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SIE Flashcards

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SIE Exam flashcards
1
Q

SEC (Securities and Exchange Commission)

A

an agency of the US gov that is responsible for protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation

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2
Q

Self-regulatory organizations (SROs)

A

entities created to regulate industry segments within an organization itself and without reliance on an actual governmental authority such as fed or state Govs

purpose: to self govern more efficiently in a narrow field –> more specialized rules and regulation

most famous SRO = FINRA (financial industry regulatory authority), trading of securities on this platform

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3
Q

FINRA

A

SRO accountable to the SEC, develops and implements rules and regulations specifically for brokerage firms and their employees involved with securities tradingg and investments

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4
Q

CBOE (Chicago Board Options Exchange)

A

largest options in the US and responsible for the S&P 500, S&P 100, Dow Jones, Nasdaq and others

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5
Q

NASSA (North American Securities Administrators Association)

A

STATE REGULATORS: devoted to investor protection, creates “model” securities laws that broadly reach many potential securities regulation issues. NASSA drafts these model acts many states use as the foundation for the laws actually enacted by the state

provides the basis for FINRA licenses 63, 65, and 66

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6
Q

SIPC (Securities Investor Protection Corporation)

A

FDIC and SIPC protect the interests of investors and bank customers. SIPC protects clients of brokers and dealers in case of financial failure of the broker. fully funded by member broker dealers

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7
Q

What happens in the event of a broker-dealer failure?

A

The SIPC organizes cash and the securities to be distributed to the clients of the failed member firm

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8
Q

What happens, in the case of a broker-dealer failure, there are no cash or securities?

A

The SIPC covers up to $500,000 of the equity balance of the customer which includes $250,000 in cash

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9
Q

FDIC (Federal Deposit Insurance Corporation)

A

protects the interests of investors and bank customers; different from the SIPC in that it helps with traditional bank deposits; in the event of a bank failure

FDIC insures a bank account of up to $250,000 and has a line of credit with the US treasury of $100 billion

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10
Q

Institutional investors

A

investors that are backed by an immense amount of capital (who are they backed by?: large financial institutions such as commercial banks, investment banks, insurance companies, pension funds, and hedge funds)

investors who invest on behalf of other people

are core drivers of the price of securities in capital markets

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11
Q

Retail investors

A

A retail investor is an individual or non-professional investor who buys and sells securities through brokerage firms or retirement accounts like 401(k)s. Retail investors are investing for themselves, often in brokerage or retirement accounts

have no effect on the price of securities in capital markets

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12
Q

Accredited investors

A

investors with sufficient net worth, annual income, and/or expertise and experience investing such that the accredited investor does not require the same level of protection afforded to retail investors by securities-related laws

allowed to purchase and sell unregistered securities referred to as private equity

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13
Q

Broker-dealers

A

when affecting securities transactions on behalf of others, they are a broker; when affecting securities transactions for their own accounts, a broker-dealer is acting in a principal capacity, they are a dealer

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14
Q

Introducing brokers

A

futures market equivalent of a registered rep in the equities market = equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets

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15
Q

Clearing brokers

A

work for a clearing firm that ensure proper settlement of transactions so that investors are ensured that their transaction is completed properly, both in a timely manner and efficiently

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16
Q

prime brokers

A

provide many different services to select clients who need more specialized, higher level services

often used by hedge funds that require sophisticated services to ensure that their funds operate properly

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17
Q

Who is exempt from registering as an investment adviser?

A
  • Certain domestic banks
  • Advisers whose business relates solely to obligations of the US gov’t such as treasury bonds
  • lawyers and accountants whose advice is related to their profession
  • broker dealer firms who do not receive any special compensation for their investment advice
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18
Q

Municipal advisors

A

entities that specialize in the intricacies of financing operations of local gov’t (I.e., municipalities through bond offerings)

work with local gov’t officials to help raise funds for critical local functions such as schools, infrastructure, hospitals, parks and rec

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19
Q

Securities

A

A security is a fungible, negotiable financial instrument that represents some type of financial value, usually in the form of a stock, bond, or option

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20
Q

What are the most common types of underwriting arrangements when a company wants to grow their business?

