Part 2: Chapter 7 - Investment Vehicles Flashcards by Ryan Lorei

Common and Preferred stock are considered what type of securities?

Equity

How well did you know this?

Not at all

Perfectly

Which of the following characteristics do Common and Preferred stock possess:
- Voting rights
- Dividends
- Fixed income asset
- Highly liquid

Voting Rights: Common

Dividends: Preferred

Fixed Income asset: Preferred

Highly liquid: Common AND Preferred

How well did you know this?

Not at all

Perfectly

How are dividends treated with respect to Common and Preferred stock?

Common: Not mandatory

Preferred: Not mandatory, but expected

How well did you know this?

Not at all

Perfectly

Why is Common Stock considered to carry a high level of investment risk?

Because it’s last in order of liquidation and susceptible to market risk.

How well did you know this?

Not at all

Perfectly

What are …
- Convertible Preferred Stock
- Floating Rate Preferred Stock

Convertible: Convertible to Common Stock

Floating Rate: dividends are reset at intervals based on a formula.

How well did you know this?

Not at all

Perfectly

How are cash dividends taxed?

At what percentage?

Fully to the investor

15%

How well did you know this?

Not at all

Perfectly

Does the issuing company of Common or Preferred stock (equity security) have an obligation to repay those who buy their stocks?

Why?

Because it’s up to the investor to sell their stock if they no longer wish to own the security.

How well did you know this?

Not at all

Perfectly

What is the difference between Short and Long Term Capital Gains?

Short: 1 year or less

Long: more than 1 year

How well did you know this?

Not at all

Perfectly

Describe American Depository Receipts.
- How are they held?
- What type of asset are they?
- In what currency are dividends paid?
- Do they have voting rights?

Receipts traded in the US on foreign stocks

By an American Bank in a foreign country

Equity asset

US dollars

How well did you know this?

Not at all

Perfectly

What are Preemptive Rights?

What do they do?

They allow existing stockholders to purchase stock ahead of new issues being sold to the public.

Prevent dilution.

How well did you know this?

Not at all

Perfectly

What are Restricted shares?

Control shares?

What rule governs the above two shares?

What does this rule state with respect to the sale of these shares?

Unregistered shares acquired through Private Placement

Registered OR Unregistered shares acquired by control persons

Rule 144

Must be owned for at least six-months before they can be sold.

How well did you know this?

Not at all

Perfectly

What are ESOs?

Why are they offered?

What’s the taxation difference between a Qualified and Non-Qualified ESO?

Employee Stock Ownership. Allow employees to purchase company stock at a predetermined price.

As an incentive to employees

Qualified: taxed upon sale of stock
Non-Qualified: taxed when purchase option is exercised

How well did you know this?

Not at all

Perfectly

What’s the difference between a Primary and Secondary Distribution with respect to:

Unissued or Already Issued Stock
Who’s selling
Who gets proceeds

Unissued Stock: Primary
Already Issued Stock: Secondary

Issuer: Primary
Large Block Stock Owners: Secondary

Issuer Gets Proceeds: Primary
Stock Owners get Proceeds: Secondary

How well did you know this?

Not at all

Perfectly

What is a SPAC?

Stated business plans?

What is the general purpose?

Another name for a SPAC

Special Purpose Acquisition Company

Usually none

Finance mergers and acquisitions

Blank Check Company

How well did you know this?

Not at all

Perfectly

How often does Preferred stock pay dividends?

How often do bonds pay interest?

Quarterly

Semi-Annually

How well did you know this?

Not at all

Perfectly

What is par value of a bond?

If you hold a bond to maturity, how much money do you get?

$1,000

How well did you know this?

Not at all

Perfectly

When a bond is trading at par, discount or premium, how does its interest rate compare to that of the prevailing market interest rates?

Par - equal to prevailing rate

Discount - less than prevailing rate

Premium - greater than prevailing rate

How well did you know this?

Not at all

Perfectly

What is the Nominal Yield on a bond?

The interest rate on the bond

How well did you know this?

Not at all

Perfectly

How do you calculate the annual interest payment on a bond?

How do you calculate Current Yield on a bond?

Calculate the Current Yield of a 9% bond at 90?

Nominal Yield X $1,000

CY = Annual $ Interest / Purchase Price

10%

How well did you know this?

Not at all

Perfectly

What is Yield to Maturity also known as?

Basis

How well did you know this?

Not at all

Perfectly

Complete this …

The (longer OR shorter) a bond’s maturity, the more it’s price will (increase OR decline) when interest rates go up?

longer

decline

How well did you know this?

