Series 65
Forward
Agreement between buyer + seller for future delivery, of a commodity at a specified price
cumulative preferred stock
if the dividend is not paid, it accumulates to the next year
If client dies and not have a will, from whom may the investment adviser representative accept instructions?
intestate - an administrator appointed by the court
Complex Trust
is permitted to retain some of its investment income. (In a simple trust, this income must be distributed to the beneficiaries in the year received.)
testamentary trust
may be used when a donor wishes to control trust assets during her lifetime. When the will is executed, will direct the executor to fund the trust with assets contained within the estate.
Benefit of S Corporation
more tax- efficient than a C Corporation. S Corporations are a pass-through form of business. In other words, since the S Corporation is not a taxable entity, its income is distributed to the owners for tax purposes.
Registration by Qualification
the registration becomes effective only when determined by the Administrator. (not federal.)
Simple Trust
trustee is required to distribute all income generated by trust to beneficiaries in year received
What is the "three prongs" test for an IA?
"three prongs" discussed in SEC Release IA-1092 include the following: Does the person provide investment advice on securities? Is the person in the business of providing investment advice? Does the person receive compensation for the advice?
Capital Asset Pricing Model (CAPM)
(CAPM) is used to find an optimal portfolio by comparing the relationship between risk (as measured by standard deviation) and the expected rate of return. To meet a client's needs, the optimal portfolio is the one with the highest expected rate of return that represents the lowest amount of risk.
Bypass trusts
(Credit shelter trusts) allows assets of deceased to "bypass" estate taxes.
Working Capital
(Current Assets - Current Liabilities) measures liquidity, assess a companies ability to pay its current liabilities (<1yr)
Quick Ratio
(Current Assets - Inventory) / Current Liabilities = Quick Ratio A more stringent measurement of a company's liquidity than current ratio. 1-3 month period of time
Current Ratios
(Current assets / Current Liabilities) measurement of liquidity for a one year period
Total Return
(Ending Value - Beginning Value) + Investment Income / Beginning Value
Earnings Per Share
(Net Income - Preferred Dividends) / Number of outstanding shares.
Tenants in common
(split 50/50) if one party dies that persons. Each has an equal right to the possession and use of the property
Rule 147
(the intrastate exemption) available for securities sold within the borders of one state. to avoid costly registration with the SEC •80% of company assets in one state. •80% of gross revenues generated from operations within one state
Exempt Transactions
- Isolated non issuer transaction -Issuer and Underwriters -Fiduciary Transactions -Any sale to financial or institutional advisers -Any transaction directed towards no more than 10 retail investors. (Private Placement)
Annuity Taxation
-Annuity withdrawals are treated as LIFO. -taxed at the investor's ordinary income rate. -Earnings withdrawn prior to age 59 and a half are subject to a 10% penalty tax, unless an exception applies (such as death or disability).
SEC Definition of IA Fiduciary Duty
-Duty to be Loyal -Duty to Inquire -Duty to Give only sustainable advice -Duty to Obtain best execution
Federally Covered (exempt) Securities
-National Exchange -Securities Sold to qualified investors under Investment Company Act of 1940. -Investment Company Securities. -Selling w/in company -Securities Promising $ in future.
529 Plans
-Qualified withdrawals used for educational purposes are tax-free. -Investor may invest $14,000 per year to a persons 529 plan without incurring fed taxes. (x2 married couple) •Allowed to aggregate five years' worth of annual gifts and contribute $70,000 (individual) or $140,000 (married couple). Section 529 plans provide for a rollover without a change of beneficiary only once within a 12-month period, but not into a Coverdell ESA.
When an investment adviser files Form ADV with the SEC, it will include:
-The past 10 years of business history and current affiliations of control persons -An audited balance sheet -The scope of authority over client funds -The compensation to be received
UTMA - Uniform Transfers To Minors Act
-tax-free savings account for minor children, -assets counted as part of the custodian's taxable estate until the minor takes possession. -assets might also work against a student seeking financial aid.
According to the Uniform Securities Act, all advertising used by a broker-dealer must be...
...supervised and checked for errors. They are also required to keep a file that is subject to audit by the Administrator. However, the Administrator does not regulate advertising that addresses only federal covered securities.
