Quiz 2

XYZ Corporation will need to borrow funds in the bond market soon. While current interest rates are not attractive from its viewpoint, the company knows that interest rates could drop suddenly. The company would like to be ready to sell the bonds quickly. It would also like the bonds to be as liquid as possible in order to attract investors. Which of the following choices is most appropriate for its needs?

Regulation D and Rule 147 place various restrictions on resales, reducing the liquidity of the issue. A shelf registration under Rule 415 will satisfy all of XYZ Corporation's needs

AMT

second method of calculating federal income tax liability. Taxpayers must pay the larger of the AMT or the result of the regular (Form 1040) income tax calculation

designated market maker

(formerly known as a specialist) may accept all of the orders listed except a not-held order, which allows a floor broker to use discretion in executing an order. If the question asked which orders may be accepted and placed on his book, the answer would be open (GTC) and day orders only. A DMM may accept a market order but must execute it immediately and may not place it in his book.

A customer purchases 10 M Dade Co. Florida 7.50% G.O. bonds at a 9.50 basis. How much interest will she collect each year?

10 M equal's $10,000 par value of bonds (the symbol M refers to thousands). The coupon rate is 7.50%. Therefore, the annual interest is $750 ($10,000 x 7.50%).

An investor is in the 28% tax bracket. Which of the following investments affords him the BEST tax advantage? A 5% municipal bond A 5 3/4% corporate bond A 6% preferred stock A 6 3/4% convertible bond

5% municipal bond offers the best tax advantage because the interest income is completely free from U.S. government taxes. The income received on the other investments is subject to U.S. taxes at the 28% tax rate. The taxable equivalent yield of the 5% municipal bond is 6.9% (5% municipal yield divided by 72%, the complement of tax bracket), which is greater than the other choices

If an issue of commercial paper is rated P-1 by Moody's, it is considered:

P-1 (also called Prime 1) is the highest rating that Moody's will assign to commercial paper. Intermediate ratings are P-2 and P-3. Speculative commercial paper would receive a rating of NP (not prime)

AMT is only an issue for

higher income taxpayers or those with special tax preference items on their returns

Standby underwriting

In a rights offering, an underwriter offers to purchase all the shares the issuing corporation may not be able to sell

MSRB rules require a municipal securities principal to approve

Memos in response to customer complaints, opening of accounts, Advertisements to be used for a seminar, Correspondence to customers -the principal must approve all transactions and must frequently review all discretionary accounts

Ralph, a New York City resident, sold his apartment for $250,000. He is contemplating purchasing another property within the next 2 to 6 months, but wants to keep the proceeds invested while he is looking. Ralph's primary goals are preservation of capital, liquidity, and limiting his tax liability. Which of the following securities best meets his objectives?

U.S. government money-market fund is not only safe, but the income received by Ralph is exempt from state and local taxes. This is not to be confused with a U.S. government bond fund, which may experience loss of capital if interests rates were to rise sharply. The other investments can result in a loss of capital if interest rates rise

Alan and Marie Johnson have one child and have just purchased a home. The Johnsons count on Marie's regular income from her medical practice to pay their mortgage and other regular bills. Alan's irregular income from the sale of his sculptures provides investment and discretionary income. The Johnsons want to purchase life insurance that will provide the potential for appreciation of future benefits, but are uncertain how much to purchase due to the unpredictable nature of Alan's income. Which of the following types of insurance is MOST appropriate for the Johnsons?

Universal life insurance will allow the Johnsons to vary their premiums based on current income levels and insurance requirements, while variable life insurance will provide returns based on the performance of a separate account. A combination of the two types, called variable universal life or flexible premium variable life, is most appropriate.

An investor with an investment objective of tax-exempt income will need access to the funds in four months. An RR should NOT recommend which of the following municipal securities?

VRDO and an ARS are both long-term securities with short-term trading features. A VRDO has a put feature that permits the holder to sell the securities back to the issuer or third party. An auction rate security (ARS) does not have this feature and, if the auction fails, the investor may not have immediate access to his funds. TANs and BANs are short-term municipal notes and, if their maturities extend four months, these securities can easily be sold in the secondary market

Legged into the position

When an individual buys or sells an option to add to an existing position to create a more complex option position, such as a straddle or spread

On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is:

When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.

To induce an investor to buy mutual fund shares shortly before a dividend or capital gain distribution is to be paid is

a violation of the Conduct Rules and is called selling dividends. There is no benefit to the customer because the value of the mutual fund will decline when the fund sells ex- (without the) dividend or when there is a capital gain distribution. The customer could just as well have waited and received the same value in shares

30-Day Visible Supply

all municipal bonds that are expected to be brought to market in the next 30 days. It is computed daily and includes all competitive and negotiated offerings that are anticipated to be brought to market. However, it does not include short-term notes or auction rate securities.

bear spread

always involves buying the higher exercise price and selling the lower exercise price. This applies to both call spreads and put spreads. A bull spread always involves buying the lower exercise price and selling the higher exercise price. This applies to both call spreads and put spreads

short interest

amount of a company's shares of common stock that have been sold short and have not yet been covered (closed out). An increase (not decrease) in short interest has historically been considered a bullish indicator by a technical analyst.

A municipal securities principal does not need to approve

an official statement (OS). An OS is prepared by an issuer of municipal securities and issuers are not subject to MSRB rules.

FINRA defines a complaint as

any written statement of a customer, or any person acting on behalf of a customer, alleging a grievance involving the activities of those persons under the control of the member in connection with the solicitation or execution of any transaction or the disposition of securities or funds of that customer. The note is considered a complaint and the RR must take it to his supervisor. The broker-dealer must keep the complaint in its records and also must record what, if anything, is done about it

MSRB rules require a municipal securities principal to

approve all transactions in municipal securities.

investment banking department

assists issuers who need to sell new securities to the public. The sales and trading department is involved in the secondary market trading of securities. The purchase and sales department and the reorganization department are both part of a firm's operations area involved in processing the trades and maintaining the books and records pertaining to customer accounts

general partner is the member of the limited partnership who

assumes liability for the debts of the entity and is usually concerned with its overall management

credit conditions are deteriorating for a municipality

bankruptcies, consumer debt, bond defaults, -except an increase in assessed valuations. This is the value placed on property by the municipality for purposes of taxation. An increase in assessed valuations would indicate that homes within the municipality are increasing in value, which will improve the municipality's credit

All GTC orders that are entered

below the current market on the designated market maker's (DMM) book (buy limit, sell stop, and sell stop-limit orders) will be reduced by the amount of the dividend when the stock sells ex-dividend. The stock will always be reduced by an amount to cover the dividend entirely. The dividend is $1.60, so the order will be reduced 1.60, which will reduce the stop price on the order to 33.40

ABC Corporation has issued two $1,000 par value bonds with the same coupon rate, one paying interest annually and the other paying interest semiannually. If both bonds are held to maturity in 10 years, the bond paying interest annually will have a total return that is:

bond paying interest annually will have a yield to maturity that is less than the bond paying interest semiannually. Yields to maturity assume a reinvestment and compounding of interest. The compounding of interest will be greater for the bond paying semiannual interest.

auction rate securities (ARSs) and variable-rate demand obligations (VRDOs)

both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARSs) do not have this feature and, if the auction fails, the investor may not have immediate access to her funds. In addition, ARSs use an auction process to reset the interest rate on the securities, whereas the interest rate on a VRDO is reset by the dealer at a rate that allows the securities to be sold at par value

Before accepting a DVP (delivery versus payment) or RVP (receipt versus payment) order from a customer,

broker-dealer must receive the name of the customer's agent and the customer's account number. The order ticket must be marked DVP or RVP.

Although broker-dealers may not obtain credit for a customer to

buy open-end shares (because mutual funds may not be bought on margin), loan value may be assigned to fully paid shares that the customer has owned for more than 30 days. Also, broker-dealers may not give a discount to nonmember broker-dealers when selling investment company shares

Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to

buying a publicly traded investment in a private equity firm

A 4.65% New York City GO bond matures in 20 years. The bond is callable in 8 years at 103.

call premium of 3 points ($30 per bond) refers to the amount above par value which the issuer must pay the owner of the bond when the bond is called. Issuers usually call outstanding bonds when interest rates decline, and they are able to issue new bonds at lower rates of interest. The bond has 8 years of call protection. The issuer would need to make an outlay of cash to call back the bonds, but would save money because of the lower rate of interest the issuer would pay on the new bonds. A call provision is exercised by an issuer and not the bondholder.

