Investment Vehicle Characteristics (25%) Flashcards
1
Q
Pricing of Treasury securities
A
- each point is $10
- each 0.1 point is 1/32 of $10 ($0.3125)
2
Q
Convertible Debt Calculation
A
- always divide par value by the conversion price
3
Q
Calculating a Bond’s Parity Price
A
- Take the bonds market price and divide by conversion ratio
- Take current stock trading price and multiply by conversion ratio
- Divide current price of bond by conversion ratio
4
Q
Current Yield
A
Return / Investment
- return is always annual interest in dollars
5
Q
Bond Ladder
A
Discount
Y - yield to call
M - yield to maturity
C - current yield
A - annual coupon
—
Premium
A - annual coupon
C - current yield
M - yield to maturity
Y - yield to call
6
Q
T-Bills
A
- issued and traded at a discount
- no stated interest rate
- highly liquid
- 13 week treasury is used as risk free rate
7
Q
Liquidation of a Company (in priority)
A
- Secured creditors
- Unsecured creditors
- Subordinated creditors
- Preferred stockholders
- Common stockholders
8
Q
Tax Equivalent Yield
A
Muni Coupon / (1 - tax bracket)
9
Q
Eurobond and Eurodollar Bonds
A
- Bond issued outside the United States but interest and principal is paid in US dollars.
- US government does not issue theres, foreign and domestic corporations and governments do however
- Eurobond pays in foreign currency. Eurodollar pays in US dollars
- Free from filing with the SEC, have lower issuance costs
- Yields are higher due to political and country risks
10
Q
Yankee Bond
A
- Non US entity bond sold in US markets in US dollars
11
Q
Advantages of Eurodollar Bonds
A
- No currency risk to investors
- Rated by US rating agencies
- Offer higher yields than domestic bonds by same issuer
12
Q
Disadvantages to Eurodollar Bonds
A
- Lack of transparency, no registered with SEC
- Political and Country risk
- Less Liquid than domestic issues
- Currently risk
13
Q
Brady Bonds
A
- In US dollars
- Maturities ranging from 10-30 years
- Relatively high safety
- Countries who participate reduced overall debt levels
- Banks sovereign risk was diversified
- Encouraged emerging markets to undertake economic reform
- Gave emerging markets broader access to economic reform
- DOES NOT CARRY US GOVERNMENT GUARANTEE
14
Q
Zero Coupon Bonds
A
- Nominal rate is zero
- Always issued at discount
- No reinvestment risk
- More volatile than other bonds
- No interest is received but taxes are owed making it phantom income
- Useful for targeted goals
- Higher level of credit risks
15
Q
Advantages of Convertible Debt
A
- If stock declines in value, you don’t convert and continue as a creditor being paid interest semi annually.
- If stock rises convert to stock. Has upside potential with very little downside.
16
Q
Negotiable CD’s
A
- Allows for open market sales
- Must have $100k or more in value
- NO prepayment penalty
- FDIC insured up to $250k
- Pay interest semiannually
- Issued at par, not discount like other money markets
17
Q
Commercial Paper
A
- Primarily used to raise working capital
- Exempt at registration at federal and state level
- Maximum maturity of 270 days
- Issued at discount, no interest received
18
Q
London Interbank Offered Rate (LIBOR)
A
- World’s most widely used benchmark for short-term interest rates
- Replaced by Secured Overnight Financing Rate (SOFR)
19
Q
Why recommend Money Market securities to clients?
A
- Highly Liquid
- Very safe
- Best place to store money needed soon
20
Q
Demand Deposit
A
- Checking Account
- Now includes Savings and Money Market Accounts
