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AFM 121 FINAL REVIEW > Chapter 6/7: Final > Flashcards

Chapter 6/7: Final Flashcards

1
Q

What are fixed-income securities ?

A

They provide cash flow to the holder over time

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2
Q

What are the two forms of cash the person would receive?

A

Coupon payments (interest payments)
Principal

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3
Q

When will you receive your ‘principal payment’?

A

You will receive it at maturity

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4
Q

What are the different types of ‘fixed income types’?

A
  1. Bonds
  2. Debentures
  3. Mortgages
  4. Swaps
  5. Preferred Shares
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5
Q

The rate that you might recieve my vary why?

A

The rate might not be fixed and be predetermined so the amount of cashflow a person might receive will vary based on the rate set.

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6
Q

Whats an example of a ‘variable rate’

A

Banks prime rate

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7
Q

What are bonds?

A

These are securities secured by specific assets

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8
Q

What does it mean to secure specified assets?

A

If the issuer defaults on payments they can take the specific assets as collateral

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9
Q

What are debentures

A

These assets are not secured

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10
Q

What does not secured mean for (debentures)

A

There is no collateral in an event where the issuer defaults on payment

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11
Q

What can they try to claim if they default on payments (debentures)

A

They can try to just claim the general income and assets of the borrower

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12
Q

What is debt short for?

A

Debenture

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13
Q

What are bond terms

A

These outline the terms of the bond

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14
Q

What does it specifically outline (bond term)?

A

The legal rights of the borrow (company) and the lender (the investor)

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15
Q

What are some examples of what we might see in ‘bond terms’?

A
  1. Dates of amount coupon payments
  2. Date of repayment principal
  3. covenants (restrictions)
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16
Q

What are bond prices

A

Its how much you pay for the bond and what you will get back at maturity

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17
Q

How are Bond prices determined?

A

Its how much the bond is worth in the market and how much you pay for it

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18
Q

What is a premium bond price?

A

Its when the bond is bought at a higher price than market value

eg: 104$ purchase at $100

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19
Q

What is discound bond price

A

When you purchase a bond less than makret value
Ex: 96 when its worth 100

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20
Q

What does ‘par or face value mean’?

A

How much the bond is worth in the market

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21
Q

What are discounted bonds?

A

Bonds that do not receive any coupon or interest payments instead they are sold at a discounted (below par) amount

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22
Q

For a discounted bond, how do thye earn money?

A

They earn the difference between the price (cost) and face value(market value) at maturity

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23
Q

Explain example: price is 90$ and the face value is 100$

A

Its basically the investor pays for the bond at 90$ when in reality its worth 100 so they earn the difference of 10$

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24
Q

What is the difference the ‘discounted bond gives us’

A

Intrest income

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25
Q

Are the price change for a discounted bond considered interest income or capital gain for tax purposes

A

INTREST INCOME

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26
Q

What are short medium and long-term bonds

A

It discusses bonds’ time frames

Short-term bonds- 1-5 years
Medium-term bonds mature in 5-10 yrs
long term bonds mature over 10 years

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27
Q

What are liquidatable bonds?

A

These are bonds that trade at a high volume

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28
Q

What are marletable bonds : the two types

A

on the run
off the run

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29
Q

What are ‘on the run bonds’

A

Bonds that are newly issued

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30
Q

What are off the run bonds

A

Bonds that are npt newly issued more old

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31
Q

Are bond markets bigger than equity markets

A

YES

32
Q

What do governments issue more of

A

Bonds not shares can’t own the government

33
Q

What is a fact about bond markets

A

More bonds than stocks so they are less liquid

34
Q

What are the two coupon rates bonds have

A
  1. Floating rates
  2. Fixed rates
35
Q

What are floating rates?

A

These are rates that adjust perodically
ex: government 90 day tbill

36
Q

Wht are fixed rates

A

These are rates that do not chnage until the end of bonds life

37
Q

What does bond maturity mean?

