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Series 79 > Chapter 1: Characteristics of Securities & Other Financial Instruments > Flashcards

Chapter 1: Characteristics of Securities & Other Financial Instruments Flashcards

1
Q

Equity Securities

A

Represent an ownership interest in the company

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2
Q

Common Stock

A

Most common equity security.

Subordinate to all debt and preferred stock.

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3
Q

Rights of Common Holders

A

Voting
Optional dividends
Limited liability
Preemptive rights

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4
Q

Preferred Stock

A

Acts similar to debt instruments.
Rights to dividends
Non-voting
Senior to common stock

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5
Q

Preferred Stock Dividends

A

Not guaranteed.

If cumulative, must be paid in full before dividends to common stock.

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6
Q

Convertible Preferred Stock

A

Can be converted to common.
Favored by pre-IPO investors.
Included in the calculation of fully diluted EPS.

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7
Q

Callable Preferred Stock

A

Issuer can redeem the stock

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8
Q

Participating Preferred

A

Holders share in the issuer’s profits.

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9
Q

Putable Preferred

A

Holder can force issuer to redeem the stock.

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10
Q

Hybrid Preferred (Trust Preferred Security)

A

Issuer creates a trust.
Trust purchases L-T debt of issuer.
Interest on debt is paid as dividends to Trust shareholders.

This is really a debt instrument.

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11
Q

Rights (Subscription Rights)

A

Limited duration privilege granted to existing shareholders to participate in a new issue before it is offered to the public.
Offered at a price below the public offer price.
Usually a 1:1 subscription ratio.
Transferrable and tradable.

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12
Q

Warrants

A

L-T (min. 5 year) securities that allow the holder to purchase company stock at a predetermined price.
Typically sold with bonds and preferred stock.
Exercise price is significantly higher than the market price at issuance.

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13
Q

Stock Appreciation Rights (SARS)

A

Holders benefit from the difference between the current market price and the grant price of the stock.
Paid in any combination of cash and stock.
Taxable as ordinary income.

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14
Q

Employee Stock Options

A

Non-cash form of compensation.
Employee pays the grant price for the stock when exercising.
Generally non-transferable.

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15
Q

Depositary Receipts (DRs)

A

Popular way for companies to raise capital in foreign markets.

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16
Q

American Depositary Receipts (ADRs)

A

DRs that are traded on U.S. exchanges.

Priced in U.S. Dollars.

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17
Q

Sponsored ADRs

A

Issued at the request of the foreign company.

Hold the same rights as the regular shareholders.

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18
Q

Level I ADR Sponsorship

A

Fewest barriers to entry.

Trade OTC.

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19
Q

Level II ADR Sponsorship

A

Requires GAAP accounting.
Subject to SEC registration and reporting.
Trades on the Big Boards.

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20
Q

Level III ADR Sponsorship

A

Applies to foreign companies that are planning a U.S. public offering.
Has the most stringent requirements.

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21
Q

Un-sponsored ADRs

A

Issued without the cooperation of the foreign company.
No reporting obligation.
Trades OTC.

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22
Q

Global Depositary Receipts (GDRs)

A

DRs that are not issued in the U.S.

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23
Q

Bond Indenture

A

The terms that apply to a bond

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24
Q

The Trust Indenture Act of 1939

A

Requires the use of indentures & mandates certain disclosures and provisions that protect bondholders.
Requires issuer to appoint trustee that has liquidation power.
Requires periodic financial reporting.
SEC exempted issues with a total value of less than $5.0 million.

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25
Q

Maturity

A

The date when a bond is due and the issuer pays the holder the bond par value.

26
Q

Coupon

A

A bond’s interest rate.

Usually paid semi annually.

27
Q

Unsecured Bond

A

Not backed by collateral.

Usually a higher coupon than secured bonds.

28
Q

Secured Corporate Bonds

A

Backed by collateral.

29
Q

Mortgage Bond

A

Secured by a mortgage on a commercial property.

30
Q

Equipment Trust Obligations

A

Secured by equipment.

The collateral’s title is held by a trustee until the bond is paid off.

