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FINRA Series 6 > Unit 1 > Flashcards

Unit 1 Flashcards

1
Q

Explain the Money Market and the type of securities it provides.

A

Open-ended mutual fund that invests in short-term debt securities.

  • The NAV is set at $1 per share.
    • Certificates of deposit (CDs)
    • Commercial paper
    • U.S. Treasuries
    • Bankers’ acceptances
    • Repurchase agreements
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2
Q

Define Income Funds

A

Mutual funds, ETFs or any other type of fund that seek to generate an income stream for shareholders by investing in securities that offer dividends or interest payments. The funds can hold bonds, preferred stock, common stock or even real estate investment trusts (REITs).

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3
Q

What does ETF mean?

A

Exchange Traded Fund

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4
Q

What is a Municipal Bond?

A

A debt security issued by a state, municipality or county to finance its capital expenditures.

  • Construction of highways, bridges or schools.
  • They are exempt from federal taxes and from most state and local taxes, making them especially attractive to people in high income tax brackets.
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5
Q

General Obligation Bond - GO

A

A municipal bond backed by the credit and taxing power of the issuing jurisdiction rather than the revenue from a given project.

GO Bonds are issued with the belief that a municipality will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral.

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6
Q

Name 3 types of Municipal Bond?

A
  1. General Obligation (GO) Bonds
  2. Revenue Bonds
  3. Industrial Development Revenue
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7
Q

Name the only Municipal bond backed by taxes, therefore they are the safest

A

General Obligation

Go Bonds

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8
Q

What type of bond is backed by the revenue generated from a public project (ex. tolls from highways)

A

Revenue Bonds (Municipal Bonds)

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9
Q

What type of bonds are backed by the revenue from a PRIVATE project (ex. Yankee Stadium)

A

Industrial Development Revenue (Municipal Bonds)

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10
Q

When a Corporation folds, liquidates, goes Bankrupt, name the hierarchy of what gets paid.

A 
W = wages
T = taxes
S = secured debt	
G = general obligations 	
D = debentures (unsecured debt)	
S = subordinated debt		
P = preferred stock 	
C = common stock
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11
Q

Name the 4 Preferred Stock Options

A
  • Callable
  • Convertible
  • Cumulative
  • Straight
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12
Q

Complete this sentence:

The greater the risk…

A

The greater the possible reward AND possible loss.

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13
Q

Name the market the most popular securities are sold in

A
  1. Primary Market

2. Secondary Market

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14
Q

How are securities sold in the Secondary Market?

A
  1. Over the Counter (OTC)

2. Stock Exchange

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15
Q

Describe Bonds

A
  • A form of DEBT
  • A bond is nothing more than a loan
  • Usually pays interest
  • Purchased for Income
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16
Q

Describe Stock Securities

A
  • Grant ownership (EQUITY)
  • Only issued by corporations
  • May pay dividends
  • May have voting rights
  • Purchased for either Growth or Income
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17
Q

What type of investments:

  • Seek capital appreciation.
  • Only REALIZED when the security is sold
  • Purchased to hedge against inflation
  • Associated with Common Stock
A

Growth

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18
Q

What type of investments:

  • Provide CURRENT income
  • Investor knows in advance how much will be received
  • No inflation protection
A

Income

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19
Q

What type of stock is:

  • Purchased for INCOME
  • Grants ownership
  • NO voting rights
  • May pay a dividend in cash ONLY
  • Less Volatile
A

Preferred Stock

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20
Q

What type of stock is:

  • Purchased for GROWTH
  • Grants ownership
  • Has voting rights
  • May pay a dividend in cash or additional stock
  • More Volatile
A

Common Stock

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21
Q

What are the 4 Classifications of Stock?