Monetary policy

carried out by the Federal Reserve Board's use of its available options for increasing or decreasing the supply of money and credit in the economy.

A municipal bond confirmation must disclose

certain tax information such as whether the bonds are subject to the alternative minimum tax (AMT), whether the bonds are issued as an original issue discount security, and whether the bonds are subject to federal income tax

saucer

chart pattern used by technical analysts that indicates that a stock has formed a bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a bullish indicator for the stock. The reverse of the saucer pattern is the inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, this is a bearish indicator

Investment advisers

compensated based on a percentage of assets under management. For example, mutual fund managers are usually compensated in this way

Convertible bondholders

considered creditors of a corporation and provide investors with the ability to convert their bonds into shares of common stock of the same issuer at a set price (conversion price). This feature links these types of bonds to the equity markets and the price of a convertible bond is affected by the price of the underlying stock. However, if the price of the underlying stock declines to the point where there is no advantage to the conversion feature, the bond may sell at a price based on its inherent value as a bond, disregarding the convertible feature

When purchasing machinery with cash,

current assets (cash) are reduced and fixed assets (machinery) are increased by the same amount. Overall, total assets do not change. Since total assets (TA) and total liabilities (TL) remain the same, stockholders' equity (TA - TL) does not change. Working capital (current assets minus current liabilities) is reduced since current assets are reduced

effective federal funds rate

daily average rate that commercial banks charge throughout the country for overnight loans. It is influenced, but not set by, the Federal Reserve Board. An increase in the federal funds rate normally signifies that the Fed has taken money out of the banking system

If the performance of the separate account of a variable life insurance policy is less than the assumed interest rate (AIR),

death benefit will decline. However, the death benefit can never drop below the face value of the policy. The cash value may also decline. However, there is no guaranteed minimum.

A customer has a restricted margin account with a debit balance of $7,500. The account is credited with $1,600 in cash dividends and debited with interest charges of $50. The debit balance after the adjustments is:

debit balance is reduced from $7,500 to $5,900 when the cash dividends of $1,600 are credited to the account ($7,500 - $1,600 = $5,900). Adding interest charges of $50 to the debit balance results in a final debit balance after adjustments of $5,950 ($5,900 + $50 interest charges = $5,950).

Stagflation

defined as a prolonged period of a high rate of inflation together with a high rate of unemployment. This does not happen too often since high unemployment usually leads to a period of low inflation or even deflation (falling prices) and the possibility of a recession. A period of low unemployment usually leads to rising prices and increased inflation

corporate retirement plan may be established as either

defined benefit or a defined contribution plan. A defined benefit plan is designed to provide employees with a fixed monthly stipend at retirement. This is generally a percentage of the employee's salary, the exact amount of which is determined by the employee's age and years of service.

Good delivery for municipal bonds, unless otherwise specified, requires

delivery of bonds that have not been called unless identified as called at the time of the trade and that have an imprinted or attached legal opinion. The bonds may be in bearer or registered form. Bearer bonds may be delivered in $1,000 or $5,000 denominations. If delivery of registered bonds is expected, they must be endorsed properly and in any denomination from $1,000 to a maximum of $100,000, in $1,000 increments

When used in reference to a Nasdaq market maker, the spread represents

difference between the price at which the firm is willing to buy (bid) and the price at which the firm is willing to sell (ask or offer) a security.

Both the SEC and FINRA may

discipline a registered representative employed by a broker-dealer for fraudulent securities activities. The MSRB has no enforcement power.

determine the dividend being paid per share,

divide the $1,000,000 in dividends by the 5,000,000 shares of common stock outstanding

To find the conversion ratio

divide the par value ($1,000) of the bond by the conversion price of $10.50

5% Markup Policy

does not apply when a security is being issued with a prospectus or for municipal securities. In this example, a prospectus would be required for a primary distribution as well as a registered secondary distribution. Securities quoted on Nasdaq would be the only choice given for which the 5% guideline would apply.

uncovered call writer

does not own the underlying stock. If the market price of the underlying stock rises above the exercise price, the stock will be called away. If the market price rises above the exercise price by an amount exceeding the premium, the difference in prices will represent the loss to the writer

