SIAA Fundamentals of Securities flashcards

35 cards. Read the term and the definition here. The deck at the top of this page is optional.

Primary vs secondary market

In the primary market the issuer sells new securities and receives the proceeds; in the secondary market investors trade existing securities with each other, and the issuer receives no cash.

Broker versus dealer

A broker acts as an agent for a client and earns a commission without taking principal risk; a dealer trades as principal, quotes bid and ask prices, and earns the spread.

Money market maturity limit

Money market instruments have original maturities of one year or less, such as Treasury bills, commercial paper, and certificates of deposit, while capital market instruments exceed one year.

Market liquidity dimensions

Liquidity comprises tightness (bid-ask spread), depth (quantity available at quoted prices), and resilience (how quickly prices recover after a large trade disturbs them).

Residual claim of common stock

Common shareholders rank last in liquidation, after creditors and preferred holders, but in exchange they hold voting rights and unlimited upside participation in the firm's growth.

Gordon growth model

The dividend discount model prices a share as P0 = D1 / (r - g), where D1 is next year's dividend, r the required return, and g the constant growth rate; it fails when g approaches r.

Sustainable growth rate

Sustainable growth equals ROE multiplied by the retention ratio (1 minus payout ratio), estimating how fast a firm can grow using internally generated funds without new external equity.

Cumulative preferred dividends

Cumulative preferred shares accumulate skipped dividends in arrears, which must be paid before any dividend can be paid to common shareholders; non-cumulative preferred forfeits them.

Modified duration

Modified duration equals Macaulay duration divided by one plus the yield per period; it estimates the percentage price change for a small change in yield, ignoring convexity.

Credit spread

The credit spread is the difference between a bond's yield and the yield of a benchmark government bond of the same maturity, compensating investors for default and liquidity risk.

Clean versus dirty price

The clean price excludes accrued interest, while the dirty (full) price includes it; the buyer pays the dirty price, equal to clean price plus accrued interest since the last coupon.

Yield to maturity assumption

Yield to maturity is the discount rate equating a bond's price to its cash flows, assuming all coupons are reinvested at that same yield until maturity, an assumption rarely realized exactly.

Investment grade threshold

Investment grade denotes ratings of BBB-/Baa3 and above; bonds rated below that threshold are high yield, carrying materially higher default risk and wider credit spreads.

Put-call parity

For European options on a non-dividend stock, C + K/(1+r)^T equals P + S; if the equality is violated, an arbitrageur can lock in a riskless profit.

Forward versus futures contract

Forwards are private, customizable, and settled at maturity with counterparty risk; futures are standardized, exchange-traded, and marked to market daily through a clearinghouse.

Option buyer payoff

At expiry a call buyer receives max(S - K, 0) and a put buyer receives max(K - S, 0); the buyer pays a premium upfront, and the maximum loss is that premium.

Plain vanilla interest rate swap

One party pays a fixed rate and receives a floating rate on a notional principal; the swap can be valued as the difference between a fixed-rate bond and a floating-rate bond.

Hedge fund fee structure

Hedge funds typically charge a management fee near two percent of assets plus an incentive fee near twenty percent of profits, often subject to a high-water mark.

Net asset value per share

NAV per share equals total fund assets minus total liabilities, divided by shares outstanding; open-end funds issue and redeem at this end-of-day value.

ETF creation and redemption

Authorized participants create ETF shares by delivering a basket of underlying securities and redeem shares for that basket, an in-kind mechanism that keeps market price close to NAV.

Expense ratio

The expense ratio divides annual fund operating expenses by average net assets; it excludes sales loads and the brokerage commissions the fund pays when trading its holdings.

Time-weighted versus money-weighted return

Time-weighted return removes the effect of external cash-flow timing and measures manager performance; money-weighted return (IRR) reflects the investor's actual experience including flows.

Market versus limit order

A market order executes immediately at the best available price with price uncertainty; a limit order sets a maximum buy or minimum sell price but may never execute.

Stop order mechanics

A stop order becomes a market order once the stop price trades; a stop-limit order becomes a limit order instead, which risks no execution during a fast-moving market.

Short sale mechanics

The seller borrows shares, sells them, and later buys them back to return to the lender; maximum loss is theoretically unlimited, and margin and locate rules apply.

Effective spread

Effective spread equals twice the absolute difference between the trade price and the midpoint of the prevailing quote, measuring the actual cost of immediacy paid.

Central counterparty novation

A central counterparty interposes itself between trade parties, becoming buyer to every seller and seller to every buyer, reducing bilateral counterparty risk through netting and margin.

Delivery versus payment

Delivery versus payment links securities transfer and cash payment so neither occurs without the other, eliminating principal risk in the settlement of a trade.

Settlement cycle T+1

Under a T+1 cycle, ownership and cash exchange one business day after trade date; many US equities settle T+1, while some bond trades settle same day or next day.

Fiduciary duty in asset management

A fiduciary must act in the client's best interest, manage conflicts, seek best execution, and disclose fees and risks clearly rather than merely avoiding outright fraud.

Suitability obligation

Firms must know the client, understand the product, and ensure recommendations fit the client's objectives, risk tolerance, and financial circumstances before advising a transaction.

Material non-public information

Information is material if a reasonable investor would consider it important and non-public if not broadly disseminated; trading or tipping on it constitutes insider dealing.

Investment policy statement

The IPS documents objectives for return and risk plus constraints of liquidity, time horizon, taxes, legal factors, and unique circumstances, and sets review and rebalancing procedures.

Capital asset pricing model

CAPM sets expected return equal to the risk-free rate plus beta multiplied by the market risk premium, where beta measures the asset's sensitivity to market movements.

Sharpe ratio

The Sharpe ratio divides portfolio return minus the risk-free rate by the portfolio's standard deviation, measuring excess return earned per unit of total risk taken.