Securities Industry Exam Overview, Exams of Business Economics

Download Securities Industry Exam Overview and more Exams Business Economics in PDF only on Docsity! SIE Exam LATEST UPDATED WITH VERIFIED ANSWERED QUESTIONS ASSURED SUCCESS. 1. purpose of securities industry - Correct answer matching investors with money to issuers that need that money to finance 2. issuer - Correct answer legal entity that sells securities in order to finance its operations (business, governments) ie. us treasury, us gov agencies, foreign governments, state and local governments, corps, banks 3. methods issuers use to raise capital - Correct answer 1) issue debt securities (bonds) and 2) issues equity securities (stocks) 4. debt securities - Correct answer publically traded loans = bonds, notes, or debt instruments. The person loaning money/buying a bond is considered a creditor to the issuer and the amount they paid for is the principal that the issuer owes them and also makes interest payments throughout the duration of the loan 5. -can be issued by banks, corps, etc 6. equity securities (common vs preferred) - Correct answer raise capital by issuing stock (equity), this time when you buy this, you have ownership in the company and if the company is profitable then you may be entitled to a portion of the profits (this is received through dividend distribution). differs from bonds bc 1) typically no maturity date and 2) dividend payments are optional 7. -only banks/corporations sell these and can do so publically or privately to specific group of investors 8. preferred=paid a predetermined dividend (usually received first and higher than those of common holders, but don't get a vote in company matters) 9. common=paid a dividend based on company fortunes 10.broker dealer = brokerage firm (2 capacities) - Correct answer 2 capacities 1) broker= (ABC - agency, broker, commission)engages in agency transactions in security accounts of others. they match up buys and sells and earn a commission for their work (like a real estate broker, acting on behalf of customers to make commission). no risk to firm, they find party willing to take other side of trade 2) dealer= (PDM - principal, dealer, markup/markdown) firms buying and selling securities for its own accounts. buy securities from clients and hold them in inventory and allow clients to buy from them. like a car dealer... buys for its inventory and sells from its inventory and can mark up and down accordingly. acts as principal and can take other side of the trade, MARK UP OR MARK DOWN 11.-risk & Inventory 12.broker-dealer departments/structure of firms (5) - Correct answer 1) investment banking 13.2) research 14.3) sales/private client 15.4) trading 16.5) operations 17.broker dealer - Investment banking - Correct answer referred to as underwriters of securities... they provide advise to issuers in who are looking to issue stocks, bonds, or a combo (structure/arrange security offerings) 18.also can assist with M&A or restructuring for bankruptcy 19.broker dealer - research - Correct answer analysts!! study market and issuers to make reccomendations (buy, sell, hold) 20.broker dealer - sales (stock or bond brokers aka registered representatives RR or investment advisor representatives IAR) - Correct answer financial professionals who market bonds, stocks, but also packaged products such as mutual funds to people and institutions 21.broker dealer - trading - Correct answer execute trades for the firm and the firm's clients and occur in electronic market places NASDAQ or hybrid ones such as NYSE 22.broker dealer - operations - Correct answer make sure things are up to standard (paperwork, trades, etc) also generate statements, etc 23. info barriers - Correct answer barrier where info shouldn't be shared with other side/other departments (investment banking on one side and research, sales/private client, trading, ops on the other) 24.market maker - Correct answer **applies to equity not bonds** 25.when broker dealer decides to display quotes on a trading system indicating they want to buy and sell at specific prices... required to do so on a REGULAR basis. stands ready to buy and sell at any given time 26. -maintain inventory 27. -these market makers are two sided... indicating a price they are willing to sell at (ASK/OFFER) and buy at (BID) 28. -usually a min of 100 shares at those prices=ROUND LOT 29.odd lot=anything but groups of 100 shares 58.exchanges - Correct answer NYSE (where trading is maintained by the DMM), NASDAQ (unlimited # of market makers) 59.quotation systems - Correct answer OTCBB, OTC Pink Markets - they check which firms trade in certain stocks 60.market maker - Correct answer stand ready to buy/sell at least 100 shraes at their quoted prices at any given time 61. traders - Correct answer do not keep any inventory, executed trades for the firm/client 62. listed securities - Correct answer equity securities that meet standars for trading on a national exchange (NYSE and NASDAQ) 63.Nasdaq (electronic) - Correct answer national association of securities dealers automated quotation system 64. third market - Correct answer trading away from traditional exchanges or OTC, on internet, etc. can accommodate after hours - usually between broker -dealers and large institutions 65. fourth market - Correct answer institution to institution trading, doesn't involve public markets or exchanges. many times broker dealers are setting up these trades 66.ECN - Correct answer electronic communication networks 67. -act in only agency capacity 68. -connect buyers and sellers electronically, anonymously, during and after trading hours 69.dark pools - Correct answer provides liquidity for large institutional investors or high-frequency traders 70. -details are concealed from the public, (no dissemination of quotes) 71. -anonymous 72. -low transaction costs and little market impact 73.settlement - Correct answer simultaneous delivery of security and buying of security in the marketplace (when a transaction is executed) 74.DTCC - deposit trust & Clearing corporation - Correct answer securities depository and national clearinghouse for the settlement of transactions in equities, bonds, mortgage baked securityes, derivatives, etc , insurance products, money marke, mutual funds 75. -will do securities issues by US and foreign entities 76. -automate and centralize transactions 77. -DO NOT HOLD SECURITIES 78. -non-profit 79. -within DTCC=NSCC (national securities clearing corp=for equity side and FICC (Fixed inc clearing corp) 80.hedge fund - Correct answer privately managed investment fund that attempts to have above average rates of return using speculation, short selling, margin, arbitrage 81. -pools of capital used to invest, very important customer to broker dealer since they do a lot of trading 82.clearing firms/introducing firms (omnibus vs fully disclosed accounts) - Correct answer 1) clearing firms: many smallers firms will hand off all of part of this process bc it can be expensive and a lot of initial investment costs 83. -aka full-service firms 84. -they have many more customers than just small broker firms, they also serve hedge funds, investment companies, etc. 85.2) introducing firms: broker-dealers that do not do their own clearing operations, the clients of these firms actually have their securities held at the clearing firm from which they receive statements/confirms 86.other vocab: 87. fully disclosed accounts=when the clearning firm has all client info and is responsible for all paperwork/ets up account at the vlrstninh gitm 88.omnibus accounts=when the clearing firm only does clearing, the introducing firm in this case has their own back office/operations and will not provide client account details to the clearing firm. does NOT hold specific client info 89.DTCC vs OCC - Correct answer **buyer for all sellers and seller for all buyers** 90.DTCC: clearing services, guarantees settlement, completed through computerized system, does not interact with customers JUST FIRMs, stocks and bonds, no counterparty risk 91.OCC: the DTCC for options, options clearing corp, they issue/guarantee option contracts and deals with brokers ONLY 92.options/OCC - Correct answer derivative product that track the value of an individual stock or index. exchange-traded options have a standardized set of terms... set by the OCC options clearing corporation. 93.prime brokerage accounts (service of clearing firms_ - Correct answer prime brokerage service is bundle of services, and the clearing firm acts as a centralized location for the clients assets, and this generates one statement = consolidated bookkeeping even though the client may use several broker- dealers, they choose one prime broker (one clearing firm) 94. -hedge funds for ex use a lot of dif. brokerage firms to trade but don't necessarily want to have that many accounts, they would rather have a consolidated account at one firm but deal with multiple --> consolidated statements, all trades settle/clear through the one 95.custodians (other important entities in the market) - Correct answer hold assets in physical form not book entry 96. registrars and transfer agents (other important entities in the market) - Correct answer registrars keep track of the owners of securities issued by the issuer 97. transfer agent: issuance and cancellation of certs 98.securities trustees (other important entities in the market) - Correct answer for certain types of bonds a trustee is assigned to hold security interests 99. regulation (4 tiers) - Correct answer 1) federal 100. 2) state 101. 3) SRO, self regulatory rules and regulations 102. 4) firm specific (in house) 103. SEC (made up of...) - Correct answer sec --> FINRA, MSRB, exchanges 104. federal regulation, regulators (5) - Correct answer most regulation occurs at this level bc of laws passed by congress. these are enforced by the SEC. 105. SEC - super regulator- securities exchange commission is a fed government agency to protect investors and maintain fair markets. they are meant to ensure congress's demands are met 106. -SEC authority: (one party must be in the US) any securities transaction that is interstate, the division of enforcement prosecutes cases on their behalf, any criminal/civil action suits are taken over by the DOJ 107. -Department of treasury: watch out for any illegal activity 108. -IRS: watch out for any illegal activity but also provide guidance to investors related to tax implications of buying, selling, and holding certain securities 109. -Federal Reserve Board (board of governors on the Fed reserve, they control the money supply) to maintain optimal employment and stable prices to change this... they change the discount rate, and reserve requirements, to do so they buy and sell securities 110. -FDIC (federal deposit insurance corporation), banking regulator, maintain public confidence in the financial system, 250K deposits per person is protected, maintain stability and financial soundness/confidence 111. fed reserve board (4 main tools, and what are their 3 main goals) - Correct answer independent agency of US govt that functions as central bank 141. -exclusions are available to broker dealers, some professionals (so long as the advise is incidental to their actual profession): 1) broker dealers that receive commissions and are already in the business of doing so as broker dealer=no need to register 2) banks, savings inst, trust co = aready regulated as banks/unless getting more commission = no need 3) professionals, LATE (lawyers, accountants, teachers, engineers) bc advice is incidental to their business BUT if they charge an additional fee just for that advice then they lose exemption/become IA. 142. 4)publishers (newspapers, etc) bc it is general advice, not tailored 143. **purpose of investment company act and investment advisers act is such that mutual fund companies must register with the SEC and the firm that manages the assets must register as an investment advisor 144. investment company act of 1940 (what are the 3 types of investment companies) - Correct answer -identifies 3 types of investment companies: management companies, unit investment trusts, face amount companies 145. -regulates mutual fund and like companies (which tend to pool together money from investors and invest the funds in securities - more than 100 shares, min 100,000 in assets, annual reports to SEC 146. SEC regulates securities industry/can take action against civil penalties but cannot imprison you, the DOJ goes to criminal court not SEC. SEC can only take action against civil penalties (fines, expulsion from membership). - Correct answer 147. Employee retirement income security act of 1974 (ERISA) - Correct answer provides standards for funding and eligibility of private retirement plans such as 401K as well as fiduciary responsibilities of trustees 148. securities investor protection act of 1970 (SIPA) - what is specific about a margin account in terms of determining value 149. -what is not covered 150. -what is the procedure - Correct answer created the Securities Investor Protection Corporation (SIPC) (NOT A GOVT AGENCY) which is industry funded, non profit insurance entity (funds through assessments paid by broker dealers, you pay into SIPC) by providing insurance to customers of broker dealers if they go bankrupt but DOES NOT protect against marketed losses or employee misconduct, also protects certs. held in street name 151. -any firm conducting interstate commerce must be members of SIPC 152. -covers both institutions and individuals for up to 500K, but no more than 250K of which can be in cash (cash and margin accounts are combined, but IRA and joint for ex have separate coverage/is considered a separate customer) 153. **** IN MARGIN ACCOUNT IT IS THE EQUITY BALANCE NOT THE MARKET VALUE THAT DETERMINES COVERAGE*** - each separate customer is covered=separate coverage for accounts: ex=joint, brokerage, ira = 3 separate coverages, roth and trad = 2 separate customers, 2 of same brokerage acct at same firm=1 customer, separate coverage for accounts at dif brokerage firms 154. -what is not covered: securities not held in street name (thus held in clients name), commodity accounts, fixed annuities, futures broker dealers that have securities in the possession of a failed broker dealer, personal accounts of senior officers, if in customers name they are given back to customer without limit 155. -IF someone borrowed money to buy some of the holdings, they are covered for the equity value so the dif between the total value and what they borrowed, they liquidify the loan portion and use that to pay it back 156. -procedures: bankruptcy occurs, trustee is appointed by federal court, securities are based on market value the day trustee was appointed, customers with assets over the limits will received the full coverage and are treated as general creditors for the remaining 157. -SIPC must be 158. The securities acts amendments of 1975 - Correct answer creates MSRB to be SRO for firms that transact business in municipal securities, no enforcement but help formulate and interpret rules set by FINRA and the SEC 159. insider trading and securities fraud enforcement act of 1988 - Correct answer was created as a response to scandals in the 1980s. insider trading is using material non public information to make investment decisions, both tippers and tippees can be subject to violations. insider trading was illegal wioth the acts of 33 and 34 but no penalties were in place so this act established fines as high as $5 mil and up to 20 yrs in prison 160. -SEC can sue up to 3x of the amount of profit made at the civil level (treble damages) 161. -insiders=corp officers/directors owning 10% or more of a company's common equity 162. penny stock reform act of 1990 (what is a penny stock) - Correct answer regulates the solicited sales of certain low priced stocks 163. -penny stocks are non-exchange traded securities=unlisted (OTC, etc) that trade for less than $5 per share. since they are risky and highly volatile this requires firms receive disclosure from customer before buying and selling them 164. federal telephone consumer protection act of 1991 - Correct answer addresses customer complaints related to cold calling, anyone who is calling with a profit motive must maintain a do not call list and activity avoid calling people on that list (who requested not to be called) - additionally sets a timeframe for such calls, 8:000 am to 9:00 pm local time of the called party 165. -only for unsolicited calls 166. USA patriot act of 2001 (CTR and SAR) - Correct answer meant to prevent terrorist acts in US and around the world by enhancing law enforcement tools, establish process for verifying identity of customers', and increase ability to prevent, detect, and prosecute money laundering AND requires all potential money laundering to be reported 167. -CIP (customer identification program) 168. banks have to file report on the below: 169. -currency transaction reports (CTRs) for transactions over 10K 170. -suspicious activity report (SAR) for transaction equal to and exceeding 5K 171. broker dealer --> OSJ (office supervisory jurisdiction)--> branch (if large enough is OSJ)--> principal--> RR - Correct answer 172. FINRA (an SRO) (rules can be broken into 4 categories) - Correct answer -NYSE and NASD merged to make FINRA in 2007 173. main SRO for securities industry, their rules can be broken down into 4 categories 174. -local cop for all broker dealers/RR 175. -must register to be a member/pay fee/take exam 1) conduct rules 2) uniform practice code (UPC) 3) code of procedure (COP) 4) code of arbitration 176. FINRA - conduct rules - Correct answer cover interactions between clients and firms re compensation, communications, sales practice violations 177. -one of largest components 178. -governs interactions between firms/customers 179. FINRA - uniform practice code - Correct answer rules govern trading and proper settlement of transaction 180. goal=to standardized these rules 181. ex=settlement and corporate actions 182. -back office, create standards for trading, little customer interaction 183. FINRA - code of procedure - Correct answer outlines process to discipline anyone who breaks FINRA rules, acting as a COP 184. -parties involved=FINRA and broker-dealers and or FINRA and registered reps 227. -cumulative vs statutory voting - Correct answer 1) first stock a corporation issues 228. 