Final Deck Specific Topics

Question 1

Trusts

Answer 1

Simple

Complex

POD / Trotten Trust

Question 2

Bond math & treasury vs corporate bonds

What is value of corp bond 103 1/4

Terms of maturity of debt instruments

What are TIPS

What are STRIPS

Answer 2

Corporate and municipal: 103 1/4 = 103 & 2/8 = 1032.5
Treasury: Each point is $10, and each .1 represents 1/32 of $10 // 90.8 = 902.50

Bills Notes Bonds - in order of length

T-Bills - short term debt obligation of gov’t, 13-week / 91-day T bills, no interest, issued at discount from par value, paid on principal at maturity, HIGH liquidity

US T Notes - obligation of gov’t 2-10 year maturity, regular semi-annual interest, non callable

US T Bonds - 10-30 years, non callable

TIPS- increases principal only, not coupon rate

Stripped U.S. Treasury - Zero coupon bond, no cash flows to reinvest and therefore no reinvestment risk

All debt securities have interest rate risk & reinvestment risk (except zero coupon)

An investor is considering a 10-year stripped U.S. Treasury and a 10-year U.S. Treasury note, both with a yield to maturity of 4.8%. Compared to the note, the strip has less reinvestment risk and more interest rate risk. Remember, the duration of a zero-coupon bond is its maturity date while any debt security paying periodic interest (Treasury notes pay semiannually) will always have a duration shorter than its length to maturity.

Question 3

Financial statements

Income statement
Statement of cash flow
Balance sheet (person)
Balance sheet (corp)

CA
CL
Capitalization

Answer 3

Income statement (profit loss / P&L): Revenue, COGS, pre-tax income

Statement of cash flow – income, expenses, taxes

Balance sheet:
- asset - liabilities = net worth / owners equity
- asset = liabilities + owners equity / shareholder equity
(shows assets and liabilities, not income and expenses)

• Current assets: all cash & other assets expected to be converted in next 12 months. // Current examples: Cash, accounts receivable, accounts, inventory, pre-paid expenses
• Fixed assets: property, plant, equipment // depreciate over time & deductible on taxable income
• Current liabilities: corporate debt obligations due within 12 months // Accounts payable, accrued wages, current long term debt (portion due within 12 months), notes payable, accrued taxes
• Long term liabilities: Long term debts // mortgages, outstanding corporate bonds, long term promissory notes, tax deferred credit

Capitalization: long term debt + equity securities
Stock split does not impact shareholder equity

Question 4

Practical Economics for Investors

Answer 4

inertial inflation: where the rate of price increases reaches a stable equilibrium (steady increase) and stays there until a shock to the system occurs

Loans between banks, usually on an overnight basis, are made at the federal funds rate. It is the most volatile of the money market rates. The discount rate is the rate charged when banks borrow directly from the Federal Reserve.

monetarist economic position: The amount of money in the economy determines the overall price level over time; therefore, the Federal Reserve should control the growth of the amount of money in the economy in a gradual and predictable way.

Yield curve benchmark tool: a single issuer over varying maturities. The most common yield curves are drawn using U.S. Treasury securities

Fiscal - gov’t spending & taxation
Monetary - FRB, inflation
Keynesian - demand goes down, unemployment will increase
Trade deficit - excess of imports vs exports
Trade surplus - excess of exports vs imports
Strong economy - inflation, too much money, FRB sells T bills to take money out of circulation, interest rates go up, value of the $ goes up, exports go down
Weak economy - Deflation, not enough money, FRB buys T bills to send money into circulation, interest rates go down, value of $ goes down, exports increase

Strong economy exports decrease
Weak economy exports increase
(a strong domestic currency hampers exports and makes imports cheaper)

Question 5

Buy limit / sell stops SL BS / BL SS

Answer 5

Sell - stop / limit orders –> Hedge against long position –> you own a stock for $30, the risk is it falls to zero, a sell stop / limit hedges against that. Stop orders, once TRIGGERED, then becomes a limit order, and goes at whatever the next market price is. Sell Limit orders you are guaranteed to get that price or better.

