IN REPOS:

The amount the investor lends is less than the market value of the securities, a difference called the spread or haircut, to ensure that it still has sufficient collateral if the value of the securities should fall before the dealer repurchases them.

STOCKS-- traditionally known as ordinary equity share.

a form of long-term equity that represents ownership interest of the firm

Ordinary equity shareholders are called

They are the true owners of the corporation.

Shareholders assume a limited liability because their risk of potential loss is limited to their investment in the corporation's equity shares.

Ordinary equity share may be sold with or without par value

Whether or not ordinary equity share has any par value is stated in the corporation's charter

the stated value attached to a single share at issuance

the issue price in excess of par is recorded as additional paid-in capital, capital surplus, or capital in excess of par.

the maximum number of shares that a corporation may issue without amending its charter

the number of authorized shares that have been sold

shares held by the public

Both the firm's dividends per share and earnings per share are based on the outstanding shares

Previously issued shares that are reacquired and held by the firm are called treasury shares

Ordinary equity share has no maturity and is a permanent form of long- term financing.

A tender offer is a formal offer to purchase shares of a corporation.

it is also a means to REPURCHASE shares.

a temporary transfer of the right to vote to another party.

VOTING RIGHTS:

Class A ordinary (common) equity share typically has limited or no voting rights while Class B has full voting rights.

Majority voting=entitles each shareholder to cast one vote for each share owned

Cumulative voting= a voting system that permits the shareholder to cast multiple votes for a single director

BV per Share:

The accounting value of an ordinary equity share is equal to the ordinary share equity (ordinary share plus paid-in capital plus retained earnings) divided by the number of shares outstanding.

a class of equity shares which has preference over ordinary (common) equity shares in the payment of dividends and in the distribution of corporation assets in the event of liquidation.

Stocks or equity shares give you a claim on the future profits or earnings of a corporation, plus the liquidation or salvage value.

In general, bonds with covenants have lower interest rates because the restrictions on what management can and cannot do makes the firm more stable and the bonds less risky.

To allow the issuer of a bond to pay off its bond early or recall it, the bond must have a

The call provision of a bond stipulates under what conditions the issuer can buy back the bond or pay it off early. Bonds with call provisions usually have multiple call dates and stated prices of the buyback.

A clause in a bond contract that allows the issuer of the bond the right to buy back all or part of the bond issued before the bond's maturity date.

The call price is normally higher than the face value of the bond, but it decreases the closer the bond comes to its maturity date

A legal contract between the bond issuer and the bond holder or purchaser. The contract lays out the legal requirements of the borrower or bond issuer.

Sinking fund provisions usually allow an issuer to repurchase their bonds periodically and at a specific price, usually at par or the prevailing market price.

A sinking fund might sound a lot like a call provision, but they are different. Sinking funds usually limit how many of the bonds the issuer can buy back early, whereas call provisions often allow the issuer to pay off all the bonds it issues

sinking fund buyback prices are usually lower than call provision buyback prices

From an issuer's point of view, convertible bonds are beneficial because they require lower interest payments than nonconvertible bonds

Since investors believed these government agencies had the full backing of the government, the agencies could borrow funds in the market at a relatively low interest rate. Even though these rates were generally higher than Treasury bill rates, the agency bonds were often viewed as almost perfectly default risk-free

A bond issued and backed by a state or local municipality to raise funds that will be used for a variety of public works projects.

A bond issued and backed by a state or local municipality to raise funds that will be used for a specific income-generating project.

There are two types of municipal bonds: general obligation bonds and revenue bonds

A bond where the bondholder can convert the bond into a specified number of shares of stock of the firm that issued the bond.

Although muni bonds are issued by state and local governments, they are not risk-free promises to repay. General obligation bonds are usually viewed as having a lower default risk than revenue bonds. This is because revenue bonds depend on a specific source of revenue for repayment. If that specific source or project does not perform as planned, then repayment of the bond can become doubtful.

is a pool of money a corporation sets aside to help repay a bond issue

the chance that the bond issuer will not be able to make timely payments.

The poorer the bond rating, the higher the rate of return demanded in the capital markets.

involve a judgement about the future risk potential of the bond provided by rating agencies such a as Moody’s, Standard and Poor’s and Fitch IBCA, Inc. Dominion Bond Rating ServiceI

A tangible evidence of debt

Two things that bond holders receive

The initial or primary sale of corporate bond issues occurs through a

The investment Bank can purchase the bonds through competitive bidding against other investment banks or by directly negotiating with the issuer.

