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FINRA Series 6 > Unit 1: Securities Markets, Investment Securities & Economic Factors > Flashcards

Unit 1: Securities Markets, Investment Securities & Economic Factors Flashcards

1
Q

Security

A

an investment of money, in a common enterprise, with the expectation of profits to be derived primarily from the efforts of a person other than the investor

Two types: Equity or Debt

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2
Q

Equity

A

stock

an ownership interest in a company

income purposes

conservative for the issuer and risky for investors

Common stock, Preferred Stock

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3
Q

Debt

A

represented by bonds and notes

creditor relationship with a company through a debt obligation

secured (backed by some collateral) or not secured

risky for the issuer and conservative for investors

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4
Q

SEC

A

Securities and Exchange Commission that regulate securities markets within the United States

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5
Q

FINRA

A

Financial Industry Regulatory Authority, a Registered Securities Association, a SRO (self-regulatory organizations) that regulates participants in the OTC in securities and NYSE

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6
Q

Primary Market/Primary Offering

A

the initial sale of a security

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7
Q

Secondary Market

A

trade between investors after the primary offering

typically take place on stock exchanges, in the over-the-counter market or both

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8
Q

Stock Exchanges

A

exchange-listed securities, like those on NYSE are priced by auction on the trading floor

brokerage houses purchase the securities for their customers at the lowest available asked or offering price or at the highest available bid price

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9
Q

OTC

A

Over-The-Counter

no centralized trading location

priced by negotiation

market makers (brokers/dealers) maintain inventories of OTC securities and sell to other broker/dealers out of their inventory for their asked or overing price or at their bid price

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10
Q

Market Makers & Buy/Sell

A

broker/dealers that customer’s can use as a resource for buy/selling securities

market makers buy & customer’s sell at bid price

market makers sell & customer’s buy at ask price

competition among market makers ensure the customer of the lowest ask/bid price available

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11
Q

Associated Person (AP) of a Member

A

any employee, manager, director, officer, or partner of a member broker/dealer or another entity (issuer, bank, etc.)

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12
Q

Broker

A

an individual or firm that charges a fee or commission for executing buy and sell orders submitted by another individual or firm

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13
Q

Dealer

A

any person engaged in the business of buying and selling securities for their own account, either directly or through a broker, that is not a bank

charges the customer a markup or markdown

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14
Q

Prospectus

A

any notice, circular, advertisement, letter, or communication, written or by radio or TV, which offers any security for sale or confirms the sale of any security

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15
Q

Balance Sheet

A

discloses the composition of its total capitalization

summarizes assets (what company owns), liabilities (what company owes), and net worth (shareholder’s equity)

Assets = Liabilities + Net Worth

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16
Q

Net Worth Formula

A

Assets - Liabilities

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17
Q

Assets Formula

A

Liabilities + Net Worth

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18
Q

Total Capitalization Formula

A

Net Worth + Long-Term Debt

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19
Q

Common Stock

A

equity security
primary means of raising capital
Authorized, Issued, Treasury and Outstanding

dividends distributed quarterly
all corporations issue common stock
most junior security
purchased for growth, income, or growth and income

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20
Q

Authorized Stock

A

A type of Common Stock (Equity)

the number of shares that a corporation is permitted to issue or sell by the state

often a company sells only a portion of the authorized shares, raising enough capital for its foreseeable needs then sell the remaining in the future or use them for other purposes

if they want to sell more shares than authorized, it must amend its charter through a stockholder vote that approves more shares

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21
Q

Issue Stock

A

A type of Common Stock (Equity)

once authorized, issued stock can be distributed to investors

issued shares have voting rights and the right to receive dividends and are considered determining a company’s total capitalization

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22
Q

Treasury Stock

A

A type of Common Stock (Equity)

stock a corporation has issued and then repurchased from the public

was outstanding stock before it was repurchased by the issuer

repurchase to increase earnings per share, to have an inventory of stock available to distribute as stock options to fund an employee pension plan, etc. or to use of future acquisitions

can hold this stock indefinitely or can reissue or retire it

does not carry the rights of outstanding common shares such as voting rights and the right to receive dividends

