Chapter 3 Security Types

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Presentation transcript:

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

Interest-Bearing Assets (continued) Fixed-income securities Basic features Examples Treasury bonds Municipal bonds Corporate bonds Mortgage-backs

Wall Street Journal NY Bond Quotes

Corp Bond Quotes from WSJ on Friday, August 24, 2000

Equities Common stock Basic features Classes of stock Preferred stock Is preferred really debt?

Wall Street Journal Stock Quotes

The New CNBC Ticker

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

Wall Street Journal Futures Price Quotes

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

Wall Street Journal Option Quotes

WSJ quotes for 8/24/00

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 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 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 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 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 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