REMINDERS

Please:

1. Rename account:
SURNAME, FIRST NAME, MIDDLE NAME

2. Camera must be open AT ALL TIMES.

3. Put microphone in mute mode.

4. Take note of your class number for recitation.

Thank
you.

Jewelyn E. Ciocon, DBA

 MODULE 2

SECURITIES

© 2009 McGraw-Hill Ryerson 4- 2

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 Securities

• Classifying Securities
• Interest-Bearing

Assets
• Equities

• Derivatives

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 “

Definition of Securities
Securities are shares, participation or interests in a corporation or in
a commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instrument, whether written or electronic in character.
It includes:

Shares of stock, bonds, debentures, notes, evidences of

n

indebtedness, asset-backed securities;

nInvestment contracts, certificates of interest or participation in a profit

sharing agreement, certificates of deposit for a future subscription;

nFractional undivided interests in oil, gas or other mineral rights;

nDerivatives like option and warrants;

nCertificates of assignments, certificates of participation, trust

certificates, voting trust certificates or similar instruments;
nProprietary or non proprietary membership certificates incorporations;

and
nOther instruments as may in the future be determined by the

Commission.
As defined by REPUBLIC ACT NO. 8799 - SECURITIES REGULATION CODE
OF THE PHILIPPINES
 Security Types
 Our goal in this chapter is to introduce the different
types of securities that investors routinely buy and sell
in financial markets around the world.
 For each security type, we will examine:
 Its distinguishing characteristics,
 Its potential gains and losses

© 2009 McGraw-Hill Ryerson 4- 5

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 Classifying Securities
Basic Types Major Subtypes
Money market instruments
Interest-bearing Fixed-income securities
Common stock
Equities Preferred stock
Options
Derivatives
Futures

© 2009 McGraw-Hill Ryerson 4- 6

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 Types of Securities

Copyright © 2008 Pearson 1-7

Addison-Wesley. All
 INTEREST-
BEARING
SECURITIES
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Interest-Bearing Securities

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 Interest-Bearing Assets
a. Money Market Instruments
Money market instruments are short-term debt obligations
of large corporations and governments.
 promise to make one future payment.
 lives are less than one year .

Examples:
Examples Treasury bills (T-bills), bank certificates of deposit
(CDs), corporate and municipal money market instruments.

gains/losses A known future payment/except when

Potential gains/losses:
the borrower defaults (i.e., does not pay).

quotations Usually, the instruments are sold on a

Price quotations:
discount basis,
basis and only the interest rates are quoted.
Therefore, investors must be able to calculate prices from the
quoted rates.
© 2009 McGraw-Hill Ryerson 4- 10
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 Example of Money Market Instruments

Treasury Bills, Notes, and Bonds

 Technically, bills, notes, and bonds are all

bonds. They are all backed by the full faith
and credit of the government. They can all be
purchased either directly from the Treasury or
through a broker. They can all trade like
hotcakes.

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 Maturity of
Treasury Bills, Notes, and Bonds

BILLS NOTES BONDS

a year or two to ten 10 to 30

less years. years.

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Sample Treasury Bill

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 Interest Bearing Securities
b. Fixed-income securities
Fixed-income securities are longer-term debt obligations of
corporations or governments.
 promise to make fixed payments according to a pre-set

schedule.
 lives exceed one year.

Examples: Treasury notes, corporate bonds, car loans, student

loans.
Potential gains/losses:
 Fixed coupon payments and final payment at maturity,

except when the borrower defaults.

 Possibility of gain (loss) from fall (rise) in interest rates
 Depending on the debt issue, illiquidity can be a problem.

(Illiquidity means it is possible that you cannot sell these

securities quickly.)
© 2009 McGraw-Hill Ryerson 4- 14
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 Quote Example: Fixed-Income Securities
 Price quotations:
The bond will mature in
AT&T, the issuer of the bond. the year 2022.

NEW YORK BONDS

Corporation Bonds
CUR NET
BONDS YLD. VOL CLOSE CHG.
ATT 61/213 6.6 153 97.75 -0.13
ATT 81/822 8.1 651 100.88 +0.25
ATT 81/824 8.0 316 101 -1.50

The annual coupon rate. You will receive 8 1/8% of the bond’s
face value each year in 2 semi-annual coupon payments.
© 2009 McGraw-Hill Ryerson 4- 15
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 Quote Example: Fixed-Income Securities
 Price quotations:
The closing price for the
*Current Yield = day is 100.875% of face
Annual Coupon / Current Price value.
NEW YORK BONDS
Corporation Bonds
CUR NET
BONDS YLD. VOL CLOSE CHG.
ATT 61/213 6.6 153 97.75 -0.13
ATT 81/822 8.1 651 100.88 +0.25
ATT 81/824 8.0 316 101 -1.50
The closing
The number of bonds traded that day. price is up by
0.25 of one
*Current yield is an investment's annual income (interest or dividends) divided by percent from the
the current price of the security. ... Current yield represents the return an investor
would expect to earn, if the owner purchased the bond and held it for a year. previous day.
EQUITIES or
EQUITY
SECURITIES
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Equity Securities

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 Equities
a. Common Stock
 Common stock: Represents ownership in a corporation. A
part owner receives a pro-rated share of whatever is left over
after all obligations have been met in the event of a liquidation.