Buy - stop / limit orders - Hedge against short stock position –> short stock position can be incredibly risky, open a margin account, borrow stock, and sell stock immediately at $50, and at some point you HAVE TO BUY BACK at a LOWER Point to then return to your broker dealer, however the loss could be unlimited.

Buy stop –> TRIGGERS to make the order (lets start talking about buying to mitigate loss) –> then becomes a buy limit —> and it would need to be BELOW the market price.

SL (sell at the price or higher) BS (trigger)
BL (buy at price or lower) SS (trigger)

Simply put
Sell limit: sell at that price or higher
Buy stop: trigger the order at this price or higher
Buy limit: buy at that price or lower
Sell stop: Trigger at that price or lower

Sell: https://www.youtube.com/watch?v=kG-wM8x3Btw
Buy: https://www.youtube.com/watch?v=dPmfjfgMeSg

Question 6

Cyclical vs defensive vs counter cyclical

Question 7

How capital gains work - individual vs filed jointly

Question 8

IRS forms for each business entity

Question 9

Annuity’s

Answer 9

All are sold through life insurance.

Fixed Annuities
- Guaranteed return (No investment risk, has inflation risk, not a security)

Variable Annuity – Non-qualified, Tax deferred (10% penalty for dist. Prior to 59 1⁄2)
- Taxed in excess of basis (LIFO) as ordinary income
- Surrender charges
- theoretically, no limit as to how much one could earn with a variable annuity
- When a variable annuity is annuitized, the number of annuity units redeemed each payment period remains constant

Index-Based Annuity
- Participation Rate determines return
- Index up 10% + Part. Rate 80% → Investor Return = 8% 2. Valuation done by using point-to-point method
- EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor’s account.

Question 10

Life insurance

Answer 10

Whole life
Premium - fixed
Schedule Death Benefit - guarenteed
Cash Value - guaranteed
Accounts - general

Variable life
Premium - fixed
Schedule Death Benefit - minimum
Cash Value - not guaranteed
Accounts - general, seperate

Variable universal
Premium - flexible (can skip)
Schedule Death Benefit - not guaranteed
Cash Value - not guaranteed
Accounts - Separate only

Question 11

Equations (discounted cash flow, IRR, etc)

Question 12

REGISTRATION OF SECURITIES

Question 13

NON-EXEMPT ( Corp. Securities)

Answer 13

EXEMPT TRANSACTION:
▪ Unsolicited
▪ Financial Inst.
▪ Issuer/UW
▪ Private Placements ▪ Fiduciaries
o Sherriff, trustee in B/K
o IsolatedNon-issuertrans.

Question 14

Under the Uniform Securities Act..

Answer 14

• A registration statement may be filed by an issuer itself, a broker-dealer, or any other person on whose behalf the offering is to be made.
• Registration of an agent is not effective when the agent is not associated with a broker-dealer registered under the act.

Question 15

A broker-dealer with an office in this state would be defined as an investment adviser if it..

Answer 15

• A fee for selling investment research and additional fees in the form of commissions for the sale of securities
• Fees for investment research sold exclusively to institutions located in this state
• If a person is in the business of selling research for a fee, that person or firm meets the definition of an investment adviser.

SELLING RESEARCH & RECIEVES COMP

Question 16

Thinly traded stocks

Answer 16

Thinly traded stocks are stocks that are not actively traded on an exchange or that are not held by a large number of investors. Because thinly traded stocks are usually less marketable and less liquid than actively traded stocks, the spread between their bid and ask prices tends to be considerably higher. They also tend to have more volatile price swings.

Question 17

ERISA

Answer 17

To protect the benefits of plan participants and beneficiaries, ERISA prescribes standards for the execution of the plan fiduciary’s duties and responsibilities.
- Participants must be offered a broad range of investment options. Minimum 3.
- The rules prohibit transactions between the plan and persons who have conflicts of interest with the plan even though a particular transaction may benefit the plan participants.

Question 18

Which of the following securities are exempt from registration requirements under the Uniform Securities Act?

