FOCUS POINTS Flashcards
1
Q
are derivative securities that may be linked to a variety of underlying (reference) assets including a stock index, foreign currency, commodity, basket of securities, change in spread between asset classes, single security, or an interest-rate and inflation-linked product.
- typically built around a fixed-income instrument (a note) and a derivative product.
- the note pays a specified rate of interest to the investor at defined intervals
- the derivative component establishes the amount of payment at maturity
- created by major financial services institutions
- registered as securities with the SEC
- clients must receive disclosure that these products are NOT bank deposits and are NOT insured by the
Federal Deposit Insurance Corporation (FDIC).
A
Structured products
2
Q
Bonds initially issued by municipalities and later traded among investors in the secondary market.
- Amortizable Bond Premium: The excess of the amount you paid for the bond over the bond’s face value can be amortized and it reduces the amount of interest includable in your income.
- Sale Before Maturity: If you sell the bond before maturity, you may recognize a taxable gain or loss.
A
Secondary Market Municipal Bonds traded at a Premium
3
Q
- If you bought the bond at a market discount, you might have to include the discount in your income as interest over the term of the bond.
- If you sell the bond before maturity, you may recognize a taxable gain or loss.
A
Secondary Market Municipal Bonds traded at a Discount
4
Q
an options strategy involving the purchase or sale of both a call and put option with the same strike price and expiration date.
Goal: To profit from a big movement in the underlying asset, regardless of the direction.
Pros: Potential for unlimited profits; protects against a significant move in either direction.
Cons: High cost; the underlying asset must move significantly to become profitable.
Max Gain (MG): Unlimited for long _ ; premium received for short _ .
Max Loss (ML): Limited to the premium paid for long _ ; unlimited for short _ .
Break-Even (BE): Strike price +/- total premium for long _ ; same as MG for short _.
A
Goal: To profit from a big movement in the underlying asset, regardless of the direction.
Pros: Potential for unlimited profits; protects against a significant move in either direction
Cons: High cost; the underlying asset must move significantly to become profitable.
Max Gain (MG): Unlimited for long straddle; premium received for short straddle.
Max Loss (ML): Limited to the premium paid for long straddle; unlimited for short straddle.
Break-Even (BE): Strike price +/- total premium for long straddle; same as MG for short straddle.
Answer: Straddles
5
Q
Bonds that have their principal and interest ensured by an escrow account with Treasury securities.
- often created when the issuer wishes to refinance at a lower rate but the original bond has a non-call feature until a future date.
- common terminology: Escrow secured, defeasance, advance refunding
- Refinancing strategy for issuers.
- Lower yield due to high security.
A
Pre-Refunded Bonds
6
Q
A type of Private Activity Bond issued to finance commercial enterprises.
- Proceeds often loaned to a private entity for a qualified purpose.
- Can provide tax-exempt financing for commercial developments.
- Higher risk than public-purpose bonds.
- Who invests?: Investors seeking higher yield and willing to take on risk.
A
Industrial Development Bonds (IDBs)
7
Q
Bonds secured by a lien on the property that benefits from the improvements financed with the bond proceeds.
- Common terminology: Special assessment, benefit assessment
- Tied to specific property or improvement
- Risk if improvement doesn’t add expected value.
- Who invests?: Income-focused investors with appetite for some risk.
A
Assessment Bonds
8
Q
A type of revenue bond that carries a moral, but not legal, commitment to avoid default
- Non-binding commitment by state or local government to support.
- Higher yield.
- Higher risk due to non-binding nature of support.
- Who invests?: Risk-tolerant investors seeking higher yield.
A
Moral Obligation Bonds
9
Q
Short-term notes issued in anticipation of future revenues, such as taxes, revenues, or bond issuances.
- Short-term, bridge financing, interim financing
- Often used to manage cash flow timing issues.
- Short-term, lower risk.
- Lower yield.
