Chapter 7

Question 1

Loddered GIC

Answer 1

Evenly divided into multiple term lengths. As each portion matures it can be redeemed or re-invested. Reduced interest rate

Question 2

Instalment GIC

Answer 2

Initial lump sum contribution is made with further minimum contributions made weekly, bi-weekly or monthly

Question 3

Index-Linked GIC

Answer 3

Guarantee a return of the initial investment upon expiry and some exposure to equity markets. Insured by the CDIC

Question 4

Interest-Rate-Linked GIC

Answer 4

Offer interest rates linked to the changes in other rates (like prime, bank’s non-redeemable GIC interest rate or money market rate)

Question 5

Yield Curve

Answer 5

Represents the relationship between the interest rates and the time to maturity for a given borrower

Question 6

Current Yield Calculation

Answer 6

Annual Cash Flow divided by Current Market Price times 100

Question 7

Callable Preferred Shares

Answer 7

Shares thar can be bought back at the discretion of the issuing company prior to maturity

Question 8

Cumulative Preferred Shares

Answer 8

Dividends not paid in one period will accumulate and be paid in a later period

Question 9

Convertible Preferred Shares

Answer 9

Shares that can be exchanged for common shares of the issuing company

Question 10

Participating Preferred Shares

Answer 10

Shares that pay a fixed dividend along with the common shares.

1. Preferred dividend is paid
2. Common shareholders receive a particular amount of common dividend
3. Any remaining funds from the dividend payment are distributed on a share-by-share basis to both common and preferred share holders

Question 11

Odd Lots

Answer 11

Transactions with less than the standard trading units (less than 100)

Question 12

Common Shares

Answer 12

Are issued by corporations and are expected to earn either dividends or capital gain or both

Question 13

Preferred Shares

Answer 13

Are issued by corporations to raise capital for investment projects and are generally issued at a fixed par value per preferred share

Gives an investor ownership stake in the company

Question 14

Perpetual Preferred Share / Hybrid Securities

Answer 14

A preferred share without a maturity date. Sold in the primary market at a par value.

Question 15

Identify the relationship between Bonds and Interest Rates

Answer 15

Bond yields and bond prices fluctuate daily

Question 16

Short Selling

Answer 16

The sale of securities that the seller does not own

Question 17

Margin Account

Answer 17

The investor can buy securities on credit and initially pay only part of the full price of purchase (no borrowing permitted)

Question 18

Cash Account

Answer 18

Customer is required to make full payment for purchases on or before the required settlement date (2 business days after transaction)

Question 19

Long Positions

Answer 19

Investor buys a security and holds it in hopes of selling later for a higher price

Question 20

Treasury Bills (T-Bills)

Answer 20

Are issued through a competitive bidding process at a discount from par

Question 21

Fixed Income Securites

Answer 21

Considered loans that investors make to governments and corporations

Question 22

Coupons

Answer 22

Include promise to re-pay the maturity value/principal on maturity date. Represents the fixed income the bondholder receives from holding that bond. Also referred to as interest income, bond income or coupon income

Question 23

5 Most common types of Fixed-Income Securities

Answer 23

1. Government and corporation Bonds
2. Guaranteed Investment Certificate (GIC)
3. Treasury Bills
4. Bankers’ Acceptances
5. Commercial Paper

Question 24

Government Bonds

Answer 24

Have virtually no default risk but are subject to interest rate risk. This is because governments can just raise taxes to pay the coupon payment or re-pay the value at maturity

Question 25

Serial Bond
Who is it used by?

Answer 25

Part of the bond matures in each year during the bond term.
Also known as Instalment Debenture
Used by municipalities

Question 26

Debentures
Who is it used by?

Answer 26

Simply promises to pay and their value depends on the issuers ability to pay interest and re-pay principal
Used provincially

Question 27

Corporation Bonds

Answer 27

Issues by corporations to finance acquisition of equipment and other purposes. Used to raise capital as an alternative to issuing new shared (debt financing vs. Equity financing)

Question 28

Convertible Bond

Answer 28

Can be converted/exchanged into a given number of common shares. Have features of both bonds and shares.

Question 29

Bond quality can be determined by 2 factors…

Answer 29

1: Credit Quality of a Province - degree of certainty that interest will be paid and principal when due
2: Market Conditions

Question 30

Escalated-Rate GIC

Answer 30

Interest rate increases over GIC term

Question 31

Banker’s Acceptance (BA)

Answer 31

A commercial draft (written instruction to make a payment) drawn by borrower for payment on a specific date

• guaranteed at maturity by the bank
• sold at a discount and mature at face value

Question 32

Commercial Paper

Answer 32

An unsecured promissory note issued by a corporation or an asset-backed security-backed by a pool or underlaying financial assets

• sold at a discount and mature at face value
• issued by large firms with established financial history and are ranked based on ability to meet short-term debt obligations

Question 33

Interest Rate Risk

Answer 33

The tendency of bonds to change in value with changing interest rates

Question 34

2 different types of return calculations of bonds…

Answer 34

1: the current yield - the coupon payment for one year divided by the market price of the bond
2: the yield to maturity - shows the return you would expect to earn over the life of a bond starting today, assuming you are able to reinvest the coupons you receive at the yield to maturity.

Question 35

Yield to maturity calculation

Answer 35

Interest income +/- price per compound period / (purchase price + par value) / 2 X 100

Question 36

Interest Rate Risk

Answer 36

Because they represent a claim on a stream of dividends, preferred shares are sensitive to the general level of interest rates. When interest rates rise, the prices of fixed-rate preferred shares tend to fall because the fixed dividend will be worth less to investors in a higher-rate environment.

Question 37

Credit Risk

Answer 37

Because preferred shareholders rank below all creditors and bondholders in the even of bankruptcy, preferred share prices can be quite sensitive to changes in perceived creditworthiness, especially when that perception goes down

Question 38

Call Risk

Answer 38

Because almost all preferred shares are callable at the option of the issuer, investors are subject to call risk. When investors are focused to give up their preferred shares when it is not in their best interest which usually happens when the shares are trading at a premium to their par value

Question 39

Extension Risk

Answer 39

If a preferred share does not have a retraction feature, the issuer have the sole ability to determine when it will return the par value to investors

Question 40

Liquidity Risk

Answer 40

The total market value of preferred shares in Canada is a fraction if the market value. As a result the value that changes hands each day through trading on Canadian exchanges is also small

Question 41

Margin Account Calculation

Answer 41

Share Dollar x 100 x % difference of max loan value = Answer

Question 42

Call Option

Answer 42

Gives the owner the option of buying shares at a fixed-exercise price prior to the call’s expiration date