Series 7 (2nd)

Structure of Debt Securities

- Indenture- >Legal document specifying the legal conditin of the bond. - Negotiability, - Sepecified Maturity Date, - Payment of Interest , - Accrued Interest, - Paying Agent-> Usually the trust department of a bank. The role of the paying agent is to transmit payments of interest and principal to investors. - Pricing, - Trustee-> Usually a financial company, it represents the investor by making sure the borrower lives up to the terms of the loan. -Secured and Unsecured, -Callable or NOncallable ->Call protections is the number of years into the issue before the issue may exercise the call provision.

Ranking For Yields

From Lowest to Highest Discount - Nominal, Current Yield, Yield to Maturity, Yield to Call Premum - YTC, YTM, Current Yield, Nominal Yield i.e. -If a bond is trading at par, the nominal yield (coupon rate) equals current yield equals yield to maturity (YTM) equals yield to call (YTC). YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.

Employee Sponsored Retirement Plan

(1) 403(b)(Also known as TSA- Tax sheltered annuity)used for those employed for the public school system. Payments received by the owner of a 403(b) plan are 100 % taxable. When tax-sheltered annuity funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable. (2)457(b)- a type of deferred compensation plan for employees of state and local municipalities. ex. Wolfe is invested in a qualified annuity. Therefore, the minimum distribution requirements are the same as for any qualified account. RMDs must begin at age 72 but can be postponed as long as continuously employed by the same employer. Unless qualifying for an exception, any withdrawals from a qualified annuity before reaching age 59½ are taxed as ordinary income with the additional 10% penalty. (3)Defined contributions plans- Money purchase pension plans, 401(k) plans(roth and Regular), and money purchase pension plans. They proide no specific end result, but instead focus on current, tax-deductible contirbutions. (4)Defined Benefit Plans - Designed to provide specific retirement benefits for participants such as fixed monthly income. (5)Contributory vs Noncontributory (6)Profit Sharing A corporate profit-sharing plan must be set up under a trust. All corporate pension and profit-sharing plans must be set up under trust agreements. A plan's trustee assumes fiduciary responsibility for the plan. (7)SEP-IRA - Permits the highest annual contributions (8)SIMPLEs- It is generally understood that the least complicated employer-sponsored retirement plan is the Savings Incentive Match Plan for Employees (SIMPLE). These plans tend to have certain restrictions. Among them are the restriction that To institute a SIMPLE plan, the business cannot have any other retirement plan in place. The limit is 100 or fewer. The catch-up provision is $3,000, and both employee and employer contributions are made with pre-tax funds. (9) Stock Purchase Plan- ESPP(allows you to purchase stocks over a specified period of time)/ Stock Options Which of the following plans is not required to meet the nondiscrimination provisions of ERISA? Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to who may participate.

Taxation of Agency Securities

- Always subject to federal - Interest earned on GNMA, FHLMC, and FNMA fed and local level. - Interest on Farm Credit and Federal Home Loans Banks Securities is exempt from state level. - Capital Gain is similar to all othrs. - Keep in mind that both cap gains and payments include both int and principal on it.

Bond Yields

(1) Nominal Yield; 5% pays $50; 8% pays $80 and so on. (2) Current Yield- Return(interes payment in dollars)/MP; (3) Discount/Premium- an investor buying a bond at premium will receive a rate of return less than the nominal and vice-versa; (4) yield to maturity- This takes in account the gain or loss the investor will have when the bonds are redeemed at maturity. Bond confirmations must disclose the lower of the yield to maturity (YTM) or yield to call (YTC). On a premium bond, 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 because the YTM (or basis) is lower than the coupon. Even though the 6½% bond maturing in 2059 is callable relatively soon, because the bond was purchased at par, CY, YTM, and YTC are all equal to the coupon (nominal) rate, so the investor won't suffer a loss of principal with an early call. Whenever an investor pays less(buys at discount), there will be a profit in addition to the annual interest, and whenever the investor pays more (buys at a premium), there will be a loss if held to maturity. In other words, if you buy a bond below par and holds to maturity, your ytm is going to be higher than the nominal yield and CY, and vice-versa. (5) Yield to call- you will never see a bond called at a discount from par. When a bond is selling at a premium, YTC generates a lower return then does the YTM. If a bond has a YTC lower than its CY; it is trading at a premium. If a bond has a YTM less than its YTC, the bond is trading at a discount. If a bond has a YTM more than its YTC, the bond is trading at a premium. --> Given a bond at a premium trading at 1100, at maturity, an investor who bought this bond will only get back the par value. That means a loss $100 has to be part of the computation. That loss will make the YTM less than the CY.

Rule 2111

(1) Reasonable-basis suitability- The rr needs to have a reasonable basis to believe that a recommendation is suitable for at least some investors. If you can't explain the risks when recommending a securities strategy then you are violating the suitability rule. (2)Customer-specific suitability- The RR has to have a reasonable basis to believe that the recommendation is suitable for a specific customer. (3)Quantitative suitability- Quantitative suitability requires a member firm who has control over a customer account to believe that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.

Liquidation Priority

(1) Secured Creditors (e.g. Mortgage bonds, equipment trust certificates, collateral trust bonds) (2) Wages and taxes- up to an amount earned in the 180 days before the employer's declaration of bankruptcy (3) Unsecured creditors (e.g. general creditors, including debentures) (4) Subordinate debt holders (5) Preferred Stock Holders (6) Common Stockholders

Foreign Debt

(1) Sovereign Debt Securities- government issues; (2) Corporate ; (3) Eurobond- any long-term debt instrument issued outside of the country for the currency. Swiss company issue bonds in pounds; (4) Eurodollar Bond- bond issued by a non American company or gov, sold outside of US and the issuer's country, but for which principal and interest are paid in USD.

Quotation of Munis B

(1)Price and Quot-on a YTM basis rather than dollar price. Each basis point is 1/100 of 1 percent. In dollar terms, one point is equal to $10 (1% of $1000), then 1 basis point is 1/100 or 10 cents ($.10). IF YTM is greater than the nominal, bond is trading at discount. - i.e. A quote of 102 is referred to as a dollar quote rather than a yield quote. The most common dollar bonds are those with a term maturity. The other choices are most often quoted on a yield basis rather than a price basis. (2) Quote rules- (a) Bona Fide (Firm)Must reflect best judgement and have a reasonable relationship to the fair market value for that security, and reflect firms inventory and expectations. Municipal bond quotations between dealers are required to be bona fide, or firm, quotes. They are required to be fair and reasonably related to the current market. Dealer must be prepared to deal the bond at this price. (b) Workable Indication- a bid in which a dealer will purchase securities from another. Dealer is always free to revisit. (c) nominal , or subject, quotation- estimate of market value. Info purposes only. (d) Holding a quote - firm for one our but if someone call you call you have 5 mn. (e) BW/OW and Multiple Markets

Municipal Fund Securities

- 529 plans-> Requires securities principle to supervise sale of. -Types: prepaid tuition plans & college savings plans. Funded after tax. Withdrawals tax free if used for qualified education expenses. Allowable contirbution varies from 235-529k .Subject to gift taxes if above $15k. Except can do 5 years at once but can't donate for 5 years after. Must b close family member. Plan assets stay plan owners but outside owners estate. Contributions limited to an idexed amount (15k in 2019) per year and per donor.

Fiduciary Account

- A fiduciary is one who has the legal power to act on behalf of another person. i.e. trustee for a trust, custodian in UGMA or UTMA, and etc. - Opening a fiduciary account requires evidence of the individual's appointment and authority which usually comes from court. - An account for a trustee must include a trust agreement detailing the limitations of the trust document. - Feduciaries must follow the Uniform Prudent Investor Act (UPIA).

Broker Dealer as Financial Advisor

- A municipal security dealer offers financial advise to an issuer in exchange for a fee or other comp. Each financial advisory relationship must be documented in writing before, upon, or promptly after its inception. This document establishes the basis of compensation for the advisory services to be rendered. Conflicts of interest- If a broker dealer is acting as a financial ad visor in an issue they can not turn around and underwrite it. However, the BD can still assist in issuance of Official Statements

Preferred stock

- Always issued with a fixed/stated rate of return. - Straight(non cumulative) -> No special features besides the dividend payment, - Cumulative-> any dividend skipped must be paid before paying a common dividend. - Convertible-> Allows you to convert each share of preferred into common stock. Conversion rate fixed at the time of the issue. May be shown as the number of shares or price in which investor can convert. You divide par value per conversion price to find out the rate. -Participating-> eligible to receive a percentage of common dividend. Maximum percentage is state when they are issued. -Callable-> The corporation can call the preferred. This is the one that has the highest dividend rate. -Adjustable Rate-> adjustment based on a chosen standard such as the US gov t-bill. - Which one carries the lower rate -> Straight preferred is the benchmark rate. As the name suggests, there are no conversion or participating features. Compared to straight preferred, both convertible and participating preferred tend to carry lower dividend rates, as the investor has been given something extra—the right to convert into common shares at a fixed price or the right to earn more than the stated rate if the issuer has a good year and the board of directors elects to make an additional dividend payment. Callable preferred allows the issuer to call the securities away from the investor. From an investor's point of view, this is not an incentive. Therefore, callable preferred tends to pay higher rates.

