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SIE Exam > SIE Part 1, Units 1-6 > Flashcards

SIE Part 1, Units 1-6 Flashcards

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1
Q

The Howey Test

A

A security is 1. an investment of money made into 2. a common enterprise 3. with the expectation of profit 4. through efforts of a third party

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2
Q

Another term for stocks and bonds

A

equity and debt

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3
Q

outstanding stock

A

any shares that a company has issued and are in the hands of the investor

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4
Q

penny stocks

A

an unlisted security trading at less than $5 a share

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5
Q

declaration date (dividend)

A

When a company’s BOD approves a dividend payment, it is recognized as the date the dividend was declared

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6
Q

Ex-dividend date (ex-date)

A

one business day before the record date. FINRA or the exchange decides. a customer must purchase the stock two business days BEFORE the record date to qualify for the dividend.

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7
Q

Order in which dates occur for the dividends

A

DERP declaration, ex-date, record date, payable date.

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8
Q

Benefits of owning common stock

A

voting rights, opportunity for capital appreciation, current income and limited liability

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9
Q

statutory voting

A

allows a stockholder to cast one vote per share owned for each item on the ballot

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10
Q

cumulative voting

A

allows stockholders to allocate their total votes in any manner they choose

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11
Q

risks of owning common stock

A

market risk, decreased or no dividend income, low priority at dissolution. If a company enters bankruptcy, the holders of its bonds and preferred stock have priority over common stockholders.

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12
Q

Stock rights/ preemptive rights/ rights

A

entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. Shares can be purchased below CMV.

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13
Q

warrants

A

a certificate granting its owner the right to purchase securities from the issuer at a specific price, normally higher than the current market price at the time the warrant is issued, and at some point in time in the future.

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14
Q

Rule 144

A

applies to shares that are sold through a nonstandard offering and are subject to resale restrictions and to sales by persons who are classified as a control person (insider) of the issuer.

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15
Q

Restricted securities

A

those acquired through some means other than a registered public offering.
may not be sold until they have been held fully paid for 6 months

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16
Q

Volume limitations under rule 144

A

greater of
1% of the outstanding shares of the company
or
the average weekly trading volume over the most recent four weeks

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17
Q

American Depositary Receipts

A

a type of equity security designed to simplify foreign investing for Americans.
T+2

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18
Q

Risks of owning preferred stock

A

purchasing power risk
interest rate sensitivity
Decreased or no dividend income
Priority at dissolution - paid behind creditors

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19
Q

Par value

A

Most debt securities have a par value of $1000

Also called principal or face value

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20
Q

Term bond

A

Structured so that the principal of the whole issue matures at once

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21
Q

Serial bond

A

Schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid

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22
Q

Balloon bond

A

An issuer sometimes schedules its bond’s maturity using elements of both serial and term maturities

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23
Q

Coupon rate

A

The interest rate the issuer has agreed to pay the investor.
Also called the stated yield or nominal yield
Calculated from the bond’s par value, usually stated as a percentage of par

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24
Q

Current yield

A

Measures a bond’s annual coupon payment (interest) relative to its market price
Annual coupon payment + market price = current yield

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25
Q

Yield to maturity

A

Reflects the annualized return of the of the bond if held to maturity
Difference between the price that was paid for a bond and par value received when the bond matures

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26
Q

Zero-coupon bonds

A

An issuer’s debt obligations that do not make regular interest payments
Issued or sold at a deep discount to their face value and mature at par.
Issued by corporations, municipalities and the US Treasury

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27
Q

Mortgage bonds

A

A corporation will borrow money backed by real estate and physical assets of the corporation. SECURED DEBT

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28
Q

Collateral trust bonds

A

Deposit securities it owns into a trust to serve as collateral for the lenders
Can be securities issued by the corporation itself or by stocks and/or bonds of other issuers
SECURED DEBT

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29
Q

Debenture

A

A debt obligation of the corporation backed only by its word and general creditworthiness
UNSECURED

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30
Q

Guaranteed bonds

A

Backed by a company other than the issuing corporation, such as a parent company
Value of the guarantee is only as good as the strength of the company making that guarantee
UNSECURED

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31
Q

Order of liquidation

A 
Secured debt holders 
Unsecured debt (debentures) ad general creditors 
Subordinated debt (debentures)
Preferred stockholders
Common stockholders
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32
Q

Risk of owning debt securities

A

Default
Interest rate risk
Purchasing power risk (inflation)

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33
Q

Municipal bond

A

Securities issued by state or local governments or by US territories, authorities, and special districts

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34
Q

General obligation (GO) municipal bond

A

Issued for capital improvements that benefit the entire community

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35
Q

Revenue bond

A

Used to finance any municipal facility that generates sufficient income
Self-supporting debt because principal and interest payments are made exclusively from revenues generated by the project or facility

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36
Q

Treasury bills (T-bills)

A

direct short-term debt obligations of the US government
Maturities of 4 weeks, 13 weeks, 26 weeks and 52 weeks
Pay no interest
issued at a discount from par value and redeemed at par

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37
Q

Treasury notes (T-notes)

A 
direct debt obligations of the US government
pay semiannual interest as a percentage of the stated par value
intermediate maturities (2-10 years)
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38
Q

Treasury bonds (T-bonds)

A

direct debt obligations of the US government
pay semiannual interest as a percentage of the stated par value
mature at par value
long-term maturities, greater than 10 years and up to 30 years

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39
Q

Treasury Inflation Protected Securities (TIPS)

A

special type of treasury security
Maturities of 5, 10 or 20 years
fixed coupon rate
the principal value of the bond is adjusted every 6 months based on the inflation rate

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40
Q

Government National Mortgage Association (GMNA or Ginnie Mae)

A

only agency securities backed by the full faith and credit of the federal government
pay monthly income and principal payments

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41
Q

Money market security

A

Fixed-income (debt) securities with one year or less left to maturity
Highly liquid
Relatively high degree of safety
Generally do not receive interest payments
Issued at a discount and mature at face value

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42
Q

Certificate of deposit (CD)

A

A debt instrument issued by a bank that pays a fixed interest rate over a specific time period

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43
Q

Negotiable certificate of deposit (CD)

A

An unsecured promissory note issued with a minimum face value of $100,000
Traded on the secondary market
Backed only by the bank’s good faith and credit

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44
Q

Banker’s acceptance (BA)

A

Short-term time draft with a specified payment date drawn on a bank
Post dated check or line of credit
Between 1 and 270 days (9 months)
Routinely used for import/export activities

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45
Q

Commercial paper / prime paper/ promissory notes

A

A short-term, unsecured debt instrument primarily issued by corporations.
Normally priced at a discount and redeemed at face value
Maturities are 270 days or less

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46
Q

Repurchase agreement (REPO)

A

A sale of securities with an attendant agreement to repurchase them at a higher price on an agreed-upon future date
Money market instrument

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47
Q

Collateralized mortgage obligations (CMO)

A

Type of asset-backed security
Value and income payments are derived from or backed by a specific pool of underlying asses
Pays principal and interest from mortgage pool monthly

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48
Q

Collateralized debt obligations (CDO)

A

Complex asset-backed securities
Do not specialize in any single type of debt
Usually their portfolios consist of non-mortgage loans or bonds

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49
Q

Derivative

A

An investment vehicle, the value of which is based on the value of another security
Examples: futures, forwards, swaps, and options

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50
Q

Futures

A

Derivatives that have a commodity as the underlying asset. Futures are NOT classified as securities

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51
Q

Option

A

A contract that represents the right to buy or sell a security or futures contract as a specified price within specified times
Purchaser acquires a right
The seller assumes an obligation

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52
Q

Long call (purchase)

A

A call buyer owns the right to buy 100 shares of a specific stock at a strike price before the expiration if he chooses to exercise the contract
Call buyer is bullish

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53
Q

Bullish

A

One who anticipates that the price of an underlying security will rise

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54
Q

Short call (sale)

A

A call writer (seller) has the obligation to sell 100 shares of a specific stock at the strike price if the buyer exercises the contract
Call writer is a bearish investor

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55
Q

Bearish

A

One who anticipates that the price of the underlying security will fall

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56
Q

Long put (purchase)

A

A put buyer owns the rights to sell 100 shares of a specific stock at the strike price before the expiration if he chooses to exercise the contract
Bearish - wants the price of the stock to fall

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57
Q

Short put (sale)

A

A put writer (seller) has the obligation to buy 100 shares of a specific stock at the strike price if the buyer exercises the contract
Bullish

58
Q

Index options

A

Tracks the performance of a particular group of stocks, such as the S&P 500 Index
If exercised, no delivery of the underlying shares is made. The write pays the options owner the differential in cash.

59
Q

Calls - in the money

A

A call is in the money when the price of the stock EXCEEDS the strike price of the call
Buyers want this; sellers do not

60
Q

Calls - at the money

A

A call is at the money when the price of the stock EQUALS the strike price of the call
Buyers do not want this

61
Q

Calls - out of the money

A

A call is out of the money when the price of the stock is LOWER than the strike price of the call
Buyers do not want this

62
Q

Puts - in the money

A

A put is in the money when the price of the stock is LOWER than the strike price of the put

63
Q

Puts - at the money

A

A put is at the money when the price of the stock EQUALS the strike price of the put

64
Q

Puts - out of the money

A

A put is out of the money when the price of the stock EXCEEDS the strike price of the put

65
Q

Intrinsic value

A

The potential profit to be made from exercising an option
Intrinsic value CANNOT be negative
Same as the amount a contract is in the money

66
Q

Parity

A

When the premium equals the intrinsic value

67
Q

Formula for an options premium

A

Intrinsic value + time value = premium

68
Q

EPIC

A

Exporters buy puts

Importers buy calls

69
Q

American-style option

A

Allows the owner of a contract to exercise ANYTIME before expiration
Nearly all equity & equity index options are American style

70
Q

European-style option

A

Option contract that can only be exercised on expiration day

Foreign currency and yield-based options are European-style

71
Q

Break even formula for calls

A

Strike price + premium

72
Q

Maximum gain for call buyers

A

The potential gains available to call buyers are unlimited because there is no limit on how far a stock’s price can rise

73
Q

Maximum loss for call buyers

A

The most the call buyer can lose is the premium paid

Happens if the stock price is less than or equal to the strike price

74
Q

Maximum gain for call writers

A

A call writer’s MG is the premium received

75
Q

Maximum loss for call writers

A

A call writer’s ML is unlimited

76
Q

Break even formula for puts

A

Strike price - premium

77
Q

Maximum gain for put buyers

A

The MG available for put owners is the option’s strike price less the amount of the premium paid

78
Q

Maximum loss for put buyers

A

The most the put buyer can lose is the premium paid

79
Q

Maximum gain for put writers

A

A put writer’s MG is the premium received

80
Q

Maximum loss for put writers

A

A put writer’s ML is the put’s strike price less the premium received

81
Q

How can an investor who is long stock protect their investment?

A

Could buy a Put option as a hedge against the stock falling in value

82
Q

How can an investor who is short stock protect their investment?

A

Could buy a call option as a hedge
The call would ensure that the client could buy the stock back at no more than the option’s strike price if the shares rise in value

83
Q

Covered calls

A

If the contract is covered, the writer already owns the underlying security
Conservative way to generate income against a stock position

84
Q

Uncovered (naked) calls

A

If the contract is uncovered (naked), the writer does not own the underlying security

85
Q

Covered puts

A

If the contract is covered, the writer already has sufficient cash available to buy the stock.

86
Q

Uncovered (naked) puts

A

If the contract is uncovered (naked), the writer does not have the cash on hand to purchase the stock at the strike price

87
Q

Covered against a short stock

A

If the option is exercised, the customer buys the stock from the option’s owner and then delivers the stock to cover the short.

88
Q

Face-amount certificates (FACs)

A

A contract between an investor and an issuer in which the issuers guarantees payment of a stated (face amount) sum to the investor at some set date in the future.
Investor agrees to pay the issuer a set amount of money, either as a lump sum or in periodic installments
Not managed & does not trade in the secondary market

89
Q

Unit investment trusts (UITs)

A

an investment company organized under a trust indenture
Do not have a BOD; they have trustees
Create a portfolio of debt or equity securities designed to meet the company’s objectives
Sell redeemable interests, also known as units or shares of beneficial interest
Not managed & does not trade in the secondary market

90
Q

Closed-end management company

A

An investment company that issues a fixed number of shares in an actively managed portfolio of securities
AKA publicly traded fund
Only investment company security that is traded in the secondary marketplace, either on an exchange or over the counter (OTC)
May issue common stock, preferred stock, and debt securities

91
Q

Open-end investment company (mutual fund)

A

An investment company that continuously offers new equity shares in an actively managed portfolio securities
Only issues common stock, but the funds themselves can purchase common stock, preferred stock, and bonds for their investment portfolios.

92
Q

Annuity

A

An insurance contract designed to provide retirement income
Stream of payments guaranteed for some period of time
Mortality guarantee

93
Q

Variable annuity

A

An insurance contract used to fund retirement. Cash values vary with the performance of a portfolio of investments
An insurance and securities license is required to present variable contracts

94
Q

Annuitization

A

irreversible election to give up ownership of the assets of the annuity in return for a lifetime income guaranteed by the insurance company

95
Q

Class A (front-end load) shares

A

Class A shares have front-end sales charges. With A shares, the sales charges ae paid at the time an investor buys shares and the sales charge is taken from the total amount invested
Best for investors with large investments and longer time frames

96
Q

Class B (back-end load) shares

A

Also called a contingent deferred sales charge
A back-end sales charge is paid at the time an investor sells shares previously purchased (has them redeemed)
The sales load, a declining percentage, changes annually is applied to the proceeds of any shares sold in that year.
With Class B shares, the full investment amount is available to purchase shares.
If the shares grow in value, the sales charge will be paid on amounts that are greater than the amount initially invested
smaller investments & longer time frame

97
Q

Class C (level-load) shares

A

Class C shares typically have a one-year, 1% CDSC, a .75% 12b-1 fee (fees used to promote the fund), and a .25% shareholder services fee. These fees never go away.
Would be appropriate for short time horizon. they are expensive to own if investing for more than 4 to 5 years

98
Q

No-load shares

A

The fund does not charge any type of of sales charge and the shares are purchased at NAV.
Permitted to charge fees that are not considered sales charges, such as purchase fees, account fees, exchange fees and redemption fees

99
Q

Breakpoints

A

quantity discounts on open-end management company shares (mutual funds)
the greater the dollar amount of a purchase, the lower the sales charge

100
Q

Letters of intent

A

A person who plans to invest more money with the same mutual fund company may immediately decrease the overall sales charge by signing a letter of intent
intention to invest the additional funds necessary to reach the breakpoint within 13 months
Can be backdated 90 days

101
Q

rights of accumulation

A

allow an investor to qualify for reduced sales charges
available for subsequent investments and not initial transactions
allow the investor to use prior share appreciation to qualify for breakpoints
do not impose time limits

102
Q

breakpoint sales

A

sales just below the breakpoint
It is not the order below the breakpoint that is a violation. It is the failure to disclose the breakpoint that triggers a breakpoint sale violation

103
Q

Forward pricing

A

uses the next available calculation to determine the value of shares redeemed or the number of shares purchased

104
Q

NAV calculation

A

total assets - total liabilities = total NAV of the fund

NAV of the fund divided by shares outstanding = NAV per share

105
Q

Expense ratio

A

calculated by dividing a fund’s expenses by its average net assets
Includes manager’s fee, administrative fees (trading, transfer agents, accountants, attorneys, etc), BOD costs, and 12b-1 fees
DOES NOT include sales charges or loads

