Securities with fixed income

For securities with fixed income include a group of financial instruments, yielding a periodic income at a fixed rate. For some of these securities rate of return is guaranteed and stipulated in the contract to purchase, on the other – income is stipulated, but not guaranteed. These papers are due to the property to bring a fixed income, usually are especially popular during periods of high rates of loan interest, as, for example, in the 70’s and 80’s.The main types of securities with fixed income – bonds, preference shares and convertible or reversible, the action [2. 171-185p.].

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Bonds – Debt instruments are corporations and governments. The owner receives revenue bonds at a predetermined rate, which is usually paid every six months, plus a nominal value of bonds (say, 1000 dollars) at the time of maturity (usually 20 or 40 years). If you bought a bond for $ 1000 with payment of 9% per annum every six months, you’ll receive $ 45 every six months (1 / 2 years x 9% x $ 1000) and by the time of maturity you will receive 1000 dollars . as the bond’s face value. Of course, an investor can buy and sell bonds before maturity at a rate which will differ from face value.With multiple combinations of risk and return these papers as popular among investors, as well as equities.

As well as ordinary shares, preference shares give the title to the share capital of the corporation. In contrast to the ordinary shares of Preferred bring pre-specified income as dividends that are paid to the need of how to pay dividends to holders of ordinary shares of the same corporation. In preferred shares no set maturity date. Typically, investors buy them for their dividends, but it can also get foreign exchange revenues [1. 583-624 p.].

Convertible securities – a special type of fixed income securities, which investors are allowed to exchange a certain number of ordinary shares of the same issuer. Convertible bonds and convertible preferred stock – are financial instruments attractive to investors because they combine a fixed income with the potential to obtain foreign exchange earnings, typical for ordinary shares.

Option (option) is called a contract concluded between two persons whereby one person gives another person the right to buy a certain asset at a specified price within a certain period of time or provide a right to sell a specific asset at a specified price within a certain period of time. The essence of the call option is that it is one of the parties (the buyer of an option) may, at its discretion either fulfill the contract or refuse to follow it.

Obtained for the right to choose the option buyer pays the seller a certain fee, called a premium. The option seller must fulfill its contractual obligations, if the buyer (holder) of an option decides to execute option contract. The buyer can sell / buy the underlying asset of an option contract only for the price, which is fixed in the contract and called the strike price. In terms of deadlines, options are divided into two types: American and European. A European option can be exercised only on the day of expiry of the contract. American – on any day prior to the expiration of the contract.

There are two main types of options – it is a call option and a put. Currently, such contracts are traded in many exchanges of the world, as well as outside the exchanges. Call option gives the buyer the option to buy the underlying asset from the seller of the option exercise price in a timely manner, or abandon the purchase. Investor purchases a call option if the expected increase in market value of the underlying asset. The most famous option contract – this call option “(call option) in shares. In option contracts stipulated the following points: the company whose shares can be bought, the number of shares to be acquired, the purchase price of shares, called the strike price (exercise price), or the price of “strike”, the expiration date of the contract (expiration date) [7. 317-322 p.].

Potential buyer of an option assumes that the stock price will rise considerably to the date of expiration of the contract. Potential option seller thinks the contrary, that the spot price of shares rises above the price it will be fixed in options contracts. By signing the contract, the option seller is at risk if the buyer has insured. The risk for the seller is that the stock price can rise over time. And then the seller will be forced to buy shares at a higher price and sell them to the buyer the option at a lower specified in the contract price. That is, the seller can lose their money. Accordingly, the seller has agreed to sign a contract, the buyer a call option must pay him a certain amount, called the premium (premium), or the option price.

The prize consists of two components: intrinsic value and time value.Intrinsic value – the difference between the current price of the underlying asset and the price of the option. Time value – the difference between the amount of premium and intrinsic value. Put option (put option) – entitles the buyer of the option to sell the underlying asset at the exercise price in a timely manner or seller of the option to refuse the sale. Buyer purchases a put option, if you expect the fall in market value of the underlying asset. The maximum loss for the buyer of a put option only premium amount paid, the payout can be great if the spot price of the underlying asset will fall heavily [2. 171-185p.].

As for the case with call options, the outcome of the transaction for the seller put option opposite. Its maximum gain is equal to the premium in case of default option. Loss could be significant if the rate of the underlying asset will fall heavily. The option can be covered, if the seller reserves the option writing out the amount of money sufficient to purchase the underlying asset.As a seller, and the option buyer may try to sell the contract to another person. If they succeed in this, it will be deemed to be “closed” (or “liquidated”, “Unleashed”), their positions and no longer participate in the option contracts. And their position on the contract is now occupied by third parties.

With options investors can generate a variety of strategies. The simplest of them – buying or selling a call option or a put. If an investor expects a significant change in the price of the underlying asset, but not sure in which direction it happens, it is advisable to buy a call option and put option [1.583-624 p.]. When an investor buys a call option (put) with a lower strike price and sells a call option (put) with a higher strike price, then it creates a strategy that is called a bull spread. Contributor will receive a small prize for the growth in the market value of the underlying asset, but his potential losses will also be small. If the investor buys a call option (put) with a higher strike price and sell a call option (put) with a lower strike price, then it will generate a bear spread.

Theoretically, options strategies offer investors a wide field for maneuvering, but in practice the possibility of different exercises is limited by the fact that most of the stock options are American, that does not give the ability to accurately determine the results of operations. The main task that must be addressed investor – this is the definition of option price. Two of the most well-known model for determining awards of options – a Black-Scholes model and binomial model (BOPM) Cox, Ross and Rubinstein.