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Csc3 Inv Products Ch 6

Csc3 Inv Products Ch 6






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    Csc3 Inv Products Ch 6 Csc3 Inv Products Ch 6 Presentation Transcript

    • CSI Global Education Inc. Investment Products CHAPTER 6: Fixed-Income Securities: Features and Types
    • Chapter Highlights
      • Corporations and governments borrow for a variety of reasons:
        • finance future growth
        • finance current operations
      • Significant evolution in the market for debt and fixed-income securities: many types and features to choose from
      • Common characteristic with most fixed-income securities: payment of a regular income stream
    • Debt or Fixed-Income Securities
      • A type of security that promises to pay the lender rent (“interest”) and returns the principal (“par”) at a specified date.
      • The security may or may not be secured by a specific pledge.
      • The debt is typically outstanding for more than one year.
    • Rationale Behind Issuance of Debt
      • Matching term of assets with term of liabilities
      • Use of financial leverage
      • Financing deficits
      • Financing growth opportunities
    • Bond Features
      • Coupon Rate
      • the expressed rate of interest income paid by the issuer
      • typically fixed for the term of the security
      • some bonds do pay a variable coupon rate
      • Par Value
      • the nominal or face value of the bond
      • the amount the issue pays at maturity of the security
      • quoted using a base value of 100
    • Bond Features
      • Term to Maturity
      • the remaining life of a bond
      • the date on which the bond matures and the principal is returned to the holder
    • Categorizing Bonds by Term to Maturity
      • Money Market
      • Up to one year term
      • Short-Term Bonds
      • Up to five years remaining to maturity
      • Medium-Term Bonds
      • From five to ten years remaining to maturity
      • Long-Term Bonds
      • Greater than ten years remaining to maturity
    • Callable Bonds
      • Callable (Redeemable)
      • issuer may pay bond off (i.e. call it in) before maturity
      • depends on behaviour of market interest rates
      • call price typically set above the par value of the bond
      • premium seen as a compensation for being called before maturity
      • Question:
      • When would the issuer find it advantageous to call a bond?
      • What if the bond was ‘non-callable’ or ‘non-redeemable’?
    • Convertibles
      • a ‘two-way’ security
      • combines the advantages of a bond with the option of exchanging the bond for common shares
      • with the conversion privilege the holder has an opportunity to participate in the capital appreciation of the underlying shares
      • the feature makes the issue more attractive or saleable
      • bondholders must be aware of forced conversion clauses
      • When to convert to the common shares?
    • Sinking Fund and Purchase Fund Debt
      • Sinking Funds
      • Sums of money which are set aside out of earnings each year to provide for the repayment of all or part of a debt issue by maturity
      • Purchase Fund
      • A fund set up to retire through purchases in the market a specified amount of the outstanding bonds or debentures if purchases can be made at or below a stipulated price
    • Extendible and Retractable Bonds
      • Extendible debt
      • Bonds that are issued with a short maturity term but with the “option” for the holder (or issuer) to exchange the debt for an identical amount of longer-term debt
      • Retractable Bonds
      • Bonds are issued with a long maturity term but with the option for the holder (or issuer) to turn in the bond for redemption at par several years sooner
      • When would the issuer elect to exercise either option?
    • Types of Bonds – Government
      • Marketable Canada and Provincial Bonds
      • marketable & transferable
      • Canada Savings Bonds
      • Provincial Savings Bonds
      • purchased only by provincial residents
      • purchased only at a specified time of the year
      • Instalment Debentures (Serial Bonds) – municipal
      • part of the bond matures each year during the term
    • Treasury Bills
      • Features:
      • Offered in $1,000 increments
      • Original terms of 3-month, 6-month and 1-year maturities
      • Do not pay interest
      • – sold at a discount and mature at 100 (par)
      • – difference between purchase price and par is the return on the investment
      • – this return is taxable as income and not as a capital gain
    • CSBs: Basic Characteristics
      • Issued by the Federal Government and must be sold back to the government – i.e. no secondary market trading
      • Redeemable at par at any time
      • Non-assignable, must be registered in the name of an individual
      • Can be purchased in denominations as low as $100
      • Limits placed on the total amount any one person can purchase
      • Market values are not affected by changes in the interest rates
      • Available only to Canadian residents
    • Types of Corporate Bonds
      • Mortgage Bonds
      • secured by pledge of land, buildings or equipment
      • Collateral Trust Bonds
      • secured by pledge of securities
      • Equipment Trust Certificates
      • secured by equipment – for example, railway cars
      • Debentures
      • unsecured – general credit of issuer
      • Subordinated Debentures
      • junior to other securities or debt
    • Types of Corporate Bonds
      • Corporate Notes
      • rank behind all other fixed-interest securities of the issuer
      • Foreign Bonds and Eurobonds
      • issued in currency and country other than issuer
      • Units
      • package of two or more corporate securities
      • Strip Bonds (Zero Coupon)
      • principal repayment part of high-quality bond
    • Foreign Bonds and Eurobonds
      • Domestic Bonds:
      • Bonds denominated in the currency and the country of the issuer.
      • Foreign Bonds :
      • Bonds issued in a currency and country other than the issuer.
      • Eurobonds :
      • Bonds denominated in a currency that is different from the country of issue. The issuing country and the country that the bond is issued in are also different.
    • Foreign Bonds and Eurobonds
      • Example: A Canadian company issued bonds denominated in Japanese Yen in the Japanese market, these would be foreign bonds .
      • Example: Bonds issued by a Canadian company or government in Japan, denominated in U.S. dollars would be Eurobonds .
    • Summary
      • Issuer: Issued in: Currency: Called:
      • Can. Canada Cdn$ ___________
      • Can. Germany Euros ___________
      • US France Sterling ___________
      • Can. Italy Cdn$ ___________
      • UK US US$ ___________
    • Summary
      • Issuer: Issued in: Currency: Called:
      • Canada Canada Cdn$ Domestic
      • Canada Germany Euros Foreign
      • US France Sterling Eurobond
      • Canada Italy Cdn$ Eurobond
      • UK US US$ Foreign
    • Explain the Following Bond Quote
      • XYZ Co 11½ 1 June /14 99.25 99.75 11.75
      • XYZ is the company
      • 11½ is the coupon
      • 1 June /14 is the maturity date
      • the bond matures on June 1, 2014
      • 99.25 represents the percentage of par (the bid price)
      • 99.75 represents the ask price
      • 11.75 is the bond’s yield to maturity