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Econ173A_topic3.1 - SIV Pool of Mortgage Loan ors Payments...

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$ % Home Bank Fig. 1 ors n Funds, Funds, etc. Tranche (AA+ = 80%) nines (BBB-C =18%) s (Unrated = 2%) nce Co. V nts ultimately pass thru to investors fying o SIV Pool of Mortgage Loan Payments Senior Tranche (80% AAA) Mezzanines 1-2 (18% BBB-C) Equity/First Loss Tranch (2%) Bank Fig. 3 Ec 173A FINANCIAL SECURITIES I p. 1 Ec 173A – FINANCIAL MARKETS LECTURE NOTES Foster, UCSD 13:14:51 TOPIC 3.1 – FINANCIAL SECURITIES I A. Equity Securities and Stock Market Indexes 1. Introduction to Equity Securities: a) Common and preferred stock. 1) Stocks are equity securities. Stockholders have an ownership share of the company equity, or value. Only corporations issue stock. 2) Every corp has issued common stock. Each share carries one vote at stockholder meetings, so large stockholders have a say in how the corp is run. Dividends are variable, not guaranteed, and continue for the life of the corp. 3) Some corps also issue preferred stock. Shares confer ownership but not voting rights. Dividends are fixed and virtually guaranteed for the life of the corp. 4) In a bad year, a company might not pay any dividend on common or preferred stock. But when times improve, the company must pay up all arrears in preferred dividends before resuming dividends on common. b) If a company goes bankrupt and its physical and other assets are liquidated, the cash raised by the liquidation is used to pay off creditors and owners in the following order: 1) Bankruptcy court costs; 2) Limited unpaid employee wages and benefits; 3) Back taxes owed to IRS and other govt creditors; 4) Secured creditors (holders of bonds with pledged collateral; 5) Unsecured creditors (other bondholders, unpaid materials suppliers); 6) Preferred stockholders (up to par value of stock); 7) Common stockholders (whatever is left, usually zip). c) Every corporation has to have common stockholders. 1) Some corporations are privately or closely held. The stock is owned by the company founders and family members and not traded in the market. 2) When a corporation "goes public" for the first time, it makes common stock available to the public with an IPO through an investment bank. 3) A publicly traded corporation may issue additional shares of common stock, called “seasoned new issues,” anytime after its IPO. BIG 1500 STOCKS ( WSJ , 6/17/ 08) N ET C HG S TOCK S YM C LOSE NYSE Alcoa ▲Olin AA OLN 39.70 25.74 0.24 1.20 NASDAQ Invitroge n IVGN 38.30 0.05
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Ec 173A FINANCIAL SECURITIES I p. 2 d) Reading stock listings. 1) Prices are in dollars and cents. 2) NYSE and AMEX ticker symbols are 1, 2 or 3 letters; NASDAQ uses 4-letter symbols. 3) ▲ and▼ = new 52-week hi or low price. 4) boldface = 1-day price change > 5%. 5) underline = unusual trading volume. 2. Introduction to Stock Market Indexes: a) Stock market indexes are average prices of groups of stocks representing industries, economic sectors, or equity capital markets as a whole. There are 3 types of indexes: 1) Price-weighted -- arithmetic average of stock prices. All Dow Jones indexes are computed this way.
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