Brainscape's Knowledge GenomeTM

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


See full index

Financial Markets 2014 > Topic 4 - The corporate debt market > Flashcards

Topic 4 - The corporate debt market Flashcards

1
Q

4.01 - What is simple interest?

A

It is the interest paid on the original principal amount borrowed or invested.

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

4.02 - When referring to interest what is the principal amount?

A

It is the initial amount borrowed or invested.

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

4.03 - What is holding period yield?

A

It is the yield on securities sold in the secondary market prior to maturity.

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

4.04 - Why would short-term money market securities such as T-notes be sold prior to maturity?

A
  • Investment was intended as short term management of surplus cash held by investor
  • Investors cash flow has unexpectedly changed and cash is needed
  • A better rate of return can be achieved elsewhere.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

4.05 - What is the yield to maturity?

A

It is the yield obtained by holding the security to maturity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

4.06 - Is the YTM (Yield to maturity) likely to be similar to the HPY (Holding period yield)?

A

They are likely to be different as there is a time cost to holding the asset for the full period which should result in a higher interest rate, however this may not be the case if interest rates move.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

4.07 - What is compound interest?

A

It is where interest is calculated on the accumulated principal amount and interest is then added to the principal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

4.08 - What is the calculation to determine the compound interest amount?

A 
FV=PV(1+i/m) to the power of txm, where
i = interest rate per period as decimal
m - compounding periods per year
t - time period
PV = Present value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

4.09 - What is short term debt?

A

A financing arrangement for a period of less than one year - appropriate for firms that experience periodic deficits in their net cash flows.

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

4.10 - Name six short term financing arrangements?

A
  • trade credit
  • bank overdrafts
  • commercial bills (bills of exchange)
  • promissory notes (commercial paper)
  • negotiable certificates of deposit
  • cash products
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

4.11 - What is trade credit?

A

Where a supplier provides goods to a purchaser with an arrangement for payment at a later date. These are specified on the invoice.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

4.12 - What is trade credit of 2/10 mean? and n/30?

A

2/10 - a 2% discount will be applicable if paid within 10 days
n/30 - full amount is payable within 30 days.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

4.13 - What are accruals?

A

Delaying the payment of obligations such as tax and leave entitlements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

4.14 - What are accounts receivable?

A

An asset on the balance sheet representing amounts due to the business.

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

4.15 - What is a bank overdraft?

A

Use of an overdraft facility which is a fluctuating credit facility provided by a bank and allows a business account to go into debit by an agreed amount.

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

4.16 - What is a bill of exchange? and what two types are there?

A

It is a discount security issued with a face value payable at a future date. Could be either a commercial bill or a trade bill

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

4.17 - What is a commercial bill? and what three types are there?

A

It is a bill of exchange issued to raise funds for general business purposes. Includes bank accepted bills, bank endorsed bills and non-bank bills

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

4.18 - What is a bank accepted bill?

A

Are those bills that are issued by a corporation and incorporates the name of a bank as acceptor.

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

4.19 - What are the features of a commercial bill (discounted security)?

A
  • Terms of 7-180 days
  • Traded on yields
  • Traded in $5-10M parcels
  • 2-way pricing
  • Extra fees apply to borrowers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

4.20 - Who are the parties involved in a commercial bill?

A
  • Drawer - issuer and secondary liability
  • Acceptor - Undertakes to repay face value of bill @ maturity
  • Payee - Party to whom bill is to be paid
  • Discounter - Party who discounts face value and purchases the bill
  • Endorser - Party that was previously holder of the bill.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

4.21 - What parties to a commercial bill are likely to be the same?

A
  • Payee is normally the drawer

* Discounter may be same as the acceptor

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

4.22 - What is the process for establishing a bill financing facility?

A
  • Borrower (drawer) approaches bank
  • Bank assesses credit risk
  • Discount applied based on credit rating
  • Maturing set 30-180 days
  • Rollover facility can be requested
  • Minimum face value of $100K
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

4.23 - What are the advantages of commercial bill financing?

