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Business Fashion Practices > FBP C19, more depth > Flashcards

FBP C19, more depth Flashcards

1
Q

Debt financing

A

the process of borrowing money to develop or expand a business / the process of taking out a loan

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2
Q

Principal

A

the amount of money borrowed

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3
Q

Duration of the bond

A

is the length of time for which the money is borrowed

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4
Q

Interest

A

is the additional amount paid in order to get the loan

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5
Q

Bonds

A

are the primary instrument of debt financing, they represent a promise to repay the loan with interest over a set period of time

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6
Q

Who issues bonds?

A
  • Corporations
  • Municipalities
  • Governments (foreign or domestic)
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7
Q

Are bonds traded?

A

Yes. The financial world trades the worth of bonds much like stocks are traded. Bonds are worth their face value + interest.
Bonds represent a security in a corporation

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8
Q

What are bonds also reffered to as

A

Referred to as “fixed income” instruments of investment

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9
Q

Interest rate

A

is a yearly % paid on the principal of the loan / Interest represents the extra amount of money needed to entice an investor

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10
Q

Is intrest valuble

A

Interest rate is valuable in the future especially if other interest rates drop because bonds pay a guaranteed interest rate

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11
Q

How is the value determined?

A

Value is determined by the interest rate paid on the initial capital investment loan called a principal

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12
Q

When is interest paid?

A

Interest is paid regularly or in full at the maturation of a bond.

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13
Q

Paperwork of a bond

A

Like the paperwork of a stock

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14
Q

Types of bonds:

A

 Registered bonds – have interest checks sent to the “registered” owner of the bond. These checks must be endorsed

 Coupon bonds – the owner must present coupon to an agent to receive interest payments

 Zero coupon bonds – do not pay interest

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15
Q

Registered bonds

A

have interest checks sent to the “registered” owner of the bond. These checks must be endorsed

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16
Q

Coupon bonds

A

the owner must present coupon to an agent to receive interest payments

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17
Q

Zero coupon bonds

A

do not pay interest

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18
Q

Why are bonds a safer investment than stocks:

A
  • They offer a fixed interest rate
  • If a company declare bankruptcy the bondholders get paid right after the IRS (claim surpasses both common and preferred stockholders)
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19
Q

Floating bond

A

when a new bond is offered

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20
Q

Three types of bonds: (based on when they have to be repaid, maturity date)

A

1) Bonds
- Mature in over 10 years
- Municipalities float bonds to build schools and roads
- Governments float a variety of bonds to finance projects
- Corporations float bonds because they allow for longer repayment terms than would be available through the bank.

2) Notes
- Mature within 1-10 years
- Floated by financial sectors

3) Bills
- Mature under a year
- Only floated by governments because most corporations go to the bank for short term loans
- Terms of repayment too short for municipalities

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21
Q

How is the value of the bond measured?

A

Par value (actual value of principal) + the projected interest based on the interest rate at the date of issue

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22
Q

Premium bond

A

if the interest rate is higher than the general interest rate offered on timed deposits

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23
Q

General interest rate

A

refers to the interest rate offered by banks, other bonds etc. that are timed

24
Q

High yield / junk bonds

A

high investment rate as corporations that offer tthen have limited credit worthiness and high risk because there’s a strong possibility that the corporation will default on the bond.
- Can be very profitable

25
Q

Default

A

means not paying the interest or the principal

26
Q

Discount bonds

A

if the interest rate offered on the bond is lower than the general interest rate

  • Bond is sold at less than face value
  • When the bond reaches maturity, the investor receives the full face value
  • Maturity is when the principal is due to be paid and the bond will be retired
27
Q

Yield

A

is the interest of the bond divided over the price of the bond

28
Q

Yield to maturity

A

accounts for the amount of interest left to be paid on the bond before the issue is retired.

29
Q

We can guarantee a bond is paid back in 2 basic ways

A
  1. Collateral – the property or assets that can be used to repay the bond in the case of default
  2. Mortgage-backed bonds – means the bond is secured by property and buildings that have mortgage
30
Q

Defaulting

A

failure to repay loan

31
Q

Asset backed bonds

A

are guaranteed by collateral

32
Q

Debentures

A

non asset backed bonds, backed by the reputation of the company

33
Q

Bonds may be convertible

A
  • The owner can redeem the bond for a specified amount of stocks
  • Once the bond is redeemed for stock you no longer get interest on threat bond as it no longer exists.
  • The actual price of stock may be higher when you convert it
34
Q

Corporate bond

A

investors who buy cooperate bonds are lending money to the company issuing the bond.

