question

Common stock

answer

the most "junior security" because it ranks last in line at liquidation. An equity or ownership position that usually allows the owner to vote on major corporate issues such as stock splits, mergers, acquisitions, authorizing more shares, etc.

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Transfer agent

answer

issues and redeems certificates. Handles name changes, validates mutilated certificates. Distributes dividends, gains, and and shareholder reports to mutual fund investors.

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registrar

answer

audits the transfer agent to make sure the number of authorized shares is never exceeded

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dividends

answer

money paid from profits to holders of common and preferred stock whenever the Board of Directors is feeling especially generous

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Declaration date

answer

the date the Board of Directors declares a dividend

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Record date

answer

the date determined by the Board of Directors upon which the investor must be the "holder of record" in order to receive the upcoming dividend. Settlement of a trade must occur by the record date for the buyer to receive the dividend

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payable date

answer

the date that the dividend check is paid to investors

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regular way settlement

answer

T + 3, trade plus three business days. T + 1 for Treasury securities

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T + 3

answer

regular way settlement, trade date plus three business days

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Ex-Date

answer

two days before the Record Date of corporate stock. The date upon which the buyer is not entitled to the upcoming dividend. Note that for mutual funds, this date is established by the Board of Directors, usually the day after the Record Date

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Pre-emptive right

answer

the right of common stockholders to maintain their proportional ownership if the company offers more shares of stock

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subscription right

answer

the securities used in additional offerings of stock to purchase available shares, usually at a slight discount

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warrant

answer

long term equity securities giving the owner the right to purchase stock at a set price. OFten attached as a "sweetener" that makes the other security more attractive

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currency exchange risk

answer

the risk that the value of the U.S. dollar versus another currency will have a negative impact on businesses and investors.

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option

answer

a derivative giving the holder the right to buy or sell something for a stated price up to expiration of the contract. Puts and calls

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bullish

answer

an investor who takes a position based on the belief that the market or a particular security will rise. Buyers of stock and call options

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bearish

answer

an investor who takes a position based on the belief that the market or a particular security will fall. sellers of stock and buyers of put options

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preferred stock

answer

a fixed-income security whose stated dividends must be paid before common stock can receive any dividend payment. Also gets preference ahead of common stock in a liquidation (but behind all bonds and general creditors)

question

fixed-income security

answer

a security promising a fixed rate of interest or dividends.

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straight preferred stock

answer

a preferred stock whose missed dividends do not go into arrears, a.k.a. "non-cumulative preferred."

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cumulative preferred stock

answer

preferred stock where missed dividends go into arrears and must be paid before the issuer may pay dividends to other preferred stock and/or common stock

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participating preferred stock

answer

preferred stock whose dividend is often raised above the stated rate

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convertible preferred stock

answer

a preferred stock or corporate bond allowing the investor to use the par value to "buy" shares of the company's common stock at a set price

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par value

answer

the face amount that a debt security will pay at maturity, e.g., $1000. For preferred stock, the amount against which the dividend percentage is calculated, e.g., $100 par value

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growth

answer

investment objective that seeks "capital appreciation." Achieved through common stock, primarily.

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income

answer

investment objective that seeks current income, found by investing in fixed income, e.g., bonds, money market, preferred stock. An equity income fund buys stocks that pay dividends; less volatile than a growth and income or a pure growth fund.

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capital appreciation

answer

the rise in an asset's market price. The objective of a "growth stock investor."

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yield

answer

the income a security produces to the holder and capital gains distributions

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total return

answer

measuring growth in share price plus dividends and capital gains distributions

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IPO

answer

a corporation's first sale of stock to public investors, By definition, a primary market transaction in which the issuer receives the proceeds

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Primary market

answer

where securities are issued to raise capital for the issuer

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secondary market

answer

a "negotiated market" including NASDAQ and non- NASDAQ securities trading

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registration statement

answer

the legal document disclosing material information concerning an offering of a security and its issuer. Submitted to SEC under Securities Act of 1933

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Securities Act of 1933

answer

a.k.a., "Paper Act," regulates the new-issue or primary market, requiring non-exempt issuers to register securities and provide full disclosure

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cooling off period

answer

a minimum 20-day period that starts after the registration statement is filed. No sales or advertising allowed during this period, which lasts until the effective or release date.

