Chapter 6 Flashcards
1
Q
THE RATIONALE
A
co so ly luan
2
Q
What are the options for companies to raise cash?
A
fixed-income securities, selling assets, borrowing from a bank, equity securities.
3
Q
What are the reasons for companies to issue fixed-income securities?
A
finance operations or growth and take advantage of financial leverage
4
Q
What is financial leverage?
A
when return from borrowing is higher than the borrowing cost.
5
Q
where the companies put details of bond?
A
In a trust deed and written into a bond contract
6
Q
What is debenture?
A
a type of bond that is secured by something not physical assets, typical general claim or residual assets -> backed by creditworthiness of issuer -> unsecured bonds.
7
Q
What is the most popular coupon payment for bond?
A
semi-annual coupon payment
8
Q
How the price of bond react to interest rate change?
A
As interest rate rise and fall, the price or value of a bond will rise and fall accordingly
9
Q
What is term to maturity mean?
A
time that remains before a bond matures/
10
Q
What is the principal to calculate bond price?
A
present value of all income from bond
11
Q
What is yield to maturity?
A
is the annual return on a bond that is held to maturity.
12
Q
What is interest of bond?
A
Coupon also called interest income or bond income or coupon income. Mostly fixed coupon rate but can also be floating -rate securities.
13
Q
What are the forms of bond’s interest payment?
A
- Step-up bond
- zero-coupon bonds, strip coupon, and residuals
- index-linked notes
14
Q
What is step-up bond?
A
bond that coupon rates can change over time according to a specific schedule (most saving bonds)
15
Q
What is zero coupon bond (strip coupon, residuals)
A
Bond that interest can be compounded over time and paid at maturity
16
Q
What is index-linked notes?
A
Bond that compensation is based on future factors.
17
Q
What is denominations?
A
Bond has denominations and can only be purchased in specific denominations (common being $1000 and $10000). (Large can be issued for investing institution )
18
Q
What does it mean when bond trading at a discount?
A
Price < par value
19
Q
What does it mean when bond trading at a premium?
A
Price > par value
20
Q
What is bond yields?
A
represents the amount of return on the bond. (there are few different kind of yields including YTM)
21
Q
What are the different kinds of bond’s terms?
A
Short-term (> 1y and <5y remaining in their term), medium-term bonds (5-10y), and long-term bonds (>10y).
22
Q
When will a bond traded as money market securities?
A
Certain bond that has the term to maturity less than 1 year. these securities including T-bills and commercial paper but some high-grade bonds also qualify when their terms are reduce below 1 year.
23
Q
What are the features of bond in the market?
A
- Liquid bond
- Negotiable bonds (if it is in good delivery form -> not today’s issue)
- Marketable bond (if it can transfer between investor, some bond are liquid but not marketable because it is not active in secondary market)
24
Q
How strip bond work?
A
From a high-quality bonds, dealer sell each coupon separately and then sell bond residue (the bond without coupon) at a discount price. The income of strip bond is considered interest income and tax must be paid annually on the interest income although the income is received when bond matures. -> recommended to be held in tax-deferred plan.
25
What is callable bond (redeemable bond)?
Bond issuers reserve the right (not obligation) to pay off the bond before maturity with 10-30 days notice. (Most corporate and provincial bonds are callable and most government bond and municipal debentures are non-callable).
26
What is standard call features?
A standard call feature allows the issuer to call bonds for redemption at a specified price on either specific dates or specific intervals over the life of the bond. Call price often is set higher than par value which called a premium for investor. (Premium payment becoming lower as the bond approaches its maturity date).
27
What is the call protection period?
period that callable bond cannot be called.
28
What is the normal premium for callable provincial bond?
100 plus accrued interest (interest that has accumulated since the last interest payment date).
29
Retractable
Co the thu vao
30
What are extendible bonds?
usually issued with a short maturity term (typically 5y) but with the option to extend the investment. which means that the investor can exchange the debt for an identical amount of longer-term debt at the same rate or slightly higher rate of interest -> so a bond can change from short term to long term bond.
31
What are retractable bonds?
opposite with extendible bond. issued with a long maturity term (usually at least but with the option to redeem early) which means investors have the right to redeem the bonds at par by a retraction date (typically 5y earlier than the maturity date).
32
What is election period in extendible and retractable bonds?
the specific period that investor must notify the trustee or agent of the issuer if they want to activate the right or not (election period often last few days to 6 months)
33
What is convertible bonds and debentures (convertibles)?
allows investors to lock in a specific price (conversion price) for common shares of the company.-> call conversion privilege. -> make bond more attractive to investors
34
what is conversion price?
The price that locked to convert from bond or debenture to common stock.
35
What is the characteristics of convertible bonds?