Issues of U.S.-based insurance companies authorized to conduct business in the state
NYSE-traded issues
Issues of nonprofit religious organizations
Commercial paper meeting certain requirements

Answer 18

All of them

Securities issued by an insurance company organized under the laws of any state and authorized to do business in that state are exempt from registration. NYSE-listed issues are federal covered, and nonprofit organizations and commercial paper with a maturity of 270 days or less in denominations of at least $50,000 and in the top three ratings are also exempt.

Question 19

It is very common for a broker-dealer to charge a fee for processing the closing of an account. There are three primary expenses involved with brokerage accounts that are not included in the fee disclosure template. They are:

Answer 19

1. commissions;
   2.markups and markdowns; and
2. advisory fees for those firms that are also registered as investment advisers.

Question 20

Expected return formula is

If the current risk-free rate is 3% and the expected market risk premium is 6%, what return should we expect from a security that has a beta of 2?

Answer 20

Expected return = risk free rate + (market ris - risk free rate) x beta

Expected return = 3% + ([9% -3%] × 2) = 3% + (6% x 2) = 3% + 12% = 15%. In this question, because we’re already given the risk premium, we can avoid the first step. That would be 3% + (6% x 2) = 3% + 12% = 15%.

Question 21

uniform securities act is to
Investment Advisers Act of 1940 is to

Answer 21

state
federal

Question 22

Client behaviors

Answer 22

Making irrational decisions based on information that should have no influence on the decision at hand is known as anchoring. Herd mentality is the tendency to follow the actions of a larger group, whether rational or not. Confirmation bias is the tendency to pay attention to information that supports one’s preconceived opinions while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers her abilities to be much better than they actually are.

Question 23

Exempt transactions..
Exempt securities..
(When one can be an exempt security but not a transaction)

Answer 23

Registration statements for securities may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and the initial offering price have not changed.

Exempt securities issued by:
- US & Canada
- Foreign countries w/ diplomatic relations (not city level)
- Depository institutions - bank, savings, trust, building and loan
- Federal credit union, industrial loan, etc
- Insurance companies (not variable life or annuity since not stock/bond
- Public utility and common carrier
- Issued by non-profit
- Securities of employee benefit plans
- Commercial paper (promissory note - 9 months 50k) & bank acceptance

Federal securities exempt at state level:
- open end, closed end, UIT (act 1940)
- Exchanges
- Under 506b or 506c of Reg D

Exempt securities under 1933
- guaranteed by the US
- railroad equip trust
- non profit, religions

Non exempt transactions:
- to a retail client

Exempt transactions
- isolated non-issuer transactions
- unsolicited non-issuer transactions (SPGH)
- unsolicited transactions
- sales by fiduciaries,
- private placements
- underwriter
- bankruptcy, guardian, conservator
- institutional investors
- limited offerings - private placement 10 people 12 months
- pre organization - SALE does not exceed 10 subscribers
- transactions with existing security holders

• Uniform Securities Act? Transactions between an issuer and an underwriter, isolated non-issuer transactions, and unsolicited non-issuer transactions (SPGH) are exempt under the Uniform Securities Act
• USA’s definition of “exempt transaction: include: unsolicited transactions, includes sales by fiduciaries, private placements and isolated non issuer transactions
• Sales to institutions, sales by fiduciaries, or unsolicited transactions are all exempt.

Question 24

Under the USA, the Administrator can revoke any transaction exemption, except

Additional administrator authority

Answer 24

those involving federal covered securities

Can:
- insist that specific forms be used to register securities.
- issue a cease and desist order without prior notice.
- inspect offices of registered broker-dealers without prior notice.
- Require a person to file a statement in writing and under oath.
- Publish information of any violation over the vigorous objections of a violator.
- Conduct investigations both inside the state and in other states to determine whether violations of the USA have occurred in his state.
- issue a subpoena

Cannot:
- Issue injunction
- deny on lack of experience
- cite a witness in contempt for refusing to appear at a hearing.

Question 25

Offer
vs
Sale

Answer 25

Offer includes an attempt to dispose of securities for value or a solicitation of an offer to buy a security

Sales involve any contract or disposition for value; solicitations and attempts to dispose are offers.