Chapter 2: Investment Vehicle Characteristics Flashcards
What is rule for cash reserves on hand
Dual income earners = 3 mo household expense
Single Income or Primary breadwinner = 6 mo household income
What are different annuities and how used
Overall part of “safe money part of retirement”
Fixed = Guaranteed, set rate of return for lifetime based on 1 time or series of periodic payments; lower rates of return, does not hedge inflation risk
Indexed/Equity Indexed = Type of fixed that is tied to underlying index like S&P 500, with a guaranteed minimum rate of return (fixed) and upside based on annuity participate rate and cap
Variable = Varied returns based on underlying investments without guaranteed minimums or caps. Money held in separate sub accounts, away from creditors (as opposed to fixed and indexed in Ins Co general account…subject to investment risk) Offers a 10 day free look period at customer inception
Contrast Mortality rate with Mortality risk
Mortality Guarantee from insurance company to pay annuitant for life (along with death benefit) creating Mortality risk for company that annuitant will live very long time
As opposed to traditional life Mortality Risk in that insured will die before enough premiums are paid into policy
What are M&E fees
Annual Mortality Risk and Expense risk fees to recoup some of costs, up to 1% - making annuities more expensive than mutual funds for investment purposes
Contrast deferred vs immediate annuities
Deferred include a surrender period with associated fees assessed if draw payments before payout period begins
Immediate annuity will pay out right after purchase payments are deposited;
Both are subject to 59 1/2 age to avoid tax penalties and only amount earned above amount paid in (cost basis) are taxed
All payments have sales charges, admin and state premium tax charges levied against them
What are 3 methods of purchasing annuities
Single Payment deferred
Periodic Payment deferred
Single payment immediate ( periodic payments must be paid in full to receive “immediate” single payment..hence deferred
Describe different annuity payout (annuitized phase) options
Life or Straight Life
Period Certain
Life with Period Certain
Joint with Last Survivor
What factors are involved in calculating first payout of variable annuity
Account value
Age of annuitant
Gender of annuitant
Settlement option
What is AIR and how used with annuities
Assumed Interest Rate
Used in valuation of annuity unit (which is fixed amount earned by investor).
AIR is base rate chosen by investor that underlying assets must perform against..if return = AIR no change in annuity unit value, but if return above AIR the increase in annuity unit value and opposite for return below AIR
What is a combination annuity
Variable annuity that allows investors to invest a portion of purchase payments into general account in exchange for a fixed rate of return; The feature is backed by claims paying ability of insurance co general fund with investments in separate account subject to all risks of stock and bond market
Compare and contrast features of Term vs Whole vs Universal Life
Term - temporary insurance with premiums that can adjust over time (or be set at guaranteed fixed level for period of time) with payout at death only if occurs within term. Renewable but at higher premiums; Generally lowest cost option
Whole - permanent insurance as insured for life with fixed premiums at higher rate since additional monies accrue cash value which can be partially surrendered or loaned against (with interest charges) in future without repayment (lowers value of death benefit) . Provides guaranteed min cash value and death benefit
Universal - form of permanent insurance that allows policy holder to adjust death benefits and therefore premiums upwards or downwards as needs arise. Similar to whole life, cash value will grow in the account but benefits are not guaranteed
Describe features and differences of Variable Life Insurance policies
Unlike Term and Whole/Universal where payments are held, invested and backed by Insurance company account, who bears the risk of investment, Variable is like variable annuities in that payments are held in a separate subaccount and policy holder bears investment risk
Contract value of cash benefits fluctuate based on performance of investments. The cash value increases based on performance, but the death benefits adjust based on performance vs AIR. (so cash value could increase 4% but death benefits reduced on 5% AIR policy)
A minimum or fixed death benefit is guaranteed, similar to other policies
Similar to variable annuities, additional fees are charged for mortality, expense risk and investment mgmt.
Describe unique features of Variable Universal Life
VUL policy death benefit and cash value are tied to the separate account (Variable) with a flexible premium (Universal) feature. The policy is funded with flexible premiums that clients may or may not pay..however enough cash value and death benefit must be maintained to keep VUL in force and some have a minimum guaranteed death benefit tied to sub-account returns
These can not be sold as investment products but rather as insurance policies with investment options/upsides
What are the risks associated with the various life insurance options
Term and Whole life are subject to credit, inflation and interest rate risk while Variable policies are primarily subject to market risk
What are policy loan limits of Whole vs Variable life
Whole - up to 90% of cash value
Variable - up to 75% of cash value
Describe different settlement options
Lump Sum-single payout
Fixed period-set time
Fixed Payment- set payments
Life income - annuity for life
Interest only - guaranteed interest returns with principal amount held by insurance co during life of survivor (tax implications??)
What are exchange options under 1035 exchange
Variable can be exchanged for whole life tax free and no health qualifications for 24 months;
Can also exchange for an annuity
Can not exchange annuity for life insurance
What are key components of Bonds
Coupon/nominal yield/stated rate = interest rate paid
Redemption/maturity date = date bond matures
Par value - face value of bond, expressed in $1000 lots
Frequency = rate of interest payments: annual, semi, quarter, mo
Default = inability of issuer to pay interest of principal
How is Current Yield of Bond determine
Annual interest / Bond Price (same as dividend yield except interest vs dividend payouts)
Discount vs Premium bond
Discount is when bond sells for below par because interest rates and yields have risen forcing prices to drop
Premium is when bond sells above par because interest rates and yields have dropped causing prices to rise
How do you calculate yield to maturity and yield to call
YTM- Total yield investors receive from coupon payments plus or minus difference between amount paid for bond and par value at maturity: YTM = Ei +/- (Price-Par)
YTC- Total yield investors receive from coupon payments plus or minus difference between amount paid for bond and par value at first call date: YTC = Ei +/- (Call Price-Par)
YTC will always be lower/higher than YTM, and
Discount bonds will have highest YTC with premium bonds having lowest since shorter time frame for investors to recoup gains (higher yields relative to nominal yields) or losses (lower yields relative to nominal yields)
Describe bond yield curves
When bonds sell at discount, the Current Yield is lowest, then YTM then YTC because gain on purchase is returned earlier divided by coupon payments
When bonds sell at premium, the Current Yield is highest, then YTM then YTC because loss on purchase is returned earlier divided by coupon payments
Bonds sold at par have equal CY, YTM and YTC
Who are different insurance and debt rating agencies? What are levels between investment grade and junk
Insurance = AM Best
Bonds = Standard & Poors. Moodys
Investment: AAA/Aaa - BBB/Baa
Junk: BB/Ba - C
What is price of bond at 98 1/4
98= bond points and every point is worth $10 so $980 with fractions also quoted at 1/4 of 10 or 2.50 so total price is $982.50
Corp bonds at 1/2, 1/4, 1/8 ($5, $2.50, $1.25)
Treasuries at 1/32 ($.3125)
How are bond yield quoted
Based on basis points so 7.92 = 792 basis points or below 800 basis points on 8% coupon so lower yield equal price at premium to par
Basis points use 4 digits so lowest level of 1% = 0.0100 or 100 basis points and 1/2 of 1% = 0.0050 or 50 basis points
What is bond indenture
Terms of the call provision expressed at “callable @XX in date; callable@xx in next date…”
What are types of bond maturities
Term - all issued at once and mature on same date
Serial - all issued at once and mature gradually over time (ie…munis)
Balloon - all issued at once with some coming due early but most of principal paid at once on final maturity date
Name (5) different types of bonds and features of each
Secured - backed by collateral; paid out first in bankruptcy ; less risky, lower coupons
Debenture - unsecured and become subordinated payoffs in bankruptcy ; more risky, higher coupons (also see income bonds)
Zero Coupon - Bought at discount with face amount at maturity difference = interest income. Interest is taxed annually as if received - “phantom tax exposure”
Convertible - Ability to convert from bonds to certain number of common stock shares at pre-set price; Par/Conversion Price = # shares; Bonds whose price level is above the stock price is trading above parity, and below parity if below stock price. If equal with stock price, then trading at parity. These bonds pay lower nominal yields and makes their market price less sensitive to interest rates. Are considered growth and income investment while others are considered just income investments
Income - Only pay income if the company generates it; often issued by company coming out of bankruptcy so higher coupon but more risk due to fundamentals of underlying company and liquidity only if earning income (so investor with high risk tolerance and little need for liquidity)
What are different bankruptcy options ?
