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SIE Study Guide: Capital Markets and SEC
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SIE Study Guide: Capital Markets and SEC

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Questions and Answers

What are the short term obligations issued at a discount called?

Money market instruments

What is the maximum maturity for money market instruments?

52 weeks

Which of the following are characteristics of Money Market Instruments? (Select all that apply)

  • High risk
  • Issued at a discount (correct)
  • Low yields (correct)
  • High liquidity (correct)
  • How often are Treasury Notes sold at auction?

    <p>Every 4 weeks</p> Signup and view all the answers

    When do Treasury Notes pay interest?

    <p>Every 6 months</p> Signup and view all the answers

    What is unique about Treasury Receipts?

    <p>They are not issued by the US Treasury.</p> Signup and view all the answers

    What is the maturity range for Treasury Bonds?

    <p>10-30 years</p> Signup and view all the answers

    Callable bonds can be redeemed before maturity at the option of the issuer.

    <p>True</p> Signup and view all the answers

    What types of issuers typically issue Commercial Paper?

    <p>Corporations and banks</p> Signup and view all the answers

    What is a key characteristic of Bankers Acceptances?

    <p>They are issued at a discount to face value.</p> Signup and view all the answers

    What do Repurchase Agreements typically involve?

    <p>Sale of securities with an agreement to repurchase them.</p> Signup and view all the answers

    Which authority backs Ginnie Mae?

    <p>The full faith and credit of the US government.</p> Signup and view all the answers

    What characterizes corporate bonds?

    <p>They are long-term debt issued by private corporations.</p> Signup and view all the answers

    What are General Obligation Bonds backed by?

    <p>The full faith and credit of the municipality</p> Signup and view all the answers

    Which of the following describe Revenue Bonds? (Select all that apply)

    <p>Not subject to debt limits</p> Signup and view all the answers

    What defines coterminous debt?

    <p>Debt issued by multiple taxing agencies sharing the same geographic boundaries.</p> Signup and view all the answers

    What are special tax bonds secured by?

    <p>One or more taxes other than ad valorem.</p> Signup and view all the answers

    What is the typical role of a buyer in options trading?

    <p>They have rights.</p> Signup and view all the answers

    When is a call option considered to be in the money?

    <p>When the current market price is above the exercise price.</p> Signup and view all the answers

    What is Section 1?

    <p>Knowledge of Capital Markets</p> Signup and view all the answers

    What is the purpose of the SEC?

    <p>All of the above</p> Signup and view all the answers

    When was the SEC created?

    <p>1934</p> Signup and view all the answers

    What is the largest SRO?

    <p>FINRA</p> Signup and view all the answers

    What does CBOE stand for?

    <p>Chicago Board Options Exchange</p> Signup and view all the answers

    What is the primary role of FINRA?

    <p>License and regulate broker-dealers</p> Signup and view all the answers

    What does MSRB stand for?

    <p>Municipal Securities Rulemaking Board</p> Signup and view all the answers

    Who manages federal finances in the US?

    <p>Department of Treasury/IRS</p> Signup and view all the answers

    What does NASAA stand for?

    <p>North American Securities Administrators Association</p> Signup and view all the answers

    What is the primary function of the Federal Reserve?

    <p>All of the above</p> Signup and view all the answers

    What does SIPC protect?

    <p>Customers' accounts in broker-dealer bankruptcy</p> Signup and view all the answers

    What type of agency is the FDIC?

    <p>Independent agency</p> Signup and view all the answers

    What are market participants?

    <p>Investors and professionals in the capital market</p> Signup and view all the answers

    What do brokers do?

    <p>Buy/sell securities for customers or their own account</p> Signup and view all the answers

    What is a primary market regulated by?

    <p>Securities Act of 1933</p> Signup and view all the answers

    What is a secondary market?

    <p>Aftermarket where investors buy/sell to each other</p> Signup and view all the answers

    What does ECN stand for?

    <p>Electronic Communication Network</p> Signup and view all the answers

    What triggers the Federal Reserve to sell bonds?

    <p>Taking money out of circulation</p> Signup and view all the answers

    What are indicators?

    <p>Metrics that predict or confirm economic trends</p> Signup and view all the answers

    What is monetary policy?

    <p>Changing the interest rate and influencing the money supply</p> Signup and view all the answers

    What is GNP?

