Content Questions Flashcards
(260 cards)
1
Q
How is a building society different to a bank?
A
Similar to a retail bank but mutually owned
2
Q
Characteristic of an ordinary share?
A
Rights to vote
Receive dividends if declared
Balance of assets after all other payouts in the event of a wind-up
3
Q
What are A / B shares?
A
Some companies give different rights to tranches of shareholders
4
Q
What are redeemable shares?
A
Shares issued in terms that the company, will or may buy them back in the future
5
Q
What are partly paid shares?
A
Shares whose full par value has not been paid by their holders, issuing firm has a call to collect remaining amount
6
Q
What is the nominal value of a share?
A
Legal face value of the share
7
Q
What is the share issue price?
A
Price the share initially is sold for
8
Q
What is a share Premium
A
Excess of issue price over nominal value
9
Q
What is the share market value?
A
Live trading price of a share
10
Q
What is the market cap?
A
Market price of share * number issued
11
Q
What is the share free float?
A
Actual availability of share stock for public investment
12
Q
Characteristics of a preference share?
A
- Normally no voting rights (can be activated through non payment of dividend)
- Dividend priority over ordinary shareholders
- dividend is fixed % of nominal value
- priority over ordinary shares in a wind-up
13
Q
What is a cumulative share?
A
Unpaid dividend accumulate in the share
14
Q
What is a participating share?
A
Entitled to more than a fixed dividend per a profit formula
15
Q
Convertible share
A
Can be converted from preference to ordinary at shareholders discretion
16
Q
What is a 0 dividend share?
A
Pay no income, redeemable above the price at which they were issued
17
Q
When is a security part of the Money market?
A
Life of less than 1 year, these are bills
18
Q
When is a security part of the debt market?
A
Life over 1 year, called a bond
19
Q
What is the flat yield of a bond and how is it calculated?
A
Gross annual coupon / market price * 100%
20
Q
Who is interested in the flat yield calc of a bond?
A
Investor wanting regular income and who doesn’t pay tax
21
Q
Other names for flat yield calc on a bond?
A
Simple yield
Interest yield
22
Q
How is the gross redemption yield of a bond calculated?
A
Flat yield % + Profit at redemption
23
Q
How is the profit at redemption of a bond calculated?
A
((Nominal value - market value)
/ years remaining) )
/ market value
24
Q
Who looks at gross redemption yield on a bond?
A
Measure of total return on a bond, useful to a non tax payer who will bond the bond to redemption
25
How is the net redemption yield calculated?
( Flat yield x adjustment for tax ) + profit at redemption
26
How to calculate simple interest on corporate debt?
6%. 20 years.
Market price - £108
NV - £100
Investor Buys 40
40 x 100 = £4,000
400 x 6 = £240
27
What is convertible loan stock?
Debt security with an option to convert into equity at a later date
28
How to calculate the conversion ratio?
Par value of bond / conversion price
29
What is a clean bond price?
Priced quoted excludes accrued interest
30
What is a dirty bond price?
Price actually paid, including accrued interest
31
What is spread analysis?
Comparing yield difference of asset vs a benchmark e.g. bond vs libor
32
What is a yield curve?
Relationship between maturity and bond yields
33
What is a normal yield curve?
Preference for liquidity e.g longer term interest are less than short term ones e.g. paid to hold for longer
34
How to calculate the Present value of a bond?
Coupon / (1 + r)
+
(coupon + £red val) / (1+r)^n
35
What is the nominal value of a GILT?
Capital payment the holder receives at redemption
36
What is the coupon on a GILT?
% of nominal value to be paid
37
What is an index linked GILT?
Coupon and redemption value can be linked to RPI (3 months prior value)
38
What does STRIPS stand for?
Separate trading of registered interest and principal securities
39
Permitted STRIPS parties?
GEMMS
HM Treasury
Bank of England
40
How many 0 coupon bonds can a 5yr strippable GILT be stripped into?
11
41
What does STRIPS do?
Separates the repayment of the principal from the interest
42
Which gov bonds settle T+2?
