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Investment Planning > Security Markets and Money Market Instruments > Flashcards

Security Markets and Money Market Instruments Flashcards

1
Q

What is an Initial Public Offering (IPO)?

A

A company’s first public offering of securities.

A way for a company to raise the capital required to buy the supplies and employee workers to sell their product.

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2
Q

What is the role of an investment bank(er)?

A

They assist a company or government municipality in underwriting securities in order to raise capital and/or acting as the issuer of those securities to the public.

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3
Q

In an IPO, what is a “firm commitment” by an investment bank?

A

Investment bankers guarantee company that entire issue will be purchased; investment bankers absorb loss if they fail to sell entire issue to investors

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4
Q

In an IPO, what is a “best effort” by an investment bank?

A

No guarantees from investment bankers to the company going public—they will sell as many shares as possible

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5
Q

What is dilution?

A

The greater number of stocks, the less valuable each stock becomes.

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6
Q

In securities, what is a red herring?

A

A prospectus that is released prior to the registration statement becoming effective (warning is written in red ink). Basically, you can’t buy.

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7
Q

In securities, what is a prospectus?

A

The offering document describing the securities for sale

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8
Q

In securities, what is registration?

A

The process of filing the prospectus with the SEC

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9
Q

In securities, what are green shoes?

A

The right to increase the size of an offering

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10
Q

In securities, what is a secondary offering?

A

A sale of securities to the public by insiders or other affiliated persons

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11
Q

In securities, what is the managing underwriter, lead underwriter, or originating house?

A

The investment banker that takes the lead role in an underwriting group

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12
Q

In securities, what is a syndicate?

A

The investment banking companies that participate with the managing underwriter to assist in the distribution of the new issue

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13
Q

In securities, what is the selling group?

A

Brokerage firms that help distribute securities in an offering but that are not members of the syndicate.

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14
Q

How long is the typical lock-up period (meaning investors and employees cannot sell their shares) after the IPO?

A

180 days

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15
Q

What is the bid price of a stock?

A

The quote at which the dealer will buy

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16
Q

What is the ask price of a stock?

A

The price at which the dealer will sell

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17
Q

What are some of the key characteristics of venture capitalism?

A

High risk for potential high yield returns or total loss
Lack of liquidity
Large percentage stake in company
See a company grow and then cash out during an IPO

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18
Q

What is seed capital?

A

Provides a new company with no products, cash for product development and market research

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19
Q

What is start-up capital?

A

Provides a company cash for initial marketing, but not sales

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20
Q

What is first stage financing?

A

Provides a company cash for manufacturing and sales activites

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21
Q

What is second stage financing?

A

Provides a company cash for working capital

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22
Q

What is Mezzanine financing?

A

Provides a company cash for expansion of new products

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23
Q

What is Bridge financing?

A

Provides a company capital for an expected IPO

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24
Q

What is acquisition financing?

A

Provides a company capital, including high-yield bonds, to acquire other companies

25
Q

What is leveraged buyout (LBO) financing?

A

Provides a company with capital to buyout all or part of a business.

26
Q

What are private placements?

A

The selling of securities privately in order to avoid SEC registration requirements of an IPO.

27
Q

What is an accredited investor?

A

A bank, insurance company, EE benefit plan, charitable organization, director, XO, or general partner of the company selling, high net worth/high income, a trust

$5M is a key figure

28
Q

What are limited partnerships?

A

A partnership entity that consists of a general partner and limited partners.

The general partner controls the business and determines when distributions are made to limited partners - unlimited liability

The limited partners do not participate in the management of the business - limited liability

29
Q

What is the primary market?

A

Facitilitates the initial offering of securities

30
Q

What is the secondary market?

A

Facilitates the method of buying and selling previously issued securities

31
Q

How many secondary markets are there?

A

4

1) aution market
2) Unlisted securities
3) Trades on the organized market and OTC
4) Institution trades / bulk trades

32
Q

What is public float?

A

Indicates the number of shares that are available for trading by investors.

33
Q

What is a round lot?

A

Considered to be the measurement of trading - 100 shares

34
Q

What is an odd lot?

A

Less than a round lot or 100 shares

35
Q

What is a market order?

