Module 1: Securities Markets and Money Market Instruments Flashcards
Financial Intermediaries
- Banks, Credit Unions
- Brokers, Dealers, Investment Bankers, Mutual Funds
- Insurance Companies
Investment Bankers and Dealers
Assist corporations and municipal governments in raisin capital by underwriting new securities and/or acting as the issuer’s agent
IPO Investment Bank’s Functions
- 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
Firm Commitment
The underwriting bank will purchase any shares that remain unsold at a specified price
Best Efforts
The underwriter will make every effort to sell all the shares, but the company does not receive any money for unsold shares
Secondary/Seasoned Offering
Already public company wants to raise more capital through the sale of more stock.
Red Herring
Preliminary Prospectus
Prospectus
The offering document for the sale of the securities
Registration
The process of filing the prospectus with the SEC
Green Shoes
The right to increase the size of an offering
Managing Underwritier/Lead Underwriter/Originating House
The investment banker that takes the lead role in an underwriting group
Syndicate
The investment banking companies that participate with the managing underwriter to assist in the distribution of the new issue
Selling Group
Brokerage firms that help distribute securities in an offering buy that are not members of the syndicate
Lockup Period
Typically 180-Days during which early investors and employees may not sell their shares.
Broker Dealer Bid/Ask Price
Bid price is the price they’re willing to buy, the Ask price is the price they’re willing to sell.
Venture Capital
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.
Venture Capital Financing
- Seed Capital
- Start-Up Capital
- First-Stage Capital
- Second-Stage Capital
- Mezzanine Financing
- Bridge Financing
- Acquisition Financing
- Leveraged Buyout (LBO) Financing
Seed Capital
This is for new companies without any products and provides them cash for product development and market research
Start-Up Capital
Cash provided for initial marketing activities buy not for sales activities
First-Stage Financing
Cash is provided for manufacturing and sales activities
Second-Stage Financing
Cash is provided for working capital
Mezzanine Financing
Cash is provided for expansion and new products
Bridge Financing
Capital is provided for an expected IPO
Acquisition Financing
Capital, including high-yield bonds, is provided to acquire other companies
Leveraged Buyout Financing
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
Private Placements
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
Accredited investor
- 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
Limited Partnership
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.
Secondary Market…Markets
Consists of four distinct markets:
- Exchange Markets which includes the NYSE and the OTC market
- Provides a method of trading unlisted securities (OTC and Nasdaq)
- Consists of stocks traded on both the organized exchanges and on the OTC market
- Generally used by institutions that trade in very large volumes among themselves without the help of brokers (ISTINET)
Security Exchanges
- NYSE
- Philadelphia
- Chicago
- Pacific
Public Float
Indicates the number of shares that are available for trading by investors
Round or Odd Lot
A round lot is a general unit of trading, usually 100 shares. An odd lot would be less than 100 shares.
Market Order
On order to buy or sell at the current price. Order executed at the best price available at the time.
Limit Order
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
Day Order
This is an order that is good just for the day and expires at the end of the day (if not executed)
Good-til-cancelled
This is an order that will remain in effect until either it is executed or canceled.
Stop order
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.
Stop-Limit Order
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.
Short Selling
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.
“Borrowing” Stock
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.
Steps for Short Selling
- 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.
- The investor sells the borrowed stock in the open market
- The investor repurchases the stock in the open market
- Finally, the investor replaces, or covers, the borrowed stock.
Leverage Financial Definition
Leverage is defined as the financial advantage of an investment that controls property of greater value than the cash invested.
Maintenance Margin
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.
Debit Balance
The amount borrowed from the broker dealer plus any accrued interest
Amount of equity calculation
The Fair Market Value of the security purchased less the debit balance
Margin Call Calculation
Debit Balance/(1-maintenance margin)
Holding Period Return Using Margin
Ending Value - Beginning Value - Margin interest / Initial Investment
Cash
Refers to cash equivalents and bank instruments of deposit that have a high level of liquidity.
Marketability
The ability to sell an investment quickly in a readily identifiable market.
CDs
also known as time deposits, interest is subject to ordinary income tax in the year earned.
Negotiable CDs
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.
Money Market Deposit Accounts (MMDAs)
Bank obligations and are federally insured, subject to the FDIC rules. Minimum balance and check writing privileges.
Money Market Mutual Funds
Typically invest in high-quality, short-term investments, such as US Treasury bills, commercial paper and negotiable CDs.
Three Major Categories of Money Market Mutual Funds
- Taxable Money Market Funds
- Tax exempt money market funds - national
- Tax exempt money market funds - state
U.S Treasury Bills
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.
Commercial Paper
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.
Repurchase agreements
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.
The Repo Rate
The rate of interest, or the difference between the sale and repurchase price of a repurchase agreement
Reverse repurchase agreement
The dealer buys governmenet securities from another dealer and then sells them back later at a higher price.
Bankers Acceptances
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.
Eurodollars
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.
Interest Income
Taxable as ordinary income on both federal and state unless municipal
Dividends
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.
Corporation Dividend Exclusion
Receive dividend income from stocks of another corporation, it results in a lower effective tax rate on their dividend income.
Types of Dividends
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.
Collectibles Special Tax Rate
Taxed at a minimum of 28%. Include art, metal, gems, antiques, coins, and stamps. Also, Gold and Silver ETFs are generally taxed as collectibles.
Net Investment Income
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
