Series 7 Top Off

investors --> investment co (a conduit) --> portfolio with stocks, bonds, $ markets

again these investment co pool together funds from many investors, they are professionally managed, diversitifaction, convenience, liquid

backing away

market maker fails to honor its quote, since it's an obligation

fundamental tools (measuring financial stability) --> debt to equity

total debt/total shareholder equity

POP = NAV plus a sales charge

what we acquire at, NAV is what we liquidate at ask price = set by fund, no negotiable

summary

public offering --> prospectus private placement/reg D - private placement/offering memorandum muni - official statement reg A+ tier 1/tier 2: offering circular

margin terminology - equity (for short)

- 150k-100 = 50 = the differential = credit - short market value =equity/investors ownership in the account

Dow Jones composite (consists of 3 averages)

- DOW Jones industrial = 30 stocks = most widely quoted = what people refer to = also smallest index - Dow Jones transportation (20 stocks) - DOW Jones utility = 15 stocks

margin terminology - marginable security

- Securities we can borrow $ on, determined by FRB ( we assume anything listed is marginable as are majority of bonds, OTC = not marginable)

good delivery

- a member firm transfer agent makes final determination as to whether in good deliverable form and may be transferred to new owner - restricted securities = never considered good delivery bc must be accompanied by special instructions, need letter from council saying these are transferable - requirements: properly registered = name of owner matches cert, properly endorsed (sig on back matches the front), signed stock power if stock cert is sent unsigned, CUSIP #s may be used to identify/clear -units of delivery, stock transactions must be delivered in multiples of 100 shares = round lot can delivery odd lot so long as identified prior to delivery, assumed that if you have 1000 shares it comes as 1 cert worth of 1000 on 10 worth 100, must be breakable into 100, 2 units of 50 would work - bond transactions must be in $1000 units or multiples thereof - 100 units adding to $1000 are permissable

types of corp bonds (secure and unsecure)

- both backed by full faith credit of issuer 1) secure: corp also pledged specific asset 2) unsecure: only backed by full faith/credit/earnings but no specific asset ability that you have lein on

covered call

- covered call is written against a stock you own - sale of call generates premium income thereby increasing the yield on the underlying security (which you get dividends, etc from) - considered conservative - many people who sell calls have the stock - provides little hedge (to hedge you want to buy a put), if stock falls and the call we wrote expires and we keep premium, offset a little bit ... our stock value that we own falls to... bc the call expires too... so to protect a long position/covered position you want to buy a put - also gives up upside potential of the stock because if it increases the call is exercised so you are doing this for premium income

margin terminology - short market value (for short)

- current market value in the short margin acct (cost of covering/buying the position back) = negative number so in example = 100

account transfer process from one b/d to another

- customer goes to new firm and fills out paperwork/automated customer acct transfer service (ACAT form) to initiate process - receiving firm inputs ACAT form and a transfer initiation form is sent to carrying b/d - carrying b/d has one business day to validate or protest the transfer (if things don't match up) - after validation, transfer completed within 3 business days - once validated, acct is frozen, open orders cancelled, no new orders accepted bc assets are leaving

delivery issues with physical shares (the following could affect delivery) - ex dividend - ex rights - due bill - due bill check

- ex dividend: buyers must have settled their trades on or before record date to be entitled to a cash or stock dividend - ex rights: buyers must have settled trades on or before record date to be entitled to participate in a rights offering - due bill: if a security is sold before it trades, "ex dividend" or ex rights, and is delievered too late to be transfered on or before the record date, it will be accompanied by a due bill. the due bill is evidence of a seller's obligation to deliver the dividend (or right) to the buyer - due bill check: due bill in the form of a check payable on the date of payment of a cash dividend, int on registered bonds, or int on unit investment tr securities due bill = seller's get dividend by accident/admin error and the buyer has right to is. occurs when bought before ex divident date and didn't get dividend then, so they get securities and due bill check

what is on a trade confirm? what is the one thing that IS NOT

- execution details (name of customer, buy or sell, price and Q) - trade and settlement dates - firm capacity (acting as agent or principal) - for bonds, $ price and yield what is NOT on: - name of contra party or a statement of the availability of info upon written request

adjustment of terms/components of an option (how may these contracts change??? ex is stock split/dividend this card is for dvidend

10% stock dividend --> becomes 110 shares from 100 shares, you increase the number of shares by either ratio of split of by the amount of stock dividend

pre refunded bonds cont (what is defeasance)

AAA rates bc backed by escrow account invested in treasuries... credit rating has gotten better on these b/c backed by escrow with trustee invested in treasuries (since still trade until call date) no longer the issuers liability bc backed by escrow account watched over by trustee, invested in treasuries... may be able to get out of restrictive covenants bc no longer obligation of issuer (pledges issuer made to bondholder ratios, etc. to not sell too much debt, etc. ) that were in the indenture= defeasance

ex rule 144 max sale

ABC corp has 5,700,000 shares outstanding with the following recent trading volume 62000 60000 56000 58000 1% of 5,700,000 = 57,000 -average last 4 trading volume = 59,000 so you can sell 59,000

other corp bonds - stepped coupon bonds = dual coupon or stepped up coupon

AKA dual coupon or step up coupon -issued with low coupon rates that increase at regular intervals. issuers generally have right to call in bond on these dates where coupon is adjusted

dealer to dealer markets --> NASDAQ (big dif between nasdaq and NYSE is that nasdaq can have unlimited number of market makers)

NASDAQ = computerized network, non physical, negotiated market, unlimited # of market makers UNLIKE NYSE where there is just one. classified as securities exchange, still defined as an exchange

margin terminology - non margineable

OTC equities, options, new issues (tho new issues along with MF get loan value after 30 days)

structured product

Typically built around a fixed-income instrument and a derivative product. Pays a specified rate of interest at defined intervals. The derivative component establishes the amount of payment at maturity. Registered as securities with the SEC, but are not bank deposits and are therefore not insured by FDIC.

currency risk

US investor is buying overseas investment = risk of loss when converting an investment made in foreign currency into US dollars. can be in your favor/not depending on US dollars in comparison to other currency

current yield (for stock)

annual dividends in dollars (these pay quarterly so be careful)/current market price

types of quotes --> bid wanted (on bulletin board/pink market, "call for a quote")

a seller indicates the desire for a bid, we will tell you what price we will buy at

clients financial objectives - speculation (long term)

aggressive growth funds, sector funds, emerging market funds, overseas/country funds, hedge funds --> want high growth risk = highest phrases = speculatin, able to withstand potential losses

unsystematic risk (risks that can be reduced using diversification= risk not exposed to market) measured with ALPHA

alpha measure investments risk and adjusted performance against a benchmark index outperforming benchmark = positive alpha, underperforming = negative alpha firm will create alpha fund bc they like to beat the market, they want high alpha a lot of hedge funds care about this especially bc some fees are paid based on performance

fundamental tools (measuring financial stability) --> risk of bankruptcy

bond ratio = total debt/total capitalization total capitalization = total debt capital + shareholder equity

opening a margin account - credit agreement (part 2)

discloses terms of loan, int amount, how it is computed, when charged

ex short straddle analysis

if you are short = you want stability = believe ABC stock will remain flat so you invest in a straddle sell 1 ABC jun 40 call at 3 sell 1 ABC jun 40 put at 2 strike price and exp mon are the same = straddle premium = 5 strategy = stability, ideally you want both options to expire so you can keep the 500 breakeven = 2 things... 1) strike price + premium = 45 OR 2) strike price - premium = 35 this time, since we are short, we make are best off if it stays between 35 and 45 max gain = $500 premium, both expire and you keep it max loss = unlimited, you can lose in either direction, but the worst is unlimited on the upside

third market

listed securities , traded OTC may be listed on NYSE but some are buy/sells awawy from the floor

qualified dividend

maxed tax at 20% if satisfy holding period... so held common stock for more than 60 days and preferred for more than 90 days

capital gains

result of sale or redemption of an asset.. if proceeds exceed the basis - holding period is measured from trade date to trade date not settlement --> st: held for less than 1 year, taxed at ordinary rates --> lt: held for more than 1 year, taxed at max of 20%

rights vs warrants

rights: issued to existing common stock shareholders, ST, immediate discount warrants: attached to new issue, LT, initial premium

yield to worst = lower of YTM and YTC, you will always quote the lower number = YTW

so at premium we quote YTC and at discount we quote YTM

NAV per share =

total assets - total liabilities/ number of shares outstanding the investors personal stake = number of shares they own * NAV = liquidation value of your shares

outstanding stock equation

total issued stock - treasury stock ex: total authorized shares: 1000000000 issued: 10,000,000 outstanding: 10,000,000 after share purchase: total authorized shares: 1000000000 issued: 10,000,000 treasury: 2,000,000 outstanding: 8,000,000 (issued - treasury)

ex) bond indexes

corp bond index treasury index 3 top muni indexes: 25 reve, 11 bond, 20 bond rank highest to lowest yield highest = corp bond, then treasury, then 25 revenue bc more risky than GO, then 20 bond bc of rating, then 11

dividend payout ratio

%= annual dividend/EPS = how much $ did you pay out as a % of what you earned Ex) dividend paid was 30 cents, EPS was $1 soo... .30/1=30%, other 70% is retained earnings so compliment of dividend payout ratio is retained earnings ratio so high growth co would have low dividend payout ratio and high retained earnings ratio where more stable co (financials, bank) etc may have opposite

ratings for muni notes (dif than bond rating)

(S&P ratings) SP1 + very strong SP1 strong SP2 satisfactory SP3 speculative (SP1 through SP2 = investment grade) Moodys MIG1 MIG2 MIG3 SG (stands for moody's investment grade.... and SG is speculative grade)

corp bonds

-issued by corporation -issuer has debt obligation, investor=creditor + = corp is not giving up any ownership - = corp has to repay $ and interest corp bonds=less capital risk than same companies stock (because they are higher in bankrupty proceedings) but they don't have the growth potential/capital appreciation since stock ownership can share in profits

adjustment of terms/components of an option (how may these contracts change??? ex is stock split/dividend this card is for reverse splits (where second number is larger)

** aggregate contract price stays the same ** again only one where number of contracts changes is even split (anything to one) so for this one we are not adjusting the number of contracts but the number of shares in those contracts ex) 1:10 split 1 BBA mar 5 call (aggregate value = 500) take 100 (shares) since we are not doing contracts like for even split where we would take the 1 and multiple it... so, 100*1/10 = 10 shares, so now we can call away 10 shares and then 5 * 10/1= 50 50 * 10 = 500 sooo now we have 1 $50 call allows you to call away 10 shares for total of $500

ETFs vs index funds

** neither product tries to beat the market, just want to cheap way to gain exposure to certain segment of the market** ETF: - fixed portfolio product, trades throughout the day - consist of bakset of securities which mirror index - trade in secondary market= no prospectus = can be sold short/buy on margin=similar to trading stock - compensation = same as for stock = commission is paid to buy/sell, there is a bid/ask price - intra day pricing -there are leveraged and inverse ETFs index fund: - sub type of mutual fund where we try to mimic index (consists of basket of securities) - shares are redeemed by the fund, can't be sold short - primary offering = need prospectus, can purchase on margin originally or short term - subject to end of day pricing - usually have no sales load = an buy where NAV=POP -forward pricing: once daily -do not allow leverage

components of an order ticket (what is NOT listed) prinicpal must approve on day of entry

**CUSTOMERS DO NOT RECEIVE THESE, THEY RECEIVE CONFIRM** created at time an order is received and includes - branch identifier - RR responsible for acct and person accepting order - buy/sell -long or short -security -quantity - acct #/name/type (cash or margin) - time stamps - time of entry and execution (if not filled will only have entry time) -wether discretion, solicited, unsolicited ** orders must be approved by a principal on day of entry ** info not included = firm capacity, accrued int, compensation, CUSIP are instead found on confirmation

annuity suitability issues (who is it aimed for, who is it no suitable for??)

+ = they are tax deferred growth, good for people who have maxed out 401K/IRAs who is the target audience: generally for investors ages 30 to 55 (it is a very effective retirement plan tool), seeking tax deferred growth or for people who have maxed out IRAs/qualified plan contributions (not for older investors) not suitable for: retirees, senior persons who are seeking immediate tax benefits, and bc of the high costs not meant to be a ST investment, have surrender fees, larger sales charges and expenses

tax considerations (when giving or receiving securities) --> annual gift limit

- 15K per person per year or 30K for married couples, one person can give up to 15K each year to as many as desired without tax imnplications. --- - amounts in excess are taxed - amonts in excess reduce the lifetime exclusion - certain amount you can pass accross free for estates = lifetime exclusion, if we eat into the above 15K rule, it starts to eat into the exclusion you can give between spouses an unlimited amount

529 plans and 529 ABLE plans

- 529 can be direct sold or advisor sold 1) direct sold = sold directly from the 529 plan website or through the mail, no salesperson 2) sold through b/d that has agreement with primary distributor of the 529 plan 529 ABLE: acheviving better life experience. this is for disabled people receiving Social security, medicaid, or private insurance payments. the max contribution is 15k per year but no front-loading. it is put away for qualified expenses (medical, job training, edu). disability payments can continue so long as acct value doesn't exceed 100K. distributions are tax free if used to pay qualified expenses. often used if they have a lot of savings that without this account type would prevent them from still getting disability money

reporting requirements

- FINRA requires firms to file info relating to certain customer complaints and other incidents involving RRS by no later than within 30 days of discovery - these events include (6) 1) being subject to customer complaint involving allegations of theft, misappropriation of funds/securities, forgery 2) having been indicted or convicted or pleaded guilty or not contest to any felony or misdemeanor involving securities violations (indicted = even if not convicted, still reportable event if convicted becomes statutory disqualification event) 3) violating secutiries laws/regulatio of the govt, SRO, financial business or professional organization 4) being subject of a suspension, term, withholding of commissions, or fines in excess of $2500 5) having been names as a defendant by a regulator alleging violation of any securities, insurance, or commodities regulation 6) being a defendant or respondent in an award or settlement of more than $15,000 *these are not all statutory disqual events, but are reportable*

option communications (tied to OCC, the clearing house/central 3rd party)

- OCC creates characteristics/risks of standardized options = prospectus delivered to client prior to or at time acct is opened additional rules for options communications include: - warning that options are not suitable for all investors - must be clear/balanced as to the risk/potential benefits of investing in options - projected annualized rates of return are permitted but cannot be based on less than 60 day experience - historical performance must cover no less than most recent 12 month period AND must include all relevant costs

FINRA suitability rules (3 obligations)

- RR/firm must have reasonable basis to believe that 1) reasonable basis obligation -= firm making reccommendation should believe it's suitable for some of its investors 2) customer specific = suitable for certain clients and not others (doesn't apply to inst) 3) quantitative obligations = just bc it is suitable for a specific client doesn't mean they can buy/sell unlimited amounts - focusing on one type of suitable investment could be too much or the number of trades within a suitable investment are what is making it unsuitable. so all may be suitable but the sheer number of trades/transactions may not be, so must evaluate all 3

tax benefit of REIT

- THIS IS FOR THE REIT ITSELF, not investors... - no taxation on income if 90% of it is distributed but when $ flows to investors in form of divident, it is taxable (similar to MF) - unlike limited partnrship, no passing through of losses and 20% of distributed income is tax deductible

account registrations - unincorporated associations

- acct is opened in name of owners or owner - indiv ownership in acct are subject to creditors claims - still taxed as you - It is an organisation of two or more persons, who are the members of the association. ... The affairs of an unincorporated association are usually managed by a committee chosen by the members.

reasons to protest account transfer request (1 business day to do so) if protest ... 5 business days to resolve

- additional docs are needed - account is flat (no assets) - invalid account number - SSN or acct title doesn't match - existing court order or tax liens - written instructions to rescind the transfer are received from the client NOT acceptable reasons = dispute over securities or $ balances bc activity may have happened if discrepancy/protest occurs, the carrying b/d (original firm) must resolve within 5 business days

KYC 2/3 - personal characteristics/non financial info (what is the formula to determine what % of equities you should have in your portfolio based on your age?)

- age: -younger=can accept more risk/longer earnings period, want to build capital, more recovery time for any losses. -old=preserve income/capital to use for retirement=less aggressive overall.. don't want to lose nest egg time horizon: 100-age=equity=% of portfolio that should be devoted to equities (more capital appreciation), comes with increased risk but good with offsetting inflation (hedging). younger=higher equity % and vice versa. investment experience: -if they have a lot, they are going to have a better idea or risk/may be more willing to be speculative, they may have more products available to them -if inexperienced, may need to gear them toward different ones, may need to take basis steps like starting to save for retirement, etc. social values: -may not want to invest in certain companies if they feel strongly about certain laws/environment, etc. risk=odds of losing 100% of investment - risk tolerance=not just based on financials but also on values/attitudes=are they comfortable losing money - young/single=may want more risk, can be more aggressive, longer investment term -young married couple = more conservative but still want growth, may be investing for child's college savings so still aggressive - older=likely want to preserve earnings for retirement, want income/capital appreciation

pattern day trading account (what is day trading and how do you become pattern day trader, and the disclosures for these types of accounts)

- aggressive acct used by people engaged in a lot of active trading - day trading = done in margin account to to avoid freeriding=purchase/sale of same security on same day - pattern day trader= 4 or more day trades within a give day period - risk disclosure statement: provide by firm prior to opening ttis acct for non-inst customer includes: 1) day trading can be very risky 2) be wary of claims of large profits from day trading 3) day trading requires knowledge of securities markets/firm operations 4) day trading will generate more commissions 5) day trading on margin/short selling may result in losses beyond initial investments approval procedures: - firm must agree its suitable to approve/have reasonable grounds for this -if customer has provided written notice the acct will not be used for day trading but the firm has evidence day trading is occurring, acct must be approved for day trading within 10 business days

short call analysis example (you are writer/seller)

- assumed uncovered unless specified = would have to go in the market and get it since do not hold the position sell 1 XYZ feb 45 call @ 2.5 current market value = 45 breakeven= strike price + premium = 47.5 strategy= bearish max gain = premium max loss = unlimited later XYZ is at 52.5 the investor is exercised against, what is the result.. cash out: $5250 to buy the stock to delivery to buyer cash in: $250 from premium $4500 (what buyer is buying it from them at regardless of what they had to buy it for) = 4750 so the lost $500

Suitability (also inst. suitability)

- based on client profile when the acct is opened - ongoing situation, not just at acct opening, day to day changes, very liquid (always moving) -applies to recommended transactions and investment strategy -RR cannot place an interest ahead of the client (churning for ex=doing a lot of activity to generate commission that does not generally benefit the client) - not determined if it makes/loses money= not about g/l at all inst suitability: can often take more risk/make own decisions = less suitability worries/obligation bc increased capability of evaluating investment risk -inst usually signs dpc saying they can use independent judgement=don't need to rely on RR

SEC 33 act - exempt transactions, REG D

- based on the way it is sold, not the specific security 1) reg D - private placement: sale of securities to unlimited number of accredited investors and a limited number of non accredited investors (35) directly, no public offering is made. SEC wrote rules on how to meet this exemption, spelled out in REG D -exempt from registration part of act but NOT anti-fraud accredited = 1) 200K per year or 300K with spouse for last 2 years, expect it to continue 2) net worth (can be with spouse) of 1 mil excluding primary residence 3) offiers/director of the issuer (only considered accredited for the specific offering) 4) inst like banks, insurance co, etc. non accredited investors max of 35 generally need purchaser representative: - appointed by non accredited investor to evaluate risks/merits of offering, cannot bee officer, director, or greater than 10% owner of issuer unless related to investor. - no specific requirements so long as you are knowledgeable enough to evaluate risk/merits bc non accredited = not considered sophisticated enough private placement memorandum, AKA offering memorandum = disclosure doc for private placement. not required if all investors are accredited but if you have any non accredited investors its required for all investors. includes financial info, suitability standards, use of proceeds. private placement securities are generally restricted including stop transfer statements that can't be transferred to other owner until it's removed, ways you can sell these restricted securities, the issuer may subsequently register them so they become trade-able

offering practices of partnerships

1) public offering = follow 33 requirements, registration with SEC, prospectus, underwiter, helps facilitate offering 2) private placement= reg d=exempt from registration=accredited investors only (many happen this way)

ex premium bond sold prior to maturity

- bond purchased for 1050$, with 10 years left to maturity, 5 years later the bond is sold at 1030$. what is result for tax purposes? well we have 1050-1000=50$ premium that will be amortized over 10 years so we have 50/10=5$ per year... so 5 years * 5$ = 25$ 1050-25 (because we amortize down to par) so we have 1025$ as adjusted cost basis sold at 1030 so we take 1030-1025 = 5 dollar capital gain if sold for less than 1025 = capital loss

sales practice violations for investing in MF (3 big ones)

- breakpoint sale = when RR prevents client from getting this: they may fail to disclose letter of intent (soliciting sales of shares just below breakpoint)/they they are close to breakpoint or advise allocation across multiple fund families - if client is reallocating in fund family, still taxable event (no sales charge tho if still in fund family), if going to other fund families then may also be sales charge/holding periods RR must disclose this if they have switch recommendations - recommend excessive purchase of class B shares: since these don't qualify for breakpoints, class A = only class that qualifies for breakpoints

account registrations - sole proprietorship

- business operated under name of individual owner and all losses/income is taxed as you - all investments are in owner's name even if business is not in owner's name (could be in name of business) - account is vulnerable to owner's personal creditors

DPP - direct participation program, what is limited partnership agreement

- business venture designed to pass through income AND losses to investors - combines tax benefits of general partnership with limited liability of c corp - c corp = big co, pay own taxes (ex is exxon mobile, intel, etc) - general partnership = can just be 2 guys opening up a store but if something goes wrong = full liability ex of DPP - s - corp= joint ventures between two business partners, each share in profit/losses, general partnerships=unlimited liability, limited partnership = investor is the limited partner=no say in business but your liability=limited to your investment only -limited partners is formed by filing a cert of limited partnership with the state, owned by general/limited partners --> limited partnership agreement defines relationship between parties - usually 1 manager - usually many investors or limited partners, are passive investors = essentially only write checks, etc.

taxation of an option if it expires

- buyer loses premium = capital loss for buyers - seller keeps it = capital gain for seller ST or LT? generally ST bc to have LT tax treatment, must hold asset form ore than a year and standard equity options usually only last for 9 months - LT if a LEAP is purchased and hed for more than 1 year, if sold a LEAP short and were short that positions for more than a year, it would result in a ST capital gain, why??? bc to be LT you mus tHOLD the asset for more than a year so can only have LT gains if you buy it not sell it short (THIS IS NOT JUST THE CASE FOR LEAPS but all securities)... selling short = doesnt start holding period, must HOLD the asset for more than a year

generic fund advertising (tombstone ad, ommitting prospectus, supplemental sales literature, generic ad - which ones are preceded/ accompanied by a prospectus, which ones can include performance info and when can each be used?)

- can't refer to fund by specific name but may include the following: - how fund operates/services it offers - basic descrip. of generic type of funds - invitation to get more info tombstone ad: not preceded/accompanies by prospectus. cannot include performance info. when can it be used? waiting period/post effective period. ommiting prospectus: not preceded/accompanied by a prospectus, it can include performance info. when can it be used? waiting period/post effective period. supplemental sales literature: it is preceded/accompanied by a prospectus, it can include performance info, when can it be used? post effective period only generic ad: is not preceded/accompanied by a prospectus, cannot include performance info. when can it be used? at any time ** waiting period=cooling off period ** post effective= once declared effective/filing is complete

discretionary account

- client authorizes third party to make investment decisions in her account/withdrawal/dep funds 1) POA must be signed = person other than owner can make decisions without owner's prior knowledge 2) prinicpal must approve acct in writing prior to opening 3) each order must be reviewed/approved promptly by principal (not in advance) 4) activity must be monitored for potential churning (if auth person is RR) not concerned if auth party is not RR -POA is good for life unless revoked/@ death - limited trading authorization = allows only discrestion to buy/sell securities - full=execute trades, withdrawal cash/securities, check writing priveleges, etc.

COD/DVP and RVP (what is needed before opening dvp or rvp account?)

- client uses other agent, usually bank, to settle trades 1) DVP=COD= delivery versus payment or collect on delivery: client buys securities, b/d delivers securities to client's bank and is paid by bank once delivered 2) RVP= receipt versus payment= client sells securities, securities are delivered to b/d from bank, b/d makes payment to bank -before opening dvp/RVP, b/d must obtain customer acct numbers and name of agent bank - since rvp/dvp trades are settled with customer's agent, acct statements from b/d generally do not reflect any cash balances or security positions @ quarters end

customer complaint

- complaints over the phone are not considered complaints - complaints = any greivances in written form only including letters, emails, ims, text messages - must be forwarded to a supervisor for review/investigation - complaint files, including copies are maintined in an OSJ ( office of supervisory jurisdiction) even if have no complaints, along with a report to indicate the action taken to resolve the complaint - records are retained for 4 years (FINRA rule) - quarterly reports are sent to FINRA (not SEC) to provide statistical/summary of complain info, no complaint = no report but still must have file

standardized components of options (what is total/aggregate contract price)

- contract between a buyer and seller although OCC guarantees performance that has standardized components = buy/sell specific number of shares of a particular stock at a fixed price over a certain period defined by: -name of underlying security -exp month of the contract, 3rd friday of the month -exercise/strike price -type of option ex) buy 1 ABC June 50 call at 5 1 = 1 contract, which represents 100 shares of underlying security ABC= name of stock 50 = strike price june = exp month 5 = premium per shares so 5*100=500 is total premium total aggregate contract price = 100 shares* 50/share = 5000 so you are paying $500 for this right (total premium cost) - if stock goes up to 55, we would make back our premium since we could then turn around and sell it at 55, bought it at 5, this makes up the different - if stock went to zero, you wouldn't exercise bc its worthless = let it expire = max loss is premium total of $500

issues and repurchased shares (equities)

- corp charter determines # of shares that can be issued - why repurchase? employee stock option plans, may have excess capital they want to use/could resell at higher price, increase earnings per share bc you decrease the number of outstanding shares - treasury stock = outstanding stock repurchased by issuer, does not receive dividends/has no votings rights and any question that asks about total dividends, DO not count treasury stock ex: total authorized shares: 1000000000 issued: 10,000,000 outstanding: 10,000,000 after share purchase: total authorized shares: 1000000000 issued: 10,000,000 treasury: 2,000,000 outstanding: 8,000,000 (issued - treasury)

important terminology re spreads

- debit or credit spread - series vs calls - one buy and one sell - options of the same class but dif series

agency securities

- debt instruments issued/guaranteed by fed agencies and GSE (govt sponsored enterprises) -exempt from fed/state registration requirement like treasuries are, no registration statement with SEC or -quoted as % of par in 1/32 of point (not like t bills which are discounted yield basis) -accrued int calculated like corp/muni --> based on 30 days in a month and 360 days in the year (UNLIKE OTHER TREASURIES WHICH ARE 365 and actually days in a month) -issued in book entry form

ex - MF

- determines which investments are placed in funds portfolio (the management co or investment advisor) - deducted from POP and experessed as % of POP (sales charge, this is set by the fund family and is NOT negotiable by RR or b/d) - amount that decreases the longer shares are held (contingent deferred sales charge) - retroactive decrease in sales charge (letter of intent) - sales charge is decreasing when a breakpoint is reached (rights of accumulation = purchases in fund family by your family) - results in cost per share being less than price per share --> dollar cost averaging. bc we buy more shares when price is lower and vice versa but same $ is invested

DPP - risk summary ( be aware of the following risks)

- did you pick good manager? did they meet objective? - in it for long time = illiquid nature/potential loss of capital (especially in early years) - unpredictable income - investor may be required to give more capital = assessment which is mandatory - rising operating costs, may be greater than originally projected - change in tax laws/government regulations could impact value of investments - oil/gas --> environmental/economic impacts

EMMA - electronic muni market access system, created by MSRB

- disclosures, stats, general data, trade data, prices, etc - official source for muni securities data, docs including, docs from issuers/underwriters related to primary market (official statement) although exempt from 33 act = SEC registration requirements = no disclosure is required to be filed but if b/d underwriters/provide these securities they have to provide official statement -ratings of munis/towns/demographics - continuing disclosure info = any updates, etc - daily stats on trading activity since RTRS feeds into this - investor edu material EMMA IS NOT A TRADE REPORTING system but an info portal

T- STRIPS= separate trading of registered interest/principal

- each payment is considered its own security... we can create a lot of zero coupon instrument from 1 t-note/bond not issued by government instead created in secondary market. b/d and banks take treasury security and tell government they want to separate each payment. the security would make (all interest and repayment of principal) and sell each individual payment as separate security. so each 6 month interest payment fo ex is sold = 1 payment, you can sell principals in 10 years as separate security) --> this effectively creates a lot of different zero coupon instruments out of 1 t-note or t-bond. each is sold at a discount, mature at face value, the dif=your interest. summary: -zero coupon treasury -issued with variety of maturities -non interest bearing (zero coupon) - locked in return

rule 147 and 147A

- exempt from federal filing, may need to register with state tho.. intrastate offering, provide exemption for sales of securities to residents of one state if... 1) the corp has principal place of business in the state and meets 1 of the following - 80% of assets are based in the state - 80% of revenues are generated in the state - 80% of the proceeds are used in the state - majority of issuers employers are in the state 2) resales to non-residents are prohibited for 6 months from the end of distribution, can immediately sell to anther state resident however * can only sell to residents, 100% of buyers must be residents - rule 147A, roughly same rule, more recent update

regulation S (think offshore)

- exemption from registration to US and foreign issuers that offer securities outside US - no offer may be directed to US person and transaction must be handled through overseasa sercurity market (although this can be a US company) -US person = natural person who is US resident -must be issued offshore, but can those securities ever come back into the US? Reg S securites may be resold 1)immediately through a designated offshore securities market 2) in the US (after 40 days if they are non convertible debt and after 1 year if they are equities of non reporting issuer or 6 months if they are equities of reporting issuers) non reporting = don;t file financiles with SEC

settlement for equity options

- expire 3rd friday of exp month 1) trading ceases at 4PM eastern time on 3rd friday 2) buyer must submit to exercise option to b/d no later than 5:30 PM on this day (if in the money by 1 cent/at all will be automatically exercised) 3) option expires at 11:59 PM eastern on this day b/d takes the time to notify OCC/get records in tact for ex) Long ABC feb 60 call - customer tells b/d they are exercising - b/d tells OCC - occ uses random selection to assign the exercise to a bd that has clients short the abcd feb 60 call - that b/d may have a lot of clients short that and they can use to choose customer through random selection, FIFO, a fair/equitable method *OCC MUST USE RANDOM SELECTION* - b/d has 3 options - settles in 2 business days bc actually exercising = buying a seucirity (which is corp security) so b/d settles with b/d, b/d exercising pays b/d selling the option

ADR - american depository receipt (sponsored vs unsponsored, all about who is paying for the program

- facilitates trading of foreign equities in US markets (this are done bc people want the liquidity of US markets) - priced in dollars, pay dividends in US dollars - sponsored = issuing company pays. if company raises capital in US or wants to list on US exchange they have to sponsor ADR = SEC requirement - unsponsored= b/d pays, issued without cooperation from the foreign company bc they thing clients want to buy = can make money off of it so they are willing to pay. quoted on bulletin board OTCBB or pink mkt (good ex = nintendo, likely thinly traded and lot of risk/volatility sponsor= deposit shares to bank who then issues shares... trade on NASDAQ or NYSE, issued with cooperation from foreign co, more liquid usually. -foreign government have have withholding tax for ADRS = you may not receive $ amount you thought= you get that as credit against US taxes or can be deducted but credit = more beneficial

mutual fund structure summary (6)

- fund co - underwriter/distributor/wholesaler/sponsor - board of directors: protect shareholders, choose direction of fund, most are not employees of the fund -investment advisor/portfolio manager: earn a fee - transfer agent: issue, redeem, cancel - custodian bank : safeguard assets, by holding cash/securities

mutual fund structure (6)

- fund company= brand name (like a car co), within this will have a lot of investment options each with own goal... -contain underwriter/ distributor /sponsor /wholesaler, they market the product line to b/d who market their clients who are the investor (underwriter is considered a legal entity who must be registered with FINRA) - board of directors = set fund objectives, worry about protecting shareholders = majority must be independent (not employees of the fund company), don't make portfolio selections but decide if growth fund, etc... -investment advisor/portfolio manager (a thing, not a person), they earn a fee (recurring) for investment advice - transfer agent: issues, redeems, cancels fund shares, distributes dividends - custodian bank = hold fund's cash/securities

arbitration disclosures

- handles disputes NOT rule violations before arbitration begins, firms are requited to disclosure the following to clients - the right to sue/to a jury trial is waived with arbitration - certain claims are not required to be arbitrated including those related to discrimination, sexual harrassment, disputes arising under a whistleblower (when you report someone to SEC) statute these can go to court - arbitration awards are generally final and binding, can't appeal - ability to obtain documents may be more limited, normal rules of evidence don't apply - decisions made by arbitrators don;t require explanation - arbitration panels may consist of either industry or public arbitrators, FINRA maintains a pool of these arbitrators

fee based accounts

- have advisory/custodial fee wrapped into one comprehensive fee - wrap accounts = one type = all services costs into one fee suitability considerations: - are they appropriate? are fees reasonable given client trading history? if not an active trader= not suitable since based on AUM so no costs for trading, better for active traders = no cost per transaction (this would be reverse churning) - traditional accts charge on a per transaction basis, assessing commission on each trade (better for buy/hold investors)

KYC - 1/3 financial factors (income, tax considerations, financial statement)

- income (earned, investment, retirement) - tax considerations (tax bracket, g/l, estate/gift taxes) - financial situation - balance sheet/income statement - identify all sources/amounts of income (salary, investment income, other income), document expenditures (taxes, mortgage, loan, living expenses, insurance, entertainment, travel, etc) this will allow you to determine discretionary income (what is left, if any to invest) - taxes: -marginal tax bracket, can they qualify for AMT (alternative minimum tax) - investment income --> do they have dividends/interest that are taxable? at what levels? -estate/gift taxes --> up to 15k per person per year or up to 30k per married couple without penalty. unlimited gifts allowed from spouse to spouse. -capital gains/losses: ST= pay income tax level (held under a year), LT=held over a year, taxed at max of 20% or if in lower tax bracket, lower. can use losses to offset gains, and up to 3K on ordinary income

account registrations - partnership

- info collected on each management partner -partnership agreement specifies persons authorized to executed trades - included under your own ordinary income

common stock ownership rights

- inspect books (10k or 10Q) one is annual report, one is quarterly - evidence of ownership (certificate) - transfer of ownership = can sell to others - can get corporate earnings (dividends) but are not guaranteed, but you are entitled, they would have to declare this - voting power (to elect board members, can vote to increase authorized shares/stock split) **YOU DO NOT VOTE FOR DIVIDENDS cash or securities**

accredited investors, how many non accredited investors can you sell to?

