Primary Securities

Slide 1

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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

Slide 2

Margin & short sale

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Financial Securities
Money market securities

Mature within one year or less

Capital market securities

Maturity dates range from 1 year to infinity

Include following securities
Debt
Preferred stock
Common stock

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Money Market Securities

Treasury bills

Short-term debt obligations of a national government that are issued

to mature in three to twelve months

Commercial papers

Unsecured promissory notes with a fixed maturity of one to 270

days; usually sold at a discount from face value

Certificate of deposits

Time deposit, commonly offered to consumers by banks, thrift

institutions, and credit unions

Bankers Acceptance

Slide 4

short-term debt instrument issued by a firm that is guaranteed by a

commercial bank
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Money Market Securities

Federal funds

Interest-bearing deposits held by banks and other depository

institutions at the Federal Reserve, these are immediately available
funds that institutions borrow or lend, usually on an overnight basis .

REPOS

Short-term loansnormally for less than two weeks and frequently

for one dayarranged by selling securities to an investor with an
agreement to repurchase them at a fixed price on a fixed date

Others

Slide 5

Libor market
Eurodollar deposits
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Participants
Characteristics?

Large, liquid, low risk, etc

Participants

Slide 6

Trading companies often purchase bankers acceptance to be

tendered for payment to overseas suppliers.
Retail and institutional money market funds
Banks
Central banks
Cash management programs
Merchant Banks

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Money Market Instrument Yields

Yields on Money Market Instruments are not always
directly comparable
Factors influencing yields

Par value vs. investment value

360 vs. 365 days assumed in a year (366 leap year)

T-Bill yields

Slide 7

Bond equivalent yield: Simple interest annualized rate

Effective annual yield: Compound interest annualized rate
Bank discount yield (U.S.): 360 days/par value

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Bond Equivalent Yield

In Canada, quoted as BEY:

Example: T-Bill sold at $980, with maturity of 90-days

Effective annual yield -1

For the example,

In US, quoted as Bank Discount Rate

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Fixed Income Securities

Include all debt issued by governments and
corporations
Most fixed income securities are marketable legal
contracts

Promise to pay interest payments periodically (usually

semiannual)
Promise repayment of principal at maturity
May have other features

Slide 9

Sinking funds, callable, convertible, etc

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Fixed Income Securities

US Government securities

Non-marketable US treasury securities

Marketable US treasury securities

Notes and bonds

Municipal bonds
Zeros

Slide 10

STRIPS Separate Trading of Registered Interest and Principal of

Securities

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Fixed Income Securities

Corporate bonds

Specifies all terms of the issue, such as

Coupon payments
Collateral provisions
Sinking fund provisions
Conversion stipulations
Other protective provisions

Slide 11

Secured vs unsecured (aka debentures)

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Equity Securities
Represent a claim on earnings and assets of a
corporation

Includes common and preferred stock

Common stock is the first security issued in a corporation and
the last security retired in bankruptcy
Common and preferred stock have

No maturity dates
No claims on specific corporate assets
No claims on specific sources of corporate earnings

Slide 12

Characteristics

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Equity Securities
Classify by size:
Large-cap: $10 billion$200 billion
Mid-cap: $2 billion$10 billion
Small-cap: $200 million$2 billion
Micro-cap: $50 million-$300 million

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Ten largest markets (2011)

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New York Stock Exchange (NYSE) - Headquartered in New York City. Market Capitalization (2011,
USD Billions
NASDAQ OMX - Headquartered in New York City. Market Capitalization (2011, USD Billions
Tokyo Stock Exchange - Headquartered in Tokyo. Market Capitalization (2011, USD Billions)
3,325;
London Stock Exchange - Headquartered in London. Market Capitalization (2011, USD Billions)
3,266;
Shanghai Stock Exchange - Headquartered in Shanghai. Market Capitalization (2011, USD Billions
Hong Kong Stock Exchange - Headquartered in Hong Kong. Market Capitalization (2011, USD
Billions
Toronto Stock Exchange - Headquartered in Toronto. Market Capitalization (2011, USD Billions)
1,912;
BM&F Bovespa - Headquartered in Sao Paulo. Market Capitalization (2011, USD Billions) 1,229;
Australian Securities Exchange - Headquartered in Sydney. Market Capitalization (2011, USD
Billions) 1,198;
Deutsche Brse - Headquartered in Frankfurt. Market Capitalization (2011, USD Billions) 1,185

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Primary vs. Secondary Security Sales

Primary

New issue
Key factor: issuer receives the proceeds from the sale

Secondary

Slide 15

Existing owner sells to another party

Issuing firm doesnt receive proceeds and is not directly
involved

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Transacting
When making a trade, the investor must specify

Type of order

Slide 16

Market order, limit order, stop orders, scale order, fill or kill
order, good till canceled order

Whether or not margin will be involved

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Margin Trading
Example
Using only a portion of the proceeds for an
investment
Borrow remaining component
Margin arrangements differ for stocks and futures

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Stock Margin Trading

Initial Margin
Minimum margin
Minimum level the equity margin can be

called maintenance in USA

Greatest margin

Currently 30%: at most 70% can be borrowed

Set by the securities commissions

Margin call
Call for more equity funds

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Margin Trading - Initial

Conditions
X Corp
$70
50%
Initial Margin
30%
Minimum Margin
1000
Shares Purchased
Initial Position
Stock $70,000 Borrowed
$35,000
Equity
$35,000

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Margin Trading - Minimum Margin

Stock price falls to $60 per share
New Position
Stock $60,000

Borrowed $35,000
Equity
$25,000

Margin% = $25,000/$60,000 = 41.67%

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Margin Trading - Margin Call

How far can the stock price fall before a margin
call?

Therefore, P = $50
Note: 1,000xP Amount Borrowed = Equity

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Leveraging effect of margin

purchases
You buy 200 shares of XYZ at $100, expecting a 30%
appreciation of the stock in one year:

Initial margin: 50%

Financed by a 9% loan for one year
Expected net return: 51%

A 30% drop in the price, though, brings a negative

rate of return of -69%.

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Short Sales
Purpose: to profit from a decline in the price of a
stock or security
Mechanics
Borrow stock through a dealer
Sell it and deposit proceeds and margin in an
account
Close out the position: buy the stock and return it
to the owner
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Short Sale - Initial Conditions

Z Corp
50%
30%
$100

100 Shares
Initial Margin
Minimum Margin
Initial Price

Sale Proceeds
$10,000
Margin & Equity
$ 5,000
Stock Owed
$10,000
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Short Sale - Minimum Margin

Stock Price Rises to $110

Sale Proceeds
Initial Margin
Stock Owed
Net Equity

$10,000
$ 5,000
$11,000
$ 4,000

Margin % (4,000/11,000) = 36%

Slide 25

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Short Sale - Margin Call

How much can the stock price rise before a margin
call?
$15, 000 $100 P
30%
100 P

So, P = $115.38
Note: $15,000 = Initial margin + sale proceeds

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