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Securities Exam > Asset Classes > Flashcards

Asset Classes Flashcards

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SIE Exam flashcards
1
Q

What are redeemable shares?

A

Shares which may be bought back from a shareholders at the company’s election

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2
Q

What are the types of preference shares? (5)

A

Cumulative, participating, redeemable, convertible and zero coupon

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3
Q

What is a cumulative pref share?

A

This year’s dividend will be paid before ordinary shareholders along with any previous periods’ dividends

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4
Q

What is a participating pref share?

A

Shares which offer the option to participate in higher profits

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5
Q

What is a redeemable pref share?

A

Pref shares which may be bought back from a shareholder at the company’s election for a pre agreed price

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6
Q

What is a convertible pref share?

A

Where shareholder has right but not obligation to convert into a predetermined number of ordinary shares

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7
Q

What is a zero coupon pref share?

A

They shares pay no dividend but are redeemed at a price higher than original purchase price

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8
Q

What is a floating rate bond?

A

A bond which resets its interest according to changes in published interest rates

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9
Q

What is an index linked bond?

A

A bond which adjusts the coupon and principal amount repaid at maturity by reference to inflation rate

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10
Q

Flat yield formula

A

(annual coupon/price) x 100

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11
Q

Convertible Bond advantages (2)

A

Enable holder to exploit growth potential in equity

They trade at a premium to value of shares they convert into

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12
Q

Conversion ratio formula

A

nominal value/conversion price of shares

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13
Q

Accrued interest formula

A

coupon payment x (no. of days since last payment/no. of days between payments)

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14
Q

What is a flat/clean price of a bond?

A

Listed bond prices which don’t include accrued interest

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15
Q

What is a dirty price of a bond?

A

Listed bond prices which include accrued interest.

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16
Q

Day count conventions (4) re: interest and their uses (3)

A

ACT/360 where each month is treated normally and year is assumed to have 360 days - used for eurobonds

30/360 where each month is assumed to have 30 days and the year is assumed to have 360 days - used for US agency and corporate issuers

ACT/365 where each month is treated normally and the year is assumed to have 365 days regardless of leap years

ACT/ACT where each month is treated normally and the year has actual number of days i.e. including leap years - used by US Treasury

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17
Q

What is a spread?

A

The difference between the yields on two debt instruments which is represented using basis points

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18
Q

What does a spread tell us?

A

The risk associated to the holding between a benchmark and a given debt instrument

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19
Q

Rates used for comparison of bonds (2)

A

Gvt bond yields which is typically the most recently issued bond closest to maturity

Swap rates where floating rates are exchanged for fixed rates

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20
Q

What is a yield curve? (2)

A

This shows yields available to investors in gvt bonds over different time horizons

Used as a useful comparison tool between gilts and bonds as investors can expect liquidity when it slopes upwards

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21
Q

What is an inverted yield curve?

A

This is where yields available on short term gvt bonds exceed those on long term gvt bonds

With inverted yield curves, impact of interest rate falls outweighs effect of liquidity preference

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22
Q

What is a real yield curve?

A

This is where the yield on instruments already includes and uplift for inflation within their returns e.g. UK inde linked gilts or US Treasury Inflation Protected Securities (TIPS)

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23
Q

Present value of money formula

A

1/(1+interest rate) to the power of no. of yrs

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24
Q

Who issues gvt debt in the UK (1) and US (1)

A

UK - Debt Mngmnt Office (DMO)

US - Bureau of the Fiscal Service

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25
Q

Characteristics of gvt bonds (3)

A

Typically quoted on basis of price of 100 units in currency’s nominal value

When interest rates across financial markets decrease, quote price of gvt bonds increases and vice versa

Enable investors to buy/sell bonds issued by relevant gvt and are also used as benchmarks for other bonds

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26
Q

What is an index linked bond?

A

These are bonds where coupon payments and principal are adjusted in line with a published index of price inflation e.g. retail prices index

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27
Q

Real interest rate formula

A

[(1 + nominal interest rate) / (1 + inflation rate)] - 1

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28
Q

What does STRIPS stand for?

A

Separate Trading of Registered Interest and Principal of Securities

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29
Q

How do STRIPS work?

A

This is where a bond is “stripped” and the interest on each individual coupon is traded separately to the principal (nominal value)

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30
Q

What security types can be stripped? (3)

A

Designated gilts, US T-Notes and Bonds

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31
Q

Who can strip gilts? (3)

A

gilt edged market makers (GEMMs), Bank of England and UK Treasury

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32
Q

Who can reconstitute stripped gilts? (3)

A

GEMMs, HM Treasury and Bank of England

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33
Q

Intl gvt bonds with T+1 settlement (4)

A

US T-Notes, US T-Bonds, UK gilts, Japanese Gvt Bond (JGB)

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34
Q

Intl gvt bonds with T+2 settlement (4)

A

French OAT, German Bund, German Bobl, German Schatz

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35
Q

Intl gvt bonds with trade date settlement (1)

A

US Treasury Bills

36
Q

Characteristics of Corporate Debt (3)

A

Less risky as interest has to be paid before dividend

Requires servicing by making regular interest payments

Can be subdivided into money borrowed directly from investors and money borrowed from banks

37
Q

What is a fixed charge in Secured Debt?

A

This is where the debt carries a fixed charge over a company’s particular asset e.g. building

38
Q

What is a floating charge in Secured Debt?

A

This is where the debt is secure over a group of the company’s assets and in the event of default it will crystallise over available assets

39
Q

What is a covered bond?

A

Senior secured debt securities of a regulated financial institution e.g. a bank where collateral is used to cover any shortfall

40
Q

What does a Note Trustee do?

A

Represents interests of security holders and provide issuer with guidance

41
Q

What does a Security Trustee do?

A

For issues secured by a pledge of securities, they are for the benefit of the various secured parties

42
Q

What does a Share Trustee do?

A

They hold the shares in an issuing SPV in order to ensure off-balance-sheet treatment

43
Q

What does a Successor Trustee do?

A

They are the trustee when a bank needs to resign due to lack of capacity or conflict of interest

44
Q

What is unsecured debt?

A

Debt which isn’t secured against any company assets therefore has a higher coupon to compensate against default

45
Q

What is subordinated debt?

A

This is debt where the holders will only be paid once the other creditors have been paid and therefore pays higher interest

46
Q

What is guaranteed debt?

A

Debt guaranteed by another company in the same group e.g. the parent of the Issuer

47
Q

What is a fixed coupon bond?

A

Bonds issued with a fixed rate coupon

48
Q

What is a floating rate bond?

A

Bonds where the coupon rate varies depending on published interest rates

49
Q

What is a cash asset?

A

Cash deposits and short term instruments with less than one year to maturity

50
Q

Examples of cash assets (2)

A

Gvt issued T-bills

Company issued Commercial Papers

51
Q

What is a Treasury Bill?

A

Gvt issued, short term loans issued at a discount to nominal value with maturity between 1 and 12 months

52
Q

What is a Commercial Paper?

A

An unsecured short term promissory note issued primarily by corporations

53
Q

Characteristics of Commercial Paper (3)

A

One missed payment of principal can lead to bankruptcy proceedings

CPs can be marketed directly to buy and hold investors or be sold to dealers who then sell them in the market

CP issuances are not all brought to market at once

54
Q

What is a repo?

A

A legally binding sale and purchase agreement where the seller agrees to buy back bonds at a future specified time and price

55
Q

What is a Eurobond?

A

Bonds issued and sold outside of their home country as long as the issue currency is different to the currency of where they are issued from

56
Q

Characteristics of a Eurobond (4)

A

Provide investors access to foreign markets

Issued in bearer form

Usually aimed at HNWs although starting to be aimed at institutions

T+2 settlement on a 30/360 basis

57
Q

What is an ADR?

A

A certificate with a number of underlying shares that allows US investors to invest in non-US companies

58
Q

What is a GDR?

A

A certificate with a number of underlying shares that allows non-US investors to invest in US companies

59
Q

What is grey market trading of a DR?

A

When the depository bank receives notification of a DRs prep for release and creates a DR on deposit

60
Q

Characteristics of a DR (4)

A

Dividends paid in company’s domestic currency into the depository bank

ADRs are sold in dollars

DR holders entitled to vote via depository bank

One off stamp duty at 1.5% for UK company shares charged by HMRC at time of creation

61
Q

What is a warrant?

