Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
189 Cards in this Set
- Front
- Back
|
01. non-working assets
working assets |
non-working assets:intend to hold indefinitely working assets: stored, then liquidated to provide cash (probably investment assets) |
|
|
01. three qualifications to qualify as an investment |
-store value for future use -intend to liquidate -expected additional return while storing initial amount invested IE. commit capital for purchase of property/securities/biz NOT a guaranteed return in excess of savings |
|
|
01. 3 Characteristics of Savings |
-no risk -amount of income available after expenses -set aside for future NOT: actively pursuing ROR |
|
|
01. What are the three parameters that make each investment different ? |
3: capital outlay, risk, and return NOT: timing and taxation of investment income (bc those are part of the return) |
|
|
01. What are the characteristics and risks of PERIODIC INTEREST INCOME? |
Char: Contractual obligation to pay Risks: interest rate, default, inflation, foreign exchagne NOTE: accrued income must be reported on the bond year if not paid annually (unless pre 1990 and always reported triennially) |
|
|
01. What are the characteristics and risks of PERIODIC DIVIDEND INCOME? |
Char: No contractual obligation to pay, tax credit Risks: biz/financial (no profit=no div), inflation |
|
|
01. What are the characteristics and risks of PERIODIC RENTAL INCOME? |
Char: Can deduct current expenses and CCA Risks: default, market (low demand), inflation (bc rent controls limit rent increase) NOTE: if meals&cleaning incl, considered biz inc |
|
|
01. When calculating capital gains, what is and is not included in the disposition value? Ref: ACB, etc. |
Capital gain = disposition - ACB - outlays to dispose NOTE: the disposition value is not impacted by outlays to dispose, but capital gains are |
|
|
01. adjusted cost base |
Total paid for asset, including commissions or FE loads NOTE: unlike disposition value, the ACB is impacted by outlays for purchase |
|
|
01. Dates and changes to capital gains |
1971-1987 50% 1988-1989 66% 1990-1999 75% Feb - Oct 2000 66% 2000+ 50% |
|
|
01. Risks Associated with the Sale of an Investment |
Market: economy, performance Interest: value of bonds Liquidity: willing buyer Inflation: purchasing power Foreign: value decreases if Cdn dollar inc |
|
|
01. When would a the difference between bond value at purchase and sale include interest income or capital gain? |
Interest: Bonds that do not make regular interest payments, diff between ACB and maturity value is interest (TBill, strip bond) Capital gain: Interest paying bonds purchased below face value (bond, debenture) See Q16, 20 U1 fin assess |
|
|
01. What are the risks of LUMP SUMS AT MATURITY if no intention to sell prior to maturity? |
Default Inflation |
|
|
01. What is the 6 steps of strategic investment planning process? |
engagement objectives & data clarify present status, identify opp & prob identify strategies and present implementing monitoring |
|
|
01. What must the Client-planner Engagement entail? (STEP 1) |
-how process applied & documented -services & timeline -responsibilities -compensation |
|
|
01. What must the OBJECTIVES/DATA process entail? (STEP 2) |
-assess priority & determine if return needed reasonable for objectives -prioritize in terms of consequences of not meeting objective -advise on risk, ie do not take more than nec -statement of lifestyle exp, income st, balance sheet |
|
|
01. What must the CLARIFYING STATUS/IDENTIFYING PROB/OPP process entail? (STEP 3) Same as "How do you create an investment/risk profile?" |
-constraints ie risk tolerance, health, etc. -cash flow commitments -inventory of investments & determine current asset all -understanding of objectives and return expectations -assess financial and emotional risk tolerance -identify unique opportunities (ie group plans) -need for liquidity or emergency -tax profile, -need for collateral |
|
|
01. Describe the following investor types:
Adventurer Individualist Celebrity Guardian |
Adventurer: confident & impetuous Individualist: confident & methodical Celebrity: Impetuous & anxious Guardian: Careful & anxious |
|
|
01. What should be summarized in an INVESTMENT PROFILE? |
-Opps & constraints -existing cash or cash flow available -objectives in terms of $ and timing -return needed -financial & emotional risk tolerance -need for liquidity & emergency funds -tax status, RRSP cont room -existing profile status -knowledge & ability to manage own port -need for collateral |
|
|
01. What must the DEVELOPING & PRESENTING process entail? (STEP 4) IE: Creating STRATEGIC INVESTMENT PLAN |
-make basic assumptions -decide on service level -asset allocation |
|
|
01. What are 4 service levels? |
1 specify amt to invest and return needed 2 general advice about inv. strategies 3 recommend specific classes of assets 4 recommend specific investments |
|
|
01. What is the difference between Asset Allocation and strategic investment planning |
Asset Allocation: determining appropriate proportions of different asset classes Strategic Planning: integrating risk tolerance, investment objectives, tax situation and holding period with asset allocation |
|
|
01. What is the difference between strategic, dynamic, and tactical asset allocation |
Strategic: matching objectives/risk to suitable asset mix Dynamic: maintaining long-term strategic AA, by changing mix w changing needs OR rebalancing back to original mix as markets change Tactical: constant monitoring of portfolio & market, changing AA in response to market cycle shifts or opportunities |
|
|
01. What could the MONITOR & UPDATE process entail? (STEP 6) |
-assess actual vs projected performance, inflation, interest rates -advise if asset allocation mix or particular investment should be changed bc changes to economic conditions -evaluate performance of client's advisors -Ongoing documention |
|
|
02. Difference between amortization period & amortization schedule |