- Investors seeking short-term, lower-risk options.
A
Anticipation Notes (TANs, RANs, BANs, etc.)
10
Q
Bonds that are paid off from the revenues generated by the specific project that the bonds are issued to fund.
- Project-based, self-liquidating, revenue-backed
- Tied to specific projects (e.g., toll road, stadium).
- Income can be more predictable if revenue source is reliable.
- Risk of project failure.
- Who Investd?: Income-focused investors with appetite for some risk.
A
Revenue Bonds
a type of municipal bond
11
Q
bonds issued at a price lower than their face (or par) value.
- The discount on these bonds is considered to be a form of interest
- The IRS requires that the implied annual interest (the discount) be reported as income each year, even though the bondholder does not receive any cash interest payments. This process is known as accretion.
- ## The constant yield method (also called the constant interest method) is used to calculate this annual income.
A
original issue discount (OID)
12
Q
These are long-term bonds with an interest rate that is reset periodically through a Dutch auction process.
- ## Liquidity risk, as the auction process can fail if there are more sellers than buyers.
A
Auction Rate Bonds
13
Q
These are long-term floating-rate tax-exempt bonds. The interest rate is reset periodically, and investors have the option to tender their bonds back to a financial intermediary.
- Interest is usually tax-exempt at the federal level, and possibly at the state and local level depending on residency. (Municipal)
A
Variable Rate Demand Obligation Bonds (VRDO)
14
Q
These are short-term debt instruments that consist of a high-yield, short-term note of the issuer, and an embedded short put option on a separate security
- The issuer repays the principal unless the value of the underlying security falls below a predetermined level.
- Interest income is taxed as ordinary income.
- Any capital gain or loss at maturity or sale is treated as a short-term capital gain or loss.
- coupon rates are typically higher than conventional bonds due to the embedded put option.
A
Reverse Convertible Securities
15
Q
In many IPOs, insiders are subject to _ agreements that prevent them from selling their shares for a certain period after the IPO (Typically 6-months)
A
Lock-Up Agreements
16
Q
- short-term notes that are issued by banks and broker-dealers.
- usually pay a coupon rate that’s set above prevailing market rates; however, in return, the buyer may be required to take
possession of the shares of an underlying asset. - the principal is typically intended to be paid back in full when the security matures unless the price of the underlying asset drops below a certain level. (knock-in level)
- If the underlying asset’s price stays above a predetermined level (the barrier), the investor receives their principal back and the high-interest payments.
A
reverse convertible securities (RCS)
17
Q
How will a new municipal issue allocate its bonds?
A
When allocating bonds in a new municipal issue, presale orders normally have first priority. This is followed by group net, designated, and then member orders.
18
Q
All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT:
A.They are long-term securities with short-term trading features
B. Interest rates are set at specified intervals
C. They are often issued by municipalities
D. They have a put feature allowing the holder to redeem the security at par
A
Answer: D
Although they are both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARSs) do not have this feature and, if the auction fails, the investor may not have immediate access to her funds. In addition, ARSs use an auction process to reset the interest rate on the securities, whereas the interest rate on a VRDO is reset by the dealer at a rate that allows the securities to be sold at par value.
19
Q
- always stands ready to buy or sell a specific stock
- assumes risk by taking the other side of the trade
- provides a two-sided quote. The bid being the price it’s willing to buy the stock, the ask being the price it’s willing to sell the stock (to other dealers)
A
Market Maker
20
Q
Often executed between the bid and offer with both customers paying the firm a commission.
A
Agency cross
21
Q
True or False. If a dealer is acting as a Riskless Principal on a customer trade it must disclose its profit (markup, markdown).
A
True
22
Q
In a ______ trade, rather than charging a markup, the dealer profits by charging a different price for the securities.
A
Net-basis trade
23
Q
True or False. In a net-basis trade, a firms profit is not disclosed on the customers confirmation; however, in a riskless principal trade, the markup must be disclosed.
