sie chapter 2 important Flashcards
Each share represents ___/___ or __%
1/100 or 1% of ownership
common stockholders have the right to
vote for corporate directors
right to limited access to the corporations books(audits on annual basis)
preemptive rights to maintain their proportional share of ownership in the corporation
proxy
absentee ballot for common stockholders if they miss the meeting
capital gains
an increase in market price of securities
used with Investors with long term investment horizon
dividends are declared by
board of directors
market risk
chance that a stock will decline
decreased or no dividend income
chance that dividends will decrease or just stop
low priority at dissolution
preferred stock holders get paid before common stockholders
order for priority with liquidation
IRS(taxes) and employee(unpaid wages) secured debt unsecured liabilities and general creditors subordinated debt preferred stock common stock
preferred share holders rights
no voting rights nor do they have preemptive rights
benefits of owning preferred stock
dividends paid before common shareholders
if corporation goes bankrupt then this applies over common stockholders also
risk of owning preferred stock
purchasing power risk
interest rate sensitivity
decreased or no dividend
paid before common shareholders but everyone else gets priority over preferred in the event of bankruptcy
straight(non cumulative)
missed dividends are not paid
cumulative
accrues payments in the event that their are missed dividend payments
dividends due cumulative stock accumulate where
on the company’s books until the corporation board of directors decides to pay them
callable preferred
Corporations often issue callable (or redeemable) preferred stock, which a company can buy back from investors at a stated price after a speci ed date.
convertible preferred share price tends to
fluctuate in line with the common.
adjustable rate preferred
adjustable dividend rates
Such dividends are usually tied to the rates of other interest rate benchmarks, such as Treasury bills and money market rates, and can be adjusted as often as quarterly.
for investors looking for income through preferred stock, which would be their least appropriate
adjustable preferred
participating preferred
In addition to fixed dividends, participating preferred stock offers its owners a share of corporate pro ts that remain after all dividends and interest due other securities are paid.
control securities
are those owned by directors, of officers, or persons who own or control 10% or more of the issuer’s voting stock.
if one person holds 5% of the voting stock and their wife owns another 5% of the voting stock, then are they a control person or not
they are
restricted securities
are those acquired through some means other than a registered pub- lic offering.
rule 144
SEC rule requiring that persons who hold control
or restricted securities sell them only in limited quanti- ties, and that all sales of restricted stock by control per- sons must be reported to the SEC by filing a Form 144,
restricted stock(unregistered) held by a nonaffiliated(non insider)=
six month hold
sell freely thereafter
restricted stock(unregistered) held by an affiliate(insider)
6 month hold
volume limits thereafter
control stock(registered) held by an insider
no hold
volume limits apply
American depository receipts (ADR’s)
ADRs are a type of equity security designed to simplify foreign investing for Americans.
An ADR is created when common shares are purchased in the foreign company’s home market.
ADRS will be listed on the _____ but some may trade ____
nyse
OTC over the counter
ADRS trade and settle T+
2
ADR taxation
dividends paid to the us investor may be subject to withholding tax by the home country.
Penny stocks
unlisted security trading at less than $5 per share
in regards to penny stocks SEC rules require that customers
before their initial transaction be given a copy of a risk disclosure document
if the account holds penny stocks, broker dealers must provide
a monthly account statement for the customer.
the provisions of the penn stock rules apply only to ____transactions
solicited
established customers are exempt from the _______ but not from the ___
suitability statement requirement
disclosure requirements
established customer is someone who
has held an account with the BD for at least one year (and has made a deposit of funds or securities); or
has made at least three penny stock purchases of different issuers on different days.
term bond
the principal of the whole issue matures at once.
serial bond
schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid.
balloon bond
the issuer repays part of the bond’s principal before the final maturity date, as with a serial maturity, but pays off the major portion of the bond at maturity.
coupon represents
interest rate the issuer has agreed to pay the investor
coupon also equals
stated yield or nominal yield
a bond with a 6% coupon is paying $60 in interest per year . par value =
6% × $1,000 par value = $60)
interest is generally paid on a ____basis
semi annual
bond prices impacted by
supply and demand
interest rates
bond prices have what relationship with interest rates
inverse
Though the price of the bond will react to market forces (interest rate sensitivity and general supply and demand), the coupon is
always the same
nominal yield
Coupon, nominal, or stated yield is set at the time of issue. Remember that the coupon is a xed percentage of the bond’s par value.
current yield
measures a bond’s annual coupon payment (interest) relative to its market price
current yield=
annual coupon payment +market price
yield to maturity
reflects the annualized return of the bond if held to maturity.
