CAPITAL MARKET SECURITIES

Capital market is a financial market.

Long term debt and equity securities bought and sold.

Channel the wealth of savers to those who can put it to long-term productive use.

Securities used by companies, corporation, government to raise fund.

The capital market includes:

1. Fixed income securities

2. Equity securities.
 FIXED INCOME SECURITIES

A fixed-income security is a debt instrument issued by a government, corporation.

They can be issued to raise debt.

The payments of a fixed-income security are known in advance.

Fixed-income securities generate regular income, reduce overall risk, and protect against
volatility of a portfolio.
 TYPES OF FIXED INCOME SECURITIES
1. Bonds

2. Treasury securities

3. Treasury bond

4. Callable bond

5. Zero coupon bond

6. Corporate bond

7. Convertible bond

8. Junk bond
 BOND

 A bond is a written agreement or contract between an issuer and the holder that requires the issuer
to pay the holder the bond’s par value or face value plus the stated amount of interest.

 Bond is issued at a discount or premium.

 Bonds denomination range from $500 to $1000

MATURITY:
Short term (bills): maturities between one and five years;

Medium term (notes): maturities between six and twelve years.

Long term (bonds): maturities longer than twelve years.

EXAMPLE
A 10-year bond with 5% coupon and $100 face value would give $5 per year as a coupon
for 10 years and will then repay the face value of $100 at the end of 10 years.

CALLABLE BOND
A callable bond gives the borrower (issuer) the right to pay back the obligation to the lender
(bondholder) before the stated maturity date.

MATURITY

The bond mature in 10 years. No call option is available in first five years but after 5 years
the corporation redeemed bonds if interest rate decreases
EXAMPLE
A Corporation issues bonds with a face value of $100 and a coupon rate of 6.5% while the
current interest rate is 4%. The bonds will mature in 10 years. However, the company issues
the bonds with an embedded call option to redeem the bonds from investors after the first
five years. The call option implies that if the interest rate decreases after five years, A
Corporation may call back the bonds and refinance its debt with new bonds with a lower
coupon rate.
 ZERO COUPON BOND

A Zero Coupon Bond is a debt security that is sold at a discount and does not pay any
interest payments to the bondholder.

Does not make coupon payment and periodic interest payment.

denomination ranging from $50 to $10,000.

MATURITY

Long-term zero coupon maturity dates typically start at ten to fifteen years.

Short-term zero coupon bonds generally have maturities of less than one year.
EXAMPLE
You can buy a $100 bond for $50 today. When the bond reaches maturity, it can be cashed
or called for the full $100 face value. Instead of paying regular interest payments, it pays
them in one lump sum at maturity.

TREASURY SECURITIES
Treasury securities include T-Notes, T-Bills and T-Bonds.

T-Bills are short term instrument and issued by government.

Safe investment and backed by full faith.

Investor lend money to government and government uses to funds to pay debt.
 Treasury notes is a debt obligation issued by treasury department.

 Pay interest every six months.

 Government pay par value at the time of maturity

MATURITY:

Maturity of T-Bills is less than one year.

Maturity of T-Notes are 2, 3, 5 and 10 years

EXAMPLE:

Mrs. Harrison buys a 1-year $1,000 treasury bill and notes for $970. She holds onto this investment for
one year and turns it in at maturity for $1,000. Harrison didn’t receive any interest payments from the
investment all year. Instead, she realized a $30 gain the sale of the bill at maturity
 TREASURY BONDS
Treasury Bonds are long-term debt instruments issued and backed by the United States government to finance its
operations.

Minimum denomination of T-bonds is $1,000.

MATURITY

10 to 30 years

EXAMPLE

A Treasury bond with a par value of $1,000,000 and an 8 percent coupon rate pays $80,000
per year, which is divided into $40,000 after the first 6-month period of the year and another
$40,000 in the second 6-month period of the year. Interest payments on Treasury bonds
received by investors are exempt from state and local income taxes.
 TREASURY INDEXED PROTECTED SECURITIES
(TIPS)
TIPS are Treasury bonds that are adjusted to eliminate the effects of inflation on interest and principal
payments, as measured by the Consumer Price Index.
MATURITY
5, 10 and 20 years
EXAMPLE
A 10-year TIPS for $1,000, and the annual coupon rate is 5%. Every six months, the U.S. Treasury
adjusts the principal for any change in the consumer price index (CPI). The interest payment is also
calculated and made on this adjusted principal amount every six months. So, if during the first six
months of your investment the CPI increased by 2%, the face value of your TIP would be: $1,000 *
1.02 = $1,020 and your first semi-annual interest payment would be: $1,020 * (.05/2) = $25.50.
 CORPORATE BONDS

Corporate bonds are debt instruments created by companies for the purpose of raising
capital. They are called fixed-income securities because they pay a specified amount of
interest on a regular basis.

Company's physical assets may be used as collateral for bonds.

 Their standard denomination is $1,000

MATURITY:

Short term 1 to 3 years, Medium term 4 to 10 years, Long term more than 10 years
EXAMPLE
Purchase a bond with a 5% coupon rate from Corporation. The bond has a face value of
$1,000. This means you will receive $50 in interest payments per year ($1,000 x 0.05).
Corporate issuers usually make payments in six-month installments, meaning in our case
that you would receive $25 in say, January, and the other $25 in June.

TYPES OF CORPORATE BOND

1. Secured securities

2. debenture
SECURED SECURITIES
Bond issued providing any specific asset as collateral.

In case of default, most senior securities first to recieive payout

Then second highest securities receive payout by the use of asset as collateral.
DEBENTURE
Unsecured bond

Bond issued without providing any specific assets as collateral.

Debenture have call provision

When market decrease companies call existing debenture and issue new debenture.
 CONVERTIBLE BOND

A convertible bond is a debt instrument that the bondholder can trade in to the issuing corporation for
a specific number of its common stock shares.

MATURITY:
Convertible bonds has a maturity of greater than 10 years.

EXAMPLE:
Bob purchases 2 bonds from the corporation and intends to keep them until they mature. Bob holds
onto the bonds for the first two years and collects the monthly interest income from the company. In
the third year, the stock price increases to $15 a share. This means that Bob can convert his $2,000
bond investment into $3,000 of common stock.
 JUNK BOND

A junk bond is a fixed-income security that is rated below investment grade by one or more of the
major bond ratings agencies. A junk bond is a corporate bond with a credit rating below BBB.

MATURITY:
Maturity can take 90 days to 30 years.

EXAMPLE:
A company issues a $100 bond at a 10% coupon, so it pays $10 a year interest. Over time, the
company's business suffers. The price of the bond falls to $50, but it is still paying out a $10 coupon,
so the yield has gone from 10% to 20% (from $10/$100 to $10/$50).
 ASSET BACKED SECURITIES
Asset-backed securities (ABS) are securities, usually bonds, which are collateralized by financial assets,
such as home equity lines, credit card receivables, and auto loans.

MATURITY:
1 to 3 years

EXAMPLE:
Company A is an auto finance company that offers car loans to consumers seeking to buy a new car. The
company gives cash to the borrower, and the borrower repay the loan amount with interest. The manager came
up with a new way to increase the number of loans. The investment firm can trade its ABS, i.e. the bonds used
as collateral for the vehicle loans, on various exchanges provided that they meet the securitization requirements.