Financial Systems: Exam 3
An "accredited investor" must have a net worth of over ______ or have an annual income of at least __________
$1,000,000; $200,000
Corporate bonds are long-term bonds with a minimum denomination of _______ and coupons that are paid __________
$1,000; semiannually
The 2010 Wall Street Reform and Consumer Protection Act required hedge fund advisors with private pools of capital exceeding ______ in assets to register with the SEC as investment advisors and become subject to all rules which apply to registered advisors
$100 million
What is the median household income of a mutual fund owner?
$100,000
The initial primary market sale for municipal bonds occurs through...
1) a public offering using an investment bank as underwater 2)a private placement to a mall group of investors
Id the market value of the securities the bond holder receive with conversion ________ the market value of the bond, the bond holder will _____________.
1) exceeds; convert and take a profit 2) does not exceed; not convert
What are the four primary classes of mutual funds available to investors?
1) stock (equity) funds 2) bond funds 3) hybrid funds 4) money market funds
A fee changed to mutual fund investors to meet distribution expenses and shareholder servicing costs is called a
12b-1 fee
What are the percentages tied to mutual fund owners?
45% of US households in 2017 72% married or living with S/O 51% are college graduates 74% are employed
In 2016, the number of families headed by a person with less than a college degree investing in mutual finds was
50 percent
What is the median age of a mutual fund owner?
51 years old
gross proceeds - net proceeds
= underwriter's spread
Mutual fund shares that charge a back-end load, an annual 12b-1 fee, and convert to class A shares after a period of time are called
Class B shares
The largest US city to ever suspend payments on its unsecured debt and declare bankruptcy was
Detroit
Under _______ rules, the 12b-1 fees that may be changed to mutual fund investors are capped.
FINRA
What are the three major bond rating agencies?
Moody's, Standard and Poor's, Fitch
band value =
PV of coupons + PV of par
The ______ is the primary regulator of mutual funds
SEC
Inflation-indexed bonds are called ________
TIPS
Negative yields can and have been bid in the auction for _______, but they cannot be bid in the auction for other types of Treasury notes and bonds
TIPS
__________ have maturities greater than 10 years
Treasury Bonds
________ have 1 to 10 year maturities
Treasury Notes
What are issued by the US Treasury to finance the national debt and other government expenditures?
Treasury notes and bonds (T-notes and T-bond)
A key difference between unit investment trusts (UIT) and opened-end and closed-end fund is that
a UIT has a termination date
What is a preferred stock?
a hybrid security that has characteristics of both bonds and common stock
In secondary markets, municipal bonds trade infrequently due to
a lack of information on bond issuers
Prices of Treasury notes and bonds are quoted as _____ of the ________ of the security
a percentage; face value
What is a herring prospectus?
a preliminary version of the prospectus that describes a new security issue
__________ is the sale of additional securities by a firm whose securities are already publicly traded
a seasoned offering
Rounding the stop-out for a Treasury note or bond down to the nearest 0.125 percent ensures that the issue will sell at
a slight discount
Try to provide an excess return (alpha)
active management
What does shelf registration do?
allows firms to offer multiple issues of stock over a two-year period with only one registration statement
_________ is the first public issue of financial instruments by a firm
an initial public offering (IPO)
The annual federal deficit is equal to ...
annual expenditures (G) less taxes (T) received
More risky funds often base their investment strategy on the opportunity for gain from
anticipated events
The _____ is the yield to maturity on the Treasury STRIP using the _______ in the calculation
asked yield; ask price
The _______ is the yield to maturity on the Treasury note or bond using the ______ in the calculation
asked yield; ask price
The ______ are the only investors allowed to interact directly with an ETF fund. They are the ______ market makers in ETF's.
authorized participants; primary
Mutual fund shares that represent the traditional means of paying for investment advice by charging a front-end load and an annual 12b-1 fee are called
class A shares
A mutual fund which initially issues a fixed number of shares which trade on a secondary market like stocks is said to be
close ended
The US treasury sells t-notes and t-bonds through...
