Personal Investment Management
ADMS 3531 Fall 2011 – Professor Dale Domian
Lecture 2, Part 2 – Security Types – Sept 20
Chapter Four Outline
− Classifying securities.
− Interestbearing assets.
− Option contracts.
− 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:
o Its distinguishing characteristics,
o Its potential gains and losses, and
o How its prices are quotes in the financial press.
Basic Types Major Subtypes
Money market instruments
− Money market instruments are shortterm debt obligations of large corporations and
o These securities promise to make one future payment.
o When they are issued, their lives are less than one year. Interest Bearing Securities
− Fixedincome securities are longerterm debt obligations of corporations or governments.
o These securities promise to make fixed payments according to a preset schedule.
o When they are issued, their lives exceed one year.
Money Market Instruments
− Examples – treasury bills (Tbills), bank certificates of deposit (CDs), corporate and
municipal money market instruments.
− Potential gain/losses – A known future payment/except when the borrower defaults (i,e,
does not pay).
− Price quotations – Usually, the instruments are sold on a discount basis, and only the
interest rates are quoted.
− The investors must be able to calculate prices from the quoted rates.
− Examples – Treasury notes, corporate bonds, car loans, student loans.
− Potential gains/losses:
o Fixed coupon payments and final payment at maturity, except when the borrower
o Possibility of gain (loss) from fall (rise) in interest rates.
o Depending on the debt issue, illiquidity can be a problem. (Illiquidity means it is
possible that you cannot sell these securities quickly.)
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
Preferred Stock – The dividend is usually fixed and must be paid before any dividends
for the common shareholders. In the event of a liquidation, preferred shares have a
particular face value.
Examples – RIM shares, Royal Bank shares, Magna shares, etc.