Chapter Two: Equity Securities Flashcards

Question

Ruby Red Jewelry has issued both common stock and cumulative preferred stock. The cumulative preferred stock pays an 8% annual dividend on stock with a $100 par value. Ruby Red Jewelry has not paid a common or preferred dividend for two quarters. It has committed to pay a $2 per share dividend to its common stockholders. How much will it be required to pay its preferred shareholders per share? A. $0 B. $2 C. $5 D. $6

Answer 1

Answer: D. Before Ruby Red Jewelry can pay its common stockholders a dividend, it must pay its cumulative preferred shareholders their dividend and all missed dividends. Ruby Red must pay $2 per share for each quarterly dividend (8% / 4 quarters × $100 = $2). It must pay two missed dividends and the current dividend, for a total of $6.

Answer 2

Very rare! Allows extra dividends when company outperforms financial goals, also a greater claim in liquidation chain than simply non-participating preferred stock.

Answer 3

Can convert their preferred stock to common stock at a set ratio anytime.

Answer 4

Conversion Ratio: Face Value / Conversion Parity Value: current market price of common stock x Ratio

Answer 5

Answer: C. The convertible price tells the shareholder how many shares of common stock she will get for one share of convertible preferred stock. To find the number of shares, divide the convertible price into the face value of the preferred stock. In this example, it is $100 / $20 = 5. Thus, the conversion ratio is 5; the shareholder will receive 5 shares of common stock upon conversion. The conversion parity price is the current market value of the preferred share if converted. It is calculated by multiplying the current market price by the conversion ratio ($13.10 × 5 = $65.50). If the convertible is trading at lower than $65.50, the investor will want to convert her shares. If the convertible preferred is trading at higher than $65.50, the investor will want to hang on to her shares.

Answer 6

Issuer can call back stock An issuer will usually choose to call in the stock if interest rates drop and the issuer can issue new preferred stock at a lower rate. Callable preferred stock tends to pay higher dividends than non-callable stock to compensate

Answer 7

an equity security that offers the owner the right to buy shares in the company at a set price (strike price) in the future costs more than market price usually thrown in as a sweetener in bond and preferred stock offering to make it more appealing

Answer 8

It's similar to a warrant, but has a shorter life (few weeks) Used when an exercising of the preemptive right occurs, during the rights offering, subscription right is offered to combat the shareholder dilution. The reduced price is called the subscription price.

Answer 9

With stock appreciation rights, the employee receives the difference between the grant price and the market price without having to shell out any money.

Answer 10

ADRs are receipts issued by a U.S. bank that represent shares of a foreign stock.

Answer 11

depository receipts are like ADRs, but they are created and sold in countries other than the United States.

Answer 12

BBB- , Baa3

Answer 13

high-yield bond, junk bond, speculative bond

Answer 14

1. History and Corporate Philosophy 2. Management Structure and Governance 3. Financial Position, Debt Structure and Sources of Liquidity 4. Economic, Political and Regulatory Environment

Answer 15

A form that has to be filed with the SEC when a bond is being issued. It specifies the scope and features of the bond, and holds the issuer to its terms.

Answer 16

The issuer of the bond, must appoint a third-party trustee to protect the bondholder's rights. In charge of making sure issuer complies and authenticates it It's usually a bank or trust

Answer 17

Bond indenture's valued over $50 million, must be qualified and registered by the SEC

Answer 18

A term bond is paid off at the maturity date in a large sum, offered a single interest rate. A serial bond can be paid over the time till the maturity date.

Answer 19

Is a serial bond maturity with one large payment, usually at the end on top off other payments.

Answer 20

Old-school bonds, no name on them and coupon attached - anyone who possess it can get paid

Answer 21

Have a name on the bond, but no coupon attached. The transfer agent is in charge of the sending the payments. They can be sold. Registered bonds have largely been supplanted by book-entry bonds.

Answer 22

False. A ratings agency is hired by an issuer to rate the bonds before issue.

Answer 23

False. Bearer bonds are not registered to a specific owner, which makes their income easy to hide and desirable to tax cheats.

Answer 24

Recall that corporate bonds have a par value of $1,000. For an 8% bond, the annual interest payment is 0.08 × $1,000 = $80. Because coupon payments are typically made twice a year, the investor will receive $40 every six months.

