Chapter 2 Flashcards
1
Q
Have a surplus of money that they probably want to generate more money with
A
Savers
2
Q
Do not have enough money and therefore may need to borrow money
A
Borrowers
3
Q
Owned by relatively small number of shareholders
A
Private Companies
4
Q
where private companies sell shares directly to a
small number of institution or wealthy investors
A
Private placement
5
Q
the national government regulatory agency charged with supervision over the corporate sector, the capital market participants, and the securities and investment instruments market, and the protection of the investing public.
A
Securities and Exchange Commission
6
Q
- publicly owned or public companies
- can raise capital from a wide range of investors
A
Publicly Traded Companies
7
Q
provide an organized forum in which suppliers of funds and demanders of funds can transact business directly.
A
Financial Markets
8
Q
Types of Financial Markets
A
- Direct Search Markets
- Brokered Markets
- Dealer Markets
- Auction Markets
9
Q
where buyers and sellers must seek each other out directly
A
Direct Search Markets
10
Q
brokers provide search services to buyers and sellers
A
Brokered Markets
11
Q
when the dealer purchase asset for their own account with the plan of selling them for a profit
A
Dealer Markets
12
Q
all traders converge in one place to buy or sell an asset
A
Auction Markets
13
Q
✓ Issuers
✓ InvestmentBanks
✓ Investors
✓ Regulatory Agencies
Securities and Exchange Commission (SEC) Philippine Stock Exchange (PSE)
A
Participants in the Primary Capital Market
14
Q
✓ Investors
✓ stock exchange/over-the-counter market
✓ Regulatory Agencies
Securities and Exchange Commission (SEC) Philippine Stock Exchange (PSE)
A
Participants in the Secondary Capital Market
15
Q
– going public for the first time
- offering shares of a private corporation to the public by issuing stocks for the first time
A
Initial Public Offering (IPO)
16
Q
a function wherein an individual or institution undertakes the risk associated with a venture or an investment
A
Underwriting
17
Q
- determining the risk and price of a particular security
A
Underwriting
18
Q
handle the orderly marketing and distribution of the securities to the intended public
A
Underwriters
19
Q
guarantees the issuer that a specific amount of bonds shall be sold to investors
A
Underwriters
20
Q
Even though they are known as banks, they do not take deposits or grant loans.
A
Investment Banks
21
Q
Specializes in helping firms raise capital by selling securities (bonds and stocks) Acts as underwriters.
A
Investment Banks
22
Q
registration statement filed with SEC describing the issue and prospects of the issuer
A
Prospectus
23
Q
registered securities that can be gradually sold to the public for two years following initial registration
A
Shelf Registration
24
Q
organized to enable an underwriting firm and top executives/management to pitch sales to investors (sales pitch)
a. generate interest among the public or potential investors
b. provide information to the issuing party and its underwriters price at which they can sell the securities
A
Road Shows
25
is a price discovery process used by investment bankers to determine the demand for an issuer’s initial offering of securities
Bookbuilding
26
large investors express their interest in purchasing securities (book)
Bookbuilding
27
Depending on the size of the book and rates, the issuer can adjust the rate, investors can keep the order or opt-out
Bookbuilding
28
* Usually done for first-time issuances
Bookbuilding
29
* Investors submit orders, building the books
Bookbuilding
30
* Issuer announces details of bond issuance and, sets initial rate guidance
Bookbuilding
31
Certificate of debt issued by an entity
Bonds
32
* Issued by the entity for fundraising
Bonds
33
An I.OU between the lender and the borrower that includes the details of the loans and its payments (e.g. amount of debt, interest rate, etc)
Bonds
34
* Issuing entity can be government or corporate
Bonds
35
* Issuer = borrower; lender = investors/bondholders
Bonds
36
* Previously in paper/physical form, but now electronic or “scripless”
Bonds
37
Date when bond proceeds (cash) gets transferred to the issuer in exchange for the bond holdings of the investors
Settlement Date
38
Date when the principal amount (face value) is repaid by the borrower to the bondholders
Maturity Date
39
Length of time of the duration of the obligation (settlement date up to maturity date)
Tenor
40
Interest rate paid by the bond issuer to the investors, usually quoted on an annual basis. Can be fixed or floating rate
Coupon Rate
41
Frequency of coupon payments (annual, semi-annual, quarterly)
Coupon Frequency
42
How much investors are willing to pay/receive to buy/sell an outstanding bond
Price
43
Total returns from holding a bond at any given time
Yield
44
The amount that is expected to be repaid to the bondholders upon maturity of the bond (can be in different currencies)
Face Value
45
Bonds that pay zero coupon but issued at a discount
Zero Coupon Bonds
46
bonds that pay a fixed rate throughout
Fixed Rate Bonds
47
bonds that pay coupon that changes per repricing date (e.g. 3m, 6m)
FLoating Rate Bonds
48
allow the issuer to redeem the bonds before maturity
Callable bonds
49
bond proceeds allocated for green projects
Green bonds
50
periodic repayment of principal
Amortizing bonds
51
issued inside the country
Domestic BOnds
52
issued outside the country
External BOnds
53
possibility of the issuer defaulting on the payment of coupons and/or capital
Default Risk
54
the effect of movements in interest rates, which can have a significant impact on the value of bonds.