amortization period: is the time period over which the mortgage is to be paid amortization schedule: ratio of principal and interest for each blended payment of their mortgage |
|
|
02. Conventional OPEN Portable Mortgage Payment Insurance |
conventional at least 20% downpayment portable transfer to another property open principal paid off at any time w/o penalty MPI: ie CMHC 1.5-2.5% of mort amt, may be cheaper to register a high interest 2nd mort if paying down quickly |
|
|
02. Home Buyers' Plan Chars |
-$25,000 -did not live in home owned by self or spouse in 5 calendar yrs before HBP -OK to own rental property as long as have not lived in it for 5 calendar yrs before HBP -Payments before due reduce first payment -Extra payments when due reduce the balance thus all other payments over repayment period |
|
|
02. levy execution |
under either land registry OR land titles system, a judgement for outstanding debt registered with the sheriff's office allows creditor to ask sheriff to seize and sell the property to recover the judgement for the outstanding debt incurred by the previous owner. |
|
|
02. land registry VS land titles system |
land registry: atlantic provinces, could allow property sold twice as you don't own unless registered first land titles system: land titles must approve all transfer documents before transfer, effectively, guaranteeing the accuracy of the title as shown on the record. |
|
|
02. Car loan characteristics |
-am 30 to 48 months, some 60 month -10% to 20% downpayment -interest calculated monthly -open |
|
|
02. 3 components of car lease |
1.expected depreciation over lease period 2.straight-interest cost of buy-back 3.sales charge (note:tax higher w lease bc pd on entire lease cost incl.interest whereas loan only pay tax on original purch price) NOT freight charges, downpayment or security deposit or PV of lease payments |
|
|
02. Terms w property purchase Grantor Grantee Mortgagor Mortgagee |
Grantor: Seller Grantee: Buyer Mortgagor: Borrower Mortgagee: Lending Institution/person NOTE: opposite as would think |
|
|
02. Def in real estate law of LAND PROPERTY |
LAND: surface of RE + anything beneath the surface (soil, minerals) + permanently joined to the surface (trees, fences, but not buildings) PROPERTY: refers to legal interest in the land, ownership |
|
|
02. Forms of ownership FREEHOLD ESTATE FEE SIMPLE LIFE ESTATE LEASEHOLD |
FREEHOLD ESTATE - either fee simple or life estate FEE SIMPLE infinite- hold title in present & future, can sell, gift or grant inheritance LIFE ESTATE indefinite-hold title for duration of life of life tenant, reverts to remainder at death, can sell, but reverts to person grantor specified LEASEHOLD definite-interest as lessee or tenant for set period ie 100 yrs. Can sell but reverts per grantor/lessor/landlord after period |
|
|
02. Key DATES re Designating a Principal Residence |
pre-1982: each spouse could designate separate house/cottage as princ residence until 1971: 1972+ no capital gains applicable, thus no need for principal residence exemption |
|
|
02. Restrictions on principal residence exemption |
-limit of 0.5 hectares, 1.23 acres -occupy on regular basis, not full time -farm property may need to separate value of house from land. $750: exemption applies to land -NOTE: the Capital Gains Exemption is the 100% allowed, not the 50% included |
|
|
02. Restrictions on capital losses on personal use property |
Cannot claim loss arising from personal-use property Can only deduct allowable capital losses arising from investment and business assets cottage is usually a personal-use property |
|
|
02. capital appreciation VS capital gain |
capital appreciation: increase in the value of an asset capital gain: realized capital appreciation |
|
|
02. What can you afford for mortgage? GDSR vs TDSR General Guide |
GDSR: 25-32% TDSR: 35-42% includes pmts on other personal loans General Guide: purchase price not exceed 2.5 times gross annual income. |
|
|
03. 4 forms of taxable investment income for interest producing investments |
interest pd in cash interest earned, but not yet received/receivable capital gains or losses from int rate change foreign exchange gains and losses |
|
|
03. bond's anniversary day |
-day one year after the day immediately preceding the date of issue of the contract, or the day that occurs at every successive one year interval from that date ie. Bond issued Nov 1st, anniversary is Oct 31st and interest paid every nov 1st until maturity |
|
|
03. If bond earned interest each month, but paid only once a year, how is it taxed? |
Use the bond year to report taxable income, ie. 12 mo's between anniversary dates |
|
|
03. How does ITA treat the change in FMV of marketable investment? |
INTEREST: increase calculated using the prevailing interest rate at the time of purchase and arising from the passage of time CAPITAL GAIN: the increase or decrease arising from a change in the prevailing interest rate |
|
|
03. Canada Savings Bonds |
-yield > savings account interest rates, rate competative w GICs (NOT l/t bonds) -protection against loss because they are registered in owner's name and not transferable -guar by Fed Gov (not BOC) - |
|
|
03. C vs R CSBs & CPBs |
C Compound:as low as $100, cash or monthly installments R Regular:$300, $500, $1,000, $5,000 and $10,000, Cash only, Pay annually RRSP: Only C for CPB, either for CSB |
|
|
03. How to transfer Ownership of Canada Savings Bonds? |
Only in following cases: to/from one's RRSP (etc.), ben/trustee of estate, between spouses if divorce agreement, as prize/scholarship from charitable org, pledge as security to Gov't MUST: return to BOC to reassign in new owner's name NOTE: Can be used as collateral for loan |
|
|
03. Redemption of CSBs |
-bond must be held for the entire month to earn interest for that month -do not trade in the bond market (2ndary) -10yr term to maturity for series issues 1996+ -no int if cashed <90days from issue -cash at any fin inst. in Canada |
|
|
03. What is Canada Investment and Savings (CIS) and what do they do? |
-federal gov't agency that assists the Bank of Canada manage gov't retail debt program -issues Canada Premium Bonds (CPB) |