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indication of interest

answer

an investor's expression of interest in purchasing a new issue of securities after reading the preliminary prospectus; not a commitment to buy

question

preliminary prospectus

answer

a.k.., "red herring," a prospectus that lacks the "POP" and the effective date. Used to solicit indications of interest.

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effective date

answer

date established by SEC as to when the underwriters may sell new securities to investors, a.k.a. "release date."

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public offering price

answer

a.k.a., "POP,' the price an investor pays for a mutual fund or an initial public offering. For a mutual fund= NAV + the sales charge.

question

exempt security

answer

a security not required to be registered under the Securities Act of 1933. Still subject to anti-fraud rules; not subject to registration requirements, e.g., municipal bonds and bank stock

question

exempt tansaction

answer

a transactional exemption from registration requirements based on the manner in which the security is offered and sold, e.g., private placements under Reg D.

question

private placement

answer

an exempt transaction under Reg D (Rule 506) of the Securities Act of 1933, allowing issuers to sell securities without registration to accredited investors, who agree to hold them fully paid 1 year before then selling them through Rule 144

question

purchaser representative

answer

someone independent of the issuer in a private placement who can represent the needs of a non-accredited investor

question

best efforts

answer

a type of understanding leaving the syndicate at no risk for unsold shares, and allowing them to keep the proceeds on the shares that were sold/subscribed to

question

firm commitments

answer

an underwriting in which the underwriters agree to purchase all securities from an issuer, even the ones they failed to sell to investors. Involves acting in a "principal" capacity, unlike in "best efforts," "all or none," and "mini-max" offerings

question

spread

answer

generally, the difference between a dealer's purchase price and selling price, both for new offering (underwriting spread) and secondary market quotes. For underwritings the spread is the difference between the proceeds to the issuer and the POP

question

standby offering

answer

a firm commitment by an underwriter to purchase any shares that are not subscribed to in a rights offering

question

auction market

answer

the NYSE, for example, where buyers and sellers simultaneously enter competitive prices, Sometimes called a "double auction" market because buying and selling occur at the same time, as opposed to Sotheby's, where only buyers are competing

question

first market

answer

the exchange market, e.g., NYSE

question

specialist

answer

an individual who oversees trading in a particular stock (GE, IBM, etc.,) in order to maintain a "fair and orderly market." The specialist buys and sells for his own account.

question

second market

answer

Also known as the "negotiated market", or "OTC" market is not a physical marketplace, but its definitely a market; where market makers put out a bid and ask price, and stand ready to take either side of the trade for at least one round lot. For stocks a round lot is 100 shares.

question

bid

answer

what a dealer is willing to pay to a customer who wants to sell

question

ask

answer

the higher price in a quote representing what the customer would have to pay/what the dealer is asking the customer to pay. Customers buy at this price because dealers sell to customers at this price. Also called "offer/offered."

question

NASDAQ

answer

National Association of Securities Dealers Automated Quotations system

question

Non-NASDAQ OTC

answer

securities trading on the "over-the-counter" market that do not meet NASDAQ requirements. For example, pink sheets

question

third market

answer

exchange-listed stock traded OTC primarily by institutional investors

question

fourth market

answer

Where big institutional investors (pension funds, insurance companies, mutual funds, etc.) trade directly through electronic communications networks (ECNs)

question

bonds

answer

debt securities which represent loans from investors to a corporation

question

partial surrender

answer

life insurance policyholder cashes in part of the cash value. Excess over premiums is taxable

question

maturity date

answer

the date that a bond pays out the principal and interest payments cease. Also called "redemption"

question

nominal yield

answer

the interest rate, also known as the "coupon rate" which is named on the bond certificate

question

leverage

answer

using borrowed money to increase returns. Debt securities and margin accounts are associated with this term.

