Series 7 Top Off- Section 3 (73% of Test) Part 2
The Securities Exchange Act of 1934 deals with:
-Filing of Financial Statements by B/D -Marking sales sales long or short on order ticket -Monitoring accounts for insider trading violations
The MSRB defined an associated person of a broker dealer what is primarily engaged in municipal securities activities other than retail sales to individual as?
A municipal financial professional (MFP)
Certificate of Participation (COP)
A municipal security paying a share of lease revenues to the investor as opposed to a bond backed by such revenues from a particular project.
How are dollar bonds quoted?
A percentage of par
What accounts would a collateralized mortgage obligation (CMO) Z-tranche be best suited for?
A professionally managed hedge fund specializing in real estate portfolio securities A zero-tranche (Z-tranche) CMO is considered to be among the most volatile CMO tranches because they receive no payments until all preceding tranches of the CMO are retired.
Raw land program
A raw land real estate partnership is usually speculative
American Depository Receipts (ADRs)
A receipt for shares of a foreign stock certificate that shows ownership in a company's stock. -Depository bank guarantees that it holds the stock -Trade in US market -Trades in US Dollars
Recourse Note:
A recourse note means that the limited partner agrees to pay the note no matter what happens
What is a "redeemable" security?
A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. Ex: variable annuities. unit investment trusts mutual funds
Electronic Communication Network (ECN)
OTC electronic system -Allos B/D to skip market makers -Open 24 hours -No Inventory. Matches buy and sell orders as Agents
What is the max political contribution allowed under MSRB rules for those eligible to vote in the municipality?
$250
What are the responsibilities of MSRB?
-Establishment of record keeping requirements for municipal broker dealers -Creation of regulations for participants in the municipal securities secondary market
conversion price formula
1000 Par/ # of shares = Price
Conversion Ratio (Bonds) Formula
1000 Par/ Conversion Price = # of Shares
What is the maturity range for municipal securities?
5 years or more
What does it mean if a indenture has closed end provisions?
Additional issues will have junior liens
If corporation reports loss they are obligated to pay interest on all bonds except?
Adjustment Bonds
An investment adviser who switches among investment classes based upon anticipated market changes is using a technique known as
Asset Allocation
What percentage of funds from investors of a DPP must be used/put into the program?
At least 85% must actually be put to work in the program.
When is interest paid on BANs?
At maturity
Issued Stock
Authorized stock that has been sold to the investors
investment grade bonds
BBB or Baa or higher -Eligible for institutions -Greater Liquidity -Lower Yield
Revenue Bonds
Backed by the revenues generated by the municipal facility the bond issue finances (Or taxes other than property tax)
Why aren't G.O bonds able to be sold short?
Because thin markets may make it difficult to cover a short municipal position
subordinated debenture
Belonging to a lower or inferior class or rank; secondary
Beta
Beta is a measure of a stock's volatility relative to the overall market. Risk averse investors are better served with lower volatility investments. The beta of the overall market is 1.0. The lower the beta the lower the volatility and the reverse.
Blank Check and Blind Pool Securities
Blank-check and blind pool securities are offerings where the issuer has not specified the use of the capital it is raising. While these securities are available individually to investors, some hedge funds will either target them or include them within their portfolios. The unique risks of these companies, coupled with the unique risks of hedge funds in general, must be considered in terms of suitability.
NYSE (New York Stock Exchange) mainly trades:
Blue Chip Stocks
Dividends on common Stock are paid at who's discretion?
Board of Directors
A municipal revenue issues flow of funds statement is contained in what document?
Bond Contract
If a customer moves account, which firm is responsible for sending the transfer initiation form (TIF) to ACATs?
The receiving Firm
Centralization of Management
is almost impossible to avoid because the general partner(s) provide the management of the program.
Blind Pool Offering (DPP) :
is one in which 25% or more of the properties are not specified.
An investor desiring a limited partnership investment with capital gains potential would most likely select one investing in:
raw land
A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be :
taxed as ordinary income
nonqualified dividends
taxed as ordinary income
A client's investment portfolio holds all equities. If the client is interested in further diversification, which mutual fund would best meet that goal?
Bond Fund
Revenue bonds that are subject to gross revenue pledge will pay what first?
Bond Interest and Principal
Call provisions of a municipal issue would be detailed most completely where?
Bond Resolution
Bond confirmations must disclose what yield?
Bond confirmations must disclose the lower of the yield to maturity or yield to call
Which risk factor would be least important to disclose in recommending collateralized mortgage obligation (CMO) securities to public customers?
Credit risk
What risk are ADR investors subject to?
Currency Risk
Formula to calculate rights before the ex date:
Current Market Price - Subscription Price= Total Total/ Number of Rights + 1
Moral Obligation Bonds
- RISKY; payment pf interest and principal is not a legal obligation - if cannot pay, state legislative appropriations would be required
Penny Stock: Established Customer
-3 transactions in 3 different penny stocks on 3 different days -Cash or securities on deposit with firm during previous 12 months - Broker dealer must send account statement detailing name and amount of each penny stock held in customer's account and value of securities when they can be valued
A married couple with a two-year-old child wants a suitable investment to help meet the financial obligations for the child's college education. What choices are the most suitable alternatives?
-A STRIP scheduled to mature in 15 years -Treasury receipts STRIPs and Treasury receipts are forms of zero-coupon bonds. STRIPs are backed in full by the U.S. government and Treasury receipts by the financial institutions that issue them. Purchased at a discount and maturing at face value in the future, they are suitable investments for those wishing to save for anticipated expenses, such as college tuition, sometime in the future.
A customer expresses the need to invest a fixed-dollar sum now that will return a fixed-dollar sum in 10 years. He mentions several investments. Which would be a suitable recommendation for his objective?
-A zero-coupon bond maturing in 10 years -Treasury Inflation Protection Securities (TIPS) -A high-yield corporate bond maturing in 10 years
Adjustable Rate Preferred
-Adjustment based in a chosen standard -US Treasury is usually the standard -Adjustments usually done quarterly -No Interest Rate Risk
Corporations engaged in rights Offerings:
-After successful completion, the market price of stock declines slightly -Number of outstanding issues would increase -The corporation would use a standby underwriter
Negotiable Certificates of Deposit (CDs)
-Also known as Jumbo CD -Minimum size $100k -Unsecured time deposits loaned to bank for a specific period -Issued at face, pays periodic interest, usually semi annual -Insured by FDIC -Only l year CDs are considered money market -Not secured by an asset -No penalty if sold early
Classifications of Stock
-Authorized -Outstanding -Issued -Treasury
Who issues commercial paper?
-B/D -Finance Companies -Corporations -Mainly Industrial Corporations and B/D
Yield to Maturity (YTM)
-Basis -the rate required in the market on a bond
Stand-by Underwriter
-Buys the left over stock in a rights of offer or unsold stock as a result of expiring rights -Issuer is assured of selling all the shares being offered
What can you find in the protective covenant for a municipal revenue bond issue?
-Call Features -Catastrophe Clause -Flow of Funds
Convertible Debt securities
-Can convert debt to shares of stock -Only issued by corporations -Conversion details located in the bond indenture
The interest on what instrument is subject to taxation at the federal, state, and local levels?
-Collateralized mortgage obligations (CMOs)
Nominal Yield
-Coupon Rate -Fixed Income -Paid semi annually
Equity Linked Notes (ELNs)
-Debt Instruments where the final payments is based on return of single stock, basket of stocks or an equity trade -Also known as ETNs -Risk Include: Credit, Market, Liquidity, Call, conflicts of interest
Amortization of a municipal bond premium does what?
-Decrease cost basis -Decrease reported interest income
Equipment Trust Certificates (ETCs)
-Finance acquisition of rolling stock -20% down- The rest financed over 15 years for example -Assets don't depreciate -Title for equipment, held as collateral -Trustee holds title ex: Transportation Companies
Of the different sharing arrangements for limited partnerships between the general partners (GPs) and the limited partners (LPs), which is generally considered the most common?
-Functional allocation
What best describes the investment characteristics of a high-quality long-term municipal bond?
-High inflation risk, low default risk -A longer term bond will be subject to more inflation risk. Because the quality of the bond is high, the level of default risk should be low.