Answer 25

A bond that sells below its par value. Buy it because you will get more than what you paid for when it reaches maturity. Suppose you want to sell your 6% bond in the market, and similar bonds are being issued today at 8%. No one is likely to pay $1,000 to receive 6% ($60 per year) when they can lend the same amount at 8% and receive $80. Your bond will not attract potential investors unless you offer to sell the bond at a discount, that is, below its par value.

Answer 26

A bond that sells above its par value. It has a high interest rate on the bond when interests rates have lowered, so it has good yields, would only give up for a good deal.

Answer 27

The annual coupon payment is 6% times its par value (0.06 × $1,000 = $60). The annual coupon payment, $60, divided by the purchase price of $960 is 0.0625. Thus, the current yield is 6.25%.

Answer 28

a snapshot approximation that represents the return an investor might expect to receive if she purchased a bond today and held it for a year. It is calculated by this formula: annual coupon payment / current bond market price Current Yield is measured in the ROI

Answer 29

- has the highest duration among bonds -pays no interest and only principle at maturity

Answer 30

Corporate bonds are quoted in 1/8th increments example: 97 1/8, is .97125 of par or $971.25 (.97125 x $1,000) Treasury Bonds are sold in 1/32 increments

Answer 31

One hundred basis points is 1%; 25 basis points is 0.25% So when a bond’s yield to maturity increases from 4.25% to 4.79%, the bond yield is said to have increased by 54 basis points

Answer 32

In finance “M” is often used to represent $1,000 Answer: 5,000

Answer 33

The maximum a dealer is willing to bid and pay. The difference is the profit and it indicates the liquidity of the bond. Example: 99 1/8 – 99 7/8

Answer 34

Answer: $15.00. Recall that the face value of a corporate bond is $1,000. The bid price in dollars on a corporate bond is therefore 98 3/8 = 0.98375 × $1,000 = $983.75. The ask price is 99 7/8 = 0.99875 × $1,000 = $998.75. The spread is the difference between bid and ask, $998.75 – $983.75 = $15.00

Answer 35

Bonds that offer a first lien on a corporate property. If the company fails, the trustee can sell the property to pay the bondholders - pay interest semi-annually

Answer 36

Secured bonds that are commonly issued by transportation companies. When an airline buys a fleet of new planes, it may decide to use an ETC to finance the purchase.They are bonds in which a trustee sells the issue to investors and delivers the proceeds to the buyer (the airline). The trustee holds legal title to the mortgaged equipment (the fleet of new airplanes), which it leases to the airline until the bond is paid off. The trustee collects rent from the airline, which it uses to send the interest payments to the bondholders.

Answer 37

Collateral trust bonds are secured by financial assets, such as stocks and bonds. The bond indenture usually requires that the market value of the collateral securities always be greater than the face value of the bonds by a specified margin. Example: Required collateral is 120%, value of the bond drops to 115%, they must provide an addition 5%

Answer 38

False - majority are unsecured, and only secured by a promise

Answer 39

An unsecured corporate bond - they range is riskiness Semi-annual interest payments + Par Value at Maturity

Answer 40

1. Secured Creditors / Claims 2. Debentures 3. Subordinate Debenture 4. Preferred Stock 5. Common Stock These are debentures that will be repaid only after other corporate debts, including regular debentures, have been satisfied. They have a high credit risk and thus pay out higher yields.

Answer 41

- Not Investment Grade -Performs more like stock; bc low credit standing makes them sensitive to market conditions and issuer’s financial performance -Short-term, so Higher Yields Falling interest rates will increase the market price of bonds in general, but the drop in corporate earnings dampens that impact on junk bonds and tends to drive their prices down. After recessionary periods, junk bonds have the potential for strong price appreciation as the economy begins to expand and corporate earnings improve, possibly leading rating agencies to upgrade junk bonds’ ratings

Answer 42

Falling interest rates will increase the market price of bonds in general, but the drop in corporate earnings dampens that impact on junk bonds and tends to drive their prices down.