106
Q

full or statutory prospectus

A

full and fair disclosure document
provides prospective investor with the material information needed to make a fully informed investment decision
must be provided before or during solicitation
Includes fund’s objective, investment policies, sales charges, management expenses, and services offered
Also discloses 1-,5-, and 10-year performance histories or performance over the life of the fund, whichever is shorter
CANNOT BE ALTERED IN ANY WAY

107
Q

Summary prospectus

A

can be provided to investors with an application to buy the fund’s shares
investors who receive a summary prospectus have the option of either purchasing fund shares using the application found therein or requesting a full prospectus
Must be able to access the full prospectus no later than the confirmation of the sale

108
Q

Statement of additional information (SAI)

A

includes funds history, policies and the fund’s consolidated financial statements including the balance sheet, statement of operations, an income statement and a portfolio list at the time the SAI was compiled
mutual funds as well as closed-end funds are required to have an SAI available for delivery within 3 business days of an investor’s request free of charge

109
Q

Omitting prospectus

A

fund advertisement
does not contain enough information to qualify as a “full and fair” disclosure
not sufficient to solicit a trade

110
Q

529 plan

A

education savings account
allows money saved to be used for qualified expenses for K-12 and post-secondary education
up to $10,000/year for K-12; no limit for post-secondary education
pre-paid tuition plan
savings plan
contributions are considered gifts under federal tax law

111
Q

Local government investment pools (LGIP)

A

designed by states or local governments to provide investment vehicles for public funds collected by local government entities
operate similar to a money market fund
not required to register with the SEC and not subject to SEC regulatory requirements

112
Q

Achieving Better Life Experience (ABLE) accounts

A

tax-advantaged savings accounts for individuals with disabilities and their families
eligibility is limited to individuals with significant disabilities where the age of onset of the disability occurred before turning 26
Only ONE ABLE account per person
contributions must be made with after tax dollars and is not tax deductible at the federal level

113
Q

Partnership

A

an unincorporated association of two or more individuals
must complete a partnership agreement
An amended partnership agreement must be obtained each year if any changes have been made
Ownership of a general partnership may be unequal and specific responsibilities may be assigned to specific partners
No liability protection
tax-reporting entity bur not a tax-paying entity

114
Q

Direct participation programs (DPP)

A

unique forms of business that raise money to invest in real estate, oil & gas, equipment leasing, and other similar business ventures
the income or losses are passed directly through to the owners of the partnership - the investors
highly illiquid

115
Q

Limited Partnership (LP)

A

a business formed by filing a partnership agreement with a state
consists of a general partner and one or more limited partners
pass through to investors a share in the income, gains, losses, deductions, and tax credits of the business entity
investors are responsible to report to IRS
lack of liquidity
income is considered passive income and is added to the ordinary income for tax purposes

116
Q

General partnership

A

an association of two or more parties formed to conduct a business jointly.
partners are jointly and severally liable for the partnership’s liabilities

117
Q

Limited partners

A

have limited liability
can’t lose more than they invested
no business management responsibilities
advantages: an investment managed by others (GP), limited liability, and flow-through of income and certain expenses

118
Q

Real estate programs (DPP)

A

can invest in raw land, new construction, or existing properties
benefit opportunities: capital growth potential - achieved through appreciation of property, cash flow (income) - collected from rents, tax deductions - from mortgage interest and depreciation allowances, and capital improvements, and tax credits - for government assisted housing and historic rehabilitation

119
Q

Oil and gas programs (DPP)

A

include speculative or exploratory (wildcatting) programs to locate new oil deposits (riskiest) and income programs that invest in producing wells (least risky)
Unique tax advantages: Intangible drilling costs (IDCs) - associated with drilling such as wages, supplies, fuel, and insurance that have no salvage value when the program ends. can be written off fully in the first year
tangible drilling costs like drilling equipment. deductible over several years (depreciation)
Depletion allowances - tax deductions that compensate the program for decreasing supply of oil or gas