yield to call
Some bonds are issued with what is known as a call feature. A bond with a call feature may be redeemed before maturity at the issuer’s option.
call feature
generally done when interest rates are
call feature allows an issuer to call in a bond before maturity.
falling
put feature
generally done when interest rates are
The investor can put the back to the issuer before it matures.
rising
convertible feature
benefit is
are issued by corporate issuers, allowing the investor to convert the bond into shares of common stock.
exchange debt instrument for one that gives investor ownership rights
When bonds are issued with features that benefit the issuer, like a call feature, the issuer generally will need to pay a _______ coupon rate of interest to make the bond attractive to new investors.
higher
when bonds are issued with features that benefit the bondholder, like put or conversion features, the issuer can usually pay a slightly____ coupon rate of interest
lower
order from lowest to highest for treasury securities maturities
bills, notes, bonds
t bill are the only security issued at a
they are
discount
without states interest rate
highly liquid
treasury bills issued with maturities
4, 13, 26, 52 weeks
t notes
direct debt obligations with maturities of 2-10 years
treasury bills
direct short term debt obligations of us gov
t bonds
direct debt obligations, pay semiannual interest as a percentage of the stated par value and mature at par value
10-30 years
treasury receipts or strips back in full by the us government
strips
the settlement of agency issued securities occurs t+
2
farm credit system (fcs)
a national network of lending institutions that pro- vides agricultural nancing and credit.
government national mortgage association
is a government-owned corporation that supports the Department of Housing and Urban Development.
only agency backed by the full faith and credit of the federal government
government national mortgage association
federal home mortgage corporation
created to promote the development of a nationwide secondary market in mortgages by buying residential mortgages from nancial institutions and packaging them into mortgage-backed securities for sale to investors.
federal national mortgage association
provides mortgage capital.
corporate bonds settle t+
3
mortgage bond
a corporation will borrow money backed by real estate and physical assets of the corporation.
equipment trust certificates
Corporations, particularly railroads and other transportation companies, nance the acquisition of capital equipment used in the course of their business. For example, railroads will issue equipment trust certi cates to purchase their rolling stock and locomotives.
collateral trust bonds
Sometimes, a corporation wants to borrow money and has neither real estate (to back a mortgage bond) nor equipment (to back an equipment trust) to use as collateral. Instead, it deposits securities it owns into a trust to serve as collateral for the lenders.
debenture
A debenture is a debt obligation of the corporation backed only by its word and general creditworthiness.
guaranteed bonds
are backed by a company other than the issuing corporation, such as a parent company. The value of the guarantee is only as good as the strength of the company making that guarantee.
guaranteed bonds are secured or unsecured
unsecured
income bonds
are used when a company is reorganizing and coming out of bankruptcy.
if an investor is seeking income, an income bond is or is not a good recommendation
NOT
order of priority for bankruptcy
secured creditors debt instruments
unsecured creditors
subordinated debt
preferred stockholders
common stockholders
municipal securities
are securities issued either by state or local governments or by U.S. territories, authorities, and special districts.
general obligation(go) bonds
issued for capital improvements that benefit the entire community.
go bonds are known as
backed by
full faith and credit issues and are backed by the municipality’s taxing
power.
ad valorem
revenue bonds
used to finance any municipal facility that generates suf cient income.
anticipation notes
are short-term securities that generate funds for a municipality that expects other revenues soon.
529 plans types
prepaid
savings plans
Local government investment pools
States establish local government investment pools (LGIPs) to provide other government entities, such as cities, counties, school districts, or other state agencies, with a short-term investment vehicle to invest funds.
ABLE
ccounts are tax-advantaged savings accounts for individuals with disabilities and their families.
capital market serves as a source of
intermediate term to long term financing
money market serves as a source of
receive or don’t receive interest payments
short term funds
dont
certificate of deposit maturities range
one year or less
bankers acceptance
is a short-term time draft with a specified payment date drawn on a bank.
commercial paper
maturites range from
hort-term, unsecured commercial paper, known as promissory notes,
1 to 270 days
though t notes and t bonds are issued with longer maturities than t bills, once the notes and bonds have only one year left to maturity they are considered
money market instruments
repurchase agreements
a financial institution, such as a bank or BD, raises cash by temporarily selling some of the securities it holds with an agreement to buy back the securities at a later date at a slightly higher price.
reverse repo
a dealer agrees to buy securities from an investor and sell them back later at a higher price
why would you place money market securities in a clients portfolio
very liquid
very safe
short term
risks of money market securities
rate of return quite low
(not good for long term investors)
incomes low and can fluctuate
draw relationship between yields and premium discount and par
premium cy ytm ytc
par
dis
cros
Under Rule 144, how long must a restricted security be held before it can be sold?
