Final #1 Missed Questions
A "qualified" legal opinion is one which: A. gives a conditional affirmation of the legality of the securities B. gives an unconditional affirmation of the legality of the securities C. is given by a qualified bond counsel D. qualifies the issue for a federal tax exemption from taxation
The best answer is A. A qualified legal opinion is one where the bond counsel has found a legal or tax "problem," and the counsel details the "qualification" in the opinion. Thus, the opinion is a conditional affirmation of the legality of the issue.
Publicly traded companies are: A. required to use accrual accounting B. required to use cash accounting C. required to use cost accounting D. have a choice of using either accrual, cash, or cost accounting
The best answer is A. Corporate financial records are kept using accrual accounting - a method that attempts to match revenues and expenses. Very small non-public companies can use cash accounting, which simply records revenues when cash payment is received; and liabilities when payment is made. In contrast, accrual accounting books revenue when services or product is delivered (but payment typically occurs in the future); and liabilities when incurred (again, payment of the liability typically occurs in the future).
Initial approval of options accounts is performed by the: I Branch Office Manager II General Principal III Registered Options Principal IV Financial and Operations Principal A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Initial approval of each options account is either performed by the Branch Office Manager (Series 9/10 license - the Series 9 covers options rules) or the Series 4 Registered Options Principal. The General Principal (Series 24 license) cannot approve options accounts - there is no options content on that exam. The Financial and Operations Principal (Series 27) is for the firm's supervising accountant.
All of the following are lagging economic indicators EXCEPT: A. Building Permits B. Corporate Profits C. Commercial Loans Outstanding D. Employment Duration
The best answer is A. Lagging indicators include reported corporate profits (showing what was already earned in the last quarter); commercial loans outstanding (showing what has been borrowed and presumably spent); and employment duration (showing how long someone was employed before being terminated). Building permits are a leading indicator, showing planned future production.
The ex date for stock splits and stock dividends is set at: A. 1 business day after the payable date B. 1 business day after the record date C. 2 business days prior to payable date D. 2 business days prior to the record date
The best answer is A. The ex date for stock splits and stock dividends is unusual because it is set at the business day after the payable date. The record date to receive the extra shares is typically a month before the payable date. Someone who buys the shares settling after the record date will not get the extra shares. Yet on ex date the price is reduced, and that customer has the same number of shares, now worth less. The customer can claim the extra shares he deserves with a due bill. As of the morning of the ex date, any new purchaser buys at the reduced price and a due bill is not needed.
A customer sells short 100 shares of ABC stock at $40 and buys 1 ABC Mar 40 Call @ $5. The maximum potential loss is: A. $500 B. $3,500 C. $4,500 D. unlimited
The best answer is A. The long call limits loss on the short stock position in a rising market. The stock was sold for $40 and can be bought back at $40 by exercising the call. The only loss to the customer is the premium paid of 5 points or $500.
Which of the following conditions must be met to send a confirmation solely to a person holding a power of attorney in a customer account? I The customer must request the sending of the confirmation in writing II The person holding the power of attorney must request the sending of the duplicate confirmation in writing III The registered representative must believe that the action is prudent IV The manager must approve of the action in writing A. I only B. II only C. I and III D. I, II, III, IV
The best answer is A. To send a confirmation to someone designated by a customer, the customer must make the request in writing. This is a purely clerical procedure, so no approval of the principal is required, nor is there a "prudent man" test. The written request must come from the customer, not the recipient of the confirmation. Remember, the account belongs to the customer, and all actions taken are at the direction of the customer.
An outstanding bond issue which is currently trading at 103 1/4 is callable starting next year at 102. The call premium on the bond issue is: A. 3/4 points B. 2 points C. 2 1/2 points D. 3 1/4 points
The best answer is B. A bond "call premium" is simply the price above par at which the issuer has the right to call in the bonds from the bondholders. These bonds are callable at 102, hence the call premium is 2 points.
