Chapter 2 - Asset Classes (27%) Flashcards
(132 cards)
1
Q
What 2 categories can Equities be divided into?
A
Ordinary Shares and Preference Shares
2
Q
Why would a company have two classes of Common Stock?
A
So then main shareholders can retain the majority vote of the businesses direction
3
Q
Which type of shareholder is payed first in a credit event of a firm.
A
Preference Shareholders
4
Q
What is a Proxy?
A
When a shareholder enables someone to vote on their behalf
5
Q
What is Nominal Value?
A
Par Value or Face Value of a Share
6
Q
What do bearer instruments not have compared to shares?
A
A register of ownership
7
Q
What is a Cumualative Preference share
A
Paid Dividends, as well as any dividends missed from previous years
8
Q
What is a Participating Preference share
A
Preference shares have fixed incomes. If a company is doing well they may loose out on profits.
To counter thing Participating preference shares exsist to offer higher distributions of extra income
9
Q
What is a Redeemable Preference Share
A
Allow the company to buy back the shares from the shareholder at an agreed price in the future.
10
Q
What is a convertible Preference Share
A
The preference shareholder has the right but not the obligation to convert the preference share into a pre-determined number of ordinary shares
11
Q
What is a Zero Coupon Preference Share
A
Pay no dividend, but are redeemed at expirty above the buy price
12
Q
What is the main type of Debt Instrument
A
Bonds
13
Q
Bond Investors generally: (4)
A
- Lend Money to the issuer n return for an agreed interest %
- Agreed maturity date
- Paid ahead of shareholders
- Legal stance against issuer if prinical or coupon is not paid
14
Q
Equity Investors generally: (4)
A
- Purchase a small portion of a company
- Can not be certain shares will in/decrease
- Can not be certain on amount of dividends
- Can suffer unlimited losses
15
Q
How is bearer ownership proved
A
Bearer Certificaites
16
Q
3 Problems with a bearer ownership structure
A
- Difficult for authoritites to monitor ownership
- The issuing organisation has difficulty knowing who to send dividends to
- Physical security of ownership is harder and more expensive to upkeep
17
Q
Where are most bearer securities held
A
CSDs (Central Security Deposits)
18
Q
Name two CSDs
A
Euroclear & Clearstream
19
Q
What is the nominal value of a bond
A
The amount that the compnay will pay back to the bond holder
20
Q
Higher risk of a bond provider = ?
A
Higher interest rate
21
Q
What is the redemption date of a bond?
A
Date in which the compnay will pay back the nominal value of the bond
22
Q
What is a Floating Rate Note
A
A bond whichs interest takes into account the effect of inflation
23
Q
Whats an Index Linked Bond
A
A bond that is linked to the inflationary index CPI
24
Q
What is a flat yeild
A
Yield that only considers the coupon and ignores the exsistence of any capital gain (or loss) if the bond is held until the redemption date
25
Flat Yield equation?
Flat Yield = (Annual coupon % / price) x 100
26
What is the flat yeild for this below question?
Flat yield on a 5% gilt redeeming in 6 years priced at £104.40
(5/104.40) x 100 = 4.79
27
What is yield to maturity
Takes into account the gain or loss made on the principal amount. Basically the total return/loss
28
What is Gross Redemption Yield
Yield to Maturity but without taking taxation into account
29
What is Net Redemption Yield
Yield to Maturity but with taking taxation into account
30
What is modified duration
The expected chnage in price, given specific chnages in interest rates
31
What is a convertible bond
Give the holder of the bond the right, not the obligation to to convert the bond into ordinary shares
32
Do convertible bonds trade at a premium? If so why if not why?
Yes, because they come with an additional feature of value. To be able to convert the bond to shares
33
What is the Conversion Ratio?
Conversion Ratio = Nominal Value/Conversion price of Shares
34
What is accrued interest?
The amount of interest that has been earned but not yet paid
35
Accrued Interest equation
Accrued Interest = Coupon Payment x (No days since last payment/No days between payments)
36
What is the Dirty Price
Clean price + Accrued Interest
37
What is ACT/360
Actual months but 360 days in a year.
38
What investment products is ACT/360 used for
US Treasury Bills & Money Market instruments
39
What is 30/360
Each month has 30 days and the year is counted at 360 days.
40
What is ACT/365?
Normal, ignores leap year
41
What investment products is ACT/ACT Used for
US Treasury and UK Gilts
42
What investment products is 30/360 used for
Used by US Agency's, corporate issuers and Eurobonds
43
What is ACT/ACT
Normal, takes into account leap year
44
What is the spread?
Difference between two yields, usually calculated in basis points.