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23
Q

Outstanding Stock

A

A type of Common Stock (Equity)

includes any shares that a company has issued but has not repurchased - investor-owned stock

Equity securities in the hands of the public

Issued stock - Treasury stock = Outstanding Stock

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24
Q

CMV

A

current market value

supply and demand price (most familiar to investors)

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25
Q

Stock Book Value

A

current hypothetical liquidation value of a share

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26
Q

Stock Par Value

A

meaningless for investors of common stock (not of preferred stock)

an arbitrary accounting value

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27
Q

Statutory voting

A

allows a stockholder to cast one vote per share owned for each item on a ballot, such as seats on the board of directors.

A board candidate needs a simple majority to be elected.

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28
Q

Cumulative voting

A

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

May be advantageous for small shareholders by giving them a greater opportunity to offset the votes of large shareholders by combining all their shares on a single seat.

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29
Q

Proxy

A

a form of absentee ballot for stockholder’s whoa re not able to attend the annual stockholder’s meeting

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30
Q

Antidilution Provision

A

offering securities to its common stockholders before the general public

gives the owner of convertible securities such as convertible preferred stock or bond, the right of the owner to maintain the same conversion ration in the event of a stock split or stock dividend

sometimes required by law or its corporate charter

*Preemptive right

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31
Q

Preemptive right

A

Stockholder’s right to buy enough newly issued shares in a company to maintain their proportionate ownership in the corporation

to maintain a proportionate interest in a company’s stock

*Antidilution provision

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32
Q

Limited Liability

A

protects stockholders form having to pay a corporation’s debts in bankruptcy. Cannot lose more than the amount they have paid for a corporation’s stock

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33
Q

Non-assessable

A

Common Stock

no such thing as assessable common stock

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34
Q

Inspection of Corporate Books

A

stockholders have the right to receive annual financial statements and obtain lists of stockholders

do not include detailed financial records or the minutes of directors’ meetings

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35
Q

Residual Claims to Assets

A

If a corporation is liquidated, the common stockholder, as owner, has a residual right to claim corporate assets after all debts and holders of more senior securities have been satisfied

common stockholder is at the bottom of liquidation priority list making them most junior security

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36
Q

Long/Bullish

A

an investor who buys shares is considered long (act of buying) the stock

and is bullish: expects the stock to increase in price

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37
Q

Short Sale

A

selling shares borrowed with the intent of buying them back at a lower price in the future for return to the owner (sell high now, buy back low later)

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38
Q

Short/Bearish

A

an investor who sells borrowed shares is short (act of selling) the stock

and is bearish: expects the stock to go down in price

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39
Q

Capital Appreciation

A

increase in the market price of shares

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40
Q

Privileges of Common Stock Ownership

A

vote on splits, membership of Board of Directors, and issuance of additional securities like common stock and convertible bonds

can cast one vote for each share of stock owned for each item on the ballot (Statutory voting or Cumulative voting)

cannot vote on anything that has to do with dividends

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41
Q

Capital Gain

A

when an investor sells a security for more than it was purchased for

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42
Q

Capital Loss

A

when money is lost on the sale of a security

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43
Q

Market Risk

A

the chance that a stock will decline in price at a time that the investor needs the money

limited to his total investment in a stock

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44
Q

Business Risk

A

uncertainty of operating income

relates to the activities of the company (management, philosophy, etc.)

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45
Q

Points

A

whole dollars the stock market’s price is quoted in

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46
Q

Round Lot

A

100 Shares

determine cost of round lot by multiplying trading day low price by 100

$71 x 100 = $7,100

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47
Q

Listed Securities

A

securities that meet the requirements of the exchange such as maintaining a certain price and trading activity and are able to trade on the exchange

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48
Q

Auction Market

A

physical locations you can buy securities like the New York Stock Exchange location, there is a trading floor where buyers and sellers compete for trades

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49
Q

Nasdaq

A

National Association of Securities Dealers Automated Quotation system

electronic stock market originated in 1971

no physical floor, computerized information system that provides price and inventory info for market makers of securities traded OTC

