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Series 7 2


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A Common stock holder is an _____ of a corporation
When a corporation is formed its corporate charter authorizes a fixed # of shares to be issued. These are:
Authorized stock is set at _______ par value set quite_____
arbitrary par value set quite low
Market value is based on:
investor expectations about the future of the company
Why is par value set so low?
Many states tax corporations based on par value.
Repurchased shares are called:
treasury stock
Does treasury stock vote or receive dividends?
A corporation hires an outside firm to act as registrar. What does the registrar do?
Maintains records of all shareholders names and addresses and is given the responsibility to make sure that the company does not issue more shares that authorized under its charter.
Everyday, as trades of stock settle, a report is made to the:______
What does he do?
transfer agent

He cancels old shares which have been sold and issues new shares in the name of new buyers of the stock. His records update daily. Usually handles mailings to shareholders.
The registrar acts as a watchdog over whom?
The transfer agent. Transfer agents can and have made mistakes
Instead of physically issuing and cancelling certificates, a newer method of recording owners is:
book entry. kept by transfer agent and by the clearing corporation that settles trades
What rights does the common stock holder have?
Right to vote for the board of directors.
Must approve of issuance of convertible bonds.
Items that require shareholder vote:
Declare a stock split
Declare a reverse stock split
Issue convertible bonds or preferred stock
Issue stock options to officers on a preferred basis
What is statutory voting?
100 votes max are allowed for each directorship
What is cum voting?
6 directorships x 100 votes=600 votes which can be cast in any manner. Benefits minority(small) investor.
Most corporations use which type of voting?
What are proxies?
Voting cards sent by a corporation. Completed by shareholders who do not attend an annual meeting.
Class A stock has all/limited voting privileges?
Class B stock has all or limited or no voting privileges?
none or limited
Do Common shareholders have the right to inspect books and records?

Do they have the right to transfer ownership?
Yes and yes
Negotiable securities can/cannot be traded?

Negotiable CAN

If a corporation goes bankrupt or is dissolved, when is the common stockholder paid?
What is the declaration date?
What is the record date?
What is the payable date?
The date the dividend is declared
The date on which the corporation takes the shareholders names and addresses from the transfer agent records for mailing the dividends.
The date the dividend checks will be mailed by the corporations transfer agent
What is regular way settlement?
3 business days after settlement
Who sets the declaration, record, and payable date?
Board of directors
Ex dividend date for cash dividends is ___ days prior to record date
If a company wants to issue new shares, it gives its existing shareholders "first chance" on the issue. This is called:
preemptive right for a rights distribution
In a rights distribution existing shareholders can subscribe at a lower/higher price?
Who issues additional shares in a rights offering?
Rights agent
Rights expire in
30-60 days
In a rights offering are fractional shares rounded to one whole share?
Preferred stock is termed a ___ security because it has priority over the common stock issued by the company.
If a company declares a dividend, who receives first Preferred or common stock holders?
Preferred dividends are paid:
Preferred differs from common in that is pays a _____ dividend rate.
____% if dividends received are not taxable to the small investor?
70%(if the position is held in less than 20% of the outstanding stock, if more than 20% is held the exclusion increases to 80%)
Once preferred shares are issued, they trade in the market. Preferred stock price movements influenced by:
Interest rate movements
What is formula for current yield?
Annual income/Market price
What is the formula for theoretical market price?
annual income/market yield
If interest rates rise what happens to preferred stock prices?
What is cumulative preferred?
If the issuer omits dividend payments, they "accumulate" and are paid IF the issuer can ever resume making dividend payments. All accumulated preferred dividends must be paid in order to make a common dividend distribution
What is convertible preferred?
The preferred shareholder can convert his shares into common stock of the issuer based on a predetermined price.

In addition to the fixed dividend rate, convertible holders can enjoy capital gains if the price of the common stock moves up
What is the conversion ratio?
Par/Conversion Price
What is the parity price of preferred equation?
Market price of common x conversion ratio
What is participating preferred?
In addition to the fixed dividend rate, the preferred participates in any extra dividends declared by the Board of Directors. AKA, Performance preferred.
Warrants expire in:
5 years
Warrants are issued at a _________ to the stock market price.
substantial premium
What is an ADR?
Vehicle for trading foreign securities in the U.S.

