Bonds vs Stocks

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What characterizes a market downturn as described in the content?

Securities prices increase by 10%

Securities prices remain stable during investor pessimism

Securities prices fall by 20% or more from recent highs (correct)

Securities prices fluctuate without a clear trend

Which of the following is true about mortgage-backed securities?

They are unsecured loans against home values.

They are bonds backed by a pool of similar loans. (correct)

They are not related to real estate transactions.

They are issued only by government entities.

Who has the authority to call back a callable bond?

A third-party agent

The bond issuer (correct)

The bondholder

The government

What type of bond provides the bondholder with more control against credit risk?

Putable bond Signup and view all the answers

What is a distinguishing feature of registered bonds compared to bearer bonds?

Registered bonds allow coupon payments to be sent to the registered owner. Signup and view all the answers

What is considered the biggest enemy of a currency?

Inflation Signup and view all the answers

What type of monetary policy is essential to control inflation?

Restrictive policy Signup and view all the answers

Which of the following best describes the M1 money supply?

It consists of highly liquid forms of money. Signup and view all the answers

Which category of US Treasury securities has a maturity of less than 1 year?

T bills Signup and view all the answers

What entity issues municipal bonds?

State and local governments Signup and view all the answers

What does IPO stand for in the context of securities?

Initial Public Offering Signup and view all the answers

Which of the following best describes the primary securities market?

Where new securities are issued and sold to investors Signup and view all the answers

Which of the following reports is crucial for the initial registration of new securities?

S-1 registration statement Signup and view all the answers

What is market capitalization?

Total value of all public issues of shares Signup and view all the answers

How do shares typically trade on the NYSE compared to NASDAQ?

NYSE trades through auction, NASDAQ trades electronically Signup and view all the answers

What are the three categories of US Treasury securities?

T bills, T notes, T bonds Signup and view all the answers

Which monetary policy authority is responsible for setting interest rates in the US?

Federal Reserve Signup and view all the answers

What is one key difference between stocks and bonds?

Bondholders are repaid the principal at maturity Signup and view all the answers

What does the Euribor rate refer to?

Rate charged by banks for overnight funds in Europe Signup and view all the answers

Which type of security allows companies to borrow money from other companies short term?

Commercial Paper Signup and view all the answers

What is the nature of M2 money supply in terms of liquidity?

Less liquid than M1 Signup and view all the answers

Why are stocks generally considered riskier investments than bonds?

Bondholders receive returns regardless of company performance Signup and view all the answers

What is the targeted inflation rate set by the Federal Reserve?

2% Signup and view all the answers

Which of the following describes the income potentially received by equity shareholders?

Dividends Signup and view all the answers

What is a primary reason a company prefers to issue stock rather than bonds?

Shares do not require repayment like bonds do. Signup and view all the answers

What does a higher return on investment typically indicate?

Higher associated risks. Signup and view all the answers

What happens to the return on investment when you buy a stock for $660, receive a dividend of $50, and sell it for $630?

It leads to a positive return of 3.03%. Signup and view all the answers

What is the expected return on a US T note purchased at a price of 96.50 with a coupon rate of 2.5%?

6.22% Signup and view all the answers

What is the difference between the interest rates of a 10-year AA bond at 4.25% and a 10-year T bond at 3.70% called?

Credit Default Premium Signup and view all the answers

If Money Supply is increasing by 3% while GDP rises by 3.5%, what can this scenario illustrate?

Restrictive Monetary Policy Signup and view all the answers

Which of the following statements best describes the risk dynamics between shareholders and bondholders?

Shareholders are more dependent on the company’s economic situation than bondholders. Signup and view all the answers

What is the result of a company maintaining a low debt-to-equity ratio?

Enhanced financial stability and investment attractiveness. Signup and view all the answers

What was the net unrealized gain or loss on Apple's largest investment in 2021?

$975M Signup and view all the answers

Which investment experienced the largest decrease in fair value for Apple from 2020 to 2021?

Certificates of deposit and time deposits Signup and view all the answers

What percentage of Apple's total long-term debt in 2021 was fixed rate debt?

98.51% Signup and view all the answers

What was the total change in Apple's portfolio assets based on fair value from 2020 to 2021?

$1,314M decrease Signup and view all the answers

What assumption is Apple making about future interest rates according to Note 7?

