[h] CPCU 410 – Module 10
[q] Classifications of bonds
State and local debt.
[q] Treasury Bill
[a] A type of U.S. government security with a maturity of one year or less. Issued at a discount and matures at par.
[q] Treasury Note
[a] A type of U.S. government debt security with a fixed interest rate and a maturity between 2-10 years. Has a semi-annual coupon payment, and sold in denominations of $1,000.
[q] Treasury Bond
[a] A type of U.S. government debt security with a fixed interest rate and a maturity of greater than 10 years and up to 30 years.
[a] A type of Treasury security that features inflation protection, because the principal is adjusted for changes in the consumer price index. Coupon payments are based on inflation-adjusted principal.
[q] Government agencies securities
[a] A type of debt security offered by agencies of the federal government. Typically provide slightly higher returns than Treasury securities.
[q] Government-sponsored agencies
[a] Corporations created by Congress to foster a public purpose, such as affordable housing.
[q] Corporate bond
[a] A debt instrument issued by a corporation in order to raise capital.
[q] Major classifications of corporate bonds
Bank and finance company bonds.
[q] Municipal bond
[a] Debt security issued by state and local governments. Interest income received is federally tax-exempt.
[q] General obligation bond
[a] A municipal bond backed by the full faith and credit of the issuing municipality. Bond is repaid by taxes earned by municipality.
[q] Revenue bond
[a] Municipal bond backed by revenues from a designated project.
[q] Foreign bond
[a] A debt instrument issued in a domestic market by a foreign entity.
[a] Long-term debt that is offered outside the issuer’s country. Never denominated in issuing country’s currency.
[q] Indenture agreement
[a] A contract between the bond issuer and the bondholder that records the obligations of the bond issuer and benefits owed to the bondholder.
[q] Face value of bond
[a] The amount that will be paid to the bondholder at the time of maturity.
[q] Convertible bond
[a] A debt instrument that can be exchanged for common stock of the same company at a fixed price in the future.
[q] Serial bond
[a] A debt instrument in which portions of principal mature on different dates.
[q] Callable bond
[a] A debt security that can be paid off by the issuer before the stated maturity date. Reinvestment rate risk is a big concern to the investor.
[q] Sinking fund
[a] An account used to deposit and save money to repay a debt. Companies often use this to repay a bond issue.
[q] Guaranteed bond
[a] A bond that is guaranteed by an entity other than the issuer, such as a parent company.
[q] Participating bond
[a] A bond in which interest payments are tied to the issuer’s financial results.
[a] A type of debt instrument that is not backed by any collateral. They are backed only by the creditworthiness and reputation of the issuer.
[q] Asset-backed security
[a] An investment security that is collateralized by a pool of assets, such as loans, leases, credit card debt, royalties, or receivables.
[q] Common stock
[a] A security that represents ownership in a corporation.
[q] Rights of common shareholders
[a] Have the right to:
Vote for board of directors.
Attend the company’s annual meeting.
Share in leftover proceeds in the event of the company’s liquidation.
Transfer their shares to others.
Inspect the company’s records.
[q] Preferred stock
[a] An alternate class of stock that may be issued by a company. The stock generally does not have voting rights, but has priority over common stock.
[q] Convertible preferred stock
[a] Preferred stock that permits the shareholder to submit the preferred stock to the issuing company and receive a predetermined number of common shares instead.
[q] Cumulative preferred stock
[a] A type of preferred stock with a stipulation that any dividend payments that have been missed in the past must be paid out to cumulative preferred shareholders first.
[q] Economic theory
[a] A type of volatility theory that suggests stock prices fluctuate due to supply and demand.
[q] Financial theory
[a] A type of volatility theory that suggests the price of a stock is the discounted present value of the future cash flows.
[q] Fundamental analysis
[a] A method of evaluating a security by examining related economic, financial, and other qualitative and quantitative factors.
[q] Technical analysis
[a] The evaluation of a security based upon past price or market indicators. Uses technical indicators and charting.
[q] Efficient market hypothesis
[a] A theory that indicates that asset prices fully reflect all available information, and therefore it is impossible to outperform the market consistently on a risk-adjusted basis.
[q] Efficient market hypothesis – weak form
[a] A form of the efficient market hypothesis that indicates that all current information is reflected in stock prices and past information has no relationship with current market prices. Therefore, technical analysis will not allow an investor to outperform the market. Fundamental analysis and insider information may allow an investor to outperform the market.
[q] Efficient market hypothesis – semi-strong form
[a] A form of the efficient market hypothesis that indicates that security prices have factored in available market information. Under this form, neither fundamental nor technical analysis can be used to achieve superior returns. Only material nonpublic information would benefit investors seeking to earn above average returns on investments.
[q] Efficient market hypothesis – strong form
[a] A form of the efficient market hypothesis that indicates that security prices have factored in available public and private information.
[q] Components of rate of return
Income generated by the investment (yield).
Capital gain or loss on the disposition.
[q] Rate of return for a bond
[a] The annual rate of return from a bond can be expressed in the following formula:
Formula = [(Interest Income + Capital Gain) / Beginning Price of the Bond]
[q] Rate of return for a stock
[a] The annual rate of return from a stock can be expressed in the following formula:
Formula = [(Dividend Income + Capital Gain) / Beginning Price of the Stock]