Answer 43

This investing strategy of profiting from differences in prices across markets

Answer 44

A fund set aside to pay off bonds

Answer 45

Term Bonds - ONCE a company issues a large number of bonds and they all mature at the same date Serial Bonds -CONSECUTIVE Bonds that are issues at consecutive years Series Bonds- INTERVALS Bonds set to mature in regular internals - used to fund projects that need steady income

Answer 46

1. Debenture 2. Income Bonds

Answer 47

Answer: 50. Find the conversion ratio by dividing the conversion price into the par value: $1,000 / $20 = 50 shares of common stock for 1 bond. The conversion ratio is not influenced by a rise in the market price of the bond

Answer 48

The bond’s conversion value is $1,200 (50 shares × $24/share). If the bond is selling at $1,200, it is said to be at conversion parity.

Answer 49

Answer: $1,200. First, find the conversion ratio by dividing the conversion price into the par value: $1,000 / $25 = 40 shares of common stock for 1 bond. Then multiply 40 shares times $30 to find the parity value (40 × $30 = $1,200).

Answer 50

High Risk! - Coupon payments for income bonds are not guaranteed - Typically, a company will offer income bonds to existing creditors prior to going into default

Answer 51

It's a zero coupon bond offered at a big discount thus considered a discount bond Interest Rate locked in for life of bond Example: A 20-year bond that has a par value of $5,000 may have a $1,000 issue price. P.S. IRS treats discount as interest and needs to pay taxes

Answer 52

Default Risk and Credit Risk -Interest Rate Risk, Purchasing Power Risk (inflation), Call Risk, Reinvestment Risk

Answer 53

Call Premium - When a call price is set at a higher value than the face value of the bond, the difference is the call premium. For instance, a $1,000 bond with a call price of $1,100 has a $100 call premium payable to the investor if the bond is called. Call Protection - Prohibits redemption during the first few years of the bond’s life. The earliest date on which a bond is callable is known as the first call date Sinking fund redemption

Answer 54

Is a bank or broker-dealer that buys Treasury securities at auction from the U.S. Treasury and resells them to investors.

Answer 55

No. Interest on all Treasury securities is taxable at the federal level, but it is exempt from state and local taxes.

Answer 56

True! For example, an investor who buys $1 million in one-year T-bills at a 5% yield will pay $950,000, and in return this T-bill investor will receive $1 million at maturity.

Answer 57

Max 1 year ; Their yield is considered to be a risk-free return, and T-bills are the common measure for a riskless rate of return.

Answer 58

Treasury Bills (T-Bills) - 1 year or less Treasury Notes (T-Notes) 2 to 10 years Treasury Bonds (T-Bond) - 10 to 30 years

Answer 59

No. They are not

Answer 60

A long-term zero coupon bonds consisting of U.S. Treasury securities created by PRIVATE issuers - not the treasury

Answer 61

Inflation-adjusted securities issued by the U.S. Treasury. With TIPS, the principal is adjusted according to the Consumer Price Index (CPI), and at maturity, the investor receives the inflation-adjusted principal or the original principal, whichever is greater. Provides Inflation and Deflation protection

Answer 62

I Bonds : Pay a guaranteed interest rate that may be adjusted upward when inflation rises EE Bonds : Pay a fixed rate -They are non-callable, nontransferable, and nonnegotiable. They cannot be sold in the secondary market -With both, interest payments accrue over the life of the bond and are paid out with the principal at maturity. In other words, the investor receives no interest until the bonds are redeemed.

Answer 63

bonds that are backed by the cashflow of other kinds of debt

Answer 64

The financial practice of combining illiquid debt obligations into a pool of assets that can be packaged into tradable securities

Answer 65

A pool of mortgages.

Answer 66

1. Prepayment risk (the risk that they will get their money back sooner than expected, which may happen when interest rates fall) 2. Extension risk (the risk that they will get their money back slower than expected, which may happen when interest rates rise)

Answer 67

Privately owned but chartered by the federal government - NO SEC OVERSIGHT -no state or local tax by entity but obv yes to investors -credit line of 2b+ Fannie Mae & Freddie Mac Both entities are privately owned, publicly traded companies that purchase mortgages on the secondary market and pool them to create mortgage-backed securities

Answer 68

Fannie Mae, Freddy Mac and Ginnie Mae

Answer 69

CMO offers a range of coupon rates and maturity dates for investors to choose from. the CMO investor’s principal is returned over the life of the security rather than repaid in a single lump sum at maturity, which occurs with other types of debt securities. CMOs typically pay investors interest and principal on a monthly basis, except for during the lockout period,

Answer 70

D. With mortgage-backed securities, mortgages in the pool can be paid off at any time, making resulting funds unpredictable. Investors never know when the principal on their MBS will be paid off. Prepayment risk is associated with falling interest rates resulting from refinancing. Extension risk is associated with lower than expected interest payments that might occur when homeowners are late in paying off their mortgages. This possibility makes the the rate of principal repayment unpredictable. Interest rates do not move up and down with the stock market.

