Series 6 Exam - My Study Cards Flashcards
Effective Funds Rate
the daily rate charged by Federal Reserve member banks
Federal Reserve Board
Responsible for Monetary Policy:
Raising/Lower reserve requirements
Raise/Lower interest rates
Change the amount of US government debt held by institutions
Sell securities in the open market
Short Sales
Strategy of borrowing shares to sell that an the investor must eventually replace. Used for bearish investors. The sell the borrowed shares at a high price and buy back to replace low.
Tier 1 Global Select Market Companies
Companies of global interest that meet the MOST stringent standards for listing
Tier 2 Global Market Companies
Companies of global interest that do NOT meet the extremely high standards for listing
Tier 3 Global Market Companies
Companies of global interest that meet the MINIMUM listing requirements
Pink Sheets
Most SPECULATIVE of all equity securities traded in the OTC market
Convertible Preferred Stock
Often issued with a lower stated dividend because the investor may have the opportunity to convert it into common stock shares and enjoy capital gains.
How many shares are there in a standard unit of stock
100
American Depository Receipts
ADR’S
Facilitate trading of foreign stocks in the US markets. They are susceptible to CURRENCY exchange risk.
Preemptive Rights
allows shareholder the RIGHT to buy more, newly issued stock so that he may retain the same percentage of ownership in a company
Rights Offering
Allows stockholder to purchase common stock below the current market price. Stockholder may sell these rights in the secondary market if he chooses.
Warrant
Certificate granting its owner the right to buy more securities from the issuer at a specified price, normally HIGHER than the market price when issued at later date (longer than what preemptive rights can provide).
Par Value of a Bond
$1,000
Bond Pricing
Stated as a Percentage of Par
Mature in 10 - 30 years
Quoted in 1/8th of a point:
1 point = 10.00 , 1/8th of a point = 1.25
Therefore, a bond quoted at 98 3/4% = 987.50.
95 1/2 = 955.00
Liquidation Priority
- Unpaid Wages
- IRS, state and county tax
- Secured Debt (bonds and mortgages)
- Unsecured Debt (debentures)
- Subordinate debt
- Preferred Stockholders
- Common Stockholders
Refunding
Practice of raising money to call a bond.
High Risk to Low Risk Bond Rank
- Secured Bond
- Debentures
- Subordinate debentures
4 Income Bonds
Determining YTM, CY and Par
Premium - CY TYM
- -
Par - - - - - - - - - - - -
- -
Discount - - PAR -
T-Bill
Short-term obligation debt instruments issued in denominations of 1,000 (PAR VALUE) to 1M and mature in 4 to maximum of 52 weeks.
Does not pay regular interest payments. They are purchased at a discount. The return is the difference between the discount and the par value.
Example:
Purchase of T-Bill at 975.00 will have a return of 25.00. (1000 par - 975.00 purchase price)
T-Notes
Issued in denominations of 1,000 (PAR VALUE) to 1M
Mature in 2 - 10 years
Stated in 1/32 of a point. 1 point = 10.00
Therefore, bond quote of of 98 2/32 = 980.6250
Standard Trading Registered Interest and Principle Securities (STRIPS)
Government backed, ZERO-COUPON instruments/bonds
Series EE Bonds
NONTRANSFERABLE bonds
Issued at 50% of their face value from $50.00 - 10k
Can be redeemed before mature but will receive a lower rate of return.
EXEMPT from STATE and LOCAL TAX. Federal tax may be paid annually or deferred until the bond matures.
Series HH Bonds
Nontransferable sold between investors.
Issued at 50% of their face value from $500.00 - 10k
Mature in 10 years.
EXEMPT from STATE and LOCAL TAX. Federal tax may be paid annually or deferred until the bond matures.
GNMA (Ginnie Mae)
Private lenders who pool together mortgages invested into with compound interest. Investor receives principal payment plus interest each month. Has PREPAYMENT RISK when interest rates in the market are low as this anticipated longterm investment can be paid off early.
Freddie Mac
Public corporation who’s stock trades on the NYSE.
Purchases residential mortgages from financial institutions and packaging them into mortgage backed securities to sell to investors.
Fannie Mae
Public corporation who provides mortgage capital.
Purchases conventional and insured mortgages from agencies like FHA and the VA .
General Obligation Bonds (GOs)
Also known as FULL FAITH and CREDIT BONDS because the interest and principal are paid back solely on good faith. Backed by income taxes, license fees and sales taxes.
