Chapter 2: Asset Classes Flashcards
.
What are redeemable shares?
Shares offered by a company o shareholders that may be bought back by the company at its election
What is the difference between ordinary shares and preference shares?
Ordinary shares typically carry voting rights (not always) and prefernece shares typicallyt do not. In the event of bankruptcy, owners of prefernece shares rank above ordinary shareholders. Preference shareholders typically receive a fixed dividend which is paid before any dividends to ordinary shareholders.
If no dividend is paid to prefernce shareholders for a substantial period of time, what is likely to happen?
Preference shareholders may gain voting rights.
What are prefernce shares also referred to as?
Hybrid Securities
Who decides the dividends for ordinary shareholders?
The directors, and this decisions is genrally ratified by shareholders at the AGM
What is a proxy?
An individual or group of individuals appointed by the board of directors of the company to represent the shareholders who send in proxy requests, to vote the represented shares in accordance with shareholders’ instructions.
What is a shares nominol value?
Also known as par value or face value
The minimum amount that the company must receive from subscribers on the issue of the shares (does not have to be paid immediately in all cases)
What are the different types of preference shares?
- Cummulative
- Participating
- Redeemable
- Convertible
- Zero coupon
What is a cummulative prefernce share?
Owners will reeive this years dividend before ordinary shareholders, as well as any unpaid divideds from previous years
What are participating preference shares?
In the event of liquidation, participating shareholders are entitled to additional funds once all other prefered shareholders have been paid, as if they were also an ordinary shareholder.
What are redeemable preference shares?
These are shares that the company can buy back from shareholders at an agreed upon price in the future. Functions similary to debt.
What are convertible preference shares?
The owner has the right, but not the obligation, to convert their preference shares into an agreed upon amount of ordinary shares
What are zero coupon preference shares?
These shares offer no dividend but the shareholder can redeem at a price above that at which they were issued.
What is a downside to prefered shares?
They are often less liquid and not as actively monitored or easily purchasable by investors
What is the redemption date of the bond?
Also referred to as maturity date
The date on which the borrower agrees to pay back the nominal value of the bond
What is the nominal value of a bond
Also refred to as par value
The amount that the borrower will pay back to the holder of the bond on maturity
What does a bond’s coupon refer to?
The interest rate that the borrower pays to the bondholder
What is a floating rate bond?
Also known as floating rate notes
A bond where its coupon references a published interested e.g., SOFR. The coupon rate resets whenj the published interest rate changes
What is an index linked bond?
Bonds that adjust both the coupon and principle amount repaid at maturity by reference to the prevailing rate of inflation.
What is a yield
A measure of the percentage return that an investment provides
What is a flat yield and how is it calculated?
A flat yield only considers the coupon and ignores the existence of any capital gain/loss if the bond is held through to redemption.
Flat yield = (annual coupon(%)/price)*100
What is gross redemption yield?
Also known as yield to maturity
Calculates the yield of a bond by taking into account the coupon and any gain/loss. Does not account for taxation
What is the Internal Rate of Return (IRR)
The discount rate that, when applied to future cash flows of the bond, produces the current price of that bond
What is net redemption yield?
Takes into account annual coupon and any profit/loss, as well as tax
What is modified duration?
The modified duration of a particular debt instrument shows the expected change in its price, givena specified change in interest rates. It is an approximate percentage change in the price of a bond brough about by a 1% change in interest rates
How to calculate effect of interest rate change on debt instrument, given the modified duration
(a/100b)c
a=modified duration
b=price of debt instrument
c=change in percetage point
How do you calculate the conversion ratio of a convertible bond
Nominal value/Conversion price of shares
What are the limitations of flat yield calculation
- Provides ab incomplete picture
- Ignores time value of money
- Cannot be used on FRN
How to calculate accrued interest?
Coupon Payment*(Number of days since last payment/Number of days between payments)
What is the flat/clean price of a bond
The price of the bond without accrued interest
What
What is the dirty price of a bond
The price of the bond + accrued interest
what does a ‘spread’ refer to in the bond market?