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50
Q

Unlisted Securities

A

Nasdaq stocks that don’t meet the listing requirements of an exchange or choose not to trade OTC

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51
Q

OTCBB or Pink Sheets

A

trade securities termed non-Nasdaq, tend to be the most speculative of all equity securities

OTC Bulletin Board

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52
Q

Preferred Stock

A

issued with a fixed rate of return (like a bond)

purchased for income

higher dividends than commons stock

nonvoting and maintains no preemptive rights

has preference over commons stock in payment of dividends and claim assets in event of issuing co going bankrupt

price sensitive to interest rates

does not normally offer the appreciation potential associated w common stock

identified by its percentage of its par value, a preferred stock with par value of $100 that pays $6 in annual dividends is known as a 6% preferred

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53
Q

Adjustable rate preferred stock

A

preferred stock issued with a variable dividend payout

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54
Q

Straight (noncumulative) Preferred

A

A type of Preferred Stock (Equity)

no special features beyond the stated dividend payment

missed dividends are not paid to the holder

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55
Q

Cumulative Preferred

A

A Type of Preferred Stock (Equity)

fixed dividend payments

any dividends owed must be paid prior to paying a common dividend, stockholders receive their current dividends plus the total accumulated dividends owed

safer than straight preferred because of above

price for cumulative feature meaning less dividend income than straight preferred

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56
Q

Convertible Preferred

A

A type of Preferred Stock (Equity)

owner can change each preferred share for shares of common sock

price is a preset amount noted on the stock certificate

lower stated dividend rate than nonconvertible because the investor may have the opportunity to covert to common shares and enjoy capital gains

par value/conversion price = number of exchanged shares available to purchase

conversion increases the total # of commons hares outstanding, which decreases earnings per common share and may decrease the common stock’s market value

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57
Q

Parity Price

A

state of a convertible bond or preferred stock when its price is equal to the market price of the underlying stock. It means two securities are of equal dollar value

CMV/Conversion Ratio (# of shares) = Parity price of common stock

CMV of common stock x conversion ration = Parity price of convertible bond

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58
Q

Participated Preferred

A

A Type of Preferred Stock (Equity)

offers fixed dividends and owners a share of corporate profits that remain after all dividends and interest due other securities are paid

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59
Q

Callable Preferred

A

A Type of Preferred Stock (Equity)

stocks which a company can buy back from investors at a stated price after a specified date

allows the company to replace a relatively high fixed dividend obligation with a lower one

dividend payment sand conversion right scenes on the call date

in exchange for call privilege, the co usually pays a premium exceeding the stock’s par value at the call , such as $103 for $100 par value stock

higher stated rate of dividend payment than straight, noncallable preferred because of risk that issuer may buy it back and end dividend payments

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60
Q

Adjustable-Rate Preferred

A

A Type of Preferred Stock (Equity)

issued with adjustable, or variable, dividend rates tied to the rates of other interest rate benchmarks, such as Treasury bill and money market rates and can be adjusted as often as semiannually

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61
Q

Cash Dividends

A

normally distributed by check or are automatically episode to a brokerage account

paid quarterly and taxed as dividend income in the year they are received

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62
Q

Stock Dividends

A

used if a company needs to use its cash for business purposes rather than to pay cash dividends, typical for co that invest cash in research and development

cost basis per share reduced by dividend

not taxed when received

stocks market price per share declines after a stock dividend but co total market value remains the same

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63
Q

Stock Splits

A

means to change the number of outstanding shares

total value of outstanding stock must be the same before and after the split

since they change the trading characteristics of a stock, share holder approval must be obtained for stock splits

if co did 2-for-1 stock split, an investor who owned 100 shares worth $20 per share would own 200 shares worth $10.

