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6. Fixed-income Securities: Features And Types

Learn the basic features and types of fixed-income securities in the Canadian Securities Course. Understand terminology, bond quotes, and ratings.

SECTION 3: INVESTMENT PRODUCTS

  1. 6 Fixed-Income Securities: Features and Types
  2. 7 Fixed-Income Securities: Pricing and Trading
  3. 8 Equity Securities: Common and Preferred Shares
  4. 9 Equity Securities: Equity Transactions
  5. 10 Derivatives

Fixed-Income Securities: Features and Types

In this chapter, you will delve into the fixed-income marketplace and explore the rationale for using fixed-income securities. You will familiarize yourself with the terminology related to bonds, debentures, and other types of fixed-income securities and learn to distinguish among the securities used by governments and corporations. Furthermore, you will understand how to read bond quotes and ratings.

LEARNING OBJECTIVES

  1. Describe the fixed-income marketplace and the rationale for issuing debt securities.
  2. Define the terminology, main features, and characteristics of various fixed-income securities.
  3. Summarize the features and characteristics of Government of Canada securities.
  4. Summarize the features and characteristics of provincial and municipal government securities.
  5. Summarize the features and characteristics of corporate bonds.
  6. Summarize the features and characteristics of other fixed-income securities.
  7. Interpret bond quotes and ratings.

CONTENT AREAS

  • The Fixed-Income Marketplace
  • The Basic Features and Terminology of Fixed-Income Securities
  • Government of Canada Securities
  • Provincial and Municipal Government Securities
  • Types of Corporate Bonds
  • Other Fixed-Income Securities
  • How to Read Bond Quotes and Ratings

KEY TERMS

Definitions of the key terms are available in the glossary. Key terms that appear in bold text within the chapter include:

  • after-acquired clause
  • equipment trust certificate
  • par value
  • bankers’ acceptance
  • Eurobond
  • premium
  • bond
  • extendible bond
  • principal
  • bond residue
  • callable bond
  • first mortgage bond
  • purchase fund
  • call protection period
  • fixed-income securities
  • real return bond
  • Canada Premium Bond
  • floating-rate securities
  • redeemable bond
  • Canada Savings Bond
  • forced conversion
  • retractable bond
  • collateral trust bond
  • foreign bond
  • serial bond
  • commercial paper
  • foreign pay bond
  • sinking fund
  • conversion price
  • guaranteed investment certificate
  • conversion privilege
  • strip bond
  • index-linked notes
  • convertible bond
  • subordinated debenture
  • instalment debenture
  • coupon rate
  • term deposit
  • liquid bonds
  • debenture
  • term to maturity
  • marketable bonds
  • debt security
  • Treasury bill
  • market price
  • trust deed
  • denominations
  • variable-rate securities
  • maturity date
  • discount
  • yield to maturity
  • mortgage
  • domestic bond
  • zero-coupon bond
  • negotiable bonds
  • election period

Key Takeaways from Chapter 6

  • Learn about the fixed-income market and the reasons for issuing debt securities.
  • Understand different types of fixed-income securities including both government and corporate bonds.
  • Get acquainted with the bond market terminology and features.
  • Gain insights into reading and interpreting bond quotes and ratings.

Frequently Asked Questions (FAQs)

What is a fixed-income security?

A fixed-income security is a type of investment that provides returns in the form of fixed periodic interest payments and the eventual return of principal at maturity.

How does a bond differ from a debenture?

A bond is typically backed by secured collateral, while a debenture is not secured by specific assets but is backed only by the issuer’s creditworthiness.

Why do governments and corporations issue fixed-income securities?

Fixed-income securities are issued to raise funds for projects, operations, and other financial needs while offering investors a relatively stable and predictable return.

How can I read bond quotes and ratings?

Bond quotes and ratings provide important information about the price and the creditworthiness of the bond issuer. Quotes are often expressed as a percentage of the bond’s par value, and ratings are assigned by credit rating agencies based on the issuer’s reliability.