question

current yield

answer

the annual interest paid by a bond to an investor divided by what the investor would have to pay for the bond

question

discount bond

answer

a bond trading below the par value

question

premium bond

answer

a bond purchased fro more than the par value, usually due to a drop in interest rates

question

interest rate risk

answer

the risk that interest rates will rise, pushing the market value of fixed-income security down. Long-term bonds are most susceptible

question

reinvestment risk

answer

the risk that a fixed-income investor will not be able to reinvest interest payments or the par value at attractive interest rates. Happens when rates are falling

question

call risk

answer

the risk that interest rates will drop, forcing investors to sell their bonds back early to the investor

question

investment grade

answer

a bond rated at least BBB by S&P or Baa by Moody's. The bond does not have severe default risk, so it is said to be appropriate for investors, as opposed to the speculators who buy non-investment grade bonds.

question

high yield

answer

an investment whose income stream is very high relative to its low market price. These types of bonds are either issued by a shaky company or municipal government forced to offer high nominal yields, or if they begin to trade at lower and lower prices on the secondary market as the credit quality or perceived credit strength of the issuer deteriorates

question

S&P

answer

one of the top three credit rating agencies for corporate and municipal bonds as well as stock. The other two are Moody's, and Fitch

question

Moody's

answer

one of the top three credit rating agencies for corporate and municipal bonds as well as stock. The other two are S&P, and Fitch

question

sinking fund

answer

an escrow account earning safe little rates of interest, established by corporations and municipalities to help with bond rating, and to make sure the principal can actually be returned at maturity

question

secured bonds

answer

corporate bonds that are backed up by specific assets, collateral

question

debenture

answer

a bond backed simply by the full faith and credit of an issuer

question

subordinated debenture

answer

debentures that have a claim on corporate assets that is below that of regular debentures when it comes to liquidating a company and paying out money to the bondholders. Since these bonds are riskier, they pay a higher coupon than debentures or secured bonds

question

claim on assets rank

answer

1. Secured creditors 2. debentures/general creditors 3. subordinated debentures 4. preferred stock 5. common stock

question

convertible bonds

answer

bonds that can be converted into a certain number of shares of the issuer's common stock. Par divided by conversion price = number of common shares

question

bond points

answer

bonds are quoted in terms of either their price or their yield. If we're talking about a bond's price, we're talking about bond points. A bond point is worth $10, a bond selling for 98 bond points is worth $980

question

basis points

answer

bonds are quoted in terms of either their price or their yield. If we're talking about a bond's price, we're talking about a bond's yield. If we're talking about a bond's yield, we're talking about basis points (yield to maturity to be exact)

question

T- bills

answer

direct obligation of U.S. Government. Sold at discount, mature at face amount. Maximum maturity is 1 year.

question

T-notes

answer

direct obligation of U.S. Government. Pay semiannual interest. Quoted as % of par value plus 32nds. Between 1 and 10 year maturities

question

T-bonds

answer

direct obligation of U.S. Government. Pay semiannual interest. Quoted as % of par value plus 32nds. 10-30 year maturities

question

Treasury STRIPS

answer

Separate Trading of Registered Interest and Principal of Securities. A zero-coupon bond issued by the U.S. Treasury in which all interest income is received at maturity in the form of a higher (accreted) principal value. Avoids "reinvestment risk"

question

series EE bonds

answer

a non marketable, interest-bearing U.S. Government savings bond issued at a discount from the par value. Interest is exempt from state and local taxation.

question

Series HH bonds

answer

a non marketable, interest-bearing U.S. Government savings bond issued at par and purchased only by trading in Series EE bonds at maturity. Interest is exempt from state and local taxation.

question

I-bond

answer

a savings bond issued by the U.S. Treasury that protects investors from inflation or purchasing power risk

question

municipal bonds

answer

a bond issued by a state, county, city, school district, etc., in order to build roads, schools, hospitals, etc., or simply to keep the government running long enough to hold another election

question

after-tax yield

answer

the amount of interest income remaining after the investor pays taxes on it

question

tax-equivalent yield

answer

the rate of return that a taxable bond must offer to equal the tax-exempt yield on a municipal bond. Tax equivalent yield= tax free municipal bond yield/ 1- tax rate

question

general obligation bonds

answer

a municipal bond that is backed by the issuer's full faith and credit or full taxing authority

question

revenue bonds

answer

a municipal bond whose interest and principal payments are backed by the revenues generated from the project being built by the proceeds of the bonds. Toll roads for example, are usually built with revenue bonds backed by the tolls collected.

