AFM 121

what are Bonds

secured by specific asset:
- bondholder can seize the collateral

Debentures

unsecured:
- no collateral

Bond Terms

describe in bond trust

what is describe in bond trust?

1. date of amount coupon payments
2. dates of principal payment
3. Covenants or retrictions

Bonds divided into different time frames:

1. short term \= 1 to 5 years
2. medium term \= 5 to 10 years
3. long term \= 10+ years

marketable bonds have existing market

on the run \= newly issued shares
off the run \= not newly issued shares or old

floating rate

when coupon rates can either be floating or fixed, adjusted every 90 days

fixed rate

never adjusted

sinking funds

requires issuer to buy back the bonds over time

purchase funds

requires issuer to buy back bond if prices are below par

protective provisions

restricts the borrower's behavior:
- limit to total debt allowed

Types of givernment bonds

treasury bills: short terms discount bonds
marketable bonds: medium to long term
risk free

Types of corporate bonds

1. mortgage bonds
2. first mortgage have the first claim; second mortgage comes after
3. collateral trust: financial collateral
4. equipment trust: equipment collateral

corporate debentures

subordinated debentures are ranked behind other forms of debt.

Can corporate bonds and debentures be floating or fixed rate?

Trues

Strip Bonds

Stripping a bond of its coupon payment to create a series of discount bonds
- interest only
- principal only

Interest only

component consists of the coupon payment
- each individual coupon can become its own discount bonds

principal only

component consists of the principal repayment

how to convert EAR to EQR

(1+EAR)^(1/4)-1

how to convert EQR to EAR

(1+EQR)*4-1

common shares

ownership in a company
- value changes depends on the total value of the company's equity and its total shares outstanding
- potential for significant gains and losses

preferred shares

- provides a cash payment/dividend
- fixed amount

Formula for Market Capitalization

shares x share price

stock dividends

the company decides to issue stocks rather than cash dividend
you receive additional company shares

dividends reinvestment plans

the investors decides to receive a stock rather than cash

formula for stock dividends

(shares x dividend price)/share price

common shares have

voting rights
treatment
- dividends receive tax crediy
- capital gains are taxed at 50% of the tax rates

price of preferred formula

dividend price/rate of return

cash account

- basic type of investment account
- not granted credit
- must make full payment before settlement date

margin account

- investment dealer lend money to clients
- interest is charges
- client must contribute part of the full price

long position

you own securities or shares

short position

created when you sell securities or shares

Maximum % that can be borrowed for purchasing a securities

- 70% - for securities \= eligible for reduced margin
- 50% - for prices \> $2 \= not eligible
- 40% for prices between $1.75 - $1.99
- 20% for prices between $1.50 - $1.74
- nothing for prices < $1.50

short sales

- occur when investors sell securities they don't own and buy it back in the future

% of market value of short securities

130% for securities \= eligible for reduced margin
150% for prices \> $2 \= not eligible for reduced margin
$3.00 per shares for prices between $1.50 to $1.99
200% for prices between $.025 - $1.49
100% + $0.25 per shares for prices < $0.25

10 types of equity transaction

1. market order
2. limit order
3. day order
4. open or good till cancelled order
5. all or none order
6.any part order
7. good through order
8. stop loss order
9. stop buy order
10. professional order

equity transaction: market order

- executed at the best available price

equity transaction: limit order

- executed only if specific price can be obtain

equity transaction: day order

- only valid for the current day ( cancelled if not executed by end of the day)

equity transaction: open or good till cancelled order

- limit orders that remain open until executed or specific date

equity transaction: all or none order

- executed only if total \# of shares can be bough or sold

equity transaction: any part order

- opposite of all or non order

equity transaction: good through oder

- remain valid for a specific period of time after which they are cancelled

equity transaction: stop loss order

- market order to sell if price drops below a certain price

equity transaction: stop buy order

- market buy order if price raises above a certain price

equity transaction: professional order

- order involving directors, management, shareholders

6 basic form of business organization

1. proprietorship
2. partnership
3. limited partnership
4. general partnership
5. corporation
6. separation

1. proprietorship

- one person business
- owner us personally liable from a legal perspective
- difficult for owners to gain money

2. partnership

owned by 2 or more

3. limited partnership

- must include one general pertmer who has to be involved in the business and has personal liability
- cannot be involved in running the business and limited to their investment

4. general partnership

- partners have unlimited liability and are both liable for the actions of all partners
- high liability issue

