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Chapter 2

Chapter 2. Securities and Markets Formula for simple return(holding period return) (Price New-Price Old)/Price Old+Dividends/Price Old= Percentage Capital Gain+dividend yield=Total Percentage Return (note if period is 1 month, must multiply by 12 to get annual return). Securities.

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Chapter 2

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  1. Chapter 2 Securities and Markets Formula for simple return(holding period return) (Price New-Price Old)/Price Old+Dividends/Price Old= Percentage Capital Gain+dividend yield=Total Percentage Return (note if period is 1 month, must multiply by 12 to get annual return)

  2. Securities • Fixed Income Securities=Bonds, Preferred Stock, T-bills, T-notes, Commercial paper, etc. Securities that have a guaranteed rate and value.(note value of a bond can change if you sell early, before maturity) • Variable Income Securities=stocks, convertible bonds, any security that can change value • Primary Securities=stocks, bonds, actual securities • Derivative Securities=options, derivatives take value from the primary securities they are derived from

  3. Government Bonds • U.S. Savings Bonds • Treasury Bills=less than one year maturity • Treasury Notes=1 to 7 years maturity • Treasury Bonds=over 7 years • State and Local Government, General Obligation Bonds=tax free muni’s are included in this group • Revenue Bonds

  4. Corporate Fixed Income • Mortgage Bonds • Debenture Bonds=normal bonds • Convertible Bonds=acts and trades as a bond unless the stock price is higher than the exercise price, then trades like a stock.If one bond trades for 20 shares of stock, and bond has par value of 1000, if stock price goes above 50, bond will trade at price*20 plus any premium, below 50 will trade like normal bond plus premium. Premium is the added value for having the option to exercise. • Commercial Paper=short term corporate notes(less than 1 year)

  5. Corporate Stock • Preferred Stock • Common Stock

  6. Mutual Funds • Closed End Investment Company • Open End Investment Company(Mutual Funds)

  7. Derivative Securities • Call(long)=buy a option to purchase a stock at a certain price before a certain date • Going Long=buy a stock hoping it will go up • Put(short)=buy a option to sell a stock at a certain price before a certain date • Short Selling=selling a stock you don’t own(need to barrow) hoping stock will drop in price • Warrant(Sweetener) • Forward and Future Contracts(is a contract to purchase at future date not a option to purchase)

  8. Financial Markets • Primary Markets • Secondary Markets • Market Order • Limit Order • Stop Loss Order

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