A

An order to buy or sell at the current price

36
Q

What is a limit order?

A

Buy or sell at a specified price

37
Q

What is a day order?

A

An order that is only good for that day

38
Q

What is a “good-til-canceled (GTC) order?

A

Order that remains in effect until executed or canceled

39
Q

What is a stop order?

A

A price above or below the current price that if reached, is automatically executed

40
Q

How is stock owned (where is it stored when purchased)?

A

2 ways. Either the purchaser gets the actual stock or it is stored at a brokerage firm.

41
Q

What is the process of short selling?

A

1) An investor asks to borrow stock from another investor through a stock broker. In order to do that, the asking investor must deposit a required amount (usually 50%) in a margin account. The margin account protects the broker and is where interest charged for borrowing comes from.
2) The borrowing investor then sells the stocks on the open market.
3) The borrowing investor then buys those stocks back at a lower price.
4) The borrowing investor then returns, or covers, those stocks back to the original investor.

42
Q

What is a margin account?

A

Allows an investor to use leverage within their investment accounts.

Leverage is the ability to control property of greater value than the cash invested in the margin account

43
Q

What are the typical percentages required in a margin account?

A

Usually 50% of the investment purchase, must be placed in a margin account. The rest can be borrowed from the BD.

The investor must maintain a “maintenance margin” which is usually 35% of the investment, but can be down to 25% according to rule 431b of the NYSE.

44
Q

What is a margin call?

A

A demand by the broker for the investor to add more money to his margin account. A failure to do so will result in the BD selling a portion of the investors position to cover the margin.

45
Q

What is a debit balance?

A

The amount owed to the BD in a margin account

46
Q

What is a T-Bill?

A

Short term government securities. sold in increments of 4, 13, 26, and 52 week T-Bills, any money earned is strictly through interest. No state taxes.

47
Q

What is commercial paper?

A

Debt. Companies will sell paper as promissory notes for a period not longer than 270 days. Usually more risk than bonds, but higher yield as well.

48
Q

What are repurchase agreements?

A

A short-term liquidity solution.

An agreement between a selling dealer, to purchase securities back at a later time at an agreed-upon price. It is technically a loan with the interest rate being the difference between the buy and sell price.

49
Q

What are banker’s acceptances?

A

Use of a bank as a intermediary between a foreign and American company to buy or sell foreign goods.

50
Q

What are Eurodollars?

A

U.S. dollars deposited at banks outside the US. These in turn can be deposited into Eurodollar CDs. Less liquid and so they offer slightly higher yield. These are generally limited to the largest financial institutions.

51
Q

How is interest from securities generally taxed?

A

Most interest income from securities is taxed as ordinary income at the state and federal level with some exceptions.

Fed securities are not taxable at the state level. State and local muni bonds are not taxable at the fed level. Bonds of a state sold by a resident of that state are generally state and fed tax exempt.

52
Q

How are dividends generally taxed?

A

It is generally taxed at the state and fed level with some exceptions. Corporations may receive an exclusion when they receive dividends from another company stock. Other dividends are seen as a return of principle (annuities) and therefore not taxed.

Taxed dividends are taxed at rates of 0%, 15%, and 20% depending on your tax filing status.

53
Q

What is the tax rate of collectibles?

A

28%

54
Q

What is the formula for holding period rate of return (HPR) with and without margin?

A

w/o margin
=(EV-BV +/- CF) / BV

w/ margin
=(EV-BV +/- CF) / initial investment

55
Q

What is the formula for margin calls?

A

= (1 - initial margin %) * $ per share / 1 - margin call %

(——–called debit balance———)

56
Q

What is the number one consideration an investor should take into account with a limited partnership?

A

Economic viability is the number one reason for the purchase of an interest in a limited partnership. Tax sheltering and loss pass-through are also considerations but should not be the primary motive to invest.

The investor should expect to hold the interest until the partnership is dissolved or liquidated.

57
Q

What is the holding period requirement for a stock investor for the dividend to qualify for the preferential tax rates?

A

The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

58
Q

What is the fourth market?

A

The segment of the security trading marketplace that allows for institutional investors to trade with other institutional investors outside of normal trading hours

Investment Planning (8 decks)

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