Understanding
Markets
Strictly Financials

Jan. 2, 2014
Donald W. Reynolds National Center
For Business Journalism
At Arizona State University
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James K. Gentry, Ph.D.
Clyde M. Reed Teaching Professor
School of Journalism and Mass Communications
...
Risk-Return Relationship
Basic Types of Risk
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Systematic or market
Unsystematic or nonmarket. Also called
“business risk.” Can be diversifi...
Specific Types of Risk
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Financial risk, credit risk, default risk
Market risk
Interest...
Types of Businesses
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Sole proprietorship
Partnership
Corporation
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Limited liability
Greate...
Types of Structures
Private corporations
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n  Non-profits
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Types of Investments
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Stocks
Bonds
Other
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Options, futures, commodities, real estate,
collectibles, curren...
Types of Markets
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Equity: Stocks
Credit: Bonds, debt or fixed income
Others
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Derivatives (such as opt...
Stock
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Stockholders want:
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Stock price to increase
Dependable dividend stream
Increase in size of dividend
Types of Stock
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Common stock
Preferred stock
Common Stock
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Risk: Lose your money if company
falters
Reward: Owners share in success when
company does well
n ...
Dividends
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Represent a return on capital invested by
shareholders.
Board must declare dividend for it to...
Preferred Stock
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Reduced risk but reward may be limited
Dividend amount is stated and is paid before
div...
Bond
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Bond is debt a company owes
Individual or company “loans” money to the
company by buying ...
Bond Terminology
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Interest rate: Fixed percentage of the bond’s
purchase price that is paid annually to...
Issuers Prefer Bonds
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When companies need to raise money, they
can issue stock or sell bonds
They often pref...
A Quasi-Bond?
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Is preferred stock debt (i.e., a bond) in
disguise?
Preferred holders have a “guaranteed”
div...
Risk and Reward
Yield

Yield Curve

Maturity
Equity or Securities Markets
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Primary market
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Go public
Private placement

Secondary market
Going Public
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Entrepreneurs have an idea. Company
grows with an investment from the
private equity marke...
Going Public (cont.)
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Company prepares a prospectus, which
is a detailed analysis of the company’s
financial hist...
IPO Terms
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Prospectus
Road show
Quiet period
Lockup period
Shelf Registration
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Firm can file one registration statement
for a relatively large block of stock and
sell parts...
Private Placement
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New issues can be sold in large lots to a small
group of buyers. Allows start-up firms to...
Secondary Offering
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If company already is public, it can sell
more stock through a secondary
offering.
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Cause...
Wall Street
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Got its name from a wall of brush and
mud built by early settlers to protect the
city of New York fr...
New York Stock Exchange
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In March 1792, Wall Street leaders met
to establish an improved auction market
In M...
NYSE (cont.)
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Until March 2006, was owned by 1,366
seat-holding members
Highest price ever paid for a seat w...
NYSE Members
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Floor brokers
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House brokers
Independent brokers

Specialists
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Manage a...
In The Day, Buy or Sell Order
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Tell your broker or “registered
representative” to buy or sell a stock at
the...
Trading on the NYSE Floor
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Trading occurs in the “Big Room”
Numerous stations, each with a roughly
figure-eig...
NYSE Floor (cont.)
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Order comes to the booth that is rented by a
brokerage house
Floor broker takes ord...
NYSE Floor (cont.)
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Stocks or groups of stocks are traded at
trading posts near the specialists’ po...
NYSE Floor (Then & Now)
Round or Odd Lots
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Round lots: Buying or selling stock in
multiples of 100 shares
Odd lots: Buying or selling sto...
Who Holds Your Stock?
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Virtually all investors leave shares in
their brokerage account in what’s
called the s...
Super DOT System
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Designated Order Turnaround
Allows orders to be transmitted
electronically to specialist.
N...
American Stock Exchange
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Non-members of NYSE couldn’t afford
office space so traded in the street
18...
NASDAQ
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National Association of Securities
Dealers Automated Quotations system
NASDAQ is a computer net...
Trading on the NASDAQ
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Trading is through an open market,
multiple dealer system, with many
market makers competi...