If co did a 1-for-2 reverse split, investor with 100 shares with $20 per share would own 50 shares worth $40 per share

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64
Q

Dividend Yield/ Current Yield

A

annual dividend (4 times quarterly dividend) divided by the current price of the stock

result is a percentage not dollar value

CMV of $50 and annual dividends of $5 = current yield of 10%

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65
Q

Priority of Dividend Payments

A
  1. cumulative shares
  2. preferred shares
  3. common dividend
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66
Q

Total Return

A

combo of dividend income (for equity investments) or interest paid (for debt investments) and price appreciation or decline over a given period of time

commons stock purchased for $20 with annual dividend of $1 is sold after one year for $24.
Dividend $1 + Capital Appreciation $4 = $5
Total Return = $5 / $20

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67
Q

Transferability of Ownership

A

when an investor buys or sells a security, the exchange of money and ownership requires little or no additional action on the investor’s part

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68
Q

The Stock Certificate

A

evidence of ownership for the shares of a corporation a person owns

identify the company’s name, number of shares, and investor’s name

printed with security’s CUSIP number (ID tracking number)

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69
Q

Odd Lot

A

share amounts fewer than 100 shares, such as 4 or 99

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70
Q

ADRs/ADSs

A

American depositary receipts/American depositary shares

facilitate the trading of foreign stocks in US markets

typically issued by a bank that has bought the foreign stock

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71
Q

Rights of ADR Owners

A

currency risks because dividends are initially paid i foreign currency

no preemptive rights

no voting rights

right to exchange the ADRs for the actual foreign share certificates

72
Q

Rights

A

Short term
Exercisable below market value
May trade with or separate from the common stock
Offered to existing shareholders only with preemptive rights (use them, sell them, or let them expire)
One right issued per share outstanding

73
Q

Warrants

A 
Long term (2-5 years)
Exercisable above market value
May trade with or separate from units
Often offered as a sweetener for another security
# issued is determined by corporation
not entitled to dividends

may be detachable (trade in secondary market in line w common stock’s price) or nondetachable from other securities

74
Q

Rights Offering

A

allows stockholders to purchase common stock below the current market price

75
Q

A Stockholder who owns rights may…

A
  1. exercise rights to buy stock by sending the rights certificates and a check for the required amount to the rights agent
  2. sell the rights and profit from their market value (rights certificates are negotiable securities)
  3. let the rights expire and lose their value
76
Q

Subscription Right Certificate

A

represents a short-term (30-45 day) privilege to buy additional shares of a corporation

one right is issued for each common stock share held by the investor

77
Q

Terms of the Offering

A

stipulated on the subscription right certificates mailed to stock holders

describe how many new shares a stockholder may buy, price, the date new stock will be issued, and final date for exercising the rights

78
Q

Standby Underwriting

A

issuer may offer unsold shares to a broker/dealer if the current stockholders do not subscribe to all the additional stock

done on firm commitment basis

79
Q

Firm Commitment

A

broker/dealer or underwriter buys all unsold shares from the issuer and then resells them to the general public

80
Q

Option

A

a contract that gives the buyer a right to buy or sell an underlying security over time at a stated price (usually 9 months)

type of derivative

two types of options contracts: calls and puts

81
Q

Derivative

A

value of the contract is primarily based on the value of the underlying security

82
Q

Options Disclosure Document

A

educational in nature and reviews basic options terminology, definitions, and risks

must be delivered prior to opening the options account

buyer is owner of contract, seller is writer of contract

83
Q

Call option

A

gives the buyer the right to call (buy) a security away from someone, and seller obligation to sell

can buy right for yourself or sell it to someone else

84
Q

Put option

A

gives the buyer the right to put (sell) a security to someone, and seller obligation to buy

can buy right for yourself or sell it to someone else

85
Q

strike price

A

set price for an option

86
Q

premium

A

difference between the higher price paid for a bond and the bond’s face amount at issue

above par

87
Q

leverage

A

a relatively small cash outlay allows an investor to control an investment that would otherwise require a much larger sum

88
Q

bonds

A

debt securities

fixed-income security

usually have a par (face value) of $1,000

used to raise working capital or funds for capital expenditures such as plant construction or equipment and other major purchases (funded debt - payable in 5 years or more)

issuer promises to repay the debt on a specified date and to pay interest on the loan amount

89
Q

fixed-income security

A

fixed interest rate when bond is issued

90
Q

Bondholders

A

creditors of the issuer. bond issuer pays interest for the use of money to the bondholder

preferential treatment over common and preferred stockholders if a corporation files for bankruptcy

