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203 Cards in this Set
- Front
- Back
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Define market value. |
the current price of the security and the price the owner would receive if they were to sell at that time
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Define market order |
an investor that wishes to buy or sell at the current market value can enter a market order
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Define bid price |
the price at which a customer can sell shares or the highest price that the dealer is willing to pay for a security |
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The bid is always _______ than the offer, and the difference between them is the ________ |
lower
trading spread |
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A narrow spread between bid and ask price indicates _______ trading, whereas a wider spread suggests _______ trading |
active
sluggish |
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Define market makers |
dealers who are capable of making continuous offerings to buy and sell |
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Where do OTC trades occur? |
a listed quotation system, such as NASDAQ |
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Where do non-NASDAQ OTC issues trade? |
OTC Bulletin Board or in a weekly publication called the pink sheets |
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The ______ is the oldest and largest exchange in the US. It is a physical location where orders to buy and sell securities are executed. A ______ is an individual with a membership on the exchange. A member firm must have an individual employee who owns a seat on the exchange, called a __________. |
NYSE
NYSE Member
Allied Member |
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After a security is sold in the primary market, it is traded in the ______ or _______.
Name and define the 2 markets that this market includes. |
aftermarket or secondary market
Exchange - represents an auction market with competitive buyers and sellers
Over the Counter (OTC) - a negotiated market where one buyer negotiates with one seller |
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Corporations that want to raise money to operate their business may do so by selling a security. What's the definition of a security? |
A financial instrument that may trade for value |
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Investors who own common stock have certain rights of ownership including: |
1. the right to vote 2. the right to transfer ownership 3. the right to receive dividends once declared 4. a junior claim to the assets of the corporation in the event of liquidation (shareholders are paid if the company goes out of business) |
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In its original charter, a corporation receives authorization to sell a specific number of shares as common stock. These are referred to as ______________. |
Authorized shares |
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A corporation may sell all or a portion of these shares, which creates sub-classifications. Name the 4 subclassifications and define them. |
1. Issued shares - authorized shares actually sold to investors 2. Unissued shares - authorized shares that haven't been sold. 3. Treasury stock - stocks that have been issued (sold to the public) and subsequently bought back by the corporation and temporarily retired. Treasury stock has no voting rights or dividends. 4. Outstanding stock - the number of issued shares that are in the hands of investors at any given time. Found by subtracting the number of shares of treasury stock from the number of issued shares |
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1. Define a warrant. 2. Are warrants short term or long term? 3. How are they priced? 4. How does a warrant help with a bond? 5. Warrants are usually ________, which means they can be traded separately from the _____ with which they were issued. |
1. allows the purchase of a stock at a set price (the subscription price or exercise price) over a set period of time. They provide an opportunity to purchase securities at a specified price. 2. Long term 3. Exercise price above the current market value stock 4. Makes bonds more attractive to investors and lowers the interest rate the corporation will need to pay on its debt 5. Detachable, security |
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1. What is preemptive rights and how does it work? 2. What is the subscription price? 3. What does POP stand for? 4. What 3 options do shareholders have with preemptive rights? 5. How long do preemptive rights last? |
1. Allows existing shareholders to maintain the same % of ownership in a corporation when new shares are issued. Before new shares of common stock are issued, current s/h's have the opportunity to purchase a sufficient number of new shares to maintain their current % ownership in the company. 2. the offering price of stock to shareholder's exercising preemptive rights 3. Public Offering Price 4. Purchase stock, sold in the marketplace, left to lapse 5. 30 to 60 days after issued |
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1. Give the definition for dividend yield. 2. How is dividend yield calculated?
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1. a method for measuring a stockholder's return on investment 2. Dividend Yield = annual dividend / share price |
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Who chooses and sets the following dates? 1. Declaration Date 2. Ex-Dividend Date 3. Record Date 4. Payable Date |
1. BOD 2. Self-Regulating Organization 3. BOD 4. BOD |
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Name and list the 4 important dates whenever a company pays a dividend. |
1. Declaration Date - the date on which the BOD declares the dividend and it becomes a liability 2. Ex-Dividend Date - the first trade date on which the stock purchaser is not legally entitled to receive the dividend. Also on this date, the market value of the stock declines by the amount of the dividend. (typically 2 days before the record date) 3. Record Date - the date on which the corporation consults the stockholder record 4. Payable Date - date on which the corporation actually distributes dividends to those shareholders of record |
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1. What is the settlement date for corporate and municipal securities? 2. What is the settlement date for government securities? 3. What is the settlement date for cash trades? |
1. 3 business days after the trade date (T+3) 2. Next business day after the trade date (T+1) 3. Same day as trade |
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1. What does the right to transfer mean? 2. Name the 2 important dates when an investor chooses to buy or sell their shares in the market and define them.
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1. Means they have the right to buy and sell their shares in the marketplace, or trade securities with other investors. 2. Trade Date - date the transaction occurred. This is when the price and quantity of shares are determined in transaction. Settlement Date - the date by which securities bought must be paid for, or securities sold must be delivered. The date for actual ownership changes hands. |
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1. A company's assets can include: 2. A company's liabilities can include: 3. For a company to be in balance, what needs to happen? 4. How do you calculate a company's net worth? |
1. Property, cash, accounts receivable, inventory, etc. 2. Current bills, accounts payable, outstanding bonds, other debt 3. Total Assets = Total Liabilities + Net Worth of Corporation 3. Assets = Liabilities + Net Worth OR Assets - Liabilities = Net Worth |
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There are 2 types of voting processes used by corporations. Name them and define them. |
Statutory Voting - shareholders are permitted one vote per share they own. ex. if there's 4 open positions and s/h holds 100 shares, they can have 400 votes. Only option is to vote or not to vote.
Cumulative voting - s/h's can multiply the # of shares owned by the # of directorships and cast the vote in any manner desired. This is more advantageous for small s/h's because they can concentrate their votes for one director. Total # of votes = # of shares x # of vacancies |
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Most stockholders vote by proxy. What is a proxy? |
A limited power of attorney that stockholders grant to someone to vote the stock either at their own discretion or at the instruction of the board of directors. |
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Any owner of common stock has the right to attend stockholder meetings AND vote on issues such as: |
1. the election of the board of directors 2. decisions about changes in the operations of the company 3. issuance of additional securities |
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Explain the limited liability concept. |
The maximum that stockholders can lose is the price they paid for the stock. |
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Corporations can raise capital by ______ or _______ |
selling stock or bonds |
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______ is one type of exemption from the Act of 1933 and allows a company to save the expense of an underwriter and avoid registration requirements by engaging in a private placement provided these conditions are met: 1. The securities cannot be sold to more than ___(#) ________ investors. Non-accredited investors must designate a _______ for each offering. 2. An accredited investor is a financial institution, private business development company, or an individual with either a net worth of ____ or an annual income of at least ____ for the past 2 years. ($_______ if joint account) 3. The corporation must have adequate reason to believe the buyer is a _________ |
Regulation D 1. 35, non-accredited Purchaser representative 2. $1 million $200,000 ($300,000 if joint) 3. Sophisticated Investor |
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There are some securities that are exempt from the 1933 Act from the registration and prospectus requirements. Even if it's exempt though, it is still subject to __________ of the 1933 Act. Exempted securities include: |
Anti-fraud Provisions
US gov & gov agency securities Municipal securities Issues of nonprofit organizations Commercial Paper Issues of domestic banks and trust companies (but not bank holding companies) Issues of small business investment companies |
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Under the Civil Liabilities for the Securities Act of 1933, the ______ must be delivered to the customer prior to or in conjunction with the security transaction. If there is false or misleading statements, exclusion of material facts that are required to be stated, or unlawful representation of the SEC's No-Approval Clause, what options does the investor have if the security is still owned? If not still owned? |
Prospectus
The investor may sue for the recovery of money paid for the security with interest, less the amount of income received.