competitive and noncompetitive single bid auctions
What are long-term obligations issued by corporations?
corporate bonds
The major purchasers of bond market securities (investors) are
corporations, foreign investors, households, governments
interest payments made semi-annually
coupon
annual rate of interest payments
coupon rate
Typically, ___________ are constant and paid on a semi-annual basis over the life of the bond
coupons
annual coupon rate divided by price
current yield
The stop-out yield for a Treasury bill auction is the _____ assigned to the issue, while the stop-out yield for a Treasury note or bond auction is the ________ for the issue
discount yield; yield to maturity
Some moderate risk hedge funds purchase _______ securities that many other investors will not buy and many institutional investors cannot buy
distressed
The types of long-term mutual funds are...
equity funds, bond funds, hybrid funds
How are T-notes and T-bonds virtually default risk free?
backed by the full faith and credit of the US government
Two of the benefits households experienced by investing in mutual funds are _____ and _______
portfolio diversification; low transaction costs
What generally has fixed dividends that are paid quarterly and does not have voting rights unless dividend payments are missed?
preferred stocks
The price of a STRIP security is the ________ of the face value of the STRIP discounted using the ________ and _________.
present value; yield to maturity; semiannual compounding
The price of a STRIP security is the __________ of the face value of the STRIP discounted using the __________ and ____________
present value; yield to maturity; semiannual compounding
clean price (formula)
priceb = PV annuity + PV lumpsum
_________ allow demanders of funds to raise equity capital
primary stock markets
In order to comply with the SEC exemption from registration, hedge funds are only sold via
private placements
The fund objective described in the ____ provides general information about the types of securities the mutual fund holds as assets
prospectus
Closed-end investment companies that specialize in real estate company shares and/or buying mortgages are called
real estate investment trusts
With a ____________ bond, the bond owner's identification information is maintained electronically by the issuer and _______ are mailed or wire transferred to the owner.
registered; coupon payments
_____________ are sold to finance specific revenue generating projects
revenue bonds
Another major driver for growth in the mutual fund industry in recent decades has been the
rise in retirement funds management by mutual funds
By legally documenting the rights and obligations of all parties involved in a bond issue; the bond indenture helps lower the ______ and _______ of the bond issue
risk; interest cost
The mutual fund industry is the ________ of the financial institutions in the US, by asset size
second largest
Debenture holders generally receive their promised payments only after all _____ debt holders have been paid
secured
What are municipal bonds?
securities issued by the state and local governments
What does STRIPS stand for?
separate trading of registered interest and principal securities
A mutual fund may offer several different _______ which invest in the same portfolio of assets but offer investors different methods of paying for broker services
share classes
The bond indenture that requires that the issuer retire a portion of the bond principal early over a number of years is called a ______ provision.
sinking fund
During the 1990's, the mutual fund industry enjoyed large growth in the number of funds and industry assets due to
soaring capital market values
Municipal bonds are issued by ________ and _______ governments to fund a temporary imbalance between expenditures and receipts, or to finance long-term capital outlays
state; local
Bonds issued with ________ attached give the bond holder the opportunity to purchase common stock of the issuing firm at a specified price up to a specified date, without loss of the underlying bond
stock warrants
Secondary stock markets are the markets in which...
stocks once issued are traded among investors
The coupon rate for a Treasury note or bond is determined by rounding the _________ down to the nearest ________ percent
stop-out yield; 0.125
Debentures which are junior in their rights to both secured debt and regular debentures are called
subordinated debentures
The bonds which are considered to be the riskiest and pay the highest yields are
subordinated debentures
During the 2008-2009 financial crisis, equity funds experienced ______ while US government money market funds experienced_________
substantial outflows; record highs
Stock prices are the...
