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CTP > Chapter 6 - Capital Markets > Flashcards

Chapter 6 - Capital Markets Flashcards

1
Q

Capital markets

A

A market in which individuals and institutions trade financial securities

Include issues with maturities extending beyond one year

Include debt and equity markets

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2
Q

Debt market

A

Includes fixed income capital such as bonds and term loans

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3
Q

Equity market

A

Shares of common and preferred stocks

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4
Q

Government debt securities

A

Govt usually only issue debt not equity

Usually:

1) backed by the full faith and credit of the issuing government
2) used to finance fiscal deficits
3) issues through the ministry of finance or treasury department

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5
Q

State owned enterprise (SOE) Government Sponsored Enterprise (GSE) in us

A

A firm that is created by a national government in order to participate in or help support various commercial activities on the government’s behalf

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6
Q

Sub sovereign entities

A

Governmental units within a country (eg. states, countries, cities)

Usually borrow only in debt

Interest paid is usually tax exempt

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7
Q

Mutual fund company

A

A company that brings together money from many people and invests it in stocks, bonds, or other assets.

Each investor in the fund owns shares which represent a part of the holding

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8
Q

Broker dealers role in capital markets

A

Serve as intermediaries in the purchase and sale if capital market securities

Roles:

  • investment bankers
  • originators
  • securities traders
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9
Q

Primary markets

A

Offer newly issued debt and equity securities to investors when firms or governments sell securities to raise funds

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10
Q

Seasoned equity offering (SEO) or follow-on issue

A

If new shares are sold by company who already has shares trading in the market, these new shares are called follow on issue etc

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11
Q

4 principle benefits of organized exchanges

A

1) a competitive marketplace where supply and demand determine prices
2) frequent trading to maximize price volatility between individual trades
3) increased depth of capital markets to enable issuers to raise large amounts of capital through securities offerings
4) a fair market for exchange participants

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12
Q

Qualified institutional buyers (QIBs)

A

In the us an institution the manages at least $100m in securities

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13
Q

Typical characteristics of private debt

A

1) lower issuance costs, since it is usually exempt from most regulatory registration
2) limited disclosure of proprietary information
3) less restrictive covenants
4) higher interest rate for the investor to offset the diminished liquidity of private placement

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14
Q

Term loan

A

Fixed maturity loan that can be repaid either in installments or lump sum payment

Term loans are typically:

1) issued with an amortizing payment structure
2) negotiated with a financial institution and are not normally bought or sold on secondary markets
3) issued for a specific financing need
4) secured by the asset being financed (usually the assets useful life)

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15
Q

Bond indenture

A

The contract between bond holders and the issuers of the bond

  • describes the bond issue
  • lists collateral
  • makes representations and warranties
  • specifies covenants
  • states the terms by which the company will provide future redemption
  • sets forth the schedule of interest payments dates and amounts, maturity date and any early redemption provisions
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16
Q

Debentures

A

Unsecured bonds that represent general claims against the issuer’s assets or cash flows

Tend to have a higher rate than secured bonds

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17
Q

Convertible bond

A

Corporate debt specifies that can be converted by the holder or sometimes the issuer into shares of common or preferred stock at a fixed ratio of shares per bond

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18
Q

Sovereign bonds

A

Bonds issued by a national govt

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19
Q

Sub sovereign bonds or municipal bonds

A

Issued by any govt under the federal or national one

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20
Q

Eurobonds

A

Aka an external bond, is an international bond that is denominated in a currency other than that is the country in which it was issued

Eg. Eurodollar bond issued in India by U.K. company is in dollars

Is a flexible financing tool giving companies the ability to raise money in whatever currency they want and take advantage of regulations in countries

Can be used as a hedge

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21
Q

Zero coupon bonds

A

Pay no interest and are issued at a discount with face value paid at maturity

Benefits:

  • no cash outlays until maturity
  • issuing company revives an annual tax deduction until maturity

Draw backs

  • not callable or refundable
  • investors must pay taxes
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22
Q

Income bonds

A

Only pay interest if a company has profits

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23
Q

Collateral trust bonds

A

Backed by securities of other companies that are owned by the firm issuing the bond

24
Q

Equipment trust certificates

A

Bonds that are secured by moveable equipment (eg. A fleet of trucks or railroad equipment )

25
Q

Index bonds

A

Bonds that have interest rates tied to an economic index and are often used when a high level of inflation is present or anticipated

26
Q

Economic development bonds

A

Typically issued by developing countries or sponsoring organizations such as the world bank or IMF to foster development of infrastructure or related projects

27
Q

Tax increment financing (TIF) bonds

A

Used primarily for local financing in which a municipality may use all or a portion of new property taxes or sales taxes within a designated district to assist in the project’s financing

28
Q

Tender option bonds

A

Or put bonds that allow the investor to redeem the bond either once during its lifetime or on specific dates.