Rates will decrease Signup and view all the answers

What is the value of U.S Treasury securities in Apple's 2021 investments?

$22,903M Signup and view all the answers

What was the largest investment in fair value reported by Apple in 2021?

Corporate debt securities Signup and view all the answers

What percentage of Apple's portfolio is made up of STI, Current Marketable Securities?

14.53% Signup and view all the answers

In what way does preferred stock resemble a bond?

It has higher priority than common stock in bankruptcy. Signup and view all the answers

Which characteristic distinguishes preferred stock from common stock?

Preferred stock pays fixed dividends. Signup and view all the answers

Which country has the highest inflation rate as mentioned?

Argentina Signup and view all the answers

What might a slightly inverted yield curve in France suggest?

A possible mild recession next year. Signup and view all the answers

What is the credit spread between Japan and Zambia based on their 10 year yields?

28.974% Signup and view all the answers

Which country is indicated to have a currency struggling for survival?

Argentina Signup and view all the answers

What is a key difference between the dividends paid by preferred stock and bonds?

Bonds pay interest, while preferred stock pays dividends. Signup and view all the answers

Which of the following best describes the market position of preferred stock holders compared to common stock holders?

They have priority over common stock holders. Signup and view all the answers

Study Notes

Market Downturn Characteristics

A market downturn is characterized by falling asset prices, indicating a decrease in investor confidence.
This can be seen in declining stock prices, lower bond yields, and a general sense of pessimism within the market.

Mortgage-Backed Securities

Mortgage-backed securities are a type of bond backed by mortgages, meaning the payments from the underlying mortgages are used to make interest payments and principal repayments to bondholders.
They can be seen as a way to securitize mortgages, making them more liquid and tradable in the financial markets.

Callable Bonds

The issuer, not the bondholder, has the authority to call back a callable bond.
This means the issuer has the right to redeem the bond before its maturity date, usually at a predetermined price.

Bonds and Credit Risk

Bonds that offer a higher yield typically provide the bondholder with more control against credit risk.
A higher yield usually reflects a higher risk associated with the borrower, so investors are compensated for taking on that risk.
This higher yield can be viewed as a form of protection against default by the issuer.

Registered Bonds vs. Bearer Bonds

A distinguishing feature of registered bonds is that the bondholder's name is registered with the issuer, making it traceable for taxation and ownership purposes.
Conversely, bearer bonds, also known as "coupon bonds", do not require registration and allow for anonymous ownership.

Currency's Biggest Enemy

Inflation is considered the biggest enemy of a currency.
This is because rising prices erode the purchasing power of a currency, essentially making it worth less over time.

Monetary Policy for Inflation Control

A contractionary monetary policy is essential to control inflation.
This policy involves raising interest rates, tightening credit conditions, and reducing the money supply.
These measures slow down economic activity and help to curb inflation by lowering demand.

M1 Money Supply Definition

M1 money supply represents the most liquid forms of money, including physical currency (coins and banknotes), demand deposits (checking accounts), and traveler's checks.

U.S. Treasury Securities with Maturity Less Than 1 Year

U.S. Treasury bills are a category of U.S. Treasury securities with a maturity of less than 1 year.
They are essentially short-term debt instruments issued by the U.S. government to finance its operations.

Issuer of Municipal Bonds

State and local governments issue Municipal bonds, also known as "munis".
These bonds are used to fund projects that benefit the public, such as infrastructure, schools, and hospitals.

IPO Meaning

IPO stands for Initial Public Offering.
This is the process by which a private company goes public, offering shares of its stock for sale to the public for the first time.

Primary Securities Market

The primary securities market is the market where new securities are first issued and sold to investors.
This is where companies raise capital by selling their stock or debt instruments directly to the public.

New Securities Registration Requirement

The Securities Act of 1933 requires a detailed prospectus to be filed with the Securities and Exchange Commission (SEC) for the initial registration of new securities.
This prospectus provides investors with essential information about the company and the securities being offered for sale.

Market Capitalization Explained

Market capitalization represents the total market value of a publicly traded company's outstanding shares.
It is calculated by multiplying the company's stock price by the number of outstanding shares.

NYSE vs. NASDAQ Trading

Shares typically trade on the New York Stock Exchange (NYSE) through an auction system, where buyers and sellers compete to determine the best price.
On the other hand, the NASDAQ uses a dealer network system, where market makers facilitate trading.

