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53 Cards in this Set

  • Front
  • Back
Preliminary definitions
* investments: lay usage v. economic usage
* primary and secondary markets
* value and valuation
More preliminary definitions
* return: income and capital gains
* return: monetary units and percentages
* risk: differentiated from speculation
* marketability versus liquidity
sources of risk:

total risk is two part...
1) unsystematic (diversifiable) - business risk and financial risk.
2) systematic risk (nondiversifiable) - market risk, interest rate risk, reinvestment, purchasing power, exchange rate risk
diversificiation and unsystematic risk
* diversification reduces (or eliminates) unsystematic risk
* unsystematic risk is asset specific
diversificiation and unsystematic risk
* for firms, unsystematic risk refers to business risk and financial risk.
* diversification does not reduce systematic risk.
portfolio assessment
* popular press place emphasis on return (w/o discussing risk)
* higher return requires accepting more risk.
* assessment should consider both the return and the risk taken to achieve return.
efficient markets
* financial markets are efficient because:
1) fierce competition exists among investors.
2) participants may readily enter and exit financial markets.
3) information is readily available.
efficient markets (2)
the efficient market implies:

* the investor should not expect to consistently outperform the market.
the importance of:
* beliefs.
* investment philosophy.
* understanding yourself.
* available time to make investment decisions.
* the investor's resources.
financial intermediaries:
each financial intermediary creates claims on itself and transfers funds from savers to:
* firms.
* governments.
* people who need funds.
the indirect transfer through a financial intermediary:
financial intermediary --> account --> general public (savers) --> money back to the
financial intermediary.

* the saver has a claim on the financial intermediary.
* the financial intermediary has a claim on the ultimate user of the funds.
the variety of financial intermediaries:
* commercial banks.
* savings and loan associations.
* mutual savings banks.
* credit unions.
* life insurance companies.
* pension plans.
* money market mutual funds.
the money market instruments:
* certificates of deposit (CDs).
* negotiable CDs.
* eurodollar CDs.
* U.S. Treasury bills (less than a year maturity)
* commercial paper
* repurchase agreements (repos)
* bankers' acceptances
* tax (or revenue) anticipation notes.
financial intermediaries and investment bankers differ.
* financial intermediaries create claims on themselves.
* investment bankers:
- facilitate the sale of new securities.
- do not create claims on themselves.
the private placement:
* direct sale of securities.
* eliminates selling costs.
* features can be tailor made for both parties.
the sale of new securities to the general public:
* initial public offerings (IPOs).
* the role of investment bankers.
functions of investment bankers (1): Advisory:
* determining type of security and amount needed.
* features offered with the security (e.g., warrants).
* price of the security.
* timing of the sale.
functions of investment bankers (2) Underwriting:
* purchase securities from issuer.
* assume risk of price decline.
* sell securities to investors.
Investment bankers' role in pricing an IPO:
* underpricing leads to windfall gains to initial buyers.
* overpricing inflicts losses on initial buyers and the investment bankers.
* tendency to underprice to assure a successful sale.
functions of investment bankers (3) Marketing:
* form underwriting syndicate.
* send preliminary prospectus to prospective investors.
* stabilize market via purchase orders.
underwriting agreements: best efforts:
* issuing company bears risk
* no guarantee from investment banker.
underwriting agreements: underwriting / firm commitment:
* investment banker purchases entire issue.
* investment banker bears risk.
security markets
* organized exchanges are:
* NYSE and the AMEX
* the listing of securities.
* over-the-counter markets (Nasdaq)
Market Makers - Security Dealers - Specialists
* offer to buy and sell for their own account.
* the spread - the bid and ask prices.
* market makers - do not set the level of prices... - facilitate security transactions.
Types of orders:
* market orders
* limit orders
* stop orders
* confirmation statements.
* T + 3 = settlement date.
* Delivery versus holding securities in street name.
Cash versus margin accounts:
* leveraging the position.
* increased potential return.
* increased risk.
Margin Requirements:
* initial margin requirement
* maintenance margin
* margin call
Margin Call Formula:
1 - Initial Margin Percentage / 1 - Maintenance Margin Percentage = Purchase Price of Stock
The Short Sale:
* premised on security prices declining.
* sale of borrowed securities.
* the uptick rule.
* short-interest ratio.
foreign securities:
* foreign stocks traded in American markets.
* American Depository Receipts (ADRs) - avoids the problem of language - expressed in dollars and not the local currency - registered with the SEC.
Security Regulations:
* Securities Act of 1933
* registation of IPOs
Security Regulations:
* Securities Exchange Act of 1934
* created SEC
* brokers / dealers must register with SEC.
Security Regulations:
* Investment Company Act of 1940.
* regulates mutual funds and other investment companies.
Security Regulations:
* Investment Advisers Act of 1940.
* Advisers must register with SEC (not licensed, just registered...)
* Disclosure requirements.
* Maintenance of books and records.
Security Regulations:
* Securities Investors Protection Act of 1970.
* Protects investors from brokerage firm bankruptcies.
Security Regulations:
* National Securities Markets Improvements Act of 1996.
* > $25 million: SEC regulation
* < $25 million: State regulation
Security Regulations:
* Regulation FD, 2000
* FD = Fair Disclosure.
* Requires companies to share market moving information with the public at the same time it is released to institutions.
* Designed to level the playing field for the small investor.
Security Regulations:
* Sarbanes-Oxley Act of 2002
* Executive accountability for accuracy of corporate financials.
* Stricter rules for auditors.
* Independence on corporate boards.
Long-Term Capital Gains...
holding period required / tax bracket / dividend income...
memorize these rules...
True / False Statements:

