3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing...
-
Upload
stanley-webb -
Category
Documents
-
view
214 -
download
0
Transcript of 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing...
![Page 1: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/1.jpg)
3
Overview of Security Types
![Page 2: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/2.jpg)
3-23-2
Classifying Securities
Basic Types Major Subtypes
Interest-bearing Money market instruments
Fixed-income securities
Equities Common stock Preferred stock
Derivatives Futures Options
![Page 3: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/3.jpg)
3-33-3
Interest-Bearing Assets
• All interest-bearing assets are basically loans
• Categorized by Maturity• Money market instruments (< 1 year)• Notes (1-10 years)• Bonds (> 10 years)
![Page 4: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/4.jpg)
3-43-4
Interest-Bearing Assets• Money market instruments
• Short-term debt obligations of large corporations and governments
• One future payment• Issued with maturities less than one year
• Fixed-income securities • Longer-term debt obligations of corporations or
governments• Fixed payments according to a pre-set schedule• Issued with maturities exceeding one year
![Page 5: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/5.jpg)
3-53-5
Money Market Instruments
• Simplest form of interest-bearing assets• Mature in less than one year• Trade in large denominations• Highly liquid market • Sold on a discount basis• Prices quoted as a % of face value
• Most familiar = U.S. Treasury Bill (“T-bill”)
![Page 6: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/6.jpg)
3-63-6
Treasury Bill Example
A 26-week T-Bill is quoted at:Price = 99.15Investment Rate = 1.718
• You pay $10,000 x 99.15% = $9,915• In 26 weeks you receive $10,000
• Dollar return = $10,000 - $9,915 = $85• 6-month rate of return = $85 ÷$ 9,915 = 0.86%• Annualized return = (1.0086)2 -1 = 1.72%
![Page 7: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/7.jpg)
3-73-7
Fixed-Income Securities• Examples:
• U.S. Treasury notes and bonds• Corporate bonds• Car and student loans
• Potential gains/losses:• Fixed coupon payments and final payment at
maturity, unless borrower defaults• Possibility of gain (loss) from fall (rise) in interest
rates• Liquidity
![Page 8: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/8.jpg)
3-8
Quote Example: Fixed-Income Securities• Price quotations from www.wsj.com—the online version of The Wall Street Journal
(some columns are self-explanatory):
You will receive 6.875% of the bond’s face value each year in 2 semi-annual payments.
The price (per $100 face) of the bond when it last traded.
The Yield to Maturity (YTM) of the bond.
![Page 9: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/9.jpg)
3-93-9
Corporate Bond QuotesCurrentYield(%)
HOME DEPOT INC 93.51 5.875 16-Dec-36 6.365 6.283 AA
HOME DEPOT INC 95.81 5.400 1-Mar-16 6.027 5.636 AA
HOME DEPOT INC 98.70 5.250 16-Dec-13 5.492 5.319 AA
HOME DEPOT INC 100.32 5.200 1-Mar-11 5.101 5.183 AA
Maturity YTM(%)Fitch
RatingsIssue Price Coupon(%)
The first bond in the list matures in 2036
Is currently priced at 93.51% of par (discount)
Pays an annual coupon rate of 5.875%
versus a Yield-to-Maturity of 6.365%
Has a current yield of 6.283% = 5.875/93.51
![Page 10: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/10.jpg)
3-103-10
Treasury Notes & Bonds• “Fixed-income securities”
• Both pay periodic interest payments – coupon payments – over the life of the instrument
• Price quotes = percent of par… with a unique twist• Percentage = 32nds • Usually indicated by the colon between the
whole percent and the number of 32nds.
![Page 11: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/11.jpg)
3-113-11
Treasury Note & Bond Quotation
5.000 May 18 95:05 95:07 22 5.51
• Coupon rate = 5%• Note matures in 2018• Bid price = 95 5/32 % of par • Ask price = 95 7/32 % of par • Price change = 22/32nds• YTM based on Ask price = 5.51%
![Page 12: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/12.jpg)
3-123-12
Classifying Securities
Basic Types Major Subtypes
Interest-bearing Money market instruments
Fixed-income securities
Equities Common stock Preferred stock
Derivatives Futures Options
![Page 13: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/13.jpg)
3-133-13
Equities• Common stock:
• Represents ownership in a corporation. • In the event of liquidation, owner receives pro rated
share of whatever is left after all obligations have been met.
