Financial Markets (Bilingual Teaching)
2. Description of a Premium, Discount, and Par Bond 1) Premium bond—when the coupon rate is greater then the
required rate of return, the fair present value of the bond is greater than its face value 2) Discount bond 3) Par bond
3. Factors affect Price Variability
1) Bond Maturity: Long-term bond prices are more sensitive
to given changes in market rates than short-term bonds 2) Coupon Rates: Low coupon bond prices more sensitive to
change in interest rates; PV of face value at maturity a major proportion of the price
4. Sensitivity of Bond Prices to Interest Rate Movements 1) Bond Price Elasticity =
(% Change In Price)/(% Change In Interest Rates)
2) The inverse relationship between Interest Rates and Price
causes the negative numbers 3) Calculation: examples?
4) Increased elasticity means greater price risk
? Longer maturity—more price variation for a change in interest rates
? Lower coupon rate bonds are more price sensitive (the PV
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Financial Markets (Bilingual Teaching)
is a greater % of current value)
? Zero-coupon bonds most sensitive, approaching –1 price elasticity
? Greater for declining rates than for increasing rates 5. Duration
1) Measure of bond price sensitivity
2) Measures the life of bond on a PV basis, Duration = Sum of
discounted, time-weighted cash flows divided by price
D??Pv(c)?ttt?1TBPv(ct)＝??tP0t?1
T3) The longer a bond’s duration, the greater its sensitivity to
interest rate changes
4) The duration of a zero-coupon bond = bond’s term to
maturity
5) The duration of any coupon bond is always less than the
bond’s term to maturity
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Financial Markets (Bilingual Teaching)
Chapter7 Stock Offerings and Investor
Monitoring
1. Common stock
1) certificate representing equity or partial ownership in a
corporation
2) Issued in primary market by corporations that need
long-term funds
3) Stock is then traded in the secondary market, creating
liquidity for investors and company evaluation for managers 2. Preferred Stock
1) Represents equity or ownership interest, but usually no
voting rights
2) Trade voting rights for stated fixed annual dividend 3) Dividend paid before common if dividends are declared by
board of directors
3. Initial public offerings (IPOs)
1) First-time offering of shares to the public 2) Firm must provide information to public
? Registration statement to SEC (Securities and Exchange Commission)
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Financial Markets (Bilingual Teaching)
? Prospectus: A prospectus specifies how the proceeds of the offering are to be used, the past performance of the issuing firm, the risk involved in the firm’s business, and the price range in which the shares will be offered. ? Firm is assisted by an investment banker 4. Secondary stock offerings
1) New stock issued by firm that already has shares
outstanding
2) Shelf Registration: 1982 SEC rule; Allows firms to place
securities without the time lag associated with registering with SEC
5. Margin requirements
Specify amount of borrowed versus amount in cash 1) Purchasing stock on margin
? Borrow a portion of the funds from broker ? Margin is the amount of equity an investor provide ? Magnifies returns (both good and bad) 2) Short sales
? Borrow stock and sell
? Repay stock loan, hopefully at a lower price
? Investor able to have potential profit from decline in stock price
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Financial Markets (Bilingual Teaching)
6. Stock Indexes 1) Typical index:
? Dow Jones Industrial Average ? Standard and Poor’s (S&P) 500 ? New York Stock Exchange Indexes ? Other Stock Indexes 2) Investing in stock indexes
? Indexing Has become very popular ? Lower transactions costs 7. Program trading by institutions
1) Simultaneously buying and selling of a portfolio of at least
15 different stocks valued at more than $1 million 2) Most commonly used by securities firms 3) Program refers to the use of computers 8. ADRs
American depository receipts (ADRs) are certificates that
represent ownership of a foreign stock. They are traded in the United States. U.S. investors can purchase ADRs as a method of investing in foreign securities.
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