35
Q

Serial bond

A

have different maturity dates that stagger the repayment for thr corporation within the same bond issue (used for long term bond issue)

36
Q

A sinking fund

A

is a cash reserve that the corporation contributes to regularly and is used to redeem the bond (offers investors a sense of security)

37
Q

A corporation can rollover the bond issue if it callable

A

-

38
Q

Callable bonds

A

allow corporations to pay off the principle early and no longer be obligated to pay interest payments

39
Q

Rolling over the debt

A

the corporation may reissue another bond at a lower interest rate.

40
Q

Municipal Bonds

A

debt securities issued by states, cities, counties and other government entities to fund day to day obligations and to finance capital projects such as buildings, schools etc.

Features:

  • Tax exempt
  • Tax exempt status is on the interest earned and not the principal
  • Used to finance local projects
  • Tax exemption is granted because the state and fed government is relieved of the costs of the improvements
41
Q

State issued bonds

Why are they issued:

A

To finance statewide projects such as unis, hospitals etc.

42
Q

State issued bonds

How are they taxed?

A

Most state bonds are double tax exempt because the federal government recognizes that improvements in the business environment of a state can impact the long-term tax base by creating jobs and opportunities.

43
Q

Treasury bill / T bill

A

a short dated government security, yielding no interest but issued at a discount on its redemption price.

44
Q

Treasury bill / T bill

How are they sold?

A

They are sold at auctions in 500.0K denominations to institutional customers. Bill is sold with no interest attached.

45
Q

Treasury bill / T bill

How is profit derived?

A

Is derived from the difference between face value at maturity and actual principal paid at time of purchase

  • Risk free
  • Redeemable in 3-6 months
  • Not callable
  • Sold by the treasury department
46
Q

Government bonds

A

Investors buy different types of bonds both foreign and domestic

47
Q

Who are government bonds bought buy:

A
  • Banks
  • Pension funds
  • Brokerage houses
  • Unions
  • Governments
48
Q

Agency bonds

A

are issued by federal agencies (us government)

Features:

  • Finances projects such as housing, energy and highways
  • Have verifying degrees of taxability
  • US saving bonds are issued in small denominations and mature in 7 years
49
Q

3 ways investors make money in bonds

Investors make money on bonds in several different ways:

A
  1. Cashing in the bond – when t matures (especially profitable in high yield bonds)
  2. Sheltering income – by buying tax free bonds
  3. Selling the bond – to other investors based on the yield to maturity, as compared to prevailing interest rates
  • Investors sell bonds at a discount if they think the interest rate is too low or low corporation loses its credit rating
  • Corporations with lower credit ratings float bonds at higher interest rates
  • If the credit rating improves the bond is worth more to the investor
50
Q

Credit rating

A

is an assessment of the ability to repay a loan

  • Governments have credit ratings
  • The lower the credit ratings the higher the interest rate must be in order to attract investors
  • Based on the corporations’ statements and other financial documentation
51
Q

Mutual funds

A

an investment program funded by shareholders that traders in diversified holdings and is professionally managed.

Features:

  • Run by professionals
  • Fund combine the monies of many investors and invest in market
  • Investors are given shares of the fund called net assets values
  • Funds not only buy stock…many funds buy an assortment of investments intraments such as bonds ect.
  • Traded once a day at the close of the market
52
Q

Net asset value

A

the investor buy a proportion of the fund. The proportion is called the net asset value share.

53
Q

Net asset value equation

A

NAV = current market value of fund – liabilities / outstanding shares

54
Q

Conditions of purchase of funds

A

Some funds have specific conditions of purchase. These conditions may vary buy they include:

  • Required fee to buy into the fund called a loan
  • Annual management fees
  • Penalty for early withdrawal from funds. Many funds require investors to commit to fund for a specific period usually 3-5 years.
55
Q

Benefits of investing in mutual funds

A
  • Professional management
  • Diversified investment portfolio
  • Ability to invest in markets the investors may not feel comfortable investing in, on their own (biotech, emerging markets)
56
Q

Many funds have specific goals and specialties

A
  • Balanced funds with mix of investments
  • Global funds
  • Emerging markets
  • Aggressive growth
  • Income
  • Index funds
  • Sector funds specialize in specific industry
  • Tax shelters
57
Q

Exchange traded funds

A

is a mutual fund that is traded on the equity exchange market like a stock

  • Usually include a combination of stocks, bonds, real estate investments and cash like a mutual fund
  • Unlike a mutual fund they are traded throughout the day like a stock and their value is based on supply and demand rather than N.A.V

Business Fashion Practices (12 decks)

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