A municipal variable rate demand note is a municipal: A. note that may be retired prior to maturity on any interest payment date at the demand of the issuer B. bond that gives the holder a tender option feature, usually at par, as of the reset date C. note that requires the issuer to reset the interest rate to the market rate upon demand of the holder D. bond that allows the issuer to vary the repayment date, upon giving written notice to the holders
The best answer is B. A municipal variable rate demand note is a municipal bond that gives the holder the right to "put" the bond to the issuer at par, typically at the interest payment dates. The interest rate is reset, usually weekly, to an indexed rate, and thus, will vary. It is called a "note" because the actual maturity is unknown - the holder, in effect, can redeem at par whenever he or she wants. With any variable rate note, the interest rate varies as market rates move; therefore the market price remains at, or very close to, par. Thus, these instruments have almost no market risk.
The sending of customer account statements and confirmations by e-mail is: A. prohibited B. permitted if the customer submits a valid e-mail address C. permitted if the customer makes the request verbally D. permitted only if the branch manager approves
The best answer is B. Customer mailings can be sent by e-mail instead of through the physical mail system if the customer provides a valid e-mail address. This is done by the customer e-mailing the request for electronic mailings.
Under IRS rules, if a customer selling shares of stock wishes to use specific identification instead of FIFO for cost basis reporting, the broker-dealer effecting the trade must be notified of this no later than: A. Trade date B. Settlement date C. December 31st of that year D. April 15th of the following year
The best answer is B. If a customer says nothing at the time of a stock sale, IRS rules requires that FIFO be used to determine which shares are sold. If the customer wishes to use specific identification instead, this must be chosen by the customer no later than settlement date.
CLOSED END BOND FUNDS Fund NAV Stock Close NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to sell 100 shares of Acco Fund will receive: A. $813 B. $813 less a commission C. $832 D. $832 less a commission
The best answer is B. If closed-end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Acco Fund is $8.13. An investor selling 100 shares receives $813 less a commission.
A customer buys 200 shares of ABC at $68 and sells 2 ABC Jan 70 Calls @ $3. The maximum potential gain is: A. $500 B. $1,000 C. $6,800 D. unlimited
The best answer is B. If the market rises, the calls are exercised. The stock (which cost $68) must be delivered at $70 for a gain of $2 per share. Since $3 was collected in premiums for selling each call, the net gain, if exercised, is 5 points or $500 per contract x 2 contracts = $1,000.
Under Rule 147, intrastate offerings cannot be resold out of state for how long following completion of the initial offering? A. 3 months B. 6 months C. 12 months D. 24 months
The best answer is B. Rule 147 requires that resale of securities sold under the intrastate exemption be restricted to intrastate only for 6 months following completion of the initial offering. Thereafter, they can be resold interstate. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a "private transaction."
Which of the following corporate distributions are taxable to the recipient? I Cash dividend II Stock dividend III Product dividend IV Stock split A. I only B. I and III C. III and IV D. I, II, III, IV
The best answer is B. Stock dividends and stock splits are not "taxable," the recipient reduces his or her cost basis per share for the additional shares received. Cash dividends and product dividends received, are taxable.
Stocks that are listed on the New York Stock Exchange can also typically be listed and traded on: A. the American Stock Exchange (NYSE American) B. the Chicago (Midwest) Stock Exchange C. the Chicago Board Options Exchange D. Instinet
The best answer is B. Stocks that are listed on the NYSE are typically not listed on the AMEX or NASDAQ. Each one of these is a "national" stock exchange, trading companies where there is a "national interest" in trading those stocks. In the past, the AMEX (now renamed the NYSE American) and NASDAQ were so-called "breeding grounds" for growing companies. As a company grew, it might qualify for the tougher NYSE listing requirements, and could move to the "Big Board." A dual listed stock is one which trades in more than one marketplace - for example, a young New England company might have listed on the Boston exchange when it was still small; and then listed on the NYSE when the company became large enough. An ECN, such as Instinet, is not a marketplace that lists stocks. It is simply an electronic order matching service.