A corporation that has filed for bankruptcy is to be liquidated. Which of the following securities issued by that corporation has seniority in the liquidation process?
1. Mortgage bondholders 2. Debenture bondholders 3. Preferred stockholders 4. Common stockholders
How many shares represent one option contract?
100. They also expire on the saturday following the third friday.
Soft Dollar
According to the SEC, soft dollars must be used to purchase products or services that assist the money manager in making investment decisions for client accounts. This generally includes research and brokerage services. Not advertising and marketing
de minimis exemption
Advisor has no place of business in state, and does not have direct communications to more than 5 non-institutional clients in state w/ in 12 consecutive months
The right to buy a stock is
A call
Which of the following statements is/are TRUE of exempt securities under the Uniform Securities Act? -Any security exempt under the Uniform Securities Act is also exempt under federal regulations -Any security exempt under federal regulations is also exempt under the Uniform Securities Act. -If state rules regarding an exemption are more restrictive than federal rules, then state rules would govern. -Federal regulations always supersede state rules.
A: If state rules regarding an exemption are more restrictive than federal rules, then state rules would govern. A security can be exempt under federal law but not state law, and vice versa. When the rules overlap, the most restrictive rule applies.
According to the SEC, which of the following communications may not be considered a form of advertising? -A personalized letter to a potential client -Instant messaging -E-mail messages sent to less than 25 prospective clients -A final prospectus
A final prospectus is not considered a form of advertising. However, any other means of communication sent to more than one person is defined as advertising. For advisers, advertising must be retained for 5 years.
Fundamental Analysis
A fundamental analyst looks at the company itself and not at the market Looks at Ratios Earnings Per Share, the P/E ratio, debt to equity.
Convexity
A measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes. Convexity is used as a risk-management tool, and helps to measure and manage the amount of market risk to which a portfolio of bonds is exposed.
Duration
A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.
General Obligation Bond (GO Bond)
A municipal bond backed by the credit and "taxing power" of the issuing jurisdiction rather than the revenue from a given project. General obligation bonds are issued with the belief that a municipality will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral.
When a broker-dealer is selling a private placement to a nonaccredited investor, the investor must be represented by:
A nonaccredited investor should be represented by a PURCHASER REPRESENTATIVE when purchasing a private placement under Regulation D. This person must be designated, in writing, for each offering.
The right to sell a stock is
A put
Security Registration under the USA
A registration statement is effective for one year from its effective date. A registration statement may be filed by the issuer, a registered broker-dealer, or any other person on whose behalf the offering is to be made.
The following persons would be allowed to trade the account of an incapacitated individual, EXCEPT: A joint tenant A court-appointed conservator A relative named in a living will The holder of a durable power of attorney
A relative named in a living will (only for medical purposes)
Retail Communication
A retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period.
Banker's Acceptance
A short-term debt instrument issued by a firm that is guaranteed by a commercial bank. -frequently used in money market funds. -traded at a discount.
UIT
A unit investment trust (UIT) is a type of investment company where investors' money is pooled and invested in securities. Investors in UITs have shares of beneficial interest in the portfolio. The shares are priced according to the performance of the portfolio of securities purchased. A UIT is not a derivative, since its value is not based on a specific security, but on the entire portfolio.
New Present Value (NPV)
A valuation method used to determine if a project or investment is worth investing in. Positive NPV → buy security Negative NPV → do not buy
Investment Companies
According to the Investment Company Act of 1940, the principal activities of investment companies are investing, reinvesting, and trading in securities.
Futures
An agreement to buy or sell a specific amount of a commodity or a financial instrument at a specific price on stipulated date.
Who is an investment adviser representative?
An investment adviser representative is any person who is associated with an investment adviser and makes recommendations, manages accounts, provides advice, solicits advisory services, negotiates the sale of advisory services, or supervises persons engaged in these activities. A broker-dealer offering wrap accounts would be considered an investment adviser, not an investment adviser representative.
An Unaffiliated Solicitor must furnish clients with:
An unaffiliated solicitor who receives cash compensation for referring clients to an investment adviser must furnish these clients with both the investment adviser's Brochure and a separate written disclosure document.
