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Series 65 > Book 2 > Flashcards

Book 2 Flashcards

Book 2 concepts

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Series 65 flashcards
1
Q

Options: Contract writer = ?

A

Contract writer = Contract seller = Short position

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2
Q

Options: Contract holder = ?

A

Contract holder = Contract buyer = Long position

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3
Q

Mgmt companies: Expense ratio = ?

A

Expense ratio = (Total expenses / Total Net Assets)

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4
Q

Mgmt companies: Sales Charge % = ?

A

(Ask - Bid) / Ask

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5
Q

Muni Bonds: Equivalent Tax-Free Yield = ?

A

Taxable Yield x (100% - Tax Bracket)

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6
Q

Muni Bonds: Equivalent Taxable Yield = ?

A

Tax Free Yield / (100% - Tax Bracket)

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7
Q

Convertible Corp Debt: Parity Price of Stock = ?

A

Bond Market Value / Conversion Ratio

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8
Q

Convertible Corp Debt: Parity Price of Bond = ?

A

Conversion Ratio x Stock Market Price

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9
Q

Convertible Corp Debt: Conversion Ratio = ?

A

Par Value of Bond / Conversion Price

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10
Q

Invest vehicles: Parity Price of Preferred = ?

A

Market Price of Common x Conversion Ratio

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11
Q

Stocks: Conversion Ratio = ?

A

Par / Conversion Price

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12
Q

Stocks: DDM = Dividend Discount Model = ?

A

Expected Next Year Dividend Rate /

Required Rate Return of Equity Investors - Dividend Growth Rate

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13
Q

Stocks: EPS = ?

A

Market Price / “Multiple”

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14
Q

Stocks: P/E Ratio = ?

A

Market Price / EPS

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15
Q

Stocks: Current Yield = ?

A

Annual Income / Market Price

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16
Q

Open-End Management company shares are ___ issued, and ___ redeemed?

A
  • continuously issued.

- continuously redeemed.

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17
Q

A client is short stock and wants to protect his position. the option strategy that should be used is to ____ ?

A

BUY a CALL.

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18
Q

TIPS:

  • An annual upwards adjustment to inflation is taxable ____ when?
  • An annual downward adjustment due to deflation is tax-deductible ____ when?
A

IN THAT YEAR.

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19
Q

TIPS are usually purchased in ____ plans that are ____.

This avoids having to pay tax each year on the upwards principal adjustment.

A
  • tax-qualified retirement plans.

- tax-deferred.

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20
Q

A discount corporate bond that is CALLABLE would be quoted on a yield basis, based upon ____ ?

A

YTM = Yield to Maturity

  1. A discount bond will NOT be called by the issuer.
  2. A discount bond will therefore be held to maturity.
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21
Q

An investor in a “Ginnie Mae” mutual fund assumes which 4 risks?

A
  1. Prepayment Risk
  2. Extension Risk
  3. Fluctuation of NAV
  4. Reinvestment Risk
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22
Q

Repurchase Agreements are initiated by the Federal Reserve to ____ the money supply.

A

LOOSEN.

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23
Q

Repurchase Agreements are used by dealers to ____ the carrying cost of government securities held in their inventory.

A

REDUCE.

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24
Q

Equity-Indexed Annuities (EIAs) have annual cap of ____%, and guarantee yearly minimum of ____%

A

annual cap of 7-9%

and guarantee a yearly minimum of 1-3%

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25
Q

Equity-Indexed Annuities (EIAs) are an ____ product, and are currently ____ defined as a “security”.

A

insurance product.

NOT defined as a “security”.

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26
Q

Cumulative Voting = (def) ?

A

Minority shareholders have the ability to elect the director of their choice.

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27
Q

Parity price: (Convertible bonds & Convertible preferred stock): Equation = ?

A

Parity price =

Par Value, the Market Trading Value
_______________________________
Conversion Ratio

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28
Q

Parity (options) = def ?

A

Parity = for options; when the premium of the option is exactly equal to the options intrinsic value

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29
Q

Parity (convertible bonds & convertible preferred stock) def = ?

A

Parity = for convertible bonds & convertible preferred stock, when total market value of common shares into which a security can be converted equals market value of convertible security.

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30
Q

conversion price = equation ?

A

Conversion price =

Par Value
_______________
Conversion Ratio

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31
Q

conversion price (def) = ?

A

conversion price = stated price at which security is convertible into common stock of the issuer.

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32
Q

Treasury stock does NOT earn ___ and does NOT receive ___ ?

A

does NOT earn interest. does NOT receive dividends.

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33
Q

Ginnie Mae: GNMA: Has pass-through ____. And is backed by ____.

A

pass-through certificates

backed by guarantee of US government

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34
Q

Which agency security has the highest credit?

A

Ginnie Mae, GNMA

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35
Q

Which agency security is fully-taxable by Federal, State, and Local tax?

A

Ginnie Mae, GNMA

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36
Q

What are the min certificates for Ginnie Mae?

A

$25,000

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37
Q

Where does GNMA debt trade?

A

OTC “over the counter”

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38
Q

GNMA buys ___ and ____ guaranteed mortgages from financial institutions for repackaging as pass-through certificates.

A

FHA and VA

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39
Q

GNMA: monthly mortgage payments are “passed through” to ____ holders?

A

certificate holders

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40
Q

Fannie Mae = FNMA = ?

A

Federal National Mortgage Association

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41
Q

FNMA is public or private?

A

publicly traded corporation

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42
Q

FNMA pass thru certs are ___ guaranteed by US federal govt?

A

NOT guaranteed

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43
Q

Federal Farm Credit Consolidated System bonds - list 3 banks

A
  1. Federal Intermediate Credit Banks
  2. Banks for Cooperatives
  3. Federal Land Banks
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44
Q

Agricultural Credit Corporations are ___ part of obligations of Federal Farm Consolidated System Bonds, and _____ issue notes.

