SIE

Question 1

SEC (Securities and Exchange Commission)

Answer 1

an agency of the US gov that is responsible for protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation

Question 2

Self-regulatory organizations (SROs)

Answer 2

entities created to regulate industry segments within an organization itself and without reliance on an actual governmental authority such as fed or state Govs

purpose: to self govern more efficiently in a narrow field –> more specialized rules and regulation

most famous SRO = FINRA (financial industry regulatory authority), trading of securities on this platform

Question 3

FINRA

Answer 3

SRO accountable to the SEC, develops and implements rules and regulations specifically for brokerage firms and their employees involved with securities tradingg and investments

Question 4

CBOE (Chicago Board Options Exchange)

Answer 4

largest options in the US and responsible for the S&P 500, S&P 100, Dow Jones, Nasdaq and others

Question 5

NASSA (North American Securities Administrators Association)

Answer 5

STATE REGULATORS: devoted to investor protection, creates “model” securities laws that broadly reach many potential securities regulation issues. NASSA drafts these model acts many states use as the foundation for the laws actually enacted by the state

provides the basis for FINRA licenses 63, 65, and 66

Question 6

SIPC (Securities Investor Protection Corporation)

Answer 6

FDIC and SIPC protect the interests of investors and bank customers. SIPC protects clients of brokers and dealers in case of financial failure of the broker. fully funded by member broker dealers

Question 7

What happens in the event of a broker-dealer failure?

Answer 7

The SIPC organizes cash and the securities to be distributed to the clients of the failed member firm

Question 8

What happens, in the case of a broker-dealer failure, there are no cash or securities?

Answer 8

The SIPC covers up to $500,000 of the equity balance of the customer which includes $250,000 in cash

Question 9

FDIC (Federal Deposit Insurance Corporation)

Answer 9

protects the interests of investors and bank customers; different from the SIPC in that it helps with traditional bank deposits; in the event of a bank failure

FDIC insures a bank account of up to $250,000 and has a line of credit with the US treasury of $100 billion

Question 10

Institutional investors

Answer 10

investors that are backed by an immense amount of capital (who are they backed by?: large financial institutions such as commercial banks, investment banks, insurance companies, pension funds, and hedge funds)

investors who invest on behalf of other people

are core drivers of the price of securities in capital markets

Question 11

Retail investors

Answer 11

A retail investor is an individual or non-professional investor who buys and sells securities through brokerage firms or retirement accounts like 401(k)s. Retail investors are investing for themselves, often in brokerage or retirement accounts

have no effect on the price of securities in capital markets

Question 12

Accredited investors

Answer 12

investors with sufficient net worth, annual income, and/or expertise and experience investing such that the accredited investor does not require the same level of protection afforded to retail investors by securities-related laws

allowed to purchase and sell unregistered securities referred to as private equity

Question 13

Broker-dealers

Answer 13

when affecting securities transactions on behalf of others, they are a broker; when affecting securities transactions for their own accounts, a broker-dealer is acting in a principal capacity, they are a dealer

Question 14

Introducing brokers

Answer 14

futures market equivalent of a registered rep in the equities market = equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets

Question 15

Clearing brokers

Answer 15

work for a clearing firm that ensure proper settlement of transactions so that investors are ensured that their transaction is completed properly, both in a timely manner and efficiently

Question 16

prime brokers

Answer 16

provide many different services to select clients who need more specialized, higher level services

often used by hedge funds that require sophisticated services to ensure that their funds operate properly

Question 17

Who is exempt from registering as an investment adviser?

Answer 17

• Certain domestic banks
• Advisers whose business relates solely to obligations of the US gov’t such as treasury bonds
• lawyers and accountants whose advice is related to their profession
• broker dealer firms who do not receive any special compensation for their investment advice

Question 18

Municipal advisors

Answer 18

entities that specialize in the intricacies of financing operations of local gov’t (I.e., municipalities through bond offerings)

work with local gov’t officials to help raise funds for critical local functions such as schools, infrastructure, hospitals, parks and rec

Question 19

Securities

Answer 19

A security is a fungible, negotiable financial instrument that represents some type of financial value, usually in the form of a stock, bond, or option

Question 20

What are the most common types of underwriting arrangements when a company wants to grow their business?

