Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ICAS - AFin > Module 11 > Flashcards

Module 11 Flashcards

1
Q

Money markets

A

Enable organisations to manage working capital efficiently, grown significantly recently due to disintermediation

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

Interbank loan (investor/ borrower)

A 
Investor = Lend
Borrower = Borrow
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Certificate of deposit (investor/ borrower)

A 
Investor = Buy
Borrower = Issue
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Government bonds (investor/ borrower)

A 
Investor = Buy
Borrower = Issue
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Commercial paper (investor/ borrower)

A 
Investor = Buy
Borrower = Issue
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Repurchase agreement (investor/ borrower)

A 
Investor = Invest in
Borrower = Borrow through
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Money market funds (investor/ borrower)

A 
Investor = Invest in
Borrower = Borrow through
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Interbank loans (4)

A
  • Loans extended from one bank to another
  • Most short term to meet regulatory reserve requirements
  • Banks offer short-term loans at LIBOR
  • LIBOR being phased out to be replaced with SONIA
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Certificate of deposit

A

Deposit with specific maturity, evidenced by a certificate. Large denomination CDs are typically negotiable (can be traded)

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

Floating rate certificate of deposits

A

Similar in form to ordinary CD but dealt with in same manner as floating rate notes. The rate of interest is set at pre-determined spread about LIBOR

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

Government bonds (4)

A
  • Maturity of one year or less
  • Safest possible investment
  • Issued at discount
  • Redeemable at par with no interest payable
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Commercial paper (5)

A
  • Short-term debt obligation (usually maturity < 9 months)
  • Typically unsecured
  • Common for issuers to roll over paper (use proceeds of issue to repay principle of previous issue)
  • Only corporations with strong reputation can successfully issue commercial papers
  • Can be issued in international markets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Repurchase agreements (repos) (4)

A
  • Combination of two transactions > sale and repurchase
  • First transaction > bank sells securities to investor agreeing to repurchase securities at specified higher price at a future date
  • Second transaction > repo is unwound as bank buys back securities from investor
  • Amount investor lends is less than value of securities to ensure it has sufficient collateral
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Money Market funds

A

Standalone, pooled investment fund which actively invests its assets in diversified portfolio of high grade, short term money market instruments

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

When trade occurs

A

One or both parties reports the event electronically to the clearing house. Clearing house settles the transaction by debiting the account of one party and crediting the account of another.

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

UK Money markets Voluntary code of conduct - key principle

A

Participants should promote integrity and effective functioning of markets

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

Three main sources of long term finance catered for in the capital markets include

A
  • Long term finance
  • Equity
  • Bonds (government/ corporate)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Long term government bonds

A

Repayable in more than a year at the time of issue and are usually interest bearing - generally issued at face value with interest being paid on the initial amount

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

Long term Corporate bonds

A

Debt issued by businesses in tradeable form

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

Bondholder can protect their investment using two principle means

A
  • Covenants

- Security (fixed or floating charge)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Two forms bonds can be issued in

A
  • Registered

- Bearer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Registered

A

Ownership is recorded by issuer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Bearer

A

Ownership is not recorded by issuer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Coupon (payments) made on bond made on

A

Annual or semi-annual basis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Final payment of bond includes

A

Principal repayment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Coupon rate

A

Interest payments on the bond stated as a percentage of the face value to be paid each period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Face value (par value)

A

Amount the issuer has agreed to repay on maturity. Redemption can be made at either discount to, or premium on

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Maturity date

A

Date of final payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Sinking funds

A

Provide partial repayment of principal at regular intervals, usually yearly

30
Q

Yield of a bond =

A

Measure of the return to the bondholder on their investment

31
Q

Interest yield on a bond (flat yield)

A

Nominal annual interest / Market price

32
Q

Redemption yield (yield to maturity)

A

Takes into account the capital repayment on maturity as well as regular interest payments. Calculation of redemption yield is IRR calculation

33
Q

Negative yield

A

Pay more for bond than you will get back over the life of the asset.

Can be popular if negative bond yield is less than charge on cash balances from banks

34
Q

Borrowing by issuing bonds > advantages (5)

A
  • Funding diversification
  • Covenants (less onerous than other debt instruments)
  • Speed
  • Currency (can be issued in many different currencies)
  • Flexibility (can be tailored to meet needs of business and investor)
35
Q

Straight bonds

A

Conventional fixed-rate bond with series of annual or semi-annual coupons and may have optional redemption provisions prior to maturity

36
Q

Zero coupon bonds

A

Pays single fixed amount at maturity. No interest payments.