Not at all

Perfectly

Complete this …

Short term bonds react the (quickest OR greatest) to interest rate changes.

Long term bonds react the (quickest OR greatest) to interest rate changes.

Short = quickest

Long = greatest

How well did you know this?

Not at all

Perfectly

Are Short or Long term Bonds safer?

Why?

Short

They have a shorter maturity, and shorter investments are usually considered safer.

How well did you know this?

Not at all

Perfectly

What is Duration?

What does it mean if a bond has a duration of 5? What does this equate to in actual dollars?

The measure of a bonds sensitivity to interest rate changes.

This means the bond’s price will move by 5% for every 1% change in interest rates.

5% X $1,000 = $50 (the price change)

How well did you know this?

Not at all

Perfectly

Which has a lower duration, Zero or Coupon bonds? Why?

Coupon Bonds Because they pay interest

What's the difference between duration and convexity? To what percentage changes does convexity typically refer?

Duration is the price sensitivity of a bond to interest rate changes. Convexity measures the severity of duration Greater than 1%

After Tax Yield Formula 4% Taxable Bond 28% Tax Bracket

Bond Interest Rate X (100% - Tax Bracket) 4% X (100% - 28%) 4% X 72% .0288 2.88%

When analyzing the safety of a bond, what THREE things would an investor use? What's ONE thing they would NOT use?

Cash flow Revenue to assets Leverage ration Profitability

What is Yield to Call on a Bond? At what price are Callable Bonds normally issued? What is this called?

The expected yield if the Bond is called on the 1st or next call date. At a premium Call premium

What are Yankee Bonds? What are Brady Bonds

US dollar bonds issued by foreign governments or companies when US interest rates are low. US dollar bonds issued by Latin American governments or companies when US interest rates are low.

What are convertible Bonds? At what rate are they converted? What is the conversion formula?

Bonds that can be converted into Common stock of the bond issuer. At a specified rate called the Conversion price. Par Value -------------------------- = Common Shares Received Conversion Price

What is a basis point of a bond in the following forms ... - Fraction - Decimal - Percentage What is a basis point a fraction or percentage of?

1/100 .01 1% Par value on a bond

What is Credit Spread on a Bond? Calculate this: if a Treasury Bond has a yield of 4% and Corporate Bond, 6%, what is the spread? How many basis points is this?

The difference between the Yield on a corporate bond versus a Treasury Bond. 2% 200

With respect to S&P and Moody's, describe their ratings and break between Investment and Speculative Grade bonds?

S&P Moody's AAA Aaa AA Aa A A BBB Baa --------------------------- BB Ba B B CCC Caa CC Ca C C DDD DD

What do S&P and Moody's use to show relatively high or low standings and with what particular ratings?

S&P uses a + OR - with AA and BB Moody's uses a 1 along ALL categories.

What maturities do Money Market securities have? Because of the above, they are considered what type of investment (high or low quality AND equity or debt)? What are the most liquid of all Money Market instruments?

12 months or less High Quality Debt Treasury Bills

What is Commercial Paper? Why are these securities issued? Why are they needed? How are they repaid to the investor? What is their maximum maturity? What category debt security is Commercial Paper?

Unsecured corporate debt Used to finance daily operations They're used by corporations waiting on Accounts Receivable to cover the cost of daily operations. Paid back with Accounts Receivable 270 days or less Money Market

Is it true that diversification with an investment fund can be achieved within a sector, across global markets and even with foreign securities?

Yes

Can an investment company eliminate risk? What do investment companies create?

No Diversification

What is the price of an Open End Investment company share tied to?

NAV

What must document allows a customer to take advantage of Rights of Accumulation? Within what period of time must funds be invested to reach the breakpoint and qualify for Rights of Accumulation? Can Investment Clubs take advantage of Rights of Accumulation?

LOI 13 Months No

What are 12b-1 fees? How often are they charged? From what are they paid for? Who are they charged by?

Fees for Sales and Marketing Annually Out of Fund Assets By the fund --- NOT the IA

What allows a fund to qualify as a Regulated Investment Company? What advantage does this afford the fund?

Paying out 90% of investment income annually Exempt form paying tax on distributed dividends

What FOUR items are used to Calculate the Total Return on a Mutual Fund?

Beginning Pric X Beginning # Shares (Ending Price X Ending # Shares) ----------------------------------------------------- TOTAL RETURN ==============================

Are Sales Loads seperate from 12b-1 and Management Fees? At what percentage does FINRA limit the Sales Load? Out of what are these fees paid?

