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60 Cards in this Set
- Front
- Back
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What can shareholders not vote on?
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Dividends
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What is the difference between statutory and cumulative voting?
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Cumulative
-aka proportional voting -one vote per share times number of directors Statutory -aka straight voting -one vote per share |
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What are preemptive rights?
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Only available to common shareholders
-Ability to maintain percentage of ownership -Accomplished through the distribution of "rights" -Current stockholders receive one right for ever share owned -Short-term right enabling holders to buy below the market price before stock is offered publicly |
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What are warrants?
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Security that allows holder to buy shares of common stock at a present price
-Attached to an offering of a bond or preferred stock -Price is at premium to current market price -Long term -May be detached and traded separately |
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What is the difference between rights and warrants?
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Rights
-Issued to shareholders -Short-term -Discount Warrants -Attached to new issue -Long term -Premium |
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What is the order of dividend dates?
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Declaration date
-Date which stock trades with dividend Ex-Dividend date -Stock sells without dividend at reduced price Record Date -Owners receive dividend Payment Date -Date which dividend, cash or stock is distributed |
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For a buyer to receive dividend, when must they settle?
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On or before record date
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What are the types of preferred stock?
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Callable
-Buyer option to repurchase at a premium Participating -Investor may receive additional dividends based on profits of company Convertible -Investor can convert into a pre-determined number of common shares Cumulative -Entitles holder to unpaid dividends in arrears before common is paid |
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What is the conversion calc for preferred equity?
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Par / Conversion Price
Par value is usually 100 and dividends are usually a percentage of par |
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What are employee stock options?
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Issued by a company to allow an employee to purchase stock at a fixed price
Employees are required to pay funds in order to acquire the stock |
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What are stock appreciation rights?
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Issued by company to provide employees (not investors) with the right to receive difference between the current market value and a fixed price
Employees not required to pay funds |
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What are ADRs?
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American Depository Receipts
Receipt for foreign securities held in US bank located in foreign country Facilitate the trading of foreign securities in the US -Receipts trade in US markets like common shares -Dividends in dollars -Sponsored (issuer pays) or unsponsored *Canadian securities are NOT ADRs |
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What are Global Depository Receipts?
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-Receipts that trade in more than on country
-Denominated in investor's home currency -If offered in US would be an ADR |
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What is a Nominal Yield?
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Same as coupon rate; fixed
Floating or variable Zero coupon |
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What is the Current Yield?
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Annual Interest / Current Market Price
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What is Yield-to-Maturity or Basis?
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Investors total overall yield
measured to the bonds maturity |
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What is the order of yield relationships?
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par ....................^...NY.....CY.....YTM
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What is a put feature?
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allows bondholder to redeem (put) bond back to issuer on a date prior to stated maturity
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What are open market purchases?
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Bonds likely trading at a discount
Issuer has available funds with no better use |
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What are call features?
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Allows issuer to redeem bonds prior to maturity
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What makes callable bonds marketable?
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Higher yield (lower price)
Call protection -Length of time during which a security cant be redeemed by issuer Call premium -Amount over par issuer must pay an investor for redeeming security early *Always quote callable bonds at lower of yield to call |
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From where does money for call features come?
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Sinking funds
Refunding issues -Using debt to retire debt |
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When interest rates change, which bonds have the largest price change?
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Largest:
Maturity Duration Smallest: Coupon |
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What is duration?
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Measure, expressed in years, of a fixed income security's price sensitivity to changes in the interest rates
Greater the duration the greater the percentage volatility |
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What is convexity?
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Relationship between yield and price
Positive convexity -As yields decline, prices increase at faster rate for long term bonds as compared to short -Duration lengthens when rates fall and shortens as rates rise *When used with duration helps provide more precise measurement of a bond's sensitivity to changes in interest rates |
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Who pays for bonds to be rated? Whats the concern?
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Issuers
Risk of default |
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What are S&P / Fitch ratings?
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S&P / Fitch:
AAA AA A BBB BB B further diff = + / - |
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What are the Moody's ratings?
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Aaa
Aa A Baa Ba B further diff = 1, 2, 3 |
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What is the Trust Indenture Act of 1939?
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Applies to corporate debt only
Trustee -Appointed by issuer to act in bondholder's best interest Indenture -Written contract which contains two components: covenants and cross defaults |
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What is a cross default?
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Clause contained in an indenture that would trigger a default if any of the bonds issued by the same company defaulted
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What are the two types of corporate bonds?
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Secured
-Backed by physical assets or collateral owned by issuer Unsecured (Debentures) -Backed by issuers full faith and credit |
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What are the types of secured bonds?
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Mortgage bonds
-Backed by real estate Equipment Trust Bond -Backed by real assets Collateral Trust Bond -Backed by securities and other companies |
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What is a convertible debenture?
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Allows issuer to:
-Offer a bond with a lower coupon rate -Issue a hybrid security (bond with a call option |
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What is conversion parity?
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When price of bond = aggregate market value of common stock
*Arbitrage opp exists if bond is available at a discount to parity |
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What is a PIK bond?
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Pay interest in both cash coupon and additional principle
Usually mezz financing which allows issuer to conserve cash and pay bondholders additional principal instead of higher cash coupon In some cases issuer has option to pay cash interest or PIK interest Additional principal is taxable as ORDINARY income Accrued interest is added to the interest expense on a company's income statement |
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What is a Euro bond?
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U.S dollar denominated deposits in foreign banks
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What is a Eurodollar bond?
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Bond issued outside the US
Pays interest and principal in USD (to people outside the US) Exempt from SEC regulation May trade in the U.S in the secondary market after 40 days |
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What is a yankee bond?
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Foreign bond issued in the US
Pays interest and principal in USD Must be SEC registered May trade in the U.S market immediately |
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What are the key points of U.S Treasuries?
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No credit risk
Highly liquid Greatest risk is interest rate and inflation risk Exempt from: State (Blue Sky) and Fed (33' Act) registration Trust Indenture act of 1939 Interest is exempt from State and Local taxes but NOT Fed taxes |
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How are T-Bills structured?
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Up to 1 year maturity
Denominated in 100 dollars Book Entry Discount and trade with accrued interest Sold in weekly auction |
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How are T-Notes and T-Bonds structured?
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2-10 year maturities (bonds can be more)
Denominated in 100 dollars Book entry Stated annually with accrued int: act / 365 Sold at periodic auction |
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How are government securities priced?
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Percentage of par and fraction 1/32
T-Bills quoted on discount yield basis |
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What is a T-STRIP and Receipt?
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Coupon payment and principal sold as zero-coupon securities (each discounted)
T-Notes and T-Bonds can be stripped (not bills) Wide range of maturities to choose from when shopping for zero-coupon Trade flat (without accrued interest) |
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What is a TIP?
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Treasury Inflation Protected Security
-Stated coupon -Principal is adjusted for inflation, based on the CPI -Principal adjustments are taxed as ordinary income in the year the adjustments are made -Adjusted principal is paid at maturity |
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What is a GSE?
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Government sponsored enterprise
-Created to reduce borrowing costs for certain sectors |
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What are three categories of GSE's?
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Mortgage
-Government National Mortgage Association (GNMA) -Federal National Mortgage Association (FNMA) -Federal Home Loan Mortgage Corporation (FHLMC) Education -Student Loan Marketing Association (SLMA) Farming / Agriculture -Federal Farm Credit Bank (FFCB) |
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How do GNMA, FNMA and FHLMC work?
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Pass-throughs representing interest in a pool of mortgages
Interest portion is fully taxable GNMA are US backed All subject to prepayment risk |
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What is extension risk?
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Opposite of prepayment risk
Risk of interest rates rising, causing holder of the MBS to receive a smaller portion of her principal back |
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What are asset backed securities?
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Securities offered by broker dealers backed by loans made by financial service companies
Ex: Credit cards Home equity loans Car loans Generally short term with investors receiving monthly payments on both interest and principal |
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What is a derivative?
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Financial instrument whos value is determined by the value of another instrument
Ex: Options Forwards Futures Structured Products |
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What is an option?
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Contract between two parties
Owner and Writer Owner is buyer and is long Writer is seller and is short Owner pays premium (creates debit) Seller receives premium (creates credit) Owner gets rights Writer assumes obligations |
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What are the two types of option?
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Call (buyers right and sellers obligation to SELL)
Put (buyers right and sellers obligation to BUY) |
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What is an option premium?
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intrinsic value + time value
Contract has intrinsic value if it is in the money It has zero intrinsic value when it is out of the money |
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In options, what does time value represent?
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Time left until expiration
-More time = more time value Market volatility -Increased market volatility |
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Do options die?
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They expire worthless
Most have lives of 9 months LEAPS have lives of up to 39 months |
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How are options exercised?
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At owner's discretion
-American Style Can be exercised at any time -European Style Can only be exercised during a specific period |
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How are options closed out?
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Investors execute an opposite transaction on the same series of option
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What are the different obligations with Futures?
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Buyer or LONG must TAKE delivery
Seller or SHORT must MAKE delivery Futures have a clearing house |
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What is the difference between futures and forwards?
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Futurres:
Have standard quantity per contract Call for delivery from locations and at times specified in exchange rules (regular for delivery warehouses) May be offset -long positions liquidated -short positions covered |
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What are structured products?
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Prepackaged securities that often combine securities
ex - bond and derivative May be linked to: Stock index Foreign currency Interest rate and inflation linked product Commodity Basket of securities |
