Financial Advisor Quick Study

Index Investing

Index investing involves investing in a portfolio that has a high correlation to a specific market index, such as the S&P 500. The advantages of this approach are its low cost and the guarantee of achieving returns that tend to match the market's performance. In exchange for these advantages, index investors give up the opportunity to beat the market. - Passive investment - Low management cost - Performance equal to overall market **Most tax efficient (Very little taxable gains)

Preservation of Capital

Preservation of capital means no fluctuations. Money market funds are the only logical choice here

Not A Security

1) Insurance or endowment policy or annuity contract (Fixed) 2) Interest in a retirement plan, such as IRA or 401K 3) Collectibles 4) Commodities - Precious metals and grains (Futures and forwards) 5) Condominiums used as a personal residence 6) Currency

Life only with Period Certain

Guaranteed a check for AT LEAST that guaranteed time. Upon untimely death, beneficiary continues to receive payment until whatever guaranteed payment period is Only if annuitant dies, then a beneficiary

Sweep Account

When customers sell securities held in their accounts, cash representing the proceeds of those sales are deposited to their accounts. In many cases, that cash is swept into a money market mutual fund where it will earn income until the money is either withdrawn or used for a new purchase. This is known as a sweep account.

Adjusted Gross Income (AGI)

When you do your taxes, you begin by listing all of your earned income (salary, wages, and bonuses) plus other income such as interest and dividends, capital gains, alimony received, and profits from a business you may own. From that total, you deduct certain items to arrive at the AGI. Among the more testable items that are deductible are - Traditional IRA contribution - Alimony paid as part of a pre-January 1, 2019, divorce decree - Self-employment tax - Penalties paid on early withdrawal from a savings account. *Although tax-exempt income from municipal securities is shown on Form 1040, it is NOT included in AGI

Corporate and Municipal Trades

30-Day-Month/360-Day-Year for accrued interest

If an insurance company wishes to order a consumer report on an applicant to assist in the underwriting process, and if a notice of insurance information practices has been provided, the report may contain all of the following information EXCEPT the applicants

Ancestry

Functional Allocation

Functional allocation is a sharing arrangement in which the general partner pays for all tangible drilling costs (capitalized costs), and the limited partners pay for all intangible drilling costs (deductible costs).

Which of the following is another term for an authorized insurer?

Admitted

When risks with higher probability of loss are seeking insurance more often than other risks, this is known as what?

Adverse Selection

Front Running

Act of placing orders for one's own account ahead of other orders that are known to be entering the market in attempt to gain from the price movement that is likely to occur

Whole life policies provide protection until the insured reaches what age?

Age 100

Nonvoting Common Stock

Companies may issue both voting and nonvoting (or limited voting) common stock, normally differentiating the issues as Class A and Class B, respectively. Issuing nonvoting stock allows a company to raise additional capital while maintaining management control and continuity without diluting voting power.

The policyowner wants to make sure that upon his death, the life policy will pay a portion of the proceeds annually to his spouse, but that the principal will be paid to their children when they reach a certain age. Which settlement option should the policyowner choose?

Interest Only Option

M2 Money Supply

Consist of M1 + Consumer savings deposits. Savings accounts, Retail CDs, money market mutual funds, Repos. M1 is also apart of M2 *What is added to M2 to arrive at M3? - Large time deposits

Moody's Investment Grade (MIG) ratings are applied to

- Municipal Notes - Short term Municipal Debts (BANs, TANs, etc)

Tax Advantages

- Municipal Bonds - IRAs

What is a precious metal?

- Platinum, Gold, Silver

All of the following would be considered dependents under a group life policy EXCEPT

An employees elderly mother

What type of whole life insurance policy generates immediate cash value?

Single premium whole life

Which of the following types of agent authority is also called "perceived authority"?

Apparent

In The Money CALL (Creates Intrinsic Value)

CMV ↑ SP

All of the following apply to defined benefit plans EXCEPT

Contributions are tied to the company profits.

What is a synonym for a "minimum deposit plan?"

Financed Plan

Which of the following is TRUE of a qualified plan?

It has a tax benefit for both employer and employee

Who would be eligible to obtain SGLI?

Military Personnel

Which Risk Is Insurable?

Only Pure Risks

What nonforfeiture option provides coverage for the longest period of time?

Reduced Paid Up

In Variable whole life policies, where are the policy premiums allocated?

Separate Account

Why Would You Include Preferred Stock In Client's Portfolio?

1) Fixed income from dividends 2) Prior claim ahead of common stock

The interest earned on policy dividends is

Taxable

Who does the spendthrift clause in a life insurance policy protect?

The beneficiary

Who does the common disaster clause protect?

contingent beneficiary

Municipal Bonds (Munis)

"Debt" Securities issued by state and local (e.g., county, city, school) governments. - Income producing investment that produces tax free income (Federal and state) (Unless you bought in another state - subject to state) - Income is tax free, but capital gains distributions are taxable - MFP - Municipal Finance Professional - Duties that include underwriting, sales, trading *Municipal Securities - Primary disclosure is the "Official Statement" *Perfect for clients with high tax brackets *T + 2 *30/360 *Interest Payments are paid SEMIANNUAL on test *Lower the rating, higher the yield *Reduce Tax Exposure *Conservative *Fixed annual interest *State Specific

Nasdaq Permits:

1) Convertible Bonds 2) Warrants 3) Common Stock 4) Preferred Stock 5) Limited Partnerships 6) ADRs

Secondary Markets

1) an agent buying unlisted securities for a client. 2) an insurance company buying corporate bonds directly from another insurance company. 3) a specialist (designated market maker) on the NYSE buying stock as a principal. *New issues sell in the primary market. Sales between investors are always in the secondary market. Deal with Secondary Market: 1) Dealer Quotes 2) Thomson's Muni Market Monitor (Formerly Munifacts) 3) Brokers Broker

Rollover

60 Calendar Days

Spreads

A spread is the simultaneous purchase of one option and sale of another option of the same class: (Opposite Sentiments) (long one and short the other) - 2 Calls = Call spread. A CALL spread is a long call and a short call. - 2 Puts = Put spread. A PUT spread is a long put and a short put. 1 Breakeven - Call Spread = Lower SP + Net Premiums - Put Spread = Higher SP - Net Premiums *Call Spread = Someone calling for me, take elevator UP from lower level (SP) (Find lower SP) *Put Spread = Elevator is going DOWN from higher floor (SP) (Select higher SP) *Gains and losses will ALWAYS be defined in a spread. Will NEVER be UNLIMITED in a spread *Bullish Spread = Profit ABOVE BE *Bearish Spread = Profit BELOW BE *Does NOT involve stock 3 Types of Spreads: 1) Price or vertical spread 2) Time or calendar spread 3) Diagonal Spread

What is material misrepresentation

A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company

Stock or Bond Power

A stock power or bond power, often called a security power, is a legal document—separate from a securities certificate—that investors can use to transfer or assign ownership to another person. "Securities powers typically are used either: (1) as a matter of convenience when an owner cannot sign the actual certificates, or (2) for safety (such as sending unsigned certificates in one envelope and signed powers in another). *Instead of signing on the back of a certificate representing a security sold, the registered owner could sign on a separate paper called - Stock (or bond) power *If the client were to assign the back of the certificate, that security would now be completely negotiable. If lost, it would be the same as losing an endorsed check. To minimize problems, make the assignment on a stock power, which is a separate piece of paper, and when put together with the actual certificate, it is treated as if the certificate itself had been signed. "Good delivery of a stock certificate"

Regulatory Risk

A sudden change in the regulatory climate can have a dramatic effect on the performance and entire business sectors. Comes from change of regulations. Government agency - state or federal may pass certain regulations.

Short Interest Theory

A technical analysis theory that examines the ratio of short sales to volume in a stock. Because the underlying stock must be purchased to close out the short positions, a high ratio is considered bullish. *Number of outstanding short shares at any given time *Higher the short interest, the more short shares, the more bullish the market (Counter intuitive)

Which of the following is NOT an allowable 1035 exchange?

A whole life insurance policy is exchanged for a term insurance policy

Which of the following bonds is most affected by interest rate risk?

A) 7.8s of '42 B) 7.3s of '37 C) 7.5s of '39 D) 7.6s of '45 (Correct Answer) - First number = Coupon Rate - Second Number = Year the bond matures 7.6% of $1,000 and will mature in 2045. *Bond with the longest maturity (Highest duration) will experience the greatest fall in a rising interest rate market

Achieving a Better Life Experience (ABLE) Accounts

ABLE accounts are TAX ADVANTAGED savings accounts for individuals with disabilities and their families. Income earned from the accounts are TAX FREE to the beneficiary. Sponsored by state or local government *Account owner and beneficiary must be disabled *Income is TAX FREE *Onset of disability must have occurred before owner turned 26 *Contributions to ABLE accounts can be made by any person, including account beneficiary -- Must be made using AFTER TAX dollars and are NOT tax deductible

Treasury Bonds (T-Bonds)

Are types of treasuries which have the longest maturities of all government bonds. Same as Treasury Notes (T-Notes) EXCEPT have long term maturities, greater than 10 years and up to 30 years - Interest is exempt at state and local level, owe at federal - Fixed income - exposed to inflation risk - Priced at % of Par *Very Safe providing income (If customer wants income and worried about losing money) *Most exposed to inflationary risk! If a customer owns a $10,000 8% U.S. Treasury Bond, and she is in the 28% federal tax bracket and a 2.5% state tax bracket, what amount of tax will she pay on the income received from the bond? - $224 *Interest on U.S. Treasury bonds is taxable at the federal level ONLY; $800 of interest taxed at 28% equals $224.

Exchange Traded Notes (ETNs)

Are unsecured debt securities issued by a bank or financial institutions. Backed only by the good faith and credit of the ISSUER. Notes track performance of a particular market index but do not represent ownership in a pool of securities the way share ownership of a fund does. *Primary risk is DEFAULT and LIQUIDITY risk *Note = Debt *Senior, unsecured debt issued by bank *Which of the following products is adversely impacted if the issuer's credit rating is downgraded? - ETN's

Which of the following investments are generally traded according to their average life rather than their stated maturity dates?

Asset-backed securities

When must insurable interest exist in a life insurance policy?

At the time of application

Short Stock, Short Put (Hedging)

BE = Stock SP + Put Premium MG = Stock SP - Put SP + Put Premium ML = UNLIMITED EXAMPLE: Short XYZ stock @ 40 Short 1 XYZ July 40 put @ 3 BE = 40 + 3 = 43 MG = 40 - 40 + 3 ($300) ML = UNLIMITED

Short Stock, Long Call (Hedging)

BE = Stock SP - Call Premium MG = BE (Stock SP - Call Premium) ML = Call SP - Stock SP + Call Premium EXAMPLE: Short XYZ stock @ 40 Long 1 XYZ July 40 call @ 2 BE = 40 - 2 = 38 MG = 38 ($3,800) ML = 40 - 40 + 2 = 2 ($200)

Long Stock, Short Call (Hedging) (Covered Call)

BE = Stock SP - Call Premium MG = Call SP + Call Premium - Stock SP ML = BE (Stock SP - Call Premium) EXAMPLE: Long XYZ stock @ 38 Short 1 XYZ July 40 call @3 BE = 38 - 3 = 35 MG = 40 + 3 - 38 = 5 ($500) ML = 35 ($3,500)

Stop Limit Order

Buy or Sell - Also has a stop price and does not become 'live" working order until the stock trades at or through the stop price. Becomes limit after trigger

Out Of The Money PUT

CMV ↑ SP

At The Money Call/Put

CMV = Strike Price (Exercise Price)

Out Of The Money

Calls: When the price of the stock is LOWER than the strike price of the call. Sellers want contracts to be out of the money, buyers do not. Put: When the price of the stock is HIGHER than the strike price of the put. Sellers want out of the money contracts. Buyers do not.

Dow Theory

Confirms the end of a major market trend, confirmed by changes in both the industrial and transportation averages 1) Primary Trends (One year or more) 2) Secondary Trends (3-12 Weeks) 3) Short-Term Fluctuations (Hours or Days) *Bull market -- Primary trend is upward (Series of higher highs and higher lows) *Bear Trend -- Series of lower highs and lower lows *Dow Jones Industrial Average and Transportation Average (Trend must be confirmed by these) (Doesn't use utilities)

Representations are written or oral statements made by the applicant that are

Considered true to the best of the applicant's knowledge

Covered Vs Uncovered PUTS

Covered puts work like covered calls, except that the "covering" equity position is a short stock position instead of long. 2 Ways To Cover Put: 1) Taking a short position in the stock underlying the short put 2) A cash-covered put *Because of unlimited loss potential, short positions are marked to the market at the close of each day

Which component increases in the increasing term insurance?

Death Benefit

Which of the following is NOT fundable by annuities?

Death Benefits

Which of the following is NOT an example of a valid insurable interest?

Debtor in the life of the creditor

What type of life insurance is best suited to cover a mortgage?

Decreasing Term

Code Of Conduct

Establish the relationship between firms and their customers

Which of the following could reduce the amount of the death benefit?

Failure to repay a policy loan

A Family's income need is greatest during which of the following periods?

Family Income Dependency Period

Supporting

Form of market manipulation that attempt to keep the price of the stock from falling is called SUPPORTING

Non-Qualified Plans

Higher cost basis = lower taxes @ retirement - Not subject to same reporting and disclosure requirements as qualified plans - Must be in writing and communicated to the plan participants - Sponsors of nonqualified plans are fiduciaries and can be held liable for acting contrary - Does not allow the employer a current tax deduction for contribution. Employer receives the tax deduction when the money is paid out to employee.

Protection of a Long Stock Position

Investors can use puts to protect a long stock position. The option acts as an insurance policy against the stock declining in price.

An insurance license issued by the Kentucky Department of Insurance shall include all of the following, EXCEPT

Name and address of the appointing insurer

All of the following are factors that an underwriter could use to select and classify risk EXCEPT

National Origin

The Municipal Securities Rulemaking Board (MSRB)

Primary industry (SRO) regulator for underwriting and trading of state and municipal securities. Writes rules but does not have enforcement powers. Enforced by SEC, FINRA & Comptroller of the Currency (Primarily FINRA) Regulates: - Writing of municipal securities rules and regulations - Underwriting of municipal securities - Trading of state or local municipal services *Rule G-37 - Allows maximum candidate contribution of $250 per election

Definite and Measurable

Specific as to the cause, time, place and amount

In a defined benefit plan

The benefit is known and the contribution is unknown

Who is a replacing insurer

The company that issues a new policy during policy replacement

Which of the following statements about group life is correct?

The cost of coverage is based on the ratio of men and women in the group

An annuitant dies before the effective date of a purchased annuity. Assuming that the annuitant's wife is the beneficiary, what will occur?

The interest will continue to accumulate tax deferred

For the purpose of insurance, risk is defined as

The uncertainty or chance of loss

Which of the following statements regarding deferred compensation funds is INCORRECT?

They are usually qualified plans

Suspicious Activities Report (SARs)

USA Patriot Act requires firms to report to FinCEN when there is an event, transaction, or series of events or transactions that appears to be questionable. $5,000 Must file a SAR within 30 days of becoming aware of suspicious transactions. *Make and retain records of wire transfers of $3,000 *You are not supposed to inform the subject of a SAR that one has been filed

When is the earliest a policy may go into effect?

When the application is signed and a check is given to the agent

Market Centers

Where buyers and seller may gather and place trades 4 in US: Exchanges (Auction Market), Nasdaq, OTC, the ECN

Bull and Bearish Test

You may be asked to determine whether a spread is bullish or bearish. Using the premiums shown, use a T-chart to determine debit or credit. If no premiums are shown, it is up to you to determine which of the options is more valuable. Expect to see one or two questions on this concept. A quick way to determine whether a spread is bullish or bearish is the following: in any spread, put or call, if you are buying the lower strike price, you are a bull. Think of it this way: "a bullish investor buys low and sells high." Take the first letters of the key words and you have BLSH (that even sounds bullish). - Buy XYZ Jan 20 call at 7; sell XYZ Jan 30 call at 3: bull call spread—debit spread - Buy ABC Aug 35 call; sell ABC Aug 25 call; bear call spread—credit spread (no premiums shown, but the 25 call will have a higher premium than the 35) - Buy DEF Mar 70 put at 6; sell DEF Mar 90 put at 17; bull put spread—credit spread - Buy LRK Sep 30 put at 9; sell LRK Sep 20 put at 3; bear put spread—debit spread

Warranty

absolutely true statement upon which the validity of the insurance policy depends

Per Captia

by or for each person. A per capita figure is calculated by dividing the total amount of something by the number of people in a place.

A Shelf Registration

is good for two years and requires a supplemental prospectus be filed before each sale. *The Securities Act of 1933 permits issuers to quickly raise money in the capital markets when needed via a shelf registration. This type of registration allows the company to, in essence, take the securities from the shelf without the delay of registering with the Securities and Exchange Commission (SEC), because the actual registration has already been done ahead of time. *Could be used for intention of one-time employee bonus.

An investor purchases an original issue discount municipal bond on the offering at 80. The bond matures in 25 years. Eight years later, the investor sells the bond for 84. The tax consequence of this transaction is

long-term capital loss of $24. The 20 point ($200) discount accretes over the 25-year life of the bond. That makes the annual accretion $8 per year ($200 divided by 25 years). After 8 years, there has been $64 of accretion ($8 times 8 years). That means the cost basis of the bond is $864. The sale at $840 represents a loss of $24 and has a long-term holding period.

The so-called 5% policy pertains to

mark ups on retail OTC transactions excepting new issues The FINRA markup markdown and commission policy does not apply to new issues as well as municipal bonds --- MSRB has its own such policy.

Option Taxation

option EXPIRES the premium of the option becomes a short-term CAPITAL gain or loss at expiration. Remember that option exercise alone does not create a taxable event. 1) Buy a call -- Capital LOSS (Option Expires) -- SP + P = Cost Basis -- Capital gain or loss (Position Closed) 2) Sell a call -- Capital GAIN (Option Expires) -- SP + P = Sale Proceeds -- Capital gain or loss (Position Closed) 3) Buy a put -- Capital LOSS (Option Expires) -- SP - P = Sale Proceeds -- Capital gain or loss (Position Closed) 4) Sell a put -- Capital GAIN (Option Expires) -- SP - P = Cost Basis -- Capital gain or loss (Position Closed) A customer, long 100 shares of ABC at 73, writes 1 ABC Apr 75 call at 2 to generate additional income. ABC stock subsequently moves higher, at which time, the customer is exercised. For tax purposes, which of the following statements are true? - Cost basis is $73 per share - Sales proceeds are $77 per share

Cannot Be Purchased On Margin But As Collateral (After 30 Days)

1) Mutual Funds 2) New issues if they meet requirements

Which of the following would be considered a nonqualified retirement plan?

Split-dollar Plan

Investment Goals

"Where do they want to be" - Planning for college education - Retirement - Saving for future purchase - Philanthropy - Capital to start a business - Leaving a legacy

The insured under a $100,000 life insurance policy with a triple indemnity rider for accidental death was killed in a car accident. It was determined that the accident was his fault. The triple indemnity rider in the policy specifies that the death must not be contributed to by the insured in any manner. In this case, what will the policy beneficiary receive?

$100,000

If an individual willfully violates provisions of the Fair Credit Reporting Act, what is the maximum civil penalty?

$2,500

An insured decides to surrender his $100,000 Whole Life policy. The premiums paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?

$3,000

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually?

$3,000

The Jefferson County Water Works revenue bond is being underwritten by a syndicate led by ABC Securities, Inc. The bond has serial maturities going out up to 25 years with a balloon at 30. The coupons range from 3.2% to 4.1%, and all the bonds are offered at par. The terms of the syndicate agreement call for a total takedown of ¾ of a point with a selling concession of ½ point. A syndicate member who sells 500 of the bonds will earn

$3,750 *When a member of the syndicate sells a bond it is entitled to the total takedown—in this case, ¾ of a point ($7.50) per bond. The computation is 500 bonds sold × $7.50 per bond = $3,750 underwriting profit. Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead. Did you notice how much extraneous information is in this question?

A customer buys XYZ Oct 75 put at 7 when XYZ is trading at 72. The stock falls to 69, and the customer exercises the put. For tax purposes, sales proceeds are

$6,800 When a put is exercised, the holder is selling stock at the strike price (75). However, the tax rules require that, if exercised, the cost basis of stock purchased or sales proceeds of stock sold is adjusted to the breakeven point of the option. For puts, breakeven is strike price minus premium (75 − 7 = 68).

Which of the following is NOT true regarding life insurance in qualified plans?

Qualified plans must provide a life insurance benefit

Basis Quote

(Basis quote) Usually priced and offered for sale on a YTM - Yield to Maturity basis rather than a dollar price. Example: 7s 35 at 7.5 — This is a 7% coupon for a bond maturing in 2035 with a YTM of 7.5% If YTM is GREATER than the coupon = Trading at a DISCOUNT

Noncyclical Industries

(Defensive) least affected by normal business cycles. Generally produce nondurable consumer goods. Fairly steady. Examples: Food, utilities, clothing, drugs, liquor, etc

US Government Debt

*Interest Income: - Fed Tax = Yes, Gov issues, Gov will tax - State Tax = No Suitable For: 1) Conservative Investor 2) Income (Low Coupon) (Low risk, low reward) 3) Safest Debt (No Default Risk) *Key word for debt (Bond Words) = Safe, safety, principal, secure Risks: 1) Inflation (Purchasing Power) 2) Interest Rate Risk

Total Return Formula

(Income + gains or - losses) / Cost Basis Your customer sells an 8% corporate bond for 102. They purchased the bond at par one year ago. What in the total return of this position? For this question ($80 + $20) / 1000 = 100 / 1000 = 0.10 (10%). Example 2: Customer sells 100 Shares of Small Co Inc common stock at $50 per share. After 6 months, they close the short position at $40 per share. Small co does not pay a dividend. What is total return? - ($0 + $10) / 40 = 10 / 40 = 0.25 (25%)

Nasdaq Quotation Service

(Inside Market Quote ONLY) Nasdaq Level 1 -- is available to registered representatives through a variety of public vendors. Level 1 displays the inside market only, the highest bids and the lowest asks for securities included in the system, and other basic information such as last sale and volume. Normal market price fluctuations prevent a registered representative from guaranteeing a Level 1 price to a client. - Volume Information - Inside Market - Last-sale information *NOT bid and ask quotes for each market maker (Each Market Maker's Quotes) Nasdaq Level 2 -- is available to approved subscribers only. Level 2 provides the current quote and quote size available from each market maker in a security in the system. To list a quote on Level 2, a market maker must guarantee that the quote is firm for at least 100 shares. (Can Enter Quote) (Interactive) (Best quote available) Nasdaq Level 3 -- provides subscribers with all the services of Levels 1 and 2 and allows registered market makers to input and update their quotes on any securities in which they make a market. --- Making a market in 15 different stocks (Used by market makers. Contains quotes from all market makers AND allows for the entry of quotes) LEVEL 3: - quotes are entered by market makers. - actual interdealer quotes are displayed. - the system shows the inside quote. *Orders MUST be timestamped

Theoretical Value

(M - S) / N M = Market Price of stock S = Subscription Price N = Number of rights needed

Regulation A

(Small to Medium Size Companies) SEC provision for simplified REGISTRATION of small issues of securities. A Regulation A issue requires a shorter form of PROSPECTUS and carries lesser liability for officers and directors for false or misleading statements. Tier 1 = 20 Million Tier 2 = 75 Million

The largest portion of an underwriting spread is

- Concession

Last week, your customer's margin account showed SMA of $6,000. As of the close of business yesterday, the margin account client had a long market value of $50,000 and a debit balance of $40,000. This client

- will receive a maintenance margin call for $2,500. *When the equity in a long margin account falls below 25% of the market value, the customer receives a maintenance margin call for the amount necessary to bring the account back to 25%. A market value of $50,000 requires at least $12,500 in equity. The account currently has only $10,000 in equity ($50,000 minus $40,000). Therefore, a call will go out for a prompt deposit of an additional $2,500. SMA cannot be used to meet a maintenance call, only an initial margin call. Depositing fully paid marginable securities is another option. In our question, it would be enough securities to bring the LMV in the account up to 4/3 times the debit balance. $40,000 × 4/3 = $160,000 ÷ 3 = LMV of $53,333.33. With LMV of $50,000, the additional needed is $3,333.33

ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's P/E ratio is higher, that would indicate that

-ABC's net income is less than MNO's. *If ABC's P/E ratio is higher than MNO's, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO's. Let's use some hypothetical numbers to prove this. The stock price of both companies is $60 per share. Both companies have 1 million shares outstanding. The P/E ratio compares the market price ($60) to the earnings per share. If ABC earned $5 per share and MNO earned $6 per share, their respective P/E ratios would be 12:1 ($60 ÷ $5) and 10:1 ($60 ÷ $6). From that we see, that given the same market price and the same number of shares outstanding, the higher the P/E ratio, the lower the earnings. Taking this one step further, if there was a third company with the same price and number shares and it had earnings per share of $1, the P/E ratio would be much higher at 60:1 ($60 ÷ $1). The information provided does not provide enough detail to know whether ABC or MNO had higher sales.

When the issuer of an insured municipal bond defaults, what does the insurance company do?

-Both principal and interest are returned over the remaining term of the bond. *Both interest and principal are paid as scheduled over time through the life of the bond. The idea is that the bondholder should not see a problem. The insurer will just take up the liability and run with it without missing a beat.

What elements of an adjustable life policy can be changed by the policyowners?

1) Amount and payment period of premium 2) Face amount 3) Period for protection

An annuity purchased with multiple payments that begins income payments after one year from the moment of purchase is known as what type of annuity?

Flexible premium deferred annuity

US Gov Bonds

-No credit risk -safety of principal -low yield -liquid -interest is taxed at FED level, exempt state and local - In Book Entry form with no paper certificates *Safest Issuer

Your customer, who lives in State A, is in the highest federal and state income tax bracket. She is considering purchasing some State B municipal bonds with an Aa rating for her portfolio. You correctly explain that municipal bonds generally pay

-lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their interest.

An insured requests a loan from her life insurance policy to pay a premium that is due. The insurer may delay that request for how many months?

0

Federal Reserve Tools (DORMM)

1) (D)iscount Rate - Rate feds charge banks 2) (O)pen Market Operations - Feds buy/sell T-Bonds on secondary market 3) (R)eserve Requirement - Amount bank must maintain on deposit 4) (M)argin on Securities 5) (M)oral Suasion *Monetary policy of Federal Reserve

Conduit Theory of Taxation

1) A fund is not taxed on earnings it distributes if it distributes at least 90% of its net investment income. 2) Investors are taxed on earnings they receive in cash. *By qualifying as a regulated investment company (the conduit, or pipeline, tax theory), the fund is liable only for taxes on retained income if it distributes at least 90% of its net investment income to shareholders. Investors will pay taxes on distributed income, whether it is received in cash or reinvested.

Purchasing Annuities

1) A single premium deferred annuity is purchased with a lump sum, but payment of benefits is delayed until a later date selected by the annuitant. 2) A periodic payment deferred annuity allows investments over time. Benefit payments for this type of annuity are always deferred until a later date selected by the annuitant. 3) An immediate annuity is purchased with a lump sum, and the payout of benefits usually commences within 60 days. **There is no such thing as a periodic payment immediate annuity.

Lifetime Records

1) Articles of incorporation (if the broker-dealer is a corporation) or partnership agreement (if the broker-dealer is a partnership) 2) Minutes of board or partnership meetings 3) Records of stock certificates (if the broker-dealer is a corporation) (Stock Certificate Book)

Fiscal Policy

1) Not considered the most efficient means to solve short-term economic issues 2) Is reflected in the budget decisions enacted by our president and congress Includes: - Increasing taxes to contract the economy - Increasing government spending to expand the economy

What are the death benefit options in universal life policies?

1) Option A - Level death benefit 2) Option B - Increasing death benefit

Investment Constraints

1) Time Horizon 2) Liquidity 3) Taxes 4) Laws and Regulations 5) Unique Circumstances and/or Preferences *Personal attitudes are constraints as well An investment adviser has a client who wants to save for college for her child. The child will be entering college in five years. This would be an example of - An Investment Constraint **Time constraints include such conditions as liquidity and time horizon, both of which are in play here. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer.

Trade Confirmations

1) Trade Date 2) Account and rep numbers 3) Buy or sell 4) Security Description 5) Capacity of broker-dealer (Agent/Principal) 6) Price Per Share (Or bond price/yield) 7) Commission 8) Total Amount 9) Firms Address, telephone number, and name *Delivered no later than settlement date *May be delivered electronically

Broker/Agent

1) Trade on behalf of customer 2) Charge Commissions

Dealer/Principal/Market Maker

1) Trade with customers from own inventory 2) Maintain Inventory 3) Profit from spread When a broker-dealer makes a market, it is acting as - Principal

Risks Of Owning Common Stock

1) Value Risk - Chance stock will decline in price 2) Decreased or no dividend income - If company loses money, no guarantee for dividend 3) Low Priority at Dissolution - No priority if bankruptcy

Types of Syndicate Accounts

1) Western Account -- Divided Account. Each underwriter is responsible only for its own underwriting allocation. 2) Eastern Account -- Undivided Account. Each underwriter is allocated a portion of the issue.

LP's Subscription Agreement

1) the general partner endorses the subscription agreement, signifying that a limited partner is acceptable. 2) the investor's registered representative must verify that the investor has provided accurate information. 3) the investor's signature indicates that she has read the offering document.

What percentage of a company's employees must take part in a noncontributory group life plan?

100%

If a person is disabled at age 27 and meets Social Security's definition of total disability, how many work credits must he/she have earned to receive benefits?

12 Credits (Persons disabled between ages 24-31 can qualify for benefits if they have credit for having worked half of the time between age 21 and the start of disability)

An agent is 23 years old, but wants to become a consultant. If he just received his agent license, how old will he be when he can apply to be a consultant?

28, will have to wait 5 year to have experience

Within how many days of requesting an investigative consumer report must an insurer notify the consumer in writing that the report will be obtained?

3 Days

When should an agent notify the department of Insurance that they have moved home or business address?

30 days

To attain currently insured status under Social Security, a worker must have earned at least how many credits during the last 13 quarters?

6 Credits

A customer wishes to liquidate 100 shares of ABC common at the market. If the current inside market is 904.78 - 905.57, the client's transaction will occur disregarding commissions and other charges at

904.78 The best (inside) bid is the price at which a client's liquidation (sell) order will be executed. *Less than 100 shares = Odd Lot ***Odd lots are usually traded by small investors; some analysts believe small investors are generally wrong.

Broker-Dealer (BD)

A BD is both a broker and a dealer but may not act in both capacities on the same transaction

Zero-Tranche CMO (Z-Tranche)

A Z-tranche CMO receives no payment until all preceding CMO tranches are retired. These are the most volatile CMO tranches. *Z-tranche CMOs would NOT be suitable for an investor needing funds in a specified amount of time, because of the unpredictable nature of when payment will be received *LAST in line when payouts occur *Most suitable for -- A professionally managed hedge fund specializing in real estate portfolio securities

Business Development Company (BDC)

A business development company (BDC) is a closed-end investment. It does not have the flexibility of regular closed-end funds because at least 70% of its assets must be invested "eligible" assets. Perhaps the most significant difference between a closed-end fund and a BDC is that the BDC must make available significant managerial assistance. In other words, in addition to being an investment company, a BDC is also an operating company. What investment company, structured as a closed-end management company under the Investment Company Act of 1940, must have at least 70% of its assets invested in eligible securities? - Business Development Companies

A transaction in which a writer covers a position by purchasing an option is called

A closing purchase

Deficit

A deficit in the U.S. balance of payments can occur if 1) Interest rates in foreign countries are higher than US domestic rates 2) US consumers are purchasing (importing) foreign goods *Anything that sends money out of our domestic economy leads to a deficit (more money flowing out than coming in). When interest rates abroad are higher, money flows out of the United States to those foreign locations. When U.S. consumers are purchasing more foreign goods and services, money flows out of the United States to those foreign markets.

Call Feature

A feature that allows the corporation/ISSUER to call in, or buy, outstanding bonds from current bondholders before the maturity date

A significant number of public investors do not have a solid understanding of how common stock is offered to the public. Two methods are the secondary offering and the follow-on offering. Which of the below are true statements regarding these methods?

A follow-on is an offering (FPO) of new shares other than the initial public offering (IPO). - Already listed on the exchange - selling more The term Secondary Offering is used to describe a situation in which already-issued shares are being resold into the marketplace, usually by insiders, officers, and directors of a company. The shares being sold are NOT new shares coming from the company. A follow-on offering, also called an APO (additional public offering) is where a company is issuing and selling more new shares to the public.

Stock Power

A form that duplicates the back of a stock certificate for transfer purposes

Estoppel

A legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived.

A customer buys 200 XYZ at 32, 2 XYZ JUN35 calls at 3, and 1 XYZ JUN 35 put at 6.50. Two months later, the customer purchases 1 XYZ JUN 35 put at 4. Before expiration, with XYZ trading at 37, he sells his stock and closes his calls at 2.10 and his puts at 0.25 for

A loss of $180. The customer opens four positions with debits to his account: 200 shares at $32 per share equals a debit of $6,400; two calls at $300 each equals $600; one put at $650 equals a debit of 650; and finally, an additional put at $400. Let's do the math on this. The total cost of the purchases is $6,400 + $600 + $650 + 400 = $8,050. The stock position is sold for $37 per share for a credit of $7,400. The calls are closed for 2.10 each (a credit of $420), and the puts are closed for a credit of $25 each. The proceeds from the sales are $7,400 + $420 +$50 = $7,870. The difference between the cost ($8,050) and the proceeds ($7,870) represents a loss of $180.

Matching Orders

A manipulation that involves one party selling stock to another with the understanding that the stock will be repurchased later at virtually the same price

An Agent is hand delivering an insurance policy to a policyowner. What must the agent obtain to complete the transaction?

A signed delivery receipt

Military Service

If rep leaves industry for regular military service, person's license is placed in "special inactive status" *Status continues until 90 days after leaving military service

Pass-Through Certificates

A pass-through security is created by pooling a group of mortgages and selling certificates representing interests in the pool. The term pass-through refers to the mechanism of passing homebuyers' interest and principal payments from the mortgage holder to the investors. Fannie Mae, Ginnie Mae, and Freddie Mac function this way. In some cases, such as the GNMA, the payments are monthly.

An insurer may delay or defer a request for a policy loan for up to 6 months unless the loan is made for the purpose of paying

A premium that is due

Public Appearance

A public appearance is participation in a seminar, webinar, radio or television interview, or other public appearance or public-speaking activity. To qualify, it must be an activity that is unscripted and could not be classified as correspondence, retail, or institutional communication.

Know Your Customer (KYC)

A requirement that firms and their reps must know all the essential facts, financial and non-financial, about a customer. Financial Circumstances: 1) Income 2) Value of home 3) Liquid net worth 4) Debt Payments 5) Total Debt Non-Financial Circumstances: **Information NOT expressed as a sum of money or numerical cash flow 1) Age 2) Marital Status 3) # and ages of dependents 4) Employment Status 5) Employment of family 6) Clients attitude towards risk (Risk Tolerance) 7) Goals 8) Objectives

Know This

A risk is a chance that a loss will occur; a hazard increases the probability of loss; a peril is the cause of loss

Wrap Accounts

Accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. (generally investment advisory accounts) *Fee is set monthly or quarterly but most often % of assets (AUM) *Like a buffet for customers - one fee, lots of services

Managed Investment Companies (Closed and Open End)

Actively manages a securities portfolio to achieve a stated investment objective. Both closed and open sell shares to public in IPO. Primary difference in open vs closed is that a closed-end company's initial offering of shares is limited (Closes after a specific authorized number of shares has been sold) *Closed-end based on supply and demand *Open end - continuous public offering

Cooling-Off Period

After the registration Statement. Last for minimum of 20 CALENDAR days No one can solicit sales of securities besides Tombstone Ads (Bare bones, minimum info) -- Are permitted before the effective date *Solicitations of sales MAY NOT be made *Deficiency letters, if issued, are sent to the ISSUER

According to the Law of Agency, a principal is represented by whom?

Agent or producer

What documentation grants express authority to an agent?

Agent's contract with the principal

What type of insurer is formed under the laws of another country?

Alien

Statutory Voting

Allows a stockholder to cast one vote per share owned for each item on ballot *Owns 100 shares *3 Chairs Open Chair 1 = 100, Chair 2 = 100, Chair 3 = 100 (300)

Cumulative Voting

Allows stockholders to allocate their total votes in any manner they choose. *Favors minority shareholders, better for people with fewer shares *Owns 100 shares *3 Chairs Open Chair 1 = 50, Chair 2 = 25, Chair 3 = 25

Bid

Always less than ask price Highest someone is currently willing to pay for the security. Highest bid and lowest ask is sometimes called the inside quote/inside market *Buy the ASK, sell the BID Bid - 48.00 -(Inside quote)- 48.10 - Ask

Fair Prices and Commissions (FINRA Rule 2121) (5% Markup Policy)

Also known as the 5% policy, was adopted to ensure that the investing public receives fair treatment and is charged reasonable rates for brokerage services. It is considered a guideline—NOT a firm rule. *Test questions try to trap students into thinking that the rule mandates markups or commissions of 5% or less. That is not true. Charges of more than 5% can be reasonable. On the other hand, there are cases where a charge of less than 5% would be unfair. The point is, disregard the number 5%—it is simply the name of the policy. Charges will vary based on: 1) Type of security (Availability of security) 2) Inactive (Thinly traded) Security 3) Selling price of the security (Higher the price, lower the markup) (Cost of executing transaction) 4) Dollar amount of the transaction 5) Full service versus discount broker (Services rendered) Applies To: - Equity securities - Exchange and OTC - Buy or sell securities *If a member must give a prospectus, that is outside the scope of the 5% policy *The 5% policy applies to both principal (dealer) and agency (broker) transactions. ***It applies to markups, markdowns, and commissions, but not to securities sold by prospectus. *Five percent is NOT the limit. A transaction charge of more than 5% might be fine if it is reasonably based on the circumstances of the trade. Proceeds Transaction = a combination of both the buy side and the sell side compensation to the dealer. (Sale of one position and purchase of another) A broker-dealer can fill a customer order in the following three ways: 1) From Inventory (Market Maker) -- If the broker-dealer is a market maker in the security, it will (as principal) buy from or sell to the customer, charging a markup or markdown. 2) Agency Capacity -- If the firm is not a market maker in the security, it can fill the order as agent, without taking a position in the security, and charge a commission for its execution services. 3) Riskless (Simultaneous) Transaction -- An order can be filled as a riskless and simultaneous transaction. (Already got something sold) *Riskless or simultaneous transactions by a BD are -- Permissible if performed in compliance with the 5% policy

Municipal Finance Professional (MFP)

An employee of a Financial Industry Regulatory Authority (FINRA) member engaged in municipal security representative activities such as underwriting and trading.

Calls "Call Up"

An investor may buy calls (go long) or sell calls (go short).

Puts "Down"

An investor may buy puts (go long) or sell puts (go short)

Protective Calls

An investor who is short stock (bearish) could buy a call option as a hedge. Client would buy the stock back at no more than the option's strike price if the shares rise in value. BE = Stock price - premium **Long Stock Appropriate Hedge = Long Put (Best for protection) or Short Call (Income) *Stock position ALWAYS in control

12b-1 Fees

Annual fees charged by a mutual fund to pay for marketing and distribution costs - What is it called when you take a % from a mutual fund?

Group life insurance policies are written as what type of insurance?

Annually Renewable Term

The death protection component of a universal life policy is expressed as what type of coverage?

Annually renewable term

Partners in a business enter into a buy-sell agreement to purchase life insurance, which states that should one of them die prematurely, the other would be financially able to buy the interest of the deceased partner. What type of insurance policy may be used to fund this agreement?

Any form of life insurance

Required Minimum Distributions (RMD)

Are required beginning in the year the account owner turns 72 and annually by December 31 thereafter. Amount is based on account values as of the end of the previous year. ***Start at 73.. Just changed *Failure to take an RMD subjects the account owner or beneficiary to a 50% federal excise tax on the under-distribution amount.

Employer contributions made to a qualified plan

Are subject to vesting requirements

all of the following are TRUE of the federal tax advantages of a qualified plan EXCEPT

At distribution, all amounts received by the employee are tax free

Wash Sale

Attempt to create a loss for tax purposes (Sell at a loss) when one's intent is to still maintain ownership of the securities. *In order to avoid violating the wash sale rule, investors selling a stock at a loss cannot purchase that same, or substantially identical, security within a 30-day period before or after the sale incurring the loss. Substantially identical would include: - Anything that is exercisable or convertible into the same shares of stock - Such as rights - Warrants - Call options - Convertible bond. *Purchasing the put options would not violate the wash sale rule because these can be exercised to sell the stock, not purchase it. (61 Days - 30 before/30 After) *Tax Swap Not a wash if: - Different Maturity - Different Issuer - Different Coupon **If at least two of the three are different, a wash sale will generally not result.

Which of the following are NOT improper claims practices if committed in conscious disregard for the law or if committed with such frequency as to indicate a general business practice to engage in that type of conduct?

Attempting in good faith to effect prompt, fair and equitable settlements of claims on which liability has become reasonably clear.

Which of the following documents used in the underwriting process contains specific medical details about an applicant?

Attending Physicians Statement (APS)

Issued Stock

Authorized stock that has been sold to investors.

Which of the following protects the insured from an unintentional policy lapse due to a nonpayment of premium?

Automatic Premium Loan

Which of the following riders can be included in a life insurance policy without additional premiums due?

Automatic Premium Loan

A maximum family benefit is updated annually and is established for each level of

Average Earnings

Which of the following is TRUE about a class designation

Beneficiaries are not identified by name

Which of the following is NOT a party to an application for life insurance?

Beneficiary

all of the following information about a customer must be used in determining annuity suitability EXCEPT

Beneficiary's age

Beta Coefficient

Beta and beta coefficient mean the same thing. A stock or portfolio's beta is a measure of its volatility in relation to the overall market (systematic risk). The overall market is typically based on the S&P 500. A security that has a beta of 1.00 moves in line with the market. A security or portfolio with a beta of greater than 1.00 is generally going to be more volatile than the overall market. The reverse is true when the beta is less than one. A security that does NOT move in relation to market movement would have a beta of zero. For example, a money market security or money market mutual fund would have a beta of close to zero *1.0 moves with market *Market up 5%, investment up 5% *Beta of 1.5 is 50% MORE volatile than market *Beta of 0.5 is 50% LESS volatile than market *Market risk is measured by a security's beta *Measures a security's volatility in relation to overall market

Current Ratio Formula

Better figure to use when comparing the liquidity of companies Current Assets / Current Liabilities = Current ratio (Expressed as a ratio - 2:1, 1.25:1) **Higher current ratio is better than low *Current Liabilities - Those due now or within 12 months - Long-term debt amount that is due within one year - Accrued taxes - Accounts payable *Long Term Liabilities - Not be paid off in the near future - Mortgages Based on yesterday's closing price of $60 per share, Blech Sheet Metal, Inc., has a current P/E ratio of 12:1. If the current quarterly dividend payment is $0.50 per share, the dividend payout ratio is - 40% *With a price-to-earnings ratio of 12:1, the earnings per share (EPS) is $5.00 ($60 divided by 12). Four quarterly dividends of $0.50 is an annual dividend of $2.00 per share. If the company is paying $2 per share from the $5 per share earnings, that is a dividend payout ratio of 40%.

In terms of social security, what is the name for the time period after the youngest child of a family turns 16 and before the surviving spouse may start receiving retirement benefits?

Blackout Period

If a customer believes interest rates have peaked, and therefore, wants to buy long-term, fixed-income securities providing semiannual interest payments, you would recommend

Bonds that do NOT have a call feature *The purchase of noncallable bonds provides the investor with a constant flow of semiannual interest income until maturity.

Equity Options

Can be created on any item with a fluctuating market value. *Mostly issued on common stocks Purchase Equity Options = T+1 Exercise Equity Options = T+2 Example: Your customer has purchased 1 February 35 call at 2 on Tuesday, December 4. This transaction will settle on: - Wednesday, December 5th (Options transactions settle on the next business day after the trade date (T+1).)

The value of annuity units

Can vary over time

Capital Appreciation Vs Income

Capital Appreciation: 1) Growth stocks 2) Options 3) Futures 4) Special situation stocks 5) Day Trading Income: 1) Dividends on common stock 2) Foreign securities 3) High yield bonds

Warrants

Certificate granting its owner the right to purchase securities from the issue at a specified price, normally higher than the current market price at the time the warrants are issued, and at some time in the future. *Long-term instrument that gives investor option of buying shares at a later date. Bundled with other securities (5+ years) *Has an exercise price that is higher than the current stock price

A state issued document empowering an insurance company to become an admitted insurer is called what?

Certificate of Authority

In order to transact insurance within a given state, an alien insurer must first obtain what?

Certificate of authority

Subscription Right Certificate

Certificate representing the privilege to buy additional shares of a corporation. The corporation sends this certificate to each common stockholder. The certificate grants one right for each share of common stock they own. These rights have a short lifespan, expiring generally within 30-45 days of issue, rarely more than 60.

Lagging Economic Indicators

Change after the economy has begun a new trend but serve as confirmation of new trend. List: Corporate profits, average duration of unemployment, labor cost per unit of output, etc.

Coincident Economic Indicators

Change direction along with the economy as a whole. List: Number of hours works, employment levels, personal income, Manufacturer sales, etc

Concerning the "Family Protection Policy" all of the following statements are true, except:

Children, upon reaching the age of majority, are permitted to convert to an individual policy without proof of insurability

Correspondence

Communication with 25 or fewer individuals within 30 calendar day period *Classification of communications with the public. *Correspondence does NOT need to be filed with FINRA Rule 2210 - Correspondence may be either pre-use approval or post-use review - It's the firms decision 1) May be reviewed after use (Post-review) 2) Must be 25 or fewer retail customers or prospects within 30 days 3) Must be in good faith

Stock Splits

Company divides each existing share of its stock into several new shares. Number of shares increases but the total value of all shares remains the same. *No tax implications until SOLD *When a corporation completes a stock split, it will not have any impact on -- The Retained Earnings

Expense Ratio

Compares the management fees and operating expenses, including any 12B-1 fees, with the fund's net assets. All mutual funds, both load and no load, have expense ratios. The expense ratio is calculated by dividing a fund's expenses by its average net assets. Expressed as: A percentage of the fund's net assets Stock funds generally have expense ratios between 1% and 1.5% of a funds net assets. Bond funds, the ratio is typically between 0.5% and 1% Includes: - Manager's Fee - Administrative Fees - Portfolio Management Fees - BOD's Costs - 12b-1 Fees - Legal Fees - Transfer agent's cost **Does NOT include sales charges or loads. (Front end or back end) or CDSC ABC Growth Fund has reported average net assets of $120 million and expenses of $1.44 million. What is the fund's expense ratio? - 1.20% *Expense ratios are calculated by dividing the expenses for the reporting period by the average assets over that period. In this example, 1.44 million / 120 million = 1.2 (1.20%).

People who enter trades at or near the same time, in the same security as a person who has inside information, are known as

Contemporaneous Traders *The simple definition of contemporaneous is existing, occurring, or originating during the same time. Contemporaneous traders may sue persons that have violated insider trading regulations, and suits may be initiated up to five years after the violation has occurred.

What type of beneficiary is next in line after the primary beneficiary?

Contingent Beneficiary

Face-Amount Certificates (FACs)

Contract between an investor and an issuer in which the issuer guarantees payment of a stated (Face amount) sum to the investor at some set date in the future. *Investment companies as defined under the investment company act of 1940 - Not managed, once portfolio is composed, the do not change - Do not trade in secondary market, only redeemable only through issuer

Commodities

Corn, Wheat, Oats, Soybeans, Beef, Pork, Eggs, Crude Oil, Coffee, Orange Juice, Industrial metals - aluminum, nickel, copper, lead, and precious metals

What stipulates that if an employee receives property or other benefits in lieu of income, such property or benefits would have been taxable income had they been received in cash; therefore, an economic benefit has been received and will be taxed accordingly?

Doctrine of economic benefit

Contraction

Downturns in the business cycle: - Rising numbers of bankruptcies - Higher consumer debt - Falling stock prices - Rising inventories - Decreasing gross domestic product *During periods of contraction, one would expect -- GDP to decrease

Intestate

Dying without a will

Earnings Before Interest & Taxes (EBIT)

EBIT, calculated from the firm's income statement, is a metric that measures the ability of a company to meet scheduled interest payments. Cash flow from financing activities reflects money raised by the company by issuing debt and equity securities. Net worth is useful for determining payback of principal but not semiannual interest.

The Securities and Exchange Commission (SEC) requires that notice of corporate actions be given for all of the following except

EXCEPT: - Interest payments on the issuers debt instruments Notice For: - Issuance of warrants to bond offering - Reverse split on common stock - Dividend payments on issuers common stock *Payment of bond interest is an obligation and therefore not considered a special corporate action notice. Reverse splits and warrants are not regular happenings, and even though some companies have paid dividends regularly, those dividends are not guaranteed and can be halted. Hence, these events would be considered special corporate actions and therefore require notification to the marketplace.

Marking the Close

Effecting trades or falsely reporting trades to influence the closing price of a stock

If the annuitant dies before the annuitization period starts, what will the beneficiary receive?

Either the amount paid into the annuity or the cash value, whichever is greater

Marking The Open

Entering orders before the opening for a stock or falsely reporting trades that never occurred to influence the opening price of a stock

Community Property with Rights of Survivorship

Essentially combines joint tenancy and community property into one form of holding title

Life insurance may be used to pay state inheritance taxes and federal estate taxes eliminating the need to sell assets from the estate. What is this called?

Estate conservation

Aleatory Contract

Exchange of unequal amounts or values

Insurance is used to transfer what to the insurance company?

Financial responsibility for loss

Registration Statement

First step to file to sell a security when it doesn't meet one of exemptions Discloses material information about the issue - part of statement is disclosure document prospectus Contains: Description of business, names and addresses of company officers, amount of corporate securities company officers 10% or more, Companies capitalization, Description of how proceeds will be used, Any legal proceedings *Brokerage reports may not be distributed during this time *Private placements are generally exempt from the registration requirements

IPO (Initial Public Offering)

First time an issuer distributes securities to the public *Underwriting proceeds go to the issuing company *Third-market dealers are not normally involved Listed Prospectus Delivery = 25 Days NON-Listed Prospectus Delivery = 90 Days

J is receiving fixed amount benefit payments from his late wife's insurance policy. He was told that if he dies before all of the benefits are paid, the remaining amount will go to the contingent beneficiary. Which settlement option did J choose?

Fixed Amount

All of the following are dividend options EXCEPT

Fixed period installments

Time Value (TV)

Formula: Premium - Intrinsic Value = TV XYZ Stock trading at 42 XYZ Oct 40 call @ 3 42 CMV - 40 SP = 2 IV *3 Premium - 2 IV = 1 TV *2 factors that affect time value: 1) Amount of time to expiration (More time to expiration, more time value) 2) Volatility (More volatile the underlying security, more time value)

Safe Harbor (Soft Dollars) (SECTION 28E)

Here are some of the items that, if received as soft dollar compensation, would likely fall under Section 28(e)'s safe harbor provisions: YES: - RESEARCH REPORTS analyzing the performance of a particular company or stock - Financial newsletters and trade journals could be eligible research if they relate with appropriate specificity - Quantitative analytical SOFTWARE - Seminars or conferences with appropriate content registration fees - The use of client's commission dollars to purchase a BD's custodial services - SERVICES FOR BENEFIT OF CLIENTS NOT PERMITTED BY SEC: - Computer Hardware - Office Equipment - Reimbursement of Travel Expenses to Attend Seminars (Hotel/Flight) - Rent - Software NOT related to securities - Payment for training for this exam - Internet Service - Office Furniture - Telephone Lines *Difference between soft and hard is that instead of paying a BD with cash, the fund will pay with brokerage business

How does the premium mode affect the total premium paid for insurance for the year?

Higher frequency of premium payments will result in higher overall premium

What type of insurer is a voluntarily formed organization that provides insurance benefits for members of an affiliated lodge or religious organization with a representative form of government?

Fraternal Insurer

In a direct transfer, how is money transferred from one retirement plan to a traditional IRA?

From Trustee to Trustee

Nonequity Options (Currency and Index)

Functions nearly the same as equity options. Because the underlying instruments are not shares of stock, nonequity options have different contract sizes and delivery and exercise standards. Settles in CASH

Pipeline (Conduit) Tax Theory

Fund must distribute 90% of NII (Net Investment Income) - Pays taxes on remaining 10%. NII = Dividends + Interest - Expenses Dividends = $500,000 Interest = $600,000 Total Income = $1,100,000 Expenses = $100,000 NII = $1,000,000 *$900,000 must be distributed (90%), if not, they pay 100%

HSA

Funds not used for health expenses may be invested in mutual funds and other securities.

Generic Advertising SEC Rule 135A

Generic advertising promotes securities as an investment medium, but does not refer to any specific security. Generic advertising often includes information about - The securities investments that companies offer, - The nature of investment companies, - Services offered in connection with the described securities, - Explanations of the various types of investment companies, - Descriptions of exchange and reinvestment privileges - Where the public can write or call for further information. All generic advertisements must contain the name and address of the sponsor of the advertisement but never include the name of any specific security. A generic advertisement may be placed only by a firm that offers the type of security or service described.

Split of Combination Offering (Hybrid)

IPO in which a corporation allows some of the existing shareholders to sell their shares along with the newly issued shares.

Testamentary Trust

MUST consult decedents WILL instructions *Only created by decedent's will **Once a testamentary trust has been created, it becomes a taxable entity in its own right and is thus subject to income taxes (Form 1041)

Ginnie Mae (GNMA)

Government-owned corporation that supports the Department of Housing and Urban Development. Ginnie Maes are the only agency securities **backed by the FULL FAITH and credit of the federal government. (Direct backing of US Treasury) *Quoted in 32nds like T-Notes and T-Bonds *Guarantees timely payment of interest and principal *Backed directly by government so risk default is nearly ZERO *Slightly higher interest rates *Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors. Features: - $1,000 minimums and in $1 increments after that - Monthly interest and principal payments - Interest Taxed at ALL LEVELS - Pass-through certificates (Paid MONTHLY) - Significant reinvestment risk *Risks: - Interest Rate Risk - Prepayment Risk - Extended Maturity Risk/Extension Risk ***The exam expects you to know that MBS are susceptible to reinvestment risk. The reasons are outlined here. When interest rates fall, mortgage holders typically refinance at lower rates. This means that they pay off their mortgages early, which causes a prepayment of principal to holders of MBS. The early principal payments cannot be reinvested at a comparable return. Sometimes the test asks which instruments are not subject to reinvestment risk. Of the answer choices given, the best answer is typically a zero coupon bond. No interest is paid on a current basis, so the investor has no reinvestment risk.***

The automatic premium loan provision is activated at the end of the

Grace Period

Solicited Trade

If a RR recommends the purchase of a specific security to a customer

LLC

If a business owner's goal is ease in raising capital, the LLC is preferable because it has no restrictions on the number of nationality of investors. *Ease in raising capital *Limits Personal Liability

Exchange Privilege

If a fund sponsor allows an investor to move funds from one fund to another within its fund family

Bona Fide (Firm) Quotes

If a municipal dealer gives, distributes, or publishes a quotation for a security, that must be BONA FIDE - Must reflect the dealer's best judgement and have a. Reasonable relationship to the fair market value for that security - May reflect the firm's inventory and expectations of market direction *Quotation need not represent the best price, must have a reasonable relationship to fair market value *Municipal dealers can make offers to sell securities by providing quotes without owning the bonds. The dealer, however, must know where to obtain the bonds if such offers are accepted.

Numbered Accounts

If requested, a customer's account may be identified by only a multi-digit number or symbols. The customer must sign a form certifying that he owns the account(s) identified by the number or symbols. The tax reporting is done the same as any other account. *Additional requirement that the customer MUST sign a document attesting to ownership

What is the disadvantage of selecting the life income settlement option?

If the beneficiary dies shortly after the payment begins, the balance of the principal will be forfeited

Qualified Dividends

If the dividend is qualified, the tax rate is generally a maximum of 15%. You do not need to know the technical points that make a dividend qualify. Just know that the tax rate is lower than the ordinary income rate applied to nonqualified dividends. - Qualified dividends are considered to be PORTFOLIO income (Dividends, interest, net capital gains)

What type of annuit can be purchased with a single premium

Immediate annuity

REITs (Real Estate Investment Trusts)

Important points to remember about REITs: - Equity Securities!!! - An owner of REITs holds an undivided interest in a pool of real estate investments. - REITs are liquid because they trade on exchanges and OTC. - REITs are NOT investment companies (mutual funds). (NOT redeemed - they ARE publicly traded) - REITs offer dividends and gains to investors but do not offer flow-through losses like limited partnerships, and therefore are not considered direct participation programs. **NO Depreciation expenses - Dividends from REITS are taxed as ORDINARY income - REITs are NOT DPPs (losses do not flow through). - A REIT must receive 75% or more of its income from real estate, have at least 75% of its assets in real estate and cash, and distribute 90% or more of its taxable income to its shareholders to avoid taxation as a corporation. - Dividends from REITs are not qualified; they are taxed as ordinary income. *Nonrecourse loans only have economic consequences for investors in real estate programs. *Equity REITS own properties (Rental income/Capital Gains) *Mortgage REITS do NOT own real estate *Hybrid Trusts - Invest in both real estate and mortgages *Investing in UNDEVELOPED land satisfies which objective -- Appreciation *REITs are NOT redeemed by the issuer. *REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property that pass through income and capital gains distributions to investors. *Investors who wish to liquidate their interests must sell them in the secondary market. *Investors receive dividends periodically (REITS AND LPS) - They both pass through investment gains to the investor and have centralized management. **The price paid for a listed REIT is MOST similar to pricing of -- A CLOSED-end investment management company (Supply and demand)

Which of the following is NOT a penalty for willful violation of a commissioner's order by an insurer?

Imprisonment

Don't Know (DK) Notice

In an interdealer trade, each side electronically submits its version of the transaction to the Automated Confirmation Transaction System. If one side does not recognize the other side's details of the transaction (e.g., the number of shares is wrong, or the price is wrong), it will electronically DK (don't know) the trade. DKs are used in interdealer trades for which one party to the transaction does not recognize the trade or, if it does, disagrees with the terms of the trade as submitted by the other party. The term can also be used within a member firm when an order or wire room does not recognize the account number or other information on an order ticket. When processing the morning mail, your firm's trading department notices a confirmation for an unrecognized trade. The proper procedure to follow is - Sending a DK notice to the sender of the confirmation.

Which of the following best describes the difference between joint life and joint and survivor annuity payment options?

In joint life option, the benefits stop after the first death

Real Estate Tax Losses

In the case of a real estate program, expenses creating the losses are: - Mortgage interest expense, - Depreciation allowances for the "wearing out of the building," and expenses for improvement to the property. - Nonrecourse debt adds to the investor's cost basis. We will get to this shortly. - Tax credits are offered for government-assisted housing and historic rehabilitation projects. The advantage of a tax credit is that is reduces tax liability dollar-for-dollar.

MSRB Conduct Rule G-17

In the conduct of its municipal securities or municipal advisory activities, each broker-dealer and municipal advisor shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice. **"Don't cheat, don't steal, and don't lie."

Refunding

In the securities industry, the term refunding is most like refinancing a loan, such as a mortgage. When interest rates fall, the municipality issues a new bond (at lower rates). Then they use the proceeds from the new bond to pay off the old, higher interest debt. 1) Advance Refunding (Prerefunding) -- Refinancing an existing municipal bond before maturity by using money from sale of a new bond issue. Municipality places the proceeds of a municipal pre-refunding in an escrow account that immediately invest in state and local gov securities. SLGS. BENEFITS: Higher Rating and Greater Marketability **When a bond issue is prerefunded, the issuer is going to redeem the bond on the first call date. The yield must be quoted to call. 2) Current Refunding -- Old bonds will be redeemed within 90 days or less from the date of issuance of the refunding bonds *Increased the quality of the bonds. Greater marketability *Pre-refunded issue becomes AAA (More Marketable) - Quoted Yield to Call

What is the disadvantage of owning a fixed annuity, as opposed to variable?

In times of inflation, the benefit of a fixed annuity will have decreased purchasing power

Tombstone Ads

Include: 1) Names of the syndicate members 2) Number of shares to be sold 3) Public offering price 4) Name of issuer 5) Type of security being offered Tombstones are advertisements often appearing in business newspapers to publicize new issues and are generally placed by a SYNDICATE MANAGER. They are not required.

Outstanding Stock

Includes all shares that a company has issued and that are in the hands of investors. Issued Stock - Treasury Stock = Outstanding Stock

All of the following are considered to be income periods EXCEPT

Income Dependency Period

IRA Investments

Ineligible Investments: 1) Collectibles (Antiques, Coins, Gems, Works of Art, Stamps, Etc) 2) Whole Life Insurance 3) Term Life Insurance Ineligible Investment Practices: 1) Short Sales of Stock 2) Speculative Option Strategies 3) Margin Account Trading May move investments through: 1) 60-day rollover 2) Direct Rollover 3) Trustee to Trustee Transfer

An insurer receives a report regarding a potential insured that includes the insured's financial status, hobbies, and habits. What type of a report is that?

Inspection Report

What is surplus lines insurance?

Insurance placed with an unauthorized insurer

Broker Call Loan Rate

Interest rate that banks charge broker-dealers on money they borrow to lend to MARGIN account customers. *A customer of a FINRA member firm buys securities on margin. Customer is expected to pay a rate of interest on margin loan based on -- Broker call loan rate *May be called with a one-day notice

Prime Rate

Interest rate that large US money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans. *Set by money center banks *A bank is likely to LOWER its prime rate when the FRB eases the money supply *A bank is likely to RAISE the prime rate when the FRB TIGHTENS the money supply

Coupon Rate (Nominal Yield)

Interest rate the bond issuer has agreed to pay the investor. Calculated from Bond's par value, usually as a percentage of par. *Interest usually paid on semiannual basis *Always the same - Fixed rate **When a question states a bond pays interest at a rate of 6% semiannually, it does not mean two payments of $60 per year. The interest rate is always stated on an annual basis ($60 per year), and it is paid twice per year, $30 every six months.

An insured purchased a Life Insurance policy. The agent told him that depending upon the company's investments and expense factors, the cash values could change from those shown in the policy at issue time. The policy is a/an

Interest-Sensitive Whole Life

What is the purpose of a conditional receipt?

It is intended to provide coverage on a date prior to the policy issue

The type of settlement option which pays throughout the lifetimes of two or more beneficiaries is called

Joint and Survivor

Your client wants to provide a retirement income for his elderly parents in case something happens to him. He wants to make sure that both beneficiaries are guaranteed an income for life. Which settlement option should this policyowner select?

Joint and Survivor

High-Yield Bonds

Lower grade bonds, once known in the industry as junk bonds. (BB or Ba or lower). May be subject to substantial price erosion during slow economics. Risk/Reward. *Speculative *Non-Investment Grade

National Market System (NMS) Securities

Larger corporations' stocks that, after being issued, trade on a national exchange (listed) or the Nasdaq system. Stocks that will not be listed are NON-NMS Securities

Large Cap Stocks

Largest companies - Long history of paying dividends. Also called "Blue-Chip Stocks" *Common Stock Dividends = Moderate *For people that need to have income and growth (Common Stocks)

What law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?

Law of large numbers

Demand Deposit (DDA)

Legal term for checking account. Considered short term funds and readily available. Provide safe but low retruns Held at banks and financial institutions from which funds may be withdrawn Historically referred to as checking accounts, now includes savings accounts and money market accounts

Legislative Risk

Legislative risk results from a change in the law. *Changes to tax code are most common legislative risks Examples: - Changes made to tax code regarding income tax - Luxury tax imposed on high-priced amenities - Law that would allow or eliminate tax deduction

Which of the following would be the best option that would help the surviving spouse of the insured to put her child through daycare after the insured's death?

Life Insurance Proceeds

What annuity settlement option provides income payments to the annuitant for the duration of his or her life, and also guarantees payment for a specified number of years?

Life income with a period certain

What are the living benefits of whole life insurance?

Loan Values

Transfer

Loss is borne by another party

Special Memorandum Account (SMA)

Line of credit *SMA may be more than EE and may exist even if there is no EE in the account. *Although the SMA is not reduced by a decline in market value, there is a certain condition where it cannot be used. SMA can always be used in a restricted account, as long as its use does not bring the account below the minimum maintenance level *Can be borrowed from the account, dollar-for-dollar *Utilizing SMA increases the debit balance *Buying power of SMA is 2:1 *EE and SMA are NOT necessarily equal *SMA CANNOT be used to meet a maintenance margin call *SMA balances may be withdrawn provided the withdrawal does not bring the account below minimum maintenance. *The market value of short securities DECREASING would cause SMA to INCREASE (Customer benefits if CMV falls) *If CMV is rising, the equity is falling, with no effect on SMA Affect SMA in a short account: 1) Decline in CMV 2) Sale of Securities 3) Purchase of Securities Affect SMA in a long margin Account: 1) Increase in market value 2) Sale of stock 3) Purchase of stock (INCREASE SMA) (Long) (Changes when there is monetary change): 1) Long Sale 2) Receipt of cash dividend 3) Reduction of debit balance *NOT receipt of STOCK dividend Generate SMA: - Nonrequired cash deposits. If a customer deposits cash that is not required to meet a margin call, the full amount reduces the debit and is also credited to SMA. - Dividends. Dividends received on securities in the margin account are added to SMA. The customer can withdraw these income distributions, even if the account is restricted. - Loan value. If a customer makes a nonrequired deposit of marginable stock, the stock's loan value is credited to SMA. Because the loan value is 50% of the current market value, the credit is equal to half what would be gained by a deposit of an equal amount of cash. - Sale of stock. When stock is sold, 50% of the sales proceeds is credited to SMA.

Living Trust

Made during the maker's lifetime. The settler transfers property into the trustand can remain thetrustee

Standard Deviation

Measure of security's deviation from its historical average returns

Inflation Protection

Mid-cap stocks (see Glossary of Terms) have historically provided good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection. There are several key words here to remember for the exam. Whenever you see "low tax bracket," the answer cannot be a municipal bond. Likewise, whenever you see "inflation protection," the answer will be common stock (unless a TIPS is given as a choice).

Regulation T Deposit Requirement

Minimum amount an investor must deposit when using credit to buy a security. 50% of the purchase price. *Listed Stocks, NASDAQ are marginable under Regulation T. Does NOT permit margin under normal circumstances on OPTION contracts *Delivery of securities is required 10 business days after settlement **It is critical to remember that Regulation T imposes margin requirements for new securities transactions and for withdrawals of cash or other collateral. Regulation T does not otherwise establish any requirements relating to the amount of margin that must be maintained in a customer's account after it has bought (or sold short) one or more securities. The rules on maintenance equity are solely those of the self-regulatory organizations (SROs). Regulation T applies to -- Both cash and margin accounts for nonexempt securities Regulation T Governs The Purchase Of: (Nonexempt Securities) - Listed Options - ADR's - Corporate Convertible Bonds *Under Regulation T, the initial margin requirement on purchases in a MARGIN account, and the full payment on purchases in a CASH account, MUST be made within 4 business days of trade date.

B just bought a new car, which he anticipates will be paid for 4 years from now. He also wants to buy a life insurance policy, but is financially limited until the car is paid off. Which of the following types of policies would be best for B?

Modified Life

Which of the following is NOT true regarding policy loans?

Money borrowed from the cash value is taxable

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard?

Morale Hazard - Someone who has an indifferent attitude towards an insurance company.

Life insurance premium rates are based upon the anticipated number of individuals within a given group who will die within a specified period of time, as indicated on

Mortality Tables

Par Value (Principal/Face Value)

Most debt securities have a par value of $1,000

When-. As-, and If-Issued Contracts (When-Issued Trades)

Must Include: - Description of the security - Purchase Price (dollar bond) or yield (serial bond) - Trade date *Because settlement date is unknown, a when-issued confirmation for bonds cannot include accrued interest. Will NOT show total dollar amount. *NOT INCLUDED -- S.A.T -- Settlement, Accrued Interest, Total Amount Due

Under the Fair Credit Reporting Act, individuals rejected for insurance due to information contained in a consumer report

Must be informed of the source of the report

No-Load Funds

Mutual funds that do not require an up-front fee *If a mutual fund has a public offering price equal to its NAV, it has no sales charge and is therefore a no-load fund.

POP

NAV + Sales Charge = POP ---$ NAV / (100%-Sales Charge) = POP ---- % Restricted persons—those not allowed to purchase shares at the POP—are defined as follows: - Member firms (whether or not they are involved in the IPO) - Employees of member firms - Finders and fiduciaries acting on behalf of the managing underwriter, including attorneys - Accountants, financial consultants, etc. - Portfolio managers, including any person who has the authority to buy or sell securities for a bank, savings and loan association, insurance company, or investment company - Any person owning 10% or more of a member firm - Furthermore, any immediate family member of any natural person of those listed are also restricted. Immediate family includes parents, in-laws, spouses, siblings, children, or any other individual to whom the person provides material support.

Mutual Fund Formulas

NAV = (Assets - liabilities) / Shares outstanding POP = NAV + Sales Charge - If sales charge given in $ POP = NAV / (100% - sales charge) - if sales charge given in % SC% = (POP - NAV) / POP

Gross Domestic Product (GDP)

Nation's annual economic output - all the goods and serviced produced within the nation *Published on quarterly basis as annual %

Filing Requirements

New Members = AT LEAST 10 business days before first use (Prefiling) Established Members = WITHIN 10 business days of first use (Postfiling) Filing with FINRA within 10 business days of first use is required for all of the following: 1) retail communications concerning collateralized mortgage obligations (CMOs) registered under the Securities Act 2) retail communications concerning public direct participation programs (DPPs) 3) retail communications that promote or recommend a specific registered investment company or family of registered investment companies including exchange-traded funds (ETFs). **REITS are NOT included in FINRA's list of retail communication requirements

Market Order

Next available price / Execution guaranteed (Buy or sell) *Fill is guaranteed, price is not (Executed IMMEDIATELY) *Does NOT restrict the price at which an order is executed

With a single premium deferred annuity, when will the annuity payments become available?

No sooner than 1 year after the annuity purchase

Can a business or corporation be an annuitant?

No, an annuitant must always be a natural person

Cash values guarantees in a whole life policy are called

Nonforfeiture Values

Fiduciaries

Not Restricted = Associated Person Restricted = On Behalf of Underwriter/Issuer

DPP's

Objectives for DPP: 1) Long-Term Capital Gains 2) Deductions against passive income 3) Deferment of taxes *Provide pass through income and ONLY DPP's allow flow through of losses *Deductions for depletion would most likely apply to oil and gas income program *RR MUST obtain written verification of investor's net worth *Highly ILLIQUID - To INCREASE liquidity -- DPP ROLLUP - A DPP rollup is a transaction involving the combination or reorganization of one or more limited partnerships into securities of a successor corporation. The securities of the successor corporation would likely have greater liquidity. *Frequently sold as private placements *Would NOT be structured as a C Corp (Taxable Entity) *DPPs are used to defer present income into the future and take advantage of time. In doing so, any gains will be taxed at favorable long-term rates. The expected losses in the early years may be taken as deductions against passive income from other sources. *At Risk Provisions: 1) Losses disallowed by the at-risk provisions in any one year may be carried over to following taxable years 2) Deductions or losses are limited to the investors' invested capital plus their percentage of partnership liabilities for which they are personally liable. 3) Qualified nonrecourse financing is excluded from tax basis except in the real estate programs. Most Important/Suitable Order: 1) Potential for economic gain 2) Tax Write-offs 3) Liquidity and marketability 4) SEC Approval Types: 1) Real Estate - Raw Land 2) New Construction 3) Existing Properties 4) LP's (Most common) 5) Leasing, oil and gas Investor Requirements: 1) In a position to take full advantage of any tax benefits generated by the DPP *Must Avoid 2 of 6 Characteristics: 1) Associates - Impossible 2) Profit Motive - Impossible - (Economic viability (Most important) - Tax benefits without economic viability = abusive shelter consequences (Back taxes, penalties, prosecute for fraud) 3) Centralized Management (Difficult) 4) Limited Liability (Difficult) *5) Freely Transferable Interest (Easy - AVOID) *6) Continuity of Life (Easy - AVOID)

Revenue Anticipation Notes (RANs)

Offered periodically to finance current operations in anticipation of future revenues from revenue-producing projects or facilities *Issued at discount *Short Term Financing

Tax-exempt Commercial Paper (TXCP)

Often used in place of BANs and TANs for up to 270 days, though maturities are most often 30, 60, and 90 days

Basis Points

One basis point is equal to 1/100th of 1%, or 0.01% (1%). A bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points. Interest rates that have risen by 1% are said to have increased by 100 basis points. If the Federal Reserve Board raises the target interest rate by 25 basis points, it means that rates have risen by 0.25% percentage points. If rates were at 2.50%, and the Fed raised them by 25 basis points, the new interest rate would be 2.75%. Basis Points --- Percentage Terms 1--0.01% 5--0.05% 10--0.1% 50--0.5% 100--1% 1000--10% 10000--100%

The dividend option in which the policyowner uses dividends to purchase a term policy for one year is referred to as the

One-year term option

Which of the following is true regarding the consent of the proposed insured for insurance contracts in Kentucky?

Only individual policies must be consented by the insured

Which of the following is true regarding the consent of the proposed insured for insurance contracts in Kentucky

Only individual policies must be consented by the insured.

Open-End Investment Companies (Mutual Funds)

Only issues one class of security, which is common stock. Can continuously issue new shares. Unlimited. *Offering shares at the next NAV calculation (Forward Pricing) *Not marginable *Not sold in secondary market (Redeemable) *Only issue common stock but can purchase Preferred or Bonds *Prospectus required on ALL issues *Priced by NAV *Ex Date Set by BOD *Full or Fractional Issues *Voting and Dividend Rights *Can invest in variety of securities *Pay dividend when declared by BOD *Redemption value of open-end investment company shares is based on the NAV computed AFTER the order is received *What would cause mutual funds NAV per share to fall? - Fund pays a dividend to shareholders - Market value of portfolio declines

Unilateral Contract

Only one of the parties to the contract is legally bound to do anything.

Business Risk

Operating risk, usually caused by poor management decisions. Related to the growth prospects of a business and is most closely associated with common stock. Not normally associated with bonds **Business risk is highest for investors whose portfolios contain stock in only one issuer or in lower-rated bonds

Which Universal Life option has a gradually increasing cash value and a level death benefit?

Option A

A 3% bond with 20 years to maturity is being issued by a syndicate with a reoffering yield of 4%. What is the term used to describe this bond?

Original Issue Discount *Because the bond is being issued by a syndicate, it is a new issue (i.e., an original issue). Because the yield (4%) is higher than the coupon (3%), it is an original issue discount.

What is the name for a life insurance policy rider that provides coverage on the insured family members?

Other-insured Rider

Control Stock

Owned by directors, officers, or persons who own or control 10% or more of the issuer's voting stock. *Control person also called Affiliate - Wants to share, sell, must complete Form 144 (Used to determine the number of shares the control person may sell over a 90-day period)

Traditional IRA contributions are tax deductible based on which of the following?

Owners Income

What is the major difference between a stock company and a mutual company?

Ownership

Which of the following refers to the amount of retirement benefits a worker receives under Social Security based on the worker's earnings and retirement age?

PIA (Primary Insurance Amount)

An insured has a life insurance policy from a participating company and receives quarterly dividends. He has instructed the company to apply the policy dividends to increase the death benefit. The dividend option that the insured has chosen is called

Paid Up Additions

When the owner of a participating whole life policy uses the dividend to provide more life insurance coverage, which of the following dividend options is being used?

Paid-Up Additions

Which dividend option is automatically selected by the company if not chosen by the policyowner?

Paid-up Additions

Peril

Perils are causes of loss insured against in an insurance policy

What type of life insurance offers an applicant a cash value element?

Permanent Insurance (Usually, Whole Life)

Retention

Planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.

Hypothecation

Pledging of customer securities as collateral for margin loans *Contract allowing securities to be pledged for the loan

All of the following are true regarding insurance policy loans EXCEPT

Policy loans can be made on policies that do not accumulate cash value

Which of the following has the right to convert the existing term coverage to permanent insurance?

Policyowner

Which of the following individuals must have insurable interest in the insured?

Policyowner

Securitization

Pooling assets, such as mortgages and various other types of loans into financial instruments allows them to be sold to general investors more easily than selling them individually. This process is called securitization. Remember, if someone owes you money, it is their debt but your asset. *Asset Backed Securities

Value Style

Portfolio managers using the value style of management concentrate on undervalued or out-of-favor securities whose price is low relative to the company's earnings or book value and whose earnings prospects are believed to be unattractive by investors and securities analysts. Value investment managers seek to buy undervalued securities before the company reports positive earnings surprises. Their primary source of information is the company's financial statements. Value investment managers are more likely to buy stocks that are at the bottom of their 52-week price range. Value managers expect to see a low P/E ratio or low price-to-book ratio and dividends offering a reasonable yield. A new customer asks her registered representative to recommend undervalued or out-of-favor securities with relatively low prices. This portfolio management strategy is known as -- VALUE *Value investing is the strategy of selecting stocks that trade for less than their book value. Value investors actively seek stocks of companies with sound financial statements that they believe the market has undervalued.

Currency Risk

Possibility that an investment denominated in a foreign currency could decline if the value of that currency declines in its exchange rate with the US dollar

Interest Rate Risk

Potential change in bond prices caused by a change in market interest rates after an issuer offers its bonds

Default Risk

Potential for investor to lose some or all of their money - under circumstances related to an issuers financial strength.

If a life insurance company uses HIV testing as part of it's underwriting, when must an applicant be notified of the procedure?

Prior to performance of the test

Which of the following clauses specifies the conditions under which a policyowner can change coverage?

Privilege of Change

Free Credit Balance

Proceeds from a sale that are not reinvested and held in the account at the broker-dealer (Free on demand)

Which of the following outcomes are possible for the writer of a covered call option?

Profit limited and loss limited Long stock -- Short call *Used to generate premium income *Low risk, limited protection

Sovereign Risk

Risk of a country defaulting on its commercial debt obligations.

Call Risk

Risk that a bond might be called before maturity and an investor will be unable to reinvest the principal at a comparable rate of return. (When interest rates fall, expect a call) *When interest rates fall, issuers will call in existing callable debt, often leads to reinvestment risk. Example: *An investor holding a 4.5% callable bond has it called away by the issuer when interest rates fall to 3.5%. This is an example of -- Call risk, whick can lead to reinvestment risk

Out Of The Money CALL

SP ↓ CMV

Short Position

Selling a security one does not own *Sell to open (Establish new position - selling), buy to close (Closing out the put they sold)

Fingerprints

Sent to US Attorney General *Brokers must have fingerprint records made for most of employees, all directors, officers and partners. NOT: Drivers, Receptionists, Doorman (Don't handle or touch securities)

Treasury Strips

Separate Trading of Registered Interest and Principal of Securities. A zero-coupon bond issued by the U.S. Treasury in which all interest income is received at maturity in the form of a higher (accreted) principal value. Avoids "reinvestment risk" *Issued at a discount and without stated rate

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

Settlement Option

Freely Transferable Shares

Shareholders have the right to sell or give away their shares without permission of the corporation

Class A shares (front-end load)

Shares sold with a front-end load are called Class A shares. Front-end sales loads are the charges included in a fund's POP. The charges are added to the NAV at the time an investor buys shares. Front-end loads are the most common way of paying for the distribution services that a fund's underwriter and broker-dealers provide. The Class A shares of the GEMCO Balanced Fund carry a sales charge of 4.5%. If the next computed net asset value per share is $32.74, purchase orders will be filled at a price of - 34.28 *Mutual funds sell at the public offering price (POP). That POP includes the sales charge—in this case, 4.5%. The sales charge is a percentage of the POP, not the NAV. The computation is the NAV divided by (100% - the sales charge). In our question, that is $32.74 ÷ 0.955, or $34.28 per share. *Front end sales load is defined as -- Difference between the public offering price and the NAV per share of the fund

Exchange Traded Fund (ETF)

Shares traded on securities markets that represent the legal right of ownership over part of a basket of individual stock certificates or other securities *They are marginal *Based on Supply and demand *May be traded on margin and sold short *Legally classified as open end fund *Intraday pricing for active traders *Lower operating cost than many mutual funds *Active traders may run up higher expenses because of being charged a commission to buy and then a commission to sell. *A prospectus must be delivered to customers following a transaction in all EXCEPT -- ETF - No requirement to send prospectus

Repurchase Agreements (Repos)

Short-term sales of securities with an agreement to repurchase the securities at a higher price Reverse Repo: - Offering to buy and then sell back later

Upon policy delivery, the producer may be required to obtain any of the following EXCEPT

Signed waiver of premium

Which of the following determines the length of time that benefits will be received under the Fixed-Amount settlement option?

Size of each installment

Reverse Split

Stock split under which a firm's number of shares outstanding is reduced. Cost basis 9Earnings per share) per share will increase. The price of a certain stock has diminished over the last several months to the point where it may be delisted by the exchange where it trades. An action the issuer could take in this case would be *The issuer would wish to increase the per share price of the stock to prevent delisting. This would require a reverse split, which lowers the number of shares but increases the price per share. *No tax consequences for a split, reverse or otherwise Even: 1:4 100 shares, $5 (100 X $5 = $500) (100 X 1 = 100; 100 / 4 = 25) $500 / 25 = $20 Per Share

Small Cap Stocks

Stocks that generally have market values of less than $1 billion but can offer above-average returns. *No Dividends (Common Stock) = Aggressive *Higher risk, more income potential - For people looking just for growth

What type of annuity is suitable for someone who wants to select the benefit option that will pay the largest amount only for as long as the annuitant lives?

Straight life

Accredited Investors

Subset of investors made up of all institutional investors and certain retail investors. Must meet 1 of criteria. *Used exclusively in primary market Qualifiers: 1) Insiders of the security's issuer (Offers, board members, major stockholders) 2) Meet Financial Criteria - Income of at least $200,000 + for past 2 years and again in current year// Net worth of 1 Million or more -- $300,000 for joint accounts 3) Natural persons qualified based on certain professional certifications 4) Holders in good standing of the Series 7, Series 65 and Series 82 Licenses *Insurance companies - Any Size *Married couples who have net worth of 1 million *Corporation with net worth of $5 MIllion

Municipal Debt

Suitable For: 1) High Tax Bracket (6 Figure Income) 2) Needs Income *Moderate/Aggressive * Moderate = Investment Grade (AAA, AA, A, BBB) * Aggressive = High Yield *Interest Income Tax: - Fed = No - State = Yes (If you live in state of issuance) Risks: 1) Default, Interest, Inflation, Callable, Reinvestment

Borrowing or Lending

Taking (Borrowing) a customer's funds for either the firms or the RR's own use is prohibited. Borrowing and lending arrangements can be permitted under certain circumstances *If firm has no policy regarding laws to and from customer, then they are not allowed. *Must have written notice from customer and principal Conduct rules permit 5 types of lending arrangements: 1) Immediate family relationship between RR and customer (No notice or approval is needed) 2) Customer is in business of lending money (Bank) (No approval is needed) 3) Customer and RR are both registered reps with same firm (Firm approval required) 4) Customer and RR have personal relationship outside of broker-customer relationship (Firm approval required) 5) Customer and RR have business relationship outside of Broker-customer relationship (Firm approval required) *If customer is bank = You can borrow, if customer is loan officer from bank = You CANNOT

Fannie Mae (FNMA)

The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates. Characteristics: 1) Interest on FNMA certificates is taxable at ALL levels. 2) FNMA is a publicly held corporation. 3) FNMA pass-through certificates are not guaranteed by the U.S. government. *FNMA is a publicly held corporation. The interest income on all mortgage-backed securities is fully taxable. Though a government agency, FNMA pass-through certificates are not guaranteed by the U.S. government. The only U.S. agency whose securities are considered direct obligations of the U.S. government is the Government National Mortgage Association. (NOT owned by the US Government) *The interest income from most U.S. government and agency securities is exempt from state and local—but not federal—taxes. Mortgage-backed securities (such as FNMA and GNMA obligations) are subject to federal, state, and local taxes.

Letter of Intent (LOI)

The LOI is a one-sided contract binding on the fund only. However, the customer must complete the investment to qualify for the reduced sales charge. A person who plans to invest more money with the same mutual fund company may immediately decrease his overall sales charges by signing a letter of intent (LOI). - Letters of intent are good for a maximum of 13 months and may be backdated 90 days. - If the LOI is not completed, the sales charge amount that applies is based on the total amount invested. - Share appreciation and income paid by the fund do not count toward completion of the letter.

Forward Pricing

The NAV of a fund share is the amount the investor receives upon redemption. It must be calculated ONCE per business day and one of those calculations must occur after the close of trading on the US exchanges. Typically at end of each business day (4:00pm ET). Wait until the next calculation to determine value of shares redeemed. *Open-End Investment Company *Applies to purchases and redemptions

What is the cost basis of an inherited mutual fund?

The NAV of the shares when the owner dies

Trade Reporting and Compliance Engine (TRACE)

The Trade Reporting and Compliance Engine (TRACE) is the FINRA-approved trade reporting system for corporate and government agency bonds trading in the OTC secondary market. Eligible: - CMOs - Asset Backed Securities (ABS) - Corporate Bonds *TRACE is a trade reporting system only. It is not an execution system. It does not accept quotations, nor does it provide settlement and clearance functions. Rules: - Both sides of the transaction must report. - Trades must be reported as soon as practicable and no later than 15 minutes after execution. - Execution date, time of trade, quantity, price, yield, and if price reflects a commission charged are all reportable and displayed. Exclusions: - Debt of foreign governments - Money market instruments - Debt securities that are not depositary trust eligible - New issues (Primary Market)

What is the name for the legal framework of state laws for broker-dealers, registered representatives, investment advisors and investment advisor representatives?

The Uniform Securities Act is a template for state securities laws in the United States.

Which of the following is considered a benefit for broker-dealers offering margin accounts to their customers?

The additional income generated from the payment of margin interest *Margin interest paid by customers is considered a source of income for broker-dealers and pledging the customer's securities as collateral for the loan is simply a necessary part of offering margin to customers. The need for more operational staff is a cost, not a benefit, and margin accounts are not typically attractive to conservative investors.

Which of the following characteristics applies to defined benefit plans but not defined contribution plans?

The amount of contributions made by the employer is determined by an actuarial formula

A 60-year-old participant in a 401(k) plan takes distribution and rolls it over to an IRA within 60 days. Which of the following is true?

The amount of the distribution is reduced by the amount of a 20% withholding tax

Mutual Fund Capital Gains Distributions

The appreciation or depreciation of portfolio securities is unrealized capital gain or loss if the fund does not sell the securities. When the fund sells the securities, the gain or loss is realized. Capital gains distributions are derived from net realized gains. As a practical (and test relevant) matter, the fund will only distribute its long-term capital gains. A long-term capital gains distribution may not be made more often than once per taxable year. What about net short-term capital gains? They are distributed along with the dividend. They are noted as a nonqualified dividend and are taxed at ordinary income rates. The terms realized gains and unrealized gains can be confusing. Think of an unrealized gain as a paper profit and a realized gain as actual profit made.

What is the cost of coverage based on for group life insurance?

The average age and the ratio of men to women

An applicant signs an application for a $25,000 life insurance policy, pays the initial premium, and receives a conditional receipt. If the applicant is killed in an automobile accident the next day,

The beneficiary will receive the full death benefit if it is determined that the applicant qualified for the policy.

A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then:

The benefit is received tax free

Which of the following is an example of liquidity in a life insurance contract?

The cash value available to the policyowner

What happens to a policy's cash value under an extended term nonforfeiture option?

The cash value is converted to the same face amount as in the whole life policy

Diversified Management Company

The company can elect to be considered diversified or nondiversified under the Investment Company Act of 1940. Meets 75-5-10 requirements. At least 75% of the fund's total assets must be invested in cash and securities issued by companies other than the investment company itself or its affiliates. - The 75% must be invested in such a way that - No more than 5% of the fund's total assets are invested in the securities of any one issuer and - No more than 10% of the outstanding voting securities of any one issuer is owned (by the 75%). *Remember, for testing purposes, the 5% and 10% limitations are part of the 75% invested. There are no conditions attached to the remaining 25%.

Conversion Ratio

The conversion price is the stock price at which a convertible bond can be exchanged for shares of common stock. The conversion ratio, also called the conversion rate, expresses the number of shares of stock a bond may be converted into. In many cases, the indenture merely tells you the number of shares into which the bond is convertible. For example, the bond may be convertible into 50 shares; thus, it would have a conversion ratio of 50:1, 50 shares for 1 bond. If a bond is convertible into 25 shares, it would have a conversion ratio of 25:1.

Currency Options

The option or the right, but not the obligation, to exchange a specific amount of currency on a specific future date and at a specific agreed-on rate

In a life settlement contract, whom does the life settlement broker represent?

The owner

What determines the penalty for surrendering a market value adjusted annuity prematurely?

The current interest rate at the time of surrender

An individual applied for an insurance policy and paid the initial premium. The insurer issued a conditional receipt. Five days later the applicant had to submit to a medical exam. If the policy is issued, what would be the policy's effective date?

The date of medical exam

All of the following are true about key-person insurance EXCEPT

The death benefit is taxable to the business

all of the following are true about key-person insurance EXCEPT

The death benefit is taxable to the business

Which of the following is INCORRECT concerning a noncontributory group plan?

The employees receive individual policies

All of the following statements concerning an employer sponsored non-qualified retirement plan are true EXCEPT

The employer can receive a current tax deduction for any contributions made to the plan

J transferred his life insurance policy to his son two years before his death. Which of the following is true?

The entire face value of the policy will be included in J's taxable income

In Whole Call

The entire issue is being called at one time

No-Load Shares

The fund does not charge any type of sales charge, and the shares are purchased at NAV. Permitted to charge fees that are not considered sales charges, such as purchase fees, account fees, exchange fees and redemption fees. Max 25 basis points *A Shares and No load shares have MAXIMUM 12B-1 Fees of 0.25% per year of net assets *May NOT claim to be a no-load if it charges 12b-1 fee *Which type of shares allow the investor to buy and sell the shares at NAV and have a 12b-1 fee of 0.25% or less? - No Load **No load funds have no sales charge and are limited to a 12b-1 fee of 0.25% annually. Class C shares charge a level load built into the expense ratio, usually as a 12b-1 fee. Class B shares have back-end loads that reduce over time (Contingent deferred sales charge, or CDSC). Class A shares charge an upfront load.

An employee is insured under her employer's group life plan. If she terminates her group coverage, which of the following statements is INCORRECT?

The insured may choose to convert to term or permanent individual coverage.

When planning for survivor protection in life insurance, what needs to be considered?

The insured's current assets, liabilities, and survivor needs

Paying Agent

The paying agent is usually a trust department of a bank. In some cases, it could be the treasurer of the issuers. The role of the paying agent is to transmit payments of interest and principal to the investors. Because most money market instruments are issued at a discount, the paying agent only repays the principal.

Which of the following best describes what the annuity period is?

The period of time during which accumulated money is converted into income payments

Variable Life Refund Provisions

The insurer must extend a free-look period to the policyowner for 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. During the free-look period, the policyowner may terminate the policy and receive all payments made. The refund provisions extend for two years from issuance of the policy. If, within the two-year period, the policyowner terminates participation in the contract, the insurer must refund the contract's cash value (the value calculated after the insurer receives the redemption notice) plus a percentage of the sales charges deducted. After the two-year period has lapsed, only the cash value need be refunded; the insurer retains all sales charges. *A policyowner who wants a refund within 45 days receives all money paid *From 45 days to two years, there is a partial refund of sale charge. *After a variable life policy has been in effect for two years, the surrender value of the policy is the cash value; there is no sales charge refund.

What does the term double indemnity mean?

The insurer will pay a benefit of twice the face amount

If the annuitant dies before the annuity start date, which of the following is true?

The interest is taxable

Concealment

The legal term for the intentional withholding of information of a material fact that is crucial in making a decision.

Mediator

The person who serves as a mediator may not serve as an arbitrator if it goes to arbitration

Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following EXCEPT

The loss may be intentional

Assumed Interest Rate (AIR)

The net rate of investment return that must be credited to a variable life insurance policy to ensure that at all times the variable death benefit equals the amount of the death benefit. The AIR forms the basis for projecting payments, but it is not guaranteed. AIR = 6% April May June Payout $1,000 $1,020 $1,000 Sep Account 7% (Up) 4% (Down) *Actual performance compared to the AIR affects the death benefit of a variable life insurance policy *Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity *the annual rate of return required to maintain the level of annuity payments.

What is the difference between a single premium and a flexible premium payment options in a deferred annuity?

The number of payments that purchase the annuity

If an insurer issues a policy based on the application that had unanswered questions, which of the following will be TRUE?

The policy will be interpreted as if the insurer waived its right to have an answer on the application

An insured stops making payments on a loan taken from his cash value policy. What will most likely happen?

The policy will terminate when the loan amount with interest equals or exceeds the cash value.

Total Takedown

The portion of the spread that remains after subtracting the management fee Members buy the bonds from the syndicate manager at the takedown. In the following example, for a 1-point spread with a management fee of 1/8 point, the takedown is 7/8 point ($8.75). **Additional takedown plus concession

How is the premium determined in a joint life insurance policy?

The premium is based on the average age of the insured

Take Note

The primary purpose of the Securities Act of 1933 is to require full and fair disclosure in connection with the sale of securities to the public. The act requires that a new issue, unless specifically exempted from the act, be registered with the SEC before public sale. All investors must receive a detailed disclosure document known as a prospectus before purchase. **While some banks and savings and loans are exempt, issuers' corporate bank holding companies are not. Private placements, municipal securities, and commercial paper (short term) are all exempt from federal registration from SEC 1933

The clause that specifies the conditions under which insurers can allow policyowners to change coverage is called

The privilege of change clause

Put-Call Ratio

The put-call ratio reflects the current open interest in the trading of put options to call options. The ratio can be used as a gauge of investor sentiment (bullish or bearish) and can be calculated to measure broad sectors of the market across many underlying securities or indexes, or it can be used to gauge investor sentiment for just one underlying security. The ratio is calculated by dividing the number of traded put options by the number of traded call options. The higher the ratio, the more bearish investors have been up to that point in time.

Capital Risk

The risk that all or a significant portion of the sum invested might be lost is known as - Capital Risk *Particularly when taking aggressive positions, such as in options or DPPs, there is a greater likelihood that a substantial portion of the initial investment can be lost. This is best described as capital risk.

An unauthorized producer wrote a line of insurance on a stage production that's appearing in Kentucky, Indiana and Tennessee. Which of the following is true?

The tax the producer will be computed on the portions of the premium applicable to the risk in Kentucky.

When must a life insurance policy loan be repaid?

The time is not specified so long as the total indebtedness does not exceed the policy cash value

Know

The time limit to return for a representative exam (Series 6 or 7) is within two years. The time limit for the SIE exam is four years. There is no education exemption. *US citizen is NOT a requirement for becoming RR

Every publicly-traded corporation is required to have a transfer agent and a registrar. The primary distinction between the two is:

The transfer agent ensures that dividend payments go out to all registered owners of record on the payable date. *Event of stock split, transfer agent is required to maintain a record of the shareholders eligible to receive additional shares Registrars make sure that the company does not issue more shares than authorized in the charter.

If an applicant submits the initial premium with an application, which action constitutes acceptance?

The underwriters approve the application

Which is generally true regarding insureds who have been classified as preferred risks?

Their premiums are lower

Broker's Broker

There are certain firms in the municipal securities business that do not position trade (keep an inventory of) bonds. Rather, they exist to assist other firms find buyers or sellers of municipal bonds. They perform this duty in both primary and secondary market transactions. They will also represent institutions, but never have any dealings with public customers. A major reason these firms exist is because the market for most municipal bonds is quite thin. *One of the features using a broker's broker is anonymity. Your firm does NOT disclose the identity of your customer and the broker's broker does NOT disclose the identity of the buyer of your client's bonds. *Do NOT perform retail trades with individual investors *Do NOT maintain inventories *Perform specialized trades for institutions *Act as AGENTS

Duration

There are two ways. All money market instruments, other than CDs, pay that "interest" through receiving the discount back at maturity. All bonds, with the exception of zero coupon bonds, pay semiannual interest. - Used to measure the sensitivity of a debt security when interest rates change in the marketplace (Measurement of time for cash flow to repay the invested principal) - Higher the coupon rate, the SHORTER the duration (Less price movement) (Less interest rate risk) - Lower the coupon rate, LONGER the duration (Greater price movement) (Greater interest rate risk) - Longer a bond's maturity, the longer the bond's duration - Duration is ALWAYS LESS than the bond's maturity - Duration for a zero coupon bond is ALWAYS EQUAL to its maturity

Holding Customers Mail

There is no requirement that the firm to agree to hold the customers mail. If they do, these requirements would be in place: 1) Customer must be made aware of alternative methods for receiving and monitoring account activity 2) Firm must receive instructions in writing for the mail to be held for MORE than 3 months 3) Member firm must establish reasonable intervals that the customer's instructions would apply *Must be a good reason - not inconvenience

Variable Rate Municipal Securities (Reset Securities)

These are municipal debt securities with interest rates that fluctuate based on current market interest rate changes. 1) Variable Rate Demand Obligations (VRDOs) 2) Auction Rate Securities (ARs) Risks: 1) Market 2) Default 3) Liquidity

Agency Securities

These​ long-term bonds are issued by institutions such as Ginnie​ Mae (GNMA), the Farm Credit Administration (FCA), Many of these securities are guaranteed by the federal government. Settle T+2 *Known as asset backed securities *Interest is subject to income tax at all levels (Federal & State) *Principal payments are not subject to tax

Under a SIMPLE plan, which of the following is TRUE regarding taxation on both contributions and earnings?

They are tax deferred on both contributions and earnings until funds are withdrawn.

Private Placement Debt

This money is loaned on a private basis. These securities are not registered with any regulatory body, such as the SEC. *No ratings to guide investors. *Although the borrower can be a company in any stage of operations, these are commonly used as mezzanine debt. Just as the mezzanine in a theater is between the bottom and top floors, this is money that is borrowed at an intermediate point in the company's development. *Risks are high. That means the potential rewards are greater than just "leaving your money in the bank." *Mezzanine Debt -- Financing supplied at the intermediate point in a new company's development

Hedge Fund Lock-Up Provisions

This provision provides that during a certain initial period, an investor may not make a withdrawal from the fund. The period when the investor cannot withdraw investment dollars is known as the lock-up period—the investor's capital is locked up. *Illiquid *Hedge funds share a pooled investment with other investors like mutual funds The length of the lock-up period will largely be dependent on what the investment strategy of the fund is and how long the portfolio manager anticipates it will take to implement the strategy and then see results of that implementation.

MSRB Rule G-15

This rule requires members to provide customer with written confirmation of transactions. - The yield or dollar price computed and shown shall be computed to the lower of call or nominal maturity date; and - For purposes of computing yield to call or dollar price to call, only those "in whole calls" are included.

Which of the following employees insured under a group life plan would be allowed to convert to individual insurance of the same coverage once the plan is terminated?

Those who have been insured under the plan for at least 5 years

What is the purpose of the applicant control clause?

To allow an adult to control the policy until a minor reaches the age of majority

Which of the following is the best reason to purchase life insurance rather than annuities

To create an estate

Which of the following is NOT a goal of risk retention?

To minimize the insured's level of liability in the event of loss

Calculating NAV (Net Asset Value)

Total Assets - Total Liabilities = Net Assets Of The Fund *Purchases and redemptions don't affect NAV *Market value INCREASING or DECLINING would affect NAV Then: Net Assets Of The Fund / Shares Outstanding = NAV Per Share Assets = $100 Million Liabilities = $5 Million Shares Outstanding = 10 Million $100 Million - $5 Million = $95 Million Total NAV $95 Million / 10 Million (Shares) = $9.50 NAV PER SHARE _____________________________________________________________________________ Cancel 10,000 shares @ $10/Share and distribute $100,000 $100MM - $100K = 99,900,000 Net Assets $99,900,000 Net Assets / 9,990,000 Shares = $10 NAV _______________________________________________________________________ JIM Growth fund has NET ASSETS of $75 million and liabilities of $3 Million. The fund has 1.2 million outstanding shares. What's NAV? *Liabilities are already in the figure -- $75 Million / 1.2 Million = $62.5

Risk

Uncertainty or chance of a loss occurring. Two types of risk are pure and speculative, only one of which is insurable.

Under Option B in a universal life policy, what happens to the death benefit?

Under Option B, the death benefit increases each year by the amount of the cash value increases

Rule 156

Under federal law, it is unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, to use sales literature which is materially misleading in connection with the offer or sale of securities issued by an investment company. Under these provisions, sales literature is materially misleading if it (1) contains an untrue statement of a material fact or (2) omits to state a material fact necessary to make a statement made, in the light of the circumstances of its use, not misleading.

FINRA Rule 2320—Variable Contracts of an Insurance Company

Under this rule, there is no maximum sales charge limitation in the sale of variable annuities. The only requirement is that the sales charge must be reasonable.

Guaranteed Bonds

Unsecured, backed only by the financial strength of a parent company, or third party (the company making the "guarantee"), not the issuer

Tax Anticipation Notes (TANs)

Used to finance current operations in ANTICIPATION of future tax receipts. Helps municipalities even out cash flow between tax collection periods. *Would have Moody's MIG rating *Short Term Financing

An insured's flexible premium is invested into a separate account. What type of insurance product did he purchase?

Variable Universal Life

Reinvestment Risk

Variation on interest rate risk. When interest rates decline, it is difficult to reinvest proceeds from redemptions, securities that have been called *Most closely associated with "Call Risk" Purchased 15 years ago with a coupon of 6.25%, a corporate bond in an investor's portfolio has matured. With interest rates now substantially lower at 2.75%, this investor, having no immediate need for the proceeds, is now exposed to -- REINVESTMENT RISK - Inability to invest proceeds from an investment that had been earning a higher rate of return, at now current lower rate

Gross National Product (GNP)

Very similar to GDP but is based not on the activity that occurs within the country but on the activity of the citizens and entities of the nation, wherever it may occur. *Published on a quarterly basis *Sees less use than GDP

Which of the following are considered intangible drilling costs (IDCs) for an oil and gas DPP?

Wages and insurance Intangible drilling costs (IDCs) are costs for those items that would have no salvage value at the end of the program. These might include wages, supplies (not equipment that can be depreciated), fuel, and insurance.

Interest Rate (Yield-Based) Options

We don't expect many questions on this topic. What can be confusing is it is the opposite of what you learned earlier (and will be tested heavily on) regarding bond prices and interest rates. Back in Lesson 4.1, we studied how bond prices fell as interest rates rose. Here, when interest rates rise, the value of a call option also goes up. The key is that yield-based options allow the investor to "bet" on the movement of interest rates, not prices. Which of the following securities underlies a yield-based option? - Treasury Securities *Yield-based interest rate options are based on the yields of Treasury bills, notes, and bonds. *Expire on -- The LAST day of trading

Interpositiong

When acting in an agency capacity for a customer, a member firm cannot place a third party between itself and the best available market (members cannot route an order through another firm). They must go directly to the best available market (to a firm at the inside market). That is the practice of interpositioning. *The only time interpositioning can be justified is if it results in a better execution for the customer. Better means a lower price than the inside offer or a higher price than the inside bid.

Nonexempt SECURITIES

When securities are required to be registered in order to be sold to the public Certain ISSUERS ARE Exempt: - US Gov, Municipalities - National and state banks (**but not bank holding companies), - Building and loans and savings and loans - Charitable, religious, educational, Nonprofit associations - Common Carries (Railroad, public utility)

Open Market Operations (OMOs)

When the Fed buys and sells US treasury bonds on the secondary market *Most often used tool by FED (FOMC)

Political Risk

While political risk can be interrelated with legislative risk, most attribute this risk specifically to the potential instability in the political underpinnings of a country. *Common stock of a US corporation and an ADR issued in the US share significant exposure to all of the following types of risk: - Social, business, market *NOT POLITICAL RISK (ADR represents a foreign stock and is subject to political, even when issued in US.)

Corporate Bond Quotes

With a face value of $1,000, each percentage point of that face is equal to $10. That would mean a bond quoted at 99 is $990 and one quoted at 101 is $1,010. These $10 "points" are further divided into eights. Each 1/8 has a value of $1.25 (divide $10.00 by 8 and it equals $1.25). The following may help you on some questions: - 1/8 = $1.25 - ¼ = $2.50 - 3/8 = $3.75 - ½ = $5.00 - 5/8 = $6.25 - ¾ = $7.50 - 7/8 = $8.75

Depository Trust and Clearing Corporation (DTCC)

World's largest securities depository. Provides custody services for virtually all securities except to transfer or ownership restrictions Provides automated clearing and settlement services in a book entry format to banks and BDs

Interest Rate Options

Yield based on yields of T-Bills, T-Notes, and T-Bonds. All yield based options are European style exercise. That is, they may be exercised only on expiration day. *Strike priced based on index yield *Interest rates move inverse to prices

SLoBS over BLiSS

You are likely to be asked which orders are reduced for cash dividends. Only those placed below the market price are automatically reduced. Remember that BLiSS (buy limits and sell stops) orders are placed below the market price and are reduced for cash dividend distributions. All orders are adjusted for stock dividends and stock splits, whether placed above or below the market.

Avoidance

eliminating exposure to a loss

Excessive Trading (Churning)

excessive trading in a customer's account to generate commissions rather than to help achieve the customer's stated investment objectives *Reverse Churning - When a client in a fee-based account pays more in fees than would be paid in a commission-based account. (When customer trades infrequently)

Mid Cap Stocks

firms that issue more than $2 billion to $10 billion of stocks

Contract of Adhesion

prepared by one of the parties (insurer) and accepted or rejected by the other party (insured)

An investor owns ten ABC 6s of 2045. The debentures have a conversion price of $50 with an anti-dilution provision. After ABC distributes a 20% stock dividend, the investor's position will be

ten ABC 6s of 2045 with a conversion price of $41.67. This question deals with the anti-dilution provisions of a convertible security. When there is a stock dividend or a stock split, the holder of the convertible maintains the same equity proportion as before. With a conversion price of $50, the debenture is convertible into 20 shares ($1,000 ÷ $50). After a 20% stock dividend, the holder should be able to acquire 20% more shares. That makes the security convertible into 24 shares. Divide the $1,000 par value by 24 shares and the conversion price is now $41.67.

Insurable Interest

the policyowner facing the possibility of losing something of value in the event of loss. MUST EXIST AT TIME OF APPLICATION. Policy owner must have insurable interest in the life of the insured.

The spread between bid and offer

typically gets narrower as the volume increases With more active trading in a stock (high volume), the spread between the bid and ask prices usually narrows.

Ex-Legal

State of NOT having an opinion

Mayhammer

Corp/US Gov't Muni OID: MUST MUST OIP: MAY MUST SD: MAY MAY SP: MAY MUST

Buy Limit Order

*More conservative *What the absolute MAXIMUM willing to pay is Example: Buy 1,000 shares XYZ @ 30 (Execute at $30 or better (Lower)

All of the following are true regarding the issuance of group life insurance to labor unions EXCEPT

Members cannot be excluded from coverage on the basis of insurability

Specialized Orders

1) Fill or Kill (FOK) - No partial executions 2) Immediate or Cancel (IOC) - Partial executions allowed. Remained is canceled 3) All or None (AON) - No partial executions. May remain GTC (Will wait) 4) Market Not Held - Held by floor broker having time and price authority

Price or Vertical Spreads

(MOST COMMON) **If SP is different = Price/Vertical spread A price spread or vertical spread is one that has different strike prices but the same expiration date. Example of a price or vertical spread: Long RST Nov 50 call for 7 Short RST Nov 60 call for 3 This is a price or vertical spread because the difference in the two options is the 50 and 60 strike prices (not the premiums). An investor sells one DEF Nov 65 put for 4 and buys one DEF Nov 70 put for 8. This position is known as -- VERTICAL SPREAD *A spread is the simultaneous purchase of one option and sale of another option of the same class. A call spread is a long call and a short call. A put spread is a long put and a short put. A price spread or vertical spread is one that has different strike prices but the same expiration date. In this question, we have a long put and as short put, both expiring in November but with different strike prices. This is a bear spread because the long option is the one with the higher strike price. A spread is bullish when the option purchased (long) has the lower strike price and the one sold (short) has the higher strike price. We remember that with the letters BLSH (buy low, sell high).

Over-The Counter (OTC) Market

(Negotiated Market) Market center for smaller companies. Trading occurs between market makers. No physical location *Most corporate debt issues trade OTC *Unlisted stocks *Most bonds (Municipal Bonds + Treasury Debt) - securities traded OTC include American depositary receipts (ADRs) and municipal bonds. - a bid is the highest price a dealer will pay when buying. - an offer is the lowest price a dealer will accept when selling.

FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for

- trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor. *FINRA's TRF is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent

A customer buys a municipal bond in the secondary market at 96 that has four years to maturity. Two years later, the customer sells the bond at 99. The tax consequences of this investment are

- two points of ordinary income and one point of capital gain. *When a municipal bond is purchased in the secondary market at a discount, the annual accretion is taxed as ordinary income. The annual accretion is one point per year (four points divided by four years to maturity). Therefore, when the bond is sold two years later, its cost basis is 98. If the bond is sold at 99, there is a long-term capital gain of one point per bond. Also, there is ordinary income taxation on the accretion of two points.

What are the two phases of annuity

1) Accumulation 2) Annuitization (Pay in, Pay out)

Elements of a Contract

1) Agreement 2) Consideration 3) Competent Parties 4) Legal Purpose

American Style Vs European Style Options

1) American Style Options allows the owner of a contract to exercise any time before expiration. 2) European can be exercised only on expiration day. EPIC: Exporters BUY Puts Importers BUY Calls *Importers like a STRONG dollar *Exporters like a WEAK dollar

Methods of Risk Management

1) Avoidance 2) Retention 3) Sharing 4) Reduction 5) Transfer

What are the three types of agent authority

1) Express 2) Implied 3) Apparent

Municipal Bond Maturities

1) Term Maturity -- All principal matures at a SINGLE date in the future *Everything is due at specified time. *Quoted in dollars (% of par) (98 1/2 or 99 3/8) *Quote price and effective yield (YTM) *An investor receiving a quote of 102 for a municipal security is probably interested in --*Term Bond *A quote of 102 is referred to as a dollar quote ($1,020) rather than a yield quote. The most common dollar bonds are those with a term maturity. Others are most often quoted on a yield basis rather than a price basis. 2) Serial Maturity -- Bonds within an issue mature on DIFFERENT dates according to predetermined schedule *Quoted on the basis of their YTM (Basis) *Longer maturity, HIGHER the yield *100% = equal to coupon rate *Most municipal bonds are issued serially .*Spread out repayment over several years *Quoted in Yield To Maturity (6.8, 4.2, 5.9) (Not price) **Able to diversify a single municipal bond issue by maturity because -- Many municipal bonds are serial issues 3) Balloon Maturity -- Issuer pays part of bond's maturity before the final maturity date, but the largest part is paid off at maturity. A customer's confirmation for a municipal bond callable at par and quoted higher than the nominal yield would show - Yield to Maturity (YTM) *Because the quoted yield is higher than the nominal yield, the bond is offered at a discount; the lower of YTM or YTC is the bond's yield to maturity.

Group life insurance is a single policy written to provide coverage to members of a group. Which of the following statements concerning group life is correct?

100% participation of members is required in noncontributory plans

Long Call (Purchase)

A call buyer owns the right to buy 100 shares of a specific stock at the strike price before the expiration if he chooses to exercise the contract. (Bullish investors) Bullish Right To Buy BE = SP + P (Strike Price + Premium) MG = Unlimited ML = Premium *Call is exercised only if the market price rises above the strike price

Short Call (Sale)

A call writer (seller) has the OBLIGATION TO SELL 100 shares of a specific stock at the strike price if the buyer exercises the contract. (Bearish investor) Bearish Obligation to Sell *Riskiest BE = SP + P (Strike Price + Premium) MG = Premium ML = Unlimited (Income) *Contract is not exercised if the market price is below the stike price

Subordinated Debt

A class of unsecured debt that ranks below a firm's senior unsecured obligations. *Lowest level of unsecured debt *Highest default risk = Highest interest rates

Combinations

A combination is composed of a call and a put with different strike prices, expiration months, or both. Combinations are similar to straddles in strategy. Investors typically use combinations because they are cheaper to establish than long straddles if both options are out of the money. *If SP or Month is different, it's a combination The WRITER, or seller, of a combination expects the market to be STABLE. The BUYER of a combination expects the market to be VOLATILE.

Capital Structure

A company's capitalization is the combined sum of its long-term debt and equity securities. The capital structure is the relative amounts of debt and equity that compose a company's capitalization. Some companies finance their business with a large proportion of borrowed funds; others finance growth with retained earnings from normal operations and little or no debt. - Long-term debt (bonds and debentures) - Capital stock (common and preferred) - Capital in excess of par (paid-in or capital surplus) - Retained earnings (earned surplus)

An individual who advises persons about their insurance or annuity contracts regarding coverage, advisability, rights, or interest under the contract would be called

A consultant

All of the following accounts are permitted to write calls except

A corporation against its own stock. *Corporations are not permitted to write calls against their own stock. If exercised, they would have to issue shares at the strike price, and this would have a dilutive effect on shareholders. Are Permitted: 1) Custodian in an UTMA account against a long stock position 2) Mutual fund against a long stock position 3) Individual in a margin account

Treasury Stock

A corporation's own stock that it has reacquired *Not issued by the US Treasury and pays neither dividends nor interest *Issued - Treasury = Outstanding **There is one case where the issuer receives the proceeds and it is not a primary offering. When a company resells treasury stock, it receives the proceeds. Because those shares were previously owned, it cannot be called a primary offering.

Fiduciary Accounts

A fiduciary is one who has the legal power to act on behalf of another person. Common examples are: - Trustee named to administer a trust - An executor designated in a decedent's will to manage the affairs of the estate - An administrator appointed by the courts to liquidate the estate of a person who died intestate (without a will) - A guardian designated by the courts to handle a minor's affairs until the minor reaches the age of majority or to handle an incompetent person's affairs - A custodian of a Uniform Gift to Minors Account (UGMA) or a Uniform Transfer to Minors Account (UTMA) - A receiver in a bankruptcy - A conservator for an incompetent person *Obligated to follow the Uniform Prudent Investor Act (UPIA)

Tenants In Common (TIC)

A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account is retained by his estate. Each party must specify a percentage of interest in the account *Most commonly used for non-spousal relatives or friends *Ownership CAN be unequal - Do NOT need to make equal investments or have equal interest in the property in account

Full Power Of Attorney

A full power of attorney allows an individual who is NOT the owner of an account to: 1) Deposit or withdraw cash or securities 2) Make investment decisions for the account owner. If customer dies, Required Documents: 1) Inheritance tax waiver 2) Affidavit of domicile 3) Certified copy of death certificate **Not Power of attorney Client dies: 1) Cancel all open orders 2) Freeze Account 3) Obtain death certificate and other legal docs 4) Accept orders from executor

Sharing

A method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss who share the losses that occur within that group.

If a client is moderately risk averse and has an investment objective of capital preservation, what types and allocation of investments would you recommend for this customer?

A mix of investment-grade bonds and cash/cash equivalents *An individual with an investment objective of capital preservation should be investing in a mix of investment-grade bonds and cash/cash equivalents. Lower risk capital appreciation vehicles, such as large-cap common stock, should also be considered. The other choices noted are too risky for a risk-averse investor.

Records of Associated Persons (Rule G-7)

A municipal securities dealer must obtain and keep on file specific information about its associated persons. The MSRB defines an associated person as anyone with a securities registration. That would include representatives and principals, but not clerical help. Most of the required information (e.g., employment history, disciplinary actions, residence, and personal data) is contained on the U4 and U5 forms. Any material change must be updated within 30 days. These records must be kept for a minimum of three years after the termination of the associated person.

Individual Retirement Account (IRA)

A qualified retirement plan that provides most individuals with a deferred federal income tax benefit. Two Types: Traditional and Roth *Contributions to IRAs are made out of earned income (Salary, wages, tips, etc). There is no age limit for making IRA contributions. *Allow a catch up contribution of $1,000 to be made for 50 years old or over *The use of margin will ALWAYS be prohibited with IRA's *Anyone with earned income can contribute to IRA, even if covered by an employer-sponsored plan *Contribution may or may not be deductible, depending on income level

An investor purchased 100 shares of RAVAD common stock at $40 per share on June 17, 2019. On May 11, 2020, with the RAVAD selling at $60, the investor hedges by purchasing one RAVAD Oct 55 put at 2. The put expires with the RAVAD selling at $65 and the investor liquidates the long stock position at that price. This would result in

A short-term capital gain of $2,500 and a short-term capital loss of $200. The investor purchased a protective put on the long RAVAD position. At the time of the purchase of the put, the holding period of the stock was less than the long-term requirement of more than 12 months. When that happens, the IRS rules that the short-term holding period (June to May is short term) is erased. Your new holding period for the underlying stock begins on the earliest of - The date you dispose of the stock, - The date you exercise the put, - The date you sell the put, or - The date the put expires. Because the investor disposed of the stock at the same time the put expired, there is no holding period, so any gains will be short term. As far as the math, the stock was purchased for $4,000 (100 shares @ $40 per share). The stock is sold for $6,500 (100 shares @ $65 per share). That is a gain of $2,500 (short term). When a long put expires, it is a capital loss in the amount of the premium. In our question, the premium was 2 points ($200) and that is a complete loss. Because the put has a five-month holding period (May to October), the loss is short term. In the real world, most accountants would just net the $2,500 short-term gains and the $200 short-term loss and report a $2,300 short-term gain. It is possible that could appear on the exam, but unlikely that you would have both choices. Please let us know if you do see something like this.

If an annuitant dies during the accumulation period, what benefit (if any) will be included in the annuitant's estate?

Accumulated Cash Value

Restricted Stock (Legended Certs)

Acquired through some means other than a registered public offering. May not be sold until held for 6 months. *You may see the phrase "The sale effectively registers the stock"

Pump and Dump

Act of inflating (Pumping) the price of an owned stock by perpetrating false and misleading positive rumors in order to sell the stock at a higher price later.

Rights of Accumulation

Allow an investor to qualify for reduced sales charges. - Are available for subsequent investments - Allow the investor to use prior share appreciation to qualify for breakpoints - Do not impose time limits

Payroll Deduction Plan

Allow employees to authorize their employer to deduct a specified amount for retirement savings from their paychecks. *Money is deducted AFTER taxes are paid and may be invested in any number of retirement vehicles at the employee's option. *401K is NOT considered a payroll deduction plan. (Considered salary reduction plan) *401(K) plans MUST be ERISA compliant *Nonqualified for exam purposes A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where she works. The annuity contract is currently valued at $16,000, and she plans to retire. On what amount will the customer be taxed if she chooses a lump-sum withdrawal? - $6,000 *Payments into a nonqualified deferred annuity are made with AFTER-TAX money; taxes must only be paid on the earnings of $6,000.

Exchange Traded Funds (ETF)

An ETF registers with the SEC under the Investment Company Act of 1940 either as a unit investment trust (UIT ETF) or as an open-end management company (open-end ETF). (Mostly Open End Companies) ETFs can be purchased on margin and sold short Expenses tend to be lower than those of mutual funds There can be tax advantages to owning ETFs. Not Redeemable by the issuer All trading taking place in the secondary markets, delivery of a prospectus is not required. ETFs trade at, or very close to, their NAVs. *Most ETF's have a LOWER expense ratio than comparable mutual funds *ETFs are a way of investing in equity (stock) or debt (bonds) securities and are not a separate asset class. (DON'T include when allocating among asset classes) Uses of Index ETF's: - Asset allocation - Following industry trends - Balancing a portfolio - Speculative trading - Hedging Differences between ETF and Index Mutual Fund: 1) Intraday trading—Investors do not have to wait until the end of a trading day to purchase or sell shares. ETF shares trade and are priced continuously throughout the day, making it easier for investors to react to market changes. 2) Margin eligibility—Index ETF shares can be purchased on margin, subject to the same terms that apply to common stock. 3) Short selling—Index ETFs can be sold short at any time during trading hours. Risks: 1) Index Risk 2) Tracking Risk

Zero-Coupon Bonds (ZR)

An Issuer's debt obligations that do not make regular interest payments. Instead, zeros are issued, or sold at a deep discount to their face value and mature at par. Because the Coupon rate is 0, these bonds tend to be more volatile than other bonds with similar maturities. Issues by corporations, municipalities, and US Treasury and may be created by BD *No Investment Risk - Has no annual income to "re-invest" *Pays interest to holder only at maturity - Owners will pay taxes on the interest annually. (Total Interest Payments / Years remaining to maturity) (1099 is sent) *Do not pay ACCRUED interest because securities are not interest bearing

The Anti-Money Laundering Officer

Bank Secrecy Act requires Firms to designate a chief AML officer. No requirement for this person to be registered as a representative.

When opening an account for a corporation, one of the required documents is a corporate resolution. Who makes the resolution?

Board of Directors

Bond Funds

Bond funds have income as their main investment objective. Some funds invest solely in investment-grade corporate bonds. Others, seeking enhanced safety, invest only in government issues. Still others seek to maximize current income by investing in lower-rated (junk) bonds for higher yields. - Bonds pay interest; bond funds pay dividends if declared by the fund's BOD. - Dividends are typically paid on a quarterly or semiannual basis, but there are income funds (both equity- and debt-oriented) that pay monthly dividends. - When interest rates rise, the prices of bonds, and, therefore, bond funds, fall (and vice versa).

Eurodollar Bond

Bond issued by a corporation (or government), sold outside the United States and the issuer's country, but for which the principal and interest are stated and *paid in U.S. dollars. The U.S. government does not issue Eurodollar bonds. These bonds are not limited to European issuers; that is just where they originated. *Eurodollar bonds pays in U.S. dollars; Eurobonds pay in foreign currency. Note that these instruments must be issued outside of the United States.

Points

Bond point = $10 Basis Point = 1/100 of 1 percent 25 Basis points = 0.25% Mill Rate = $0.001 (1/10th of a cent)

Corporate Bonds

Bonds issued by corporations. Settles T+2 and pay accrued interest based on a 30-day/360 day *Bonds Par Value = 1,000 *Bond Key Words: Obligation, Safe, Safety, Income, Principal = Debt *Fixed annual interest *Secured or unsecured *High yield, more risky *Issuers borrow money from investors, receive interest SEMIANNUALLY *1 Bond Point = $10 Corp or Muni Bond: 98% of 1,000 = $980 98 1/2% = $985 --- 1/2 = $5 Gov't Quote: 98.16 *At Maturity = Last interest payment 8% of 1,000 = $80 $1,040 at maturity *Reason an investor might choose to invest in a corporate bond - Corporation is legally obligated to pay interest on its bonds *Failure to make timely interest payments puts the corporation into default **Convertible securities (debt or preferred stock) are ALWAYS convertible into common stock. Therefore, they can be issued only by an entity that also issues common stock: a corporation.

Repayment Risk

Borrower will repay the principal on a loan or debt instrument (Notes & Bonds) before its maturity and thus deprive the lender of future interest payments

Negotiability

Both bonds and money market securities are readily transferrable. This enables investors to sell their security before maturity date. Secondary market trading is less common in the money market because of the short maturities.

Which of the following would be TRUE of both the fixed-period and fixed-amount settlement options?

Both guarantee that the principal and interest will be full paid out

BLiSS

Buy Limit or Sell Stop (Both done at or below the current market price) -- Buy limit order -- limit price or LOWER Market Order = Next available price / Execution Guaranteed Limit Order = At specified price or better/Price guaranteed Stop Order = Primarily used to protect / Nothing guaranteed Stop Limit Order = Like a stop, but becomes limit after trigger

Limit Order

Buy or Sell - The limit price is the maximum purchase price if buying or the minimum selling price if selling *At specified price or better / Price guaranteed *Stop-Limit Order -- Order that once triggered, becomes a limit order instead of a market order Which of the following applies to an open order to buy 600 XYZ at 44? - The order may be partially filled at the limit price or better. - The order is entered in the order book. - It must be executed at the price specified or better. *There are two clues that this is a limit order. The first clue is that there is a specified price (44). Market orders are simply a request to "get me the best price available in the market right now." This customer wants to buy the stock but will not pay any more than $44 per share (or better, meaning less) for it. When a limit order is placed, unless there is a fill or kill (FOK) or all-or-none (AON) designation, partial orders are acceptable; it is only the price where there is a limitation. The second clue is that it is an open order. Used in this fashion, open is synonymous with good-til-canceled (GTC) and remains open until it is executed or the investor cancels it. A market order is a day order, and because the customer has agreed to accept the "market" price, is always promptly executed; it would never carry over to the next day.

Stop Order

Buy or Sell - a stop order does not become a "live" working order in the marketplace until the stock trades at or through a specified price (Stop Price). Once the order is triggered by the stock reaching the specified stop price it becomes market order. *Primarily used to protect / Nothing guaranteed *Always takes precedence over limit orders *Designed to protect a profit or prevent a loss if the stock begins to move in the wrong direction Stop Order: 1) Protects the profit on a long position 2) Prevents loss on a short position *A buy stop could be used to protect an investor who is short, and a sell stop could be used to protect an investor who is long. Stop orders never guarantee execution price.

Options

Buyers = Rights Sellers = Obligations *Purchase = T+1 (Settles next day) *Exercise of EQUITY Options = T+2 *Exercise of INDEX Options = T+1 (Cash) *Proof of ownership is trade confirmation *A corporation cannot write calls on common stock it has issued. Strategies that have UNLIMITED loss potential: 1) Writing (selling) an uncovered call option 2) Selling stock short *Buying back an option contract that was previously written or selling an option contact that was previously purchased is known as - Closing out a position *Listed options EXPIRE at 11:59 pm ET on the third Friday of the expiration month *Last moment to TRADE/CLOSE the option is at 4PM EST *EXCERCISE by 5:30PM EST *Buyer pays a DEBIT, seller receives a CREDIT *Options Disclosure Document (ODD) - MUST be sent at or before account approval *Accounts are approved by ROP (Registered Options Principal)

Best Efforts Underwriting (Investment Banker Acting As Agent/Broker)

Calls for underwriters (or the syndicate) to sell securities from the issuer to the investor acting simply as an agent. *Not as risk for the shares but issuer is *They agree to do their best to sell all the shares 2 Types of Best Effort: 1) All-or-None (AON) (Sell all shares or cancel) 2) Mini-Max (Sets minimum and maximum issuer needs to move forward) **Syndicates are usually formed to spread the risk of an offering among several underwriters instead of one underwriter taking all the risk.

At The Money

Calls: When the price of the stock EQUALS the strike price of the call. Sellers want at the money contracts at expiration, buyers do not. Sellers keep premium without obligation Puts: When the price of the stock EQUALS the strike price of the put. Sellers want at the money contracts at expiration, buyers do not. Sellers keep premium without obligation

Which of the following is true of the taxation of cash values in a business life insurance policy?

Cash values grow tax deferred

What type of assignment is used to secure the payment of a debt with an existing life insurance policy?

Collateral Assignment

Tax and Revenue Anticipation Notes (TRANs)

Combination of TANs and RANs

When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is

Conditional

Debentures (unsecured bonds)

Debt obligation of the corporation backed only by its word and general creditworthiness. Written promises of the corporation to pay the principal at its due date and interest on a regular basis. Good faith. Not secured Issued by corporations, not municipalities

Money Market Instruments

Debt obligations that are traded in the money market and mature in a year or less (T-Bills, commercial paper (270), Negotiable, jumbo certificates of deposit (CDs), Banker's Acceptances (BAs)) Suitable For: 1) Short Term Objectives *Liquidity - 1 year or less Risks: 1) Low Returns than with longer-term instruments 2) Potential reinvestment of principal at different rates over short periods of time

When must an IRA be completely distributed when a beneficiary is not named?

December 31 of the year that contains the fifth anniversary of the owners death

An individual has just borrowed $10,000 on a 5-year note from his bank. The note is due in installments. What type of life insurance policy would be best suited to this situation?

Decreasing Term

Section 457 Plans

Deferred compensation plan set up under Section 457 of the tax code that may be used by employees of a state, political subdivision of a state, and any agency or instrumentality of a state. This plan may also be offered to employees of certain tax-exempt organizations (hospitals, charitable organizations, unions, and so forth, but NOT churches). - These plans are exempt from ERISA—nongovernmental plans must be unfunded to qualify for tax benefits, while government plans must be funded. - These plans are generally not required to follow the nondiscrimination rules of other retirement plans. - Plans for tax-exempt organizations are limited to covering only highly compensated employees, while any employee (or even independent contractor) of a governmental entity may participate. - Distributions from 457(b) plans of nongovernmental tax-exempt employees may not be rolled over into an IRA, but there is no 10% penalty for early withdrawal. - It is possible to maintain both a 457 and 403(b), or a 457 and 401(k) and make maximum contributions to both. You could also have an IRA along with the 457.

Margin Call

Demand by a broker that investors pay back loans made for stocks purchased on margin - Required Deposit - Reg T Deposit (Fed Call) Which of the following statements regarding margin calls are true? - Customers are not entitled to an extension of time - Firms can sell securities without first contacting the customer. *Some customers mistakenly believe that a firm must contact them for a margin call to be valid, which is not the case. Most firms will attempt to notify their customers of margin calls but are not required to do so. Also, there is no entitlement when it comes to an extension of time.

Specially Designated Nationals (SDN) List

Designed to identify persons involved in illegal activities, including terrorism - checks databases

Rule 5130

Designed to protect the integrity of the public offering process and to protect public investors. - Members make a bona fide public offering of securities at the POP - Members do not withhold securities in a public offering for own benefit - Industry insiders do not take advantage of their insider status. - Cannot be a roommate - You can buy for portfolios you manage but not own - Rep letter obtained within 12 months prior to sale - Rule does not apply to employees of firms engaged solely in sales of DPPs or investment company securities (Mutual funds) - De Minimis Rule - Not exceed 10% of account, if own more than 10%, account can buy new equity issue if carve out procedures are in place

Rights Of Accumulation

Differences between ROA and LOI are - Allow the investor to use prior share appreciation and reinvestment to qualify for breakpoints and - Do not impose time limits. *Reinvested dividends and changes in the net asset value do not count toward a breakpoint during the period of a letter of intent but do count under rights of accumulation after the letter has been completed.

Defined Benefit Plans (Traditional Pension Plan)

Employer contributions to defined benefit or defined contribution (money purchase) pension plans are mandatory. In all cases, allowable employer contributions are 100% deductible to the corporation. There is no tax obligation to the employee until withdrawal. *Annual contribution is determined by yearly actuarial calculations *More Risk to EMPLOYER *Are Highly Compensated *OLDER employees benefit the MOST *Requires ACTUARY services - Must calculate annual contribution amount necessary to meet benefit requirement *Contribution amounts VARY, Benefit plans are FIXED *NOT suitable for buying muni bonds *Pays for life, based on formula

Bill decides to take up skydiving as a hobby. His insurer attaches a condition onto his policy which states that any injuries incurred while skydiving will not be covered. What of the following terms is NOT associated with the condition that the insurer attached?

Exposure

Preferred Stock

Equity Security. Represents ownership but not normally the appreciation potential associated with common stock. Characteristics: - ALWAYS issued with a fixed (stated) rate of return unlike CS - Identified by Annual dividend payment stated as % of par value - Price fluctuates inversely with interest rates - Fixed return is the dividend being paid - Purchased for income - No Right To Purchase Shares That Would Keep Their Proportionate Ownership If Additional Shares Are Issued - No voting or pre-emptive rights - Some are issued with a variable dividend payout known as adjustable rate preferred stock (Move inversely with interest rates) - Not the same growth potential as common stock - Higher INCOME (Dividend) potential than Common Stock Suitable For: 1) Income - Moderate (Dividend Income) 2) Quarterly Dividends (Higher dividends than common stock) Benefits: - Payment of dividend - Claim to assets Risks: - Riskier than bonds, higher income than bonds & Common stock - INTEREST RATE RISK, INFLATION RISK (purchasing power) (Different than common stock) Market Risk, Business Risk, Call Risk, Reinvestment Risk If your client wished to purchase a preferred stock that would offer him the highest likelihood of assured income, plus the opportunity to take part in the growth of the company's common stock, which of these features might he consider? - Convertible - Cumulative **The convertible feature allows the investor to take part in the company's growth because the price of the common stock will reflect that growth. The cumulative feature, although not guaranteeing dividends, means that any missed dividends will have to be paid before anything can be paid to the common shareholders.

If a change happens for insurance, the agent may do all of the following EXCEPT

Erase the incorrect answer and record the correct answer

Profit Sharing Plan

Established by an employer allows employees to participate in the business's profits. *Profit-sharing plans need NOT have a predetermined contribution formula. *Plans that do include such a formula generally express contributions as a fixed percentage of profits. *To be qualified, a profit-sharing plan must have substantial and recurring contributions, according to the IRC. *Offer employers the greatest amount of contribution flexibility: - Ability to skip contributions during years of low profits appeals to corporations with unpredictable cash flows. - Relatively easy to install, administer, and communicate to employees. *Annual contribution NOT mandatory *Grows Tax-Deferred *Contributions are tax-deductible to corporation -- 100% taxable at payout *Under ERISA, must set standards for vesting, eligibility, and funding

What is the main advantage of converting from group life insurance to individual coverage?

Evidence of insurability is not required

All of the following risks apply to both foreign and domestic debt instruments except

Exchange Both Apply: - Political - Repayment - Interest Rate

A policy which pays monthly income upon the death of the breadwinner for a predetermined number of years after death, plus a lump sum at death, and combines level term and whole life is known as which policy?

Family Maintenance

Which of the following types of insurance covers the whole family in a single contract?

Family Policy

Footnotes

Footnotes to the financial statements identify significant financial and management issues that may affect the company's overall performance. Can't analyze companies financial statements without footnotes Footnotes are generally found on the bottom of the financial statements and can be several pages long. *contain information that doesn't have a place in the main body of the financial statements Disclosures about details: - Long-term debt - Timing of future cash flows - Nature of liabilities - Pending litigation - Accounting methods used - Extraordinary Items - Management philosophy Financial footnotes found in which of the following would be of the greatest importance to your broker-dealer's retail customers? - Balance sheets of stocks you've recommended to them - Income statements of stocks you've recommended to them

Which of the following policies is characterized by a provision where the premiums are lower in the early years of the policy and increase over time to a point where they become level for the remainder of the policy?

Graded Premium Whole Life

Which of the following terms best describe the coverage provided by term policies, as compared to any other form of protection?

Greatest

An insured has a modified endowment contract. He wants to withdraw some money in order to pay medical bills. Which of the following is true?

He will have to pay a penalty if he is younger than 59 1/2

Cyclical Industries

Highly sensitive to business cycles and inflation trends. Most produce durable goods, such as heavy machinery and automobiles. Examples: Steel, auto, heavy equipment, etc

Supply Side Theory

Holds that government should allow market forces to determine prices of all goods. *Encourage business activity - reduce business taxes

Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until retirement, and inflation?

Human Life Value Approach (HLVA)

Equipment Trust Certificates (ETCs)

Loan secured by the equipment, usually for railroads and other transportation companies. SECURED LOAN - Backed by equipment Issued by corporations, not municipalities

STRIPS

Long term Zero Coupon bonds issued by the US Treasury Bought at a discount and then redeemed for par value at maturity

An investor purchases a zero coupon bond at a price of 64. The bond matures in nine years. Five years later, the investor sells the bond at a price of 80. This would result in

Long term capital loss of $40 Discount = $360 ($1,000 - $640) YTM = 9 Years Annual Accretion = $360 / 9 = $40 5 Years Later = $40 X 5 = $200 $640 + $200 = $840 (Long term loss of $40)

Debt To Equity Ratio

Long-term debt / (Long-term debt + net worth) = debt ratio (Expressed as percentage) If company with more than 50% debt to equity is HIGHLY leveraged

Mortality Tables

Indicate the number of individuals within a specified group starting at a certain age, who are expected to be alive at a succeeding age.

Volatility

Indicates how much and how quickly the value of an investment, market, or market sector changes. A way of measuring a bond's volatility that combines maturity and coupon rate is called DURATION. Higher duration = more volatile price, lower duration = less price volatility

Restricted Accounts

If the equity in the account is less than the Regulation T requirement but greater than or equal to the minimum maintenance requirement, the account is restricted. If an account becomes restricted, there is no requirement for the customer to take any action to remove the account from the restricted status. A maintenance call will be sent only if the account falls below the minimum maintenance requirement. If Account Is Restricted, Rules Are: 1) To purchase additional securities, put up 50%. 2) To withdraw securities from the account, the customer must deposit cash equal to 50% of the value of the securities to be withdrawn. 3) If securities are sold in a restricted account, at least half the proceeds must be retained in the account to reduce the debit balance. This is called the retention requirement. Also, 50% of the proceeds are credited to SMA. *If securities are sold in a restricted account, EQ is NOT affected If a customer has a restricted margin account with special memorandum account (SMA) of $2,500, how much must he deposit to purchase $10,000 worth of stock? - $2,500 *When a margin account is restricted, any new purchase must meet the 50% Regulation T requirement. Therefore, a purchase of $10,000 of stock will require a margin call of $5,000. The $2,500 of SMA is, in essence, a line of credit and represents the sum that may be applied to a margin call. By using that SMA of $2,500, the customer need only deposit an additional $2,500.

A client buys stock on Monday, May 2, in a cash account. Under Regulation T, when is the client's payment due?

In 4 business days Regular-way firm-to-firm settlement is two business days after the trade date (T+2). Under Regulation T, payment must be made two business days after the settlement date (S+2 or T+4). *Customer payments for purchases (Regulation T) = T+2 + S+2 = 4 days

Fee-Based Accounts

In a fee-based account, the customer pays a flat fee for as many trades as they would like. This type of account would not be appropriate for a buy and hold investor. *Suitable for active trader (Moderate level trading) *Charge is typically applied on a monthly or quarterly basis

Certificate of Limited Partnership

Includes: 1) The amount of time the partnership expects to exist 2) All conditions of dissolution *The certificate contains, among other information, the limited partnership's name and business, the amount of time the partnership intends to exist, and the conditions of dissolution. It does not contain each partner's net worth, nor is there a market-out clause like those generally associated with underwriting agreements for new issues.

Phantom Income (Annual Accretion of the Discount)

Income that must be taxed in a year even if the income is not distributed from the company. Pays interest to holder only at maturity - Owners will pay taxes on the interest annually. (Total Interest Payments / Years remaining to maturity) (Zero Coupon Bonds)

Forward Split

Increases the number of shares and reduces the price without affecting the total market value of shares outstanding; an investor will receive more shares, but the value of each share is reduced. *Cost basis per share will decrease Even: 2:1 100 shares, $60 $6,000 (100 X $60 = $6,000) (100 X 2 = 200; 200 / 1 = 200) $6,000 / 200 = $30 Per Share Uneven: 5:4 100 shares, $60 $6,000 (100 X 60 = $6,000) (100 X 5 = 500; 500 / 4 = 125) $6,000 / 125 = $48 Per Share

Know This

Indemnity means insureds cannot recover more than their loss.

Inverse (Reverse) Funds

Inverse funds, sometimes referred to as reverse or short funds, attempt to deliver returns that are the opposite of the benchmark index they are tracking. **FINRA warns investors that most leveraged and inverse ETFs reset daily, meaning that they are designed to achieve their stated objectives on a daily basis. Their performance over longer periods of time—over weeks, months, or years—can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period. Therefore, in most cases, these would not be suitable investments for buy-and-hold investors or those with other than a very short time horizon.

Retail Investors

Investing their own assets. (Smaller than Institutional) *Active participant in the secondary markets *Individual who purchases securities for a personal account

Unit Investment Trust (UIT)

Investment Company Act of 1940 - UITs are not actively managed; there is no board of directors (BOD) or investment adviser. - UIT shares (units) must be redeemed by the trust. - UITs are investment companies as defined under the Investment Company Act. *It is important for you to know that the definition of investment company does not include HOLDING COMPANIES. UIT Risks: 1) Market Risk 2) Interest Rate Risk

Investment Companies

Investment Company Act of 1940 No registered investment company is permitted to make a public offering of securities unless it has a net worth of at least $100,000. Renewal Provisions Of Investment Advisors Contract: 1) The renewal must state the adviser's compensation. 2) The renewal must be approved by either majority vote of the board or majority vote of the outstanding shares, as well as majority vote of the noninterested members of the board. 3) The contract must be terminable upon no more than 60 days' notice. *All management companies have diversified and non-diversified *The Investment Company Act of 1940 does not include variable annuities in its definition of investment companies. On the other hand, the separate account is. Most often, it is a unit investment trust (UIT). *Diversified = Management Company

Unit Investment Trusts (UITs)

Investment company organized under a trust indenture. Do not have board of directors, they have trustees. Create portfolio of debt designed to meet companies objectives. - Fixed or nonfixed - Not managed, once portfolio is composed, the do not change - Do not trade in secondary market, only REDEEMABLE only through issuer (Does not trade in secondary market) - Fixed portfolios DON"T have management fees (Passive) *Must provide prospectus to customer following a transaction *Fixed = Purchases portfolio of bonds *Nonfixed (Contractual Plans) = Purchase Shares of mutual funds

As a field underwriter, a producer is responsible for all of the following tasks EXCEPT

Issue the policy that is requested

Collateral Trust Bonds

Issued by corporations that own securities of other companies as investments (Backed by Real Estate)

Construction Loan Notes (CLNs)

Issued to provide interim financing for the construction of housing projects *Issued at discount

Grant Anticipation Notes (GANs)

Issued with the expectation of receiving grant money from the federal government *Short Term Financing

Bond Taxation

Issuer Federal Tax State & Local Interest Payment Treasuries Y N Maturity or Biannual Munis N Depends Biannual FNMA Y Y Biannual GNMA Y Y Monthly Bonds N N Biannual

Which of the following would be considered value provided by life insurance?

It can be used as collateral to secure a loan

Which of the following is true regarding the spendthrift clause in life insurance policies?

It can protect the policy proceeds from creditors of the beneficiary

Which of the following is correct regarding credit life insurance?

It insures the life of a debtor

Which of the following is correct regarding the credit life insurance

It insures the life of a debtor

Which of the following is true regarding a risk retention group?

It is a liability insurance company owned by its members

An investor purchases a 2x leveraged ETF. The index value is $100. On day 1, the index falls by 10% and then on day 2 goes up by 10%. How has this affected the investor's account?

It is down 4% If the index drops by 10 points on day 1, it has a 10% loss and a resulting value of 90. Assuming it achieved its stated objective, the leveraged ETF would therefore drop 20% on that day and have an ending value of $80. On day 2, if the index rises 10%, the index value increases to 99. For the ETF, its value for day 2 would rise by 20%, which means the ETF would have a value of $96 (80 × 20% = 16). On both days, the leveraged ETF did exactly what it was supposed to do—it produced daily returns that were two times the daily index returns. But let's look at the results over the two-day period: the index lost 1% (it fell from 100 to 99) while the 2x leveraged ETF lost 4% (it fell from $100 to $96). That means that over the two-day period, the ETF's negative returns were 4 times as much as the two-day return of the index instead of 2 times the return.

Which of the following is NOT true regarding a Certificate of Authority?

It is issued to group insurance participants

Which of the following is true about the social security program?

It is mandatory for most workers to pay FICA taxes

If an insured surrenders his life insurance policy, which statement is true regarding the cash value of the policy?

It is only taxable if the cash value exceeds the amount paid for premiums

When a reduced-paid up nonforfeiture option is chosen, what happens to the face amount of the policy?

It is reduced to the amount of what the cash value would buy as a single premium.

Which of the following is TRUE regarding the annuity period?

It may last for the lifetime of the annuitant

Calculation of Combined Equity

LMV + CR - DR - SMV = EQ An investor has a margin account with the following positions: - Long 500 shares JKL, LMV is $80 per share and DR is $15,000 - Long 200 shares MNO, LMV is $130 per share and DR is $16,000 - Short 400 shares PQR, SMV is $50 per share and CR is $30,000 The combined equity in the account is - $45,000 *The basic equation for the calculation of combined equity is: LMV + CR - DR - SMV = EQ. Plugging in the numbers, we have long market value (LMV) of $66,000 ($40,000 + $26,000). To that we add the credit balance (CR) of $30,000 giving us a total of $96,000. From that, we subtract the debit balance of $31,000 ($15,000 + $16,000) plus the short market value (SMV) of $20,000, or a total of $51,000. $96,000 ‒ $51,000 = equity of $45,000. An alternative is to compute the equity of the longs and the equity of the short separately and add them together. The long equity is LMV of $66,000 minus DR of $31,000 = $35,000. The short equity is the CR of $30,000 minus the SMV of $20,000 = $10,000. Those two total $45,000 in combined equity.

Which of the following is the basis for a claim against an insurance policy?

Loss

Loss

Loss is defined as the reduction, decrease, or disappearance of value of the persons property insured in a policy.

The Human Life Value approach to determining Life Insurance needs is based upon which of the following ideas?

Loss of the breadwinners income

Due To Chance

Loss that is outside insured's control

Stability in the value of a debt portfolio is greatest when:

Maturities of the debt securities are short

An investor opens the following options position: Long 1 ABC Aug 50 call @ 5½; short 1 ABC Aug 55 call @ 3½. What is the investor's maximum gain, maximum loss, and breakeven point?

Maximum gain is $300; maximum loss is $200; breakeven is $52. The first step is to identify the position. This is a debit call spread. It is a debit spread because the option purchased costs more than the one sold. The investor purchased the 50 call for a premium of 5½ and sold the 55 call for a premium of 3½. That difference (5½ minus 3½), a debit of $200, is the most the investor can lose. This is a bullish spread (the investor bought the low strike price and sold the high strike price). If the investor is correct and the stock rises, the short call will be exercised. That means the writer will have to sell the stock at $55 per share. However, the investor will exercise the 50 call and deliver the stock purchased for $5,000 and receive proceeds of $5,500. The $500 profit is reduced by the $200 it cost to put on the spread (the debit). That means a net gain of $300. The fastest way to do a question like this is to subtract the debit from the strike price difference (5 points here) and you have your maximum gain. In this case, it is $5 minus $2 = $3. Breakeven follows the call-up rule; add the net premium (the debit of $2) to the lower strike price ($50) to arrive at $52.

An investor opens the following positions: Buy 100 shares of SSG @48; write 1 SSG Dec 50 call @3¾. What is the customer's maximum gain, maximum loss, and breakeven point?

Maximum gain is $575; maximum loss is $4,425; breakeven point is $44.25. The first step is to identify the position. This is long stock with a short call (i.e., a covered call position). Breakeven is the customer's net cost. The price of the stock ($48) minus the premium ($3.75) received equals the $44.25 per share breakeven point. The strategy is to generate some income with a little protection against a decline in the price of the SSG stock. The premium income plus the excess of the strike price over the purchase price of the stock is the most this client can make. If the stock's price should rise well above the strike price of $50 per share, the short call will be exercised and the customer will deliver the stock purchased at $48 and receive $50. Regardless of how high the stock price rises, this customer can never make more than the $2 difference plus the 3¾ premium ($5.75 × 100 shares). If the stock's price should decline, the call will expire unexercised. That 3¾-point premium protects the long stock, but only for those 3¾ points. Once the market price falls below $44.25 (the breakeven point), it is all a loss for the customer down to a maximum $4,425 if the price drops to zero. Why doesn't the breakeven follow the "call-up" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven

Good Delivery

Meaning that a certificate has the necessary endorsements and meets all other requirements (signature guarantee, proper denomination, and other qualifications), so that title can be transferred by delivery to the buying broker, who is then obligated to accept it.

Money Market

Money market funds are no-load, open-end investment companies (mutual funds) that serve as temporary holding accounts for investors' money. As the name implies, the portfolio of a money market fund consists of money market securities. Money market mutual funds are most suitable for investors whose financial goals require liquidity above all. The interest these funds earn and distribute as dividends is computed daily and credited to customer accounts monthly. The NAV of money market funds is generally fixed at $1 per share. The only other MMFs with a stable NAV are institutional money market funds, which are 99.5% government securities. **Be aware that an investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although a money market fund seeks to preserve the value of the investment at $1 per share, it is possible to lose money by investing in a money market fund. *Check Writing privileges **Characteristics: - Offered without a sales load - Stable NAV - Portfolio of short term debt

Convertible Feature

Much like convertible preferred stock, convertible bonds are issued by corporate issuers, allowing the investor to convert the bond into shares of common stock. *When the value of a convertible bond equals the # the shares an investor would receive if the conversion feature were exercised, the bond is said to be at PARITY *Coupon rates are NOT higher than nonconvertible bond rates *If CS is above parity, will affect price *Convertible bondholders are creditors *They are lower because of the conversion feature's value to the bondholder. The bondholders are creditors, and if the stock price rises above the conversion price, the conversion feature will greatly influence the bond's price.

Municipal Spread

Municipal spread questions are generally asked in terms of points, not dollars. One bond point equals $10. Be ready for a question that asks you to rank parts of the spread in order of their size. Remember that the manager's fee is typically the smallest, and the total takedown is the largest. The additional takedown is a part of the total takedown amount, even though the name is a bit misleading. You may see a question that asks under what circumstances a syndicate member can receive the full spread when a bond is sold. The answer is that the syndicate member receives the full spread if the member is also the syndicate manager. Also, be ready to define total takedown as the concession plus the additional takedown.

Randomly Selected and Large Loss Exposure

Must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location

Gross premium for a life insurance policy is determined by adding which two components

Net premium and expenses

Political Contributions

Not be used to procure business. *Political Parties, Candidates for Office, Elected Officials *Must be able to vote for *Maximum of $250 per election

What document must a producer provide to the insured during policy replacement?

Notice Regarding Replacement

Which of the following are not requirements for corporate actions?

Notify the customer prior to the payment of the semiannual interest payment *Interest payment dates are established when the bond is issued

Family Balance Sheet

ONLY includes assets and liabilities, NOT income like salary, dividends, or interest, or amounts paid for expenses *Net worth would be found on this

Qualifying the Customer

Obtaining a written confirmation from the following: - Registered BD - Registered Investment Advisor (SEC) - Licensed Attorney - CPA

Regular Way Settlement

Occurs by the end of the business day either one or two business days following the trade T+1 = All treasury securities: T-Bill, T-Notes, T-Bonds T+2 = Corporate issues (Stocks and bonds), municipal debt, agency securities, GSE securities *REQUESTED Settlement *Be care of July 4th and Christmas questions (30 days in June)

Buyback

Occurs when a company buys its own outstanding shares in the open market from existing shareholders. - Reduces number of supply - Normally Cash Offer

Tender Offer

Offer to buy security directly from the owners of the security (and not through secondary markets). *Normally Cash Offer - Open for at least 20 business days after announcement of M/A - Changes require at least 10 business days - Target company gives opinion within 10 business days - Short-tendering PROHIBITED Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within: - 10 business days of the announcement. *Once a tender offer is announced, the target company, within 10 business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken.

Bid

Price at which an investor can SELL to a BD. Price at which an investor can redeem shares of mutual fund - Market maker buys, customer sells MMA: 22.05 - 22.25, 10 x 8. (First number is Bid - Lower Price) The next two numbers tell us the number of shares that quote is good for (in hundreds)

Rule 147

Offerings that take place entirely in one state are exempt from registration when issuer has its principal office (headquarters) in the state and all purchases are residents of the state Must meet criteria: 80% of income in state, 80% of issuers assets are in state, 80% of offering proceeds are used within state, majority of employees work in state *Be careful - 100% of investors from IN STATE *Securities may not be resold to non-residents of the state for 6 months after initial purchase Regulation D (Safe Harbor): No registration as long as there are no more than 35 nonaccredited investors. -- Private Placement Stocks (Letter Stock/Legend Stock) - Sign a letter to hold stock for investments 506(B) - Can say you're accredited 506(C) - Must prove you're accredited *Statutory Disqualification: Ex - Convicted of felony within 10 years

Closed-End Investment Companies

Often called PUBLICLY TRADED FUNDS. Limited number of shares. May issue common stock, preferred stock, and debt securities. Fixed number of shares. *May be purchased on margin *Common shares of Closed may be purchased in the secondary market *Based on supply and demand * Not Redeemable (Because it's traded on OTC/Secondary) *Shares Fixed, Full issues only *No Prospectus after IPO *Ex Date set by FINRA/Exchange *Dividend and voting rights *Can invest in variety of securities *Pay dividend when declared by BOD *Publicly traded closed end funds are NOT obligated to deliver a prospectus when traded in the secondary market place Benefit of purchasing in 2nd market: - Shares are frequently trading at a discount to the NAV.

When would unpaid interest be added to a policy loan balance?

On the policy anniversary date

Account Updating

Once a customer account has been opened at a broker-dealer, rules require that updating information on the account record occur no less frequently than once every: 36 MONTHS *Must occur at least every 36 months thereafter

Cross Guarantee

One account guarantees the money for another account

Markets

Primary Market = Issuers (Corporations/Gov/etc) sell to public (IPO, APO, SPO) Secondary Market = Investors trade with investors Third Market = Market Makers in OTC (NASDAQ) (Closed-end investment company & ETF's) Fourth Market = ECN's, Dark Pools - Institutional investors buying bulk without BD's

SEC

Primary federal regulator in the securities industry The standard SEC disclaimer reads as follows: "These securities have not been approved or disapproved by the SEC, nor have any representations been made about the accuracy or the adequacy of the information" *All exchanges are subject to oversight of SEC

ERISA Provisions

PRIVATE SECTOR ONLY (Corporate) *Primary purpose = Protect employees from the mishandling of retirement funds by corporations and unions - Participation. This identifies eligibility rules for employees. ***All employees must be covered if they are 21 years or older and have performed one year of full-time service, which ERISA defines as 1,000 hours previous year or more or under SECURE ACT - Permanent Part Time (500 hours for 3 consecutive years) - Funding. Funds contributed to the plan must be segregated from other corporate assets. Plan trustees must administer and invest the assets prudently and in the best interest of all participants. IRS contribution limits must be observed. - Vesting. Vesting defines when an employer contribution to a plan becomes the employee's money, such as an employer-matching contribution to a 401(k) plan. ERISA limits how long the vesting schedule can last before the employee is fully vested. Note that an employee is always fully vested in the employee's own contributions to a plan. *Must comply with vesting requirements - Communication. The plan document must be in writing, and employees must be given annual statements of account and updates of plan benefits. - Nondiscrimination. All eligible employees must be treated impartially through a uniformly applied formula. - Beneficiaries. Beneficiaries must be named to receive an employee's benefits at death. Must name a beneficiary. *ERISA applies to private-sector plans (Corporate) only. It does NOT apply to plans for federal or state government workers (Public sector plans), nor is it applicable to nonqualified plans

A participating insurance policy may do which of the following?

Pay dividends to the policyowner

Growth Style

Portfolio managers using the growth style of portfolio management focus on stocks of companies whose earnings are growing faster than most other stocks and are expected to continue to do so. Because rapid growth in earnings is often priced into the stocks, growth investment managers are likely to buy stocks that are at the high end of their 52-week price range. Therefore, in the eyes of some, they might be buying stocks that are overvalued. Growth managers expect to see high P/E ratios (price to earnings ratios) or high price-to-book ratio with little or no dividends.

50-year-old Sue is married to 53-year-old Aaron, who is the primary breadwinner in the family. They have raised two children, who have recently left the house and are earning stable incomes. Sue and Aaron are in which of the following income periods?

Pre-retirement

What is the term that describes the frequency and the amount of the premium payment?

Premium Mode

Example

Premium. CMV. IV. TV ABC Oct 40 Call. 8. 45. ? ? 1) 45 CMV - 40 SP = 5 IV 2) 8 Premium - 5 IV = 3 TV *At or out of money, intrinsic value = 0

In which of the following instances would the premium be tax deductible?

Premiums paid by an employer on a $30,000 group term life insurance plan for employees

Mutual Funds

Pool of investors' money invested in various securities as determined by the fund's stated investment objective. Investors can purchase Class A, Class B, Class C shares, No load. Advantages/Characteristics: 1) Professional management 2) Retains voting rights similar to common stockholders 3) Must offer reinvestment of dividends and capital gains at NAV (Without a sales charge) 4) NOT able to purchase any time during a day (One time) 5) Not purchased on margin but can be used as collateral for a margin loan after 30 days 6) Funds simplify tax calculations for investors by supplying 1099 7) Various withdrawal plans may be offered for REDEMPTION of shares 8) Guaranteed marketability 9) Can be purchased full or fractional shares 10) DO NOT TRADE ON SECONDARY MARKET EITHER ON EXCHANGE OR OTC 11) Considered a GROWTH FUND 12) Ex-dividend day for a mutual fund is the DAY AFTER record date 13) When dividends are reinvested, they are still taxed 14) Must provide prospectus to customer following a transaction Order for steps for the distribution of dividends is: Declaration date - (record and payable date) - ex-dividend date (ALL Set by the funds BOD, not FINRA for mutual funds) Suitable For: 1) Diversification 2) Professional Management (Human = Active, Computer = Passive) 3) Minimal Amount Required 4) Report distributions ANNUALLY to investors Risks: 1) Tenure Risk 2) Depends on what's in platform Can offer all of the following: - Acting as custodian for retirement accounts - Check writing privileges for redemptions - Ability to do transfers by telephone or online *Not physical custody of funds portfolio cash and securities **Sales loads (Go to BD or UW), management fees, and operating expenses -- All reduce investor returns because they reduce the amount of money available for the fund to invest Reporting: - Must Furnish: Audited ANNUAL reports to SEC and shareholders, and unaudited SEMI-ANNUAL reports to shareholders *Included in SEMIANNUAL financial reports to shareholders: - Balance sheet showing assets, liabilities, net assets - Income statement detailing profit and loss for the period - List of portfolio securities as of the date of balance sheet - Compensation paid to the BODs and Advisory Board - Total dollar amount of securities bought and sold during period ANNUAL REPORT: - Distributions

Customer Confirmation

Printed document stating the trade date, settlement date, and money due from or owed to a customer. It is sent or given to the customer ON OR before the settlement date (Completion of a transaction). See also dealer confirmation; duplicate confirmation. A customer's confirmation of a municipal securities transaction must include - the LOWEST potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax. *Customer confirmations always reflect a worst-case scenario (lowest) regarding yield. Any possible tax ramifications, such as the bond being designated as an AMT bond, must also be disclosed. Catastrophe call provisions need not be disclosed on a confirmation. Commissions and markups/markdowns are disclosed, but not the highest yield. Must Include: - Whether member acted as agent or principal - If member (BD) is a market maker in the security - If a control relationship exists between member and issuer - Date and time of the transaction (or the fact the time of the transaction will be furnished upon request - Commissions if the firm acted as an agent

Rule G-37 Political Contributions

Prohibits municipal firms from engaging in municipal securities business with an issuer for two years after any political contribution is made to an official of that issuer. In this context, municipal securities business refers to negotiated underwritings, not to competitive underwritings. The idea is to prevent firms from making large political contributions in return for being selected as underwriter for that issuer. *$250 per election

Federal Funds Rate

Rate that the commercial money center banks charge each other for overnight loans of $1 Million or more. *Considered a barometer of the direction of short-term interest rates

If an insurer needs to obtain information about the applicant from investigators, what is the insurer required to do?

Provide the applicant a disclosure authorization notice

Indemnity

Provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss and is not allowed to gain financially because of the existence of an insurance contract

Federal Home Loan Mortgage Corporation (FHLMC) (Freddie Mac)

Public corporation. Was created to promote the development of a nationwide secondary market in mortgages by buying residential mortgages from financial institutions and packaging them into mortgage backed securities for sale to investors. *Backed by the implied backing but not full faith and credit of US Gov

Federal National Mortgage Association (FNMA)

Publicly held corporation that provides mortgage capital. *Backed by the implied backing but not full faith and credit of US Gov

Discount Rate

Rate the Federal Reserve charges for short-term loans to member banks. Federal Reserve sets this rate! *Only rate of the 4 set by a unit of the federal government. Other 3 are set by the bank that is making the loan. *Federal reserve member banks needing to borrow money can 1) Borrow from The Federal Reserve Bank at the discount rate 2) Other member banks, who will lend to one another at the federal funds rate *To tighten monetary policy, making it more difficult for customers to borrow money, FRB can -- Raise the discount rate *To ease monetary policy allowing customers to borrow more easily -- Lower the discount rate *Indicates the direction of the Federal Reserve Boards monetary policy

Which services are associated with Standard & Poor's and AM Best?

Rating the financial strength of insurance companies

Ratio Call Writing

Ratio call writing involves selling more calls than the long stock position covers. This strategy generates additional premium income for the investor, but also entails unlimited risk because of the short uncovered calls. An investor who is long 100 shares of HIJ common stock writes 2 HIJ OCT 45 calls. This is a 2:1 ratio write because the ratio of total calls to covered calls is 2:1. The 100 shares in the account is enough to cover one of the calls. The other call is uncovered and that means the potential loss is unlimited. *Exposes an options investor to: - Unlimited loss (In rising market) - Limited Gain (In falling market)

Accrued Interest

Recap for calculating accrued interest follows. - Corporate, agencies, and municipals: use 30-day months (360-day year) - U.S. Treasury securities: use actual day months (365-day year) When counting days: - Go back and include the last interest payment date. - Go up to but not including the settlement date. *For a new bond issue, the date from which interest accrual begins is called the dated date. *This first payment is called a long coupon.

Rehypothecation

Repledges the securities as collateral for a loan from a bank

Currency Transaction Reports (CTRs)

Report currency received in the amount of more than $10,000 on a single day. Report must be filed within 15 days of receipt of currency. Non failure can result in $500K fines, 10 years in prison or both. Designing deposits to fall under the $10K radar is prohibited act known as structuring. *Checks are not considered currency. Included as currency are cash, postal money orders, and traveler's checks. *Form 112 -- The Bank Secrecy Act requires broker-dealers to report on FinCEN Form 112 any currency deposited or received in excess of $10,000 on a single day.

Know This

Representations are statements believed to be true. Insured's statements on the application are representations.

North American Securities Administrators Association (NASAA)

Represents state and provincial securities regulators in the US, Canada, and Mexico. No specific regulatory authority. Association of state securities administrators. Writes model rules but has no regulatory authority* *Enforcement of state securities rules and regulations - Under Uniform Securities Act of 1956 *Chief Securities Regulator = "The Administrator" *A Broker-Dealer firm's registration to do business in a given state may be revoked by - The State's Administrator

Retail Communication

Requires approval by a principal before the earlier of: - First Use - Filing with FINRA *More than 25 retail investors within any 30 calendar day period *A copy of all communications must be filed with FINRA *New members (1 year or less), filing must occur at LEAST 10 days BEFORE use *For established firms, filing must happen WITHIN 10 days of FIRST use. *Please note that the term retail customer refers to any customer—existing or prospective—that does not fit into the definition of institutional client. Considered Retail or Correspondence: 1) an electronic communication distributed through the firm's website regarding potential opportunities with the firm as a registered representative. 2) a written communication to all of the firm's customers regarding a new mutual fund being offered. 3) a letter to 10 individual investors within the past week regarding a new investment strategy.

Cash Settlement

Requires delivery from seller and payment from buyer on same day Settles on trade date. Buyers and sellers must agree before the trade takes place Trade Date = Pay Date

Conditional Contract

Requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations.

Social Security Retirement Benefits are available to all of the following persons EXCEPT

Retirees age 59 1/2

Solo 401K

Retirement plan that can maximize your savings if you're self employed or if you're a partner in a business whose only employees are the partners and their spouses

An individual purchases a life policy and lists his parents as the beneficiaries. He is able to change beneficiaries at any time. What type of beneficiary designation does the policy have?

Revocable

To offer its shareholders a privilege to obtain its shares at a fixed price, which of the following products does a corporation issue?

Rights

Systematic Risk

Risk that changes in the overall economy will have an adverse effect on individual securities, regardless of the company's circumstances. Generally caused by factors that affect all businesses, such as war, global security or inflation. **No matter how diversified a portfolio is, it will still be subject to systematic risk *Nondiversifiable Mitigating Systematic Risk: - Portfolio managers will use derivative securities 1) Market 2) Interest Rate 3) Inflation or Purchasing Power *Portfolio manager using index options is trying to reduce which of the following types of risk -- Systematic

Uniform Practice Code (UPC)

Rules of the NASD concerned with standards and procedures for the handling of OVER THE COUNTER securities transactions, such as delivery, SETTLEMENT DATE, and EX-DIVIDEND DATE. *Governs every day procedures - day to day *Rules governing dealer to dealer transactions

In The Money PUT (Creates Intrinsic Value)

SP ↓ CMV

Street Name

Security is held in electronic form by a BD on behalf of a customer *Customer is the beneficial owner *BD is named the nominal owner

Variable Annuity (Security)

Same As Fixed: - Payments made with after-tax dollars - Fixed administrative expenses - Income guaranteed for life Different Than Fixed: *Payments are invested in the separate account *Portfolio of equity, debt, or mutual funds *ANNUITANT assumes investment risk *IS a security *Return depends on separate account performance *Monthly payments MAY fluctuate up or down *Typically protects against purchasing power risk *Subject to registration with the state insurance commission and the SEC *Tax deferred until withdrawn *Accumulation units are most often associated with VAs *2 licenses are required for sale - insurance and securities license. Suitability must be determined and a prospectus must be delivered. *All contributions to annuities are made with after-tax dollars, unless the annuity is part of an employer-sponsored (qualified) retirement plan or held in an IRA. Because there is no tax on the "way in," the exam will concentrate on taxation on the "way out." Suitability: - There must be a life insurance need. - The applicant must be comfortable with the separate account and the fact that the cash value is not guaranteed. - The applicant must understand the variable death benefit feature. - Supplement retirement income that keeps pace with inflation - Poor choice for short term investors (CSDCs) *Variable Annuities and Options are defined as securities *Fixed Annuities are NOT defined as a securities *Once a variable annuity has been annuitized, each annuity unit's value varies with time, but the number of annuity units is fixed *Annuitized payments are viewed as part earnings and part cost basis for tax purposes (Earnings are taxable, cost basis is returned tax free) *If an annuity is cashed in, the growth and accumulation portion of its value is taxable as ORDINARY income. *Payout depends on SAAPI - Sex, Age, Account Balance, Payout Option, Interest Rate *Fees Associated: Administrative fees, Investment Advisory Fees, Custodial Fees, Surrender Charges (7-10 Years) *No Upfront Sales Charge *1 time irrevocable decision (Cannot be changed once elected) *The portion of the premium invested in the insurance company's general account is used to provide for the minimum guaranteed amount of the death benefit. Risk: - Market Risk (Greatest) Guaranteed: 1) Minimum death benefit - Can never fall below guaranteed minimum amount 2) Ability to borrow 75% of cash value after in force at least 3 years 3) Right to exchange policy for permanent form of insurance, regardless of health, within first 24 months Separate Account Used For: - used for the investment of funds paid by contract holders. - regulated under both securities and insurance laws.

Growth or Special Situation Industries

Seems to be disconnected to the business cycle, doing well regardless of the economy. *Capital appreciation = another term for growth *Shows unusual profit potential resulting from nonrecurring circumstances. (New management, patents pending, new product, etc) A mutual fund portfolio consists primarily of shares of companies considered to be prime candidates for a takeover attempt. Of these choices, this mutual fund is best described as - a special situation fund. *Special situation funds buy securities of companies that are considered to be in a position to benefit from special, nonrecurring situations. Those could be new management, new products, patents pending, takeover, or turnaround situations.

Capital Market Instruments

Segment of the securities market that deals with more than one year to maturity

SLoBS

Sell Limit or Buy Stop (Both done at or above the market price) *Sell limit order - Limit price or HIGHER Market Order = Next available price / Execution Guaranteed Limit Order = At specified price or better/Price guaranteed Stop Order = Primarily used to protect / Nothing guaranteed Stop Limit Order = Like a stop, but becomes limit after trigger A customer enters the following order: Sell 1,000 shares of XYZ at 23. Which of the following executions would the customer accept? -23.50 **When selling at a limit price (23), the customer will accept that price or better (higher for sell orders). Given the customer is willing to accept 23, any price of 23 or higher (in this case 23.50) is an acceptable execution.

Municipal Notes

Short-term securities that generate funds for a municipality that expects other revenues soon. Usually, municipal notes have less than 12-month maturities, although maturities may range from three months to three years. Because of their short-term nature, interest and principal is paid at maturity. That is just another way of saying that they are issued at a discount.

S set up an individual retirement account that her employer is now contributing to. Her employer's contributions are not included in her gross income. What kind of retirement plan does S have?

Simplified Employee Pension (SEP)

Pure Risk

Situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept.

Wagering on a sporting event is known as what type of risk?

Speculative

Corporate Debt

Suitable For: 1) Income (HIGHEST Coupon) *Moderate/Aggressive *Interest Income: - Fed = Yes - State = Yes Risks: - BUSINESS RISKS is unique to corporate debt** Default, Interest Rate, Inflation (Purchasing Power), Callable, Reinvestment

Office of the Comptroller of the Currency

Supervises nearly 1,400 national banks, federal savings associations and federal branches and agencies of foreign banks operating in the US> Ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly and comply with applicable laws and regulations. Director of Federal Deposit Insurance Corporation (FDIC) * Will either use full name or Comptroller of the Currency. Do not get mixed up with OCC (Options Clearing Corporation) *Primary bank regulator, directs the FDIC Supervises: - National Banks - Foreign Banks operating in the US - Federal Savings Associations

Variable Rate Demand Obligations (VRDOs) (Auction Rate Securities)

The MSRB defines variable rate demand obligations (VRDOs) as floating rate obligations that typically have a nominal long-term maturity of 20-30 years, but have an interest rate that is reset periodically. The reset can be daily, weekly, monthly, semiannually, or flexible. Matching the interest rate to market conditions tends to keep the price of these relatively stable. One of the key features of this security is the ability of the investor to demand the issuer repurchase the bonds at par value. This can be done on any reset date. In essence, this is a put option where the investor "puts" the bond and receives the face amount plus any accrued interest. This feature is why VDROs are sometimes considered money market instruments. In fact, you can find them in the portfolio of many money market mutual funds. *Main advantage is that -- The bond's price should remain relatively stable *No fixed coupon rate *Variable rate security *Interest is federally tax exempt *Provides hedge against inflation Your new customer lists tax-free income as an investment objective but notes that he will need access to $50,000 within the next four to six months for a down payment on a vacation home he is purchasing. To meet the objective of tax-free income, a registered representative considers municipal securities for the $50,000. Which of the following municipal securities recommendations would be the least suitable? - Auction Rate Security (ARS) **An ARS is a long-term instrument tied to short-term interest rates and, therefore, would not be suitable for someone with a short-term time horizon. Each of the remaining answer choices are short-term notes aligning better with the customer's need to access the funds in the next four to six months.

In a fixed annuity, which of the following is true regarding the guaranteed interest rate on the investment?

The annuitant will receive the higher of either the guaranteed minimum rate or current rate

Collateralized Mortgage Obligations (CMOs)

Type of asset backed security. Pool a large number of MORTGAGES, usually on single-family residences. Structured into maturity classes called tranches. Backed by Ginnie Mae, Fannie Mae, Freddie Mac *Pay principal and interest (Interest Taxable at ALL levels) *Highly sensitive to change in interest rates *Not government backed (Repayment of underlying mortgages) *Created by investment banks (Different trances = different risks, profiles) *Pay monthly income (Interest) *Special disclosure and suitability risk Risk: - Prepayment - Extension

Regulation FD (Issuers)

The federal regulation governing corporate officials who are required to make public (fair disclosure) any information disclosed to analysts or investors. The selective disclosure of material nonpublic information by issuers. - Unintentional Leaks - Release by NEXT business day via press releases, conference calls, webcasts Info was disclosed, in order to avoid regulation FD, issue must -- Promptly disclose the information as soon as reasonably practical, but in no event after the later of 24 hours or the start of the next day's trading on the New York Stock Exchange. *Issuer disclosure rule

AMT Bonds

The interest on these nonpublic purpose bonds (or private purpose bonds) may be taxable because the act reserves tax exemption for public purposes. Because these bonds are used for a nonpublic purpose, the interest income may be subject to the alternative minimum tax (AMT). - Tax-exempt interest on private purpose, nonessential government service municipal bonds; - Certain costs associated with direct participation programs (DPPs), such as research and development costs and excess intangible drilling costs; - Local taxes (e.g., state income and property) and interest on investments that do not generate income; and - Accelerated depreciation on investment property. *Private Purpose Municipal Bonds ARE included in the list *The language of the Internal Revenue Code (IRC) says that taxpayers are required to add the excess of the AMT over the regular tax to determine their total tax liability *Interest on private activity municipal bonds is included in the taxable income of an investor who is subject to the alternative minimum tax. (Considered preference Income) Investors who are subject to AMT must have which of the following preference items added to adjusted gross income to calculate their tax liability? - Interest on a private purpose municipal bond **On the exam, whenever you see a private purpose municipal bond, the interest on the bond is a tax preference item for the purpose of the alternative minimum tax.

Direct Rollover

The plan administrator can transferring a distribution directly to another retirement plan or IRA. Sometimes a check will be issued made payable to your new account. No taxes will be withheld from your transfer amount. *Moves money from employer plan (401K) to IRA. *This is considered a transfer, not a rollover

Closing Transaction

The sale or purchase of an option contract to eliminate or undo an existing option position *Can be either a buy or a sell (Always opposite) *If a customer sold puts to open, which of the following transactions would be allowed if the options agreement was not returned signed within 15 days? *Buy puts to close **If the agreement is not returned signed in 15 days, only closing transactions to offset those positions already open would be allowed.

Variable Life Sales Charges

The sales charges on a fixed-premium variable life contract may not exceed 9% of the payments to be made over the life of the contract. The contract's life, for purposes of this charge, is a maximum of 20 years. For those of you familiar with life insurance compensation, the effect of this is that renewal commissions are earned up to the 20th anniversary of policy issue. * The maximum sales charge over the life of the contract is 9%.

Bonds and Interest Rates

When Interest Rates Rise = Bonds Fall When Interest Rates Fall = Bonds Rise (More callable) *If interest rates increase, the interest payable will remain UNCHANGED (Its the nominal yield)

FINRA Rule 2330 - Member's Responsibilities Regarding Deferred Variable Annuities

This rule applies to recommended purchases and exchanges of deferred (not immediate) variable annuities and recommended initial subaccount allocations. On the other hand, this rule does not apply to reallocations among subaccounts made or to funds paid after the initial purchase or exchange of a deferred variable annuity. In other words, once the investor has made the initial purchase, any subsequent investments do not come under the rule. Likewise, once the initial subaccount decisions have been made, later changes are not covered by the rule. *One example of egregious behavior stated in the rule (and possibly on the exam) is recommending that a client take a home equity loan and use the proceeds to fund the purchase of a deferred variable annuity. *FINRA Rule 2330 frowns on recommending the exchange of one deferred variable annuity for another within a period of 36 months. This only applies to deferred variable annuities. When an exchange takes place, it is generally under the provisions of IRS Section 1035 - no red flag raised there. 2 Benefits to Deferred Variable Annuities: 1) Taxes on ALL earnings are deferred until withdrawal 2) If the proper separate subaccounts are selected, there is potential inflation protection

Margin Deposits

To borrow shares for short sales, an investor must make margin deposits 1) Short Market Value (SMV) - CMV of stock position investor sells short 2) Credit Register (CR) - Amount of money in customer's account 3) Equity (EQ) - Customer's net worth Amount of equity in account is determined by: CR - SMV = EQ *FINRA Minimum Maintenance Requirement = 30% when selling short or $5 per share, whichever is greater

The paid-up addition option uses the dividend

To purchase a smaller amount of the same type of insurance as the original policy

Form U4

To register an associated person of a member firm with FINRA they fill this out. Registration not effective until passes exam. - Name, address, any aliases - 5 year residency history - 10 year employment history - Information on any changes, arrest or convictions relating to investment business - Professional Designations *Marital status or Education is not reported Termination, for whatever reason, requires that the old firm file a Form U5. Registration, whether for the initial or any subsequent one, requires filing of a Form U4. *30 Days to update *If amendment involves STATUTORY DISQUALIFICATION, an amendment must be filed within 10 business days *Before submitting an application to enroll with FINRA, member firm must ascertain the person's business reputation, character, education, qualifications, and experience as part of application process. **Form U4 requires an applicant to provide a 5-year residency history and a 10-year employment history. With regard to the employment history, the **member firm must verify the previous 3 years. There is no requirement to verify residency history.

Trade Blotters

Trade blotters are a daily record of all activity, including cash received and disbursed, securities received and delivered, and identification of securities bought and sold that day. The daily blotter would not contain client information or settlement dates. Blotters must be posted no later than the first business day following the activity. 6 years

Insurance

Transfer of risk of loss from an individual or a business entity to an insurance company, which, in turn, spreads the costs of unexpected losses to many individuals. The cost of an insured's loss is transferred over to the insurer and spread among other insureds.

Municipal Advisor

Type of investment banker that advise municipalities on issuing of municipal debt. Work under a contract with the municipality to provide advice and issues such as debt structure, bond features and other issues involved with raising capital - may NOT be compensated *Acts under contract of selling securities

Firm Commitment Underwriting (Investment Banker Acting As Principal/Dealer/Market Maker)

Underwriters contract with the issuer to buy the securities - Buy shares from issuer and resells at higher price (POP) (Public Offering Price) (Only in PRIMARY market) *A firm may never guarantee to a customer that it will repurchase the shares at the POP if the deal subsequently trades lower *Have more risks because they actually bought from issuer

In what type of life insurance policies can the policyowner skip premium payments without the policy lapsing?

Universal Life

Short Stock, Short Put

Unlimited MAX loss - Only one that has unlimited loss

Vesting

Which is INCORRECT concerning a Section 457 Deferred Compensation plan?

Dollar Bond

When a bond is quoted as a price (As a % of Par), instead of basis (Yield) Which of the following quotes represents a municipal dollar bond quote? - 85 1/2 *Dollar bond quotes are based on a percentage of face amount (Par $1,000). Therefore, a quote of 85½ is 85.5% of $1,000, or $855. *They are term bonds *They have a sinking fund provision *They are quoted as a percentage of par

Withdrawal Plans

Withdrawal plans are normally a free service. Not all mutual funds offer withdrawal plans 1) Fixed-Dollar -- Liquidates enough shares each period to send that sum. The amount of money liquidated may be more or less than the account earnings during the period. 2) Fixed Percentage (Fixed Share) -- Fixed number of shares or a fixed percentage of the account is liquidated each period. 3) Fixed Time -- Customers liquidate their holdings over a fixed period.

reduction

Would include actions such as installing smoke detectors in our homes.

Records Maintained for 4 Years

Written Complaints (Paper, email, text, instant message, tweet, social media post, etc) - Must turn complaint over to appropriate supervisor or principal without delay FINRA = 4 Years SEC = 3 Years

An investor purchased a 2x leveraged inverse ETF for $10,000. The ETF was linked to the performance of the S&P 500. During the first period, the S&P 500 rose by 8%, while during the next period, the index fell by 7%. What is the investment's value at the end of the second period?

*$9,576 The investment's value at the end of the second period would be $9,576. In 2× leveraged inverse ETF, the value of the shares would move in an opposite direction to an index by twice the amount of movement of the index. When the S&P 500 rose by 8%, the leveraged inverse ETF would have fallen by 16%. The investment value would have declined to $8,400 ($10,000 × 16% = $1,600; $10,000 - $1,600 = $8,400). When the S&P 500 fell by 7%, the leveraged inverse ETF would have increased by 14% from $8,400 to $9,576 ($8,400 × 14% = $1,176). $8,400 + $1,176 = $9,576.

1035 Exchange

***principal approval of any sale or exchange (including a 1035 exchange) must be obtained within **7 business days. A 1035 exchange is a tax-free exchange between like contracts. The IRS allows annuity and life insurance policyholders to exchange their policies without tax current liability. This 1035 exchange provision applies to transfers of cash values from annuity to annuity, life to life, and life to annuity. It cannot be used for transfers from an annuity to a life insurance policy. **FINRA is concerned about Section 1035 exchange abuses where the registered representative emphasizes the tax-free nature of the exchange without pointing out possible disadvantages. - Possible surrender charges on the old policy, - A new surrender charge period on the new policy, and - Possible loss of a higher death benefit that existed on the old policy. A 58-year-old investor owns a single premium deferred variable annuity with a current value of $500,000. The original investment was $150,000 and the contract has a death benefit provision. If this investor wished to exchange this policy for one offered by a competing company, - using a 1035 exchange would avoid any current taxation. *Section 1035 of the Internal Revenue Code permits the exchange of an annuity to another annuity, whether issued by the same or a competing company, with the tax-deferral on earnings continuing. These exchanges can also be made from an insurance policy to an annuity, but not from an annuity to an insurance policy. *No annuity to life insurance allowable for 1035 Exchange

Exploitation (Rule 2165)

*65 or older *18 and older whom the member reasonably believes has a mental or physical impairment and unable to protect own interest *BD must make reasonable effort to obtain name and contact information of trusted contact person for senior customer when -- Opening an account or when updating account information *Only signature required is the Principals *Firm verifies identity (Drivers license, passport) *Copy sent to customer within 30 days for customer to verify *Must verify account info every 36 months *Hold CANNOT be longer than 15 days *May request for trusted contact person *FINRA considers reasonable 55 BUSINESS days.

Sallie Mae

**Do NOT issue mortgage backed securities Which of the following statements regarding Sallie Mae debentures are true? *Interest is tax exempt at the state and local levels *Interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation. As a general rule, debentures pay interest every six months. Sallie Mae is not backed by the taxing power of the U.S. government, and money is used for student loans for higher education.

Time or Calendar Spread

**If Expiration is different = Time/Calendar/Horizontal Spread A time spread or calendar spread, also known as a horizontal spread, includes option contracts with different expiration dates but the same strike prices. Investors who establish these do not expect great stock price volatility. Example of a time or calendar spread: Long RST Nov 60 call for 3 Short RST Jan 60 call for 5 This is a time or horizontal spread because the difference in the two options is the Nov and Jan expiration dates (time). A credit calendar spread occurs when premium received exceeds the amount paid out. An investor creates a credit spread by selling the distant expiration and buying the near expiration. The distant expiration has more time value, and therefore, a higher premium.

Short Stock Appropriate Hedge

**Long Call (Protection), Short Put (Income) *If you're LONG - Exercised, If you're SHORT - ASSIGNED

Long Stock Appropriate Hedge

**Long Stock Appropriate Hedge = Long Put (Best for protection) or Short Call (Income) *If you're LONG - Exercised, If you're SHORT - ASSIGNED

Hedge Funds

**Most hedge funds are organized as limited PARTNERSHIPS *The partnership is the issuer of the ownership units. *Not investment companies under Investment Company Act of 1940 (Don't provide same level of transparency) *They may not be suitable for discretionary accounts where account holders are not familiar with the risks associated with them. *They may charge both an annual fee and a fee based on the funds' profits. *Typically have unrestricted concentration limits *Initial investment minimums are typically well over $100,000 *Details of the offering would be found in -- Private Offering Memorandum *Blank-check and blind pool securities are offerings where the issuer has NOT specified the use of the capital it is raising. (Most Likely for Hedge Funds) **Hedge funds are LESS liquid than mutual funds Characteristics: - They invest in private securities, real assets, derivatives, and structured products. - They are privately organized and generally unregistered. - They use leverage, short positions, and concentrated positions.

FINRA

**Regulates all matters related to investment banking, trading in the over-the-counter (OTC) market, trading in NYSE-listed securities and the conduct of FINRA member firms and associated persons. Largest and PRIMARY SRO. - Promote investment banking and securities business - Standardize principles and practices - Promote high standards of commercial honor - Encourage the observance of federal and state securities laws - Provide a medium for communication - Adopt, Administer and enforce rules - Promote self discipline - Margin Maintenance requirements are set by FINRA (SRO) 1) Code of Procedure 2) Uniform Practice Code 3) Code of Arbitration 4) Code of Conduct * Must employ at least 2 principals *SEC/FINRA can impose sanctions but not jail time *Recruitment advertisement promises substantial training to be delivered to incoming employees - Would NOT violate general standards regarding member firm communications *All member firm communications are held to certain standards - FINRA mandates that members must consider the nature of the audience to which the communication will be directed and should provide details and explanations appropriate to the audience. Firms applying for FINRA membership are required to: 1) Agree to be in compliance with all federal securities laws. 2) Pay dues, assessments, and other charges the association levies.

Types Of Preferred Stock

*1) Straight (Noncumulative) - No special features beyond the stated dividend payment (Higher dividend than Cumulative) *2) Cumulative - Accrues payments due to its shareholders in the event dividends are reduced or suspended. (Pays in arrears) 3) Callable Preferred - Buy back from investors at a stated price after a specified date. Similar to refinancing a mortgage - (*Pays HIGHEST stated dividend rate) 4) Convertible Preferred - Can exchange shares for a fixed number of shares of the issuing corporations common stock (Par Value / Conversion Price) ($100 par / $5 Conversion = 20 Shares of common, 20 X $6 CMV = $120) 5) Adjustable Rate Preferred - Issued with adjustable (Or variable) dividend rates (**Best for investors looking for fixed income) (Mostly associated with T-Bills) (**Adjustable-rate preferred dividends are tied to benchmark interest rates such as Treasury securities. As the rates fluctuate up and down, so do the dividends on adjustable shares) - WHEN INTEREST RATES RISE - LIKELY TO PAY HIGHER DIVIDEND 6) Participating Preferred - Share of corporate profits that remain after all dividends and interest due other securities are paid *Dividends paid in: - The in arrears dividends (Cumulative) - Stated Preferred (All Preferred) - Excess Dividend (Participating) - Common Dividends (Common)

MSRB Rule G-22 Control Relationships

*A control relationship exists if someone represents both an issuer and municipal securities dealer. The dealer must disclose the control relationship to the customer before it can affect any transaction in that security for that customer. Although, initially, this disclosure can be oral, the dealer must make a written disclosure at or before the transaction's completion. The disclosure is made on the confirmation. If the transaction is for a discretionary account, the customer must give express permission before the transaction can be executed. *Must disclose in ALL customer transactions, including research reports Control Relationships: 1) Proprietary Products 2) Incentives 3) Research after underwriting

Research Report

*A document that states the banking industry is ready for recovery but ABC Bank will not participate in the recovery and if owned, investors should sell the security A research report is a document prepared by an analyst or strategist, typically as a part of a research team for an investment adviser or broker-dealer. The report may focus on an individual stock or sector of the economy and generally, but not always, will recommend buying, selling, or holding an investment. Items NOT labeled as research reports: - Discussions of broad-based indices - Commentaries on economic, political, or market conditions - Technical analyses concerning the demand and supply for a sector, index, or industry based on trading volume and price - Statistical summaries of multiple companies financial data, including listings of current ratings - Notices of ratings or price target changes

Buy Stop

*Always placed ABOVE CMV *Buying can only protect short positions, not long positions. *A buy stop order is placed above the prevailing market price and is elected (triggered), becoming a market order to buy when the stock trades AT or through (ABOVE) the stop price. Example: Buy 100 shares ABC @ 35 stop (Triggered at $35 or better (Higher); becomes market order)) If a customer with an unrealized gain on a short stock position wishes to protect her profit, she should enter -- A Buy Stop Order *A buy stop order can be placed above the current market to protect the short stock position. If the stock trades at or above the stop price, the order is elected and becomes a market order to buy the stock, which will be used to cover the short position.

Sell Stop

*Always placed BELOW CMV Example: Sell 100 shares ABC @ 30 Stop (Triggered at $30 or better (Lower); becomes market order))

Defined Contribution Plan

*Annual contribution is pre-determined (Fixed) *Retirement benefits are uncertain *YOUNGER employees benefit the MOST *More Risk to EMPLOYEE *MOST POPULAR *Benefit amount is VARIABLE, Contribution amount is FIXED Contribution Plans: 1) Money-purchase pension plan 2) Profit Sharing plan (qualified) 3) 401(k) Plan 4) SIMPLE Plans 5) 403B

Long Stock, Long Put (Hedging)

*BEST OPTION BE = Stock SP + Put Premium MG = Unlimited ML = Stock SP + Put Premium - Put SP EXAMPLE: Long XYZ Stock @ 43 Long 1 XYZ July 40 Put @ 2 BE = 43 + 2 = 45 MG = UNLIMITED ML = 43 + 2 - 40 = 5 ($500)

Long Straddle (Volatility - Movement)

*BUY a Call and BUY a Put (Long straddle) *Same stock, same expiration, same SP *Does NOT involve stock *Same month and SP *Two BE points: 1) SP + Total premiums 2) SP - Total premiums Gain: - Outside BE points - Maximum = Unlimited Loss: - Between BE points - Maximum = Total Premiums S - Short Straddle I - Inside BE's L - Long Straddle O - Outside BE's Long Straddle = Expects substantial volatility in the stock's price but is uncertain of the direction the price will move. To be ready for either occurrence, the investor purchases both a call and a put. EXAMPLE: A customer buys 1 LMB Aug 70 put for 4 and 1 LMB Aug 70 call for 4. The customer will break even at - $62 or $78 **This is a straddle (a put and a call on the same stock with identical terms). There are two breakeven points solved by using the "call up" and "put down" rule. To break even, the customer must recover $800 total paid in premiums. On the long 70 call, this occurs if the market price rises to 78 ("call up" 8 points from 70). On the long 70 put, this occurs if the market price falls to 62 ("put down" 8 points from 70).

Stop Limit Orders

*Become limit orders when elected *Trigger -- First trade at or through stop price Buy Stop Limit Order: Investor wants to buy stock if rises to $25 but doesn't want to pay more than $26 B 100 ABC @ 25 stop limit 26 24 (Order Entered) 24.75 24.90 25 (Trigger) 26ob (Execution 26 or LOWER) Sell Stop Limit Order: Investor want to sell the stock if it falls to $25 but wants at least $24 S 100 ABC @ 25 stop limit 24 26 (Order Entered) 25.90 25.75 25 (Trigger) 24ob (Execution 24 or HIGHER)

Achieving A Better Life Experience (ABLE) Accounts

*Beneficiary of the account is the account owner and income earned by the account is NOT taxed *Onset of disability occurred before age 26 *Only ONE able account per person *Contributions can be made by any person including account beneficiaries themselves *After tax dollars and is NOT tax deductible for purposes of federal income taxes

Technical Analysis

*Chart price and volume over a period of time Uses: - Price Forecasting - Timing Considerations: - Price, Price history, Volume (Charts) - Support - Resistance - Breakouts - Consolidation - Trend Line "The trend is your friend" - Head and Shoulders - Reversal Interested In: 1) Graphs 2) Trading Volume 3) Moving Averages 4) Reversals 5) New highs and lows 6) Open short positions Least Interested In: - Price-to-earnings (P/E) Ratio - Declaration of increased dividends *Declines outnumber advances = Bear *Advances outnumber declines = Bull *Rising advance/decline line is a bullish indicator. indicates that more stocks are rising in price than falling.

T-Bonds Pricing and Denominations

*Issued in denominations of $100 to $5 Million *Mature at least 10 years from date of issue (10-30) *Quoted exactly like T-Notes (1/32% of par) *Book Entry Form *With few exceptions, securities issued by the U.S. Treasury are the only government securities carrying an exemption from state income tax. They are, however, taxable on the federal level. (Your client lives in a state with a personal income tax - to minimize liability...)

Credit Spread (Selling)

*Credit/Narrow = 6 Letters (Want them to meet at 0 and both expire - WORTHLESS) *If the thing you SOLD is more than the thing you bought, you will have a CREDIT EXAMPLE: B1 ABC Oct 30 Call S1 ABC Oct 35 Call = CREDIT *Credit Spread = MG *Net Credit = MG *Maximum Loss = SP difference - Net Credit Profitable If: - Difference in premiums NARROWS - Both options EXPIRE *All price spreads: - MG + ML = Difference in SP's *In the pocket = Credit (Selling) This reminds you that credit spreads are profitable if the difference between the premiums narrow or the options expire. This is logical because sellers want the options they write to expire, and option premiums decline as expiration approaches. In which type of spread does the investor want premiums to narrow? Look for the credit spread. *The market attitude of a customer who establishes a credit call spread is -- BEARISH *In a call spread, a customer is buying one call and selling another with different strike prices and/or expirations. In any spread, one of the options is dominant. In a short call spread, the short call position is dominant because it has the higher premium; writing calls is bearish.

Sole Proprietorship

*Does not protect owners' personal assets from losses incurred by the business - The owner is liable for all the debts of the business. Responsible if the business liquidates, you could lose everything

Preservation of Capital/Safety

*Doesn't want to lose anything, no tolerance for risk - CDs - Money market mutual funds - Fixed annuities - Government securities and funds - Agency issues - Investment grade corporate bonds and corporate bond funds - Bank Deposits - US Treasury Income Fund (Treasuries) - Stable Value Fund

Dated Date

*For a new bond issue, the date from which interest accrual begins is called the dated date. One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 21, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due? - 20 Interest started accruing from the dated date of the bond (March 1). Interest accrues up to, but not including, settlement. Therefore, 20 days of accrued interest are due. The customer's first interest payment the following August will represent interest that has accrued from the dated date.

Market Maker

*Having been told that a firm incorporates PROPRIETARY trading in its business model buying and selling securities into and out of its own inventory you would know that is is A MARKET MAKER *Market Maker -- Trades in a PROPRIETARY account to facilitate trading of a security and provide liquidity *Any entity, individual or institution, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security is known as a market maker or trader.

Debit Spread (Buying)

*If I purchase something, I use my DEBIT card to BUY Debit = widen = exercise (When you begin to widen, you need to exercise.) *Debit/Widen = 5 Letters *If the thing you BOUGHT is more expensive, you will have a DEBIT *Out of the pocket = Debit (Buying) *Debit Spread = ML *Net Debit = Maximum Loss *Maximum Gain = SP difference - Net Spread *Profitable If: - Difference in premiums WIDEN - Both options EXCERCISED (In the money) This reminds you that debit spreads are profitable if the difference between the premiums widens or if the options are exercised. The test may ask you about which type of spread the investor wants the premiums to widen. Look for the debit spread. *All price spreads: - MG + ML = Difference in SP's

Diagonal Spread

*If SP and Expiration are different = Diagonal Spread A diagonal spread is one in which the options differ in both time and price. On an options report, a line connecting these two positions would appear as a diagonal. Example of a diagonal spread: Long RST Jan 55 call for 6 Short RST Nov 60 call for 3 This is a diagonal spread because both the strike prices and expiration dates are different.

For the risk disclosures found in the margin agreement, all of the following would be accurate disclosures except

*If a maintenance call is not met, the customer must direct which securities to sell. (If a maintenance call is not met it is the BD who determines which securities to sell, not the customer.) ACCURATE: - Customers are not entitled to an extension of time to meet a margin call. - Customers can lose more money than initially deposited. - Firms can increase their in-house margin requirements without advance notice.

Cum Rights vs. Ex-Rights

*Investor who buys stock Cum Rights - Receives the right Ex-Rights - Does NOT receive the right Many investors prefer to sell their rights rather than exercise them. Because those rights enable the holder to buy the stock at a price below the current market, they have a value. The exam may ask you to compute the theoretical value of a right. It makes a difference if it is trading cum rights or ex-rights. Market Price - Subscription Price -------------------------------------- Number of rights to purchase 1 share *The easy way to remember is this: When the question asks for the value of a right before the ex-date (cum rights), the formula is with 1. If it ask for the value of a right on or after the ex-date, it is without the 1.

Treasury Strips

*Issued by US Treasury *Zero coupon bond issued by US Government. MINIMAL investment risk. *Backed in FULL by the US Government. *Do NOT make regular interest payments (Pays NO periodic interest) *Quoted based on Yield To Maturity A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? - U.S. Treasury STRIPS maturing in 18 years *STRIPS are issued at a discount, and are backed by the U.S. Treasury. Purchasing these maturing in 18 years gives the client a guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bonds will certainly pay off at maturity, but there is no growth potential. The same problem plagues the municipal bonds. Common stock, no matter how respectable the company is today, offer no guarantees for the future.

T-Notes Pricing and Denominations

*Issued in denominations of $100 to $5 Million *Mature at par or they can be refunded (2-10 years) *Issued, quoted and traded as a percentage of par in 1/32% Example: A quote of 98.24, which can also be expressed as 98-24 or 98:24, on a $1,000 note means that the note is selling for 98 24⁄32% of its $1,000 par value. *Book Entry Form Example: A customer purchases ten 8% Treasury notes at 101-16. What is the dollar amount of this purchase? *$10,150 Though the denomination of the T-notes purchased is not given, always assume par ($1,000) unless told differently in the question. Remember that government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 101 plus 1/2 = $1,015; $1,015 × 10 bonds = $10,150.

T-Bill Pricing and Denominations

*Issued in denominations of $100 to $5 Million *Maturities of 52 weeks or less. *52-week bills are auctioned every 4 weeks *Others, such as 4-week and 26-week are auctioned WEEKLY *Quoted on a yield basis and sold at a discount from par. (Bid HIGHER than ask price) (equals lower dollar price) (Bigger discount, lower the price) EXAMPLE: Bid = 2, Ask = 1.5 *Zero coupon securities *Book Entry Form

Limit Orders

*Limit orders of ANY kind are NEVER for protection

Sell Limit Order

*More Conservative *What the absolute MINIMUM will to sell at Example: Sell 1,000 shares XYZ @35 (Execute at $35 or better (Higher)

Limited POA (Limited Trading Authorization)

*More common (Spouse granting LPOA for IRA Account) *Allows buying and selling of orders but not withdrawal of assets *All POAs stop at death

Bull and Bear Spreads

*More expensive contract (Higher premium) is DOMINANT *Calls with LOWER SP's have HIGHER premiums - B DEC 50 Call - S DEC 45 Call (This is in the $ first) (Bearish) *Puts with HIGHER SP's have HIGHER premiums: - S JAN 50 Put (This is in the $ first) - B Jan 45 Put (Bullish) ^^ ****On a price spread, if you are LONG, LOWER, SP = BULLISH ***buLLS (Long, lower, SP) The easiest way to identify these is to remember that bulls always buy low and sell high. That is, a bull spread is created when the investor buys the option with the low strike price and sells the option with the high strike. Please note, this is the strike or exercise price we are looking at, not the premium. If a bull spread is buying low and selling high, then a bear spread is buying high and selling low. *Bull calls don't deal with FINRA rules? If a customer buys 5 ABC Jan 40 puts and writes 5 ABC Jan 45 puts, which of the following statements are true? - Customer profits if the spread narrows - The customer is a bull *Because a put is a right to sell, the premium on the 45 puts is higher than that of the 40 puts. The customer is writing the put with the higher premium, so this is a credit spread, and the bullish investor will profit at expiration if the difference between the two premiums narrows as the contracts lose value. __________________________________________________________________________ John purchased a DMF May 90 call and simultaneously sold a DMF Jun 80 call. Which of the following best describes John's position? - Bear Spread *This investor has established a net credit diagonal call spread. He bought the lower premium call (higher strike and earliest expiry) and sold the higher premium call (lower strike and longest expiry). He hopes the spread will narrow to zero (if the market falls below 80 and both calls expire worthless) so he can keep all of the premiums. He is a bear, and so is the spread. *BE on a CALL Spread: - Add net credit to LOWER SP *BE on a PUT spread: - Subtract net credit from HIGHER SP

Other Types of Quotations

*Most common are Workable and Nominal 1) Workable Indication - Reflects a bid price at which a dealer will purchase securities from another dealer. Free to revise its bid for securities as market conditions change 2) Nominal or Subject Quotation - Indicates a dealer's estimate of a security's market value. Provided for informational purposes ONLY and are permitted if the quotes are labeled as such. Apply to ALL municipal bond quotes distributed or published by any dealer 3) Holding a quote - May hold for a certain time. (OUT-FIRM with recall quote) -- Firm for an hour (or half hour) with a 5 minute recall period. Allows to search for better quote before selling. *Receiving an out-firm quote allows dealers to try to sell bonds that they don't own, knowing that if they find a buyer within the allotted time, they can buy the bonds at a fixed price from the firm providing the out-firm quote.

Fair Prices and Commissions Rule (G-30)

*Municipal securities are exempt from the FINRA policy (Corporate securities follow FINRA 5% policy) *BD's CANNOT charge a commission and a markup or markdown on the same transaction *Must be listed on the customer confirmation - FMV of the securities at trade time; - Total dollar amount of the transaction; - Any special difficulty in doing the trade; and - The fact that the dealer is entitled to a profit.

506 (C) Regulation D

*Must prove you're accredited What is the MAXIMUM number of NONACCREDITED investors allowed in a regulation D exempt transaction under Rule 506(c)? - None (In order to sell under Rule 506(c) (Which allows advertising), all purchasers of the advertised securities MUST be accredited investors A company is offering a private placement, with the intent of selling shares to nonaccredited investors up to the 35 allowed for in Regulation D. Which of the following is true? - The offering may NOT be advertised *Advertising private placements is considered a solicitation to sell. If the securities are advertised, all purchasers must be accredited, or the company must reasonably believe they are. In this instance, the intent is to sell to up to 35 allowable nonaccredited investors; with that intent clearly stated, the offering could not be advertised to anyone.

Covered Vs Uncovered CALLS

*ONLY relates to SHORT calls -- no such term as a covered or uncovered long call Covered = Investor owns the number of shares "covered" by the option contract Covered 2 = With a long call with same or lower strike price and an expiration date no sooner than that of the short call. Uncovered = Investor writes a call option without owning the underlying stock or other related assets that would enable the investors to deliver the stock should the option be exercised. (Naked Write) *Naked call writers face UNLIMITED potential risk of loss *One advantage of writing a call option covered by shares of underlying stock is - Immediate income is generated

Interest Rates

*Raising interest rates (Tighten money): - Contracts economy - Bearish - Fights inflation *Lowering Interest Rates (Loosen Money) - Expands economy - Bullish - Risks inflation

In April, a customer buys 1 MCS Oct 50 call for 9 and sells 1 MCS Jul 50 call for 4. What will the customer's profit or loss be if he buys back the July call for $1 and sells the October call for $12?

- $600 Profit The net gain is $600 because the client paid a total of 10 (9 + 1) and received a total of 16 (12 + 4). 1600 - 1000 = $600

Short Straddle (Little Volatility - Flat - Neutral - Stable)

*SELL a Call and SELL a Put (Short Straddle) Short Straddle = Expects that the stock's price will not change or will change very little. The investor collects two premiums for selling a straddle. The investor has created a short straddle by selling a call and a put with the same strike price and expiration date. *Same month and SP Gain: - Between BE points - Maximum = Total Premium Loss: - Outside BE points - Maximum = Unlimited S - Short Straddle I - Inside BE's L - Long Straddle O - Outside BE's

In The Money

*The holder of an in-the-money option contract gives a do not exercise instruction (notice) to your broker-dealer. This notice - Is used to avoid automatic exercise at expiration *Options that are at least $0.01 in-the-money at expiration will be automatically exercised unless a do not exercise instruction or notice is given. If the holder of such a contract does not want the automatic exercise to occur, this notice must be given before expiration.

Which of the following would not be a concern for an investor writing a naked option?

*The premium the investor must pay for the contract Concerns: - Possibility of exercise - Risk/reward ratio - Loss potential

A Western account underwriting of $100 million in municipal bonds is established. A member firm agrees to underwrite 10% of the issue and sells out its entire allotment of $10 million. However, some of the other firms participating in the underwriting are unable to sell their full allocation, and $15 million of the bonds remain unsold. What is the financial obligation of the underwriting firm who sold their entire allotment?

- $0 *Divided liability in a Western account means that if a member meets its commitment, it has no further liability for unsold bonds. If that had been an Eastern account, the member would be obligated for 10% of the unsold bonds, or $1.5 million.

When the inside market (best bid and best offer) for XYZ stock was 17.30-17.60, a market maker bought 100 shares from a customer at 16.90. At the time of the trade, the market maker's market was 17.25-17.70. What was the amount of the markdown?

- $0.40 *Markdown is always based on the inside quote. In this case, the inside bid is 17.30 and the difference between that and the 16.90 buying price represents a $0.40 markdown.

The DERP Corporation has a rights offering. The common stock is currently selling at $45.50. DERP is issuing one new share of stock at $40 per share for each 10 shares owned. What is the theoretical value of one right when the stock is traded ex-rights?

- $0.55 *The formula for the theoretical value of a right when it is ex-rights (the buyer doesn't get the rights) is (M ‒ S) ÷ N where M = market price of the stock, S = the subscription price, and N = number of rights needed. Plug in the numbers and you have ($45.50 ‒ $40) divided by 10. That is $5.50 divided by 10 or $0.55 each

A corporation plans to issue stock to the public at $10 per share. If the manager's fee is $0.10 per share, the underwriting fee is $0.25 per share, the concession is $0.45 per share, and the reallowance is $0.20 per share, the spread is

- $0.80 *In a corporate offering, the spread has three components: the manager's fee, the underwriting fee, and the concession. The math here is $0.10 plus $0.25 plus $0.45 = $0.80. The reallowance is not a separate item; rather, it is part of the $0.45 concession and represents a give-up if a member of the selling group sells to a FINRA member firm that is not a member of the selling group.

A customer's restricted margin account shows the following: LMV $30,000 DB $16,000 SMA $0 If the customer sells $2,000 of securities, how much could be withdrawn from the account?

- $1,000 *In this restricted account, half of the sales proceeds will be used to reduce the DB balance to $15,000 and half of the sales proceeds are released to the special memorandum account (SMA). Therefore, when $2,000 of stock is sold, $1,000 is credited to SMA. This is the amount that can be withdrawn from the account.

If a customer has a long margin account with a market value of $12,000, a debit balance of $8,000, and special memorandum account (SMA) of $2,000, how much can the customer withdraw from the account?

- $1,000 *SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. In this account, maintenance equity is $3,000 (25% of $12,000),0 and the current equity in the account is $4,000 ($12,000 MV − $8,000 DB). Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000.

In an existing margin account with special memorandum account (SMA) of $2,000, if a customer wishes to buy 300 shares of ABC at $20 per share, how much must the customer deposit?

- $1,000 *The customer wishes to purchase $6,000 worth of stock, and the Regulation T requirement is $3,000. There are two ways to solve this question; pick the one you find easiest to understand. SMA represents money that may be borrowed to purchase additional securities. With a Regulation T requirement of $3,000 (50% of the new purchase) and $2,000 already in SMA, an additional $1,000 deposit is required to meet that $3,000 call. Alternatively, the SMA has buying power of 2:1 when Regulation T is 50%, so $2,000 of SMA will purchase $4,000 of stock. Of the remaining $2,000 balance, the broker will lend 50%, so the customer must deposit $1,000.

Another TIPS Problem An investor purchases a TIPS bond with a 3% coupon. During the first year, if the inflation rate is 8%, the principal value of the security at the end of that year will be closest to

- $1,081.60 The principal value of a TIPS bond is adjusted semiannually by the inflation rate. The exact calculation would be $1,000 × 104% × 104%, which equals $1,081.60. Each six months, the interest is paid on that adjusted principal and that is why the security keeps pace with inflation. There is a shortcut that will always work on the exam. Just recognize that the principal value increases based on the inflation rate compounded semiannually. Take the simple interest rate and choose the next highest number. In this example, 8% simple interest would be $80 (which would always be one of the choices). Because the computation is done twice per year, the compounding effect makes the correct choice slightly higher.

One of your clients with a margin account is concerned about recent declines in the market price of securities in her portfolio. The current market value of her holdings is $2,100,000, and the debit balance is $900,000. She would like to know how low the value can go before she receives a margin maintenance call. You would reply

- $1,200,000 *The computation for this question is the debit balance ($900,000) divided by 0.75 and that is equal to $1,200,000. At that point, the equity in the account is $300,000, which is equal to 25% of the long market value.

A corporation in the 35% tax bracket reports operating income of $4 million for the year. The firm also received $200,000 in preferred dividends from domestic corporations. Assuming no other items of income or expense, what is the company's tax liability?

- $1,435,000 *The corporation's $4 million operating income is taxed at a rate of 35%. For tax purposes, corporations can exclude 50% of all dividends received from domestic common and preferred stocks. Thus, 50% of the $200,000 received from preferred dividends is taxed at the 35% tax rate ($200,000 × 50% = $100,000). The $4 million in income plus the $100,000 in taxable dividends equals $4.1 million, and $4,100,000 multiplied by a 35% tax rate equals taxes of $1,435,000.

One of your existing cash account customers opens a new margin account. The initial activity in the account is the purchase of $12,000 CMV of ABC and the short sale of $10,000 CMV of XYZ. With Regulation T at 50%, what is the amount of the initial margin call?

- $11,000 *A margin account containing long and short positions is known as a combination or mixed margin account. In a mixed-margin account, it is generally easiest to figure the transactions separately. Whether a long purchase or a short sale, the initial margin requirements are the same: 50% of the transaction. The investor needs $6,000 ($12,000 times 50%) for the purchase and $5,000 ($10,000 times 50%) for the short sale.

A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty-two years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is

- $11,750 *Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Because the investor is older than 59½ (38 + 22 = 60), there is no additional 10% penalty tax. Effectively, this is a 25% tax on $47,000.

In a new margin account, a customer buys 300 shares of ABC at $40 per share, 100 shares of the Ajax Mutual Fund at $24, and 10 PDQ Aug 30 calls at 4. The customer will receive a margin call for

- $12,400 *The customer must pay 50% of the value of the stock and 100% of the value of the mutual fund shares and the options because these securities are nonmarginable and require full payment. To calculate the total payment required, add $6,000 (50% of $12,000) plus $2,400 (Ajax) plus $4,000 (PDQ calls) to arrive at $12,400.

A customer's long margin account contains the following securities: 100 shares of DEF, CMV $40 per share 200 shares of AMF, CMV $50 per share 100 shares of KLP, CMV $80 per share The current debit balance in the account is $10,800. If each of the securities held in the account were to appreciate by $5 per share, the equity in the account would be

- $13,200 *Before the $5 increase, the total long market value in the account is $22,000 and, therefore, the equity is $11,200 ($22,000 - $10,800 = $11,200). If each of the 400 shares in the account increases by $5, which represents an increase of $2,000 in long market value, the equity will increase by the same amount. After the increase, the long market value is $24,000 and the equity is $13,200 ($24,000 - $10,800 = $13,200).

If an M&N 1 corporate bond issued at par with a 6% coupon is later purchased in August for 97 plus accrued interest of $16, how much taxable interest must the investor report for the year?

- $14 *The purchaser of a bond pays the seller the interest that has accrued since the last interest payment date. A purchaser in August will pay the interest that has accrued since May 1. Then, on November 1, the investor will receive the entire six months of interest. We are told that the investor paid $16 in accrued interest. That is income to the seller. Then, when the November payment of $30 (6% coupon is $30 semiannually) is made, the investor must report the amount over the accrued interest paid out as income. In our question, that is $30 minus $16 = $14.

A customer's margin account shows a debit balance of $10,000. Federal law permits the broker-dealer to rehypothecate a maximum of

- $14,000 of the customer's margin securities *When a customer buys securities on margin, the broker-dealer holds the purchased securities as collateral for the margin loan. That is known as hypothecation. In most cases, broker-dealers rehypothecate the securities to a lending institution to recover the funds they loaned to the margin client. SEC rules limit the rehypothecation to 140% of the customer's debit balance (140% × $10,000 = $14,000).

A convertible preferred stock with a par value of $100 is currently trading at $125 per share. The conversion ratio is 5:1. If the common stock is trading at $30 per share, what must the preferred stock's price be to be at parity?

- $150 *The math is 5 × $30 = $150. The logic is, you can convert the preferred stock into five shares of the common. If the common is trading at $30 per share, to be equal, the preferred stock must be selling for five times that price.

An investor writes 1 XYZ 180 call at 6.65. If the investor makes a closing purchase at the call's intrinsic value when the stock is at $184.75, he realizes a gain of

- $190.00 *The investor received a premium of $665. The position was closed with a purchase at intrinsic value: $475. The net profit is the difference, or $190. Premium - Intrinsic Value = TV

A customer is long 200 shares of MTN at 30 and 400 shares of DWQ at 20 in a margin account. If the debit balance in the account is $8,000, and the customer sells 200 DWQ shares for $4,000, the credit to special memorandum account (SMA) is

- $2,000 *Because this account is below 50% margin, the account is restricted ($6,000 equity divided by $14,000 market value equals 42.8% equity). When securities are sold in a restricted account, 50% of the proceeds are released to SMA. Because $4,000 worth of securities were sold, $2,000 (50%) is credited to SMA.

A customer opens a new margin account, and the first trade is the short sale of 100 shares of ABC, at a price of $18 per share. What is the required margin deposit?

- $2,000 *The minimum of $2,000 is never waived for short sale margin requirements. If the short sale calculation is less than $2,000 ($1,800 in this case), the customer is still required to deposit the $2,000 minimum.

An investor redeems 200 shares of ABC Fund, which has no redemption fee. If the quote is $12.05 bid $13.01 asked, what amount will the investor receive?

- $2,410.00 *If a mutual fund has no redemption fee, the investor will receive the bid price per share (net asset value) multiplied by the number of shares being redeemed. In this case, the investor would receive $2,410 ($12.05 × 200 shares).

A corporation has $20 million net income after taxes, 7 million common shares outstanding, and $15 million of 6% preferred stock ($25 par). What is the corporation's earnings per share (EPS)?

- $2.73 *Begin by calculating how much of the net income is available for common stockholders (net income after taxes minus preferred dividends results in the earnings available for common stockholders). The preferred stockholders received $900,000 in dividends ($15 million par × 6% = $900,000), or 600,000 shares × $1.50 per share = $900,000). After subtracting $900,000 from the net income of $20 million, this leaves $19.1 million (earnings available for common stockholders). Compute EPS (earnings available for common ÷ number of common shares outstanding = $19.1 million ÷ 7 million shares = $2.73 per share EPS). **Dividing net income after taxes, interest, and payment of preferred dividends by the number of common shares outstanding determines EPS

In a new margin account, a customer sells short 1,000 shares of XYZ at $30 per share and deposits the required margin. If the stock subsequently falls to $25 per share, the equity in the account is

- $20,000 *When selling short, the initial credit balance is the sum of the proceeds of the sale ($30,000) plus the 50% Regulation T margin requirement ($15,000) or $45,000. The beginning equity is $15,000 (CR − SMV = EQ, or $45,000 − $30,000 = $15,000). If the market value falls to $25,000, equity is determined as $45,000 minus $25,000 equals $20,000.

A customer has the following accounts: Market value: long account $35,000; short account $40,000 Balance: long account (DR) $23,000; short account (CR) $60,000 SMA: long account $3,000 Regulation T: 50% What is the combined minimum maintenance requirement for the long and short margin positions?

- $20,750 *The minimum maintenance for long accounts is 25% of the LMV (25% × $35,000 = $8,750). The minimum maintenance for short accounts is 30% of the SMV (30% × $40,000 = $12,000). In this case, $8,750 plus $12,000 equals a combined maintenance of $20,750.

DWQ declares a quarterly cash dividend of $0.20. After the ex-dividend date, what will be the exercise price of a listed DWQ May 25 call option?

- $25.00 *Because a listed option is not adjusted for a cash dividend, the exercise price of a DWQ May 25 call option remains the same: $25.

The XYZ Corporation's A-rated convertible debenture is currently selling for 90. If the bond's conversion price is $40, what is the parity price of the stock?

- $36 Per Share If the bond's conversion price is $40, it means the bond is convertible into 25 shares ($1,000 par value divided by the $40 conversion price). Parity means equal, so what does each share have to be worth so that 25 of them are equal to $900? Dividing $900 by 25 shares results in a parity price of $36. That does not mean the stock is selling for $36 per share (probably a bit less), but at $36, holding the bond or converting into the stock gives the investor equal value. Some students quickly see that the bond is 10% below its par value, so the stock, to be equal, must be 10% below the conversion price. Take 10% off $40 and the result is $36. Either way works.

A client enters a buy stop order for 100 shares of XYZ at 40. Trades then occur at 38, 39, 39.90, 40.05, 40.10, and 39.78. At what price is the order TRIGGERED?

- $40.05 *The order is triggered as soon as the price gets to 40 or higher. That would be the trade at 40.05. A typical use of a buy stop order is to protect a short stock position. Because the short stock position has unlimited potential loss, the short seller can gain protection by entering a buy stop order. That order is entered at a price above the current market (the short seller is hoping the price will fall), but if the price reaches or exceeds the stop price, the stop will be triggered. At that time, a market order is entered and the client pays the next price (which could be more or less than 40). In this case, the next price is 40.10, and although not the answer to our question, that is the likely price per share paid by the client.

If a customer buys 1 FLB Oct 50 call at 3 and she exercises the option to buy 100 shares when the market is at 60, what is the cost basis of the 100 shares?

- $5,300 *The cost basis of the 100 shares is the total amount the investor spent to acquire them. She paid $300 to purchase the call option. When she exercised the call, she purchased 100 shares of FLB at $50 per share for $5,000, so the cost basis is $5,300.

Your 66-year-old customer invested $35,000 in a nonqualified variable annuity. It now has a value of $55,000, and your customer wishes to make a random withdrawal of $30,000. What is the tax liability that results if the customer is in the 28% tax bracket?

- $5,600 *Partial or random liquidations of a variable annuity are taxed on a last-in, first-out (LIFO) basis, which means that the last dollars into the account, the earnings, are withdrawn first. Of the $30,000 withdrawn, $20,000 represents deferred earnings or income that is now taxable at the 28% rate (0.28 × $20,000 = $5,600). No penalty applies because the investor is older than age 59½.

If a customer's margin account shows a long market value of $6,000 and a debit balance of $5,000, the maintenance margin call will be for

- $500 *If a customer's margin account shows a long market value of $6,000 and a debit balance of $5,000, the maintenance margin call will be for

If a customer writes 1 ABC Nov 60 put at 3.50, and the put is exercised when ABC is 57.50, the customer's cost basis in ABC stock is

- $56.50 *At exercise, the premium of the contract affects the cost basis of the stock acquired. Because the premium of 3.50 was received when the put was written, the cost basis of the stock will be $60 per share less the premium, or 56.50.

An investor purchases 100 shares of Affiliated Grain Processors (AGP) common stock at $62 per share. The FINRA member firm handling the transaction has a commission rate of $0.02 per share. How is the trade reported on the consolidated tape?

- $62 *The consolidated tape is a high-speed, electronic system that reports the latest price and volume data on sales of exchange-listed stocks. The price shown does not include commission or other charges.

An investor purchased one unit of a real estate limited partnership. The cost of the unit was $20,000. The investor's allocable share of nonrecourse debt was $50,000. During the first year, the investor received an income distribution of $5,000. What is the investor's current tax basis?

- $65,000 The $20,000 purchase price of the unit is basis. Because this is a RELP, nonrecourse debt increases basis. That addition of $50,000 increases the basis to $70,000. Distributions reduce basis, and there was one of $5,000 bringing the basis down to $65,000. Remember, it is only real estate where nonrecourse debt increases basis. Recourse debt increases basis in any DPP.

In a new margin account, if a customer buys 300 XYZ at 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the Regulation T margin requirement is

- $7,200 *The Regulation T requirement for purchasing $14,400 (300 × 48) of stock is 50%, or $7,200. The Regulation T requirement for writing covered calls is zero. Therefore, the Regulation T requirement for establishing both of these positions is $7,200. Note that this question asks for the Regulation T requirement, not the deposit that must be made. The margin call (deposit) would be $6,900 because the requirement is reduced by the $300 premiums already received into the account for the calls. After depositing $6,900, the customer will have $7,200 in the account, which meets the requirement.

In a new margin account, a customer sells short $60,000 worth of ABC stock and deposits $30,000 to meet the Regulation T requirement. If the value of ABC falls to $55,000, the special memorandum account (SMA) balance in the account would be

- $7,500 *For every $1 decrease in market value in a short account, $1.50 of SMA is created. Therefore, if the market value falls by $5,000, the SMA balance would be $7,500.

If a customer writes 1 Jul 80 put at 7, and the put is exercised when the market price is at 70, for tax purposes, what is the effective cost basis of the stock put to the seller?

- $73 *The cost basis is 80 (the price at which the writer must buy) minus 7 (the premium the writer was paid), or $73 per share.

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes?

- $75 *Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule: investors who sell securities at a loss and repurchase them, including their equivalents, 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 ÷ 40) of KLP common stock. Hence, the investor has bought back the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed.

A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund?

- $8,30 *The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. In this case, the NAV is $7.80 and we are told the sales load is $0.50. Adding the two numbers together equals the public offering price of $8.30. The underwriter's concession of $0.12 is part of the $0.50 as is the $0.15 administrative fee.

An aggressive investor buys ABC stock with a beta of 1.7. The S&P 500 has a 10% rate of return for the year, and ABC's return is 12%. What is the alpha for ABC?

- -5% *With a beta of 1.7, an investor would expect ABC stock to be 70% more volatile than the general market as measured by the S&P 500. Remember, the beta of the market is 1.0. Therefore, we would expect to see the stock return 17% based on the S&P 500's 10% return. However, the actual return on ABC was only 12%. Alpha measures the difference in the actual return vs. the expected return. The difference between the expected return (sometimes referred to as the required return) of 17% and the actual return of 12% is a negative 5%. That represents an alpha of -5% for ABC stock.

Another Tax Equivalent Yield Question If an investor in the 27% federal marginal income tax bracket invests in municipal general obligation public purpose bonds nominally yielding 4.5%, what is the tax-equivalent yield?

- 0.0616 The formula for computing tax-equivalent yield is nominal yield divided by (1 − federal marginal income tax rate), so 0.045 / (1 − 0.27) = 6.16%.

New offering: 800,000 units at $6 per unit. Each unit has two shares of common stock and one warrant. Each warrant is to purchase half a share of common stock. Based on this information, how many shares of stock will be sold, and how many warrants will be sold?

- 1.6 million shares and 800,000 warrants *Warrants may be distributed to stockholders in an underwriting as part of a unit. The warrant is a form of bonus to entice investors to purchase the unit. As each unit contains two shares, 1.6 million shares are being distributed. As each unit also includes one warrant, 800,000 warrants are being distributed.

An investor is long 10 XYZ 60 calls. After XYZ goes "ex" a 50% stock dividend, the adjusted position will be

- 10 XYZ Oct 40 calls, contract size 150 shares. *This question is testing your knowledge of how an option is adjusted when the underlying stock goes ex (ex-dividend) due to a stock dividend as opposed to a cash dividend. When that happens, the number of contracts which the investor owns is generally not adjusted. What does change is how many shares each contract controls. Before the stock trades ex, the investor owns 10 calls and the strike price is $60. A 50% stock dividend is declared, so each contract is increased to control 150 shares. The aggregate share price for the initial transaction was $6,000, 10 contracts exercisable at $60 per share. After the transaction, the customer owns 10 contracts, which control 150 shares. In order for the aggregate amount to be the same $6,000, the exercise price of the calls will be reduced to $40 per share (150 shares times $40 equals $6,000).

A bond with 25 years to maturity, 7% coupon, quoted on a 6.25% basis is callable in 10 years at 103, 15 years at 102, and 20 years at par. On the customer's confirmation, the dollar price quoted must be based on

- 10 Years to call * This is a premium bond. With premiums, the years to call will be lower than the years to maturity. The question becomes which call date should be used. As a rule of thumb, always use the near-term (first) in-whole call date.

If a contract calls for a delivery between member broker-dealers of 500 shares of stock, all of the following certificate combinations would be a good delivery conforming with the FINRA Uniform Practice Code except

- 10 certificates for 30 shares each and 4 certificates for 50 shares each. *Good delivery between member firms requires delivery of certificates of 100 shares, in multiples of 100, or the ability to put certificates of less than 100 shares into stacks of 100 shares. Note that the 10 certificates, each for 30 shares, could not be stacked in units of 100. Each of the five certificates for 40 shares can be combined with one of the five certificates for 60 shares. Clearly, 40 plus 60 equals 100, and that can be done five times. Likewise, the 10 certificates for 50 shares can be taken two at a time, giving us five pairs of 100 shares. The 200- and 300-share certficates are multiples of 100 (they end in 00), and that makes them acceptable.

To meet a Fed call, a customer must deposit which of the following?

- 100% of the call in cash - 200% of the call in marginable security *To meet an initial call, the customer can deposit cash equal to the call or deposit fully paid-for marginable securities with a market value equal to twice the call. For example, if the trade is for $10,000, the margin call will be 50% of that, or $5,000. If the customer wishes to deposit fully paid-for marginable securities, it has to be in an amount sufficient for the BD to lend the account $5,000. With Regulation T at 50%, $10,000 of free and clear stock has a loan value of $5,000—exactly what is needed for the margin call.

Excess margin securities are defined as securities in excess of

- 140% of the customers debit balance *Excess margin securities are securities in excess of 140% of the customer's debit balance. Margin securities (140% of the debit balance) are at a bank collateralizing the customer's debit. For example, if a customer purchases $20,000 of stock, the customer will put up $10,000 and borrow $10,000. The member will take $14,000 of the stock to a bank to collateralize the $10,000 debit. The balance ($6,000) of the stock must be placed in segregation (excess margin securities).

FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the overall expenses and amount of broker-dealer compensation considered fair and reasonable. That limit is

- 15% of the GROSS proceeds *If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. The 10% limitation is on the amount of compensation received by a member firm for selling interests in the DPP. The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners. The 5% is the FINRA markup policy and that does not apply to DPPs.

A customer has placed an open order to buy 1,600 shares of GHI at $60. GHI declares a 25% stock dividend. On the ex-date, this order is considered a buy limit order for

- 2,000 shares at $48 *The order is adjusted on the ex-date. The number of shares increases by the percentage of the stock dividend, and the specified price is reduced to compensate. In this case, the number of shares increased to 2,000 (1,600 + 25%), and the specified price is adjusted to $48 per share. To get the adjusted price, divide the total value of the original market order (1,600 × $60 = $96,000) by the new number of shares ($96,000 ÷ 2,000 = $48). The order's total market value, $96,000, remains the same.

XYZ Corporation declares a 4-for-3 stock split. An investor long 600 shares will receive how many additional shares?

- 200 Shares *With a 4-for-3 split, the investor will receive additional shares equal to one-third of the current holdings. For every three shares held, an investor receives a fourth share. The investor will now have 800 shares, but the question is only asking about the additional shares, not the total.

A trade for 325 shares may be settled by all of the following deliveries except

- 4 certificates for 80 shares and one for 5 shares *The Uniform Practice Code requires that deliveries be made in certificates that can be aggregated into lots of 100s or multiples of 100. There is no way to take the 80s and the 5 and make a lot of 100. With 325 one-share certificates (like paying a bill with pennies), you can make three separate stacks of 100 and then one of 25. The 90s and 10s can be aggregated and give three stacks of 100 with the final 25 being in one certificate. The 300-share certificate is a multiple of 100, and the remaining certificates add up to the odd lot of 25 shares.

ZOO is trading at 50.63. Your customer, who owns 100 shares of the stock, places an order to sell ZOO at 50.25 stop limit. The tape subsequently reports the following trades: ZOO 50.63 50.75 50.13 50.17 50.27 Your customer's order could first be executed at

- 50.27 *The sell stop limit order is elected (triggered) at the first trade of 50.13; when the stock trades at or below the stop price of 50.25, the order becomes a sell limit order at 50.25. The order can be executed at that price or higher (the limit placed by the customer). The next trade reported after the trigger is reached is below the limit price. The order could be executed at the next trade of 50.25 or higher, and that is the trade at 50.27

If a customer places an order to buy 200 shares of ABC stock at $25, and he wants to meet the margin call by depositing fully paid listed stock currently trading at $10, how many shares must he deposit?

- 500 *To meet a margin call with marginable stock, an investor must deposit twice the value of the call. In this example, the margin call on the $5,000 purchase is $2,500. Because the customer must deposit $5,000 of marginable stock, at $10 per share, the customer must deposit 500 shares of the stock to meet the call. $25 X 200 = $5,000 / 10 = 500

A customer gives you a limit order to buy 500 shares of XYZ at 30. You erroneously buy 1,000 shares at 29. The customer is entitled to

- 500 shares at 29. *The customer is entitled to 500 shares at 29. A buy limit order may be executed at the limit price or better (lower). If the firm buys more shares than indicated on the order ticket, the customer cannot be held responsible.

ETF Question Your customer owns a leveraged ETF having a performance goal of 200% of the underlying index. When purchased two days ago, the ETF was priced at 50. If the index was down 10% the first day and up 20% the second day, what is the value of the ETF today if it performed as it was intended to?

- 56 Priced at 50 when purchased, after the first day's 10% decrease in the index, the 2× leveraged ETF would be down 20% (20% × 50 = 10-point decrease) to 40. After the second day's 20% increase in the index, the 2× leveraged ETF would be up 40% (40% × $40 = 16-point increase) to 56. On the calculator provided at the testing center, you could arrive at the correct answer by taking the original 50, multiplying times 80% (the 10% decrease is doubled means the stock is only 80% of what it was) and then multiplying that result by 140% (2× the 20% increase).

Of the following callable bonds, which confirmation must show yield to call?

- 6% municipal, basis 5.5%, due 2028 *The only bond priced at a premium is 6% municipal, basis 5.5%, due 2028. On a premium bond, the yield to call will be lower than the yield to maturity.

A customer in the 28% tax bracket owns a 9% ABC Corporation 20-year bond that is currently yielding 8.7% to maturity. She is considering buying tax-exempt securities. What is the comparable yield for a municipal bond?

- 6.480% *When comparing the yield of a taxable corporate bond to a tax-free municipal bond, use the formula: interest on corporate bond × (100% − tax bracket). In this case, 9.0% times 0.72 equals 6.480%. Remember to use the coupon rate, not the yield to maturity. After all, the investor is receiving $90 per year in taxable interest on each bond. In this case, a tax-exempt bond yielding more than 6.480% will provide a higher after-tax return.

Your client has entered a limit order to buy 600 shares of DMF at $50 per share. DMF declares a 10% stock dividend. How would this order be adjusted on the ex-date?

- 600 Shares at $45.45 *In this example, adjust only the share price: $50 ÷ (1 + 0.10) = $45.45. The number of shares in the order is not adjusted unless the shares can be increased by a full round lot (100 shares).

One of your customers has been regularly investing into the shares of an aggressive growth fund. The investor has a long time horizon and does not expect to touch the account for a number of years. In the event of an emergency, federal law would require redemption proceeds forwarded within

- 7 Dyas *One of the provisions of the Investment Company Act is that redemption requests must be honored within 7 days.

A corporate bond pays interest on a J/J 15 schedule. An investor purchasing these bonds on Friday, April 17, would pay accrued interest for

- 96 Days *A J/J 15 schedule means the bond pays interest on January and July 15. Corporate (and municipal) bonds count each month as 30 days. As with all bonds, the accrued interest is paid from the previous interest payment date up to but not including the settlement date. A trade made on Friday the 17th settles the following Tuesday (T+2), April 21. The previous interest payment was January 15. Do the following simple calculation: Settlement date of 4/21 Minus last interest - 1/15 Result is 3/06, or 3 months plus 6 days With each month being 30 days, the answer is 90 + 6 or 96 days.

An investor buys 2 LMN 40 calls and pays a premium of 4 each, and also buys 2 LMN 40 puts and pays a premium of 2.50 each. At the time of purchase, LMN is trading at $40.75. On the expiration date, LMN is trading at $32.50. If the investor closes her position for its intrinsic value, excluding commissions, the investor realizes

- A $200 profit *Closing out a position is the opposite of the opening transaction. In this situation, the investor opened by buying two calls for a total of $800, and closed them out by selling for their intrinsic value. (Calls have intrinsic value when the market value is above the strike price; in this situation, there is no intrinsic value.) The investor also bought two puts for a total of $500 and closed them out by selling for their intrinsic value of $1,500. (Puts have intrinsic value when the market value is below the strike price; in this situation, the intrinsic value is $7.50 per contract, or 40 − 32.50 = 7.5 × 2 = 15 × 100 shares = $1,500.) The resulting profit on the position is $200 ($1,500 − $1,300), the total of the premiums paid for all of the options.

You receive a not-held order from a customer who wants you to buy 1,000 shares of ABC when the price is right. Under NYSE rules, this order is

- A Day order *Unless the customer instructs you otherwise, not-held orders must be executed on the day received. *With a not-held order, the customer gives the firm's time or price broker the discretion as to time or price. Remember, however, that time and price alone do not require the order to be done in a discretionary account.

A customer, concerned about a possible pull-back in XYZ stock, instructs her broker to "Sell my XYZ stock if it falls to 40, but I don't want less than 39.75 for my shares." The broker should enter

- A Sell Stop Limit Order *A sell stop limit order would be appropriate (sell 100 XYZ 40 stop 39.75). Once the price of XYZ trades at or through (below) 40, the order is elected and becomes a limit order to sell at 39.75 or better (higher).

A municipal bond subject to a refunding call must be quoted at yield to call in which of the following instances?

- A bond at a premium callable at par *An investor's yield would be less on a premium bond if called at par rather than if allowed to mature. Thus, a registered representative must quote the lower potential yield scenario (in this case, yield to call).

If at expiration for XYZ options, XYZ stock closes at 40.15, which of the following open option positions will automatically be exercised by the Options Clearing Corporation (OCC)?

- A customer long 1 XYZ 40 call *At expiration, the OCC will automatically exercise open option positions if those positions are in the money by 0.01 or more. In this case, the customer's long 40 call position is in the money by 0.15. The member firm 45 call and the 40 puts are out of the money.

A customer who has, as part of her account holdings, unlisted REITS, as well as a limited partnership interest in an oil and gas program, may expect her servicing member firm to show

- A per share estimated value of the securities. *general securities member must include in a customer account statement a per share estimated value of a DPP or unlisted REIT security, in a manner reasonably designed to ensure that the per share estimated value is reliable.

All of the following option strategies could be effectively used in a BEAR market except

- A short straddle Could Be Used: 1) A Credit Call Spread 2) A Debit Put Spread 3) A Short Call Short straddles are appropriate only in flat or neutral markets. The writer will lose in a rising market (the call will be exercised) or a falling market (the put will be exercised). Short calls and short call spreads are bearish, as are debit (long) put spreads.

If an investor practices value investing, which of the following stock types is he least likely to purchase?

- A stock with an above-average price to earnings (P/E) ratio *A growth investor looks for stocks with above-average (P/E) ratios. Conversely, a value investor focuses on stocks with low P/E ratios, a low price-to-book value, and historically high dividend yields.

A married couple with a two-year-old child have $25,000 to deposit towards an investment to help meet the financial obligations for the child's college education. Given the following choices, which of the following is likely the most suitable investment?

- A treasury STRIP scheduled to mature in 16 years *Treasury STRIPs are zero-coupon bonds, backed in full by the U.S. government. Purchased at a discount and maturing at face value in the future, they are suitable investments for those wishing to save for anticipated future expenses, such as college tuition. A CMO maturing in five years doesn't align with the time horizon for this child's college education and carries other unsuitable risks. A money market fund would hardly meet the growth requirement needed to meet college tuition needs. For exam purposes, municipal bonds are a suitable choice only when something in the question indicates that the investor is in a high income tax bracket.

An investor owns 100 shares of the 4% $80 par convertible, callable, cumulative preferred stock issued by HBH Creations. With a conversion price of $20 and a current market price of $84, HBH issues a call of all of the outstanding preferred shares at $82. If the HBH Creations common stock is currently selling at $18 per share, what is likely the wisest choice for the investor?

- Accept the call at $82 *Although issuers generally exercise the call privilege when the common stock's price is above the conversion price, there are cases when the call is exercised with the hope of eliminating some of the preferred shares with their preferred dividend payout. Let's go through the math of this question. With a par value of $80 and a conversion price of $20, each share of the preferred stock is convertible into 4 shares of the HBH Creations common stock. If the investor converts, those 4 shares are currently worth $18 each or a total of $72 for each share of preferred converted. That being the case, the investor's decision is, "Do I convert and have stock worth $7,200 (remember, there are 100 shares of the preferred, each convertible into 4 shares of the common), or do I accept the call at $82 per share of preferred totaling $8,200?" Why not sell the preferred stock at $84? Because the moment the call is announced, the price of the preferred will fall. Holding on to the preferred stock doesn't make sense because after the call date, the preferred will no longer receive dividends.

Miranda is on the board of directors of a company whose common stock trades on the New York Stock Exchange. Three months ago, Miranda acquired several hundred shares of the company's stock in a private placement. The company is doing quite well, and Miranda turns in an order to buy 1,000 shares. As the registered representative handling this account, you would

- Accept the order as given *The first point to note is that restrictions apply only to the sale of stock by control persons, not purchases. The fact that the customer owns some restricted stock (private placement, three months ago) has no bearing on a new purchase. The short swing rule requires that profits made by control persons must be disgorged, but that only applies when the security is held less than six months. Nothing in the question indicates when Miranda plans to sell the stock. Form 144 is required when restricted or control stock is sold, not purchased.

If a customer sells a zero coupon bond before maturity, gain or loss will be the difference between sales proceeds and

- Accreted Value *Zero coupon bonds must be accreted for tax purposes. Each year, the annual accretion is taxable to the holder. In addition, the customer may adjust the cost basis of the zero upward by the amount of the annual accretion.

If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following except

- Adjustment Bonds Obligated: 1) Convertible Bonds 2) Debentures 3) Variable Rate Bonds Even if a corporation reports a loss, the corporation is obligated to pay interest on all of its outstanding debt except for income (adjustment) bonds. Adjustment bonds require interest to be paid only if ABC has sufficient earnings and the payment is declared by the board of directors.

Records Maintained for 3 Years

- Advertising - Trial Balances - Forms U4 and U5 and fingerprint cards for terminated personnel - Customer confirmations - Order Tickets - Other ledgers - List of every office where each associated person regularly conducts business - Associated persons' compensation records - Firms compliance and procedures manual

The credit rating for a municipality's debt would be adversely affected if funds needed to make payments exceeded funds available. This is an unfunded pension liability and can result if monies set aside to make future payments are not enough or if poor investment decisions deplete the funds.

- Aggressive *The credit rating for a municipality's debt would be adversely affected if funds needed to make payments exceeded funds available. This is an unfunded pension liability and can result if monies set aside to make future payments are not enough or if poor investment decisions deplete the funds.

When an outstanding bond issue is the subject of a refunding, the holders of those bonds have their claim on any pledged assets terminated. This is known as

- Defeasance *Defeasance occurs when an outstanding bond issue is paid off prior to maturity through a refunding. Once the creditors (the bondholders) have received their funds, any liens on assets or revenues are terminated.

SEC Regulation SHO mandates a locate requirement for short sales that is applicable to

- All short sales of equity securities - NYSE Issues - Nasdaq Securities - American depositary receipts traded on the Nasdaq Stock Market. - preferred stock traded on the NYSE. - over-the-counter equity securities. *This regulation mandates a locate requirement: before the short sale of any equity security, firms must locate the securities for borrowing to ensure that delivery will be made on settlement date. Does NOT apply to: 1) Nonconvertible bonds traded on the NYSE *Convertible bonds ARE considered equity securities

Negotiable Certificate of Deposit (CD)

- Also called Jumbo CDs (Mature in 1 year or less) - Minimum size is $100,000 (Most common is 1 Million) - Unsecured time deposits - No prepayment penalty - Allows initial investor to sell in open market before maturity date - Issued at face value (NOT a discount) - Pays semiannual interest *Jumbo CDs are insured (up to FDIC limit of $250K but NOT secured by any bank asset) - Banks version of an unsecured promissory note in the same way that a commercial paper is for corporations. *Interest-Bearing Instrument

Which of the following is contained in an official notice of sale?

- Amount of good-faith deposit required with the bid *The official notice of sale contains the information a syndicate needs to prepare a bid, including the amount of the good-faith deposit the syndicate must submit with the bid. The delivery date has not been determined. The syndicate develops the yield for each maturity and the agreement among underwriters. A notice of sale is published to provide syndicates with information on proposed new (primary market) issues.

For an oil and gas limited partnership (LP), allowances in the form of deductions are allowed by the IRS to be taken to compensate for a depleting resource. The allowance can be taken based on

- Amount of natural resources SOLD *Depletion allowances may be taken only once the oil or gas is sold and is based on the amount sold (depleted).

FINRA Rule 4530 states that each member shall promptly report to FINRA (but in any event not later than 30 calendar days) after the member knows or should have known of the existence of any of the following, other than when

- An associated person of the member is the subject of any disciplinary action taken by the member involving suspension, termination, the withholding of compensation or of any other remuneration in excess of $2,000. *In almost all cases involving violations or adjudications, FINRA Rule 4530 requires notification within 30 calendar days. That is also the case when an associated person of the member firm is the subject of any disciplinary action taken by the member involving suspension, termination, withholding of compensation or of any other remuneration in excess of $2,500, the imposition of fines in excess of $2,500, or discipline of any sort that would significantly limit the individual's activities on a temporary or permanent basis.

Tamika is a registered representative with Financial Engineers, LLC, a FINRA member broker-dealer. The firm uses an investment policy statement (IPS) to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat seven months from now. When using the IPS, this would be considered

- An investment constraint *Investment constraints are obstacles or restrictions that must be met in order to meet goals. In this case, we are dealing with a liquidity constraint—in seven months, cash will be necessary to make the purchase.

All sell orders must indicate whether they are long or short. In which of the following cases would the sell order be marked long?

- An investor has purchased the stock being sold but the trade has not yet settled. *A customer is considered long a security only if she owns the stock or has entered into an unconditional contract to buy the stock and will deliver the shares; owns convertible securities, has converted them, and will deliver; or owns an option, has exercised it, and will deliver. Otherwise, the sale is marked as a short sale on the order memorandum.

A customer with a moderate income from a secure job is in the 28% tax bracket. She has a small diversified portfolio and has $10,000 she would like to invest in a limited partnership. If she is willing to accept only a moderate amount of risk, which of the following limited partnerships would be the most appropriate recommendation?

- An oil and gas income program *The customer is not in a high tax bracket and would not be able to take full advantage of the tax benefits produced by an exploratory oil and gas program or by new-construction real estate limited partnerships. A raw land real estate partnership is usually speculative. Of the answers listed, the income and moderate risk from an oil and gas income program would be of greatest benefit to this investor. *Oil and Gas Advantages: 1) Depletion 2) Intangible Drilling Costs (IDC) 3) Potential Cash Flow and/or Income *Oil and gas LP's may NOT receive dividends *Oil and gas drilling MOST likely lead to largest amount of shelter *LEAST RISKY -- INCOME *Passive income can only be sheltered by passive loss, so the real estate income program will only add to the income. Oil and gas drilling programs allocate the majority of investment dollars to drilling. These are intangible drilling costs (IDCs), which are 100% deductible when drilling occurs. Undeveloped land has very little in the way of losses, and equipment leasing programs usually generate income shortly after starting. *An investor in oil and gas LP program is subject to economic consequences for: 1) Depreciation on tangible assets 2) Operating Losses 3) Recourse Loans A working interest in an oil and gas partnership entitles the holder to: - portion of the revenue - responsibility of the expense of extraction Program Sharing Arrangements (Oil and Gas): - Disproportionate Sharing - Reversionary Working Interest - Functional Allocation DPP 3 Programs: 1) Exploratory (Wildcat) 2) Developmental 3) Income (Production) 4) Sometimes combination

An investor buys a municipal bond at a discount. The bond carries a 3% coupon. At maturity, the bond will pay the face amount to the holder of the bond on the maturity date. In the meantime, the IRS requires accretion of the discount. That accretion is tax-exempt income when the bond is

- An original issue discount bond *If the discount is an original issue discount (OID), the annual accretion is not taxable. An OID means that the bond's issuance price in the primary market was below par (a discount). As an OID, the annual accretion is considered part of the interest being paid by the issuer and that is why it is tax exempt. However, if the discounted transaction were in the secondary market, then the annual accretion would be taxable as interest income. That does not affect the tax-exempt status of the coupon interest paid. Please note: It is highly unlikely that your exam will ask about the tax treatment of the accretion when a secondary market purchase of an OID municipal bond occurs at a price above or below its accreted value. As we show you in the LEM, the test could ask about capital gain or loss, but we do not expect a question about figuring the tax on the accretion in this unusual case.

You are asked to read the prospectus for a new issue of common stock for a client. You would expect the prospectus to include

- An overview and history of the issuer's business and any risks associated with the offering. *The prospectus will include: 1) Overview and history of the business 2) Risks associated with it. 3) The SEC disclaimer that is on the front cover 4) The effective date (Not the date of filing that is shown) *A legal opinion does not apply to common stock.

When participating in an underwriting of a new equity issue, FINRA rules would permit a member firm to grant concessions or other allowances to

- Another member firm *When engaged in an underwriting, a member can grant discounts and other concessions only to other member firms. A suspended member must be treated like a member of the general public (no discounts or concessions). Issuers are on the other side of the underwriting; they receive the proceeds, not a portion of the underwriting fees.

Under the Code of Arbitration Procedure, arbitrators fall into one of two categories: public or nonpublic arbitrators. Which of the following persons could not be a public arbitrator?

- Any person who worked in the financial industry for any portion of her career *Those who have worked in the financial industry for any duration during their careers will always be classified as nonpublic arbitrators. Certain professionals, such as attorneys and accountants, can be considered nonpublic if at least 20% of their revenues comes from representing financial industry firms or any parties to an arbitration. One time in five years is certainly not going to be 20% of their revenues.

Customer account statements must include the per-share estimated value of a direct participation program (DPP) or unlisted real estate investment trust (REIT) security held in the account. Which of the following does FINRA accept as an estimated value methodology?

- Appraised Value *For these securities, where a ready market does not exist, the estimated value must be based on an appraised valuation of the assets and liabilities of the DPP or REIT. This appraisal must be performed at least annually, by, or with the material assistance or confirmation of, a third-party valuation expert or service. The value must be derived from a methodology that conforms to standard industry practice. Because there is no market value, an alternative, such as appraisal, must be used. There is another method known as net investment, not gross investment. Tax basis is irrelevant to the current value.

One of your customers has made periodic purchases of shares of the Castel Growth Fund over the past several years. The customer has decided to take a profit and sell some of those shares. When the investor's tax return is prepared for the year in which the sale of those shares occurs, it is necessary to establish a cost basis of the shares sold. Which of the following methods is available for mutual funds, that is not available for determining the cost basis of stock?

- Average Cost Basis *The Internal Revenue Service allows using the average cost basis to determine the cost basis of redeemed mutual fund shares. Investors cannot use this method when selling shares of any security other than a mutual fund. The other methods of determining cost basis are FIFO and share identification. FIFO is the default method used by the IRS if an investor fails to choose. Share identification can frequently result in a lower tax bill, especially if the security was purchased at different intervals at varying prices.

An investor holding a broad-based diversified portfolio of stocks feels that the market, which has slowed recently, may be poised for a brief fall before it continues an upward trend long term. The investor does not want to incur the cost of selling a portion of their holdings or assume the risk of mistiming the market. A possible strategy would be to

- BUY an index PUT option *By not liquidating, the client can benefit if the market increases. Because the portfolio is broad-based and diversified, it should move with the market. An index option also moves with the market, and therefore, would be a good hedge vehicle. A long put should be used because it will increase in value if the market should decline.

A new client, age 25, earning $41,000 annually has saved $20,000 to allocate to an investment portfolio for the first time. The client conveys that while he would like to see some growth, an investment with moderate risk and some downside protection are important objectives for his first time investing. Aligning with the client's investment experience and objectives, which of the following would be the most suitable?

- Balanced Fund *A balanced fund, which consists of both equities and debt instruments, not only aligns with the growth objective but also offers some downside protection against falls in market due to the debt portion of its portfolio. Equity index funds move with the markets and offer no downside protection. A money market fund would not align with growth, and a municipal bond fund would have no benefit for an investor in a lower income bracket.

Records maintained for 6 years

- Blotters - Record of original entry - General Ledger - Assets and liabilities - Stock Record - All securities held by firm - Customer Ledgers - Customer statements - Customer Account Records - Designation of Principals (After designation ENDS) *When using the ACATS system to transfer a customer account from one member to another, the transferring member must keep records of the transfer for six years

Some analysts use an industrial corporation's balance sheet to arrive at what might be considered the intrinsic value per share of the enterprise. That calculation is known as

- Book Value Per Share *Book value per share is calculated by subtracting the liabilities and par value of preferred stock (if any) from the tangible assets as shown on the balance sheet. Common stock prices can be above, below or very close to the book value per share depending on the kind of industry and current economic conditions. If the company liquidated, holders of the common stock could receive something close to the book value, but that would depend on how the assets were valued. Earnings per share uses the income statement, not the balance sheet and has nothing to do with intrinsic value. As far as the exam, net asset value per share relates solely to investment companies, not industrial corporations. Retained earnings is only part of the company's book value and will be less than the book value.

Municipal Bonds

- Bought in OTC market **MOST suitable for investors with high tax bracket wanting INCOME for their investment account *When creating a muni bond portfolio, consider: - Geographic location - Credit rating - Source of funds backing the bond *Tax free interest payments are more suitable for those in higher tax brackets *Tax free interest is why municipal bonds are NOT considered suitable investments to be included in one's retirement account such as an IRA *If it's not a true public purpose bond, sometimes Muni bonds are FULLY taxable *Tax exempt income *If investor purchased MB in secondary market, what would be a factor in calculating the total dollar amount paid for bond? - The Settlement Date - The Dated Date - The Coupon Rate Municipal bonds are not normally sold short because -- The municipal bond market is illiquid

The manager of an equity fund wishes to hedge the fund's portfolio against a possible market decline. Of the strategies listed, to provide the best protection, the manager would buy

- Broad-based index puts *The best way to hedge a long position is to buy puts. In this case, the broad-based index would be a better match for the stock portfolio than a narrow-based index. **Traders in broad-based are MOST exposed to -- Systematic risk

An aggressive investor is willing to risk $25,000 to align with his bearish outlook on the overall market. He notes liquidity being important if he needs to divest quickly, and risk taken needs to be commensurate with the upside potential. Which of the following would align most suitably with these objectives?

- Broad-based market inverse index fund *Inverse, or reverse, funds attempt to deliver returns that are opposite of those returned by the index they are tracking. If the index fell, aligning with this investor's bearish market outlook, a broad-based inverse index fund should do well, generating positive returns as the index performs negatively. When shorting calls, gains are limited to the premiums collected, and losses are potentially unlimited, which embody too much risk with not enough gain. Hedge funds are not deemed to be liquid and can be eliminated based on the investor's desire to get out quickly. An index fund (not inverse or reverse) moves with the market, and losses would occur if the markets faltered as this investor expects.

Without any position in the stock, an investor wrote an ABC Jul 60 call for 6. On the expiration date, ABC is selling for 66, and the investor closes the position at the intrinsic value. For tax purposes, the investor has

- Broken even *ith the stock at 66, the call is 6 points in the money (call-up rule). That means the option will cost 6 points to close the position. The writer sold the option for 6 points and bought it back for 6 points. That results in breaking even.

If a customer buys 2 Canadian dollar 78 calls and writes 2 Canadian dollar 80 calls, this position is

- Bull call spread *Bull positions in options spreads are established by buying the option with the lower strike price.

For a customer interested in buying an inverse exchange-traded fund (ETF) by tracking the performance of the Standard & Poor's 500 index, which of the following market views would make that purchase most inappropriate?

- Bullish *Inverse (reverse) ETFs are designed to deliver returns that are opposite of the benchmark index they are tracking. Therefore, buying an inverse ETF that tracks the S&P 500 index at a time when the market outlook is bullish would be most inappropriate. If the index rises with the anticipated bullish market, the fund that delivers returns that are the opposite of the index would fall in value.

A customer sells short 1,000 XYZ at 60. Three months later, XYZ is at 44. Which two of the following strategies are the most likely the customer would use to protect her unrealized gain?

- Buy 1,000 XYZ 45 Stop - Buy 10 XYZ Mar 45 Calls *In this short position, the customer currently has an unrealized gain of 16. She stands to see her unrealized gain begin to erode if the stock price rises, so she could enter a buy stop order above 44 to allow herself to buy and cover her position if a price rise occurs. Purchasing calls would also be effective, because the right to exercise would allow the investor to buy stock at 45 and protect a gain of 15 points less the premium paid. If the buy stop at 45 is correct, why isn't the buy at 45 stop limit correct as well? Good question. Remember, when a stop limit order is triggered, the order becomes a limit order. When the stock rises to 45 (or higher), the customer now has a buy at 45 limit which means pay no more than 45. Once triggered, the stock may never get as low as 45 and the customer's order to buy will not be executed.

A margin account is restricted by $5,000. Which of the following actions may the customer take to bring the account to the Regulation T requirement?

- Deposit $10,00 of fully paid marginable stock *As we teach in the course, KISS (Keep It Series 7 Simple). Saying the account is restricted is just to make it seem more difficult. The question asks how to get the account off restriction? The customer needs $5,000 in cash to do so. However, there is no answer of $5,000. But there is another way to get money—deposit fully paid marginable securities. How much? The deposit should be 200% or twice the amount of cash needed. That would be $5,000 × 2, or $10,000.

If a U.S. corporation exports machine tools to Switzerland and will be paid in Swiss francs (SF), to protect against foreign-exchange risk, it should

- Buy SF Puts *What is the concern of this corporation? If, when the Swiss company pays for the tools, the value of the SF has fallen against the U.S. dollar, the company will receive less money. For example, if the bill is for 100,000 Swiss francs and, at the time of the sale, that amount of SF is worth $110,000 (each SF is worth $1.10), a decline in the value of the SF to $1.05 means the exporter will receive $105,000 instead of the expected $110,000. To hedge against a decline value (regardless of the asset), we buy puts. In the case of exporters from the Unitred States, they buy puts on foreign currency. There are two important acronyms to remember, EPIC and IPEC. Referring to U.S. based companies, Exporters buy Puts and Importers buy Calls. Because there are no options on the U.S. dollar, the Swiss company should buy calls on its own currency to hedge In other words, EPIC works in reverse if the question is dealing with a foreign company. Then it is IPEC for Importers buy Puts and Exporters buy Calls.

On the order book, all of the following orders are reduced on the ex-date for a cash dividend except

- Buy Stop *Only orders placed below the market price are reduced for cash dividends on the order book. Buy limits and sell stops are entered below the market price. Buy stops are entered above the market price.

A significant increase in which of the following types of orders may cause a bull market to accelerate?

- Buy Stops If the market is rising, only those orders on the order book above the current market will be executed. Buy stops and sell limits are both entered above the prevailing market price. Of these two, only buy orders (in this case buy stops) will accelerate a rise in the market.

Which of the following transactions in the same security will affect the holding period of a security held for 12 months or less?

- Buy a put - Sell Short *The holding period of a capital asset is based on the amount of time the asset is held at risk. When there is no longer the possibility of a loss, there is no longer any risk. Buying a put or selling short effectively removes the risk from a transaction and destroys any short-term holding period. The short-term holding period will not become a long-term holding period for tax purposes, as long as the offsetting position (put or short) is maintained.

Which of the following options positions would reduce the risk on a long position in the underlying stock?

- Buy a put - Sell a call *Buying a put reduces risk on the stock's decline. Selling a call reduces the net cost of the long purchase. Both are hedging the stock position.

An investor sold 100 shares of MAS short when the stock was trading at 21. If MAS is now trading at 16, and the investor wants to protect her gain, which of the following orders should she place?

- Buy stop at $16.10 *A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading. In this case with the stock trading at 16, a buy stop of 16.10 is the best choice.

Which of the following orders may be used to acquire a security at a specific price or better?

- Buy stop limit - Buy limit *Only buy orders can acquire stock. Only buy limit orders can acquire stock at a specific price or better.

Which of the following orders would not be reduced on the order book on the ex-dividend date for a cash dividend?

- Buy stop order - Sell limit order Open sell limit orders and open buy stop orders, which are placed above the current market, will not be reduced on the order book when a stock goes ex-dividend for a cash dividend.

Which of the following affects the holding period of XYZ stock, a position that has been held for six months?

- Buying an in-the-money put - Buy an out-of-the-money put *Buying a put (in or out of the money) on a stock held short term (one year or less) erases the holding period until the put is disposed of. At that time, the holding period starts over

A registered principal must approve all orders

- By the END of trading day *Registered principals must approve all orders promptly after execution. FINRA interprets this term, however, as by the end of the trading day. Orders may always be approved earlier, but are not required to be.

A customer's long margin account has a market value of $60,000, a debit balance of $35,000, and special memorandum account (SMA) of $5,000. To eliminate the restriction, the customer can

- Deposit $5,000 in cash. - Sell $10,000 of securities in the account. *When equity is between the initial (50% of long market value [LMV]) requirement and the maintenance requirement (25% of LMV), an account is described as restricted. This account has $25,000 of equity, which is $5,000 below the initial requirement. To bring the equity to 50% of the market value, the customer may deposit $5,000 in cash or sell $10,000 of securities. If $10,000 of securities are sold, LMV becomes $50,000, the debit falls to $25,000, and equity is at $25,000—exactly 50% of the LMV. However, if a customer is using securities to eliminate a restriction (either by selling or depositing fully paid securities), the customer must sell or deposit an amount equal to twice the restriction.

CMO's

- CMOs are NOT backed by the U.S. government; they are corporate instruments. (CAN be purchased and sold OTC) - Interest paid is taxable at ALL levels. (Federal, State, and Local) *Interest ONLY payments are taxed as ordinary income - CMOs are backed by agency pass through securities - mortgage pools. (Held in a trust account) - CMOs yield more than U.S. Treasury securities. - CMOs ARE subject to interest RATE risk. (Extended payment risk and prepayment risk -- Liquidity is LEAST consideration) *CMOs would be expected to carry greatest CREDIT risk out of Freddie Mac, Ginnie Mae, Fannie Mae - Can be exposed to extension and prepayment risk - NO fixed maturity date -Tranche is associated with CDOs and CMOs - CMOs are issued in $1,000 denominations and trade OTC. - TACs are protected against prepayment risk but not extension risk. - Yield quotes on CMOs are based on -- Tranche's expected life - Interest rates fall -- Prepayment risk will INCREASE, price of each tranche will RISE - Compared to CMOS, CDOs have -- LESS prepayment risk Must be included in an advertisement: 1) a disclosure of the CMO's coupon rate and final maturity date 2) a generic description of the CMO tranche. 3) a disclosure that payment assumptions may or may not be met. A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be: -- Taxed as ORDINARY income

You sell a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield must be stated as the yield to

- Call *Municipal Securities Rulemaking Board rules require that, when a call date has been fixed by a prerefunding, the yield to call so fixed must be reflected on the confirmation statement. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event. Therefore, it is appropriate to price the bond to the call date. The old maturity on the bond has no further significance.

Under SEC rules, which of the following events requires a broker-dealer to furnish an updated account statement to a customer?

- Change of the customer's name or address *Any change in a customer's status, particularly one that could be a sign of potential identity theft, requires a broker-dealer to update the customer account record. A copy of the change must be furnished to the customer within 30 days for verification purposes. A change to the broker-dealer's address has no impact on the account. If there is a change to the individual handling the account, it will be done separately from the account statement. Account statements are not the proper place to disclose disciplinary actions.

A corporation has issued debt securities backed by the securities of other companies that it holds in its corporate investment portfolio. These debt securities are known as

- Collateral Trust Bonds *A corporation issuing debt securities secured by a pledge of another company's securities it holds is issuing collateral trust bonds.

A customer must present a signed representation letter stating that he is not a restricted purchaser before buying a new issue of

- Common Stock *New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Before buying an IPO, a customer must present a representation letter stating he is not a restricted person.

Which of the following underwriting arrangements is associated with an invitation, typically found in The Bond Buyer, directed at investment bankers and broker-dealers, intended to solicit interest in underwriting a new municipal issue?

- Competitive Bid *With a competitive bid underwriting, a municipality publishes invitations to bid in The Bond Buyer or another municipal bond publication. Investment bankers and broker-dealers interested in underwriting the new municipal issue would respond to the invitation to bid.

Which of the following is typically the largest component of a corporate underwriting spread and is received by members of the selling group?

- Concession *The concession tends to be the largest component of a corporate underwriting spread. That is paid to the members of the selling group. The manager's fee is generally the smallest component.

Convertible Bonds

- Convertible bond price driven by: - Interest Rates - Common Stock Price - Issuer pays a LOWER interest rate** - Holders receive a fixed interest rate** - Holders may share in the growth of common stock** - Generates income from interest payments during a bear market but if market becomes bullish, can be converted into common stock - Market price on a convertible bond depends on (Value of the underlying stock, rating of the bond, current interest rates) - Issued by corporations - Coupon rates are usually LOWER than non-convertible bond rates of same issuer - If no advantage to converting, would sell at a price based on market value without convertible feature - Bondholders are creditors of the corporation When it comes to issuing a debt security, which of the following features will generally enable the issuing corporation to borrow at the lowest interest rate? - Convertible **Because the convertible feature offers potential growth through the exercise of the conversion option, the interest rate on these securities is generally lower than other debt issues of the same corporation. . *An investor interested in acquiring a convertible bond would -- want the safety of a fixed income investment along with potential capital appreciation

If a customer sells $5,000 worth of stock in a restricted margin account, the special memorandum account (SMA) will be

- Credited by $2,500 *When securities are sold in a restricted account, 50% of the proceeds are credited to SMA. In other words, the customer is permitted to remove 50% of the proceeds from the account, but the balance must remain in the account to reduce the debit balance.

Liquidity ratios measure the solvency of a firm, or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio?

- Current assets divided by current liabilities *Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity, which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio, which measures how much of a company's earnings are distributed to common stockholders.

Under the USA PATROIT Act of 2001, which of the following must be maintained by financial institutions, such as banks and broker-dealers, to prevent the financing of terrorist operations and money laundering?

- Customer Identification Programs (CIPS) *The USA PATRIOT Act of 2001 requires financial institutions to maintain CIPs to protect against financing terrorist operations or activities and potential money laundering activities. The Office of Foreign Asset Control (OFAC) publishes and maintains the Specially Designated Nationals and Blocked Persons list, which financial institutions use to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money-laundering activities.

Order Ticket

- Customer account number; - Registered representative identification number; - Whether the order is solicited or unsolicited; - Whether the order is subject to discretionary authority; - Description of the security (symbol); - Number of shares or bonds to be traded; - Action (buy, sell long, or sell short); - Options (buy, write, covered, uncovered, opening, or closing); - Order restrictions and price qualifications (e.g., market, GTC, or day order); - Type of account (cash or margin); and - The time the order was received, the time of entry, and the price at which it was executed. *Account name or number MUST be on order ticket BEFORE order execution *Changing account number requires manager approval *If justified, a supervisory person with the broker-dealer, but not a registered representative, may correct a bona fide error. A rep of a broker-dealer cannot do this because of the concern that any such payment may conceal individual misconduct. NOT on order ticket: 1) Current Market Price 2) Client's name or address 3) Date account was opened Contains: 1) Price and time limits 2) Discretionary authority exercised 3) Account number for which the order is entered

Which of the following is used to report a bankruptcy filing of a registered representative of a FINRA member firm?

- DRP *DRP stands for disclosure reporting page. That is the part of the Form U4 where a registered person indicates certain mandatory disclosures. In addition to bankruptcy filing, it includes the following: · Criminal disclosures · Civil disclosures related to nonsecurities cases · Disclosures of actions taken by regulatory authorities · Customer complaints · Termination for cause The TIF is the transfer initiation form used with ACATS to transfer a customer account from one member firm to another. ADV is the form used by investment advisers to register with the SEC or the appropriate state(s). There is no Form BF.

Your customer wants to buy 1,000 shares of XYZ stock and has entered a not-held order with instructions to you to purchase the stock when you feel the price looks right. Under the rules, this order will be treated as

- Day order *Unless the customer designates that the order is GTC, a not-held order is treated as a day order, and any unexecuted portion of the order remaining at the end of the day will be canceled.

The risk that time value may erode the premium of an equity option, even while the underlying issuer remains financially sound, is an example of

- Decay Risk *Time decay is the loss of time value as an option nears its expiration date. At the expiration date, the time value is zero. The only value to the option is intrinsic value, if any.

To achieve its goals, an inverse ETF uses

- Derivatives and debt *An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to the advantage of temporary imbalances between the ETF's net asset value and market price.

The DRS is a system for

- Direct Registration of Securities *DRS stands for Direct Registration System. It is a program that began in the mid-1990s as an alternative to "street name" registration for customer securities. Like street name, DRS is based on electronic bookkeeping. In direct registration, a stock is registered in an investor's name, but the company that issued the stock (or its transfer agent) is the one that holds the security in book-entry form, instead of a broker-dealer. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Your client, age 52, is considering taking distributions from her qualified retirement plan. A portion of her contributions were made with after-tax dollars. Which of these is correct?

- Distributions of earnings are 100% taxable, and a 10% penalty will be applied to the distributions. *For qualified plans, distributions of earnings are tax deferred until taken. When taken, those earnings are 100% taxable. Unless meeting one of the exceptions (e.g., death, disability), distributions taken before age 59½ will have a 10% penalty applied. When there is a cost basis (after-tax contributions), that portion is always returned tax and penalty free.

If an index is up 2%, a 3× leveraged inverse ETF tracking that index should be

- Down 6% *Inverse, or reverse, funds attempt to deliver returns that are the opposite of the index they are tracking. If the index is up, the inverse fund should be down. A leverage fund attempts to deliver returns that are a multiple of the index it is tracking. Therefore, an inverse 3× leveraged fund should be down 3× as much as the index is up if it performs as it should—so in this example, down 6% (3 × 2%).

Shortly before the end of the cooling-off period, the underwriters and representatives of the issuer have a meeting to review the status of the new issue. This is called

- Due Diligence Meeting *The final meeting before the end of the cooling-off period is known as a due diligence meeting and is always held before the effective date of the new offering. **A due diligence meeting is held between the issuer and the underwriter before the effective date and is one of the final meetings held before the sale of the security so that each party may review all aspects of the issue

When it comes to securities data, the industry relies heavily on acronyms. Which of the following is used exclusively for municipal securities?

- EMMA *EMMA is the Electronic Municipal Market Access system. EMMA is a centralized online source for free access to municipal disclosures, market transparency data, and educational materials about the municipal securities market and is operated by the MSRB. ACT is the Automated Confirmation Transaction Service. TRACE is the Trade Reporting and Compliance Engine. CAT is the Consolidated Audit Trail that reports quotes and activity on national market system (NMS) equity securities. All of these serve various parts of the industry, but EMMA is the only one exclusively devoted to municipal securities. - Website operated by MSRB for - Retail, nonprofessional investors - Contains official statement - Ratings information - Real time access to prices

With respect to elective deferrals, a 403(b) plan must meet the requirements of the universal availability rule. Under this rule, if any employee of the employer maintaining the 403(b) may participate, then all of the employer's employees must be given the opportunity to participate. Certain employees may be excluded, including

- Employees who normally work less than 20 hours per week. *The IRS considers 20 hours per week to be equivalent to 1,000 hours per year (where mandatory eligibility begins). Working less than that allows the employer to exclude the employee from participation. Although most substitute teachers are likely to fall short of the 1,000 hours per year, any who meet that requirement must be given eligibility. Contributing to an IRA has nothing to do with plan eligibility.

As with all businesses, mistakes happen. What document is checked by the registered representative to verify the accuracy of a trade?

- Execution Report *It is the execution report that is reviewed by the registered representative to verify the trade matched the submitted order. The confirmations come later and we want to make sure they are accurate.

What action could a corporation take that would result in the forced conversion of an outstanding convertible debt security?

- Exercise the call feature when the debt security's conversion value exceeds the call price Benefits: - Increase in the market price of the underlying common stock will lead to a comparable increase in the price of the convertible. - Although they trade in line with the issuer's common stock, they are less volatile than the common shares. - Fixed interest payments - Redeemed at maturity - When compared with similar nonconvertible debentures, convertible debentures are issued with a LOWER coupon rate. For example, when the market price of the common stock is $25 per share, a $1,000 convertible debenture with a conversion ratio of 50 shares per bond has a conversion value of $1,250 (50 shares time $25 per share). Because most convertibles are also callable, by calling the bonds at the stated call price (perhaps 102 or 103) the company can force the bond holders to convert the bonds. Using our example, why would investors hold onto the bonds knowing that, within about 30 days, they're going to get a check for $1,020 or so for each bond when they could convert and own shares worth $1,250 per bond. This is known as forced conversion. The coupon rate is fixed, and an investor would not want to convert to the stock just because the dividends on the stock are lower than the interest on the bond. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Which of the following statements regarding oil and gas limited partnerships are true?

- Exploratory programs are more risky than developmental programs. - Successful exploratory programs provide higher returns than developmental programs. *Exploratory oil and gas direct participation programs drill in areas where there are no proven oil reserves. While the chances of success are relatively small, successful exploratory wells provide large returns to investors. Developmental programs drill in areas adjacent to sites where proven oil reserves exist; while the probability of success is favorable, the returns will not be as great as a successful exploratory program. *Exploratory is MOST risky

An intrastate offering is exempt from

- Federal Regulation *An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration. Securities do not register with FINRA.

The cost of the asset is $100,000, and it will be depreciated on a straight-line basis with no salvage value. This means that

- For the next five years, the company will have an operating expense deduction of $20,000. *Depreciation is not a liability (i.e., a bill to be paid). Depreciation is the annual expense (write-off) representing the loss in value of a fixed asset over a set period. In this question, that period is five years. Straight-line depreciation means equal amounts each year. With a zero salvage value, the entire cost is depreciable. The $100,000 cost divided by five years is $20,000 per year. No "cash" is involved, which is why depreciation is frequently referred to as a noncash expense.

An order to sell at 38.65 stop limit is entered before the opening. The subsequent trades are 38.85, 38.50, and 38.35. The order

- Has not yet been executed *A stop limit order is a stop order that becomes a limit order once the stop price has been triggered. On a sell stop order, the stop price is entered at a price below the current market. The order is not triggered until the market declines to or below the stop price. For this question, that means no trigger unless the stock trades at $38.65 or lower. When the limit price is the same as the stop price on a stop limit order, the order may be executed only at or better than the limit price. In this case, the order has not yet been executed because no transaction has occurred at or above the limit of 38.65 after the stop was triggered at 38.50.

Trough

- High unemployment - Flat GDP - Low inflation - Low consumer demand

The ABC Corporation would like to raise capital via a Regulation D private placement. Under Rule 506(c), which of the following statements is true?

- If the offering is limited to accredited investors, advertising IS permitted *Rule 506(c) of Regulation D differs from Rule 506(b) in that all of the investors must be accredited. In that case, advertising is permitted. It is Rule 506(b) that permits the exemption if no more than 35 of the investors are nonaccredited, but advertising would not be permitted. If the sale is exclusively to accredited investors, the private placement may advertise.

One of the advantages of writing a call option covered by shares of the underlying stock is

- Immediate Income is generated *When an investor writes a call option and owns the underlying shares, the premium is credited to the account on the next business day (T+1). For this benefit, the investor has given up most of the upside potential because once the stock rises above the exercise price, it will likely be called away. That places a limit on the upside potential. There is downside protection, but it is limited to the extent of the premium received. The underlying stock can be purchased on margin, regardless of writing the call.

If general interest rates increase, the interest income of an open-end bond fund will do which of the following?

- Increase *What does a bond fund invest in? Bonds. One of the features of an open-end company (mutual fund) is the continuous issuance of new shares. The question states that interest rates are increasing. As that new money is received, the fund's manager will be able to invest in bonds offering that higher return. This will cause the income of the fund to increase. It is not part of the question, but the increase in interest rates will likely lead to the NAV of the fund decreasing (as interest rates go up, the price of the bonds in the fund's portfolio will go down).

Expansion/Recovery

- Increased consumer demand - Increases in industrial production - Rising stock prices - Rising property values - Increasing GDP - Higher wages *Recovery is the period of growth from the trough to the prior peak *Expansion is when the economy reaches the prior peak and continues to grow

As a new registered representative, you overhear some of the "old hands" discussing tracking risk. More than likely, the topic of the conversation is

- Index ETF's *Any investment that attempts to track an index or other benchmark needs to be evaluated in terms of its tracking error. That is, how close does the performance of the portfolio match up to that of the index? This tracking error or risk will, over the long run, cause the performance of ETFs tracking the same index to have differing results **Tracking Risk**

Agency Securities Taxation

- Interest on corporate bonds is taxable on all levels (federal, state, and local). - Interest on municipal securities may be taxed by the municipal level (state and local governments) but not by the federal government. - Interest on issues of the federal government (Treasury bills, notes, and bonds) is taxed by the federal government but is exempt from taxation at the state and local levels. - Interest on mortgage-backed securities is taxed on all levels (federal, state and local). - Interest on issues of U.S. territories, e.g., Puerto Rico and Guam, qualifies for a triple exemption (federal, state, and local). **50 Year maturity = TVA Bonds (Tennessee Valley Authority Bonds -- Only government security with 50 years)

AMT

- Is assessed against high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income. *The AMT is assessed against high annual income earners. When calculating adjusted gross income, some deductions and exemptions are disallowed, resulting in a higher taxable adjusted gross income.

Which of the following actions of XYZ Corporation would raise additional capital?

- Issue callable preferred stock - Make a rights offering

If trading is halted in a listed stock, what happens to the trading in the stock's listed options?

- It is halted *Options trading is always halted when the trading of the underlying security is halted. Options rely primarily on the underlying market value for premium determination.

Last week one of your customers placed a good-til-canceled order to sell 200 shares of ABC with an 18 stop when the stock was trading at $18.85. It is now the ex-date for a $0.55 dividend and the order has not yet been executed. What has happened to your customer's stop order?

- It is reduced to $17.45. *Unless the customer has given DNR (do not reduce) instructions, open buy limit orders and open sell stop orders are reduced on the ex-dividend date by the amount of the dividend.

Which of the following statements regarding an official statement are true?

- It must be delivered to purchasers at or before settlement - It is generally used by underwriters to help sell the issue *An official statement is a document similar to a prospectus and is furnished, in most cases, to buyers of new issue municipal bonds. SEC rules require that an official statement be prepared for most—but not all—new municipal issues. The MSRB has no such requirement, as it does not regulate issuers.

A municipal revenue bond has a catastrophe call feature, but otherwise, is not callable. Which of the following statements regarding the features of this bond that must be described on a customer's confirmation is true?

- It need not be designated as callable. *Catastrophe call provisions associated with municipal revenue bond issues are not included on customer confirmations. Only call provisions with specific dates are included on confirmations.

If a customer does not pay for equity securities purchased within two business days of the regular way settlement date, the broker-dealer may request a time extension from

- Its designated examining authority *A time extension may be requested from the broker-dealer's designated examining authority, which could be FINRA or one of the exchanges.

If XYZ Corporation sells an additional 1 million common stock with a par value of $1 for $10 per share, which of the following is true?

- Its paid-in surplus will increase. *Paid-in surplus is a balance sheet entry that accounts for money raised from the issuance of stock in excess of par value. When more shares are sold, paid-in surplus will increase.

Callable Bonds

- Least attractive to potential investors for new corporate debt issue -- Low Call Price *Call premiums tend to decrease over time. *Call prices are stated as a percentage of the principal amount to be called. - Investor prefers a higher coupon (Nominal) yield than a lower one and collateral always adds to the security of debt Trade confirmations must show yield to call on which of the following callable bonds? - 5½%, 5% basis, maturing 2040 **Bond confirmations must disclose the lower of the yield to maturity (YTM) or yield to call (YTC). On a bond selling at a premium, the YTC is the lower of the two. The terminology here shows the coupon, the basis (YTM), and the maturity date (and, in one case, the call date). The 5½% bond with a 5% basis is the only bond trading at a premium. We know that because the YTM (or basis) is lower than the coupon. Under Municipal Securities Rulemaking Board (MSRB) rules, which of the following yields for a callable bond would be shown on a confirmation? - Yield based on NEAREST in-whole call **MSRB rules require that yield to call based on the nearest (near-term) entire issue (in-whole call) be disclosed on a customer's confirmation.

What would NOT be found in the underwriting of a new CORPORATE bond issue?

- Legal Opinion *Municipal securities are the only ones requiring a legal opinion. The bond counsel provides the legal opinion attesting to the validity, enforceability, and tax status of the issuer's bonds. There is no such requirement for corporate debt issues.

Hedging

- Let stock lead If you have a LONG stock (Bullish), you want opposite (Bearish) -- Short Call or Long Put (Opposite Sentiments) If you have a SHORT stock (Bearish), you want opposite (Bullish) -- Long Call or Short Put From there if you want: - Protection = Buy - Income = Sell Example: Long stock wanting protection = Long put (For protection)

When a company issues additional preferred stock and bonds, which of the following will be the net result?

- Leverage is INCERASED *Leverage is the use of investors' money at a fixed cost to benefit the common shareholders. Both preferred stock and bonds are fixed-rate issues. Therefore, issuing more preferred stock or bonds increases the leverage of the common stockholders.

A client purchases 1,000 shares of the XYZ Value Fund when the NAV is $18.75 and the POP is $19.74. Five years later, the client makes a gift to her daughter when NAV is $24.50 and POP is $25.79. The daughter elects to receive all distributions in cash. Two years after the gift, she sells all shares when the NAV is $34.25 and POP is $36.05. What are the tax consequences of this sale?

- Long-term capital gain of $14,510 In the case of a gift of securities, the donee acquires the donor's cost basis—$19.74 per share. Sale (redemption) takes place at the NAV ($34.25) for a profit of $14.51 per share (times 1,000 shares = $14,510.00).

A mutual fund's unrealized loss last month results in which of the following?

- Lower net asset value (NAV) per share - Reduction in the proceeds payable to shareholders who liquidate their shares *An unrealized loss is the same as a decrease in NAV. An investor receives less at redemption than she would have if the redemption had taken place before the asset's depreciation.

The end of the month closing price for the common shares of Momentum Growth Industries (MGI) for the past six months has been charted as 88, 95, 100, 103, 104, and 104. Each month has seen a decrease in the daily average trading volume. This is likely a signal to a technical analyst that

- MGI stock is oversold *Let's define overbought (and oversold). Over means to an excess. We know that stock prices are based on supply and demand. Increased demand pushes prices up. When the demand slows down, so does the rate of price increase. This is usually accompanied by a reduction in trading volume. Oversold is the opposite. An abundance of sellers leads to a decline in the stock's price, and as the sellers begin to leave the market, the reduced supply along with reduced trading volume indicates a bottom (a support level). In our question, the rate of monthly price increase has slowed and the trading volume is less. This is a sign of an overbought stock (fewer buyers in the market) that has reached a resistance level. The "throwaway" answer here relates to the EPS, something that is not used by a technical analyst.

Which of the following is always affected by a change in the market value of securities in a long margin account?

- Maintenance Requirement *SMA is only affected if the current market value (CMV) increases. In terms of dollars, the maintenance requirement will continuously fluctuate with the market value because it is a percentage of the CMV.

Each of the following types of orders will remain open (working orders) until certain conditions are met, except

- Market Orders *A market order is executed immediately at the prevailing market price. A stop, or stop limit, order is not triggered until a set price is hit or passed through. A good-til-canceled order remains open until executed or canceled.

Your firm is bidding on a new general obligation bond issue. As the issuer weighs and evaluates the competitive bids, what factor will be most important in deciding who will be awarded the winning bid?

- Net Interest Cost *Net interest cost measures an issuer's overall cost of borrowing for a particular bond issue. It is, therefore, the most important item an issuer considers when evaluating competing bids.

OTC Quotes

- Markups and markdowns are charged when a market maker is acting as a principal (dealing from inventory with financial risk). - Unless stated otherwise, firm quotes are good for a round lot only. A quote of 11 - 11.50, 3 × 5 is firm between dealers for 300 shares at the bid price of 11 and 500 shares at the ask price of 11.50. - Nominal quotes can be given for informational purposes and can be printed only if clearly labeled as such. - A relatively wide spread indicates a thin trading market for the security. - Securities identified as OTC non-Nasdaq may not always have last sale information readily available. That is because that information may be difficult to find for these thinly traded securities. An over-the-counter (OTC) quote that must be reconfirmed with the OTC trading room before a broker-dealer takes action is - Subject *Before a trade can take place, a subject quote always must be reconfirmed with the OTC trader or market maker that provided it. Subject quotes are typically used in conjunction with thinly traded securities or before filling large block orders.

A customer opens the following options position: Long 1 KALE Oct 70 put @4¼; short 1 KALE Oct 80 put @10. What is the customer's maximum gain, maximum loss, and breakeven point?

- Maximum gain is $575; maximum loss is $425; breakeven point is $74.25. *The first step is to identify the position. This is a credit put spread. It is a credit spread because the option sold brought in a higher premium than the one purchased. The credit of $575 is the most the investor can make. This is a bullish spread (the customer bought the low strike price and sold the high strike price). If the customer is correct and the stock rises above $80, the options will expire unexercised and the customer will keep that net credit of $575. If the customer is wrong and the price of the KALE stock falls below $70, the short put at 80 will be exercised, causing the customer to purchase the stock at $80. Then, the customer will exercise the long 70 put and sell that stock at $70. This results in a loss of $1,000 reduced by the $575 net credit, or $425 maximum loss. It is always easier to recognize that the maximum loss is the difference in strike prices minus the maximum profit. In this question, the spread is 10 points and the maximum profit is the credit of 5¾ points. That makes the maximum loss the remaining 4¼ points. Breakeven follows the put-down rule. Subtract the net premium from the higher strike price ($80 - 5.75 = $74.25).

An investor opens the following options position: Sell 1 RIF Sep 70 call @ 6; sell 1 RIF Sep 70 put @1. What is the investor's maximum gain, maximum loss, and breakeven point?

- Maximum gain is $700; maximum loss is unlimited; breakeven points are $63 and $77. *The first step is to identify the position. This is a short straddle—a short put and a short call with identical terms. That means we are going to have two breakeven points. The maximum loss is unlimited because one of the positions is an uncovered call. The maximum profit is the premiums (credit) received of $700. Breakeven points follow the call-up and put-down rule. That is, add the premiums of $7 to the strike price of the call ($7 + $70 = $77) and subtract the premiums of $7 from the strike price of the put ($70 ‒- $7 = $63). Please note: In any options question, short positions are always uncovered (naked) unless something in the question indicates they are covered.

COD/POD Trades

- Member firm must have appropriate documentation - Up to 35 calendar days to make payment

Sell orders for equity securities

- Must be marked long or short *Every sell order in an equity security must be marked as either a long sale or a short sale.

A customer receives a call from his registered representative (RR) telling him that he purchased 200 shares of RCA at 34.50 for the market order he had entered earlier that day. Later that day, his broker tells him that the report he received was in error, and the shares were bought for 34.75. The customer

- Must pay $34.75 per share *If an error has been made in the notice of execution and reported to a customer, the customer must pay for the shares at the correct price. The correct price is the price at which the order was executed, either on the exchange or in the market where the execution occurred.

Portfolio Diversification

- Mutual Funds (More Specifically, Asset allocation funds and balanced funds) - For equity portfolios, add some debt and vice versa - For domestic portfolios, add some foreign securities - For bond portfolios, diversify by region/rating

Brokered CDs

- NOT part of the money market - Commission or fees to buy brokered CDs are generally HIGHER than bank issued ones - These may or may not be covered by FDIC insurance. - NOT redeemable before maturity

If a member firm wishes to have a clearly erroneous trade reviewed, it must notify

- Nasdaq Market Operations *To have a clearly erroneous trade reviewed, a member must notify Nasdaq Market Operations within 30 minutes of the trade. The NAC is where appeals of disciplinary hearings are made.

A convertible corporate bond with an 8% coupon yielding 7.1% is available but may be called sometime this year. Which feature of this bond would probably be least attractive to your client?

- Near-term Call *The near-term call would mean that no matter how attractive the bond's other features, the client may not have very long to enjoy them.

Which of the following is associated with a process whereby a municipal issuer first appoints and then works with the underwriters who will be establishing the interest rate and offering price for a new municipal bond issue?

- Negotiated Underwriting *In a negotiated underwriting the municipality appoints an underwriting group of investment bankers or broker-dealers to underwrite the offering. The underwriters will then work with the municipal issuer to establish the interest rate and offering price of the new issue to best meet the municipality's needs and in light of current market conditions. NEGOTIATED UNDERWRITING - the underwriter works with the issuer to establish the offering price. - the underwriter works with the issuer to establish the interest rate. -the municipality appoints an investment banker or broker-dealer to underwrite the offering.

Sovereign Debt Securities

- Securities issued by national governments - What you do have to know is that the safety of a sovereign bond depends on the economy of the issuing country. - US T-Bonds is an example - On Exam - Likely to see foreign governments

An investor purchased a single premium deferred variable annuity 20 years ago. The premium deposit was $50,000. The account is now worth $200,000 and the investor is still working. When does the investor have to begin taking required minimum distributions?

- Never with a nonqualified annuity *On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates.

Broker-to-broker confirmations must be sent no later than

- Next business day *Confirmations between brokers (broker-to-broker confirms) must be sent no later than the next business day following the transaction (T+1).

Your client makes two municipal bond purchases from your firm's trading desk. One of the bonds has a nominal yield of 5% and a basis of 6%. The other has a coupon rate of 7.5% and a yield to maturity of 6%. If your client holds both bonds to maturity, the tax consequences when receiving the principal will be

- No gain and no loss *The first bond is selling at a discount. We know that because the basis (yield to maturity) of 6% is higher than the coupon or nominal rate of 5%. The second bond is selling at a premium. We know that because the yield to maturity (basis) of 6% is lower than the coupon or nominal rate of 7.5%. Because the bonds were purchased from the firm's trading desk, we know these are secondary market trades rather than a purchase of new issue from the syndicate. Municipal bonds purchased in the secondary market at a discount have that discount accreted and taxed as ordinary income each year. By maturity date, the discount has been fully accreted, so there is no gain and no loss. The same is true with municipal bonds purchased at a premium. The premium is amortized each year over the life of the bond so that at maturity there is no gain and no loss.

A municipal bond dealer gives your firm's trading desk an estimate of a municipal security's market value. This is

- Nominal Quote *A nominal, or subject, quotation indicates a dealer's estimate of a security's market value. Nominal quotations are provided for informational purposes only and are permitted if the quotes are clearly labeled as such. A workable indication is usually a firm bid price from a dealer and holding a quote is one that is firm for a specified time.

An investor, age 57, wants to amend an existing portfolio to have a greater percentage be in fixed-income (debt) instruments. Current market sentiment is that interest rates are very high and likely to begin contracting soon. The investor agrees and asks for your thoughts regarding what those debt instruments might be. The most suitably aligned with the market sentiment would be

- Noncallable Corporate Bonds *If one anticipates that interest rates will be falling, noncallable bonds would be better, as there is no risk of them being called and you can continue to earn the higher rate the bonds were issued with. Anything with a variable rate will have the interest payable adjusted to align with current rates, and therefore, would not desirable when rates are falling. Money market funds are not debt instruments, and again, the returns they pay reflect trending interest rates.

Regarding the taxation of dividends received from corporate securities, which of the following are true?

- Nonqualified dividends are taxed at the rate the investor's ordinary income will be taxed. - Qualified dividends are taxed at a maximum rate specified by the IRS and will depend on the investor's income tax bracket. *Qualified dividends are taxed at the same rate as long-term capital gains—a rate significantly lower than the ordinary income tax rate levied against nonqualified dividends. That lower rate ranges from 0% to as high as 20%, with an even higher effective rate for those with an extraordinarily high income. For most investors, the rate is 15%, and that is the number you should use in any computations. With ordinary income tax rates on nonqualified dividends as high (currently) as 37%, there is a real benefit for most investors to receive qualified dividends.

A registered representative reproduced a research report prepared by an independent research analyst on his broker-dealer's letterhead, with no mention of the party who prepared the report. If this literature is forwarded to a select group of clients only, the registered representative's action is

- Not Allowed *A broker-dealer is prohibited from presenting to a client research reports, analysis, or recommendations prepared by other persons or firms without disclosing that they were prepared by a third party.

Liquidity

- Securities listed on an exchange - Unlisted NASDAQ stocks or bonds - Bond Mutual funds - Publicly traded REITS - Individual Corporate Bonds

If a registered options principal is asked to approve a discretionary order to buy 1 XYZ Oct 60 put and sell 1 XYZ Oct 55 put for a net debit of $5, he should

- Not approve the order *Because this is a debit spread, the maximum gain occurs if both sides are exercised. If this occurs, the investor earns $5 (buy stock at 55 when the short put is exercised and sell stock at 60 by exercising the long put). Because the net premium paid for the spread is $5, there can never be any gain. This spread is not economical.

A customer has substantial passive income from a real estate investment. Which of the following limited partnership (LP) programs is most suitable for this customer if he wishes to offset this income?

- Oil and gas exploratory program *Passive income may be offset by passive losses. Of the programs listed, the one most likely to have significant losses, particularly in the early years, is an exploratory or wildcat drilling program.

An individual is covered under his employer's 401(k) plan. The plan provides for 100% employer matching of the first 3% of the employee's contribution. The employee decides to contribute 7% of his pay to the plan. Under ERISA, which of the following statements is correct?

- Only the 7% contributed by the employee is immediately vested *Under ERISA rules, any contribution by an employee is immediately vested. It is only employer contributions that may subject to a vesting schedule.

For a customer who has purchased stock and wants to write a call option, the option ticket would be marked

- Opening Sale *An opening transaction is used when establishing a new option position. It is an opening purchase if your client is buying the option. It is an opening sale if your client is writing the option. Closing is the term used when the client eliminates an existing option position through a trade of the contract.

All of the following are considered insiders under the Securities Exchange Act of 1934 except

- Owners of 10% or more of the corporation's debt securities. **It is equity, NOT debt securities that makes one an insider. Officers, directors, and major shareholders (equity owners) are insiders.

Planned Amortization Class (PAC)

- PACs have the least prepayment and extension risk. (Lower than average) - Because of the lower risk, PACs have lower yields than comparable TACs. - PAC's have 2 companion tranches - one to absorb prepayments and one to buffer against extension risk - PAC's have a more certain maturity date than comparable TAC's (Most predictable) A planned amortization class (PAC) collateralized mortgage obligation (CMO) offers - Protection from both repayment and extension risk **A PAC offers protection from both prepayment and extension risk. This protection is greater than that offered by a targeted amortization class CMO, which protects against prepayment risk only.

A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments?

- PSA *The Public Securities Association (PSA) is the source of historical data for prepayment projections on CMOs.

Records Kept For Life of Firm

- Partnership Agreement - Corporate Charter or Articles of Incorporation - Stock Certificate Books - Minutes - Amendments - Organizational Records

If interest rates fall, which of the following statements regarding collateralized mortgage obligations are true?

- Prepayment risk will INCREASE - Prices of each tranche will rise

Bonds

- Prices can be impacted by supply and demand - Bonds with more time and lower coupon rate are more volatile - Bonds issued by states are backed by income taxes, license fees, sales tax, etc - Bonds issued by towns, cities, counties are back by property (Ad valorem or real estate) *Call provision of a bond stipulates call date and call price *Call protection is MOST valuable to a bond owner when bond prices are generally -- RISING - Call protection prohibits them from being called before a certain date *Bonds (Debt instruments pay SEMIANNUAL Dividends) *Which types of investments are MOST susceptible to interest rate risks? -- Bonds

APO (Additional Public/Primary Offerings)

- Primary Offerings - Come after the IPO - May be multiple APOS over time *Underwriting proceeds go to the issuing company Listed Prospectus Delivery = 0 Days (No Requirement) NON-Listed Prospectus Delivery = 40 Days

An order memorandum or ticket must be prepared

- Prior to order execution *Order tickets must be prepared prior to order execution. Please read the question carefully. Preparation is the first step and that must be done before the order can be sent for execution. After the execution report, the order ticket is completed with the execution information.

Federal Farm Credit System

- Provides agricultural financing and credit - Backed by issuers - Interest exempt from state and local taxes *High risk proposition by traditional lenders *Interest received is EXEMPT from ALL state and local taxation (NOT federal) - Any agency with "Mortgage" is FULLY taxable

ABC stock is going ex-dividend today, and certain orders on the order book must be reduced prior to the opening. For a cash dividend of 0.12, which of the following orders would be reduced?

- Sell 100 ABC at 45 stop *Orders that are entered below current market value would be reduced unless do not reduce (DNR) instructions are received. Those orders are buy limits, sell stops (BLiSS) orders. These orders are reduced by the amount of the dividend on the ex-dividend date for a cash dividend distribution.

ESA Features

- Provisions that allow contributions to continue past age 18 for beneficiaries with special needs - Allowing Coverdell ESA contributions, for any year, to be made up to April 15 of the following year (just like contributions to your IRA). - Contributions can be made by parents and other adults (Anyone); the total for one child is $2,000. - Contribution limit is $2,000 PER YEAR, PER CHILD until the child's 18th birthday. - Contributions are not tax deductible, but all earnings are tax-deferred. - Distributions are tax-free if they are taken before age 30 and used for eligible education expenses. - If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty on the earnings or rolled over into a different Coverdell ESA for another family member. Their definition of family is extremely broad and, in addition to the obvious, includes cousins, aunts and uncles, and even in-laws. - Funded with AFTER TAX contributions - Can be for high school or college costs

TCB Corporation wants to offer $75 million worth of common stock solely to residents of its home state. The issue will not be registered at the federal level. What type of registration will TCB use to register with the state?

- Qualification *If the registration is just with one state, the registration will be done through qualification. Qualification means that the state will collect all the information and decide whether or not to clear the offering for sale in the state.

The holder of a yield-based call option would be more likely to profit if

- Rates Rise - Debt Prices Fall *Holders of yield-based call options profit if rates rise. Prices of debt securities fall if rates rise.

For municipal bond transactions, data captured and made available to the market place is done by which of the following?

- Real-Time Transaction Reporting System (RTRS) *The Municipal Securities Rulemaking Board RTRS captures transaction data for municipal bonds and makes it available to the market place via numerous third-party vendors available to the public.

When conducting a discussion with a client about the merits of investing in a direct participation program, all of the following could be tax advantages except

- Recapture of depreciation. - Tangible drilling expenses. Depreciation is the deduction against income representing the cost recovery of certain fixed assets. When one of those assets is sold for more than the straight-line depreciated value, the excess is recaptured as ordinary income. Only intangible drilling expenses benefit the limited partner.

An investor opens a long position in one XYZ Nov 140 put @7. Disregarding any commissions, if the option is exercised, on settlement date the investor

- Receives $14,000 *When an investor takes a long position in an option, it means that the investor has purchased the option. When a put is exercised, the holder must deliver the stock on settlement date. At that time, proceeds representing the strike price ($140) for 100 shares ($14,000) are received.

Sam Brown has several stock rights. Which of the following is not an alternative regarding these stock rights?

- Redeeming them from the issuer for cash Alternative: 1) Gifting the rights to his son to exercise 2) Selling in the open market at the prevailing market price 3) Exercising the stock rights before expiration to purchase shares of stock *Rights are not redeemable by the issuer. They may be sold in the secondary market or given to someone else to trade or exercise. If exercised, rights are exchanged for an appropriate number of shares of the underlying common stock.

Registered Representative 1, employed by Member Firm 1, sells a new equity issue to Registered Representative 2, employed by Member Firm 2. Which of the following have violated the rules designed to protect the public and abide by restricted persons prohibitions?

- Registered Representative 1 - Member Firm 1 - Registered Representative 2 - Member Firm 2 *Members and their associated persons may not take advantage of their insider status to gain access to new issues for their own benefit at the expense of the investing public. In this light, all of the parties are responsible for violating rules designed to protect the public regarding offerings of new issues. The member firms, as well as the designated supervisors, are included for failing to supervise.

Which of the following orders on the order book would be reduced for a cash dividend on the ex-date?

- Sell 100 XYZ at 50 stop *Orders on the book adjusted on the ex-date for a cash dividend are those below the current market: buy limits and sell stops. The buy limit at 50 is marked DNR (do not reduce), so the only order reduced is the sell stop at 50.

The requirement for a broker-dealer to locate a security to be sold short before executing the order is found in

- Regulation SHO *Regulation SHO mandates a locate requirement for short sales. Before entering a short sale order, members are required to locate the security to ensure that delivery can be made on settlement date. The locate requirement applies to short sales in all equity securities. Failure to positively locate the stock before making the short sale is the prohibited practice of naked short selling. Regulation T mandates that short sales be made in margin accounts. The Trade Reporting and Compliance Engine (TRACE) is the FINRA-approved trade reporting system for corporate and government agency bonds trading in the OTC secondary market. FINRA's Uniform Practice Code tangentially deals with this issue because the location requirements enable delivery of stock sold short to be made according to its rules on good delivery.

If interest rates increase, the interest payable on outstanding corporate bonds will

- Remain Unchanged *The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year, regardless of the prevailing interest rates in the market. It is the market price of bonds—not the interest payable—that responds inversely to changes in interest rates.

Your broker-dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is

- Required AT LEAST 10 business days before first use or publication. *Filing with FINRA is required at least 10 business days before first use or publication for retail communications having to do with options.

ACATS -- A new customer has given you written authorization to transfer the holdings in her account at another broker-dealer to her new account at your broker-dealer. Under the Uniform Practice Code, using the automated customer account transfer system form, the carrying broker-dealer would have how many days to validate the positions and how many days to complete the transfer after validation?

- Requires the CARRYING Firm to validate or take exception - One business day to validate - Three business days to transfer AFTER validation Order: 1) Customer Signature on TIF 2) TIF is sent to ACATS by the receiving firm 3) Carrying Firm validates or takes exception (One business day) 4) Transfers within 3 business days *An account NOT recognized would be a cause for rejection *When using the ACATS system to transfer a customer account from one member to another, the transferring member must keep records of the transfer for six years

Exclusions from Filing

- Retail communications that previously have been filed with FINRA and that are to be used without material change - Retail communications that do not make any financial or investment recommendation or otherwise promote a product or service of the member - Retail communications that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker - Retail communications that do no more than identify the member - Correspondence - Institutional communications - Communications that refer to types of investments solely as part of a listing of products or services offered by the member - Retail communications that are posted on an online interactive electronic forum

Filing with FINRA within 10 business days of first use is required for all of the following except

- Retail communications that promote or recommend a specific real estate investment trust (REIT). *Real estate investment trusts (REITs) are not included in FINRA's list of retail communications requiring postfiling.

All of the following might be used to measure the marketability of a new municipal general obligation issue except

- Revdex *Revdex is an index of yields on 25 revenue bonds with 30-year maturities that are traded in the secondary market.

A head and shoulders bottom formation is an indication of

- Reversal of a downtrend *A head and shoulders bottom formation is also known as an inverted head and shoulders formation. It is that part of a graph in which a downtrend has reversed to become an uptrend. It is not, however, an indicator of the bullishness or bearishness of the market as a whole. It is an indication only of the direction of a trend, which may be either short or long in duration.

A sell limit order is executed when a stock is

- Rising - At or ABOVE the limit price *A sell limit order is placed above the prevailing market price. Therefore, it may be executed if the market is rising. If executed, limit orders will be filled at the limit price or better, which in the case of a sell limit is the limit price or higher.

Which of the following exemption provisions of the Securities Act of 1933 may not be used for an initial offering of securities?

- Rule 144 *Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities. *Under Rule 144, when shares are sold by an affiliate (control), Form 144 need NOT be filed if 5,000 or fewer shares are sold or the dollar amount is $50,000 or less. Meeting either of these conditions is considered the de minimis exception. This de minimis rule applies to sales in any 90-day period. *Does NOT exceed 10% of account

Which index does the VIX track?

- S&P 500 *As reported by the CBOE, "The VIX Index measures the level of expected volatility of the S&P 500 Index over the next 30 days that is implied in the bid/ask quotations of SPX options. Thus, the VIX Index is a forward looking measure, in contrast to realized (or actual) volatility, which measures the variability of historical (or known) prices." When there is more put buying than call buying, the VIX increases. Conversely, more call buying than put buying results in a decrease to the VIX.

Which of the following taxes is considered regressive?

- Sales *Sales tax is considered regressive because the rate remains constant irrespective of the amount being taxed. Income taxes, for example, take more from a person with a high income than from a person with a low income.

Account Recommendations

- Securities account types (open an IRA or margin account) - Roll over transfer assets from one type of account to another *The desired result of an account recommendation is a new account

An investor is short stock at 60. The current market price of the stock is 33, and the investor anticipates it will continue to decline. If the investor would like to generate income but still benefit if the stock continues to fall, which of the following positions would do that?

- Sell a 35 call *The client has two objectives: Generate income and benefit from a price decline. Selling the 35 call accomplishes both. The sale of the call option generates premium income and the writer of a call option benefits when the price of the underlying stock declines (the investor earns the premium because the option expires unexercised). Why not buy a call to protect the short stock position? Good idea, but note that the question states the investor would like to generate income. The only way one can generate income with options is to sell them (be a writer). Buying a put would be like "doubling down." The investor already made the bearish bet by selling short. Buying the put is the same bet (and does not generate income). Selling the 30 put meets the objective of receiving income but does not benefit from a decline in price. If the stock's price continues to fall, once it drops below 30, the likelihood of exercise increases and that is not what an option writer wants.

You have a customer who has been following the common stock of the PQR Corporation. In early trading the stock is selling at $57 per share, which is slightly above its previous all-time high. The customer expects the stock to decline somewhat over the next few months. If the customer wishes to buy 100 shares of PQR stock if it declines to $50 or lower, which strategy would you likely approve the representative recommend to the customer?

- Sell a PQR 50 put. - Enter a buy limit order for PQR at 50. *Buy limit orders are always placed below the current market. This customer want to buy the PQR stock, but only if it can be purchased at a price no higher than 50. A put option will be exercised only when the strike price is above the current market. In this case, writing a 50 put results in the seller being exercised (and buying the PQR stock), but only if the market price is below 50. Cushioning the fact that the stock's market price might be lower than the purchase price of 50 is the fact that the sale of the put-generated premium.

A customer long 100 shares of XYZ stock who wishes to reduce risk and generate income should

- Sell an XYZ Call *If the customer sells a call, the risk of owning the stock is reduced by the call's premium. Receipt of the premium satisfies the customer's income objective.

Underwriters and selling group members violate rules regarding sales of new equity issues to restricted persons when they do which of the following?

- Sell blocks of the new issue to accounts of partners or officers of the member firm - Sell to brokers and dealers outside the selling group who position the securities for later resale at higher prices *Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their supported family members. Firms selling only investment company products and/or direct participation programs, and their employees, are exempt from these rules

A customer who owns a portfolio of blue-chip stocks believes the securities will provide long-term appreciation but fears that the market will decline over the short term. Which options strategy would likely offer some protection against the expected decline while allowing the customer to generate additional income?

- Sell covered calls *Selling calls will generate income and protect the downside to the extent of the premiums received.

Which of the following positions would create the most risk for an investor?

- Sell short 100 shares of SSS and sell 1 SSS put *A short sale of SSS stock has unlimited loss potential. Selling a put obligates the customer to buy the stock at the strike price in return for premium. A short sale, coupled with a sale of a put, is equivalent to selling an uncovered call and creates the most risk.

Written notice of intent to deliver before an agreed-to settlement date is required in which of the following transactions?

- Seller's Option *A seller's option trade gives the seller a specified settlement date that exceeds the regular way delivery date to deliver the securities. If the seller wishes to deliver them before the agreed-on settlement date, she must provide 24-hour notice to the buyer.

Which investor has the greatest potential risk if the price of QRS goes up?

- Short 10 Calls on QRS If the market is rising, the greatest potential risk that an investor can take is a SHORT NAKED CALL because the potential loss is UNLIMITED. Please note that any short option, put or call, is uncovered unless something in the question indicates the opposite.

Bankers' Acceptances (BA)

- Short term time draft - Post dated check or line of credit - Between 180 and NEVER more than 270 days - US corporation use BA's extensively to finance international trade - usually pays for goods and services in a foreign country (Might see bill of exchange or a letter of credit (LOC) - Always issued at a discount from the face value. - Bank pays upon maturity

Commercial Paper (CP)

- Short term unsecured paper - Sold in blocks of $100,000 (For working capital) - Could be called a promissory note - 1 to 270 days, although most mature within 90 days - Issued at a discount from the face value

Which of the following types of mutual funds has capital appreciation as its investment objective?

- Specialized *An objective of high-capital appreciation is most likely realized by a stock fund. A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation.

A customer of your broker-dealer is bullish on U.S. equity securities across a broad spectrum of industries. He would like to participate in an anticipated upward movement of an equity stock index. Which of the following investments would you recommend as being closely related to the movement of equities in general?

- Standard & Poor's depository receipts (SPDRs) *The SPDR is an index fund designed to replicate and track the performance of the S&P 500, a broad-based equity index.

State and local government securities (SLGS) are purchased by

- State and local governments *SLGS securities are purchased by municipal issuers that are subject to IRS yield restrictions when they invest the proceeds of a prerefunding. The monies placed in escrow are invested in SLGS, which are government securities whose interest rates are arranged to comply with IRS restrictions.

It would be expected that your firm would employ heightened suitability standards when evaluating recommendations for

- Structured products. *The higher the risk of the investment, the greater the need for checking suitability. Structured products, such as equity-linked notes and exchange-traded notes, are considered complex products. In many cases, FINRA has discovered that registered representatives had inadequate understanding of the investment, leading to their making unsuitable recommendations.

Which of the following documents spells out the rights of each member of the underwriting syndicate and how the issue is allocated?

- Syndicate Letter *The syndicate letter (also called the agreement among underwriters, syndicate agreement, syndicate account letter, or account summary report) is the document that forms the syndicate and spells out each member's rights and obligations. The allocation of the new bond offering that is accorded each syndicate member is detailed in this agreement. Members of a syndicate receive notice of their share of the offering through -- Syndicate Letter *The syndicate letter is sent by a municipal dealer to prospective members inviting them to join the syndicate and setting forth the conditions of the syndicate. Such conditions include who the manager will be, the percentage participation (each member's share), and the amount of good faith deposit required.

The interest from which of the following bonds is subject to federal income tax?

- T-Notes - Federal National Mortgage Association (FNMA) *Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax.

A taxpayer's most advantageous tax benefit is

- Tax Credit *A tax credit reduces a person's tax liability dollar for dollar. Deductions, depreciation, and depletion reduce taxable income. *Historic rehabilitation and government-assisted housing are two programs that offer potential tax credits.

All of the following statements regarding a municipality's debt limit are true except

- That the debt limit is the maximum amount a municipality can borrow in any one year. *The debt limit is the maximum amount of debt a municipality can have.

A municipal bond underwriter looking in The Bond Buyer would recognize the percentage of new issues sold versus new issues offered for sale the prior week as

- The Acceptance or placement ratio The placement ratio, also known as the acceptance ratio, is compiled weekly and reflects the municipal bonds sold divided by the municipal bonds offered in the previous week.

All of the following information, if missing from the delivery of a municipal bond certificate registered for principal only, would fail to meet good delivery standards except

- The CUSIP number *A missing CUSIP number for a bond will still meet good delivery standards. The CUSIP number is an alphanumeric designation for an issue and is distinct from the bond number, which is unique to the bond certificate. For bonds that are registered in the name of the owner, assignment (the signature of the seller) is required for delivery. A municipal bond certificate always requires a legal opinion, unless ex-legal (without the legal opinion) is specified at the time of the trade. Please note that unless something in the question says the sale is ex-legal, it is not.

When a customer sells $20,000 of securities from a margin account, all of the following are affected except

- The Equity *Equity is only affected by changes in market prices and never by sales of securities in the account

The market-wide circuit breaker (MWCB) rule uses which of the following as the pricing reference point to measure a market decline?

- The S&P 500 index recalculated DAILY

A corporation has an outstanding issue of 8% convertible debentures with a conversion price of $25. The bond indenture contains an antidilutive clause guaranteeing the debt holders the right to maintain proportionate equity conversion in the corporation. If the company pays a 10% stock dividend to its common shareholders, how will that affect the debenture holders?

- The bonds will now be convertible at approximately 22.73. *The antidilutive provision means the debenture holders will be able to convert into an equivalent share value as before. With a conversion price of $25, the bond is convertible into 40 shares ($1,000 ÷ $25). After the 10% stock dividend, they should be able to have 10% more shares, or 44 shares. That means the conversion price must be reduced. Divide $1,000 by 44 shares and the result is $22.73. Remember, anytime there is a stock dividend, prices go down.

In an interdealer trade, if the seller delivers before the settlement date, which of the following statements is true?

- The buyer may accept the stock or refuse it without prejudice. *In a regular way trade, the firm is not obligated to accept securities delivered before the settlement date (two business days after the trade date), but it may do so if it wishes.

The Municipal Securities Rulemaking Board (MSRB) and FINRA rules requiring uniformity of business practices by member firms may be altered or modified by a mutual agreement between the broker-dealers concerned. There is, however, an exception to modifying the rules when it comes to the rules regardingv

- The content of confirmations *The contents of confirmations are specified in SEC Rule 10b-10 and followed by the MSRB and FINRA. They cannot be altered by a mutual agreement.

When determining position limits for listed options contracts and LEAPS contracts on the same side of the market, which of the following statements is true?

- The contracts must be aggregated *LEAPS and listed options on the same side of the market, on the same underlying security, must be aggregated and remain within position limits. *Size of 1 LEAPS contract -- 100 Shares

A registered representative is opening both cash and margin accounts for a corporation. Which of the following documents will he need?

- The corporation's charter and bylaws - The name(s) of natural persons authorized to trade the account *Corporate accounts are generally those established by the officers of a corporation. Such accounts require a copy of the corporate resolution naming the authorized person(s) and account trading limits (if any). If it is to be a margin account, a copy of the corporate charter and a signed margin agreement are also required.

One of your new customers indicates that he does not want the securities transferred into the name of the brokerage firm nor does he want the securities held in his name at the firm. At the same time, he wants to be able to make trades easily without delivery issues. What would you recommend?

- The customer should use the DRS *DRS stands for the Direct Registration System. DRS provides a book-entry service. The issuer keeps the records of ownership with no certificates issued. When there is a sale of securities in the account, the customer tells the DRS to deliver to the broker-dealer and there are no hassles with signature guarantees or mutilated certificates. Transfer and ship creates potential delivery issues because the customer will have to be sure to have everything in good deliverable form to the broker-dealer by T+2. *the company that issued the stock (or its transfer agent) is the one that holds the security in book-entry form.

Which of the following describes additional paid-in capital?

- The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value *Earned surplus is another name for retained earnings.

Investors in zero-coupon corporate bonds would find all of the following to be true except

- The discount must be accreted annually with taxation deferred until maturity. TRUE: 1) The discount is in lieu of periodic interest payments. 2) The bond's duration is equal to its length to maturity. 3) The discount must be accreted and is taxed annually. On a corporate zero-coupon bond, the discount is accreted on an annual basis and investors receive a Form 1099-OID indicating the amount of taxable accretion earned for the year. That is one of the reasons why these bonds are favored for tax-sheltered accounts, such as an IRA, or for UTMA accounts where the child's income might be very low. One of the important characteristics of these bonds is that their duration is equal to the length to maturity. This gives them a longer duration than coupon bonds of the same length and is the reason for their greater price volatility.

All of the following would be reasons for an employer to choose a nonqualified plan over a qualified plan except?

- The nonqualified plan provides an immediate income tax deduction for the employer. Preferred: 1) The nonqualified plan is not subject to ERISA reporting and disclosure requirements. 2) The nonqualified plan provides greater flexibility. 3) The nonqualified plan can discriminate in favor of highly compensated employees.

Many mutual fund investors elect to reinvest their dividends into additional shares of the fund. When an investor does this with dividends paid by a common stock fund,

- The dividends are taxable in the year received. *Unlike dividends from a municipal bond fund or UIT, which are exempt from federal income tax, dividends from stock funds (or taxable bond funds) are taxable in the year paid, regardless of whether they are reinvested or taken in cash. The test wants you to know that there is no tax advantage to reinvesting distributions. There are other benefits, such as reinvestment at NAV instead of POP, but tax breaks is not one of them. As it happens, when dividends are reinvested, the investor's tax basis increases by the amount of the dividend.

The bond placement ratio, as shown in The Bond Buyer, is computed by taking

- The dollar value of new issues sold divided by the dollar amount of the new issues offered. **The bond placement ratio is the percentage of new municipal bonds offered last week that were sold last week. Although not a term you'll see on the exam, think of this as the success ratio. It reports how well the underwriters did in moving the week's new issues. For example, if $1 billion of bonds were offered during the week, and $700 million were placed (sold), that is a 70% placement ratio.+ *Represents the dollar value of -- Bonds PLACED divided by bonds OFFERED *Measure of demand for new issue MBs (Each week)

Which of the following events requires a member firm to provide a client with a specific FINRA-designed educational communication?

- The firm, directly or through a registered representative, individually contacts a former customer of that registered representative to transfer assets to the firm. Rule 2273 requires delivery of a FINRA-created educational communication by the recruiting firm highlighting key considerations for former customers in transferring assets to the recruiting firm, and the direct and indirect impacts of such a transfer on those assets. - Within 3 months of hire - Send FINRA prepared educational communication to customer - Outlines financial incentives of rep - Costs and services that are different *NOT applicable to institutional clients - Will Send FORM TIF (Transfer Initiation Form)

A customer asks for sales literature for a money market mutual fund. Upon receiving the literature, she notices

- The fund seeks to maintain a stable price but the fund can lose money. *Sales literature for money market mutual funds must include the fact that it is possible to lose money when investing in the fund.

Which of the following Statements is true of an irrevocable trust?

- The grantor must give up ownership of items placed in the trust - The structure of the trust may reduce estate taxes *The grantor may be able to avoid some of the tax consequences because he gives up ownership of items in the trust and cannot change the terms of the trust once established.

A provision permitting the syndicate members participating in a firm commitment offering to engage in short selling on an IPO is

- The green shoe option *A green shoe clause, negotiated with and agreed to by the issuer, allows the syndicate to sell up to 15% more shares than initially registered within 30 days of the IPO beginning to trade. Because the underwriters do not own those additional shares, they are, in reality, selling them short. However, because the issuer has agreed to issue the additional shares, the syndicate does not have the risk normally associated with selling short. In the case of a stock offering, when demand is considerably lower than supply for a new issue (the opposite of the conditions using the green shoe option), the price in the aftermarket is likely to fall. Under these circumstances, the underwriter can stabilize the security by bidding for shares in the open market. These bids may be placed at or just below the public offering price. The managing underwriter can enter or appoint a syndicate member to enter stabilizing bids for the security until the end of the offering period. In a firm commitment underwriting, the underwriter assumes substantial financial risk for the underwriting. To limit its risks, a market-out clause in the underwriting agreement specifies conditions under which the commitment is cancelable. An example of such an event would be the sudden death of the company president. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle?

- The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. - The investor is 30 years old and has a newborn child and wishes to assure funds for a college education. *Zero-coupon bonds maturing in 18 years would assure the 45-year-old of the face value at age 63. Being in an IRA, there would be no current taxation, and upon maturity, if desired, the funds could be distributed without the 10% penalty. Zero-coupon bonds are one way to guarantee funds for college education. However, with no current income, they would not be suitable for the 65-year-old and would not offer any tax shelter to the 20-year-old.

An investor purchased an interest in a limited partnership, paying $10,000 in cash and signing a recourse note to the partnership under a letter of credit for $40,000. Which of the following statements are true?

- The investor's tax basis will be $50,000. - The investor's maximum loss will be $50,000. *A recourse note means that the limited partner agrees to pay the note no matter what happens. He is legally liable for the $40,000, which makes both his tax basis and maximum loss potential $50,000.

A trade is made for $10,000 of municipal bonds on an ex-legal basis. That means

- The legal opinion is NOT attached *Regular way delivery for municipal bonds is with the legal opinion attached. However, under MSRB Rule G-12, if, at the time of the trade, it is specified that the delivery will be made ex-legal, it is a good delivery. In this case, the bond will typically be stamped ex-legal.

A member firm must prefile its retail communications if

- The member has not previously filed with FINRA - It appertains to standardized options prior to the distribution of the ODD. - The advertising relates to single stock futures. - Under an order from FINRA to prefile.

Which of the following will halt trading in listed options when there is a trading halt in the underlying stock?

- The options exchange on which the option is listed *If trading is halted in any stock on which options trade, trading in those options is also halted by the Chicago Board Options Exchange

One of your customers has maintained a traditional IRA for the past 15 years. Some of her annual contributions were not tax deductible due to her income level and participation in another qualified plan. At age 60, the customer elects to make a lump-sum withdrawal. Which of the following statements is true?

- The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. *All earnings, whether from deductible or nondeductible contributions, are tax deferred. Therefore, all earnings are taxable as ordinary income upon withdrawal. Only the nondeductible contribution is returned tax free.

What happens to outstanding fixed-income securities when market interest rates drop?

- The prices increase. *When interest rates drop, the price of outstanding bonds rises to adjust to the lower yields on bonds of comparable quality.

An over-the-counter (OTC) trader's quote of "60 to 63, work out," in response to a broker holding a customer order to sell a block of stock, indicates which of the following?

- The quote is tentative (nominal), merely suggesting a range in which the order is likely to be filled. *The term work out means that the quote is approximate, or nominal. As with a subject quote, the OTC trader that supplied the quote will most likely negotiate with a number of market makers to get the customer's securities sold or bought.

Marking-to-the-market is

- The revaluing of securities held long or short in the account based on the actual CMV of the securities. *Marking-to-the-market is the revaluing of an account based on the CMV of all securities positions in the account. In order to determine the necessity of additional maintenance calls or the availability of SMA, this revaluing is done at least once per business day in accounts that have margin balances.

If a customer writes 2 ABC Feb 90 puts at 8 and buys 2 ABC Feb 80 puts at 2, which of the following statements are true?

- The spread is bullish - The BE is 84 This is a credit put spread (the net credit being 6 points per share) in which the breakeven point is calculated by subtracting the net premium (debit or credit) from the higher strike price (90 - 6 = 84). A credit put spread is like the net sale of a put, and buying the lower strike price in any spread (put or call) is bullish.

An analyst reports that a stock's price is consolidating. This means

- The stock's trendline is moving primarily in a horizontal direction. *In general, when the trendline of a stock's market price is moving within a very narrow range (the chart is basically a pattern of horizontal movement), the technician views that as a consolidation. Within a relatively short time after the consolidation has been verified, it is expected the price will move. What isn't determined yet is if the movement will be up (bullish) or down (bearish).

When describing a new offering of municipal bonds, which statement is true regarding presale orders?

- The takedown on presale orders is split among the syndicate members based on their participation. *Unlike registered corporate issues, investors may place orders for a new municipal bond issue before the issue has even been awarded to the syndicate. These presale orders have the highest priority in terms of allocation, and all syndicate members share proportionately in the takedown (their underwriting compensation).

An investor sold a corporate bond with a 5% coupon at a net price of 101. The bond had accrued interest for 45 days. Which of the following statements regarding the confirmation of this trade is correct?

- The total amount due on the purchaser's confirmation will appear as $1,016.25. *Accrued interest is always added to the price of a bond. When you buy the bond, you pay that accrued interest, and when you sell a bond, you receive that accrued interest. The principal value is 101, or $1,010. Forty-five days of accrued interest is ⅛ of a 360-day year, or ¼ of a 180-day semiannual interest payment. With a 5% coupon, the bond pays $25 every 6 months. One-quarter of that is $6.25, so the total proceeds to the seller (and cost to the purchaser) is the $1,010 plus the $6.25, or $1016.25. One of the details included on a bond confirmation is the yield to maturity based on the price of the bond, but not the current yield.

A fundamental analyst researching a stock is concerned with all of the following except

- The volume of shares traded. A fundamental analyst IS concerned with: 1) The economic climate 2) The inflation rate 3) How an industry is performing 4) A company's historical earnings trends (Stock market price as a multiple of the company's earnings) 5) How it is capitalized (Capitalization ratio) 6) Product lines 7) Management Efficiency 8) Financial statement ratios, such as the P/E ratio. A technical analyst is concerned with: 1) Trading volumes or market trends and prices.

Interval Funds (closed-end discretionary funds)

- These are closed-end investment companies, registered as such under the Investment Company Act of 1940. - Unlike other closed-end funds, interval funds do not trade in the secondary market. - They are called interval funds because at certain intervals, which may be anything from monthly to annually, investors are allowed to sell a portion of their shares back to the fund at net asset value (NAV). - One benefit of these funds is that the portfolio manager can take certain illiquid positions a mutual fund manager might not take because there is no need for daily liquidity with an interval fund. - In general, these would be more suitable for an investor with a longer time horizon. **May issue DEBT securities

A member firm may commingle the securities of two or more customers

- With customers written permission *member may commingle a customer's securities with those of other customers only if all of the customers involved have given their written consent.

In a competitive offering of municipal bonds, the issue is usually awarded to the syndicate that offers to sell the bonds

- With the lowest net interest cost to the issuer *In a competitive underwriting for municipal bonds, competing syndicates submit bids to the issuer. The issuer (or representative) examines the bids to determine which bid provides the issuer with the lowest net interest cost.

Danielle is the CFO of the XYZ Manufacturing Company. XYZ's shares are listed on the NYSE. She purchased shares of XYZ common stock through her registered representative of a FINRA member firm 165 days ago and, wishing to add on to her home, sells the stock and realizes a $50,000 profit. Under SEC rules, how will this transaction be treated?

- This is considered a short-swing profit and it must inure to the benefit of the issuer. *The first point to understand is that this question has nothing to do with Rule 144 concerning the sale of control or restricted stock. It relates to another SEC rule that also deals with control stock, but for a different purpose. As an executive officer, Danielle is subject to the short-swing profits rule involving the sale of control stock. When control stock is sold prior to a six-month holding period, any profits are defined as short-swing profits and must be disgorged to the issuer. The phrase "inure to the benefit" refers to the profits being returned to the issuer.

All of the following are reasons for entering a stop order except

- To guarantee execution at a specified price or better. *A stop (loss) order is entered to protect a profit or to limit a loss. Execution at a specific price can never be guaranteed because a stop order becomes a market order when the stop price is hit. It is only a limit order (if executed) where the specified price (or better) is guaranteed. Stop Order: 1) Protect unrealized gains on long position 2) Protect profits on short position 3) Limit losses on long position Used for: 1) Establish positions 2) Protect profits on long positions 3) Protect profits on short positions

A member firm's client has issued instructions for the assets held in an account at another member to be transferred to this account. The member firm has received the proper ACATS validation from the carrying firm. Therefore, it is expected that the transfer will be completed within

- Two additional business days *When using the ACATS system, validation takes place in one business day and the transfer in three business days. Please note the question states that validation has been received. That means the transfer will take place in two more business days (making it a total of three business days). Follow this trail. On Monday, the receiving firm sends the TIF to the carrying firm. On Tuesday, the carrying (delivering) firm validates the TIF and has three business days to make delivery (by Friday). On Wednesday, the validation gets to the receiving firm. Yes, the exam can be that tricky.

Under which of the following circumstances may a member firm sell a new equity issue to one of its nonregistered employees?

- Under NO circumstance *Member firms and employees of members (registered and nonregistered) are prohibited from buying a new equity issue at the public offering price.

Your client purchases 100 shares of XYZ common stock at $50 and sells two XYZ Oct 55 calls for a premium of $2 each. This investor's maximum potential loss is

- Unlimited *This is a ratio write. The client is writing more calls than he has stock to cover. The first call is covered by the 100 shares of stock owned, but the second call is uncovered, or naked. A short naked call has unlimited loss exposure.

A registered representative is contacted by a new client who wishes to transfer his 401(k) plan assets into an IRA at your firm. The amount being transferred is $1,050,000 and the registered representative recommends diversifying into Class C shares of five different funds in the XYZ mutual fund group. This recommendation would be

- Unsuitable because a purchase of that size is likely going to reach a significant Class A share breakpoint. There are two problems with recommending Class C shares for this client. The first is that the no-front-end-load feature is not a selling point. A typical load on a $1 million purchase of Class A shares is zero, eliminating any benefit of the Class C share. The second point is that Class C shares generally have a higher 12b-1 charge and, even if the fund group was one of a small number that carries a 1% load on this large of a purchase, it wouldn't take long for the lower expense ratio of the Class A shares to result in a better deal for the investor. As a test-taking tip, beware of large purchases of Class C and especially Class B shares ($100,000 or more).

A 2X leveraged inverse ETF tracks an index that has recently fallen 2%. If the ETF was priced at $25 per share before the drop in the indices price, where should the ETF be priced now, assuming the ETF portfolio performed as intended?

- Up $1 per share *An inverse fund portfolio attempts to mirror returns that are the opposite of the index it is tracking. Therefore, if the index has fallen, this ETF should be up. A leveraged ETF attempts to produce returns that are a multiple of those produced by the index it is tracking. Therefore, if this index has fallen by 2%, the 2x leveraged fund should move twice as much (4%). With the index dropping by 2%, this inverse fund will rise by 4%; that is, $1 on a $25 index.

What are defined as securities?

- Variable Annuities - Options *A security is any investment for profit with management performed by a third party. In addition, an element of risk must be present. Fixed annuities are not considered securities, as return is guaranteed by the insurance company issuer. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return.

Peak

- Very low unemployment - Slowdown in inflation - Slowing of GDP growth - Steady consumer demand

When does pension payment liability affect the credit rating of a municipality?

- When funds needed to make payments exceed funds available *The credit rating for a municipality's debt would be adversely affected if funds needed to make payments exceeded funds available. This is an unfunded pension liability and can result if monies set aside to make future payments are not enough or if poor investment decisions deplete the funds.

Which of the following is not a factor when a communication to be distributed to the public is either being reviewed or approved within the broker-dealer?

- Whether the piece will be distributed in written form or via electronic media *FINRA holds broker-dealers to certain general standards regarding all member firm communications. Consideration must be given to whether all statements in a communication are clear and not misleading, are balanced regarding the representation of risk and reward, do not omit material facts or make exaggerated claims, and do not imply that past performance can be projected to future outcomes. These standards would apply and be the same, whether the communication was distributed in written or electronic form.

Under FINRA rules, if a member wants to have the terms of a clearly erroneous trade adjusted, it must notify Nasdaq Market Operations

- Within 30 minutes of the execution *If a member wants to have a clearly erroneous trade adjusted or nullified, the member must make the request of Nasdaq Market Operations within 30 minutes of the execution.

If an investor interested primarily in speculation does not expect the price of DWQ stock to change, she will

- Write an uncovered call *An investor who expects prices to remain stable writes an uncovered straddle (short straddle). In selling the put and call at the same terms, the writer collects double premiums. Both expire if the price remains stable, but if the price moves, one side loses money. Short straddles carry unlimited loss potential because of the uncovered call.

The Bond Buyer's revenue index is which of the following?

- Yields of municipal revenue bonds with 30 years to maturity *The Bond Buyer's revenue index is an average yield of 25 revenue bonds with 30 years to maturity. Which of the following regarding the Bond Buyer Revenue Bond Index (Revdex) are true? - It includes 30-year bonds - It is compiled WEEKLY

Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in

- a JTWROS account with the Social Security number of the designated person used. *In a JTWROS account, the assets are considered jointly owned. Only one tax identification number (Social Security number) is placed on the account. If it is the number of the nonemployed individual, the Form 1099 will go to that person and that is whom the IRS will expect to pay the taxes. That might be the correct answer to a test question. In the real world, it might not satisfy the IRS that the one in the lower tax bracket is being credited with all the income and gains. If the IRS audits the account and sees that the funds came from the working individual, there could be tax issues. However, the exam does not always deal with the real world and we won't either on this one.

An investor purchased a new issue corporate zero-coupon bond for $600. The bond has a maturity of 20 years. Six years later, the investor sells the bond for $740. For tax purposes, this would result in

- a capital gain of $20. *The $400 discount is accreted over the 20 years to maturity. That is an annual accretion of $20. After 6 years, that is $120, making the tax basis of the bond $720. Because the sale at $740 is $20 more than the basis, the investor has a long-term capital gain.

Démodé Classic Investments (DCI) is planning a direct mail campaign to several thousand potential investors. The topic of the campaign deals with owning real estate through direct participation program limited partnerships. Under FINRA Rule 2210 on communications with the public, this is considered

- a retail communication and must be filed with FINRA WITHIN 10 business days of first use or publication. *A direct mail communication to more than 25 existing and/or potential clients within a 30-day period is a retail communication. Unless an exception applies, a designated principal of the firm must approve all retail communications. DPPs are part of a group of securities (other common examples are investment companies and CMOs) where filing with FINRA within 10 business days of first use or publication is the rule.

At 3:55 pm ET, a registered representative receives a market order from an officer of XYZ to buy 75,000 shares of XYZ for the company's account. The registered representative must

- advise the officer that a safe harbor under SEC Rule 10b-18 no longer exists before placing the order. *Under SEC 10b-18, an issuer purchasing its own securities cannot affect the opening or closing of the security. A safe harbor is available if the issuer is not involved in the first transaction of the day or in any transaction in the last 30 minutes of trading (10 minutes if the security is actively traded). Compliance with the rule is voluntary. If an issuer wants to reduce or eliminate its regulatory liability, it must satisfy the safe harbor conditions. Otherwise, repurchases will not fall under the safe harbor for that day. If the issuer were to purchase its own securities during the last 30 minutes of trading, it may be forced to justify that its purchase did not affect the closing price. If a registered representative receives an order from an issuer at 3:55 pm ET, he must advise the issuer that a safe harbor is not available. The representative may then place the order if instructed to do so.

If your client expected short-term interest rates to fall, you might recommend that the client

- buy a Treasury bill yield-based put. *The key to debt options is that the investor is betting on the movement of interest rates, not the price of the security. As with any other investment based on downward movement (put down), the strategy called for here is buying a U.S. Treasury bill put option.

Features of an employee stock purchase program (ESPP) include all of the following

- contributions are a percentage of pre-tax income. - the purchase price is discounted. - participants can sell the stock at any time. - Contributions are not deductible on his tax return. *Employee stock purchase plans (ESPPs) are NOT qualified plans. That means that the employee purchases the stock with after-tax dollars. For example, an individual has a monthly salary of $5,000 and elects to contribute 10% of gross salary to the plan. The employer will take $500 per month out of the paycheck after subtracting withholding tax and Social Security contributions and any other deductions. Before enrolling in the plan, this employee's monthly take-home pay might have been $3,700. Now it will be $3,200.

An hour ago, you entered a sell limit order for your customer in XYZ stock. Looking at a current quote, you could expect the order to have been executed if

- the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price. *A sell limit order sets the minimum price an investor will accept. The order should have been executed if the current bid price is higher than the sell limit or the last reported price in the stock is higher than the sell limit.

One of your customers owns 10 HBH Creations 4.5% convertible callable debentures. The conversion price into HBH common stock is $40. With the current market price of the HBH Creations stock at $44, the company publishes a notice that all of the debentures will be called in thirty days at a price of 104. When the customer calls for your advice, you would probably recommend

- exercising the conversion privilege. *Generally, a corporation exercises the call privilege when the call price is below the parity price. With a current market price of the stock at $44 per share, the parity price of the debenture is 110 ($1,100). The effect of this call is that it, in essence, forces the investors to convert, and the issuer never has to pay off the debt. Let's take a look at the math here. With a conversion price of $40, a debt security with a par value of $1,000 is convertible into 25 shares ($1,000 ÷ 40). If the stock is currently selling at $44 per share and the investor could convert into 25 shares, it makes the conversion worth $1,100 (25 shares times $44 = $1,100). In our question, the call price is 104 ($1,040) so the question becomes, "What is a better deal for your customer: exercising the conversion privilege that gives the customer stock with a value of $1,100 or accepting the call worth $1,040?" Why not just sell the debentures? Because once the call at 104 has been issued, the price of the debentures will decline to approximately that level. Why not sell the stock? The investor doesn't own any stock until conversion, so there is nothing yet to sell.

The item that is not true when you read a bond quote of 6.5s of 29 at 99 is

- if the price quote was changed to a basis quote, the yield would be less than 6.5%. *This bond is trading at a discount of 1 point ($10); therefore, a basis quote, which is the bond's yield to maturity, will be greater than the 6.5% coupon, not less than 6.5%. YTC is only shown when it produces the lowest yield. That would never be the case with a bond traded at a discount.

One of your clients has a profit in STV common stock. The purchase price was $40 per share and is now $60 per share. The client is looking to take the profit and feels the stock still has a bit more growth. The client's strategy is to enter a sell limit order at $62. It is critical that the client understand that

- if the stock never reaches $62, the order will never be executed. *One of the risks with a limit order, buy or sell, is that the stock may never reach the price limit. In that case, the order is never executed. For this client, if the stock climbs to $61.99 and then plunges, the client has lost out on much or maybe all of the profit. Because the order can never be executed below the price limit, it never becomes a market order. It is purchasing a put option on stock held less than 12 months and one day where the holding period is erased.

If a customer purchases stock in an existing margin account and fails to make payment within the time period specified under Regulation T, the broker-dealer carrying the account can take all of the following actions except

- liquidate the entire account and remit any balance to the customer. *If a customer does not meet a Fed call, the firm can use existing SMA to meet the call, request an extension of time from its DEA, or liquidate the unpaid portion. The firm would not close out the account.

A registered representative is reading an article in a popular magazine about the advantages of tax deferral in retirement planning. There is a note that reprints of the article are available. In order to send these reprints to existing and prospective customers,

- member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors *This is an example of an independently prepared reprint. It is a form of retail communications and can be used only if the preparer is independent of the member firm. In most cases, these are used "untouched." However, if there are factual errors or statements contrary to FINRA standards, they must be fixed. Preapproval by a principal is required and there is no filing necessary with FINRA. If the publisher is independent but received money from an issuer or underwriter for authoring the article, it may not be used.

Member firms employing registered representatives who have a disciplinary history or who have been associated with disciplined firms may have to install taping systems to record all telephone conversations between their registered persons and existing and potential customers, review those recordings, and file reports with FINRA under Rule 3170. All tape recordings made pursuant to the requirements of this rule shall be retained for a period of

- not less than three years from the date the tape was created, the first two years in an easily accessible place. *FINRA Rule 3170 requires that all tape recordings made pursuant to the requirements of the rule are to be retained for a period of not less than three years from the date the tape was created, the first two years in an easily accessible place. Each taping firm shall catalog the retained tapes by registered person and date.

A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are

- partially a tax-free return of capital and partially taxable. *The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.

A municipal bond in default is in good delivery form if

- past-due and current coupons are attached. - subsequently due coupons are attached. *To be in good delivery form, a municipal bond must be accompanied by all unpaid coupons: past due, currently due, and subsequently due. Insurance or letters of guarantee do not constitute good delivery

The ABC Insurance Company is advertising its variable annuity product as "ABC Lifetime Income—income generated from mutual fund returns." This advertisement is

- prohibited because it implies returns from mutual funds. *Variable contracts or their underlying accounts cannot be advertised as mutual funds. Proprietary terms can be used instead of words such as "annuity."

Reasons why a corporation might engage in a stock buy-back program would include all of these except

- reducing annual interest expense. *There is no interest expense with stock. When a company buys back its stock, it becomes treasury stock. That stock is no longer outstanding. Buying back the stock should cause the earnings per share to increase (there are now fewer shares outstanding). Many times one company will acquire another one by paying for the purchase with its treasury stock rather than cash. Many companies offer employees ownership opportunities through employee stock options. This is a way to ensure that the company has enough stock to meet the needs.

Approval of a new options account by a principal may occur before

- the customer has verified information on the new account form. *For the account to be opened, it would need to be approved by a principal first. To do so, a new account form would have to be completed, suitability information would have to have been supplied by the customer, and an options disclosure document would have to have been provided to the customer. The new options customer must verify information on the new account form within 15 days of opening the account.

When a customer instructs a registered representative to transfer and ship, the representative instructs the margin department to transfer ownership into

- the customer's name and deliver the securities to the customer. *The term transfer and ship means to transfer the securities into the name of the customer and ship (deliver) the securities to the customer. To hold in street name would require the securities to be transferred into the name of the broker-dealer and held for safekeeping.

XYZ, Inc., has 5 million shares outstanding and will issue 1 million shares of new stock through an upcoming rights offering. Regarding the rights offering, a registered representative (RR) should know that

- the exercise price is generally lower than the current market price at issuance. *The exercise price is generally below the current market price at issuance. None of the other choices are true because the value of the right drops on the ex-rights date. Each existing share receives 1 right, so in this case, XYZ will issue 5 million rights. An investor must exercise the rights within 30-45 days of issuance; otherwise, they will expire.

A 3× leveraged inverse exchange-traded fund means

- the goal of the fund is to have the shares go up by three times the amount that the targeted index falls. *A leveraged inverse fund attempts to produce returns opposite of the targeted index in the amount designated by the leverage multiplier—in this case, three times. If the targeted index rose, the inverse fund would fall by the leverage multiplier, and in that regard, substantial risk must be recognized due to the leverage. Leveraged funds will use derivative products like options and futures to help meet the desired goal, and they can use investment strategies such as margin to purchase securities for the fund portfolio as well. Lastly, because the fund shares are exchange traded, they can be purchased on margin by investors.

If a prospectus for a variable life insurance product contains hypothetical projections of returns,

- the maximum return permitted is 12%, and there must be an illustration showing a 0% return as well. *In discussions of variable life insurance with customers, projections of hypothetical returns may be used. This is to demonstrate how the program really works and the risks involved if the projections are not met. The maximum allowable hypothetical rate of return is 12%, and there must also be a projection shown assuming a 0% return. Variable life insurance must not be sold as an investment product. It must always be emphasized that the policy should be purchased to meet an insurance need.

The derivative-based strategy known as portfolio insurance involves

- the purchase of a put on the underlying security position. *The purchase of a put option to hedge the downside risk of an underlying security holding is called a protective put position, one of many derivative-based strategies collectively known as portfolio insurance.

One of your customers purchased 1,000 shares of PKZ stock on the day preceding the ex-dividend date. Her account instructions are to have all purchases registered in her name. Several weeks after the payable date, she contacts you with the news that she did not receive the dividend from the issuer. The proper procedure is

- to have your broker-dealer send a due bill to the firm representing the seller. *The ex-dividend date is the first day on and after which purchasers of a stock are not entitled to a previously declared dividend. The "ex" means without. This customer purchased before the ex-date, so she is entitled to the dividend; the seller of the stock is not. Broker-dealers use a due bill when the incorrect party receives a distribution from the issuer. Therefore, your firm would send a due bill to the broker-dealer representing the seller, who is the party obligated to remit the dividend amount.

Customers seeking to open an options account may have the account approved by

-the branch manager initially as long as it is subsequently approved by a principal who has a Series 10 registration or is a Registered Options Principal (ROP). *In general, an options account will be approved by a Limited Principal with a Series 10 license or a Registered Options Principal (ROP). If the branch office manager is not a Registered Options Principal or a Limited Principal—General Securities Sales Supervisor, account approval or disapproval shall, within ten (10) business days, be submitted to and approved or disapproved by a Registered Options Principal or a Limited Principal—General Securities Sales Supervisor.

CE

1) Firm Element 2) Regulatory Element Firm - Annual training plan - Regulatory Developments, Scope of the member's business activities, performance of personnel, supervisory needs. (All RR's in contact with public) (By Dec 31) Regulatory - ****Changed on Kaplan question, all RR complete a computer based training by December 31 EVERY YEAR**** *All registered persons must complete computer-based training sessions annually by December 31 to comply with -- BOTH the regulatory and firm level CE *The continuing education requirement consists of two elements: regulatory and firm. Both of these must be completed by December 31 every year. The best answer here is "both." The two responses that list the two requirements individually are technically correct, but you are expected to select the best response.

Common Stock Can Be Classified As:

1) Authorized 2) Issued 3) Outstanding 4) Treasury - Largest issuer of debt is the Treasury Department *Equity Security *Worried about inflation/Saving Principal- Key word for CS *Higher GROWTH than Preferred *Common stock are often classified by the size of the corporation. (Market Capitalization) (Outstanding Shares X Current Market Value) *Have preemptive rights, right to vote for BOD's, right to inspect the books (Get report 2 times a year) *All corporations issue common stock, not all corporations issue preferred stock *Cannot be held liable for any debts of the corporation so can't lose more than you've put at risk. Risks: *Most susceptible to Business Risk & Market Risk - Legislative - Regulatory - Capital *Common stock pays QUARTERLY dividends, not interest income (Qualified dividend is taxed favorable (Lower rates) - taxed at same rates as long term capital gains (15%) *Nothing Fixed Suitable For (Ownership): 1) Capital Appreciation (Income - Dividend Payments) 2) Growth (Only for Common Stock) 3) Limited Liability 4) Voting rights *Not interest payments (For bond holders) An investor is long 500 shares of DEFG common stock, short 200 shares of DEFG common stock, and short 300 shares of DEFG 5% preferred stock. A tender offer for DEFG common shares is announced. Under SEC rules, this investor is permitted to tender - 300 Shares *The rules permit tendering of net long shares. That means the difference between the long and short positions. In this question, the investor is net long 300 shares: the difference between the 500 long and the 200 short. The preferred shares are not relevant because the tender is only for the common stock. Characteristics: - Limited Liability - Residual Claims To Assets - Transferability - Stock Splits - Stock Dividends

Capital Growth: - Balanced, Moderate: - Aggressive Growth

1) Balanced = Common stock, common stock mutual funds, blue chip stocks, defensive stocks 2) Aggressive = Technology stocks, sector funds - Common Stock - Large Cap Value Stocks - Growth and Income Fund

Six Year Records

1) Blotters (records of original entry) 2) General ledger (accounting information such as income and expense and assets and liabilities) 3) Customer ledgers (statements of the customer's accounts) 4) Customer account records (six years after the account is closed) 5) Principal designation record (which individual supervises what) 6) Stock Ledger **Customer has written a letter of complaint to the dealer. A municipal securities dealer must first -- Accept the complaint and record the action taken **MSRB rules list customer complaints as a 6 record. FINRA rules only require a 4 period. This difference is likely to be tested.

Registration

1) Broker Dealers register at the STATE level under authority of each states ADMINISTRATOR 2) Broker Dealers register at the FEDERAL level under authority of SEC *A BD is permitted to accept payment for a new issue from a new customer when the -- Registration is effective Before the filing of a registration statement for a new issue, a registered representative may not - solicit indications of interest for the security. - solicit orders. - confirm the sale of the security to a customer.

4 Basic Transactions available to an option investor

1) Buy Calls 2) Sell Calls 3) Buy Puts 4) Sell Puts

Options Trading Contracts

1) Buyer: - Opening Purchase -- Closing Sale Seller: - Opening Sale -- Closing purchase

Death Of Customer

1) Cancel Open Orders 2) Freeze the account (Mark it deceased) 3) Await instructions from the executor of the estate Which of the following occurs in a partnership account if one partner dies? - The account is frozen until a new or amended partnership agreement is received. *Upon a partner's death, a partnership account is automatically frozen until a new or amended partnership agreement is received. The deceased partner's share usually goes to an estate, not to the other partners.

Dividends may be paid in 3 ways:

1) Cash Dividends - Quarterly/taxed year distributed (Qualified or Nonqualified) 2) Stock Dividends - Authorized shares/Not taxable except cost per share will impact taxes (Paid quarterly) (Not taxed until sold) 3) Product Dividends *Stockholders must receive notice from issuer in event of actions of shareholders (Unscheduled/Unprecedented): Stock Splits, Dividend Payments, Rights/Warrant Offerings *No Notice for Interest Payments on BONDS *Profits that are not distributed to shareholders are called - RETAINED EARNINGS

Certain ISSUES are EXEMPT from the Registration Statement

1) Commercial paper, bankers' acceptances (BA), and other securities that have maturities of 270 days (9 months) or less 2) Insurance policies and fixed annuity contracts (but not variable) (Buyer assumes no investment risk) 3) Government Securities ** If you see the word variable or the phrase separate account product, the product must be registered.

Taxes (Incomes)

1) Cost Basis = Cost of investment + Commission 2) Sales Proceeds = Proceeds - Commission 3) Earned Income = Salary, Wages, Commissions, Bonuses, Tips, Consulting Fees 4) Portfolio Income = Dividends, Interest, Capital Gains 5) Passive Income = Limited Partnerships, Investment Property Ordinary Income - Consist of several different types of income that are combined (Earned Income, Investment, and Passive) *All of the following are taxed as ordinary income EXCEPT: 1) Bonus from employer 2) Interest payments from bond portfolio 3) Profit made from sale of long held security 4) Consultation fees received from a client **^(3) Profits made from sale of long held (More than one year) are long term CAPITAL GAINS and not taxed as ordinary income. Bonuses and consulting fees are EARNED income. Interest payments are PORTFOLIO income. Both are components of ORDINARY INCOME

Writing A Put Option

1) Covered - Writer already has sufficient cash available to buy the stock 2) Uncovered (Naked) - Writer does not have the cash on hand to purchase the stock at the strike price. 3) Covered Against A Short Stock - Covered put where the customer is short the stock and writes the put.

Writing A Call Option

1) Covered - Writer already owns the underlying security (Most Common) 2) Uncovered (Naked) - Writer does not own the underlying security (Much more risk due to the uncertain price at which the security must be purchased)

Dividend Disbursement Dates (D.E.R.P)

1) Declaration Date - When a company's BOD approves a dividend payment 2) Ex-Dividend Date (Ex-Date) - 1 to 2 business days before the record date. Must purchase before record date to qualify (Day after for mutual funds) 3) Record Date - Stockholder of record (Those who own stock) ("Will Be paid to holder of record on..." 4) Payable Date - Receive checks when name appears on books as of record date ("Will be delivered...") (D.E.R.P)

Risk of Owning Debt Securities

1) Default 2) Credit/Financial *The default risk in debt backed by the US Treasury is effectively zero. Treasury backed securities are the safest investment for US investors (Government Bonds - TBills, TNotes, TBonds)

Types of Nonsystematic Risk

1) Default Risk - Inability to make timely debt payments 2) Business Risk - Not normally associated with bonds 3) Repayment Risk 4) Liquidity Risk - Not be able to sell quickly and at fair price 5) Regulatory Risk 6) Legislative Risk 7) Political Risk - Instability within an emerging economy 8) Sovereign Risk

Members of Exchange

1) Designated Market Maker (DMM)- Specialist that acts as the dealer on the floor for specific security (NYSE - Priority, Precedence, Parity) (Opening quote for issues listed on NYSE is set by DMM) (Maintains a fair and orderly market on the NYSE trading floor) (CANNOT take a Not-Held order) 2) Floor Broker - Represents their firm and their clients (CAN take a Not-held order) 3) Two-Dollar Broker - If floor becomes overwhelmed by trades, they step in 4) Floor Traders - Members that buy/sell on the floor *Trading on exchange happens between members, not employees

Benefits Of Owning Preferred Stock

1) Dividend Preference - Must be paid before any payment 2) Priority At Dissolution Over Common Stock - If bankrupt, have priority claim over common stockholders.

Market Benchmarks

1) Dow Jones (DJIA) - 30 Large stocks 2) Standard & Poor (S&P) - (Overall market performance) - 500 Large stocks, several index mutual funds and ETFs 3) Russell 2000 Index - 2000 Small Companies 4) Wilshire 5000 - 5000 companies (All sizes) (Largest amount) 5) Bloomberg Barclays US Aggregate Bond Index (Agg) - Entire Bond Market 6) MSCI EAFE - Index for foreign equities

Insurable Risks Involve:

1) Due to Chance 2) Definite and Measurable 3) Statistically Predictable 4) Not Catastrophic 5) Randomly Selected and Large Loss Exposure

Can Be Sold On Margin

1) Exchange Listed stocks and bonds 2) NASDAQ Stocks 3) Non-NMS securities OTC issued approved by FRB 4) Warrants

4 Stages of the Business Cycle

1) Expansion 2) Peak 3) Contraction 4) Trough *If US economy were to enter inflationary period, Fixed income payments would NOT become more valuable

Types of Prospectuses For Mutual Funds

1) Full or Statutory Prospectus - Full and fair disclosure (Must be provided no later than confirmation of the sale) 2) Summary Prospectus - Standardized summary of key information taken from fund's full or final prospectus. (Funds name, Exchange Ticker, A Legend) 3) Statement of Additional Information (SAI) - Within 3 business days (Free of charge). Includes - Balance Sheet, Statement of Operations, Income Statement, Portfolio Lists 4) Omitting Prospectus - Another term for fund advertisement, not sufficient *The prospectus of a mutual fund must show the fund's performance over the last 10 years or the life of the fund, whichever is shorter. The data must be shown as the last year's performance, the performance over the last five years, and the performance over the last 10 years. If a fund has less than 10 years of performance records, it must disclose the intermediate time frames if it has them (one and five years) and the performance for the life of the fund. ****Final Prospectus includes all information + Effective date (Release Date) and Public Offer Price -- Does NOT contain SEC approval**** *To obtain a SAI regarding a particular mutual fund, an invest can do all of the following EXCEPT: - Apply to FINRA (SEC, The fund itself, broker dealer are possible sources an investor may look to for a copy. The fund itself is required to have it available for delivery within 3 business days of request) **SAI = Optional **Summary Section = Mandatory for open end

Gifts Vs Inheritance

1) Gift -- The client is considered to have acquired the security on the donor's purchase date and at the donor's purchase price. **Interspousal gifts to citizens of the United States, regardless of amount, are NOT subject to gift taxes. Husband can gift wife $100,000 for NO gift taxes *Donor's original cost basis (cost and holding period) passes to recipient (the donee) *Annual Gift Tax Exclusion - $15,000 per person without gift taxes - Lifetime exemption adjusted annually * If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on -- The market value of the securities on the date of gift. **If a gift tax is due, it is paid by the donor and based on the gift's value on the date it is given. 2) Inheritance -- The client's cost basis for determining if there is a taxable capital gain is the FMV as of the date of death. Holding period is not a consideration because any gains are considered long-term. *Cost basis to heirs = Market value on date of death - Stepped-up basis ^ - Always considered long-term Estate - Paid by estate or donor - Estate tax Exemption - Unlimited to spouse - Adjusted yearly - Estate and gift = Unified credit - Due nine months after death (Estate)

Investment Objectives

1) Growth (Can be aggressive, moderate, or even conservative) 2) Income (Can be current, future, or high risk) 3) Stability (Capital preservation - safety)

What are the two classifications of annuities according to the time when annuity payments begin?

1) Immediate 2) Deferred

Benefits of Owning Debt Securities (Bond = Debt)

1) Income - Bonds are considered the best way to produce current income for an investor 2) Safety - If a corporation fails, bonds are higher in priority that equity securities *Bonds Par Value = 1,000 *Bond Key Words: Obligation, Safe, Safety, Income, Principal = Debt * Mandatory Interest Payments * Priority in Dissolution * Usually FIXED (Safe)

Primary Components of Income Statement

1) Income Statement - P&L, summarizes a company's revenues (sales) and expenses for a fiscal period (Usually quarterly) (What came in, what went out, how much is left) 2) Cost of Goods Sold (COGS) - Cost of labor, material, production used to cerate finished goods. 3) Revenue - Indicate the firm's total sales during the period (the money that came in). 4) Pretax Income - The amount of taxable income, is operating income less interest payment expenses.

2 Types of Securities To Public In Primary Market

1) Initial Public Offering (IPO) 2) Additional Public Offering (APO) - May be called a follow-on offering or a subsequent public offering **Must provide prospectus to customer following a transaction

3 Types of Investors

1) Institutional 2) Retail 3) Accredited

What two elements are necessary for a life insurance contract to have a legal purpose?

1) Insurable Interest 2) Consent

What are the three main instances when insurable interest exists in life insurance?

1) Insuring your own life 2) The life of a family member 3) Life of a business partner

Spread Factors

1) Issue's Size 2) Issuer's Financial Condition 3) Amount of Market Activity in the Issue 4) Market Conditions *"The more active a security, the NARROWER the spread"

Freddie Mac

1) Issues pass-through securities 2) Purchases conventional residential mortgages from financial institutions Freddie Mac is a publicly owned and traded U.S. government agency that issues pass-through securities based on a pool of conventional residential mortgages purchased from financial institutions. Ginnie Mae is the only U.S. agency that issues securities backed by the full faith and credit of the U.S. government.

Largest To Smallest Payout Options

1) Life Annuity/Straight Life/Life Only ($$$$) 2) Life With Period Certain ($$$) 3) Joint With Last Survivor ($$) 4) Unit (Cash) Deferred ($)

Rules Set By Exchange

1) Listing and delisting of a security 2) Order Priority 3) Capital Requirements for Members *A corporate charter is granted by a government entity, usually the state. An exchange CANNOT revoke a corporate charter

Which of the following positions violate the rules governing position limits? (Assume SSS stock is subject to a 100,000-option position limit.)

1) Long 50,000 SSS Aug 40 calls, short 55,000 SSS Aug 40 puts 2) Long 50,000 SSS Aug 40 calls, short 55,000 SSS Jan 40 puts The expiration dates and strike prices may be different or the same. However, the total number of contracts on the same side of the market is limited to 100,000 for this stock. Long calls and short puts are on the same side of the market (the bull side), and short calls and long puts are on the same side of the market (the bear side).

When determining a position limit, a member firm aggregates which of the following customer positions?

1) Long Calls and Short Puts 2) Short Calls and Long Puts Contracts on each side of the market are used for determining position limits. Long calls and short puts are on the same side (bullish), and long puts and short calls are on the same side (bearish).

Long Margin Accounting (Customer Owns Security)

1) Long Market Value (LMV) - CMV of stock position the investor purchased 2) Debit Register (DR) - Amount of money borrowed 3) Equity (EQ) - Customer's net worth in the margin account *Amount of equity in account is determined by: LMV - DR = EQ *When the market value of securities goes up or down, the DR does not change. *When marking to the market, the calculation of Regulation T and minimum maintenance is based on the new LMV. *How low can LMV fall? DR / 0.75 *Minimum Maintenance = 25% of the LMV (SRO Rules)

Hedges

1) Long Stock, Long Put (Protective Put) 2) Long Stock, Short Call (Covered Call) 3) Short Stock, Long Call 4) Short Stock, Short Put (Covered Put) After selling ABC short at 70, a customer holds the position as ABC gradually falls to $53 per share. Which of the following strategies would best protect her gain? -Buy 55 Calls If the investor buys the 55 calls, she has the right to purchase the stock at $55 per share. If exercised, the investor has a 15-point gain, less the premium paid.

Types of Systematic Risk

1) Market Risk** 2) Interest Rate Risk** 3) Reinvestment Risk 4) Inflation Risk** 5) Currency Risk 6) Call Risk *Purchasing Power Risk

Leveraged Exchange-Traded Fund (ETF)

1) May be purchased on margin 2) Securities within the leveraged fund portfolio may be purchased on margin *Because an ETF is purchased and sold on an exchange, the rules generally applying to all exchange products, such as purchasing them on margin, would apply. Leveraged funds can use a number of different securities types, including derivative products, and trading techniques, such as trading on margin, as a means of attaining the leveraged returns they promise.

What are the three factors that determine the premium for a particular life insurance policy?

1) Mortality 2) Interest 3) Expense

Finding NAV (Open and Closed End)

1) NAV + SC = POP ? 5% $10.00 SC% X POP = SC $ 5% (.05) X $10.00 = $0.50 NAV = $9.50 2) NAV + SC = POP $9.50 5% ? POP = NAV / (1 - SC%) $9.50 / (1.00 - .05) = $9.50 / .95 = $10.00 POP = $10.00

Bond Yields

1) Nominal Yield (Coupon) - Set at the time of issue. Fixed % 2) Current Yield (CY) - Measures a bond's annual coupon payment (Interest) relative to market price. (Annual coupon payment / Market Price = CY) 3) Yield To Maturity (YTM) - Reflects the annualized return of the bond if held to maturity "Basis" - If you see a bond that is trading on a "Basis of" and the question then provides you a yield, that yield is the YTM 4) Yield To Call (YTC) - Bond with a call feature may be redeemed before maturity at the issuer's option. *A 6% corporate bank trading on a 7% basis is trading? - At a discount (7% = YTM) (6% = NY)

Cannot Be Purchased On Margin

1) Options (Both calls and puts) 2) Rights 3) Non-NMS Securities and OTC issues not approved by FRB 4) Insurance Contracts 5) Mutual Funds and New Issues (30 Days) Forms On Margin: 1) Credit Agreement 2) Hypothecation Agreement 3) Consent to Loan Agreement (Optional) - Also include application

3 Stages of Money Laundering

1) Placement - Funds or assets are moved into laundering system 2) Layering - Conceal the source of funds or assets. Layers of transactions. (Customer enters several orders in complex securities without concern) 3) Integration - Illegal funds are commingled with legitimate funds

Why Include Common Stock In Client's Portfolio?

1) Potential Capital Appreciation 2) Income From Dividends 3) Hedge Against Inflation

529 Plans

1) Prepaid Tuition Plans -- Lock in future tuition rates at today's prices (Inflation protection) 2) Education Savings Plans -- Invest lump sum or make periodic payments. Can lose money *Both are funded with AFTER-TAX dollars *Earnings grow tax DEFERRED *Withdrawals taken for QUALIFIED education expenses are generally tax-free *$10,000 per year can be used for K-12 tuition *College savings plans (but not prepaid tuition plans) may be set up in more than one state, though the allowable contribution amount varies from state to state. *As of the date of this printing, the total allowable contribution varies from a low of $235,000 to a high of $529,000. *No age limit for contributions or distributions * No Income limits for contributions *All earnings between now and withdrawal can be tax free when used for qualified expenses *if the grandparents have a substantial estate, they can contribute up to $75,000 ($150,000 if a joint gift) without any gift tax ramifications. *There are few restrictions on who may be the first beneficiary of a 529 plan. However, if the beneficiary is redesignated, the new beneficiary must be a close family member of the first. *Just as with other municipal securities, an OS must be delivered to prospective investors. *Secure Act - now permits -- Student loan interest or principal up to a lifetime maximum of $10,000 per child *Maximum lifetime contribution varies from state to state

Syndicate Allocation Priorities

1) Presale Order 2) Group Net Order 3) Designated Order 4) Member Order and Member-Related Order "Pro Golfers Don't Miss" P.G.D.M

Risk Of Owning Preferred Stock

1) Purchasing Power Risk - Because of inflation, fixed income produced will not produce as much in the future as it does today 2) Interest Rate Sensitivity - When interest rates rise, the value of preferred shares declines 3) Decreased or No Dividend Income - Like CS, if company loses money, no dividend potential 4) Priority At Dissolution - Paid ahead of CS but behind all creditors

Municipal Bond Marketability Factors

1) Rating 2) Maturity - Shorter the time until maturity, the more marketable the bond 3) Higher the coupon, the more marketable the bond 4) Block Size - Typical block - $100,000 - Smaller are not as marketable 5) Call Features - Longer the call protection, more marketable the bond (noncallable are most marketable) 6) Dollar Price - Lower dollar price are more marketable

Rule 2111

1) Reasonable Basis (Broad) 2) Customer Specific 3) Quantitative *FINRA would find a RR is NOT in violation if - the recommendation made would be suitable for at least SOME customers *Control relationships must ALWAYS be disclosed

All of the following are allowable municipal dealer quotes

1) Requests for offers only 2) Requests for bids only 3) Bona fide quote 4) Identified Nominal quote

Execution of Transactions

1) Requires reasonable effort to get customers reasonable and fair price 2) Principal Transaction - Price fair and reasonable (Mark up/Mark Down included) 3) Agency Transaction = Commission fair and reasonable

The Securities Act of 1933 Protects Investors Who Buy New Issues By:

1) Requiring registration of new issues 2) Requiring an issuer to provide full and fair disclosure about itself and the offering 3) Requiring an issuer to make available all material information necessary for investor to judge 4) Regulating the underwriting and distribution of primary issues 5) Providing criminal penalties for fraud in the issuance of new securities

Order Of Liquidation

1) Secured Debt Holders (Bond) (Can be backed by real assets - manufacturing facilities, etc) 2) Unsecured debt (debentures) and general creditors (Backed by the issuer's full faith and credit - credit rating, financial security, business reputation) 3) Subordinated debt (debentures) 4) Preferred stockholders 5) Common stockholders *Wages, taxes, administrative claim holders, attorneys, courts, liquidators, property appraisers - Paid after secured debt holders but before or as unsecured

Regulations

1) Securities Act of 1933 = Primary Market Laws 2) Securities Ex. Act of 1934 = Secondary Market Laws 3) Investment Co Act of 1940 = Mutual Fund, UIT Laws

Unlimited Max Loss

1) Selling Uncovered Call 2) Short Straddle 3) Selling Stock Short

Listed Security Short Sales

1) Short sales may take place at opening 2) Short sale can be executed at ANY time in the trade sequence 3) Short sales may take place at the closing **Must be in a short margin account *The buyer is never informed that shares being purchased represent borrowed shares. Your customer asks you to borrow shares of stock from another investor's account and then sell the borrowed stock in the open market. Sometime later, the customer repurchases the stock in the open market and replaces, or covers, the borrowed stock. Identify the type of transaction that was used in this account. - Short Sale *A short sale allows an investor to take advantage of falling stock prices. The mechanics involve borrowing shares, selling them at a high price, and then returning those shares by buying them at a lower price. Collars and puts are options that can be used in the face of a potential decline in the price of the underlying stock.

Option Account

1) Suitability 2) Disclosure Document 3) Account Approval (15 days AFTER approval to get agreement in) 4) First Trade 5) Agreement *Have 15 days after approval to get agreement in

Treasury Securities (Safest)

1) T-Bills -- (Negotiable) Short term, trade at discount from par. Money Market instrument. **13-week is commonly used in quantitative analysis as the RISK FREE investment. 2) T-Notes -- Pay interest every 6 months. Sold at auction every 4 weeks. Maturities of 2, 3, 5, 7, or 10 years 3) T-Bonds -- Long term (10-30 years). Pay interest every 6 months. *The interest earned on any security issued by the U.S. Treasury is taxable on the federal level. The interest on any security issued by the U.S. Treasury is exempt from state and local taxation. (T-Bills, T-Notes, T-Bonds, STRIPS) *Also called DIRECT DEBT One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that **Agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing - Tax EXEMPT at state and local levels - TAXABLE at federal level Advantage: - Extremely Safe (Safest investment for US investor) Risk: - Extremely low interest rates

Exempt from FRB Margin Requirements

1) T-Bills, T-Notes, T-Bonds 2) US Gov Agency Issues 3) Municipal Securities

2 Ways To Reduce Taxes - Tax deferral and Tax free income

1) Tax Deferral. Contributions to an IRA, a qualified retirement plan, or a TSA may be tax deductible and not taxed until withdrawn. 2 Benefits: 1) Investments are made with pretax money. 2) There are no taxes on the income and growth until the money is paid out 2) Tax-Free Income. Municipal bonds pay interest that is free from federal taxation. Municipal bonds generally pay interest at a lower rate than taxable bonds. That is because the interest is tax-free. Depending on the investor's tax bracket, the municipal bond may result in higher returns on an after-tax basis. It is also possible to generate tax-free income using a Roth IRA and the Coverdell ESA.

Current Income - Tax-Free Income - High Yield Income - From Stock Portfolio

1) Tax Free = Bonds (NOT Zero coupons), REITS, CMOS 2) High Yield = Municipal bond, municipal bond funds, Roth IRAS 3) From Stock = Below investment grade corporate bonds, corporate bond funds, Preferred Stocks, Blue chip Stocks - Bonds - Preferred stock

KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income?

1) Tax Rate 2) Allowance For Bad Debt *Higher taxes mean less net income. The allowance for bad debts is an expense item, and increasing it lowers operating income. Dividends are paid out of retained earnings, which have no effect on the net income the company reports.

Keynesian (Demand-Side) Theory

1. Demand for goods controls employment and prices 2. Government's fiscal policies determine the economies health 3. Focus on increasing the supply of money to the consumer *Active government intervention in the marketplace is the best way to ensure economic growth and stability *Stimulate consumer demand - reduces individual taxes

Tax Equivalent Yield

A customer in the 28% tax bracket wants to buy a municipal GO bond with a 7.5% yield that matures in 6 years. The tax-equivalent yield of this bond is - 0.104 To calculate the taxable return, use the tax-free equivalent yield formula: municipal bond yield ÷ (1 − investor's tax bracket). Using this formula, 0.075 ÷ (1 - 0.28) = 0.104, or 10.4%. This means the investor, who is in the 28% tax bracket, must earn 10.4% in taxable interest to equal the 7.5% tax-free municipal interest yield.

Which of the following statements is the MOST correct regarding customer accounts?

A customer may open both a cash and margin account at the same time *Customers may open a cash account, margin account, or any other account so long as the firm supports that type of an account and an authorized principal approves it.

Real Estate Investment Trust (REIT)

A method of pooling investment money using the trust form of ownership if certain tax requirements are met. One advantage of the REIT is the avoidance of corporate tax (thus no double taxation) + many more. - Own commercial property (Equity REIT) - Own Mortgages on commercial property (Mortgage REIT) - Do both (Hybrid REITS) *Owner of REITs hold an undivided interest in a pool of real estate investments *REITs may or may not be registered (public or private) with the SEC -- Most REITS are listed/NASDAQ - some are private *REITs may or may not be listed (trade) on exchanges *REITs are not investment companies (Open or closed end) *REITs offer dividends and gains to investors but do not pass through losses like LPs, not considered DPPs ^ Pay interest dividends to investors and pass through gains but NOT losses, deductions, depreciation *Publicly traded REITs file with SEC and trade on exchange *Not a DPP *Taxation as a conduit - Losses, depreciation, deductions do NOT pass throughterm-193 *Listed = Registered and traded on exchange *Non qualified dividend

Custodian

A person who manages a minor's account under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA) *May also refer to a firm that holds assets in a qualified retirement account such as an IRA - Buy or sell securities - Exercise rights or warrants - Liquidate, trade or hold securities - One adult is custodian for one minor - no such thing as joint custodians or joint beneficiaries - Adult can open account using minors social *Irrevocable, indefeasible *Cash accounts ONLY *Must reinvest proceeds within reasonable time *No options are allowed EXCEPT COVERED CALLS *Custodian can loan money but not borrow from account

Letter Of Intent (LOI)

A person who plans to invest more money with the same mutual fund company may immediately decrease the overall sales charges by signing LOI. Informs investment company to invest additional funds to reach breakpoint within 13 months. One side contract binding the fund only. May be backdated 90 days. When is the sales charge deducted from purchases of mutual fund shares made under a letter of intent? -- When each purchase is made

Proxy Voting

A process that enables shareholders who are unable to attend a meeting to authorize another individual to vote on their behalf or may vote by mail or electronically. *Shareholders have 10 days before annual meeting to return proxy *If customer signs proxy and fails to indicate how shares are to be voted, member must vote the shares as recommended by issuers management *If an owner of shares is held in STREET NAME and has NOT returned proxy earlier than 10 days, member firm may vote how they see fit on MINOR MATTERS A party wishing to solicit proxy authority to vote a particular stockholder's shares must register with - SEC Can: - Later decide to vote personally - May still abstain from voting altogether - May reassign the proxy to another

Liquidity

A product is liquid if a customer can sell it quickly at face amount (or very close to it) or at a fair market price. Liquid investments include: - Securities listed on an exchange or Nasdaq - Mutual funds - Exchange-traded funds - Most real estate investment trusts (REITs). Illiquid investments include: - Annuities, when initially purchased and/or when the annuitant is under age 59½ - Real estate - Securities purchased in a private placement - DPPs - Hedge funds.

Long Put (Purchase)

A put buyer owns the right to sell 100 shares of a specific stock at the strike price before the expiration if he chooses to exercise the contract. Therefore a put buyer is a bearish investor because he wants the price of the underlying security to fall. Bearish Right To Sell BE = SP - P (Strike Price - Premium) MG = BE X # of shares ML = Premium (Protection) *Put is exercised only if the market price falls below the strike price

Put Feature

A put feature for a bond is the opposite of a call feature. With a put feature, the investor can put the bond back to the issuer before it matures. Usually when interest rates are rising. Benefits the bondholder *Puttable bond is likely to be put back to the issuer when interest rates -- RISE

Short Put (Sale)

A put writer (seller) has the obligation to buy 100 shares of a specific stock at the strike price if the buyer exercises the contract (Bullish investor) Bullish Obligation To Buy BE = SP - P (Strike Price - Premium) MG = Premium ML = BE X # of shares *Contract is not exercised if the market price is above the strike price

Prime Broker

Allows a customer (Generally an institution) to select one member firm to provide custody, trading and other services *To open prime brokerage account for a customer, a member (the prime broker) must sign an agreement with the customer, spelling out the terms of the agreement, as well as names of all executing brokers the customer has contracted with. Often execute some of their customers' transactions, but they have the option to send a trade to an executing broker. *Provides custody and clearing services (Including Margin Loans). May provide some execution services and contracts within other brokers to provide additional execution services

Voluntary Accumulation Plans

Allows a customer to deposit regular periodic investments on a voluntary basis (minimum amounts found in the prospectus). The plan is designed to help the customer form regular investment habits while still offering some flexibility. Voluntary accumulation plans may require a minimum initial purchase and minimum additional purchase amounts. Many funds offer automatic withdrawal from customer checking accounts to simplify contributions. If a customer misses a payment, there is no penalty because the plan is voluntary. The customer may discontinue the plan at any time. *Once opened, contribution and frequency and VERY flexible

Alpha (Portfolio Theory)

Alpha is the difference between the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns. The risk of the portfolio associated with the factors that affect all risky assets is systematic risk. *If stock has Beta of 1.5 and market goes up 10%, expected return is 15% (1.5 X 10) *If ACTUAL return is less than 15%, investor was not compensated for risk taken, vice versa -- If equaled 15% you would have ZERO ALPHA (Stood in place) *Negative Alpha is NOT GOOD *Measures performance that adjust for risk, relative to known benchmark When comparing the performance of several portfolios, which would you be most likely to recommend to your clients? **The one with the HIGHEST alpha

Class B (Back-End Load) Shares

Also called contingent deferred sales charge (CDSC). Paid at the time an investor sells shares previously purchased (Redemption). Declining percentage no longer than 5-7 years. Often have higher expenses than Class A Shares *Best for investors with smaller investments and long time frames *Dividend is smaller than Class A *No POP *Class B and Class C shares have MAXIMUM 12B-1 Fees of 0.75%

Income Bonds

Also known as "Adjustment Bonds" Used when a company is reorganizing and coming out of bankruptcy. Pay interest only if the corporation has enough income to meet interest or debt obligations. *Does not provide income *Bonds = Safety, Principal *Pays INTEREST, not dividends

Margin

Amount of equity that must be deposited to buy securities in a margin account *The opening of a margin account requires a separate margin risk disclosure document be provided to each customer prior to or at the time of opening the account. None of the other accounts require special additional documentation. *A client opens a new margin account and, as the initial trade, purchases 300 shares of MS Corporation common stock at $10 per share. The firm would send the client a margin call for? **No credit may be extended in a new margin account with less than $2,000 in equity. This purchase of $3,000 of stock would normally require 50% payment ($1,500) in accordance with Regulation T, but because it is the initial trade in the account, the $2,000 minimum must be met. *Selling to open (a short sell) can only be done in a margin account (Sell 100 ABC to open) *Options can be sold on margin *Accounts that have contribution limits may NOT be on margin *Customer equity in a margin account may not drop below 25%; For a short account, the minimum is 30% *What is true regarding accounts trading on margin? -- A fiduciary account may only trade on margin if it is specifically permitted in the trust or custodial agreement. *Corporate and partnership accounts may trade on margin as long as it is not prohibited. *A partnership would like to open a margin account. Which of the following is NOT needed? - A partnership agreement that specifically allows margin borrowing NEEDED: - Credit agreement - Hypothecation agreement - Account Agreement - Consent to loan agreement is OPTIONAL

Reserve Rate

Amount of funds that a bank must hold in reserve; rate is given as percentage of total deposits *Considered the MOST powerful and used infrequently *Has most dramatic impact when changed

Current Yield (CY)

Amount of income an investor will receive as a percentage of the cost of the investment Current Yield (CY) - May apply to stocks and bonds Dividend Yield - Income is from a stock dividend Formula for CY: Annual Income (in dollars) / Current market value(Price) = CY *ANNUAL FIGURE

Which of the following riders pays a beneficiary a death benefit that is double or triple the face amount if the insured's death was caused by an accident as defined in the policy?

An accidental death rider

Municipal Financial Professional (MFP)

An associated person of a broker-dealer who is primarily engaged in municipal securities activities other than retail sales to individuals. The MFP designation also includes anyone who solicits municipal securities business for the broker-dealer, or is in the supervisory chain above another person with the MFP designation. This can include senior officials of the broker-dealer, or executives, or management committee members of the broker-dealer. *An employee of a broker-dealer engaged in municipal security representative activities other than retail sales or who solicits municipal securities business for the broker-dealer.

Laws and Regulations

An example of how laws or regulations could be an investment constraint is the case of the accredited investor. A registered representative may find the absolutely perfect investment to meet the client's objectives only to find out the client can't make the purchase because of lack of accredited investor status. Another case might be when the desired security is not registered for sale in the client's state of residence

Who can make a fully deductible contribution to a traditional IRA?

An individual not covered by an employer-sponsored plan who has earned income

What is a foreign insurer?

An insurer with a home office in another state

Liquidity Risk

An investor might not be able to sell an investment quickly at a fair market price *Ability to buy or sell a security easily *Secondary market provides liquidity to investors (T-Bills, Stock on exchanges) *Uncertainty that an investor will be able to find a buyer for a security - Advantage of being listed on exchange is having buyers and sellers readily available

Time Horizon

An investor's time horizon and liquidity needs will determine the level of volatility the client should assume. Over a 20- or 30-year time frame, dramatic short-term volatility is acceptable, even to those who are risk averse. Money that will be needed within three to five years should be invested for safety and liquidity.

Eurobond

Any long-term debt instrument issued and sold outside the country of the currency in which it is denominated. For example, if a Swiss company issued bonds denominated in British pounds, it is a Eurobond. *Eurodollar bonds pay in U.S. dollars; Eurobonds pay in foreign currency. Note that these instruments must be issued outside of the United States.

MSRB Rule G-21 Advertising

Any material designed for use in the public media is considered advertising. This includes abstracts and summaries of the OS; offering circulars; reports; market letters; and form letters, including professional, product, and new issue advertisements. A municipal securities principal or general securities principal of the dealer must approve all advertising before use, and a copy of each advertisement must be kept on file for four years.

Insider Information

Any material nonpublic information - that is, any information that has not been disseminated to, or is not readily available to, the general public. Tipper- person that relays the information Tippee - Person who receives the information Controlling person = Penalty is $2 Million or 3X the profit made, whichever is greater. *Violators may also face criminal penalties up to $5 Million and up to 20 years in jail. Firm = $25 Million or 3X damages

Private Securities Transactions

Any sale of securities outside an associated person's regular business and her employing member. *Known as "Selling Away" *The EMPLOYING FIRM must run the trade on its own books and see to it that the representative is properly supervised. Question: Which of the following actions violates FINRA rules regarding selling away? - Engaging in private securities transactions without written prior consent of the employing BD

Regulation Best Interest (Reg BI)

Any strategy or product that firms or individuals recommend to retail customers must be in the customers' best interest (not just suitable) 1) Disclosure - (Scope and terms, fees and costs, material facts) 2) Care - (Risk and rewards, reasonable basis, series of recommended transactions) 3) Conflict - (Identify and mitigate conflicts, eliminate special compensation for specific securities) 4) Interest - (Identify and mitigate conflicts, eliminate special compensation for specific securities) 5) Compliance - Know it exists

Which of the following would qualify as a competent party in an insurance contract?

Applicant has a prior felony conviction

Build America Bonds (BABs)

BABs were created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and stimulating the economy. While bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, BABs are taxable obligations. Bondholders pay tax on interest received from BABs. However, tax credits are provided in lieu of the tax-exempt status usually afforded the interest on municipal securities. These bonds attracted investors who would normally not buy tax-exempt municipal bonds and expanded the pool of investors to include those in lower-income tax brackets, investors funding retirement accounts where tax-free securities would normally not be suitable, public pension funds, and foreign investors. 1) Tax Credit BABs -- Provide BONDHOLDER with a federal income tax credit equal to 35% of interest paid on the bond each tax year 2) Direct Payment BABs -- Provide NO credit to the bondholder, provide the MUNICIPAL ISSUER with payments from the US Treasury equal to 35% of interest paid *The BABs program expired on December 31, 2010, without being renewed. *BABs are TAXABLE obligations issued by municipal governement

Breakpoints (Class A)

Breakpoints are available to any person. For a breakpoint qualification, person includes married couples, parents and their minor children, corporations, and certain other entities. Investment clubs or associations formed for the purpose of investing do not qualify for breakpoints. - Breakpoint levels vary across mutual fund families. There is no industry standardized breakpoint schedule. - Mutual funds that offer breakpoints must disclose their breakpoint schedule in the prospectus and how an account is valued for breakpoint purposes. - The SEC further encourages that breakpoint discount availability information be accessible through various means of communication, including websites. - Discounts may be the result of a single large investment, a series of aggregated investments, or a promise to invest via a letter of intent (LOI). - Purchases made by the same investor in various accounts can be aggregated to qualify for a breakpoint discount. Eligible accounts include traditional brokerage, accounts held directly with a fund company, 401(k), IRA, and 529 college savings. - Shares purchased in the same fund family other than money market accounts are eligible to be aggregated together to qualify for a breakpoint discount, including those held at separate securities firms. **Married couples, parents with minor children, and corporations are ELIGIBLE **Parents combined with adult children (Even if they are legally considered dependents) and investment clubs are NOT ELIGIBLE

Earnings Per Share (EPS)

Calculated by dividing the earnings available to the common shareholder (earnings) by the number of outstanding shares *Fully diluted earnings per share -- assumes all convertible securities have been converted (Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company.) - Interest expense down - Earnings up - Taxes Up - Number of common shares up Which of the following actions would cause a corporation's earnings per share (EPS) to increase? - A reduction in the number of shares outstanding *There are two primary ways to increase EPS. 1) Increase the company's earnings. 2) Reduce the number of outstanding shares.

Capital Asset Pricing Model (CAPM)

Calculates the required investment return that should be achieved given the risks taken *Based on a risk multiplier called the beta coefficient *Gives required and expected return *Assumes that investors are averse to risk and if taking risk, expect to be rewarded for it *Takes into account systematic risks *Believes diversification can be used to reduce risk

Nonsystematic Risk (Unsystematic Risk)

Can be reduced through diversification. Risk that is unique to a specific industry, business, or investment type. *Can be reduced through diversification *If a risk is related to the specific ACTION of a company 1) Business 2) Financial 3) Liquidity 4) Political 5) Regulatory *From time to time, a registered representative will be asked for help in constructing or revamping a customer's portfolio. When done properly, which of the following is the risk that can be reduced or eliminated in the portfolio construction process? - Nonsystematic

Preliminary Prospectus (Red Herring)

Can be used as a prospecting tool, allowing issuers and underwriters to gauge investor interest and gather indicators of interest (Potential interest in purchasing) BEFORE EFFECTIVE DATE. May be made available to any customer expressing interest during cool off period *Access to a prospectus on the SEC website is sufficient to meet delivery requirements *The preliminary prospectus will include an overview and history of the business as well as any risks associated with it. The preliminary prospectus cannot include the effective date or public offering price (POP) because they have yet to be determined. NOT Included: 1) Final public offering price 2) Effective (Release) date

Carryforward Losses

Capital losses in excess of $3,000 can be used to offset next year In the last year, a customer made the following four transactions: Purchased 1,000 shares of ABC stock for $67 per share Purchased 500 shares of DEF stock for $45 per share Sold 1000 shares of ABC stock for $50 per share Sold 500 shares of DEF stock for $55 per share Which of these is the result of the year's transaction? - 1,000 X 67 = 67,000 (Purchased) - 500 X 45 = 22,500 (Purchased) - 1,000 X 50 = 50,000 (Sold) - 500 X 55 = 27,500 (Sold) = (-12,000) net loss *Customer can use 3,000 to reduce ordinary income leaving 9,000 in losses to carry forward

Carrying Firm (Clearing Firm)

Carries customers accounts and accepts funds and securities from customers. Must segregate (Hold separately) customer funds and securities held in their custody from the firm's own capital and securities. May not comingle the firm's assets with client assets *Do trade executions, clear and settle transactions, take custody of customer funds and securities

NAV

Cause a change in NAV = CMV declines Would NOT cause change in NAV = Portfolio securities sold for big capital loss *The Doubleclick Tech Fund calculates net asset value two times every day. The first NAV is set at noon Eastern Time. When will the second calculation take place? - After the close of trading **The NAV of a fund share is the amount the investor receives upon redemption. It must be calculated at least once per business day (but may be more often), and one of those calculations must occur after the close of trading on the U.S. exchanges. A typical fund calculates its NAV at the end of each business day (4:00 pm ET). Though the close is typically at 4:00 pm, markets occasionally close earlier. *NAV will NEVER be higher than POP in a mutual fund

Pricing of Closed-End Investment Company Shares (Closed End)

Closed-end investment companies are commonly known as publicly traded funds. After the stock is distributed, anyone can buy or sell shares in the secondary market, either on an exchange or OTC. Supply and demand determine the bid price (price at which an investor can sell) and the ask price (price at which an investor can buy). Closed-end fund shares usually trade at a premium or discount to the shares' NAV. **Closed-end investment companies trade in the secondary market (exchange or OTC). That makes their price based upon supply and demand for their shares. As a result, their buying and selling price does not have a direct relationship to the NAV of the shares. Put another way, the market price of a closed-end fund is independent of the fund's NAV. *Supply and Demand *Can sell at, above, or below NAV *Once per week computation for NAV *Investors pay a commission *Share price fluctuates independently of NAV *Can include senior securities in its capital structure (Preferred stock and bonds) CEF Risk: 1) Pricing Risk 2) Leverage Risk

The principal difference between a selling syndicate and a selling group would be:

Commitment Syndicate implies a firm commitment; group implies best efforts. Syndicate = 1st string (Hire professionals, they will sub out) Selling Group = 2nd String *Primary purpose of a syndicate desk in the context of an equity offering is to: - Build an order book and allocate the stock

Dividend Payout Ratio

Common Dividends / Earnings Per Share **Which kind of companies are known to have high dividend payout ratio -- Public Utilities *Investors looking for current income from stocks generally seek HIGH dividend payout ratios. *Investors looking for growth prefer stocks with LOW dividend payout ratios, wanting the company to reinvest its earnings into growing the company.

Government National Mortgage Association (GNMA)

Commonly known as "Ginnie Mae," this agency of HUD operates in the secondary mortgage market. It is involved with special government financing programs. - Called pass-through securities because the payments are made up of both interest and principal - Fully taxable - Pays MONTHLY interest payments - Backed by full faith and credit of federal government *Of the following government-sponsored entities, which is backed by the full faith and credit of the U.S. government? - GNMA

Hazard

Conditions or situations that increase the probability of an insured loss occurring.

Securities

Confusion about the difference between commodities and securities. Security = Financial asset Commodity = Hard asset such as gold, beef, orange juice or oil - Active market in a derivative investment called futures. *Securities issued by the US gov are backed by - its full faith and credit, based on its power to tax the people as well as print currency when needed.

Investment Company Act of 1940

Congressional legislation regulating companies that invest and reinvest in securities. The act requires an investment company engaged in interstate commerce to register with the SEC. 1) Face Amount Certificate (FAC) (Rare) 2) Unit Investment Trusts (UITs) - Investment company but not management company (Hands off - Passive) (Valued at end of day) 3) Management Investment Companies (Valued at the end of day)(Closed vs Open) All of the following must be sold with a prospectus: 1) closed-end funds in the primary market 2) open-end funds in the primary market. 3) an IPO of common stock. *Securities sold in the SECONDARY market do not have a prospectus delivery requirement.

When an insured makes truthful statements on the application for insurance and pays the required premuim, it is known as which of the following?

Consideration

M3 Money Supply

Consist of M2 + Large time deposits. Assets that are a bit harder to move into a DDA and spend. Examples: Jumbo CD, multiday repos. M2 is apart of M3 so by extension so is M1 *M3 includes all of M1 and M2

Reggie owns a convertible bond that converts into 20 shares of common stock. The current market value of the bond was 118½ at the close on Friday, April 1. A 30-day call is announced before the opening on Monday, April 4, at a price of 102. The stock is trading at $57.75. What should Reggie do?

Convert the bond into the stock Reggie will not be allowed to hold the bond to maturity because it is being called. Now that the call has been announced, the market value of the bond will fall to meet the call price. This occurs as a result of declining demand. (Who wants to buy a bond that is about to be called at a lower price?) Thus, redeeming the bond at the call price and selling the bond would both yield the same results: $1,000 times 102% equals $1,020. If he converts the bond, he will get the following results: 20 shares times $57.75 equals $1,155. Therefore, it makes the most sense to convert the bond.

Accrued Interest

Corp/Muni/Agency = 30/360 US Gov't = Actual/365

Settlement

Corp/Muni/Agency = T+2 US Gov't = T+1 Most options transactions = T+1 Exercise of equity options = T+2

Options Clearing Corporation (OCC)

Corporation that handles options transactions on the stock exchanges and is owned by the exchanges. It issues all options contracts and guarantees that the obligations of both parties to a trade are fulfilled. Primary functions are to standardize, guarantee the performance of, and issue options contracts *Regulates options What method is used to assign exercise notices to broker-dealers with short positions by Options Clearing Corporation (OCC)? - Random Selection Basis **The OCC assigns exercise notices to short broker-dealers (those with customers who are short) using a random-selection basis only. Broker-dealers, however, may then assign exercise notices to their short customers on a random basis, on a FIFO basis, or any other method that is fair and reasonable.

The breakeven point for covered call writers is

Cost of stock less premiums. The breakeven point for an investor who owns the underlying stock and writes a call is the cost of that stock less the premium received from the sale of the call.

A key person insurance policy can pay for which of the following?

Costs of training a replacement

Debt Coverage Ratio (DCR)

Coverage = Available Revenues / Debt Service Requirement Example: $10,000,000 available revenues $4,000,000 Annual Debt Service $10,000,000 / $4,000,000 = 2.5 to 1

What characteristic makes whole life permanent protection?

Coverage until death or age 100

Federal Deposit Insurance Corporation (FDIC)

Created during the Great Depression of the 1930s in response to widespread bank failures and massive losses to bank customers. Independent agency that preserves public confidence in the banking system by insuring deposits. *Coverage PER OWNER, PER ACCOUNT (A joint account with two owners would be covered up to $250K per owner) *Covers: - Bank deposit accounts (Checking & Savings) - Money Market Accounts - CDs - Self Directed IRAs Does Not Cover: - Mutual Funds - Annuities - Life Insurance Policies - Stocks and Bonds *If a married couple has a joint account with a market value of $1 Million and a DEBIT balance of $600K, all of which is in securities, how much would account have? - A joint account has a maximum coverage of $500K; however in a MARGIN ACCOUNT, only the equity is covered so the DEBIT balance is subtracted from market value ($1 Million - $600K = $400K)

Securities Investor Protection Corporation (SIPC)

Created under the Securities Investor Protection Act of 1970, this agency oversees the liquidation of insolvent BROKERAGE firms and provides insurance on investors' trading accounts. No more than $500,000 per separate account NOT customer. SIPC covers no more than $250,000 in cash. (Each separate account - no matter how many people are on the account, it's covered up to the $500K) *Futures are not a security and not covered by SIPC *Separate Customer = Individual account, Joint Account, UTMA, Trust Account *All BD's registered with SEC must be members except: - Banks dealing exclusively in municipal securities - Firms dealing exclusively in US Gov Securities - Firms dealing exclusively in redeemable investment company securities *Cash and Margin accounts for same customers are COMBINED for determining SIPC, only the equity in a margin account is covered (Not full market value)

Which of the following would be the beneficiary in credit life insurance

Creditor

Which of the following is TRUE about credit life insurance

Creditor is the policyowner

Foreign Currency Options (FCOs)

Currency options allow investors to speculate on the performance of currencies other than the U.S. dollar or to protect against fluctuating currency exchange rates against the U.S. dollar. *Cash settled in US dollars with no physical delivery of foreign currency *Contract sizes 10,000 **You should know that the only FCO with a contract size other than 10,000 units is the Japanese yen. (1 Million) *Strike prices are quoted in US cents EXCEPT Japanese Yen (1/100th of a cent)

Working Capital

Current Assets - Current Liabilities = Working Capital

Working Capital Ratio

Current Assets - Current Liabilities = Working capital (Expressed as a dollar amount $$) All of the following affect working capital: 1) Decrease in current liabilities 2) Declaration of a cash dividend 3) Increase in current assets Which items would change if a company buys equipment for cash? - Working Capital *The general balance sheet formula is assets = liabilities + shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it does not affect total liabilities, nor does it affect equity.

Current Ratio

Current Assets / Current Liabilities = Current Ratio

An employee dies having 6 quarters of coverage during the previous 13-quarter period. What status of coverage does the employee have under Social Security?

Currently Insured

Discretionary Account

Customer may grant trading authority to RR to place trades without preauthorization. If RR selects any of 3 A's, it's a discretionary account: - Action - Asset - Amount *Time and price are NOT considered discretionary *Time or price - unless written instructions state time, it is effective only the day entered *Any response that include "AND" suggest more than one A needs to be controlled and is not accurate *Discretion is granted to RR, not the firm - If RR dies, authority ends *Discretion needs approval from customer/Principal The requirements for a discretionary account include a written authorization from the customer, a written acceptance by a principal of the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation. No approval from FINRA is required.

Commission Based Account

Customer pays a commission or other type of payment on each investment transaction *Suitable for people that DON'T trade a lot

Dividend Dates

D - Declaration Date E - Ex-Dividend Date R - Record Date P - Payable Date *All dates are set by the board of directors of corporation except - Ex Dividend Date (Market Center - Exchange) (FINRA - OTC) *Ex Date set 1 day before RECORD date *30 days in June, watch out for test question *Record date on Wednesday, 12th - Ex date is Tuesday, 11th. Must purchase day before ex date or cash settlement on ex date to be owner and get dividend (Seller would get dividend if NOT)

Bond Buyer

Daily NEWspaper provides information on NEW Issues in the municipal market Manager is interested in bidding on some GO bond issues that will be available in coming months -- Will find information in Bond Buyer The Bond Buyer compiles several indexes of municipal bonds. Which of the following is limited to bonds with the highest ratings? - The 11 Bond Index *This index takes the highest rated (AA or better) bonds from the 20 Bond Index of bonds with A ratings or better. The manager of ABC Municipal Securities is interested in bidding on some general obligation bond issues that will be available in the coming months. Where would the manager find information about these forthcoming issues? - Bond Buyer *Municipalities publish their official notices of sale soliciting bids from interested parties in The Bond Buyer. The notice gives the details of the bonds put up for bid and how to bid on the issue. The Standard & Poor's Bond Guide gives details of outstanding issues and their ratings. The EMMA is an online site primarily for retail nonprofessional investors. - The Bond Buyer's 20-Bond Index reflects: - The average yield of 20 high-quality general obligation (GO) bonds. *The Bond Buyer 20-Bond Index is defined as the average yield of 20 general obligation bonds having a rating of A or better and a maturity of 20 years. Bonds that have a rating of AAA and AA are included in the 11-Bond Index. Revenue bond yields are reported in the Revdex 25. Although all but the Revdex include bonds with a 20-year maturity (Revdex is 30 years), it is the yields that are reported, not the average maturities.

Auction Rate Securities (ARs)

Debt securities that have interest rates that are periodically reset through Dutch auctions, typically every 7, 14, 28, or 35 days. ARS are generally structured as bonds with long-term maturities (20-30 years). Municipalities and public authorities, student loan providers, and other institutional borrowers first began using ARS to raise funds in the 1980s. ARS were marketed to retail investors who were seeking a cash-equivalent investment that paid a higher yield than money market mutual funds or certificates of deposit, although ARS did not have the same level of liquidity as those other instruments. *Has not been a new issue ARS since 2007 *Inherent risk associated is the potential to have a failed auction *Long term investments, Holders may NOT have immediate access to funds if fails Long-term securities issued by municipalities that use a Dutch auction method to reset short-term interest rates known as clearing rates are - ARS *ARS are long-term securities issued by municipalities that use a Dutch auction to reset interest rates at short-term intervals. The reset rate is known as the clearing rate and establishes the rate paid during the period following the auction. RISKS: 1) A Failed Auction (Lack of demand)

Dilution

Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued, and the shareholder's equity is diluted. A stock dividend or stock split does not change a stockholder's percentage of ownership. Refunding debts has no effect on stockholders. **The conversion of convertible bonds into common stocks An immediate dilution to earnings per share (EPS) would be least likely to occur from -- Refunding a bond at par

An insurance company sells an insurance policy over the phone in response to a TV ad. Which of the following best describes this act?

Direct Response Marketing

Treasury Notes (T-Notes)

Direct obligations of US government. Pay semiannual interest as a percentage of the stated par value and they mature at par value. T-Notes have intermediate maturities (2-10 years) *Minimum purchase amount of $100 *Priced at % of par

Which of the following is NOT a standard exclusion in life insurance policies?

Disability

Code of Arbitration (COA)

Disputes, Claims, with any FINRA brokerage firm can be resolved in arbitration or mediation. Any financial disputes between customers, RR's, BD's, etc *45 Days to respond *Must be paid within 30 days of decision *Simplified Code of Arbitration = $50K or less (One arbitrator - written arguments) Larger Disputes = $50K - $100K (One arbitrator), Greater than $100K (3 arbitrators) *Statute of Limitations = 6 years *No appeal to arbitration finding - FINAL & BINDING *In the absence of a signed arbitration agreement, a customer can still force a member to arbitration, but a member cannot force a customer to arbitration. *If a customer requests to see the predispute arbitration agreement she has signed, a member firm must supply her with a copy within 10 business days of the request. Settle Disputes Between: *A member and a registered clearing corporation *A member and one of its associated persons *A member and a client who has signed a predispute arbitration clause *Mediation is mandatory, Arbitration is NOT *If arbitration is unsuccessful, dispute moves to mediation *Mediator CANNOT serve as arbitrator *Public = Anyone who is NOT "non-public" *Non-Public = Anyone who has ever worked in the financial industry

When contributions to an immediate annuity are made with before-tax dollars, which of the following is true of the distributions?

Distributions are taxable

Calculating Tax Equivalent Yield

Divide the tax free yield by 100% less the investor's tax rate Investor = 30% tax bracket Municipal Bond Yield = 7% 7% / (100% - 30%) = 10% Assume same investor is in 30% tax bracket. If corporate bond currently yields 11%, what would be the equivalent municipal yield? 11% X (100% - 30%) = 7.7% *Municipal yield will always be LESS than Corporate Yield *The corporate bond will always have a higher coupon. *AFTER-TAX YIELD: 7 X (1.00 - 0.30) = 4.9% Just to clarify, If an investor has a municipal bond and is looking to find an equivalent yield to a corporate bond, they would DIVIDE? (Municipal is lower than corporate). Yes, this is correct :) Vice versa, if an investor has a corporate bond, looking to find municipal bond equivalent, they would MULTIPLY to find higher. Yes, this is correct :) *20, 22, 22 better off keeping corporate bond (Lower tax brackets) *30, 35, 40 better off with muni bond (Higher Tax brackets)

Voting Rights

Do NOT: - Shareholders do NOT vote on dividend-related matters, such as when they are declared and how much they will be. DO: - Stock splits - Board members - Issuance of additional equity-related securities such as common stock, preferred stock, and convertible securities.

Variable Life Insurance Contract Exchange

During the early stage of ownership, you have the right to exchange a variable life insurance contract for a form of permanent insurance issued by the company with comparable benefits (usually whole life). The length of time this exchange privilege is in effect varies from company to company, but under no circumstances may the period be less than 24 months (federal law). The exchange is allowed without evidence of insurability. If a contract is exchanged, the new permanent policy has the same contract date and death benefit as the minimum guaranteed in the variable life insurance contract. The premiums equal the amounts guaranteed in the new permanent contract (as if it were the original contract). - The contract exchange provision must be available for a minimum of two years. - No medical underwriting (evidence of insurability) is required for the exchange. - The new policy is issued as if everything were retroactive. That is, the age of the insured as of the original date is the age used for premium calculations for the new policy. In a variable life annuity with 10-year period certain, a contract holder receives - A minimum of 10 years of variable payments, followed by additional variable payments for life. **The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. An example would be if a contract holder of a life annuity with 10-year period certain died after 5 years, payments would continue for 5 more years to the beneficiary and then stop.

Modern Portfolio Theory (MPT)

Employs a scientific approach to measuring risk and, by extension, to choosing investments. It involves calculating projected returns of various portfolio combinations to identify those that are likely to provide the best returns at different levels of risk. It is the concept of minimizing risk by combining volatile and price-stable investments in a single portfolio. *Focuses on relationships among investments in a portfolio *Diversified portfolio that has negative correlation reduces volatility and increases overall returns (Perfect negative correlation is -1.0) *Will have close to ZERO unsystematic risk, only real risk is SYSTEMATIC *Which risk CANNOT be eliminated through diversification under MPT? -- Systematic Risk

Regulation SP (Security/Privacy)

Enacted by SEC to protect the privacy of customer information - includes: customers social, account balances, transaction history, and any information collected through an internet cookie *A firm must include in its privacy opt-out notices - Policies to protect the security of nonpublic information Provide: 1) Reply form with the opt-out notice 2) Electronic means to opt out if the customer has agreed to the electronic delivery of information 3) Toll-free number that customers may call. *If a broker-dealer sends a customer an initial privacy notice that contains an opt-out provision, the firm may not disclose nonpublic, personal information about that customer for how many days from the mailing? —- 30 Days *BD must provide an initial and annual privacy policy to -- Retail Customers

Telephone Consumer Protection Act of 1991 (TCPA)

Enacted to protect consumers from unwanted telephone solicitations - Anyone making cold calls informs prospects of their name, company's name, and company's telephone number or address - No calls are made to numbers on the company or federal do not call list - Solicitation occurs only between 8:00 am and 9 pm based on prospects time zone EXEMPT: - Calls made on behalf of tax-exempt nonprofit organizations - Calls made to parties with whom the caller has an established business relationship - Caller has expressed prior permission or invitation to call - Call for legitimate debt collection

Institutional Investor

Entity that pools money to purchase securities. Examples: banks, insurance companies, pensions, hedge funds, and mutual funds. Sometimes called "Qualified Institutional Buyers (QIBs) - Owns and invest a minimum of $50 million in total assets *Active participant in the secondary markets *Institutional Communication May Require: - If pre-use principal approval is not required, the associate must have training on these communications - A BD may require principal approval before use - If principal approval is not required it must still be reviewed by a principal after use *Rule allows for either preapproval or review. If the firm allows the communication to go out before approval by a principal then, the associate must have training on these communications

What is the name of the tax that is levied by the federal government on the right to transfer property at the time of death?

Federal Estate Tax

Corporate Characteristics

Exam questions may test avoidance of corporate characteristics. For example: 1. Which of these characteristics is the most difficult to avoid? Centralized management—no business can function without it. 2. Which of these characteristics is the easiest to avoid? Continuity of life—there is a predetermined time at which the partnership interest must be dissolved. 3. Which two corporate characteristics are most likely to be avoided by a DPP? Continuity of life and freely transferable interests—interests cannot be freely transferred; GP approval must transfer shares.

Yields

Expresses cash interest payments in relation to the bond's value. Determined by: Issuers credit quality, prevailing interest rates, time to maturity, and any features the bond may have such as a call feature *Measured in basis points

What nonforfeiture option is automatically selected by the company if not chosen by the policyowner?

Extended Term

Business Continuity Plan (BCP)

FINRA requires member firms to create and maintain a BCP to deal with the possibility of a significant business disruption. (Epidemic, etc) *ALL federally covered broker-dealers and investment advisers must have a BCP - Clearing Brokers - Introducing BDs - Investment Advisors Includes: - Data backup - Alternate communications - Alternate physical locations - Firms must designate a member of senior management who is also a principal to approve, update, and conduct ANNUAL review of plan - FINRA requires 2 names of people who may be contacted in event (Principals/Senior Management) - Prompt customer access to funds and securities if the firm is unable to continue business

Code Of Procedure (COP)

FINRA's formal procedure for handling trade practice complaints involving violations of the Conduct Rules. The Department of Enforcement is the first body to hear and judge complaints. (How member violations are handled) *Under the Code of Procedure, appeals must be filed with the NAC within 25 days after receiving the decision. *Governs how FINRA handles things if BD's or RR's violate policies/Investigating trade practice violations *Can request hearing *No maximum size of potential fine *Transfers to Department of Enforcement (DOE) *25 days to respond *14 days to respond to second notice *Hearing will be held within 21 days of response *Decision rendered within 60 days *DOE rulings may be appealed - Goes to: - National Adjudicatory Council - SEC - The Courts

A married couple wants to include the entire family in their whole life policy under one rider. Which of the following riders will help them achieve that goal?

Family Term

Which rider, when attached to a permanent life insurance policy, provides an amount of insurance on every family member?

Family Term Rider

Federal Reserve Board (FRB)

Federal Reserve Act of 1913 established the federal reserve system as the central bank of the US to provide the nation with a safer, more flexible, and more stable monetary and financial system. Primary Goals: *maintaining maximum employment levels. *maintaining an appropriate level of inflation. Consist of 12 regional banks - Conduct the nation's monetary policy to promote maximum employment - Promote a stable price environment, keeping inflation under control. - Supervise the printing of currency, determine monetary policy, regulate and impact the money supply - Sets INITIAL MARGIN Regulation T Requirements - Municipal bonds, T-bills, Agency are EXEMPT from margin - Reserve Requirement - least used tool/most drastic *Which actions would have effect of causing interest rates to increase? - Raising reserve requirements - Raising Discount Rate FRB Tools: - Regulation T - Reserve Requirements (least used, most drastic) - The Discount Rate *Fiscal policy includes: (Taxing and spending) - Increasing taxes to contract the economy - Increasing government spending to expand the economy - Congress and the President set the Fiscal Policy *Wants to expand (loosen) money supply, it will buy treasuries from banks in the open market *To tighten monetary policy, making it more difficult for customers to borrow money -- Raise the discount rate *To expand overall economy, FRB, acting as agent for US Treasury will BUY securities via open market operations, pushing interest rates down *To stimulate the economy during a recession by expanding the availability of credit, FRB would: - Lower reserve requirement - Buy US gov securities in open-market operations - Lower discount rate *Would NOT raise federal funds rate (Not set by FRB) **All decisions regarding initial margin eligibility are the role of FRB -- The determination whether OTC stock is eligible for purchase on margin is made by FRB

Federal Open Market Committee (FOMC)

Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply *Increase economic activity by purchasing T-BIlls *Decreases economic activity by selling T-BIlls *Buys treasuries to lower interest rates *Sells treasuries to raise interest rates *Most frequently used tool in monetary policy

If a life policy allows the policyowner to make periodic additions to the face amount at standard rates, without proving insurability, the policy includes a

Guaranteed insurability rider

UTMA Vs UGMA

Individual states choose which type of custodial account is available in their state *UTMA accounts allow for real estate to be titled, UGMA do not *UTMA accounts may be held in custodial name until beneficiary turns 25, UGMA accounts are available at age (18) *Only 1 state still offers UGMA accounts

Blue Sky Filings

Individual states have own securities laws. *Process of coordinating the Federal and state registrations *Blue-Sky Laws are regulated by state securities regulators

Fill-Or-Kill (FOK) Order

Instruction to fill (execute in its entirety) the order immediately or kill (cancel) the order completely *NO partial executions ALFA Electronics has been trading around 70. A customer tells his registered representative that if 1,000 shares of the stock can be purchased in a single attempt, the customer will take it. If not, the customer is not interested and the order should be canceled immediately. How should the representative enter this order? - $1,000 ALFA FOK at 70 *A fill-or-kill (FOK) order designates that the customer wants the order to be filled in its entirety in one attempt or be canceled. With an all-or-none (AON) order, the broker-dealer can make numerous attempts to fill the order in its entirety. With an immediate-or-cancel (IOC) order, the broker-dealer can make only one attempt to fill the order, but a partial fill is acceptable. A customer tells a broker to buy 1,500 shares of ABC at 33.60 immediately for the full 1,500 shares. This is - FOK

In the agent/Insurer relationship, who is considered the principal?

Insurer

Know This

Insurer's consideration is the promise to pay for losses: Insured's consideration is the payment of premium and statements on the application.

Who makes up the Medical Information Bureau

Insurers

Statistically Predictable

Insurers must be able to estimate the average frequency and severity of future losses and set appropriate rates.

Not Catastrophic

Insurers need to be reasonably certain their losses will not exceed specific limits

The provision that sets forth the basic agreement between the insurer and the insured and states the insurer's promise to pay the death benefit upon the insured's death is called the:

Insuring Clause

During partial withdrawal from a universal life policy, which portion will be taxed?

Interest earned on the withdrawn cash value

Point-to-Point

Interest in computed based on the value of the index at the end of the contract compared to the beginning

Holding a callable bond with call protection is least impactful for the investor when

Interest rates are RISING *Bonds are more likely to be called when interest rates are falling. Call protection, a length of time during which the bond cannot be called, protects the investor during these times. Therefore, the call protection is least impactful when interest rates are rising—in other words, least impactful during times when the bond wouldn't likely be called.

Intrinsic value

Intrinsic value -- Amount by which the option is in the money Time value -- The market's perceived worth of the time remaining to expiration *(IV - P) EXAMPLE: An XYZ NOV 40 put has a premium of 1.25 when XYZ stock is selling at 41. With the market price above the strike price (41 is higher than 40), the option is out of the money. That means no intrinsic value. Therefore, the entire premium of $1.25 ($125) is time value. PIT -- Premium minus intrinsic value equals time value Difference between Strike Price and Current Market Value (CMV) *If it's not IN THE MONEY, there is no intrinsic value Formula: Stock Price - Strike Price = IV XYZ Stock trading at 42 XYZ Oct 40 call @ 3 42 CMV - 40 SP = 2 IV Intrinsic Value + Time Value = Premium (IV + TV = Pr) Parity = Premium equals intrinsic value

Fully Disclosed (Introducing Firm)

Introduces its customers to a clearing firm. May take orders from customers and pass those orders to a clearing firm for execution. Does not have the ability to execute trades for its customers

Speculative Risk

Involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.

Original Issue Discount (OID) Bonds

It is not unusual to have a municipal bond issued at a discount on its initial public offering. When a municipal bond is bought in the secondary markets at a discount, that discount is ACCRETED on a straight-line basis. *OID is Accreted and NOT taxed! *Owner of OID discount bond must adjust cost basis by accreting discount over life of bond *Secondary market discounts can accrete and ARE taxed as ordinary income A 3% bond with 20 years to maturity is being issued by a syndicate with a reoffering yield of 4%. What is the term used to describe this bond? - Original Issue Discount *Because the bond is being issued by a syndicate, it is a new issue (i.e., an original issue). Because the yield (4%) is higher than the coupon (3%), it is an original issue discount. A customer purchases $100,000 of original issue discount municipal bonds. How will this trade be considered for tax purposes when the bonds mature? - No capital gain *Original issue discount profit at maturity is treated as part of the tax-free interest on a municipal bond. However, for a municipal bond bought at a discount in the secondary market, the discount is considered ordinary income subject to tax.

Mortality and Expense Charges

Just as mutual funds have an expense ratio where all of the operating costs are viewed as a percentage of the net assets, variable insurance companies have expense ratios, too. Some of these charges, such as for portfolio management, are similar to those found with mutual funds. But, insurance companies have some specific costs unique to their products. The mortality risk fee covers the risk that the insured may live for a period shorter (life insurance) or longer (annuity) than assumed. The expense risk fee covers the risk that the costs of administering and issuing the policy may be greater than assumed. And, of course, the investment management fee is the cost of the management of the chosen separate account subaccounts.

When an applicant purchased a life insurance policy, the agent dated the application 4 months prior. When asked by the applicant, the agent said he was allowed to backdate policies up to 6 months if it would

Lower the insured's premium

Limited Partnerships (LPs)

LP Required Documents 1) The certificate of limited partnership 2) The partnership agreement 3) The subscription agreement LPs are liable for a proportionate share of recourse loans assumed by partnerships. LPs have NO liability for nonrecourse loans and only in real estate DPPs does the nonrecourse loan add to the investor's basis. **Real Estate does NOT have depletion allowances like Oil and Gas does *Acquires LP status in DPP when -- He and GP have BOTH signed subscription agreement *Rights and liabilities of general and LP's are listed in -- Partnership agreement *Limited partnership programs are categorized as direct participation programs. The term direct participation refers to -- The flow-through of profits and losses of the partnership to the individual limited partners *Method of analyzing LPs by identifying sources of revenue and expenses -- Cash Flow Analysis *The maximum commission in selling partnership offerings is 10%. *Commissions taken are NOT deducted from the original investment to determine beginning cost basis. *Principal paid on a loan does NOT reduce LP's taxable income - reduces cash and loan balance but not a cost for tax purposes *Sold publicly via a prospectus offering would be expected to have --- A LARGE group of investors, each contributing a SMALL sum *(REITS AND LPS) - They both pass through investment gains to the investor and have centralized management. Priority of Payments When LP is Liquidated: 1) Secured Creditors 2) General Creditors 3) Limited Partners 4) General Partners *LP's share of losses may be used to offset PASSIVE INCOME Taxation for LP's: 1) Depreciation 2) Depletion 3) Accelerated Depreciation 4) Intangible Drilling Costs 5) Interest paid on a loan Benefits: 1) Investment managed by others 2) Limited Liability 3) Flow through of income & certain expenses Both Real Estate and Oil and Gas Offer: 1) Limited Liability 2) Depreciation Allowances 3) Deferred Receipt of Income and Capital Gains NEEDED: - Credit agreement - Partnership agreement is required - no requirement that the agreement specifically allow margin. (Does not prohibit margin borrowing) - New Account Form - Hypothecation agreement (Optional) - Subscription Agreement - Certificate of Limited Partnership Would Be Disclosed: 1) How the general partners will be compensated 2) What matters the LPs can vote on under the democracy provisions 3) How the operating profits will be distributed Rights of LP's in a DPP: 1) Sue general partners 2) Vote on business objectives 3) Inspect all books and records *DO NOT make day to day decisions (for GP only)

Immediate-Or-Cancel (IOC) Order

Like FOK except that a partial execution is acceptable. Remainder is cancelled An investor submits an immediate-or-cancel order to buy 500 shares of stock at 32.20. When the order reaches the trading floor, the quote is 32.18 - 32.26, 6 × 6. The investor - Did not buy any shares *An immediate-or-cancel order (IOC) is a limit order requiring immediate execution or cancellation. Unlike its cousin, the fill-or-kill (FOK) order, a partial fill is permitted with an immediate-or-cancel order. An IOC order to buy 500 shares at 32.20 means that the investor will buy up to and including 500 shares as long as the purchase price is at no higher than $32.20 per share. Buyers pay the lowest ask price (the least a seller is willing to accept for the stock). At the time this order is presented, the lowest ask was 32.26. Even though the seller was willing to sell all 500 shares (the quote size was for 600), the price is not low enough, so the order is canceled. A representative enters a customer's immediate-or-cancel (IOC) order to sell 1,000 shares at $12. If only 500 shares can be sold at $12, which of the following will occur? - The 500 shares will be sold at $12; the remainder of the order will be canceled unexecuted. *An IOC order will take a partial fill. Time is the limiting factor in an IOC.

Policy Loans

Like traditional whole life insurance, a variable life insurance contract allows the insured to borrow against the cash value that has accumulated in the contract. However, certain restrictions exist. Usually, the insured may only borrow a percentage of the cash value. The minimum percentage that must be made available is 75% after the policy has been in force for three years. If the death benefit becomes payable during any period that a loan is outstanding, the loan amount is deducted from the death benefit before payment. The interest rate charged is stated in the policy. - A minimum of 75% of the cash value must be available for policy loan after the policy has been in force three years. - The insurer is never required to loan 100% of the cash value. Full cash value is obtained by surrendering the policy to the insurer. - If the insured dies with a loan outstanding, the death benefit is reduced by the amount of the loan. - If the insured surrenders the contract with a loan outstanding, cash value is reduced by the amount of the loan.

A whole life policy that requires the policyowner only pays premiums for a specified number of years is known as what kind of policy?

Limited-pay Whole Life

The premium of a survivorship life policy compared with that of a joint life policy would be

Lower

If a settlement option is not chosen by the policy owner or the beneficiary, what option will be used by the insurer?

Lump-sum payment

Special Tax Bond

MUNICIPAL REVENUE BOND that will be repaid through excise taxes on such purchases as gasoline, tobacco, and liquor. The bond is not backed by the ordinary taxing power of the municipality issuing it.

Office of Foreign Assets Control (OFAC)

Maintain customer identification programs (CIPs) to prevent financing of terrorist operations and money laundering. Financial institutions must keep records of identification information *When individuals open an account, OFAC checks their name against SDN - Specially Designated Nationals *Part of the US Treasury Department

Durable POA

Many POAs allows the power to continue if the owner is incapacitated. If language allows it, it's durable. All POAs end with the death of either the person who granted the power (account owner) or the person so appointment (the attorney) A durable power of attorney survives the physical or mental incompetence of the grantor but not the death of either party. This means that orders entered after the time of death of the grantor, even if the purchase or sale was decided upon before death, are not accepted.

Exchanges Within a Family of Funds

Many sponsors offer exchange or CONVERSION privileges within their families of funds. A mutual fund family, (sometimes referred to as a fund complex), is when a single sponsor or distributor offers more than one fund. Exchange privileges allow an investor to convert an investment in one fund for an equal investment in another fund in the same family without incurring an additional sales charge. Exchange with no-load, must apply: - The purchase may not exceed the proceeds generated by the redemption of the other fund. - The redemption may not involve a refund of sales charges. - The sales personnel and dealers must receive no compensation of any kind from the reinvestment. **This is a TAXABLE event. If there is a gain or loss, it MUST be reported ****Any exchange of funds is considered a sale for tax purposes. Any gains or losses are fully reportable at the time of the exchange. (Tax consequences are treated as a sale and new purchase)

Price-To-Earnings Ratio (P/E Ratio)

Measure of amount of earnings a company makes compared with its current market value. CMV / EPS = P/E Ratio (Expressed as a number)

M1 Money Supply

Measure of the most readily available money to spend: cash and money in Demand Deposit Accounts (DDAs) - Money closest to being spent

Consumer Price Index (CPI)

Measures the rate of increase or decrease in a sample of prices. - Inflation - Increase in prices - Deflation - Decline of prices - Stagnation - Prolonged periods of slow or little growth - Associated with high unemployment - Hyperinflation - Pace of inflation is extremely high - Rising inflation 50% or more each month - Stagflation - Describes unusual combination of inflation and high unemployment. *Monthly number that compares annual % (July to last years July) - Computed each month *Term "Constant Dollar Measurement" is sometimes used for CPI

Which of the following information about the applicant is NOT included in the general information section of the application for insurance?

Medical Background

Sharing Accounts

Member firms and RRs are prohibited from sharing in profits and losses in a customer's account. An exception is made if a joint account has received the member firm's prior written approval and the RR shares in the profits and losses only to the extent of his proportionate financial contribution to the joint account. *Exceptions to proportion rules are made when sharing in a joint account with immediate family members *Firms cannot have joint accounts with customers

MSRB

Municipal Securities Rulemaking Board *Regulates all matters related to the underwriting and trading of state and municipal securities. *Regulates but does not have enforcement powers so it really has no regulatory power over the municipalities who issue municipal securities *The MSRB rule on retention of customer complaints is six years - Bank Dealers = FDIC to enforce (State and local) - Federal Reserve Board Banking Member = FRB - Comptroller of the currency = National Bank - Broker Dealers = FINRA/SEC *Issuers of municipal or municipal fund securities are EXEMPT issuers and are not regulated or under the guidance of the MSRB or any other self-regulatory organization.

Municipal Bond Insurance

Municipal bond issuers can insure their securities' principal and interest payments by buying insurance from a number of insurers. This will generally improve the marketability of the bond. Among those specializing in insuring municipal issues are National Public Finance Guarantee Corp. Insured bonds are generally issued with lower coupon rates because investors will accept lower rates of return for the added safety insurance affords. In addition, the cost of insurance may also lessen the yield a municipal issuer is willing to pay. Many small issues of municipal bonds are not rated because of the cost to rate a bond can be expensive. Instead, many issuers will insure the bond for principal and/or interest. When a bond is insured, MSRB rules require of the certificates accompanied by evidence of insurance, either on the face of the certificates or in a separate document.

Bid Wanted/Offer Wanted (BW/OW)

Municipal dealers are called upon regularly to provide current quotations for municipal securities they do not have in inventory. Municipal bonds are not listed on any exchange—they do not have the quote and price transparency of listed securities. When a customer of a municipal firm is looking for a specific bond, the dealer will actively solicit offers to sell from the marketplace. If the customer has bonds to sell, the dealer will actively solicit bids from the marketplace for those bonds. *Under MSRB rules, any indication of interest or solicitation by a municipal dealer would be considered a QUOTATION REQUEST *Quotation = ANY bid for or offer of municipal securities

Options Disclosure Document (ODD)

Must be provided at or before the time of the account approval. Explains strategies, risks and rewards. Must be approved by a Registered Options Principal (ROP) *Customer has 15 days to return the signed options agreement.

An insured purchased an insurance policy 5 years ago. Last year, she received a dividend check from the insurance company that was not taxable. This year, she did not receive a check from the insurer. From what type of insurer did the insured purchase the policy?

Mutual

Mutual Funds

Mutual Fund Risks: 1) Market Risk 2) Interest Rate Risk 3) Net Redemptions 4) Expense Risk 5) Tenure Risk *Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence is not in the client's best interest, as the client might be subject to substantial additional sales charges. *Management fees paid by an investment company are part of -- The operating expense of the fund (Custodial fees are also part of the operating expenses) *Class B and C shares have CSDC *Stock Funds = Growth, value (Like growth, less volatility), Blend/Core *If mutual fund is redeemed within 7 days, commissions are refunded (Not meant for short term)

Treasury Receipts

NOT issued by US Treasury. NOT backed by full faith and credit of US Government *Created by BD's who buy treasury securities and are put in trust in which they collateralize the receipts. Sold under names like Certificates of Accrual on Treasury Securities (CATS) and Treasury Income Growth Receipts (TIGRS) *Pay interest (must be accreted AT maturity) *Each receipt is priced at a discount from the payment amount, like a zero coupon bond *Quoted based on Yield To Maturity *Issued by BD *Made up of basket of treasury bonds *Low risk with NO current income Characteristics: - the certificates may represent either the principal or the interest portion of the securities that were deposited with a trustee. - they are stripped bonds. - they are zero-coupon bonds. - Purchased at a discount - Mature at face value - Interest NOT paid annually, still report to IRS as taxable income for the year

Which of the following is NOT true regarding the needs approach method of determining the value of an individuals life?

Need is predicted using the number of years until the insured's retirement

Net Investment Income (NII)

Net investment income (NII) includes gross investment income—dividend and interest income from securities held in the portfolio—minus operating expenses. Advertising and sales expenses are not included in a fund's operating expenses when calculating NII, but management fees, custodian bank charges, and legal and accounting fees are included. NII = Dividends + Interest - Expenses of the fund (D + I - E) *SEC rules require that open-end management companies distribute dividends to their investors from the firm's NII *Dividends MUST be paid from the NII

If an insurance company issues a policy even though some questions on the application were unanswered, when can the insurer get the answers to those questions?

Never; the insurer has waived its right to those answers by issuing the policy

Cash Account

No margin borrowing - 100% of trades value must be deposited *Purchase of new issue common stock can happen in a cash account Basic investment account, and anyone eligible to open an investment account can open one. In a cash account, a customer must pay IN FULL for any securities purchased. NO BORROWING. - Personal Retirement (IRA) - Corporate Retirement (401K) - Custodial Accounts (ESA, UTMA) Your customer purchases 200 shares of Seabird Airlines (the ticker is SBRD) at $30 a share in a cash account. Under Regulation T, the Federal Reserve has set the initial margin requirement at 50%. How much does your customer need to deposit for this trade? $6,000 *Cash Account Reg T = T+4 *Cash Account Regular Way = T+2 *Corporate stock is purchased in a cash account, and it will settle regular way T+2. In a cash account, FULL PAYMENT would be REQUIRED no later than two business days after T+2 - in other words, T+4 ****Neither the customer's signature nor the registered representative's signature is required to open a cash account. A principal must review and accept the new account by signing the form (ONLY A PRINCIPAL MUST SIGN NEW ACCOUNT FORM)

Rule 144 (Restricted Stock and Control Persons)

Part of SA of 1933 applies to shares that are sold through a nonstandard offering and are subject to resale restrictions and to sales by persons who are classified as control persons (Insiders) of the issuer *Volume limitations: 1% of the outstanding shares of the company OR Weekly average trading volume over the most recent 4 weeks (Might show 5 weeks on test) *Control persons are always subject to volume limitations. *Nonaffiliates have no volume (or any other restrictions) in sale of registered stock. *There is a minimum - 1,000 shares or $50,000 in sales proceeds are permitted without filing form 144 (No short sales, No short swing profits) *Must act as agent (Unless Market Maker) - May not solicit buyers of 144 stock unless: 1) Customer has expressed interest in previous 10 business days, 2) Member has expressed interest in previous 60 calendar days **Rule 144A regulates the trading of restricted securities to INSTITUTIONAL investors known as qualified institutional buyers. Rule 144A - Allows Non-registered foreign and domestic securities to be sold to Qualified Institutional Buyers (QIBs) (Min of $100k) *An affiliate holding unregistered shares can sell 4 times a year (The filing is good for 90 days (three months), which would allow for as many as four filings per year.) **When you encounter a Rule 144 question, always look for two things: 1) What kind of stock is being sold? (Restricted or control) 2) Who is selling it? (Insider or noninsider) Only restricted stock has a holding period. Control stock, unless it is restricted, can be sold immediately, but volume limits always apply.

Which type of insurance policy pays dividends if there are excess premiums over the cost of providing the insurance?

Participating

General Partnership

Partnership in which partners share equally in both responsibility and liability **Consider COLLECTIVE OBJECTIVES -Unlimited liability -Management responsibility - Fiduciary Responsibility - Act as an agent for the partnership in managing partnership assets. - Sell property to the limited partnership. - No conflicts of interest (Can't Borrow, Comingle, Borrow)

Cost Basis

Pay estate taxes within 9 months of death Can get alternative pricing up to 6 months after death

A prospective insured receives a conditional receipt but dies before the policy is issued. The insurer will

Pay the policy proceeds only if it would have issued the policy

Treasury Inflation-Protected Securities (TIPS)

Protects investors against purchasing power (inflation) risk. *Issued with a fixed interest rate but the principal amount is adjusted SEMIANNUALLY by an amount equal to the CPI. Does not receive until the bond matures, it is reported as income each year Benefits: 1) Semiannual adjustments to principal based on the Consumer Price Index (CPI) 2) Interest payments that keep pace with inflation *Fixed interest rate, par value changes *Principal value adjusted every 6 months (Par Value) *Pays interest every 6 months *Matures 5, 10 or 20 years *At maturity, principal will never be less than original 1,000 par *Helps with variable annuities *Exempt from state and local income taxes on the interest income generated, subject to federal taxation *Differ from all other US Treasury securities by subjecting the investor to Phantom Income A TIPS bond has a coupon of 3%. Over a two-year period, the annual inflation rate has been 4.5%. At the end of that time, the principal value of the TIPS would be - $1,093.08 **TIPS bonds have the special feature of adjusting the principal value every six months by the inflation rate. With an annual rate of 4.5%, the adjustment is 2.25% semiannually. There are two ways to solve this. One is to take the calculator given to you at the test center and multiply $1,000 × 102.25%. Take the result and multiply that times 102.25%. Do that two more times (there are four adjustments in two years), and the ending number will be 1,093.08. A faster way is to take the simple interest of 4.5% per year. That is $45 per year or $90 for the two years. Add that to the original principal to get $1,090. That is not the correct answer, but the next highest number in the answer choices is.

Long Position

Purchase of securities in anticipation of a price increase *Buy To Open, Sell to Close

Nonqualified vs Qualified

Qualified = Pre-Tax Dollars Non-Qualified = After-Tax Dollars

Employer Sponsored Retirement Plans

Qualified for public schools & 501 (c)3 - Non-profit organizations - Employees ONLY (Not students) - Cost basis is $0

Breakpoints (Sales)

Quantity discounts on open-end management company shares (Mutual funds). The greater the dollar amount of a purchase, the lower the sales charge. *Breakpoints only apply to Class A Shares Term used in the securities industry to mean sales just below the breakpoint at which the investor would pay a lower sales charge.

Tactical Asset Allocation

Refers to SHORT TERM portfolio adjustments that adjust the portfolio mix between asset classes in consideration of current market conditions. This is an active strategy. Those who practice tactical asset allocation, buying and selling to try to "time the market," are candidates for fee based accounts *Typically associated with HIGHER paying commissions

Marginable

Refers to securities that can be used as collateral in a margin account

Strategic Asset Allocation

Refers to the proportion of various types of investments composing a long-term investment portfolio. This is a passive strategy. *Long term approach (More passive) (Index funds) *Standard is to subtract age from 100 to determine % of portfolio of stocks *Rebalance portfolio *Commission based account is more suitable

To prevent the loss of investment income for the insurer, policyowners receiving a loan from the cash value of a policy are charged a

Rate of interest

Bond Ratings

Rate strengths of borrowers Three major credit rating agencies: Fitch Ratings, Moody's Investors Service, Standard and Poor's Rating Service (Most Important) *May see A.M Best Co *AAA (Aaa) - Highest investment grade rating for bond issuers awarded by S&P and Moody (Prime) *AAA--BBB- are INVESTMENT GRADES (Only quality eligible for purchase by institutions *BB+ (Ba1) starts "SPECULATIVE *Ba (BB) - Highest NONINVESTMENT grade *D rating indicates the issuer is in DEFAULT Non-Rated - Issues are usually nonrated because they are too small to justify the expense of rating. Nonrated bonds are not necessarily better or worse than rated bonds. *Lower the rating, higher the yield *Trade Confirmations: - Trade Date - Description of the security - CUSIP Number - Commissions (Not markups or markdowns) - Coupon Rate and Maturity Date - Customer's Name *No obligation to print bond credit rating on trade confirmation

Reclamation

Reclamation occurs when a buying broker-dealer, after accepting securities as good delivery, later discovers that the certificates were not in good deliverable form (e.g., certificates are mutilated). The securities can be sent back to the selling broker-dealer with a Uniform Reclamation Form attached within specific time frames, depending on the reason reclamation is being made. NEVER subject to reclamation: 1) Bond certificates to an in-whole call 2) Bonds where the issuer goes into default after the trade date After receiving and accepting securities from another firm, a broker-dealer discovers that the securities received were not in good deliverable form. Recourse for the broker-dealer is to - File a reclamation

In the event of a policy surrender, any outstanding debts on the policy may be deducted from the cash value, and the difference may be used to purchase

Reduced Paid-Up Insurance

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

Reduction

Securities Exchange Act of 1934

Regulates SECONDARY market. Created SEC and gave it the authority to regulate securities exchanges and the OTC (Over The Counter) Market BDs must comply with SEC Rules, failure results in: - Censure - Limits on activities - Suspension - Revocation of registration Does: - Regulates manipulative, deceptive devices - Regulates BD's and associates persons - Regulates trading of corporate securities

An insured will be allowed to reactivate her lapsed life insurance policy if action is taken within a certain period of time, and proof of insurability is provided. Which policy provision allows this?

Reinstatement Provision

All of the following are marketing arrangements used by insurers EXCEPT

Reinsurance System

Stock Dividends

Reinvest profits for business purposes rather than pay cash dividends. Common in growth companies. In a 20% stock dividend, what happens to the number of shares and the share price? Share price goes down, number of shares goes up *In a stock dividend the shareholder gets more shares of stock, but because the total value of the shareholder's position does not change, each share is now worth less.

Under the Fair Credit Reporting Act, if a consumer challenges the accuracy of the information contained in a consumer or investigative report, the reporting agency must

Respond to the consumer's complaint

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Responsible for catch-up provision. Individuals age 50 and older are allowed to contribute $1,000 for retirement. Corporate Accounts -- Catch up is available for corporate plans - $6,000 instead of $1,000 for individual

Penny Stocks

Risk Factors: - Limited Transparency - High Volatility - Illiquidity Unlisted security trading at less than $5 per share. *Must sign disclosure of suitability; name of stock, number of shares, current quotation, amount of commission (Only applies to SOLICITED transactions - cold calls) *The tax treatment on gains or losses in penny stock investing are no different from any other stock. Because these are not traded on the exchanges or Nasdaq, it is not always easy to find a buyer or seller at your price. Many of these companies are not bound by the same financial reporting requirements as listed companies, making it difficult to really determine where the money is going. These low-priced stocks tend to fluctuate much more, with daily price swings of 25% or more not being unusual. *Receive MONTHLY Account Statements *Exemptions from Suitability: - Hold account with BD for 1 year - 3 Penny Stock purchases of different issues on different days - Not recommended by RR

Which type of retirement account does not require the owner to start taking distributions at age 72?

Roth IRA

Risk Disclosure Document (Penny Stock Rules)

Rule 15g-2 requires that customers, before their initial transaction in a penny stock, be given a copy of the Risk Disclosure Document. The member firm must receive a signed and dated acknowledgment from the customer that the document has been received. *The SEC requires the firm to wait at least 2 business days after sending the statement before executing the first trade. This is to give clients time to carefully consider their trade.

Disclosure of Quotations (Penny Stock Rules)

Rule 15g-3 requires members to provide penny stock purchasers with a current bid and asked quote on the stock to prevent the practice of quoting prices that are away from the current market to customers. The quote information must be provided to the customer orally or in writing before effecting any transaction with the customer for the purchase or sale of any penny stock. This information is also sent in writing with the trade confirmation.

Frequency of Customer Account Statements (Penny Stock Rules)

Rule 15g-6 requires members to provide penny stock purchasers with monthly statements showing the estimated market value of each penny stock purchased.

Customer Suitability Determination (Penny Stock Rules)

Rule 15g-9 addresses sales practices to curb abusive sales practices. This rule requires members who are soliciting new customers to make a suitability determination. The member must inquire as to the prospective customer's income, net worth, objectives, and risk tolerance. This suitability statement shows why the proposed penny stock trade is suitable for the customer. The member firm sends the statement to the customer for a signature. Once returned, trading in penny stocks may take place.

Options Clearing Corporation (OCC)

SRO 1) Standardize option contracts 2) Guarantee the performance option contracts 3) Issue option contracts 4) Creates *Clears Trades: - Process - Match - Settle *Does NOT determine option premiums, supply and demand determines premiums *Issuer of ALL listed options *OCC RANDOMLY selects firm to assign and then the BD may allocate on Random, FIFO or any reasonable basis *NOT considered fair and reasonable is selecting based on the size of the writer's position

Books and Recordkeeping Requirements (Rules G-8 and G-9)

Rule G-8 lists the various records to be made and Rule G-9 states the retention requirements. We think it is easier for you to learn them if we group the rules together. Record maintenance requirements specify the length of time that various records must be kept. Generally, records are categorized into the following three maintenance periods: - Records kept for the lifetime of the firm - Records kept for six years - Records kept for four years (all those not specifically designated as lifetime or six-year records) **MSRB Rule G-9 requires that designations of principals must be maintained for six years. All records must be kept readily available for two years.

Disclosure of Compensation (Penny Stock Rules)

Rules 15g-4 and 15g-5 require members to provide penny stock purchasers with information on the compensation to be earned by both the member and the RR as the result of the transaction. This is to prevent excessive markups.

Volatile Market Conditions Rule 80B

Rules known as the market-wide circuit breaker rules protect against rapid, uncontrolled drops in the market. 1) Level 1 halt = 7% decline in S&P 500 - Before 3:25 pm—15 minutes; - At or after 3:25 pm—trading may continue, unless there is a Level 3 halt 2) Level 2 halt = 13% decline in S&P 500 - Before 3:25 pm—15 minutes; - At or after 3:25 pm—trading may continue, unless there is a Level 3 halt 3) Level 3 halt = 20% decline in S&P 500 - At any time—trading will halt and not resume for the rest of the day *A Level 1 or 2 halt cannot occur more than one time per day. In other words, if a Level 1 halt has already occurred, it would take a Level 2 halt to stop trading again. *During a market halt, while no trading can occur, investors can still cancel existing (open) orders that had been entered previously.

SEP IRA

SEP plans are qualified individual retirement plans that offer self-employed persons and small businesses easy-to-administer pension plans. SEPs allow employers to contribute money to SEP IRAs that their employees set up to receive employer contributions. - the retirement account is usually set up at a bank or other financial institution Requirements: - Has reached age 21 - Has worked for the employer in at least 3 of the last 5 years - Has received at least $600 in compensation from the employer during the year (for 2020)

SIMPLE Plans

SIMPLEs are retirement plans for businesses with NO more than 100 employees that have no other retirement plan in place. - The employee makes PRETAX contributions into a SIMPLE up to an annual contribution limit, which CAN include catch-up contributions for those age 50 and older. The employer IS permitted to make matching contributions for employees.

Financial Crimes Enforcement Network (FinCEN)

Safeguard the financial system from illicit use, to combat money laundering, and to promote national security through the collection, analysis, and dissemination of financial intelligence. *Suspicious Activity Reports are filed with FINCEN from USA Patriot Act *Under Bank Secrecy Act (BSA)

US Treasury Bills (T-Bills)

Safest money market security is the T-Bill. - Available in maturities of 4, 8, 13, 26 and 52 weeks.(One year or less) - No security is SAFER than a T-Bill - Risk free investment is the 13 week (91 day) T-Bill (Always issued at a discount from the face value) *Does NOT issue commercial paper -- Its short-term borrowing is done with T-Bills - Has lowest interest rate - Highly liquid - Redeemed for par value at time of maturity, bought at discount - Short term debt reacts the least in price when rates change - NOT CALLABLE - Pays NO interest - Auctioned WEEKLY - They are quoted with a bid HIGHER than the ask. Risk: - Exposed to inflation risk (Fixed income) A respected analyst reports that last week's T-bill rate at 1% is lower than the rate for the preceding week and lower than the average for the past month. Which of the following is true? - Investors are paying MORE for TBills *When the rate is lower, the price has gone up (Investors are paying more as interest rates are going down)

Capital Gains and Losses Formula

Sales Proceeds - Adjusted cost basis = (Capital gains if a positive number, capital losses if a negative number) Short Term = 1 year or less (Taxed Ordinary Income) Long Term = One Year or More (Taxed At Favorable Rate) *Long term gains are taxed separately from ordinary income *Short term gains are included in ordinary income *Long term capital gains rate is LOWER than investors ordinary income tax rate *DIVIDENDS are not included in calculation of gain or loss for TAX PURPOSES *Customer sells short 100 shares of ABC common stock at $35 per share. ABC stock increase in value, customer covers the short for $45 per share. What is result of transaction? - $10 per share LOSS ($35 - $45 = $-10 (loss))

Class A (Font-End Load) Shares

Sales charges are paid at the time an investor buys shares, and the sales charge is taken from the total amount invested. *Most common way of paying *Best for investors with large investments (To get breakpoints) and longer time frames *Come in at POP (Only Class) *Only class to get breakpoints *Lower 12b-1 fees than B or C *A Shares and No load shares have MAXIMUM 12B-1 Fees of 0.25% per year *When purchasing Class A, NAV + Sales charge is paid *NAV per share is the price the investor -- Will receive upon REDEMPTION of the shares A customer sells shares of the ABC Growth Fund and invests the proceeds into the Windmill Income Fund. Both investments are in Class A shares. What are the tax consequences for these transactions? - The customer will realize any capital gains or losses and will pay a new sales charge. ** This transaction will result in the customer realizing any capital gains or losses for tax purposes. The exchange (conversion) privilege would waive the new sales charge if this transaction was between funds within the same fund family (sponsor). In this question the funds are at different sponsors; any sales charges will apply to the new purchase.

Statutory Disqualification

Sanctions by SEC, state regulator, SRO, foreign financial regulator or foreign equivalent. Will be rejected if: - Has been expelled or suspended from membership - Under an SEC order of a foreign financial regulator denying, suspending, or revoking registration or barring from association with BD - Has been found to be the cause of another BD or associated person being expelled or suspended by another SRO, SEC or foreign equivalent. Can Automatically Disqualify an applicant from Registration: - Misstatements willfully made in an application for membership or registration - Felony conviction, either domestic or foreign, or a misdemeanor CONVICTION involving securities or money within the past 10 years - Court injunctions prohibiting the individual from acting as an investment advisor, an underwriter, or BD *Failure to disclose facts like bankruptcy or outstanding liens can disqualify you *Non-Securities misdemeanors do NOT have to be reported. *Only a court injunction enjoining from entering the securities business - NOT A DOMESTIC ISSUE

Capital Markets

Secondary Markets are where securities trade between investors. The seller is never the issuer. (investors and facilitators) Settlement rules are for secondary market trades *Proceeds go to existing stockholders *Capital Markets raise funds accomplished by corporations through issuance of stock (equity) or bonds (debt)

Corporate Debt (Riskiest)

Secured Corporate Debt - Collateral Trust Bonds - Equipment Trust Certificates - Mortgage Bond Unsecured Corporate Debt - Debenture - Subordinated Debenture - Guaranteed Bond - Income Bond (Adjustment Bond) (Interest payable only if earned, trade flat) Zero Coupon Bonds - Purchased at a discount - Interest paid at maturity but taxed annually - Do NOT trade with accrued interest - Investors looking to provide: - Accumulation of capital - Protection against investment risk *Interest: - Taxable at all levels as ORDINARY income - Zero accretion taxed annually

Primary Market (Offer) (Issuer Transactions)

Securities are sold by the issuer - a corporation or a government to the investing public in what are known as issuer transactions The seller is always the issuer (Can be corporations, municipalities, and the federal government or its agencies) If the issuer of the security has RECEIVED the FUNDS from an offering, it is a primary market transaction. Whether IPO, APO or something else. If the issuer is GETTING the MONEY, it is a primary offering *Regarding primary offerings, there is NO limit to the number of primary offerings a corporation can issue -- Can only have 1 IPO, no limit on SPOs or APOs it can issue which are all primary offerings

Form U5

Should a person registered with a member resign or be terminated, the member must file Form U5 with the CRD within 30 days of termination date. Responsibility of MEMBER FIRM to fill out. Termination, for whatever reason, requires that the old firm file a Form U5. Registration, whether for the initial or any subsequent one, requires filing of a Form U4. *Discharged, Permitted to resign or Other - all details must be disclosed *If a BD discovers that a filed Form U5 was INACCURATE, an amended form must be filed and sent to the former employee within 30 days of the discovery of inaccuracy

Bond Anticipation Notes (BANs)

Sold as interim financing that will eventually be converted to long-term funding through a sale of bonds *Issued at discount If an investor purchases a bond anticipation note (BAN) that matures in one year, when will the investor collect the interest? - At Maturity *Short Term Financing

Inflation Risk

Sometimes called *purchasing power risk. Effect of continually rising prices on a fixed investment income. *Highest degree of purchasing power risk -- Long term, high grade bond (Longer a fixed income investment is held, the more vulnerable the investor is) (25 Year municipal bond)

Private Placement

Sometimes it is difficult to identify private placement stock in a question because of the many terms that can be used to describe it. Recognize all of the following terms as being synonymous with private placement stock: - Restricted (because it must be held for a six-month period) - Unregistered (no registration statement on file with the SEC) - Letter stock (investor agreed to terms by signing an investment letter) - Legend stock (bear a restrictive legend on the certificate)

Section 529 Plans (Qualified Tuition Plans)

Sponsored by state or local governments. Education savings account. Plans allow saved money to be used for qualified expenses K-12 and college education. 2 Types: 1) Prepaid Tuition - State Residents (Protect against inflation in tuition) (Doesn't include investment risk) 2) Savings Plans - Residents and nonresidents *more popular *Official Statement is the disclosure form *The 529 plans are considered by the SEC and FINRA to be state municipal fund securities. *****No earnings limits, no annual contribution limit, no age limit for contributions or withdraws and tax free *After Tax contributions *Non-qualified = subject to tax & 10% penalty *May NOT withdraw earnings up to the value of the scholarship tax free *Type of municipal security (MSRB) *May be used for pre-college education costs *Which of the following considerations should a RR explain to a customer when recommending a 529 plan? - Potential deductibility of contributions from state taxes

An applicant buys a nonqualified annuity, but dies before the starting date. For which of the following beneficiaries would the interest accumulated in the annuity NOT be taxable?

Spouse

Adjustments

Standardized: Standardized for corporate actions such as - Forward & Reverse Splits (Even & Uneven), Dividend Payments (Cash & Stock), Rights and Warrant Offerings Not-Standardized: Adjustments that are unique to each situation include - Mergers & Acquisitions, Takeovers, Spinoffs, Option contracts are traded on issuer securities

Local Government Investment Pools (LGIPs)

States estab to provide other govn entities (cities, counties or other state agencies) with a SHORT term investment vehicle to invest funds. formed as a trust and can purchase shares or units in lgip's investment portfolio. Not retail investors. can maintain a fixed NAV of $1 similar to money markets-facilitates liquidity and minimum price volatility not required to register with the sec. no prospectus but information statements *Typical investors are municipal governments - other government entities, NOT retail investors *Short term, similar to money market

Local Government Investment Pools (LGIPs)

States establish local government investment pools (LGIPs) to provide other government entities—such as cities, counties, school districts, or other state agencies—with a short-term investment vehicle to invest funds. The LGIPs are generally formed as a trust in which municipalities can purchase shares or units in the LGIP's investment portfolio. *Not a money market fund *Do NOT have to register with SEC *No Prospectus - Have disclosure documents *Similar to money market fund - Maintain $1.00 NAV, facilitating liquidity; less volatility

Joint tenants with right of survivorship (JTWROS)

Stipulates that a deceased tenant's interest in the account passes to surviving tenant(s). All parties have an undivided interest in the account. *Common for married couples - No changes in any account name(s) can be made unless authorized by a QUALIFIED and REGISTERED Principal - Principal MUST be informed of essential facts in writing - Must have approval of other tenant but approval goes to Principal, Not RR. - No rules prohibiting opening account for unmarried persons. Must take all steps to understand death consequences *Mail may be directed to the joint owner agreed upon by both parties to the account -Orders may be entered by either party

Hedge Fund

Stock positions + Options (Opposite Sentiment) 1) Protection or Profit 2) Income *Considered a form of private investment company, unregulated *Highly leveraged portfolios *Commodity Speculation *Use of short positions *Hedge fund having a lock-up provision means: *Investors are required to maintain the investment for a minimum length of time (Illiquid)

Stock Rights (Preemptive Rights)

Stock rights, sometimes known as preemptive rights, or simply rights, entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. The rights are valued separately from the stock and trade in the secondary market during the subscription period, which is typically 30-45 days. *May exercise the rights to buy stock, sell the rights, let the rights expire *Short term, allow one to purchase shares below current market value *To offer its shareholders a privilege to obtain its shares at a fixed price, which of the following products does a corporation issue? -- RIGHTS

Surplus

Surplus in the US balance of payments can occur if: 1) Interest rates in foreign countries are lower than US domestic rates 2) Foreign consumers are purchasing (Importing) US Goods *Anything that brings money into our domestic economy leads to a surplus (More money coming in than going out)

A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as

Survivor Protection

Life insurance can provide which of the following?

Survivor protection

Which of the following is called a "second-to-die" policy?

Survivorship Life

If the irrevocable beneficiary of a life insurance policy becomes legally incompetent and cannot perform any legal act, the policyowner could obtain a loan for the benefit of

That beneficiary

When giving a life insurance policy as a gift, the gift is received

Tax Free

Regarding taxation, how does the cash value of a universal life policy accumulate?

Tax deferred

Tax-Sheltered Annuities 403(B) Plans (TSA)

Tax-sheltered annuities (TSAs) offered through 403(b) plans are available to employees of: 1) Public educational institutions; 2) Tax-exempt organizations (501(c)(3) organizations) 3) Religious organizations. Tax Advantages: 1) Contributions (Which generally come from salary reduction) are excluded from a participant's gross income 2) Participants/ earnings accumulate tax-free until distribution *You might see a question that asks if a student can be a participant in an educational institution's TSA. The answer is NO, because the plan is only available to employees. *Qualified retirement plan *Contributions are made BEFORE taxes *Growth is tax deferred *Any distribution is FULLY taxable at ordinary income rate *Although can be made into mutual funds, some 85% of the funding is through annuities

Which of the following is an example of a producer being involved in an unfair trade practice of rebating?

Telling a client that his first premium will be waived if he purchases the insurance policy today

Leading Economic Indicators

Tend to change direction ahead of the overall economy. List: - Money supply - building permits - average weekly initial claims for unemployment - machine tool orders - stock prices - # of employment ads - S&P 500 - manufacturer new orders

Countercyclical Industries

Tend to rise when the economy turns down. Products that people buy when they are scared and looking for safety. Example: Gold mining and refinement *When economy appears to be moving into recession - Gold and mining help

ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should

Tender The Bonds The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50). Once the call date passes, the issuer ceases interest payments making it unattractive to continue to hold the bonds.

Freeriding

Term used when securities are purchased and then sold before payment is made for the purchase. Account will be frozen for 90 days as penalty.

Bond's Indenture (Deed of Trust)

Terms of the loan are expressed in a document known as bond's indenture. *States the issuers obligation to pay back a specific amount of money on a specific date.

Acid Test Ratio (Quick Test)

Test of companies liquidity if everything really goes bad (Current Assets - Inventory) / Current Liabilities - Acid-test ratio.

Rule 613 (Consolidated Audit Trail)

The SEC adopted Rule 613 to create a comprehensive consolidated audit trail (CAT) that would allow regulators to efficiently and accurately track all activity, including options, throughout the U.S. markets in National Market System (NMS) securities. The rule specifies the type of data to be collected and when the data is to be reported to a central repository. *A customer of your broker-dealer is questioning the timeliness in which one of her equity orders for a stock listed on Nasdaq was handled and executed. A source providing the most complete order entry and execution details for the customer's order could be found - CAT *For an equity stock listed on Nasdaq, the source that would provide the most complete information about the handling of the order and its execution, including a timeline of all relevant entry and execution events, is the Consolidated Audit Trail (CAT). The CAT tracks orders throughout their life cycle and identifies the broker-dealers handling them, thus allowing regulators to efficiently track activity in eligible securities throughout the U.S. markets. Please note that the former reporting system (OATS) was replaced by CAT on September 1, 2021

Authorized Stock

The amount of stock that a corporation is authorized to sell as indicated in its charter Issued and outstanding stock is the authorized stock of a corporation that has been purchased by investors. The remaining authorized but unissued stock may be used for: - raising capital at a later date. - exchanging stock with stockholders in a conversion - paying stock dividends to stockholders. *The IRS does NOT want a corporation's authorized but unissued stock to pay federal income taxes. The IRS treats a corporation as an entity like an individual taxpayer and wants money, not stock

Dollar Cost Averaging (DCA) (Securities)

The low cost of entry makes dollar cost averaging available for even the smallest of investors. Person invests identical amounts at regular intervals. This form of investing allows the individual to purchase more shares when prices are low, and fewer shares when prices are high. In a fluctuating market and over time, the average cost per share is lower than the average price of the shares. However, dollar cost averaging does NOT guarantee profits in a declining market because prices may continue to decline for some time. In this case, the investor buys more shares of a sinking investment. **It involves investing a fixed amount of money every period, regardless of market price fluctuation. If the market price of shares is up, fewer shares are purchased; if the market price of shares is down, more shares are purchased. Over time, if the market fluctuates, dollar cost averaging will achieve a lower average cost per share than average price per share. **Practice of dollar cost averaging requires the investor to -- Buy a security in a falling market and buy it in a rising market *Dollar cost averaging requires the investor to invest a fixed amount of money on a regular basis, regardless of whether the stock market is rising or falling. When this is done, more shares are purchased when the price per share is low and fewer when the price per share is high. In following this scheme, the investor's average cost per share is lower than the average price paid per transaction. Dollar cost averaging (DCA) will ALWAYS result in a lower cost per share than the price paid per share except - When the price for each purchase is the SAME **There are two requirements for a dollar cost averaging program to work. 1) The same amount must be invested at each specified interval. 2) The price per transaction does NOT remain the same. If that is the case, then the average cost per share and average price paid per transaction are the same. The price needs to move for DCA to show a benefit. *an employee stock purchase plan is one way to use dollar cost averaging *dollar cost averaging is the investment of a fixed amount of money each period. *dollar cost averaging is a passive investment strategy.

Sinking Fund

To facilitate the retirement of its bonds, a corporate or municipal issuer may establish a sinking fund operated by the bonds' trustee. *Can be used to call bonds, redeem bonds at maturity, or buy back bonds in the open market. The concept is similar to the escrow account on a home mortgage To establish a sinking fund, the issuer deposits cash in an account with the trustee. Because a sinking fund makes money available for paying off the bonds, it can aid the bonds' marketability and safety. - Money to pay off interest and principal obligations Benefit: - Bond will generally be issued with an interest rate lower than without the sinking fund - Bond will generally receive a higher rating *A water and sewer revenue bond is MOST likely to require a mandatory sinking or surplus fund

Unsolicited Trade

Trade that originates from and is initiated by customer *A customer called his registered representative to place a trade to buy 100 shares of ABC. The customer wants to put a limit on the order, but is unsure what would be an appropriate price. At the suggestion of the registered representative, the customer enters the order with a limit of $30. This trade was: - Unsolicited **The customer, independent of the registered representative, placed the order, making it unsolicited. While the rep did advise on what an appropriate limit price would be, the customer ultimately placed the order instructions with the limit, and would not be considered discretionary.

Speculation

Trading a commodity with a higher-than average risk in return for a higher-than-average profit potential. The trade is effected solely for the purpose of profiting from it and not as a means of hedging or protecting other positions. *Maximum income or maximum growth without regard to stability -- SPECULATION *Speculation - Those with conservative outlook are unlikely to engage in speculation. - Options Contracts/Trading - DPPs - High-Yield Bonds - Unlisted/Non-Nasdaq stocks or bonds - Sector Funds - Precious Metals - Commodities - Futures - Penny Stocks - Short Selling

An agent who knowingly misrepresents material information for the purpose of inducing an insured to lapse, forfeit, change or surrender a life insurance policy or annuity has committed an illegal practice known as

Twisting (Unfair Trade Practice)

Transfer on Death (TOD)

Type of account registration that allows the owner of the account to pass all or a portion of it, upon death, to a single or multiple beneficiaries. No specific legal documents are needed. Benefits: *Avoids Probate (More flexible than will) *Assets do NOT avoid or reduce estate tax, if applicable *Allows owner to pass all or portion of account to named beneficiary *In case of joint account, TOD becomes effective after death of last surviving tenant The beneficiaries and percentages can be changed as often as desired.

ECN

Type of alternative trading system that trades listed stocks and is required to register with the SEC as a BD 4th market - Institutional investors buying bulk without BD's

Options

Type of derivative investment. A Derivative is a contract that derives its value from an underlying asset. Derivatives are often used for the asset class of commodities, such as oil, gasoline or gold; these are called futures. Another derivatives asset class is currency options, based on the value of a foreign currency VS the US dollar. Two party contract. Option Contracts 1) Calls (Call Up) 2) Puts (Put Down) *Futures are derivatives that have a commodity as the underlying asset. Futures are not classified as securities. *Primary regulators for options are the Options Clearing Corporation (OCC) and the Chicago Board of Option Exchange (CBOE) Order: * Determine suitability, principal approval, first trade, signed option application

American Depositary Receipts (ADRs)

Type of equity security designed to simplify foreign investing for US investors. Created when common shares are purchased in the foreign company's home market. Holding the ADRs in a portfolio entitles the investor to dividends paid in -- U.S. dollars and the ability to trade ADRs on U.S. securities markets - T+2 - Only taxable in US for capital gains - Trading profits would be taxed as capital gains - Owner of ADR may request that the depositary bank cancel the ADR and send them the underlying foreign shares - No voting rights, just foreign trading, dividends, and no preemptive rights *Trades are executed domestically in US dollars *Foreign corporation wants to see ADR issued for common stock for easier access to US capital markets * Facilitates investing in foreign securities in domestic exchange *Designed to simplify foreign investing for US investors, helps foreign companies attract US investor base - Are US Issued Securities Suitable For: 1) Diversification** (Primary Benefit) 2) Adds exposure to foreign stock (Equity) Risks: 1) Currency Risk

Collateralized Debt Obligation (CDO)

Typically complex asset backed securities. Do not specialize in any single type of debt, usually consist of nonmortgage loans or bonds. (Credit Card debt, auto, etc)

Class C (Level-Load) Shares

Typically have one-year, 1% CDSC, a 0.75% 12b-1 fee, and a 0.25% shareholder service fee. Fees never go away that's why they are referred to as having a level load. Expensive to own if investing for more than 4 to 5 years. *Best for investors with short time frames (at least year but not more than 5) *No POP *Have 12b-1 fee as Primary sales charge *Class B and Class C shares have MAXIMUM 12B-1 Fees of 0.75%

Index Option Features

Typically use a multiplier of $100. Stop trading at 4:15pm ET if the are broad based. 4:00pm ET for narrow based index options. Settles in CASH* rather than in delivery of a security. Expire on the third Friday of the expiration month by 11:59pm One major difference between index options and equity options: The exercise of an index option settles the next business day (T+1), whereas the exercise of an equity option settles in two business days (T+2). With regard to trading (buying or selling contract), settlement is the next business day for both. *Automatic Exercise = Any contract in the money by at least $0.01 will be exercised at expiration *Broad Based - Reflect movement of the entire market and include S&P 100, S&P 500 and the AMEX major market index *Narrow Based - Track the movement of market segments in a specific industry (Pharmaceutical/technology) *High readings are not bullish or bearish, measure of expectation (fear) that the market will be volatile - expectation of higher volatility translates to higher premiums Which of these will the writer of an index option be required to deliver to the buyer if the buyer exercises the option? -- Cash equal to the intrinsic value **There is no underlying stock to deliver in an index option, nor does the writer deliver a basket of stock. The writer delivers cash equal to the intrinsic value of the contract. If all an investor could get back was the original premium, then profit would be impossible.

US Dollar

US Dollar Strengthens: - Cost of imports decreases - Imports increase - Cost of US exports increase - Exports decrease - Price of US products increase US Dollar Weakens: - Cost of imports increases - Imports decreases - Cost of US exports decrease - Exports increase - Price of US products decreases *Imports > Exports = Trade deficit * Imports < Exports = Trade Surplus *If US dollar is relatively strong against Japanese Yen -- The US dollar will buy more goods produced in Japan, while the Japanese yen buys fewer goods produced in the US *Reasonable to expect an increase in exports from the US if: - Yen strengthened against the dollar - Dollar weakened against the British pound (US exports should increase when foreigners have greater purchasing power. That occurs when their currency is stronger than the dollar)

Market Risk

When the overall market declines, so too will any portfolio made up of securities from that market

When does an adjustable life policy accumulate cash value?

When the premiums paid are more than the cost of the policy

When will a contingent beneficiary receive death benefit from a life insurance policy?

When the primary beneficiary dies before the insured

Which of the following security types provides investors with a stated maturity date, a floating interest rate, and an option to put the security back to a financial intermediary on a daily or weekly basis?

Variable rate demand note

Stand By Underwriter

When a company's current stockholders do NOT exercise their preemptive rights in an additional offering, a corporation has an underwriter standing by to purchase whatever shares remain unsold as a result of rights expiring. - Firm Commitment - Buys all of the shares that current stockholders do not subscribe to at the subscription price

Trading Flat

When a debt security is trading flat, it means no accrued interest is included in the transaction. In most cases, this occurs when the issuer is in default of interest payments.

Making recommendations

When an RR provides information that a reasonable person would view as suggesting a course of action regarding a security, class of investment, or an investment strategy. *Reasonably could be viewed as a "Call To Action" and "Reasonably would influence an investor to trade a particular security or group of securities" "Suggesting or Advising - market sectors, or products" *If a RR provides info on specific investment that a customer has requested it is NOT a recommendation *If a RR introduces a specific product in response to a customers generic question - it IS a recommendation *Which of the following is NOT required for communication to be considered a recommendation? - The INTENTION to make a recommendation

Special Considerations (Other risk of alternative debt securities)

When comparing alternative investments, debt or equity, to traditional ones, the following factors must be considered: - Lack of regulation - Low transparency - Low liquidity - High fees - Lack of historical data

Pricing of Open-End Investment Company Shares (Open End)

When it comes to open-end investment companies (mutual funds), any person who wants to invest in the company buys shares directly from the company or its underwriters (or a broker-dealer with a selling agreement) at the public offering price (POP). A mutual fund's POP is the NAV per share plus any applicable sales charges. A mutual fund's NAV is calculated daily by deducting the fund's liabilities from its total assets. NAV per share is calculated by dividing the fund's NAV by the number of shares outstanding. Because all buying and redeeming is done through the investment company, there is no secondary trading of shares in these companies. *Sells redeemable securities *Under Conduct Rule, MAXIMUM sales charge on any transaction on open end investment company -- 8.5% of the OFFERING price *Can NEVER have a POP LESS than its NAV. Prohibited Activities: - Purchase any security on margin; - Participate on a joint basis in any trading account in securities (i.e., an investment company cannot have a joint account with someone else); - Sell any security short; or - Acquire more than 3% of the outstanding voting securities of another investment company.

When would life insurance policy proceeds be included in the insured's taxable estate?

When there are any incidents of ownership at the time of death

Good 'Til Cancelled (GTC)

When your order is valid until you cancel it; placing an order to buy 100 shares at $10 GTC means that is a standing order until you tell the system to kill it *Historically have been cancelled at end of April and October - For order to stay in effect longer than 6 months, customer would need to reinstate the order. A customer enters an order to buy 1,000 ABC at 50, good for the week only. How will this order appear on the order book? - Buy $1,000 ABC 50 GTC *Limit orders and stop orders are entered on the order book as either good til canceled (GTC) or day orders. Orders that are good for only a particular time frame (good for the week) will appear as GTC. It is the responsibility of the broker-dealer that entered the order to cancel it at the end of the week, if unexecuted.

Filing Continued

Whether a first-year firm or not, retail communications for investment companies (including mutual funds, variable contracts, and unit investment trusts) that include a ranking or a comparison that is generally not published or is the creation of the investment company or the member must be filed with FINRA at least 10 business days before first use (prefiling). In addition, there is a 10-day prefiling requirement for any retail communication involving option contracts (for all members). If the ranking or comparison is generally published or is the creation of an independent entity (e.g., Lipper or Morningstar), the usual filing rules for filing will apply (i.e., within 10 business days of first use [postfiling]).

Bulk Transfers

*FINRA permits firms to make bulk exchanges at NAV of money market mutual funds utilizing negative response letters without affirmative consent *Negative response letter permitted if: - 30 days advance notice - Involves Merger & Acquisition of funds - Letter contains comparison of fees for each fund - Contains description of investment objectives *When a member firm is acquired by another member, it is PROHIBITED to be charged any fees for transferring their accounts to another member firm

Margin Document/Disclosure

*Must be provided on ANNUAL basis to margin customers Includes: - Customers can lose more money that initially deposited. - Customers are not entitled to choose which securities or other assets in their account(s) are liquidated or sold to meet a call for additional funds. - Customers are NOT entitled to an extension of time to meet a margin call. - Firms can increase their in-house margin requirements without advance notice.

Your customer has purchased $40,000 of stock in a new margin account and deposits the required Regulation T amount into the account. At the end of the month, the broker-dealer charges the client interest on the monies borrowed in the amount of $133. At the end of the month, the value of the stock drops to $36,000. The month-end statement for this client will show a debit balance of

- $20,133 *A decrease in the value of the position will not affect the client's debit balance. The margin call on this account would be the Regulation T requirement of 50% of the purchase price. Any interest charges will be added to the client's debit balance.

TIPS (Keeps pace with inflation)

Protects investors against purchasing power (inflation) risk. *Issued with a fixed interest rate but the principal amount is adjusted SEMIANNUALLY by an amount equal to the CPI. Does not receive until the bond matures, it is reported as income each year Benefits: 1) Semiannual adjustments to principal based on the Consumer Price Index (CPI) 2) Interest payments that keep pace with inflation *Fixed interest rate, par value changes *Principal value adjusted every 6 months (Par Value) *Pays interest every 6 months *Matures 5, 10 or 20 years *At maturity, principal will never be less than original 1,000 par *Helps with variable annuities *Exempt from state and local income taxes on the interest income generated, subject to federal taxation *Differ from all other US Treasury securities by subjecting the investor to Phantom Income

Alternative Assets

This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors. *Alternative assets are most often characterized by inefficient pricing, providing potential abnormal returns or alpha returns. That is the prime reason for their popularity, especially with institutional investors.

Withdrawals From Traditional IRA

You can postpone beginning distributions until the later of: - April 1 of the calendar year after you turn age 72 or - April 1 of the calendar year following your retirement (but only for qualified plans, not an IRA). *Assume questions are about traditional IRAs unless they specifically state otherwise *Income and capital gains earned from investments in any IRA account are NOT taxed until the funds are withdrawn and, if a qualified withdrawal, are NOT taxed at all in the case of a Roth. IRS MANDATES: - Required Beginning Date (RBD) (Starting distributions) - Required Minimum Distribution (RMD) (How Much)

Equity-Linked Notes (ELNs)

**Debt instruments where the final payment at maturity is based on the return of a single stock, a basket of stocks, or an equity index. In the case where the note is based on the return of an index, the security would be known as an index-linked note. In the instances where the securities are traded on an exchange (most still are not), they are generally referred to as exchange-traded notes (ETNs). ELNs, exchange-traded or not, are considered alternative products with unique risks, and therefore, not suitable for most investors. Risks: - Credit risk (ELNs/ETNs are unsecured debt obligations) - Market risk - Liquidity risk (although exchange-traded, a trading market may not develop) - Call, early redemption, and acceleration risk (ETNs may be called at the issuer's discretion) - Conflicts of interest [the issuer may engage in trading activities that are at odds with note holders (shorting, for instance)]. - Maturity payment based on return on stock or index *THESE ARE DEBT SECURITIES, NOT EQUITY *Structured product

Defined-Contribution Plan

*Annual contribution is pre-determined (Fixed) *Retirement benefits are uncertain *YOUNGER employees benefit the MOST *More Risk to EMPLOYEE *MOST POPULAR *Benefit amount is VARIABLE, Contribution amount is FIXED *Employees carry investment performance risk *NOT 100% vesting ready immediately Contribution Plans: 1) Money-purchase pension plan 2) Profit Sharing plan (qualified) 3) 401(k) Plan 4) SIMPLE Plans 5) 403B

If a customer fails to meet a Regulation T margin call of $2,500, securities may be sold out of the account with a value of

- $5,000 *Securities valued at twice the Regulation T cash call must be sold out if a customer fails to meet a Regulation T margin call ($2,500 × 2 = $5,000).

UTMA

- Buy or sell securities or other assets, such as real estate, in an UTMA; - Exercise rights or warrants; - Liquidate, trade, or hold securities. Registered representatives should know the following UGMA/UTMA custodial account rules: - All gifts, (and transfers in the case of UTMA), are irrevocable. - An account may have only one custodian and one minor or beneficial owner. - A donor of securities can act as custodian or appoint someone to do so. - Unless acting as a custodian, parents have no legal control over an UGMA/UTMA account or the securities in it. - A minor can be the beneficiary of more than one account, and a person may serve as custodian for more than one UGMA/UTMA, provided each account benefits only one minor. - The minor has the right to sue the custodian for improper actions. - These can only be opened as cash accounts—margin is NOT allowed. What type of account allows for the irrevocable transfer of almost any kind of asset, including works of art and real estate, for the benefit of a minor? -UTMA

Dollar Costs Averaging

- Buying more when low and less when high - End up with lower than average cost basis than those of underlying shares. Doesn't guarantee profit. Dollar-cost averaging means investing money in equal portions, at regular intervals, such as monthly or quarterly. This strategy is most effective when prices in the market are volatile.

Key Points About Roth IRA

- Contributions are NOT tax deductible. Always tax free contributions. - Distributions are tax-free if taken after age 59½ and a Roth account has been open for at least 5 years. - Contributions can be made at any age as long as there is earned income. and if income is not too high. - Distributions are not required to begin at age 72. - If because of death, disability, or first-time home purchase, the distribution is qualified and not subject to tax or the 10% penalty. - As with all IRAs, there must be a named beneficiary (who can be a minor). - The contributions (all made with after-tax money) may always be withdrawn without tax or penalty. It is only the earnings where the five years/age 59½ rules apply to avoid tax and penalties. - Cannot contribute the maximum in both a traditional and a Roth. - Better for younger individuals with lower income Characteristics: *Tax Free Growth *Early Withdrawal Penalty *Tax Free Distribution *After Tax Contribution *Funded with earned income

CIP Obtained Information

- Customer name - Date of birth (for an individual) - Address, which must be: - for an individual, a residential or business street address - for an individual who does not have a residential or business street address, an Army Post Office or Fleet Post Office box number, or the residential or business street address of a next of kin or another contact individual - For a person other than an individual (such as a corporation, partnership, or trust), a principal place of business, local office, or other physical location - Social Security number for an individual or Tax ID number for a business entity - For a non-U.S. person, one or more of the following: 1) Taxpayer identification number 2) Passport number and country of issuance 3) Alien identification card number, or the number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard. *An exception is granted to persons who do not currently have, but who have applied for, a Social Security number. In this instance, the firm must obtain the number within a reasonable period and the account card must be marked applied for.

Tenancy By The Entirety (TBE) (ONLY MARRIED)

- Each cotenant has undivided interest in account - Can be created ONLY by married persons - Consent of the other tenant IS required before the other tenant can sell or give away interest in the property - Passes to surviving spouse at death - Most commonly used for ownership of real property (Real estate) and almost never for an account at a securities firm - Considered a single owner - no separate shares - Checks or distributions must be made payable in the account name and endorsed by all parties

Qualified Plans

- Employer contributions are a current deductible expense, - Employee contributions are generally made with pretax money, - All earnings and growth in the account is tax-deferred until withdrawal - Certain protections are offered to employees under ERISA.

New Account Form (Options)

- Investment objective(s) (e.g., safety of principal, income, or growth) - Employment status (name of employer, self-employed, or retired) - Estimated annual income from all sources - Estimated net worth (exclusive of residence) - Estimated liquid net worth (cash, securities, etc.) - Marital status and number of dependents - Legal age (whether the customer has reached the age of majority in that state) In addition, the customer's account record may contain the following information (if applicable): - Investment experience and knowledge (e.g., number of years, size, frequency, and types of transactions for options, stocks, bonds, other) - Source(s) of background and financial information for the customer - Date the ODD was furnished to the customer (not later than the date the account is approved for options trading) - Nature and types of transactions for which the account is approved (e.g., buying, uncovered writing, or spreading) - Whether this a retail (natural person) account or institutional account - Signature of the registered representative introducing the account - Signature of the registered options principal (ROP) or the general sales supervisor approving the account and the date of approval **If the signed option agreement is not returned within 15 days of account approval, the firm can permit closing transactions only. Options Order: 1) Obtain essential facts from the customer 2) Obtain approval from the branch manager 3) Enter the initial order 4) Obtain a signed options agreement

Equity Index Annuity (EIA)

- Not a variable annuity (Fixed annuity) - Not a security because you CAN'T lose money on it - Participation rate (90% and market goes up 10%, you get 90% of that or 9%) - CAPS - Capped at 15%, total of $100K, participation rate at 80%, how much will you have after year 3? - Year 1 = Up 10% = $108K - Year 2 = Down -3% = $108K (If index goes down, annuitant DOES NOT lose money) Negative: - Longer surrender charge periods (As long as 15 years)

ESA (Coverdell)

- Provisions that allow contributions to continue past age 18 for beneficiaries with special needs - Allowing Coverdell ESA contributions, for any year, to be made up to April 15 of the following year (just like contributions to your IRA). - Contributions can be made by parents and other adults (Anyone); the total for one child is $2,000. - Contribution limit is $2,000 PER YEAR, PER CHILD until the child's 18th birthday. - Contributions are not tax deductible, but all earnings are tax-deferred .- Distributions are tax-free if they are taken before age 30 and used for eligible education expenses .- If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty on the earnings or rolled over into a different Coverdell ESA for another family member. Their definition of family is extremely broad and, in addition to the obvious, includes cousins, aunts and uncles, and even in-laws.- Funded with AFTER TAX contributions - Can be for high school or college costs (Primary or secondary education) The Coverdell offers greater investment flexibility. (Better than 529) Primary schools are called elementary schools, intermediate (upper primary or lower secondary) schools are called middle schools, and secondary schools are called high schools.

Simplified Employee Pension Plans (SEP IRA)

- Qualified plan that is funded by an employer rather than individual - Must be 21 and have performed services for employer during 3 of last 5 years and received at least $650 in compensation - Allows employer to contribute up to 25% of employees salary - Fully vested immediately - Employer contributions are tax deductible to employer. Not taxable on employee until withdrawn. Earnings accumulate tax deferred

Donor Advised Funds (DAF)

- Separately identified fund or account that is maintained and operated by a 501(c)(3) organization. (Sponsoring organization) - $100K may be donated at one time or periodically, real benefit to tax payer is that there is one tax statement at end of year.

Transfer on Death (TOD)/ Payable On Death (POD)/ Totten Trust

- Simplest way to keep assets held in brokerage accounts from becoming subject to probate upon client's death and be distributed specifically as account owner wishes. - Does NOT avoid estate taxes if applicable. - Owner has right to change beneficiaries at any time and provide unequal distributions - TOD (transfer on death) provides that, upon the death of the account holder, the assets pass to the named beneficiary or beneficiaries without going through probate. - The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS Totten Trust (Poor Man's Will) - Allow transfer of bank account

Variable Annuity (Non Qualified)

- Tax Deferred (10% penalty for distribution prior to 59 1/2) - Taxed in excess of basis (LIFO) - Surrender Charges - Taxed as ORDINARY INCOME (No capital gains with retirement plans) *Higher cost basis and thus LOWER taxable amount Variable annuities pay variable payments once annuitized, do not guarantee a rate of return, and are not considered liquid investments; they do offer multiple investment options through the subaccounts. - Monthly payout varies - Variable rate of return - Investment risk assumed by annuitant - Portfolio of equities, debt, money market instruments - Separate account - Resistant to inflation - Insurance and securities regulation Risk: - Inflation - Interest Rate - Market

Go Bonds

- Taxes you're OBLIGATED to pay. - Capital improvements that benefit ENTIRE community. (Do NOT produce revenues) Characteristics: - Backed by full faith and credit of issuer (Funded by state or local taxes) - Voter approval REQUIRED - If issued by local (not state) and political subdivisions, backed by Ad Valorem taxes *Principal and interest MUST be paid by taxes collected by municipal issuer *Taxes are based on ASSED VALUE *Voter approval may be required for new bond issues for construction of: 1) State Prisons 2) Public High Schools - Limited Tax GOs - Secured by a specific tax (Income Tax) (More risk) Issuer is limited to what tax or how much can be used to service debt - Debt ceiling or limit opposed on issuer (Lower the statutory debt limit, the safer for bondholders) - Do not produce revenue - Interest Rates Go UP, Bonds go DOWN (Flip Flop) ***Mill Rate X Assessed Value *Ratio of taxes collected to taxes levied might be used in analysis for GO Issuers Economic Health: - Income per capita - Employment - Population trend - Economic diversity - Ability to raise taxes *Sources of Revenue: - Ad Valorem - Sales Taxes - Fines - Income Taxes - Gasoline - License Fees and Assessments Source of Debt Service for a CITY issued GO Bond: 1) Real Estate Taxes or Licensing Fees Risks: - Default Risk Negative Indications: 1) Unemployment 2) Delinquent Taxes 3) Municipal Operating Expenses Keywords: - Full faith of issuer - Backed by taxing power of issuer - Voter approval (Voter Referendum) - Coterminous (Overlapping debt) - Mil Rate - Bond Resolution *Which debt issues would produce tax-free interest at ALL levels? -- GO bonds issued by GUAM (Issues from a territory of US, produce interest that is tax free at federal, state and local level)

Community Property With Rights of Survivorship (CPWROS)

- Used in community property states (9 states) - Allows married couples to share property, like a home, equally - Legally each one has 50% interest - When first dies, entire home is then owned by survivor - Avoids probate

Form ADV

A = Adviser (IA) B = Bodies (People) (IAR's) 1A - Business name, form of ownership - control persons (Federal covered and State IA's) Part 1A is the form used by all applicants for registration as an investment adviser. 1B - Disclosure Reporting Pages (DRPs) - Details about disciplinary events involving the adviser or affiliates (State ONLY) If the applicant is registering on the state level, Part 1B is also required. 2A - Create narrative brochures containing information about firm (Firm Brochure) Part 2A is the brochure 2B - Brochure supplements containing information about certain supervised persons Part 2B is the brochure supplement. *ADV 2 - Deliver to a client or prospective client the current brochure and supplement before or at the time of entry into in an investment advisory contract - FEDERAL = NO time requirement to deliver (48 hour Rule) - STATE = Deliver 48 hours in advance or have 5 days to rescind without penalty *Form ADV-E is used as the cover page for the annual surprise audit performed by the independent accountant on all IAs who maintain custody of customer assets. UPDATING FORM: - Updated ANNUALLY - Should information change (Material Change) - Prompt notification must be given in Part 1 - File an annual updated amendment within 90 DAYS after the end of the advisor's fiscal year. (Making sure over 90 million) - If there are material changes in the brochure (ADV 2) - deliver to client annually within 120 days after the end of fiscal year - No material changes, no brochure or summary

REITS

A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its taxable income to investors. *Owner of REIT hold an undivided interest in a pool of real estate investments *Liquid because they trade on exchanges and OTC *NOT investment companies (Mutual funds) *Offer dividends and gains to investors but NOT flow through losses like LP's, NOT considered DPP

Tenants In Common (TIC)

A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account is retained by his estate. Each party must specify a percentage of interest in the account *Most commonly used for non-spousal relatives or friends *Ownership CAN be unequal - Do NOT need to make equal investments or have equal interest in the property in account **Goes to estate - Does NOT avoid probate - Checks or distributions must be made payable in the account name and endorsed by all parties

Industrial Development Revenue Bonds (IDRs)

A municipal development authority issues industrial development revenue bonds (IDRs or IDBs) to construct facilities or purchase equipment, which is then leased to a corporation. The municipality uses the money from lease payments to pay the principal and interest on the bonds. The ultimate responsibility for the payment of principal and interest rests with the corporation leasing the facility; therefore, the bonds carry the corporation's debt rating. Some of these bonds are subject to the alternative minimum tax (AMT). *Discuss Tax bracket of individual and AMT *Highest credit risk -- debt service is the responsibility of the corporation leasing the facility rather than the issuing municipality *If industrial development bonds are called because of condemnation, this would be covered under -- Catastrophe *Backed by corporate credit (Lease back)

S Corp

Although taxed like a partnership, offers investors the limited liability associated with corporations in general. The profits and losses are passed through directly to the shareholders in proportion to their ownership in the S corporation. *Maximum of 100 shareholders *No Non-resident aliens *No more than one class of stock (presumably common) *Allows flow-through of business income and losses in order to avoid double taxation (Incorporated Business Model)

ETF

An ETF registers with the SEC under the Investment Company Act of 1940 either as a unit investment trust (UIT ETF) or as an open-end management company (open-end ETF). (Mostly Open End Companies) ETFs can be purchased on margin and sold short Expenses tend to be lower than those of mutual funds There can be tax advantages to owning ETFs. Not Redeemable by the issuer All trading taking place in the secondary markets, delivery of a prospectus is not required. ETFs trade at, or very close to, their NAVs. *Most ETF's have a LOWER expense ratio than comparable mutual funds *ETFs are a way of investing in equity (stock) or debt (bonds) securities and are not a separate asset class. (DON'T include when allocating among asset classes) Uses of Index ETF's: - Asset allocation - Following industry trends - Balancing a portfolio - Speculative trading - Hedging Differences between ETF and Index Mutual Fund: 1) Intraday trading—Investors do not have to wait until the end of a trading day to purchase or sell shares. ETF shares trade and are priced continuously throughout the day, making it easier for investors to react to market changes. 2) Margin eligibility—Index ETF shares can be purchased on margin, subject to the same terms that apply to common stock. 3) Short selling—Index ETFs can be sold short at any time during trading hours. Risks: 1) Index Risk 2) Tracking Risk

Deferred Compensation Plan

An agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement. *Lower tax bracket at retirement age (persons affiliated with the company solely as board members are not eligible for these plans because they are not considered employees for retirement planning purposes). *Risky because the employee covered by the plan has NO right to plan benefits if the business fails. (Employee becomes creditor of firm) *May also forfeit benefits if they leave the firm before retirement. *Taxable as ordinary income to the employee. *Employer is entitled to tax deduction at the time the benefit is paid out. *Benefits highly compensated employees who are just a few years from retirement NONQUALIFIED: *Not qualified plan and may be discriminatory. Does not set standards for vesting, eligibility, and funding. *Often used by corporations to - Retain high salaried key employees

401K

An employee's elective deferrals are made with pre-tax dollars. Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis. A 401(k) plan is a type of defined contribution plan

Sector Rotation

An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts Cyclical = Do well in good times, poor in bad (Auto, heavy machine, steel) Defensive = Perform regardless (Utilities, food, pharmaceuticals) Counter-Cyclical = Precious metals

Revenue Bonds

Backed by user fees (Choose to pay) (Self Supporting)(Airports, tolls, utilities (Water, sewer, electric), housing, transportation, education (College dorms and student loans), health (Hospitals, retirement centers), industrial, sports) (Excise taxes) Characteristics: *Not subject to statutory debt limits (Not repaid from taxes) and do NOT require voter approval *May be subject to an additional bonds test before subsequent bond issues with equal liens on the project may be issued *Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. *Generates sufficient Income *AMT only applies to Revenue Keywords: - User fees = choice - Covenants - Self supporting - Trust Indenture or Trust Resolution - Feasibility Study (estimates of revenues) - Condemnation (Considered a catastrophe and ONLY applied to revenue bonds *If someone is worried about AMT — No IDR's When assessing the quality of revenue bonds, consider: 1) Economic Justification -- Be able to generate revenues - Feasibility Study - Competitive Study - Debt Service Coverage Ratio 2) Competing Facilities -- Not be placed where better alternatives are easily available 3) Sources of Revenue -- Sources should be dependable 4) Call Provision 5) Flow of Funds -- Must be sufficient to pay all the facility's operating expenses What would affect credit rating of municipal revenue issues: 1) Quality of the facilities management 2) Debt service coverage ratio 3) Rate covenants set forth in the indenture

C Corp

Business structure that distinguishes the company as a separate entity from its owners. **If a business expects to need significant capital, this form is almost ALWAYS the preferred choice. *A C corporation is the ONLY business form where the tax and other consequences of the account do not accrue to the individual owners. Unlike the management of a partnership [the general partner(s)], in most cases, the corporation's officers and directors are shielded from personal liability for the corporation's debts and losses. Shareholders are also shielded from corporate creditors. That is the limited liability benefit of owning stock. Corporate income tax applies to the corporation as an entity rather than being passed through to the shareholder. If your client is a C corporation, you will only look at the corporation's financial needs and objectives when determining suitability. *Subject to double taxation *50% of corporate dividends excluded from income

529 (Considered a security)

Can now be used for qualified educational expenses for both primary and secondary education, are more beneficial then Coverdell for financial aid purposes. Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition Under the SECURE Act of 2019, plan holders can use 529 plans to pay a lifetime maximum of $10,000 to pay down student loan debt - It is the Section 529 plan that offers the greatest amount of control to the donor - Tax free if used for education - Donor retains control of asset!! - Does NOT allow catch up provision (Not a retirement plan) - Funds withdrawn for qualified education expenses are always free of FEDERAL income tax. - The maximum contribution limits are determined on a state level. - No contribution is tax deductible funds not used for health expenses may be invested in mutual funds and other securities. $17,000 or A special widower rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years' worth may be used under this method (5 × $17,000 = $85,000).

Defined Benefit Plans (Traditional Pension Plan)

Employer contributions to defined benefit or defined contribution (money purchase) pension plans are mandatory. In all cases, allowable employer contributions are 100% deductible to the corporation. There is no tax obligation to the employee until withdrawal. *Annual contribution is determined by yearly actuarial calculations *More Risk to EMPLOYER *Are Highly Compensated *OLDER employees benefit the MOST *Requires ACTUARY services - Must calculate annual contribution amount necessary to meet benefit requirement *Contribution amounts VARY, Benefit plans are FIXED *NOT suitable for buying muni bonds *Pays for life, based on formula *Employees carry NO investment performance risk *A traditional defined benefit plan promises to pay a specific benefit to a participant at his normal retirement age as specified by the plan document. *Uses FINAL salary and length of service to determine payout

New Account Form (Rule 4512)

FINRA Requires this form to be filled out - Rule 4512 - Customer's name and address - Legal age - Name(s) of the firm's associated person(s), if any, responsible for the account - If the customer is a corporation, partnership or other legal entity, the names of any persons authorized to transact business on behalf of the entity - Signature of the partner, officer, or manager denoting that the account has been accepted in accordance with the member's policies and procedures for acceptance of accounts - Subject to the Trusted Person Contact Rule, (2165), name of and contact information for a trusted contact person age 18 or older who may be contacted about the customer's account - Appears on SDN list, Citizenship, Employed by another broker-dealer *****Customer signature is NOT required - Only Principal, partner, Officer, Manager ********** *Must make reasonable effort to obtain: - The customer's tax identification or Social Security number - The occupation of customer and name and address of employer - Whether the customer is an associated person of another member

Allocation/Investment Objective

Growth = Common Stock, sector funds Income = Corporate Bonds, Preferred Stock, Blue Chips Safety/Preservation of Capital = Bills, Notes, Bonds, US Gov Securities, CDS, Money market funds (70+ age) Liquidity = Money Market Funds Speculation = Volatile stocks, high yield bonds, stock/index options, leveraged and inverse ETFs

Fixed Annuities

Guaranteed fixed rate of return (No investment risk, has inflation risk, not a security) - When election begins receiving income, payout is determined by accounts value and annuitants life expectancy based on mortality table - Monthly payout fixed - Guaranteed interest rate - Investment risk assumed by insurance company - Portfolio of fixed income securities and mortgages - General account - Inflation risk - Insurance regulation

IRA

IRA contributions can be invested in stocks, mutual funds, bank accounts, and annuities. They CANNOT be invested in life insurance or collectibles

Delivery vs Payment (DVP); Receipt vs Payment (RVP)

In a DVP/RVP arrangement, payment for securities purchased is made to the selling customer's agent, and/or delivery of securities sold is made to the buying customer's agent in exchange for payment at time of settlement. Normally used for institutional accounts, this is a cash-on-delivery settlement. The broker-dealer handling the trade must verify the arrangement between the customer and the bank or depository, and the customer must notify the bank or depository of each purchase or sale. DVP: *Used by institutions to purchase stock *Will NOT pay until delivered RVP: *When bank sells

Traditional IRA

Individual retirement arrangements in which qualified contributions are tax deductible and income and capital gains on investments within the account are not taxed until the money is withdrawn after age 59 1/2 *Must be EARNED INCOME under age 70 1/2 *May or may not be tax-deductible unless - Covered by employer sponsored plan and how much income you make *No limit on transfers, rollover is once per 12 months *Contributions are from earned income (Salary, Wages, Tips, Etc) *Tax free bonds, whether purchased individually or through a mutual fund or UIT, are considered INAPPROPRIATE investments because the tax-free benefit is lost. Suitable for IRA: - Writing Covered Calls - Buying puts on stock held long - A rated corporate bonds - Blue Chip common stocks - AAA rated US Government agency bonds ***All taxable distributions from a retirement account are taxed as ORDINARY INCOME, not capital gains 3 IRA Penalties: 1) 6% for excess 2) 10% for premature (59 1/2) 3) 50% for insufficient Exception To Tax Penalty: 1) Death 2) Disability 3) First Time Home Buyer ($10,000) 4) Education Expense 5) Medical Premiums 6) Medical Expenses in excess of AGI Characteristics: *Tax Free Growth *Taxable Distribution *Early Withdrawal Penalty *Deductible Contribution *RMD *Funded with earned income

Diverse portfolio would hold tangible assets to address which risk?

Inflation (Hedge against inflation)

Negative Response Letter

Informs the recipient of the letter of an impending action, and requires the recipient to respond or act within a specified time frame if the recipient objects to the action. If the recipient does not respond, he is deemed to have consented to the action. - The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts. - The negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund. - The negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased. - The negative response feature will not be activated until at least 30 days after the letter was mailed.

In a fixed annuity, the payment can be described as

Interest only

Annuitization

Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ORDINARY INCOME taxes are paid based on an EXCLUSION ratio (cost basis divided by expected return = how much of the distribution is a return of cost basis (the original principal invested), and not subject to income taxes).

Revocable Trust

Living trust that has the permission to be revoked Among the benefits of a revocable trust is that the grantor (settlor) retains all control over the assets. There are no tax benefits and the grantor can be the beneficiary (and trustee) if the trust is set up that way. In almost all cases, income received into a revocable (grantor) trust, whether distributed or not, is taxable to the grantor.

Community Property

Marital property classification recognized by some, but not all states. Most property acquired during the marriage is considered to be owned jointly by both spouses and would be divided at the time of divorce, annulment, or death. *Varies from state to state *probably won't be tested

Complex Trust

May Accumulate Income (Taxed only if distributed) interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries

Per Stirpes

Means "Branch" - Beneficiary's share of the inheritance is to go to an heir Means per family line ie if 5 children and 1 dies, then 4 children and the kids of the 5th would get the $

Averaging

Most common is monthly average, can be best when markets are expected to be highly volatile

Simple Trust

Must be distributed in the year it was received (Taxed every year) Simple trusts may not make charitable contributions, and they provide no discretion on income distribution.

Deferred Compensation Plan

Non-qualified, may discriminate, no IRS approval needed - Used to attract key employees

SEC Rule 17a-3

SEC Rule 17a-3 requires delivery of a copy of the account information within 30 days of opening (and every 36 months thereafter). Customers are to verify the information and note any relevant changes to the information.

Roth vs Traditional IRA

Similarities: ◆The dollar limits on annual contributions are the same—$6,500 plus a $1,000 catch-up for those age 50 and over. The contribution is limited to 100% of earned income. ◆Owners have discretion to invest assets in a variety of investment choices, and the prohibited transactions are the same as in traditional IRAs. ◆Earnings accumulate on a tax-deferred basis—i.e., without current tax consequence. Differences: ◆Roth IRA contributions are available only to taxpayers who have an income below a certain limit. Once a person's income exceeds the limit she can no longer contribute to the plan ◆Roth IRA contributions are always made with after-tax dollars (non-deductible). Pretax with traditional ◆Distributions from Roth IRAs are tax-free. ◆RMDs are never required from Roth IRAs during the account owner's lifetime. Question: What is acceptable? Answer: Gold or silver coins minted by the U.S. Treasury Department Fixed annuities REITs *Traditional IRA contributions are FULLY deductible no matter how much income is earned if the taxpayer is not covered by any other qualified plan.

Pattern Day Trader

Someone who executes 4 or more day trades in a 5-business-day period. The minimum equity requirement for pattern day traders is $25,000. That means they must have on deposit at least $25,000 in the account equity on any day in which day trading occurs. Before opening, Member must: 1) Provide risk disclosure 2) Approve the account for day trading (principal Approval) 3) No cross guarantee allowed

Municipal Issues

States, Cities, Counties, US Territories, Agencies and Authorities, School Districts/Taxing Districts *No Muni Bonds on Retirement Plans *Provide a form of prospectus known as an OFFICIAL STATEMENT (OS) *Interest on a municipal security is EXEMPT from the federal income tax (Called tax-exempt or tax-free investments) *The tax-equivalent yield for a municipal bond issued by an entity within a state with a state income tax will have a higher tax-equivalent yield to a resident of that state because of the "double" tax exemption. (Formula = Municipal Bond Coupon / 100% - Investors Tax Bracket) *For exam purposes, you NEVER recommend municipal bonds to investors unless they are in the higher tax brackets. *Capital Gains are NOT tax free *Might affect credit rating of municipal revenue issue: - Rate covenants set forth in the indenture - Debt service coverage ratio - Quality of the facilities management *Quotation on a municipal security between dealers is assumed to be - a Bona Fide Quote (Or firm quotes) (Required to be fair and reasonably related to current market) An investor in fixed-income debt securities wishing to eliminate interest rate risk could do so by -- holding the securities until they mature *Short Selling municipal bonds is almost NEVER done *Principal or agency trade appear on the confirmation statement for when-issued trade or municipal bonds (The capacity of the firm, principal or agent, must be disclosed on all confirms. The settlement date, accrued interest, and total price would not appear on a when-issued confirm.) Included on Securities Confirmation: 1) Capacity in which the BD acted 2) Whether securities are fully registered or book entry 3) Date of maturity that has been fixed by a call notice

Joint Tenants With Right of Survivorship (JTWROS)

Stipulates that a deceased tenant's interest in the account passes to surviving tenant(s). **Goes to surviving party All parties have an undivided interest in the account. *Common for married couples - No changes in any account name(s) can be made unless authorized by a QUALIFIED and REGISTERED Principal - Principal MUST be informed of essential facts in writing - Must have approval of other tenant but approval goes to Principal, Not RR. - No rules prohibiting opening account for unmarried persons. Must take all steps to understand death consequences *Mail may be directed to the joint owner agreed upon by both parties to the account -Orders may be entered by either party - Checks or distributions must be made payable in the account name and endorsed by all parties

457 Plan

The 457 plan is unique in that it is the only tax-qualified retirement plan permitting withdrawals, for any reason, before reaching 59½ without penalty. Question: City Fireman, what plan would be most appropriate? Answer: 457 (Government workers) - Can be used by employees of state, political subdivision of state, agency of state. Also, may be offered to certain tax-exempt organizations - hospitals, charitable organizations, unions, NOT churches - Nonqualified - Unfunded Deferred Compensation Plan - NOT covered under ERISA - Not required to follow nondiscrimination rules - Can own both 457 and 403B or 457 and 401K and make max contributions to both

Ask

The price at which an investor can buy a security - Market maker sells, customer buys MMA: 22.05 - 22.25, 10 x 8. (Second number is Ask - Higher price) A customer market order to BUY should be done at the best possible (lowest) ask (offering) ($22.25) (the 10 x 8 means bidding for 1000 shares and offering 800 shares

403B

The rule is that you can only defer RMDs in the plan of the employer where you are currently employed. For example, assume you retire from Company A and get a job with Company B, and both companies have a 401(k) plan. You can only defer RMDs from the Company B plan, because that is your current employer; you will have to take RMDs from the Company A plan. The same would be true if it were two different school systems with 403(b) plans.

Irrevocable Trust

The settlor gives up all ownership A properly constructed irrevocable trust removes the grantor's assets from the estate thereby ***eliminating estate tax*** (MOST IMPORTANT) on them. The grantor no longer has the power to change the beneficiary and cannot serve as trustee. The assets pass directly to the beneficiary without going through probate. Advantages: - It generally avoids estate tax. - Provide estate liquidity. - Insurance proceeds are removed from the estate of the insured for tax purposes.

Behavioral Finance

The study of the influence of psychology on the behavior of investors or financial analysts. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases. 1) Overconfidence = Overestimate abilities 2) Conservatism = Hard time changing beliefs even when new info is presented 3) Herd = Following the masses 4) Anchoring = Base expectations upon first information. Difficult to move away from 5) Regret Aversion = Prepares to avoid distress over adverse outcome 6) Confirmation Bias = Look for new info to support existing views

Joint Account

Two or more adults are named on the account as co-owners, with each allowed some form of control over the account. In addition to filling out the appropriate new account form, a joint account agreement must be signed. *All parties must sign *While mail only needs to be sent to one of the parties to the account, checks for disbursements from the account must be made payable to all parties and endorsed by all parties in order to be deposited. Any required forms pertinent to the account, such as a margin agreement or options agreement, must be signed by all parties.

ADR's

Type of equity security designed to simplify foreign investing for US investors. Created when common shares are purchased in the foreign company's home market. Holding the ADRs in a portfolio entitles the investor to dividends paid in -- U.S. dollars and the ability to trade ADRs on U.S. securities markets - T+2 - Only taxable in US for capital gains - Trading profits would be taxed as capital gains - Owner of ADR may request that the depositary bank cancel the ADR and send them the underlying foreign shares - No voting rights, just foreign trading, dividends, and no preemptive rights *Trades are executed domestically in US dollars *Foreign corporation wants to see ADR issued for common stock for easier access to US capital markets * Facilitates investing in foreign securities in domestic exchange *Designed to simplify foreign investing for US investors, helps foreign companies attract US investor base - Are US Issued Securities Suitable For: 1) Diversification** (Primary Benefit) 2) Adds exposure to foreign stock (Equity) Risks: 1) Currency Risk 2) Exchange 3) Political

Customer Identification Program (CIP)

US Patriot Act of 2001 designed to: - Verify the identity of any new customer - For an individual, an unexpired government-issued identification such as a driver's license, passport, military ID, or state ID - For a person other than an individual, documents showing the existence of the entity, such as certified articles of incorporation, a government-issued business license, a partnership agreement, or trust instrument; - Maintain records of the information used to verify identity - Determine whether the person appears on the Office of Foreign Assets Control (OFAC) list of known or suspected terrorists or terrorist organizations. These rules are designed to prevent, detect, and prosecute money laundering and the financing of terrorism. **Requires a social security or Tax ID number on new account form. The firm CAN open the account if the number has been applied for. *Actual DOB must be obtained & Identity (Drivers License/Passport)

UTMA

UTMA and UGMA accounts are custodial accounts. They are for the benefit of the child and bear the child's Social Security number. Although in practice the taxes are usually paid by the parent or legal guardian, they are the responsibility of the beneficial minor (child). You CANNOT use UTMA (or UGMA) money for the basics: food, clothing, and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, and sports league registration, would be permitted. UTMA - can designate the age up to 25 Any adult can give a gift to a minor in a custodial account. There is no limitation on the size of the gift. However, any gift in excess of $17,000 (or such higher number as indexing provides for) will possibly subject the donor to a gift tax liability. Once a gift is given to a minor, it cannot be reclaimed.

Laddering Strategy

With bonds maturing every year, the investor is reinvesting the principal at current market rates. In a period of rising inflation, interest rates follow along, so annually, the maturing bonds will be used to purchase new bonds with higher coupons.

Commercial Paper

- Issued by corporations (especially finance companies) to raise working capital - Exempt from registration from Federal and State with maximum maturity of 270 days - Highly liquid, safe

Investment Advisor Representative (IAR)

- No record keeping requirements ***An IAR only notifies administrator if IA is covered ***An IAR and IA notify administrator when its state Federal: - Register with STATE administrators - Only register in state in which you maintain office** NOT REGISTER: - If you have no office in state - Don't register STATE: -Register if office in state or client with residence NOT REGISTER: - No office and MORE than 5 clients Fed IAR - Must register ONLY in states in which they maintain an office (place of business) State IAR -Must register only in states in which they maintain an office or have more than 5 clients in a state IA Vs IAR Registered investment advisers, but not their representatives, are permitted to maintain custody of client assets (if not prohibited by the Administrator). There is no minimum net worth standard for IARs like there is for IAs. Both may be granted written discretionary powers, and if so, only the IA may be required to be bonded (adequate net worth will suffice).

Certificates of Deposit (CDs) (Time Deposit)

- Non-negotiable - Can't sell to anyone, ONLY redeem at bank Benefits: - Available with min deposit as little as $500 - 3 months to 5 year maturities *Capital Preservation with NO risk = Insured Bank CD *NO interest rate risk Risks: - Early withdrawal penalty - Inflation risk - Low yields (Not long term investment)