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Asset classes Flashcards

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SIE Exam flashcards
1
Q

How much ownership of a company do you need to maintain legal control?

A

> 50%

(DONE)

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2
Q

What is issued share capital?
Authorised share capital?

A

Issued share capital = no. of shares x nominal value
- this value is usually on balance sheet/ income statement
(nominal value = fixed legal value of shares)

authorised share capital = max capital they can raise by issuing shares before needing approval (they can increase this by an ordinary resolution of the shareholders)

(DONE)

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3
Q

What is market cap?
free float adjusted market cap?

A

no of shares in issue x share price

ff adj = only looks at shares in the free float i.e. excludes those that directors/ pension funds holding as we cant access them

(DONE)

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4
Q

What are the 2 types of equity?
Type of dividends?
Voting rights?
Special features?

A

Preferred shares
- priority (get nominal value of shares not current share price)
- fixed dividends
-no voting rights (but can be activated)
- special features - cumulative (in terms of dividend payments i.e. miss 1 yr then next yr get more), participating (i.e. can participate in extra dividends), convertible (to ordinary)

Ordinary shares
- 2nd priority
- variable dividends
- voting rights
- special features - A/B shares = have diff e.g. voting rights indicated by company upfront, partly paid

Both
- special features - redeemable by company

(DONE)

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5
Q

Advantages and disadvantages of shares to company?

A

Advantages
- raise capital
- payments = discretionary e.g. dividends

Disadvantages
- less control e.g. in case of activist investors
- potentially high payouts

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6
Q

Advantages and disadvantages of shares to investor?

A

Advantages
- return linked to performance
- ownership rights

Disadvantages
- = risk capital
- potential volatility caused by unrelated factors

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7
Q

What are ADRs?
Advantages?
Voting rights?
Dividends?

A

certificate that represents equity in overseas company e.g. british company
- UK company issues shares to bank, bank pays for them in £. Bank will act as a depositary for these shares i.e. safekeeping. Bank will issue ADRs in $ to $ investors
- reduces Fx risk for investors as bank pays in $ and receive dividends in $ (still some exposure i.e. in amount of dividends received)
- have voting rights
- bearer docs = no central register so have to claim their dividends. Instead registered in name of depository who holds the shares

(DONE)

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8
Q

What is the difference between ADRs and GDRs?
Sponsored depository receipts?
Adv?
Disadv?

A
  • ADRs - issued in US but traded anywhere
  • GDRs - issued anywhere + traded anywhere (usually in $ or euros)
  • Sponsored DR - bank and company discuss to create depository receipts

Adv?
- Investor: access to overseas companies (domestic market). Freely transferable securities
- Company: raise cash internationally

Disadv?
- Investor: some fx risk
- Company: lack of transparency of ownership

(DONE)

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9
Q

How long are depository receipts allowed to grey market trade?

A

3 months

= depository bank sells the receipt before the shares are actually owned (as long cash is deposited with depository as collateral) and where investors get all benefits of share that in the future they will own

(DONE)

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10
Q

What is a warrant?
Why do companies issue it?
Conversion premium?
Why would someone buy it?

A
  • right to buy new shares in company at fixed price (=exercise/strike price) on future date
  • not part of ordinary share capital
  • issued by company/ as sweetener with other investments e.g. debt = where it’d be detachable/ non-detachable
  • conversion premium = warrant price + exercise price - current share price
  • warrant price usually low so get access to company at lower price that hope will go up (leveraged investment)

(DONE)

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11
Q

Difference between warrant/ covered warrant/ options?

A

IDMTTS - issued, shares delivered, maturity, traded on, Types, settlement

Warrants
- company
- new shares –> potential dilution
- > 1 yr
- LSE/OTC
- rights to buy only
- physically settled

Covered warrants
- IB (hence covered as banks must already own the shares = = safer. they are securitised derivative)
- existing shares = no dilution
- <1 yr
- LSE
- right to buy and sell (call and put warrants)
- cash (i.e. look at implied profit) and physically settled

Options
- any writer
- existing shares = no dilution
- <1 yr
- derivatives exchange
- right to buy and sell (call and put options)
- cash (i.e. look at implied profit) and physically settled

(DONE)

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12
Q

Advantages and disadvantages of warrants?

