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Canadian Financial System.docx

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Wilfrid Laurier University
Roopa Reddy

Canadian Financial System 12/4/2012 4:45:00 PM Types of Investments: BONDS - represents debt for issuing corporation or government Characteristics:  legal, binding agreement  fixed rate of return (often paid semi annually)  Fixed term  principal repaid at maturity  Priority over stockholders Types:  Secured vs. Unsecured (debentures)  Registered vs. Bearer Features  callable  serial  convertible Determinants of Bond Value 1. What impacts the coupon rae at bond issue?  Prevailing interest rates  Credit rating of issuer  Features 2. What impacts bond price when traded?  Coupon rate & prevailing rate of interest (relationship)  Changes in credit rating  Economic/market risk  Inflation Concept of Yield Percentage return on any investment Helps us to compare investments Yield = what you made/what you paid = interest + Capital gain/what you paid FOR A BOND  interest = coupon rate x face value  Capital gain = face value – purchase price Bond Pricing 3 scenarios to consider: - you pay LESS than face value (<1000) for the bond = priced “at a discount” - you pay MORE THAN face value (>1000) for the bond = priced at a premium” - you pay face value (=1000) for the bond “priced at par” Scenario 1: Pay at a “discount” - when coupon rate is less than the expected yield. Scenario 2: Pay at a “Premium” - when the coupon rate is more than expected yield Scenario 3: “at par” - when coupon is equal to the expected yield Reading Bond Quotations Maturity  when you will earn back the face value Price  % of face value Change from day before change Equity  selling ownership of company Stocks Represents equity/capital for issuing company Characteristics  Voting rights who should be on board of directors, you part own company  No fixed term  Variable term  fluctuating price  Dividends  optional for company to pay out dividends to shareholders  Risk Bonds  Holders are 1 in line when company goes bankrupt o Low return than stocks Common Stocks & Preferred Stocks Common Stocks Preferred Stocks Price Volatility  Most volatile  because  More hybrid investment  you are buying and has debt and equity selling AND price  Less volatile (dividends) – changes are more harder sensitive to interest rates to predict Dividends Not necessarily Yes but only after interest  “extra” dividends paid on debt sometimes given  Cumulative  if no dividends are given in year 3, you get them in year 4  Paid before common stock Bankruptcy  Paid after preferred
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