Here, a single investment bank obtains the exclusive right to originate, underwrite and distribute the new bonds through a one-on-one negotiation process. With a negotiated sale, the investment bank provides the organization and advising services to the issuers

In their arrangement, the underwriter does not guarantee a firm price to the issuer. The investment bank incurs no risk of mispricing the security since it simply seeks to sell the securities at the best market price it can get for the issuing firm.

All are advantages of using BONDS, EXCEPT:

A DISADVANTAGE OF USING BONDS:

The typically restrictive nature of indenture covenants may limit the firm’s future financial flexibility.

The face value of the bond that is returned to the bondholder at maturity

The % of the par value of the bond that will be paid out annually in the form of interest. Formula is: Stated interest payment divided the Par value.

The security underwriter of bonds

The length of time until the bond issuer returns the par value to the bondholder and terminates the bond.

This refers to the ratio of the annual interest payment to the bond’s market price.

The agreement between the firm issuing the bonds and the bond trustee who represents the bondholders. It provides the specific terms of the loan agreement, including the description of the bonds, the rights of the bondholders, the rights of the issuing firm and the responsibilities of the trustees.

This refers to the bond’s internal rate of return. It is the discount rate that equates the present value of the interest and principal payments with the current market price of the bond

Unsecured Long-term Bonds:

unsecured long-term debt and backed only by the reputation and financial stability of the corporation. To provide some protection to the bondholder, the issuing firm may be prohibited from issuing future secured long-term debt that would create additional encumbrance of assets.

allows borrower to incur indebtedness and still preserve some future borrowing power

Claims of bondholders of subordinated debentures are honored only after the claims of secured debt and unsubordinated debentures have been satisfied.

a bond secured by a lien on real property. Typically, the market value of the real property is greater than that of the mortgage bond issued. This provides the mortgage bondholders with a margin of safety in the event that the market value of the secured property declines. Should the issuing firm fail to pay the bonds at maturity; the trustees can foreclosure or sell the mortgaged property and use the proceeds to pay the bondholders.

mortgage bonds that have the senior claim on the secured assets if the same property has been pledged on more than one mortgage bond.

These bonds have the second claim on assets and are paid only after the claims of the first mortgage bonds have been satisfied.

All the assets of the firm are used as security for this type of bonds.

forbid the further use of the pledged assets security for other bonds. This protects the bondholders from dilution of their claims on the assets by any future mortgage bonds.

These bonds allow the issuance of additional mortgage bonds using the same secured assets as security. However, a restriction may be placed upon the borrower, requiring that additional assets should be added to the secured property if new debt is issued.

These bonds allow the issuance of additional bonds up to a limited amount at the same priority level using the already mortgaged assets as security

one in which the interest payment changes with market conditions.

are bonds rated BB or below. The major participants of this market are new firms that do not have an established record of performance, although in recent years these bonds have been increasingly issued to finance corporate buyouts.

bonds payable or denominated in the borrower's currency, but sold outside the country of the borrower, usually by an international syndicate of investment bankers. This market is denominated by bonds stated in U.S. dollars

usually sold by an international syndicate of investment bankers and includes bonds sold by companies in Switzerland, Japan, Netherlands, Germany, the United States and Britain, to name the most popular countries.

e also referred to as bonds issued in Europe by an American company and pay interest and principal to the lender in U.S. dollars

carry the "full-faith-and-credit" backing of the government and investors consider them among the safest fixed-income investments in the world

refer to the financial markets where the issuance, buying, and selling of debt securities like bonds occur. The other names include debt markets, fixed-income markets, and credit markets.

At the same time, the government issues bonds intending to finance government spending or expenditure, including infrastructure spending and debt repayment. One example is the Treasury securities market.

Bond markets allow companies to obtain capital without causing equity dilution.

requires interest payments only if earned and non-payment of interest does not lead to bankruptcy. Usually issued during the reorganization of a firm facing financial difficulties, these bonds have longer maturity and unpaid interest is generally allowed to accumulate for some period of time and must be paid prior to the payment of any dividends to stockholders.