A

NOT part of obligations of Federal Farm Consolidated System.

do NOT issue notes.

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45
Q

Federal Farm Credit System backed by _____

A

Federal Farm Credit System Banks

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46
Q

Federal Farm Credit System interest exempt from ___ and ___ taxes

A

state

local

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47
Q

Federal Farm Credit System only has ___ backing of US govt

A

implicit

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48
Q

Federal Farm Credit System has ___ tax

A

federal

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49
Q

Federal Farm Credit System has ___ and ___ discount obligations issued

A

long term and short term

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50
Q

Federal Intermediate Credit Bank has ___ discounted notes

A

short term

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51
Q

Federal Intermediate Credit Bank is usually ____ in nature

A

seasonal

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52
Q

Federal Intermediate Credit Bank issues ____ term loans to farmers

A

short term

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53
Q

____ ____ _____ ____ makes loans to, and buys agricultural and livestock paper of:

  1. Commercial Banks
  2. Production Credit Association
  3. Agricultural Credit Corporations
  4. Incorporated Livestock Loan Companies
A

Federal Intermediate Credit Bank

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54
Q

Treasury Receipts are a ___ coupon bond

A

zero coupon

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55
Q

Treasury receipts does ___ pay interest at regular intervals between issue and maturity.

A

does NOT pay interest at regular intervals between issue and maturity.

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56
Q

Treasury Receipts are sold by an ____

A

intermediary (brokerage firm)

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57
Q

Treasury Receipts are sold at a ___ ___ to par

A

deep discount

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58
Q

Treasury Receipts, are they stable?

A

NO, the fluctuate wildly

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59
Q

Treasury Receipts, what is the reinvestment risk

A

NONE

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60
Q

Treasury Receipts are subject to federal income tax, when?

A

annually

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61
Q

zero coupon bonds trade ___ and ___ accrued interest

A

FLAT

and WITHOUT accrued interest

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62
Q

zero coupon bonds have ___ semi-annual payments

A

have NO semi-annual payments

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63
Q
  1. BOTH are exempt from registration under Securities Act of 1933
  2. BOTH are interest bearing obligations quoted in 32nds
  3. Both are trades settled in federal funds
  4. Both are eligible for trading in Federal Reserve Open Market Operations

what are they?

A

government and agency securities

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64
Q
  1. Bond is negotiable.
  2. interest payments can be redeemed by anyone
  3. at maturity, registered owner receives face amount of bond
  4. registered in owner’s name
  5. bearer coupons attached
  6. anyone can clip the coupons and receive interest payments
  7. principal amount only repaid to registered holder
  8. no such bonds issued since 1983 (they still trade in the market)

what are they?

A

Bond - “Registered to Principal Only)

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65
Q

Industrial Development Bonds: Final responsibility for debt service rests with ___ ?

A

corporate lessee of facility

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66
Q

Industrial Development Bonds are backed by the ____ paid by the corporate lessee, as well as the ____ of the corporate lessee

A

rental revenues

guarantee of the corporate lessee

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67
Q

Industrial Development Bonds take on credit rating of _______

A

the corporation leasing the facility

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68
Q

Industrial Development Bonds: This bond may; be subject to what tax?

A

Alternative Minimum Tax (AMT) or regular tax.

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69
Q

Industrial Development Bond, also called ?

A

Industrial Revenue Bond

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70
Q

treasury stock = how much = equation?

A

Treasury stock = Issued shares - Outstanding shares

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71
Q

Municipal Bond Funds - Taxation - Distributions:

Dividend distributions representing interest are ____

Dividend distributions representing capital gains are ____

A

tax-free

taxable

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72
Q

Warrants and Rights - Dividends:

Warrants and Rights ____ pay dividends.

Only if ____ , resulting in purchase of common shares, would _____ be received.

A

do NOT pay dividends

only if EXERCISED, would DIVIDENDS be received

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73
Q

Are hedge funds regulated as investment companies?

A

NOPE

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74
Q
  1. company assumes mortality risk
  2. company assumes expense risk
  3. annuitant assumes investment risk
  4. annuitant assumes purchasing power risk
  5. annuitant assumes market risk

what product?

A

variable annuity

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75
Q

common dividends are declared and paid when?

A

quarterly

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76
Q

Which types of ownership have equity position? name 3.

A
  1. common shareholders
  2. preferred shareholders
  3. convertible preferred shareholders
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77
Q

Repurchase agreements (Repo): US govt ___ securities, to Fed Reserve or another dealer, promising to ___ them back at a later date.

A

SELLS to fed reserve, promising to BUY them back at a later date.

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78
Q

Repurchase agreements (Repo): interest, how to calculate?

A

Interest = (Sales price - Purchase price)

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79
Q

Repurchase agreements (Repo) = The Fed is ____ cash to banks and ___ credit

A

INJECTING cash

INCREASING credit

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80
Q

Repurchase agreements (Repo): dealer ___ securities to Fed, to get liquid

A

dealer SELLS to fed

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81
Q

Repurchase agreements (Repo), interest rates do what after?

A

DECREASE

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82
Q

Repurchase agreements: (Repo) – public customer is ___ of monies ?

A

LENDER

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83
Q

Repurchase agreements (REPO) – government dealer is ___ of govt securities?

A

SELLER

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84
Q

Repurchase agreements (REPO) – dealer is “___ ___” , by selling government securities to customer, with agreement to buy them back at a later date.

A

“getting liquid”

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85
Q

Repurchase agreements (REPO), customer is ___ of cash to govt dealer

A

LENDER

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86
Q

Repurchase agreements (REPO), government securities dealer is ____ from federal reserve

A

SELLER

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87
Q

Repurchase agreements (repo), government securities dealer will ____ back, later.

