SIE questions

An investor purchases a 5% bond at $800 and holds it for 5 years, at which time the bond matures, the investor receives the principal. What is the total return for this investor?

$450 The bond will pay $50 annually for each of the 5 years, wh is $250. This bond was purchased at a discount ($800) and will mature at par ($1,000), giving the investor a $200 gain. The interest earned plus the gain is $450.

Short Call Option

obligation to sell asset (bearish) Received premium Max gain= premium Max loss= unlimited B/E: strike + premium

Registered representative (RR)

Individual who is registered with the broker dealer and solicitations or conduct securities business. Considered an associated person.

Qualified institutional buyer (QIB)

Investor that owns and invest a minimum of 100 million in securities on a discretionary basis. An individual cannot qualify.

BD margin department

Overseas the extension of credit to investors from the farm. Ensures the firm and investors follow federal regulations concerning the extension of credit allowed within margin accounts.

Settlement date of corporate and municipal securities (bonds)

Regular-way settlement trade date + 2 business days Regulation T under Securities Exchange Act of 1934

Stock spilt require approval from

Shareholders

Securities act of 1933 "paper act"

1. Provide investors with sufficient information to make informed investment decisions related to new issues through full and fair disclosure. 2. prevent misrepresentations and fraudulent activities in the sale of securities. Under this Act, issuers selling securities to the public are generally required to register their security with the SEC by filing a written registration statement and prospectus. To sell a new issue, the security must either be registered with the SEC or be exempt from registration.

Types of Preferred Stock

1. Straight -pays the stated dividend payment -missed dividends are not paid to holder 2. Cumulative -accrues payments due in the event dividends are reduced/suspended -provides steady income 3. Callable Preferred -typically has highest state dividend rate -company can buy back @ stated price after specified date (refinance) 4. Convertible Preferred -generally issued with a lower stated dividend rate because the investor can convert it to common shares, price fluctuates w/ CS price 5. Adjustable Rate Preferred -dividends are tied to rates of other interest rate benchmarks -price stable -LEAST appropriate choice if looking for incomey

Broker Dealer Departments

1. investment banking 2. research 3. sales 4. trading 5. operations

A recession begins when there are ___ consecutive quarters of declining real gross domestic product (GDP)

2 (6 months)

When must a customer make payment for most purchases of securities ?

2 business days after settlement date. Investors are required to pay for securities 2 business days after the settlement date ( S + 2 ) . Regular - way settlement for corporate and municipal securities is trade date plus 2 business days ( T + 2 ) , so the payment due date can also be worded as trade date plus 4 business days ( T + 4 ) . Regular - way settlement for U.S. government securities and options is T + 1 , so the payment due date can be worded as T + 3 .

ABC Brokerage runs an "Ask the Expert" call-in line to provide both prospects and customers with general information regarding investments and estate planning. Under the TCPA of 1991, during what hours may ABC offer this service?

24 hours a day

Communication records are kept for:

3 years correspondence, emails, instant messages, records of gifts !

Updates and account information verification must be sent to the client at least every:

36 months

Customer Complaints are kept for:

4 years

SAR & CTR are kept for:

5 years

Municipal complaints, account records, blotters, POA's

6 years

An investor owns a 6% corporate bond, which was purchased on a 6.75% basis. Which of the following could be the bond's market price on the date of purchase?

89 Since the basis (YTM) of the investor's bond is greater than the coupon (nominal) rate, this is a discount bond (a price less than par). Since each bond point is $10, a bond quoted at 89 points = $890. This is the only answer choice below par ($1,000). Yield comes from semiannual interest payments and price appreciation at maturity. If the interest payments are 6%, the other .75% (75 basis points) has to come from some price appreciation at maturity. Upon maturity, the investor receives par value, which is greater than the purchase price resulting in a capital gain for the investor.

If an investment yields 9% and CPI is 3% for that time period, what is the real rate of return?

9-3=6%

The Securities Act of 1933 covers ?

A New issues of securities that must be sold with a prospectus

Securities exchanges are:

Auction markets where exchange-listed securities are bought and sold. Have listing requirements that issuers must meet. Those that do not trade OTC

Central registration depository (CRD)

Automated database containing records on register persons and firms. Is maintained and operated by FINRA.

Broker-dealer is

Firm in the business of executing security traits for commission

Market maker is

A dealer always ready to buy and sell securities by maintaining a quote of buy and sell prices

Trustee is

A firm, such as a trust company, commercial bank, or similar financial institution, hired by bond issuer's to protect the bond holders interest

Custodian is

A firm, such as a trust company, commercial bank, or similar financial institution, hired by the issue were to physically safeguard cash and securities for buying public

Mutual Fund Prospectus

A description of the mutual fund, including the fund's objectives, investment policies, and restrictions. Costs and annual fees and expenses charged by the fund.

A dealer is

A firm acting as a principal trading for its own account, and charges a markup on purchases, or mark down on sales, instead of being paid commission. Act in principle capacity.

A broker is

A firm acting as an agent, executing orders on behalf of customers and gets paid commission. Acts in an agency capacity.

Investment advisor (IA)

A firm in the business of providing advice on securities for compensation.

Introducing broker dealer is

A firm that introduces customer accounts to a clearing broker dealer through a clearing agreement, which dictates each parties responsibilities. Does not maintain custody of clients assets securities.

A trader is

A person in the firms trading department, who affect security transactions at the market makers quotes

callable bonds

Issuer may end contract early at or above face value. (Par or premium) some interest Call protection: not called right away, specific time set and disclosed. When interest rates fall High coupon

nonqualified retirement plan

A retirement plan that do not meet ERISA standards They may lose some or all these benefits.

Stock Rights

A short-term privilege that allows current stockholders to buy stock of a new issue at less than market value.

Under SEC rules, member firms that maintain records utilizing an electronic recordkeeping system may preserve the records in all the following ways:

Acceptable storage media includes original hard copies, microfilm, microfiche, and optical disc. As an alternative, firms may maintain a time-stamped audit trail system. A separate duplicate copy needs to be maintained in an alternate location or a backup electronic recordkeeping system must be in place. Firms are allowed to utilize a third party to maintain records if the third party provides proper maintenance and allows unlimited and unhindered access of these records to the firms. Firms should not send duplicate copies to FINRA.

Inflation-Adjusted Return

Actual Return - Rate of Inflation

Rule 144A regulates:

Allow qualified institutional buyers (QIB) to trade unregistered securities with each other. Restrictions: initial purchases by QIB must equal $500,000 or more. Trade on separate trading platform: PORTAL Never publicly traded unless registered.

American vs. European Options

An American option can be exercised at any time during its life (AA) A European option can be exercised only at maturity (EE)

Refunding Bonds

Bonds issued to retire bonds already outstanding. The refunding bonds may be sold for cash and outstanding bonds redeemed in cash, or the refunding bonds may be exchanged with holders of outstanding bonds.

Qualified retirement accounts have annual contribution limits adjusted annually for inflation, contributions that exceed the limit are subject to:

An annual 6% excess contribution penalty tax until excess is withdrawn.

Assumed Interest Rate (AIR)

An arbitrary rate of interest used to project the rate of growth in the separate account assets in s a variable contract has been annuitized. Not guaranteed Separate account > Air : annuity payments increase Separate account < Air : annuity payments fall Rate benchmark remains unchanged throughout life.

Registar is

An entity that works with the transfer agent to keep current files of bonds and stock owners. They ensure that the amount of stock in circulation does not exceed the authorized amount.

Primary Issue

a new offering of an issuer sold to investors No matter how many shares it may have issued in the past.

Subordinated debenture bond

An unsecured bond that gives bondholders a claim secondary to other bondholders. After secured bondholders and straight debenture holders. Higher default risk and high term interest rates to investors.

An associated person is

Any partner, officer, Director, branch manager, person, under common control, or employee of broker or dealer. Register representative is considered an associate person.

Only signature required on broker dealer new account form is :

Approving principal

Records that must be kept for the life of the enterprise plus an additional 3 years after enterprise ceases to exist

Articles of incorporation/partnership agreement, board meeting minutes(partnership minutes), stock certificate books and amendments

Mutual fund managers compensated :

Based on percentage of assets under management (management/investment advisory fee. No sales charge

Which investments do not protect a customer against inflation?

Bonds

Hedging

Buy option contracts to protect Long stock with long put Short stock with a long call Ex: buy a stock and buy a put so you're covered if the stock goes down

Freeriding (market manipulation)

Buying and immediately selling securities with- out making payment. This practice violates the SEC's Regulation T.

A systemic risk is a risk that

Cannot be avoided or reduced through diversification Market, interest rate, reinvestment, inflation, and currency risks.

Typically, an investor with a short time horizon would be most concerned with what?

Capital preservation

churning

Causing or making transactions to earn more commissions, disregarding the best interest of the client. Encouraging trades of size, which are too large for the customer for the purpose of generating larger compensation.

PPI (producer price index) measures

Change in producer or wholesale prices in manufacturing or commodity markets

Variable life policy owners have the right to vote for all of the following

Changes in investment policies The independent auditing firm The board of managers

Statement of changes to retained earnings

Changes in the amount of profit the company has kept and reinvested in the business for further growth. Shows how the company is growing and predicts further dividend payments/growth.

designated market maker (DMM)

Charged with keeping the market fair and orderly. Facilitates the trading of a given stock, matching up buyers and sellers. When no public orders are outstanding, DMM can buy/sell for own account.

Share Classes (Mutual Fund)

Class A (Front-end load) Shares: -Sales charges are paid up front (when buying shares) -MOST COMMON way paying for mutual fund shares. Class B (Back-end load) Shares: -Sales charged is paid at the time an investor sells (redeems) shares. Also referred to as contingent deferred sales charge (CDSC) -The sales load, a DECLINING percentage charge reduced annually. Class C (level-load) Shares: -have a 1 yr 1% CDSC, a .75% 12b-a fee, and a .25% shareholder fee. These never go away. -appropriate for investors who have short time horizons due to annual charges make them expensive to own. No-load shares: -Companies market their share to public. -No underwriters -No sales charge and purchased at NAV -Has redemption fee when selling (redeeming) but it's a small amount and fixed.

Options clearing corporation (OCC)

Clearing agency, through which transactions for all listed options are completed. Is the obligator, the grantor and the issuer of options

What type of underwriting is used for general obligation issues?

Competitive bed

securities regulated by the Securities Exchange Act of 1934

Corporate securities traded in the secondary market

Record Retention

Correspondence and communications, including e-mails, instant messages, and records of gifts, are kept for 3 years Customer complaints are kept for 4 years - CTR & SAR reports are kept for 5 years -- Customer account records, blotters, municipal complaints, and PAs are kept for 6 years -- Articles of incorporation/partnership agreement, board meeting minutes, and stock certificate books are kept for the life of the enterprise plus 3 years after the enterprise ceases to exist

Company Balance Sheet would show:

Current assets and current liabilities Capitalization What is has in value and what debt is outstanding.

Mutual fund prices

Customers redeem at the NAV and purchase at the POP. The POP = NAV + SC. This is the mutual fund pricing formula, which is more commonly expressed as NAV + SC = POP. Typically, when the POP equals the NAV, it is likely the investor is purchasing a no-load fund.

market order

Day order

Public offering price is

Determined by the underwriter and issuer, and includes the total amount needed to come and see the underwriter, in addition to the amount required by the issuer.