Class C shares

- One year 1% CDSC, .75% 12b-1, and .25% shareholder services fee. - Level Load and they are for short term since expensive long term (more than 4 years)

common stock

- Authorized -> the corporate charter specified the number of shares a company is authorized to issue. - Issued -> authorized stocks that has been sold to investors. - Outstanding-> any shares that the company has issued and are in the hands of investors. - Treasury- is stock a corporation has issued and subsequently reacquired. Limited Liability, Residual Claims to Assets, - Stock Splits ->forward stock split increases the number of share and reduces the price without affecting market value.. A reverse split has the opposite effect on the number and price of shares. - Stock Dividends -> a company may chose to do a stock dividend instead of paying cash. This increases the number of shares but reduces the price. Just divide the price by the 100+(%stock dividend) and you will come with the new price. 3 , Transfer ability

Government National Mortgage Association(Ginnie Mae):

- Backed by full faith and credit of US gov. Interests higher than treasuries but lower than that of all other securities. - GNMA securities are available with a minimum denomination of $25,000. issues varies from $1,000 to $10,000, with the exact number unlikely to be tested. Monthly int and principal payments. Taxed at all levels. Reinvestment risk. - They do not originate loans, nor it purchases or sell other secs. Private inst approved by them originate, pool and sell to investors. - Guarantees only MBS backed by single and multi home loans insured by gov agencies (FHA or VA). - Guarantees timely payment of interest and principal. - Risks: prices up or down, prepayment risk(mortgage paid off earlier than expected if int fall), Extended maturity ( remain outstanding longer, int rate up). They have high reinvestment risk since they may end up paid off earlier and you will be left with it on hands. - Yield quotes are based on a 12-year prepayment assumption.

Legal Opinion

- Bond counsel-> attorney specialized in tax-exempt bond offerings (issuer is responsible). - An unqualified legal opinion means that the bond counsel found no problems with the issue. A qualified opinion means that the issue is legal, but certain contingencies exist. For example, the bond counsel might render a qualified opinion because authority to tax is in question or the issuer does not have clear title to the property. - An unqualified opinion -> means the bond counsel attests that, to the best of its knowledge, the issuer has the legal right to issue the securities in question. In the case of tax-exempt bonds, the interest the issuer will pay on the bonds is exempt from federal taxation and the bonds are exempt from federal registration requirements. The legal opinion does not evaluate the issue's marketability, or safety, debt service requirements. - Qualified Opinion- there may be a legal uncertainty of which purchasers should be informed. Unqualified Opinion- issue by the bond counsel unconditionally. -ex- legal -> allows the bond to meet good delivery requirements without an attached legal opinion. - underwriter's counsel-> Managing underwriter may choose to employ another law firm as underwriter's counsel. The firm is not responsible for the legal opinions and is employed to represent the underwriter's interests.

Expense Ratio

- Calculated by dividing Annual OPS Expenses/ Average dollar value of the fund's AUM. - Sales charge is not considered in this.

Account Changes

- Changes in accounts name or designation-> no change can be made unless the change has been authorized by a qualified and registered principal designated by the member. - Internal Transfer -> when a transfer is made to an account from an account of which the recipient is not a signatory, approvals and documentation similar to a change in designation are required. - Bulk Transfers- > when you liquidate positions in the account allows for brokers to transfer money to money market accounts without permission. Done through Negative Response Letter that informs the recipient an action was taken and ask him to respond within a specified time frame if he/she disagree. ex. An example of a bulk transfer is the member firm deciding to switch money market funds used for sweeps of customer credit balances. A negative response letter is one where the customer's agreement is assumed unless responding negatively to the change. - Negative Response Letter -> generally 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 respnd, he is deemed to have consented to the action. The negative response letter contains a tabular comparison of the natre and amount of the fees charged by each fund. contains a comparative description of each fund and the funds to be purchased. The negative response feature won't be activated until at least 30 after the letter was mailed.

Business Accounts

- Corporate Account - >must establish (1) the business's legal right to open an investment accounts; (2) an indication of any limitations that the owners, the stockholders, a court, or any other entity has placed on the securities in which the business can invest; (3) who will represent the business in transactions involving the account. Firm must also obtain a copy of corporate charter and resolution when opening an account for a corporation - Partnership Accounts -> complete a partnership agreement disclosing which partners may transact in the account. - Sole Proprietorship -> Opened like an individual account. -NUmbered accounts > If requested a customer account may be identified by only a multidigit number or symbols.

Mutual Fund Features

- Cost of Entry-> Most mutual funds allows initial investment as low as $1000. Once account is opened, additional investment may be as low as $25. - Dollar Cost Averaging-> Investing a constant amount over a period of time. If market price is up, investment in less shares. If it is down, invest in more shares. This will result in a lower avg price at the end. - Withdraw Plan-> Fixed-Dollar, Fixed Percentage, Fixed time. Advisor may emphasize that you may zero out the account and there is no guarantees with withdraw plans. - Voluntary Accumulation-> allows customer to deposit regular periodic investments on a voluntary basis. - Exchange within a family fund-> allows 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. Any gains or losses in the conversion must be reported for tax reasons. Rules: Purchase may not exceed the proceeds generated by the redemption of the other fund; redemption may not involve a refund of sales charges; the sales personnel and dealers must receive no compensation of any kind from the reinvestment.

Regulation S-P (Privacy Notices)

-Enacted by the SEC to protect customer information -Deals with nonpublic information like SS numbers, transaction history -Firms must provide a privacy notice describing its privacy policies whenever a new account it opened and after that. -Reasonable opt-out methods must be provided to customers so information is not sent out to third party vendors. -Lastly firms must secure private information (locking laptops and computers, and locking document vaults) - Must give the customer 30 days to implement any opt out provision.

Taxation of Mutual Funds

- Dividends -> Qualified (taxed at the long-term capital gains rate). Non qualified (taxed as ordinary income) - Net Investment Income (NII)= dividends + interest - expenses of the fund (not included ad and sales expenses). Note that cap gains are not a part of it. - Conduit Theory->Triple taxation(stock -> fund -> investor). However if they qualify as Regulated Investment Company(RIC), if the fund acts as a conduit (only retains for expenses and passes on the rest), it will only be charged for taxes on its expenses. To qualify for that, needs to distribute at least 90% of NII to shareholders. - MF Cap Gain Distr-> funds buy and sell securities at gains and losses. They need to distribute the net capital gains on those to shareholders. If they distribute up to 90%, they avoid extra taxation. Investors report as long term even if they own the fund for a month(long term no more than once a year_). If short term, it comes with div and int and is under regular income bucket. - Taxation on Reinvestment Distribution -> Distribution are taxed from investor whether they are taxed or reinvested. FORM 1009- DIV is used to enter info in FORM 1040. Most mutual funds operate as regulated investment companies. This means that Triple taxation of investment income can be avoided if the mutual fund qualifies under Subchapter M of the IRC. To avoid taxation under Subchapter M, a fund must distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed amount. This rule applies to management companies (open-end and closed-end) and UITs. That means ETFs are also included. Although not investment companies registered under the Investment Company Act of 1940, REITs can also take advantage of Subchapter M's tax benefits.

Class A Shares

- Front end load which are the charges included in a fund's POP. i.e. customer invest 10k in a fund with 5% front end load. The customer ends up depositing only 9500 ($500 in fees). Because of the sales charge should be recommended long term. *POP = NAV + Sales charge dollar amt *Sales Charge % = Sales charge dollar amt/ POP *POP = NAV/(100%- Sales Charge Percentage) - Breakpoints-> Investment clubs or associations are not qualified. Everyone else is qualified. i.e. Married couples, parents with minors, and corporations are eligible. Parents combined with adult children are not. No industry standard on breakpoints. This must be discounted in the prospectus and various other means including websites. May be a result of a single large invest, series of aggregate or a LOI. Can be made by same investor in various accounts. Purchased in same fund family may qualify. - Breakpoint Sale -> Selling instruments just below the break-point for a higher commission. -LOI -> will invest enough funds in 13 months. One sided contract binding on the fund only. Holds in escrow. If invest enough of the money, receive escrowed shares. If not, liquidate escrowed shares or pay difference of sales charge. Backdating the letter means that customer May backdate or after 90 days. Still, you will be liable in the future. - Rights of Accumulation -> Allow investor to qualify to reduced sales charge. However, those differ from Letters of intent where they allow the investor to use prior share appreciation and reinvestment to qualify for breakpoints, and do not impose time limits. Customer may qualify for reduced charges when the total value of shares previously purchased plus the new purchases exceeds a breakpoint amount. - Comb Privilege- Combine more than one fund

Stock Splits

- If a stock splits 3 for 2, an investor will receive an additional 50 shares for every 100 shares owned. The price will decline by one-third, but the total value of the position will stay the same. For example, if a shareholder owns 100 shares before the 3 for 2 split, the shareholder will have 150 shares after the split (3/2 × 100 = 150). To determine the number of shares after a split, multiply the number of shares owned by the first number of the split and then divide by the second number (2:1).

Penny Stocks

- If a stock trades for less than $5 and is not listed on a major exchanges. A penny stock is a non-Nasdaq (Bulletin Board or OTC Pink) stock trading under $5 per share. - Provide monthly statements - Lack of transparency and liquidity, and no track record. - 15 g rules -> (1) requires that customers before their initial transaction in a penny stock, be given a copy of the Risk Disclosure Document. Firm must receive a signed and dated acknowledgment from the customer that the document has been received. the SEC also requires the firm to wait at elast two business days after sending the statement before executing the first trade. (2) firm must provide the customer with bid and ask price before selling penny stock. (3) firm must disclose the compensation earned by them and the representative in the penny stock transaction. (4) firm must prepare a suitability statement that shows penny stock would be suitable to this customer. However, a firm may request from a established customer (someone who trade penny before, or who trade in the account at least a year before the soliciation). Before effecting a penny stock transaction with a customer, the member firm must To avoid price gouging, SEC Rule 15g-3 requires that no penny stock transaction may take place without the member firm providing the customer with the current inside market quotes. Those are the highest bid and the lowest ask price currently quoted. The current quotes are more important to the customer than the most recent trade because that trade may have been hours or even days ago. Trading may commence two business days after sending the risk disclosure document.

Munis Tax Calcs

- If munis are bought at a premium Tax law requires municipal bond premiums to be amortized. The effect of amortization is to decrease reported interest income and cost basis. If held to maturity, the cost basis will have been amortized down to par. Therefore, at maturity, there is no reported capital loss. - Interest -> In almost every case interest is exempt from federal income tax. TAX REFORM ACT of 1986, limited the federal tax exemption for public purpose projects only(benefit citizens rather than individuals). For calculating the tax savings, simply take the tax bracket and multiple by the int payment. If you get a bond within state you would have double benefit since your bond would get savings both in state and federal. Formula for computing tax-equivalent yield = Muni coupon rate (nominal yield) / (100%- Investor's Tax Bracket) Investor in 27% brakcet Muni yield 4.5% .045/ (1-.27) = 6.16 equivalent You never recommend munis to customers unless they are in higher tax brackets. A customer buys five municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has The premium on the municipal bonds must be amortized. The tax rules require that when you purchase a bond at a premium, you have to reduce the cost basis of the bond each year. Even though there are five bonds in the question, here's the math on one bond and then we'll multiply by five to get the total amount. The investor buys the bond at 104 or $1,040 and the bond is due to mature in 20 years. Take the $40 premium divided by the 20 years to maturity and that will tell us the amount that we amortize/reduce the cost basis by each year. $40/20=$2. It then tells us that the bond is sold after 10 years. Ten years of amortization is $2 per year x 10 years = $20. That lowers the basis of the bond to $1,020 ( $1,040 - $20 = $1,020). The bonds are sold at 103 or $1,030, so the gain is $10 per bond times five bonds for a total gain of $50. An investor buys a GO bond with a coupon of 3½% that has a basis of 3¾%. If the bond is held until maturity, the investor's actual yield will be This is tricky, so follow along. With a coupon of 3½% and a basis (yield to maturity) of 3¾%, we know the bond was purchased at a discount. GO bonds are municipal bonds, and when a municipal bond is purchased in the secondary market at a discount, the accretion of the discount is taxed as ordinary income. Therefore, a portion of the investor's return will be taxable, making the actual return slightly less than the yield to maturity.

Power of Attorney

-Full -> Deposit or withdraw cash or securities - Limited->entering of buy and sell orders but no withdraw of funds - Durable-

Registration types

- Individual Account - Multiple Owner accounts -> (1)Joint Account- Two or more;Joint account agreement must be signed.Suitability based on group of acct holders. 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. (2)Joint Tenants with Right of Survivor ship (JTWROS)- In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of one party in a two-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account. ex. 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. ex. In a JTWROS account, when the surviving party assumes control of the entire account in the event one of the tenants dies, any party named on the account may enter orders for the account. While distributions from the account must be sent in the names of all of the owners, mail could be sent to one party only, with permission from all other parties to the account. (3)Tenants in Common- deceased tenant interest in the account is retained by the tenant's estate and not passed. Each Party Specifies a percentage of interest in the account. (4)Fiduciary and Custodial Accounts- Someone other than the owner places trades. Investment occurs for the owner's interest but owner has no or little control. UGMA and UTMA accounts, designed to make gits of money and securities to minors. Securities in this account are managed by a custodian until minor reaches majority. Account is not used to pay expenses associated with raising a child, such as three basic needs of food, clothing, and shelter. For those accounts, The minor's Social Security number is required because the account is fully owned by, and taxed to, the minor—not to the custodian or the parent.

Taxation of Corporate Debt

- Interest is treated as ordinary income. - Zero coupon -> you have to pay taxes on it yearly even if you don't see any money (phantom income). To calculate, you would come up with the years to maturity and divide it by the difference between the price you paid and the par value. - Just as with other investments, you have to pay capital gains on your bond.

Treasury Bill Prices and Denominations

- Issued in $100 to $5 mil - 52 (auctioned monthly)weeks or less -Quoted on a yield basis and sold at a discount from par. - Because quoted in yield, bid is higher than ask price. Which translate in bid price being lower than ask.

Treasury Bond Prices and Denominations

- Issued in $100 to $5 mil - Mature at least 10 years from date issued. - Quoted like t-notes - Form = Book entry semi annual interests.

Treasury Note Prices and Denominations

- Issued in $100 to $5 mil - Mature at par, or refunded where the gov offers a new security. 2,3,5,7or 10 years. - Issued, quoted, and traded as a percent of par. So 98.01 = 98 1/32% = 980.3125 - Form = book entry A customer purchases five 6.25% U.S. Treasury notes at 98.24. How much will the customer receive on each interest payment date? Although minimum purchase denominations can be less, always use par value ($1,000) for these calculations. A 6.25% bond pays $62.50 annually (6.25% × $1,000 = $62.50). Therefore, a customer purchasing five bonds receives $312.50 each year. Because Treasury notes pay semiannually, each interest payment equals $156.25.

Student Loan Marketing Association (Sallie Mae)

- Issues short and long term securities and the proceeds from the securities are used to provide student loans for higher education. - Privately owned. -Usually $10,000 min deno

Fair Price and Commissions Rule G-30

- Municipal securities are exempt from Finra rules, but they still must be reasonable on their pricing. Makrdown and up must be reasonable taking into account all of the characteristics of a trade, such as: - FMV of the securities at trade time; - Total dollar amount of the transaction; - Any special difficulty in doing the trade; - The fact that the dealer is entitled to a profit. -Broker's Broker -> They exist to assist other firms find buyers or sellers of municipal bonds. They deal primarily with other municipal securities firms acting as their agents. One of the features of 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.

Farm Credit System(FCS)

- National network of lending institutions that provides agricultural financing and credit. -$1000 denom, not pass through -FCS securities are part of a small group of federal agency securities where the interest is exempt on a state and local (but not federal) level. A key to remembering is that any agency with the title mortgage is fully taxable. - Privately owned but government sponsored and it offers farm credits to investors. - Backed by the bank of the FCS. - They issue discount notes, floating rate bonds, and fixed rate. Mat 1 to 30 years. Used to provide farmers with loans.