Banks hold foreign securities in Country of Origin

No voting or preemptive rights
All exchange listed ADRS are
Sponsored ADRS are often called:
Non sponsored ADRS are:
assembled by banks and broker dealers without the issuers participation. Trade OTC.
Dividends from ADRS are declared in ______ currency:
foreign currency, converted into U.S. dollars and remitted to the receipt holders by the intermediary bank.
Market price of ADR influenced by:
Performance of company stock and currency exchange fluctuations
What is the P/E ratio?
market price of security/earnings per share
What is the earnings per share ratio?
Market price/multiple
How often is Standard and Poors stock guide published?
Common dividends are declared_________ paid________
quarterly, quarterly
Outstanding stock is:
issued stock-treasury stock
What is a bond?
Debt security which obligates the issuer to pay interest(usually semi annually) and to repay the principal amount when the debt matures
Bonds are issued with a ________ par value and a ____rate of interest on the debt.
stated, stated
Bonds can be issued with a stated par value without a stated rate of interest. These are called
ZERO coupon bond
A bond issue where every bond has the same interest rate and maturity is called a:
TERM bond issue
A bond issue with differing maturities is a
serial bond issue. (Munis and Corp EQUIPMENT TRUST CERTIFICATES)
U.S government issues are typically_____ bonds
A bond issue where the bonds have the same maturity but different dates of issuance is a:
SERIES bond issue
Corporate bonds quoted:
% if par in 1/8s
Government bonds quoted in:
% of par in 1/32nds
Both Corporate and government bonds are quotable on a percentage of pay basis because:
They are both TERM bonds
What is the reason why government bonds are quoted in 32nds?
Government trading is much more active. Traders are willing to trade on narrower margins.
Serial bonds are quoted on a ________ basis
Basis quotes are in ________
yields. A quote of 5.50% is a bond priced to yield 5.50%
The difference between 5.50 and 5.60 is ___ basis points
If the market interest rate move up, bond price must:
Discount bond: If the market interest rate moves down, the price of the bond must:
move above par so that the bond gives a competitive yield to the current market
Corporate and government bonds are quoted on
percentage of par basis because they are term bonds
Municipal serial bonds are quoted on a:
yield basis.
Longer maturity, ______ volatility
shorter maturity, __________ volatility
Lower coupon
Greater Volatility
Higher coupon________volatility
What issues are most volatile?
Long term zero coupons issues.
What is the nominal yield?
Stated rate of interest on the bond
On a discount bond the current yield is ________ than the nominal yield
What is the formula for YTM?
ann income+annual gain(OR -ann loss)/purchase price+redemption price/2
Arrange the yields for DISCOUNT bonds from lowest to highest:
Nominal Yield, Current yield, YTM
Arrange the yields for premium bonds from lowest to highest:
Current Yield
Nominal Yield
Call on a bond occurs when:
interest rates DROP
Call protection is typically:
10 years
Call price sets________ on market price
Put price sets_________on market price
Ratings agencies only rate bonds for:
Credit risk
The 2 main ratings agencies are:
Moody's and Standard and Poor's.
Are government bonds rated?
No, because they are considered to have no credit risk
What are the top for ratings four investment grade by Standard and Poors?
The ratings used for short term issue commercial paper by Moody's is:
P1 P2 P3 and NP
Moodys Muni ratings are:
Mig1 Mig2 Mig 3 and SG
Long term maturities, low coupon rate bonds, and deep discount bonds are most susceptible to _________ risk.
Interest rate
A normal(ascending)yield curve is typical during:
periods of economic expansion, when monetary policy is loose.
Short term rates move ________ than long term rates.
As short term rates rise closer to Long term levels the yield curve...
flattens out
If the federal reserve really tightens short term credit short term rates can rise above long term rates. This is called an...
inverted yield curve
A positive curve indicates that investors expect interest rates to:
A negative curve indicates that investors expect interest rates to:
Widening spread indicates coming_____
Narrowing spread indicates coming _______
Corporations issue debt to raise __________
Intermediate and long term bonds are typically issued in:
fully registered or book entry form.
Short term commercial paper is issued only in:
book entry form
What is the purpose of a trust indenture?
This is the bond contract. It spells out the interest rate, maturity, collateral, call or put provisions, and all other relevant features. Trustee is usually a commercial bank.
All corporate issues of 5million or more must have a trust indenture
Long term corporate debt is funded/unfunded debt?
If a trust indenture is open end, what does this mean?
A corporation can sell additional bonds having equal status against the real estate.
Mortgage bonds are the most common form of corporate debt and are the principal financing source for:
public utilities
Equipment Trust Certificates typical financing for:

What form are they issued in?
airlines, trucking companies, and railroads
Issued in Serial form
Non callable, rated highly
Unsecured corporated debt backed by:
Issuers promise to pay.
Commercial paper sold at________- matures at _____--
Sold in________ form

Investors are _______- investors
discount, face value

book entry

Income bond only obligates issuer to pay if it has_________

These bonds trade____
sufficient earnings

AKA adjustment bonds

Flat (without accrued interest)
Convertible bonds are corporate________.

