Chapter 2
Securities and Markets
Formula for simple return(holding period
return)
(Price New-Price Old)/Price
Old+Dividends/Price Old=
Percentage Capital Gain+dividend
yield=Total Percentage Return
(note if period is 1 month, must multiply
by 12 to get annual return)
Securities
• Fixed Income Securities=Bonds, Preferred Stock,
T-bills, T-notes, Commercial paper, etc. Securities
that have a guaranteed rate and value.(note value
of a bond can change if you sell early, before
maturity)
• Variable Income Securities=stocks, convertible
bonds, any security that can change value
• Primary Securities=stocks, bonds, actual securities
• Derivative Securities=options, derivatives take
value from the primary securities they are derived
from
Government Bonds
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U.S. Savings Bonds
Treasury Bills=less than one year maturity
Treasury Notes=1 to 7 years maturity
Treasury Bonds=over 7 years
State and Local Government, General
Obligation Bonds=tax free muni’s are
included in this group
• Revenue Bonds
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Corporate Fixed Income
Mortgage Bonds
• Debenture Bonds=normal bonds
• Convertible Bonds=acts and trades as a bond
unless the stock price is higher than the exercise
price, then trades like a stock.If one bond trades
for 20 shares of stock, and bond has par value of
1000, if stock price goes above 50, bond will trade
at price*20 plus any premium, below 50 will trade
like normal bond plus premium. Premium is the
added value for having the option to exercise.
• Commercial Paper=short term corporate notes(less
than 1 year)
Corporate Stock
• Preferred Stock
• Common Stock
Mutual Funds
• Closed End Investment Company
• Open End Investment Company(Mutual
Funds)
Derivative Securities
• Call(long)=buy a option to purchase a stock at a
certain price before a certain date
• Going Long=buy a stock hoping it will go up
• Put(short)=buy a option to sell a stock at a certain
price before a certain date
• Short Selling=selling a stock you don’t own(need
to barrow) hoping stock will drop in price
• Warrant(Sweetener)
• Forward and Future Contracts(is a contract to
purchase at future date not a option to purchase)
Financial Markets
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Primary Markets
Secondary Markets
Market Order
Limit Order
Stop Loss Order