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Preferred Vs. Common
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SUMMARY OF LIQUIDATION RIGHTS
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Yield Curves
Normal Yield Curve
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anomalies
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security price relationships that appear to contradict well regarded hypothesis; in this case the efficient market hypothesis
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Commissions/Markups
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1.The charge that a broker-dealer assesses for executing an agency trade for the customer.
2.The difference, in a principal transaction, between the price charged to the customer and the prevailing interdealer price.
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Price Changes and Resulting Yield Changes
Discount Bond Picture
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objectives
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the investor's goals, expressed in terms of risk and return, included in the policy statement
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Common Stock (2)
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1.Authorized Shares-When corp is chartered, it is authorized to issues certain number of shares. Subject to change by majority vote from stockholders.
2.Issued shares-Actual number of shares sold. Ones that have not been sold/distributed are called unissued stock
3.Treasury Stock-Stock issued and then bought back by the company.
4.Outstanding Stock=Issued stock less Treasury stock.
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Preffered Stock (1)
BASICS
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1.Normally issued by established companies that have already issued common stock.
2.Intended for investors who are more interested in income than capital appreciation (BONDS).
3.Don't usually have voting rights
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Corporate Bonds
Convertible Bonds
Forced Conversion
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Another disadvantage:Happens when the redemption price of the bonds may be less than the version value. Bondholder could be forced to either convert the bonds immediately or accept less than their conversion value.
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secondary market
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the market in which outstanding securities are bought and sold by owners other than the issuers.
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optimal portfolio
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the efficient portfolio with the highest utility for a given investor, found by the point of tangency between the efficent frontier and the investor's highest utility curve
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correlation coefficient
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a standardized measure of the relationship between two series that ranges from -1.00 to +1.00
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Dividends (1)
BASICS
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1.Portion of corps profit paid to common/preffered shareholders.
2.Board of Directors decides about the dividends.
3.Paid on a per-share basis
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Bonds
Redeeming Bonds (4)
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Sinking Fund-Money is deposited in order to redeem bonds. Ensures that the debt will be paid in an orderly fashion AND enhances the safety.liquidity of the issue.
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accumulation phase
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phase in the investment life cycle during which individuals in the early to middle years of their working career attempt to accumulate assets to satisfy short term needs and longer term goals
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gifting phase
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phase in the investment life cycle during which individuals use excess assets to financially assist relatives or friends, establish charitable trusts, or construct trusts to minimize estate taxes.
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Investment management company
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a company, separate from the investment company, that manages the portfolio and performs administrative functions
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nasdaq intermarket
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a trading system that includes nasdaq market makers and ECNs that quote and trade stockes listed on the NYSE and the AMEX. it involves dealers from the nasdaq market and the intermarket trading system.in many ways, this has become what had been labeled the third market.
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multifactor model
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a risk return framework that considers multiple sources of both macroecondomic and microeconomic risk in deriving the expected rates or return for a risky-asset portfolio.
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capital preservation
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a return objective in which the investor seeks to minimize the risk of loss; generally a goal of the risk averse investor
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subordinated bonds
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debentures that, in case of dcefault, entitle holders to claims on the issuer's assets only after the claims of holdders of senior debentures and mortgage bonds are satisfied.
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Maloney Act of 1938
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Enabled the creation of non-exchange SROs.
Most securities transactions DO NOT take place on an exchange. Instead they take place in the over-the-counter market (OTC). National Association of Securites Dealers (NASD) was created in 1939 to self-regulate the OTC.
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Preferred Stock (3)
DIFFERENT TYPES OF:
PARTICIPATING,CALLABLE,CONVERTIBLE
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1.Participating-May receive a higher dividend than what is stated if the corp is doing well. (RARE)
2.Callable-Company has right to repurchase the stock at a specific price some time in the future. Call price is higher than the stock's par.
3.Convertible-Investor may convert preferred to common at their discretion.
Appeals to investors who want higher, more secure income than common stocks typically provide but also want the higher potential for capital appreciation.
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Bonds
Redeeming Bonds (2)
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Call Risk-Investor is unlikely able to reinvest their money for the same return that they were previously receiving before the call back.
Call Premium-Issuer buys back bonds at more than par to compensate for call risk.
Continous Call-Call feature that can be exercised at any time after the first call
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Bonds
Redeeming Bonds (1)
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Some bonds have call options that allow the issuer to call back the bonds before they mature. This is called a call provision.
Refunding is when the issuer calls back the bonds and then refinances them at a lower interest rate.
