1. ©2012, College for Financial Planning, all rights reserved. Module 5 Equities & Debt Instruments Foundations In Financial Planning SM Professional Education Program

2. Learning Objectives 5–1: Explain characteristics of common stock investing. 5–2: Explain various strategies for purchasing common stock. 5–3: Interpret methods for stock evaluation. 5–4: Describe types of risk associated with investing in stock. 5–5: Identify characteristics of preferred stock investing. 5–6: Identify characteristics and methods of investing in real estate, collectibles, and options. 5–7: Identify a definition, description, or characteristic relating to debt instruments. 5–8: Calculate a current yield, yield to call, or yield to maturity for a given bond. 5–9: Identify the sources of risk or the degree of liquidity and marketability for a given debt instrument. 5-2

3. Questions To Get Us Warmed Up 5-3

4. Capitalization Bonds Common stock Preferred stock 5-4

5. Common Stock Characteristics Rights Dividends Voting Preemptive Splits Stock split Reverse split Returns Capital appreciation Dividends 5-5

6. Buying Common Stock Long position Short position Margin 5-6

7. Evaluating Stock EPS (earnings per share) P/E (price/earnings ratio) Yield Investment Styles: o Growth o Value o Blend 5-7

8. Common Stock Risks Systematic o Market risk o Currency risk (exchange rate) for international stocks Unsystematic o Business risk o Event risk Liquidity & Marketability 5-8

9. Preferred Stock Fixed dividends Senior to common stock Normally no voting rights Cumulative dividends Some issues can be called Participating preferred 5-9

10. Real Estate Direct ownership o land o home o building o passive income and losses Real estate investment trusts o equity o mortgage o hybrid Limited partnerships 5-10

11. Collectibles Types Risks Marketability 5-11

12. Options A contract that gives the holder the right to buy or sell a security at a set price (strike price) within a set time period 5-12 Call Buy a call when you expect the stock price to go up Put Buy a put when you expect the stock price to go down

13. Debt Terminology Maturity date o money market instruments o bonds o notes Par value Coupon rate Registered vs. bearer bonds Discount vs. premium Indenture Default Call provision Sinking fund 5-13

14. Bond Calculations Nominal Yield = annual income/par value Current Yield = annual income/current price Yield to Maturity Example: A $1,000 par value 6% bond with 20 years to maturity selling at $940 PV = -940 PMT = 30 (assume semiannual payments) N = 40 FV = 1,000 I = 6.54% 5-14

15. Bond Calculations Yield to Call Example: A $1,000 par value 7% bond with 20 years to maturity, callable in 5 years at $1,070 selling at $970 PV = -970 PMT = 35 N = 10 FV = 1,070 I = 8.90% 5-15

16. Bond Types 5-16

17. Bond Risks Interest rate risk o inverse price/interest o rate relationship o duration Purchasing power risk Call risk Reinvestment risk Financial risk Event risk Liquidity Marketability 5-17

18. Question 1 Returns from common stock can be in the form of which one of the following? a.dividends only b.interest only c.interest and capital appreciation d.dividends and capital appreciation 5-18

19. Question 2 Bond ratings considered “investment grade” are those within a.the top two ratings. b.the top three ratings. c.the top four ratings. d.the top five ratings. 5-19

20. Question 3 Which one of the following interest rates does the Federal Reserve directly control? a.Treasury bond rate b.commercial paper rates c.fed funds rate d.mortgage-backed securities rates 5-20

21. Question 4 A real estate investment trust (REIT) that primarily offers interest income to the investor is a(n) a.equity REIT. b.mortgage REIT. c.hybrid REIT. d.balanced REIT. 5-21

22. Question 5 An investor has a bond with a duration of 7. If interest rates go up 1.5%, how much is the price of the bond expected to fall? a.1.5% b.7.0% c.10.5% d.14% 5-22

23. Question 6 A debt instrument issued with a maturity of one year or less is called a a.bond. b.note. c.money market instrument. d.debenture. 5-23

24. Question 7 Virtually all bonds have each of the following except a.interest payments. b.maturity date. c.voting rights. d.an indenture. 5-24

25. ©2012, College for Financial Planning, all rights reserved. Module 5 End of Slides Foundations In Financial Planning SM Professional Education Program