1) NYSE

(meaning, process)

1) the basic notion that a dollar received today is worth more than a dollar received at some future date.

2) The time value of money concept can be used to convert cash flows earned over an investment horizon into a value at the end of the investment horizon. This is called the investment's....FUTURE VALUE..... and is the same as that in the compounded rate of return example.

1) converts cash flows received over a future investment horizon into an equivalent (present) value as if they were received at the beginning of the current investment horizon.

2)This is done by discounting future cash flows back to the present using the current market interest rate.

1) ~ INFLATION.....the continual increase in price of a basket of goods & services

2) ~ DEFAULT RISK.....risk that a security issuer will default on the security by missing an interest or principal payment

3) ~ LIQUIDITY RISK.....risk that a security cannot be sold at an

4)~TIME TO MATURITY.....length of time a security has until it matures

1) ~ YIELD CURVE ON U S TREASURY

1) ~ bonds are basically fancy IOU's

2) ~ corporations and governments issue Bonds (borrow money ) to fund their day - to - day operations

3) ~ when you buy a bond, you are loaning money for a certain amount of time....whether G E or UNCLE SAM

4) ~ in return, bondholders get back loan amount plus interest

5) ~ coupon is the interest rate on the bond

6) ~ face value of one bond is $1,000

7) ~ maturity is the month / day / year it matures 8) ~ interest payments are semi-annual

BOND PRICE MOVEMENT

1.  
   1. ~ Bond prices move inversely to interest rates / yields.
   2. When interest rates fall, bond prices rise...and vice versa.
   3. If you hold a bond to maturity, price fluctuations & interest rate fluctuations don't matter.
   4. You will receive the original face value of the bond, along with all semi-annual interest payments you expect.

BONDS

1) A BOND IS A LOAN.........and you are the lender. 2) Who's the borrower?........typically, either U S government.......a state or a local municipality......or a large corporation like Home Depot or Coca Cola.

4) BOND SPEAK:

Face Value?

Maturity Date?

Coupon?

1. ...... When a bond is issued......the amount you pay is known as FACE VALUE.
2. Once you buy it, the issuer promises to pay you back on a particular day.....MATURITY DATE.....at a predetermined interest rate.....COUPON.
3. If you purchase one bond...face value is $1,000 .....with a 4% coupon and a 10 year maturity......you would collect interest payments totaling $40.....semi annually......in each of those 10 years......and when the decade is up......you get your $1,000 back.

7) FACE VALUE - PAR VALUE

1. ONE BOND IS $1,000 WORTH OF SECURITIES.
2. ONE BOND AT A 4% INTEREST RATE OR COUPON RATE PROVIDES $40 IN ANNUAL CASH FLOW.
3. 100M BONDS IS $100,000 WORTH OF SECURITIES. 100M BONDS AT A 4% INTEREST / COUPON RATE GENERATES $4,000 IN ANNUAL CASH FLOW.
4. MATURITY BONDS HAVE SEMI-ANNUAL PAYMENT PERIODS WITH A PREDETERMINED FINAL MATURITY

1) BOND

1. BONDS THAT TRADE AT 100% OF THEIR FACE VALUE....OR 100 CENTS ON THE DOLLAR.
2. WITH PAR BEING 100.....PREMIUM IS ABOVE PAR; DISCOUNT IS BELOW PAR.

1. BONDS THAT DO NOT PAY COUPON INTEREST.
2. THE RETURN IS A HIGHER LUMP SUM PAYMENT RECEIVED BY THE BOND HOLDER UPON MATURITY OR SALE OF BOND.
3. WITH FACE VALUE SET AT $1,000 PER BOND, THE PURCHASE PRICE IS GENERALLY SET AT A SIGNIFICANT DISCOUNT TO PAR.

1) INITIAL INVESTMENT RECOVERY PERIOD.

BASICALLY THE AVERAGE LIFE IN A CASH FLOW SENSE THAT INCORPORATES THE ARRIVAL OF THE CASH FLOWS WITH THE ASSETS MATURITY DATE.

2)THE TIME IT TAKES TO RECOVER THE INITIAL INVESTMENT...TAKING INTO CONSIDERATION THE COUPON, THE MATURITY, AND THE TIMING AND RE-INVESTMENT OF THAT INVESTMENT AND AT WHAT RATE.