A

Its when the bonds term comes to end

38
Q

can the maturity date be modified

A

yes in the bond trust

39
Q

What ar the types of bonds thats maturity date adjusts

A
  1. Callable
  2. Retractable bonds
40
Q

What are callabe bonds

A

These are bods that are repurchased by issuer (company) before maturity date

41
Q

What are retractable bonds

A

These are bonds that are force issuer to repurchase back by bondholder

42
Q

what are planned repurchases?

A

These are bonds that require the issuer to repurchase some of the bond over time

43
Q

There are two types of planned repurchase

A

sinking
purchase fund

44
Q

What is a sinking fund?

A

Requries the issuer to buy the bonds over time

45
Q

What is the purchase fund

A

it requires the issuer to buy the bond back at a below par price

46
Q

What are convertible bonds

A

Its when bonds have the prvosiiso that allows them to be able to be converted to shares

47
Q

What is a call option

A

This is in the bond that allows the conversion of bond price to shares

48
Q

What kinda of companies issue convertible bonds

A

Less credit-worthy companies are given as an upside

49
Q

What are protective covenants

A

These are restrictions on the borrower’s behavior

50
Q

What happens when we violate a covenant?

A

It can lead to a technical default which means they broken the bonds trust even when they haven’t missed any payments

51
Q

What are government bonds?

A

They are often seen as ‘treasury bonds’ and are bonds issued by the government

52
Q

What are the names of government bonds in Canada germany UK

A

Canadas
Bunds
Gilts

53
Q

What are the two types of government bonds

A
  1. Treasury bills
  2. Marketable bonds
54
Q

What are treasury bonds

A

Short-term discounted bonds

55
Q

What are marketable bonds

A

These are medium to long-term bonds with coupon payments

56
Q

What are real return bonds

A

These are government bonds that adjust coupon rates due to inflation and its used to see markets inflation expectation

57
Q

What are corporate bonds (3 types)

A
  1. Mortageg bonds
  2. Collaterial bonds
  3. Equipment trust
58
Q

What is mortgage bonds

A

They have specific assets as collateral

59
Q

What are first and second mortgage bonds?

A

first mortgages have specific assets as collateral and you pay back second mortgage bonds after the first is paid back

60
Q

What is collateral trust

A

Used for financial collateral

61
Q

What are equipment trus?

A

Used for equipment collateral

62
Q

What are ‘corporate debentures’?

A

Corporations issue unsecured debt

63
Q

How is their unsecured debt based off of?

A

It’s based on a companies unencumbered assets and its cash flow

64
Q

Where are subordinated deb ranked?

A

Its ranked behind other forms of debt

65
Q

What are the bond rates for corporate bonds and debentures

A

Floating or fixed rates

66
Q

What are short-term corporate borrowing

A

It is when corporations can borrow for short periods

67
Q

What are strip bonds?

A

It is when a bond is stripped of its coupon payments to create a series of discount bonds

68
Q

What is an ‘intrest only’/ ‘principal only’ bond

A

Only consists of the coupon payments. consists of the principal repayment

69
Q

What is the quasi-fixed income?

A

Its basically we can think we can buy fixed income like individual retail investors however that’s not the case. They can invest in term depoits or GIC’s

70
Q

What is the ‘fair’ or theoretical price of a bond?

A

Shows a bonds pv of its cash flows

71
Q

What is the discount rate

A

The required rate of return

72
Q

What does the dsicount rate mean?

A

Its how much they expect to earn as a return to be interested to buy

73
Q

How do we find the price of a bond?

A

PV!

74
Q

What are the coupon + principal repayment

A

coupon payments are the cash flow
principal repayment is the cash flow we get at end of maturity

75
Q

What fucntion do you use to find the rate?

A

RATE()

76
Q

what periods do you use

A

not the number of years th periods

77
Q

If they give you the present value what is that

A

NPV or the pv of the bond

AFM 121 FINAL REVIEW (10 decks)

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