Preferred Stock Why Is Preferred Stocks Preferred - Coursework Example

Preferred Stock – Why Is Preferred Stocks Preferred? Public corporations have two types of stocks which are common and preferred stocks. Common stocks are the most widely trafficked type of stocks. Preferred stocks are less available in the marketplace. Preferred stocks provide investors with many advantages that common stocks don’t offer. One of the benefits of preferred stocks is that they pay a guaranteed dividend to the stockholders. Common stocks on the other hand pay dividend only if the board of directors declares it. Another advantage of preferred stocks is in case of a bankruptcy preferred stock holders receive compensation in the liquidation prior to common stock holders. A disadvantage of preferred stocks is that they do not have voting rights. 4. Yields – The current yield on a bond is the coupon rate divided by the price. Thus it is very similar to what reported for common stocks and preferred stocks. Yes the yield on bonds and dividend yield formulas for common and preferred stocks are very similar to each other. 8. Futures vs. Options – What is the difference between a future contract and an option contract? Do the buyer of a future contract and an option contract have the same rights? What about the seller. The difference between an option contract and a future contract can be found in the obligation each financial instrument puts on the buyers and sellers. An option contract gives the buyer the right to buy or sell the asset at a specific price during the life of the contract. The owner of an option is not obligated to exercise the option to buy or sell. A future contract give the buyer the obligation to purchase the asset or the seller the obligation to purchase the asset or the seller the obligation to sell the asset at a future date. Another difference between options and future is that future can be bought with no up-front fees, while options require the payment of a premium. A third difference between the two instruments is that futures typically deal with large sums of money in comparison with options. A difference that occurs during the sales of option and futures lies in the timing. Both are obligated to sell, but in futures the date of sale is unknown. Futures are considered a more risky investment. Questions and Problems 5. Bonds – You purchased 3000 bonds with a par value of $1000 for $940. The bonds have a coupon rate of 8.4% paid semiannually, and mature in 10 years. How much will you receive on the next coupon date? How much will you receive when the bonds mature? Each bond pays the following coupon rate 1000 x .084 = $84. The coupon rate is paid semiannually, thus each coupon payment is worth $42. Since the owner of the bonds has 3000 bonds you multiply $42 x 3000 = $126,000. This is the amount the owner of the bonds will receive on the next coupon data. Once the bonds expire the owner will receive equals 3,126,000 [(3000 x $1000)+126000] 6. Future Profits – The contract size for platinum futures is 50 troy ounces. Suppose you need 700 troy ounces of platinum and the current futures price is $1530 per ounce. How many contracts do you need to purchase? How much you pay for the platinum? What is you dollar profit if platinum sells for $1595 a troy ounce when the future contract expires? What if the price is $1493 at expiration? You need to buy 14 contracts (700 / 50). The contract price is (14*50*$1530) = $602,000. The dollar profit if platinum sells for $1595 at expiration is $45,500 [(1595-1530) x 700]. If the platinum sells for $1493 an ounce the investor will have a loss of $25,900 [(1497-1530) x 700]. Read More