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CISI: Securities > Chapter 6: Corporate Actions > Flashcards

Chapter 6: Corporate Actions Flashcards

1
Q

What is a Preference Share?

Why are they AKA hybrid?

A

A PS are hybrid instrument, as income events are dividends, but these are specified (amount & frequency), similar to a bond.

There is a also no contract to oblige the issuer to pay these.

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2
Q

What is a Bullet Payment?

A

Whereby the principal of the bond is paid in a lump sum payment.

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3
Q

What is a Non-Bullet Issue?

A

Whereby the principal of the bond can be paid over a series of payments.

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4
Q

Which Bonds Typically Have Higher Coupons?

Bullet or Non-Bullet?

A

Bullets

As the lump sum payment is more uncertain causing a higher default risk, demanding higher coupons to relfect this.

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5
Q

What is a Sinking Fund?

4 points? ChatGPT ones?

A
  • A variation of the Single Bullet Maturity
  • Issuer sets aside funds annually for maturity payment
  • Funds held by a trustee, used for bond buybacks (sub par value) or held until maturity
  • Reduces defualt risk
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6
Q

What is a Putable Bond?

A

A bond that gives the investors the flexibility to require the bonds to be redeemed early, after giving the issuer due notice.

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7
Q

What is a Callable Bond?

A

Where the issuer has the right, at specified points, to redeem some or all of the bonds at a pre agreed amount, often par value.

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8
Q

What is a Bonus Issue?

Definition

A

A bonus issue is where a company issues new shares to its shareholders for no consideration, raising no further capital.

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9
Q

What is a Bonus Issue AKA?

2 more

A
  • Scrip Issue
  • Capitalisation Issue
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10
Q

Why are Bonus Issues Used?

A

To improve the liquidity and marketability of their shares.

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11
Q

How are Bonus Issue Shares Created?

Why does this change shareholder funds in company accounts?

A

These are made by converting undistrubuatble capital reserves into share capital. Converts reserves from previous share premiums or retained profits.

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12
Q

What Changes Following a Bonus Issue to a Companies Value?

A
  • Nominal Value of the share capital will increase proportionatley to the number of shares issued.
  • The net worth of the business should remian the same
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13
Q

What Changes Following a Bonus Issue to a Companies Mkt. Cap?

A
  • Dividends per share will proportionatley fall, in line with the market value
  • However Market Cap should remain the same.
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14
Q

Why Might a Bonus Issue Increase Share Value?

A

Once a share is double figures (UK) or $200, it is considered expensive, so improving the liquidity can result in a bigger market an increased share price.

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15
Q

What is a Stock Split?

How is this represented?

A

A corporate action whereby issued shares are divided into muliple shares.

E.g. 1 share becoming 5 is a “5-for-1 Split”

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16
Q

What is a Reverse Stock Split? (Consolidation)

A

A corporate action whereby issued shares are combined, to boost a shares value. This makes them more valuable if the share values have fallen too low.

This, like a regular split, has no impact on the accounts.

17
Q

What is the Ex-Bonus Price?

Not an Ex-girl…….

A

The price after the issue.

18
Q

What is the Cum-Bonus Price?

A

The price before the issue.

19
Q

What is a Pre-Emptive Right?

Definition

A

A pre-emptive right is a right (but not obligation) of existing shareholders in a corporation to purchase newly issued stock before it is offered to others. To protect current shareholders from dilution or control loss.

20
Q

Why do Pre-Emptive Rights Exist?

A

To prevent the issue of new shares, convertibles etc, other than to existing shareholders, with the prior approval in a meeting (AGM).

21
Q

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What is a Special Resolution?

Why is it needed?

A

Jurisdictions require this from shareholders before before allowing new shares to be alloted in cash to anyone other than existing shareholders.

22
Q

What is the Maximum Issuance of New Shares p/a?

A

5%

Unless there is a detailed reason otherwise

23
Q

What is a Rights Issue?

What does this mean?, Can this be traded?

A
  • A rights issue is an offer by a company of new shares for cash to the existing shareholders in proportion to their holding
  • Usually at a discount
  • This right (privellage) can be traded
24
Q

Do Rights Have an Expiry Date?

If so are they short or long term

A

Yes, these are usually short term.

25
Q

What Makes a Rights Issue Attractive?

Think about 5

A
  • No dilution (assuming the take up their rights)
  • Discounted Shares (Attractive)
  • No obligation
  • Can sell the shares of the right
  • Can be underwritten
26
Q

What is the Cum-Rights Period?

How long is it?

A

Owners of cum-rights shares can maintain their proportionate ownership and avoid dilution. These rights are short-term, minimum 10 days, and can be traded in the secondary market.

27
Q

What is a Provisonal Allotment Letter?

What does this highlight?

A

A renouncable and transferable letter that sets out:
* Shareholders Holding
* The rights
* Acceptance date

28
Q

What is the Nil-Paid Value?

A

The difference between the theoretical ex-rights price and the rights issue price.

29
Q

What Options do Shareholders Have When Dealing with a Rights Issue?

4 options

A
  • Take up the rights in full
  • Sell the rights nil-paid in full
  • Sell the rights nil-paid to preserve current stake without dilution
  • Take no action
30
Q

What is a Share Buyback?

A

When a company decides to use cash to repurchase shares from existing shareholders.

31
Q

When are Buybacks Considered Worthwhile?

Why might a company do this?

A
  1. When the company has reduced its activities, and has a surplus of cash to return to shareholders.
  2. When a company wants to reorganise its capital structure to include more debt and less equity.
32
Q

Why are There Restrictions on Share Buybacks?

A
  1. To prevent shareholders from being unfairly preferred to creditors.
  2. To make sure the company has receieved approval to buy back its own shares.
33
Q

What is The Creditors Buffer?

A

Where the capital base of a company (in the majority of cases share capital and share premium) must be maintained.

34
Q

Do Share Buybacks Need to be Discussed at AGMs?

If so what is discussed?

A

Yes

In this meeting they willl discuss whether its allowed, the price for the shares and the quanitity. (The limit must be in line with the regulator).

35
Q

What is a Block Trade?

A

Where an investement bank acting for the company will seek to do a small number of large trades with investors.

36
Q

What is an Accelerated Book Build?

A

Involves offering shares in a short time period, with little or no marketing. This is done very quickly, 1 or 2 days.

CISI: Securities (11 decks)

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