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SIE updated > SIE Chapter 3-5 > Flashcards

SIE Chapter 3-5 Flashcards

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SIE Exam flashcards
1
Q

Board member responsibilities

A

overseeing mgmt team, caproate governance, declaring dividends

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2
Q

Order of payout in corporates bankruptcy

A

Debt holders, preferred stock, common stock

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3
Q

If a corporation chooses to repurchase some of its outstanding shares

A

Treasury Stock (does not receive dividends and no voting rights)

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4
Q

If there are 1 million shares authorized in the articles of incorporation and 10,000 issues shares, how many are outstanding

A

10,000 issues - outstanding

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5
Q

If there are 1 million shares authorized in the articles of incorporation and 10,000 issues shares, then -2,000 are purchased as treasury , how many are outstanding

A

8,000

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6
Q

Market Cap formula

A

Number of outstanding shares x the market value of the shares at the time

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7
Q

Common stock ownership rights

A

Inspection of books (10k), certificate of ownership, transfer of ownership (right to sell on secondary market), participation in corporate earnings (dividends), voting power for election of board and authorization of additional shares and stock splits but NOT for dividends

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8
Q

Two voting methods for common stock owners - Statutory and Cumulative. What is the difference

A

Statutory - beneficial for large shareholders, one vote per share per issue. Cumulative, beneficial for small shareholders, allows shareholders to multiple the number of shares owned by the number of voting issues

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9
Q

Unregistered stock that is acquired through a private placement or as compensation for senior executives of an issues. Mandatory six month holding period but could be longer with a lock up period

A

Restricted Securities

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10
Q

Registered stock that is part of an issuer’s public float and purchased in the open market by officers, directors, or greater than 10% shareholders of the issuers (no min holding period)

A

Control Stock aka Affiliated Stock

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11
Q

Permits the sale of restricted and control stock.

A

Rule 144

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12
Q

What are the regulations of Rule 144

A

Need to notify the SEC at time of the sale, may be sold over 90 day period (every 90 days you can sell limited quantity) . Limited to greater of number of shares that can be sold - 1% of the outstanding shares or the average weekly trading volume over the last 4 weeks. Not required if selling no more than 5k shares or $50,000

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13
Q

Shares of foreign companies that are sold in the USA, priced in US dollars, pay dividends in US dollars, can be sponsored or unsponsored

A

American depositary receipts ADRs

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14
Q

Sponsored vs unsponsored ADRs

A

Sponsored - issued in cooperation with the foreign company, may trade on US exchange. Unsponsored - issued without involvement of foreign company and trade OTC

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15
Q

Stock of strong, well-established, dividend paying companies

A

Blue Chip

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16
Q

Stock of companies with sales and earnings that are expanding father than the economy, pay little if any dividends

A

Growth

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17
Q

Stock of companies that pay higher than average dividends (utilities companies, manufacturing companies)

A

Income

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18
Q

Stock of companies that are resistant or recession (utilities, Tabaco, health care, healthcare, wine, cosmetic)

A

Defensive

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19
Q

Stocks of companies that fluctuate with business cycle (appliances, autos, vacations)

A

Cyclical

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20
Q

What is Preferred stock

A

does not having voting rights, pays a stated dividend based on par value (not guaranteed) usually quarterly

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21
Q

Non-cumulative preferred stock vs cumulative

A

Non-cumulative - not entitled to unpaid div (div in arrears) but if cumulative, investor is entitles to unpaid dividends before commons tock dividends may be paid

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22
Q

Callable preferred stock

A

issuer has the ability to repurchase the stock, typically repurchased at a premium to the par

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23
Q

Participating preferred stock

A

investors may receive additional dividends based on company’s profits

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24
Q

Convertible preferred stock

A

can convert into CS

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25
Q

a shareholders right to maintain percentage owners (no dilution). Only for common stock, not preferred stock. distributed through a rights offering (one right per share owned) and are discounted below the current MV prior to a public offering, must be exercised within four to six weeks and are tradable

A

Pre-emptive rights (which are a type of derivative)

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26
Q

Attached to bonds or stock as sweeteners, allow holders to purchase a specific number of the company’s CS. Exercise prices is above current MV and are long term

