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Securities Industry Essentials (SIE)
Certification
⫸ characteristics of LP. Answer: pass-through gains and losses, tax consequences, individual partners being responsible for reporting to the IRS ⫸ Capital Markets. Answer: the stock and bonds market. both private and public sectors. source of financing for corps, municipalities and gov't intermediate to long term financing ⫸ primary market. Answer: securities are sold to the investing company in issuer transactions. Issuer receives proceeds of sale ⫸ secondary market. Answer: securitites trade between investors. One investor is selling to another. Issuer not involved. Stock markets one or more stockholders in corp are selling all or some of their shares to the public. proceeds are paid to selling stockholders rather than corp.
⫸ Third Market. Answer: aka nasdaq intermarket. exchange listed securities are traded otc. all securities listed on nyse and most securities lited on regional exchanges are eligible for otc AS LONG AS TRADES ARE REPORTED TO THE CONSOLIDATED TAPE within 10 seconds of execution ex:A market in which exchange-listed securities are traded in the OTC market ⫸ fourth market. Answer: market for institutional investors. large blocks of stock (unlisted and listed) trade in transactions UNASSISTED by bd. Transactions take place through electronic communications networks. open 24 hours and act solely as agents ⫸ Fiscal policy. Answer: based on the assumption that gov't can control such economic forces like unemployment levels and inflation by ADJUSTING OVERALL DEMAND FOR GOODS NAD SERVICES. ⫸ M1. Answer: currency circulation and demand depsits. converted to currency immediately. most liquid ⫸ M2. Answer: everything from M1 plus time deposits (savings accounts, nonnegotiable cds, money market funds, overnight repurchase agreements
the excess amounts above the amount of a bank's deposits required to be held on reserve ⫸ discount rate. Answer: rate the FRB charges for short term loans to member banks. indicates direction of FRB monetary policy. a decreasing rate=easing of FRB POLICY. INCREASING RATE=RIGHTENING OF FRB POLICY *member banks get a DISCOUNT rate from the FRB ⫸ prime rate. Answer: Rate of interest banks charge on short-term loans to their best customers each bank sets own prime rate ⫸ broker loan rate. Answer: The interest rate banks charge broker/dealers on money they borrow to lend to margin account customers ⫸ financial statements. Answer: issue quarterly and annual reports ⫸ balance sheet. Answer: company's assets and liabilities. assets- liabilityies=equity/net worth. can't tell analysts if company is improving or deterioriating
⫸ income statemenet. Answer: compares revenue w costs and experses during a specific period. used to judge efficiency of a company's operations and profitability ⫸ recessions. Answer: mild, short term contractions. decline in real output of goods and services (gdp) 6mo+ ⫸ depression. Answer: 6quarters or 18mo + ⫸ Downturns in business cycle characteristics. Answer: falling stock prices, decreasing gdp ⫸ coincident indicators. Answer: vary directly and simultaneously with business cycle. number of hours worked, employment levels, personal income, industrial production, manufacturing and trade sales, gdp, nonagricultural employment ⫸ lagging indicators. Answer: differentiates long term trends from short term reversals that occur in trend ⫸ inflation: mild vs high. Answer: mild inflation=economic growth. high inflation: reduces dollar's buying power-hurts economy ⫸ stagnation. Answer: prolonged periods of slow or little econ growth + high unemployment
⫸ monetarist theory. Answer: Milton friedman. money supply is the major determinant of price levels. well controlled, moderately increasing money supply leads to price stability. controlled by FRB ⫸ supply side. Answer: gov't should allow market forces to determin prices of all goods. Believes fed gob't should reduce gov't spending as well as taxes ⫸ balance of payments. Answer: flow of money betwn us and others ⫸ surplus. Answer: more money flowing into contry than out.us is selling more goods to foreign countries (exporting) than our consumers are importing, we will have more money coming in than out. ⫸ deficit. Answer: more money flowing out of country than in. may occur when interest rates in ANOTHER country are high because money flows to where it earns the highest return. American purchases of foreign goods (importaint) causes us dollars to flow out of country ⫸ GNP (Gross National Product). Answer: OWNERSHIP BASED. total dollar value of goods & services produced by a nation at home or away