A
True
24
Q
- corporate bonds
- municipal securities
- U.S. government and government agency securities
Often trade in the ________ settings
A
Dealer-to-dealer settings
Aka over-the-counter (OTC) markets.
25
Within each broker-dealer, a ________ is responsible for maintaining the broker-dealer's inventory as well as trading the firm's proprietary account.
Position trader
26
An inquiry regarding the availability of a block of stock.
Workout quote
27
Indicates a quote is subject to confirmation and is therefore not firm.
Subject quote
28
True or False. Unless a specific qualification is given, all quotes are considered firm.
True
29
The state price at which market makers are willing to buy or sell securities
Firm quote
30
What are aftermarket trading session hours?
4:00 PM to 8:00 PM.
Those market makers that participate must keep their quotes open until at least 6:30 PM
31
What are premarket trading hours?
4:00 AM - 9:30 AM
32
Any Equity that's not listed or traded on a national securities exchange is considered
An OTC equity security
33
- domestic and foreign equity issues
- warrants
- units
- ADRs
- DPPs
All are considered ?
OTC equities
34
Prices of OTC equities may be obtained from the
OTC Markets Group
35
Lists the name and phone number of the market makers for each stock in the non-listed exchange.
The OTC Markets Group
36
Refers to exchange-listed securities being traded over-the-counter between broker-dealers and large institutional investors.
The third market
37
Refers to direct insitution-to-institution trading and doesn't involve the services of a broker-dealer.
The Fourth Market
38
The electronic service that provides quotations for listed securities that are traded in markets outside of the primary marketplace where the securities are listed.
- does not quote securities listed on the OTC Bulletin Board or the OTC Markets Group.
The Consolidated Quotation System
39
True or Flase. Directed Orders (those orders where an investor's specifies the exchange in which they want their trade executed) are exempt from a broker-dealers *best execution rule*
True.
However, non-direct orders are subject to the best execution rule.
This means the broker-dealer is obligated to execute the trade on the exchange that offers the best deal.
40
Becomes a market order to buy or sell securities if the orders specified price is reached or passed. (I.e. the order is activated).
Stop (loss) order.
Guarantees execution but not a specific execution price.
41
Is always placed above the current market price of the security and is used to limit a loss or protect a profit on a short sale.
Buy Stop Order.
42
generally defined as the insertion of a third party between the customer and the best market.
- specifically prohibited if it's to the detriment of the customer
## Footnote
However, this is allowed if the member firm can demonstrate that the customer received a better price because of the intervention of a third party.
Interpositioning
43
Nasdaq Level _ provides subscribers with the highest bid and the lowest offer (i.e., the inside market) for a security that has at least two market makers
- actual market makers are not listed
- does not display the cumulative trading volume or the prices of the transactions as they occur
- typically used by the branch offices of member firms (Although non-members firms can also subscribe)
Nasdaq Level I
44
True or False.
A broker-dealer must satisfy the locate requirement before allowing a customer to execute a short sale.
True
## Footnote
Regulation SHO requires a broker-dealer to make a notation on every sell order ticket to indicate whether the transaction is a long sale or a short sale. A long sale is when the customer is selling stock that he owns and is not required to borrow the security to make delivery. With a short sale, the broker-dealer (not the customer) must be able to borrow the security to make delivery. There's no requirement for a broker-dealer to become a market maker in order for its customers to execute short sales. The margin requirement on short sales is 50%.
45
Allows investors to compare the yields available on T-bills with the yields available on notes, bonds, and other interest-bearing securities
*ask yld* or bond/coupon equivalent yield
46
Government securities are quoted in increments of ?
1/32 nds of a point.
