Podcast
Questions and Answers
What is the fair price of the bond when calculated at a discount rate of 10%?
What is the fair price of the bond when calculated at a discount rate of 10%?
- $100.00
- $96.77 (correct)
- $97.50
- $95.00
How does a Treasury bill generate return for investors?
How does a Treasury bill generate return for investors?
- By reinvesting the interest income
- Through a premium price on sale
- From the difference between the purchase price and the maturity value (correct)
- By paying periodic interest
What does the current yield measure in an investment?
What does the current yield measure in an investment?
- The cash flows relative to the current market price (correct)
- The total return over the life of the investment
- The initial amount invested in the security
- The historical performance of the investment
What is the term used to describe the discount at which a Treasury bill is purchased?
What is the term used to describe the discount at which a Treasury bill is purchased?
Which of the following formulas correctly calculates the yield on a T-bill?
Which of the following formulas correctly calculates the yield on a T-bill?
How is earnings from a T-bill classified for tax purposes?
How is earnings from a T-bill classified for tax purposes?
What is the primary purpose of the Committee on Uniform Security Identification Procedure (CUSIP)?
What is the primary purpose of the Committee on Uniform Security Identification Procedure (CUSIP)?
What is the yield calculation for an 89-day T-bill purchased for 99.5 yielding 2.061% based on?
What is the yield calculation for an 89-day T-bill purchased for 99.5 yielding 2.061% based on?
What information is NOT typically included on a retail trade ticket?
What information is NOT typically included on a retail trade ticket?
Which component is not included in the fair price calculation of a bond?
Which component is not included in the fair price calculation of a bond?
When does the change in legal ownership of a securities transaction become effective?
When does the change in legal ownership of a securities transaction become effective?
In calculating current yield, which factor is irrelevant?
In calculating current yield, which factor is irrelevant?
Which type of securities typically settles on the day of the transaction?
Which type of securities typically settles on the day of the transaction?
What is the duration of the T-bill used to calculate its yield that falls within the given example?
What is the duration of the T-bill used to calculate its yield that falls within the given example?
Which of the following represents the face amount of a transaction?
Which of the following represents the face amount of a transaction?
What does the total settlement amount on a trade summary often include?
What does the total settlement amount on a trade summary often include?
What is indicated on a buy ticket from the trading desk’s perspective?
What is indicated on a buy ticket from the trading desk’s perspective?
Which of the following is typically required for full identification of a bond?
Which of the following is typically required for full identification of a bond?
What is the general sequence when a securities transaction is completed?
What is the general sequence when a securities transaction is completed?
What is the present value of the bond’s income stream based on the coupon payments provided?
What is the present value of the bond’s income stream based on the coupon payments provided?
What format are most bond issues now issued in?
What format are most bond issues now issued in?
How many coupon payments remain for the bond described?
How many coupon payments remain for the bond described?
What does a negative present value indicate when using a financial calculator?
What does a negative present value indicate when using a financial calculator?
When are bond interest payments typically made?
When are bond interest payments typically made?
What is the total amount of coupon payments over time for the bond?
What is the total amount of coupon payments over time for the bond?
What is the role of accrued interest in bond transactions?
What is the role of accrued interest in bond transactions?
What type of bond may pay interest annually instead of semiannually?
What type of bond may pay interest annually instead of semiannually?
What is the value to be entered for 'FV' when calculating the present value of the coupon payments?
What is the value to be entered for 'FV' when calculating the present value of the coupon payments?
What input is used for 'N' in the financial calculator for the bond described?
What input is used for 'N' in the financial calculator for the bond described?
Which organization in Canada is responsible for clearing bond transactions?
Which organization in Canada is responsible for clearing bond transactions?
Which button might be used on some financial calculators to compute present value?
Which button might be used on some financial calculators to compute present value?
What may happen if a bond is purchased just before its interest payment date?
What may happen if a bond is purchased just before its interest payment date?
