Mergers and Acquisitions Quiz

Study Notes

Government Securities: Invests in U.S. government bonds and GNMA mortgage-backed securities; often named GNMA funds.
Corporate Bonds: Seeks yields higher than government bonds, focusing on investment quality.
High Yield Bonds: Associated with higher risk, typically invests in "junk" bonds with below investment quality ratings.
Municipal Bonds: Issued by local governments, these bonds are favored for their tax-exempt status.
International Bonds: Consists of government bonds and other securities from foreign countries.
Emerging Market Bonds: Features more speculative bonds from developing countries.
Floating Rate Bonds: Adjusts interest rates based on market conditions, often linked to adjustable-rate mortgages.
Inflation Indexed Bonds: Primarily U.S. government bonds, their principal and rates are adjusted based on inflation rates.
Other Bond Funds: Includes zero-coupon bond funds, convertible securities funds, and multi-sector bond funds.

A Type Load: Imposes a front-end charge (4-6%), no annual sales charge, and potential 12b-1 fees (0.25%).
B Type Load: No front-end charge but includes annual sales charge (0.75-1.0%), may have redemption charges, and generally has 12b-1 fees (1.0%).
C Type Load: No front-end charge, includes annual sales charge (0.75-1.0%), does not have redemption charge if held for a year, typically 12b-1 fees (1.0%).
No Load: No front-end, annual sales, or redemption charges; may have minimal 12b-1 fees (0.25% or less).

Risk Premium Components: Typically includes liquidity risk, maturity risk, and default risk, calculated as liquidity risk + risk-free rate + maturity risk + default risk.

Definition: Fixed contractual payments made to bondholders, which can be influenced by market interest rate changes.

Maturity Value: Also referred to as par value or face value, it is the amount due to bondholders upon maturity.

Description: The return calculated by dividing the annual coupon by the bond's face value.

Interpretation: Calculated as the annual coupon divided by the market value of the bond.

Example with Coupon of $40: With a face value of $1,000 and market price of $930, the approximate yield to maturity is about 6.51%.
Example with Coupon of $2,243.5: On a face value of $100,000, market price of $124,345.43, with maturity of 23.76 years, the yield to maturity is approximately 2.42%.

Coupon Impact: Premium bonds experience greater price fluctuations compared to discount bonds due to interest rate changes.

U.S. Government Bonds: Not subject to state taxes but subject to federal taxes.
Municipal Bonds: Usually exempt from both federal and state taxes if purchased within the state of residence.

Priority Structure: Preferred shares carry a higher risk compared to bonds due to lower asset priority in bankruptcy and lack of guaranteed principal return.

Sector Funds: Focus on a specific sector like utilities or technology.
Industry Funds: Concentrate on industries such as pharmaceuticals or real estate.
Commodity Funds: Invest in physical goods, including gold and oil.
Regional Funds: Target investments concentrated in specific geographical regions (e.g., Midwestern U.S.).
International Funds: Invest mainly in foreign markets, such as the Pacific Rim or Europe.
Balanced Funds: A mix of equity and bond investments for risk management.

Key Distinction: Mutual funds pool investors' funds for collective investment, whereas separately managed accounts allow investors to own individual stocks and bonds directly in their names.