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Series 7 - MASTER DECK > Unit 3 - Customer Information, Risk and Suitability, Product > Flashcards

Unit 3 - Customer Information, Risk and Suitability, Product Flashcards

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Series 7 Top-off Exam flashcards
1
Q

KYC

A

The Know Your Customer rule places an obligation on the firm and associated person to seek information from customer. Customers not required to provide all information so some flexibility. Both financial and non-financial information must be gathered before making a recommendation.

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2
Q

3 components of the customer profile needed to make informed investment recommendations.

A

Customer Balance Sheet
Customer Income Statement
Customer Profile - Nonfinancial Investment Considerations (often carries more weight than financial considerations. The customers emotional acceptance of investing and motivation to invest which molds the portfolio.

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3
Q

Define declaration date, ex-date, record date, payable date and settlement date as it relates to dividends.

A
  • Declaration date: date the board declares the dividend.
  • ex-date: The first date an investor can trade for a security and not receive the dividend is called the ex-date or ex-dividend date.
  • The value of the security is reduced by the amount of the distribution on the ex-date
  • regular way settlement for corporate securities os trade date plus two business days (T+2)
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4
Q

P/E ratio

A

The price-to-earnings ratio measures the relationship between a company’s stock price, with the company’s earnings per share (EPS).

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5
Q

Volatility of short-term interest rates vs. price volatility.

A

Short-term interest rates are more volatile than long-term interest rates because they change more frequently. The federal funds rate is considered volatile because it changes daily. The longer a bond’s maturity (or duration) the more volatile it is in response to interest rate changes compared with similar short-term bonds.

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6
Q

Duration

A

Useful tool in bond calculations. It is the measure of the amount of time a bond will take to pay for itself. The longer a bond’s duration the greater the sensitivity to interest rate changes. The duration of an interst-paying bond is always shorter than the time to its maturity because the interest payments can be reinvested and earn additional income. The duration of a zero-coupon bond is always equal to the time to its maturity because there is only one payment.

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7
Q

MPT

A

Modern Portfolio Theory. Seeks to reduce the risk in a portfolio while simultaneously increasing expected returns. Diversification reduces risk only when assets whose prices move inversely or at different times, in relation to one another are combined. MPT wants securities in a portfolio to have negative correlation not positive correlation.

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8
Q

CAPM

A

Capital Asset Pricing Model. Used to calculate the return that an investment should achieve based on the risk that is taken.

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9
Q

4 stages of the business cycle

A

Expansion
Peak
Contraction
Trough

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10
Q

Defensive Industries

A

Least affected by normal business cycles. Includes industries such as: food, pharma, tobacco, utilities

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11
Q

Cyclical Industries

A

Highly sensitive to business cycles and inflation trends. Includes: steel, heavy equipment, automobiles, capital goods

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12
Q

Balance Sheet Equation

A

Assets = liabilities + Shareholder’s Equity

Assets - liabilities = Shareholder’s Equity

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13
Q

Current Assets

A

include all cash and other items expected to be converted into cash within the next 12 months.

  • cash and equivalents include cash and short-term safe investments
  • accounts receivable
  • inventory
  • prepaid expenses
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14
Q

Current Liabilities

A

Current Liabilities are corporate debt obligations due for payment within the next 12 months. Includes

  • accounts payable
  • accrued wages payable
  • current long-term debt - due within 12 months
  • notes payable
  • accrued taxes
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15
Q

Long-term liabilities

A

Financial obligations due for payment after 12 months. Examples include bonds and mortgages. Long-term promissory notes.

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16
Q

3 types of shareholder equity that are included on the balance sheet

A

capital stock at par
capital in excess of par
retained earnings

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17
Q

Capital in Excess of Par

A

Often called additional paid-in capital or paid-in surplus, is the amount of money over par value that a a company received for selling stock

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18
Q

Capital Stock at Par

A

includes preferred and common stock, listed at par value. Par value is the total dollar value assigned to stock certificates when a corporation’s owners (the stockholders) first contributed capital. Par value of common stock is an arbitrary value with no relationship to market price.

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19
Q

Retained Earnings

A

Sometimes called earned surplus or accumulated earnings, are profits that have not been paid out in dividends. Retained earnings represent the total of all earnings held since the corporation was formed, less dividends to stockholders. Operating losses in any year reduce the retained earnings from the prior years.