Following payoff of secured debts
Chapter 11 - reorganization of debt; company is debtor in possession. US trustee appoints creditor committee of 7 largest holders of unsecured debt
Chapter 7 - repay/payoff by liquidating assets and paid out according to order of (1) admin expenses, (2) taxes, rents, wages, benefits, (3) unsecured creditors (4) equity investors
Name different types of Treasury Securities
T-Bills = Less than 1 yrs with minimum denomination of $; lowest interest rate risk of all securities except TIPS
T-Notes = 2-10 year maturities with semi-annual payments
T-Bonds = Maturities up to 30 yrs with semi annual payments and highest degree of interest rate risk
STRIPS = Zero coupon Treasuries which avoid credit and reinvestment risk. Taxes paid annually as “phantom tax exposure”
TIPS = Inflation protected with periodic adjustments based on changes in inflation - CPI with minimum payout of Par value and max based on inflation rate adjustment
Only risk Treasuries eliminate is credit or default risk
What are different Agency Bonds and risk levels
Debt securities issued by either Govt Sponsored Enterprises (GSEs) or Fed Govt agencies; high quality, high security; minimum investment levels; Sold through broker dealer syndicates or by auction for short term
GSE = Federally chartered, privately owned; not direct obligations of US govt so not protected against default risk; Public companies with common stock: Ex: FNMA, FHLMC, Sallie Mae (no longer GSE but public traded as primary student loan maker)
Fed Govt Agencies = Federally chartered, and owned with direct obligations of US govt so are protected against default risk; Ex: GNMA, SBA, FHA
What are different types of foreign bonds (6 a/b) and characteristics
Developed market bonds - US, Canada, EU, Aus, NZ and Japan issued, less risky still currency risk
Emerging/Developing market bonds - all others with less mature securities markets and higher costs
Foreign Pay - issued and traded outside US in foreign currency with high currency risk
US Pay Bonds - issued and traded outside US in US currency, eliminating currency risk;
- Eurodollar bonds are issued, traded and registered outside of US with waiting period beyond issue date to start trading
- Yankee Bonds which allows foreign issuers to borrow money in US with US dollars; registered with SEC with immediate trading upon issue
Sovereign Bonds - issued by foreign government and payable in foreign currency- less political risk for Developed market bond countries than Emerging market bond countries
Brady Bonds - Issued by emerging market countries but collateralized by US Treasury Securities (usually for Latin America countries)
What is Prepayment vs Extension risk
Prepayment - risk of receiving principal back sooner than expected and need to reinvest in lower /falling interest rates
Extension - risk of receiving principal back later than expected with no ability to reinvest with rising interest rates
Describe features of Mortgage Backed Securities
Mortgage Backed (MBS) are pools of loans packaged together and resold in different yield /time securities which may be guaranteed by US Treasury (GNMA) or limited support for GSEs (FNMA, FHLMC)
Describe features of Asset Backed Securities
Asset Backed (ABS) are similar to mortgage except backed by other secured assets like auto loans, aircraft leases, credit card receivables and business loans with credit quality based on sources other than originator, since the financial institutions carrying loan securitize these into pools of loans called Special Purpose Vehicle (SPV) which are sold to Trust as interest bearing securities. Are subject to prepayment risk as sold with an average maturity date
Describe features of Collateralized Mortgage Obligations
CMOs are investments that uses MBS to create various classes of bonds or tranches with different interest rates, repayment schedules and priority for principal repayment all with same risk class
Describe features of Real Estate Mortgage Investment Conduits
REMICs are multi-class securities like CMOs which allow for different classes of securities with different maturities and coupons to be created and unlike CMOs allow for different risk classes
Describe features of Collateralized Debt Obligations
CDOs are asset backed securities which pay out in predetermined manor based on amount of cash flow collected from package of owned assets; CDO focuses on repackaging individual fixed income assets into a security that can be divided up and sold in pieces in secondary market (mortgages, corp bonds, corp loans, auto loans, credit card debt). Default claims on prepayments are made first by senior tranches which also have higher claim on interest payments than junior tranches and therefore higher credit rating and pay lower yields. Most junior or “equity” tranches receive only residual cash after all other tranches paid by prescribed formula
What are the different types of CMOs: PACs, TACs and Z-Tranches and their impacts on risk
PAC is planned amortization class, which may protect the investor more against pre-payment and extension risk; If interest rates rise and principal is paid more slowly, money is transferred from the support class (created when principal is repaid sooner) to protect PAC owner against extension risk
TAC is target amortization class which protect some against pre-payment but not extension; If interest rates rise and principal is paid more slowly, there is no transfer from the support class to protect TAC owner against extension risk
Z-Tranche is zero coupon bond inside CMO that returns principal only after all other tranches have been paid off
Compare and contrast principal only vs interest only securities
Principal only are concerned with rate at which principal is returned - faster the better
Interest only concerned with rate of interest payments and receive a higher yield when prepayments slow down (rising interest rate environment) and lower yield when they speed up (declining interest rate environment)
As principal declines, so does the amount of interest paid by homeowner/received by investor declines..so faster principal declines, the lower interest / yields to investor and longer it takes to pay off prinicpal the higher interest / yields to investor
What is difference between General Obligation and Revenue bonds and Double Barrel
GOs are backed by full faith and credit of municipality with repayment from taxes, licenses etc.. GOs require voter approval and if tacked onto property taxes (ad-valorem or as to value) based on assessed value times millage rate up to max - limited tax bonds
If also backed by Revenues generated from investment then are considered double barreled
Revenue Bonds are backed by user fees and other revenue from facility built, and do not require voter approval .
Special Tax or Special Assessment bonds can also be set to cover costs or derive revenue from specific group of beneficiaries of the improvements (ie..gas tax, hotel tax, Kensington MAD property fee) or could be created
Public Housing projects can issue PHA or NHA Section 8 bonds which are covered by housing payments that are subsidized by government..so less risky
Industrial Development Revenue bonds created for govt to lease assets back to corporations - can create moral obligation bonds
What are investment implications of Muni bonds
Primarily Tax exempt for Fed and in many cases State (local projects) that pay lower yields if GO vs Rev and than non munis. Appeal to higher tax bracket or those without IRA/Pensions to invest higher yields
Taxable for govts refunding principal (interest tax exempt) or Private Activity / Purpose bonds (ie, leased back to private entity) or special programs, Appeals to pensions, low tax based and those with other tax exempt options (like IRA/Roth)
What is a VRDO
Variable Rate Demand Obligation is a long term security sold as a short term investment which pays a floating rate of interest that is regularly reset
What are Certificates of Participation
COPs are type of financing in which investors purchase a share of the lease revenues of the project rather than the issued bond secured by the revenues. Not subject to voter approval
What are Mutual Fund Securities and common security type
Similar to private mutual fund, a fund of funds issued by governments that is not a fixed income security. Local Government Investment Pools and 529 college savings plans are examples.
Investors are owners of portfolio, not loaners therefore not a fixed income
What are key features of 529 Savings Plan
Contributions are non deductible, but qualified withdrawals and any interest/gain are tax exempt from Fed and if state run plan that state taxes.
Asset allocation of investments can only be changed 2x per year
No income limit on contributions. Donor contributions are considered a gift for tax purposes and subject to tax exemptions and limits of $15k/yr (2021) or 1 time 5 yr $75k per single and $30k/$150K MFJ gift
Qualified expenses include tuition, room, board, books, supplies, computer tech at accredited secondary school for degree and for private high and primary school
Beneficiaries dont have to be blood related and can be changed. If original has not used funds, next beneficiary must be related. If new beneficiary other than account owner or blood relative will lead to taxation on gains
What are key features of ABLE Accounts
Similar to 529 but for eligible people with disabilities called designated beneficiaries
to pay for qualified disability expenses
Only designated beneficiary can open but if unable, legal guardian can manage
Only 1 account per eligible individual. $ in account do not impact Medicaid and balance below $100K not SSI. Donor contributions by any one up to $15K for gift tax purposes can be given by each donor . Maximum amount contributed overall limited to state 529 plan max (generally $350,00)
Qualified expenses include any expense to maintain or improve the health, independance or quality of life (education, transportation, housing, healthcare)
Beneficiaries must have significant disability before 26th birthday
Limited rollovers from 529 of designated beneficiary to ABLE account is allowed
What is an LGIP
Local Government Investment Pool are investment vehicles like mutual funds or short term bond funds created by state to allow munis and state govt entities to invest in short term
Not required to register with SEC and not subject to regulations
What is defeasing as related to bond refunding
Defeasing is paying off debt early and can be done by current refunding (use proceeds to pay off existing bond holders within 90 days) or advance funding (to put proceeds in certified escrow account in order to service existing debt or tap into existing revenue stream)
What are critical factors in General Obligation bond credit rating analysis
Tax Collection ratio; Amount of direct vs overlapping debt; Inflows and outflows of tax revenue dollars
What are critical factors in Revenue bond credit rating analysis
Feasibility study and Debt Service Coverage ratio based on revenue divided by
Net revenue pledge = debt paid after operating expenses or
Gross revenue pledge = debt paid first
What is order of key elements for Net Revenue Flow of Funds
Revenue fund
Operations and Mtce fund
Debt Service Fund
Debt Service Reserve fund
Reserve Maintenance fund
Replacement and Renewal fund
Sinking fund
Surplus fund
Accrued Interest - what is meant by ‘F & A 15 bond? and how determined for Corp vs Government Securities
Interest paid semiannual in Feb and April of 15th of each month.
