Chapter 3/4/5 Flashcards
(106 cards)
1
Q
What is the progression of a company’s shares from the time of incorporation to the point at which the corporation may choose to purchase its shares in the open market.
A
- Shares get authorized: Once the original number of shares is set, it can be changed only by a majority vote of the stockholders and by revising the corporate charter
- Shares get issued: Shares that are sold to the public.
- Treasury stock: When a firm repurchases some of the issued shares.
- Most corporations issue fewer shares than what’s authorized in order to keep a certain amount of stock available for future use.
2
Q
Outstanding shares
A
Shares that have been issued to the public minus treasury stock
3
Q
What are the rights of common shareholders?
A
- Right to inspection: Stockholders have the right to inspect certain books and records of the company, including the stockholders’ list and the minutes of stockholders’ meetings.
- Right to vote: Each shareholder gets an amount of votes equal to the shares they own.
- Right to receive dividends
- Right to evidence of ownership: Shareholders have the right to receive at least 1 certificate as proof of ownership.
- Right to transfer: Stockholders have the right to freely transfer their shares by selling them, giving them away, or bequeathing them to heirs. However, there are some shares that are not freely transferable. These are called restricted stock.
- It’s important to remember that shareholders vote on whether the corporation may execute a stock split, but NOT on whether the corporation should pay cash and/or stock dividends. Dividend decisions are made by the BOD
4
Q
Statutory voting vs cumulative voting.
A
Statutory voting: A corporate voting procedure where each shareholder gets one vote per share.
Cumulative voting: lets shareholders weight their votes toward particular candidates and improves minority shareholders’ chances of influencing voting outcomes.
5
Q
Lock-up agreement
A
For certain investors who own restricted securities, a lock-up agreement dictates the amount of time that pre-IPO investors must wait before selling their shares after the company has gone public. The lock-up period also restricts or limits the supply of shares being sold in the market.
6
Q
Control securities
A
Control securities are those held by an affiliate of the issuing company that were purchased in the secondary market. Control persons may include officers, directors, or other insiders (those with more than 10% ownership) and their respective family members.
7
Q
Rule 144
A
regulates the sale of restricted securities and control (affiliated) securities.
- Under Rule 144, the maximum amount of securities that a control person of an exchange-listed company may sell over any 90-day period is the greater of 1% of the total shares outstanding or the average weekly trading volume during the four weeks preceding the filing.
8
Q
True or false: for the restricted securities of a reporting company the purchaser must generally hold the securities for six months before he can dispose of them?
A
True
9
Q
True or false: Under Rule 144, a person that intends to sell either restricted or control securities must notify the SEC by filing Form 144 at the time the sell order is placed with the broker-dealer?
A
True, once notification is made, the SEC provides a 90-day period during which the securities may be sold. If the securities are not sold during this period, an amended notice must be filed.
- A notification IS NOT required if the amount of the sale doesn’t exceed 5,000 shares or securities with a value that doesn’t exceed $50,000
10
Q
Blue-Chip stocks
A
Shares of well-established, financially robust companies with a long history of stable earnings, a solid reputation and a strong market presence.
11
Q
Growth stock
A
An issue of a company whose sales, earnings, and share of the market are expanding faster than the general economy and the industry average.
- Typically these companies pay little to no dividends.
12
Q
Defensive stocks
A
Shares of companies that are resistent to recessions (firms w/ inelastic demands).
Defensive stock IS NOT the same as a defense stock.
13
Q
Income stock
A
Shares of companies that pay higher-than-average dividends in relation to their market price.
14
Q
Cyclical stocks
A
Stocks that are associated with companies whose earnings fluctuate with the business cycle.
15
Q
American Depositary Receipts (ADRs)
A
ADRs facilitate the trading of foreign stocks in the United States. An ADR represents a claim to foreign securities while the actual underlying shares are held by U.S. banks located overseas. ADRs exist becuase many foreign companies do not want to list their shares directly on U.S. stock exchanges.
