Series 79 - Knopman
Bond Question 1 An issuer refinances $300M in debt from 9.5% to 6.0%. What is the semi-annual interest savings? Bonus Q - How much % is 250 Basis Points?
$300M * (9.5-6.0) = $10.50. $10.50/2 = $5.25M semi-annually A 9% Coupon = 9% Nominal Yield Coupons are paid semiannually 250 Basis Points = 2.50%
Benefits of a WKSI
- Can use a FWP whenever (must be filed with SEC by first date of use) - Automatic Shelf Registration
Cool off period - when does this happen? what happens during?
- Happens after you file. - Collect IoI - You can compile the preliminary prospectus (Red Herring) - All the information from the company's registration statement; when all the syndicates from the bank are working on the deal. gives investors all the information they need to submit an iOi if they want to . This iOi will contain a range of prices but not the final price
Effective Date - What is it, how many dates, and where does it fall from within the timeline of an IPO?
- Used to figure out who's interested in purchasing and what the range should be - you can request acceleration if you need less than the allotted 20 days to come up with a range and who is going to be interested in purchasing - falls after the cooling off period and before the post-effective date
8K Triggers
- change in auditor and an explaination - Restating prior results - delisting or transferring exchanges - unregistering equity sales - change in company name/address - change in senior management or board Note that civil lawsuits DO NOT require a 10K
Shelf Registration - what is it. when can it be used until?
- delayed registration for a follow on until favorable conditions are met - Lasts for 3 years
Treasury Bills - What is the 1) Maturity length 2) Coupon 3) How do you recognize it - explain 4) how does it differ from A T-Note or Bond
1) 1 year or less 2) No fixed coupon because of its short length 3) Way to recognize a T-bill is that its (BID > ASK) 4) T-Note is 2-10 years; T-Bond is 30 years
Changes to the U4 vs U5 How many days? 1) Statutory disqualification 2) All other changes 3) Terminate registration
1) 10 days 2) 30 days 3) 30 days
REIT characteristics 1) Taxes? 2) Trading characteristics
1) 75 revenues must be from real estate 2) 75 must be invested into real estate 3) 90 must pass through to shareholders - shareholders pay tax - stock is no different than a corporation's stock - they pay out great dividends
Preferred stock - what is it and what are its characteristics 1) Purpose 2) Trading Characteristics
1) Allows company to issue equity without dilution; pays a fixed dividend quoted as a % of par 2) Trades like a bond (very sensitive to changing interest rates)
Talk about these: 1) Interest Rate Risk 2) Call Risk 3) Reinvestment Rate Risk 4) Inflationary Risk 5) Credit Risk
1) As interest rates increase, bonds prices decrease 2) Risks of bonds getting called back early 3) Risk that the proceeds from the payment of principal and interest, which have to be reinvested at a lower rate than the original investment. Call features affect an investor's reinvestment risk because corporations typically call their bonds in a declining interest rate environment. 4) Inflation 5) credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.
Interest Rates 1) Fed Funds Rate 2) Discount Rate 3) Broker's Call Rate 4) Prime Rate a) what is it b) who's it set by
1) Bank to bank loans; market 2) Fed loans to bank; fed 3) rate B/D pays when they borrow from bank; market 4) what banks charge best institutional clients; markets
Dividends - what is the below terms and in what order do they occur in: 1) Declaration Date 2) Record Date 3) Payable Date 4) Ex Date When do you actually get a security after executing the order?
1) Dividend is announced 2) Last date to be on the record to secure a dividend 3) Dividend is actually paid 4) First day of trading without a dividend; on this date, the price of the stock falls by the amount of the dividend DERP is the order T+2
An investor buys a 6% coupon bond trading at a 6.5% basis. Is the bond purchased at a discount or a premium?
1) Draw the pyramid! 2) Then you see 'Basis' is Yield to Maturity 'Coupon Bond' is Nominal Yield
Investment Strategies 1) Undervalued stocks with good growth potential 2) 'Hot' stocks that continue to grow 3) '100% equity portfolio with dividends immediately reinvested into more stocks
1) GARP - Growth at a reasonable price 2) Price Momentum Investing 3) Aggressive growth
What is it and what's its purpose: 1) American Depository Receipts 2) American Depository Shares Sponsored vs unsponsored?
1) Helps foreign stock be listed on the US markets 2) They're the shares held by the bank. Based on these shares, Banks create ADRs that facilitate trading in the US Sponsored ADRs - Company registers w/ SEC; traded on an exchange; has voting rights; has annual reports; pays dividends in USD Unsponsored ADRs - Bank registers; traded OTC; sometimes has voting rights; dividends are paid out in USD
Who wants a strong dollar? Who wants a weaker dollar?
1) Importers and Foreign Exporters 1) US Exporters and Foreign Importers Importers want home currency to be strong to buy more stuff. Exporters want to sell more stuff!
What is: 1) Yield to worst 2) Yield to Maturity 3) Yield to Call What is the order of yield between: 1) Yield to Maturity (YTM) 2) CY 3) NY 4) Yield to Call (YTC) Understand: AT&T 9's of '25
1) Lower of Maturity vs Call 2) The yield you'd receive if it reaches maturity 3) The yield you'd receive if it gets called early Discount 1) YTC 2) YTM 3) CY 4) NY Premium 1) NY 2) CY 3) YTM 4) YTC AT&T.. issuing a 8% bond to mature at 2025 If you see something on yield that you don't know on the exam, it's likely Yield to Maturity.(YTM might also be referred to as Basis)
Regulation FD (Fair Disclosure) What happens if someone: 1) Accidentally discloses 2) Intentionally discloses
1) Must tell general public within one business day or before the start of next day's trading; whichever is earlier 2) Must be prepared to disclose to the SEC
Selling Private Securities. Permission/Notification 1) With compensation 2) Without compensation 3) What must they always do
1) Permission 2) Notification 3) Supervise the transaction
Relationship between interests rates and prepayments for mortgage backed securities 1) Interest rates increase 2) Interest rates decrease What risks are associated with both?
1) Prepayment increases (Prepayment Risks) 2) Prepayment decreases (Extension Risks)
What are the primary documents delivered here? 1) Pre-registration period 2) Cooling off period 3) Post-effective Date
1) S-1 Prepared 2) Red Herring 3) Final Prospectus
Which has more volatility: 1) 30 year coupon bonds vs 30 year zero coupon bonds 2) 30 year coupon bonds vs 5 year coupon bonds 3) Low coupon bonds vs high coupon bonds
1) Zero Coupon bonds 2) 30 year coupon bond (longer term more voltile) 3) Low coupon bonds
Internal Inspections: 1) Back Office 2) Non-supervisory Branch 3) Office of Supervisory Jurisdiction 4) Supervisory Branch office
1) as determined 2) 3 years 3) Annually 4) Annually
13D - what is it and within how many days must you file? where must you file?
Active! Devil! Filed with an investor acquires more than 5% a) Issuer b) SEC c) Exchange where security is traded Must file within 10 days * you must also disclose intent
What is it and what types of covenants are part of the Trust Indenture Act of 1939?
Affirmative Covenant - Require issuer to (a) Pay Taxes (b) Submit SEC filings Negative Covenant - Prohibit actions like no selling of key assets or no additional debt Financial Covenant - Having specific coverage or leverage ratios
Best Efforts Underwriting - Multiple kinds (what are they)
All or none - all or it's cancelled Mini-Max (or Part or None - is when a minimum percentage must be sold or the deal is cancelled Firm has no financial responsibility for unsold shares
What are preemptive rights
Allows shareholders to avoid dilution when additional shares are issued
What qualifies as a branch office?
Anything with at least 1 registered rep
For misleading information on registration statements, who is liable? What must you prove?
Board, Issuer, Directors and partners, those who signed off and consented. You must prove 'Prudent Man' provisions to prove that you did the normal level of work to not be liable
Corporate Insider
Board; or someone who owns more than 10%
Zero Coupon Bonds - Why buy them? What are the characteristics?
Buy a bond at a heavy discount that will mature to $1000 at the end of the cycle; but because you're buying at a discount, it's EXTREMELY sensitive to changing interest rates. No semi-annual coupons will be given.
Sarbanes Oxley - what is it
Certification of 10Ks and 10Q's. contains a certificate of certification that certifies that the financial statements are correct says that the majority of the board of directiors must be independent (not a member of the firm or employee) Personal loans to executives are prohibited unless it's on market terms
Form 4 - what is it and within how many days must you file?
Changes in ownership are reported on Form 4 and must be reported to the SEC within 2 days
Section 404 of Sarbanes Oxyley
Company's CEO certification of the internal controls for financial reporting
Maintaince of funds in Underwriting
Contingency satisfied - Escrow (maintained by a Qualified Financial Institution, or QFI) releases the funds to issuer by noon the next business day Contingency not satisfied - returns the funds to investors
What is the conversion ratio for convertible bonds? Ex 1 - 7% convertible corporate bond with a conversion ratio of $30
Conversion Ratio = Par Value / Conversion Price Ex 1 - 1000/30 = 33.333 : 1 Means as an investor, for each 1 bond, you get 33.333 shares of stock.
Corporation C vs S 1) Maximum number of shareholders 2) Exchange listed 3) Tax Status 4) Shareholder Composition 5) Capital Gains
Corporation C 1) Unlimited 2) Potentially, if public 3) Does not pass through; corporation is taxed 4) Anyone 5) Taxed @ favorable long term rate if held over 1 year Corporation S 1) 100 2) No 3) Pass through gains/losses 4) Domestic US persons only 5) See above **Husband and wife and count as one shareholder
Anti Money Laundering Compliance (AML) - What triggers Currency transaction reports and Suspicious Activity reports? 1) Trigger 2) Deadline 3) Customer Notification
Currency Transaction Reports - 1) Cash deposits greater than $10,000 within one day 2) 15 days 3) Yes! Suspicious Activity Report - 1) Suspicious Activity 2) 30 days 3) No!
How do you calculate Current Yield for a bond?
Current Yield = Annual Interest / Market Value
An investor buys a 7% coupon bond at 97 that matures in 10 years. What is the Yield to Maturity?
Current Yield = Annual Interest / Market value of the bond 97 indicates it's a discount Current Yield = 70/970 = 7.22% Nominal Yield = 7% Discount 1) YTC 2) YTM 3) CY 4) Nominal Yield 7.44%
An investor would like to make a profit on an investment in the next 6 months. Assuming he expects interest rates drop drastically, which would be the most appropriate investment 1) 5 year t-note currently trading at a discount 2) 3 month t-bill 3) 10 year AAA-rated new issue corporate debt 4) 7 year t-note currently trading at par
D - longer term bonds are more volatile.
Parity Price - what is it? And do the ex below: Party price of bond (conversion ratio 33.33:1) Market Value of stock is $36
Ex 2 - Parity price of bond = (MV of stock) x (conversion Ratio) $36 * 33.33 = 1,200. 'At Parity, you'll be indifferent to owning stocks or bonds at this price.'
Global Depositary Receipts (GDR) - what is it
FOREIGN company shares trading in FOREIGN country (NOT the USA) Has nothing to do with the SEC
Institutional Pot - Difference between a fixed arrangement and a jump ball arrangement?
Fix Arrangement - compensation is pre-negotiated among underwriters (what is standard) Jump Ball Arrangement - Investors placing indicaions assign credit for sale to a specifc underwriter (more awk)
13F - what is it and within how many days must you file?
Flash of Fund Manager!!!! For institutional Investment Managers (owning at least $100M in discretionary assets). Due 45 days of calendar quarter end It is a quarterly filing required of institutional investment managers with over $100 million in qualifying assets
You go from a 0 to 13% owner in a public company - what do you file
Form 3 which is for insiders; Form 13D which is for insider with intent to vote.