For Corp Bonds pay at end of settlement date (15th) with 30 days per month and 360 per year vs Treasuries settling at T+1 or next settlement date (16th) with actual or calendar days ( ie…Feb = 28 days, April = 30, May = 31)
What are Anticipation Notes and how used
TaxANs, BondANs, RevenueANs, Tax&RevenueANs are instruments created by local govts and schools in advance of short term collection of funds from above, that put into a money market fund which provide $ now
What is corporate version of short term anticipation note/IOU and max days issued in advance
Commercial paper with maturity of max 270 days
What is difference between bank CDs and Negotiable CDs
Bank CDs have fixed rate, are not liquid in a secondary market and interest is forfeited if cashed in early. Also insured by FDIC and min investment of ~$1K
Negotiable or Jumbo CDs are negotiated rates, can be resold in secondary market with no penalties and have min of $250K , not insured by FDIC
Both pay compound interest and while typically short term (under 2 yrs) can be long term
What are repurchase agreements / reverse repurchase
Agreements where one institution sells the other govt securities today with agreement to buy at a later date at set price. Difference in value is fixed rate of return. Party that sells is re-purchaser and one agreeing to buy and sell is reverse repurchaser
What are BAs
Banker Acceptance notes for foreign trade with loan purchased at discount (fixed interest rate) for set period of time - ~270 days, which is secured by collateral (often goods being imported/exported)
Name base form of common equity ownership in securities and key features of each
Common - Limited liability, Pre-emptive rights, Ownership with cumulative or statutory voting rights
Restricted - Higher priority for dividends, unregistered, sale subject to holding period, exiting reporting company of company reports, requires transactions by shareholders to be disclosed via filing Form 144, no short term (< mo) sales by affiliate companies or bypassing registration requirements via red flag transactions with affiliate accounts at broker dealers
Penny - Issued by companies not maintaining exchange requirements and must trade on Non-Nasdaq OTC. that carry higher investment risk due to fundamentals of issuing companies, requires investors to acknowledge risk disclosures
What is ADR and how used compared to GDR
American Deposit Receipt allows American investor to trade in foreign company stock with US dollars (rather than foreign currency) and subject to same US market risks in addition to currency risk for dividend payouts
Global Deposit Receipt allows trading of foreign company stock including those issued by US companies, in many foreign markets at once, outside the US via trades in European stock exchanges
Different stock analysts and key elements of each
Fundamental - focused on financial health of stock - Net Earnings, Cash Flow, Dividends..etc
Technical - focused on movement of stock over time, as past history repeats. Concerned with charts/patterns of trendlines, support, resistance and break out points, head and shoulders (bearish vs reverse bullish), cup (bearish) /saucer (bullish), advance/decline ratio, volume (low volume/small movment - bearish) and market sentiment (put/call ratio) and option volatility (historical and implied)
Describe odd lot vs short interest theories
Odd Lot: Assessing volume of odd lot (< 100 share) orders and doing opposite as these investors assumed less sophisticated to time market - bearish or bullish depending on volumes
Short Interest: Assess volumes of open short sales with high volume suggesting potential for buying frenzy when stock price rises so bullish indicator
How does preferred stock differ from common
Preferred is primarily an equity based income investment (except convertible preferred which is income and growth)
Primarily concerned with interest rate and credit worthiness, not profits
Are paid dividends at fixed rate before dividends to common stock but both must be voted on by Board vs bonds which are obligation of company
Prices of preferred can vary with changes in interest rates, like bonds
Different types include
(1) Cumulative - which require make up dividend payouts if skipped,
(2) Adjustable rate- which payout based on rate tied to benchmark, with a cap,
(3) Participating - with minimum fixed rate but also participates in upside if dividends raised higher for common
(4) Convertible Preferred - which allows investor to convert 1 share of preferred for XX of common and if worth this amount on open market is “at parity” (ie..1:10 with stock at $15 = $150)
What governs investment companies that pool investments
Investment Company Act of 1940 - which grants SEC authority to require companies to register securities and report out with full disclosure of operations annually. Investment companies primarily invest or trade in securities or have more than 40% of its assets outside government securities
Name 3 types of investment companies
Management Companies, Unit Investment Trusts, Face Amount Certificate companies
What are differences between open and closed end funds?
Closed End Funds:
- Use leverage by issuing preferred stock and bonds by issuing senior securities (to common stock with lower payout priority)
- Trade shares along other public company stocks throughout the day
- Can be either diversified from at least 75% of fund, no more than 5% in any 1 company and no more than 10% of company ownership or Non diversified (not diversified), with Non Diversified Closed End most risky of 4 types of mgmt company funds
Open End Funds
- Buy only common stock / equity positions
- Do not trade shares with other investors throughout day but rather bought/sold to open end fund and settled at end of day at day end NAV
- Can be either diversified or non diversified with Diversified Open End fund the least risky
What are Government vs Prime vs Tax Exempt Money Market funds?
MM Funds that primarily invest 99.5% in:
Government - Treasury securities
Tax Exempt - Munis
Prime - Corporate debt
What is difference in fee structure between open ended and closed ended funds?
Open End funds have sales charge and 12-1B (distribution-sales literature, advertising, sales rep compendation) fees while closed end funds involve brokerage commissions similar to other publicly traded stocks on secondary market
What is difference in share trading between open ended and closed ended funds?
Open End funds continually issue and redeem shares with unlimited amount of buying or selling in/out of fund, issuing new shares as needed; SO will always sell at NAV or above (based on sales charge involved). Will also likely receive fractional shares due to not knowing until end of day the NAV
Closed End funds are bought and sold on secondary market like public stock as sellers must find buyers and vice-versa based on market price and can therefore sell below NAV, These funds can also be traded on margin or sold short Closed end funds have no distributor as they are traded on an exchange
Yield vs total return calculation
Yield is return earned from dividend or interest income an is always positive; Total return captures both yield plus/minus net change in security price
What are key characteristics of A, B, C shares and suitability for type of investor (why) ?
A shares charge up front sales charge or front load as % of Net Asset Value (end of day true up of total assets - liabilities and expenses). These charges can be reduced by quantity buys above break points or direct purchase within fund family or LOIs). A shares are good for long term investors with high dollar amounts to invest (more option to reduce charge) and lower long term 12-1B fees
B shares do not charge up front but rather at redemption of sale and are back-end loaded, as % of NAV. They have a contingent deferred sales charge based sliding scale of reduced charges based on time held. Once time has elapsed, these convert to A shares (with lower 12-1b fees.
They typically have higher 12-1b fees than A shares and are more suited to intermediate or long term investors with small amounts to invest, since will incur higher 12-1b fees through redemption period
C shares do not charge any sales charges but carry higher 12b-1 fees and often called level load; Are most suitable to short term investors with healthy (up to $500k) to invest since no front or back end loads and higher fees only for short period of time
What is Public Offering Price and how determined and used with comparing sales charges?
POP = NAV + Sales Charge (or POP-NAV = Sales Charge or (POP-NAV) / POP = % Sales Charge of POP (not NAV)
NAV / (100% - sales charge) = POP
How is a letter of intent used?
To reduce front end sales charges by committing to purchase set quantity of shares by certain time at lower fee breakpoints. If not reached the amount of extra shares purchased with initial lower fees are pulled from investor account equal to fees that would have been paid
What are rights of accumulation and how does this work with combination privilege?
Rights of Accumulation: Based on account value (rather than initial new money) the higher value is used toward next breakpoint when purchasing additional shares, but if value drops then the amount invested (principal/cost basis) is used to figure breakpoint
Combination Privilege allows investor to combine purchases across a family of funds to reach higher breakpoints and if used in conjunction with RofA, then net value increase across all funds in family can further reduce sales charges
What is conversion exchange privilege
Allows investors to transact (buy/sell) shares within same family of funds at the NAV not the POP, thereby avoiding sales charge. This is considered a taxable event however from IRS concern
What are different share redemption options under a systematic withdrawal plan
Fixed dollar
Fixed shares
Fixed time
Fixed percentage of account value
What are different functions of mutual fund and responsibilities
Board of Director
Investment Advisor/Portfolio Manager
Custodian
Transfer Agent
Underwriter/Distributor/Wholesaler
What are interval funds
A type of closed end fund that rather than listing/trading on secondary market it regularly offers to repurchase shares based on deadline to tender offer based on NAV at certain date with possible redemption charge up to max 2%;
They may also continue to offer new shares based on NAV prices (unlike traditional closed end)
What are advantages of buying ETF vs Open End Fund
While both offer diversification, ETFs/Indexed funds are traded ongoing in market (intraday trading) and allow for immediate diversification across broader asset class with lower investment and since not managed lower fees. Must settle for index returns vs open end fund that might beat market performance
Different types of REITs and characteristics
Equity - generate income thru rent collection and sale of properties
Mortgage (mREITs)- provides financing for RE projects
Hybrid - Do both Equity and Mortgage financing functions
Also,
Publicly Traded - Registered with SEC and traded on major exchanges
Public Non Listed (PNLRs) Register with SEC and provide ongoing reports but not traded on major exchanges
Private (placement) Exempt from SEC registration or reporting and not traded on national stock exchanges, so illiquid with limited and varied redemption programs..sold only to institutional and accredited investors
Describe key characteristics of hedge fund, private equity and venture capital firms
Hedge fund - Private investment group that focuses on delivering absolute positive performance despite market conditions through options and other trading in private securities
Private Equity - Purchases a company, improves them, then sells to larger investors (via leveraged buyout )
Venture Capital - Invests via early funding of start up companies and instead of leverage (like private equity) buy shares in the company making smaller investments in many companies - minority ownership
What are DPPs and key advantages including BDCs
Direct Participation Programs, structured as partnerships with limited and general partners that fund (equity and via debt -loans-LPs) and manage business (GPs), with tax gains and losses passed through to partner investors
DPP have limited life and can be formed for high risk ventures such as oil/gas exploration, natural resource income programs (natural gas), raw land, new construction and equipment leasing programs.
Can also set up as a business development company - closed end fund specializing in equity and debt instruments in early stage small to medium size companies and/or distressed companies thru debt refinancing. High dividend yields as generally higher risk
What is crossover point for DPP
Point at which program switches to profitability
To participate in DPP what must investment advisor ensure
1) Ensure suitability of investment recommendations such that investor’s situation can realize the benefits described in the prospectus; 2) Reflect the high risk, lack of liquidity and specific tax benefits directed at specific individual 3) investor has enough net worth to absorb total loss of investment 4) Not be a part of the partnership themselves
What are 2 structured products and key features
ETN - Exchange Traded Notes - characteristics of bond and ETF with returns based on performance of benchmark minus fees paid out only in full at maturity. Are traded on secondary market but do not own stocks they trade in
ETF - Exchange Traded Funds - index fund (like SPDR, VIPERS) that own stocks they trade in with intraday trading capabilities and can come in form of
- Leveraged ETF: uses derivatives to derive higher returns on percentage basis due to higher risk exposure ( as opposed to leverage: borrowing)., ie 2-3X exposure to 1x movement in index. Good for short term trading
- Inverse ETF (ultra short fund) which bets against index by moving at 2-3x times opposite of index movement (so when market drops, this ETF value increase x fold)
What are HOLDRs
Holding Company Depository Receipts - unmanaged, static basket of stocks from particular industry - Direct Index Fund?
What are Death bonds
Use of viatical settlements to create a diversified pool of life insurance policies with profits coming from delta between what is paid+premiums and death benefit
What are precious metals and why important
Gold, Silver, Platinum and Palladium often bought as commodities to hedge inflation risk. Can be bought as individual commodities or in funds that own directly or mine products
What are 4 types of derivatives and key component of each
Warrants - Similar to call option (right to buy for set price over a longer (up to 10 yr) period , and issued directly by company - so included in diluted EPS along with convertible bonds as often offered to reduce bond interest notes)
Options - Issued by options exchange market with permission of underlying company stock so value derived. Puts/Calls and all combos
Options are zero sum game (equal winner and loser at strike price plus premium)
Futures contracts is a binding agreement that obligates both parties to buy and sell at agreed upon price now (spot) with future delivery in time : Hedge strategies for long (buy-farmer, raw good supplier) and short (seller-producer-manufacturer) ; $ is deposited at 5-15% into margin account which are settled daily (marking to market-like stock and bond margins) and if not enough cash in account to cover position which is moved between buyer /seller based on result each day; If margin account goes below, requires more margin $ deposited. Compared to spot market which is more volatile and settled at current prices vs time of distribution.
Forwards -Specifies a price for an underlying instrument at a future specified date but is not traded on an exchange and are private transactions not standardized or regulated by exchanges so include additional “counter-party risk”
What are types, class and series of options
Type = either Call or Put
Class = all calls and puts on a particular security
Series = the security, strike price and exercise date on a class
Review and know put/call hedge and speculative strategies relative to intrinsic and time value
see pages 172-184
What is VIX and how relate to options
VIX is Volatility Index used to capture investor sentiment; which is calculated by net amount of short to long sells with higher % of short sells indicating bearish investor sentiment
What are Treasury Receipts
Tresury receipts are issued by broker-dealers.
(as opposed to Eurobonds which are issued outside the US and payable in a foreign currency and Brady bonds are payable in US dollars issued for Emerging Market companies)
G-Tech, Inc. issued 6% convertible non-cumulative preferred stock ($100 par value) several years ago, with a conversion price of $10. G-Tech common stock is now trading @14.50. What is the preferred stock at parity? (what is formula calculation)
$145.00 - $100 par value divided by conversion price of $10/share = 10 shares times $14.50 per share = $145.00
Which of the following is an accurate statement of Collateralized Mortgage Obligations (CMOs)?
1) their offer and sale is restricted to institutional investors
2) they trade in a liquid secondary market
3) they are considered equity securities
4) they are complex instruments subject to heightened suitability requirements
CMOs are complex securities that few people understand. They do not trade on an active or liquid secondary market. Some retail investors buy CMOs, but the registered rep needs to be sure they understand what they’re getting into.
Which of the following is a true statement concerning commodity futures contracts?
A grain farmer typically hedges his risk by establishing short futures positions
A grain farmer typically hedges his risk by establishing long futures positions
A cereal producer typically hedges its risk by establishing short futures positions
These days, stock options have taken the place of most futures transactions for purposes of hedging
The farmer’s risk is that the price of grain could plummet; the producer’s risk is that the price of grain could rise. So, they bet that way in case the risks materialize.
The farmer sells his grain now for X price-per-bushel so that if the corn or beans (etc.) drop in price, he’ll profit.
If a bond is convertible at $40, when common stock is at $50 the bonds trade at $120. What is the position of the bond relative to market price…
Par value of bond is $1000; so convertible at $40/share = 25 shares are convertible. 25 shares X $50 = $1,250 market price.
So Bond should be worth $1250 but bonds trading at $1200, so trading below parity.
Could benefit if sold stock short and buy bond to cover ?
What is a contingent deferred sales charge and where used
For mutual fund b shares, sales charge is deducted when shares are redeemed
What defines load vs no load funds
What does open interest mean relative to options
What are features and benefits of variable vs equity indexed annuity.
Guaranteed min rate for Index Annuity, Upside on stock market for Variable Annuity
What are key differences in where traded and margin elements of options, futures and forwards
All of the following would be considered “management companies” under the Investment Company Act of 1940 except
face-amount certificate
open-end fund
closed-end fund
non-diversified fund
face-amount certificate
there are three types of investment companies as defined by the Investment Company Act of 1940: face amount certificate, UIT, and management company. Management companies are the open- and closed-end funds.
What defines a face amount investment company
The Rosewood-Halcyon Equity Income Fund holds large positions in 10 common stock issues. This week all of the holdings distributed dividend payments of $10,000 each. Therefore, which of the following statements is accurate?
The NAV remains unchanged due to dividend distributions.
The NAV remains unchanged if proportionally more purchase orders come in versus redemptions.
The NAV will rise unless market values decline by more than the dividends distributed.
Shareholders will be taxed on the dividends whether distributed or not.
The NAV will rise unless market values decline by more than the dividends distributed.
When money comes into the fund from the dividend-paying stocks, the shares of the fund have to rise . . . unless the stocks’ market values decline by more than the dividend.
Donald is convinced that ABC Companies will miss their next earnings announcement by a large percentage. Which of the following options positions would be the most appropriate if Donald wants to take on the least amount of risk?
establish a long straddle on ABC
buy ABC puts
buy ABC calls
sell ABC calls
buy ABC puts
A “missed earnings announcement” should drive the stock price down. When anticipating a drop in the stock (bearish) buy puts or sell calls. Buying puts has limited risk. Donald would buy a straddle if he had no idea which way the earnings announcement would go–but was convinced it would make the stock go up or down.
Mike Meaney places an order to sell 1,000 shares of ABC @50 stop–limit 50. Therefore, which of the following statements is accurate?
the order will execute only if the price of ABC rises to a price higher than $50
the order will be activated only if the price of ABC drops to $50 or below
the order will be activated only if the price of ABC drops below $50
the order will execute only if the price of ABC rises to $50
The order will be activated only if the price of ABC drops to $50 or below
nothing happens at all unless the stock trades at or below the stop price.
What determines price rises or falls in sell stop-limit???
How often is the Net Asset Value calculated for the shares of a closed-end management company?
at the end of the trading session
every 15 minutes during the trading session
continuously, through the trading day
within 7 days of a customer request
At the end of the trading session
NAV is calculated only when the trading session ends for both open- and closed-end funds. The market price for a closed-end fund changes throughout the day, which was the “trick” to this question, WHEREAS market price is confirmed based on end of day NAV for Open End Fund
With which money market security below would one accurately associate collateral?
Commercial Paper
Treasury Bills
Negotiable CD
Banker’s Acceptance
Banker’s Acceptance
BA’s are used for importing/exporting and are backed both by a bank’s guarantee and the goods being imported/exported.
On February 5 the board of directors for ABC declared a dividend of $1 per share of common stock. The record date is Monday, April 2. The ex-date, therefore, is
Thursday, March 29
Friday, March 30
Tuesday, April 3
Wednesday, March 28
Correct Answer: Friday, March 30
under T + 2 settlement, go back one business day from the Record Date—that’s the Ex-Date or “Ex-Dividend Date” for common stock trading on the secondary market.
A securities salesperson recommends the purchase of an investment-grade bond fund to an existing customer on his book of business. The salesperson tells the customer an investment into the fund involves no commissions or sales charges. Turns out, the fund imposes a 12b-1 fee of .24%. According to the NASAA policy statement, “Dishonest or Unethical Business Practices by Broker-Dealers and Agents in Connection with Investment Company Shares,” which of the following best addresses this situation?
The salesperson has performed his job properly, as his statement was correct.
The salesperson has likely engaged in a fraudulent sales practice.
The salesperson’s statement–though, technically, correct–could still be considered misleading and manipulative.
The salesperson’s statement is inherently misleading, as all investments into mutual funds involve either commissions or sales loads.
The salesperson has performed his job properly, as his statement was correct.
a mutual fund is considered “no load” provided the 12b-1 fee is not > .25% of average net assets. A no-load fund also has no upfront or back-end sales charges.
In a set of performance data, which of the following is the most frequently represented within the data set?
meme
mean
median
mode
Mode
the median is the half-way point, while the mean is the average of the results.; Definition of Mode is the value that occurs the most frequently in your data set, making it a different type of measure of central tendency than the mean or median.
Rollie is an investor struggling to measure the return on a recent investment. Rollie purchased 100 shares of XXZ common stock @40. During the first quarter, the company paid a dividend of 25 cents. With the stock trading @39 at the end of the quarter, what is Rollie’s annualized rate of return?
25%
-7.5%
0
-2.5%
-7.5%
the 25-cent dividend is nice; unfortunately, the market price is down by $1. So, Rollie is down 75 cents outa’ $40. That means he’s down 1.875%. There are four financial quarters per year, so multiply that number by 4, and you’ve got your answer.
