Chapter 2Securities 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

• 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

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

• Primary Markets

• Secondary Markets

• Market Order

• Limit Order

• Stop Loss Order