|
|
03. jobbers vs Primary distributors
(re t-bill auctions) |
Primary distributors: only participate in the auction process jobbers: represent core group of market makers that the BOC deals with in its monetary policy operations |
|
|
03. TBill Issued by terms of maturity min on 2ndary market |
BOC on behalf of Govt of Can 98, 182, and 364 days min $5,000 to $50,000 |
|
|
03. bearer form |
name of buyer not recorded with the issuer or on the security itself |
|
|
03. BID vs ASK price |
BID (buy) price at which the investment dealer would buy a T-bill in the secondary market...you get the bid price if are selling ASK (sell) price at which the investment dealer would sell a T-bill in the secondary market...you get ask price if you are buying |
|
|
03. discount or zero coupon bonds Tbill Yield |
sold at a discount (that is, less than their face value) and mature at their face value or PAR (TBills) Tbill yield to maturity expressed on an annualized basis |
|
|
03. What must you remember when calculating interest for a CSB? |
-Bonds are issued at Par, so you get par value at early redemption (unlike Tbill) -Was the bond held at least 90 days? If not, no interest paid -Don't calc interest for the month of redemption, only month prior to redemption |
|
|
03. When do you use the TVM calculation versus the formula for TBills to calculate the yield of at TBill? |
TVM if asking for effective yield Formula if asking for quoted yield |
|
|
03. What must you remember when calculating yield of a Tbill? |
-Is Q asking for effective yield? (use TVM) -Is compounding more than once a yr? (EFF%) -Is Q asking quoted yield? (use formula) -Is TBill US? (use 360 not 365) |
|
|
03. What must you remember when calculating income from TBill? |
-Are you given effective yield (TVM) or quoted yield (formula) -Is bond sold prior to maturity? (capital gain/loss) -Is the bond US? (use 360 not 365 and deduct $200 from gain or loss) |
|
|
03. Effective annual return |
assumes that on each successive maturity date, the principal and interest are reinvested at the original interest rate (higher than quoted yield) Use calculator TVM and if more than 1 compound per year, press EFF% |
|
|
03. Portfolio insurance management techniqu |
-management technique that provides a minimum rate of return with upside potential -ie. buying half Tbills, half common shares quoting minimum return of 50% of Tbill rate. Switch shares to bonds when prices low and bonds to shares when prices high. |
|
|
03. CSB/CPB minimums |
SOME CSB's issued with min's. Meaning a min rate for each year guaranteed. The rate rec'd will be the higher of the guaranteed min and the rate of new bonds issued that year. CPB's ALL have a 3 year guarantee of 10 yr term |
|
|
03. What do you need to remember when comparing rates/terms of GICs? |
-look for compound frequency |
|
|
03. What deposits are eligible for CDIC? |
sav/chq, TD, GIC, debentures by loan co <5yrs, traveller's cheques money orders /drafts certified drafts and cheques |
|
|
03. What deposits are NOT eligible for CDIC? |
USD a/c TD >5yrs debentures issued by banks bonds and debentures by gov't or corps Tbills MFs, Stocks Mortgages |
|
|
03. What are considered separate accounts for CDIC coverage? |
Each can have 100K Ind a/c - total of GICs, savings, w same co joint spouses a/c trust RRSP (note a spousal and ind combined) |
|
|
03. If a client is wary of exceedign CDIC insurance, what do you need to ensure with regard to deposit amoutn? |
Check FV of principal + compounded interest. ie. 90K at 6% compounded over 4 yrs would exceed insurance at maturity by $13K. Use annual payout for a $100K deposit. |
|
|
03. What are the National Instrument 81-102 requirements per CSA for MMF? |
-all assets mature w/i 365days -average term w/i 90days -95% assets in same currency -95% assets credit rating A1/A |
|
|
03. How does FE load impact price of MFs |
Increases purchase price of units greater than NAV. Price=NAVPS/(1-sales charge) |
|
|
mortgage-backed security (MBS |
-pool of mortgages -Interest payments and principal repayments are made monthly into the pool -most insured by private insurer or CMHC |
|
|
03. Taxation of MBS |
-interest accrued reported annually -ACB=original cost-acrued interest paid at purchase-principal payments received -Capital gains at disposal are diff between proceeds (less accrued interest) and ACB |
|
|
03. Canada bills |
-promissory notes denominated in U.S. dollars issued in book-entry form -sold at a discount -mature in 270 days or less -issued solely for foreign exchange reserve purposes |
|
|
03. Canada notes |
-promissory notes usually issued in denominations of $1,000 U.S -issued for terms of nine months or greater -issued at a fixed or floating rate -offered on a continuous basis -fund foreign exchange reserve requirements |
|
|
03. Short-term Government of Canada bonds and zero coupon bonds |
-remaining terms to maturity of up to three years -same investment quality asTBills -Less liquid than TBills |
|
|
03. Provincial treasury bills, provincial savings bonds, and short-term provincial bonds |
-raise short-term funds - |
|
|
03. Provincial and municipal short-term paper |
-sold by tender to investment dealers or through private negotiations with buyers -investment quality is generally ranked lower than gov't of Can -Payment rate Municipal>Provincial>Gov't Can |
|
|
03. Euro medium-term notes (EMTNs) |
-medium-term notes issued outside of Canada and the United States. -fixed or floating interest rates -denominated in a range of currencies -dual currencies on each issue; coupon payments made in one currency and principal repayment in another |
|
|
03. Finance company paper |
-secured by specific assets/backed by general credit of the issuing company -varying, but short terms to maturity |
|
|
03. Commercial paper |
-unsecured, short-term promissory notes issued by major corporations -may be supported by the issuer's line of credit with a bank, or guaranteed by a parent company -highest yield (and level of risk) available for money market investments -few days or up to one year |
