Series 7 - Function 3

Interest on CMOs are paid _________________ to all tranches, _______________ is paid back to the ___________________ until it is retired

Pro rata Principal First tranche Quotes are based on tranche's expected life

Difference between qualified and unqualified legal opinion

Qualified: Legal uncertainty of which purchasers should be informed Unqualified: Issued by bond counsel unconditionally Smaller munis choose not to obtain a legal opinion, certificate must declare that they are ex legal

Revenue bonds have a trust indenture or bond resolution/covenant describing:

Rate covenant - Maintain rates to pay expenses Insurance Maintenance Non discrimination Book and audit Sinking fund Additional bonds: open or closed end Call provisions: whole or partial, catastrophe Put provisions Net or gross revenue pledge

RTRS

Real Time Transaction Reporting System - Muni bond transaction reporting Transactions reported to it by firms within 15 mins of trade

Treasury receipts vs Treasury STRIPS

Receipts - Type of zero coupon bond issued by BDs. Buy treasury securities, place them in trust at a bank, and sell separate receipts against the principal and coupon payments STRIPS - Backed by US gov, receipts are not. Zero coup bond. Taxed annually and must be accreted even though interest is not received until maturity Quoted based on yield to maturity as they are a zero

Statement of Cash Flow contains

Reports a business's source and uses of cash and the beginning and ending values for cash each year -Compare revenues with expenses - Money going in vs money going out -Operating activities: items from income statement only -Investing activities -Financing activities: items from balance sheet - equity and debt financing Does not reflect accounting changes

CAPM (Capital Asset Pricing Model)

Return an investment should achieve based on level of risk taken More risk, higher the return Uses beta and alpha

Differences between stock rights and warrants

Rights: Short term, on issuance - exercise price below market price, may trade with or separate from common stock, offered to existing shareholders with preemptive rights Warrants: Long term, on issuance - exercise prices higher than market price, may trade with or separate from the units, "sweetener" for another security -Issued with debt instruments, allowing them to offer a lower interest rate

Who enforces MSRB rules?

SEC Concerning dealers: FINRA Non national banks that are members of Fed: Federal Reserve board

Specified LP vs a blind pool

SP: At least 75% of assets identified in advance

What is when issued basis and what is not included on the confirmation?

Security is authorized but not issued SAT is what is not included. Settlement date Accrued interest Total dollar amount due at settlement

Capital gains holding periods

Short term - Holding period of one year or less Long term - Holding period of one year or more Taxable even when selling out of mutual fund, defined as short or long term based on how long the investor held the fund

Tactical Asset Allocation

Short term adjustments, more active Adjust investment mix based on market conditions Stocks heavy one year, bonds heavy the next year

Balance Sheet

Snapshot of a company's financial position at a given moment in time Identifies the value of the company's assets and liabilities Does not indicate whether the company is improving or deteriorating Balance sheet equation: Assets = Liabilities + Net worth Assets - Liabilities = Net worth

Define spread for a syndicate on a bond issue

Spread is the syndicates compensation Difference between the price the syndicate pays the issuer and the reordering price

What regions do not have overlapping debt?

States

Cumulative vs Statutory voting

Statutory: One vote per share owned for each ballot item - Favors larger shareholders Cumulative voting: Allocate total votes in any manner of their choosing - Favors smaller investors

Preemptive Rights

Stockholders rights that entitle them to maintain their proportionate ownership in a company by buying newly issued shares before the company offers them to the public May: Exercise rights to buy stock, sell the rights and profit from market value, let rights expire

Straight vs cumulative preferred stock

Straight (non cumulative): No special features beyond the stated dividend payment. Missed payments are not paid to holder. Cumulative: Any dividends in arrears must be paid before paying a common dividend

Fundamental investment analysis

Study of the business prospects of an individual company within the context of its industry and overall economy Examines financial statements and company management Use business cycle phases to look for companies in industries that offer better than average opportunities within the current business cycle

What must investors sign prior to investing in CMOs?