What does the present value tell an investor about future coupon payments?
What does the present value tell an investor about future coupon payments?
What is the semi-annual payment amount per coupon for the bond's income stream?
What is the semi-annual payment amount per coupon for the bond's income stream?
Which input is used for 'PMT' when calculating the present value of the bond's income stream?
Which input is used for 'PMT' when calculating the present value of the bond's income stream?
Which bond is generally less volatile in price, assuming both have the same term to maturity and yield?
Which bond is generally less volatile in price, assuming both have the same term to maturity and yield?
What generally increases the price volatility of a bond?
What generally increases the price volatility of a bond?
What is the primary risk faced by investors holding fixed-income securities?
What is the primary risk faced by investors holding fixed-income securities?
How is duration defined in the context of bond investments?
How is duration defined in the context of bond investments?
If two bonds have the same coupon rate and yield, how does their term to maturity affect their price volatility?
If two bonds have the same coupon rate and yield, how does their term to maturity affect their price volatility?
What factor affects how different bonds react to changes in interest rates?
What factor affects how different bonds react to changes in interest rates?
How does a bond's duration help investors?
How does a bond's duration help investors?
Which bond is likely to have higher duration?
Which bond is likely to have higher duration?
What typically happens to the price of a bond when interest rates increase?
What typically happens to the price of a bond when interest rates increase?
Why is it important to understand a bond's duration?
Why is it important to understand a bond's duration?
Study Notes
Trade Details
- Includes specific information about the counterparties involved in a trade, such as the investment advisor's employer and the client's name and account number.
- Retail trade tickets are prepared from the client's perspective; a buy ticket indicates the trading desk sells to the client.
- Identification details of bonds include the issuer’s name, maturity date, and coupon rate.
- Bond identification uses the CUSIP number, a unique code for North American securities, established in 1964 for trade clearing and settlement.
Settlement Process
- Legal ownership changes immediately upon confirmation of a securities transaction, while payment occurs later.
- Settlement period varies by security type: T-bills settle on transaction day; other securities like bonds settle the next clearing day.
- Essential information in trade documentation includes nominal amount, price, yield, settlement date, custodian name, and total settlement amount.
Bond Valuation
- A bond's fair price is the total present value of its principal and its coupon payments.
- At a 10% discount rate, a bond may be valued at approximately $96.77 based on its cash flow calculations.
Treasury Bill Yield Calculation
- T-bills are short-term securities sold at a discount and yield returns based on the price difference at maturity.
- Formula for calculating yield:
[ \text{Yield} = \left(\frac{100 - \text{Price}}{\text{Price}}\right) \times \left(\frac{365}{\text{Term}}\right) \times 100 ] - Example: An 89-day T-bill purchased at 99.5 gives a yield of approximately 2.061%.
Current Yield on Bonds
- Current yield is calculated by focusing on cash flows and current market price rather than the initial investment amount.
- Example: A bond with semi-annual payments can have its present value calculated using financial calculators to determine cash flow values.
Duration and Interest Rate Sensitivity
- Duration measures a bond's price sensitivity to interest rate changes, indicating the percentage price change for a 1% rate shift.
- A bond with a higher duration is more sensitive to interest rate volatility.
- Comparison can be made between bonds of varying coupons and maturities based on their duration.
Bond Ownership and Trade Management
- Modern bond transactions often utilize electronic record-keeping through book-based formats instead of physical certificates.
- Canada’s CDS (Clearing and Depository Services Inc.) provides trade clearing and settlement for bond transactions.
Accrued Interest Calculation
- Most bonds pay interest biannually on set dates which coincide with their maturity date.
- Accrued interest may be payable when purchasing bonds, ensuring equitable transactions between buyers and sellers.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your knowledge on the specifics of investment trade counterparties, including important details about clients and investment advisors. This quiz covers critical information like names, addresses, and account specifics that are vital for retail trade tickets. Enhance your understanding of the trading processes and documentation involved in client investments.