The investor may sue for damages to the extent of recovery as if the security was still owned. |
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What is a due diligence meeting? |
A meeting held by the underwriter, officers, directors, and syndicate members prior to the issuance of the final prospectus in order to review all aspects of the issue and determine if disclosure information is accurate and sufficient |
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What are blue-sky laws and how was the term coined? |
New issues must be registered under state securities laws that govern the registration of securities and securities personnel.
Before the act was implemented, the lack of regulations made it possible for anyone to be able to sell a piece of Kansas "blue sky" to someone in California and get away with it |
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During the cooling off period, the issuer prepares a red herring prospectus. 1. What physical characteristic on the prospectus tells you if its a red herring? This tells investors that a registration statement has been ____ but not yet ______. 2. Does a red herring contain a final offering price? 3. Can a red herring collect actual solicitations or offers? |
1. Red border around the cover page filed, effective 2. No, but it may contain a date range, i.e. ($15-20 per share) 3. No, but it can be used to collect indications of interest |
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Before corporate securities can be sold to the public, a statement must be filed with the SEC. The day the SEC receives the registration statement is the ____, which is followed by a cooling off period of ____ days.
There are 5 things required in a registration statement which include: |
filing date 20-days
1. description of issuers business 2. shareholdings of officers, directors and underwriters and identification of all insiders (ppl holding 10% or more of company's securities) 3. biographical data on all officers and directors 4. company's capitalization supported with financial docs and statements 5. proposed usage of issue's proceeds |
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1. When a corporation is participating in a primary offering, it typically utilizes the services of an investment banker. What 2 responsibilities does an investment banker primarily have? 2. In exchange for their expertise, the investment banker receives ______, when the securities are sold to the public. This is called the ______, and it is the difference in price between ______ and ________. |
1. raise the capital and distribute the issue to the public 2. a portion of the sales proceeds underwriters spread what the issuer receives and what the public pays for the offering |
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1. Define secondary offering. 2. Who do the proceeds of the sale go to? 3. How does this effect the outstanding shares? |
1. A registered offering by a current shareholder of a large number of outstanding shares of a security 2. to the seller, not the issuing company 3. it doesn't change |
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Define primary offering/distribution and what does it refer to? (Who receives the proceeds?) |
When a corporation is already public but distributes additional securities
The issuing corporation receives the proceeds |
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Define IPO. |
Initial Public Offering is a corporation's first distribution of a stock to the public. Must be registered with the SEC. |
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1. Define the Securities Act of 1933. 2. What does this act prevent, and in what market? 3. Who is responsible for the enforcement of securities laws? 4. What does this act require the issuer to do? 5. When rulemaking, the main focus is to consider whether a rule or action is _______ & _______. It is also required to consider whether a rule promotes ________, ________ & _________. 6. Issuers are required to register securities if _________. |
1. Provides purchasers of new issues of securities with information regarding the issuer 2. Fraud in the primary market 3. Securities and Exchange Commission (SEC) 4. Provide prospective investors with a prospectus with info on issuer 5. in the public interest and protects investors efficiency, competition, capital formation 6. the US mail or other interstate commerce channels are used to sell this issue |
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Bullish vs. Bearish |
Bullish - expects the value to appreciate or prices to go up
Bearish - expects the value of the security to depreciate or prices to go down |
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Define the following: 1. Option 2. Call Option 3. Put Option
4. How much is a round lot? 5. Define strike or exercise price. 6. T/F: Once the option buyer (long position) pays the writer (seller, or short position), a fee (option price) for the right to exercise the option within the option period, they are obligated to buy or sell the security. |
1. legally binding contract between buyers and sellers 2. the right to buy 3. the right to sell 4. 100 shares 5. the specified price to buy or sell at 6. False - IF the buyer chooses to exercise the option, then they are obligated to buy or sell the security. Otherwise, they don't have to. |
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What is an ADR and what does it allow investors to do? |
American Depository Receipts are certificates issued by a commercial US bank to represent ownership of shares of a foreign company
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What are secured and unsecured bonds? |
Secured - there's specific collateral protecting the bondholder
Unsecured - only backed by corporation's promise to pay back investor |
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The compensation that is paid back for money that is temporarily used by someone borrowing it is called A. Accumulation B. Payback C. Interest D. Capital Gain |
C. Interest |
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What is the key difference between straight preferred stock and participating preferred stock shares? A. Participating preferred offers the investor the potential to receive dividends in addition to the stated dividend. B. There is no difference as both terms describe the same security. C. Straight preferred shares enjoy an additional catch up provision for unpaid past dividends D. Participating preferred shared may be converted to either common stock or corporate bonds |
A. Participating preferred offers the investor the potential to receive dividends in addition to the stated dividend |
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Which of the following Is another name for debt security? A. Common stock B. Preferred stock C. Bond D. All of the above |
C. Bond |
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A U.S. government bond quoted at 108.06 - 109.09 has an asking price of: A. $108.60 B. $1,081.88 C. $1,092.81 D. $1,099.00
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$1,092.81. Bond prices are quoted at $1,000 par in 32nds, with each point worth $10. The ask price (last price quoted) would be $1,090 + (9/32 x $10) for a price of $1,092.81 |
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The stock value that is determined by supply and demand is A. Even value B. Par value C. Book value D. Market value |
D. Market value |
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A likely result of continued mild inflation in the economy is A. an increase in economic activity B. rising interest rates C. lower prices on government bonds D. all of the above |
D. All of the above |
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The maturity periods of money market instruments can range from as short as overnight to as long as A. 90 days B. 270 days C. 1 year D. 10 years |
C. 1 year |
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Inflation Protection Securities (TIPS) adjust which of the following based in the CPI? A. Principal amount semi-annually B. Interest rate annually C. Interest rate semi-annually D. Principal amount annually |
A. Principal Amount Semi-Annually |
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Which of the following is synonymous with market risk? A. Capital Risk B. Systematic Risk C. Timing Risk D. Inflation Risk |
B. Systematic Risk |
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If a company decides to liquidate its assets, which of the following is correct regarding the order of the liquidation? A. Preferred stockholders are paid first, then bondholders, common stockholders are paid last B. Everyone with rights to the assets is paid at the same time C. Common stockholders are paid first, then preferred stockholders then bondholders D. Bondholders are paid first, then preferred stockholders, and finally common stockholders |
D |
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When exercising a preemptive right, at what price is the shareholder allowed to purchase new stock? A. Current market value B. Par value C. Preemptive price D. Subscription Price |
D. Subscription price |
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Which of the following statements concerning money market instruments is TRUE? A. newly issued T-bills and T-notes are both money market securities B. Commercial paper is unsecured corporate debt with a maximum maturity of 270 days C. Negotiable CDs issued by commercial banks have minimum denominations of $1,000 D. Repurchase agreements are used to expedite foreign trade and are secured by the originally purchased goods of the importer |
B. Commercial paper is unsecured corporate debt with a maximum maturity of 270 days |
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Define offer (or "ask" price) |
The price at which the customer can buy shares |
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1.FINRA requires members and their associated persons to use ________ to determine the best market for executing a customer order so that the customer receives _________. 2. There are 5 factors used to determine if a member routed the customer to the best market. Name them.