A

government securities dealer, will BUY back, LATER

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88
Q

Municipal bond, backed by municipality. cities and towns, interest paid by “ad valorem”. states, interest paid by income and sales taxes. “GO” called what?

A

General obligation bond

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89
Q

Example of this bond, public schools, do not produce revenue and are not funded by revenue bond issues. “carried on the backs of the taxpayers”.

A

General obligation bond

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90
Q

Municipal bond, used to build revenue producing facility

A

Revenue Bond

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91
Q

Municipal bond, paid from NON ad-valorem (eg ETOH, tobacco, gas tax)

A

Special tax bond

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92
Q

Muni bond, state legislature has moral obligation (not legal) to pay debt

A

Moral Obligation Bond

GO - debt limit - voter approval needed for non-self-supporting debt

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93
Q

Income bond issued by ___

A

corporatoin

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94
Q

Revenue bond issued by ____

A

municipality

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95
Q

Endowment bonds issued by ____

A

Hospitals and Colleges

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96
Q

Revenue bonds vs GO, which has higher risk of default?

A

Revenue bonds have higher risk of default than general obligation bonds.

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97
Q

NON self-supporting debt, due to paid fm tax collections and NOT revenues, what type muni bonds?

A

Special Tax Bonds

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98
Q

Default-Moral Obligation Bond – payment made by?

A

Legislative Apportionment

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99
Q

Bonds:

  1. long term = “serial maturies” (sequence of years)
  2. issued at par
  3. pay interest semi-annually
A

Long Term Serial Bonds

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100
Q

Bonds:

  1. “serial maturities” (sequence of years)
  2. discount from par
  3. mature at par value
A

Short Term Serial Bonds

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101
Q

Defease. def?

A

to void a bond or a loan, when the borrower sets aside cash or bonds sufficient enough to service the borrower’s debt.

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102
Q

escrow. def?

A

(verb) place in custody or trust.

(noun) Bond/deed/document kept in custody of 3rd party.

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103
Q

Equivalent Taxable Yield: eqn?

A

Tax Free Yield
_______________
(100% - Tax Bracket%)

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104
Q

Equivalent Tax-Free yield: equn?

A

Taxable Yield x (100% - Tax Bracket%)

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105
Q

taxable distributions from municipal bond funds:

dividend distributions representing interest are ____

dividend distributions representing capital gains are _____

A

interest tax free

capital gains taxable

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106
Q

Investment Vehicles: Money market debt:

unsecured short term money market debt, issued by corporation with max maturity 270 days. issued at discount and matures at face value.

what is it?

A

commercial paper

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107
Q

TAN: Tax Anticipation Note, is issued when?

A

issued in advance of taxes

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108
Q

RAN: Revenue Anticipation Note: issued when?

A

issued in advance of revenues, NOT taxes

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109
Q
  1. interim financing when long term bond about ot be issued.
  2. less than one year
  3. no periodic interest payments
  4. payment at maturity = (Repayment Principal + Interest)

what is it?

A

BAN: Bond Anticipation Note

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110
Q

Investment vehicles: money market debt

  1. matures on pre-set date at pre-set price
  2. quoted on a yield basis
  3. unsecured promissory note
  4. NOT funded debt of issuer
  5. money market instrument
  6. unfunded debt

what is it?

A

commercial paper

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111
Q

Lead Liquid Money Market Instrument is what?

A

Banker’s Acceptance

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112
Q

What is the highest quality banker’s acceptance, which is eligible for trading by Fed Trading Desk?

A

Prime Banker’s Acceptance

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113
Q

Reverse Repurchase Agreements:

  1. Fed is ____ credit
  2. Fed fund rate changes to ____
A

Fed is TIGHTENING credit.

Fed funds rate GOES UP.

114
Q

Mgmt companies:

POP = Public Offering Price = eqn?

A

Net Asset Value + Sales Charge

115
Q

Mgmt companies:

POP : Public Offering Price: Max Sales charge:

FINRA rules, max sales charge on mutual fund purchases is _____ of POP ?

A

8.5%

116
Q

Mgmt companies:

Sales charge percentage calc = ?

A

(Ask - Bid) / Ask

117
Q

Contingent Deferred Sales Charge = CDSC = when?

A

if customer redeems shares before stated time period

118
Q

Mgmt companies:

  1. Breakpoints
  2. Letter of Intent
  3. Rights of accumulation
  4. Dividend Reinvestment at NAV

FINRA requirements for what?

A

Max Sales Charge

119
Q

Mgmt companies:

Breakpoint. def?

A

Reduced sales charge for large dollar purchase.

120
Q

Mgmt companies:

Offering price = eqn?

A

NAV / (100% - Sales Charge%)

121
Q

Mgmt companies:

Max sales charge for 12b-1 funds?

A
  1. 25% max

6. 25% max if fund imposes service fees for account maintenance

122
Q

max total 12b-1 fee?

A

0.75% of average annual net assets

123
Q

Mgmt companies:

Share classes:

    • high “up front”, low 12b-1
    • good for long term

which share class?

A

Class A

124
Q

Mgmt companies:

Share classes:

    • contingent deferred sales charge
    • 0/50% 12b-1
    • good for intermediate term

which share class?

A

Class B

125
Q

Mgmt companies:

Share classes:

    • No upfront sales charge
    • smaller “rear load”
    • 0/75% 12b-1
    • short term investment

which share class?

A

Class C

126
Q

Mgmt companies:

    • publicly traded
    • purchaser can sell share to someone else
    • cannot be redeemed by the fund

which type fund?