91
Q

Funded debt

A

any long-term debt payable in 5 years or more

92
Q

Low to high risk bonds

A
  1. bonds issued by the federal government
  2. agency issues by the federal government
  3. municipal bonds
  4. corporate bonds (riskiest, but highest potential income)
93
Q

trust indenture

A

a legal contract between the bond issuer and a trustee representing bondholders

94
Q

The Trust Indenture Act of 1939

A

requires corporate bonds of $5 million or more and greater than 270 days to maturity to be issued under a trust indenture

requires a corporation to appoint a trustee – usually a commercial bank or trust company – for its bonds

federal and municipal governments are exempt from the Trust Indenture Act provisions

95
Q

Maturities

A

on the maturity date, the loan principal (face amount) is repaid to the investor

longer time to maturity, greater the risk to bondholders

commonly fall in the 5-30 year range

96
Q

Info on Bond Certificate

A 
Name of Issuer
Interest rate and payment date
Maturity date
Call features
Principal amount (par value)
CUSIP number for ID
Dated date (date interest starts accruing)
Reference to the bond indenture
97
Q

Coupon (bearer) Bonds

A

not registered, no proof of ownership is needed to sell a bearer bond
have no been issued in the US since 1982

term coupon still used to describe interest payments received by bondholders

98
Q

Fully Registered Bonds

A

transfer agent maintains a list of bondholders and updates it as bond ownership changes

interest payments are automatically sent to bondholders of record

if bond is issued with a certificate is fully registered

transfer agent cancels seller’s certificate when bond is sold and issues a new one in the buyer’s name

99
Q

Registered as to Principal Only Bonds

A

have the owner’s name printed on the certificate, but the coupons are in bearer form

no longer issued

100
Q

Book–Entry Bond

A

book-entry owners do not receive certificates, but transfer agent maintains the security’s ownership records

there is a registered bond owner

available for all US government and municipal bonds

101
Q

Liquidation Priority between Bonds and Stocks

A
  1. unpaid wages
  2. IRS, state, and county taxes
  3. secured debt (bonds and mortgages)
  4. unsecured bonds (debentures) and general creditors of the issuer
  5. subordinated debt
  6. preferred stockholders
  7. common stockholders
102
Q

Bond Par Value

A

most bonds are issued with face, or par value of $1,000

represents the dollar amount of the investor’s loan to the issuer, and it is the amount repaid when the bond matures

103
Q

Two primary factors affecting a bond’s market price

A
  1. issuer’s financial stability

2. overall trends in interest rates

104
Q

Bond Pricing

A

bond quotes are commonly stated as percentages of par

a bid of 100 means 100% of par or $1,000
a bond quote of 98 (1/8) means 98.125% of $1,000 or $981.25

one point is 1% of $1000 or $10

minimum variation is 1/8 point

105
Q

Basis point

A

1/100 of 1%

100 basis points equals 1%, 75 basis points is .75%

106
Q

Standard & Poor / Moody

A

rate both corporate and municipal bonds and base their bond ratings primarily on an issuer’s creditworthiness

107
Q

Speculative (non-investment-grade) bonds

A

commonly referred to as high-yield bonds or junk bonds

must offer high yields to compensate investors for the elevated risk

safest ratings have the most As, risker are B, C and D ratings

108
Q

Rating to Yield for Debt Securities

A

higher the bond’s rating, lower its yield

lower returns for safer investments

109
Q

Liquidity (Marketability) Factors

A

ease with which a bond or any other security can be sold

determined by:

  1. quality
  2. rating
  3. maturity
  4. call features
  5. coupon rate and CMV
  6. issuer
  7. existence of a sinking fund
110
Q

volatility

A

fluctuation in price

bonds with longer terms to maturity experience greater volatility than short-term bonds

111
Q

Debt Service

A

the schedule of interest and principal payments due on a bond issue

112
Q

Redemption

A

when bond’s principal is repaid

usual occurs on the maturity date

redemption equals the last semi-annual interest payment pus the principal of the bond