A
  • Lower cost than other short term borrowing
  • Borrowing cost (yield) determined at issue date (not affected by interest rate changes)
  • Flexibility
  • Use of rollover facility for longer periods
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

4.24 - What is the calculation for the price of a discount security?

A 
P = Face Value / (1+yt) where
y= yield in decimal
t= time to maturity divided by 365.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

4.25 - What are P-Notes?

A

Promissory notes (commercial paper) are discounted securities similar to bills of exchange but where there is no acceptor involved.

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

4.26 - What are the features of P-Notes?

A
  • Use same discounted security formula
  • Minimum $100K
  • Maturity generally to 180 days
  • revolving facility available
  • available to companies with excellent credit reputation.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

4.27 - Why are P-Notes only available to companies with an excellent credit reputation?

A

Because:

  • there is no acceptor or endorser
  • they are unsecured investments.
28
Q

4.28 - What are NCDs?

A

Negotiable Certificates of Deposit - which are short term discount securities issued by a bank with an initial term up to 180 days. Banks use these to manage their liabilities and liquidity.

29
Q

4.29 - What is the difference between P-Notes and T-Notes?

A

Essentially P-Notes that are issued by Government by tender and have an active secondary market (OMO) and are extremely liquid.

30
Q

4.30 - What are T-Notes used for by banks?

A

For their Prime Asset Ratio.

31
Q

4.31 - What is meant by the bank is a price maker?

A

It means they will provide both a bid and offer quote. The price taker does the opposite.

32
Q

4.32 - What does it mean to buy a commercial bill? What is this the opposite to?

A

This means you are lending money when you buy a commercial bill. This is the opposite to cash where to buy a cash product is to borrow money.

33
Q

4.33 - What are the different types of cash products?

A
  • Overnight cash
  • 7 day cash
  • Overdrafts
  • Fixed term deposits
  • Fixed term loans
34
Q

4.34 - What are the features of overnight cash?

A
  • initial deposit or loan is made overnight
  • deposits/withdrawals by 11am next day or rolled over
  • interest rate reset daily
  • parcels of $5-10M
  • Market mainly used by banks
35
Q

4.35 - What are the features of 7-day cash?

A
  • Initial period of deposit/loan is 7 days
  • After 7 days, deposit / withdrawals require 24 hours notice
  • Interest rate is reset daily after initial 7 day period.
36
Q

4.36 - What are the medium to long term debt finance options?

A
  • Term loans or fully drawn advances
  • Mortgage finance
  • Debentures, unsecured notes and subordinated debt
  • Leasing
37
Q

4.37 - What are the ways to finance a medium-long term debt option?

A

1) repayment of interest only during term with full amount due on maturity
2) regular repayment of principle + interest (amortised)
3) deferred repayment loan - instalments commence at an agreed point

38
Q

4.38 - What is a term loan?

A

It involves the loan of a specific amount of funds provided for a stated business purpose over a certain period of time.

39
Q

4.39 - Who are the main providers of a term loan?

A

Commercial banks and finance companies. To a lesser degree, investment banks, merchant banks, insurance offices and credit unions.

40
Q

4.40 - What is a fully drawn advance?

A

It is a term loan where the full amount is provided at the start of the loan.

41
Q

4.41 - When granting a term loan, a lender will seek to protect its financial risk exposure. What is a method of doing this?

A

Use of a loan covenant which are conditions or restrictions placed on a borrower and specified in the loan contract.

42
Q

4.42 - Loan covenants can be in two forms, what are they?

A

Positive covenants - actions that must be taken by the borrower - min level of working capital
Negative covenants - conditions that restrict the activities or financial structure - max D/E ratio

43
Q

4.43 - What will occur if the borrower breaches the loan covenant?

A

It would result in a default of the loan contract entitling the lender to act.

44
Q

4.44 - What is a mortgage?

A

Is a form of security for a loan, the Mortgagor conveys an interest in the land and property to the lender (mortgagee). This is discharged when the loan is repaid.