Suitability agreement

Support and Resistance Levels

Support: Bottom of the trading range Resistance: Top of the trading range Stock stays within a narrow range it is consolidating

Difference between TANs and RANs

TAN - Tax Anticipation Note - Used to finance current ops/expenses in anticipation of future tax receipts RAN - Revenue Anticipation Note - Finance current ops in anticipation of future revenues TRANs are a combo of the 2 BAN - Bond Anticipation Note - Funded through sale of bonds MIG ratings provided for these short term muni debts

Total take down vs concession vs additional takedowns

TT - Portion of the spread that remains after subtracting the management fee. Members buy bonds from the syndicate manager at the takedown. Concession - Discount the selling group receives from the syndicate member. Selling group buys at concession. AT - Syndicate member keeps the remainder of the total takedown 1 point spread, 1/8 management fee, takedown is 7/8 or $8.75 $991.25 what members pay Member sells to selling group at $995 - concession is $5 or 1/2 point Additional takedown is the difference between TT and Concession $995 - $991.25 = $3.75

When counting days of interest, go back and include ________________ and go up to but not including the _______________________________

Include the last interest payment date Settlement date Buyer receives full amount of next interest payment including interest that accrued while the seller owned the bond

Current assets and liabilities

Converted for cash or due for payment within the next 12 months

Systematic Risk

Market risk - markets move together. Investors may lose principal due to price volatility. Cannot diversify away

Beta

Measure of volatility compared to the market as a whole Beta of 1 moves with market Beta of 1.5, 50% more volatile than the market Beta of .5, 50% less volatile than the market

Bond Ratings high to low Moody's: S&Ps:

Moody's: Investment grade: Aaa, Aa, A, Baa. Speculative: Ba, B, Caa, D S&Ps: investment grade: AAA, AA, A, BBB. Speculative: BB, B, C, D

List and order the normal allocation priority for munis

Pro golfers don't miss PGDM Presale, Group/Syndicate, Designated, Member

In whole call vs in part call

In whole - Certain bond will be called - Will always show YTC on confirmation In part - Uncertainty as to whether the particular bond will be called

Money market funds keep their value at ________________

$1 per share, yield varies - Fixed NAV No load, but do have a management fee Check writing priveleges

Buyer buys a 5% muni with 10 years to maturity at 90 Accete the bond to show what costs basis is after 2 years

$100 discount must be accreted over remaining 10 years $100 / 10 years remaining $10 per year 2 years, cost basis is 92. Held to maturity there will be no capital gain Applies if purchased in secondary market

Buyer buys an 8% muni with 8 years to maturity at 108 Amortize it to show what cost basis is after 2 years

$80 premium must be amortized over remaining 8 YTM $80 / 8 years $10 per year. After 2 years, cost basis is 106

Quick Ratio (Acid Test)

(Current Assets - Inventory) / Current Liabilities Test of a company's ability to meet short term obligations

Gargantuan Computers, Inc. (GCI) conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights?

(Market price - subscription price) / (# of rights + 1) (70 - 50) / (1 + 1) = 20 / 2 = $10

Cum rights formula

(Market price - subscription price) / (# of rights + 1) Ex date - Get rid of the +1 Value before the ex date (cum) use + 1 Value on ex date or after, don't use +1

Closed end provision bonds allow ________________________

Additional bond issues with junior liens

Your customer purchases FYZ 4% convertible preferred stock at $80 per share. The conversion price is $20. With the common stock now trading 2 points below parity, you know that the common shares of FYZ are trading at

-$14. The conversion ratio is computed by dividing par value by the conversion price ($100 par / $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 / 5 = $16). $16 − 2 = $14.

General partnership characteristics

-2 of more owners -Everything flows through -Unlimited liability

Equity wash - If purchasing same security after a loss within ___________, loss not allowed. However, if buying same security and a different ___________________ from original purchase after loss, difference is allowed

-30 days -Number of shares Sold 100 shares of KLP at a loss of $1 per sahre 15 days later - Buys KLP convertible bond for a conversion price of $40 - Converts to 25 shares Original loss was $100 May declare a $75 loss as he only bought back 25 shares compared to the original 100

REITs must distribute _________ or more of income to avoid__________________

-90% or more of income to shareholders -Taxation as a corp

What is the rate banks use to charge each other for overnight loans? Rate charged by Fed to a member bank? Rate commercial banks charge their best corporate customers?

-Fed funds rate -Discount rate -Prime rate

Zero coupon bonds are sold at _______________________________ and investors owe tax ________________________

-A deep discount from face value -Each year on the amount by which the bonds have accreted as if they received the cash No reinvestment risk as there are no interest payments to reinvest

Describe Official Statement

-A disclosure document prepared for a new municipal issue by or for the issuer -Contains a complete description of the issue and financial details about the issuer - Like a prospectus -Creditworthiness, purpose, source from which interest and principal will be paid, among other items -MSRB rules require that a copy of the official statement be given to each purchaser of a new issue, if one has been prepared

Farm Credit System

-Ag financing and credit -Backed by issuers -Interest exempt from state and local taxes