|
|
03. Bankers' acceptances |
-short-term promissory notes issued by major non-financial corporations -unconditionally guaranteed by a major Canadian chartered bank -yield < Commercial paper |
|
|
03. Chartered bank paper |
-Dep offered by the chartered banks -transferable -sold on a discount basis -ex Bearer deposit notes and bearer term notes |
|
|
03. What is a benefit of holding a money market fund? |
Diversification bc various high quality, short-term debt securities -NOT fixed int rate! -Chars: fixed NAVPS, primarily int income, s/t objective |
|
|
04. Bond terms Debentures Bonds Registered Bonds Bearer Bonds |
Debentures: Secured by general credit Bonds: Secured by asset (CSB misnamed) Registered: Coupon paid to specific Bearer: Coupon paid to current holder |
|
|
04. Yield to maturity |
At bond issue, this is the coupon On secondary market, this is the calculated prevailing rate w TVM. Nominal, not effective. |
|
|
04. Bond Terms Coupon Maturity Date Face Value Coupon Rate Discount Bonds Premium Bonds |
Coupon: each interest payment Face Value: Amt rec'd at maturity Coupon Rate: Rate of int paid in NOM% (if semiann, EFF% higher) Term to Mat: time left till mat date Discount: trading for less than face value Premium: trading for more than face value |
|
|
04. Bond Terms Par Value Units of Par Trust Deed/Indenture |
Par Value: price bonds initially sold at and face value at maturity. Units of Par: diff in market value made relative to base of 100. ie $1000 bond sold at $960 said to be priced at 96. Deed/Indenture: terms & conditions |
|
|
04. What are examples of trust deed/indenture items that if the issuer defaulted on, then all oustanding bonds could also be considered default? |
-limits on new debt -conditions on future mergers -identify pledged property -dividend restrictions |
|
|
04. What are prevailing interest rates? What are they used to determine? |
Prevailing: current int rates expressed as nominal rates Used to determine the present value of stream of income payments and future lump sum of bond |
|
|
04. What else other than present value impacts the market value for a bond? |
Tax: bc of diff of taxation of gain & interest, prices reflect preference to buy discount>premium>par, unless buying in RSP or buyer has gains to offset w premium bond losses. Yield to Maturity: Assuming flat rate, PV is higher for longer term to maturity Coupon: receive cash earlier w higher coupon, so may pay more for sooner payments |
|
|
04. How do you calculate the FMV or current value of a regular bond? |
present value of both stream of interest payment + present value of the face amount (future lump sum). Can calculate the PV of overall bond, then subtract PV of interest payments for PV of face amount. |
|
|
04. What is the value of a perpetual bond? |
=PMT/NOM% Where PMT is the periodic interest payment and NOM% is the nominal return of a comparable bond ie. compare an annual pay perpetual bond to nominal rate of a 20 yr annual compounding bond. |
|
|
04. Bond measuring terms Basis Point Spread |
Basis Point: smallest measure for reporting bond yield, expressed as 1/100 of 1%. Meaning 100 basis points is 1% Spread: Difference in yields. ie. Spread between s/t bond yielding 4% and l/t bond yielding 5.5% is 1.5% or 105 basis points |
|
|
04. Difference nominal annual interest rate (NOM%) effective yield bond equivalent yield |
NOM% is interest rate for each payment =(payment/face amount)x #payments per year EFF% is int rate taking compounding periods into account Bond Equivalent Yield: Compares NOM% of all bonds as though they were semi-annually compounding |
|
|
04. What is current yield, and how do you calc? |
-measure of the annual return provided by a fixed income investment -does not take cap gain/loss into account -purely indication of current return =annual interest payment/price paid for bond |
|
|
04. What is Yield to Maturity, and how do you calc? |
-measure of return, taking into account capital gain/loss -TVM solved for I/YR -If purchased at par & held to maturity, YtoM = current yield -same as bond equivalent yield -assumes interest reinvested at same rate |
|
|
04. What is Yield to Call, and how do you calc? |
-measure of return, taking into account capital gain/loss over period of anticipated call -TVM solved for I/YR xP/YR=yrs based on anticipated call date FV=face amount + penalties for issuer retiring debt prior to maturity date |
|
|
04. Differentiate normal vs inverted yield curve |
Normal (+ve) st rates lower than lt rates Inverted (-ve) st rates higher than lt rates Inversion caused by BOC raising ST lending to keep foreign money from leaving Can in times of volatility |
|
|
04. What is Liquidity Preference Theory and why is it perceived to be as such? |
-investors perceive LT bonds to be riskier than ST bonds thus must pay higher rate 1. PV varies more when rates change as term to maturity increases 2. Chance of default increases with increasing term to maturity |
|
|
04. Why would Monitoring Changes in the Yield Curve to Facilitate Bond Switching? |
identify opportunities to shorten maturity without sacrificing return |
|
|
04. If normal yield curve moved up and/or left, what are considerations if selling bond? |
-If wanting to take advantage of same yield at decreased risk (term), would need to sell bond at a loss -Normally pay a commission to switch investments |
|
|
04. What happens when a bond is called? |
-bond ceases to earn interest -bond holder not legally obliged to redeem -can redeem for face+accrued int+call penalty NOTE: Q's give T/F options between "bonds cease to earn interest after the effective call date" and "bondholders are not obliged to redeem their bonds when called", pick former bc latter unlikely (from U4 L3 asses) |
|
|
04. Ways to retire bonds |
Callable bonds Serial Bonds (some bonds mature each yr) Sinking Fund provision Adhoc basis via repurchase plans |
|
|
04. 3 ways for a sinking fund to retire debt |
1. accumulating funds to repay at maturity 2. Calling portion of debt each year (most common) 3. Repurchase debt on secondary market |
|
|