    <p>Gross National Product</p> Signup and view all the answers

    Study Notes

    Knowledge of Capital Markets

    • Understanding the various roles, regulations, and entities in capital markets is crucial for effective participation and compliance.

    The SEC

    • Established by Congress in 1934 as a U.S. federal government agency.
    • Aims to protect investors, maintain fair and efficient markets, and facilitate capital formation.
    • Enforces several key laws including the Securities Act of 1933 and 1934, and the Investment Company Act of 1940.

    SROs (Self-Regulatory Organizations)

    • Organizations that create rules and regulations to promote order in specific industries.
    • FINRA is the largest SRO regulating the securities industry.

    CBOE (Chicago Board Options Exchange)

    • Originated the VIX; first recognized securities exchange for option trading.
    • Oversees standardized options and related contracts listed on its exchange.

    FINRA

    • An independent, non-governmental authority that licenses and regulates broker-dealers.
    • Audits firms, ensures compliance, and governs trading of various securities including equities and options.

    MSRB (Municipal Securities Rulemaking Board)

    • Oversees U.S. municipal securities and supports FINRA in regulatory efforts.

    Department of Treasury/IRS

    • Manages federal finances including tax collection and public debt.
    • The IRS specifically administers federal tax laws.

    State Regulators

    • Enforce regulations on local services, insurance, banking, and consumer protection.

    NASAA (North American Securities Administrators Association)

    • The oldest international organization focused on investor protection.
    • Functions as a state regulatory body.

    The Federal Reserve

    • The central bank responsible for monetary policy, clearing checks, supplying currency, and setting interest rates.
    • Independent body focusing on broader economic interests rather than political ones.

    SIPC (Securities Investor Protection Corporation)

    • Protects customer accounts in the event of broker-dealer bankruptcy; coverage up to $500,000 total, with $250,000 for cash.
    • Oversees the liquidation of member firms.

    FDIC (Federal Deposit Insurance Corporation)

    • Independent agency that insures deposits in banks.
    • Created to maintain financial stability and funded by premiums from banks.

    Market Participants and Their Roles

    • Investors, broker-dealers, investment advisors, and custodians each play distinct roles in the capital markets.

    Investors

    • Can be categorized as accredited, institutional, or retail based on their investment capabilities and capital deployment expectations.

    Broker-Dealers

    • Engage in buying and selling securities both on behalf of customers and for their own accounts.
    • Types include introducing brokers, clearing brokers, and prime brokers.

    Prime Broker

    • Manages accounts across several clearing houses, handling back-office operations for clients.

    Investment Advisors

    • Provide investment advice and manage assets for a fee, encompassing both individual and institutional clients.

    Municipal Advisors

    • Offer guidance to local governments regarding municipal offerings and bond issuance.

    Issuers and Underwriters

    • Legal entities or syndicates that develop, register, and sell securities to raise capital.

    Traders vs. Investors

    • Traders focus on short-term market trends, while investors often pursue long-term strategies; trading incurs capital gains tax and commissions.

    Market Makers

    • Provide liquidity by buying and selling securities and are obligated to maintain quotes during trading hours.

    Custodians

    • Hold assets for safekeeping without fiduciary responsibility for those assets.

    Trustees

    • Manage trust assets and act as fiduciaries to protect beneficiaries' interests, especially in bond agreements.

    Registrars

    • Ensure that companies issue only authorized shares to maintain investor protection.

    Transfer Agents

    • Maintain investor records and ensure proper handling of security ownership and dividend payments.

    Depositories and Clearing Corporations

    • Facilitate transaction confirmation, settlement, and delivery in an efficient manner.

    DTCC (Depository Trust and Clearing Corporation)

    • Provides clearing and settlement services, handling most U.S. financial market transactions.

    OCC (Options Clearing Corporation)

    • Standardizes option contract terms and guarantees performance of these contracts.

    Primary Market

    • Regulated under the Securities Act of 1933; involves new issuances where the issuer benefits from sales.

    Secondary Market

    • Regulated under the Securities Act of 1934; where investors trade securities among themselves.

    Third Market

    • Exchange-listed securities traded over-the-counter, utilized by institutional investors to reduce transaction costs.

    Electronic Stock Exchange

    • Refers to platforms like Nasdaq which enable electronic trading of securities.

    OTC Market

    • A decentralized trading venue for unlisted securities, lacking a central marketplace but facilitated by market makers.

