Wrong answers Flashcards
Policy switching if interest rates fall
switch from low duration to high duration
rates down - prices up - yield down
switch to long as more sensitive to rates
Rates relationship with bond price
rates down - price up
LT more sensitive to changes in rates
Types of nominee and why
Nominee appears on share register and is legal owner of shares - beneficial ownership resides with underlying client
e.g. asset managers, institutional investors
pooled nominee - indiv clients groups within single nominee registration - no separate voting entitlement
designated nom - nominee iname includes unique identifies for each indiv client
sole nonimee - each client has own nominee
corp nom - issuing comp forms nominee for smaller holders
grpouped noms may lose perls - too much admin
sole or designated - can mandate div to particular acc
Effect of interest rate reduction
bond, eq, and property - positive effect - prices rise - financing cheap
cheap money = decrease in purchasing power = currency devalues
ratio analysis
tech analysis
long call short call
long put short put
long call, short put - bullish - make money in rising markets
long call - profit from exercising @ strike and selling at market
short put - profit from premium collected as holder wont exercise
short call long put - bearish -make money in falling markets
short call -make money from prem as holder wont exercise
long put - profit from selling and rebuying at market
how do ratings agencies rate issuers of bonds
assess whether CF due to be generated by borrower will comfortably service debts
standard settlement
usually T+2 with exceptions
Gilts, T bonds, JGBs - T+1
Money market instruments T+1
repo and secs lending can be T+0
certificated stcoks T+1
callable / putable bonds
why would you want to exercise option?
callable bonds - can be called back early at discretion of issuer
- if rates go down
- higher yield and lower price than reg as adds val to issuer
putable bonds - cann be put back at discretion of holder
-if rates go up
-higher price lower yield than straight bond as adds val to holder
quant fund stock selection
actively managed fund
selection process driven by computer models solely
enhanced cash fund vs money market fund
money market = highly liquid near term instruments
certificates of deposit, interbank loans, commercial paper; T-bills, repos
enhanced cash = same but also higher yielding less liquid asssets e.g. low rated bonds, longer maturity, foreign currency debt, ABCP, MBS (mortgaged backed secs), SIVs(special investment vehicles)
purpose of diluted EPS on balance sheet
to warn of future earnings changes as result of
-convertible loan stock or pref shares being exercised
- options or warrants being exercised
what is a municipal bond
tax?
In US - state and local gov issue thes the finance local borrowing
often tax efficient, particularly for those who live in the municipality
free from fed tax and local state tax
often guaranteed by 3rd party known as monoline issuer
what happens to warrants on takeover
often exercise date is accelerate to takeover date - destroys any time val
investor could suffer big loss
if waarant is out of money e.g. just issued - it may become worthless
SETS order book price moves from accepted tolerance
causes AESP - automatic execution suspension period
to allow investors time to react
price tolerance varies from 5-25% depending on share
AEP lasts for 5 mins + 0-30 secs - no tades executed but orders can be places
then auto execution resumes after uncrossing auction program is run
buy side and sell side analyst
buy side - work at asset management firms
sell side - work at brokerage firms
when is FX trading most volatile
at release of key economic data
- Non farm pay rolls report - 1st fri month @8.30 EST
-Publication of personal consumpton expenditure price index - monthly
fed fund target rates - 8x a year
what is a reverse split
aka consolidation
comp reduces no. of shares and share price goes up proportionally
smaller shareholders may be cashed out and recieve cash for holdings e.g. if consol is 20 to 1 and u own less than 20 shares
will increase EPS
what can share premium reserve be used for
share prem reserve = capital reserve account
- cannot be distributed as divi
can be used to
-write off initial costs of issuing share/listing
to fund increase in called up share cap caused by bonus/scrip
what can share premium reserve be used for
share prem reserve = capital reserve account
- cannot be distributed as divi
can be used to
-write off initial costs of issuing share/listing
to fund increase in called up share cap caused by bonus/scrip
money market instruments
T bills, eligible bills, certificates of deposit, commercial paper, repos
what is a pip
a pip = 5th figure of a quote
what is a carry trade
borrowing safe low interst currency - converting into risky comoodity currency - investing in higher yielding assets
potential double return - high yield + appreciation of original currency
times of uncertainty - these are unwound and flows go from commodity currency to safe haven
certificates of deposit
negotible bearers secs
issued by commercial banks in exchanged for fixe dterm deposit with lower rate than equiv bank deposit
can be issued for up to 5 years
tradable
NFA
CFTC
ESMA
NFA = national futures association - self reg orginisation or US futures. mandatory for any brokers in US - independt no ties to specific marketplace
CFTC - commodities futures trading comission - independent agency to issue forex regs for financial markets in US
WSMA - european secs markets authority 0 independent EU authority promotes alignment between regs in EU
who can participate in the interbank markets
commercial banks, instit investors or large corporate depositing at least 500k for term of 1 night - 1 yr
what interest is notifyable according to UKLA disclosure and transparency rules
3% interst in form of voting rights for PE
fund manager = 5% voting rights
developed markets requirements by FTSE
cleaning and settlement T+3 or less
frontier = t+7
formal stock regulatory authorities
high income economy(measured by world bank GNI per capita)
difference between offer for sale and subscription
sale involves issuing house
subscription does not
issuing house usually IB
both @fixed prices
warrant conversion premium
= price of warrant + exercise price - share price
3 probs with bearer secs
money laundering regs are useless
issuing company has probs paying divi
physical security of shares v important - increases cost
exempt persons frot stamp duty/SDRT
exempt instruments?