113
Q

Sinking Fund

A

operated by the bond’s trustee

can be used to call bonds, redeem bonds at maturity, or buy back bonds in the open market

to establish, the issuer deposits cash in an account with the trustee

can aid the bond’s price stability

114
Q

In-Whole or Partial Calls

A

allows the issuer to redeem a bond issue before its maturity date, either in whole or in part (in-whole or partial calls)

Uses:

  1. if general interest rates decline, can redeem bonds with a high interest rates and issue new bonds with a lower rate
  2. reduce debt
  3. replace short-term debt issues with long-term issues and vice versa
  4. means of forcing the conversion of convertible corporate securities
115
Q

Call Premium

A

a premium (a price higher than par) the issuer pays bondholders in return for in-whole or partial calls

116
Q

Tendering

A

to retire a portion of debt

117
Q

Call Protection Period

A

5 or 10 years to provide safety to investors in periods of declining interest rates

during his period the issuer may not call any of its bonds

want highest possible rate of interest for the longest period of time

118
Q

Call Risk

A

risk that the bonds will be called and the investor will lose its stream of income from the bond

119
Q

Refunding

A

practice of raising money to call a bond

issuer sells a new bond issue with a lower rate to buy back an old bond issue with a high rate

120
Q

Bond Yield

A

the cash interest payments in relation to the bond’s value

determined by:

  1. the issuer’s credit quality
  2. prevailing interest rates
  3. time to maturity
  4. call features
121
Q

Nominal Yield (Coupon/Stated Yield)

A

fixed percentage of the bond’s par value

set at issuance an printed on the face of the bond

coupon of 6% means bondholder is aid $60 in interest annually until the bond matures

6% x $1,000 = $60

122
Q

Current Yield (CY)

A

measure’s a bond’s annual interest relative to its market price

Annual interest/Market price = CY

as bond price rises, yield declines and vice versa

123
Q

Yield to Maturity (YTM)

A

reflects the annualized return of the bond if held to maturity and is the most comprehensive measure for comparison of bond yields

difference between the price paid for a bond and par value

124
Q

General Obligation Bonds (GOs)

A

backed by the taxing power of the issuer

municipal securities

125
Q

Long-Term vs. Short-Term Bonds

A

Long-Term have…

  1. higher yields
  2. more likely to be callable
  3. will fluctuate in price more with interest rate changes

Short-Term…
1. provide greater liquidity than long-term

126
Q

Marketable Government Securities

A

trade in the secondary market (OTC)

127
Q

Non marketable Government Securities

A

Have no secondary market and are only redeemable through the federal government

EE, HH, and I Bonds

128
Q

T-Bills

A

Treasury Bills

Short- Term Marketable US government debt w a maturity of one year or less issued at a discount from par

return is the difference between the price the investor pays and the par value received when the bill matures

buys for 975, receives $1,000, $25 is the investor’s return

mature in 4, 13, 26, or 52 weeks

129
Q

T-Notes

A

intermediate-term bonds that pay interest every 6 months

mature in 2-10 years at par or can be refunded (called)

130
Q

T-Bonds

A

long-term securities that pay interest every six months

mature in more than 10 years

callable

131
Q

Treasury Inflation Protection Securities (TIPS)

A

helps protect investors against purchasing power risk

purchased in minimum increments of $100

exempt from state and local income taxes but subject to federal taxation

132
Q

Consumer Price Index (CPI)

A

standard measurement of inflation

133
Q

Separate Trading of Registered Interest and Principal of Securities (STRIPS)

A

a type of zero coupon created from US Treasury notes and bonds when the Treasury sells separate receipts against the principal and coupon payments

not issued or sold directly to investors, only through financial institutions and government securities broker/dealers

backed directly by the Treasury

sold in multiples of $100

134
Q

Series EE Bonds

A

type of Non marketable Government Security

sold at face value starting at min of $25, max $1,000 per yr
earn a fixed rate of interest,c edited monthly and paid at redemption

135
Q

Series HH Bonds

A

type of Non marketable Government Security

no longer issued as of 9.1.2004, but billions are still outstanding

current-income securities and pay a fixed rate of interest every 6 months until maturity (10 years) or redemption