1) accredited investor: can be people or inst. must meet 1 of 2 financial test. a) must have net worth of over 1 million excluding primary residence (can be together with your spouse) b) must make 200K per year or 300K per year with your spouse, expect that to continue, and has been that way for past 2 years rules about private placement and who they can be sold to, can't sell to more than 35 non accredited investors = important bc of private placement rules

investment co overview

- investors buy into portfolio, a package, professionally managed, diversification, liquidity, convenience and cost (could be periodic investment plan = can deduct from pay check or checking and there may not no dollar minimums), and it exchanges at NAV (=the liquidation price, value or portfolio at end of day

other corp bonds - high yield bond

- junk bonds or speculative bonds - bonds with low ratings (lower than investment grade which is lower than Baa3 for moody and BBB for S&P and Fitch) and bc of this, have to issue with high yield to get people to buy them

trust account

- legal arrangement, creator gives fiduciary control of property to a person or inst (trustee) for benefit of beneficiares - 2 types 1) revocable= living=vivos. the creator can revoke, change any terms, doesn't decrease estate taxes but avoids probate if funded prior to donor death 2) irrevocable, can't be changed after signed, will decrease estate taxes/avoid probate

sales charges (class A vs class B shares... is one better?? does all money go to work in each of these??)

- major cost of acquiring fund, amount deducted from investors purchase - 8.5% = cap as % of POP - benefits the selling brokers - used to cover costs of promo/sales literature - types: (these can both still have 12b-1 fees) 1) front end loads: all paid up front = class A. not all money goes to work, total investment less sales charge goes to work. 2) back end = contingent deferred sales charge = class B = pay later. all money goes to work but if you get out too soon... could have additional deferred sales charges. % decreases as your holding period increases. this is assessed at time the investor redeems. appears superior over class A shares.... but these class B tend to have higher ongoing fees when compared to class A and SEC requires that class B be converted to class A at some point 3) 12b-1 fees cover distribution costs/marketing expenses of underwriter. normally paid to the distributor, can be shared with b/d. established under investment company act of 1940

BDC = business developmental co (what are two big benefits, and what are the areas in which they buy into (3) all are non public

- many are formed as registered investment companies (like MF.... to which 90% of income won't be taxed..), less liquidity than MF -invest in both stock/debt of non public companies (unlike MF) such as: 1) small/developing companies 2) financially troubled companies 3) private companies investors combined capital goes to BDC which then invests capital in private company the earnings/interest payments from the private company come back to the BDC which then passes that along to investors bc 90% of is tax free to them benefits: 1) these may not trak S&P 500 --> provides investors with diversification away from plain vanilla investments, and 2) unlike hedge funds which dabble in similar areas, BDC are structured as public offering = doesn't need to be Reg D = can be sold to non accredited investors= income/net worth requirements are avoided since they are public offerings negatives: underlying assets are illiquid

opening a margin account - margin basics (part 1)

- margin basics: means borrowing something , can borrow $ to fund stock purchses = long margin acct or borrow securities to execute short sale - it increases your purchasing power - leverages client, but potential losses can be large due to adverse market changes - under Reg T, client puts up half, so half $ borrowed and 1/2 money deposited y client = double purchasing power

preferred stock (when are dividends paid out, trade more like bonds and are sensitive to i-rate changes, higher than common in terms of bankruptcy, pay a stated dividend quoted as % of par)

- most people buy b/c of the dividends, trade more like bonds = sensitive to i-rates but not as much as much by changes in stock prices -pays a stated dividend (% of par, typically par is $100) - dividends are paid to preferred before common stock holders and are senior in bankruptcy precedings - there are a lot of different types of preferred stock - no maturity date - pays quarterly dividends (bonds = semi annual) - energy, financial service co, banks = tend to have a lot of money and therefore highest dividends

exempt securities SEC 33

- muni debt - US treasuries -agency securities - short term corp debt 1) us government/agency securities, municipal securities/securities issued by banks or non profit organizations (have their own registrations already, no need to double up), short term corporate debt (maturities can't except 270 days), and securities issued by small business investment companies

non discretionary orders, what is not held order = only time discretion can be used by RR in non discretionary account but all other info must be received from client except time/execution price

- must be marked solicited or unsolicited - if recommended by RR and they accepted by customer this is considered solicited - if a trade is placed by a customer without RR recommendation order ticket = unsolicited NOT HELD ORDER: - if a customer specifies b/s, amount, asset, and allows her rR to determine time/price of execusion = not held order and only good for that day = not held accountable - when can an RR exercise discretion in non discretionary account? if they determine only time/price= must have the security, b/s, quantity then RR has the day to fill this, usually done right away unless you have something in writing, this is a not held order = not held accountable

investor considerations for DPP (must has sufficient net worth, and RR must tell them all facts, etc, risk, illiquidity, etc....) what about discretion? can RR use discretion in these?? NO

- must certify investors are aware of unusual risk, RR must tell investor of all relevant facts/lack of marketability (they must certify they informed customers) - investors must have sufficient net worth/income to absorb a loss of the entire investment - RR are NOT permitted to exercise discretion in these products, must talk with client/get their agreement for DPP = must be solicited

FINRA required info for opening accounts (many firms go beyond this) (5) and then what should you inquire about but are not FINRA requirements

- name (or # code) - address, this cannot be a PO box unless in the military - whether of legal age (based on state law) - RR of record - Signature of supervising principal - copy of this info must be provided to client every 36 months -customers do not have to sign new account form (margin accts do however) - many include predispute arbitration agreement, not required but many firms use this you SHOULD inquire the following prior to the original transaction (but are NOT FINRA requirements) - tax ID/SSN - occupation/income/employer address - whether associated with other member firm (doesn't apply to inst accounts and if client reuses you must document this and why)

account registrations - joint account

- new info taken for both owners - any owners can iniative activity - when sigs are required ,all must sign - checks must be made payable to both/same with stock certs 2 types: - joint tenant with rights of survivorship (if one dies, the other gets the rest). can only be used by legally married couplies, must complete community property document, based on laws of state where they reside, 50/50 split=always equal ownership - joint tentants in common - if one dies their portion is transferred to their estateq, common for business partners, can own specified amount = doesn't need to be equal, if

CDO = collateralized debt obligations

- not govt or govt agency securities - repackaged fixed income assets into product sold in secondary market, assets are first pooled together then issue securities off of pools (tranches) -underlying assets don't have to be mortgages, can be auto loans, credit card debt, corp debt) these serve as collateral for investors. -each tranche has different maturities/interest payments -similar to CMOs but don't limit investments to mortgages -primary purpose of CDO is to distribute risk, could be credit risk, etc. dif tranches absorb dif credit risk, once defaults get over certain point, the second tranch will begin absorbing defaults and so on, so some securities have high credit quality. others, lower (will have higher yield). quality of underlying debt determines risk of CDO and which tranch you actually bought ** in sum = structured product where interest is sold in pool of fixed income assets ** in sum = Debt instrument where the collateral for the promise to pay is an underlying pool of other debt obligations; Tranches are created for seniority of cash flows

brokered CDs

- offered by b/d and have different characteristics than typical CDs... - if not bank product, FDIC may not apply these - fees/commission may apply - maturities are generally greater than 1 year - CD may be callable - limited secondary mkt = ability to get out early --> lead to a loss/lack of liquidity -Financial institutions use brokers to market their CDs to help them gain deposits. The rates on brokered CDs tend to be very competitive because the financial institution is competing directly with other institutions for your deposit.

spreads summary

- one buy, one sell - same class dif series - class = same underlying security and same type of option (both calls or both puts) - series = defines one specific option, same underlying security, exp month, same strike price - can be debit or credit -bullish or bearish -since one is a buy and one is a sell for the premium we are finding the dif unlike straddles/combos where we are adding them together because on the same side of the trade 4 types: 1) horizontal (dif exp month) 2) vertical (dif strike price) 3) diagonal (dif both) 4) butterfly spread.. here for strategy we want it to end closest to the middle strike price as possible, anything above highest and below lowest strike prices is where we see max loss. made up of one credit spread and one debit spread

hedge fund risk summary

- one of most aggresive investment choices/only for sophisiticated investors - high risk/high reward -investors should know following risk: - illiquid, gating policies = trouble getting money out, concentration of portfolio, use of leverage/derivates to multiply that bet, little control over management = no say - unlike MF, high initial and ongoing costs based on performance (may be upfront fee to join and % of the profits as well) = performance driven - very unregulated bc not 40 act company = less regulatory disclosures

options overview

- option= contract between 2 parties. buyer= owner/long the option/pays premium. they pay premium which is the price of the option. they acquire the right to d something to underlying stock, they are in control of the option writer = seller = short the option- they sold an option they didn't own, seller receives premium and takes on/assumes obligation to do something

priority of orders (PGDM, pro golfers don't miss) for muni offerings

- orders in which orders are allocated among the distribution group (4 types) 1 = top priority, 4 = bottom priority 1) pre-sale orders = have top priority, received before bonds are awarded and priced, may allow underwriters to make more aggressive bid 2) group net= benefits all syndicate members according to their percentage interest, but all benefit 3) designated = buyer determines which member will receive credit for the sale 4) member = syndicate member placing the order is the only member to receive credit for the sale

exercise vs close out example

- outlines why not always a good idea to exercise early ... 1 ABC may 65 call at 3 bought when ABC current mkt value is 64 (so out of the money) later ABC market value increases to 72 and now this call is trading at higher premium (at least 7, since in the money that amount... and time value is unknown) based on supply and demand (if trading at a lower premium than this then there would be an arbitrage opportunity = lock in a profit (you would buy it and immediately sell it., why the market adjusts otherwise this is the case with all of them). so let's just say there an $8 premium (7 points intrinsic and 1 point time value) scenario 1 = exercised, stock sold cash out: -$300 (3*100 shares)= total premium to acquire - $6500 to purchase the stock = 6800 total cash in: - 7200 from the sale (turn around and sell it bc mkt price is higher) = 7200 total = you make 400 scenario 2: closed out (at the new premium obviously bc that is what the same option is going for) cash out: $300 cash in: $800 (new premium for writing the call) total = $500, also usually cheaper commission wise to do scenario 2. often time b/d will charge commission to exercise option and liquidate stock, if sell option only one commission charged

new issue rule (ONLY APPLIES TO EQUITY IPOs) who are considered restricted persons (who are finders and fidicuaries, what about MF portfolio managers?) what are the general exemptions??

- oversubscribed = increase the demand for shares than there are shares available when it starts trading. it likely pops up when it starts trading in the secondary market. this may make it tempting for b/d to sell to itself/sell to family/employees bc you can make easy profit in secondary market= what FINRA new issue rule prohibits.... soo this rule prohibits member firms from selling equity IPOs to any account in which restricted person has beneficial interest to prevent ^^ who is a restricted person? - member firms and any member firm (member of FINRA) firm employees regardless if that b/d was part of the distribution - immediate family members or member firm employees if... 1) there is material support (25% of persons income)= spouse, children 2) sharing of household with immediate family member 3) the purchase is made through the family's member firm (so if you're a non immediate family member they can't buy through your b/d BUTTTT they can buy from another b/d) whereas immediate family members cant buy from ANY B/D - finders and fiduciaries (attorneys, accountants or finder= brought deal to b/d) are all restricted - portfolio managers purchasing for own account are restricted, however can buy for teh fund what must be done before the sale can take place?? (to assure no restricted persons in account) - verify that the acct is eligible to purchsae the IPO (written or electronic communication) cannot be oral statement - re-verify this eligibility every 12 months to make sure no restricted person involved general exemptions: - an account that includes restricted persons, provided their combined ownership (all restricted persons) doesn't exceed 10% -issuer directed sales that allow restricted persons to purchase if the associated person or persons immediate family is an employee or director of the issuer.... so regardless of restricted status if you for the company going public you can buy shares. restricted persons can purchase if associated person or associated persons immediate family member is employee or director of issuer **these even applies to B/D if they are doing own IPO** **so in sum, you can always buy into your own IPO** -portfolio manager can buy for the fund -b/d purchasing for own account after making a bona fide public offering, so if b/d make firm commitment and there are leftover shares... allows

settlement (SEC, MSRB, b/d to b/d) vs customer payment

- payment date is set by FRB under provisions of Reg T (involves corp securities) transaction: --> corp securities in cash/margin = t+2 to settle and t+4 of s+2 for payment --> munis= t+2 for settlement, exempt from Reg T along with gov securities, but usually pay t+2 --> Us govt = t+1, exempt from Reg t payment but usually t+2 --> option = t+1 settlement, t+ 4 of s+2 for payment ** b/d can have stricter requirements tho**

munis are most unsuitable for...

- people in low tax brackets - people in retirement accounts (already benefit from tax exemptions... do not want to take on lower yield if not getting tax benefits... wouldn't make sense for this account type)

tax treatment of variable life (policy surrender, loans (can be tax free is taken against cash value), death benefit (not taxed, but can be included in estate taxation), estate taxation), for surrender = FIFO FYI.... for annuity withdrawals, earnings/growth portion are taken out first and taxed then contributions (basis, which are tax free)

- policy surrender: FIFO system, premiums paid in (are already taxed, assumes premium paid with after tax dollars) are returned 1st while the excess/growth is taxable as income. this is when you want out of insurance = want $ back loans= many have tax free loan capabilities against policy's cash value (equity value) death benefit: tax free to beneficiary however death benefit is included on insurer's estate... when they die, taxes may be taken out of estate estate taxation: if 1 mil insurance policy increase size of estate which increases likelihood of tax since death benefit is included in deceased estate

under this conduit theory of taxation = subchapter M

- possible that MF is not paying tax liability and that liability is passed onto shareholders - relieves a funds burden of paying taxes on income as the distribution is passed through to shareholders = conduit theory * to qualify as regulated investment co (an IRS term) a fund must distribute a least 90% of net investment income to its investor then it won't be taxed on funds that are dist. so if it qualifies, it is only taxed on undistributed portion ex) if fund has 100 Mil in net investment income and 99 mil is disbursed, only taxed on that 1 mil --> net investment income = (div + int) - (expenses + mgmt fees), capital gains are not included here.. ** burden for paying taxes ultimately falls on shareholder **

an options premium (what is it made of?) intrinsic and time value)

- premium = cost of option - it is made of: 1) intrinsic value: the in the money amount, if in the money it was intrinsic value. however this cannot be negative, but it can be zero (if out of the money or at the money, then intrinsic value is zero and the whole premium would be time value) 2) time value: buyer has right up to exp date so buyer is willing to pay more than just the intrinsic value and seller alternatively wants compensation for this time (risk for them for long time period). whatever is left from intrinsic value is time value = it is the amount in excess of intrinsic value.

firm supervision: principals

- principal= engaged in management of member firm/are responsible for acct approval/maintenance: (officers, directors, partners of the firm) (every RR needs a supervisor, no limit on number of reps per supervisor) - option activities have option principal and same for munis, ** general securities principal--> create written supervisory procedures

protecting client information, regulation SP

- privacy: can't provide info unless ordered by court/court entity, client provides written permission, don't have right to know info of spouse acct -regulation SP: statement privacy= can't share info, must be easy for client to agree to. these are rules to protect privacy of client, at account opening and annually thereafter discloses info that's shared and shared with who. required a reasonable "opt out" provision if you don't want this shared

warrants

- provided to you when you buy original shares or bonds = offering for 1st time in primary mkt as a sweetener of sorts - give you right to buy specific # of shares @ price above current price in the future, these are long term and some can be perpetual, they are detachable and so you can trade the warrant separately than underlying security -buy at premium bc sweetener

securites received as a gift (tax implications of this) (get lower of fmv or cost basis) = worst tax treatment

- receipient of securites uses lower of fair market value or cost basis = they get the worst tax treatment - if FMV exceeds donors original cost basis, use original basis and use donor's holding period - if FMV is less than donors cost basis and sold for... 1) more than basis, use basis 2) more than basis, but less than FMV at time of gift, use FMV 3) less than FMV at time of gift, use FMV at time of gift

prohibited trading practices - interpositioning

- refers to insertion of a third party between a customer and the best market= add another layer - can only do so if it is advantageous to customer - prohibited if detrimental to customer ex) non MM went to other non MM to go to MM = doesn't make sense to add another non MM

retiring debt prior to maturity (call provision) and what are three reasons why people would buy these? one reason that issuer would call?

- retired debt= issuer loses debt obligation - some are redeemed prior to final maturity such as call provision: allows issuer to call/redeem prior to maturity = issuer has right either in whole call (entire) or partial (lottery call=random lot). if called investor gets call price/usually a premium but at least par plus accrued interest why call? when i-rates go down bc they can reissue at lower rates = refinancing of sorts why buy these? - higher yield=compensatino for giving issuer right to call in. - call protection=period of time when they can't be called -call premium=issuer pays a bit more to invsetor to call in their bonds

measuring systematic risk (again risk that impacts all of the securities, diversification won't help) what is BETA, what is the case when beta =1, what about less than 1 or greater than 1, what about negative?

- risk that security is exposed with the market... we measure this using BETA (measures volatility of an asset relative to entire market) - BETA = correlation coefficient between portfolio or specific stock and the market, if 1 = moves with the market, - if greater than 1 = more volatile than the market/expected to outperform when the market is up and underperform when the market is down - if less than 1, it's expected to underperform when market is up and outperform when market is down = less volative - negative beta = moves in opposite direction ex) S&P up 10% stock A, beta = 1.5 (up 1.5 times as much as the 10% increase we saw with the s&p 500) (overperform in up market) stock b, beta = .5 (up only half as much, so 5%) ex) s & p down 10% stock A = beta is 1.5 (drops by 15%) (underperform in down market = risk you take to get potential overperformance in up market) stock b = beta is .5 (drops by 5%) again outperform in down market

KYC 3/3 - financial objectives/goals

- safety: likely very old or very young (little discretionary income) who want this. they should invest in gov't securities - short term (capital preservation): protect principal, likely money market instruments are best -income: (typically retired people): reliable stream of cash, income funds or bonds are good choices - growth/income: less volatile, less earnings, usually blue chip companies are good choice=regular dividends -long term growth: greater volatility, may just be starting out, aggressive bc want to begin saving for retirement etc. - aggressive growth: may have reliable income, etc 'and can take this risk on --> penny stock/options - speculation: active, short term speculation -reduced/defer taxes= look to save taxes, usually high net worth clients, they can put money in retirement vehicles to defer payments, muni securities (often times are exempt at state/local level if bought in your own resident area), may want to interest tax losses to offset gains

REIT- real estate investment trust (3 types, mortgage/debt, equity, hybrid)

- similar to MF= collection of something - REITs concentrate investments in real estate related investments, in order to earn profits for shareholders types: 1) mortgage/debt = issue secured loans that are backed by real estate purchases. this is an income play 2) equity: own/operate income producing real estate. hope underlying assets increase in value, this is a growth play 3) hybrid: combo of both, mix of properties some interest bearing others with growth play

separate account

- subject to regulation bc investment co product - regulated under investment co act of 1940 - must be registered with SEC - must be sold by prospectus - investments may be changed through accumulation phase with no tax liability - movement --> does not create tax liability = major annuity benefit - there is a "menu" for separate account sub accounts (they are flavors or investment choices)

characteristics of variable life insurance

- takes some aspects of variable annuity and compiles it with life insurance -agent must be registered/must get prospectus 1) death benefit: must provide present fixed minimum benefit, which grow based on performance 2) cash value: no guarantee, but in life long policies this wil build up overtime not in term life (where strictly insurance) 3) loan feature: let you take out % of cash value (usually 75%) 4) premium payments = generally paid in fixed amounts at fixed intervals 5) investment acct: choose from various sub accounts of the separate account, can swtich up with no tax penalty, can change when mkt conditions change = switch asset mix to more bond or more stock 6) risk: policy holder assumes risk that investment returns will be lower than anticipated (SINCE THIS IS VARIABLE CONTRACT....) risk is on investor

DPP main benefits

- tax benefit - limited liability - pass through income/losses - venture into areas providing diversification away from traditional stock/bond investments

client financial objectives - tax relief (variable time line)

- tax exempt muni bonds, muni $ market funds, tax deferred (annuities and retirement plans_ time line = varies phrases: high tax bracket, professional like business owner ** if have tax deferred account = you pay tax at later date with hopes that at that time you are in lower income bracket= don't want to buy tax free securities in tax deferred account instead invest in taxable securites (you already have the tax benefit so it's a waste)

tax swaps and wash sale rule

- tax swap= sell asset/use proceeds to buy another one for tax benefit - wash sale rule= if you generate a gain, this doesn't apply only for loss. IRS says you can use loss to offset gain/deduct from income but for economic reasons ONLY, not tax implications.... SO IRS says if you sell assets at loss and within 30 days of the sale you purchase the security or something substantially similar the loss will be disallowed --> added to your basis. same applies if long or short position (if sold short then re-shorted stock in 30 days = same rules) what is defined as substantially the same? the stock itself, bonds or pref. stock that are convertible into stock, rights, warrants, call options that are exercisable into the stock. for bonds, bonds of same issuer, coupon, maturity would count (not illegal but loss is disallowed). 61 day period, wash rule...if you want to sell security/use loss --> sell stock at a loss then wait 31 days and buy same stock back = can also profit if stock goes up OR not wait 30 days after you sell and buy stock that isn't substantially similar (rule doesn't apply here) ex. wash rule: 1000 shares owned ABC with basis of $43 per share, current mkt value = $22 but expected to increase in future. in order to offset capital gains, she sells stock on December 3rd at $22 recording a $21,000 loss (43,000-22,000) fearing increase in stock value, she buys 1000 shares ABC at 24 on dec 20.... (not allowed). consequences= not illegal, loss of 21,000 is disallowed but 21 point loss is now added to new cost basis of new purchase so (24+21)=45 so then when you sell the stock, the g/l is determined by 45 what if she bought ABC Jan 25 calls or ABC convertible bonds on Dec 20? loss is STILL disallowed, what if only bought for example 3 call options = right to buy 300 shares = partial wash sale (since you sold 1000) --> in this ex, 70% loss allowed, 30% disallowed

CMO (collateralized mortgage obligations - define this) communications

- the core asset = very safe like ginnie mae but CMOs themselves are corporate securities = manufactured by b/d= dif cash flow = multi-class debt instruments backed by pool of mortgage related securities disclosures are as follows (3 types): 1) general standards: have to include full name CMO in name, cannot compare to any other investments, disclose that yield/average life (no fixed maturities, can differ especially bc of prepayment) may fluctuate, radio/TV adds must suggest contacting RR before investing 2) edu material: prior to sale, the following must be provided to non-inst customers: description of risks/characteristics of CMOs, structure/types of tranches (sep categories of interest and payments coming back), questinos you should ask, glossary of terms). 3) suitability: provide investors with ability to choose yield, maturity schedule, risk exposure to meet needs, allow investors investors to customize prepayment risk, may expose investors to extension risk (is this middle or LT investment?). retail investor should review carefully before investing

crowd funding

- the jumpstart our business startups (JOBS) act established crowdfunding procedures -they allow small businesses to raise capital using the internet - now allowed under SEC rules through the JOBS act.... only online platform of a b/d or approved funding portal - amount a person can invest is based on their income/networth

annuity changes and expenses (4 types of expenses) is there a max on fees/expenses like MF??

- this is a complex product (insurance - lifetime income potential as well as investment components) so expenses/charges are generally more expensive than MF, MF have 8.5% POP max sales charge, for annuities it must be fair and reasonable so no max... -many annuities are similar to B share MF where there is a contingent deferred sales charge **like MF, not all money goes to work in separate account due to expenses, etc** expenses: - deducted from investment income = not all money goes to work - management fee: advisor's fee for making investment decisions in separate account - expense risk charges: charges if expenses are greater than expected - admin expenses: cost of issuing/servicing contracts - mortality risk charges: a guarantee that annuities will be paid for life even if you live beyond expectancies

3/3 purposes of option- generate income

- to generate income on an existing stock position, an investor could sell an option - short calls may generate income on long stock positions... since you own the position you don't hvae to go in the market and buy it... so you give the stock away but you make a premium and give up profit potential of the stock - short puts may generate income on short stock positions. if you don't own the stock, you can buy a short put...

pricing of govt securities

- trade at 1/32 of a point (t-note, t-bond, agency securities) they are quoted as a % of par - t bills are quoted on discounted yield basis, not dollars. the bid/ask are more of a yield than dollar price, tho bid is numerically higher (what the dealer will buy at)... think of it like it is a discount off of face value, so bid of 2.94=looking to buy at 2.94% discount from face value. the bids higher yield represents lower price and vice versa. whereas an ask of 2.9% = smaller discount off face value = higher price

treasury stock

- treasury stock = outstanding stock repurchased by issuer, does not receive dividends/has no votings rights and any question that asks about total dividends, DO not count treasury stock

straddles/combo summary

- two buys or two sells - straddle = same exp month and strike price -combo= any differences strategy for buyers of both = volatility strategy for sellers of both = stability for examples... we are adding the premiums together because we are on the same side for each option (both buys or both sells)... then we take strike price + the combined premium and strike price - the combined premium (since one is a call and one is a put) to get our range... for buyers anything outside this is profitable for sellers anything within this is profitable

par value = face value = principal, usually 1000 for bonds and 100 for stock

-interest rates are based on this number -amount issuer pays when bond matures regardless of what you paid

prime brokerage account (common for inst)

- when inst would execute trades with multiple b/d in order to get best execution, inst will centralize all trades through one b/d to prevent all b/d from knowing the strategy, more specialized services can be offerred by this one b/d (custody, securities lending, margin financing, clearing, processing, operational support, research, customized reports= save money instead of this coming from several b/d) - so all trades are reported/settled, and clear through the prime broker who consolidates confirms from the other b/d to the inst customer

other indexes...

- wilshire 5000= largest index (smallest = Dow Jones industrial, though most widely quoted) - Russell 2000 = focus on small caps - russell 1000 = focus on large caps - nasdaq composite = all companies in nasdaq - nasdaq 100 = the largest 100 companies in nasdaq bond indexes: - barclays capital - marill lynch (most report on corp bonds, govt bonds, agency securities)

type or orders --> stop order (of existing position)

- you want to protect profit, limit a loss = of position that you own - order where if price you designate is hit it activates a market order = guarantee execution at this point but not price -specify security, size, price -only executed if trading occurs at or through the stop price - sell stop = (you want it to go up but you protect it from going down) exit long position if stop price or lower - buy stop (you want it to go down but protect it from going up) exit short positions if price hits stop or higher

redeeming MF shares (how long to receive funds from fund after notice is received?? how many calendar days??) (what is redemption fee and why do they do this?? where does this money go??)

-NOT A TRADE - the process: redeemer receives proceeds within 7 calendar days from the fund (7 calendar days of receiving the redemption notice) - MF investor may sell shares and receive next calculated NAV minus any contingent deferred sales charge or redemption fee -redemption fees: usually if traded before certain time has elapsed=assessed against investors who redeem their shares after holding them for short period. this money doesn't go to RR or distributor but it is kept in portfolio. in/out trading may force PM to sell soemthing they don't want to raise money = the logic behind charging clients for in/out trading

convertible pref stock ex (hybrid securities, large inst investors like these)

-an investor bought 4%, $100 par convertible preferred stock at $110. stock is convertible at $10 and common stock price has risen to $12. conversion ratio= 100/conversion price= 100/10= 10 shares of common per share of preferred stock owned based on increased price of common stock, at what price should pref stock be trading? - take the mkt value of the common * conversion ratio = price of preferred - - well we take the conversion ratio which equals 10 shares and we multiple that by $12 --> trading at $120

put provision

-bondholder can put the bond back to the issuer prior to maturity @ par value -attractive when i-rates have increased so you can go buy one with higher i-rates -investor accept lower yield for ability to do this and allows investors to redeem bonds at value greater than mkt value as irates increase

debt with foreign characteristics - yankee bonds

-bonds issued by foreign entities in US/primary sold in US, allow foreign entities to borrow dollars in US marketplace so they are dollar denominated -bonds must be registered with SEC/primary sold in US --> can immediately trade in secondary market

collateralized mortgage obligations (CMOS)

-different from traditional pass-through's because: 1. issued with a stated maturity, and 2. the principal payments are exclusively used for the newest maturity in sequence, until each maturity is paid off these are mortgaged backed bonds created by dividing mortgage pools into various bond classes (tranches) takes mortgage pools and create various securities off of it --> tranches - refers to various bond classes. this was done primarily to distribute impact of the prepayment risk to dif tranches (means slice in french). people who don't care about prepayment risk may not buy these/accept higher yield from the pooled mortgages. int is paid monthly and is fully taxed like the pass thru (principal however is paid sequentially) issued in $1000 denominations subject to act of 1933 registration and the trust indenture act of 1939 private label CMOS - means the pools include non-US agency mortgage securities so mortgages aren't backed by GNMA, FHLMC, FNMA... subjects investor to more credit risk of the issuer = we have credit risk of issuer/homeowner to be concerned with

CMOs - sequential pay/plain vanilla (does this really solve prepayment risk...)))???