A

Warrants

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27
Q

Rule 10b-18 (Safe harbor) for treasury stock / repurchasing stock rules

A
  • Only one BD used, purchase cannot be made late in the day, purchase price is restricted, single day purchase amount is restricted
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28
Q

If the stock’s market price rises above the warrant’s subscription price

A

Intrinsic value (pre-emptive rights have immediate intrinsic value since stock price is below market price)

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29
Q

In a bond contract what is the difference between and issuer and an investors

A

Investor lends money to the issuer (aka creditor), and the issuer (debtor) promises to repay debt services (all interest thought life of the bond and principal at maturity)

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30
Q

When a corporation has more debt than equity outstanding what is it considered?

A

A leveraged issuer

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31
Q

the amount that the

issuer agrees to pay the investor when the bond matures

A

Par value (principal or face value)

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32
Q

Interest payments (coupon rate or nominal yield) is based on what

A

Par value regardless of what was paid for the bond. Stated annual but generally paid semi-annually

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33
Q

What will the investors receive from the issuer on the due date

A

Last interest payment and par value

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34
Q

unsecured corporate debt (no asset backing the bond) just the company’s good faith and earnings ability

A

Debenture

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35
Q

Initial Interest Payment

A

Traditionally, bonds pay interest on the 1st or 15thnewly issued bonds pay interest from the dated date (the date from which interest begins to accrue), which may not fall on the 1st or 15th so initial interest might be more than others.

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36
Q

Term maturity

A

the entire bond matures on the same date

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37
Q

Bond offering matures over several years

A

Serial maturity

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38
Q

Long Coupon vs Short Coupon

A

If the first coupon is for more than six months, it’s referred to as a long coupon; if the first coupon is for less than six months, it’s referred to as a short coupon.

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39
Q

some serial maturities are structures so that principal and interest payments represent about equal annual payments over life of offering

A

Level debt service

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40
Q

Issued at a deep discount to face value then matures at face value (no interest) interest is considered the difference between purchase price and par value. trade flat (without accrued interest) and no reinvestment risk

A

Zero-coupon bonds

41
Q

Interest that is earned since last interest payment

A

Accrued Interest

42
Q

A bond that is selling for less than par

A

discount

43
Q

a bond selling for more than par

A

premium

44
Q

Investors who purchase bonds assume the risk that the bond’s market value may decline if market interest rates rise

A

Interest rate risk

45
Q

Risk that an issuer may default and may not be able to meet its obligations to pay interest and principal to the bondholders. Bonds with higher ratings have lower yields and vice versa

A

credit risk

46
Q

Backed by the full faith of the US government

A

treasury instruments

47
Q

Credit ratings companies

A

S&P and Fitch (use all upper case AAA and use +or- AAA+) Moodys only capitalized first letter i.e. Aaa and uses letters (Aaa 1, Aaa 2)

48
Q

Investment grade quality vs speculative grade

A

Triple BBB (AAA, AA, A, BBB) and up are Investment grade and BB, B, and lower are Speculative or Junk Bonds or High Yield bonds

49
Q

Who pays for the bond rating

A

the issuer

50
Q

For corporate and municipal bonds, bond price may be expressed in points. each point is equal to what

A

1% of bond par or 10$. They trade in 1/8 of a point or $1.25 i.e. 109 3/8 would be 109.375 x 10 or 1093.75

51
Q

if a bond is quoted at 93 and 5/8th what is the price

A

93.625% x 10 or 936.25

52
Q

Government bonds are priced in 1/32. what would 87.24 or 87 and 24/32

A

87.75% or 877.50

53
Q

Government bond that is 106.04 would be what?

A

106 and 4/32 or 106.125% or 1061.25

54
Q

T-bills are quoted based on what?

A

Discount yield basis not dollar. In a T-bill quote, the bid’s higher yield represents a lower price, while the ask’s lower yield is a higher price

55
Q

three different measures for determining a bond’s yield

A

—nominal yield (same as coupon, fixed), the current
yield (annual interest ÷ current market price), and yield-to-maturity (effective return, aka basis, includes the reinvestment of annual interest and the gain or loss over the life of the bond). If bond trades at par, all three yields would be the same (8% or 8/100 etc). If bond at discount - nominal stays the same, current yield a little increase and YTM is the highest increase.