What are key features of DPP - Direct Participation Programs and characteristics of investments in them
A program which provides for flow through tax consequences regardless of structure of legal entity, including oil and gas programs, real estate programs (existing properties: BREIT), agricultural and cattle programs, Subchapter S, non publicly traded Business Development Company - BDC closed end fund, and usually set up as limited partnership,
DPPs are characterized by
limited life,
high income,
are non-correlated or alternative investments,
not liquid,
may be redeemable to issuer,
primary tax advantage from depletion
Purchasing raw land is riskiest type of real estate DPP
What are similarities and differences between Equity Indexed and Variable (Indexed) Annuities
Equity Indexed is a fixed payment annuity promising min rate of return (min guarantee) with some upside potential based on equity index it is tied to, and the participation rate as well as market cap each year. Since pay min are more exposed to inflation/purchasing power risk and do NOT receive dividend distributions of underlying index stocks. Not protected against creditors
Variable Annuity is a variable payment annuity based on investor selected subaccounts and overall return, allowing higher returns, without guaranteed minimum to be returned so are a better protected against purchasing power risk, More subaccounts to choose from better oppty for diversification and returns. Sub accounts are put in separate accounts from company , not subject to creditors so Insurance Company rating not as important
Both annuities are tax deferred with life/mortality guarantees post accumulation phase, but amount will vary based on fixed vs variable as well as death benefit based on amount invested
What are key characteristics of hedge fund
Limited number of high net worth investors (min $1M) unless non accredited investors buy in fund of hedge funds - mutual fund with similar traits and costs of hedge fund
Very low liquidity since not actively traded, may be redeemable to issuer at set intervals
High management fees (2%)+Capital Gains recovery (20%): 2 & 20
Seek to achieve absolute positive performance regardless of market
Which qualified plans allow for employers to contribute on a discretionary basis
Employer Based Defined Contribution plans: SEP-IRA, SIMPLE (yes for matching option, no if 2% contribution; ESOP,
No discretion for Employer Based Defined Benefit Plans or Money Purchase Plan or SEP-IRA if employer contributes
Which qualified plans allow for employees to contribute on a discretionary basis
Individual /Sole Proprieter Plans: IRA, Roth, Keogh,
Employer Based Defined Contribution plans: 401K, 403B, 457,/TSA, Profit Sharing, Simple, Money Purchase plan, SEP-IRA
Which plans are covered by ERISA rules
Employer based Defined Benefit, Defined Contribution and Keogh;
Simple, SEP and Individual plans are not and just require documentation and forms for business owner record-keeping
Name different types of annuity payout products and elements of each
Immediate - Initial lump sum payment with annuitized payments following ; Funds contributed are called purchase payments and sales charge, admin fees, state premium taxes are deducted; For variable annuities mgmt fees are also deducted from sub accounts
Deferred - Ongoing purchase payments during accumulation phase with stated surrender period under which high surrender charges may occur in early yrs until a surrender value is established which can be used to sell out of annuity
An Investors Rate of Return would be decreased as measured by the Sharpe Ratio if which of the following were decreased
- Standard Deviation
- Riskless Rate of Return
- Rate on 3 mo T-bill
- Portfolio Return
Portfolio Return
Rp - Rf / Std
10 - 5 / 5 = 1
STD: 10-5/ 2 = 2.5 (increase)
Riskless or 3mo Tbill 10 -3/ 5 = 1.4 (increase)
Portfolio Return: 8 - 5 / 5 = 0.6 (DECREASE)
What is another name for excess equity and how determined
SMA - Special Mtce Account, like line of credit created when have more equity in margin than required, and can be used to buy more stock on margin
If S&P changes the rating assigned to XYZ Industries’s 5s debentures of ‘25 from BB to BBB, which of the following is accurate?
the bonds’ yield to maturity will rise
the bonds’ yield to maturity will drop
the bonds’ market price will drop
the bonds will be subject to a mandatory catastrophic call
the bonds’ yield to maturity will drop
the credit rating is rising, so the market price of the bonds is also rising, reducing their yield on the secondary market.
An investor would like to have a stock sold at a specific price and only if it drops to a certain price or lower. The order that should be placed is called a
sell stop
sell limit
short sale
sell stop-limit
sell stop-limit
a sell-stop order is placed below the current market price. To name a specific price, we have to add the word “limit” to the order.
Other:
A sell limit is a pending order used to sell at the limit price or higher while a sell stop, which is also a pending order, is used to sell at the stop price or lower.
Sell limit is used to guarantee a profit by selling above the market price and sell stop is used to minimize loss by selling at the stop price.
Sell Limit Order = at limit price or above market price; for securing profit
Sell Stop Order = at stop price or below market price; for minimizing loss
A buy limit is used to buy below the current price while
A buy stop is used to buy above the current price.
Buy Limit Order
If the currency or security for trading reaches the limit price, the limit order becomes a market order. It is used to buy below the current price when the value is believed to increase after dropping at the limit price. It sets the maximum or minimum value you are willing to buy a certain stock.
Example: Stock currently trading at $100; limit price at $90.
You wait for the right buying opportunity when the price drops at $90 or lower to buy.
Buy Stop Order
If the currency or security for trading reaches the stop price, the stop order becomes a market order. It is used to buy above the current price when the value is believed to increase continuously. It allows you to limit loss.
Example: Stock currently trading at $100; stop price at $110.
You are waiting for the right buying opportunity but the price increases and does not drop. If the value reaches $110, you buy to control or lessen incurring loss.
GDP has declined significantly the past few quarters. New claims for unemployment are rising, as is inventory. Based on the direction of interest rates, bond prices are most likely
about to flatten
about to revert to the standard deviation
about to fall
about to rise
About to rise
interest rates drop when the economy contracts. Rates down/price up.
The only security below that leaves the investor with “reinvestment risk” is a
Debenture
Corporate zero coupon bond
Treasury STRIP
Treasury Receipt
Debenture
T-notes pay interest every six months, which would presumably be reinvested into new T-notes. What if rates are down at that point? That’s reinvestment risk, which would be avoided by zero coupons, STRIPS, Treasury receipts and the like. They don’t pay an income stream—investors just get back a higher par value than they paid.
Jim represents a state-registered investment adviser in State A. His brother, John, represents a federal covered investment adviser in State A. How does this difference affect their registration requirements in State B?
because both are investment adviser representatives, there is no difference in registration requirements
the difference in registration requirements turns on assets under management (AUM) for their associated client accounts
both are exempt from registration requirements provided their number of clients in State B does exceed 5
provided he has no place of business in State B, John is exempt from registration requirements
Provided he has no place of business in State B, John is exempt from registration requirements
Only IARs representing state-registered firms operate under the de minimis rule. For IARs representing federal covered advisers, the only thing that matters is, “Do they have a place of business in the state?” If so, they must register with that state.
Within a money market mutual fund we would least expect to find which of the following investment vehicles?
Commercial Paper
Preferred stock
Treasury Bills
Treasury Notes
Preferred stock
To be in a money market portfolio the security has to be a debt security. So, while T-Notes are, also, not typically in a money market portfolio, they can be when they are within 1 year of maturity.
Which of the following is associated with falling interest rates?
Bond prices falling
Coupon rates rising
Yields rising
Bond prices rising
Bond prices rising
Rates and yields are the same thing. Bond prices move in the opposite direction.
What is the primary objective of a preferred stock investor?
income
growth
growth & income
capital preservation
income
U.S. Treasury securities are used for capital preservation. For growth or growth & income common stock is available. Preferred stock pays a fixed income stream to the investor. The only type of preferred stock connected with growth is convertible preferred stock, on which investors receive a lower income stream in exchange for potential upside.
What is true of mutual fund sales charges and 12b-1 fees?
management fees may not be covered by 12b-1 fees
12b-1 fees are included in the expense ratio
sales charges are not included in the expense ratio
all choices listed
all choices listed - Review page 144
even though sales charges and 12b-1 fees both cover distribution costs, there are differences.
The sales charge is deducted from the investor’s check when she buys (A-shares) or when she sells (B-shares).
A 12b-1 fee is deducted from assets, along with other operating expenses.
For which TWO reasons do corporations perform forward stock splits? I. to raise the nominal share price II. to lower the nominal share price III. to increase market liquidity IV. to decrease market liquidity
II, III
I, III
II, IV
I, IV
II, III
the only reason to effect a forward stock split is to lower the nominal share price enough to attract more buyers. If Starbucks at $50 a share scares investors, maybe people will buy more than twice as much at $25.
Which of the following investments would be expected to have the lowest volatility?
small cap fund
government bond fund
mid cap fund
money market mutual fund
money market mutual fund
money market mutual funds maintain a share price of $1, so they’re less volatile than a government bond fund, whose NAV fluctuates as interest rates rise and fall.
Which statement below accurately explains the significance of the “efficient frontier” in regards to portfolio optimization?
all portfolios lie along the frontier until they are then market-tested
portfolios should be constructed to lie outside/above the efficient frontier
portfolios should be constructed to lie behind/below the efficient frontier
portfolios lying behind/below the efficient frontier are to be avoided
portfolios lying behind/below the efficient frontier are to be avoided
a portfolio can not lie outside/above the efficient frontier–that high of an expected return must be dragged down by the risk/standard deviation. Optimal portfolios lie along the curve called the “efficient frontier.” Portfolios behind/below the curve are less than optimal.
ABC trades for $112,000 per share. XYZ trades for $40 per share. Therefore
XYZ is more expensive
Both stocks pay dividends
ABC is more expensive
Not enough information provided
Not enough information provided
unless we can compare the price to the earnings, book value, cash flow, or sales, we have no idea which stock is cheap and which one expensive.
Which of the following is an accurate statement concerning Exchange Traded Notes (ETNs)?
they are asset-backed securities issued by financial institutions
no coupon payments are distributed during the investor’s holding period
ETNs are more liquid than typical corporate bonds
ETNs are synonymous with ETFs
No coupon payments are distributed during the investor’s holding period - review pg 167
Unsecured (not asset backed) securities
Less liquid than other securities;
Subject to market, credit and liquidity risk
Do not pay coupon payments but rather pay amount based on performance index and investor fees , per formula; When redeemed after holding period; during which value changes based on performance index and creditworthiness of issuer
ETN are like ETF tied to Index but a type of bond unlike ETF - equity
What is the name for a financial product created by Merrill Lynch and traded daily on the American Stock Exchange that allows investors to buy and sell a basket of stocks in a particular sector, industry or other classification in a single transaction?