-each tranch gets interest but principal all goes to tranch A = are being paid down until tranch A is retired then principal is paid to tranch B which becomes active tranch and you work down this line... soo.. if you wanted shorter term investments, you should enter one of the earlier tranches to get paid, if you want large term enter into later tranches since it takes longer to be paid period one, interest to all tranches, and principal to tranch a period 2: tranch a is done, principal and interest paid to tranch b, and just interest to tranch c period 3: tranch b is done, principal and interest paid to tranch c ** if i-rates go down, homeowners refinance and pay off old mortgages so ... bc these speed up payments, we end up working our way down the line quicker = didn't really solve prepayment risk issue... soo new CMO structures emerged...

registration change/internal transfer

-for married/divorces you need marriage cert/divorce decree, or court doc need to add/remove (can take drivers license) - to add/remove a person you need DOB, SSN, contact info, both parties must sign, principal approved changes - must occur before transactions occur. - to move securities internally, all parties on acct have to approve transfer, stock transfer must be completed if trasnferring stock (dif than account transfers)

non retirement dist (early withdrawal penalty), what are exemptions

-if you take out money before you are 59 1/2, you are taxed at ordinary income level (adds that withdrawal amount to your taxable income) and then a 10% penalty - exemptions include: 1) rollover: you receive proceeds once per year (bc you receive them monies, only allowed one per year per SSN) allowed per SSN, must be done in 60 days otherwise considered a withdrawal, can be withholdings in case you don't make the deadline 2) trustee to trustee transfer: owner doesn't have access to funds, can do as many time a year as your want, no withholdings

bidding at the auction (competitive vs non competitive bids)

-issued in an auction conducted by US treasury (tbill, notes, bonds). t bills are auctioned off weekly usually mon but also tues. settlement for that new issue is that thurs unlike treasuries traded in the secondary market (settlement is next business day). while notes and bonds are auctioned off as announced 1) competitive bids: placed by large institutions usually indicate indicate (they usually have to place them this way) - quantity - price/yield they are willing to pay 2) non competitive bid: placed by the public. these indicate quantity ONLY not the price/yield... these are always filled first. the bidder agrees to pay lowest price (highest yield) of the accepted competitive bids. -these are set aside, because competitive bids are what determine the price

why bond prices fluctuate from par? (2) interest rates and credit risk

-most are initially sold at par but as time goes on they trade more or less this value - discount = pay less than par value - premium = pay more than par why? 1) interest rates may have moved since bond was issued... so if interest rates in economy has increased, the fixed bond rate becomes less attractive bc can get higher return in market. inverse relation between int rate changes and bond prices (opposite of changes in market interest rates). bonds with same risk/maturity are issued with higher yield when market interest rates go up so for already issued bonds, must lower price by enough to compensate/match the increase in interest rates bc that is what investor can get elsewhere and vice versa -> so return is roughly the same 2) credit risk of bond: bonds pay interest/eventually repayment principal. how likely are they to default? increased risk of this --> want higher return to compensate. recognition that issuer may default on int or repayment. high credit risk issuers have to pay higher int. to induce investors to buy. return should = risk free rate plus premium for taking on risk US govt securities assume risk free rate corp/muni = difficult to evaluate credit risk higher rated bonds=lower yield and higher prices and vice versa

CIP (customer ID program) = not required prior to account opening and is dif than FINRA acct opening info. used to verify customer info

-not required prior to account opening but reasonable time period - used so b/d can verify customer: 1) required identifying info" name, legal address (residential or business = dif than FINRA acct opening info), DOB, ID # 2) identifying US persons: tax ID/SSN 3) ID number for non US persons: one or more of the following: Tax ID, passport #, alien/green card #, any government issued doc establishing residency/identity 4) OFAC: office of foreign asset control: maintains names of suspected terrorists/crinimals --> all transactions are blocked/law enforcement is notified/is responsible for clearing the list

DPP suitability issues

-risky/long holding periods = must be assumed investor has liquidity in other investments bc it may be a lot of time before crossover point is reached typical investor profile: - higher bracketed, higher income, has enough stocks/bonds and are looking for diversification (take advantage of tax benefits if of higher bracket) -for sophisticated investors who are seeking performance not correlated with stock market -investor has need for present/future tax benefit -investor is aware of risks and is able to tie up funds over long periods risks: -illiquidity, lack of control, may need to put more money up, long commitment

ETN = exchange traded note (what are the two major risks)

-structured product created by b/d and issued as unsecure debt by issuer - trades on exchanges -low fees -give investor access to areas of mkt they may not otherwise have easy access to -performance linked to mkt index, int rates, currency bakset, or some underlying security or basket of securities... -backed by only full faith/credit of issuer (credit risk) 1) your return is based on performance of what it's linked to 2) risk that issuer may default = credit risk these are not principal protected but performance is linked to performance of an sset -can be purchased on margin, sold short bc they are trade on an exchange -issuer has/is obligated to deliver performance (of what it is linked to) at maturity

reverse convertible (3 main characteristics)

-structured product issued as short term, high yield note -linked to single underlying stock=reference security (usually of another issuer) not typically of the issuer themselves 1) fundamental characteristics: benefits = higher yield than other fixed income securities with same maturity 2) knock-in level: level that's normally 70-80% of the initial value of the reference security, so below value of reference security. if reference security never falls below the knock-in level, the investor continues to receive interest and principal at maturity 3) value of reference security falls (not par): negative= if value of reference security falls below knock-in level and at maturity closes below initial value --> issuing b/d will deliver the reference security at the depreciated value. the investor no longer receives principal @ maturity but instead gets shares of reference security (which are now worth less)

zero coupon bonds

-they trade without accrued int=trades flat -no int paid semi annually=don't need to worry about int reinvestment=locked in return up to maturity with no reinvestment risk -dif between purchse price and par value since this is considered interest income

preemptive rights

-tradeable based on intrinsic value/amount of time that is left (trade on some exchange as stock) -short term - must be exercised within 4-6 weeks define= shareholder's right to maintain % of ownership, no dilution -dist through rights offering (1 right per each share owned), based on some formula, takes x rights plus some $ (suscription price) to buy one new share) -the lower the subscription price, the more intrinsic value but less $ the co can make but **ONLY FOR COMMON STOCK OWNERS, not pref. stock -exercised prior to public offering at a discount = immediate instrinsic value (the amount of the price discount) so company that is already public can raise additional capital as follow on offering but go to existing sharedholders first at a discount - you can subscribe (meaning you will have no dilution of ownership) to the offering or trade them (sell them for $ in which you will have a dilution in your ownership %) - type of derivative product bc value is derived based on common stock as compared to subscription price (increase value of stock compared to sub price ==> more intrinsic value) ** in sum, are short term (4-6 weeks to exercise), only for common stock holders, immediate intrinsic value bc offered at a discount, allows you to maintain ownership %, no dilution, you can subscribe or trade them

alternatives ex

1) invests in mortgages and properties (hybrid REIT) = mortgages/bonds and equity 2) responsible for decision in LP (GP) 3) riskiest real estate program - raw land. little tax benefit bc no depreciation since not equipment 4) oil/gas program that generates immediate cash flow (income) 5) hedge fund - use of exotic investment strategies 6) BDC = invests in developing/financially troubled companies

after market prospectus requirements

-want to buy securities in secondary market shortly after they were issued.... distribution participants (anyone involves in the deal) that sell securities in the after market must provide purchasers with a copy of the prospectus for a specified period from the effective date.... 1) for non listed IPO: 90 days 2) for non listed follow-on: 40 days 3) for IPO of security to be exchange listed (NASDAQ OR NYSE): 25 days 4) exchange listed, follow on: no requirement depends on if IPO or follow on and whether security is listed or unlisted... *** the more public info available about company --> shorter time period for after market prospectus***

muni bonds and their issuers

1) (mostly general obligation bonds) states/political subdividions, cities, towns, county, school districts 2) (most revenue bonds) public agencies/authorities like transit systems, housing authrities, water/electrical systems 3) territories (puerto rico, guam, US vergin island...) these will be triple tax free automatically

ex treasuries

1) 10 plus years to maturity = t bond 2) int is federally taxed = all 3 3) sold at weekly auction = t bills 4) discounted security = t bills/T-STRIPS (but these aren;t issued by the govt) 5) 2-10 year maturity = notes 6) book entry issuance = all 3 7) int paid semi annually = t notes and t bonds

refunding (idea of refinancing... so when irates are going down you call bonds in if callable and then reissue at lower yield) ... what is advanced refunding and what is pre-refunded to call date and what is escrowed to maturity??

1) 10% debenture, callable at 102 2) 7% debenture if i-rates are decreasing, issuer refinances existing bond to take advantage of lower rates -so will issues 1) and use $ to buy 2) since the issue was callable...they will call it.. idea is that you issued higher rate bond which is callable and you use thte money to buy the lower yield one -investors now must reinvest at lower rate **existing bond retired within 90 days of refunding issue** advance refunding: (using same ex as above) but bonds have 2 years left of call protection... -issuer can issue the 2) but can't call the 1) for the next 2 years... the proceeds from 2) are placed in escrow account watched by separate trustee, invested in treasury securities (no risk, which is sufficient to pay debt service on the 10% bonds) pre-refunded to call date: used escrow $ to buy back @ call date (paid off at call date) escrowed to maturity: used escrow $ to retire them at maturity (paid off at maturity date)

3rd party research (2) (3rd party research and independent 3rd party research)

1) 3rd party research/disclosure rules: research entity that b/d has control over = material prepared by affiliate of a b/d or @ request of b/d that maintains editorial influence over the content. both author and b/d are eligible to be conflicting and both must list all conflicts. disclosures apply to firm that created the report and any firm that distributed the report 2) independent 3rd party research: defined as material prepared by a person or firm that is unaffiliated with distributing b/d = has no editorial control and isn't required to approve the report. distributing b/d conflicts don't matter in this case bc those rules only apply to CREATOR of report not the firm distributing. must tell clients you/b/d didn't write it

t/f ex - investor profile

1) 40 yr old should consider her portfolio to consist of 50-60% equitities (100-age=%) so 100-40=60%, T 2) older couple with sufficient retirement income will likely be aggressive with investments (F) do not want to sacrafice nest egg for potential $ opportunities) 3) indiv. concerned with labor practices in other countries may avoid investments in emerging markets (T) 4) couple saving for college will be very conservative/safe with investments (F) - can't be too conservative, need growth but not overly safe

457 and profit sharing plans

1) 457 = designed for state and local government employees (otherwise same as 401K). employees may elect to contribute generally pretax/grows tax deferred= cost basis is zero, earnings grow tax deferred= comes out and must be taxed as regular income. they max the annual contributions per year bc they do decrease individual taxable income - employers may match, they aren't taxed for this, employee won't need to pay these taxes until withdrawn 2) PSP: from a for profit co. contributions don't have to be made (at the discretion of board of directors, subject to annual limits, amount alloted to employees is made by pre-determined formula

additional margin considerations 1) portfolio margin 2) leveraged ETFs 3) pattern day trading

1) AKA risk based margin. type of margin given to large investors usually inst. where they have more related positions in the account. computer will run risk profile on acct and will come up with net margin requirement - so margin is based on net risk in the portfolio (risk of long stock position being offset by put on that stock etc.) - ultimately the client comes up with less $ than if longs and shorts each had their own 50% requirement, looks instead at aggregate risk level - eligibility limited to customers approved for uncovered options writing and certain firms (this is for individuals) = are you able to understand risk 2) leveraged ETFs: doube long, triple long, etc... -min maintenance for these equals the leverage factor times 25% (long) and 30% (short) - if something is triple long = 3x the maintenace requirement which can be more than Reg T bc leverage already within the portfolio = why requirements can be greater 3) pattern day trading = designation bc do a lot of in/out trading -defined as executed 4 or more day trades over 5 days period - typically offered addtional leverages in the account --> can get 4 to 1 buying power SMA intra day so within that day ** 1 requirement = the account has min equity of 25K**

educational savings plans

1) CESA: coverdell edu savings account. tru/custodian acct to beneficiary. contribution max at 2K per year until beneficiaries 18th birthday. non deductible, earnings are tax free if used for qualified edu expenses , may be used for private edu on any level (though better for k-12). funds must be used by 30th birthday or beneficiary or transferred to dif relative CESA (permitted if relative is not 30) 2) 529 = college savings plan. can be used for k- college but designed for higher edu/college. 15k per year or can frontload up to 5 years so 75K or 150 K for married couple

ESOPS and deferred comp plans

1) ESOP= employee stock ownership plans. the co. contributes own stock or purchases its stock for acct. stock not held by employees while employed but dist when no longer employed. the retirement benefits are based on co performance 2) deferred comp plans: generally non qualified deferred comp plans (NQDC). agreement between employer/employee to pay employee compensation in the future. generally unfunded = money not set aside, instead there is a promise to pay at retirement. if the employee leaves, this is voided=not subject to ERISA or need for IRS approval

inventory valuation (2 methods, LIFO, FIFO)

1) FIFO, first in first out: oldest costs are matched with first units sold so use first in (first cost) against first sales = have lower cost of goods sold = higher profit = higher taxes and operating margin for business, but when using lower cost of goods sold, what's left in inventory is the higher valued stuff so inventory valuation would be higher on balance sheet when using FIFO -inventories reflect cost of latest purchases -if used in inflationary times, it results in greater profits 2) LIFO (last in, first out): opposite of the above. higher costs of goods sold --> lower profit--> lower taxes and margin -lower inventory value on balance sheet -sell last items you produce -most recent costs are matched with first units sold -inventories reflect the cost of earliest purchases -if used during inflationary time, results in lower profits

restricting activity in acct (what is free riding)

1) FRB, reg T must be obtained for purchases in cash/margin acct in s+2 or T+4 2) payment extension granted by SRO (FINRA) if can't make payment 3) if payment not made/no extension --> position is closed out/securities sold on 3rd busienss day after settlement (s+3) 4) result --> acct is frozen for 90 days, trades can be done but all done in advance, $ in hand freeriding= buy stock, then sell it but only pays one side= can't just use proceeds to get new one

muni fund securities (LGIP, prepaid tuition, 529)

1) LGIP: local government investment pools: not open to the public. these are created by state/local government to provide muni entities a place to invest funds... government entity purchase interest in LGIP (trusts which provides them safety and diversification/place to invest funds) not for regular investors 2) prepaid tuition: type of college savings plan, offered by state, purchaser locks in tuition costs at current level --> protects from future cost increased. NOT SELF DIRECTED. may limit child to schools in that state., doesn't guarantee acceptance into most prestigious schools, the idea is you buy college tution credits 3) 529: popular for college savings although can use same $ for k-12 (max of 10K for tuition and books for grades k-12). Acct owner chooses the plan, ex NY or CA, state may give you aggressive vs nuetral option, 529 plan you choose will use fund company who invests in mutual funds, in essense you choose a plan but can alter investment direction (SELF DIRECTED). funded with after tax dollars = no deduction. - benefits: investment grows tax deferred and comes out tax free on fed level if used for qualified edu expenses (tuition, books/supplies, room board)... tax free at state level depends on the state, many times if you buy into your own state plan = tax free at state level as well - unlike prepaid tuition plan... NOT limited to schools in the state in which you bought the plan.. can be used in any state - to avoid gift tax, the current max contributions = 15K per person per year for married couples it is then 30K. allow front loading of up to 5 years... so an individual can give 75K and a married couple can give 150K.

tax treatment of discount/premiums THIS IS PART 2, there will be 3 parts it is broken down into

1) OID - original issue discount 2) premium bond 3) secondary market discount bond

no principal approval is needed for the following retail communications and is not required for correspondence as is or inst. communications

1) Retail communications that make no financial/investment recommendation/doesn't promote a product/service. market letters that make NO financial/investment reccommendations 2) correspondence 3) inst. communications ****name of b/d MUST be disclosed on retail communication/correspondence****

ex t/f muni chapter

1) VRDO contains put provision (T) 2) tax free distribution can be taken from 529 plan for pre college expenses (T) 3) exemption from a state tax need not be considered when evaluating equivalent yields (F) must subtract this from 100 with whatever federal tax bracket is 4) discount on a OID is considered ordinary income (F) the dicsount =tax free income, the discount on the secondary market one is considered taxable as ordinary income 5) capital loss can be the result of selling a premium bond prior to maturity (T) depending on if sod for more or less than adjusted cost basis tha tyou amortized down to for a prem bond or discount bond for what you accreted up to

variable rate muni securities (2, VRDO and ARS)

1) VRDO: variable rate demand obligations. Long term securities marketed as short term instruments. -variable rate of interest asdjusted at specified internals (AKA reset dates) when holders can redeem for par value plus accrued interest at any time - so in essense, includes a put provision on each reset date @ pare plus any accrued interest 2) ARS: auction rate securites: LT investments with variable interest rates reset at periodic intervals through dutch auction = single price auction = all winners get same price... auction sets lowest interest rate at which all securities being offered for sale will clear the market= net clearing rate. people who want to get out of the ARS will put them up for sale in these auctions SO don't have put provision like the VRDOs do -7, 28, 35 days (interest rate reset periods...). the buyers state i-rate they're willing to accept to buy and auction starts at lowest interest rate and increases interest rate until all bonds are purchased that were put up for sale... the clearing i-rate is the lowest i-rate at which all offered for sale will be purchaseed= net clearing rate - issue of liquidity, historically, such that more were up for sale than were bought --> may have issued bc no put provisions = may have unsold ones

ex for end of options chapter

1) a straddle involves: buying both or selling both a put and a call on the same underlying security (same strike price and exp month, if either are different = a combo) . you want volatility if you are buying, you want stability if you are selling. 2) the breakeven on a straddle is found by...adding the total premium or subtracting the total premium from the strike price (a range, because one is a call and one is a put, you do one of those strike prices plus the total premium and the other one less the total premium) 3) vertical spreads have dif strike prices but same exp date 4) for vertical spreads, the dif in the strike prices equals the max gain plus the max loss. premium will be max gain if received or max loss if you paid it 5) a debit put is bearish and the investor wants the spread to widen 6) long calls are used to hedge short stock positions and short calls generate income on long positions (you get premium) --> covered call writing strategy 7) VIX call will likely become more valuable after the market drops bc that increases volatility 8) if investor believes bond prices may be falling, she may want to purchase yield based calls (decrease in bond prices means increase yield/irates and calls are bullish 9) holding period on stock and a put on the stock will run concurrently if the two are married (bought on same day) if not.... and the LT position hasn't been established then when you buy the put it resets the holding period... if LT was established then nothing happens to it if you buy put

treausry ex

1) agency securities aren't direct obligation of us govt, credit risk is ___ (low) 2) agency securities are ______(exempt) from state/fed registration 3) ginnie, fannie, freddie offer ______ (mortgage backed securities) 4) mortgage backed securities represent an interest in a ______ (pool) of mortgages 5) ________ (prepayment) risk is unique t mortgage backed securities 6) CMOS dist. prepayments through various _____ (tranches) 7) _____(CDO) are types of securities backed by varous types o debt that attempt to dist risk

exchange on equity trade (agent vs principal trades), NBBO is national best bid or offer

1) agent trade: 2 firms and 1 client involved. commission is disclosed on the confirm 2) principal: 1 firm and 1 client involved. markups on NMS securities are disclosed on client purchases and markdowns on NMS securities are disclosed on client sales - compensation calculation is based on NBBO = national best bid or offer

additional order qualifiers (can be added to an order) 1) all or none, 2) immediate or cancel, 3) fill or kill 4) market on open or market on close

1) all of none (AON) = don't want partial execution, so fill whole order by end of day or cancel it 2) immediate or cancel (IOC): fill what you can, then cancel the remainder, want it done right now 3) fill or kill (FOK): execute entire order immediately or cancel = if can't be filled rn then kill the whole thing 4) market on open (MOO) or market on close (MOC): buy or sell as close to market open or market close as you can

ex t/f

1) asset allocation models are used to create optimal portfolios (t) 2) russell 2000 is the largest index (F) 3) stock with a beta of 1.25 will outperform in an up market and underperform in down market (T) 4) CAPM states that return on investments should equal a risk free rate of return plus a risk premium (T) 5) a rising put/call ratio indicates bullish sentiment (F) actually bearish... 6) a buy stop order may be used to take advantage of a break in the support level (F) it would be a sell stop

important summary of annuity phase

1) becomes property of insruance co that know valye of acct, gender age, and makes guess about your life expectancy 2) you lose death benefit 3) choose payout option which takes fixed number of annuity units multiplied by fluctuating value = payment amount will fluctuate bc value of annuity units go up and down 4) investments remain in tact 5) payments are mix of tax free basis and growth (taxable)

variable product communications (what is used to sell the product) = separate acct products (insurance and annuities, where investment risk falls to customer)

1) both must be identified as insurance products, cannot imply they are mutual funds, remind about tax implications/penalties especially if liquidating/moving, disclosure all charges/expenses 2) describing them as short term, liquid investments is PROHIBITED. must disclosure that loans/withdrawals will impact both cash value/death value (especially with outstanding loans) 3) guarantees: features are guaranteed by insurance co NOT by selling b/d or RR 4) hypothetical illustrations of rates of return are allowed - gross rate of up to 12% is permitted as long as the 0% is also provided (must show best and worst case %) - rates must be consistent with current mkt conditions - must reflect max expenses/sales charge - statement must be made that the rate/chart/brochure is hypothetical = not prediction of return or a guarantee

methods to decrease sales charge (breakpoints and letter of intent and rights of accumulation)

1) breakpoint: volume discount provided by fund family to incentivize investments in that fund family: - this increases money, sale charge tiers down - if you land in a given tier, the sales charge is applied to entire fund family not just specific growth fund you purchased but all funds within same fund family and is applied to $ you have ex) customer invests 60K in MF, 4.5% sales charge, funds next calculated NAV is 19.61, max offering price is 21.32. fund charges a 1% redemption fee. using previous breakpoint schedule how many shares can investor purchase?? POP=NAV/100-sales charge % 19.61/100-4.5%=19.61/.955 = 20.534 60,000/20.534=2922.55 shares (can have fractional MF shares) *** get down to price you would pay per share and then divide the amount of money you would be investing (the 60K)*** 2) letter of intent: when not enough cash to qualify for breakpoint = grants you grace period if not all money is deposited today -give you 13 month window, may be backdated 90 days to include previous purchase but cuts into 13 month period -not binding!!! the portion of shares held in escrow in case of non - performance, if can't come through the discount granted up front will just be adjusted back = back to standard pricing **no downside to letter of intent, you can't lose ** 3) rights of accumulation: broader than individual... aggregate purchases within brand name but looks beyond your indiv purchases to include your spouse, etc/other family member -spouse/other immediate family member -fiduciary for single tr account - pension/profit sharing plans qualified under IRS code guidelines -other groups so long as they weren't only formed for purchase of decreasing sales charge

how b/d function - 2 capacities

1) broker (ABC) = agent/acts as conduit, finds other party willing to take other side of trade, like a matchmaker. they collect a commission, no risk to the firm = not using own money. think like real estate, broker doesn't your house then sell it 2) dealer (PDM) = acting in principal capacity, firm doesn't arrange the other side of the transaction but TAKES the other side of the trade. compensation = mark up (client buying/firm selling=higher price) or mark down (firm buying or client selling = lower price) -they have risk bc they are using their own money/dealing out of their own account and since they are buying things there is a risk that they may not be able to resell

types of contracts (2) call/put

1) call: buyer has right to buy underlying stock at strike price. they hope the stock goes up bc no matter how high you can buy at that set price = more of a steal/discount the higher the price of the stock goes. seller has obligation to sell stock if buyer chooses to exercise 2) put: gives buyer right to sell stock at a strike price, you hope the stock goes down because you can sell it at a fixed price and its worth more when market prices fall (bearish). seller has obligation to buy the stock (they are paid a premium to take on this obligation). think put... put it back to seller. the buyer hopes that the stock falls to zero

type of transactions, identified in 1 of 3 ways, 1) purchase, 2) long sale, 3) short position

1) purchase= buy security and can be paid in full or on margin 2) long sale: sales of securities that are owned by client 3) short position created by: short sale (sell high, buy low)= sale of security not owned = borrow securities from b/d and sells them with agreement to repurchase and deliver on a future date. the appropriate amount of margin must be deposited to borrow securities -risk on the upside is unlmited bc you lose when money stock goes up and gain money if stock goes down

life of an option (1 of 3 things can happen)

1) can expire worthless: optino is at or out of the money so buyer of option lets it expire bc no incentive. - max profit for the seller of the call/put = premium - max loss for the buyer of call/put = premium 2) exercised: buyer/who is long exercises this, 2 styles 1) american style: can be exercised at any time up until expiration (can exercise early). usually the case for equity options (regular stock) 2) european style: options may only be exercised on day of exp (index options/foreign currency options) 3) liquidation: trade your way out of it = closing out = alternative to exercising it, you execute opposite transaction on the same series of options. so if you bought the option, you sell the same one and vice versa

chap 20 example

1) cancel/rebill is used if an execution was for incorrect customer 2) in order for a trade to be placed in an error account __( principal authorization is required) 3) a trade resulting from a system malfunction that can be voided by a regulator is referred to as a___ (clearly erroneous trade) 4) FINRA receies ___ (quarterly) complaint reports from b/d and the b/d must maintain records of complaints for __ (4 years) 5) the ___ (hearing panel) is the first to review/determine what if any action will be taken re a violation of industry rules 6) monetary disputes between firms/customers are settled through ___ (arbitration) 7) a fine in excess of $2500 that's assessed to an RR must be reported within __ (30 days of discovery)

opening a margin account - Reg T 50% rule can be met by the following (part 1)

1) cash equalling 100% of reg T call (50% of the purchase total) 2) full paid marginable securities equalling 2x the Reg T call (or equal to purchase total) --> so if you want 100K stock A on margin come up with 100K of stock B

selecting an underwriter (2 different methods used) competitive vs negotiated sale

1) competitive sale/underwriting: notice of sale advertises the offering to underwriters. this notice is prepared by issuer and contains relevant details about the issue. they are inviting underwriters to submit sealed bids, who wins?? one that will have lowest interest costs over the life of the bond for the issuer 2) negotiated sale: issuer appoints a managing underwriter then mutually agree on the terms of the deal muni advisor = in addition, typically employed to assist in selecting underwriter, etc

ex t/f corp debt

1) convertible bond is at parity when it's market value equals the value of the security into which it's converted (T) 2) ETC is secured by the securities to which it's linked so FALSE (ETC is unsecure obligation of issuer, though strucuted product created by B/D, it is NOT secured by the security it's linked to but is unsecure obligation of the issuer) 3) investor decides whether to exercise a reverse convertible (F).... issuer who gives you shares if it falls below knock in level/finishes below initial level SOO not investor choice) 4) when stock falls below knockk-in level, the reverse convertible may be exercised (T) the knock in level=key level, if it never falls below this you get par value) only way to get shares if it at some point it falls below the knock in level which is 70-80% of the initial value of that stock

ex t/f stock chapter

1) corp can deduct up to 65% of dividends received from stock when owning 20%> of issuer (T) and up to 50% if own less than 20% 2) unlimited amount of ordinary income can be offset with capital losses (F) only 3K 3) g/l on the sale of inherited securities is based on mkt value at time of inheritance (date of death) (T) AND is automatically considered LT 4) repurchase of stock within 30 days of a sale for a loss would disallow the loss (T) --> wash sale rule

4 factors determine muni general obligation ability to pay back - summary

1) demographics (property value, business moving in or out, etc...per capita income) 2) nature of issuers debt: debt trend/past and present, attitude toward debt, are they close to debt ceiling? are they due all at once or level debt service? 3) aspects affecting issuers ability to pay: pension plans outstanding, liabilities, legal issues, current financial situations, tax liabilities 4) muni debt ratios (overlapping and direct)

ex end of chap 18

1) doc allowing b/d to lend customer securities to another customer which is not mandatory when opening account = loan consent agreement 2) ___ (FRB) determines list of marginable securities 3) margin account = restricted when equity is less than 50% of market value but $ not due till maintenance kicks in 4) SMA is created when equity is greater than 50% of market value 5) excess equity is created in short market acct when the short market value declines (bearish) 6) if first transaction in margin acct is 1800 worth of stock, the investor the investor must deposit 1800$ 7) 3x long ETF requires min maintenance of 3 * 25= 75%

ex) end of chapter

1) during periods of inflation, profits will be greater if inventory is valued using (FIFO) and lower using (LIFO) 2) quick asset ratio removes (inventory) from current assets 3) the % of total capitalization represented by debt is found in the (Bond ratio). higher bond ratio = more leveraged the co is 4) working capital will (remain the same) when a cash dividend is paid. it decreases when it is declared. 5) to determine net income, taxes are deducted (after) bond interest 6) in order to find current yield of stock, the (annual dividend) is divided by the (current market price) 7) calculating EPS after accounting for convertible securities results in (fully diluted EPS)

handling errors 1) error account 2) filing to follow instructions (type of error) 3) client errors

1) each b/d has error account, used if the firm or RR executes a trade in error - RR does not decided to place trade in error acct, principal auth is required to place trades in this acct - if execution was for wrong customer, can do cancel/rebill process through the error acct 2) clients may refuse trades if their instructions were not followed (buying more than ordered, failing to execute at client's limit or better), principal is consulted to correct error, trade goes to error account 3) b/d are not responsible for errors caused by client (them placing orders online, etc) they are responsible for their own errors. - if client receives an erroneous trade report, the b/d doesn't need to stand by erroneous report, client must accept the actual price, that is binding

ex t/f

1) electronic communication going to 35 retail investors in 30 days is considered retail communications (T) 2) advertisements re investment co sent to 15 retail investors must be filed within 10 days of use (F) only 15 people = correspondence, the rules for filing are for retail communication= no need to file with FINRA for corresp/inst. comm 3) scripts used in public appearance are considered retail communications (T) 4) electronic comm sent to 40 inst investors doesn't need to be filed with FINRA (T)

summary of splits and dividends and how they change option contracts (what about cash dividends..... strike price is not adjusted)

1) even split: anything to 1, only one which we change the number of contracts, take contract (leading number) and multiple by the split, then take strike price and multiply by the reciprocal 2) odd split: anything not to 1 (and where first number is bigger) you DO NOT change the number of contracts but the number of shares in each contract. so take number of shares represented in the contract and multiply by the fraction then take the strike price and multiply by the reciprocal. 3) reverse split (where second number is bigger): you do the same thing as odd split... you take shares represented in the contract and multiply by the fraction and take the strike price and multiply by the reciprocal... so again number of shares represented by the contract change not number of contracts 4) dividends: increase number of shares by dividend %. STRIKE PRICE IS NOT ADJUSTED FOR CASH DIVIDEND on the ex dividend date)

other types of investment companies (focus is on MF though)

1) face amount cert company (FAC): issue debt cert, effectively buying zero coupon bond = promise face value @ maturity or surrender value if presented prior to maturity (just think get face amount at maturity) 2) unit investment trust: portfolio of securities is created and left alone.... supervised NOT managed = no management fee (cheaper to own bc of this ) the benefits of this: fixed portfolio= no portfolio turnover = less taxable event, you know exactly what you're buying = lots of transparency, ownership referred to as shares of beneficial interest (SBI), think unit = stays as one=stays the same

analyzing revenue bonds...(3 main parts...) (what is feasibility study/what does it look at and what are credit enhancements (letter of credit/bond insurance are ex) and finally what is the legal opinion (what are two things it does, what is qual/unqual and which is better and finally what doesn't it make a ruling on)

1) feasibility study: focuses on economic viability on need for the service. looks at the anticipated demand for the program... revenue/costs for similar programs that already exist, engineering aspects of the proposed project 2) credit enhancements: means credit is credit enhanced by credit of someone other than the issuer... ex) bond insurance , guarantees interest/principal will be paid if issuer defaults so backed by issuer credit.. another example are letters of credit: guarantee from bank guaranteeing int/principal payments or guarantee from govt/state 3) legal opinion: prepared by bond counsel selected by the issuer and provides opinions on 2 things 1) issuers legal, valid/enforceable obligation... issue is legal/enforceable obligation of the issuer 2) tax exempt status of the issuers interest income qualified vs unqualified: -unqualified=better=means no exceptions/stipulations/conditions they have to point out=clearn -qual: subject to conditions/qualifications LEGAL OPINION DOES NOT ADDRESS: - credit quality of the bond.. this is rating agency

know your customer (3 main sections- financial factors, personal characteristics, financial objectives/investment goals)

1) financial factors - includes income (earned, invested, retirement), tax considerations (tax bracket, g/l/estate/gift taxes), financial situation (balance sheet) 2) personal characteristic - age, time horizon, investment experience, risk tolerance, social values 3) financial objectives/investment goals - cash reserve, preservation of capital, liquidity, current income, growth, college funding, retirement funding, tax relief, speculation

underwriting commitments (5 types)

1) firm commitment: 2) best efforts 3) best efforts all or none 4) best efforts mini-maxi 5) stand by

trade reporting overview - the following systems are used to report trade executions all automated but what system is for what (rules are the same just want to separate) 1) trade reporting facility (TRF) 2) OTC reporting facility (ORF) 3) trade reporting and compliance engine (TRACE) 4) real time transaction reporting system (RTRS)

1) for Nasdaq and 3rd party markets 2) for OTC equities (OTCBB and pink marketplae) 3) for corp debt, agency debt, US govt debt= mandatory reporting for secondary market transactions except corp money markets, foreign govt, munis bc MSRB has own system 4) for trades in muni securities NOT muni fund securities like 529 1,2,3 = FINRA 4= muni 1 and 2 have 10 seconds to report/as soon as possible/practical = equities have less time 3 and 4 = have 15 mins, more time in fixed income

disclosure/updates on forms u5 and u6

1) form u5 = filed by b/d if registration is termed, have 30 days to do so - copy of form must be provided to RR (bc includes reason as to why they are terming) - changes to form u5 must be made within 30 days -registration becomes inactive when you leave a firm (need another firm to pick it up), if inactive for more than 2 years = lose registration -FINRA must be notified of all written complaints that are received after the RR leaves the firm - requalification is required if registration is termed for more than 2 years (FINRA maintains jurisdiction for those 2 years) 2) form u6 = reports disciplinary actions against RR and firms and final arbitration awards against RR and firms - how rule violations/disciplinary actions get attached to your record

muni bond types (2)

1) general obligation 2) revenue for corp debt.... we had 1) secure 2) unsecure

general partners vs limited partners

1) general partners: active, run program/make decisions, pick property, hire/fire, day to day manager with unlimited personal liability - must have a least 1% interest in partnership -seen as fiduciary toward limited partner - protect the interest of the limited partners/manage program -last at liquidation, first one are secured lenders then general creditor then LP then GP 2) limited partners: passive, write checks, no management (if they do, they may endanger status at which point they may have unlimited liability) no ability to negotiate contracts or hire/fire, simply contributors of capital. rights=lend $ to partnership (general creditor), inspect books, compete

ex

1) investor who cashes out mutual fund shares too early may be subject to _____ (Redemption fee) 2) _______ (breakpoint sale) = result of selling mutual fund shares, just below the amount that qualifies for reduced sales charge. this is an innapropriate sale bc RR is trying to prevent from getting discount 3) moving assets from one fam to another is referred to as _______(switching) and is a ____ (taxable event). switches within fund family = no additional sales charge but is taxable 4) mutual funds make _____ (captial gains) dist only once per year (referring to LT gains bc St gains are trated as income 5) a ________ (regulated investment co) serves as a pipeline for income dist to be taxed to the shareholder --> the 90% threshhold 6) investment co that can issue pref stock/bonds/common is considered a _____ (closed end fund). open end = common only. capitalization = how fund got $/raises to make subsequent investments

alternative packaged products (hedge funds and fund of hedge funds) (what are gating policies)

1) hedge funds 2) fund of hedge funds 1) not a 40 Act company = not investment company, these are specialized vehicles for wealthy investors through Reg D for accredited investors, idea is they can take on more risk so SEC lightens requirement = no registration=private placement. -they use exotic strategies like options/leverage/derivatives, commodities, short stock, futures=not usually used -invest in developing companies, etc like BDC ****goal/idea = oversized performance and performance not correlated with stock market***** (think hedge against stock market) -make big bets on stock 2) package of hedge funds, not just one since hedge funds make a lot of concentrated bets - $ is allocated to more hedge fund manager = spreading out bets, each be may be risky but with a lot of bets --> diversification -generally for wealthy investors - like hedge funds have gating policies - gating policies = can't take $ out jut because you feel like it, may have once per year gating policy and limits only 25% of investors investment to come out

2 important components to time value (how much time left and how likely/volatile is it? the more likely it is to move = higher the premium)

1) how long till it expires? less time = little likelihood of change ( so smaller premium bc there isn't as much risk ), the longer the time = increase likelihood it may change and you should compensate seller more for this 2) how likely is it to move before expiration? how volatile is the stock?? more volatile = higher premium will be bc it increases the change there will be movement

ex) end of chap 17

1) if executed order tickets must be ___(time) stamped and approved by ___ (principal) on the day of entry 2) in order to execute short sale an ___(easy to borrow list or manually locate) must be checked by the b/d 3) an order that may be activiated but no executed = stop limit order 4) ____ (fill or kill) must be completely executed immediately or cancelled 5) when trading decision made by RR without clients's consent order ticket must be marked ___ (discretionary) 6) if customers limit order improved the MM quote it must be displayed within __ (30 seconds) 7) the ___ (5% policy) = FINRA guideline dictating fair markup and down 8) ___ (20%) decline in SP 500 from previous days close results in market half for remainder of the day

other types of corp bonds - income bond

1) income bond: int payable only if income is sufficient, if not sufficient, can actually miss income payments on these bonds -issued by company in reorganization (bankruptcy and reemerging). promise to repay principal at maturity but interest only payable if income is sufficient

summary of types of non equitiy options

1) index (narrow or broad based, VIX, interbank, forwards) seller pays buyer the in the money amount. european style. 2) currency, seller pays the buyer the in the money amount. european style. quoted in cents per unit, $100 per point, except YEN which is 1/100 of a cent so contract size is 1 mil not 10,000 so evens out. non currency options on US dollar all about your expecation of foreign currency 3)yield = if prices go up = expectation yield will go down and if you expect decrease in yields you are bearish = buy a put of sell a call or if you htink they will go up you are bullish = buy a call or sell a put

non equity options - index options (2 types)

1) index options: give us opportunity to speculate or hedge on movement of the market/index -based on broader basket of stocks -we would want to select index that best mirrors our portfolio 1) broad based indexes: try to reflect the movement of the market = dif industries included/ex is s&p 500, DOW, RUSSELL 2000, wilshire 5000 (broadest), S&P 100, VIX (volatility index). if you want to hedge broad based portfolio, you will use broad based indexes 2) narrow-based indexes: reflects performance of a partciular sector, example = biotech, computer tech, oil. MF managers focused in specific sectors are good examples = better to use narrow based indexes to hedge portfolio focused on one specific sector (better correlation) *** just like equity options, you are either bullish or bearish but on whole market or sector not just one stock ***

t/f varible products

1) insurance premium is lower if policy;s cash value is greater than death benefit (F) premiums are usually fixed, cash value can accrued based on performance 2) death benefit in variable life policy may exceed stated amount (F) usually face value = minimum guarnatee but whole point of variable policy is that assets grow and policy benefit increases 3) cash values are guarnateed in variable life policies (F) no guarantee with separate account policies, risk is with investor 4) if variable life policy is surrenders, the premium (basis, so return of capital) payments are returned 1st, tax free followed by taxable cash value (T), FIFO 5) death benefit of variable life policy is tax free to the beneficiary (T) but may go into estate taxes and thus will be taxable

life insurance terms

1) insured/beneficiary: insured = person's life we are betting on, person whose life the policy is written, beneficiary = recipient if owner dies=person who receives money from the policy 2) premium= amount of $ we send to insurance co to keep policy in place 3) cash value = premium is too large and the extra amount can be invested = policy holder equity in a life insurance contract. cash value grows in many types of contracts life whole life but for term life where it's pure insurance, would not 4) death benefit: amount of $ the beneficiary receives when insured dies, often face amount of policy. if there are loans on the policy, then the death benefit may be smaller, this is tax free benefit to beneficiary 5) riders: extra benefits you can purchase that give you extra protection (ex = accidental death benefit, disability income, etc. if die in accident, may provide greatest payout

inverse/leveraged ETFs

1) inverse: if have a lot of stocks already, you may be worried and buy bear ETF mearning when market goes down this product will go up and vice versa (bought as hedge on existing portfolio)= it would have negative correlation to your long stock portfolio. bull etf = track market, bear etf=inverse. so if index goes down by 2%, the etf will go up by 2%, similar to shot selling without unlimited risk 2) leveraged: get multipler of mkt index, this comes in inverse forms as well, can have double long or double bear = works in opposite direction 2x of mkt. ****Much more aggressive, designed for ST trading, if you have strong belief market will go up or down in coming days --> you can get a lot of money or lost a lot - portfolio reset daily and as a result are designed for ST trading, they take advantage of intra day savings in the index**

t/f

1) investment analysis tool used only by inst clients is NOT required to be provided to FINRA (T) 2) SEC requires a client's net worth to be verified before reccomending certain investments (F) they suggest/reccommend only 3) Suitability is not based on G/L (T) 4) suitable recommendations may be considered excessive (T)

adjustment to balance sheet (how certain transactions impact balance sheet) looks at transaction, effect on working capital, impact on balance sheet

1) issue stock: -we assume cash goes into cash/cash equivalent like marketable securities (so increase in working capital because we increased current assets but no change to current liabilities) -increase current assets -increase shareholder equity bc increase stock 2) issue bonds: -we assume cash goes to cash/marketable securities (so increase in working capital because we increased current assets but no change to current liabilities) - increase current assets bc no change in current liabilities - increase LT liabilities 3) buy equipment for cash = no money borrowed -decrease in working capital bc decrease to current assets with no change to current liabilities - decrease current assets bc you use cash - increase in fixed assets bc equipment bought 4) declare cash dividend (saying I will pay you x amount at some point in the future) - decrease in working capital bc increase in current liabilities with no change to current assets - increase current liabilities (dividends payable) - decrease shareholder equity bc it comes from retained earnings 5) pay cash dividend (decrease in cash so decrease in current assets) - no change to working capital -decrease current assets bc use cash - decrease current liabilities bc decrease dividends payable you just set up

muni bonds - general obligation (have the highest credit rating)

1) issued by state, city , town, school dist, for wide array of muni needs for general purposes... backed by full faith and credit and taxing power of the muni ONLY - at a state level = sales tax, income taxes - at a local level = collect taxes from property or ad valorem tax (based on value such as assessed property value multiplied by some millage rate = tax bill or by parking/licensing fees)

primary market players (4)

1) issuer: needs capital, hires underwriter, investors invest, and most of their $ goes to issuer. 2) underwriting manager (investment banker) - usually one lead company on this: facilitates distribution, assumes liability that varies with offering type, -signs underwriting agreement with issuer 3) syndicate members: usually one b/d doesn't want to underwrite alone... so this is a group of b/d that do underwriting, this helps to increase the selling base and disburse risk -signs syndicate agreement with manager AKA agreement among underwriters 4) selling group: b/d who assist in selling but doesn't share in liability of deal (signs selling agreement with manager) -signs selling agreement with manager

secured bonds... what are they backed by (3) ? (mortgage bonds, equipment trust certificates, and collateral trust bonds

1) mortgage bonds: lein on some property, if corp defaults it was secure against building it pledges soo..... 1st backed by first or second mortgage on the property and then second the lein on property as additional security for the loan so the collateral = real estate (buildings, land) 2) equipment trust certificates: AKA rolling stock because typically backed by moving equipment like planes, trains, trucks. Secured by piece of equipment that's owned by co and used in its business. if default, trustee who protects the bondholders has title to that equipment (until bonds are paid off) and can release/resell. typically issued by a transportation company. 3) collateral trust bonds: (secured by 3rd party securities owned by issuer). backed by securities of another company.. if default, securities held in other entity are collateral... usually parent co, etc. securities are placed in escrow as collateral for bonds

tax considerations of muni bonds (1 - interest income and 2) discounts/premiums) the following are all part of interest income considerations... until I specify part 2 which is discount and premiums

1) muni bond interest: interest received is exempt from federal taxes and can be exempt from state/local f bought in the state you live. if live in NY and buy NY muni = exempt on all levels interest paid on bonds issued by US territories is already triple tax free. - bank qualified bonds = issued by qualified small issuers (issue no more than $10 mil per year), allow banks to deduct 80% of interest costs they are paying to depositors on the funds that are used to purchase these bonds who benefits the most? investors in high tax brackets bc of tax exemptions. however munis are generally unsuitable for investors who are in lower tax brackets r as an investment in retirement accounts bc you take lower yield and don't have as high of a benefit on taxes... regardless of tax brackets bc they grow tax deferred and when taken out is taxed as ordinary income you are getting lower yield but not benefiting fully from taxes * the higher the tax bracket, the more suitable they become *

Auction markets (1= nasdaq, 2=non exchange issues (OTC), 3=ECN, 4= dark pools)

1) nasdaq: electronic exchange, negotiated market, unlimited number of market makers not just one DMM, securities exchange 2) non exchange issues (OTC): often low priced/thinly traded. 2 systems offer real time quotes (not execution system!! you have to call up these systems to buy/sell). one is OTCBB, must be reporting co. and 2, OTC pink markets=may be non reporting co. again, these are not exchanges=no listed requirements like NYSE or nasdaq which have a lot of rules, can have any number of market makers and someone can be an MM one day and not the next. 3) ECN = electronic communication networks: created b/c exchanges were slow to innovate. DO NOT commit capital, always act as agent, operated by b/d or registered as exchange matches buy/sell, low cost. b/ds subscribes to ECN and use it to buy/sell to clients. when order is received, system is instantaneously scanned to determine if there is a matching order... if so, then the order is executed, if not, it is displayed. **anonymous and open to everyone 4) dark pools: provides liquidity for inst investors and high frequency traders. quotes aren't disseminated to the public and thus limits impact to the market. anonymous, can buy/sell in large quantities

registration process for sec 33 act (3 big periods...)

1) pre registration period: prior to filing registration statement with SEC, once filed begins cooling off period, once we go effective = post registration period. document preparation and underwriters do due diligence, registration statement is completed. RR and b/d cannot talk to public about these yet 2) cooling off period: -after the registration statement is filed with the SEC this period beings. -RR and B/d can reach out to investors to get indications of interest, no firm orders or money can be accepted. -to get indications of interest, you send the prelimiary prospectus (red herring), final offering price and effective date are missing. -blue sky the issue =state security laws = register security with the state - final due diligence meeting: issuer, underwriter, accountant, lawyers all meet and see if any material changes that would make us need to amend the material 3) post reisgration period: SEC provides effective date = now can sell/confirm orders/collect money. you get a copy of the final prospectus (must contain no approval clause)

client financial objectives (5, from above)

1) preservation of capital 2) current income 3) growth/capital appreciation 4) speculation 5) tax relief

types of preferred stock (7)

1) non-cumulative: dividend if not paid doesn't accumulate = no need to pay back up dividends 2) cumulative: investor is entitled to unpaid dividends (in arrears) before any common stock holders can get any 3) callable: issuer can redeem/call back after certain period of time (call protection... certain period of time that they can't). usually if i-rates are decreasing they will exercise so they can reissue at lower price. these are repurchased by issuer at premium over par value for inconvenience to investor 4) convertible: investor can make $ 2 ways (quarterly dividends and if value of common stock rises=capital gain)= best for those who want $ annually but also want that upside potential. take par value ($100) and divide by the conversion price to give you the number of common shares 5) participating: can participate in extra dividends based on company profits 6) adjustable/variable rate: idea is that dividend is adjusted based on short term benchmark rate, most of the time dividend is fixed. dividends vary based on benchmark (treasury bill, etc.). suitable for investor who thinks i-rates will go up not for people who think the opposite, if i-rates increase with the adjustments every pay period = dividends rise. 7) series K shares: (derivative/structured product, created by financial services co, who creates depository shares who deposit with bank and shareholders who buy them have interest in stock, like a %). originated when investors wanted higher return but not increased risk for fixed income products when i-rate environment is decreasing - fixed rate for x amount of time that changes to floating rate and usually callable at date it switches/conversion happens, usually are non-cumulative, no voting rights, no rights offering - can change increase with i-rates/also issuer can call, if i-rates go down (issuer may not want to call if decline by too much)

muni docs/info

1) official statement: used by muni issuers as disclosure doc, doesn't have to prepare this but hard to sell without one bc investor want info. if one is created it has to be provided to investors by b/d 2) legal opinion: prepared by attorneys hired by issuer who give opinion on two things 1) the tax exempt nature of these. exempt at federal level and if you are a resident is exempt at state and local level 2) they determine it's a legitimate obligation of the issuer **** DO NOT GIVE opinion on the credit worthiness of the issuer, that is the job of credit rating agencies*** new issue confirmations: provided to buyers along with final official statement by no later than settlement date committee on uniform securities identification procedures: CUSIP: underwriters are expected to apply for CUSIP numbers that are used to identify unique securities (based on issuer, coupon, maturity) EMMA: electronic muni market access: MSRB website used by issuer/underwriter to submit docs/provide electronic to public - electronic access = public info to info about muni market including trade acttivity and market stats -docs = presale docs, official statements, continuing disclosures - plan info like 529 plans

physical or electronic ownership 1) bearer 2) registred as to principal only 3) fully registered 4) book entry

1) only with bonds, held in certificate form, doesn't have your name on it but has name issuer and has coupons and every 6 months you clip your coupon and present it to bank who sends it to paying agent (hired by issuer) and you get paid (int coupons are physically attached) 2) in certificate form, with name of owner evidenced (int. coupons physically attached) - coupons don't have your name but the bond was registered in your name 3) (today how it would go): in certificate form with name of owner evidenced on it and int payments are automatically mailed or paid electronically credited to bank acct depending on how issuer/paying agent agreed to it - couldn't transfer ownership until you endorse certificate 4) position held electronically at a depository, cert. isn't held by customer, name is recorded by b/d and you own securities but issuer has b/d (so held in st name) b/d has you as owner and has those records issuer pays DTC who allocates some $ to b/d who then allocate to clients based on their books/records

stock and option positions together (what are two reasons why people do this? 1) used to protect in volitile market ... what do you want to buy if you own the stock, what about if you don't own the stock?? and 2) will generate income

1) options are used to protect in a volatile market: -- long stock and long put ... so if stock goes down, the value gained on the put can offset the loss on the stock. ... you fear the stock will go down, buy put so you locked in price that you can sell at - short stock and long call: if you don't own the stock, you want to buy the right to buy it at a locked in price. you fear the stock may go up = buy call = right to buy at fixed price 2) generate income in stable market: (idea is if market stays stable, options will expire, you get to keep premium = enhances return, however for the covered put upside risk is unlimited - long stock and short call (effectively selling a covered call), you own the stock and are selling the right for someone to buy it from you at set price - short stock and short put (sell covered put) even though put is considered covered, it doesn't protect short stock positions well, if stock goes up all that happens is put expires and you keep premium but because still short the stock = unlimited upside risk ** to best hedge = buy call when you are short stock**

trading process (5 parts) order entry, execution, clearing, settlement, custody

1) order entry - order ticket includes b/s, price, etc, happens when RR places an order 2) execution- buying/selling of trade in a market center 3) clearing - executing firms agree on details of trade if same info doesn't match = DK = dont know notice sent 4) settlement - day in which customers name is placed or removed from issuers books. buying = name added and vice versa 5) custody - safeguarding of clients/firm assets, how are they held, st name??

other types of CMOs

1) planned amortization and target amortization class: AKA pack bond provides most predictable cash flow and maturity. designed for more risk averse investor trying to avoid prepayment risk, provides protection from prepayment risk but not from slower prepayments called extension risk. issuer will stick to payment schedule so long as prepayments fall in a range/bond so what do they do with prepayments since they won't get prepayment?? (SEE BELOW) 2) companion or support tranche: absorbs the prepayments so if the prepayments are fast, these bondholders are paid very fast, if slow they will wait to get principal = least predictable cash flow/maturity.... -if fast, pack bondholders don't take them, thrown @ companion bondholders - if slow, the pack bondholders have priority and support/companion have to wait for principal this reflects excess or shortfalls in payments to PAC (planned amortizaton) and TAC (target amortization) 3) z- tranche: last tranch to receive payments = end of structure, at beginning works like zero coupon in that no payments are received until numerous things happen first.

3 types of spreads

1) price/dollar/vertical spread 2) time/calendar/horizontal 3) diagonal spread

what do LPs invest in?? (3) REITs invest in real estate (bond/mortgage, equity, hybrid)

1) real estate 2) oil/gas 3) equipment leasing programs 4) public equity/debt programs 1) real estate: 1) raw land (this is the riskiest): speculation on land appreciation, no income from property, few tax benefits no positive cash flow or depreciation. you simply buy land and hope it goes up in value... this may go on for decades, etc. 2) new construction: - buy property, put up building then sell it (shorter term than above), risk of overbuilding/cost overruns 3) existing: buy existing property, has operational history (rent, maintenance, costs, etc). may have problematic tenant issues (long term leases) 4) low income (government assist) = safest: benefit potential tax credits, little change of appreciate, high maintenance costs, government back stop. may get tax credits = $for $ decrease in tax bill. 2) oil/gas 1) exploratory (highest risk): where you look for oil where none has been found before = wild catting= high risk/high potential reward 2) developmental (safer than balanced) : drill near existing field/known reserve= near proven reserves 3) balanced (safer than exploratory)= combo of exploratory/developmental 4) income (lowest risk of the 4, bond like situation just want income)= purchase existing wells, create immediate cash flow, we know what we're buying even tho prices change 3) equipment leasing programs: -used to lease equipment like computers, airplanes, other machines, equipment purchased from manufacturers then leased to users + = investors help fund these purchases and they receive income as well as depreciation tax benefits (seen as if you've lost that $... no cash expense=wear/tear of equipment = use 10% of it in a year...) - = bc its a wasting asset = no appreciation of underlying assets 4) public equity/debt programs: -DPPs may invest in public equity or debt of existing issuers 1) such as small capitalization debt: many of these bonds are illiquid but higher yield/return because the issues are often times unrated so may be in areas where fewre buyers so to entice buyers must have higher yield 2) small cap equity: publically traded but may be illiquid, these programs are often concentraed in a specific industry in which general partner has exepertise

sum what LPs invest in 4)

1) real estate: raw land, new construction, existing, governmental/low income 2) oil/gas: wild catting/exploratory, the developmental (near reserves), then balanced, then income/existing 3) euipment leasing programs 4) bond/stocks of existing issuers, small capitalization bonds= have high yield bc illiquid and unrated/not a lot of buyers, and then small cap stock = usually in expertise of GP

summary of rules

1) rule 144 = restricted and control stock, must open 90 day window with SEC, acn sell the greater of 1% of outstanding shares or average weekly trading volyme for past 4 weeks) you do not need to file form 144 if it is less than 5000 shares or less than 50K$ 2) 144A = equity and debt, can sell without volume restirctinos from rule 144 if going to QIBs... unless the same class is on listed exchange then you cannot 3) rule 147 and 147A are the same and they look at how offerings intrastate and not subject to fed filing but may need to register in the state. cannot resell to non residends within 6 months, can immediately sell to residends. must have primary place of business as well as one of the following 80% of assets, revenue, proceeds in the state or majority of employees from the state. must be offering to ONLY residends 4) 145 = looks at reclassification of securities as offering that must be filed (M&A, etc) what is exempt = changes in par value, stock split and reverse stock split 5) regulation s = looks at offshore securities

basis - special cases (3: securities converted to stock, inherited securities, gifted sercurities)

1) securities converted to stock: no taxable event because didn't sell/received proceeds. cost basis = what you paid for convertible divided by the conversion ratio = basis per share 2) inherited securities: beneficiaries would take market value at date of death, holding period is always LT regardless of how long the decedent held them. beneficiary takes LT tax rate when they go to sell, estate taxes based on that market value 3) gifted securities: recipients basis= lower of donors cost or market value (lower basis = higher gains when you sell = good for IRS)

debt with foreign characteristics (4)

1) soverign debt: debt issued by foreign national government, the credit rating is based on the country, country's ability to repay is reflected in debts yield 2) euro dollar bond = int/principal paid in US but issued outside US. issued by foreign govt, corps, international agencies like the world bank. have seasoning period = can't trade in US until after this period, usually 40 days before can come to US and trade in secondary market) 3) yankee = foreign entity issues bonds in US market... in US dollars/borrows US dollars in US marketplace. If registered with SEC and primarly sold in US can be immediately sold in secondary market 4) eurobond = issued in one country with currency denominatino of another (currency, country, and market

3 purposes of options

1) speculation 2) hedging 3) generate income

types or prospectuses

1) statutory prospectus: the official one, all required disclosure. part of registration statement. condensed form of the registration statement providing details on the offering 2) preliminary prospectus: used during the cooling off period to determine indications of interest, this is red herring = has red letters across it that indicate it is preliminary. it omits the offering price and effective date, any underwriter/dealer discounts, and proceeds to issuer. could include expected price range, although that may change too once the final offering is set 3) summary prospectus: short form prospectus, used for mutual fund offerings. investor must be informed of full statutory prospectus 4) free writing prospectus: any written/graphic communication that helps sell the deal that doesn't meet qualifications of statutory prospectus -includes legend recommending that investor read the statutory prospectus ex= emails, press release, marketing materials, term sheets -generally must be filed with SEC too

common stock voting methods (2) statutory vs cumulative

1) statutory: benefit larger shareholders, where you get 1 vote per share owned per issue 2) cumulative: benefits small shareholders, allows shareholders to multiply the number of shares owned by the number of voting issues ex) 4 candidates running for 3 seats, how does this work if you own 300 shares statutory: candidate A gets 300 votes, candidate B gets 300 shares, candidate C gets 300 shares (candidate D could have gotten 300 if they chose not to give it to one of the above, but the idea is that you can only disburse the 300 to one candidate at a time) so you take 300 shares owned --> 300 votes (1 vote per share) per issue (in this case there are 3 seats (3 issues) available so you get 900 total votes) cumulative: you get to multiply shares owned by number of voting issues so 300*3=900 votes, same as statutory but you can allocate however you choose among the candidate, so you could do 800 to A, 50 to B and 50 to D

basis from stock split and dividends

1) stock splits and dividends = no immediate g/l until investor sells after these events split=not taxable bc didn't sell but basis adjusted, $/value doesn't change but value per share changes ex) owns 100 shares xyz at 180 per share, xyz co. executes 3:2 split so now you do 100 * 3/2= 150 shares and then do price times reciprocal which is 180*2/3=120$ per share total value before and after is still 18,000$ 2) dividend: same thing, you receive additional shares, say you owned 100 shares and there was 8% dividend --> now own 108 shares which you divide by total value to get cost per share

payout options (4)

1) straight life annuity: simplest bet, annuitant receives payments for life, highest payout with highest risk, if you die NO $ goes to benef bc not your $ once annuitized 2) life annuity with period certain: x # of years are guaranteed, payments are made to annuitant for life or to beneficiary if annuitant dies for specified number of years -the longer you want the guarantee=lower payment per month. - if you select 10 year guarantee, and you die after 7, someone is paid for 3 years. if you have 10 yr guarantee but are alive after 10 you still get $ --> still life annuity, this is just about minimum guarantee in event you die prematurely 3) joint/last survivor annuity: payments are made for life so long as annuitant is living = takes double death to cease payments. older combo of ages = increase payout bc they look at combo of ages/life expectancies to decide. smaller than payments in straight life bc less risk 4) unit refund life annuity: at least give me original contributions back, at death any remaining portion is paid to beneficiary. payout options are irrevocable

four key concepts for basic options (strategy, breakeven, max gain, max loss)

1) strategy: for option buyers: call: bullish put: bearish for option writers/sellers: call: bearish put: bullish 2) breakeven: where market is trading so investor breaks even (think call up, put down...) this is the case for sellers and buyers calls: strike price + premium (since you paid premium, you need it to go up to breakeven) puts: strike price - premium (since received premium you can deal with it going down) 3) max gain: - premium is max gain for sellers and max loss for buyers - buyers of calls, the max gain is unlimited since stock can rise unlimited amount - for buyers of puts, max gain is realized if stock falls to zero so it is (strike price - premium *100). it cannot fall below this, if it falls to this, you buy it for nothing and can put it to someone at the strike price so you would effectively be up the whole strike price - the premium * 100 shares per contract 4) max loss: - buyers max loss is premium - for sellers of calls, max loss is unlimited (if uncovered), as the stock price can keep increasing - for sellers of puts, max loss is realized if stock falls to zero (strike price - premium *100) because you have to buy it at a full strike price = you are down the full strike price - the premium you received multiplied by 100 shares in contract

3 main types of US treasuries of marketable treasury securities, they can all be traded in the secondary market

1) t bill: no periodic interest, issued at discount and matures at face value, zero coupon bond 2) t notes: int bearing, paid semi annually 3) t bonds: int bearing, paid semi annually 2 and 3 are interest bearing securities, that pay semi annual interest. the coupon is stated as annual %=attributes of traditional fixed income investments and then investor receives face value at maturity 1) t bill: maturity is up to 1 year, denominations in $100 multiples (so min of $100 and multiples of), book entry form, interest: issued at discount but matures at face value the dif is your interest. they are sold in weekly auction, quoted on a discounted yield basis soo the higher number actually represents a lower price 2) t-notes: 2-10 year maturity, denominations in $100 multiples (so min of $100 and multiples of), book entry form, interest: stated annually, but paid semi annually, sold at periodic auctions announced by the govt. trade in 1/32 of a point and is quoted as a % of par 3) t bonds: maturity of 10 years or more, denominations in $100 multiples (so min of $100 and multiples of), book entry form, interest: stated annually, but paid semi annually, sold at periodic auctions announced by the govt. trade in 1/32 of a point and are quoted as a % of par ** for US treasuries, accrued interest, we assume 365 days in the year and actual number of days in each month **

taxation of retirement plans (tax status of contributions and tax status of distributions)

1) tax status of contributions: pre tax have zero cost basis (taxable at withdrawal) this is qualified. After tax have cost basis (tax free at withdrawal) anything above this is taxed, this is non qualified. so earnings grow tax deferred --> are never considered G/L 2) tax status of dist - any portion representing pre-tax is taxable as ordinary income - any portion post tax is a return of capital/not taxed - earnings=taxed as ordinary income - subject to RMDs

types of govt agencies (2) for the mortgage ones... talk about prepayment risk, also who is suitable for these investments and why people accept the prepayment risk??? bc higher yield than other treasuries

1) those involved with farming loans 2) involved in mortgage backed securities 1) federal farm credit bank (FFCB): provide ag loans to farmers to help seasonality issues. interest on this debt is subject to fed tax but exempt from state/local. issue bonds to raise $ to provide financially to farmers 2) mortgaged bonds: - GNMA - govt national mortgage agency = ginnnie mae (g = govt guarnateed, the other two are not) - FNMA - fed natl mortgage agency = fannie mae - FHLMC - fed natl loan mortgage corp = freddie mac those are all agencies that issue the mortgaged backed securities most common type of mortgaged backed securities = pass through certificate AKA mortgaged backed pass through certs... govt agency or bank must get guranteed by govt agency. they pool mortgages together (buy a lot of mortgages or bank makes them) then they pool together then then sell an interest (not THE interest) in that mortgage pool and then investors own undivided interest in this pool and the homeowners pay int/principal to bank servicing the loan. that servicing bank keeps a fee for this and the reaminder goes into the pool.... if you bought into the pool, you will receive monthly payments form that pass through, each of these payments represents interest and principal. SOOO basically the idea is that the payments that the homeowners make are pass through to investors. interest portion is fully taxed = fed, state, local added risk = prepayment risk = risk that you may get principal paid back t you quicker than expected bc homeowner can prepay mortgages, etc. this usually happens during times of i-rate declines... so you get $ back quicker and likely have to reinvest at lower rates because int rate environment went down. why would someone prepay? 1) bc they move... you sell house/pay off that mortgage 2) int rates decline = can take advantage of refinancing provide good credit quality and higher yield than treasuries = why people deal with prepayment risk because of yield pick up - often used to supplement retirement income (montlhy payments...)

methods of offering REITs

1) tier 1, traditional way: go through full blown 33 registration requirements, register with SEC, prospectus exchange list it, publicly trade throughout the day = highly liquid. most transparent disclosure wise 2) tier 2, some reits are registered = SEC process is completed, but not exchange listed, for investors this means this product lacks liquidity 3) tier 3, least transparent/illiquid. perhaps only with accredited investors since unregistered and illiquid

investment analysis tools (the tools, and 2) what are the firm requirements in terms of disclosures and then when does FINRA need to have access and when not)

1) tools: simulates outcomes and their statistical liklihood or different investments (hypothetical outcomes) or strategies 2) firm requirements: in order to provide tool to investors, must first explain disclosures that they are projected in firms investment tool and - criteria, methodology, tools limitations - results may change overtime/from use to use -describe how investment are selected and whether certain investments may provide better results ** FINRA has to have access to tool if being offerred to retail investors, if only offerred to inst clients then FINRA does not need to have access