Price Risk or Market Risk
55
the seniority with which corporate debt is ranked in the event of the issuer’s liquidation.
Seniority Risk
56
the risk of inflation rising unexpectedly and eroding the real value of the bond’s coupon and redemption payment which a security can be converted into cash
Inflation Risk
57
occurs if bonds are issued in a different currency
Exhange Rate Risk
58
A dollar today is worth more than a dollar tomorrow
time value of money
59
Suppose PHP 1,000 is invested in an instrument that pays either 3% simple interest or 3% interest compounded semi-annually. How much will the investment be after 2 years?
FV = 1,000 + 15 + 15.225 + 15.453 + 15.685 = 1,061.362
60
Simple interest formula
FV = PV x ( 1 + r x t)
61
Compound interest formula
FV = PV x ( 1 + r / n)n x t
62
Converting a value received at a future date to an equivalent value today
Discounting
63
Simple discount formula
PV = FV / ( 1 + r x t)
64
Compound discount formula
PV = FV / [( 1 + r / n)n x t]
65
How much should be invested in an account earning 5% simple interest or 5% interest compounded quarterly so that the value after 2 years is PHP 2,000?
PV = 2,000 / (1 + 0.05 x 2) PV = 2000/ 1.10
PV = 1,818.18
66
How much should be invested in an account earning 5% simple interest or 5% interest compounded quarterly so that the value after 2 years is PHP 2,000?
PV = 2,000 / [(1 + 0.05/4 )2 x 4] PV = 2000/[(1.0125)8]
PV = 1,810.80
67
Profit Dynamics
Principal: PHP 100,000.00
Tenor: 5 years
Issue Date: [●]
Maturity Date : [●]
Coupon Rate: 6.00% p.a. (subject to 20% W/Tax)
Coupon Frequency: Quarterly
Interest Computation:
Per Year:
= PHP 100,000.00 x 6.0% x 0.8
= PHP 4,800.00
Per Quarter
= PHP 4,800.00/ 4
= PHP 1,200.00
68
Debt security instrument that pays a variable interest rate linked to a financial index and adjusted periodically, typically every 3 to 6 months
Floating Rate Note
69
Differs from a Fixed-rate Bond; interest rate not fixed at an absolute rate but “floats” with market rates, cannot be predetermined
Floating Rate Note
70
Principal payment on the debt is paid down regularly with the interest over the life of the bond.
Amortizing Bond
71
Each payment has an allocated amount for the interest and the principal
Amortizing Bond
72
For the Philippine government yield curve, the yield curve is called
BVAL
73
shows the government’s borrowing rates for different tenors at any given point in time
BVAL
74
serves as the risk-free benchmark rate since government bonds have zero credit risk (direct government obligations)
BVAL
75
graphically/visually represents yields on similar bonds across a variety of maturities
Yield curve
76
positive yield curve. Longer-term interest rates are higher than shorter-term interest rates
Normal yield curve
77
the difference between long and short term interest rates is large
Steep curve
78
a small or negligible difference between short and long-term
interest rates
Flat yield curve
79
negative yield curve. Long-term interest rates are less than the short term interest rates
Inverted curve
80
are measures of the return that can be earned on bonds.
Yields
81
the return, as a percentage of the cost price, which a bond offers is often referred to as the ____________.
bond’s yield
82
The Yield is calculated by
taking the annual coupon and dividing by the bond’s price and then multiplying by 100 to obtain a percentage.
83
Factors Influencing the Yield Curve
* Market forecasts and expectations with regards to the direction of changes in interest rates
* Presumable liquidity premium in the yield of the bond
* Market inefficiency – turn from long-term cash flows to short-term or short-term term cash flows to long term cash flows
84
Unlike conventional loans, bonds are financial instruments that are negotiable, which means that they have an active ______________________
secondary market
85
bonds are traded in an __________________________
OTC (Over-the-Counter) market
86
The most straightforward yield is to look at the coupon paid on a bond as a percentage of its market price – known as the _________________________.
flat or running yield
87
Formula of flat or running yield
Flat yield (%) = (Annual coupon / Bonds market price
(Price paid to purchase £100 nominal)) x 100
88
There is an inverse relationship between the price and the yield of a bond
Bond Pricing
89
Coupon > Yield
Premium
90
Coupon = Yield
Par
91
Coupon < Yield
Discount
92
True or False
If a bond’s price increases, the yield decreases and If a bond’s price decreases, the yield increases
True
93
A 30 year bond is paying a 7% coupon and is currently priced at face value. What is the current yield on the bond?
