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Flashcards in Unit 2 Deck (43):
1

Bonds are _____________ investments

Debt

2

When purchasing stock/equity

-investor becomes part owner
-entitled to share in profits
-given voting rights

3

When purchasing bonds/debt

-creditor and liabilities to issuer
-highest claim on assets

4

Order of claim

Bank loans
Bondholders
Debentures
Notes

5

Appeal of bonds to investors

Low risk
Income source
Diversification (adds fixed income to portfolio)
Choice

6

Par value is also known as

Principal, face value

7

Bonds valued at discount are

Below face value

8

Bonds valued at premium are

Above face value

9

Bonds valued at par value are

At face value

10

What market can bonds be purchased in?

The secondary market

11

Coupon

Rate of interest
Percentage of the face value

12

How often are coupons paid usually?

Semi-annually

13

How are bonds quoted?

As a % of face value

14

Yield

Return you get on bond
-current yield
-yield to maturity

15

Current Yield Equation

Annual interest payment/purchase price

16

Yield to Maturity

Accounts for all future payments and gains/losses made at day of maturity

All interest payments + gains/losses (bought at premium or discount)

17

100 basis points is

1%

18

Corporate debenture

High risk and coupon rate
Can have no claim/general claim on assets
A way for corporations or gov't to raise money fast

19

Strips bonds

Aka zero coupon bond
Principal and regular payments are sold separately, each sold at discount

20

Convertible bonds

Can exchange bonds at future date for common shares or preferred shares
Gives bonds idlers great gains if company share price increases
Low coupon rate

21

Callable bonds or retractable bonds

Allow issuer to call in the bond
High coupon rate
May call in when current market interest goes down so they can reissue with lower coupon rates

22

Corporate notes

Similar to debentures
High interest and high risk
Not backed by issuers' assets

23

Liquidity

The relative ease with which an asset can be turned into cash

24

Why are CSBs so desirable

Immediately redeemable
High liquidity
Backed by government taxation powers

25

Stocks are ___________ investments

Equity

26

Extendible bonds

Company can postpone paying back its bondholders

27

Bond prices are more volatile when interest rates are low because

The relative change of a 1% change in rates is more significant

28

What affects the price of a bond?

Current market interest rate
Coupon rate
Terms to maturity
Individual risk and factors
Special features

29

Why does the normal yield curve increase as time passes?

1. Inflation erodes purchasing power of currency over time -> issuers build premium into coupon rate
2. Opportunity cost: cash is tied up
3. Longer time to run into financial risk/default

30

When does the inverted yield curve occur?

When economy is entering a recession
Long term bonds with high coupon rate becomes more valuable

31

Who is the most affected by inflation?

Company because they pay for the inflation premiums built into the coupon rate

32

Credit risk/default

Failing to repay principal amount and interest in a timely manner

33

How are bonds traded?

Over The Counter system

34

Role of credit or bond-rating agencies

Assess risk associated with bonds
Tells investors about risk of default

35

Three well-known credit agencies

Moody's
Standard and Poor's
Fitch

36

Investment Grades

High quality, low risk
AAA AA A BBB

37

Non-investment grades
Speculative grades
Junk bonds

Low quality, high risk
BB B CCC CC C D

38

How does ranking affect bond price?

High ranking -> low coupon rate -> low cost of capital -> high profitability

39

2008 economic crisis

Credit/bond-rating agencies overrated mortgage-related securities and insolvent financial institutions

40

GIC

Guaranteed Investment Certificate
Low risk low yield

41

Key risks of GICs

May not keep place with inflation
Variable returns with index or market-linked GICs

42

GICs are safe because

The bank of financial institution that borrowed from you is GUARANTEED to return you the money

43

Canada Deposit Insurance Corporation

Crown government insurance company
Issuers Canadian deposits and GICs up to $100k per account