56
Q

Call Provision on a bond

A

Issuer may redeem its outstanding bonds before reaching maturity. If called, the investor receives the full return of principal plus any accrued interest. Issuers do this in case of declining interest. Callable bonds typically have higher yields that non-callable

57
Q

call protection

A

Most callable bonds contain a restriction on how soon the bonds
may be called—typically 5 to 10 years after the date of issuance

58
Q

the issuer is often required to pay
the bondholders more than the par value in order to compensate them for the early redemption of the
bonds

A

call premium

59
Q

Put Provisions on a bond

A

the bondholder the right to redeem the bond on a specified date (or dates)
prior to maturity. For bonds which offer the put feature, their yields are generally lower (and prices higher)
since the bondholders are given the ability to redeem their bonds in the event that interest rates rise

60
Q

Conversion ratio for converting bonds to stock

A

par value of bond / conversion price i.e. 1,000 par value / $40 conversion price = 25 shares per bond

61
Q

what is the relationship between bond prices and yields

A

Inverse - as bond prices increase (premium) yields decrease. as bond prices decrease yields increase

62
Q

what is the relationship between bond prices and interest

A

Inverse - as interest rates rise bond prices will fall, as interest rates fall, bond prices will rise

63
Q

Convertible bonds provide the investors with what?

A

Safety of principal and potential stock growth

64
Q

What does conversion parity mean?

A

Price of convertible bond = market value of the common stock

65
Q

When you convert a bond, is it taxable?

A

no

66
Q

If an investor wants to build a bond portfolio that maintains a stable value, she should purchase bonds with:

A

Short maturities

67
Q

Characteristics of treasury debt

A

Backed by US Gov, Highly liquid (no credit risk), interest is taxable at the fed level but exempt from state taxes. Issued in book entry form (no physical certificate)

68
Q

Characteristics of T-Bills, T-Notes, and T-Bonds

A

T-Notes and T-Bonds pay semi-annual interest, T-Bills are issued at a discount. T-Bill are up to 1 year, T-notes are 2 to 10 years, and T-Bonds are over 10 years. Use 365 days. trades on secondary market. T-Bills are auctioned weekly, others are periodic

69
Q

Minimum dollar value of a treasury

A

$100, and in 100 multiples

70
Q

How do inflation protected securities (TIPS) work?

A

Offered at a stated coupon with interest paid semi-annually but principal gets adjusted based on inflation . It is adjusted for deflation but at payment date, gov will pay lower of par or inflation adjusted, never below par

71
Q

how do T-STRIPS work?

A

Created in secondary market (not by gov), are non-interest bearing (zero coupon), issued at a discount and mature at face value. separate trading of registered principal and interest securities. considers each payment own security (at discount) including principal

72
Q

T-Bill settlement for new issue

A

Thursday following the auction

73
Q

Settlement for treasuries in secondary market?

A

T+1

74
Q

How does bidding at T-Bill auctions work?

A

First the non-competitive bids are counted that do not have price yet, then competitive bids at the lowest yield. Any left over goes to next lowest yield and so on. then EVERYONE gets the same yield at the highest yield that completed the fulfillment and clears the auction

75
Q

Debt instruments issued or guaranteed by federal agencies and Government-Sponsored Enterprises GSEs. Exempt from state and federal registration. Quoted in 1/32. Accrued interest 30 day month / 360. Issued in book entry form.

A

Agency securities

76
Q

Examples of Agency Securities

A

Farming (Federal Farm Credit Bank FFCB) exempt from state tax, Mortgage Backed Securities (GNMA, GNMA, FHLMC, packaged mortgages, interest portion is fully tax by fed and state and subject to prepayment risk)

77
Q

Which of the following is a government guarantee (others are agency only)GNMA, GNMA, FHLMC

A

GNMA or Ginnie May

78
Q

unscheduled, short-term debt offerings that are used to smooth out Treasury cash flows. Can be as short as one day

A

Cash Management Bills (CMBs)

79
Q

The most common security issued by government agencies

A

mortgage-backed pass-through certificate (pooled securities)

