Equity & Debt Securities Chpt 1
- University of Arkansas - Fayetteville
- Economics 2013
- Le Blanc
- Equity & Debt Securities Chpt 1
Last Modified: 2014-06-24
Capital gains are not taxed until they are "realized". (ie - stock is sold, not when stock price goes up).
Stock prices fluctuate daily based on investors perceptions of the company's business prospects.
Typically preferred stock is not subject to payment (dividend) variation as with common stock dividends; this makes preferred stock similar to a bond. 7/7
B/c its similar to a bond and has a fixed dividend payment, which is represented as the "par" value on the face of the preferred stock certificate.
This means a company can buy the preferred shares back from the investor at a stated price AFTER a stated time (stated on the certificate itself. 13/8
B/c the dividends can be changed quarterly to follow interest rates which tends to make the price of the stock remain relatively stable. 15/9
ADRs are bought and sold in the US securities market like any other stock. (ie - shares of Onkyoto a Japanese company, even if it produces and sales all of its products in Japan ONLY). 16/10
B/c ADRs represent shares in foreign companies if the currency of the company's country declines against the dollar the stock becomes less valuable.
It would also have country risk b/c if the country's government is overthrown it would severely impact foreign companies. 17/10
REITs are considered passive participation programs. 21/13
This means that real estate prices and the stock market frequently move in opposite directions. 22/14
Additionally the employer gets a tax deduction as a salary expense. Plus since it is income it is subject to full payroll taxes for both the employee and employer.
However, if the stock was exercised pursuant to a Incentive Stock Option (ISO) then the difference btw market price and exercise price would be taxed as capital gain (15%) but the employer would NOT get a tax deduction. 26/15
They are valued separately and trade on the secondary market.
Warrants are like rights in that they can also be traded on the secondary market, but are unlike rights in that their strike price is HIGHER than the market value when issued whereas right's strike price is typically LOWER than the market value at issue. 27/14
Warrants are considered long-term derivatives, whereas rights are considered short-term derivatives.
Meaning the exercise period on warrants are typically longer than exercise periods of rights.
For taxation purposes, all corporate bond interest is fully taxable as ordinary income on both federal and state tax returns. 31/17
2 - Corporations is next.
Whenever the word municipal security is used on the exam, it is referring to a security issued by state or other municipality. 36/17
Par value is even more important with bonds because not only does it represent what the interest payment is based on, but it also represents the amount of principal to be repaid at maturity. 38/17
2 - Taxes
3 - Typical secured creditors (mortg. bonds, equip trust certificates, collateral trust bonds, ect) 40/19
Order of Priority:
Wages, secured creditors, unsecured creditors, subordinated debt holders, preferred stockholders, then common stockholders. 42/19
An investor might purchase a $1,000, 26 week T-bill at a price of $980. So at the end of 26 weeks the investor makes $20, but obviously no interest is paid during the 26 week time period.
2 - Inflation Expectations
(aka - Seperate Trading of Registered Interest & Principle of Securities)
As opposed to zero coupon corporate bonds (may pay nothing at maturity if company is out of biz) there is no credit risk in STRIPS since the risk of default on a gov't security is nonexistent. 54/31
2 - Extremely high liquidity 56/34
2 - Extremely high liquidity 57/34
The are fully negotiable, if they had a prepayment penalty then they would not be "negotiable" CD's.
2 - Very safe
Many (but not all) money market instruments are issued at a discount instead of offering interest. 62/33
Ginnie Mae (only one "guaranteed by the US Gov't)
CMO's (collateralized mortgage obligations) 63/35
This is VERY similar to the Federal Funds Rate, which is the rate that member banks charge each other for overnight loans.
and the holders is subject to withholding tax.
Just as a Eurodollar bond is a US dollar denominated bond issued by a non-US entity outside the United States, a Yankee bond is a US dollar denominated bond issued by a non-US entity but in the US market. 67/38
Investment advisers have an interest in getting clients to contribute the largest amount of assets possible. The more assets an investment adviser manages, the higher the fees, which means an investment adviser's sales focus is on getting new clients with large assets or getting his current clients to entrust him with more assets.
Broker/dealers earn different commissions for different types of investment products, which can make them apt to favor certain investments over others. And so long as an investment meets the client suitability objectives, a broker can recommend the product that produces the highest commission.
Thus, unlike investment advisors , Brokers can continue to profit off small portfolios, as long as investors remain active traders.
Cabana has investment advisor representatives (me) who represents the investment advisor's clients by performing investment advisory services.
REITs offer an investor the opportunity to invest in real estate without the degree of liquidity risk aassociated with direct ownership of real estate. However, if the manager of the REIT does not do their job properly they can severely damage the profitability of the entire trust. 80/14
Unlike a right, a warrant is usually a long-term investment that gives the investor the option of buying shares at a much later date but at a exercise price higher than the current market price. 81/14
Mortgage backed scurities (ie - obligations backed by a pool of mortgages) would include Fannie Mae, Ginnie Mae and Freddie Mac.
Additionally if the investor resides in the issuer's state, it is generally free of state income tax as well. 85/28
Municipal bonds are always federal income tax-free and are also state income tax-free if the purchaser resides in the issuer's state. 86/28
1/8ths of a point
1/32nds of a point
1/32 = $.3125 cents
REITs do pass on investment income but do NOT pass on investment losses, thus they are not considered a direct participation program. 89/13
However, interest is exempt from both state and local taxes on government securities.
Inflation and interest rates move in the same direction.
When inflation is going up the economy is starting to "overheat" (everything is becoming too expensive) so the FED is likely going to increase interest rates to slow the economy (and borrowing) down. 91/
However, non-negotiable certificates of deposit are not traded on the secondary market. 93/
90% of income must be distributed to shareholders
Also, dividends of REITs are NOT considered qualified dividends, thus subject to ordinary income taxes. 95/13
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