04. What is a sinking fund? |
- money accumulated on a regular basis in a trust account to redeem debt securities -terms specified in trust indenture are legal obligation of the issuer |
|
|
04. Bonds are most commonly retired through serial bonds or callable bonds. When would an issuer chose to retire via repurchase? |
-If bond trading at deep discount issuer may repurchase outstanding debt, then reissue the debt at new rates -Adhoc via 2ary market or PUBLICLY announce offer to repurchase specific number of bonds at a specific price -bondholder not required to sell bonds & would continue to earn interest |
|
|
04. What happens to the price and yield of an issued bond when issuer's credit rating declines? |
-yield to maturity on the bond must increase to compensate the investor for the increased risk of default. Because the coupon is fixed, lowering the price of the bond achieves this. -only relevant if selling bond before mat -PV must decrease to allow higher yield to compensate invetor for increased risk of default -ie, can not get as much for bond when selling |
|
|
04. Why is there interest rate risk with bond investing? |
the present value of the bond between the date of purchase and the maturity date can vary dramatically in response to changing interest rates -irrelevant if holding to mat |
|
|
04. How would 2 bonds w same original yield to maturity & same term be impacted by changing interest rates? Assuming actual coupon differs. ie. 10 yr 5% bond priced at 98.0 w YtM 5.26% & 10 yr 8% bond priced at 121.1 w YtM 5.26% |
Values of lower coupon bonds are more susceptible to changes in interest rates than bonds with a higher coupon |
|
|
04.How does actual yield to maturity differ with changing rates? (Reinvestment Risk) |
-BC YtM assumes interest reinvested & compounded at same rate as YtM, if rates rise, interest can be reinvested at higher rate, actual YtM higher. If rates fall, actual YtM lower. -This is Reinvestment Risk |
|
|
04. How does coupon or term impact price re changing interest rates, assuming everything else equal? |
-bond with the longer term to maturity is more volatile -lower coupon bonds are more susceptible to changes in interest rates than bonds with a higher coupon |
|
|
04. How do you numerically compare change in relation to an interest rate change? |
TVM to calc new bond price, then divide the change in bond price by the original bond price for percentage of change |
|
|
04. duration |
-weighted average time (years) to receive the present value of the interest and principal -coupon bond duration always less than term to maturity -zero coupon bond has same duration as term |
|
|
04. What is working rule of thumb used to approximate change in a price of bond with a change in interest rate? |
100-basis point change in yield (1%) can be multiplied by duration to estimate % change in price -ie change from 7% to 8% w a 5 yr duration will result in a 5% decrease in price |
|
|
04. Immunization |
-passive bond investment strategy that protects an investor from interest rate risk -purchase bond/bond portfolio w duration equal to duration of cash flow required by the investor |
|
|
04. rules-of-thumb comparing bond w convexity |
- same yield and term to maturity, the lower the coupon; the higher the convexity - same yield and coupon, the longer the term to maturity; the higher the convexity -same coupon and term to maturity, the convexity increases as yield decreases |
|
|
04. What is the reason to use convexity vs duration to compare bond price chagnes? |
-duration estimates approx change in bond price given a change in prevailing interest rates, only if change small, i.e. less than 1% -If larger yield changes, or highly convex price-yield relationship, relying on duration results in high degree of error. Should consider effect of convexity on price changes |
|
|
04. How does pricing compare w duration tangent and convex price-yield rel'p? |
-duration of a bond is rep'd by a line tangent to the price-yield rel'p at a specific price point -tangent underestimates price increase caused by rate decrease -tangent overestimates price decrease caused by rate increase |
|
|
05. Features of Government of Canada Bonds |
-largest single issuer in the Cdn bond market -5 to 25 years -called "bond" but actually debenture -safe bc Canada can print money to pay at mat -non-callable -less issued if no federal deficit -$1,000, $5,000, $25,000, $100,000, and $1 mil -fed guarantees debt of several crown corps and agencies |
|
|
05. Real Return Bonds |
-indexed for inflation by adjusting the face value of the bond to reflect a corresponding change in the Consumer Price Index (change in CPI) - face value adjusted first day of ea bond year for CPI for previous 12 months -int payments based on face value start of yr |
|
|
05. Why would the government frequently reopened the same bond issue to raise capital? (instead of staring new issue) |
to make sure that enough bonds were available in the secondary market to facilitate liquidity |
|
|
05. Are bonds always issued at par? |
No - strip bonds issued at discount and mature at par No - if additional bonds issued on a previous issue, the are released at same coupon as original issue, w PV determined by prevailing interest rates |
|
|
05. What do the Municipal Finance Authorities do? |
-issue bonds on behalf of municipalities -province unconditionally guarantees (most cases) - |
|
|
05. How does the British Columbia Municipal Finance Authority differ from most? |
-their debts are not guaranteed by the province - Authority manages a debt reserve fund -has the power to levy taxes to raise funds to meet debt obligations |
|
|
05. Why would a corporation prefer to finance large expenditures by issuing bonds or debentures rather than stocks? |
selling partial ownership of the company dilute the current ownership structure -during some economic periods, there may be no market for shares issued by the company -cheaper method of financing (debt interest fully deductible, dividends pd with after-tax income) |
|
|
05. Types of Corporate Bonds |