Brokers buy foreign shares on the respective foreign exchanges. These shares are then delivered to a custodian. A depository bank then issues a receipt to the broker. These receipts are traded on U.S. stock exchanges or OTC markets. ADRs can pay dividends.
16
Q
Sponsored vs unsponsered ADRs
A
Sponsored: the foreign company whose stock underlies the ADR pays a depositary bank to issue ADR shares in the U.S. This is a way for foreign companies to access U.S. capital markets.
Unsponsored: the foreign company doesn’t pay for the cost associated with trading in the U.S.; instead, a depositary bank issues the ADR. These are often not liquid.
17
Q
Cumulative PS
A
A type of PS to where if the firm misses a dividend payment, all payments missed ust be paid before common shareholders receive dividends.
18
Q
Participating PS
A
PS holders that can receive a special dividend if a firm does especially well and the common dividend exceeds a certain amount.
19
Q
Callable PS
A
PS that can be repurchased by the firm at a set price at a certain point in the future. The call price is usually higher than the firms par value.
20
Q
Convertible PS
A
PS that can be converted to common stock after a certain date. The trade off is that the preferred dividends will be lower in this case than for normal PS.
21
Q
Conversion ratio
A
The # of common shares that a convertible PS holder receives if the PS is converted.
Calculation: par value of PS ÷ conversion price
- PS can also be callable.
22
Q
Difference between options and warrants
A
Options are listed on an exchange and traded from investor to investor.
Warants are issued by the company itself.
23
Q
Preemptive rights
A
When a firm issues additional shares, preemptive rights give existing shareholders the option to purchase new shares before they are offered to the public. If existing shareholders participate in the new offering, they’re shares won’t be diluted but if they don’t they will. Each investor has the preemptive right to buy one new share for every existing share they own.
- An investor can trade there preemptive rights.
24
Q
Warrant
A
A derivative that give the right, but not the obligation, to buy or sell a security at a certain price before expiration. The price at which the underlying security can be bought or sold is referred to as the exercise price or strike price. A warrent’s subscription price is usually set at a higher price than the current market price.
25
FINRA Rule 2261
If requested, a member firm is required to make available for inspection by a regular customer the information related to the firm's financial condition as disclosed in its most recent balance sheet. The balance sheet may be delivered to a customer in either physical or electronic form.
26
FINRA Rule 2262
A brokerage firm that has a control relationship with the issuer of any security is required to disclose this fact to its customers.
Two situations in which a control relationship exists are if the member firm is a publicly traded company or if it’s a subsidiary of a publicly traded company.
27
SEC Rule 10b-18
To minimize the possibility of manipulation, the SEC has created this rule, which controls how an issuer or any affiliates may purchase its own stock in the secondary market. This rule is designed to mitigate a firm buying its own stock to boost its price.
## Footnote
* Some of the legitimate reasons for issuers to purchase their own stock in the open market include for stock buyback plans or for funding employee stock purchase plans
* The SEC will assume no manipulation if:
1. * Only one broker-dealer is used to place bids and make purchases during any trading session.
2. Issuers do not purchase their own stock within the first or last 30 minutes of the trading day. If the stock is actively traded, the rule changes to 10 minutes.
3. The price may not be higher than the highest independent bid or the last independent transaction price, whichever is higher.
4. The amount of stock purchased on any single day is limited.
28
Preemptive rights example:
A company with 1,000,000 shares outstanding is planning to issue an additional 100,000 shares. If a rights offering is being conducted and an investor owns 20,000 shares, how many additional shares will her current ownership allow her to purchase?
(100,000 ÷ 1,000,000) = 10%
20,000 * .1 = 2,000
29
Cumulative voting example:
A company has six candidates who are running for four available positions on its board of directors. If the company is using cumulative voting, what's the maximum number of votes that a shareholder can cast for one candidate if she owns 500 shares?