These can be converted into________

The conversion price is set at a ____ to the stock's current market price.

the common stock of the issuer
What is the equation for parity price of bond?

Parity price of stock?
Conversion ratio x stock market price

Bond market value/conversion ratio
When a convertible security trades above parity, the conversion feature has_________-value
What is arbitrage?
A trader buys the lower price security and simultaneously sells the equivalent higher priced security to lock in the profit before someone else does.
When a convertible security is above par it acts like________ Below par acts like________
What are the terms of a sinking fund provision?
allows issuer to retire portions of the issue by either calling the bonds or buying the bonds in the open market if the price is lower than the call price.
A corporation issues refunding bonds when interest rates have:
dropped. or when it simply does not have the funds or the desire to retire the bonds
Corporate debt is traded principally in the _______market.

The NASDAQ stock market quotes_______ corporate bonds. Does not quote ________corporate bonds


NOT Non convertible
A round lot trade of bonds is:
5 1k value bonds($5000 face amount)
Corporate bonds quotes are in the:
yellow sheets
Direct paper is paper bought from the:
Regular way corporate bonds trade:
Cash settlement on Corporate bonds occurs:
same day as trade dated before 2:30 p.m.
Corporate bonds trades settle in_________funds

Government funds settle through____
clearing house

GSCC(Government Securities Clearing Corporation) Referred to As FED FUNDS
For corporate bonds: Interest accrues:

Government agency interest accrues:

Government issues accrue:
30/360 Does not include settlement date
actual/actual Does not include settlement
Which bonds trade flat?
defaulted, income, zero coupon, commercial paper.
Commercial paper yields listed in:
Wall Street Journal
Standards and Poors publishes a called bond record. How often is his published?
Twice a week
With a discount bond, or commercial paper is discount fully taxable in for that tax year?
For obligations maturing over one year, the IRS requires that the pro-rata portion of the_______ earned that year be taken as interest income on the tax return
In a corporate liquidation what is the priority of payments to creditors?
Secured creditros(mortgage bondholders)
Unpaid wages, taxes,
debenture bondholders
subordinated debenture bondholders
Preferred stock holders
common stock holders
A person who makes a secondary market in corporate bonds is called a
The U.S government issues debt in order to:
finance the running of the government
Negotiable government debt issues are:
Long term bonds, intermediate term notes and short term notes
New issues are in what form?
Book entry
U. S. Government debt is sold at________ by ________-bid

This is held________
Agency debt is not directly backed by
the U.S. Governments promise to pay
How long is maturities on treasury bonds?
Treasury notes?
Treasury bills?
30 years
1-10 years
1,3, and 6 months securities
Interest from U.S. government obligations subject to ________tax not to________tax
Purchasers of zero coupon treasury receipts are subject to
liquidity risk
Treasury strips are_______-obligations of the U. S. government.

They are made from ___year or longer maturities
Available only in__________ form
Disount is taxable annually as_____
book entry
interest income received
Farmers can obtain low rate financing through the________.
Are they directly backed by U. S. government?
Federal Farm Credit Consolidated System.
What do federal land banks do?
Make long term loans to farmers secured by first mortgages on farm buildings and land.
Who makes interemediate term loans to farmers, up to 5 years for agricultural production?
Federal Intermediate credit banks

Implicitly backed by U.S. government gives higher yield
These have maturities from 5-270 days
Banks for cooperatives
What does the Federal Home Loan bank do?
Loans funds to savings and loan institutions with the main collateral being S and L mortgages.
Is Fannie Mae listed on NYSE?
Yes, Used to be owned by government
A tac bond protects against what type of risk?
Not against_____
extension risk
PAC is buffered against
prepayment and extension risk
CMOS are available in _____denomination
CMOS are quoted in
Cmos are backed by_______
CMOS are exempt/non exempt?
32nds. Very often CMOS are also quoted on a yield spread basis.
Backed by mortgage pass through certificates held in trust