Disadvantages of convertible securities to the issuer:
-If converted shareholders equity is diluted -Converted shares can shift control at the company -Loss of Leverage -Raises corporations taxable income
Advantages of convertible securities to investors:
-Interest Payments that are fixed redeemable for its face value amount at maturity. Interest payments higher than dividend income -Convertible preferred stock: Pays higher dividends than common stock -Market Price tends to be more stable during market declines -Market price increases if stock price moves up -No tax liability on conversion transaction
zero coupon bond
-Issued at a deep discount -No Interest Payments -Market price determined by current interest rtes -Yield is locked in -Used to fund education and retirement needs
True Statements about Negotiable CD:
-Issued by banks & backed by issuing bank -Minimum denomination is $100k -Referred to as Jumbo CD -Can be traded on secondary market
G.O issued by state:
-Issued by state -Backed by income tax, license fees, sales tax
What primary factors affect marketability of a municipal bond?
-Its rating (Higher= Better) -Its Coupon (Higher=Better) -Its Maturity (Shorter= Better) -Normal block size is 100k so higher amounts are more marketable
Risk of penny stock
-Lack of transparency -Lack of liquidity -No track record -Frequent pump and dump activity
over-the-counter market (OTC)
-Largest market in the US -Market where unlisted securities trade
Common Stock Characteristics:
-Limited Liability -Residual Claims to assets -Last in line at liquidation -Junior security
Objectives of DPP program:
-Long-term capital gains. -deferment of taxes. -deductions against passive income.
Disadvantages of convertible securities to investors:
-Lower interest rates -Convertible bonds are not suitable for people who want income -Lower priority to investor -If called, investors are forced to make a decision to convert or not
Zr
-Means Zero Coupons Bonds -Issued at Discount -No coupon rate
General Obligation Bonds (GOs)
-Municipal Bond -Backed by taxes -Usually property taxes/Ad Valorem Taxes
Bona fide quote characteristics
-Must reflect the dealers best judgement and have reasonable relationship to the fair market value -May reflect the firm's inventory and expectations of market direction -Quotes can take consideration for dealers inventory and any anticipated market movement
Rights of ADR Owners
-No voting -Rights are pasted to the holder
Private Placement Debt
-Not Registered with SEC -No Rights -High Risk
What do analyst consider before issuing G.O Bond?
-Outstanding Debt -Tax Collection Ratio -Public attitude towards more debt
OTC Bulletin Board (OTCBB)
-Pink Sheets traded here -No central marketplace- Trades happen over the phone, computer networks
If interest rates are rising, which statements regarding collateralized mortgage obligations are true?
-Prepayment risk decreases. -Extended maturity risk increases.
What information could an analyst use to establish the rate of return on a direct participation program (DPP)?
-Present value -Internal rate of return
Legal Opinion
-Printed on the face of every bond certificate -Unless printed ex-legal -Signed by bond counsel -Issuer is responsible for retaining bond counsel
Who is regulated by the MSRB?
-Quotes -Dealers -Sales Rep ONLY
Revenue Bond Trust Indenture Includes
-Rates covenant -Maintenance covenant -Insurance Covenant -Additional Bond Test -Sinking fund -Catastrophe Clause -Flow of funds -Books and records covenant -Call feature
Advantages of Preferred Stock
-Receive dividends before common stock holders -If company is bankrupt, preferred stock has priority over common shareholders
Planned amortization class (PAC) collateralized mortgage obligation were designed to provide which of the following benefits, compared to plain vanilla tranches?
-Reduce prepayment risk for tranche holders -PACs reduce, but cannot eliminate, prepayment risk for tranche holders. The companion tranches will have higher prepayment risk than the PAC, as they were designed to absorb the bulk of the prepayment risk
What is required if municipality wishes to issue G.O bonds above its statutory limit?
-Referendum -Then voter approval must follow
What are allowable municipal dealer quotes:
-Request for offers only -Bona fide quotes -Request for bid only
Liquidation Priority (Corporation)
-Secured Creditor (Mortgage Bonds/Equipment Trust/Collateral Trust) -Unsecured Creditor (General Credit/Debenture) -Subordinated Debt holders -Preferred Stockholder -Common Stockholders
Limited Tax General Obligation Bonds
-Secured by a specific tax -Issuer is limited to taxes they can collect -Higher Risk
Collateral Trust Bonds
-Securities owned are used as collateral -Also known as collateral trust certificates
Legitimate factors in determining the markup on a stock:
-Security Price -Overall value of the transaction -The availability
Commercial Paper
-Short term unsecure paper issued by corporations (especially finance companies) primarily to raise working capital. -Also referred as promissory Note -One to 270 day maturity -Issued at a discount
Advantages of convertible securities to the issuer:
-Sold with lower coupon rate than non convertible b/c the conversion feature -At conversion, company reduces debt -Little effect on stock price once converted -At issuance, conversion price is higher than market price of the common stock
feasibility study
-Study done before issuing revenue bonds -Study includes estimated revenues that will generate and detail the operating, economic and engineering aspects of the proposed project
Market timing is normally associated with which portfolio management styles?
-Tactical asset allocation -Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy
What should a registered representative disclose when discussing collateralized mortgage obligations (CMOs) with a customer?
-The rate of return may vary because of early repayment. CMOs are corporate mortgage-backed bonds that separate mortgage pools into different maturity classes called tranches. Like other mortgage-backed securities, CMOs subject investors to the risk of early repayment when interest rates fall; registered representatives should disclose this risk to CMO customers. CMO interest is taxed at all levels, and there is no government backing on CMOs. Different CMO tranches have differing levels of investment risk.
Commercial Paper Characteristics:
-Unsecured -Quoted on a discount yield basis -Interest received a maturity
Banker's Acceptance (BA)
-Used by impact/export business as short term time draft with a specified payment date drawn on by a bank -Payment date usually: 180-270 days -Issued at a discount
Sources of Revenue Bonds
-Utilities -Housing -Transportation -Education -Health -Industrial -Sports
Voting Rights of Common Stock Holders:
-Vote for Board of Directors -Issuance of convertible securities or additional common stock -Substantial changes in corporations business, such as mergers and acquisitions -Declaration of Stock Splits
What are the different types of CMO tranche?
-Z (Zero) -PAC (Planned Amortization Class) -TAC (Target amortization Class)
A working interest in an oil and gas partnership entitles the holder to:
-a portion of the revenue. -responsibility for part of the expense of extraction.
What must a REIT do to qualify for favorable tax treatment?
-be organized as trusts. -distribute at least 90% of their investment income to shareholders. -invest at least 75% of their assets in real estate-related activities
Real estate investment trusts (REITs) can distribute what to their shareholders?
-cash dividends. -capital gains. -stock dividends. NEVER LOSSES!
Depreciation expense is a deduction for investors, available for which Partnerships?
-equipment leasing limited partnerships. -real estate limited partnerships (RELPs). -movie production limited partnerships
A risk faced by investors in most CMOs that is not found in corporate bonds is
-extension risk
Which risk are considered diversifiable?
-financial risk. -business risk -Sovereign risk
The SEC requires that all sell orders be identified as either long or short. A person is not considered to be long a security if he :
-has sold an in-the-money put option on that security simultaneously with entering the short sale order
A client of your broker-dealer is interested in collateralized mortgage obligations (CMOs). While determining suitability for the client, what should be discussed:
-how changing interest rates may affect the prepayment rates. -the relationship between mortgage loans and mortgage securities -the tax consequences of CMOs
What statements are true about CMOs?
-interest payments are distributed pro rata when received. -principal repayments are applied to earlier tranches first -CMOs are a derivative security
The risk of a bond decreasing in value during periods of inflation is known as:
-interest rate risk -Interest rate risk is the possibility that interest rates might rise, causing bond prices to fall. Periods of inflation are accompanied by rising interest rates.