80
Q

Who can issue Municipal Bonds

A

Cities, Counties, public agencies and authorities, territories like PR (territory bonds are free from fed, state, and local taxes or triple tax free)

81
Q

Types of Municipal Bonds

A

General Obligation bonds (GO bonds) and Revenue Bonds)

82
Q

Issued for general purposes to meet any need of the municipality, free from state taxes such as sales and income taxes, and backed by full faith and taxing power of the municipality. require voter approval bc backed by taxes

A

General Obligation Bonds

83
Q

Issued for projects or enterprise financing and backed by the revenue produced by the thing that authority operates (i.e. tolls, bridges, airports, water etc). Not backed by taxes. self supporting debt

A

Revenue Bonds

84
Q

Types of Revenue Bonds

A

Transportation (use tolls), special tax (one specific tax liquor), special assessment (one time fee for benefitting properties like sidewalks), double barreled (backed by two sources project rev and tax dollars), moral obligation (if project rev is insufficient, state is morally not legally obligated for shortfall) private activity (more than 10% benefit private entity), industrial development bond (secured by a lease agreement with a corp user)

85
Q

Properties of Municipal Notes

A

Short term (1 year or less) tax-free anticipation notes, for financing a project, federally tax free. TANs - tax anticipation notes (paid by tax) RANs - revenue anticipation note, BANS bond anticipation notes,

86
Q

Rating for Municipal Notes

A

S&P SP 1+ SP1, SP2, SP3, SP4 and MOODYs - MIG 1 MIG 2, MIG 3, SG (all but SG are investment grade)

87
Q

What is a syndicate

A

When a manager invites other BS to participate in underwriting an issue and share the liability. Syndicate letter address the size and type of offering, percentage required to participate, responsibility for unsold commitments of other members of the group

88
Q

Municipal bonds are exempt for what taxes

A

Fed taxes

89
Q

long-term investments that have a short-term twist—the interest rates or
dividends that they pay are reset at frequent intervals through auctions

A

Auction Rate Securities

90
Q

long-term security that’s marketed as a short-term investment interest rate is adjusted at specified intervals (daily, weekly, monthly) and, in many
cases, this adjustment allows the owner to sell or put the security back to the issuer or a third party on the
date that a new rate is established

A

Variable Rate Demand Obligations (VRDOs)

91
Q

Types of corporate bonds

A

Secured bonds (Mortgage bonds, Equipment Trust Certificates, Collateral Trust Bonds, Asset Backed securities) and Unsecured Bonds (High yield Junk bonds and guaranteed bond)

92
Q

When corporate bonds are backed by only the corporations full faith and credit

A

Debenture bonds

93
Q

Liquidation proceedings

A

Secured creditors including secured bonds, administrative expenses, general creditors or unsecured creditors or debentures, subordinated creditors, preferred stock, common stock

94
Q

normally issued by companies in reorganization (bankruptcy). The issuer promises to
repay the principal amount at maturity, but does NOT promise to pay interest unless it has sufficient
earnings.

A

Income Bonds

95
Q

Eurodollar Bonds, Yankee Bonds, and Eurobonds

A

A Eurodollar is a dollar-denominated deposit that’s made outside of the United States; Yankee bonds allow
foreign entities to borrow money in the U.S. marketplace and registered with SEC; Eurobond is sold in one country, but denominated in the currency of another

96
Q

Types of Money-Market Securities

A

 Commercial paper - short term corp debt (270 days)
 Bankers’ acceptances - facilitates foreign trade
 Negotiable certificates of deposit - short term obligations of banks (min of 100k) and FDIC insures 250k
 Federal funds like TBill
 Money-market mutual funds
 Repurchase agreements (Repos) - a dealer selling securities to another dealer with agreement to repurchase

97
Q

short-term debt instruments with one year or less to maturity, provide safety of principal and liquidity, suitable for investors when intending to make a purchase in the near future

A

Money Market securities

98
Q

Used to facilitate foreign trade. It is a time draft that has been guaranteed (collateralized) by a bank

A

bankers acceptance

99
Q

A municipality borrowing for a short-term period to finance a capital project

A

Bond anticipation notes

SIE updated (6 decks)

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