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SIE JMP > Equities and Debts > Flashcards

Equities and Debts Flashcards

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1
Q

Security

A

Intangible financial asset that may be bought, sold, or gifted between persons. Paper certificate or electronic records.

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2
Q

Howey Test

A

SEC v. WJ Howey Co, 1946

  1. an investment of money made into
  2. a common enterprise
  3. with the expectation of profit
  4. through the efforts of a third party
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3
Q

Examples of securities

A 
Stocks
Bonds, notes, and debentures
Options
Mutual funds
Jumbo CDs
Depositary receipts
Units in an investment
Variable life and variable annuities
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4
Q

Not securities

A 
Cash and currency
Fixed annuities
Whole and term life insurance
Personal residence
Commodities and futures
Bitcoin/cryptocurrency
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5
Q

Common stock

A

Authorized
Issues
Outstanding
Treasure

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6
Q

Authorized stock

A

The number of shares a corporate charter specifies that can be issued

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7
Q

Issued stock

A

Authorized stock that has been sold to investors

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8
Q

Outstanding stock

A

Any shares that a company has issued and are in the hands of investors

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9
Q

Treasury stock

A

Stock a corporation has issued and subsequently reacquired. Can be held indefinitely or reissued or retired. Does not carry rights of outstanding common shares

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10
Q

Types of common stock

A

Large Cap/Blue chip
Mid-Cap
Small Stocks

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11
Q

Formula for a corporation’s market capitalization

A

=current market value (CMV) of a share times the number of outstanding shares

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12
Q

Penny stock

A

Unlisted security trading at less than $5 per share. Highly speculative. Customers must be given a copy of risk disclosure document; client must sign and date acknowledgement that the document has been received.

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13
Q

Penny stock cold calling rules

A

Rep must determine suitability based on buyer’s financial situation and objectives; must disclose

  • the name of hte penny stock
  • the number of shares to be purchased
  • a current quotation
  • the amount of commission the firm and representative received
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14
Q

Established customer

A

-has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities)
or
has made at least three penny stock purchases of different issuers on different days

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15
Q

Types of dividends from common stock

A
  1. Cash dividends, typically paid quarterly and taxed in the year they are distributed
  2. Stock dividends, typical of growth companies; cost per share adjusted downward; not taxable, but consequences when shares are sold
  3. Product dividends
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16
Q

Dividend disbursement dates

A

DERP

  1. Declaration date: when a company’s BOD approves a dividend payment
  2. Ex-dividend date (ex-date) on the basis of the dividend record date, FINRA or exchange declares ex-date: one business day before the record date. stock must be purchased before the ex-dividend date
  3. Record date: stockholders of record on the record date receive the dividend distribution
  4. Payable date: Dividend disbursing agent sends dividend checks to all stockholders on the books as owners as of the record date
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17
Q

Benefits of owning common stock

A

Voting rights
Opportunity for capital appreciation
Current income
Limited liability

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18
Q

Statutory voting

A 
allows a stockholder to cast one vote per share owned for each item on a ballot, such as candidates for the BOD. A board candidate needs a simple majority to be elected
Ex. 100 shares owned
BOD seat 1 100 votes
BOD seat 2 100 votes
BOD seat 3 100 votes
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19
Q

Cumulative voting

A

Allows stockholders to allocate their total votes in any many they choose
Ex. 100 shares owned
BOD seat 1 300 votes
BOD seat 2 and 3 0 votes

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20
Q

Risks of owning common stock

A

Market risk
Decreased or no dividend income
Low priority at dissolution

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21
Q

Pre-emptive Rights/Stock rights

A

Entitles existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public

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22
Q

Rights offering

A

Allows stockholders to purchase common stock below the current market price. Valued separately from the stock and trade in the secondary market during the subscription period, typically 30-45 days.

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23
Q

Warrant

A

A certificate granting its owner the right to purchase securities from the issuer at a specific price, normally higher than the current market price at the time the warrants are issued and at some time in the future; a sweetener in connections with other securities such as debt instruments

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24
Q

Rule 144

A

applies to shares that are sold through a nonstandard offering and subject to resale restrictions and to sales by persons who are classified as a control person (insider) of the issuer

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25
Q

Restricted stock

A

Acquired through some means other than a registered public offering, such as in private placement
May not be sold until they have been held fully paid for six months. They have a restrictive legend on the certificate
Legended or Legended certs

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26
Q

Control stock

A

Owned by directors, officers, or persons who own or control 10% or more of the issuer’s voting stock. Families will aggregate their positions to determine percentage of ownership.

