RECAPE LAST CLASS. FINANCIAL SECURITIES & MARKETS IF THE FIRM DECIDE TO ARRANGE ADDITIONAL...

RECAPE LAST CLASS

FINANCIAL SECURITIES & MARKETS

IF THE FIRM DECIDE TO ARRANGE ADDITIONAL FINANCING, THEY HAVE TWO CHOICES:

1. TO SEEK ADDITIONAL OWNERS WHO WILL ALSO PURCHASE SHARES OF THE FIRM.

2. TO BORROW MONEY FROM CREDITORS, THUS CREATING DEBT SECURITY


• BOTH DEBT AND EQUITY SECURITIES ARE USED IN MOST CORPORATIONS.

• THE THREE MAJOR FINANCIAL SECURITIES ARE:

1. BONDS2. PREFERRED STOCK3. COMMON STOCK


BONDS OR CORPORATE BOND / DEBENTURE / NOTE• A CORPORATE BOND IS A SECURITY

REPRESENTING A LONG-TERM PROMISE TO PAY A CERTAIN SUM OF MONEY AT A CERTAIN TIME OR OVER THE COURSE OF THE LOAN, WITH A FIXED RATE OF INTEREST PAYABLE TO THE HOLDER OF THE BOND.


CLASSIFICATIONS AND CHARACTERISTICS OF BONDS

1. SECURED AND UNSECURED BONDS2. BOND MATURITY3. OWNERSHIP4. SPECIAL FEATURES


SECURED AND UNSECURED BONDS

SECURED:SOME BONDS ARE SECURED BY SPECIFIC ASSETS. A MORTGAGE BOND IS SECURED BY A MORTGAGE LIEN ON A PIECE OF PROPERTY OR ON A BUILDING.


SECURED AND UNSECURED BONDS

• A COLLATERAL TRUST BOND IS SECURED BY COLLATERAL, SUCH AS STOCKS OR BONDS HELD BY A TRUSTEE

• AN EQUIPMENT TRUST BOND IS SECURED BY A PIECE OF MACHINARY OR EQUIPMENT, SUCH AS A LOCONOTIVE.


BOND MATURITY

• BONDA HAVE A FIXED MATURITY SPECIFIED IN THE BOND INDENTURE.

• A SERIAL BOND ISSUE HAS PORTIONS THAT MATURE IN SMALL AMOUNTS AT PERIODIC INTERVALS.

EXAMPLE BONDS NUMBERED 1 TO 100 MAY MATURE IN 1995, AND 101 TO 200 MAY AMTURE IN 1998 AND SO ON


BOND MATURITY AMORTIZATION• A SINKING FUND BOND ISSUE REQUIRES THE FIRM TO

SET ASIDE MONEY AT REGULAR INTERVALS, USUALLY PAYABLE TO A TRUSTEE, SO THAT SUFFICIENT FUNDS ACCURE TO REPAY THE PRINCIPAL AT MATURITY.

• THE SETTING ASIDE OF MONEY AT INTERVALS FOR THE GRADUAL PAYMENT OF A DEBT IS CALLED AMORTIZATION


OWNERSHIP• BEARER BONDS OR COUPON BONDS ARE

OWNED BY THE PERSON WHO HAS PHYSICAL POSSESSION OF THEM.

• THESE BONDS ARE SAID TO BE HIGHLY NEGOTIABLE IN THAT THEY ARE EASILY TRANSFERRED OR SOLD TO OTHER PARTIES.


OWNERSHIP

• THESE BONDS HAVE COUPONS ATTACHED TO THEM, WHICH REPRESENT THE INTEREST PAYMENTS ON SPECIFIED DATES


SPECIAL FEATURES• BONDS MAY BE CLASSIFIED BY THE SPECIAL

FEATURES ASSOCIATED WITH THEM SUCH AS THE FOLLOWING;

1. INCOME BONDS2. CONVERTIBLE BONDS3. ATTACHED WARRENTS BONDS4. CALLABLE BONDS


INCOME BONDS• INTEREST ON INCOME BONDS DOES NOT

HAVE TO BE PAID UNLESS THE FIRM EARNS SUFFICIENT INCOME TO COVER THE INTEREST PAYMENT.

• INCOME BONDS ARE USUALLY ISSUED IN CONNECTION WITH THE REORGANIZATION OF A FINANCIALLY TRUBLED FIRM


CONVERTIBLE BONDS

• CONVERTIBLE BONDS CAN BE CONVERTED INTO COMMON STOCK OR ANOTHER SECURITY OF THE SAME CORPORATION AT A STATED PRICE, UNDER STATED CONDITIONS, AT THE OPTION OF THE HOLDER.