2) most widely issued type of stock 229. 3)basic unit of corporate ownership 230. -has a par value for company financing but that has nothing to do with market value 231. rights of common stock owners: 232. -right of inspection: can look at the books and records, usually receive an audited report 233. -right to vote: can attend shareholder meetings and vote on important issues including election of members of board, m&a, if stock is to be split. DO NOT VOTE ON WHETHER CORP SHOULD PAY CASH OR STOCK DIVIDENDS. all dividend decisions are made by board of directors. number of votes available is determined by the number of shares the person owns. 234. -statutory voting=shareholder is given one vote per share owned per voting issue=beneficial for larger owners 235. -cumulative voting=multiply number of shares they own by number of voting issues --> total number of votes they can cast in any manner they want, favors minority voters 236. (each seat on the board that is available represents 3 voting issues). ex. if 3 board positions are available and someone owns 1,000 shares, if there is statutory voting then they can cast 1000 per issue, so each candidate can receive 1000 votes but no more (and not all candidates need to be voted on). if use cumulative voting then they would have 3000 votes that they can disburse in any way to the candidates. 237. -right to receive dividends: portion of company's profit that can be paid out 238. -right to evidence of ownership: right to receive stock certificates as proof of how many are ownded, transfer agent, name of corp, owner, signed by corp. officer. 239. -right of transfer: can transfer shares by selling them, gifting them, etc. some restrictions apply such as when they got them before the IPO or if they were given as part of work compensation = RESTRICTED 240. restricted shares specific to IPO (lock-up agreements and legends) - Correct answer lock up agreements=how much time that pre-IPO investors must wait before selling their shares after the company has gone public (usually 6 months) this prevents those who initially funded the company from immediately profiting once it goes public 241. -also serves to limit the supply of shares sold in the market 242. -cannot be sold until legend is removed 243. rule 144 (3 main parts) 244. -holding period 245. -notice of sale 246. -volume limitation (rules for restricted vs control securities) 247. what is the exemption amount - Correct answer regulates the sale of restricted (typically unregistered) and control/affiliate (owned by control person 10% or more and their family members) securities. 1) holding period: for restricted shares it is 6 months from when they were bought, no holding restrictions for control securities 2) notice of sale: someone selling either type of these securities most notify the SEC by filing form 144 at the time the sell is placed. the SEC responds by providing a 90 day window by which it can be sold, if they are not sold during this time, an amended notice must be filed. 248. -EXEMPTION applies if it is under 5000 shares or total value of 50K or less 249. 3) volume limitation: max amount of securities a control person can sell over 90 day period is the greater of either 1% of the total shares outstanding OR average weekly trading volume during the 4 preceding weeks 250. unissued shares - Correct answer any shares that haven't been sold or distributed 251. treasury stock - Correct answer when a corporation issues and subsequently repurchases it's own stock. as long as it remains in the treasury, it has no voting rights and does not receive dividends. treasury stock shows up as informational item on corp's balance sheet 252. outstanding stock - Correct answer number of shares that have been issued to the public MINUS any stock that has been repurchased by the company (treasury stock). this stock receives dividends and has voting rights 253. market capitalization - Correct answer used to indicated a company's size. this can be calculated by multiplying current market price of the stock by the number of outstanding shares 254. classification of stock (ways they are typically sorted) (5) - Correct answer 1) based on size (large, mid, small cap) 255. 2) type of issuing company 256. 3) assumed risk 257. 4) expected return 258. 5) correlation to business cycle 259. stock classification: blue chip stocks - Correct answer describes common stock of large, well established stable mature companies with great financial strength (with long unbroken records or earnings and dividend payments) 260. stock classification: growth stocks - Correct answer stock of a company whose sales, earnings and share of the market are expanding faster that the general economy/industry average 261. stock classification: defensive stocks - Correct answer associated with companies that are resistant to a recession including service related industries (utilities), production of stable products (groceries, pharmaceuticals). these companies perform well regardless of how the economy is doing 262. *** defense stock does not equal defensive stock, defense stock is associated with production of armed services, etc. 263. stock classification: income stocks - Correct answer associated with companies that pay higher than average dividends in relation to their market price 264. -attractive to older/retired investors who are interested in current income and not capital appreciation 265. -ex = utility stocks 266. stock classification: cyclical stocks - Correct answer associated with businesses whose earnings fluctuate with the business cycle 267. -examples include household appliances, steel, construction, and automobile companies 268. American Depository Receipts (ADRs) (sponsored vs unsponsored) - Correct answer -represents a claim in foreign securities though they are held in the U.S. banks located oversees 269. -trade in U.S. exchanges or OTC and pay dividends in U.S. dollars 270. -can be sponsored or unsponsored: sponsored means the company pays a depository bank to issue ADR shares in the U.S. the sponsorship permits the company to to raise capital in the U.S and list the ADR on the NYSE or Nasdaq. the larger ADRs are sponsored. Unsponsored ADR=the company does not pay for the cost of the trading in the U.S. and instead the depository bank issues the ADR (OTC) 271. preferred stock - Correct answer issued by companies that already have common stock outstanding 272. -better for investors interested in income not capital appreciation (like bondholders) 273. -lack voting rights 274. -issued with a par/face value of $100 corresponding to it's initial market price and will pay a specified dividend (for example a 5% preferred stock will pay $5 per value of $100) this dividend rate can also be listed as $5 for ex and this represents the max the shareholders will receive, but if the company is not doing well they can pay less 312. rights vs warrants - Correct answer rights: issued to existing common stock holders, subscription price below current market value, maturity is short term (30-45 days) 313. warrants: issued to purchasers of the issuers stocks or bonds, subscription price above the current market value, maturity is long term (years, not days) 314. FINRA rule 2261 - disclosure of financial condition - Correct answer if customer requests, a member firm must make available their most recent balance sheet 315. FINRA rule 2262 - disclosure of control relationship with issuer (2 situations in which a control relationship exists) - Correct answer brokerage firm that has a control relationship with an issuer must disclose that to a customer and must be presented before or at time of trade of that security 316. 2 situations in which a control relationship exists: 1) member firm is a publically trade copmany 2) member firm is a subsidiary of a publically traded copmany 317. SEC Rule 10b-18 - purchase of certain equity securities by the issuer (2 reasons why this is appropriate and 4 things SEC assumes for this to be valid) - Correct answer controls how an issuer or affiliates can purchase their own securities, since this can be done to increase the price of the security 318. 2 reasons why it is appropriate to do so: 1) stock buyback plans 2) funding employee stock purchase plans 319. -SEC assumes the buying of their own securities is valid if they do the following: 1) only one broker dealer is used to place bids/make purchases 2) purchases are not made during certain times in the day (can't be first part or last part) 3) the bid or purchase price is limited: the price can not be higher than the highest independent bid 4) the amount of stock purchased on a single day is limited, cannot exceed 25% of average trading volume for that security 320. 3 reasons why corp would buy back their own stock - Correct answer 1) so there are less outstanding shares 321. 2) increase the market price of the security (rule 10b has rules around this) 322. 3) buy back to give to employees in the form of stock option plans 323. market cap = market capitalization - Correct answer # of outstanding shares * market value per share 324. earnings per share - Correct answer increases when you repurchase a share since it is how much $ they made divided by the number of shares outstanding... so same profitability divdied by a smaller number of shares (since they were bought back) --> bigger earnings per share 325. common stock owners have the right to... - Correct answer 1) inspection of books (co. statements, etc) 326. 2) right to vote on election board/authorized shares NOT ON DIVIDENDS 327. 3) evidence of ownership (certificate usually in street name) 328. 4) dividends (entitled but no guaranteed) 329. 5) transfer of ownership (secondary market) 330. restricted stock (investment letter/lockup agreement) - Correct answer received through private placement (whether gifted or bought) --> restrictions in place before they can be resold 331. -lockup agreement basically means you are holding the security for a defined time period since you are not able to turn around and sell it right away (can drive price down if people can sell these with no rules) 332. restricted vs control stock - Correct answer restricted: 6 month holding period, received through private placement or as compensation for senior exec 333. control/affiliated stock: no min requirement holding period, registered stock, purchased in open market by officers, directors, (anyone owning 10% of more) 334. **both must follow rule 144, and a control person can own both types of stock since they can acquire privately but also purchase on the market** 335. rule 144 - Correct answer used when trying to sell restricted or control securities 336. -once filed with SEC you are letting them know that you are going to sell... they give you a 90 day period for which you can sell the greater of 1% of oustanding shares or the average weekly trading volume over the last 4 weeks. purpose=limit market impact by limiting Q that can be sold 337. -NOT required for shares with value under $50K or under 5k shares 338. ADR =american depository receipt (2 types) - Correct answer -shares or foreign stock sold in the U.S. so investors can buy using US$ and get dividends in US$ 1) sponsored=issued in cooperation with foreign co and traded on US exchanges, co pays for sponsorship program by giving shares to US bank to convert 2) unsponsored=issued without involvement of foreign company, trades in OTC market, brokerage firms pays for ADT program bc they think they can make a commission off of these stocks 339. preferred stock - Correct answer no voting rights, bought bc of dividends (paid before common holders), designed to provide returns similar to bonds, DIVIDENDS ARE PAID QUARTERLY 340. types of common stock (5) - Correct answer 1) blue chip 341. 2) growth 342. 3) income 343. 4) defensive 344. 5) cyclical 345. types of preferred stock (5) - Correct answer 1) non cumulative=no payment of back up dividends=no entitle to unpaid dividends 346. 2) cumulative=investor is entitled to unpaid div. they must be paid to pref. before common can be paid at all, unless all are paid to pref then none go to common). IF NO divident pair to pref. holders OR only some was paid then zero will go to common holders unless full payout went to pref. first. 347. 3) callable=company can buy back shares or stock, typically over par value ($100), since some pref. stock doesn't have a maturity if a company raised the money they needed then can minimize outstanding shares) 348. 4) participating= can receive extra dividends if co. did well that year 349. 5) convertible= can convert to common stock 350. pref. stock cumulative vs non cumulative ex - Correct answer non cum 8% --> year 1=0, year 2=$2 351. cum 6% --> year 1=0, year 2=$2 352. *common stock owners earn no dividends for year 1 or 2 since pref. weren't paid the full amount 353. what is payout in year 3 for each 1) non cum=8 2) cum= 16 (since they need to pay the full 6 for each of the previous years first) 354. convertible preferred stock (conversion ratio & price of pref stock equations) - Correct answer less risky than common stock bc you still receive dividends and if common stock rises so does pref. stock 355. -conversion ratio (how many shares of common stock would i receive per 1 pref stock you own)= par (usaully 100)/conversion price 356. -price of pref. stock = market value common stock * conversion ratio 357. ex: investor bought 4%, $100 par convertible pref stock at $110, stock is convertible at $10 and common stock price has risen to $12.... sooo if you convert if you will get 10 shares of common stock * 12 =$120, if you keep it in pref. you only have a value of $110.... 387. -accreted=adjustment cost basis which is accredeted up to par value, you pay taxes on this 388. why bond prices fluctuate from par (2) - Correct answer 1) i rate risk: inverse relationship between i-rate and price of bond. when i-rate increases other bonds are issued with higher rates of return thus already issued bonds have to be discounted to be copmetitive, must be discounted enough to match increase in irate. since bond was issued, if i-rates go up price of bond will go down to make it more attractive/comparable 389. 