Ex: 99.12 = 99 12/32 = 99.375 = $993.75
This may also be quoted as
99-12
47
- most common security issued by government agencies
- interest in the pool are sold to investors as pass-through certificates
- represents an undivided interest in the pool and owners are entitled to share in the cash flow that's generated by the pool
- fully negotiable (marketable) securities
- each payment includes a portion of both interest and principal
Pass-through certificates
48
Raises money to buy insured FHA, VA, and conventional residential mortgages from lenders such as banks and savings and loan associations
- backed by its authority to borrow from the Treasury
FNMA
49
How do you calculate accrued interest on a *dated date* basis?
Start counting at: last coupon date
And count up to: but not including, the settlement date.
50
Corporate, municipal, and U.S. government agency bonds calculate accrued interest on a _____ day basis
30/360 day basis
51
Treasury bonds and notes calculate accrued interest on a ______ day basis
Actual calendar/365 day basis
52
Calculate accrued interest
Annual interest X. # of accrued days/ 360 or 365
53
Most bonds pay interest ?
Semi-annually
54
Corporate and municipal bonds trade in increments of ?
1/8 of a point or $1.25
Remember a point = $10
55
1 point = ?
$10
56
Define level debt service
Serial maturity bonds that are structured so that principal and interest payments represent approximately equal annual payments over the life of the offering
57
.01 % =
1 basis point
58
100 basis points =
1.00
59
Define Defeasance
Elimination of restrictive covenants (such as a limit on how much debt an issuer my raise)
60
If an amount deposited into an escrow account is enough to pay off the outstanding issue at the call date.
This is considered?
Pre-refunded to call (advanced refunding)
61
If the amount deposited into an escrow account is sufficient to pay debt service at maturity, this is considered?
Escrowed to maturity
62
What are the tax implications for corporate bonds?
Interest
- treated as ordinary income; subject to federal, state, and local taxation.
- Accrued interest
- seller reports the amount of Interest received from the buyer and pays taxes on that interest
- buyer reports interest payment received minus the amount paid to seller
63
Are Zero-Coupon bonds taxed?
Yes, over the life of the bond the cost basis is accreted each year up to par. Each year you pay taxes on the accredited amount
64
What are the tax implications for a premium bond?
- cost basis is amortized down to par
- amortized amount reduces taxable interest
65
How are discount bonds and premium bonds taxed if the issue is sold prior to maturity
If so prior to maturity, a capital gain or Capital loss is determined
For a discount bond
- by the difference between the bonds cost basis and the sales proceeds.
For a premium bond
- by the difference in amortized cost basis and sales proceeds.
66
- begins with a fixed rate and later changes to a floating rate
- usually callable at the time it switches
- depository shares with each share representing a number of preferred shares
- usually non-cumulative
- no voting rights
- no rights offerings
Series K shares (preferred stock)
67
True or false. Only for common stock can an investor receive a rights offering
True.
Preferred shareholders cannot receive rights offerings.
68
- facilities trading of foreign equities in U.S. markets
- priced in U.S. dollars
- pay dividends in U.S. dollars
- sponsored or unsponsored
ADRs
69
An ADR with the following characteristics is considered?
- issued in cooperation with the foreign company
- may trade on U.S. exchanges
(Nasdaq or NYSE)
Sponsored ADR
70
An ADR with the following characteristics would be considered?
- issued without the involvement of the foreign company
- generally traded in OTC market (OTCBB or OTC pink markets)
Unsponsored ADRs
71
- non-physical; phone and computer network
- negotiated market
- unlimited number of registered "market makers"
- classified as a securities exchange
Nasdaq
72
- non-exchange issues
- often low priced and thinly traded
- two systems that offer real-time quotations
OTC
Two systems
- OTCBB (Bulletin Board)
- must be reporting companies
- OTC Pink Markets
- may be non-reporting companies
73
- taxed at a maximum of 20% after holding period is satisfied (1.) 60 days for common stock (2) 90 days for preferred stock
Qualified dividends
74
True or false. Non-qualified cash dividends are taxed at ordinary income rates
True
75
A corporation receives $1M in dividends from stock it owns in other corporations.
