Chapter 6/7: Final Flashcards
What are fixed-income securities ?
They provide cash flow to the holder over time
What are the two forms of cash the person would receive?
Coupon payments (interest payments)
Principal
When will you receive your ‘principal payment’?
You will receive it at maturity
What are the different types of ‘fixed income types’?
- Bonds
- Debentures
- Mortgages
- Swaps
- Preferred Shares
The rate that you might recieve my vary why?
The rate might not be fixed and be predetermined so the amount of cashflow a person might receive will vary based on the rate set.
Whats an example of a ‘variable rate’
Banks prime rate
What are bonds?
These are securities secured by specific assets
What does it mean to secure specified assets?
If the issuer defaults on payments they can take the specific assets as collateral
What are debentures
These assets are not secured
What does not secured mean for (debentures)
There is no collateral in an event where the issuer defaults on payment
What can they try to claim if they default on payments (debentures)
They can try to just claim the general income and assets of the borrower
What is debt short for?
Debenture
What are bond terms
These outline the terms of the bond
What does it specifically outline (bond term)?
The legal rights of the borrow (company) and the lender (the investor)
What are some examples of what we might see in ‘bond terms’?
- Dates of amount coupon payments
- Date of repayment principal
- covenants (restrictions)
What are bond prices
Its how much you pay for the bond and what you will get back at maturity
How are Bond prices determined?
Its how much the bond is worth in the market and how much you pay for it
What is a premium bond price?
Its when the bond is bought at a higher price than market value
eg: 104$ purchase at $100
What is discound bond price
When you purchase a bond less than makret value
Ex: 96 when its worth 100
What does ‘par or face value mean’?
How much the bond is worth in the market
What are discounted bonds?
Bonds that do not receive any coupon or interest payments instead they are sold at a discounted (below par) amount
For a discounted bond, how do thye earn money?
They earn the difference between the price (cost) and face value(market value) at maturity
Explain example: price is 90$ and the face value is 100$
Its basically the investor pays for the bond at 90$ when in reality its worth 100 so they earn the difference of 10$
What is the difference the ‘discounted bond gives us’
Intrest income
Are the price change for a discounted bond considered interest income or capital gain for tax purposes
INTREST INCOME
What are short medium and long-term bonds
It discusses bonds’ time frames
Short-term bonds- 1-5 years
Medium-term bonds mature in 5-10 yrs
long term bonds mature over 10 years
What are liquidatable bonds?
These are bonds that trade at a high volume
What are marletable bonds : the two types
on the run
off the run
What are ‘on the run bonds’
Bonds that are newly issued
What are off the run bonds
Bonds that are npt newly issued more old
Are bond markets bigger than equity markets
YES
What do governments issue more of
Bonds not shares can’t own the government
What is a fact about bond markets
More bonds than stocks so they are less liquid
What are the two coupon rates bonds have
- Floating rates
- Fixed rates
What are floating rates?
These are rates that adjust perodically
ex: government 90 day tbill
Wht are fixed rates
These are rates that do not chnage until the end of bonds life
What does bond maturity mean?
Its when the bonds term comes to end
can the maturity date be modified
yes in the bond trust
What ar the types of bonds thats maturity date adjusts
- Callable
- Retractable bonds
What are callabe bonds
These are bods that are repurchased by issuer (company) before maturity date
What are retractable bonds
These are bonds that are force issuer to repurchase back by bondholder
what are planned repurchases?
These are bonds that require the issuer to repurchase some of the bond over time
There are two types of planned repurchase
sinking
purchase fund
What is a sinking fund?
Requries the issuer to buy the bonds over time
What is the purchase fund
it requires the issuer to buy the bond back at a below par price
What are convertible bonds
Its when bonds have the prvosiiso that allows them to be able to be converted to shares
What is a call option
This is in the bond that allows the conversion of bond price to shares
What kinda of companies issue convertible bonds
Less credit-worthy companies are given as an upside
What are protective covenants
These are restrictions on the borrower’s behavior
What happens when we violate a covenant?
It can lead to a technical default which means they broken the bonds trust even when they haven’t missed any payments
What are government bonds?
They are often seen as ‘treasury bonds’ and are bonds issued by the government
What are the names of government bonds in Canada germany UK
Canadas
Bunds
Gilts
What are the two types of government bonds
- Treasury bills
- Marketable bonds
What are treasury bonds
Short-term discounted bonds
What are marketable bonds
These are medium to long-term bonds with coupon payments
What are real return bonds
These are government bonds that adjust coupon rates due to inflation and its used to see markets inflation expectation
What are corporate bonds (3 types)
- Mortageg bonds
- Collaterial bonds
- Equipment trust
What is mortgage bonds
They have specific assets as collateral
What are first and second mortgage bonds?
first mortgages have specific assets as collateral and you pay back second mortgage bonds after the first is paid back
What is collateral trust
Used for financial collateral
What are equipment trus?
Used for equipment collateral
What are ‘corporate debentures’?
Corporations issue unsecured debt
How is their unsecured debt based off of?
It’s based on a companies unencumbered assets and its cash flow
Where are subordinated deb ranked?
Its ranked behind other forms of debt
What are the bond rates for corporate bonds and debentures
Floating or fixed rates
What are short-term corporate borrowing
It is when corporations can borrow for short periods
What are strip bonds?
It is when a bond is stripped of its coupon payments to create a series of discount bonds
What is an ‘intrest only’/ ‘principal only’ bond
Only consists of the coupon payments. consists of the principal repayment
What is the quasi-fixed income?
Its basically we can think we can buy fixed income like individual retail investors however that’s not the case. They can invest in term depoits or GIC’s
What is the ‘fair’ or theoretical price of a bond?
Shows a bonds pv of its cash flows
What is the discount rate
The required rate of return
What does the dsicount rate mean?
Its how much they expect to earn as a return to be interested to buy
How do we find the price of a bond?
PV!
What are the coupon + principal repayment
coupon payments are the cash flow
principal repayment is the cash flow we get at end of maturity
What fucntion do you use to find the rate?
RATE()
what periods do you use
not the number of years th periods
If they give you the present value what is that
NPV or the pv of the bond
