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CSC Volume 1 > CH 6 Fixed Income Securities: Features and Types > Flashcards

CH 6 Fixed Income Securities: Features and Types Flashcards

1
Q

What is financial leverage?

A

If companies believe they can get a greater return on cash invested in their business than it would cost to borrow money.

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2
Q

Is bond interest payments tax deductible?

A

Yes

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3
Q

What are the details of a bond issue outlined in?

A

Trust deed

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4
Q

What is the primary difference between a bond and debenture?

A

Bonds are secured by physical assets but the debentures may be secured by something other than physical assets.

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5
Q

What is a bond yield?

A

An approximate measure of the annual return on the bond if it is held to mature.

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6
Q

Money market securities?

A

Short time fixed income one year or less.

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7
Q

Liquid bonds?

A

Trade in significant volumes for which it is possible to make medium and large trades quickly without making a significant sacrifice on the price.

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8
Q

Negotiable bonds?

A

Bonds that are transferable because they are deliverable form.
(refers to a time when actual paper copies of bonds and fixed income securities were delivered b/w individual dealers)

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9
Q

Marketable bonds?

A

Bonds ready for market e.g. private placement or other new issue because of price and features are attractive.

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10
Q

Strip Bonds

Zero bond or zero-coupon bond?

A

Created when a dealer acquires a block of high-quality bonds

and separates the individual future dated interest coupons from the rest of the bond.

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11
Q

Why are strip bonds usually held in a tax deferred plan?

A

Income is considered interest rather then a capital gain and taxes must be paid annually.

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12
Q

Callable bonds?

A

Bond issuer reserve right , but not the obligation to pay off bond before maturity usually 10 to 30 days notice.

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13
Q

All corporate and provincial bonds callable?

A

Yes

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14
Q

All government of Canada bonds and municipal the benches callable?

A

No

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15
Q

What is the call protection period?

A

The period before the first possible call date.

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16
Q

Reasons to issue callable Bonds(2)

A
  • take advantage of lower interest rate

- reduce debt with excess cash

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17
Q

what is Canada yield call?

A

Allows issuer to call the bond at a price based on the greater of
a) par or
b) price
based on the yield of an equivalent term government of Canada bond plus a yield spread.

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18
Q

What happens to the price of a bond when the yield falls below the coupon rate?

A

The price of the bond rises higher then par.

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19
Q

Extendable bonds and debentures?

A

Short maturity but with an option to exchange debt for an identical amount of long term debt at same or slightly higher rate of interest.

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20
Q

Election period?

A

The time period where a decision to exercise the maturity option must be made.

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21
Q

Convertible bonds?

A

Option to exchange bond for common shares.

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22
Q

Convertible bonds have special appeal to whom?

A

Wants to share in company growth while avoiding any substantial risk. Willing to accept a lower yield of the convertible in order to have a call on the common shares.

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23
Q

What is protection against dilution?

A

For convertible bonds if the common shares of the company are split the conversion privilege will be adjusted accordingly.

24
Q

Characteristics of convertible bonds

A
  • conversion prices of the bond goes up gradually over time to encourage early conversion
  • can normally be converted into stock anytime before conversion privilege expires
  • any common stock received by bondholders from the conversion entitles holder only to those dividends declared and payed after conversion takes place
  • some may have protection against dilution clause
  • normally callable, usually small premiums after reasonable notice
25
Q

what is Forced conversion?

A

When company stock rises in value above the conversion price a company may force the holder to exchange the security for stock by calling back the security.

26
Q

Why are forced conversions an advantage to the issuing company?

A
  • Can improve the company’s debt to equity ratio.
  • Believes issuer of having to make interest payments.
  • Can also help make room for new debt financing.
27
Q

Sinking funds?

A

Sums of money that are set aside out of earnings each year to provide for the repayment of all or part off the debt issue by maturity.
binding on issuer

28
Q

Purchase funds?

