unit 2: equity

Question 1

ADR

Answer 1

trades on NYSE or NASDAQ
ADR ratio: reflects number of shares per ADR
US $ denominated and pays US$ dividend.
Dividend paid by company to sponsoring bank who then pass it to ADR holders

Question 2

equity issue methods

Answer 2

• placing (selective marketing)
• intermediaries offer
• offer for sale
• offer for sale by subscription

Question 3

if equity issue method raises finance

Answer 3

called marketing operations

Question 4

bonus issue

Answer 4

aka scrip issue /capitalisation issue
company undertakes a 1 for 4 bonus issue (1 new share for 4 existing ones)
Avg share price value drops by 1/5

Question 5

cum bonus vs ex bonus price (TEBP)

Answer 5

cum bonus: price of existing shares

Question 6

fixed income is deemed

Answer 6

safe, short term market for cash <12 months for wholesale funds
lender of last resort = BoE
- banks with surplus liquidity deposit, banks with insufficient take out
- cash rich institutions deposit, companies take out

Question 7

LIBID, LIBOR

Answer 7

LIBID - depositing money

LIBOR/SONIA (sterling overnight index average)- taking money

Question 8

money market intruments

Answer 8

treasury bills, local authority bills, floating rate notes, commercial paper, certificates of deposit

Question 9

money market instruments are bearer instruments - means?

Answer 9

no register

Question 10

settlement of money market instruments

Answer 10

dematerialised settlement at Euroclear UK + Ireland (using CREST settlement system)

Question 11

Who issues treasury bills

Answer 11

Debt management office. DMO offered to pay holder face value in 91 calendar day’s time

Question 12

Certificate of deposit (CDs)

Answer 12

Minimum denominations of a CD is normally 100,000
Issued by banks
CD promise to pay 1m plus interest

Question 13

Commercial paper

Answer 13

Short term debt issued by creditworthy companies and banks: maturity between 7 days and 12 months (similar to treasury bills)
Issued at discount and held to maturity. No interest

Question 14

Floating Rate Note

Answer 14

Issued at par but have coupon that is linked to a pre-specified market rate (i.e. 6 month LIBOR plus margin)
Trade at or close to par value. Duration (measure of bond sensitivity to yield/interest rate charges) is close to 0.

Question 15

Floating Rate Note

Answer 15

Issued at par but have coupon that is linked to a pre-specified market rate (i.e. 6 month LIBOR plus margin)
Trade at or close to par value. Duration (measure of bond sensitivity to yield/interest rate charges) is close to 0.

Question 16

Gilt repo

Answer 16

contract to sell securities for cash and buy them back at an agreed later date (buyback price) which is original plus interest price (‘repo ‘rate)
Collateral means interest charge is low
Term up to a year

Question 17

Bond

Answer 17

Coupon expressed as an annual percentage of the nominal value
Nominal value/par: the capital payment the holder receives at redemption
T+1 settlement if govt bond
T+2 settlement if corp bond

Question 18

when coupon = discount rate, bond will be priced at

Answer 18

100

Question 19

bond sensitivity

Answer 19

some bond prices change more than others

price sensitivity is determined by: life (longer dated more volatile) coupon (lower coupon bonds are more volatile)

Question 20

gross redemption yield (GRY)

Answer 20

flat yield - loss

investors required return

Question 21

theories of yield curve: liquidity preference theory

Answer 21

longer dated bonds offer a risk premium, investors demand a liquidity premium for holding longer term debt