⫸ if the dollar is weak. Answer: foreign currency buys more us goods. exporting increases ⫸ underwriting syndicates. Answer: group of underwriters who work with issuer through registration and bring securities to market to sell. ⫸ primary offering. Answer: proceeds go to corporation, municipality or gov't *doesn't have anything to do with the #of times offered, but WHERE the proceeds go. ⫸ public offerings. Answer: regulated under sec act of 1933, full and fiar disclosure. requires new issue be registered with SEC before public sale ⫸ ipo rules. Answer: make bona fide public offering at pop.do not withhold securities for own benefit, industry insiders don't take advantage of insider status to gain access to new issues. apply to common stock ⫸ before selling ipo. Answer: must obtain written rep from owner that the account is eligible
⫸ tombstone advertisement. Answer: advertisement run for new issue prior to effective date, minimal information provided. do not need to be filed with sec contains issuer name, type of security, # of shares, pop, names of underwriters or group ⫸ shelf offering. Answer: an issuer who is already a publicly traded company can register new securities without selling the entire issue at once covered under securities act of 1933 supplemental prospectus required ⫸ isolated non issuer transaction. Answer: occurring in secondary market (non isuser) that occur infrequently. do not involve securities professionals. "FOR SALE BY OWNER" ⫸ coordination. Answer: issuer files with state at the same time it files with sec. ONLY used for IPOs ⫸ notice filing. Answer: certain securities are federally covered. states do not have jurisdiction over registration requirements. states could file a notice to sell securities in that state along with the payment of a filing fee.
⫸ red herring. Answer: a preliminary prospectus made available to prospective investors during the waiting period between the registration statement's filing with the SEC and its approval ⫸ during cooling off period. Answer: take indications of interest, distribute red herring, publish tombstone ⫸ prospectus delivery requirement: OTC Pink or OTCBB. Answer: 90 days ⫸ prospectus delivery requirement: nasdaq. Answer: 25 days ⫸ prospectus delivery requirement: nonnasdaq. Answer: 40 days ⫸ exempt securities from 1933. Answer: gov't securities, municipal bonds, commercial paper and banker's acceptances (270 days or less); insurance policies, national and state bank (NOT holding company) building and loan, interest in railroad equipment certificates, banks ⫸ exempt transactions from 1933. Answer: small and medium corp offerings, private placement, securities sold and offered intrastate, offer and sales made out side us BY us issuers.
⫸ preferred stock risks. Answer: purchasing power, interest rate sensitivity, decreased or no dividend, lower priority at dissolution (more than common) ⫸ straight (noncumulative) preferred stock. Answer: The straight preferred stock has no additional features. The holder is entitled to the stated dividend rate and nothing else. If the corporation is unable to pay the dividend, it is not owed to the investor. ⫸ cumulative preferred stock. Answer: Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid. ⫸ callable preferred stock. Answer: Preferred stock that the issuing corporation, at its option, may retire by paying the call price plus any dividends in arrears. allows company to replace high fixed dividend with lower ones ⫸ adjustable rate preferred stock. Answer: preferred stock whose dividend is tied to another rate, often the rate paid on T-bills and money markets. price of stock remains stable ⫸ participating preferred stock. Answer: Stock that allows the preferred stockholder to participate in the profits of the corporation along with the common stockholders. noted on stock certificate
