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Canadian Securities Course - Volume 1 > Chapter 6 > Flashcards

Chapter 6 Flashcards

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SIE Exam flashcards
1
Q

What are fixed-income securities?

A

investments that represent the debt of the security’s issuer

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2
Q

What are fixed-income securities also referred to as?

A

Debt securities

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3
Q

What are some different types of fixed-income securities?

A

-bonds
-debentures
-money market instruments
-mortgages
-preferred shares

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4
Q

How do fixed-income securities work?

A

The issuer of the fixed-income security promises to repay the investor in full, with interest included over the life of the security or at maturity

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5
Q

Why would governments issue a fixed-income security?

A

-To raise money to finance operations
-If more is spent on obligations than it receives in tax revenue, they need to make up the difference by borrowing money via fixed-income securities

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6
Q

What is a government’s primary source of revenue?

A

Tax revenue

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7
Q

Why would a corporation issue a fixed-income security?

A

Two main reasons:
1. To finance operations or growth
2. To take advantage of financial leverage

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8
Q

Why would a corporation issue a fixed-income security to finance operations or growth?

A

-corporation doesn’t want to spend available cash
-instead can issue a bond and use the proceeds for a purchase to finance operations/growth
-borrowing costs of the bond are paid out from the corporation’s revenue stream

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9
Q

Why would a corporation issue a fixed-income security to take advantage of financial leverage?

A

-increase profits
-they can use borrowed funds to seek magnified percentage returns on an investment
-may allow them to increase production and revenues
-borrowing money to allow increase in profits may allow them to increase the return on shareholder’s equity

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10
Q

What is a debenture?

A

A type of bond that is secured by something other than a specified physical asset and backed by the general creditworthiness of the issuer

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11
Q

What is a debenture also referred to as?

A

unsecured bond

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12
Q

What is a bond?

A

A long-term, fixed obligation debt security that is secured by physical assets

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13
Q

In what are the details on a bond issue outlined?

A

Trust deed

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14
Q

What is a trust deed?

A

a legal document that outlines details of a bond issue

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15
Q

What happens if an issuer of a bond can no longer meet the obligations of the trust deed?

A

The bond goes into default and the provisions of the trust deed allow the bondholders to seize specified physical assets and sell them to recover their investment

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16
Q

List the important characteristics of a bond

A

-Par value (face value)
-coupon rate
-maturity date
-term to maturity
-bond price
-yield to maturity

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17
Q

What is the par value?

A

-the principal amount the bond issuer agrees to pay at maturity to the bondholder
-a bond is issued and matures at its par value

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18
Q

What is the coupon rate?

A

-the interest or rate paid by the issuer relative to the bond’s par value over the term of the bond
-represents the regular interest the issuer is obligated to pay to the bondholders

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19
Q

What is the most common type of coupon payment?

A

Semi-annual

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20
Q

When is the coupon rate of a bond set?

A

At the time of issue

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21
Q

Why is a bond considered a fixed-income investment?

A

bondholders get a fixed-income stream of payments based on the coupon rate and return on principal at maturity

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22
Q

How are coupon payments impacted by changes in interest rates?

A

-they aren’t
-changes in interest rates only impact the value and price of a bond

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23
Q

What does maturity date mean?

A

the date at which the bond matures

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24
Q

What happens at a bond’s maturity date?

A

-The bond matures
-principal amount of loan is paid back to investor
-final interest payment is also made

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25
Q

What does term to maturity mean?

A

the time remaining before a bond matures

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26
Q

What does bond price mean?

A

Basic:
-the price an investor pays today to earn interest every 6 months and receive the principal repayment upon maturity
Specific:
-the sum of the present value of all future interest payments plus the present value of the future repayment of the loan upon maturity

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27
Q

How is a bond price quoted?

A

quoted using an index with a base value of 100

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28
Q

What does yield to maturity mean?

A

the annual return on a bond that is held to maturity

29
Q

List the main features that most bonds have in common

A

-interest payments (coupons)
-can only be purchased in specific denominations
-bond pricing, par value is always 100
-bond yields (there are different types)
-term to maturity (again, different types)

30
Q

Are bond coupon rates fixed or variable?

A

-most are fixed
-some are variable (floating-rate securities)

31
Q

What does a bond’s coupon rate indicate?

A

the income the bondholder will receive

32
Q

How do the coupon rates work with step-up bonds and most types of savings bonds?

A

coupon rates can change over time, according to a specific schedule

33
Q

What is an index-linked note?

A

-a loan where a rate of interest doesn’t have to be applied
-instead, can be compensated in the form of a return based on future factures like the change in the level of an equity index

34
Q

What denominations are most common for purchasing bonds in the retail market?

A

$1,000 and $10,000

35
Q

What denominations are most common when institutional investors are purchasing bonds?

