertible bond
58
Participated Preferred
A Type of Preferred Stock (Equity)
offers fixed dividends and owners a share of corporate profits that remain after all dividends and interest due other securities are paid
59
Callable Preferred
A Type of Preferred Stock (Equity)
stocks which a company can buy back from investors at a stated price after a specified date
allows the company to replace a relatively high fixed dividend obligation with a lower one
dividend payment sand conversion right scenes on the call date
in exchange for call privilege, the co usually pays a premium exceeding the stock's par value at the call , such as $103 for $100 par value stock
higher stated rate of dividend payment than straight, noncallable preferred because of risk that issuer may buy it back and end dividend payments
60
Adjustable-Rate Preferred
A Type of Preferred Stock (Equity)
issued with adjustable, or variable, dividend rates tied to the rates of other interest rate benchmarks, such as Treasury bill and money market rates and can be adjusted as often as semiannually
61
Cash Dividends
normally distributed by check or are automatically episode to a brokerage account
paid quarterly and taxed as dividend income in the year they are received
62
Stock Dividends
used if a company needs to use its cash for business purposes rather than to pay cash dividends, typical for co that invest cash in research and development
cost basis per share reduced by dividend
not taxed when received
stocks market price per share declines after a stock dividend but co total market value remains the same
63
Stock Splits
means to change the number of outstanding shares
total value of outstanding stock must be the same before and after the split
since they change the trading characteristics of a stock, share holder approval must be obtained for stock splits
if co did 2-for-1 stock split, an investor who owned 100 shares worth $20 per share would own 200 shares worth $10.
If co did a 1-for-2 reverse split, investor with 100 shares with $20 per share would own 50 shares worth $40 per share
64
Dividend Yield/ Current Yield
annual dividend (4 times quarterly dividend) divided by the current price of the stock
result is a percentage not dollar value
CMV of $50 and annual dividends of $5 = current yield of 10%
65
Priority of Dividend Payments
1. cumulative shares
2. preferred shares
3. common dividend
66
Total Return
combo of dividend income (for equity investments) or interest paid (for debt investments) and price appreciation or decline over a given period of time
commons stock purchased for $20 with annual dividend of $1 is sold after one year for $24.
Dividend $1 + Capital Appreciation $4 = $5
Total Return = $5 / $20
67
Transferability of Ownership
when an investor buys or sells a security, the exchange of money and ownership requires little or no additional action on the investor's part
68
The Stock Certificate
evidence of ownership for the shares of a corporation a person owns
identify the company's name, number of shares, and investor's name
printed with security's CUSIP number (ID tracking number)
69
Odd Lot
share amounts fewer than 100 shares, such as 4 or 99
70
ADRs/ADSs
American depositary receipts/American depositary shares
facilitate the trading of foreign stocks in US markets
typically issued by a bank that has bought the foreign stock
71
Rights of ADR Owners
currency risks because dividends are initially paid i foreign currency
no preemptive rights
no voting rights
right to exchange the ADRs for the actual foreign share certificates
72
Rights
Short term
Exercisable below market value
May trade with or separate from the common stock
Offered to existing shareholders only with preemptive rights (use them, sell them, or let them expire)
One right issued per share outstanding
73
Warrants
```
Long term (2-5 years)
Exercisable above market value
May trade with or separate from units
Often offered as a sweetener for another security
# issued is determined by corporation
not entitled to dividends
```
may be detachable (trade in secondary market in line w common stock's price) or nondetachable from other securities
74
Rights Offering
allows stockholders to purchase common stock below the current market price
75
A Stockholder who owns rights may...
