SIE Study Guide: Capital Markets and SEC
40 Questions
100 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

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.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    This quiz focuses on key concepts related to capital markets, including the purpose and mission of the SEC. It is designed to help users understand the fundamentals of securities regulation and the role of the SEC in maintaining fair and efficient markets. Ideal for those preparing for the Securities Industry Essentials (SIE) exam.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser