Chapter 9

Insured vs conventional mortgage

Federally insured mortgages guarantee loan repayment to the lending financial institution,
thereby protecting it against the possibility of default by the borrower. The guarantor can be
either the Federal Housing Administration (FHA) or the Veterans Administration (VA). To
qualify for FHA and VA mortgage loans from a financial institution, borrowers must meet
various requirements specified by those government agencies
Financial institutions also provide conventional mortgages. Although not federally insured, they
can be privately insured so that the lending financial institutions can still avoid exposure to credit
risk. The insurance premium paid for such private insurance will likely be passed on to the
borrowers. Lenders can choose to incur the credit risk themselves and avoid the insurance fee. a
home loan that is not backed by a government entity.

Fixed-Rate Mortgages

The term fixed-rate mortgage refers to a home loan that has a fixed interest rate for the entire
term of the loan. This means that the mortgage carries a constant interest rate from beginning to
end. Fixed-rate mortgages are popular products for consumers who want to know how much
they have to pay every month.

An adjustable-rate mortgage (ARM) allows the mortgage interest rate to adjust to market
conditions. The initial interest rate is fixed for a period of time. After that, the interest rate
applied on the outstanding balance resets periodically, at yearly or even monthly intervals .
Differences between fixed-rate vs. adjustable-rate mortgages
The biggest difference between a fixed-rate mortgage and an ARM is that, with the former, your
monthly principal and interest payment stay constant. With an ARM, the payment changes after
the introductory period is over.
The other key differences include:
Initial interest rate: An ARM typically has a lower initial interest rate and monthly payment than
a fixed-rate loan.
Interest rate over time: After the ARM’s initial rate period, the rate and monthly payment can
rise (or fall). If it increases, you could wind up with an unaffordable monthly payment. A fixed-
rate mortgage, by contrast, has a fixed payment throughout the life of the loan; the rate and
payment won’t change unless you refinance to a different loan.
Rate caps: The rate on your ARM can’t increase past a certain point with each adjustment, nor
over the life of the loan.
Down payment minimum: A conventional ARM requires a higher down payment of 5 percent,
compared to 3 percent on some conventional fixed-rate loans
Chapter 10
The ownership of common stock allows shareholder to a number of rights not available to other
individuals. Normally only the owners of common stock are permitted to vote on certain key
matters concerning the firm, such as the election of the board of directors, authorization to issue
new shares of common stock, approval of amendments to the corporate charter, and adoption of
bylaws. Many investors assign their vote to management through the use of a proxy, and many
other shareholders do not bother to vote. As a result, management normally receives the majority
of the votes and can elect its own candidates as directors. common stock is the portion of
equity

Preferred Stock
Preferred stock represents an equity interest in a firm that usually does not allow for significant
voting rights. Preferred shareholders technically share the ownership of the firm with common
shareholders and are therefore compensated only when earnings have been generated. Thus, if
the firm does not have sufficient earnings from which to pay the preferred stock dividends, it
may omit the dividend without fear of being forced into bankruptcy. The owners of preferred
stock normally do not participate in the profits of the firm beyond the stated fixed annual
dividend. From a cost perspective, preferred stock is a less desirable source of capital for a firm
than bonds. Because preferred stock normally has no maturity, it represents a permanent source
of financing.
INITIAL PUBLIC OFFERINGS: IPO
A corporation first decides to issue stock to the public in order to raise funds. It engages in an
initial public offering (IPO), which is a first-time offering of shares by a specific firm to the
public. An IPO is commonly used not only to obtain new funding but also to offer some founders
and VC funds a way to cash out their investment.
Because firms that engage in an IPO are not well known to investors, they must provide detailed
information about their operations and their financial condition. A firm planning on going public
normally hires a securities firm that serves as the lead underwriter for the IPO. A few months
before the IPO, the issuing firm develops a prospectus and files it with the Securities and
Exchange Commission (SEC). The prospectus contains detailed information about the firm and
includes financial statements and a discussion of the risks involved. The offer price also may be
influenced by prevailing market and industry conditions. company public registration kora kina,
shelf registration ( jei permission niye future a share sell korbe)
Organized exchange: Each organized exchange has a trading floor where floor traders execute
transactions in the secondary market for their clients. The NYSE has a trading floor where trades
can be executed. It has two broad types of members: floor brokers and specialists. Floor brokers
are either commission brokers or independent brokers. Commission brokers are employed by
brokerage firms and exe- cute orders for clients on the floor of the NYSE. Independent brokers
trade for their own account and are not employed by any particular brokerage firm. Specialists
can match orders of buyers and sellers.
Over the counter market: Stocks not listed on the organized exchanges are traded in the over-
the-counter (OTC) market. (Does not need any physical place to conduct share buy and sell).
exchanges, the OTC market also facilitates secondary market transactions. Unlike the organized
exchanges, the OTC market does not have a trading floor. Instead, the buy and sell orders are
completed through a telecommunications net-work. Because there is no trading floor, it is not
necessary to buy a seat to trade on this exchange; however, it is necessary to register with the
SEC. Many stocks in the OTC market are served by the National Association of Securities
Dealers Automatic Quotations (Nasdaq)