1) types of theories

1) trend lines: straight line show direction/speed of price movement 2) saucer/inverted saucer: chart formations showing that an upward trend has come to an end (saucer) or a downward trend has come to an end (inverted saucer) 3) moving avgs: provide current direction of prices, over period of time removing random fluctuations (ex 50 day, 200 day, etc) 4) overbought/oversold: overbought = buying has pushed the price too high and a pullback is expected. oversold = selling has pushed price too low and a bounce is expected (can happen with big events like litigation) 5) resistance/support levels: consolidation = stock price seems to move back and forth between 2 numbers, a pattern - resistance: point at which stock stops increasing - support = point at which stock stops decreasing -breakpoint= breakout of resistance or support, in order to profit on a breakout, one could 1) enter sell stop orders below a support level or buy puts 2) enter buy stop orders above a resistance level (or buy calls) ** we only want to sell or short it if market falls below support and reserve is true of resistance, bc we think the breakout will occur and stock will increase or decrease** 6) head/shoulder patterns - you don't know you have this until you reach the top - a full head/shoulders = reversal of an upward trend and is considered bearish bc we think stock hit max point (the right shoulder didn't go above the head so we htink the mkt will fall from there) - head and shoulders bottom = reversal of a downward trend --> bullish indicator -the entire head and shoulders = bearish (reversal of upward trend) - entire inverted head and shoulders = bullish, reversal of downward trend

investment companies

1) unit investment trust 2) face amount cert companies 3) management co (of which MF lie, open and closed funded)

benefits of limited partnership (ex of DPP) 1) pass through of income/losses = skip layer of taxation, 2) limited liability = can only lose what you put in/any loans assumed and 3) diverisification away from stock market

1) unlike c corp, whcih pays own taxes when distributes divident that will be taxed again, we have flow through here instead...... so passive income/losses flow directly to limited partners taxes. allows them to skip on layer of taxation (reported on k1). a portion is taxed as ordinary income (20% deductible) in sum= pass through of income/losses to investors 2) limited liability: can only lose $ you put in or any loans assumed 3) diversification away from stock market etc.

additional margin docs 1) loan consent agreement 2) margin disclosure doc

1) used for short sales -client trading on margin agrees that b/d can lend those securities out to other short sellers *** not mandatory for opening the account 2) this must be provided to all customers opening a margin account and indicates the following - client can lose $ if deposited - firm can force the sale of securities or assets in the account - firm can sell securities from the account without notifying the customer - customer has no control over which assets are sold to meet margin call - the in house maintenance requirement can be changed without prior written notification to client (can be stricter than SRO requirement) -client is not entitled to an extension for a maintenance call - they can come after you for more money than is sitting in your acct, you are responsible for the full debit bc you borrowed money = liability beyond account balance

fallbacks of limited partnerships

1) very illiquid: typically not publically traded, hard to get out once owned, general partner approval is required to sell 2) lack of control: general partner makes a lot of the major decisions, limited partners have limited voting power and no management authority 3) effects of tax law changes: these products complicate tax filing and if tax law changes, original benefits may no longer apply 4) calls to contribute additional funds: partnership may want additional capital, failure to do so can lead to loss of original ownership in partnership

fundamental tools (measuring financial stability) --> liquidity ratios

1) working capital = current assets - current liabilities (so not all assets/liabilities are included, just current ones) 2) current ratio = current assets/current liabilities 3) quick asset ratio = (current assets-inventory)/current liabilities

additional tax considerations

1) zero coupon muni: difference between discount bought at and par = interest income. you accrete to par value at maturity 2) capital appreciation bonds: issued at deep discount, return on initial principal value is reinvested at a compound rate until maturity. and at maturity investor gets single payment representing initial amount and investment return (like zero coupon bonds) but discount isn't accreted so all is pushed off til maturity (all the growth happens then) 3) private activity bonds: ex= industrial development bonds... interest is often subject to alternative minimum tax = add back tax preference items (may lose deductions, etc. you had under regular way). you should calculate both ways and pay whatever is higher. interest income is often tax exempt but is typically taxable for investor subject to AMT. if you calculated taxes the regular way, and you are subject to AMT you may lose the tax exemption * only pay AMT if its higher than regular tax * yields are higher than non AMT bonds bc of this disadvantage may not be suitable for investor subject to AMT

order duration qualifier (used to determine when/if an order is executed) day order and good till cancel

2 popular ones are 1) day order: unless otherwise told, we assume all orders are day orders and cancelled at days end if not executed 2) good till cancel = gtc/open order = stays on book until it expires, is executed or is cancelled by the investor - can be one week, one month, or specified period - can be adjusted for distribution on the security or partial execution (stock split, etc) * orders may specify exposure to only normal trading hours - 9:30 to 4 pm or request pre market and or post market (though we assume normal trading hours) but must be specified and will receive disclosures

conversion ratio = # of shares investor would have received at conversion

= par value of bond (1000) divided by the conversion price (this will give you the number of shares you can convert into) ex) 6% debenture, mkt price 1100, convertible @ 20 sooo we take 1000/20=50=conversion ratio=50 shares

bidding ex

100,000,000 bond offering at 4.5% coupon, bids received are as follows: 1) 20 mil non comp (will be filled first, but set aside while prices are determined) 2) 40 mil at 4.9 3) 40 mil at 5 4) 30 mil at 5.1 so we automatically fill the first 20, so down to 80,000,000, the next we fill is people willing to pay highest price/lowest yield so 4.9, then 40 mil at 5 which completes the auction... sooo 20 mil non comp are filled then 40 at 4.9 then 40 at 5 and the 30 at 5.1 aren't filled.. (so although bidders agree to pay highest yield that complete the auction, they are filled lowest yield to highest) everyone gets the same yield, the highest yield that completes the auction is what all bidders are awarded at = the clearing rate. the highest bid was 5%, so all bidders get 5% and the auction clears at 5%

concerns with 1035 exchanges

1035 exchange = tax avoidance tool used when not happy with current annuity where you swap one contract for another without taking control of the $, this is tax free (like a rollover) -concern = FINRA did a study/found these exchanges didn't provide any economic benefit, only beneifit was extra sales charge to RR - if 1035 exchange was suggested too early, may have to pay surrender fees as well -FINRA says must inform invsetor of surrender fees and all downsides (salespersons may get increase sales charge as a result for ex) sooo... - customer must benefit from new annuity - RR signed off on the application and was approved by agents

adjustment of terms/components of an option (how may these contracts change??? ex is stock split/divend this card is for even splits (1/2)

2 types of stock splits ** in either case, the aggregate contract value will stay the same after the adjustment = good way to check math ** 1) even= anything to 1 (2:1, 3:1, etc etc). if this occurs, it is the one time you increase the number of contracts you are long/short (but number of shares per contract stay the same). for odd split/dividends we see that number of contracts that you are long/short stays the same but the number of shares represented by the contract will be adjusted even ex) 1 ABC feb 60 call (60*100=6000 aggregate value), 2:1 stock split (even) first take number of contracts you were long or short and multiply by the split soo 1 * 2/1 = 2 contracts but number of shares per contract remains at 100 so now 2 contracts representing 100 shares (total of 200 shares) to get new strike price you take the original strike price and multiply by the reciprocal of the 2:1, so it is 60 *1/2 = 30 so what is the new call option contract.... 2 ABC feb 30 call (30 *200 = 6000)

underwriting - best efforts

2) best efforts: syndicate does its best but unsold shares are retained by issuer. they do not commit their own capital. syndicate acts as agent=not taking on financial commitment (think like with real estate agent, if can't sell house at the end of the day it is still your house)

ex) syndicate liability for unsold bonds

3 member syndicate involved in firm commitment underwriting of 100$ mil bond offering - 50% manager - member A 30% - member B 20% what they actually sell... manager sales 50 Mil A sales 30 mil B sales 5 Mil = total of 85 mil shares = 15 mil left unsold if undivided.... (go back to original %) - 7.5 mil = responsbility of manager - 4.5 mil = responsiblity of member A - 3 mil = " " of member B if divided... 0 to manager 0 to member A 15 mil to member B

pattern day trading

4 or more day trades over 5 day period ** 1 requirement = the account has min equity of 25K** typically allow more leverage in the account like 4 to 1 buying power etc

S&P 500 is made of...

400 industrial 20 transportation 40 utility 40 financial

ex..

4th market = transaction between inst quote guaranteed for specific price/size = firm quote cost of executing principal transaction = mark up or down

series k share - type of preferred stock

7) series K shares: (derivative/structured product, created by financial services co, who creates depository shares who deposit with bank and shareholders who buy them have interest in stock, like a %). originated when investors wanted higher return but not increased risk for fixed income products when i-rate environment is decreasing - fixed rate for x amount of time that changes to floating rate and usually callable at date it switches/conversion happens, usually are non-cumulative, no voting rights, no rights offering - can change increase with i-rates/also issuer can call, if i-rates go down

typical option length

9 months although you can get LEAP which is long term option and can go as long as 39 months

reporting on brokercheck

= history/disciplinary history - some of the u5/u6 is available to the public via brokercheck(not everything) - contains background info and disciplinary history - allows investors to do research before using b/d/R/r info includes: - RRs current employing firm, the lsat 10 years of employment history, and all approved registrations - any felonies, certain misdemeanors, and civil proceedings, and investment related violations - pending customer initiated arbitrations and civil proceedings involving investment - related activities - written customer complaints filed within last 24 months alleging sales practice violations of $5k or more - terminations of employment after allegations involving violations of rules, fraud, theft, failure to supervise

no load fund (what are 3 requirements... what does it say about 12b-1 fees??) (can have redemption fees/other fees that are not considered sales charges)

= no sale charge, there are 3 requirements 1) no sale charge, no front end 2) no deferred sale charge 3) could charge limited 12b-1 fee, can't exceed 25 basis points = .25% of funds average net assets per year. NAV and POP are equal since no sales charge CAN have other fees not considered sale charge, redemption fee (to prevent people from getting out early) since they don't like people trading in and out, so it is time based

spread (what is a class and what is a series), what is a debit and what is a credit spread, what is the strategy? (bearish or bullish, NOT volatility/stability like straddles/combos)

= options of same class but dif series -position that combines multiple option strategies - limited loss and gains - always 1 buy and 1 sell, need letters b and s to spell bedspread.... ***created with the sale/purchase of two options of the same class but different series - can be either bullish or bearish unlike straddles/combos where we want volatility or stability -either debit or credit spread 1) debit = paid net amount 2) credit = received the net amount class = options of the same type (calls or puts) on the same underlying security. examples = both calls or both puts, so all APPL calls or all APPL puts series = options of the same class, same exp, and same strike price. examples = all APPLE jul 140 calls = a series. a series names the SPECIFIC option

convenants (revenue bonds have these) what is the most important one --> flow of funds... establishes payout series... there are two types (net revenue and gross revenue pledge bonds)

= pledges issuer makes to bondholders if we take your money we promise this in return....... 1) rate covenant: pledge to maintain user fees at a level sufficient to meet debt service/other obligations 2) maintence/operation= pledge to maintain project in good working order/contribute to a fund for that purpose 3) insurance: pledge to carry insurance on the property --> the property is insured if it was to be damanged.. this is dif than muni insurance 4) catastrophe call: provides issuer with ability to retire a bond due to destruction of the revenue source backing the bond 5) additional bonds: pledge not to issue more debt unless certain tests are met 6) non discrimination: won't grant special rates to any one person or group 7) flow of funds: most important=establishes priority for payment of debt service.... that they use $ they collect - net revenue pledge bond (assume this kind if not noted)... saying bondholder payout doesn't come first, net does not gross. pledges gross revenue minus operational/maintenance cost THEN debt service is paid.... so 1st priority = first pay maintenance/operational costs --> that leaves us with net ---> then pay debt service - gross revenue pledge bond: pledges gross revenue to bondholders to pay interest/principal... 1st thing paid on these bonds is debt service then maintenance/operating costs

accum phase

= savings phase or AKA pay in period or deposit phse buying accum units meaning in most contracts (non qual=not through work) with after tax dollars - no immediate/up front benefit to buy into annuity (bc no deduction, after tax dollars) but also no limit on how much we put in at a given time and growth is tax deferred, earnings are taxable as income -similar to MF pricing = end of day pricing, AUV = accumulation unit value so if you're fundin gyour annuity periodically you are likely paying dif prices to do so

interest rate

=coupon rate=nominal yield of par value -generally is fixed, some have floating rates=resent periodically, stated annually, paid semi-annually. paid semi-annually=paid every 6 months *so each int. payment = the semi annual int)

outside brokerage accounts (what are the employee requirements, the executed b/d requirements and what are exemptions)

=employed by other member firm, don't want you to take one b/d info and give it to another employee requirements: - obtain your employer prior written consent - provide written notification of association to executing firm (where new acct is) ** must be done within 30 days of employment if opened prior to employment executing b/d requirements (new acct opened) - must send duplicate statements/confirms if requested - applies to accts for employee spouse, dependent children, any acct in which you control/have beneficial interest in exemptions: - if only purchases MF/UIT, 529, variable annuity contracts = no need to get approval

think call up, put down... for calls, it's in the money when mkt price is above strike price and we are bullish and for puts, it is in the money when the mkt price is below the strike price and we are bearish

=when in the money, IT DOESN'T matter if you are buying or selling ... if mrkt is up then both buyer and seller trade in the $ call option

clearing a trade - what is DK - affirmation

DK = don't know. B/ds sends info to other b/d to report info on trade. one you se this you have 20 minutes to either affirm or DK = didn't do trade or terms don't match (wrong ec, price, q, cusip, etc) affirmation= buyer/seller agree to terms -trade is locked in and DTCC is notified -trade is now ready to settle

Depository trust and clearing corp = DTCC

DTCC = main holding company does clearing/settlement and info services for depository. eligible securities through its subsidiaries including (they take number of shares you bought and add to your b/d and subtract from b/d) - DTC = dep trust co, provides custody/safekeeping services for securities, they move securities - NSCC = (acts as buyer for all sellers and vice versa) national securities clearing corp= central counterparty for clearing, settling, and guaranteeing US equity trades - back office functionality -DTC and DTCC can be used mostly interchangeably, DTCC = holding co that owns DTC/NSCC - transactions among members are completed through computerized book entry = book entry settlement, no physical delivery of securities

fair prices/commission - 5% policy

FINRA policy NOT rule, (provide guidline for what other b/d do.. like a speed limit) it's a guideline for commissions, markups, markdowns should be fair and reasonable generally shouldn't exceed 5% - even if markup/markdown may be under 5%, doesn't mean it's fair, if all other b/ds are charging 1% but you charge 3% better have really good reason for this - certain transactions may justify higher/lower markups/downs factors influencing the charge: - type of security involved - availability of the security (is it actually traded or hard to get? - price (higher price may justify higher markup) - amount of money involved - patterns of markups - never can be based on the type of client or whether the firm will profit --> these are NOT RELEVANT applications and exclusions: - application: applies to agency and principal transactions as well as proceeds transactions = when client sells stock and using proceeds of that sale to buy another stock, regulators see this done in one day and treat it as one trade so for ex if you sell 10 k worth of stock and charge $200 for trade then took 10K to buy other stock and charged another $200, for this they are charge $400 on 10K not 20K so 400/10000= 4% - exclusions: trades involving securities sold under prospectus or offering circular ( new issues, MF, variable annuities, IPOs) bc already built in charges for these/covered under other rules and price already includes compensation built in = no need for mark up/mark down. -exempt securities = US gov, munis, etc.

OATS = order audit trail system

FINRA system that provides timeline that tracks life of both customer/internal firm orders in NASDAQ and OTC equities from beginning to end and provides daily reports -system tracking life of order that firms have to send to FINRA daily and they may investigate if suspicious, etc.

redemption fees

Fees charged by a mutual fund on shareholders who redeem fund shares within a short period of time. The intent of the redemption fees is to discourage rapid-fire shifts from one fund to another in an attempt to "time" swings in the stock market. they do not want this in/out trading

mark up/mark down

MM displays quotes = inter dealer price= are dealer offering to other b/d but are adjusted when trading with retail clients - dealer has to make profit, and those price adjustments are built into price charged to customers = what goes on confirm *we are describing a wholesale price and a retail price* ex) bid = 17.05, ask = 17.15 this is what b/d pay to trade to each other, mark up and down is added to these ...factor in .05 markdown/up then.. bid = 17, ask = 17.2 (confirm states this, the difference is profit for the b/d)

market makers

Market makers (b/d) have to commit capital, b/d always willing to buy/sell that security and registers as such, usually did research/investment banking for the co.

calculating POP (what you buy at, what they sell at, so ask) what is the equation??

POP = NAV/100-sales charge % ex) sales charge: 5%, 8.5% NAV= 69.8, 45.95 POP 1= 69.8/100-5=69.8/.95=73.47 POP 2= 45.95/100-8.5=45.95/.915=50.21

calculating the sales charge (what does FINRA say is the largest this can be?) (what is the equation to calculate sale charge %, so you can see if over 8.5% of POP)

POP = ask side of the market = what issuer will sell at and you will buy at NAV= bid side of market = what issuer will buy at and you will sell at ex. bid (NAV)= 9.2 and ask (POP)= 10 the difference is fixed, the dif = the sales charge, or load and is a % of the POP or money invested. FINRA says that this cannot be greater than 8.5% of the POP, this is not negotiable to calculate sales charge: POP-NAV/POP = 10-9.2/10= .8/10=8%

POP equation and Sales charge equation summary

POP= NAV/100-sales charge % **the denominator should be a decimal sales charge= POP-NAV/POP (cannot exceed 8.5% of POP)

Mutual funds closed end vs open end

NAV calculated daily for each closed end (publically traded): - typically one time issuance of common shares= one time $ raise, your capital is fixed, can use preferred stock or debt = can leverage - if someone new wants to buy = buy from existing shareholder = in secondary mkt = no prospectus required - trades throughout the day between existing/new investors - trade @ a discount or premium to NAV with commission or mark up added (supply and demand determine price) - NAV is less important since supply and demand pay a larger role -sponsor doesn't stand ready to redeem, go sell in secondary market - can sell short, purchase on margin etc bc are in secondary market open end (AKA mutual fund) - continually issue new shares = ongoing $ raise, common shares sold by prospectus each time someone new wants to invest = investment pool continues to grow and grow - can only issue common stock can buy anything tho - MF creates new shares each time and gives you prospectus each time - issued/redeemed at the end of the day - shares are sold at NAV plus sales charge - sponsor stands ready to redeem shares at next calculated NAV (forward pricing) - bc new issuance, each time = can't short or buy on margin = primary distribution - share remain in the primary market - all about 4:00 pm pricing *** big difference between the two = all about how you get out ***

OCC and options trading (settlement with b/d? disclosures??)

OCC = options clearing committe, they regulate exchange traded options they are the buyers for all sellers and the sellers for all buyers. They guarantee all option contracts, make sure they are filled -b/d aggress on price, settlement goes through the OCC who becomes guarantor = eliminate counter party risk -b/d settle with OCC which is T+1 - OCC creates/requires distribution of options disclosure doc (characteristics/risks of standardized options) -OCC only deals with b/d not with customers...

ex sold OID prior to maturity

OID purchased at $700 w 10 years to maturity, 5 years later the bond is sold for $880. what is result for tax purposes? 1000-700=300 discount, each year consider portion of $300 interest income for the year and increase our cost basis by that amount (since muni this is int is free income) straight line method (not real world but for test) $300 discount --> 300/10 years = $30/year so after 5 years, it is accreted up to 30*5=150 and 150 + 700 = 850 (bc we acrete up to par). 850 is our new adjusted basis if sold at 880, we have (880-850) the $30 difference is treated as capital gain

offering of REIT vs LP

REIT: tier 1 = registered and listed, tier 2 = just registered and tier 3 = neither LP: public offering = the whole deal =registered= prospectus=listed or can do reg d which is private placement with accredited investors only

prohibited trading practices - front running

RR executes trades for proprietory accts (or those for which they have discretion) ahead of a customer's block order (an order that can move the market) -similar = RR reccommends stock to clients after they bought it for themselves then sell it after

credit ratings (S&P and fitch vs moody)

S&P/fitch: AAA, AA (high), A, BBB (medium), BB, B (speculative grade/junk bonds/high yield bonds) AAA, AA, A, BBB (are considered investment grade) they use + or - as additional qualifier Moody: Aaa, Aa, A, Baa (investment grade) and then Ba, B (junk bond/high yield/speculative) to further specify, they use 1,2,3

research reports (form of communication)/quiet periods (dif types of offerings and the firms role and how that impacts the length of the quiet period)

SEC concerned with bias, don't want research group to be too promotional when IPO coming up --> hence quiet periods - if IPO offering, and the firm is a manger/co manager, the length of the quiet period is 10 days - if an IPO, and the firm is a regular underwriter (other distribution participant) the length of the quiet period is 10 calendar days as well - is is it a follow on offering and the firm is a manager/co manager, the length of the quiet period is 3 calendar days - if it is a follow on offering and the firm is a regular underwriter/other distribution participant then there are no restrictions for the quiet period - if it is a follow on offering or IPO and the firm is non distribution participant, there are also no restrictions for the quiet period **IPO restricts everyone invovled as you can see above **follow on only restricts people at the top of the book like manager, etc. ** if firm not involved in the offering = no restriction ** distribution participants can't initiate coverage but can continue coverage prior to effective dates

penny stock (define it, required disclosures for solicited sales (do not apply to unsolicited), and what are disc/requirements for new clients, and what are the exemptions)

SEC defines as OTCBB (bulletin board) and OTC pink marketplace stocks that have bid price below $5 per share so... - not listed on exchange, but quoted (since cannot be on exchange and be under $5, must be on OTC= these are not on exchanges) -clients must be approved for penny stock trading and receive risk disclosures created by FINRA required disclosures for solicited sales include: - current quote of penny stock - compensation received by b/d and RR -doesn't apply to unsolicited transactions special suitability rules apply for new clients but not established clients rule on new customers: - must receive disclosure doc - must sign off on first 3 trades (give client time to process transaction/risks) **exemption: if have been client for 1 year OR made 3 separate purchases of 3 dif penny stocks on 3 dif days ==> established client**

customer account statements (how often must they be sent) (what info is on them?)

SEC requires they are sent at a minimum quarterly, for active accounts they are sent monthly info on them: - summary of total value of investments/cash - unrealized/realized G/L - detailed info on specific investments portfolio - income generated from investment for the statement period and year to date - positions/activity - outstanding GTC order or open orders - name of clearing firm and introductory firm

investment co communications (MF, UIT, ETF, FACC (face amount cert company) what is SEC rule 482 (governs mostly MF ads)

SEC rule 482 under 1933 act = omitting prospectus rule (governs advertising rul for MF and specifically MF performance data included in the ads) these ads are the primary way to communicate performance date to MF investors and prospective investors. rule 482 ads must address a MF that is selling its securities pursuant to a registration statement which is filed with SEC - a 482 ad is considered a prospectus and doesn't need to contain all of the info in a normal prospectus - summary prospectus allowed, must be filed with SEC and contains the highlights -client can make purchase based on the content but must be told a complete version exists - complete pros must be sent by settlement along with trade confirm required disclosure if 482 ad includes performance info: - read prospectus = carefully consider risks, objectives, charges, expenses - tell investors source from which they can read prospectus - performance info/fee disclosure must be displayed in font size that is at least as large as that used for non-standardized performance info - that data being quoted represents performance and that past performance DOESN'T GUARANTEE FUTURE results - that investments return/principal value go up/down so when redeeming shares, they may be worth more or less than original cost - reported performance disclosed by co doesn't reflect sales charges/tax liability but does reflect ongoing fees (expense ratio)

ex SMV increases by 10K to 110K, since bearish any increase will work against us so equity decreases

SMV = - 110K Credit balance = 150K equity = 40K SMA = 15K equity should be SMV * 50% = 55K so we are restricted bc fell below 50% maintenance for short selling is 30% of SMV so that would be 33K or below later SMV increases by another 10K to 120K... SMV = - 120K Credit balance = 150K equity = 30K SMA = 15K equity must be 60K at least (SMV * 50%), for maintenance call it is SMV * 30 = 36 which we are below --> maintenance call and remember SMA cannot be used to cover maintenance call fixes = - 6K cash deposited or buy securities

short term capital gain vs long term

ST: held for less than 1 year, pay income tax level LT: 20% max or if in lower tax bracket, you will pay that, held for longer than 1 year -capital losses are used to offset capital gains and a max of 3K to decrease ordinary taxable income

trade through rule = type of violation

a violation, order should always be routed to best market price - b/d will use its expertise in sending order to some exchange. retail clients don't know about dif prices of stock in dif exchanges... trade through = when didn't get best price client should always get NBBO = natinoal best bid or offer

MF distributions (under conduit theory of taxation)

activity in portfolio generates capital events --> flows through and reported under 1099-div 1) investment income: MF company will break it down for investor, this portion is income (cash/div/int on bonds). ST capital gains= taxed at regular income level = ST gains are dist. as income. may be dist more frequently than once per year 2) capital gains: generated by sales of securities in portfolio where the proceeds exceed original cost. distributed once per year. always considered LT capital gains (must be realized) since ST = distributed as income (see above) ***both distributions (investment income and capital gains) are taxable in year received whether taken or reinvested

prohibited trading practices - marking the close/marking the opening

affecting trades near the opening or close of trading in an attempt to influence a stock's closing price up or down - one reason would be for margin accounts bc are marked to marked daily based on closing (may lead to margin calls, etc) - series of trades at or near open/close to manipulate security pricing

regulation NMS (national market system), SEC Rule 1) quote increment 2) limit order display rule 3) limit order protection rule

aim = uniformity 1) quote increment: min price/sub penny rule (1.00) -only allow quotes in penny increments, exception is if stock is less than $1 in which you can go 4 decimal places out (.0001), anything above a $ that has 3 decimals is not allowed - can't accept or display order pricing/quotes of less than one penny - can execute in sub penny just not quote 2) limit order display rule, objective = make spreads more narrow - allows customer orders to compete with Market makers - if order is better price than b/d quote, they have to display that order with in 30 seconds if the limit price improves the MM quote (higher bid, lower ask) - if customer's limit price matches the MMs quote that's currently the inside market and customer's size is added to MMs display 3) limit order protection rule (AKA morning rule) - must do for the customer at least what you did for yourself - firms may not trade ahead of custmer limit order - while holding a customer limit/mkt order if MM trades for its own account at the same or better price, it must immediately (with in 60 seconds ) fill the customer order at same price or better

convertible debentures and conversion parity

allows bondholder ability to convert part value of bond into pre determined number of shares of common stock + provide investor with semi annual interest. safety of principal (at maturity you get par value) and you are creditor = high seniority in bankruptcy BUUUTTT you also potential for stock growth/appreciation if stock goes up, it affects your bond price (if stock increases, the value of that convertible bond increases as well) -issuer pays lower coupon as a trade off of you getting the best of both worlds - dont have to convert, can always take par value @ maturity... - conversion price is set at a premium @ issuance and the bon'd price is influenced by underlying stock price conversion price = price at which it can be converted

ATS - alternative trading system --> ECN, trade crossing entworks, firm internal execution systems

alternative means to access liquidity =other trading venues -ECNS are a subset of ATS -very long/exhaustive process to be exchange listed so SEC allows you to register here, can buy sell quckly, more innovative (over 60 of these today) -ability to quickly match buy/sell (like ebay) -lot of participants here, lot of trade activity --> better prices -defined as SEC approved electronic trading system designed to match buy/sell of subscribers - more liquidity and act in agency capacity = no contribution of capital -under ATS, systems are required to register as either exchange or b/d -b/d use these to b/s more efficiently sometimes at lower prices

premium bond

amortize the premium down to par value (opposite of accreting). reduce cost basis down to par value at maturity which decreases taxable interest

margin terminology - credit balance (for short)

amount collected on by the initial short sale plus the Reg T deposit so lets pretend client wants to short 100K worth of stock, they need to come up with 50K of credit balance = 100K + 50K so deposit = 150K

ratio call writing

an option position that consists of a long stock position but more calls are written then the number of shares owned (so partially covered) example: buy 100 shares of xyz @ 50 write 2 xyz june 50 call so we are writing 200 shares worth of options, but we only own 100 risk of writing calls: 1 call is covered with stock owned, but ratio writing has the other call, which is uncovered = unlimited risk if stock goes up (remember on calls, the buyer wants the stock to icnrease so if it does it will be exercised and you have to deliver) - we want the stock to be right at 50 = max gain realized here. above 50, the second call has unlimited risk -since more calls are written it has unlimited risk bc second call is uncovered max loss = unlimited, because ONE of the two are uncovered max gain = at 50... no movement

types of revenue bonds

anything no GO... 1) transportation revenue: backed by user tolls/fees 2) special tax: backed by one specific tax (gasoline or tabacco, excise tax on alc) 3) special assessment: assessments on the benefiting properties of a project (sidewalk, sewer) --> ONE TIME FEE 4) double barreled: backed by 2 sources... backed first by the revenue of the facility and if needed also general obligation = full faith/credit of the muni 5) moral obligation: if revenue is insufficient, state legislature says we will then vote to appropriate funds as needed = morally but not legally obligated 6) private activity: more than 10% of proceeds benefit private entity (ex sports team, etc) 7) industrial development bond: issued by muni and secured by a lease agreement with a corp user... muni leases the facility to the corp, and THE LEASE PAYMENT BACKS THE BONDS.... so credit = based on the corp NOT the muni

balance sheet summary

assets= current assets, fixed assets, intangibles current assets= account receivable, marketable securities, inventories, cash, (you can turn to cash in 1 year period) fixed assets= equipment (PPE = property, plant, equipment) takes longer than 1 year to sell off assets and lose value each year = depreciation intangibles: goodwill, patents, trademarks, intellectual property liabilities: current liabilities, long term liabilities current liabilities: accts payable, accrued expenses, income tax payable, ST debt LT liabilities: - long term debt (notes/bonds) - leases stockholder equity: ownerships consists of common/preferred stock, retained earnings (earned by co but not paid out in dividend yet)

underwriting - stand by

association with a rights offering (which is where issuer wants to increase their money, they give existing share holders right to buy shares at discount). syndicate stands by ready to buy any shares that aren't bought through a rights offering, the syndicate agrees to underwrite those shares through a firm commitment underwriting, syndicate will keep them if unsold = principal dealer

filing for retail communications to FINRA

at least 10 business days PRIOR to 1st use of the following communications: - investment co that contains self created rankings (your own opinion) - security futures - bond mutual funds that incorp volatility ratings within 10 business days of 1st use (doesn't need to be done ahead of time) - investment co that have no self created rankings -DPP - collaterized mortgage obligations (CMOs) - securities derived from other securities or indexes - any template for reports produced by investment analysis tools - free writing prospectus (FWP)

quotes (what is an inside market quote?)

b/d discussing prices thety are willing to b/s to eachother at -willing to trade at this price inside market= highest bid and lowest offer of all market makers for a given stock market maker = b/d who is willing to b/s in a given security bid (b/d willing to buy at)= 10 (MM1), 9.98(mm2), 9,95(mm3) ask (b/d willing to sell at and client buys at)= 10.1 (mm1), 10.08 (mm2), 10.05 (mm3) highest bid = 10 and lowest offer = 10.05 customer sells to highest bid and buy at lowest offer/ask (buy and sell from b/d)

code of arbitration 1) participants 2) arbitration panel 3) for small disputes 4) statute of limitations

b/ds vs b/d, b/d vs RR, b/d vs client - system in which monetary disputes are resolved 1) can be member to member, member to employee, or member and client (can't be forced to take dispute to arbitration but many of them sign pre dispute arbitration agreement which agrees them to submit disputes to arbitration (new account form) and if signed client must take dispute to arbitration 2) arbitration panel: typically 3 people unless it is simplified arbitration (only 1 then). if public customer is involved then majority of panel must come from outside security industry 3) for small disputes --> not exceeding 50K you can use simplified arbitration = FINRA assigns 1 arbitrator. generally not hearing unless the parties want to usually done through the submission of documents. if public customer is involved, that one arbitrator must come from outside securities industry 4) statute of limitations: there is a 6 year statute of limitations to bring someone to arbitration

corp dividend exclusion rule

based on your ownership %, if you invest in other corps common or preferred stock you get a tax break.... if you have fewer than 20% ownership then you get 50% tax excluded on those received and if you own over 20%, you get 65% excluded from taxes **dividends from REITS DO NOT COUNT HERE** bc don't pay tax bc distributed 90% income.... so no exclusion would apply here then