2) credit risk: risk that company won't be able to pay back investors... we use credit rating agencies to tell us this.. more risky the company usually higher the yield/rate of return to compensate. 390. return=risk free rate + premium for taking risk (general rule of thumb) 391. -lowest risk=fed gov/treasury (will have lower yield) 392. can be either discount or premium 393. bond quoted at 94.5... what is the price, bonds price is stated as % of par - Correct answer means you are paying 945, since you take 94.5*10+945 (since it is measured against par which is 1000, you take 100*10=1000) 394. bond rating agencies/credit rating=how investors measure/are sure they will get their money back 395. -who pays for these ratings 396. -what are the concerns of the raters? - Correct answer S&P and Fitch use all caps and +/- system 397. Moody's use Aaa and 1,2,3 398. AAA, AA, A, BBB =investment grade 399. BB, B....=speculative grade=junk bond=high yield bonds 400. -the issuers pay bc if bond wasn't rated then it would be hard to market to investors/they couldn;t determine risk 401. -the risk of default is their main concern, they look at liklihood they can be paid back 402. corp/muni bonds prices can be expressed in terms of points and trade in increments of.... - Correct answer - trade in increments of 1/8, 1/8=.125 * 10 = 1.25 = 1/8 of 1% of par sooo .. 403. 93 5/8 = 93.625 * 10 = trades at 936.25 404. 93 1/8 = 93.125 * 10 = trades at 931.25 405. rate: 5 1/4, 92 1/2 406. Decimal: 5.25, 92.5 407. $ value: 52.5, 925 - 1 point=1% of bond par value or = to $10 408. - 409. government security pricing (treasury market) trades at. ___ fraction of a point - Correct answer 1/32, bc this allows for smaller price movements, since this is a very liquid market 410. quote: 87.24, fract = 87 24/32, dec=87.75 (24/32=.75), dollar= 877.5 411. treasury bill quoted by ____ not ____ - Correct answer -quoted by yield NOT dollar price 412. -higher yield bid represents lower price but ask's lower yield represents higher price 413. types of bond yields (3) - Correct answer 1) nominal yield:coupon rate, fixed, does not change. 7% coupon = $70 per year (.07*1000) or 35$ semi annually 414. 2) current yield: relates annual interest to price of bond.... = annual interest/current market price of bond 415. 3) yield to maturity: overall rate of return if held to maturity. assumes 1) reinvestment of coupon annually and 2) takes into consideration loss/gain @ maturity depending on if you paid discount or premium for bond if you paid $900 you will make $100. YTM=overall rate of return=Basis=most IMPORTANT of all yields 416. -if bond is trading at par, ALL THREE WILL BE EQUAL 417. -if trading above par meaning i-rates went down, NY doesn't change, CY is smaller since you are dividing by a larger denominator, and YTM is even smaller since it takes into consideration losses at maturity for paying premium 418. -if trading below par=meaning i-rates went up. NY does not change, CY will be higher since denominator is smaller, and YTM is even higher since takes into account gains at maturity 419. nominal and current do not give you overall return on investment, only YTM does 420. basis point= - Correct answer .01%, so there are 100 basis points in 1%, so yield changes are referred to in these small increments, 6--> 6.25 yield = 25 basis points (helpful to think of this as .06-->.0625, full percentage would be to .07, only went quarter of the way or quarter of 1% so 25 basis points) 421. why pay premium for a bond? - Correct answer bc i-rates offered by purchasing the bond are better than the market can offer/other bonds are being issued at . premium is high enough price to match/be competitive with today's market rates of lower interest 422. YTM=overall rate of return=Basis=most IMPORTANT of all yields, when people say bond it trading to yield they are referring to this - Correct answer 423. bond current yield DOES NOT EQUAL basis - Correct answer 424. retiring debts prior to maturity (2, call and put provisions) - Correct answer 1) call provision= issuer can call back bonds prior to maturity. used when i-rates fall since they can reissue and have less irate obligation. similar to refinancing, you can pay lower rate so they call in bonds and reissue at lower irate. can be 1) whole or partial/lottery call (random lot is chosen) 425. -call premium= amount above par issuer will pay to call in bonds since investor will usually receive a premium since the call price is a premium 426. -call protection=period of time when bonds cannot be called 427. -why buy these? higher yield = comp for having this feature also call protection and call premium offer protection 428. 2) put provision: bondholder can put it back to issuer... do it if i-rates go up bc they can get better return elsewhere, companies will issue these bc investors will accept lower yield bc of it 429. tender - Correct answer issuer offers to buy back bonds in secondary market 430. convertible bond (conversion parity, arbitrage opportunity) - Correct answer investor can convert bond into predetermined number of shares of common stock 431. -investors have safety of receiving principal back at maturity but also could potentially take advantage of stock growth 432. -accept lower yield for this feature 433. -conversion price =set at bond issuance 434. conversion ratio=# shares investor will receive at conversion= par value of bond/ conversion price 435. -conversion parity: price of convertible bond=value of shares you can turn them into 436. -arbitrage opportunity: locked in profit=taking advantage of price difference where it shouldn't exist you can pay discount price on bond and convert to higher priced stock then sell it 437. ex: 1000/40=25 * 45 (market price of stock)=1125 (also equals parity price of bond) 461. U.S treasury bond (3 main types, general info, why are they safe) - Correct answer issued by the fed government and therefore backed by the full credit/faith of US govt= effectively no credit risk, and highly liquid 462. -they are safe bc, 1) highly liquid, ability to convert to cash quickly and cheaply, 2) no risk 463. -interest is only taxed at the federal level not at state and local level 464. types: all are marektable in secondary market 465. type 1: t bills 466. type 2: t notes 467. type 3: t bonds 468. U.S Treasury - t bills - Correct answer -issued at a discount and mature at face value, effectively are zero discount bonds 469. -up to 1 year maturity, offered at $100 or multiples of this, book entry form, interest rate=par value paid at maturity - discount 470. -weekly auction usually monday or tuesaday and settles on thursday 471. -quoted on a discounted yield basis meaning for ex (bid is 2.94% and ask is 2.90%) think of this as % discount, so the 2.94% though is a higher numeric value represents a larger discount off of face value and therefore a lower price whereas the 2.90% is a lower number but is less of a discount and therefore higher price (inverse relationship between discount or price and yield) 472. U.S. Treasury - t notes: - Correct answer interest bearing paid semi annually 473. 2-10 year maturity, traded at $100 or multiples of, book entry form, periodic auctions 474. -quotes at % of par in points and 1/32 of a points 475. U.S. Treasury - t-bonds - Correct answer interest bearing, paid semi annually, book entry, periodic auctions, $100 or multiples of, maturity = 10 + years 476. -accrued interest is paid by taking actual number of days since last payment/365 as opposed to other methods that assume 30 days in each month 477. -quotes at % of par in points and 1/32 of a points 478. U.S Treasuries types quick comparison - Correct answer 1) t bill: up to 1 year maturity, book entry, $100 or multiples of, weekly auction, pays discount and thus similar to zero coupon bond 479. 2) t notes = 2-10 year maturity, book entry, 100$ of multiples of, periodic auction, pays interest semi annually, quote at % of par value in points and in 1/32 of a point 480. 3) t bonds: 10+ maturity, $100 or multiples of, book entry, semi annual, periodic auctions, quotes at % of par in points and 1/32 of a points 481. other types of U.S. Treasuries (2) - Correct answer 1) TIP: teasury inflation protected 482. 2) T-STRIP: separate trading registration interest principal securites 483. U.S. Treasury - TIP - Correct answer treasury inflation protected, since high inflation hurts bonds especially since an investor is holding onto them for a long period of time, this can change the purchasing power but specifically inflation hurts bonds for 2 reasons 1) purchasing power decreasing, if you i-rate is 4% but interest is 5% you are not keeping up with inflation= negative real rate of return 2) increasing inflation --> fed usually tightens --> increase i-rate--> decrease in bond price 484. *** so the good thing about TIPS is that they have a fixed/stated coupon rate but the principal is adjusted based on the rate of inflation or CPI 485. -at maturity you get the adjusted prinicpal not par and if there is deflation it is adjusted downward but never below $1000 so you always get par value at maturity so you get the greater of the adjusted value or par value - so for example say due to inflation the principal rises from $1000 to $1030 on a fixed 4% rate, then your annual interest is going from $40 to 41.2 486. U.S. Treasury - t-strip - Correct answer treasury, separate trading registartion interest princiapl securities. these are not issued by the federal government, but created in the secondary market. a broker dealer or bank take the treasury note and separate each interest and principal payment as an individual security and if you buy it you are only entitled to that one payment --> creation of many zero coupon instruments from only 1 t bond or 1 note = not interest bearing 487. -issued at discount and mature at face value 488. -issued with variety of maturities 489. **zero coupon treasury** 490. bidding at U.S treasury auction(2 types) - Correct answer 1)competitive bids: placed by large financial inst. who state the PRICE and Q they are willing to pay for it, most broker dealers HAVE to bid this way 491. 2) non competitive: placed by public and some broker dealers, only indicate Q they want to buy, these bids are filled 1st, bidder pays lowest price of highest yield of accepted competitive bids 492. ex. 100,000,000 bonds offered at 4.5% coupon 1) 20 mil non comp bid (set aside, filled first, just not sure what price) 2) 40 mil @ 4.9% 3) 40 mil at 5% 4) 30 mil @5.1% 493. so what happens: non comp is filled first, so left with 80 mil. then 40 mil at 4.9% (lower yield=highest price) and then 4 mil at 5% and 30 mil is not filled. 494. *** everyone pays the same yield and that is the highest bidded yield or lowest price that completes the auction of those bids that won, so all pay in this case the 5%) 495. summary U.S treasuries - Correct answer 10+ maturity = t bill 496. taxed at federal level: t bill, note, bond 497. sold at weekly auction: t bill 498. discounted security: T-bill, STRIP 499. 2-10 yr maturity: t notes 500. book entry issuance: t bill, note, bond 501. i-reate paid semi annually: t bond, t note 502. T/F about auction - Correct answer t: non com bids are filled first 503. t: comp bids determine price 504. f: non comp bids submit Q and YIELD 505. t: lowest price/highest yield clears the auction 506. agency securities (2 types) - Correct answer **like treasuries these are exempt from state and fed SEC registration 507. -not direct obligation of the U.S. government, but the idea is that since they created these agencies they won't let them fail=idea is that they are veyr lower risk 508. -quoted at % of par in 1/32 of a point 509. -accrued interest based on assumption there are 30 days in each month not ACTUALy # days like corp/muni bonds 510. -book entry 511. types: 1) GSE (government sponsored enterprise)/non mortgage backed: farming loans specifically, fed farm credit bank=loans to farmers, subject to fed but not state/local taxes 2) mortgage backed 512. agency securities - mortgage backed (pass through cert, what are the risks) - Correct answer ginnie mae (GNMA)=government guarnateed, fannie mae (FNMA), freddie mac (FHLMC) (both are backed by the agency ONLY) 513. -they issue pass through certificates which are: when a group of mortgages with similar fixed rates are pooled together and then sell the interest in this pool to investors 514. -each mortgage payment made by homeowners is made up of interest and principal, which is paid to bank servicing the loan who keeps a fee for this, the rest of put into the pool so these payments are being passed through to investors (int/principal) 515. -the interest portion is FULLY TAXED at state, local, fed level 516. -risk= prepayment risk=get payments sooner than you thought. homeowners will often times pay off a mortgage faster bc they are moving or are refinancing bc of i-rate decreases (for refinancing specifically). these 6) construction anticipation noten (CLNS): issued by municipalities to provide funds for the construction of a project that will eventually be funded by bond issue. 547. auction rate securities (muni security)=ARS - Correct answer - long term holdings with interest they pay are reset at frequent intervals through auctions 548. -2 types, one that is a bond with 20-30 yr maturity and 2) preferred shares with cash divident. 549. VRDO - variable rate demand obligations - Correct answer long term, marketed as short term investment 550. -interest rate is adjusted at specified intervals (daily, weekly, monthly) and in many cases there is a put option (to give back to issuer) on the date that a new rate is established 551. ratings for municipal notes - Correct answer S&P: SP 1+, SP 1, SP2 = invesment grade, SP# = speculative grade or junk bond or high yield 552. Moodys: MIG 1, MIG 2, MIG 3 (literally stands for moodys investment grade) =investment grade, SG=speculative grade/junk bond 553. municipal bond underwriting (4 parts, 1 role of underwriter and underwriting process/how underwriter is selcted, 2 types and 4) syndicate offering) - Correct answer 1) role of underwriter: municipalities use competitive/negotiated process and can select investment bankers to help. Basically an underwritier acts as a link between the issuer and investor. they assist the issuer in pricing/structure of inancing/ and preparing the disclosure or official statement (though not legally required for munis since they are exempt from securities 1933 act) but many issue these to help market to customers NOT THE SAME as a prospectus 554. 2/3) underwriting process/how underwriter is selected: - negotiated method: state/city selects investment bankers to work with and together negotiate details and guidelines between both parties - competitive methods: issuer has underwriters submit sealed bids and best bid = lowest cost over life of the bond, wins. basically each underwriters submits a bit that states we will pay you X$ for bonds if you issue at ___ rate. to begin this process, the issuer will publish a notice of sale. 5) forming syndicate: a syndicate is a group of brokers dealers that get together to underwrite an issue. why do they do this? 1) share in liability=spread out risk 2) a lot of firms try to sell the deal=more firms are able to sell the bonds 555. syndicate agreement/letter: agreement between broker dealers re the size, type of offering, split of unsold bonds, and % required for each particpant before entering into one of these syndicate offerings 556. interest income on muni bonds=exempt from fed taxes and investors accept lower yield bc of this and if bought in your resident state, are often exempt from state and local taxes as well and thus are attractive to those in high tax brackets - Correct answer 557. Corporate bonds (+/- for investors and corps) - Correct answer bonds issued by corporations. 