Form S-1
General Registration form for companies about to IPO *Contains description of business, cap table, use of proceeds, legal proceeds against issuer, names of underwriters, compensation being received by them, and list of insiders, salaries, and 5 year business history Also Needs financial Statements (Audited) Balance Sheet (2 Years) Income Statment (3 Years) Statement of Cash Flows (3 years) For WKSIs - can't be older than 130 days All others - can't be older than 135 days
Ginnie Mae Fannie Mae Freddie Mae What are they? And which are government agencies vs government sponsored enterprises?
Government Agencies - Ginnie Mae Government Sponsored Enterprises (Agency Security) - Fannie Mae and Freddie Mac. These have an implied guarantee but are not directly backed by the USA Fannie Mae, Ginnie Mae, and Freddie Mac are all government-sponsored mortgage companies. These private companies are often referred to as "secondary market lenders" that back loans and set regulations and guidelines. By backing and securing home mortgage loans, they help make homeownership more accessible. They are mortgages that are sold by banks to other people. so banks can sell mortgages to even MORE people.
Insider Trading and Securities Fraud Enforcement Act of 1988
Has Broker-Dealer requirements: (a) Compliance reviews (b) Information barriers (c) Restriction List Penalties for Insider Trading - Treble Damages (3x profits or 3x losses avoided Criminal - $5M dollar fine or 20 years in jail
Well Known Seasoned Issuer - what are the conditions and who is never a WKSI
Has been public for at least one year AND it has $700M in public float (OR) it has issued $1Bn in non-convertible debt in the last 3 years. **Investment companies can never be a WKSI!!
Cross Default Clause
If you default on one traunch on your cap structure, you default on the others
Form 3 - what is it and within how many days must you file?
Initial Statement of beneficial ownership - must file within 10 days of becoming an insider
What is the relationship between interest rates and bonds?
Inversed
Who needs to register with the SEC?
Issuers (Private) with: 1) 2000 shareholders AND 2) $10M of assets People: 1) 10% shareholders in companies and other corporate insiders 2) 5% shareholders
What are Warrants and who issues them?
Just the same as options, but they're issued by a company. They sweeten the deals of bonds by giving you an option to exercise a stock later. In turn, interest rates are lower than bonds because of the potential upside
Mediation vs Arbritration Difference? What are the documents that finalize both
Mediation's goal is to not let it get to arbritration. Latter is binding when former is not. Mediation is binding only if parties signs a 'memorandum of understanding' after mediation. Mediation is more lenient. Memorandum of Understanding formalizes/finalizes Mediation. Arbitration Submission Agreement finalizes Arbitration
Monetary Policy vs Fiscal Policy
Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the U.S. Federal Reserve. Fiscal policy is the collective term for the taxing and spending actions of governments.
NASDAQ Listing Requirements
No seasoned period required Average Monthly trading volume needed (not daily) have requirements on listing, (less important, but) Initial Listing Requirements 1) $4 bid price 2) 3 market makers (DDM - helps ensure liquidity) Continued Listing Requirements 1) $1 bid price 2) 2 market makers (DDM)
General Supervision - Loans involving customers. When do you need permission
No. Unless they're a bank or a family member 1) BFF 2) Someone from the same company
OTCBB vs OTC Pink 1) Listing Criteria 2) Eligibility Requirements 3) Permitted Quotes
OTC BB 1) Regional (Not national exchange) 2) At least one market maker AND and SEC FILER 3) No subject quotes. Must be firm in their OTC Pink 1) Regional (Not national exchange) 2) At least one market maker (doesn't have to register for SEC) 3) Same as above **Note this is a quotation facility. Not where trades happen. If trades happen, you need a broker dealer
13D - what is it and within how many days must you file?
Owning public stock with a passive intent and you have more than 5% ownership. Must file within 45 days of calendar year end
PRE 14A and DEF 14A. What's the difference and when do you need to file
PRE - at least 10 days DEF - at least 20 days to the meeting difference is that you only need PRE for some things, (not executive comp, election of the board, shareholder proposals, etc.)
