Mortgage backed securities issued in standardized

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-mortgage backed securities -issued in standardized denominations -issued or backed by quality borrowers -usually insured and highly collaterized -repayment schedules vary but many are similar to bonds -types of mortgage backed securities -pass-throughs: pass principal and interest payments on pools of mortgages to investors -collaterized mortgage obligations (CMOs): -pass through is sliced into several classes with sequential maturities -tranche A principal is repaid first. Other tranches only receive interest. Then tranch B principal is repaid -investors choose class that matches their maturity preference -timing of CF’s depends on prepayments -stripped MBS -interest only (IO) and principal only (PO) -IO investors receive cash flows from interest payments on mtg pool -PO investors receive cash flows from principal payments on mtg pool -pool must have both IO’s and PO’s -if interest goes down, prepayments go up: IO investors are hurt and PO investors benefit -IO and PO = regular pass through CHAPTER 10 -forms of equity -common stock: basic form of ownership, voting rights, residual claim, limited liability -preferred stock -preferred claim on earnings and assets: dividends paid ahead of common -dividends may be skipped without firm going bankrupt -cumulative dividends must be paid before common stock dividends -non participating: dividends do not go up with profits -convertible preferred stock and bonds -convertible to specific number of common shares -convertible preferred pay dividends until conversion -potential for higher returns -primary equity markets -initial public offering: first sale of securities to the public -seasoned equity offering: sale of additional shares to the public -secondary equity markets -direct search -brokers
-dealers: Nasdaq, OTC -auction markets: allocate selling shares to the highest bidder, providing a buyer/seller -major source of bids and offerings -market orders: buy/sell at best available current price -limit orders: buy/sell at a specific price- no guarantee of execution -market makers in the stock buying and selling for their own accounts -stocks not listed on exchanges are traded in over the counter market -reasons: little investor interest, small issue size, insufficient order flow CHAPTER 11 -Nature of derivatives -securities whose value are based on values of other assets -forwards, futures, options, swaps

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