Money market securities are very short-term debt obligations. They are usually highly
marketable and have relatively low credit risk. Their low maturities and low credit risk
ensure minimal capital gains or losses. These securities trade in large denominations, but
they may be purchased indirectly through money market funds.
Much of U.S. government borrowing is in the form of Treasury bonds and notes. These
are coupon-paying bonds usually issued at or near par value. Treasury bonds are similar in
design to coupon-paying corporate bonds.
Municipal bonds are distinguished largely by their tax-exempt status. Interest payments
(but not capital gains) on these securities are exempt from income taxes.
Mortgage pass-through securities are pools of mortgages sold in one package. Owners
of pass-throughs receive all principal and interest payments made by the borrower. The
firm that originally issued the mortgage merely services the mortgage, simply “passing
through” the payments to the purchasers of the mortgage. The pass-through agency
usually guarantees the payment of interest and principal on mortgages pooled into these
pass-through securities.
Common stock is an ownership share in a corporation. Each share entitles its owner to one
vote on matters of corporate governance and to a prorated share of the dividends paid to shareholders. Stock, or equity, owners are the residual claimants on the income earned by the firm.
Preferred stock usually pays a fixed stream of dividends for the life of the firm: It is a
perpetuity. A firm's failure to pay the dividend due on preferred stock, however, does not
set off corporate bankruptcy. Instead, unpaid dividends simply cumulate. New varieties of
preferred stock include convertible and adjustable-rate issues.
Many stock market indexes measure the performance of the overall market. The Dow
Jones averages, the oldest and best-known indicators, are price-weighted indexes. Today,
many broad-based, market value–weighted indexes are computed daily. These include the
Standard & Poor's composite 500 stock index, the NYSE, the Nasdaq index, the Wilshire
5000 Index, and several international indexes, including the Nikkei, FTSE, and DAX.
A call option is a right to purchase an asset at a stipulated exercise price on or before
an expiration date. A put option is the right to sell an asset at some exercise price. Calls
increase in value, while puts decrease in value as the value of the underlying asset increases.
A futures contract is an obligation to buy or sell an asset at a stipulated futures price on
a maturity date. The long position, which commits to purchasing, gains if the asset value
increases, while the short position, which commits to delivering the asset, loses.