Yes 8.5% Fund assets

With respect to fees, what are the following: - Redemption Fee AND its limit - Exchange Fee - Account fee

A fee when investors redeem Mutal Fund shares, 2% A fee when investors exhange their Mutual Fund shares for another fund within the same fund family. Fee for Account maintenance

If a quote for an Investment Company shares is lower than the NAV, you know if is WHAT TYPE of Investment company?

Closed-End

How do these different classes of shares differ with respect to upfront or back-end sales loads and annual expense Levels (high or low)? A B C What's unique about Class A Shares?

A = Upfront / Low B = Back-end / Mid and Declining C = NO Load / Highest Class A is the only Class that offers Breakpoints

What are the two types of distributions on Mutual Funds?

Capital Gains Investment Income

Capital Gains distributions on mutual funds are always considered ___________- term for investors? What's another name for Capital Gains distributions? What are two ways in which an investor can take Capital Gains distributions?

Long Dividend Distributions Cash or additional shares

If an investor reinvests the Capital Gains distribution, at what value is it invested? Are they taxed on this?

NAV Yes

What's another name for Investment Income on a Mutual Fund? How are these taxed? Does taxation depend on what the investor does with the Investment Income (cash or reinvest)?

Dividends Ordinary income No

What's the primary difference between an Indexed Mutual Fund and ETFs?

ETFs issues stock that's traded in the secondary market

To what indexes OR investments are the following ETF's related: - SPDR - Diamonds - QQQ - HOLDRS What does the Acronym HOLDRS stand for?

SPDR - S&P 500 Index Diamonds- NYSE QQQ- NASDAQ HOLDRS - Euro Company Trusts Holding Company Depository Receipts

Inverse ETFs are also called _______ ETFs Inverse and Leveraged ETFs are suitable for what type of investors? They are designed for _________ - term investing of ___________.

Short Sophisticated Short, 1-day

What are ETNs? In what sectors do ETNs commonly invest? With respect to ETFs AND ETNs, what are each OR both subject to: - Market Risk - Final maturity date - Counterparty risk (why on this one?

Exchange Traded Notes Commodities Currencies Emerging Markets Indexes Both ETNs ETNs, because they're issued by banks and a bank could go under.

What types of investors are Hedge Funds appropriate for? Are Hedge Funds considered Investment Companies? On what timeframes can investors sell their Hedge Fund shares?

Affluent and Semi-Affluent No Monthly, Quarterly, or Semi-Annually

Define the qualifications for an Accredited Investor? A Qualified Investor? Semi-Affluent Investors?

Net worth more than $1 Million, not including residence OR $200k+ in income for the past 2 years and upcoming year ($300,000 for married couples). Net worth of $2.2MM or more OR $1.1 Million or more in invested assets Must be able to invest at least $25,000

Which are Government Organizations and Government Sponsored Organizations?

GNMA = G FNMA & FHLMC = GSO

What are the average life expectancies of CMOs? Why? What are the two risks associated with CMOs?

2-20 years because they are often paid off early Extension Risk Call Risk

How does the value of the precious metals move in relation to the equity markets (correlated or inversely correlated)? How does one invest in precious metals directly? Indirectly?

Inverse Buying coins or bars Investing in a fund

What is a Forward contract? A Futures contract? On what assets are the above typically used for?

A customized agreement between two parties that can't be traded. A legal agreement made on a trading floor. Commodities Commodities and equities

Why do investors buy or sell futures contracts? What would you buy to protect against a drop in a portfolio value? What about a rise?

To hedge against the rising or falling of a portfolio value. Short hedge Long hedge

Calculate this futures contract result: An investpor buys 1 soybean futures contract for $.45. He later sells the contract for $.43. A soyben contract is for 5,000 bushels. What was the end result for the investor?

Bought: $.45 Sold: $.43 -------------------- Lost $.02 X 5,000 -------------------- Lost $100 ===========

What does the following mean when Bought or Sold: - Buying a Call or Put option - Selling a Call or Put option? What is a typical term of a Call or Put option contract? When you sell an option, what position are you taking and what do you get in return?

Buying Call or Put - Call: gives the right to buy - Put: gives the right to sell Selling a Call or Put - Call: Obligates to buy - Put: Obligates to sell 9 months Short Premium

What are LEAPS? What is the typical contract term?

Longterm Equity Anticipation Securities. Longterm options on stocks 39 months

What are the two types of Options exercise styles and how do they differ?