France
Germany
43
Which gov bonds settle T+1?
UK
USA
Japan
44
How do French and German gov bonds settle?
Euroclear, Clearstream
45
How do UK gov bonds settle?
Crest
46
How do US gov bonds settle?
DTCC
47
How do Japan’s gov bonds settle?
Tokyo stock exchange
48
How often is the coupon paid on French and German gov bonds?
Annual
49
How often is the coupon paid on UK, US and Japan gov bonds?
Semi- annual
50
All main gov bonds quote 1/100 except?
US. 1/32
51
Life time of Japanese gov bonds?
Long - 10
Super long - 20
52
Life time of US gov bonds?
T-notes: 2 - 10 years
T- Bonds: 10+
53
Life time of OATS?
2 - 50 years
54
Life time German gov bonds and their names?
Schwartz - up to 2
Bobl - 5 years
Bund > 10
55
Life time of UK gov bonds?
Short < 7
Medium 7 - 15
Long > 15
56
Legal form for French and German gov bonds?
Bearer
57
Legal form for UK and US gov bonds?
Registered
58
Legal form for Japan’s gov bonds?
Registered or bearer
59
What is a debenture?
Secured debt instruments such that the holder can enforce the security should the company default on payment
60
What is loan stock?
Unsecured debt instrument, lenders have no legal charge over the companies assets
61
Difference between UK and US debenture?
UK - Secured debt transaction
US - loan agreement no security
62
What is the role of a trustee for secured debt?
Fulfil the requirements of the trust deed and protect the assets on beneficiaries behalf
63
Order of repayment waterfall?
Liquidator
Fixed charge holders
Preferential creditors (employees)
Floating charge holders
Unsecured creditors
Subordinated loan stock
Preference shareholders
Ordinary shareholders
64
What is an exchangeable bond?
Holder has the right to convert into shares of another company, usually a subsidiary of the bond holder
65
When interest rates rise, what happens to bond prices?
They fall
66
What is the pull to redemption for a bond?
Price fluctuates less the closer the old is to its redemption date
67
Features of high coupon, short dates bonds?
Less volatile and less risky
68
2 segments of the money market?
Inter bank market
Money market securities
69
Features of US government T-Bills?
Less than 1 year (3 months most common)
Issued weekly
No coupon paid, issued at a discount
70
Typical expiry for commercial paper?
7 days to 12 months (270 days in the US)
71
Features of commercial paper?
Discount instruments, no coupon and redeemed at par
72
What is the repo rate?
Difference between sale and repurchase price, interest paid for borrowing the money
73
Difference with a Eurobond vs corporate bond?
- International bond offered in several countries
- Usually has a internal syndicate to co lead the management
- Fixed price re offer often applies
74
What makes it a Eurobond?
Nationality of the issuer, the bond denomination and the country of issue are all different
75
Who regulated Eurobonds?
ICMA
76
How do Eurobonds settle and report?
T+2, reporting through TRAX
77
What is a depository receipt?
Bearer certificate representing a holding in shares
78
What in an ADR?
American depositary receipt, allows US investors to invest in overseas companies
79
Benefit of ADR?
- Avoid fcy conversion on capital and dividends
- Voting is carried out on ADR holders behalf
80
What is sponsored vs unsponsored ADR?
Sponsored - From issue of company
Unsponsored - FI (Bank) issued
81
How long can the grey-market for ADRs (pre release) be open?
Up to 3 months
82
What collateral is used for pre release ADRs?
Cash only
83
What is the tax treatment for ADRs?
No stamp duty
1.5% HMRC creation fee on the conversion of UK shares into DRs
84
ADR settlement time?
T+2
85
What is a warrant?
Security issued by a complaint entitling the holder to buy new shares in the company at a fixed price on a future date
86
What is the Conversion premium equation for warrants?
(Strike price + warrant price ) - current share price
87
What is a covered warrant?
Warrant issued by investment bank, so claim is against the bank not the company for the shares
88
Standard way to quote for FX?
Over the counter, quote driven
89
If $ is the base currency which side of the FX equation is it placed?
