CHAPTER 6

CAPITAL MARKET INSTRUMENTS

C.M INSTURUMENTS (SECURITIES)

Negotiable instruments that represent ownership: Equity instruments such as C.S.

Negotiable instruments that denote indebtness: Debt (fixed income) securities such as bills, notes and bonds.

PREFERRED STOCKS

They are issued in international markets representing ownership and carrying some privileges:– The right to be paid dividends before the common

stockholders– The right to receive a specific amount in the form

of dividends each year.

PREFERRED STOCKS cont.

Different from C.S. In a way that their cash dividends are certain (guaranteed) and they do not increase as earnings rise.

The are callable unilaterally: they have a redemption feature.

COMMON STOCKS

Holders of the common stock are the actual owners of the issuing corporation.

If you have stocks, you have the right of the companies earnings depending on your proportional share after the interest paid on bonds and dividends paid on preferred stock.

RIGHTS THAT ARE PROVIDED BY THE C.S

Receiving dividend Voting right Pre-emptive right: subscribing to capital

increases Receiving proportionate share from

dissolution if any Receiving information about the corporation

RECEIVING DIVIDEND

Stockholders do not have a contractual right to receive dividends regularly. They can just expect that the dividends are to be declared and paid. Board of directors declare the dividends.

Cash dividends- stock dividends.

VOTING RIGHTS

Shareholders can elect the board of directors and vote on major business issues. By this way they can control the corp.

PRE-EMPTIVE RIGHTS

It enables the existing shareholders to buy new issues of C.S. At a price below their market value during a specified time period.

They can maintain their proportionate share in the total outstanding shares.

DUITIES AND RESPONSIBILITIES OF THE STOCKHOLDERS

They must honor their capital subscription payment promises when appealed by the board of directors. If delayed, they become liable for interest and punitive payments.

Their liabilities are confined to their subscriptions only.

STOCKS ARE EITHER BE LISTED OR UNLISTED

* LISTED STOCKS ARE TRADED ON ONE OF THE ORGANIZEDSECURITIES EXCHANGES

* UNLISTED STOCKS ARE TRADED ON OTC MARKETS

PRICES OF COMMON STOCKS

Nominal (par) value: face value of the stock Issuance value: it is the value of the common stock

which is calculated by utilizing the discounted cash flows technique by some experts. It can not be lower than its nominal value according to the C.M. Law.

Market value: it is the price at which the stock is traded.

VALUATION OF STOCKS

PRICE/EARNINGS RATIO DIVIDEND YIELD PRICE/BOOK VALUE

THEY GIVE IDEA WHETHER A STOCK IS OVERVALUED OR UNDERVALUED

VALUATION OF STOCKS cont.

If the P/E ratio and P/B ratio of a firm below than the industry average and dividend yield is higher than the ind. ave. The stock may be seem as undervalued, it may be good to buy it however the other data have to be considered.

OTHER CONSIDERATIONS ON STOCKS

BLUE-CHIP COMPANIES LARGE-CAP CAMPANIES EMERGING GROWTH STOCKS VALUE STOCKS FOREIGN STOCKS

ASSIGNMENT OF OWNERSHIP

THERE ARE TWO TYPES OF OWNERSHIP; BEARER SHARES NAME SHARES

FOR THE BEARER SHARES

Delivery is adequate for the transfer of ownership.

Transfers of these shares need not be informed to the corporation.

TO THE NAME SHARES

Can be transferred to the third parties by endorsement and delivery.

The process has to be entered into the company ledgers.

TYPES OF THE C.S

Hamiline ve nama yazılı (bearer shares – name shares)

Adi ve imtiyazlı (common and preferred shares)

Bedelli –bedelsiz (scrip issues) Primli-primsiz (shares with premıum or not) Kurucu-intifa

DERIVATIVES OF THE EQUITY INSTRUMENTS

1. Profit and Loss Sharing Certificates (Kar Ve Zarar Ortaklığı Belgeleri)

2. Participation Dividend Certificates (Katılma İntifa Senedi)

3. Non-voting Shares (Oydan Yoksun Hisse Senedi)

1. PROFIT AND LOSS SHARING CERTIFICATES

Companies issue them in order to meet their financial needs.

They can be put to sales in or out of Turkey. They have a maturity of 3 months- 7 years.

The longest maturity for them is 15 years. If they are issued by “Special Finance Corporations” the max. Maturity is 2 years.

1. PROFIT AND LOSS SHARING CERTIFICATES cont.

Issued with longer than 2 year maturity, have got to be issued on exchange.

Can not be issued with coupon, no profit guarantee. If there is loss they have to contribute to the loss.

1. PROFIT AND LOSS SHARING CERTIFICATES cont.

They provide the participation of profit and loss but they are not recognize as common stocks since they have a maturity and no voting rights.

Also they can not be recognized as income bonds since it requires to participate loss if any.

1. PROFIT AND LOSS SHARING CERTIFICATES cont.

Investors can get principal and dividend at the end of the maturity.

They can be sold either directly by the issuer or through securities dealers.

They must be registered by the CMB.