Examples:
Examples San Miguel shares, SM Holdings shares, Cebu
Pacific shares, etc.

Potential gains/losses:
gains/losses
• Many companies pay cash dividends to their shareholders.
However, neither the timing nor the amount of any dividend is
guaranteed.
• The stock value may rise or fall depending on the prospects
for the company and market-wide circumstances.
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Stocks vs Shares

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 Sample: STOCK SUBSCRIPTION AND ISSUANCE
(New Corporation: DELA CRUZ CORPORATION)
(Minimum Subscribed Capital is 25% of A/C; Minimun Paid-up Capital is 25% of
Stock Profile
S/C)
% of A/C,
Authorized Capital Stock ₱ 5,000,000.00 Par Value / Share ₱ 100.00
S/C
Subscribed Capital Stock ₱ 1,250,000.00 25% # Authorized Shares 50,000

Paid-up Capital Stock ₱ 312,500.00 25% # Subscribed Shares 12,500

% in Philippine pesos

Stockholder Complete Ownershi

TIN# Authorized Subscribed Paid-Up
Names, Nationality p (25% of authorized) (25% of authorized)

JUAN DELA CRUZ 155-917-504-000 20% ₱ 1,000,000.00 ₱ 250,000.00 ₱ 62,500.00

JUANA DELA CRUZ 143-081-046-000 20% 1,000,000.00 250,000.00 62,500.00

UNO DELA CRUZ 146-966-114-000 20% 1,000,000.00 250,000.00 62,500.00

SEGUNDO DELA CRUZ 146-966-189-000 20% 1,000,000.00 250,000.00 62,500.00

THIRDY DELA CRUZ 131-570-740-000 20% 1,000,000.00 250,000.00 62,500.00

TOTALS 100% ₱ 5,000,000.00 ₱ 1,250,000.00 ₱ 312,500.00

Stock Certificate- Example
DELA CRUZ CORPORATION

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Preferred Stock Certificate- Example

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Common Shares
vs.
Preferred Shares

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 What are Common Shares?
 When someone refers to a share in a company, they are
usually referring to common shares.
 Those who buy common shares will be essentially
purchasing shares of ownership in a company.
 A holder of common stocks will receive voting rights, which
increases proportionally with the more shares the holder
owns.
 Those who purchase common shares try to sell the share at
a higher price than when they bought it in order to turn a
profit. Sometimes, common shares will come with dividends
that are paid out.

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 What are Preferred Shares?
 Although preferred shares still include some features of
common shares, they also share some features with
a bond. As a refresher, the bond issuer borrows capital
from the bondholder and makes fixed payments to them at
a fixed interest rate for a specific period. Like bonds,
preferred shares receive a fixed amount of income through
a recurring dividend.
 Additionally, preferred shares come with a par value, which
is affected by interest rates. When the interest rates go up,
the value of preferred shares declines. When the rates go
down, the value of preferred shares increases. Similar to
common shareholders, those who purchase preferred
shares will still be buying shares of ownership in a
company.
4- 26
 Comparison

Common vs Preferred Shares

Common Shares Preferred Shares

Company Ownership Yes Yes

Voting Rights Yes No

Dividend Variable Fixed

Order of Claim to Second First

Earnings
Returns based on Earnings Earnings

[Link] 4- 27
DERIVATIVES

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 Derivatives

Primary asset: Security originally sold by a business or

government to raise money.

 Derivative asset: A financial asset that is derived from

an existing traded asset, rather than issued by a business
or government to raise capital. More generally, any
financial asset that is not a primary asset.

© 2009 McGraw-Hill Ryerson 4- 29

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Derivatives

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Options and Futures

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 Options vs Futures

OPTIONS FUTURES

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 a. Futures Contracts
 Examples: financial futures (i.e., Kingley Commodities Inc.,
A & A Commodities Inc. and Onapal Philippine Commodities
Inc. T-bonds, foreign currencies, and others), commodity
futures (i.e., soybeans and sugar).

 Potential gains/losses:
 GAIN: contracted price > the market price of the underlying
asset, and vice versa.
 If you sell your contract before its maturity, you may gain or
lose depending on the market price for the contract.
 Note that enormous gains and losses are possible .

© 2009 McGraw-Hill Ryerson 4- 33

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 Futures Contracts - Example
 An oil producer needs to sell their oil. They may use
futures contracts do it. This way they can lock in a
price they will sell at, and then deliver the oil to the
buyer when the futures contract expires. Similarly, a
manufacturing company may need oil for making
widgets. Since they like to plan ahead and always have
oil coming in each month, they too may use futures
contracts. This way they know in advance the price
they will pay for oil (the futures contract price) and
they know they will be taking delivery of the oil once
the contract expires.
© 2009 McGraw-Hill Ryerson 4- 34
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 Example: Futures Contract
Your company gives its customers an option to pay in bitcoin.
Roughly 0.5% of your monthly revenue is collected in bitcoins
so you haven’t felt the need to hedge the exposure.
However, your sales team tells you that recently they recently
signed a contract that will result in a particularly large payment
of 200 bitcoins in 3-months.

