CACS 2- Chapter 3 Fixed Income And Equity Securities. Flashcards
What is the difference between the primary and secondary market:
Primary- The market for the issuance of new securities which include IPOs
Secondary market- resale market.
Difference between money markets and capital market:
Money - short term finance, comprising securities with max tenure of 1 year.
Capital market- Long term fianncing <1 year,
What is the difference between bonds and equity securities:
1) Bond holders are creditors of a company and not owners.
2) Bond holders receive fixed regular coupon payments while equity holders receive dividends (which can be uncertain and variable depending on the company performance)
What are bonds called at different prices called:
Above par- premium bonds
Below- discount bonds
Same price- par bonds
What is the relationship between YTM and bond price?
They are inversely proportional to one another.
How can we classify bonds according to their maturity:
Medium: 1-10 years
Long term: 10 years or more.
Perpetual bonds are bonds that do not have a maturity date.
What’s the relationship between coupon rate, current yield and YTM?
For the different kind of priced bonds?
Discount bonds:
Coupon rate< Current Yeild < YTM
Premium Bonds:
Coupon Rate > Current Yield > YTM
Par bonds:
Coupon rate= current yield= YTM
What are callable bonds?
Bonds that the issuer reserves the right to redeem the bond before maturity at a pre-specified call price. They usually come with a period of call protection during the initial years where they cannot be called.
What are putable bonds:
Bonds which give the investor the option to sell the bonds before the maturity date. Putable bonds come with a lower coupon rate as compared to a straight bond becauuse the put option is favourable to the investor.
What are the different types of equities (shares):
Common shares
Preference shares- if a company goes bankrupt pref share holders will be paid ahead of common share holders. But they have no voting right. Fixed dividends may not be paid yearly. Cumulative (stored and paid eventually), non cumulative (no obligation on the issuer to pay dividends)
Convertible securities
How are return of equities achieved
Dividend yield or capital gains
What is book value?
It is the total value of the company’s assets that shareholders will theoretically receive if the company was liquidated.
What are the 2 major approaches to the valuation of stock:
Absolute valuation- arrives at a fair value for a stock using discounted cash flow models.
Relative valuation- arrives at “fair multiple” for a stock relative to peers.
When talking about stocks, what are the type of industries:
Growth industries - above average growth in sales and profits, regardless of business cycle.
Defensive industries- stable performance over a business cycle (e.g. household products)
Cyclical industries- sensitive to the business cycle. Sensitive to the economy.
Counter cyclical industry- performance is negatively correlated to the economy.
What are the classifications by life cycle stage:
Pioneer industry- start up with high risk
Goth industry - rapid expansion
Mature- stock selection crucial
Decline- keen competition and market size shrinking.