Types of order : on the basis of a broker

Market order is an order to buy or sell a share on the current situation or the best available price
of the share in the market.
Limit order : There will be a maximum amount of money or minimum number of money from
where the broker will buy or sell share on behalf of the owner/( akta restriction create kore dewa
hoi 100 tk er modhe othoba beshi sell kore kintu kome sell na kora same when it goes for buying
the share)
Stop Order: It is an order to buy or sell a stock at market price once share is traded at specific
price (dhoro akta share jodi 1000tk specifically hoi then ami share ta kinbo and jodi stock
er price1500 hoi tahole sell kore dibo, it will not require any maximum or minimum price
issue)
Margin requirement: when you can buy share by using debt from broker is called marginal
requirement. it’s a borrowed amount which is provided by the broker.

Short sale: Short selling is a financial strategy where an investor borrows a security, sells it on
the open market, and then buys it back later for less and returns it the borrower.
 CHAPTER 11
STOCK VALUATION METHODS
Investors conduct valuations of stocks when making their investment decisions. They consider
investing in undervalued stocks and selling their holdings of stocks that they consider to be
overvalued.

Price earning method: A relatively simple method of valuing a stock is to apply the mean
price–earnings (PE) ratio (based on expected rather than recent earnings) of all publicly traded
competitors in the respective industry to the firm’s expected earnings for the next year.
Reasons for Different Valuations: Investors may use different forecasts for the firm’s earnings
or the mean industry earnings over the next year. The previous year’s earnings are often used as a
base for forecasting future earnings, but recent earnings do not always yield an accurate forecast.
A second reason for different valuations when using the PE method is that investors disagree on
the proper measure of earnings. Some investors prefer to use operating earnings or exclude some
unusually high expenses that result from onetime events.
Limitations of the PE Method: The PE method may result in an inaccurate valuation of a firm
if errors are made in forecasting the firm’s future earnings or in choosing the industry composite
used to derive the PE ratio. The PE ratio varies substantially over time, which suggests that even
if investors could properly estimate next year’s earnings, it is difficult to know how those
earnings should convert into a stock valuation.( পিই পদ্ধতির ফলে কোনও ফার্মের ভু ল মূল্যায়ন হতে
পারে যদি ফার্মের ভবিষ্যতের উপার্জ নের পূর্বাভাসে বা পিই অনুপাত অর্জ নের জন্য ব্যবহৃত শিল্প কম্পোজিট বেছে
নেওয়ার ক্ষেত্রে ত্রুটি করা হয়। পিই অনুপাত সময়ের সাথে সাথে যথেষ্ট পরিমাণে পরিবর্তি ত হয়, যা পরামর্শ দেয়
যে বিনিয়োগকারীরা যদি পরের বছরের উপার্জ নগুলি সঠিকভাবে অনুমান করতে পারে তবে সেই উপার্জ নগুলি
কীভাবে স্টক মূল্যায়নে রূপান্তরকরা উচিত তা জানা কঠিন।)