EPS (earnings per share)

basis EPS = earnings available to common stockholders/average # of shares of common stock outsanding

using PE ratio = market price of stock / EPS

basis EPS = market value/PE if market value is 42/20 = 2.1 so PE is the multiple, the higher the PE= more growth oriented the company is higher PE also means people are paying more per shared based upon the earnings (doesn't mean it's a good or bad co)... PE can be bc investors feel growth rate of that co will be higher or co could be overvalued , etc if debt or pref stock is convertible, fully diluted EPS is recalculated after converting to common stock

nasdaq stock market= unlimited number of market makers, what is level 1, 2 and 3 access

bid=22.9(mm1), 22.95 (mm2), 22.85 (mm3) ask = 23.05(mm1), 23.15 (mm2), 23.00 (mm3) size=50 x 50 (mm1), 10 *40 (mm2), 20*30 (mm3) inter market = highest bid and lowest ask, so that is 22.95 (10) and lowest ask = 23 (30) intermarket = 22.95 - 23, 10* 30 level 1: shows inside market only without identifying MMs, very general info (must pay NASDAQ to get right to this info) level 2: (will also see level 1) more expensive, most used by traders/hedge fund managers and available to public, it quotes all MM that deal in that security, -total view provides additional depth/aggregate size at the five best price levels (you pay extra to make it look nice/have it be more organized=upgraded version of level 2) level 3: same as level 1 and 2, but only available to MM where they can change quotes (must be FINRA member firm and MM). can adjust to be more competitive and inside market would change

ex market discount sold prior to maturity

bond issued at par, later purchased for $900 with 10 years left to maturity, 5 years later, bond sold at $980, what is the result?? well we take 1000-900=100 discount 100/10=10$ each year accrued 50$ accrued after 5 years we well at 980, of which $80 is taxable taxable = proceeds - cost so 980-900 = $80 taxed but how is it taxed??: portion of the $80 is attributable to what was accreted, 10$/year for 5 years = $50=treated as ordinary income since $950 became adjusted cost basis (980-950=30), the $30 above that is treated as capital gains, but the $50 is still taxble because what is taxable is proceeds-cost=$80 -$50 treated as ordinary income -$30 above that is treated as capital gains ** if we held this to maturity... we get par ($1000) and the $100 is treated as ordinary income ** summary: if sold early = some is taxed as ordinary income if reaching maturity = all discount is treated as ordinary income

quoting bonds (corp/muni quoted at 1/8 and treasury at 1/32)

bond prices/i-rates are generally quoted as a % of par (1000) -if bond priced at 100=selling at 100% of its par value then it is $1000 -if bond is priced at 99 --> selling at 99% of par value, so 99% of 1000=990. (1000*.99=990) -1 full point is 1% of $1000 or $10 so bonds can be quoted in terms of points or $ amounts - corp/muni bonds trade in increments of 1/8 of a point of $1.25 -treasury= 1/32 of a point bonds can also be quoted in yield or basis terms = allow us to compare bonds with dif characteristics --> yield generally determines bond's value

ex

bonds backed by investments of other issuers are ________ (collateral debt bonds) issued by federal government = soverign debt issued outside US but pay debt service in US dollars = euro dollar bonds unsecure corp debt for ST liability = commercial paper (less than 270 days because it then doesn't have to be SEC 33 registered)

example long put (when you buy a put)

buy 1 ABC April 95 Put at 3.5 - market value is at 94 - breakeven = strike price - premium = 95-3.5=91.5 - strategy = bearish - max gain = strike price - premium *100 = 91.5*100= $9150 - max loss = premium later with ABC at 80, investor exercises, what is the result... cash out: $350 for premium $8000 to purchase the stock =$8350 cash in: $9500 for putting it to seller gain of 1150

price/dollar/vertical spread (1/3) = difference between the options is the price/dollar

buy 1 ABC jun 40 call sell 1 ABC jun 50 call again spread = same class, dif series, so here we have same underlying security and same type of option, but dif strike price = dif series AND remember, one is a buy and one is a sell identify the spread by what's different about the series --> price/dollar spread vertical = from old options table where strike price ran vertical

diagonal spread (3/3) = dif strike price and dif exp month (so combo of horizontal and vertical = diagonal, think about a table)

buy 1 DEF sep 40 put sell 1 DEF mar 30 put so this combines the two other ones.... dif strike price and dif exp month

long call analysis example (you are buyer)

buy 1 XYZ feb 45 call at 3 current mkt value is 45 breakeven = strike price + premium = 45+3=48 strategy: bullish max gain = unlimited max loss = premium, $300 later XYZ at 58, the investor exercises the option and then immediately sells the stock, what is the result... cash out: - $300 premium - $4500 to buy stock (since exercising) $4800 total cash in: - $5800 (from selling the stock) so you gain $1000

spreads - bull/bear, debit/credit, widen/narrow, looking at example that doesn't include the premiums (follows same steps as above) ex 1

buy an xyz nov 90 call sell an xyz nov 80 call -dominant strategy = one with higher premium and the one with the higher premium for a call is the one with the lower strike price so the sell -we are seller -strategy: bearish - credit spread (since we are seller = we take in the higher premium) - narrow

types of quotes --> offer wanted (on bulletin board/pink market, "call for a quote")

buyer indicates desire for an offer, we will tell you what we will sell at

if there is a period of stable interest rates.. which is most volatile? (of preferred stock?_

convertible bc it is the only one where the value is based on common stock and i-rate. all others are based on i-rates so won't change much in stable i-rate environment

market analysis factors (terms/theories) - short interest

calculated based on # of shares that have been sold but not yet covered ratio or days to cover is used to determine the bearish or bullish sentiment in totality b/d report to FINRA --> reports further - increase in short interest is considered bullish... if a lot of people are short selling = all need to go into market to buy securities --> risk in price, bullish no time limit to cover short but who you borrowed from may demand delivery sooner = forces you to buy it = short squeeze

mutual fund expense ratio (what are two ways that this can be decreased) what is the largest ongoing fee??

calculated by dividing a funds expenses by its average net assets ****(sales charge are not expenses)***** defined as % of funds assets paid for operating expenses, management fees, including 12b-1/admin, all other asset based costs **this DOES NOT include sale charge, really comes down to ongoing costs of ownership. can be based on the activity in the fund (less active--> may mean less charges), same expenses decrease as assets increase - index fund for example, tend to have more static portfolio= no need for high power portfolio manager because they mimic a fund = low expense ratio - bio tech fund on the other hand likely has a lot of trading = powerful portfolio manager is needed= may have higher expense ratio two ways to decrease this: 1) assets under management increase 2) any fee/expense decrease - also if less active fund --> like index funds = lower fees ***largest expense is the management fee --> goes to portfolio manager

debt service coverage ratio

calculated by taking amount available for debt service and dividing amount needed for debt service *****how many times does availbale revenue cover debt service?? ex) 10 mil available, debt service = 5 mil, so the debt service coverage is 2:1

uncovered call

call written against stock that is not owned considered most speculative option strategy with unlimited potential risk if call is exercise, you have to sell stock you don't have = have to go into the market and get it and there is no limit to how high this can go

clearing erroneous trades

can be declared null and void and cancelled by a regulator ex= trades done at prices not related to the current market value, erroneous transactions due to system malfunctions, news events trading halts, stock splits, and reorganizations are all factors in making the determination - process is designed to ensure fair/orderly markets - FINRA decisions are appealable by affected parties, to clear trade should be broke, b/d needs to prove it was clearly erroneous

how to put in trades for straddle or combo (what is legged into the position mean??)

can do all at once or can create the strategy by doing 1 and then the other called legged into the position = when investor has one option component and adds another to create a multiple option position

ex off set gains/losses

capital loss: 40,000 capital gain: 25000 ordinary income is 110,000 1) first thing we will do is offset gains soo left with 15,000 (40,000-25,000=15,000) in capital losses of which you can deduct 3K from your ordinary income soo you have $107,000 and you will carry forward 12,000 in losses (15,000-3,000). 2) how much could the investor realize in capital gains in the following year without being subject to tax.... the answer would be $12,000 which is the amount of loss you could use to offset the capital gains ** NO LIMIT to the number of years you can carry forward a loss **

verifying net worth/sophistication

certain investments have min requirement for net worth, earnings, sophistication. can be offered to retail clients but usually in limited numbers -SEC has suggested following methods to verify customer standing: - review previously filed IRS tax forms -review bank/brokerage account statements - obtain written verification as to customers accredited status from b/d, investment advisor, etc. **(SEC doesn't require these to be used, but does require reasonable attempt to be made to determine if investor status has been verified before recommending) ** just because was suitable at some point does not mean that it is suitable now ** just because was invested in before does not mean suitable for today

treasury debt overview

characteristics: -issued by fed govt and backed in full faith by US govt=said to have zero credit risk -highly liquid, no credit risk taxation of interest: - interest is taxable at fed level exempt at state and local levels

butterfly spread (what is our max gain, max loss? what do we want the market to expire at? talk about the nuetralizing effect... where are we making money? where are we losing money?

combo of 2 spreads, one is a debit spread and one is a credit spread can create with either calls or puts ex) long 1 ABC may 60 call short 2 ABC May 50 calls long 1 ABC may 40 call so the 1st and second are paired and the second and third are paired (since 2 middle option contracts) (short is dominant strategy here, so credit spread) long 1 ABC may 60 call short 1 abc may 50 call (long is dominant strategy here, so debit spread) short 1 abc may 50 call long 1 abc may 40 call when you sell the two middle options and buy the outside ones, said to be short body and buy the wings want market at exp to be as close as possible to the middle strike price max gain = at middle strike price, in this case is at 50 max loss = above the higher strike price and below the lower strike price if you are long the may 40 call, you make money if the market is above 40, if at 50 that long call is in the money by 10 points, the 2, 50 calls that you are short will expire and the 60 call you are long will expire, the only one that is in the money is the abc 40 call if goes above 50, you lose on the 2, 50 calls you are short (have to delivery securities to buyer but will have to pay higher market price to get them), only making on the 1, 40 call, buying the 60 call neutralizes everything over 60 because we would be making money on the 40 and 60 call but losing on the 50. each point above 60 = gain 1 point from the 40 call and 1 from the 60 call but losing 2 on the 50 calls = neutral effect

DPP evaluation

complex investments, not suitable for average investor, not all are highly risky but are complex in nature = effects taxes, (separate k1), less liquidity than average product -investors/RR should use the following factors when evaluating potential/merits of a program: - look at managerial track record (GP is in charge) - start up costs (can be greater than expected) - time to crossover = tend to generate losses in early years and eventually cross over to profit - use of leverage (they use borrowed funds=may increase need for assessments from investor) - competitive landscape - GP exit strategies (ultimate asset sale) ***most important= economic soundness of the program, they must have economic merit

asset allocation

constructing portfolio of various asset classes based upon investment objectives/goals/risk tolerance/expected return income is not necessarily determinant of risk tolerance optimal portfolio = provide greatest return for given amount of risk - for equities take 100-age = % of $ that should be in equities (rule of thumb) other % can be fixed income, etc. - we want to diversity ex) 50% cash, 50% equities or 50% equities, 35% ai, 15% cash (this may be the better choice unless the question specifies client will be making a big purchase soon= need money in cash)

definitions - correspondence, retail communication, inst. communication

correspondence: things sent to 25 or fewer retail investors (prospective or existing client) within 30 calendar day period. can be written or electronic communication, no preapproval needed but subject to review/supervision because of increased volume. must be archived=must keep record for audit retail communication: 25 or more retail investors within 30 calendar day period. subject to preapproval/filing with regulator FINRA inst. communication: anything sent to only inst. investors (# of receivers doesn't matter). these are subject to review/supervision but bc more sophisticated clients, preapproval is not needed. don't need to file with FINRA. * if sent to mix of inst and retail clients = lost lighter regulator touch = may need preapproval ** only one that needs preapproval is retail communication and must file with FINRA. Inst communication/correspondence are just subject to review/supervision

cost basis

cost basis= total amount paid to acquire security, usually includes commissions/other fees paid (embedded in cost)

straddles and combinations overview (what is the strategy, same for both)

created by either buying both call/put or selling both call/put on the same underlying security strategy: - if you are long the straddle or combo: you look for volatility. you make $ when it goes up and down. if stays around strike price, you could lose $ on both - if you are short the straddle or combo: taken in 2 premiums, you want stability, don't want movement because they will be hurt by movements in both directions straddle = 2 options that you are either buying/selling will have same expiration month and same strike price combo = if anything is different about expiration dates/strike prices then not straddle but a type of combo

investment returns (based on type of security) - equities (what is current yield)

current yield = annual payments in dollars/current market rate

opening a margin account - hypothecation pledge/agreement (part 3)

customer pledges securities to b/d as collateral in the margin acct meaning the securities must stay with the firm - many b/d are owned by bank and in many cases lend $ to b/d at wholesale rate than marked up and loaned to client at higher rate or interest earning that spread. parent bank also wants to be protected just like b/d who is also lending = rehypothecation (bank can ask for up to 140% of the debit balance) so if 200K worth of stock, can ask fr up to 140K of collateral protection from b/d so bottom line... * clients hypothecate to b/d and b/d to clients summary: -b/d borrows money from bank to replace loan that was made to customer - b/d can borrow 100% of debit balance from bank - 140% of debit balance - amount of customers securities that can be rehypothecated to bank as collateral

type of orders --> limit order

customer wants to b/s at a set price or BETTER - specifies security, size, price -order only executed if limit price is able to be met - buy limit = pre set price or lower -sell limit = pre set price or higher

ex annuity

deferred annuity = purchased with periodic payments/distributions made at some point in the future (no $ immediately, you wait) sub account product = portfolio into which an investor directs some or all $ in variable annuity, can alter mix with no tax implications accum phase: period during which $ is deposited and growth is tax deferred , value measured in accum units, market to market each day straight life annuity: settlement option offering greatest potential return assumed interest rate= AIR= hypotehtical return used to determine whether payouts are increasing or decreasing

investment companies, and the types (3)

defined by investment company act of 1940 = looks at packaged products, mostly mutual funds overall it is a trust or corp that invests the pooled funds of investors types: -face amount cert companies -unit investment trust -management companies (mutual funds are subset here both closed end and open end)

financial exploitation rules (defined (what is a specified adult) and procedures....)

defined: appy to specified adults who are most likely to be exploited including 1) 65 years of age or older 2) any person age 18+ who is believed to have a mental or physical impairment that jeopardizes ability to protect own interests procedures: - if signs of diminished capacity or dementia are identified the firm should place temporary hold on disbursement of securities or funds - designated trusted contact should be notified - info regarding trusted contact should be obtained when an account is opened (although not required, reasonable effort should be made)

underwriting spread (breaks into 3 categories: manager fee, member/underwriting fee, concession)

dif between public offering price (what the investor pays) and $ going to issuer 1) manager fee = $x for every share sold goes to lead manager because they run the syndicate 2) member/underwriting fee= for risk syndicate members take on, manager also is part of this group 3) concession= goes to any b/d who sells, manager in this group too or sell group

disclosures

disclosures made to client prior to execution: - speculative nature of options - limited marketability of penny stocks - default risk of high yield bonds - potential conflicts of interest (investment positions held by the firm OR control relationship with issuer) investment limitations of the firm - certain securities are unavilable - b/d is limited in transaction disclosure of costs and fees: - mutual funds: dif share classes, redemption fees -annuities: surrender charges, morality and expense charges - non discretionary fee-based accounts: based on AM, unsuitable for buy and hold investors - soft dollar arrangements = credits to buy research etc..

taxation of dividends for corporations (qual vs non qual and corp dividend exclusion)

dividends can be qualified or non qualified qualified cash dividends are taxed at a max of 20% after satisfying holding period of more than 60 days for common stock and 90 days for preferred stock (lower tax because the company has already been taxed on the increase in profit = you receive preferential rate non qualified cash dividend= taxed at ordinary income rates (highest is then 37%) taxes paid on ADRS can be used as a tax credit or deductible corp dividend exclusion: based on its ownership percentage, a corp may exclude from taxes a portion of the dividends that it receives from another corps common or preferred stock (see below, again if a corp invested in other corps common or preferred stock) --> ownership %: less than 20% --> 50% excluded from taxes --> ownership % 20% or more --> 65% excluded from taxes

corporate insiders (define insider)

do they have access to info they could trade on? insider=any officer or director of issuer or individual who owns 10% or more in voting stock Must do the following: -must file form 3 with SEC w/in 10 days of becoming insider, must let SEC know of any changes. - file form 4 to report purchases/sales within 2 business days, however no required filing for certain transaction w/in 401K Can't do this: 1) engage in short sales of co.= can't speculate shares on own stock going down bc we can have ability to influence that -can't retain short swing profits=gain on stock held for less than 6 months can sell stock whenever you want, but if prior to 6 months=all profits returned = short swing profit rule =only gains returned

rule 145

doesn't deal restricted securities deals with reclassification of securities into new security as offering subject to registration and disclosure docs what is subject to rule 145: (something is giving up to get someone else) - substitution of one security for another - securities that are a result of a merger/acquisition (you may get some portion of each corp) issue securities to buy securities of another company = considered offerings = must register/file prospectus -securities issued after a transfer of assets from one corp to another NOT subject to rule 145: (nothing is given up to get something) -stock splits -reverse stock splits -change in par value

debt with foreign characteristics - euro dollar bonds (what is seasoning period/generally how long)

dollar denominated bonds = pay interest and principal in US dollars but issued outside US (mostly Europe). - issuers include foreign corps, govt, multinational corp, international agencies, etc. - - issued outside US = can't trade in US until after seasoning period (generally 40 days) before can come to US/trade in secondary market

maturity date

due date=when last interest payment/payment is made

caluclating EPS

earnings per share = earnings available to common stockholders/average # of shares of common stock outstanding again earnings available to common stockholders = net income - preferred stock dividends ex) EBIT = $250 mil 21% tax rate 80 mil outstanding shares(common stock) 600 mil of 5% debentures 100 mil of 6% prefer stock basis EPS: EBIT - interest = 250-30 (bc you take 600 *5%)=220=taxable income taxable income- taxes = 220-46.2 (220 mil * 21%)= net income = 173.8 net income - pref dividend = earnings available to common stock holders = 173.8-6 (6% of 100)=167.8 then we take 167.8/outstanding shares=167.8/80=$2.1 earnings per share

systematic risks (4 types) (M=market, I=interest, I=inflation, E=event)

effect the value of all securities and cannot be avoided through diversification 1) market risk: risk inherent in all securities due to market fluctuations. market changes pull all stocks up or down 2) interest rate risk: risk that value of a fixed income investment (bond) will decrease due to increases in market rates 3) inflation risk: risk that an asset or purchasing power of income may decrease over time due to shrinking value of currency. real interest rate = nominal yield - inflation 4) event risk: significant event could cause huge changes in market like terrorist attack, etc.

constructing optimal portfolio (what is the efficient frontier?)

efficient frontier = ideal relationship between expected risk and return on graph... you have a line that shows the efficient frontier... so if on that line is efficient x axis= risk y axis=expected return so if you have this frontier line... and points A and B are on the line. A is to the SW of B and B is to the NE of A, and C is not on the line and is right below B (so same x value and lower y value) - A is lower risk and lower return - B has higher risk and higher return - C therefore has lower return for same amount of risk as B so B is better choice - C has higher risk than A but same level of return... so A is better than C ** in sum, we find out that those on the frontier are better

ERISA

employee retirement income security act of 1974, prevents the misuse/mismanagement of pension plans - rules apply to sector defined benefit/defined contribution plan - determines qualified status: employer/employee contributions are tax deductible, earnings usually tax deferred - plans must not be discriminatory/must be offerred to all employees who are 21 years or older and have worked 1 year of 1000 hours - defines approved vesting schedules: when money contributed by employer is employees, any $ you put in is 100% vested immediately

conversion parity

equal market value (question may give you price of stock/bond and ask you what the other would have to be trading at to be at parity...) if trading at parity it means that the price of the convertible bond = aggregate market value of shares of common stock

equity vs index option (dif/similarities table)

equity: underlying interest= stock multipler = 100 shares exercise= receive/deliver stock settlement on exercise: 2 business days (if option is trading... settles next business day but here we are talking about settlement upon exercise...= buying or selling of a security) exercise style: american (can exercise anytime) index: underlying interest: value/avg of an index multipler: $100 dollars (exercised by writer paying buyer the in the $ amount --> multipler for indexes is $100 per point, if optio nis in the money by 7 points, the writer pays buyer $700) exercise: receive/deliver stock... simply pay the in the $ amount with equity you call or put away actual stock... so cash here... exercise style: european = can only exercise on exp

mutual fund complex = family of funds = brand name

ex = us govt fund, s and P 500 fund, growth fund, can swap between these at NAV bu this reallocation is taxable but no extra sales charge (UNLESS you move between fund families, so beyond that one car co/brand name)

ex, distribution of spread

ex) POP = 14 issuer $= 13 = $1 spread 1000 shares are sold to custiner at 14$ per share manager fee = .15 member fee = .25 concession = .6 if the manager sells from their allocation (then they get all three fees, they are the only party that can)... customer pays: 14000 issuer receives: 13,000 manager receives: 1000 (since $1 spread, only $1000 left to split because dif between POP and what issuer gets) member: 0 selling group: 0 if member sells from their allocation ... customer pays: 14,000 issuer gets: 13,000 manager gets: 150 members get: 850 (get .25 and .6 of the 1000) if selling group sells... customer pays: 14,000 issuer gets: 13,000 manager gets: 150 member gets: 250 selling group gets: 600

death during accumulation phase

ex) basis = 100K, account grows to 300K if they die, beneficiary gets 300K - the acct value. what about taxes? the 200K growth was never taxed so the benef pays taxes on that growth as ordinary income ex) basis = 100K, acct falls to 60K, the benef gets the 100K meaning you cannot lose $ if you die when contract is under water... the benef gets the greater of the account value or the basis (original contributions). you get at least what you put in any gains/growth of account are taxable as regular income to benef

yield calculations (taxable equivalent yield formula (caluclate rate for taxable bond) and the net yield formula (caluclates yield of tax free bond)

ex) investors earn 4.55% on a tax free muni and is in the 35% tax bracket.. what must a taxable bond yield to be equivalent? - must be higher yield, obviously...bc not going to have the tax free element=must compensate - what yield would we need on taxable bond to be equal to tax free yield if we pay 35% in taxes? taxable equivalent yield formula = tax free yield/ 100% - tax bracket % **the denominator is the complement of your tax rate so in this ex... we have 4.55/100-35=4.55/65=7% = taxable bond yielding 7% is equivalent ex 2): 7% corp bond in 35% bracket, what tax exempt yield would be required to equal taxable yield?? net yield formula = tax free yield = taxable yield * (100-tax bracket %) *simple rearrangement of above equation so in this example we have 7*100-35=.07*65=4.55%

take these ex a step further by considering the state fax to factor in

ex) ohio resident purchases state of ohio GO bond yielding 4.25%, he is subject to 30% fed tax and 3% state tax... what must a taxable bond yield to be equivalent 1) look at taxes you are exempt from --> state ad fed since he is ohio resident. tax free yield/(100-(fed+state tax%)) = 4.25/100-(30 +3) = 4.25/67=6.34% **we minused the state and federal taxes.... bc we are not paying them.. fed tax is simply your tax bracket, we are just added the state in there as well now.... one more additional level to calculate but the same formulIowa resident purchases some state of ohio GO bond and is also subject to 30% fed tax what is taxable equivalent yield. cont.... Iowa resident purchases some state of ohio GO bond and is also subject to 30% fed tax what is taxable equivalent yield. well we take the 4.25/100-30=4.25/70=6.07 % (because not not exempt from state taxes... so we only subtract the federal)

in the $ vs out of the $

ex) strike price is $60 FOR CALLS: - in the money when the market price is above the strike price for calls because it's more valuable bc you get discount for it... only wants to buy stock at 60 if actually its currently worth more than that - if market price is below strike price then it is out of the money bc why would you buy it for 60 if it's worth 50? you would just buy it in the market FOR PUTS: - in the money for put when market price is below strike price bc put is right to sell, you can buy it for cheap, sell it for more = selling at rate higher than in the market currently - out of the money when market price is above strike price for put bc if it is worth 70 you would rather sell it at 70 than 60, so it wouldn't make sense to exercise the put...

spot trades = currency exchanges, settle in 2 business days.... what are forwards then??

exchange currencies in more than 2 business days, may do 30 day forward = lock in price but exchange 30 days later...

secondary markets

exchange of existing financial instruments among investors -NYSE/other centralized exchanges provide a location for trade execution, trading = monitored by DMM or speciailist (same thing) meaning that b/d add liquidity, exchanges include NYSE, NASDAQ, regionals

example 1) taxation of an exercised call

exercised call = premium + strike price investor is long one ABC june 90 call at 4. if the option is later expired, the investor will have... 1) a basis of 9200 2) 8800, 3) 8600 4) 9400 9400.... if exercised, just buying stock, no capital gain until they sell that stock and when they do, they will compare cost basis to proceeds of that sale so here we just need to determine cost basis of acquiring cash out: 400 9000 =9400 = cost basis holding period doesn't start for the stock until we exercise the option, so would need to hold for over one year for LT gain

specs for currency options

exp= 3rd friday of the month exercise = US dollar = settled (similar to index options, the writer will pay the buyer the in the money amount) - contract size = 10,000 units (quoted in cents per unit, makes each point worth $100 but since Yen is quoted in 1/100 of a cent, making contract size 1 mil it still comes out to be $100) so you pay 2.25 points --> 225$ -european style= only exercise at exp but can always liquidate trade out of it at any time but can only EXERCISE one exp date ** remember there are no options on the US dollar, it is all about your expecation of foreign currency ***

riskless princpal -->

firm's purchase and resale to its client is reported as one trade markups must be disclosed on confirm

initial margin requirement

for initial transactions on new margin account regulators prefer that the lesser of 2K cash or 100% of the market value at a minimum is in the account so if client was to make purchase of 2K or less they would simply pay in full for long position - purchase 2K --> 100% of purchase -between 2K and 4K --> $2000 cash deposited - above 4K --> 50% reg T (2K doesn't meet 50% requirement anymore) ex) buy $1500 ABC - pay in full, so deposit 1500 buy 3000 ABC, deposit 2K which is the minimum (reg t says 1500 since 50% but bc not at 2K min, we must make 2K deposit at least) buy 5000 ABC - deposit 2500, reg T kicks in, since 2K does not meet 50% requirement for short... unlimited loss potential so 2K minimum (don't have lesser of 2K or 100% market value like with long positions above) below 4K short sale --> 2K deposit above 4K short sale --> reg T ex) 1500 XYZ short, deposit 2K 3000 XYZ short, deposit 2K, since 1500 reg t isn't enough short 5K of XYZ --> deposit 2500

defined benefit pension plan

for munis... a specified amount is guaranteed by the company as a lifetime annuity, and employees know what they could count on as retirement income -typically for muni employees - these are future obligations of the issuer -unfunded = not fully set aside and would reflect negatively on credit rating -this plan defines the eventual obligation to employees for corporations..... typically defined contribution = set aside $ in 401K but make no guarantee about payments at retirement, you get what in the account when you retire

Muni communications (what is a form letter)

general provisions: ads include published material, any promo material given to public. DOES NOT APPLY to preliminary official statements or official statements, but applies to abstracts of such. - form letter is any written letter/email distributed to 25 or more people within 90 day period - ads cannot be false/misleading new issue ads: - can show yield, initial offering price even if price, YTM or maturity have changed as long as date of sale by issuer is contained, date of sale for competitive is dates bids were submitted to issuer, date of sale for negotiated is date contract to purchsae security is executed, statement must be made that new issues may no longer be available at time of ad and price may be dif in secondary mkt muni fund securities (529s, etc) - in addition to basic disclosures must... if investing outside state of residence, home state tax benefits should be considered bc many times is tax free in resident state, if past performance is presented, can't guarantee future performance, mas sales loads are included in performance, print/electronic ads must be presented in font sizes and styles that provide info in balanced manner, average annual yields must be presented for 1,5, or 10 years approval by principal: - each ad must be approved IN WRITING prior to 1st use by generic or muni securities principal, copies of ads must be kept for 4 years from each use (MSRB rules)

prepayment risk

get money back sooner than you hoped/planned for/ahead of schedule. risk that mortgages will be paid off early due to lower i-rates resulting in reinvestment in lower yielding investments. investors get chunks of money back when they don't want it

covered put

give someone right to put it to you at the strike price (writing a put) - this means that the investor has sufficient cash in the account to satisfy the obligation of being exercised against...meaning they have the cash to buy the stock we can calculate the max loss... of selling a put.. worst case the stock falls to zero and you are up the preimum so you take strike price - preimum * 100. (why you can't have cash covered call because no limit to how high it can go)

dual agency cross -->

giving stock from 1 party to another = dual agent bc we have both clients - internal trades are executed between bid/offer -commission charge to both buyers and seller -commission must be disclosed on confirm

clients financial objective - preservation of capital (short term)

goal = not lose money time horizon = short what to invest in?: money market funds and t bills, commercial paper, Short term CDs risk = low phrases: park funds, safety, liquidity

clients financial objectives - current income (medium)

goal = want income on my objectives time horizon = medium investments: bond, income mf, annuity contracts (not as liquid), pref stock, utility stocks, REIT risk = medium phrases: steady, reliabile income (may be in retirement and need fixed income)

market analysis factors (terms/theories) - put/call ratio

guages sentiment of market, some believe increase in put/call ratio is a bearish mood bc inrease the number of people buying puts = expected market decline

types of orders --> market order

guarantee execution but NOt guaranteed time/price, cusotmer wants next available price. -they specify security/size of order ONLY, order is immediately executed at best price available

TIPS: treasury inflation protected securities (what happens if delfation occurs vs inflation?)

high inflation hurts bonds 1) hurts your purchasing power since you are locked into a fixed yield... you have 4% yield and inflation is 3%=your real rate of return is 1%, so only 1% ahead of the game even though stated return is 4% 2) if inflation increases, the fed may tighten and thus increases interest rates which will further decrease bond prices (since your bond is then less valuable because you can get a new one with higher yields) TIPS has stated coupon rate that remains constant %, but principal is adjusted for rate of inflation of CPI or deflation ex) principal originally $1000, coupon is 4%, $40 int per year, let's say that CPI increases by 1% (inflation) = $10 annual adjustment (1% of 1000 is 10$) so the principal is now 1010, coupon is still 4, annual payment = 40.40 because you are now taking 4% of 1010 so the annual payment goes up what if deflation occurs? - principal is adjusted downward however at maturity you always get at least par ***in summary: the fixed coupon gets multiplied by the new principal. and at maturity we get adjusted principal NOT just par, if deflation occurs, we get at least par so at maturity they pay greater of par or adjusted principal*** TIPS are attractive if inflation is expected to increase

fundamental tools (measuring financial stability) --> interest leverage ratio

how much money you have available to pay bond interest which is earnings before interested tax depreciation and amortization divided by amount of bond interest = $ you have available to pay bond interest divided by amount of bond interest you have ** higher to coverage, the safer it is and vice versa

what is an annuity? immediate vs deferred

hybrid with insurance aspect/also investment vehicle so in contract = life insurance policy but majority of premium goes to a savings vehicle (which will have choices = subaccount) -tax deferred growth of the contributions - 2 ways to structure it 1) give me a lump sum today to invest = immediate annuities = purchased in one lump sun with payout starting immediately 2) fund contract periodically = deferred annuities. purchased with period payments and payout typically starts after retirement **payout can be immediate or deferred (deferred = focus of exam, put in savings vehicle, used as supplment to work sponsored retirement plan or social security - the contract has a death benefit if the owner dies during the contribution period bc hidden life insurance in contract (they get the greater of the original contribution or contracts current mkt value) - annuity owner cannot run out of money when dist begins even if funds are exhausted, they can do this bc some owners die younger and some older = $ moved around/evens out over time, it's THEIR risk

cumulative vs non cumulative preferred stock example

idea is that you want to pay the common stock holders in year 3 so if that is the case what do you need to pay pref. stock holders in year 3 1) 8% preferred --> year 1 $0 paid, year 2 $2 paid, and .... year 3 must pay $8 (since no cum, so don't owe for any years before, just need to make sure pref. get full dividend amount in that year) 2) 6% cum preferred stock: year 1 $0 paid, year 2 $2 paid, .... year 3 must pay $16 (owe 6 from year 1, 4 from year 2, and then 6 from year 3 so in total have to pay 6+4+6 before they can pay common = 16). 3) common stock: year 1 $0 paid, year 2 $0 paid, year 3 ... any amount

prohibited trading practices - trading ahead of research

if a firm has knowledge of material, non public info regarding contents of a research report, if may NOT establish, increase, decrease, or liquidate an inventory position in a security OR its derivative -why FINRA requires info barrier between trading/research

legislative risk

risk that new laws may have negative impact on an investment's value (tax code changes, etc). can be good or bad - may require all cars have backup cams = good if youre in that business otherwise can increase costs

