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HS328 Investment Planning > Chapter 2: Market Structure, Asset Classes, And Securities Law > Flashcards

Chapter 2: Market Structure, Asset Classes, And Securities Law Flashcards

1
Q

Best-Effort Agreement

A

the investment bank sells the securities to investors and unsold shares are returned back to the issuer.

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2
Q

Firm Commitment Agreement

A

the investment bank purchases all the securities from the firm and then sells the securities to the public.

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3
Q

What is the Fixed Income Market?

A

long-term debt market in which governments and firms borrow investor’s money in return for interest and principal payments to the lenders.

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4
Q

What is the Money Market

A

The Money Market is the collection of short-term investors at the wholesale or retail level

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5
Q

What kinds of assets (5) are traded in the Alternative Investment Market

A

assets traded in this market include derivatives, collectibles, private equity, real estate, hedge funds, and commodities.

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6
Q

Treasury Bills (T-Bills)

A

Short-Term securities issued by the US Treasury to help finance the national budget deficit.

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7
Q

What is Commercial Paper and what is it used for?

A

Commercial Paper is a private company’s short-term unsecured promissory note.

It is generally used as working capital or cash management strategies.

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8
Q

Negotiable Certificate of Deposits

A

Also known as Jumbo CDs, are deposits of 100K+ placed with commercial banks.

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9
Q

Repurchase Agreements

A

Also known as REPOs.

The issuer agrees to repurchase the securities at a specific price on a specific date.

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10
Q

Banker’s Acceptances

A

Securities that act as a line of credit for companies that are too small to issue commercial paper.

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11
Q

Bonds

A

Fixed Income securities that make regular interest payments and then one final lump sum of principal payment.

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12
Q

When the US Treasury borrows in the short-term what type of security does it use?

A

Treasury Bills (T-Bills)

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13
Q

When the US Treasury borrows in the long-term what type of security does it use?

A

Treasury Notes and Treasury Bonds

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14
Q

Interest on Municipal bonds

A

interest accrued is tax-free for for federal income tax.

interest accrued is tax-free for residents living in the state that issued the bond.

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15
Q

What do Corporate Bonds finance?

A

Wealth-increasing projects

Dividend payments

Share repurchases

Mergers & acquisitions.

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16
Q

what happens to Mortgage Backed Securities in relation to interest rates?

A

As interest rates increase, the value of Mortgage Backed Securities decreases.

As interest rates decrease, the value of Mortgage Backed Securities increases.

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17
Q

what kind of specialty risk are Mortgage Backed Securities subject to?

A

Pre-payment Risk

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18
Q

what are owners in equity shares also known as?

A

Common Shareholders

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19
Q

What is Systematic Risk

A

Systematic risk refers to the variability in returns caused by changes in broad economic factors such as inflation, GDP, interest rates, and political events. It affects the entire market or large segments of the economy, and cannot be eliminated through diversification. Examples include recessions, political instability, or changes in monetary policy.

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20
Q

Unsystematic Risk

A

the variability in returns due to changes in firm specific factors, such as dividend payments, free cash flow, and executive leadership.

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21
Q

How is systematic risk measured?

A

by the Beta of the stock

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22
Q

What is the average Beta in the equity market?

A

1

23
Q

What are Derivatives used for?

A

Hedging, speculating, and arbitrage strategies.

24
Q

At what point does a financial advisor register with the SEC?

A

110M Assets Under Management

25
Q

If a financial advisor has less than 110 AUM where does he register?

A

with the state(s)

26
Q

What is the definition of a investment advisor?

A

Any person who, for compensation, is engaged in the business of, providing advice to others or issuing reports or analyses regarding securities.

27
Q

What are the exceptions to the definition of investment advisor (9)?

A
  1. Banks & Bank Holding Companies
  2. LATE - Lawyers, Accountants, Teachers, & Engineers.
  3. Brokers and Dealers whose services are incidental to the conduct of their business and who receives no special compensation.
  4. Publishers of bona fide newspaper, news magazine, financial publication or general/regular circulation
  5. Government Securities Advisors
  6. Credit rating agencies
  7. Family offices
  8. Government and political subdivisions
  9. Non-US Advisors
28
Q

What does the efficient market hypothesis claim?

A

That is it difficult or impossible to consistently outperform the market

29
Q

What are the major asset classes?