Schedule 13-D
Anyone, including any entity, who acquires more than 5% of issuers equity securities must notify the issuer, the exchange where securities are traded and SEC w/in 10 days of acquisition.
Beta
Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market
Debt-to-Equity Ratio
Bonds + Preferred Stock / common stock at par + capital surplus + retained earnings. A company w/ more debt than equity outstanding is considered leveraged
Child Support (payer and recipient)
Child support payments are: not tax-deductible for the payer (yes taxes) not taxable for the recipient. (no taxes)
Fiscal Policy
Controlled by Congress
Monetary Policy
Controlled by Federal Reserve
Convertible bonds
Convertible bonds can be converted into a company's common stock, not preferred stock, at the option of the bondholder. The bondholder is likely to convert only if the market price exceeds the conversion price. -Coupon rates are usually lower than those on similar nonconvertible bonds -Convertible bondholders are creditors of the corporation -If the underlying common stock should decline to the point where there is no advantage to convert the bonds into common stock, the bonds will sell at a price based on their inherent value as bonds, disregarding the convertible feature
A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at: The same price as before the notice appeared Near $28 Near $55 Near $60
Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).
Price to Earnings Ratio (P/E)
Current Market Price/ Earnings Per Share
Debentures
Debentures are written promises of a corporation to pay the principal and interest on corporate debt when due. The debenture is not secured by any pledge or property.
The US Goverment EE bonds
EE bonds are non-marketable and non-transferable. They are sold at 50% of the face value. The term of the bond is 17 years. The bond pay interst at the maturity or redemption. The interest is federally tazable, but exempt from state and local taxes.
All of the following are associated with state standards for prudent investing by fiduciaries, EXCEPT: The prudent man standard ERISA Legal lists The Uniform Prudent Investor Act
ERISA = federal law regulating qualified pension plans.
Which of the following investments would be MOST suitable for an estate account? -Commercial paper -Treasury bonds -Preferred stock -Nonnegotiable CDs
Estates are intended to last only for a short time (a year or two). The executor or administrator of the estate has a fiduciary responsibility to safeguard the estate's assets until they can be distributed to the heirs. Estates should generally invest only in short-term, safe, liquid assets such as money-market instruments.
Investment Advisers Act of 1940
Federal regulation of investment avisors
Brady Bond
Fixed income issue by Emerging Market Governments. Principal collateralized by US Treasury Zero-Coupon Bonds w/ Fed Reserve.
Difference between future and forward
Future: Exchange traded, guaranteed transaction, settlement can be used over mostly used by speculators Forward: private agreement, settlement at end of contract, mostly used by hedgers.
A client contacts a firm and indicates his desire to buy a call option on a stock that he already owns. Why would the investor buy a call option on the stock?
He wants the ability to buy more shares at a guaranteed price in case the stock goes up
Bid
Highest Price a buyer is willing to pay for a security. A market order to sell should be executed at the highest bid price available
Under IRS rules, which of the following items are exempt from the definition of earned income? -Unemployment benefits -Alimony -Child support -Income received from investments in property -Net earnings from self-employment
I, II, III, and IV only
Industrial Development Revenue Bond (IDBs)
Issued by municipality but backed by a private corporation. Bond only as good as corporation that backs them.
Jack has a substantial amount of cash value built up in his variable life insurance policy. He would like to use some of it for a home renovation project. Which TWO of the following choices would be used to explain to Jack his options for accessing his cash value? -If he withdraws some of his cash value, it will be treated as taxable earnings first, then a tax-free return of premiums (LIFO). -If he withdraws some of his cash value, it will be treated as a tax-free return of premiums first, then taxable earnings (FIFO). - If he takes a loan against the cash value, it will be taxed as earnings first, then treated as a tax-free return of premiums (LIFO). - If he takes a loan against the cash value, it will be tax-free.
II and IV. Any withdrawal of cash value from a life insurance policy is considered a return of premiums first, which would be tax-free. Withdrawals above the amount of premiums paid will be considered interest and, therefore, taxable as income. Policyholders usually prefer to borrow against their cash value, since this would be tax-free. The loan does not need to be repaid, but any amount still outstanding on the death of the insured will be subtracted from the death benefit.
