CH 1-CH 7.1 SIE

Authorized Stock

When a corporation is formed, its corporate charter authorized that a fixed number of common shares may be issued

Para value for common stock

has no bearing on the market price of the stock but is simply used for accounting purposes

Market Cap

The numbers of shares outstanding times the current market price

Repurchases shares are called

treasury stock

What rights do common shares have that Treasury shares do not

the right to vote on issues that will affect them and the right to receive dividends

OTC securities

Smaller companies that do not meet the requirements to be listed on NYSE or Nasdaq

Listed securities

companies that do meet the requirements to be listed on NYSE or Nasdaq

Settlement

Occurs when the securities and the purchase price have officially changed hands

Executed Trade

the new owner will immediately take on the risk of the price falling or rising in the future

Regular way settlement

trade is executed in an equity, settlement is one business day after the trade date

When a company decides to issue stock dividends

Total number of shares outstanding increases, but the value of each outstanding share decreases

Why does value of each outstanding share decrease when dividends are issued

The value of the company has not changed

Stock dividends vs stock split

dividends are stock distributions that involve less than 25% of oustanding shares vs split is larger distribution

2:1 forward split ratio

a shareholder would wind up with twice the number of shares as they previously owned

Reverse stock split 1:10

Results in fewer shares outstanding but at a higher price per share

Preemptive right

shareholders having the right to keep their proportional ownership in the company if the company chooses to issue more shares

Rights

distributed to shareholders prior to issuance of new shares to the public. Give the owner the option to buy a certain number of shares at a reduced price over time

What three things does a right give the shareholder the option to do

1. Exercise the right to buy new shares at a price below the current market price

2. Sell the right to another investor

3. Do nothing and let the right expire worthless

FIFO

The first items entered in the inventory account are the first to leave when the sale is recorded.

LIFO

The last items entered into inventory are the first to leave when a sale is recorded

Earnings per common share formula

earnings available for common/common shares outstanding

Dividend or current yield

Annual income/market price

price earning ratio

market price of security/earnings per share

A stock with a P/E ratio of 10 is

selling at 10 times earnings

Limited Liability

their losses are limited to the money they invest

Right to inspect books and records

Corporations must provide shareholders with audited annual reports that include the company’s financial statements

Right to transfer ownership

shares are liquid, meaning that they can be bought and sold

Right to corporate distributions

Shareholders have the right to receive distributions such as dividends if declared by the board of directors

Right to corporate assets upon dissolution

in the event of a liquidation, shareholders have a residual claim to the company’s assets. This means that they will be paid after all other claims have been satisfied

Right to vote

Shareholders have the right to approve certain corporate decisions

Items that require a shareholder vote

• declare a stock split

• declare a reverse stock split

• issue convertible bonds or preferred stock

• issue stock options to officers on a preference basis

items that do not require a shareholder vote

• declare a cash dividend

• declare a stock dividend

• declare a preemptive rights distribution

Share buyback

reduces the number of common

Statutory voting

Votes must be evenly cost, more common

cumulative voting

the shareholder may divide their total votes in whatever manner they choose

Proxies

will cast votes on behalf of shareholder’s who do not attend the meeting

Preferred stock rights

Does not have the right to vote or preemptive rights

Similarities between preferred and bonds

have a fixed interest rate and do not have rights

Differences between preferred and bonds

• bonds mature on a set date while preferred stock has an indefinite life

• Bondholders have priority of claim to interest payments and corporate assets upon liquidation ahead of preferred shareholders

• Bondholders have a legal right to interest payments vs preferred dividends are only paid if declared by the board of directors

market price common stock

market price fluctuates with issuer’s profits and losses

risks of common stock

riskier, but more growth potential

market price preferred stock

market price fluctuates with interest rates and issuer’s creditworthiness

risk with preferred stock

less risky but less growth potential

income production for common stock

• may receive a share in company’s in the form of dividends

• Participate in the company’s growth through appreciation in stock price

• dividends may or not be paid regularly

Income production for preferred stock

• when dividends are paid, they are paid as a fixed percentage of par

• Seniority over common, meaning dividends are paid to preferred ppl before common

Cumulative preferred

If the issuer does not pay, the missed payments accumulate and must be paid before the issuer can resume making any other dividend payments

• All accumulated preferred dividends must be paid before a dividend can be paid to common shareholders

Callable preferred

The issuer has a right to redeem the shares after a set date, and may do so when interest rates fall.

convertible preferred

shareholders can exchange their preferred shares for common stock based on a predetermined price