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1. reasonable diligence, best possible price 2. the market's characteristics: price, volatility, liquidity, pressure on communications -the size and type of transaction -the # of markets the member firm checked on before entering the order -the accessibility of a quotation -the terms and conditions of the order (whether it is a market order, not held order, or a stop loss order)
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Members and their associated persons are not allowed to ________ between a member and the best market for a security unless _____________. Then the burden is on the member to show why the third party was necessary to __________ on behalf of the customer. This standard applies to both agent and principal transactions. |
introduce a third party the order cannot be executed directly with the market receive the best execution |
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In a trading account with a broker/dealer, the investor must normally pay in full to purchase securities. This is known as a __________. However, by establishing a ________, it is possible to make purchases with credit extended by the broker/dealer. |
cash account
margin account |
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1. The ____________ was granted authority, under Regulation _____ of the Securities Exchange Act of _____ to establish margin requirements for broker/dealers. 2. The current Regulation ____ margin requirement is _____. This means that customers that purchase securities must deposit at least ____ of the value of the securities. 3. Only ______ or ______ may be used as collateral in margin accounts. 4. The practice of pledging securities as collateral for margin loans is known as_________. 5. Who can lend the customer the remaining 50% of the purchase price? |
1. Federal Reserve Board, Regulation T, 1934 2. T, 50%, 50% 3. cash or fully paid securities 4. hypothecation 5. broker/dealer |
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1. Securities that can be purchased on margin are referred to as ____________. This list includes any stock listed on ________ or on ________, and certain over-the-counter stocks approved for margin by the Fed Reserve. 2. _______, including shares of _______ mutual funds, are ineligible for margin purchases for _____ days. However, if the fund is approved for margin, the customer may use it as collateral after the fund has been ________ by the customer for _____ days. |
1. marginable securities, a national exchange or NASDAQ 2. New issues, open-end mutual funds, 30 days, fully paid for, 30 days |
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_____________ is also under the jurisdiction of the Federal Reserve Board. It deals with the extension of credit by banks and other financial institutions. |
Regulation U |
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1. Under Regulation T, the Fed Reserve requires customers purchasing securities on _____ or in _____ to pay for the securities within ______ business days. 2. A regular-way settlement requires ____ business days for corporate securities to be paid for. 3. The FRB requires the broker/dealer to give the customer _____ extra business days to pay for the security. 4. "When must the customer pay for the security?" OR "What is the Regulation T settlement?" |
1. margin, cash, 5 business days 2. T+3 days 3. 2 extra days 4. T+5 |
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1. Broker/Dealers are allowed to waive Regulation T calls in the amount of $______ or less. 2. Under exceptional circumstances, the member firm may apply for --- and _______ may grant --- an extension to the payment date. 3. If no extension is received, the member firm must liquidate (sell) the securities and ______ the customer's account for ______ days. |
1. $1,000 2. FINRA 3. freeze, 90 days |
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1. During the 90-day frozen period, can credit be extended to customers? 2. Can the customer continue to purchase securities? On what basis? |
1. No 2. Yes, cash basis |
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1. Collect on Delivery (COD) orders are used by _______ and are cleared through the ___________. 2. Either before or at the time a member accepts a COD order, the member must know 4 things. Name them. 3. The customer must receive a trade confirmation from the member no later than _______. After the customer receives a confirmation, the agent must ________ for the securities to the member. 4. COD Orders have a maximum of ________ days to settle, and they are also known as __________. |
1. institutional customers, Depository Trust Corporation (DTC) 2. Name and address of the agent representing the customer, customer's account number and institution numbers 3. close of the next business day, promptly deliver instructions4 4. 35 days, Delivery vs. Payment (DVP) |
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Because bonds and preferred stock have a higher claim, they are called __________ of a corporation. |
Senior securities |
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1. The par value of preferred stock is typically $______. 2. Dividends are expressed as a ____ of par, or simply in a dollar amount. 3. Example: What would a 5% preferred stock yield in a dividend? ($) |
1. $100 2. percentage 3. $5 |
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1. Because preferred stocks pay a _____ dividend, they deliver ______ income to investors. 2. Preferred stocks are _______ sensitive. |
1. fixed (or stated), fixed 2. interest rate |
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1. A stated preferred dividend represents the ______ dividend that the stock will pay. 2. If a company cannot pay the stated dividend, it pays ______________. |
1. maximum 2. whatever it can afford |
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Cumulative preferred stock, or dividend preferred, is a provision that gives the preferred stockholder a better confidence of a dividend being paid. Why? |
No dividends can be paid to common stockholders if any preferred dividends are in arrears. So if a company hasn't paid a dividend in 2 years, the cumulative preferred stockholders will get 2 years of dividend payouts before common stockholders get any. |
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Participating preferred stock offers investors the potential to receive _________ in addition to the __________. In other words, they may participate in __________ remaining after the company's normal ______ and ________ have been met. |
dividends, stated dividend excess interest, dividend obligations |
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1. What does convertible stock allow owners to do? 2. When is the conversion price and conversion ratio decided? 3. Define conversion price. 4. Define conversion ratio. 5. How do you calculate the conversion ratio? |
1. Convert, or exchange, their preferred stock for a designated number of common shares 2. At the stock's issuance 3. The price at which the shareholder may convert to common shares 4. The number of shares that will be received for each share of preferred stock 5. Dividing the par value of the preferred stock by the conversion price |
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Which of the following preferred shares has the highest yield? A. Participating B. Cumulative C. Convertible D. Straight Preferred |
D. Straight Preferred
The highest yield is the lowest price, and Answers A, B and C are features that add to the price and thus lower the yield. |
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1. Corporations that own either preferred or common stock are eligible for a tax advantage, know as the __________. How does this tax advantage work?
2. Is this tax advantage available to individual taxpayers? |
1. 70% dividend exclusion
A U.S. corporation that receives dividends from owning the shares of another U.S. corporation is entitled to exclude from tax up to 70% of the dividends received.
2. No |
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1. Issuers with significant debt are said to be highly __________. 2. Who may issue bonds? 3. When is interest from bonds typically paid? 4. Define the maturity date. 5. What happens on a bond's maturity date? 6. Why would an issuer retire debt prior to maturity? |
1. leveraged 2. corporations, U.S. government, municipalities 3. semi-annually 4. a future date in which the issuer promises to pay back the investor a specified rate of interest and the principal amount 5. the bondholder receives the principal amount plus interest due. The bond is thus redeemed and considered retired. 6. In order to reduce interest charges and improve their financial condition |
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1. Individual bonds usually have a par (face) value of $______. 2. _________ bonds (the owner's name is on record) pay interest _________. 3. Corporate bonds are quoted in _______ points and _______ of a point. Each point represents $_____, therefore each fraction of a point represents $______. |
1. $1,000 2. registered, semi-annually 3. whole, eighths $10, $1.25 |
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A bond quoted at 101 3/8 represents how much? |
$1013.75
$10 x 101 3/8 = $10 x 101 + $10 x (3/8) = $1010 + $10 (.375) = $1010 + $3.75 = $1013.75 |
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1. Define interest rate. 2. How is the interest rate typically expressed? 3. What else can an interest rate be called? 4. Bonds may sell in the marketplace for more or less than their par value due to ___________. 5. A bond selling at less than par value is selling at _________. 6. A bond selling above par value is selling at _________. |
1. Compensation paid to the bondholder for the amount of money borrowed 2. Percentage 3. Coupon Rate 4. interest rate fluctuations 5. discount 6. premium |
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1. There is a __________ relationship between bond prices and interest rates. 2. What happens to the market price of existing bonds as interest rates rise? 3. What happens to the market price of existing bonds as interest rates decline? |
1. inverse relationship 2. the market price declines because they are worth less than new bonds with higher coupon rates 3. the market price of existing bonds rises |
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A bond's _______ is the same as its coupon rate, also known as its ________. |
nominal yield
stated rate |
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1. The nominal yield is based solely on the bond's _______. 2. Is the nominal yield related to the market value of the bond? 3. The _______ represents the income the investor will receive annually from the issuer, although the actual interest payments are typically paid semi-annually. |
1. par value 2. no 3. nominal rate |
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1. A bond's nominal yield will depend upon how the bond is ________ as well as the ________ of the issuer. 2. Issuers with lower _______ must offer higher ______ in order to compete. 3. Any change in the _____ of the issuer can affect a bond's value in the _________. |
1. secured, credit rating 2. credit ratings, yields 3. credit rating, secondary market |
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1. The two most recognized bond ratings are _________ and _________. 2. Define investment grade. 3. What credit ratings are considered investment grade? |
1. Standard & Poor's, Moody's 2. securities that can be purchased by banks 3. S&P = AAA, AA, A, BBB Moody's = Aaa, Aa, A, Baa |
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1. A bond's ______ represents the return on investment by relating the ________ to the _______ required to purchase the bond.
