Securities that are purchased in order to be held for investment. This is in contrast to securities that are purchased by a broker-dealer or other intermediary for resale. Banks often purchase marketable securities to hold in their portfolios.

1. A. Fixed income securities
B. Equity Securities
Characteristics of
Investment Securities

2. Characteristics of bond
• Par value or face value of most bonds is $1000
• Typical bonds have a maturity time
• Most bonds are coupon bonds, where coupon
refers to the periodic interest that the issuer
pays to the holder of the bond
• Interest on bonds is typically paid semi-
annually

3. Characteristics of Bonds
• Zero coupon bond:
• An innovation in traditional format of bonds
• These bonds are sold at discount
• Issuers of zero bonds include local and federal
government
• Bond prices are quoted as a percentage of par
value

4. • The bond price reflect the par value and any
accrued interest, and increase or decrease in
the market interest yield
• If bond is selling at discount, it means that the
interest rate on the bond is below the current
interest rate on similar bonds in the market
and vice versa

5. • Callable bonds
• If a bond is callable, the issuer can call it back
by paying off the obligations
• Exercising the call provision become attractive
to the issue when market interest rate fall
significantly below the coupon rate on the
bond
• Cost of calling back include call premium or
administrative costs

6. • Senior securities:
• Corporate bonds are senior securities, which
mans they are senior to any prefferred stock
and to the common stock in terms of priority
of payment
• Within bonds categories, there exist
differences of priority of claims
• Debentures: unsecured bond that is not
backed by a specific asset

7. • Convertible Bonds:
• Bonds that are convertible at the holder’s
option into common stocks
• Junk bonds: High risk, high yield bonds
carrying low rating

8. Equity securities
• Equity securities represent ownership in a
corporation
• These securities represent residual claim
• There are two types of equities:
– Preferred stock
– Common stock

9. Preferred stock
• Dividend is fixed in amount and known in
advance on preferred stocks (like debt)
• The stream of dividends continues forever(like on
shares) unless it is called
• Preferred shareholders cannot force the firm into
liquidation if their dividend is not paid (like in
case of common stock)
• Preferred stock is also know is hybrid security
because it resembles both equity and fixed
income securities

10. • Preferred stocks have the feature of
cumulative dividends
• Preferred stock may carry variable rate of
dividend that is tied to current market interest
rate
• Preferred stock may also have feature of
convertibility into common stock (may be
mandatory or optional)

11. Common stock
• Common stock represents the ownerships
interest of the company.
• Ownership is concentrated or closely held
when the firm’s shares are held by few
individuals
• Ownership is scattered when shares are held
by lots of people

12. Characteristic of common stock
• Common shares give the right to shareholders
to vote
• It gives the right to receive dividends,
however, dividend rate is not fixed
• Common shares also give the right to right
issues
• Common shares are riskier than preferred
stock and bonds

13. Derivative Securities
• Securities that derive their values from an
asset or security
• There are two types of derivative securities
– Future contracts
– Options

14. Future contract
• A future contract obliges traders to purchase
or sell an asset at an agreed-upn price at a
specified future date
• The contract can be used for commodities or
securities
• Cash is not required to be paid until delivery,
only a margin is required to reduce the
chances of default of the other party

15. • The margin is small compared to the value of
the purchase or sell
• Many investors in future markets are hedgers
or speculator
• Hedgers seek to reduce risk of price
uncertainty over some future period of time
• Speculators seek to profit from future
uncertainty in prices

16. Types of future contracts
• There are two types of future contracts
– Long position
– Short-position
• Long-position:
• The long position is held by a trader who commits
to purchasing the asset on the maturity date
• Short position (short-selling)
The short position is held by a trader who commits
to deliver the asset on the maturity date

17. Advantages of future contract
• A. Helps in hedging
• B. investors can benefit from price fluctuations.
• Helps producers to get orders at current prices and
continue production without worry
• Buyers do not have to pay the full price, still they can
obtain the commodities in future at current price
• Buyers don’t have to worry about storage problems

18. Option Contracts
• Option is a right to buy or sell a stated number of
shares of stock within a specified period at a
specified price
• There are two types of option contracts:
– Put option
– Call option
• Put option
• An option to sell a stated number of shares at a
stated period at a specified price

19. • Call option
• A right to buy a stated number of shares at a
stated period at a specified price
• Parties in option contract:
• Option writer: who gives the right to the
buyer of the option in exchange for a price
• Option holder: who obtains the right to buy or
sell shares