500 shares * 4 candidates = 2,000 total votes
30
Leverage financing
Raising capital through debt
31
Leveraged issuer
When a firm has more debt than equity
32
How to determine the amount of interest an investor will receive on a bond annually?
Multiply the par value * the coupon rate.
## Footnote
BONDS USUALLY PAY INTEREST SEMI-ANNUALLY. One of the payments will be on the day of maturity (just in a prior year) and one will be six months from then.
Traditionally, bonds pay interest on the 1st or 15th of the month to ease paperwork issues. However, newly issued bonds pay interest from the dated date (the date from which interest begins to accrue), which may not fall on the 1st or 15th. For this reason, the very first coupon on a newly issued bond may be for more or less than the traditional six-month period as the issuer tries to get synchronized with the 1st or 15th payment date. If the first coupon is for more than six months, it’s referred to as a **long coupon**; if the first coupon is for less than six months, it’s referred to as a** short coupon**.
33
Accrued interest
Since bond interest is paid semiannually, a bondholder who sells a bond between interest payments is usually entitled to the interest earned during the period when he still owned the bond.
34
Zero coupon bond
Bonds that receive no periodic interest and are sold at a discount. When the bond matures a large lump sum is made.
## Footnote
Usually, the longer the zero-coupon bond’s maturity, the deeper its discount will be from par value.
35
True or false: Bond issuers often issue a lot of bonds at the same time to different customers?
True
36
Term vs serial bond issuance
Term issuance: If all of the bonds in an offering are due to mature on the same date
Serial issuance: parts of an offering will mature sequentially over several years, it’s referred to as a serial bond issue.
37
True or false: with serial bond issues, an investor has to purchase bonds that all mature at different times?
False, with serial issues, an individual investor could purchase a quantity of bonds that mature at the same time or, if she wants, she could purchase bonds with different maturities.
38
True or false: Most of the time, bonds are sold initially at par?
True, but although most bonds are initially sold at par value, as time goes by, these bonds may trade in the market at prices that are less than or more than par. A bond that’s sold for less than its par value is selling at a discount, while a bond that’s sold for more than its par value is selling at a premium.
## Footnote
* A bond's price is usually stated as a % of par.
39
Credit risk
Measures the likelihood that a bond issuer may default. Moody's, S&P, and Fitch measure credit risk by providing bond ratings.
## Footnote
* Issuers that are considered high credit risks must pay a higher rate of interest in order to induce investors to purchase their bonds.
* Generally, if a company is perceived as becoming more risky, the prices of its bonds will fall; however, if a company is viewed as improving, its bond prices tend to rise.
40
True or false: Traditionally, corporate and municipal bonds trade in increments of 1/8 of a point, while Treasury notes and bonds trade in increments of 1/32 of a point?
True
| This just means that bonds aren't a whole # % of par most of the time.
41
How do movements in interest rates affect bond prices?
if interest rates rise, the price of existing bonds will fall since the demand for existing bonds that offer lower interest rates will decline. If interest rates fall, the price of existing bonds will rise since they’re worth more than a new bond issued with a lower coupon.
42
What are the 3 measurments for determining a bond's yield?
1. Nominal yield= coupon rate
2. Current yield= annual interest ÷ current market price
3. YTM= effective return
43
True or false: Callable bonds typically have higher coupon rates than noncallable bonds?
True
44
Call protection
A type of protection for investors that invest in callable bonds that states the bonds cannot be called until a certain amount of time has passed- typically 5-10 years. f the call protection period runs out and the bonds are subsequently called, the issuer is often required to pay the bondholders more than the par value in order to compensate them for the early redemption of the bonds. This additional amount is referred to as a **call premium**.
45
In-whole callable bonds vs partial calls (a.k.a. lottery calls) vs catastrophe call
In-whole calls = Where the entire issue is being called at once.
Parital calls= Some of the bonds will be retired early, but others will remain outstanding.
Catastrophe call= provisions which are enacted only if a bond’s underlying collateral is destroyed. For example, a bond is issued to generate funds which will be used to construct a bridge. If later, due to severe flooding, the bridge washes into the water, the issue may be called with the bondholders being paid back with insurance proceeds.
