©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