Semester Test 2 Flashcards
What are bond ratings?
-Bond ratings are purchased by a firm issuing bonds to have a 3rd party evaluate the credit risk of the bond
-These ratings inform the market of the bond’s safety.
What are the major sources of long-term funds available to business corporations? Indicate their relative importance
-Internal funds
>Retained earnings
>Depreciation
-External funds
>Debt markets (eg Bonds)
>Equity markets (eg stocks)
-Businesses raise more funds from debt than equity
-Banks loans are an important source of intermediate-term funds
Why would firms raise capital in markets other than their domestic or home market
- If the firm has overseas facilities it may make good financial sense to raise funds in the country in which the facility exists.
- Financing rates may be lower outside the home market
- Size of some issues suggests going outside the home market in order to find a sufficient number of buyers
Describe convertible bonds, callable bonds, putable bonds, and Eurodollar bonds
-
Convertible Bonds
> Can be converted, at the investor’s option, into a specified number of common shares -
Callable Bonds
>Can be redeemed prior to maturity at par value plus a call premium at the issuer’s option -
Putable Bonds
>Allow investor to force the issuer to redeem the bonds prior to maturity. -
Eurodollar Bonds
>Dollar-denominated bonds that are sold outside the U.S
What are investment grade bonds and “junk bonds:?
-Investment grade bonds are ones with a ratting of BBB or higher
-Junk-bonds are ones lower than investment grade
Why do firms issue more debt (bonds) over equity
- Borrowing is cheaper than raising equity financing
- Bonds have a maturing date and equity never matures
How can bonds be sold and explain each option
-
Thru public issues
>Bonds offered to all investors
>Must be approved by Securities Exchange Commission (SEC) -
Thru private placements
>Sold to specific qualifying members
>Don’t go thru SEC scrutiny
.Don’t require public disclosure of Co’s info
List and explain the types of interest rates
-
Money market rate
>Int rate on an obligation w/ a maturity of less than 1yr
>Currently 11.75% - Call money rates
- Capital market rates
-
London InterBank Offered Rate (LIBOR)
>Currently 5.43% -
Repo rate
>The rate@ which the central bank of a country lends money to commercial banks in the event of a shortfall of funds
>Currently 8.25% -
Prime int rate
>Lowest rate @ which a clearing bank will lend to its clients on overdraft
>Currently 9%
Describe some of the characteristics of common stock
- Can vote for the firm’s BoD and other major issues as allowed by the firm’s charter
- Have a residual claim on the firm’s assets and earnings in case of bankruptcy
- Have claim to a dividend (if declared)
List and briefly explain the special features usually associated with preferred stock
- They carry a fixed dividend
- They have a preference over common shareholders
- Have no voting rights, except in certain circumstances
- Preferred stock may be cumulative or non-cumulative
How are int rates determined in SA
-They are set by the SARB in response to what is happening and what is expected to happen in the economy
Characteristics of Bonds
- Have no voting right
- Bonds have a fixed maturity
- Bondholders have a senior claim on Co’ assets
Identify the primary market functions of investment bankers
-They originate growing firms that can benefit from securities offerings
-They can underwrite the risk, of a new offering by using their capital to purchase the securities from the issuer and then sell the securities to investors
What are the characteristics of a good market
- Its liquid, meaning that trades are executed quickly at a price close to fair market value
- Has quick and accurate trade execution
- The market will have reasonable listing requirements to denote, to traders, that firms of good–to-high quality have securities listed on the market
- Trading occurs with low transactions costs
Contribution/unit =
Selling price/unit - Variable cost/unit