Series Bonds

Different issue dates, same maturity date

DPPs

Direct Participation Programs

The fed has announced today that they are raising the discount rate by 25 basis points. The market price of a PDQ 6.5% bond that closed yesterday at par will likely trade today at:

Discount When interest rates rise existing bonds become less attractive due to the new bonds being issued at the new higher rates. Interest rates rise=bond prices fall. A bond trading at par before the rise in rates will likely trade at a discount after it goes up.

Which index is the narrowest measure of the market ?

Dow Jones Transportation Index

catch-up provision

Employees over age 50 can contribute and make additional contribution to qualified plan. Limit changes annually

Securities and Exchange Commission (SEC)

Enforcer of federal securities law and is responsible for protecting U.S. investors

BD Operations department

Ensures accurate record keeping within the firm

BD operations department

Ensures accurate recordkeeping within the firm

JTWROS 2 siblings acquired 1,200 shares as joint tenants with right of survivorship. Each sibling's ownership is:

Equal/undivided Ownership/interest

What may preserve a customers purchasing power?

Equity holdings

Employee Retirement Income Security Act (ERISA)

Established minimum standards to protect the interest of participants and beneficiaries of employer-sponsored retirement plans offered by the private sector. Qualified retirement, must meet the minimum standards to qualify for certain tax benefits under the internal revenue code (IRC) Must be in writing and under ERISA to ensure not discriminatory, and fiduciaries do not misuse the plan assets.

Which date of the dividend payment process is set by FINRA

Ex-dividend date

De minimis rules exception

Exception of MSRB Rule G-37, only contributions to officials of issuers are made by MFPs entitled to vote for such officials, provided the contributions are not more than $350 by each MFP to each official, per election.

ETN

Exchange Traded Note unsecured best securities issued by banks or financial institutions. Backed by full faith and credit

Who is hit the hardest by inflation?

Fixed income investors as the rates of return are most likely to be less than the inflationary increases

no-load fund

Fund-to-investor method of purchasing mutual fund shares. No middle man (BD or RR)

ETF

Funds not actively managed. Tax and cost efficient Trade at varying prices during normal trading hours(9:30-4pm) Registered as UIT or Open-ended investment companies ETF trade in exchanges

warrant

Gives the holder the ability to buy a specified number of shares at a predetermined price and on a Specified future date. Long term

BD trading department

Handle trade executions for clients and the firm

BD trading department

Handles trade executions for clients and the firm

Clearing broker dealer is

Handles trade, both buy and sell. Responsible for all paperwork associated with the execution of the transaction and maintain custody of client, assets and securities, which can be segregated appropriately.

To receive favorable tax treatment a REIT must

Have at least 75% of its assets invested in real estate, cash or treasuries Minimum of 75% of its gross income from real estate activities And 90% of ordinary income must be passed through to holders of the units

Primary offering

IPO might sell additional securities to raise more capital: follow-on offering / additional public offering (APO)

Risks avoided by investing in us government securities

Marketability and default risk However, capital subject to erosion from inflation and from rising interest rates.

discount rate

If fed lowers discount rate= cheaper for banks to borrow money and lend more. Money supply increases=interest rates fall. Money supply decreases= interest rates rise.

A call option above strike price

In the money

The shares of ABC Incorporated's preferred stock are currently trading at $110, which is above its par value. The most likely reason for this increase in market price is:

Interest rates have declined since this preferred stock was issued and its dividend yield is now more valuable to investors.

Declining CPI well traditionally cause

Interest rates to decrease, causing bond, prices to rise and yields to decrease

Rising CPI will traditionally cause

Interest rates to increase causing bond prices to fall and yields increase

BD research department

Investigates issuers and the merits of their securities to make buy and sell recommendations

Wrap Account

Investment advisory product Person must be registered as a AI to charge wrap fees

Security is an

Investment contract offered through a legal entity managing the efforts for an expected profit. Stocks, bonds, and mutual funds.

final due diligence meeting

Just prior to the end of the cooling-off period Discuss/review detailed information in the registration statement, determine if all the material information regarding the issue had been disclosed, and prepare final prospectus for submission to SEC.

Issuer is an

Legal entity: corporation, municipality, federal government, offering securities to the public to raise capital. They may sell equity(stocks) or debt(bonds) securities to raise money.

LGIPs

Local Government Investment Pools: established by state/local government entities to allow for the investment of public funds. Regulated by MSRB Not available to general public

All of the following are municipal fun securities

Local government investment pools ABLE programs 529 plans

Municipal variable rate demand notes are best described as

Long-term bonds issued at short term rates $100,000 minimum Larger institutional investors Interest as a dusted frequently based on the interest rate environment Floating rate

A portfolio manager rebalances an investors portfolio primarily to:

Make sure the portfolio stays in line at a clients risk profile and investment objectives. To do this, the manager may have to sell assets that are out, performing the portfolio, and by assets that are under performing

Institutional investor is an entity that

Makes security transactions on a large scale for their accounts, or for institutional clients such as: insurance for investment companies, trust, broker, dealers, investment, advisors, banks, savings, institutions, governmental agencies, or employee benefit plans

Market-out clause

May be included in an underwriting agreement that releases the underwriting firm from the agreement. If there are any material adverse circumstances that affect the issue were or market distributions that make marketing, the issue difficult or impossible.

Statement of Cash Flows

Measures inflows and outflows of company's cash. Indicator of company's ability of paying bills.

Participating Preferred Stock

Minimum (fixed dividend) and maximum dividend (percentage of participation) May pay extra dividend along with fixed dividend. The percentage of participation is stated on the preferred stock.

Cyclical stocks

Mirror the economy Examples of securities include automobile, manufacturers, furniture, and clothing, stores, construction, hotels, and restaurants

countercyclical stocks

Move in the opposite direction of the market as a whole Stock market declines equals move towards safe for investment options Stocks, less attractive equals bonds, become favored investment Gold or precious metals sore when the market declines

Which securities have the greatest taxation risk?

Municipal bonds right now they are not subject to federal tax

Letter of Intent (LOI)

Must be completed within 13 months.