558. + for corp= corp doesn't give up any ownership by issuing bonds - for corp: corp has to pay interest and principal 559. + for investor: less risk than buying company stock, since you are the 1st one paid - for investor: doesn't offer same potential for capital appreciation/no ownership/doesn't share in company growth potential through dividends 560. two major types of corp bond classifications (secure vs unsecure) - Correct answer the debt issued is backed by the issuers full faith/credit but... 1) secure: ADDITIONALLY, specific assets back the bonds and thus bondholders have a claim against the specific asset=add to the creditworthiness of the bond. ex=mortgage bonds, equipment trust certificates, collateral trust bond 2) unsecure=debenture= no specific asset that the bondholder has a lein against=you are a general creditor = backed by full fait/credit earning of corp only. company can issue depentures after regulate depentures and those are called subordinated debentures which have JUNIOR claim if the co. defaults then the claims are subordinate to those of regular bondholders 561. types of secure corp bonds (3 types) - Correct answer rolling stock=backed by something of value 1) mortgage bonds: bondholders have lein on property as additional security 2) equipment trust certificate: secured by specific peice of equipment owned by the company, trustee has title to that equipment which can be sold or released (plane, train, trucks=collateral) 3) collateral trust bond=backed by securities of another company/entity (many times is the parent company) in this case the collateral is securities 562. order of payout for liquidation proceedings - Correct answer taxes payable to IRS/unpaid wages --> secured creditors --> general/unsecure creditors --> subordinated creditors --> preferred stockholders --> common stockholders 563. other types of corp bonds (4 types) - Correct answer 1) income bonds: issued by company coming out of bankruptcy = reorganization. the interest is payable only if income is sufficient enough. Therefore they promise to pay back interest but only interest if there is enough income to do so 3) euro dollar: issued outside US but pay interest/principal in U.S $. avoid SEC registration 4) yankee bonds: allow foreign entities to sell in US=must be registered in US 5) eurobonds= bonds sold in country that is different than currency paying i-rate/principal (eurodollar is an example) so the issuer/currency/market may all be different 564. money market instruments (5 types) - Correct answer short term debt, year or less, considered very creditworthy and very liquid, good place to park money for short term who seek safety but intend to have a large purchase pending/in the near future 1) t-bills: 2) bankers acceptance: created by foreign trade, import/export 3) commercial paper: unsecured obligation of corp, max maturity=270 days to avoid registration requirements 4) negotiatble certificate of deposits: unsecured bank debt (100,000 $ minimum). negotiable=can trade in secondary market 5) repurchase agreements (repos): dealer selling to another dealer with agreement to repurchase at a higher price the different = your interest) this involves 2 transactions 565. return on equity investments (2 main ways) and 4 important dividend dates - Correct answer 1) dividends 566. 2) capital appreciation 1) declaration date: BOD says we will pay a divdident of $x at some future date, this is an announcement 2) payment date: set by BOD, date dividend is distributed 3) record date: set by BOD, determines for ownership purposes, to receive dividend, you must be an owner on this date (ownership occurs 2 days after payment=t+2 settlement, so settlement day). for buyer to receive dividends, transaction must settle on or before record date. 4) ex-dividend date: NOT set by BOD but is function of settlement date. this literally means without dividend. = when stock began to sell without the dividend = one business day before record date, on this day the price of the stock is discounted by the value of the dividend 567. ** cash transactions/cash trades=settlement is same day=you become owner same day** 568. order of events for cash dividends (the dates) - Correct answer declaration --> ex divident --> record --> payout 599. if we change the yield of a bond we refer to this as ____ - Correct answer points 600. basis points 601. there are 100 basis points in 1%, so they are 1/100 of 1% 602. instead of saying trading at 4.6% ytm many say trading at 4.6 basis meaning trading at at price that is equal to ytm of 4.6 603. bond yield fills in the blanks - Correct answer 1) bonds ny is = _____ 604. 2) to calcluate bonds CY, an investor must use its ______ int. payments dollar value 605. 3) to calc bonds CY, the ____ of the bond is used not the investors _______ 606. 4) a bonds ytm is = _____ or ______ 6) 1.2% is = _____ basis points 7) if interest rates increase, bond yields _____ while bond prices _____ 1) coupon rate 2) annual interest 3) current market price, purchase price 4) basis or total yield 5) 120 6) increase, decrease 607. price vs yield ex - Correct answer ytm=7.75% 608. price: 102 609. coupon: ____ (8, 7.75, or 7.65) 610. what we know is that we are looking for the NY, which is the fixed coupon rate. we also know that this is trading at a premium so the interest rates are down, and the order is as follows, NY = highest, then CY, and YTM is the lowest. so what is greater than 7.75 as an option? 8. 611. CY: 8.45 612. YTM: 8.25 613. price= ____ (98.5, 100, 103 7/8) 614. we know that this is not trading at par. we know that the current yield is greater than the ytm, so we know that this is trading at a premium. so the asnwer has to be 103 7/8. 615. coupon=6 616. price= 95.5 617. ytm= ____ (5.85, 6, 6.25, or 6.47) 618. what we know is this is this is trading at a discount. we also can calucate the CY = 60/95.5=6.628 * 10 = 6.28 or 60/955=.0628*100=6.28. given this is trading at a discount, the ytm is the highest yield so has to be higher than 6.28 so thus 6.47 is answer. 619. cost basis vs sale proceeds - Correct answer cost basis: price of ownership=total paid to acquire ownership INCLUDING commissions paid/other fees 620. sale proceeds: amount received LESS commissions 621. capital gains vs capital losses (short vs long term) and (realized vs unrealized gains) - Correct answer based on trade date to trade date, it is the result of sale or redemption of an asset if the proceeds exceed the basis/what was paid. 622. -if sell at higher price than what you bought at = capital gains - short term/long term are defined by the IRS a) long term = you held the position for more than 1 year, taxed at a max of 20% b) short term=you held it for less than one year. taxed at ordinary rates 623. usually you make money on longer term basis since taxes are lower especially if you are in one of the top tax brackets. 624. capital losses: sell asset at lower price than what you bought it at, same LT and ST definitions as capital gains 625. unrealized gains= appreciation=not taxed=you own the securities and it's now trading at a higher price than what you bought it at but you havent sold the security, once you do it becomes realized gains 626. return of capital - Correct answer getting your OWN money back=not taxable, doesn't occur on a lot of investments, but it is when the investor receives some or the original investment back 627. t/f cost basis and capital events - Correct answer 1) cost basis is = to amount paid for a security minus commission, F 628. 2) sale of security held for more than 1 year results in long term capital gain and loss, T 629. 3) holding period of a security is measured from trade date to trade date, T 630. 4) any amount of original investment received by an investor is considered return on capital, T 631. total return (equation) - Correct answer applies to stock AND bond investments 632. -all cash flows (cash dividends, interest, etc) PLUS any appreciation or MINUS any depreciation in value - this doesnt reference a time period, it equals 633. = (end value-beginning value) + investment income (TOTAL PAID OVER TIME NOT per yr/beginning value) - ex: investor bought stock for $25/share and received $5 in income since the start. stock is now trading at 30. 634. total return(expressed in %)=(30-25)+5/25= 10/25=40% 635. you don't have the actual total return on an asset until you sell it but you can calculate it theoretically 636. measuring investment return (3 ways) - Correct answer 1) real rate/inflation adjusted= rate of return minus inflation rate 637. 2) risk adjusted return: rate of return minus risk free return 638. 3) risk free return: rate of return found on a U.S. treasury bill since risk is considered to be very very low 639. ex. 6% rate of return while inflation is 1.5% and t bills are yielding at 2% 640. real return=6-1.5=4.5 641. risk adjusted=6-2=4 642. averages/indexes (narrow vs broad based) - Correct answer how we talk about how someone's portfolio is looking 643. -investment returns are often compared against a benchmark of a group of securities 644. -narrows based indexes: follows a specific sector (not concerned with the number of stocks) 645. -broad based: follows a general market like S&P and Dow Jones (also not concerned with the number of stocks) 646. S&P 500 (what is composition) - Correct answer most widely followed=most compared to this benchmark 647. -400 industrial co 648. -20 transportation 649. -40 utility 650. -40 financial 651. dow jones (3 dif averages, which is the most widely followed) - Correct answer broken into 3 averages 652. -broad sector not many stocks 653. -smallest index 689. ex: you invest $2000 (lets say 2% of your portfolio) in XYZ company, but they only happen to have $4000 worth of common stock... so although you are following the 1st rule, you own over 10% of the company's voting rights so you are not considered to be diversified 690. prospectus contents (what MUST it include) - Correct answer offering document used whenever an issuer sells securities, DOES NOT HAVE TO BE AN IPO. so long as they are coming directly form the issuer this is neeeded. broker dealer will usually provide you with this 691. -must include: 692. they outline objectives of the fund, risk , historical performance, sales charges, operating expenses, exchange priveleges (other fund flavors within the same HH brand), breakpoint table=discount for volume, share class comparison table (choices you have in how you would like to buy the fund, dif class types represent diferent pay structure) 693. sales charge does NOT equal commission - Correct answer sales charge=issuance/primary distribution and is fixed whereas commission refers to trading activity=secondary market 694. fill in the blank ex for MF - Correct answer 1) individual ownership in specific mutual fund is represented by (common stock) shares (from ex above, where you cannot own more than 10% of companies voting rights) 695. 2) _____ provides an investor with the abilityto invest a small amount and obtain an interest in a large number of securities (diversification) 696. 3) a diversifiied portfolio cannot invest more than ____ in any one comany and cannot control any more than ____ of any one companys voting stock (5%, 10%) 697. 4) for a diversified fund, no more than _____ of funds assests must be diversified (75) 6) _______ must preceded or accompany any solicitation of mutual fund shares (prospectus) 698. mutual fund structure (5 parts) - Correct answer fund company=HH=brand name, will have a lot of investment options each with own target goal. think of this as a car company, offering many dif models 699. XYZ fund=one offering within the HH has many different parts 1) custodian bank=holds funds, cash, securities for safekeeping 2) board of directors: protect shareholders, independent =no employees, set agenda for fund 3) underwriter/distributor/wholesaler: market product line to broker dealesrs who market to their clients 4) investment advisor: earn a fee to render advice, AKA portfolio manager 5) transfer agent: does all back office/paperwork, issues, redeems, cancels funds, paperwork 700. MF board of directors - Correct answer 1) independent, investment co act of 1940 required majtority to be independent parties 701. 2) set agenda for fund 702. 3) protect shareholders 703. 4) elected by and responsible to shareholders 704. 5) deals with policy and admin related matters, and hires other parties invovled such as bank, transfer agent, etc 7) DO NOT MANAGE but do set agenda 705. MF investment advisor - Correct answer chooses securities, IAR= investment advisor representative 706. -is the fund manager, will adjust holdings/allocations as market changes (liquidate and reinvest in something new) 707. -subject to SEC scrutiny under 1940 act 708. -manages based on objectives from BOD 709. -invests assets, provides analysis and research, implement appropriate diversification 710. -earn management fee=NOT transactional based, it is recurring and expressed as a % of assets under management (AUM) 711. ***usuually the largest expense of the fund 712. *may pay sales charge once, but pay fees recurring 713. MF transfer agent - Correct answer act as registrar, paperwork center, computes net asset value, sends confirms, receives recurring fee for services 714. MF Custodian bank - Correct answer keeps assets safe, responsible for payable/receivable functions 715. -receives fee for services 716. MF expense ratio - Correct answer =how expensive it is for you to own the fund 717. =total of my fees in a given year 718. =% of a funds assets paid for opearting expenses/yearly operating costs=ongoing costs of ownership NOT sales charges 719. MF underwriter/wholesaler/distributor - Correct answer *in sum--> able to buy shares at NAV and sell directly to investors or market the shares through independent dealers with who they can they share the sales charge with (wholesaling) this type of relationship where the broker dealer is involved, the broker dealers acts as a conduit between investor and underwriter/wholesaler 720. -market the product line to broker dealer to market to investors 721. -appointed by board, their job is to push the product to encourage broker dealers to sell brand name 722. -receive portion of sales charge for marketing/selling, though most of it is paid to RR so the broker dealer/RR get the majority while the wholesalers gets smaller portion 723. -BUT they may receive an ongoing 12b-1 fee/distribution fee which they can share with RR or broker dealer if they want 724. Mutual Fund complex - Correct answer idea to to collect as much money as possible and have as many fund options available as possible so as to cater to variety of investors 725. -so one fund complex can include international fund, global fund, growth fund, target date fund, money market, etc. 726. -usually can transfer one from fund to another within the same family without paying an additional sales charge BUT this is a taxable event. if you go from fund family to fund family this is taxable AND you will pay additional sales charge 727. POP (also what is SEC max), POP equation - Correct answer public offering price=NAV plus any applicable sale charge 728. -set by the fund NOT broker dealer 729. so POP =price you pay to acquire fund, and NAV is price to liquidate/sell fund 730. SEC says POP can max out at 8.5% 731. POP=NAV/100-sales charge %) 732. ex calculate sales charge (sales charge equation) - Correct answer NAV=bid=9.2 733. POP=ask=10 734. sales charge=(POP-NAV)/POP=10-9.2/10=.8/10=.08=8% 735. ex, using NAV and sales charge to calculate offering price - Correct answer sales charge=5% 736. NAV=$69.8 737. NAV/(100-sales charge %)=POP, denominator=complement of your sales charge 738. sooo 69.8/100-5=69.8/95=.734=73.4$ 739. sales charge=8.5% 740. NAV=45.95$ 773. ex: if sales charge =4.5% based on investor investing 60K, NAV=19.61, max offering price=21.32, the fund charges 1% redemption fee, how many shares can investor purchase. 