In Which Market?
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In general, but with exceptions:
NYSE: Oldest, largest, best known
n  AMEX: Smaller, younger
n  NA...
ECNs
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Electronic Communications Networks
Are basically Web sites that allow
investors to trade directly ...
NYSE - Archipelago Marriage
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Merged in March 2006 to create NYSE
Group, Inc., a publicly-held company.
...
NYSE Euronext
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Merged April 2007
Operates world’s largest, most liquid
exchange with diverse products and
ser...
Deutsche Borse Seeks
To Buy NYSE Euronext
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Worked on a deal from 2011 to 2012.
Would have created world’s lar...
NYSE and ICE
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ICE or the Intercontinental Exchange
took over NYSE Euronext on Nov. 13.
ICE is a 13-year-old ...
NYSE ‘Hybrid Market’
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Floor trading and automated trading
Specialists or Archipelago strengths
Why? Customers’...
NASDAQ Response
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NASDAQ acquired Instinet Group Inc.,
another ECN
Exchanges v. OTC Market
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Stocks in almost 10,000 companies
aren’t listed on any exchanges
They are trade...
BATS Global Markets
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Newer exchange, founded in 2005
Located in Kansas City
Competes on technology...
Direct Edge
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Another ECN with exchange status
Merging with BATS
Has DOJ approval; awaiting SEC
Ex...
U.S. Equities Market Share
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NYSE Floor
11
NYSE Arca
12
Nasdaq
16
Nasdaq Bx
3
BATS BZX, BYZ...
Dark Pools
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Also “Dark Liquidity” or “Dark Pool Liquidity”
Lightly regulated trading not open to the...
High-Frequency Trading
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Also known as “high-speed trading.”
Electronic trading strategies driven by
statistic...
High-Frequency Trading
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Research has shown that algorithmic trading
broadly makes prices less volatile and r...
Cyclical, Income, Growth
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Cyclical: Highly dependent on the state of the
economy. When things slow, earnings ...
Stock Ownership
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In 2011, 54% of Americans said they
had money in the stock market, either
in an individual stock...
Stock Ownership
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87% of upper-income Americans ($75,000 or
more annually) own stocks.
83% of postgradua...
Institutional Investors
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Organizations that invest their own assets or
pool those it holds in trust for ...
Changing Attitudes
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Institutional investors who own large
blocks of stock are increasingly
demanding a say in cor...
Stock Market Averages
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Dow Jones Industrial Average: Best known
and most widely reported market ind...
Stock Market Indexes
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NYSE Composite Index: All stocks traded on
the NYSE.
Standard & Poor’s 500 Index: Broa...
Market Indexes (cont.)
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AMEX Composite: Companies on the AMEX.
Russell 2000: Follows smallest two-thirds ...
Reg FD, Disclosure
and Guidance
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Regulation Fair Disclosure, October
2000
Bars public issuers from selectively
re...
Blue-Chip Stock
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Company with national reputation for
quality, reliability and ability to be
profitable in good or bad...
Classes of Stock
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Some firms have more than one class
Primarily done to assure control of the
firm by one group, s...
Stock Split
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If stock price increases significantly, a
company might do a split to lower the price,
whi...
Stock Split
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Number of splits is down notably. Just
10 split in ’13, compared with an
average of 48 annually...
Insider Trading
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Buying and selling of company stock by
officers, directors, employees, family
members, etc. Pers...
Option
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On an organized exchange, the right to
buy or sell securities, commodities, etc.
at some point for an agr...
Warrant
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Type of security, usually issued with a
bond or preferred stock, that entitles
holder to buy a proportio...
Owning International Stocks
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Rewards
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Diversification, capital gains, dividends,
country’s currency rises aga...
Credit or Debt Markets
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Historically, the amount of long-term
debt financing issued in the U.S. greatly
excee...
Terminology
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Bills – Maturity dates up to one year
Notes – Maturity dates of two to 10
years
Bonds – 10 years...
Who Issues Bonds
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Issued by U.S. companies
Issued by the U.S. Treasury
Issued by federal, state and local...
Issuers Prefer Bonds
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When companies need to raise money,
they can issue stock or sell bonds
They often pref...
