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CTP 6th Edition > CH06-Capital Markets > Flashcards

CH06-Capital Markets Flashcards

1
Q

Key differences in Capital Markets compared to Money Market investments

A 
Maturities over a year
Purpose is Return
Capital Market investments can be debt or equity
No fixed maturity date
Less liquid than MM investments
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2
Q

Describe Primary capital market

A

Debt and equity to investors; stock issues

  • IPO=initial public offerings
  • Seasoned equity offering
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3
Q

Describe Secondary capital market

A

No change in cash flow or number of outstanding securities

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4
Q

Describe Private capital market

A

Securities offered and sold to limited group

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5
Q

Market Type ___ when Trades occur on the stock exchange or OTC market

A

Secondary market

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6
Q

Market Type ___ when Market price of existing shares guides price for new shares

A

Primary b/c NEW shares

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7
Q

Market Type ___ when Issues may be exempt from registration. e.g. with SEC in US or FCA in UK

A

Private

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8
Q

Market Type ___ when Firms gets funds on issue date if underwritten; syndicate markets to issue to investing public

A

IPO = Primary

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9
Q

Seniority of claims in liquidation

A
  1. Secured debt holders
  2. Senior debt
  3. Subordinated debt
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10
Q

What’s more expensive for a Company: debt or equity?

A

Equity is more expensive

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11
Q

cost differences of debt and equity notes from class

A

debt has interest expense

Equity has risk that they get paid last at liquidation, so expect higher returns

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12
Q

Term Loan

A

Fixed maturity, typically > 1 year
Specific need
Typically Term matches life of asset
Often pay interest only, not principal which results in a balloon payment

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13
Q

describe Bond Indentures

A

describes a bond issue, lists collateral, makes reps & warranties, specifies covenants and redemption terms, and sets interest payments or call provisions

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14
Q

Mortgage bonds

A

LT Bond
Specific assets
Substantial covenants

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15
Q

Debentures

A

LT Bond
Subordinated basis
Unsecured - General claims against assets or cash flows

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16
Q

Convertible bond

A

LT Bond

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17
Q

Sovereign bonds

A

LT Bond

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18
Q

Sub-Sovereign bonds

A

LT Bond

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19
Q

Eurobonds

A

LT Bond

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20
Q

Zero-coupon bonds

A

LT Bond

*watch out for imputed interest

21
Q

Floating-rate debt

A

LT Bond
Based on LIBOR or another market index
Get price protection as index resets (daily / weekly / monthly)

22
Q

High-yield (Junk) bonds

A

LT Bond

23
Q

Project Financing

A

Bank agrees to offer funding at initiation of project and then offers additional funding as milestones are met
(e.g. construction of a building)
pg166

24
Q

Securitization

A

debt securitized by A/R and inventory to increase liquidity and lower the yield paid by issuers. Securitization makes debt more liquid and attractive to investors

25
Q

MAC Clause

A

MAC=Material Adverse Change
Allows the lender to refuse funding or declare a borrower to be in default, even if all agreements are in full compliance

e.g. death of key person that makes lender question if they will be repaid
pg 168

26
Q

What is the Guarantees requirement?

A

allows lenders recourse to the guaranteeing party to obtain payment in the event the subsidiary is in default

27
Q

Is a Comfort Letter a guarantee?

A

No, technically a comfort letter is not a guarantee. It is not legally enforceable. It is a good faith, moral obligation representing stated actions

28
Q

Equity Securities

A

=Ownership in the company through:
Common Stock (voting rights)
Preferred Stock (non-voting but pays dividend)
Hybrid Securities (convertibles / warrants)
Depository Receipts

29
Q

Common Hybrid Securites

A
  1. Convertibles (convert bond or preferred stock to common stock)
  2. Warrants (bonds with an equity purchase option)
30
Q

Does a Convertible provide new capital for the issuer?

A

No. It simply converts existing debt or preferred stock into common equity.

31
Q

How is the stock issue price of an IPO determined?

A

Investment bankers help determine the highest price that should still result in all shares sold

32
Q

Are Private Placement Securities underwritten?

A

No. They are sold.

33
Q

Who are Private Placement Securities sold to?

A

QIBs= Qualified Institutional Buyers, a limited group of high net worth institutional investors

34
Q

4 benefits of organized exchanges

A
  1. competitive marketplace where supply and demand determine prices
  2. frequent trading minimizes price volatility
  3. fair market for exchange participants
  4. depth of capital market allows issues to raise large amounts of capital through securities offerings
35
Q

Which type of securities are issued by Government and Not-For-Profit?

A

Debt securities, only. (Can’t issue equity or hybrid)

36
Q

name the legal portion of a debt contract

A

promissory note

37
Q

define promissory note

A

unconditional promise to pay a specified amount + interest at a defined rate either on demand or on a certain date.

38
Q

Which action perfects a lien and makes it enforceable in a court of law?

A

filing notice with the appropriate governmental agency, which makes the lien legally enforceable

39
Q

Income bonds

A

Income bonds pay interest only if a company has profits, thus reducing some of the issuer’s risk of issuing debt.

40
Q

zero-coupon bonds

A

With zero-coupon bonds, investors are required to pay taxes on imputed earnings each year, even through no actual payment is received until maturity.

41
Q

A company issues securities that are given an investment quality rating of “BB” after the company has an economic downturn. These securities are __________________.

A

HY Bonds

Also referred to as junk bonds or below-investment-grade bonds (i.e., an investment quality rating of “BB” or less from S&P or Ba1 or lower from Moody’s), high-yield bonds are issued by less creditworthy entities.

42
Q

T/F: Bonds with call provisions typically require a higher coupon rate than similar non-callable bonds

A

True

43
Q

T/F: Investors prefer floating-rate debt because it matches current interest rates.

A

True

44
Q

define Eurobond (AKA External Bond)

A

A Eurobond (sometimes called an External Bond) is an international bond that is denominated in a currency other than that of the country in which it is issued.

45
Q

T/F: Regarding Preferred Stock, most voting rights are granted only if a specified sequence of preferred dividends is missed

A

True

46
Q

The principal benefit of issuing convertibles is to _______________.

A

Provide the issuer with a lower interest rate.

47
Q

What is APIC?

A

Additional paid-in capital (APIC) is an account that reflects the difference at the time of issue between the par value and the issuance price (less underwriting costs) of newly issued stock.

The formula is: ((Issue Price - Par Value) * number of shares) - underwriting costs

48
Q

Define Tracking Stock

A

Tracking stock is a separate stock created by a parent company to track the financial progress of a particular line of business. Despite being part of a publicly traded entity, tracking stocks trade under unique ticker symbols. These stocks are meant to create opportunities for investors to buy into a fast-growing unit without investing in the whole firm. The revenues and expenses of the segment being tracked are extracted from the firm’s financial statements and are linked to the tracking stock for valuation purposes. However, tracking stocks do not provide stockholders with ownership in the parent company, nor do they include voting rights.

49
Q

Book value per share is defined as

A

total book value of common equity divided by the number of common shares outstanding.

e.g. Par value of $200,000 plus $400,000 in retained earnings plus $4,000,000 additional paid-in capital equals $4,600,000. This amount divided by 200,000 shares equals $23 per share.

CTP 6th Edition (64 decks)

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