Answer 20

best efforts underwriting: investment bank is only required to place as much of the issuance as is possible given market conditions. if the underwriter is unable to sell all of the shares for the issuer, then the underwriter is not legally responsible for purchasing any remaining shares itself. NOT ideal for the issuer but it does protect the investment bank from having to make a purchase of the shares

firm commitment underwriting: investment bank is required to purchase the entire issuance of the offering if any shares remain after being offered to the public. IDEAL for the issuer who is guaranteed that all of its shares will be sold

Question 21

Hedging

Answer 21

process where traders take positions to reduce the risk of other positions

Question 22

Transfer agents

Answer 22

typically a commercial bank that is a client of the corporation and that maintains records of all equity and bond holders

Question 23

Depository trust and clearing corporations (DTCC)

Answer 23

settles most securities transactions; in charge of transferring funds from the buying brokers account to the account of the broker who made the sale

Question 24

Options Clearing Corporation (OCC)

Answer 24

guarantees that contracts on each side of an options contract are fulfilled, which primarily means that the seller or writer of a contract received a premium, and that the buyer of the contract received the underlying security from the seller of the option exercised

Question 25

Primary market

Answer 25

Securities are created on the primary market. Debt and equity are sold, issues, and traded in capital markets. corporations and governments use capital markets to borrow money, raise capital, and finance everything from operations, to forming new companies, to mortgages and loans. associated with long term sources of capital as opposed to money markets

Question 26

secondary market

Answer 26

where previously issued stocks, bonds, and other financial instruments are available to buy and sell. AKA auction market

Question 27

Auction market

Answer 27

first bid has priority high bid and low offer have the floor a new auction begins when all bids at a certain price are exhausted there are no secret transactions bids and offers must be audible

Question 28

third and fourth markets

Answer 28

third market: deal in pink sheets, they exist to provide another avenue of trading in financial markets. actually traded in the OTC market and where unlisted securities trade - traded through telephone and computer market AKA penny stocks fourth market: traded "offline" so as to not disrupt the price of the security

Question 29

monetary policy

Answer 29

how money supply can be utilized to maximize economic growth. administered by the Federal Reserve

Question 30

fiscal policy

Answer 30

primarily concerned with government taxation and expenditures. increased taxation will lead to less economic growth because there will be less capital to invest in economic growth

Question 31

open market activities

Answer 31

initiated by the Federal Reserve to affect the money supply and economic growth. ex: FR buys and sells treasury securities from and to primary dealers. the the FR wants to increase the money supply, it will buy treasury securities on the open market, transfers money from the balance sheet of the federal reserve to the market economy in exchange for holding the securities on the balance sheet

Question 32

4 main interest rates:

Answer 32

federal funds rate: rate the largest banks charge each other for overnight loans of $1 million or more. most volatile prime rate: rate that banks charge low-risk customers (corporations) with excellent credit. rate fluctuates based on money supply discount rate: interest rate that the FRB charges to FR banks when the bank is issuing short-term loans --> when the FRB lowers the discount rate, it costs bank less to borrow money from the FR and other banks so banks can charge a lower interest rate to customers broker loan rate: rate that banks charge brokers and dealers when lending money for a customer's margin accounts AKA loan rate or the money rate

Question 33

4 primary statements companies provide on an annual and quarterly basis are:

Answer 33

income statement, a balance sheet, a cash flow statement and a statement of retained earnings

Question 34

income statement:

Answer 34

shows the revenues and expenses of the company over a period of time and calculates net profit or net income number. reported using the accrual method

Question 35

cash flow statement

Answer 35

reported with the income statement and represents cash flows from investing, operating, and financing activities

Question 36

inflation

Answer 36

decreases the purchasing power of currency by lowering the value of the future cash flows of a bond. to lower this demand, investors typically require a higher bond yield or more attractive interest rates to justify the purchase

Question 37

an invested yield curve

Answer 37

signifies a future recession since bonds with longer maturity dates have a lower yield rate yield curve flattens to indicate a recession and typically has an upward slope

Question 38

gross domestic product

Answer 38

consumer consumption, investment, governmental expenditures, and net exports and imports

Question 39

gross national product

Answer 39

basically the same as GDP plus or minus economic output that occurs outside of a nation's border, income earned from foreign investments, and income earned by foreign residents inside the US

Question 40

exchange rates

Answer 40

affect the securities market in one of two ways: directly by impacting the value of securities for foreign companies and indirectly when affecting the cost for domestic businesses to conduct business overseas

Question 41

spot exchange rate

Answer 41

current price level in the market to directly exchange one currency for another, for delivery on the earliest possible value date. spot rate is set by the forex market

Question 42

Keynesian economic theory

Answer 42

continued demand is what supports the economy. increased or steady demand for certain products or services naturally leads to more businesses being created. result = more jobs, rising wages, an increase in loans. fed gov't must sustain the economy by spending tax money on projects that stimulate certain sectors or the economy as a whole

Question 43

monetarist economic theory

Answer 43

inflation and deflation are the direct result of the available money supply. if there's not enough money in circulation, prices fall. when there's too much money in circulation, prices rise. fed gov't must regulate the money supply and stay out of the gov't.