2. How do you calculate this? |
1. current yield coupon rate dollar amount required to purchase the bond
2. Current Yield =
(annual dollar interest paid) ------------------------------------------- (current market price) x100% |
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If a bond with a par value of $1,000 was purchased for $802, and paid a coupon rate of 5%, its current yield is... |
Current yield =
$1,000 x 5% 50 ----------------------- --------- $802 = 82
Current yield = .0623 x 100 = 6.23% |
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The _____, expressed as a _______, is the economic benefit that would be realized on a bond or other fixed income security if the bond was held until the maturity date. In other words, it is the total return the investor would receive. |
yield to maturity
percentage |
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1. The yield to maturity may be ______ than the current yield if the bond is selling at a _______, or _______ than the current yield if the bond is selling at a _________.
2. YTM considers not only the ______ realized during the holding period, but also the difference (gain or loss) between the ________ and ________ received at maturity.
3. The factors taken into account are: (4) |
1. greater, discount less, premium
2. nominal yield, purchase price and par value received at maturity
3. annual coupon payment in dollars number of years to maturity par (or face) value realized at maturity price paid |
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1. The yield to maturity is a _______ measuring the total _________ of the bond from the time of purchase until maturity.
2. How do you calculate the YTM? |
1. rate of return, performance
2. Annual interest + Annualized Gain OR - Annualized Loss ------------------------------------------------------------- (Purchase price + Redemption price) / 2 |
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1. Bonds yields will move in the _________ direction of bond prices, therefore when a bond is selling above par, the current yield and yield-to-maturity will both be below the _________. 2. The ________ is always fixed as it is the _________ determined at the time the bond is issued. |
1. opposite, nominal yield 2. nominal yield, coupon rate |
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A bond's bond point is equal to $______, and a basis point is equal to $______. |
$10 $0.10 |
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On a par bond, the ________, ________ and ________ are all the same |
nominal yield, current yield and yield to maturity |
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On a discount bond, the highest yield is the _______, followed by the ______, and then the _________ as the lowest yield. |
yield-to-maturity, current yield, nominal yield |
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On a premium bond, the highest yield is the ________, followed by the _________, and then the _______ as the lowest yield. |
nominal yield, current yield, yield-to-maturity |
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1. Duration is a powerful tool in understanding the ________ risk when the bond is purchased. 2. Investors use duration to measure the ________ of the bond. 3. Generally, the higher the duration, or the longer the investor needs to wait for the bulk of the payments, the price will ________ as interest rates _______. 4. When calculating the duration, it is important to take into consideration other features, such as whether the bond is ________ or ________. 5. When comparing a bond's duration, all other factors being equal, the duration will be _________ to the bond's rate and to the market's yield. |
1. interest rate risk 2. volatility 3. drop 4. callable or convertible 5. inversely proportional |
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1. Name the 3 secured bonds. 2. Name the 2 unsecured bonds. |
1. Mortgage bonds, equipment trust certificates, collateral trust bonds 2. debentures, subordinated debentures |
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1. Mortgage bonds (the most common type of secured bonds) are _______ by a _______ or _______ against _________. 2. Corporations issue both ______ and ______ mortgage bonds, with _______ holders retaining a senior position with respect to claim on assets in the event of a foreclosure or liquidation. |
1. collateralized, lien or mortgage, real property 2. first and second, first |
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Equipment trust certificates are usually issued by _____ and _______, and are secured by ______ and _________. These have historically proved to be secure investments. Why? |
railroads and airlines, railroad cars and airplanes
Because the bonds are retired at a faster rate than the equipment is depreciated. |
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Collateral trust bonds are issued by _______ that own portions of other companies and can pledge the stock as _______ for a bond issue. |
corporations, collateral |
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1. Debentures (the most common type of bond issued) are issues that are ______ by a pledged asset, but secured only by __________. 2. Who usually issues debentures? 3. In the event of default, the claims of debenture holders are _________ to those of _______ bondholders but still take priority over __________. |
1. unsecured, good faith of the issuer 2. well-established corporations 3. subordinate, secured bondholders, stockholders |
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Subordinated debentures have ______ claims than that of ordinary debentures or any other _______ debt issues of a corporation but still have claims over _________. |
junior, secured, stockholders |
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1. Most issuers of corporate debt have ________, which give the corporation the flexibility to retire debt prior to maturity. 2. Are these features a benefit to issuers? Why? 3. Why would a bond be called by the issuer? 4. When the issuer is calling in the old bonds by issuing new bonds, the process is called _________. |
1. call features 2. yes, they allow them to retired the bonds at their option 3. if the issuer can borrow the funds at a reduced interest rate or has accumulated excess revenues with which to return the outstanding debt 4. refunding |
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1. Do bondholders typically want their issues called? Why or why not? 2. Most bonds are not callable for the first ____ to _____ years after issuance. This feature is called the _________. 3. Call features usually require that the bondholder receive a ______ for the bonds. |
1. No, because they are receiving a higher interest rate than what is currently available in the market. 2. 5 to 10 years, call protection period 3. premium (above par) |
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1. Convertible bonds allow the holder to do what? 2. Is this a benefit for the investor? Why? 3. When first issued, convertibles act like _____, but with a lower ______. 4. Do convertible bonds usually carry higher or lower interest rates than nonconvertible bonds? Why? 5. Companies typically offer _____ yields on convertibles. Why? 6. The bond's _____ will increase or decrease along with the _______ of the underlying stock. 7. The _____ and ______ are determined at issuance. 8. How do you calculate the conversion ratio, and what does it mean? |
1. exchange or convert into common shares in the issuing company at a predetermined price 2. yes, because it has a stock option hidden inside 3. regular corporate bonds, interest rate 4. lower interest rates because the investor is being given the opportunity to participate in an increase in the value of the common stock with a conversion privilege 5. lower, because they can be changed into stock and thus benefit from a rise in its price 6. market value, value 7. conversion price and conversion ratio 8. dividing the par value of the bond by the conversion price, tells you how may shares will be received for each bond |
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1. U.S. government securities, also known as _______ or simply _______, are considered to be _______ investments. Why? 2. They are also _______ because the denominations are quite large. 3. Interest on these securities are subject to ________ only, not to _____ and ______. However, ________ on these bonds are still fully taxable. |
1. Treasury Securities, securities, extremely safe. They represent direct obligations of the US government. 2. highly liquid 3. federal taxation, not state or local, capital gains |
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1. Treasury securities are both __________ and _________. 2. A _______ security is one for which ownership can be transferred to ___________ in a negotiated market. 3 What are considered marketable securities? (3) 4. Why does the US government sell marketable securities? 5. When you buy one of these securities, you are lending your money to ________. |
1. marketable, nonmarketable 2. marketable, another party 3. t-bills, notes, bonds 4. in order to pay off maturing debt and raise the cash needed to run the federal government 5. the US government |
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1. A _________ (or "___________") security is one that may only be redeemed by the issuer. 2. What are 2 examples of these securities? 3. Since 1986, all securities issued by the Treasury Department have been ________, meaning they exist only as electronic records in computers. 4. The only place to buy a paper Treasury today is in __________. |
1. nonmarketable (or "redeemable") 2. Series EE and Series HH savings bonds 3. book-entry 4. the secondary market |
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1. The major distinction among the types of treasury securities discussed is their ________. This is important because the value of a marketable debt security is affected by changes in _________. 2. As interest rates rise, the market value of an existing debt security _______. Further, the longer the maturity, the _______ the market value will be affected. 3. For this reason, _______ is more volatile than _________. |
1. maturity date, interest rates 2. decreases, more 3. long-term debt, short-term debt |
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1. Treasury Bills (T-Bills) are government-issued short term obligations with maturities of _______ or less. 2. T-Bills are traded at a ______ from their face amount and are known as ________. 3. They mature at their ______, and the difference between the discount and face amount is treated as _______. 4. T-Bills are further referred to as _________ because they do not ________. |
1. 1 year 2. discount, discount securities 3. face amount, interest 4. non-interest bearing securities, do not pay periodic interest |
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1. Treasury bills are quoted on a _______ basis, with the _____ denoting the ______ from the face amount of the issue. 2. Most securities have a _____ that is lower than the _______ quotation. 3. With T-Bills, the higher yield denotes a _______, consequently, the _______ is greater than the ______ price. 4. Although the ______ is numerically higher, the discount yield represented by the bid quotation actually signifies a _______ price. |
1. discount yield bases, yield, percentage discount 2. bid quotation, asked quotation 3. larger discount, bid, asked price 4. bid, lower
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A Treasury Bill quotation appears as follows. How do you determine the ask price? Bid price?
Bid = Asked ____ _______ 7.45 7.30
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For a $1,000 T-Bill, the ask: 7.30 or .073 x $1000 = $73 $1,000 - $73 = $927
For a $1,000 T-Bill, the bid: 7.45 or .0745 x $1,000 = $74.50 $1,000 - $74.50 = $925.50 |
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1. T-Bills are currently issued with the following maturities (4): 2. T-Bills are issued with a minimum denomination of $______, in $______ increments. 3. Ownership is evidenced by ______ alone, there are no _______. |
1. 4 weeks (1 month) 13 weeks 26 weeks, 52 weeks (1 year)
2. $1,000 and $1,000
3. book entry, no certificates issued |
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1. Treasury notes are issued with maturities of: (4) 2. T-Notes are issued in denominations beginning at $________. 3. T-Notes have stated ______, and pay _____ interests to their owners, and are known as ______ securities. 4. T- Notes are quoted in point as a percentage of par. The percentages are broken down into _____ increments and the fractional part is expressed as a ______. |
1. 2 years 3 years 5 years 10 years
2. $1,000 3. interest (coupon) rates, semi-annual interest, interest-bearing securities 4. 1/32 increments, decimal |
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1. Treasury bonds have maturity terms go greater than ______ and pay a _______. They are issued in _______ form. 2. T-Bonds are issued with denominations beginning at $_______. 3. T-Bonds have stated ______, pay ______ payments to their owners, and are known as _______ securities. 4. T-Bonds are quoted in points as a percentage of par in _____ increments and the fraction is expressed as a _____. |
1. 10 years, a fixed interest rate, book-entry 2. $1,000 3. interest (coupon) rates, semiannual interest, interest-bearing securities 4. 1/32, decimal
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Calculate the dollar value of a Treasure Bond quoted at 102.20. |
102.20 = 102 and 20/32 102 and 20/32 = 102.625 102.625% x $1,000 = $1026.25 |
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1. The majority of mortgage securities are issued and/or guaranteed by any one of the following (3): 2. Agency bonds buy ______ or ______ of such loans originated by _____, then _________ the loans, or place them in a pool and issue securities representing fractional undivided interests in the pool, and distribute the securities through the _____ community. |
1. An agency of the US government Ginnie Mae (a government-owned corporation within the Dept of Housing and Urban Dev) Government Sponsored Enterprises (GSE's) such as the Fed Natl Mortgage Assoc (Fannie Mae), and the Freddie Mac. Both are chartered by congress, but owned by stockholders 2. qualified mortgage loans or guarantee pools, financial institutions, securitize dealer |
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1. Mortgage-Backed securities represent an ownership interest in ______ made by financial institutions (savings and loans, commercial banks or mortgage companies) to finance the borrower's purchase of a home or other real estate. 2. These are created when these loans are _____ or _______ by issuers for sales to investors. 3. As the underlying mortgage loans are paid off by the homeowners, the investors receive payments of and ______ and _______. 4. Interest is typically paid on a ______ basis and is ______ to the investor. |
1. mortgage loans 2. packaged or pooled 3. interest and principal 4.monthly, fully taxable |
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1. Investors may purchase mortgage securities when they are ______ or after they are issued in the ______ market. 2. Investments in mortgage securities are typically made by who? 3. These securities may ultimately be redistributed by ______ in the ________ |
1. issued, secondary 2. large large institutions 3. dealers, secondary market |
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1. The most basic mortgage securities are known as _______ or _______, which represent a direct ownership in a pool of mortgage loans. 2. These mortgage securities may be pooled again to create _____ for a more complex type of mortgage security known as a _______, or since 1986, a _______. 3. These 2 are similar types of securities, which allow _______ to be directed so that different classes of securities with different ______ and _______ can be created. They may be collateralized by mortgage loans as well as securitized pools of loans. |
1. pass-throughs or participation certificates (PCs) 2. collateral, Collateralized Mortgage Obligation (CMO) or a Real Estate Mortgage Investment Conduit (REMIC) 3. cash flows, maturities and coupons |
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1. CMO's are backed by _______ and are issued with varying short, medium and long-term maturities, known as _______. 2. Each ______ is paid ______ at a _______ interest rate. 3. How many maturities at a time can receive principal payments? 4. How long does this payment process go on for? |
1. an underlying pool of mortgages, tranches 2. tranch, semiannually, fixed 3. just one 4. until all tranches are sequentially retired |
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1. Nonmarketable government issues are known as _________. 2. These issues cannot be ______, the owner must ______ them. 3. Three common types that are issued are: |
1. US savings bonds 2. negotiated in the marketplace, redeem 3. Series EE, Series HH and Series I bonds |
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1. _________ are safe, low-risk savings products that are often sold in _____ form at ________. 2. They can be purchased at a _______ of _____ of their face value in denominations ranging from $______ to $______. 3. These securities issued after ______ earn a ______ rate of interest and will mature to their face value in _____ years. 4. The interest rate is adjusted every ____ months in ______ and ______. 5. Value of the bond ______ every month, but the interest is compounded ___________. 6. Income from these bonds are subject only to ______. Taxes on the accrued interest can be paid _____ or ______ until the bond's redemption. |
1. Series EE bonds, paper form, financial institutions 2. discount of 50%, $50 to $10,000 3. May 2005, fixed, 30 years 4. 6 months, April and November 5. increases, semiannually 6. federal taxation, annually or deferred until the bond's redemption |
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1. _________ could be purchased only in exchange for Series EE bonds, however as of _______, new bonds were not available. 2. They were issued in denominations ranging from $_____ to $______ at their face value. 3. Unlike EE bonds, these paid current interest income in 2 __________ payments. |
1. Series HH Bonds, September 2004 2. $500 to $10,000 3. semiannual |
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1. _______ are sold at face value and are available in denominations ranging from $____ to $_____. 2. Their unique component is the _______ interest they pay, which is made up of a base _______ and an ________. 3. They pay interest for ____ years. |
1. Series I bonds, $50 to $5,000 2. semiannual, fixed rate and an inflation indexed rate 3. 30 |
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1. _________ pay no periodic interest. They are purchased at a ______ from their face value and are redeemed at _________ on a designated maturity date. 2. What must a holder of one of these securities do annually for tax purposes? What is this process called? 3. ______ amounts must be claimed as _______ income each year even though the money is not received until the bond ________. |
1. Zero-coupon bonds, deep discount, par 2. Increase the cost basis, this is called accretion 3. Accretion taxable income, matures |
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1. Who issues zero-coupon bonds? (3) 2. _______ issue zero-coupon bonds based on the U.S. Government bonds that are known as ______, which are issued by _________ and backed by an escrow receipt in U.S. Treasury securities 3. If a zero coupon bond is issued directly from the U.S. Government, it is called a _____________. These can be purchased only through _________ and _________. 4. Who are these securities good investment options for? |
1. Corporations, municipalities, and U.S. government 2. Financial institutions, treasury receipts, broker/dealer 3. treasury STRIPS (Separate Trading of Registered Interest and Principal Securities), broker/dealers and depository institutions 4. investors who wish to receive a known payment on a specific date in the future |
