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Definition
| 1. A long term debt instrument that requires the issuer to pay a set annual rate of interst and to repay the borrowed sum on a specified date |
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Definition
| 2. A legal document that details the terms of a bond |
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| 3. With respect to a bond, the date on which the bond's principal is to be paid |
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| 4. In finance, the amount borrowed under a loan |
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| 5. A bond's orignal value and the amt that will be pd at the bonds maturity date |
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| 6. The amt of interest to be pd on the dates specified in an indenture agreement |
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| 7. A bond's annual interest rate stated as a percentage of its par value |
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| 8. A debt instrument that gives the holder the option to convert the bond into another security (generally common stock) of the issuing company at a specified price, within a given time, and under stated terms. |
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| 9. A debt instrument guaranteed by an entity other than the issuer |
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| 10. A debt instrument that has different portions of the principal maturing on different dates. |
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| 11. A debt instrument that links interest pmts to the fibnancial performance of the issuer |
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| 12. A debt instrument that pays interst at a rate that is indexed to the rates on US treasury securities or other money market instruments |
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| 13. A debt instrument that gives the issuer the right to pay off the hond before maturity |
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| 14. A debt instrument that pays no interest and that can be redeemed at par at maturity |
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Term
| 15. Sinking fund provision |
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Definition
| 15. A provision that requires a bond issuer to set aside money at periodic intervals for the specific purpose of repaying a portion of its existing bonds each year |
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Definition
| 16. A debt instrument that is secured by specific assets and has priority over the funds received in the liquidation of those assets |
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Definition
| 17. A debt instrument that is an unsecured general obligatino of the issuing corporation |
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| 18. Asset backed security |
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Definition
| 18. A financial instrument collateralized by a pool of loans, leases, or other receivables |
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| 19. Mortgage backed securithy |
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Definition
| 19. A financial instrument collateralized by a pool of mortgages |
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Definition
| 20. The effect on a bond's price of the overall pattern of interest rates, including the coupon rate, current interest rates, and inflation |
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| 21. The effect on a bond's price of the length of time to maturity. |
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| 22. The effect on a bond's price of the risk specific to the bond issuer |
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Term
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Definition
| 23. The difference in yield between securities |
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Term
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Definition
| 24. One one-hundredth of one percent |
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Term
| 25. Yield To Maturity (YTM) |
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Definition
| 25.A measure of the total rate of return a bondholder will earn over the life of the hond if it is held to maturity |
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| 26. Nominal Rate of Return |
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Definition
| 26. The rate of return unadjusted for the effects of inflation |
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Definition
| 27. The rate of return adjusted for the effects of inflation |
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Definition
| 28. The relationship between the nominal rte of return and the real rate of return |
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Term
| 29. General obligation bond |
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Definition
| 29. A municipal debt instrument secured by the full faith, credit, and taxing authority of the issuing state or municipality |
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Definition
| 30. A municipal debt instrument that is payabloe entireley from revenue received from the users or beneficiaries of the projects financed |
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Definition
| 31. International debt instruments denominated in U.S. Dollars or another currency, which are issued outside of the issuer's country of origin. These bonds pay annual interst, have maturities of three to seven years, and are not secured. |
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Definition
| 32. Issued by co's or govts outside the country of the issuer. Foreign bonds are denominated in the currency of the country in which they are to be sold and are more highly regulated by the country in which they are issued. |
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Term
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Definition
| 33. THe amount that the bond's purchase price exceeds its par value |
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Definition
| 34. The amt that the bond's purchase price is below its par value |
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Term
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Definition
| 35. Represents an ownership interst in the firm and has priority over common stock with respect to dividends and liquidation pmts. Dividends must be fully paid on preferred stock before any dividends are pd on common stock, but preferred stock carries no voting rights. |
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| 36. Cumulative Preferred Stock |
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Definition
| 36. Gives the holder the right to receive accrued unpaid dividends before dividends are paid to common stockholders. |
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| 37. Noncumulative Preferred Stock. |
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Definition
