Card Set Information
Prep for Series 7
The term's meaning depends very much on the
context. In finance, in general, you can think of equity as ownership in
any asset after all debts associated with that asset are paid off. For
example, a car or house with
no outstanding debt is considered the owner's equity because he or
she can readily sell the item for cash. Stocks are equity
because they represent ownership in a company.
A security is essentially a contract
that can be assigned a value and traded.
Examples of a security include a note, stock, preferred share, bond,
debenture, option, future, swap, right, warrant, or virtually any other financial asset.
Limited liability refers to the terms of limited partnerships,
which comprise at least one general partner, who takes on unlimited
liability, and one or more limited partners, who would never lose
more than their original initial investment in
fulfilling the partnership's obligations. Limited liability
protects a partner's personal assets from being liquidated should the
company become insolvent. Additionally, limited liability can refer to an investment that has
limited downside risk, such as a long position in a stock, with which the
investor can lose no more than his or her initial investment.
Act of 1933
The Securities Act of 1933 was the first major piece of federal
legislation regarding the sale of securities. Prior to this legislation, the
sale of securities was primarily governed by state laws; however, the market crash
of 1929 raised some serious questions about the effectiveness of how the
markets were being governed. Because of the turmoil surrounding the investing community at this
time, the federal government had to bring back stability and investor
confidence in the overall system. In general, the legislation was enacted as the need for
more information within and about the securities markets was
acknowledged. The legislation addressed the need for better
disclosure by requiring companies to register with the Securities and Exchange
Commission. Registration ensures companies provide the SEC and potential
investors with all relevant information by means of the prospectus and registration
entity (issuer) issues a bond that states the interest
rate (coupon) that will be paid and when the loaned funds (bond principal)
are to be returned (maturity date). Interest on bonds is usually paid every six
months (semi-annually). The main categories of bonds are corporate bonds,
municipal bonds, and U.S. Treasury bonds, notes and bills, which are
collectively referred to as simply "Treasuries". Two features of a bond - credit quality and duration - are the
principal determinants of a bond's interest rate. Bond maturities range from a
90-day Treasury bill to a 30-year government bond. Corporate and
municipals are typically in the three to 10-year range
Mortgage-backed certificates are
the most common type of pass-through, where homeowners' payments pass from
the original bank through a government agency or investment bank to
Treasury Receipts In general, stripped U.S. Government
bonds are referred to as Treasury receipts but are better known as
TIGRS (Treasury Investment Growth
Receipts), CATS (Certificates of Accrual on Treasury Securities), etc.
The call protection is advantageous to investors because it prevents the
issuer from forcing redemption early on in the life of a security. This means
that investors will have a minimum number or years, regardless of how poor the
market becomes, to reap the benefits of the security.
The period for which the bond is protected is known as
the "deferment period" or the "cushion".
Insider Trading Act of 1988
Insider Trading Act of 1988 An act enabled
in 1988 to increase the liability penalties to all involved parties to
insider trading. This act was
established due to the increase in high profile insider trading cases, as
well as the increase in monetary values of the trades. The act allows the
SEC to order a penalty of up to three times the profit, and the guilty
parties may serve significant jail time according to the extent of their
crime. Insider trading occurs when members outside of the establishment
are given information which is not available to the public as a whole, and
use it to increase their wealth through buying/selling stock.
A "Private Securities Transaction", as defined
by the NASD, is the sale of a security by a broker working for a NASD-licensed
firm wherein a) the security is not recognized by the employer or typically
sold by the broker, b) the broker receives outside compensation for the
transaction, or c) both.
Underwriters generally receive
underwriting fees from their issuing clients, but they also
usually earn profits when selling the underwritten shares to
investors. However, underwriters assume the responsibility of
distributing a securities issue to the public. If they can't sell
all of the securities at the specified offering price, they may be
forced to sell the securities for less than they paid for them, or retain
the securities themselves.
Gross Domestic Product
Gross Domestic Product The monetary value of all the
finished goods and services produced within a country's borders in a
specific time period, though GDP is usually calculated on an annual basis.
It includes all of private and public consumption, government
outlays, investments and exports
less imports that occur within a defined territory.
GDP = C + G + I +
is equal to all private consumption, or consumer spending, in a nation's
is the sum of government spending
is the sum of all the country's businesses spending on capital
is the nation's total net exports, calculated as total exports minus
total imports. (NX = Exports - Imports)
Call and Put
1. In some exchanges, the call period is
an important time in which to match and execute a large number of orders
before opening and closing.
2. A call becomes more valuable as the price of the underlying asset
When an investor
purchases a put, he or she expects the underlying asset will decline
in price. The investor will then profit by either selling the put options
at a profit, or by exercising the option. If an investor writes a put
contract, he or she is estimating the stock will not decline
below the exercise price, and will not fall significantly below the exercise
A security that
represents ownership in a corporation. Holders of common stock exercise control
by electing a board of directors and voting on corporate policy. Common
stockholders are on the bottom of the priority ladder for ownership structure.
In the event of liquidation, common shareholders have rights to a company's
assets only after bondholders, preferred shareholders and other debtholders
have been paid in full.
The degree of uncertainty that an
investor can handle in regard to a negative change in the value
of his or her portfolio.
Breakpoint For example, suppose that
an investor plans to invest $95,000 in a front-end load mutual fund and faces a
sales charge of 6.25%, or $6,125. If a breakpoint of $100,000 exists with
a lower sales charge of 5.5%, the investor should be advised to
invest an additional $5,000. If the investor can add another $5,000
to the investment, he or she would benefit from a lower breakpoint
sales charge of $5,500, or a savings of $625 on this transaction.
Mutual funds are required to give a description of these breakpoints and
the eligibility requirements in the fund prospectus. By reaching or
surpassing a breakpoint, an investor will face a lower sales charge and
save money. Any investor
purchase of fund shares that occurs just below a breakpoint is considered
unethical and in violation of NASD rules.
Letter of Intent
1. Letters of intent are used
during the merger and acquisitions process to outlines a
firm's plan to buy/take over another company. For example, the
letter of intent will disclose the specific terms of the transaction
(whether it is a cash or stock deal).
2. Unlike wills, letters of intent are often not legal documents.
However, because a letter of intent represents the wishes and
desires of the parents, the courts will still often use it as a benchmark
in conjunction with other documents to determine what happens to the
Call Risk The risk, faced by a holder of a
callable bond, that a bond issuer will take advantage of the
callable bond feature and redeem the issue prior to maturity. This means
the bondholder will receive payment on the value of the bond and, in most
cases, will be reinvesting in a less favorable environment (one with a
funds offer higher potential capital appreciation but usually at
above-average risk. Growth funds are more volatile than funds in the
value and blend categories. The companies in a growth fund portfolio are
in an expansion phase and they are not expected to pay dividends. Investing in growth funds
requires a tolerance for risk and a holding period with a time horizon of
five to 10 years.
1. Dividends may be in the form of cash, stock or
property. Most secure and stable companies offer dividends to their
stockholders. Their share prices might not move much, but the dividend
attempts to make up for this.
High-growth companies rarely offer dividends because all of their
profits are reinvested to help sustain higher-than-average growth.
pay out interest and dividend income received from their portfolio
holdings as dividends to fund shareholders. In addition, realized capital
gains from the portfolio's trading activities are generally paid out
(capital gains distribution) as a year-end dividend.