SMA - special memorandum account

if account is working in your favor (longs increase and shorts decrease) then the acct picks up excess equity meaning b/d is more comfortable with the position excess equity is like a line of credit journaled into the SMA and the SMA is line of credit you can remove in form of cash or buy/short more securities but is occurs whenever equity moves above the initial 50% requirement ** this DOES NOT go down if the market moves against you **

underwriting - best efforts all of none

if all shares/full issue are not sold = issue is cancelled and it is retained by issuer. acting in agent capacity. investors who are buying in, their money is held in escrow account until contingency is met (in this case, all securities are sold ) then money is released. if cancelled, money is returned

mediation = alternatie to arbitration

if dispute, FINRA might first appoint mediator -neutral facilitator to assist parties with disagreement to reach mutually acceptable resolution - if dispute is eligible for arbitration, mediation may be used instead - arbitration = come up with binding decision = not the case with mediaton - may not be successful, may not get both parties to agree and in that case the parties proceed to arbitration * mediation is usually ST, structured, task oriented, hands on process, if settlement is reached, the decision is private and confidential

how do you use VIX??/when does volatility tend to increase?

if invsetor believes S&P 500 will fall, how do they profit from that using VIX options? buy VIX calls or VIX puts?? *** remember we are not betting on the market,,,, we are betting on the volatility.... and we know that it is sudden drops in the index that increase volatility, we we are bullish on volatility then we want calls (call up) - since drop in index, that means a spike in volatility so we buy VIX calls thinking volatility will increase making VIX calls more valuable -if we are using S&P 500 index options you would buy a put (bearish) bc you think it was falling buy trading VIX options you aren'e trading S&P 500 but trading WHAT's GOING TO HAPPEN to volatility

market analysis factors (terms/theories) - market momentum

if market is up, it is expected to continue to increase and vice versa = the trading volume that sustains and increases or decreases in prices. high trading volume increases momentum

option taxation - close out position

if sold option you buy it and vice cersa -g/l = dif between premium you paid and premium you received could be G/L for seller or buyer ST again most of the time only exeception = bought LEAP and held it for more than a yaer

puts and holding periods (what is the one exception?)

if you have stock then later buy protective put, it may impact your holding period for that stock... - if you have stock that has appreciated in value but you have held it for ST, you would buy protective put to lock in profit then hold it until it would be LT --> IRS doesn't allow this - if a stock's long term holding period isn't yet established.... then the purchase of a put terminates the holding period fo the stock - the holding period begins anew only after the put expires or is closed out -if a stock LT holding period is already established, a put purchase doesn't change it (remains LT) married put: = the exception - a put purchased on the same day that the stock is purchased= considered married and holding period can start on that purchase date - premium paid for the put becomes part of the stock's basis, even after exp rather than taking capital loss on expired put, you put the put premium in the cost basis

opportunity risk

risk that passing on the opportunity of making a higher return on another investment

currency options summary of exporter vs importer

importer: pay foreign currency, fear it gets more expense = buy a call to lock in price you can buy it at exporter = receive foreign currency, fear it will decrease in value = you buy put to lock in price at which you can sell at

dollar cost averaging (what must RR disclose to clients)

in bearish market especially investors pull $ out as they see their portfolios go down but often leads to losing $ --> DCA = technique when investors take emotion out = invest on auto pilot = same periodic investment regardless of share price over a fixed period ex = 401K contributions - theory= as share prices go down you buy more shares more cheaply and as shares prices increase, since you're putting same $ amount in you will buy fewer shares important things to note: - no profit guaranteed (RR can never say that) - RR must disclose: no guarantee of LT growth, prices are subject to change, contributions must continue even when prices decrease otherwise losses occur

bond fund volatility rating (define it, what is the rating based on, what are disclosures) (***can ONLY use these ratings if complete pros is provided to customer**)

independent 3rd party measurement of how sensitive a bond fund's NAV is to changes in economy/market conditions rating based on: - credit quality of funds portfolio, market volatility of funds portfolio, fund performance, i-rate risk, prepayment risk, currency risk - can only use these ratings if complete prospectus is provided to customer - disclosures: name of rating entity, most current rating/date of the rating, explanation of symbols used in ranking

types of quotes --> firm quotes (majority of them)

indicative of certain size and quotes are guaranteed for the size of indicated -price in $.01 increments -quotes in round lots (100s) 2 round lots = 200 shares Ex) 16.5 - 16.57, 20 x 30 - this means that they are asking to buy 20 round lots so (20*100)=2000 shares at 16.5 and want to sell 30 round lots (3000) shares at 16.57 -b/d is obligated to buy at least 2K shares at 16.5 and sell 3K at 16.57

market analysis factors (terms/theories) - trading volume

indicator or the support behind a move in the direction of stock prices lot of volume in up market = positive lot of volume in down market = negative not a lot of volume = hard to determine

example 2, taxation of stock if exercised

investor owns 100 shares XYZ at 42 per share and sells XYZ Dec 40 call for 3 if the call is exercised, what are the investors sales proceeds for tax purposes... again not g/l here just sales proceeds strike price + premium = 43/share or 4300 G/L = made 1 point or $100 but that wasn't the questions... bought at 42 and sold at 43, and then LT/ST... depends on when we bought XYZ

accrued int (what is the deal with corp/muni/govt agency and then treasury notes/bonds for counting accrued int days)

interest originally begins to accrue on the dated date (date from which interest starts accruing). 1st i-rate payment is from dated date up to the coupon payment date so 1st i-payment can actually be for more than 6 months = long i-payment or less than 6 months = short i-payment but once paid int on coupon date, each subsequent payment will be in 6 months -when buying in secondary market, buyer pays mkt price of bond and accrued int b/c seller is entitled to portion of 6 month period=entitled to that portion of the interest bc otherwise buyer received full payment which they don't deserve. start counting at last coupon date and count up to but NOT including settlement date of trade. settlement date is used bc it is when security is exchanged for $=seller accrues int until receive buyers $ -corp/muni/govt agency: you assume each month has 30 days regardless of what each month actually has and assume 360 days in the year - for treasury notes/treasury bonds, accrued int based on actual # of days in each month and assume 365 days in a year (thing the govt does the right thing... hence actual days in the year) once we have the number of days, how do we calculate the amount? well annual interest in dollars * (# of accrued days (fraction of year the seller deserves) divided by 360 or 365 days depending on type of security)

tax implications for taxable bonds (corp bonds not munis)... how is int treated? what about zero coupon bonds?

interest=treated as ordinary income, subject to fed, state, local taxes. accrued int. buyer pays sellers, the seller reports as int received and pays taxes. the buyer reports int. payment minus the amount paid to seller (accrued int) then they're taxed zero coupon bonds: still pay taxes (dif between purchse price and par value since this is considered interest income). -each year you accrete (this amount is considered your int=taxable income each year and you increased your cost basis by that amount considered interest income) the cost basis up to par value so no g/l at maturity. -they trade without accrued int=trades flat -no int paid semi annually=don't need to worry about int reinvestment=locked in return up to maturity with no reinvestment risk

soft $ arrangements

investment advisor vs b/d... b/d=firm that earns transactional compensation. many firms are both btw. however if they are just a pure investment advisor... (see below) -if one firm is a pure investment advisory, they can direct business (order flow) to certain firms and in return get credits (soft dollar credits). you can spend these on things that help the investment advisor be a better advisor in summary: soft dollar arrangement = IA receiving research/other services from B/D in exchange for order flow, the services from b/d must benefit their clients what activities qualify? 1) acceptable= things you can get with your credits - research reports, access to analysis, portfolio analysis software, subscription to industry trade publications, attendance cost for a securities conference or seminar, IA software 2) unacceptable use of soft dollars: -cannot pay for office space, accounting fees, advertising/marketing expenses, travel reimbursement, professional licensing fees, subscription to mass marketing publications, travel, salaries, hardware

averages and indexes (narrow vs broad based)

investment returns are often compared against a benchmark of a group of securities (like getting a grade in class, better to compare to class scores) narrow = one particular sector/segment of the market broad based = looks at market as a whole like S&P 500

example, LMV increase (long ex) so margin works out for the client

investor buys 100K of securities in margin account Initial purchase: LMV = 100K = total stock value debit balance = 50K = the half you are borrowing equity = 100K - 50K = 50K or the reg t deposit (so 100K * 50% or LMV * reg t = 50K) so LMV increases by 10k to 110,000 (value of stock) LMV = 110K debit balance= 50K equity = 60K so if you sold all today you could walk away with 60K = 10k profit from the start in 110K account, under Reg T 55,000 or 50% is required but this client has 60K so they have 5K of excess equity --> SMA (simply meaning we have funds above the 50% requirement) with SMA... ** NOT extra equity, but line of credit that can be removed 1 for 1 or if buying securities can get 2 to 1 leveraging with SMA so SMA * 2) -you can take out as cash (increase debit balance and decrease equity) - get double buying power for securities = can buy 10K of securities with 5K SMA (LMV then goes to 120K but bc borrowing full 10K our debit goes to 60K and same equity at 60K)

SMV example, SMV decreases (movement in your favor) again for short sale

investor executes 100K sale on margin credit balance = amount collected from short sale + reg t requirment SMV = current market value of margin account credit balance = 150K = 100K + 50K SMV = - 100K (initial position size, - negative #) equity= 50K ( the deposit or CB- SMV) then SMV falls by 10K to 90K (short seller is bearish so happy about this) SMV= - 90K credit balance = 150K (unaffected bc from original sale/reg t requirement) equity = credit balance - SMV = 60K (so it increased) so you sold something for 100K but can buy it at 90K, there's 10K profit = equity grew by 10K equity needs to be at least SMV * 50% = in this case 45K, any equity above 50% is SMA SMA = 60 - 45= 15K and shorting power for SMA = SMA * 2 = 30K

ex long hedge (put put) or protective put (synonymous)

investor is bullish on ABC stock, fears the stock's downside risk does the following: - buys 100 shares of ABC at 96 - buys 1 ABC June 90 Put at 3 (locked in at 90... so although you want market to increase, you are safe at 90) strategy= bullish on ABC, the put is just bought for protection - if stock goes up, the option expires but get gains from stock increases main gain = unlimited bc stock can go up forever -breakeven= soo we need $99 per share to breakeven = 99 = cost of stock + cost of put cash out: (we are on one side here so... no net breakeven to determine since no money in) 9600 to acquire stock 300 to buy option =9900 or 99/share so if the stock went to 99, we cover the cost of the put (insurance) why buy the put? later ABC falls to 80 and the investor exercises the put, what's the result? cash out: 9900 cash in: 9000 for putting option to someone loss is capped at 900 = max loss even if stock fell to zero

tracking performance (active vs passive portfolio... active = tries to beat market, passive = tried to maintain/follow index)

investor must track how his investments are performing relative to a benchmark or index (if investment is up 5% but S&P is up 10%... you're not doing that well) - must compare parts of portfolio to match those indexes - if portfolio contains fixed income and equity = compare each portion to the related index, so a stock index and a bond passive portfolio = follow index (likely will reflect what % index is up or down) active portfolio = try to beat index, you hope you do better than the market

ex covered call writing (want income purposes= you own the stock and sell a call)

investor owns DEF stock but believes it will trade flat for next short period even though the Long term they may still be bullish on it = want to keep it but may want income in the short term --> sell a covered call against this stock long 100 shares of DEF at 42 sells 1 DEF jun 45 call at 2 you sell to take in premium = the income portion, you are now obligated to sell it at 45 to buyer so you give up upward potential of stock sacrafice: stock's upside potential for the premium. not only take in dividends etc of stock but premium income as well loss is realized if DEF stock...declines.. the call will expire and your stock that own can fall to zero, so we can keep the 200 premium at least.. but we are down significanclty on the stock we own (have a lot of downside risk -again we are doing this for income... if we really wanted to protect the position that we own we would buy a put = right to sell it to somone else so we wouldn't be holding onto worthless stock ** with decrease in stock the only benefit is that you get to keep the premium bc the call will expire, but downside = very little hedge breakeven: well... cash out: 4200 cash in: 200 so.. = 4000 or 40/share later DEF rises to $67 and the investor is exercised against, what is the overall result... cash out 4200 cash in 4500 (obligated to sell at 45 regardless of how high the stock goes) 200 =4700 gain of 500

ex)

investors cost basis ($ already paid taxes on) = invested amount plus any reinvested distributions June 2015: person invests 10K in XYZ growth fund Dec 2015: income of 600 is reported on form 1099 Dec 2016: income of 700 is reported on form 1099 dec 2017: person redeems shares for $14,500 investor wants to increase shares purchased so 600 and 700 are taxable events, even if no real $ was accepted bought at 10K proceeds=14,500 basis=11,300 --> original 10K plus all reinvestments + 600 + 700=11,300 soo taxable gain is 14,500 (proceeds) - 11,300 (basis) = 3200 (taxable amount)

OID - original issue discount

issued at discount to face value, ex is a zero coupon bond. so it is issued at a discount but pays par value, the difference is your tax free interest income. each year you can increase your cost basis up to par at maturity = accretion -if you hold to maturity you get par, you accreted to par --> no taxable g/l at maturity, dif was considered your interest income along the way. YOU MUST BE accreted at rate that will bring basis to par at maturity. - if sole prior to maturity, you could result in capital g/l depending on if you sold for more or less than accreted value (so this is determined by difference between bond's accredited/adjusted cost basis and sale proceeds) ex used straight line method of accretion/ammoritzation (to adjust cost basis) which is what's used for exam questions however actual method is called constant yield or constant interest method (on exam will likely just tell you adjusted cost basis)

secondary market discount bond - part 3 of tax consideration for premium/discount bonds)

issued at par but later purchased at discount in secondary market - why drop to discount in secondary market? 1) interest rates increase so bond prices go down 2) general interest levels haven't changed but bond had credit down grade = more risk = more return = lower price this discount was created in secondary market and is taxable as ordinary income and is NOT considered tax free interest income. **ONLY munis pay tax free interest income, secondary market does not **** no accretment/need to pay taxes each yer because that can happen at maturity when sold, accreted market discount is taxed as ordinary income **Basis is not adjusted

example 3 option taxation if exercised

long DEF feb 45 put at 3 if option is later exercised when DEF is at 40, the investor will have... 1) proceeds of 200 2) 4200 3) 4500 d) 4800 = 4200 put = strike price - premium = 4500 - 300 = 4200 cash out: 300 for premium cash in: 4500

technical analysis (2 types, theories and charts)... look at market against past performance/past indication

looks at market or specific stocks, etc against past performance/past indication of interest, can be done in 2 ways 1) theories: short int theory, DOW theory 2) charts: chart patterns that we can used to predict based on how they have tracked in the ST)

trader

maintains no inventory, execute trade for the firm/firm clients

syndicate practice, what are the types of syndicate...eastern vs western

manager invites other b/d to participate and share in liability by sending syndicate letter --> agreement among underwriters. which addresses: - size/type of offering (most are firm commitment) - type of syndicate 1) eastern/undivided = each member is responsible for their % of unsold bonds regardless of what each b/d sold, all parties take up some % of unsold shares as well 2) western/divided= members are responsible only for original allocation of bonds, once you sell that, your liability is over = not responsible for unsold bonds left by other members - % required to participate, manager usually assumes greatest responsibility - priority of orders = manner in which credit for orders are allocated among members (allocate bonds and disburse profits)

debt with foreign characteristics - eurobonds

many dif types - sold in 1 country but denominated in currency of another (like euro dollar bonds) - issuer, currency, primary market may all be different

ex - activity

market price above strike price --> calls are in the $, puts are out of the $ premium - intrinsic value = time value increase in the number of contracts but shares in the contract stay the same = even split (anything to 1) odd split, reverse splits and dividends all change the number of shares required doc when opening options account --> options disclosure doc strike price + premium = breakeven for calls strike price - premium = breakeven for puts

currency spot price (what is interbank market?)

market price for foreign currencies is established in interbank market = trading of foreign currencies between banks around the world, very unregulated bc no government can regulate this fully and decentralized = not an exchange - unlimited trading hours - spot trade generally settle in 2 business days (currency exchanges)

sum max gain and max loss for seller and buyer

max gain: - for buyer of calls = unlimited - for buyer of puts = strike price - premium *100 -for sellers of calls= premium - for sellers of puts = premium max loss: - for buyers of calls: premium - for buyers of puts: premium - for sellers of calls: unlimited (if uncovered) - for sellers of puts: strike price - premium *100

annuity phase = you hand contract over to insurance co = property of insurance co

means savings is over -contract holder wants to start getting money in formalized method - insurance co changes accum units --> annuity units - investments may remain in tact - accum units = property of investor - annuity units = property of insurance company - once you annuitize contract, death benefit is gone***** - at annuitization, insurance co knows the following: the value of the account, age, gender, and guess about life expectancy (what the unit value is based on) - will ask about payout option, payout option will effect amount of payments, *****payout is established by multiplying fixed number of annuity units by fluctuating value - investments remain in tact = value of annuity units go up and down which means your payment stream will fluctuate, payments are mixed of basis (tax free) and earnings (taxable)

margin terminology - long market value (LMV) (for long)

means you are buying = gross value of acct, if seeking to buy 200K of stock, LMV = 200K market to market at 4PM each day

M and A and spinoff (define them)

merger= combo of 2 companies that are usually equal --> dist. of new shares acquisition: one co purchases another/assumes total control. acquiring co continue to trade, while acquired co. shares cease to trade spinoff: co has a lot of different business units and spinoff specific unit as separate entity. the unit may not fit in larger business model/trouble selling it. shareholders recive new shares of the business unit

maintenance call

min allowable amount which is 25% of the LMV or 30% of the SMV this requires deposit if equity falls below 25% LMV in long account or 30% below SMV in short account * must be remediated immediately* these are SRO rules, Reg T = FRB/much bigger picture

underwriting - best efforts mini-maxi

min amount must be sold for deal to move on... unsold portion retained by issuer, underwriter act as agent

prohibited trading practices - anti intimidation/coordination interpretation

mms cannot coordinate price, quotes, transactions or trade reports - mms cannot threaten, harass, intimidate other mms - cannot retaliate against or discourage the competitive activities of another mm

issuing GO bonds vs issuing revenue bonds (define each)

muni debt issues are exempt from the registration and prospectus requirements issuing GO bonds: - require voter approval usually bc backed by full faith and taxing power - subject to debt limitation which limit ability to add debt above its debt ceiling issuing revenue bonds: - backed by specific revenue facilities not your taxes,, backed by fees that are paid to use facility or services -feasibility study is done, usually includes engineering report

series (spreads)

names a specific option, so same class, same strike price, same exp month ex= all apple june 140 calls = a series

receiving annuity benefits, withdrawals and loans

neither are annuitization (when $ handed over to insurance co for payout schedule), these are still in accumulation phase you just need some money 1) withdrawal: annuitants may choose to take these, they control the timing and amount of money they want to take - earnings are withdrawn 1st and taxable not the basis/contribution that went in post-tax, aka, would come out tax free -annuity contracts/retirement plans don't create capital events -may be subject to penalty if not certain age, if taken prior to 59 1/2 subject to 10% penalty, the gross amount of withdrawal is added to taxable income 2) loans: may be tax implications, must pay yourself back unlike withdrawal where $ is gone -interest is charged which decreases the number of accumulation units

NAV

net asset value = liquidation price = value of portfolio at the end of the day bid price of shares or redemption price of shares, the accounting value of a funds position, marked to the market at closing prices as of 4PM -investors who redeem their shares receive the next computed NAV - acquire @ POP, which is NAV plus a sales charge - each day = new NAV and POP - if put order in before 4PM= you get todays price, order past 4PM you get next day price - the portfolio manager can trade positions but MF don't trade... you acquire or redeem at the end of the day, other investment companies have the intra day trading

unsecure corp debt

no specific asset= debenture if default - you are considered general creditor... can issue debentures after original debenture = subordinated debentures = have secondary/junior claim = paid after all other bondholders

uncovered put

no sufficient cash to meet obligation of being exercised against on the put a lot of risk if underlying security falls because again you have to put it at strike price regardless, stock could be worthless = you can't turn around and sell it and make any money

inherited securities - tax treatment (NO TAX IMPLICATIONS, but these are considered LT for holding period)

no tax liability to recepient bc already went through deceased person's estate (assume any inheritance tax etc was handled by the estate). cost basis is the value at time of death - stepped up if deceased cost basis is lower - stepped down if decesed cost basis is higher inherieted securites are ALWAYS considered LT holding period

investment returns - debt (what are dif types of yields, how do you calc current yield?)

nominal yield, the stated coupon current yield = annual int earned/current market price ytm= looks at total reinvestment/reimbursement at the end depending on if you paid discount or premium ytc= yield if callable (either highest or lowest) ytw= lower between ytm and ytc

dealer to dealer markets - OTC (2 systems that offer real time quotations...)

non exchange issues = over the counter. there are requirements in order to be eligible to be listed on an exchange. many choose not to list or are not large enough to (often low priced/thinly trade) are what you see in the OTC like penny stocks 2 systems that quote but these are NOT exchanges: they show which b/d are willing to sell/buy on certain stocks, the b/d then buys shares for you acting as agent, charges commission. the market maker is the one contacted 1) OTCBB (bulletin board) = must be reporting co 2) OTC pink market = may be non reporting co

muni bonds - revenue bonds (more risk here)

not backed by full faith/taxing power but by specific revenue producing facility to fund SPECIFIC project (like toll road) bridge, etc airport, stadium, water systems. -if revenue isn't sufficient they could default -considered self supporting debt because not backed by taxes but by the facility its using to finance - do not require voter approval but general obligation bonds do because they are backed by taxes thus there is a debt ceiling - these will often have feasibility study that will be accompanies by engineers report

types of quotes --> subject

not firm=subject to reconfirmation and is tentative, usually over the phone where firm quotes are printed in electronic system

adjustment of terms/components of an option (how may these contracts change??? ex is stock split/divedend this card is for odd splits (2/2)

number of contracts stays the same but the number of shares in each contract changes (this is anything that is not some number to 1) ex) 3 for 2 split, 1 ABC feb 60 call. still only 1 contract but we take number of shares it used to represent by the split .. so we take 100 *3/2 = 150 shares and same as before we take the strike price and multiply this by the reciprocal so 60 * 2/3 = 40 40*150 = 6000

ex

ommitting pros= doc including MF performance info sent to client b4 making a purchase ranking entity--> organizatino hired to compare dif MF bond fund volatility rating: independent 3rd party measurement of NAVs sensitivity to changes in econ/mkt conditions variable product communication: may include hypothetical illustreations of return, only what could happen, no guarantee, capped at 12% growth rate CMO advertising: investment cannot be compared to ANY other investment quiet period= research reports can't be dist. by underwriting participants

when must trade confirms be sent?

on or before settlement of the trade

net basis -->

only case where compensation is not disclosed, markup is NOT disclosed = client is likely institutional = can judge the value of the trade firms purchased/resale to its client is reported as two trades - retail/client must provide prior written consent inst clients may provide both oral and written consent or use a negotiated client letter

premium bond taxation (part 2 of tax consideration for premium/discount bonds)

premium must be amortized over the life of the bond, if held at maturity you are amortized down to par, you receive par, no g/l at maturity. on muni bond, can't deduct amount you amortize because pay tax free interest income if sole prior to maturity, you could have g/l but based on difference between adjusted basis (what you amortized down to) and sale proceeds...

ex

prerefunding = issue new debt to retire debt at some point in the future zero coupon=not subject to revinestment risk ytm=basis

analyzing vertical/price/dollar spreads (1/3) - ex

only dif is strike price buy 1 xyz feb 80 call at 3 sell 1 xyz feb 90 call at 1 what is the dominant strategy?? the one with the higher premium what is net premium? 2, because we bought one and sold one, so money going in and out, must find the difference by selling the call, we are decreasing the cost (because instead of paying 3 we paid 2 net for premium) and risk but we gave up profit above 90 = cap profit potential are we paying or receiving money? net premium = 200 buy or sell = buyer, bc we pay more money than we are taking in so we are more like the buyer, dominant strategy = with higher premium = buying, buying a call = bullish = wnat market to increase debit or credit: debit bc we paid out premium, net of 2 points of $200 to establish position widen or narrow: debit = 5 letters and so is widen breakeven = must make 2 points back bullish/bearish = bullish bc dominant strategy is buying a call breakeven: 80+2= 82 (we take dominant strategy and apply the net premium like a regular option contract) --> always use strike price of dominant strategy and then if call you add the net premium and for put you subtract the net premium ***breakeven point must be between the two strike prices*** -bullish bc each point above 80 = 1 more point youc an sell it for above what price you bought it at max gain: we gave up the unlimited profit potential of buying a call when we sold the call, meaning we capped our earnings at 90, because we could have to delivery somebody at 90... sooo the most we can be up is 10 points less the 2 premium we paid which is 8 or 800 this is re of how high the market goes. *** difference between the strike prices less the premium ** max loss: if stock goes to zero... both are calls = both expire are out of the money = lose net premium of 200 ** horizontal line at 80 and also at 90, breakeven is strike price of dominant strategy plus two in this case bc it's a call and the net premium is 2... we know that the breakeven must be between the two strike prices and anything above that will be a gain, which we can see then maxes at 8 points or 800$and anything between 82 ad 80 is a less. together the 2 and 8 make up the 10 which is the difference between the two strike prices - soo if above 80 the call is in the money net premium= will always be either the most you can make or the most you can lose... if you are taking in the net premium then it is the most you can make/max gain, if you are paying out the premium then it is the most you can lose/max loss **max gain plus max loss will equal the difference between the strike prices ** dif = 10 max gain = 8 max loss = 2 for calls, the lower the strike price, the more valuable the option, higher premium all other things equal will be on the option with the lower strike price

withdrawal plan (4 methods for this)

opposite of DCA (which is way to buy into fund) -withdrawal allows investor to receive regular, periodic payments from their accounts -min acct value is required - variety of methods are available such as fixed dollar, fixed %, fixed time, fixed # shares (payments will go up/down as share prices change) -payments aren't guaranteed for life of investor, the investor can run out of money and once it's gone it's gone ***Cannot advise DCA and withdrawal plan at once...makes no sense bc you are paying sales charge to buy into them just to then take the money out...

life of a trade -->

order entry --> execution --> clearing --> settlement --> custody

trade confirm vs order ticket

order ticket = no order has yet taken place trade confirm = after the fact, trade is completed

market analysis factors (terms/theories) - market sentiment

overall attitude of investors as it relates to market or specific security

non qualified dividend

paid at normal income levels, max out at 37%

convertible preferred stock conversion ratio

par value (100) and divide by conversion price --> will give you the number of shares you can convert to (since you can convert into predetermined number of common shares) regardless of what happens to common stock, it doesn't effect the divident so normal common stock is more risky than the convertible pref. stock

most common type of mortgaged backed securities = pass through certificate

pass through = combo of interest and principal paid each month are subject to taxes on all 3 levels

other corp bonds - zero coupon bonds

pays no semi annual interest = zero coupon why buy? issued at deep discount/matures at face/par value. the difference is interest income - though not paid interest semi annually, must act like you are (accreted yearly, the dif between purchase price and par) = assumes you get portion of interest yearly (can be taxable) =increase your carry value/cost basis by that amount -trades flat=no semi annual interest - trade without accrued interest (the int earned since last int payment). - no reinvestment risk = more locked in return over life of bond -suitable for investor who is planning for specific future need (college, retirement, etc) bc you know how much money you'll have, it's a locked in return.

