Series 7 - Questions answered wrong
Flow of Orders in a Brokerage Firm
1) Wire Room 2) Purchase dept 3) Margin dept 4) Cashiering dept
Characteristics of TBILLS
1) always trade less a discount to yield 2) zero coupons 3) max maturity of 6 months Treasury bills are sold in minimum denominations of $100 and are not callable before maturity. They mature in 4, 13, or 26 weeks from issuance and are sold at a discount. Interest on Treasury bills is taxable at the federal level only.
The issuer of a limited tax bond is limited to a specified...
1) max rate 2) tax source
Information Needed for Suitability
1) tax bracket 2) Investment objectives 3) Net Worth
Current Yield
Annual Divi / CMV
This SRO sets the initial margin requirements on nonexempt securities
FRB
Stopping stock is only permitted when...
It is a public order
MSRB is an SRO that does not enforce it's own rules
It's empowered and accountable to the SEC, rules are enforces by FINRA, the SEC, FRB, and the comptroller of the currency
Attractive Bond Feature for Issuer
Low Call premium
Interest expense incurred from buying securities on margin cannot be offset with income from...
MUNIs, b/c interest is not taxed, and therefore is not deductible
A quote in the OTC Pink indicates that a dealer is...
Prepared to make a firm "bonafide" quote for 100 shares
Depression
Severe downturn in Economy for 18+ months & Extremely high level of unemployment (+15%)
Not affected by issuance of bonds: Assets, total liabilities, Working Cap, or Shareholder's Equity?
Shareholder's equity
Securities listed on NYSE & other SEC regulated Exchanges are exempt from registration on the...
State level
To convert Tax Equivalent Yield (TEY)...
TEY = tax-free yield / (100-tax bracket)
Negotiated Bidding Process
Revenue Bonds; Muni chooses the investment bank that it wants
Sarbanes-Oxley
The research analyst conflict of interest rules were mandated by the Sarbanes-Oxley Act
Municipal bond analysts
concerned with financial aspects of municipal bonds to ensure that they do not default. Various financial ratios and collection records are critical to their analysis.
MSRB Rule G-28
a muni dealer must notify firm and send the firm duplicate confirms if an employee, or spouse of employee, opens acct with the dealer
Reg A
applies to new issue of $5mm or less - good candidate would be a small manufacturing company; venture capital firms, private equity funds and hedge funds are specifically excluded.
Best efforts commitments
are used for corporate securities - an all or none commitment is a type of best efforts commitment.
Standby commitments
are used only for corporate stock rights offerings; allows a corporation to sell as much of a new issue to current stockholders as possible, backed by the underwriter's promise to purchase any unsold rights
Stop Orders & Ex-Divi Dates
automatically adjusted on ex-dividend date
SEP-IRAs
set up by SMALL corps to allow employees to make contributions toward an employee's retirement
Investment Company Act of 1940
to ensure the individual investor is fully informed about affairs of invt co and is treated fairly
Coincident, or current, indicators
GDP & Industrial Production
For company to call a bond at par before maturity, the investors return would be?
Greater than the yield to maturity
Increasing prices amid high unemployement
Stagflation
Mary bought a 7% J&J 15 Muni Bond on Tues, March 18th in Regular Way Trade... how much accrued interest will she pay?
- 15 - Indicates January 15th - T+3, so settles on Friday 3/21 - 30/360 Basis = 66/360 x 70 = 12.83
How many days until a mutual fund can be used for margin purposes?
30 days
Pattern Day Trader
4 trades in 5 days, must maintain 25,000 in margin acct - has same minimum margin requirement as margin acct aka 25% of CMV
What is the MAX maturity for TBILLS?
6 mo's
Any distribution from a corporate pension plan can be rolled over into an IRA within XXX days to maintain its tax-deferred status?
60 days
At the request of an SRO or law agency, RR's must provide...
ALL documents or evidence at their request
A broker's broker
Acts as agent in transactions by facilitating the movement of blocks of bonds. The broker's broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker's broker does not make a market in securities
Matching, Pegging, Fixing, Attempt to create the appearance of active trading in a security
All illegal according to the Sec Act of 1934
How much can a customer withdraw from SMA in cash?
All of it
defensive industry stocks
Are non-cyclical; generally produce nondurable consumer goods, such as food, pharmaceuticals, and tobacco.
Gov Bonds & Notes are quoted...
As an annualized percentage of par in 1/32nd
Special Assessment Bonds
Backed by taxes or charges against those who benefit from the proceeds of the bond
Wilshire 5000
Broadest measure of market of all US headquartered Economy
Manufacturing Sales
Coincident Indicator
Bond counsel examines WHAT in validity of municipal issue?
Confirns the LEGAL DEBT of muni and it's tax exempt status by evaluating... 1) municipal statutes 2) State constitution and amendments (for restrictions) 3) Judicial edicts 4) legislative authority
3 Truths of Convertible Bonds
Coup rates lower than nonconvertible bonds, creditors of the corporation, if underlying stock price declines to point where converting is disadvantageous, bonds trade at inherent value
The Telephone Consumer Protection Act
Covers all Telemarketing companies (not universities, NPOs, nor small businesses) and enforces the 8-9 pm rule of the customer's location, does not need to disclose the DNR list unless asked.
Fed Funds quoted for Business news every....
Day
The date on which the interest on a new muni will begin accruing interest
Dated Date
Debt Service Ratio
EBIT / (Principal + Interest Due) or NET-INCOME / Total Debt Due Net income = sales - expenses Total Debt
Eurodollars & which government is the income from eurodollar bonds always taxed?
Eurodollars is US currency deposited in foreign banks; The income from a foreign investment is taxable to the investor under the rules of the country in which he pays taxes.