Under Rule 144, the Form 144 is filed: I by the seller of the restricted shares II by the buyer of the restricted shares III 10 business days prior of the placement of the order IV at, or prior to, the placement of the order A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. The Form 144 is simply a notification to the SEC that stock will be sold in compliance with the Rule - the SEC does not approve of the sale. The Form must be filed by the seller at, or prior to, with the placement of the sell order.
Which of the following is NOT defined as an "investment company" under the Investment Company Act of 1940? A. Face Amount Certificate Company B. Real Estate Investment Trust C. Management Company D. Unit Investment Trust
The best answer is B. The Investment Company Act of 1940 defines 3 types of investment companies; face amount certificate companies, unit investment trusts, and management companies. Real Estate Investment Trusts are not defined under the Investment Company Act of 1940 because they do not invest in securities; rather, they make real estate investments.
Ford Motor Company has issued 8% convertible debentures, convertible at a 10:1 ratio. Currently the debenture is trading at 102. The stock is trading at 98. Which statements are TRUE? I The conversion price is $100 II The conversion price is $102 III The parity price of the common stock is 98 IV The parity price of the common stock is 102 A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. The conversion price is found by taking par and dividing it by the conversion ratio. $1,000 / 10 = $100 conversion price. Thus, each bond is convertible into 10 shares of common stock at $100 each. If the bond is now trading at 102, or $1,020, the common stock's parity price is $1,020 / 10 shares per bond = $102. Since the common stock is trading at $98 per share, it is trading below parity.
A municipal dealer buys $100,000 of 8% General Obligation bonds, M '42, at par. The dealer immediately reoffers the bonds to customers. Which TWO of the following quotes would be considered "fair and reasonable" under MSRB rules? I 102 II 110 III 6.00 Net IV 7.50 Net A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. The dealer purchases 8% bonds at par. Any mark-up that he earns upon reselling the bonds must be fair and reasonable. A price of 102 equals a mark-up of 2% above par. This is certainly fairer than a price of 110, representing a 10% mark-up from par. To get an "approximate" price for a long-term bond offered on a yield basis, divide the coupon by the basis (this only works for long term bonds). Thus, an 8.00% bond offered on a 6.00% basis would have an approximate price of 8.00/6.00 = 1.33333 x $1,000 par = $1,333.33. This is about a 33% mark-up over par, which is excessive. In contrast, an 8.00% bond offered on a 7.50% basis would have an approximate price of 8.00/7.50 = 1.066666 x $1,000 par = $1,066.66. This is a 6.66% mark-up over par, which is a little high, but not as high as the other choice!
A customer has $8,000 of capital losses and $3,000 of capital gains in a tax year. On that year's tax return, the investor has a(n): A. $3,000 capital loss deduction with no loss carryforward B. $3,000 capital loss deduction and a $2,000 loss carryforward C. $3,000 capital loss deduction and a $5,000 loss carryforward D. $8,000 capital loss deduction
The best answer is B. The tax law allows capital gains and losses to be netted each year. Net capital gains are fully taxable at the appropriate tax bracket. However, only $3,000 of net capital losses can be deducted in any year. Any losses above this amount can be carried forward to the next tax year. Here, the customer has a net capital loss of $5,000 of which $3,000 can be deducted this year with the unused $2,000 loss carried forward to the next tax year.
A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st and Jul 1st. A customer buys 5M of the notes. How much will the customer pay, disregarding commissions and accrued interest? A. $5,056.25 B. $5,070.00 C. $5,062.50 D. $5,090.00
The best answer is C. "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). A customer will buy at the ask price, which is 101 and 8/32nds = 101.25% of $5,000 par = $5,062.50.
In 2019, a self-employed individual earns $180,000 for the year, and contributes the maximum amount to an HR10 plan. If this individual wished to make a contribution to a self-directed Individual Retirement Account for this year, which statement is TRUE? A. A contribution is prohibited because this person is already covered under a qualified retirement plan B. A maximum contribution of $6,000 is permitted, which is an adjustment to that year's taxable income C. A maximum contribution of $6,000 is permitted, but no adjustment is allowed to that year's taxable income for that amount D. A contribution is permitted only if the HR10 contribution is reduced by the same amount
The best answer is C. Any individual, whether or not he is covered by another retirement plan, can make an annual contribution to an Individual Retirement Account. However, if that person's income is high (above $74,000 in 2019 for an individual) and that person is covered by another qualified retirement plan, the contribution is not tax deductible. This person makes $180,000 per year and contributes to a Keogh plan, so the IRA contribution is not tax deductible.
