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Series 79 (VKM) > Section 1 > Flashcards

Section 1 Flashcards

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Series 79 Top-Off Exam flashcards
1
Q

What is a form 8-K? When is it filed?

A 
Current report filed with the SEC; generally required to report material events that impact a public company to shareholders; filed within 4 days of event triggering report
Regulation FD (Fair Disclosure) is reported here.
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2
Q

What is a 10-Q? What is included?

A

Quarterly report; contains UNAUDITED financials, MD&A, and disclosures about market risk and controls; use to calculate LTM; does NOT contain holdings of large shareholders

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3
Q

What is a form 10-K? What is included?

A

Annual report; contains AUDITED financials; MD&A; company informatoin, outstanding shares, and holdings of large shareholders

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4
Q

What defines an investor with “beneficial ownership”

A

Directors, officers, or any principal stockholder who owns 10% of more of any class of the company’s registered securities (note, this does not include an entity that holds securities for the benefit of a third party such as a broker-dealer); note that ownership of 5% or more triggers 13D / 13G

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5
Q

What are the two SEC rules and forms for beneficial ownership reports? What are the differences?

A 
Rule 13D / Form 13D - Filed only if a beneficial owner of 5% or more of voting class of securities; interested in influencing control over the issuer; gives issuer advance notice; includes source of funds, # of shares owned, and background information; must be filed within 10 days of acquiring the stock 
Rule 13G / Form 13G - shorter, less burdensome; allowed for INSTITUTIONAL or PASSIVE investors, who do not intend to affect control of the issuer; does not include source of funds
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6
Q

When must a Form 13D be filed?

A

Within 10 days of acquiring the stock

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7
Q

What is Rule 13F / Form 13F?

A

Requires institutional investment managers to file a Form 13F, if they exercise discretion over $100mm or more of assets; foreign money managers must also file
Due 45 days after the CLOSE of the calendar year in which the $100mm threshold is reached

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8
Q

When must a Form 13F be filed?

A

Within 45 days after the CLOSE of the calendar year in which the $100mm of assets under management threshold is reached

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9
Q

When must a 10-K be filed?

A

Between 60 to 90 days after the company’s fiscal year end

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10
Q

When must a 10-Q be filed?

A

Between 40 to 45 days after the end of the company’s first three fiscal quarters

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11
Q

Which SEC filing should you use to identify the holdings of large shareholders?

A

10-K, Schedule 14A, or Schedule 13D/13G

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12
Q

When must an 8-K be filed?

A

Within 4 days of the event triggering the report

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13
Q

What is SEC Schedule 14A?

A

Form that discloses information about issues on which shareholders are expected to vote by proxy; sent to shareholders in advance of shareholder meeting and filed with SEC

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14
Q

When must a Schedule 14A be sent to shareholders?

A

Sent to shareholders and SEC in advance of the shareholders meeting where shareholders are required to vote by proxy

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15
Q

What is a Form / Schedule 13D?

A

Form filed by a beneficial owner of 5% or more of voting class of securities; interested in influencing control over the issuer; gives issuer advance notice; includes source of funds, # of shares owned, and background information; must be filed within 10 days of acquiring the stock

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16
Q

What is deemed a large shareholder and is disclosed on the 10-K or 14A?

A

owning 5% or more of voting class stock

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17
Q

What is an “accelerated filer” and when must they file their 10-K, 10-Q, and 8-K?

A

An accelerated filer is a company that has been reporting for over ONE YEAR and has public float greater than $75mm and less than $700mm.
10-K: Must file within 75 days of fiscal year end
10-Q: Must file within 40 days of fiscal quarter end
8-K: Must file within 4 days of triggering event

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18
Q

When must a regular filer file their 10-K, 10-Q, and 8-K?

A

10-K: Within 90 days of fiscal year end
10-Q: Within 45 days of fiscal quarter end
8-K: Must file within 4 days of triggering event

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19
Q

What is a “large accelerated filer” and when must they file their 10-K, 10-Q, and 8-K?