1. Conversion price goes up overtime (to encourage early conversion)
2. Some debenture issues with a clause that no adjustment for interest or dividends (no pay accrued interest or dividends before the conversion take place)
3. Protection against dilution: if stock split up before then the privilege will be adjusted accordingly.
4. Convertibles normally are callable, usually small premium and after reasonable notice.
36
What is forced conversion?
When the issuer uses call right. they force investors to convert to the predetermined number of common shares or the bond will be called. Happen often when market interest rates fall below the coupon rate or if the price of underlying common shares begins to trade above the conversion price.
37
How the company that uses forced conversion calculate the price for convert bond to common shares?
95% of the weighted average trading price for 20 consecutive trading days, ending 5 days before maturity or the date fixed for redemption. (like sell common stock with 5% cheaper than market price)
38
What are the different option of issuers when using forced conversion?
1. Force investor to choose between predetermined number of share or accept the company's redemption offer.
2. Force investor to pay a conversion price at 95% of market price (average 20 trading days)
39
What is the market behaviour of convertibles?
1. If conversion price > market price -> convertible bond behaves like other straight fixed-income security.
2. if conversion price < market price -> bond price will increase accordingly.
- > even if the interest rate rise sharply, the bond price will not drop below the conversion price.
40
Where do issuers get money to conduct the redemption maturity?
1. From sinking fund (by calling them on a fixed schedule dates or from the secondary market)
2. from purchase fund (only when buying them in the secondary market when the trading price is at or below the specified price)
41
What is sinking fund?
Sums of money that are set aside out of earnings each year to provide for the repayment of all or part of a debt issue by maturity. (sinking fund provision is as binding on the issuers as any mortgage provision).
42
What is purchase funds?
is the fund that set aside to retire a specified amount of the outstanding bonds or debentures through purchases in the market. The purchases must be available at or below a stipulated price.
43
What is the different between sinking fund and purchase fund?
Sinking fund provisions are binding while purchase funds retire bonds only under the right market conditions.
44
What is protective provisions?
grant the bond holders the right to veto or block certain corporate actions.
45
What are the common protective covenants in Canadian corporation bonds?
1. Security (includes details of assets-backed)
2. Negative pledge (issuer will not pledge (cam co) any assts if the pledge results in less security for investor)
3. Limitation on sale and leaseback transaction (on back assets)
4. sale of assets or merger (in case of mere, forcing either retiring the debt or assumption by the newly merged company)
5. dividend test (ensures equity will not be drained by excessive dividend payments)
6. Debt test (states which financial tests and other circumstances allow the firm to issue more debt)
7. Sinking or purchase find and call provisions (outlines the provisions of the sinking or purchase fund and the specific dates and price the firm can call the debt)
46
What is Crown corporation?
A company that issue debt that has a direct call on the government of Canada (always noncallable).
47
What are the bond issued by Government of Canada?
1. Treasury Bill (T-Bill)
2. Canada savings bonds (CSBs) and Canada premium bonds (CPBs)
3. Real return bonds
48
What is Treasury Bill (T-Bills)?
- short term (3m, 6m, 1y)
- denominations from $1,000 to $1 mil.
- not pay interest (sell at discount and this discount is taxable as income for investors)
- Transferable
- Every 2 weeks, regular T-bills are sold at auction by Ministry of Finance through Bank of Canada.
49
What are CSBs and CPBs?
- Were secure savings product fully guaranteed by the government.
- Not transferable (no secondary market and can redeemed any time)
- Discontinued since Nov 2017 (declining sale and high management cost)
50
What is real return bond?
- pay interest throughout life and principal upon maturity.
- Coupon payment are adjusted for inflation to provide a fixed real coupon rate.
- At maturity, the maturity amount is calculated by multiplying the original face value of the bond by the total amount of inflation since the issue date.
- cumulative level of inflation called bond's inflation compensation
51
What are types of provincial and municipal government securities?
1. Guaranteed bonds (can extend guarantees to municipal loans, school costs or industrials concerns)
2. Provincial securities
3. Municipal securities
52
what decide the price of province bond?
credit quality ( depends on existing debt/ capita, level of federal transfer payments, stability of provincial government, wealth of the province in terms of natural resources, industrial development, and agricultural production) and market condition.
53
What are guaranteed bonds?
- Many provinces also guarantee the bond issues of provincially appointed authorities and commissions.
- Most province also issue T-Bills (Investment dealers and bank purchase them both at tender and by negotiation usually for resale).
- Issues sold abroad are underwritten by syndicates of dealers and banks
54
What are provincial securities?
Saving bonds that can be purchased only by residents of province, only at certain time of year and redeemable every 6 months (or in QC any time)
55
What are the different savings bond in Ontario?
variable-rate bond, fixed-rate bond, and step-up bond (interest paid increases over time).
56
What are municipal securities?
- mostly from installment debenture (also called a serial bond).
+ Part of this bond mature in each year of its term.
