TMExam.com Printable Flash Cards Section 2 Ch 2 - 7 in ......

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Printable Flash Cards Section 2

Ch 2 - 7 in Essentials

Version 4.1

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All information in this document was cross-referenced with or obtained from Essentials of Treasury Management, 4th Ed, which, itself, is a great

compilation of publicly available financial management information. All information in this file is segmented into associated chapters in Essentials of

Treasury Management, 4th Ed. This is not all of the information in the text, Essentials of Treasury Management, 4th Ed and is not meant to take the

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UCC Article 5

Defines and sets guidelines for Letters of Credit (L/C),

Documentary Draft and Documentary Demand for Payment.

Notes: ___________________________________________________

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TMExam.com II Correct: __ __ __

Describe DDA’s and TDA’s

DDA’s = Demand Deposit Account. Also known as a checking

account.

TDA’s = Time Deposit Account.

Types: Savings Accounts, Money Market Deposit Accounts (MMDA),

CD’s and NOW Accounts.

Notes:

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Credit Unions

Nonprofit. Generally only able to offer services to certain types of

“members”: teachers, labor unions, etc.

Deposits are insured by the NCUSIF not the FDIC.

Notes: _____________________________________________

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Four Main roles of the Fed

1. Monetary Policy

2. Currency Issuance

3. Supervision and Regulation

4. Government Services

5. Depository Institution Services

Notes: __________________________________________________

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Financial Crimes Enforcement Network (FinCEN)

FinCEN –Implements policies to detect and fight money laundering

by criminal or terrorist organizations

Notes: _____________________________________________

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Federal Deposit Insurance Corporation (FDIC)

Established in 1933 as part of the Glass-Steagall Act.

Provides insurance on bank deposits

Offers $250,000 insurance on consumer and commercial

deposits at banks and thrifts.

Supervises depository institutions

Becomes trustee in the event of a bank failure.

Owns the Deposit Insurance Fund (DIF)

Notes: ________________________________________________

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Securities and Exchange Commission (SEC)

Primary mission of protecting investors and maintaining the integrity of

the securities market

Requires companies to register IPO’s and disclose financial information

for investors to make sound decisions.

Regulates Mutual Funds, Investment advisors and monitors for insider

trading

Notes: ___________________________________________________

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Office of Foreign Asset Control (OFAC)

An office in the Treasury Department.

Enforces economic trade sanctions against foreign countries, Terrorist

sponsoring organizations and international drug traffickers.

Able to freeze foreign assets under US jurisdiction.

Notes:

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3 phases of money laundering

Placement: Depositing money into a financial institution

Layering: Creating financial transactions to hide original

origins of deposited money

Integration: Creating a legitimate explanation of funds

Notes: ___________________________________________________

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USA Patriot Act

In response to 9/11 attacks.

Adds more regulation on Financial Institutions in order to detect

terrorism financing

Implemented “know your customer” rules for financial institutions

Notes: _____________________________________________

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Sarbanes Oxley Act (SOX)

Companies must disclose if the audit committee has a financial

expert

Companies must develop internal controls for financial reporting

Companies must disclose code of ethics for officers

Requires an audit committee to preapprove services provided by

an auditor

Requires audit committee be briefed by auditors on company’s

accounting methods

Notes: ___________________________________________________

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Check 21

Allows for check truncation and electronic clearing of checks

Meant to improve the efficiency of the US payment system

Allows for Image Replacement Documents (IRD) as a legal

substitute for paper payment methods (except for foreign checks)

Notes:

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Gramm-Leach-Bliley Act

Allowed the creation of financial holding companies to own and

engage in a variety of financial activities.

Allowed foreign banks to enter the US markets more easily

Requires financial organizations to disclose their privacy policy

for sharing customer information.

Notes: ___________________________________________________

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Reg J, Reg Q

Reg J Established the check collection and settlement rules through

the Fed.

Reg Q Says that S and C corporations cannot receive interest on DDA

accounts (many provisions were removed as part of Dodd-Frank Act)

Notes: _____________________________________________

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Reg D, Reg E

Reg D Created the reserve requirement for depository institutions.

Reg E Protects consumers and sets guidelines for Electronic

transactions (ACH, Debit and Credit cards – but not Wires)

Notes: ___________________________________________________

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Reg Z

Protects customers from increases in credit card interest rates

Sets age limits on issuance of credit cards (21) without certain

qualifying factors being met

Requires credit card issues to receive permission to charge

over balance fees

Eliminates 2 cycle billing

Prohibits creditors from crediting minimum payment towards

lower interest rates first

Notes: ______________________________________________

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Reg BB, Reg CC

Reg BB requires banks to meet the credit needs of the

communities in which it does business – provisions of the CRA

Reg CC All about Checks – meant to speed processing of checks and sets

standards for endorsements. Sets rules for PTD

Notes: ___________________________________________________

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UCC Article 3

Determines what meets standards of accord and satisfaction for

negotiable instruments

Created the rule of “paid in full” satisfying full payment of debt

(payee currently has 90 days to return the check before it is considered

paid in full)

Notes: _____________________________________________

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UCC Article 4

Defines the rules in the relationship between the bank and its

Customers, when a bank can charge a customer and the customer’s rights

to use banking services

Customers can issue stop payments, bank does not have to pay stale dated

checks, customer must report fraudulent signatures (within 30 days of

receiving statement)

Bank not required to pay stale dated checks (over 6 months)

Notes: ___________________________________________________

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UCC Article 4A

Defines the rules surrounding Electronic Transactions (ACH, Wires,

CHIPS).

Security Procedures – use of security measures to protect the

customer and the funds from fraud (using PIN’s, information

verification, etc)

Consequential Damages – Says that Banks are not responsible for

losses due to bank error that are in excess of the actual loss (unless it

agrees to pay these damages in writing).

Notes: _____________________________________________

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Political Risk, Nationalization, Expropriation

Political Risk – Change in government policy may have an adverse

effect on a company’s position.

Nationalization – When a country takes ownership of the assets (land,

buildings, equipment) of a public property (or a specific industry such as

oil).

Expropriation – When a country takes ownership of a specific

company’s assets.

Notes: _____________________________________________

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Blocked Currency, Forced Reinvestment, Required

Majority Ownership

Blocked Currency – When exchange controls exist that will not allow

conversion to other currencies.

Forced Reinvestment – A transfer risk that requires that all profits

made in a country be reinvested into the country and not transferred

from the country.

Required Majority Ownership – Companies must be owned by

resident nationals.

Notes: _____________________________________________

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Shared Service Center

Shared Service Center (SSC) – A method of consolidated a variety of

business functions into one area: accounting, treasury, HR, etc, for use by

divisions of a company.

Notes: _____________________________________________

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AFP Service Codes (Essentials)

Six Character, alphanumeric codes that help identify, describe,

and report banking services and charges.

(Helps compare prices and services between banks, which is difficult

because banks use different explanations for the same services)

Notes: _____________________________________________

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Reserve Requirement, Earnings Credit Rate

Reserve Requirement – Currently 10%. This is the amount of collected

balances that the bank is required to maintain at the Fed. Since the bank

cannot use this money, it feels that its business customers should share

the expense.

Earnings Credit Rate – The rate that the bank uses, along with the

available balance, to determine the Earnings Credit. The earnings credit is

used to offset bank charges

Notes: _____________________________________________

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Request for Information (RFI)

Request for Proposal (RFP)

RFI – A request for information. Used prior to RFP – this is not to get

bids but to see who qualifies or to get some ideas of what to do.

RFP – Formal bid for services. Gives detail on what you are looking

for and asks for companies to explain how they can service you. Also

asks for pricing information (although pricing is not always the

deciding factor in RFP’s).

Notes: _____________________________________________

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Counterparty Risk

The risk that another party in a transaction or agreement will not fulfill

their requirements as promised.

There are multiple methods of reducing counterparty risk: Increase

number of counterparties, eliminate high risk counterparties, use third

party custodians, adjust liquidity allocations among counterparties,

implement balance limits on counterparties.

Notes: ___________________________________________________

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Bank Score Card, Relationship Review

Service Report Card – Used to rate banking services (Lockbox,

ACH, Internet Banking, etc.). Gives companies a method of evaluating

and comparing bank services and relationships.