    ECN (Electronic Communication Network)

    • Matches buy/sell orders electronically, operational 24/7, enhancing trading opportunities for all participants.

    The Fourth Market

    • Direct trading of significant security blocks between institutional investors through electronic networks.

    Monetary vs Fiscal Policy

    • Monetary policy involves interest rates and money supply control, while fiscal policy includes government spending and taxation adjustments.

    Open Market Operations

    • Involves the buying and selling of government securities by the Federal Reserve to influence money supply.

    Federal Funds Rate

    • The interest rate at which banks lend to each other overnight.

    Discount Rate

    • The interest rate charged to commercial banks for loans obtained from the Federal Reserve.

    Interest Rate

    • The cost of borrowing money expressed as a percentage of the principal.

    Balance Sheets

    • Provide a snapshot of a company's financial position, detailing assets, liabilities, and shareholder equity.

    Income Statement

    • Reflects a company's financial performance over a period, summarizing revenues and expenses.

    Business Cycle

    • Describes the fluctuations in economic activity over time.

    Leading/Lagging Indicators

    • Leading indicators predict changes in the economy, while lagging indicators confirm trends after they have occurred.

    Coincident Indicators

    • Indicate the current state of the economy, moving in tandem with economic cycles.

    Inflation

    • Increased money supply leads to higher prices as purchasing power diminishes.

    Company Categories

    • Companies can be classified into cyclical, defensive, and growth categories based on their performance during economic fluctuations.

    Keynesian Economic Theory

    • Advocates for government intervention to ensure economic stability and growth via spending and taxation policies.

    Monetarist Economic Theory

    • Focuses on controlling the money supply as a primary driver of economic stability and price levels.

    US Balance of Payments (BOP)

    • Tracks all international transactions, comparing a country's foreign currency receipts to its currency payouts.

    GDP (Gross Domestic Product)

    • Represents the total market value of goods and services produced annually within a country.

    GNP (Gross National Product)

    • Measures the total economic output of a nation, including earnings from foreign investments.

    Role of Investment Banker

    • Acts as an intermediary for firms seeking to issue securities, conducting feasibility analyses and determining risks.

    Underwriting Syndicate

    • A group of investment banks that collectively manage the distribution of new securities, sharing associated risks.

    IPO (Initial Public Offering)

    • Initial securities issuance mechanism; not conducted via trading platforms.

    Secondary Offering

    • Involves the sale of existing securities by major shareholders with proceeds going to sellers rather than the issuer.

    Follow-on Offering

    • Additional stock issuance following an IPO that can either dilute or maintain existing shares' value.

    Best Efforts Underwriting

    • An underwriting strategy where the underwriter tries to sell as many shares as possible without guaranteeing all shares are sold.

    Firm Commitment Underwriting

    • A type of underwriting where the underwriter takes on financial responsibility for unsold shares.

    Shelf Registrations

    • Allow companies to register securities for future sales, facilitating flexibility in capital raising.

    Types of Equities

    • Include common stock, preferred stock, rights, warrants, and American Depositary Receipts (ADRs).

    Common Stock

    • Offers limited liability, voting rights, and residual claims on assets.

    Preferred Stock

    • Non-voting shares that provide dividend payments before common stock dividends.

    Rights

    • Short-term instruments offered to existing shareholders to purchase new shares at a lower price.

    Warrants

    • Long-term securities that grant the right to purchase stock at a specified price, typically above current market price.

    ADRs (American Depository Receipts)

    • Represent foreign securities held by U.S. banks, trading in U.S. markets and denominated in U.S. dollars.

    Types of Debt Instruments

    • Include treasury securities, agency bonds, corporate bonds, and municipal securities.

    Treasury Bills

    • Short-term government obligations issued at a discount, with maturities ranging from 4 to 52 weeks.

    Money Market Instruments

    • Short-term obligations maturing in under a year, known for their liquidity and low risk.

    Treasury Notes

    • Intermediate securities with maturities of 2 to 10 years that pay interest semiannually.

    Treasury Receipts

    • Zero-coupon bonds created by brokerages from existing treasury securities, not backed by the government.

    Treasury Bonds

    • Long-term securities with maturities of 10 to 30 years, paying interest every six months and callable after five years.

    Callable vs. Noncallable Bonds

    • Callable bonds can be redeemed early by the issuer, commonly used when interest rates decline, while noncallable bonds offer better protection for investors.

    Conversion

    • Allows the investor to convert a security into another form, typically shares of common stock.

    Types of Money Market Instruments

    • Include U.S. T-bills, Commercial Paper, Negotiated CDs, Bankers Acceptances, and Repurchase Agreements.

    Commercial Paper (CP)

    • Short-term unsecured promissory notes used by corporations for financing, typically with maturities of up to 270 days.### Commercial Paper
    • Short-term unsecured debt instrument issued by corporations and banks, typically for working capital.
    • Commonly used to fund short-term liabilities such as payroll, accounts payable, and inventory.
    • Maturities range from 1-270 days, with most issued for 90 days.
    • Priced at a discount and redeemed at face value.
    • Frequently issued by companies with high credit ratings and also known as promissory notes.

    Bankers Acceptances

    • Utilized in the import/export business as a short-term draft with a specified payment date drawn on a bank.
    • Payment dates typically fall between 180-270 days.
    • Issued at a discount to face value.
    • Commonly employed by U.S. corporations to finance international trade and referred to as bills of exchange.

    Repurchase Agreements (Repos)

    • Involves the sale of securities with the promise to repurchase them at a higher price later.
    • Always purchased at a discount, making them attractive for short-term financing.
    • Treasury securities are the most common collateral for repos, categorized as money market securities.

    Agency-Backed Securities

    • Entities closely tied to the government, such as Fannie Mae (FNMA), Freddie Mac (FHLMC), and Sallie Mae (SLMA).
    • Asset-backed securities are taxed at the federal level, while mortgage-backed securities incur taxation at all levels.
    • Generally offer higher yields compared to treasury securities.

    Nominal Yield

    • Refers to the interest rate printed on a bond, representing the percentage of interest the issuer pays relative to the bond's face value.
    • Annual interest payment can be calculated as nominal yield multiplied by the bond's face amount, typically $1,000 unless specified otherwise.

    Bonds and Interest Payments

    • Bonds provide fixed income investments, yielding consistent annual interest payments.

    Ginnie Mae (GNMA)

    • Government National Mortgage Association focused on acquiring special assistance mortgages with below-market rates.
    • Operates under the Department of Housing and Urban Development, primarily handling Veteran Affairs and Federal Housing Administration mortgages.
    • Backed by the full faith and credit of the U.S. government, presenting zero risk of default.
    • Requires a minimum investment of $1,000, offering monthly interest and principal payments that are taxed at all levels.

    Corporate Bonds

    • Long-term debt instruments issued by private corporations, usually paying semiannual coupons and returning face value at maturity.

    Debenture

    • Represents an unsecured debt obligation of a corporation, relying solely on its general creditworthiness, not collateral.

    Municipal Securities

    • Notes have maturities of less than 5 years, while bonds have longer maturities.
    • They are generally more marketable but yield less profit to dealers.

    Types of Municipal Bonds

    • General Obligation (GO) Bonds: backed by the full faith, credit, and taxing ability of the issuing municipality.
    • Revenue Bonds: secured by revenues generated from the facility financed by the bond issue.

    General Obligation Bonds

    • Backed by the taxing power of local governments, requiring voter approval for issuance.
    • Used for projects that benefit the entire community and often supported by ad valorem taxes.

    Revenue Bonds

    • Secured by revenues from specific municipal facilities, not contingent on ad valorem taxes.
    • Issued without voter approval and not subject to debt limits, providing financial flexibility.

    Coterminous Debt

    • Refers to the scenario where two or more taxing agencies share the same geographical boundaries and can issue debt independently.

    Special Tax Bonds

    • Secured by one or more taxes other than ad valorem, such as sales tax or excise taxes.
    • Considered self-supporting debt due to their dedicated tax revenue.

    Role of Buyers in Options

    • Buyers have rights and control over the options market, making bullish positions by paying premiums.
    • Sellers have obligations and prefer contracts to expire without exercising, keeping the premium without executing stock transactions.

    Options Basics

    • Buyers who exercise options benefit from contracts, while sellers aim to let contracts expire.
    • Call options are in the money when the current market price exceeds the exercise (strike) price.
    • Example: A call option for ABC at $50 becomes in the money when ABC stock price rises to $57, creating a $7 intrinsic value for the buyer.

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