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20
Q

Capital Structure

A
  • long-term debt
  • capital stock
  • capital in excess of par
  • retained earnings.
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21
Q

Working Capital

A

The amount of capital or cash a company has available.

current assets - current liabilities = working capital

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22
Q

Current Ratio

A

Current assets / current liabilities

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23
Q

Quick Asset Ratio

A

(Acid Test Ratio). Quick Assets are current assets minus inventory. Quick Assets / current liabilities.

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24
Q

Debt-to-equity Ratio

A

Best way to measure the amount of financial leverage being employed by a company. Really is debt to total capitalization.
Debt / Total Capitalization.

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25
Q

Book Value per share

A

Basically the liquidation value of an enterprise.

Tangible assets - liabilities - par value of preferred / shares of common stock outstanding = book value per share.

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26
Q

Pretax income

A

operating income less interest payment expenses as interest payments on a corporation’s debt is not considered an operating expense.

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27
Q

When are dividends paid (on income statement)

A

Paid out of net income after taxes have been paid.

28
Q

EPS

A

Earnings per share
EPS = earnings available to common / number of shares outstanding.
or if P/E is known
EPS = current market price of common stock / P/E ratio

29
Q

Current Yield

A

(Dividend Yield).

CY = annual dividends per common share / market value per common share

30
Q

Dividend Payout Ratio

A

Measures the proportion

31
Q

Statement of Cash Flows

A

Reports a business’s sources and uses of cash and the beginning and ending values for cash and cash equivalents each year. 3 components:

  • operating activities
  • investing activities
  • financing activities
32
Q

P/E Ratio

A

P/E Ratio = current market price of a common share / Earnings per share (EPS)

33
Q

Technical Analysis

A

attempts to predict the direction of prices on the basis of historic price and trading volume patterns when laid out graphically on a chart.

34
Q

Fundamental analysis

A

concentrates on broad-based economic trends; current business conditions within an industry; and the quality of a particular corporation’s business, finances and management.

35
Q

Consolidation (trend)

A

If a stock’s price stays within a narrow range, it is said to be consolidating. Trendline is horizontal and moves sideways.

36
Q

Reversals (trend)

A

indicates that an upward or downward trendline has halted, and the stock’s price is moving in the opposite direction. Between two trendlines, a period of consolidation occurs and the stock price levels off.

37
Q

Head and shoulders top pattern

A

indicates the beginning of a bearish trend in the stock. First the stock rises, then it reaches a plateau at the neckline. second advance pushes the price higher but then the price falls back to the neckline. Finally the stock price rishes again but falls back to neckline and continues downward.

38
Q

Head-and-shoulders bottom

A

Inverted head-and-shoulders. indicates a bullish reversal.

39
Q

Authorized Stock

A

refers to the specific number of shares the company has authorization to issue or sell.

40
Q

Treasury stock

A

Stock a company has issued and subsequently repurchased from the public. The company can hold this stock indefinitely or can reissue or retire it. Treasury stock does not carry the rights of outstanding common shares, such as voting rights and the right to receive dividends. If company buys back stock EPS increases.

41
Q

Statutory voting

A

Allows a stockholder to cast one vote per share owned for each item on a ballot (such as candidate for BOD. A board candidate needs a simply majority). Benefits the larger investor.

42
Q

Cumulative voting

A

allows stockholders to allocate their total votes in any manner they choose. Benefits the smaller investor

43
Q

Proxies

A
  • a form of absentee ballot.
  • a stockholder may revoke a proxy at any time before the company tabulates the final vote at its annual meeting.
  • Class B is non-voting stock.
44
Q

Inspection Rights

A

Stockholders have the right to receive annual financial statements and obtain lists of stockholders. Inspection rights do not include the right to examine detailed financial records or minutes from the BOD.

45
Q

Straight preferred stock (noncumulative)

A

no special features beyond the stated dividend payment. Missed dividends are not paid to the holder. The year’s stated dividend must be paid on straight preferred if any dividend is to be paid to common shareholders.

46
Q

Cumulative Preferred

A

Any dividends in arrears must be paid before paying a common dividend.

47
Q

Preemptive Rigths

A

Existing stockholders have preemptive rights or stock rights. A rights offering allows stockholders to purchase common stock below the current market value. The rights are valued separately from the stock and trade in the secondary market during the subscription period. A stockholder who receives rights may:

  • exercise the rights
  • sell the rights
  • let the rights expire.
48
Q

Cum rights formula

A

market price - subscription price / number of rights to purchase 1 share + 1

49
Q

Ex-rights formula

A

market price - subscription price / number of rights to purchase 1 share

50
Q

Warrants

A

Certificate granting its owner the right to purchase securities form the issuer at a specified price (normally higher than the current market price) as of the date of the issue of the warrant. Warrants are usually long-term - typically 5 years.
Usually bundled with preferred or bond but are detachable and may trade separately from the bond or preferred stock.