44
In General, the greater the difference in the risks of the comparables the great the ??
Spread
45
What is a Government Bond Yield.
The most common comparison trend.
46
What is a Swap Rate?
The rate for exchanging floating rates for fixed rates
47
What is a Published reference rate
LIBOR (London Inter Bank Offered Rate) or the SOFR (Secured Overnight Financing Rate) can be used to benchmark
48
What does the Normal Yield Curve capture?
That investors have a liquidity preference
49
What does the Inverted Yield Curve imply?
Market rates are expected to fall
50
Why would a government choose to imply a Negative Interest Rate?
An investor will be loosing money by keeping it in the bank, they are more profitable to loan it out or invest it. This pushes economic growth
51
What are 2 drawbacks to Negative Interest Rate?
1. Could encourage holding cash in order to save, keeping money out of the banking system.
2. Pension funds/Insurers who can take limited risks, may find it difficult to achieve a positive return.
52
What is the present value of a bond equation?
1/(1 + R) X n
53
Through what body is Government Debt traded through in the US and UK respectively?
Treasury of the Bureau of the fiscal service (US) & Debt Management Office (UK)
54
What is the redemption price
The amount paid and the interest received on a bond
55
What is interest payable
The total value of the coupons paid to the holder of the bond every year.
56
What is accrued interest
Interest that is been earned overtime, but is yet to be paid
57
What is the effect of changes in interest rates
Could increase or decrease the redemption price of a bond
58
What is the concept of risk free?
Investing in US Treasury Bonds. The US control the money supply so in theory the risk of investing in US Cash bonds should be risk free.
59
What two indexes are used when Index-Linking bonds?
RPI (Retail Prices Index) and the CPI (Consumer Price Index).
60
What is a positive of investing in Index-Linked bonds
They are practically inflation free as the total returns takes into account the RPI or the CPI.
61
Real interest rate calculation?
Real Interest rate = (1 + Nominal Interest rate) / (1 + Inflation rate)
62
What is a zero coupon bonds
They pay 0 interest but do pay a lump sum on the redemption date.
63
What happens on the STRIPs market?
The trading of a bonds interest
64
One Key advantage of the STRIPs market?
Investors can precisely match their liabilities
65
What is a Fixed Charge
The debt carries a charge over a single company asset
66
What is a Floating Charge
The debt is carried against a group of companies asset.
67
What are asset-backed securites?
Bonds that are backed by a pool of assets
68
Mortgage-Backed Securities?
Group of mortgage loans packaged and sold to investors, when homeowners pay the mortgage the investors receive payments of interest and capital.
69
Why do Asset Back Securities (ABS) use a Special Purpose Vehicle (SPV)
Lessen the default risk investors face when investing in securities
70
What type of bond does not use an SPV?
Covered Bonds
71
What is a debenture?
A UK Based secured debt transaction
72
What is a Note Trustee?
Appointed to represent the interests of the holders of the securities, while proving guidance to the issuer
73
What is a Security Trustee?
Looks after the securities involved on behalf of an investor
74
What is a Share Trustee
Holds the shares in a SPV to ensure off-balance sheet treatment for the originator of the transaction
75
What is a Successor trustee
A trustee appointed when there is a conflict of interesr
76
What are the three tiers of Debt?
Senior Debt & Subordinated Debt & Mezzanine Debt
77
Rank the 3 tiers of debt from most important to least
Senior
Subordinated
Mezzaine
78
2 Characteristics of Senior Debt
Lowest Rate of interest
From lenders perspective, most secure
79
Subordinated debt, is it higher or lower interest rate than Senior Debt?
The interest rate is higher
80
Which debt is the most risky?
Mezzanine Debt
81
What is unsecured debt
Not secured against the asset, the holder of the debt has no special protection in case of default. This can have better rates.
82
What is Guaranteed debt
The guarantee is provided by a third party
83
What is Subordinated debt
The investor will only be repaid once other creditors have been paid
84
What is a convertible bond?
Convertible bonds give the holder of the bond the right, but not the obligation, to convert into a predetermined number of ordinary shares of the issuer.
85
What Bond Ratings are considered Investment Grade?
BBB- or Baa3 and above
86
What Bond Ratings are considered Non-Investment Grade
Ba1 or BB+
87
3 Advantages of Cash Deposits
Liquidity
Predictable return of interest
Safety - Cash is not exposed to market volatility
88
3 Drawbacks to investing in Cash
Varying credit worthiness of the banks
Inflation rates can return a negative profit
Varying interest rates
89
What is a Treasury Bill (T-Bill)
Short term government debt borrowing. Basically an IOU
90
How do investors see a profit on T-Bills
Pay no coupon, issued discount to nominal value.