Commercial Paper
It is a major component of money market mutual funds. Commercial paper is a sort of a corporate (I-O-U), backed by the credit quality of the issuer, which is generally very high. Issued at discount.
Form 8-K
If an event occurs that would "materially affect" the issuer's financial condition or share price. Examples: acquisition, bankruptcy, resignation of directors, or a change in the fiscal year. Filed with SEC in 4days
A customer buys a premium bond that is callable. Which of the following would be least beneficial for the customer? The bond is called at its par value in five years The bond is called at its par value in ten years The bond is called at its par value in fifteen years The bond is called at its par value in twenty years
If the bonds are called in five years at par, the premium paid for the bond would be amortized over the shortest time period. This would result in the investor realizing a lower yield than if the bond were called after a longer period of time.
An investor writes an uncovered RST May 25 put for a premium of 4. When RST is at 16, the put option is exercised. If the stock is immediately sold at the current market price, what is the investor's profit or loss? $500 loss $500 profit $900 loss $900 profit
If the stock is put to the writer, he would be required to buy the stock for $2,500. His cost basis for tax purposes would be $2,100 ($2,500 strike price - $400 premium received). Since he then sold the stock for $1,600, he would have a net $500 loss ($2,100 - $1,600).
Compared to Treasury securities, agency securities are:
In general, agency issues are not as liquid as Treasury securities, since the issues are usually smaller in size and are not traded as much. Lower liquidity and a slightly greater credit risk for those agencies not directly backed by the U.S. government means that agencies have slightly higher yields than Treasuries.
Treasury Notes
Intermediate Term. One to yen years. They are sold at par, and pay semi-annual interest.
How much may investors deduct from long-term capital losses against other income?
Investors may deduct up to $3,000 of net long-term capital losses against other income. Any remaining net capital losses may be carried forward to be netted against the following year's capital gains and losses
10-k
Is the annual shareholders report. Includes information on executive compensation
10-Q
Is the quartely shareholder report
Market Capitalization
Large Cap Stocks $5 Billion < Mid Cap Stocks $1 Billion - $5 Billion Small Cap Stocks $1 Billion > Micro Cap $50 Million >
Professionals whose investment advice is incidental to the practice of their professions
Lawyers, Accountants, Teachers, Engineers. (LATE)
What is the difference between a limited Partnership and LLC
Limited partnership- you must have a general partner
Treasury Bonds
Long Term bonds 10+ years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level. Treasury bonds are issued with a minimum denomination of $1,000.
A "qualified" retirement plan is any plan that:
Meets specific ERISA standards outlined in Section 401(a) of the IRS Code. Eligibility.Vesting. Investment of Plan Assets Qualified retirement plans give employers a tax break for the contributions they make for their employees. Qualified plans that allow employees to defer a portion of their salaries into the plan also reduce employees' present income-tax liability by reducing taxable income. Example: 401(k)
In determining the loan value of marginable securities, the agent should:
Multiply the market value by 50%
What yield would the customer require from a taxable corporate bond in order to receive the same after-tax yield as the municipal bond?
Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield
1035 exchanges
Non qualified annuity for non qualified annuity Life insurance for life insurance Life insurance for non qualified annuity.
Which of the following items may not be bought on margin? Pink Sheets securities Nasdaq securities Options Futures Open-end investment company shares
Nonmarginable securities include those found in the Pink Sheets, on the OTCBB, as well as options, new issues, including IPOs, and mutual fund shares.
Payroll Deduction Plans
Nonqualified Plan. Allow employees to purchase life insurance, mutual funds, and variable annuities through after-tax deductions from their paychecks
Ask
Offering price, lowest price a seller is willing to accept for as security. A market order to buy should be executed at the lowest offer/ask price available.
State Registration (AUM)
Office in state. < $100million (State) $100-110 Million (choice- state or SEC) >$110 (SEC)
When can IA charge performance-based fees
Only for qualified clients: at least $1 million AUM with the adviser or has a net worth of $2 million.