A registered representative is invited by a very satisfied customer to that customer's ski house in Vail, Colorado during Christmas. Which statement is TRUE about the representative accepting this invitation? A. If the representative accepts the invitation, this is a violation of FINRA rules because the value is more than $100 B. If the representative accepts the invitation, this is a violation of FINRA rules because there is a conflict of interest C. The representative can only accept the invitation if he or she notifies the member firm and follows the firm's policies and procedures D. The representative can accept the invitation without restriction
The best answer is C. Business entertainment does not fall under the $100 gift limit. Business entertainment is permitted as long as it is not too excessive or too frequent and it must comply with the firm's policies and procedures. Business entertainment means that the representative and the customer are together at some type of event.
Earlier this year, a client of yours wrote a letter to the firm, requesting that his mail be held for 2 months, which your firm did. Later in the year, the customer writes another letter, asking that the mail be held for another 3 months. Which statement is TRUE about this? A. You can follow the customer's written instructions and hold the mail for an additional 3 months B. You can follow the customer's written instructions and hold the mail for an additional 3 months only if the branch manager approves C. You can follow the customer's written instructions and hold the mail for an additional 3 months if the letter included an acceptable reason for holding the mail D. You cannot hold the mail for any additional length of time
The best answer is C. FINRA does not allow a customer's mail to be held unless the customer requests in writing. As long as the request does not exceed 3 months, no other information is needed. However, if the customer wants the mail held for more than 3 months, then a valid reason must be given in the request, such as safety or security concerns. In calculating the 3 months, FINRA aggregates all hold requests that occur within a year. The first 2 month hold request did not require an acceptable reason. The next request takes the customer over 3 months in 1 year, so an acceptable reason must be given in the 2nd request letter in order to hold that customer's mail again.
The bond counsel for a new municipal issue will opine on which of the following? I The legal validity of the issue as a binding obligation on the issuer II Federal and Local tax status of the interest income to be received by holders of the issue III The fairness and reasonableness of the reoffering yields IV The compliance of the issuer with Treasury arbitrage regulations A. II, III, IV B. I, II, III C. I, II, IV D. I, III, IV
The best answer is C. Municipal bond counsels give an opinion on the validity, legality and tax exempt status of a new municipal issue. They do not give an opinion of the fairness of the yield on that issue (remember, lawyers do not give economic opinions).
Which is the BEST definition of an "annuity unit"? A. An accounting measure used to determine the number of units the contract holder may purchase in the separate account B. An accounting measure used to establish the contract holder's ownership interest C. An accounting measure upon which the amount of pay out is determined D. An accounting measure used to determine the contract holder's death benefit
The best answer is C. Once a variable annuity contract is annuitized, accumulation units are converted to annuity units. These determine the annuity payments to be made.
Which statement is FALSE about Rule 147? A. Both the issuer and all purchasers must be state residents B. Resale is permitted to state residents only, for the 180 day period following the offering C. The rule exempts intrastate issues from State registration D. The rule exempts intrastate issues from Federal registration
The best answer is C. Rule 147 exempts "intrastate" issues from registration with the SEC. However, the issue is still subject to state (blue-sky) registration. To obtain the 147 exemption, both the issuer and the purchaser must be state residents. Resale is restricted to state residents for 6 months following the offering; thereafter, the issue can be sold interstate. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a "private transaction."
The provisions of the Securities Exchange Act of 1934 apply to which of the following activities? I Trading rules for exempt securities II Trading rules for non-exempt securities III Anti-fraud rules for exempt securities IV Anti-fraud rules for non-exempt securities A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
The best answer is C. The Securities Exchange Act of 1934 relates to the secondary (trading) market. The provisions of the Act apply to non-exempt securities only, with the exception of the "anti-fraud" provisions of the Act. The "anti-fraud" provisions apply to both exempt and non-exempt securities.