ETNs
UITs
ETFs
HOLDRs
HOLDRs
a HOLDR is a financial product created by Merrill Lynch and traded daily on the American Stock Exchange that allows investors to buy and sell a basket of stocks in a particular sector, industry or other classification in a single transaction. Unike ETFs, the composition of a HOLDR does not change over time and does not track a particular index.
Which of the following types of financial reports would have received the highest level of scrutiny by a reporting company’s independent auditor?
compiled
unaudited
compiled/audited
audited/certified
audited/certified
some reports–like the 10Q–are more about timeliness than accuracy, so they are only compiled/unaudited. Audited/certified reports provide investors with the most accuracy.
What is another name for unaudited
Compiled; no opinion as to quality of financial statements is given by accounting firm; The statements are much less than that given by certified/audited financials
Using CAPM, calculate the expected return for ABC common stock: Riskless Rate: 1% Expected Market Return: 10% Beta: 1.5
8.2%
13.5%
14.5%
5.0%
14.5%
Investors assume/expect to receive the riskless rate plus a risk premium:
1% plus, first, 1.5 times 10%, then, minus 1.5 times 1%.
Equals: 1% plus (15% - 1.5%). 1% + 13.5% = 14.5%
ABC Companies just reported a large increase in sales and profits. However, their stock price has dropped recently as equity investors have engaged in a “flight to quality.” This scenario illustrates which investment risk?
business risk
market risk
liquidity risk
purchasing power risk
market risk
The company is doing well, but the stock market is hurting those who hold the stock. Market risk.
The flight to quality is the dynamic that unfolds in the markets when investors are more concerned about protecting themselves from risk than they are with making money. During times of turbulence, market participants often will gravitate to investments where they are least likely to experience a loss of principal.
Which of the following would NOT cause a drop in an open-end fund’s Net Asset Value?
the fund pays a dividend distribution
a bond fund experiences a rise in interest rates
redemptions increase dramatically
securities held in the portfolio decrease in value
redemptions increase dramatically
when there are more sellers than buyers, the amount of assets decreases. But, so does the number of shares, leaving everything proportional. Remember that NAV is calculated based on net of held shares/assets in fund minus operating expenses including sales charges; Then shares are redeemed at the NAV or purchased at the NAV plus maybe a sales charge.
Paying a dividend will reduce cash on hand - asset = lower NAV
Bond fund with rise in interest - lower bond price = lower NAV
Securities decrease in value - lower security price = lower NAV
Which of the following shares are included when a company announces its Earnings Per Share (EPS)?
authorized shares
issued shares
treasury shares
outstanding shares
outstanding shares
net income available to common stock divided by the shares outstanding = EPS
What is difference between issued, authorized and outstanding shares?
Authorized - number shares allowed per charter
Issued - number of share created/issued for trading, usually lower than authorized
Outstanding - number of shares in market, used to calc eps, where diluted eps would also include issued not actively traded like convertible bonds, participating preferred and warrants
What is the ex-dividend and record date for dividends
Ex div = excludes dividend, meaning that on this date stock trades without benefit of owning declared dividend
in a regular way settlement the dividend belongs to the seller if stock bought on the ex-date. The ex-date determines the date buyer is not entitled to the declared dividend since on the ex-date it’s too late for the buyer. He doesn’t pay for the dividend and doesn’t receive it.
The ex dividend date occurs just before record date, which is date investor must be holder of record to receive declared dividend; Settlement must occur by the record date for buyer to receive dividend
Typically, the ex-dividend date for a stock is one business day before the record date, meaning that an investor who buys the stock on its ex-dividend date or later will not be eligible to receive the declared dividend. Rather, the dividend payment is made to whoever owned the stock the day before the ex-dividend date.
One of your clients feels that ABC common stock is likely to rise significantly over the next several weeks. In order to take advantage of this, your client, who wants to minimize risk, should, and why:
sell a put
buy a put
buy a call
sell a call
Buy a call
buying an option is less risky than selling one. If you think something is about to rise, buy a call on it. Selling puts is another possibility, but that is much riskier than buying a call, since could lose value of strike price if stock went to zero
For an open-end management company, which of the following would distribute dividends and capital gains to shareholders?
custodian
board of directors
investment manager
transfer agent
Transfer agent
The custodian would receive dividends and interest payments from portfolio securities. When it comes time to distribute $ to shareholders, the transfer agent handles that function.
Technical analysts refer to the point where buying pressure overcomes selling pressure as
support
resistance
channeling
advance/decline ratio
support: buying wont allow sell off to drop below this level
on the other hand, resistance is where selling pressure overcomes buying pressure; Selling wont allow buyer frenzy to break through
Channeling is a chart pattern that graphically depicts the peaks and troughs of a security’s price over a period of time. If there is an observable symmetry in the oscillation, then it is considered to be a valid price channel that can be used as a tool for stock analysis.
A subsequent primary distribution of a company’s equity securities is associated with which of the following and why?
secondary offering
secondary distribution
subscription rights
dilution of equity
subscription rights
subscription rights must be made available to prevent the current shareholders from having their equity diluted. Primary and secondary are terms with quite different meanings.
SO eliminate both secondary options (since still a primary offering) AND eliminate dilutions of equity since subscription rights allow for stockholders to prevent dilution
What are key features of GNMAs?
GNMAs are not high-yield investments due to their US Government guarantee.
They pay interest and principal monthly, and that can end up being reinvested at lower rates going forward for the investor.
They are not exempt from Fed, State or Local taxes
According to NASAA’s Policy Statement “Dishonest or Unethical Business Practices of Broker-Dealers and Agents, “ when must a final prospectus be delivered to a client purchasing an
IPO?
Mutual Fund?
For a mutual fund, the prospectus would be delivered at or before the solicitation.
For an IPO, it is delivered “no later than the due date for confirmation.”
An investor bought an 8% bond at a basis of 9.10. Three years later, he sells the bond at a 6.95 basis. In this example he realizes a:
long-term gain
short-term gain
long-term loss
short-term loss
long-term gain
Basis = Yield; So a Basis Quote is the price at which a debt security can be bought or sold based on the yield. A bond purchased as “5.50 basis” is trading at a price that makes the yield 5.5%
if the yield dropped from 9.1% to 6.95%, that’s just another way of saying he bought low and sold high. Yield down—price up. Means the same thing.
Which of the following is an accurate statement of commodity futures and why/why not
An Iowa farmer raising corn would typically take a long futures position on corn
A cereal maker producing corn flakes would typically take a long futures position on corn
Like a long options position, a long futures position is paid-in-full at the time the contract is opened
Like a long options position, a long futures position subjects the investor to limited loss
A cereal maker producing corn flakes would typically take a long (buy) futures position on corn
An Iowa farmer raising corn would typically take a short (sell) futures position on corn
Futures contracts involve daily margin settlement,
Investors can lose much more than they initially put down as “margin.”
ABC Industries has issued $50 million par value of bonds. The first two interest payments are at 3%, with the nominal yield rising by 1/2 of 1% each year going forward. What type of bond did ABC Industries issue?
a balloon maturity bond
a capital appreciation bond
a step-up bond
a serial maturity bond
a step-up bond
balloon and serial maturities have nothing to do with the nominal yield of the bond; rather, they refer to how the issuer repays the principal.
A capital appreciation bond is another name for a zero coupon bond.
The FOMC is buying Treasury securities. What effect will this have on the bond market as a whole?
no effect whatsoever
prices on outstanding bonds will fall
coupon rates on new issues will rise
yields on outstanding bonds will fall
yields on outstanding bonds will fall
when the FOMC buys Treasury securities, based on buying behavior, they push up their price, which pushes down their yield.
Also will buy to ease economic conditions which will reduce interest rates and thereby yields
An investor purchased shares of ABC @11 several months ago. Currently, ABC is trading for $17. The investor wrote down a target price of $20 for this stock. Therefore, which of the following orders would she enter at this point?
short sale
sell-stop @20
sell limit @20
sell-stop @20, limit 20
sell limit @20
to sell a stock for more than it’s trading–or for a certain amount–enter a sell limit order.
In a variable life insurance policy, the policy owner should know that I. death benefit is calculated annually II. death benefit is tied to AIR vs. actual performance of the separate account III. minimum cash value is guaranteed by the insurance company’s general account IV. cash value is calculated daily
II, IV
I, II, III, IV
I, II, IV
II
Correct Answer: I, II, IV
Death benefit is calculated annually.
The minimum death benefit is guaranteed but any increased death benefit is dependent on performance of sub accounts, therefore tied to AIR (actual performance of the separate account
Minimum death benefit NOT cash value is guaranteed by the insurance company’s general account
Cash value is calculated daily based on performance of sub-accounts
Which of the following equates the present value of a bond’s future cash flows to the current market price of the bond?
current yield
yield to maturity
effective yield
after-tax yield
yield to maturity
the simple definition of YTM is that it is the yield to the investor if the bond is held to maturity. The fancier definition is to say that YTM is the rate that makes the present value of the bond’s future cash flows equal to its current market price.
The effective yield is a measure of the coupon rate, which is the interest rate stated on a bond and expressed as a percentage of the face value.
Which type of security is associated with a Form F-6 filing under the Securities Act of 1933?
when ADRs are created, a Form F-6 is filed with the SEC electronically through EDGAR, as required under the Securities Act of 1933.
Which of the following pay interest semiannually to the investor?
equity mutual funds
United States Treasury Bills
United States Treasury Notes
tax-exempt municipal notes
United States Treasury Notes
T-Bills are bought at a discount to face value.
T-Notes and T-Bonds pay semiannual interest.