1) SHORT TERM DEBT INSTRUMENTS ISSUED WITH AN ORIGINAL MATURITY OF ONE YEAR OR LESS

2) GENERALLY SOLD IN LARGE DENOMINATIONS -TYPICALLY MILLIONS / BILLIONS

3) USUALLY LOW DEFAULT RISK....GENERALLY ISSUED BY HIGH-QUALITY BORROWERS

4) .....NOT ALWAYS SECURED

5) ~ ORIGINAL MATURITY OF ONE YEAR....

6) ~ THE LONGER THE MATURITY....THE GREATER THE RISK.....THE HIGHER THE REQUIRED RATE OF RETURN MONEY MARKETS ARE MARKETS THAT TRADE DEBT SECURITIES / INSTRUMENTS WITH ORIGINAL MATURITIES OF ONE YEAR OR LESS. THE NEED FOR MONEY MARKETS ARISES AS CASH RECEIPTS DO NOT ALWAYS COINCIDE WITH CASH EXPENDITURES AND VICE VERSA.

BECAUSE HOLDING CASH INVOLVES AN OPPORTUNITY COST, HOLDERS OF EXCESS CASH INVEST THESE FUNDS IN MONEY MARKET SECURITIES.

1) - TREASURY BILLS

......EXAMPLES OF MONEY MARKET FUNDS

SHORT -TERM OBLIGATIONS ISSUED BY THE U.S. GOVERNMENT

....3 MONTH

.....6 MONTH

.....ONE YEAR.

GUARANTEED BY U S GOVERNMENT

EXAMPLES OF MONEY MARKET FUNDS.....

SHORT-TERM FUNDS TRANSFERRED BETWEEN FINANCIAL INSTITUTIONS.....USUALLY OVERNIGHT.....RARELY FOR MORE THAN A DAY

EXAMPLES OF MONEY MARKET FUNDS

.....REPO

S.....AGREEMENTS INVOLVING THE SALE OF SECURITIES BY ONE PARTY TO ANOTHER WITH A PROMISE TO REPURCHASE THE SECURITIES AT A SPECIFIED DATE AND PRICE.

EXAMPLES OF MONEY MARKET FUNDS

.....SHORT-TERM, UNSECURED PROMISSORY NOTES ISSUED BY A COMPANY TO RAISE SHORT-TERM CASH

EXAMPLES OF MONEY MARKET FUNDS

.....CD'S.....BANK-ISSUED TIME DEPOSITS, AGAIN UNSECURED, THAT SPECIFIES A PRICE AND DATE

EXAMPLES OF MONEY MARKET FUNDS.....

TIME DRAFTS PAYABLE TO A SELLER OF GOODS, WITH PAYMENT GUARANTEED BY A BANK

....SIMILAR TO CASHIER'S CHECK

LONDON INTERBANK OFFERED RATE

LIBOR

1) THE INTEREST RATE AT WHICH BANKS OFFER TO LEND UNSECURED FUNDS TO OTHER BANKS IN THE LONDON MONEY MARKET.

2) THESE FUNDS TRADED IN THE EURODOLLAR MARKET ARE OFTEN USED AS AN ALTERNATIVE TO FED FUNDS AS A SOURCE OF OVERNIGHT FUNDING FOR BANKS

COMMON STOCK

fundamental ownership claim in a public corporation. commonly referred to as equity participation. 

Characteristics include:

1) discretionary (up to the corporation) dividend payments;

2) voting rights;

3) residual claims.....lowest on TOTEM POLE;

4) limited liability

In event of bankruptcy.....

1) bank debt and first mortgage bondholders have first claim....

2) followed by any accounts payable....

3) then preferred stock holder......

4) then equity stockholder

THE ORIGINATOR

or LEAD INVESTMENT BANK.

......from decision to issue....

1) registration statement.....

2) red herring prospectus.....

3) SEC requests for additional info.....

4) final or official prospectus issued.....

5) stock issued to Public

1).....formal application and submission of info to SEC.......

carefully prepared set of documents, including a prospectus, which is filed with the SEC prior to an IPO.

Extremely lengthy and complex

.....allows firm to offer multiple issues over a two year period....

submit one registration statement summarizing the firm's financing plans for the period .

~ Act of 1933 requires the preparation of shorter and easier to understand document

1) .....a preliminary version of the prospectus, distributed to potential buyers prior to the security's registration......provides investors with description of company's business, financial statements, info on officers & directors, detailed info re compensation, litigation, other material information

2) RED HERRING originates from tradition in Britain.....young hunting dogs were trained to follow a scent by dragging pungent fish like herring across the trail. Opportunity for investors to review if something is fishy......