The difference between two yields, usually expressed in basis points, with each basis point representing 1/100 of 1%
What are ‘spreads’ used for in the bond market?
They are used to compare instruments against one another or to benchmark. In general, the greater the diference in the risks of the comparables, the larger the spread
What does the yield curve represent
The relationship between yields on financial instruments from the same issuer,but with different periods to maturity
what does the normal yield curve demonstrate about investor preferences?
Investors prefer liquidity over a higher yield rate. This is why, given the same coupon rate, the price of a short dated government bond will be higher than that of a longer dated government bond, resulting in a higher yield for the longer dated instrument.
What does the normal yiled curve look like?
Upward-sloping to the right
What does the inverted yield curve look like
downward-sloping to the right
What is on each of the axis of the yield curve?
Gross redemption yield on the y axis, term to maturity (years) on the x axis.
What does the inverted yield curve demonstrate?
Yields available on short term government bonds exceed those available on long term government bonds.
What causes the inverted yield curve?
When there is an expectation of a significant reduction in interest rates at some stage in the future
What can the inverted yield curve be a sign of?
It can be interpreted as a forecast for slowing economic conditions or an impending recession
What are the effects of a negative interest rate?
Bnaks would have to pay to leave their excess cash with the central bank, which should encourage them to lend it out, thus boosting the economy. It would encourage spending amongst the genral population.
What are the negative effects of a negative interest rate?
Poeple may withdraw savings to avoid negative rates. long term funds such as pensions would be less successful.
Why might an investor buy into negative bond yields?
When an investors need to preserve most of thier capital is greater than their wish to generate a poitive return.
What is discounting and how is it calculated?
- The process of establishing present values
- 1/(1+r)^n where r is the interest rate and n is number of years
How are government bonds typically quoted?
They are quoted on the basis of the price a buyer would pay for 100 units of the currency’s nominal value
What is the ex-dividend period of a bond
seven working days prior to the coupon payment date where bonds are sold without upcoming dividend payment
what is cum-dividend
When a bond is sold with dividend included
What does a deflation floor refer to
Some index linked bonds have a deflation floor where the redemption payment will not be less than the origional par value. There is no deflation floor for UK index linked gilts
How are real interest rates calculated?
[(1 + Nominal interest rate)/(1 + Inflation rate)] + 1
What is the consumer price index
The rate at which prices faced by consumers are increasing
What is a zero coupon bond
a bond that pays no coupon. they are sold at a discount to face value and the return comes from the difference between purchase price and the price paid at redemption
What are zero coupon bonds also referred to as?
Pure discount bonds
What does STRIPS stand for?
Seperate Trading of Registered Interest and Principle of Securities
What is BRICS
The major emerging markets:
* Brazil
* Russia
* India
* China
* South Africa
What is fixed charge secured debt?
The debt carries a charge over a particular company asset e.g., a building
What is floating charge secured debt?
The debt is secured against a group on company assets; in the event of default, a floating charge crystallises over the available assets at that point.
What are bonds issued with a fixed charge usually referred to as?
Debentures
What are asset backed securities?
Bonds that are backed by a particular pool of assets
What are MBSs
Mortgage backed securities are bonds that are created when a group of mortgage loans are packaged for sale to investors.
Why do ABSs often utilise a special purpose vehicle?
SPV is seperate entity therefore seets leave the originators financial statement. This also means that if the originator suffers bankruptcy the SPV remains intact, therefore increasing credit-worthiness of ABSs
When ABSs do not use an SPV, what are they referred to as?
Covered bonds
What is a note trustee
A note trustee is appointed to represent the interests of holders of the securities, while providing guidance to the issuer
What is a security trustee?
For issues secured by a pledge of securities or other properties, the security is charged in favour of the trustee for the benefit of the various secured parties. The governing documents dicatate the order of priority of payments among the entitled parties.
What is a share trustee?
Holds the shares in an issuing SPV in order to ensure off-balance sheet treatment for the originator of the transaction
What is a successor trustee?
Provided for banks which need to resign because of conflicts of interest or when work requirements exceed the bank’s capacity