Municipal bonds pay at specified intervals
Which of the following could accurately be described as a “secured” money market instrument and why?
Treasury Bill
Commercial Paper
Banker’s Acceptance
Negotiable CD
Banker’s Acceptance
BA is a money market certificate supporting imports and exports backed by collateral.
Commercial paper is a short term unsecured loan
T- Bill is backed by US Treasury but not secured
Negotiable CD is a bank cd traded on secondary market but not secured by any collateral
Which of the following best reflects the effects of compounding?
total return
yield
dollar cost averaging
annualized return
total return
total return on a mutual fund shows the growth or loss of value in NAV plus the dividends and capital gains distributed. If an investor reinvests those distributions, he gets the full effect of compounding.
Yield is function of payout to price
dollar cost averaging is function of timing
annualized returns is function of determining yearly returns
What is difference between cumulative and statutory voting by shareholders
cumulative voting is the method favored by minority shareholders who can abstain on voting for some and give unused votes all to just one
statutory allows shareholders to cast no more votes than for number of shares owned and must vote for each
If an investor opens a new margin account and purchases 200 shares of ABC, an NYSE-listed security, on margin for $18 a share, he must deposit
$4,000
$1,800
$2,000
$18 per share
$2,000
for an initial margin transaction the customer puts down half, or at least $2,000. Half the purchase price is $1,800, which is below the $2,000 minimum.
An ABC April 50 call is trading @2.50 with the underlying instrument trading at $51. What is not true of this option?
It is in the money
It has intrinsic value
It represents a bearish position
It has time value
It represents a bearish position
“intrinsic value” is the amount that an option is in-the-money. This option is in-the-money by $1, because the right to buy @50 is worth $1 when the stock is really worth $1 more. Why is the premium more than $1? Time value, which equals the other $1.50 in the premium. There IS no ‘position’ here, just a contract. The buyer would be bullish; the seller bearish.
If an investor purchased shares of ABC that have risen $12, how might the investor increase his yield and provide a partial hedge if he feels the stock is likely to trade sideways?
write straddles
write covered calls
purchase straddles
purchase puts
write covered calls
covered calls will provide income/yield and will do well if the stock trades in a narrow range. Buying puts would be ideal if he were looking for protection and were nervous about a big drop in price.
Straddles are buying or selling a call and put on same stock with same strike price and expiration. This would be used when expect stock to move - heavy volatility but not sure which way
An investor owns 200 shares of common stock. If the corporation effects a 10% stock dividend, she will receive
20 additional shares
20 additional shares, with cost basis rising
10% of her original cost
no additional shares
20 additional shares
she will receive 10% of 200 shares.= as if received cash which were used to purchase stock at then price. Cost basis of original stock is not impacted
An investor purchased an 8% corporate bond at par last year. If the bond is now trading @98, the investor’s total return is
7%
6%
-2%
8%
6%
he made $80 in interest but lost $20 in market value. If he makes $60 in total from a $1,000 investment, his total return is 6%.
38) What is true of gross margin and net margin?
one is calculated pre-tax, the other after-tax
both are of interest primarily to technical analysts
both are found on a corporation’s balance sheet
none of the choices given
one is calculated pre-tax, the other after-tax
profits and profit margins are found by reviewing the income statement. Net income after tax divided by revenue = net profit margin.
ERISA prohibits certain transactions between the plan and parties-in-interest. Parties-in-interest include:
the union
the employer
immediate family members of parties-in-interest
all choices listed
all choices listed
these parties-in-interest are not allowed to borrow from the plan or lease office space to or from the plan, etc., except under some very strict exemptions.
A party-in-interest is defined by the Employee Retirement Income Security Act of 1974 (ERISA) to include the following:
-Any person who provides services to the plan,
-Fiduciaries and employees of the plan,
-An employer whose employees are covered by the plan,
-A person who owns 50 percent or more of such an employer or -employee association (union), and
- Relatives of any of the aforementioned individuals.
Certain plan transactions with parties-in-interest are prohibited under ERISA. These transactions are:
A sale, exchange, or lease of property;
A loan or other extension of credit (including late deposits of employee deferrals to the trust);
The furnishing of goods, services or facilities;
A transfer of the plan’s assets to a party-in-interest for the use or benefit of a party-in-interest;
An acquisition of employer securities or real property in violation of the 10 percent limitation.
Which of the following are direct obligations of the U.S. Treasury?
CMOs
GNMA securities
FNMA securities
Treasury Receipts
GNMA securities and Treasury Securities, except
Treasury Receipts are backed up by Treasury securities, which is why they’re not a direct obligation of the US Treasury.
ABC common stock trades at $50 per share. The earnings per share are $1.00. The company pays no dividends. The “float” is 10,000,000 shares. Which of the following terms best describes this stock?
blue chip stock
large cap value stock
small cap growth stock
large cap growth stock
small cap growth stock
a stock trading at a high P/E ratio (50) is a growth stock. That was all you needed to conclude to answer this question. Note that a market cap of $500 million is far short of a large-cap stock., defined as between $300M and $2B
Interest earned on most municipal bonds is
tax-free at the local level
tax-free at the state level
tax-free at the federal level
all of the choices given
Tax-free at the federal level
the states and local governments can tax their residents on municipal bond interest if the bond is issued by another state or local government. The federal government usually provides the tax break on the interest. What about capital gains? Those are still taxable.
If the XYZ 6s of ‘19 are rated BB+, what can be concluded?
the bonds are investment grade
the bonds are in the second credit tier
the bonds would typically be found in a high-yield portfolio
the bonds are of low investment grade quality
the bonds would typically be found in a high-yield portfolio
BBB is the cutoff on investment-grade for S&P. It’s Baa for Moody’s.
Ba1/BB+ is a rating in the middle of that range, reflecting an issuer that has some risk of default, but is still a safer investment than others; it is considered to be just below investment grade.
Under the Uniform Securities Act which of the following constitutes an offer and a sale of securities?
publishing a tombstone advertisement
making a gift of non-assessable stock to a good friend
offering stock in a failed enterprise to satisfy the claims of creditors through a bankruptcy proceeding
selling a variable life insurance policy
Selling a variable life insurance policy
VLI = A SECURITY, and all securities that are sold were also offered.
Which of the following would be an inappropriate recommendation for a 51-year-old client primarily seeking tax-exempt income?
purchasing municipal bond funds within a taxable account
purchasing a closed-end municipal bond fund within a taxable account
purchasing municipal bond funds within a 401(k)
purchasing municipal bonds within a taxable account
Purchasing municipal bond funds within a 401(k) would be INAPPROPRIATE
What is true concerning the tax implications of disributions from holding a publicly traded Real Estate Investment Trust (REIT)?
Most REIT dividends are ordinary income. Sometimes, dividends are allocated to capital gains distributions or return of capital and as such can be subject to shareholder capital gain rates.
Also REITs do not pass losses, only RE Partnerships
Commercial paper is used by companies for all of the following reasons EXCEPT:
financing receivables
working capital
bridge financing
financing large construction projects
Financing large construction projects
Commercial paper is short term unsecured loan, used for: financing receivables, providing working capital and short-term (bridge) loans in anticipation of receiving money in the near future. For long-term projects, bonds would be issued. Some companies issue commercial paper in order to then purchase higher-yielding securities
Is considered a money market security and issued as discount to loan value
Jones and Barker, a registered investment adviser, buys securities for the advisory omnibus trading account before allocating shares to the various client accounts. Which of the following is a true statement of this practice?
Jones and Barker may allocate those stocks with subsequent favorable price movements to accounts that pay performance fees and allocate those stocks with subsequent unfavorable price movements to accounts that pay a % of assets-only
both choices listed
neither choice listed
Jones and Barker must take great pains not to allocate the shares based on subsequent market movements
Jones and Barker must take great pains not to allocate the shares based on subsequent market movements
the adviser must allocate the trades in a manner that is fair to clients rather than self-serving. ???????
Situation involves buying shares for both house and client accounts…must be treated consistently
All of the following would lead to a higher dividend yield except
rising dividend, stable market price
stable dividend, rising market price
stable dividend, falling market price
rising dividend, falling market price
Stable dividend, rising market price would lead to a LOWER (not higher) dividend yield
if the dividend stays the same while the market price rises, yield decreases.
Div = 50 50 60 60
Price = 100 120 100 120
Y =0.5 0.41??? 0.6 0.5
What can SMA be used on margin accounts to obtain more stock
excess equity (SMA) can not be used if using it brings the customer below minimum maintenance or $2,000, otherwise can be used
Which of the following orders would be reduced on the ex-dividend date for ABC common stock?
market order
buy-stop order
sell limit order
sell-stop order
sell-stop order (review section)
only sell-stop and buy-limit orders are reduced by the amount of the dividend on the ex-date . . . unless also marked DNR (Do Not Reduce). Only these two orders would be triggered due to the lowering of the stock’s market price.
When determining suitability for a bond investor, which is of most importance?
bond denominations
yield to maturity
nominal yield
current yield
Incorrect
Correct Answer: yield to maturity
Rationale
yield to maturity is what matters most to a bond investor. How much yield can she receive based on her risk tolerance and time horizon?
HOW IS PRICE TO BOOK DETERMINED
MARKET PRICE DIVIDED BY BOOK VALUE = ??
For purposes of calculating AMT, which of the following are tax preference items? I. interest on private purpose municipal bonds II. interest on general obligation bonds III. accelerated depreciation IV. capital appreciation on preferred stock
IV
I, III, IV
I, III
III
I, III
Rationale
private purpose municipal bonds are a common AMT-related concern for investors, which is why the official statement indicates whether the bonds are subject to AMT.