457 Plans
Only state and local governments and certain nonprofit organizations are eligible to establish a Section 457 plan. They operate the same way as a 401(k) and 403(b) plans.
At the beginning of last year, Paul Rosencrantz's portfolio was worth $100,000. The portfolio ended the year down 20%, mainly due to market fluctuations. What is the return Paul's portfolio needs to earn this year to recoup his losses?
Paul's portfolio was down 20% in the prior year, bringing his portfolio value to $80,000. In order to recoup his losses he needs to earn $20,000, which would bring Paul back to a portfolio value of $100,000. That means you need to compare the $20,000 needed to the existing value of $80,000. $20,000 divided by $80,000 is 25%. A return of 25% would bring Paul back to his original amount of $100,000.
Performance-based fees
Performance based fees are generally prohibited. Only two types of clients may be charged such a fee: - Registered investment companies (Mutual Funds). - An individual with an account value in excess of 1 million. - An individual with an account value in excess of $750,000 and a net worth of at least 1.5 million. In this cases Fulcrem fees are permitted.
American Depositary Receipts (ADR)
Purpose of ADRs is to facilitate trading in foreign securities in US. Enables US US investor to diversify their portfolio
If an advisory client is most concerned with minimizing taxes, common stocks may provide a lower tax liability than corporate bonds because:
Qualified cash dividends are taxed at a maximum rate of 20% which is less than the interest on corporate bonds is taxed as ordinary income.
RELP vs REIT
Real Estate Limited Partnership (RELP) is a very illiquid investment and suitable for long-term investors. Real estate investment trust (REIT) shares trade in the secondary market and are, therefore, liquid. The shareholders have limited liability and participate in a diversified portfolio of various real estate holding.
Exempt Issuers- not required to be registered at state level.
Registration Exemptions • United States • Canada • Foreign national government • Bank, savings, trusts • Insurance companies • Nonprofits • Railroads, common carriers, public utility holding company.
Securities Act 1933
Regulation of new issues. IPOs
Ginnie Mae Bonds
Represents an interest in pools of insured or guaranteed mortgages. Expect monthly interest payment that consist of both interest and principal, minimum denominations of $25,000, and interest that is subject to local and state tax. Good for client who wants monthly income.
According to the Investment Company Act of 1940, who is considered an affiliated person
any officer, director, partner, copartner, or employee of the investment company. The term also includes any person who directly or indirectly owns, controls, or holds, with power to vote, 5% or more of the outstanding securities.
Schedule 13-F
Required to be filed quarterly when institutional investment managers exercise investment discretion over at lease $100,000,000.
Under the Uniform Securities Act, which of the following actions is NOT exempt from state registration? -The sale of securities by a sheriff -An isolated nonissuer transaction -Transactions in exchange-listed securities -A Rule 147 offering
Rule 147 covers intrastate offerings that are exempt from federal or SEC registration, but may be subject to state qualification. A transaction by a fiduciary such as an executor, sheriff, marshal, guardian, trustee in bankruptcy, and isolated nonissuer transactions are exempt under the Uniform Securities Act (USA). Any security listed on the New York Stock Exchange and securities listed on any other recognized national or regional exchanges are exempt from state registration. (62610)
Under the Securities Act of 1933, with whom are nonexempt issuers required to file registration statements?
SEC
gross profit margin
Sales - Gross Profit / sales measurement of a company's manufacturing and distribution efficiency during the production process. Higher the margin the more efficient. Investors are willing to pay for efficiency.
Section 15 of the Securities Exchange Act of 1934 regulates:
Section 15 of the Securities Exchange Act of 1934 requires broker-dealers to register with the SEC.
Selling Away
Selling away is defined as an agent executing trades without the knowledge of his broker-dealer.
The person who supplies the assets to place in a trust may also be referred to as:
Settlor, grantor, or maker. All used interchangeably
Registration by Coordination
State registration statement coordinated w/ federal. New Issuers (IPOs) When a security is in registration with the SEC under the Securities Act of 1933, that registration can be coordinated with the Administrator for state registration. A registration under coordination will automatically become effective at the same time the federal registration becomes effective, provided that no stop order is in effect, the registration statement has been on file with the Administrator for at least 10 days, and a statement of the minimum and maximum proposed offering prices and underwriting discounts has been on file for two business days. A prospectus meeting the requirements of the Securities Act of 1933 must also be filed with the Administrator. Under the Uniform Securities Act, in order to register a security using registration by coordination, the security must also be registered with the SEC under the Securities Act of 1933.