Dividends for preferred

• Convertible - lower

• callable - higher

if the market price of common stock rises

the convertible’s value is pushed up, allowing the issuer to sell convertibles with lower rates

participating preferred

enables shareholders to participate in the earnings of the company more fully. Strong earnings may mean a special dividend is declared, which participating people receive

preferred stock dividend rate

is fixed and set at a level comparable with the current market rate of interest for equivalent securities. Will always be a percentage of par

Current yield formula

annual income from security/market price of security

Warrant

A long term option to buy stock at a fixed price, quite a bit above the market price of a stock

What is included in a warrant

A period before it can be exercised and then it can be exercised at a set price until expiration

Rights exercise price

below the market price

Rights expiration and trading

short term and yes

warrants exercises price

above the market price

warrants expiration and trading

long term and yes

Perpetual warrants

Does not have an expiration as most warrants have a 5-year plan

ADRs purpose

To facilitate the trading of foreign securities to the US and foreign companies can list their shares for trading on stock exchanges

How are ADRs are created

A bank will buy foreign stock and place it in the trust of the country of origin. Then the bank issues ADRs which are backed by securities held in trust

• The ADRs are registered with the SEC and sold in the US are priced in USD

ADR Receipt Holder Rights

As dividend payments are received, the bank passes these on to the receipt holder in USD. But the receipt holder has no voting rights.

ADR Receipt holder votes

The bank votes the sharers that it owns and will sell off any preemptive rights and send the money to the receipt holder

Currency risk or exchange rate risk

The risk of currency exchange fluctuations

ADRs and currency risk

Although ADRs are priced in USD, the market price will depend on changes in foreign currency markets. ADRs are subject to currency risk

A newly issued warrant

Can be exchanged for stock at a price higher than the market price

Bond issuer

borrower = debtor

Bond investor

Lender = creditor

Term bond issue

A bond issue for which every bond has the same interest rate and maturity

Examples of term bond issues

Corporate bond issues and US government bonds

Serial bond issue

An issue with differing maturity rates

Series bonds

An issue of bonds with same maturity but different dates of issuance

Bond

A fixed income security that represent a loan between an issuer that nees money and an investor that has funds to lend

Serial bonds

Mature over a series of years and are associated with balloon maturities

Dealers

Firms that buy and sell bonds out of their own industry

From the investor’s perspective

The investor pays the dealer’s ask price when they buy bonds

The investor receives the dealer’s bid price when they sell bonds

Corporation bond issuer

• Quoted on percentage of par basis

• and is a term bond

US government bond issuer

• Quoted on percentage of par basis

• and is a term bond

Muni Bond 1

• Quoted on percentage of par basis

• and is a term bond (dollar)

Muni Bond 2

• Yield basis

• and is a serial bond

Bid and ask spread

Dealers pay the bid price when buying and receive the ask price when selling

When a customer sells a bond

They will sell it at the bid price

Current yield

the annual return that an investor will receive, given what they paid for a bond

Price adjustment current yield

moves the current yield of the existing bonds in line with that of newly issued bonds

Nominal yields

Do not change with movements in interest rates

nominal yield

The stated rate of interest set when the bond is issued. Does not change and is not affected by changes in market prices or interest rates

Current yield

The current return an investor is earning based on the price they paid and the stated coupon rate of the bond

Bond selling at Par

Coupon Rate = Current Yield = YTM

Bond selling at a discount

Coupon rate < current yield < YTM

Bond selling at a premium

yield to maturity < current yield < coupon rate

callable bond

the issuer has the right to call in (redeem) the bond at a predetermined price (expressed as a % of par value) at a date prior to maturity.

Call Penalty

When issuing a callable bond the cost to issuer is higher coupon rate and the final payment of more than par value

Call premium (investor’s perspective)

the increase over par value that they receive when the bond is called

Process of calling a bond

• The issuer calls the bond

• The issuer pays the bondholder the final interest payment

• The issuer returns the original plus the extra premium investment to the bondholder

• The issuer can sell new bonds at the current, low interest ratees

Why do callable bonds have higher coupon rates

there is an inherent interest rate risk that the investor assumes when buying a callable bond

Yield to Call

A measure of how the call affects an investor’s return.

Why is a YTC higher than YTM for discount bond

Because the investor is receiving the gain between the discounted price paid and the amount received prior to maturity

Why is Yield to Call for Premium Bond lower than YTM

The investor paid more for the bond, which means they lose the higher coupon payments earlier when the bond is called

Discount bond lowest to highest

Price is below par, nominal yield < current yield < YTM < YTC