FINA 3315 Ch 9 & 10

What are convertible bonds?

are securities originally issued as corporate bonds or preferred stock gives investors the option to convert the bonds to shares of the the issuers stocks
hybrid: contain attributes of debt and equity
they should be viewed as a form of equity

What are eurodollar bonds and what is the risks?

issued and traded outside the US and not registered by the SEC
denominated in US dollars
primarily aimed for foreign based investors
Americans are not exposed to foreign exchange risk because denominated in dollars

What are yankee bonds and what are their risks?

Yankee bonds and by supernational agencies
issued and traded in the US
Registered with SEC
all transaction in US dollars
No currency risk

What are dollar denominated bonds and what are they?

Dollar denominated bonds are debt securities issued by foreign governments or corporations but pay interest in US dollars.
yankee bonds
eurodollar bonds

What are the risk with collateral mortgage obligations?

there is a call risk since it is prepaid by investors
different trenches have different types of risk
Maturity dates are uncertain

What is collateralized mortgage obligations?

Multiple mortgages are pooled and invested
trenches are the categories money is organized in depending on the type of investment (Short-term

What are treasury strips?

zero coupon bonds created from the US treasury securities and sold by the government security dealers
interest and principal payment is striped from treasury bond

10-year Treasury note:
20 semiannual interest payments
1 principal payment
👉 After stripping:
➡️ You now have 21 separate zero-coupon securities

explain characteristics of zero coupon bonds

attractive because their is no uncertainty about rate of return on reinvested income
you will already know what you will get paid after your purchase
the money will grow a certain percentage yearly until u receive it at maturity

What are zero-coupon bonds?

bonds who do not pay interest
sold a discount of their par
subject to massive price volatility
interest is accrued in tax even though it is not received

what is the tax advantage of municipal bonds?

the interest of municipal bonds are tax exempt for federal taxes
you may have local taxes if you live in the state where bond is issued

What is the risk and return of municipal bonds?

municipal is more risky than treasury

What are municipal bond guarantees?

is an additional source of collateral in the form of insurance. which improves the quality of the bond

What is revenue bonds in municipal bonds?

are serviced by the income generated from specific income producing projects
ex: toll road

What are general obligation bonds in municipal bonds?

are backed by the full faith

What are the two types of municipal bonds?

general obligation bonds
revenue bonds

What are municipal bonds?

issued by states

What is the risk and return of agency bonds?

high quality securities almost as low risk as gov notes and bonds
have slightly higher yields than gov securities

What are the different types of agency bonds?

federal home loan bank
federal farm credit systems
small business administration
student loan marketing association
federal national mortgage association

What are agency bonds?

Debt securities issued by various agencies and organizations of the US government

What are the maturity ranges for tips and how does it pay interest?

Maturity for tips is: 5

What rates do TIPS offer?

TIPS usually offer lower returns because it has lower risk

What is TIPS?

Treasury inflation protected security reduces purchasing power risk because it adjusts returns for any inflation that has occurred

What is split rating?

occurs when a bond issue is given different rating by major major rating agencies

What are junk bonds (high yield bonds) ?

bonds with below investment grade ratings reflecting issuers lacking financial strength

What are investment grade bonds?

Bonds receiving one of the top four ratings
indicates strong well run companies

What are bond rating agencies and what are examples?

perform extensive financial analysis on companies assessing credit risk associated with different bonds
ex: moody

What is income bonds in bonds?

most junior of all

What is subordinate debenture in bonds?

Unsecured bond issues whose claim is secondary to other debenture bonds
they are third in line to get paid if company defaults

What is debenture in bonds?

a bond that is totally unsecured

What are junior bonds?

Unsecured debt

What are the unsecured debt?

Debenture
subordinate debenture
income bonds

What is first and refunding bonds?

Are combination of first mortgage and junior lien bonds
bonds are secured by first mortgage on some of the issuers property and by second or third mortgages on other properties
less secure than straight first mortgage bond

What is equipment trust certificates?

Are secured by specific pieces of equipment

What is collateral trust bonds?

are secured by financial assets owned by the issuer but held in trust by a third party

What are mortgage bonds?