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1. ______ have a fixed interest rate, however their principal amount adjusts ______ based on the ______. 2. If the CPI is 4% that year, what is the principal on the bond? |
1. Treasury Inflation Protection Securities (TIPS), semi-annually, Consumer Pricing Index (CPI) 2. CPI = 4% that year, the principal on the bond would adjust every 6 months by 102% (1000 x 1.02 = 1020 and 1020 x 1.02 = 1040.40) |
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1. Who issues municipal bonds? (6) 2. What is included under political subdivisions? (3) 3. Municipal bonds (munis) were originally issued in bearer form only, but now all new munis with maturities greater than _____ are required to be issued in fully registered form. 4. Munis are divided into two main classifications. Name them. |
1. states possessions of the U.S. cities counties districts other political subdivisions 2. school districts water and sewer districts other public services 3. 1 year 4. general obligation bonds revenue bonds |
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1. Who can levy and collect taxes on general obligation bonds? Why? 2. Local subdivisions, such as cities and counties, generate most of their tax revenue from __________. 3. A property tax is also known as ______, and it is based on the assessed value of ______, and is the main source of funding for _______ and ______. 4. General obligation bonds issued by the states are generally secured by _______, ______, ______ and ______ taxes because states do not levy property taxes. |
1. only issuers who have the authority to levy and collect taxes because the full faith, credit and taxing power of the issuer back them 2. property taxes 3. ad valorem, real estate, local expenditures and debt 4. income, gasoline, sales and excise taxes |
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1. ________ are issued to finance distinct projects. The issuer pledges the revenues and user fees generated from the project in order to support the bond issue. 2. Are revenue bonds backed by taxation from municipalities? 3. Some of the projects for which revenue bonds are issued include: (7) |
1. Revenue Bonds 2. No 3. Airports, hospitals, toll roads, turnpikes, bridges, water and sewage systems |
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All of the following statements about the preliminary prospectus are true EXCEPT A. It is used to obtain nonbonding indications of interest from potential investors B. The final offering price of the security is included in the document C. It is used because the final prospectus is not yet effective D. A red border on the cover page informing the investor that this security's registration has not yet become effective. |
B. The final offering price of the security is included in the document |
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An investment based on a security that is closely tied to a current fashion or trend may primarily carry: A. Business/credit risk B. Timing risk C. Social and political risk D. Liquidity Risk |
C. Social and political risk |
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A convertible preferred is convertible at $20 per share. The stock is currently selling on a market at 120. Which of the following are correct statements? I. The preferred stock's conversion ratio is 6. II. The preferred stock's conversion ratio is 5. III. The common stock must be selling at $24 to be at parity with the preferred stock. IV. The common stock must be selling at $20 to be at parity with the preferred stock. A. I and III B. I and IV C. II and III D. II and IV |
C. II and III
The conversion ratio is the par value of the preferred stock divided by the conversion price, $100/$20 = 5. It identifies the number of common shares received upon conversion. The parity price of the common stock is determined by dividing the conversion ratio into the market value of the preferred stock, $120/5 = $24 |
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Which situation would cause U.S. exports to become less competitive than foreign exports? A. the U.S. dollar strengthens when compared to foreign currencies B. Foreign currencies strengthen against the U.S. dollar C. None of the above, this is a function of supply and demand D. The U.S. dollar weakens when compared to foreign securities |
A. The U.S. dollar strengthens when compared to foreign currencies |
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If an investor wanted to purchase an unlisted security, the order would be entered A. in the over-the-counter market B. in the bond market C. on the NYSE exchange D. in the commodities market |
A. in the over-the-counter market |
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Why does a diversified portfolio tend to carry a lower degree of investor risk? A. a diversified portfolio contains a broad representation of growth stocks B. not all market segments or investment types in a diversified portfolio will move in tandem with one another C. a diversified portfolio is traded frequently to capture current market trends D. a diversified portfolio includes equity from all of the best performing industries |
B. Not all market segments or investment types in a diversified portfolio will move in tandem with one another |
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Which of the following is measured by the yield to maturity? A. the total performance of a bond from the time of purchase until maturity B. the return on a bond based on its current market value C. the return on a bond up to the call date D. the return of an investment in relation to the degree of risk |
A. the total performance of a bond from the time of purchase until maturity |
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ABC Corporation has $4 per share in earnings and has paid a $0.50 dividend every quarter. ABC is currently trading at $20 per share. What is ABC's current yield? A. 5% B. 10% C. 17.5% D. 20% |
B. 10%
The current yield is determined by taking the annual dividend divided by the current market value of the stock. $2 is the annual dividend divided by $20 market price = 10% |
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When current stockholders have pre-emptive rights, they are entitled to A. the opportunity to purchase new shares before the shares are offered to the public B. voting rights C. a special purchase price when they buy bonds from the same company D. a special discount on new issues |
A. the opportunity to purchase new shares before the shares are offered to the public |
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Which one of the following securities is traded and quoted at a discount? A. U.S. Treasury Notes B. Common stock C. U.S. Treasury Bills D. Corporate Bonds |
C. U.S. Treasury Bills |
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All of the following factors should be used to determine if a member used reasonable diligence in routing a customer order to the best market EXCEPT A. the size and type of transaction B. the number of markets the member firm checked before entering the order C. accessibility of a quotation D. the customer's investment experience |
D. the customer's investment experience |
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The proceeds from the sale of a security went directly to the issuer of the security. This transaction occurred in which market? A. secondary market B. over the counter market C. NYSE D. primary market |
D. primary market |
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If a corporation wishes to retain the right to buy back their preferred stock at a future date, they will issue which type of stock? A. convertible preferred B. cumulative preferred C. participating preferred D. callable preferred |
D. callable preferred |
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Securities that represent a direct ownership interest in a pool of mortgage loans are known as A. Pass-throughs B. UITs C. ETFs D. Asset backed securities |
A. pass-throughs |
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What is the most common type of bond issued? A. secured B. unsecured C. open-end D. closed-end |
B. Unsecured - debentures are the most common type of bond issued |
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Mortgage backed issues are considered to be safe instruments. Which statement is INCORRECT concerning these securities? A. GNMA, FNMA and FHLMC will all hold FHA and VA loans in their portfolios B. GNMA, FNMA and FHLMC are all backed by the federal government C. Interest received is subject to federal, state and local taxation D. GNMA is a government-owned corporation |
