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