3) ~ RED HERRING is preliminary disclosure statement....printed in RED INK ON FRONT COVER.....explicitly states that the issuing company is not trying to convince / coerce purchase of securities. INFORMATIONALLY ONLY. If you smell something FISHY.....CAVEAT EMPTOR

.....annual report required by SEC....

provides a comprehensive summary of public company's performance

....including AUDITED financial statements

.....quarterly reports filed with SEC.

....similar info to 10 K.

'

....generally unaudited

1. ..... a voting ballot sent by a public corporation to its shareholders........
2. statement required of a U S public firm.....
3. typically mailed.....
4. solicitation of shareholders vote on issues like Directors, executive compensation, etc. Authorizes company to vote on their behalf.

1) NYSE

2) NASDAQ

3) AMEX

..... STOCK EXCHANGE trading process.....

 

1) all transactions on the NYSE occur at a specific place on the floor called a **trading post**.

 

2) Every stock is assigned **a market maker or specialist** with responsibility to maintain *stability and liquidity*.

1) .....blue chip stock market index

2) .....30 major companies on the Frankfurt Stock Exchange

.....stock market index of the **225** largest companies

traded on the *Tokyo Stock exchange*

CORE EQUITY CAPITAL/TOT RSKWT'D ASSETS

(total of all assets held by bank weigted for credit) 

Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It consists of the types of financial capital considered the most reliable and liquid, primarily Shareholders' equity.

Examples of Tier 1 capital are common stock, preferred stock that is irredeemable and non-cumulative, and retained earnings.

includes items such as undisclosed reserves, general loss reserves, subordinated term debt, and more.

(a measure of a bank's financial strength with regard to the second most reliable form of financial capital, from a regulator's point of view).

The forms of banking capital were largely standardised in the Basel I accord, issued by the Basel Committee on Banking Supervision and left untouched by the Basel II accord.

Henry M. Paulson, Jr. [image]

1. President George W. Bush nominated him  to be the 74th Secretary of the Treasury on June 19, 2006. As Treasury Secretary, Paulson is the President's leading policy advisor on a broad range of domestic and international economic issues.
2. The United States Senate unanimously confirmed Paulson to the position on June 28, 2006 and he was sworn into office on July 10, 2006 by Supreme Court Chief Justice John Roberts.

Before coming to Treasury, Paulson was Chairman and Chief Executive Officer of Goldman Sachs since the firm’s initial public offering in 1999. He joined Goldman Sachs Chicago Office in 1974

Prior to joining Goldman Sachs, Paulson was a member of the White House Domestic Council, serving as Staff Assistant to the President from 1972 to 1973, and as Staff Assistant to the Assistant Secretary of Defense at the Pentagon from 1970 to 1972.

Paulson graduated from Dartmouth in 1968, where he majored in English, was a member of Phi Beta Kappa, and an All Ivy, All East football player. He received an M.B.A. from Harvard in 1970.

Bernanke[image]

14th Chairman of the Board of Governors of the Federal Reserve

Assumed office February 1, 2006

Preceded by Alan Greenspan

 (age 54) Augusta, Georgia Alma mater B.A. Economics, Harvard College Ph.D. Economics, MIT On March 16, 2008, JP Morgan Chase announced the acquisition of Wall Street investment bank Bear Stearns Inc. The purchase was controversial, due to the unprecedented involvement of Federal Reserve System. Chase paid a very low $ 236M , but shortly after the deal was announced, the Fed confirmed that in a complex package of debt securitization agreements, they were underwriting the deal for around $30 B

recession

inflation

The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index.

Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won't be able to purchase as much with that dollar as he/she previously could.

While the annual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero inflation to 23% inflation, the Fed actively tries to maintain a specific rate of inflation, which is usually 2-3% but can vary depending on circumstances.

opposite of deflation

a fund which borrows money by issuing short-term securities at low interest and then lends that money by buying long-term securities at higher interest, making a profit for investors from the difference.

SIVs are a type of structured credit product; they are usually from $1bn to $30bn in size and invest in a range of asset-backed securities, as well as some financial corporate bonds.

A SIV has an open-ended (or evergreen) structure; it plans to stay in business indefinitely by buying new assets as the old ones mature, and the SIV manager is allowed to exchange investments without providing investors transparency / the ability to look through to the structure.

The risk that arises from the transaction is twofold. 1) the solvency of the SIV may be at risk if the value of the long-term security that the SIV has bought falls below that of the short-term securities that the SIV has sold. 2) there is a liquidity risk, as the SIV borrows short term and invests long term; i.e., outpayments become due before the inpayments are due. Unless the borrower can refinance short-term at favorable rates, he may be forced to sell the asset into a depressed market.

