Finance Investment Options Overview

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Questions and Answers

What does a rating of Ca indicate about a bond's obligations?

The obligations are likely to be repaid in full with interest.

The obligations are secure and backed by physical assets.

The obligations are speculative with little chance of repayment. (correct)

The obligations rank in the highest percentile of their category.

What do the numerical modifiers added to Moody’s ratings indicate?

The historical performance of the bond issuer.

The interest rate attached to the bond.

The ranking within the generic rating category. (correct)

The duration of the bond's maturity.

What is the primary purpose of issuing fixed-income securities for companies?

To improve their credit ratings.

To finance operations and take advantage of leverage. (correct)

To distribute profits to shareholders.

To hedge against inflation risks.

What differentiates a bond from a debenture?

Bonds are secured by physical assets, while debentures are not. Signup and view all the answers

What is indicated by the rating of C in Moody's rating system?

The bond is highly speculative with a small chance of recovery. Signup and view all the answers

Which characteristic is common to fixed-income securities?

They provide regular interest payments through coupons. Signup and view all the answers

What characterizes a short-term bond?

It has a term of more than one year but less than five years. Signup and view all the answers

Which category includes bonds that have a term to maturity of up to one year?

Money market securities Signup and view all the answers

How does the classification of a long-term bond change over time?

It progresses through medium-term and short-term classifications as time passes. Signup and view all the answers

What does liquidity refer to in the context of bonds?

The ease with which bonds can be traded. Signup and view all the answers

What is meant by negotiable bonds?

Bonds that can be transferred as they are in good delivery form. Signup and view all the answers

Why are Government of Canada bonds considered to have good liquidity?

They are generally in high demand by domestic and international investors. Signup and view all the answers

What is indicated by the term 'marketability' in bond trading?

How well a bond can be traded without affecting its price. Signup and view all the answers

When is a bond classified as a money market security?

When its term to maturity is one year or less. Signup and view all the answers

What specialized feature might some GICs offer for emergencies?

The ability to redeem in case of a medical emergency Signup and view all the answers

What happens to a bond originally classified as long-term after eight years if it had a term of 15 years?

It becomes a short-term bond. Signup and view all the answers

What is NOT a feature of liquid bonds?

They usually trade at a significant loss. Signup and view all the answers

Why have fixed-income mutual funds and ETFs become more popular?

Uncertainty in equity markets and low-interest rates Signup and view all the answers

What advantage do fixed-income mutual funds and ETFs offer to individual investors?

Professional management of a diversified bond portfolio Signup and view all the answers

Which characteristic of fixed-income mutual funds appeals especially to smaller investors?

Ease of access with a limited amount of money Signup and view all the answers

What is one of the challenges of investing in individual bonds compared to fixed-income funds?

Complexity in managing a diversified bond portfolio Signup and view all the answers

Which types of governments issue fixed-income securities?

Provincial, municipal governments, and corporations Signup and view all the answers

What is a typical feature of professional investment management in fixed-income funds?

Research-driven selection of securities in a portfolio Signup and view all the answers

How do fixed-income mutual funds and ETFs primarily benefit investors?

By ensuring access to diverse domestic and global debt markets Signup and view all the answers

What role does liquidity play in fixed-income mutual funds and ETFs?

It enables quick access to cash by allowing easy buy and sell options Signup and view all the answers

What is the primary characteristic of commercial paper?

It has terms ranging from three months to one year. Signup and view all the answers

Which of the following statements about term deposits is accurate?

A penalty is often incurred for early withdrawals. Signup and view all the answers

Guaranteed Investment Certificates (GICs) generally differ from redeemable GICs in that:

They cannot be converted into cash at any point. Signup and view all the answers

What type of financial asset backs a commercial paper when classified as an asset-backed security?

Financial assets pool Signup and view all the answers

Which of the following is true regarding the secondary market for commercial paper?

It allows for buying and selling before maturity. Signup and view all the answers

Why might the interest rates on redeemable GICs be lower than on non-redeemable GICs?

Because they offer more flexibility for cash outs. Signup and view all the answers

Which feature of commercial paper makes it attractive to investors?

Higher yields compared to T-bills. Signup and view all the answers

What should investors consider with GICs regarding customization options offered by banks?

They can choose terms as brief as 30 days. Signup and view all the answers

How are commercial paper rating agencies significant to investors?

