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Canadian Securities Course > Chapter Six > Flashcards

Chapter Six Flashcards

1
Q

What is financial leverage?

A

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

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2
Q

Is bond interest payments tax deductible?

A

Yes

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3
Q

What are the details of a bond issue outlined in?

A

Trust deed

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4
Q

What is the primary difference between a bond and debenture?

A

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

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5
Q

What is a bond yield?

A

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

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6
Q

Money market securities?

A

Short time fixed income one year or less.

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7
Q

Liquid bonds?

A

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

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8
Q

Negotiable bonds?

A

Phones that are transferable because they are deliverable form.

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9
Q

Marketable bonds?

A

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

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10
Q

Zero bond or zero-coupon bond?

A

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.

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11
Q

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

A

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

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12
Q

Callable bonds?

A

Bond issuer reserve right to pay off bond before maturity usually 10 to 30 days notice.

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13
Q

All corporate and provincial bonds callable?

A

Yes

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14
Q

All government of Canada bonds and municipal the benches callable?

A

No

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15
Q

What is the call protection period?

A

The period before the first possible call date.

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16
Q

Canada yield call?

A

Allows issueer 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.

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17
Q

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

A

The price of the bond rises higher then par.

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18
Q

Extendable bonds and debentures?

A

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.

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19
Q

Election period?

A

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

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20
Q

Convertible bonds?

A

Option to exchange bond for common shares.

21
Q

Convertible bonds have special appeal to whom?

A

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.

22
Q

What is protection against dilution?

A

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

23
Q

Are convertibles usually callable?

A

Yes.

24
Q

Forced conversion?

A

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.

25
Q

Why are forced conversions an advantage to the issuing company?

A

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.

26
Q

Sinking funds?

A

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.

27
Q

Purchase funds?

A

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.

28
Q

What are the more common protective covenants found in Canadian corporate bonds?

A

Security. Negative pledge. Limitation on sale and lease back transactions. Sale of assets and merger. Dividend test. Debt test. Additional bond provisions. Sinking and Purchase fund and call provisions.

29
Q

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

A

Federal government.

30
Q

How are T-bills sold?

A

Sold at a discount and mature at 100.

31
Q

What term are Canada savings bonds issued for.

A

Three years

32
Q

How often can you redeemed Canada savings bonds?

A

Anytime

33
Q

Which bonds can only be purchased through payroll savings program?

A

CSBs

34
Q

How is interest earned for Canada savings bonds?

A

When redeemed interest and for each full month.

35
Q

When redeemed how our candidate premium bonds interest paid?

A

Interest earned up to the last anniversary date of issue.

36
Q

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

A

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

37
Q

Real return bonds?

A

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

38
Q

What two factors determine bond quality?

A

Credit and market conditions.

39
Q

First mortgage bonds?

A

Senior securities of company because they constitute a first charge on company assets, earnings before unsecured current liabilities are paid.

40
Q

What does after acquired clause mean?

A

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

41
Q

Collateral trust bond?

A

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

42
Q

Equipment trust certificate?

A

Variation on mortgage and collateral trust bonds.

43
Q

Corporate notes?

A

Short-term unsecured

44
Q

Domestic bonds?

A

Issued in the currency and country off the issuer.

45
Q

Foreign bonds?

A

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

46
Q

Eurobonds?

A

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

47
Q

Euro Canadian bonds?

A

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

48
Q

Preferred securities or debentures?

A

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

49
Q

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

A

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

Canadian Securities Course (6 decks)

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