Treasury Issues
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Life, or term, is fixed at time of issue
Treasury bill: One year or less
Treasury not...
Uses of Bonds
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Corporations use bonds:
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U.S. Treasury uses bonds:
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Pay for expansion or modernizatio...
How Bonds Are Traded
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Most already-issued bonds are traded
over the counter
Bonds also can be purchased from...
Bonds Then and Today
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Until 1983, all bondholders received
certificates
Some of these Bearer Bonds had ...
Rating Bonds
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Standard & Poor’s, Moody’s Investors
Services and Fitch are best known
Corporate, internat...
Bond Rating Code
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Aaa/AAA: Best quality
Aa/AA: High quality
A/A: High-medium quality
B...
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Strictly Financials 2014: Understanding Markets by Jimmy Gentry

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Jimmy Gentry presents "Common Size Analysis" during the Reynolds Center for Business Journalism's annual Business Journalism Week, Jan. 2, 2014. Gentry is the Clyde M. Reed Teaching Professor at the University of Kansas' School of Journalism and Mass Communications.

The annual event features two concurrent seminars, Business Journalism Professors and Strictly Financials for journalists.

For more information about business journalism training, please visit http://businessjournalism.org.

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Strictly Financials 2014: Understanding Markets by Jimmy Gentry

  1. 1. Understanding Markets Strictly Financials Jan. 2, 2014
  2. 2. Donald W. Reynolds National Center For Business Journalism At Arizona State University
  3. 3. n  n  n  n  n  James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communications University of Kansas jgentry@ku.edu
  4. 4. Risk-Return Relationship
  5. 5. Basic Types of Risk n  n  Systematic or market Unsystematic or nonmarket. Also called “business risk.” Can be diversified away. Strictly Financial
  6. 6. Specific Types of Risk n  n  n  n  n  n  n  n  n  Financial risk, credit risk, default risk Market risk Interest rate risk Purchasing power or inflation risk Event risk Exchange-rate or foreign exchange risk Liquidity risk Political or sovereign risk Tax risk
  7. 7. Types of Businesses n  n  n  Sole proprietorship Partnership Corporation n  n  n  n  n  Limited liability Greater access to capital Permanency Flexibility Double taxation
  8. 8. Types of Structures Private corporations n  Public corporations n  Non-profits n 
  9. 9. Types of Investments n  n  n  Stocks Bonds Other n  Options, futures, commodities, real estate, collectibles, currencies
  10. 10. Types of Markets n  n  n  Equity: Stocks Credit: Bonds, debt or fixed income Others n  n  Derivatives (such as options and futures), commodities, real estate, collectibles, currencies Historically, the amount of long-term debt financing issued in the U.S. greatly exceeds the volume of equity financing Strictly Financial
  11. 11. Stock n  Stockholders want: n  n  n  Stock price to increase Dependable dividend stream Increase in size of dividend
  12. 12. Types of Stock n  n  Common stock Preferred stock
  13. 13. Common Stock n  n  Risk: Lose your money if company falters Reward: Owners share in success when company does well n  n  Appreciation Dividends
  14. 14. Dividends n  n  n  n  Represent a return on capital invested by shareholders. Board must declare dividend for it to be paid. Dividend payment is not a business expense. It is an after-tax expense. Usually relationship between company’s age and size, and the dividends it pays.
  15. 15. Preferred Stock n  n  n  n  Reduced risk but reward may be limited Dividend amount is stated and is paid before dividends on common If company is liquidated, holders are preferred over common holders. Dividends don’t necessarily increase if company prospers.