## Footnote
* Both partial and in-whole calls must be disclosed to a client prior to a bond’s purchase and noted on the confirmation. However, due to the unlikelihood of occurrence, catastrophe calls are exempt from this rule
46
Put bonds
This provision gives the bondholder the right, but not the obligation to sell the bond back to the issuer. These bonds are typically priced higher and have lower coupon rates.
47
Convertible bonds
Allows the bondholder to convert the par value of their bonds into common stock after a certain date. These types of bonds are typically issued by firms w/ a weak credit rating to incentive investors to buy its bonds. These types of bonds typically have lower coupon rates than nonconvertible bonds.
48
Conversion price
The price at which a bond can be converted into common stock.
49
Conversion ratio
Par value ÷ conversion price
## Footnote
A conversion is immediately profitable if the underlying stock is trading at a premium to the conversion price.
50
Parity Price
A price level that sets two assets or securities equal in value to one another. Used to determine when it is financially beneficial to convert a bond into shares of common stock.
How to calculate:
Multiply shares that can be converted into * price of stock. This result gives you what a bond would have to trade at to be at parity.
51
True or false: Convertible bonds cannot be callable?
False, most convertible bonds are callable.
52
Forced conversion
Forced conversion occurs when the issuer of a convertible security exercises their right to call the issue. In doing so, the issuer forces the holders of the convertible security to convert their securities into a predetermined number of shares. Issuers choose to initiate a forced conversion when interest rates have declined significantly since their convertible security was issued.
## Footnote
* If the owners of convertible bonds or convertible preferred stock convert those securities into the common stock of the corporation, the conversion is NOT a taxable event.
53
Convertible bond example:
A bond is convertible at $25 and currently trading at $1,100. If the underlying common stock is trading at $28, how much will an investor receive if he converts the bond and immediately sells the stock?
$1000 (par value) ÷ $25 (conversion price) = 40 shares
40 shares * $28 = $1120
54
Level debt service
When principal and interest payments are equal from year to year
55
Marketable (negotiable) vs non-marketable (non-negotiable) Treasuries
Marketable securities= Treasury securities are considered marketable securities since they’re traded in the secondary market after issuance.
non-marketable securities= U.S. savings bonds are considered non-negotiable since they’re purchased from and redeemed back to the U.S. government.
56
T-Notes vs T-Bonds
T-Notes have a maturity < 10 years, whereas T-bonds have a maturity > 10 years. Each have a minimum par value of $100. However, most par values of these are $1,000.
## Footnote
* The interest received on T-notes and T-bonds is taxed at the federal level, but exempt from state and local taxation.
57
Treasury Inflation-Protected Securities (TIPS)
The rate of interest on TIPS is fixed; however, the principal amount on which that interest is paid may vary based on the change in the Consumer Price Index (CPI). During rising inflation, principal will increase in order to avoid diminishing purchasing power.
| When inflation slows, principal CANNOT fall below $1,000
## Footnote
* TIPS are available in 5, 10, and 30 year maturities.
* The interest received on TIPS is taxed at the federal level, but exempt from state and local taxation.
58
Treasury Bills (T-Bills)
T-Bills are securities that mature in one year or less. T-bills are always sold at a discount from their face value and, unlike Treasury bonds and notes, T-bills don’t make semiannual interest payments. The difference between a T-bill’s purchase price and its face value at maturity represents the investor’s interest. T-bills are quoted on a discounted yield basis, not as a percentage of their par value. The yield represents the percentage discount from the face value of the security.
59
Asks yield/ Bond-equivalent yield
Allows investors to compare the yields available on T-bills with the yields available on notes, bonds, and other interest-bearing securities. The bond equivalent yield takes into account the fact that the interest being earned is on the amount invested, not on the face amount.
## Footnote
A T-bill’s bond equivalent yield is always greater than its discount yield.
