CS Professional SMCF flashcards

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

Preference shares ranking

Preference shares rank ahead of ordinary shares for dividends and liquidation proceeds but behind all creditors. Variants include cumulative, participating, and redeemable preference shares, each altering the holder's cash-flow profile.

Clean versus dirty bond price

The clean price excludes accrued interest and is the quoted price. The dirty or full price equals the clean price plus accrued interest, and is the amount the buyer actually pays.

Discount yield formula

Discount yield equals face value minus price, divided by face value, multiplied by 360 divided by days to maturity. It understates the true investment return because it uses face value as the denominator.

Forward versus futures contract

A forward is a bespoke over-the-counter contract carrying counterparty credit risk. A future is exchange-traded, standardised, and marked to market daily through a margin account.

Rights issue mechanics

A rights issue offers new shares pro rata to existing holders, usually at a discount, protecting them from dilution. Shareholders may take up, sell, or let the rights lapse.

Bookbuilding process

Bookbuilding gathers indicative bids from investors to build a demand curve, then sets the offer price. It contrasts with a fixed-price offer where the price is set before marketing.

Greenshoe option

An over-allotment option letting the stabilising manager sell up to a set percentage more shares than the base deal, then buy them back to support the price after listing.

Firm commitment underwriting

The underwriter buys the entire issue and resells it, bearing the risk of unsold shares. In a best-efforts arrangement the underwriter acts as agent and bears no subscription risk.

Limit order versus market order

A market order executes immediately at the best available price, accepting price risk. A limit order executes only at the specified price or better, accepting execution risk.

Bid-ask spread as cost

The bid-ask spread is the implicit cost of immediacy paid by traders. It widens with volatility, thin liquidity, and information asymmetry between dealers and informed traders.

Short selling mechanics

The seller borrows securities and sells them, hoping to repurchase lower and return them. Maximum loss is theoretically unlimited because price can rise without limit.

Margin call trigger

If account equity falls below the maintenance margin, the broker issues a margin call requiring a deposit. Equity equals current market value of securities minus the loan.

Broker versus dealer role

A broker acts as agent for a client, earning commission and owing best-execution duties. A dealer acts as principal, trading from its own inventory and earning the spread.

Central counterparty function

A clearing house novates each trade, becoming buyer to every seller and seller to every buyer. It mutualises counterparty risk through margin requirements and a default fund.

Client asset segregation

Regulated firms must hold client money and securities separately from firm assets, so client property is protected and returned if the firm fails. Commingling is a serious breach.

Market maker obligation

A market maker continuously quotes two-way bid and ask prices in assigned securities, providing liquidity. In return it receives privileges such as fee rebates or order information.

Three limbs of market abuse

Market abuse comprises insider dealing, unlawful disclosure of inside information, and market manipulation. Manipulation includes spoofing, layering, wash trades, and marking the close.

Definition of inside information

Information is inside information when it is specific, not generally available, and likely to have a significant effect on price if disclosed. Trading or tipping on it is prohibited.

Disclosure of interests threshold

Crossing a specified shareholding threshold, commonly three or five percent depending on the regime, triggers a notification obligation so the market can see significant stakes.

Mandatory bid trigger

Takeover rules require an acquirer crossing a control threshold, often thirty percent of voting rights, to make a general offer to all shareholders at the highest price paid.

WACC formula

Weighted average cost of capital equals equity weight times cost of equity plus debt weight times after-tax cost of debt. Weights use market values and V equals equity plus debt.

CAPM cost of equity

Cost of equity equals the risk-free rate plus beta multiplied by the equity risk premium. Beta captures systematic risk; unsystematic risk is diversified away and not rewarded.

Tax shield of debt

Under Modigliani-Miller with tax, firm value rises by approximately debt multiplied by the tax rate because interest is deductible. Distress costs offset this benefit at high leverage.

Free cash flow to firm

FCFF equals EBIT times one minus the tax rate, plus depreciation, minus capital expenditure, minus the increase in working capital. It is discounted at WACC.

Enterprise value definition

Enterprise value equals market capitalisation plus net debt plus minority interest plus preference shares. It is capital-structure neutral and pairs with EBITDA in valuation multiples.

Gordon growth model

Price equals next year's dividend divided by the cost of equity minus growth. It requires growth below the cost of equity and assumes stable perpetual growth.

Sustainable growth rate

Sustainable growth equals return on equity multiplied by the retention ratio, where retention is one minus the dividend payout ratio. It is the growth fundable without new equity.

Bond price at par

A bond trades at par when its coupon rate equals its yield to maturity. Price rises above par when the coupon exceeds the yield and falls below par when it is lower.

Sharpe ratio

The Sharpe ratio equals portfolio return minus the risk-free rate, divided by the standard deviation of returns. It measures excess return per unit of total risk.

Duration and price sensitivity

Modified duration approximates the percentage change in bond price for a small change in yield. A duration of five implies roughly a five percent price fall for a one percent yield rise.

Value at risk meaning

A one-day 95 percent VaR of a stated amount means a five percent chance of losing more than that amount in a day. It says nothing about loss size beyond the threshold.

Board independence criteria

An independent director has no material relationship with the company, such as prior employment, advisory fees, or family ties. Independence supports objective oversight of management.