Competitive Bidding Process
General Obligation Bonds; firm commitement - issuer awards deal to the bank offering the lowest net interest costs
Classical Economic Theory
If left alone, economy's health will balance
Summarization of Preliminary & Final Prospectus
Illegal - cannot be summarized in any way
The money contributed to SEP vests when?
Immediately
Indications of Economic conditions
Industrial production, inventories, S&P 500, Consumer orders
Increasing prices amid expanding economical period
Inflation
All of the following are regulated by the MSRB EXCEPT: A) dealers. B) quotes. C) issuers. D) sales representatives.
Issuers
Commercial loans outstanding are what kind of indicator?
Lagging
FOMC's short term effect on the economy
Making credit more or less available
Underwriting Spread
Managers fee + underwriters fee + concession
Regulation D of the Securities Act of 1933
Marks the exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued nor the number of accredited investors who may purchase the shares.
Least important debt obligation of MUNI
Matured Debt
Buying Power
Multiplying excess equity by 2
Municipal Securities adverts are approved by whom?
Municipal Securities Principal - not MSRB
Securities exempt from Act of 1933
Munis - US - Domestic Bank securities (not held by holding companies)
Net Direct Debt per Capita
NDD = (self supporting debt - sinking fund accumulation) / population
What would the MSRB NOT consider advertisements?
Official Statements
Gov Bills are quoted...
On a discounted yield basis. I.E. 6.31 - 6.18
In a cash transaction on the record date, when is the ex-divi date?
One business day after the record date - for non-cash transactions, the ex-divi date is 2 business days prior to record date
Contributions to IRA
Only earned income can be contributed to IRA, Soc. Security & Trust income not eligible.
OIDs
Original issue discount; IRS is the ultimate authority for determining the amount of the discount on OID bonds, as they set the guidelines for OIDs and is under their jurisdiction for taxes; Because the bond is being issued by a syndicate, it is a new issue (i.e., an original issue). Because the yield (4%) is higher than the coupon (3%), it is an original issue discount.
Losses from DPPs can be used to offset...
Passive gains, such as income from Limited Partnerships
"300 over"
Refers to yield of bond being 300 basis pts over that of a comparable security
Finding Excess Equity
Reg T is 50% of CMV, excess equity is if the equity balance exceeds the Reg T requirement
Objectives of Call Buyers
Speculating, Delaying, Diversifying, Hedging Short position
Who sets the margin requirement for OTC stock?
The FRB; sets requirements for marginable stocks and decides which OTC securities are marginable on a case-by-case basis
The MSRB is accountable to...
The MSRB is accountable to the SEC
Truth in Securities Act
The Securities Act of 1933; requires full & fair disclosure
Advantage of Callable Convertible Preferred Bonds?
The oppty to participate in any appreciation in the value of common stock. In return for advantage, the preferred pays lower rate than nonconvertible preferred. Stockholders must surrender stock when it is called, but they will usually receive a premium over par value. Divis cease on call date.
Systematic risk
The possibility that an overall decline in the market will cause a loss in an investment. Index options investors are exposed to the risk that market movement will cause the option positions to move adversely.
Banker's Acceptances
Time draft used to facilitate trading of foreign goods
Which of the following balance sheet entries may be affected when a company pays a cash dividend? 1) Shareholders' equity. 2) Total assets. 3) Total liabilities. 4) Working capital.
Total Assets & Liabilities decrease; When a company pays a cash dividend, the dividends payable (a current liability) and the cash account (current assets) are reduced by the same amount. Because liabilities and assets are each reduced by the same amount, working capital is not affected. Shareholders' equity, or net worth, is also not affected when the dividend is paid.
Sell-out
When a BUYER if security fails to complete contract and the BD closes the contract by selling the security of the account for the BUYER
Stock Index Call Options
When excercised, Buyer receives cash equal to the difference between the strike price and CMV of the index (this diff is the intrinsic value) multiplied by 100$
Constant Dollar Plan
When investor maintains fixed amount of monies in a portfolio regardless of CMV - if MV increases, cap is withdrawn, if decreases, movies contributed
When must a Municipal Dealer notify a client in writing regarding an underwriting?
When the deal has any financial interest in the underwriting of a security being solicited for sale
Max Gain on Long Stock & Short Straddle when call is exercised...
add premiums, subtract dollar amount between MV and SP
State Registration applies to...
all in-state sales persons and BD's and out-of-state salespeople and BD's doing business in that state
To hedge against a decline in the market, a customer should...
buy puts or sell calls
What is the taxable gain for the sale of discounted bonds on a cost-basis accretion?
cost basis = the price at purchase (i.e. premium or discount to par) sell price - bought price
Current Ratio
current assets / current liabilities
If a company redeems outstanding debentures, working capital...
decreases; working cap = current assets - current liabilities
ADRs
domestic trading of foreign securities, issued by domestic banks and represent interest in a foreign corp; An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities. Dividends on ADRs are subject to both federal and state income tax. In addition, the country of origin will frequently levy a tax which may be used as a credit on the investor's federal income tax return; ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities
FINRA Rule 5130
ensures underwriters make a bona fide public offering of all new issues by prohibiting selling new issues to accounts of restricted persons
Banker's acceptances
imports & exports
Uniform Practice Code
maintains similarity of business practices among member organizations in the securities industry
Dow Jones Industrial Average
narrowest measure of market, 30 industrial stocks
SIPC
non-profit, funded by members, subject to SEC oversight
Regulated by MSRB
underwriters, traders, and sales of MUNIs; not the actual municipality
T-Bills = Principal stable, interest is fluctuated
upon maturity, investor receives par value, but amount of interest may fluctuate based on prevailing interest rates
Collar
used to protect profits from long stock position; long stock, long puts, short out of the money calls on same security; options are usually out of the money when position is opened