A customer is short 1,000 shares of ABC stock at $50 in a margin account. The minimum maintenance margin requirement is: A. $10,000 B. $12,500 C. $15,000 D. $25,000
The best answer is C. The minimum maintenance margin requirement for short stock positions is 30% of the current market value = 30% of $50,000 = $15,000.
Which of the following parties of an account can give trading authorization to another party of the account? A. A first party can give trading authorization to a third party B. A first party can give trading authorization to a second party C. A second party can give trading authorization to a third party D. A third party can give trading authorization to a second party
The best answer is C. The parties to an account are: First Party: Brokerage Firm Second Party: Customer Third Party: Someone Other Than the Broker or Customer Since only Second Parties can open accounts, only a Second Party can give trading authorization to either a First Party (a discretionary account) or to a Third Party (a Third Party trading authorization).
Buy stop orders: I are used to buy securities at prices that are lower than the current market II are used to buy securities at prices that are higher than the current market III guarantee a specific execution price or better IV do not guarantee a specific execution price or better A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. Buy stop orders are used to buy securities at prices that are higher than the current market - they are used to "stop" a loss on a short stock position. If the market rises to the stop price, the order is "elected" and becomes a market order to buy. The buy order will be filled at the prevailing market price - so there is no guarantee of a specific execution price or better.
All of the following debt securities may be issued by corporations EXCEPT: A. Equipment trust certificates B. Mortgage bonds C. Adjustment bonds D. Moral obligation bonds
The best answer is D. Corporations do not issue moral obligation bonds. Municipalities that are at their legal debt limits may issue such bonds, which morally obligate them to pay (but there is no legal obligation to pay). Corporations can issue equipment trust certificates backed by equipment owned by the company. Also, they can issue adjustment bonds, also known as income bonds, that obligate the issuer to pay only if there are sufficient earnings. Finally, corporations can issue mortgage bonds backed by real property.
Which of the following recommendations are "red-flags" that are usually unsuitable for seniors? I Variable annuities II Structured products III Mortgaging home equity for investment purposes IV Using retirement savings to invest in high-risk investments A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV
The best answer is D. FINRA has stated that it does not prohibit any particular recommendation to a senior citizen as long as it is suitable, however certain types of recommendations are "red-flags" - meaning that the firm must be able to strongly defend such a recommendation to a senior citizen. Included on the list of "no-no's" are recommendations to seniors to: purchase variable annuities, equity indexed annuities, and real estate limited partnerships purchase variable life settlements purchase complex structured products such as CDOs (Collateralized Debt Obligations) mortgage their residence to obtain funds for investment purposes use retirement savings, including early withdrawals from IRAs, to invest in high-risk investments
Which call covenant MUST be considered when computing the dollar price of a municipal premium bond quoted on a yield basis? A. Catastrophe call B. Extraordinary optional call C. Sinking fund call D. In whole call
The best answer is D. MSRB rules require that if a premium bond is quoted on a yield basis, that the dollar price that is computed be the lower of the price computed to any call dates or maturity. This usually means that the price is computed to give the yield to the near term call date, since the premium is lost in the fastest time. The only calls that must be considered are those that have a "reasonable" certainty of occurring. An "in whole" call means the issue or maturity is callable in whole at predetermined dates. These call dates must be considered. Sinking fund calls are chosen on a random order basis - since we don't know which bonds will be selected for call, there is not a "reasonable" certainty. Extraordinary optional calls, such as a mortgage revenue bond issue calling in bonds if mortgages are prepaid, also is not considered. Finally, a catastrophe call (for example, bonds are called if a facility is destroyed) does not have a "reasonable" certainty and is not considered.