Answer 71

A. I and III

Answer 72

A. Ginnie Mae stands for Government National Mortgage Association, and it is a government agency that guarantees mortgage-backed securities. Fannie Mae, or the Federal National Mortgage Association, issues mortgage-backed securities, and it is privately owned but chartered by the federal government. Fannie Mae and other Government-Sponsored Enterprises (GSEs) are publicly traded companies created by the federal government to serve a public purpose. Of the securities issued in the mortgage-backed security industry, only Ginnie Mae securities are guaranteed by the full faith and credit of the federal government.

Answer 73

debt securities that mature in one year or sooner - HIGHLY Liquid -Considered very safe -Big Purchasing Power Risk bc they offer such low-yield that can't keep up with inflation -not required to register w/ SEC but subject to anti-fraud laws

Answer 74

-Unsecured, but considered safe bc short-term and high credit rated issuers

Answer 75

- usually in the international market - Banker’s acceptances are usually issued at a discount to face value

Answer 76

At its simplest, a repo is a form of short-term borrowing. A short-term contract to sell an asset, such as a Treasury bond, and simultaneously buy it back in the future at an agreed-upon price (typically a higher price) often done overnight

Answer 77

The primary purpose of municipal notes is to meet an agency’s cash flow needs in anticipation of the taxes, fees, or other sources of revenue that fund its ongoing commitments. Zero Coupon Notes are issued by different names, depending on where the anticipated receipts are coming from

Answer 78

Nope - Certificates of deposit (CDs) are not considered securities, but are still considered part of the money market Bank CDs typically offer low yields and, therefore, do not protect against purchasing power (inflation) risk.

Answer 79

Accounts where funds can be withdrawn at any time. In other words, the funds are payable on demand. Both checking and savings accounts are considered demand deposits.

Answer 80

- denominated in currency other than where it is issued (sold) -Underwritten by foreign banks Example: bonds may be issued and sold in Britain by a Kuwaiti company and denominated in the pound The currency in which the Eurobond is based will also be the currency in which the principal and interest are paid. Issuers often choose Eurobonds because they can pay better interest rates in the chosen denomination. An issuer may choose to issue the bond in a country with the fewest regulatory constraints

Answer 81

Eurodollar Bonds denominated in U.S. dollars but will be sold outside of the US Not offered in US or to US investors, so no taxes or SEC Regulations required

Answer 82

They are issued by foreign governments Currency Risk Sovereign bonds tend to be less risky than other types of foreign bonds because governments can raise taxes or lower spending to make their interest payments Politically stable governments typically issue debt securities with lower coupon rates than less stable governments

Answer 83

Answer: B. Eurodollar bonds are Eurobonds denominated in U.S. dollars, meaning that the interest and principal will be paid in U.S. dollars, but the bonds will be sold outside the U.S.

Answer 84

Principal and sometimes interest was collateralized with U.S. Treasury bonds held in escrow by the U.S. Federal Reserve Attractive to investors because investors can invest in emerging market debt with improved liquidity and transparency Bradies are denominated in U.S. dollars, they allow investors to invest in sovereign debt without currency risk. Many Brady bonds were callable and were retired by the issuing countries.

Answer 85

Answer: A. A Brady bond is a sovereign debt security issued in U.S. dollars by Latin American and other developing countries. Brady bonds offer U.S. investors the opportunity to assume the risk associated with investing in a foreign government (sovereign risk) without the risk of being paid in a currency that might lose value relative to the dollar (currency risk).

Answer 86

To raise capital for day-to-day operations issued by states, cities, and counties

Answer 87

1. General Obligation (GO) Bonds (LESS RISKY) -unsecured bonds backed by the full faith and credit of the municipality and paid for by taxpayers 2. Revenue Bonds - secured bonds used to finance specific projects and are funded by the revenue stream generated by the project.

Answer 88

Revenue, Revenue

Answer 89

Revenue, GO

Answer 90

Closer, Closer

Answer 91

call, not call

Answer 92

Decline, Increase

Answer 93

interest rates

Answer 94

Answer: B. When bonds are valued less than their par value using a discounted cash flow analysis, this generally means that interest rates have risen, and the bond buyer should be only willing to purchase the bond at a discount.

Answer 95

Annual Payment / Annual Rate of Return

Answer 96

Annual Payment / Annual Rate of Return She would divide $10,000 by 0.05 (the rate of return expressed as a decimal), which would yield $200,000. In other words, $200,000 earning 5% should provide an investor with $10,000 per year indefinitely.

Answer 97

If the exam gets tricky and asks you to calculate the monthly or quarterly payment amount, it’s important that you remember to divide the annual rate of return by the payment period referenced in the question. For example, if the exam asks you to calculate the amount needed to provide a perpetuity of $500 per month using a 6% annual rate of return, you’d first need to convert the 6% into monthly terms. You’d do this by dividing 6% by 12 (the number of regular periodic payments the investor desires). In this case, it would yield a monthly rate of return of 0.005. You would then divide the desired monthly payment by this amount, not the original 6%. In this problem, that would mean the investor needs a nest egg of $100,000 to pay a perpetuity of $500 per month.

Answer 98

Answer: A. A perpetuity is an annuity or stream of payments without end. To calculate the present value of a perpetuity, divide the periodic payment by the rate of return (also known as interest rate or yield). In this case there are two ways to reach the answer: (1) divide the 2% rate of return by 12 to get the monthly rate of return (0.001667), then divide the monthly payment by the monthly rate of return ($5,000 / 0.001667 = $2,999,400), or (2) multiply $5,000 times 12 months to get a $60,000 annualized payment to the family and then divide that by the 2% yield, or $60,000 / 0.02 = $3 million.

Answer 99

Numbers below one are worrisome.

Answer 100

Companies with high debt-to- equity ratios are usually businesses that require a lot of capital but have steady cash flow, which enables them to meet high debt service payments.

Answer 101

Investment Advisor aka Portfolio Manager

Answer 102

- Is usually a company, not an indv - Needs to be registered under the Investment Advisers Act of 1940 - Paid percentage of Fund's value - Manages the portfolio’s day-to-day trading - Identifies the tax status of distributions made to shareholders

Answer 103

- Usually a bank or stock exchange member broker-dealer, holds the mutual fund’s shares and monetary funds - Responsible for performing the accounts receivable and accounts payable functions - Maintains records of dividends and interest received from the company’s investments - Keeps the company’s assets physically segregated and restricts access to certain officers and employees

Answer 104

- aka customer service agent -sends out shareholder reports - The custodian may also serve as its transfer agent, but custodial functions should be independent of transfer agent functions. - issues new shares to buyers and cancels any shares redeemed by shareholders

Answer 105

- Sponsor Mutual Funds, aka market and sell shares to the public - either directly or through broker-dealers

Answer 106

12b-1 ; Mutual fund companies that choose to market and sell their own shares may call themselves “no-load” funds. In this case, the distribution cost generally is recovered through the 12b-1 fee (named after a section in the Investment Company Act of 1940). The 12b-1 fee is an annual marketing or distribution fee on a mutual fund and cannot exceed 0.25% of net assets if the company wishes to call itself a “no-load” fund.

Answer 107

D. The board of directors can include persons other than non-interested persons, but at least 40% must be non-interested. Shareholders vote on a change in investment adviser.

Answer 108

B. The mutual fund company sells shares to the underwriter, not the transfer agent, at the NAV.

Answer 109

C. Shareholders do not get a say in what percentage of the profits should be retained or what percentage should be paid out in dividends.

Answer 110

A. In addition to managing the portfolio’s day-to-day trading, the investment adviser identifies the tax status of distributions made to shareholders.

