SIE Prep

ADRs:

certificates issued by US banks that represent shares in foreign companies, to allow US investors to trade foreign stocks on US exchanges and in receive dividends in USD

Are ADRs callable?

no

preemptive rights:

give shareholders the opportunity (right) to buy additional shares (before they are issued to the public) at a slight discount to market price to avoid dilution (for CS owners)

warrants:

gives a buyer the right to purchase a stock at the specified exercise price regardless of the current market price until the warrant expires (LT, 5+ years)

When a stock split occurs, what does change for an investor?

Number of shares owned, price per share, and number of votes (number changes but the proportional power doesn't)

Stock dividends are when

a company pays shareholders more shares as a dividend instead of cash at a percentage of the number of stocks you already own, and the price of each stock decreases proportionally

A short seller’s market view is

bearish = believe it’s overvalued in the market = hope it will go down in value to then sell it for a profit

The max loss of a short sale is

infinite

What features make a bond more sensitive to interest rate risk?

Low coupon, high term to maturity

The highest yield of a bond would be it’s yield _ ___ because

YTC because you would get the maturity principal repayment soonest, so the yield is higher

The phantom tax on a ZCB is called

annual accretion

annual accretion:

because the IRS considers the total gain earned on a ZCB at maturity, but it makes the bondholder report annually what you ‘would have earned’ and taxes you on that

How can an investor avoid annual accretion?

by putting a ZCB in a tax-deffered account like a retirement account, college, education savings account

Formula for annual accretion taxed amount

(Par value - Purchase price)/(# total term to maturity)

A call option benefits the __ and the coupon on callable bonds is _ for the investor

call option benefits the issuer and the coupon is high

A put option benefits the __ and the coupon on callable bonds is _ for the investor

put option benefits the bondholder and the coupon is lower

When would an investor exercise a put option of their bond?

when IR are higher in the market, so sell back to the issuer and buy a new bond that issues higher coupons

Types of corporate debt are

secured bonds and unsecured (debenture) bonds

Types of secured bonds are

(corporate debt) Mortgage bonds, Collateral trust bonds, and Equipment trust obligations/certificatoins

Collateral trust bond:

backed by a different trust or portfolio of securities, a type of secured corporate debt

Equipment trust obligations/certificaions:

backed by pieces of equipment owned by the borrower, type of secured corporate debt

Unsecured bonds are also called

debentures

Debentures:

unsecured corporate debt, a corporate bond backed by the credit of the corporation

Eurodollar bonds:

foreign bonds issued and traded outside the US but denominated in USD (to attract US investors) a

Are eurodollar bonds registered with the SEC?

no

Eurodollar deposit:

US dollars that are deposited in a bank abroad

Eurodollar deposites are/are not subject to Federal Reserve regulations or FDIC insurance, do/don’t offer higher interest rates, and are used to ___.

deposits are not subject to Federal Reserve regulations or FDIC insurance, do offering higher interest rates, and are used to facilitate international trade

Conversion price (CP):

the price you pay per share when you convert, defined when the (convertible) bond is issued (sold to the public for the first time)

Conversion ratio (CR):

the number of shares you receive if you convert the bond, defined when the (convertible) bond is issued (sold to the public for the first time)

Conversion price =

Par value / conversion price

parity price is calculated by

dividing the market price of the convertible security by the conversion ratio, which is the number of shares a convertible security can be converted into.

Ex. The yield on a convertible bond as compared to a similar non-convertible would be higher/lower?

lower

Treasure receipts are

essentially STRIPS before the gov used the STRIPS model, broker/dealers would do this themselves

TIPS:

a coupon bond whose coupon adjusts based on the inflation rate at the time of coupon payments (semiannual adjustment)

Series I Bond:

US gov issued savings bonds that can includes both fixed and variable interest rate that is adjusted every six months based on inflations which bond compound seminannually and only paid out at maturity

Interest on a Series I bond is

paid at once at maturity but compounds semiannually

What is the maturity and redemption of a Series I bond?

Total 30 year maturity, can redeem after 5 years with no penalty or losses of accrued interest

Can Series I bonds be traded on the secondary market?

no

Government agencies have implicit/explicit guarantees?

explicit

Government sponsored enterprises have implicit/explicit guarantees?

implicit

Agency security refers to

both government agencies and government sponsored enterprises

An MBS is a bond that is secured by _____, pays interest __, and the average life of an MBS __ than the stated maturity.

mortgages and other RE loans, pays interstate monthly, shorter

A money market account is

a type of savings account that earns a higher annual percentage yield (than a CD or high yield savings account) at a rate that is set by the bank, which pays interest, and you can write checks and potentially withdrawl up to 6 times per month

The purpose of investment companies are to improve retail investor's’

ability to diversify, get financial advice, and liquidity

Investment companies…

pool money from investors and deploy it based on a specific investment goal

Unit Investment Trusts (UITs):

a trust, has board of trustees, raise capital from investors selling units of their trust which holds other securities