A person maintains an IRA account and has contributed both pretax and after-tax dollars. Withdrawals from this account will be treated as

earnings on an IRA account grow tax-deferred. If an investor maintains an IRA account that has pretax and after-tax contributions and makes withdrawals, the IRS considers withdrawals to come from both sources. Therefore, a portion of the withdrawal is taxable and the other portion is tax-free. If only pretax contributions are made, the entire withdrawal will be taxable as ordinary income. Withdrawals from a tax-deferred account are never taxable as a capital gain

401(k) plan

employee can usually make a pretax contribution in the plan and reduce taxable income. Employee contributions and growth in the account are tax-deferred. Employers are not required to match contributions, but may do so

Fiscal policy

enacted by Congress. Fiscal policy is the use of the government's power to tax and spend. Control of the economy by changing the levels of government spending and taxation can either put money into the economy, or take money out of the economy

A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. The equity in the account is:

equity in a long margin account equals market value minus the debit balance. The equity equals $7,000 ($15,000 - $8,000). SMA does not enter into the calculation of equity.

Most BDCs trade on an

exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors.

Mortgage-backed securities are also issued by

financial institutions such as commercial banks, investment banks, and home builders. These securities are referred to as private label MBS and may contain some agency securities, however, they typically contain other types of mortgage loans that are not agency securities. A private label MBS is not an obligation of the U.S. government or any GSE and its credit rating is assigned by an independent credit agency. A private label MBS has higher credit risk and is generally not given a AAA rating

Dow Theory,

followed by some technical analysts, states that a major reversal in the market has occurred when both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) break their trends

Under industry rules, a brokerage firm is allowed to charge a customer

for collection of dividends, holding of securities, and other services. Most brokerage firms do not charge for these services, but if they do charge, the amount must be reasonably fair and not discriminate between customers

Annuity suitability rules require that contracts sold through FINRA members be

forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company

Overlapping debt involves only

general obligation borrowing

largest deduction in a real estate program is

generally depreciation

narrow-based index

gives a measurement of stocks in a particular industry or sector of the economy. A broad-based index option would be used to hedge a diversified stock portfolio.

required equity for a short sale where the stock is less than $5 per share is

greater of $2.50 per share or 100% of the market value

If the customer is short RST calls

he anticipates that the market price of RST stock will decline. Since he is bearish on the stock, he could also be long puts on RST. This is considered on the same side of the market.

An XYZ Corporation convertible bond is selling in the market at $1,248.75. It is convertible at $30. XYZ common stock's market price is 37.50. The bond has been called at 103. Which of the following activities is the LEAST attractive alternative for a holder of the bond?

holder could sell the bond and receive $1,248.75. If he converted, he would receive 33 1/3 shares ($1,000 par divided by $30 per share conversion feature) with a total value of $1,249.88 (33 1/3 x $37.50). The least attractive alternative is to allow the bond to be called and receive $1,030.

When interest rates are rising,

industrial corporations that market big-ticket items as well as utilities that are heavy borrowers will be adversely affected. Cosmetic companies, due to the nature of the business and the low cost of their products, are not affected as much by rising interest rates

Most commercial paper is purchased by

institutional investors

When calculating the alternative minimum tax, certain items may need to be included in taxable income that normally are not. One of these items is

interest on many private activity bonds. Therefore, a taxpayer subject to the AMT may lose the tax exemption on these bonds. Since this is a disadvantage, these bonds generally trade with higher yields than regular municipal bonds to reflect that the interest received might be taxable

call protection provision of five years would be most valuable to a recent purchaser of the bond if

interest rates are falling. If interest rates fall, outstanding bond prices will rise. Issuers of bonds will call or retire bonds when interest rates decline, and will issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds

BDC will use the money it raises to

invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves

For tax purposes, BDCs are regulated similar to

investment companies (mutual funds and closed-end funds) and to REITs that also must distribute a minimum of 90% of their income. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies

An investor is short 100 shares of QRS stock at $25 per share, and sells one QRS July 25 put at 2. The investor will make money in all of the following situations, EXCEPT:

investor is bearish on the stock, and has taken in additional income by selling a put. By selling the stock and the put, the investor has taken in a total of $27 per share. A profit will be realized as long as the stock price remains below $27 per share. But, since the hedge is limited to the amount of the premium, the investor's maximum loss is still unlimited

In August, an investor sells an uncovered listed option and receives a $1,100 premium. The following February, the customer makes a closing purchase transaction at 3. The result of the transaction is:

investor made an $800 profit on the closing transaction (sale at $1,100 and purchase at $300). The profit is treated as a capital gain in the year the transaction is closed out.

