INVESTMENT ANALYSIS & PORTFOLIO

MANAGEMENT MODULE

DR T. CHINODA
2020
 CHAPTER 2: SECURITIES TRADING

How Securities Are Issue

Firms sell new securities to raise capital.
These new issues of securities are marketed to
the public by investment bankers in the
primary market.
Thus, the primary market for securities issued
for the first time.
The subsequent purchase and sale of already-
issued securities takes place in the secondary
market.
Two types of primary market issues- The initial
public offering (IPO) are security issues by a
companies for the first time to the public.
Seasoned new issues –offered by companies
that already have floated their securities and are
issuing more of the same securities . A sale by
Econet of new shares-because Econet already has
some shares listed on the stock exchange.
A public offering is an issue of securities to the
general public that can the be traded on the
secondary market, and a private placement- is an
issue that is sold to a few selected investors, such
as institutions and other wealthy individuals.
 The Pricing of Money Market Securities
• 1.The nominal value, or face value (N). This is the
amount that will be received by the holder when the
security matures. It is therefore also the future value.
• 2. The discounted value (DV)-the price that must be
paid today for the instrument (present value). The
discount is the difference between the nominal value
and the discounted value.
• 3. The present value (P)-the current market value of the
instrument, also known as the consideration.
• Thus, D = N - P, and P = N - D.
• 4. The discount rate (d) depends on the nominal value
and the market price of the security.
• 5. The tenor (t)-the number of days to maturity..
 Calculating the Consideration on a Discount
Security (P)
If we know the discount rate, d, the discount is
then calculated as follows:
Since P = N - D, then P = N - Ndt.

Example:
A customer signed a promissory note agreeing to
pay $100 000 in three months' time. You them
decide to discount the note with a bank at a
discount rate of 22 %. How much would you
receive from the bank now ?
Solution.
P = N (1 -dt), N = 100 000, d = 0.22, and t = 3/12

Therefore : P = 100 000 ( 1 - 0.22 x 3/12) = $94 500.

You therefore receive $94500 now from the bank and the
discount on the face value would be equal to $100 000 -
$94500 = $5 500

Practice: A discount security with a tenor of 91 days and a

nominal value of $1 000 000 is issued at a discount of
18%pa. calculate the consideration ( issue price) of the
security?
 Calculating the Discount rate, d, to full tenor.
An investor may want to know the discount rate, d, given
the full tenor, the face value, and the issue price of a
security. To get the discount rate we use the following
formula:
P=N(1-dt) then simplifying P=N-Ndt
make d the subject of the formula Ndt=N-P
Diving both side by Nt d=N-P/Nt

Example: A discount security with a nominal value of $1

000 000 and a tenor of 90 days is issued at $ 946 845.00.
Calculate the discount rate, d.
Solution.
D = 1 000 000 - 946 845 = 53 155. Therefore

d = 53 155 x 365
1 000 000 90
= 0.21557 = 21.56% pa

Practice: Assume that a discount security with 40 days to

maturity and a face value of $2 000 000 is traded at $1 962
450 in the money market. At what discount rate per year is
it issued?
 Equivalent simple interest rate ( Yield ).

The interest rate charged on a loan is not equivalent to the

rate that is charged when a bill is discounted before its
maturity date.
The difference arises from the fact that the discount rate is
calculated on the future value ( D = Ndt), whereas the
interest rate is calculated on the present value ( I = Pit).
When a note is discounted, the interest rate which is
equivalent to the discount rate will be greater than the
actual discount rate.
Example:Determine the discount, the discounted value,
and the equivalent simple interest rate on a note of $35 000
which is due in 9 months at a discount rate of 26%.
Solution.
The simple discount, D, is found by :

D = Ndt, where N = 35 000, d = 0.26 , and t =

9/12
Therefore, D = 35 000 x 0.26 x 3/4 = $6 825
The discounted value, P, is found by : P = N - D
= 35 000 - 6 825 = $28 175.
Since S = P - I, then I = S - P. This means that the
interest on the note should be equivalent to the discount,
that is : I = 35 000 - 6 825 = 28 175.
Since P, is equal to $28 175, the equivalent simple interest
rate is the rate that will yield an interest amount of $6 825
when applied to this principal over a term of 9 months.
We know that I = Pit, therefore,

6 825 = 28 175 x i x 3/4 , solving for i,

6 825 = 21 131.25i
i = 0.32298
Thus, the simple interest rate which is equivalent to the
discount rate of 26% is 32.30%.
The equivalent simple interest rate is the yield on the
money market security. The yield is not the same as the
discount rate
Practice: Determine the discount, the discounted value,
and the equivalent simple interest rate (yield) on a note of
$100 000 which is due in 65 days and can be discounted at
a discount rate of 26%.