A

A large accelerated filer is a company that has been reporting for over ONE YEAR and has public float of $700mm or more
10-K: Within 60 days of fiscal year end
10-Q: Within 40 days of fiscal quarter end
8-K: Must file within 4 days of triggering event

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20
Q

What is Regulation FD (Fair Disclosure)?

A

SEC regulation passed in 2000; prohibits public companies from selectively disclosing material, non-public information to some investors but not others; if non-public information is shared, it must be disseminated publicly through “broad, non-exclusionary” distribution methods (e.g. 8-K, press release, conference call)

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21
Q

What methods are deemed “broad and non-exclusionary” under the SEC’s Regulation FD?

A
  1. Press release on approved wire service
  2. Conference call open to the public (if adequate notice is given)
  3. Filing an 8-K
  4. Posting on website (SEC does not deem it an adequate method of disclosure by itself)
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22
Q

Under Regulation FD, when must a company inform the public of non-public information that has been shared?

A

If it is UNINTENTIONAL, within 24 hours or by start of next trading session
If it is INTENTIONAL, disclosed publicly at the same time it is disclosed to selected investors

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23
Q

Under rule 13d-1, what is deemed a “material change” in ownership and requires investor to file an amended schedule 13d?

A

More than 1% of the clss of securities owned

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24
Q

When must non-institutional investors, who qualify to file 13-G file the form with the SEC?

A

Within 10 days of the equities purchase; must not own 20% or more of the company’s stock

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25
Q

What is not reported on a Form 13F?

A

Open-end securities, mutual funds, non-equity holdings such as bonds, and short positions

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26
Q

What is a proxy statement? and when is it used?

A

Filed with SEC using Schedule 14-A
Used when company must disclose material public information about issues on which shareholders are expected to vote such as,
1. proposed members of board of directors and proposed compensation
2. Expected shareholder resolution
3. Updated count of shares issued / outstanding
4. Proposed merger terms such as transaction terms, rationale for any fairness opinion, and financial information regarding transaction

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27
Q

Which filing will contain information about a proposed merger or tender offer?

A

Schedule 14-A

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28
Q

Beneficial owners of more than 10% of any class of a company’s registered stock must file which forms?

A

Beneficial ownership reports of insiders: Forms 3, 4, and 5
Form 3: Initial statement of beneficial ownership
Form 4: Discloses changes in beneficial ownership
Form 5: Annual statement of changes

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29
Q

What is a Beneficial Ownership Reports of Insiders Form 3? When must it be filed?

A

Initial statement of beneficial ownership; insider must file within 10 days of becoming a director, officer, or more than 10% beneficial owner of the issuer

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30
Q

What is a Beneficial Ownership Reports of Insiders Form 4? When must it be filed?

A

Discloses any changes in the beneficial owner’s ownership of securities in the company; must file Form 4 within 2 business days after any transaction resulting in a change of ownership

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31
Q

What is a Beneficial Ownership Reports of Insiders Form 5? When must it be filed?

A

Annual statement of changes in beneficial ownership; summary of transactions reports on Beneficial Ownership of Insiders Forms 3 and 4
Must be filed within 45 days of the end of the company’s fiscal year

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32
Q

Beneficial Ownership Reports of Insiders are covered by which SEC rule?

A

Rule 16a

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33
Q

What is the purpose of NASD Rule 2711?

A

To promote investor confidence by separating the functions of the investment banker from the trader and researcher; prohibits a research analyst from attending a bake-off / pitch or participating in the solicitation of investment banking business

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34
Q

What is NASD Rule 2711(j) / NYSE Rule 472(g)(2)?

A

Prohibits retaliation against research analysts, particularly against research analysts who write unfavorable reports that may jeopardize broker-dealer/investment banker relationships

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35
Q

Under NYSE Rule 472(b)(1-3), what is the investment bank allowed to do PRIOR to the research department publishing a research report?