Which statement is BEST regarding participating preferred stock? A. The dividend rate is fixed B. The dividend rate varies depending on the decision of the Board of Directors C. The dividend rate is fixed as to maximum but not as to minimum D. The dividend rate is fixed as to minimum but not as to maximum
The best answer is D. Participating preferred pays a fixed dividend rate but also participates with common in "extra" dividends declared by the Board of Directors. Therefore, the dividend rate is fixed as to minimum but not as to maximum.
The Dow Jones Averages consist of: A. 15 stocks B. 20 stocks C. 30 stocks D. 65 stocks
The best answer is D. The Dow Jones Averages have 65 stocks - 30 industrials, 20 transportations and 15 utilities. The Dow Jones Industrial Average, which is the most widely quoted of the 3 averages, includes 30 stocks.
In November, a customer buys 1 ABC Jan 75 Call @ $6 when the market price of ABC is 73. The customer's maximum potential gain is: A. $600 B. $6,900 C. $8,100 D. unlimited
The best answer is D. The holder of a call has unlimited gain potential. He or she has the right to buy stock at a fixed price - and the stock can rise an unlimited amount.
A customer owns a long-term negotiable CD. If the customer wishes to tender the CD prior to maturity, the registered representative should inform the customer that: A. a prepayment penalty will be charged B. he or she will receive par value of the principal plus accrued interest C. the CD may not be redeemed prior to maturity D. the customer will receive the market value plus accrued interest
The best answer is D. There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If the customer redeems prior to maturity, the customer will receive the market value of the CD at that point in time. If market interest rates have risen, the CD value will be lower than par.
Individual retirement account (IRA)
a personal retirement plan that allows individuals with earned income to deposit up to $6,000 for the year 2019. Contributions are deductible in full for individuals who are not covered under another qualified retirement plan. If the individual is covered by another qualified retirement plan, the deductibility of the contribution varies with the individual's income. The earnings in the account accrue on a tax-deferred basis.
HR-10 plan
also called a Keogh plan, a retirement plan for self-employed individuals, based upon their self-employed income. Contributions to a Keogh are fully deductible from the employer's gross income. Employer contributions are limited to 25% of pre-deduction income annually, capped at a maximum of $56,000 in 2019.
Stop order
also called a stop-loss order, an order that becomes a market order to buy (buy stop) or a market order to sell (sell stop) when the security trades at a specified price, known as the stop price. Once the market goes to, or through, the stop price, the order is said to be "elected," and turns into a market order - thus the actual execution price is not known. Once elected, the order is filled "at the market." A buy stop order is placed above a stock's current market price and is executed if the market rises to, or through, that price. A sell stop order is placed below a stock's current market price and is executed if the market falls to, or through, that price.
Bond counsel
also known as the bond attorney, the lawyer or law firm that prepares all the legal documents for a new issue municipal bond (the bond resolution, trust indenture (if there is one) and official statement); and which renders the legal opinion attesting to a bond's legality, validity, and tax-exempt status.
Rule 144
an SEC rule that permits the holders of private placement "restricted" shares to resell these securities in the public markets without filing a registration statement, if the issuer has "gone public." Rule 144 requires public notice of the sale; places limitations on the timing of the sales; and limits the amount that can be sold. Holders of "control" stock (shares purchased by officers of the issuer in the open market) also come under most of the Rule 144 limitations.
Lagging economic indicator
an economic measure that shows where the economy was in the business cycle during the past 12 months. Lagging indicators include reported corporate profits, the ratio of consumer credit to income levels, and employment duration
Ex rights / Ex stock dividend date
different than the ex date for cash dividends, the ex date for non-cash distributions is set at the business day after the payable date. Due to this unusual ex date, between the record date and the payable date, the securities will trade with a due bill for the extra shares or rights issued as a result of the distribution
Investment Company Act of 1940
federal regulation administered by the SEC that defines the structure for investment companies (face amount certificate company; unit investment trust; or management company) and which sets the regulations under which the companies must operate.
