Financial Assets, Money,

Financial Transactions, and

Financial Institutions

EQUITIES

Two common Types of Equity

Common Stock
Entitles its holders to vote for the members of a firms
board of directors and, therefore determine company
policy.
Preferred Stock
Normally carries no voting rights but does entitles its
holders to a fixed share of firms net earnings ahead of its
common stock holders.

CHARACTERISTICS OF COMMON STOCK

Claim on Income
As the owners of the corporation, the common
stockholders have the right to the residual income
after bondholders and preferred stockholders have
been paid.
Claim on Assets
Just
like claim on residual income common
stockholders have a residual claim on assets of the
corporation in the case of liquidation.

CHARACTERISTICS OF COMMON STOCK

Voting Right
The common stockholders elect the board of directors
and are in general the only security holders given a
vote.
Proxy: Gives a designated party the temporary
power of attorney to vote for the signee at the
corporation annual general meeting.
Proxy Fights: When rival groups compete for proxy
votes in order to control the decisions made in a
stockholders meeting.
Majority Voting
Cumulative voting

CHARACTERISTICS OF COMMON STOCK

Preemptive Right
The right of a common shareholder to maintain a
proportionate share of ownership in the firm. When
new shares are issued, common shareholders have
the first right of refusal.
Limited Liability
Although the common stockholders are the owners of
company however their liability in case of bankruptcy
is limited to the amount of their investment.

FEATURES AND T YPES OF PREFERRED STOCK

Multiple Classes
A company can issue more than one series or class of
preferred stock, and each class can have different
characteristics.
Claim on Assets and Income
Have priority over common stock with regard to claim
on assets in the case of liquidation. And also has
claim on income prior to the common stock
holders.

FEATURES AND T YPES OF PREFERRED STOCK

Cumulative Feature
Requires all past unpaid preferred stock dividends to
be paid before any common stock dividends are
declared.
Protective Provisions
Provisions for preferred stock that are included in the
terms of the issue to protect the investors interest.
Generally allow for voting rights in the event of non
payment of dividends.

FEATURES AND T YPES OF PREFERRED STOCK

Convertibility
Convertible preferred stock allows the preferred
stockholder to convert the preferred stock into a
predetermined number of shares of common stock,
if he or she chooses so.
Adjustable Rate Preferred Stock
Preferred stock intended to provide investors with
some protection against wide swings in the stock
value that occur when interest rates move up and
down. The dividend rate changes along with
prevailing interest rates.

BONDS

A bond is a type of debt or long term promissory note,

issued by the borrower, promising to pay its holder a
predetermined and fixed amount of interest per year.
There are different types of bonds, few of these are
mentioned on the next slide.

T YPES OF BONDS
Debentures
The term debenture applies to any un-secured long term
debt.
Subordinated Debentures
A debenture that is subordinated to other debenture in
being paid in the case of insolvency.
Mortgage Bonds
It is a bond secured by a lien on real property.

T YPES OF BONDS

Eurobonds

Bonds issued in a country different from the one in

whose currency the bond is denominated.

Zero and very low coupon bonds

Bonds issued at a substantial discount from their

face value that pay no or little interest.

Junk Bonds

Bonds having very low ratings are called junk

bonds.

TERMINOLOGY AND CHARACTERISTICS OF BONDS

Claim on Assets and Income
In case of insolvency, claims of debt in general,
including bonds, are honored before common and
preferred stock. Bonds also have a claim on the
income that comes ahead of common and proffered
stock.
Par value

The bonds face value that is returned to the

bondholder on the maturity.

TERMINOLOGY AND CHARACTERISTICS OF BONDS

Coupon Interest Rate
A bonds coupon interest rate indicates that what
percentage of the par value of the bond will be paid
out annually in the form of interest.
Maturity
The length of the time until the bond issuer returns
the par value to the bondholder and redeems the
bond.

TERMINOLOGY AND CHARACTERISTICS OF BONDS

Indenture
The legal agreement or contract between the firm
issuing the bonds and the bond trustee who
represents the bondholders.
Current Yield
The ratio of the annual interest payment to the bonds
market price.
Current Yield=Annual Interest Payment
Market price of the bond

TERMINOLOGY AND CHARACTERISTICS OF BONDS

Bond Ratings
AAA (Highest credit quality) AA (Very high credit
quality)-A (High credit quality)
BBB (Good credit quality)-BB (Speculative)-B (Highly
speculative)
CCC-CC-C (High default risk)

DEFINITIONS OF VALUE
Book Value
The value of an asset as shown on a firms balance
sheet. It represents the historical cost of the asset
rather than its current market value or replacement
cost.
Liquidation Value
The amount that can be realized if an asset were sold
individually and not as a part of going concern.

DEFINITIONS OF VALUE

Market Value

The observed value for the asset in the

marketplace.

Intrinsic or Economic Value

The present value of the assets expected

future cash flows. The value is the amount
that investor consider to be a fair value, given
the amount, timing, and riskiness of future
cash flows.

DETERMINANTS OF VALUE
The amount and timing of the assets expected cash
flow.
The riskiness of these cash flows
The investors required rate of return for undertaking
the investment.