sum the present value of all future cash flows
Mutual funds that follow a predetermined allocation of risk over time are called
target date funds
The source of funds for repayment of municipal bonds is __________ or _________
tax receipts; project revenues
The types of short-term mutual funds are
tax-exempt money market mutual funds, money market mutual funds
Approximately 75% of all hedge funds are located in
the Cayman Islands
What is a stock market index?
the composite value of a group of secondary market traded stocks
Municipal bonds are not free from default risk. Default on municipal bonds tend to rise and fall with...
the economy
Hedge funds operate under two exemptions from SEC registration requirements, which are
the fund has less than 100 investors, the investors in the fund are accredited
Since 1997, the U.S. Treasury has issued Treasury Inflation Protected Securities (TIPS) whose returns are not fixed but are tied to
the inflation rate
A bond indenture is...
the legal contract that specifies the rights and obligations of the issuer and the holders
What is the dirty price?
the price of the bond with accrued interest
What is the clean price?
the price without accounting for accrued interest
What is a coupon?
the regular interest payments that corporation or government promises to pay
Long-term mutual funds that are designed to replicate a particular market index and that trade on secondary market are called
exchange traded funds
________ is the principal amount of the bond that borrowed up front and is eventually repaid at the end of the term
face value
par value or principal
face value
What are mutual funds?
financial institutions that pool the financial resources of individuals and companies and invest those resources in portfolios of assets
Like close-end funds, unit investment trusts issue a _______ number of shares
fixed
To insulate the mutual find Chief Officer from undue internal pressure or influence, SEC regulations require that only the _______ can fire this officer
fund's board of directors
___________ bonds are backed by the full faith and credit of the issuing of municipality
general obligation
Municipal bonds backed by the full faith and credit of the issuer are called _________ bonds. Governments usually rely on ________ to make payments on these bonds.
general obligation; tax collections
The major issuers of bond market securities (borrowers) are...
government, corporations
The holder of a stock warrant will exercise the warrant and buy the stock when the market price of the stock is _________ the price specified in the warrant
greater than
A syndicate is a...
group of investment banks working in concert to issue stock
Investment pools that invest funds for wealthy individuals and other institutional investors are called
hedge funds
The primary advantage of money market mutual funds over bank deposits is
higher interest rates
the national debt (ND) is the sum of ...
historical annual federal deficits
Municipal bonds are attractive to ___________ because interest is exempt from federal and most local income taxes
household investors
Deceptive fund management practices that use share classes and 12b>1 feea to trick investors into believing they are buying no-load funds are referred to as
improperly assessed fees
The return for the investor from investing in mutual fund shares reflects three aspects of the underlying portfolio of mutual fund assets, which are
income and dividends earned on the fund assets, capital gains earned on the fund assets, capital appreciation from the profitable investment of new funds
Some risk-avoidance hedge funds primarily on the stable returns from ______ rather than on ________
income; capital gains
The semiannual coupon paid on TIPS securities is based on the ______ and so ________ from period to period
inflation-adjusted principal; may vary
Mutual funds that manage retirement plans for an institutions' employees are called
institutional funds
___________ act as distribution agents in best efforts underwriting and act as principals in firm commitment underwriting
investment banks
Firms that pool the financial resources of individuals and companies and invest those resources in diversified portfolios of assets are called
investment companies
Bonds may either be...
investment or speculative (junk) grade
What does a proxy vote allow?
it allows stockholders to vote by absentee ballot
Historically, hedge funds have avoided regulations by limiting the number of investors to _____ who must be deemed to be _______
less than 100; accredited investors
Because mortgage bonds are backed with a claim on specific assets of the firm, they are ______ risky and have ______ yields than unsecured bonds
less; lower
Mutual funds that maintain a predetermined risk level are called
lifestyle funds
As part of mutual fund reforms adopted by the SEC in 2014, money market mutual funds were given the approval to impose ______ and ______ on funds during times of financial stress, to address risks of investors runs on those funds
liquidity fees; redemption gates
What are the benefits of mutual funds?