A

closed-end fund

127
Q

Mgmt companies:

Registered fund under Subchapter M MUST distribute ____ percent of NII ?

A

90% of NII

Investors = “Regulated” under (M) by IRS

Fund = no tax on distributed NII (“flows thru”)

Fund = taxed on retained income

128
Q

Most funds distribute ____ of NII and ____ of capital gains

A

97% of NII

98% of capital gains

IRS Tax Code imposes tax surcharges on funds that do not distribute at least 97% of NII and 98% capital gains to shareholders.

129
Q

Mgmt companies - funds - distributions - tax cost basis = investor “cost” = ?

A

investor “cost” = (Original Purchase Price + All Reinvested Distributions)

130
Q

Mgmt companies - funds - distributions - tax cost basis = Taxable gain, or Tax-deductible capital loss = ?

A

Taxable Gain, or Tax-Deductible Capital Loss =

Sale Proceeds - Investor Cost

131
Q

Mgmt companies:

    • continually issues new shares
    • redeems its own shares
    • redeemable with sponsor
    • non-negotiable and do NOT trade
    • must be sold thru prospectus offering
    • may issue new shares continuously
    • must redeem outstanding shares based on NAV
    • share price = NAV

what type of fund?

A

Open-End Management Company

Mutual Fund

132
Q

Mgmt companies:

    • buying shares in secondary market = (Ask Price + Commission)
    • “Publicly-Traded Fund”
    • Fixed number of negotiable shares –> public
    • Shares NOT redeemable by the fund
    • Securities portfolios = ILLIQUID
    • Redemption = difficult
    • Trade in secondary market exchange or OTC
    • NAV = Investor sentiment may push share price higher or lower than the NAV

what type of fund?

A

Closed-End Management Company

133
Q

Which is the only fund that can sell for less than NAV, if investors are bearish on that fund’s prospects?

A

Closed-End Management Company

134
Q

Agency Bonds:

    • Backed by full faith of USA
    • No Credit Risk
    • Only issues mortgage backed pass-through certificates
    • Prepayment risk = if decreased interest rates
    • NAV risk = if increased interest rates

what type of agency?

A

GNMA = Ginnie Mae

135
Q

Investment vehicles – Insurance Based Products

Perpetuity Value = eqn ?

A

Perpetuity value =

Annual payment
_________________
Market Rate of Interest

136
Q

How to calculate payment for variable annuity?

A

Payment = Annuity Units x Unit Value

137
Q

How to calculate number of variable annuity units?

A

Number of annuity units =

Value of separate account interest
___________________________
“annuity unit factor”

138
Q

annuity term = conservative estimated annual return needed for constant annuity payments = set when contract annuitized = chosen by customer = based on earnings in separate account

A

AIR = Assumed Interest Rate

139
Q

Variable annuity is defined legally as what type product?

A

“security”

140
Q

Investment vehicles – insurance based products

    • whole life policy
    • cash –> designated separate account
    • premium amount fixed and level
    • policy guarantees minimum fixed death benefit
    • death benefit can increase over fixed amount, if separate account increases
    • “security” and sold with prospectus

what type product?

A

VARIABLE LIFE

permanent insurance with cash value invested in separate account.

141
Q

Tax-Free exchange of insurance for another policy type or annuity.

“Exchange” for another policy without tax consequence.

Name that exchange?

A

1035 Exchange

142
Q
    • Annuity contract = regulated as insurance product
    • annuity contract NOT defined as “security”
    • annuity payments will NOT increase if inflation increases
    • investment risk borne by insurance company
    • investments held in general account

Name that annuity?

A

Fixed Annuity

143
Q
    • Developed in 1980s, source of liquidity for terminally ill AIDSs patients with short life expectancy (2-3 years)
    • One can invest in another’s life insurance
    • Buyer = Viatical settlement provider
    • Seller = original owner of life insurance policy = Viator
    • Viator = gets cash at decreased value
    • buyer = pays premiums and gets insured person’s death benefit

name that product?

A

Viatical Settlement

144
Q

Investment Vehicles - Insurance based products:

    • between fixed and variable annuity
    • return linked to well-known index
    • capped to a max interest rate/year
    • non-qualified plans –> NO deduction for contributions
    • regulated as INSURANCE
    • min rate of return given
    • NOT guaranteed by PBGC (Pension Benefit Guarantee Corporation)

name that investment vehicle?

A

Equity Indexed Annuity (EIA)

145
Q
    • point-to-point method
    • annual reset method
    • high-water-mark method

these are methods to credit change to what insurance based product?

A

Equity Indexed Annuity (EIA)

146
Q

Life annuity payment ends when?

A

Person dies

147
Q

A life annuity usually pays the ___ amount of all annuity payment options.

A

LARGEST

148
Q
    • taxed at LIFO
    • capital gains tax
    • 10% penalty tax before age 59.5
    • non-tax qualified retirement plan
    • original non-tax-deductible contribution
    • reinvestment of dividends, interest, capital gains, over time –> tax deferred
    • market participation and tax-deferred-growth
    • contributions to non-qualified contracts are NOT deductible.
    • payments are guaranteed for life of contract holder
    • separate account growth is tax-deferred until distributions commence
    • no limits on amount individual can invest

name that type of annuity?

A

Variable Annuity Contract

149
Q

insurance based products:

    • minimum guarantee lower than fixed annuity
    • piece of gains of S&P 500
    • inflation hedge, but protected against bear market
    • high expenses and surrender fees

name that insurance based product?

A

Equity-Indexed Annuity (EIA)

150
Q
    • buying put options to protect downside
    • selling calls for extra income, to offset cost of put options (limits upside growth)

this is called?

A

“collaring” investment portfolio

151
Q

insurance based product:

    • “pure insurance”
    • no cash value
    • non-renewable after certain age
    • if premium is NOT paid, policy lapses

name that insurance based product?