Tenessee Valley Authority (TVA)

- New deal program to control flooding,conserve soil,and bring hydroelectric power to the mid-south - Not backed by US gov but instead backed by the revenue generated by TVA's projects. -Tennessee Valley Authority bonds are the only government security available today with a maturity as long as 50 years. Most of the agencies don't offer anything longer than 20 years, and the maximum on Treasury bonds is usually 30 years -The TVA is a federal agency formed as an act of Congress in 1933. As such, the debt securities it issues are considered federal agency securities.

Business Development Company (BDC)

- New vehicle to aid in the promotion and dev of small businesses. - Closed end; but at least 70% of assets need to be invested in "eligible" assets - Eligible is any issuer that does not have any class of securities listed on a national securities exchange. Exception is if they have an aggregate market value of outstanding voting and non-voting of less than $250 million.

No Load Funds

- No sales fee is charged. (front end load) - However, they can charge fees for other expenses including a redemption fee for people that are in and out too often. This amount cannot exceed .25% of average net assets.

Open-End Investment Companies (Mutual Funds)

- Offer an UNLIMITED number of shares - Shares are always new (primary offerings) so you always need to issue a prospectus in time of sale. - Can sell full shares or partial (fractional) shares - Do NOT issue senior securities; Only issue common stocks - Usually pay dividends quarterly - The fund cannot issue senior securities, but the fund itself CAN invest in senior securities -Buys shares at the public offering price(POP), which is NAV + Sales charges. NAV per share= (Assets - Liabilities)/Shares outstanding). -They sell redeemable securities so when the investor sell those shares, the fund just buys them at NAV. - Compute price once per day at around 4pm. Whenever an order is received the share price is based on the next NAV price.

Money Market Instruments

- One year or less in maturity and high quality. - Issued at discount -Types: (1) T Bills-4, 8, 13, 26, and 52 wks, (2) Commercial Paper- short-term unsecured paper issue by corps. Maturity 1 thru 270 days, (3) Negotiable CDs(Jumbo)- minimum $100k. Unlike CDs at my bank there is no prepayment penalty. Insured by FDIC(250K) but not secured against banks assets. (4) Brokered CDs, (5) Bankers Acceptance(BA)- a postdated check or line of credit that is never more than 270 days. (6) Repo- sale of a security when you agree to repurchase it for a higher price the next day. The seller unitiates. Treasuries tend to be used here. Reverse Repo is the opposite where the buyer initiates and intends to resell those securities the next day.

Taxation of Equity Securities

- Portfolio Income - Portfolio income includes dividends (qualified or not), interest, and net capital gains derived from the sale of securities. No matter what the source of the income is, it is taxed on the year in which it is earned. - If dividends are qualified (most of the cash dividend. Assume any dividend of a US corporation is qualified unless assumed otherwise)than tax rate is generally a maximum of 15%(lower than the ordinary tax rate). If unqualified, it can be as high as the tax payer bracket. - Stock dividends are not taxed since the overall value of the account remains the same. However, you need to adjust your cost basis in the account. Then, you will be taxed in the difference of the new cost basis and the price you sell those shares for in the market. - For capital Gains, short term = less than 12 months and the tax rate is the same as your income like salary. The long-term cap gain is the same as the qualified dividend(generally 15%). - For capital losses, the losses that exceed capital gains are deductible against earned income. The mass deductible is $3k. If in excess of $3k, you may carry it forward indefinetly. See example below: Your customer has experienced $7,500 in capital losses this year. He has realized $2,000 in capital gains and has $65,000 adjusted gross income. How much of his loss will he be able to carry forward to next year? He will first offset his $2,000 in capital gains, leaving $5,500 in losses. He next offsets $3,000 in adjusted gross income, leaving $2,500 in losses to carry forward to next year. Provided the loss is offset to the maximum each year, there is no limit to how long losses may be carried forward.

Municipal Notes

- Short term securities that generates funds for a municipality that expects other revenues soon. Less than 12 months maturities.Issue at discount with the price and interest being paid at maturity. Moody's Investment Grade ratings are applied to municipal notes, which are short-term municipal debts such as bond anticipation notes (BANs). Tax Anticipation Notes (TANs) - finance current ops in anticipation of future tax receipts. Revenue Anticipation Notes (RANs) -Finance current operations in anticipation of futures revenues from revenue producing projects or faci. Tax and Revenue anticipation notes Bond Anticipation Notes(BANs) Tax excempt commercial paper Constructions Loan Notes (CLNs) Grant Anticipation Notes

Business Accounts

- Sole proprietorship- >treated as individual account, unlimited liability - General Partnership-> profits/losses flow thru investors for tax purposes (avoids double tax), must consider collective objectives of partners, unlimited liability -Limited Partnership-> Responsibility is only of the general partner and limited partner is limited ot what he invests (DPPS are like this). -LLC-> limited liability with tax advantages(flow through of taxable earnings, losses), the LLC owners are members (not shareholders) and are not personally liable for debts of the LLC. - S Corp-> taxed like a partnership, it has limited liability, , profit/loss pass thru in direct proprtion to their ownership in the S corp, <100 shareholders, losses based on stock basis, consider objectives of all members, Form K-1 - C Corp-> business separate from owners as a separate entity, officers/directors shielded from liability, tax applied to corporation, double taxation, harder to dissolve, good if expectation of high profit, can raise large capital

Local Government Investment Pools (LGIPs)

- States establish this accounts to provide other governments entities (cities, counties, school districties and etc) with a short term investment vehicle to invest funds. - Formed as trust where the municipalities can buy shares units. -Operate similar to money market funds (keep NAV of $1) - Not required to fill with SEC

Voting Rights

- Statutory Voting -> allows a stockholder to cast one vote per share owned for each item on the ballot, such as a candidate for the BOD. A board candidate needs a simple majority to be elected. - Cumulative voting -> allows stockholders to allocate their total votes in any manner they choose. - Proxies -> this is a form of a absentee ballot.

Preemptive Rights

- Stockholders have the right to keep their proportionate ownership of the company. In order to do so, they get rights when a new issue occurs. The common stock trades Cum (with) right until the ex- (without) date occurs. The ex-date is the first day it is too late for the investor to buy the stock. It is usually one business day before the ex-date A stockholders who receive rights may (1) exercise the rights to buy stock by sending the rights certificates and a check for the required amount to the right agent; (2) sell the rights and profit from their market value; (3) let the rights expire and lose their value. Example: ABC will be issuing 1 million new shares. ABC has 10 million shares currently outstanding. Each share is entitled to one right. That means 10 million right will be issued, and it will take 10 rights to buy one share. Many investors prefer to sell their right rather than exercise them. To calculate the theo price of right: Before the ex date (Market Price-Subscription Price)/(Number of rights to purchase 1 share + 1) Value after ex-date (Market Price-Subscription Price)/(Number of rights to purchase 1 share) Example of rights - A corporation is having a rights offering. The terms of the offering require 4 rights plus $40 to purchase one share. With the stock's current market price at $50 per share, the theoretical value of one right before the ex-rights date is Because the question is asking about the value before ex-rights, it means we use the cum-rights (with rights) formula. That is, the (market price minus the subscription price) divided by the (number of rights it takes to buy one share plus one). Plugging in the numbers gives us ($50 - $40) ÷ (4+1) = $10 ÷ 5 = $2.00 - Standby Underwriter -> when a company's current stockholders do not exercise their preemptive irghts in an additional offering, a corporation has an underwriter standing by to purchase whatever shares ramain unsold as a result of rights expiring.

Secondary Market

-is where previously issues securities are bought and sold. The securities act of 1934 regulates it(the securities act of 1933 regulates activity in the primary market). -Stock Exchanges-> Those are auction markets -OTC-> Those are negotiated markets. The largest in terms of the number of securities traded. Inter-dealer market in which unlisted securities-that is, securities not listed on any exchange trade. Pink sheet (thinly traded). No central market place, trading takes place over the phone over comp networks., and in tradin rooms accross the country. OTC markets have market makers (it is an interdealer network). OTC is a negotiated market. - Electronic communication network(ECN) -> Broker dealers can send an order through this channel instead of going through a market maker. Auto matches buys and sells orders at specified prices. - Dark Pools-> trading volume that occurs that is not openly available to the public. Bulk of this volume reprsents large trades engaged in by institutional traders and trading desks away from the exchange markets. Orders are matched electronically for execution without routing the order to market place where last sale price and volume info is displayed.