Answer 111

are used to invest in equity securities aka common stock

Answer 112

- expensive, high price-to-earnings ratio - contains stocks of growing companies ; they reinvest their earnings into expansion, acquisitions, and research and development, and therefore pay low or no dividends

Answer 113

1. Equity (Stock) FUNDS 2. Fixed-Income (Bonds) FUNDS 3. Money Market FUNDS

Answer 114

1. Equity (Stock) FUNDS 2. Fixed-Income (Bonds) FUNDS 3. Money Market FUNDS

Answer 115

-Contains stocks of growing companies (investing in R&D, expansion, acquisition) -No Dividends, why above reasons -Yes, expensive because potential future earnings high, long-term investment, need to wait to hit it big Goal/Bet = Capital appreciation

Answer 116

Opposite Growth is growing companies (R&D, Acquisition, Expansion) and Income is well-established, nice dividends

Answer 117

Well-established companies that produce nice dividends - has an investment horizon longer than a year

Answer 118

-Stocks trading less than they are worth (according to the portfolio manager) -Generally thought of being out of favor, perceived boring and low to no growth potential - High Dividends bc of low price to earnings ratio -Considered safer (conservative) bc bullet point above Goal/Bet: depressed price will rise

Answer 119

Growth and Value Funds Appeals to Investors Who Seek: future capital appreciation + dividends and SUBSTANSTIAL diversification

Answer 120

Investors who want future growth and need current decent dividends

Answer 121

-Stock that invests outside of the investors country of residence - Long-term Capital Appreciation (although SOME produce current income)

Answer 122

- Invest in a specific sector - Higher Risk - no diversification, it's volatile Goal/Bet - Appreciation potential when increased demand for product or service sector provides (EX: Masks)

Answer 123

A growth and income fund has a MODERATE price to earnings ratio (income is MODERATE, growth is HIGH) A blended (value and growth) fund has a LOW price to earnings ratio (value is LOW, growth is HIGH)

Answer 124

Contains stocks and bonds - Equity Funds for appreciation and Bond Funds for Income Any percentage of stocks vs bonds, check prospectus on philosophy Why - Goal/Objective: Lower volatility than an equity funds, but higher returns than a bond fund

Answer 125

a fund that adjusts to become more conservative as the target-date approaches, common retirement fund yes, they vary based on how they are structured, maintained and the fees

Answer 126

Yield and risk vary, ex: Treasury Bonds = safe, Corporate Bonds = no as safe

Answer 127

bond maturity dates, share price and yield

Answer 128

- invest in high-quality, short-term debt instruments - MUST BE high liquidity, high quality (law) - nearly as safe & liquid as bank accts but w higher yield - Perfect for investors who need high liquidity but want a higher interest rate than bank acct

Answer 129

- NAV $1 per share The debt instruments they invest does not produce capital gains or losses - very rare the "buck is broken" -Pay dividends based on short-term interest

Answer 130

Mutual Funds that are set-up to track certain market segments. Will hold the same proportion of securities (stocks and bonds) that it is tracking - adviser is mimicking, not analyzing stocks examples: S&P500 (500 large capitalization stocks) DOW Industrial Average (30 large-cap, blue-chip stocks)

Answer 131

outperform

Answer 132

A balanced fund is stocks and bonds, a type of mutual fund A blended bund is value and growth funds is a type of equity fund

Answer 133

1. Equity Fund 2. Income Fund 3. Growth Fund 4. Balanced Fund 5. Money-Market Fund

Answer 134

Load Fund: POP = Nav + Sales Charge No-Load Fund: POP = NAV

Answer 135

The NAV (Net Asset Value) aka Book Value of the fund Calculated erry day

Answer 136

The price is based on the performance of the securities in the fund. The NAV can change daily because the market value of a fund’s securities portfolio fluctuates, as does the number of outstanding shares.

Answer 137

Market Value + Assets - liabilities divided by number of shares

Answer 138

Front-end, included in the investment PURCHASE of shares Back-end, charged at the investment SALE of shares

Answer 139

It's a back-end charge and is dependent on when the shares are sold, it gets lower the longer they hold and can be zero once sold

Answer 140

It's a discount on a front-end sales charge, when you invest a lot of money. The exact dollar amount is the breakpoint. Example: MegaFund charges a 5% sales charge on investments under $25,000 and 4.25% on investments at or above $25,000. The breakpoint in this case would be $25,000.

Answer 141

The breakpoint in this case would be $25,000.