60
Stripped Securities/Treasury Receipts (TRs)
Securities that have been transformed from a principal amount with periodic interest coupons into a series of zero-coupon bonds. An important distinction is that Treasury Receipts are backed by Treasury securities that are owned by the issuing broker-dealer; they’re NOT directly backed by the U.S. government.
61
Treausry STRIPS
Dealers are able to purchase T-notes and T-bonds and separately resell the coupon and principal payments as zero-coupons after requesting this treatment through a federal reserve bank. STRIPS are backed by the full faith and credit of the U.S. Treasury and are quoted on a yield basis, not as a percentage of their par value.
62
Cash Management Bills (CMBs)
Unscheduled, short-term debt offerings that are used to smooth out Treasury cash flows. CMBs are issued at a discount, but will mature at their face amount. The duration of CMBs may be as short as one day.
63
True or false: The U.S. government sells Treasuries at auctions?
True, the shorter the maturity, the more frequent the auctions.
64
Competitive tenders
At treasury auctions, firms will place competitive tenders that state the price and/or yeild that they are willing to buy at.
65
Non-competitive tenders
Typically placed by individuals that buy Treasuries. Non-competitive bids are filled first; however, the bidders must agree to accept the yield and price as determined by the auction
66
Government Sponsored Enterprises (GSE)
Publicly chartered, but privately owned organizations. Congress allowed for their creation to provide low-cost loans for certain segments of the population. The enterprise issues securities through a selling group of dealers with the offering’s proceeds provided to a bank (or other lender). The bank then lends the money to an individual who is seeking financing
## Footnote
* FFCBs and FHLBs are examples of GSEs
67
Federal Farm Credit Banks (FFCBs)
FFCBs provide funds for three separate entities—Banks for Cooperatives, Intermediate Credit Banks, and Federal Land Banks. These organizations make agricultural loans to farmers. Interest received on these obligations is subject to federal tax, but is exempt from state and local taxes.
68
Pass-Through Certificate
The simplest method of creating a pass-through certificate is for an agency to purchase a pool of mortgages with similar interest rates and maturities. Interests in the pool are then sold to investors as pass-through certificates. Each certificate represents an undivided interest in the pool and the owners are entitled to share in the cash flow that’s generated by the pooled mortgages.
69
FHLMC/Freddie Mac
Providex funds to banks to finance new housing. Freddie Mac raises money for its operations by issuing mortgage-backed bonds, pass-through certificates, and guaranteed mortgage-backed certificates.
## Footnote
* These securities are not backed by the U.S. government; instead, they’re backed by other agencies and the mortgages that are purchased by Freddie Mac.
* Interest earned on Freddie Mac securities is subject to federal, state, and local tax
70
FNMA/Fannie Mae
Raises money to buy insured Federal Housing Administration (FHA), Veterans Administration (VA), and conventional residential mortgages from lenders such as banks.
## Footnote
* Not backed by the gvoernment, but the issues are backed by its authority to borrow from the U.S. Treasury.
* Subject to federal, state, and local taxes
71
GNMA/Ginnie Mae
A government organization that operates within the U.S. Department of Housing and Urban Development. Ginnie Mae’s purpose is to provide financing for residential housing. GNMA issues mortgage-backed securities and participation certificates, but its most popular securities are modified pass-through certificates. Ginnie Mae guarantees monthly payments to the owners of the certificates, even if it has not been collected from the homeowners.
## Footnote
* The mortgages in the pool have maturities that range from 25 to 30 years. However, due to prepayments, foreclosures, and refinancings, the average life of the pool tends to be much shorter especially during periods of declining interest rates and the resulting prepayment risk.
* Although Ginnie Mae securities are explicitly backed by the full faith and credit of the U.S. government, any interest earned on them is subject to federal, state, and local taxes.
72
Modified Pass-Through Certificates
A modified pass-through certificate is backed by a pool of FHA and/or VA residential mortgages. As the homeowners in the pool make their mortgage payments, a portion of those payments is passed through to the investors who purchased the certificates from GNMA.