  16. 16. Bond n  n  n  n  n  n  Bond is debt a company owes Individual or company “loans” money to the company by buying a bond Bond pays interest over a fixed period of time Principal is repaid to the lender or holder of the bond at end of the term Interest rate is typically fixed when the bond is sold (i.e., fixed income security) Interest rate is comparable to what other bonds, with that rating, are paying
  17. 17. Bond Terminology n  n  n  n  Interest rate: Fixed percentage of the bond’s purchase price that is paid annually to the bond holder Yield: Return on investment if bond is held to maturity. Equals interest rate. If bond is traded before maturity date, yield could change although interest rate stays the same. Par value: Dollar amount paid for bond at time of issue Maturity date: When bond comes due
  18. 18. Issuers Prefer Bonds n  n  n  When companies need to raise money, they can issue stock or sell bonds They often prefer bonds, in part because issuing more stock can dilute the value of shares investors already own Bonds also may have income tax advantages
  19. 19. A Quasi-Bond? n  n  n  Is preferred stock debt (i.e., a bond) in disguise? Preferred holders have a “guaranteed” dividend. Is that like the fixed interest rate of a bond? Why do investors pick common, preferred or bonds?
  20. 20. Risk and Reward
  21. 21. Yield Yield Curve Maturity
  22. 22. Equity or Securities Markets n  Primary market n  n  n  Go public Private placement Secondary market
  23. 23. Going Public n  n  n  n  Entrepreneurs have an idea. Company grows with an investment from the private equity market (venture capital). Owners decide to “go public.” Register with SEC to make an initial public offering (IPO). Investment bankers typically underwrite the offering through a syndicate.
  24. 24. Going Public (cont.) n  n  Company prepares a prospectus, which is a detailed analysis of the company’s financial history, its products and services, as well as management’s background and experience. Prospectus should identify and assess risk factors the company faces.
  25. 25. IPO Terms n  n  n  n  Prospectus Road show Quiet period Lockup period
  26. 26. Shelf Registration n  n  Firm can file one registration statement for a relatively large block of stock and sell parts over a two-year period This can reduce red tape and costs, and because stock can be sold directly to institutional investors, can eliminate the underwriting fee
  27. 27. Private Placement n  n  n  New issues can be sold in large lots to a small group of buyers. Allows start-up firms to show appeal by raising capital on their own. Additional shares later can be offered through an underwriter. Many debt issues are placed privately, usually to large buyers such as insurance companies.
  28. 28. Secondary Offering n  If company already is public, it can sell more stock through a secondary offering. n  n  Causes dilution Major owners sell their shares. They get the funds so no dilution.
  29. 29. Wall Street n  n  Got its name from a wall of brush and mud built by early settlers to protect the city of New York from attacks (1609) Site of New York’s first organized stock trading
  30. 30. New York Stock Exchange n  n  n  In March 1792, Wall Street leaders met to establish an improved auction market In May 1792, 24 men signed an agreement to trade securities only among themselves, maintain fixed commission rates and avoid other auctions Considered the origination of NYSE
  31. 31. NYSE (cont.) n  n  n  Until March 2006, was owned by 1,366 seat-holding members Highest price ever paid for a seat was $4 million Price was determined by auction.
  32. 32. NYSE Members n  Floor brokers n  n  n  House brokers Independent brokers Specialists n  n  n  n  n  Manage auction process Execute orders for brokers Serve as catalysts Provide capital Stabilize prices
  33. 33. In The Day, Buy or Sell Order n  n  n  Tell your broker or “registered representative” to buy or sell a stock at the current price, or market price. Called a market order. If you name the price to buy or sell, you’re making a limit order. Tell your broker to buy or sell once the price hits a specific price, you’re placing a stop order at a stop price.
  34. 34. Trading on the NYSE Floor n  n  n  Trading occurs in the “Big Room” Numerous stations, each with a roughly figure-eight shape, with counters and screens above. Called “trading posts.” Each counter is a “specialist’s” post
  35. 35. NYSE Floor (cont.) n  n  n  n  Order comes to the booth that is rented by a brokerage house Floor broker takes order to appropriate specialist’s post Specialist keeps a list of unfilled orders. Processes orders as prices move. Specialist’s job is to maintain an orderly market in the stock (match buyers/sellers)
  36. 36. NYSE Floor (cont.) n  n  n  n  n  Stocks or groups of stocks are traded at trading posts near the specialists’ positions. Floor brokers can use a specialist or trade between themselves, called trading in the “crowd” Terminals display the stock’s activity. After every trade, a reporter records the stock symbol, price and initiating broker. Successful trades are confirmed.