A

-very large denominations, possibly worth millions of dollars

36
Q

What is par?

A

-bonds trading at 100
-also called face value

37
Q

What does it mean when a bond is trading at a discount?

A

trading below par (under 100)

38
Q

What does it mean when a bond is trading at a premium?

A

trading above par (over 100)

39
Q

What has the biggest impact on bond pricing?

A

market interest rates

40
Q

What is a bond yield?

A

the amount of return on a bond (what the bond is yielding)

41
Q

List different types of bond yields

A

-yield to maturity
-current yield
-interest income earned divided by its face value

42
Q

What is current yield?

A

dividing coupon income by the current market price

43
Q

Do bond yields and price stay constant over their terms, or do they fluctuate?

A

-they fluctuate
-coupon, however, stays constant over the term of the bond

44
Q

What term to maturity does a short term bond have?

A

more than 1 year but less than 5 years remaining in their term

45
Q

What term to maturity does a medium term bond have?

A

5-10 years remaining in their term

46
Q

What term to maturity does a long term bond have?

A

greater than 10 years remaining in their term

47
Q

What are money market securities?

A

-bonds that have a term to maturity of up to 1 year
-short-term, fixed income security

48
Q

What are some types of money market securities?

A

-t-bills
-commercial paper
-some high grade bonds qualify when their terms are reduced below 1 year mark

49
Q

What are the traits associated with how easily bonds can be traded?

A

-liquidity
-negotiability
-marketability

50
Q

What are liquid bonds?

A

-trade in significant volumes
-medium and large trades can be made quickly without a significant sacrifice on the price

51
Q

What is an example of a type of bond that has good liquidity?

A

-Government of Canada bonds
-there is an active market and are generally in high demand by both domestic and international investors

52
Q

What are negotiable bonds?

A

-in good delivery form and can be easily transferred
-refers to a time when actual paper copies of bonds were delivered between investment dealers
-not an issue today because most bonds are electronically recorded

53
Q

What are marketable bonds?

A

-have a ready market
-ex: a private placement with attractive features might have clients ready and willing to buy it
-not necessarily liquid because most private placements don’t have an active secondary market

54
Q

What is a strip bond?

A

-aka zero coupon bond
-individual interest coupons are separated from the rest of the high-quality bond
-each coupon, and bond residue, is sold separately at significant discounts to their face value

55
Q

What is bond residue?

A

-the bond without the coupons (from strip bond)

56
Q

What are some characteristics of strip bonds?

A

-no interest payments (strips are purchased at a price that gives a compounded rate of return when they mature at par)
-trade at a discount to their par value
-interest income (not capital gains), therefore tax is paid annually even though interest isn’t received until maturity (should be held in a tax-deferred plan because of this)

57
Q

What is a callable bond?

A

bonds that come with a clause outlining that bond issuers reserve the right (but not obligation) to pay off the bond before maturity (this is a call or redemption feature)

58
Q

Why would an issuer pay off a callable bond before maturity?

A

To take advantage of lower interest rates or reduce their debt when they have excess cash to do so

59
Q

What is a standard call feature?

A

this allows the issuer to call bonds for redemption at a specific price on either specific dates or specific intervals over the life of the bond

60
Q

Is the call price of a bond lower or higher than the par value?

A

-call price is set higher than the par value of the bond, which provides a premium payment for the bondholder

61
Q

What is the call protection date?

A

The period before the first possible call date

62
Q

What are some examples of callable bonds in Canada?

A

Most corporate and provincial bond issues (Government of Canada bonds and municipal debentures are usually non-callable)

63
Q

What happens to a callable bond’s premium payment as the bond approaches maturity?

A

premium payment becomes lower (closer the bond is to maturity date, less hardship for the investor)

64
Q

How much notice does the issuer of a callable bond have to give if they want to call or redeem the bond?

A

10-30 days

65
Q

What is an extendible bond?

A

-short maturity term (typically 5 years) with an option to extend the investment
-investor can exchange the debt for an identical amount of longer-term debt (typically 10 years) at the same rate or a slightly higher rate of interest
-basically, maturity date can be extended so the bond changes from a short-term bond to a long-term bond

66
Q

What is a retractable bond?

A

-opposite of extendible
-issued with long maturity term but with option to redeem early
-at least 10 year maturity date, but investors can redeem the bonds at par by a retraction date (usually 5 years earlier than maturity date)

67
Q

What is an election period for extendible and retractable bonds?

A

a specific timeframe where holder must notify that they are either extending the term or allowing it to mature (extendible bond), or shortening the term of the bond (retractable)

68
Q

What happens if a bondholder doesn’t take any action during an election period (extendible and retractable bonds)

A

-Extendible: bond automatically matures on the earlier date and interest payments cease
-retractable: debt remains a longer-term issue

69
Q
A

Canadian Securities Course - Volume 1 (1 decks)

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