73
True or false: Typically, the interest received from municipal bonds is NOT federally taxed?
True. Also, most states don’t tax the interest from bonds that are issued within their state borders if they’re purchased by their state residents.
74
General obligation (GO) bonds vs revenue bonds
GO bonds: issued for general purposes. Also, a GO is secured by the full faith, credit, and taxing power of the issuer. Prior to issuing GO bonds, issuers must obtain voter approval.
Revenue bonds: Issued to fund some project (ex: building a bridge). Not paid through taxes but instead through fees on the project (ex: paying a toll).
## Footnote
* GO bonds are usually subject to a debt ceiling
* Revenue bonds are generally riskier than GO bonds
75
Types of revenue bonds
1. Housing bonds: for low or moderate income families. Repaid through rent.
2. Dormitory bonds: To build dorms for students. Repaid through tuition usually.
3. Health care bonds: To build non-profit hospitals.
4. Utility bonds: sewage, trash, etc. Repaid through user fees.
5. Transportation bonds: repaid through user fees.
6. Special tax bonds: *Bonds for some project but are repaid through an excise tax.*
7. Special assessment bond: *These bonds are payable only from a specific charge on those who directly benefit from the facilities.*
8. Moral obligation bonds: Moral obligation bonds are first secured by the revenues of a project; however, if revenues are insufficient to pay debt service requirements, the state is morally obligated (but not legally required) to provide the needed funds. Prior to issuing the bonds as moral obligation bonds, the legislative approval of the state government must be obtained.
9. Lease rental bonds: One municipal entity leases a facility from another. Bonds repaid through lease payments.
10. Private activity bonds :If more than 10% of the bond’s proceeds will be used to finance a project for use by a private entity and if more than 10% of the bond’s proceeds will be secured by property used in the private entity’s business (ex: sports team)
11. Industrial Development bonds (IDBs): IDBs are a type of private activity bond that are issued by a municipality and secured by a lease agreement with a corporation. The purpose for the offering is to build a facility for a private company.
12. Double barrel bonds: Bonds that will be paid by a combination of tax dollars and revenue dollars from the project being constructed.
76
True or false: In certain cases, a municipality may not be able to issue bonds that are exempt from federal income tax?
True, this may occur when the bonds are issued to finance projects that don’t provide a significant benefit to the general public.
77
Tax anticipation notes (TANs)
GO securities that are issued to finance current municipal operations in anticipation of future tax receipts from property taxes.
78
Revenue anticipation notes (RANs)
A type of muni note issued for the same purpose as TANs except that they’re issued in anticipation of receiving revenues at a future date. Revenues could be in the form of federal or state subisidies.
79
Tax and revenue notes (TRANs)
When TANs and RANs are issued together.
80
Bond anticipation notes (BANs)
A type of muni note issued to obtain financing for projects that will eventually be financed through the sale of long-term bonds.
81
Grant anticipation notes (GANs)
A type of muni note issued in expectation of receiving funds (grants) from the federal government.
82
Contruction loan notes (CLNs)
A type of muni note issued by municipalities to provide funds for the construction of a project that will eventually be funded by a bond issue.
83
Moody's rating categories for munis
1. MIG 1 - investment grade
2. MIG 2 - investment grade
3. MIG 3 - investment grade
4. SG - non-investment grade
84
S&P's rating categories for munis (highest to lowest)
1. SP-1+
2. SP-1
3. SP-2
4. SP-3
85
Auction rate securities (ARSs)
long-term investments that have a short-term twist—the interest rates or dividends that they pay are reset at frequent intervals through auctions.
86
Variable rate demand obligations (VRDOs)
A long-term security that’s marketed as a short-term investment. A VRDO’s interest rate is adjusted at specified intervals (daily, weekly, monthly) and, in many cases, this adjustment allows the owner to sell or put the security back to the issuer or a third party on the date that a new rate is established.