B. GNMA, FNMA and FHLMC are all backed by the federal government.
Only GNMA is a government guaranteed agency. FNMA and FHLMC are private corporations with backing by their authority to borrow from the treasury |
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Sandra is in the 28% tax bracket and purchased a corporate bond at par with a 12% coupon rate. What is the equivalent yield for a municipal bond? A. 7.20% B. 8.64% C. 9.20% D. 12% |
B. 8.64%
Net yield = taxable yield x (100% - tax bracket) = 12% x (100% - 28%) = 12% x 72% = 8.64% |
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A bond's call premium as defined as the amount A. Added to the initial price of the bond to cover the call privilege B. the issuer adds to the interest payments to offset the call feature C. the issuer pays the bondholder to exercise the call D. the investor pays to purchase a callable bond |
C. The issuer pays to the bondholder to exercise the call |
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Which two investors are considered bullish? I. Buyer of call contracts II. Seller of call contracts III. Buyer of put contracts IV. Sellers of put contracts A. I and III B. I and IV C. II and III D. II and IV |
B. I and IV |
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On a discount bond, which of the following correctly states highest to lowest yield? A. YTM, current yield, nominal yield B. nominal yield, YTM, current yield C. current yield, nominal yield, YTM D. nominal yield, current yield, YTM |
A. YTM, current yield, nominal yield |
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1. Industrial revenue bonds are issued but not __________. 2. They are supported by a ______ with a corporation. 3. They are used to finance _________ such as __________. |
1. backed by municipalities 2. lease agreement 3. industrial projects, parking garages |
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1. Interest received from municipal bonds -- is it taxable? Federal? State? Local? 2. Are munis suitable for inclusion in retirement plan portfolios? Why or why not? 3. Who are munis suitable for in regards to investors? 4. Are capital gains realized from the sale of munis taxable? |
1. It is exempt from federal taxes, but may or may not be subject to state and local taxes (most states exempt interest on issued within their own state) 2. Not if they grow tax-deferred 3. Investors in high-tax brackets 4. Yes |
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1. In order for investors to determine their specific tax benefit from a municipal bond investment compared to a taxable corporate bond, investors must calculate their __________. 2. How do you calculate this? |
1. tax-equivalent yield 2. divide the tax-free yield by 100% minus the investor's tax rate |
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An investor in a 28% tax bracket is considering purchasing a muni with a 5% yield. What is the tax equivalent yield? |
Municipal Yield = 5% ----------------------- ------- 100% - marginal tax bracket 100% - 28%
= .069 or 6.9% The investor would have to purchase a taxable bond yielding more than 6.9% in order for their net yield to be superior to the nontaxable 5% muni |
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What is a triple tax exempt bond? |
Bonds that are issued by commonwealths, territories, and possessions of the US (such as Puerto Rico) are exempt from federal, state and local taxation |
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1. The money market is the term used for lending, borrowing, and investment of _________. The time periods of the investments range from as short as ________ to as long as _______. 2. Name the issuers of MMF's (3) 3. The debt instruments that trade in the money market are referred to as ________, and are considered highly ______ and ______ investments. 4. Name the 5 different kinds of these instruments. |
1. short-term instruments, overnight to 1 year 2. banks, corporations and the U.S. government 3. money market instruments, liquid and safe 4. CD's Commercial Paper Banker's Acceptances Repurchase Agreements Municipal Money Market Instruments |
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1. Commercial banks can borrow funds by issuing ___________, these short-term instruments have maturities ranging from _______ to _______. 2. They are considered ____ because they are secured by _________. 3. The minimum denomination is _________, but these usually trade in amounts of ______ or more. 4. Can owners of CD's trade them in the money market prior to maturity? What is this type of CD called and why? |
1. certificates of deposit, a few weeks to several years 2. safe, the general credit of the issuing bank 3. $100,000 , $1 million 4. yes, this type of CD is called a brokered or jumbo CD because it actually trades in the secondary markets as opposed to a conventional bank CD, which is redeemed at the bank and could have penalties if redeemed early |
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1. _________ is a short-term debt instrument issued by _________. 2. It carries a maximum maturity of _____ days. 3. Is it collateralized? 4. It is usually purchased at a _______ and redeemed at ______ at its maturity. 5. _________ do not issue commercial paper |
1. Commercial paper, highly rated corporations 2. 270 days 3. no, it is backed by the good faith and credit of the corporation 4. discount, par 5. commercial banks |
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1. _________ are checks payable at a specified future date drawn on and accepted by a _______. 2. They are used to provide a means of payment for merchandise in ______ and _______ transactions. 3. They are considered ______ because they are backed by both the _________ and the __________ originally purchased by the importer. |
1. Bankers Acceptances, bank 2. import and export 3. extremely safe, bank and merchandise originally purchased by the importer |
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1. ________ are the sale of exempt securities (T-Bills, T-Notes, T-Bonds, or munis) with an agreement for the seller to buy them back on a later date, at an _________. 2. The difference between the _________ and the __________ represents __________ on the transaction. 3. Who frequently uses these securities? |
1. Repurchase Agreements, agreed price 2. original sale price, higher repurchase price, interest 3. Federal Reserve, other financial institutions |
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1. __________ issue short-term debt instruments like _______, that are paid back with a _____________. 2. These and other short term municipal issues are called ______________. |
1. Municipalities, Tax Anticipation Notes (TANs), municipality's future tax collection 2. municipal money market instruments |
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Inflation and deflation occur as the overall economy cycles through the periods commonly referred to as ___________, __________, _______ and a ____________. This describes what is known as the ___________. |
expansion, peak, recession and trough business cycle |
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1. During periods of economic expansion, the demand for goods and services overtake supply, and prices rise. This is called _______. 2. As prices continue to rise, economic activity _______, and a _________ follows. 3. A continued recession causes employers to _________, and prices ______. This ______ in persistent and appreciable decline in general price levels. |
1. inflation 2. slows, recessionary period 3. lay off workers, fall, deflation |
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1. ________ is a method through which the government attempts to maintain a stable economy by the usage of _____ and ______. 2. The principal focus of fiscal policy is _______ and _________. |
1. Fiscal policy, taxation and expenditure programs 2. stable economic growth and high levels of employment |
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1. If the US is experiencing an inflationary economy, what can the government do in order to reduce demand and slow down economic activity? 2. If the economy is in a recession, what can the government do to stimulate economic activity? |
1. decrease expenditure programs or increase taxes
2. increase expenditure programs, general tax cuts also increase economic activity by providing consumers with an increase in disposable income |
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1. ________ attempts to control the supply of money and credit in the economy. This control affects _______, causing an increase or decrease in economic activity. 2. The primary focus of ________ is to _________ |
1. Monetary policy, interest rates 2. monetary policy, control inflation |
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The duties of the Federal Reserve fall into the following general areas: (4)
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1. Conducting the nation's monetary policy 2. Supervising and regulating banks and other depository institutions and protecting the credit rights of consumers 3. Maintaining the stability of the financial system 4. Providing certain financial services to the US government, the public, financial institutions and foreign official institutions |
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1. The Federal Reserve attempts to control _______ and ______ indirectly by raising or lowering _________. 2. __________, or the "cost of money" directly affect the cost of doing business. 3. The Fed can influence the economic cycle by ______________. 4. An increase in interest rates does what to the supply of money and credit? Economic activity? Inflation? 5. A decrease in interest rates does what to the supply of money and credit? Economic activity? Recessionary periods? |
1. inflation and employment, short-term interest rates 2. Interest rates 3. Manipulating the prevailing interest rates 4. Tightens the supply of money and credit, slows down economic activity and slows down or curbs inflation 5. Loosens the supply of money and credit, generates economic activity, reverses a recession |
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1. One economic measure that is used by the Federal Reserve is a ________ for its member banks. This is a percentage of the ________ that are required to be placed in the _________. This is a ______ requirement. Banks also borrow from _______ to maintain their reserves. 2. There are 4 other important interest rates. Name them. |
1. reserve requirement member banks' deposits Federal Reserve bank daily each other 2. Federal Funds Rate Prime Rate Broker Loan Rate Discount Rate |
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1. The _______ is the rate that one bank charges another for ________. The effective __________ is the average of all the federal funds across the country. 2. Is it set by the Fed Reserve? |
1. Federal Funds Rate, short-term money federal funds rate 2. No |
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The _________ is the rate that individual banks charge their most credit-worthy commercial borrowers for _______ loans. |
prime rate, unsecured |
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The ______ (or "call loan rate") is the rate that banks charge _________ for money that they lend to _________. |
broker loan rate, broker/dealers, margin account investors |
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The _________ is the rate banks are charged for borrowing from _________. |
discount rate, the Fed |
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1. Since banks must lend money at a higher rate than they borrow it, you can see how changes in the _______ can eventually affect ______, ________ and ________. 2. The discount rate is set by ________, but the Federal Funds rate is established by __________. |
1. discount rate, savings rates, CDs and mortgage rates 2. the Fed, the member banks |
