Review

Yield to maturity

if current yield is less than YTM trading at discount Also known as basis / current yield /coupon/ NY

Common Stock

less safe (riskiest b/c of lowest claim to assets)

When interests rates fall

look for a call ( callable) with longest call time * investors will want to purchase bonds with high coupons * trading at premium

If market is rising

short naked calls have unlimited risk b/c its unlimited

In regards to bonds ( yield is lower than coupon)

trading at premium

A Bond that has YTM (yield to maturity) that is less than its coupon

trading at premium EX: Bond issued with coupon of 8% trading at yield of 6% ( yield is lower than coupon)

limit order

used to buy or sell at a specific price or better. Therefore, buy limits are entered below the current market and sell limits are entered above the current market. Stop orders have several uses. The most common of these is to protect gains on both long and short positions

Leveraged buyout (LBO).

when debt is used to acquire a firm

When the Federal Reserve Board purchases securities in the open market

when interests rates fall bond prices rise

Holders of ADRs

have the most rights common stock holders hold (rights to receive dividends)

a stock (or bond) power

If the owner cannot or does not wish to sign the certificate itself, he may execute a stock or bond power instead.

Coupon (Nominal yield)

(interest paid on a bond)

Issuers of Bonds (Debt Securites)

* Corporate * Municipal * US government

T+3 ( regular way)

* Corporate/ Municipal Bonds * Exercised options * Trade date plus 3 bizz days

Municipalities

* Interest is generally exempt from taxation at the federal level * if purchaser lives in residing state it can be exempt from state and location

Puttable bonds

* Once the bond becomes puttable, interest rate risk has been eliminated * if bond is newly issued it makes the offering more attractive

Bonds (Debt Securities)

* Principal paid at maturity * Interests is paid simiannually * trade in the secondary market * represent obligation to repay

Ginnie Maes (GNMA)

* They are quoted in 1/32nds. * They are traded with an accrued interest computed on a 30/360 basis

Rule 144a

* allows securities to be sold to (qualified) institutional buyers without having to meet the holding period or volume requirements of Rule 144

callable bond (redeemable bond )

* is a bond that can be redeemed by the issuer prior to its maturity. * Most municipal bonds and some corporate bonds are callable * A callable bond pays an investor a higher coupon and used when interest rates are falling

Current yield for premium bond

* less than coupon * if bought at maturity you loose money * investor pays above par value.

Yield to call

* meaning the bond can be called before maturity * Highest yield for discount bond

Current yield for discount bonds

* more than coupon * if bought at maturity you make money

CMO ( Collateralized mortgage obligation)

* mortgage backed corporate security * yield no guaranteed * does not have federal and government backing * taxed at all levels * rate of return( interest) varies due to prepayment risks

Variable securities

* subject to purchasing power risk * Its an income instrument * provide protection from inflation * good for retired persons * variable annuity does not guarantee an earnings rate of return * does guarantee a life time payment * tax-deferred growth

Rule 144

* think is it restricted or controlled * controlled stock can be sold immediately but volume limits apply * filling is good for 90 days * Insiders can not short / no naked options (uncovered) *insiders can sell(write) calls agaonst long stock * non affiliates can start to sell unrestricted stock after holding period of 6 months

Mutual funds

* used to invest in securities such as stocks, bonds, money market instruments, etc... * Used to produce capital gains and income * give small investors access to professionally managed, diversified portfolios * can be purchased at NAV per share * dividend distros are not guaranteed

Bonds (Indentures )

*Debts * if trading at premium its coupon rate will represent highest of yields * DO NOT have divided yield * if a bond is trading at par, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call. * As bond prices fall, yields increase.

Bankers acceptances

* are used primarily to finance imports and exports * They are short-term time drafts with a specified payment date drawn on a bank—essentially lines of credit.