Answer 142

ROA: Adding more money to your fund accumulates your initial purchase of shares and therefore let's you reach different breaking points for a lower front-end sales charge when you purchase more LOI: If you know you're buying more in the future, can write a LOI and get the lower front-end sales load for current purchases until then Example: Using the previous example breakpoint schedule, an investor has $10,000 in her fund account and plans to invest $15,000 more in the next 13 months. She could write a letter of intent to her broker, who would charge her the 4.25% sales load on any new shares purchased in the next 13 months.

Answer 143

Sent to your broker and yes, up to 90 days

Answer 144

POP = NAV Sales Charge = Back-end, can be $0 if held for long enough 12b-1 Fee = Higher than (A), may convert to (A) if held long enough Appropriate for: Smaller accts with investors who intend to hold for a longer time

Answer 145

POP = NAV + front-end sales charge Sales Charge= Can be reduced through Breakpoints 12b-1 Fee = Lower than (B) & (C) Appropriate for: Accts large enough to benefit from breakpoints

Answer 146

POP= NAV Sales Charge= No front-end, no back-end 12b-1 Fee= Higher than (A) or (B) Appropriate for? Smaller investors who won't hold for a long time

Answer 147

annually, quarterly, 0.25%, 8.5%

Answer 148

- Dividends & Capital Gains reinvested into the fund (no sales charge) - still subject to taxation -usually retirement accounts bc high withdrawal penalities

Answer 149

An investment strategy; buying the same security at the same price periodically despite price being high and low Why? lowers the average cost per share of the investment over time

Answer 150

A way to save money on a sales charge Allows the investor to sell shares of one type of fund and buy shares of a different fund within the family at the NAV rather than the POP IRS say's TAX IT - it's taxable, all gains and losses

Answer 151

It's Naughty, short-term gains strategy Profits from the differences between daily closing NAV and next day's NAV There's a penalty called a Redemption Fee to discourage bc could end up costing fund more $$ in admin fees

Answer 152

1. Point-to-point - the difference (of the index) between beginning point of the contract and end point of the contract 2. High-water method - the difference between the highest point and the starting term 3. Annual Reset Indexing Method -Locks in "gain" each year, this gain credited each year instead of at the end of the contract

Answer 153

The investor, not the issuer, bc they pick accts that work like mutual funds and get their gains depending on the performance of chosen accts

Answer 154

Accumulation Phase - person puts money into account, grows and shrinks depending on investments chose Payout Phase - When they being to receive payments either fixed amounts or variable, whatever they choose

Answer 155

It will go to the beneficiary - it's called a death benefit, they will receive based on the total invested If the annuity lost money- they will receive the total invested money

Answer 156

1. Purchase with a lump sum and deferred payment 2. Purchase Periodically (weekly/monthly/annually) Scheduled, deferred payment 3. Purchase lump sum, Payout begins in 30 days

Answer 157

Surrender time is the time you cannot touch the money in an annuity, the fee is if you want to touch it and the value is the value of the acct after the surrender fee is subtracted

Answer 158

Pro: Free additional money, usually 3-5% more of what you choose to contribute Con: have long surrender time and if you don't wait, get hit with a surrender fee Not great for older people who can't wait the surrender time and lose free money in paying the fee

Answer 159

IRS allows exchanges of annuity contracts without being taxed, however not usually in best interest of client, usually new surrender time so not good for oldies

Answer 160

1. Random Withdrawal - requests sums at random times 2. Fixed-Payments 3. Lump Sum

Answer 161

Life income is bigger, shortest time span so bigger check

Answer 162

1. Can undo everything within 10 days 2. Broker must submit everything to insurance company quickly 3. Early Redemption - If annuity is redeemed within 7 days, rep has to return sales commission

Answer 163

life insurance, life insurance

Answer 164

It's temp life insurance, for ex. insured until age of 40. why? can't afford life insurance, gets more expensive at tend of initial policy bc your older and stuff. ALSO NO CASH VALUE (what you pay you don't get back)

Answer 165

Two, cannot

Answer 166

$100, share

Answer 167

Answers: 1. C; 2. A; 3. B; 4. D

Answer 168

1. Lump Sum - all of it 2. Fixed-Period - $ put into interest account for the fixed period, gets until period over 3. Fixed-Amount - $ put into interest acct and gets a fixed amount till $ runs out 4. Life Income - certain amount till death

Answer 169

FIFO, LIFO

Answer 170

third Friday of the month