Securities Industry Essentials Exam

What is the par value for most debt securities?

$1,000

Advantages of Preferred Stock

-dividend preference -priority over common stock during bankruptcy dissolution

Risks of Owning Debt Securities

-failure to pay interest (default risk) -fluctuation in interest rates -inflation- which would decrease the purchasing power of the bond

What are some risks of owning common stock?

-market risk -decrease or loss of dividend -low priority at dissolution (last in line for residual funds during bankruptcy)

Why would you include common stock in a client's portfolio?

-potential capital appreciation -income from dividends -hedge against inflation

What are some benefits of common stock holders?

-right to vote for corporate directors -it is freely transferable -the opportunity for capital appreciation -limited liability

Risks of Preferred Stock

-rising interest rates -decreased or elimination of dividend -purchasing power declining over time

Benefits of Debt Securities

-steady and predictable income -Stability- the obligation to make interest payments is a high priority of bond issuers

Order of Liquidation

1- Secured Debt holders 2- Unsecured Debt holders and general creditors 3- Subordinated Debt (inferior ranks of unsecured debt) 4- Preferred Stock Holders 5- Common Stockholders

Discount Bond

A bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate

Treasury Stock

A corporation's own common stock that has been reacquired by the corporation and is being held for future use (stock buyback)

What does a higher rating on a bond typically lead to?

A lower yield

What can a stockholder who receives rights do?

A stockholder who receives rights may: - exercise the rights to buy stock by sending the rights certificates and a a check for the required amount to the rights agent; - sell the rights and profit from their market value; - let the rights expire and lose their value.

S&P's Bank/Investment Grade Bonds

AAA- capacity to repay principle and interest judged high AA- very strong, slightly less secure than AAA A- more susceptible to adverse economic conditions BBB- adequate capacity to repay principal and interest and can be slightly speculative

Moody's Bank/Investment Grade Bonds

Aaa- capacity to repay principle and interest judged high Aa- very strong, slightly less secure than AAA A- more susceptible to adverse economic conditions Baa- adequate capacity to repay principal and interest and can be slightly speculative

How are zero coupon bonds taxed?

Although the bond's interest payment is only paid at the maturity date, the owners of zero bonds must pay taxes annually.

S&P's Speculative (noninvestment-grade) Bonds

BB- slightly speculative, significant chance the issuer could miss a payment B- issuer has missed one or more interest or principle payments C- No interest is being paid on bond at this time D- issuer is in default, payment of interest or principle is in arrears

Moody's Speculative (non-investment grade) Bonds

Ba- slightly speculative, significant chance the issuer could miss a payment B- issuer has missed one or more interest or principle payments Caa- No interest is being paid on bond at this time D- issuer is in default, payment of interest or principle is in arrears

Collateral Trust bonds

Bonds backed by financial assets that are grouped together such as securities

General Obligation (GO) Bonds

Bonds issued by governments that pledge their "full faith and credit," including tax revenues, to repayment. These bonds are used for capital improvements that benefit the entire community

Callable Preferred Stock

Company has the right to repurchase the stock at a specified price at some point in the future.

Which voting method benefits the smaller investor?

Cumulative voting

What does a lower rating on a bond typically lead to?

Higher volatility- which could lead to higher return if the bond creditworthiness is maintained

DERP

Order in which the dates involving dividend distributions occur. Declaration date Ex- dividend date Record date Payable date

Convertible Preferred Stock

Preferred stock with an option to exchange it for common stock at a specified rate.

Balloon Bond

Repaying a bond's principle using fixed term payments and paying off a major portion of the bond at maturity

How can restricted stock be sold?

Restricted stock can only be sold when the issuer of the stock removes the restriction, which allows the shares to trade freely

Preemptive Rights

Rights that entitle shareholders to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered to outside buyers.

American Depositary Receipts

Securities backed by American depositary shares that permit U.S. investors to hold shares of non-U.S, companies and trade them in the US markets with US currency

Which voting method benefits larger shareholders?

Statutory voting

Participating Preferred Stock

Stock that allows the preferred stockholder to participate in the profits of the corporation along with the common stockholders.

What happens to a bond's coupon rate as a result of market forces?

The coupon always remains the same- it is a fixed percentage of the bond's par value.

What type of quality does a non-rated bond suggest?

The fact that a bond is not rated has nothing to do with its quality. Some bonds are just too small to be rated by large institutions like the S&P and Moody's

How does a call feature affect the coupon rate of interest?

The issuer will typically have to pay a higher coupon rate if the bond has a call feature, in order to make the bond attractive to investors.

How does a bond's coupon rate affect its volatility?

The lower a bond's coupon rate, the more volatile it is The higher a bond's coupon rate, the less volatile it is

How does maturity date affect a bond price's volatility?

The more time left until maturity, the more volatile a bond's price will be to a change in interest rates The closer the bond is to maturity, the less volatile it is to a change in interest rates

Market Capitalization

The total value of a company's issued shares found by multiplying the number of outstanding shares by the current market value of a share

Why are warrants offered in connection with other securities?

They can make debt instruments such as bonds more attractive

True/False: All corporations issue common stock, but not all corporations issue preferred stock

True

What type of yield is a bond that is trading on a "basis of" measurement?

Yield to Maturity (YTM) Bond

What is the default risk of debt back by the U.S Treasury?

Zero

Term Bond

a bond structured so that the entire principle matures at one time

Premium Bond

a bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate

Warrant

a certificate that grants an owner the right to purchase securities from the issuer at a specific price, generally higher than market value, to be redeemed at a later date.