1. exercise rights to buy stock by sending the rights certificates and a check for the required amount to the rights agent
2. sell the rights and profit from their market value (rights certificates are negotiable securities)
3. let the rights expire and lose their value
76
Subscription Right Certificate
represents a short-term (30-45 day) privilege to buy additional shares of a corporation
one right is issued for each common stock share held by the investor
77
Terms of the Offering
stipulated on the subscription right certificates mailed to stock holders
describe how many new shares a stockholder may buy, price, the date new stock will be issued, and final date for exercising the rights
78
Standby Underwriting
issuer may offer unsold shares to a broker/dealer if the current stockholders do not subscribe to all the additional stock
done on firm commitment basis
79
Firm Commitment
broker/dealer or underwriter buys all unsold shares from the issuer and then resells them to the general public
80
Option
a contract that gives the buyer a right to buy or sell an underlying security over time at a stated price (usually 9 months)
type of derivative
two types of options contracts: calls and puts
81
Derivative
value of the contract is primarily based on the value of the underlying security
82
Options Disclosure Document
educational in nature and reviews basic options terminology, definitions, and risks
must be delivered prior to opening the options account
buyer is owner of contract, seller is writer of contract
83
Call option
gives the buyer the right to call (buy) a security away from someone, and seller obligation to sell
can buy right for yourself or sell it to someone else
84
Put option
gives the buyer the right to put (sell) a security to someone, and seller obligation to buy
can buy right for yourself or sell it to someone else
85
strike price
set price for an option
86
premium
difference between the higher price paid for a bond and the bond's face amount at issue
above par
87
leverage
a relatively small cash outlay allows an investor to control an investment that would otherwise require a much larger sum
88
bonds
debt securities
fixed-income security
usually have a par (face value) of $1,000
used to raise working capital or funds for capital expenditures such as plant construction or equipment and other major purchases (funded debt - payable in 5 years or more)
issuer promises to repay the debt on a specified date and to pay interest on the loan amount
89
fixed-income security
fixed interest rate when bond is issued
90
Bondholders
creditors of the issuer. bond issuer pays interest for the use of money to the bondholder
preferential treatment over common and preferred stockholders if a corporation files for bankruptcy
91
Funded debt
any long-term debt payable in 5 years or more
92
Low to high risk bonds
1. bonds issued by the federal government
2. agency issues by the federal government
3. municipal bonds
4. corporate bonds (riskiest, but highest potential income)
93
trust indenture
a legal contract between the bond issuer and a trustee representing bondholders
94
The Trust Indenture Act of 1939
requires corporate bonds of $5 million or more and greater than 270 days to maturity to be issued under a trust indenture
requires a corporation to appoint a trustee -- usually a commercial bank or trust company -- for its bonds
federal and municipal governments are exempt from the Trust Indenture Act provisions
95
Maturities
on the maturity date, the loan principal (face amount) is repaid to the investor
longer time to maturity, greater the risk to bondholders
commonly fall in the 5-30 year range
96
Info on Bond Certificate
```
Name of Issuer
Interest rate and payment date
Maturity date
Call features
Principal amount (par value)
CUSIP number for ID
Dated date (date interest starts accruing)
Reference to the bond indenture
```
97
Coupon (bearer) Bonds
not registered, no proof of ownership is needed to sell a bearer bond
have no been issued in the US since 1982
term coupon still used to describe interest payments received by bondholders
98
Fully Registered Bonds
transfer agent maintains a list of bondholders and updates it as bond ownership changes
interest payments are automatically sent to bondholders of record
if bond is issued with a certificate is fully registered
transfer agent cancels seller's certificate when bond is sold and issues a new one in the buyer's name
99
Registered as to Principal Only Bonds
have the owner's name printed on the certificate, but the coupons are in bearer form
no longer issued
100
Book--Entry Bond