• Preferred stock: • Dividend usually fixed • Dividend must be paid before any dividends paid to
common shareholders. • In the event of a liquidation, preferred shares have a
particular face value.
![Page 14: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/14.jpg)
3-143-14
Common Stock
Potential gains/losses:• Cash dividends paid to shareholders
• Neither the timing nor the amount of any common stock dividend is guaranteed.
• Stock value may rise or fall
![Page 15: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/15.jpg)
3-15
Common Stock Price Quotes
Fig 3.2
![Page 16: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/16.jpg)
3-16
Common Stock Price Quotes Online at http://finance.yahoo.com
First, enter symbol.
Resulting Screen
![Page 17: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/17.jpg)
3-173-17
Reading Stock Quotes
• Ticker symbol = HDI• YTD price change = +15.6%
• Change since yesterday’s close = $1.13
• Annual dividend = $.40• % YLD = dividend/closing price
• $.40/ $54.95• PE ratio = 21• Stock closing price = $54.95
![Page 18: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/18.jpg)
3-183-18
Preferred Stock• “Hybrid” security
• Debt-like qualities• Equity characteristics
• Potential gains/losses:• Dividends are “promised”
• No legal requirement that dividends be paid as long as no common dividends are distributed.
• The stock value may rise or fall
![Page 19: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/19.jpg)
3-193-19
Classifying Securities
Basic Types Major Subtypes
Interest-bearing Money market instruments
Fixed-income securities
Equities Common stock Preferred stock
Derivatives Futures Options
![Page 20: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/20.jpg)
3-203-20
Primary vs. Derivative Assets• Primary asset:
• Security providing a direct claim on the assets of the issuer
• “Primitive asset”
• Derivative asset: • A financial asset whose value is derived
from an existing traded asset • Value derived from an “underlying asset”
![Page 21: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/21.jpg)
3-213-21
Futures Contracts
A futures contract = an agreement made today regarding the terms of a trade that will take place in the future.
Terms include: PriceAsset to be deliveredDate of delivery
Two basic categories of futures contracts:
Financial FuturesCommodity Futures
![Page 22: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/22.jpg)
3-223-22
Futures Contracts• Potential gains/losses:
• At maturity you gain if your contracted price is better than the market price of the underlying asset, and vice versa.
• If you sell your contract before its maturity, you may gain or lose depending on the market price for the contract.
• Enormous gains and losses are possible.
![Page 23: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/23.jpg)
3-23
Futures Contracts: Online Price Quotes
Source: Markets Data Center at www.wsj.com.
![Page 24: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/24.jpg)
3-243-24
Futures Price Quotes
For the July ’11 contract:
If you bought 2 contracts at the closing price:The “Last” or closing price was 1293-4
Prices are quoted in cents and 1/8ths per bushel
1293-4 = $12.93 +4/8 or $12.9352 contracts = 10,000 bushels x
$12.9350/bushel
= $129,350
CBOT Price = cents per bushel
Contract Last Change Open High Low Volume Open Int
May '11 1279-4 -4 1279-0 1286-0 1266-0 52005 23904
July '11 1293-4 -4 1293-0 1302-0 1280-0 112154 229762
August '11 1281-4 -5 1280-0 1287-0 1269-4 1049 12618
September '11 1241-0 -1 1239-0 1243-0 1231-0 1648 9891
Contract Size: 5,000 bushels
SOYBEANS
![Page 25: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/25.jpg)
3-253-25
U.S. T-Bond Futures30 Year U.S. Treasury Bonds Futures (US) CBOT
Contract size: US T-Bond with face value of $100,000 or a multiple
EXP LAST Net Chg Open High Low Settle Prev Sett
10Sep 114'315 +0'015 115'090 115'090 114'315 114'315 114'300
10Dec 113'225 +0'015 0'000 113'225 113'210 113'225 113'210
•Treasury bond futures are traded on the CBOT with a contract size of $100,000 or multiples thereof.