A

Company
Advantages
- raise capital
- delay losing control
- delay paying dividends
- can make another security look better e.g. sweetening bonds

Disadvantages
- issue equity < market price
- dilution

Investors
Advantages
- leverage (exposure to share for low price)

Disadvantages
- no votes/ dividendfprefers
- worthless if share price never > exercise price

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13
Q

What are pre-emption rights?

A

Right for existing shareholders to have first refusal on issue of new shares

(DONE)

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14
Q

When do preference shares carry voting rights?

A
  1. when = fixed % of notional value but dont pay dividends
  2. zero coupon preference shares

(DONE)

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15
Q

What are the different types of debt?

A
  1. Bank loans
  2. debt securities (companies + gov can issue)
    - bills = maturity < 1 yr (money markets)
    - bonds = maturity > 1 yr (capital markets)

(DONE)

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16
Q

What do these features of a bond represent?
- Coupon
- Nominal value
- Redemption date

A
  • Coupon - interest paid every 6m in UK
  • Nominal value - repayment amount
  • Redemption date - year it’ll be repaid

(DONE)

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17
Q

Difference between index-linked bonds + conventional?

A

Index-linked
- coupon + redemption linked to an inflation e.g RPI (retail price index).
- If no inflation just get coupon + redemption
- lower yield though

Conventional
- fixed coupon

(DONE)

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18
Q

How does the STRIPS market work?
Who are the permitted parties?
What’s the benefit?

A
  • Separate Trading of Registered Interest and Principal of Securities
  • allows gilts which are deemed strippable to be split into zero coupon bonds (at discount of NV but redeemed at NV) so that investors can match their liabilities + reduce reinvestment risk (that happens with coupon bonds due to inflation)
  • E.G. 5 year gilt –> 11 zero coupon bonds
  • permitted parties = GEMMS (gilt edged market makers), HM Treasure, BoE
  • They are tradable

(DONE)

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19
Q

What is the info for these countries bonds?
Legal form
Duration
Coupon frequency
Settlement time

France
Germany
UK (Gilts)
US
Japan (JGBs)

A

France
Legal form - bearer
Duration - OATS = 2-50
Coupon frequency - annual
Settlement time -T+2

Germany
Legal form - bearer
Duration - Schats < 2y, Bobl =5, Bund > 10
Coupon frequency - annual
Settlement time -T+2

UK (Gilts)
Legal form - registered
Duration - short < 7, med = 7-15, long > 15
Coupon frequency - 6m
Settlement time -T+1

US
Legal form - registered
Duration -t-bills < 2y, t-notes = 2-10, t-bonds <>10 issued quarterly
Coupon frequency - 6m
Settlement time -T+1

Japan (JGBs)
Legal form - reg/bearer
Duration - maturities =2-40, long =10 and most common, superlong = 20
Coupon frequency - 6m
Settlement time -T+1

(DONE)

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20
Q

What are the 2 types of corporate bonds?

A

Secured debt /asset backed security
- fixed charge over a specific asset e.g. property = more common
- floating charge over pool of assets e.g. inventory/ receivables (more risky)
- =debentures (UK secured debt/ US unsecured debt)

Unsecured debt
- = loanstock in UK

(DONE)

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21
Q

Difference between asset backed securities and covered bonds?

A
  • Covered bond =if pool of assets owned by originator
  • Asset backed security = pool owned by SPV

(DONE)

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22
Q

Purpose of a trust deed?

A

Empowers trustee to advocate on behalf of debenture holders

(DONE)

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23
Q

What are the different types of trustees?

A
  1. note trustee
  2. security trustee - takes ownership of the asset
  3. share trustee - for SVP, become legal owner

(DONE)

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24
Q

What are the different types of unsecured debt?
Convertible bonds. What is the meaning of deep in the money?