5. corporation

dominant form of corporation when measured my assets or sales

6. separation

- ownership is separated from management
- ownership is transferred by the buying and selling of shares

regulation of corporation is government by

- government act of corporation
- corporations charter
- by laws \= compensation policies, payment of dividends

shareholder rights

most decision within a corporation are decided by the board of directors and/or management

proxy

allows someone else to vote on behalf of shareholder

Financing procedures

1. private placement
2. public offering

Financing procedures: private placement

- sale of corporate debt or equity to private investors
- not available to the public
- managed by investment dealers

Financing procedures: public offering

- sale of securities to the public
- investment dealers manage the process
- prospectus list out the details about the stocks
- green sheet: marketing document that summarizes the offering

investment generate 3 types of income

1. interest
2. dividends
3. capital gain/losses

1. interest income

full amount added to taxable income

3. capital gain/losses

tax deferral \= only taxable when you sell an investment
tax loss selling \= can be triggered strategically
- gains included in taxable income - 50%
- losses can be accrued over time and used to reduce capital gains

tax efficiency

source of income that produces the lowest effective tax rate that depends on the marginal tax rate NEVER ineterst income

non-registered plan/account

typically trading/investing account
- no maximum to the amount that you can deposit to be an investment

registered pension plans

created to help save for the retirement:
- provide a tax deduction for contribution
- are not taxed as investment income while in the plan
- withdrawals from the plan are taxed

TFSA

NOT tax deductible
- deposits into TFSA
- investment income inside
- withdrawals from

Risk and Return

- investors prefer an investment that generates the greatest return for a given level of risk

example of low risk

Canada's saving bonds, GIC's

Riskier Assets

tesla, amazon, google

level of Risk and Return ( less risky to greater risk)

TBDPCD
treasury bonds
bonds
debentures
preferred shares
common shares
derivatives

types of risk

inflation
business
political
liquidity
interest rate
foreign exchange
default
systematic
non-systematic

inflation risk

inflation erodes the the future value of security's cash flow.

how to measure risk

- variance
- SD

what is investors characteristic, risk tolerance, and return objectives used for?

used to create a policy statement IPS that outlines the investing strategy
- target return/dollar amount
- age of the investors
-dependents

asset allocation

investors' money can be distributed amongst three broad categories
- cash
- fixed income
- equities

the market/economy can alternate between

expansion - economic profit growth
peak - max economic activity/profit in a cycle
contraction - economic and profit decline
trough - minimum economic activity/profit in a cycle

what is the goal of active asset allocation?

to be more invested in equities between the through and the peek and less between the peak and the through

interest rate rise during an expansion, and fall during a contraction:

fixed income has income that is fixed
- cash flow doesn't change, bond prices rise/fall when interest rate fall/rise
equities have income that is variable
- cash flow changes more than interest rates, meaning equities rise/fall when interest rates rise/fall

premium bonds

price \> face value \= coupon payment

discount bonds

price < face value \= no coupon payment

retractable bonds

can be put back to the issuer
- bondholder is force to purchase

stock indices

used for Performance comparison and to gauge overall market movements

Business risk

- the risk to that particular business or industry

Political risk

the risk of doing business in a particular country

Liquidity risk

can I monetize my investment quickly and easily?

Interest rate risk

- how sensitive is a security's return to an increase in interest rates

Foreign exchange risk

how the strength / weakness of the C$ will affect investment returns if investing in foreign securities

Default risk

the risk that a company goes bankrupt or defaults on its debt obligations.

Systematic (market) risk

risk relating to the overall market or economy

Non-systematic (non-market) risk

Risk relating to a specific firm (ie.The risk that a company goes bankrupt or revenues significantly decline because of a recall of its products

Correlation

measures how the returns of 2 securities are related:
+1.0 indicates perfect positive correlation

- 1.0 indicates perfect negative correlation

0.0 indicates no correlation

Beta

Measures the volatility of a security's return relative to the overall market.

The higher the beta, the riskier the security

Primary investment objectives

Safety (can we lose some or all our money)

Income (typically from interest or dividends)

Capital growth (increases in the price of a security

Secondary investment objectives

Marketability / liquidity

Tax minimization (increasingly important given 50+% taxes in Canada)

Investors Policy Statement

Target return/dollar amount

Age of the investor (time left to retirement/goal)
Dependents (children, parents)

investor's money can be distributed amongst 3 broad categories of assets

cash \= no return, no risk
fixed income \= low return, low risk
equities \= high return, high risk

What does Strategic mean

High level asset allocation

Tactical/Dynamic/Integrated Asset Allocation

Shift the asset allocation based on short-term expectations for different asset classes

Passive Asset Allocation Strategies

Two types:

- Buy and hold limited number of individual stocks,similar to Warren Buffet

- Invest in a market index, like the S&P 500, asexemplified by Vanguard and Jack Bogle

Industry (Sector) Rotation

shift money between industries or sectors
- Cyclical stocks grow/decline with the economy