Chapter 6: Corporate Actions Flashcards
What is a Preference Share?
Why are they AKA hybrid?
A PS are hybrid instrument, as income events are dividends, but these are specified (amount & frequency), similar to a bond.
There is a also no contract to oblige the issuer to pay these.
What is a Bullet Payment?
Whereby the principal of the bond is paid in a lump sum payment.
What is a Non-Bullet Issue?
Whereby the principal of the bond can be paid over a series of payments.
Which Bonds Typically Have Higher Coupons?
Bullet or Non-Bullet?
Bullets
As the lump sum payment is more uncertain causing a higher default risk, demanding higher coupons to relfect this.
What is a Sinking Fund?
4 points? ChatGPT ones?
- A variation of the Single Bullet Maturity
- Issuer sets aside funds annually for maturity payment
- Funds held by a trustee, used for bond buybacks (sub par value) or held until maturity
- Reduces defualt risk
What is a Putable Bond?
A bond that gives the investors the flexibility to require the bonds to be redeemed early, after giving the issuer due notice.
What is a Callable Bond?
Where the issuer has the right, at specified points, to redeem some or all of the bonds at a pre agreed amount, often par value.
What is a Bonus Issue?
Definition
A bonus issue is where a company issues new shares to its shareholders for no consideration, raising no further capital.
What is a Bonus Issue AKA?
2 more
- Scrip Issue
- Capitalisation Issue
Why are Bonus Issues Used?
To improve the liquidity and marketability of their shares.
How are Bonus Issue Shares Created?
Why does this change shareholder funds in company accounts?
These are made by converting undistrubuatble capital reserves into share capital. Converts reserves from previous share premiums or retained profits.
What Changes Following a Bonus Issue to a Companies Value?
- Nominal Value of the share capital will increase proportionatley to the number of shares issued.
- The net worth of the business should remian the same
What Changes Following a Bonus Issue to a Companies Mkt. Cap?
- Dividends per share will proportionatley fall, in line with the market value
- However Market Cap should remain the same.
Why Might a Bonus Issue Increase Share Value?
Once a share is double figures (UK) or $200, it is considered expensive, so improving the liquidity can result in a bigger market an increased share price.
What is a Stock Split?
How is this represented?
A corporate action whereby issued shares are divided into muliple shares.
E.g. 1 share becoming 5 is a “5-for-1 Split”