A

term life

152
Q

insurance based product:

    • higher premium than term life, level each year
    • does NOT increase with age
    • fixed coverage
    • “straight life”
    • cash value invested in general account
    • cash value can be used to pay premiums

name that insurance based product?

A

whole life

153
Q

insurance based product:

    • flexible policy – allows policy owner to change both the premium payments and death benefit
    • minimum payment amount
    • minimum = term life insurance
    • increased minimum = excess invested in general account and builds cash value (like whole life)
    • cash value = buy additional insurance or decrease premiums

name that insurance based product?

A

Universal Life-Flexible Insurance

154
Q

insurance based product:

    • guaranteed rate of return
    • only subject to state insurance regulations
    • “investment risk” = assumed by insurance company
    • state insurance regulations = YES
    • federal and state securities laws = NOPE

name that insurance based product

A

Fixed Annuity

155
Q

“extra” payments if insured lives longer than “mortality tables”

name that insurance term?

A

Mortality Risk

156
Q

Fixed Annuity – who assumes the inflation risk?

A

Annuitant.

purchasing power risk assumed by annuitant.

157
Q

Periodic Certain Annuity – why used?

A

usually to bridge a gap in time

early retirement –> social security payments

158
Q

Perpetuity value = eqn?

A

Annual payment
_______________
market rate of interest

159
Q
    • no guarantee of specific rate of return
    • annuity investments increase better than expected, annuity increase
    • annuity investments decrease worse than expected, annuity amount decreases
    • new non-exempt issues sold with prospectus

name that annuity?

A

variable annuity

160
Q

investment vehicles - other investments:

    • structured product offered by banks
    • tied to benchmark index
    • debt of the bank
    • minimal liquidity risk
    • no interest or dividend payments
    • value grows based on benchmark index
    • capital gains tax = good

name that investment vehicle?

A

Exchange Traded Notes (ETNs)

161
Q
    • charge one-time up-front sales charge reduced by breakpoints for larger dollar purchases
    • usually have no 12-b-1 fees

name that mutual fund share class?

A

Class A

162
Q
    • no up-front sales charge
    • redemption fee within 7 years, declining
    • fee zero redemption –> convertible to Class A
    • 12b-1 fee (0.50%)
    • convert to Class A –> (no 12b-1 fee then)

name that share class?

A

Class B

163
Q
    • no upfront sales charge
    • no redemption fee
    • level annual 12b-1 fee (0.75%)

name that share class?

A

Class C

164
Q

what is the primary reason for selection of a particular Tax Sheltered Investment?

A
  1. Primary reason = Economic viability

2. Secondary reason = tax benefits.

165
Q

Options:

Short stock : Short Put –> breakeven =?

A

short sale price + premium

166
Q

when is short stock & short put used = ?

A
    • used in a flat market
    • income strategy
    • collects income from sale of put
    • covered put writer
167
Q

options:

    • “protect the gain”, after 1st buying the stock
    • sells a call at a strike price, just above market price of stock
    • buys a put at a strike price, just below market price of stock

stock rises –> called away

stock falls –> put is exercised, limiting downside loss.

(because premium was received and a premium was paid, the cost of the downside protection is oven “0”)

name that option strategy?

A

Collar

168
Q

what type of option can be traded or exercised at any time?

A

American Style option

169
Q

what type of option can be traded any time, but only exercised at expiration?

A

European Style option

170
Q

what type of style options are Index Options?

Institutional money managers, hedge portfolios with index options. Didn’t want unintended exercise.

A

European Style

171
Q

Income Bonds (Adjustment Bonds) – why are they known as “scary bonds” ?

A

If no income, doesn’t need to make interest payment.

172
Q

economic climate situation:

    • investors sell corporate bonds
    • investors buy government bonds
    • government bonds yields decrease

when would this occur?

A

pending recession expected

173
Q

economic climate situation:

    • interest rates rise
    • stock prices fall

when would this occur?

A

during extended periods of high inflation.

174
Q

Rising inflation is a “lose-lose” situation for both the ___ and long-term ___ markets?

A

stock market

long-term-bond market

175
Q

economic climate situation:

    • short term rates higher than long term rates
    • federal reserve is tightening credit

this occurs along with ___ yield curve?

A

inverted yield curve

176
Q

____ measures a stock’s price volatility relative to stock-specific (non-market) factors.

A

Alpha

177
Q

____ measures a stock’s price volatility relative to the market as a whole.

A

Beta

178
Q

Dividend or current yield formula =

A

Annual income
____________
Market price

179
Q

Dividend discount model = DDM = eqn = ?

A

Expected Next Year Dividend Rate
_____________________________
(Required Rate of return for Equity investors - Dividend Growth Rate)

180
Q

Parity price of preferred stock = eqn?

A

Market price of common x Conversion Ratio

181
Q

type of stock:

  1. does NOT vote
  2. does NOT receive dividends
  3. deducted from outstanding shares
  4. earnings per share then increase

what type of stock?

A

Treasury stock

182
Q

this type of payment can be:

  1. cash or company products
  2. common shares
  3. common shares of another company
  4. but NOT listed options of that company

what type of payment is this?

A

Corporate Dividend Payments

183
Q
  1. stock split
  2. reverse stock split
  3. issue convertible shares
  4. repurchase shares for Treasury
  5. declaring a cash or stock dividend

which of these does NOT require stockholder approval?

A

repurchase shares for Treasury

184
Q
  1. transfer shares
  2. dividends
  3. vote

these are rights of whom?

A

common shareholder

185
Q

corporate debt:

premium corporate bond (that is callable) would be quoted on a yield basis, based upon ___ ?