45
Q

4.45 - What will occur if the mortgager defaults on the loan?

A

The mortgagee is entitled to foreclosure on the property (i.e. take possession of assets and realise any amount owing on the loan).

46
Q

4.46 - Which institutions provide mortgage finance?

A
  • Commercial banks
  • Building societies
  • life insurance offices
  • super funds
  • Trustee institutions
  • Finance companies
47
Q

4.47 - What are the options for interest rates on a mortgage loan?

A
  • Fixed up to five years
  • Variable
  • Interest only loan - up to 5 years.
48
Q

4.48 - What is securitisation?

A

Some mortgage lenders use a process of securitisation to finance continued growth in their mortgage lending The lender sells a parcel of existing loans to a trustee of a special purpose vehicle. The trustee funds this purchase by issuing new securities such as bonds into the capital markets. The cash flows due on the mortgage loans held are used to pay interest and principal commitments due on the bonds.

49
Q

4.49 - How was securitisation affected during the GFC?

A

Suffered a large contraction from $215Bn to $112Bn in 2010.

50
Q

4.50 - What is the corporate bond market used for?

A

The markets for the direct issue by companies of long-term interest bearing debt securities.

51
Q

4.51 - Lenders in the corporate bond market attract higher what?

A
  • Risk - compared with lending indirectly through intermediaries
  • Yield - owning to sharing in the profit margin usually taken by intermediaries.
52
Q

4.52 - Debentures and unsecured notes include what assets?

A
  • corporate bonds
  • fixed income securities
  • unsecured notes
53
Q

4.53 - What are unsecured notes?

A

Bands with no underlying security attached.

54
Q

4.54 - International debt markets are used by who?

A
  • Financial institutions who are the largest borrowers

* governments and corporations

55
Q

4.55 - Why do international debt markets attract investors?

A

Because they

  • provide a deep and liquid market
  • allow higher investment returns
  • are a form of portfolio diversification
56
Q

4.56 - Why have international debt markets grown in importance?

A

Due to the deregulation of the FX markets and that they are accessible to borrowers with a strong financial reputation and good credit rating

57
Q

4.57 - What do the international debt markets consist of?

A

Large unregulated money and capital markets with major centres in London, the Middle East and ASIA. USD is the major currency used.

58
Q

4.58 - What is the Eurozone?

A

The domestic market for countries adopting the euro currency. Debt securities denominated in euros have grown as the predictability, liquidity and volatility of the euro consolidate.

59
Q

4.59 - What are the Euromarkets?

A

They originated in Europe and allow for countries to hold USD. They provide intermediated and direct finance over a range of terms to maturity.

60
Q

4.60 - What are the three ‘euro’ markets?

A
  • Eurocurrency market - provide intermediated bank finance
  • Euronote market - provide short-term direct finance
  • Eurobond markets - provide medium to long-term direct finance
61
Q

4.61 - What is a ‘Euro transaction’?

A

It is a transaction conducted in a foreign country but not in its currency. Euro means outside.

62
Q

4.62 - What are credit ratings agencies?

A

Organisations specialising in assessing the credit quality associated with financial obligations. The rating methodology balances business risk, financial risk and environmental risk.

63
Q

4.63 - What services does a rating agency provide?

A
  • Long term credit ratings (BBB & above is investment grade)
  • Short term credit ratings
  • A rating of an overall corporation
  • Specific credit ratings on an obligor
  • credit ratings of specific international market issues.
64
Q

4.64 - What are the three key types of risk relevant to international markets?

A
  • country risk - risk of law changes
  • sovereign risk - risk of foreign govt defaulting
  • foreign exchange risk.
65
Q

4.65 - What was the impact of the GFC on credit ratings?

A

Placed under scrutiny as mortgage products were rated favourably during the GFC. In addition favourable ratings for countries didn’t reflect the sovereign debt crisis eg Greece, Spain and Italy.

Financial Markets 2014 (8 decks)

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