A

best efforts underwriting: investment bank is only required to place as much of the issuance as is possible given market conditions. if the underwriter is unable to sell all of the shares for the issuer, then the underwriter is not legally responsible for purchasing any remaining shares itself. NOT ideal for the issuer but it does protect the investment bank from having to make a purchase of the shares

firm commitment underwriting: investment bank is required to purchase the entire issuance of the offering if any shares remain after being offered to the public. IDEAL for the issuer who is guaranteed that all of its shares will be sold

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21
Q

Hedging

A

process where traders take positions to reduce the risk of other positions

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22
Q

Transfer agents

A

typically a commercial bank that is a client of the corporation and that maintains records of all equity and bond holders

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23
Q

Depository trust and clearing corporations (DTCC)

A

settles most securities transactions; in charge of transferring funds from the buying brokers account to the account of the broker who made the sale

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24
Q

Options Clearing Corporation (OCC)

A

guarantees that contracts on each side of an options contract are fulfilled, which primarily means that the seller or writer of a contract received a premium, and that the buyer of the contract received the underlying security from the seller of the option exercised

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25
Q

Primary market

A

Securities are created on the primary market. Debt and equity are sold, issues, and traded in capital markets.

corporations and governments use capital markets to borrow money, raise capital, and finance everything from operations, to forming new companies, to mortgages and loans.

associated with long term sources of capital as opposed to money markets

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26
Q

secondary market

A

where previously issued stocks, bonds, and other financial instruments are available to buy and sell. AKA auction market

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27
Q

Auction market

A

first bid has priority
high bid and low offer have the floor
a new auction begins when all bids at a certain price are exhausted
there are no secret transactions
bids and offers must be audible

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28
Q

third and fourth markets

A

third market: deal in pink sheets, they exist to provide another avenue of trading in financial markets. actually traded in the OTC market and where unlisted securities trade - traded through telephone and computer market AKA penny stocks

fourth market: traded “offline” so as to not disrupt the price of the security

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29
Q

monetary policy

A

how money supply can be utilized to maximize economic growth. administered by the Federal Reserve

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30
Q

fiscal policy

A

primarily concerned with government taxation and expenditures. increased taxation will lead to less economic growth because there will be less capital to invest in economic growth

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31
Q

open market activities

A

initiated by the Federal Reserve to affect the money supply and economic growth. ex: FR buys and sells treasury securities from and to primary dealers.

the the FR wants to increase the money supply, it will buy treasury securities on the open market, transfers money from the balance sheet of the federal reserve to the market economy in exchange for holding the securities on the balance sheet

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32
Q

4 main interest rates:

A

federal funds rate: rate the largest banks charge each other for overnight loans of $1 million or more. most volatile

prime rate: rate that banks charge low-risk customers (corporations) with excellent credit. rate fluctuates based on money supply

discount rate: interest rate that the FRB charges to FR banks when the bank is issuing short-term loans –> when the FRB lowers the discount rate, it costs bank less to borrow money from the FR and other banks so banks can charge a lower interest rate to customers

broker loan rate: rate that banks charge brokers and dealers when lending money for a customer’s margin accounts AKA loan rate or the money rate

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33
Q

4 primary statements companies provide on an annual and quarterly basis are:

A

income statement, a balance sheet, a cash flow statement and a statement of retained earnings

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34
Q

income statement:

A

shows the revenues and expenses of the company over a period of time and calculates net profit or net income number. reported using the accrual method

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35
Q

cash flow statement

A

reported with the income statement and represents cash flows from investing, operating, and financing activities

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36
Q

inflation

A

decreases the purchasing power of currency by lowering the value of the future cash flows of a bond. to lower this demand, investors typically require a higher bond yield or more attractive interest rates to justify the purchase

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37
Q

an invested yield curve

A

signifies a future recession since bonds with longer maturity dates have a lower yield rate

yield curve flattens to indicate a recession and typically has an upward slope

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38
Q

gross domestic product

A

consumer consumption, investment, governmental expenditures, and net exports and imports

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39
Q

gross national product

A

basically the same as GDP plus or minus economic output that occurs outside of a nation’s border, income earned from foreign investments, and income earned by foreign residents inside the US

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40
Q

exchange rates

A

affect the securities market in one of two ways: directly by impacting the value of securities for foreign companies and indirectly when affecting the cost for domestic businesses to conduct business overseas

41
Q

spot exchange rate

A

current price level in the market to directly exchange one currency for another, for delivery on the earliest possible value date. spot rate is set by the forex market

42
Q

Keynesian economic theory

A

continued demand is what supports the economy. increased or steady demand for certain products or services naturally leads to more businesses being created. result = more jobs, rising wages, an increase in loans.

fed gov’t must sustain the economy by spending tax money on projects that stimulate certain sectors or the economy as a whole

43
Q

monetarist economic theory

A

inflation and deflation are the direct result of the available money supply. if there’s not enough money in circulation, prices fall. when there’s too much money in circulation, prices rise. fed gov’t must regulate the money supply and stay out of the gov’t.