Dividend Discount Model: This model is still applicable today. Williams stated that the price of a
stock should reflect the present value of the stock’s future dividends.(future a joto dividend pabo
tar present value predict kora)
Limitations of the Dividend Discount Model: The dividend discount model may result in an
inaccurate valuation of a firm if errors are made in estimating the dividend to be paid over the
next year or in estimating the growth rate or the required rate of return by investors. For
example, many smaller publicly traded firms that are attempting to grow retain all
earnings to support growth and thus are not expected to pay any dividends. ( jei company
dividend dei na okhane ai model use kora jabe na)
Relationship with PE Ratio for Valuing Firms: The dividend discount model and the PE ratio
may seem to be unrelated, given that the dividend discount model is highly dependent on the
required rate of return and the growth rate whereas the PE ratio is driven by the mean multiple of
competitors’ stock prices relative to their earnings expectations and by the earnings expectations
of the firm being valued. the PE multiple is influenced by the required rate of return on stocks of
competitors and the expected growth rate of competitor firms. there is a positive relationship
between a firm’s growth rate and its value when applying either method.
Adjusted Dividend Discount Model: The value of the stock is equal to (1) the present value of
the future dividends to be received over the investment horizon plus (2) the present value of the
forecasted price at which the stock will be sold at the end of the investment horizon. To forecast
this sales price, investors must estimate the firm’s earnings per share (after removing any
nonrecurring effects) in the year that they plan to sell the stock.
Capital Asset Pricing Model: The capital asset pricing model (CAPM) is sometimes used to
estimate the required rate of return for any firm with publicly traded stock. The CAPM is based
on the risk that results from exposure to general stock market movements.
The CAPM suggests that the return of a stock (Rj) is influenced by the prevailing risk-free rate
(Rf), the market return (Rm), and the beta (Bj), as follows:

where Bj is measured as the covariance between Rj and Rm, which reflects the asset’s sensitivity
to general stock market movements. The CAPM implies that, given a specific Rf and Rm,
investors will require a higher return on a stock that has a higher beta. A higher beta implies a
higher covariance between the stock’s returns and market returns, which reflects a greater
sensitivity of the stock’s return to general market movements.
Estimating the Market Risk Premium: The yield on newly issued Treasury bonds is
commonly used as a proxy for the risk-free rate. Historical data for 30 or more years can be used
to determine the average market risk premium over time. This serves as an estimate of the
market risk premium that will exist in the future. However, in some periods, the market risk
premium may be higher than in other periods.
FACTORS THAT AFFECT STOCK PRICES
Economic Factor: A firm’s value should reflect the present value of its future cash flows.
Investors therefore consider various economic factors that affect a firm’s cash flows when
valuing a firm to determine whether its stock is over- or undervalued.
Interest rate : jokhon interest beshi thake tokhon Bank a tk rakha preffer korbe rather than
stock a invest kora karon bank a risk free thake and stock risk free na,jekhane loss howar
chance thake.(interest rate sathe stock price er relation negative)
Impact of the Dollar’s Exchange Rate Value: The value of the dollar can affect U.S. stock
prices for a variety of reasons. First, foreign investors prefer to purchase U.S.stocks when the
dollar is weak and to sell them when the dollar is near its peak. Stock prices are also affected by
the impact of the dollar’s changing value on cash flows.
Market-Related Factors: January effect -it’s a hypothetical concept that people assume that
there could be chance of increasing stock price in the beginning of the year,so they start to buy
the shares in December for that reason the price of stocks start
Noise trading: na jene /or information er shortage thakar karone je trade kora hoi tahi hoche
noise trade ,atey kore stock market er environment e impact pore
Firm-Specific Factors
Dividend Policy: akta company ta kmn devidend dei ata onek impact kore
Signifact debt level change : akta company koto tuk debt a che ata jene invest korte hbe karon
jei companer onek debt oikhane inbest kora risk bca okhan theje return pabo kina oita sure na
Company offerings & repurchase : Existing shareholders jonno ata valo na karon notu noutn
share bazare chara tader power over company komiye dei
Earning Surprises: akta companyr earning valo hole stock a invest kora valo
Acquisitions and Divestitures: