Understanding Products & Their Risks Flashcards
Equities
shares represent ownership of the corporation
common stock rights
- voting rights, cooperate directors
- Limited access to corporate books
- Preemptive right to maintain share ownership
Growth (capital gains)
increase in market price of securities
Limited Liability
equity ownership is limited liability- meaning the investor cannot be forced to pay out more monies to take care of additional debts
Market Risk
chance stock will decline in price
Decreased or no dividend income
risk of owner ship if company looses money. up to board to directors to issue dividends but it is not gaurenteed
Low Priority at dissoltuin
if a company enters bankruptcy the holders of its bonds and preferred stock have high priority over common stock holders
Bankrupcy
general term, allows individuals and businesses to get relief from their debt or make a plan to repay the money to creditors.
Two chapters of Bankrupcy
Reorganization & liquidations
Preferred Stock
an equity security- represents a class of ownership in the issuing cooperation. They have no voting rights or preemptive rights.
Control Securities
those owned by directors, officers or persons who control 10% or more of the issuer’s voting stock
Restricted Securities
those acquired through some other means than a registered public offering- cannot be sold unless held for more than 6 mths
Penny Stock
unlisted in US stock exchange- it is a security that trades for less than 5 dollars per share
Debt Securities/Bonds
represents borrowed money by corporations, fed gov’t or local govt’s from investors
Maturities
Each bond has its own maturity date-
Term bond
structured so principal of whole issue matures at once
Serial Bond
Schedules portion of principal to mature at intervals over a period of years until repaid
Balloon
both serial and term matruties
Coupon
Interest rate the issuer has agreed to pay an investor- fixed percentage
Yields
cash interest payments in relation to the bonds value
Nominal Yield
coupon, nominal or stated yield is set at the time of issue-
Current Yield
Measures a bonds annual coupon payment (interest) relative to the market price
Annual Coupon Payment / market price = current yeild
Yield to Maturity
reflects annualized return of the bond if hels to maturity
Yeild to Call
may be redeemed before the issuers maturity - they do this when interestrates are falling
Put Feature
opposite of a call feature=investor can put back to the issuer calling in a bond before it matures
Convertible
Can convert bond into shares of common stock
Treasury Bills
direct short term debt obligations of the US govt. Typical 4, 13 or 26 weeks can be up to a year but no more- they pay no interest
Treasury Notes
Debt obligation to US Gov’t - pay semi annual interest -as a % of the stated par vlaue and they mature at par value (maturities 2-10 years)
Treasury Bonds
Debt to US gov’t- pay semi annual interest a stated par value and mature at par value. 10-30 year mature
Treasury Receipt
not fully backed by us GOV-separates coupon interest payments from the original
Treasury STRIPS
Fully backed by US Gov’t
Gov’t National Mortgage Association GNMA
gov’t owned supports dept of housing and urban development. Only agency securities backed by the full faith and credit of the govt
Freddie Mac
nation wide secondary market in mortgages- buys residential mortgages from financial institutions and packaging them into mortgage backed securities for sale to investors
Fannie Mae
Publicly held corp that provides mortgage capital - purchases to loans such as FHA and the VA
Mortgage Bonds
corporation borrows money backed in real estate and physical assets of a corporation
Equipment Trust Certificates
Example, rail roads rent equipment and are expected to pay it back
Collateral Trust Bonds
deposits securities into its own trust and uses that as collateral
Debentures
sold in good faith- unsecured- written promise
Guaranteed Bonds
backed by a company other than issuing corporation- such as a parent company. Value is only as good as the strength of the company making - these are unsecured debt securities! Dont let the name fool
Income Bonds
AKA adjustment bonds used when a company is reorganizing and coming out of bankruptcy- not a good recommendation for someone who is seeking income.
Municipal Bonds
securities issued by state or local governments lends money for public works - roads, hospitals, civic centers etc.
General Obligation Bonds (GO)
issued for capital improvements that benefit the entire community -typically don’t produce revenue
Revenue Bonds
used to finance any municipal facility that generates sufficient income ( utilities, housing, transpiration etc)
Short-term municipal obligations (anticipation notes)
short term securities that generate funds for a municipality that expects other revenues soon- usually they have a less than 12 month maturity- repaid when municipality receives the funds
TANS - Tax anticipation notes
tax anticipation notes- finance current operations in anticipation of future tax receipts- helps municipalities even out cash flow between tax periods
RANS -Revenue anticipation notes-
offered periodically to finance current operations in anticipation of future revenues form revenue producing projects of facilities
TRANS - Tax and Revenue
combo of TAN and RANS
BANS
Bond anticipation - sold as an interim financing that will eventually be converted to long term funding through the sale of bonds
CLN
Construction loan notes - used to finance construction or housing projects
GANS
Grant anticipation notes
BABS
Build America Bonds- created under economic recovery and reinvestment act of 2009 to assist in reducing cost to issuing municipalities and stimulating the economy. BABS ARE TAXABLE
Tax Credit Babs
provide the bondholder with a federal income tax credit to equal 35% of the interest paid on the bond in each year- excess credit can be carried forward
Direct Payment BABS
provide no credit to the bond holder but instead provide the municipal issuer with payments from the US treasury equal to 35% of the interest paid by the issuer
LGIPS
Local government investment pools - short term vehicle to investment funds (states establish these)
-not required to register with the SEC- rules vary from state to state
ABLE
Achieving a better life experience- for people with disabilities and their families. Created in 2014 non-taxable - age of onset for the disability occurred before turning 26. Not tax deductible for federal taxes - some states allow income tax deductions
Capital Market
source for intermediate to long term financing- usually in the form of equity or debt securities with maturities of more than one year
Money Market
provide short term funds to corporations banks, broker dealers- government municipalities & federal Gov’t - fixed income (debt) securities with short term maturities- less than one year -
CD’s
Certificate of Deposit- bank issue with fixed interest rates and min. most mature in one year or less- some can be traded on a secondary market AKA negotiable CD’s
BA- Bankers Acceptance
short term draft with a specified payment date drawn in a bank- essentially it its a post dated check or a line of credit ( acceptance 1 day to 9 mths) used extensively to finance international trade
Commercial Paper/Promissory Notes
Prime Paper/Promissory Notes - short term unsecured commercial paper to raise cash to finance accounts receivable and seasonal inventory gluts- range from 1-270 daYS - most mature within 90 days
US Treasury BIlls
direct short term debt obligations of the US government - issued weekly with maturities of 4, 13, 26, and 52 weeks
REPO’s Repurchase Agreements
in this a bank or broker dealer raises cash by temporally selling some of the securities it holds with an agreement to by back at a later date and a slightly higher price.
Reverse Repo
dealer agrees to buy securities from an investor and sell them back at a higher price
Options
Derivative of securities - they derive their value from that of an underlying instrument such as a stock, stock index, interest rate or foreign currency