The money is used for public projects such as schools, courthouses, etc.
Tax Equivalent Yield
Municipal Yield / (1 - investor’s tax bracket)
Tax-Free Equivalent Yield
Corporate Yield (tax free rate) / (1 - investor’s tax bracket)
Revenue Bonds
Used to fund municipalities such as Utilities, housing, transportation, education, health, industrial…etc.
Not backed by full faith of the municipality
Special Revenue Bond:
IDR - Industrial Development Revenue Bond
used to purchase equipment and then leased to a corporations
Typically TAXABLE at the FEDERAL LEVEL
Conversion Parity Price of COMMON STOCK Calculation
Market Price of the Bond
————————————————-
Conversion Ration (# of shares)
Example:
Market Value = 1400
Par Value = 1,000 / conversion price (50)
= 20 shares conversion
1400 / 20 conversion shares = 70 conversion price.
Negotiable CD (Jumbo CDs)
Minimum face of 100k
Federal Funds Rate
interest rate charged on reserves traded among member banks for overnight use - MOST VOLATILE RATE. - Calculated DAILY.
Prime Rate
BEST rate on corporate loans
Discount Rate
Charge on loans to depository institutions
Broker Dealer Rate
Charge on loans to margin accounts for broker dealer customers
London InterBank Offered Rate (LIBOR)
average interest rate charged when banks in the London interbank market borrow loans from each other. Internationally recognized benchmark or short-term loans.
Balance of Payment
The flow of money between the US and other countries
Investment Company
Corporation or trust that pools investor’s money and then invests that money in securities on their behalf
Investment Company of 1940
Act that governs investment companies
Diversified Investment Company
States that a DIVERSIFIED company meets the requirements of the 75-5-10 rule test, where:
- 75% of the funds total assets MUST be invested in securities by companies other than the investment company itself.
OF THAT 75%, it should be invested such that……
- No more than 5% of the funds total assets are invested in the securities of any one issuer
- No more than 10% or the outstanding voting securities of any one issues may be owns
Example: If a company has $7M in assets, a MAXIMUM of only 700k can be invested in this company.
Exchange Traded Funds (ETFs)
Equity index fund, like the S&P 500, but it traded on the floor of the exchange
Open-End Company
- Issues no more than 1 class of security
- maintains a minimum debt -to-asset ratio of 3:1.
Bankers Acceptances (MM)
Finances imports and exports. Like post dated check and is payable in 1 to 270 days
Commercial Paper (MM)
Finances seasonal shortages. Matures up to 270 days but most mature in 90.
Negotiable CDs (MM)
Min 100k contribution. Traded in secondary market BEFORE maturity
Ex-Date
SRO - Closed market
BOD - open market
Best Efforts Offering
An offering of newly issued securities in which the investment banker acts as an agent of the corporation, promising only his best efforts n making the issue a success, but not guaranteeing the corporation that all shares will be sold or its money for an unsold share
Tendering
Practice of a bond issuers buying back their bonds in the open marker because the bonds were not callable
Secondary Offering
When one or more major STOCKHOLDERS sells control stock to the public for the first time, and the proceeds of the offering belong to the STOCKHOLDER - NOT the ISSUER
Revenue Bond
Bonds to finance municipal facilities such as utilities, housing, transportation, education, etc.
Based on FULL FAITH! - not back by the municipality
Usually pay less interest than corporate bonds
Legal Opinion
Attached to every bond certificate that states the issue conforms with applicable laws, the state constitution, and is tax free at the federal level.
written and signed by the bond counsel who specializes in tax-exempt bond offerings
Securities Exchange Act of 1933
Federal legislation requiring full and fair disclosure of all material information about the issuance of new securities.
Helps prevent fraud in the sale of new securities
The company must provide a registration statement with includes the prospectus filed with the SEC
Securities Exchange Act of 1934
Federal legislation that established the SEC. Aimed to protect investors by regulating the exchanges, the OTC market, the extension of credit by FRB, broker/dealers, insider transactions, trading activities, client accounts, and net capital
Securities Investor Protection Corporation
Non-profit membership corp created by an act of congress to protect clients of brokerage firms forced into bankruptcy. Composed of all brokers and dealers and dealers registered under the Securities Exchange Act of 1934, and members of national security exchanges, and most FINRA Members
