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