When dollar amounts are declining in regards to foreign currencies

* foreign money will buy more American currency * exports will rise b/c US goods and service become less costly

Par value of a Bond

1k ex: 99% = 990,

Basis points of a bond

= 1%

Bonds 1 Point

= 10

a special purpose acquisition company (SPAC)

A company without business operations that raises money through an IPO in order to have its shares publicly traded for the sole purpose of seeking out a business or combination of businesses

A corporate or municipal issuer might include a put option on a newly issued bond to

A puttable bond grants the investor the right to put the bond back to the issuer at par before maturity. In other words, the issuer must redeem the bond on the bondholder's request. Investors find this feature attractive when rising interest rates cause bond prices to decline. In return, the issuer can offer these puttable bonds with a lower coupon due to the desirability of the put feature. Once the bond becomes puttable, interest rate risk has been eliminated

short straddles

Short straddles are appropriate only in flat or neutral markets.

An investor unaffiliated with the issuer is permitted to sell restricted stock without being subject to volume restrictions after having held the shares, fully paid, for a period of at least

After six months, an unaffiliated investor can begin selling restricted stock and is not subject to volume restrictions.

Capital gains on municipal bond transactions

Although interest earned on municipal bonds is generally exempt from federal tax and exempt from state income tax for residents in the state of issuance, capital gains are not exempt.

When an investment banker is successful on a competitive bid corporate underwriting in which they agree to purchase the shares from the issuer, the underwriters will be handling the offering as

An underwriting is known as a firm commitment when the investment banking firm (underwriters) winning the competitive bid have agreed to purchase the entire issue from the issuing corporation with the obligation to resell to the public.

For U.S. investors holding American Depositary Receipts (ADRs), dividends received are

Any tax taken on dividends received from ADRs is taken in the country of origin. This is a foreign withholding tax for U.S. investors. The foreign withholding tax may later be taken as a credit against any U.S. income taxes owed by the U.S. investor.

If the market value in a long margin account increases

As long as a margin account is not restricted, every $1 increase in market value creates $.50 of SMA. As market value increases, equity also increases dollar for dollar.

Writing(Selling/Short) calls

Bearish market attitude

Moody's bond ratings are based primarily on an issuer's

Bond ratings are credit ratings for an issuer and measure the issuer's ability to repay principal and interest and, thus, its financial strength.

A corporate bond valued at $1,012.50 is shown in the Standard & Poor's Bond Guide as

Corporate bonds are quoted as a percentage of par in eighths. The quote of 101-1/4 = $1,012.50 is correct. This represents $1,010 (101% of par; $1,000) + $2.50 (1/4 of 1 bond point; $10). Each point in a corporate bond is equal to $10.

Bond point equal to 10

Ex: bond at 94 = 94 * 10 = 940

The market attitude of a customer who establishes a credit call spread is

In a call spread, a customer is buying one call and selling another with different strike prices and/or expirations. In any spread, one of the options is dominant. In a short call spread, the short call position is dominant because it has the higher premium; writing calls is bearish.

A married couple in their late 50's opens an investment account with a BD. Having specified an income objective which of the following would be least suitable

Knowing only that the objective is income, the least suitable would be common stock. Remember that dividends are not stated or guaranteed for common shares.

banker's acceptances.

Money market instruments guaranteed by a bank that are used to provide capital for exporters to foreign countries * BAs provide short-term financing for importers and exporters

Ratio Call Writing

Ratio call writers assume unlimited loss potential in a rising market, and limited gain potential in a falling market. Maximum gain-while limited-occurs if the stock is trading at the strike price of the short calls at expiration.

An investor's portfolio includes 10 bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation?

The gain would be $100 for the bonds (one point for one bond is $10 × 10 bonds) and $200 for the common stock (one point is $1 × 200 shares). The total portfolio gain is $300

bond indenture

The indenture is the agreement between the issuer and the bond trustee that sets forth how the debt will be retired.

Under the Securities Act of 1933, an accredited investor is defined as one having

To qualify as an accredited investor under Regulation D of the Securities Act of 1933, the investor must be either an institutional investor or an individual with a net worth of at least $1 million (not to include net equity in a primary residence), or have an income of at least $200,000 for each of the past two years with the same expected in the current year.

Callable

When the stock is called, dividend payments are no longer made which means higher dividend rate

Balance sheet formula

assets = liabilities + net worth

Credit call spread

bearish

short against the box

designed to lock in a capital gain, not realize it currently for tax purposes but instead defer it to a later tax period

Fail to delivers

ex: A mutilated certificate would not be considered good delivery nor would a bond delivered without the legal opinion attached unless it was trading ex-legal meaning no legal opinion was ever rendered.