What type of order may a customer use to protect profits or limit losses in current positions?
Stop orders are entered to limit losses or to protect profits on current positions in an investor's account. If the market rises, buy stop orders may be used to protect short stock positions. If the market falls, sell stop orders may be used to protect long stock positions.
nondiversifiable risk
Systematic (market risk) is the risk associated with the entire market.
TIPS
TIPS (Treasury Inflation-Protected Securities) are interest-bearing (fixed-coupon) but the principal is adjusted semiannually to reflect inflation. Therefore, in an inflationary environment, both his income and principal will rise. Offered in 5-year, 10-year, and 20-year maturities
Registration by Notification
TSLAW- Reserved for the Largest Issuers with High- Quality Securities. 500+ shareholders Total net worth + $4mm In business for 36 months
Technical analysis
Technical analysis is based on the belief that studying the history of security trades will help predict movements in the future. Technical analysts are known as "chartists" because they believe that the history of a security is told by its stock prices. Technical analysts will use moving averages, trading volume, breakouts, charts, support and resistance levels
Technical Analysis
Technical- Based on viewing the past performance of a particular stock and/or index in order to identify trends or patterns. Looks at: Trading Volume, Charts, Short Interest
Form ADV Part II
The ADP part II is a disclosure document often called "The brochure". It describes an investment advisor's business, methods used to charge clients, and must be given to prospect clients.
The two principal US Goverment Agencies that issue debt securities are:
The Federal Farm Credit Bank (FFCB) and the Federal Home Loan Banks (FHLB)
Under the Uniform Securities Act, in order for an issuer to be eligible to use registration by coordination, the issuer must also register with the SEC under: The Investment Company Act of 1940 The Securities Act of 1933 The Securities Exchange Act of 1934 The Investment Advisers Act of 1940
The Securities Act of 1933 regulates the federal registration of newly issued securities. Under the Uniform Securities Act, in order to register a security using registration by coordination, the security must also be registered with the SEC under the Securities Act of 1933.
In order for a fund to assess a fee under a 12b-1 plan, the plan must be approved by:
The Shareholders
Sharpe Ratio
The Sharpe Ratio uses standard deviation to determine if an investor is getting enough return for the risk he's taking. Mathematically, it would be the actual return you get minus the "riskless rate of return," divided by the standard deviation.
The Wilshire 5000
The Wilshire 5000 is considered to be the broadest measure of activity and movement of the overall stock market.
Wash Sale Rule
The benefit of selling securities at a loss is that you can offset your ordinary income by up to $3,000 per year. But in order to use that loss, stay out of that stock for at least 30 days.
Imports into the United States have been falling dramatically, while exports have been rising. A major cause of this would be:
The dollar declining relative to our trading partners' currencies. When a country's currency is in decline, its goods would fall in price relative to similar products imported from abroad. Falling interest rates in the U.S., choice may not always have an effect on lowering the value of the dollar.
If an adviser has custody of customer funds and securities, the submission of Form ADV-E must be performed by:
The form must be filed by an independent accountant, not the adviser, within 120 days after the completion of the audit. Submission of Form ADV-E with the SEC is required if the adviser has custody of client funds and securities.
An income statement of an individual would contain:
The income statement of an individual contains all income (salary and investment income) and expenses that a person has had during a given period. It also contains any gains or losses on sales of assets by the individual as well as any interest paid on borrowed funds. The balance sheet includes the assets owned, the liabilities owed, and the person's net worth, which is assets minus liabilities.
Relationship between bond prices and interest rates.
The movement of existing bond prices is inversely related to the changes in market interest rates. If interest rates are expected to fall, prices will then rise. Interest Rates and yields are correlated.