Left side
90
Where is the counter or quote currency in the FX quote?
Right side
91
Settlement time for spot FX?
T + 2
92
What is a bid / quote offer in FX?
Buy / Sell
93
How are forward adjustments shown to an FX Forward bid/quote?
Spot price, plus a bid/offer adjustment in pips
10/20 - add to spot
15/10 - subtract
94
Interest rate parity equation?
Forward / Spot = (1 + Rv) / (1+ Rb)
95
What factors affect FX rates?
Supply / demand
- international trade
- speculation
-purchase rate parity
96
What is a unit trust?
Collective investment scheme
Trust not a company
97
Are unit trusts closed?
No open ended
98
What are the Trust deeds for a unit trust?
Constitution of the unit trust, drawn up by manager and trustee
99
Types of unit trust?
Regulated - can promote to retail clients
Unregulated - not allowed to promote to retail clients
100
What is an NMPI?
Non-mainstream pooled investments, any unregulated pooled scheme e.g. hedge fund
101
How are units in a unit trust sold?
Units issued at an initial price, stated in the prospectus. If further demand, more units can be created
When cashing units, investor can cancel or redeem
102
Who can buy / sell units?
Unit manager - there is no secondary market
103
How is the unit price in a unit trust calculated?
Underlying assets / number of units in issue
104
What is a single priced unit trust?
Charges added for purchases and deducted for sales
105
What is two way pricing?
Spread between bid and offer is retained by the fund manager
106
How is income distributed in a unit trust?
Income units - capital paid out
Accumulation - income added into fund
107
What tax is paid on unit trusts?
Corporation tax on income (except UK dividends) at 20%
108
What is an ICVC?
Investment company with variable capital
109
Who is responsible for investment decisions in an ICVC?
Authorised corporate director - like a fund manager
110
What is a depositary in ICVC?
Custodian of the scheme assets and ensure they act within the regulatory framework
111
How is an ICVC taxed?
Corporation tax on income (except UL dividends) at 20%. Gains exempt from tax
112
What is an ITC?
Investment trust, a company with fixed share capital listed on LSXE
113
Nature of investment trust?
Closed ended
114
Who regulated investment trusts?
Not FCA regulated, governed by companies act and LSE
115
What is gearing?
Process of companies borrowing money to expand
116
Tax rate on Investment trust?
19% corporation tax, not on UK Dividends
117
What is an ETF?
Exchange traded fund, track indices with open ended fund investment
118
Common features of hedge funds?
- Tend to be unregulated
- Hire investment entry levels
- flexible with assets
- gearing
- liquidity constraints with lock in periods
119
What is a structured product?
Product created by combining 2 or more individual financial instruments, often a derivative with securities or cash
120
Features of structured products?
Income or growth
Defined risks and returns
Linked to an external measure
Defined term
121
What is an underwriting offer?
Where a bank guarantees the minimum level of proceeds on an issue
122
What is stabilisation in bond market?
Where issuing house purchase stock on the secondary market post issue to maintain prices
123
What is green shoe?
Option to increase the number of shares an issuing house will market to the public
124
Types of follow on offerings?
Non-dilutive - issued share capital sold not from free float
Dilutive - increase share float to sell more equity into the company
125
What is an open offer for shares?
Only open for existing shareholders
126
What is an offer for subscription?
Company issuing shares direct to the public
127
What is an offer for sale for shares?
Bank (issuing house) buys up the shares before offering them to the public
128
Why would a company do a fixed price offer?
Lower to generate goodwill amongst purchasers
129
What is book building?
When the book runner assesses interest from IR presentations and constructs a demand curve to ascertain possible offer prices
130
What is a placing?
Similar to offer for sale, when an issuing house only sells to institutional clients - no need for a prospectus
131
What is an introductions for shares?
Company obtains a listing without issuing new share capital
132
What is the syndicate group for an equity offering?
Underwriting firm helps a company determine the security to issue, price, time to market etc
133
What are the managers in an issuance?
Manage the issuance, e.g coordinate across geographies
134
What are the listing rules?
Sponsor
3 years of audited accounts
135
What are the stock exchange rules for securities listed?
Minimum requirements on equity and debt, depending on whether it’s on the main / junior market
136
How big the free float need to be for a stock exchange listing?
25%
137
What are the continuous obligations for a listed company?
Price sensitive info disclosed
Dividends, dealing etc
Financial information
138
Types of bond issuers?
Gov
Corporate
Supranational
US state (municipal)
Agency bonds (US)
SPVs
139
2 types of auction for UK GOV bonds?
Competitive and Non competitive
140
For competitive UK gov bond auction what are the rules / process?
Large investors
GEMMS bid with Debt Management Office
Bid price and volume
£1m minimum
If successful pay the price
141
For non-competitive UK gov bond auction what are the rules / process?
Private investors as well
No price bid
£1k minimum, £500k max
Pay average of successful competitive bids
142
Difference between a tender and auction government bond process?
Auction - pay bid price
Tender - pay lowest successful price
143
What is an MTN?
Medium term note (opportunistic financing) issued through scheduled funding
144
Stages of a bond issue
Pitching
Indicative bid
Mandate announcement
Credit rating roadshow
Listing syndication
145
What is a stock exchange?
Corporation providing facilities for members to trade company stocks and securities
146
What is an MTF?
Multilateral trading facility (trading system facilitating trading instruments) for equities
147
Regulation on MTF?
Treated as an exchange. Defined rules for members
148
What is an OTF?
Organised trading facility, network for bond and derivative trading
149
What is a dark pool?
Exchange trading with OTC confidentiality through hidden orders
150
What is the regulation on a dark pool?
Treated as OTC unless volumes are large and then treated as an MTF
151
Benefit of a dark pool?
Reducing market impact of large orders, better pricing and lower execution costs
152
What is dual capacity?
Member forms can trade on their own account (principal) or for someone else (agent)
153
Special roles broker dealers can play?
Market makers
Stock borrowing and lending
Algorithmic trading
154
What is an inter dealer broker?
Anonymity for forms who wish to offload a position without giving away their trading position to a competitor
155
What is an SBLI? And what do they do?
Stock borrowing and lending intermediary, can help a short seller by arranging the loan of security from a fund
156
What happens to voting rights during stock lending?
Seller loses their voting rights for the period
157
What is a quote driven exchange?
Price controller by market makers
Bid/offer spreads
Firm pieces up to a specified level
Screen / phone based
158
What is an order driven exchange and their features?
Prices determined by buy and sell orders
Orders in execution on an order book
Electronic trading
159
What is traded on SETS?
FTSE all share
Most liquid AIM and Irish sticks
ETFs and commodities
160
How does SETS settle orders? Features
- automated order driven trading
systems
- prioritised by price and then time of entry
- Anonymous
161
What is Novation in SETS?
LCH, Clearnet and SIX act as central buyer and seller of all stocks making it anonymous
162
When is the opening auction call period on SETS?
7:50 to 8am
163
Types of orders that can be placed in opening auction call period?
- limit order (volume and no worse than price)
- iceberg order (limit order hiding some of the order)
- market order (size order but no specified price)
164
When do trades begin to execute on SETS?
8am matching algorithm is run
165
Timing of continuous order book trading on SETS?
8am - 4:30pm
166
Types of orders during continuous order book trading?
Limit orders
Execute and eliminate
Market order
Fill or kill
Iceberg
All or nothing
167
What is an all or nothing order?
Order sits on the books until all can be executed at the desired price or nothing will occur. If not executed it’s deleted at the end of the day
168
What is a fill or kill order?
Specified price and volume, if not completely filled then the whole order is cancelled
169
What is an execute and eliminate order?
Limit order but any unfilled portion is cancelled
170
Can a limit order be deleted?
Yes during the auction period
171
What is the uncrossing algorithm?
Run at end of each auction period and selects an uncrossing price enabling the max volume of trades
172
Which orders get added to order book if not filled
Limit
Iceberg
173
Problem with High frequency trading?
Can cause flash crashes with the systemic risks from algo trading
174
Benefits of central counterparty service?
