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BU473 - Investment Management > Quiz 1 > Flashcards

Quiz 1 Flashcards

1
Q

Fiscal policy is conducted under:

A

Minister of Finance

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2
Q

Monetary Policy is conducted under:

A

Bank of Canada

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3
Q

Fiscal policy is:

A

federal government uses taxation and government spending to achieve economic objectives

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4
Q

Monetary policy is:

A

BOC attempts to control money supply and credit conditions (interest rates) to acheive economic objectives

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5
Q

If there is high money supply, interest rates are:

A

Low

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6
Q

If there is low money supply, interest rates are:

A

high

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7
Q

Who is a lender of last resort?

A

BOC

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8
Q

BOC can adjust:

A

money supply and bank rate

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9
Q

If bank rate is 1.5% , chartered banks need to make ______ than 1.5%

A

more (to pay back loan)

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10
Q

Interest rates affect bond value T/F

A

T

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11
Q

When was BOC founded, when did it become a crown corporation

A

1934, 1938

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12
Q

When was ultimate monetary authority given to government

A

1967

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13
Q

Roles of BOC

A
  • conduct monetary policy
  • supply quality bank notes
  • promote safety and efficiency of Canada’s financial system
  • provide efficient and effective funds management services
  • communicate our objectives openly and effectively and stand accountable for actions
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14
Q

Prime rate is:

A

What banks charge customers

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15
Q

Yield curve def:

A

relationship between yields and time for a specific security eg. GOC bonds

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16
Q

Normal Yield Curve (slope)

A

yields increase over time, slope upward

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17
Q

In a normal yield curve, long term investments have _____ yields than short term investments

A

higher

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18
Q

Inverted Yield Curve (slope0

A

Yields decrease over time, slope downward

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19
Q

In an inverted yield curve, long term investments have _____ yields than short term investments

A

lower

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20
Q

Flat Yield Curve

A

yields constant over time

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21
Q

Negative bank rates vs positive bank rates

A 
-ve = you have to pay to keep money in the bank
\+ve = bank pays you to keep money there (interest)
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22
Q

Overnight rate

A

interest rate that one chartered bank charges another, when it loans money overnight

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23
Q

The overnight rate is targeted in a range of:

A

0.5% (50 basis points)

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24
Q

The upper end of the overnight rate range is:

A

bank rate

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25
Q

Money market instruments basic def

A

short term debt instruments issued by governments and corporations

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26
Q

Gov. money market instruments

A

treasury bills

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27
Q

Length options of treasury bills

A

3 mo, 6 mo, 1 yr

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28
Q

Corporation money market instruments (3)

A

Commercial Paper
Acceptance (finance) paper
Banker’s Acceptance (BA)

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29
Q

Corporation money market instruments have up to ____ maturity

A

1 yr

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30
Q

Commercial paper def

A

short term unsecured debt instrument issued by corporation

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31
Q

Acceptance (finance) paper def

A

secured debt instrument issued by a finance or acceptance company (non-deposit taking financial institution)

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32
Q

Banker’s Acceptance (BA) def

A

short term debt instrument issued by corporation with a bank guarantee for its repayment eg. GM issues paper, and TD Bank guarantees repayment. This is a TD Bank BA

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33
Q

Money market instruments are sold at a ____ and mature at _____

A

discount, par

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34
Q

Money market yield calc: Bought at 98.50
1.5% interest
90 day t-bill
what is yield?

A

6.18%
calc:
(((100-98.5)/98.5)*365)/90

365/90 to annualize it

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35
Q

Banker’s Acceptance is guaranteed by:

A

bank

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36
Q

Acceptance paper is issued by:

A

finance company

37
Q

Par (Face Value, FV) is always:

A

$100

38
Q

Bonds and Debentures are ____ term debt instruments

A

longer

39
Q

Bonds and Debentures have a maturity date of:

A

1 yr or longer

40
Q

Bonds and Debentures are issued by

A

governments and corporations

41
Q

bonds are secured by

A

specific assets (collateral)

42
Q

Debentures are (secured/unsecured)

A

unsecured, secured by company credit

43
Q

Ask price

A

seller wants to sell to you at this price

44
Q

bid price

A

max price a buyer is willing to pay for a security (max you want to pay)

45
Q

ask price

A

min. price seller is willing to receive (min they want to sell to you)