Definition: Leveraged buyouts are essentially takeovers that involve using lots of borrowed money.  These were made famous in the 1980's when corporate raiders would issue junk bonds, buy a conglomerate that was mismanaged, and sell of its parts.

Advice: LBO's can make money in two ways:

1.) Buy the company and sell off its pieces, then repay the debts.  If the value of the pieces is greater than the business as a whole, the buyer makes a profit.
2.) Buy the company and manage it more efficiently.  As long as the company can be managed so that it generates enough cash flow to pay the interest on bonds, the buyer will profit.                     

Hedge Funds

Definition: A fund allowed to use a number of strategies to make money.  Because they'rerestricted on the number of people that can invest in them, they typically require that you invest at least $250,000.  They pride themselves on being able to make money when the stock market drops.  However, some  are very risky.

TeenAnalyst Advice: Hedge funds come in all different types of flavors: market neutral, currency, interest rates, short funds, special situations, and mergers and acquisitions.
They don't face the same regulations so they can use advanced investing techniques, as well as futures and options, to achieve higher rates of returns.

This type offund makes money by taking the first 20% of the profits.  If it has a couple bad years in a row, the company won't be making any money.  That's why few survive two or three consecutive bad years.

Fixed-income securities can be contrasted with variable return securities such as stocks.

To understand the difference between stocks and bonds, you have to understand a company's motivation. A company wants to raise money, and it doesn't want to wait until it has earned enough through ongoing operations (selling products or providing services). In order for a company to grow as a business, it often must raise money; to finance an acquisition, buy equipment or land or invest in new product development. Investors will only give money to the company if they believe that they will be given something in return commensurate with the risk profile of the company. The company can either pledge a part of itself, by giving equity in the company (stock), or the company can give a promise to pay regular interest and repay principal on the loan (bond) (bank loan) or (preferred stock).

• The principal of a bond is the amount that is being lent.
• The coupon is the interest that will be paid.
• The maturity is the end of the bond, the date that the amount must be returned.
• The issuer is the entity (company or govt.) who is borrowing the money (issuing the bond) and paying the interest (the coupon).
• The issue is another term for the bond itself.
• The indenture is the contract that states all of the terms of the bond.

People who invest in fixed-income securities are typically looking for a constant and secure return on their investment.

• inflationary risk
• interest rate risk
• currency risk
• default risk
• repayment of principal risk
• reinvestment risk
• liquidity risk
• maturity risk
• streaming income payment risk
• duration risk
• convexity risk
• credit quality risk
• political risk
• tax adjustment risk
• market risk

Similar to bond but securitization condictions are unsecured in case of bankrups, considered creditors, but no voting rights. 

defined as a certificate of acceptance of loans which is given under the company's stamp and it carries an undertaking that the debenture holder will get a fixed return(fixed on the basis of interest rates)and the principle amount whenever it matures. In finance, it's a long-term debt instrument used by governments and large companies to obtain funds. It is similar to a bond except the securitization conditions are different. usually unsecured in the sense that there are no liens or pledges on specific assets. It is, however, secured by all properties not otherwise pledged. In the case of bankruptcy holders are considered general creditors.

The advantage to the issuer is they leave specific assets burden free, and thereby leave them open for subsequent financing. generally freely transferrable by the holder. Holders have no voting rights and the interest given to them is a charge against profit.

P/E Ratio

A valuation ratio of a company's current share price compared to its per-share earnings

 Calculated as:

[image]

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.
 
The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of  current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

EPS

NET INCOME - DIVIDENDS ON PREFERRED STOCK / AVG OUTSTANDING SHARES

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability. 

Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. 
 

Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures. 
 

In the EPS calculation, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

NET INCOME

Often referred to as "the bottom line" since net income is listed at the bottom of the income statement. In the U.K., net income is known as "profit attributable to shareholders".

1. A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share. 
  
 1. Net income is calculated by starting with a company's total revenue. From this, the cost of sales, along with any other expenses that the company incurred during the period, is removed to reach earnings before tax. Tax is deducted from this amount to reach the net income number. Net income, like other accounting measures, is susceptible to manipulation through such things as aggressive revenue recognition or by hiding expenses. When basing an investment decision on net income numbers, it is important to review the quality of the numbers that were used to arrive at this value.