All of the following statements regarding the tax treatment interest received from a collateralized mortgage obligation (CMO) investment is true:
-it is taxable at the state level. -it is fully taxable at all levels. -it is taxable at the federal level
Name some advantages of a real estate investment trust (REIT):
-liquidity -diversification. -professional management -Being able to divest of the shares easily -Using real estate as a potential hedge against the movement of other equity securities the customer owns -Having a professionally managed portfolio of commercial real estate assets TAX TREATMENT IS A DISADVANTAGE DIVIDEND TREATMENT IS A DISADVANTAGE THE FACT THAT THE LOSSES ARE NOT PASS THROUGH IS A DISADVANTAGE
Three types of REITs:
-mortgage REITs. -equity REITs. -hybrid REITs
Pooling assets such as auto loans and mortgages into investment vehicles for sale to the public is the process known as :
-securitization -Pooling assets, such as mortgages and various other types of loans into financial instruments allows them to be sold to general investors more easily than selling them individually. This process is called securitization. Remember, if someone owes you money, it is their debt but your asset.
Interest on Corporate Bonds
-taxed as ordinary income -Fed, State, and Local Tax Zero Coupon: Income tax each year on the amount by which the bond has accreted
If a customer holds certificates of beneficial interest in a real estate investment trust (REIT), what can they do?
-the certificates are publicly traded. -a mortgage REIT represents pooled capital for real estate financing. -investors receive dividends periodically
Limited Partnership Subscription agreement?
-the investor's signature indicates that she has read the offering document. -the investor's registered representative must verify that -the investor has provided accurate information. -the general partner endorses the subscription agreement, signifying that a limited partner is acceptable.
Collateralized mortgage obligation (CMO) tranche A has been created to have the most predictable near-term principal pay off. A tranche set up in this way will have
-the least reinvestment risk -a lower yield
What is associated with asset backed securities?
-the securitization of assets. -pooling individual assets into larger financial securities to be sold to investors -expected cash flow from credit card debt, leases, auto loans, and mortgages
Regulation FD covers
-the selective disclosure of material nonpublic information by issuers Regulation FD was enacted to curb the selective disclosure of material nonpublic information by issuers to financial analysts and institutional investors. The rule helps ensure that all investors receive equal access to a company's material disclosures at the same time.
If a customer buys bonds that have already been called, the confirmation must disclose:
-the yield to redemption. -the redemption price. -the redemption date A customer who has purchased a called bond has probably purchased one that has been prerefunded. The yield to original maturity is no longer a factor.
According to Municipal Securities Rulemaking Board rules, if a customer purchases a municipal bond from your firm, the confirmation must disclose:
-whether your firm acted as agent or principal. -your firm's address. Customer trade confirmations must make explicit disclosures regarding the terms of the transaction and the parties involved. The broker-dealer must always disclose the capacity in which it acted (i.e., principal or agent.) The confirmation must show the name of the person for whom the trade was executed (i.e., the customer). The name, address, and telephone number of the broker-dealer must be shown so a customer may contact the firm easily. The settlement date is also required, but the broker-dealer is not required to disclose where it acquired the bonds or the price it paid.
A carrying member—after receiving account transfer instructions from the receiving member—must validate the positions in the account within how many business days of receipt?
1 day
What can be used to compute alternative minimum tax?
1) Excess intangible drilling cost 2) Accelerated Depreciation 3) Percentage of Depletion in excess of basis
When municipal bonds are traded by dealer banks, who enforces the rules?
1) FDIC 2) FRB 3) OCC
Once a Tender Offer is announced, the target company has how many days to provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken?
10 Days
Regulation 14E requires that tender offers be open for at least_____________ days and remain open for at least______ days after any change to the offering price.
20 days 10 days
What rate is normally considered adequate coverage of interest and principal charges for a municipal revenue bond?
2:1
Records relating to terminated representatives must be retained for how many years?
3 years
Trial balance records must be kept for how many years?
3 years
After opening a new account, how many days does a firm have to provide the customer with a copy of the account record?
30 Member firms must provide new customers with a copy of the account record (new account form) within 30 days of opening the account; this ensures that the information the firm has on file is accurate.
A customer contacted her registered representative requesting that her account be updated with her new residential address. The member firm must send a copy of the updated account record to the customer within
30 days
Customer account information must be updated at least every
36 months
An abstract of a municipal securities issue official statement must be maintained on file for:
4 years
Under the USA PATRIOT Act of 2001, member firms must maintain records of reports of currency transactions involving more than $10,000 for
5 years
Information gathered to verify a customer's identity must be maintained by a member firm for at least
5 years The USA PATRIOT Act requires that information gathered to verify a customer's identity must be maintained for at least five years.
Customer account records (such as the new account form) must be maintained for not less than
6 years commencing from the date the account is closed
Formula to calculate rights on/after ex date:
Current Market Price- Offer Price= Total Total/ Number of Rights
Industrial development revenue bonds are non suitable for what type of client?
A Client wishing to maximize his after tax interest income. Industrial Development Bonds are subject to allowance tax
What type of security is a REIT considered?
A REIT share is an equity security that represents undivided ownership in a portfolio of real estate investments.
Zero-Tranche CMO (Z-Tranche)
A Z-tranche receives no payment until all preceding CMO tranches are retired (the most volatile CMO tranches). Subject to interest rate risk and extension risk when interest rate rises
A municipal bond subject to a refunding call must be quoted at yield to call in which of the following instances?
A bond at a premium callable at par
Bond ladder strategy
A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk. The laddered portfolio will generally provide higher, not lower yields than a portfolio consisting entirely of short-term bonds.
Warrants
A certificate granting its owner the right to purchase securities from the issuer at a specified price -Long term instrument -Some warrants never expire -Purchase price is higher than current market price on the date of issue of the warrant -Offered as a sweetener, usually with bonds or preferred stock -Can Trade separately
subscription right
A certificate representing the privilege to buy additional shares of a corporation. -Short Life Span= 30-45 days -One right per common share
Tax and Revenue Anticipation Notes (TRANs)
A combination of the characteristics of both TANs and RANS.
When auction rate securities reset the yield to be paid in the upcoming period, what process is used?
A dutch auction that establishes a clearing rate
Proxy
A form of an absentee ballot
General Partner (GP)
A general partner of a limited partnership is a key executive of the program who purchases and sells the property and/or appoints someone to manage the property. The general partner does not have limited liability. By not allowing the general partner to have limited liability, the program is able to rule out limited liability as a corporate characteristic.
Which pooled investment vehicles would most likely be structured as a limited partnership?
A hedge fund
A limited Partner can deduct how much losses from passive income?
A limited partner can only deduct partnership losses to the extent of his basis
If a customers places a market order, then later finds an error what should be done>
A market order means the customer states that he is willing to accept the best price at the time of execution. A mistake made in reporting does not alter that fact.
Current Ratio
A measure of liquidity. It is the current assets divided by the current liabilities. The higher the ratio, the more liquid the company. This has no bearing on whether high or low P/E ratios are desirable.
Planned Amortization Class (PAC)
A type of CMO tranche that uses support tranches to absorb the risk of prepayment, if actual prepayment does not conform with anticipated levels. If actual prepayments for the mortgage pool are within a specified range, the PAC tranche will experience its originally computed return. If actual prepayments are less than or greater than the range allows, investors are subject to extension and contraction risk
Reverse stock split
After this split, investors own fewer shares worth more per share. Total Value unchanged
An investor has a portfolio containing 60% equities, 5% debt instruments, and 35% options and futures. Which of the following would best describe this investor's investment style?
Aggressive
Term Maturity
All principal matures at a single date in the future
Outstanding Stock:
All stock issued by company to investors
Cumulative Voting:
Allocate their total votes in any manner they choose. Good for smaller shareholders
Top 4 ratings for S& P:
AAA, AA, A and BB
Which credit rating agency specializes in the insurance sector?
AM Best
Top 4 rating for moody's:
Aaa, Aa, A, Baa
Accrued Interest on government bonds is based on how many days?
Actual/365
What does it mean if an indenture has closed end provision?
Additional Issues will have junior liens
Nonvoting common stock
Allows company to raise additional capital, while maintaining management control and continuing without diluting voting power
Out firm quote
Allows dealer to try to sell bonds that they don't own, knowing that if they find a buyer within the allotted time they can buy the bonds at a fixed price -Firm for one hour with 5 min recall period -Firm controls for one hour
How does the issuer benefit from offering warrants issued with Debt Instruments ?
Allows issuer to offer a slightly lower interest rate.
Rights Offering
Allows stockholders to purchase common stock below market value
Income Bonds
Also known as adjustment bonds -used when company is reorganizing and coming out of bankruptcy -Not suitable for customers seeking income -Interest payments are not guaranteed
What does a bond resolution spell out?
Also known as bond contract This spells out characteristics of issue Ex: Maturities, call features, issuers responsibilities any restrictive covenants
If more than 10% of the bonds proceeds go to the private entities, the interest on the bond is a tax preference item for what tax purposed?
Alternative Minimum Tax
Municipal bonds purchased at a premium must be:
Amortized Premium/ Years to maturity = Average Amount of Interest Per year Cost of Bond - (Years x Average Interest per year) = Amount Paid Amount paid- Amount Sold= Gain/ Loss
What is a municipal finance professional (MFP)?
An associate of the B/D engaged in municipal securities representation activities other than retail sales
Historically, what does a stock exchange operate as:
An auction
NASDAQ Stock Exchange
An electronic exchange market
An individual with an investment objective of capital preservation should invest in what?
An individual with an investment objective of capital preservation should be investing in a mix of investment-grade bonds and cash/cash equivalents.
According to MSRB rules, a control relationship would exist between a municipal securities firm and an issuer when?
An officer of the firm is in a position of authority over the issued
Who signs an official statement for a new municipal issue?
An official or officials of the issuer
Current Yield Formula
Annual Interest / Current Market Price
Bond YTM formula
Annual Interest- (Premium/ years to maturity) / Average Price of the bond
Eurobond
Any long term Debt instruments issued and sold outside the country of the currency in which it is denominated
Cumulative Preferred Stock
Any skipped dividend must be paid before paying common dividend -Less risk/Less Dividend
5% Policy Rule
Applies for both principal and agency transactions. But not to security that are sold by prospectus
Current Assets
Current assets are those that are either cash or expected to generate cash within the next year. Warehouses are fixed assets used for many years.
high-yield bonds
BB or Ba or lower
Speculative Rating for S&P:
BBB
Capital Gains and Capital losses (Corporate debt)
Bonds sold @ premium: Capital Gain Bonds sold @ Discount: Capital Loss Zero Bonds= No gain or loss
Special Tax Bonds
Bonds sourced by one or more designated taxes other than ad valorem taxes
Serial Maturity
Bonds within issue on different dates according to a predetermined schedule
Mortgage Bonds
Borrowed Money backed by real estate of company -Real estate pledged as collateral
When an issuer of an insured municipal bond default, what does the insurance company do?
Both principal and Interest are returned over the remaining term of the bond
What type of municipal is not tax exempt?
Build America Bonds (BAB)
Barbell Strategy
Buying bonds with very short maturities and bonds with long maturities is the concept behind the barbell strategy.
How are municipal securities defined?
By their maturities
Blue Chip Stock
Common stock of well known company with history of growth and dividend payments Ex: Dow Jones 30 Industrials
callable preferred stock
Company can buy back the stock from investors at a stated price on the call date or any date thereafter. -Call price higher than Par -Higher dividend date
BW/OW
Considered a quotation request
Rule 144 Control Stock
Controlled.restricted stock is not liquid
Computing Parity of Bond:
Conversion Ratio X Current Market Value
ABC Corporation raised capital through an offering of equity securities. Which component of the balance sheet has changed as a result?
Current assets When equity securities are issued, cash (a current asset) and net worth increase. Fixed assets and liabilities remain unchanged as a result of the offering.
Which preferred stock allows the holder to reduce the risk of inflation?
Convertible
What does CAV mean?
Cost Basis of the Bond
The term tranche is associated with which of the following investments?
CMO Collateralized mortgage obligations are a type of mortgage-backed security. A CMO issue is divided into several tranches, or slices, which set priorities for payments of principal and interest.
What statements regarding collateralized mortgage obligations (CMOs) is true?
CMO returns are affected by interest rate changes
Collateralized Mortgage Obligations (CMO)
CMOs are backed by mortgages. All mortgage-backed securities are subject to interest rate risk. If rates rise, extended maturity risk exists, which means the actual life of the underlying mortgage will be longer than the expected life. If rates fall, prepayment risk exists, which means mortgage holders will likely refinance their existing mortgages. As a result, the actual life of the underlying mortgages will be shorter than the expected life.
Where are CMOs traded?
CMOs are traded over the counter rather than listed on the exchanges.
CMOs can be purchased for what amount? And can trade for a minimum of what amount?
CMOs can be purchased for as little as $1,000 but mainly trade in minimum amounts of $25,000. Both prepayment risk and extended maturity risk apply to these mortgage-backed securities. The only security where yield is locked in is a zero-coupon bond.
Savings Account
Carries no market risk
Which of the following debt securities does not have a fixed maturity date?
Collateralized mortgage obligation (CMO) CMOs are mortgage-backed securities. Because mortgages are often paid off ahead of the scheduled maturity, the exact maturity date of a CMO is uncertain.
Exploratory
Exploratory oil and gas direct participation programs drill in areas where there are no proven oil reserves. While the chances of success are relatively small, successful exploratory wells provide large returns to investors.
Who enforces MSRB rules?
FINRA
What is the compensation limit for DPP?
FINRA Rule 2310 limits compensation on the sale of a DPP to 10% of the offering price. That is the largest component of the offering expenses.
An investor desiring a limited partnership investment with passive income and tax deductions from business operations would most likely select one investing in:
Existing property and new-construction partnerships seek passive income and tax deductions from business operations
Which real estate limited partnerships allows tax credits to the investor?
Historic rehabilitation Historic rehabilitation partnerships allow not just deductions, but actual tax credits.
Bona Fide (firm) Quote
Dealer must be prepared to trade the security at the price specified in the quote
Debenture
Debt obligation of the corporation -Backed by company's word and credit worthiness -Promise to Pay -Unsecure
What is least likely to be a risk concern to an investor in an oil and gas DPP?
Deductions for intangible drilling costs
What document are the terms of offering described?
Described in subscription right -Includes the number of shares a shareholder may buy and the subscription (exercise) price -Final exercise date is shown
Who conducts the auctions on a stock exchange?
Designated Market Makers
Industrial Development Revenue Bonds (IDR or IDB)
Development Authority issues to construct facilities or purchase equipment, which is then leased to a corporation -Carry a corporations debt rating
Developmental
Developmental programs drill in areas adjacent to sites where proven oil reserves exist; while the probability of success is favorable, the returns will not be as great as a successful exploratory program.
A registered representative must obtain written verification of an investor's net worth for which type of investment?
Direct participation program Ex: Limited Partnerships, real estate limited partnerships, equipment leasing limited partnerships, oil and gas limited partnerships. Before an investor can become a limited partner, the investor must provide a written verification of net worth. The investor is accepted as a limited partner only when the general partner signs the subscription agreement.
default risk
Diversification works best with nonsystematic (unsystematic) risks. Default risk, the possibility of losing money when a specific company cannot pay off its debts, is a common case where spreading the risk around (diversifying) reduces risk
Indenture
Document that list the terms of the loan Also known as Deed of Trust
When a bond is quoted as a price instead of basis it is known as what?
Dollar Bond
The term wildcatting refers to:
Drilling for oil or gas where none has occurred previously.
If earnings (net income) have increased faster than the shares outstanding:
EPS will increase
Alternative Investment (Debt securities)
ETNs Leveraged ETFs Considered structured products
What happens to the number of shares and earnings when there is a reverse split?
Earning increase while shares decrease
If a registered rep switches firms, when does educational material need to be provided:
Educational material only needs to be provided if contact is made with the customer within three months of the representative's employment with the new firm.
Participating Preferred Stock
Eligible to receive a percentage of the common dividend. Fixed dividend Max percentage is stated when stock is issued
Equity REITs
Equity real estate investment trusts (REITs) are a way to invest in real estate without having to own or manage properties
What do municipal securities broker's broker do?
Execute trades for other municipal securities broker dealers -Conceal the identity of principals and customers -Act as agents -Has no inventory -Helps to sell municipal bonds that the syndicate has been unable to sell
Although most REITs are traded actively in the secondary markets, an investor purchasing a nontraded mortgage REIT is exposed to which risk not found with others?
Liquidity risk
Focus Report
FOCUS reports (it will not be tested, but the acronym stands for Financial and Operational Combined Uniform Single) are part of the large group of records with a three-year retention requirement. Blotters, ledgers, and most records containing detailed information about customers have a six-year requirement.
Trust Indenture/ Bond Resolution
Face of Revenue Bond certificate empowers trustee to act on behalf of the bondholder
How are Collateralized Mortgage Obligation (CMO) interest taxed?
Federal, State, and Local Taxes
Which oil and gas programs would be least risky?
For oil and gas programs, ranking from least risk to most would be as follows: income, developmental, and exploratory. Raw land is a type of real estate program.
An investor seeking liquidity, short term would use:
For short-term liquidity, savings or checking accounts are always options; money market funds would generally allow for a slightly better return, as would short-term T-bills
How are ADRs taxed?
Foreign Income tax Foreign Income tax can be used as credit against US Income Tax return
Fund of Hedge Funds
Funds of hedge funds allow all investors—not just accredited investors—to have access to hedge fund investments, and they are likely to have lower initial investment requirements, making that access even easier. To divest of fund of hedge fund shares, the issuer would have to redeem them from the investor, as is the case with all registered mutual funds.
Statutory debt limits apply to what type of municipal bond?
G.O Bond
Long Term Gains/Loss
Gains/Loss after 12 months -Max tax 15%
Short Term Gains/Loss
Gains/Loss within 12 months -Taxed as ordinary income
Two types of municipal bonds
General obligation bonds and revenue bonds
What investors are not suitable for what investors?
Generally, CMO tranches are not suitable for smaller or unsophisticated investors, which is why customers are required to sign a suitability statement before purchasing any CMO tranche
A hedge fund would be an appropriate recommendation for :
Generally, these funds are limited to those meeting the accredited investor status who do not have a great need for liquidity and can afford loss.
convertible preferred stock
Gives the owner the right to exchange each preferred share for shares of common stock Conversion Rate is fixed at the time of issue
What securities trade over the counter (OTC)?
Government and Agency Securities ADRs Nasdaq Securities
Guaranteed Bonds
Guaranteed by a corporate entity other than the issuer
How is the Par value related to the market price of stock?
Has nothing to do with market price of stock
Alternative minimum tax (AMT) is assessed against who?
High Annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income
Which market is considered a dealers market?
OTC Market
Interest Risk
Interest rate risk is the danger that interest rates will rise and adversely affect a bond's price. This risk is greatest for long-term bonds; short-term debt securities are affected the least if interest rates change.
When is the call feature of a bond usually exercised?
Interest rates have declined. Allows issuers to refund
Accrued Interest
If an investor sells bonds before the semi annual interest payment date, the buyer pays the seller the amount of interest that has accrued since the last interest payment. Buyer receives the full interest amount of the next interest payment. Most bonds pay interest every 6 months: either the 1st or 15th
What is the expense limit for DPP?
If the organization and offering expenses exceed 15% of the gross proceeds,
You received a signed broker-to-broker transfer initiation form (TIF) from an established customer desiring to transfer a specifically designated part of his account to your firm, which is eligible to use the Automated Customer Account Transfer Service (ACATS). Your firm is obligated to submit the transfer instruction to the carrying member by establishing the instruction in the ACATS
Immediately FINRA's Uniform Practice Code requires that the receiving member firms immediately forward the TIF to the firm currently carrying the account. A customer may transfer all or part of the securities held in the account.
Partial Call on speculative bonds:
Improve quality or remaining bonds
Functional Allocation (Oil and Gas) Program:
In a functional allocation program, the general partner picks up all tangible drilling costs, while the limited partners pick up all intangible drilling costs. As intangible drilling costs are deductible as they are incurred, this type of program benefits the limited partners. Tangible drilling costs, however, are deductible pro rata over the estimated life of the well.
Portfolio Income
Includes dividends, Interest, and net capital gains derived from the sale of securities. Taxed in the year earned
Another name for Adjustment Bonds
Income Bonds
What are some indications of deteriorating credit of a municipality?
Increase in per capita debt Increase in personal bankruptcies Increase in tax delinquencies
At settlement, accrued interest does what?
Increase the amount the buyer must pay and increase the amount the seller will receive
Forward Stock Split:
Increases the number of shares. Does not effect overall market value
Which municipal bond has the highest credit risk?
Industrial Revenue Bonds
If an order is executed for a customer and the registered representative later notices that she entered the wrong account number on the order ticket, what action must she take?
Inform a principal, who will take or direct any action needed to correct the error
What is Intangible drilling cost?
Intangible drilling costs are the noncapital costs of putting in a well. They are currently deductible expenses such as fuel, wages, and rent. An intangible drilling cost is one that, after expenditure, has no salvage value.
Intangible Drilling Costs (IDCs)
Intangible drilling costs are those associated with drilling a well, but do not include the cost of capital equipment (e.g., pumps, casing). They include wages, fuel, repairs, hauling, supplies, surveys, tests, and drilling mud, and they are incidental to and necessary for the drilling activity.
OTC market
Interdealer Networks and a negotiated Market
Which risks would least impact collateralized mortgage obligation (CMO) investors?
Liquidity Risk
If a customer is in a low federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend?
Investment-grade corporate bond If an investor is in a low-tax bracket, any benefit from receiving tax-free municipal bond interest is diminished, making municipal bonds a less suitable investment. Zero-coupon bonds pay no interest until maturity, and therefore, are not suitable for someone seeking current income. To maximize income, the best recommendation of the choices listed is the corporate bond, which offers a higher yield than a government bond with a similar maturity.
Lease Rental Bonds
Issued to finance office construction for itself or its state or community Ex': Build Schools
Special Assessment Bonds
Issued to finance the construction of public improvements such as streets, sidewalks, or sewers.
Construction Loan Notes (CLNs)
Issued to provide interim financing for the construction of housing projects
Preferred Stock
Issued with a fixed rate of return in the form of dividends. Non voting Subject to inflation risk Like bonds, the prices are inverse to interest rates
Grant Anticipation Notes (GANs)
Issued with the expectation of receiving grant money from the federal government.
The Bond resolution includes all covenants between who?
Issuer + Trustee acting for bondholders
What can only be accomplished after the additional bonds test for a revenue bond?
Issuing new bonds with an equal lien on the projects revenues
A summary statement of all interest and dividends credited to a customer's account must be sent to the primary accountholder each year in
January Member firms must provide an IRS Form 1099 to the primary account holder of all the interest and dividends credited to the account in January. This form is used in the customer's tax return preparation.
Why do hedge funds tend to limit the participation to a maximum of 100 investors?
Keeping it to 100 or less avoids the need to register with the SEC.
What is least important to a municipal bond analyst?
Legality of Issue
What is the maturity range for Municipal notes?
Less than 5 years
15g Rules
List of Rules to protect investors who trade penny stock
Debt capital refers to:
Long Term Debt
Which securities carries the highest degree of purchasing power risk?
Long-term, high-grade bond The longer a fixed-income investment is held, the more vulnerable the investor is to purchasing power risk from inflation.
Under the 5% markup policy, which of the following determines the amount of markup in a principal transaction?
Lowest Ask
If the maturity and coupon rate are the same then what will determine if the bond gets called?
Lowest call price will be called
What best describes the advantages of an oil and gas income program, as compared to other types of oil and gas programs?
Lowest risk of capital
When an issued bond is purchased by a client in the secondary market, after the sale, MSRB rules require you to do what?
Make delivery of the certificates accompanied by evidence of insurance, either on the face of the certificate or in separate document
What effect does a call provision have on a municipal bond?
Makes bond less attractive to investors because a call would terminate the interest payments
What terms are associated with OTC trading?
Market Maker Negotiated Market
Formula to calculate the value of a right?