2. PARTICIPATION DIVIDEND CERTIFICATES

Issued for cash, not represent a specific capital. Provide

– Dividend payment, – Dispolution payment if any, – Pre-emptive right.

Not provide – Voting rights (ownership rights),– Involment into management .

2. PARTICIPATION DIVIDEND CERTIFICATES

Can be put to sales in or out of Turkey. Overseas sales require approval of the ministry of finance.

Issue limit is max. Net worth of the issuer. Min issue can be one-sixth of net-worth.

They can be issued infinitely in accordance to the decision of the board of company.

3. NON-VOTING SHARES

They are like the ordinary shares, however they do not provide voting rights. Holders of them benefit from dividend payments and dissolution payments if any.

If not authorized by the articles of association, non-voting shares cannot be issued.

3. NON-VOTING SHARES cont.

They have to be in the name, not to the bearer.

In the event of;– No dividend distributed for 3 successive years– No dividend is distributed for the year while any

permission is given by regulations.

Non-voting shares automatically transform to voting shares

3. NON-VOTING SHARES cont.

They have subscription rights in capital increases.

Rights to bonus shares (scrip issues). Rights to get information. Rights to participate the general meeting of

shareholders with no voting power.

3. NON-VOTING SHARES cont.

Non-voting shareholders may convene special meeting of shareholders cannot prejudice the rights of non-voting shareholders.

The validity of the ordinary shareholders’ decisions is subject to approval by non-voting shareholders.

First issue of non-voting shares has to be offered to public.

FIXED INCOME SECURITIES:BONDS

It is a certificate indicating that a corporation has borrowed a fixed sum of money and promises to repay it at a future date.

They are long-term securities. Bondholders do not have any voice in

management.

BONDS cont.

Corporation agrees to pay at a specified intervals interest at a stated rate. The principle is paid off at the maturity date.

Bonds generally can be traded anywhere in the world. Mostly there are OTC markets for them. Some corporation bonds in USA are listed on an exchange.

BONDS cont.

Trading for bonds is usually done by bond dealers. There are bond trading desks of major investment dealers in USA.

The dealers provide liquidity for bond investors. They also buy and sell bonds among themselves.

BONDS cont.

Bonds can be issued with or without coupons.

No-coupon bonds are issued and sold below par paid off at maturity in full sums: Treasury bills in Turkey.

Treasury notes and bonds are generally in bearer form.

BONDS cont.

Bonds can be issued in Turkey– With fixed interest– With variable interest

All bonds must be listed on an exchange.

TYPES OF BONDS

Government-corporate Bonds Premıum- Par Lottery Bonds Fıxed Rate-Variable (Floating Rate) Indexed Bonds (Foreign Exchange or Gold) Guaranteed Or Nonguaranteed

DERIVATIVES OF THE BONDS

1. Income Bonds (Kara İştirakli Tahvil) 2. Convertible Bonds (H.S İle Değiştirilebilinir

Tahvil)

1. INCOME BONDS

They can be redeemed at maturity only, the principle payment can not be split over years.

There are three types of period income (returns):– Interest+dividend– Either interest or dividend – Dividend only

1. INCOME BONDS cont.

Interest is paid on due dates. Dividend payment is declarated latest two

months from the general meeting of the shareholders when profit for the year is approved.

2. CONVERTIBLE BONDS

The holder of it can exchange the security, at his option for the C.S. Of the issuer in accordance of the terms of the bond indepture.

It is a bond with a call option to buy the C.S. of an issuer.

2. CONVERTIBLE BONDS cont.

These securities carry a maturity of 2-7 years.

Conversion of bonds can be made after 2 years.

Conversion is made through the intermediary of bank branches.

Convertible bonds are issued with coupons which are payable on an annual basis only.

BOND YIELDS

COUPON YIELD CURRENT YIELD YIELD TO MATURITY

COUPON (NOMINAL) YIELD

The interest rate that is written on the face value of the bond.

A bond’s coupon payment per year stated as the percentage of the current market price of the bond.

COUPON YIELD cont.

Example:

If a bond has a face value of $1.000 and the coupon rate is 30%. This comes to $300 per year.

The coupon yield does not change.

CURRENT YIELD

It can be obtained by dividing interest to the price of the bond.

The amount of the current income provided by a security stated as a percentage of its current market price.

CURRENT YIELD

Example.

Suppose you can buy a 30% coupon rate, $1.000 bond for $800.

Annual interest still $300.

You paid only $800 and get $300 so that your current yield= 300/800 = 37,5 %

YIELD TO MATURITY

A bond’s compound average rate of return over its remaining life.

It is calculated by approximate method.

YIELD TO MATURITY cont.

Example:

Coupon rate 30%, $1.000 face value selling at $1.200, 5 year bond.

You know that in this 5 year period you will lose $200, $40 yearly.

YIELD TO MATURITY cont.

Example cont.

The interest rate should be adjusted to take care of this loss. The adjusted coupon is $300-$40=$260

The average price can be obtained by taking the average of the cost price $1.200 and the maturity payment $1.000 gives $1.100.

YIELD TO MATURITY cont.

Example cont.

260/1.100= %23,64