Examples of financial intermediaries are banks, mutual funds, and insurance companies.
True. Also: savings and loans, pensions.
True / False Statements:

The SEC requires private placements to make a full disclosure.

Less public risk. One of the advantages of a private placement is that the firm does not have to meet the SEC disclosure requirements that are necessary in order to sell securities to the public.
True / False Statements:

Investment bankers do not issue securities, but they do serve as advisers to firms that want to raise capital.

Firms issue securities.
True / False Statements:

Margin is a way to leverage return with very little risk.

Margin involves buying securities on credit. The use of margin magnifies not only the potential gain but also the potential loss. Because of the increase in potential loss, buying securities on credit increases the element of risk that must be borne by the investor.
True / False Statements:

Brokerage commissions are determined by the SEC.

Brokerage commission rates are supposed to be set by supply and demand, but in reality only large investors are able to negotiate commission rates with brokerage firms.
True / False Statements:

Repurchase agreements are subject to market risk because of their long-term maturities.

Repurchase agreements are guaranteed short-term contracts for a set price at a specified date.
True / False Statements:

To become a registered representative with the NASD, a planner must pass one or more NASD exams; no exams are required to become a registered investment advisor with the SEC.

The NASD is the "governing" body and the SEC is the "regulating" body.
True / False Statements:

Blue-sky laws make it possible for the SEC to enforce securities laws and prevent market manipulation, deception, misrepresentation of facts, and fraudulent practices.

Blue-sky laws allow states to regulate speculative investment schemes by requiring individuals who are investment advisers to register with the state.
True / False Statements:

The Securities Act of 1933 requires that new securities be registered with the SEC and that adequate and accurate disclosure be provided to buyers by the prospectus.

But... not defining adequacy and doesn't have to guarantee...
True / False Statements:

The Investment Advisers Act of 1940 requires advisers with more than $25 Million under management to register with the SEC and provide disclosure statements to clients.
True / False Statements:

A financial planner who gives investment advice for a fee has a duty to clients (1) to disclose conflicts of interest and (2) to be licensed with the SEC.

Rationale: Duties owed to a client include the duty to disclose, to diagnose, to consult, and to keep current. Further, because a financial planner sells advice about securities, registration (not licensure) as a registered investment adviser with the SEC is required.
True / False Statements:

Gains from the sales of capital assets can be offset by capital losses, dollar for dollar.
True / False Statements:

A wash sale invloves selling securities on which capital losses can be realized and the buying them back 30 days later.

on day 31 you are OK.