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Variable annuity
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a contract under which an annuity is purchased with a fixed amount of money that is converted into a varying number of accumulation unites. at retirement, the annuitant is paid a fixed number of monthly units, which are converted into varying amounts of money. the value of both accumulation and annuity units varies with the performance of a portfolio of equity securities.
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risk free asset
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an asset with returns that exhibit zero varianc
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electronic crossing system (ECS)
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an electronic trading system that matches large buy and sell orders
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Holding period
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The amount of time an investment is owned.
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fixed income investments
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loans from investors to firms or governments, with contractually mandated payment schedules.
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collateral trust bond
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a mortgage bond wherein the assets backing the bond are financial assets like stocks and bonds
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marginal tax rate
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the portion of each additional dollar in income that is paid as tax
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Employee Retirement Income SEcurity Act of 1974 (ERISA)
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Covers the admin. of private, qualified retirement accounts such as 401(k) plan.
Provides standards for the finding, vesting and other aspects of such pans as well as fiduciary responsibilities of pension fund trustees.
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Debt financing/Equity financing
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Different ways to raise capital for a corp.
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Bond Terms
Par Value
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Amount that the issuer agrees to pay the investor when the bond matures. Also called, principal or face amount.
Typically issued with $1000 par. Many munis are $5000. Round lot of bonds would be $100000 of total par value.
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semistrong-form efficient market hypothesis
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the belief that security prices fully reflect all publicly available information, including information from secirty transactions and company, economic, and poliitical news.
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Senior (secured) bonds
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the most senior bonds in a firm's capital structure. they have a first claim on specific assets of the firm in case of bankruptcy.
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market order
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an order to buy or sell a security immediately at the best price available
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Call provisions
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specify when and how a firm can issue a call for bonds outstanding prior to their maturity.
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national association of securities dealers automated quotation (nasdaq) system
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an electronic system for providing bid-ask quotes for securities traded on nasdaq
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price continuity
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a feature of a liquid market in which prices change little from one transaction to the next due to the depth of the market
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load or sales charge
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an amount charged to purchase shares in most mutual funds trhat are sold by brokers or other members of a sales force. typical charges range from 4 to 8.5% of the initial investment. the charge is added to the net asset value per share to determine the offering price.
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Holding period return (HPR)
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The total return from an investment for a given period of time, stated as a percentage.
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Preferred Stock (2)
DIVIDEND BASICS
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1.Normally issued with a par value of $100, and always carries a specified dividend.
2.5% preferred stock is expected to yield $5 annually.
3.Sometimes the dividend rate is the stated dollar amount. ($3 preferred stock is expected to pay 3% annual dividend)
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Calculating Returns on Fixed-Income Securities
Current Yield
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Bond's market price may fluctuate. Current yield measures the interest the investor receives from the bond compared to its current market price.
Current Yield= Annual Interest Payment/Current Market Price
Does not take into consideration the price appreciation on a discount bond or price depreciation on a premium bond.
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Capital Market Line (CML)
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the line frm the intercept point that represents the risk free rate tangent to the original efficient frontier; it becomes the new effiecient frontier
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Real risk-free rate (real RFR)
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The basic interest rate with no accommodation for inflation or uncertainty; the pure time value of money
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Types of Bonds (Two types)
Unsecured
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1.Most corp bonds are secured only by the corp's good faith and credit. These are calles notes and debentures. If issuer defaults, holders of securities have same claim on the company's assets as any other creditor, before stockholders, but after secured bondholders.2.Subordinate Debentures-An issue that has a junior claim on company's assets.
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Types of Bonds (Two types)
Secured
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1.Secured are backed by the full faith and credit of the issuer and by the specific assets that the corp owns:
a.Mortgage Bonds-Gives bondholders lien of property.
b.Equip. Trust Certificates-Secured by piece of equip company owns.
c.Collateral Trust-Secured by third-party securities owned by the issuer.
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THE INDENTURE (Two Types)
1.Closed End Indenture
2.Open End Indenture
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1.Does not permit the corp to issue additional bonds secured by the same assets as the original issue. This provides investor with most protection against default.
2.Open-End Indenture-May issue additional bonds secured by the same assets as the original issue. Indenture will usually require the corp meet a specific level of earnings before it can issue more. This requirement known as: EARNINGS TEST or ADDITIONAL BONDS TEST
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registerd competitive market makers (RCMM)
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members of an exchange who are allowed to use their memberships to buy or sell for their own account within the specific trading obligations set down by the exchange. because they are on the floor, the have a better feel for the market and low commissions, but they provide liquidity to the market.
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Insider Trading Act of 1988
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Response to the scandals of the 80's. Elaborates on the Acts of '33 and '34. PLUS sets out criminal penalties.
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