| 37. Does not give the holder the right to receive accrued unpaid dividends. |
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| 38. Convertible preferred stock |
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Definition
| 38. Gives the holder the right to convert it to a stated number of common stock shares. Like other preferred stock, it carries a stated dividend. |
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Term
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Definition
| 39. Represents an ownership interest in the corporation. The holder has voting rights but also has the lowest priority with respect to dividend pmt and liquidation. |
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Term
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Definition
| 40. A method used to determine the price of a stock by analyzing data that are fundamental to the co, such as expected growth, dividend payouts, risk, and interest rates. |
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Term
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Definition
| 41. A method of determining stock prices by attempting to determine patters in market activity statistics, past prices and market volume. This method does not attempt to measure the inherent value of the stock being analyized, but rather tries to predict the value based on historical patterns and predictable trends. |
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Term
| 42. Efficient Market Hypothesis (EMH) |
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Definition
| 42. States that well organized capital markests such as the NYSE are basically efficient markets and while inefficiencies may exist, they are relatively small and not common. In such markets, all stocks have an NPV of zero (ie the difference between their value and their cost is zero) meaning they are all prices according to their worth. |
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Definition
| 43. Suggests that historical price data are of no value for purposes of preducing future price data, (prices have no memory) and that technical stock market analysis has no real value. |
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Term
| 44. Semi Strong form efficiency |
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Definition
| 44. Asserts that all publicly known and available info is fully and quickly reflected in stock prices. Accordingly it suggest that fundamental analysis cannon produce superior returns relative to the market. |
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Term
| 45. Strong form efficiency |
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Definition
| 45. States that all information of every kind is somehow included in stock prices, therefore, making insider information impossible. |
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Term
| 46. Dividend Growth Model |
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Definition
| 46. A financial model that takes the position that the price of a common stock can be found by calculating the present value of its future dividend pmts in perpetuity. This model assumes that dividends grow at a constant rate. |
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Term
| 1. Explain why it is important for a risk mgmt professional to have an understanding of how bonds and stocks operate. |
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Definition
| 1. A risk mgmt professional should have an understanding of how bonds and stocks operate because these assets provide insurers with the liquidity and investment income they need to operate profitably. |
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Term
| 2. Describe the basic components of a bond. |
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Definition
2.The basic components of a bond include the following;
(a) Maturity Date: Date on which the bonds principal is to be pd.
(b) Principal (face value or par value): The bond;s original value and the amt that will be pd at the bond's maturity date
(c) Interest rate (coupon rate) The bond's annual interst rate stated as a percentage of its par value.
(d) Rights and duties of the issuer and the buyer (s) of the bond: Corporate bondholders are creditors and do not share in the co's profits and losses. However, they must be paid before the co'shareholders receive dividends. |
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Term
3. Describe the benefits associated with using the following types of bonds:
(a) convertible bond
(b) Guaranteed Bond
(c) Floating Rate Bond
(d) Zero coupon bond |
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Definition
3. benefits associated with using the following types of bonds include:
(a) convertible bond: Greater chance for profit because the bond's value is supoported by both its bond value and the stock conversion value.
(b) Guaranteed Bond: If the guarantor is more financially stable than the issuer, having the guarantee will thend to increase the value of the bonds.
(c) Floating Rate Bond: Popular with issuing co's when current interst rates are high but are expected to decline because the co will not be forced to continue to pay a coupon rate that is significantly higher than the prevailing interest rate,
(d) Zero coupon bond: Sell at a deep discount and tend to reduce the problems related to the reinvestment of coupon payments. |
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Term
| 4. Explain how a sinking fund provision for a bond affects the bond issuer |
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Definition
| 4. Adding a sinking fund provision to a bond requires the bond issuer to repay a portion of the bond each year. By regularly paying off part of its debt, the issuer will have a much less to pay at the bond's maturity date. |
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Term
| 5. Constrast a secured bond and a debenture bond. |
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Definition
| 5. Secured bonds are bonds that are collateralized, or backed by specific assets of the issuer. They are secured by specific assets and have priority over the funds received in the liquidation of those assets. Debenture bonds are unsecured general obligations of the issuing corporation and have no priority over other debts in a liquidation. |
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Term
6. describe how the collateral backing and credit risk differ for the following bonds:
(a) Asset backed security
(b) Mortgage backed security |
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Definition
6. The collateral backing and credit risk differ for the following bonds
(a) Asset backed security: Is collateralized by a pool of loans, leases, or other receivables. Payments on the underlying loans or receivables are passed directly to the investors, and interest and principal are pd according to a schedule designed to appeal to the investors. Credit risk exists because the borrowers on the underlying assets could default.