A breakout below the support level

is a bearish signal

Federal Farm Credit Banks

issue consolidated systemwide notes that are issued at a discount (as with T-bills) and are non-interest-bearing. Bonds are also issued that are interest bearing (have a stated interest rate). Interest is subject to federal taxation but is exempt from state and local taxation.

Bank-qualified bonds are

issued by small municipalities and, to qualify, a municipality may only issue up to $10,000,000 annually. This is done to encourage commercial banks to invest in locally issued municipal securities. Commercial banks that purchase this type of security are permitted to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds

Private activity bonds

issued to finance the construction of a facility that will be used by a private corporation. Interest earned on such bonds is often subject to the Alternative Minimum Tax (AMT)

nonqualified variable annuity

not used in conjunction with a qualified retirement plan (such as an IRA). Any contribution is made with after-tax dollars. Therefore, the appreciated value portion of withdrawals would be taxed as ordinary income and the remainder would be considered as return of capital (amount invested), which is not taxed. If a withdrawal is made prior to age 59 1/2, the ordinary income portion of the withdrawal is assessed a 10% penalty

Z-tranche or the accrual bond

longest maturity, does not receive interest or principal payments until the shorter maturing tranches have been retired

Keynesian economic theory

looks at the demand side of the marketplace. It states that government intervention in the marketplace (by using such measures as expenditure programs) is necessary for controlling the economy

Monetary theory

looks to increase or decrease the money supply in order to control the economy.

Mortgage-backed securities (MBS)

may be issued by a U.S. government agency, such as the Government National Mortgage Association (GNMA or Ginne Mae), or a government-sponsored enterprise (GSE), such as the Federal National Mortgage Association (FNMA or Fannie Mae) or the Federal Home Loan Mortgage Association (FHLMC or Freddie Mac). The securities issued by these three entities are commonly referred to as agency securities and receive high ratings (e.g., AAA). A collateralized mortgage obligation (CMO) is an example of this form of MBS

institutional block trader

may forward orders to the NYSE trading floor from the brokerage firm's trading desk but is not physically located and trading on the floor of the NYSE. The designated market maker, an independent broker, and floor traders are permitted to trade on the NYSE floor.

sale of a limited partnership interest is executed by

means of a subscription agreement. It is signed by the limited partner, but is not final until the general partner signs the agreement which signifies the acceptance of the limited partner

divided account (Western account),

member is responsible for its own participation in the syndicate. If any bonds remain unsold, it is the responsibility of that member. In an undivided or Eastern account, any unsold bonds are the responsibility of the entire syndicate. Each member would then be liable for the same proportion as his original participation.

pattern day trader

minimum equity requirement is 25,000, amount must be deposited in the account before the customer may continue day trading and must be maintained in the customer's account at all times -Day-trading buying power is limited to four times the trader's maintenance margin excess, determined as of the close of the previous day.

Long-term bond prices are

more volatile than short-term bond prices. Discount bond prices are more volatile than premium bond prices. If the investor expects interest rates (yields) to decline, she is anticipating rising bond prices. The bonds that will rise (fluctuate) the most are long-term, discount bonds

To find the adjusted dividend per share,

multiply the inverse of the split by the original dividend of $0.15 ([$0.15 x 4] / 5 = $0.12). Since the dividend is adjusted for the split, the investor would receive the same total dividends after the split as before (280 shares x $0.15 per share = $42)

An employee of a FINRA member firm who wishes to open an account or place an order at another member firm

must notify her firm and the executing firm, in writing, prior to opening a securities account. Since the RR is the custodian for the UTMA account, she will be placing orders for this account.

A portfolio consisting of stocks from the same industry may be protected (hedged) against adverse market movements by using

narrow-based index options

formula for the debt service coverage ratio

net revenues divided by the annual debt service

needed to open a new discretionary account

new account form, a basic customer margin agreement, and a power of attorney -basic customer margin agreement includes the hypothecation, loan consent, and credit agreements. A trust agreement is needed to open a trust account.

closed-end investment company, sell at their..

offering price, which is the net asset value plus a sales charge (when applicable).