44
Q

dilutive secondary offering

A

reduce the value of the share price because additional new shares are now available in the market but the company’s value has not changed aka follow-on offerings

45
Q

nondilutive secondary offerings

A

do not reduce the value of the share price because no new shares are issued

46
Q

underwriting commitment AKA firm commitment

A

guarantees the purchase of all of the securities being offered in a sale

47
Q

what is included in the offering document?

A

basic info about location, type of business, contact information, and any type of jurisdictional information

must disclose offering price, number of shares being issues, the form of securities being offered, how escrow is handled, and how the proceeds will be sued

must also include management’s experience, all risks involved, and type of industry

48
Q

securities act of 1933

A

requires the registration of securities before they are sold to the public, and it was the first major fed legislation to regulate the offer and sale of securities. ensures public will receive all necessary financial information in the offering prospectus of securities being sold

49
Q

prospectus

A

similar to offering document, but issued with mutual funds, stocks, and bonds. provided by brokerages, underwriters, and investment bankers

50
Q

how long is the waiting or quiet period once a corp files a registration statement?

A

20 days

51
Q

blue sky laws

A

state-specific securities laws that need to be followed by investors and firms operating in that state

52
Q

what is the main benefit of allowing for the shelf registration of securities?

A

there is better flexibility when issuing debt and equity

53
Q

key business cycles

A

expansion: strong economic indicators and moves to the peak
peak: high point of the expansion phase
contraction: is usually a recession or a depression
trough: when downtrends begin to level off allowing for the cycle to begin again

54
Q

ADR (American depository receipts)

A

securities that allow US citizens to purchase shares of foreign companies in the US market without having to make the purchase on the foreign stock exchange

do not have call risk meaning the company cannot redeem those shares, do have currency and political risk

55
Q

Treasury bills

A

primary instrument used by the Federal Open Makret Committee (FOMC) to regulate the money supply.

56
Q

TIPS (treasury inflation protected securities)

A

have their principal amount adjusted for inflation as calculated by the consumer price index

these bonds compensate investors for the inflation that erodes the value of their investment. (TIPS typically have a lower yield than comparable treasury bonds or notes since they’re compensated by the inflation adjustments)

57
Q

securitization

A

financial institutions will sell pools of mortgages to other financial institutions with expertise in packaging the loans as a single security

58
Q

corporate bonds

A

taxable securities
they have a set maturity
typically have a set par (100) value of $1000
trade on major exchanges

59
Q

bond indenture (formal agreement between the bond issuer and the investor)

A

form of the bond
total dollar amount of the particular bond issuance
property pledged behind the bond
any protective covenants - acts that must be or cannot be performed by the issuer (working capital requirements, debt-equity ratio requirements, and restrictions on dividend payments)
redemption rights and call privileges

60
Q

callable bond or redeemable bond

A

can be redeemed by the bond issuer before its stated maturity (corp. has right to call the bond away from the investor). investors are compensated for this risk with higher interest rates on a comparable bond and a premium is paid to the investor when the call option is exercised

61
Q

when is a bond called?

A

when interest rates decline and a company can find less expensive financing

when there is a rising interest rate environment. when the investor realizes they can receive a higher interest rate for investing the same principal

62
Q

convertible bonds

A

enable the bondholder to convert the bond into stock from the same company - have variable interest rates

63
Q

conversion ratio

A

determines the number of shares an investor receives upon the conversion of each bond

tells the investor how many shares they’ll receive from converting each bond they own

64
Q

arbitrage

A

when investors try to take advantage of pricing discrepancies between convertible bonds and the underlying stock

65
Q

discount rates

A

interest rate charged to commercial banks (MS, JP Morgan, etc.) on loans they receive from the lending facility federal banks

66
Q

bond

A

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

Bonds are units of corporate debt issued by companies and securitized as tradeable assets

67
Q

general obligation bonds

A

bonds backed by the full faith and credit of the municipality and are paid with general revenue and borrowings

68
Q

dutch auction

A

where the price is lowered until it matches a bid.

municipal bonds and treasury bonds are sold through dutch auction

69
Q

variable rate demand note (VRDN)

A

debt instrument that represents borrowed funds that are payable on demand and accrue interest based on a prevailing money market rate, such as the prime rate

interest rate on VRDN is adjusted daily, weekly, or monthly to reflect the current interest rate environment

70
Q

money market funds

A

NOT insured by the FDIC. SEC mandates that the prospectus states that the federal gov’t doesn’t guarantee the money, and there’s no guarantee that the funds will maintain a net asset value of a dollar.

average maturity must be short-term, no longer than 90 days

71
Q

coupon rate

A

The coupon rate is the annual income an investor can expect to receive while holding a particular bond

72
Q

how often treasury bonds pay interest?