46
Q

spread is

A

diff. between ask and bid

47
Q

bond market and treasury market is a _____ market

A

dealer, aka over the counter

48
Q 
Simple current yield calc
GM 8% May 28
bid = 101.50
Ask = 102.00
what is interest
A

$8/yr interest
Paid 102
8/102*100 = 7.84%
we paid 102, not 100 so yield is less

49
Q

Yield increases, bond price ______

A

decreases

50
Q

Yield decreases, bond price _________

A

increases

51
Q

2 categories of GOC bonds

A

redeemable bonds and marketable bonds

52
Q

redeemable bonds

A

can be cashed in by holder with issuer at face value, before maturity date
non-transferable and no secondary market exists

53
Q

redeemable bonds include:

A

Canada savings bonds

canada premium bonds

54
Q

marketable bonds

A

issued and backed by the GOC

outstanding market price fluctuates

55
Q

GOC marketable bonds and guaranteed bonds have a ____ interest rate based on the face value of the bond

A

fixed

56
Q

Real return bonds

A

pay interest on a regular basis (semi-annually)
have a fixed real coupon rate eg. 2%
at each coupon date the real coupon rate is applied to a par value that has been adjusted for the cumulative level of inflation since the issue date

57
Q

Marketable Bonds are offered on a _____ basis through auctions

A

demand

58
Q

Solve YTM, what components are there

A 
PV
FV
I/YR
N
PMT
59
Q

If a bond is at par value then

coupon ___ Current yield ___ YTM

A

=,=

60
Q

If a bond is at a discount then

coupon ___ Current yield ___ YTM

A
61
Q

If a bond is at a premium then

coupon ___ Current yield ___ YTM

A

> ,>

62
Q

YTM takes into account

A

capital gain and loss

63
Q

Current yield = ____/____

A

income/price

64
Q

Mortgage bonds

A

real property pledged

65
Q

Collateral Trust Bonds

A

securities pledged (stocks or bonds)

66
Q

Equipment Trust Certificates

A

issued by transportation companies and rolling stock (vehicles) are pledged as collateral

67
Q

Debentures

A

no specific collateral pledged

68
Q

Subordinated Debentures

A

rank last among lenders

69
Q

Protective Covenants (clauses) (might be found in a coporate trust deed) list

A

Negative Pledge Provision (debentures)

After Acquired Clause (mortgage bonds)

70
Q

Negative Pledge Provision (debentures)

A

If the company issues more debt and pledges assets, these assets would also back the debentures

71
Q

After Acquired Clause (mortgage bonds)

A

If the company purchases more assets, these assets will also be pledged as collateral for existing mortgage bonds

72
Q

Retractable Bond/Debenture

A

option of holder to cash in bond/debenture at face value with the issuer, at a predetermined early date before maturity

73
Q

Decode

Enbridge 8%, 1 October / 20 / 14

A

Enbridge = company issuing bond
8% coupon rate
/ 20 is maturity date (2020)

/ 14 means you can cash in at 2014

74
Q

Why would you want to exercise option on retractable bond?

A

if interest rates are higher, you want to cash in and put your money in higher rate investments

75
Q

Extendable bond

A

can extend maturity rate of bond

76
Q

why extendable bond

A

want to keep higher rate if rates go down

77
Q

exercise cut off date

A

last day investor can retract/extend

78
Q

election period

A

investor may elect to exercise their option, may commence starting several days to months prior to retraction or maturity date

79
Q

terms of retraction or extension are listed in

A

trust deed and bond prospectus

80
Q

retractable and extendable bonds/debentures are sometimes called

A

dual maturity bonds

81
Q

convertible bond/debenture

A

option to convert to shares

82
Q

foreign PAY bonds

A

issued by domestic issuer but interest and principal is paid in a foreign currency

83
Q

Foreign bonds

A

issuer is foreign, but interest and principal are payed in the currency of the country where the bonds are issued

84
Q

Eurobonds

A

issuer is canadian, bonds are issued in another country

currenty is NOT the currency in the foreign country

85
Q

Province of BC issues bonds in England in $CAN

A

Euro-Canadian bonds

86
Q

BCE issues bonds in Germany in US dollars

A

Euro-dollar bonds

87
Q

Callable bonds

A

issuer can force holder to cash in bonds at a specified price on or after a specified date

88
Q

Canada yield Calls

A

call price is greater of:
par (100) or the price based on the yield of an equivalent term GOC bond plus a yield spread (eg. current yields +200 basis points)

89
Q

100 basis points is

A

1%

BU473 - Investment Management (2 decks)

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