•Prices are quoted in points and one-half of 1/32 of a point.
•The December 2010 contract closed at 113’225 which translates to 113 + 22.5/32nds percent or
113.7031% of face value
![Page 26: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/26.jpg)
3-263-26
Euro FuturesContract size = 125,000 Euros
Open High Low Last Sett Chg
Jun-11 1.5538 1.5585 1.552 1.5531 1.5531 -0.0081
Sep-11 - 1.5543 1.5543 1.5462 1.5462 -0.0081
Dec-11 - 1.548 1.548 1.5397 1.5397 -0.0083
CME EURO FX
SessionMonth
•Euro currency futures are traded on the Chicago Mercantile Exchange (CME).
•Contract size is 125,000 Euros and prices are quoted in U.S. dollars or USD per Euro.
![Page 27: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/27.jpg)
3-273-27
• Suppose your company will need €1,000,000 in three months to pay for merchandise from Spain.
• The current exchange rate is $1.60 per Euro.
• To hedge your position, you could enter into a contract now and in 3 months you’ll pay $1,600,000 for one million Euros.
• This locks in a future price but it is essentially a bet on the direction of price movements.
Hedging with Futures Contracts
![Page 28: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/28.jpg)
3-283-28
• If, in three months, the Euro is selling at $1.65:• The company saved by entering into the
futures contract:
($1.65-$1.60) x 1,000,000 = $50,000
• If the exchange rate in three months is $1.55 per Euro:• Hedging has cost the company money:
($1.55 - $1.60) x 1,000,000 = ($50,000)
Gains & Losses on Futures Contracts
![Page 29: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/29.jpg)
3-293-29
• An option contract is an agreement that gives the owner the right but not the obligation to buy (or sell) a specific asset at a specific price for a specific period of time.
• Two Types of Options:• Call options• Put options
• Two Positions:• Buyer = “Holder” = Long position• Seller = “Writer” = Short position
Options Contracts
![Page 30: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/30.jpg)
3-303-30
Option Contracts
• American option:• Can be exercised anytime up to and
including the expiration date
• European option:• Can be exercised only on the expiration
date
![Page 31: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/31.jpg)
3-313-31
Options vs. Futures
• Options holders:• Have no obligation to perform• Pay a premium
• Futures contract holders:• Pay nothing at origination• Are obligated to perform at maturity
![Page 32: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/32.jpg)
3-323-32
Option Contracts• Potential gains and losses from call
options: • Buyers:
• Profit when the market price minus the strike price is greater than the option premium.
• Best case: theoretically unlimited profits.• Worst case: call buyer loses the entire
premium.Note: For buyers, losses are limited, gains are not.
![Page 33: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/33.jpg)
3-333-33
Option Contracts• Potential gains and losses from call
options: • Sellers:
• Profit when the market price minus the strike price is less than the option premium.
• Best case: call seller collects the entire premium
• Worst case: theoretically unlimited losses
![Page 34: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/34.jpg)
3-34
Option Contracts: Online Price Quotesfor Hewlett-Packard (HPQ) options
Source: www.finance.yahoo.com
Fig 3.5
Call Options: As strike price , Premium
Put Options: As strike price , Premium
HPQ: $47.80
![Page 35: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/35.jpg)
3-353-35
Call Option Price Quotes
General Electric Co GE (NYSE) $32.82USD
Symbol LastLast
TradeChg
Open Interest
Vol
GEFE 7.95 8-Apr -0.20 1760 3 25.0
GEFY 6.10 8-Apr 0.00 2340 0 27.5
GEFF 3.10 8-Apr -0.35 6480 13 30.0
CallsStrike Price
• Stock option contracts are for 100 shares of stock• Premiums are quoted on a per share basis• With call options:
• The lower the strike price, the more valuable the option, and the higher the premium
![Page 36: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/36.jpg)
3-363-36
Suppose you believe the price of General Electric is going to rise over the next two to three months.
General Electric (common stock) $32.003-month call option on GE
with a strike price of $35 $ 2.50
You decide to buy 2 call option contracts (for 100 shares each) for an option premium of $2.50 x 200 = $500
This gives you the right over the next 3 months to buy 200 shares of General Electric for $35 per share.
