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Financial Securities

Test 3 Review

TermDefinition
What is investment You put in money into something and expect it to grow
What is the difference between equity investing and income investment such as bonds In equity investing, you hope for capital appreciation (shares), and income investing a stream of cash.
What is the difference between bull or bear market In an index where it increases is a one market and where an index decreases is the other market. One markets are associated prices and higher stock indexes and the other markets are associated with falling stock prices and lower stock indexes
What is the difference bid and ask price for an equity Bid price is the highest a buyer is willing to pay and an ask price is the lowest a seller is willing to sell.
What is discount brokerage Discount brokerage charges less commission (usually a flat rate) but does not offer investment advice
What is full cover brokerage Full coverage brokerage charges more commission, but provides investment advice, analyst reports, and research on companies
What is an index. A benchmark or a yard stick that lets you measure the performance of a stock market, part of a stock market or a single investment S&P/TSX and S&P/TSX Canadian Bond Index
What determine the price of equity and the price of bond Current interest rates, its coupon, its term to maturity, and its individual risk factors.
When would a bond be traded at discount , at par or at premium? If your ytm is greater than the coupon rate you would buy it at discount If your ytm is less than the coupon rate you would buy it premium If your ytm is equal to the coupon rate then you would buy it par
What is the normal face value of a bond $1000
How would bonds be quoted if it is traded above par, or at discount Percentage of face value. Traded Above Par would be 101.25% if it was 1012.50 or 94.5% would be $945.00
How are basis points calculated 1% x 1% is equal to 1 basis point 0.001 x 0.001 = 0.0001
Who would issue bonds Corporations or Governments
How are bonds yield calculated? Coupon Rate/Bond Price
What is the difference between coupon rate and yield rate Coupon rate is the annual percentage interest paid on a bonds face value. Yield rate is the dividend divided by the closing price of the stock.
How is a bond’s price determined Part One Bond prices are inversely related. When interest rates are low bond prices are high and when interest rates are high bond prices are low.Yield to maturity, time to maturity, and size of the coupon affect the price volatility of the bond.
How is a bond’s price determined Part Two Longer maturity bonds have greater price volatility than shorter, The longer the bond, the longer the period for which the cash flows are fixed.Low coupon bonds have greater price volatility than high coupon bonds.
How is a bond's price determined Part Three High coupon bonds have a greater amount of proportion of the bond’s total cash flows occur closer to today and are therefore their present value is less affected by a change in YTM. Sensitivity of a bond’s
Short Form How Are Bond's Price Determined Current interest rates, its coupon, its term to maturity, and its individual risk factors.
What is the difference between the Principal trade and the Agency transaction Part One Principal Trade bond inventory is used as the counter-party, it involves some risk to the dealer, who must use its own capital to maintain an inventory and the later off-set its inventory positions.
What is the difference between the Principal trade and the Agency transaction Part Two Agency Transaction is when a buyer needs “matched” with a seller directly on the exchange. An agency trade will not be completed if a counter-party cannot be found.
Strip Bonds sold at discount no coupon rate, sold back at face value since you hold it until it matures you can say it has an annual rate
Convertible Bonds can be exchanged at a predetermined date or set price such as common or preferred shares. Conversion ratio
Callable Bonds bonds that can be called back by the issuer, in which they pay back the principal plus interest during the time of it was issued
Extendible bonds that can be extended they are short term while retractable are long term in the hands of the issuer
What is a yield curve Is the link between maturity and yield, graphical representations of the different interest rates paid by bonds with the same level of risk.
What is market capitalization Market capitalization is number of shares x share price
When would a yield curve be negative, positive or flat ( slop upward, downward or flat) Part One A positive slope would occur in a healthy economy where long term investments had a higher maturity compared to short term. Economy will grow at a normal rate nothing major is supposed to occur
When would a yield curve be negative, positive or flat ( slop upward, downward or flat) Part Two , holding longer bonds has higher risks so is a normal situation. Negative slope would occur when the government is about to hit the recession, predicts long term interest rates to decline.
When would a yield curve be negative, positive or flat ( slop upward, downward or flat) Part Three Flat interest rate occurs when investors do not know in which way the economy is going to go, therefore it become flat and at the this time investors should invest in low risk investments as the interest rates all the same.