31
Q

Collateral Trust Bonds

A

Secured by other securities rather than fixed assets.

Typically use securities of subsidiary companies as collateral.

32
Q

Guaranteed Bonds

A

Bonds issued by one company and are guaranteed by another, usually a parent.
Not secured.

33
Q

Callable Bonds

A

Issuer has the right to redeem the bonds before maturity.

Includes a call premium

34
Q

Bond Conversion Ratio

A

Par Value / Conversion Price of Equity

35
Q

Bond Conversion Parity

A

MV of Bond / Conversion Ratio

Represents the stock price at which a holder can convert without a loss or gain.

36
Q

Eurobond

A

A bond issued in a currency other than the issuer’s home currency and where it is located.

37
Q

Variable Rate Bond

A

Interest payments are benchmarked to another interest rate (LIBOR, etc).
Rate periodically adjusts.

38
Q

Income Bonds

A

Interest payments are conditional on sufficient earnings.

Usually issued as part of a bankruptcy or reorganization.

39
Q

Zero Coupon Bonds

A

No interest payments.
Sold at a significant discount to par value.
Eliminates reinvestment risk.

40
Q

Current Yield

A

Annual coupon amount in $ / Market Price of Bond

Represents the actual income rate of return.

41
Q

Yield to Maturity (Premium)

A

(Annual coupon pmt - (premium/yrs to maturity))/avg. of par and market price

Represents the estimated return a holder would receive if held to maturity.

42
Q

Yield to Maturity (Discount)

A

(Annual coupon pmt + (discount/yrs to maturity))/avg. of par & market price

Represents the estimated return a holder would receive if held to maturity

43
Q

Yield to Call (Premium)

A

(Annual coupon pmt - (premium/yrs. to call)) / avg. of par and market price

Represents the yield the holder would receive if the issuer calls the bond.

44
Q

Yield to Call (Discount)

A

(Annual coupon pmt + (discount/yrs to call)) / avg. of par and market price

Represents the yield a holder would receive if the issuer calls the bond.

45
Q

Yield to Worst

A

Represents the lowest yield possible an investor could receive on a bond.

46
Q

Discount Yield (Bond Equivalent Yield)

A

(Discount/Par Value) x (365 / Days to Maturity)

Expresses the effective yield on a bond that does not pay interest in order to compare to interest paying bonds.

47
Q

Spread

A

The difference between two different yields

48
Q

Duration

A

Measure’s the sensitivity of the price of a fixed income security to a change in interest rates.

49
Q

Convexity

A

Measures how a bond’s duration changes with changes in interest rates. A higher convexity means lower sensitivity to interest rate changes.

50
Q

Treasury Bills

A

Short term government securities. Terms of 4, 13, 26, and 52 weeks.

Don’t pay interest, sold at a discount.

51
Q

Treasury Notes

A

Medium term securities with 2,3,5,7,and 10 year terms.

10 yr. note is frequently used a a benchmark.

52
Q

Treasury Bonds

A

Long term securities. Currently issued with 30 term. Pays interest semi-annually.

53
Q

Treasury Inflation-Protected Securities (TIPS)

A

Fixed coupon that pays 2x / year. Principal amount changes according to changes in the CPI. 5, 10, and 30 yr. terms.

54
Q

Savings Bonds

A

Series EE - fixed yield

Series I - variable interest

55
Q

Municipal Bonds

A

Issued by state and local governments.

Exempt from federal tax and local tax within issuing jurisdiction.

56
Q

General Obligation Muni Bond

A

Backed by tax revenue. Usually voted on.

57
Q

Revenue Muni Bonds

A

Used to fund a specific project and backed by that project’s revenue stream.

58
Q

Asset Backed Securities

A

Notes that are originated by an institution that are backed by a pool of assets, usually mortgages.

59
Q

Derivatives

A

A security or contract in which the value is derived from or tied to the value of an underlying asset.

Most commonly used to hedge.

60
Q

4 Main Types of Derivatives

A
  1. Futures Contract
  2. Forward Contract
  3. Option Contract
  4. Swap

Series 79 (16 decks)

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