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The basic features of a fixed-income security
- Fixed-income security (a.k.a. bonds or debt securities) is a financial instrument used by an entity to raise funds, called issue.
- It allows governments, companies, and other types of issuer to borrow money.
- Contractual obligations of the issuer to pay the promised payments (interest & principal amount) at a specified future date to the investor.
- The plain vanilla bond is a basic and standard type of bond, where an investor invests a specific amount at year Zero. The investor receives fixed periodic interest payments and also receives the original amount at the maturity.
- Cash flow for a plain vanilla bond
- A bond has lower risk and return as compared to common shares. It doesn't provide ownership rights but provides a prior claim on the company's earnings and assets.
- Operating Cash Flows: Related to firm's day-to- day operations
- Investing Cash Flows: Related to acquisition & sale of long-term assets
- Financing Cash Flows: Related to raising or repaying capital – from both equity and debt
Non-cash Investing and Financing Activities
- Non-Cash Activities are not reported in the Cash Flow Statement.
- A company purchases machinery and the seller also finances it.
- A company has debentures (debt) outstanding and they are converted to common shares (equity).
Cash-flow Statements - Under US GAAP and IFRS
|Description||Under US GAAP||Under IFRS|
|Interest & Dividend Received||Operating Activities||Operating or Investing Activities|
|Dividends Paid||Financing Activities||Operating or Investing Activities|
|Interest Paid||Operating Activities||Operating or Financing Activities|
|Taxes (Due to Operations)||Operating Activities||Operating Activities|
|Taxes (Due to Investing or Financing)||Operating Activities||Investing or Financing Activities|
Discrete versus continuous random variables
- A discrete random variable is one for which the number of possible outcomes is finite, and for each possible outcome, there is a measurable and positive probability.
- For example, the probability of it raining on 33 days in June is zero because this cannot occur, but the probability of it raining on 25 days in June has some positive value.
- For a discrete distribution, p(x) = 0 when x cannot occur, or p(x) > 0 if it can.
- A continuous random variableis one for which the number of possible outcomes is infinite, even if lower and upper bounds exist. The probability of any single value is 0.
Cumulative distribution function
- A cumulative distribution function (cdf), F(x), provides the probability that a random variable, X, will be less than or equal to a given value. The cumulative distribution function for a random variable, X, can be expressed as:
F(x) = P(X ≤ x).
- It represents the sum, or cumulative value, of the probabilities for the outcomes up to and including a specified outcome.
- Given the cdf for a random variable, the probability that an outcome will be less than or equal to a specific value is represented by the area under the probability distribution which is to the left of the value.