  37. 37. NYSE Floor (Then & Now)
  38. 38. Round or Odd Lots n  n  Round lots: Buying or selling stock in multiples of 100 shares Odd lots: Buying or selling stock in other quantities
  39. 39. Who Holds Your Stock? n  n  n  Virtually all investors leave shares in their brokerage account in what’s called the street name. Investor retains beneficial ownership, though. This offers safe storage. You can get tangible certificates if you want them. Typically, you must pay for them.
  40. 40. Super DOT System n  n  n  Designated Order Turnaround Allows orders to be transmitted electronically to specialist. Now makes up a substantial percentage of NYSE trading, particularly smaller orders
  41. 41. American Stock Exchange n  n  n  n  n  Non-members of NYSE couldn’t afford office space so traded in the street 1842: New York Curb Exchange By late 1870s known as “curbstone brokers” and their market was known as the Curb. Merged with NASDAQ in 1998 Acquired by NYSE Euronext in 2009
  42. 42. NASDAQ n  n  n  n  National Association of Securities Dealers Automated Quotations system NASDAQ is a computer network with no physical location for trading Uses a multiple market maker system, not the specialist system About 4,000-plus companies
  43. 43. Trading on the NASDAQ n  n  Trading is through an open market, multiple dealer system, with many market makers competing to handle each transaction. The computer network checks for matches, which can be handled instantly.
  44. 44. In Which Market? n  In general, but with exceptions: NYSE: Oldest, largest, best known n  AMEX: Smaller, younger n  NASDAQ: Youngest, least experienced n  Some of NYSE’s most actively traded stocks are also quoted on the NASDAQ n 
  45. 45. ECNs n  n  n  n  Electronic Communications Networks Are basically Web sites that allow investors to trade directly with one another Archipelago and Instinet were best known BATS Trading
  46. 46. NYSE - Archipelago Marriage n  n  n  n  Merged in March 2006 to create NYSE Group, Inc., a publicly-held company. Largest merger ever between securities exchanges. Combined leading equities market with most successful electronic exchange. Archipelago: low fees, user-friendly technology
  47. 47. NYSE Euronext n  n  n  Merged April 2007 Operates world’s largest, most liquid exchange with diverse products and services Six equities exchanges in five countries and six derivatives exchanges
  48. 48. Deutsche Borse Seeks To Buy NYSE Euronext n  n  n  Worked on a deal from 2011 to 2012. Would have created world’s largest trading exchange. European Union regulators rejected the deal in February 2012.
  49. 49. NYSE and ICE n  n  n  ICE or the Intercontinental Exchange took over NYSE Euronext on Nov. 13. ICE is a 13-year-old company based in Atlanta. Derivatives in general and energy futures in particular have fuelled ICE’s rapid growth. Questions surround NYSE future Strictly Financial
  50. 50. NYSE ‘Hybrid Market’ n  n  n  Floor trading and automated trading Specialists or Archipelago strengths Why? Customers’ desire for faster access to liquidity and greater anonymity
  51. 51. NASDAQ Response n  NASDAQ acquired Instinet Group Inc., another ECN
  52. 52. Exchanges v. OTC Market n  n  n  n  Stocks in almost 10,000 companies aren’t listed on any exchanges They are traded “over the counter” (OTC) Typically handled by phone or computer Generally, comparatively inexpensive and infrequently, or “thinly,” traded
  53. 53. BATS Global Markets n  n  n  n  n  n  Newer exchange, founded in 2005 Located in Kansas City Competes on technology and cost Developed its own software platform Also offers an options trading platform Has entered Europe
  54. 54. Direct Edge n  n  n  n  n  n  Another ECN with exchange status Merging with BATS Has DOJ approval; awaiting SEC Expected to close Q1 2014 BATS-Edge combo will be No. 2 exchange in market share Some days BATS-Edge combo has exceeded NYSE trading Strictly Financial
  55. 55. U.S. Equities Market Share n  n  n  n  n  n  n  n  NYSE Floor 11 NYSE Arca 12 Nasdaq 16 Nasdaq Bx 3 BATS BZX, BYZ 10 Direct Edge X, A 10 TRF 37 Other 3 November 2013