Market Price- Subscription Price/ Number of Rights to purchase 1 share + 1
Computing Parity to Stock:
Market Price/ Conversion Ratio
money market
Market for buying and selling short term loanable funds in the form of securities and loans -Money traded not cash -Buyer= Lender of money -Seller= Borrower of Money -Low risk, Low Yield, High Liquidity -One year or less maturity Date -Issued at a discount to avoid admin cost -Best practices recommend the use of DVP
A wealthy client owns a large percentage of a thinly traded common stock. When this client wants to sell a major portion of her securities, she will immediately face :
Marketability Risk/Liquidity Risk
Capital Loss
Max tax deduction per year= $3,000 If losses are over $3k, it can be carried over indefinitely
What is the maximum compensation in a limited partnership roll up?
Maximum compensation in a limited partnership roll-up is limited to 2%. That amount must be paid to the brokerage firm, whether the partners vote for or against the proposed roll-up.
Tax Limits are measured in?
Mills. One mill = $1 per $1000 or $.001
Long Term Debt
Minimum of 5 years Most frequently 20-30 years
A large amount of cash deposits into an account may indicate that a customer is engaged in
Money Laundering
When is interest on CMOs paid?
Monthly
Dilution
More shares outstanding. Remember, same pie, more pieces
An investor seeking a high level of income combined with a moderate level risk would purchase:
Mortgage Bonds
Which assets would be least likely used to back a collateralized debt obligation (CDO)?
Mortgages Unlike CMOs, which are backed by mortgages (as the M indicates), CDOs are invariably backed by some other form of asset. Remember that what someone owes is their debt, while it is an asset to the creditor.
Foreign Corporate Debt Securities
Most frequently purchased by institutions
Municipal Notes
Municipal Bonds with less that 5 years maturity
What investment offers a tax consequence suitable for a high income, high net worth investor?
Municipal bonds because the interest payment is tax free
Municipal broker's broker deals with who?
Municipal dealers Bank Dealers Institutions
Penny Stock: Customer suitability determination
Must Inquire about: Income Net Worth Objectives Risk Tolerance Customers must sign suitability statement
Risk Disclosure Document
Must be provided before initial trade in penny stock -Client must sign -Must wait 2 Business days b4 first trade
Municipal Bond dealer making a bona fide quote:
Must have reasonable relationship to fair market value
Penny Stock: Disclosure of Quotations:
Must provide current bid and asked price orally or in writing before effecting any transaction with the customer for the purchase of sale
Who issues general obligation bonds?
National Public Finance Guarantee Corp and AMBAC
What Debt instrument trades with accrued interest?
Negotiable CD
Coverage ratio for a municipality revenue bond:
Net Revenue/ Annual Interest and Principal Expense
What is the net overall debt of municipality?
Net direct + Overlapping debt
Primary Market deals with
New Issue
Which transactions in securities that are sold by prospectus are not subject to the 5% markup policy?
New Issues Ex: Mutual Funds
Noncumulative (straight) preferred
No special features beyond the stated dividend payments
Penny Stock: Established customer exception
No suitability required
Are gains earned from a municipal bond tax free?
No. Only interest is tax free
If one anticipates that interest rates will be calling, what security would be a good recommendation?
Noncallable Bonds If one anticipates that interest rates will be falling, noncallable bonds would be better, as there is no risk of them being called and you can continue to earn the higher rate the bonds were issued with. Anything with a variable rate will have the interest payable adjusted to align with current rates, and therefore, would not desirable when rates are falling. Money market funds are not debt instruments, and again, the returns they pay reflect trending interest rates.
Brokered CDs
Not a money market instrument B/D Sells High Fees and Comp than bank issued CD May not be covered by FDIC May have penalty if redeemed too soon
Where are municipal and US Government securities traded?
OTC
What market sells municipal bonds?
OTC Market
What document includes information about the issuers financial conditions?
Official Statement
Tax-Exempt Commercial Paper
Often used in place of BANs and TANs for up to 270 days, though maturities are most often 30, 60, and 90 days.
Where do ADRs register?
On the books of US Banks responsible for them -Individual investor is not considered the registered owner
Statutory Voting:
One vote per share for each item on ballot. Simple majority to be elected Equal number per seat Good for larger shareholders
What is part of the depreciable basis of a limited partner in a real estate direct participation program?
Only fixed plant (buildings) and equipment can be depreciated
How to figure out number of rights to acquire 1 new share:
Outstanding shares of common shares/ # of new shares being issued
What municipal bonds are backed in full by US Government?
PHA or NHA "Section 8 Bonds"
What does the investor receive upon redemption of a bond?
Par + Final semi Annual Interest Payment (Whatever current Interest Rates are)
Conversion Ratio Formula
Par Value / Conversion Price
How to find the conversion price for common stock? Preferred to common stock
Par Value/ # of Shares
Which investments produce passive income?
Passive income results from : DPPs and personal real estate rentals
Passive Losses from DPPs
Passive losses may be carried over indefinitely,
Net Revenue Pledge
Pay current operating and maintenance expense first
How are dollar bond quotes represented?
Percentage of Par ex: 85 1/2
Riskless and simultaneous transactions by a broker/dealer are:
Permissible if they comply with 5% policy
What mortgage-backed securities would provide investors with the most predictable maturity date?
Planned amortization classes (PACs) PACs are planned amortization class collateralized mortgage obligations and have established maturity dates. Prepayment risk is transferred to the PAC companion—or support—class bonds.
If interest rates fall, what statements regarding collateralized mortgage obligations are true?
Prepayment risk will increase. Prices of each tranche will rise.
Secondary Market deal with
Previously issued bought and sold
What is not considered when trying to diversify a municipal bond portfolio?
Price
What would not flow through as a loss to limited partners?
Principal repayments are not deductible for tax purposes. The interest is deductible.
A purchaser of a G.O municipal bond should be concerned with what?
Property Tax assessments Market Risk
G.O Issued by towns, cities, counties:
Property tax
Penny Stock: Disclosure of Compensation
Provides customer with compensation info on both member and registered rep/
Rating services for bonds rate based on?
Quality/Default Risk
Customer statements must be sent at least
Quarterly The SEC and FINRA require member firms to send customer account statements at least once per calendar quarter. There is an exception when the account contains penny stocks. In that case, the frequency is monthly.
If a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which investment is most suitable?
REITs
Coterminous Debt (GOs)
Refers to two or more taxing agencies that share the same geographic boundaries and are able to issue debt. Separately
Prompt disclosure of unintentional selective disclosure of material corporate information is a requirement of
Regulation FD
Regulation FD (Fair Disclosure)
Regulation FD (Fair Disclosure) is an issuer disclosure rule (all issuers) that addresses selective disclosure such as may be given to securities market professionals and others that may trade on the basis of the information. If the disclosure of information is intentional, the issuer must make a simultaneous disclosure to the public. If the disclosure was unintentional, the issuer must make disclosure promptly. Promptly means under the regulation not later than 24 hours or the commencement of the next day's trading on the New York Stock Exchange, whichever is later (which accommodates for weekends and holidays) after a senior official of the issuer learns of the disclosure.
Which form of soft-dollar compensation paid by a broker-dealer to an investment adviser is not allowable under the safe harbor provisions of Section 28(e)?
Reimbursement for meal expenses incurred while attending an investment semina
Senior Security
Relative priority of claim of a security ExL Bonds and Preferred Stock
What does non recourse do to the basis of s DPP?
Remember, it is only real estate where nonrecourse debt increases basis. Recourse debt increases basis in any DPP.
Penny Stock: Frequency of customer Account statements:
Requires members to provide penny stock purchases with monthly statements
What type of municipal bond will most likely require a sinking fund?
Revenue Bond
Double-Barreled Bonds
Revenue bonds that have characteristics of GO bonds. Interest and principal are paid from a specified facility's earnings, but bonds are also backed by taxing power of the state or municipality.
Preemptive Rights
Right to maintain a proportionate interest in a company's stock
Stock on Exchange must register with SEC according to what act?
Securities Exchange Act 1934
Sovereign Debt Securities
Securities issued by National governments - Ex: GILT from UK, US issued Treasury securities -Safety depends on economy of the issuing country -Subject to currency risk
To calculate the accrued interest, you must know what info?
Settlement Date Coupon
What happens to the number of shares and earnings when a stock is split?
Shares increase while price decreases
Revenue Anticipation Notes (RANs)
Short Term Municipal Bond Offered periodically to finance current operations in anticipation of future revenues from revenue producing projects or facilities.