Additional Learning Resources


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📚✨ Quiz Time! ✨📚

🧐 Assess and Solidify Your Understanding

Welcome to the Knowledge Checkpoint! You’ll find 10 carefully curated quizzes designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you’re on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck! 🍀💪

markdown ## What is the primary purpose of issuing debt securities in the fixed-income marketplace? - [ ] To enhance stockholder equity - [ ] To increase market volatility - [ ] To raise the company's share price - [x] To raise capital for governments and corporations > **Explanation:** Debt securities allow governments and corporations to raise capital needed for various expenditures without diluting ownership stakes. ## Which of the following is NOT a main feature of fixed-income securities? - [ ] Principal - [ ] Maturity date - [x] Dividend yield - [ ] Interest rate or coupon > **Explanation:** Fixed-income securities typically involve features such as principal, maturity date, and interest rate or coupon, whereas dividend yield is associated with equity securities. ## What is a bond's par value? - [ ] The market price of the bond - [x] The face value of the bond - [ ] The varying interest rate of the bond - [ ] The bond's yield to maturity > **Explanation:** The par value, also known as face value, is the nominal value of a bond that will be paid back to the bondholder at maturity. ## What feature of a bond ensures that it has protection against early redemption by the issuer? - [ ] Collateral trust bond - [x] Call protection period - [ ] Convertible bond - [ ] Foreign pay bond > **Explanation:** A call protection period prevents the issuer from redeeming the bond before a specified date, giving bondholders some assurance on their investment period. ## Which type of bond allows bondholders to convert their bonds into a predetermined number of shares of the issuing company? - [ ] Callable bond - [ ] Zero-coupon bond - [x] Convertible bond - [ ] Floating-rate securities > **Explanation:** Convertible bonds provide bondholders the option to convert their bonds into shares, allowing them to benefit from future stock price appreciation. ## What are Treasury bills commonly known as? - [ ] Callable bonds - [ ] Serial bonds - [x] Short-term debt securities - [ ] Eurobonds > **Explanation:** Treasury bills are short-term debt securities issued by the government that typically mature in a year or less. ## What type of bond adjusts its payments based on the inflation rate? - [ ] Callable bond - [ ] Zero-coupon bond - [ ] Eurobond - [x] Real return bond > **Explanation:** Real return bonds, or inflation-indexed bonds, adjust interest payments based on inflation rates to protect the purchasing power of investors. ## Which type of bond can be paid off by the issuer before its maturity under specific conditions? - [ ] Serial bond - [x] Redeemable bond - [ ] Mortgage - [ ] Commercial paper > **Explanation:** Redeemable bonds can be repaid by the issuer before maturity date, providing the issuer some flexibility in managing debt. ## What is the primary characteristic of zero-coupon bonds? - [x] They do not pay periodic interest but are sold at a discount to par value. - [ ] They provide high coupon rates. - [ ] They can be converted into shares. - [ ] They pay floating interest rates. > **Explanation:** Zero-coupon bonds are sold at a discount to their par value and do not pay periodic interest. Instead, the bondholder receives a lump sum at maturity. ## What key factor does "yield to maturity" represent in bond investing? - [ ] Face value of the bond - [x] Total return anticipated on a bond if held until it matures - [ ] Periodic interest payments - [ ] Borrower's credit rating > **Explanation:** Yield to maturity represents the total return an investor can expect to earn if the bond is held to its maturity date, including all interest payments and any gain/loss if the bond was purchased at a discount or premium.

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In this section

  • 6.1 Introduction to Fixed-Income Securities
    Discover the essentials of fixed-income securities, their significance in financial markets, and the critical terminologies involved.
  • 6.2 Fixed-income Marketplace
    An in-depth guide on the fixed-income marketplace, the rationale for issuing debt securities, different types of fixed-income securities, their characteristics, issuers, and taxation.
Saturday, July 13, 2024