American: can be exercised at Any time. European: can only be exercised at Expiration.

What does ONE option equal in stock shares?

100

What is a Spread? What is a Straddle?

A Long and Short position on two contracts on two Call or Put options on the same stock with DIFFERENT expiration dates and prices. A Long and Short position on two contracts on two Call or Put options on the same stock with the SAME expiration dates and prices.

Draw the options chart

When you're hedging a position, what does this mean with respect to the investment AND what position do you take on the investment?

You already own the investment You're taking the opposite side

If an investor already owns stock and fears the price will drop, what option would they take to hedge? And what option would they take if they were short on a stock? Do investors BUY or SELL options to hedge?

Long Put - gives them the right to sell at a price. Long Call - Gives them the right to buy at a price. Buy

When an option is bought or sold, a premium is paid or received. What is the phrase to remember the breakeven point?

Call Up / Put Down So if I pay $5 to purchase a stock at 70 in the future, then $75 is breakeven. If I paid $5 to sell a stock at $70 in the future, then my breakeven is $65.

What are two types of: - Annuities - Annuity payouts - Annuity payments

Fixed and Variable Immediate and Deferred Single Premium and Periodic Payments

On Fixed Annuities and Variable Annuities, who bears the investment risk?

Fixed - insurance company Variable - annuitant

How are earnings on annuities taxed? When are they taxed?

Deferred Upon annuitization

Fixed, variable, or both---what type of annuity: - provides minimum death benefit - is considered a security - utilizes a separate account

Variable Variable Variable

On a variable annuity, what exactly is the "separate account?" What are the two types of units in the separate account of a variable annuity and what do they mean?

An investment portfolio of mutual funds and other managed securities. Accumulation units -- you're paying in Annuity units -- the annuity is paying you

What do variable annuities NOT have?

Guaranteed cash values

What's the difference between Qualified and Non-Qualified annuities? On each of these, how are distributions taxed? What is the taxation method on early withdrawl?

Qualified - bought with before-tax dollars Non-Qualified - bought with after-tax dollars Qualified - all of the distribution is taxed Non-Qualified - only the earnings are taxed at distribution LIFO

What are THREE types of annuity payments?

Life Survivor - pays until the last annuitant dies Joint - pays until one of the annuitants dies Period certain

What are Equity Index Annuities? Are they considered securities?

Annuities whose separate account are tied to market index. No

What are THREE methods used to credit annuities? Do annuitants participate in the decline of an index (i.e. take losses)?

Point to Point - compares the change of the annuity index over a period of time and credits the account High Water Mark - takes the high point of a period of time and credits the account accordingly. Annual Reset - return is determined from the beginning of the year to the end of the year and takes gains when there's an increase. No

How do the prices of real estate move with relation to financial assets (correlated OR inversely correlated)? Because of the above, how can they be used with an investment portfolio?

Inversely To hedge risk

What are two ways a real estate investor: - can make money - can invest in real estate

Rents and appreciation Directly or in a fund

What type or real estate is the riskiest? Why?

Raw land - No income - No depreciation

What's a REIT? What are THREE types of REITs? Can REITs invest in other REITs? What are the FOUR conditions a REIT must achieve to avoid __________?

A publicly traded company that manages a portfolio of real estate. Equity - owns real estate Mortgage - lend money to developers Hybrid - mixture of the above Yes ... avoid Double Taxation Distribute 90% of profits 75% of assets in real estate, mortgages or other REITs Derive 75% of income from rents, interest or sales At least 100 shareholders with no more than 50% ownership in 5 people

Are REITs considered investment companies? If publicly traded, what must they do? Are they regulated by the Investment Company Act of 1940? What are the net worth and/or income to invest in a REIT?

No Register with the SEC No None

Do variable annuities protect investors against capital loss? Do changes in the investment strategy of variable annuities require a majority shareholder vote?

Yes Yes

What kind of security (equity or debt) is an Equity-Linked Note?

Debt

What analysis is used to determine if a customer has enough Life insurance to fund future financial goals?

Capital Needs Analysis

1% is equal to how many basis points? Based on the above, what is .8% in basis points?

100 80

What are THREE methods used to calculate interest credited to an Indexed Annuity?

Participation rates - interest is credited based on the customers participation percentage (rate) in gains. Spread - a set percentage or fee is taken from any gains. Interest Rate Cap - a cap is set on the interest applied.

Part 2: Chapter 7 - Investment Vehicles Flashcards

(101 cards)