  56. 56. Dark Pools n  n  n  n  n  Also “Dark Liquidity” or “Dark Pool Liquidity” Lightly regulated trading not open to the public. Mostly involves block trades by institutions away from public exchanges so trades are anonymous. Main advantage to institutional investors: Can buy or sell in large blocks without other investors knowing since neither size of trade or trader’s identity are revealed. Prices are reported after trades completed. Also means some market participants are disadvantaged since they can’t see trades executed and prices paid so this market is not transparent. Strictly Financial
  57. 57. High-Frequency Trading n  n  n  Also known as “high-speed trading.” Electronic trading strategies driven by statistics and algorithms. WSJ reported in October 2012 that by some measures, such firms make up 5 of every 10 stock trades in the U.S. each day. Strictly Financial
  58. 58. High-Frequency Trading n  n  n  Research has shown that algorithmic trading broadly makes prices less volatile and reduces the overall cost of trading. These firms’ ability to buy and sell large blocks of securities in fractions of a second has raised fears that ordinary investors are being left behind. Is drawing criticism. Strictly Financial
  59. 59. Cyclical, Income, Growth n  n  n  Cyclical: Highly dependent on the state of the economy. When things slow, earnings and stock price fall. When economy recovers, earnings and stock prices rise. Income: Stocks that pay dividends regularly. Growth: Pay little or no dividend while profits are reinvested.
  60. 60. Stock Ownership n  n  In 2011, 54% of Americans said they had money in the stock market, either in an individual stock, a mutual fund or self-directed 401(k) or IRA This was down from 56% in ‘10 and 57% in ‘09. High in the 21st Century was 67% in ‘02 and 65% in ‘07. Gallup, April 2011
  61. 61. Stock Ownership n  n  n  n  87% of upper-income Americans ($75,000 or more annually) own stocks. 83% of postgraduates and 73% of college graduates own stocks. 64% of Republicans hold stocks, compared with half of Democrats and independents. Ages 50 to 64 are most likely to say they have money in the stock market. Gallup, April 2011
  62. 62. Institutional Investors n  n  n  n  Organizations that invest their own assets or pool those it holds in trust for others. Examples: Investment companies (including mutual funds), pension systems, insurance companies, universities and banks. Trade regularly and in tremendous volume. Must buy or sell at least 10,000 shares for a transaction to be an “institutional trade.”
  63. 63. Changing Attitudes n  n  Institutional investors who own large blocks of stock are increasingly demanding a say in corporate management. Socially or environmentally conscious individual shareholders also are becoming more involved.
  64. 64. Stock Market Averages n  n  n  n  n  Dow Jones Industrial Average: Best known and most widely reported market indicator Made up of 30 industrial companies Dow Jones Transportation Average: 20 airlines, railroads and trucking companies Dow Jones Utility Average: 15 gas, electric and power companies Dow Jones 65 Composite Average: all 65 companies in the other three averages
  65. 65. Stock Market Indexes n  n  n  NYSE Composite Index: All stocks traded on the NYSE. Standard & Poor’s 500 Index: Broad base of 500 stocks. Considered benchmark for largestock investors. NASDAQ Stock Market Composite Index: Stocks traded through its electronic system. Often more volatile because of types of companies it covers.
  66. 66. Market Indexes (cont.) n  n  n  n  AMEX Composite: Companies on the AMEX. Russell 2000: Follows smallest two-thirds of the 3,000 largest U.S. companies. Includes many IPOs of past few years. Benchmark for small-company stocks. Value-Line: 1,700 common stocks. Wilshire 5000: Broadest index, including nearly all stocks traded in U.S. markets.
  67. 67. Reg FD, Disclosure and Guidance n  n  Regulation Fair Disclosure, October 2000 Bars public issuers from selectively revealing material nonpublic information to securities analysts, broker-dealers, investment advisers, and institutional investors, before disclosing it to the public.
  68. 68. Blue-Chip Stock n  Company with national reputation for quality, reliability and ability to be profitable in good or bad times
  69. 69. Classes of Stock n  n  Some firms have more than one class Primarily done to assure control of the firm by one group, such as Ford Motor Company’s Class B, which isn’t publicly traded (held by family) but has 40 percent of voting power, although it represents less than 10 percent of total shares outstanding.