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27
Q

Rule 144 volume limitations

A

Form 144: the number of shares a control person may sell over a 90-day period.
Greater of
1% of the outstanding shares of the company
or
the average weekly trading volume over the most recent four weeks

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28
Q

American depositary receipts

A

Type of equity security designed to simplify foreign investing for Americans.
Created when common shares are purchased in the foreign company’s home market. Shares are deposited in a foreign branch of a US bank and a receipt (the ADR) is created. Each ADR may represent one or more shares of the foreign company’s shares held on deposit.

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29
Q

Benefits of ADRs

A

Ease of use: will be listed on NYSE or Nasdaq, some traded OTC; settle T+2
ADR taxation: dividends paid to a US investor may be subject to a withholding tax by the home country of the underlying foreign stock issues. The amount of tax withheld by foreign government is applied as a credit against the investor’s US tax liability. Capital gains only taxable in the US
Currency and political risk protection since they are issued and pay dividends in US dollars.

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30
Q

Preferred stock

A

Rate of return is fixed rather than subject to variation; no voting rights, no pre-emptive rights

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31
Q

Benefits of owning preferred stock

A

Dividend preference

Priority at dissolution over common stock

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32
Q

Risks of owning preferred stock

A

Purchasing power risk
Interest rate sensitivity
Decreased or no dividend income
Priority at dissolution behind all creditors

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33
Q

Types of preferred stock

A

Straight (noncumulative): missed dividends are not paid to holder
Cumulative: accrues payments due its shareholders

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34
Q

Callable preferred stock

A

company holds the right to buy back the stock for a stated price after a specified date, allows a company to replace a high fixed-dividend obligation with a lower one when the cost of money has gone down

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35
Q

Convertible preferred stock

A

owner can exchange the shares for a fixed number of shares of the issuing corporation’s common stock, generally issued with a lower stated dividend rate

36
Q

Adjustable rate preferred stock

A

Issued with adjustable (variable) dividend rates, usually tied to the rates of other interest rate benchmarks, such as T bills and money market rates. Can be adjusted as often as quarterly. For investors looking for income through preferred stocks, this would be their least appropriate choice.

37
Q

Participating preferred stock

A

Fixed dividends and a share of corporate profits that remain after all dividends and interest due other securities are paid.

38
Q

Bond par value

A

Principal or face value. Most debt securities have a par value of $1000

39
Q

Maturity types

A

Term bond: the principal of the whole issue matures at once
Serial bond: schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid
Balloon bond: Maturity using both serial and term maturities. Issuer repays part of the principal before the final maturity date but the major portion at maturity.

40
Q

Coupon

A

the interest rate the issuer has agreed to pay the investor
also called stated yield or nominal yield
Calculated from the bond’s par value, usually stated as a percentage of par
Coupon time par value equals interest per year

41
Q

Accrued interest

A

If the bond trades between coupon payments, the buyer (new owner) must pay the seller (old owner) the amount of interest earned to date at the time of settlement. Corporate and municipal trades use a 30-day-month/360-day year calculation
T bonds and notes employ the actual number of days elapsed

42
Q

Bond pricing

A

On secondary markets it can trade at
Price of par, a premium to par or a discount of par
Measured in points, with each point equaling 1% of face value or $10

43
Q

How market forces affect bond prices

A

Inverse relationship
Interest rates increase= bond prices in the secondary market decrease
Interest rates fall=bond prices in secondary market increase
Coupon rate doesn’t change

44
Q

Nominal yield

A

Coupon, stated yield

Set at time of issue

45
Q

Current yield

A

Measures a bond’s annual coupon payment (interest) relative to its market price
Annual coupon payment / market price=current yield

46
Q

Yield to maturity

A

the annualized return of the bond if held to maturity.
The difference between the price that was paid for a bond and the par value received when the bond matures. If the bond is purchased at a discount, the investor makes money at maturity (the discount amount increases the return). If the bond is purchased at a premium, the investor loses money at maturity (premium amount decreases the return)

47
Q

Basis point

A

1/100 of 1%

1% equals 100 basis points

48
Q

Yield to call

A

reflect the early redemption date and consequent acceleration of the discount gain if the bond was originally purchased at a discount or the accelerated premium loss if the bond was originally purchased at a premium

