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Corporate Bonds
Convertible Bonds
Example
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Yield Curves
Flat Yield Curve
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Investment Objectives:
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1.Income-Desire investments that produce a steady, reliable stream of cash. Inflation can erode returns.
2.Growth-Desire captial to appreciate. Possibility of loss.
3.Preservation of captial-Treasury bills
4.Tax Relief-Munis (tax free) or Annuities/Retirement Plan (tax-deferred)
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Sales literature
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Notices, circulars, research reports, form letters, and reprints of published articles.
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1.Customers
2.Consumers
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1.Has an ongoing relationship with firm.
2.Provides info to the firm in connection with a potential transaction.
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Risk
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the uncertainty that an investment will earn its expected rate of return
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beta
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a standardized measure of systematic risk based on an asset's covariance with the market portfolio
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Dividends (3)
EX-DIVIDEND/STOCK DIVIDEND
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1.Ex-Dividend Rule-The time when stocks trade without the dividend. Usually on the second business day prior to the RECORD DATE. A person purchasing stock on or after ex-dividend date will not receive the quarterly cash dividend.
2.Stock Dividend-Paying a dividend in stock rather that in cash. Not taxable until shares are sold.
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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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Bonds
Maturity Date
Serial issues vs. Term Issues
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1.Serial Bond Issue-bonds mature sequentially. Allows issuer to pay principal over time.
2.Term Bond Issue-All bonds mature at the same time. Called dolland bonds as they are qouted at a dollar price in secondary market.
3.Balloon issue-Portion of issue mature serially with a large portion of them maturing in one specific year.
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Alternative Trading System
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A nontraditional, computerized trading system that competes with or supplements dealer markets and traditional stock exchanges. While they facilitate trading in shares, they do not provide listing services.
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fiduciary
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a person who supervises or oversees the investment portfolio of a third party, such as in a trust account, and makes investment decisions in accordance with the owner's wishes.
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market
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the means through which buyers and sellers are brought together to aid in the transfer of goods and/or services
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filter rule
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a trading rule that recommends security transactions when price changes exceed a previously determined percentage.
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Classification of Stocks (2)
Income, Cyclical, ADR
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1.Income-Pay higher than average returns. Dividends are high in relation to the market. (Elderly people)
2.Cyclical-Companies whose earnings fluctuate with the economy. (steel, automobiles)
3.ADR-American Depository Receipts. Trading of FOREIGN stocks in U.S.
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Dividends (2)
ORDER OF PAYMENT
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1.Declaration Date-Date that dividend is authorized by BOD.
2.Record Date-Date on which the shareholder must officially own the stock to be entitled to receive the dividend.
3.Payment Date-Date that dividend is actually paid. (Usually quarterly, taxable in the year in which they were paid/received)
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Bond Rating
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Corps with poor credit ratings must pay a higher rate of interest.
Gov't securities have no risk b/c of full faith and credit.
Moody's and S&P rate bonds
AAA-BBB (Aaa-Baa) are considered investment grade while BB (Ba) and below are high-yield or junk bonds.
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prospectus
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a booklet that describes a mutual fund and offers its shares for sale. it contains information required by the SEC on such subjects as the fund's invetment objective and policies, services, investment restrictions, officers and directors, procedures for buying and redeeming shares, charges, and financial statements
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floor broker
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an independent member of an exchange who acts as a broker for other members
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revenue bond
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a municipal bond backed by revenue generated by specific municipal projects.
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Mutual fund
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an investment company that pools money from shareholders and invests it in a variety of securities, including stocks, bonds, and money market securities. a mutual fund ordinatily stands ready to buy back its shares at their current net asset value, which depends on the market value of the fund's portfolio of securitiesat the time. mutual funds generally coninuously offer new shares to investors
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capital appreciation
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a return objective in which the investor seeks to increase the portfolio value, primarily through capital gains, over time to meet a future need; generally a goal of an investor willing to take on above-average risk to meet a goal
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unweighted index
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an index affected equally by the performance of each security in the sample regardless of price or market value. also referred to as an equal-weighted index.
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Systematic risk
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the portion of an individual asset's total variance that is attributable to the variability of the total market portfolio
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savings account
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a money market security wherein an individual loans money to a bank or credit union through a liquid, low risk, low interest account
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consolidated quotation system
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an electronic quotation service for issues listed on the NYSE, the AMEX, or regional exchanges and traded on the Nasdaq intermarket.
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overfunded plan
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a defined benefit pension plan in which the present value of the pensino liabilities is less than the plan's assets
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Securities Act of 1933
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-Concerned with full and fair disclosure
-Goal=investors are provided with info needed to make informed investment decisions.