774. we are looking for POP first here.... which is NAV/100-sales charge %=19.61/95.5=.2053=20.5$ per share... and we have 60K soooo we take 60,000/20.5=2926.552 shares (CAN BUY FRACTIONAL SHARES OF MF) 775. letter of intent: if investor does not currently qualify for breakpoint, they can be granted a grace period =we will give you extra time to get to the breakpoint level 776. -13 month window they give you 777. -you can also backdate (MAX 90 days).... to include a prior purchase in this qualificaiton BUT if you do so, however back you backdated it counts toward your total 13 month window 778. ** this is NOT binding, if investor intends to come up with money to invest at breakpoint level but cant there are no penalties, sales charges will just be adjusted to be normal 779. ROA (Rights of accumulation): purchase in fund family by your family=right to add all purchases made from some family of funds by your immediate family as well as fiduciary for single account, trustee, pension/profit sharing plans, investment clubs =ability to reduce sales charges as valye of shares reaches breakpoint 780. dollar cost averaging (DCA) what are important RR disclosures re this? (4) - Correct answer when investors try to take this fear/emotions out of investing and invest fixed number of shares or put away X dolllars regardless of market conditions (what we do with retirement assets etc) 781. =method of investing involving making the SAME PERIODIC investment regardless of share price over fixed period of time= number of shares bought changes since if price decreased you will have more shares and vice versa bc based on dollar amount NOT shares 782. -important disclosure RR must tell: 1) this does not guarantee a profit 2) no promise of LT growth 3) prices can change 4) contributions must continue even when prices decrease, otherwise losses occur 783. t/f MF ex - Correct answer 1) sales charges are based on total investments within same complex of funds (FUND FAM NOT INDIV FUND), T 784. 2) letter or intent allows purchaser over 15 month period be consolidated to determine sales charge, F (13 months) 785. 3) ability to decrease sales charge as valyue of shares reaches a breakpoint is referred to as rights of accumulation (T) 786. 4) use of dollar cost averaging assumes LT growth (F) 787. redeeming MF shares (redemption process and redemption fee) - Correct answer means liquidation of sale 788. redemption process: MF investor may redeem shares and receive shares next calculated NAV (MINUS any contingent deferred sales charges or redemption fees if applicable) 789. -funds are required to send investors the payment for these shares within 7 calendar days of receinv the request (MF Liqudation is not a trade... but a redemption) 790. redemption fee: depends on how long you have helpd the fund... used to prevent in and out trading which can cause the portfolio manager to sell out of positions they may not want to 791. MF withdrawal plans (opposite of DCA) - Correct answer -allows investors to receive regular payments from accounts or can say liquidate X shares each month, etc. 792. -minimum account value is required 793. -variety of methods include 1) fixed dollar 2) fixed % 3) fixed time 4) fixed # shares 794. -payments aren't guaranteed for life, when $ is gone, $ is gone 795. ***as RR you cannot advise clients to parcipate in DCA and withdrawal plans at the same time bc sales charged are levied on teh purchase and it makes no sense if you are then just withdrawing the funds 796. MF Sales practice violations (3) - Correct answer -for breakpoint sale: a violation is when an RR is trying to prevent client from getting breakpoint by failing to disclose letter of intent as an option, recommending allocation of funds across multiple fund families to diversity (prevent accumulation toward breakpoint), fail to let client know they are close to breakpoint 797. -RR has to disclose tax events associated with moving within fund family and also sales charges associated with moving to other fund families=considered new purchase 798. -excessive purchases of class B shares is a volation since these do not qualify for breakpoint.... so shouldn't be recommended large purchases 799. MF t/f check in - Correct answer 1) redemption fee is assessed on ALL sales of MF, F (only some depending on holding period) 800. 2) client should not be engaged in withdrawal plan while also purchasing shares, T 801. 3) class B shares shouldn't be recommended to investor who is considering buying a lot of shares, T 802. 4) switching form one fund to another within the same fund family is a tax- free exchange, F 803. other types of investment companies - Correct answer 1) face amount certificate copmany (FAC): issue debt certs, promises face value at maturity or surrender value is presented =zero coupon bond. 804. 2) unit investment company: no portfolio turnover since it is constructed and then left alone=remains fixed for fixed for the life of the the trust 805. +: transparency, you know exactly what is it it and is cheaper and more tax efficient since no turnover=not as much g/l that would be passed along to investor to pay also no high managemet fees (referred to as supervised not managed), ownership considered as shares of beneficial institution (SBI) 806. in arrears - Correct answer owed 807. basic bond characteristics (6) - Correct answer bond=contract between issuer and investor 808. debt service = represents the total of all interest payments over the life of the bond & the final repayment of the principal value at maturity 809. -par value 810. -coupon rate 811. -initial interest payment: 812. -accrued interest: nterest 813. -zero-coupon bonds: 814. -maturity date: bond 815. bond characteristics (par value) - Correct answer par value=AKA principal is the amount the issuers agrees to pay the investor upon maturity (so if you pay $1000 you will receive $1000 at maturity 816. bond characteristics- coupon rate (fixed/variable) - Correct answer : AKA fixed interest rate paid on the bond, based on par value. Coupon rate is usually higher with longer term bond since these are riskier, the investor expects a higher rate of retun, investors accept lower rates of interest for shorter term bonds since these are less risky since the money is returned relatively quickly and there is less chance for market movements that may change the value of your investment (if I-rates go up or down around you but you are locked into your rate). can be fixed or variable/floating 817. -fixed or variable/floating: most are fixed for the lifetime of the bond (fixed) but some adjust to reflect market conditions as intereste rates move up or down= (variable or floating rate securities) 1) corp/muni bonds trades in increments of 1/8 of a point = .125 and 5/8 = .625 2) treasury notes/bonds: 1/32 of a point 842. ex: bond quoted at 93 5/8 = 93.625% or 936.25$ 843. interest bearing bonds vs zero coupon bonds - Correct answer interest bearing bonds = pay interest at regular intervals and are for investors who desire CURRENT income 844. zero coupon bonds=pay interest (technically) at maturity in lump sum payment, and is for investors who desire a lump sump payment at a future date 845. bond prices and yields: an inverse relationship (how to calculate bond yield -> 3 dif ways) - Correct answer if interest rates rise then the value (price) of existing bonds will fall since the demand for them will fall since they offer lower rates, conversely if interest rates fall then the value of existing bonds will rise since theyre worth more than a NEW bond issued with lower coupon rate. 846. -bond yield 1) nominal yield: coupon 2) current yield: (annual interest in $/ current market price) 3) yield to maturity: (effective return) 847. redeeming bonds prior to maturity (2) - Correct answer 1) call provisions: 848. 2)convertible bonds 849. redeeming bonds prior to maturity - call provisions (call premium, call protection, call types (3), put provisions) - Correct answer -if a bond offering includes this the issuer can redeem the bonds before maturity, if called, the bondholder gets the full principal and any accrued interest. Issuers like this because they don't have to pay the rest of the interest payments and can take advantage of declining interest rates (call it back and reissue at lower I-rate=less payment obligations). to entice buyers, usually these have higher coupon rates in general 850. -call protection=restriction on how soon the bonds may be called (usually 5-10 years). if the call period runs out and the bond is called, the issuer is usually required to pay additional par value to compensate for early redemption, this additional amount = call premium 851. -call types 1) in-whole=whole issue is called at once 2) partial (lottery calls) meaning some of the issue is being called while others can remain outstanding 3) catastrophe call enacted when bond's underlying collateral is destroyed (ex raising money to build bridge, but flood destroys this... the issue can be called with bondholders paid back with insurance) 852. *** in-whole and partial/lottery calls must be disclosed but due to unlikihood of occurrence catastrophe calls are exempt 853. -put provisions: opposite of call feature, this allows bondholder to redeem bond at given date PRIOR to maturity. yields are generally lower for these bonds since they can be redeemed if interest rates go up 854. redeeming bonds prior to maturity - convertible bonds - Correct answer - way to entice buyers if an issuer has a poor credit rating for ex, they give the investor the ability to convert the par value into predetermined number of shares of company's common stock. the tradeoff=this bonds usually have lower coupon rates. this alters capital structure of issuer as debt is converted to equity 855. -conversion price =price at which bond can be reverted to stock and is SET WHEN BOND IS ISSUED 856. -conversion ratio= # of shares investor will receive at conversion when surrendering $1000 face amount of bonds = par value of bond/conversion price 857. **conversion ratio X conversion price = $1000 always ** 858. -determining when to convert: (you want to compute conversion ratio and then multiply by mkt value of stock by which you will compare the value of your bond, the higher one=determines what you do) depends on what stock is trading at compared to underlying value of bond (ex, you have bond convertible at $40 and the bond is trading at 85% of par. The same co. stock is trading at $35 per share.... soo if you convert you will have 1000/40=25 shares X market price of 35=$875 value. if you keep the bond (85% of par) you have a value of $850. 859. +/- of convertible bonds: 860. + : co. can borrow $ at lower rate (offer lower coupon) since the convertible feature is attractive to investors they accept the tradeoff, and even if stock isn't doing well... the investor is protected bc the bond still have value. 861. -: when bonds are converted --> increase in outstanding stock shares--> adjusted balance sheet for issuer as more equity as opposed to debt=deleverages. but this released the debt obligation (keeping in mind dividends are voluntary & no $ owed at maturity) - force conversion: many convertible bonds are callable and if they are called and the value is less than conversion value you could be forced to convert or accept less v 862. general annuity info/types of annuities (2) - Correct answer annuity is sponsored by an insurance company, and it is a type of saving vehicle, that can grow tax deferred, usually is used for retirment savings in addition to 401k and/or an IRA (usually if you have capped on those contributions yearly) 1) fixed 2) variable 863. fixed annuity - Correct answer - fixed rate of return, very conservative, likely won't keep up with inflation 864. investment risk assumed by the insurance co 865. it is not a security and it held in the general insurance account (where non securities live)(generally shouldn't lose your money here, very safe), the portfolio is safe, secure, predictable investments, the inflation hedge is poor 866. -may guarantee rate for x number of years then it may change 867. -if company can't earn this % rate to pay annuitants, THEY are responsible for making up the difference=responsibility of insurance co not owner. ****it is a guaranteed contract and the insurance company accepts the risk, owner is promised fixed rate of return**** 868. *safe but no equity component* 869. variable annuity - Correct answer -risky but growth potential but also a lot of loss potential 870. -risk is assumed by the annuitant 871. -it is a hybrid so it is part security and part insurance 872. -it is held in separate account, not general insurance account 873. -portfolio is held within different subaccounts within this separate account... (similar to dif types of fund within fund family) they are chosen to help meet specific investor needs (investors can move the sub accounts around without tax liability) 874. -superior inflation hedging 875. -you have choices as annuitant as to where to put money, FINRA and SEC say this is a security 876. -equity driven 877. -regulated as state insurance, reg by FINRA as SRO level, and fed regulation from SEC 878. -insurance co lobbied congress bc they wanted products to compete with wall street so they said yes so long as they were to be separated into a separate account AND must give clients prospectus 879. *has equity/stock component and superior inflation hedging* 880. the separate account (annuity) - Correct answer subject to regulation since it is an investment company product=covered by 1) investment co act of 1940, 2) registered with SEC and 3) must have prospectus delivery 881. -can change between sub accounts (within separate account) with no tax liability (with MF this movement does have tax consequences but no sale charges) 882. accumulation phase (annuity) - Correct answer =savings phase=pay in period=deposit phase 883. -you purchase accumulation units 884. -non qualified contract=not given to you through your employer but form broker dealer or insurance co directly 885. -we buy into annuity contracts with after tax dollars so no immediate tax deduction benefits but ALSO no limitation as to how much $ we can contribute=very dif compared to IRA/401Ks 915. -they are expensive bc they are complicated prodcuts, have investment attributes and insurance attributes, they have life income potential=won't run out of $ hence why no cap on sales charge 916. -like class B MF... the longer you are in the contract, the less you will have to pay 1) management fee: advisor fee for making investment decisions in separate account 2) expense risk charges: charged if expenses are greater than estimated by insruanc co 3) admin expenses: cost of issuing/servicing contracts (bookkeeping, etc) 4) mortality risk charges: a guarantee annuitants will be paid for life even if they lice beyond life expectancies=life insurance co makes up the difference****** 917. qualified vs non qualified annuity - Correct answer non qual= contract yuo bought personally, unrelated to employment status. available to anyone, and no limitation on contributions. but also no up front tax benefit bc they are after tax dollars used so these after tax dollars determine cost basis (or principal) so the good thing is the cost basis is dist tax free, any growth is taxed though 918. qual= bought through work, funded on a pre tax basis, offerred to certain types of employees (mostly tax exempt organizations or public schools, 401K are typically tied to corporate world), since pre tax basis, this is deductible in the sense that this is deducted from your pay so you you have less gross pay to be taxed by the IRS (immediate benefit) = zero cost basis so the entirely of the contract will be taxed upon distribution - contribution amount is limited 919. all annuity payments are due at ordinary income rates - Correct answer 920. annuity ex - Correct answer 62 yr old contributes 10K, she receives lump sum of 16K how it is taxed in each type of annuity 1) qual: all 16K taxed, 10K contribution is pre tax, earnings=6K, zero cost basis since no taxes paid, taxable amount is the full 16K 2) non qualified: 10K=fax free, 6K =taxed at her income bracket, earnings=6K, basis==10K, taxable amount is the 6K 921. equity indexed annuities (EIA) - Correct answer middle ground=offer fixed rate but also returns which vary based on the market (tied to an index) 922. -hybrids, offer minimum return but offer upside meaning meaning if the offer is a 3% guarantee but the stock market does better= you may have the option for upside returns BUT if market does poorly you will still get the 3% the catch is.... 923. -if market goes down, you still get 3% but if market does really well, there may be a cap on your returns=participation rate=limit index appreciation client will receive (this can be 80% etc meaning if index returns 10% you get 80% of the 10%, etc this is a stated value..) 