Which of the following securities has the highest claim on a corporation’s net income?
debentures
secured bonds
preferred stock
common stock
preferred stock
Not speaking of bankruptcy claims, but normal operations net profits:
bonds represent a debt that is owed, period. Preferred stock and common stock owners have a claim on net income/earnings, with preferred stock having a higher claim than common.
A bond is quoted at 97 3/8. What is the market price?
$973.80
$9,735.50
$973.08
$973.75
$973.75
Rationale
“97” means $970. 3/8 of $10 = $3.75. $973.75.
What are rights of accumulation, letter of intent and
breakpoints as related to mutual fund share class (A)
a mutual fund prospectus has a section called something like “Sales Charge Reductions” that lays out features such as
breakpoints - qty discount
rights of accumulation - accumulate shares over time
letters of intent - based on dollar cost averaging into break pts
and combination privileges- combining multiple related accounts to meet breakpoints
all of which help to reduce sales charges on A shares.
Your customer sold short 100 XYZ @55. With the stock currently @49, you would recommend that he protect his position by entering a:
Buy-limit @50
Buy-stop @50, limit
Buy-stop @50
Buy-limit @49
REVIEW
Buy-stop @50
the buy-stop order would lead to an automatic purchase if the stock went up against the investor. Keep the word “limit” off, though, if you want protection. Limit is for selling high or buying low to obtain favorable position….
Which TWO of the following statements concerning REITS are true? I. may trade on the first or second market II. are exempt under the Securities Act of 1933 III. may not be held within a 401K or Keogh plan IV. may pass through income but not losses to investors
I, IV
II, III
I, II
I, III
I, IV
Rationale
real estate partnerships pass through losses, but REITS do not. REITS have no exemption from registration under the Securities Act of 1933. There is no reason that a REIT can not be held in a 401(k) or Keogh account.
Dilution of shareholder equity does not occur via the issuance of
convertible debentures
warrants
convertible non-cumulative preferred stock
subscription rights
subscription rights (REVIEW RATIONALE)
securities that convert to common stock cause eventual dilution of shareholder equity because when the debentures, preferred stock, or warrants are converted, those investors suddenly get their share of the earnings, without bringing anything to the table. Rights are issued in order to avoid diluting shareholder equity. Existing shareholders get to maintain their current % ownership by exercising subscription rights.
Which of the following best describes interest rate risk to a holder of preferred stock?
as interest rates rise, prices fall
bond interest must be paid first
as interest rates fall, prices rise
interest rates are unpredictable
as interest rates rise, prices fall
Rationale
QUESTION NOT ASKING ABOUT INTEREST RATE RISK, BUT WHAT ARE NEGATIVE CONSEQUENCE OF INTEREST RATE MOVEMENTS SO, PRICES WOULD FALL IF THE INTEREST RATE RISES
AND if you thought “as rates fall, prices rise” is somehow a bad thing, slow down….would be positive for bonds and preferred stock
A client participated in a 401(k) plan over 20 years of service. If she and her employer contributed $50,000 to her account, with the account valued at $92,500 at retirement, the client’s cost base is
$42,500
$50,000
$0
$92,500
$0
Rationale
The contributions go in pre-tax, so there is no cost basis as there would be in, say, a non-qualified variable annuity. A “cost basis” would imply that this amount has already been taxed.
For downside protection over the long-term, an individual would most likely choose which of the following?
deferred variable annuity
blue chip mutual fund
equity indexed annuity
immediate variable annuity
equity indexed annuity
Rationale
indexed annuities offer downside protection through a guaranteed minimum rate.
Investment advisers earn management fees, typically a percentage of the assets managed for pension and mutual funds. Such management fees are NOT associated with:
closed-end funds
unit investment trusts
open-end funds
face-amount certificates
unit investment trusts
Rationale
the UIT is a non-managed portfolio, without an investment adviser.
A true statement of wedge patterns followed by chartists is that
a rising wedge pattern is considered a bullish indicator
a rising wedge pattern is considered a bearish indicator
a short-term anomaly is called a “pitching wedge”
a falling wedge pattern is considered a neutral indicator
a rising wedge pattern is considered a bearish indicator
Rationale
a wedge pattern is represented by parallel lines connecting support and resistance, where the lines start out wide and then become narrow. A rising wedge = bearish. A falling wedge = bullish.
Tax implications of insurance contracts are accurately described by which of the following statements?
all surrenders of cash value are taxable
death benefits are taxable to the beneficiary at ordinary income rates
death benefits are includable in the decedent’s estate
the policyholder must either surrender the amount of cash value equal to the net premiums paid or the entire cash value
Death benefits are includable in the decedent’s estate
Rationale
death benefits are not taxable to the beneficiary. Partial surrenders of cash value are allowed, or the policyholder can take a loan against cash value.
REVISIT Life Insurance: death benefits (viatical settlements, trusts that exclude proceeds? and surrender of cash (meaning)
What is the primary investment objective of an investor holding preferred stock?
purchasing power protection
income
tax advantages
growth & income
income
preferred stock pays a stated rate of income; that income also is tax-advantaged if held in a taxable account. ONLY CONVERTIBLE preferred stock offers growth in addition to income.
Which of the following securities are backed by the full faith and credit of the United States Treasury?
Collaterized Mortgage Obligations
Treasury Receipts
FNMA securities
GNMA securities
GNMA securities
Treasury receipts are created by broker-dealers and other financial institutions. They are backed up by Treasuries held in escrow, but that’s a big step down from being a direct obligation of the US Treasury. GNMA is the “Government National Mortgage Association” backed up by the full faith and credit of the US Government.
What are the different classifications of Preferred Stock
Straight: is an equity income security that pays a fixed dividend amount based on stated interest rate and only after BoD declares (unlike bond which mush have interest paid); Is primarily a fixed income security
Cumulative: If dividend payout is skipped for quarter it must be made up for in subsequent dividend issue before common stock can be paid out
Participating: When common stock declares dividend increase, preferred stock rate also increases - therefore the dividend rate is fixed as to minimum but not at maximum
Adjustable/Floating or Variable Rate preferred: Rate of dividend payout tied to a benchmark with a cap and because interest payment rate varies the market price for the stock remains stable, unlike other where dividend interest rate is fixed
Convertible: Allows for preferred stock to be exchanged for common stock at a stated price or number of shares..and if equal to value of market price for stock are trading at parity. When out of parity can be source of growth by converting to common. Growth and Income strategy for investor
Primary concerns/risks of preferred stockholder is interest rate and credit risk as move in same was as bonds..with par value unchanged. Can have an expiration date on Preferred Stock and therefore companies may deposit to sinking fund to pay off interests and prinicipal
In which way are options and futures in common?
are derivatives
standardized contracts
Bought within a margin account
BUT NOT
margin requirements
futures trading involves lots of margin. Options are bought in full, even if done so within a margin account.
In this account, when one owner dies, the assets pass to the owners estate, not the other account owners. This type of account is known as
Joint tenants in common
For a “tenants in common” account, the assets of the deceased go to his/her estate. For a “joint tenants with rights” account, the assets of the deceased go to the other account owner(s).
Which of the following can help fixed-income investors manage call or prepayment risk?
GNMA securities guaranteed by the US Treasury
corporate bonds
CMOs
buying CMOs
bonds that are callable, and mortgage securities, present call or prepayment risk. When rates drop, investors end up doing worse than they hoped.
CMOs have tranches designed to reduce prepayment and extension risk.
A growth & income fund distributed $1.10 in dividends and 90 cents in capital gains this year. If the bid price is $13.50 and the offer price $14.00, the yield is
7.85%
Capital gains are not part of yield (only total return). Take the dividend of $1.10 and divide it by the offer price of $14.
Which EFM assumes that current stock prices adjust rapidly to the release of all new public information, and that security prices have factored in available market and non-market public information?
Semi-Strong Form Efficient Market Hypotheses
The semi-strong form assumes that current stock prices adjust rapidly to the release of all new public information. It contends that security prices have factored in available market and non-market PUBLIC information. Private insider information may still be leveraged to achieve gains according to Semi-Form
Under the Uniform Securities Act, the Administrator has all of the following authorities EXCEPT
- summarily suspending a registration before an opportunity for a hearing has been given
- issuing an order of disgorgement
- issuing a cease and desist even before anybody violates the rules
- seek an order of injunction
Issuing an order of disgorgement
The Administrator can issue a cease & desist even before anybody violates the rules, and they can summarily suspend a registration due to apparent violations AS LONG AS they promptly grant a hearing to the respondent. The Administrator can seek a court injunction and ask the court to order disgorgement (repayment of ill-gotten gains that is imposed on wrongdoers by the courts) to harmed investors, but the Administrator can NOT ISSUE court orders or injunctions.
Which of the following statements concerning open-end mutual funds is NOT accurate?
1) they may close off purchases to new investors when assets reach a specified amount
2) shares trade either over-the-counter or on the NYSE
3) management fees are never covered by sales charges and 12b-1 fees
shares trade either over-the-counter or on the NYSE
Investors of an open-end fund redeem their shares for NAV; they do not have to trade them with other investors as in NYSE.
Management fees are a separate line item under operating expenses. Sales charges and 12b-1 fees cover the cost of marketing/selling the shares to investors.
Open end funds can sell unlimited number of shares but for management purposes may choose to
Closed end funds on other hand trade in daily market on NYSE at auctioned prices and are leveraged with Preferred stock and bonds
Use the following information to determine the market price for XYZ common stock:
Dividend: $2.00 Dividend Payout: 33.3% P/E ratio: 20:1
$120.00
first, find the earnings-per-share for XYZ. If $2.00 is a payout of 33.3%, the earnings must be $6. The P/E of 20 means the stock trades for 20 times more than the earnings of $6 per share. 20 times $6 = $120 per share.