These bonds are usually redeemed at par value

29
Q

Green bonds

A

Used by federally qualified organizations to raise funds to promote sustainability by developing under utilized or abandoned properties. Or the fund sustainable projects or renewable energy

30
Q

Project financing - debt capital

A

Applies to large projects often in energy or for large private infrastructure projects (stadiums, toll roads, shopping centers). Lenders are paid from the project’s cash flows and generally don’t have recourse to project’s individual sponsors or owners

31
Q

Indenture

A

A legal document that outlines the rights and obligations of the borrower and the creditor

Intended to protect the lenders from actions by management that could hurt the lenders

32
Q

Representations and warranties

A

The existing conditions at the time when the loan agreement is executed as attested to by the borrower

33
Q

Events of default

A

May occur if the borrower breaches or violates any term or condition under a debt agreement

34
Q

Cure period

A

Provides a period of time in which an event of default may be corrected before the lender may pursue default remedies

35
Q

Call provision

A

Gives the issuer the right to call a bond or other security for redemption period to the maturity date

36
Q

Put provision

A

Allows the investor to force the issuer to repurchase the debt at specified dates

37
Q

Sinking funds

A

A provision in the indenture agreement the requires issuers to call or repurchase on the open market a portion of the outstanding bond issue each year. Basically amortizing it over the life of the bond. Increases the safety of the bond and requires a lower interest rate

38
Q

Defeasance of debt

A

Removes the debt from the borrower’s balance sheet without retiring the debt. Borrower places sufficient funds I. Escrow, usually in government securities, to pay for interest and principal. Payment and retirement is debt are now guaranteed so the debt can be removed from the balance sheet

39
Q

Promissory note

A

The legal portion of the debt contract, which is an unconditional promise to pay a specified amount plus interest at a defined rate

40
Q

Lien

A

A legal claim on an asset. Lender has a lien or claim on assets used to collateralize a loan, in the event that the lender can’t take physical collection of it

41
Q

Credit enhancements

A

When the lender is provided with reassurance that the borrower will honor the obligations. This is done through additional collateral, insurance or third party guarantee

42
Q

Guarantees

A

A credit enhancement mechanism
Where a lender requires a third party to grantees a loan and then the lender can go after the guarantor should the borrower fail to pay

43
Q

Aspects of bond ratings corporates should consider

A

1) the rating criteria used by the agencies
2) the importance of the ratings to investors and management
3) changes in ratings

44
Q

Maturity matching

A

Matching the life of the debt issue to the life of the specific asset financed

45
Q

Shareholders equity accounts

A

Par value

Retained earnings

Additional paid-in capital

Represent the historical accounting value of the equity and not the current market value

46
Q

Par or face value - equities

A

An arbitrary amount usually stated in the corporate charter that indicates the minimum amount stockholders have put up or must put up in the event of bankruptcy.

Usually $1 or 0

47
Q

Retained earnings

A

The earnings, net of dividends, paid to shareholders, accumulated since the inception of the firm. What is reinvested in the firm, does not represent an available pool of funds

48
Q

Additional paid in capital (APIC)

A

An account that reflects the difference at the time of issue between the par value and the issuance price (less underwriting costs) of newly issued stock

49
Q

Book value per share

A

The total book value of common equity divided by the number of common shares outstanding

50
Q

Market value per share

A

The current price at which a share of stock is traded

51
Q

Treasury stock

A

Represents shares of common equity that have been reacquainted by the issuer

52
Q

Tracking stock

A

Separate stock created by a parent company to track financial progress of a particular line of business. Trades under a unique ticker deprecate from parents regular stock

Do not provide investors with ownership in parent company, no voting rights

53
Q

Preferred stock

A

Doesn’t have voting rights, pays dividends, dividends are not tax deductible

Dividends are usually paid in arrears. Meaning any missed preferred dividends must be repaid before common shareholders get dividends

54
Q

Convertible securities

A

Usually bonds or preferred stock that may be exchanged for common stock at the holder’s or issuer’s option at a pre stated price.

55
Q

Warrants (bonds with an equity purchase option)

A

Company issued options that give warrant’s owner the right to buy a stated number of shares of stock at a specified price for a specified period of time.

Often listed in a major exchange and traded like options

Most warrants are detachable meaning they can be traded separately from the bond

56
Q

Depository receipt (DR)

A

A type of negotiable financial instrument (typically equities) that trad on a local exchange but represent stock ownership in a foreign, public ally listed company

CTP (8 decks)

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