924. -appropriate for investor who doesn't wnt to lose $ in stock market, but for this safety they trade any return above stated maximum 925. annuity suitability issues (who is it good for and who is it bad for) - Correct answer used as retirement plannning tool if you capped contributions to 401k etc. 926. -target audience: 30-55 yrs old=better suited for younger investors bc of tax deferred benefit of variable contract so they may look for tax deferred growh to offset inflation, and for people who have maxed out other contributions for retirment 927. unsuitable for: seniors/retirees bc this group wants immediate tax benefits... there are usually multiple year surrender fees (like redemption charge) and sales charges are very high meanings they are not great for short term investment horizon 928. 1035 exchange - annuity (investor must be informed about RR commission and possible surrender/redemption charges) - Correct answer tax avoidance tool, allows you to swap from one annuity to another with no tax bc you were not happy with the annuity 929. -RR may recommend this if you're unhappy with annuuity you can do this to swap one contract for another=tax free like rolling over IRA, etc. 930. -FINRA research found that often times these exchanges had no benefit economically for the owner... but RR gets extra commission from this... 931. -one catch is that there may be a surrender fee if offered too soon in the contract (you will have to pay this on your way out) 932. **investor must be informed of all of the catches 933. -intent of RR (commission) 934. -possible surrender charges 935. ex mortality risk expenses (annuity) - Correct answer guarantees payments for life regarldess of life expectancy soooo if you live to be very old and contract is out of $, the insurance co will add $ to continue to pay you until you die... that is THEIR risk NOT yours (why they do life expectancy risk assessment, etc) 936. municipal fund securities (annuities) 3 types - Correct answer 1) local government investment pools (LGIP) 937. 2) state tuition plan 938. 3) 529 Plans 939. Local government investment pools (LGIP) = muni fund securities - Correct answer created by state/local government as a way to invest funds of that government. They purchase an interest in a trust, a diversified portfolio with safety of investment 940. -NOT for retail investor/general public 941. prepaid tuition plan (muni fund securities) - Correct answer type of college savings plan many state offer. it allows you to pay a lump sum to the state and they will give you admission to a prelisted list of schools that are in that state, assuming the student meets certain other requirements 942. -the state does a backwards calculation based on tuition costs in the future and they say pay me an amount right now and you will get access to much larger tuition costs when ready to use 943. -investor buys college tuition credits and locks in the tuitition costs at the current level=protects against future costs 944. 529 plans (muni fund secruities) - Correct answer investor set aside $ and select between different mutual funds, grow tax deferred and any earnings grow tax deferred AND can be taken out tax free if the money is used for the right purposes, doesn't limit schools you can go to like the state tuition plan. 945. -funded with after tax dollars 946. -most investors choose to fund one from own state.... if you purchase plan in the state in which you don't live, you may be subject to state tax, if you bought in your own state you are exempt at state and fed level... - money used in one state plan can be used in another state 947. -max contribution=15K per year to avoid gift tax (this is doubled for married couples), OR you can front load five years of contributions so 75K up front or 150K per married couple (for people who haen't contributed enough yet or are just opening account adn kid is of age) 948. -withdrawals that are qualified (tuition, books, room/board) can come out tax free. for grades k-12 there is a max withdrawal of 10K 949. **** 529 plans remain property of donor not like an UGMA or UMA which become property of child when they are of age... so with this plan you can use one kids plan on another kid if one got full scholarship, etc.... 950. 529 direct sold vs 529 advisor sold - Correct answer direct sold: involves no salesperson, can do online, sold directly through 529 savings plan website 951. advisor sold: sold through broker dealer that has selling agreement with primary distributor of 529 plan 952. 529 able plan= acheiving a better life experience - Correct answer if you are disabled and receving social security disability, medicaid, or private insurance payouts, this allows you to continue receiving medicare payments 953. -max contribution is 15K per year NO front loading 984. three types: 1) mortgage/debt: an income play=when they issue secured loans that are backed by real estate purchases 2) equity: more of a growth play=owning/operating income producing real estate 3) hybrid: combo of both 985. tax benefit: unlike traditional business where business is taxed, dividend is sent out, then investor is taxed at income level, there is no taxation (FOR REIT ONLY) on income if 90% of it is distributed. so for ex if they had 1mil of income and gave out 900,000 of it, not tax bill for them BUT money flowing to investors via dividend is taxable (but 20% is tax deductible), no passing through of losses 986. -these fall under securities act of 1933 (must be registered with SEC and have prospectus delivered) 987. -many trade on secondary market=trade throughout the day 988. -bc of the tax benefit, they don't qualify for dividend exclusion rule that is found with other stocks 989. -attractive for investors seeking current income 990. in sum: they can lend $ like mortgages=bond like, loan backed by real property other times more speculative, they buy property and manage it with hopes it goes up in value 991. methods of offering REIT (3) - Correct answer 1) tier 1: (transparent, liquid) traditional way=registered, follow securities act of 1933, send out prospectus, list on exchange, trades throughout day, highly liquid 992. 2) tier 2= mostly transparent=registered but not exchange listed meaning this product lacks liquidity 993. 3) tier 3: less transparency, illiquid: =unregistered and illiquid. may only be accredited investors through reg d offering (meaning through private placement). 994. T/F REIT - Correct answer 1) hybrid reits invest in both mortgages and properties (T) 995. 2) REITS are not taxed on income if they distribute a min of 90% (T) 996. 3) their shares are exemplt from registration requirements of SEC 1933 act (F) 997. 4) shares are not traded in secondary market and are redeemed by issuer (F) 998. limited partnership (subtype of DPP, direct participation program) (+ and -) - Correct answer -tax benefit/diversification 999. -limited partnership=subtype of direct participation program (DPP), profits/losses of investment flow through directly onto investors tax form=passive income and losses. 1000. -Limited partnership=business venture designed to be tax effecient by passing through both income and losses to investors=try to skip traditional taxation but DONT want unlimited liability=want best of both worlds 1001. take away characteristics: 1) flow through of income means no double taxation... portion is taxed as ordinary income, 20% is deductible. losses flow through too which is only product that does this 2) limited liability=LP are only liable for the amount invested and any loans. Not going to lose home or other belongings like in a general partnership if something goes wrong. worst=lost of original investment 1002. negatives: tend to be very illiquid, not publically traded=lack of control=when you purchase it it is very hard to get out, LPs hire general partner who makes major decisions so this person's approval may be required to sell, also means lack of voting power, in addition owning this makes tax filing difficult and if tax code changes, some initial tax benefits may no longer apply. 1003. *also... partnership has the ability to ask for additional capital in a year or so time and if you can't up your capital you can lose your original interest in the partnership. 1004. general and limited partner (limited partnership) - Correct answer general partner=managerial=job is to manage program but also protect LP interest... they are viewed as fiduciary toward the LP. they make choices on who to hire, fire, pick properties. they have UNLIMITED personal liability. they also have to have at least 1% interest in the fund so if 100mil raised they have to put in at least 1 mil. 1005. limited partner: write checks, they're investors but passively, not involved with management, can't negotiate contracts, have certain rights such as the ability to lend money to the partnership, inspect books, contribute capital. 1006. ways to endanger this status=do things that only GP can do 1007. Limited partnership offering practices (2) - Correct answer 1) public offering: offered under act of 1933, registration required under act of 1933 underwriter is used to facilitate, prospectus is used 1008. 2) private placement: offered through reg d=private placement=opened to accredited investors=exemption from registration through reg d 1009. what are they investing in.... types of LP (real estate programs, 4 total) - Correct answer 1) raw land deal=speculation on land appreciation=most aggressive. you buy land and pray bigger business will eventually want to buy it. the property doesn't make any money, few tax benefits. can go on for decades 1010. 2) new construction: buy property, put up housing, etc. then sell it. shorter time horizon but risk of overbuilding, cost overruns, etc. 1011. 3) existing construction: safter=buy existing property, will have operational history so you know approx costs of upkeeping, details, problems, etc. 1012. 4) low income/government assisted: safest investment bc government backs them, tax benefits/credits but high maintenance costs 1013. what are they investing in.... types of LP (oil/gas programs, 4 total) - Correct answer 1) exploratory=riskiest=looking for oil where none has been found before=called wild cating=high risk with high potential reward 1014. 2) developmental: safest of first 3=drilling near existing field/area it has been found before (proven reserves) 1015. 3) balanced=middle risk=combo of exploratory and developmental 1016. 4) income=safest overall= purchase of existing wells/already in production creates immediate cashflow, we know what we are buying 1017. DPP (direct participation program)- risk summary - Correct answer -did you pick a good manager? up to management abilities of general partner 1018. -tend to generate losses in first years 1019. -illiquid/in product for a long time, can lost capital 1020. -unpredictable income 1021. -may be asked to come up with additional fund=assessment (can be mandatory) 1022. -high operating costs 1023. -tax law change an impact value of investment 1024. -gas/oil projects can have a large economic and environmental impact 1025. LP investor considerations (role of RR) - Correct answer - investors need to know risks, this is job of RR who must inform them of this and make sure they can absorb any losses, would not be a good idea to put too much money into these... 1026. *** even in discretionary accounts.. the RR CANNOT exercise discretion in these products, they must be solicited=MUST talk to the client 1027. LP example fill in the blank - Correct answer 1) LPs pass through ______ to investors (income and loss) 1028. 2) GP must invest no less than 1% in partnership 1029. 2) LP ______ have a fiduciary responsibility to partnership (DO NOT) that is job of GP 1030. 3) LPs generally avoid registration by offering securities through _____ (reg d offerings) 1031. 4) ______ is considered the riskiest real estate program (raw land) 1032. 5) overbuilding is a risk in _______ LP (new construction) 1033. 6) riskiest oil/gas program is ______ (exploratory) 1034. t/f LP - Correct answer 1) partnerships may require LPs to deposit additional funds (T) 1062. cost of option usually consists of 2 elements, instrinsic value and time value 1063. intrinsic value + time value = premium (which is determined by supply and demand) 1) intrinsic value= the amount by which the contract is in the money. if in the $ then has intrinsic value. premium is generally more bc buyer has right to exercise this up to some exp rate so they have to pay increase amount for this right/seller needs to be compensated for the risk involved with the time associated with this obligation. 1064. **if out of the money or in the money=NO instrinsic value at all... this is never a negative number. so the whole premium would be time value. 1065. -where the stock price is now helps determine instrinsic value before you decide to buy it.. if it is already at a premium if may be a good thing to buy 1066. 2) time value=additional cost in the premium, portion of premium that exceeds time value for description above. usually 9 months or LEAPS can be up to 30 months 1067. if the stock is at the money what is it's worth....(how much is time value worth/what determines it) 1) how much time is left till exp... if exp is tomorrow then now likely it will fluctuate much, if 5 mo left then likely many changes can happen (probably higher value to pay for this then) 2) market volatility=how likely it is to change, if very volatile then increase the time value 1068. options ex - Correct answer option: ABC june 35 call @ 3 1069. mkt price: 36 1070. in/@/out of the $: in the money 1071. intrinsic value: 1 1072. time value: 2 1073. option: DEF Apr 60 Put at 7 1074. mkt price: 54 1075. in the money 1076. intrinsic value=6 1077. time value =1 1078. RST Jul 35 Put @ 1.5 1079. mkt price: 35 1080. at the money 1081. intrinsic value: 0 1082. time value 1.5 1083. XYZ Aug 110 Call @ 2 1084. mkt price: 109 1085. out of the money 1086. intrinsic value: 0 1087. time value =2 1088. individual options strategies for calls (rights, obligations, strategy, breakeven, max gain, max loss for Jul 50 cal @ 5 for reference) - Correct answer buyer: 1089. right: buy at strike price 1090. obligations: none 1091. strategy: want market to go up (bullish) 1092. breakeven: strike price + premium 1093. max gain= unlimited (stock can keep increasing in price) 1094. max loss= premium (you let call expire) 1095. seller: 1096. right: none 1097. obligations: sell stock to buyer at strike price 1098. strategy: hope market goes down (no one will want to buy at strike price is it is cheaper elsewhere so buyer lets it expire and seller keeps premium) 1099. breakeven: strike price + premium (you start with the premium already so you can deal with it going up by strike price and still not have lost anything) 1100. max gain=premium if buyer lets it expire 1101. max loss=unlimited (stock can keep increasing in price) 1102. option strategy is considered speculative trading strategy - Correct answer 1103. long call - breakeven ex - Correct answer buy 1 XYZ feb 45 call @ 3 1104. current mkt value = 47 1105. breakeven=strike price + premium = 45+3=48 1106. but why?? 1107. cash out: 1108. -you pay 3$/share for premium 1109. -you also pay 45$ per share if exercised 1110. -this totals 48$ spent in the process to establish this position so we need at least 48 to breakeven 1111. short call - breakeven ex - Correct answer sell 1 XYZ feb 45 call @ 2.5 1112. mkt value=47 1113. since it's a call the breakeven is still strike price + premium = 47.5 1114. cash in: 1115. -they get 2.5$ per share for premium 1116. -they get 45$ per share if buyer decides to buy it from them 1117. -total =47.5..... so the stock can increase to 47.5 and you still haven't lost money... (since you are short the posotion you have to buy it... so don't want to pay more than this price bc you can only sell it for 45 so you are immediately losing money after this (since already received premium=gives you a buffer) 1118. individual options strategies for puts (rights, obligations, strategy, breakeven, max gain, max loss) - Correct answer buyer: 1119. right: put to sell at strike price=sell back to seller at strike price 1120. obligation: none 1121. strategy: want market to go down (so you can buy it cheap and sell it for more) 1122. breakeven: strike price - premium 1123. max gain: (strike price-premium) *100 1124. ideally want stock to fall to zero so you are up the full strike price minus the premium... so you can buy it at zero = worst case since the stock is wothless and sell it to seller at strike price so the most you can make is the strike price *100 share BUT also have to factor in wha tyou have paid which is the premium... so you take strike price-premium (since both are per share costs) then multiply by 100 shares 1125. max loss: premium (you have this right so you don't have to exercise it... so you can let it expire and thus you are only out the premium you paid) 1126. seller: 1127. right: none 1128. obligation: buy from buyer if they put it to them at strike price 1129. strategy: they want the market to go up.... then buyer won't exercise this since it would be pointless to pay 70 dollars for something worth 60.... you would lose money immediately so they keep the premium this way. 1130. breakeven: strike price - premium (since you want stock to go up.... but you can handle it to go down the value of the premium since you already pocketed that amount) 1131. max gain: premium 1132. max loss: (-) of strike price - premium * 100. worst case is that you pay 50$ for worthless stock but you already make the $5 premium so you are losing 4500$ total. which is (50-45) * 100. 