CH 6 Fixed Income Securities: Features and Types

Question 1

What is financial leverage?

Answer 1

If companies believe they can get a greater return on cash invested in their business than it would cost to borrow money.

Question 2

Is bond interest payments tax deductible?

Answer 2

Yes

Question 3

What are the details of a bond issue outlined in?

Answer 3

Trust deed

Question 4

What is the primary difference between a bond and debenture?

Answer 4

Bonds are secured by physical assets but the debentures may be secured by something other than physical assets.

Question 5

What is a bond yield?

Answer 5

An approximate measure of the annual return on the bond if it is held to mature.

Question 6

Money market securities?

Answer 6

Short time fixed income one year or less.

Question 7

Liquid bonds?

Answer 7

Trade in significant volumes for which it is possible to make medium and large trades quickly without making a significant sacrifice on the price.

Question 8

Negotiable bonds?

Answer 8

Bonds that are transferable because they are deliverable form.
(refers to a time when actual paper copies of bonds and fixed income securities were delivered b/w individual dealers)

Question 9

Marketable bonds?

Answer 9

Bonds ready for market e.g. private placement or other new issue because of price and features are attractive.

Question 10

Strip Bonds

Zero bond or zero-coupon bond?

Answer 10

Created when a dealer acquires a block of high-quality bonds

and separates the individual future dated interest coupons from the rest of the bond.

Question 11

Why are strip bonds usually held in a tax deferred plan?

Answer 11

Income is considered interest rather then a capital gain and taxes must be paid annually.

Question 12

Callable bonds?

Answer 12

Bond issuer reserve right , but not the obligation to pay off bond before maturity usually 10 to 30 days notice.

Question 13

All corporate and provincial bonds callable?

Answer 13

Yes

Question 14

All government of Canada bonds and municipal the benches callable?

Answer 14

No

Question 15

What is the call protection period?

Answer 15

The period before the first possible call date.

Question 16

Reasons to issue callable Bonds(2)

Answer 16

• take advantage of lower interest rate

- reduce debt with excess cash

Question 17

what is Canada yield call?

Answer 17

Allows issuer to call the bond at a price based on the greater of
a) par or
b) price
based on the yield of an equivalent term government of Canada bond plus a yield spread.

Question 18

What happens to the price of a bond when the yield falls below the coupon rate?

Answer 18

The price of the bond rises higher then par.

Question 19

Extendable bonds and debentures?

Answer 19

Short maturity but with an option to exchange debt for an identical amount of long term debt at same or slightly higher rate of interest.

Question 20

Election period?

Answer 20

The time period where a decision to exercise the maturity option must be made.

Question 21

Convertible bonds?

Answer 21

Option to exchange bond for common shares.

Question 22

Convertible bonds have special appeal to whom?

Answer 22

Wants to share in company growth while avoiding any substantial risk. Willing to accept a lower yield of the convertible in order to have a call on the common shares.

Question 23

What is protection against dilution?

Answer 23

For convertible bonds if the common shares of the company are split the conversion privilege will be adjusted accordingly.

Question 24

Characteristics of convertible bonds

Answer 24

• conversion prices of the bond goes up gradually over time to encourage early conversion
• can normally be converted into stock anytime before conversion privilege expires
• any common stock received by bondholders from the conversion entitles holder only to those dividends declared and payed after conversion takes place
• some may have protection against dilution clause
• normally callable, usually small premiums after reasonable notice

Question 25

what is Forced conversion?

Answer 25

When company stock rises in value above the conversion price a company may force the holder to exchange the security for stock by calling back the security.

Question 26

Why are forced conversions an advantage to the issuing company?

Answer 26

- Can improve the company's debt to equity ratio. - Believes issuer of having to make interest payments. - Can also help make room for new debt financing.

Question 27

Sinking funds?

Answer 27

Sums of money that are set aside out of earnings each year to provide for the repayment of all or part off the debt issue by maturity. binding on issuer

Question 28

Purchase funds?

