SIE Exam Preview/Recap. 100% Coverage. Comprehensive, Guaranteed understanding.

SIE Exam Preview/Recap. 100% Coverage. Comprehensive, Guaranteed understanding. purpose of securities industry - ✔✔matching investors with money to issuers that need that money to finance issuer - ✔✔legal entity ...

SIE Exam Preview/Recap. 100% Coverage. Comprehensive, Guaranteed understanding. purpose of securities industry - ✔✔matching investors with money to issuers that need that money to finance issuer - ✔✔legal entity that sells securities in order to finance its operations (business, governments) ie. us treasury, us gov agencies, foreign governments, state and local governments, corps, banks methods issuers use to raise capital - ✔✔1) issue debt securities (bonds) and 2) issues equity securities (stocks) debt securities - ✔✔publically traded loans = bonds, notes, or debt instruments. The person loaning money/buying a bond is considered a creditor to the issuer and the amount they paid for is the principal that the issuer owes them and also makes interest payments throughout the duration of the loan -can be issued by banks, corps, etc equity securities (common vs preferred) - ✔✔raise capital by issuing stock (equity), this time when you buy this, you have ownership in the company and if the company is profitable then you may be entitled to a portion of the profits (this is received through dividend distribution). differs from bonds bc 1) typically no maturity date and 2) dividend payments are optional -only banks/corporations sell these and can do so publically or privately to specific group of investors preferred=paid a predetermined dividend (usually received first and higher than those of common holders, but don't get a vote in company matters) common=paid a dividend based on company fortunes broker dealer = brokerage firm (2 capacities) - ✔✔2 capacities 1) broker= (ABC - agency, broker, commission)engages in agency transactions in security accounts of others. they match up buys and sells and earn a commission for their work (like a real estate broker, acting on behalf of customers to make commission). no risk to firm, they find party willing to take other side of trade 2) dealer= (PDM - principal, dealer, markup/markdown) firms buying and selling securities for its own accounts. buy securities from clients and hold them in inventory and allow clients to buy from them. like a car dealer... buys for its inventory and sells from its inventory and can mark up and down accordingly. acts as principal and can take other side of the trade, MARK UP OR MARK DOWN -risk & Inventory broker-dealer departments/structure of firms (5) - ✔✔1) investment banking 2) research 3) sales/private client 4) trading 5) operations broker dealer - Investment banking - ✔✔referred to as underwriters of securities... they provide advise to issuers in who are looking to issue stocks, bonds, or a combo (structure/arrange security offerings) also can assist with M&A or restructuring for bankruptcy broker dealer - research - ✔✔analysts!! study market and issuers to make reccomendations (buy, sell, hold) broker dealer - sales (stock or bond brokers aka registered representatives RR or investment advisor representatives IAR) - ✔✔financial professionals who market bonds, stocks, but also packaged products such as mutual funds to people and institutions broker dealer - trading - ✔✔execute trades for the firm and the firm's clients and occur in electronic market places NASDAQ or hybrid ones such as NYSE broker dealer - operations - ✔✔make sure things are up to standard (paperwork, trades, etc) also generate statements, etc info barriers - ✔✔barrier where info shouldn't be shared with other side/other departments (investment banking on one side and research, sales/private client, trading, ops on the other) market maker - ✔✔**applies to equity not bonds** when broker dealer decides to display quotes on a trading system indicating they want to buy and sell at specific prices... required to do so on a REGULAR basis. stands ready to buy and sell at any given time -maintain inventory -these market makers are two sided... indicating a price they are willing to sell at (ASK/OFFER) and buy at (BID) -usually a min of 100 shares at those prices=ROUND LOT odd lot=anything but groups of 100 shares spread (ask, bid, etc) - ✔✔spread=difference between ask and bid price=profitability of market maker, larger the spread=more MM makes bid=what firm will buy at/what client sells at ask=what firm will sell at/what client buys at -more actively traded securities tend to have more narrow spreads **markup (sell price/ask)/markdown (buy price/bid) is in addition to the spread comp for broker dealer, investment advisor, - ✔✔1) broker dealer receives $ bc of transaction based compensation (broker receives commission) 2) investment advisor charges fees for managing portfolio, usually based on assets under management traders --> proprietary trading - ✔✔trade for the firm without setting price markers like a market maker = no quotes entered. simply execute trades on the quotes made from a market maker investment advisor vs broker dealer - ✔✔broker-dealers earn commission for executing trades while investment advisors charge fees for providing advise to their clients (based on % of assets under management AUM) and are charged whether trades are executed or not municipal advisors - ✔✔-provides advice to or on behalf of municipalities (state, city, council) usually the issuer. usually related to municipal finance offering -municipal advisor is an entity that advices municipalities on bond offerings (middle man between municipality itself and broker firm (underwriter potentially) types of investors (4) - ✔✔retail, accredited, institutional, QIB retail investors - ✔✔(any investor that is not an inst. advisor) regular individuals with regular accounts buying stock and bonds from broker-dealers with limited assets/income accredited investors (what are the qualifications) - ✔✔these are people with more assets/income and can assume more risk. These includes directors, exec officers, firms, and individuals with assets/net worth over 1 mil (not including prim. residence), or those who make 200k (or 300k with spouse) each year and have for the lsat two and expect to continue making that much -can be individuals and inst. institutional investors - ✔✔large investors that pool money to purchase securities (banks, insurance companies, pension plans, endownments, hedge funds which are referred to as qualified institutional buyers (QIBS) -defined by value of assets invested, usually not individuals QIB (3 qualifiications) - ✔✔QIBS=qualified institutional buyers criteria --QIB=qualified inst. buyer=entity that must own/invest $100 million of securities & CANNOT be a natural person 1) certain types of investors qualify (NEVER WILL BE AN INDIVIDUAL): insurance companies, registered investment advisors or companies, small business development companies, private/pension plans, certain bank trust funds, corps, some non-profit, etc 2) must manage over 100 mil of securities unrelated to them 3) must be purchasing for their own account or account of another QIB primary market - ✔✔where securities are issued, new company issuing stock for ex. beginning of a shares existence = primary distribution of issuers shares. funds are directed to the issuer secondary market - ✔✔where securities are traded: those who bought those in the primary market will want to sell them and this is where the secondary market comes into play. funds are no longer directed to the issuer, and instead pass between investors -sells securities with help of underwriter -issuer (needs capital)--> underwriter (facilitates distribution/buys from issuer/resell to investor)--> investor IPO/follow-on - ✔✔IPO=initial public offering, primary market, sell some % of the co. and safe some to sell later on usually follow-on=existing company sells equities @ a later date=subsequent offering markets within the secondary market (2) - ✔✔exchange market, dealer-to-dealer market 1) exchange market= electonric of phsysical (NYSE- has one DMM) centralized trading venue that functions as an auction, auctioneer who controls trading in a given stock is DMM (designated market maker) 2) dealer to dealer market= when stocks don't quality for physical or electronic markets they trade over the counter (OTC, usually low priced/thinly traded, done between two parties without the supervisory role of an exchange) people connect over phones or computers, usually less trading acivity than Nasdaq. most bonds (non-equities) are traded in the OTC market (no organized exchanges aside from certain bonds). securities that are traded over the counter are traded in a dealer to dealer market. for companies that cannot meet requirements to trade on larger/more centralized exchanges. in otc market, spread between bid and ask is larger, usually smaller co since it is timely and expensive ot get on exchange -NASDAQ (has several market makers), is a dealer market but not considered OTC exchanges - ✔✔NYSE (where trading is maintained by the DMM), NASDAQ (unlimited # of market makers) quotation systems - ✔✔OTCBB, OTC Pink Markets - they check which firms trade in certain stocks market maker - ✔✔stand ready to buy/sell at least 100 shraes at their quoted prices at any given time traders - ✔✔do not keep any inventory, executed trades for the firm/client listed securities - ✔✔equity securities that meet standars for trading on a national exchange (NYSE and NASDAQ) Nasdaq (electronic) - ✔✔national association of securities dealers automated quotation system third market - ✔✔trading away from traditional exchanges or OTC, on internet, etc. can accommodate after hours - usually between broker -dealers and large institutions fourth market - ✔✔institution to institution trading, doesn't involve public markets or exchanges. many times broker dealers are setting up these trades ECN - ✔✔electronic communication networks -act in only agency capacity -connect buyers and sellers electronically, anonymously, during and after trading hours dark pools - ✔✔provides liquidity for large institutional investors or high-frequency traders -details are concealed from the public, (no dissemination of quotes) -anonymous -low transaction costs and little market impact settlement - ✔✔simultaneous delivery of security and buying of security in the marketplace (when a transaction is executed) DTCC - deposit trust & Clearing corporation - ✔✔securities depository and national clearinghouse for the settlement of transactions in equities, bonds, mortgage baked securityes, derivatives, etc , insurance products, money marke, mutual funds -will do securities issues by US and foreign entities -automate and centralize transactions -DO NOT HOLD SECURITIES -non-profit -within DTCC=NSCC (national securities clearing corp=for equity side and FICC (Fixed inc clearing corp) hedge fund - ✔✔privately managed investment fund that attempts to have above average rates of return using speculation, short selling, margin, arbitrage -pools of capital used to invest, very important customer to broker dealer since they do a lot of trading clearing firms/introducing firms (omnibus vs fully disclosed accounts) - ✔✔1) clearing firms: many smallers firms will hand off all of part of this process bc it can be expensive and a lot of initial investment costs -aka full-service firms -they have many more customers than just small broker firms, they also serve hedge funds, investment companies, etc. 2) introducing firms: broker-dealers that do not do their own clearing operations, the clients of these firms actually have their securities held at the clearing firm from which they receive statements/confirms other vocab: fully disclosed accounts=when the clearning firm has all client info and is responsible for all paperwork/ets up account at the vlrstninh gitm omnibus accounts=when the clearing firm only does clearing, the introducing firm in this case has their own back office/operations and will not provide client account details to the clearing firm. does NOT hold specific client info DTCC vs OCC - ✔✔**buyer for all sellers and seller for all buyers** DTCC: clearing services, guarantees settlement, completed through computerized system, does not interact with customers JUST FIRMs, stocks and bonds, no counterparty risk OCC: the DTCC for options, options clearing corp, they issue/guarantee option contracts and deals with brokers ONLY options/OCC - ✔✔derivative product that track the value of an individual stock or index. exchangetraded options have a standardized set of terms... set by the OCC options clearing corporation. prime brokerage accounts (service of clearing firms_ - ✔✔prime brokerage service is bundle of services, and the clearing firm acts as a centralized location for the clients assets, and this generates one statement = consolidated bookkeeping even though the client may use several broker-dealers, they choose one prime broker (one clearing firm) -hedge funds for ex use a lot of dif. brokerage firms to trade but don't necessarily want to have that many accounts, they would rather have a consolidated account at one firm but deal with multiple --> consolidated statements, all trades settle/clear through the one custodians (other important entities in the market) - ✔✔hold assets in physical form not book entry registrars and transfer agents (other important entities in the market) - ✔✔registrars keep track of the owners of securities issued by the issuer transfer agent: issuance and cancellation of certs securities trustees (other important entities in the market) - ✔✔for certain types of bonds a trustee is assigned to hold security interests regulation (4 tiers) - ✔✔1) federal 2) state 3) SRO, self regulatory rules and regulations 4) firm specific (in house) SEC (made up of...) - ✔✔sec --> FINRA, MSRB, exchanges federal regulation, regulators (5) - ✔✔most regulation occurs at this level bc of laws passed by congress. these are enforced by the SEC. SEC - super regulator- securities exchange commission is a fed government agency to protect investors and maintain fair markets. they are meant to ensure congress's demands are met -SEC authority: (one party must be in the US) any securities transaction that is interstate, the division of enforcement prosecutes cases on their behalf, any criminal/civil action suits are taken over by the DOJ -Department of treasury: watch out for any illegal activity -IRS: watch out for any illegal activity but also provide guidance to investors related to tax implications of buying, selling, and holding certain securities -Federal Reserve Board (board of governors on the Fed reserve, they control the money supply) to maintain optimal employment and stable prices to change this... they change the discount rate, and reserve requirements, to do so they buy and sell securities -FDIC (federal deposit insurance corporation), banking regulator, maintain public confidence in the financial system, 250K deposits per person is protected, maintain stability and financial soundness/confidence fed reserve board (4 main tools, and what are their 3 main goals) - ✔✔independent agency of US govt that functions as central bank -controls money supply and influences the interest rate, increase $ --> decrease i-rate -goal=low inflation, stable prices, max employment -4 main tools: 1) open market operations=fed buying and selling securities to influence money supply (MOST COMMON) 2) discount rate = only i-rate they ACTUALLY SET, they influence many others 3) reserve requirements: increase this=less banks can lend 4) regulation T- amount to deposit in order to buy on margin, currently 50% SRO regulation (3 examples) - ✔✔member organization you must join to be in securities industry/how SEC keeps watch since they have limited funds, etc. the day to day cops day-to-day rules that brokerage firms must follow are set by the SRO even though the SEC is in charge of overall regulation -FINRA (financial industry regulatory authority) -MSRB (municipal securities rule-making board) -CBOE (chicago board options exchange) maintain rules to treat customers fairly (fair and equitable trading) the trouble is that they have no ability to punish violators all broker dealers must join an SRO firm (in house) rules (3 types of employees) - ✔✔WSP - written supervisory procedures, outline policies and procedures to to supervise workers. this is essentially a manual. 3 types of personel 1) registered principals 2) registered representatives 3) and unregistered employees state (blue sky) regulation (NASAA) - ✔✔states often require broker dealers and their agents to be registered in the state in order to conduct business there, in addition, issuers are required in many states to register their securities before selling in a given state. these rules are established under USA (uniform securities act) which = blue sky laws -the USA are established by the NASAA (north american securities administrators association=oldest international investor protector agency, with focus on preventing fraud) -also created USA -set rules for licensing/exams which includes all 50 states (commissioner/administrator =person in each state appointed by gov setting these rules) and puerto rico/other territories as well, but states can have more stringent rules than those outlines in the uSA (model law) -MAIN GOAL=PROTECT INVESTORS FROM FRAUD securities act of 1933 (4 main parts) - ✔✔first legislation to cover securities industry, focus on the primary market 1) prospectus= required that investors be given full and fair information to be provided with full and fair disclosure to be able to make informed investment decisions=disclosure doc with all relevant info. the SEC doesn't approve this, just need to see info has been filed 2) outlines rules of conduct for both issuers and investment bankers (underwriting firms). underwriters must perform reasonable investigation/due diligence =liability 3)regulates raising of capital 4)requires SEC registration of new issues the maloney act of 1938 (3 important events) - ✔✔1) created non-exchange SRO, so NASD (national association of securities dealers) was created in 1939 to self regulate the OTC market 2) 1975 this act's scope created the MSRB (municipal securities rule making board) 3) in 2007 NYSE and NASD merged member regulation and created FINRA securities exchange act of 1934 ( 4 major parts) - ✔✔rules for activities in the secondary market (two highly recognized exchanges are the NYSE and Nasdaq) 1) created the SEC (regulatory authority in prim/sec markets) to help delegate to SROs 2)created margin requirements (Reg T) even though fed enforces this 2) regulatory oversight to the Fed Reserve board regarding the extension of credit (use of margin) for borrowing money or short selling (borrowing the shares that are sold with the assumption that the stock will decline in value allowing them to buy it borrowed stock at a lower price 4)creates registration requirements for broker dealers/RR and trading and insider regulation investment advisers act of 1940 (ABC rule for defining AI, which means they regulated by SEC, what are the exclusions (4) - ✔✔-defines and provides exclusions for firms acting as IA (investment advisors who are regulated by SEC) ABC rule for defining IA: providing advice in securities/asset allocation, operating as a business, receiving compensation for the advice, ex=mutual fund companies and firms that manage wrap accounts (charge fee for service and fee for transactions as one). this also includes firms that manage wrap accounts=charging one fee for advice and transactions -exclusions are available to broker dealers, some professionals (so long as the advise is incidental to their actual profession): 1) broker dealers that receive commissions and are already in the business of doing so as broker dealer=no need to register 2) banks, savings inst, trust co = aready regulated as banks/unless getting more commission = no need 3) professionals, LATE (lawyers, accountants, teachers, engineers) bc advice is incidental to their business BUT if they charge an additional fee just for that advice then they lose exemption/become IA. 4)publishers (newspapers, etc) bc it is general advice, not tailored **purpose of investment company act and investment advisers act is such that mutual fund companies must register with the SEC and the firm that manages the assets must register as an investment advisor investment company act of 1940 (what are the 3 types of investment companies) - ✔✔-identifies 3 types of investment companies: management companies, unit investment trusts, face amount companies -regulates mutual fund and like companies (which tend to pool together money from investors and invest the funds in securities - more than 100 shares, min 100,000 in assets, annual reports to SEC SEC regulates securities industry/can take action against civil penalties but cannot imprison you, the DOJ goes to criminal court not SEC. SEC can only take action against civil penalties (fines, expulsion from membership). - ✔✔ Employee retirement income security act of 1974 (ERISA) - ✔✔provides standards for funding and eligibility of private retirement plans such as 401K as well as fiduciary responsibilities of trustees securities investor protection act of 1970 (SIPA) - what is specific about a margin account in terms of determining value -what is not covered -what is the procedure - ✔✔created the Securities Investor Protection Corporation (SIPC) (NOT A GOVT AGENCY) which is industry funded, non profit insurance entity (funds through assessments paid by broker dealers, you pay into SIPC) by providing insurance to customers of broker dealers if they go bankrupt but DOES NOT protect against marketed losses or employee misconduct, also protects certs. held in street name -any firm conducting interstate commerce must be members of SIPC -covers both institutions and individuals for up to 500K, but no more than 250K of which can be in cash (cash and margin accounts are combined, but IRA and joint for ex have separate coverage/is considered a separate customer) **** IN MARGIN ACCOUNT IT IS THE EQUITY BALANCE NOT THE MARKET VALUE THAT DETERMINES COVERAGE*** - each separate customer is covered=separate coverage for accounts: ex=joint, brokerage, ira = 3 separate coverages, roth and trad = 2 separate customers, 2 of same brokerage acct at same firm=1 customer, separate coverage for accounts at dif brokerage firms -what is not covered: securities not held in street name (thus held in clients name), commodity accounts, fixed annuities, futures broker dealers that have securities in the possession of a failed broker dealer, personal accounts of senior officers, if in customers name they are given back to customer without limit -IF someone borrowed money to buy some of the holdings, they are covered for the equity value so the dif between the total value and what they borrowed, they liquidify the loan portion and use that to pay it back -procedures: bankruptcy occurs, trustee is appointed by federal court, securities are based on market value the day trustee was appointed, customers with assets over the limits will received the full coverage and are treated as general creditors for the remaining -SIPC must be provided to new customers and on a yearly basis with existing customers The securities acts amendments of 1975 - ✔✔creates MSRB to be SRO for firms that transact business in municipal securities, no enforcement but help formulate and interpret rules set by FINRA and the SEC insider trading and securities fraud enforcement act of 1988 - ✔✔was created as a response to scandals in the 1980s. insider trading is using material non public information to make investment decisions, both tippers and tippees can be subject to violations. insider trading was illegal wioth the acts of 33 and 34 but no penalties were in place so this act established fines as high as $5 mil and up to 20 yrs in prison -SEC can sue up to 3x of the amount of profit made at the civil level (treble damages) -insiders=corp officers/directors owning 10% or more of a company's common equity penny stock reform act of 1990 (what is a penny stock) - ✔✔regulates the solicited sales of certain low priced stocks -penny stocks are non-exchange traded securities=unlisted (OTC, etc) that trade for less than $5 per share. since they are risky and highly volatile this requires firms receive disclosure from customer before buying and selling them federal telephone consumer protection act of 1991 - ✔✔addresses customer complaints related to cold calling, anyone who is calling with a profit motive must maintain a do not call list and activity avoid calling people on that list (who requested not to be called) - additionally sets a timeframe for such calls, 8:000 am to 9:00 pm local time of the called party -only for unsolicited calls USA patriot act of 2001 (CTR and SAR) - ✔✔meant to prevent terrorist acts in US and around the world by enhancing law enforcement tools, establish process for verifying identity of customers', and increase ability to prevent, detect, and prosecute money laundering AND requires all potential money laundering to be reported -CIP (customer identification program) banks have to file report on the below: -currency transaction reports (CTRs) for transactions over 10K -suspicious activity report (SAR) for transaction equal to and exceeding 5K broker dealer --> OSJ (office supervisory jurisdiction)--> branch (if large enough is OSJ)--> principal--> RR - ✔✔ FINRA (an SRO) (rules can be broken into 4 categories) - ✔✔-NYSE and NASD merged to make FINRA in 2007 main SRO for securities industry, their rules can be broken down into 4 categories -local cop for all broker dealers/RR -must register to be a member/pay fee/take exam 1) conduct rules 2) uniform practice code (UPC) 3) code of procedure (COP) 4) code of arbitration FINRA - conduct rules - ✔✔cover interactions between clients and firms re compensation, communications, sales practice violations -one of largest components -governs interactions between firms/customers FINRA - uniform practice code - ✔✔rules govern trading and proper settlement of transaction goal=to standardized these rules ex=settlement and corporate actions -back office, create standards for trading, little customer interaction FINRA - code of procedure - ✔✔outlines process to discipline anyone who breaks FINRA rules, acting as a COP -parties involved=FINRA and broker-dealers and or FINRA and registered reps -can result in fine, censure, expulsion, suspension AND INVOLVES APPEAL PROCESS -only SEC through DOJ can imprison you FINRA - code of arbitration - ✔✔process to resolve disputes between members/as well as those that involve customers -settles monetary disputes mostly -parties are broker-dealers, RR, customers -can result in monetary settlements & NO APPEAL PROCESS -doesn't have to be rule violation can be customer complaint etc -cheaper than litigation arbitration=determine if person is owed an amount, etc rules, reg, creation of SROs are always reactionary - ✔✔ CBOE (Chicago board options exchange) (an SRO) - ✔✔trading platform for options, stock indexes, interest rates, and ETF -is the SRO for the options market -largest options market in us and is regulated by SEC Firm specific rules - ✔✔not all oversight comes from SEC and FINRA, but principals providing oversight within the firm by constant monitoring to uncover any misuse/wrongdoing -compliance works with sales professional to ensure ethical trading environment -compliance creates rules that form WSP (written supervisory procedures) ** internal rules tend to be more stringent and materially different than those set by SEC and SROs MSRB (an SRO) ( 2 things you must do if transacting business in muni securities business) - ✔✔-securities acts amendments of 1975 required that broker-dealers transacting in municipal securities must a) register with the SEC and 2) create their own municipal securities rulemaking board -SRO charged with rulemaking for municipal securities, FINRA enforces -main concerns with standards of professional practice, including broker-dealer qualifications, rules of fair practice, and recordkeeping ****rules do not apply to issuers of municipal securities ***no enforcement abilities, the SEC does this/or another regulator industry *for bank dealers, SEC does not enforce these rules but rather the FDIC, or Fed Reserve, or comptroller of currency who enforces rules... - ✔✔broker dealers: FINRA, SEC bank dealer: FDIC, FRB, controller of currency shareholders have limitd liability - ✔✔meaning they are not held responsible for corp debts, and are a separate person under the law. the worst they can incur is losing their initial investment coporations structure - board of directors - ✔✔sharedholders elect a board of directors who oversees management team, corporate governance, declare dividends bondholders - ✔✔the corp using money from investors with promise of paying principal.interest back over the predetermined lifespan of the bond -interest -principal at maturity -liquidation preference over stock holders -CREDITOR status stockholders - ✔✔no maturity date, they are part owners of the company hence (equity) and no guaranteed int. payments -if company prospers, the shareholders can expect to share in its profits in the form of cash or stock distributions (dividends) and their shares also increase in value *** if company fails they are more likely than other investors to lose entire investments since bondholders have higher claim in assets and are paid out first -dividends -potential capital appreciation Two types of equity securities (basic info) - ✔✔1) common stock: traiditional form of equity, paid out last if bankruptcy (considered junior), receive dividend only after bondholders are paid interest and preferred stock holders are paid dividend 2) preferred stock: considered a senior security. first payout is secured creditors, then unsecured creditors, then preferred stock owners, and lastly common stock owners authorized shares - ✔✔during incorporation (articles of incorp/charter) specify how many total shares can be issues, this can only be changed by a majority vote among the BOD and thus a change in the articles. most companies issues fewer than this number in order to safe some for future use issued shares - ✔✔number of shares that are actually issued/have been sold by the corp common stock (& rights of common stock owners (5)) -cumulative vs statutory voting - ✔✔1) first stock a corporation issues 2) most widely issued type of stock 3)basic unit of corporate ownership -has a par value for company financing but that has nothing to do with market value rights of common stock owners: -right of inspection: can look at the books and records, usually receive an audited report -right to vote: can attend shareholder meetings and vote on important issues including election of members of board, m&a, if stock is to be split. DO NOT VOTE ON WHETHER CORP SHOULD PAY CASH OR STOCK DIVIDENDS. all dividend decisions are made by board of directors. number of votes available is determined by the number of shares the person owns. -statutory voting=shareholder is given one vote per share owned per voting issue=beneficial for larger owners -cumulative voting=multiply number of shares they own by number of voting issues --> total number of votes they can cast in any manner they want, favors minority voters (each seat on the board that is available represents 3 voting issues). ex. if 3 board positions are available and someone owns 1,000 shares, if there is statutory voting then they can cast 1000 per issue, so each candidate can receive 1000 votes but no more (and not all candidates need to be voted on). if use cumulative voting then they would have 3000 votes that they can disburse in any way to the candidates. -right to receive dividends: portion of company's profit that can be paid out -right to evidence of ownership: right to receive stock certificates as proof of how many are ownded, transfer agent, name of corp, owner, signed by corp. officer. -right of transfer: can transfer shares by selling them, gifting them, etc. some restrictions apply such as when they got them before the IPO or if they were given as part of work compensation = RESTRICTED restricted shares specific to IPO (lock-up agreements and legends) - ✔✔lock up agreements=how much time that pre-IPO investors must wait before selling their shares after the company has gone public (usually 6 months) this prevents those who initially funded the company from immediately profiting once it goes public -also serves to limit the supply of shares sold in the market -cannot be sold until legend is removed rule 144 (3 main parts) -holding period -notice of sale -volume limitation (rules for restricted vs control securities) what is the exemption amount - ✔✔regulates the sale of restricted (typically unregistered) and control/affiliate (owned by control person 10% or more and their family members) securities. 1) holding period: for restricted shares it is 6 months from when they were bought, no holding restrictions for control securities 2) notice of sale: someone selling either type of these securities most notify the SEC by filing form 144 at the time the sell is placed. the SEC responds by providing a 90 day window by which it can be sold, if they are not sold during this time, an amended notice must be filed. -EXEMPTION applies if it is under 5000 shares or total value of 50K or less 3) volume limitation: max amount of securities a control person can sell over 90 day period is the greater of either 1% of the total shares outstanding OR average weekly trading volume during the 4 preceding weeks unissued shares - ✔✔any shares that haven't been sold or distributed treasury stock - ✔✔when a corporation issues and subsequently repurchases it's own stock. as long as it remains in the treasury, it has no voting rights and does not receive dividends. treasury stock shows up as informational item on corp's balance sheet outstanding stock - ✔✔number of shares that have been issued to the public MINUS any stock that has been repurchased by the company (treasury stock). this stock receives dividends and has voting rights market capitalization - ✔✔used to indicated a company's size. this can be calculated by multiplying current market price of the stock by the number of outstanding shares classification of stock (ways they are typically sorted) (5) - ✔✔1) based on size (large, mid, small cap) 2) type of issuing company 3) assumed risk 4) expected return 5) correlation to business cycle stock classification: blue chip stocks - ✔✔describes common stock of large, well established stable mature companies with great financial strength (with long unbroken records or earnings and dividend payments) stock classification: growth stocks - ✔✔stock of a company whose sales, earnings and share of the market are expanding faster that the general economy/industry average stock classification: defensive stocks - ✔✔associated with companies that are resistant to a recession including service related industries (utilities), production of stable products (groceries, pharmaceuticals). these companies perform well regardless of how the economy is doing *** defense stock does not equal defensive stock, defense stock is associated with production of armed services, etc. stock classification: income stocks - ✔✔associated with companies that pay higher than average dividends in relation to their market price -attractive to older/retired investors who are interested in current income and not capital appreciation -ex = utility stocks stock classification: cyclical stocks - ✔✔associated with businesses whose earnings fluctuate with the business cycle -examples include household appliances, steel, construction, and automobile companies American Depository Receipts (ADRs) (sponsored vs unsponsored) - ✔✔-represents a claim in foreign securities though they are held in the U.S. banks located oversees -trade in U.S. exchanges or OTC and pay dividends in U.S. dollars -can be sponsored or unsponsored: sponsored means the company pays a depository bank to issue ADR shares in the U.S. the sponsorship permits the company to to raise capital in the U.S and list the ADR on the NYSE or Nasdaq. the larger ADRs are sponsored. Unsponsored ADR=the company does not pay for the cost of the trading in the U.S. and instead the depository bank issues the ADR (OTC) preferred stock - ✔✔issued by companies that already have common stock outstanding -better for investors interested in income not capital appreciation (like bondholders) -lack voting rights -issued with a par/face value of $100 corresponding to it's initial market price and will pay a specified dividend (for example a 5% preferred stock will pay $5 per value of $100) this dividend rate can also be listed as $5 for ex and this represents the max the shareholders will receive, but if the company is not doing well they can pay less types of preferred stocks (5) cnbcc - ✔✔1) cumulative 2) non cumulative 3) participating 4) callable 5) convertible types of preferred stocks (5) - ✔✔1) cumulative 2) non cumulative 3) participating 4) callable 5) convertible non cumulative preferred stock - ✔✔missed dividend payments don't accumulate, only current year dividends need to be paid out before common stock owners (preference is only for the current year) -so if a company was not paying out full dividends bc the market was poor, the year in which they are able to pay out the dividends, they do not need to make back tracking (missing) payments and only current year preference applies Cumulative preferred stock - ✔✔if the company doesn't pay all of it's owed dividends, if it is cumulative then the preferred stockholders receive dividends first (before common stock holders) **most preferred stock is cumulative** -missed dividends accumulate and are paid back to preferred stock owners before common stock owners Participating preferred stock - ✔✔preferred stock return is generally the max annual return that an investor can expect to receive, but for those who buy participating preferred stock, they can receive greater dividends if ... 1)the company is doing well 2)common dividends exceed a certain amount callable preferred stock - ✔✔company has the right to repurchase back/call back the stock at a specified price, usually a price higher than the stock's par/face value so that investors want to buy it (so when itnerest rates go down... then they can also pay lower payments, this is an environment when call protection is most valuable to customer, when i-rates decrease) convertible preferred stock - ✔✔caters to investors who care more about capital appreciation than income, the trade off is obviously a lower dividend rate -investors can convert the par value of the stock into a predetermined number of common shares at a specified price -conversion ratio = par value/conversion price, for example take $100 and conversion price is $25 then the investor would be entitled to 4 shares of common stock for every one share of preferred stock -sometimes the issuer will add a callable feature to this stock, to let the stock be called will depend on the relative price of the common stock common vs preferred stock - ✔✔common = have ownership in the company, greater potential for capital appreciation, typically has voting rights preferred stock= have ownership in the company, more likely to receive regular dividend payments, higher priority in the event of bankruptcy, issued with a specific dividend rate derivative securites - ✔✔investments that track the value of common stock and allow the investor to purchase the security at a specified price per share regardless of what price the stock it at. derivative securities - preemptive rights (rights offerings and subscription price) - ✔✔-preemptive rights = rights before the shares go public rights offering is available to some common stock holders, which occurs when a company intends to issue more stocks and they allow current shareholders to purchase some of the stock before it goes to the public -by participating in this offering their ownership in the company stays proportional, if they do not then their ownership in the company declines since there will be more shares -existing shareholders receive 1 right per share they own HOWEVER the number of rights required to buy one stock, the price at which the shares may be acquired, and the available period for exercising these rights will vary -typically the offer is only good for a couple of days AND the price is usually below the market price. PRESET/SPECIFIED PRICE = SUBSCRIPTION PRICE -investors who acquire these rights have two options 1) they can exercise them or 2) rights can be traded derivative securities - warrants - ✔✔like rights, warrants allow a common stock owner to be able to buy the stock at a specified price (subscription price) in the future -unlike stock rights, warrants typically have a maturity that is set for years in the future/some have no end -unlike stock rights, warrants subscription price is typically higher than the current market price of the stock -typically include warrants with new issues of stocks to add an incentive -the value arises when the stock's value increases beyond the warrant price bc then the investor could sell and make a profit rights vs warrants - ✔✔rights: issued to existing common stock holders, subscription price below current market value, maturity is short term (30-45 days) warrants: issued to purchasers of the issuers stocks or bonds, subscription price above the current market value, maturity is long term (years, not days) FINRA rule 2261 - disclosure of financial condition - ✔✔if customer requests, a member firm must make available their most recent balance sheet FINRA rule 2262 - disclosure of control relationship with issuer (2 situations in which a control relationship exists) - ✔✔brokerage firm that has a control relationship with an issuer must disclose that to a customer and must be presented before or at time of trade of that security 2 situations in which a control relationship exists: 1) member firm is a publically trade copmany 2) member firm is a subsidiary of a publically traded copmany SEC Rule 10b-18 - purchase of certain equity securities by the issuer (2 reasons why this is appropriate and 4 things SEC assumes for this to be valid) - ✔✔controls how an issuer or affiliates can purchase their own securities, since this can be done to increase the price of the security 2 reasons why it is appropriate to do so: 1) stock buyback plans 2) funding employee stock purchase plans -SEC assumes the buying of their own securities is valid if they do the following: 1) only one broker dealer is used to place bids/make purchases 2) purchases are not made during certain times in the day (can't be first part or last part) 3) the bid or purchase price is limited: the price can not be higher than the highest independent bid 4) the amount of stock purchased on a single day is limited, cannot exceed 25% of average trading volume for that security 3 reasons why corp would buy back their own stock - ✔✔1) so there are less outstanding shares 2) increase the market price of the security (rule 10b has rules around this) 3) buy back to give to employees in the form of stock option plans market cap = market capitalization - ✔✔# of outstanding shares * market value per share earnings per share - ✔✔increases when you repurchase a share since it is how much $ they made divided by the number of shares outstanding... so same profitability divdied by a smaller number of shares (since they were bought back) --> bigger earnings per share common stock owners have the right to... - ✔✔1) inspection of books (co. statements, etc) 2) right to vote on election board/authorized shares NOT ON DIVIDENDS 3) evidence of ownership (certificate usually in street name) 4) dividends (entitled but no guaranteed) 5) transfer of ownership (secondary market) restricted stock (investment letter/lockup agreement) - ✔✔received through private placement (whether gifted or bought) --> restrictions in place before they can be resold -lockup agreement basically means you are holding the security for a defined time period since you are not able to turn around and sell it right away (can drive price down if people can sell these with no rules) restricted vs control stock - ✔✔restricted: 6 month holding period, received through private placement or as compensation for senior exec control/affiliated stock: no min requirement holding period, registered stock, purchased in open market by officers, directors, (anyone owning 10% of more) **both must follow rule 144, and a control person can own both types of stock since they can acquire privately but also purchase on the market** rule 144 - ✔✔used when trying to sell restricted or control securities -once filed with SEC you are letting them know that you are going to sell... they give you a 90 day period for which you can sell the greater of 1% of oustanding shares or the average weekly trading volume over the last 4 weeks. purpose=limit market impact by limiting Q that can be sold -NOT required for shares with value under $50K or under 5k shares ADR =american depository receipt (2 types) - ✔✔-shares or foreign stock sold in the U.S. so investors can buy using US$ and get dividends in US$ 1) sponsored=issued in cooperation with foreign co and traded on US exchanges, co pays for sponsorship program by giving shares to US bank to convert 2) unsponsored=issued without involvement of foreign company, trades in OTC market, brokerage firms pays for ADT program bc they think they can make a commission off of these stocks preferred stock - ✔✔no voting rights, bought bc of dividends (paid before common holders), designed to provide returns similar to bonds, DIVIDENDS ARE PAID QUARTERLY types of common stock (5) - ✔✔1) blue chip 2) growth 3) income 4) defensive 5) cyclical types of preferred stock (5) - ✔✔1) non cumulative=no payment of back up dividends=no entitle to unpaid dividends 2) cumulative=investor is entitled to unpaid div. they must be paid to pref. before common can be paid at all, unless all are paid to pref then none go to common). IF NO divident pair to pref. holders OR only some was paid then zero will go to common holders unless full payout went to pref. first. 3) callable=company can buy back shares or stock, typically over par value ($100), since some pref. stock doesn't have a maturity if a company raised the money they needed then can minimize outstanding shares) 4) participating= can receive extra dividends if co. did well that year 5) convertible= can convert to common stock pref. stock cumulative vs non cumulative ex - ✔✔non cum 8% --> year 1=0, year 2=$2 cum 6% --> year 1=0, year 2=$2 *common stock owners earn no dividends for year 1 or 2 since pref. weren't paid the full amount what is payout in year 3 for each 1) non cum=8 2) cum= 16 (since they need to pay the full 6 for each of the previous years first) convertible preferred stock (conversion ratio & price of pref stock equations) - ✔✔less risky than common stock bc you still receive dividends and if common stock rises so does pref. stock -conversion ratio (how many shares of common stock would i receive per 1 pref stock you own)= par (usaully 100)/conversion price -price of pref. stock = market value common stock * conversion ratio ex: investor bought 4%, $100 par convertible pref stock at $110, stock is convertible at $10 and common stock price has risen to $12.... sooo if you convert if you will get 10 shares of common stock * 12 =$120, if you keep it in pref. you only have a value of $110.... premtive rights (rights offering) 2 different types - ✔✔=type of derivative since value is derived from common stock value shareholders right to maintain % ownership in the company, no dilution... this is distributed through a rights offering -rights offering=issue more shares at discounted (shareholders exercise right at price below market value) rate to EXISTING shareholders, usually one right per share owned. ONLY if you have common stock shares do you receive any rights. this discounted price is am immediate value to shareholders since -often will take x amount of rights to be able to utilize them (think of this as an expiring coupon) - if you use rights your ownership % stas the same 1) short term=must be exercise within 4-6 weeks 2) tradeable=trade on same exchange, you can take part in the rights offering or trade your rights on the market warrants - ✔✔-considered a "sweetener" type of derivative provided when you buy original stock or bond in the market -gives you right to buy shares above market value and for long term/perpetual -may be detached and traded separately (underlying security can be separated from the warrant itself) two derivative types - ✔✔1) preemtive right 2) warrants rights vs warrants (stock) - ✔✔rights=issued to sharedholder, short term, below market price, immediate discount/instrinsic value warrants= attached to new issue, Long term, initiial premium, above market value SEC rule 10b-18 - ✔✔provides rules surrounding repurchasing of company stock... to prevent issuers from manipulating the stock price... it is okay if the following are true 1) only one broker dealer used 2) cant be made early or late in the day 3) price is restricted 4) amount (Q) is limited debt isntruments (bonds) general info - ✔✔-investor becomes creditor =meaning they are owed money -you are paid interest semi annually, calculate annual rate and then divide by 2 -priority over stock owners in terms of payout if company goes bankrupt (increase safety of investment) also bc they are a consistent source of income (since i-rates must be paid unlike dividends which are optional/up to board of directors par value - ✔✔=$1000= principal=what issuer will pay investor at maturity along with last interest payment. If the investor bought premium or discount bond, they still only get the par value back. also what i-rate is based on. coupon rate=interest rate=nominal yield (3 points) - ✔✔1) fixed % of par 2) set when bond is issued 3) stated annually but paid semi annually ex: 10% paid annually per par value of 1000=50 per 6 months or 100 per year debenture (bond) - ✔✔unsecured corporate debt=company not pledging asset backing up the bond such as a specific building/capital but simply full faith/earnings ability of the corp term vs serial maturities and level debt service (bonds) - ✔✔term=entire offering matures at one date serial=bond offering matures over serveral years=several maturity dates. as time goes on, more principal is paid as less i-rates are paid -level debt service= set up so i-rate and principal are set up to receive equal payments over the life of the offering (equal annual payments) debt service - ✔✔payment of i-rate/principal zero coupon bond (trades flat, accreted) (2 reasons why this is beneficial) - ✔✔does not pay annual interest, instead you pay a discount on the bond price and at maturity is worth face value, so the value you gain at maturity is considered your interest payment (dif between discount rate and par paid at maturity) (+) not subject to reinvestment risk (risk that you may not be able to reinvest coupons received at same rate) since interested is not paid annually but only technically one time at the end (+) locked in return bc you know you get par value at maturity, nothing happens in between -trades flat=no accrued i-rate when sold (typically with bonds you pay price of bond and accrued interest rate that previous owner is owed) -accreted=adjustment cost basis which is accredeted up to par value, you pay taxes on this why bond prices fluctuate from par (2) - ✔✔1) i rate risk: inverse relationship between i-rate and price of bond. when i-rate increases other bonds are issued with higher rates of return thus already issued bonds have to be discounted to be copmetitive, must be discounted enough to match increase in irate. since bond was issued, if i-rates go up price of bond will go down to make it more attractive/comparable 2) credit risk: risk that company won't be able to pay back investors... we use credit rating agencies to tell us this.. more risky the company usually higher the yield/rate of return to compensate. return=risk free rate + premium for taking risk (general rule of thumb) -lowest risk=fed gov/treasury (will have lower yield) can be either discount or premium bond quoted at 94.5... what is the price, bonds price is stated as % of par - ✔✔means you are paying 945, since you take 94.5*10+945 (since it is measured against par which is 1000, you take 100*10=1000) bond rating agencies/credit rating=how investors measure/are sure they will get their money back -who pays for these ratings -what are the concerns of the raters? - ✔✔S&P and Fitch use all caps and +/- system Moody's use Aaa and 1,2,3 AAA, AA, A, BBB =investment grade BB, B....=speculative grade=junk bond=high yield bonds -the issuers pay bc if bond wasn't rated then it would be hard to market to investors/they couldn;t determine risk -the risk of default is their main concern, they look at liklihood they can be paid back corp/muni bonds prices can be expressed in terms of points and trade in increments of.... - ✔✔- trade in increments of 1/8, 1/8=.125 * 10 = 1.25 = 1/8 of 1% of par sooo .. 93 5/8 = 93.625 * 10 = trades at 936.25 93 1/8 = 93.125 * 10 = trades at 931.25 rate: 5 1/4, 92 1/2 Decimal: 5.25, 92.5 $ value: 52.5, 925 - 1 point=1% of bond par value or = to $10 - government security pricing (treasury market) trades at. ___ fraction of a point - ✔✔1/32, bc this allows for smaller price movements, since this is a very liquid market quote: 87.24, fract = 87 24/32, dec=87.75 (24/32=.75), dollar= 877.5 treasury bill quoted by ____ not ____ - ✔✔-quoted by yield NOT dollar price -higher yield bid represents lower price but ask's lower yield represents higher price types of bond yields (3) - ✔✔1) nominal yield:coupon rate, fixed, does not change. 7% coupon = $70 per year (.07*1000) or 35$ semi annually 2) current yield: relates annual interest to price of bond.... = annual interest/current market price of bond 3) yield to maturity: overall rate of return if held to maturity. assumes 1) reinvestment of coupon annually and 2) takes into consideration loss/gain @ maturity depending on if you paid discount or premium for bond if you paid $900 you will make $100. YTM=overall rate of return=Basis=most IMPORTANT of all yields -if bond is trading at par, ALL THREE WILL BE EQUAL -if trading above par meaning i-rates went down, NY doesn't change, CY is smaller since you are dividing by a larger denominator, and YTM is even smaller since it takes into consideration losses at maturity for paying premium -if trading below par=meaning i-rates went up. NY does not change, CY will be higher since denominator is smaller, and YTM is even higher since takes into account gains at maturity nominal and current do not give you overall return on investment, only YTM does basis point= - ✔✔.01%, so there are 100 basis points in 1%, so yield changes are referred to in these small increments, 6--> 6.25 yield = 25 basis points (helpful to think of this as .06-->.0625, full percentage would be to .07, only went quarter of the way or quarter of 1% so 25 basis points) why pay premium for a bond? - ✔✔bc i-rates offered by purchasing the bond are better than the market can offer/other bonds are being issued at . premium is high enough price to match/be competitive with today's market rates of lower interest YTM=overall rate of return=Basis=most IMPORTANT of all yields, when people say bond it trading to yield they are referring to this - ✔✔ bond current yield DOES NOT EQUAL basis - ✔✔ retiring debts prior to maturity (2, call and put provisions) - ✔✔1) call provision= issuer can call back bonds prior to maturity. used when i-rates fall since they can reissue and have less irate obligation. similar to refinancing, you can pay lower rate so they call in bonds and reissue at lower irate. can be 1) whole or partial/lottery call (random lot is chosen) -call premium= amount above par issuer will pay to call in bonds since investor will usually receive a premium since the call price is a premium -call protection=period of time when bonds cannot be called -why buy these? higher yield = comp for having this feature also call protection and call premium offer protection 2) put provision: bondholder can put it back to issuer... do it if i-rates go up bc they can get better return elsewhere, companies will issue these bc investors will accept lower yield bc of it tender - ✔✔issuer offers to buy back bonds in secondary market convertible bond (conversion parity, arbitrage opportunity) - ✔✔investor can convert bond into predetermined number of shares of common stock -investors have safety of receiving principal back at maturity but also could potentially take advantage of stock growth -accept lower yield for this feature -conversion price =set at bond issuance conversion ratio=# shares investor will receive at conversion= par value of bond/ conversion price -conversion parity: price of convertible bond=value of shares you can turn them into -arbitrage opportunity: locked in profit=taking advantage of price difference where it shouldn't exist you can pay discount price on bond and convert to higher priced stock then sell it ex: 1000/40=25 * 45 (market price of stock)=1125 (also equals parity price of bond) treasury securities (2 types, marketable vs non marketable) - ✔✔do not need to be regsitered, are considered the safest fixed income investment, backed in full faith by u.s gov, other ratings are determined by this. 1) marketable (WHAT WE FOCUS ON): negotiable=traded in secondary market=treasury bills, notes, bonds (these are most popular 3), trasuring separte trading of registered interest and principals securities (T-STRIPS), treasurng inflation protected securites (TIPS), and treasury cash management bills (CMBs) 2) non marketable: non negotiable = purchased and redeemed back to the u.s govt treasury notes vs treasury bonds - ✔✔both pay irates semi annually, both with min denominations of $100 but treasury notes typically have maturities of 2-10 years, while t bonds have maturity of more than 10 years. ** interest earned is taxed at fed level but not state and local - main reason to buy =safety TIPS (Treasury Inflation Protected Securities) - ✔✔major concern re holding asset for long time is that the prucahsing power upon return of your money will not go as far... people buy TIPS bc although intaerest rates are fixed the principal paid back varies based on CPI, if delfation occurs it wil decrease but NOT below 1000. -5, 10, 30 year terms only -taxed at fed level but not state or local level ex: 4% coupon, original price=1000, but inflatino rose principal to 1030... how much interest is next payment worth.. well interest rate is fixed but you take 4% of the 1030... sooo next payment = 20.6$ or 41.2 annualy) interset bearing treasury bonds - ✔✔t notes, t bonds, and TIPS treasury bills=discount securities=non interest bearing securites (ask yield) - ✔✔short term maturities that mature in 1 year or less , can buy one with 4 week, 13 week, 26 or 52 week maturity. -similar to zero coupon bonds, these do not pay annual interest instead since they are always sold at a discount the difference between that purchase price and the par value paid back at maturity represents the interest ** quoted on discounted yield basis NOT as % of par value.. the yield represents the % discount from the face value of the security **** but since price and yield are inverse.... the numerically higher number (yield) will represent a lower price. -ask yield=coupon rate on other bonds to compare the yield to the t-bill. ask yield will always look bigger since it takes into account that interest is based on what is invested not on the face amount stripped securities (3) - ✔✔=when security is stripped of interest payments and final principal payments and then repackaging and selling as zero coupon bonds. ... though these repackaged securities were not issued by the treasury, their cash flowers were secure since they were a direct obligation of the U.S. govt----> led to issuance of 1) TR (treasury receipts) which are backed by treasury securities that are owned by the issuing broker dealer NOT directly backed by u.s treasury 2) T-STRIPS=sep trading of registered int. and principal securities program= dealers can buy t-bonds, t notes and separately sell coupon adn principal payments as zero coupon (interest=dif between purchase price and face value paid at maturity) after requesting this through fed reserve bank. backed by us treasury quoted on yield basis 3) CMBs=cash management bills=issued at discount but mature at face value, very short (1 day sometimes) used to smooth out cash flow of treasury U.s treasury auctions - primary market (competitive vs non competitive tenders) - ✔✔securities firms compete by bidding on these auctions=competetive tenders since they specify price and yield firm is willing ti buy them at (similar to limit orders, may not be filled). -non competitive tenders: do not specify a price and are guaranteed to be ordered. these are filled first however bidder must accept yield and price determined by the auction -all winners pay lowest price of accepted competitive tenders=dutch auction agency securities (bonds) (2) - ✔✔-issued by gov agencies (backed in full faith by u.s. govt) and government sponsored enterprises, not direct oblgiation of u.s. government but are considered very safe and tend to have a bit higher yield than u.s. treasuries (logic is that since u.s. gov created these they will not let them default) -quoted in 1/32 of a point 1) fed agencies: direct extensions of U.s. gov=backed in full faith includes govt national mortgage association (GNMA) 2) GSE: publically chartered by privatey ownded allow for creation of low cost loans for certain segments of the population. issues securiteis trhough selling group of dealers proceeds go to bank (ex= fed farm credit banks/fed home loan banks) -FFCB: provide funds to banks that make ag loans to farmers -FHLB: provide liquidity to savings and loan inst. that need extra funds to meet demand for money. U.S treasury bond (3 main types, general info, why are they safe) - ✔✔issued by the fed government and therefore backed by the full credit/faith of US govt= effectively no credit risk, and highly liquid -they are safe bc, 1) highly liquid, ability to convert to cash quickly and cheaply, 2) no risk -interest is only taxed at the federal level not at state and local level types: all are marektable in secondary market type 1: t bills type 2: t notes type 3: t bonds U.S Treasury - t bills - ✔✔-issued at a discount and mature at face value, effectively are zero discount bonds -up to 1 year maturity, offered at $100 or multiples of this, book entry form, interest rate=par value paid at maturity - discount -weekly auction usually monday or tuesaday and settles on thursday -quoted on a discounted yield basis meaning for ex (bid is 2.94% and ask is 2.90%) think of this as % discount, so the 2.94% though is a higher numeric value represents a larger discount off of face value and therefore a lower price whereas the 2.90% is a lower number but is less of a discount and therefore higher price (inverse relationship between discount or price and yield) U.S. Treasury - t notes: - ✔✔interest bearing paid semi annually 2-10 year maturity, traded at $100 or multiples of, book entry form, periodic auctions -quotes at % of par in points and 1/32 of a points U.S. Treasury - t-bonds - ✔✔interest bearing, paid semi annually, book entry, periodic auctions, $100 or multiples of, maturity = 10 + years -accrued interest is paid by taking actual number of days since last payment/365 as opposed to other methods that assume 30 days in each month -quotes at % of par in points and 1/32 of a points U.S Treasuries types quick comparison - ✔✔1) t bill: up to 1 year maturity, book entry, $100 or multiples of, weekly auction, pays discount and thus similar to zero coupon bond 2) t notes = 2-10 year maturity, book entry, 100$ of multiples of, periodic auction, pays interest semi annually, quote at % of par value in points and in 1/32 of a point 3) t bonds: 10+ maturity, $100 or multiples of, book entry, semi annual, periodic auctions, quotes at % of par in points and 1/32 of a points other types of U.S. Treasuries (2) - ✔✔1) TIP: teasury inflation protected 2) T-STRIP: separate trading registration interest principal securites U.S. Treasury - TIP - ✔✔treasury inflation protected, since high inflation hurts bonds especially since an investor is holding onto them for a long period of time, this can change the purchasing power but specifically inflation hurts bonds for 2 reasons 1) purchasing power decreasing, if you i-rate is 4% but interest is 5% you are not keeping up with inflation= negative real rate of return 2) increasing inflation --> fed usually tightens --> increase i-rate--> decrease in bond price *** so the good thing about TIPS is that they have a fixed/stated coupon rate but the principal is adjusted based on the rate of inflation or CPI -at maturity you get the adjusted prinicpal not par and if there is deflation it is adjusted downward but never below $1000 so you always get par value at maturity so you get the greater of the adjusted value or par value - so for example say due to inflation the principal rises from $1000 to $1030 on a fixed 4% rate, then your annual interest is going from $40 to 41.2 U.S. Treasury - t-strip - ✔✔treasury, separate trading registartion interest princiapl securities. these are not issued by the federal government, but created in the secondary market. a broker dealer or bank take the treasury note and separate each interest and principal payment as an individual security and if you buy it you are only entitled to that one payment --> creation of many zero coupon instruments from only 1 t bond or 1 note = not interest bearing -issued at discount and mature at face value -issued with variety of maturities **zero coupon treasury** bidding at U.S treasury auction(2 types) - ✔✔1)competitive bids: placed by large financial inst. who state the PRICE and Q they are willing to pay for it, most broker dealers HAVE to bid this way 2) non competitive: placed by public and some broker dealers, only indicate Q they want to buy, these bids are filled 1st, bidder pays lowest price of highest yield of accepted competitive bids ex. 100,000,000 bonds offered at 4.5% coupon 1) 20 mil non comp bid (set aside, filled first, just not sure what price) 2) 40 mil @ 4.9% 3) 40 mil at 5% 4) 30 mil @5.1% so what happens: non comp is filled first, so left with 80 mil. then 40 mil at 4.9% (lower yield=highest price) and then 4 mil at 5% and 30 mil is not filled. *** everyone pays the same yield and that is the highest bidded yield or lowest price that completes the auction of those bids that won, so all pay in this case the 5%) summary U.S treasuries - ✔✔10+ maturity = t bill taxed at federal level: t bill, note, bond sold at weekly auction: t bill discounted security: T-bill, STRIP 2-10 yr maturity: t notes book entry issuance: t bill, note, bond i-reate paid semi annually: t bond, t note T/F about auction - ✔✔t: non com bids are filled first t: comp bids determine price f: non comp bids submit Q and YIELD t: lowest price/highest yield clears the auction agency securities (2 types) - ✔✔**like treasuries these are exempt from state and fed SEC registration -not direct obligation of the U.S. government, but the idea is that since they created these agencies they won't let them fail=idea is that they are veyr lower risk -quoted at % of par in 1/32 of a point -accrued interest based on assumption there are 30 days in each month not ACTUALy # days like corp/muni bonds -book entry types: 1) GSE (government sponsored enterprise)/non mortgage backed: farming loans specifically, fed farm credit bank=loans to farmers, subject to fed but not state/local taxes 2) mortgage backed agency securities - mortgage backed (pass through cert, what are the risks) - ✔✔ginnie mae (GNMA)=government guarnateed, fannie mae (FNMA), freddie mac (FHLMC) (both are backed by the agency ONLY) -they issue pass through certificates which are: when a group of mortgages with similar fixed rates are pooled together and then sell the interest in this pool to investors -each mortgage payment made by homeowners is made up of interest and principal, which is paid to bank servicing the loan who keeps a fee for this, the rest of put into the pool so these payments are being passed through to investors (int/principal) -the interest portion is FULLY TAXED at state, local, fed level -risk= prepayment risk=get payments sooner than you thought. homeowners will often times pay off a mortgage faster bc they are moving or are refinancing bc of i-rate decreases (for refinancing specifically). these prepayments usually speed up when i-rates go down, so you get your money faster but will reinvest at lower rate -so why buy them? higher yield than treasury=yield pickup, have good credit quality with higher yields than treasury municipal bonds (2 types) and their issuers (3 types) - ✔✔issued by 1) states, political subdivisions, town, counties 2) public agencies for transport, water, etc 3) territories = puerto rico, guam, U.S virgin islands, --> these are TRIPLE TAX FREE two types: 1) general obligation 2) revenue bonds municipal bonds - general obligation (ad valorem tax) - ✔✔-issued by state, city, town, schools, for GENERAL PURPOSE for wide array of needs, backed BY FULL FAITH CREDIT AND TAX abilities of the municipalities -the sources of debt service=full faith tax/credit opportunties of muni (-sales/income taxes at state level) and at local level of government they collect money with ad valorem tax=based on assessed value (such as property taxes) -requires voter approval -higher credit rating thus lower yield -lower yield -subject to debt limitation = max debt muni can take on (ONLY applicable here bc it is backed by taxes) municipal bonds - revenue bonds - ✔✔=self supporting debt bc it is backed by the revenue produced by the facility (pay toll to use road or bridge for ex) -NOT backed by full faith credit/taxing abilities but instead by specific revenue producing facilities -airports, sports stadium (payment for entrance/user fees) -if this revenue is not enough then --> default -more risk than GO -DO not require voter approval since not backed by taxes *** usually will have feasibility study which is conducted to determine the costs/revenue capacities of a project*** -higher yield thus more risk -NOT subject to debt limitation ***many different types of these, see next card** types of revenue bonds (rev bonds=type of muni bond) (12) - ✔✔anything not backed by full faith/credit faith of the municipality 1) transportation revenue: used of toll/user fees 2) special tax: backed by one specific tax, ex=gas or tobacco or excise tax on alcohol 3) special assessment: backed by one time fee charged to people who benefit from a project (side walk or sewer system) they can charge assessment fee on benefiting properties 4) double barreled: backed by 2 sources of revenue provided by the facility. if revenue isn't sufficient, it is also general obligation of the municpality's full faith in tax/credit 5) moral obligation: if project revenue is insufficient, the state legislature is morally, NOT legally obligated to cover short fall (not double barrelled, but will vote to disburse funds if needed 6) private activity: bond where 10 or more % of proceeds will benefit a private entity (ex. sports team) ex) = industrial development bond: issued by municipality to build facility for corporation to use it, the muni will lease the facility to the corporation and it is the lease payments that pledge to back the bonds 7) house revenue bonds: bonds issued by state/local housing finance agencies in an effort to help fund single family or multi family housing for normal to low income families 8) dormitory bonds: issued to build housing for students at public universities, repaid by tuition 9) health care revenue bonds: used to construct non profit hospitals and health care facilities 10) utility revenue bonds: to finance gas, water, sewer, and electric power systemed onwed by government unit (backed by issuer fees charged