2 - Equities; Debt Flashcards
When can a company buy back shares?
Why would a company do this and does this impact the investor in a negative way?
At companies election
4 reasons for co. To buyback:
1. Gearing: in a leveraged buyback (using debt to finance a buyback) more liabilities increases debt and simultaneously reduces equity (by increasing liabilities; assets-liabilities), hence increasing the debt/equity ratio which by definition is more geared
2.to improve price/earnings ratio, and thus increase a company’s earnings per share, if EPS increases, so should the share price
3. For private firms with a small group of shareholders, a buyback from an investor who wants to leave when none other shareholders want to buy their stake, this will keep the company private, no need for a 3rd party
4. Excess cash is inefficient for a business (not sure if this is true all the time), but this excess can be “returned” to investors, so a buyback can be a method of returning this cash. If a company has no planned use, perhaps shareholders may want their money back!
Which share category is less risky, preference or ordinary. Why?
Hint: Explain and name another term for preference shares
Preference shares; (annual) dividend policy + ranking (for dividends and insolvency)
Hybrid securities; some characteristics as bonds (fixed annual payments)
When may preference shareholders be entitled to vote?
What is the nominal value of a share?
Who proposes dividends for ordinary shareholders?
Which one often outperforms the other and why: ordinary vs preference
No dividend paid for a substantial period of time - determined in companies constitution
minimum amount a company must receive from subscribers on the issue, set at outset and in the co.s articles
Directors, ratified by shareholders at the AGM.
Ordinary because preference shares are less liquid and not easily purchasable
What is one reason why shares in a company may increase in value over time
Profits that are retained should be reinvested into the company, increasing its value and potential to revenue earn
5 varieties of preference shares
and how do they work?
How many of the 5 features of preference shares can be exhibited in one?
cumulative; any dividends missed are rolled over
participating; offer opportunity to participate in higher distributions (as opposed to missing out on them with the fixed dividends preference shareholders are stuck on) including in the event of distributions to ordinary shareholders, the extra being paid after all preference shareholders are paid
redeemable; (callable) company can buy back shares at election, this is + very to company as they can buy back expensive shares (with a high coupon eg5%) and then reissue these shares at a lower rate, likely action if rates drop
convertible; + to holder as they can get involved with high capital gains if shares increase, but have a bond as a base layer
zero dividend; + to company- no voting rights and no dividend paid. For holders, it offers fixed capital gains for a fixed time.
More than one can be in any one instrument
+/-ves of Redeemable preference shares
Does the investor like the share being redeemed?
company can buy back, hence like debt. At an agreed price
Investor may or may not like it, depending on whether they thought that the company had potential, perhaps the act of returning cash can show plans of restructuring rather than reinvesting. Plus investor may have wanted the cash back at the pre agreed redemption price (may have been at a premium to current share price)
Convertible preference shares; how f(x)
right but not obligation to turn them into a predetermined number of ordinary shares, reducing risk of missing out on upside of ordinary shares, in case of bonus issue, the number is recalculated
What does Zero Coupon mean?
Do u only get ZCBs or can u get equities/ other instruments that are zero coupon?
no dividend, redeem above the price they were issued
Bonds only, you can’t redeem a share above the price is was purchased unless the value of the shares went up.
Hybrid instruments can be ZCBs -so that is the blurred line.
In an index-linked bond, is the coupon or principal adjusted, or both?
adjusts both coupon and principal to prevailing rate of inflation, specifically an index
What is a floating-rate note and what happens if the rate is changed?
bonds that state the coupon by reference to a published interest rate; SOFR. The coupon is reset after pre-determined reset periods
3 ways bond yields can be calculated
Gross redemption yield/ flat rate yield/ net redemption yield
Why EXACTLY does price fall for a bond when interest rates rise?
- People want to see the same increase in return on their bonds as there has been in the interest rate change, so people are willing to pay LESS for a bond so less demand at current price level
- People see that the opportunity cost is lower so they save rather than use bonds so less demand and higher supply as bondholders try to switch
What does a flat yield reflect and what does it ignore?
Name and explain an alternative name for GRY?
What does GRY ignore, and therefore used by who?
what does NRY incorporate?
Reflects coupon payments/ ignores capital gains
Yield to Maturity- as it incorporates any capital gains/losses into account.
GRY ignores taxation. Hence used by non-tax paying long-term investors such as pension funds and charities.
all : annual coupons and p&l and looks at after tax cash flows
What 2 key factors influence the volatility of a fixed-interest security?
What conditions of these factors would lead to a very volatile instrument?
Coupon value and Time.
A Low-Coupon, Long-Dated bond
What is modified duration? (formula and description)
A measure of volatility
The change in price of instrument given a 1% change in interest rates, so the higher the Modified Duration, the more volatile.