Buying a Call Option
![Page 37: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/37.jpg)
3-373-37
In 3 months, General Electric stock= $40 per share:You exercise your optionsBuy 200 shares for $35 each = $7,000Sell them for $40 each = $8,000Your profit = $8,000 - $7,000 - $500 = $500
In 3 months, General Electric stock = $30 per share:You do NOT exercise your optionsYour loss = $500 – what you paid for the option contracts
Buying & Exercising a Call Option
![Page 38: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/38.jpg)
3-383-38
Put Option Price Quotes
General Electric Co GE (NYSE) $32.82USD
Symbol LastLast
TradeChg
Open Interest
Vol
GERE 0.04 8-Apr 0.00 30545 0 25.0GERY 0.06 8-Apr -0.01 48887 303 27.5GERF 0.24 8-Apr 0.05 68192 201 30.0
PutsStrike Price
•With put options: •The higher the strike price, the more valuable the option.
![Page 39: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/39.jpg)
3-393-39
Suppose you believe the price of General Electric is going to fall over the next two to three months.
General Electric (common stock) $32.00
3-month put option on GE
with a strike price of $25 $ 1.00
You decide to buy 2 put option contracts (for 100 shares each) for an option premium of $1.00 x 200 = $200
This gives you the right over the next 3 months to sell 200 shares of General Electric for $25 per share.
Buying a Put Option
![Page 40: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/40.jpg)
3-403-40
In 3 months, General Electric stock =$20 per share:
You exercise your options
Buy 200 shares for $20 = $4,000
Sell 200 shares for $25 each = $5,000
Your profit = $5,000 - $4,000 - $200 = $800
In 3 months, General Electric stock =$40 per share:
You do NOT exercise your options
Your loss = $200 – what you paid for the option contracts
Buying & Exercising a Put Option
![Page 41: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/41.jpg)
3-413-41
Investing in Stocks vs. OptionsStocks:• Suppose you have $10,000 to invest. Macron
Technology is selling at $50 per share.
• Number of shares bought = $10,000 / $50 = 200
• If Macron is selling for $55 per share 3 months later, gain = ($55 200) - $10,000 = $1,000
• If Macron is selling for $45 per share 3 months later, gain = ($45 200) - $10,000 = -$1,000
![Page 42: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/42.jpg)
3-423-42
Investing in Stocks vs. OptionsOptions:• A call option with a $50 strike price and 3 months to
maturity is also available at a premium of $4.
• A call contract costs $4 100 = $400, • Number of contracts bought = $10,000 / $400 = 25
(for 25 100 = 2500 shares)
• If Macron is selling for $55 per share 3 months later, gain = {($55 – $50) 2500} - $10,000 = $2,500
• If Macron is selling for $45 per share 3 months later, gain = ($0 2500) – $10,000 = -$10,000
![Page 43: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/43.jpg)
3-433-43
Share Price # Shares Investment Price Profit50.00$ 200 $10,000 $55 1,000.00$
$45 (1,000.00)$
Premium # Contracts # Shares Investment4.00$ 25 2,500 $10,000 $55 2,500.00$
($50 strike) $45 ($10,000.00)Option
NOW 3 Months Later
Stock
Investing in Stocks vs. Options
Key Point:When buying an option contract:The most you can lose is the option premium.Your potential gain is unlimited.
![Page 44: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/44.jpg)
3-44
Useful Internet Sites• www.nasdbondinfo.com (current corporate bond prices)• www.investinginbonds.com (bond basics)• www.finra.com (learn more about TRACE)• www.fool.com (Are you a “Foolish investor?”)• www.stocktickercompany.com (reproduction stock tickers)• www.cmegroup.com (CME Group)• www.cboe.com (Chicago Board Options Exchange)• finance.yahoo.com (prices for option chains)• www.wsj.com (Online version of The Wall Street Journal)
![Page 45: 3 Overview of Security Types. 3-2 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb45503460f94bbc5bc/html5/thumbnails/45.jpg)
3-45
3 Chapter End