SIE Investment Products

Common Stock

Represents ownership in a corporation.

• Usually has voting rights

• Dividends are NOT guaranteed

• Last to receive assets in liquidation

• Higher risk than preferred stock

Preferred Stock

Ownership with priority over common stock for dividends and liquidation.

• Usually fixed stated dividends

• Generally, no voting rights

• Dividends are NOT guaranteed

• Paid after creditors, before common stock

Cumulative Preferred Stock

Missed dividends accumulate and must be paid before common shareholders receive dividends.

Corporate Bonds

Debt issued by corporations to raise money.

• Bondholder is a creditor, NOT an owner

• Interest is generally federally and state taxable

• Principal generally repaid at maturity

• Subject to default and interest-rate risk

Treasury Securities

U.S. government debt.

• T-bills: Mature in 1 year or less; sold at discount

• T-notes: 2–10 years

• T-bonds: More than 10 years

• Interest federally taxable, exempt from state/local income tax

General Obligation (GO) Bonds

Municipal bonds backed by the issuer's taxing power.

• Often supported by property (ad valorem) taxes

• Generally used for public projects

• Usually require voter approval, depending on jurisdiction

Revenue Bonds

Municipal bonds backed by income from a specific project or facility.

• Examples: Tolls, airports, water systems

• NOT generally backed by taxing power

• Main concern: Whether project generates enough revenue

Ad Valorem Tax

Property tax based on assessed value.

• Common source of support for GO bonds

• Ad valorem means 'according to value'

Debenture

Unsecured corporate bond.

• Backed by issuer's general creditworthiness

• No specific assets pledged as collateral

• Higher claim than stockholders in liquidation

Callable Bond

Issuer can redeem bond before maturity.

• More likely called when interest rates FALL

• Investor faces reinvestment risk

• Often offers higher yield than comparable noncallable bond

Zero-Coupon Bond

Bond that makes no periodic interest payments.

• Purchased at a discount

• Matures at face value

• Interest accrues over time

• Taxable zeroes may generate phantom income

Bond Prices and Interest Rates

INVERSE RELATIONSHIP.

• Interest rates UP → Existing bond prices DOWN

• Interest rates DOWN → Existing bond prices UP

• Longer maturities generally have greater interest-rate risk

Premium vs. Discount Bonds

PREMIUM: Market price above par; nominal yield > current yield > YTM.

DISCOUNT: Market price below par; YTM > current yield > nominal yield.

Assumes standard fixed-rate bonds without special features.

Nominal Yield vs. Current Yield vs. YTM

Nominal yield: Annual coupon rate based on par value.

Current yield: Annual interest ÷ market price.

YTM: Total annualized return if held to maturity, assuming promised payments and standard reinvestment assumptions.

Secured vs. Unsecured Bonds

SECURED: Specific collateral backs the bond, such as real estate or equipment.

UNSECURED: No specific pledged collateral; backed by issuer's credit.

Both are debt and generally rank ahead of stockholders.