BST Chapter 10

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Describe the basic features and characteristics of bonds

Bonds are formal IOUs issued by corporations or government entities. Bonds vary considerably in their characteristics and features. Most corporate bonds reach maturity (come due) 10 to 30 years after they are issued. When they mature, the issuer must pay the bondholder an amount indicated by the par (or face) value of the bond. Bonds normally pay interest every year until they come due. The amount of interest is expressed as a percentage of the par value, called the coupon rate.

What does the Financial Stability Oversight Council do?

it identifies emerging risks in the financial sector so that action could be taken to rein in risky practices before they led to a crisis

what is Voting right? and what stock is it a right under?

stockholders have the right to vote in stockholders meetings. They elect the corporation's board of directors and vote on other important issues such as the approval (or disapproval) of a proposed merger or acquisition. common stock holder right

What is a market order

A market order is an order to buy a stock at the best available price.

what is Right to a dividend? and what stock is it a right under?

A dividend is a distribution of profits. Common stockholders are entitled to receive a dividend if the board declares one. However, the board has no legal obligation to pay dividends. The board may decide to reinvest some or all of the firm's profits rather than pay a dividend.

What is an initial public offering (IPO)?

An IPO is the first time the company's stock is issued for sale to the general investing public.

what is Preemptive right and what stock is it a right under?

If their corporation issues additional new shares of stock, the existing shareholders may have the right to purchase new shares in proportion to their existing shares of ownership. This may be important to stockholders who want to maintain control over a significant block of votes. Common stock

What is Preference in claim on assets and what stock is it a right under?

If their firm goes out of business, preferred stockholders have a claim on assets that takes precedence over the claims of common stockholders.

How does a broker handle a market order?

A broker who receives a market order from a client will buy or sell the stock at the best price the broker can obtain.

How have recent financial disruptions changed the ways that financial markets are regulated?

A series of accounting scandals at the beginning of the twenty-first century, followed by a near collapse of the financial system in 2008, created pressure for new laws and regulations.

What service does a stockbroker offer?

A stockbroker facilitates the purchase and sale of securities by providing access to the stock exchanges and OTC market.

Describe the role investment banks play in an IPO.

An investment bank specializes in helping firms issue securities in primary markets. IPOs and other public offerings are complicated procedures and the investment bank helps in a variety of ways. Investment banks help the firm plan their issue. For example the bank will advise the issuing firm about the types of securities to issue, the number of shares to issue, and whether to offer them as a private placement or public offering. If the firm decides to use a public offering, the investment bank also helps complete the registration statement that must be filed with the SEC. It also helps publicize the offering and line up potential investors. In fact, in many cases the bank actually underwrites the offering. This means the bank actually buys all of the securities itself, thus guaranteeing the firm a given amount of financial capital. (The investment bank makes a profit by re-selling the securities to other investors at a higher price.) Finally, the investment bank handles all of the detail work when the stock is actually sold, ensuring that investors receive their shares and all of the necessary procedures are followed.

What stakeholder group might be harmed when a firm issues convertible bonds?

But there is one important group that may be unhappy with this arrangement; the corporation's existing stockholders may be displeased if the new stock issued to holders of convertible securities dilutes their share of ownership—and their share of any profits!

What is a convertible bond and why do investors find such bonds attractive?

Convertible bonds allow bondholders to convert the bond into a specified number of shares of common stock. This is attractive to the bondholders since it allows them to limit risk while taking advantage of favorable changes in the price of the company's stock.

Briefly describe the difference between a full service broker and a discount broker.

Discount brokers simply carry out trades, while full- service brokers offer additional services such as tax and estate planning and investment research. As their name implies, discount brokers charge lower commissions and fees than full-service brokers.

Describe five different investment strategies.

Investors who focus on income buy securities that offer a steady and predictable stream of income. Market timers try to time their purchases and sales of securities so that they "buy low and sell high." Value investors try to identify companies which are undervalued by investors. Growth investors try to find companies that are likely to grow much faster than average. Buy and hold investors tend to buy a diversified portfolio of stocks with the intention of holding them for a long period of time.

What is Preference with respect to dividend payment and what stock is it a right under?

Owners of preferred stock are more likely to receive a dividend, and the amount of the dividend is usually a specific amount.

What basic rights do Preferred stockholders have?

Preference with respect to dividend payment, and Preference in claim on assets

What is the difference between common and preferred stock?

Preferred stockholders normally do not have voting rights in stockholders meetings. Also, though a dividend is more likely to be paid to preferred stockholders than to common stockholders, there is no guarantee that the total return (dividend plus capital gain) to preferred stockholders will be greater than the total return to common stockholders.

what is Right to a residual claim on assets and what stock is it a right under?

Should the corporation cease operations, stockholders have a residual claim on the assets of their corporation. This means that they are entitled to whatever is left after court and legal fees, employees, suppliers, creditors (such as banks and bondholders), and preferred stockholders are paid what they are owed. common stock

what are Investors who focus on income?

They buy securities that offer a steady and predictable stream of income. Income investors tend to have portfolios that are heavily weighted in bonds (which pay a stated rate of interest) and preferred stocks (which offer a stronger possibility of paying a dividend than common stock). This approach is popular with retirees and others who are very risk averse. Its main drawback is that such safe investments generally offer a fairly low rate of return and seldom generate large capital gains.

What is the Dodd-Frank Act of 2010

This far-reaching law expanded the Fed's regulatory authority over nondepository financial institutions, such as hedge funds and mortgage brokers, that had previously operated with little regulatory oversight or accountability.

The basic rights of common stockholders include

Voting rights, Right to a dividend, Preemptive right, Right to a residual claim on assets

What is a limit order?

a limit order is an order to buy shares of a stock only if its price is below some specified amount (or to sell shares of a stock only if the price is above a specified value).

How does a broker handle a limit order?

broker who receives a limit order from a client will only buy or sell the security if the price meets the conditions specified by the client.

What are Buy and hold investors

tend to buy a diversified portfolio of stocks with the intention of holding them for a long period of time. This approach puts its faith in the ability of a diversified portfolio to minimize risk and in the long-term trend for stock prices to rise over time. Investors who adopt a buy and hold approach seldom see dramatic short-term gains, but usually experience a good long-term return on their portfolios. This approach requires patience and the courage to stick with stocks during inevitable periods of market declines.

What advantages do convertible bonds have for the issuing firms?

they also can benefit from issuing convertible bonds because the popularity of this feature with investors allows it to offer a lower coupon rate on convertible bonds (or a lower dividend on preferred stock), thus reducing its fixed payments. And if investors convert to common stock, the firm no longer has to make these fixed payments at all.

What are growth investors?

try to find companies that are likely to grow much faster than average. Such investors tend to look for small companies with unique products in fast growing sectors of the economy. But such sectors tend to attract a lot of competition, and are beset by rapid technological change. This makes predicting winners and losers in growth sectors very difficult.

What are Value investors?

try to identify companies which are undervalued by investors. They do a lot of research in an attempt to find discrepancies between the true (intrinsic) value of a firm's stock and its current market price. The challenge of this approach is that there are thousands of other investors doing the same thing. Unless an investor is among the very first to discover an undervalued stock, the investors who discover it first will buy it up, driving up the price and eliminating the opportunity.

What are market timers?

try to time their purchases and sales of securities so that they "buy low and sell high." They tend to have a fairly short investment horizon and focus on making profits quickly. There are a couple of problems with this approach. First, so many factors affect the price of stocks—some of them based on random events—that it is hard to consistently identify the timing and direction of changes in stock prices. This approach tends to require frequent trades, which results in frequent payments of commissions and brokerage fees.


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