A customer without a discretionary account gives a registered representative the following verbal instructions: Buy 1,000 shares of General Electric whenever you think the price is right. Under current regulations:

order may be executed by the RR, but only on the same trading day. It is not a discretionary order, which requires written power of attorney. The customer indicated to the registered representative the name of the specific stock (GE), the action (to buy), and the amount (1,000 shares), so this is a not-held order. Allowing the RR to make decisions limited to price and time does not constitute discretion. Absent written instructions from the client, this type of time and price discretion is only valid the same trading day.

A designated market maker places a GTC order in his book to buy 1,000 shares of XYZ at $30. XYZ declares a 50% stock dividend. The designated market maker should adjust the order when the stock sells ex-dividend to:

order must be adjusted to reflect the change in XYZ stock. The number of shares will be increased to reflect the dividend and will now be 1,500 shares (1,000 shares plus 50% of 1,000). The price of ABC will be adjusted downward to $20. The total value of the order before the dividend (1,000 shares at $30 = $30,000) must equal the value after the dividend (1,500 shares at $20 = $30,000)

An investor purchases an ABC Corporation October 50 put and pays a premium of $7. The underlying security declines to $40 per share. For tax purposes, the proceeds of the sale are

proceeds of the sale for tax purposes are $4,300 ($5,000 strike price minus the $700 premium paid for the option equals the proceeds of the sale). The cost basis of the stock purchased is $4,000. The customer's profit is then $300

fidelity bond

provides insurance in the event of a fraud judgement against the broker-dealer.

mutual fund investor most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely

purchase an income fund. A growth fund invests in companies that are growing rapidly and pay out a small percentage of earnings in dividends. Investors seeking capital gains will most likely purchase a growth fund. A no-load fund is an open-end investment company that does not have a sales charge and whose investment objectives may be income or capital gains. A sector fund is a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.

if the investor is concerned that rising interest rates will erode the value of the preferred stock portfolio,

purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based calls (which are yield-based options) increase in value when interest rates rise, also creating a viable hedge.

business development company (BDC)

raises capital by selling securities to investors and is similar in structure to a closed-end investment company.

When securities are inherited,

recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period

violation of the Securities Act of 1933, if a registration statement has not been filed with the SEC

registered representative may not inform a customer that the customer may receive as many shares as desired. Nor may the registered representative solicit buy orders or solicit indications of interest from the customer. A registration statement needs to be filed before indications of interest may be accepted, and only indications of interest will be acceptable at this time, not orders

A retail communication concerning direct participation programs (DPPs), collateralized mortgage obligations (CMOs), and investment companies are all

required to be filed with FINRA. Investment companies include variable insurance products, mutual funds, closed-end funds, unit investment trusts (UITs), and exchange-traded funds (ETFs). A retail communication that does not make any financial or investment recommendation, or promote a product or service, such as providing information about a broker-dealer, does not need to be filed with FINRA

Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may

resell those securities to a qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144. Qualified institutional buyers must have at least $100 million dollars of investable assets

Although the MSRB creates

rules governing municipal securities broker-dealers, its rules are enforced by other regulatory bodies. The appropriate regulatory agencies are the: -SEC or FINRA for broker-dealers, Comptroller of the currency for federal banks, FRB for state banks that are members of the FRB, FDIC for member banks of the FDIC

IRS will not allow the loss if

same security or any security convertible into the same security is repurchased within 30 days of the sale. The customer must wait until the 31st day to buy back the security or its equivalent -wash sale

If a stock is held

short-term (one year or less) and a put is purchased, the holding period is terminated and would not resume until the put is sold or expires. When the holding period resumes, it will do so as if the stock was purchased on that day -If a long-term holding period were established on the stock, then the acquisition of the put would not affect the investor's holding period. If the stock and the put are purchased on the same day, that is termed a married put. In that case, the price of the put will be added to the price of the stock to arrive at a cost basis for the entire position. When the put expires, there will not be a taxable event since the stock must be sold to trigger a capital gain or loss. The purchase of the put will create a hedge by allowing the investor to sell the stock at the strike price, thereby reducing a loss. There is still potential for the stock to rise and for the customer to achieve large gains

Reverse convertible securities

short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal. The investor is anticipating a stable price for the underlying asset and is not able to participate in any increase in the value of the underlying asset

