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Chapter 3 Security Types. Classifying Securities Interest-Bearing Assets Equities Derivatives Options Summary and Conclusions. Classifying Securities. Interest-Bearing Assets. Money market instruments Basic features Examples T-bills Commercial paper.

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Chapter 3 security types
Chapter 3Security Types

  • Classifying Securities

  • Interest-Bearing Assets

  • Equities

  • Derivatives

  • Options

  • Summary and Conclusions



Interest bearing assets
Interest-Bearing Assets

  • Money market instruments

    • Basic features

    • Examples

      • T-bills

      • Commercial paper


Interest bearing assets continued
Interest-Bearing Assets (continued)

  • Fixed-income securities

    • Basic features

    • Examples

      • Treasury bonds

      • Municipal bonds

      • Corporate bonds

  • Mortgage-backs



Corp bond quotes from wsj on friday august 24 2000
Corp Bond Quotes from WSJ on Friday, August 24, 2000


Equities
Equities

  • Common stock

    • Basic features

    • Classes of stock

  • Preferred stock

    • Basic features

    • Is preferred really debt?




Derivatives
Derivatives

  • Primary vs derivative assets

  • An example: STRIPS

  • Futures contracts

    • Basic features

    • Basic types

    • Buying and selling

    • Delivery

    • Marking-to-market

    • Potential gains and losses



Options
Options

  • Calls

  • Puts

  • Basic features

    • The contract

    • The premium

    • The strike price

    • Potential gains and losses

      • Stock sells for $100/share - buy 1 round lot

      • Call option sells for $5 -- buy 20 contracts



Wsj quotes for 8 24 00
WSJ quotes for 8/24/00


Problem 3 5
Problem 3-5

You found the following stock quote for DRK Enterprises, Inc., in the financial pages of today’s newspaper. What was the closing price for this stock that appeared in yesterday’s paper? How many round lots of stock were traded yesterday?


Problem 3 5 solution
Problem 3-5 Solution

Yesterday’s Papers’ Closing Price:

Yld % = Div. / Closing Price

4.6% = 3.60 / Closing Price

Closing Price (today’s paper) = 3.60 / .046 = 78.26 = $78¼

Yesterday’s = $78¼ + 3/8 = $78

Round Lots:

Volume in 100s is 7295, so 7295 round lots or 729,500

shares were traded.


Problem 3 6 solution
Problem 3-6 Solution

In the previous problem, assume the company has five

million shares of stock outstanding. What was the

net income for the most recent four quarters?

Net Income:

P/E = Price / EPS = 16 and stock price = 78 ¼, so

16 = 78.25 / EPS

EPS = 78.25/ 16 = $4.89

so with 5 million shares outstanding,

Net Income = $4.89 x 5M = $24,450,000


Problem 3 12
Problem 3-12

Suppose the following bond quote for ISU Corporation

appears in the financial pages of today’s newspaper.

If this bond has a face value of $1,000, what closing

price appeared in yesterday’s newspaper?


Problem 3 12 solution
Problem 3-12 Solution

Yesterday’s close:

Interest = 7-7/8 = 7.875%

Interest payment = 7.875% x $1,000 = $78.75 annually

Current Yield = 8.7% = Interest payment / Bond price

8.7% = $78.75 / Bond price

Bond price = $78.75 / 8.7% = $905.17,

but prices are quoted as percent of par value, so

Yesterday’s price = 90.517 - 0.5 = 90.017

So yesterday’s price is $900.17


Problem 3 13 solution
Problem 3-13 Solution

In the previous problem, in what year does the bond

mature? If you currently own 25 of these bonds, how

much money will you receive on the next coupon

payment date?

The bond matures in 2011 (from the 11 after the “s”)

Coupon Payment:

Interest payment = $78.75 / 2 = $39.375 every six months

So 25 bonds will pay:

$39.375 x 25 = $984.38


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