A

yield-to-call

186
Q

treasury bonds “stripped” of their coupons

“zero coupon” treasury obligations

separate trading of registered and principal security

name that debt instrument?

A

STRIPS

187
Q

how long are STRIPs usually held for?

A

usually held to maturity.

high level of interest rate risk, but purchasers not worried about this.

188
Q

broker-created, zero-coupon treasury bonds = called wut?

A

treasury receipts

189
Q

debt vehicle:

    • fixed interest rate
    • principal amount adjusted every 6 months = based on CPI
    • interest paid semi-annually, based upon Interest Amount = (fixed rate x adjusted principal amount)
    • Interest will increase if principal amount increases (due to CPI)
    • interest will decrease if principal amount decreases (due to deflation)
    • lower interest rate than similar maturity bonds, due to the inflation protection
    • as inflation rises, the return rises, and the bond price will not fall.

name that debt vehicle?

A

TIPS: Treasury Inflation Protected Securities

190
Q

Earned income on STRIPS is taxable annually unless ?

A

in a retirement plan

STRIPS & TIPS only best for: retirement plans, IRAs, Keoghs, and Pensions.

annual “earning” of discount reported as taxable income each year.

owner does NOT get money until maturity

191
Q

bond product:

    • over 1-10 yrs
    • quoted in 32nds
    • semi-annual interest
    • quoted as percent of par value in 32nds
    • minimum $100.00 par value

name that debt product?

A

Treasury NOTES

192
Q

debt product:

    • up to 12 months
    • yield basis quote
    • 1, 3, 6, 12 months
    • 4 weeks, 13 weeks, 26 weeks, 52 weeks
    • discount from par ($100.00) minimum
    • mature at par
    • discount earned = interest income
    • quoted on a discount yield basis

name that debt product?

A

Treasury BILLS

T-Bills

193
Q

GNMA = Ginnie Mae = interest income is fully taxable. why?

A

mortgage interest was deductible by mortagee, on federal and state returns, and “passed-through”.

194
Q
  1. T-Bills
  2. T Notes
  3. T Bonds
    NOT treasury stock

what is the minimum denomination of par value?

A

$100.00

195
Q
    • T Notes
    • T Bills
    • T Bonds

what entry form?

A

book entry

196
Q
    • government national mortgage association (1968)
    • directly owned and backed by government
    • created to give credence to mortgage backed securities (MBS)
    • only buys government insured mortgages (FHA/VA/Farms Home FmHA)
    • mortgage pools –> securitized –> sold to investors

name that govt agency?

A

Ginnie Mae = GNMA

197
Q
    • student loan marketing association
    • purchases insured student loans from qualified lending institutions
    • purchased from: colleges/universities/state agencies/banks
    • sells normal debentures at semi-annual interest

name that organization?

A

Sallie Mae = Student Loan Marketing Association

198
Q
    • denominated in US Dollars, issued by foreign countries
    • backed by zero coupon treasury bonds, purchased by Latin American country, matured at par
    • backed by US Govt
    • Gave Latin American countries 30 years to get their acts together and reduce their govt spending and institution pro-growth policies
    • goal was –> 30 year bonds –> give Latin America time –> bring them back to normal bond market

name that type of bond?

A

Brady Bonds

199
Q

debt vehicle:

    • minimum denomination $25.000.00
    • higher minimum to discourage small investors
    • difficult to quantify risk of short/long maturity (due to falling/rising interest rates)
    • securities backed by mortgages
    • pass-through undivided interest on pool of mortgages
    • pro rata of monthly mortgage –> certificate holder

name that debt vehicle?

A

Mortgage Backed Pass-Through Certificates

200
Q
    • Buys VA and FHA guaranteed mortgages
    • buys conventional mortgages
    • income = from spread
    • privatized
    • debt obligations still implicitly backed by federal govt and rated AAA by Moody’s and AA by S&P
A

FNMA = Fannie Mae

201
Q
    • Federal Home Loan Mortgage Corp (FHLMC)
    • buys conventional mortgages that do NOT carry government insurance or guarantee
    • Buys conventional mortgages from banks –> mortgage pools –> securitized –> investors
    • still (implicitly) backed by US govt, and has AAA Moody’s and AA by S&P.
    • buys conventional mortgages NOT insured by VA or FHA
A

Freddie Mac = FHLMC

202
Q
  1. short term loans – planting & harvest
  2. intermediate loans – buy equipment
  3. long term loans – buy land and buildings

these are part of what credit system?

A

Federal Farm Credit System

203
Q

Federal Farm Credit System

    • short term – 1 year or less
    • discount from $5,000 minimum
    • yield more than T-Bills

these are what type of debt vehicle?

A

Federal Farm Credit System

Discount Notes

204
Q

Federal Farm Credit System

    • traditional non-callable bonds
    • pay interest semi-annually in 2-10 year maturities
    • minimum $5,000

name that type of debt vehicle?

A

Federal Farm Credit System

Designated Bonds

205
Q

Federal Farm Credit System

    • traditional callable bonds
    • up to a 30 year maturity
    • semi-annual interest
    • fixed rate bonds, minimum $5,000, or, Floating rate bonds minimum $1,000.

name that type of debt vehicle?

A

Federal Farm Credit System

Farm Bonds

206
Q

Federal Farm Credit System

    • Designed for retail investors
    • minimum $1,000 denominations
    • unique estate planning feature
    • “Survivor’s Option”, bond may be redeemed at par plus accrued interest upon death
    • estate taxes due 9 months after death –> these bonds can be redeemed and used to pay death tax liability.

name that type of debt vehicle?

A

Federal Farm Credit System

Retail Bonds

207
Q

– Yield 0.25% more than US Treasuries, no direct US guarantee (but same credit rating).

what are they?