Trading of government and agency securities takes place solely in the __________market
Quotes for U.S. government issues are placed by the primary dealers on____
a computer quote system through services such as Bloomberg, Reuters, Bridge Information Systems.
Agency debt trading is less/more active than U.S. governments?
Agencies are quoted on a _____________- to equivalent maturity treasuries
yield spread basis
Trades of U.S. government issues settle regular way on ___________
Cash settlement is________
Trades settle in_______
The business day after trade date
Same day before 2:30 p.m.
Fed Funds
Municipal bonds are?
debt issues of state and local governments territories and political subdivisions.
Munis are registered_________-.
Fully registered or book entry
All muni issues have a ___opinion printed on the face of the bond. The bond counsel examines the issue for_____________
legality, validity, make sure interest exempt from Federal tax under current law
Long term munis are issued at_____ pay interest_____

Short term issued at _________ mature at________
These are ________bonds
A general obligation bond is backed by___________
Unlimited_________taxing power
the full faith, credit, and taxing power of the issuer.
State issues are backed by________
Income and Sales taxes.
What is a revenue bond?
A bond backed by a specific source of revenue to which the full faith and credit of the issuer is not pledged. Revenue bonds are self supporting
Greater risk than G.O. bonds. Trade at higher yields.
What is a maintenance covenant?
A promise by the issuer to maintain the facility in good repair
What is the rate covenant?
A promise by the issuer to maintain fees for using the facility at a high enough level to cover debt service.
What is a net revenue pledge?
after Operation and Maintenance, the remaining amout pledged to bondholders
What is a special tax bond?
Secured by tax other than ad valorem such as excise taxes such as cigarettes, liquor, gasoline taxes.
What is a special assesment bond?
To fund an improvement that does not benefit the general public but rather a small portion of the community.
What is a double barrelled bond?
Issue backed by a revenue source other than ad valorem and by the faith and credit of a muni issuer
Short term muni notes are usually under__yr maturity.
Issued at_______ with a stated interest rate.
What is a BAN?
Issued to start capital projects: Paid off by the placement of the final long term bonds issue.
What is a CLN?
Issued to start the building of multifamily housing projects. Are typically issued up to 3 years
Variable rate demand notes have almost ________market risk
What is the formula for debt per capita?
net overall debt/population
What is the formula for Debt to assessed valuation?
Net overall debt/assessed property value
Debt per capita_______used widely
Debt to assessed valuation________used widely
is not
What is the collection ratio?
taxes collected/taxes assessed
What is the debt service coverage ratio?
pledged revenues/debt service requirement
Muni bond insurers are:
Munis trade_______.
Intrastate issues are_______exempt
TRIPLE, Federal state and local
Who rates munis for marketability risk?
What is the blue list?
Printed dealer listings of muni bonds offered each day.
What is the brokers wire?
electronic wire service giving current trading information to muni firms
All offers made in dealer publications must be________

must be willing to sell
Brokers Broker ________carry inventory
Acts as________
does not
Workable is a _____--bid
A round lot for munis is_________
100k face amount
5k face amount
What is PSA
Public Securities Association
Most muni and government dealers belong to PSA
Interest on muni bonds accrues_____

Muni notes________
What is a bond with enhanced credit
insured bonds
What is the blue list total?
total dollar amount of muni bonds offered each day
Aside from the blue list, what other sources offer info about the muni secondary market
Brokers wire
Muni bond interest is ______from federal
_________-to state
What is the formula for equivalent taxable yield?
Tax free yield/100-tax bracket
A bank may deduct _______% of interest expense yet receives tax free incom
What is a money market instrument?
An instrument to matures in one year or less
The federal reserve is a critical player in the Money Market. Why?
The Fed attempts to control the amount of credit available through open market operations.
The largest money market instrument is:
T bills

Any treasury security with 1 year or less to maturity is considered a money market instrument
A bankers acceptance is a money market instrument. What is it used to for?
To finance imports and exports.
Are negotiable CDS(jumbo CDS) money market instruments?
Yes. Long term CDS do have market risk.
Repos by the Fed Reserve_______-credit
Reverse repo_______credit
Repurchase agreement Interest rates track_________rate
Fed Funds rate
Repurchase agreements do not have__________risk
Do have ________
liquidity due to their short duration
purchasing power risk
What is the shortest term money market instrument?
Federal Funds
What is the effective Fed Funds rate?
gives an indication of the daily demand for reserves and is the daily average of many banks rates
What does LIBOR stand for?
London Interbank offered rate

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