®1999 South-Western College Publishing 1 Chapter 2 Bonds, Stocks, And Other Financial Securities

®1999 South-Western College Publishing 2 Basic Characteristics Of Bonds Government or Corporate SecuritiesGovernment or Corporate Securities Coupon PaymentsCoupon Payments Par Value, Face Value, or PrincipalPar Value, Face Value, or Principal ClassificationClassification –Money market securities –Capital market securities Cash Flow see next slideCash Flow see next slide

®1999 South-Western College Publishing 3 Cash Flow Characteristics Time $ Price Five Year Bond $ 80 $ 80 $80 $1000 $950

®1999 South-Western College Publishing 4 Advantages And Disadvantages Of Bonds AdvantagesAdvantages –Good sources of current income –Investment is relatively safe Risk of defaultRisk of default –Bondholders receive payments first Before shareholdersBefore shareholders DisadvantagesDisadvantages –Limited potential profit –Prices sensitive to interest rates

®1999 South-Western College Publishing 5 Types Of Bonds Treasury billsTreasury bills Commercial paperCommercial paper Bankers’ acceptanceBankers’ acceptance Repurchase agreementsRepurchase agreements Federal fundsFederal funds EurodollarsEurodollars Negotiable certificates of depositNegotiable certificates of deposit U. S. Treasury notes U. S. Treasury bonds Federal agency bonds Municipal bonds Mortgages Mortgage-backed securities Money Market Securities Capital Market Securities

®1999 South-Western College Publishing 6 Basic Characteristics Of Common Stock Ownership in a FirmOwnership in a Firm –Voting rights DividendsDividends –Cash –Stock Capital GainsCapital Gains –Maximum 20% tax

®1999 South-Western College Publishing 7 Classification Of Common Stock GrowthGrowth IncomeIncome Blue-ChipBlue-Chip Speculative Cyclical Defensive

®1999 South-Western College Publishing 8 Preferred Stock CumulativeCumulative –Unpaid dividends accumulate –Paid before common stock dividends ParticipatingParticipating –Dividends ties to success of firm –Tied to stated earnings formula

®1999 South-Western College Publishing 9 Reading The Stock Page Go G / / Go G / /2 Net Change Close Today’s Lo Today’s Hi Vol 100s P/E Yield Div Sym Stock 52 week Lo 52 Week Hi

®1999 South-Western College Publishing 10 Calculating Dividend Yield Annual Dividends Annual Dividends Closing Price Closing Price 100

®1999 South-Western College Publishing 11 Calculating P/E Ratio Stock Price Stock Price EPS EPS

®1999 South-Western College Publishing 12 Calculating EPS EPS EPS P/E P/E

®1999 South-Western College Publishing 13 Derivative Securities Stock OptionsStock Options –Call option –Put option Convertible BondsConvertible Bonds –Conversion ratio, price, value, and premium Futures see next slideFutures see next slide SwapsSwaps

®1999 South-Western College Publishing 14 Futures CommoditiesCommodities MetalsMetals Energy ProductsEnergy Products Interest Rates Currencies Indexes

®1999 South-Western College Publishing 15 Major Sources Of Risk

®1999 South-Western College Publishing 16 International Securities Possible Higher ReturnsPossible Higher Returns DiversificationDiversification Exchange Rate RiskExchange Rate Risk Kinds Of InvestmentsKinds Of Investments –Direct purchase –American Depository Receipts (ADRs) –Mutual Funds see next slide

®1999 South-Western College Publishing 17 Mutual Funds Open-EndOpen-End –Issue shares on demand Closed-EndClosed-End –Fixed number of shares Sales ChargesSales Charges –Load –No load NAV Net Asset ValueNAV Net Asset Value –Current market value of the assets per share - based on the market value of the securities in the fund

®1999 South-Western College Publishing 18 Diamonds And Spiders DiamondsDiamonds –Unit trusts –Trades on the American Stock Exchange –Represents the Dow Jones Index SpidersSpiders –Unit trusts –Trades on the American Stock Exchange –Represents the S & P 500 Index Standard & Poor’s Standard & Poor’s