Cfp Module 1 : Security Markets

Front 1

Module 1: Security Markets

LO-1 is...

Back 1

Explain functions of financial intermediaries, including investment bankers and dealers.

Mayo Ch. 1 & 2, CFP Section 1, Questions 1 - 7, Application A

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Module 1: Security Markets

LO-2 is...

Back 2

Identify components, terms, or mechanisms related to primary or secondary markets.

Mayo Ch. 2 & 3, CFP Section 2, Questions 8 - 20, & Application B

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Module 1: Security Markets

LO-3 is...

Back 3

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

Question 21.

Front 4

Module 1: Security Markets

LO-4 is...

Back 4

Identify regulatory issues affecting financial planners.

Mayo Ch. 3, CFP Section 3, Questions 22 - 31, Application C

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Module 1: Security Markets

LO-5 is...

Back 5

Explain terminology related to taxes that affects investment decisions.

Mayo Ch. 6 pp 127-133, 149-150, CFP Section 4, Questions 33-36

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Primary Market <def>

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The initial sale of securities.

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Secondary Market <def>

Back 7

A market for buying and selling previously issued securities.

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Application A

Back 8

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Application B

Back 9

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Application C

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CFP Module 1: Security Markets: OVERVIEW: Upon completion of this module, you should be able to understand how securities are created, traded, and taxed.

Back 11

CFP Module 1 Book Sections are:
*Creation of Securities
*Seacurity Markets & Short-Term Instruments
*Security Laws & Regulations
*Taxation & Securities

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portfolio

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an accumulation of assets owned by the investor and designed to transfer purchasing power to the future.

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investment (in economics)

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the purchase of plant equipment, or inventory.

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investment (in lay terms)

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acquisition of an asset such as a stock or a bond.

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value

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what something is worth;

the present value of future benefits.

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valuation

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the process of determining the current worth of an asset.

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return

Back 17

the sum of income plus capital gains earned on an investment in an asset.

INCOME + CAP GAINS = ?

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income

Back 18

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

dividends and interest.

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capital gain

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an increase in the value of a capital asset, such as a stock.

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rate of return

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the annual percentage return realized on an investment.

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risk

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the possibility of loss;

uncertainty of future returns.

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speculation

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an investment that offers a potentially large return but is also very risky;

a reasonable probability that the investment will produce a loss.

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marketability

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the ease with which an asset may be bought and sold.

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liquidity

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moneyness;

the ease with which assets can be converted into cash with little risk of loss of principal.

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systematic risk

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associated with fluctuation in security prices;

e.g., market risk.

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unsystematic risk

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the risk associated with individual events that affect a particular security.

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business risk

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the risk associated with the nature of a business.

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financial risk

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the risk associated with a firm's sources of financing.

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market risk

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systematic risk;

the risk associated with the tendency of a stock's price to fluctuate with the market.

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investment rate risk

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the uncertainty associated with changes in interest rates;

the possibility of loss resulting from increases in interest rates.

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reinvestment rate risk

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the risk associated with reinvesting earnings or principal at a lower rate than was initially earned.

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purchasing power risk

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the uncertainty that future inflation will erode the purchasing power of assets and income.

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exchange rate risk

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the uncertainty associated with changes in the value of foreign currencies.

Front 34

CFP Question 1:

What is the distinction between liquidity and marketability?

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?

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CFP Question 2:

What is risk and what are the sources of risk that every investor must face?

Back 35

?

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CFP Question 3:

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

Back 36

?

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CFP Question 4:

What is the relationship between risk and expected return?

Back 37

?

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CFP Question 5:

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

Back 38

?

Front 39

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)

Back 39

?

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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?

Back 40

?

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Mayo Questions: 3

What differentiates an underwriting from a best-efforts agreement?

Who bears the risk in each of these agreements?

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?

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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?

Back 42

?

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Mayo Questions: 6

What is a financial intermediary?

What role does it play?

What differentiates a financial intermediary from an investment banker?

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?

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Mayo Questions: 7

What features differentiate savings accounts, certificates of deposit, and negotiable certificates of deposit?

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?

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Mayo Questions: 8

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

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?

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Mayo Questions: 9

What assets do money market mutual funds acquire?

Could an individual saver acquire these assets?

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?

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Mayo Questions: 10

Why are money market mutual funds among the safest investments available to savers?

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?

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tax anticipation note

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short-term government security secured by expected tax revenues.

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banker's acceptance

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short-term promissory note guaranteed by a bank.

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repurchase agreement

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the percentage of cash that banks must hold against their deposit liabilities.

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commercial paper

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unsecured, short-term promissory notes issued by the most creditworthy corporations.

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U.S. Treasury Bill

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short-term debt of the federal government

(time frame?)

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money market instruments

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short-term securities, such as treasury bills, negotiable certificates of deposit, or commercial paper.

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money market mutual funds

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mutual funds that specialize in short-term securities.

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federal deposit insurance corporation (FDIC):

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federal government agency that supervises commercial banks and insures commercial bank deposits.

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eurodollar certificates of deposit

(eurodollar CDs)

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time deposit in a foreign bank and denominated in dollars.

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negotiable certificates of deposit

(jumbo CDs)

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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.

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certificates of deposit

(CDs)

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a time deposit with a specified maturity date

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registration

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process of filing information with the SEC concerning a proposed sale of securities to the general public.

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securities and exchange commission (SEC):

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government agency that enforces the federal securities laws.

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preliminary prospectus

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(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.

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firm commitment

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agreement with an investment banker who guarantees a sale of securities by agreeing to purchase the entire issue at a specified price.

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best-efforts agreement

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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.

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syndicate

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a selling group assembled to market an issue of securities.

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originating house

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an investment banker that makes an agreement with a firm to sell a new issue of securities and forms the syndicate to market them.

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underwriting

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the process by which securities are sold to the general public and in which the investment banker buys the securities from the issuing firm.

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initial public offering (IPO)

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the first sale of common stock to the general public.

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investment bankers

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an underwriter;

a firm that sells new issues of securities to the general public.

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private placement

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the nonpublic sale of securities.

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financial intermediary

Back 70

a financial institution, such as a commercial bank, that borrows from one group and lends to the other.