Fixed Income Securities:

Factors Affecting Pricing

1. Use of Proceeds
2. Term/Maturity
3. Payment Schedule
4. Coupon / Interest Rate
5. Collateral / Securitization
6. Capital Structure
7. Credit Rating
8. Restrictions / Covenants

Fixed Income Securities:

Factors Affecting Pricing:

Use of Proceeds

~HOW ARE FUNDS GOING TO BE DEPLOYED

Fixed Income Securities:

Factors Affecting Pricing:

Use of Proceeds:

Positive Uses

• USED TO REPAY PORTION OF CP, CD, BA
• PAYDOWN EXISTING BANK FACILITIES
• GENERAL CORPORATE PURPOSES
• ADVANCE SERVICE CAPABILITIES
• INCREASE CAP EX
• CONSOLIDATE OPERATING EFFICIENCIES

Fixed Income Securities:

Factors Affecting Pricing:

Use of Proceeds:

Negative Uses

• Leverage Balance Sheet as Much as Possible
• Invest in Non-Related Business
• Explore Global Opportunities that have no Strategic Advantages

Fixed Income Securities:

Factors Affecting Pricing:

Term/Maturity

-DEFINE THE TERM.....HOW LONG DO YOU NEED THE LOAN

Fixed Income Securities:

Factors Affecting Pricing:

Term/Maturity:

Factors that Will Impact Term/Maturity

• Credit Profile
• Earning History
• Yield Curve
• Pro Forma Cash Flow Projections
• Risks in Current Financial Markets
• REdemption Features
• Callable vs. Non-Callable

Fixed Income Securities:

Factors Affecting Pricing:

Coupon/Interest Rate

• Interest Charge Per Annun
• Payable Every 6 Months...Semi-Annually
• Spread to Comparable U.S. Treasury
• Yield Spread

Fixed Income Securities:

Factors Affecting Pricing:

Coupon/Interest Rate:

Yield Spread - Differential is Based Upon

• Credit Risk
• Liquidity
• Technicals in Market Place
• Fundamentals in Market Place
• Overall Economy - US & Global
• Any Global Issues
• Size of Deal

• Assets Pledged for Security
• First Mortgage
• General Obligation
• Secured Vs. Unsecured
• Subordinated vs Unsubordinated

Fixed Income Securities:

Factors Affecting Pricing:

Capital Structure

• Balance Sheet Ramifications
• Identify & Align This debt to current pecking order
• Establish How much leverage
• Ability to service Debt
• Short term vs Long term

Fixed Income Securities:

Factors Affecting Pricing:

Credit Rating

• Credit Worthy
• Due Dilegence
• Professional Rating Services
  • Moody's, Standards & Poors, Duff & Phelps, Fitch, Keefe, Bruyette & Woods
• Define Outstanding Judgements
• Related Risks

Fixed Income Securities:

Factors Affecting Pricing:

Restrictions/Covenants

• Limitations & Provisions Placed Upon the Issuer
• Identure Statement - Legal Contract
• Charter of Commitment

Fixed Income Securities:

Factors Affecting Pricing:

Restrictions/Covenants:

Examples of Restrictions

• Lock Box Arrangement
• Liens Against Secured Assets
• Concept Similar to Garnishment of Wages
• Coupon Reset
• Change of Control
• Poison Pill

Dollar General:

Private Equity TakeOut:

Stock Price before Take Out

Dollar General:

Private Equity TakeOut:

EPS

P/E

EPS - $1.30 Per Share

P/E - 13 (comp discounters were at 20 multiple)

Dollar General:

Private Equity TakeOut:

Negligible Debt

CAGR

Negligible Debt - $200 Million

CAGR - 12-15% over 7 years

Dollar General:

Private Equity TakeOut:

CAGR

$30-$32 a share is

7-10 year period

@ a conservative 10% CAGR

Dollar General:

Private Equity TakeOut:

Shares Outstanding

& Market Cap

1.  
   1. 341 million shares outstanding;
   2. market price of $17 a share;
   3. Market Cap of $5.8 billion

Dollar General:

Private Equity TakeOut:

Speaker

Dollar General:

Private Equity TakeOut:

Dollar General:

Private Equity TakeOut:

How did KKR Raise The Money

~ KKR & GS...... $1.0 Billion

Dollar General:

Private Equity TakeOut:

2 20 Rule for Private Equity Firms

• On the Front End they charge a 2% fee for transactions (taxed as capital gain)

• On the Back End they receive a 20% return on their investment and they get the first 20%

ROE

1. Housing Deflation
2. Illiquid Tech bubble
3. Recession 9/11
4. Interest Rated down/leverage Up
5. New methods of capital formation: Structured Products