* If the price is at nominal/face value then the yield is the same as the coupon rate.
* In this case 7%.
94
If the above bond’s price falls to $980, what happens to the yield? Does it increase or decrease?
* When price decreases, then required yield increases beyond the coupon rate, i.e. beyond 7%.
* The purchase will receive 7% of $1000 having paid only Php 980. This means the purchaser receives around 7.14% of his investment each year (based on 70/980 expressed as a percentage).
* If he holds on to the bond for the 30 years, the purchaser will also benefit from a windfall gain of a further $20 on redemption, having paid Php 980 and receiving back $1000.
95
If the bond’s price now increases to Php 1,100, what happens to the yield? Does it increase or decrease?
* When price increases, then required yield decreases because an increase in a bond’s price results in a fall in the bond’s yield.
* For a buyer paying Php 1100, the annual yield generated by the bond will fall to 6.36% each year (based on 70/1100 expressed as a percentage).
* The purchaser will also suffer a further loss at redemption when the bond will only pay back Pho 1000 even though the purchaser paid Php 1100 to buy the bond.
96
Find the price today of a 10-year bond assuming 1,000 in face amount, a coupon rate of 5% payable semi-annually, and having a current yield of 6%.
97
Interest earned on a debt instrument that has not been paid yet
Accrued Interest
98
Price of a bond that includes accrued interest since last coupon payment
Dirty Price
99
Price of a bond that does not include the accrued interest
Clean Price
100
Formula of Accrued Interest
Accrued Interest = Face Value x (Coupon rate / Coupon Frequency) x (days since last coupon / Days between Coupon payments)
101
The quoted (clean) price of a government bond is $120. Suppose the bond bears a coupon rate of 5% payable semi-annually. Assuming that the bond has a face amount of $100 and matures on 20 December 2023, what is the dirty price today (September 20) of the bond? For simplicity, assume that there are 360 days in a year
Accrued Interst = $1.28
Dirty price = 1.28 + 120 = $121.28
102
Formula of Rate of Return
Rate of return = (final value - initial value) / initial value = net return of an investment / initial value
103
104
A bond with a face value of Php 1,000 and a coupon interest rate of 12% was issued 3 years ago and is redeemable after five years from now at a premium of 5%. The prevailing market interest rate is 14%. Estimate the bond yield to maturity?
* YTM = [ c + {(F-P)/n}] / (F+P)/2
=[120 + {(1000-1050)/5} / (1,000+ 1,050) /2 = 120 +(-10) /1025
= 110/1025
=10.73%
105
What is the current yield on a bond that is worth Php 900 with a par value of Php 1,000 and a coupon rate of 10%?
Current yield = annual interest / net proceeds
= (1,000 X 0.10) / 900
= (100) / 900 = 11.11%
106
You bought a callable bond with a face value of Php 1,000 and a coupon rate of 5%. The bond matures in 10 years, but the issuer can call the bond in two years. You bought the bond for Php 960.00 Calculate the yield to call.
* YTM = [ I + {(F-P)/n}] / (F+P)/2
=[50 + {(1000-960)/2} / (1,000+ 960) /2
= (50 + 20)/980
= 70/980 = 7.14%
107
A five-year Php 1,000 par value bond pays a 6.5% annual coupon rate. Given a Yield to maturity of 8%, what is the price of the bond today?
Year1=65/[(1+8%)^1]=60.1852 Year2=65/[(1+8%)^2]=55.7270 Year3=65/[(1+8%)^3]=51.5990 Year4=65/[(1+8%)^4]=47.7769 Year 5 = 1,065 /[ (1 + 8%)^5] = 724.8211 Bond Price = Php 940.11
108
Maria bought a Php 110,000 bond with a 4% coupon for Php 66,455.90 when there was 10.5 years to maturity. After 4 years, Maria sold the bond for Php 120,463.26. Calculate the yield to maturity at selling date.
YTM = [ I + {(F-P)/n}] / (F+P)/2
=[4,400 + {(110,000-120,463.28)/6.5} /
(110,000+120,463.28) /2
= (4,400 – 1,609.74)/115,231.60 = 2.42 %