question

user fees

answer

also known as "user charges"

question

IDR

answer

"Industrial Revenue Bond". A revenue bond that builds a facility that the issuing municipality then leases to a corporation. The lease payments from the corporation back the interest and principal payments on the bonds

question

bearer bonds

answer

an unregistered bond that pays principal to the bearer at maturity. Bonds have not been issued this way for over two decades, but they still exist on the secondary market.

question

registered as to principal only

answer

a bond with only the principal registered. Interest coupons must be presented for payment.

question

fully registered

answer

also known as "book/journal entry"

question

book/journal entry

answer

a security maintained as a computer record rather than a physical certificate. All U.S. Treasuries and many mutual funds are issued in this manner. Also known as "fully registered."

question

money market

answer

the short-term (1 year or less) debt security market. Examples include commercial paper, banker's acceptance, T-bills.

question

TANs

answer

Tax Anticipation Notes, short term loans issued by municipalities and backed up by tax revenues

question

commercial paper

answer

a short-term unsecured loan to a corporation. Issued at a discount from the face value

question

negotiable CDs

answer

large-denominated certificates of deposit that may be traded (negotiable) on a secondary market

question

bankers aceptance

answer

(BA) money-market security that facilitates importing/exporting. Issued at a discount from face value. A secured loan.

question

mortgage-backed security

answer

a fixed income security created with a pool of mortgages, e.g., GNMA

question

prepayment risk

answer

the risk that mortgages underlying a mortgage-backed security/pass-through will be paid off sooner than expected due to a drop in interest rates. Investors reinvest the principal at a lower rate going forward.

question

GMNA

answer

a government agency (not a public company) that buys insured mortgages from lenders, selling pass-through certificates to investors. Monthly payments to investors pay interest and return principal only at maturity, while "pass-throughs" pass through principal monthly. Thus the clever name "pass-through"

question

FNMA

answer

buys mortgages from lenders and sells mortgage-backed securities to investors. A quasi-agency, a public company listed for trading on the NYSE

question

FHLMC

answer

a quasi-agency, public company that purchases mortgages from lenders and sells mortgage-backed securities to investors. Stock is listed on NYSE

question

CMO

answer

a collateralized mortgage operation, a very complicated "derivative" that gets its value from underlying mortgages or mortgage backed securities

question

tranche

answer

a class of CMO. Principal is returned to one at a time in a CMO

question

REMIC

answer

Real Estate Investment Conduit. A type of mortgage-backed security

question

GDP

answer

measures total output of the American economy. It's the sum total value of all goods and services produced by the economy, measured as the price paid by the consumer

question

business cycle

answer

a progression of expansions, peaks, contractions, troughs, and recoveries for the overall (macro) economy

question

inflation

answer

"too many dollars chasing too few goods." Rising prices as measured by the consumer price index (CPI). Major risk to fixed-income investors (loss of purchasing power)

question

CPI

answer

Consumer Price Index. A measure of inflation/deflation for basic consumer goods and services. A rising Consumer Price Index represents the greatest risk to most fixed-income investors

question

recession

answer

two quarters (6 months) or more of economic decline. Associated with rising unemployment, falling interest rates, and falling gross domestic product

question

depression

answer

six quarters (18 months) or longer of economic decline

question

deflation

answer

a general drop in the level prices across the economy, usually connected to an economic slump

question

FOMC

answer

the Federal Reserve Board's Federal Open Market Committee. Sets short-term interest rates by setting discount rate, reserve requirement and buying/selling T-bills to/from primary dealers

question

fiscal policy

answer

means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply

question

monetary policy

answer

what the FRB implements through the discount rate, reserve requirement, and FOMC open market operations. Monetary policy tightens or loosens credit in order to affect short-term interest rates and, therefore, the economy.

question

discount rate

answer

interest rate charged by the 12 Federal Reserve Banks to member banks who borrow from the FRB

question

prime rate

answer

interest rate charged to corporations with high credit ratings for unsecured loans

question

fed funds rate

answer

interest rate charged on bank-to-bank loans. Subject to daily fluctuations

question

T-bills

answer

these treasury securities are a short term obligation of the U.S. government that fall under the category of cash equivalents and are safe and liquid investments (less than one year)

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