6 months
call
right to buy
put
right to sell
long call vs short call
long call has right to buy(bullish)
short call (writer) received premium (bearish)
obligation to buy
long put vs short put
right to sell(bearish)
obligation to buy(bullish)
at the money =
price of stock equals strike price
intrinsic value
same as the amount a contract is in the money
parity for call=
when premium equals intrinsic value
break even for long calls found by
adding strike price and the premium
Max gain for long call
unlimited
max loss for long call is
premium
Break even for short call is
adding strike price to premium
max gain for short call
premium
max loss for short call
unlimited
long put Break even
strike price-premium
long put max gain
strike price-premium
long put max loss
premium paid
short put breakeven
strike price-premium
short put max gain
premium
short put max loss
strike price-premium
options clearing corporation
the clearing agent for listed options contracts.
listed options settle T+
1
listed options expire on
the third friday of the expiration month at 11:59 pm
any contract that is in the money by at least___will be automatically exercsied
.01
american style
call or put buyers can exercise a contract any time before expiration
european style
these type of options can only be exercised at expiration
occ options disclosure document
must be provided at or before the time the account approval
all options must ultimately be approved by
a firms ROP
then no later than ___days after the account approval, the customer must return the signed options agreement
15 days
options account must be ____before trading can occur
approved
covered
writer owns the underlying security
naked
(more risky)writer does not own the underlying security
protective puts
an investor who is long stock could buy a put option as a hedge against stock falling in value
protective calls
an investor who is short stock could buy a call option as a hedge
the options clearing corporation assigns short bds ____
randomly
investment company
corporation or trust that pools investors money and then invests that money in securities on their behalf
variable annuities have subaccounts that are defined as either
uits or open end management investment companies
face amount certificate
is a contract between an investor and an issuer in which the issuer guarantees payment of a stated(face amount) sum to the investor at some set date in the future
a unit investment trust
an investment company organized under a trust indenture
facs and uits are managed or not managed
once portfolio are composed they are changed or not changed
not
not
facs and uits trade or dont trade in secondary market
redeemable through
don’t
issuer
debt fixed uit
typically purchases a portfolio of bonds and terminates when the bonds in the portfolio mature
equity fixed uit
purchases bonds and terminates when the bonds in the portfolio mature
non fixed uit
purchases shares of an underlying mutual fund
management investment company
actively manages a securities portfolio to achieve a stated investment objective
close end investment companies
will raise capital for its portfolio by conducting a common stock offering.
may also issue bonds and preferred stock and debt securities
company registeres a fixed number of shares with the sec and offers them to the public for limited time. once all shares have been sold then its closed to new investors.
trades in secondary market
Open-end investment companies(mutual funds)
An open-end company only issues one class of security, which is common stock (no preferred shares or bonds)
It does not specify the exact number of shares it intends to issue but registers an open offering with the SEC. In other words, mutual funds conduct a continuous primary offering of common stock.
while mutual funds only issue common shares to their shareholders, the funds themselves can purchase common stock, preferred stock, and bonds for their investment portfolios. As noted, each fund has a stated invest- ment objective, and which types of securities the fund portfolio purchases has largely to do with ful lling that objective.
annuity
have what type of guarantee
is an insurance contract designed to provide retirement income.
mortality guarantee.
If the investment manager of an insurance company is responsible for selecting the securi- ties to be held in the separate account, the separate account is
directly managed and must be registered under the Investment Company Act of 1940 as an open-end management invest- ment company.
if the investment manager of the insurance company passes the portfolio management responsibility to another party, the separate account is
indirectly man- aged and must be registered as a UIT under the Investment Company Act of 1940.
fixed vs variable annuity
A fixed annuity differs from a variable annuity. Though both are insurance company products and both guarantee a stream of income for life, a fixed annuity simply promises a stated rate of return. Therefore, it is the insurance company who is at risk to provide the rate of return it promised. The investor assumes no investment risk with a xed annuity. With no investment risk for the investor to shoulder, the product is not considered to be a security.
mutual funds are ____securities
redeemable which means they do not trade in any secondary market
front end load shares
Class A shares have front-end sales charges (loads). With A shares, the sales charges are paid at the time an investor buys shares and the sales charge is taken from the total amount invested. Front-end loads are the most common way of paying for mutual fund shares.
class b shares
Class B shares have a back-end sales load, also called a contingent deferred sales charge (CDSC). A back-end sales charge is paid at the time an investor sells shares previously purchased (has them redeemed).
class c level load shares
good for investors with __time horizon
Class C shares typically have a one-year, 1% CDSC, a .75% 12b-1 fee (fees used to promote the fund discussed later), and a .25% shareholder services fee. Because these fees never go away, C shares are commonly referred to as having a level load.
short
no load shares
As noted earlier, some companies market their shares directly to the public, eliminating the need for underwriters and thus the sales charges used to compensate them. As the name no load implies, the fund does not charge any type of sales charge and are purchased at NAV. However, not every type of fee passed on to shareholders is considered to be a sales charge. No-load funds are permitted to charge fees that are not considered sales charges, such as purchase fees, account fees, exchange fees, and redemption fees.
market timing
short-term buying and selling of mutual fund shares to take advantage of inefficiencies in mutual fund pricing.
NAV=
total assets-total liabilities
a prospectus may or may not be altered
may not and cant take any measure to bring attention to any specific passage or section
summary prospectus
A mutual fund can provide a summary prospectus to investors who may include an application that investors can use to buy the fund’s shares.
statement of additional information
Mutual funds (open end) as well as closed- end funds are required to have an SAI available for delivery within three business days of an investor’s request without charge.
finanancial reports
The Investment Company Act of 1940 requires that shareholders receive financial reports at least semiannually. One of these must be an audited annual report.
an investment company must send a copy of
a balance sheet to any shareholder who requests one in writing between semi annual reports
funds costs and fees
The services mutual funds offer may include retirement account custodianship, investment plans, check-writing privileges, transfers by telephone or online, withdrawal plans, and numerous other services and privileges. However, an investor should always weigh the cost of services provided, as the costs are ultimately passed on to the investor, against the value of the services to the investor.
sales loads
Discussed earlier, funds can charge sales loads in different ways: front-end (A shares), back-end (B shares), or level-load (C shares) sales charges.
operating expenses
Typical expenses would be salaries and administrative fees.
Fund portfolio management fee
Paid to those hired to manage the investments in the fund portfolio, it is calculated as a percentage of assets under management.
which fee is every funds greatest expense
management fee
non us market securities
ome funds invest either in part or exclusively in the secu- rities of companies that have their principal business activities outside of the United States. While there is no limit to what their objectives can be, most are structured for long-term capital appreciation.
direct participation programs
Direct participation programs (DPPs) are unique forms of business that raise money to invest in real estate, oil and gas, equipment leasing, and other similar business ventures. DPPs are not taxed directly as a corporation would be; instead, the income or losses are passed directly through to the owners of the partnership—the investors. The investors are then indi- vidually responsible for satisfying any tax consequences.
real estate programs
Real estate programs can invest in raw land, new construction, or existing properties.
cash flow comes from
rents
capital growth comes from
appreciation of property
oil and gas programs
include speculative or exploratory (wildcatting) programs to locate new oil deposits (generally considered the riskiest developmental programs that drill near existing producing wells in hopes of locating new deposits) and income programs that invest in producing wells (generally considered the least risky).
intangible drilling costs
These are costs associated with drilling, such as wages, supplies, fuel, and insurance that have no salvage value when the program ends. These IDCs can be written off (deducted) in full in the first year of operation. In contrast, tangible drilling costs are associated with items that have some salvage value at the end of the program, such as drilling equipment.
depletion allowances
hese are tax deductions that compensate the program for the decreasing supply of oil or gas (or any other resource or mineral) after it is taken out of the ground and sold.
leasing programs
Equipment leasing programs are created when DPPs purchase equipment leased to other businesses.
limited partnership
LPs are investment opportunities that permit the economic consequences of a business to ow or pass through to investors. The businesses themselves are not tax-paying entities. These pro- grams pass through to investors a share in the income, gains, losses, deductions, and tax credits of the business entity.
general partners
have unlimited liability, meaning that they can be held personally liable for business losses and debts. Their role is to manage all aspects of the partnership and have a feduciary responsibility to use the invested capital in the best interest of the investors. In managing the partnership, they make decisions that legally bind the partnership, and they buy and sell property for the partnership; they are compensated for ful lling these duties.
limited partners
As their title implies, limited partners have limited liability, meaning that they can’t lose more than they invested. They have no business management responsibilities, and in fact, should they participate in any day-to-day management of the business, they can lose their limited liability status and be considered a GP. Limited partners have the right to vote on overall business objectives and the right to receive cash distributions, capital gains, and tax deductions generated by the business. They have the right to inspect all books and records, and if the GP does not act in the best interest of the business, limited partners have the right to sue the GP.