Relationship Review – These are more formal than Report Cards and

allow two way communications between your company and the

service provider. Allows your company to rate service as well as

discuss future needs and expectations (Essentials).

Notes: _____________________________________________

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Service Agreement, Account Resolution,

Signature Card

Service Agreement – Detailed agreement between company and service

provider specifying and detailing the services to be provided.

Account Resolution – A bank required document that enables the

management or owners of a company to grant someone the ability to

manage the company’s bank accounts and bank services.

Signature Cards – A paper or electronic image of the signature of

authorized account signers. Banks use this for verification of signature.

Notes: _____________________________________________

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Account Analysis

A bank statement detailing banking services, volume, balances,

Earnings Credit, etc for the period.

822 is the ANSI transaction format for Account Analysis.

Notes: _____________________________________________

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Required Balance Calculation

Average Required Balance (CB) =

))1()365

( RRD

ECR

SC

CB = Required Collected Balance (to offset Service Charges)

SC = Bank Service Charges

ECR = Earnings Credit Rate

RR = Reserve Requirement (usually 10%)

D = Number of Days in Month

Notes: _____________________________________________

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Earnings Credit Calculation

Earnings Credit = AC x (1-RR) x (ECR x 365

D)

AC = Average Collected Balance (total collected balance ÷ days in cycle)

RR = Reserve Requirement (usually 10%)

ECR = Earnings Credit Rate

D = Number of Days in Month

Notes: _____________________________________________

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Financial Stability Board (FSB)

Based in Basel, Switzerland. Focused on promotion and implementation

of international regulatory, supervisory and financial sector policies.

Members of FSB are from G-20 nations, the world bank, IMF, BIS and

OECD, among others

Goals include: Maintaining Financial stability, promote transparency,

implement international financial standards and conducting peer reviews

Notes: ___________________________________________________

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Five General Areas that Regulation of FI’s is

Concentrated (Essentials)

Monitoring safety and soundness of the banking system

Setting monetary policy

Guidelines for bank and FI chartering

Allocating credit to certain sectors of the economy and consumer

protection

Protect investors who purchase securities through FI’s

Notes: _____________________________________________

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National Credit Union Administration (NCUA)

Commodity Futures Trading Commission (CFTC)

NCUA: Government agency that is responsible for chartering and

oversight of federal credit unions. It also manages the National Credit

Union Share Insurance Fund (NCUSIF), which is similar to the FDIC

CFTC: Regulates futures and options markets in the US. Dodd Frank

Act requires CFTC to work with the SEC to regulate OTC derivatives

Notes: ___________________________________________________

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Bank for International Settlement (BIS)

Based in Basel, Switzerland.

In general, BIS has 4 primary responsibilities: As a forum for

discussion and policy analysis among central banks, Acts as a center

for economic and monetary research, Acts as a counterparty for the

financial transactions of central banks, Acts as an agent or trustee for

international financial operations

Notes: __________________________________________________

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Basel Committee on Banking Supervision (BCBS)

Committee on Payment & Settlement Systems (CPSS)

BCBS: Standard setting body in the BIS and is a forum for cooperation

on banking supervisory issues. The objective is to improve banking

supervision and increase understanding of supervisory issues globally.

CPSS: Standard setting body for payment and securities settlement

systems hosted by the BIS. Is a forum for central banks in domestic

payment and clearing systems in addition to international and

multicurrency settlement systems

Notes: ___________________________________________________

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Int’l Org of Securities Commissions (IOSCO)

Financial Action Task Force (FATF)

IOSCO: Sets international standards for securities markets. The

members of IOSCO regulate over 95% of global securities markets.

FATF: International organization. Develops policies to fight

terrorism financial and money laundering both nationally and

internationally.

Notes: _____________________________________________

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International Association of Insurance Supervisors

(IAIS)

Standard setting group for insurance regulators globally and is tasked

with increasing cooperation of members internationally and domestically.

Goal is to ensure efficient, fair, safe and stable insurance markets (4th Ed)

Notes: ___________________________________________________

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Financial Stability Oversight Council (FSOC)

A committee led by the US Treasury Secretary that is responsible for

monitoring the financial system to identify threats to financial

stability. The FSOC cannot take action but can make

recommendations.