Wilshire Associates Equity Index

shows the market value in dollars of roughly 7,000 NYSE, NYSE MKT (formerly NYSE Amex), and Nasdaq stocks. It contains the most stocks of the choices listed

Recapture

situation where tax benefits previously taken should be paid back to the government

Supply-side economics

states that the government should reduce marginal tax rates and the size of government to promote economic growth

Dollar cost averaging

systematic method of investing that results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits are not obtained with funds that have a stable asset value, such as money-market funds

To determine the equity in a combined margin account,

take the long market value (LMV) plus the credit balance (CR), then subtract the debit balance (DR) and the short market value (SMV) -LMV + CR - DR - SMV

Time value is calculated by

taking the difference between an option's premium and its intrinsic value

put/call ratio

technical market indicator and is found by dividing the volume of all put transactions by the volume of all call transactions on a daily basis. Technical analysts view the put/call ratio as a contrarian indicator. The higher the ratio, the more oversold the market, and the higher the probability that the market will reverse course and turn bullish. The opposite is true for a low put/call ratio, which is viewed as a bearish indicator.

On March 9, an investor purchased 1,000 shares of ABC at $20 and then on July 20, the investor purchased an additional 1,000 shares of ABC at $12. On May 11 of the following year, the investor sold 1,000 shares of ABC at $25. For tax purposes, he must report a:

the investor has two positions in ABC stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor did not identify the shares to be sold, it is the first shares that were purchased in March at $20 that were sold. Therefore, since the shares were held for more than one year, the investor will report a $5,000 long-term capital gain.

arbitrage situation occurs when

there is a price difference in comparable securities. If the stock is selling above parity, the value of the stock received from converting the bond is more than the value of the bond. An investor could sell the stock short and buy the bond, and then convert the bond and use the stock to cover the short position

periods of easy money,

there is availability of money. Therefore, interest rates will decline or be lower. In periods of easy money, bonds of similar quality generally will have short-term yields lower than long-term yields. Both short-term and long-term yields will be below normal. This situation creates a positively sloped yield curve where yields rise from short to long term

If investors are long stock,

they can lock in an existing profit, or protect themselves against a market decline, by buying a put. If the market price continues to rise, investors will realize an additional profit, minus the premium paid for the put -investor can provide protection against a loss by using a put

Regular-way settlement for stock transactions is

three business days. In most cases, settlement occurs electronically through DTCC. In this case, since the seller must make physical delivery of the securities, settlement takes place at the buyer's premises

Municipal bond insurance guarantees

timely payment of principal and interest. If a municipal bond has 10 years to maturity, the insurance company is obligated to make 20 interest payments as they come due and a lump sum at maturity.

Regulation NMS modernized the U.S. markets for trading equity securities. Among other rules, Regulation NMS prohibits

trade-through of a protected quote. A protected quote is the highest bid and lowest offer (the inside market) in a market center that allows electronic executions. A trade-through occurs when there is an execution of a buy order at a price above the lowest ask price, or an execution of a sell order below the highest bid

Standard & Poor's Depositary Receipt (SPDR)

type of exchange-traded fund (ETF). It can be used to refer to a specific exchange-traded fund that tracks the S&P 500 or a group of ETFs.

Interbank market

unregulated over-the-counter market in which currencies of different countries are bought and sold. Foreign currency transactions may settle on a spot or forward basis. Spot transactions settle in two business days from the trade date. In a forward transaction, the exchange rate is established on the trade date but settlement occurs in more than two business days. While foreign currency transactions are not reported on Nasdaq, spot quotes are available from information vendors such as Knight-Ridder Financial Information Systems, Reuters, and Telerate

convertible bonds are issued by companies with

weaker credit ratings and allow the issuer to sell debt at a lower cost. Since the conversion feature is a benefit to the bondholder, convertible bonds will have a lower coupon than similar nonconvertible bonds

Raw land

will satisfy an investor's need for an investment that has the potential for capital appreciation without producing currently taxable income. However, raw land is not eligible for depreciation deductions or tax credits. Due to the limited benefits, an investment in raw land is considered speculative

MSRB regulates

yield that must be disclosed on a client's confirmation. The yield disclosed is the lower of the yield to maturity or yield to call. In other words, the yield to worst. If a bond is callable and trading at a discount, the lower of the two would be the yield to maturity.