mortgage: secured by fixed assets collateral trust: backed by other securities debentures: secured by creditworthiness Junk: debt issue of low credit quality income: only pay interest if the company earns convertible: option of converting bond to shares |
|
|
05. How are corporate bonds classified? |
Method of retirement: callable, non-callable, serial, sinking fund Special features: extendible, retractable Security: mortgage, collateral, debentures, income, convertible |
|
|
05. Why would a company choose to issue a debenture rather than a bond? |
-service biz w insufficient assets to pledge -assets already pledged for other debt -well established & credit-worthy co |
|
|
05. Features of junk bonds |
-bonds or debentures rated below B++ -return 4-5% higher -often issued during mergers and takeovers -may still be actively traded in default |
|
|
05. Features of convertible (exchangeable) bond/debenture
|
-allow co to offer lower interest rate for bond plus call option on stock -shares could be of affiliated co, or shares in an unrelated co that company holds -Co usually calls bond if conversion price rises above share price, effectively forcing investors to convert their bonds |
|
|
05. conversion price vs conversion ratio |
price: usually higher than current market price ratio: # of share bondholder can exchange for every $100 of face amount of bond |
|
|
05. What is the minimum value of a convertible bond? |
If shares well below conversion price Min=value of debt security at prevailing rates If underlying stock exceeds conversion price Min=stock's price multiplied by the conversion ratio Note: actual price typically higher than min, to reflect the dual nature of the security |
|
|
05. risks of convertible bonds |
Credit risk: rank junior to other debts, but senior to commonshareholders Interest Rate: more susceptible than other bonds bc rising rates can decrease stock prices bc rates expected to erode co profits, causing double blow when rates rise. |
|
|
05. explain the difference between domestic-issue, foreign-pay bonds and foreign-issue, foreign-pay bonds |
Foreign Issue: Bonds issued ouside the issuer's home country & in other currency (ie Eurobonds) Domestic issue, foreign pay: Cdn co/gov't issues, but paid in USD, Euros, Yen, Francs, etc. Bondholder trying to benefit from changing exchange rates or hedging against cdn $. Issuer may find more success raising capital w foreign investment. Euro-Cdn Bond: issued outside can, payable in cdn $ |
|
|
05. How are FEDERAL, PROVINCIAL & CORPORATE bonds first issued on primary market through dealer/bank/trust? |
FED: bid for max 20% issue, w rate set at .25 point nearest to avg yield of accepted tenders, underwritten (ie dealer purchases and sells at profit) PROV: Fiscal agency appt'd, creates syndicate who underwrite and may sell blocks to large purchasers for resale on 2* CORP: either Agency (best effort) or Underwriting (purchase and sell at pofit) (note, no prospectus req'd if sold directly to an inst inv) |
|
|
05. describe how bonds are traded in the secondary market (pg 172) |
-Dealer purchases/sells bond earning on diff between purchase and sell price -Broker acts as agent/rep earning commission on transaction -Ask Price: price security offered for sale -Bid price: price buyer willing to pay |
|
|
05. explain how bond trading is regulated |
-self-regulated via IDA with help from Toronto & Montreal bond traders associations -set Trading and Delivery regulations which set trading practices, acceptable size/units, method for calc accrued interest, etc. |
|
|
05. describe how the credit-worthiness of a bond issue is rated |
-Not standardized -must be independently rated -rated as compared to other debt issuers -rating based on ability to service debt, repay principal and make dividend payments |
|
|
05. describe bond features, including their impact on bond yields and pricing |
afdsf |
|
|
05. What bond features do bond issuers use to attract investors without increasing their interest expenses? (looking for types of bonds) |
Put: holder has right/but not obligation to sell bond back at a guaranteed price w/i specified time frame. Retractable:redeem bond at par at a particular date Extendible: extend term to maturity to a specified date Foreign-pay:hedge against a falling Cdn $ Strip Bonds: always trade at a discount |
|
|
05. How would you price a put bond? |
1. if rates drop, value determined by term to maturity (bc you would not sell early) 2. if rates rise, value determined by term to redemption date (to reduce the loss) |
|
|
05. What issue do strip bonds address with regard to pricing? (aka zero coupon bonds) |
Projected YTM assumes reinvestment of interest at same rates. As this may not be possible, the actual YTM will likely differ. Strip bonds have no reinvestment interest rate risk because the internal compounding rate is fixed by the purchase price |
|
|
05. strips residuals |
strips: Zero coupon bonds that are derived from the COUPON payments residuals:zero coupon bonds that are derived from the PRINCIPAL amount -strip bonds separate ea coupon payment from the principal repayment of a regular bond & sell each part separately at a discount |
|
|
05. What is a major drawbacks of strip bonds |
-tax treatment -difference between the purchase price and the face amount received at maturity is a capital gain -no accounting for gain/loss unless sold before maturity -taxed on income ea yr, but does not rec any until maturity |
|
|
05. What is meant by underwriting a bond? |
bidders buying bonds from fed gov't underwrite the bonds, meaning that they assume the liability if they cannot sell the bonds for a price they desire. |
|
|
05. How would a trader promote liquidity of a bond issue on secondary market? |
making a market or calling a market by indicating both bid and offering prices -NOTE: trader must process any transactions that meet the bid or offering price requirements if they call the market |
|
|
05. How are NEW corporate bonds/debentures issued? |
-w investment dealer (or group of) -Dealer studies co, economy, then recommends terms/size/provisions of issue -Dealer helps prepare prospectus (needed unless selling entire issue to institutional investor) |