Unit investment trust (UIT)
one of the three types of investment companies defined in the Investment Company Act of 1940. A UIT is organized not as a corporation, but as a trust which issues units (called shares of beneficial interest) representing an undivided interest in a portfolio of securities. UITs can either be "fixed" or "participating." In a fixed UIT, the trust establishes a portfolio that never changes. The portfolio eventually self-liquidates. In a participating UIT, a holding company buys open-end management company (mutual fund) shares. Investors buy units of the holding company.
Face amount certificate
one of the three types of investment companies defined in the Investment Company Act of 1940. The purchaser of this instrument agrees to pay a fixed amount either periodically or in a lump sum. In return, the issuer agrees to pay the purchaser the face amount of the certificate at some future date. The face amount is always greater than the investor's total periodic payments - the difference being the income earned on the certificate. Few of these certificates are issued today.
Management company
one of the three types of investment companies defined under the Investment Company Act of 1940. This investment company is organized as a corporation and employs an investment adviser to manage a portfolio of securities, against which it issues shares to the public. Depending on how it issues securities to the public, a management company is described as either an open-end management company (i.e., a mutual fund) or a closed-end management company (i.e., a publicly traded fund).
Second party
regarding brokerage accounts, the parties to the account are: First Party - Brokerage Firm; Second Party - Customer; Third Party - Anyone other than the Brokerage Firm or Customer.
Real estate investment trust (REIT)
regulated as a closed-end management company, REITs purchase different kinds of real estate investments such as buildings, mortgages, and short-term construction loans. REITs can invest in property (Equity REIT) or can buy mortgages and other real estate loans (Mortgage REIT). This security trades on the exchanges or in the OTC market.
Exempt security
securities, including governmental issues such as U.S. Government securities, Agency securities, municipal bonds; money market instruments such as commercial paper and banker's acceptances; and issuers that are regulated under other laws such as banks, insurance companies and common carriers; that are exempt from the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 (except for the anti-fraud provisions).
Restricted stock
stock, usually issued directly to the officers or directors of a corporation in a private placement, that has not been registered with the SEC. These shares are privately placed under Regulation D, and thus are exempt from registration. Resales of restricted securities in the public markets must comply with the provisions of SEC Rule 144
Rule 147
the SEC rule that spells out the requirements for an issuer to obtain an exemption from registration for a new issue because the offering will be made only in 1 state (an intrastate exemption). 100% of the issue must be sold solely to state residents to obtain the exemption.
Securities and Exchange Act of 1934
the federal regulation to curb manipulation and fraud in the trading (secondary) markets. The Act consists of a broad array of provisions to: curb insider abuses; require registration and self-regulation of exchanges under SEC oversight; require registration of member firms and their sales employees; require issuers to make public their financial statements; give the Federal Reserve the power to set margins; and numerous rules to curb manipulative market practices.
Variable rate demand note
the first attempt at issuing a long-term municipal security at a short-term interest rate, this is a municipal note where the issuer resets the interest rate weekly (or even daily), based upon a reference interest rate. At the reset date, the owner can either continue to hold the note at the new interest rate; or can redeem the note with the issuer at par. Thus, the interest rate on the note varies; and the note is payable upon demand of the holder at each reset date.
Annuity units
the fixed number of units upon which the pay-out from a fixed or variable annuity is calculated. The number of annuity units is fixed when the accumulation units are annuitized.
Participating preferred stock
the preferred shareholder receives the fixed dividend and also participates in better than expected earnings with the common shareholder. This "extra" dividend is payable to both the preferred and common stock only if the earnings for common exceed a specified amount. These securities are rarely issued today.
Legal opinion
the written opinion of the municipal bond attorney attesting to the fact that a municipal bond issue is valid, legal under the terms of the municipality's charter and that the interest on the bond is federally tax-exempt. An unqualified legal opinion means that the bond counsel has found no potential problems with the issue. A qualified legal opinion means that contingencies exist that could affect the bond's legal or tax status.
In-whole call
under the terms of the call covenant found in the bond contract, the issuer has the option of calling all of an outstanding issue at one time at predetermined dates and prices. The issuer will call in the bonds if interest rates have fallen sufficiently for the issuer to refinance at lower current rates and save on future interest payments
