Fixed Income

Question 1

How can a corporation raise the required capital for a company?

Answer 1

1) issue a bond/debenture
2) issue preferred shares
3) issue common shares

Question 2

how can the government raise capital?

Answer 2

1) issue a bond or debenture

2) issue t-bills

Question 3

financial leverage

Answer 3

earning more money on capital borrowed than the interest you are paying on the loan

Question 4

bonds vs debentures

Answer 4

bonds are secured and debentures are unsecured

Question 5

Step-Up Bonds

Answer 5

bonds that have coupon rates that increase with time according to a specific schedule.

Question 6

Callable Bonds

Answer 6

gives the issuer the option to call the bond before its maturity date.

Question 7

Call Protection Period

Answer 7

the period between the initial issue date and the first potential call date.

Question 8

Extendible Bond

Answer 8

has 2 potential maturity dates.

Question 9

Convertible Bonds & Debentures

Answer 9

a convertible security allows the investor to lock in a specific price for common shares of the company.

Question 10

Mortgage Bonds

Answer 10

a mortgage is a legal document that contains an agreement to pledge land, buildings, or equipment.

Question 11

Floating-Rate Securities (Variable-Rate Securities)

Answer 11

they do not offer a fixed coupon rate. Interest rate’s are adjusted up or down at regular intervals.

Question 12

Collateral Trust Bonds

Answer 12

bonds secured by stocks or bonds of companies that are controlled by the issuing company.

Question 13

Subordinate Debentures

Answer 13

junior debentures ranks behind other debentures but before preferred shares in terms of entitlement. info found on prospectus.

Question 14

Equipment Trust Certificates

Answer 14

equipment is pledged as collateral instead of real property.

Question 15

Corporate Notes

Answer 15

is a short term unsecured promise to pay.

Question 16

High Yield Bonds

Answer 16

junk bonds. speculative non-investment grade.

Question 17

Commercial Paper

Answer 17

a promissory note issued by a corporation that is either unsecured or secured by a pool of financial assets. 3months - 1 year.

Question 18

Bankers Acceptance

Answer 18

commercial draft guaranteed by a bank (30-90 days) sometimes as long as a year.

Question 19

T-Bills

Answer 19

only interest earned is taxed. T-bills are sold at a discount and mature at FV.

Question 20

Strip Bonds (Zero Coupon Bonds)

Answer 20

the spread between the purchase price and the maturity value is considered the investors’ interest which is taxable interest. sold at a discount and matures at FV. Traditional bonds just stripped of their coupons by the investment firm.

Question 21

Domestic Bonds

Answer 21

all are the same

Question 22

Foreign Bonds

Answer 22

an issuer is issuing a bond in a foreign country in that country’s foreign currency.

Question 23

Eurobond

Answer 23

there are three countries involved, one for each of the 3 variables.

Question 24

Yankee Bond

Answer 24

a CDN company issues a bond in the US in USD funds.

Question 25

Liquidity, Negotiability, and Marketability

Answer 25

Liquidity: bonds that trade in significant volume. Negotiability: refers to whether the bond is in good delivery form. Marketability: bonds that have a ready market, which means that clients are willing to buy the bond b/c it has an attractive price and features.

Question 26

Current Yield

Answer 26

=Annual Income/Current Market Price

Question 27

Yield-To-Maturity (YTM)

Answer 27

=(Annual Income +/- Annual Price Change)/Avg. of market price and maturity price

Question 28

Bond Pricing Properties

Answer 28

**Interest rates and bond yields move in the same direction, with YTM always moving more than CY**

Question 29

5 bond pricing principles:

Answer 29

1) interest rates in the market and the market value of existing bonds are inversely related. 2) long-term bonds are affected more by interest rate changes than are high-coupon bonds. 3) low-coupon bonds are affected more by interest rate changes than are high coupon bonds. 4) the market value of a bond will also be impacted by the creditworthiness of the issuer. 5) yields move in the same direction as interest rates, with YTM always moving more.

Question 30

Reinvestment risk

Answer 30

the YTM formula assumes that when interest payments are received they can be reinvested at the same interest rate.

Question 31

Duration

Answer 31

simply a multiplier, and it tells you how much a bond's price will change given a 1% change in market interest rates.

Question 32

Liquidity Preference Theory

Answer 32

people usually lock up their money one if they are compensated by a higher interest rate.

Question 33

Expectations Theory

Answer 33

suggests that in an efficient market, each of the choices are equally attractive b/c rates are not to influence a borrower's decision.

Question 34

Market Segmentation Theory

Answer 34

the big players are the one who really affect interest rate fluctuations.

Question 35

banks and insurance companies

Answer 35

banks invest in the short term. | insurance companies invest in the long term.