1133. option premium=how much you are willing to pay in attempt to profit - Correct answer 1171. g/l is determined by the difference between the price paid the price received for an option (compare premiums) 1172. exercise vs close out option ex - Correct answer mkt = 64 when bought 1173. 1 ABC may 65 call @ 3 1174. later market increase to 72 and now premium for some option is much higher = 7 points of intrinsic value and lets assume 1 point of time value so premium is 8 now. 1175. scenario 1= exercise option/sell afterward 1176. cash out: 65 + 3 = 68$ per share or $6800 1177. cash in: 7200 (what we can make if we turn around and sell it) 1178. so we make $400 1179. scenario 2: close out 1180. cash out: $300 or $3 per share (we haven't exercise this yet so only have out of pocket paid for premium) 1181. cash in: sell it and sellers make premium so it is not selling at 8 premium so we make 800$ 1182. differenc ehere is 500$ so better in this case to close out 1183. also usually cheaper commission to sell out/liquidate than to exercise an option 1184. OCC and options trading - Correct answer the OCC guarantees transaction by always being other party in the transaction even tho not actually involved in the trading. they guarantee listed potion contracts (the ones that are listed on central exchanges)=eliminates counterparty risk between buyer and seller... doesn't matter who is on the other side of the contract bc the 3rd party OCC eliminates this bc they become a buyer for all sellers and a seller for all buyers 1185. -over the counter options may not be guaranteed by the OCC 1186. -deals with broker dealers not customers 1187. -creates/requires distribution of options risk tolerance doc which is called the (characteristsics and risks of standardized options) must be sent @ or prior to account being approved for options trading 1188. -regulate exchange traded options and settle with broker dealer T+1 1189. deadlines for equity option contracts (3 important times) (counter instructions) - Correct answer they expire the 3rd Friday of the month listed when entered into a contract BUT there are 3 important times on that date 1) when option trading closes at 4PM eastern or 3 PM central 2) broker can submit exercise notice to their broker by no later than 5:30 PM ET 3) officially expires at 11:59 PM ET on this day 1190. by time 2 or 3, if the option is in the money then the OCC assumes buyer wants to service since it has value so the option will in this case be exercised for you... however you can give counter instructions if you don't want it to be exercised bc it may only be worth a couple of dollars and you don't think you'll have the ability to sell it and make any money 1191. exercising an equity option (process) - Correct answer 1) investor tells broker dealer (you never go back to the person who shorted it to you bc they may have closed it on their end, et... may no longer be in existence so we don't attempt to rematch up with the original party involved 1192. 2) broker dealer tells OCC who then checks records to see what other broker dealers are short the specific option. once they find dealers with this they use RANDOM selection to assign to one of many dealers who are short this position 1193. 3) broker dealer chosen may have several investors that are short it and they can use ANY OPTION THEY WANT to match up the option contract... can use random, FIFO, or fair/equitable methods 1194. 4) the two brokerage firms now exchange with one another and is treated like normal stock settlement so t+2 1195. index options - Correct answer options on an index=provide opportunity to speculate or hedge based o nmovement of the market/index 1196. -unlike equity options, (everything previously discussed), these options are cash settled 1197. -index=basket of stocks so instead we exercise for cash... seller pays buyer the in the money amount = dif between closing index value and strike price so instead of calling/puting stock the seller pays the buyer the different of these two values 1198. -the strategy is the same.. if the market is up you want to buy a call and ice versa 1199. options t/f - Correct answer 1) OCC issues/guarantees all contracts and deals with broker dealers not customers (T) 1200. 2) trade settlement between broker dealers and the OCC is the same business day (F) it is T+1 and for broker dealer to broker dealer is t+2 1201. 3) equity options expire at 11:59 PM on ET on third friday of exp month (T) 1202. 4) index options provide opportunity to hedge against movement of the market, rather than movement of specified stocks (T) 1203. hedging long/short positions - Correct answer if you long stock you want to buy a put if stock goes down, gain on put can offset losses from the stock 1204. -if short stock you want to buy a call, give you a locked in price to buy @ so not bad if stock goes up... gain on the call if stock increases can offset loss on the stock 1205. covered/uncovered positions (options) - Correct answer when you sell it it can be covered/uncovered 1) covered call= call is written against stock you OWN. sale of the call generates income, increased yield on underlying security. considered conservative option strategy. provides some hedge, if stock was to go down, you let the call expire but we keep the premium=doesn't offset full risk but still. we write call so we can keep premium, we gave up upside potential of stock bc we gave that right to someone to buy it from us @ higher price, we isntead take the premium if the stock goes up (letting call expire) 2) uncovered call: call is written but you don't own the underlying security. very risky bc if you don't have stok and call is exercised against you, you ahve to sell stock you don't have=you have to go out into the market to buy it (stock can increase by an unlimited amount) 1206. -sale of call=creates premium income= increased yield in addition to dividend on stock 1207. 3) covered put: put written when investor has enough cash to satisfy that obligation . so if stock falls to zero and you are put that stock you have cash to buy that stock. 1208. -can't have cash covered call bc if stock increases it has no limits... can never know how much you would need BUT for put you know how much cash you would need in worst case scenario 1209. 4) uncovered put=written without enough cash to meet obligation so increased risk if the security goes down 1210. uncovered options are done in margin NOT cash accounts 1211. covered can be done in margin and cash accounts 1212. types of financial transactions (2 types - public offering and private/reg D) and positive and negatives of each, also PIPE) - Correct answer 1) public offering 1213. 2) private/reg D 1) as regulated in the 1933 act, can be initial public offering or just subsequent offering (AKA follow-on offering). The benefits to this is that you can offering to the public=wide aware of investors. the negatives is that it is more time consuming and more expense overall. the SEC disclosures/registration/process/filing fees/attorney/accounting fees can add up 1214. -proceeds can be primary, secondary, or a combo of both 1237. how is the spread split (3) 1238. *** lead manager is only party that can get all 3*** 1) manager fee (they run syndicate) 2) member/underwriting fee (for risk broker dealers take on) lead manager is also a member 1239. 3)concession (selling concession bc it goes to any member who sells, can be manager, external B/D in selling group) 1240. underwriting ex - Correct answer public price =14 1241. issuer price =13 1242. 1000 shares sold 1243. manager fee=.15 per share 1244. member fee= .25 per share 1245. concession = .6 per share 1246. if manager sells: 1247. -the customer pays 14*1000=14000 1248. -the issuer receives 13*1000=13000 1249. -manager gets... $1000 (takes in all 3 pieces) 1250. -member gets...0 1251. -selling group gets...0 1252. member sells: 1253. -customer pays 14*1000=14000 1254. -issuer receives 13*1000=13000 1255. -manager gets... .15*1000=150 1256. -member gets... .85*1000=850 1257. selling group get...0 1258. selling groups sells: 1259. -customer pays 14*1000=14000 1260. -issuer receives 13*1000=13000 1261. -manager gets... .15*1000=150 1262. -member gets... .25*1000=250 1263. -selling group gets... .6*1000=600 1264. underwriting... participants that have liability for unsold portions of area issues - Correct answer 1) managing underwriting 1265. 2) member firms 1266. NOT selling group 1267. underwriting spread ex - Correct answer identify how underwriting spread is distributed for sales that are credited to the different market participants 1268. managing underwriter: 1269. -gets member, managing (only person that can get this), and selling group fees 1270. syndicate member: 1271. -gets member and selling group fees 1272. selling group: 1273. -gets selling group fee 1274. securities act 1933 (no approval clause/any exemptions?... will carry on to next cards, issuer liability vs underwriter liability) - Correct answer -regulates primary/new issue market 1275. -requires SEC approval for new issues 1276. -purpose: to provide full and fair disclosure so investors can make informed decisions 1277. -issuer files registration statement with a lot of co. info, a portion of which is the prospectus (CANNOT be altered) 1278. -SEC DOES NOT approve or dissaprove the securities.... doesn't weigh in on investment = no approval clause 1279. Any exemptions: yes for 1) certain types of securites and 2) specific types of transactions 1280. issuer liability: 1281. -issuer is liable if there is fraud involved (untrue statements, etc) AND if they purposely left out information 1282. underwriter liability: 1283. -they must perform reasonable investigation 1284. -due diligence (conduct reasonable investigation/let SEC know if they find anything worth noting) 1285. registration process under securities act of 1933 (3 dif time periods) - Correct answer 1) pre registration 1286. 2) cooling off 1287. 3) post registration 1) prior to actual filing with SEC, this is when talking with bankers, repping documents, completing registration statement, broker dealer/RR DONT talk to the public (CANNOT reach out to get idea of investor interest), underwriter does due diligence 2) file with SEC, issuer distributes preliminary prospectus = red herring (bc has red writing saying preliminary)= doesn't have final offering price or effective date yet (2 missing pieces) 1288. -RR/Broker dealers can reach out to the public to get an idea of potential investor interest BUT no money can be accepted/no firm orders placed 1289. -Blue sky the issue=refer to state securities registration/laws, may need to register with each state in which we plan to sell 1290. -hold final due diligence meeting, all parties meet and make sure everyone performed their due diligence and make sure all info is current/no need to change anything 1291. 3) get effective date from SEC=can legally sell 1292. -can confirm orders with those who are interested=give out final copy of prospectus to them with final pricing 1293. -can accept money 1294. -must contain SEC no approval clause 1295. after market prospectus requirements (depends on 2 factors and then lists 4 options with time period) - Correct answer if you reach out to broker dealer in syndicate wanting to buy shares in secondary market OR any participants selling in secondary market must also... you do need to provide prospectus for CERTAIN period of time most effective date 1296. -most of the time delivered electronically, SEC determines access as delivery. 1297. so for how longer after effective date do you need to? 1298. -depends on 1) type of offering and 2)whether it was listed or unlisted (on an exchange) 1) non listed IPO=90 days 2) non listed follow on =40 days 3) IPO to be exchange listed=25 days 4) exchange listed follow on = no requirement for after market prospectus delivery 1299. ** more public info available=less time needed** 1300. types of prospectus (4) - Correct answer prospectus=any communication that offers a security for sale 1) statutory pros= the official prospectus=has all required disclosures and info 2) preliminary prospectus (AKA red herring)=same as final statutory pros except was used prior to knowing effective date and final price/dealer discounts/proceeds to issuer, etc. used to get indication of interest and can have expected price range which can change depending on how much interest they find investors have 1328. -EXEMPTION applies if it is under 5000 shares or total value of 50K or less - rule 144A provides exemption if selling restricted securities to qualified institutional buyer (QIB). restricted sercurities can be sent to them without volvume restrictions or holding periods 1329. -QIB cannot be natural person and has to hae a least 100$ mil of assets under management 1330. ** if securities of the same class are listed on exchange then they aren't eligible for 144A exemption 1331. typically 144A is used dfor big corporate debt offerings 1332. rule 145 - Correct answer doesn't deal with restricted securities 1333. -instead regulates reclassificaiton of one security into a new security as an offering subject to registration/disclosure requirements 1334. -what is subject to this rule? 1335. substitution of one security for another, securities that are a result of a merger or acquisition, securities issued after a transfer of assets form one corporation to another (these are all considered an offering so must issue prospectus) 1336. what isn't subject to 145? 1337. -stock split, reverse stock split, changes in par value (bc not giving up something to get something) 1338. Rule 147 and 147A - Correct answer 147A is one and the same, though considered a more recent update 1339. -instrastate offering, 100% of investors must be residents (provides an exemption for sales of securities to residents of one state) 1340. -the corporation has its principal place of business in the state and meets 1 of 4 requirements 1) 80% of assets are in that state 2) 80% of revenue is generated in that state 3) 80% of proceeds used are based in the state 4) a majority of issuers employees are based in the state 1341. -resales to non residents are prohibited to 6 months from end of distribution 1342. *may need to register in the state even though exempt from securites registration 1343. ex for exemptions - Correct answer 1) investors must be residnets of the state (147) 3) sales are limited to max # of non accredited investors (reg D) 4) non resident cannot purchase stock for 6 months after last sale of offering (147) 5) an offering memorandum is the disc doc (reg D) 1) rule 144= sales of restricted and control stock 2) rule 144A=QIB 3) rule 145=reclassification of securities 1344. muni securities: issuring general obligation and revenue bonds (general info/two ways of selecting an underwriter) - Correct answer -general ob bonds are backed by full faith and credit and taxing abilities of muni issuer 1345. -revenue=backed by specific revenue producing facility 1346. muni debt=exempt from reg with SEC and don't need prospectus 1347. issuing GO bonds: 1348. -need voter approval bc backed by taxing powers 1349. -have debt limitation = can't add debt beyond debt ceiling 1350. issuing revenue bonds: 1351. -dont require voter approval since backed by fees for use of facility and service 1352. -usually have feasibility study to determine cost, etc. 1353. selecting an underwriter (2) 1) competitive sale: throwing bonds out for competitive bids by publishing notice of sale (way to advertise to underwriters) contains relevant details, etc. sealed bids are submitted, and the one that provides the issuer with the lowest interest costs over the life of the bond wins 2) negotiated= issuer appoints managing underwriter to work with and they mutually agree on terms, etc. 1354. ** many issuers also have municipal advisor who in addition to underwriter can be separate firm etc. who assist with process) 1355. public offering =prospectus 1356. private/reg d= memorandum 1357. muni=official statement (though not required by 33) - Correct answer 1358. muni docs (4)/info - Correct answer 1) official statement 1359. 