Exchangeable bonds

Guaranteed bonds

Floating rate notes

Payment in kind

A

CEGFP

Convertible bonds
- stock at investors discretion. It’s a vanilla bond with an option to buy shares. If price of shares fall, convertible falls. Deep in the money = exercise price &laquo_space; market price of underlying asset so value is intrinsic

Exchangeable bonds
- > stock of another (i.e. subsidary of issuer)

Guaranteed bonds
- guaranteed by 3rd party (w better credit rating)

Floating rate notes
- coupon floats in line with market interest rates
- but bond trades at par = capital protection

Payment in kind
- zero coupon bonds issued at discount

(DONE)

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25
Q

What are eurobonds?
Where are they dealt?
Who regulates?
Settlement?
Coupon frequency?
Day count convention?
Immobilisation?
How are prices quoted?

A
  • international bonds issued in eurocurrency (=any currency different from market it’s issued in)
  • OTC/ exchange-traded
  • reg. by international capital markets association (ICMA). trades reported through TRAX
  • settlement = T+2
  • Annual coupon = fixed + pay gross (no tax deducted)
  • 30/360
  • bearer documents held (=immobilised) in centralised depositories e.g. euroclear/ clearstream
  • prices quoted clean but will settle dirty
  • interest paid before deduction of witholding tax deducted = tax deducted from income due to recipient and paid to gov.

(DONE)

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26
Q

Order of liquidation?

A

Creditors: LFPFUS = lily fixed pasta for US mmmm
- liquidators
- fixed charge holders (secured debt)
- preferential creditors e.g. staff
- floating charge holders (secured debt)
- unsecured creditors - trade creditors (ppl who you bought from on credit), gov (unpaid tax), unsecured debt
- subordinated loan stock e.g. PIK
- mezzanine debt = has characteristics of both debt and equity. High yield + unsecured debt that represent’s claim on companies assets. Can be subordinated debt e.g. PIK notes/ preferred stock

Owners: PO
- preference shareholders
- ordinary shareholders

(DONE)

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27
Q

What are the different types of credit rating?

A

S&P/ Fitch
- Investment grade = AAA - BBB
- Speculative grade = BB - D
- Have subcategories +/-

Moodys
- Investment grade = Aaa - Baa
- Speculative grade = Ba - C
- subcat - 1,2,3

(DONE)

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28
Q

Advantages and disadvantages of debt?

A

Company
- Advantages: dont give up control, paid from pre-tax profits, cheaper to finance
- Disadvantages: must pay regardless of performance otherwise > repercussions

Investor
- Advantages: priority, known payments
- Disadvantages: lower return

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29
Q

What is flat yield?
Disadvantages?
Uses?
Coupon/ yield relationship?

A

= (gross annual coupon/ market price) * 100
- ignores capital gains/ impact of tax (as it’s gross)
- measures income return only so useful for investor looking for reg. income who doesn’t pay tax e.g. pensioner
- market price > NV –> coupon > FY

(DONE)

30
Q

What is gross redemption yield?

A

= annualised total return for bond held to maturation i.e. considers coupon + capital gain. Useful for non-taxpayer who’ll hold bond until redemption e.g. charities

= flat yield + ((profit/loss at redemption)

Profit / loss at redemption = ((NV - MV)/ Duration of bond // market price ) * 100

If trading above par then GRV < FY.
If trading at par then GRV = FY = Coupon

(DONE)

31
Q

What is net redemption yield?

A

considers impact of tax on coupon

(DONE)

32
Q

Present value of a bond?

A

Discount future cash flows

= coupon/ (1+r)^n
r = interest rate
n = number of years to maturity

Make sure to include redemption value in last year =
redemption price + coupon/(1+r)^n
n = last year

Discount rate = investors expected return. price calculated = price investor willing to pay for bond today

(DONE)

33
Q

What’s the difference between clean and dirty price?

A

Clean price
- quotes price of a bond

Dirty price
- clean price + accrued interest
Accrued interest = (bond * interest rate) x (no of days which dep. on day-count convention)

(DONE)

34
Q

Difference between cum coupon period and ex coupon period?