A

Research analyst is PROHIBITED from submitting a research report to the investment banking division prior to publishing; analysts may communicate with and verify facts with the investment banking personnel, but must gain approval from Legal / Compliance prior to submitting any factual sections to investment banking personnel

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36
Q

What is NASD Rule 2711(b) / NYSE Rule 472(b)?

A

Prohibits anyone who works in a firm’s investment banking department or who is engaged in investment banking activities from supervising and exercising control over a research analyst or their compensation / evaluations

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37
Q

Corporate tax rate

A

Annual tax on taxable incomes of corporations

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38
Q

Marginal tax rate

A

Tax rate on the last dollar earned

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39
Q

Effective tax rate

A

Actual tax rate paid; = income taxes paid / net taxable income before taxes

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40
Q

What are the three sections of the cash flow statement? What are found in each?

A

Operating: Net Income, working Capital, D&A
Investing: purchase and sale of marketable securities, long-term investments, and capital investments / expenditures (e.g. PP&E)
Financing: Raising capital via debt/equity, dividend payments, treasury stock, retained earnings, notes / bonds payable

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41
Q

Treasury stock method

A

Fully diluted shares = (Total Shares if all options / warrants are exercised) - [(# of in-the-money options/warrants) x Weighted average strike price per share) / price per share]

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42
Q

Earnings per Share

A

EPS = (Net Income - Dividends to Preferred Shareholders) / Shares Outstanding

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43
Q

Return on Equity

A

ROE = Net income / shareholders’ equity

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44
Q

Total Enterprise Value

A 
Market Capitalization of Common Stock 
\+ Debt 
\+ Market Value of Preferred Stock 
\+ Value of minority interests
- cash / cash equivalents
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45
Q

Price to Book Value

A

Market capitalization / book value

BV = Total assets less intangibles - Total liabilities

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46
Q

Dividend Yield

A

Annual dividend / Current Share Price
**Shows how much of the dividend the investor will receive proportionate to the stock price (high yield insulates a security from volatility)

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47
Q

Price to Earnings Ratio

A

P/E = Stock Price / EPS
Higher P/E ratios indicate that investors are expecting higher future earnings growth and are willing to pay more (e.g. growth stocks)

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48
Q

What is beta?

A

Measure of the risk of a security compared to the overall market; Beta = 1, means that the stock as the same volatility as the market; Beta > 1, means the stock has greater volatility than the market (more aggressive); Beta > 1 is conservative and less volatile than the market

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49
Q

What is the formula for WACC?

A

WACC = (Cost of debt x (1 - Marginal Tax rate) x %Debt)+

+ ((Risk-free rate + (Beta + Risk premium) x %Equity)

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50
Q

What is the formula for Cost of Equity (CAPM)?

A

Cost of Equity = Risk-free rate + (Beta * Risk premium)

**Risk premium = Exp. market return minus risk-free rate

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51
Q

What is the risk-free rate of return?

A

Expected rate of return of investing in U.S. treasuries or risk-free investments

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52
Q

For which type of stock is a dividend guaranteed?

A

Preferred stock

53
Q

Which type of stock receives voting rights?

A

Common stock;

Preferred on occasion, but it will be specified in the offering

54
Q

What is a warrant? What are some key characteristics?

A

A warrant is the right to buy shares of a security at a particular price in the future

  • Typically good for 5-30 years
  • No dividends
  • Often attached to bond offer to “sweeten the pot” for low yielding bonds
  • Independently transferrable and tradable
55
Q

How do warrants differ from a right?

A

Warrants are long-term; rights are short-term
Warrants are usually above market price; rights are below
Warrants typically offered as “sweeteners” for other securities; rights are only offered to existing shareholders (e.g. to avoid diluting ownership during new issue)

56
Q

What is a Stock Appreciation Right?