A

Farm Bonds

208
Q
    • $25,000 minimum
    • $1 billion pool –> $25,000 pass-thru –> investors
    • $25,000 minimum = so as to be unattractive to the small investor
    • Unusual risks = prepayment risk and covered following
    • mortgage payments –> pooled mortgages –> payments –> certificate holders
    • payments made monthly (principal and interest)

name that debt product?

A

MBS = Mortgage Backed Securities

209
Q

Federal Home Loan Bank (FHLB)

    • 1932, great depression, loans to Savings & Loans
    • one-year or less, minimum $100,000
    • yield more than T-Bills

name that debt instrument?

A

Discount Notes

Federal Home Loan Bank (FHLB)

210
Q

Federal Home Loan Bank (FHLB)

    • up to 30 year maturity
    • interest semi-annually
    • fixed rate bonds
    • $10,000 minimum face amounts

what are they called?

A

“Bullet Bonds”

(bullet next to listing)

Federal Home Loan Bank (FHLB)

211
Q

Bonds:

If interest rates FALL, yields on existing securities will FALL and the price will go UP. This is when issuers will do what?

A

CALL IN the CALLABLE securities.

212
Q

Sharpe Ratio equation

A

Rm-Rf
______________
Std Dev

213
Q

bonds

  1. yield to call is lower than YTM
    2 YTM is lower than current yield

this is true when bond is purchased at what?

A

premium

214
Q

Fed Actions

what is DORM?

A 
D = Discount rate
O = Open market operations
R = Reserve requirements
M = margin on securities
215
Q

YTM for discount bond?

A

Annual interest + Annual capital gain
___________________________________
(Bond cost + Redemption price)/2

216
Q

Coupon payment + [(F-P)/n]
__________________________
Average value of bond

A

YTM = Yield to Maturity

C = coupon payment
F = Face value of bond
P = Price investor paid for bond
n =# years to maturity

217
Q

Beta comparison of 2 different stocks or portfolios

A

divide both by their Beta and compare

218
Q

Bonds

Macaulay Duration

The longer the maturity, the ___ the duration.

the lower the coupon, the ___ the duration.

A

longer

lower

219
Q

Bonds

Macaulay Duration

Duration = def?

A

Duration is the weighted average term-to-maturity of a security’s cash flows.

Duration is the length of time for price of bond to be repaid by its internal cash flows.

220
Q

Zero coupon bond duration is the ____ ?

A

time to maturity

221
Q

Current yield = ?

A

Annual interest in dollars
___________________
Bond’s market price

222
Q

YTM = Yield to Maturity = ?

A

Annual Income + Annual capital change
_____________________________
Average price

223
Q

Internal Rate of Return (IRR) on an Investment = Rate of Interest Implicit in the Investment = ?

A

Yield to Maturity (YTM)

224
Q

Rule of 72

72 / Interest Rate Return = ?

A

Years to double in value

225
Q

Rule of 72

72
_______________
# years

= what ?

A

IRR = Internal Rate of Return

226
Q

Yield to Maturity also known as

A

True Yield = rate of return on bond, if held to its maturity date

includes: compounding of semi-annual interest payments, and discount or premium price of bond at time of purchase.

227
Q

Current Yield = def?

A

return relative to security’s market price

228
Q

Nominal yield = def?

A

coupon rate = stated yield = fixed annual rate of interest (as % of par value)

229
Q

Premium bonds:

what is the highest and lowest yield types?

A

Highest = Nominal yield

Mid = Current yield

Lowest = YTM = Yield to Maturity

230
Q

Discount bonds:

what is the highest and lowest yield types?

A

Highest = YTM = Yield to Maturity

Mid = Current yield

Lowest = Nominal yield

231
Q

Discount bond:

how to calc YTM ?

A

Annual Income + Annual Capital Gain
______________________________
Average Bond Value

232
Q

Current Yield = how to calc?

A

= Annual coupons
___________________
Current Bond Price

=

Annual Interest Earned
______________________
Current Market Price

233
Q

Annual Accretion of Bond Discount = Annual Earning of Discount = ?

A

Bond Discount
_________________
# years to maturity

234
Q

Bonds:

Yield to Call Date:

eqn?

A

= Annual Income = Annual Capital Gains or loss to the call date

___________________________________

Average Price

235
Q

Bond current yield = ?

A

Annual Income

______________

Market Price

236
Q

Calling a bond:

Issues are likely to call bonds when interest rates ____, because then they can call on the issue and refund at ____ market rates.

A

DROP.

current market rates

237
Q

Calling a bond:

Discount bond, if called early:

____ customer’s yield to call date.

A

IMPROVES

238
Q

Calling a bond:

Premium bond, called early:

____ customer’s yield when called at call date.

A

DETERIORATES.

239
Q

Corporate to Govt yield spread = eqn ?

A

AAA Corporate Bond Yield - U.S. govt bonds

“Spread” around 5% = “Risk Premium”

240
Q

Widening corporate bond to govt bond spread = sign of ___ ?

A

coming recession (“flee to safety”)

241
Q

narrowing corporate bond to govt bond spread = sign of ___ ?

A

coming expansion

sell governments = increase yields

buy corporates = decrease yields

242
Q

fed tools = DORM = wut?

A 
D = discount rate
O = open market operations
R = reserve requirements
M = margin on securities
243
Q

Sharpe Ratio = eqn?

A

(Rate of return - Risk Free Rate of Return)
_________________________________
Std Dev

244
Q

bonds = the yield curve = ascending curve = sign of wut?

A

normal economic expansion

245
Q

bonds = yield curve = flat curve = sign of wut?

A

economy peaking

246
Q

bonds = yield curve = inverted curve = sign of wut?