persons: intermediaries e.g. LSE member firms, registered charities and gifts
instruments: gilts, non convertible loan bonds (£), bearers stocks, foreign registered stocks, rights issues, CFDs, some derivatives, ETF
Active bond strats
riding yield curve - upwards sloping - buy bonds with mats longer than investment horizon, hold to end of period then sell
anomaly swtiching - switch between bonds with similar characteristics but prices/yields our of line
– substitution switches - differ only in terms of price and yield
–pure yield pickup switch - switching based on increased yield to maturity
policy switching - switch between 2 diff bonds to take advantage of anticipated changes in rates, rating, sector
inter market spread switch - corp to gov (flight to quality), gilt to corp if yield difference is excessiv
passive bond selection strats
immunization/duration matching
- matches price and reinvestment rate matched at point of duration to libaility
CF matching - bond redemption proceeds meet liability as it falls due
combination matching - mixture of CF matching in short term and immunisation in long term
SAFE
synthetic agreement for forward exchange
- variation on short term currency swap
- no actual exchange of principal at inception or nat - basically a CFD on notional cash sums
types of custodian
global - 1 stop shop across range of foreign markets
sub-custody - appointing of local agent to global custonian
- lower credit rating than global and regional
local custodian = country specialist
regional custodian - multiple markets in a region
-mid range between local and gloal in terms of benefits
exchangeable bond
straight bond + embedded option to convert into equity of company other than issuer (usually subsidiary)
asset backed securities (ABS) and SPVs
ABS = debt secured against a pool of assets
SPV sits between lender (for mortgages) and investment company) and create Asset backed bond which they sell to bank
bank can then issue these bonds - does not appear on the balance sheet of bank
bankcrupty remote - since SPV is stand alone with pool of assets to service debt
lead manager?
issuing house?
underwriter?
syndicate?
spomsor?
corp broker?
lead manager: aka lead underwirters - given responsibility to lead syndicate and coordinate issuance of secs
underwirter: firm who guarantees min level of proceeds from a share issue - will take onto own books then sell to market
if fails to be taken up will purchase “ discount
ussuing house - invites apps from public at higher price than they paid the issying company
syndicate - group of investment banks and stockbrokers who collectively issue secs of a company
sponsor - may be same comp and lead manager
asesses suitability for listing
asesses best method of bringing comp to market
coordinates prospectus production
corp broker - facilitates marketing of shares
who writes the prospectus in IP0
sponsor - coordinates production
legal advisor - ensures relevant matters are covered
accountants - validates financial statements
offer for subscription vs offer for sale
subscription = straigh to investor - will be knowledgable company e.g. ITC
sale = via an issuing house to investor
UKLA conditions for listing and ongoing obligations
conditions :
- pub company
-freely transferable shares with pre emptions rights
- 25% free float
limit of 30% ownership (not hard)
-min market val 700k eq, 200k debt
-3 years audited accounts
- 12 months working cap
continuing:
- disclosure of price sensitive info through RIS
AIM roles and conditions for entry
Nom advisor - applies to LSE
Broker - liquidity provider
must maintain both
shares susspended if either lost and removed from AIM if not replaced in a month
conditions: accounts
and additional reqs for yound companies
continuing reqs:
must disclose info through RIS
weighting of indices
price weighted - assumes 1 share per comp + biased towards higher share prices
e.g. DJIA
value weighted (market cap)
- biases towards large companies
SP500, NASDAQ, FSTE100
Dow divisor
adjusts price weighted index for bonus issues, splits, consolidations such that events dont alter numerical val of DJIA
DJIA = sum of component stocks/ dow divisor
currently a dow multiplier
RPI and CPI
gilts?
