2007 David K. Linnan

SECURITIES’ TYPES &

BEHAVIORProf David K. Linnan

LAWS #600August 22, 2007

2007 David K. Linnan

CONCEPTS IBACKGROUND FOR TODAY

Be conscious that we are talking on the side of securities, valuations and markets today, so we are talking in effect about “ownership” rather than “management,” any you are doing a budget b-school introduction; EXCEPT when we talk about options behavior and the contest between debt and equity

2007 David K. Linnan

CONCEPTS IISIX CONCEPTS FOR TODAY

1. How different kinds of securities interrelate and behave, constituting capital structure

2. Financial asset concept (stream of payments & certainty)

a. Bonds?b. Stock?c. Derivatives?

3. Discounted present value/terminal value calculations

2007 David K. Linnan

CONCEPTS IIISIX CONCEPTS FOR TODAY (CONT’D)

4. Expectation theory of interest rates/yield curve shows current rates, but they change daily (HIDDEN, BUT

STILL THERE)

5. Market interest rate concept, treasury bills currently ?%, recently ?%, how much one year ago; assume fixed payment stream like bond, can calculate current value based on current conditions

6. Valuing streams of payments/financial assets on present discounted basis using risk-free rate plus (default) premium (AT LEAST FOR 20 YEARS,

$10,000 ANNUALLY AT TREASURIES PLUS 1%)

2007 David K. Linnan

PAYMENT STREAM IANSWER ON 20 YEARS OF $10,000 PER YEAR STRUCTURED

SETTLEMENT AT TREASURIES PLUS 100 BASIS POINTS

1. Assume $10,000 today and 19 years of discounted payments (paid at end of year)2. Using 08/21/07 treasury rates from US Treasury at

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.htmlwith a bit of interpolation, equals…

$116,007.20 (my simplest calculation)

3. Annuity interpolated at 10 year rate plus 100 basis points equals

roughly $120,000

2007 David K. Linnan

PAYMENT STREAM IIANSWER ON 20 YEARS OF $10,000 PER YEAR

STRUCTURED SETTLEMENT AT TREASURIES PLUS 100 BASIS POINTS

$116,007.20

Why not $200,000?

What about Tobacco settlements?

What about contingency recoveries?

2007 David K. Linnan

SECURITIES TYPES ICommon Stock

Preferred Stock

(liquidation pref & possible dividend)

LOOK AT SAMPLE MIDTERM FOR ARTICLES OF INCORP

2007 David K. Linnan

SECURITIES TYPES IIDebt

Look at credit ratings for default risk, etc., security

Options & Warrants

Look at behavior question on leveraging