2) legal opinion 1360. 3) new issue confirmation 1361. 4) committee on uniform securities identification procedure 1) the disclosure doc for muni deals --> technically is not required but can be hard to sell without it , hard to market to investors if they don;t have these details. the broker dealer distributes (mandatory for them to distribute it IF one was prepared) 2) prepared by bond council attorney hired by muni who give opinion on - whether issue is legal, valid, enforceable obligation - tax exempt status of the issue=interest received is exempt from fed taxes and sometimes state taxes 1362. ***does not give opinion about creditworthiness of bond, that is for credit rating agencies*** 1363. 3) provided to purchasers along with copy of official statement by no later than settlement date (there is also a prelim official statement) 1364. 4) CUSIP # = universal ID# they assign to uniquely idenetify each security (underwriters apply for one) 1365. EMMA (electronic muni market access) - Correct answer MSRB website, used by issuer and underwriter to submit docs 1366. -provides public access to muni market activity and statistics 1367. -various docs put there (Pre sale, disclosures, official statements) 1368. -includes plan info for 529, etc 1369. t/f ex for muni docs - Correct answer 1) when an official statement is prepared by issuer, it must be provided to any purchaser of new issue (T) 1370. 2) legal opinion guarantees the payment of principal/interest in a muni bond (F) (all they say is that it is tax exempt and it is a legal obligation to pay) 1371. 3) bond counsel for issuer prepares legal opinion (T) 1372. 4) MSRB (don't haveauthority over issuer, they have power over banks, B/D,, etc) requires preparation of an official statement (F) 1373. how broker dealers function recap - Correct answer 1) agency transaction: earna commission, buy/sell for someone else/ agent helps you buy/ sell a house... but ultimately if they can't help it is still your house...=they have no risk. but they earn a commission for this work if they are successful. 1374. 2) dealer: principal trades executed by dealers and they charge markups/mark downs. the dealer buys from someone looking to sell and keep in your inventory and if can't sell, they assume the risk 1375. dealer mark up and mark down - Correct answer -market maker quotes is an inter dealer quote... what broker dealers pay one another 1409. covered vs uncovered options - Correct answer -covered=you own the security/have the security to deliver (no margin requirement/risk is limited since you just deliver what you already have) 1410. -uncovered=you do not have the position=has to be done in margin account, margin is required as risk can be significant 1411. what is required on order ticket t/f - Correct answer 1) indicate if discretion was not exercised for orders in discretionary account (T) 1412. 2) trade recommended by RR and accepted by customer can be marked unsolicited (F) 1413. 3) sale of securities that are not owned by customer is documented as being sold short (T) 1414. 4) all sales of options must be done in margin account (F) only uncovered must 1415. types of orders (3, just list them) - Correct answer 1) market order 1416. 2) limit order 1417. 3) stop order 1418. 1/3 - market order - Correct answer customer is ready and wants to buy/sell, customer specifies security and size of order only, order is executed immediately 1419. -fill=guarantee execution 1420. -order executed immediately 1421. **time/price is not guaranteed 1422. 2/3 - limit order - Correct answer where customer only wants to buy/sell @ specific price or better 1423. -customer specifies security, size, price 1424. -order is only executed if limit price can be met 1425. -limit=buy or sell that may not be executed 1426. *buy limit=buy at that price of lower 1427. *sell limit=sell at that price or higher 1428. ex) ABC trading at 30.75, she enters limit order to buy 1000 at 30. if it increasing you miss the mark/it is not executed. the price can also continually get better but investor set a threshold=profit not guaranteed 1429. ex) sell limit order: ABC trading at 29.4 is going to sell them client places sell limit at 30. risk=stock could go up to 45 or higher next week so profit is not guaranteed 1430. 3/3 stop order (stop and stop limit orders are on separate card) - Correct answer -nicknamed a stop loss order bc you stop if from going too far in the direction you don't want it to go 1431. may be used to limit a loss (if you long the position) or protect a gain (if you short) 1432. -doesn't guarantee specific price 1433. -2 types (buy stop and sell stop) 1434. -if you long stock=you are bullish, you want market to go up. You fear that stock could fall in value so you need to limit downside risk so you enter stop order below current market value bc if it is going to go down you want to stop that loss) 1435. -if you are short the stock=you hope market goes down=fear that stock may increase so you enter buy order above market price which is to limit the upside risk) 1436. stop and stop limit order - Correct answer both are triggered/activated when a trade occurs @ or through the stop price (a price set by the investor). but may not provide protection bc possible they won't execute 1437. -sell stop orders will activate at stop price or lower 1438. -buy stop orders will activate at stop price or higher 1439. -once stop order activated --> it becomes a market order and immediately is executed. the risk is you don't know the price 1440. -once stop limit order is activated (when you enter a stop and limit price... once stop is activated it becomes limit...) --> becomes a limit order=uncertain execution. risky bc it can be activated but never executed 1441. stop/limit order ex - Correct answer 1) can be used to hedge a long position (sell stop)=mkt price of lower 1442. 2) once activated may not be executed (stop limit order 1443. 3) once activated it is immediately executed (stop order) 1444. 4) can be used to hedge a short position (buy stop) 1445. sum for stop orders - Correct answer 1) sell stop orders=used when long the position=@ mkt price or lower 1446. 2) buy stop order=short the position=you hope it goes down but if not you protect it from going too high 1447. sell stock order exs (trigger price vs execution price) - Correct answer 1) long the position RST has risen in value so you have an unrealized gain but you are scared of it going down so you get a sell stop=at stop price or lower it is executed, so you sell 1000 RST at 30 stop 1448. -once activated it become market order which is executed immediately but no one price is guarnateed (can be executed at price above or below) 1449. -the 30$ is not guaranteed, cant lock in price, hope you get around this 1450. 2) you bought 1000 ABC at 34m you enter sell stop at 30 1451. -today's it has traded at 30.5, 35, 30.7, 30.38, 29.87, then 29.85 1452. -trigger price=first trade @ or below the stop price, doesn't have to hit 30 exactly, but must at least be lower) so in our ex the first price was 29.87 1453. -execution price=whatever the next trade is after the trigger.... so in this case that was 29.85 1454. ex buy stop - Correct answer protect profit (already sold something, sold short, but either way you have realized profit) 1455. -short position so you enter buy stop at 30 1456. -trigger=at or above 30 1457. -investor is short 1000 @ 26 1458. -places buy 1000 DEG at 30 stop 1459. -today trades are 29.75, 29.6, 29.7, 30.12, 30.15 1460. -trigger=30.12 1461. -execution=30.15 1462. order qualifiers (how long is an order good for) - Correct answer there are different qualifiers that can be used to influence when/if an order is executed but the two popular ones are: 1) day order 2) GTC = good till canceled 1) unless otherwise indicated, all orders are day orders and are cancelled @ day's end if not executed 1463. 2)good till cancel/open order=stays on book until it expires, is executed, or is cancelled. this can be placed for one week, one month, or other specified period of time. the entering firm should be periodically checking as it is their responsibility. it can be adjusted for distribution on the security or partial execution (ex... if you had order for 1000 and there was a stock split, it is adjusted OR if you had order for 1000 shares and 500 were filled=it is changed to 500). 1464. orders t/f - Correct answer 1) a day order thats not executed on specific day will be carried to next day (F) 2) buy stop at 17$ will be triggered if stock trades at 17 or below (F) 3) sell stop at 37 will be triggered if stock trades at or below 37 (T) 4) a GTC order is adjusted if underlying stock is the subject of a stock dividend (T) 1465. the trading process (5 steps) - Correct answer 1) order entry=ticket details show how trade should be executed 1466. 2)execution=occurence of a trade in a market center (some venue) 1467. 3) clearing=executing firms agree on trade details, anything not recognized results in DK or don't know which is sent from on B/D to another if details don't match up exactly 1505. **since no economic gain/loss from this event or any change in owners %, or change to issuers capitalization** simply makes it more marketable 1) forward stock split: 2:1, 3:1, etc. this is when more shares are created at a lower price per share 2) reverse stock split: lower # of shares @ higher price 1:5 1506. **for both, dividends per share are adjusted proportionately** 1507. tax treatment: additional shares aren't taxed bc dollar value of what you had stayed the same (total basis is unchanged, but basis per share is adjusted) 1508. ex forward split: 1509. -investor owns 100 shares of XYZ at $180/share, XYZ co executes 3:2 split...(for every 2 shares they had, they are not going to have 3) 1510. Before split= 100 shares, $180/share, total value=$18000 1511. after split= 100*3/2=150 shares 1512. -180*2/3=260/3=$120 per share 1513. -total value=150*120=$18000 (ALWAYS SAME AS BEFORE) 1514. ex reverse stock split 1515. -investor owns 1000 shares of XYZ @ $10/share 1516. -executes 1:4 reverse stock split so for every 4 shares they have they're only going to have 1) 1517. -before=1000*10=10,000$ 1518. -1000 shares 1519. -$10 per shares 1520. after= 1521. -1000*1/4=250 shares 1522. -10*4/1=$40/shares 1523. $40*250=$10,000 1524. t/f stock splits - Correct answer 1) forward or reverse split changes the total value of securities in portfolio (F) 1525. 2) after a 1 for 5 stock split, an investor who owns 500 shares will now own 100 (T) 1526. 3) after a 3 for 2 stock split, an investor who owned 200 will now own 300 (T) 1527. 4) after a 5 for 4 stock split, 100 shares @$50/shares will equal 125 shares @ 40 (T) 1528. 100*5/4=500/4=125 1529. $50+4/5=200/5=40 1530. tender offer (type of corp action) (main reason for doing this) - Correct answer -one entity makes offer to purchase something from you and he will give you cash compensation for it=intent to buy shares from owner @ fixed price for certain period of time 1531. -offer can be made from issuer (would happen if they have extra cash and they want to buy x% back of their shares) or third party 1532. -main reason=offer typically made to acquire a co. or a controlling position and a seat on the board of directors (may want to buy 20 or 30% of shares @ one time) (this is a third party offer) 1533. -offer can be for ALL shares of a specific % 1534. -a lot of acquisitions are done this way 1535. -shares may only be tendered if an investor is long the stock or its equivalent such as: 1) convertible security (exercise not required), 2) right or warrant (exercise not required), 3) a call option (cant tender with this, only if exercised) 1536. *for 1 and 2 the receiving firm exercises them /takes care of them unlike a call option 1537. other corp actions (4, preemptive rights, m&a, spinoff, exchange offering) - Correct answer 1) preemptive rights: provide existing shareholders with opportunity to purchase additional shares directly from co usually pay discount (to maintain existing ownership %) 1538. 2) mergers/acquisitions: merger=combo of 2 companies. acquisition=one co purchasing/assuming control of another 1539. 3) spinoff: co may choose to spinoff a specific business to existing shareholders--> shareholders receive new shares of original co + new co. that you owned as part of a larger co. 1540. 4) exchange offering=you owned one security and co. says we will offer you cash/new security if you turn in those other securities you own 1541. forward official communications (two ways to receive this annually, OBO and NOBO, what do they send (2)?) - Correct answer -1 time per year the co. sends you report 1542. -when received in the mail from issuer versus B/D?? this dictates NOBO and OBO - NOBO=non objecting beneficial owner: owners who allow issuers to contact/send communication to them directly - OBO= objecting beneficial owner=owner who will no release personal info to issuers (don't want them to know who they are) so the communication is sent directly through the B/D 1543. beneficial owner=investors whose securities are held in their name/recorded on firms books 1544. what do they send? 1) proxies: ability to vote....must be immediately fowarded to customer, by signing beneficial owner allows another person to vote on your behalf (as you would if you don't attend meeting). you only have x days to vote 2) forms 10-k (annual) and 10-Q (quarterly). SEC rules=financial info that must be forwarded to shareholders 1545. who B/D charges for their services? (2) - Correct answer 1) charging issuers: member firms charge issuers for forwarding materials to beneficial owners, rates are subject to SEC rules 1546. 2) charge customers: for safekeeping of securities, cannot discriminate between customers, services includes safekeeping of securities, collection of dividends/interest, and exchange and transfer of securities 1547. **cannot charge them for forwarding proxies bc they're already charging the issuers for this 1548. ex, fill in the blank corp action - Correct answer 1) combo of two companies=merger 1549. 2) an interest to purchase shares of another owner=tender offer 1550. 3) shareholders receive shares of a buinsess unit of a co=spinoff 1551. 4) one co. assumes control of another=acquisition 1552. t/f corp action - Correct answer 1) OBO, all communications comes from broker dealers (T) 1553. 2) NOBOs don't allow issuers to contact them directly (F) 1554. 3) B/D may charge an issuer when forwarding proxies (T) 1555. 4) B/D may charge customers a fee when transferring securities (T) 1556. types of customer accounts (2 main types and 1 based on securites invested in) - Correct answer two main ones: 1) cash account: customers agrees to buy securities in full 2) margin account: two types 1557. -1) long account=borrow $ from broker to buy securities, customers pays x % of costs 1558. -2) short account=where you sell securities without previously owning them. but you will eventually have to buy them= so you put $ down for this =client borrows 1559. one based on securities invested in: 1560. 3) options account: about type of securities you're buying, can set it up to be cash or margin account 1561. optioning a margin account (3 components of margin agreement and margin disclosure document) - Correct answer -margin=leverage=use small sum of money to control some larger amount=subject to regulation T=must deposit 50% of trade value=leverage of 2:1