120
Q

Leasing programs (DPP)

A

created when DPPs purchase equipment to lease to other businesses
investors receive income from lease payments as well as a proportional share of write-offs from operating expenses, interest expense and depreciation of the actual equipment

121
Q

Real estate investment trust (REIT)

A

a company that manages a portfolio of real estate, mortgages or both to earn profits for shareholders
own commercial property (equity REITs)
own mortgages on commercial property (mortgage REITs)
do both (hybrid REITs)
may or may not be registered with the SEC (public or private)
are not investment companies
offer dividends and gains to investors but do not pass through losses like LPs and is not a DPP

122
Q

Hedge fund

A

a form of an investment company that hedges its market commitments
highly aggressive
unregulated investment company
high returns utilizing debt leverage and derivative products (options and margin)
can limit the number of investors or require large initial or minimum investments

123
Q

Exchange-traded funds (ETFs)

A

considered an equity security
invests in a specific group of stocks, generally to mimic a particular index
similar to a mutual fund
trades like a stock
how it trades is similar to a closed-end investment company
registered
expenses tend to be lower & the management fee is also low
there is a commission

124
Q

Exchange-traded notes (ETNs)

A

senior, unsecured debt securities issued by a bank or a financial institution
backed only by the good faith and credit of the issuer
bond like instruments with a stated maturity date but do not pay interest & offer no principal protection
exposed to market risk, default risk, and liquidity risk

125
Q

Systematic risk

A

the risk that changes in the overall economy will have an adverse effect on individual securities, regardless of the company’s circumstances.
one cannot diversify away Systematic risk

126
Q

market risk

A

the risk that when the overall market declines, so too will any portfolio made of securities the market compromises

127
Q

interest rate risk

A

potential change in bond prices caused by a change in market interest rates after an issuer offers its bonds
inverse relationship between the direction of rates and bond price moves
when interest rates rise, the market price of bonds falls. this is considered a systematic risk for fixed-income securities

128
Q

reinvestment risk

A

the potential that a bond investor may not be able to reinvest interest income or principal in new bonds at the same rate of return

129
Q

Inflation risk (purchasing power risk)

A

the effect of continually rising prices on investment returns.
if an investment’s yield is lower than the inflation rate, the purchasing power of the client’s money diminishes over time.

130
Q

nonsystematic risk

A

company specific risk that can be reduced through diversification

131
Q

default risk (financial risk)

A

potential for an investor to lose some or all of their money
includes risk that a debt security fails to make interest payments
nonsystematic risk

132
Q

business risk

A

the risk inherit in equity securities that poor management decisions will have a negative impact on the stock’s performance
can be reduced through diversification
nonsystematic risk

133
Q

call risk

A

the risk that a bond might be called before maturity and an investor will be unable to reinvest the principal at a comparable rate of return
when interest rates are falling, bonds with higher coupon rates are most likely to be called

134
Q

prepayment risk

A

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

135
Q

currency risk

A

the possibility that an investment denominated in one currency could decline if the value of that currency declines in its exchange rate with the US dollar

136
Q

liquidity risk

A

the risk that an investor might not be able to sell an investment quickly at a fair market price.
also known as marketability risk

137
Q

regulatory risk

A

the risk that changes in regulations may negatively affect the operations of a company
ex: rulings made by the Environmental Protection Agency (EPA) or the Food and Drug Administration (FDA)

138
Q

legislative risk

A

results from a change in the law

ex: changes in tax code

139
Q

political risk

A

the risk that an investment’s returns could suffer as a result of political changes or instability in a country, such as from a change in government, nationalization of industries, military control or tax codes

140
Q

diversification

A

a risk management technique that mixes a variety of investments within a portfolio, thus minimizing the impact of any one security on overall portfolio performance

SIE Exam (3 decks)

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