US Treasury Security Categories

The three categories of US Treasury securities are:
- Treasury Bills (maturity less than 1 year)
- Treasury Notes (maturity between 1 and 10 years)
- Treasury Bonds (maturity over 10 years)

U.S. Interest Rate Setter

The Federal Reserve, also known as the Fed, is the monetary policy authority responsible for setting interest rates in the U.S.
The Fed's decisions on interest rates have a significant impact on the overall economy.

Stock vs. Bond Key Difference

One key difference between stocks and bonds is that stocks represent ownership in a company, while bonds represent a loan to a company or government.
Stockholders are equity owners, while bondholders are creditors.

Euribor Rate explained

The Euribor (Euro Interbank Offered Rate) is a measure of the average interbank lending rate in the Eurozone.
It provides a benchmark for interest rates on various financial instruments, such as loans and deposits.

Corporate Short-Term Borrowing

Commercial paper allows companies to borrow money from other companies short term.
It is considered a form of unsecured debt and is typically used for working capital needs.

Liquidity of M2 Money Supply

The M2 money supply is considered less liquid than M1, as it includes savings deposits, money market mutual funds, and time deposits.
These components require a conversion step to become readily spendable.

Stocks vs. Bonds Risk

Stocks generally considered riskier investments than bonds due to their potential for both higher returns and higher losses.
Stocks have a higher risk because they are tied to a company's performance, which can fluctuate.
Bonds generally offer lower returns, but the risk of losing principal is lower, as they are backed by the issuer's promise to repay the loan.

Federal Reserve's Inflation Target

The Federal Reserve (Fed) has a targeted inflation rate of 2%.
This target rate is believed to be optimal for a healthy economy.

Equity Shareholder Income Potential

Equity shareholders potentially receive income from dividends and capital gains.
Dividends are payments made by a company to its shareholders, while capital gains represent the profit made from selling shares at a higher price than they were bought for.

Company Preference for Stock Issuance

A company might prefer to issue stock rather than bonds when it wants to raise capital without taking on additional debt.
Issuing stock allows the company to sell a portion of its ownership to investors without having to make interest payments on borrowed money.

Higher Return on Investment Significance

A higher return on investment typically indicates a more profitable or successful investment.
However, it's vital to consider the risk associated with a higher return, as higher returns often come with higher risk.

Return on Investment Calculation

In a scenario where you buy a stock for 660,receiveadividendof660, receive a dividend of 660,receiveadividendof50, and sell it for $630, the return on investment would be calculated as follows:
- Total Return: 630(saleprice)+630 (sale price) + 630(saleprice)+50 (dividend) - 660(purchaseprice)=660 (purchase price) = 660(purchaseprice)=20.
- Return on Investment: (20/20 / 20/660) * 100% ≈ 3.03%.

U.S. Treasury Note Return

The expected return on a US T-note purchased at a price of 96.50 with a coupon rate of 2.5% would depend on the maturity date of the bond.
The coupon rate of 2.5% suggests that the bond will pay 2.5% of its face value annually.
However, the purchase price being below par (96.50) means there will be potential capital gains when the bond matures, assuming it stays at par till maturity.

Interest Rate Difference Explained

The difference between the interest rates of a 10-year AA bond at 4.25% and a 10-year T bond at 3.70% is called the "credit spread."
The credit spread reflects the difference in risk perceived between the two investments.
AA-rated bonds are considered safer than T-bonds, so the higher yield on the AA bond is the market's way of compensating investors for taking on the slightly higher risk.

Money Supply and GDP Relationship

When Money Supply is increasing by 3% while GDP rises by 3.5%, this scenario could illustrate a healthy economic environment.
The growth in the money supply could be contributing to the growth in GDP.
This is a good sign because it suggests that the economy is expanding and money is flowing through the system effectively.

Shareholder vs. Bondholder Risk

Shareholders bear more risk than bondholders because their returns are linked to the company's success, while bondholders are guaranteed to receive their interest payments and principal back, providing a level of security.
Shareholders have upside potential but also could face negative consequences if the company does poorly.

Low Debt-to-Equity Ratio Impact

Maintaining a low debt-to-equity ratio often strengthens a company's financial position.
It indicates that the company relies more on equity financing than debt, making it less vulnerable to financial distress.