49
Q

Three major Bond ratings agencies

A

Fitch Ratings Inc
Moody’s Investors Service Inc
Standard & Poor’s Rating Service

50
Q

Bond ratings

A

Bank grade/investment grade
AAA (S&P) Aaa (Moody’s): Highest
AA (S&P) Aa (Moody’s): Very strong
A (S&P) A (Moody’s): slightly susceptible
BBB (S&P) Baa (Moody’s): slightly speculative
Speculative/Noninvestment grade
BB (S&P) Ba (Moody’s) Speculative
B (S&P) B (Moody’s) Issuer has missed one or more pymts
C (S&P) Caa (Moody’s) No interest being paid
D (S&P) D (Moody’s) Issuer is in default

51
Q

High-yield bonds

A

Lower grade bonds, junk bonds

BB/Ba or lower

52
Q

Nonrated bonds

A

Some issues too small to justify the expense of a bond rating

53
Q

Bond volatility

A
  • more time left to maturity, more volatile a bond price given a change in interest rates
  • lower a coupon rate, more volatile
54
Q

Bond features

A

call feature: allows issuer to call in a bond before maturity
put feature: investor can put the bond back to issuer before maturity
convertible feature: convert bond into common stock

55
Q

Zero coupon bond

A

Debt obligations that do not make regular interest payments.
Sold at discount to face value and mature at par
Can be issued by corporations, municipalities and US Treasury (called STRIPS)
can be created by broker-dealers from other types of securities

56
Q

Secured debt

A

Mortgage bonds
Equipment trust certificates
Collateral trust bonds

57
Q

Unsecured debt

A

Debentures: debt obligation of the corporation backed only by its word and general creditworthiness
Guaranteed bonds: backed by a company other than the issuing corporation, such as a parent company
Income bonds/adjustment bonds: when a company is reorganizing and coming out of bankruptcy. Pay interest only if the corporation has enough income to meet interest on debt obligations and the BOD declares that the interest payment be made
Subordinated debt: claim behind that of any other creditor, but still senior to any stockholder

58
Q

Order of liquidation

A 
Secured debt holders
Unsecured debt and general creditors
Subordinated debt
Preferred stockholders
Common stockholders
59
Q

Benefits of debt securities

A

Income

Safety

60
Q

Risks of deb securities

A

Default
Interest rate risk
Purchasing power risk (inflation)

61
Q

Municipal bonds

include taxation

A

Issued by state or local governments, US territories, authorities, and special districts.
Second in safety of principal only to US government and US government agency securities, but based on issuing municipality’s financial stability.
Interest is tax free on a federal level and at state level if investor lives in the state of issuance

62
Q

General obligation municipal bonds

A

Bonds issued for capital improvements that benefit the entire community, typically do not produce revenues, so principal and interest must be paid by taxes collected by the municipal issuer. GO bonds are known as full faith and credit issues and are backed by the municipality’s taxing power.

63
Q

Revenue bonds

A

Can be used to finance any municipal facility that generates sufficient income. Self-supporting debt because principal and interest payments are made exclusively from revenue generated by the project or facility:
utilities, housing, transportation, education,health, industrial, sports

64
Q

Short term municipal obligations (anticipation notes)

A

Short term securities that generate funds for a municipality that expects other revenues soon. Usually have less than 12-month maturities, can range from 3 months to 3 years.

65
Q

Categories of short term municipal notes

A 
Tax anticipation notes (TANs)
Revenue anticipation notes (RANs)
Tax and revenue anticipation notes (TRANs)
Bond anticipation notes (BANs)
Tax-exempt commercial paper
Construction loan notes (CLNs)
Variable rate demand notes
Grant anticipation notes (GANs)
66
Q

Tax equivalent yield

A

The tax savings of a tax-free bond may be more attractive than a taxable bond with a higher interest rate. Depends in part on investor’s tax bracket.
equals tax-free yield by 100% less the investor’s tax rate
CY / (100%-tax bracket)=tax equivalent

67
Q

Treasury bills

A

Direct short-term debt obligations of the US government.
Issued weekly with maturities of 4 weeks, 13 weeks, 26 weeks, and sometimes 52 weeks.
Issued at a discount from par value and redeemed at par.
T-bills and STRIPS are the only Treasury security issued at a discount.
Without a stated interest rate. No accrued interest
Highly liquid
13-week (90-day) T-bills are used in market analysis as the stereotypical risk-free investment

68
Q

Treasury notes

A

Semiannual interest as a percentage of the stated par value, and they mature at par value. Intermediate maturities of 2-10 years.

