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

Module 1: Securities Markets and Money Market Instruments Flashcards

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1
Q

DEFINE:
Accredited Investor

A
  1. A bank, insurance company, registered investment company, business development company, or small business investment company.
  2. An employee benefit plan that meets ERISA requirements
  3. A charitable organization, corporation, or partnership with assets exceeding $5 million.
  4. A director, executive officer, or general partner of the company selling the securities.
  5. A business in which all the equity owners are accredited investors.
  6. A natural person with income exceeding $200k in each of the 2 most recent years, or joint income with a spouse of $300k and reasonable expectations for the income to continue.
  7. A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchase a sophisticated person makes.
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2
Q

DEFINE:
Banker’s Acceptances

A

Short-term drafts drawn by a private company or a major bank used to finance imports and exports. They are typically traded at a discount from their face value in the secondary market.

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3
Q

DEFINE:
Best Efforts

A

A type of underwriting agreement in which there are no guarantees from investment bankers to the company going public- they will sell as many shares as possible.

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4
Q

DEFINE:
Broker-Dealer

A

Derives from the fact that many securities firms act as both brokers and dealers.

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5
Q

DEFINE:
Cash

A

In financial planning, cash refers to cash equivalents and bank instruments of deposits that have a high level of liquidity.

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6
Q

DEFINE:
Certificates of Deposit (CDs)

A

Also known as time deposits, these are deposits made with a bank or savings and loan for a specific period, commonly one month to five years.

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7
Q

DEFINE:
Commercial Paper

A

A negotiable, short-term, unsecured promissory note issued by a large corporation to finance accounts receivable and inventories.

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8
Q

DEFINE:
Day Order

A

An order that is good just for the day and expires at the end of the day if not executed.

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9
Q

DEFINE:
Debit Balance

A

The amount owed to the broker-dealer. It includes the original amount borrowed by the investor plus any accrued interest.

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10
Q

DEFINE:
Dilution

A

Lowering the value of outstanding shares by issuing additional shares.

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11
Q

DEFINE:
Eurodollars CD

A

Shares the same characteristics as its domestic counterpart except that the obligation is the liability of a non-US bank.

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12
Q

DEFINE:
Eurodollars

A

US dollar-denominated deposits at banks outside the United States used to settle international transactions. The average deposit is very large (in the millions) and has a maturity of less than 6 months.

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13
Q

DEFINE:
Firm Commitment

A

A type of underwriting agreement in which investment bankers guarantee the company going public that the entire issue will be purchased and absorb the loss if they fail to sell the entire issue to investors.

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14
Q

DEFINE:
Good-Til-Canceled (GTC)

A

An order that will remain in effect until either it is executed or canceled. Sometimes broker-dealers will put a time limit on GTC orders, such as 90 days, after which they will automatically be canceled.

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15
Q

DEFINE:
Initial Public Offering (IPO)

A

A company’s first public offering of securities.

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16
Q

DEFINE:
Leverage

A

The financial advantage of an investment that controls property of greater value than the cash invested.

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17
Q

DEFINE:
Limited Partnership

A

Are characterized by a partnership entity that consists of a general partner and limited partners. These programs offer investors a share in the income, gains, losses, deductions, and tax credits of the business entity.

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18
Q

DEFINE:
Limit Order

A

An order to buy or sell at a specific price. The price acts as a ceiling for purchases and a floor for sales.

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19
Q

DEFINE:
Liquidity

A

The ability to sell or redeem an investment quickly and at a known price without a significant loss of principal.

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19
Q

DEFINE:
Maintenance Margin

A

The minimum percentage of cash equity in a position, typically set at 35%. The maintenance margin is set by the broker-dealer, not the Fed, but Rule 431(b) of the NYSE requires a minimum maintenance requirement of at least 25%.

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20
Q

DEFINE:
Margin

A

When an investment is purchased on margin, 50% of the funds are deposited by the investor (known as the initial margin percentage, as established by Federal Reserve Regulation T), and the 50% may be borrowed from the broker-dealer.

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21
Q

DEFINE:
Margin Call

A

If the equity in an investor’s position drops below the maintenance margin percentage, then the investor will receive a margin call, which is a demand by the broker to add cash to the margin account. If the investor does not add cash promptly, a portion of the investor’s position will be sold by the broker to cover the margin call.

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22
Q

DEFINE:
Marketability

A

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

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23
Q

DEFINE:
Market Order

A

An order to buy or sell at the current price. The order would be executed at the best price available at that time.

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24
Q

DEFINE:
Money Market Deposit Accounts (MMDAs)

A

Offered by some banks and savings and loans. MMDAs are bank obligations and are federally insured, therefore they are very safe and high liquid. They require a minimum balance to be maintained, and can offer limited check-writing privileges.

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25
Q

DEFINE:
Money Market Mutual Fund

A

These funds typically invest in high-quality, short-term investments, such as US Treasury bills, commercial paper, and negotiable CDs, that mature within one year and have an overall weighed average maturity of less than 60 days.

