Nature and use of financial Instrument Flashcards
What are the advantages of debt instruments
Interest is deductible
Fixed-principal payment, so fixed cash flows
No impact on ownership
What are the disadvantages of debt instruments?
Fixed commitment for periodic interest
May be subjective restrictive debt covenants
What are the characteristics of common shares
Voting rights and residual owners of the company
Dividends discretionary
What are the characteristics of preferred shares?
Hybrid security
No voting rights
Cumulative results in fixed commitment
What are the characteristics of stock rights
- required to offer to the existing shareholders first
- Gives the holder the right to purchase one common share at a specified price for a specified period of time
What are the characteristics of warrants?
option to buy shares at a specified price
Attached to another security usually but can be stand-alone
What are advantages of derivatives
Gives price info for underlying assets
Allow risk to be managed and shifted to others
Reduce transactions costs
Improve market efficiency for underlying assets
what are derivatives
Security that derives its value from value or return on an underlying security or asset
what 2 types of options
Call option - option buyer has the right to buy an asset at a particular price
Put option - option buyer has the right to sell an asset at a particular price
Relationship of the following with respect to call options Underlying asset price Strike Price Volatility of asset price The Time of expiration
Underlying asset price - positively related to call
Strike Price - neg related to call
Other all positive to all
What are future contracts?
x
What are forward contracts
x
What are the differences between forward and future contracts
x
What are swaps
x
What are convertible securities
x