Answer 28

Set up to retire a specified amount of the outstanding bonds or the debentures through purchases in the market if these purchases can be made at or below a stipulated price. binding only under the right market conditions

Question 29

What are the common protective covenants found in Canadian corporate bonds? (8)

Answer 29

1. Security 2. Negative pledge 3. Limitation on sale and lease back transactions 4. Sale of assets and merger 5. Dividend test 6. Debt test 7. Additional bond provisions 8. Sinking and Purchase fund and call provisions

Question 30

Who is the largest single issue of marketable bonds in Canada?

Answer 30

Federal government.

Question 31

How are T-bills sold?

Answer 31

Sold at a discount and mature at 100.

Question 32

What term are Canada savings bonds issued for?

Answer 32

Three years

Question 33

How often can you redeemed Canada savings bonds?

Answer 33

Anytime

Question 34

Which bonds can only be purchased through payroll savings program?

Answer 34

CSBs

Question 35

How is interest earned for Canada savings bonds?

Answer 35

When redeemed interest and for each full month.

Question 36

When redeemed how our candidate premium bonds interest paid?

Answer 36

Interest earned up to the last anniversary date of issue.

Question 37

When will you not earn interest on Canada savings bonds or Canada premium bonds?

Answer 37

If you redeem within the first three months following issue date.

Question 38

Real return bonds?

Answer 38

Pays interest throughout life off bond and repays principal amount at maturity however coupon payment and principle are adjusted for inflation.

Question 39

What two factors determine bond quality?

Answer 39

Credit and market conditions.

Question 40

First mortgage bonds?

Answer 40

Senior securities of company because they constitute a first charge on company assets, earnings before unsecured current liabilities are paid. first mortgage bond= best security a company can issue

Question 41

What does "after acquired clause" mean?

Answer 41

All assets that can be used to secure the loan even those acquired after the bond what issued.

Question 42

Collateral trust bond?

Answer 42

One that is secured not by a pledge of property but of securities or collateral.

Question 43

Equipment trust certificate?

Answer 43

Variation on mortgage and collateral trust bonds.

Question 44

Corporate notes?

Answer 44

Short-term unsecured

Question 45

Domestic bonds?

Answer 45

Issued in the currency and country off the issuer.

Question 46

Foreign bonds?

Answer 46

Issued outside of the issuers country and denominated in the currency of the foreign country where issued.

Question 47

Eurobonds?

Answer 47

Issued in foreign market and denominated in a currency other than that of the market where the bonds are issued.

Question 48

Euro Canadian bonds?

Answer 48

If Canadian corporation or government issued Eurobonds denominated in Canadian dollars they would be called this.

Question 49

Preferred securities or debentures?

Answer 49

Very long term 25-99 years, subordinate to other debentures, interest can often be deferred, often trade on exchange. Rank ahead of preferred.

Question 50

What are the two main reasons and rationale for borrowing money for corporations?

Answer 50

To finance operations or growth. To take advantage of operating leverage.

Question 51

What is bankers acceptance (BA)

Answer 51

commercial draft by borrower for payment on a specific date and guaranteed by maturity by borrowers bank may be sold bfr maturity at prevailing prices, offering a higher yield than Govt of CA T-Bills

Question 52

What is a commercial paper

Answer 52

either an unsecured promissory note issued bt corp on a asset backed security by a pool of underlying assets issue term range form less than 1 mth to 3 years sold at discount and mates at face value

Question 53

Term Deposits?

Answer 53

offers a guarantee tare for a short term deposit (up to1 yr) penalty normally apples for funds before certain periods

Question 54

Types of GICs? (5)

Answer 54

1. Escalating GIC- int tare increases over GIC term 2. Laddered GIC- investment divided into multiple terms lengths & matured portion can be reinvested or redeemed. 3. Installment GIC- initial lum-sum made with further contributions made weekly, bi-weekly or monthly 4. index linked GIC- grantees a return for initial investment at expiry at some expose to equity marked. 5. . Interest rate linked GIC- offers int rate linked to other rates such as prime, bank, non-redeemable GIC int rate or money market

Question 55

what are fixed income mutual funds & Exchange-Traded Funds

Answer 55

-specializes in bond that have grown significantly over past decades - high demand due to equity market uncertainty and lower int rate easy access to diversified portfolio of debt and securities feature for both domestic and global market

Question 56

Attractive features of Fixed income mutual funds & Exchange- Traded Funds?

Answer 56

- professional investment management - liquidity - low investment cost