SIE Prep

What is selling shares that increase in price?

capital appreciation

What is a distribution of profits?

dividends

What is authorized stock?

the number of shares that the company is authorized to issue

What is issued stock?

authorized stock that has been sold to investors

What is outstanding stock?

all shares that a company has issued and are in hands of investors

What is treasury stock?

stock a corporation has issued then later bought back

Shares outstanding formula

issued shares-treasury stock

What is the market cap of large cap stocks?

excess of $10 billion

What is market cap for mid- cap stocks?

$2 billion to $10 billion

What is the market cap for small- cap stocks

$250 million to $2 billion

What do penny stocks trade for?

less than $5/share

What does SEC require in regard to penny stocks?

customers be given a copy of a risk disclosure document before the initial transaction

Regardless of activity in customers account, BD must provide what to customer regarding penny stock?

provide a monthly account statement to the customer indicating market value and # of shares as well as issuer name

Established customers are exempt from sustainability statement requirement but not from disclosure requirements in regard to penny stock if the customer:

#1 has held an account with the BD for at least a year

#2 has made at least 3 penny stock purchases of different issuers on different days

What does DERP stand for?

Declaration

Ex-dividend

Record

Payable

Which dates are typically the same

ex-date & record date

What dates are established by the company’s board?

declaration date, record date and payable date

What dates are established by a regulator like FINRA?

ex-dividend date

What is statutory voting?

Example 1: Shareholder owns 100 shares in a statutory vote

Statutory Voting
Board of directors: seat 1	100
Board of directors: seat 2	100
Board of directors: seat 3	100

What is cumulative voting?

Example 2: Shareholder owns 100 shares in a cumulative vote

Cumulative Voting		OR	Cumulative Voting
Board of directors: seat 1	175		Board of directors: seat 1	300
Board of directors: seat 2	50		Board of directors: seat 2	0
Board of directors: seat 3	75		Board of directors: seat 3	0

What rights to information does common stockholders have?

right to receive an audited set of financial statements of company’s performance (form 10-k) made part of annual report

What are preemptive rights?

right to maintain their proportionate share of ownership in corporation

What are the financial benefits offered by owning common stock?

-capital gains

-income

-limited liability

Why include common stock in client’s portfolio?

-potential capital appreciation

-income from dividends

-hedge (protection) against inflation

What are the risks of owning common stock?

-value risk

-decreased or no dividend income

-low priority at dissolution

What is straight preferred (noncumulative) stock?

no special features, missed dividends are not paid to holder

What is cumulative preferred stock?

accrues payments due to its shareholders if dividends are reduced or suspended (unpaid dividends add up until paid)

What is callable preferred stock?

company can buy back from investor at its stated price after specified date

What is convertible preferred stock?

if the owner can exchange the shares for a fixed number of shares of the issuer’s common stock

What is adjustable rate preferred?

preferred stock issued with adjustable dividend rates

What is participating preferred stock?

offers owners an additional share of corporate profits after all other dividends are paid

What are the benefits of owning preferred stock?

-dividend preference

-priority at dissolution over common stock

What are the risks of owing preferred stock?

-purchasing power risk

-interest rate sensitivity

-decreased or no dividend income

-priority at dissolution (creditors are paid before)

How are ADR’s taxed?

-dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the issuer

-any trading profits (capital gains) from the ADR would only be taxable in the U.S.

What are the risks associated with ADRs?

-currency and political risk

-voting and preemptive rights

What is rule 144 stock?

an SEC rule that sets the requirements for selling or purchasing restricted, unregistered or control stocks

What is restricted stock?

are those initially acquired by investors through some means other than a registered public offering

Restricted securities may not be sold by investors until they have been held (fully paid) for how long?