DPPs cannot have all 6 characteristics of a corporation, must avoid 2

-Associates -Profit motive -Centralized management -Limited liability -Freely transferable interests*** - DPPs are not freely transferable, not freely liquid -Continuity of life*** - DPPs do not have this, partnership is for a specific life or duration

Loans for variable insurance

-Available after 3 policy years -Min percentage available after 3 years is 75% -Must maintain positive account value -DB reduced by outstanding loan

Current income or income driven investments

-Bonds: Corp, gov, muni, agency -Equities: pref stock, utilities, blue chip -MFs, REITs

Basis for a limited partner determines what:

-Capital gain or loss upon sale -LP can lose no more than the basis Basis is calculated as: Investment + Share of recourse debt - Cash distributions Passive losses may be used to offset passive income, but not capital gains

Describe an IDR or IDB

-Construct facilities or purchase equipment, then leased to corporation -Muni uses money from lease payments to pay principal/interest on bonds -Backed by corporate credit but issued by state or municipality as a revenue bond -If a non public purpose bond, interest paid will be taxable to those taxpayers subject to the AMT

Coverdell Education Savings Account (CESA)

-Contribution limit is $2k per year per child under age 18 -Contributions can be made by persons other than parents but total is still $2k per child -Contributions must cease after after 18th birthday -Not tax deductible -Tax free as long as taken prior to age 30 and used for education expenses -If not, taxes charged to beni and subject to ordinary income tax and 10% penalty

Taxation of life insurance

-DB - Income tax free -Surrender - Gains taxable as ordinary income -Loans - Not taxable

Types of unsecured corporate debt

-Debenture - Backed by general credit of company, general creditor -Subordinated debenture - Paid last -Guaranteed bond - Backed by company other than the issuer -Income/Adjustment bonds - Used when a company is reorganizing or coming out of bankruptcy. Only pay income if corp has enough income to meet interest payment and if BOD declares payment

What can be deducted in LPs?

-Depreciation: Real estate and equipment (Not land) -Natural resources - Depletion (Crops cannot deplete or depreciate) Allowance can be taken based off of the amount of natural resources sold -IDCs generate immediate deductions

What should we consider when analyzing the viability of revenue bonds?

-Economic justification: Feasibility study, competitive facilities, debt service coverage ratio

Investment considerations for DPPs

-Economic viability -Sharing arrangements: Disproportionate sharing of income and expenses between GP and LPs -Tax considerations -Safety -Lack of liquidity -Suitability: Can afford cap risk, in a position to benefit from tax consequences associated with programs

Life insurance refund provisions

-Free look period of 45 days from the execution of application or 10 days from the time the owner receives the policy - whichever is longer -Refund period extends to 2 years - If refunded prior to 2 years, insurer refunds the policy's cash value + % of sales charges deduced -After 2 years - Cash value only -Max sales charge over the life of the contract - 9%

Limited partnerships have 2 types of owners, describe them:

-General partner: Manages the business, has unlimited liability -Limited partner: Funds the business, has limited liability

Money market instruments are ________________ with ________________ or less to maturity

-High quality debt instruments -1 year or less

What consequences flow to owners of DPPs?

-Income -Expenses -Credits -Deductions -Losses

Recourse loan vs non recourse loan responsibilities

-LPs are responsible for payment on a proportionate share of recourse loans, money the partnership borrowed. Have responsibility for nonrecourse loans ONLY in real estate partnerships -GPs are responsible for payment on nonrecourse loans, not LPs

Equipment leasing programs for LPs and risks

-Leasing out airplanes, railroads, cars, computers, etc -Risk of obsolescence

Characteristics of limited partners

-Limited liability -No management responsibility -Partnership democracy allows them to switch GP, dissolve partnership, monitor books, sue GP

The ___________________ governs the issue and trade of munis They do not ______________________ issuers and have no ________________ to enforce the rules they make

-MSRB -Regulate -Authority

Describe Underlying trust indenture

-Makes the issue more marketable - Contract between bond's issuer and a trustee appointed on behalf of bond's investors -Not required -Normally includes flow of funds -Known as protective covenant - Outlines covenants Included in bond contract

College savings plan

-May be set up in more than 1 state (not prepaid tuition plans) -No age or income limitations on contributions on distributions -$15k limit in 2019

Life insurance contract exchange priveleges

-May exchange a VL for a whole life contract -Period of eligibility is 2 years -No medical underwriting/evidence of insurability is required for exchange

3. Preservation of capital investment recommendations

-Money market securities -MM MFs -CDs -Gov securities -Principal protected funds. Illiquid.

What should we consider when analyzing viability of GOs?

-Munis attitude towards debt and taxes -Issuers economic health: income per capita, unemployment rate, population trend, economic diversity -Ability to raise taxes -Debt limit -Budget

Open End management company

-Mutual fund -Continuous primary offering -Must redeem shares through fund, no secondary trading -Common stock only -Price by formula -8.5% max sales charge -Ex date set by BOD - 1 bus day after record date

Suitability for Variable Annuities

-Not suitable for placement in qualified plans as earnings are already tax deferred -Other retirement plans should be maxed out first -Should not cash out life insurance, existing VA contracts, existing investments or refinance homes -User anticipates needing funds later (kid's school, buying a home) -Not suitable for those with low risk tolerance

Types of Sharing Arrangements, define: -Overriding Royalty Interest -Reversionary Working Interest -Net Operating Profits Interest -Disproportionate Sharing -Carried Interest -Functional Allocation

-ORI - Holder of interest receives royalties, no partnership risk - Land owner selling mineral rights -RWI - GP bears no cost, receives no revenue until LPs have recovered their capital. LPs bear all costs -NOPI - GP bears no costs, but is entitled to % of net profits - Private placements only -DS - GP bears small % of expenses but receives large % of revenues -CI - GP shares TDC with LP but receives no IDCs. LPs get deductions from it. GP gets write offs from depreciation -FA - Most common - LPs receive IDCs. GP receives TDCs which are depreciated over years. Shared revenues.

Passive loss subtracts what 3 things from Revenues?

-Operating expenses -Interest payments - Not principal -Depreciation or depletion Rent revenue: $48k Expenses: -$15k Interest: -$24k Depreciation: -$10k Taxable reported income: -$1k May add depreciation back in to complete cash flow, so we would be a gain of $9k

Long term bond ________________________ are more volatile than short term bonds but short term bond ____________________ are more volatile than long term bonds

-Prices -Interest rates Long term bonds have more credit risk than short term bonds

Types of Real Estate LP programs and objectives

-Raw land: Appreciation only -New construction: No immediate cash flow, appreciation major objective -Existing property: Immediate cash flow potential -Gov assisted housing: Tax credits, minimal appreciation and cash flow potential -Historic rehab: Tax credits

What are the 3 primary components of the income statement?

-Revenue - What came in -COGS - What went out -Pre tax income - How much is left before tax

What expenses are deductible in the current year for LPs?

-Salaries -Interest payments -Management fees *Principal payments on property are not deductible expenses*

Liquidation Priority

-Secured bonds -Debentures and general creditors -Subordinated debentures -Preferred stock -Common stock

What is the liquidation priority of a LP?

-Secured creditors -Other creditors -Limited partners: First, for their claims to shares or profits, second, to a return of contributed capital -GP: 1. Fees and other claims not involving profits, 2. Share of profits, 3. Capital return

Closed End management company

-Shares are fixed, offered all to public in one IPO, once shares are issued fund is closed to new investors -Shares not redeemable -Secondary trading -Priced by supply and demand - Independent of NAV -Ex date set by FINRA, one business day before record date -Commissions

Order Period

-Short period of time following the award of a municipal issue to the winning syndicate -During the order period, orders for an issue of municipal bonds are allocated in accordance with the priority defined in the syndicate letter, not on a first come-first served basis.

Growth or capital appreciation driven investments

-Stocks with earnings momentum -high P/E ratios -low dividend payout ratio Blue chips & defensive stocks - Balanced/moderate growth Tech stocks, sector funds - Aggressive growth

Maturity length on Government securities - Shortest to longest

-Tbills - 1 year or less - Issued at discount - Stable principal, unstable interest bc paid at maturity -Tnotes - 2 - 10 years -Tbonds - More than 10 years - Exempt from state and local taxes

Examples of MM investments

-Tbills - High quality, 1 year or less to maturity -Bankers Acceptances - BA - Facilitate foreign trade - import and export, 270 days max to be exempt -Commercial Paper - Unsecured promissory note - 270 days max to be exempt. Companies use to finance accounts receivable and seasonal inventory overages -Negotiable Jumbo CDs - Minimum $100k but most issued for 1 mil or more - 1 year or less for maturity

2 types of investment companies covered in Series 7

-Unit Investment Trusts - Once a UIT sets its portfolio, it remains the same for the life of the fund and the term is fixed. Issues redeemable shares. -Management Companies - Actively manage a securities portfolio to achieve a stated investment objective - Closed or Open ended

Characteristics of general partner

-Unlimited liability -Management responsibility -Fiduciary -Can't borrow from, compete with, or commingle funds with partnership -Syndicator handles the registration of the LP units

Accrued interest for US gov securities is computed on the basis of:

Actual days elapsed in the year

What type of tax cannot be used for a special tax bond?

Ad valorem Special tax bonds usually include: alcohol, tobacco, hotels, business license tax, excise, gas

Taxation of Annuities

-contributions made with AFTER-tax dollars -interest, dividends, and capital gains taxes are deferred until distributions are made -anything exceeding the cost basis is taxed at ordinary income - LIFO for random withdrawals -exclusion ration if annuitized: percentage of contribution basis to total - part of payment taxed, part not -distributions to beneficiaries taxed as ordinary income

FINRA rules for an LP limit underwriting compensation to ________________ of total money raised

10%

Stock splits

100 shares, valued at $20 per share 2:1 stock split Results in investor owning 200 shares at $10 per share

A 12b-1 fee of more than _____________ of average net assets may not be described as a ________________________

.25% No load fund Max allowed 12b-1 is .75% 12b-1s cover ads, sales literature, prospectus deliver - not fund management expenses

3 important docs are required for limited partnership:

1. Certificate of limited partnership - Filed in home state - Attests to the formation of the LP 2. Partnership agreement 3. Subscription agreement - Filled out and signed by LPs who are interested. Effective when GP signs it. Verify sent worth of LPs and that they understand risk.

Bond confirmations must show: 5 things

1. If agency transaction - Name of party on the other side, amount of any commission 2. Dated date if it affects interest 3. Fully registered, registered to principal only, book entry form or bearer form 4. Called or prefunded - Call price 5. Whether interest is taxable or subject to AMT

LOI for breakpoints can last for _____________________, be backdated for ____________________________ and based on __________________________

13 months 90 days Dollars invested - Appreciation and income paid by fund do not count

Government notes and bonds are quoted in ____________________

32nds Quote of 101 - 16 is 101 + 16/32 = $1015

F&A muni bond is traded regular way on Monday, March 5th, how many days of accrued interest are owed

36 days 30 for February March 5th = 6 days - Settles on March 7th (T + 2) - Do not include settlement date

Balanced funds make up what percentage of stocks and bonds typically

60% stocks 40% bonds Appropriate for investor who seeks balance between the 2

Total period of time for equity wash sales

61 days

Calculate tax equivalent yield and cite formula Muni yields 7% Investor in 30% tax bracket Corp yields 11% Investor in 30% tax bracket

7% / (100%-30%) = 7% / 70% = 10% 11% x (100%-30%) = 11% x 70 = 7.7% Muni yield / (100%-Tax bracket) Corp yield x (100%-Tax bracket)

Translate: -7s 25 at 7.5 -7s 25 at 99.5 -6% bond quoted on a 6.5 basis -Bond quoted at 104 3/8

7% coupon Maturing in 2025 YTM 7.5% 7% coupon Maturing in 2025 Price of 99.5% of PAR or $995 6% coupon 6.5% YTM $1043.75 (3/8 of $10 or $3.75)

If advertised as diversified, company must follow ______________________________ test

75-5-10 test 75% of the assets are invested so that: -No more than 5% of fund assets are invested in any one issuer -Fund owns no more than 10% of the voting stock of any one issuer -No restrictions on remaining 25% *Appreciation past 5% if investment was initially below it does not require action*

Banks are allowed to deduct _________________ of the interest carrying cost of the deposits funding the purchase of ___________________

80% Bonds

Unsystematic risk

Affects securities, not markets. Can be diversified away. Business risk is a type - Business can fail.

Who charges commission vs a mark up?

Agency - Commission Dealer - Mark up

The ______________________ or ____________________________ is signed by by reps of all syndicate members and establishes a joint account to sell newly issued securities

Agreement among underwriters or syndicate letter Details responsibilities and liabilities of each firm

ADRs

American Depository Receipts - Issued by US banks and trade on US security markets. Represent a specific number of shares in a foreign company trading in the US -Generally do not have voting rights -Individual investor does not own stock, ADRs are registered on the bank books -Net tax liability - Any U.S. income tax due, credited by any amount of foreign income tax withheld

Partnership agreement

An agreement that clearly states what roles of general and limited partners and guidelines for operation Signed by limited partners and general partner

Dividend Payout Ratio

Annual Dividends / EPS

Current Yield Formula

Annual dividends per common share / CMV

Current Yield

Annual income / Current market price 6% bond trading for $800 $60 / $800 = 7.5% - Trading at a discount (Greater than nom) 6% bond trading at $1200 $60 / $1200 = 5% - Trading at a premium (Less than nom)

1035 exchange that is not allowed

Annuity to life insurance

Subchapter M, conduit, or pipeline tax theory

As long as 90% of NII is distributed, company is considered a regulated investment company and funds not taxed on dividends distributed only on what is retained Fund distributes only 89%, must pay taxes on

Alpha

Assets actual return compared to expected returns Stock has a beta of 1.5, market goes up 10%. Expected return is 15%. Actual return less than 15%, investor not compensated for risk taken

Fully Diluted Earnings Per Share

Assumes all convertible securities have been converted Interest expense down Earnings up Taxes up Number of common shares up Earnings per share typically go down No more debt, good for the company

Why are ARS risky?

Auction Rate Securities Long term, variable rate bond notes tied to short term interest rates - Long term maturities 20-30 years Use clearing rate, if bid is above clearing rate, they will receive no bonds Failed auctions can happen when there is a lack of demand

Describe Bond resolution

Authorizing resolution containing a description of the issue Included in bond contract

Differences between The Bond Buyer and Thomson Muni Market Monitor

BB - Primary market, new issues. Published every business day. Publishes 30 visible supply and placement/acceptance ratio. TMMM - Secondary municipal markets.

Short Interest Theory

Based on the reasoning that even though short selling reflects a belief that prices will decline, the fact that short positions must eventually be covered is a source of upward price pressure. High short interest is a bullish indicator Low short interest is a bearish indicator

Difference between a bona fide and nominal/subject quotation

Bonafide - Dealer must be prepared to trade the security at the price specified in the quote, reflects dealers best judgement and relationship to FMV Nominal - Dealer's estimate of a security's market value. Info purposes only. Quotation can be an indication of interest and can be one sided

Who writes and signs a legal opinion on the face of bond certificates?

Bond counsel

Current Ratio

CA/CL

Price to Earnings Ratio (P/E)

CMV / EPS

Capitalization or Capital Structure

Combined sum of a company's long term debt and equity securities Capital structure is built with equity and debt Long term debt, capital stock, capital in excess of par, retained earnings

Dow Theory

Confirms the end of a major market trend confirmed by changes in industrial average and transportation averages Primarily trend in bull market: higher highs, higher lows Primary trend in a bear market: lower highs, lower lows

Working Capital

Current assets - Current liabilities Examples: Cash, marketable securities of other companies, accounts receivable Not included: Convertible bonds because they are long term

What are in the footnotes?

Disclosures about details such as: -Long term debt - "These are convertible bonds" -Timing of future cash flows -Nature of liabilities

Revenue bonds that have characteristics of GOS. Interest and principal are paid from facility earnings Bonds are also backed by the taxing power of the state or municipality

Double barreled bonds Have 2 sources of revenue backing

Oil and gas program types and benefits

Drilling: -Exploratory: High risk, high reward, high IDCs -Developmental: Drill near existing fields to discoer new reserves - Medium risk, medium IDCs -Balanced - Combo of Exp, Dev, and/or Income Income: -Buys existing production -Safest oil partnership -Generates income

What is the central online site used to locate key info about munis?

EMMA Retail info, official statements, ratings info, real time access to prices MM - Muni Market

Earnings Per Share (EPS)

EPS = earnings available to common / number of common shares If a stocks market price and the P/E ratio are known, can use: EPS = CMV / P/E ratio

Most important consideration of a DPP is that it must have:

Economic viability. Can't be setup to fail just for write offs.

What is writing the scale? What is an inverted scale?

Establishing the reordering yield or price for each maturity Determining what price or yield is necessary in order to be able to sell various serial maturities Yields on short term maturities are higher than on long term maturities. Typically long maturities yields are higher.

3 accounting methods for purchases of same security

FIFO - Shares held longest are used to calc gain or loss Share ID - Picking which shares to liquidate Average basis - Total cost / total shares and using that as a basis

FNMA & FHLMC

Fannie Mae Freddie Mac -Quasi gov agency issues - Publicly owned -Both pass throughs -Backed by issuing authorities -$1k increments -Semi annual payments of principal and interest -Prepayment and reinvestment risk -Interest taxed at all levels

Convertible bond parity formula

Find conversion ratio Convertible at $50 Par $1000 = Ratio of 20 Divide CMV of bond / Ratio $1200 / 20 = $60 Parity price or Multiple CMV of stock x Ratio $45 / share x 20 = $900 parity price

What licenses are required for selling fixed and variable annuities

Fixed - Insurance only Variable - Securities and insurance Variable Life insurance - Securities and insurance

Convertible bonds

Fixed interest payments, maturity dates, less volatile than common stock Prices driven by - Interest rates, common stock price Conversion price of $40 $1000 / $40 = 25 / 1 Bond convertible at $50 - 20 : 1 Bond selling for 104 Common stock price would have to be $52 - Parity price Stock selling below $52 - Bond is worth more Stock selling above $52 - Buy bond, convert to common, sell shares

Modern Portfolio Theory (MPT)

Focuses on investment relationships Negative correlation between investments reduces volatility and increases returns. Perfect is -1 Close to zero unsystematic risk. Only real risk is systematic.

Calculate expense ratio

Fund expenses / Average net assets = Expense ratio

2 types of muni bonds. Describe and what makes them distinct

GO: Issued by states and political subdivisions Backed by full faith and credit of taxing authority Taxes: States: income and sales. Political subdivisions: Ad valorem/ real estate taxes Debt limit Need voter approval Revenue Bond: Issued by states, political subdivisions, commissions, agencies, authorities Backed by specific revenue sources - self supporting User charges: tolls, concessions, fees from highway, bridges, airport, parks. Lease payments No voter approval needed

GNMA

Ginnie Mae - Supports HUD -Only agency security backed by full faith and credit of US gov -Pass through security, Minimum increments of $1k -Monthly payments of principal and interest -Prepayment and reinvestment risk -Interest taxed at all levels

How do bond calendars work?

Gov - 365 days Muni/Corp - 360 days

Variable insurance death benefit vs separate account value

Guaranteed DB plus variable DB Separate account performance impacts variable DB based on AIR AIR does not impact cash value of VL policy or guarantee. Only variable DB Separate account cash value - Unit values calculated daily, cash value calculated monthly

Mortgage bonds have the _____________________________________ among all claims on assets pledge as collateral

Highest priority

Company with 50% debt or more is considered ___________________

Highly leveraged

Cyclical Industries

Highly sensitive to business cycles and inflation trends. Perform better in expanding economies Steel Heavy equipment Capital goods Autos

Differences between IDCs and TDCs

IDCs: -100% deductible in the first year of operation -Wages, supplies, fuel costs, insurance -Cost that after being incurred has no salvage value TDCs: -Costs incurred that have salvage value -Storage tanks, wellhead equipment -Not immediately deductible, depreciated over several years

Rank parts of the spread in order of their size

Managers fee is the smallest Total takedown is largest - Additional takedown is part of total takedown

How are taxes on munis handled?

Interest is tax free at the federal level, tax free typically at the state level, generally taxable to nonresident investors Territorial bonds exempt at all levels

A preliminary OS is like the OS except it omits what 2 things:

Interest rate Offering price

Calculate cost basis for an LP

Investment + Share of recourse debt - Cash distributions Passive losses may be used to offset passive income, but not capital gains

What law established the fact that there are 3 types of investment companies?

Investment Company Act of 1940

Collateral trust bonds

Issued by corporations that own securities of other companies as investments. Corp issues bonds secured by a pledge of those securities as collateral

Issued stock vs treasury stock vs outstanding stock

Issued: authorized and distributed Treasury: issued and then subsequently bought back. Can hold indefinitely Outstanding: Issued - Treasury

Difference between NIC and TIC

Issuer uses them to determine which syndicate will be awarded the issue NIC - Net Interest Cost - Combines amount of proceeds the issuer receives (Dollar price) with the total coupon interest it pays. Lowest wins. Determines actual cost of borrowing. TIC - Trust Interest Cost - Same as NIC. Adjusted for time value. Discounts future interest payments to arrive at present value.

Convertible bond advantages to issuer and investor

Issuer: -Marketability -Lower interest rate (Disadvantage to investor) Investor: -Safety of debt -Appreciation potential

LGIPs and ABLEs

LGIPs - Short term investment vehicle for government entities, like a MM fund for government. No SEC registration, no prospectus ABLEs - Tax advantage savings accounts for individuals with disabilities and their families. Income not taxed

Greatest disadvantage of a DPP is ____________________

Lack of liquidity

Moral obligation bonds need what to appropriate funds if revenues are insufficient

Legislative authority

Strategic Asset Allocation

Long term approach Subtract age from 100 to determine stocks in portfolio Rebalances over time to maintain percentages

Debt Ratio

Long term debt / Total capitalization

Lease back revenue bond

Muni issues bonds to finance office construction for itself or its state or community - School and lease to school district

What is an MFP?

Municipal Financial Professional Associated person of a BD who is primarily engaged in muni securities activities other than retail sales

Net Investment Income

NII = D + I - E DIE Dividends + Interest - Expenses Taxable to investor when distributed No advertising and sales expense, management, custodian bank, legal, accounting fees, transfer agent costs

Describe the difference between net and gross revenue pledge

Net: Ops and maintenance covered first, then debt service Gross: Debt service first, then ops and maintenance

Do TBills generate interest? Y/N How are they quoted?

No! Quoted on an annualized yield basis

Market breadth

Number of issues closing up or down on a specific day Advances and declines reflect it Declines higher - Bear Advances higher - Bull

Dollar bonds are quoted ____________________

On a yield basis as a percentage of par (85 1/2) -Dollar bonds are actively traded and the quote is made in dollars - 85 1/2 = $855

What types of bonds uses rental revenues and are backed by full faith and credit of the US gov

PHAs and NHAs Public Housing Authority

Compute the sales charge pecentage

POP - NAV then Sales Charge / POP 10.50 - 10 = .50 .50 / 10.50 = 4.8% If % is known: NAV / 100 - Sales % = POP 10 / 100% - 4.8% = 10.50

Special Assessment Bonds

Payable from the assessment on the benefited property (users of streets, sidewalks sewer, lighting, electricity districts)

What type of annuity is not possible or does not exist

Periodic payment immediate annuity Whole point is to pay into it periodically to then annuitize later

CMO - PAC vs TAC

Planned Amortization Class CMOS - PACs -Targeted maturity dates, retired first and offer protection from prepayment and extension risk -Predictable maturity dates and lower yields 5ish years Targeted Amortization Class - TACs -Transfers prepayment risk only to a companion trance and does not offer protection from extension risk -Higher yields, less predictable maturity dates, elevated risk 10+ years

When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be ________________________. The money set aside is invested in ____________________________, which makes the issue very safe and highly marketable.

Prefunded Gov securities The rating of pre-refunded bonds is AAA, as they are now backed by U.S. government securities

How do you adjust the cost basis of bonds bought at a premium and a discount? STRIPS are also included

Premium - Amortize - Reduce cost basis Discount - Accrete - Increases cost basis

Muni bond funds capital gains are _____________________

Taxable Dividends are tax exempt - Treated as interest

CMOs are _______________________________ at all levels and pay interest ______________

Taxable Monthly

DPPs are not ______________ as an entity, the ownere are _________________

Taxed Taxed

Where is the official notice of sale to solicit bids for bonds usually published?

The bond buyer Bonds rating and underwriter not included because not yet determined

If a customer is buying a penny stock, suitability and a disclosure must be done if ______________________.

The customer is not established (Held account for at least one year with BD or has made at least 3 penny stock purchases of different issuers on different days) If established, can skip suitability but must send disclosure requirements

Odd Lot Theory

Theory that the ODD LOT investor who trades in less than 100-share quantities is usually wrong and that profits can be made by acting contrary to odd-lot trading patterns.

Head and shoulders top and bottom

Top: indicates the beginning of a bearish trend in the stock Bottom: indicates the beginning of a bullish trend or reversal

What is the purpose of a broker's broker?

Trades only with institutional customers Help other muni dealers place unsold portions of new bond issues Act solely as agents, do not disclose identity of customers

TIPS

Treasury Inflation Protected Securities Protects investors against purchasing power risk Issued with a fixed interest rate but principal amount is adjusted semiannually by amount equal to change in CPI - Consumer Price Index Subject to federal tax, not state and local taxes

BABs, describe and 2 types

Used in 2009 to help economy recover- Build America Bonds Bondholder pay tax on interest, but receive tax credits instead Tax Credit BAB - Receive tax credit equal to 35% of interest paid on bond each year Direct Payment BAB - No credit, issuer receives payments from treasury equal to 35% of interest paid by issuer Expired in 2010

Technical analysis

Uses price forecasting and timing Considers: price, price history, volume patterns when charted

Shareholders vote and do not vote on the following:

Vote on: Stock splits/reversals, board members, issuance of equity related securities Do not vote on: Dividend amounts and when they will be declared

Describe difference between western and eastern syndicate accounts

Western - Divided. Responsible only for its own underwriting allocation. Continental divide is in the west. Eastern - Undivided. Each underwriter is allocated a portion of the issue, after the issue has been distributed, each underwriter is allocated additional bonds representing its proportionate share of any unsold bonds. Financial liability may not end after initial allocation.

Book value and BV per share

What common stockholders receive if liquidated. Liquidations value if common stock Net worth - pref stock - intangibles = book value / shares outstanding = BV

The yield shown on a customer confirmation must be the lower of:

YTM or YTC Premium will list YTC Discount will list YTM

Z Tranche

Zero Tranche CMO No payment until all preceding CMO tranches are retired - Most volatile