to customers) 11) lease rental bonds: one muni leasing a facility to another (state building authority may issue bond to build dorm and then the authority will lease the dorm to the college ) 12) taxable muni bonds: may not always be able to issue tax free bonds.. this may be the case for projects that don't offer enough benefit for the general public (sports facility) municipal notes (6 types) - ✔✔shorter term than bonds, , year or less usually, issued to assist with cash flow needs. tax free at fed level -issued in anticpation of future event that will provide money to pay off debt 1) tax anticipation notes (TAN): issued in anticipation of future tax receipts they will collect 2) revenue anticipation notes (RAN): issued in anticipation of future revenue they will receive from state or fed subsidies 3) tax and revenue anticipation notes: when TANS and RANS are issued together 4) bond anticipation notes (BAN): issued in future anticipation of future long term bond they will issue 5) grant anticipation notes (GAN): issued in anticipation of fed grant to muni 6) construction anticipation noten (CLNS): issued by municipalities to provide funds for the construction of a project that will eventually be funded by bond issue. auction rate securities (muni security)=ARS - ✔✔- long term holdings with interest they pay are reset at frequent intervals through auctions -2 types, one that is a bond with 20-30 yr maturity and 2) preferred shares with cash divident. VRDO - variable rate demand obligations - ✔✔long term, marketed as short term investment -interest rate is adjusted at specified intervals (daily, weekly, monthly) and in many cases there is a put option (to give back to issuer) on the date that a new rate is established ratings for municipal notes - ✔✔S&P: SP 1+, SP 1, SP2 = invesment grade, SP# = speculative grade or junk bond or high yield Moodys: MIG 1, MIG 2, MIG 3 (literally stands for moodys investment grade) =investment grade, SG=speculative grade/junk bond municipal bond underwriting (4 parts, 1 role of underwriter and underwriting process/how underwriter is selcted, 2 types and 4) syndicate offering) - ✔✔1) role of underwriter: municipalities use competitive/negotiated process and can select investment bankers to help. Basically an underwritier acts as a link between the issuer and investor. they assist the issuer in pricing/structure of inancing/ and preparing the disclosure or official statement (though not legally required for munis since they are exempt from securities 1933 act) but many issue these to help market to customers NOT THE SAME as a prospectus 2/3) underwriting process/how underwriter is selected: - negotiated method: state/city selects investment bankers to work with and together negotiate details and guidelines between both parties - competitive methods: issuer has underwriters submit sealed bids and best bid = lowest cost over life of the bond, wins. basically each underwriters submits a bit that states we will pay you X$ for bonds if you issue at ___ rate. to begin this process, the issuer will publish a notice of sale. 4) forming syndicate: a syndicate is a group of brokers dealers that get together to underwrite an issue. why do they do this? 1) share in liability=spread out risk 2) a lot of firms try to sell the deal=more firms are able to sell the bonds syndicate agreement/letter: agreement between broker dealers re the size, type of offering, split of unsold bonds, and % required for each particpant before entering into one of these syndicate offerings interest income on muni bonds=exempt from fed taxes and investors accept lower yield bc of this and if bought in your resident state, are often exempt from state and local taxes as well and thus are attractive to those in high tax brackets - ✔✔ Corporate bonds (+/- for investors and corps) - ✔✔bonds issued by corporations. + for corp= corp doesn't give up any ownership by issuing bonds - for corp: corp has to pay interest and principal + for investor: less risk than buying company stock, since you are the 1st one paid - for investor: doesn't offer same potential for capital appreciation/no ownership/doesn't share in company growth potential through dividends two major types of corp bond classifications (secure vs unsecure) - ✔✔the debt issued is backed by the issuers full faith/credit but... 1) secure: ADDITIONALLY, specific assets back the bonds and thus bondholders have a claim against the specific asset=add to the creditworthiness of the bond. ex=mortgage bonds, equipment trust certificates, collateral trust bond 2) unsecure=debenture= no specific asset that the bondholder has a lein against=you are a general creditor = backed by full fait/credit earning of corp only. company can issue depentures after regulate depentures and those are called subordinated debentures which have JUNIOR claim if the co. defaults then the claims are subordinate to those of regular bondholders types of secure corp bonds (3 types) - ✔✔rolling stock=backed by something of value 1) mortgage bonds: bondholders have lein on property as additional security 2) equipment trust certificate: secured by specific peice of equipment owned by the company, trustee has title to that equipment which can be sold or released (plane, train, trucks=collateral) 3) collateral trust bond=backed by securities of another company/entity (many times is the parent company) in this case the collateral is securities order of payout for liquidation proceedings - ✔✔taxes payable to IRS/unpaid wages --> secured creditors --> general/unsecure creditors --> subordinated creditors --> preferred stockholders --> common stockholders other types of corp bonds (4 types) - ✔✔1) income bonds: issued by company coming out of bankruptcy = reorganization. the interest is payable only if income is sufficient enough. Therefore they promise to pay back interest but only interest if there is enough income to do so 2) euro dollar: issued outside US but pay interest/principal in U.S $. avoid SEC registration 3) yankee bonds: allow foreign entities to sell in US=must be registered in US 4) eurobonds= bonds sold in country that is different than currency paying i-rate/principal (eurodollar is an example) so the issuer/currency/market may all be different money market instruments (5 types) - ✔✔short term debt, year or less, considered very creditworthy and very liquid, good place to park money for short term who seek safety but intend to have a large purchase pending/in the near future 1) t-bills: 2) bankers acceptance: created by foreign trade, import/export 3) commercial paper: unsecured obligation of corp, max maturity=270 days to avoid registration requirements 4) negotiatble certificate of deposits: unsecured bank debt (100,000 $ minimum). negotiable=can trade in secondary market 5) repurchase agreements (repos): dealer selling to another dealer with agreement to repurchase at a higher price the different = your interest) this involves 2 transactions return on equity investments (2 main ways) and 4 important dividend dates - ✔✔1) dividends 2) capital appreciation 1) declaration date: BOD says we will pay a divdident of $x at some future date, this is an announcement 2) payment date: set by BOD, date dividend is distributed 3) record date: set by BOD, determines for ownership purposes, to receive dividend, you must be an owner on this date (ownership occurs 2 days after payment=t+2 settlement, so settlement day). for buyer to receive dividends, transaction must settle on or before record date. 4) ex-dividend date: NOT set by BOD but is function of settlement date. this literally means without dividend. = when stock began to sell without the dividend = one business day before record date, on this day the price of the stock is discounted by the value of the dividend ** cash transactions/cash trades=settlement is same day=you become owner same day** order of events for cash dividends (the dates) - ✔✔declaration --> ex divident --> record --> payout - ex: if i buy stock on the 11th, it settles on the 13th. but they open the ownership books on the 12th (record date) you wont receive a dividend, last day you could have bought it was the 10th so you were owner on record date. if buyer does not get dividend the seller is entitled due bill - ✔✔a check that the seller gives to the buyer as a transfer payment along with the delivery of the securities that were not issued on the correct date. the buyer was entitled to a dividend that the seller received instead due to back office issues, so seller incorrectly received it and must pay back to buyer. seller incorrectly remains stock owner/gets div. - this due bill accompanies delivery of stock **happens when SECURITIES are not delivered by record date** dividend dates ex - ✔✔t/f declare div on june 1, payable on jul 25, to owners on jul 12 1) stock trades ex div on jul 11 - T 2) seller is entiteld to divident on a trade executed on july 10 - F (seller is not, BUYER is) 3) if securities aren't delivered by jul 12 a due bill will accompany the securities - T 4) cash trade can be done as late as jul 25 to receive dividend - F you wouldn;t be owner by the 12th if this was teh case stock dividends (impact and tax abilities) - ✔✔NOT cash dividends, this is when you receive extra shares of stock not cash. what is the impact: no gain/loss, no change in equity, same % ownership as before since you receive more shares, the price is adjusted accordingly so the overall real value is the same as before. -no tax ability for this since cost basis is adjusted and therefore there is no additional compensation that occurs such as income/capital gains. simply number of shares increase ex: investor owns 100 shares of co. at $60 per share. the copany declares 10% stock dividend thus... increase in 10 shares so before the dividend you had 100* 60 = 6000$ market value and after the dividend you had 110 shares but the price per share was 54.54 so --> $6000. what you can do is just divide the b4 value by the number of shares after the stock dividend to find the price. **no change in value owned unless the price then goes back up to $60** stock dividends usually paid quarterly bond i payments semi annually/every 6 months - ✔✔ calculating current yield for EQUITIES=dividend yield - ✔✔=annual income (as a dollar value)/current market price = annual income from dividends compared to stocks current market price NOT original market price, this is presented as a % ex. stocks trading at $40 per share has paid quarterly divident of $.30, the current yield is... (.3*4)/40= 1.2/40=3.00% return on stocks T/F - ✔✔1) stock dividends change the overall value of a portfolio - F 2) cost basis of shares is reduced after a stock divident - T 3) stock dividend is taxable income - F 4) if a cash dividend remains the same the CY on the stock will increase after the stock dividend is paid. T bc with stock dividend the price goes down... so you are dividing the annual dividend by a smaller number. also we know that it is the same amount of dividends but there are more shares return on bond investments (4 main types of yields) - ✔✔1) NY - nominal yield = coupon rate=annual return 2) CT - current yield = annual interest payments ($ value)/current market price NOT purchase price 3) YTM- yield to maturity=basis=total yield: Total yield includes the following: semiannual interest rate payments, interested earned from reinvesting interest or coupon and the gain or loss you receive at maturity depending on if you bought the bond at a premium or discount 4) YTC- yield to call= an investors yield if the bond is called at par. only relevant is two things are true, 1) the bond is callable and 2) entire issue is callable, whole call -for callable bonds, you always quote the LOWER of the YTM and YTC=yield to worst -if trading at par, all 4 yields are equal, if trading at discount YTC is highest bc it is always better to make money quicker... and not wait 30 years till maturity so ytmytc yield to call has the lowest yield in this case (use ytc since lower) at discount: ny--> cy --> ytm --> ytc (highest) at premium: ny--> cy -->> ytm --> ytc (lowest) ex: yield: 8, 9, 6.5% bond price: 1000, 1125, 812.5 calculate CY: 80/1000=.08 or 8%, 90/1125=8%, 65/812.5=8% if we change the price of bond we refer to this as___ if we change the yield of a bond we refer to this as ____ - ✔✔points basis points there are 100 basis points in 1%, so they are 1/100 of 1% instead of saying trading at 4.6% ytm many say trading at 4.6 basis meaning trading at at price that is equal to ytm of 4.6 bond yield fills in the blanks - ✔✔1) bonds ny is = _____ 2) to calcluate bonds CY, an investor must use its ______ int. payments dollar value 3) to calc bonds CY, the ____ of the bond is used not the investors _______ 4) a bonds ytm is = _____ or ______ 5) 1.2% is = _____ basis points 6) if interest rates increase, bond yields _____ while bond prices _____ 1) coupon rate 2) annual interest 3) current market price, purchase price 4) basis or total yield 5) 120 6) increase, decrease price vs yield ex - ✔✔ytm=7.75% price: 102 coupon: ____ (8, 7.75, or 7.65) what we know is that we are looking for the NY, which is the fixed coupon rate. we also know that this is trading at a premium so the interest rates are down, and the order is as follows, NY = highest, then CY, and YTM is the lowest. so what is greater than 7.75 as an option? 