6 months

What is a restrictive legend?

when restricted stocks are issued, this will be on the certificate warning about the period restriction

The volume limitations on the number of shares that can be sold under rule 144 are the greater of (for control stock)

#1 1% of the outstanding shares of the company or

#2 the average weekly trading volume over the most recent 4 weeks

What are stock rights/ preemptive rights?

grants existing stockholders the opportunity to maintain their proportionate ownership in a company by buying the newly issued shares before the company offers them to the public

What is a rights offering?

allows stockholders to purchase common stock below the current market price to maintain ownership of shares

-given to existing shareholders

-allow one to purchase shares below current market value

What is a warrant?

certificate granting its owner the right to purchase securities from the issuer at a specified price

-bundled with other securities

-allows someone to purchase shares at a price that is above the current market value at the time the warrants were issued

What is the main difference between a warrant and a right?

a warrant is usually a long-term security that gives the investor the option of buying shares at a later date at the specified exercise price

What is a stock split?

a company divides each existing share of its stock into several new shares

-the total number of shares increases but the total value of all shares taken together remain the same

What is a forward split?

increases the number of shares and reduces the price without affecting the total market value of shares outstanding due to stock price being so high

-investor receives more shares but value of each share is reduced

-cost basis per share will decrease

What is a reverse split?

investors own fewer shares with a higher per share price due to stock price being low

What is a spin-off?

a corporation forms a subsidiary company out of some of the corporation’s assets and operations

-issues shares of newly formed corporation to shareholders of original company

What is a buyback?

company buys back its own outstanding shares in the open market from existing shareholders

Why would a company buyback shares?

reduces number of shares available and can increase value of shares available

What is a tender offer?

an offer to buy a security from the owners of the security (not through secondary markets)

What is the tax impact of stock splits and dividends?

never taxable because they result in receipt of additional shares

What is the tax impact of mergers, acquisitions, and spin-offs?

not taxable but cash portion is taxable as a capital gain or loss

What are the tax implications of buybacks and tender offers?

almost always all-cash offers and are treated as a sale of security resulting in taxable capital gain or loss

What should be included in notification of corporate actions?

-Title of the security

-Date of declaration

-Date of record for determining holders entitled to receive the distribution or to participate in the split

-Date of payment or distribution

-For a cash dividend—the amount to be paid

-For a stock dividend—the rate of the dividend (e.g., 10%)

-For a split (forward or reverse)—the rate of the distribution (e.g., 2:1, 3:2)

What is proxy solicitation?

offers to let a third-party vote the shares, like other shareholders, those wanting to take control of a company and activist investors seeking changes in the company

What are term bonds?

principal of the whole issue matures at once

What is a sinking fund?

a cash reserve to accumulate money to retire bonds at maturity

What are serial bonds?

schedule for portions of the principal to mature at intervals over a period of years until the entire balance has been repaid

What are balloon bonds?

maturity schedule that is hybrid of serial & term maturities

-issuer pays part of principal before final maturity date

-major portion is paid at final maturity

What is the coupon rate?

interest rate the bond issuer has agreed to pay the investor

What else is a coupon rate also called?

-stated yield

-nominal yield

What is accrued interest?

interest that has been earned or accumulated but has not yet been paid due to bonds trading between coupon payments

What is a bonds yield and what are the factors that relate to it?

measure of interest payments in relation to bond’s value

-bond’s

- rating-interest rates

-general interest rates

-time to maturity

What is the current yield?

measures a bond’s annual coupon payment relative to its market price

What is the current yield formula?

CY= annual coupon payment/ market price

What is a bond’s YTM?

reflects the annualized return of the bond if held to maturity

What is a bond’s YTC?

bond that may be redeemed by the issuer before maturity

What are yields measured in?

basis points which equal 1/100 or 1%

What is the relationship between price and yields?

-for a bond trading at a discount: coupon < CY < YTM < YTC

-for a bond trading at par: coupon = CY = YTM = YC

-for a bond trading at a premium: coupon > CY > YTM > YTC

What is a call feature and when would it generally be exercised?

allows an issuer to redeem a bond before maturity, typically when interest rates are falling

What is a put feature and when would it be exercised?

allows the investor to force the issuer to pay off the bond before it matures, typically when interest rates are rising

What are convertible bonds?

allows investor to convert the bond into shares of the issuer’s common stock

What does parity mean?

when the value of a convertible bond equals the value of the shares an investor would receive if the conversion feature were exercised

What is phantom income?