Qualified vs Non-Qualified

- Tax Deferred-> income tax is put off to a later time - Qualified Plan-> Pre tax. employer sponsored place like 401(k) or 403(b). - Qualified -> contributions made with pretax dollars and earnings in the account are tax-deferred until the fund are withdrawn. i.e. Qualified plan or IRAs. - Non Qualified- after tax - Deductible Contribution->Payroll Deduction Plan - Non deductible contribution -> contribution to a qualified plan or an IRA which is made with after-tax dollars. - Employer sponsored Pension Plans-> They can be both qualified and non-qualified. Growth in qualified pension plans, as well as other qualified plans, is tax deferred, not tax free. All growth is taxable at the time of distribution. A taxable distribution from any retirement plan is taxes as ordinary income, never as capital gain. - Non-qualified plans do not provide a tax deduction to the employer until the employee receives the economic benefit as income at some point in the future. They are, however, more flexible because they do not have to comply with ERISA reporting and nondiscrimination requirements. i.e. Payroll deductions plans and etc. - Money-purchase pension plans, 401(k) plans, and qualified profit-sharing plans are all examples of defined contribution plans. An employer may offer stock options that give an employee the right to purchase a specified number of shares of the employer's common stock at a stated exercise price over a stated time period. No actual contribution is made, just payment when the employee decides to exercise the option. Unlike the other choices, this is not a qualified plan. - Payroll deduction plan -> After tax dollars are contributed here. A 401 is a salary reduction plan and not a payroll deduction.

Convertible Debt Securities

- The conversion privilege s exercised in at the discretion of the investor. Most convertible are debentures. -Conversion Ratio -the amount of shares the bond may convert into. Many times a conversion price will be given so you will just need to divide that by $1000. For preferred stock you would divide that by $100. Advantages to issuer -Convertibles have lower coupon than regular -helps reduce debt. -AT issuance, conversion price is higher Disadvantages issuer Advantages Investor Disadvantage Investor - Lower interest rate so not suitable for investor looking for income. - Computing Parity (Convertible bonds usually sell at a premium above parity)-> RST debenture is convertible to common at $50. If RST bond is currently trading for $1200, what is the parity price of the common? Par value: $1000 Conversion Price: $50 Conversion Ratio: 20 Parity = $1200/20 = $60 So, we know the bond is trading at $1200. We can also wwap it for 20 shares. If those shares are selling for $60 each, converting gets you the same $1200 in value as just holding the bond. That is parity - RST debenture is convertible to common at $50. The common is trading at $45, what is the parity price of the bond? Par value: $1000 Conversion Price: $50 Conversion Ratio: 20 20 x$45 = $900 is the parity price. XYZ Corporation has outstanding a 7% convertible bond currently trading at 102. The bond, which has a conversion price of $50, was issued with an antidilution covenant. If XYZ declares a 10% stock dividend, the new conversion price, as of the ex-date, will be: To compute a new conversion price, divide the current conversion price by 100% plus the percent increase in shares. $50 / 110% = $45.45.

Bonds

- The terms of the loan are expressed in a document known as the bond's indenture. Sometimes also referred to as a Deed of trusts. Five years or more in maturity

Class B Shares

- They impose a back end charge for early redemption, and asset based 12b-1 fee greater than those imposed on Class A. -> Contigent Deferred Sales Charge (CDSC) - is eliminated overtime and they conver to class A shares. -> Because of the higher maintenance costs, if the order is large enough (more than $100k) to get a break, the firm may not let you buy class B shares. So regulators scrutinize large purchases of class B shares.

Revenue Bond Analysis

- They should have economic justification, competing facilities, sources of revenue, call provisions, flow of funds. - Net Revenue Pledge -> Issuer pays ops and maint exp first from gross rev, and then pays debt service second Flow of funds are: (1)Operations and Main, (2) Debt service accounts, (3) debt service reserve fund, (4) Reserve Mainatance fund, (5) renewal and replacement fund, (6) surplus, sinking fund - Gross Revenue Pledge = Pays debt service first and then pays ops and maint rev. Debt Coverage Ratio = Net revenue divided by annual interest and principal expense. Debt service coverage measures the amount of money available for debt service compared to the annual debt service requirements. Annual debt service includes both interest and principal expense.

Variable Rate Municipal Securities

- Those are municipal debt securities with interest rates that fluctuate based on current market interest rate changes. Called RESET SECURITIES. -Variable Rate Demand Obligations (VRDOs)-> 20-30 years maturity but interest can be reset daily, monthly, yearly and etc. Investor may demand the issuer to repurchase the bonds at par. This can be done on any reset date like a put. - Auction Rate Securities (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. Interest is periodically reset through Dutch auction, typically every 7, 14, 28, or 35 days. This failed in 2008 since investors where not willing to step in and bid.

What are the rights conferred upon ownership of Common?

-Although ownership of common stock means the holder's maximum loss is limited to the original investment, it is not a stockholder right. The doctrine of limited liability is a legal construct and shields stockholders from being responsible for debts of the company. Being able to vote the shares; being able to sell them without needing the issuer's permission; and dividends, if declared, are considered rights of owning stock.

Mutual Fund Share Classes

-Can't charge sales charges in excess of 8.5% of the pop - All sales commissions and expenses are embedded in the POP. - Sales expenses include commissions for managing underwriter, broker-dealers, and their registered reps.

closed-end investment company

-Conducts a Common Stock offering to raise capital and register a fixed number of shares for initial offering. - The fund capitalization is fixed unless an additional public offering is made at a later time. - Investors close their position by selling them in the secondary market. EXECEPTION: Interval Funds - they do not trade in the secondary market. At certain intervals, investors are allowed to sell shares back to the fund at NAV. Suitable for long time horizon. Can take more iliquid positions - Can Issue bonds and preferred. -Supply and demand determine the bid and ask prices. They usually trade at a premium or discount to the shares' NAV. - Cannot Issue partial shares. - NAV computed once a week.

Account Opening Requirements

-New Account Form (Rule 4512)->Name, address, age, firm associated, signature of partner, officer, or manager of member firm denoting that the account has been accepted. Reasonable efforts for SSN, Address of Employer, Whether associated Person. Nowhere in the FINRA rules on account opening does it require or suggest obtaining personal information about family members. That information becomes important when we look at the suitability rules. Please note that the tax ID or Social Security number is required under the customer identification program (CIP), but not FINRA rules. - Customer Identification Program(CIP)-> us patriot act and is designed to prevent, detect and prosecute money laundering and the financing of terrorism. Used to (1) verify the identity of any new customer; (2) maintiain records of the information used to verify idenity; (3) determine whether the person appears on the Office of Foreign Assets Control(OFAC). The customer identification program (CIP), a part of the USA PATRIOT Act of 2001, requires a Social Security or tax identification number included on the new account form. The firm can open the account if the number has been applied for. In this instance, the firm must obtain the number within a reasonable period and the account card must be marked applied for. - Opening Accounts for Other Members' Employees -> The FINRA rule requires that a person associate with a member, before opening an account or placing an initial securities order with another member, notify the employer and the executing member, in writing, of her association with the other member. The employing Finra member must grant written consent before the account is opened. - Trusted Contact Person(Rules 2165 and 4512)-> Rule to have firm make reasonable efforts to obtain trusted contact information for specified adults. An specified adult is older than 65 or 18 with impairments. Hold of 15 days . - If a customer wants to open an account in the name of her adult son and wants the account to be approved for uncovered option writing, her request should be refused because R: An adult cannot open an account and name another adult as the beneficial owner unless approval is granted by that adult. The type of option trades and the third party's investment experience are not relevant. Furthermore, the child is an adult, not a minor, and we have no suitability information.

Federal National Mortage Association(Fannie Mae- FNMA)

-PUblic corporation that Provides mortage capital where they purchase conventional and insured mortgages from agencies such as the FHA and VA. - Issues debentures, short-term discount notes, and MBS. -- $1000 minimums. $1000 increments.Int paid semi anually

Munis Purchased at Premium and Discount

-Premium -> The purchaser of a muni bond at a premium most amortize the premium on a straight line basis over the remaining life of the bond. i.e. So if you buys a 8% muni bond with eight YTM at a price of 108. THe premium of eight point must be amortized over the remaininign YTM ($10 per year). If a bond is sold before maturity, gain or loss is the difference btween the sale price and the adjusted cost basis. - Discount -> If a Muni bond is bought at a discount, the discount is accreted. Accretion is the process of adjusting the cost basis back up to par. i.e. The actual tax affect of accretion depends on whether the bond was purchased as an original issue discount (OID- i.e. a new issue being offered at a discount) or an issue purchased at a discount in the secondary market. For a regular issue on the secondary market, the accretion increases reported int income. So the accretion is considered taxable income. i.e. A customer buys a 5% muni with 10 YTM at 90. The amount of the annual accretion is $10 per bond (10-point discount /10ytm).Each year the cost basis is adjusted upward.

Federal Home Loan Corporation (Freddie Mac-FHLMC)

-Public corporation created to promote the development of a nationwide secondary market in mortgages by buying residential mort from fin inst and packaging them into MBS for sale to investors - PCs (Mortageg Participation Certificates) which make principal and int payments once a year -GMCs (guaranteed mortgage certific) which make int pay twice a year. and Principal once

Types of Treasury Securities

-Treasury Bills-> short term and issue with a discount from par. 13-week t-bill is commonly used as risk-free investment -Treasury Notes-> Semi annual int. Sold every four weeks. 2,3,5,7 or years to maturity -Treasury Bonds-> 10-30 years with semi-annual int. -Strips -> separate trading of registered interest and principal of securities. Backed by full faith of us gov. -Treasury Receipts -> types of zero coupon bond from US Treasury notes and bonds. Not backed by full faith of US gov. zero coupon bonds -TIPS-> helps protect investors against inflation. They receive int payment is equal to the fixed int rate times the newly adj principal. Exempt from state and local taxes. i.e. 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. Your customer wishes to lock in a long-term yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend? The Treasury STRIPS is long-term, no-interim income security and has a locked-in yield because it is purchased at a discount from par. The Treasury bill is short term, the Treasury bond provides semiannual interest, and the corporate zero is riskier than the STRIPS.

Discretionary account

-an account that gives your broker the power to make trades for you. - There is an exception to the requirement that applies to the exercise of time or price discretion. This is discretion orally granted by the customer to purchase or sell a specific amount of a particular security. An oral granted of time or price discretion is limited until the end of the day on which the customer grants it. If the order is to be good for longer than that the customer must state it in writing. - Rules prhibit the exercise of any discrtionary power by a broker dealer or agent in a customer's account unless : (1) the customer has given prior written authorization (power of attorney) to a state individual or individuals; or (2) the account has been accepted by the brokerage firm, as evidence in writing by the firm. - Time or price are not considered discretion.

ADRs

-is simply receipt for shares of a foreign stock deposited with a custodian. -The ADR is issued by a domestic bank. Everything is in English and in U.S. dollars. The foreign certificates are usually held on deposit at a foreign branch of the domestic bank, and the ADRs are issued domestically. -Dividends are in US dollars. You also have the right to exchnage your ADR for the foreign shares they represent. -In most countries, a withholding tax on dividends is taken at the source. In the case of investors holding ADRs, this would be a foreign income tax. The foreign income tax may be taken as a credit against any US income taxes owed by the investor. - ADRs are registered on the books of the US banks responsible for them. The invidivdual investors in the ADRs are not considered the stock's registered owners.

12b-1 Asset Based Fees

-permits a MF to collect a fee for promoting, selling, or undertaking activity in connection with the distribution of its shares . NO fund management expenses are included in the 12b-1 -Expressed as an annual amount but they are deduced quarterly as a percentage of total NAV Requirements: >12b-1 fees can have different norms depending on share class. Maximum allowed is .75% for distribution and promotion, and Finra does permit an additional .25% as a service fee for shareholder services, but that is treated separate from the 12b-1 for marketing and promotion. >the fee must reflect the anticipated level of distribution services A registered representative's compensation consists of trailer commissions. The most likely reason for this is Trailer commissions are a feature when you have customers owning mutual funds with 12b-1 charges. In most cases, those charges are levied every year and, over time, can add up to considerable compensation to the representative.

Finra Rule 2121

5% policy was adopted to ensure that investment public is not abused. Does not mean that you have to trade for 5% commish, but that you need to be fair. It does not apply to securities sold by prospectus. The dealer's cost is not a legitimate factor in determining the markup on a stock. In a proceeds transaction (sell one position; take the proceeds and buy another), the 5% markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side and applying the total to the inside market on the buy side. Transactions in securities that are sold by a prospectus are not subject to the 5% markup policy. A mutual fund will disclose its cost to the client in the prospectus and is therefore not subject to the rule. Five percent is a guideline, and markups can exceed it. Markups are always based on the inside offer, which is the lowest ask price in a particular security. Markdowns are based on the inside bid, which is the highest bid price for a particular security.

Accrued Interest in Munis

Computing Accrued Interest- The calculation to determine accrued interest assumes all months- even Feb- have 30 days. So to calculate the day: If an F&A muni is traded regular way on Monday, March 5, the number of days of accrued int is calculated as follows: Feb = 30 Mar 5 = 6 days (settles T+2 regular way March 7, you go up to but not including) The dated date is the date on which newly issued bonds begin to accrue interest. If this was settled as for cash, then it would settle on the 5th. - for calculating accrued int, keep the below in mind: . Corporate, agencies, municipals: use 30-day months(360-day year) . U.S. Treasury secs: use actual day months (365-day year) When counting days: . Go back and include the last int pay day . go up but not including the settl date.. - For a nw bond issue, the date from which interest accrual begin is called the DATED DATE. Even if the bond is issued in a later date, the dated date is the date that will count. ex. if the bond's dated date is April 1st and the interest payments dates are June 1 and December 1, the first interest payment will be on December 1 and wil be for eight months of interst. - Trading Flat -> when a debt security is trading flat, it means no accrued int is included in the transaction.. On Monday, June 1, an investor pays 92 to purchase a 5% J&J municipal bond maturing on July 1, 2030. Purchasers of bonds pay accrued interest to the seller, in addition to the market price of the bond. How many days of accrued interest will this seller receive? There are 152 days of accrued interest. On municipal bonds, the accrued interest calculation uses 30-day months and 360-day years. Interest begins to accrue on the last interest payment date and runs up to, but not including, the settlement date. This J&J bond pays interest on January 1 and July 1 of each year. Therefore, with a June purchase date, the most recent interest payment was on the previous January 1, the day that interest begins to accrue. The trade date is June 1 with a settlement date of June 3 (T+2). The buyer of the bond becomes the owner of the bond on June 3, and from that date forward, the buyer is entitled to the interest. That is why interest payable to the seller stops accruing on June 2. Here is the math. We have 5 months (January, February, March, April, and May) plus 2 days of accrued interest in June. With each month counting as 30 days, that is 150 days + 2 more in June equaling 152 days. How do we know that the J&J dates are the first of the month rather than the 15th? Good question. For the answer, we look to the maturity date of the bond. That is July 1, 2030, and is the clue that the interest payment dates are on the first of the month.

AMT bonds

Created so that wealthy individuals pay taxes on their bonds. Interest on private activity municipal bonds is included in the taxable income of an investor who is subject to the alternative minimum tax.

Margin Account

Credit Agreement- Discloses the terms of the credit extended by the broker-dealer. These include the methods of interest computation and situations under which interest rates may change. This must be signed. Hypothecation- gives the broker-dealer a lioen on the customer's margin securities. And, as with the credit agreement, this must be signed by the customer. Loan Consent- A signed loan consent agreement permits a firm to loan out a customer's margin securities; this is considered another way to finance a customer's debit balance. This form is optional. Risk Disclosure

Customer Financial Profile

Customer Balance Sheet Customer Income Statement A family balance sheet only includes assets and liabilities, not income like salary, dividends, or interest, or amounts paid for expenses.

Alternative Investments Debts

ETNs, Leveraged ETFs, and Financial Derivatives Equity Linked Notes (ELNs or ETNs)- 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.They have unique risk amoung credit risk, market risk, liquidity risk, call, early dedemption and acceleraiton risk, and conflicts of interest Private PLacement Debt- No ratings to guide investors since they are private. When looking at those, bear in mind the following --> Lack of Regulation, Low Transparency, Low Liquidity, High Fees, Lack of Historical Data.

ECN

Electronic communication networks (ECNs) are a type of alternative trading system (ATS) that trade listed stocks and other exchange-traded products. Unlike dark pools, another type of ATS, ECNs display order in the consolidated quote stream. As ATSs, ECNs are required to register with the SEC as broker-dealers and are also members of FINRA. Trading in the fourth market (institution to institution) is done largely through ECNs.

Pattern Day Trades

Executes four or more day trades in a five business day period.

Investment Objective(steps to reach the goal)

Growth, Income, Stability INvestment COnstraints- liquidity, time horizon, taxes, laws and regulations, and personal ethical choices.

IRAs

In order to open an IRA, a person needs to have earned income(Rentals, Pension Funds, child support, and passive income from DPPs are not considered earned income). - Roth IRA-> They have no RMDs. The account will continue to grow tax free until the person contributing decides to take it out. - Traditional IRA-> 6k per individual and 12k per couple. - Individuals aged 50 or older may make catch up contributions. EGTRRA allows for extra contributions. Distributions without penalty may begin after age 59 1/2 and must begin by April first of the year following the year and individual turns 72, withdraws less than the RMD may incur penalties. ex. Securities or funds may be rolled over by the account holder from one IRA to another only once a year. Direct transfers from one account to another, where the account holder does not receive the funds during the transfer, are not restricted in frequency. ex. You may contribute to an IRA only until the first tax filing deadline (April 15) even if you filed an extension. - Educational IRA (Coverdell ESAs)-> 2000 limit per kids up until 18 years old. Distributions are tax free if they can be taken tax free before the age of 30. Early withdraw 10 % penalties on all IRAs are removed in case of: -- death - Disability - First time purchase of a primary residence - Qualified higher education expenses for immediate family members. -Certain medical expenses in excess of AGI limit - Up to 5k during the first years after a child is born - Up to 5k during the first year after an eligible person is adopted (anybody under the age of 18). Direct Rollover Trustee to Trustee 60 Day Rollover

Gos Bond Analysis

Income of Municipality, General Wealth of the Community, Characteristics of the issuer, Debt Limits - Ad Valorem Taxes -> Property taxes are based on a property's assessed valuation, which is a percentage of the estimated market value. One mIll is 1/10 of a cent, or $0.001. i.e. - a home is $400,000 - The tax base is based on a 50% assessment of market value - Annual tax rate is 7 mills. 400k X .50 X.007 = $1400 tax -Official Statement (OS)-> The official statement, which is the disclosure document used in new municipal offerings, will describe the issue's financial condition in detail. - Debt Statement->This is used to analyse GO debt. It includes the full valuation of taxable property, the estimated assessed value of property, and the assessment percentage. To evaluate the municipality's debt structure, an analyst calculates TOTAL DEBT, the sum of all bonds issued by the municipality, and subtracts self supporting debt from this figure. So, back out revenue bonds and look at GOs and short term notes i.e. SO, Total debt (all bonds issued by the municipality) - Self Supporting Debt - Sinking Funds accumulations = net direct debt Net direct debt + Overlapping debt = Net total debt

MSRB Rules

Independent Self Regulatory Organization that governs the trade and issuance of munis. The MSRB governs the practices of underwriting and trading municipal bonds. It does not govern municipal issuers. Rules enforced by Finra. If commercial bank, enforcement is duty of agency that oversees them (Office of controller, FED, FDIC) Rule G-7(Records of associated person - Keep all the U4 and U5 forms with info about registered employees for a minimum of 3 years. Rules G-8 and G-9(Books and Record-keeping Requirements) Lifetime records: - Articles of incorporation, minutes, records of stock certif Six-year records: - blotters, general ledger, customer account records, WRITTEN customer complaints(Finra is only 4 years, this is likely to be on exam), principal designation(documents appointing principal) Rule G-15: Provide customer with written confirmation of transactions. Disclose the yield to call number. Rule G-17: Deal fairly and not engage in dishonest behavior. Rule G-21 Ads: A muni sec principal must approva all ads before use, and a copy of each must be kept in file fro three years. Rule G-22 Control Relationships: Discloure of Control- If dealer control is controlled or is under common control with a security's issuer. Member must disclose the level of control . Rule G-37 Political Contribution Prohibits to make business for two years if contributions made. MFPs may contribute $250 Municipal FInancial Professinoal (MFP)- > is an associated person of a broker dealer who is primarily engaged in municipal securities activites other than retail sales to individuals. Subject ot the rules regarding political contributions. Municipal Securities Rulemaking Board (MSRB) rules for NYSE member firms are enforced by The board's rules are enforced by FINRA for securities firms. The MSRB has rulemaking authority but no enforcement or examination authority.

Types of Revenue Bonds

Industrial Development Revenue Bonds (IDRs or IDBs) - used to construct facilities or purchase equipment (which is then leased to a corporation). Money from lease payments is used to service interest & principal.. The debt service for IRBs is derived from the lease payments made by the leasing corporation to the issuing municipality. Therefore, the credit rating of the bonds is dependent on the credit worthiness of the leasing corporation, not the issuing municipality. The ultimate responsibility for the payment of principal and interest rests with the corporation leasing the facility; therefore they carry the corporation's debt ratings. Lease Rental Bonds - Municipality issues bonds to finance office construction for itself or state or community Double Barreled Bonds - They have characteristics of Gos. Interest and principal are paid from a specified facility's earnings. However, the bonds are also backed by the axing power of the state or municipality and therefore have the backing of two sources of revenue. Have the backing of two sources of revenue. Both the municipality and The facility earnings. Although backed primarily by revenues from facility, double barreled bonds are rated and traded as GOs. Certificates of Participation (COPs) - LRBs that permit investor to participate in revenue from lease, installment, or loan payments related to acquisition of land or construction of equipment (no voter approval required) by the municipality. Not viewed legally as a debt of a municipality, but the holder could foreclose on the equipment if wanted. Special Tax - those are bonds secured by one or more designated taxes other than ad valorem (property) taxes. It could be supported by the sales of tabacco, alcohol, fuel or business license taxes. Special Assessment- public improvement such as sidewalks, sewers and etc. New Housing authority (Sections 8 bonds)- for new housing projects. Backed by US gov. no double barreled. Moral Obligation Bond - State or local issued, or state or local agency issued bond. If revenues or tax collection backing the bond are not sufficient, the state has authority to appropriate those. .S tate can appropriate the bond and make the payment but no obligation. It is just a moral one. A moral obligation bond is one where: The MSRB defines a moral obligation bond as: "A bond that, in addition to its primary source of security, is also secured by non-binding covenant that any amount necessary to make up any deficiency in debt service will be included in the budget recommendation made to the governing body, which may appropriate funds to make up the shortfall. The governing body, however, is not legally obligated to make such an appropriation." BABs - Created under the Economic Recovery and Reinvestment Act of 2009. tax credit provided in lieu of tax exempt.

Taxation of Treasury Securities

Interest - subject to federal but exempt on state level. TIPS- the yearly increase on the principal is taxed. Capital Gain or Loss - no different then all other securities

Bond Duration

Measures the sensitivity of a bond's price to interest rate movements. It is basically a measurement of the time it takes for the cash flow (interest payments) to repay the invested principal. The higher the coupon rate, the shorter the duration. The lower the coupon rate the longer the duration.The longer the duration, the greater the market price movement and vice versa. The approximate percentage the value of the bond will fall for each 1% increase in market interest rate Zero coupon bond always has a duration equal it its maturity. On the other hand, the duration of interest paying bond is always less than its maturity. Then, after considering for maturity, the bond with the highest interest rate will have the shorter duration. Now, if the bonds have similar int. rate , the one with the shorter maturity will have shorter duration.

Options Account

Order of approval: -Obtain approval from qualified supervisor - Obtain essential facts from the customer -Enter the initial order - Obtain a signed options agreement ->This agreement must be signed and returned to the member within 15 days after the account has been approved.

Municipal Bond Marketability

Ratings, Maturity, Coupon, Block Size, Call Features, Dollar Price, -Refunding-> Very much like refinancing. Issue a new bond for lower interest rate and use proceeds to pay the old one. (a)Advanced Refunding- Uses funds of refinance to repurchase it. (b)Current Refunding - This differs from advanced refunding in that the old bonds will be redeemed within 90 days or less from the date of issuance of the refunding bonds. Insurance - more marketability and lower int. rate.

The Ratings Game

S&P Ratings= AAA, AA, A, BBB(investment grade), BB, B, CCC, C, D Moody = Aaa, Aa, A, Baa(Investment Grade), Ba, B, Caa, Ca, Ca, C

Types of Corporate Bonds

Secured- Backed by various kinds of assets. i.e. Mortgage Bonds, Equipment Trust Certificate, Collateral Trust Bonds. Those are senior bonds. Income (adjustment) Bonds = Pays interest only if the corporation has enough income to meet the interest payment and if the board of directors declares a payment. Not suitable for customers seeking stable income. 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. Used when companies are coming out of bankruptcy. Unsecured- Backed only by the corporation itself. i.e.Debentures, Guaranteed Bonds(guaranteed by a corporate entity other than the issuer itself). Subordinate bond(Those are subordinate to the other issues.Belong to a lower class or rank.they are usually debentures)

Shareholder rights

Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholders' proportionate interest). Statutory Voting -> Allows to cast one vote per share owned on each item in the ballot Cumulative voting -> Allows stockholders to allocate their total votes in any manner they choose.

Achieving a Better Life Experience (ABLE) Act

Tax-Advtg savings account for individuals with disabilities and their families. -Benf accounts owner and earnings are not taxed. -Significant disabilities that occurred before age of 26.

Munis Maturities

Term Maturity- All principal matures at a single date in the future. They are quoted as dollar bonds. Quoted by price. Serial Bonds -Bonds within an issue mature on different dates according to a predetermined schedule. They are quoted on the basis of their yield to maturity. Balloon Maturity(type of serial)- Pays part of a bond's maturity before the final maturity date, but the largest portion is paid off at maturity.

Invest Comp Def Under Invest Act of 1940

The Invest Company Act classifies invest companies into three broad IT DOES NOT INCLUDE HOLDING COMPANIES. Categories: - Face Amount Certificates-> Contract between investor and issuer in which the issuer guarantees payment of a stated or fixed sum to the investor at some set date in the future. In return for this future payment, the investor agrees to pay the issuer a set amount of money either a lump sum or in periodic installments. -Unit Investment Trusts-> Unmanaged investment company organized under a trust indenture. They don't have a board of directors, employ an investment adviser, and actively manager their own portfolio. Just raise funds, invest them in something, leave it there, and redeem in specified future date. Trust must maintain a secondary market in the units allowing the investor to redeem at NAV. -Management Companies-> Actively manage securities in a portfolio to achieve a stated objective. I.e. open end invest funds, close end investment fund, ETFs ( a type of Open end). They can be diversified and non-diversified. To be diversified meets the 75-5-10. -> At least 75% of the funds 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% is invested in one security and no more than 10% of the outstanding voting securities of one issuer is owned

Original Discount Bond(OD)

The accretion of an OID is tax-free. A bond issued at a significant discount from its maturity value is known as an original issue discount bond (OID). In the case of a corporate bond, the computation is more complex than can be tested, but there are two things you need to know: - A portion of the discount is taxed as ordinary income each year until maturity, even though it is not actually received. This is called phantom income. Each year's taxable amount is reported on Form 1099-OID. - Because a portion of the discount has been taxed each year, at maturity there are no tax consequences—no gain, no interest An investor buys a newly issued 5% muni with 10 YTM at 90. Because the bond was purchased as an OID, the reported int ($60) would be tax free. The accretion has no effect. Better yet, the accretion affects the cost basis so if the investor were to sell, they would have the accretion added.

Agency Securities

They are not necessarily government agencies but they have ties to the government. Pass Through Certificates for the mortages are created when they are bundled together. Which type of risk is a mortgage-backed security most likely to experience? A mortgage-backed security, such as a collateralized mortgage obligation, is most likely to experience reinvestment rate risk. As mortgages are paid off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower yielding securities. This is the practical effect of prepayment risk.

Capital Gains and Losses on Munis

They are not tax free. You have to pay as in any other instrument.

Employment Retirment INcome Security Act of 1974(ERISA)

This is a federal legislation that regulates the establishment and management of corporate pension or retirement plans, also known as private sector plans- not public plans like those for government workers, nor it is applicable to nonqualified plans. Participation- all employees over 21 and with over 1 year (1000 hour) Funding- must be segregated from other corp assets Vesting- Communication Nondiscrimination Beneficiaries Under ERISA, a plan trustee may not write uncovered calls in an accounts Deferred compensation plans are nonqualified, and therefore, do not have to meet the nondiscrimination provisions of ERISA.

Types of Accounts

To open a cash account, only the signature of the principal accepting the account is required. For margin accounts, the signature of the customer is required on the margin agreement. The signature of the spouse is required only for a joint account. (1) Cash (2) Margin (3) Prime Brokerage- is an account in which a customer (generally an institution) selects one member firm (the prime broker) to provide custody, trading, and other services, while other firms, called executing brokers, typically execute most of the trades placed by the customer. customer selects one firm and enters into an agreement with the others. The customer receives trade confirmations and account statements from the prime broker, who facilitates the clearance and settlement of the securities transactions. Responsibility for compliance of certain trading rules rests with the executing broker. (4) Fee Based- Appropriate for investors who engage in moderate levels of trading activity. (5) Wrap Accounts- firms provide a group of services. (5) Transfer on Death(TOD) (6) Advisory Account 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.

Accredited Investor

Under Rule 501 of SEC Regulation D, an "accredited investor" is any one of the following: (1) a national bank; (2) a corporation, business trust, or charitable organization with total assets in excess of $5 million; (3) a director, executive officer or general partner of the issuer; (4) a natural person who had individual income in excess of $200,000 in each of the two most recent years, or joint income with that person's spouse in excess of $300,000 in each of the two most recent years, with a reasonable expectation of reaching the same income level in the current year; (5) any natural person whose individual net worth, or joint net worth with that person's spouse, excluding the primary residence, exceeds $1 million at the time of purchase; (6) a trust with assets greater than $5 million with the purchase directed by a sophisticated investor; (7) a private developing company; or (8) an entity in which all the equity owners are accredited investors.

Warrants

Unlike rights, they are a long term investment. There is not standard length but they generally have an expiry of 2 years. Purchase price higher than market Offered as sweeteners for bonds and preferred.

zero coupon bond

a bond that makes no coupon payments and thus is initially priced at a deep discount and mature at par ($1000). Acretion- the difference between the discounted purchase price and the full face value at maturity. More volatility on those since they have longer duration.

DVP; RVP

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.

Investment Goals(end game)

plannign for college retirement Saving for a future purchase, such as home philanthropy capital to start a business leaving a legacy

churning

the illegal and unethical practice that occurs when a broker dealer engages in excessive buying and selling

Types of Munis (stop at 135)

trust Less than five years maturity = Notes. If longer, = bonds - General Obligations = They are issued for capital improvements that benefit the whole community. No revenue is produced so it must be backed by the full faith, credit, and taxing powers of the municipality. Issued by local (not state) and backed by ad valorem(according to value) taxes. So backing by taxing power. So backed by taxes, license fees, fines, property for towns, and income taxes, sales taxes, and license fees for states. Which of the following municipal issues would least likely involve overlapping debt? Overlapping debt refers to property tax districts (areas). Airport issues are usually revenue issues of an authority that has no property taxing powers. - Statutory Debt Limits - the debt municipalities can incur may be limited to a certain %. If the municipality wishes to issue Gos that would put it above its statutory limit, a public referendum is required. Voter approval on a referendum must follow: (1) Tax Limits =Some states limit property taxes to a certain percentage of the assesses value or to a certain percentage increase in any singleyear. (2) Limited Tax GOs-> the issuer of limited tax Go bonds is limited as to what tax or taxes or how much can be used to service the debt. As a result, there is more risk with lmited tax GOs than with a comparable GO backed by the full taxing authority. (3) Overlapping Debt(conterminous)-> diffirent taxing authorities may tax the same thing. State debt cannot overlap with any other municipal entity. - >Revenue Bonds= Backed by the revenues generated by the municipal facility. Not subject to limits and don't require approval. However, they may be subject to a n additional bonds test before subsequent bond issues with equal liens on the project's revenue may be issued. Characteristics of Revenue Bonds: (1) Feasibility Study -> Done before issuing a revenue bond. Engage various consultants to prepare a report that determines the economic feasibility of a certain project (2) Sources of Revenue ->They are not backed by real taxes. They are self supporting. i.e. utilities, housing, transportation, educations, health, industrial, sports. (3) Trust Indenture (bond resolution)-> municipality abides by certain covenants. A trustee appointed in the indenture supervises the issuer's compliance with the bond covenants. i.e. Rate covenant, maintenance covenant, Insurance covenant, Additional bonds test (close or open ended), Sinking fund, Catastrophe clause, flows of funds, books and records, call feature. The bond resolution describes not only the characteristics of the proposed offering, but also the obligations the issuer has to its bondholders. The bond resolution, which is also referred to as the bond contract, contains the requirement for the municipality to properly keep the facilities books, reporting requirements regarding revenues collected, conditions of the maintenance covenant, and terms of the rate covenant. The underwriting agreement is between the municipality and underwriters, and it spells out the terms agreed to for the underwriting of a new issue. The bond contract describes the nature of the contract and the issuers' duties to bondholders. The bond contract is a more expansive document than a bond resolution. The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance. Munis are not required to have trust indendures, but it increases marketability Voter approval may be required for new issues of GO bonds. State prisons and public high schools are among the facilities for the public good that are built and supported by GO issues. User fees (like tolls) support revenue bond issues for the construction of facilities such as airports and turnpikes.