A

Allows employees to benefit if the company’s stock appreciates
Once a SAR vests, the employee can exercise the right at any time before the expiration date (or on the settlement date, if specified); the employee receives the difference between the award price and market price on the day exercised;
- Employee does not have to pay for the shares when an SAR is exercised (doesn’t own the stock or rights of shareholder)

57
Q

Does an employee have to pay for an SAR?

A

No, they are just paid the difference between the award price and market price on day exercised; income is treated and taxed like wages (e.g. social security, Medicare)

58
Q

Do unsponsored ADRs have voting rights?

A

No they do not; only SPONSORED ADRs have voting rights

59
Q

How many banks can be involved in the issue of sponsored ADRs?

A

Only one bank has a formal agreement with the foreign company to act as the depository bank; will receive dividends, convert dividends to US dollars, and distribute them to holders in the US

60
Q

What is a debenture?

A

A corporate bond backed by the issuer’s promise to pay the bondholder

61
Q

What is a convertible bond?

A

A bond that can be converted into shares of stock

62
Q

What is the par value of corporate bonds?

A

Unless otherwise stated, the par value of corporate bonds is $1,000 (also known as the principal or face value)

63
Q

Conversion Ratio

A

Conversion ratio = Par value of convertible bond / conversion price of equity
Shows the number of shares of common stock that each convertible security can be turned into

64
Q

What is convexity?

A

The measure of how the duration of a bond changes based on changes in interest rates

65
Q

What is the coupon of a bond?

A

The stated annual interest rate based on the bond’s par value (e.g. if a $1000 bond has a 7% coupon, the annual interest payment is $70, or $35 semi-annually)

66
Q

What document serves as the formal agreement between the bondholder and the bond issuer?

A

The indenture

67
Q

Conversion parity formula

A

Conversion parity = Market value of bond / conversion ratio

68
Q

What is the definition of bond yield?

A

The actual rate of return of the bond to the investor (different than the coupon rate if the bond is not trading at par)

69
Q

What is the nominal yield of a bond?

A

The same as the coupon rate

70
Q

Current yield formula

A

Current yield = Annual coupon interest amount / Market price of the bond

71
Q

What is yield to maturity? How is it different than current yield?

A

The estimated annual rate of return that a bondholder will receive if they hold the bond to maturity; unlike current yield, accounts the time value of money

72
Q

Yield to Maturity formula

A

YTM = [Annual coupon payment +/- (Premium/discount / Years to Maturity)] / Avg. of par and market price

73
Q

Yield to Call

A

The yield an investor will receive on a callable bond if the issuer calls the bond before maturity

74
Q

What is Yield to Worst?

A

The lowest possible yield than an investor could receive on a bond; lowest of the yield to call (YTC) and yield to maturity (YTM) rate. It is intended to provide the rate of return in the worst case scenario (assuming the issuer does not default)

75
Q

Discount yield formula

A

Discount yield = (Discount / Face value) x (365 / Days to Maturity)

76
Q

What is the discount yield?

A

The effective yield of a bond that is sold at a discount from par and does not pay periodic interest

77
Q

What is a bond’s duration?

A

The measure of a bond’s sensitivity to relatively small interest rate changes and risk poised by volatility (e.g. the price of a bond with a duration of 6 would change 6% for every 1% change in interest rates)

78
Q

What are the three main credit rating agencies?

A

Standard & Poor’s, Moody’s, and Fitch Ratings

79
Q

Anything below WHICH bond rating is deemed speculative?

A

Anything below BBB/Baa investment grade tier is considered speculative or “junk bonds”

80
Q

What are the S&P and Fitch rating scale for bonds?

A

AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-

81
Q

What are the Moody’s rating scale for bonds?

A

Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3

82
Q

What is deemed a medium grade bond?

A

BBB+, BBB, BBB- or Baa1, Baa2, and Baa3

83
Q

What is a registration statement? What is included?

A

Serves to provide investors with information to make an informed investment decision; includes audited financials
SEC does not approve the investment or verify the accuracy of the financial statements

84
Q

When does registration statement become effective?