book-entry owners do not receive certificates, but transfer agent maintains the security's ownership records
there is a registered bond owner
available for all US government and municipal bonds
101
Liquidation Priority between Bonds and Stocks
1. unpaid wages
2. IRS, state, and county taxes
3. secured debt (bonds and mortgages)
4. unsecured bonds (debentures) and general creditors of the issuer
4. subordinated debt
5. preferred stockholders
6. common stockholders
102
Bond Par Value
most bonds are issued with face, or par value of $1,000
represents the dollar amount of the investor's loan to the issuer, and it is the amount repaid when the bond matures
103
Two primary factors affecting a bond's market price
1. issuer's financial stability
| 2. overall trends in interest rates
104
Bond Pricing
bond quotes are commonly stated as percentages of par
a bid of 100 means 100% of par or $1,000
a bond quote of 98 (1/8) means 98.125% of $1,000 or $981.25
one point is 1% of $1000 or $10
minimum variation is 1/8 point
105
Basis point
1/100 of 1%
100 basis points equals 1%, 75 basis points is .75%
106
Standard & Poor / Moody
rate both corporate and municipal bonds and base their bond ratings primarily on an issuer's creditworthiness
107
Speculative (non-investment-grade) bonds
commonly referred to as high-yield bonds or junk bonds
must offer high yields to compensate investors for the elevated risk
safest ratings have the most As, risker are B, C and D ratings
108
Rating to Yield for Debt Securities
higher the bond's rating, lower its yield
lower returns for safer investments
109
Liquidity (Marketability) Factors
ease with which a bond or any other security can be sold
determined by:
1. quality
2. rating
3. maturity
4. call features
5. coupon rate and CMV
6. issuer
7. existence of a sinking fund
110
volatility
fluctuation in price
bonds with longer terms to maturity experience greater volatility than short-term bonds
111
Debt Service
the schedule of interest and principal payments due on a bond issue
112
Redemption
when bond's principal is repaid
usual occurs on the maturity date
redemption equals the last semi-annual interest payment pus the principal of the bond
113
Sinking Fund
operated by the bond's trustee
can be used to call bonds, redeem bonds at maturity, or buy back bonds in the open market
to establish, the issuer deposits cash in an account with the trustee
can aid the bond's price stability
114
In-Whole or Partial Calls
allows the issuer to redeem a bond issue before its maturity date, either in whole or in part (in-whole or partial calls)
Uses:
1. if general interest rates decline, can redeem bonds with a high interest rates and issue new bonds with a lower rate
2. reduce debt
3. replace short-term debt issues with long-term issues and vice versa
4. means of forcing the conversion of convertible corporate securities
115
Call Premium
a premium (a price higher than par) the issuer pays bondholders in return for in-whole or partial calls
116
Tendering
to retire a portion of debt
117
Call Protection Period
5 or 10 years to provide safety to investors in periods of declining interest rates
during his period the issuer may not call any of its bonds
want highest possible rate of interest for the longest period of time
118
Call Risk
risk that the bonds will be called and the investor will lose its stream of income from the bond
119
Refunding
practice of raising money to call a bond
issuer sells a new bond issue with a lower rate to buy back an old bond issue with a high rate
120
Bond Yield
the cash interest payments in relation to the bond's value
determined by:
1. the issuer's credit quality
2. prevailing interest rates
3. time to maturity
4. call features
121
Nominal Yield (Coupon/Stated Yield)
fixed percentage of the bond's par value
set at issuance an printed on the face of the bond
coupon of 6% means bondholder is aid $60 in interest annually until the bond matures
6% x $1,000 = $60
122
Current Yield (CY)
measure's a bond's annual interest relative to its market price
Annual interest/Market price = CY
as bond price rises, yield declines and vice versa
123
Yield to Maturity (YTM)
reflects the annualized return of the bond if held to maturity and is the most comprehensive measure for comparison of bond yields
difference between the price paid for a bond and par value
124
General Obligation Bonds (GOs)
backed by the taxing power of the issuer
municipal securities
125
Long-Term vs. Short-Term Bonds
Long-Term have...
1. higher yields
2. more likely to be callable
3. will fluctuate in price more with interest rate changes
Short-Term...