A

A warrant is an instrument issued by a company which allows holder to subscribe for shares at a fixed price over a fixed period. If the holder wants to exercise, the company will issue new shares

62
Q

Characteristics of a warrant (4)

A

Value is driven by length of time they are valid for and value of underlying security

Holding a warrant doesn’t entitle investor to vote or receive dividends

Highly geared investment opportunity often issued alongside other investments

63
Q

What is a covered warrant?

A

LSE traded warrants issued by firms rather than the company whose shares the warrant enables investor to buy often in the form of call or put warrants

64
Q

Qualifying features of a REIT (4)

A

Must contain at least 3 single rental properties

Must not involve a property representing more than 40% of the total value of the property rental business

Must distribute at least 90% of its profits by way of dividend in each accounting period

No corporation tax is payable

65
Q

Characteristics of an open ended fund (3)

A

Not as suitable for funds investing in physical property

Suitable for investors looking for more liquidity

If investing in property, will often employ redemption moratoria where investors can’t sell back their units for a period

66
Q

Most commonly quoted FX currency pairs (4)

A

USD/EURO
USD/GBP
USD/SWISS FRANC
USD/YEN

67
Q

What is rational pricing?

A

The assumption that asset prices will reflect arbitrage-free price of an asset as deviation will be arbitraged away

68
Q

What is arbitrage?

A

Taking adv of a pricing anomaly i.e. mismatch between securities trading in two or more market to enable a risk-free profit

69
Q

What is interest rate parity?

A

Spot and future prices for currency trades incorporate any interest rate differentials between two currencies

70
Q

Forward rate for GBP/USD formula

A

£ Spot rate x [(1 + US Short term interest rate) / (1 + UK £ Short term interest rate)]

71
Q

What is Purchasing Power Parity (PPP)?

A

A theory which predicts that amounts of different currency should have equal purchasing power

72
Q

Long term effect of PPP (1)

A

If one economy consistently has an inflation rate in excess of its competitors, then its currency will deteriorate against its trading partners

73
Q

Factors affecting demand for USD (4)

A

Overseas operators needing to pay for exports in USD

Overseas investors investing in US capital

Speculation of an increase in value

Higher price means lower demand

74
Q

Factors affecting supply of USD (3)

A

US importers purchasing overseas currency to pay for imports

US residents investing in overseas assets

Speculation of the USD decreasing in value

75
Q

What is a regulated CIS?

A

A collective investment scheme authorised by the local financial regulator or recognised by the local financial regulator if they are from outside the country

76
Q

What is an unregulated CIS?

A

A collective investment scheme which is not authorised or recognised by the local financial regulator

77
Q

Risks of an unregulated CIS (6)

A

Lack of liquidity

Lack of diversification

Fixed or long term commitment needed

No guarantee of capital/income return

High charges and heavily geared i.e. the fund can borrow to enhance total funds available

Currency/geopolitical risk where investment located may not be in investor’s home currency

78
Q

What is a unit trust?

A

Professionally managed collective investment fund here assets are held by trustees and invested by managers

This type of trust holds a portfolio of investments

79
Q

What is an AUT?

A

Authorised unit trust which is allowed to be marketed to the investing public and must be constituted by a trust deed between the manager and trustee

80
Q

What is an open-ended investment company?

A

A type of open ended collective investment formed as a corporation under the OEIC regulation which is allowed to issue and redeem shares on an ongoing basis unlike regular companies

81
Q

What is an ETF?

A

A passively managed investment fund traded in real time on stock markets which contains a basket of investments

82
Q

Available types of ETF (5)

A

Those which track popular stock indices,

track market sectors

geographical regions

currencies, commodities

actively managed ETFs as of 2008

83
Q

What is ETF physical replication?

A

Physical replication means the ETF will buy and own most or all of an index’s constituents in order to replicate the index’s performance

84
Q

What is ETF synthetic replication?

A

This involves the ETF provider entering into a contract with a counterparty to deliver the return of the fund’s benchmark index for a fee

85
Q

What is a specialist fund?

A

a closed ended fund which invests in a specific area e.g. property, infrastructure so it turns illiquid assets into liquid investments

86
Q

What is a structure deposit?

A

Cash based products which can only be offered by banks which are able to accept deposits

87
Q

What is a structured investment?

A

Either a principal-protected investment product or capital at risk investment product designed to fulfil customised risk/return objectives

Securities Exam (6 decks)

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