Price investor pays for a mutual fund is based on:

NAV + sales charge

NASDAQ markets

National association of securities dealers automated quotation: Global Select Market Global Market Capital Market Securities are referred to as NMS Securities (National Market System)

BD investment banking department

Negotiate with issues when selling securities to the public

Mutual Fund Expense Ratio

Operating costs include BOD stipends, custodial fees, transfer agent fees, advisory fees, 12b-1 fees (if charged) and administrative fees (legal, accounting, and day-to-day expenses) Sales charge is not apart of ratio

Cost Basis

Original purchase price of a security plus any costs associated with that purchase. Used to calculate taxable gains or losses associated with the sale is a security or liquidation in verían types of accounts.

When opening an account registered representative collect all essential information: and much send a copy to the customer with in:

Otherwise known as account record and within 30 days or with customers next statement.

A call option below spike price

Out the money

Telephone Consumer Protection Act of 1991 (TCPA)

Phone call initiated by BDs 9-5 Must have a reason provide call back number Call-in lines are exempt

Mutual funds are:

Pooled investments that can hold a variety of stocks, bonds, and other securities.

market maker payments

Prohibited from issuer for marking a market in a security. unless for bona fide services : underwriting, and reimbursement of regulatory expenses.

generic advertisements

Promoting the issuer itself and not soliciting securities, permitted in the cooling-off period

FINRA and SEC regulation state that commissions and fees charged to customers must be:

Reasonable

Declining inflation rate

Reduce purchase power risk

Which form of business structure allows the owner to limit liability and avoid double taxation of the company's income?

S corporation

broad-based indexes

S&P 100 S&P 500 Russell 2000 Wilshire Index

Liquid assets include?

Savings, checking, annuities, mutual funds, stocks, and bonds. Money market, treasury, bonds, muni bonds.

Underwriter/investment banker

Securities broker Taylor, that administers the public issuance and distribution of securities for a corporation or other issuing body. Works with an issuing entity to assist in determining the offering price, and may buy the security from the issue or to sell to the public investors through a distribution net work.

Capital markets are

Securities markets

lower beta means

Security's value does not fluctuate as dramatically or as frequently.

What type of transaction cannot take place in all option, accounts?

Selling calls

I'll share variable annuities have

Shorter contingent, deferred sells charge. And higher mortality and expense risk fees

Negative yield curves

Shorter maturities, having higher yields, then longer maturities Right before recession Interest rates are very high in the market and the demand for money far exceeds the money supply

Coincident indicators

Show current economic situation Include: personal income, GDP industrial production, unemployment levels Is the economy, a strong then personal income and retail sales will be showing strong data

Who avoids double taxation ?

Sole proprietorship, general partnership, and S corporation

Market Rumors

Spreading false or misleading information about companies to influence the price of stocks and/market price

Blue Sky Laws

State securities laws

put option out of the money

Stock price is higher than the strike price

All the following are backed by the us government, except:

T-receipts

Logging indicators

Take a fact after the economy has changed they confirm where the economy was in the business cycle, and provide information where the economy may be headed Include: average, employment, seriation, reported, corporate, profits, and the average prime rate

Internal Revenue Code (IRC)

Tax deductions on contributions made by the employer, as well as pretax contributions and tax-deferred growth for the plan participant(employee)

BD research department

That investigates issuers and the merits of their securities to buy and sell recommendation

What dates In the dividend payment process are determined by the board of directors?

The amount of the dividend, dividend date, record date, and payable date.

Underwriting spread is

The difference in price between with the public pays and what the issuer receives Compensates : Managing underwriter Syndicate Selling group

If income is passed on to the partners of a DPP what can the partner do with this for tax purposes?

To offset passive losses

credit (default) risk

The possibility that an issuer will be unable to pay back principal/interest.

when a call is exercised

The writer must sell the underlying security at the strike price

Book Value

Theoretical liquidation value of the business. What the stock would be worth if assets are sold and liabilities are paid and all obligations of the corporation are settled

Maximum a person can contribute to a traditional IRA

Total amount of earned income

Treasury Securities and options settlement date

Trade date + 1

auction market

Trading of listed stocks on the floor of the exchange, such as NYSE. Where buyers and sellers come together and trade listed stocks and options that are registered for public trading.

OTC market

Trading unlisted securities Corporate debt, all government and municipal debt securities A negotiated market

cash account

Transactions are paid for with cash or cash equivalent, within a certain amount of time. Regulation T requires payment no late than 4 business days after the trade date (T+4) Investors must pay for their purchases of securities before selling them. Freeriding - If a client attempts to profit on and then sell those same securities before paying for them.

TIPS

Treasury Inflation Protection Securities are a type of us government debt where the principal amount is adjusted every 6 months based on changes in the consumer price index. 1000 par value Pay interest semiannually Interest rate is fixed Principal amount adjusted for inflation No inflation risk because of the semiannual principal adjustment

Tax Deferred Bonds

U.S. Government bonds

Treasury Inflation-Protected Securities (TIPS)

U.S. Treasury securities that protect investors against inflation because the amount to be repaid rises with inflation Principal adjusted every 6 months, paid semiannually Inflation=principal increase Deflation=principal decrease No inflation-risk/purchasing power-risk b/c adj Lower interest rate b/c protection.

Private placement disclosures

Under reg D An offering memorandum Or private placement memorandum (PPM)

Penny Stock Rules

Under the penny stock rules, an established customer is someone who has held an account with a broker-dealer for at least 1 year and has made a deposit of cash or securities into the account OR has made at least 3 unsolicited penny stock transactions of different issuers on 3 different occasions in the account.

UIT

Unit investment trade organized under a trust indenture. Board of trustees Not actively managed by investment advisor because it maintains fixed portfolio. Transaction costs are low

Restricted Stock

Unregistered stock typically acquired through private offerings or employee incentive plans, and is subject to mandatory holding periods before it can be sold.