when you have to pay taxes on a zero-coupon bonds interest annually

What is the bond rating chart for Moody’s compared to Standard & Poor’s

Bond Ratings
Moody's	Standard & Poor's	Description
Aaa	AAA	Highest Grade
Aa	AA	High Grade
A	A	High Medium, a sound debt
Baa	BBB	Medium, considered good
Above: Investment Grade Debt Below: Non-Investment Grade, Speculative, High Yield, Junk
Ba	BB	Fair, lower medium, some uncertainty
B	B	Fair, somewhat speculative
Caa	CCC	Speculative, weak
Ca	CC	Very speculative, marked weakness
No equivalent	C	Extremely speculative, default likely, may have declared bankruptcy
C	D	Issue in default

What are bonds rated in the top four categories called?

investment grade

What is the primary risk of owning a debt security?

default risk: when the issuer fails to pay interest or principal when due

What are types of secured debt? (debt that has collateral)

-mortgage bonds

-equipment trust certificates

-collateral trust bonds

What are types of unsecured debt?

-debentures

-guaranteed bonds

-income bonds

-subordinated debt

What are debentures?

term for an unsecured bond

-most senior (highest priority) of the unsecured debt obligations

What are guaranteed bonds?

the responsibility of the issuer but are further backed by a third party should the issuer default

What is the most common third-party guarantor?

parent company of an issuer

What is income bonds?

also called adjustment bonds, they only make interest payments when the company has enough income and the board authorizes the payments

What is subordinated debt or subordinated debenture?

these debt obligations are below debentures in order of seniority

What is the order of liquidation?

#1 secured debtholders

#2 unsecured debt (debentures) & general creditors

#3 subordinated debtholders

#4 preferred stockholders

#5 common stockholders

What are treasury bills (t- bills)

-t-bills are issued by the U.S. Treasury.

-t-bills are short-term debt obligations of the federal government.

-t-bills are issued weekly with maturities of 4, 6, 8, 13, and 26 weeks.

-t-bills are issued monthly with a maturity of 52 weeks.

-t-bills are issued at a discount and mature at par.

-the difference between the discount and par value is the interest payment.

-t-bills do not pay periodic interest; all interest is paid at maturity.

What are T- STRIPS?

securities that pay no periodic interest and are sold at a discount

What are treasury notes (t-notes)?

-intermediate-term direct debt

-t-notes are issued by the Treasury,

-t-notes have maturities from as short as two years to a maximum of 10 years,

-t-notes pay interest every six months (semi-annually), and

-at maturity, the investor receives the final semi-annual interest payment and the par value.

What are treasury bonds (t-bonds)?

-long-term direct debt

-T-bonds are issued by the Treasury,

-t-bonds have maturities greater than 10 years and up to 30 years,

-t-bonds pay interest every six months (semi-annually),

-at maturity, the investor receives the final semi-annual interest payment and the par value.

What are treasury receipts?

when BDs buy treasury securities, place them in trust at a bank and sell receipts against the principal & coupon payments

What are treasury inflation-protected securities (TIPS)?

-issued w/ maturities of 5,10 or 30 years

-fixed coupon rate

-pay interest every 6 months

-principal value of bond is adjusted every 6 months based on inflation

What is the farm credit system?

-national network of lending institutions that provides agricultural financing and credit.

-privately owned, government-sponsored enterprise

-raises funds through the sale of Farm Credit Debt Securities to investors.

-funds are made available to farmers through banks and Farm Credit lending institutions.

-the FCA, a government agency, oversees the system.

What is the government national mortgage association (GNMA or Ginnie Mae)

-government owned

-supports housing & urban development

-based on portfolio of mortgages

-creates a monthly payment that is part principal part interest (pass-through security)

What is the federal home loan mortgage corporation (FHLMC or Freddie Mac)?

-public corporation

-promote the development of a nationwide secondary market in mortgages

-packages mortgages into mortgage-backed securities for sale to investors

What is the federal national mortgage association (FNMA or Fannie Mae)

-publicly held corporation that provides mortgage capital

-purchases conventional insured mortgages from agencies

-packages them into mortgage-backed securities for sale to investors

What are general obligation municipal bonds?

-used to generate capital for infrastructure or property improvements

-projects do not produce capital so interest & principal is paid from taxes

-known as full faith and credit bonds

What are revenue bonds?

-used to finance a municipal facility that generates sufficient income to pay the bond

-utilities

-housing

-transportation

-education

-health

-industrial

-sports

What is the tax-equivalent yield formula?

tax free yield/ (100% - investors tax rate)