SF CH 2 Flashcards
(36 cards)
What is indirect investing?
The buying and selling of the shares of investment companies that hold portfolios of securities. Example: buying shares from a mutual fund.
What are the three categories of marketable securities?
- The money market.
- Capital Market.
- Derivatives Market.
What are non-marketable financial asset? What are their characteristics?
These are securities that are not traded in the market.
- Typically a direct exchange of claims between an issuer and investor: this means that as the owner of a savings account, you must open the account personally and deal with the bank.
- Highly liquid.
What are examples of non-marketable financial assets?
- Savings accounts with financial institutions.
- GICs Guaranteed Investment Certificates. non-transferable time deposits that offer investors higher returns than those available on savings accounts.
What are money market securities?
These are securities that are short-term (matures in one year or less), highly liquid, low risk debt instruments sold by governments, corporations with temporary excess funds to invest.
How do intermediary money market make profit?
They buy large blocks of these instruments at a certain rate. Then they sell smaller denominations of that block to customers but for a lower interest.
What are some examples of money market securities?
- Treasury bills: short-term notes sold a discount and redeemed at face value.
- Commercial paper: short-term unsecured notes issued by large well-known corporations.
- Eurodollars:
- Repurchase agreement: agreements between a borrower and lender to sell and repurchase money market securities.
- Banker’s acceptance
What are Capital market securities and are the two sub-categories under it?
Capital Market securities have maturities greater than one year and the risk is much higher than in the money market.
- Fixed income securities
- Equity securities.
What are Fixed Income Securities?
These are securities with specified payment dates and amounts and must mature at some future date.
What are bonds and why is considered a fixed income security?
Bonds are long-term debt instruments representing the issuer’s contractual obligation.
They are considered as fixed-income securities because the interest payments and the principal repayment are specified at the time the bond is issued and is fixed for life.
What are treasury bonds?
Long-term bonds sold by the US government.
What is a call provision and what is its benefit to the issuer?
An element of a bond that gives the issuer the right to “call in” bonds, thereby depriving investors of that bond.
A call provision benefits issuer because they save money if the market rate is below the coupon rate.
What is a sinking fund provision?
A provision in some bonds that requires the issuers to put money aside to be able to repay bondholders at maturity
What are callable bonds, retractable bonds, extendible bonds, convertible bonds and floating rate bonds?
- Callable bonds: gives the issuer the option to call or repurchase outstanding bonds at predetermined “call prices”.
- Retractable bonds: allows the bondholder to sell the bonds back to the issuer at predetermined prices at specified times.
- Extendible bonds: allows the bondholder to extend the maturity date of the bond.
- Convertible Bonds: these bonds can be converted into common shares at predetermined conversion prices.
- Floating rate bonds: bonds that have adjustable coupons tied to T-bill rates. They are attractive for the times of volatile interest rates.
What are the two types of bonds?
Government bonds and corporate bonds
What are mortgage bonds and debentures?
- Mortgage bonds: These are bonds secured by real assets. Which means that the holders have legal claim to specific assets of the issuer.
- Debentures: unsecured and are backed only by the general financial worthiness of the firm.
What are negative and positive covenants?
- Negative covenants: these are protective measures written in bond indentures (contracts) that prohibit certain actions by the issuer to ensure that the bonds are able to be repaid.
- Positive covenants specify actions that the firm agrees to undertake.
What is securitization?
Refers to the transformation of illiquid, risky individual loans into more liquid, less risky securities referred to as asset-backed securities.
What are asset-backed securities?
Securities issued against some type of asset-linked debts bundle together, such as credit card receivable or mortgages.
What are mortgage backed securities?
Created when a financial institution purchases a number of mortgage loans that are then repackaged and sold to investors as mortgage pools. The investors assume little default risk because most mortgages are guaranteed by a federal government agency.
What is the difference between fixed-income securities and equity securities?
Equity securities represent an ownership interest in a corporation.
What are the three forms of equity securities?
- Preferred stock
- Income trusts
- Common stock
What are preferred stocks, and why is it considered a hybrid security?
Preferred stocks have elements of a equity security and a fixed income security.
Preferred stocks are securities that increases in value but also pays a fixed dividend amount with the payments known in advance.
Common Characteristics of Preferred stocks include
- Non-voting rights.
- Payment to preferred shareholders are prioritized compared to common shareholders.
- Cumulative feature which requires the company to pay all preferred dividends both current and arrears before paying any dividends to common shareholders.