Leveraged ETFs (Exchange Traded Funds)

Use borrowing techniques and attempt to magnify the returns of an underlying index. Can be used as an alternative to margin, which takes advantage of borrowed money to increase returns. Higher costs must be disclosed Short term investing

Agency Issues (federal government)

Used by government agency

Rule 415 (Shelf Registration)

Used by large, established, publicly traded companies. (blanket registration on file for 3 years). Does not have to adhere to 20 day cooling off period, just provides SEC 2 day notice of new issue. Prospectus supplement provided.

Income Bonds (Adjustment Bonds)

Used when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the corporation has enough income to meet interest on debt obligations and if the board decides to make a payment. Not for investors looking for income

Which index measures activity in NYSE, AMEX and NASDAQ?

Value Line index

serial bonds

Varying maturities and interest rates

Other types of equities

Warrants- sweetener, long-term, issued above cmv, intrinsic value. stock (subscription) rights- preemptive, short term (30 days), issued below cmv Both are Issued by corporation, trade in second market,

Matched sales market manipulation

When 2 or more parties work together buying and seeking a security, with the intent to give the appearance of active trading

Front running (market manipulation)

When employee of a broker dealer prior to executing a large Customer order, places the same order from their own account.

When do issuers typically call bonds?

When interest rates are falling - So they can reissue new bonds with a lower coupon

Registered Representative may buy securities in a clients account without the client's prior written authorization when

When rr only chooses the time and/or price of the trade

Leading indicators

Where the economy is headed Indicators are the stock market money, supply housing, starts and initial claims for unemployment

The sponsor

Wholesaler, distributor, or underwriter Selling fund shares to public or retail broker dealers

Company that is highly leveraged

Will have more outstanding debt compared to the equity shown the balance sheet.

T-STRIPS (Separate Trading of Registered Interest and Principal of Securities)

zero coupon bonds, long term Issued at discount interest is paid at maturity Yearly interest taxable as ordinary income at the federal level. Phantom/imputed interest Interest rate risk(HIGH) Price influenced by interest rate movement in market. Greater discount+longer the term = more volatile Investors to fund retirement Income in retirement vehicles is tax-deferred until withdrawn

higher beta means

Price of the security is more likely to rise or fall dramatically over short period of time High risk tolerance

put option in the money

Price of the stock is lower than the strike price

Freeriding

- If a client attempts to profit on and then sell those same securities before paying for them.

What type of firms are not members of SIPC?

Broker-dealers that sell only mutual funds or variable annuities

Transfer agent is

A firm that performs all recordkeeping and customer service function, processes, name, and address change, and keeps track of the number of shares, owned by the investor. They will also act as the paying agent, distributing dividends, and Capitol gains to investors.

Municipal advisor is

A firm that provides advice to, or on behalf of a municipal entity. May also give advice regarding municipal financial products, or the issuance of municipal securities, including advice with respect to structure, timing, terms, and other similar matters concerning such financial products or issues, or solicitation of the municipal entity

Growth and Income Objective

Moderate risk tolerance Portion of the portfolio invested in common stocks for growth, (capital appreciation), well, another portion is allocated to generate income by investing in: Dividend, paying stocks, such as blue, Chip common and preferred Bonds such as investment grade, corporate, and US government bonds

Prime broker is

A large firm typically used by hedge funds and institutions to handle complex needs. Account holder may use multiple executing brokers to handle trades. All trades are then settled, and cleared through the prime broker, who then maintains custody. Eliminates multiple statements and confirmations from the different executing broker dealers, and can allow for higher margin, or borrowing, capabilities

An investor shorts a stock at $100 per share. What kind of order can the investor place to liquidate the short position if the stock goes above $105?

Buy a stop order at $105 A buy stop order could be placed by an investor with a short position. Remember, when a customer is short a stock, they don't own it and are hoping that the price drops. That customer could enter a buy stop order to limit their losses if the stock price rose.

Mutual Fund Pricing

Buy at the POP- Net Asset Value + Sales Load = Public Offering Price Redeem at NAV plus sales charge

capital preservation objective

Primary goal is to prevent loss of investments, total value Usually through a money market funds Risk tolerance is very conservative They do not want to lose value due to market risk If the rate of return is less than inflation an investors, purchasing power will be reduced

The greatest risk of owning a mutual fund that invests in common stocks is the risk of loss of:

Principal

An investor purchases a $1000 TIPS w/ 3% coupon and 10-year maturity. Six months later, the CPI reports an inflation rate increase of 4%. What is true

Principal amount adjusted to $1040

double taxation

C corporations are taxed first at the corporate level and then the profits distributed by dividend payments are taxed as part of the personal income of the shareholders.

What index are TIPS linked to?

CPI - treasury inflation protected securities are a type of us government debt where the principal amount is adjusted every 6 months based on changes in the consumer price index.

SPIC members

All broker-dealers that sell stocks or bonds or clear these transactions must be members of SIPC. Member firms must advise all new customers in writing at the time of opening an account that they may obtain more information and the SIPC brochure by contacting SIPC. They must provide the SIPC website address and telephone number. Members must provide all customers with this same information in writing at least once per year. Member firms must display an official sign showing membership at each location. They cannot imply that SIP membership confers approval or a recommendation concerning any security. Broker-dealers that sell only mutual funds or variable annuities only are not members. Firms that are not members must disclose that they are not members.

The economy slumped into a recession. The current yield on a treasury bond is expected to:

Decrease Recession=interest rates fall. Interest rate decrease, the price of bonds increase, which will reduce the current yields on bonds in secondary market.