+ non-callable
57
What credit of municipality depend on?
Taxation resources. (all else being equal, the municipality with a diversified industrial sector is a better investment risk than a municipality built around 1 major industry).
58
What are types of corporate bonds?
1. Mortgage bonds
2. Floating-rate securities
3. Domestic, foreign, and Eurobonds
4. Collateral trust bond (secured by securities or collateral, the issuers often own few fixed assets)
5. Equipment trust certificates (secured/pledge equipment, often issued in serial form, with set amount that matures each year)
6. Subordinated debentures (Khoan no thu cap, details is in prospectus ban cao hach)
7. Corporate notes (short-term unsecured promise)
8. High-yeild bonds or speculative bonds (high risk compensated by high yeild)
59
What is mortgage bond?
agreement pledge land, buildings, or equipments as security for a loan. (best securities the company can issue is first mortgage bond especially when they include after-acquired clause)
60
What is floating-rate securities (variable-rate securities)?
- bond that automatically adjusts to changing interest rate.
- popular
- A minimum rate on the bonds protect investor
61
What is domestic bonds?
issued in the currency and the country of issuer.
62
What is foreign bonds?
issued outside of the issuer's country and denominated in the currency of the issuer's country.
63
What is Yankee bonds?
Canadian company issues bonds in US dollars in the United states
64
What is Samurais bonds?
British company issues yen-denominated bonds in Japan.
65
What is foreign pay bonds?
bonds pay interest in one currency and the principal in another.
66
What is Eurobonds?
International bonds issued in a currency other than the currency of the country where the bond is issued
67
What is EuroCanadian bonds?
When a Canadian company or government issues Eurobonds denominated in Canadian dollars.
68
What is Eurodollar bonds?
Eurobonds denominated in U.S dollars.
69
What is Bankers' acceptances (BA)?
- is a commercial draft drawn by a borrower for payment on a specified date. A BA is guaranteed at maturity by the borrower's bank.
- Sold at discount
- Trade in multiples of $1,000 with minimum initial investment of $25,000.
- Term from 30 - 90 days some up to 365 days
70
What is commercial paper?
- unsecured promissory note issued by a corporation or asset-backed security backed by a pool of underlying financial assets.
- term from less than 3m to 1y
- sold at discount
- usually issued by large firms
71
What is term deposit?
- offer a guaranteed rate for a short-term deposit (usually <= 1y)
- Penalty normally applies for withdrawing funds before a certain period.
72
What is Guaranteed investment certificates (GIC)?
- offer fixed rates for specific term
| - Can redeemable or non-redeemable (cannot cash before maturity except depositor's death or extreme financial hardship).
73
Will Canada deposit insurance corporation (CDIC) cover all GICs?
No, not for GICs over 5y
74
What is escalating-rate GIC?
The interest rate for these GICs increases over the GIC’s term
75
What is laddered GIC?
The investment for these GICs is evenly divided into multiple-term lengths. As each portion matures, it can be reinvested or redeemed. This diversification of terms reduces interest rate risk.
76
What is Instalment GIC?
An initial lump sum contribution is made for these GICs, with further minimum contributions made weekly, bi-weekly, or monthly.
77
What is index-linked GIC?
These GICs guarantee a return of the initial investment at expiry and some exposure to equity markets. They may be indexed to domestic or global indexes or to a combination of benchmarks.
78
What is interest-rate linked GIC?
These GICs offer interest rates linked
| to the change in other rates such as the prime rate, the bank’s non-redeemable GIC interest rate, or money market rates
79
What are the popular managed product related to fixed-income?
Fixed-income mutual funds and exchange-traded funds (professional management, liquidity, low investment cost) -> suit for investor with limited money and find bond is too complex
80
What does it mean when the bond quote bid 99.25 and ask 99.75
bond quote for percentage of par rather than an dollar amount so that mean if you want to buy $5,000 face value of this bond would cost $5,000 * 99.75% = $4,987.5 plus accrued interest.
81
What is Aaa rating mean?
highest quality, lowest level of credit risk.
82
What is Aa rating mean?
high quality, very low level of credit risk
83
What is A rating mean?
upper-medium grade, low level of credit risk
84
What is Baa rating mean?
medium-grade and moderate credit risk
85
What is Ba rating mean?
speculative and substantial credit risk
86
What is B rating mean?
consider speculative and high credit risk
87
What is Caa rating mean?
judged speculative, poor standing and very high credit risk
88
What is Ca rating mean?
highly speculative, very near default with some prospect of recovery of principal and interest
89
What is C rating mean?
lowest rated and are typically in default, with little prospect for recovery of principal or interest.
90
What is the difference between a marketable issue and a liquid issue?
A marketable bond means there is a market willing to purchase the securities. A liquid market means one can make purchases and sales of the security easily without much of a sacrifice in price, since the securities trade abundantly
