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Course 3: Investment Planning > Module 1: Securities Markets and Money Market Instruments > Flashcards

Module 1: Securities Markets and Money Market Instruments Flashcards

1
Q

Financial Intermediaries

A
  1. Banks, Credit Unions
  2. Brokers, Dealers, Investment Bankers, Mutual Funds
  3. Insurance Companies
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2
Q

Investment Bankers and Dealers

A

Assist corporations and municipal governments in raisin capital by underwriting new securities and/or acting as the issuer’s agent

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3
Q

IPO Investment Bank’s Functions

A
  • Advising corporation on the best way to raise long-term capital
  • Raising Capital for issuers by distributing new securities
  • Buying Securities from issuers and reselling them to the public
  • Disributing Large Blocks of stock to the public and to institutions
  • Helping issuers comply with securities laws
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4
Q

Firm Commitment

A

The underwriting bank will purchase any shares that remain unsold at a specified price

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5
Q

Best Efforts

A

The underwriter will make every effort to sell all the shares, but the company does not receive any money for unsold shares

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6
Q

Secondary/Seasoned Offering

A

Already public company wants to raise more capital through the sale of more stock.

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7
Q

Red Herring

A

Preliminary Prospectus

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8
Q

Prospectus

A

The offering document for the sale of the securities

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9
Q

Registration

A

The process of filing the prospectus with the SEC

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10
Q

Green Shoes

A

The right to increase the size of an offering

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11
Q

Managing Underwritier/Lead Underwriter/Originating House

A

The investment banker that takes the lead role in an underwriting group

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12
Q

Syndicate

A

The investment banking companies that participate with the managing underwriter to assist in the distribution of the new issue

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13
Q

Selling Group

A

Brokerage firms that help distribute securities in an offering buy that are not members of the syndicate

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14
Q

Lockup Period

A

Typically 180-Days during which early investors and employees may not sell their shares.

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15
Q

Broker Dealer Bid/Ask Price

A

Bid price is the price they’re willing to buy, the Ask price is the price they’re willing to sell.

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16
Q

Venture Capital

A

Financing for privately held companies typically in the form of convertible preferred stock and is characterized by high risk with the potential for high return. High Risk, High Return, Lack of Liquidity, Low correlation with equities.

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17
Q

Venture Capital Financing

A
  1. Seed Capital
  2. Start-Up Capital
  3. First-Stage Capital
  4. Second-Stage Capital
  5. Mezzanine Financing
  6. Bridge Financing
  7. Acquisition Financing
  8. Leveraged Buyout (LBO) Financing
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18
Q

Seed Capital

A

This is for new companies without any products and provides them cash for product development and market research

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19
Q

Start-Up Capital

A

Cash provided for initial marketing activities buy not for sales activities

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20
Q

First-Stage Financing

A

Cash is provided for manufacturing and sales activities

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21
Q

Second-Stage Financing

A

Cash is provided for working capital

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22
Q

Mezzanine Financing

A

Cash is provided for expansion and new products

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23
Q

Bridge Financing

A

Capital is provided for an expected IPO

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24
Q

Acquisition Financing

A

Capital, including high-yield bonds, is provided to acquire other companies

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25
Q

Leveraged Buyout Financing

A

Capital is provide to allow managmeent to buy all or part of a business; it is often used when a public company divests a division that it feels is not longer part of its long-term plans

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26
Q

Private Placements

A

Some businesses choose to sell their securities privately in order to meet their capital formation needs. Most commonly bonds to small group of institutions or sophisticated individual investors. Limited to 35 unaccredited investors, unlimited accredited investors

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27
Q

Accredited investor

A
  • Bank, insurance company, registered investment company, business development company,
  • An employee benefits plan within the meaning of ERISA $5m
  • A charitable organization, corporation, or partnership with assets exceeding $5m
  • A director, executive officer, or general partner of the company selling the securities
  • A business in which all equity owners are accredited investors
  • A natural person who has individual or joint net worth that exceeds $1m at the time of the purchase
  • A natural person with income exceeding $200k in each of the most recent two years or $300k including spouses income
  • A trust with assets in excess of $5m, not formed to acquire the securities offered, whose purchase a sophisticated person makes
28
Q

Limited Partnership

A

A partnership entity that consists of a general partner and limited partners. The general partner controls the business activities of the partnership, determines when distributions are made to LP’s and has unlimited liability.

29
Q

Secondary Market…Markets

A

Consists of four distinct markets:

  1. Exchange Markets which includes the NYSE and the OTC market
  2. Provides a method of trading unlisted securities (OTC and Nasdaq)
  3. Consists of stocks traded on both the organized exchanges and on the OTC market
  4. Generally used by institutions that trade in very large volumes among themselves without the help of brokers (ISTINET)
30
Q

Security Exchanges

A
  • NYSE
  • Philadelphia
  • Chicago
  • Pacific
31
Q

Public Float

A

Indicates the number of shares that are available for trading by investors

32
Q

Round or Odd Lot

A

A round lot is a general unit of trading, usually 100 shares. An odd lot would be less than 100 shares.

33
Q

Market Order

A

On order to buy or sell at the current price. Order executed at the best price available at the time.

34
Q

Limit Order

A

This is an order to buy or sell at a specific price. The price acts as a ceiling for purchases and a floor for sales. “Or better is inferred with limit orders

35
Q

Day Order

A

This is an order that is good just for the day and expires at the end of the day (if not executed)

36
Q

Good-til-cancelled

A

This is an order that will remain in effect until either it is executed or canceled.