Tax Anticipation Notes (TANs)
Short Term Municipal bond Issued to finance current municipal operations in anticipation of future tax receipts from property taxes.
MIG rating are provided to what type of bond?
Short term municipal debt (Notes)
Official Statement
Similar to prospectus -Must be delivered to purchaser at or before settlement -It is generally used by underwriters to help sell the issue
A customer of a member transfers his account to another member firm. Under SEC rules, the transferring member must maintain copies of the customer's account records for how many years following the transfer?
Six Years
soft dollars
Soft dollars is a term used to describe payments made by broker-dealers to investment advisers in return for research and other eligible services. The difference between soft dollars and hard dollars (cash) is that instead of paying a broker-dealer with cash, the fund will pay with brokerage business. Soft dollars may be used to pay for research, software, services for the benefit of clients, and seminar registration fees. Not permitted by the SEC are computer hardware, office equipment, and reimbursement of travel expenses to attend seminars.
Bond Anticipation Notes (BANs)
Sold as interim financing that will eventually be converted to long-term funding through a sale of bonds.
(Even) Stock Split
Split shares to make the stock price lower and more appealing
Exchange listed ADR is considered:
Sponsored ADR -Also known as ADR shares
State and Local government securities (SLGS) are purchased by who?
State and Local governments
Authorized Stock:
Stock Available to sell at the corporations discretion
Treasury Stock
Stock that a corporation has issued and reacquired
Penny stock
Stocks trading under $5 -Traded : OTC Bulletin and OTC Link
Who registers the securities and packages the program for a limited partnership?
Syndicator
A portfolio manager using index options is trying to reduce which of the following types of risks?
Systematic Risk
Which of the following types of risk cannot be eliminated through diversification under the modern portfolio theory?
Systematic risk
Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with what?
Tax Preference items
What does the legal opinion deal with?
Tax exempt status or the proposed issue and legality
Qualified Dividend
Taxed at a lower rate. Max tax 15% Ex: Mutual Funds, US Corporation
What is the collection ratio?
Taxes collected vs Taxes assessed
Arrears
Technical term for missed dividends
All municipal bonds are quoted in basis except?
Term Bonds/ Dollar Bonds
Duration
Term used to measure the sensitivity of a debt security -Higher Coupon= Shorter the duration -Lower Coupon= Longer Duration -Long Duration debt securities have greater interest rate risk than shorter
What date does interest on a new municipal issue begin accruing?
The Dated Date
Who has the final decision to whether a stock is listed on the NYSE?
The NYSE
A customer interested in a collateralized mortgage obligation (CMO) might look to what for historical data or projections regarding mortgage prepayments?
The Public Securities Association (PSA) is the source of historical data for prepayment projections on CMOs.
A new customer of the broker-dealer submits a completed transfer initiation form (TIF). The principal at the delivering firm receives the instruction data through the ACATS and may promptly reject the instruction for which of the following reasons?
The account is not recognized
If your client dies, what must you do as a RR?
The account's registered representative should cancel all open orders and mark the account Deceased. The firm should not permit any trades until proper documents are received from the estate representative. It is not the responsibility of the firm to contact the decedent's attorney or the beneficiaries.
Adjusted Basis
The adjusted basis is a limited partner's cost basis at any point in time. Gain or loss on the sale of the partnership is determined by comparing the sales proceeds to the adjusted basis.
At Risk Provision- (DPP)
The at-risk provisions (you can only deduct what you can lose) apply to all DPPs. Real estate has one unique feature in that nonrecourse financing is part of the investor's tax basis.
repurchase agreements (repos)
The sale of securities w/ an agreement to repurchase hem at a higher price on an agreed upon future date -Issued at a discount
If all bonds have the same maturity date, the bond with the highest coupon rate will have what?
The shortest maturity
If their is no par value assigned to preferred stock, the dividend is what?
The stated rate
What records must kept for the life of a broker-dealer organized as a corporation?
The stock certificate book, articles of incorporation or partnership agreement, and minutes of the directors' meetings are to be kept on file and accessible for the life of the firm
If a clients investment objective changes, when must the account record be updated?
Under SEC rules, firms must provide a customer an updated account record reflecting any change in investment objectives within 30 days of the change.
A sharing arrangement in which only deductible costs are apportioned to the investor, with the sponsor bearing all capitalized costs is called:
a functional allocation
If a limited partnership failed, how will the limiter partner be compensated?
The limited partner will not receive any return of his investment. In a failed program, the partnership's creditors are paid first with any sale proceeds—before the limited partners receive any money. If the limited partners had not signed a recourse agreement, even though the partnership still owes money on the mortgage, the limited partners are not liable for any money beyond their original investments.
The longer a bond's maturity what happens to the risk?
The longer a bond's maturity, the greater the risk to the investor. As a result, long-term bonds generally pay higher interest rates than medium- or short-term bonds. If a fund replaces medium-term bonds with long-term bonds, the bonds would pay higher interest rates, and thus generate more income. Additionally, as interest rates increase, so do yields.
If all bonds have the same maturity date, the bond with the lowest coupon rate will have what?
The longest duration
debt limit
The maximum amount of debt that a municipality may incur
What is the inherent risk associated with auction rate securities?
The potential of a failed auction
Workable Indication
The price at which a municipal Securities dealer is willing to purchase securities from another municipal dealer. The price may be revised if market conditions change.
When comparing pre emptive rights and warrants, one similarity is:
Their voting privilege
Dated Date :
This is when new issue interest starts to accrue. Once the issue makes its first interest payment to bond holders, the dated date is no longer used to compute accrued interest because there is a prior interest payment date.
Timing Risk
Timing risk has to do with trading in and out of the market and wouldn't be of much concern for a position intended to be held
define debt service
Total Interest and principal payable by the issuer plus any amount required to be deposited into a sinking fund
On what document does the trade date appear?
Trade Confirmations
Dark Pools
Trading volume that occurs that is not openly available to the public. Mainly large trades from institutions -Large trades occur on ECN
One form of debt security attractive to many high net worth investors is the collateralized mortgage obligation (CMO). A CMO is a pool of mortgages structured into maturity classes called :
Tranches
Paying Agent
Trust Department of a bank. Trustee usually serves as paying agent
What document contains the protective bond covenant?
Trust Indenture
Which securities act deals with corporate bonds?
Trust Indenture Act of 1939
Who operates the sinking fund?
Trustee
US T-Bills
Type of money market Maturity: 4,8,13,26 and 52 weeks Safest security Issued at a discount
Ballon Maturity
Type of serial maturity. Issuer pays a portion before final maturity date, largest portion paid off at maturity
Eurodollar Bond
US Denominated Eurobond. -Have lower issuance cost -No SEC registration -Higher yields -Subject to political and country risk
ADR Represents:
US security trading in a foreign market
What age must a disabled person be to eligible for ABLE Account?
Under 26 years old (On Set before 26 years)
Sec 10b-18
Under SEC 10b-18, an issuer purchasing its own securities cannot affect the opening or closing of the security. A safe harbor is available if the issuer is not involved in the first transaction of the day or in any transaction in the last 30 minutes of trading (10 minutes if the security is actively traded). If the issuer were to purchase its own securities during the last 30 minutes of trading, it may be forced to justify that its purchase did not affect the closing price. If a registered representative receives an order from an issuer at 3:55 pm ET, he must advise the issuer that a safe harbor is not available. The representative may then place the order.
What type of legal opinion does the issuer desire?
Unqualified Opinion
Under FINRA rules, how long is a member firm able to hold customer statements and confirmations?
Up to 3 months
Procedures used upon death of a client:
Upon the death of a client, all open orders must be canceled. The account is then frozen until proper legal documentation is received. Once that has occurred, the executor may begin conducting activity in the account.
Types of Variable-Rate Municipal Bonds
VRDOs ARS
How are rights valued?
Valued Separately from stock and traded in the secondary market during subscription period.
Adjustable Rate Preferred Stock
Variable Dividend Payout
What does pre-refunded mean?
When funds are escrowed to call in a bond at a predetermined call date. Money is vested in government securities which increases the credit rating
When are callable preferred stock likely to be called?
