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CTP > CH06-Capital Markets > Flashcards

CH06-Capital Markets Flashcards

1
Q

Key differences in Capital Markets compared to Money Market investments

A 
Maturities over a year
Purpose is Return
Capital Market investments can be debt or equity
No fixed maturity date
Less liquid than MM investments
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2
Q

Describe Primary capital market

A

Debt and equity to investors; stock issues

  • IPO=initial public offerings
  • Seasoned equity offering
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3
Q

Describe Secondary capital market

A

No change in cash flow or number of outstanding securities

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4
Q

Describe Private capital market

A

Securities offered and sold to limited group

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5
Q

Market Type ___ when Trades occur on the stock exchange or OTC market

A

Secondary market

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6
Q

Market Type ___ when Market price of existing shares guides price for new shares

A

Primary b/c NEW shares

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7
Q

Market Type ___ when Issues may be exempt from registration. e.g. with SEC in US or FCA in UK

A

Private

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8
Q

Market Type ___ when Firms gets funds on issue date if underwritten; syndicate markets to issue to investing public

A

IPO = Primary

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9
Q

Seniority of claims in liquidation

A
  1. Secured debt holders
  2. Senior debt
  3. Subordinated debt
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10
Q

What’s more expensive for a Company: debt or equity?

A

Equity is more expensive

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11
Q

cost differences of debt and equity notes from class

A

debt has interest expense

Equity has risk that they get paid last at liquidation, so expect higher returns

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12
Q

Term Loan

A

Fixed maturity, typically > 1 year
Specific need
Typically Term matches life of asset
Often pay interest only, not principal which results in a balloon payment

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13
Q

describe Bond Indentures

A

describes a bond issue, lists collateral, makes reps & warranties, specifies covenants and redemption terms, and sets interest payments or call provisions

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14
Q

Mortgage bonds

A

-Secured and have Substantial covenants
-used to finance specific assets, such as real estate. Covenants may include:
The assets involved
The right of an organization to issue additional bonds
The use of second or junior mortgages
Sinking-fund requirements
Reporting requirements
Restrictions involving key financial ratios
Prepayment terms
Restrictions on dividend policy

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15
Q

Debentures

A

Subordinated basis
Unsecured bonds that represent general claims against the issuer’s assets and/or cash flows, and may have a higher interest rate than secured bonds

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16
Q

Sovereign bonds

A
  • issued by a national government
  • typically denominated in the currency of the issuing government.
  • political risk
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17
Q

Sub-Sovereign bonds

A

=Muni bonds
-General obligation or Revenue bonds

General obligation bonds are paid from the proceeds of general tax revenues.

Revenue bonds are repaid from the revenues generated from specific public projects or services (e.g., stadiums, toll roads and bridges, or public utilities)

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18
Q

Eurobonds

A

international bond that is denominated in a currency other than that of the country in which it is issued.

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19
Q

Zero-coupon bonds

A

*watch out for imputed interest
=do not pay interest and are therefore issued at a substantial discount below par value.

  • 2 advantages for the corporate issuer:
    (1) there is no cash outflow until maturity
    (2) the issuing company receives an annual tax deduction until maturity
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20
Q

Floating-rate debt

A

LT Bond
Based on LIBOR or another market index
Get price protection as index resets (daily / weekly / monthly)

21
Q

High-yield (Junk) bonds

A
  • non-investment-grade bonds (i.e., an investment quality rating of BB+ or lower from S&P, or Ba1 or lower from Moody’s)
  • offer a higher yield to compensate for increased default risk
22
Q

Project Financing

A

Bank agrees to offer funding at initiation of project and then offers additional funding as milestones are met
(e.g. construction of a building)
pg166

23
Q

Securitization

A

debt securitized by A/R and inventory to increase liquidity and lower the yield paid by issuers. Securitization makes debt more liquid and attractive to investors

24
Q

MAC Clause

A

MAC=Material Adverse Change
Allows the lender to refuse funding or declare a borrower to be in default, even if all agreements are in full compliance

e.g. death of key person that makes lender question if they will be repaid
pg 168

25
Q

What is the Guarantees requirement?

A

allows lenders recourse to the guaranteeing party to obtain payment in the event the subsidiary is in default

26
Q

Is a Comfort Letter a guarantee?

