Tutorials Flashcards
Differentiate Unsecured loans stock to Debentures
Debentures:
Loan capital. The issuer provides some form of security to the holders of a debenture, usually in the form of a floating charge against the assets of the company.
Unsecured loan stocks:
No explicit assets backing them and holders rank alongside other unsecured creditors. Yields will be higher than on the debentures to reflect the higher risk of default.
Certificate of deposit
A certificate stating that some money has been deposited. They are issued by banks and building societies. Terms to maturity are usually in the range 28 days to 6 months. Interest is payable on maturity.
Features and risk characteristics of a government bill:
- Short-dated securities issued by governments to fund their short term spending, borrowing and liquidity requirements.
- Issued at a discount and redeemed at par with no coupon.
- Mostly denominated in the domestic currency, although issues can be made in other currencies.
- Yield is typically quoted as a simple rate of discount for the term of the bill.
- Tend to be secure and highly marketable despite not being quoted.
- Often used as a benchmark risk-free short term investment.
Characteristics of Equities
- Shares are issued by commercial undertakings and other bodies
- Shareholders receive dividends paid out of profits after all other obligations have been met.
- The return is made up of dividends received and any increase in the market price of the shares.
- Higher risk than corporate bonds issued by companies.
- No legal obligation to pay dividends
- Generally low initial yield but dividends expected to grow over time
- No fixed redemption yield.
Describe the main differences between a preference share and an ordinary share
A preference share pays a dividend which is generally fixed. An ordinary share pays a dividend out of residual profits which is at the discretion of the company.
A preference share dividend is a prior charge so that, in general, no ordinary share dividend can be paid if a preference share dividend is outstanding.
A preference shareholder may have no voting rights and is likely to get prior ranking in a winding up.
Investment and risk characteristics of money market instruments
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