A

Cum coupon period = with coupon i.e. entitled to next coupon payment. If buying during this period dirty price would be price + portion of the coupon that belongs to seller

Ex coupon period = without i.e. coupon is given to seller therefore dirty price < clean price as coupon is deducted as this interest is owed to buyer

(DONE)

35
Q

How are bond prices quoted?

A

£100 nominal value
i.e. if they say £10, 000 nominal, assume 100 bonds

(DONE)

36
Q

How is the day count for accrued interest calculated?

A

From day after coupon paid –> settlement date

(DONE)

37
Q

Difference between LIBOR and LIBID?

A

LIBOR = benchmark for interbank borrowing

LIBID = benchmark for deposits

(DONE)

38
Q

Use of spreads and benchmarks?

A

Gives us difference between yield of one investment with another in bps

Default spread = compares to gov securities

swap rates = if entering a contract to exchange securities the swap rate is usually the fixed rate of a swap e.g. An interest rate swap refers to the exchange of a floating interest rate for a fixed interest rate

(DONE)

39
Q

How is simple interest calculated?

A

Number of bonds x (interest rate* nominal value)

(DONE)

40
Q

How is conversion premium calculated?

A

= Conversion price - current share price (value)
= above / current share price (expressed as %)

conversion price = market price/ no. of shares
No. of shares stated in conversion terms e.g. £100 NV = 50 shares

(DONE)

41
Q

What factors affect bond price?
Bond yield calculation?

A

Interest rates
- high interest rates –> lower bond prices as ppl want better yields. Also yields move in same direction as interest rates
Yield = annual coupon/ bond price

Time to redemption
- longer bonds = more volatile and more sensitive to interest rate movements

(DONE)

42
Q

How do you calculate overall risk of bond?

A

Modified duration = measures volatility i.e. approximate % change in bond price for 1% change in interest rates
Change in price = - MD * change in interest rates * bond price

Higher modified duration = more volatile

Long-dated, low yield and low coupon = most volatile

(DONE)

43
Q

What are treasury bills?
Duration range?
Average duration?
What’s the benchmark risk free rate?

A
  • Short-term unsecured debt = zero coupon therefore issued at discount
  • 1m - 12m (av 3m)
  • benchmark RFR = discount rate of the t-bill = (face value-price t-bill issued/price t-bill issued)

(DONE)

44
Q

What’s the minimum amount for T-bills in UK?

A

£25k in secondary markets

(DONE)

45
Q

What is commercial paper?
Duration? US exception?
How is it issued?
Difference between direct paper and dealer paper?

A
  • like t-bills (short term unsecured debt, 0 coupon) that companies issue
  • Up to to 1 yr (av 3m), US = max 270 days
  • CP programme = rolling programme ie used for liquidity
  • = direct paper when issued to investors directly eg money market funds
  • = dealer paper when IB help companies market their CP (inv secondary market)

(DONE)

46
Q

Purpose of LIBOR?
Purpose of SONIA?

A

LIBOR
- london interbank offered rate = org by ICE Benchmark admin (IBA) to get estimate of what rate banks lend to each other and give an average

SONIA (by BoE)
- Sterling overnight index average in UK = alternative used as LIBOR has had scandal

(DONE)

47
Q

What is the repo market?
Repo rate?
Difference between bilateral and tripartite repo?
Reverse repo?
Difference between term repos and open repos?
Most common repos?

A
  • banks go direct to another bank bc they need cash short term and so sell high quality securities eg GILTS + agree forward contract to repurchase it for a price
  • repo rate = sale price - repurchase price
  • between 2 banks vs 2 banks and custodian bank (also performs admin)
  • other side of the trade i.e. buy and then resell gilt at preagreed price
  • agree repurchase date in doc vs repurchase date unspecified
  • overnight settlement

(DONE)

48
Q

What is the foreign exchange market?
Who’s involved?
Difference between spot and forward?
Cross rates?

A
  • OTC market
  • large international banks
  • spot = < T + 2 days
  • forward = > T + 2 days
  • any currency rate that doesn’t directly compare with $

(DONE)

49
Q

How are Fx prices quoted?
Spot rate quoted?