136
Q

Series I Bonds

A

type of Non marketable Government Security

low-risk, liquid savings product designed to protect investors from an inflation risk

Electronic bonds are sold at face value starting at min of $25, max $1,000 per yr

Paper bonds are sold at $50, $75, $100, $200, $500, $1000, or $5000

have an annual interest rate that reflects the combined effects of a fixed rate and a semiannual inflation rate

137
Q

Ginnie Mae

A

Government National Mortgage Association

  1. only agency security backed in full by US government
  2. issues pass-through certificates
  3. investors receive interest and principal on a monthly basis, investors buy to satisfy income objectives
  4. yields are slightly higher than on Treasuries
  5. subject to interest rate and prepayment risk

min. $25,000, 12-year payment assumption

138
Q

Collateralized mortgage obligations (CMOs)

A

securities created from pools of mortgages

provide investors with a greater range of timeframes and a greater cash-flow

  1. Repayment Risk
  2. Extension Risk
  3. yield more than T-securities
  4. interest subject to federal, sate, and local taxes
  5. $1000 issue
  6. unsuitable for small or unsophisticated investors bc complexity and risk
139
Q

Mortgage-Backed Securities (MBS)

A

use pools of mortgages as collateral for the issuance of securities

140
Q

Asset-Backed Securities (ABS)

A

use pools of assets (leases, loans, receivables, credit card debt, royalties, etc.) as collateral for the issuance of securities

141
Q

Repayment Risk

A

if interest rates fall and homeowner refinancing increases, principal is received sooner than expected

142
Q

Extension Risk

A

if interest rates rise and refinancing declines, investor may have to hold his investment longer than anticipated, although he does receive more interest payments

143
Q

Tranche

A

segregates portions of the cash flows from the CMO in order to redirect its principal and interest payments to other tranches based on a predetermined distributions schedule established when CMO was created.

144
Q

Municipal Bond

A

a bond issued by a form of government other than the federal government or agency of the federal government

considered very safe, only federal government bonds are safer

  1. interest earned is exempt from federal taxation
  2. most suitable for high tax bracket investors
  3. unsuitable for low tax brackets or within retirement plans
  4. interest may also be tax-exempt at the state and local level if the bond holder is a resident of the state in which the bond is issued
145
Q

Revenue Bond

A

can be used to finance any municipal facility that generates enough income to support its operations and debt service

146
Q

Industrial Development Revenue Bonds (IDRs or IDB)

A

issued by a municipality for the benefit of a private sector corporation

147
Q

Legal Opinion

A

states that the issue conforms with the applicable laws, the state constitution, and that the interest is tax free at the federal level

attached to every bond certificate, written and signed by the bond counsel (an attorney specializing in tax-exempt bond offerings)

148
Q

Corporate Bonds

A

issued to raise working capital or capital for expenditures such as plant construction and equipment purchases

quoted in points and 1/8s

two types: secured & unsecured

149
Q

Secured Bonds

A

secured when the issuer has identified specific assets as collateral for interest and principal payments

  1. Mortgage Bonds (real estate pledged as collateral)
  2. Collateral Trust Bonds (backed by company’s own stock or another company’s stock)
  3. Equipment Trust Certificates
150
Q

Collateral Trust Bonds

A

issued by corporations that own securities of other companies as investments

151
Q

Equipment Trust Certificates

A

used by railroads, airlines, trucking companies and oil companies to finance the purchase of capital equipment

152
Q

Unsecured Bonds

A

no specific collateral backing and are classified as either debentures or subordinated debentures

153
Q

Debentures

A

backed by the general credit of the issuing corporation and a debenture owner is considered a general creditor of the company

junior to secure bonds and senior to subordinated debentures and preferred and common stock

154
Q

Subordinated Debentures

A

offer higher income than either straight debentures or secured bonds due to their subordination, therefore riskier and often have conversion features

