Chapter 2
Price of a Bond
The bond price reflect the par value and any accrued
federal government.
Bond prices are quoted as a percentage of par
value.
Callable Bonds
If a bond is callable, the issuer can call it back by
Senior Securities
Corporate bonds are senior securities, which means
Convertible Bonds
Bonds that are convertible at the issuers option into
common stocks.
Junk Bonds
High risk, high yield bonds carrying low rating.
Equity Securities
Equity securities represent ownership in a
corporation
These securities represent residual claim
There are two types of equities:
Preferred stock
Common stock
Preferred Stock
Dividend is fixed in amount and known in advance
Preferred Stock
Common stock
Common stock represents the ownerships interest of
the corporation.
Ownership is concentrated or closely held when the
firms shares are held by few individuals.
Ownership is scattered when shares are held by lots
of people.
vote.
It gives the right to receive dividends, however,
dividend rate is not fixed.
Common shares also give the right to purchase new
shares.
Common shares are riskier than preferred stock and
bonds.
Derivative Securities
Securities that derive their values from an asset or
security.
There are two types of derivative securities:
Future Contracts
Options Contracts
Future Contracts
A future contract obliges traders to purchase or sell
Future Contracts
The margin is small compared to the value of the
purchase or sale.
Many investors in future markets are hedgers or
speculator.
Hedgers seek to reduce price uncertainty over some
future period of time.
Speculators seek to profit from future uncertainty in
prices.
Option Contracts
Option is a right to buy or sell a stated number of
units of an asset within a specified period at a
specified price.
Option Contracts
There are two types of option contracts:
1. Call Option
A right to buy a stated number of units of an asset
at a stated time at a specified price.
2. Put Option
An option to sell a stated number of units of an
asset at a stated time at a specified price.
Call Option
*
(Option Holder)
*
(Option Writer)
Put Option
*
(Option Holder)
*
(Option Writer)