-Also provides rules for the conduct of issuers AND investment bankers
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Limited Liability
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If a corp. fails the most a shareholder can lose is their original investment.
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Bonds Terms
Registered Bonds
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1.Registered as to principal only will have the owner's name/address. Payments are received by means of attached interest coupons
2.Fully Registered-Payments are received by means of a check from the issuer every six months
3.Book entry form-Becoming quite common. No phyiscal bond issued. Done by computer. All negotiable U.S. Treasury/gov't agency debt is issued in book entry form.
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Prices and Yields
Interest-Rate Risk
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Definition:When one purchases a bond, he or shes runds the risk that the market value of their investments may decline if interest rates rise.
Bonds with londer maturities are more vulnerable to interest rate risk. Also, bonds with lower coupon rates rend to be more sensitive to interest rate risk.
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unsystematic risk
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risk that is unique to an asset, derived from its particular characteristics. it can be elminated in a diversified portfolio.
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short sale
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the sale of borrowed stock with the intention of repurchasing it later at a lower price and earning the difference
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Financial Risk
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Uncertainty due to the method by which a firm finances its assets.
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autocorrelation test
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a test of the weak form efficient market hypothesis that compares security price changes over time to check for predictable correlation patterns
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Closed-end investment company
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an investment company that issues only a limited number of shares, which it does not redeem. Instead, closed end shares are traded in securities markets at prices dertermined by supply and demand.
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completely diversified portfolio
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a portfolio in which all unsystematic risk has been eliminated by diversification
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covariance
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a measure of the degree to which two variables, such as rates of return for investment assets, move together over time relative to their individual mean returns
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Low-load fund
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a mutual fund that imposes a moderate front-end sales charge when the investor buys the fund, tupically about 3-4 percent.
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Trust Indenture Act of 1939
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Provides added security for bond investors. Requires an agreement (AKA-indenture) b/w corp that issues and and a trustee who would act for the owners of the bonds in case the corp liquidates.
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Classifications of Stocks (1)
Blue Chip,Growth,Defensive
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1.Blue Chip-High-grade issues of major companies that have already established themselves (GE, XOM)
2.Growth-Company's sales, earnings, and share of market are expanding faster than the market. (GOOG)
3.Defensive-Resistent to a recession. Sectors of "necessary" service (electric and gas).
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Bond Terms
Bearer Bonds
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1.Bearer-Does not have the name of the owner recorded either on the bond or on the books of the issuer. The bond has interest coupons attached. When payment is due, holder clips off the appropriate coupon and deposits it in a bank. NO LONGER ISSUED IN U.S.
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Coeffeicient of Variation (CV)
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A measure of relative variability that indicates risk per unit of return. In general, it is equal to the standard deviation divided by the mean value.
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Arbitrage pricing theory (APT)
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a theory concerned with deriving the expected rates of return on risky assets based on the asset's systematic relationship to several risk factors. this multifactor model is in contrast to the single-factor CAPM
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abnormal rate of return
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the amount by which a security's return differs from the market's expected rate of return based on the market's rate of return and the security's relationship with the market
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call option
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an option to buy a firm's common stock within a certain period at a specified price called the strike pric
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estimated rate of return
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the rate of return an investor anticipates earning from a specific investment over a particular future holding period
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Bonds
Redeeming Bonds (3)
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Issuers lock in a lower rate prior to a scheduled call date. Proceeds from refunding issue invested in gov't securities and deposited in bank.
Elimination of responsibility on the part of the issuer and the elimination of the bondholder's rights is referred to as defeansance.
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Price Changes and Resulting Yield Changes
Premium Bond
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-If interest rates increase, 10% existing bond price goes up because it has a more attractive yield than the market.Assume purchase price is 110.
-Nominal Yield=10%
-Current Yield=100/110=9.1%
-If held to maturity, the bond will pay $1000, which is $100 less than its purchase price.Thus, YTM will be less than current yield in order to reflect the premium paid for bond.
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capital asset pricing model (CAPM)
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a theory concerned with deriving the expected rates of return on risky assets based on the assets systematic risk levels
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Calculating Returns on Fixed-Income Securities
Yield to Call
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Takes into acount a bond's cash flow through its first call date.
Calculated the same way as YTM, except that it reflects the bond's interest payments until it is called, rather than when it matures.
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Geometric mean Return (Rg)
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The nth root of the product of the annual holding period returns for n years, minus 1.
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initial public offering (IPO)
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a new issue by a firm that has no existing public market.
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