69
Q

Treasury bonds

A

semiannual interest as a percentage of the stated par value and mature at par value. Long term maturities, greater than 10 years and up to 30 years.

70
Q

Treasury receipts

A

Brokerage firms create a treasury receipt fro US Treasury notes and bonds. Buy them, place them in trust at a bank, and sell separate receipts against the principal and coupon payments. Yields more profit for the BD versus selling the original Treasury securities outright.
Zero coupon bond

71
Q

Treasury STRIPS

A

(Separate Trading of Registered Interest and Principal of Securities)
Treasury department designates certain issues as suitable for stripping into interest and principal components. Banks and BDs perform the actual separation of interest coupon and principal and trading of STRIPS.
Zero coupon bond

72
Q

Treasury Inflation Protected Securities

A

TIPS
Issued with maturities of 5, 10, or 20 years. Fixed coupon rate and pay interest every six months. The principal value of the bond is adjusted every six months based on the inflation rate. The final principal payment at maturity will have been adjusted for inflation over the term of the bond. The final principal payment will never be less than the original $1000 par.

73
Q

Agencies (or agency-like organizations) of the federal government that are authorized to issue debt securities

A

Farm Credit Administration
Government National Mortgage Association (GNMA, Ginnie Mae)
Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac)
Federal National Mortgage Association (FNMA, Fannie Mae)
Student Loan Marketing Association (SLMA, Sallie Mae)

74
Q

Taxation of interest from bonds

A

Treasury: Fed yes, state/local no, at maturity or biannually
Municipality: Fed no, S/L depends, Biannually
FNMA & FHLMC: Fed, yes; s/l yes; biannually
GNMA: Fed yes, s/l yes, monthly
Territory bonds: Fed no; s/l no; biannually

75
Q

Money market security

A

fixed-income (debt) securities with one year or less left to maturity; highly liquid, relatively safe; lower returns; usually no interest, issue at a discount and mature at face value

76
Q

Types of money market securities

A

CD Certificates of deposit Jumbo CDs
Banker’s acceptance
Commercial paper/prime paper/promissory notes

77
Q

Certificates of Deposit

A

CDs Certificates of deposits/Jumbo CDs/Negotiable CDs values of $100K or $1M or more; Mature in one year or less; bank’s version of an unsecured promissory note

78
Q

Banker’s acceptance

A

Banker’s acceptance (BA) short term time draft with a specified payment date drawn on a bank. Essentially a postdated check or line of credit, normally between 1 and 270 days; to finance international trade

79
Q

Commercial paper

A

Prime paper, promissory notes
Short term, unsecured commercial paper to raise cash to finance accounts receivable and seasonal inventory gluts; maturities range from 1-270 days, though most mature in 90 days. Typically companies with excellent credit ratings issue commercial paper

80
Q

US Treasury bills

A

Direct, short term debt obligations of the US government. Issued weekly with maturities of 4 weeks, 13 weeks, 26 weeks, and at times 52 weeks

81
Q

Repurchase agreements

A

REPOs.
A financial institution, bank or BD, raises cash by temporarily selling some of its assets it holds with an agreement to buy back the assets at a later date at a slightly higher price. Used by banks that need to raise capital, either with another bank or the Fed Reserve Bank

82
Q

Reverse repurchase agreements

A

Reverse REPO. Dealer agrees to buy securities from an investor and sell them back later at a higher price.

83
Q

Federal funds loans

A

Excess deposits above the reserve requirement can be loaned from one member bank to another for the purchase of meeting the requirement. Very short term, sometimes overnight.

84
Q

Collateralized mortgage obligations

A

CMO
Asset backed security. Pools of assets can included expected payments from different types of loans. A pool of mortgages is structured into maturity classes called tranches.

85
Q

Collateralized debt obligationes

A

CDO
Asset backed securities, do not specialize in any single type of debut, usually consist of nonmortgage loans or bonds, including auto loans, leases, credit card debt, a company’s receivables, or even derivative products of any of the assets listed.

SIE JMP (12 decks)

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