Face Amount Certificate (FAC) Entity:

not really favored because lost the tax benefits they had, just know it’s a type of IC

Open end funds are priced at

NAV

Closed end funds are priced at

market price

ETFs are priced at

market price

UITs are priced at

NAV

What are the number of open end funds?

unlimited, continuous issuing

What are the number of closed end funds?

fixed at issuance

What are the number of UITs?

fixed at issuance

What are the number of ETF shares?

unlimited; continuous issuance

Where do open end funds trade?

only redeemable

Where do closed end funds trade?

secondary market

Where do UIT funds trade?

only redeemable

When can open end funds trade?

just once a day at 4pm EST

What investment companies can trade intraday (anytime during market hours)?

closed end funds, UITs, and ETFs

If an investor wanted to liquidate their shares of a mutual fund, they would…

redeem with the open end fund, it would cancel those shares, issue and sell new ones

How often are mutual fund investors required to receive shareholder reports?

Semiannually, includes BS, IS, and portfolio holdings

Which party is responsible for holding and safekeeping a mutual fund's cash and securities?

the custodian

POP =

(NAV)/(100% - Sales Charge %)

Mutual funds are priced using __:

forward pricing: based on the next NAV plus sales charge if applicable to reach the POP

When are the most MF orders executed / when will it be executed if it’s midday?

Typically the next 4pm EST on a weekday

Breakpoints:

reduced sales charge for an investor when they invest large amounts into a MF (big volume for reduced price)

letters of intent (LOI):

a breakpoint discount (typically 13 months, can be reduced to 90 days) by committing to invest a specified amount over a period of time, during which you would receive the discounted breakpoint sales charge in that period relevant to the total future committed amount

Rights of accumulation:

a mutual fund gives a reduced sales charge based on the total investments (aggregated holdings) in accounts related to their fund

sales charge:

commission fee that's paid either when purchasing or selling (front end vs back end fee)

Mutual fund expense ratio include

management fee, 12b-1 fees, and other expenses

Expense Ratio =

(Operating Expenses)/(Average Value of Fund Assets)

Management fees pay

active fund managers

Management fees are lower for what types of funds?

ETFs and index funds

12b-1 fees pay for

marketing and shareholder services

Class A shares have __ charge and do/don’t offer breakpoints

have sale charge and do offer breakpoints

What class of shares have the lowest 12b-1 fees?

Class A

Class B shares have __ charge, paid on _ and do/don’t offer breakpoints.

back end sales charge, paid on redemption, and do not offer break points

Class C shares have __ charge and do/don’t offer breakpoints.

level load charges and don’t offer breakpoints

The term “break the buck” is when

a mutual fund’s NAV deviates from the $1 target

Do UITs do reinvestments?

no, as shares generate dividends or interest income, the trust receives it and passes it through to investors)

What is the return from UITs?

the pass through of gains, distributes portfolio income to investors

reconstitution (of an ETF):

the process of updating an ETF portfolio as companies added to or subtracted from the underlying index it is tracking

REITs manage __ and just _ are passed through

a portfolio of RE investments, just gains are passed through

REITs are more liquid than _ because they are sold on

direct RE ownership, sold on exchanges and OTC

REITs are/aren’t direct participation programs

aren’t

equity REIT:

a trust that owns real estate and gets returns by renting out the property and collects rent or lease payments

mortgage REIT:

makes loans in connection with real estate (ex. builders, developers) and gets interest to generate return

hybrid REIT:

owns real estate and makes loans, to collects rent and interest from the loans it makes

all REITs aim to quality for the tax benefits they get if they quality, and all 3 requirements need to be met:

1. 75% of income arises from real estate

2. 75% of assets are invested in real estate or related activities (mortgages)

3. 90% of taxable income are distributed to shareholders every year

Direct participation programs:

umbrella category of business structure that offers flow through tax treatment by passing through everything: income, gains, losses, deductions, and credits directly to investors

Disadvantages of DPP investments →

very limited secondary market (liquidity risk), change in tax laws can significantly reduce value (legislative risk), can lose entire investment (capital risk)

Master limited partnerships:

primarily energy-related businesses structures that trade publicly on exchanges, have partnership taxation (no corporate tax), full pass through, and must generate at least 90% of its gross income from natural resources or RE. Investors purchase units and have the investment objective of income

MLPs must

generate at least 90% of its gross income from natural resources or RE. Investors purchase units and have the investment objective of income

Who is eligible to open a brokerage account?

individuals, multiple individuals (in a joint account), business entities, trusts, investment clubs, and foreign entities (not minors)

What form is used to open a brokerage account?

a new account form

Registered reps of BDs can cold call clients at what time?

8am-9pm in the customer’s time zone

Can BDs cold call anyone?

yes

How can prospective clients remove themselves from cold call lists?

By joining that firm’s for FTC’s do not call list

What list(s) does a BD rep need to check before cold calling?

your firm’s and the FTC’s do not call list