Financial Securities

1
Financial Securities

• An Overview of Financial Products

2
Equities

• American Depositary Receipt (ADR) receipts for
  foreign stocks traded on US exchanges
  
• Preferred Stock - generally has a dividend that
  must be paid out before dividends to common stock
  and the shares usually do not have voting rights
  
• Treasury Stock - stock that has been repurchased
  by the issuing company. These shares don't pay
  dividends, have no voting rights, and should not
  be included in shares outstanding calculations
  (share buyback)
• Penny Stock - A stock that sells for less than
  1 per share but may also rise to as much as 10
  per share as a result of heavy promotion. Traded
  OTC of PINK SHEETS (unregulated by SEC), yellow
  sheets for OTC bonds
• Short-Selling - assume that they will be able to
  buy the stock at a lower amount than the price at
  which they sold short (do not own the stock)
  
• Exchange-Traded Fund (ETF) - security that tracks
  an index, a commodity or a basket of assets, but
  trades like a stock on an exchange, thus
  experiencing price changes throughout the day as
  it is bought and sold.
• Real Estate Investment Trust (REIT) - A security
  that sells like a stock on the major exchanges
  and invests in real estate directly, either
  through properties or mortgages.

3
Fixed-Income Products

• Yields a regular (fixed) payment
• -Principal of bond is amount being lent
• -Coupon is interest that will be paid
• -Maturity is end of the bond
• -Indenture-contact that states these things
• Current yieldgoing interest rate
• Embedded options callability-issuer can repay
  earlier but at a premium
  
• Puttability-force issuer to repay before
  maturity
  

4
Fixed-Income Products (cont.

• Fixed-rate bonds-coupon remains constant
• Floating rate notes (FRN)-coupon linked to a
  money market index (reset periodically)
  
• High yield bonds-rated below investment grade by
  credit rating agencies-risky junk bonds
  
• Zero Coupon Bonds-do not pay interest, coupons
  traded independently
  
• Inflation linked Bonds-principal amount indexed
  to inflation-payments increased with inflation
  
• Asset-backed securities
• (MBS) mortgage-backed security
• (CMO) collateralized mortgage obligation
• (CDO) collateralized debt obligation

5
Fixed-Income Products (cont.)

• Subordinated bonds-lower priority than other
  bonds of the issuer in case of liquidation
  
• Perpetual bonds-perpetuities-no maturity date
• Bearer bond-certificate issued without a named
  holder
  
• Market pricepresent value of all future interest
  and principal payments of bond discounted at the
  bonds yield
  
• Yield and price are inversely related

6
Investment Funds

• Hedge Fund lightly regulated private investment
  fund using unconventional investments to offset
  losses (merger arbitrage, market neutral
  arbitrage, long-short)
• Mutual Fund pools of investment capital
• Private Equity Fund collaboration of funds that
  directs a private company's or individual's
  equity, either in the stock market or real
  estate
• Venture Capital Fund that primarily invests the
  financial capital of third-party investors in
  enterprises that are too risky for the standard
  capital markets or bank loans
• Money Market short-term borrowing and lending,
  typically up to thirteen months

7
Commodities

• undifferentiated product whose value arises from
  the owner's right to sell rather than the right
  to use
  
• Commodities Exchanges
• Chicago Board of Trade
• London Metal Exchange
• New York Mercantile Exchange
• Types
• Foodstuffs coffee, sugar, cocoa, corn, rice,
  soybeans, wheat, flowers, barley, orange juice
  
• Fuels sweet crude oil, unleaded gasoline,
  diesel, petrol
  
• Precious metals gold, platinum, palladium,
  silver
  
• Industrial metals copper, lead, zinc, tin,
  aluminum, nickel, steel
  
• Rare metals germanium, indium, cadmium, cobalt,
  chromium, magnesium, manganese, molybdenum,
  silicon, rhodium, selenium, titanium, vanadium,
  wolframite, tungsten
• Modern commodities bandwidth, RAM

8
Foreign Exchange

• Currency, Forex, FX
• largest market in world
• Trades 24 hours a day (no weekends)
• Most traded dollar, euro, yen, pound, franc,
  australian dollar
  

9
Derivatives Products

• Futures - contracts to buy or sell an asset at a
  future price and date
  
• Forwards same as future except price
  predetermined
  
• Options contracts that give the buyer the right
  to buy or sell an asset at a specified future
  date
  
• Put - An option contract giving the owner the
  right, but not the obligation, to sell a
  specified amount of an underlying asset at a set
  price within a specified time. The buyer
  estimates that the underlying asset will drop
  below the exercise price before the expiration
  date
• Call - An option contract giving the owner the
  right (but not the obligation) to buy a specified
  amount of an underlying security at a specified
  price within a specified time.
• Swaps two parties agree to exchange cash flows
• Over-the-counter (OTC) traded directly between
  two parties without an exchange (298 trillion)
  
• Exchanged-traded Korea Exchange, Eurex,
  Intercontinental Exchange, TOCOM, Chicago
  Mercantile Exchange, Chicago Board of Trade

10
Derivatives Products (cont.)

• Bonds- bond future, bond option, repurchase
  agreement
  
• Stocks- stock future, stock option, equity swap,
  stock option warrant
  
• Money Market interest rate swap, forward rate
  agreement, interest rate cap and floor swaption
  
• Foreign Exchange - fx future, fx option, currency
  swap, fx forward
  
• Credit Derivatives - credit default swap, total
  return swap, credit-linked notes, CDS swaption
  
• Energy Derivatives commodities futures
• Freight Derivatives freight rate futures
• Weather Derivatives weather futures