Amortization
The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan. All premium bonds must be amortized annually, that is, the cost basis is reduced each year until maturity. If held to maturity, the investor's basis will equal par value. There will be no capital loss. Although the amortization of the premium may be deducted against interest income in the cases of corporate and U.S. Treasury instruments, amortization is NOT deductible for municipal bonds.
A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio? 6.5 times 7.5 times 8 times 8.6 times
The price-earnings ratio is the market price of the stock ($56) divided by the earnings per share ($7) which equals eight times.
Holding Rate
The return that someone earns over the life of an investment is referred to as the holding period rate of return.
Private Placement
The sale of securities to a relatively small number of select investors as a way of raising capital. Under the Uniform Securities Act, any transaction involving no more than 10 persons (there is no limit on institutional accounts) is considered an exempt transaction known as a private placement, if the following conditions are met. -The seller believes that all the noninstitutional buyers are purchasing for investment purposes only. -No commission or other remuneration is paid for soliciting noninstitutional buyers.
Bond Ratings
The top four categories according to Standard & Poor's are AAA, AA, A, and BBB. If you are utilizing the Moody's bond rating system, the top four classes would be Aaa, Aa, A, and Baa.
Discounted Cash Flow (DCF)
The total value of an investment's anticipated cash flows in today's dollars. Discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. If price is below the DCF then it would suggest that the investment is attractive or undervalued.
Time Weighted Return
Time-weighted averages are used to compare the performance of two money managers. Do not take in to account additions or withdrawals
A client is short 1,000 shares of XYZ. Which of the following actions may the adviser recommend to offset the risk of the short stock? Buy 10 XYZ puts Buy 10 XYZ calls Sell 10 XYZ puts Sell 10 XYZ calls
To reduce the risk of shorting the stock, the adviser may recommend buying calls on XYZ, as the investor has the right to buy the stock should its price rise, so as to be able to replace the shares that were borrowed.
Ralph has purchased 4.0% TIPS with an original principal amount of $1,000. If the adjusted principal amount is $1,020, how much interest will Ralph receive on his next payment?
Treasury Inflation-Protected Securities (TIPS) pay a fixed rate of interest, based on inflation-adjusted principal. The adjustment to principal is based on the Consumer Price Index. TIPS pay interest semiannually, based on a fixed rate applied to the adjusted principal. Interest payments are calculated by multiplying the adjusted principal by 1/2 of the annual interest payment. In this question, the 4.0% rate of interest is multiplied against the principal of $1,020 for an annual interest amount of $40.80. Each payment during the year will equal $20.40.
STRIPS
Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) permit investors to hold and trade the individual interest and principal components of eligible treasury notes and bonds as separate securities. STRIPS are guaranteed by the U.S. Government and sometimes called "zero-coupon" securities because the investor only receives a payment at maturity. The Treasury does not issue or sell STRIPS directly to investors, STRIPS are purchased through financial institutions and broker/dealers that separate the original security into the two parts.
Rank the following investments from least to most risky: Common stocks Preferred stocks U.S. government securities Limited partnerships
U.S. government securities Preferred stocks Common stocks Limited partnerships
Eurodollar
US dollar used outside of US
Accredited Investor
Under Regulation D: -Institutional Investors (banks, insurance, ect) -net worth of $1 million +
The Securities Exchange Act of 1934 regulates which of the following: Broker-dealers Stock exchanges Transfer agents FINRA
Under the Securities Exchange Act of 1934, the SEC was given the power to regulate broker-dealers, stock exchanges, transfer agents, and self-regulatory organizations such as the NYSE and FINRA.
Under the USA who is considered a person?
Under the USA, a person is defined as a legal entity, which would include individuals (natural persons) and business entities such as corporations, broker-dealers, partnerships, and investment advisers.
Under the USA, which of the following transactions would NOT be considered exempt? An offer to an investment company A transaction by an executor of an estate An unsolicited issuer transaction effected through a registered broker-dealer A transaction by a trustee that is involved in a bankruptcy proceeding
Under the Uniform Securities Act, any offer to an investment company or other institutional investor, a transaction by an executor of an estate, or a trustee involved in a bankruptcy, would be defined as an exempt transaction. An unsolicited nonissuer transaction may qualify as an exempted transaction.
