Chapter 8 Flashcards
Full voting rights
Class B
Issued by national government agencies and government sponsored corporations other than the Bureau of Treasury.
Government Agency Notes
-a bond secured by a lien on real property
-Market value of real property > Mortgage bonds issued
Mortgage
- Numerous rights of stockholders
a. Right to vote
b. Right to receive dividends
c. Right to share in residual assets
d. Right to transfer their ownership
e. Right to examine the corporate bonds
f. Pre-emptive right
Preferred Share Features
Par value
- It is the face value that appears on the stock certificate
Dividends
It’s stated as a percentage of the par value and are commonly fixed and paid quarterly but are not guaranteed by the issuing firm
Cumulative and Noncumulative dividends
Cumulative dividends are carried forward in arrearage when they are not paid in a particular year
Noncumulative dividends are lost forever when they are not declared in a particular year.
- No definite maturity date
Preferred shares are usually intended to be permanent. However, it sometimes carries special retirement provisions such as a) call feature, (b) sinking fund provision, and (c) conversion option. - Convertible preferred share
Owners have the option to exchange preferred shares with ordinary shares - Voting rights
Preferred share does not ordinarily carry voting right. However, the firm may hold special voting procedures for a specific time period to elect a board of director that represent the preferred shareholder’ interests. - Participating features
This entitles the holder to share in profits beyond the declared dividend. Most preferred share issues are nonparticipating which means their return is limited. - Protective features
- To assure regular payment of preferred share dividends and improve preferred share quality, covenants may
(a)Restrict the amount of common share cash dividends
(b)Specify minimum working-capital levels
(c) Limit the sale of securities senior to preferred share - Call provision
This gives the issuing firm the right to call in the preferred share for redemption. - Maturity
Most preferred shares before a re perpetual, but today, it already has a sinking fund (thus an effective maturity date)
Who are its users and how does it work?
companies, banks, investors
Types of Bonds
Unsecured Long-term Bonds
Secured Long-term Bonds
Interest bearing bank deposits that cannot be withdrawn without penalty before a specified date.
The main risks are:
being locked into low interest rates if rates rise
penalties when withdrawn prior to maturity
Time Deposits (CD)
Capital Market Trading
Primary Market
Secondary Market
An agreement involving the purchase of securities by one party from another with the promise to sell them back at a given date in the future.
Reverse repurchase agreement
Features of Ordinary Equity Shares
Par value/No par value
-It is the stated value attached to a single share at issuance.
-Issue price in excess of par is recorded as Additional paid-in capital, Capital surplus, or Capital in excess of par
Authorized, Issued, and Outstanding
Authorized shares is the maximum number of shares that a corporation may issue without amending its charter
Issued shares is the number of authorized shares that have been sold.
Outstanding shares are those shares held by the public.
- No Maturity
It’s permanent. It’s neither callable nor convertible bit it can be repurchased in the secondary markets through a brokerage firm or tender offer.
Tender offer is a formal offer to purchase shares of corporation. - Voting rights
-Ordinary Share entitles the holder to vote in selection of directors and other matters.
-It can be exercised through proxy voting done under the rule of SEC.
Class A ordinary equity shareholders has limited to no voting rights while Class B has full voting rights. The two common systems of voting are majority voting and cumulative voting - Book Value per Share
It is equal to the ordinary share equity (ordinary share + paid-in capital + retained earnings) divided by the number of shares outstanding - Numerous rights of stockholders
a. Right to vote
b. Right to receive dividends
c. Right to share in residual assets
d. Right to transfer their ownership
e. Right to examine the corporate bonds
f. Pre-emptive right
ordinary equity shareholders has limited to no voting rights
Class A
What is a money market?
Debt instruments that have short term maturities
Allows governments, banks and large institutions to raise money by selling money market securities
Transfer excess funds to those in need of those funds.
two common systems of voting are
majority voting and cumulative voting
Unsecured short-term promissory note issued by a corporation to raise short-term cash, often to finance working capital requirements
90 days to 9 months maturity
Credit rating of the issuing company is important to see the ability of the firm to repay the borrowed funds.
Sold on a discounted basis.
Commercial Paper
Trading Process for Corporate Bonds
explain
Unsecured Long-term Bonds
Debentures
Income Bonds
Subordinated Debentures
Types of Money-Market Instruments
Commercial Paper
Bankers’ Acceptances
Treasury Bills (T-bills)
Government Agency Notes
Local Government Notes
Interbank Loans
Time deposits (CD)
Repurchase Agreements (Repos)
bonds denominated in a currency other than the currency of the market in which they are offered
Eurobonds
-investment bank can purchase the bonds through COMPETITIVE BIDDING against other investment banks or by directly negotiating with the issued.
Competitive Sale
carried forward in arrearage when they are not paid in a particular year
Cumulative dividends
what is capital market
a financial market in which longer-term debt (original maturity of one year or greater) and equity instruments are traded.
includes BONDS, STOCKS, MORTGAGES
Highly liquid securities
Maturity of one year or less
Issued by the Bureau of Treasury (BTr)
Default risk free
Little interest rate risk
Sold on a discounted basis
To cover current government budget deficits and to refinance maturing government debt
Treasury Bills (T-bills)
number of authorized shares that have been sold.