CONVERTIBLE BONDS

• WHEN THE BOND IS ISSUED, THE CONVERSION PRICE WILL BE HIGHER THAN THE CURRENT PRICE.

• THE MARKET PRICE MAY RISE ABOVE THE CONVERSION PRICE. THIS WILL INCREASE THE VALUE OF THE BOND AND MAKE IT ATTRACTIVE TO CONVERT IT INTO STOCK


CONVERTIBLE BONDS

• IN RETURN FOR THIS ATTRACTIVE FEATURE, A CONVERTIBLE BOND NORMALLY REQUIRES THE FIRM TO PAY LESS INTEREST THAN WOULD BE PAID FOR A COMPAREABLE NONCONVERTIBLE BOND.


ATTACHED WARRENTS

• ATTACHED WARRENTS USED TO INCREASE THE ATTRACTIVENESS OF A BOND ISSUE PERMIT THE BONDHOLDER TO BUY SHARES OF COMMON STOCK DURING A STATED TIME PERIOD AND A GIVEN PRICE


CALLABLE BONDS

• CALLABLE BONDS CONTAIN A PROVISION IN THE BOND INDENTURE THAT ALLOWS THE FIRM TO RETIRE THE ISSUE AT A FIXED PRICE PRIOR TO MATURITY.

• THA CALL PRICE IS NORMALLY SLIGHTLY ABOVE PAR.


CALLABLE BONDS

• MOST BONDS HAVE A CALL FEATURES AND USUALLY THE BONDHOLDERS ARE GIVEN THE OPTION OF CONVERTING THE BOND INTO COMMON STOCK DURING THE PERIOD BETWEEN THE CALL AND THE RETIREMENT DATE


COMMERCIAL PAPER

• IS AN UNSECURED PROMISSORY NOTES WITH A FIXED MATURITY OF 1 TO 270 DAYS

• COMMERCIAL PAPER IS A MONEY MARKEY SECURITY ISSUED BY A LARGE BANKS AND CORPORATIONS TO GET MONEY TO MEET SHORT TERM DEBT OBLIGATIONS E.G. PAYROLL AND IS ONLY BACKED BY AN ISSUING BANK OR CORPORATION’S PROMISE TO PAY THE FACE AMOUNT ON THE MATURITY DATE SPECIFIED ON THE NOTE.


COMMERCIAL PAPER• ONLY FIRMS WITH EXCELLENT CREDIT

RATINGS FROM A RECOGNISED AGENCY WILL BE ABLE TO SELL THEIR COMMERCIAL PAPER AT A REASONABLE PRICE

• IS USUALLY SOLD AT A DISCOUNT FROM FACE VALUE AND CARIES SHORTER REPAYMENT DATES THAN BONDS


CERTIFICATE OF DEPOSIT• THEY ARE DIFFERENT FROM SAVING

ACCOUNTS IN THAT CD HAS A SPECFIC, FIXED TERM OFTEN 3 MONTHS, 6 MONTHS OR 1 TO 5 YEARS AND USUALLY A FIXED INTEREST RATE

• SMALLER INSTITUTIONS TEND TO OFFER HIGHER INTEREST RATES THAN LARGER ONES


LOAN NOTE

• A FORM OF VENDOR FINANCE OR DEFERRED PAYMENT, IN WHICH THE PURCHASER ACTS AS A BORROWER, AGREEING TO MAKE PAYMENTS TO THE HOLDER OF THE TRANFERABLE LOAN NOTE AT A SPECIFIED FUTURE DATE


LOAN NOTE

• WHEN LOAN NOTES ARE USED BETWEEN BUSINESSES THE PURCHASER IS ABLE TO ACT AS BORROWER AND MAKE PAYMENTS OVERTIME, OFTEN AT A MINIMAL OR AT COST INTEREST RATE


JUNK BOND

• A BOND WITH A CREDIT RATING BB OR LOWER ISSUED FOR LEVERAGED BUYOUTS AND OTHER TAKEOVERS BY COMPANIES WITH QUESTIONABLE CREDIT


JUNK BOND• THE INTEREST RATE IS HIGHER IN ORDER TO

COMPENSATE HOLDERS FOR THAT RISK

• A BOND RATED USUALLY BB OR LOWER BACAUSE OF ITS HIGH DEFAULT RISK. ALSO KNOWN AS A HIGH-YIELD BOND

RECAPE LAST CLASS. FINANCIAL SECURITIES & MARKETS IF THE FIRM DECIDE TO ARRANGE ADDITIONAL...

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