1. provide greater liquidity than long-term
126
Marketable Government Securities
trade in the secondary market (OTC)
127
Non marketable Government Securities
Have no secondary market and are only redeemable through the federal government
EE, HH, and I Bonds
128
T-Bills
Treasury Bills
Short- Term Marketable US government debt w a maturity of one year or less issued at a discount from par
return is the difference between the price the investor pays and the par value received when the bill matures
buys for 975, receives $1,000, $25 is the investor's return
mature in 4, 13, 26, or 52 weeks
129
T-Notes
intermediate-term bonds that pay interest every 6 months
mature in 2-10 years at par or can be refunded (called)
130
T-Bonds
long-term securities that pay interest every six months
mature in more than 10 years
callable
131
Treasury Inflation Protection Securities (TIPS)
helps protect investors against purchasing power risk
purchased in minimum increments of $100
exempt from state and local income taxes but subject to federal taxation
132
Consumer Price Index (CPI)
standard measurement of inflation
133
Separate Trading of Registered Interest and Principal of Securities (STRIPS)
a type of zero coupon created from US Treasury notes and bonds when the Treasury sells separate receipts against the principal and coupon payments
not issued or sold directly to investors, only through financial institutions and government securities broker/dealers
backed directly by the Treasury
sold in multiples of $100
134
Series EE Bonds
type of Non marketable Government Security
sold at face value starting at min of $25, max $1,000 per yr
earn a fixed rate of interest,c edited monthly and paid at redemption
135
Series HH Bonds
type of Non marketable Government Security
no longer issued as of 9.1.2004, but billions are still outstanding
current-income securities and pay a fixed rate of interest every 6 months until maturity (10 years) or redemption
136
Series I Bonds
type of Non marketable Government Security
low-risk, liquid savings product designed to protect investors from an inflation risk
Electronic bonds are sold at face value starting at min of $25, max $1,000 per yr
Paper bonds are sold at $50, $75, $100, $200, $500, $1000, or $5000
have an annual interest rate that reflects the combined effects of a fixed rate and a semiannual inflation rate
137
Ginnie Mae
Government National Mortgage Association
1. only agency security backed in full by US government
2. issues pass-through certificates
3. investors receive interest and principal on a monthly basis, investors buy to satisfy income objectives
4. yields are slightly higher than on Treasuries
5. subject to interest rate and prepayment risk
min. $25,000, 12-year payment assumption
138
Collateralized mortgage obligations (CMOs)
securities created from pools of mortgages
provide investors with a greater range of timeframes and a greater cash-flow
1. Repayment Risk
2. Extension Risk
3. yield more than T-securities
4. interest subject to federal, sate, and local taxes
5. $1000 issue
6. unsuitable for small or unsophisticated investors bc complexity and risk
139
Mortgage-Backed Securities (MBS)
use pools of mortgages as collateral for the issuance of securities
140
Asset-Backed Securities (ABS)
use pools of assets (leases, loans, receivables, credit card debt, royalties, etc.) as collateral for the issuance of securities
141
Repayment Risk
if interest rates fall and homeowner refinancing increases, principal is received sooner than expected
142
Extension Risk
if interest rates rise and refinancing declines, investor may have to hold his investment longer than anticipated, although he does receive more interest payments
143
Tranche
segregates portions of the cash flows from the CMO in order to redirect its principal and interest payments to other tranches based on a predetermined distributions schedule established when CMO was created.
144
Municipal Bond
a bond issued by a form of government other than the federal government or agency of the federal government
considered very safe, only federal government bonds are safer
1. interest earned is exempt from federal taxation
2. most suitable for high tax bracket investors
3. unsuitable for low tax brackets or within retirement plans
4. interest may also be tax-exempt at the state and local level if the bond holder is a resident of the state in which the bond is issued
145
Revenue Bond
can be used to finance any municipal facility that generates enough income to support its operations and debt service
146
Industrial Development Revenue Bonds (IDRs or IDB)
issued by a municipality for the benefit of a private sector corporation
147
Legal Opinion
states that the issue conforms with the applicable laws, the state constitution, and that the interest is tax free at the federal level
attached to every bond certificate, written and signed by the bond counsel (an attorney specializing in tax-exempt bond offerings)
148
Corporate Bonds
issued to raise working capital or capital for expenditures such as plant construction and equipment purchases
quoted in points and 1/8s
two types: secured & unsecured
149
Secured Bonds
secured when the issuer has identified specific assets as collateral for interest and principal payments
1. Mortgage Bonds (real estate pledged as collateral)
2. Collateral Trust Bonds (backed by company's own stock or another company's stock)
3. Equipment Trust Certificates
150
Collateral Trust Bonds