Reduced counterparty risk
Total anonymity
Less admin
Netting of transaction
Better pricing
175
French trading, clearing and settlement systems?
Euronext, NSC
LCH. Clearnet
Euroclear France
176
German trading, clearing and settlement systems?
Deutsche Borse
Clearstream
Clearstream
177
Japan trading, clearing and settlement systems?
Tokyo stock exchange
JSCC
JASDEC
178
US trading, clearing and settlement systems?
NASDAQ, NYSE, Euronext, SuperDot
NSCC
DTC
179
Equities market settlement time
T+2
180
Costs of trading, types of fees
Broker commission
Account fee
Exchange, regulatory and clearing fees
181
What is a market value weighted index?
Index weighted towards market cap of each company tracked
182
What are the two main price weighted indices?
Nikkei 225
Dow Jones
183
What is a total return index?
Performance of stocks tracked assuming dividends are reinvested
184
Main UK indices?
FTSE 100
FTSE All-share
185
Main US indices
Dow Jones (30 industrial companies)
NASDAQ
S&P 500
Russell 2000
186
Worldwide indices
MSCI World
Dow Jones Stoxx
NASDAQ Composite
NASDAQ 100
187
European Indices
FTSE Eurofirst 300
DAX 30
CAC 40
188
Asian Indices
Nikkei Stock 225 - Japan
Hang Seng - Hong Kong
189
Difference between value and price weighted indices?
Value weighted is on market cap and price assumes 1 share per company
190
What is a total return index?
Measures fluctuations in price and the income
191
What is authorised share capital?
Amount of shares a company can issue in total
192
What is issued share capital?
Shares sold by a company to its shareholders
193
What is included in the share free float?
All shares held by investors other than
- owners with more than 5%
- restricted stock (execs)
- insider holdings
194
What must GEMMS do?
Quote on gov bonds to give liquidity
Obliged to quote to broker dealers
Register with the treasury
195
How do corp bonds trade?
Over the counter
- Phone
- Dealer system
- electronic trading platforms
196
Examples of B2B corp bond platform?
MTS cash and Brokertec
197
Examples of B2C corp bond platform?
MTS bond vision and Trade web
198
Examples of OTF corp bond platform?
Bloomberg bond trader
199
What is a sinking fund?
When principal is paid in part of full before the end
200
What is a scrip issue?
Free issue of shares to existing shareholders. Used to reduce share prices
201
What does a 1:2 scrip issue mean?
For every 2 shares you get 1 free
NEW ON LEFT
202
Effect on market from a scrip issue?
Share price down
Number of shares up
203
Effect on the market from a stock split?
Share price down
Number of shares increased
204
Effect on the balance sheet of a scrip issue?
NV - Flat
Share capital - Increases
Share premium account - Falls
205
Effect on balance sheet of a stock split?
NV - Lowered
Share capital - Flat
Share premium account - Flat
206
How to calculate nil price paid?
Ex rights price calc, if new shares taken. Add all / new shares.
Nil price paid is saving or difference between the full price and new price
207
Why would a company buy back shares?
Rationalise capital structure
Substitute dividend payouts
Give excess cash back to shareholders
208
Why would an investor build a stake in a company?
Own shares
Strategic link
Acquire target company
209
What method is used for settlement usually in Europe
Transfer securities/funds trade by trade on a gross basis. Delivery and payment at the same time
210
Method used for settling trades in US?
Transfer instructions on a gross basis with delivery of security. Funds netted with payment at the end of the cycle
211
What is net settlement method in the system?
Delivery and payment netted and sent end of the cycle
212
All securities settle T+2 except
Equity +10
New issue +1
GILTS / T Bonds / Japan Gov +1
Rep +0
MMF +1
FX Forwards
213
Services of a custodian?
Segregate and protect assets
DvP
Corp actions
Link with registers
Market info
Regulator link
214
What is a global custodian?
Manage custody arrangements across foreign markets
215
What is a sub custodian?
Employed by global custodian as it’s local agent
216
What is a prime brokerage?
