513 - Module 1

Question 1

Accredited investor

Answer 1

defined in Rule 501 of Regulation D and includes the following: „
A bank, insurance company, registered investment company, business development company, or small business investment company
„ An employee benefit plan, within the meaning of the Employee Retirement Income Security Act of 1974 (ERISA), if a bank, insurance company, or registered investment advisor makes the investment decisions or if the plan has total assets in excess of $5 million
„ A charitable organization, corporation, or partnership with assets exceeding $5 million
„ A director, executive officer, or general partner of the company selling the securities
„ A business in which all the equity owners are accredited investors „
A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase (does not include the value of a person’s primary residence)
„ A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year
„ A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchase a sophisticated person makes

Question 2

Banker’s acceptances

Question 3

Best efforts

Answer 3

The underwriting company for an IPO will try to sell all shares, but ultimately the company will not receive any money for unsold shares.

Question 4

Broker-dealer

Answer 4

Securities firms act as both brokers (agents of sellers of securities who receive a commission for executing a transaction) and dealers (principals who buy and sell securities for their own accounts).

Question 5

Cash

Answer 5

Cash equivalents and bank instruments of deposit that have a high level of liquidity.

Question 6

Certificates of Deposit (CDs)

Answer 6

Time Deposits - Deposits made with a bank or savings and loan for a specified period, commonly one month to five years. Interest subject to ordinary income tax in the year earned. FDIC insured.

Question 7

Commercial paper

Question 8

Day order

Answer 8

Buy/sell order that is only good for the day.

Question 9

Debit balance

Answer 9

The amount owed to the broker, includes the original amount borrowed plus any accrued interest.

Question 10

Dilution

Answer 10

Selling of additional stock to raise capital, usually resulting in lower value of all the stock.

Question 11

Eurodollar CD

Question 12

Eurodollars

Question 13

Firm commitment

Answer 13

Underwriting company for an IPO will commit to purchasing any unsold shares.

Question 14

Good-till-cancelled (GTC) orders

Answer 14

Buy/sell order that will remain in effect until filled or cancelled.

Question 15

Initial public offering (IPO)

Answer 15

The first offering of shares of a corporation to the public. Coordinated with investment bankers, lawyers, accountants and appraisers.

Question 16

Leverage

Answer 16

The financial advantage of an investment that controls property of greater value than the cash invested.

Question 17

Limited partnerships

Question 18

Limit order

Answer 18

Buy/sell at a specific price (or better).

Question 19

Liquidity

Answer 19

The ability to sell or redeem an investment quickly and at a known price without a significant loss of principal.

Question 20

Maintenance margin

Answer 20

The amount of funds an investor must maintain for holding a leveraged investment. Usu. 35%

Question 21

Margin

Answer 21

The amount of funds an investor must contribute for the initial purchase of leveraged investments. Usu. 50%

Question 22

Margin call

Answer 22

A demand by the broker to add cash to the margin account, if the equity in an investor’s position drops below the maintenance margin percentage.

Question 23

Marketability

Answer 23

The ability to sell an investment quickly in a readily identifiable market.

Question 24

Market order

Answer 24

Buy/sell at the current price.

Question 25

Money market deposit accounts (MMDA)

Answer 25

Bank obligations that are federally insured, considered very safe and highly liquid. Require a minimum balance and offer limited check-writing privileges.

Question 26

Money market mutual funds

Answer 26

Invested in high quality short term investments such as T-bills, commercial paper, negotiable CDs. Rate of return is highly sensitive to changes in short term interest rates.

Question 27

Negotiable CDs

Question 28

Net investment income

Question 29

Primary market

Answer 29

Facilitates the initial sale of securities issued to the public.

Question 30

Private placements

Answer 30

An issue—most commonly bonds—to a small group of institutions or sophisticated individual investors. These avoid the SEC registration requirements of an IPO, and the company’s information is not accessible by the general public.

Question 31

Public float

Answer 31

The number of shares available for trading by investors.

Question 32

Repo rate

Question 33

Repurchase agreements

Question 34

Reverse repurchase agreements

Question 35

Secondary market

Answer 35

Provides investors with a method of buying and selling securities.
-exchange market (NYSE, OTC)
-unlisted securities (OTC, Nasdaq)
-both exchange and OTC
-institutions/pensions (INSTINET)

Question 36

Securities Investor Protection Corporation (SIPC)

Answer 36

Oversees liquidation of brokerage firms and insures investor accounts up to $500,000 in the case of brokerage firm bankruptcy.

Question 37

Short selling

Answer 37

Borrowing stock to sell on the market, in the hopes to make a profit if the price goes down.

Question 38

Stop order

Answer 38

Buy/sell if the price of the stock trades at or through the stop price. A buy stop would be placed higher than the current market price, a sell stop would be placed lower. If it trades through the stop price, this becomes a market order.

Question 39

Stop-limit order

Answer 39

Same as Stop order, but when the stock trades at or through the stop price, it becomes a limit order.

Question 40

US Treasury bills

Question 41

Venture capital

Answer 41

Financing for privately held companies (e.g., start-ups) typically in the form of convertible preferred stock and is characterized by high risk with the potential for high return.

Question 42

Wash sale