|
|
05. How do you deal with accrued Interest at the Time of Purchase? (pg 173) |
purchaser pays dealer appropriate bond price, plus an amount equal to the interest that has accrued since the last payment date interest owed=int for that periodxdays held/days in period |
|
|
05. Features of Bond Rating Services |
-independent (cannot rate own corp) -probability of prompt and uninterrupted payment of interest and dividends, and the repayment of principal (not just debt servicing) -Each agency develops own rating scales -RELATIVE bc compares to other issuers (merits relative to other firms) -ABSOLUTE bc minimum rating to be investment grade security |
|
|
05. Compare bond strategies in terms of liquidity. |
Laddered: reduce risk by blend of maturities, averages reinvestment risk Barbell:Only short & LT. ST kept to maturity and reinvested in another 5 yr term, LT sold ealy each year and reinvested into another 25yr bond |
|
|
05. On what would different bond strategies focus? |
Liquidity (Ladder, Barbell) Quality Maturity (Matching,Immunization,Strips) Swapping (Riding Yield Curve,Tax-advantaged Investing) |
|
|
05. What is duration? |
Weighted avg time to receive PV of interest and principal |
|
|
05. Describe following bond strategies: Swapping, Riding the Yield Curve, Tax Advantaged Investing |
Swapping: reducing volatility by taking advantage of changing yield curves, switching bond before rate or credit changes Riding Yield Curve: assuming +'ve sloped yield curve remains unchanged, buy longer term bond and sell it at a gain every year. ie 5 yr 9%, 4 yr 8.5% Tax-advantaged Investing: if high MTR, seek deep discount, low coupon bond where YTM results mostly from capital gain |
|
|
05. Compare the following maturity strategies for holding bonds: Matching, Immunization, Strips |
Matching: term to mat=needs Immunization: duration=needs Strips: eliminate reinvestment risk Q's: say that if need to match time AND amount, should use immunization strategy |
|
|
06. What are retained earnings? |
the cumulative after-tax profits of a company not yet paid as dividends |
|
|
06. When is the ex dividend date |
the day on which the shares begin to trade without the right to the declared dividend, is two trading days prior to the date of record ie. if declared a dividend to be paid on July 24, to shareholders of record at the close of business on July 10, ex dividend date is July 8 |
|
|
06. how shares are first brought to market |
(1) corp retains inv. dealer service (2) dealers help develop preliminary prospectus (3) pre-pros submitted for regulatory approval (4) final prospectus issued w share price (5) Dealer distribute issue |
|
|
06. explain how shares trade in the secondary markets, including the role of brokers, dealers, and investment firms in these transactions |
Securities Firm: can be both or either of a broker & dealer broker: acts as an agent to facilitate transaction, earns via commissions on trades only dealer: acts as principal buying security and selling them at a profit, in addition to earning on commissions charged on transactions (called distribution) |
|
|
06. Describe following Underwriting Processes bought deal best-efforts commitment |
BOUGHT DEAL:dealer purchases entire issue and bears entire risk BEST-EFFORTS commitment:dealer agrees to use best efforts to sell the issue |
|
|
06. Stock Exchange vs OTC? Benefits of listing on SE or OTC?? |
Stock Exchange: strict listing requirements including disclosures (ie TSX, ) OTC: less stringent rules, network of dealers, "unlisted" (ie.NASDAQ, TSX Venture Exchange) SE Bens: marketability, exposure, confidence OTC Bens: inability to meet requirements, unwilling to disclose, low trade volume, low investor interest |
|
|
06. What are types of stock orders? |
market order: immediate sale at best price limit/day order: at set price, valid till day end open order: limit order in effect to set time limit Stop-loss: price at which shares will be sold at market (will not sell at stop-loss price) |
|
|
06. How are quantities of stocks termed? |
Board Lot: standardized units at normal price $.005-$.095 1,000, $.10-$.995 500, $1.00+ 100 Odd Lot: less than board lot Broken Lot: particularly small volumes (odd & broken usually cheaper) |
|
|
06. How are quotes made? |
ASK lowest price that a seller will accept BID highest price that a buyer will pay QUOTE bid-ask spread |
|
|
06. What is a secondary distribution? |
When a securities firm will underwrites a large blocks of shares offered for sale by a single investor, whether listed on an exchange or not, offering it for sale in the OTC market in the same manner as a new issue |
|
|
06. What price would you get for shares sold at market order assuming... Bid: $40 Ask: $43 Day's High: $46 Day's Low: $38 Last Trade: $42 |
As long as the bid and ask do not change, will receive the bid price or $40, i.e. the highest price the market is willing to pay, for her shares |
|
|
06. cash accounts vsmargin accounts |
CASH: requires cash to buy securities, and securities in a/c to sell MARGIN: can buy securities w money borrowed from broker |
|
|
06. Margin |
margin account has credit available through the brokerage firm the MARGIN is the portion that the investor pays in cash or other securities to secure the loan |
|
|
06. Describe the strategies that an investor can use when investing in equities: taking a long position using financial leverage trading on margin short selling dollar-cost averaging market timing |
LONG ownership w hope of price increase LEVERAGE borrowed funds to acquire asset MARGIN same as leverage w max set by IDA SHORT sale of securities borrowed from dealer (bet on price fall to repay securities for less $) DCA TIMING |
|
|
06. Terms with Margining |
issue a call: require investor to make up difference when under-margined under-margined: when security falls in valud meaning insufficient $ on margin |
|
|
06. How to calculate amount owing because of market decrease (under-margined) |