Secured debt by real estate

What are the secured bonds in debt?

mortgage bond
collateral trust bond
equipment trust certificates
first and refunding bonds

What are senior bonds?

Secured obligations

What is call premium?

The extra amount added to the bonds par value paid upon call to compensate bondholder

what is the difference between premium and discount bonds?

Premium bond: sells for more than its par value
occurs when IR is below coupon rate
Discount bond: sells for less than its par value
occurs when IR are above coupon rate

What is the difference between a serial bond and term bond?

term bond: bond has a single maturity date for all bonds being issued
Serial bond: has series of bonds with different maturity dates within a single bond offering

What is a bonds current yield?

current yield is the interest component of a bonds return relative to the price of the bond market price

What is call risk in bonds?

risk the bond will get called before its scheduled maturity

What is liquidity risk in bonds?

The risk it will be difficult to sell the bond to convert into cash at a reasonable price

What is business/financial risk in bonds?

The risk the issuer will not pay interest or principal payment

what is purchasing power risk in bonds?

The riskiness the increase of inflation to cause the purchasing power to decrease

what is purchasing power risk in bonds?

The riskiness the increase of inflation to cause the purchasing power to decrease

What is interest rate risk in bonds?

the chance that changes in interest rate will negatively affect the bond's value

What are historical returns and total returns on bond?

total return depend on direction of interest rate movement
interest rate rising=capital loss

What is the yield spread/credit spread?

it is the difference between the corporate and government bond rates

Why are corporate bond rates higer?

Corporate bonds are riskier

What is the relationship between bond price and interest rate?

inverse
increase IR= decrease bond price
Decrease IR= increase bond price

What are bonds?

long term debt securities
fixed periodic payments
fixed principal at maturity
has both capital and income

What is on balance volume

and when is the market bull or bear?

What is market technicians?

Analysts who believe it is primarily supply and demand that drive stock prices

What is market volume?

Is the amount investor interest in stocks
increasing volume during a rising market is a positive sign that the upward movement will continue
when stocks have been moving up interest begins to drop (signaling the end of a bull market)

What is a confidence index and what does it measure?

confidence interval measures the tone of for the market through bond returns

What is a technical analysis?

Using historical record of stock prices. if these pattern repeat themselves investors who know about them will be able to spot it early on

what is familiarity bias (behavioral finance)?

buy stocks that are familiar to them

What is anchoring (behavioral finance)?

attempt to predict unknown quantity

What is belief perseverance (behavioral finance)?

ignore information that conflicts with existing belief

What is narrow framing (behavioral finance)?

Investors tend to analyze a situation in isolation while ignoring larger context

What is overreaction?

Overreact to good performance and overestimate likelihood that the trend will continue

What is Representativeness (behavioral finance)

Cognitive biases that occur when people have difficulty thinking about randomness of outcome

What is loss aversion (behavioral finance)?

exhibit: risk adverse when confronting gains and risk seeking when confronting loss

Self attribution bias (behavioral finance)?

take credit for success and blame external factors for failure

Overconfidence (behavioral finance)?

Investor underestimates risk

What is behavioral finance?

Market participants make systematic mistakes when they invest and those mistakes create persistent inefficiencies in the market

What is momentum in stock prices?

Price stock continue to move up or down for 6-12 months
theres a tendency of stock to keep moving the same direction they have before

What is a small firm effect?

Small firms tend to earn positive abnormal returns

What is the calendar affect?

Stock returns may be closely tied to the time of year or week

What are market anomolies?

Patterns observed in the market that seen inconsistent with the EMH

What is equilibrium?

occurs when cost of active investing= benefits of active investing

What is expected return using CAPM?

Re= Risk free rate+ beta ( Rate market - risk free rate)

How is abnormal return calculated?

Abnormal return= actual return-expected return

What is the difference between weak

semi strong and strong EMH (efficient market hypothesis)?

what is the Efficient Market Hypothesis?

The efficient market hypothesis states stock prices incorporate new information therefore investor should not expect abnormal return
makes it impossible to beat the market

What are efficient markets?

A market that rapidly and fully incorporates new information
Efficient when all information is available

What is the random walk hypothesis?

Theory the stock price movement is unpredictable