Notes: _____________________________________________

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Consumer Financial Protection Bureau (CFPB)

Fin Industry Regulatory Authority (FINRA)

CFPB: Created by the Dodd Frank Act. Oversees financial products and

services that are offered to consumers.

FINRA: regulates securities firms and registered securities firms that do

business in the US.

Notes: ______________________________________________

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The Dodd Frank Act

US Legislation that became effective in 2010 in response to the causes of

the Great Recession. The Act increases financial oversight of various

financial instruments, ends too big to fail, creates multiple agencies that

are charged with protecting consumers and monitoring the financial

system in multiple ways.

Notes: _____________________________________________

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Federal Insurance Office (FIO)

The Red Flag Rule

FIO: To be housed under the US Dept. of Treasury. When created, it

will be responsible for monitoring the insurance industry and providing

policy recommendations.

Red Flag Rule: Requires FI’s (any institution that holds a consumer

transaction accounts) to protect, prevent and mitigate identity theft risk

Notes: ___________________________________________________

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UCC Article 9

Pension Protection Act (PPA)

UCC Article 9: Covers lending transactions where collateral is taken

for lending money. The lender must file a UCC-1 form that lists the

collateral used to secure the loan.

Notes: __________________________________________________

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Sales Tax

Use Tax

Sales Tax: A tax that is charged to someone for purchasing a good or

service. The seller is responsible for charging it and remitting the tax to

the government.

Use Tax: A taxed charged after a sale, where no sales tax was collected.

The buyer is responsible for paying the tax to the government.

Notes: ___________________________________________________

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Unanimous Consent

Cram-Down

These are two methods of formulating a Ch 11 reorganization plan

Unanimous Consent: 2/3 of creditors and equity holders must agree

on the reorganization plan

Cram-Down: When the court forces a reorganization plan that it feels

is fair to all parties involved. Used when creditors and equity holders

do not agree on a reorganization plan

Notes: _____________________________________________

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3 Types of Formal Ch 7 Bankruptcy procedures

Informal Bankruptcy

- Freefall: Company enters bankruptcy with no plan to come out of it

- Pre-Arranged: Some creditors have agreed to bankruptcy plan but

it may not be binding

- Pre-packaged: A formal plan has been filed with the SEC and all

creditors have accepted it.

Informal Bankruptcy: Where a company does not file bankruptcy but,

instead, comes to an agreement with creditors on reducing debt in order

to assist the company in becoming financially viable.

Notes: ___________________________________________________

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Uniform Bank Performance Report (UBPR)

SAS 70 Audit

UPBR: Report published by FFIEC that allows you to evaluate the

performance of a bank. Three types of data are used: bank data, peer

group data, percentile ranking of the bank

SAS 70 Audit: An audit that monitors a financial institutions

operational risk.

Notes: __________________________________________________

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PCAOB

PCAOB – Public Company Accounting Oversight Board

Created by SOX – monitors all accounting organizations that provide audit

services to public companies.

Notes: _____________________________________________

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Non-cash US payment methods

Paper Items (checks, money orders, etc)

ACH

Wire transfer

Credit and Debit Cards

Notes: _____________________________________________

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Four types of Interbank check clearing methods

Clearing House – Banks in close proximity meet to “exchange” checks

that have been deposited to their bank.

Federal Reserve Bank – Fed receives checks and processes and sends

them to the appropriate bank.

Correspondent Bank – Bank A holds an account at Bank B specifically

for the clearing of checks (may also perform other services for the bank)

Direct Send – Bank A sends a cash letter to Bank B (or fed branch). This

allows the items to be processed more quickly.

Notes: _____________________________________________

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Ledger Balance, Collected Balance,

Available Balance

Ledger Balance – Total of all of the transactions that are showing up in

your bank system (regardless of the availability)

Collected Balance – Ledger Balance minus Deposit Float. Amount that

has been collected/settled.

Available Balance – Amount available – Collected balance plus amount

to be collected at the end of the day plus Reg CC required credits

(assigned/required float based on the deposit type).

Notes: _____________________________________________

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Pre-Authorized Draft, Money Order, Travelers

Checks

Pre-Authorized Draft/Check – ACH drafts, transaction is

initiated by the payee (loan payments, utility bills, etc)

Money Order – Prepaid check like payment instrument.

Travelers Checks – Prepaid check like payment instruments (very much

like money orders). 2 signatures are usually required for security

purposes.

Notes: _____________________________________________

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Procurement Cards (Purchasing Cards, PCards)

Used for employee business purchases – supplies, etc.

These allow the company to more efficiently track spending and keep

employees from filing for reimbursement for regular purchases.

Notes: _____________________________________________

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Smart Card

The information for purchase verification is stored in the card rather

than using a network to verify funds. Also called Chip Cards.

Notes: _____________________________________________

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ACH Transaction Participates (from Sender to

Receiver)

1. Originator (business initiating ACH transaction)

2. ODFI (bank that processes the origination)

3. ACH Operator (processes the transaction to the appropriate RDFI)

4. RDFI (Receivers Bank)

5. Receiver (Person receiving the ACH transaction)

Notes: _____________________________________________

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Clearing House Interbank Payment System (CHIPS)

A bank owned, real time settlement system that uses bilateral and

multilateral netting of payments.

CHIPS processes over 95% of USD cross border payments (chips.org)

Payments through CHIPS are final once released. CHIPS is governed by

UCC 4A

Notes: _____________________________________________

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Bank Clearinghouse

Bank Clearinghouse: Group of financial institutions that exchange

payments between each other in order to make financial transactions

processed more efficiently

Notes: _____________________________________________

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OCR

PTD

Optical Character Recognition (OCR) – reads information printed on

check and remittance data. Used in Lockbox to increase efficiency.

PTD – Issued to be paid by payor and not the bank

Notes: _____________________________________________

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___________________________________________________

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Debit Cards, Smart Cards, Stored Value Cards

Debit Cards – Funds are deducted directly from bank account or

giro account.

Smart Card – Contain a microchip that stores the value on the card that

offers security protection. These will be prepaid.

Stored Value Card – Offers no security protection and is able to keep

track of purchases made and balances. Used mainly as gift cards or

phone cards.

Notes: _____________________________________________

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___________________________________________________

___________________________________________________


SWIFT

Society for Worldwide Interbank Financial Telecommunications

A member-owned cooperative through which the financial world

conducts its business operations with speed, certainty and confidence.

More than 9,000 banking organizations, securities institutions and

corporate customers in 209 countries trust us every day to exchange

millions of standardized financial messages. (swift.com)

Notes: _____________________________________________

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Financial Action Task Force (FATF) and Office of

Foreign Assets and Control (OFAC)

FATF: International body that is tasked with creating and

promoting policies to fight money laundering and terrorism

financing.

OFAC: US body under the US Department of Treasury that is

tasked with creating, promoting and enforcing policies to fight

money laundering and terrorism financing

Notes: _____________________________________________

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Exchange Rate Calculations

Exchange Rate Calculations

if $1 = ₤1.5, then

$100 = 100 ÷ 1.5 = ₤66.66

And

₤100 = 100 x 1.5 = $150.00

Notes: _____________________________________________

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Scenario and Sensitivity Analysis

Simulation

Scenario Analysis – “what if” analysis of a projects outcomes

(worst case and best case scenario’s)

Sensitivity Analysis – Analysis of how sensitive the analysis is in

changes in assumptions.

Monte Carlo Simulation analytical technique that estimates an

outcome based on random variables.

Notes: _____________________________________________

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Cash Letter

Used in the Check Clearing Process where a bundle of checks is

packaged to be transferred between banks, a clearinghouse, or a federal

reserve office. It includes a list of the checks with dollar amount, $ total

and number of checks

Now, a cash letter can also mean a list of checks along with images

Notes: _____________________________________________

___________________________________________________

___________________________________________________

___________________________________________________


Factors of Check Availability

Paying Bank Endpoint

Time of Deposit

Day of Deposit

Specific Bank’s Availability Schedule

Notes: _____________________________________________

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___________________________________________________


Pre-Authorized Draft Transactions

Remotely Created Check

Pre-Authorized Transactions: Where the payor allows the payee to

debit an account for payment. Can be reoccurring or one time

Remotely Created Check: Electronic Debit that is approved for a one -

time payment. Many times, this is created as an ACH from an actual

check at the point of sale.

Notes: _____________________________________________

___________________________________________________

___________________________________________________

___________________________________________________


Participants in a Credit Card Transaction

Cardholder

Issuer

Merchant

Merchant Acquirer

Acquiring Processor

Issuer Processor

Network Operator

Notes: _____________________________________________

___________________________________________________

___________________________________________________

___________________________________________________


Ghost Cards, Department Cards, Single Use Cards

Ghost Cards: No actual card is created. A number is supplied to a

specific vendor for purchases

Department Cards: P-card that is linked to a specific department rather

than an individual user (Essentials)

Single Use Card: Cards or card numbers created for one specific

purchase or payment

Notes: _____________________________________________

___________________________________________________

___________________________________________________

___________________________________________________


Bank Identifier Code (BIC)

International Bank Account Number (IBAN)

BIC: International standard to identify a bank country and branch

location

IBAN: International standard to identify bank accounts across borders

Notes: __________________________________________________

________________________________________________________

________________________________________________________

________________________________________________________


Cash Letter

Ledger Cutoff

Cash Letter: A group of checks with a list showing the detail of the

checks.

Ledger Cutoff: Time a deposit must be received to be credited to your

ledger balance that day.

Notes: _____________________________________________

___________________________________________________

___________________________________________________

___________________________________________________


FedGlobal ACH Payments

FedGlobal: A service offered by the Federal Reserve to process ACH

credits across borders.

Notes: _____________________________________________

___________________________________________________

___________________________________________________

___________________________________________________


Ghost Card, Departmental Card,

Single Use Card

Ghost Card: Where a card number is issued to make purchases but no

physical card is issued

Departmental Card: Where a card is issued to a department of a company

rather than to an individual of the company

Single Use Card: As the name implies, this is a card that is issued for one

purchase

Notes: ___________________________________________________

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_________________________________________________________

_________________________________________________________


What is:

Private Placement and IPO

Private Placement – When a company sells its securities to a limited

number of investors. Usually less expensive to the seller than offering

to the public.

IPO (Initial Public Offering) – Company offers stock for public sale

for the first time.

Notes:

___________________________________________________

___________________________________________________

___________________________________________________

___________________________________________________


Money Market

Short-term

Maturity of 1 year or less (usually)

Highly liquid

Generally invested in very safe securities: T-Bills, Commercial

Paper, etc.

Notes: ___________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________


Capital Market

Long-term

Maturity of more than 1 year

Less liquid than Money Market Securities

Unlike Money Market, these may be in riskier investments: bonds,

stock, etc.

Notes:

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___________________________________________________

___________________________________________________

___________________________________________________


T-Bills, Government Sponsored Enterprises,

Municipal Notes

T-Bills – Issued by the US Treasury. Considered Risk Free. Maturity of 1

yr or less. Can be bought and sold easily for low transaction fees.

GSE – Ginnie Mae, REMIC’s, Mortgage Backed Securities, Fannie Mae,

Freddie Mac, Sallie Mae. Backed by US Government.

Municipal Notes Issued by State and Local Government. Considered

safe and may offer Tax Exemption on Interest.

Notes: _____________________________________________

___________________________________________________

___________________________________________________

___________________________________________________


Convertible Bonds, Warrants

Convertible Bonds – Bonds that can be converted to shares of stock

at a specific time and/or for a specific amount per share (some classes

of stock may also be convertible).

Warrants – Attached to Bonds and give the bondholder the ability to

purchase shares of stock at a specific time and/or for a specific amount

per share. (Can be attached to preferred stock).

Notes: _____________________________________________

___________________________________________________

___________________________________________________

___________________________________________________


Stock Terms Par Value, Retained Earnings,

Paid-in Capital

Par Value – The nominal amount that the issuer of a security places on

each share. Usually an arbitrary low number (Ex. $1. There can also be a

$0 par value).

Retained Earnings – Profits generated that are held within the company

and not paid to shareholders. These funds are meant to be used for

company reinvestment (to create more value).

Paid-in Capital – Amount paid at time of stock issuance per share of

stock (Ex from Essentials – New share costs $25 and has a $1 par value,

the Paid in Capital is $24 per share).

Notes: _____________________________________________

___________________________________________________

___________________________________________________

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Term Loan

Term Loan – Medium or Long term debt usually used for fixed assets

(plant, machinery, etc) and may be for duration equal to the expected

life of the asset. Payments are usually in installments but other

payment methods are available.

Notes: _____________________________________________

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Treasury Stock

Treasury Stock is stock that has been repurchased by the company.

These stocks have no votes and do not receive dividends.

Treasury stocks can 1) be retired or held to be resold, 2) used for

stock options, warrants, or convertible bonds or 3) used to fund

repurchases or future acquisitions

Notes: _____________________________________________

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Treasury stock, Book Value per share,

Market Value per share

Treasury Stock – Stock repurchased by a company. Held within

company for reissue or retirement. Does not carry votes or receive

dividends.

Book Value per Share – Stockholder equity divided by outstanding

shares of stock.

Market Value per Share – Current selling price per share of stock in

the market.

Notes: _____________________________________________

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Medium or Intermediate Term

Notes and Bonds and Long Term Bonds

The issuer is the Borrower and the investor is the lender. Bonds are

coupon with investment amount paid at maturity or zero-coupon with

investor paying discounted amount and receiving face value at maturity.

Bonds and other debt generally have precedence to company assets in

bankruptcy (compared to stocks)

Medium or Intermediate Term – Usually for terms of 2 to 10 years.

Very similar to LT bonds but with a shorter maturity.

Long Term Bonds – Usually for 10 to 30 years.

Notes: _____________________________________________

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Covenants and indentures, debentures, cure period

Covenants or indentures – legally binding requirements that the

borrower of funds (or bond issuer) must comply (maintain certain

Quick Ratio, cannot pay dividends over certain % of net income, etc).

Debenture – Represents unsecured debt – company usually must have

high credit standing to issue debt that is debentured.

Cure Period – The time the borrower has to correct an event of

default.

Notes: _____________________________________________

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Callable Bonds, Zero Coupon Bond, Equipment

Trust Certificate, Economic Development Bond

Callable Bonds –Issuers can buy back bonds and reissue at lower rate

can present the investor with need to reinvest funds.

Zero Coupon Bond – Purchased for below par value and par value is

paid when bond matures

Equipment Trust Certificate – Bonds secured by movable equipment

Economic Development Bond – Issued by underdeveloped countries or

sponsor of underdeveloped country

Notes: _____________________________________________

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Municipal Bonds, High Yield Bonds

Municipal Bonds – Bonds issued by governmental entities. May offer

tax advantages.

High Yield Bonds – aka Junk Bonds. These bonds are high risk and

have a low bond rating.

Notes: _____________________________________________

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Income Bond, Collateral Trust Bond,

Indexed Bonds

Income Bond – Will guarantee principle but will only pay interest if

company is profitable.

Collateral Trust Bond – Bonds that are collateralized by the securities

of another company.

Indexed Bonds – Interest rates paid are tied to the interest rate of an

economic index (Ex Inflation).

Notes: _____________________________________________

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Securitization, Off Balance Sheet Financing, Project

financing, Floating Rate Debt

Securitization – Bundling assets together (many times A/R or

inventory) and selling as securities.

Off Balance Sheet financing – A lease that does not show up on the

balance sheet (As with capital lease).

Project financing – Financing a project – the lender is paid from the

projects cash flows (may not have recourse in event of default).

Floating Rate Debt – Debt with a rate tied to fluctuations in the

interest environment. Lender or borrower makes decision based on

yield curve (or anticipated changes in yield curve).

Notes: _____________________________________________

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Sinking Fund, Refinancing Operations (Essentials),

Defeasance of Debt, Promissory Note

Sinking Fund – Funds are regularly paid into a trust or account in order

to repay the lump sum of a bond issue at maturity. May be required as

part of a bond issues indenture agreement.

Refinancing Operations – If bonds are callable, the issuer may call the

bonds and reissue new bonds in periods of lower interest rates.

Defeasance of debt – Sufficient funds are placed in an irrevocable trust

and used to repay debt. Removes debt from balance sheet without

repaying debt.

Promissory Note – An agreement with the lender dictating the terms to

repay (how and when).

Notes: _____________________________________________

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Lien, Guarantee, Full Guarantee, Specific Project

Guarantee (Essentials)

Lien – A legal claim on collateral in case of default.

Guarantee – Confirmation by a parent company that a subsidiary’s

debt will be repaid.

Full Guarantee – The parent company agrees to pay all debt if the

subsidiary defaults.

Specific Project Guarantee – Parent company only agrees to repay

amounts related to a specific project.

Notes: _____________________________________________

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Guarantee of payment/collection, Comfort Letter,

Performance Guarantee, Personal Guarantee

Guarantee of pay. or coll. – Guarantor agrees to make payment on the

loan or to collect in case of default.

Comfort letter – Parent company provides letter of the actions it ill or

will not take on behalf of the borrower (may not be enforceable).

Performance Guarantee – Full – Parent agrees to fully guarantee

subsidiary’s repayment. Best Efforts – Parent agrees to use its best effort

to make the subsidiary pay.

Personal Guarantee – Owner or managers of the business personally

guarantee the repayment of debt.

Notes: _____________________________________________

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Various issuers of debt and equity securities

Central Banks – debt securities – T Bills

Corporations – debt and equity securities – bonds and stock

Government Sponsored Entities – Debt Securities – Non Asset

Backed Debt Securities

Municipalities – Debt Securities – Municipal bonds

Mutual Fund Companies – Debt and Equity Securities – Sell funds

made up of Money Market, Stocks and Bonds

Notes: __________________________________________________

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Maturity by ST Investment Type

CP: Up to 270 days, usually 45 days

Asset Backed CP: Up to 270 days, usually 45 days

Bank Obligation: 1 day to 2 years

T-Bills: 4 to 52 weeks

Floating rate notes: Variable

Repo: Negotiable

Notes: ___________________________________________________

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Depository Trust and Clearing Corp (DTCC)

“An investment, industry owned works through its subsidiaries to

provide clearing, settlement and information services for equities,

corporate and municipal bonds, government and mortgage backed

securities, MM instruments and over the counter derivatives”

Essentials, 4th Ed

It is a combination of the DTC and NSCC

Notes: _____________________________________________

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Investment Bankers, Origination Desks, Securities

Traders, Brokerage Syndicates

Investment Banker: Help place (sell) securities for a company

Origination Desk: Evaluate, price and manage the placement of

securities

Securities Traders: Manage secondary markets for securities (after

placement)

Brokerage Syndicates: Multiple brokerage firms that work together to

place securities (creates efficiencies)

Notes: ___________________________________________________

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Callable Bond, Tender Option Bond, Foreign Bond,

Eurobond

Callable bond: Allows the issuer to buy back (call) bond issues if

they have an opportunity to save interest expense.

Tender Option Bond: Allows the buyer to sell the bond back to the

issuer at par value during the life of the bond, or at a point in time

Foreign Bond: Sold in a country that is not the company’s home

country. Sold in the denomination of the country it’s being sold

Eurobond: Sold in multiple countries at the same time, but not in the

home country of the issuer.

Notes: _____________________________________________

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Multicurrency Bond, Credit Enhancement,

Tracking Stock

Multicurrency Bond: Allows the investor to choose multiple currencies

that the bond is denominated. Many times, the currencies are

predetermined.

Credit Enhancement: Additional guarantee that the borrower will pay.

Can be a number of items: collateral, insurance, letter of credit, etc.

Tracking Stock: A security that tracks a stock index. Also called Spiders

Notes: ___________________________________________________

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Settlement Risk

Settlement Risk: The risk that the debited party in a transaction will

not perform or honor the obligation

Notes: _____________________________________________

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Treasury Stock

Treasury Stock is stock that has been repurchased by the company.

These stocks have no votes and do not receive dividends.

Treasury stocks can 1) be retired or held to be resold, 2) used for

stock options, warrants, or convertible bonds or 3) used to fund

repurchases or future acquisitions

Notes: _____________________________________________

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Types of Bankruptcy

Chapter 7: Company liquidation

Chapter 9: Government bankruptcy

Chapter 11: Company reorganization

Chapter 13: Consumer bankruptcy

Chapter 15: Bankruptcy that includes multiple countries

Notes: _________________________________________________

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