Another Flashcards
(22 cards)
What is a financial security?
A financial claim or financial instrument that is a claim to the payment of a sum of money at some future date.
Financial securities can be categorized as debt or equity.
Define debt.
An amount of money borrowed by one party from another.
Includes government debt via Treasury bonds and corporate debt through bonds or commercial paper.
Define equity.
A share representing an ownership stake in a company, entitling the holder to dividends and the ability to sell shares at market price.
Shares are issued in primary markets and traded in secondary markets.
What are the two distinct types of financial securities?
Debt and equity.
What is the leverage ratio?
Debt / equity.
Some textbooks calculate it as debt/total assets.
What are the types of debt in the money market?
- Treasury bills
- LIBOR
- Banker’s acceptance
- Commercial paper
- Repurchase agreements
- Certificates of deposit (CD)
Certificates can be negotiable or non-negotiable.
What is a bond?
A type of financial claim showing that a borrower owes a specified sum, with agreed interest and principal payments on designated dates.
Who are the issuers of bonds?
- Corporations
- Private firms
- Governments
The government bond market accounts for the largest share of the bond market.
What is a coupon in relation to bonds?
The stated interest payment made on a bond.
Define face/par value of a bond.
The principal amount of a bond that is repaid at the end of the term.
What determines the bond’s yield to maturity (YTM)?
The interest rate required in the market on a bond with similar features.
Explain the relationship between bond value and interest rate.
Bond value fluctuates inversely with interest rates; if interest rates rise, bond values decline, and vice versa.
What is a clean price?
The price of a bond net of accrued interest.
What is a dirty price?
The price of a bond including accrued interest, also known as the full or invoice price.
How is accrued interest calculated?
By taking the fraction of the coupon period that has passed and multiplying it by the next coupon payment.
What are pure discount bonds?
Bonds sold at a discount that promise a single payment at a fixed future date.
What are level coupon bonds?
Bonds that offer cash payments at regular intervals, not just at maturity.
What are consols?
Bonds that never stop paying a coupon and have no final maturity date.
What is the bond rating concerned with?
The possibility of default.
Name the top rating agencies.
- Moody’s
- S&P
- Fitch
What are some other types of bonds?
- Floating-rate bonds
- Income bonds
- Convertible bonds
- Put bonds
- Junk bonds
- Exotic bonds (CoCo bonds, NoNo bonds)
What is the summary of key concepts discussed?
- Debt vs. Equity
- Types of debt
- Bond valuation
- Bond price and interest rate
- Bond ratings
