Chapter 10 The Stock Bond and Mortgage Markets

Common Stock Equity claims representing ownership of the net income and assets of a corporation that receive a variable dividend after preferred stockholders have been paid and retained earnings have been put aside 2

Preferred Stock Equity claims representing ownership of the net income and assets of a corporation that receive a fixed dividend before common stockholders are entitled to anything 3

Program Trading • Pre-programming of computers to buy or sell a large number (basket) of stocks • Widely used by institutional investors 4

Dow Jones Industrial Average (the Dow) An index that measures stock price movements of 30 of the largest companies traded on the NYSE 5

New York Stock Exchange (NYSE) • The world’s largest market for trading stocks located on Wall Street in New York • Trades the stocks of over 3, 000 companies 6

Stock Market Indexes Is the Most Famous the Best? Dow Jones Industrial Average - 30 stocks of some of the largest companies in America, “the blue chip. ” Dow Jones Transportation Average - 20 airline, trucking, and railroad stocks. Dow Jones 65 Composite Index - all stocks in the Dow Jones Industrial, Transportation, and Utility Averages. Standard & Poor’s 500 - weighted index of prices of 500 broad based corporations. 7

New York Composite Index - weighted average of the market value of all stocks traded on the NYSE plus four subgroup indexes representing industrial, transportation, utility, and finance stocks. Wilshire Equity Index Value - weighted index of the value of all stocks listed on the NYSE, the American Stock Exchange, and over-the-counter stocks that NASDAQ members. NASDAQ Composite Index - a weighted index that measures changes in prices of all stock traded by the NASDAQ system. 8

Cracking the Code -- The Stock Market Below is a typical entry of the stock page of the Wall Street Journal 52 weeks HIGH: 67 7/18 LOW: 26 11/18 STOCK: Gap Inc. SYM: GPS DIV YLD: . 20 %: . 3 PE: 41 VOL 100 S: 17847 HIGH: 62 3/8 LOW: 59 1/4 NET CHANGE: -3¼ 9

The Ten Largest Companies (measured in market value) Traded on the Big Board, February 1999 Company name Symbol Average Number of shares traded Market Value of Outstanding Stock (billions) General Electric Merck & Co. , Inc. Wal-Mart Stores, Inc. Pfizer Inc. Exxon Corp. Coca Cola Co. International Business Machines Corp. AT&T Corp. American International Group Lucent Technologies Inc. Exhibit 10 -1 GE MRK WMT PFE XON KO IBM T AIG LU $328. 7 194. 1 194. 0 161. 8 157. 5 156. 7 4, 813, 547 3, 460, 742 3, 414, 326 2, 782, 958 4, 224, 258 3, 765, 753 5, 331, 253 144. 0 138. 7 133. 9 5, 331, 253 2, 524, 947 7, 777, 063 10

American Stock Exchange A stock exchange located in New York that trades the stock of over 660 companies 11

Over-the-Counter Market A network of thousands of securities dealers located all over the country that trade stocks of more than 30, 000 companies over the telephone or computer 12

Association of Securities Dealers Automated Quotation System (NASDAQ) An association whose members trade stocks over an advanced computer system that provides immediate information about prices and the number of shares being traded 13

The Returns to Stocks and Bonds Over Time Value of $100 invested in stocks in 1969 a Value of $100 invested in stocks in 1969 b $4, 000 3, 500 3, 000 2, 500 2, 000 1, 500 1, 000 500 0 1969 Exhibit 10 -2 1973 1978 1983 1988 1993 1998 14

Open-end and Closed-end Mutual Funds • Open-end: continually sells new shares to the public or buys outstanding shares from the public at a price equal to the net asset value • Closed-end: sells a limited number of shares and does not buy back outstanding shares 15

Load • A sales commission required to be paid to a broker to buy into some mutual funds • By law, the load cannot exceed 8. 5 percent of the investment 16

No-Load Mutual Fund A mutual fund purchased directly from the company where the load is avoided 17

A Sample of the Types of Mutual Funds (Stocks) Aggressive Growth Funds invest in small companies with potential for growth seeking capital appreciation. Global Equity Funds invest in stocks from around the world achieving greater diversification than investing in comparable stocks from one country. 18

Growth and Income Funds invest in companies that are expected to grow and that pay dividends. Income Equity Funds invest in companies that are expected to pay high dividends. Index Funds invest in a market basket of stocks that replicates the basket included in a stock market index. Sector Funds invest in stocks of particular industries. Socially Conscious Funds invest in companies they believe to be ethically responsible. 19

A Sample of the Types of Mutual Funds (Bonds) Corporate Bond Funds invest only in corporate bonds. Global Bond Funds invest in bonds from around the world. Ginnie Mae Funds invest in Ginnie Mae mortgage-backed securities. High Yield Bond Funds invest most of their portfolio in junk bonds. 20

Long-term Municipal Bond Funds invest in a broad base of municipal funds; earnings are exempt from federal taxes. State Municipal Bond Funds invest in municipal bonds from one state; earnings are exempt from federal taxes and from state taxes for investors living in the issuing state. U. S. Government Income Funds invest in U. S. government bonds. 21

A Sample of the Types of Mutual Funds (Stock and Bond Funds) Balanced Funds invest in some combination of stocks and bonds to preserve principle, generate income and achieve long-term growth. Flexible Portfolio Funds can vary relative investments between stocks, bonds, and money market instruments. Income Mixed Funds invest in stocks and bonds to earn high dividend and interest income. Convertible Securities Funds invest in securities that can be converted to common 22 stock.

Mortgage Bonds backed by personal property 23

Collateral Bonds backed by financial assets 24

Debenture Bonds with no specific collateral backing but that have a general claim on the other unpledged assets of the issuer 25

Subordinated Debenture Bonds with no collateral backing that have a general claim after debenture bondholders have been paid 26

Cracking the Code on Corporate Bonds The Wall Street Journal Bond Chg Cur Yld Vol Close Net ATT 7. 6 43 106 5/8 +1/8 27

Treasury Strips A type of government securities that allow investors to register and trade ownership of the interest (coupon) payments and the principal amount of the security 28

Inflation-Indexed Bonds whose principal amount is adjusted for inflation at the time when coupon payments are made (usually every six months) 29

General Obligation Bonds Municipal bonds to be repaid out of general tax revenues 30

Revenue Bonds • Municipal bonds to be repaid out of the revenues from a specific project that the bond supports • Repayment is based on the success of the specific project 31

Cracking the Code on Treasury Bonds The Wall Street Journal Rate Mo/Yr Yld 9 Bid Nov. 18 138: 12 Asked Chg Ask 139: 18 +10 5. 75 32

Government National Mortgage Association (GNMA) Government sponsored program that guarantees the timely payment of interest and principal on bundles of at least $1 million of standardized mortgages 33

Mortgage-Backed Securities • Securities backed by a pool of mortgages • They have a low default risk • They provide a steady stream of income 34