issued by corporations that own securities of other companies as investments
151
Equipment Trust Certificates
used by railroads, airlines, trucking companies and oil companies to finance the purchase of capital equipment
152
Unsecured Bonds
no specific collateral backing and are classified as either debentures or subordinated debentures
153
Debentures
backed by the general credit of the issuing corporation and a debenture owner is considered a general creditor of the company
junior to secure bonds and senior to subordinated debentures and preferred and common stock
154
Subordinated Debentures
offer higher income than either straight debentures or secured bonds due to their subordination, therefore riskier and often have conversion features
155
Guaranteed bonds
backed by a company other than the issuer, such as a parent company
increases the issue's safety because someone other than the issuer is guaranteeing timely payment of interest and principal
municipal bonds often carry a guarantee
156
Income Bonds/Adjustment Bonds
used when a company is reorganizing and coming out of bankruptcy
pay interest only if the corporation has enough income to meet the interest payment and the board of directors declares a payment
bc missed interest payments do not accumulate for future payment, these bonds are not suitable fore customers seeking income
157
Zero-Coupon Bonds
1. no reinvestment risk
2. no semiannual interest payments to reinvest
3. buying zero is only way to lock in rate of return
4. will receive face amount at maturity
5. income tax each year on the amount the bonds have accreted
trade flat (doesn't pay interest)
*for a couple who wishes to have $100,000 available in a college education fund in 10 years
158
Convertible Bonds
corporate bonds that may be exchanged for a fixed number of shares of the issuing company's common stock
1. pays interest at a fixed rate and redeemable for face value at maturity if not converted
2. priority over common stockholders in event of corporate liquidation
3. market price is more stable during market declines
*not for investors who's main objective is income
A. Convertible bondholders are creditors of the corporation
B. coupon rates are usually lower than nonconvertible bond rates of the same issuer
C. If the underlying stock should decline sharply, the bonds will sell at a price based on their inherent value as bonds disregarding the convertible feature
159
Duration
measure of the amount of time a bond will take to pay for itself
160
Money Market
high quality debt instruments with one year or less to maturity (discount)
161
Capital Market
intermediate to long-term financing usually in the form of equity or debt securities with maturities of more than one year
162
Banker's Acceptance (BA)
short-term time draft or letter of credit for foreign trade
max maturity of 270 days
issued at a discount and mature at par
163
Commercial Paper/Promissory Notes
short-term, unsecured, to raise cash to finance accounts receivable and seasonal inventory overages
max maturity of 270 days
lower interest rates than bank loan interest rates
for companies with excellent credit ratings
164
Negotiable Certificates of Deposit (CDs)
1. minimum face value of $100,000, but most are issued for $1 million or more
2. mature in one year or less
3. can be traded in secondary market and are considered money market securities
4. used by banks
5. unsecured
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Gross Domestic Product (GDP)
a nation's annual economic output, all the goods and services produced within it
166
Four Stages of the Business Cycle
1. Expansion
2. Peak
3. Contraction (decline)
4. Trough (when business activity stops declining and levels off)
(cycle repeats)
167
Recession
when GDP declines for 6 consecutive months (two quarters)
168
Federal Reserve Board (the Fed)
conducts monetary policy by influencing the money supply, which in turn affects interest rates and the economy
determines how much money is available for businesses and consumers to spend
1. changes in reserve requirements !! Least used tool
2. changes in the discount rate on loans to member banks
3. open-market operations (buying and selling Treasury securities) (Federal Open Market Committee) !! Most used tool
multiplier effect: when a small change in reserve requirements has an exaggerated result in terms of money supply
169
Reserve Requirement
commercial banks must deposit a certain percentage of their depositor's money with the Federal Reserve
become federal funds
170
Fiscal policy
legislative decisions of Congress and the President that can influence the levels of unemployment and inflation by adjusting overall demand for goods and services
ability to tax and spend and can include increases or decreases in...
1. federal spending
2. money raised through taxation
3. federal budget deficits or surpluses
171
Federal Funds Rate
interest rate charged on reserves traded among member banks for overnight use in amounts of $1 million or more
172
Prime Rate
base rate on corporate loans at large US money center commercial banks
173
Discount Rate
charge on loans to depository institutions set by the FRB in NY
174
Broker Call Loan Rate
charge on loans to broker/dealers with stock as collateral
175
LIBOR
London InterBank Offered Rate
average interest rate charged when banks in the London interbank market borrow unsecured funds from each other
176
Balance of Payments
flow of money between the US and other countries
