Equity Analysis exam 2 pt 1

debt instrument

contract that represents a sum of money that is borrowed and paid overtime

equity instrument

contract that represents the residual fractional ownership of an entity.

primary sector

raw materials

secondary sectors

manufacturing

tertiary sectors

services; transportation, finacing, communications, arts, entertainments, recreation.

quaternary sector

knowledge and research and development. education.

derivative instrument

financial contract whose value comes from the value of another underlying asset.

what can serve as underlying assets?

debt and equity instruments.

types of derivatives

stocks, options, futures, forwards

financial securities

tradebale financial assets that represent some kind of ownership, debt, or financial claim. this can be exchanged in financial markets.

security

tradeable financial asset whose financial value is derived from an underlying asset or contract

securization

act of taking the ownership of an asset and making it easily tradeable on the secondary market

financial markets

any place or system that provides buyers and sellers the means to trade financial instruments.

CUPIS number

9 digit number used to identify financial securities in the U.S and canada.

the first 6 digits are

unique to the security

7-8 digits..

identify type of security. letters → debt, numbers → equity

9 digit?

automatically generated check number.

creditors

people/organizations that are owed money

what order is cash paid out by

seniority

what is the order?

1. senior debt

2. mezzanine level

3. shareholders equity

senior debt

institutional funds with covenants (promise or restriction written into a contract) that make it senior to all other security claims.

secured and unsecured. ex: capitalized asset loans, bank loans

mezzanine level

intermediate level, entities can model their own specific hierarchy of instruments, so pref equity can be senior to corporate bonds.

subordinate debentures, convertible securities, preffered equity

ex: corportate bonds, convertible bonds, preffered shares

subordinate debentures

unsecured debt instruments not backed by specific collateral, gets paid after senior creditors

shareholders equity

most subordinate security, common stock, common equity.

preffered dividends

hybrid/equity instrument because it has fixed dividend payments (debt) but it represents ownership (stock).

if company pays pref dividends (which they will most likely do) its income statement will list “Net Income applicable to shareholders)

ONLY SOLD IN OVER THE COUNTER TERTIARY MARKETS

if company pays pref dividends, where can i find it?

its income statement will list “Net Income applicable to shareholders”

secured debt

debt is backed by collateral, meaning specific asset is promised to lender as security for loan

unsecured debt

backed by full trust and credit.

loan

contractual right to receive money on demand or on fixed determinable dates

Financial lease

you are buying the asset, but financing it and paying it overtime.

if failure, asset is taken

PV+interest + portions

ex: ammoritzation, car lease, financed PPE

lessor

entity that provides asset

lesse

entity that pays and uses asset

operating lease

rented asset. considered deb

how does an operating lease show up on the lessor side?

as an asset and its depreciation schedule on balance sheet

how does an operating lease show up on the lesse side?

list rental cost as an expense on their income statement.

securitized debt

debt that has been bundled together and turned into an instrument security that can be sold/traded

debt instruments

money market bills and papers, capitla market notes and bonds, amortized debt

money market bills and commercial papers

maturity of less than 1 year, sold at discounted price and repaid at higher price than FV

ex: T-bills

capital market notes and bonds

debt securities with term lenghts of more than 1 year

pays interest in a variety of ways throughout maturity. INTEREST ONLY

AMMORTIZED DEBT

any term that pays combination of BOTH principal and interest at regular intervals.

secured debt→ if you fail, you get asset taken.

mortgage, equipment loans

Publicly listed equity securites vs private equity instruments and securities

Private companies create equity through private equity, and debt through bank loans.

Public companies create equity through common stock and debt through corporate or commercial paper

in economics and governemnts, the shorthand term “public” sector refers to ____, while private sector refers to___

government, non-government.

stock market

market for financial security issuance and trading.

stock market index

measured performance of a list of constituents (part that makes up larger whole) stocks to represent a particular market or part of a market. a reporting tool only.

DOW JONES, SP500

exchange traded funds (EFT) and INDEX

investment funds that hold basket of assets like stocks, bonds, or commodities and trades on stock exchange like an inidivudal stock.

EFT INDEX: also can be used to mimic performance of a stock market index (you buy stocks on that index and see performance)

mutual fund

pools money from investors and uses it to buy a portfolio of investments. these are not traded and are managed.

hedge fund

pools money from investors, much more flexible and aggressive with investment methods. not limited to publicly listed securities. invests in both public and private sectors, FX market, buy distressed companies, etc. USED BY WEALTHIER INDIIDUALS AND INSTITUTIONAL INVESTORS.

Capital markets

provides long term debt and equity financing and investment

equity and bond markets (longer than 1y maturity)

money markets securities exchange…

provide short term debt financing and investment

• tbills, commercial papers, Certified deposits (cash)

derivative markets exchange..

futures, FX, options

provides instruments for the management of financial risk

broker

an agent who trades on behalf of customer

dealer

agent who trades on behalf of company or on their own behalf

primary market

where newly formed equity or debt securities are sold.

secondary market

existing forms of equity or debt securities are traded.

over the counter market (broad category)

Securities are traded directly between parties through dealers PRIVATELY , rather than on a formal exchange market

ex: corporate bond traded through a dealer network

third market

securities are traded OTC instead on the exchange where they are listed

ex:investment banks directly buying stocks issued for the first time.

fourth market

large institutional investors trade securities directly with each other with no broken or dealer acting as intermediary

ex: one pension fund sells large block of shared directly to another institution

retail investor

individual person who possesses financial securities. Purchases them through a broker that holds the securities in the investors brokerage account. in only special cases doe she not use a broker

institutional investor

wide variety of business entities that pool money to invest in variety of securities, starting primarily through the 4th market.

ex: banks.

efficient market hypothesis and theory

assumption that security prices at any time fully reflect all available information.

strong form efficient markets

all public and available information, inclusive to insider information is reflected on price

semi strong efficient markets

all publicly and available information is reflected. subject to disparities between private and public information. there can be:

• over reactions or under reactions as investors become aware of additional info

• private information is not assumed to be reflected on price.

weak markets

only past market data is reflected. markets were historically weak but technology has allowed markets to beocme more efficient.

delayed response

market recognizes good news but insufficient informaiton exists to accurately adjust the price.

what type of stock is common stock vs pref stock?

traditional equity vs hybrid

what type of stock can common stock vs pref stock be?

common stock can be multiple classes, pref stock is generally C but can be converted to common stock.

a- class of stock

held by investors with voting rights

b-class of stock

held by founders with 10x voting power

c-class of stock

no voting rights, held by employees and some class A