CACS 2- Chapter 3 Fixed Income And Equity Securities. Flashcards

1
Q

What is the difference between the primary and secondary market:

A

Primary- The market for the issuance of new securities which include IPOs

Secondary market- resale market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Difference between money markets and capital market:

A

Money - short term finance, comprising securities with max tenure of 1 year.

Capital market- Long term fianncing <1 year,

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the difference between bonds and equity securities:

A

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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are bonds called at different prices called:

A

Above par- premium bonds

Below- discount bonds

Same price- par bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the relationship between YTM and bond price?

A

They are inversely proportional to one another.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How can we classify bonds according to their maturity:

A

Medium: 1-10 years
Long term: 10 years or more.
Perpetual bonds are bonds that do not have a maturity date.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What’s the relationship between coupon rate, current yield and YTM?

For the different kind of priced bonds?

A

Discount bonds:

Coupon rate< Current Yeild < YTM

Premium Bonds:

Coupon Rate > Current Yield > YTM

Par bonds:

Coupon rate= current yield= YTM

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are callable bonds?

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are putable bonds:

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the different types of equities (shares):

A

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 well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How are return of equities achieved

A

Dividend yield or capital gains

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is book value?

A

It is the total value of the company’s assets that shareholders will theoretically receive if the company was liquidated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the 2 major approaches to the valuation of stock:

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

When talking about stocks, what are the type of industries:

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the classifications by life cycle stage:

A

Pioneer industry- start up with high risk

Goth industry - rapid expansion

Mature- stock selection crucial

Decline- keen competition and market size shrinking.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly