Series 7 Options and Quicksheet, Series 7 - Master Exam
Corporate Bonds do the following:
1. Interest paid every 6mo. 2. Interest taxed at all levels. 3. Offer Convertible Bonds. 4. Lower coupon than Non-Convertible Bonds. AVOID if looking to max Income.
COMBINED ACCOUNT
1. LMV — Dr + Cr — SMV = equity
Hedge Funds
1. Not regulated. 2. NOT liquid. 3. Sophisticated Investors ONLY.
DEBT Securities
1. Owner is a creditor of issuer. 2. Purchased for Income I.e. Interest. 3. Income received may NOT keep pace with Inflation.
SECURITIES ACT OF 1933
1. Paper Act; Prospectus Act. 2. Regulates new issues; requires registration of securities.
Nonqualified Plans
1. Payroll deduction. 2. n Deferred compensation and 3. Section 457 plans.
SECURITIES AND EXCHANGE ACT OF 1934
1. People and Places Act. 2. Regulates exchanges, BDs, and associated persons; requires registration and 3. Antifraud provision; defined inside information.
Real Estate: Government-Assisted Housing
1. Tax credits for investing in public housing. 2. Cash flow via rental income can be suspect and 3. Appreciation is minimal.
In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC announced a long-term capital gains distribution. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for tax purposes?
1. The capital gain distribution is treated as long term. and 3. The capital gain from redemption is treated as short term.
Sell Stop Below CMV:
1. Triggered at or below stop price. 2. Execute immediately at next available price.
Sell Stop Limit Below CMV:
1. Triggered at or below stop price. 2. n Execute at limit price or better (higher). 3. Execution not guaranteed.
Equipment Leasing
1. Typically airline and railroad equipment or computers and 2. High depreciation potential of equipment due to obsolescence.
Doubled barreled Bonds - 2 pledges
1. User fee. 2. Full faith and credit of the Muni issuer
TECHNICAL ANALYSIS CONCEPTS
1. Uses price and volume history to forecast future price movements and 2. Use of charts to plot movement and establish points of entry or exit. Example: Trend lines, levels of resistance and support, breakouts, consolidation, and head and shoulder patterns (for reversals).
Muni Relevant Factors 1. Fair Value of Bonds. 2. Dollar Amount of Trade.
3. Availability of Securities 4. Execution expense. 5. Value of Services and 6. The Dealer is entitled to a profit.
Muni Advisors do: 1. Makes recommendations. 2. Negotiated I.e. Issuer selects the underwriter
3. Competative - notice of sale in the Dai8ly Bond Buyer.
Components of Muni Spread: 1. Selling Concession = Large Indirect component. 2. Additional take down.
3. Total No Individual take down = Large component. 4. Management Fee = Smallest Individual component. .
25% = Minimum maintenance for long stock position
30% = n Minimum maintenance for short stock position
A customer writes 1 ABC July 35 put at 3 when ABC is trading at 36. Maximum potential loss is $3,200.
A short put writer loses when the market price of the underlying stock declines. The lowest ABC can go is to zero. That means the put buyer can exercise the put and the writer is obligated to purchase worthless stock at the strike price of $35. But, the writer did receive a $3 per share premium so the maximum loss is 35-3 or $32 per share i.e. $3,200
T-bill quoted @ 1.3% (discount from par) Par — discount:
= 100% — 1.3% = 98.7% of PAR or $987
Example: 1 XYZ January 35 call @ 2 Premium
= 2(100 shares) = $200
Stop Orders are used:
1. Stop a loss. 2. Protect a profit. 3. Establish a stock position.
moral obligation bonds
"legislative Appointment"
NOTE on SMAs: Market value INCREASES, add to SMA
MV Decreases it does NOT take SMA away. To LOSE SMA the account holder must use SMA!!
REGULATION SHO
Mandates a locate requirement for securities to be sold short before the short sale.
Par Value:
Assume $1,000 unless specified differently
30 CALENDAR DAYS
IRS wash sale period before and after a trade
40 call, Stock @ 42 = 2 points
In-the-money
MSRB G-20
Max gifting/gratuity = $100.00
13 MONTHS
Length of time covered by a letter of intent
Pooled Investment with clearly defined Investment Objectives
Liquid Investment
POP =
NAV / (100% - SC%) = $18.50 / 92.5% = $20 POP
40 put, Stock @ 44 = 0 points
Out-of-the money
$ SC =
POP - NAV
Total capitalization:
long-term debt + net worth
Example: Original issue discount (OID) bond sold @ $950, maturing in 10 years:
$1,000 par - $950 price = $50 discount. Annual accretion = $50 discount / 10 years = $5 Calculate cost basis for each year: Cost + annual accretion = cost basis each year.
NAV =
$18.50, $SC = $1.50
Example: NAV =
$18.50, POP = $20
0.25% =Maximum 12b-1 fee for no load fund:
1% = 100 basis points for bonds, Rule 144 sale volume limit and Maximum asset-based fee (12b-1 maximum of 0.75% plus FINRA 0.25% servicing fee).
40 put, Stock @ 37 = 3 points
In-the-money
40 call, Stock @ 38 = 0 points
Out-of-the money
Over the Counter OTC
Unlisted and Negotiated Market.
Special Assessment
against benefit of property
PREMIUMS:
· 1 point = $100
Buy Stop Limit Above CMV:
1. Triggered at or above stop price. 2. Execute at limit price or better (lower). 3. Execution not guaranteed
MSRP Rules enforced by:
Banks: FRB, FDIC and OCC aka Office comp troller of currency. Broker/Dealers: SEC and FINRA aka SRO
Example: XYZ stock trading @ $42 pays a $2 annual dividend
$2 / $42 = 4.76% dividend yield
T-note or T-bond quoted @ 94.08 94% of par + 8/32nds =
$940 +1/4 point ($2.50) = $942.50
Perfect negative correlation is
1.0
T-bond
10 years and over, % of par in 32nds and NOT CALLABLE
On a single day, a customer purchases 15 TPL Sep 50 puts at 6 and 15 TPL Sep 50 calls at 1. If the price of TPL is $45 per share and the customer has no other security positions, what is this position called? Straddle
A long straddle is the purchase of a call and a put on the same stock with the same strike price and expiration. A straddle differs from a combination in that the strike prices and/or the expiration dates on a combination are different. A spread is a long put and a short put or a long call and a short call, rather than a put and a call.
Under the FINRA 5% policy, in a proceeds transaction, markup is computed based on: the total of the compensation earned on the buy and sell side applied against the prevailing market price on the buy side.
A proceeds transaction is viewed as one transaction for markup/markdown purposes. To compute, a member must add the compensation earned on the sell side to the compensation earned on the buy side and apply the total to the inside market on the buy side.
Balloon:
A repayment schedule over a period of years having the largest number of bonds maturing at the final maturity date.
A sophisticated client has expressed an interest in becoming more aggressive with their investment strategy. She is willing to invest $25,000 for a minimum of 7 to 10 years and accepts that the investment can and will fluctuate in value over time. Which of the following investments would be the most appropriate?
ABC Capital Appreciation Small-Cap Fund. For someone who is willing to take the risk and invest for the long haul, a small- or mid-cap growth fund would be appropriate.
You have entered an AON order to purchase 1000 shares. What is NOT true: It must be filled immediately.
AON do NOT have the immediacy requirement found in FOK or IOC, but when executed they must be filled entirely. They can be day orders or entered as GTC orders.
Discounts Accrete:
Adjust cost basis up
Equity: Dividend Current Yield:
Annual dividend /current market value
Current Yield
Annual interest / current market value; Example: Bond trading @ $1,200 pays $60 annual interest $60 / $1,200 = 5% current yield
SPECIAL MEMORANDUM ACCOUNT (SMA)
Applicable to long and short accounts
Flow-through is one of the characteristics of a DPP. In general, for tax purposes, losses cannot exceed a limited partner's cost basis. Which of the following would be a way to increase that cost basis?
Assumption of recourse debt. A LLP's cost basis generally consists of the original investment, any calls for additional capital, and assumption of recourse debt - and non-recourse debt in real estate deals.
Market - Buy or Sell:
At the market - Execute immediately at next available price.
40 call, Stock @ 40 = 0 points
At-the-money
Convertible Bonds
Conversion ratio: par / conversion price: Example: Bond convertible @ $40 $1,000 / $40 = 25 share conversion ratio
Muni Money Market Securities
BANS, TRANS, TANS = Less than 1 year maturity
SLOBS: Above the CMP
BLISS: Below the CMP
Limit Order book of the Designated Market Maker:
BRK. B Bid Ask 238.91 238.99 5 X 2 Buy Limit Sell Limit 5 X 2 = There are 500 shares wanted for buy and 200 shares to sell.
100% = Required equity when purchasing new issues, options, and mutual fund shares and Amount of nonrequired cash deposit credited to SMA in margin accounts.
BUSINESS DAY = Settlement date for cash transactions
Industrial development revenue bonds
Backed by corporations with lease back payments made to issuer.
Special tax bonds:
Backed by taxes other than real estate. Examples include alcohol and tobacco taxes.
Upside down Head and Shoulders:
Bearish to Bullish.
Restricted Equity Account:
Below ReT = 50%; 1. Buy stock - deposit 50%. 2. Sell stock 50% retention to pay down debt and 3. Withdrawal securities: deposit into account 50% of securities value.
Example: Yield quote
Bond trading to yield 3.70 means the YTM is 3.7%
Buy at Limit price or CMV:
Buy limit below: Better = Lower
Example: Apple is Trading at I.e. 128 Market Order:
Buy or Sell 1000 shares of apple at Market : Instruction - Execute at Any I.e. best available price.
What is the tax treatment of returns from CMOs? Ordinary income on all levels
CMOs receive no special tax treatment. Any income is ordinary and is taxed on all levels.
When the Municipal bonds are callable at par. Yield to call - YTC must be displayed on which of the following confirmations? 5.5%, 5% YTM basis, maturing 2040
Callable bonds selling at a premium must be priced to call. Whenever a bond's basis - YTM is than its coupon, it is selling at a premium.
CORPORATE DEBT SECURITIES - UNSecured:
Debenture: backed by issuer's full faith and credit
Payable date:
Decided by BOD: Date Dividend is distributed.
Declaration date:
Decided by Board of Directors; Date Dividend is declared
Buy or Sell Limits
Now you want your price or better during the trading session I.e. Day order unless order is GTC.
All of the following are characteristics associated with equity-linked exchange-linked notes except - they can be linked to a single stock or basket of stocks and re therefore, equity securities.
Even though equity-linked nots - ELNS are linked to the performance of a single stock or basket of stocks such as an indexes, they are debt instruments, not equity instruments'.
Blake has just completed all the required documentation to open a margin account with your firm. The first trade entered is the purchase of 40 shares of APPL stock at $70 per share. This trade would require an initial margin deposit of: $2,000.
FINRA rules do not permit lending in a margin account without minimum equity of $2,000. The effect of this is to require the lesser of full payment or $2,000 until the dollar value of the trade exceeds $4,000.
AMERICAN DEPOSITARY RECEIPTS (ADRs)
Facilitate U.S. citizens owning foreign shares, 'Foreign shares held by bank -domestic bank issues receipt, ADR is U.S. security traded in U.S. markets quoted; in U.S. dollars; Dividends declared in foreign currency, but paid in U.S. dollars and ADR holder has currency risk.
Mortgage REITs:
Finance properties, acquisitions and earn interest on the loans.
PREFERRED STOCK
Fixed par value - assume $100 unless stated different; Dividends are fixed stated rate / % of par
For a municipal bond, the opinion rendered by the bond counsel would attest to the legality of the issue.
For all Muni bonds a legal opinion rendered by outside counsel, known as the bond counsel would attest to the legality of the issue.
Regarding institutional communications, FINRA would consider each of the following covered by that definition except: an individual meeting the definition of accredited investor.
For an individual to be considered an institution, there must be $50 million or more in assets. The level to be an accredited investor is significantly less.
The dollar price used to compute the yield to call must be recorded on the confirmation of which of the following callable municipal bonds? 9s 25 quoted at 7.0
For callable premium bonds quoted on a yield basis, the yield computed to the near term in-whole call is used. The confirmation shows the call date and call price as the expected maturity. The only bond shown quoted at a premium is 9s 25 quoted at 7.0.
Net Asset Value (NAV) Per Share
Fund assets - fund liabilities / number of outstanding shares
Long stock, short call: Long 100 shares XYZ @ 30, Short 1 XYZ. Oct. 40 call @ 2:
Maximum loss - CMV - premium received = 30 - 2 28 28(100 shares) = $2,800: Maximum gain - XP - CMV + premium received = 40 - 30 + 2 = 12, 12(100 shares) = $1,200: BE = CMV - premium received = 30 - 2 = 28 28(100 shares) = $2,800.
A new registered representative is a member of your team and asks you about prospectus delivery requirements. It would be correct to state that delivery of a prospectus to a customer is NOT required for the purchase of - a new issue of general obligation bonds.
GO bunds, as municipal securities, require the delivery of an official statement, NOT a prospectus.
Debit call spread: Long 1 XYZ July 30 call @ 3 Short I XYZ July 35 call @ 1 Net debit paid = 2
Maximum loss = net debit paid = 2(100 shares) = $200, Maximum gain = difference in )(Ts — net debit paid (35 — 30) — 2 = 3, 3(100 shares) = $300, BE = lower XP + net debit paid = 30 + 2 = $32
Greater than AIR
Greater than previous month's payment
Callable Corporate Bonds when called:
Has Re-investment Risk
DMM = Demonstrated Market Makers
Have to maintain an orderly and continuous market.
Test question: The muni issuer is looking to issue or sell $100million worth of bonds. I.e. 100mil/1000 par = 100k of bonds.
He does all of the following: 1. Hires a muni Financial advisor, i.e. a Broker Dealer and 2. Hires a Bond counsel to render a legal opinion. There are NO switching within these roles.
When compared to mutual funds, which of the following statements regarding hedge funds is least accurate? Hedge funds tend to be more diversified in order to hedge risk.
Hedge funds portfolios are more concentrated and less diversified.
Your customer has a discretionary trading account with your municipal firm. According to Municipal Securities Rulemaking Board (MSRB) rules, customer authorization is required for a purchase of municipal securities in which there is a control relationship between the issuer and your firm.
If a control relationship exists between the issuer and the member firm, MSRB rules require consent from the client before any transactions, even in a discretionary account. An example of a control relationship might be one where your firm acts as a financial advisor to the municipality.
IRA Tax Favored Individuals
Individual retirement accounts. IRAs, both traditional and Roth
Equity: Outstanding Shares:
Issu&I shares -Treasury shares / Shares repurchased by corp.
GO's Unlimited:
It will get done! Bondholders prefer to buy these types of Munis
Less than AIR
Less than previous month's payment
COMMON WAYS TO ANNUITIZE
Life Only - Monthly payment and Payments end with life of annuitant
VA Annuitize:
Lifetime monthly income, Each payment represents part earnings and part cost basis being returned and Only taxed on earnings portion; cost basis returned tax-free.
Municipal bond quotations between dealers are required to be "a bona fide quote."
Municipal bond quotations between dealers are required to be bona fide, or firm, quotes.
Short Stock, Short put to covered put:
Neutral to slightly bearish: Max Loss: Unlimited; Max gain: CMV - XP + Premium received; breakeven: CMV + Premium received.
Long stock, Short Call, Covered Call:
Neutral-Slightly Bullish: Max Loss: CMV - premium received; Max Gain: XP- CMV +Premium received, Breakeven: CMV - Premium Received.
GO's Limitied:
No more than a specific amount
Five years ago, at the age of 55, your customer invested 76,000 in a nonqualified variable annuity. It now has a value of $95,000, and your customer wishes to make a random withdrawal of $32,000. What is the tax liability that results if the customer is in the 27% tax bracket? $5,130
Random withdrawals from an annuity are treated on a last-in, first-out (LIFO) basis. In this case, the first $19,000 of the $32,000 withdrawal is from earnings and is taxed at the ordinary income rate of 27%.. There is no 10% penalty because the investor is now 60 (above the 59½ limit).
Cash Dividend
Received by shareholders: Market price of stock declines by the amount of the dividend on the ex-dividend date: Taxable when received.
2 BUSINESS DAYS
Regular way settlement for corporate and municipal securities (T+2)
GO Bonds: Backed by full faith/credit of issuing municipality - safe
Rev Bonds: Backed by User fees.
Same as AIR
Same as previous month's payment
Equity Income Funds: Seeks Dividend Income.
Sector Funds: Less diverse and risk more volatile
A customer of a broker-dealer has a portfolio of investments where expected payments from mortgages back the securities. This process is known as: securitization.
Securitization leads to asset-backed securities. The assets could be mortgages or even credit card debt.
Leverage Funds:
Seek a multiple of returns. I.e. 2x, 3x. NOT suitable for conservative investors.
Special situation funds
Seeks to take advantage of Industrial changes. I.e. take over canidates.
Revenue Bonds: No voter approval, has user fees,
Self supporting or Default, Feasibility Study, competitive facilities, Debt coverage ratio.
OPTION EXERCISE SETTLEMENT
Settlement for the transaction resulting when an option contract is exercised will be the same as the underlying security.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS):
Sold by financial institution, Backed by pool of mortgage securities, Associated with refinancing and prepayment risk 2 Securities separated into tranches, Each tranche has different risk characteristics and Investor chooses tranche and signs suitability statement.
Which of the following is not considered a debt security? Prior lien preferred stock
Stock, whether preferred or common, represents equity (ownership) and is never considered a debt security. The most common example of a promissory note on the exam is commercial paper, a money market instrument. Debentures represent an unsecured debt of the issuer. Equipment trust certificates represent debt secured by specific equipment, typically rolling stock.
Preferred Stock Types
Straight noncumulative: Missed dividends are not payable.
TEST QUESTION: Floor brokers execute orders for customers of NYSE member firms.
TEST QUESTION: Floor broker makes DECISION about time and price I.e. execution.
Capital Gains
Taxable—compare cost basis to proceeds.
The MSRB has no jurisdiction or authority to regulate municipal bond issuers.
The MSRB has no jurisdiction over municipal issuers. It sets standards for quote and registration requirements for dealers and registered representatives.
Your client, age 75 and not retired from his job of 45years, wants to continue contributing to a retirement plan as long as possible. What plans can he do? IRA, 401k, SEP IRA and Roth IRA
The SECURE Act removed the age limitation on all Retirement Investments if one is employed.
Under the Secure Act, an individual who works part time for a corporation offering a 401(k) plan is eligible to participate by: being at least 21 years of age and working at least 500 hours per year for each of the three previous years.
The Secure Act extends coverage to part-time employees. They are defined as having worked at least 500 hours per year for each of the three previous years. In addition, the individual must be at least 21 years of age.
The volatility market index - VIX is best characterized as: a "fear" index, measuring the expectations of market volatility.
The VIX index is a measure of investor's expectations regarding market volatility. This index is referred to as the "fear" index and VIX options are traded on the Chicago Board Options Exchange. - CBOE
TIME VALUE
The amount of an options premium that exceeds intrinsic value, Time value = premium — intrinsic value: Example: 1 XYZ July 30 call @ 3, XYZ stock trading @31, Intrinsic value = in-the-money amount = 31 — 30 = 1 Time value = premium — intrinsic value = 3 — 1 = 2 points time value
A registered representative intends to send the same email regarding an investment strategy and product this week to her 10 retail clients - what is the FINRA communications rule?
The email can reviewed by a principal before or after use in accordance with the firm's written procedures regarding correspondence and need not be filed with FINRA.
Your client has sold securities in a long margin account. All of the following are affected by the sale of these securities in the account except equity.
The equity does not change when a sale takes place in a margin account. Equity will be affected only if the customer elects to withdraw some or all of the proceeds. The SMA will go up; debit balance and market value will go down.
When a corporation issues a debt security, the terms of the loan are expressed in a document known as the bond's deed of trust. The deed of trust is sometimes referred to as: the indenture.
The indenture, sometimes also referred to as the deed of trust, states the issuer's obligation to pay back a specific amount of money on a specific date. A debenture is a debt security containing an indenture. Bond resolution is a term used for municipal bonds, not corporate debt.
An investor sells 1000 shares of DEF short at 50 and meets the initial margin requirement. If DEF falls to 45, what is the equity in the account? 30,000.00
The initial margin requirement for a $50,000.00 short sale is $25,000.00 When the stock drops $5,000, equity increases by that amount.
An investor writes 1 XYZ 180 call at 5.30. If the investor makes a closing purchase at the call's intrinsic value when the stock is at 182, he realizes a gain of: $330.
The investor received a premium of $530. The position was closed out at the intrinsic value = $200. Therefore, the gain is the difference of $330.
Sell Limits
Their price or MORE and SELL Limits are placed ABOVE the CMV. Price is more important than execution.
A customer asks you for a quick, accurate definition of 12b-1 fees. A good reply would be that they are often referred to as asset-based distribution fees and are used to cover the costs of marketing and distributing the fund shares to investors. They can be used to compensate registered representatives with commissions for servicing an account (trailers), but are not sales charges.
They can be used to compensate registered representatives with commissions for servicing an account (trailers), but are not sales charges.12b-1 fees are not sales charges. Often referred to as asset-based distribution fees, they are assessed to be used for covering any marketing and distribution costs for the fund. They can also be used to pay commissions to registered representatives for servicing an account in which case the commissions are known as trailers.
A client is interested in purchasing a newly issued Treasury security that will provide him with a virtually assured value in 7 years when the principal will be needed. You should recommend: a Treasury note.
Treasury notes have intermediate maturities between 2 and 10 years. New notes are issued with maturities of 2, 3, 5, 7 and 10 years.
One respect in which the capitalization of a closed-end investment company differs from an open-end investment company is that the closed-end company? can issue senior securities.
Under the Investment Company Act of 1940, only the closed-end company has authorization to issue senior securities I.e. preferred stock and bonds.
Overlapping Debt aka Coterminous = Living together
When 2 or more taxing agencies share some of the same geographic boundaries and are able to issue Debt separately
DPPs offer a number of benefits for those in high income tax brackets but there can be tax consequences that are not advantageous - Depreciation recapture.
When DDP unit is sold, depreciation recapture may apply if the partnership has been depreciating its fixed assets using accelerated depreciation.
A member firm's client has issued instructions for the assets held in an account at another member to be transferred to this account. The member firm has received the proper ACATS validation from the carrying firm. Therefore, it is expected that the transfer will be completed within: two additional business days.
When using the ACATS system, validation takes place in one business day and the transfer in three business days. Please note the question states that validation has been received. That means the transfer will take place in two more business days I.e. making it a total of three business days.
Closing Sale
Which of following would be used to ELIMINATE or REDUCE a long position.
All of the following are exempt securities except: municipal bond mutual funds.
While municipal bonds are an exempt security, bond mutual funds are not; they are investment company securities, which must be registered with the SEC prior to public sale.
An investor purchases an original issue discount (OID) municipal bond in the primary market at 60. The bond has a maturity of 20 years. One year before maturity, the investor sells the bond for 95. The tax consequences of this transaction would be: a capital loss of $30
With 20 years to maturity and a $400 original issue discount, the annual accretion is $20. One year before maturity, the accreted value is $980. That means a sale at $950 results in a capital loss of $30. In a municipal bond purchased in the primary market (new issue) with an original issue discount, the annual accretion is considered tax-free income. That is different from the treatment afforded taxable bonds.
An investor owns 100 shares of XYZ at $5 per share. After a 1:2 reverse split, the investor will own - fewer shares that are each individually worth more than before the split.
With a reverse split, the number of shares goes down while the price of the shares goes up.
NON -DEBT OPTIONS:
Yield-based strike price and Premium multiplier = 100
Stop Orders aka Stop Loss Orders
aka Protect the profit.
Market NOT held:
an order given by the customer to the floor broker.
A Share:
are appropriate for Large Investments and Long time Horizons.
Territorial bonds
are exempt at all levels e.g., Puerto Rico, U.S. Virgin Islands.
Net worth:
assets — liabilities
Adding annual accretion for 10 years
brings cost basis to $1,000 (par) No gain if held to maturity
·An option is in-the-money
by the amount of its intrinsic value
Parity price of bond:
conversion ratio x common stock price; Example: Bond has 25 share conversion ratio Common stock trading @ $44; 25 shares x $44 = $1,100 bond parity price.
Current ratio:
current assets / current liabilities
Working capital:
current assets — current liabilities
Parity price of common:
market price of bond / conversion ratio; Example: Bond trading @ $1,100 Conversion ratio = 25 shares; $1,100 / 25 shares = $44 parity price of common.
One way in which real estate investment trusts (REITs) differ from direct participation programs (DPPs) is that a REIT
must distribute at least 90% of its taxable income to shareholders annually in the form of dividends while all of a DPP's income flows through to the investors.
Subordinated debenture:
paid last of all debt if issuer is in default
Buy Limits
there price or LESS and Byu Limits are placed BELOW the CMV
Regular way = government:
trade date + 1 business day (T+1)
Regular way = corporate and municipal:
trade date + 2 business days (T+2).
Receipt or delivery vs. payment RVP or DVP:
up to 35 calendar days
Spreads: Speculative Strategy
with limited Risk I.e. Loss and gain
EQUITY OPTION CONTRACT
· I contract = 100 shares
SUITABILITY - Options contracts are considered speculative Less suitable for those with:
-lower or fixed incomes, -lower net worth, - less risk tolerance and less investment experience.
XYZ 3.5% preferred
.035 x $100 par value = $3.50 annual dividend
Bond Yield quote:
1 basis point = .01 of yield
Bond Price quote:
1 bond point = 1% of par = $10
Individuals meeting which of the following standards meet the definition of an accredited investor? Net worth of at least 1 million excluding net equity in a primary residence.
1 million net worth- not including primary residence or have had annual earnings of at least 200k for past 2 years.
CMOs descending order High to low Prepay risk
1) Zero-Tranch - Highest. 2. TAC and 3. PAC
REGULATION T
1. 50% initial margin and 2. Set by the Federal Reserve.
Discretionary Order: The 3 "As"
1. Action I.e. Buy or sell. 2. Asset - Which Security and 3. Amount - How many shares. Remember: Time and Price are Execution NOT part of the 3 "As".
TIPS: Principal and Interest Keeps Pace with Inflation.
1. Agency Issuers: GNMA, FHLMC and FNMA.
Oil and Gas Drilling: Balanced
1. Both exploratory and developmental drilling
Muni Bond suitability
1. Interest - Reciprocity or Reciprocity immunity. 2. Federal Tax Exempt. 3. Territorial Bonds = exempt at both Federal and state levels. I.e. Puerto Rico, US Virgin Islands
SPECIAL MEMORANDUM ACCOUNT (SMA)
1. Line of credit for future purchases or loans. 2. Buying power = 2 x SMA. 3. Loan value = 1 x SMA. 4. Generated by the increase in market value, nonrequired deposit, sale of stock (50% to SMA), dividends, or interest and 5. Decreased by the purchase of securities or cash withdrawal.
FINRA RULE 2330
1. Applies to recommended purchases and 1035 exchanges of deferred variable annuities (NOT immediate) and initial subaccount allocations. 2. Disclosure of features, costs, and surrender charges and 3. Must note if a 1035 exchange of a variable annuity has occurred within the last 36 months.
ORDER TICKETS
1. Approved by a principal promptly after execution. 2. Changes to tickets must be approved by a principal.
Money Market Securities
1. Mature less than 1year. 2. Purchased for Safety and Principal.
Index funds
1. More tax efficient. 2. Not managed. 3. Low tax expenses. "Efficient Market Hypothesis!!
Munis: 1. Interest Tax Exempt at Federal Level
2. Appropriate for Investors in a high marginal Tax Bracket - seeking income and 3. NOT suitable for Retirement Accounts
TRUST INDENTURE ACT OF 1939
1. Applicable to corporate bond offerings of greater than $50 million in 12 months. 2. Establishes a contract between the issuer and the trustee for the bondholder's benefit.
Debit Call Spread:
Attitude: Bullish, Max Loss: Net debit Difference paid; Max Gain: Lower in XPs - net debit paid: Breakeven: XP + net debit paid
Position: Long Call
Attitude: Bullish, Max Loss: premium paid, Max Gain: unlimited: Breakeven: XP + Premium
Credit Put Spread:
Attitude: Bullish, Maxx Loss: Difference in XPs - net Credit; Max Gain: Net Credit higher received: Breakeven: XP - Net Credit received.
Short-call Straddle:
Attitude: DO NOT expect volatility: Max Loss: Unlimited: Max Gain: Total Premiums received: Breakeven: 2 BEs = XP + and - total premiums.
Long-call Straddle:
Attitude: Expect volatility: Max. Loss: Total Premiums Paid; Max. Gain: Unlimited; Breakeven: 2 BEs = XP+ and - total premiums.
Short Stock, Long Call:
Bearish: Max Loss: XP - CMV + Premium Paid; Max Gain: CMP + Premium Paid; Breakeven: CMV - Premium paid.
On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purpose: $75
Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule: investors who sell securities at a loss and repurchase them, including their equivalents, 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 ÷ 40) of KLP common stock. Hence, the investor has bought back the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed.
Which of the following municipal issues has a maturity of 20 years or longer but is often found in the portfolio of money market mutual funds? VRDOs
Because the investor can demand the issuer of a variable rate demand obligation (VRDO) repurchase the bonds at par value, they are sometimes considered a money market instrument.
A corporation has $20 million net income after taxes, 7 million common shares outstanding, and $15 million of 6% preferred stock ($25 par). What is the corporation's earnings per share (EPS)? $2.73
Begin by calculating how much of the net income is available for common stockholders I.e.net income after taxes minus preferred dividends results in the earnings available for common stockholders. The preferred stockholders received $900,000 in dividends I.e. $15 million par × 6% = $900,000, or 600,000 shares × $1.50 per share = $900,000). After subtracting $900,000 from the net income of $20 million, this leaves $19.1 million I.e. earnings available for common stockholders. Compute EPS I.e. earnings available for common ÷ number of common shares outstanding = $19.1 million ÷ 7 million shares = $2.73 per share EPS.
One of your clients interested in a hedge fund notes that the fund invests in blank-check companies. He seems uncertain what blank-check companies are, so you explain that they are sometimes known as special purpose acquisition companies (SPACS) and are unique in that they have no business operations but instead raise money for the sole purpose of seeking out a business to engage in.
Blank-check companies, sometimes known as special purpose acquisition companies (SPACS), are unique in that they have no business operations. Instead, they raise money for the sole purpose of seeking out a business to engage in. Once businesses are targeted, proposals will be presented to shareholders who can vote to approve or not. While a blank-check company doesn't indicate what industry or sectors might be targeted, blind-pool companies generally do.
Public and New Housing Authority bonds - Section 8:
Bonds provide financing for low-and moderate-income housing and are backed by the full faith and credit of the U.S. government.
Free Ride
Bought and sold without paying for the buy.
DPPs FINRA Rule 2310
Brokers compensation cannot exceed 10%. DO NOT confuse 15% max with organization and expenses - NO broker is involved with these.
Head and shoulder
Bullish to Bearish
Long stock, Long put:
Bullish: Max Loss: CMV XP + Premium paid, Max Gain: Unlimited: Breakeven: CMV + Premium paid.
Example: Apple is Trading at I.e. 128 Buy Limit:
Buy 1000 Shares of Apple at $125 a share. Instruction: Execute at $125.00 or LESS/Lower. Or another Alternative to set the stock at less CMP is to sell a PUT.
Put
Buy = Bear and Write = Bull
Call
Buy = Bull and Write = Bear
Options: 1. Purchase for Leverage 2. Sold for Income. 3. Speculative.
Buy Long a call = Bullish. Risk= Maximum loss is Premium.
Which of the following does the capital asset pricing model I.e. CAPM assume? Investors are averse to risk and will choose the investment with the highest return for any given level of risk
CAPM takes into account systematic risk, the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk and, if taking on risk, expect to be rewarded for it. Therefore, the pricing of an asset must reflect that.
Price-to-earnings (P/E) ratio:
CMV / EPS
TAX RULES FOR OPTIONS - EXPIRATION
Capital gain or loss when position expires: Example: Long 1 XYZ June 35 call @ 4 Option expires, buyer loses premium, 4(100 shares) = $400 capital loss; Example: Short 1 XYZ June 35 call @ 4 Option expires, seller (writer) keeps premium, 4(100 shares) = $400 capital gain
TAX RULES FOR OPTIONS - CLOSING TRANSACTION
Capital gain or loss when position is closed: Example: Open position—buy 1 July 40 call @ 4 Close position—sell 1 July 40 call @ 5: = 1 point gain, = $100 capital gain
FOREIGN CURRENCY OPTIONS
Cash settled, no delivery of foreign currency; Strike price in cents (except yen, in 1/100th of a cent), Contract size = 10,000 units of currency BUT except yen = 1,000,000 units of currency
Equity: Dividends payable as:
Cash, stock, or property
Your client has sold 300 shares of stock. What is NOT considered good delivery: four 75 - share certificates.
Certificates of 100 shares or larger are considered good delivery as long as they can be evenly divided by 100. Denominations smaller than 100 shares must be stackable into groups of 100.
Recommending Unsuitable trades NOT allowed
Churning = Excessive In size and Frequency of trading.
One concern that FINRA has with fee-based accounts is that they might lead to: reverse churning.
Churning is the practice of over-trading an account, resulting in higher commissions. Reverse churning occurs when a client in a fee-based account pays more in fees than would be paid in a commission-based account. This is generally the case when the customer trades infrequently.
A new client, age 26, has a $15,000 inheritance to invest and notes that it is for long-term savings. He tells you that it won't be needed for many years and wants to simply see it grow over time. Given his age and the small amount to invest, your recommend a balanced fund, whut which share class would be most suitable?
Class B Shares. These shares have a back-end load - sales charge known as a contingent deferred sales charge - CDSC only payable when the shares are redeemed and those sales charges decline typically over the 1st six to eight years.
INVESTMENT COMPANY ACT OF 1940
Classifies and regulates the three types of ICs
DNR: Do not reduce for Cash Dividend
Client has to Instruct/tell us to DNR.
A pooled investment with a share price that can be significantly different from its net asset value (NAV) per share is most likely: a closed-end fund.
Closed-end funds' share prices can differ significantly from their NAVs. Open-end fund shares are purchased and redeemed based on their NAVs. Market forces keep exchange-traded fund share prices close to their NAVs because arbitrageurs can profit by trading when there are differences.
MM Funds:
Conservative and safe. Life cycle funds: used for target date Investments. I.e. Retirement.
ASSUMED INTEREST RATE (AIR)
Conservative estimate of return on investments in the separate account and Each period, the actual earnings of the separate account are compared with AIR.
An investor is looking for a fixed-income investment that can provide a reasonable income while offering potential inflation protection. Which of the following would be the best recommendation to meet this investor's objective? Convertible bonds
Convertible bonds offer the best solution for this client. The bond carries a fixed interest rate, meeting the goal of reasonable income. The ability to convert the bond into common stock offers the potential to keep pace with inflation.
20 CALENDAR DAYS
Cooling off period: minimum time between filing date and registration
Tax-Free Equivalent Yield
Corporate yield x (100% - investor's tax bracket): Example: Corporate bond yielding 7.2%, investor in 15% tax bracket, 7.2% x (100% - 15%) = 6.12% tax-free equivalent yield.
90 CALENDAR DAYS
Maximum time for a letter of intent to be backdated and Length of time cash account can be frozen for nonpayment.
60 CALENDAR DAYS
Maximum time to roll over holdings from one qualified plan to another without penalty
Cumulative:
Missed dividend - dividends in arrears and current preferred dividend must be paid before common.
Equity: Annual Dividends:
Most recent quarterly = dividend x 4 quarters
NON -INDEX OPTIONS:
Multiplier for strike prices and premium = 100 and Cash settled, no delivery of underlying
An investor purchases a municipal general obligation bond on Wednesday, April 22, 2020. The bond pays interest on a J/J 1 basis. How many days of accrued interest would be included on the trade confirmation? 113
Municipal bond accrued interest is computed on a 30/360 basis. That is, every month has 30 days. Settlement for municipal securities is T+2. That means a trade on Wednesday the 22nd settles on Friday the 24th. The simplest way to do this is to subtract the last interest payment (1/1) from the settlement date (4/24). Doing that gives us 3/23. Three months is 90 days plus the additional 23. That totals 113. Alternatively, there are 30 days in January, February, and March. That is 90 days. Accrued interest is paid up to, but not including the settlement date, so that is one day less than 24 days. Once again, the total is 113 days.
An investor who is considering the purchase of Mount Laurel, New Jersey, general obligation municipal bonds for an investment for his portfolio should know that the bonds are not subject to registration with the Securities and Exchange Commission (SEC), but are required to make full disclosure by delivering an official statement.
Municipal securities are exempt on both the state and federal level, meaning that they are not subject to registration with the SEC or any state, but do have a full disclosure document available to investors known as an official statement.
Tax Equivalent Yield
Municipal yield / (100% - investor's tax bracket): Example: Municipal bond yielding 3.5%, investor in 15% tax bracket, 3.5% / (100% - 15%) = 4.12% taxable equivalent yield.
Munis are Exempt from Registration Requirements of 1933 - the Prospectus act
Munis give an Official Statement aka OS to clients
Public Offering Price (POP) Per Share
NAV + $ sales charge (SC) or NAV/100% - SC%
An investor in an oil and gas limited partnership program is subject to the economic consequences of all of the following except: nonrecourse loans.
Nonrecourse loans only have economic consequences for investors in real estate programs.
For each violation of FINRA or MSRB rules, FINRA may impose which of the following sanctions? Fines Censure Restitution Expulsion
Fines, Censure, Expulsion - NOT Restitution
Munis: Eastern or UNdivided syndicate members
Not only are you responsible to sell your percentage BUT if others syndicates within the group DONT sell theirs YOU HAVE to sell theirs as well.
Anticipation notes
Short-term borrowing in advance of receiving funds from long-term debt. Examples include tax, (TANS), revenue, (RANs), and bond (BANs) anticipation notes.
B Shares.
Small Investments and Long Time Horizons
A source of funds used to service municipal revenue special tax bond issues might be - gasoline taxes.
Special tax bonds are bonds secured by one or more designated taxes other than ad valorem - property taxes. While gasoline represents a special source of taxation, income does not.
In examining the balance sheet of a corporation, you would expect to be able to determine the net worth of the firm on the date of the balance sheet.
The balance sheet provides a snapshot of the financial condition of the firm on that date. It does not provide information on the flow of expenses, revenues, and cash during the reporting period.
You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? 401(k) balance Credit card balance Monthly income Electric bill? 401k and Credit Card Balance
The balance sheet reflects a person's net worth by comparing assets and liabilities. A 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills, such as the electric bill, are found on the income statement.
A customer buys 1,000 shares of XYZ at $47. Several months later, the stock is at $56. The customer, concerned about a possible pullback and wanting to best protect the unrealized gain, should buy 10 XYZ 55 puts.
The best way to protect a long position is to buy a put. Writing a call will only protect the customer to the extent of the premium received. Because the customer owns 1,000 shares, it will take 10 puts to hedge.
When it comes to issuing a debt security, which of the following features will generally enable the issuing corporation to borrow at the lowest interest rate? Attaching warrants
There are two ways for an issuer to "sweeten" a debt offering. One is adding the convertible feature. The other, with a similar effect, is attaching warrants. Because the warrant feature offers potential growth through the exercise of the exercise option, the interest rate on these securities is generally lower than other debt issues of the same corporation.
In a scheduled premium variable life insurance policy, which of the following is contractually guaranteed? The right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months
There is a contract exchange privilege during the first 24 months, allowing the conversion of the variable policy to a comparable form of permanent insurance. The ability to borrow at least 75% of the cash value applies after the third year of coverage. There is a guaranteed minimum death benefit, not cash value. Scheduled premium means fixed premiums. It is universal life that has flexible premiums.
Modern portfolio theory (MPT)
diversifies a portfolio using negative correlation of securities to all but eliminate unsystematic risk
Earnings per share (EPS):
earnings available to common / total outstanding common shares
Example: Equity securities settle T + 2;
so, when an equity option is exercised, the resulting stock transaction will settle as the underlying equity security settles = T + 2
Example: Index, debt, and currency transactions settle T + 1;
so, when any of these option contracts are exercised, the resulting transaction will settle as the underlying settle = T + 1
XP
strike/exercise price, CMV = curr market value of stock
A customer wants to know who guarantees that the contra party to a listed yield-based option on T-bonds she owns will deliver the cash if she exercises the option contract. Her registered representative should answer
the Options Clearing Corporation (OCC) because it guarantees all listed option contracts.
If you do not have a Discretionary Order I.e. The 3 "As"
the clients needs to have a signed Discretionary Auth on file.
40 put, Stock @ 40 = 0 points
At-the-money
XYZ Corp. has issued $30 million of debentures. Each bond issued has a warrant attached enabling the holder to buy three shares of XYZ common at $30 per share. If all of the warrants are exercised, XYZ Corp. will receive $2.7 million.
$30 million of bonds with a par of $1000 is 30,000 bonds. That means a total of 90,000 shares can be issued. If all are purchased at $30 per share, the company will receive $2.7 million.
Special assessment bonds
Only assess property owners who benefit from the bond issue.
Foreign Stock funds
Used for diversification. Has political risk.
Close End funds - 2nd market
1. Managed. 2. Trade on Exchanges or OTC - Liquid. 3. Priced via supply and demand.
LONG ACCOUNT
1. Long market value — debit = equity and 2. LMV — Dr = equity.
Open end funds I.e. Mutual Funds - Primary Market
1. Managed. 2. Growth funds - seeking capital appreciation.
Fees can have a major impact on long-term performance of an investment. Your client interested in purchasing a periodic payment deferred annuity would not be concerned about 12b-1 fees.
12b-1 fees only apply to open-end investment companies while all of the others are typical fees or charges levied against variable annuities.
T-note
2-10 years, % of par in 32nds and NOT CALLABE
Your customer, a small-business owner, likes investments that are short term, relatively safe from credit risk, and liquid. He's heard that higher rates of return can be realized from auction rate securities than the rates he is currently getting on the Treasury bills in his portfolio. He asks you to explain them to him. Which of the following would you note as being reasons why they are not suitable for him? 1. Auction rate securities are intended as long-term investments. 2. Interest or dividend rates are reset at established intervals based on a Dutch auction. 3. If the auction fails, holders of ARSs may not have immediate access to their funds. 4. The interest or dividend rate is set as the lowest rate to match supply and demand at the time of the auction.
1. Auction rate securities are intended as long-term investments and 3. If the auction fails, holders of ARSs may not have immediate access to their funds.
Rights:
1. Available to existing shareholders. 2. Short term 30-45 days 3. When issued - exercise price is below CMV - allows purchase at a discount. 4. NOT marginable
Money Market Securities are:
1. Banker Acceptances. 2. Commercial Paper and 3. CDs
Defined EMPLOYER Benefit Plans
1. Benefits employees CLOSER to retirement. EMPLOYER assumes Investment risk.
Defined EMPLOEE Contribution Plans
1. Benefits employees FURTHER from retirement I.e. younger people. 2. Employee Assumes Investment Risk.
Bills, Notes and Bonds
1. Bills issued at Discount. 2. Notes and Bonds Pay interest semi-annually.
DIRECT PARTICIPATION PROGRAMS (DPPs)
1. Business structure that reports to the IRS, but is not taxed as a business entity. 2.All tax consequences flow through to partners. 3. Net operating income is passive income to investors. 4. Net operating loss is passive loss to investors. 5. Interests in partnerships considered illiquid (not easily transferable) and 6. Partnership dissolves on predetermined date or event; assets liquidated, and proceeds distributed to partners.
Oil and Gas Income
1. Buying existing producing wells. 2. Immediate production and income. 3. Safest of all oil and gas partnerships.
Margin Required Documents:
1. Credit Agreement. 2. Hypothecation Agreement and 3. Loan Consent Form I.e. Optional
SHORT ACCOUNT
1. Credit — short market value = equity and 2. Cr — SMV = equity
1934 Act RegT - FRB
1. Cust must initially be at risk for 50%. 2 Cust gets 2 additional days to settle I.e. T+4. 3. Ineligible or Non margin Securities: a. Options, b. New issues = 30 days from effective date.
MSRB other Disclosures:
1. Dated date - the date the bonds start to accrue Interest for the next time around. 2. Called or Preferred. 3. Ex-legal = trades without a legal opinion
Oil and Gas Drilling: Developmental
1. Drilling in areas where resource has been previously found
Oil and Gas Drilling: Exploratory
1. Drilling in new areas and 2. High risk and reward
REGULATION S-P
1. Enacted by SEC to protect the privacy of customer information. 2. Requires initial and annual privacy notice describing privacy policies and simple opt-out method.
Maintenance
1. Equity below call Min maintenance. 2. Deposit cash = 1 X call amount and 3. Deposit Securities = 2 X Call Amount.
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA)
1. Established to prevent abuse or misuse of pension funds. 2 Applicable to private-sector retirement plans and 3. Mandates guidelines for plan: participation, funding, vesting, communication, nondiscrimination, and beneficiaries.
All or None (AON)
1. Execute all if available. 2. If entire order can not be executed, hold order as good til canceled (GTC).
Immediate or Cancel (IOC)
1. Execute any portion available immediately. 2. Cancel any balance remaining.
Market on Close
1. Execute at or near the close of the day. 2. Not guaranteed exact closing price.
Market at Open
1. Execute at or near the open of the day. 2. Not guaranteed exact opening price.
Sell limit above CMV:
1. Execution NOT guaranteed. 2. Sell limit price or better i.e. higher.
Buy/Stop above CMV:
1. Execution not guaranteed. 2. Triggered at or above stop price and 3. Execute immediately at next available price.
MUNICIPAL TAXATION - Interest:
1. Federal Level - Exempt. 2. State level—in-state investor State - Exempt. 3. level—out-of-state investor - Taxable. 4. Local level—local municipality investor - Exempt and 5. Local level—out-of-municipality investor - Taxable.
DPPs: All Profits, Losses. Tax Deductions and Tax Credits flow thru to owners
1. Generates passive Income I.e. PIGs or Passive Losses I.e PALs. 2. Passive Losses I.e. PALs can offset Passive Income I.e. PIGs. 3. More suitable for sophisticated Investors. RISK: NOT LIQUID.
MARKUP POLICY
1. Guide for listed and unlisted transaction charges. 2. Applies to markups, markdowns, and commissions.
MISC Investment Company points.
1. High portfolio turnover results that results in Higher costs and Potential Capital gain Distributions.
Real Estate: Existing Properties
1. Immediate cash flow. 2. Tends to be safer than new construction because cash flow is known and 3. Depreciation deductions allowed.
Strategies: Bond Laddering I.e. Lowers Interest Rate Risk
1. Increases Liquidity. 2. NOT suitable for Investors Seeking Growth.
Account long 100 shares ABC at $20
1. Long 200 shares DEF at $50, 2. Short 100 shares LMN at $26. 3. LMV = $20(100) + $50(200) = $2,000 + $10,000 = $12,000. 3. Dr = 50% LMV = 50%($12,000) = $6,000. 4. SMV = $26(100) = $2,600. 5. Cr = SMV + 50% SMV = $2,600 + $1,300 = $3,900. 6. Combined equity = LMV — Dr + Cr — SMV = $12,000 — $6,000 + $3,900 — $2,600 = $7,300.
CORPORATE DEBT SECURITIES - Secured
1. Mortgage bond: backed by real estate 2. Collateral trust bond: backed by other securities the issuer owns e.g., government debt and 3. Equipment trust certificate: backed by equipment used in the issuer's business, most commonly rolling stock.
TIPs General Characteristics:
1. Most agencies Issue. 2. Taxed at all levels. Very safe 2nd to US Debt/Treasuries in terms of Default Risk.
Real Estate: New Construction
1. N9 immediate cash flow, 2. Rental income potential can only be estimated, 3. Tends to appreciate faster than older properties and 4. Depreciation deductions allowed.
529 Plans:
1. NO income Limits. 2. No age Limits. 3. Max contributions set by state.
Collateralized Mortgage Obligations I.e. CMOS
1. NOT suitable for small or Unsophisticated Investors. 2. CMO's yield and maturity are established based on Historical and Projections of Pre-payments from "The Public Securities Association aka PSA.
If caught Free Riding Account is frozen for 90 days
1. No Credit Privileges' and 2. Will have to pay in full for all trades during this 90 day freeze.
Zero Coupon Bonds
1. No Interest Paid until Maturity. 2. Appropriate for a Target Investment I.e. College Education. 3. Greatest sensitivity to Interest rate movement I.e. Interest Rate Risk.
Warrants:
1. Offered with other securities as "sweeteners," sold as units e.g., bond with warrant 2. Long Term - 2 - 5 yrs or longer. 3. When issued exercise price is above CMV - anticipated value with time. 4. Marginable
In discussing a direct participation program with your customer, she notes investment characteristics that are important to her and some that are not. For a DPP to be considered suitable for the customer, rank the following items in order of those that should be most important to those that should be least important?
1. Potential for Economic Gain. 2. Tax Write Offs, 3. Liquidity and Marketability. and 4. SEC Approval
CoverDell:
1. Pre and Post 2nd education. 2. Yes Income limits for contributions. 3. Max 2k per year. 4. Age Limit contributions - 18 Distributions by age 30.
REGULATION D
1. Private placement exempt transaction. 2. Up to 35 nonaccredited investors for 506(b); all accredited investors for 506(c). 3. Accredited investors must meet minimum net worth or annual income criteria.
Equity Securities: Ownership positions aka Common stock
1. Purchased for growth or capital appreciation. I.e. best hedge for Inflation. Common stock of companies with earnings. 2. Purchased for Income. I.e. Dividends I.e. Preferred stocks and common stocks of Utilities aka Defensive stocks.
US Government Debt Securities aka Treasury Securities.
1. Safest Debt when it comes to default risk. 2. Interest is Tax Exempt at State and Local Levels and 3. Purchased for Income and Safety
LIQUIDATION PRIORITY
1. Secured bonds 2. Debentures and general creditors 3. Subordinated debentures 4.Preferred stock and 5. Common stock.
From first to last, which of the following sequences reflects the priority of payments made when a limited partnership is liquidated?
1. Secured creditors, 2.General creditors, 3.Limited partners and 4. General Partners
Inverse aka reverse funds
1. Seek to return the opposite of the markets and can be leveraged. 2. NOT suitable for conservative Investors.
Qualified Plans - Employer Sponsored
1. Simplified employee pension plans (SEPs). 2. Tax-sheltered annuities (TSAs), both 403(b) and 501(c)(3). 3. Savings incentive match plans for employees (SIMPLEs) and 4. 401(k)s, both traditional and Roth.
REGULATION A+
1. Small and medium offerings exempt transaction allowing issuers to raise up to $75 million in a 12-month period without full registration. Two tiers: Tier 1 allows offerings up to $20 million and Tier 2 allows offerings up to $75 million.
High Yield Bonds:
1. Speculative. 2. High Default Risk. NOT SUITABLE for Investors Seeking Income.
Income Adjustment Bonds
1. Speculative. 2. NOT suitable for Investors seeking Income.
Balanced funds:
1. Stocks for growth. 2. Bonds for income.
NO Call Risk
1. Zero Coupon Bonds and 2. T-note and or T-Bonds
Hedge Positions: Strategy to reduce Risk when buying or selling stock short. "Generates additional Income."
1. combining a stock position with an options contract.. 2. Always let the stock position control. 2. Always hedge with opposite market attitude. 3. Best protection - purchase contract. 4. Limited protection plus income sell contract.
COMMUNICATIONS WITH THE PUBLIC FINRA defines three categories of communications (written or electronic):
1.Retail: Available to more than 25 retail investors within any 30 calendar-day period. 2.Correspondence: Available to 25 or fewer retail investors within any 30 calendar-day period. 3. Institutional: Available only to institutional investors. Examples: other member firms, banks, insurance companies, registered investment companies, any entity including individuals, with $50 million or more in total assets.
8.5% = Maximum sales charge for open-end (mutual fund) company
10% = Penalty for premature IRA distribution, Affiliate or control person if owning 10% or more of outstanding shares, Maximum sales charge on public limited partnerships and Of 75% of a diversified management company's assets, no single holding more than 10% of the voting control of a single company (no restrictions on the other 25%).
Uneven split:
100 shares @ $30 = $3,000 After 3-for-2 uneven split, position becomes: 150 shares @ $20 = $3,000; Note: $3,000 / 150 shares = $20 adjusted stock price
Even split
100 shares @ $30 = $3,000: After 2-for-1 even split, position becomes: 200 shares @ $15 = $3,000; Note: $3,000 / 200 shares = $15 adjusted stock price.
Position: Short Call
Attitude: Bearish, Max Loss: Unlimited, Max Gain: Premium received: Breakeven: XP + Premium
Position: Short Put
Attitude: Bullish, Max Loss: Breakeven to Zero; Max Gain: Premium received: Breakeven: XP - Premium
Muni Confirms must have listed: 1. Name, address, telephone number of Broker Dealer/Bank.
2. Customers Name. 3. Buy or Sell 4. Detailed Descript of Security. 5. CUSIP Number and 6. Trade Date and Settlement date listed. IF requested time can be listed as well.
Muni Suitability: Knowledge of customer
2. Financial Backround. 3. Tax Status and 4 Investment Objectives.
A registered representative has recently retired couple in their late sixties as her customers. They each have a modest monthly pensions and collect social security benefits putting them in the lowest tax bracket. They accumulated savings and investments totaling $175,000.00 that they want to reallocate now that they are both retired. Which of the following portfolio asset allocations is most suitable for their current circumstances?
25% domestic equities, 60% investment grade bonds, 15% cash.
MINIMUM MAINTENANCE LONG ACCOUNT
25%: 1.How low can LMV fall before a maintenance call? 2. Debit / (1 — .25) = Dr / .75
Underwriting Munis: 1. Process. 2. Public Finance Vs Corp Finance
3. Types of syndicates. 4. Syndicate participants and 5. components of the underwriting spread.
ETF: 1. passive management. 2. Trade on exchanges - liquid.
3. some tax efficiencies and 4. Commissionable transaction.
MINIMUM MAINTENANCE SHORT ACCOUNT
30%: 1. How high can SMV rise before a maintenance call? and 2. Credit / (1 + .30) = Cr / 1.30.
Special Memorandum Account aka SMA: 1. Applicable to long and short accounts. 2. Line of credit for future purchases or loans. 3 Buying power = 2 x SMA. 4. Loan value 1xSMA
5. Generated by the increase in MV, Non required Deposit, Sale of Stock I.e. 50% to SMA and Dividend or Interest. 6. Decreased by the Purchase of Securities or cash with drawl
40% = Minimum percentage of mutual fund board members that must be noninterested members.
50% = Regulation T, Penalty for insufficient IRA distribution after age 72, Amount of sales proceeds credited to SMA in a margin account, Required cash deposit when withdrawing stock from a margin account and Corporate dividend exclusion.
T-bill
52 weeks or less, Annualized % discount from par and NOT Callable
5% = Markup policy guideline, Of 75% of a diversified management company's assets, no more than 5% of total assets invested in a single company (no restrictions on the other 25%).
6% = Penalty for excess IRA contributions.
Example: Price quote
6s of '43 @ 92 = 92% of par = .92($1,000) = $920
75% = Minimum amount of IC's assets that must be invested in securities of other issuers for IC to be classified as diversified and Amount of limited partnerships assets that must be identified to be a specified program.
90% = Minimum of net investment income that a mutual fund must distribute by year-end under Subchapter M.; Minimum amount of net operating income that must be distributed by a REIT by year-end.
Customer sells short 100 shares XYZ at $30 SMV
= $30(100 shares) = $3,000: Cr = SMV + 50% SMV = $3,000 + $1,500 = $4,500 Cr — SMV = equity $4,500 — $3,000 = $1,500.
ZYX Corporation declares a 3-for-4 stock split. An investor holding 1,200 shares will, after the split is distributed, own? 900 shares.
A 3-for-4 split is a reverse split. That is, the number of shares owned after the split is less than before. The math is that the investor will have three-fourths of the number of shares previously held. The total value of the account will remain unchanged because, in a reverse split, the price per share increases.
A municipality's statutory debt limit imposes a limit on - the issuance of additi9onal general obligation bonds.
A Muni's statuary debt limit is similar to the credit limit on a credit cared. Once its reached, no more borrowing is permitted unless the debt limit is amended.
A speculative investor believes the market in Australian dollars will remain flat for the next several months. Which of the following positions allows investor to take advantage of a lack of movement in the exchange rate between Australian and US dollars?
A Short Straddle: Sellers of options, either puts or calls, benefit from a flat market. With a short straddle if there is not market movement, both the put and call will expire worthless and the writer will make the entire premium.
The statement that is not correct when you read a municipal bond quote of 4.3s of 41 @101 is: a basis quote would be above 4.3%.
A basis quote shows the bond's yield to maturity (YTM). A bond with a nominal yield of 4.3% selling at a premium is going to have a YTM less than the coupon. Therefore, it is not correct to state that the basis quote would be above 4.3%; it would be less than the coupon.
An investor purchases a bond on its initial public offering. Even though the bond has a maturity value of $1,000 in 10 years, the offering price is only $600. If this investor holds the bond until it matures: there is no reported capital gain.
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 all $400 of the discount has been accreted. This results in no reported capital gain
An investor would like to buy a stock currently trading at $44, but is willing to pay no more that $40. Which of the following orders would be the most appropriate for a registered representative to recommend? Place a buy limit order at $40.00
A buy limit of $40 will only be executed at $40 per share or less.
Cred Call Spread:
Attitude: Bearish, Max Loss: Difference in XPs - Net Credit: Max Gain: Net Credit lower received, Breakeven: XP + Net Credit received.
Debit Put Spread:
Attitude: Bearish, Max Loss: Net Debit Paid; Max Gain: Difference in XPs - net debit paid; Breakeven: Higher XP - Net Debit paid.
Position: Long Put
Attitude: Bearish, Max Loss: Premium Paid; Max Gain: Breakeven to Zero: Breakeven: XP - Premium
Which of the following would establish a covered put? Short stock at 40, short put at 35
A covered put is created when a short stock is combined with a short put. Covered puts are established when the investor is neutral or slightly bearish; therefore, the strike price of the put is less than the cost of the stock sold short. The reason the put writer is covered (protected) is that if the stock's price should decline below 35 and the holder of the option exercises, the stock purchased by the writer is used to cover (replace) the borrowed stock for the short sale at 40.
If the placement ratio found within The Bond Buyer is high, this would indicate that the market for municipal bonds is strong with dealers more likely to bid on new municipal issues.
A high placement ratio, also known as the acceptance ratio, indicates that most of the bonds coming to the market are being sold—in other words, a strong market. Under those conditions, dealers would tend to bid on new issues, because they will probably be easy to sell given the current market conditions.
A local school district needs to invest funds short term. This investment vehicle is known as
A local government investment pool - LGIP
A state has issued a revenue bond to fund the construction of a new dormitory at the state university. The bond also contains a nonbinding covenant that any amount necessary to make up any deficiency in debt service will be included in the budget recommendation made to the state legislature. The governing body may, but is not legally obligated, to appropriate the funds. This is a description of: a moral obligation bond.
A moral obligation bond is a revenue bond where there is a nonbinding pledge from a governing body to make up any shortfall in meeting the debt service.
A Syndicate is underwriting $200 million in municipal bonds and sets up a Western underwriting account with 10 syndicate members. Only one syndicate member, Atlas Municipal Securities sells out its 10% commitment, amounting to a total of $20 million sold by them. At the syndicate settlement date, $18million of bonds are still unsold. The financial obligation of AMS is: $0.00
A western account means divided liability where each member is responsible for his allocation only and has no liability for any remaining bonds left unsold by other syndicate members.
One of the unique benefits of an employee stock purchase plans is: the employer compares the price of the stock at the beginning of the purchase period and the end of the period and the purchase is discounted from the lower of the two.
A wonderful advantage to the employee stock purchase or stock option plan offered by many employers is the opportunity to "play the market." In most cases, the purchase period is every six months and the company will use the employees' escrowed funds to purchase the stock at the lower of the current market price or the price six months earlier.
Test Question: Sell Stops:
Accelerate Bearish Trends.
Test Question: Buy stops
Accelerate Bullish Markets.
MSRB RULE:
Accrued Interest -Dated date up to BUT NOT including Settlement date and Total dollar amount
The calculation of accrued interest for a municipal bond: includes interest from and including the last payment date.
Accrued interest represents the amount of interest that has accrued back through and including the last interest payment date. It is computed up to, but not including, the settlement date and, for corporate and municipal bonds, is based upon a 30-day month and a 360-day year.
Property taxes - ability to raise them
Ad Valorem = Added Value = Property taxes
Premiums Amortize:
Adjust cost basis down
When contrasting preemptive rights and warrants, it would be correct to state that, at issuance: rights have intrinsic and time value while warrants only have time value.
At the time of issuance, preemptive rights always offer the stock at a price below the current market thus creating intrinsic value. Although rights rarely are effective for longer than 45-60 days, that does represent time value. On the other hand, warrants are always issued with an exercise price above the current market I.e no intrinsic value but do have time value.
XYZ Corporation issued 7 million shares of common stock in its initial public offering. It later purchased 500,000 shares of Treasury stock. XYZ recently engaged an underwriter to raise capital by selling an additional 3 million shares through a standby rights offering. By the expiration date of the offering, only 2 million shares were sold through exercise of the rights. As a result, how many shares will XYZ have outstanding? 9.5 million
After the 500,000 issued shares were repurchased for the Treasury, there were 6.5 million outstanding. In a standby rights offering, the underwriter agrees, on a firm commitment basis, to pick up any unsold shares and bear the responsibility for selling them to the public. Therefore, all 3 million of the additional shares are now outstanding for a total of 9.5 million shares.
Special Tax Bonds
Alcohol, Tabaco, hotel aka sin taxes
VA PAYOUT OPTIONS: Lump sum
All earnings above cost basis taxed and Cost basis returned tax-free.
OPTION TRANSACTION SETTLEMENT
All options transactions (equity, index, debt, and currency) settle next business day = T + 1.
The performance of the XYZ Growth Fund has been in the top 1% of all funds in its category for the past 1-, 5-, and 10-year periods. Which of the following would be the biggest risk factor to an investor investing in this fund? The manager's tenure is six months
Although one cannot predict the future from the past, when a portfolio manager has consistently been ranked at the top, it is not considered a major risk to bet on a winner. The problem here is that almost all of that performance was achieved under the direction of previous management. With only six months on the job, the new manager is untested and there is no way to know how the future performance will rank. You might see this referred to as tenure risk. Diversification is one of the benefits, not risks, of a mutual fund. In a growth fund, one does not expect a high dividend yield.
Which of the following is not a right conferred upon ownership of common stock? Limited Liability
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.
The official notice of sale to solicit competitive bids for a new municipal bond issue is usually published in the bond buyer.
Although some of these notices are published in the issuer's local press, substantially all are found in the Bond Buyer
Compared to U.S. government agency-backed CMOs, CDOs have: less prepayment risk.
Although there is some prepayment risk with CDOs, it is minimal when compared to CMOs. Unlike mortgages, which are frequently paid off early when homeowners move, those who move can take their cars or their credit cards with them and continue to make the payments.
An investor is concerned about the future of interest rates and wants tax-free income with a long-term maturity based on short-term rates. Which of the following would be the most appropriate recommendation? A municipal auction rate security (ARS)
An ARS is a long-term instrument tied to short-term interest rates and, therefore, would be suitable for someone with a long-term time horizon.
An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 20 million shares outstanding, and, on average, 140,000 shares have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next 90 days is: 150,000.
An affiliate who has held restricted shares beyond the six-month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the four weeks before the sale in any 90-day period. In this instance, 1% of the outstanding shares - 200,000 is greater than the last four weeks average trading volume -140,000, so the investor's entire position can be sold.
NYSE can best be described as
An auction order limit driven market.
A 2× leveraged inverse exchanged-traded fund (ETF) tracks an index that has recently fallen 1%. If the ETF was priced at $100 per share before the drop in the indexes price, where should the ETF be priced now, assuming the ETF portfolio performed as intended? Up $2 per share
An inverse fund portfolio attempts to mirror returns that are the opposite of the index it is tracking. Therefore if the index has fallen, this ETF should be up. A leveraged ETF attempts to produce returns that are a multiple of those produced by the index it is tracking. Therefore if this index has moved 1%, the 2× 200% leveraged fund should move 2% I.e. 2 × 1% = 2%. Because it is in 2× inverse ETF, the index falling by 1% means that the ETF should be up 2% or $2 I.e. 2% × $100 = $2.
An issuer interested in reducing its interest cost can use the call provision to call in outstanding bond issues. The issuer is most likely to call bonds with a high coupon and low call premium.
An issuer will always try to use the call provision to lower its interest cost when it has outstanding callable bonds.
Hedge Funds use short positions in their investment strategies.
And Mutual Funds cannot use short positions.
Coupon
Annual interest I par value: Bond pays $60 annual interest $60 / $1,000 = 6% coupon yield
Yield to Maturity
Annualized return if held to maturity
COMMON WAYS TO ANNUITIZE Joint and Last Survivor
Annuity on more than one life and Payments continue until last annuitant dies.
Real Estate: Raw Land
Appreciation potential only objective. 2. Very speculative. and 3. No depreciation deductions for raw land.
Which of the following U.S. Treasury securities is least affected by reinvestment risk? STRIPS
As zero-coupon securities, STRIPS have minimal reinvestment risk—there is no income to reinvest.
There are many different types of asset-backed securities, but the common theme uniting all of them is: they are supported by a contractual obligation to pay.
Asset-backed securities (ABS) are structured debt financing backed by a contractual agreement to pay. They are "first cousins" to MBS (mortgage-backed securities), with the primary difference being that the collateral is not real estate
Types of GOs - Limited tax bond:
Issued when issuer's ability to raise taxes is limited to a specified tax.
A FINRA member firm sends a promotional piece to 23 individuals over a three-day period. Ten of these individuals are current customers of the firm. The other 13 are prospects whose names came from a commercially available mailing list service. Under the FINRA rule on communications with the public, this promotional piece would be considered: correspondence.
Correspondence is defined as any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. If it goes to more than 25, it is retail communication. The fact that some of the recipients are customers and others are prospects is irrelevant. It is simply the number of people during the 30-day period.
Under the rules on communication with the public, review of which of the following by a principal may take place either before or after distribution?
Correspondence to 25 or fewer retail investors within any 30-calendar-day period. A principal may review correspondence before or after its distribution as long as it is limited to no more than 25 retail investors during any 30-calendar-day period. The other choices require principal approval rather than just review before first use
TAX RULES FOR OPTIONS - EXERCISE:
Cost basis of stock position adjusted when option is exercised and No gain or loss reported until stock position is closed. Example: Long 1 XYZ Dec. 25 call @ 3.5 Call is exercised; investor owns XYZ stock at $25 per share, Sells stock at $30 per share, Cost basis in stock adjusted upward by 3.5 to account for cost of call, Cost basis in stock = 25 + 3.5 = 28.5 Stock sold at 30, Sale - cost (30 - 28.5) = 1.5 point gain 1.5(100 shares) = $150 capital gain.
An investor holding shares of several funds from the CDS fund family has opted for a fixed dollar withdrawal plan to supplement her income each month. With this type of withdrawal plan, the amount received each month.
Could be less than, equal to, or more than the account earnings that period.
An investor is interested in a LLP and asks his RR to explain the "crossover point". The point at which the program begins to generate taxable income instead of losses, which generally occurs in later years.
Crossover point is the point at which the program begins to generate taxable income instead of losses.
Your new customer wishes to do an options trade as soon as possible. What is not required before he can execute a trade? The customer must sign and return the options agreement.
Customers have 15days after account opening to return the signed options account agreement during which time they may execute a trade.
Record date:
Decided by BOD: Date trade must settle by for buyers to receive current dividend.
Ex Dividend date:
Decided by FINRA or SRO: One business day before record date
Which of the following would not dilute a corporation's earnings per share (EPS)? A 1:2 stock split
Dilution occurs when there are more shares for the same amount of earnings. It most commonly happens when a convertible security, such as a bond or a warrant, is exercised. A 100% stock dividend doubles the number of outstanding shares without a change to earnings. However, a 1:2 split (reverse), cuts the number of shares in half and that will double the EPS.
Asset Allocation:
Diversified by equities debt and cash positions.
Adjustable rate:
Dividend tied to another rate e.g., T-bill rate.
HyBrid REITs
Do both Equity and Mortgage
A dollar cost averaging plan is least successful when: stock market prices remain stable.
Dollar cost averaging only works when prices are fluctuating.
Which of the following direct participation programs typically generates a dollar-for-dollar credit against federal income taxes? Rehabilitating certified historic structures
Dollar-for-dollar reductions on taxes owed are known as tax credits. These are typically available in certain real estate direct participation programs (DPPs). Those would include rehabilitation credits for certain buildings originally placed in service before 1936 and certified historic structures and buildings located in historic districts. Another program offering tax credits is government sponsored low income housing, not just any residential housing.
A bond with a 9% coupon, maturing in 18 years and 6 months, is selling at 120. The yield to maturity is closest to: 7.05%
Don't waste time trying to do the yield to maturity computation. This bond is selling at a premium (120% of par). Therefore, all of the computed returns must be lower than the 9% nominal (coupon) yield. Only two of them are. The 7.50% represents the current yield ($90 ÷ $1,200). We know from our charts that, just like a seesaw, the farther from the center you go, the bigger the move at the end. That means the nominal yield is the highest, followed by the current yield (CY), the yield to maturity (YTM), and finally the yield to call (YTC) as the lowest. Because only one choice is lower than the CY, you get the correct answer with minimal effort.
Munis: Western or Divided Syndicate members
EACH syndicate member will be liable ONLY for the sale of the portion allocated to them
Your broker-dealer has recently published a research report about ABC Fracking Company. Your research team has rated ABC with a strong buy recommendation. You would be least likely to send this report to a client who: is an ESG investor
ESG stands for environmental, social, and governance. That investor would likely have a negative attitude toward investing in fracking
A RR recommending an ETF to a client could accurately explain that as a general rule, these funds are passively managed and have low expense ratios.
ETFs represent a basket of stocks that reflect an index like the S&P 500.00
One July 45 mini-option contract call is quoted at 3. A buyer will pay: 30.00
Each mini-option contract represents 10 shares of the underlying equity security instead of 100 shares as is the case for standard contracts.
Your customer owns a variable annuity contract. The assumed interest rate (AIR) stated in the contract is 5%. In January, the realized rate of return in the separate account was 7%, and she received a check in February based on this return for $200. In February, the rate of return was 10%, and she received a check in March for $210. For her April check to be $210, what rate of return would the separate account have to earn in March? 5%
Each month's payout depends on the actual earnings compared to the AIR. If the actual rate of return equals the assumed interest rate, the check will stay the same. We don't compare one month's return to another's; we compare the actual to the assumed. If the actual is higher, the following month's check goes up. If the actual is lower, the following month's check goes down. And, as stated earlier, if the actual equals the assumed, there is no change.
Your broker-dealer is compiling a list of investments suitable for a qualified retirement plan. The list should NOT include: investment-grade municipal bonds
Earnings in a qualified retirement plan account grow tax deferred. Municipal bonds are not a suitable investment for a qualified retirement account because the interest payments they provide are already tax exempt.
An appeal of an adverse Code of Procedure decision may be made by either party within 45 days of the decision date.
Either party may appeal a ruling from a disciplinary hearing within 25 days of the rendering of the decision. The first appeal is to the National Adjudicatory Council.
An individual works for a local manufacturing company. The company offers a contributory defined contribution plan. If the annual employer contribution is 10% of salary and the employee adds 3%, under ERISA rules, only the 3% must be immediately vested.
Employee contributions are always immediately vested. ERISA provides for several methods of vesting, but none of them require immediate vesting of employer contributions.
You have several clients interest in a tax sheltered annuity - TSA, but one of them is not eligible to participate. Who is it? A student enrolled full time in the local community college.
Employees of 501c3 and 4063b organizations qualify for tax-sheltered annuities - TSAs. Students are NOT employees.
Term:
Entire issue matures on one date.
Excess Equity:
Equity above Reg T = 50%; Credits special memorandum account (SMA)
An exchange traded fund (ETF) differs from a mutual fund in that it can be sold short.
Exchange traded funds can be sold short or purchased on margin, much like any other listed stock. Almost all ETFs are open-end investment companies but so are mutual funds, so there is no difference. There are index mutual funds just as there are index ETFs, and just like mutual funds, an ETF's net asset value (NAV) is computed after the 4 pm market close.
Fill or Kill (FOK)
Execute entire order immediately or cancel entire order
A customer writes 1 July 40 put at 6. The put is exercised when the market price is 30. For tax purposes, what is the effective cost basis of the stock put to the writer? 34
Exercise of the put involves a cost to the writer of $40 less the $6 premium already received. Market price does not apply to this questions.
GNMA: 1. Interest paid monthly. 2. Only agency backed by the Full Faith and Credit of US Government.
FHLMC and FNMA: Interest is paid every 6 months.
You have an individual client who is in the 33% marginal income tax bracket. Which of the following debt securities offers the highest after-tax return? 8% ABC Corporation debenture
First of all, eliminate the preferred stock because it is not a debt security. Then, subtract the 33% from each of the remaining choices to determine which has the highest after tax return. The 8% bond will cost $26.40 in taxes on the $80 annual interest leaving the investor with $53.60. There is no tax on the municipal bond, so the investor keeps all $50. There is federal income tax of $19.80 on the Treasury, resulting in net proceeds of $40.20.
FINRA—COMMUNICATION WITH THE PUBLIC
For FINRA member firms, all options advertising and sales literature are designated as falling under one of the three FINRA communications categories: Retail and Correspondence.
The IRS allows investors to minimize tax liability when reporting sales by limiting gains or maximizing loses in anticipation of what an investors year-end tax liability might be. Given year-end tax needs can only be anticipated when a sale occurs, which of the following reporting methods allows an investor the most flexibility? Share identification
For investors, the idea is to minimize tax liability if able by limiting gains or maximizing losses in anticipation of what one's year-end tax liability might be. The IRS allows three methods of reporting; share identification, FIFO, and average cost basis. Of the three allowable methods share identification is the most flexible. Using this method, the investor keeps track of the cost of each share purchased and specifies which shares to sell based on his anticipated year-end tax needs.
Fox tax purposes, a limited partner in a direct participation program will include in their cost basis, cash and property contributions to the partnership and any recourse and nonrecourse debt assumed for which of the following types of programs? Raw land real estate
For limited partners, typically only recourse debt can be included in cost basis for tax reporting. The one exception where nonrecourse debt is allowed to be included is in real estate programs.
An investor purchased a nonqualified fixed annuity many years ago. Now, the investor needs money and decides to cash in the policy. How will the proceeds be taxed? Everything in excess of the cost basis will be taxed as ordinary income.
For nonqualified annuities, everything in excess of the cost basis is taxed as ordinary income. If the investor has not reached age 59½, there will probably be a 10% penalty.
A customer of a broker-dealer has opted to use share identification for tax reporting when selling shares of her mutual funds. With this method of tax reporting, she would want to identify the shares to be sold as those that have the lowest cost basis generating the least gain.
For tax reporting purposes, showing the lowest taxable gain is always the most advantageous. One way to do this when selling shares is to identify the shares that cost the most when purchased, those that give one the highest cost basis. The higher the cost basis, the lower any gains will be.
MUNICIPAL INDICES AND RATIOS - Found in The Bond Buyer:
GO index: 20 specific GO bonds each with 20-year maturities; Revdex: 25 specific revenue bonds each with 30-year maturities; 30-day visible supply: total par value of all new municipals to be offered in the next 30 days and Placement ratio: total par value of all municipals sold/total par value of all municipals offered within the previous week
A generic ad for an investment company placed by a broker-dealer would contain: the name of the broker-dealer, but not the name of the investment company.
Generic advertising of investment companies presents a nonspecific introduction to investment company shares. A specific fund or investment company is not mentioned in generic advertising, but the broker-dealer who is placing the ad must be named.
If a contract calls for a delivery between member broker-dealers of 500 shares of stock, all of the following certificate combinations would be a good delivery conforming with the FINRA Uniform Practice Code except: 10 certificates for 30 shares each and 4 certificates for 50 shares each.
Good delivery between member firms requires delivery of certificates of 100 shares, in multiples of 100, or the ability to put certificates of less than 100 shares into stacks of 100 shares. Note that the 10 certificates, each for 30 shares, could not be stacked in units of 100.
Which of the following statements regarding hedge funds is correct? Hedge funds are usually structured as a partnership.
Hedge funds are usually structured as a partnership, with the general partner as the investment manager and the investors as limited partners. Hedge funds are actively and aggressively managed, seeking superior returns, and they are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management.
Common stocks of Blue Chip Company: Proven track record to do good thru bad times.
I.e. Purchased for growth and Income. 1. Combination of Common and Preferred Stocks. 2. American Deposit Receipts aka ADRs. ADRs = Currency Risk
GO's = Taxes, Voter Approved, Backed by full faith of issuing Government
I.e. county, city, state
On Muni: Name of Contra Party available on request
If BD acts as Principal the Mark up is disclosed
On Muni: Agent or Principal
If BD is acting as Agent the Commission is disclosed
Your customer tells you she is very bearish on the market and thinks she can capitalize on that view by purchasing an inverse exchange traded fund (ETF) that tracks the Dow Jones Industrial Average (DJIA). In a subsequent, discussion she explains her understanding of how the fund works and makes several comments that are all accurate except one. Which is the inaccurate statement that as her registered representative you would want to correct?
If the DJIA decreases by 10%, this ETF is managed to increase by twice that amount. An inverse ETF is managed to perform the opposite of the index it is tracking. It is not managed to perform at any stated multiple of that performance as would be the case if it were a leveraged (two or three times) ETF. If the market falls, the inverse ETF is managed in such a way as to attempt to rise by the same percentage. In other words, perform the opposite. The invested amount is the most one can lose and like all other exchange traded products, shares can be sold intraday in the open market.
An investor is long stock at 675. The current market price of the stock is 682; it is anticipated that the stock will continue to rise. If the investor would like to generate income, but limit how much can be made if the stock continues to rise, which of the following contracts would do that? Sell a 685 call
If the investor sells a 685 call, and collects the premium, income would be generated. However, if the price continues to rise, the call will be exercised, obligating the investor to sell the stock I.e. at a profit. Buying options could not be a correct choice because only selling them generates income
Market order
Immediate execution at Best avail price. I.e. Execution more important than price.
In a direct participation program limited partnership for tax purposes, income for the general partners is earned income, but for the limited partners it is passive income.
In a direct participation program limited partnership for tax purposes, income for the general partners is earned income, but for the limited partners it is passive income.
If a prospectus for a variable life insurance product contains hypothetical projections of returns,: the maximum return permitted is 12%, and there must be an illustration showing a 0% return as well.
In discussions of variable life insurance with customers, projections of hypothetical returns may be used. This is to demonstrate how the program really works and the risks involved if the projections are not met. The maximum allowable hypothetical rate of return is 12%, and there must also be a projection shown assuming a 0% return. Variable life insurance must not be sold as an investment product. It must always be emphasized that the policy should be purchased to meet an insurance need.
A popular vehicle for saving for retirement is the variable annuity. A registered representative explaining the benefits of this product would probably be making an incorrect statement by claiming that variable annuities offer the ability to exchange funds between subaccounts without incurring a tax liability under IRS Code Section 1035.
In general, variable annuity expenses are higher than those of a mutual fund with similar objectives. That doesn't mean the fund is good and the variable annuity bad, it is that there are guarantees and other features offered by the variable annuity that a fund does not have and they have to be paid for.
The owner of a variable annuity contract chooses a joint life with last survivor option. In choosing this options, the annuity payments will continue as long as one of the annuitants is alive and be smaller than if a life with period certain option has been chosen.
In joint w/survivor settlement options - annuity payments continue until the second person on the contract dies.
ZERO-COUPON BONDS
Issued at a discount, Mature at par, Often used for target date goals and High price sensitivity to interest rate movement.
Equity: Treasury Shares - Shares repurchased by corp:
Issued shares - outstanding shares
Taylor is a registered representative with Pelf Securities, Inc., a FINRA member firm. Taylor wishes to purchase shares of the Mega Growth Fund directly from Mega-Funds Distributors, (MFD), a FINRA member sponsoring the Mega group of funds. Compliance with FINRA rules would require: nothing in addition to the normal account opening procedures.
In most cases, before an employee of a member firm can open an account at another member firm, written notice and consent must be obtained. In addition, if requested, duplicates of confirmations or statements must be sent from the other member to the employing member. The primary exception to the rule is when the account is only purchasing mutual funds or variable annuities directly from the issuer—the case in our question.
The MSRB operates the Real-Time Reporting System (RTRS), enabling municipal securities dealers to report information about trades. In most cases, trade reports must be submitted within: 15 minutes.
In most cases, the RTRS requires reports within 15 minutes of the trade.
ABC Corporation has outstanding a 10% cumulative preferred stock with a par value of $60 and a market value of $100. Two years ago, ABC omitted its preferred dividend. Last year, it paid a dividend of $5 per share. In order to pay a dividend to common shareholders this year, each preferred share must be paid a dividend of? $13.
In order for a common dividend to be paid when the issuer has cumulative preferred stock outstanding, the current and previously missed preferred dividends must be satisfied. In this case, the stated dividend is 10% or $6 I.e. 10% × par of $60. Two years ago, the shortfall was $6. Last year it was $1. The arrearage of $7 plus the current year's $6, I.e. $13, must be paid before anything can be paid to common.
When a limited partnership interest is sold, gain or loss to the partners is determined by the difference between the sales proceeds and the adjusted cost basis.
In the case of LLPs, the cost for ta purposes is usually subject to a number of adjustments and may be higher or lower than the original investment.
A client purchases 1,000 shares of the ABC Global Growth Fund when the net asset value (NAV) is $8.75 and the POP is $9.21. Three years later, the client makes a gift to her daughter when NAV is $9.50 and POP is $10.00 and the daughter elects to receive all distributions in cash. Two years later, she sells all shares when the NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? Long-term capital gain of $5,040
In the case of a gift of securities, the donee acquires the donor's cost basis, $9.21 per share. Sale (redemption) takes place at the NAV ($14.25) for a profit of $5.04 per share (times 1,000 shares).
Example: Long 1 OEX March 450 call @ 2, OEX Index trading @ 458 at expiration
In-the-money amount = CMV - XP = 458 -450 = 8 When exercised buyer receives 8(100) $800 cash delivery, Profit = amount received at exercise - premium paid = 8 - 2 = 6(100) = $600, BE = premium + strike price = 452 MG = unlimited (long call) ML = $200 (premium paid)
Which of the following client statements describes an investment objective rather than an investment constraint? "I want to maximize my income."
Income is an objective. Liquidity, tax considerations, and personal attitudes are investment constraints.
Which of the following descriptions applies to settlement of index option contracts? Index options are settled in cash when exercised.
Index options are settled in cash equal to intrinsic value of the option based on the closing price of the option the date it is exercised. T+1
VARIABLE ANNUITY
Insurance company product, Priced like mutual fund (NAV + SC = POP), No maximum sales charge, Early redemption fees, All earnings (dividends and capital gains) reinvested, Earnings grow tax deferred and Non-qualified unless stated otherwise.
Munis can have Legislative Risk
Interest is Federal Exempt aka recipical Immunity
Which of the following choices describes the strategy most likely to be recommended to a fixed income client looking to reduce interest rate risk? Buy variable rate bonds.
Interest rate risk affects those investing in fixed income investments such as bonds or preferred stock. As interest rates rise, the value of those assets declines.
Private Activity
Interest taxable to an Investor subject amount. Public purpose Non essential bond
Example: XYZ July 40 call, XYZ stock trading @ 43
Intrinsic value = 43 — 40 = 3
Serial:
Issue matures over a period of years.
TREASURY RECEIPTS
Issued at a discount and backed by broker-dealers (BDs), Mature at par, Discounts: accrete / add, adjust cost basis up. Premiums: amortize i.e. subtract, adjust cost basis down.
Callable Bonds
Issuer can buy back bonds as of a specified date before maturity at a specified price; Issuer will call bonds in anticipation of current interest rates falling; Allows issuer to lower the cost of borrowing and Facilitates "refunding;" replacing one issue with another at a lower net interest cost to the issuer.
Callable:
Issuer may buy back shares after a specified date at a specified price.
Participating:
Issuer may pay more than stated dividend.
TYPES OF General Obligation Bonds - GOs: Unlimited tax bond
Issuer pledges all of its unrestricted resources to meet debt service, including an unlimited property tax on all taxable property within the district.
Balance sheet items affected by the issuance of new common stock would be total assets and net worth.
Issuing stock brings in new capital in the form of cash. This raises the assets and, because stock is equity, raises the net worth by the same amount.
Section 28-e of the Securities Exchange Act of 1934 deals with - a safe harbor for non-cash compensation from broker-dealers to investment advisers.
It creates a safe harbor describing what is permitted, such as research and custody for the IA's client funds and securities.
When a Technical Analyst sees a "Head and Shoulders" on the graph/chart:
It is a signal of a reversal.
An investor was able to acquire 10,000 shares of RITVA common stock on its IPO @ $10 per share. Now stock is selling for $50 per share and the investor is nervous about the future for the market. An order is turned in to sell 100 RITVA 55 calls at a premium of 2 and buy 100 RITVA 45 puts at a premium of 2 this is a CASHLESS Collar
It is cashless because the calls are sold for 2 and the puts bought for 2. That means no out of pocket cash. The investor has "put a collar" on the long position in the stock by selling an out of the money call and buying an out of the money put.
A limited partner is a passive investor with no partnership management responsibilities.
LLP are passive investors with no management responsibilities.
Customer purchases 100 shares XYZ at $24
LMV = $24(100 shares) = $2,400; Dr = 50% LMV = $1,200, LMV — Dr = equity, $2,400 — $1,200 = $1,200.
When will account be at minimum maintenance?
LMV = $35,000, Dr = $20,000: Dr / .75 = $20,000 / .75 = $26,666.67
VA Payout options: Random:
Last-in, first-out accounting basis, All earnings withdrawn first and are taxable and After all earnings are withdrawn, cost basis is returned tax-free.
Moral obligation bonds:
Legislative authority is required to pay back bondholders if revenues are insufficient.
Equity Securities: Ownership position: REITS on the secondary Market
Liquid way to invest in Real Estate
Exchange
Listed and Physical location, Auction market.
An investor purchases 100 shares of JKL common stock at a price of $42 per share on April 22, 2020. On June 27, 2021, JKL's market price is $51 and the investor liquidates the position. Which of the following transactions made on October 17, 2020, would have an effect on the investor's tax treatment of this gain? Buying a Feb 45 JKL put
Long-term capital gains tax rates are available when one has a holding period of more than 12 months. Although this investor held the JKL stock for more than 14 months, the purchase of the February put caused the holding period to be erased. It means that the holding period from April 22 to October 17 (almost 6 months) is negated and starts all over again when the put is disposed of or expires. When that happens in February, the clock starts anew. In our example, the JKL stock will have a short-term holding period based on the slightly more than four months from the February 2021 expiration date to the liquidation date in June 2021. None of the other positions affects the holding period of a long stock position.
Stock Split Adjustment
Market price and cost basis lower for split, Investor receives additional shares, Aggregate value remains the same and Taxable when shares are sold.
Stock Dividend Adjustment
Market price and cost basis of stock adjusts lower for dividend; Investor receives additional shares, Aggregate value remains the same, Taxable when shares are sold: Example: 100 shares @ $55 = $5,500, After 10% dividend, position becomes: 110 shares @ $50 = $5,500, Note: 100 shares x 10% = 10 additional shares
Reverse Stock Split Adjustment
Market price and cost basis of stock adjusts up for reverse split; Investor will have fewer shares; Aggregate value remains the same
Market value increases, add to SMA
Market value decreases, do not take SMA away. To lose SMA, account holder must use SMA.
When the inside market (best bid and best offer) for XYZ stock was 17.30-17.60, a market maker sold 100 shares to a customer at 17.90. At the time of the trade, the market maker's quote was 17.25-17.70. What was the amount of the markup? 0.30
Markup is always based upon the inside quote. In this case, the inside offer is 17.60 and the difference between that and the 17.90 selling price represents a $.30 markup.
Jim and Pam Thomas have been married for many years. How will the estate be taxed when transferred to the remaining spouse if one of them dies? Taxes will not be owed on the estate until the death of the surviving spouse.
Married couples are allowed to transfer their entire estate to the surviving spouse at death with no tax imposed on any level; federal, state, or local. Taxes will however be owed at the death of the surviving spouse.
15 CALENDAR DAYS
Maximum length of time a customer can place options orders before the signed option agreement is required
Long 1 XYZ July 30 call @ 3
Maximum loss = premium paid = 3(100 shares) = $300, Maximum gain = upside potential -stock could rise to infinity = unlimited, BE = XP + premium = 30 + 3 = 33
Long straddle: Long 1 XYZ July 30 call @ 3 Long 1 XYZ July 30 put @ 2
Maximum loss = total premiums paid = 5(100 shares) = $500, Maximum gain = maximum potential (long call upside) = unlimited, 2BEs = XP + and — total premiums paid = 30 + 5 = 35: 30 — 5 = 25
Your customer, divorced with two children and age 52, has a portfolio consisting of 80% equities with the remaining 20% diversified among several other products. Her annual income is $115,000. Which of the following events would most likely be cause to immediately reallocate her investments? She has been notified by her employer that due to corporate downsizing her position is being eliminated.
Of the scenarios listed, the loss of her job is likely to be the one that would generate the most immediate reallocation of investments. With two children and the loss of her income, a reallocation of investments from riskier equities to less risky instruments such as bonds might be in order.
Among the items shown on a customer confirmation for a bond transaction is the amount of accrued interest. The amount of accrued interest is added on the buyer's confirmation and added on the seller's confirmation.
On customers confirmations the amount accrued interest is added to the buyer's confirmation to show the net amount to be paid and is added tot he seller's confirmation to show the net amount that is to be received.
A customer wishes to transfer his account position to another borker-dealer. After validating the positions, the carrying broker-dealer is required to complete the transfer within how many business days - 3
Once a request for account transfer has been validated, which must occur within one business day, the carrying firm has 3 business days to complete the transfer.
A structured instrument known as an asset-backed security would not be backed by: loans on marginable securities
One common theme uniting asset-backed securities is the contractual obligation to make payments. In the case of a margin account, there is no repayment schedule. The margin debt can exist for years with the only payment being that of interest.
A customer who had invested in a Coverdell Educations Savings Account on behalf of her 10yr old daughter for many years may also make an investment into a Section 529 Plan in the same year for the same child
One is permitted to maintain both an ESA and a Section 529 Plan for the same beneficiary.
A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus was that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken? No action would be taken
One of the key distinctions of a UIT is its lack of management. Once the portfolio has been created, it is fixed until maturity, in the case of debt securities, or until some predetermined liquidation point, in the case of an equity trust.
Which of the following would be defined as a research report? A document that states the banking industry is ready for recovery but ABC Bank will not participate in the recovery and if owned, investors should sell the security
One of the keys to defining a research report is that it recommends taking action (buy, sell, or hold) on the subject security. Commentaries on economic, political, or market conditions are not included in the definition of a research report unless there is the aforementioned call to action.
One of the concerns of the Employee Retirement Income Security Act of 1974 (ERISA) is fair treatment of all employees. Towards that goal, ERISA established certain eligibility requirements to ensure there would be nondiscrimination.
One of the requirements under ERISA for a plan to be qualified is the absence of discrimination between highly and lower-paid employees.
Assuming all of are equal quality, one would expect the highest nominal yield from which of the following municipal securities? A private activity bond
One potentially negative feature of the private activity bond is that it might be subject to the alternative minimum tax (AMT). As a result, investors in those bonds are going to demand a higher return to compensate for that tax.
When the holder - owner of an index option exercises the contract, the account of the holder will be credited the in-money amount
One will exercise an index option when it is in the money by more than the premium paid. Because exercise of an index option settles in cash, the account of the holder will be credited the in-the-money amount.
Certain order types on the order book are reduced for cash dividends on the exdividend date. These order types are buy limits and sell stop limits.
Only orders placed below the market, buy limits and sell stops (remember the acronym BLiSS), will be adjusted for cash dividends. Sell limits and buy stops are placed above the prevailing market and are not adjusted for cash dividends.
The flow of funds statement found within a municipal trust indenture relates to - revenue bonds only and is found within the bond resolutions.
Only revenue bonds have a flow of funds statement. The order and priority of handling, depositing, and disbursing revenues taken in by the project the bond has funded is set forth in the bond resolutions.
A registered representative is obligated to adhere to the prospectus delivery requirements of the Securities Act of 1933 when making a sale of - Shares of the STU open-end investment company, a fund whose portfolio makeup is exclusively U.S. Treasury issues.
Open-end investment companies (mutual funds) register their shares under the Securities Act of 1933. As a continuous new issue, a prospectus must precede or accompany any sale.
TEST QUESTION: Long Stock Position:
Opening purchases are used to establish or add to long stock position.
TEST QUESTION: Short Stock position:
Opening sales are used to establish or add to a short stock position.
CMO investors tend to invest in PACs because they have: low extension and reinvestment risk.
PACs are retired first and offer protection from prepayment, extension, and reinvestment risk. That added safety results in lower average returns than most of the other tranches.
SC =
POP - NAV / public offering price
SC% =
POP - NAV; / POP = ($20 - $18.5) / $20 = .075 = 7.5% SC
MSRB G-37
Pay 2 Play: $250 max campaign contribution FOR SOMEONE you can vote for
Stocks have statistically been in a bull market for several years. An investor that studies technical analysis is bearish on the stock market in the short term. They would like to invest 100,000.00 of an investment portfolio valued at 10million and try to take advantage of the coming stock market correction. Which of the following would be the wrong thing for a registered representative to recommend?
Place buy stops on the securities in the portfolio identified as the most likely to fall. Buy stops are placed above the current market value of securities and would not benefit a customer that expects the market to fall.
Hypothecation agreement
Pledging Securities as collateral for loans and will be in "Street Name" I. e. Name of BD
For tax-reporting purposes, qualified dividends are considered to be what type of income? Portfolio
Portfolio income includes dividends and or qualified or not, interest, and net capital gains derived from the sale of securities.
MANAGEMENT COMPANY
Portfolio managed by specific objective: Examples: growth, income, specialized i.e. banking, technology, geographic area.
The common stock of Acheulean Stone works, Inc has a beta of 1.2 and has returned 10.4% over the past year. If the return of the market over that same period was 8% it would be correct to state that: ASWI generated positive alpha.
Positive alpha is the result when a stock's actual return exceeds the CAPM expected return based on its beta.
The alternative minimum tax - AMT: would be least likely to affect taxpayers who - earn interest from general obligation bonds.
Preference items, for purposes of the AMT, do not include interest received from general obligation bonds.
Long put - Buy
Premium - pay out, Right to SELL stock at the strike price
Example: 1 Canadian dollar April 80 call @ 2
Premium = 2(100) = $200 XP in cents = .80, BE = premium + strike price = 82 or $.82 MG = unlimited (long call) ML = $200 (premium paid)
Example: 1 T-bond 68 call @ 2
Premium = 2(100) = $200 Yield-based XP = 6.8%, BE = premium + strike price = 70 or 7% MG = unlimited (long call) ML = $200 (premium paid)
Short call - Sell or Write:
Premium Receive Obligation to SELL stock at the strike price
BASIC OPTIONS POSITIONS: Long call-BUY:
Premium- Pay out Right to BUY stock at the strike price.
Short put - Sell or write
Premium-Receive, Obligation to BUY stock at the strike price
Your customer owns a leveraged ETF having a performance goal of 3× of the underlying index. When purchased two days ago, the ETF was priced at 100. If the index was down 5% the first day and up 3% the second day, what is the value of the ETF today if it performed as it was intended to? 92.65
Priced at 100 when purchased, after the first day's 5% decrease in the index, the 3× leveraged ETF would be down 15% I.e. 15% × 100 = 15-point decrease to 85. After the second day's 3% increase in the index, the 3× leveraged ETF would be up 9% I.e. 9% × $85 = 7.65-point increase to $92.65. On the calculator provided at the testing center, you could arrive at the correct answer by taking the original 100, multiplying times 85% I.e. the 5% decrease tripled means the stock is only 85% of what it was and then multiplying that result by 109% I.e. 3× the 3% increase.
An investor purchases a treasury inflation protection securities - TIPs bond with a 4% coupon. If during the fist year the inflation rate is 9%, the approximate principal value of the security will be $1092.00
Principal value of TIPS bond is adjusted semi-annually by inflation rate. Calculation: 1000.00 X 104.5%X104.5% = 1092.025
COMMON WAYS TO ANNUITIZE Period Certain
Protects heirs, Period certain length specified in contract, Payments continue for length of period certain, even if annuitant dies and If annuitant outlives period certain length, payments continue until annuitant dies.
PHA's/NHA's both have Tax Credits
Public Housing and National Housing Authority - bonds are backed by full faith of US Government.
A customer is likely to experience the greatest purchasing power risk with which of the following investments? A 30-year U.S. Treasury bond
Purchasing power or inflation risk is greatest with long-term fixed income investments, regardless of their investment quality. ADRs represent equities and the convertible preferred has the opportunity to convert into equity.
All of the following risks are considered diversifiable except: purchasing power risk.
Purchasing power risk, also known as inflation risk, is a systematic risk and, as such, is one that cannot generally be lessened through diversification. The other choices are forms of unsystematic I.e. nonsystematic risk and can be reduced through diversification.
Equity REIT:
Purpose to purchase property for rental to commercial tenants.
When reviewing a client's account, your supervisor notices that although each recommendation appears to be suitable based on that client's profile, there is a concern regarding the frequency of activity in the account. This is an example of? 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.
If an investor holds certificates of beneficial interest in a real estate investment trust (REIT), the investor will receive income and capital gains distributions from the issuer and may sell the certificates in the secondary market to divest.
REITs are actively traded in the secondary market but are not redeemable by the issuer. They are not direct participation programs (DPPs), so while income and gains will flow through, there is no pass-through of operating losses.
A convertible bond has a conversion price of $50 per share. If the market value of the bond rises to a 10 point premium over par, which of the following statements is TRUE? Conversion ratio is 20:01 with parity price of the common at $55.00
Regardless of the price of the bond, the conversion ratio will always be 20:1 because $1000 divided by 50 is 20. Parity value of the stock will be $55 = 1100/20
1 BUSINESS DAY
Regular way settlement for U.S. government securities and options and Ex-dividend date relationship to record date for stock.
4 BUSINESS DAYS
Regulation T: cash purchases must be paid in full (regular way settlement (T+2) and Regulation T payment (S+2)
MUNI: Execution of Transactions
Requires reasonable effort to get customer fair and reasonable price
BRK. B Bid Ask 238.91 238.99 5 X 2 Buy Limit Sell Limit Immediate or Cancel: Buy 300 shares BKB.B @ 238.99 IOC
Result: Bought 200, balance to buy 100 canceled. Partial Execution
BRK. B Bid Ask 238.91 238.99 5 X 2 Buy Limit Sell Limit: Fill or Kill: Buy 300 shares BKB.B @ 238.99 FOK
Result: Nothing done, order canceled.
BRK. B Bid Ask 238.91 238.99 5 X 2 Buy Limit Sell Limit All or None: Buy 300 shares BkB.B at 238.99 AON
Result: Nothing done, order to buy 300 remains working as a GTC. No partial execution.
A corporation has reported earnings per share of $1.00. If it pays a dividend of $0.75 per share, the effect of the re3maining $.25 will be to increase working captial.
Retained earnings represent money that has been earned but NOT distributed to Shareholders as a dividend.
Which of the following would be considered an equity security? Preemptive rights
Rights and warrants are included in the term equity security. Confusingly, equity-linked notes are debt securities, even though the term equity is in the name. On this exam, notes always represent a form of debt security.
Which of the following exemption provisions of the Act of 1933 may not be used for an initial offering of securities? Rule 144
Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities. Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.
A member firm is in compliance with Regulation S-P when it provides a retail consumer with an initial privacy policy statement.
S-P distinguishes between a consumer and a customer. In the case of a consumer, there is no ongoing relationship. That means that only an initial privacy policy statement is necessary. For a customer, it would be both initial and annual.
A statement of additional information - SAI is available upon request to investors in each of the following investment companies except: a close-end investment company.
SAI need not be in a prospectus but available for BOTH open and closed-end investment companies as well as ETFs BUT NOT UITs.
Savings incentive match plans for employees - SIMPLES are funded with pretax contributions and allow catch-up contributions for those age 50 and older.
SIMPLS are qualified plans funded with pretax contributions. Like most qualified plans, they allow catch-up contributions for those age 50 and older.
When will account be at minimum maintenance?
SMV = $45,000, Cr = $60,000: Cr / 1.30 = $60,000 / 1.30 = $46,153.85
When discussing a client's finances, which of the following would be of least importance when planning to make a lump-sum investment? Current salary
Salary enables the registered representative to determine the funds available for periodic investment. A lump-sum investment could be made with money from an inheritance, a year-end bonus, or lottery winnings.
Example: Apple is Trading at I.e. 128 Sell Limit:
Sell 1000 shares of Apple at $130.00 a share. Instruction: Execute at $130.00 or Higher/more.
What is the order of liquidation in the event of a corporate bankruptcy? Senior bonds, general creditors, preferred stock, common stock
Senior bonds are those with collateral pledged to protect the investors. They always come first. They are followed by general creditors with the last of those being holders of subordinated debt. Last in line are the equity holders. That would be preferred stock and common stock at the end.
An investor holds shares of the CTS Balanced Fund and wants to exchange them for shares of the CTS Growth Fund. One of the features the CTS fund family offers to shareholders is the conversion privilege. The exchange of one fund for another within the same fund family would have which of the following consequences?
Shares of the CTS Growth Fund would be purchased at the net asset value (NAV) without a sales charge and any gains from the sale of the CTS Balanced Fund would be taxable.
Straddles: Long Straddle: Expectation of Volatility. Risk = limited Loss
Short Straddle: Expectation of Price Stability. Risk = UNLIMITED.
Your client wishes to sell XYZ short. You explain that this can be done at any time during the trading day.
Short sales can be done at any time during the trading day as long as the shares to be borrowed have been located first as per the locate requirement of regulation SHO.
C Shares:
Short times Horizons.
A general risk component representing the variability of a stock's total return as it directly relates to overall movements in the general economy is known as:
Systematic risk, also called market risk, is the variability in a stock's total return that is directly associated with overall movements in the general economy and cannot be eliminated through diversification. The other three choices are all unsystematic risks.
A registered representative has had a well-established customer for over eight years who purchased penny stocks through the broker-dealer on numerous occasions. If the RR wants to make recommendations to the customer for penny stock purchases, the RR is required to
Take into account the customer's financial ability and investment objectives.
JGH 6.0% bonds are convertible into 25 shares of JGH common stock and are trading at 106. Later, when the JGH common is trading at $42, the bonds are called at 104. Which of the following choices would maximize the investment value for a holder of the JGH convertible bonds, once the call is announced?
Tender the bonds for the call.
A customer is short 200 shares of ABC at 32 and simultaneously writes 2 ABC January 30 puts at 2..50. The customer will break even on this strategy if the underlying stock subsequently trades at 34.50
The 2 sales generated proceeds of 34.50. This is the BE point for the position. Anywhere below 34.50 the customer is making a profit.
Designated Market Makers (DMMs) on the floor of the NYSE cannot handle odd-lot market orders.
The DMM cannot handle an order with a not-held instruction. Not-held orders are in the hands of the broker-dealer's commission house floor broker.
Your customer is interested in up-to-the-minute price information for municipal securities transactions. This information is available through an approved portal within 15 minutes of a trade and is captured by which of the following? The MSRB's Real Time Transaction Reporting System (RTRS)
The MSRB's RTRS captures pricing information and makes it available to the marketplace through third-party data vendors within 15 minutes of a trade.
Which of the following is an issuer of federal agency securities? The Tennessee Valley Authority (TVA)
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.
Securities exempt from regulation under the Trust Indenture Act of 1939 include short-term commercial paper and secured corporate bonds.
The Trust Indenture Act of 1939 deals only with corporate bonds. Treasury bonds and municipal bonds would be exempt from regulation under the Act of 1939. Promissory notes, such as commercial paper, would be covered if the maturity was over 270 days.
A corporate bond is quoted in the Wall Street Journal as follows: Bid: 100½ Asked: 100¾ Bid Chg.: -⅛ YTM: 5.75% From this information, you know the nominal yield is: greater than 5.75%.
The bid and asked prices show that the bond is being quoted at a premium I.e. above par, with a yield to maturity of 5.75%. When bonds are trading at a premium, the nominal yield aka coupon rate is greater than the yield to maturity.
The capital asset pricing model - CAPM states that: the pricing of a stock should take into account systematic risk as well as nonsystematic risk.
The capital asset pricing model states that the pricing of a stock should take into account systematic risk as well as the expected return of a theoretical risk-free asset.
You have a 62-year-old client who opened a Roth IRA with your firm 1 year ago. The account was funded with a $6,500 deposit and the account's value is now $7,500. The client has another Roth, opened 8 years ago at another firm. The client would like to withdraw $7,000 from this account rather than the one at the other firm. The tax consequences of this withdrawal would be? no tax.
The client is 62 and the initial Roth IRA deposit was made 8 years ago. It is irrelevant which account the money is taken from as long as there is an account that has been open for at least 5 years.
ERISA is designed to give protection to persons covered under employer-sponsored retirement plans. Included in their regulations are all of the following except: quarterly statements of accounts.
The communication requirements are for annual, not quarterly, statements
The following information has been reported for ABC stock: Annual dividend = $5 PE ratio = 15 EPS = $10 Market cap: $3.2 billion What is the dividend payout ratio? 50%
The computation is "dividends paid divided by earnings made." In this question, that is $5 divided by $10, or 50%.
A customer purchases an ABC $100 par 6½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is: $14
The conversion ratio is computed by dividing par value by the conversion price I.e. $100 par ÷ $20 = 5. Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio I.e. $80 ÷ 5 = $16. $16 − 2 = $14. LO 5.d
A customer gives you a limit order to buy 500 shares of XYZ at 30. You erroneously buy 1,000 shares at 29. The customer is entitled to: 500 shares at 29.
The customer is entitled to 500 shares at 29. A buy limit order may be executed at the limit price or better (lower). If the firm buys more shares than indicated on the order ticket, the customer cannot be held responsible.
Your customer sells 2 IJK October 50 Calls at 4 and 2 IJK Oct 50 puts at 3. The customer will break even when the price of IJK is 43 and 57
The customer sells calls and puts with the same strike price and expiration date, so the position is a straddle
An investor sold short 1,000 shares of LUMN at 52 on January 10. If the investor covered the short position at 43 on January 15 of the following year, which if the following statements is true? The investor has a short term capital gain.
The customer would have generated a short term capital gain of $9,000 on the position by selling short at 52 and covering (buying the stock) at 43. Although the period of time that the investor remained short exceeded one year, there is no holding period for the stock (the customer did not own the stock for more than one year. There is no wash sale because there is no loss.
A customer purchases 300 XYZ at 35 and writes 3 XYZ October 35 calls at 3.. The customer will profit under all of the following circumstances except: If XYZ falls below 32 at expiration.
The customer's net outlay for each share is $35 minus the $3 premium. Once the stock falls below $32, the client stands to lose money. $32 per share is the clients breakeven for this covered call hedge position
Some information found on a municipal bond confirmation is only relevant to new issues. One example of this type of information is the in-whole call dates.
The dated date is the first day that interest begins to accrue on a new issue. Once the bond makes its first interest payment, the dated date is no longer relevant.
Test Question: A Spread
The difference between what the issuer receives and what the public pays.
An investor purchased a zero-coupon corporate bond on the offering. The price was $520 and the bond matures in 12 years. Ten years after the purchase, the investor sold the bond for $945. For tax purposes, the investor will report: $25 long-term capital gain.
The discount on zero-coupon bonds must be amortized over the life of the bond. In this question, the $480 discount ($1,000 minus the purchase price of $520) is amortized at a rate of $40 per year ($480 divided by 12 years). That $40 per year is reported as ordinary income even though nothing was received by the investor. That is why it is called, "phantom" income. If the bond is sold before maturity, the accreted value is compared with the sale price. If the sale price is higher, the difference is capital gain. If it is lower, it is capital loss. After 10 years, the accreted value is $920 ($40 per year times 10 years = $400 added to the initial $520). The sale price of $945 exceeds the cost basis of $920 by $25 and that is a long-term capital gain.
DERP Corporation has issued 4% convertible debentures maturing in 2042. The conversion price is $25 and the common stock is currently trading at $30 per share. One would expect the DERP debentures to be selling: somewhat above $1,200.
The first step here is to compute the parity price. A conversion price of $25 means the debenture is convertible into 40 shares of the common stock I.e. par of $1,000 divided by $25 = 40 shares. With a current market price of $30 per share, the parity price of the convertible would be $1,200 I.e. 40 × $30. Because convertible securities generally sell at a slight premium over their parity price, the debentures should have a current market value a bit higher than $1,200.
Your customer purchases LKQ 6.25% $60 par value convertible preferred stock at $70 per share. The conversion price is $12. With the common stock now trading 1 point above parity, you know that the common shares of LKQ are trading at: $15.00.
The first step is to determine the number of shares available upon conversion. With a par value of $60 and a conversion price of 12, the conversion ratio is 5 shares. With a current market value of $70, the parity price is $14 ($70 divided by 5). If the common stock is trading one point above parity, $14 plus $1 = $15. In the real world, it is rare to find a common stock selling above parity, but this is the test world and anything can happen here. Although not likely to be tested, there is an arbitrage opportunity here. For example, if an investor purchased 1,000 shares of the preferred stock, the cost would be $70,000. These could be immediately converted into 5,000 shares of the common stock and sold for $15 per share. This would result in an immediate profit to the arbitrageur of $5,000. That is why you don't see common stock selling above the parity price.
If an investor in the 33% federal marginal income tax bracket invests in municipal general obligation public purpose bonds nominally yielding 4.42%, what is the tax-equivalent yield? 6.597%
The formula for computing tax-equivalent yield is nominal yield divided by 1 − federal marginal income tax rate, so 4.42% / 1 − 0.33 = 4.42 / 0.67 = 6.597%.
A customer writes two ABC Jul 15 puts at 2 when ABC is 14. If the contracts are closed at a premium of 4 when ABC is 13, the customer has: a $400 loss.
The investor receives $400 in premiums I.e. 2 × $200 and pays $800 to close out the options I.e 2 × $400, resulting in a net loss of $400 I.e $800 − $400.
The more contingencies you add to your order.
The less likely it will be executed.
Of the following investors, the creditor with the lowest priority claim to the assets of a corporation during a liquidation would be the holder of its subordinated debentrues.
The lowest claim level of creditor of a corporation would be the holder of a subordinated debenture.
Which of the following statements regarding limited partnerships are true?
The maximum commission in selling partnership offerings is 10%. and Commissions taken are not deducted from the original investment to determine beginning cost basis.
What would be the impact of a 10% stock dividend on the exdate for a retail investor that owns an option contract the following option contract? 1 ABC July 40 call
The number of contracts owned will stay the same, and the strike price will be reduced. When adjusting options contracts for stock dividends and fractional splits, the number of contracts held will not change.
An investment with less volatility than common stock, but with a similar growth potential, would be: a convertible debenture.
The only security with the growth potential of common stock is something allowing the investor to own that common stock. The clearest example of that is a convertible security. Because the convertible debenture is a debt obligation of the issuer and has the obligation of semiannual interest payments, it tends to have less volatility than the stock. On the other hand, if the common stock's price increases, the convertible's price will increase in tandem. Penny stocks are noted for their high volatility and regular bonds, regardless of their rating, and do not offer the growth potential of common stock.
If TCB is trading at 43 and the TCB Apr 40 call is trading at 4, what are the intrinsic value and the time value of the call premium? Intrinsic value: 3; time value: 1
The option is in-the-money by 3 points because the strike price is 40 and the market price is 43. This sets a minimum premium of $3 per share. Because the actual premium is 4, the balance of 1 represents time value. The premium, minus the intrinsic value, equals the time value. This is true whether the option is a put or a call.
For corporate retirement plans, which of the following characterizations is true? Defined contribution plans use actuaries to determine contribution so that the exact benefit at retirement is known well in advance. The plans favor those with longer time left to retirement.
The plans favor those with shorter time left to retirement. The plans favor those with shorter time left to retirement. By contrast, defined contribution plans use a specified contribution amount, but the benefit at retirement is unknown. These plans favor those with longer time left to retirement.
The 5% markup policy applies to each of the following transactions EXCEPT: agency transactions in nonexempt unlisted securities.
The policy does apply to nonexempt securities and transactions on an exchange and OTC market, and it applies to transactions where the participants were acting in either an agency or principal capacity.
An investor is seeking tax advantages through an oil and gas direct participation program (DPP). With this type of partnership, he would expect to benefit most from depreciation allowances and intangible drilling costs.
The primary tax benefits found in oil and gas investment partnerships are the depletion allowances because of the depleting natural resource and intangible drilling costs. There is never a tax credit for oil and gas partnerships.
An investor purchases a TIPS bond with a 4% coupon. If during the first year the inflation rate is 9%, the approximate principal value of the security at the end of that year will be? $1,092.
The principal value of a TIPS bond is adjusted semiannually by the inflation rate. The exact calculation would be $1,000 x 104.5% x 104.5%, which equals $1,092.025.
The visible supply as shown in the Bond Buyer is the Percentage of new issues sold versus new issues offered for sale.
The visible supply refers to all new issue municipal bonds projected to be issued for sale within the next 30 days.
An investor purchases a TIPS bond with a 5% coupon. If during the first two years, the inflation rate is 6%, the approximate principal value of the security at the end of the second year will be: $1,126.
The principal value of a TIPS bond is adjusted semiannually by the inflation rate. The exact calculation would be $1,000 × 103% × 103% × 103% × 103%, which equals $1,125.51. Each six months, the interest is paid on that adjusted principal and that is why the security keeps pace with inflation. Obviously, the answer must be something a bit higher than $1,120 because of the semiannual compounding.
In late September, a customer sells 5 XYZ calls for total premiums of 750.00. One month later, the investor closes this position when the contract is trading at 2. The result is a loss of 250.00
The proceeds minus the cost will determine a gain or loss. The proceeds total $750.00. while the cost to buy back is $1000.00
Prior to effecting an initial penny stock transaction for a new customer, the registered representative must do all of the following except: determine if the client has been receiving monthly statements.
The question tells us this is the first trade in penny stocks for a new customer. The monthly statements haven't started yet. The penny stock rules require registered representatives to provide disclosure information to all penny stock buyers. In addition, they must determine suitability based on financial information, investor experience, and objectives supplied by the buyer. As additional protection, the customer must sign the suitability statement.
Regarding the performance of a variable annuity's separate account and the assumed interest rate (AIR), which of the following is true? If separate account performance is less than the AIR, next month's payment is less than this month's.
The relationship between the payment received and separate accounts performance as compared to the AIR is as follows: if separate account performance is greater than the AIR, next month's payment is more than this month's; if separate account performance is equal to the AIR, next month's payment stays the same as this month's; if separate account performance is less than the AIR, next month's payment is less than this month's. We never compare to the actual performance; only to the AIR.
An investor is long 500 shares of DEFG common stock, short 200 shares of DEFG common stock, and short 300 shares of DEFG 5% preferred stock. A tender offer for DEFG common shares is announced. Under SEC rules, this investor is permitted to tender: 300 shares.
The rules permit tendering of net long shares. That means the difference between the long and short positions. In this question, the investor is net long 300 shares: the difference between the 500 long and the 200 short. The preferred shares are not relevant because the tender is only for the common stock.
RIF Corporation will be issuing 5 million additional shares of common stock. RIF's common stock has preemptive rights. If the current market value of the RIF stock is $50 per share and it takes 4 rights plus $40 to buy one share, what is the value of one right on the ex-rights day? $2.50
The value of a right on the ex-rights day is computed by subtracting the subscription price ($40) from the current market price ($50) and dividing that by the number of rights it takes to buy one share. In our case, that would be $10 divided by 4 = $2.50. Had the question asked about the value cum rights, it would have been $10 divided by 5, or $2.00.
A corporation issued a bond with a coupon of 6%, callable at 103. The bond matures in 2059. Current interest rates are 8%. It is most likely that: the bond is selling at a discount.
There is excess information in this question (a favorite trick of the test authors). We don't need to know the call price or the maturity date. Simple, we have a 6% bond when current market interest rates are 8%. The inverse relationship between interest rates and bond prices teaches us that this bond is going to be selling at a discount. Bonds are called when interest rates go down, not rise. The coupon on a bond is fixed.
In a new margin account, a customer buys 100 XYZ at 62 and simultaneously writes 1 XYZ Jan 65 call at 2. The margin call will be for $2,900.
There is no margin requirement on the short call, as it is covered by the long stock. The requirement for $6,200 of stock is $3,100, but the call will be for $2,900 because the 2-point premium received when the call was written will be applied first.
An example of a security that cannot trade in the secondary market would be - open-end investment company mutual fund shares.
There is no secondary trading market for ope-end investment company mutual fund shares. All purchases and redemptions are done through the issuer or underwriter.
When a customer gives the registered representative handling the account the discretion to determine the time or the price of the order, FINRA considers this order: a day order.
These are sometimes called not-held orders and are only good for the day on which they are entered. They can be extended, but it must be done in writing.
A technical analyst notices a head and shoulders top formation on a chart. The formation is generally an indicator of the reversal of an upward trend.
This formation, found on a chart depicting a securities movement that is generally used by technical traders, indicates that the market has topped. Therefore, the future direction should be downward, a reverse of the trend that brought it to the top.
Your customer has established the following spread: Long 1 ABC Jan 60 call at 7 Short 1 ABC Jan 70 call at 4 The customer will realize a gain at expiration if the spread: widens to more than 3 points and ABC trades above 63.
This is a bull call spread I.e. established at a net debit, so the customer wants the spread to widen and the stock price to rise above the breakeven, which is 63.
Your new client informs you that she has a variable annuity purchased several years ago and soon will begin taking distributions. The variable annuity is not part of an employer-sponsored plan or held in an IRA. She asks you how the withdrawals will be taxed. You should inform her that: If she decides to annuitize before she reaches age 59 1/2 , the taxable portion will be subject to the 10% penalty.
This is a nonqualified variable annuity where contributions are made with after-tax dollars. Those contributions are considered cost basis and returned tax free, but any earnings above cost basis are taxed as ordinary income.
A customer of a broker-dealer is long 1 MMS July 60 call and short 1 MMS July 70 call. Which of the following is true? The position has limited gain and loss potential.
This is a spread position. All spreads - Debit or credit, whether put or call spreads, have a limited gain and loss potential.
The Enigma Scientific Devices Corporation has issued a $25 par value cumulative preferred stock with a stated dividend rate of $1.15. If an investor's required rate of return is 5%, the stock should be purchased when selling at? $23.00 per share.
This is a straightforward arithmetic question. Simply, $1.15 is 5% of what number? Divide $1.15 by 5% and the answer is $23.00 per share.
An investor has the following spread position: Short 1 July 40 put Long I July 50 put Regarding the position, which of the following is true? This is a debit spread and loss is limited to the net premium paid.
This is a vertical debit spread. With debit spreads, losses are limited to the net premium paid. We know this is a debit spread because the price to buy the right to sell stock at 50 is higher than the right to sell it at 40.
With the underlying stock at $428, an ABC Jan 425 call is trading at $3. All of the following statements regarding the option are true except: it has time value.
This option is at parity or breakeven, which occurs when the premium equals the in-the-money amount. An option trading at parity has no time value. When an option has no time value remaining, it is very near or at the moment of expiration.
A Customer writes 1 XYZ Feb 50 put at 1 and buys 1 XYZ Feb 60 pout at 7. The Breakeven point is: 54
This put spread results in a net debit of six points. To calculate BE for a put spread on subtracts the net premium from the higher strike price. BE on a spread can never be outside the spread.
A bond was issued 3 years ago with a coupon of 6%. The bond matures in 21 years and is callable at 103. Current market interest rates are 8%. Which of the following is most likely true? The bond is selling at a discount.
This question contains more information than is needed. Simply, this is a bond where interest rates have gone up since it was issued. When interest rates go up, bond prices go down. Bonds are not called when current interest rates are higher than the coupon; the reverse is true.
When the IRS reviews a limited partnership offering to determine if it is abusive, the single most important fact is: the presence of economic viability.
Time and time again, the IRS wins cases where it can prove that there is no realistic economic justification for the limited partnership.
With XUV stock trading at 43.10, a customer buys 3 ABC Jun 40 puts at 1.50. What is the time value of the contracts? $1.50
Time value is the premium minus the intrinsic value. A 40 put is out of the money when the stock is trading at $43.10. Therefore, the entire premium is time value.
Credit Enhancement Insurance
Timely payment of interest and principle. Does NOT insure 2nd price.
Legislative Authority to borrow the money I.e. Issue the bonds
Unqualified I.e. Without Reservation Versus Qualified I.e. with Reservation.
A firms has prepared a research report on the equity securities issued by the CDT corporation. Regarding the report and its distribution from broker-dealers to clients, which of the following statements is NOT true? The report must disclose whether, within the last five years, the firm has received fees for investment banking services from CDT corporation.
To avoid conflicts of interest the report must disclose whether, within the last 12 months - NOT 5 years, fir the firm has received fees for investment banking services from CDT corporation.
In a volatile market, which of the following option strategies carries the most risk? Short straddle
To establish a short straddle, the investor sells a call and a put; the short call carries unlimited loss potential.
REAL ESTATE INVESTMENT TRUSTS (REITs)
Traded on exchanges or OTC; Provide liquidity for real estate investors; 75% of assets must be invested in operating income producing real estate or mortgages to qualify as a REIT and 90% of net operating income must be distributed for REIT to avoid taxation as a trust.
A security is quoted, Bid - 0.79; Ask - 0.74. This is most likely a quote for: a U.S. Treasury bill
U.S. Treasury bills are quoted at a discount from par. As a result, the bid has a higher discount than the ask. That is what makes the bid price lower than the ask.
The registration rules of the Securities Act of 1933 do not apply to: the prospectus delivery requirements of U.S. Treasury bonds.
U.S. Treasury securities are exempt from the provisions of the Securities Act of 1933; there is no prospectus. New issues of unit investment trust (UITs) require a prospectus.
Which of the following statements is correct? Interest received on GNMA securities is taxable on both the state and federal level.
Unlike Treasury issues, which are taxed only on the federal level, the interest on GNMA securities is taxable on both the state and federal level. The increase to principal on a TIPS bond is reported each year and taxed as interest income. The difference between the discounted purchase price of a T bill and its maturity value is considered interest income.
Asked to point out the differences between open-end funds and closed-end funds, you could state that closed-end funds trade in the secondary market and can trade above or below the net asset value of their investment portfolio.
Unlike open-end funds that must be purchased from the issuer with sales charges assessed and have redeemable shares, closed-end funds trade in the secondary markets with commissionable transactions. Because they trade in the secondary market, their share prices are subject to the forces of supply and demand and therefore can trade above or below the net asset value of their investment portfolio.
If an investor purchased a municipal bond at 103 in the secondary market, which of the following would be a factor in calculating the total dollar amount paid for the bond? The coupon rate
When computing the total price of a bond purchase, it is necessary to know the accrued interest. The accrued interest cannot be determined without knowing the coupon rate. Neither the bond's rating, the maturity date, nor the scale aka covered later in the course are used in the computation of the total price.
An investor purchases a 7% general obligation GO bond on a 7.30 basis. If the bond is callable in five years at par and matures in 10years, it is true that - yield to call (YTC) is higher than yield to maturity (YTM).
When a bond's basis (YTM) is in excess of its coupon, the bond is selling at a discount. If a bond is selling at a discount its yields in ascending order will be coupon, current yield, YTM and YTC.
The Jefferson County Water Works revenue bond is being underwritten by a syndicate led by ABC Securities, Inc. The bond has serial maturities going out up to 25 years with a balloon at 30. The coupons range from 3.2% to 4.1%, and all the bonds are offered at par. The terms of the syndicate agreement call for a total takedown of ¾ of a point with a selling concession of ½ point. A syndicate member who sells 500 of the bonds will earn: $3,750.
When a member of the syndicate sells a bond it is entitled to the total takedown—in this case, ¾ of a point I.e. $7.50 per bond. The computation is 500 bonds sold × $7.50 per bond = $3,750 underwriting profit. Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead. Did you notice how much extraneous information is in this question?
The term for the annual increase of cost basis of a municipal bond purchased at a discount is "accretion."
When a municipal bond is purchased at a discount, accretion of the discount will adjust the cost basis annually.
When one of the partners in a partnership account dies, the registered representative (RR) must: allow existing orders to be executed or expire and then freeze the account until further instructions are received.
When a partner in a partnership account dies, all open - unexecuted orders should be canceled and the account frozen until an amended partnership agreement is received. Freezing the account does not require the assets to be liquidated.
Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is not true? The renewal may be executed orally, provided it is done within two years of the initial contract.
When an investment company employs an outside investment advisory firm to manage its portfolio, the act requires a written contract setting forth the adviser's compensation. The contract is for two years initially and must be renewed annually thereafter. The contract must be initially approved by a majority vote of the outstanding shares and the noninterested members of the board of directors and annually renewed by either a majority vote of the board of directors or of the outstanding shares, as well as a majority vote of the noninterested members of the board. The contract must be terminable at any time, with a maximum of 60 days' notice and with no penalty, upon a majority vote of the board of directors or of the outstanding shares, and it must terminate automatically if assigned.
An investor who owns 300 shares of DEF common stock and goes short four call options is engaging in a strategy best described as? ratio writing.
When an investor writes more call options than is long the underlying asset, the position taken is that of a ratio write. In our question, it is a 4 to 3 ratio leaving one option uncovered.
A 70-year-old individual, who purchased a single premium immediate fixed annuity, elected monthly payments for life with a 10-year certain settlement option. If the individual lives to the age of 85, monthly payments will continue until death.
When choosing the settlement option, life with 10 years certain, the annuitant will receive payments until the later of death or 10 years.
An employee has enrolled in his company's nonqualified deferred compensation plan. The benefit paid at the time of the employee's retirement is: taxable as ordinary income to the employee and can be taken as a deduction by the employer's
When enrolled in a company's nonqualified deferred compensation plan, the benefit paid at the time of the employee's retirement is taxable as ordinary income to the employee and can be taken as a deduction by the employer when paid out.
A corporate offering of 1 million additional shares to existing shareholders is a "rights offering."
When new shares are being offered to existing shareholders before the general public, it is done under the terms of a rights offering.
KAPCO Manufacturing Corporation declares a 5-for-1 stock split on its outstanding shares of $20 par value common stock. This split will cause: the par value of the shares to change to $4 per share.
Whenever there is a stock split aka forward, such as this, or reverse, the par value is adjusted for the split.
Closing Purchase
Which of following would be used to ELIMINATE or REDUCE a short position.
A margin account has a market value of $24,000 and a debit balance of $20,000. The maintenance call will be for $2,000.
With equity of $4,000, this account is below minimum. The maintenance call will be for an amount necessary to bring the account back to minimum. Minimum is 25% of $24,000, which is $6,000. Because equity is $4,000, the call will be for $2,000.
All of the following will affect the working capital of a corporation except: payment of a cash dividend.
Working capital is defined as current assets minus current liabilities. On the declaration date, the future dividend payment is "booked" as a current liability (dividend payable). When the payment date comes, disbursement of the cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.
Trust Indentures vs Official statement
Written promises or covenants between the types of Revenue Bonds; Industrial Rev Bonds, Corp Credit Back the Bond i.e IDBS/IDAs.
Limit order = you may or may not get!
You care more about price than you do getting the stock.
A couple with a child 10 years away from entering college has saved $160,000 for that single purpose. Which of the following portfolio mixes would be the most suitable for meeting the investment objective? 20% T-bills, 10% corporate bonds, 70% equities and equity funds
Zero-coupon bonds, which are purchased at a discount and mature at face value, are the most suitable investment for future anticipated expenses such as college tuition. The T-notes, which are medium term U.S. government securities, would additionally be a suitable investment where risk of principal loss wouldn't be a concern as it would with equities or corporate bonds.
An investor who purchases 20-year Aaa rated corporate zero-coupon bonds would be least concerned with: reinvestment risk.
Zero-coupon securities have no reinvestment risk because there are no interest payments to reinvest. All fixed-income securities have purchasing power (inflation risk), especially when the maturity is as long as 20 years. The same is true for interest rate risk. In fact, zero-coupon bonds, because of their long duration, are the most sensitive to changes in interest rates. Is there default risk? Yes, even with a triple A rating. A lot can happen in 20 years.
A characteristic of hedge funds that would not be found in a mutual fund is
a lock-up period. Hedge funds generally employ a lock-up provision. This is to ensure that capital invested by shareholders will remain with the fund long enough for the manager to implement the intended fund strategy. There is no standard lock-up period; it can differ from fund to fund. It
Collection Ratio:
a means of detecting deteriorating credit obligations; It is calculated by dividing Taxes collected by Taxes assessed
Current liabilities:
accounts payable + accrued wages and taxes payable
The resale restrictions of Securities and Exchange Commission Rule 144 would apply to:
an individual who owns 100 shares of company's stock and is a registered Rep of the firm who did the underwriting of the company's IPO offering.
Book value per share:
book value / number of outstanding common shares
Current assets:
cash and equivalents + accounts receivable + inventory
Dividend payout ratio:
common dividends / EPS
Hayden owns 1,000 shares of XYZ common stock. XYZ announces the sale of additional shares with preemptive rights granted to existing shareholders. The terms of the rights offering require five rights plus $56 to purchase each additional share of XYZ stock. Hayden could choose to?
exercise the rights and acquire 200 shares upon the payment of $11,200. Hayden owns 1,000 shares. That means receiving 1,000 rights. If Hayden needs five rights to buy one share, then those 1,000 rights can purchase 200 shares. With a price of $56 per share, it will take $11,200 to make the acquisition. Issuers do not redeem rights;
Guaranteed bond:
guaranteed by a third party (parent company guarantees subsidiary's debt).
An investor acquires limited partner status in a direct participation program when?
he and the general partner have both signed the subscription agreement.
SUITABILITY - Options contracts are considered speculative. Therefore, they are as follows: More suitable for those with: -higher incomes, -
higher net worth, - more risk tolerance, -more investment experience
Zero Coupon Bonds or O.I.D.s
implicated Int on Munis is Tax Free = NO phantom income on Zero Coupon Munis
One of your clients is interested in setting up an Achieving a Better Life Experience (ABLE) account for his son who was recently diagnosed with a disability at age five and is currently receiving benefits through Social Security Disability Insurance (SSDI). Regarding these accounts, you correctly explain that
income earned by the account is not taxed, and his son is eligible to be the beneficiary of such an account. Those who are already receiving SSDI are automatically eligible to establish and be the beneficiaries of ABLE accounts where income earned is not taxed.
Income and or adjustment bond:
interest payable only if earned - risky; not suitable for investors seeking income
Munis: Short Term Debt obligations I.e. months up to 3years
keep in mind: TANs, RANs and BANs are only up to 1 year!
Debt ratio:
long-term debt / total capitalization
Book value:
net worth — (preferred and intangibles)
Seller's option/buyer's option:
no sooner than first day after regular way (3rd business day for corporate and municipal); no later than date specified in settlement contract.
A registered representative recommends a variable annuity with an income rider to a client. The client's investment objectives, tax bracket, investment experience, and risk tolerance all align well with a variable annuity recommendation. The client agrees to purchase the contract and informs the registered representative that he will be cashing out a variable annuity he purchased two years ago to fund the new contract and will forward the check as soon as he receives it. Based on this information, the representative should
reevaluate whether the recommendation for the variable annuity contract is still suitable based on the client's proposed funding of the investment.
Cash:
same day; BD approval required
All of the following option contracts are in-the-money when XYZ is 54 except
short XYZ 50 put. CMV is 54 1. short XYZ 50 put. "Put down" 54 is above the strike, (up) so this contract is out of the money. 2. long XYZ 60 put. "Put down" 54 is below the strike, (down) so this contract is in the money. 3.long XYZ 50 call. "Call up" 54 is above the strike, (up) so this contract is in the money. 4. short XYZ 45 call. "Call up" 54 is above the strike, (up) so this contract is in the money.
With ABC stock selling for $49, a client sells one ABC 50 Nov call option in his cash account with your firm. One week later, ABC is now at $51 per share and his spouse sells two ABC 50 Nov calls in her account. In early November, ABC is selling for $62 per share and the spouse is assigned an exercise notice on one of the calls. The client calls and asks you, "Why was the exercise notice assigned to my spouse and not me?" You should respond:
your broker-dealer uses random allocation when assigning exercise notices. When an option is exercised, the Options Clearing Corporation (OCC) determines the broker-dealer to whom it will be assigned by random selection.
INTRINSIC VALUE
· Difference between strike price and current market value of stock
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)
·Backed by the full faith and credit of the U.S. government; Approves enders who issue pass-through certificates created from a pool of FHA- and VA-insured mortgages and Monthly check to investor includes both principal and interest.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) AND FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)
·Backed by the issuing agencies, Lines of credit with the U.S. Treasury and Mortgage-backed paper associated with prepayment risk.
FEDERAL FARM CREDIT SYSTEM
·Backed by the issuing agency, Loans to farmers, Finance land purchases, Finance farm equipment purchases, Establishes buying co-ops to achieve economies of scale when purchasing agricultural goods
Treasury STRIPS
·Issued at a discount and backed by U.S. Treasury, Mature at par, Discounts: accrete i.e add, adjust cost basis up. Premiums: amortize i.e. subtract, adjust cost basis down
ALPHA
·The actual returns that a portfolio manager generates in excess of the risk-adjusted returns as defined by the CAPM; If the risk-adjusted return that is expected is 8% and the actual return is 9%, then the alpha is a positive 1%, and indicates investor's return was greater than the risk he took.
BETA: Measures the volatility of a security compared
·The beta of the market is 1.0: A security with a beta greater than 1.0 is more volatile than the market and A security with a beta less than 1.0 is less volatile than the market.
CAPITAL ASSET PRICING MODEL (CAPM)
·Used to derive expected return of an asset on the basis of the asset's systematic risk and systematic risk cannot be diversified away.