A

After a “cooling off” period; minimum of 20 days after filing of registration statement

85
Q

What form is filed if a public company is going private?

A

Schedule 13e-3

86
Q

What form must be filed for a tender offer?

A

Schedule 14d-1

87
Q

What is a tender offer?

A

When an acquirer makes a public offer to shareholders of a publicly traded corporate to tender their stock at a specified time and price (typically at a premium), subject to a minimum number of shares being sold

88
Q

Can restricted stock be tendered in a tender offer?

A

Yes

89
Q

What is a GARP investor?

A

Growth at a reasonable value; focused on growth and value investing

90
Q

What is a capital appreciation investor?

A

Investor looking for growth stocks; represented by an increase in stock price

91
Q

What is interest rate risk?

A

Refers to the risk of fluctuation in the market value of fixed income investment products (e.g. bonds) due to interest rate movements

92
Q

What is credit risk?

A

Refers to the risk that a particular company may default on bond payments

93
Q

What is inflation risk?

A

Risk that the purchasing power of one’s money will decline over time (applicable to low yielding investments such as money market funds)

94
Q

What is currency / exchange rate risk?

A

Risk that the value of an international investment might be affected based on changes in exchange rates

95
Q

What is reinvestment risk?

A

The risk that an investor will not be able to reinvest the interest earned on bonds / fixed income securities at as high a rate as the original interest rate

96
Q

What is stock market / systematic risk?

A

Risk that cannot be reduced through diversification (e.g. risk affecting all stocks); refers to the risk that the entire market will decline and the value of the investment will decline with it

97
Q

What is a C corp? How is it taxed?

A

Traditional corporate structure; taxed as a corporation

98
Q

What types of corporate structures are considered “pass through” entities?

A

LLCs and S Corps since they do not pay taxes at the entity level

99
Q

What is the difference between a “qualified purchaser” and an “accredited investor”?`

A

“Qualified purchasers” need at least $5 million in investments
“Accredited investors” need at least $1 million in net worth

100
Q

Who is responsible for all futures exchange related contracts?

A

The clearing house
All members of a futures exchange are required to clear their exchanges through a clearing house. Buyers and sellers agree on a price, and the broker clears it with the clearing house. Since clearing houses must clear all trades at the end of the trading session, it is the responsibility of the brokers to have enough money on deposit at the clearing house to cover their debits. The clearing house, in turn, must ensure all members have deposits sufficient to cover their contractual obligations. Thus, the responsibility for futures related contracts ultimately lays with the clearing house, even if the buyers or sellers become insolvent prior to settlement.

101
Q

What is included in a bond contract?

A

I. trust indenture
II. applicable legal statutes
III. other pertinent legal documents

102
Q

What is the federal funds rate?

A

The rate that banks charge one another on overnight loans to meet reserve requirements

103
Q

All of the following go up in value as the underlying stock goes up in value EXCEPT?
a) calls, b) rights, c) puts, d) warrants

A

Puts, calls, rights and warrants are all derivatives whose value is dependent on the value of underlying stock. The value of calls, rights, and warrants all go up in value as the underlying stock increases in value. In contrast, puts go down in value as the underlying stock increases in value.

104
Q

What is an accredited investor?

A

Institutional investors, organizations, or individuals with net worth of more than $1 million (excluding the value of their primary residence)
Also includes individuals with income of more than $200,000 in each of the two most recent years (or joint income of $300,000)

105
Q

What is a qualified purchaser?

A

Individuals, family-owned organizations, or trusts with investments of $5 million or more OR
1) a company with $25 million or more in investments; 2) investment manager with $35 million or more under management; 3) company beneficially owned exclusively by qualified purchasers; or 4) most qualified institutional buyers

106
Q

What is the difference between a Treasury Note and Treasury Bill?

A

Treasury Bills - issued at $100 and do NOT pay interest; available in 4, 13, 26, or 52 week terms; sold at a discount and redeemed at maturity for par
Treasury Notes - issued at 2, 3, 5, 7, or 10 year terms; pay interest every 6 months and redeemed at face value at maturity; a 10-year Treasury Note is a benchmark rate

107
Q

Risk-free rate of return

A

The rate of return on U.S. treasuries

108
Q

If a corporate bond’s trust indenture is to be secured by mortgaged property and the fair value of the property is at least __% of the aggregate principal amount of the outstanding indenture securities, the issuer must provide the trustee with an opinion or certificate from an independent expert.

A

Under the Trust Indenture Act, if an indenture is to be qualified or secured by the mortgage or pledge of property or securities, the issuer must provide the trustee with a certificate or opinion regarding the fair value of the property or securities. This certificate or opinion must be made by an expert, such as an engineer or appraiser. The expert must verify that releasing the property or securities will not impair the indenture security. If the fair value of property or securities is at least 10% of the aggregate principal amount of the outstanding indenture securities (and at least $25,000), then the certificate or opinion must come from an outside expert.

109
Q

How long is the cooling off period after a registration statement is filed?

A

Minimum of 20 days long

110
Q

Are restricted shareholders able to tender their shares in a tender offer?

A

Yes, any class of securities subject to a tender offer may participate, including restricted share. However, the bidder must accept the shares subject to the existing restrictions.

111
Q

The SEC requires reporting of tender offers of more than __% of a company

A

5%

112
Q

What form is filed when a tender offer is filed with the SEC?

A

14d-1 and Schedule TO (tender offer) form

113
Q

What must be done when a tender offer is extended?

A

The extension must be made public by issuing a press release or other form of public communication

114
Q

When must the target company of a tender offer file their recommendation (accept/reject/no opinion/unable to take a position)?

A

Must file their recommendation through form 14D-9 with the SEC within 10 days of the commencement of the tender offer

115
Q

What types of corporate structures have limited liability?

A 
Limited Partnerships (LPs)
Limited Liability Corporations (LLCs)
116
Q

What are the rules to qualify as a REIT?

A

90% of income is distributed to investors

75% of gross assets are invested in real estate

117
Q

What are considered money market funds?

A

Short-term investment vehicles that mature in one year of less (include t-bills, CDs, and commercial paper)

118
Q

Who qualifies as a Qualified Institutional Buyer (QIB)? What is the benefit?

A

Includes institutional investors such as mutual funds, insurance companies, and employee benefit plans
Includes entities with discretion over $100mm and dealers with discretion over $10mm

119
Q

What is a qualified purchaser?

A

Companies with $25mm+ in investments
Investment manager with $25mm+ under management
Company beneficially owned exclusively by qualified purchasers
Most qualified institutional buyers

120
Q

What is bring down due diligence?

A

Means to continue due diligence up to the closing date of the deal; purpose is to discover anything that the buyer’s side may have missed earlier in the due diligence process

121
Q

What is rule 402 of the Sarbanes-Oxley Act?

A

Prohibits issuers from making personal loans to executives of the issuer; only exception is loans for home improvement and consumer credit loans and other loans normally available o the general public

122
Q

What is rule 404 of the Sarbanes-Oxley Act?

A

Requires annual assessment of a company’s internal control structure and procedures for financial reporting

123
Q

The seven members of the Federal Reserve’s Board of Governors are chosen by whom?

A

The Board of Governors members are appointed by the president of the United States with Senate approval.

124
Q

What type of market is an auction market?

A

First market - where securities are traded on an exchange floor; NYSE is an example

125
Q

How long must a tender offer be open?

A

20 days

126
Q

How many additional business days must a tender offer be open if the issuing company offers an amendment to price or number of securities (>2%)?

A

10 additional business days

127
Q

When must a firm submit recorded telemarketing activities to FINRA?

A

Within 30 days at the end of each quarter

128
Q

Dividend discount formula

A

Price / Share = Annual Dividend / (Discount Rate - Dividend Growth Rate)

Series 79 (VKM) (3 decks)

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