Apple's Largest Investment Unrealized Gain or Loss

The largest investment by Apple in 2021 was in U.S. Treasury securities which experienced a net unrealized gain in fair value. This indicates that Apple made a profit on this investment.
Specific details of net unrealized gain/loss would be found in the footnotes of their financial statements.

Apple's Largest Investment Decreased Fair Value

The investment with the largest decrease in fair value from 2020 to 2021 for Apple was in its current marketable securities portfolio.
This means that the value of Apple's investments in short-term securities had gone down.
The decrease in fair value could be attributed to a variety of reasons, including market fluctuations or a change in investment strategy.

Percentage of Fixed Rate Debt in Apple's Total Long-Term Debt

The specific percentage of Apple's total long-term debt in 2021 that was fixed rate debt would be found in the footnotes of their financial statements.

Total Change in Apple's Portfolio Assets based on Fair Value

The total change in Apple's portfolio assets based on fair value from 2020 to 2021 can be found in Apple's financial statements.
The change in overall asset value is important for understanding the performance of Apple's investment strategy.

Apple's Assumption About Future Interest Rates

According to Apple's Note 7, the company is making an assumption about future interest rates.
This assumption may be stated in a general way in the disclosure section, like "assumptions about future interest rates are based on current market conditions".
Apple's assumption about future rates helps them to estimate potential gains and losses on their debt investments.

Value of U.S. Treasury Securities in Apple's Investments

The value of U.S. Treasury securities in Apple's 2021 investments would be found in their financial statements, specifically in the section detailing their investment portfolio.

Apple's Largest Investment in Fair Value

The largest investment in fair value reported by Apple in 2021 would be found in their financial reporting.
Look for a breakdown of investment holdings and the corresponding fair value.

Percentage of Apple's Portfolio Made Up of STI, Current Marketable Securities

The percentage of Apple's portfolio that is made up of STI (Short Term Investments), Current Marketable Securities, would be found in their financial statements.
It will be detailed in the section on investment holdings and their breakdown by asset type.

Similarity Between Preferred Stock and Bonds

Preferred stock resembles a bond in terms of its fixed dividend payments.
Like a bond, preferred stock has a set dividend rate, just like a bond's fixed interest payment.

Distinguishing Feature Between Preferred Stock & Common Stock

Preferred stock differs from common stock in terms of voting rights.
Preferred stockholders typically have limited or no voting rights, unlike common stockholders who have the right to vote in company decisions.

Inflation Rates of Various Countries

Information about inflation rates in different countries would be found in economic data reports and statistics released by official sources such as central banks and international organizations.
The text does not provide specifics on inflation rates for specific countries, but you can find this information by researching reliable economic data sources.

Inverted Yield Curve in France

A slightly inverted yield curve in France might suggest that investors believe the French economy is headed for a period of slower growth or even a recession.
An inverted yield curve occurs when short-term interest rates are higher than long-term interest rates, which is typically seen as a potential signal of an economic slowdown.

Credit Spread Between Japan and Zambia

The credit spread between Japan and Zambia based on their 10-year yields reflects the difference in risk associated with holding debt from these two countries.
Zambia generally has a significantly higher credit spread compared to Japan, indicating a much higher risk of default for Zambian debt.
This spread is reflected in the difference between their 10-year yields.

Country with Struggling Currency

The text does not specify any particular country with a currency struggling for survival, and this is not a typical aspect of a general finance topic.
However, many economic indicators and financial reports would be available online to understand which countries might be facing currency instability.

Preferred Stock vs. Bond Dividends

A key difference between the dividends paid by preferred stock and bonds is that preferred stock dividends are not guaranteed.
The dividend payment for preferred stock is decided by the issuing company's board of directors based on company performance and profit, similar to a common stock dividend.
Bond interest payments are typically fixed and contractual, meaning the borrower is obligated to make scheduled payments, regardless of the company's financial performance.

Market Position of Preferred Stockholders

Preferred stockholders generally have a higher claim on company assets and profits than common stockholders.
They are considered to be in a more senior position and are paid their fixed dividends before common stockholders receive any.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz covers essential macroeconomic variables and their impacts on GDP, including the roles of consumption, investment, government spending, and interest rates. It also touches on the sources of funds in securities markets. Test your knowledge of these critical economic concepts and their interrelations.