Issued shares i
general outflow of money from the banking industry
disintermediation
It is a class of equity shares which has preference over ordinary equity shares in the
dividends
distribution of corporate shares in case of liquidation
but after debt.
It generally has no voting rights
Preferred Share
raise money to finance investments that will generate profits, or in the case of government issuers, public benefits - for many years in the future
bond market
the ratio of the annual interest payment to the bond’s market price
5 Current Yield
the sale of the securities takes place
Secondary Market
unsecured long-term debt and backed only by the reputation and financial stability of the corporation
Debentures
interest payment changes with market conditions
Variable Bonds
bonds’ most prevalent example of the interest only loan with investors receiving exactly the same two sets of cash flows:
Periodic Interest Payments
Principal returned at Maturity
long-term promissory note issued by the firm
bonds
are lost forever when they are not declared in a particular year.
Noncumulative dividends
a formal offer to purchase shares of corporation.
TENDER OFFER
is the maximum number of shares that a corporation may issue without amending its charter
Authorized shares
Capital Market Participants
National and Local Government
issues long-term notes and bonds to fund the national debt
issues notes and bonds to finance capital projects
Corporation
issues both bonds and stock to finance capital investment expenditures and fund other investment opportunities.
backed by the government; investors consider them the safest fixed-income investments in the world
Treasury Bonds
bonds rated BB or below
Junk Bonds
Features of
Money-Market Instruments
Short-term
Sold in large denominations
Low default risk
Highly Liquid
Low returns on investment
A promissory note issued by a non-financial firm to a bank in return for a loan.
The bank then resells the note in the money market at a discount and guarantees payment.
Risk of default is very low.
Bankers’ Acceptances
are those shares held by the public.
Outstanding shares
requires interest payments only if earned and non-payment of interest does not lead to bankruptcy
Income Bonds
Approximate Yield Formula
look nb
disadvantages of using bonds
Debt (other than income bonds) results in interest payments that, if not met, can force the firm into bankruptcy.
Debt (other than income bonds)produces fixed charges, increasing the firm’s financial leverage.
Debt must be repaid at maturity and thus at some point involves a major cash outflow.
Typical restrictive nature of indenture covenants may limit the firm’s future financial flexibility.
Sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified date in the future.
Repurchase Agreements (Repos)
two kinds of secondary market
- organized exchanges
- OTC exchanges
concerned with cash management or with financing their portfolios of financial assets
money market
-a single investment bank obtains the exclusive right to originate, underwrite and distribute the new bonds through a one-on-one negotiation process.
- the investment bank provides the origination and advising services to the issuers
Negotiated Sale
Issued by provincial or local governments.
Local Government Notes
-the underwriter does not guarantee a firm price to the issuer.
Best Effort Underwriting Basis
It is a form of long-term equity that represents ownership interest of the firm.
Ordinary equity shareholders are called residual owners, the true owners of the corporation
Shareholders assume a limited liability.
Ordinary (Common) Equity Shares
claims of bondholders of subordinated debentures are honored only after the claims of secured debt and unsubordinated debentures have been satisfied
Subordinated Debentures
agreement between the firm issuing the bonds and the bonds trustee who represents the bondholders
indenture
the chance that the bond issuer will not be able to make timely payments
involves a judgement about the future risk potential of the bond provided by rating agencies
Credit Quality Risk and Bond Ratings
Advantages of using bonds
Long-term debt is generally less expensive than other forms of financing.
Bondholders do not participate in extraordinary profits; the payments are limited to interest.
Bondholders do not have voting rights.
Flotation costs of bonds are generally lower than those of ordinary(common) equity shares.
Other types of Bonds
Variable Bonds
Junk Bonds
Eurobonds
Treasury Bonds
main risk of Time Deposits
The main risks are:
being locked into low interest rates if rates rise
penalties when withdrawn prior to maturity
refers to the bond’s internal rate of return; the discount rate that equates the present value of the interest and principal payments with the current market price of the bond
6 Yield to Maturity
Bond Features and Prices
1 Par Value
face value of the bond that is returned to the bondholder at maturity
2 Maturity
the length of time until the bond issuer returns the par value to the bondholder and terminates the bond
3 Coupon Interest Rate
percentage of the par value of the bond that will be paid out ANNUALLY in the form of interests
4 Indenture
agreement between the firm issuing the bonds and the bonds trustee who represents the bondholders
5 Current Yield
the ratio of the annual interest payment to the bond’s market price
6 Yield to Maturity
refers to the bond’s internal rate of return; the discount rate that equates the present value of the interest and principal payments with the current market price of the bond
applied to repos which means the collateral is valued at slightly less than the market value and reflects the underlying risk of the collateral.
Repurchase Agreements (Repos)
new issues of stocks and bonds are introduced
one where the issuer of the security actually receives the proceeds of the sale.
Investment Funds, Corporations, Individual Investors
Primary Market
Loans extended from one bank to another with which it has no affiliations.
Short-term basis
Unsecured
When banks have insufficient liquid assets, banks borrow to balance assets and liabilities.
When banks have a surplus of liquid assets, they will offer loans to other banks.
Interbank Loans
valuation formula
Po = Dp/Kp
Other Arrangements of capital market
Competitive Sale
Negotiated Sale
Best Effort Underwriting Basis