A

economy “overheating” –> short-term credit is severely tightened

247
Q

Discount bond:

when pricing a discount bond quoted on a yield basis, the redemption date used in the calculation is the ____ date?

A

maturity date

248
Q

Premium bond:

When pricing a premium bond quoted on a yield basis, the redemption date used in the calculation is the ____ ___ ___ ?

A

earliest call date

249
Q
    • long-term maturities
    • low coupon rate bonds
    • deep discount bonds

these have ___ ___ risk ?

A

interest rate risk

250
Q

ex date

A

1 business day prior to record date

day price of stock reduced by dividend amount

purchasers of stock won’t be eligible for dividend

251
Q
    • contracts cannot be closed by trading on an exchange
    • are not standardized
    • require delivery of an asset at fixed price and date
    • custom contracts between 2 institutions
    • NOT standardized and only trade OTC

name that type of contract?

A

forward contracts

252
Q

annuity concepts:

    • annual rate of return in prospectus of variable annuity
    • illustrates compounding effect of contributions over life of contract & resultant value of annuity at retirement
    • conservatively presented for illustrative purposes only; not a guaranteed rate of return
    • used to determine initial monthly payment to annuitant
    • only applies during annuity period
    • no meaning during accumulation period

name that term?

A

AIR = “Assumed Interest Rate”

253
Q

why would a company buy a futures contract?

A

to protect against rising prices before a future purchase.

regulated by CFTC

254
Q

duties of mutual fund “sponsor”

A
  1. establishes fund
  2. registers fund w/ SEC
  3. aka “fund underwriter”

does NOT manage fund

255
Q

what happens if death of majority corporate shareholder?

A
  1. corporate’s life is unaffected
  2. deceased shares pass to beneficiary by will
  3. deceased shares pass under terms of that state’s law if individual died “intestate”
256
Q

market-linked investment = pre-packaged investment strategy based on a single security, or basket of securities, options, indices, commodities, debt issuance, or foreign currencies, and to a lesser extent, derivatives.

name that thingy?

A

structured products

257
Q

calculate tax equivalent yield for municipal bonds?

A

= Yield
_________
(1 - tax rate)

258
Q

options straddle is what type of strategy?

A

neutral (long straddle)

259
Q

double-barreled bond is backed by?

A

revenue bond:

backed by:

  1. revenue
  2. taxing power of municipality (ad valorem)
260
Q

municipal bond secured by taxes OTHER than ad valorem taxes = ?

A

special tax bond

261
Q
  1. Federal Land Bank Bonds
  2. Banks for Cooperative Notes
  3. Federal National Mortgage Association Bonds
  4. Federal Home Loan Bank Bonds

are these “direct” obligations of the US govt?

A

NOPE

262
Q

type of trusts

unmanaged

portfolio cannot be changed

what is it?

A

Fixed Unit Investment trusts (UITs)

263
Q

What are debentures backed by?

A

“full faith and credit”

264
Q

conversion ratio for convertible preferred stock?

A

Par value
_________
conversion price

265
Q

Callable bonds quoted on a yield basis:

  1. Discount bonds are priced based on yield to _____.
  2. Premium bonds are priced based on yield to _____.
A

Discount bonds are priced based on yield to MATURITY.

Premium bonds are priced based on yield to CALL.

266
Q

Type of security:

  1. issued in serial maturities.
  2. secured by specified corporate assets.
  3. commonly issued by transportation companies.
  4. default NOT common during recessionay periods.

name that type of security?

A

Equipment Trust Certificates (ETCs)

267
Q

Federal Farm Credit Funding Corporation Note is subject to ____ income tax, but is EXEMPT from ____ tax ?

A

subject to federal income tax

exempt from state and local tax

268
Q
  1. user fees
  2. special taxes
  3. lease rentals
    but NOT capitalized interest

these are sources of income for what type of debt?

A

Municipal Revenue Bond

269
Q

Dividend Payout Ratio

A

Common Dividend Paid
_________________
EPS

270
Q

CAPM = Expected Return = ?

A

Rf + B(Rm - Rf)

271
Q

Most volatile bonds are?

A

long term zero coupon bonds

272
Q

Least volatile bonds are?

A

short term high coupon bonds

273
Q

I am the annual % return based on buying a bond at par.

What am I called?

A

nominal yield

274
Q

I am the annual percent return based on buying a bond at the current market price.

What am I called?

A

current yield

275
Q

Annual percent return based on buying a bond at current market price and also includes pro-rated gain if bond bought at a discount. or annual pro-rated loss if bond bought at a premium.

A

YTM = Yield to maturity

276
Q

If a discount bond:

Yield to call is ____ than Yield to maturity

A

Yield to call is GREATER than Yield to maturity

277
Q

If a premium bond:

Yield to call is ___ than Yield to maturity

A

Yield to call is LESS than Yield to maturity

278
Q
    • Nominal Yield
    • Current Yield
    • Yield to Maturity (YTM)
    • Yield to Call (YTC)

From top to bottom, this shows from lowest to highest, the yield measures for a market ____ bond ?

A

DISCOUNT bond

279
Q
    • yield to call (YTC)
    • Yield to maturity (YTM)
    • current yield
    • nominal yield

From top to bottom, this shows from lowest to highest, the yield measures for a market ____ bond ?

A

PREMIUM bond

280
Q

If you buy a muni in the state you live, it is ____ tax free?

A

TRIPLE tax free

281
Q

an annuity option where, if the annuitant dies before receiving the full investment value of the annuity contract, the remainder is refunded to his or her estate.

A

Unit Refund Annuity

282
Q

Investment Vehicles: Corporate Debt: Convertible Debt: Conversion Ratio:

per share parity price = ?

A

per share parity price =

premium price
____________
conversion ratio

Series 65 (2 decks)

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