51
Q

ADRs

A

American Depositary Receipts. Negotiable security instruments that are issued by a domestic (US) bank and trade on the US securities markets. Each ADR represents a specific number of shares in a foreign company held by a custodian, typically a bank in that company’s country.

  • Rights to receive dividends.
  • Right to exchange their ADR for the foreign shares they represent.
  • Dividends are declared in the foreign currency but are payable in US dollars. Withholding tax on dividends is taken at the source
52
Q

Bonds - Key points

A 
1 bond point is $10
100 basis points = 1%
CY = annual interest / current market value
For Premium:  CY > YTM > YTC
For Discount:  CY < YTM < YTC
53
Q

Key Rating Services

A
  • Moody’s
  • S&P
  • Fitch
  • A.M. Best (Insurance)
  • DBRS
  • Japan Credit Rating Agency
54
Q

Mortgage Bonds

A

Highest priority among all claims on assets pledged as collateral.

55
Q

Collateral Trust Bonds

A

Issued by corporations that own securities of other companies as investments. A trust indenture usually contains a covenant requiring that a trustee hold the pledged securities.

56
Q

Equipment Trust Certificates

A

ETCs. Used by railroads, airlines, trucking companies and oil companies.

57
Q

Debentures

A

Backed by the general credit of the issuing company. Debentures are below secured bonds and above subordinated debentures and preferred and common stock in the priority of claims on corporate assets.

58
Q

Subordinated Debentures

A

Paid last of all debt obligations.

59
Q

Liquidation hierarchy in event of bankruptcy

A
  • secured debt (bonds and mortgages)
  • unsecured liabilities (debentures) and general creditors
  • subordinated debt
  • preferred stock
  • common stock
60
Q

Guaranteed Bonds

A

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

61
Q

Income Bonds

A

aka Adjustment Bonds. Used when a company is reorganizing and coming out of bankruptcy. Pays interest only if the corporation has enough income to meet the interest payment and if BOD declares a payment. Not suitable investments for customers seeking income.

62
Q

Zero-Coupon Bonds (Advantages / Disadvantages)

A
  • Offers investors a way to speculate on interest rate moves.
  • Substantially more volatile than traditional bonds
  • price fluctuates wildly with changes in market rates
  • When interest rates change, a zero’s price changes much more as a percentage of its market value than an ordinary bond.
  • Suitable investor for future anticipated expenses (e.g. college tuition)
  • No reinvestment risk as there are no interest payments to reinvest.
63
Q

Taxation of Zero-Coupon Bonds

A

income tax is owed each year on the amount by which the bonds have accreted.

  • IRS requires accretion on a straight-line basis
  • may be capital gain or capital loss depending on sale proceeds and cost basis.
64
Q

Convertible Bonds

A

Corporate bonds that may be exchanged for a fixed number of shares of the issuing company’s common stock. Pays lower interest than non-convertible bonds and generally trade in line with the common stock.

65
Q

Conversion Price and Conversion Ratio

A

Conversion price is the stock price at which a convertible bond can be exchanged for shares of common stock. The conversion ratio, also called the conversion rate, expresses the number of shares of stock a bond may be converted into:
Example: A bond with a conversion price of $40 has a conversion ratio of 25:1 ($1,000 / $40) = 25.

Although the conversion ratio of a bond is always stated on the bond certificate and the investor’s confirmation, it is not stated directly in the number of shares, but in terms of the price at which a conversion can occur.

66
Q

CMOs

A

Type of asset-backed security. Asset-backed securities are ones whose value and income payments are derived from or back by a specific pool of underlying assets. These pools of assets can include expected payments from different types of loans such as mortgages. Poolig the assets is called securitization. Issue by private-sector financing corporations and are often backed by Ginnie Mae, Fannie Mae and Freddie Mac.

67
Q

Principal Only CMOs (POs)

A

Income stream comes from principal payments on the underlying mortgages - both scheduled mortgage principal payments and prepayments. a PO sells at a discount from par.

Series 7 - MASTER DECK (3 decks)

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