Chapter Six Flashcards

You may prefer our related Brainscape-certified flashcards:
1
Q

What is financial leverage?

A

If companies believe they can get a greater return on cash invested in their business than it would cost to borrow money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Is bond interest payments tax deductible?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the details of a bond issue outlined in?

A

Trust deed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the primary difference between a bond and debenture?

A

Bonds are secured by physical assets but the debentures may be secured by something other than physical assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is a bond yield?

A

An approximate measure of the annual return on the bond if it is held to mature.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Money market securities?

A

Short time fixed income one year or less.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Liquid bonds?

A

Trade in significant volumes for which it is possible to make medium and large trades quickly without making a significant sacrifice on the price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Negotiable bonds?

A

Phones that are transferable because they are deliverable form.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Marketable bonds?

A

Bonds ready for market e.g. private placement or other new issue because of price and features are attractive.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Zero bond or zero-coupon bond?

A

Created when a dealer acquires a block of high-quality bonds

and separates the individual future dated interest coupons from the rest of the bond.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Why are strip bonds usually held in a tax deferred plan?

A

Income is considered interest rather then a capital gain and taxes must be paid annually.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Callable bonds?

A

Bond issuer reserve right to pay off bond before maturity usually 10 to 30 days notice.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

All corporate and provincial bonds callable?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

All government of Canada bonds and municipal the benches callable?

A

No

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the call protection period?

A

The period before the first possible call date.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Canada yield call?

A

Allows issueer to call the bond at a price based on the greater of a) par or b) price based on the yield of an equivalent term government of Canada bond plus a yield spread.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What happens to the price of a bond when the yield falls below the coupon rate?

A

The price of the bond rises higher then par.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Extendable bonds and debentures?

A

Short maturity but with an option to exchange debt for an identical amount of long term debt at same or slightly higher rate of interest.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Election period?

A

The time period where a decision to exercise the maturity option must be made.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Convertible bonds?

A

Option to exchange bond for common shares.

21
Q

Convertible bonds have special appeal to whom?

A

Wants to share in company growth while avoiding any substantial risk. Willing to accept a lower yield of the convertible in order to have a call on the common shares.

22
Q

What is protection against dilution?

A

For convertible bonds if the common shares of the company are split the conversion privilege will be adjusted accordingly.

23
Q

Are convertibles usually callable?

A

Yes.

24
Q

Forced conversion?

A

When company stock rises in value above the conversion price a company may force the holder to exchange the security for stock by calling back the security.

25
Q

Why are forced conversions an advantage to the issuing company?

A

Can improve the company’s debt to equity ratio. Believes issuer of having to make interest payments. Can also help make room for new debt financing.

26
Q

Sinking funds?

A

Sums of money that are set aside out of earnings each year to provide for the repayment of all or part off the debt issue by maturity.

27
Q

Purchase funds?

A

Set up to retire a specified amount of the outstanding bonds or the debentures through purchases in the market if these purchases can be made at or below a stipulated price.

28
Q

What are the more common protective covenants found in Canadian corporate bonds?

A

Security. Negative pledge. Limitation on sale and lease back transactions. Sale of assets and merger. Dividend test. Debt test. Additional bond provisions. Sinking and Purchase fund and call provisions.

29
Q

Who is the largest single issue of marketable bonds in Canada?

A

Federal government.

30
Q

How are T-bills sold?

A

Sold at a discount and mature at 100.

31
Q

What term are Canada savings bonds issued for.

A

Three years

32
Q

How often can you redeemed Canada savings bonds?

A

Anytime

33
Q

Which bonds can only be purchased through payroll savings program?

A

CSBs

34
Q

How is interest earned for Canada savings bonds?

A

When redeemed interest and for each full month.

35
Q

When redeemed how our candidate premium bonds interest paid?

A

Interest earned up to the last anniversary date of issue.

36
Q

When will you not earn interest on Canada savings bonds or Canada premium bonds?

A

If you redeem within the first three months following issue date.

37
Q

Real return bonds?

A

Pays interest throughout life off bond and repays principal amount at maturity however coupon payment and principle are adjusted for inflation.

38
Q

What two factors determine bond quality?

A

Credit and market conditions.

39
Q

First mortgage bonds?

A

Senior securities of company because they constitute a first charge on company assets, earnings before unsecured current liabilities are paid.

40
Q

What does after acquired clause mean?

A

All assets that can be used to secure the loan even those acquired after the bond what issued.

41
Q

Collateral trust bond?

A

One that is secured not by a pledge of property but of securities or collateral.

42
Q

Equipment trust certificate?

A

Variation on mortgage and collateral trust bonds.

43
Q

Corporate notes?

A

Short-term unsecured

44
Q

Domestic bonds?

A

Issued in the currency and country off the issuer.

45
Q

Foreign bonds?

A

Issued outside of the issuers country and denominated in the currency of the foreign country where issued.

46
Q

Eurobonds?

A

Issued in foreign market and denominated in a currency other than that of the market where the bonds are issued.

47
Q

Euro Canadian bonds?

A

If Canadian corporation or government issued Eurobonds denominated in Canadian dollars they would be called this.

48
Q

Preferred securities or debentures?

A

Very long term 25-99 years, subordinate to other debentures, interest can often be deferred, often trade on exchange. Rank ahead of preferred.

49
Q

What are the two main reasons and rationale for borrowing money for corporations?

A

To finance operations or growth. To take advantage of operating leverage.