When interest rates decline
Parity Price
When the underlying common stock has the same value as the convertible preferred
Under Municipal Securities Rulemaking Board rules, the customer's confirmation when purchasing a callable municipal bond will show which yield?
With callable municipal bonds, the confirmation must show the lower of the yield to maturity (YTM) or yield to call (YTC). For a bond bought at a discount, the YTM is lower than YTC.
Municipal Bonds priced/offered for sale:
YTM
Can dividends be paid out to shareholders if there is no earnings?
Yes
If a stock is split does the investor get an additional certificate:
Yes
Can municipal dealers make offers to sell securities by providing quotes without owning the bonds?
Yes. But dealer must know where to obtain the bonds if such offer is accepted
Under Municipal Securities Rulemaking Board (MSRB) rules, which of the following yields for a callable bond would be shown on a confirmation?
Yield based on nearest in-whole call
Stock Splits have what effect on preferred stock?
Zero Effect
If a municipal bond settles on the date of interest payable, it is trading flat, without accrued interest. Meaning:
Zero Interest- Due by Maturity
A bond sold at a discount reports what gain/loss on redemption?
Zero gain or loss on redemption
A tool used by investment banking firms to combine several unsuccessful limited partnership programs into one new entity is:
a DPP rollup
A customer who has, as part of her account holdings, unlisted REITS, as well as a limited partnership interest in an oil and gas program, may expect her servicing member firm to show
a per share estimated value of the securities
A taxpayer's most advantageous tax benefit is:
a tax credit.
It is not uncommon for one company to attempt to take over another by acquiring a significant percentage of its voting shares. This is called
a tender offer
A customer of a registered representative is considering a hedge fund investment and asks what the lock-up period means? The registered representative correctly explains that it is :
a time when liquidation of fund shares is prohibited by the fund, meaning there is an element of illiquidity to be considered.
sinking fund
an account managed by the bond trustee for early bond redemption -Aids in bonds marketability and safety
SEC Regulation FD is best described as a rule requiring disclosure by:
an issuer of securities
An individual who invests in an undeveloped land limited partnership would be most interested in:
appreciation.
Institutional managers are moving to increase their cash position. This action would be viewed as
bearish When investment managers liquidate securities to increase their cash positions, stock prices are likely to fall
Which five main brokerage records must be retained for six years?
blotters, general ledgers, customer ledgers, stock records, and customer account records.
A general partner is considered to have a conflict of interest with the business of a limited partnership if she :
borrows money from the business
When analyzing a direct participation program investment, a method that takes into account the revenues and expenses is:
cash flow analysis
While there can be a number of variables, cost basis for a limited partner (LP) is best defined as?
cash investment made plus recourse debt minus distributions.
Under FINRA Rule 2273, if a registered rep wishes to recommend that any existing customers move their accounts to the new firm,
certain disclosures have to be made in an educational format using a FINRA template. This educational communication has to be delivered to any former customer who transfers during the first three months of the registered reps new association.
nonsystematic risk
company risk—the risk that an individual investment will perform poorly. Diversification can reduce most nonsystematic risks.
Holding a quote
dealer can hold quote for a certain time
The primary tax benefit of an income oil and gas program is:
depletion
Many fixed-income investors diversify their portfolios by maturity. If one were investing in CMOs, that would be done by buying :
different tranches Although CMOs technically have maturity dates, it is rare for one to ever last that long. The standard way to vary the expected return of principal is by using different tranches. Serial bonds are generally issued by municipalities and are not mortgage-backed. Different issuers has nothing to do with maturities and yield-based options might be used as a hedge, but not to diversify maturities.
A Form 112 must be filed whenever a customer
engages in a transaction involving more than $10,000 in currency.
Investors in collateralized mortgage obligations (CMOs) tend to choose a tranche meeting their maturity expectations. Should the debt continue past the expected payoff date, it is an example of
extension risk A CMO's yield and maturity are estimates based on historical data or projections of mortgage prepayments from the Public Securities Association (PSA). The particular tranche an investor owns determines the priority of their principal repayment. When the debt continues beyond the projected date, the investor has encountered extension risk. Prepayment risk is that the debt will be paid off early rather than later.
A company very concerned about liquidity would want
high current ratio
The result of declining inflation on outstanding bonds would be
higher prices and lower yields
Which DPP offers tax credits?
historic rehabilitation and government-assisted housing offer tax credits, and either should be suitable for discussion.
Losses from direct participation programs can be used to offset :
income from limited partnerships
When a member firm sells municipal bonds to a customer out of its inventory, it must
indicate the amount of markup on the customer's confirmation
An investor purchasing long-term AAA-rated bonds should be concerned most with:
inflation risk
The principal tax benefit of investing in an exploratory oil and gas drilling program is derived from:
intangible drilling costs (IDCs)
unqualified opinion
issued by the bond counsel unconditionally -bond counsel has rendered an opinion without any qualifying limitations -Issuer has the authority to issue bonds that are legal, valid and enforceable obligations of the issuer
A broker-dealer registered with the SEC for 10 years would be required to have on file
its charter or articles of incorporation
Ex-rights formula
market price - subscription price / number of rights to purchase 1 share
Under Regulation FD, if an officer of an issuer makes an unintentional disclosure of nonpublic, material information to an institutional investor, the issuer :
must promptly make public disclosure of the same information
Yield quotes on collateralized mortgage obligations (CMOs) are based on
the tranche's expected life Yield quotes on CMOs are based on the tranche's expected life, not the average life of the mortgages in the pool backing all of the tranches
FINRA rules require broker-dealers to conduct anti-money laundering training
on an ongoing basis
A confirmation of each customer trade must be given or sent
on or before the settlement date
You have a high net worth client who is interested in investing in a hedge fund. Details of the offering would be found in the fund's
private offering memorandum
A planned amortization class (PAC) collateralized mortgage obligation (CMO) offers :
protection from both prepayment and extension risk A PAC offers protection from both prepayment and extension risk. This protection is greater than that offered by a targeted amortization class CMO, which protects against prepayment risk only.
basis quote
quoted at YTM
If interest rates are dropping, an investor with a maturing bond will be most concerned with
reinvestment risk
Customer account statements must request that customers
report promptly any discrepancies or inaccuracies. This allows the member firm to ensure that trades are correctly reported on the statement and in the customer's account.
ACATS requires the carrying firm to do what?
requires the carrying firm (TTA) to validate or take exception to the securities listed on the TIF within one business day. If all is in order, the transfer must be completed within three business days. The receiving firm, EMPM, is responsible for sending the signed TIF to ACATS.
When assets are pooled into financial instruments such as collateralized mortgage obligations (CMOs) to better facilitate selling them to the general public, the process is known as
securitization
Overlapping Debt
several taxing authorities that draw from the same taxpayers can issue debt
Depletion allowances in oil and gas programs are based on the amount of oil :
sold Depletion allowances are allowed to compensate for a mineral resource, which is considered accomplished when it is sold.
Traders in stock index options are exposed to:
systematic risk Systematic risk is the possibility that an overall decline in the market will cause a loss in an investment.
The document attesting to the formation of a limited partnership, filed with designated authorities, is called:
the certificate of limited partnership
An investor in an equipment-leasing direct participation program (DPP) using straight-line depreciation would probably not be concerned about:
the likelihood of recapture
Credit Risk Involves:
the possibility of issuer default Credit risk is the danger of losing all or part of the invested principal as the result of the issuer's failure
Business Risk
the risk of losing principal due to the failure of an issuer to continue keeping the business successful.
Regulatory Risk
the risk that changes in regulations can negatively impact a particular product or company.
The Municipal Securities Rulemaking Board (MSRB) rules that require uniformity of business practices by municipal dealers may be altered or modified by a mutual agreement between the dealers concerned. There is, however, an exception when it comes to
the rules regarding the content of confirmations The contents of confirmations are specified by the MSRB and cannot be altered by a mutual agreement.
Qualified Opinion
there may be a legal uncertainty of which purchasers should be informed -The legal opinion is qualified with restrictions and conditions
VRDOs
variable-rate demand obligations that are a type of municipal security structured for tax-free money-market and high-net-worth investors
nominal (subject) quote
when this type of quote is provided, it is for informational purposes only. a firm is not required to buy or sell securities at the posted price.