real estate investment trust
A real estate investment trust (REIT) is a company that manages a portfolio of real estate, mortgages, or both to earn pro ts for shareholders. REITs pool capital in a manner similar to an investment company but are not investment companies, neither open nor closed end.
reits registered with sec are ___and non registered are
public
private
reits traded on the stock exchange are
listed
reits are or are not investment companies
are not
reits offer
dividends and gains to investors but do not pass through losses
hedge funds are considered
unregulated as they currently do not have to be registered with the sec
they do require that investors meet that test of being a sophisticated investor. This means they should be accredited having the minimum income and investment knowledge
hedge funds
Hedge funds are similar to mutual funds in that investments are pooled and profession- ally managed, but they differ in that the fund has more exibility in the investment strategies employed. While hedging is the practice of attempting to limit risk, most hedge funds spec- ify generating high returns as their primary investment objective. In attempting to achieve these returns, they tend to shoulder a substantial amount of risk. Hedge funds are typically aggressively managed and often construct portfolios of high-risk investments.
it is not unusual for hedge fund organizers
to also be investors in the fund
exchange traded products
are securities that trade intraday on a national securities exchange, and are priced so the value of the product is derived from other investment instruments, such as a commodity, a currency, a share price, or an interest rate. Generally, these types of products are benchmarked to stocks, commodities, or indices. They can be actively or passively managed portfolios. The following are two common ETPs.
exchange traded funds
considered an equity security, invests in a specific group of stocks and generally does so to mimic a particular index, such as the S&P 500.
etfs priceing and ease of trading
ince individual ETF shares are traded on exchanges, they can be bought or sold anytime during the trading day at the price they are currently trad- ing at as opposed to mutual funds, which use forward pricing and are generally priced once at the end of the trading day.
etfs margin
ETFs can be bought and sold short on margin like other ETPs. Mutual funds cannot be bought on margin, nor can they be sold short.
etfs operating costs
ETFs traditionally have operating costs and expenses that are lower than most mutual funds.
etfs tax efficiency
ETFs can and sometimes do distribute capital gains to shareholders like mutual funds do, but this is rare.
etfs commissions
the purchase or sale of ETF shares is a commissionable transaction.
etfs overtrading
Given the ability to trade in and out of ETFs easily, the temptation to do so is possible.
etfs market influences on prices
Because ETFs trade on exchanges, share prices can be in infl uenced by market forces such as supply and demand, like any other ETP.
exchange traded notes
are senior, unsecured debt securities issued by a bank or financial institution.
sovereign risk
the risk of a country defaulting on its commercial debt obligations.
liquidity risk
risk that an investor might not be able to sell an investment quickly at a fair market price is known as liquidity risk or marketability risk.
financial risk
financial risk relates primarily to those companies that use debt financing (leverage).
business risk
generally caused by poor management decisions.
capital risk
the potential for an investor to lose some or all of her money
no matter how diversified a portfolio of investments is, it will still be subject to
systematic risk
market risk
Market risk is the risk that when the overall market declines, so too will any portfolio made of securities the market comprises.
interest rate risk
defined as a potential change in bond prices caused by change in market interest rates after an issuer offers its bonds.
reinvestment risk
This is a variation of interest rate risk. When interest rates decline, it is dificult to reinvest proceeds from redemptions, securities that have been called (call risk), or investment distribu- tions and maintain the same level of income without increasing credit or market risks.
inflation risk
Sometimes referred to as purchasing power risk, inflation risk is the effect of continually rising prices on investment returns. If an investments yield is lower than the in ation rate, the purchasing power of the client’s money diminishes over time.
non systematic risk
these risks can be reduced through diver- si cation. They are risks that are unique to a specific industry, business enterprise, or invest- ment type.
beta measure
volatility of asset
less than one is less volatile
more than 1 is volatile
prepayment risk
Prepayment risk is the risk that a borrower will repay the principal on a loan or debt instrument (bond) before its maturity and thus deprive the lender of future interest payments.
currency risk
Currency risk is the possibility that an investment denominated in one currency could decline if the value of that currency declines in its exchange rate with the U.S. dollar.
regulatory risk
Changes in the rules that a business must comply with can devastate individual companies and industries almost overnight
legislative risk
Whereas regulatory risk comes from a change to regulations, legislative risk results from a change in the law.
political risk
While political risk can be interrelated with legislative risk, most attribute this risk speci - cally to the potential instability in the political underpinnings of the country. While this is particularly true in emerging economies, it can occur even in highly developed societies.
nonaffiliates
freely transferrable after a 6 month holding period
who is an affiliate
director, officer, or sharesholder owning directly or indirectly 10% or more of outstanding voting stock