What's allowed across the: Pre-registration period vs Cooling off period vs Post effective date
Pre Registration period 1) No Sales 2) No Marketing 3) No indications of interest. *Issuer files w registration w/ SEC Cooling off period 1) No Sales 2) Marketing Okay 3) Roadshow Okay 4) Indications of interest are Okay 5) FWP's Okay *Effective Date where SEC 'clears' the issue Post Effective Date 1) Sales Okay 2) All purchases must receive final prospectus 3) Quiet periods for research
Schedule 14A
Preliminary Proxy Statement (PRE14A) Not needed for: 1) Election of the board 2) Executive compensation 3) Shareholder proposals Definitive Proxy Statement (DEF 14A) For Mergers, name changes, major items
The syndicate does all except: 1) Collect iOi, and circle shares 2) Run Roadshow 3) Stablilize after effectiveness 4) Prepare offering documents
Prepare offer documents - that's for the issuer
Primary vs Secondary share
Primary - new shares are created (Dilutive) Secondary - existing shareholders are selling their stock (non-dilutive) **split offerings combine the two
Form S-4
Register securities as part of an M&A if they are going to be issued for the acquisition *Contains description of business, cap table, use of proceeds, legal proceeds against issuer, names of underwriters, compensation being received by them, and list of insiders, salaries, and 5 year business history
Securities Act of 1934
Regulates 2nd Market. Gives Fed ability to regulate Margin; requires public firms to have financial reports Prohibits fraud (no paying off clients for them to push your stock!)
Securities Act of 1933
Regulates new issue market. Requires registration with SEC before securities can be sold to the public.
Regulatory vs Firm element - Difference? And how often?
Regulatory element is license for continuing education within 120 days after 2nd anniversary and every 3 years thereafter Firm element (created by the firm) needs to be done annually.
S-1 vs Preliminary Prospectus
Same - but the cover is different. There's no range of prices within the S-1
Order of capital structure Preferred stock Unsecured debt Common Stock Subordinated debt (convertible bonds, mezzanine debt) Secured debt
Secured Debt Unsecured Debt Subordinated Debt Preferred Stock Common Stock
SIPC - what is it and what does it do
Securities Investor Protection Corporation Non profit that protects separate customers. Covers you up to $500K; $250 of that in cash. For each account55
Form S-3
Short form registration of S-1. Can be used by any company that's been public for 1 year (USED FOR FOLLOW ONS). Company must have a public float for 1 year
What group within the Syndicate has no risk?
The Selling Group
Form 424(b) What is it and what does it contain
This is the Final Prospectus. Same information as the S-1 but has a final price for the security rather than a range. *Note that the SEC will never 'approve' but rather they will 'clear'
Trust Indenture Act of 1939
Trust Indenture has covenants (between the trustee [Aka Bank] and issuer) that details obligations of the issuer. Requires corporate bonds (no need for US Gov bonds or Municipal bonds) to have a trust indenture. **Note that a trust indenture does not guarantee against defaults Trustee is the bank that will represent all individuals; if a company goes bankrupt, they'll represent you
Firm commitment
Underwriter buys all the stock and has responsibility to sell them.
What is a 'Standby' Underwriter commitment?
Used in context of a rights offering. When a primary offering happens, shareholders have the right to purchase additional stock to make sure they aren't diluted. 'standby' underwriting or 'rights' offering is whe nthe bank purchases the stocks that the shareholders don't want to purchase.
What happens when the Fed buys treasuries? Sells? What happens when it lowers/raises discount rate?
When fed buys, it releases $ into the banking system; removes if it sells which tightens money Lowers discount - enables banks to borrow for cheaper hence more money Raises discount - more expensive to borrow $ so less money available
Gun-Jumping
When issuer discusses a deal after making the decision to go public but before filing a registration with the SEC
Asset Backed Securities - what assets do not back it?
When other pools of loans are turned into bonds (Credit card debt, student loans, car loans, etc.) Corporate equipment would not back an ABS because its financial assets that do so ABS are debt instruments secured by underlying financial assets They are rated as investment or speculative grade they provide a monthly stream of income to an investor
Insiders
When you're a C-level, director or something similar, or when you own 10%+ of the shares No short sales (you must hold onto the stock for at least 6 months). No Short-swing profits!!
What do you do during the Cooling Off Period?
You build a book!