155
Q

Guaranteed bonds

A

backed by a company other than the issuer, such as a parent company

increases the issue’s safety because someone other than the issuer is guaranteeing timely payment of interest and principal

municipal bonds often carry a guarantee

156
Q

Income Bonds/Adjustment Bonds

A

used when a company is reorganizing and coming out of bankruptcy

pay interest only if the corporation has enough income to meet the interest payment and the board of directors declares a payment

bc missed interest payments do not accumulate for future payment, these bonds are not suitable fore customers seeking income

157
Q

Zero-Coupon Bonds

A
  1. no reinvestment risk
  2. no semiannual interest payments to reinvest
  3. buying zero is only way to lock in rate of return
  4. will receive face amount at maturity
  5. income tax each year on the amount the bonds have accreted

trade flat (doesn’t pay interest)

*for a couple who wishes to have $100,000 available in a college education fund in 10 years

158
Q

Convertible Bonds

A

corporate bonds that may be exchanged for a fixed number of shares of the issuing company’s common stock

  1. pays interest at a fixed rate and redeemable for face value at maturity if not converted
  2. priority over common stockholders in event of corporate liquidation
  3. market price is more stable during market declines

*not for investors who’s main objective is income

A. Convertible bondholders are creditors of the corporation
B. coupon rates are usually lower than nonconvertible bond rates of the same issuer
C. If the underlying stock should decline sharply, the bonds will sell at a price based on their inherent value as bonds disregarding the convertible feature

159
Q

Duration

A

measure of the amount of time a bond will take to pay for itself

160
Q

Money Market

A

high quality debt instruments with one year or less to maturity (discount)

161
Q

Capital Market

A

intermediate to long-term financing usually in the form of equity or debt securities with maturities of more than one year

162
Q

Banker’s Acceptance (BA)

A

short-term time draft or letter of credit for foreign trade

max maturity of 270 days

issued at a discount and mature at par

163
Q

Commercial Paper/Promissory Notes

A

short-term, unsecured, to raise cash to finance accounts receivable and seasonal inventory overages

max maturity of 270 days

lower interest rates than bank loan interest rates
for companies with excellent credit ratings

164
Q

Negotiable Certificates of Deposit (CDs)

A
  1. minimum face value of $100,000, but most are issued for $1 million or more
  2. mature in one year or less
  3. can be traded in secondary market and are considered money market securities
  4. used by banks
  5. unsecured
165
Q

Gross Domestic Product (GDP)

A

a nation’s annual economic output, all the goods and services produced within it

166
Q

Four Stages of the Business Cycle

A
  1. Expansion
  2. Peak
  3. Contraction (decline)
  4. Trough (when business activity stops declining and levels off)
    (cycle repeats)
167
Q

Recession

A

when GDP declines for 6 consecutive months (two quarters)

168
Q

Federal Reserve Board (the Fed)

A

conducts monetary policy by influencing the money supply, which in turn affects interest rates and the economy

determines how much money is available for businesses and consumers to spend

  1. changes in reserve requirements !! Least used tool
  2. changes in the discount rate on loans to member banks
  3. open-market operations (buying and selling Treasury securities) (Federal Open Market Committee) !! Most used tool

multiplier effect: when a small change in reserve requirements has an exaggerated result in terms of money supply

169
Q

Reserve Requirement

A

commercial banks must deposit a certain percentage of their depositor’s money with the Federal Reserve

become federal funds

170
Q

Fiscal policy

A

legislative decisions of Congress and the President that can influence the levels of unemployment and inflation by adjusting overall demand for goods and services

ability to tax and spend and can include increases or decreases in…

  1. federal spending
  2. money raised through taxation
  3. federal budget deficits or surpluses
171
Q

Federal Funds Rate

A

interest rate charged on reserves traded among member banks for overnight use in amounts of $1 million or more

172
Q

Prime Rate

A

base rate on corporate loans at large US money center commercial banks

173
Q

Discount Rate

A

charge on loans to depository institutions set by the FRB in NY

174
Q

Broker Call Loan Rate

A

charge on loans to broker/dealers with stock as collateral

175
Q

LIBOR

A

London InterBank Offered Rate

average interest rate charged when banks in the London interbank market borrow unsecured funds from each other

176
Q

Balance of Payments

A

flow of money between the US and other countries

FINRA Series 6 (6 decks)

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