Cfp Ii: In Class Module 1, Security Markets

Front 1

Preliminary definitions

Back 1

* investments: lay usage v. economic usage
* primary and secondary markets
* value and valuation

Front 2

More preliminary definitions

Back 2

* return: income and capital gains
* return: monetary units and percentages
* risk: differentiated from speculation
* marketability versus liquidity

Front 3

sources of risk:

total risk is two part...

Back 3

1) unsystematic (diversifiable) - business risk and financial risk.
2) systematic risk (nondiversifiable) - market risk, interest rate risk, reinvestment, purchasing power, exchange rate risk

Front 4

diversificiation and unsystematic risk

Back 4

* diversification reduces (or eliminates) unsystematic risk
* unsystematic risk is asset specific

Front 5

diversificiation and unsystematic risk

Back 5

* for firms, unsystematic risk refers to business risk and financial risk.
* diversification does not reduce systematic risk.

Front 6

portfolio assessment

Back 6

* 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.

Front 7

efficient markets

Back 7

* 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.

Front 8

efficient markets (2)

Back 8

the efficient market implies:

* the investor should not expect to consistently outperform the market.

Front 9

the importance of:

Back 9

* beliefs.
* investment philosophy.
* understanding yourself.
* available time to make investment decisions.
* the investor's resources.

Front 10

financial intermediaries:

Back 10

each financial intermediary creates claims on itself and transfers funds from savers to:
* firms.
* governments.
* people who need funds.

Front 11

the indirect transfer through a financial intermediary:

Back 11

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.

Front 12

the variety of financial intermediaries:

Back 12

* commercial banks.
* savings and loan associations.
* mutual savings banks.
* credit unions.
* life insurance companies.
* pension plans.
* money market mutual funds.

Front 13

the money market instruments:

Back 13

* 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.

Front 14

financial intermediaries and investment bankers differ.

Back 14

* financial intermediaries create claims on themselves.
* investment bankers:
- facilitate the sale of new securities.
- do not create claims on themselves.

Front 15

the private placement:

Back 15

* direct sale of securities.
* eliminates selling costs.
* features can be tailor made for both parties.

Front 16

the sale of new securities to the general public:

Back 16

* initial public offerings (IPOs).
* the role of investment bankers.

Front 17

functions of investment bankers (1): Advisory:

Back 17

* determining type of security and amount needed.
* features offered with the security (e.g., warrants).
* price of the security.
* timing of the sale.

Front 18

functions of investment bankers (2) Underwriting:

Back 18

* purchase securities from issuer.
* assume risk of price decline.
* sell securities to investors.

Front 19

Investment bankers' role in pricing an IPO:

Back 19

* 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.

Front 20

functions of investment bankers (3) Marketing:

Back 20

* form underwriting syndicate.
* send preliminary prospectus to prospective investors.
* stabilize market via purchase orders.

Front 21

underwriting agreements: best efforts:

Back 21

* issuing company bears risk
* no guarantee from investment banker.

Front 22

underwriting agreements: underwriting / firm commitment:

Back 22

* investment banker purchases entire issue.
* investment banker bears risk.

Front 23

security markets

Back 23

* organized exchanges are:
* NYSE and the AMEX
* the listing of securities.
* over-the-counter markets (Nasdaq)

Front 24

Market Makers - Security Dealers - Specialists

Back 24

* 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.

Front 25

Types of orders:

Back 25

* market orders
* limit orders
* stop orders

Front 26

Settlement:

Back 26

* confirmation statements.
* T + 3 = settlement date.
* Delivery versus holding securities in street name.

Front 27

Cash versus margin accounts:
(borrowing)

Back 27

* leveraging the position.
* increased potential return.
* increased risk.

Front 28

Margin Requirements:

Back 28

* initial margin requirement
* maintenance margin
* margin call

Front 29

Margin Call Formula:

Back 29

1 - Initial Margin Percentage / 1 - Maintenance Margin Percentage = Purchase Price of Stock

Front 30

The Short Sale:

Back 30

* premised on security prices declining.
* sale of borrowed securities.
* the uptick rule.
* short-interest ratio.

Front 31

foreign securities:

Back 31

* 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.

Front 32

Security Regulations:
* Securities Act of 1933

Back 32

Features:
* registation of IPOs

Front 33

Security Regulations:
* Securities Exchange Act of 1934

Back 33

Features:
* created SEC
* brokers / dealers must register with SEC.

Front 34

Security Regulations:
* Investment Company Act of 1940.

Back 34

Features:
* regulates mutual funds and other investment companies.

Front 35

Security Regulations:
* Investment Advisers Act of 1940.

Back 35

Features:
* Advisers must register with SEC (not licensed, just registered...)
* Disclosure requirements.
* Maintenance of books and records.

Front 36

Security Regulations:
* Securities Investors Protection Act of 1970.

Back 36

Features:
* Protects investors from brokerage firm bankruptcies.

Front 37

Security Regulations:
* National Securities Markets Improvements Act of 1996.

Back 37

Features:
* > $25 million: SEC regulation
* < $25 million: State regulation

Front 38

Security Regulations:
* Regulation FD, 2000

Back 38

Features:
* 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.

Front 39

Security Regulations:
* Sarbanes-Oxley Act of 2002

Back 39

Features:
* Executive accountability for accuracy of corporate financials.
* Stricter rules for auditors.
* Independence on corporate boards.

Front 40

Long-Term Capital Gains...
holding period required / tax bracket / dividend income...
RULES.

Back 40

memorize these rules...

Front 41

True / False Statements:

Examples of financial intermediaries are banks, mutual funds, and insurance companies.

Back 41

True. Also: savings and loans, pensions.

Front 42

True / False Statements:

The SEC requires private placements to make a full disclosure.

Back 42

False.

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.

Front 43

True / False Statements:

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

Back 43

True.

Firms issue securities.

Front 44

True / False Statements:

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

Back 44

False.

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.

Front 45

True / False Statements:

Brokerage commissions are determined by the SEC.

Back 45

False.

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.

Front 46

True / False Statements:

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

Back 46

False.

Repurchase agreements are guaranteed short-term contracts for a set price at a specified date.

Front 47

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.

Back 47

True.

The NASD is the "governing" body and the SEC is the "regulating" body.

Front 48

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.

Back 48

False.

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

Front 49

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.

Back 49

True.

But... not defining adequacy and doesn't have to guarantee...

Front 50

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.

Back 50

True.

Front 51

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.

Back 51

False.

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.

Front 52

True / False Statements:

Gains from the sales of capital assets can be offset by capital losses, dollar for dollar.

Back 52

True.

Front 53

True / False Statements:

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

Back 53

True.

on day 31 you are OK.