STIPS and TIPS
Zero Coupon Bonds!! STRIPS - Treasury STRIPS are fixed-income securities sold at a significant discount to face value and offer no interest payments because they mature at par. STRIPS is an acronym for Separate Trading of Registered Interest and Principal of Securities. TIPS = Treasury inflation protected securities (TIPS) refer to a treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation.
What types of bonds have no reinvestment risk?
Zero coupon bonds - because there's no cash that gets generated from them
Which is most like gun-jumping? a) Two days prior to its effective date, the company files a free writing prospectus b) Two months prior to its filing a registration statement, an issuer released an update to its data protection policies c) two weeks prior to its effective date, the company files an amended S1 d) two weeks prior to filing a registration statement, the company releases results for the previous quarter
d
What are the three parts of a syndicate
under writing, selling group, manager
When are you considered an insider?
when you're a chief, board, or 10% shareholder
Insider Trading - when are you eligible to be dinged?
when you're a chief, immediate family, or board member
Quiet Periods for Equity Research: Syndicate Manager Syndicate Member IPO Follow on
10 day, 10 day 3 day, none
An issuer sells $125M in bonds at 99. Underwriting fees are 80 basis points. What is the amount of money that the issuer will receive?
125 * .99 = 123.75 .008 * 125M = 1M 123.75-1 = 122.75 **Fees are based on face value, not the discounted value
An investor wants to learn who in a specific company is the largest active shareholdres and what other stocks they own. What filings could the investor review to learn this info?
13D to ID active Shareholders 13F to review their holdings **10K also has great than 5% shareholders
Research Analysts vs IBD Activity 1) Joint DD 2) IB Bakeoff 3) Roadshow A) Rules B) Exception for Emerging Growth Companies?
1a) No 1b) Yes 2a) No 2b) Yes 3a) No 3b) No **Note IB analysts cannot read unpublished research reports
An investor purchases a 5 year corporate bond. shortly thereafter, the fed announces a change in monetary policy with a goal of increasing the fed funds rate. What risk would the investor imediately be concerned about? 1) Purchasing power risk 2) Reinvestment rate risk 3) Credit Risk 4) Interest rate risk
4) Interest rate risk - As prices go up, price o bond will fall.
Investor owns a 7% bond, purchased at 96. It is callable at 104. If the bond is called away by the issuer. How much money does the investor receive?
98 (1000) = 980 103 (1000) = 1030 7% bond = (.09)(1000) = 70 Semi Annual Payment = $35 Par Value = $1000 Call Premium = $40 Semi Annual Payment = $35 1075
Investor owns a 9% bond, purchased at 98. It is callable at 103. If the bond is called away by the issuer. How much money does the investor receive? Why would an issuer call away a bond early?
98 (1000) = 980 103 (1000) = 1030 9% bond = (.09)(1000) = 90 Semi Annual Payment = $45 Par Value = $1000 Call Premium = $30 Semi Annual Payment = $45 1075 **Regardless of whether it's called away or fully matured; you get the semiannual payment
Form 5 - what is it and within how many days must you file?
A Form 5 is generally due to the SEC no later than 45 days after the company's fiscal year ends and is only required from an insider when at least one transaction, because of an exemption or failure to earlier report, was not reported during the year non-market trades (stock based comp)
Lagging, Leading, and Coincident Indicators - what are they and provide examples
A leading indicator is an economic factor that changes before the economy transitions into a particular pattern or trend. A positive change in these indicators predict economic improvement while negative changes predict economic contraction. Leading indicators include: - Stock market (e.g. S&P 500) - New building permits - New orders for consumer goods A coincident indicator is a measurable economic factor that varies directly and simultaneously with the business cycle. In other words, coincident indicators confirm where the economy is and represent the current state of the economy. Coincident indicators include: - Industrial production and related capacity utilization - Employment levels (non-farm payroll) A lagging indicator is a measurable economic factor that changes after the economy has started to follow a particular pattern or trend, but serve as a confirmation of the new trend. Lagging indicators help confirm long-term trends and differentiate long term trends from short-term reversals that occur in any trend. Lagging indicators include: - Corporate profits - Average duration of employment