SIE Lecture Notes Review - Stocks, Bonds, Municipal Securities, Money Markets

A comprehensive set of practice flashcards covering stock basics, dividends, valuation, voting, warrants, ADRs, bonds (types, yields, calls/puts, ratings), municipal debt, money markets, and investment companies to prepare for the exam.

What is market capitalization and how is it calculated?

Market cap = number of outstanding shares × current market price per share.

What is treasury stock?

Stock the company bought back; it doesn’t receive dividends or voting rights.

What is authorized stock?

The total number of shares a company is allowed to issue as stated in its charter.

What is par value?

A nominal value used for accounting purposes (e.g., $1 per share) and not the market price.

What is issued stock vs outstanding shares?

Issued stock is shares the company has sold; outstanding shares are those sold and currently owned by investors.

How is market value (market cap) illustrated in an example?

Market cap = 400,000 shares × $10 = $4,000,000.

What is the difference between outstanding shares and treasury shares in terms of rights?

Outstanding shares have voting rights and dividends; treasury shares do not.

What is equity financing?

When a business sells partial ownership in the form of shares to raise money.

What is Regular Way Settlement (T+1)?

Settlement occurs one business day after the trade date.

What is an American Depositary Receipt (ADR)?

A receipt that represents foreign shares traded on U.S. exchanges; ADR holders receive USD dividends but do not have voting or preemptive rights; the bank votes shares and handles rights.

What are preemptive rights?

Short-term rights (usually 30–60 days) allowing shareholders to buy new shares at a discounted price to maintain proportional ownership.

How is earnings per share (EPS) calculated?

EPS = Net income after tax ÷ Number of outstanding shares.

What does the price/earnings (P/E) ratio represent?

P/E ratio = Stock price ÷ EPS; a multiple showing how many times earnings investors are willing to pay for the stock.

What are basic rights of common shareholders?

Inspect records, transfer ownership, preemptive rights, receive dividends, claim assets, and vote at annual meetings.

What is the difference between statutory voting and cumulative voting?

Statutory voting distributes votes evenly; cumulative voting allows concentrating votes for preferred candidates (advantage for small investors).

What is proxy voting?

Voting by a designated representative when shareholders can’t attend the meeting.

What are the main types of stock dividends and stock splits?

Stock dividends add shares (outstanding increases, value per share decreases); stock splits change the number of shares with a proportional change in par value, keeping total value the same and usually not taxable right away.

What is a stock split?

An adjustment to the number of shares outstanding (e.g., 2:1) that lowers the price per share but keeps total value constant.

What is a stock dividend?

Issuing additional shares to shareholders instead of cash; increases outstanding shares but keeps total value the same.

What is a warrant?

Long-term option to buy stock at a set price; typically lasts 5–10 years; can be traded separately and is valuable only if the stock rises.

What is the difference between rights and warrants?

Rights are short-term, discounted-share offers; warrants are longer-term options with usually higher exercise prices and longer duration.

What is an ADR, and what rights do ADR holders have?

ADR holders receive USD dividends; no voting or preemptive rights; the bank votes the shares and handles any rights; currency risk applies.

What is a bond in basic terms?

A loan to a company or government where the issuer pays interest regularly and repays the principal at maturity; bondholders are creditors, not owners.

What is par value in bonds?

The face value of the bond, typically $1,000, used to calculate interest payments.

What is a coupon rate?

The yearly interest payments as a percentage of par value (e.g., 5% on a $1,000 bond = $50/year).

What is a term bond?

All bonds in the issue have the same maturity date and interest rate.

What is a serial bond?

Bonds in a issue mature at different times (often with varying rates). A balloon maturity can occur when a large payment is due at one date.

What is a zero-coupon bond?

A bond that pays no periodic interest but is sold at a discount and pays par at maturity; no reinvestment risk.

What is STRIPS?

Separate Trading of Registered Interest and Principal of Securities; zero-coupon Treasuries created by stripping coupons and principal, traded separately.

What is yield to maturity (YTM)?

Total return if the bond is held to maturity, including interest payments and any gain/loss from price relative to par.

What is yield to call (YTC)?

Return assuming the bond is called before maturity; used to evaluate callable bonds.

What is yield to worst (YTW)?

The lowest potential yield among YTM, YTC, or other applicable yields; important for risk disclosure.

What is a puttable bond?

A bond with a put option allowing the holder to sell back to the issuer at a set price after a date, usually leading to lower coupons.

What is the priority of payments in bankruptcy?

1) Secured creditors, 2) Administrative & Priority Claims, 3) Unsecured creditors, 4) Subordinated creditors, 5) Preferred stock, 6) Common stock (residual).

What are the basic types of U.S. Government debt?

Treasury Bills (T-bills), Treasury Notes (T-notes), Treasury Bonds (T-bonds), STRIPS (zero-coupon), and TIPS (inflation-protected).

What is STRIPS and how does it relate to reinvestment risk?

STRIPS are zero-coupon Treasuries created by stripping a bond’s interest and principal; they have no coupon payments and interest rate risk is tied to the maturity.

What is a TIPS security?

Treasury Inflation-Protected Securities; principal adjusts with inflation, interest paid on adjusted principal; not callable.

What are money market instruments?

Short-term debt instruments that mature in 1 year or less and offer high liquidity and safety, usually with low returns.

What are the main money market instruments listed?

T-bills, Commercial Paper, Banker’s Acceptances, Jumbo CDs, and Repurchase Agreements (Repos).

What is a repurchase agreement (repo)?

A short-term loan where a dealer sells securities with an agreement to buy them back later at a higher price; used to manage liquidity.

What is the role of the Fed in money markets?

Open market operations: buying or selling money market instruments to influence credit in the economy; can be dovish (increase credit) or hawkish (tighten credit).

What is a money market instrument’s usual settlement convention?

OTC trading with T+1 settlement for many securities; money markets are typically settled quickly through depository systems.

What is the basic tax status of U.S. government debt vs municipal debt?

U.S. government debt: interest taxed federally, exempt from state/local taxes. Municipal debt: interest exempt from federal tax and usually state/local tax if in-state.

What is a GO bond vs a revenue bond in municipal debt?

GO bonds are backed by the issuer’s taxing power; revenue bonds are repaid from a specific project’s revenues.

What is a CAB (capital appreciation bond)?

Zero-coupon municipal bond sold at deep discount; only the discounted price counts toward debt limits; repayment at par.

What is a COP (certificate of participation)?

A financing instrument that allows municipalities to raise funds without counting toward the debt limit; investors receive lease payments.

What is a TAN?

Tax Anticipation Note; borrowed against future property tax revenue.

What is a VRDN?

Variable Rate Demand Note; long-term borrowing with short-term rate resets; can redeem at par at reset dates.

What is a mutual fund (open-end management company)?

A fund that continuously issues new shares, redeems shares, and holds a portfolio managed by an adviser; price based on net asset value.

What is a closed-end fund?

A management company with a fixed number of shares traded on an exchange; can raise money with stocks or debt, unlike open-end funds.

What is a UIT?

Unit Investment Trust; fixed or non-fixed; fixed UITs do not trade after issue and self-liquidate at maturity; non-fixed UITs invest in mutual funds.

What is a unit investment trust’s fixed vs non-fixed type?

Fixed UIT selects a portfolio that never changes; Non-Fixed UIT holds assets indirectly by investing in mutual funds.

What is the difference between an investment company and a UIT?

Investment companies pool money to invest (e.g., mutual funds, unit investment trusts); UITs are a fixed trust that issues units and self-liquidates.

What is the Trust Indenture Act of 1939?

Requires a trust indenture for corporate bond issues of $50 million or more; a trustee monitors compliance for bondholders.