What is electronic trading environment. Are all stock markets using this method of trading TSX became an electronic environment, all trading takes place on linked computers. No the NYSE still maintains a trading floor.
Blue Chip stock very safe stock, usually pay dividends (Enbridge)
Growth stock stocks with high potential yield. Yield refers to return (which is the appreciation of the stock price)
Cyclical stock seasonal stocks, during certain seasons sell more
Speculative stock any stock with fluctuations, usually investors high expectations
Turnaround stock company with good performance at one point, did poorly at one point, chance to do better. (Mergers and acquisitions is an indication that companies may turn around)
What is the difference between primary and secondary market Primary market which shares are initially first sold to investors where IPO’s occur, and secondary market is when an owner of existing shares wants to sell to a new buyer, almost all activity occurs in the secondary market.
IPO is the first sale of shares by a company to the public is called a Primary Distribution or an Initial Public Offering
Bid is the highest price a buyer is willing to pay for a stock, called the demand in economics
Ask is the lowest price a seller is willing to sell a stock for, called the supply in economics
Transfer Agent works for a company and keep track of its shareholders, important for sending out dividend payments and informing eligible shareholders of annual meetings and their right to vote.
Board Lot unit of shares i.e 1 board lot is equal to 100 shares
What is a market index A market index measure is a way of measuring how a market is doing and where it is going
What are mutual funds Mutual funds is a type of investment fund, it’s a collection of investments stocks, bonds, other funds or ETFs, and commodities.
how are they managed Funds are controlled by a Fund Manager, an expert investor or a team of investors who make decisions on when to buy and sell investments within the fund
How are funds priced Funds are priced on the amount of money you went to spend, not the price of share.
What is MER MER – Management Expense Ratio, MER are costs represented as a percentage of your assets in the fund that are paid annually Usually 2-4% for equity based and “actively managed” funds
Are mutual funds investments safe Part One Yes they are safe. Managed by expert investors, regulated by OSC, diversified safer then investing in individual securities, liquidity, diversified, ease of entry, convenient, dollar cost averaging.
Are mutual funds investments safe Part Two Over time the average price unit becomes smaller and smaller which lessons the risk of price fluctuations over time. Easily done with mutual funds
Stocks and Bonds Equity and Debt
What are bondholders entitled to in the event of bankruptcy? Bondholders have a higher claim on assets than a stock holder in the event of bankruptcy. It may be backed up behind collateral which provides security in the case of bankruptcy.
What is the appeal of bonds to an investor? Part One Income Source: Provide a series of cash flow with minimal risks to their invested capital Diversification: Reduce portfolio risk while potentially increasing returns over time
What is the appeal of bonds to an investor? Part Two Safety: Bonds are back up behind collateral Choice: Investors can choose from a wide range, allows investors to find the bond(s) whose cash flows match their income requirements.
What is the difference between bonds valued at discount, premium and par value? A bond traded under its face value is at discount A bond traded over its face value is at premium A bond traded at the value is par value
How are bond prices quoted? a percentage of face value
What is a coupon? is the rate of interest the bondholder will receive as a percentage of the face value.
What is meant by a bond’s yield? is represented by the return you get on the bond.
What is the difference between current yield, and yield to maturity? Part One Current yield is the annual return on dollar and is found by using the annual interest rate by the purchasing price.
What is the difference between current yield, and yield to maturity? Part Two Yield to maturity will tell you the total return you will receive by holding the bond until it matures. Takes in to account of you invest the interest payments back plus if bonds are bought at discounts or premiums.
basis point basis point: Percentage of yield for 1 %; for example 25 point basis is the same as 0.25%
corporate debenture companies raise capital debt by issuing debt through form of bonds, debentures, or notes. Bonds without collateral, issued on credit history .
Traditional bonds no extra feature, just discount and coupon rate
Why are corporate notes less secure than bonds or stocks? Corporate Notes have the least claim among the group of prior claimants. Corporate notes is between buyer and seller
Why are Canada Savings Bonds desirable though they have relatively low rates of return? Immediately redeemable at face value plus any interest that has been collected since the last payment. More Liquidity
What are extendible/retractable bonds? One are that are short term where the maturity date can be extended, and the other are for long term. In the hands of the issuer to extend the date,
Why are bond prices more volatile when interest rates are low? They are more volatile when interest rates are low, since the relative change of a 1% change in rates is more significant.
