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 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