37
Q

Stop order

A

This is an order to buy or sell if the price of the stock trades at or through the stop price. A buy stop would be placed higher than the current market price of the stock and a sell stop would be placed lower than the current market price of the stock. If the stock trades through or at the stock price, the order then becomes a market order.

38
Q

Stop-Limit Order

A

Similar to a stop order with the difference being that if the stock trades at or through the stop price, it then becomes a limit order rather than a market order.

39
Q

Short Selling

A

Individuals borrow stock to sell in the open marketplace, hopefully to buy back at a lower price and sell back to make a profit on a falling stock.

40
Q

“Borrowing” Stock

A

entails making sure that there are shares in a margin account that the short seller can sell against. Once these shares are spoken for, no one else can go short against them - they must go short against other shares.

41
Q

Steps for Short Selling

A
  1. The investor uses a stockbroker to borrow stock from another investor’s account. This requires the short seller to make a deposit equal to the margin requirement (currently 50%) times the fair market value of the stock to the broker.
  2. The investor sells the borrowed stock in the open market
  3. The investor repurchases the stock in the open market
  4. Finally, the investor replaces, or covers, the borrowed stock.
42
Q

Leverage Financial Definition

A

Leverage is defined as the financial advantage of an investment that controls property of greater value than the cash invested.

43
Q

Maintenance Margin

A

Is set by a broker-dealer, not the Fed. If the equity in an investors position drops below the maintenance margin percentage, then the investor will receive a margin call.

44
Q

Debit Balance

A

The amount borrowed from the broker dealer plus any accrued interest

45
Q

Amount of equity calculation

A

The Fair Market Value of the security purchased less the debit balance

46
Q

Margin Call Calculation

A

Debit Balance/(1-maintenance margin)

47
Q

Holding Period Return Using Margin

A

Ending Value - Beginning Value - Margin interest / Initial Investment

48
Q

Cash

A

Refers to cash equivalents and bank instruments of deposit that have a high level of liquidity.

49
Q

Marketability

A

The ability to sell an investment quickly in a readily identifiable market.

50
Q

CDs

A

also known as time deposits, interest is subject to ordinary income tax in the year earned.

51
Q

Negotiable CDs

A

Deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of up to one year. Negotiable CDs are bought and sold in the secondary market at a market-determined price.

52
Q

Money Market Deposit Accounts (MMDAs)

A

Bank obligations and are federally insured, subject to the FDIC rules. Minimum balance and check writing privileges.

53
Q

Money Market Mutual Funds

A

Typically invest in high-quality, short-term investments, such as US Treasury bills, commercial paper and negotiable CDs.

54
Q

Three Major Categories of Money Market Mutual Funds

A
  • Taxable Money Market Funds
  • Tax exempt money market funds - national
  • Tax exempt money market funds - state
55
Q

U.S Treasury Bills

A

Short-Term government securities. Have a maturaty that is less than one year, they are not subject to original issue discount taxation rules that apply to other bonds. Interest income from the bill, which is not taxable until the bill matures, is taxed at ordinary federal income tax rates but is not subject to state or local income tax. The discount amount is ordinary income.

56
Q

Commercial Paper

A

a negotiable, short-term, unsecured promissory not issued by a large corporation to finance account receivable and inventories. A substitute for short-term bank financing. Money market mutual funds are the primary purchasers of commercial paper. Term to maturity is no more than 270 days.

57
Q

Repurchase agreements

A

Dealers will sell some of those securities to another dealer with an agreement to buy them back at a later date at an agreed-upon price. The buyer of the repo then receives the equivalent of a fixed yield or return on the investment. Technically a collateralized loan.

58
Q

The Repo Rate

A

The rate of interest, or the difference between the sale and repurchase price of a repurchase agreement

59
Q

Reverse repurchase agreement

A

The dealer buys governmenet securities from another dealer and then sells them back later at a higher price.

60
Q

Bankers Acceptances

A

Short-term drafts drawn by a private company on a major bank used to finance imports and exports. Typically traded at a discount from their face value in the secondary market. Companies that are too small to issue commercial paper sometimes use bankers acceptances to finance their short-term debt needs.

61
Q

Eurodollars

A

US Dollar-denominated deposits at banks outside the United States used to settle international transactions. A variation on the Eurodollar time deposit is the Eurodollar CD.

62
Q

Interest Income

A

Taxable as ordinary income on both federal and state unless municipal

63
Q

Dividends

A

Taxable to individuals on both federal and state income tax. Most dividends are taxed at rates of 0%, 15% or 20% dependent on income. Stock must be held for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date to qualify for preferential rates.

64
Q

Corporation Dividend Exclusion

A

Receive dividend income from stocks of another corporation, it results in a lower effective tax rate on their dividend income.

65
Q

Types of Dividends

A

C-corp dividends (qualifying dividends) - receive capital gains treatment, net income is taxed on the corporate level first, and then the dividend is distributed to the shareholder.
S Corp Dividends are not taxed at the corporate level prior to being distributed, so they do not qualify for the preferential treatment.

66
Q

Collectibles Special Tax Rate

A

Taxed at a minimum of 28%. Include art, metal, gems, antiques, coins, and stamps. Also, Gold and Silver ETFs are generally taxed as collectibles.

67
Q

Net Investment Income

A

Investment income reduced by a certain deductible investment expense - for example, the penalty on the early withdrawal of savings and investment interest expense, as computed for regular tax purposes. The tax is 3.8% of the lesser of the net investment income, or the excess of the MAGI over a specified threshold amount $250,000

Course 3: Investment Planning (6 decks)

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