A

semi-annual basis

73
Q

option

A

serve as a unique tool to help reduce the risk of the investment, options can provide the investor the choice to buy or sell, can help inverstors increase their returns

American options: exercised or closed at any time prior to the date of expiration

European options: stipulate shorter duration of time in which the option can be exercised

74
Q

call option

A

the obligation to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.

75
Q

put option

A

gives the holder the right to sell the underlying asset at a specified price on or before expiration

76
Q

strike price

A

the price at which the option can be exercised by the investo, exercise date (or expiration date) is the time by which the option can be exercised

Options contracts are derivatives that give the holders the right, but not the obligation, to buy or sell some underlying security at some point in the future at a pre-specified price. This price is known as the option’s strike price (or exercise price).

77
Q

option premium

A

Premiums for options are the cost to buy an option. Options give the holder (owner) the right but not the obligation to buy or sell the underlying financial instrument at a specified strike price. The premium for a bond reflects changes in interest rates or risk profile since the issuance date.

78
Q

open interest

A

primarily used to evaluate the amount of liquidity in an options market to assure there is active trading

79
Q

options trading

A

position limit is the maximum number of contracts an investor can hold on an underlying security

CBOE usually establishes these limits based on the amount of liquidity in a stock and the number of shares outstanding

80
Q

when a bond makes an interest payment or a stock pays a dividend

A

it will affect the price of the asset and the value of the option.

in the case of stocks, the stock price will fall by the amount of the dividend. the vaslue of the option will increase as the option holder may receive the dividend or interest payment depending on the date the option expires and if it is exercised

81
Q

in the money call option

A

if the current price of the underlying asset is higher than the agreed upon price (or strike price) call would have intrinsic value

82
Q

difference between statutory voting and cumulative voting

A

statutory: allows the shareholder to vote one time per share for each seat on the BOD

cumulative: allows the shareholder to pool votes together and then allocate them as desired. ex: shareholder has a total of 20 votes for the 10 shares that are held. shareholder can cast 20 votes for one candidate, 15 for one and 5 for another, or any other allocation

83
Q

common stockholders

A

paid last in a liquidation, bondholders, general creditors, and preferred shareholders are paid first

84
Q

dividends

A

share of the corporations profits

ex: a company could pay a dividend of $.25 per share. companies may choose not to pay dividends and instead reinvest profits for greater growth

85
Q

pre=emptive rights

A

provides investors with a contractual right to acquire new shares proportionate to their current shares

86
Q

defensive stocks

A

resistant to changes in economic cycles

87
Q

systemic risk

A

reflects the fact that the performanmce of an individual security will be impacted by the performance of the overall market

88
Q

preferred stock

A

issued by corporations, features characteristics of both stocks and bonds

holders of preferred stock typically do not have voting rights

89
Q

nominal value

A

Nominal value of a security, often referred to as face or par value, is its redemption price and is normally stated on the front of that security. With respect to bonds and stocks, it is the stated value of an issued security, as opposed to its market value

90
Q

warrant

A

entitles the holder to buy the issuer’s stock at a specified price for a period of time

long term instrument, 5 years or moreand the exercise price ofthe warrant is ussually higher than the stock price at the time of the issue

warrant becomes exercisable only if the stock appreciates over the long term above the exercise price. warrants are attached to bonds or preferred stock allowing the issuer to pay a lower interest rate or dividend

91
Q

how do most equity trades settle?

A

regular way, t + 2

92
Q

what happens on the morning of the ex-dividend date?

A

the price of the stock drops by the amount of the dividend and certain types of orders will be automatically reduced by dividend price

93
Q

stock split

A

an adjustment in an issuer’s outstanding share count, after a stock split, each investor’s ownership position remains unchanged, but the number of shares and the stock price are adjusted

94
Q

how often is interest paid

A

every 6 months

95
Q

bond

A

security issued by a corporation or governmental entity to raise capital, representing a loan to a borrower in return for payment of interest and principal (return of their money) to the lender

96
Q

coupon

A

periodic bond interest paid

97
Q

par value

A

amount of money bond will receive at maturity

always assume a par value of $1000

98
Q

bond quotation

A

states the price the bond is trading

ex: if bond is quoted ABOVE par, it is trading at a premium. if a bond is quoted BELOW then it is trading at a discount

ex: bond is quoted at 95, it is trading at 95% of par or $950

SIE exam (1 decks)

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