FIRE314, Notes 1

Chapter 3: Overview of Security Types

Learning Objectives
Price quotes for all types of investments are easy to find, but what do they mean? Learn the answers for:

1. Various types of interest-bearing assets.

2. Equity securities.

Security Types
Our goal in this chapter is to discuss the basic types of securities that (small) investors routinely buy and sell in financial markets around the world.

For each security type, we will examine: Its distinguishing characteristics, Its potential gains and losses, and How its prices are quoted in the financial press.

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Classifying Securities
Basic Types
Interest-bearing (Debt Obligations) Equities Derivatives
(we will not discuss in this class)

Major Subtypes
Money market instruments Fixed-income securities

Common stock Preferred stock

Futures Options

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Interest-Bearing Assets
Money market instruments are short-term debt obligations of large corporations and governments. These securities promise to make one future payment. When they are issued, their lives are less than one year. Fixed-income securities are longer-term debt obligations of corporations or governments. These securities promise to make fixed payments according to a pre-set schedule. When they are issued, their lives exceed one year.
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Money Market Instruments

Examples: U.S. Treasury bills (T-bills), bank certificates of deposit (CDs), corporate and municipal money market instruments. Potential gains/losses: A known future payment/except when the borrower defaults (i.e., does not pay). Price quotations: Usually, the instruments are sold on a discount basis, and only the interest rates are quoted. Therefore, investors must be able to do calculate prices from the quoted rates.
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Fixed-Income Securities
Examples: U.S. Treasury notes, corporate bonds, car

loans, student loans.

Potential gains/losses:

Fixed coupon payments and final payment at maturity, except when the borrower defaults. Possibility of gain (loss) from fall (rise) in interest rates Depending on the debt issue, illiquidity can be a problem. (Illiquidity means it is possible that you cannot sell these securities quickly at a fair price.)
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Quote Example: Fixed-Income Securities

Price quotations from TRACE (Trade Reporting and Compliance Engine) all broker/dealers who are FINRA members report corporate bond transactions to TRACE
Excerpt from: Most Active Investment Grade Bonds
Issuer Name ANHEUSER BUSCH INBEV WORLDWIDE Symbol Coupon Maturity 2.50% 3.63% 5.75% 6.75% 5.40% Jul-22 Moody's/S&P/ Fitch A3 /A /A High 101.113 Low 98.324 Last 99.217 103.23 108.474 103.406 Change Yield%

BUD3876 843 GOLDMAN SACHS GROUP INC GS.JBZ GOLDMAN SACHS GROUP INC GS.AEH GOLDMAN SACHS GROUP INC GS.XV GENERAL ELEC CAP CORP MTN BE GE.HDJ

0.285 2.59009 0.162 2.63978 -0.149 4.62896 0.232 6.47299

Feb-16 A3 /A- /A Jan-22 Oct-37 A3 /A- /A Baa1 /BBB+ /A-

104.4 102.5125 111.302 106.677 105.25 108.474 100 104.7

Sep-13 A1 /AA+ /

104.7 -0.10818 0.98194

This bond pays 5.4% of the bonds face value each year in 2 semi-annual payments.

The price (per $100 face) of the bond when it last traded.

The Yield to Maturity (YTM) of the bond.

Quotes from Aug. 22, 2012

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Quote Example: Fixed-Income Securities

Price quotations from TRACE
Excerpt from: Most Active High Yield Bonds
Issuer Name ATP OIL & GAS CORP TXU CORP NAVISTAR INTL CORP NEW SPRINT CAP CORP BEST BUY INC ROYAL BK SCOTLAND GROUP PLC Symbol Coupon Maturity Moody's/S&P/ Fitch High 33.75 57.25 99.125 105.315 92.26 103.939 Low 29.66667 54.9 95.875 100.817 88.48 100.156 Last 32.5 56.5 95.9375 103.25 92.26 101.848 Change 1.25 0 -0.1625 -1.5 1.26 1.152 Yield% N/A 12.3045 8.90333 6.29466 6.70237 4.07202

ATPG.GE 11.88% May-15 6.55% Nov-34 TXU.KO NAV.GN S.GM BBY.GI

8.25% Nov-21 6.90% May-19 5.50% Mar-21

RBS37023 5.00% Oct-14 88

Ca /D / Ca /CC /C B2 /CCC+ /CCC B3 /B+ /B+ Baa2 /BB+ /BB+ Ba3 /BB+ /BB+

Quotes from Aug. 22, 2012

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Treasury Yields at http://finance.yahoo.com/bonds

Quotes from Aug. 22, 2012

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Equities
Common stock: Represents ownership in a corporation. A part owner receives a pro rated share of any distribution (dividend, and, in the event of a liquidation, a pro rated share of whatever is left over after all obligations have been met.
Preferred stock: The dividend is usually fixed and must be paid before any dividends for the common shareholders. In the event of a liquidation, preferred shares have a particular face value.

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Common Stock
Examples: IBM shares, Microsoft shares, Intel shares, Dell shares, etc.
Potential gains/losses: Many companies pay cash dividends to their shareholders. However, neither the timing nor the amount of any dividend is guaranteed. The stock value may rise or fall depending on the prospects for the company and market-wide circumstances.

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Common Stock Price Quotes WSJ

NYSE Stock Exchange Tuesday, August 21, 2012

?
D
Drew Industries D.R. Horton Dril-Quip Dr Pepper Snapple Group Dr. Reddy's Laboratories ADS DST Systems DSW Cl A DTE Energy Symbol Open High

?
Low Close 29 18.1 70.9 45.2 29.6 51.2 62.2 59.9 29.1 18.3 Net Chg %Chg Vol 50,521 52 Week High 30.55 19.35 77.12 45.85 35.16 56.62 64.9 62.22 52 Week Low 17.82 8.03 47.49 34.65 27.28 40.48 37.4 47.03 29.3 18.5 71.7 45.5 29.7 51.2 62.6 60.6 29.9 18.7 73 45.5 29.9 52.8 64.9 60.6 -0.1 -0.41

?? ?
Div Yield ... ... PE 20.4 7.29 26.2 16.1 18.7 8.7 12.2 16.1 YTD %Chg 18.8 44.7 8.25 14.8 1.56 14.9 45.9 9.94

DW DHI DRQ DPS RDY DST DSW DTE

-0.2 -0.87 4,588,906 0.03 228,115

0.2 0.82 ... 1.4 ... 3

71.3 0.02 45.3

-0.1 -0.24 1,197,884 1.81 2.35 276,538 368,146

29.9 0.53 52.3 1.2

0.3 0.83 0.8 1.53 0.7 1.12 2.5 4.14

64.5 3.27 59.9

5.34 1,650,194 636,684

-0.6 -0.98

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Common Stock Price Quotes Online at http://finance.yahoo.com

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Preferred Stock
Example: Citigroup preferred stock. Potential gains/losses: Dividends are promised. However, there is no legal requirement that the dividends be paid, as long as no common dividends are distributed. The stock value may rise or fall depending on the prospects for the company and market-wide circumstances.

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Preferred Stock Quotes WSJ

Quotes from WSJ from Sept. 7, 2010

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Useful Internet Sites

www.investinginbonds.com (bond basics) http://cxa.gtm.idmanagedsolutions.com/finra/BondCenter/Default.aspx (current corporate bond quotes) finance.yahoo.com (quotes for stocks, indexes, etc.)

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