liquidity intermediation, denomination intermediation, diversification, cost advantages, managerial expertise
Why do T-notes and T-bonds have low returns?
low interest rates (yields to maturity) reflect low default risk
Hedge fund managers generally charge two types of fees: _______ fees and _______ fees
management, performance
At the end of each day, the mutual fund assets are ______, liabilities are deducted and the net amount divided by the number of shares to obtain the __________.
marked to market; net asset value
___________ refer to the extent and speed with which financial security prices reflect unexpected news events
market efficiency
Some risk-avoidance hedge funds use a ________ strategy, in which hedging strategies are to reduce material risk
market-neutral arbitrage
What are capital markets?
markets for equity and debt instruments with original issue maturities of more than one year
What are bond markets?
markets in which bonds are issued and traded
What are primary markets?
markets in which corporations raise funds through new issues of stock, most of the time through investment banks
when the principal amount is paid back
maturity date
Some corporate bonds and most ______ bonds are ________ bonds, meaning that the bond issue contains many maturity dates with a portion of the principal being paid off on each date
municipal; serial
Open ended funds are traded at their ________, which is determined once a day after market close
net asset value
With cumulative voting ...
number of votes assigned to each stockholder equals the number of shares held multiplied by the number of directors to be elected
Hedge funds located outside of the United States and structured under foreign laws are designated
offshore hedge funds
Describe the T-bonds and T-notes liquidity risks.
older issued t-bonds and t-notes trade less frequently than newly issued t-bonds and t-notes (off the run vs. on the run)
STRIPS separates what into two separate securities?
one set of securities reflects interest payments, one set of securities reflects principal payments
A mutual fund for which the number of shares outstanding fluctuates daily with the amount of share redemptions and new purchases is said to be
open ended
The largest portion of investments company business is in
open-end mutual funds
ETF's are legally classified as _______ funds, but have a ______ number of shares outstanding at any time
open-end; fixed
Try to match the performance of a particular index (S&P 500)
passive management
Index funds may enjoy lower management fees because they are _______ managed
passively
__________ fees are unique to hedge funds
performance
What are the two components of bond values?
the underlying annuity and the principal
What does TIPS stand for?
treasury inflation protected securities
T or F: due to market supply and demand, it is possible for closed-end funds to trade at a price above or below their net asset value
true
T or F: during the financial crisis of 2008, most hedge funds experienced losses, though many funds still managed to outperform market indexes like the S&P500
true
T or F: stock warrants may be detached from the underlying bond and sold separately to another investor
true
The principal value of a TIPS security is adjusted every six months ______ for inflation or ________ for deflation, as measured by the percentage change in the consumer price index
upward; downward
Load funds presumably provide the investor with more personal attention and advice on fund selection than no-load funds, which _________ translates into better performance
usually does not
Straight voting ...
vote one at a time
required rate of return
yield-to-maturity
Who creates STRIPS? From what are they created?
Financial institutions and government securities brokers dealers create STRIPS from T-notes and T-bonds
Bearer bonds are owned by the ________ and have _________ attached to the bond so the bearer can collect interest payments
bearer; coupons
Why do bond values change?
because interest rates change in the market
Describe the T-bonds and T-notes interest rate risks.
because of their long maturity, t-notes and t-bonds experience wider price fluctuations than money market securities when interest rates change
The legal contract that specifies the rights and obligations of the bond and the bond holders is called the
bond indenture
________ are long-term debt obligations issued by corporations and government units
bonds
As part of improved disclosure rules imposed on mutual funds by the SEC as of 2004, mutual fund companies must provide clear information to investors on
brokerage commissions and discounts, up-front sales changes
Accrued interest must be paid by the __________ of a bond to the _________ of a bond if the bond is purchased between interest payment dates
buyer; seller
How is the principal value of TIPS adjusted?
by the percentage change in the consumer price index (CPI) every six months