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1. The Fed also influences the economy through the ________, which buys and sells ____________ to member banks. 2. The FOMC has the ability to _____ interest rates and _______ or _______ the money supply. 3. If the FOMC wants to _______ the money supply, they can sell _______ to ________. These sales are charged against the ________ of the banks, thereby reducing their ability to _______ and effectively _______ interest rates. |
1. Federal Open Market Committee (FOMC), government securities 2. lower, increase or loosen 3. tighten, securities to banks reserve balances of the banks, make loans, raising |
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1. When the economy is slow, the government typically _____ interest rates to _____ spending. Investors will see a _______ in the value of their bonds. 2. When the economy is doing well, the government typically ______ rates to _____ spending. Investors will see a ________ in the value of their bonds. |
1. lowers, urge, increase 2. raises, slow, decrease |
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1. Interest rate changes also affect ____________ activity. If interest rates in the US are _______ than foreign rates, foreign investors will want to invest in US dollars, making the dollar stronger. 2. As the dollar strengthens, the _________ increases. Currency exchange rates are typically based on how much ________ is worth to the US dollar. |
1. international economic activity, higher 2. exchange rate, foreign currency |
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1. Strong US dollars also make foreign goods more ______, which _______ the demand for imported goods. 2. This causes US exports to ______, causing a _______. To correct this, US interest rates must ______, thereby _______ the dollar and helping to alleviate the trade imbalance. |
1. affordable, increases 2. decrease, trade deficit, fall, weakening |
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Any _______ has risks. It is the responsibility of the registered representative to identify these risks, explain which risks may affect the investor and formulate a plan to help manage the risks involved. |
investment selection |
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1. _________ is the risk than an issuer ay not be able to meet interest or principal payments on fixed income securities. 2. It is a risk associated with the specific circumstances of any ________, such as possible obstacles and threats to achieving the financial goals, as they might affect the price of the securities. 3. It includes many influences associated with business success or failure such as _______, ______ and ______. This risk is usually managed with a _______ focus. |
1. Business/credit risk 2. particular company 3. competitive pressures, market share, competence of management long-term |
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1. _______ fluctuate constantly and directly affect the market value of fixed income securities. The threat of suffering a loss due to a change in the interest rate is called _________. 2. All _______ securities are subject to ________. 3. _________ maturities are at greater interest rate risk than _______ maturity terms. 4. ______ prices are also influenced by changes in interest rates, although not directly like _______ prices. 5. _______ and ________ are inversely related |
1. interest rates, interest rate risk 2. fixed income, interest rate risk 3. longer, shorter 4. stock, bond 5. interest rates and bond prices |
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1. ________ is also known as "purchasing power risk" because as inflation causes money to ______ in value, purchasing power shrinks. 2. Because most bonds pay a _______ over several years, they are _________ impacted by rising interest rates. 3. All ______ securities are subject to ______ risk. |
1. Inflation, decrease 2. fixed interest rate, negatively 3. fixed income, inflation |
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1. ______ is the risk that an investor may sustain a loss if a security must be liquidated. 2. This risk _____ as the quantity of securities _________. 3. The more _______ an investment is, the higher the _________. |
1. inflation risk 2. increases, decreases 3. volatile, liquidity risk |
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________ is the risk of selling or redeeming a security at an inappropriate time, thus sustaining a loss or mitigating a profit. |
Marketability or redeemability risk |
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_______ is the risk that, upon maturity, if interest rates have fallen, the income produced by the currently available bond yields may be much less. |
Reinvestment risk |
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_______ is the risk that changes in tax laws could adversely affect the potential net profitability of an investment. |
Reinvestment risk |
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_________ is the risk that changes in tax laws could adversely affect the potential net profitability of an investment. |
Taxability risk |
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1. ________ is exposure to the uncertain future market value of a portfolio based on changes n investor sentiment and the resulting movement of the overall securities markets. 2. _______ risk is also called _______ risk, and cannot be ________ away. 3. If the entire market, or system, declines, will a diversified portfolio decline as well? 4. ______ is usually managed with a ______ focus. |
1. Market risk 2. Market, systematic, diversified 3. Yes 4. Market risk, short-term |
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1. ________ is the risk that a particular investment may fall out of social or political favor and may become obsolete or less profitable. 2. Significant political risk is carried in securities issued in countries with __________. |
1. Social and political 2. unstable government |
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________ is the risk that foreign investments, such as international stocks and ADRs may be greatly affected by large movements in currency exchange rates. |
Currency exchange risk |
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The basic ______ of an investor must be kept in mind when making securities recommendations. |
financial objectives |
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The _______ concept suggests that investments involving greater risk will often produce a greater reward. |
risk/reward |
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1. An investor with a _____ strategy is one who typically invests in instruments that are not susceptible to _____ or risk of ______. 2. The term ________ refers to industries that are likely to perform steadily, in spite of changes in the economic cycle. 3. What do non-cyclical stocks include? 4. The performance of _____ is more closely tied to the economic cycle and would be expected to outperform during a period of expansion and growth and underperform in an economic downturn. 5. What to cyclical stocks include? |
1. defensive, market fluctuation or risk of principal 2. defensive stocks 3. food, clothing, toiletries, and utilities 4. cyclical stocks 5. durable goods such as automobiles, refrigerators, and consumer electronics, construction-related materials and equipment |
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1. The opposite of a defensive investor is _______. 2. One holding an aggressive strategy invests in securities or instruments seeking ______ appreciation of principal without the fear of it fluctuating in the _______. 3. What is an example of an equity this strategy may invest in? |
1. aggressive investor 2. long-term, short-term 3. emerging growth type companies |
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1. A registered representative has the responsibility to ________. 2. In order to recommend suitable investments for a specific client, it is based upon _________. 3. Institutional customers such as ______, _______ and _______ are expected to take more responsibility in determining suitability. 4. The two most important considerations in determining the scope of a embers suitability obligations in making recommendations t an institutional company are _____ and _______. |
1. know the client 2. information obtained from the client 3. mutual funds, pension plans, insurance companies 4. the customer's capability to evaluate investment risk independently and the extent to which the customer is exercising independent judgment in evaluating a member's recommendation |
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1. FINRA lays out 3 important components of suitability obligations. The first component requires that there is a ______ a security or investment strategy. This means the investment or strategy must be reasonable. 2. The second component requires that the recommendation be ________. There must be a reasonable basis rooted in the customer's financial profile for believing that a recommendation is suitable. 3. The third component is _________. This requires that even if each individual recommendation for a transaction is suitable, when added all together and taking into account the customer's financial profile, the transactions cannot be _________ (churning). |
1. Reasonable basis for recommending 2. customer specific 3. quantitative suitability, excessive in quantity |
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To properly ascertain your customer's financial status, current information should be obtained, including the following:(9) |
Income Expenses Discretionary Income Assets and Liabilities Liquid Assets Insurance Needs Participation in retirement programs Participation in benefit plans Tax Status |
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1. Preservation of Capital refers to the investors desire for _____ and ______, in other words, protection against the loss of invested principal. 2. An investor who expects to use their funds within the next 5 years or who simply has a very low tolerance for risk will typically sacrifice __________ for ________. 3. What kinds of securities may be a good fit for the investor discussed above? |
1. liquidity and safety of principal 2. growth of principal for this level of liquidity 3. money market funds, short-term treasuries, or Ginnie Maes |
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1. _______ means income now as opposed to in the future. This translates into investments with a ________. 2. A retired investor on a fixed pension may wish to generate additional income by investing in securities with dependable or predictable yields. In such a case, _____ is generally sacrificed because ________ are taken in cash. In addition, ______ may be less of a concern to such an investor. |
1. Current income, current yield 2. growth, distributions are taken in cash, volatility |
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1. Income-producing investments may be considered, which could include: (6) 2. For increased diversification, choices such as ________ and a wide range of income oriented _______ are available. 3. _________ and ________ may be advantageous for investors in the higher tax brackets |
1. Corporate bonds Treasury securities Agency securities "Blue chip" stocks Utility stocks Preferred stocks 2. REITS, mutual funds 3. Municipal bonds and municipal bond funds |
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Remember that higher yields generally carry a higher degree of __________. |
higher degree of risk or price volatility |
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1. Investors with _________ investment horizons and a need for growth of invested capital, also called ________, are better suited for a portfolio based on _________. 2. Historically, common stocks are more volatile in the _________ but offer more opportunity to __________ with inflation. |
1. longer, capital appreciation, equities 2. short term, keep pace |
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1. The degree of uncertainty that investors can tolerate with regard to a negative change in the value of their portfolio is called ________. 2. The most common way to determine a client's risk tolerance is to have the client complete an ___________. |
1. risk tolerance 2. asset allocation questionnare |