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26
Q

DEFINE:
Negotiable CDs

A

Deposits of $100k 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.

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27
Q

DEFINE:
Net Investment Income

A

Investment income reduced by certain deductible investment expenses- for example, the penalty on the early withdrawal of savings and investment interest expense, as computed for regular tax purposes.

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28
Q

DEFINE:
Primary Market

A

Facilitates the initial sale of securities issued to the public.

With primary market transactions, fund from a new issue would flow from investors to the issuing company.

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29
Q

DEFINE:
Private Placements

A

Used by companies to sell an issue- most commonly bonds- to a small group of institutions or sophisticated individual investors. Private placements avoid the SEC registration requirements of an IPO, and the company’s information is not accessible by the general public.

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30
Q

DEFINE:
Public Float

A

Indicates the number of shares that are available for trading by investors, the remaining shares of those outstanding generally are held by insiders and often have restrictions on disposition.

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31
Q

DEFINE:
Repo Rate

A

The rate of interest on a repurchase agreement, calculated by the difference between the sale and repurchase prices of the securities.

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32
Q

DEFINE:
Repurchase Agreements

A

Dealers in government securities use repurchase agreements, or repos. To satisfy short-term liquidity needs, 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.

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33
Q

DEFINE:
Reverse Purchase Agreements

A

In a reverse repo, the dealer buys government securities from another dealer and then sells them back at a higher price.

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34
Q

DEFINE:
Secondary Market

A

Provides investors with a method of buying and selling previously issued securities. The secondary market consists of four distinct markets.

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35
Q

DEFINE:
Securities Investor Protection Corporation (SIPC)

A

The SIPC oversees the liquidation of brokerage firms and insures investors’ accounts up to a maximum value of $500k ($250k for cash balances) in the case of bankruptcy of a brokerage firm. While the SIPC insures brokerage accounts in the event of a brokerage firm’s financial difficulties, it does not cover market losses suffered while waiting to get securities from a bankrupt brokerage firm.

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36
Q

DEFINE:
Short Selling

A

Short selling is a strategy where traders profit from a decline in the price of an asset, often a stock. In a short sale, investors borrow shares of a stock they believe will fall in value, sell those shares on the open market, and later buy them back at a lower price to return to the lender.

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37
Q

DEFINE:
Stop Order

A

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 prices of the stock, and a sell stop would be placed lower than the current market price of the stock. If the stock trades at or through the stock price, the order then becomes a market order.

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38
Q

DEFINE:
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

DEFINE:
U.S. Treasury Bills

A

Short-term government securities.

40
Q

DEFINE:
Venture Capital

A

Financing for privately held companies (e.g., start-ups) typically in the form of convertible preferred stock and is characterized by high risk with the potential for high return.

41
Q

DEFINE:
Wash Sale

A
42
Q

__________ are financial institutions that assist corporations and municipal governments in raising capital by underwriting new securities and/or acting as the issuer’s agent in the issuance of securities.

A

Investment banks or bankers

43
Q

An investment bank’s functions may include the following:

A
  1. Advising corporations on the best ways to raise long-term capital
  2. Raising capital for issuers by distributing new securities
  3. Buying securities from issuers and reselling to the public
  4. Distributing large blocks of stock to the public and to institutions
  5. Helping issuers comply with securities law
44
Q

What does it mean for an investment banking firm to underwrite a stock offering?

A

They purchase all the public shares at a pre-established price and then resell them to the public, presumably at a significant profit.

45
Q

What are the 2 types of underwriting agreements?

A

Firm commitment and best efforts.

46
Q

DEFINE:
Secondary or Seasoned Offering

A

A means by which a company who has already issued shares, but wants to raise more capital, does so by selling more stock.

A sale of securities to the public by insiders or other affiliated persons.

47
Q

DEFINE:
Red Herring

A

Preliminary prospectus; it is called a red herring because of the statement printed in red ink on the front of the prospectus that states, “A Registration Statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. Information contained herein is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective.”

48
Q

DEFINE:
Prospectus

A

The offering document for the sale of securities.

49
Q

DEFINE:
Registration

A

The process of filing the prospectus with the SEC.

50
Q

DEFINE:
Green Shoes

A

The right to increase the size of an offering.

51
Q

DEFINE:
Managing Underwriter, Lead Underwriter, or Originating House

A

The investment banker that takes the lead role in and underwriting group.

52
Q

DEFINE:
Syndicate

A

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

53
Q

DEFINE:
Selling Group

A

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

54
Q

DEFINE:
Lockup Period

A

A period during which early investors and employees may not sell their shares.

55
Q

How long is a typical lockup period?

A

180 days

56
Q

DEFINE:
Broker

A

Agents of sellers of securities who receive a commission for executing a tansaction.

57
Q

DEFINE:
Dealer

A

Principals who buy and sell securities for their own accounts.

58
Q

A dealer is also known as a __________ in over-the-counter markets.

A

Market maker

59
Q

A dealer is also known as a __________ in the Securities Exchange.

A

Specialist

60
Q

Dealers quote prices on a __________ basis.