Due to extreme volatility in the cryptocurrencies, you decide to

hedge the exposure. CBOE offers bitcoin futures with a
multiplier of one and because you currently have a long
position in bitcoin, so you must get a short position in bitcoin
futures, i.e. you must sell 200 futures.

You sell 200 XBT/K8 contracts with a future value of $6,820.

The contract matures in 90 days .
4- 35
 The value of your contract at inception is zero. At the
settlement date, if the bitcoin price has dropped to $6,400,
the payoff to the party with long position is as follows:

 Because you have short position, your payoff will be exactly

opposite to the payoff to the long position. Your profit
amounts to $84,000. By selling the futures you have
guaranteed that you get at least $6,820 per bitcoin no matter
what happens to the bitcoin price. You can sell the 200
bitcoins at the spot price at expiration of $6,400 for proceeds
of $1,280,000 and receive $84,000 as profit on the futures
contract. Hence, your net cash flows are $1,364,000; which
equals the price you locked i.e. 200 multiplied by $6,820.
4- 36
 b. Option Contracts
 A call option gives the owner the right, but not the obligation,
to buy an asset, while a put option gives the owner the right,
but not the obligation, to sell an asset.
 The price you pay today to buy an option is called the option
premium.
 The specified price at which the underlying asset can be
bought or sold is called the strike price, or exercise price.
 An American option can be exercised anytime up to and
including the expiration date, while a European option can be
exercised only on the expiration date.

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Options Contract

© 2009 McGraw-Hill Ryerson 4- 38

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 Option Contracts
Potential gains and losses:
Buyers of options profit if the strike price is better
than the market price, and if the difference is greater
than the option premium. In the worst case, buyers
lose the entire premium.

Sellers of options gain the premium if the market

price is better than strike price.

GAIN: the market price > than strike price

Here, the gain is limited but the loss is not .
© 2009 McGraw-Hill Ryerson 4- 39
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 Option Contracts - Example
 Company ABC's shares trade at $60, and a call writer is
looking to sell calls at $65 with a one-month expiration.
If the share price stays below $65 and the options expire,
the call writer keeps the shares and can collect another
premium by writing calls again.

 If the share price appreciates to a price above $65,

referred to as being in-the-money, the buyer calls the
shares from the seller, purchasing them at $65. The call-
buyer can also sell the options if purchasing the shares is
not the desired outcome.
© 2009 McGraw-Hill Ryerson 4- 40
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 Options Contract Example

You expect Company XYZ's stock price to go

up to $90 within the next month. You find out
that you can buy an option contract for this
company at $4.50 with a strike price of $75 per
share. That means you’ll pay $450 for your
options contract ($4.50 x 100 shares).

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Options Contract Example .. cont’d
 The stock price begins to rise as you expect and
stabilizes at $100. Prior to the expiry date on
the options contract, you execute the call
option and buy all 100 shares of Company
XYZ at $75 (the strike price) for $7,500.

 Since it’s worth $100 a share, you can then sell

your new stock on the market for $10,000.
Your profit would be $2,050, since you’d need
to take the original $450 options contract into
account ($10,000 - $7,500 - $450 = $2,050).
 Investing in Stocks versus Options, I.

Stocks:
Suppose you have $10,000 for investments. Macron
Technology is selling at $50 per share.

Number of shares bought = $10,000 / $50 = 200

• If Macron is selling for $55 per share 3 months later, gain

= ($55  200) - $10,000 = $1,000

• If Macron is selling for $45 per share 3 months later, gain

= ($45  200) - $10,000 = -$1,000
© 2009 McGraw-Hill Ryerson 4- 43
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Investing in Stocks versus Options, II.

Options:
A call option with a $50 strike price and 3 months to
maturity is also available at a premium of $4.

• A call contract costs $4  100 = $400, so number of

contracts bought = $10,000 / $400 = 25 (for 25  100 =
2500 shares)

• If Macron is selling for $55 per share 3 months later,

gain = {($55 – $50)  2500} - $10,000 = $2,500

• If Macron is selling for $45 per share 3 months later,

gain = ($0  2500) – $10,000 = -$10,000
© 2009 McGraw-Hill Ryerson 4- 44
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 Useful Internet Sites/References
 [Link] (reference for bond basics)
 [Link] (reference to see whether you are a “Foolish investor.”)
 [Link] (reference for reproduction stock tickers.)
 [Link] (reference for CNBC TV)
 [Link] (Chicago Board of Trade)
 [Link] (Montreal Exchange)
 [Link] (Chicago Mercantile Exchange)
 [Link] (New York Mercantile Exchange)
 [Link] (Chicago Board Options Exchange)
 [Link]
treasury-bills-notes-and-bonds-all-about/#:~:text=The%20major
%20difference%20among%20them,years%20from%20their%20issue
%20date.

© 2009 McGraw-Hill Ryerson 4- 45

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© 2009 McGraw-Hill Ryerson 4- 46
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