Securities Act of 1933

An act that regulates the sale of securities to the public via the primary market. Exempt: private placement

Minimizing the risk of losing principal is addressed by which investment strategety

Defensive

A dealer sells a security at its:

Ask lower price

Non-systematic risk is

Associated with a specific security, company, or industry, and can be reduced through diversification. Business risk, liquidity, risk, and credit risk are types of non-systemic risks

Rule 147 Intrastate Offerings

At least one of the requirements: 80% of the issuer's gross revenues must come from business activities within the state, 80% of the issuer's assets are located within the state, 80% of the net proceeds from the offering must be used within the state, or a majority of the issuer's employees must be based within the state. Securities purchased under Rule 147 may not be sold outside of the state for 6 months. The appropriate disclosures must be made to purchasers on the limitations of resale. Certificates must be marked with the appropriate legend stating any restrictions. These securities still must be registered under blue-sky laws.

A positive yield curve indicates

Bond issuer is willing to pay higher coupon = Use money for a longer period Bond investors are willing to wait longer to get principal back in return for higher yield on the bond

Corporate Bonds

Bonds issued by corporations to fund operating expenses Trust indenture: legal agreement outlining terms of the loan Bren corp and bond holder Trustee: represent bond holders and protect their interest. *must meet requirements: trust indenture act of 1939(certain corp debt securities, register the 1933, and be issued under trust indenture) *corp debt issues exceeding $5,000,000 w/ maturities of 1 year or greater. Secured and unsecured Convertible Callable

Protect a short stock position you would buy a :

Call

The most volatile bonds are?

DEEP DISCOUNT LONG TERM and zero-coupon bonds

What type of order is only good during the trading session placed?

Day Day orders are good only during the trading day placed. Market orders are day orders. GTC orders are good until the order is filled or cancelled. The maximum amount of time that this type of order can remain opens varies by firm.

A bond is an

Debt security that represents a creditor relationship with the issuer.

accredited investors under Rule 501 of Reg D.

Defines an accredited investor as an investor that meets of the following criteria: • Natural persons with individual or joint net worth of $1 million (including spousal equivalents) An individual with an annual income of $200,000 for the past 2 years or a couple (including spousal equivalents) with joint income of $300,000 that expects that income level to remain ■ An individual holding a Series 7, Series 65, or a Series 82 . An employee of private funds if deemed knowledgeable (officers, directors, general partners, trustees, advisory board members, and employees that participate in the investment activities) Investment advisers (federal, state, and exempt reporting) Rural business investment companies (RBICs) • Any bank, investment company, and insurance company, regardless of assets

Investment Company Act of 1940

Defines and regulates investment companies, including mutual funds

ETF (exchange traded fund)

Exchange-listed product investing in a portfolio of securities Registered as UIT or open-end investment companies. Trade in exchanges Buy on margin and sell short

Not regulated by ERISA

Government, municipality, nonprofit, or individual plans

Put Provision

Grants right to sell (put) the bond to the issuer at a specified price/date prior to maturity. Protects bondholders from declining values

common stock

Greatest risk of loss and junior security in terms of claims of corporate assets

An investor has 40% of their 401k invested in their company's stock. They have no other savings. What is the largest risk for this investor?

Nonsystematic risk

income strategy

I'm a stable/flat market Selling option contracts to earn the premium (additional income)

Internal Revenue Code (IRC)

IRS has authority to issue monetary fines and punishment for violating the this code Covers rules concerning taxation including income, gift, estate, and capital gains.

coincident indicators

Include personal income, GDP, and industrial production.

Speculation Objective

Investors, willing to take on additional risk and seeking above average returns. Often engage in strategies that are extremely risky. Strategies considered aggressive our day, trading, investing in hedge funds, or microcap stocks, investing in derivatives, and short selling.

FINRA (Financial Industry Regulatory Authority)

Is the leading SRO (self-regulations organization) regulating BD and RR in the securities industry SEC has final authority !

risk-free rate of return

Is the return that amuses there can be no losses and is extremely safe.

If the fed raises the discount rate, what happens to the money supply?

It decreases

A corporation has common stock trading in the secondary market at $100 per share. It announces a 5-for-1 stock split. How will the split impact the share price?

It will decrease to $20 per share 100/5=20

Largest outgoing expense for fund

Management fee

Painting the Tape

Manipulative trading involving a series of purchases, or sales, rather than paired buys and sells, with the intent to give the false appearance of a trend in a stock's price and lure other investors into the same trading activity

OTC market (over the counter)

Negotiated market where unlisted securities are bought and sold.

BD Investment banking

Negotiates with issuers when selling securities tot he public

A bond is currently offered in the market at 103. Which of the following is the correct order of yields from highest to lowest for this bond?

Nominal, current, YTM, YTC When trading at a premium, the nominal yield is the highest. The current yield is less than the nominal yield, the YTM is less than the CY, and the YTC is the lowest. At maturity, the bond will be redeemed only for its par value, the owner will suffer a loss if the bond was purchased at a premium. That loss will reduce the investor's CY, YTM, and YTC.

Prepayment/Extension Risks

Non-systematic risk :Common to mortgage or loan - backed securities. Interest rates drop = borrowers refinance their loans at lower interest rates. People pay off their loans and retire them ahead of schedule. Extension: opposite. Interest rates rise = loans take longer than anticipated to be paid off, cause securities to have extended maturities.

credit (default) risk

Non-systematic risk that an issue, or will be unable to pay back the interest/principle due to its creditors. A borrower who misses a payment is said to be in default. High-yield bonds

Capital risk

Non-systematic risk, losing some or all capital used to purchase an investment. Like stocks, if a company defaults, their risk would be losing their capital.

Business Risk

Non-systematic: risk that a company will not have adequate cash flow to meet its operating expenses. If the company goes into bankruptcy, and investor will lose the amount invested. Also known as selection risk.

Liquidity (marketability) risk

Non-systemic Risk resulting from the lack of market ability of an investment, that cannot be sold quickly enough to prevent or minimize a loss or benefit from a potential gain. Occurs when there is no ready buyers in the market for a particular security.

