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7/26/2019 2 Primary Securities
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Slide1 W. Suo
Primary Securities
7/26/2019 2 Primary Securities
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Slide2 W. Suo
Objective
What are the primary securities and their
characteristics? Money market securities
How they are quoted
Bonds Equities
How they are traded Marin ! short sa"e
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Slide3 W. Suo
#inancia" Securities
Money market securities Mature within one year or "ess
$apita" market securities Maturity dates rane %rom & year to in%inity 'nc"ude %o""owin securities
(ebt
Pre%erred stock $ommon stock
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Slide4 W. Suo
Money Market Securities
)reasury bi""s Short*term debt ob"iations o% a nationa" overnment that are issued
to mature in three to twe"ve months
$ommercia" papers +nsecured promissory notes with a %i,ed maturity o% one to -./
days0 usua""y so"d at a discount %rom %ace va"ue
$erti%icate o% deposits )ime deposit1 common"y o%%ered to consumers by banks1 thri%t
institutions1 and credit unions
Banker2s 3cceptance short*term debt instrument issued by a %irm that is uaranteed by a
commercia" bank
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Slide5 W. Suo
Money Market Securities
#edera" %unds 'nterest*bearin deposits he"d by banks and other depository
institutions at the #edera" 4eserve1 these are immediate"y avai"ab"e
%unds that institutions borrow or "end1 usua""y on an overniht basis5 4EPOS
Short*term "oans6norma""y %or "ess than two weeks and %requent"y%or one day6arraned by se""in securities to an investor with anareement to repurchase them at a %i,ed price on a %i,ed date
Others 7ibor market Eurodo""ar deposits
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Slide6 W. Suo
Participants
$haracteristics? 7are1 "iquid1 "ow risk1 etc
Participants )radin companies o%ten purchase banker2s acceptance to be
tendered %or payment to overseas supp"iers5 4etai" and institutiona" money market %unds
Banks
$entra" banks $ash manaement prorams Merchant Banks
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Money Market 'nstrument 8ie"ds
8ie"ds on Money Market 'nstruments are not a"ways
direct"y comparab"e
#actors in%"uencin yie"ds Par va"ue vs5 investment va"ue 9:/ vs5 9:; days assumed in a year Simp"e interest annua"ied rate
E%%ective annua" yie"d> $ompound interest annua"ied rate Bank discount yie"d 9:/ days@par va"ue
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Bond Equiva"ent 8ie"d
'n $anada1 quoted as BE8> E,amp"e> )*Bi"" so"d at AC/1 with maturity o% /*days
E%%ective annua" yie"d *&
For the example,
'n +S1 quoted as Bank (iscount 4ate
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#i,ed 'ncome Securities
'nc"ude a"" debt issued by overnments and
corporations
Most %i,ed income securities are marketab"e "ea"
contracts Promise to pay interest payments periodica""y
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#i,ed 'ncome Securities
+S Dovernment securities on*marketab"e +S treasury securities Marketab"e +S treasury securities
otes and bonds Municipa" bonds
Feros S)4'PS G Separate )radin o% 4eistered 'nterest and Principa" o%
Securities
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#i,ed 'ncome Securities
$orporate bonds Speci%ies a"" terms o% the issue1 such as
$oupon payments $o""atera" provisions
Sinkin %und provisions
$onversion stipu"ations
Other protective provisions
Secured vs unsecured
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Equity Securities
4epresent a c"aim on earnins and assets o% acorporation
'nc"udes common and pre%erred stock $ommon stock is the %irst security issued in a corporation andthe "ast security retired in bankruptcy
$ommon and pre%erred stock have o maturity dates o c"aims on speci%ic corporate assets
o c"aims on speci%ic sources o% corporate earnins
$haracteristics
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Equity Securities
$"assi%y by sie> 7are*cap> A&/ bi""ionGA-// bi""ion Mid*cap> A- bi""ionGA&/ bi""ion Sma""*cap> A-// mi""ionGA- bi""ion Micro*cap> A;/ mi""ion*A9// mi""ion
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Ten largest markets (2011)
ew 8ork Stock E,chane
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Primary vs5 Secondary Security Sa"es
Primary
ew issue Jey %actor> issuer receives the proceeds %rom the sa"e
Secondary E,istin owner se""s to another party 'ssuin %irm doesn2t receive proceeds and is not direct"y
invo"ved
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)ransactin
When makin a trade1 the investor must speci%y )ype o% order
Market order1 "imit order1 stop orders1 sca"e order1 %i"" or ki""
order1 ood ti"" cance"ed order
Whether or not marin wi"" be invo"ved
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17/26Slide17 W. Suo
+sin on"y a portion o% the proceeds %or an
investment
Borrow remainin component
Marin arranements di%%er %or stocks and %utures
Marin )radin
E,amp"e
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Slide18 W. Suo
'nitia" Marin
Minimum marin Minimum "eve" the equity marin can be
ca""ed Lmaintenance in +S3 Dreatest marin
$urrent"y 9/N> at most ./N can be borrowed Set by the securities commissions
Marin ca"" $a"" %or more equity %unds
Stock Marin )radin
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Slide19 W. Suo
I $orp A./
;/N 'nitia" Marin
9/N Minimum Marin
&/// Shares Purchased
'nitia" Position
Stock A./1/// Borrowed A9;1///
Equity A9;1///
Marin )radin * 'nitia"
$onditions
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Slide20 W. Suo
Marin )radin * Minimum Marin
Stock price %a""s to A:/ per share
ew Position
Stock A:/1/// Borrowed A9;1///
Equity A-;1///
MarinN A-;1///@A:/1/// &5:.N
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Slide21 W. Suo
Marin )radin * Marin $a""
How %ar can the stock price %a"" be%ore a marin
ca""?
)here%ore1 P A;/
ote> &1///,P G 3mount Borrowed Equity
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Slide22 W. Suo
7everain e%%ect o% marin
purchases 8ou buy -// shares o% I8F at A&//1 e,pectin a 9/N
appreciation o% the stock in one year> 'nitia" marin> ;/N #inanced by a N "oan %or one year E,pected net return> ;&N
3 9/N drop in the price1 thouh1 brins a neative
rate o% return o% *:N5
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Slide23 W. Suo
Short Sa"es
Purpose> to pro%it %rom a dec"ine in the price o% a
stock or security
Mechanics
Borrow stock throuh a dea"er
Se"" it and deposit proceeds and marin in an
account $"ose out the position> buy the stock and return it
to the owner
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Slide24 W. Suo
Short Sa"e * 'nitia" $onditions
F $orp &// Shares
;/N 'nitia" Marin
9/N Minimum MarinA&// 'nitia" Price
Sa"e Proceeds A&/1///
Marin ! Equity A ;1///
Stock Owed A&/1///
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Slide25 W. Suo
Short Sa"e * Minimum Marin
Stock Price 4ises to A&&/
Sa"e Proceeds A&/1///
'nitia" Marin A ;1///
Stock Owed A&&1///
et Equity A 1///
Marin N
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Sl d 26W Suo
Short Sa"e * Marin $a""
How much can the stock price rise be%ore a marin
ca""?
So1 P A&&;59Cote> A&;1/// 'nitia" marin Q sa"e proceeds
A&;1 /// A&//9/N
&//
P
P
=