Product Dividends

a dividend paid by selling a sample of the company's product to shareholders

unsecured debt

a loan that is not backed by pledged assets

What is a basis point?

a measurement of yield equal to 1/100 of 1%. A full percentage point is equivalent to 100 basis points. Ex: if a bond trades at 5.89 basis points, the bond has a YTM of 5.89%

Preferred Stock

a nonvoting share of ownership in a corporation that pays a fixed dividend

Form 144

a notice to the SEC that a control person wants to sell their shares

The Howey Test

a security is an investment of money made into a common enterprise with expectation of profit through the efforts of a third party

Dividends

a share of earnings distributed to shareholders

Cumulative Preferred Stock

accrues payments due to its shareholders in the event dividends are reduced or suspended

Stock Dividends

additional shares of a company's own stock given to stockholders. The stock itself is not taxable, but the adjust cost per share will impact taxes when the shares are sold

Statutory Voting

allows a stockholder to cast 1 vote per share owned for each item on a ballot

Convertible Feature of a Bond

allows investors to convert bonds into shares of common stock

Cumulative Voting

allows stockholders to allocate their total votes (one vote per share) in any manner they choose. Ex: 70 votes in favor of board member, 30 votes in favor of another

Rights offering

allows stockholders to purchase common stock below the current market price. Each share holder is given one right per share owned

Capital appreciation

an increase in the market price of shares

Security

an intangible financial asset that may be bought, sold, or gifted between persons

Put Feature of a Bond

an investor can put the bond back to the issuer before maturity date if interest rates are rising. If market interest rates are higher than the current rate of the bond, an investor would want to put the bond, to receive their principle back and re-invest in the market

Guaranteed Bonds

an issuer sells unsecured (no collateral) bonds that are backed by issuers promise to pay as well as another company's promise to pay

Rule 144

applies to shares that are sold through a nonstandard private offering and are subject to resale restrictions and to sale of shares to insiders in the company

Administrative Claimants

attorneys, courts, appraisers, auctioneers and liquidators who assist with liquidation and are paid for their services

Savings Bonds

bonds issued by the federal government as a way of borrowing money. These bonds are series bonds and do not trade

Equipment Trust Certificates

bonds secured with factory and equipment as collateral

Mortgage bonds

bonds secured with real estate as collateral

Zero Coupon Bonds

bonds that pay no annual interest but are sold at a discount below par, thus compensating investors in the form of capital appreciation

How are yield measured?

by basis points

secured debt

debt guaranteed by collateral

Cash Dividends

distribution from earnings paid in the form of cash. Typically are paid quarterly and taxed in the year they are distributed

Non-qualified Cash Dividends

dividends are taxed at the investors ordinary income tax rate

Call Feature of a Bond

gives the company the ability to retire a bond issue prior to its stated maturity date. Typically occurs when the when market interest rates are decreasing, so that the issuer can issue more bonds at a lower rate

Commodity

hard assets such as gold or oil

Straight Preferred Stock

has no special features beyond the stated dividend payment

Current Yield

measures a bond's annual interest payment relative to market price Equation: annual coupon payment/market price = current yield

Adjustable rate preferred stock

preferred stock whose dividend is tied to another rate, often the rate paid on T-bills.

Serial Bond

schedules the repayment of principle to mature over intervals over a period of years until the balance has been repaid

Control Stock

stock owned by directors, officers, or persons who own or control 10% or more of the issuer's voting stock

Examples of Securities

stocks, bonds, notes, options, mutual funds, jumbo CDs, units in an investment, variable life and annuities

municipal bonds

tax-exempt bonds issued by state and local governments

Authorized Stock

the amount of common stock that a corporation is authorized to sell as indicated in its charter

Yield

the annual rate of return on a bond if the bond were held to maturity

What happens if a bond trades between coupon payments?

the buyer of the bond must pay the seller the amount of interest earned to date at the time of settlement

Declaration Date

the date on which the board of directors officially approves a dividend

Payable Date

the date that the dividend check is paid to investors

Maturity Date

the date the investor receives the his/her loan principle back

ex-dividend date

the date two business days before the date of record, establishing who is entitled to collect a dividend

Record Date

the date when the company determines ownership of outstanding shares for dividend purposes

Yield to Maturity (YTM)

the interest rate that makes the present value of a bond's payments equal to its price

Coupon Rate

the interest rate the issuer has agreed to pay the investor

Qualified Cash Dividends

the maximum tax rate of these dividends is determined by the current IRS tax code and the investor's income tax bracket. This rate will always be lower than the investor's ordinary income tax rate

Issued Stock

the number of shares of common stock sold to investors

Yield to Call (YTC)

the rate of return earned on a bond when it is called before its maturity date at the issuer's option

Oustanding Stock

the total amount of common stock issued that is held by investors

Rule 144 Volume Restrictions

the volume of shares sold under Rule 144 is restricted to the greater of: -1% of the outstanding shares of the company or -the average weekly trading volume over the most recent four weeks

Duration

the way of measuring a bond's volatility based on maturity date and coupon rate

Nominal Yield

this type of yield is stated at the time of issue (Ex: coupon)

Why does a company issue stock?

to raise capital

Debentures

unsecured bonds backed only by the credit worthiness of the bond issuer

Income Bonds

unsecured bonds requiring that interest be paid only after a specified amount of income is earned. Companies typically issue these when they are in bankruptcy