What features affect the pricing of a bond? (4) Current interest rates, its coupon, its term to maturity, and its individual risk factors.
What is the yield curve? Yield Curve is the link between maturity and yield. Graphical representation of the different in interest rates paid by bonds with the same level of risk, but different maturities.
Variations in Yield Curve Only expectations. Inverted yield curves indicated of recession (make people want to invest short term borrowing) Yield curves will have yields higher for longer bonds Flat yield curve no point of holding long term bonds
What is meant by an inverted yield curve? How does it predict future interest rates? An inverted yield curve is one where short term bonds provide higher interest rates then long term bonds. It predicts long term interest rates to decline.
Who is most affected by purchasing power (inflationary) risk? Investors highly dependent on a bond’s cash flows for their day-to-day living expenses are the most exposed to purchasing power risk because it may lead to deterioration in their standard of living.
Who is most affected by liquidity risk? Investors are most affected by liquidity risk because sometimes they need to sell their holdings in a secondary market, and if the market is stagnant, no one will buy the bonds.
What is credit (default) risk? What is meant by “junk bonds?” A bond issuer is in default by failing to repay principal and interest in a timely manner. Junk Bonds are bonds without none-investment grades which reflects their increased level of risk.
How and where are bonds traded? How is it different from stocks? Convertible bonds are traded on the tsx, most bonds are over the counter. The investment firm places orders on the exchange where it is matched with a counter party’s order.
Agency vs Principal Trade Agency transactions occur with a buyer being matched with a seller. Principal transactions occur when dealers buy the bonds themselves, and hold it and sell it at a higher price. They use their own money which can be risky.
Ticker Symbol is the symbol used to search , abbreviation
Dividends is the distribution of income through shareholders. Personal drawings
Earnings Per Share Net Income divided by outstanding shares
Retained earnings meaning how much of the corporation net incomes that is not distributed through dividends. (Beginning Balance + Net Income – Drawings)
Unlimited Authorization legally can distribute as much stocks as they want
Outstanding shares that were purchased but not held
Mutual Funds are pools the capital of many individuals investors for the purpose of investing in securities such as stocks, bonds, money market, instruments and similar assets.(Collection of investments)
How do you invest in a mutual fund? Part One To invest in a mutual fund you go to a bank or broker, and your capital is contribution is added into the pool of funds which is then invested.
How do you invest in a mutual fund? Part Two You tell them what to invest in after you open an account. You buy units of the fund instead of buying shares. Income is earned through capital gains and distrubtions.
What is Dollar Cost Averaging, and explain how you can use mutual funds to achieve this? Dollar Cost Averaging is an investment strategy for reducing the impact of volatility on large purchases of financial assets such as equities. It is used if mutual funds check their price, and it is low
Funds companies put aside to make sure they have enough to pay back bonds to put aside.
Explain how you can diversify your portfolio (ie. the different methods), using just one mutual fund company. Type of Investment (equity vs income ratio) Geography (focus on certain countries or regions of the world) Investment Style (Income, Growth, Balanced, Index)
Debentures have little to no collateral
Real return bonds protects to protect investors from inflation.
Advantages of Mutual Fund Part One Diversification Managed by expert investors (expertise) Liquidity Ease of entry (low minimum investment) Convenience (automatic payment plans)
Advantages of Mutual Fund Part Two Access to investments usually available to larger investors It’s regulated (OSC) Dollar-Cost Averaging Safer than investing in individual securities
Disadvantages of Mutual Fund Loads (unless it is a no-load fund), MERs (Mutual Funds – most expensive type of investment), Risk of financial loss, Less control over your investments, Less predictable income
upward sloping yield curve. Generally, the further a bond’s maturity date, the higher the yield will be in order to compensate investors for bearing additional risk.
term issues the yield curve is “inverted”. When the difference between short and long-term rates is relatively small, the yield curve is “flat”. When yields on short-term issues are higher than longer-
Created by: SinthuGotCash