Tutorials

Question 1

Differentiate Unsecured loans stock to Debentures

Answer 1

Debentures:
Loan capital. The issuer provides some form of security to the holders of a debenture, usually in the form of a floating charge against the assets of the company.

Unsecured loan stocks:
No explicit assets backing them and holders rank alongside other unsecured creditors. Yields will be higher than on the debentures to reflect the higher risk of default.

Question 2

Certificate of deposit

Answer 2

A certificate stating that some money has been deposited. They are issued by banks and building societies. Terms to maturity are usually in the range 28 days to 6 months. Interest is payable on maturity.

Question 3

Features and risk characteristics of a government bill:

Answer 3

• Short-dated securities issued by governments to fund their short term spending, borrowing and liquidity requirements.
• Issued at a discount and redeemed at par with no coupon.
• Mostly denominated in the domestic currency, although issues can be made in other currencies.
• Yield is typically quoted as a simple rate of discount for the term of the bill.
• Tend to be secure and highly marketable despite not being quoted.
• Often used as a benchmark risk-free short term investment.

Question 4

Characteristics of Equities

Answer 4

• Shares are issued by commercial undertakings and other bodies
• Shareholders receive dividends paid out of profits after all other obligations have been met.
• The return is made up of dividends received and any increase in the market price of the shares.
• Higher risk than corporate bonds issued by companies.
• No legal obligation to pay dividends
• Generally low initial yield but dividends expected to grow over time
• No fixed redemption yield.

Question 5

Describe the main differences between a preference share and an ordinary share

Answer 5

A preference share pays a dividend which is generally fixed. An ordinary share pays a dividend out of residual profits which is at the discretion of the company.
A preference share dividend is a prior charge so that, in general, no ordinary share dividend can be paid if a preference share dividend is outstanding.
A preference shareholder may have no voting rights and is likely to get prior ranking in a winding up.

Question 6

Investment and risk characteristics of money market instruments

Answer 6

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