Question 44

dilutive secondary offering

Answer 44

reduce the value of the share price because additional new shares are now available in the market but the company's value has not changed aka follow-on offerings

Question 45

nondilutive secondary offerings

Answer 45

do not reduce the value of the share price because no new shares are issued

Question 46

underwriting commitment AKA firm commitment

Answer 46

guarantees the purchase of all of the securities being offered in a sale

Question 47

what is included in the offering document?

Answer 47

basic info about location, type of business, contact information, and any type of jurisdictional information must disclose offering price, number of shares being issues, the form of securities being offered, how escrow is handled, and how the proceeds will be sued must also include management's experience, all risks involved, and type of industry

Question 48

securities act of 1933

Answer 48

requires the registration of securities before they are sold to the public, and it was the first major fed legislation to regulate the offer and sale of securities. ensures public will receive all necessary financial information in the offering prospectus of securities being sold

Question 49

prospectus

Answer 49

similar to offering document, but issued with mutual funds, stocks, and bonds. provided by brokerages, underwriters, and investment bankers

Question 50

how long is the waiting or quiet period once a corp files a registration statement?

Answer 50

20 days

Question 51

blue sky laws

Answer 51

state-specific securities laws that need to be followed by investors and firms operating in that state

Question 52

what is the main benefit of allowing for the shelf registration of securities?

Answer 52

there is better flexibility when issuing debt and equity

Question 53

key business cycles

Answer 53

expansion: strong economic indicators and moves to the peak peak: high point of the expansion phase contraction: is usually a recession or a depression trough: when downtrends begin to level off allowing for the cycle to begin again

Question 54

ADR (American depository receipts)

Answer 54

securities that allow US citizens to purchase shares of foreign companies in the US market without having to make the purchase on the foreign stock exchange do not have call risk meaning the company cannot redeem those shares, do have currency and political risk

Question 55

Treasury bills

Answer 55

primary instrument used by the Federal Open Makret Committee (FOMC) to regulate the money supply.

Question 56

TIPS (treasury inflation protected securities)

Answer 56

have their principal amount adjusted for inflation as calculated by the consumer price index these bonds compensate investors for the inflation that erodes the value of their investment. (TIPS typically have a lower yield than comparable treasury bonds or notes since they're compensated by the inflation adjustments)

Question 57

securitization

Answer 57

financial institutions will sell pools of mortgages to other financial institutions with expertise in packaging the loans as a single security

Question 58

corporate bonds

Answer 58

taxable securities they have a set maturity typically have a set par (100) value of $1000 trade on major exchanges

Question 59

bond indenture (formal agreement between the bond issuer and the investor)

Answer 59

form of the bond total dollar amount of the particular bond issuance property pledged behind the bond any protective covenants - acts that must be or cannot be performed by the issuer (working capital requirements, debt-equity ratio requirements, and restrictions on dividend payments) redemption rights and call privileges

Question 60

callable bond or redeemable bond

Answer 60

can be redeemed by the bond issuer before its stated maturity (corp. has right to call the bond away from the investor). investors are compensated for this risk with higher interest rates on a comparable bond and a premium is paid to the investor when the call option is exercised

Question 61

when is a bond called?

Answer 61

when interest rates decline and a company can find less expensive financing when there is a rising interest rate environment. when the investor realizes they can receive a higher interest rate for investing the same principal

Question 62

convertible bonds

Answer 62

enable the bondholder to convert the bond into stock from the same company - have variable interest rates

Question 63

conversion ratio

Answer 63

determines the number of shares an investor receives upon the conversion of each bond tells the investor how many shares they'll receive from converting each bond they own

Question 64

arbitrage

Answer 64

when investors try to take advantage of pricing discrepancies between convertible bonds and the underlying stock

Question 65

discount rates

Answer 65

interest rate charged to commercial banks (MS, JP Morgan, etc.) on loans they receive from the lending facility federal banks

Question 66

bond

Answer 66

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer. Bonds are units of corporate debt issued by companies and securitized as tradeable assets

Question 67

general obligation bonds

Answer 67

bonds backed by the full faith and credit of the municipality and are paid with general revenue and borrowings

Question 68

dutch auction

Answer 68

where the price is lowered until it matches a bid. municipal bonds and treasury bonds are sold through dutch auction

Question 69

variable rate demand note (VRDN)

Answer 69

debt instrument that represents borrowed funds that are payable on demand and accrue interest based on a prevailing money market rate, such as the prime rate interest rate on VRDN is adjusted daily, weekly, or monthly to reflect the current interest rate environment

Question 70

money market funds

Answer 70

NOT insured by the FDIC. SEC mandates that the prospectus states that the federal gov't doesn't guarantee the money, and there's no guarantee that the funds will maintain a net asset value of a dollar. average maturity must be short-term, no longer than 90 days

Question 71

coupon rate

Answer 71

The coupon rate is the annual income an investor can expect to receive while holding a particular bond

Question 72

how often treasury bonds pay interest?