A
  1. Authorized – The total number of shares that a company is authorized to sell
  2. Issued – Authorized shares that have been sold
  3. Treasury Stock – Issued shares that have been repurchased by the company
    Treasury stock is NOT a government security
    • Treasury stock does not vote nor does it receive dividends
  4. Outstanding – Issued stock currently held by investors
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22
Q

What type of security:

  • Is purchased for Growth (Capital Appreciation)
  • “Buys low and sells high”
  • ONLY investment that can outpace inflation
  • Will NEVER have Credit Risk
A

Common Stock

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23
Q

With Common Stock, a stockholder may have what type of vote?

A

Cumulative or Statutory

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24
Q

What type of vote allows does this example demonstrate:

  • An investor owns 1000 shares
  • There are five candidates running for three seats open on the board to be voted on
  • The investor may cast 1000 shares for each of the three seats
A

Statutory (Regular)

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25
Q

What type of vote allows does this example demonstrate:

  • An investor owns 1000 shares
  • There are five candidates running for three seats open on the B.O.D.
  • The investor can cast 3000 votes for one candidate
  • Advantageous for small shareholders
A

Cumulative

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26
Q

What allows American investors to purchase foreign stocks traded on foreign exchanges

A

American Depositary Receipt (ADR)

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27
Q

What is purchased for income and has a par value of $100

A

Preferred Stock

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28
Q

If you have 4% Preferred Stock, how much will receive per quarter in dividends, or per year

A

$1.00 per quarter in dividends, or 4.00 per year

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29
Q

What is the The Ex-Dividend date

A

The first day that an investor can purchase the stock and NOT get the dividend

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30
Q
  • Sold to EXISTING shareholders at a BELOW MARKET price to maintain proportionate ownership
  • Short term (30-45 days)
A

Rights

31
Q 
Gives the buyer the opportunity to EITHER buy or sell a stock in the future
Medium term (9 months)
A

Options

32
Q
  • Usually attached a sweetener to another security from the same issuer. Allows the buyer to purchase stock at a set price in the future
  • Longer term (years)
A

Warrants

33
Q

The buyer of a call option believes the price of the stock will go UP. This investor is considered…

A

Bullish

34
Q

The seller of a call option believes the price of the stock will go DOWN. This investor is considered…

A

Bearish

35
Q

This security is a form of debt. The investor is lending the issuer money.

A

Bonds

36
Q

What is the par value of a bond?

A

$1000

37
Q

Bonds typically pay interest how often?

A

Semi-Annually

38
Q

How do you calculate the Annual Interest on a bond?

A

Coupon rate x Par = Annual Interest

39
Q

These securities are defined by the issuer, the duration and the credit rating

A

Bonds

40
Q

Name 4 types of bonds

A
  1. U.S. Treasury (Safest type of debt)
  2. Agency issues
  3. Municipal Bonds
  4. Corporate Bonds
41
Q

This security are a FIXED investment and there is typically no protection against inflation

A

Bonds

42
Q

With bonds, when interest rates go up

A

Prices go down and vice versa

43
Q

Bonds are priced in POINTS. Each point is worth how much?

A

$10

44
Q

If a bond is quoted with a price of 100, it would be selling at how many points?

A

100 points x 10 = $1000 (par)

45
Q

If a bond is quoted with a price of 90, it would be selling at how many points?

A

90 points = $900

A bond priced at a DISCOUNT will sell below par

46
Q

If a bond is quoted with a price of 1050, it would be selling at how many points?

A

105 points = $1050

A bond priced at a PREMIUM will sell above par

47
Q

Define Nominal yield

A

The interest rate printed on the preferred stock certificate or bond indenture. This will never change and reflects the amount of income the investor will receive in a year

48
Q

The annual income divided by the current market price

A

Current Yield

49
Q

The annualized return if the bondholder keeps the bond until it matures. It will ALWAYS move in the same directed as current yield

A

Yield to Maturity

50
Q

Define Treasury Stock

A

Treasury Stock is issued shares that have been repurchased by the company.

  • It is NOT a government security
  • It does not vote nor does it receive dividends
51
Q

What risks do Preferred Stock present?

A

Risks include:

  • Interest Rate risk
  • Inflation (purchasing power) risk
52
Q

What is the Annual Income of a 5% bond selling at $1000?

