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Primary Securities

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Objective

What are the primary securities and their

characteristics? Money market securities

How they are quoted

Bonds Equities

How they are traded Marin ! short sa"e

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#inancia" Securities

Money market securities Mature within one year or "ess

$apita" market securities Maturity dates rane %rom & year to in%inity 'nc"ude %o""owin securities

(ebt

Pre%erred stock $ommon stock

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Money Market Securities

)reasury bi""s Short*term debt ob"iations o% a nationa" overnment that are issued

to mature in three to twe"ve months

$ommercia" papers +nsecured promissory notes with a %i,ed maturity o% one to -./

days0 usua""y so"d at a discount %rom %ace va"ue

$erti%icate o% deposits )ime deposit1 common"y o%%ered to consumers by banks1 thri%t

institutions1 and credit unions

Banker2s 3cceptance short*term debt instrument issued by a %irm that is uaranteed by a

commercia" bank

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Money Market Securities

#edera" %unds 'nterest*bearin deposits he"d by banks and other depository

institutions at the #edera" 4eserve1 these are immediate"y avai"ab"e

%unds that institutions borrow or "end1 usua""y on an overniht basis5 4EPOS

Short*term "oans6norma""y %or "ess than two weeks and %requent"y%or one day6arraned by se""in securities to an investor with anareement to repurchase them at a %i,ed price on a %i,ed date

Others 7ibor market Eurodo""ar deposits

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Participants

$haracteristics? 7are1 "iquid1 "ow risk1 etc

Participants )radin companies o%ten purchase banker2s acceptance to be

tendered %or payment to overseas supp"iers5 4etai" and institutiona" money market %unds

Banks

$entra" banks $ash manaement prorams Merchant Banks

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Money Market 'nstrument 8ie"ds

8ie"ds on Money Market 'nstruments are not a"ways

direct"y comparab"e

#actors in%"uencin yie"ds Par va"ue vs5 investment va"ue 9:/ vs5 9:; days assumed in a year Simp"e interest annua"ied rate

E%%ective annua" yie"d> $ompound interest annua"ied rate Bank discount yie"d 9:/ days@par va"ue

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Bond Equiva"ent 8ie"d

'n $anada1 quoted as BE8> E,amp"e> )*Bi"" so"d at AC/1 with maturity o% /*days

E%%ective annua" yie"d *&

For the example,

'n +S1 quoted as Bank (iscount 4ate

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#i,ed 'ncome Securities

'nc"ude a"" debt issued by overnments and

corporations

Most %i,ed income securities are marketab"e "ea"

contracts Promise to pay interest payments periodica""y

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#i,ed 'ncome Securities

+S Dovernment securities on*marketab"e +S treasury securities Marketab"e +S treasury securities

otes and bonds Municipa" bonds

Feros S)4'PS G Separate )radin o% 4eistered 'nterest and Principa" o%

Securities

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#i,ed 'ncome Securities

$orporate bonds Speci%ies a"" terms o% the issue1 such as

$oupon payments $o""atera" provisions

Sinkin %und provisions

$onversion stipu"ations

Other protective provisions

Secured vs unsecured

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Equity Securities

4epresent a c"aim on earnins and assets o% acorporation

'nc"udes common and pre%erred stock $ommon stock is the %irst security issued in a corporation andthe "ast security retired in bankruptcy

$ommon and pre%erred stock have o maturity dates o c"aims on speci%ic corporate assets

o c"aims on speci%ic sources o% corporate earnins

$haracteristics

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Equity Securities

$"assi%y by sie> 7are*cap> A&/ bi""ionGA-// bi""ion Mid*cap> A- bi""ionGA&/ bi""ion Sma""*cap> A-// mi""ionGA- bi""ion Micro*cap> A;/ mi""ion*A9// mi""ion

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Ten largest markets (2011)

ew 8ork Stock E,chane

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Primary vs5 Secondary Security Sa"es

Primary

ew issue Jey %actor> issuer receives the proceeds %rom the sa"e

Secondary E,istin owner se""s to another party 'ssuin %irm doesn2t receive proceeds and is not direct"y

invo"ved

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)ransactin

When makin a trade1 the investor must speci%y )ype o% order

Market order1 "imit order1 stop orders1 sca"e order1 %i"" or ki""

order1 ood ti"" cance"ed order

Whether or not marin wi"" be invo"ved

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+sin on"y a portion o% the proceeds %or an

investment

Borrow remainin component

Marin arranements di%%er %or stocks and %utures

Marin )radin

E,amp"e

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'nitia" Marin

Minimum marin Minimum "eve" the equity marin can be

ca""ed Lmaintenance in +S3 Dreatest marin

$urrent"y 9/N> at most ./N can be borrowed Set by the securities commissions

Marin ca"" $a"" %or more equity %unds

Stock Marin )radin

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I $orp A./

;/N 'nitia" Marin

9/N Minimum Marin

&/// Shares Purchased

'nitia" Position

Stock A./1/// Borrowed A9;1///

Equity A9;1///

Marin )radin * 'nitia"

$onditions

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Marin )radin * Minimum Marin

Stock price %a""s to A:/ per share

ew Position

Stock A:/1/// Borrowed A9;1///

Equity A-;1///

MarinN A-;1///@A:/1/// &5:.N

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Marin )radin * Marin $a""

How %ar can the stock price %a"" be%ore a marin

ca""?

)here%ore1 P A;/

ote> &1///,P G 3mount Borrowed Equity

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7everain e%%ect o% marin

purchases 8ou buy -// shares o% I8F at A&//1 e,pectin a 9/N

appreciation o% the stock in one year> 'nitia" marin> ;/N #inanced by a N "oan %or one year E,pected net return> ;&N

3 9/N drop in the price1 thouh1 brins a neative

rate o% return o% *:N5

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Short Sa"es

Purpose> to pro%it %rom a dec"ine in the price o% a

stock or security

Mechanics

Borrow stock throuh a dea"er

Se"" it and deposit proceeds and marin in an

account $"ose out the position> buy the stock and return it

to the owner

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Short Sa"e * 'nitia" $onditions

F $orp &// Shares

;/N 'nitia" Marin

9/N Minimum MarinA&// 'nitia" Price

Sa"e Proceeds A&/1///

Marin ! Equity A ;1///

Stock Owed A&/1///

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Short Sa"e * Minimum Marin

Stock Price 4ises to A&&/

Sa"e Proceeds A&/1///

'nitia" Marin A ;1///

Stock Owed A&&1///

et Equity A 1///

Marin N

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Short Sa"e * Marin $a""

How much can the stock price rise be%ore a marin

ca""?

So1 P A&&;59Cote> A&;1/// 'nitia" marin Q sa"e proceeds

A&;1 /// A&//9/N

&//

P

P

=