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Unformatted text preview: Question 1 1) Distinguish between a debt security and a equity security. 839 With debit securities "represent a creditor relationship with another entity. Debt securities include US government securities, municipal securities, corporate bonds convertible debt, and commercial perper. Trade accounts receivable and loans receivable are not debt securities because they do not meet the definitation of a security". (Investments in Debt Securities, pg 839) With equity security you will find ownership interest "such as common , preferred or other captial stock. They also include rights to acquire or dispose of ownership interests at an agreed-upon or determinable price, such as in warrants rights and call or put options. Companines do not treat converttible debt securiteis as equity securities. Nor do they treat equity securities redeemable preferred stock ( which must be redeemed for common stock)." (Investments in Debt Securities, pg 847). 26) What is meant by the term underlying as it relates to derivative financial instruments? Per (Investment in Debt Securities, pg 868) Feature Traditional Financial Instrument Derivative Financial Instrument (call opt) Payment provision stock price times the number of shares Change in stock price (underyling) timesnumber of shares (notional amount Initial investment investor pays full cost initial investment is much less than full cost Settlement Deliver stock to receive cash...
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- Spring '09