Answer 72

semi-annual basis

Question 73

option

Answer 73

serve as a unique tool to help reduce the risk of the investment, options can provide the investor the choice to buy or sell, can help inverstors increase their returns American options: exercised or closed at any time prior to the date of expiration European options: stipulate shorter duration of time in which the option can be exercised

Question 74

call option

Answer 74

the obligation to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.

Question 75

put option

Answer 75

gives the holder the right to sell the underlying asset at a specified price on or before expiration

Question 76

strike price

Answer 76

the price at which the option can be exercised by the investo, exercise date (or expiration date) is the time by which the option can be exercised Options contracts are derivatives that give the holders the right, but not the obligation, to buy or sell some underlying security at some point in the future at a pre-specified price. This price is known as the option's strike price (or exercise price).

Question 77

option premium

Answer 77

Premiums for options are the cost to buy an option. Options give the holder (owner) the right but not the obligation to buy or sell the underlying financial instrument at a specified strike price. The premium for a bond reflects changes in interest rates or risk profile since the issuance date.

Question 78

open interest

Answer 78

primarily used to evaluate the amount of liquidity in an options market to assure there is active trading

Question 79

options trading

Answer 79

position limit is the maximum number of contracts an investor can hold on an underlying security CBOE usually establishes these limits based on the amount of liquidity in a stock and the number of shares outstanding

Question 80

when a bond makes an interest payment or a stock pays a dividend

Answer 80

it will affect the price of the asset and the value of the option. in the case of stocks, the stock price will fall by the amount of the dividend. the vaslue of the option will increase as the option holder may receive the dividend or interest payment depending on the date the option expires and if it is exercised

Question 81

in the money call option

Answer 81

if the current price of the underlying asset is higher than the agreed upon price (or strike price) call would have intrinsic value

Question 82

difference between statutory voting and cumulative voting

Answer 82

statutory: allows the shareholder to vote one time per share for each seat on the BOD cumulative: allows the shareholder to pool votes together and then allocate them as desired. ex: shareholder has a total of 20 votes for the 10 shares that are held. shareholder can cast 20 votes for one candidate, 15 for one and 5 for another, or any other allocation

Question 83

common stockholders

Answer 83

paid last in a liquidation, bondholders, general creditors, and preferred shareholders are paid first

Question 84

dividends

Answer 84

share of the corporations profits ex: a company could pay a dividend of $.25 per share. companies may choose not to pay dividends and instead reinvest profits for greater growth

Question 85

pre=emptive rights

Answer 85

provides investors with a contractual right to acquire new shares proportionate to their current shares

Question 86

defensive stocks

Answer 86

resistant to changes in economic cycles

Question 87

systemic risk

Answer 87

reflects the fact that the performanmce of an individual security will be impacted by the performance of the overall market

Question 88

preferred stock

Answer 88

issued by corporations, features characteristics of both stocks and bonds holders of preferred stock typically do not have voting rights

Question 89

nominal value

Answer 89

Nominal value of a security, often referred to as face or par value, is its redemption price and is normally stated on the front of that security. With respect to bonds and stocks, it is the stated value of an issued security, as opposed to its market value

Question 90

warrant

Answer 90

entitles the holder to buy the issuer's stock at a specified price for a period of time long term instrument, 5 years or moreand the exercise price ofthe warrant is ussually higher than the stock price at the time of the issue warrant becomes exercisable only if the stock appreciates over the long term above the exercise price. warrants are attached to bonds or preferred stock allowing the issuer to pay a lower interest rate or dividend

Question 91

how do most equity trades settle?

Answer 91

regular way, t + 2

Question 92

what happens on the morning of the ex-dividend date?

Answer 92

the price of the stock drops by the amount of the dividend and certain types of orders will be automatically reduced by dividend price

Question 93

stock split

Answer 93

an adjustment in an issuer's outstanding share count, after a stock split, each investor's ownership position remains unchanged, but the number of shares and the stock price are adjusted

Question 94

how often is interest paid

Answer 94

every 6 months

Question 95

bond

Answer 95

security issued by a corporation or governmental entity to raise capital, representing a loan to a borrower in return for payment of interest and principal (return of their money) to the lender

Question 96

coupon

Answer 96

periodic bond interest paid

Question 97

par value

Answer 97

amount of money bond will receive at maturity always assume a par value of $1000

Question 98

bond quotation

Answer 98

states the price the bond is trading ex: if bond is quoted ABOVE par, it is trading at a premium. if a bond is quoted BELOW then it is trading at a discount ex: bond is quoted at 95, it is trading at 95% of par or $950