A

Stocks, Bonds and Derivatives (such as real estate, commodities, and other non-traditional investments)

30
Q

What the main goal of the primary market?

A

To raise capital for the government and businessess

31
Q

What does the seconday market allow for?

A

allows everyday people to trade securities on the market typically using the New York Stock Exchange (NYSE), London Stock Exchange, or NASDAQ. Exchanges for trading stocks during regulated hours.

32
Q

what are the advantages of going public as a company?

A

creates currency and liquidity = stock is liquid which can be used as currency for acquisitions.

creates awareness and credibility = public firms receive more attention than private.

33
Q

what are the disadvantages of going public as a company?

A

exposure = annual and quarterly filings of disclosures.

stock price and shareholder value = executives want price of stock to increase resulting in them making decisions that are better for the short term to increase stock, but not for the long term growth of the overall company.

less control = possible for original owners to lose control if they sell too many shares.

34
Q

what do investment banks act as to help the issuing firm determine its financial needs and raise capital?

A

Underwriters

35
Q

who takes on a majority of the risk in a firm commitment agreement?

A

the underwriter assumes the risk of the securities not selling

36
Q

who takes on a majority of the risk in a best-efforts agreement?

A

the issuing company assumes the risk of some of the shares not being able to be sold.

37
Q

What do asset/share prices to reflect in the Weak Form of an Efficient Market?

And how do we expect an investor to attempt to generate a return on their investment?

A

Asset prices reflect historical pricing and volume information therefore we wouldn’t expect an investor to use price and volume information to generate a return.

38
Q

what are broker-dealers?

A

individuals or firms that buy and sell securities, either for clients or themselves.

When the BD trades on behalf of clients, its a broker.
When it trades on behalf of itself, its a dealer.

39
Q

what does Modern Portfolio Theory believe about share prices and how to get to the most efficient portfolio?

A

Believes that publicly traded assets are fairly priced and that combining them together produces the most efficient portfolio.

40
Q

What assumptions (7) does Modern Portfolio Theory make about investors?

A
  1. investors and rational are risk-averse
  2. investors make decisions that maximize their expected wealth.
  3. investors are not biased.
  4. investors have consistent risk preferences.
  5. investors don’t consider trading costs such as taxes, fees, bid-ask spreads, etc.
  6. investors are price takers, meaning their trades have no impact on prices.
  7. investors can borrow and lend at the risk-free rate of interest.
41
Q

what does Modern Portfolio Theory assume about security returns?

A

that their returns are random variables which reflect all available public and private information.

42
Q

What does the Weak Form of an Efficient Market suggest about Technical analysys and Fundamental Analysis?

A

that technical analysis is useless.

Investors may be able to “beat the market” however by using Fundamental Analysis and insider trading.

43
Q

How do we expect asset prices to respond in the Semi-Strong Form of an Efficient Market?

A

Asset prices reflect all publicly available information therefore investors cannot “beat the market” based on publicly available information as the price of the stock already includes it.

44
Q

what does the Semi-Strong Form of an efficient market suggest about technical and fundamental analysis?

A

It suggests that technical analysis and fundamental analysis are useless and that investors can only “beat the market” by insider trading.

45
Q

What do asset prices reflect in the Strong Form of an Efficient Market?

A

asset prices reflect all relevant information, including private information therefore investors cannot “beat the market” based on public or private information as the price of the stock already includes it.

46
Q

what does the Strong Form of an efficient market suggest about attempts to beat the market?

A

It suggests that all attempts to beat the market are pointless - even with insider trading.

47
Q

what is the formal goal of the SEC?

A

To protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation.

48
Q

what is the ABC rule?

A

Advice, Business, and Compensation.

49
Q

The Investment Advisors Act of 1940

A

requires investment advisors to register with the SEC if they manage assets in excess of 100 Million.

50
Q

The Securities Act of 1933

A

Regulates the offering and sale of securities

51
Q

The Securities Exchange Act of 1934

A

Governs secondary market trading and established the SEC (the securities and exchange commission)

52
Q

Which legislative Act has a purpose to reduce volatility in the financial markets?

A

Dodd Frank Act of 2010

53
Q

What are the key benefits of issuing a bond instead of a security?

A
  1. tax advantages
  2. no dilution of ownership
  3. potential for lowering the firm’s cost of capital because the yield on bonds is much less than the required return on equity.

HS328 Investment Planning (7 decks)

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