A

5% x $1000 (PAR) = $50 Annual Income

53
Q

What is the Current Yield of a 5% bond selling at $1000

A

$50 Annual Income / $1000 (Market Value) = 5% Current Yield

54
Q

What is the Annual Income of a 5% bond selling at $1100?

A

5% bond selling at $1000 (Market Value) has a current yield of 5%

  1. 5% x $1000 (PAR) = $50 Annual Income
  2. $50 Annual Income / $1000 (Market Value) = 5% CY
55
Q

What is the Current Yield of a 5% bond selling at $1100

A

CY = 4.55%
1. 5% x $1000 (PAR) = $50 Annual Income
$50 Annual Income / $1100 (Market Value) = 4.55% CY
5% bond selling at $1100 has a current yield of 4.55%

56
Q

Name the 4 U.S. Treasury Securities

A

Treasury B.N.B TIPS

  1. Treasury Bills (Maturity less than 1 year)
  2. Treasury Notes (2-10 year maturity)
  3. Treasury Bonds (10-30 year maturity)
  4. TIPS - Treasury Inflation Protection Security
57
Q

Name the 2 Bond Securities that are Agency Issues

A
  1. Government National Mortgage Association (Ginnie Mae) or GNMA
  2. Federal National Mortgage Association (Fannie Mae)
58
Q

Which Agency Issued Security is backed by the full faith and credit of the U.S. Gov’t.

A

Government National Mortgage Association (Ginnie Mae)

59
Q

Which security would you recommend for investors in high tax brackets

A

Municipal Bonds

  • The only reason to recommend is for tax purposes
  • The income is exempt from federal ordinary income tax
  • They are appropriate for investors in high tax brackets
60
Q

Which Securities risks are based on credit rating

A

Corporate Bonds

61
Q

What does it mean when a bonds risks is Speculative

A
  • It credit rating is low (BB or lower)

- Its RISKY and will have a higher coupon rate than AAA-BBB

62
Q

What type of bond is ideal for someone who does not need current income, but needs to know what amount will be received at maturity

A

Zero Coupon Bond

63
Q

What type of Bond is Price is so stable, you can write checks against it

A

Money Market

64
Q

Who is tasked with managing the money supply to control inflation.

A

Federal Reserve Board

65
Q

What is the Discount Rate

A

The discount rate is set by the Federal Reserve Board to designate the rate at which member banks can borrow from the Fed.

66
Q

What is the Fed Funds Rate

A

A rate charged by member banks lending overnight to other banks. This is the MOST volatile rate as it changes DAILY

67
Q

What is the Prime Rate

A

A rate charged by banks to their most creditworthy customers

68
Q

What is the Broker Call Loan Rate

A

A rate charged to broker/dealers for margin accounts

69
Q

What is the minimum face amount of a negotiable CD is:

A

Negotiable CDs are issued in the minimum face amount of $100,000. These are called jumbo CDs and are typically traded in blocks of $1 million.

70
Q

When interests rates drop what happens to the prices and yield

A

When interest rates drop, prices will rise, decreasing effective yield.

71
Q

When the yield is higher than the coupon, it means the bond was purchased at a discount or at premium

A

When the yield is higher than the coupon, it means the bond was purchased at a discount

72
Q

How long must an economic decline continue before it is classified as a depression?

A

If a decline in the GDP persists for six or more quarters and is accompanied by high unemployment, the economy is said to have entered a depression.

73
Q

An investor purchased a corporate bond for 97. If the bond is sold for 99, the investor has a profit of

A

This investor has a profit of two points, or $20. Bond points are worth $10 each. The actual dollar prices of the bonds are computed as follows: 97 = 97 % of par (or 97 points) = $970, 99 = 99% of par (or 99 points) = $990.

74
Q

When the Current Yield (CY) is below the Nominal Yield, this is considered selling .

A

This is considered selling at a PREMIUM.

FINRA Series 6 (6 decks)

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