Chapter 6 Flashcards
What is a bond and debenture?
A long term, fixed obligation that is secured by physical asset. The details of the bond are listed inn trust deed and written in bond contract.
Debenture is a type of bond that is not secured by a physical asset, generally secured by a general claim on residual assets. Backed by credit worthiness
What are the three categories of bonds according to their term to maturity?
Short term: more than 1 year, less than 5
Medium-term: More than 5 years, less than 10
Long-term: more than 10 years,
What is included in money market securities?
Short term, fixed income securities, term of 1 year or less. (T-Bills, commercial paper and some high-grade bonds when term is below 1 year)
What is a liquid bond?
They can be traded in significant volumes, therefore medium and large orders can be made quickly without significant sacrifice in price (gov bonds good example)
What is a negotiable bond?
They can be transferred in good delivery form, which generally refers to when bonds were in paper forms and deliver in paper-form. negotiability is not really an issue anymore. Means it can be easily transferred
What is a marketable bond?
They have a ready market, they have a private placement or clients ready to buy it. Often not liquid before most private placements dont have an active market
What is a strip bond?
It is a zero coupon bond.Trade at a discount and income is considered interest income rather than capital gain. Recommended to keep strip bonds in tax-deferred plans such as RRSP.
What are callable bonds?
When the issuer has the right to pay off the bond before maturity. issuer must give 10 to 30 days notice that bond is being called.
Most corporate and provincial bonds are callable.
Most government of Canada and municipal debentures are not callable
What are callable bonds?
When the issuer has the right to pay off the bond before maturity. issuer must give 10 to 30 days notice that bond is being called.
Most corporate and provincial bonds are callable.
Most government of Canada and municipal debentures are not callableW
What is call protection period
Before before the first call date when callable bond cannot be called.
What are extendible bonds?
bonds issue with short maturity (normally 5 years) and they have an option to extend the investment (normally 10 years) at the same interest rate or slightly higher rate,
What are retractable bonds?
Bonds that are issued with a. long maturity date (10 years usuall) but the investor has the option to redeem early by a retraction date (usually 5 years before maturity)
What date is selected if election is made to extend/shorten the term of extendible/retractable bonds
The bond automatically matures on the earlier date.
Why are convertible bonds less affected by changes in interest rates?
The price of the bond will not drop below the conversion price even if interest rates rise sharply.
What is a purchase fund?
When a fund is set up to retire a specified amount of the outstanding bonds or debentures through a purchase in the market. The price must be at or below a stipulated price