inflation indices
Gilts use 3 months prior RPI except those issued pre jun 05 which use 8 months prior
RPI = UK retail PI = 500 goos and services
excludes top 4% earning households
arithmetic avg
RPIX = -mortgage repayments
RPIY = - mortgage repayments and VAT
CPI = globally harmonised index, excludes housing costs, geometric avg, used by MPC, all priv households
RPI typically higher than CPI
medium term notes
- issued on a scheduled funding basis
shelf registration - allows several to be authorised under one registration - letting company roll out issues over next 2 years
2- 10 yrs
What is a dark pool
an MTF without any reqs to fulfil MIFID transparency
XC traded liquidity with OTC confidentiality
Treated as MTF/OTF if volumes are huge
MTF/OTF
MTF - crossing network for equities
OTF - crossing network for bonds
both are alternative to XCs
conversion premium of bond
paid £125 per 100 NV
right to covnert to 50 shares
shares trading “2.10
Price of bond/no. of shares bond is worth
= price per share of bond
price per share of bond - market price /market price
125/50 = 2.5
2.5-2.1 = 0.4
0.4/2.1 = 19% =answer
regulatory framework for aim
Companies Act
FCA reqs - e.g. transparency rules
LSE
limit orders
have price and time limit
sell 1000 shares at 360pby next tues
max time limit = 90 days
can be partially filled
removed at end of trading day if no time limit
oly orders displayed on SETS order book
iceberg orders
type of limit order
hides size of large order to limit market impact
executes in tranches
at market/at best orders
no specified price
will fill as much as poss at any available price and remainder cancelled
only during automatic exc
fill or kill
only during automatic exc
normally have specified price
entire order executed at price or better or cancelled
execute and eliminate
only during automatic exc
executes as much of trade as poss then eliminates rest
has set price
what is a CCP
central counterparty
service that can be provided by trading system - e.g LCH for SETS
assumes responsibility for settling with each counterparty - buyer and seller remain anonymous
- helps reduce counterparty risk
- improvement in price
financial gearing ratio
= debt/equity
how would a eurobond list in london
admission to listing by FCA
admission to recognised stock exchange e.g. LS=E
split capital ITC shares
set up for pre specified amount of time - usually 5-10 years then wound up (increasing risk)
zero divi pref shares - cap growth @ pre established redemption price
income shares - entitled to most of income generated from assets of trust, some cap protection
annuity income shares - v high and rising yield with baso no cap protextion
ordinary income shares - high income and share of remaining assets after prior ranking shares
capital shares - entitled to remaining assets on wind up - v high risk
equity multiplier
total assets/total equity
LSE listing reqs
market cap must be 700k+, with at least 25% free float
market val of bond issues must be 200k+
all secs must be freely transferable
any subs issue of ordinary shares must be made to existing shareholders 1st unless pre exemption resolution
no holde rover 30%
3 years of audited accounts
must disclose annual accoutns with 4 months of end of FY
PV of bond
(val of 6 yr 8% bond with 4.5% interest rates)
= £coupon x 1/r x [1-1/(1+r)^n)] +NV/(1+r)^n]
or discount back cash flows usuing
CPV = FV/(1+r)^n
unsponsored vs sponsored ADR
unspon = issued by depositary bank with no involvement by issuer
largely OTC traded
some shareholder benefits dont apply
difference between tactical and strategic cash
tactical = shorter term = high interest, over night deposit facility leading high rated banked
strategic - investments in cash and near cash money market instruments or funds
difference between auction and tender
auction - non IL gilts, T bills
competitive pricing - pay bid price
tender
- IL gilts, corp bonds, US gov bonds
- compet auction ranked by price
everyone pays lowest successful bid
compet vs non compet auction UK gilts
compet - primary dealers via GEM phone line
min bid = 1mn NV, 500k NV for T bills
pay bid price if successful
non compet - anyone registered with DMO
ax bid = 500k - bid for NV not for price
pay vol weighted avg of compet bid
succesful auctions
bid to cover ratio
calculated 2 ways:
- bids received/bids accepted
- $ amount bids received/ $ accepted
above 2.0 = successful
US debt auctions
singple price auction - 2 options compet and non compet
compet - bidder spec rate, yield or discount margin
non compet - $5m max per auction and accepts rates etc of compet
@close - US treasury awards all non compet bids that comply with auction rules and accepts compet bids in ascending order of rate, yields, discount argin (low to high) - until quant is filled
all receive highest accepted
ROCE
= EBIT / (equity + LT liabilities)
EBIT / (total assets- current liabilitites)
open offer vs rights issue
open offer = rights issue but take it or leace it
rights cannot be sold nil paid so investor cannot transfer rights
forward rate calc
F/S = (1+var) / (1 +base)
remember to divide annual r
