Chapter 2: Investment Vehicle Characteristics Flashcards

Question

How are bond yield quoted

Answer 1

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

Answer 2

Terms of the call provision expressed at "callable @XX in date; callable@xx in next date..."

Answer 3

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

Answer 4

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)

Answer 5

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

Answer 6

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

Answer 7

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

Answer 8

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)

Answer 9

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

Answer 10

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)

Answer 11

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

Answer 12

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

Answer 13

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

Answer 14

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

Answer 15

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

Answer 16

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

Answer 17

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

Answer 18

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)

Answer 19

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

Answer 20

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

Answer 21

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

Answer 22

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

Answer 23

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

Answer 24

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

Answer 25

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)

Answer 26

Tax Collection ratio; Amount of direct vs overlapping debt; Inflows and outflows of tax revenue dollars

Answer 27

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

Answer 28

Revenue fund Operations and Mtce fund Debt Service Fund Debt Service Reserve fund Reserve Maintenance fund Replacement and Renewal fund Sinking fund Surplus fund

Answer 29

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)

Answer 30

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

Answer 31

Commercial paper with maturity of max 270 days

Answer 32

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

Answer 33

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

Answer 34

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)

Answer 35

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

Answer 36

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

Answer 37

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)

Answer 38

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

Answer 39

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)

Answer 40

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

Answer 41

Management Companies, Unit Investment Trusts, Face Amount Certificate companies

Answer 42

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

Answer 43

MM Funds that primarily invest 99.5% in: Government - Treasury securities Tax Exempt - Munis Prime - Corporate debt

Answer 44

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

Answer 45

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

Answer 46

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

Answer 47

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

Answer 48

POP = NAV + Sales Charge (or POP-NAV = Sales Charge or (POP-NAV) / POP = % Sales Charge of POP (not NAV) NAV / (100% - sales charge) = POP

Answer 49

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

Answer 50

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

Answer 51

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

Answer 52

Fixed dollar Fixed shares Fixed time Fixed percentage of account value

Answer 53

Board of Director Investment Advisor/Portfolio Manager Custodian Transfer Agent Underwriter/Distributor/Wholesaler

Answer 54

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)

Answer 55

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

Answer 56

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

Answer 57

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

Answer 58

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

Answer 59

Point at which program switches to profitability

Answer 60

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

Answer 61

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)

Answer 62

Holding Company Depository Receipts - unmanaged, static basket of stocks from particular industry - Direct Index Fund?

Answer 63

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

Answer 64

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

Answer 65

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"

Answer 66

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

Answer 67

see pages 172-184

Answer 68

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

Answer 69

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)

Answer 70

$145.00 - $100 par value divided by conversion price of $10/share = 10 shares times $14.50 per share = $145.00

Answer 71

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.

Answer 72

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.

Answer 73

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 ?

Answer 74

For mutual fund b shares, sales charge is deducted when shares are redeemed

Answer 75

Guaranteed min rate for Index Annuity, Upside on stock market for Variable Annuity

Answer 76

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.

Answer 77

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.

Answer 78

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.

Answer 79

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???

Answer 80

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

Answer 81

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.

Answer 82

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.

Answer 83

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.

Answer 84

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.

Answer 85

-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.

Answer 86

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

Answer 87

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

Answer 88

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

Answer 89

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

Answer 90

Individual /Sole Proprieter Plans: IRA, Roth, Keogh, Employer Based Defined Contribution plans: 401K, 403B, 457,/TSA, Profit Sharing, Simple, Money Purchase plan, SEP-IRA

Answer 91

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

Answer 92

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

Answer 93

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)

Answer 94

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

Answer 95

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.

Answer 96

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.

Answer 97

About to rise interest rates drop when the economy contracts. Rates down/price up.

Answer 98

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.

Answer 99

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.

Answer 100

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.

Answer 101

Bond prices rising Rates and yields are the same thing. Bond prices move in the opposite direction.

Answer 102

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.

Answer 103

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.

Answer 104

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.

Answer 105

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.

Answer 106

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.

Answer 107

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.

Answer 108

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

Answer 109

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.

Answer 110

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.

Answer 111

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

Answer 112

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%

Answer 113

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.

Answer 114

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

Answer 115

outstanding shares net income available to common stock divided by the shares outstanding = EPS

Answer 116

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

Answer 117

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.

Answer 118

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

Answer 119

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.

Answer 120

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.

Answer 121

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

Answer 122

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

Answer 123

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.”

Answer 124

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.

Answer 125

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."

Answer 126

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.

Answer 127

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

Answer 128

sell limit @20 to sell a stock for more than it's trading--or for a certain amount--enter a sell limit order.

Answer 129

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

Answer 130

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.

Answer 131

when ADRs are created, a Form F-6 is filed with the SEC electronically through EDGAR, as required under the Securities Act of 1933.

Answer 132

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

Answer 133

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

Answer 134

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

Answer 135

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

Answer 136

$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.

Answer 137

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.

Answer 138

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

Answer 139

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

Answer 140

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%.

Answer 141

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.

Answer 142

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.

Answer 143

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.

Answer 144

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

Answer 145

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.

Answer 146

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.

Answer 147

Selling a variable life insurance policy VLI = A SECURITY, and all securities that are sold were also offered.

Answer 148

Purchasing municipal bond funds within a 401(k) would be INAPPROPRIATE

Answer 149

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

Answer 150

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

Answer 151

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

Answer 152

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

Answer 153

excess equity (SMA) can not be used if using it brings the customer below minimum maintenance or $2,000, otherwise can be used

Answer 154

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.

Answer 155

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?

Answer 156

MARKET PRICE DIVIDED BY BOOK VALUE = ??

Answer 157

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.

Answer 158

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.

Answer 159

$973.75 Rationale "97" means $970. 3/8 of $10 = $3.75. $973.75.

Answer 160

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.

Answer 161

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....

Answer 162

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.

Answer 163

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.

Answer 164

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

Answer 165

$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.

Answer 166

equity indexed annuity Rationale indexed annuities offer downside protection through a guaranteed minimum rate.

Answer 167

unit investment trusts Rationale the UIT is a non-managed portfolio, without an investment adviser.

Answer 168

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.

Answer 169

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)

Answer 170

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.

Answer 171

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.

Answer 172

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

Answer 173

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.

Answer 174

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).

Answer 175

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.

Answer 176

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.

Answer 177

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

Answer 178

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.

Answer 179

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

Answer 180

$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.