Speculative bonds are also called

Credit Quality Risk:

e higher credit risk bonds are ___

using the debt instruments to obtain capital reduces the cost of capital since the interest expense associated with such instruments is tax-deductible.

Bond prices fall when interest rates rise, and vice versa.

Stock market rallies and companies outperforming the market are common when the economy is booming, and investors will be more interested in stocks than debt instruments, causing investment to shift from the debt market to the stock market

bear market = stock market collapse

To more closely align the interests of bondholders and executives, many bonds carry with them bond covenants, which either tell management what to do or place restrictions on what management can do

A portion of a bond agreement that specifies what the borrower (the bond issuer) may or may not do during the life of the bond.

during a bear market or stock market collapse, investors will shift their investments to bonds

CREDIT QUALITY RISK:

High quality corporate bonds are considered __

The money market exists to provide the loans that financial institutions and governments need to carry out their day-to-day operations

The money market is dominated by professional investors, although retail investors with P50,000 can also invest.

A company that has a cash surplus may “park” money for a time in short-term, debt-based financial instruments such as treasury bills and commercial paper, certificates of deposit, or bank deposits.

If demand for long-term loans and mortgages is not covered by “deposits from savings accounts, banks may the issue certificates of deposit, with a set interest rate and fixed-term maturity of up to five years.

Sums of less than Php50,000 can be invested in money market funds

The money markets do not exist in a particular place or operate according to a single set of rules. Nor do they offer a single set of posted prices, with one current interest rate for money. Rather, they are webs of borrowers and lenders, all linked by telephones and computers.

At the centre of each web (money market web) is the ______ whose policies determine the short-term interest rates for that currency.

the job of treasurers is to invest any unneeded cash as safely and profitably as possible and, when necessary, to borrow at the lowest possible cost.

There is no precise definition of the money markets, but the phrase is usually applied to the buying and selling of debt instruments maturing in one year or less.

There are numerous types of money-market instruments. The best known are commercial papers, bankers' acceptances, treasury bills, repurchase agreements, government agency notes, local government notes, interbank loans, time deposits, bankers' acceptance, and papers issued by international organizations.

It is a short-term debt obligation of a private-sector firm or a government-sponsored corporation. Only companies with good credit ratings issue this money market instrument.

Maturity of commercial paper: most cases, the lifetime, or maturity, greater than 90 days but less than nine months

Commercial paper is usually unsecured although a particular commercial paper issue may be secured by a specific asset of the issuer or may be guaranteed by a has paper bank.

Many large companies have continual commercial paper programmes, bringing new short-term debt on to market every few weeks or months

this allows issuers to borrow money for long periods of time at short-term interest rates

Before the 1980s, these were the main way for firms to raise short-term funds in the money markets

An acceptance is a promissory note issued by a non-financial firm to a bank in return for a loan

Acceptances usually have a maturity of less than six months

Similar to bond investors, money-market investors are extending credit, without taking any ownership in the borrowing entity or any control over management.

Bankers' acceptances differ from commercial paper in significant ways. They are usually tied to the sale or storage of specific of specific goods, such as an export order for which the proceeds will be received in two or three months. They are not issued at all by financial-industry firms.

Banker's acceptances DO NOT BEAR interests.

In Banker's acceptances, Investors rely on the strength of the guarantor bank, rather than of the issuing company, for their security.

are securities with a maturity of one year or less, issued by national governments

Treasury bills issued by a government in its own currency are generally considered the safest of all possible investments in that currency

issued by, provincial or local governments, and by agencies of these governments such as schools authorities and transport commissions. The ability of governments at this level to issue money-market securities varies greatly from country to country.

LOCAL GOVERNMENT NOTES:

In some cases, the approval of national authorities is required; in others, local agencies are allowed to borrow only from banks and cannot enter the money markets

Loans extended from one bank to another with which it has no affiliation are called

Time deposits, another name for certificates of deposit or CDs, are interest-bearing bank deposits that cannot be withdrawn without penalty before a specified date

A repo (REPURCHASE AGREEMENTS) is a combination of two transactions. In the first, a securities dealer, such as a bank, sells securities it owns to an investor, agreeing to repurchase the securities at a specified higher price at a future date. In the second transaction, days or months later, the repo is unwound as the dealer buys back the securities from the investor.

refers to the network of corporations, financial institutions, investors and governments which deal with the flow of short-term capital