Do you sell Alarms? And other Questions, Answered!

A Firstline Securities Limited Blog by: Dalia King

Hi everyone!

I hope this message meets you all very well, healthy, happy and enjoying life. If not, take heart that brighter days must come.

Today I’m going to answer three questions that you either may have been wondering about but never asked; or after reading my answer, may realise you never knew what you didn’t know! So let’s get into it.

Is Firstline a security company?

The name of our company is Firstline Securities Limited. We’ve been in business since 2005 but in late 2018, we began to use the phrase ‘Firstline Financial’ in our marketing material  in order to bring an end to a decade answering variations of “do you sell alarms”, “I’m looking for guard work” and “what’s your canine rate”.

It’s understandable. Security, securities. Potato, potahtoe.

What is a financial security?

A financial security is a tradeable financial asset that holds monetary value. It can be divided into three main categories:

• I own this! / Equity securities like common stock
• They owe me! / Debt securities like bonds and notes
• I could own this, it depends – check me back later! / Derivatives like options and forwards

We placed “Securities” in our name because this is what we do on a daily basis – trade in the above financial assets.

Can I get a loan please?

Take a look at my fancy table:

If you’re smelling what I’m cooking, you now know that while we cannot give your business a loan, we can arrange for you to issue a note which investors will buy into. Potato, potahtoe*

* Ok, it’s more nuanced than this (for example, we provide funding to corporate clients only, not individuals) but you get the general idea. If you want to take a deeper dive into the differences, let me know.

I invested in a note at a premium. Does this mean I lost money?

Upfront, I want to say that this answer is going to cover the basics. It will be sufficient for dinner party conversation, but you will be unmasked as a fraud should you attempt to engage a CFA charter-holder. I know this because the CFA charter-holders (and candidates) in the office have advised that there is *so much more* I could have said. So much complexity. So many variables. “You haven’t even explained present value, indicated tenor, or discussed YTM!”

If you guys want to get into those complex variables, we’ll get the Portfolio Team to expand. For now, and in plain English:

• The purchase price of a note can be at par value, above par value (premium) or below par value (discount).
• A note’s coupon is the rate of interest it pays annually. It is expressed as a percentage of the note’s par value and therefore is not impacted by a premium or discounted purchase price.

• A note’s yield is the rate of return it generates for you. In the example above, all three investments provide you with $6,000 cash at the end of the year, but the value of that cash to you in the context of what you paid to get it, will differ, as this $6,000 will represent either a larger or smaller share of the purchase price in discounted and premium scenarios respectively. Stay with me.

• The general rule of thumb (in life!) is that you earn less when you buy something at a premium and you earn more when you buy it at a discount.

Which brings us to the original question: do you ‘lose’ when you buy at a premium?

• Well, from a philosophical standpoint, you “lose out” on earning the greater return you’d have if you were able to buy it at a lower price. However, if the price is not negotiable, and your return is still higher than you would get if you were to invest in other instruments, did you really “lose out”? We could talk about opportunity cost here, but let’s save that for another day (and for the MBAs in the office).
• If you sell your note before it is due to mature, (and at a lower price than you paid for it), your yield to maturity will decrease further and it may also represent an actual capital loss. Though the risk of capital loss and diminished yields is higher when you purchase at a premium, this can occur regardless of the purchase price.

All of that to say, no, there is no direct causal link or correlation between purchasing at a premium and losing money.

***

Ok, all this number-crunching has tired this attorney out, but I can easily catch a second wind.

Are there any other burning questions you need answered, like yesterday? Ask us! Even if I don’t have the answer, someone in the office should. We real smart over here. But more importantly, and all jokes aside – no question is a silly one; no answer is ‘obvious’. We welcome your curiosity – which has never killed any cat I ever knew.

Have a great weekend everyone!

Dalia