(b) Mortgage backed security: Collateralized by a pool of mortgages. Credit risk differs from that of asset backed securities because most first mortgages are guaranteed by the U.S> goverment through national mortgage agencies. |
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Term
| 7. Id components that either directly or indirectly affect bond pricing. |
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Definition
7. The following components directly or indirectly affect bond pricing:
(a) current market interest rates
(b) coupon rate
(c) time to maturity
(d) yield to maturity
(e) inflation
(f) Issuer's credit rating |
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| 8. Describe the relationship between bond prices and interest rates. |
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Definition
| 8. The prices of bonds move inversely with changes in interest rates; when interest rates increase, the prices of bonds currently in circulation decrease. |
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Term
| 9. Describe the two components affeting changes in bond prices when interest rates fluctuate |
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Definition
| 9. Two components affeting changes in bond prices when interest rates fluctuate are the coupon rate and the bond's maturity. Thelower the coupon rate and thelonger the maturity of a bond, the more volatile its price will be. |
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Term
| 10. Explain the difference between a nominal and a real rte of return and why th inflation rate is important to a typical investor. |
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Definition
| 10. The nominal rate of return is the rate of return unadjusted for the effects of inflation. The real rate of return is the rate of return adjusted for the effects of inflation. The inflation rate is important to an investor because it has a substantial effect on the purchasing power of the dollars returned on investments |
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| 11. Describe the relationship between monimal returns, real returns, and inflation, according to Fisher. |
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Definition
11. Accoridng to Fisher, the relationship between nominal returns, real returns, and inflation is:
1 + Nominal rate of return = (1 + Real rated of return) x (1 + Inflation Rate) |
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Term
| 12. Id the four classifications of bonds. |
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Definition
12. The four classifications of bonds are:
(1) Federal debt
(2) Corporate Bonds
(3) State and local debt
(4) International Bonds |
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Term
| 13. Explain why Treasury securities have lower interest rates than corporate or agency bonds. |
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Definition
| 13. Treasuriy securities haev lower interest rates than corporate or agency bonds because they are guaranteed by the U.S govt for pmt of principal and interest and because there is virtually no risk of default. |
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Term
| 14. Id reasons for which a govt sponsored enterprise (GSE) might issue federal debt. |
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Definition
14. A Govt sponsored enterprise (GSE) might issue federal debt to:
(1) alleviate economic recessions
(2) Correct mkt imperfections that lead to misaollocations of resources
(3) Redistribute wealth
(4) Channel credit into special economic sectors |
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Term
15. Describe the operation of and security provided for the investor of the following municipal bonds:
(a) General obligation Bonds
(b) Revenue Bonds |
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Definition
15.
(a) General obligation bonds are securied by the full faith, credit, and taxing authority of the issuing state or municipality and are repayable from the general revnues provided by collectible taxes and from other available revenues. They offer a high level of security for the investor
(b) Revenue bonds are payable entirely from revenue received from the users or beneficiaries of the projects financed by the bond proceeds. They involve higher risk than general obligation bonds because of the possibility that the projects financed may not bring in enough revenue to pay bondholders. |
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Term
16. Describe the characteristics of the following types of international bonds:
(a) Eurobonds
(b) Foreign Bonds. |
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Definition
16. the following are characteristics of the following types of international bonds:
(a) Eurobonds: Long term debt instruments and are issued outside the issuer's country of origin. They typically pay interst annually, have maturities of three to seven years, and are unsecured.
