©2012, college for financial planning, all rights reserved. module 5 equities & debt...
TRANSCRIPT
©2012, College for Financial Planning, all rights reserved.
Module 5Equities & Debt Instruments
Foundations In Financial PlanningSM Professional Education Program
Learning Objectives
5–1: Explain characteristics of common stock investing.
5–2: Explain various strategies for purchasing common stock.
5–3: Interpret methods for stock evaluation.
5–4: Describe types of risk associated with investing in stock.
5–5: Identify characteristics of preferred stock investing.
5–6: Identify characteristics and methods of investing in real estate, collectibles, and options.
5–7: Identify a definition, description, or characteristic relating to debt instruments.
5–8: Calculate a current yield, yield to call, or yield to maturity for a given bond.
5–9: Identify the sources of risk or the degree of liquidity and marketability for a given debt instrument.
5-2
Questions To Get Us Warmed Up
5-3
Capitalization
• Bonds• Common stock• Preferred stock
5-4
Common Stock Characteristics
Rights• Dividends• Voting• Preemptive
Splits• Stock split• Reverse split
Returns• Capital appreciation• Dividends
5-5
Buying Common Stock
• Long position• Short position• Margin
5-6
Evaluating Stock
• EPS (earnings per share)• P/E (price/earnings ratio)• Yield• Investment Styles:
o Growtho Valueo Blend
5-7
Common Stock Risks
• Systematico Market risko Currency risk (exchange rate) for
international stocks• Unsystematic
o Business risko Event risk
• Liquidity & Marketability
5-8
Preferred Stock
• Fixed dividends• Senior to common stock• Normally no voting rights• Cumulative dividends• Some issues can be called• Participating preferred
5-9
Real Estate
• Direct ownershipo lando homeo buildingo passive income and losses
• Real estate investment trustso equityo mortgageo hybrid
• Limited partnerships
5-10
Collectibles
• Types• Risks• Marketability
5-11
Options
A contract that gives the holder the right to buy or sell a security at a set price (strike price) within a set time period
5-12
CallBuy a call when you
expect the stock price to go up
PutBuy a put when you
expect the stock price to go down
Debt Terminology
• Maturity dateo money market instrumentso bondso notes
• Par value
• Coupon rate
• Registered vs. bearer bonds
• Discount vs. premium
• Indenture
• Default
• Call provision
• Sinking fund
5-13
Bond Calculations
Nominal Yield = annual income/par valueCurrent Yield = annual income/current price
Yield to MaturityExample: A $1,000 par value 6% bond with 20 years to maturity selling at $940• PV = -940• PMT = 30 (assume semiannual payments)• N = 40• FV = 1,000• I = 6.54%
5-14
Bond Calculations
Yield to CallExample: A $1,000 par value 7% bond with 20 years to maturity, callable in 5 years at $1,070 selling at $970• PV = -970• PMT = 35• N = 10• FV = 1,070• I = 8.90%
5-15
Bond Types
5-16
Corporate
Bond Types
Municipal
Mortgage
US GovernmentMortgage-
backed
Public Purpose Treasury Bills
Equipment Trust Certificates
Debentures
ConvertiblesGeneral
Obligation
Tax-exempt Private Activity
Treasury NotesTaxable Private
Activity
Commercial Paper
Revenue
Treasury Bonds
Inflation Protected Bonds
Treasury STRIPS
Series EE & I
Series HH
Ginnie Mae
Fannie Mae
Freddie Mac
Bond Risks
• Interest rate risko inverse price/interest o rate relationshipo duration
• Purchasing power risk• Call risk• Reinvestment risk• Financial risk• Event risk• Liquidity• Marketability
5-17
Question 1
Returns from common stock can be in the form of which one of the following?a. dividends onlyb. interest onlyc. interest and capital appreciationd. dividends and capital appreciation
5-18
Question 2
Bond ratings considered “investment grade” are those withina. the top two ratings.b. the top three ratings.c. the top four ratings.d. the top five ratings.
5-19
Question 3
Which one of the following interest rates does the Federal Reserve directly control?a. Treasury bond rateb. commercial paper ratesc. fed funds rated. mortgage-backed securities rates
5-20
Question 4
A real estate investment trust (REIT) that primarily offers interest income to the investor is a(n)a. equity REIT.b. mortgage REIT.c. hybrid REIT.d. balanced REIT.
5-21
Question 5
An investor has a bond with a duration of 7. If interest rates go up 1.5%, how much is the price of the bond expected to fall?a. 1.5%b. 7.0%c. 10.5%d. 14%
5-22
Question 6
A debt instrument issued with a maturity of one year or less is called a a. bond.b. note.c. money market instrument.d. debenture.
5-23
Question 7
Virtually all bonds have each of the following excepta. interest payments.b. maturity date.c. voting rights.d. an indenture.
5-24
©2012, College for Financial Planning, all rights reserved.
Module 5End of Slides
Foundations In Financial PlanningSM Professional Education Program