91
How do investors see a profit on C-Paper
Pay no coupon, issued discount to nominal value (Same as T-Bills)
92
What is the role of the dealer in the sale of Commercial Paper
The dealer sells the paper in the market, the dealer market invovleds large investment banks.
93
What is a Repo Agreement
Re-purchase agreement. Basically I sell this to you but promise to buy it back at a future date down the line.
94
What is the Direct Issuer fee in the USA?
0.05%
95
What is a Repo Rate
The difference between the buy and sell price of a Repo Agreement
96
What is a Reverse Repo.
Basically I sell this to you but promise to buy it back at a future date but the seller actually then buys it at the future date instead
97
Why would a party enter a Reverse Repo?
To cover a short position on Gilts
98
What is a Eurobond
Bonds issued and sold outside their home country (They DO NOT need to be denominated in the Euro)
99
What is a Bearer document?
A document that proves ownership of a Bearer Bond
100
What is the settlement period for a EuroBond
T+2
101
What is Grey Market Trading
Basically the investor has brought a receipt that entitles them to an overseas share that is yet to be listed. If the facilitation process or company was to bust the receipt would be not worth a dime.
102
What is a Warrant
A warrant gives the investor the obligation, but not the right to buy shares at a fixed price over a fixed duration of time.
103
Why would an investor use a Warrant Option?
If they believe the price of the stock is to rise, they would exercise a warrant to ensure the price of the stock purchase is lower then the market. Making a tidy profit
104
What is a Covered Warrant
A Warrant offered by an Investment bank rather than an issuing company
105
What is a Real Estate Investment Trust
Investors pooling together money in order to buy property
106
What is an Open-Ended Investment Trust
Investors pooling together money in order to buy portfolios of investment.
107
What is a Spot Transaction?
Currency deals settled within two working days
108
What is an open ended investment fund
Pooling money together to buy portfolios of investments such as stock or bonds.
109
When currencies are traded, what is the first currency called?
The base currency
110
When currencies are traded, what is the second currency called?
The quote currency
111
What is Arbitrage?
Taking advantage of a mis-match in prices between markets
112
What is Purchasing Power Parity Theory
The rate to which exchange rates tend to move over the long term. Basically a decline in the value of a basket of goods should also decline the value of that currency when compared to other currencies
113
What is a CIS?
Collective Investment Scheme
114
What is a UCIS?
Unregulated Collective Investment Scheme
115
What is the difference between a CIS and a UCIS
UCISs are not authorised or recognized by the local regulator
116
6 risks of a UCISs
Not liquid
Fixed/Long term commitment
High Charges
No guarantee of profit
Gearing
Geopolitical
117
What is an Open-Ended Fund
A fund type that can accommodate a change in demand for the fund. Ie Open ended (anyone can buy/sell on demand) and the capital is variable
118
What is a Closed-Ended Fund
The capital of the fund does not change, shares are instead traded on the stock market
119
What is an Authorized Unit Trust (AUT)
essentially a unit trust that is allowed to be marketed to the investing public, and must be constituted by a trust deed made between the manager and the trustee.
120
What is the primary duty of the Trustee
Protect the interest of the shareholders
121
What is special about the Manager of Authorized Unit Trust?
Authorized by the FCA
122
What is a Structured Deposits
Cash based products but can only be offered by banks which are able to accept deposits.
123
What is a Structured Investment
A structured product, also known as a market-linked investment, is a pre-packaged structured finance investment strategy based on a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies, and to a lesser extent, derivatives.
124
What is a 'soft' floor
the investor will get most or all of their money back as long as the underlying index does not fall by more than a certain proportion
125
What is a 'precipice bond'
A precipice bond is an investment that will pay an attractive level of income over a set period, eg, 10% per annum over three years. However, the ‘precipice’ is that if a reference index, such as a stock market index, falls by more than a certain level over that period, the capital will suffer an equivalent loss.
126
What kind of investor would use a Structured Product
High Net Worth Individuals (HNWIs)
127
What are 4 benefits to a Structured Product
Protection of capital investment
Enhanced returns & reduced volatility
Access to different asset classes
Reduced Risk
128
What is a 'Look-back feature on a Structured Product?
Gives the investor the ability to realize the returns based on the highest percentage rise of the underlying over the period of the structured product
129
What is a Cash or Nothing structured product?
If the product reaches a certain level at maturity, the investor is paid interest. Else they are just paid the capital
130
What is a Quantos structured product?
Designed to protect the investor in adverse currency movements when the underlying asset is denominated in a foreign currency
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