⫸ restricted securities. Answer: may not be sold until they have been held fully paid for 6 months. after 6 months, may sell but is subject to volume restrictions(affiliated) ⫸ in any 90 day period an investor may sell. Answer: the greater of 1% of the tota outstanding shares of the same class at the time of sale OR the average weekly trading volume in the stock over the past FOUR weeks on all exchanges or as reported through nasdaq ⫸ rule 144. Answer: restricted stock held by an nonaffiliated ( month hold sell freely after) restricted stock held by an affiliate (6 month hold volume limits) control stock (registered) held by an affiliate (no hold, volume limits always apply) ⫸ debt securities (bonds). Answer: a certificate of indebtedness to the investor. state borrower's obligation to pay back a specific amount of money on a specific date to the investor. fixed annual interest rate. now a creditor of the borrowing company ⫸ term bond. Answer: issue mature at same time. because entire principal is repaid at once, issuers may estab a sinking fund account to accumulate money to retire the bonds at maturity
⫸ Treasury securities. Answer: safety of principal. bills, notes, bonds ⫸ t bills. Answer: short term debt obligations. issued weekly in maturities of 4,13,26 wks. always short term instruments of less tan 1 year. pay NO interest on bonds( no stated interest rates), INSTEAD they are issued at a discount from par and redeemed at par. highly liquid. book entry form only t security issued at A DISCOUNT TO PAR. I ALL INTEREST PAID AT MATURITY ⫸ t notes. Answer: pay semiannual interest as a percentage of par value. mature at par value, 2-10 yrs. book entry form ⫸ t bonds. Answer: pay semiannual interest as a percentage of par value and mature at par. long term 10-30 yrs. book entry form
⫸ t receipts. Answer: bd buy t securities, place them in a trust at a bank and sell separate RECEIPTS against the principal and coupon payments, separating coupon interest payment from principal. NOT BACKED BY FULL FAITH OF GOV'T-backed by good faith and credit of those that issue them A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These are the new securities ⫸ STRIPS. Answer: designates certain isues as suitable for stripping interest and principal from components. BACKED BY FULL FAITH OF US GOV'T ⫸ Freddie Mac (Federal Home Loan Mortgage Corporation). Answer: public corp. created to promote development of nationwide secondary mkt in mortgages by buying residential mortages from financial institutions and packaging them into mortaged back securities ⫸ Fannie Mae (FNMA). Answer: The Federal National Mortgage Association, publicly held corp that provides mortgage capital. purchases conventional and insured mortgages from agencies like FHA and VA. securities backed by FNMA's general credit
allows issuer to pay interest only if corp has enough to meet interest on debt obligations and if bod declares that the interest payment be made ⫸ municipal securities. Answer: issued either by state or local gov. lending money to issuer for the purpose of PUBLIC WORKS and CONSTRUCTION. GO bonds and Revenue bonds ⫸ GO bonds. Answer: issued for capital improvements that benefit entire community. projects typically don't produce revenues, so principal and interest MUST be paid by TAXES collected by municipal issuer: income taxs, license fee,s sales taxes (backed by municipality's taxing power). amount of debt can be limited by state and local statues to protect taxpayers from excessive taxes. need voter approval ⫸ revenue bonds. Answer: used to finance any municipal facility that generates sufficient income. self supporting. ex: utilities, housing, transportation (toll roads and airports) education, health (hospitals), inductrial and sports. no debt limits. no voter approval needed ⫸ tax exempt commercial paper. Answer: used in place of BANs and TANs for up to 270 days. most often 30,60,90 days
⫸ variable rate demand notes. Answer: fluctuating interest rate and are usually issued with a put option ⫸ taxable bond. Answer: Build America bonds (pays interest received from BABs, but tax credits are provided) attract investors who would normally not buy tax exempt municipal bonds, and expanded the pool of investors to include those in lower income tax brackets, investors funding retirement acts where tax free securities would normally not be suitable, public pensions funds, foreign investors. ⫸ tax credit babs. Answer: provide bondholder with federal income tax credit equal to 35% of interest paid on the bond in each tax year. ⫸ direct payment babs. Answer: - provide no credit to the bondholder but instead provide the municipal issuer with payments from the US Treasury equal to 35% of the interest paid by the issuer ⫸ section 529 plans. Answer: no income limitations. defined as municipal fund security. must be accompanied or preceded by official statement or offering circular. can make lump sum donations or period payments.
