Chapter 6 + 7 - slides

Question 1

what does fixed income include

Answer 1

bonds, debentures, mortgages. swaps and preferred shares

Question 2

what are fixed incomes

Answer 2

fixed stream of cash flows - coupon payments over time, principal repayment at maturity

Question 3

can fixed stream of income be variable

Answer 3

yes in some cases

Question 4

bonds ve debentures

Answer 4

bonds are secured by specific assets - so in a default event, the bondholder can seize the collateral

debentures are unsecured - there’s no collateral to the bondholder in a default event

Question 5

how are bond terms described in a bond trust

Answer 5

outlines the legal rights of the borrow + lender

• dates of amount coupon payments, date of principal repayment, covenants

Question 6

what are discount bonds

Answer 6

bonds that don’t include a coupon payment,

these bonds are sold at a discount and investors earn the difference between the price and face value at maturity

• these price changes are considered as interest income, NOT AS CAPITAL GAINS

Question 7

define face value

Answer 7

the payment of the principal

Question 8

long term vs medium term cs short term bonds

Answer 8

long = over 10 years
medium = 5-10 yrs
short = 1-5 yrs

Question 9

is the bond market larger than the equity market

Answer 9

yes, as governments can issues bonds but not shares

• the are many more bonds than stocks, so each bond is less liquid

Question 10

what are the different bond coupon rates

Answer 10

floating or fixed

floating - adjust periodically,

fixed - never adjusts, the coupon rate is the same for the entire life of the bond

Question 11

how can the maturity date of a bond be modified

Answer 11

callable bonds - can be repurchased by the issuer before the maturity date, the price of repurchase set out int he bond trust

retractable bonds - can be put back to the issuer - bond holders force the repurchase

Question 12

define sinking fund bond

Answer 12

a bond that requires hte issuer to buy back the bonds over time - not waiting until the lumps sum at maturity

Question 13

define a purchase fund bond

Answer 13

required the issuer to buy back the bonds over time as long as the bonds are priced below par

Question 14

what are convertible bonds

Answer 14

bonds that contain a provision that allows the bond to be converted to share of the issuer - often used by less credit worth companies to give investors some potential upside

Question 15

what are protective provisions

Answer 15

aka covenants - these provisions restricts the borrower’s behaviour

violating a covenant can lead to technical default even though the borrower may not miss an interest or principal payment

Question 16

what are government bonds

Answer 16

aka treasury bonds -

Question 17

what are Canadian gov’t bonds, german gov’t bonds, and uk gov’t bonds called

Answer 17

canada = canada’s
german = bunds
uk = gilts

Question 18

what are the types of government bonds

Answer 18

treasury bills - short-term discount bonds

marketable bonds (treasury bonds) - medium and long-term bonds with coupon payments

Question 19

why are government bonds considered risk free

Answer 19

they are free from bankruptcy

Question 20

what are real return bonds

Answer 20

government bonds that adjust hteir return to based on the rate of inflation - in canada, the face value for a coupon and principal payments is adjusted each year based on inflation

real return bonds can be used to discover the market’s inflation expectations

Question 21

what types of bonds can a corporation issue

Answer 21

mortgage bonds, first mortgage, second mortgage

collateral trust - financial collateral
equipment trust - equipment collateral

Question 22

can corporations also issue unsecured debt

Answer 22

yes, credit ratings/worthiness is based on the company’s cash flow and unencumbered assets

subordinate debentures are ranked behind other forms of debt

corporate bonds or debentures can be fixed or floating

Question 23

what’s commercial paper

Answer 23

corporations can borrow for short periods of time by issuing commercial paper

Question 24

what happens when a company’s commercial paper is gauranteed by a bank

Answer 24

it becomes a banker’s acceptance - the commercial paper now has 2 company’s responsible for repayment

Question 25

what are strip bonds

Answer 25

strips a bond of its coupon payments to create a series of discount bonds

interest only component consists of the coupon payments - each individual coupon can become its own discount bond

principal only component consists of the principal repayment

Question 26

what’s a bond’s fair or theoretical price

Answer 26

the present value of its cash flows