Revision Deck: Securities

Question 1

What is Corporate Debt?

2.2.3.2

Answer 1

The borrowing of a company that requires servicing by making regular interest payments

Question 2

XYZ has Issued Bonds @ 8% annual and maturing in 2030, the bonds are priced @ $156 per $100 nominal. $5000 nominal will then cost?

2.2.3.2

Answer 2

5000 * 156 / 100 = $7800

Question 3

What are the Positives for Negative Interest Rates?

2.2.5.3

Answer 3

• Increased spending in the market
• Increased lending from corporates.

Question 4

Why were Government Bonds Priced to Produce Negative Yields?

2.2.5.3

Answer 4

Investors were willing to pay governments a premium for the privellage of lending money to them. Their wish for secuirty surpases their wish for a positive return.

Question 5

What is Yield Chasing?

2.2.5.3

Answer 5

When financial institutions buy high yield high risk bonds in a time of negative yields, hoping to acheive a positive return.

Question 6

What are the Negatives for Negative Interest Rates?

2.2.5.3

Answer 6

• Deposits may be switched to cash
• Money leaves the banking system
• Economic Instability
• Long term investors not finding suitable returns

Question 7

Why Would a Buyer Pay More than the Nominal Value of a Bond?

2.2.3.1

Answer 7

If the interest avialible on depositited funds is lower than the coupon rate of the gilt, then that gilt would be an attractive investement.

Question 8

How long is the Ex-Dividend Period?

2.2.3.1

Answer 8

For most gilts it is 7 days prior to the coupon date, for the remainder the bond is cum dividend.

Question 9

What are Example of Risk Free Securities?

2.2.3.1

Answer 9

Yields on US treasuries

Question 10

What does the Risk Free Rate Represent?

2.2.3.1

Answer 10

The minimum amount an investor would accept to invest any money, and the investor would always want any amount more than risk free amount for accepting any risk at all.

Question 11

What is Commercial Paper?

2.2.5.3

Answer 11

Is an unsecured short term promissory note issued primarily by corporations, although there are municpal and soverign issues.

Question 12

What are Factors of Commercial paper? Coupon and Maturity?

2.5.3

Answer 12

• Issued at a discount to par value as they pay no coupon
• Maturity of up to one year in the EU and 270 days in the US

Question 13

Why is Commercial Paper Issued?

2.5.3

Answer 13

To manage liquidity

Question 14

What is Asset Backed CP?

Answer 14

is a secured short term investment vehicle typically between 90 and 180 days.

Question 15

What can Happen if a CP Payment is Missed by One Day?

2.5.3

Answer 15

Bankruptcy proceedings

Question 16

What are the 2 Methods of Issuing Commerical Paper?

2.5.3

Answer 16

• Selling striaght to a buy and hold investor, as with most money market funds
• Sells paper to a dealer, who then sells paper to market

Question 17

What is an Ongoing CP Programme?

2.5.3

Answer 17

Where an issuer advertises the rate at which it is willing to issue, the paper at various terms, so buyers can purchase whenever they have the fund to invest.

Question 18

What are CP Programmes Promoted by Dealers Called?

2.5.3

Answer 18

Dealer paper

Question 19

What is Direct Paper?

2.5.3

Answer 19

Where large issuers issue paper directly to the market.

Question 20

How much of the Issuance fee is saved in the US for direct paper?

2.5.3

Answer 20

0.05% or 5 basis points

Question 21

What is Rollover Risk?

2.5.3

Answer 21

Is the risk that new issues generally funding the retirement of old issues, the main risk is that they will not be able to cover the new CP issue.

Question 22

What is Grey Market Trading?

2.7.1

Answer 22

When the DR is being created, the DR bank is notified that the undelrying shares will be on receipt, as long as it has the adequate collateral, it can create and sell the receipt.

This can be up to 3 months before the issue.

Question 23

How are Dividends on Depository Receipts Paid?

2.7.1

Answer 23

To the registrars in their local currency and then passed on to the DR holder.

Question 24

Can DR holders vote at AGMs?

2.7.1

Answer 24

Ordinarily yes, the vote is passed on by the depository bank.

But some do not, like the NVDR in Thailand.

Question 25

How Much is Stamp Duty in the UK on DRs?

2.7.1

Answer 25

0.5% of the price paid to purchase shares.

Question 26

How much is Stamp Duty on DRs Traded Outisde of the UK?

Answer 26

In the US no stamp duty is charged.

HMRC charges a 1 off fee of 1.5% when the DR is created.

Question 27

What is a Placing?

4.1.4

Answer 27

A company markets it shares directly to a broker, an issuing house or another financial instituion.

Question 28

Is a Placing Expensive? Why?

4.1.4

Answer 28

Placing is the least expensive, as the prospectus is less detailed and no underwriting is required?

Question 29

Is Underwrting Required for a Placing?

Answer 29

No.

Question 30

What is a Special Provision?

Answer 30

Where a formal prospectus is not required due to the class of investor being sophisticated, qualified or accredited investors.

Question 31

What is an Auction When Issuing Bonds?

4.4.2

Answer 31

Dmo uses to issue gilts, and the highest bidders pay the price they bid.

Question 32

What is a Tender When Issuing Bonds?

4.4.2

Answer 32

Up until 1987 the tender method was standard, when all bidders pay a common strike price, which is a minimum price set by the DMO.

Question 33

What is Shelf-Registration?

4.4.2

Answer 33

Enables a single registration to be used for a number of bonds issues for a period of up to 2 years.

Question 34

What is a Reverse Enquiry?

4.4.2

Answer 34

Bonds issues in response to an enquiry from clients of the dealers, that want a particular maturity and coupon.

Question 35

What is a Limit Order?

5.3.2

Answer 35

Specify both time and price

Question 36

What is an Ice-Berg Order?

5.3.2

Answer 36

Type of limit order that alllows the participant to hide the total size of their order. Once the tip has been settled the rest will automatically be cleared.

Question 37

What is a Market Order?

5.3.2

Answer 37

Do not specify price and are immediately executed at the next best availible price.

Question 38

What is an Execute and Eliminate Order?

5.3.2

Answer 38

Executes as much of the order as possible and can cancel the rest.

Question 39

What is a Fill-or-Kill Order?

5.3.2

Answer 39

Specified a price either the order would be filled at that price, or the next best availible over the determined limit, if it cannot be filled it will be cancelled entirely.

Question 40

What is an All-or-None Order?

5.3.2

Answer 40

The same as fill of kill orders, just if the order cannot be filled immediatley, they will be cancelled until the end of the trading day.

Question 41

What are Criticisms of the DIJA?

5.4

Answer 41

That higher proced stock can have more of an impact on the index, despite having a smaller market cap in some cases.

Question 42

What is Price Return on an Index?

5.4

Answer 42

Measure the price perfomance and disregard dividends.

Question 43

What is the Total Return on an Index?

5.4

Answer 43

Measures the performance of both price return and dividend reinvestment.

Question 44

What is Net Total Return on an Index?

5.4

Answer 44

Accounts for dividend reinvestment after the deduction of withholding tax.

Question 45

Net T

What is Free-Float Factor?

5.4

Answer 45

Determines the impact of shares on an index that can actually be bought by a fund manager.