A
  • base rate = first = 1
    -bid/offer = sell price / buy price for company where buy price usually higher. Spread = money the bank makes

(DONE)

50
Q

What are forward rate pip adjustments?
2 way pip adjustments?

A
  • adjustment added / subtracted from spot rate if bank thinks currency will weaken / strength respectively
  • bank gives adjustment that results in spread widening eg if bid/ offer = 1.2675/1.2685 and bank quotes 10/20 then forward price = 1.2685/ 1.2705

(DONE)

51
Q

What is the interest rate parity?

A

= arbitrage-free method of pricing FX forwards

F = ((1 + r var)/ (1 + r base) )* Spot price

r = must represent period you’re calculating it over. Usually annually but if eg 6m and they give year pa rates then half them
Base = base currency

(DONE)

52
Q

How do you get cryptocurrency?
Risks of cryptocurrency?
What is distributed ledger?

A
  • buy/ earn/ crypto mining
  • not reserve backed, unreg, hacking
  • centralised place of recording transactions held by decentralised network or computers therefore hard to manipulate + prevents single point of failure

(DONE)

53
Q

What are the different types of yield curves?

A

Normal
- positive yield to maturity = longer dated bonds have higher yields

Inverted
- shorter dated bonds have higher yields
- Longer dated bonds have lower yield which represents additional risk premium = liquidity premium
- linked to recession as expectation is that interest rates will fall

(DONE)

54
Q

What is a medium term note? When does it mature?

A

A debt note, matures within 2-10 years

(DONE)

55
Q

What are credit enhancements?
What are the 4 types?

A

When bond issuer gives bondholders guarantees beyond their good name. Can improve likelihood they’ll meet their obligations therefore improve credit rating of bond. Can be in the form of:
1. letters of credit from bank
2. fixed-charge over assets
3. credit insurance
4. guarantees by parent company

(DONE)

56
Q

What are SPVs?
ABS tranches?
Mortgage-backed securites?

A

ABS = bonds secured against pool of assets

SPVs
- Companies may create SPVs = companies specifically created to issue asset backed securities as a separate legal entity from the original owner fo the underlying assets (usually bank)

Asset backed securities tranches
- classes of bonds = tranches who get varying amounts when repayment of the loan is made dep. on their class
- Collateralised bond obligations, collateralised debt obligation, mortgage backed securities, collateralised loan obligations

Mortgage backed securities
- pool of assets = home loans. used by retail banks to securitise cash flows from mortgages that they’d otherwise get over 25yrs

(DONE)

57
Q

How is the pricing of securities, shares and bonds done?

A

Pricing done via tender style where investors make bids and issuing house chooses highest bids. Once acceptable price determined, the successful person eventually pays a common strike price = lowest successful bid

(DONE)

58
Q

What are agency bonds?

A

gov sponsored bonds e.g.
1. Federal Home Loan Mortgage Corporation (Freddie Mac)
2. Federal National Mortgage Association (Fannie Mae)
3. Federal Home Loan Banks

(DONE)

59
Q

What is a sinking fund?

A

Bond issuer sets aside specific amount each year. This may be combined with a callable bond so issuer can redeem some/ all of the bond (at pre-agreed amount i..e par value) e.g. if interest rates move lower as they can reissue at more beneficial rate.

Callable bond usually offers more attractive interest rate bc of callable nature

(DONE)

60
Q

What are supranational bonds?

A

Issued by supranationals e.g.
- World Bank
- European Investment Bank
- Asian Development Bank

(DONE)

61
Q

What is a non-deliverable forward?

A
  • forward contract, usually settled in cash, where 2 parties agree to take opposite sides of a transaction for a contracted rate
62
Q

What is the purpose of a trustee in a collective investment scheme?

A

They are like the overseer who’s job is act in the best interests of the investors of the scheme

63
Q

Difference between regulated and unregulated collective investment schemes?

