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70 Cards in this Set

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Module 1: Security Markets

LO-1 is...
Explain functions of financial intermediaries, including investment bankers and dealers.

Mayo Ch. 1 & 2, CFP Section 1, Questions 1 - 7, Application A
Module 1: Security Markets

LO-2 is...
Identify components, terms, or mechanisms related to primary or secondary markets.

Mayo Ch. 2 & 3, CFP Section 2, Questions 8 - 20, & Application B
Module 1: Security Markets

LO-3 is...
Explain characteristics of a given type of short-term security or deposit instrument.

Question 21.
Module 1: Security Markets

LO-4 is...
Identify regulatory issues affecting financial planners.

Mayo Ch. 3, CFP Section 3, Questions 22 - 31, Application C
Module 1: Security Markets

LO-5 is...
Explain terminology related to taxes that affects investment decisions.

Mayo Ch. 6 pp 127-133, 149-150, CFP Section 4, Questions 33-36
Primary Market <def>
The initial sale of securities.
Secondary Market <def>
A market for buying and selling previously issued securities.
Application A
Application B
Application C
CFP Module 1: Security Markets: OVERVIEW: Upon completion of this module, you should be able to understand how securities are created, traded, and taxed.
CFP Module 1 Book Sections are:
*Creation of Securities
*Seacurity Markets & Short-Term Instruments
*Security Laws & Regulations
*Taxation & Securities
an accumulation of assets owned by the investor and designed to transfer purchasing power to the future.
investment (in economics)
the purchase of plant equipment, or inventory.
investment (in lay terms)
acquisition of an asset such as a stock or a bond.
what something is worth;

the present value of future benefits.
the process of determining the current worth of an asset.
the sum of income plus capital gains earned on an investment in an asset.

the flow of money or its equivalent produced by an asset;

dividends and interest.
capital gain
an increase in the value of a capital asset, such as a stock.
rate of return
the annual percentage return realized on an investment.
the possibility of loss;

uncertainty of future returns.
an investment that offers a potentially large return but is also very risky;

a reasonable probability that the investment will produce a loss.
the ease with which an asset may be bought and sold.

the ease with which assets can be converted into cash with little risk of loss of principal.
systematic risk
associated with fluctuation in security prices;

e.g., market risk.
unsystematic risk
the risk associated with individual events that affect a particular security.
business risk
the risk associated with the nature of a business.
financial risk
the risk associated with a firm's sources of financing.
market risk
systematic risk;

the risk associated with the tendency of a stock's price to fluctuate with the market.
investment rate risk
the uncertainty associated with changes in interest rates;

the possibility of loss resulting from increases in interest rates.
reinvestment rate risk
the risk associated with reinvesting earnings or principal at a lower rate than was initially earned.
purchasing power risk
the uncertainty that future inflation will erode the purchasing power of assets and income.
exchange rate risk
the uncertainty associated with changes in the value of foreign currencies.
CFP Question 1:

What is the distinction between liquidity and marketability?
CFP Question 2:

What is risk and what are the sources of risk that every investor must face?
CFP Question 3:

A significant part of this text is devoted to valuation. What causes an asset to have value today?
CFP Question 4:

What is the relationship between risk and expected return?
CFP Question 5:

What is the implication of an efficient securities market for the return an investor will earn over a period of time?
Mayo Questions: 1

In an underwriting, what role does each of the following play:
a) the investment banker
b) the syndicate
c) the red herring
d) the SEC
e) the saver (investor)
Mayo Questions: 2

Why is it important that in an underwriting the investment banker does not overvalue (that is, overprice) the securities?

If the securities are overpriced, who suffers the loss?
Mayo Questions: 3

What differentiates an underwriting from a best-efforts agreement?

Who bears the risk in each of these agreements?
Mayo Questions: 4

Why do investors buy new issues of securities?

Besides the risk associated with fluctuations in the market as a whole and the loss of purchasing power through inflation, what is the source of risk associated with initial public offerings?
Mayo Questions: 6

What is a financial intermediary?

What role does it play?

What differentiates a financial intermediary from an investment banker?
Mayo Questions: 7

What features differentiate savings accounts, certificates of deposit, and negotiable certificates of deposit?
Mayo Questions: 8

If a saver had $12,540 to invest for a short period of time, what alternatives would be available?
Mayo Questions: 9

What assets do money market mutual funds acquire?

Could an individual saver acquire these assets?
Mayo Questions: 10

Why are money market mutual funds among the safest investments available to savers?
tax anticipation note
short-term government security secured by expected tax revenues.
banker's acceptance
short-term promissory note guaranteed by a bank.
repurchase agreement
the percentage of cash that banks must hold against their deposit liabilities.
commercial paper
unsecured, short-term promissory notes issued by the most creditworthy corporations.
U.S. Treasury Bill
short-term debt of the federal government

(time frame?)
money market instruments
short-term securities, such as treasury bills, negotiable certificates of deposit, or commercial paper.
money market mutual funds
mutual funds that specialize in short-term securities.
federal deposit insurance corporation (FDIC):
federal government agency that supervises commercial banks and insures commercial bank deposits.
eurodollar certificates of deposit

(eurodollar CDs)
time deposit in a foreign bank and denominated in dollars.
negotiable certificates of deposit

(jumbo CDs)
a certificate of deposit in which the rate and the term are individually negotiated by the bank and the lender and which may be bought and sold.
certificates of deposit

a time deposit with a specified maturity date
process of filing information with the SEC concerning a proposed sale of securities to the general public.
securities and exchange commission (SEC):
government agency that enforces the federal securities laws.
preliminary prospectus
(red herring)

initial document detailing the financial condition of a firm that must be filed with the SEC to register a new issue of securities.
firm commitment
agreement with an investment banker who guarantees a sale of securities by agreeing to purchase the entire issue at a specified price.
best-efforts agreement
agreement with an investment banker who does not guarantee the sale of a security but who agrees to make the best effort to sell it.
a selling group assembled to market an issue of securities.
originating house
an investment banker that makes an agreement with a firm to sell a new issue of securities and forms the syndicate to market them.
the process by which securities are sold to the general public and in which the investment banker buys the securities from the issuing firm.
initial public offering (IPO)
the first sale of common stock to the general public.
investment bankers
an underwriter;

a firm that sells new issues of securities to the general public.
private placement
the nonpublic sale of securities.
financial intermediary
a financial institution, such as a commercial bank, that borrows from one group and lends to the other.