1. Calc orig & current market values 2. Calc new max loan = cur mv x cur loan max% 3. Calc new min marg=orig mv - new max loan 4. Cal under marg owing = marg on dep - new min marg QUICK: orig marg pd - orig mv - new loan max |
|
|
06. What is the Efficient Market Hypothesis is a theory? |
suggests that, over time, investors cannot consistently outperform the market for a given level of risk due to the speed at which information is spread around the investment community |
|
|
06. Describe the following options derivatives When would you buy/sell a call or put? |
OPTIONS fee for the right, but not obligation to buy/sell stock
PUT: to sell at set price in certain timeframe CALL: to buy at set price in certain timeframe If down, buy a put or sell a call If up, buy a call or sell a put |
|
|
06. Stock splits, consolidations, repurchases |
SPLIT improve the marketability and liquidity CONSOLIDATION raising the market value to a more "respectable" level REPURCHASE cannot call shares, but can repurchase on open market (to a limit) |
|
|
06. Whey would a company complete a stock repurchase? |
-increase value of undervalued shares -accumulate shares to re-distribute under employee stock sharing plans -defend against take-over bids |
|
|
06. Derivatives |
financial products that derive their value from underlying securities, currencies, or indices. |
|
|
06. Difference between Rights and Warrant Derivatives |
RIGHTS to purchase shares in co at price usually below market to encourage more investment (life span of weeks/months) WARRANTS same as rights, but span years (rights & warrants traded on open market) |
|
|
06. Who issues rights and warrants, calls and puts? |
corporations issue rights and warrants investors create calls and puts (bets between investors regarding the future market value of the shares issued by a particular company) for investor to sells a call option, must be an investor who wishes to buy a call option on that same stock |
|
|
06. Describe types of employee stock option plans ESOPS Phantom Stock appreciation rights SAR |
ESOPS:right to buy shares at certain price, tax advantaged bc 50% deduction if arms length PHANTOM: bonus based on diff between value at exercise date and exercise price |
|
|
06. What does one acquire by purchasing publicly traded shares? |
an ownership interest in the equity of a public corporation w/o legal liability NOT guaranteed div, right to assets, |
|
|
06. How should stock dividends impact price of stock? How do they and why? |
-Paid by rapidly growing companies who prefer to capitalize after tax income. Because PU capital increases along with the number of authorized shares, the price should not change. -Reality, prices often drop bc future earnings per share become diluted |
|
|
06. What is the difference between change of paid up capital on a stock split vs stock dividend? What negative effect do they both share |
Stock Div: total PU cap increases, but per share capital same Stock Split: total PU capital the same, but PU Capital per share decreases -prices often drop bc future earnings per share become diluted |
|
|
06. How is the amount received following the bankruptcy or closure of a company received to shareholder? |
Liquidating Dividend: deemed to be a dividend to the extend it exceeds PU capital of shares |
|
|
06. Dividend Terms Ex Dividend Date Cum Dividend Date Record Date Declaration Date |
Record: Date shares must be owned to rec div Declaration: date div authorized& announced Ex Dividend:day shares begin to trade wo right to div, 2 days prior to the date of record Cum Dividend: "with dividend" entitled to receive the declared dividend |
|
|
06. How is it taxed if company pays dividend in excess of retained earnings? |
Treated as a return of shareholders' capital and not a dividend |
|
|
06. Why should a price increase w RE? |
1 the company now has more assets per share 2 with more assets, the company is in a better position to grow and earn greater profits in the future |
|
|
06. beta factor required rate of return |
volatility of an individual stock compared to the market as a whole the return that the investor would otherwise earn on a risk-free investment, such as a guaranteed investment certificate, plus a premium for incurring the risk associated with making an investment in the stock market |
|
|
06. What is the Efficient Market Hypothesis (EMH)? |
-theory that suggests that, over time, investors cannot expect to consistently outperform the market -efficiency in the stock market refers to the economy's ability to allocate scarce resources where they can be best used -ie By the time an investor reads about an event, stock price has already adjusted |
|
|
06. What are features of Preferred Shares? |
-hybrid security -fixed dividend (not guaranteed) -ranked senior to common shares, below bond -accounting - SH eq not co debt -min $25 value, trade $20-$30 like bonds, dep. on int rates bc dividend is fixed on par value -no voting rights |
|
|
06. Types/variations of Preferred shares Note: Straight Preferred is normal type |
Cumulative: must pay all div in arrears before paying div to common shareholders Voting: Rights allowed if fixed div in arrears 6+ quarterly payments floating: div varies w/i range w int rates Convertible: can convert to common w/i time Participating: right to net profit at set rate Redeemable: Co can call w/i time for premium Retractable: sell back to co at set price/time |
|
|
06. What are most common features of Cdn Preferred shares? |
Callable (Redeemable) & Cumulative |
|
|
06. What is the difference to the company of taxation of issuing interest on bonds vs dividends on preferred shares? |
-Co pays preferred dividends from after-tax income -debt payments on bonds that are treated as a business expense and qualify for a tax deduction -Preferred shares are expensive for the issuing company |
|
|
06. How are securities regulated? |
Prov Sec Com: each prov administers their own securities act CSA: allows prov to coordinate, makes policies IDA: Self-reg of securities MFDA: Self-reg of MFs FED: only admin's via criminal code & corporations act |