A

Set up to retire a specified amount of the outstanding bonds or the debentures through purchases in the market if these purchases can be made at or below a stipulated price.
binding only under the right market conditions

29
Q

What are the common protective covenants found in Canadian corporate bonds? (8)

A
  1. Security
  2. Negative pledge
  3. Limitation on sale and lease back transactions
  4. Sale of assets and merger
  5. Dividend test
  6. Debt test
  7. Additional bond provisions
  8. Sinking and Purchase fund and call provisions
30
Q

Who is the largest single issue of marketable bonds in Canada?

A

Federal government.

31
Q

How are T-bills sold?

A

Sold at a discount and mature at 100.

32
Q

What term are Canada savings bonds issued for?

A

Three years

33
Q

How often can you redeemed Canada savings bonds?

A

Anytime

34
Q

Which bonds can only be purchased through payroll savings program?

A

CSBs

35
Q

How is interest earned for Canada savings bonds?

A

When redeemed interest and for each full month.

36
Q

When redeemed how our candidate premium bonds interest paid?

A

Interest earned up to the last anniversary date of issue.

37
Q

When will you not earn interest on Canada savings bonds or Canada premium bonds?

A

If you redeem within the first three months following issue date.

38
Q

Real return bonds?

A

Pays interest throughout life off bond and repays principal amount at maturity however coupon payment and principle are adjusted for inflation.

39
Q

What two factors determine bond quality?

A

Credit and market conditions.

40
Q

First mortgage bonds?

A

Senior securities of company because they constitute a first charge on company assets, earnings before unsecured current liabilities are paid.
first mortgage bond= best security a company can issue

41
Q

What does “after acquired clause” mean?

A

All assets that can be used to secure the loan even those acquired after the bond what issued.

42
Q

Collateral trust bond?

A

One that is secured not by a pledge of property but of securities or collateral.

43
Q

Equipment trust certificate?

A

Variation on mortgage and collateral trust bonds.

44
Q

Corporate notes?

A

Short-term unsecured

45
Q

Domestic bonds?

A

Issued in the currency and country off the issuer.

46
Q

Foreign bonds?

A

Issued outside of the issuers country and denominated in the currency of the foreign country where issued.

47
Q

Eurobonds?

A

Issued in foreign market and denominated in a currency other than that of the market where the bonds are issued.

48
Q

Euro Canadian bonds?

A

If Canadian corporation or government issued Eurobonds denominated in Canadian dollars they would be called this.

49
Q

Preferred securities or debentures?

A

Very long term 25-99 years, subordinate to other debentures, interest can often be deferred, often trade on exchange. Rank ahead of preferred.

50
Q

What are the two main reasons and rationale for borrowing money for corporations?

A

To finance operations or growth. To take advantage of operating leverage.

51
Q

What is bankers acceptance (BA)

A

commercial draft by borrower for payment on a specific date and guaranteed by maturity by borrowers bank
may be sold bfr maturity at prevailing prices, offering a higher yield than Govt of CA T-Bills

52
Q

What is a commercial paper

A

either an unsecured promissory note issued bt corp on a asset backed security by a pool of underlying assets
issue term range form less than 1 mth to 3 years
sold at discount and mates at face value

53
Q

Term Deposits?

A

offers a guarantee tare for a short term deposit (up to1 yr) penalty normally apples for funds before certain periods

54
Q

Types of GICs? (5)

A
  1. Escalating GIC- int tare increases over GIC term
  2. Laddered GIC- investment divided into multiple terms lengths & matured portion can be reinvested or redeemed.
  3. Installment GIC- initial lum-sum made with further contributions made weekly, bi-weekly or monthly
  4. index linked GIC- grantees a return for initial investment at expiry at some expose to equity marked.
  5. . Interest rate linked GIC- offers int rate linked to other rates such as prime, bank, non-redeemable GIC int rate or money market
55
Q

what are fixed income mutual funds & Exchange-Traded Funds

A

-specializes in bond that have grown significantly over past decades
- high demand due to equity market uncertainty and lower int rate
easy access to diversified portfolio of debt and securities feature for both domestic and global market

56
Q

Attractive features of Fixed income mutual funds & Exchange- Traded Funds?

A
  • professional investment management
  • liquidity
  • low investment cost

CSC Volume 1 (7 decks)

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