8. CY: 8.45 YTM: 8.25 price= ____ (98.5, 100, 103 7/8) we know that this is not trading at par. we know that the current yield is greater than the ytm, so we know that this is trading at a premium. so the asnwer has to be 103 7/8. coupon=6 price= 95.5 ytm= ____ (5.85, 6, 6.25, or 6.47) what we know is this is this is trading at a discount. we also can calucate the CY = 60/95.5=6.628 * 10 = 6.28 or 60/955=.0628*100=6.28. given this is trading at a discount, the ytm is the highest yield so has to be higher than 6.28 so thus 6.47 is answer. cost basis vs sale proceeds - ✔✔cost basis: price of ownership=total paid to acquire ownership INCLUDING commissions paid/other fees sale proceeds: amount received LESS commissions capital gains vs capital losses (short vs long term) and (realized vs unrealized gains) - ✔✔based on trade date to trade date, it is the result of sale or redemption of an asset if the proceeds exceed the basis/what was paid. -if sell at higher price than what you bought at = capital gains - short term/long term are defined by the IRS a) long term = you held the position for more than 1 year, taxed at a max of 20% b) short term=you held it for less than one year. taxed at ordinary rates usually you make money on longer term basis since taxes are lower especially if you are in one of the top tax brackets. capital losses: sell asset at lower price than what you bought it at, same LT and ST definitions as capital gains unrealized gains= appreciation=not taxed=you own the securities and it's now trading at a higher price than what you bought it at but you havent sold the security, once you do it becomes realized gains return of capital - ✔✔getting your OWN money back=not taxable, doesn't occur on a lot of investments, but it is when the investor receives some or the original investment back t/f cost basis and capital events - ✔✔1) cost basis is = to amount paid for a security minus commission, F 2) sale of security held for more than 1 year results in long term capital gain and loss, T 3) holding period of a security is measured from trade date to trade date, T 4) any amount of original investment received by an investor is considered return on capital, T total return (equation) - ✔✔applies to stock AND bond investments -all cash flows (cash dividends, interest, etc) PLUS any appreciation or MINUS any depreciation in value - this doesnt reference a time period, it equals = (end value-beginning value) + investment income (TOTAL PAID OVER TIME NOT per yr/beginning value) - ex: investor bought stock for $25/share and received $5 in income since the start. stock is now trading at 30. total return(expressed in %)=(30-25)+5/25= 10/25=40% you don't have the actual total return on an asset until you sell it but you can calculate it theoretically measuring investment return (3 ways) - ✔✔1) real rate/inflation adjusted= rate of return minus inflation rate 2) risk adjusted return: rate of return minus risk free return 3) risk free return: rate of return found on a U.S. treasury bill since risk is considered to be very very low ex. 6% rate of return while inflation is 1.5% and t bills are yielding at 2% real return=6-1.5=4.5 risk adjusted=6-2=4 averages/indexes (narrow vs broad based) - ✔✔how we talk about how someone's portfolio is looking -investment returns are often compared against a benchmark of a group of securities -narrows based indexes: follows a specific sector (not concerned with the number of stocks) -broad based: follows a general market like S&P and Dow Jones (also not concerned with the number of stocks) S&P 500 (what is composition) - ✔✔most widely followed=most compared to this benchmark -400 industrial co -20 transportation -40 utility -40 financial dow jones (3 dif averages, which is the most widely followed) - ✔✔broken into 3 averages -broad sector not many stocks -smallest index -dow jones industrial average=30 stocks (most widely quoted of the three and it the most popular stocks, and is what people reference when asking how the market looks) -dow jones transportation= 20 stocks - dow jones utility= 15 stocks equity indexes (4) - ✔✔wilshire: largest index of 5000 stocks russell 2000=focus on small cap stocks (small company) nasdaq composite=all nasdaq listed securities nasdaq 100=largest 100 companies on nasdaq bond indexes (1) - ✔✔barclays capital tracking performance - ✔✔-like grades, your portfolio is looking at how you measure up to your peers -measure porfolio against benchmark, for example if you have a large cap portfolio you may be measuring/comparing to S&P, so if S&P is up 10% and you are up 15% you are beating the benchmark per say investment companies, investment company act of 1940 (established 3 types of investment companies) - ✔✔corporation or trust that invests the pooled funds of investors in diversified portfolios -act of 1940: prebuilt portfolios mainly for diversitification and established 3 tyeps of investment companies 1) face amount certificate company 2) unit investment trusts 3) management company: subset of which is a mutual fund investors give money to --> investment copmanies---> give money to the portfolio main breakdown of mutual fund (2, open vs closed) a type of management company which is a type of investment company - ✔✔open v closed refer to the capitalization of funds 1) open end: issued and redeemed at 4:00 value, these are not traded. ongoing $ raising, more and more money is taken in=continue to issue new shares so the investment pool/capital to invest is always increasing. can ONLY issue common stock to raise money, shares are ALWAYS new issues=will always come with a prosectus regardless of how old the fund is, since it is coming directly from the issue=always in primary market **shares sold at NAV+sales charge *sponsor stands ready to redeemd your shares or ell you new ones at all times *can't buy on margin and can't buy short since new issue 2) closed end: trade throughout the day, one time money raise=fixed amount of capital, can raise money through issuance of preferred, common or debt securities, shares trade in secondary market= no prospectus required **NAV is less important for closed ended funds since supply and demand really determine it, they trade throughout the day at a discount or premium to NAV can drift from this due to supply and demand *once initial issuance is over, you must sell ot other investor to redeem it (secondary market) *can buy on margin/credit, can buy short as well *trades like a stock, up and down benefits of mutual fund - ✔✔-investors buy into a portfolio that is professionaly managed, -very liquid -diversified -convenience and cost--> the best bang for your money, for low cost you can buy into something packaged that is diversified which would cost a LOT of money to do by just buying stocks alone -exchanges at NAV=net asset value=fundamental value of funds liquidation NAV and NAV per shares and liquidation value of your shares - ✔✔net asset value=value of portfolio at the end of the day divided by the total number of shares =fundamental value per share (determined at close each day) -different each day -synomymous with bid price or redemption/liquidation price soooo liqudation value of your shares=# shares you own * NAV NAV per share=(total assets-total liabilities)/# shares outstanding diversified definition (2 requirements for this... as it is a regulatory term) - ✔✔regulatuary term= 1) no more than 5% of portfolio can be invested in any one company (thing to keep in mind, you may initially buy to follow this rule but if the value of certain securites increase, it looks as though they represent a lot higher % of the portfolio. Regulators say that you initially followed the rule and if the value grows beyond that you can still be considered to be diversified) AND 2) fund can't own 10% of any given stock/can't have more than 10% of voting rights ***1 and 2 apply to 75% of the portfolio, the other 25% can be invested in whatever they want *** ex: you invest $2000 (lets say 2% of your portfolio) in XYZ company, but they only happen to have $4000 worth of common stock... so although you are following the 1st rule, you own over 10% of the company's voting rights so you are not considered to be diversified prospectus contents (what MUST it include) - ✔✔offering document used whenever an issuer sells securities, DOES NOT HAVE TO BE AN IPO. so long as they are coming directly form the issuer this is neeeded. broker dealer will usually provide you with this -must include: they outline objectives of the fund, risk , historical performance, sales charges, operating expenses, exchange priveleges (other fund flavors within the same HH brand), breakpoint table=discount for volume, share class comparison table (choices you have in how you would like to buy the fund, dif class types represent diferent pay structure) sales charge does NOT equal commission - ✔✔sales charge=issuance/primary distribution and is fixed whereas commission refers to trading activity=secondary market fill in the blank ex for MF - ✔✔1) individual ownership in specific mutual fund is represented by (common stock) shares (from ex above, where you cannot own more than 10% of companies voting rights) 2) _____ provides an investor with the abilityto invest a small amount and obtain an interest in a large number of securities (diversification) 3) a diversifiied portfolio cannot invest more than ____ in any one comany and cannot control any more than ____ of any one companys voting stock (5%, 10%) 4) for a diversified fund, no more than _____ of funds assests must be diversified (75) 5) _______ must preceded or accompany any solicitation of mutual fund shares (prospectus) mutual fund structure (5 parts) - ✔✔fund company=HH=brand name, will have a lot of investment options each with own target goal. think of this as a car company, offering many dif models XYZ fund=one offering within the HH has many different parts 1) custodian bank=holds funds, cash, securities for safekeeping 2) board of directors: protect shareholders, independent =no employees, set agenda for fund 3) underwriter/distributor/wholesaler: market product line to broker dealesrs who market to their clients 4) investment advisor: earn a fee to render advice, AKA portfolio manager 5) transfer agent: does all back office/paperwork, issues, redeems, cancels funds, paperwork MF board of directors - ✔✔1) independent, investment co act of 1940 required majtority to be independent parties 2) set agenda for fund 3) protect shareholders 4) elected by and responsible to shareholders 5) deals with policy and admin related matters, and hires other parties invovled such as bank, transfer agent, etc 6) DO NOT MANAGE but do set agenda MF investment advisor - ✔✔chooses securities, IAR= investment advisor representative -is the fund manager, will ad