Types of Securities Flashcards
what is a bond
a formal contractual obligation to pay an amount of money to the holder at a certain date, plus, a series of cash interest payments based on a specified percentage of the face amount at specified intervals
what does the annual cash interest equal on a bond
the bond’ face amount times the stated rate
what is an indenture?
a document that contains all of the terms of the agreement for a bond
What may be included in an indenture
- whether the issuer can sell property purchased with bond proceeds
- the extent of maintenance the issuer must provide
- that purchased property must be insurance
- that purchased property cannot be pledged as security for another loan
what are debt covenants?
restrictions or protective clauses that are imposed on a borrower by the creditor in a formal debt agreement or an indenture
examples of debt covenants
- limitations on issuing long-term or short-term debt
- limitations on dividend payments
- maintaining certain financial ratios
- maintaining specific collateral that backs the debt
types of bonds
Maturity pattern
- term bond
- serial bond
Characteristics of interest rate
- variable rate bonds
- zero-coupon or deep-discount bonds
- commodity-back bonds
Redemption provisions
- callable bonds
- convertible bonds
Securitization
- mortgage bonds
- debentures
- equipment trust bonds
Repayment provisions
- income bonds
- revenue bonds
Bond ratings
Bond valuation
factors influencing a company’s dividend policy
- legal restrictions
- Stability of earnings
- rate of growth
- cash position
- restrictions in debt agreements
- tax position of shareholders
what is the date of declaration?
the date the directors meet and formally vote to declare a dividend
the dividend becomes a liability
what is the date of record?
the date as of which the corporation determines the shareholders who will receive the declared dividend
typically falls from 2-6 weeks after the declaration date
what is the date of distribution?
the date on which the dividend is actually paid.
usually 2-4 weeks after the date of record
what is a stock dividend?
an issuance of stock and entails the transfer of a sum from the retained earnings account to a paid-in capital account.
what is a stock split?
the existing shares are divided into more shares so that the market price per share will be reduced.
does not involve any accounting entries
Advantages of issuing stock splits and dividends
- the price per share will be lower which may increase demand
- can be a publicity gesture
- larger number of shareholders who are usually good customers
what are reduce stock splits
reduce the shares outstanding, thereby increasing the market price per share
Motives of share repurchases (treasury stock)
- mergers
- share options
- stock dividends
- tax advantages to shareholders
- to increase earnings per share and other ratios
- to prevent hostile takeovers
- to eliminate a particular ownership interest
If a company has cumulative preferred stock
All preferred dividends for the current any any unpaid prior years must be paid before any dividends can be paid on commons stock
if a company uses the residual dividend policy, it will pay
dividends only if earnings exceed the amount needed to support an optimal capital budget
The following excerpt was taken from a company’s financial statements: “ . . . 10% convertible participating . . . $10,000,000.” What is most likely being referred to?
preferred stock
if a bond sells at a premium, the
stated coupon rate must be more than the required market rate
What characteristics distinguish income bonds from other bonds
-pay interest only if the issuing company has earned the interest
-riskier than normal bonds