Code or procedure 1) complaint filed 2) copy of complaint is sent to respondent and given days to respond 3) hearing panel 4) appeal

police the industry used for handling FINRA rule violation - process used to discipline members who violate FINRA rules (what happens to you when you violate FINRA rules) 1) complaint filed and forwarded to department of enforcement 2) copy of complaint and letter of acceptance, waiver, and consent (AWC) is sent, the respondent is given the opportunity to respond - given 25 days for 1st notice - given 14 days for 2nd notice if you disagree/reject (not signed) a hearing is held 3) hearing panel: potential results = fine without limit, suspend/revoke registration, bar from association with a member firm, can censor you publicly = blame you = goes on your record. they cannot imprison you, nor can SEC, can recommend to DOJ to be brought up on criminal charges but have right to trial 4) can you appeal decision in hearing panel? YES appeal decision = first appeal goes to national adjudicatory council (with in FINRA) from there can be appealed with SEC and then with federal court

soo overall reverse convertible

positive= higher yield than other fixed income products with same maturity negative = if stock falls below knock in level and closes below initial level you only get the number of shares at that close price which will be worth less than par and then get interest, BUT not principal. another negative = don't participate in upside fo stock... all issuer would pay you is par value in best case scenario

1/3 purpose of option - speculation

purchased/sold to generate a profit. in this case, the investor has no existing position in the underlying security long calls/short puts: bullish long puts/short calls: bearish buying straddles: volatility selling straddles: stability spreads can be bullish and bearish but limit risk by giving up profit potential

performance of reverse convertible (ex)

principal value = 1000 maturity= 1 yr knock in level = $40 coupon annually=12% initial value of XYZ = $50 convertible into 20 shares of XYZ results.... XYZ closes at $53 soooo we know that XYZ never falls below knock in level=get interest and par value at maturity so regardless of where XYZ closes at maturity, the principal amount is paid, customer receives 1000 if principal and $120 of interest think of it that there are two horiztonal lines on a graph... one is the knock in level (lets say $40... that is one line) and the initial value lets say is another horitzontal line (does not move) and then the other line on the graph is the actual value of XYZ which can be a smooth line or curved, etc as the value changes over time relative to the intiial and knock in level

performance of reverse convertible (ex) 2

principal value = 1000, 1 year annual coupon of 12% initial value = 50, knock in level is 40, convertible into 20 shares of XYZ results... lets say that... XYZ falls below knock in level but it then closes at 43, so bc at a point it dropped below, the investor receives 20 shares @ 43=860 in value and may get $120 worth of interest -since XYZ stock fell below knock in level and ended below initial value, issuer delivers 20 shares of XYZ (instead of par value and the shares are worth less than par) and $120 of interest is paid at maturity.

balance sheet (part of 3 financials, 1) cash flow, 2) income statement) assets vs liabilities

produced annually/quarterly = snap shot of assets, liabilities, shareholder equity at one point in time ASSETS: (current assets, fixed assets, intangibles) -->current assets (can be turned to cash in 1 year period) -cash -marketable securities -accts receivable = $ owed to the business -inventories -other current assets -->fixed assets (take longer than 1 year to sell off assets) -PPE=property, plant, equipment, lose value every year = depreciation (land can't depreciate tho) -->intangibles: items that cannot be sold but have value. this includes good will (if one company bought another for more than the book value), patents, trademarks, intellectual property LIABILITIES: --> current liabilities (co must pay within 1 year) - accts payable -accrued expenses -income tax payable -short term debt --> long term liabilities (greater than 1 year) -long term debt (notes/bonds) -leases -treasury stock?? STOCKHOLDER EQUITY: - ownership consists of common/preferred stock, the par value is used for the stock -additional paid in capital = amount it sold for in excess of par - retained earnings = $ earned by company not paid out in form of dividend

stock and option positions summarized

protect in volatile market - if you are long the stock, buy a put (long hedge/protective put) - if you are short the stock, buy a call income in stable market (will sell bc you take in premium) - if long the stock, sell a call (covered call) - if short the stock, sell a put (covered put, but unlimited upside risk bc you still don't own the stock)

other types of options 2/3 - currency options (what exchange do they sell on, philadelphia)

provide opportunity to speculate/hedge on movement of foreign currency vs US dollar *AKA exchange rates on foreign currencies compared to US $) -no options on US dollar bc we alwaysaassume US dollar is other currency involved -can hedge against adverse market move ex) US exporters sell to Europeans so you are paid in Euros which will convert to US dollars... you are concerned that the value of that currency will go down. a way you can hedge is by buying a put on that foreign currency bc you fear it will go down (so you lock in price to sell that currency at) ex 2) US importer, import goods = you pay british pounds in the future= will have to go get british pounds in the future, fear = british pound will increase and thus cost you more when you go to buy to hedge = buy british pounds call (lock in price for which you can buy the currency at) -trade on the philadelphia exchange --> NASDAQ OMX PHLX (again not talking about currencies themselves but options on the currencies)

rule 144A (STOCK OR DEBT)

provides exemption if selling restricted securities to QIB -QIB= inst with at least $100 mil assets under management -144A securities can be equity or debt securities which are offered by domestic or foreign issuers -IN SUMMARY: restricted securities can be sold to QIB without volume restrictions or holding periods - HOWEVER, if the same class are listed on an exchange, they are ineligible for 144A exemption - a lot of the time these are corporate debt offerings

QIBS

qualified institutional buyer -inst that manages at least $100 mil of assets - cannot be natural person - all QIBS are accredited investors, but not all accredited investors are QIBS - 144A transaction, buyer must be QIB

use of ranking entities (for investment co, specifically MF) (SEC required yields, MM vs other funds)

ranking entity= organization independent from investment co that is hired to provide ranking symbol for the fund (ex) moringstar/Lipper= nationally ranked - SEC required standardized yields: for MM funds it is a 7 day yield and for other funds it is a 30 day yield (bond fund, etc). - disclosures: objective of the fund, name of ranking entity, criteria used for ranking, past performance is not guarantee of future results, explanation of symbols used in the ranking

prohibited trading practices - quoting a security in multiple mediums

refers to displaying quotes on same security in multiple markets only permitted if quotes are the same price

market analysis factors (terms/theories) - index futures

reflects investor attitude toward direction of underlying market may head in the short term

regulation exemptions for SEC 33 act- Reg A+ tier 1 and tier 2 offerings

reg A+ = small offerings, they can be public offerings (if so, the disclosure doc = offering circular) offering circular, replaces full prospectus that would be required for full public offerings, also saves money (anytime you can get around the prospectus requirements) reg A+ tier 1: max offering size = 20 mil, time period = 12 months, max amount that can be sold by existing shareholders = 6 mil (30% of offering) (some shares are sold by selling stockholders, others by private equity firms, etc) Reg A+ tier 2 (more strict ongoing requirements) - max offering size = $50 mil, time period = 12 months, max amount that can be sold by existing shareholders $15 mil (30% of the offering)

securities act of 1933 (what is no approval clause... and what are issuers and underwriters liability??)

regulates primary/new issue market purpose: provide full and fair disclosure so investors can make informed decisions -have to make full/fair disclosures -issuer files registration statement, portion of which is the prospectus (disclosure doc investor receives) and must precede or accompany any solicitation of a new issue (NO MARKUPS or HIGHLIGHTING on this) -SEC no approval clause = included prospectus. they don't approve this/disapprove the securities = doesn't pass on investment - SEC requires SEC registration of new issues but there are exceptions liability: issuers have liability, if there is fraud, issuer is liable (untrue or material commissions = fraud). underwriters have liability too. must exercise due diligence = reasonable investigation, disclose anything found to SEC

communication standards

regulators don't care about format, have general standards however: - must be fair/balanced that means should include upside and downside - can't have false, exaggerated, misleading information. can't imply historical patterns will happen again but can document historical performance - clear/balanced as to risks/potential benefits - considerate to audience - can't predict/project performance

alternative products

reit, limited partnerships, hedge funds

income statement (did I make or lose money)

revenue (sales) - cost of goods sold = gross profit gross profit - operating expenses (sales, general, administratorand depcreciation and amortization) = operating income operating income +/- other income/expenses = EBIT if you have no other income or expense, then that will now equal EBIT (earnings before interest and taxes), interest is paid before taxes EBIT - interest = taxable income taxable income - taxes = net ncome net income - preferred stock dividends = earnings available to common stock holders earnings available to common stockholders - common stock dividends = retained earnings most professionals use non accounting term, accounting on the other hand uses a term called GAP (general accounting principals) which are the terms we used above), many use a non GAP term called EBITA = we take EBIt and add D and A (depcreciation and amortization) the non cash expense many see EBITA or measure of cash flow of a co/total value of a co.... they are worth 6x EBITA....

credit risk

risk of default = risk bond may not repay its obligations (moody etc check for this)

reinvestment risk

risk that interest rates will fall and semi annual coupons will be reinvested at a lower rate, no reinvestment risk with zero coupon bond

capital risk

risk that investors will lose invested capital, (now discuss what the bankruptcy preceedings are... bond holders then stock holders, etc.)

unsystematic risk (4 types, B=business risk, R=regulatory risk, P=political risk, L=liquidity risk)

risk that is specific to a given security and can be managed through diversification 1) business risk: risk that company may perform poorly causing a decrease in stock value. happens due to increases in competition/advancements in marketplace and the fundamental model may be on the decline 2) regulatory risk: risk that new regulations may have negative impact on investments value 3) political risk: risk that political event outside US could adversely affect domestic markets 4) liquidity risk: risk that investment cannot be bought or sole quickly enough to prevent or minimize a loss, this stems form a lack of marketability, etc.

Regulation SHO (for short selling) 2 parts to the rule 1) what are market requirements, 2) locate requirement

rules around short selling, created by SEC 1) market requirements: refers to long sale/short sale. anytime customer sells, order ticket must be marked long or short sell. when can they be marked long on ticket?? 1) you own it 2) you can delivery by settlement without having to borrow them 3) convertibles have been tendered 4) options, warrants, rights have been exercised or tendered and b/d believes the security will be delivered promptly ** if you own convertible and sell stock, you mark ticket short = not good enough to just own it MUST be exercised ** ** if sold short, the b/d marking ticket must be able to deliver by settlement and how do they do that???? (see below) 2) locate requirement (only applies to short sales) - b/d can only mark ticket short if they have a reasonable believe that they can borrow the stock, one of the ways they do this is "easy to borrow" list that can't be over 24 hours old - stock loan dept: all clients who signed loan consent agreement = allow you to borrow their stock = gives you an idea to b/d of how much we can borrow of a given security = have done a "locate: we know what's available so if stock isn't on list (easy to borrow list) you can't mark short until you locate the stock - difficult to borrow stocks that need to be manually located prior to short sale - may be from customer of other firm - failed delivery/naked short sale = really bad ** in sum = can't buy short unless on list or can be manually located

time/calendar/horizontal (2/3)

same class dif series buy 1 XYZ dec 40 call sell 1 xyz sep 40 call exp month is different, again we identify by the difference, on old option table, month ran horizontally

example LMV decreases (so market moves away from you)

same ex continued later LMV falls by 20K to 90K so after decrease... LMV=90K = value of stock debit = 50K (still the same from 100K purchase) equity = 40K (below 50%, 50% of 90K = 45 = restricted however doesn't have to be remediated until below 25% lmv or 30% smv) ** SMA doesn't disappear so SMA = 5K still later lmv falls by another 30K ... lmv = 60K debit = 50k equity = 10 k SMA = 5K but now min maintenance kicks, 25% of LMV = 15K and the equity in the account is short of that at 10K ** SMA IS NOT USABLE TO MEET MAINTENANCE CALL** client could come up with 5K cash --> debit falls to 45 then we have 60K LMV - 45 debit = 15 equity which meets it if client has no funds, maintenance call sale = liquidate positions, the same amount will be 4X the call so 5K call is met with 20K sale SMA still doesn't change = not destroyed by movement against you

class (spreads)

same underlying security and same option type (so call or put)

liquidation proceedings for LP

secured lenders, general creditors, LP, then GP

short put ex (writing the put)

sell 1 DEF Nov 35 put at 4 current mkt value is 36 breakeven = strike price - premium *100 = 3100 strategy = bullish max gain = premium max loss = strike price - premium * 100 = 3100 later DEF is at 25, the investor is exercised against and stock is immediately sold cash out: $3500 cash in: $400 $2500 = $2900 so loss of $600

put spread example analysis

sells 1 ELG Nov 95 put at 8 buys 1 ELG Nov 80 put at 1 again... spread = same class different series. class = same type of option (so both puts or both calls), one must be a buy and one must be a sell. and must be the same underlying security first of all, the dominant strategy is the sell.. the higher premium net premium = 7 we are: seller strategy: bullish debit or credit: credit, we are taking in the premium as seller narrow or widen: narrow breakeven: take the strike price of the dominant strategy and then plus or minus the net premium depending on if call or put = 95-8=88 (again this must be between the two strike prices). so on either side of this is your loss and your gain max gain: premium of $700, if stock goes above 95... no one is going to put stock to us, because no longer valuable (put down is what the buyer wants) max loss: $800 (15-7=8), max gain plus max loss = the difference between the two strike prices... think of it like this... worst case the stock falls to zero... we would then have to but it at 95, but can sell it at 80, so the max we lose is 15 but we also took in 7 premium so max loss is 8. **on puts the higher strike price will have the higher premium**

example 4 option taxation if exercised

sells one GHI Aug 60 put at 4 if GHI falls to 50 and put is exercised what is cost basis?? (not G/L) 1) 4600 2) 5400 3) 5600 4) 6000 put = strike price - premium = 56/share or 5600 cash out: 6000 cash in: 400

balance sheet formula: total asset=total liabilities + shareholder equity

sharedholder equity= total assets - liabilities

spreads - bull/bear, debit/credit, widen/narrow, looking at example that doesn't include the premiums (follows same steps as above) ex 3 **** good ex because same strike prices

short a JMK oct 75 call long a JMK Dec 75 call for calls again the dominant strategy is associated with the lower strike price in this case they are the same so we then look at ... 1) assume they expire in the same year 2) the one that expires later has the higher premium... this includes the idea of time value, the longer there is left = the more risk that the seller is taking on so in this example the dec call has a higher premium we are buyer: strategy: bullish debit widen

investment returns - capital gains/capital losses

short term = regular income levels long term = 20% or if you are in lower tax bracket, you pay that gain= realized when sales proceeds exceeds cost basis loss= realized when cost basis exceeds sales proceeds return of capital = return of investors original investment an expiration is a sale @ 0

Corporate commercial paper

short term money market instrument unsecure debt obligation of corp for short term liabilities - max maturity of 270 days (allows exemption from SEC 33 act)

muni notes (4 types) again issued in anticipation of future revenue to payoff the notes...

shorter term, generally a year or less (can be longer but not usually) these are issued in anticipation of future even used to payoff the notes 1) TAN: tax anticipation notes 2) RAN: revenue anticipation notes 3) BAN: bond anticipation notes 4) GAN: grant anticipationnotes (fed grant to muni) tax free federally use proceed to retire the notes

capital losses

sold asset at a loss= sale proceeds are less than the basis (cost to acquire) same holding period for LT and ST applies - can first be offset against capital gains if gains > losses, you pay tax on the difference - if losses are greater than gains, the max you can write off on taxes is 3K (against ordinary income, set by IRS)

trading halts (2 types) 1) regulatory 2) trading

some are regulatory trading hals and some are market trading halts 1) regulatory: SEC may issue a halt or trading suspension: -for any individual security for up to 10 business days (may be under investigation, etc) - and on any exchange for up to 90 days after notifying president of USA when this happens all b/d trading is prohibited (quoting, trading, etc) even in foreign markets (even if still trading there) or internal crossing system, alternative trading 2) trading halts= based on downside market volatility only: may be imposed due to significant decreases in S&P 500 (% triggers are reset each day) - 7% decline --> halt for 15 mins of entire market - 13% decline --> half for another 15 mins of entire market - 20% decline --> half for remainder of the day

other methods of holding securities (mostly for equities) - DVP/COD/RVP - DRS

some clients choose to hold positions away from b/d 1) DVP/COD (same) and RVP: = when client uses bank to consolidate multiple brokerage accounts -DVP=delivery vs payment or COD which is collect on delivery - RVP = receipt vs payment DVP/COD= imagine you order something to your house, you don't pay until it is delivered... - client is buying securities - b/d delivers securities to clients bank and is paid by the bank -usually for large inst investor usually bc required by law bc not allowed to keep securities at b/d, MF is a good ex, must be held in MF name at bank RVP= opposite, client is selling securities and the bank delivers the securities to b/d and b/d makes payment to banks 2) DRS = direct registration system - enables investors to hold assets in book entry form directly with the issuer or its transfer agent - want securities in your name not st name, issuer must have DRS arrangement tho= way to hold in your name without having to have the physical cert

discount bond taxation (bond sold prior to maturity)

soo... g/l determined by dif between bond cost basis and sale proceeds -zero coupon bonds: if investor bought 10 year zero coupon bond 3 years ago for $500 and sold it today for $500 she realizes a.... well cost basis is accreted up to par value and we consider accredited amount as interest income each year. portion of discount is considered as taxable income each year and increases her cost basis so we compare accreted basis (in ex is 650) to sale price of $500 = capital loss bc sold it for less than adjusted/accredited cost basis

sample property bill

source of income for local muni tax rate is stated in mills... which is multipled by the assessed value of a house/property NOT THE MKT VALUE. assessed value is usually % of total market valye ---> 80% FMV in this ex... assessed at 336,000 at .007 (=7 mills) = $2352 so in this ex... $7 per $1000 of assessed value. why taxes go up??? 1) reassess values 2) they simply increase the tax rates

currency option strategy ex

speculator believes US dollar will weaken, resulting in a euro rally, the speculator decides to... -buy a call.. (we are bullish on the euro) ex) buy 1 Euro jun 160 call at 3.35 breakeven for call = strike price plus premium = 163.35 strategy= we want euro to go higher, bullish and therefore bearish on US $ max gain = unlimited max loss = premium if euro increases to 166 and option is closed out at its in the money amount the result is.... cash in: 600 since 6 points in the money cash out: 335 for premium =265 gain $

spread vs straddles/combos

spread = 1 buy and one sell, strategy = bullish or bearish, classes and series, debit (pay net amount) or credit = (take in net amount) straddles/combos = both buy or both sell, strategy = volatility if you own it and stability if you are short it

prohibited trading practices - market rumors

spreading false/misleading info to influence the price of stocks and or bonds

straddle vs combo

straddle = strike price and expiration month are the same for 2 options that you are buying or selling combo = any other 2 options you are buying/selling that do not have the same exp month AND strike price

REIT characteristics

subject to act 1933, so SEC registration and prospectus delivery - many trade in secondary market, trades throughout the day, we can short them/buy on margin - don't qualify for dividend exclusion rule since they have the other tax benefit - attractive for investors seeking income (mortgage/bond types) as well as growth vehicle (equity ones)

underwriting - firm commitment

syndicate takes a firm commitment = responsible for unsold shares, they buy full offering and any unsold are retained by them. acting in principal/dealer capacity (deals from own account)

investment returns - muni bonds (tax equivalent yield)

tax equivalent yield = tax free yield/(100%-tax bracket %) = what would I need to earn on a corporate to be equivalent to a muni ex) if I had a 6% tax free bond, and was in 25% tax bracket... 6%/100-25%= 6%/75%=8 (this means that an 8% taxable bond is equivalent to a 6% tax free muni for an investor in the 25% tax bracket)

liquidation order

taxes for IRS/outstanding wages --> secured bondholdres --> general creditors (unsecure) --> subordinated debenture --> pref stock --> common stock *** of secured creditors are owned more than asset is worth... then they become unsecure creditor for the remainder because they are only served up to the value of the asset ***

restricted account

the acct is below the initial 50% requirement, at some point we may need to come up with more cash, but not always required to be remediated once we have reached maintenance then we may need more funds

public appearances (what about unscripted ones-not considered retail comm, inst. comm, or correspondence....)

the following standards must be followed if for a planned/formal/expected event: - if you will be making any recommendation, any conflict of interest must be disclosed - written procedures must be established to supervise public appearances - any scripts/slides/handouts must be reviewed/are considered communications ** unscripted public appearances are NOT considered retail communications, inst. communications, or correspondence**

what determines what the premium is??? (SUPPLY AND DEMAND)

the market determines this.... it is based on supply and demand, what are people willing to buy and sell at look at where the stock price is now before determining if worth buying, if at 60 and strike price is 50 = intrinsic value of 10 points = worth at least 10 points bc can buy at 50, turn around and sell at 60 so worth at least 10 to you... if stock is at 45, strike price is 50= no intrinsic value but may have time value if stock is at 50 = at the $, what is it worth?? only time value is left

4th market

transaction between inst mostly, most 4th market trades are internal crosses set up bu money managers --> dark pools = anonymous allow inst investors and high frequency traders (many times small firms buying and selling quickly) to buy/sell with each other anonymously, quotes aren't disseminated to the public = limit impact on public market

term and serial maturities (what is level debt service)

the two ways that an issuer may structure their loan repayment: 1) term maturities: all principal paid on 1 maturity date. entire offering matures on one date 2) serial maturities: each will have dif coupon rate bc dif maturity dates. bond offering matures over several years (series of maturity dates). sometimes this is structured as level debt service which is when principal and interest payments represent approximately equal annual payments over the life of the offering = issuer roughly pays same amount each year. with each year = less int to pay bc some of the bonds have matured = can afford to pay a little more principal then sooo with more time passing there is less interest and more principal paid -for both, bonds are issued on the same day and interest is paid each year

type of non equity options 3/3 yield options

these are options on the yield bond prices are inverse to yields/interest rates preferred stock is the same way (trades based on dividend yields) these options work like index options, the index is the yield on a particular security if investor believes yields will decrease, they should buy yield based puts OR sell yield based calls if expect increase in yields, buy a call or sell a put

accredited investor - qualifications

these are people with more assets/income and can assume more risk. These includes directors, exec officers, firms, and individuals with assets/net worth over 1 mil (not including prim. residence), or those who make 200k (or 300k with spouse) each year and have for the lsat two and expect to continue making that much -can be individuals and inst.

summary of agreements signed for underwriting

underwriting manager signs the : underwriting agreement with issuer syndicate members: sign the agreement among underwriters AKA syndicate agreement with manager selling group: signs selling agreement with manager

tax considerations (when giving or receiving securities) --> unified gift and estate taxes exemption (estate accounts)

unified gift and estate tax exemption: the amount that can be left in an estate without incurring estate taxes

analyzing general obligaiton debt (4 factors in determing abilitiy of the issuer to generate sufficient taxes to pay debt service_

these are the things that rating agencies look for... 1) demographics: evaluate the tax base, geographic location, property taxes, per capita income, look at trends like are business leaving or coming in = what happens to property value, etc) 2) nature of the issuers det: look at their debt trend, past and present attidue toward debt, the schedule of debt payment, type of debt issued (are they close to a debt ceiling? do they have level debt service or all coming due at once?? 3) aspects affecting issuers ability to pay: existing unfunded pension/liabilities like defined beneif pension plan?, tax limitations are they close to them?, tax rates/collections, current financial conditions (are they operating at a surplus? any outstanding litigation?? 4) muni debt ratios: issuers net overall debt (direct (debt they have issued) /overlapping (muni responsibility for debt issued by other entity but it overlaps this muni... ex would be school district bond... overlaps with town residents as well who are taxed...), also debt to assessed value, and debt per capita

muni market analysis (indexes), bond buyer indexes (newspaper geared toward muni buyers), many variations

they select bonds they feel are most representative of the marketplace - 20 bond index= 20 GO bonds with 20 yr maturities - 11 bond index= 11 of the above 20 with higher rating (avg = AA+ or Aa1) - 25 revenue index= 25 revenue bonds with 30 yr maturities, avg rating of A+ or A1 -40 bond index= 40 recently issued and actively traded bonds. based on avg prices quoted by brokers's broker -treasury bond index: higher yielding than muni bond indexes bc of taxes, munis interest is tax free, int earned on treasuries is taxed, if corp bond was an option that would be the highest **these indexes show the avg yields and are compiled on a weekly basis

debt with foreign characteristics - sovereign debt

this is debt issued by foreign national government, credit rating is based on issuing government, country's repayment ability is reflected in debts yield

additional underwriting terminology - shelf registration

this is when the issuer files registration statement with the SEC and can issue securities off of this for up to 3 years, so it gives issuer flexibility in coming to the market. disclose type of securities/number of securities, etc. allow them to raise money in increments, change in market/i-rates, etc make them not want to come to come to the market incrementally. this allows them to do it very quickly. each time they come to the market, they file prospectus supplement = specifics of securities sold at that specific time - most leg work is done with initial shelf regsitration up front = when market conditions change favorable we can come to market quickly.. again jsut need to file the prospectus supplement

additional underwriting terminology - market out clause

this provides underwriter with ability to get out of firm commitment underwriting based on events that make marketing the issue difficult or impossible these are limited/disclosed in the clause

client financial objectives - growth/capital appreciation (long term)

time horizon = long term securities: common stock, variable annuity, mf growth funds, convertible securities (lie between current income and growth) risk = high phrases= capital appreciation

2/3 purposes of option - hedging

to protect an existing stock position, could buy an option - long puts may be used to protect the downside risk of a long stock position (gives you right to sell at a strike price re of market price, good if you fear market is going to go down... so you have the stock you hope it goes up but you fear it will go down so you protect the downside portion) - long calls may be used to protect the upside risk of a short stock position. if you are short the stock, you want the stock to decrease but the risk is if the stock increases. so you buy a call so you lock in price you can buy at no matter how high it goes

ex for chap 19

tracks life of a nasdaq transaction --> OATS source for muni disclosure --> EMMA report of a trade that's not agreed by both parties --> DK electronic ownership of securities at a depository --> book entry exercise noice for an option must be reported no later than --> 5:30 PM on 3rd friday date on which a stock beings to trade without div ---.> ex dividend date

secondary markets

trading of co that have gone public are traded between investors = existing securities among investors - within secondary markets there are exchanges like NYSE, etc. they provide location for trade execution -trading in monitored by DMM or specialist (matchmakers looking to facilitate trades) -DMM create a fair/orderly market - keeps the book for a given security

traditional vs variable products (insurance)

traditional products: whole life, term life. the insurance company takes on the risk, take in premiums if doesn't earn enough its on them... these are not securities, there is no registration requirements or prospectuses, the investment account is the general account, the portfolio is whatever the insurance co wants in the general account (safe, secure, predictable with guarnatees), the inflation hedge is poor variable products: (tend to be more aggressive --> hope for superior return) - the contract owner holds the risk - these are securities, there is registration process and disclosure obligation in form of investment - the investment account is the separate account - the portfolio is the subaccount where there are choices that meet investor objectives (like dif mutual funds, many dif themes, you can change these selections and more without tax implications) -inflation hedge is superior bc has equity component so hopefully underlying assets grow faster than inflatino

firm to firm settlement dates

unless specific exemption is made, settlement (completion of transaction between firms involved) will occur as follows: Main ones: corp/muni securities = t+2 us govt securities/options= t+1 others: cash settlement for any security = same business day sellers option= special negotiated where settlement would be delivered no earlier than normal t+2, and settle some day after 2 business days = usually when want securities in their name and will wait/negotiate for something special when issued = securities that begin to trade although no physical securities yet (spin off for ex) determined by division in FINRA called national uniform practice committee that determines settlement

debenture=

unsecured corp debt=only backed by full faith credit of corp NOT a specific asset

option taxation - exercised (most complex) 3/3 (how do you calculate cost basis if a put is exercised vs a call?)

upon exerise doesn't result in G/L itself... so option premium doesn't make g/L but when you exercise these you are either buying or selling stock... -need to know cost basis of acquiring that stock if you sell = need to know proceeds from that sale - if put is exercised, buyer has right to sell (what are proceeds), the writer has to buy (what is their cost basis??) to calculate cost basis or sales proceeds... 1) of an exercised call, the premium is added to the strike price (call up) 2) of an exercised put, the premium is subtracted from the strike price (put down)

capital asset pricing model (CAPM), offshoot of optimal portfolio (=greatest return for given risk level)

used to determine if return on investment equals the risk premium in excess of the risk free rate of return. the formula is based on 3 factors: 1) risk free rate (treasuries rate) 2) market rate of return (S&P 500) 3) BETA (with systematic risk, measures volatility..) ex) 3% = risk free rate 8% = s& p market return soo... 5% = equity risk premium, AKA excess market return, the differential expected return = risk free rate + excess market return (AKA equity risk premium --> dif between 8% and 3%) * BETA soo... 3+5 * beta ** just trying to caluclate expected return based on those factors **

market analysis factors (terms/theories) - options volatility

used to evaluate a stock's volatility in the future

type of index option = VIX option (general, what is it?? how are they settled ??)

vix = volatility index vix = barometer of investor sentiment and expected market volatility calculated based o premiums for S&P 500, index options reflected over the next 30 days period if you knew premiums they can back out and figure out volatility = how VIX is calculated VIX options are cash settled, with each point equal to $100 - when you buy them, the premium is just multiplied by 100 to figure out the cost... and if exercised the writer pays the buyer the in the money amount (same as with index options) vix options give you a way to trade what you think is going to happen to this volatility = why you buy them

premium bond taxation (bond sold prior to maturity)

we amortize (adjust cost basis downward) so g/l is determined by dif between amortized cost basis and sales proceeds ex) has 5% bond with 10 year to maturity for $1100. if sold after 3 years at $1050 the result is... so we compare amortized basis (1070 - this amount will be given on exam) to sale of 1050 so we have a $20 loss if held to maturity.... we amortize down to par/are paid par = no g/l

margin terminology - equity or net value (=the differential) (for long)

what's left after you take LMV - debit balance = the investor ownership in the acct so in the ex is 100K

AIR = assumed interest rate

when calculating first payment, they use AIR AIR: -no guarnatee, but guess of how quickly the $ will grow overtime when it's in their posession -it is a hypothetical return on investment - it is a fixed % - no guarnatee or minimum rate if acct performance is greater than AIR --> then it will create the check if acct performance is lower than AIR --> it will decrease the check if acct is performing equal to AIR --> the check/annuity payment will stay the same **payment changes, first payment = not a guarantee**

discretionary orders

when discretion is granted to RR< each use must be documented - if trading decision was made by RR without client consent to specifi trade, must indicate discretionary - if client consented order ticket indicates discretion not exercised even if in discretionary account

updating client info (how often does SEC require updating customer info?) (if changes are made, FINRA says they must be sent to client within 30 days or time of next statement)

when getting info you are required to take down certain info but also required to ask about a LOT more - SEC requires updating of customer info at least every 3 years - failure to update client info on a timely basis may result in the execution of unsuitable transactions or regulatory issues - FINRA requires a copy of updated changes to a customer within 30 days or at the time the next statement is mailed - if client moves to new state, the firm and RR must be registered in that state in order to continue conducting business with the client - changes in the financial background for better or worst must be updated --> a dif pattern of transactions may indicate a change - objectives change as customers age, increase age --> tend to be more conservative

return of capital

when investor receives some of the original investment back, that $ isn't taxed but cost basis would drop if originally invested 1K, got $100 back, cost basis is now $900 not $1000

rule 144 (restricted vs control stock) when you file form 144, what is the max you can sell?? what size/total worth must they be not to have to file 144 **ONLY STOCK**

when purchased securities through private placement, they didn't go through registration one way to sell restricted stock is with rule 144 which permits the sale of restricted/control stock - restricted=unregistered stock, acquired through private placement/compensation for senior executives of an issuer - control= registered (shares are publically traded) but are owned by control person = insider, officer, director, or anyone who owns 10% or more of the issuer *insiders can own both -when intending to sell either control or restricted stock the SEC must be notified - you must file form 144 at the time the sell order is placed with SEC - this then opens window during which you can sell, gives you 90 day window through brokers trade (they act as agent) and must be unsolicited or broker acts as principal where b/d buys for won inventory - if you didn't sell everything you were entitled to sell over the 90 days, you would have to re-file another form 144 * max sale allowed is the greater of 1% of the outstanding shares or the average weekly trading volume over the last 4 weeks** - form 144 is NOT required if selling less than 5000 shares or worth no more than $50K if any threshold breaks, you must file

identifying securities sold

when you buy some shares, then more, etc... how are you treated tax wise? the IRS gives you 2 choices: 1) identify certain shares at time of transaction 2) FIFO= 1st in, 1st out ex: yr: 2013, 14, 15, 16, shares: 1000, 2000, 2000, 1000 price: $5, $10, $8, $22 (historical purchases^) in current year, investor redeems 1000 shares @ $20 per share if FIFO then 1000 shares at $5 will be applied to 1000 shares at $20 so you bought @ 5000 and sold @ 20,000 --> 15,000 worth of capital gains from this if investor had a lot of capital gains already they could identify dif purchase so acquired at $22,000 and sold at $20,000 --> capital loss of 2000 ** if there was a short sale closed out more than a year later, it would still be short term b/c when sell short any g/l will always be short term, b/c IRS never recognized you had a holding period**

on debit spread you want spread to widen

widen = dif between premiums when we take off the spread we want dif between premiums to widen/ be greater than 2... (when we put on the spread, the difference was 2) but why? bc on debit spread you initially bought the more expensive option if you went to liquidate this strategy you would sell more expensive option/buying back cheaper option. so when we sell, we want to take in more than the 2 points so you hope spread widens

margin terminology - debit balance (for long)

will be the 1/2 you didn't put down, assuming you put down half so 100K = the loan amount *****

spreads - bull/bear, debit/credit, widen/narrow, looking at example that doesn't include the premiums (follows same steps as above) ex 2

write an ABC mar 35 put buy an ABC mar 40 put for puts the higher premium is associated with the higher strike price dominant strategy = buy strategy= bearish debit or credit= debit narrow or widen= widen

research reports/disclosures (what are the conflicts of interest and know that these can be on behalf of the firm, producer (analyst) of report)

written in plain english and must disclose: - name/certifications of analyst who prepared report - plain meanings of ratings used - any material conflicts of interest (firm and author of reports are included in these conflicts of interest) - conflicts could be on behalf of analyst as well (see above bullet) or firm itself such as..... (owns 1% or more of the stock, is a market maker for the stock, has received investment banking compensation in the last 12 months or expects to receive such comp. in the next 3 months, whether analyst or member of analyst hh has financial interest in the company such as owns shares, warrants, or options in the co, or is an officer, director, or subject of co advisory board member)

Bond yields (4 types)

yield=return on bond 4 types: 1) nominal = coupon rate = fixed % 2) current yield = annual interest in dollars/current mkt price. This relates annual interest to the price. if at a premium, you get same coupon but on more $=less than nominal yield. (close to zero since dividing by bigger number) 3) YTM = basis=includes the reinvestment of int and the g/d over the life of the bond (discount vs premium taken into account bc you are paid par value at maturity regardless). measured to bonds maturity. premium paid = same int on larger amount invested AND you lose $ when you only get back par @ maturity 4) YTC= yield to call=factors in reinvestment of int and g/l and if you paid premium or discount BUT all are measured to the bonds call date not maturity date ex) @ par, all are equal - if mkt price decreases =trading at discount (if mkt price decreases this means that i-rates went up... meaning that you can get higher yield in the mkt=existing bonds you must discount to match this). when this is the case... NY doesn't change, CY is now same dollar amount divided by lower price meaning that this is now greater than NY, and YTM is not even large bc you bought at a discount but get par at maturity and then YTC is even higher bc factors in you make discount even faster if called= make it back faster (since for YTC is is measured to bonds call date which is sooner than maturity date so you would have the funds sooner) - if trading at a premium (bc are now more valuable)= interest rates went down=mkt price increases. same coupon but more money spent = not doing as well as the coupon rate NY stays the same, CY is same top value divided by larger number on the bottom = lower number so now below NY, then YTM is even lower than that bc we are paying more to get it but only get par at maturity and then YTC is even lower bc you are going to lose that money even faster now (we assume called away at pay... if called away at premium that would be dif)

ex long straddle analysis

you are uncertain about the direction of ABC but you think it's going to move so you buy (remember we want volatility if we are long a straddle or combo) 1 ABC Jun 40 call at 3 1 ABC jun 40 put @ 2 (since exp date and strike price at the same = straddle) combined premium = 5 to long this straddle strategy = volatility breakeven = must make back 5, 2 ways to get it back 1) strike price + premium = 40 +5 = 45 OR 2) strike price - premium = 40 - 5 = 35 (since one is put and one is call) we hope that it goes outside of that break even points, that is when we make money, when it is above 45 or below 35 (so picture graph with two horizontal lines with one at 35 and one at 45, the loss occurs between those two. max gain: unlimited on upside bc we own a call, if stock falls to zero, we are up (strike price - premium * 100) so max gain is unlimited max loss: worst = exp = premium loss of $500

on a credit spread you want it to narrow

you initially sold the more expensive option and took in money, but if you go to liquidate, you have to buy back the more expensive option and payout money and you want to pay out as little as possible, you want spread to narrow