A

Regulated
- restricted on concentration i.e. must be diversified
- controlling interest i.e. max exposure to 1 company
- borrowing restrictions i.e. cant be highly leveraged
- E.g. Recognised schemes(UCITS). Marketing can be done EEA
- E.g . Authorised schemes (Domestic funds). Marketing can be done domestic only

Unregulated
- E.g. hedge funds
- marketing to professionals, domestic only

64
Q

What is the legal structure, holdings, supervision, management, investment rules, borrowing powers, price system, value of the below?
Unit trust/ OEIC/ Investment trust?

A

Unit trusts + OEIC/ICVS = CIS

Unit trust
legal structure: trust
holdings: open ended, units (distribution = pays out income vs accumulation = reinvest income)
supervision: trustee
management: fund manager
investment rules: defined
borrowing powers: limited
price system: bid-offer
value: NAV (daily)

OEIC/ICVC
legal structure: Company
holdings: open ended, shares (distribution = pays out income vs accumulation = reinvest income)
supervision: depositary
management: authorised corporate director
investment rules: defined
borrowing powers: limited
price system: single (but charge dilution levy = admin fee on top)
value: NAV (daily)

Investment trust
legal structure: company
holdings: closed ended, shares
supervision: independant auditors
management: fund manager
investment rules: flexibility
borrowing powers: often use leverage to invest
price system: bid-offer
value: market supply and demand

65
Q

Difference between open ended and closed ended?
Pricing?
Costs?

A

open ended funds = CIS
- new shares are created whenever an investor buys them and retired when investor sells them back i.e.
- no secondary market - trades w management
- portfolio valued daily and price = NAV per unit/share (as can increase or decrease no. of shares to meet supply and demand)
- costs = initial charges, ongoing (varies based on passive vs active managed), exit charges

Closed ended funds
- fixed capital structure = issue fixed number of shares which are traded on an exchange
- can have longer term view as investors can’t sell shares back to you like they can with open ended
- price = can trade at premium/ discount of NAV

66
Q

What are split capital investment trusts?
types of shares?

A
  • Companies set up for limited period
  • Shares:
  • zero income preference shares - pre-determined redemption
  • income shares - pre-determined redemption = NV of share
  • capital shares - no income, redemption of what is left. = highest risk
67
Q

What is an exchange traded products?
Characteristics?
Who can trade them?
Examples?

A
  • open-ended products that trade on secondary market at NAV (hybrid fund that blends benefits of open ended and close ended funds)
  • Follow a tracker/ index funds = diversified + low cost. Short shares = inverse performance, leveraged shares = accelerated performance
  • only authorised ppl can trade in primary market = buying/ selling shares ‘in kind’ with basket of underlying securities
  • e.g. ETFs (equity based) or exchange traded commodities
68
Q

What are structured products?
Structured deposits vs structured investments?

A
  • Combines at least 2 financial instruments to offer e.g. growth w/ lower risk/ high risk income. Run for defined term.
  • Structured deposit - where returns on deposit linked to performance of another asset e.g. index. guaranteed by FSCS
  • Structured investment - no FSCS protection
  • capital protected product e.g. 0 coupon bond (funding leg) w/ long option position (performance leg)
  • capital at risk product - leveraged participation e.g. asset w short call option (if profitable makes asset price cheaper)
  • Buffer zone product - offers participation to an asset but -ve returns protected to certain lvl
69
Q

What are the advantages and disadvantages of

A

Advantages
- principle protected
- return enhanced
- less volatility
- most based offshore therefore benefit from tax purposes, potentially reduced regulation

Disadvantages
- credit risk of bond i.e. issuer defaults
- counter-party risk
- provider risk
- inflation risk
- must be held to maturity
- high charges
- call risk (which prevents participation in future profits/ rebounding from losses)

70
Q

Benefits and negatives of direct property investment?
Types of indirect property investment? benefits and negatives?

A

Direct
- Benefits: inflation protection as it’s a real asset
- Cons: illiquid, high costs, possible depreciation

Indirect - REITS
- Benefits: dont pay corp. tax in UK if distributing 90% income, liquid
- Cons: like a share therefore volatile

Indirect - property open ended funds
- Benefits: NAV pricing more similar to value of asset
- Cons: redemptions infrequent so periods where can’t trade

Securities (4 decks)

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