Bundled package of services offered by investment banks to hedge funds
217
What is rehypothication?
Banks use assets they don’t own for collateral - leverage cycle
218
Types of UK registered securities?
UK equities, gilts and debentures
219
Examples of bearer securities?
Bank notes, Eurobonds and depository receipts
220
What is a broker nominee account?
Broker holds investors shares in a nominee account in the investors name or in a pooled accountx
221
For pooled nominee accounts whose name reflects on the register?
- Name of one pooled nominee not all investors
- if a named nominated it will show the nominee name
222
What is the ex dividend date?
Date from which all transfers of the security are contracted without the right to the dividend
223
What is the record date for shares?
Books closed date, when company reviews register for shareholders eligible for the dividend
224
What is a special ex trade?
Special arrangement trade to buy with dividend up to 10 days before ex-dividend date
225
What is a special cum trade?
Buying shares cum div in ex div period, ok up to and including dividend date - special arrangement
226
Why is gross settlement of all trades risky?
Exposures banks to Herstatt risk as entire value of each deal must be transferred
227
What is CLS?
Continuous linked settlement - real time net settlement in a 5 hr window
228
Where can a bonus issue be funded from?
Share premium or profit and loss reserve
229
Where are retained profits shown in the income statement?
Retained earnings accounts (profit after dividends)
230
Difference between capital and revenue expenditure?
Capital - non current assets, shows on balance sheet
Revenue - shows on income statement
231
What is enterprise cash flow?
Free cash flow before considering payments made to any of the providers of finance to the firm - both lenders and equity holders
232
What is equity cash flow?
Free cash flow after financing costs but before dividends
233
How are depreciation charges shown trading profit?
Add to trading profit
234
How are increase to general provisions shown trading profit?
Add to trading profit
235
How are increases in inventory shown trading profit?
Deduct from
236
How is earnings per share calculated?
Profit for ordinary shareholders / number of ordinary shares
237
How is profit available to ordinary shareholders calculated?
Profit after tax - preference dividends - minority interest
238
How do you calculate PE ratio?
Market price per share / earnings per share
239
How do you calculate gross dividend yield?
Div per share / market price *100%
240
What is the dividend cover calculation?
Earnings per share / div per share
241
What might a high dividend yield indicate about the growth of a company?
Low growth
242
What is the gearing ratio?
Interest debt (includes pref shares and ODs) / equity shareholders funds
243
What is net debt to equity calculation?
( Debt - cash ) / equity
244
Earnings from highly geared companies can be?
Volatile
245
What is the interest cover calc?
Profit before Interest and tax / interest payable
246
What is the current ratio calc?
Current assets / current liabilities
247
What is the acid test (quick ratio) calculation?
(Current assets - inventory ) / liabilities
248
Calc for ROCE?
PBIT / capital employed x 100
249
What is ROCE used for?
Ration to determine managements success at utilising funds made available to it from debt and equity
250
What is the risk premium?
Additional return over a risk free return needed to compensate the investor for taking on the risk
251
What are systematic risks?
Risks on whole financial system
- interest / inflation
- reinvestment
- liquidity
- currency
- political and legal
252
What are non systematic risks?
Risks specific to a company or sector
- business
- industry
- management
253
How is diversification of risk achieved?
Adding stocks that are not perfectly correlated
254
What is a long hedge used for?
People with a genuine long term interest in the asset looking to remove uncertainty of potential price movements
255
What is a short hedge used for?
Remove uncertainty of owning the asset, e.g. remove the risk of price falling before you sell
256
What is the Efficient Market Hypothesis?
Current market price reflects historic price info (stronger version also say it includes current public info)
257
What is a passive style of fund management?
Fund manager tries to replicate returns based on a benchmark
258
What is an active fund manager?
Trying to outperform a benchmark e.g. beat the market
259
Pro / cons of active fund management
Pro: Choice of investments / can avoid riskier sections
Cons: Fees, costs, key man risk
260
Pro / cons of passive fund management
Pro: Only exposed to systematic risk, lower expenses
Cons: Lack of control, not likely to make an alpha