Shares of stock that are in possession of investors are referred to as:

Outstanding shares

MRSB rule G-37

Prohibits brokers, dealers, or municipal security dealers from engaging in municipal securities business with an issuer within two years after any contribution is made to an official of the issuer by either the broker, dealer, municipal securities dealer or and municipal finance professional (MFP) associated with these firms. One exception: de minimis rule.

Depository trust & clearing corporation (DTCC)

Provide institutional trade processing clearing and settlement services

REITs (Real Estate Investment Trusts)

Publicly traded reits are listed and trade on a stock exchange and are considered safer than non-traded. Non-traded REITs are still registered with the SEC but are unlisted and do not trade on an exchange. Their harder to redeem, and investors may have to wait long periods of time to liquidate their investment. Private REITs are not registered with the SEC, they are normally offered as private placements through Regulation D and are only offered to qualified purchasers or accredited investors. There are no disclosure requirements for private REITs.

The breakeven point of 1 JKL Dec 40 Put @ 3

Put: strike price minus the premium (40-3=37)

Under IRC special tax treatment is allowed for qualified REITS:

Qualified REITS must have 75% of assets invested in real estate, cash, or treasury's Minimum 75% of its gross income from real estate activities 90% of net investment income must be "passed through" (distributed) to holders of the units. If all is done REIT is only taxes on the retained amount and would be considered qualified under IRC Subchapter M

Practices that have resulted in disciplinary action and clearly violate this responsibility for fair dealing include the following:

Recommending speculative low-priced securities : Excessive trading activity: churning, twisting, or over trading. Trading in mutual fund shares: short-term basis not proper trading vehicles.

Refunding Bonds

Replacing an outstanding bond issue with a new bond issue, think refinancing mortgage. New proceedings are used to pay off the old obligation.

North American Securities Administration Association (NASAA)

Representative body made up of securities regulators from Canada, Mexico, and the 50 states and the territories of the United States. Responsible for making amendments to the USA Responsible for creating, updating, and maintaining the state licensing exams. Creates model rules Inter USA and issues statements of policy to help interpret the act.

Company Income Statement would show:

Revenues incoming and expenses flowing out. Sales revenue, gross revenue, interest expense(bond interest expense), tax expense, and salary expenses. Net income after expenses are paid out of the incoming revenues.

Which is not a direct obligation of the U.S. government?

Securities issued by the Federal Home Loan Mortgage Corporation Securities issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) are mortgage-backed pass-through securities comprised of residential mortgages issued by financial institutions. FHLMC is a publicly traded company that is sponsored, but not backed by, the full faith, credit, and taxing power of the U.S. government.

Capital appreciation (growth) objective

Seek growth in their portfolio total market value, and this investment strategy can be moderate to aggressive. Accomplished by investing in equities and equity funds.

To open margin account customer needs to

Sign margin agreement that pledged their securities. Sign Loan consent agreement: authorized firm to lend the client securities to others. Provided Credit disclosure : explaining all the details on how the loans work and how interest is chargered Written hypothecating agreement: permits the BD to use some of the customers securities as collateral for a bank loan to finance the customers margin account debt or to lend to customers Provided margin risk disclosure at or before account opening.

In the long term, which of the following investments is most likely to protect a investors portfolio against the effects of inflation

Stocks, a Stablecompanies, revenues, and earning should increase overtime at or greater paste then inflation

The total underwriting spread includes compensation paid to each party for their role in the sale of the issue. Which party receives the largest amount of the spread per share?

Syndicate members without a selling group

Interest rate risk

Systematic Risk that an investment value will change inversely to, changes in the general economy's interest rates (as interest rates, rise, bond, prices, fall, and vice versa) Duration : tool used to determine the price sensitivity of a bond based on a small interest rate change Higher deviation number = higher interest-rate risk

Reinvestment risk

Systematic Risk the future proceedings will have to be reinvested at a lower potential interest rate Bonds and preferred stocks Most evident, during periods of falling interest rates, in which coupon payments, received our only capable of being reinvested at lower yields

Inflation (purchasing-power) risk

Systematic risk, where Inflation means money will buy less in the future than it does now

Self-regulatory organizations (SROs)

The Maloney act of 1938 amended the Securities Exchange Act of 1934 and authorized the creation of a new SRO National Association of Securities Dealers (NASD) :regulates over-the-counter trading. Eliminated by FINRA: Financial industry Regulatory Authority - we register with. Supervise the day-to-day activities of BD and RR SEC had final say!

high-yield bonds

junk bonds, speculative bonds High risk of default on principle/interest payments. Higher coupons and yields Investors expect to be paid more for taking on this risk. Only for high risk tolerance investors

Market price of common stock is influenced by :

The expectation for future earnings of the company !

The SEC no approval clause states that:

The fact that a new offering has been reviewed by the SEC does not mean the Commission approves of the offering or vouches for the truthfulness of the registration statement

Assets-liabilities =

net worth

assets - liabilities=

net worth

A mutual fund investor places an order to liquidate their shares on Monday night at 4:32 pm Eastern time. What price will they receive?

Tuesdays NAV

CPI (Customer price index) measures

the change and consumer prices of a fixed basket of goods and services that a consumer would purchase measures inflation

Treasury Receipts

Zero coupon bond created by brokerages. B/D buy treasury securities and place them in trust at a bank and sell seperate "receipts" against the principal. *Not backed by the U.S. Government

Depository Trust & Clearing Corporation (DTCC)

a trade financial services company providing institutional trade processing, clearing and settlement services.

convertible preferred stock

allows the owner to exchange preferred shares for a fixed number of common shares at a specified price, called the conversion price. Great for capital appreciation and growth.

12b-1 fees

annual fees charged by a mutual fund to pay for marketing and distribution costs Associated with load funds , no-load if assessment is .25% if net assets or less) Allows investment company to charge some of their promotional expenses to shareholders. Include marketing, advertising (printing and mailing and sales literature to new investors) and other costs of distributing fund shares

SEC Rule 144

details how certain stock, either restricted or control, can be sold to the public. If company is a SEC reporting company, stock is restricted from sale for 6 months and the certificate must be marked with the appropriate legends stating any restrictions. Sellers must file form 144 with SEC declaring their intention to sell. "Notice of intention to sell" must be filed at or before the sale date.