A

No, technically a comfort letter is not a guarantee. It is not legally enforceable. It is a good faith, moral obligation representing stated actions

27
Q

Equity Securities

A

=Ownership in the company through:
Common Stock (voting rights)
Preferred Stock (non-voting but pays dividend)
Hybrid Securities (convertibles / warrants)
Depository Receipts

28
Q

Common Hybrid Securites

A
  1. Convertibles (convert bond or preferred stock to common stock)
  2. Warrants (bonds with an equity purchase option)
29
Q

Does a Convertible provide new capital for the issuer?

A

No. It simply converts existing debt or preferred stock into common equity.

30
Q

How is the stock issue price of an IPO determined?

A

Investment bankers help determine the highest price that should still result in all shares sold

31
Q

Are Private Placement Securities underwritten?

A

No. They are sold.

32
Q

Who are Private Placement Securities sold to?

A

QIBs= Qualified Institutional Buyers, a limited group of high net worth institutional investors

33
Q

4 benefits of organized exchanges

A
  1. competitive marketplace where supply and demand determine prices
  2. frequent trading minimizes price volatility
  3. fair market for exchange participants
  4. depth of capital market allows issues to raise large amounts of capital through securities offerings
34
Q

Which type of securities are issued by Government and Not-For-Profit?

A

Debt securities, only. (Can’t issue equity or hybrid)

35
Q

name the legal portion of a debt contract

A

promissory note

36
Q

define promissory note

A

unconditional promise to pay a specified amount + interest at a defined rate either on demand or on a certain date.
AKA defines due dates for principal payments

37
Q

Which action perfects a lien and makes it enforceable in a court of law?

A

filing notice with the appropriate governmental agency, which makes the lien legally enforceable

38
Q

Income bonds

A

Income bonds pay interest only if a company has profits, thus reducing some of the issuer’s risk of issuing debt.

39
Q

zero-coupon bonds

A

With zero-coupon bonds, investors are required to pay taxes on imputed earnings each year, even through no actual payment is received until maturity.

40
Q

A company issues securities that are given an investment quality rating of “BB” after the company has an economic downturn. These securities are __________________.

A

HY Bonds

Also referred to as junk bonds or below-investment-grade bonds (i.e., an investment quality rating of “BB” or less from SnP or Ba1 or lower from Moody’s), high-yield bonds are issued by less creditworthy entities.

41
Q

T/F: Bonds with call provisions typically require a higher coupon rate than similar non-callable bonds

A

True

42
Q

T/F: Investors prefer floating-rate debt because it matches current interest rates.

A

True

43
Q

define Eurobond (AKA External Bond)

A

A Eurobond (sometimes called an External Bond) is an international bond that is denominated in a currency other than that of the country in which it is issued.

44
Q

T/F: Regarding Preferred Stock, most voting rights are granted only if a specified sequence of preferred dividends is missed

A

True

45
Q

The principal benefit of issuing convertibles is to _______________.

A

Provide the issuer with a lower interest rate.

46
Q

What is APIC?

A

Additional paid-in capital (APIC) is an account that reflects the difference at the time of issue between the par value and the issuance price (less underwriting costs) of newly issued stock.

The formula is: ((Issue Price - Par Value) * number of shares) - underwriting costs

47
Q

Define Tracking Stock

A

Tracking stock is a separate stock created by a parent company to track the financial progress of a particular line of business. Despite being part of a publicly traded entity, tracking stocks trade under unique ticker symbols. These stocks are meant to create opportunities for investors to buy into a fast-growing unit without investing in the whole firm. The revenues and expenses of the segment being tracked are extracted from the firm’s financial statements and are linked to the tracking stock for valuation purposes. However, tracking stocks do not provide stockholders with ownership in the parent company, nor do they include voting rights.

48
Q

Book value per share is defined as

A

total book value of common equity divided by the number of common shares outstanding.

e.g. Par value of $200,000 plus $400,000 in retained earnings plus $4,000,000 additional paid-in capital equals $4,600,000. This amount divided by 200,000 shares equals $23 per share.

49
Q

Why have financial institutions (FIs) been heavy users of preferred stock?

A

Because most regulatory authorities count preferred stock a regulatory capital AND most rating agencies look favorably on the use of preferred stock.

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