87
True or false: municipal securities are exempt from the registration and prospectus requirements of the Securities Act of 1933?
True, however, the underwriting process for municipal securities follows many of the same guidelines that are used for corporate underwritings.
The MSRB formulates the rules and regulations that relate to municipal underwritings
88
Feasibility study
A study the must be performed by a consulting engineer prior to issuing revenue bonds. This study will identify whether the project will be able to bring in the necessary revenues.
89
Investment banker's role in muni issuings
Investment banks serve as underwriters. The underwriter acts as a vital link between the issuer and the investing public by assisting the issuer in pricing the securities, structuring the financing, and preparing a disclosure document (referred to as the official statement). Traditionally, several broker-dealers will combine to form an underwriting syndicate and one firm will act as the syndicate manager (lead underwriter). The syndicate is essentially a group of underwriters that share the liability and risk for selling the issue.
90
Competitive sale vs negotitated sale
Negotiated sale: The muni issuer selects an underwriter.
Competitive sale: Rather than selecting its underwriter, an issuer may invite interested underwriters to compete against one another by submitting bids for the issue.
91
Summary of the method that issuers use for underwriting:
1. U.S. government securities- auction process
2. Muni GOs- competitive sale
3. Muni revenue bonds- negotiated sale
4. Corporate bonds- negotiated sale
92
Secured bonds
1/2 types of corporate bonds. Secured bonds are backed by specific assets of a firm.
93
Types of secured bonds:
* Mortgage bonds: bonds secured by 1st or second liens on RE
* Equipment trust certificate: bonds secured by a specific piece of equipment owned by the company.
* Collateral trust bonds: secured by third-party securities (stocks/bonds) that are owned by the issuer.
* ABSs
94
Unsecured bonds
1/2 types of corporate bonds. When corporate bonds are backed by only the corporation’s full faith and credit, they’re referred to as **debentures**.
95
Order of liquidation
1. Secured creditors
2. Administrative expenses (taxes, accountants, etc.)
3. General creditors (debentures)
4. Subordinated creditors (suboridanted debentures)
5. PS
6. CS
96
High-yield bonds/junk bonds
Corporate bonds that are rated below investment grade.
97
Guaranteed bonds
A guaranteed bond is one that, along with its primary form of collateral, is secured by a guarantee of another corporation
## Footnote
* Typically done by a parent company.
98
Income bonds
Income bonds are normally issued by companies in reorganization (bankruptcy). The issuer promises to repay the principal amount at maturity, but does NOT promise to pay interest unless it has sufficient earnings. Since interest payments are not promised, income bonds trade flat (without accrued interest), sell at a deep discount (well below par), and are considered speculative investments.
99
Eurodollar
A dollar-denominated deposit that’s made outside of the United States.
100
Eurodollar bonds
pay their principal and interest in U.S. dollars, but are issued outside of the U.S.
101
Yankee bonds
Yankee bonds allow foreign entities to borrow money in the U.S. marketplace. These bonds are registered with the SEC and sold primarily in the United States.
102
Eurobond
A bond sold in one country, but denominated in the currency of another. The issuer, currency, and primary market may all be different.
103
True or false: Money-market instruments are a separate asset class and referred to as cash equivalents?
True
104
Commercial paper
Commercial paper is short-term, unsecured corporate debt which typically matures in 270 days or less. Commercial paper is exempt from registration and requirements of the Securities Act of 1933. Similar to T-bills, commercial paper is usually issued at a discount; however, some issues are interest bearing. The standard minimum denomination is $100,000.
## Footnote
Typically only issued by high qualitiy corporations so it's generally very safe.
105
Bankers' Acceptances (BAs)
Instruments that are used to facilitate foreign trade. time drafts that a business can order from the bank if it wants additional security against counterparty risk.
106
Example: The price for a Treasury bond with a principal value of $1,000 is 94-18. What's the dollar price of this bond?
94 + 18÷32 = 94.5625%
$1000 * 0.945625= $945.625