A

bid and ask

61
Q

DEFINE:
Bid Price

A

The price at which the dealer will buy.

62
Q

DEFINE:
Ask Price

A

The price at which the dealer will sell.

63
Q

DEFINE:
Seed Capital

A

A stage of venture capital for new companies without any products and provides them cash for product development and market research. This is sometimes referred to as seed financing.

64
Q

DEFINE:
Start-Up Capital

A

A stage of venture capital where cash is provided for initial marketing activities but not for sales activities.

65
Q

DEFINE:
First-Stage Financing

A

A stage of venture capital where cash is provided for manufacturing sales activities.

66
Q

DEFINE:
Second-Stage Financing

A

A stage of venture capital where cash is provided for working capital.

67
Q

DEFINE:
Mezzanine Financing

A

A stage of venture capital where cash is provided for expansion and new products.

68
Q

DEFINE:
Bridge Financing

A

A stage of venture capital where capital is provided for an expected IPO.

69
Q

DEFINE:
Acquisition Financing

A

A stage of venture capital where capital, including high-yield bonds, is provided to acquire other companies.

70
Q

DEFINE:
Leveraged Buyout (LBO) Financing

A

A stage of venture capital where capital is provided to allow management to buy all or parts of a business; it is often used when a public company divests a division that it feels is no longer part of its long-term plans.

71
Q

Private placements are limited to _____ unaccredited investors, and _____ accredited investors.

A

35; an unlimited number of

72
Q

What is the most frequent type of investor in private placements?

A

Insurance companies and pension funds.

73
Q

DEFINE:
General Partner

A

Controls the business activities of the partnership, determines when distributions are made to the limited partners, and has unlimited liability.

74
Q

DEFINE:
Limited Partner

A

Does not participate in the management of the partnership and have limited liability.

75
Q

What are the advantages of a limited partnership?

A
  1. Business venture participation with limited liability
  2. Start-up financing shared with other partners, whereby one individual is not responsible for all the start-up costs
  3. Receipt of periodic income payments
76
Q

What are the disadvantages of limited partnership?

A
  1. They are generally riskier investments than bonds or exchange-traded equities
  2. They are usually illiquid
  3. Limited partners cannot participate in the management of the partnership
  4. The sale of the partnership interest may be restricted
77
Q

T/F: Limited partnership investments are generally suitable for the average investor.

A

FALSE
Mutual funds or ETFs offer investors many of the same advantages of LPs, including diversification and professional management, but without as much marketability or liquidity risk.

78
Q

What are the 4 markets within the secondary market?

A
  1. The exchange (auction) market where listed securities trade and includes the New York Stock Exchange (NYSE) and the over-the-counter (OTC) market.
  2. Provides a method of trading unlisted securities via OTC and Nasdaq.
  3. Consists of stocks traded both on the organized exchanges and on the OTC market.
  4. Generally used by institutions (e.g., pension funds) that trade in very large volumes among themselves without the help of brokers (INSTINET).
79
Q

What is the major security exchange in the world?

A

NYSE

80
Q

What are the listing requirements for the NYSE?

A
  1. 400 round-lot holders
  2. 1.1 million public shares outstanding
81
Q

Companies that do not qualify for listing on exchanges or that decide not to list their securities on an exchange may have their securities listed where?

A

The National Association of Securities Dealers Automated Quotation system (Nasda

82
Q

DEFINE:
Round Lot

A

Considered the general unit of trading, which is usually 100 shares.

83
Q

DEFINE:
Odd Lot

A

Less than 100 shares

84
Q

What are the two ways individual common stock can be held?

A
  1. An investor is issued a certificate (certificate form) of ownership by the corporation indicating the number of shares owned.
  2. Investors may use a brokerage firm to hold stock in a brokerage account on their behalf (street name).
85
Q

T/F:
If a cash equivalent is liquid, it is also automatically marketable.

A

FALSE

86
Q

Why are Money Market Mutual Funds typically used by investors as part of their emergency fund?

A

Because they are highly liquid.

87
Q

What are the 3 major categories of money market mutual funds?

A
  1. Taxable money market funds
  2. Tax-exempt money market funds- national
  3. Tax-exempt money market funds- state
88
Q

The _______ T-Bill is cited as the risk-free rate in various asset-pricing models and performance measures.

A

13-week

89
Q

DEFINE:
Risk-Free Rate

A

Used as a benchmark to measure the return of other assets and represents the lowest level of return an investor expects to receive.

90
Q

Who is typically the primary purchaser of commercial paper?

A

Money Market Mutual Funds

91
Q

What is the maximum term to maturity for Commercial Paper?

A

270 days.

92
Q

Banker’s acceptance are analogous to a ____________________ issued to a borrower by a financial institution.

A

personal line of credit

93
Q

DEFINE:
Interest Income

A

Income from deposit accounts- CDs, money market instruments, and bonds.

94
Q

DEFINE:
Dividend Income

A

Income from stocks.

95
Q
A

CFP Investment Planning (1 decks)

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