(b) Foreign Bonds: Issued by a corporation or govt outside its own country. THey tend to be more highly regulated by the country in which they are issued. |
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Term
| 17. Describe the importance of variations in bond valuations on balance sheets caused by financial statement preparation using SAP or GAAP accouting principles. |
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Definition
| 17. variations in bond valuations on balance sheets are important because the constitute a significant portion of the insurer's surplus and affect the financial ratios used by regulators, rating organizations, banks and customers when they are analyizing the financial condition of the company. |
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Term
| 18. Describe the valuation of the bond premium or discount according the SAP |
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Definition
| 18. Accoding to SAP, bond premium or discount is amortized over the life of the bond using the constant yield method of amortiation, which provides for an equal rate of return for each year until the bond's maturity. |
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Term
| 19. Describe the bond ratings assigned by the Securities Valuation Office (SVO) of the NAIC |
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Definition
| 19. The value of a bond on an insurer's balance sheet depends on the rating assigned to hte bond by the Securities Valuation Office (SVO). Bonds with the lowest credit risk are rated NAIC 1 and those with the highest credit risk, NAIC 6. |
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Term
| 20. Describe the valuation of the bond premium or discount according to GAAP |
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Definition
| 20. According to GAAP, bonds are recorded on the balance sheet at their amortized cost if they are held-to-maturity debt security, it is recorded on teh balance sheet at its fair market value. |
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Term
| 21. Contrast preferred stock dividends, common stock dividends and bond interest payments |
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Definition
21. Dividend pmts differ as follows:
(1) Preferred stock dividends: The pmt of fixed dividends is not legally binding and must be voted on and approved by the board of directors. Preferred stock dividends are not tax deductible expenses for the issuing co
(2) Common Stock Dividends: Not fixed dividends. If a co'searnings increase consitently, the dividend usually also increases. Common dividends are not tax deductible.
(3) Bond Interest: Bondholders can require pmt of coupons. Not paying results in a default. Interest is tax deductible. |
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Term
| 22. Id factors that influence the price of common stock. |
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Definition
22. Teh following factors influence the price of common stock:
(a) changes in interst rates
(b) judgments concerning the firm'searning potential
(c) Relative price-to-earnings ratio
(d) Potential takeover and breakup value
(e) Dividend payout ratio
(f) quality of mgmt. |
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Term
23. Describe the following approaches to stock pricing:
(a) fundamental analysis
(b) Technical Analysis
(c) Efficient market hypothesis
(d) Dividend growth model |
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Definition
23. The following are approaches to stock pricing:
(a) fundamental analysis: TO determine th price of a stock based on an analysis of data that are fundamental to the co, such as expected growth, dividend payouts, risk, and interest rates.
(b) Technical Analysis: Technical analysis involves examining mkt activity statistics, past prices, and mkt volume to detect patterns and predict a stock's price
(c) Efficient market hypothesis: Asserts that stock prices reflect the expectations of all market participants and that no individual investor has superior knowledge. Different forms of mkt efficiency lead to different stock valuation approaches
(d) Dividend growth model for valuing stocks is based on the assumption that the price of common stock is equal to the present value of the future dividend stream in perpetuity. |
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Term
23. Describe the following approaches to stock pricing:
(a) fundamental analysis
(b) Technical Analysis
(c) Efficient market hypothesis
(d) Dividend growth model |
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Definition
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Term
| 24. Describe the three forms of efficient market hypothesis. |
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Definition
24. the three forms of efficient market hypothesis are:
(1) Weak form efficiency: Asserts that current stock price reflects all historical info about the stock's price fluctuations. Assumes that successive changes in a stock's price are independent of each other, thereby rejecting technical analysis.
(2) Semi strong form efficiency: Asserts that the current stock price reflects historical data and all current information about the stock, thereby rejecting fundamental analysis
(3) Strong form efficiency: Asserts that stock prices reflect historical info, current public info, and insider info available only to insiders and experts. This form suggests that not even experts can conisistently outperform the mkt |
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Term
25. Describe the financial presentation of stocks prepared using the following approaches:
(a) SAP
(b) GAAP |
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Definition
25. The financial presentation of stocks prepared using the following approaches appears as follows:
(a) SAP:
(1) preferred and common stocks are reported at the values published by the Securities Valuation Office ofthe NAIC
(2) Semi strong form efficiency: Asserts that the current stock price reflects historical data and all current info about the stock, therby rejecting fundamental analysis.
(3) Temporary mkt value fluctuations are reported as unrealized gains or losses in surplus.
(4) If a decline in mkt value is other than temporary, the loss is reported as a realized loss in the income stmt
(b) GAAP:
(1) trading securities must be recorded at fair value on the balance sheet. Gains or losses resulting from changes in valuation of trading securities are recorded in the current-period income stmt.
(2) Securities available for sale must be reported at fair value on the balance sheet. Gains or losses resulting from changes in valuation of securities available for sale are not reported in the income stmts but are reported as a separate amt in the stmt of owners' equity |
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