Institutional Investor
Under the Uniform Securities Act, investment advisers and investment adviser representatives are exempt from registration in a state if they have no place of business in the state and all of their clients are institutional investors. Examples of institutional investors include broker-dealers, banks, insurance companies, qualified employee trusts, and other investment advisers. Remember, there is no registration exemption for advisers simply based on the fact that their clients are wealthy or have a high net worth.
Which of the following features are characteristics of variable life insurance policies? Minimum guaranteed death benefits Guaranteed separate accounts Exposure of policyholders to investment risk Nonguaranteed surrender value
Variable life policies have a separate account into which premiums are invested. The performance of the separate account is not guaranteed. A variable life policy will pay the beneficiary the greater of the minimum guaranteed death benefit or the value of the separate account.
Warrants
Warrants are long term securities issued by some corporations that give the investor the option of buying shares at a later date at a fixed price. They have an expiration date. Warrants are purchased in the open market and sometimes attached to other securities.
Under the Investment Advisers Act of 1940, when is a firm's registration required to be electronically filed or renewed?
Within 90 days of the adviser's fiscal year-end
Under the Uniform Securities Act, in the absence of fraud, when must action be taken for recovery on a transaction made in violation of a state registration provision?
Within three years of occurrence and two years of discovery, whichever comes first
Assessable stock
a class of stock which the issuing company is allowed to demand additional funds from existing stockholders.
Yankee Bond
allows foreign entities to borrow money in US market place
According to the Employee Retirement Income Security Act (ERISA) who is not considered a fiduciary?
attorneys, accountants, and actuaries are not considered fiduciaries when acting solely in their professional capacities.
Irrevocable trusts
cannot be modified or terminated w/o permission of beneficiary
adjusted gross income (AGI)
consists of taxable income.
Inter Vivos Trust
created during grantors lifetime.
Roth IRA withdrawal uses (held 5+ years)
earnings not subject to tax if: -up to a $10,000 lifetime maximum to pay for a first-time home purchase. -qualified education expenses. -59 1/2 -become disabled or pass away -medical expenses for the unemployeed
Investment adviser representatives (IARs) are defined as:
employees of investment advisers (IAs) who negotiate the sales of advisory services, manage client portfolios, make recommendations regarding securities, or manage other employees involved in any of these functions.
Dividend discount model
evaluates what the current market value of a stock should be based on a calculation of the present value of a stock's predicted future dividend cash flows.
Break even for a Call
price + premium. (Call = +)
Break even for a Put
price - premium (Put = - )
The Internal Rate of Return is the most appropriate method to use to determine:
profitability of a project
Defined Benefit Plans
provide employees with fixed monthly payment at retirement
Zero Coupon Bond
purchased at a discount and does not pay periodic interest. All interest is paid at maturity (the difference between cost and par value). The discount must be accreted each year and is treated as ordinary income even though it was not actually received.
Benefit of ETFs
purchased on margin, can be sold short.
Investment Company Act of 1940
regulation of mutual funds and other investment companies
Securities Exchange Act of 1934
regulation of secondary markets/ trading markets (exchanges)
12b-1 fees
sales charges collected by broker-dealers to compensate their registered representatives who are involved in mutual fund sales. Voted on by stock holders.
What is the priority of an Adviser for a trust?
the Trust.
Dollar Weighted Return
used to calculate a client's internal rate of return and take into account how much the client earned based on the amount of money invested. This method is not considered a fair way to measure the performance of money managers since they have no control over when their clients invest.
Equity Indexed Annuities (EIAs)
•Returns are linked to performance of underlying stock index. •Guaranteed min-rate of return. •Risk is more limited, but so are potential returns
Equity- Indexed Annuities (EIAs)
•Returns are linked to performance of underlying stock index. •Guaranteed min-rate of return. •Risk is more limited, but so are potential returns.
Keogh Plans
•Self-employment •max contribution $52,000. •If indiv has employees who are eligible to be covered, he must make a contribution to the plan for his employees equal to the percentage that he contributes for himself. Eligible employees: employed 1yr+, worked at least 1,000 hrs, who are 21+ •Tax Deferred