They assess the issuer’s ability to meet short-term obligations. Signup and view all the answers

What does the clause regarding accrued interest on convertible bonds typically state?

The issuing company is exempt from paying accrued interest since the last designated interest payment date. Signup and view all the answers

What typically happens to dividends during the conversion of a convertible bond?

The bondholder is entitled to dividends declared only after the conversion takes place. Signup and view all the answers

What is the purpose of a protection against dilution clause in convertibles?

To adjust the conversion privilege if the common shares of the company are split. Signup and view all the answers

Why might a company choose to force conversion of its convertible bonds?

To retain more control over the debt by converting it to equity. Signup and view all the answers

Under what circumstances is forced conversion likely to occur?

When the market price of the common stock rises above the conversion price. Signup and view all the answers

What is the usual nature of convertibles concerning callability?

Convertibles are usually callable at a small premium after reasonable notice. Signup and view all the answers

What typically occurs during a stock split in relation to convertible securities?

The conversion privilege is adjusted to maintain value. Signup and view all the answers

What defines a forced conversion clause in convertible debt?

It mandates conversion when certain market conditions are met. Signup and view all the answers

What happens to a bondholder's conversion rights if a company undergoes a stock split?

They are protected and adjusted to reflect the new number of shares. Signup and view all the answers

Study Notes

Guaranteed Investment Certificates (GICs)

Some banks offer GICs with specialized features, such as medical emergency redemption or homebuyers’ plans.
Regular contributions in homebuyers’ plans accumulate for down payments.

Fixed-Income Mutual Funds and ETFs

Demand for fixed-income mutual funds and exchange-traded funds (ETFs) focused on bonds has risen due to equity market uncertainties and low interest rates.
These funds provide investors with diversified portfolios of debt securities hard to replicate by individuals.
Features include professional management, liquidity, and low investment costs.
Particularly suitable for investors with limited funds or those who find investing in individual bonds complex.

Types of Bonds by Term to Maturity

Bonds are classified based on their maturity:
- Short-term: More than one year but less than five years.
- Medium-term: Five to ten years.
- Long-term: Greater than ten years.
Money market securities are short-term fixed-income securities with terms of one year or less, including T-bills and commercial paper.

Bond Dynamics Over Time

A bond initially classified as long-term will transition to medium-term and then to short-term as time elapses.
After a specified period, a long-term bond may become a money market security if it has a term of one year or less left.

Liquidity, Negotiability, and Marketability

Liquidity indicates how easily bonds can be traded; highly liquid bonds can support significant volume trades without major price changes.
Government of Canada bonds have strong liquidity due to high demand from domestic and international investors.
Negotiable bonds can be transferred easily and often include features like protection against dilution and a call option for early redemption.

Convertible Bonds

Convertible bonds can be exchanged for a predetermined number of common shares, often with a protection clause against dilution.
Forced conversion provisions allow issuers to compel bondholders to convert bonds into equity under certain market conditions.

Commercial Paper

An unsecured promissory note issued by corporations, with terms ranging from less than three months to one year.
Usually sold at a discount and matures at face value, rated based on the issuer's short-term debt capacity.
Generally offers higher yields than Government of Canada T-bills.

Term Deposits

Term deposits provide a guaranteed interest rate for short-term deposits, typically one year.
A penalty usually applies for early withdrawal within a specified period.

Guaranteed Investment Certificates (GIC)

GICs feature fixed interest rates for a set term, with both principal and interest payments guaranteed.
Two types: redeemable (lower rates, can be cashed before maturity) and non-redeemable (higher rates, locked until maturity except under specific conditions).

Bond Quotes and Ratings

Bond quotes illustrate price and yield dynamics; yield can fluctuate daily while coupon income remains constant.
Obligation ratings by Moody’s categorize bonds, with lower ratings indicating higher risk and reduced likelihood of recovery.

Summary of Features and Options

Companies utilize fixed-income securities to finance operations and leverage growth.
Bonds provide regular interest payments and have a face value due at maturity.
There are physical asset-secured bonds and debentures secured by credit rating.
Bonds come with various features and options to meet investor needs.

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Description

This quiz explores various fixed-income investment options including GICs, mutual funds, and ETFs. It highlights specialized features of GICs and the growth in demand for bond-focused funds. Test your knowledge on these financial instruments and their unique attributes.