Investment Planning: Securities Laws and Regulations Flashcards
Individuals or firms that buy and sell securities either for clients of for themselves.
Broker-Dealers
When a broker-dealer trades on behalf of clients, it acts as a __________ .
Broker
When a broker dealer trades on its own behalf, it acts as a _________ .
Dealer
Broker dealers are regulated by _____________ in addition to a requirement to register with _____________ .
Regulated by SEC
Register with FINRA
Created as part of the Buttonwood agreement in 1792 but officially began trading stocks and government bonds in 1817. Considered the most famous of all secondary markets.
New York Stock Exchange
The most famous of all OTC markets.
NASDAQ
Self Regulatory Organization responsible for oversight of U.S. equity securities and financial advisors that participate in the market.
FINRA
Those securities that are recorded electronically eliminating the need to issue paper certificates.
Book Entry
These individuals follow the ownership trail for both stocks and bonds and record how each is held.
Transfer Agents
Sold as pure discount bonds because there are no coupon payments made.
T-Bills
The treasury typically issues T-Bills with maturities of ___, ___, ___, ___, in denominations of $100.
4, 13, 26, and 52 week
Costly registration procedures are required for securities over how many days?
270 days
Consists of a private sector company’s issue of short term, unsecured, promissory notes that are used as part of the firms working capital or cash management strategies.
Commercial Paper
Deposits of $100,000 or more placed with commercial banks at a specific stated rate of interest.
Jumbo CD’s
When an issuer or seller of securities agrees to repurchase the underlying securities at a specific price on a specific date.
Repurchase Agreement (Repos)
What are the 3 types of Repos?
1) Tri-Party
2) Deliverable
3) Held in custody
Securities that act as a line of credit issued from a bank- usually the bank acts as an intermediary between a U.S. and foreign company. (For companies too small to issue commercial paper.)
Bankers Acceptances
What are the two most common types of Municipal Bonds?
General Obligation and Revenue Bonds
What are the tax implications on a Municipal Bond?
- States do not tax interest on bonds issued in their state
- Federally they are Tax exempt
Proceeds from this type of bond issue are:
- Backed by the full faith and credit of the U.S. Government
- Backed by taxing authority of Municipality
- Proceeds are used for non-revenue generating projects
General Obligation Bonds
Issued to finance revenue producing products, not backed by the full faith and credit of the issuing body. Interest and principal are repaid from revenue from the project… higher yield because more risk is taken.
Revenue Bonds
What are the 5 broad categories of corporate bonds?
1) Banks & Finance Companies
2) Industrials
3) Public Utilities
4) Transportation
5) International
Two methods corporations use to raise funds:
By issuing:
Equity Obligations
& Debt Obligations
What are the benefits to issuing debt instead of equity in a corporation?
- No dilution of equity ownership
- Receiving an Interest Rate Deduction
- Obtaining a Lower Cost of Capital
Ownership claims on a pool of mortgages.
Mortgage Backed Securities
The process of transforming mortgages into securities that can be sold to the public is known as ___________________ .
Securitization
The relationship between the value of MBS’s and interest rates is ____________ .
Inverse
How to calculate the “expected prepayment” in a MBS calculation?
(Total Investment - Scheduled Principal Payment) X (Historical Mortality Rate for Mortgages)
Created to expand the flow of mortgage money by creating a secondary market.
Fannie Mae (FNMA)
Remains a government agency with the department of Housing and Urban Development (HUD).
Ginnie Mae (GNMA)
Stock holder owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing.
Freddie Mac (FHLMC)
What is the difference between CMO’s and MBS’s?
CMO’s pay back in tranches
What is the relationship between maturity and interest rate risk?
The longer the maturity, the greater the interest rate risk
The difference between the ratings of a specific issue by different agencies:
Split rating
What are the (2) primary differences between preferred stock and common stock?
Preferred Stock
- Shareholders generally receive preferential dividends (over common stock)
- Shareholders have priority in the event that a company goes bankrupt
This type of risk is the variability in stock return due to changes in economic factors due to interest rates, inflation, and economic productivity.
Systematic (Market) Risk
How is systematic risk measured?
Beta
Classifications of equity securities based on type of stock (7).
1) Defensive Stocks
2) Cyclical Stocks
3) Blue Chip Stocks
4) Growth Stocks
5) Income Stocks
6) Interest Sensitive Stocks
7) Value Stocks
Classifications of equity securities based on size of company? (4)
1) Large Cap
2) Mid Cap
3) Small Cap
4) Micro Cap
Firms that are relatively unaffected by general fluctuations in the economy; provide products that are necessary for everyday life.
Defensive
Examples of ‘Defensive’ stocks:
- Utilities
- Soft Drinks
- Groceries
- Candy
- Pharmaceuticals
- Tobacco
This class of stock typically performs well during recessions or periods of low GDP growth.
Defensive
Firms that prosper in expanding economies and tend to do poorly during down business cycle. They tend to have large investments in plant and equipment and therefore have high fixed costs.
Cyclical
Examples of ‘Cyclical’ stocks:
Automobile, Cement, Paper, Airlines, Railroads, Machinery, and Steel
This classification of stocks typically performs well during economic expansion.
Cyclical
Highly regarded investment quality firms, leaders in their respective industries, offer investors quality investments with steady dividend streams and relatively consistent growth.
Blue Chip
Examples of ‘Blue Chip’ stock:
Exxon Mobile, Walmart, IBM, McDonalds, Coca-Cola, Johnson and Johnson, Procter and Gamble, Verizon
Companies that are typically categorized as having the potential to perform well in any market.
Blue Chip
Firms with sales, earnings, and market share growing at higher rates than average or the general economy, most profits reinvested in company for future growth.
Growth
Examples of this category of stock includes tech, internet, biotech, content marketing, drones, and sustainable energy.
Growth
Firms that make large dividend payments relative to other firms in the economy. Often pay out the majority of their earnings in the form of dividends.
Income
Examples of this classification of equity security include utilities and blue chip stock.
Income
Definition of this type of equity security offering are firms that are largely affected by changes in interest rates which cause the cost of debt to increase.
Interest Rate Sensitive
Examples of Interest Rate Sensitive Equity Securities:
Housing, Commercial banks, Insurance Companies, Communications Companies, Utilities
Firms that trade at prices that are low given their historical earnings and current asset value. These securities tend to have low price to earnings ratios and tend to be out of favor in the market.
Value
Risks that are unique to individual companies, securities, industries, or countries.
Unsystematic Risk
Risks driven by macroeconomic factors that affect nearly all investments.
Systematic Risks
List the 5 biggest Systematic Risks:
1) Purchasing Power Risk
2) Reinvestment Rate Risk
3) Interest Rate Risk
3) Market Risk
4) Exchange Rate Risk
PRIME
Tax equivalent return of a bond is calculated by taking:
(After Tax Yield) / (1 - Federal Tax - State Tax)
How is YTM calculated?
INTEREST+(FACE VALUE-PRICE/N) / FACE VALUE+PRICE/2