Varable rate demand notes

are long-term municipal bonds that are created with money market funds and tied to money market rates. They are issued in $100,000 minimums and are only available to large or institutional investors. Municipal governments pay investors based on these short-term rates. The interest is adjusted frequently based or the interest rate environment, which is considered a variable or floating rate. These notes include a put option that allows the investor to demand repayment of principal and interest from the issuer on demand.

Aggressive investment strategies

attempt to maximize growth of capital

A defensive investment strategy

attempts to protect principal

Debenture

backed by issuer's full faith and credit (ability to pay principal and interest)

Debentures (unsecured bonds)

backed only by general credit-worthiness of issuing company. Issuers full faith, credit, and promise.

A dealer purchases a security at its:

bid higher price

US government securities

bills-short term no 9 month bill notes- 2-10 years, semiannual interest, exempt from state and local taxes bonds- 10-30 years, semiannual interest, only interest exempt from state and local taxes Free of default risk but subject to interest-rate risk. Conservative investors

Term Bonds

bonds that all mature at the same time and same interest rate

secured bonds

bonds that are backed by specific collateral that reduce risk-must be forfeited in the event that the issuing firm defaults Mortgage bonds: backed by corporations real estate Equipment trust certificates: Collateral trust certificates :backed by parent company

Types of equity securities

common stock, preferred stock, ADRs

Market orders are what type of order?

day

Dividend payment process

declaration date, (BOD) ex-dividend date, date of record, date of payment

A stock is a

equity security

Treasury Department

executive agency responsible for promoting economic prosperity and ensuring financial security of the United States

Federal Open Market Committee (FOMC)

includes the board of governors and 5 district presidents who implement monetary policy.

Interest rates and bond/stock prices

inversely related

Income Objective

invest in securities that pay regular income through interest or dividends

Monetary policy

is the control of the U.S. money supply and is controlled by the Federal Reserve .

A short call can be covered three ways ;

long stock held in the account , by an escrow receipt showing that the long stock is held at another financial institution , or by another long call , same strike price or less with the same expiration or later . Stock held at another financial institution can only be evidenced by an escrow receipt , not by a client's attestation to its existence . A standard listed short XYZ call is covered if: 100 shares of XYZ stock is held long in the account or an escrow receipt shows that it is held at another financial institution

convertiable bond

may be exchanged for common stock of the firm, at the holder's option They can be callable if market rates have declined or when common stock rises above strike price (forced conversion)

unsecured bonds (debentures)

not backed by collateral Subordinated debentures Guarantee bonds Income bonds High yield bonds

Short Put Option

obligation to buy (bullish) Received premium Max gain= premium Max loss= strike price - premium

Reg D

private placement transactions are exempt from registration when offered to no more than 35 non-accredited investors (persons who do not meet the definition of accredited under the Act).

principal Income investment strategies

provide current income

MSRB

regulates municipal securities market. Securities issued by state, local government entities, towns, cities, counties, authorities, and school districts. Activities: underwriting, trading municipal securities and 529 college savings plans. CREATES RULES FOR MUNICIPAL FIRMS, sec and FINRA enforce the rules for BD.

Long Call Option

right to buy (bullish) Paid premium Max gain= unlimited Max loss= premium B/E: strike price + premium

Long Put Option

right to sell (bearish) Paid premium Max gain= strike price - premium Max loss= premium B/E: strike-premium

Book entry settlement

securitiesheld in book entry on the issuer's books or in brokerage accounts These securities must be settled through a registered securities depository , such as DTCC , and are deposited at the clearing agency . The clearing agency will transfer ownership through bookkeeping entries and does not include a physical delivery of certificates .

Uniform Securities Act (USA)

set of securities laws used to establish uniform securities registration standards and laws at the state level. Serves as a model law that produces state administrators w/ a template/guide to create regulations for securities refutation and transactions in their own state. Amendments to this act are the responsibility of the North American Securities Administration Association (NASAA)

Defensive stocks

stocks that remain stable during economic declines/fluctuates Consumer, staples, equal a Central products consumers cannot live without Food, utilities, pharmaceuticals, healthcare

Reasonable Basis Suitability

suitable for at least some investors

Rule 144 - Restricted Stock

unregistered paper you're holding (not part of IPO) -example: Reg D Private placement

Guarantee bonds

unsecured bonds backed not only by the promise of the issuer to pay, but also a parent company. If the issuer defaults on the bond, the parent company must step in and make payments, similar to a co-signer on an automobile.

Important Dividend Dates (DERP)

•Declaration Date - The date on which the board of directors announces the company will pay a dividend to shareholders. • Ex-dividend Date - On this day, the security begins to trade without the value of the dividend in the stock price. The ex-dividend date is 1 business day before the record date (R-1). This date is set by FINRA. Record Date - The date on which an investor must own the stock to receive the dividend. This date is set by the board of directors. Only "shareholders of record" will receive a dividend. • Payable Date - The date on which the company pays the dividend to the shareholders of record. This date is set by the board of directors and is usually a week or more after the record date, so the company has sufficient time to ensure all shareholders entitled to receive the payment are accurately paid.

FINRA Suitability Standard Rule 2111

■ Reasonable - basis suitability - Firms must have a reasonable basis to believe , based on adequate due diligence , that a recommendation is suitable at least for some investors . ■ Customer - specific suitability - Firms must have reasonable grounds to believe a recommendation is suitable for the specific investor based on the customer's profile ▪ Quantitative suitability - Firms must have a reasonable basis to believe the number or size of recommended transactions within a certain period is not excessive , considering the size and character of the customer's account .