  70. 70. Stock Split n  n  n  n  If stock price increases significantly, a company might do a split to lower the price, which it expects to stimulate trading. In a split, more shares are available but total market value is still the same. Price may move up after split, therefore increasing the value of your stock. Reverse split: Exchange more shares for fewer, say 10 for five. To boost share price.
  71. 71. Stock Split n  n  n  Number of splits is down notably. Just 10 split in ’13, compared with an average of 48 annually since 1980. Researchers say it’s partly because retail investors are increasingly turning investing over to professionals. Cache in having high-priced stocks, some say. Strictly Financial
  72. 72. Insider Trading n  n  Buying and selling of company stock by officers, directors, employees, family members, etc. Person or trust owning 10 percent or more of a company's stock also considered an "insider." SEC calls them "insiders" because of access to early and potentially key company events.
  73. 73. Option n  n  On an organized exchange, the right to buy or sell securities, commodities, etc. at some point for an agreed upon amount. In a company, stock options are granted to corporate executives and others as part of their compensation packages.
  74. 74. Warrant n  n  Type of security, usually issued with a bond or preferred stock, that entitles holder to buy a proportionate amount of common stock at a specified price, usually higher than the market price at time of issuance, for a period of time. Also called a Subscription Warrant
  75. 75. Owning International Stocks n  Rewards n  n  Diversification, capital gains, dividends, country’s currency rises against dollar Risks n  Tax treatments differ by country, accounting and trading rules can be different, converting dividends can add expenses, distance and language barriers
  76. 76. Credit or Debt Markets n  n  n  Historically, the amount of long-term debt financing issued in the U.S. greatly exceeds the volume of equity financing Short-term or “money market” Bond market
  77. 77. Terminology n  n  n  Bills – Maturity dates up to one year Notes – Maturity dates of two to 10 years Bonds – 10 years or longer
  78. 78. Who Issues Bonds n  n  n  n  Issued by U.S. companies Issued by the U.S. Treasury Issued by federal, state and local government agencies Issued by overseas companies and governments. When sold in dollars, are sometimes called Yankee Bonds.
  79. 79. Issuers Prefer Bonds n  n  n  When companies need to raise money, they can issue stock or sell bonds They often prefer bonds, in part because issuing more stock tends to dilute the value of shares investors already own Bonds also may have income tax advantages
  80. 80. Treasury Issues n  n  n  n  n  Life, or term, is fixed at time of issue Treasury bill: One year or less Treasury note: One to 10 years Treasury bond: 10 years or more Generally, the longer the term the higher the interest rate
  81. 81. Uses of Bonds n  Corporations use bonds: n  n  U.S. Treasury uses bonds: n  n  Pay for expansion or modernization, cover operating expenses finance takeovers or other changes in management structure Finance government activities, pay off (refinance) national debt States, cities, counties, towns use bonds: n  Pay for public projects, supplement budgets
  82. 82. How Bonds Are Traded n  n  n  Most already-issued bonds are traded over the counter Bonds also can be purchased from the inventory of a brokerage firm that might make a market in the bonds Commissions and markups
  83. 83. Bonds Then and Today n  n  n  n  Until 1983, all bondholders received certificates Some of these Bearer Bonds had coupons attached to the certificate To collect interest, investor detached the coupon and exchanged it for cash. Hence, the bond interest rate is called the Coupon Rate. Today most new bonds are called Book Entry bonds and are registered electronically
  84. 84. Rating Bonds n  n  n  n  Standard & Poor’s, Moody’s Investors Services and Fitch are best known Corporate, international and municipal bonds are rated Credit ratings influence interest rates If a company’s rating is downgraded, investors demand a higher yield
  85. 85. Bond Rating Code n  n  n  n  n  n  n  n  n  Aaa/AAA: Best quality Aa/AA: High quality A/A: High-medium quality Baa/BBB: Medium quality Ba/BB: Some speculative element B/B: Future default risk Caa/CCC: Poor quality, default danger Ca/CC: Highly speculative C/C: Lowest rated, poor prospects
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