37
Q

Deep discount bonds

A

Pays low annual coupon but bonds are issued at discount to par value

38
Q

Partly paid bonds

A

Only portion (15-30%) paid on issue, balance payable at later date - usually after 6-9 months

39
Q

Index-linked bonds

A

Redemption value and interest payments adjusted to take account of increases in appropriate price index over life of the bonds eg RPI in UK

40
Q

Dual currency bonds

A

Gives the holder the right to redemption in one of other of two currencies at fixed rate of exchange

41
Q

Convertible bonds

A

Can be converted (at investor’s option) into given number of ordinary shares.

42
Q

Bonds with equity warrants

A

Equity warrant entitles holder to purchase pre-determined number of ordinary shares at pre-determined price on or by date.

43
Q

FRNs (floating rate notes)

A

Bonds with fixed maturity, where interest coupon is regularly adjusted, fixed with reference to LIBOR usually for 3 or 6 months

44
Q

Two types of embedded options

A
  • Call option

- Put option

45
Q

Call option

A

Allows the issuer to buy back the bond at par

46
Q

Put option

A

Allows the holder to sell the bond back to the issuer at a particular price (eg if interest rates rise and bond price falls)

47
Q

Global bond market is comprised of (3)

A
  • Domestic bonds
  • Foreign bonds
  • Eurobonds
48
Q

Domestic bonds =

A

Bonds issued by companies in their own country and in own currency

49
Q

Foreign bond markets =

A

Bonds issued within the domestic market of the currency of denomination, but issued by non resident borrowers eg Yankee/ Bulldog

50
Q

Eurobond market =

A

Bond denominated in currency which differs from that of country of issue

51
Q

Considerations when deciding where and how to raise capital (4)

A
  • Which market has cheaper cost of borrowing
  • Where they can issue to diversify investor base
  • Currency most suited to their needs
  • Regulations subject to by issuing in a certain country
52
Q

Usual method of issue of domestic UK corporate bonds is by a

A

Bought deal

53
Q

Bought deal =

A

One or more lead managers commit to purchase or underwrite the entire issue. Issue is bought either at a fixed price (immediate certainty of cost) or on a yield margin relative to a benchmark, gilt-edged stock (exposed to gilt market movements)

54
Q

Grey market trading

A

Unofficial dealing on a ‘when issued’ basis - indicated the price at which the bonds will trade when officially listed

55
Q

Majority of Eurobond issues are launched using the

A

Placing mechanism

56
Q

Placing mechanism

A

Lead manager (bank) makes firm offer to issuer, specifying the structure of issue and all-in cost. Acceptance of issuer forms binding contract, authorising launch of bond on agreed terms. Lead manager then invites banks/ investors to buy. Lead is responsible for underwriting the issue and will TRY to obtain best price for issuer (unlike brought where price is agreed at the start)

57
Q

Private placement

A

Bonds sold to private investors eg banks/ pension funds. Reduces regulation and speeds up issuing process. Applies to both UK Domestic and Eurobond.

58
Q

Factors affecting pricing of bond issues (5)

A
  • Government yield
  • Credit rating
  • Pricing of comparable issues
  • Size and liquidity of the issue
  • The terms
59
Q

Negotiability of bonds

A

After bond has been issued, may be traded on secondary bond market

60
Q

Price of an irredeemable bond

A

Nominal annual interest / Market discount rate(or redemption yield

61
Q

Nominal annual interest =

A

Coupon rate x nominal bond value

62
Q

Expenses of bond issue (5)

A
  • Professional advisors’ fees
  • Printing costs
  • Commissions
  • Stock exchange listing charges
  • Trustee’s fees
63
Q

Credit ratings (6)

A
  • Issuer of security can pay credit rating agency to evaluate the credit risk.
  • Used by potential investors who are unfamiliar with issuer.
  • Essential in some markets, unnecessary in others
  • Rating applies to individual security not issuer
  • Rating signifies likelihood of default
  • Long term/ short term ratings
64
Q

Rating criteria (6)

A
  • Economic environment
  • Financial structure
  • Forecasts, budgets and contingency plans
  • Quality of management
  • Firm’s competitive position in the industry
  • The industry
65
Q

Triple A =

A

Best rating

66
Q

Medium term notes (MTNs)

A

Another form of corporate debt financing > debt securities with maturities falling between those of commercial paper and corporate bonds.

Registered just like corporate bonds but cheaper and easier to register.

67
Q

Offer of MTNs

A

Offered on a continuous or periodic basis (similar to commercial paper)

68
Q

MTN features (3)

A
  • Usually coupon-bearing instruments
  • Not discount instruments
  • Usually unsecured
69
Q

Investing in short term vs long term

A

Balance of risk and return likely to be higher priority and liquidity a lower priority in long term (opposite for short term)

70
Q

Green bond

A

Bond to raise funds for new and existing projects with environmental benefits

71
Q

Green bonds criteria (4)

A
  • Use of proceeds
  • Process for project evaluation and selection
  • Management of proceeds
  • Reporting

ICAS - AFin (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions