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29 Cards in this Set

  • Front
  • Back

Fixed Income Securities

Represent debt of the issuing entity. This is a promise by the issuer to repay the maturity value or principle on the maturity date, and to pay interest either at stated intervals over the life of the security or at maturity. In most case, if the security is held to maturity, the rate of return is fairly certain.




Two main reasons for issuing these securities


- To finance growth


- To take advantage of operating leverage.

Financial Leverage

If companies believe they can earn a greater return on cash invested in their business than it would cost to borrow money, they can increase the return on shareholder's equity by borrowing money.

Bond

Is a long-term, fixed obligation debt security that is secured by physical assets.




Imposed fixed financial obligations on the issuers. Payment of regular interest payments and the return of the principal on the date of maturity.




Bond goes into default, means issuer can no longer meet these fixed obligations, the trust deed allow the bondholders to seize specified physical assets and sell them to recover their investment.

Trust Deed

The details of bond issue are outlined in a ________ deed and written into a bond contract.





Debenture

This is a type of bond, that promises the payment of regular interest and the repayment of the principal at maturity but may be secured by something other than a physical asset.

Floating Rate Securities

bonds with variable coupon rates are typically referred as _____________________

Index-linked Notes

{TBE}

Denominations

Bonds can be purchased only in specific _______________. The most commonly used ___________ are $1000 or $10000

Bond Pricing

A bond trading at quoted price of 100 is said to be trading at face value or par.




A bond trading below par, say at price of 98 is said to be trading at a discount. A bond trading above par say at price of 104 is aid to be trading at premium

Categorized Bonds

Grouped into three categories according to their term to maturity




Money Market : Up to one year term to maturity




Short-Term Bonds : From one up to 5 years remaining to maturity




Medium-Term Bonds : From 5 to 10 years remaining to maturity




Long-Term Bonds ; Greater than 10 years remaining to maturity





Liquid Bonds

____________ are bonds that trade in significant volumes, which it is possible to make medium and large trades quickly without making significant sacrifice on the price.

Negotiable Bonds

_____________ are bonds that can be transferred because they are deliverable form.




(in "good delivery" means certificates are not torn, power of attorney has not been signed off, and so on).




Bond be negotiable is not much of an issue anymore, as most bonds are book based now, and certificates are not issued.

Marketable bonds

_______________are bonds for which there is a ready market. Private placement or the new issue may be marketable (clients will buy it) because its price and features are attractive

Callable bonds or Redeemable Bond

Option to pay off the bond before maturity, either to take advantage of lower interest rates, or simply to reduce their debt when they have the cash to do so.




As a rule, the issuer agrees to give 10 or 30 days notice that the bond is being called or redeemed

Accrued interest

Accrued interest refers to the interest that has accumulated since the last interest payment date.

call protection period

the period before the first possible call date (during which the bonds cannot be called)

Canada Yield call

Allow the issuer to call the bond at a price based on the greater of




a) par or


b) price based on the yield of an equivalent-term Government of Canada bond plus a yield spread

Yield Spread

_____________is simply an additional amount of yield. Generally, this spread is less than what the spread was when the bond was issued, and remains constant throughout the term of the issue.

sinking fund

are sum of money that are set aside out of earnings each year to provide the repayment of all pay of debt issue by maturity

purchase fund

a fund is set up to retire a specified amount of the outstanding bonds or debentures through purchases in the market, if these purchases can be made at or below a stipulated price.

extendible bonds

issued with a short maturity term (usually five years, but with an option for investor to exchange the debt for an identical amount of long-term debt (usually ten years) at the same or slightly higher rate of interest by the extension date

Retractable bonds

opposite of extendible bonds. bonds are issued with longer maturity term, but give investors the right to turn in the bond for redemption at par several years sooner ( by retraction date)

election period

with both extendible and retractable bonds, the decision to exercise the maturity option must be made during a time period called the election period. for extendible bond, the election period may last from a few days to six months or more.

convertible bonds

allow investors to lock in a specific price ( the conversion price) for the common shares of the company.

conversion privilege

the right to exchange a bond for common shares on specifically determined terms.

forced conversion

once the market price of the common stock involved in the conversion rises above specific level and trades at or above this level for a specific number of consecutive trading days, the company can call the bonds for redemption at a stipulated price.

Interest rate provisions for bonds

1. Coupon rates can change over time according to specific schedule (step-up bonds, most saving bonds)




2. There may be no periodic coupon interest - interest can be compounded over time, and paid at maturity. (zero-coupon bonds, strip coupons, and residuals)




3. A rate of interest does not have to be applied. Compensated in forms of a return based on future factors, such as the change in the level of an equity index. (index-linked notes)



Bond pricing


Basis Points

A ____________ equals one one-hundredth of a percentage point. So 200 ___________ equals 200/100 or 2%