How much is excluded from taxes?
If the percent of ownership is not told in the questions, assume 50% would be excluded from taxes.
76
True or False. REITs are not taxable.
True. Because REITs distribute at least 90% of their income to investors.
The investors themselves pay taxes on any dividend received. But they pay taxes on only 80% of the value of the dividend due to a 20% deduction benefit
77
Based on its ownership percentage, a corporation May exclude from taxes a portion of the dividends that it receives from another corporations common or preferred stock that it owns
Refer to as the corporate dividend exclusion
Ownership percentage: < 20% = 50% excluded from taxes
Ownership percentage: 20% > = 65% id excluded from taxes
78
Is when an investor receives some of the original investment back
A Return of Capital
Note that this return of capital (principal) is not taxable.
But the amount return reduced the cost basis of the investment dollar for dollar.
79
Calculate the cost basis for gifted securities
Lower of the donors cost or market value
80
True or false. A gain/loss on a short sale is always short term
True.
The IRS does not recognize a short sale as having a holding period.
81
Government agency debt that pays interest semi-annually and has a fixed maturity date
FNMA & FHLMC notes and bonds
82
Each trunch receives monthly interest payments, but only one tranche receives principal repayments at a time
This often referred to as a _______ CMO
Plain vanilla (or sequential pay)
83
Foreign issued securities issued in U.S. dollars.
- may later trade in the U.S.
Eurodollars
84
True or False. Hedge funds are regulated
False. Hedge funds are high leverage and therefore high risk investments mean for wealthy investors.
They also require a significant initial investment and money cannot be withdraw for some time (lock-up provision)
85
What is the go to way in calculating accrued interest?
Determine the last coupon date. Now take the last day of accrued interest.
Example, investor B buys a bond on October 18th, a Wednesday, this will settle regular way (October 20th). This bonds dated date is January 1. Last paying July 1 (6 months later)
Now take
10/20 - 7/1 = 3 × 30 (30/360 calendar) + 19
= 109
86
What does the following formula calculate
Annual interest (coupon) + (discount/ number of years to maturity)
/ the average price of the bond (par + discount or premium/2)
Yield to maturity
87
Is a put and a call on the same underlying security with the strike prices and/or the expiration months being different
Combination
88
With a short combination, the investor makes money of the stock stays inside the
Break-even points
89
True or false. The dividend payout ratio is the percentage of net income that will be distributed as dividends to Common shareholders
True
90
True or false. Excessive intangible drilling costs in an oil and gas program triggers and Alternative Minimum Tax
True
Remember that the benefits of an oil and gas program, are potential cash flow, depletion, depression, and intangible drilling costs that are not in excess according to the IRS
91
When assets are pulled into financial instruments such as collateralized mortgage obligations to better facilitate selling them to the general public, the process is known as
Securitization
92
True or false a tenants in common account has a transfer of death benefit
False. Transfer of death accounts are available for individual accounts. They can also be used for certain joint accounts like joint tenants with rights of survivorship
93
- avoids probate
- allows the owner of the account to pass all or a portion of it, upon death, to a single or multiple beneficiaries
- Assets in the account do not avoid estate tax
Transfer on death
94
This type of business account
- subject to double taxation, earnings are taxable to the corporation and then our tax again to the shareholder when paid out as a dividend
C corporation
95
True or false....Distributions from LLCs and S corporations are taxed only once because there is no taxation at the business entity level
True
96
Define an Insider
An officer, director, or major shareholder of a public company
97
True or false. Before an employee of a finra member firm opens an account with an outside member firm, the employer must grant written permission.
True
Though there are exceptions such as an employee who purchases mutual funds or variable annuities directly from the issuer. Also if the employee is purchasing non-securities products, such as fixed annuities or term life insurance.
98
Member firms may place a temporary hold on the distribution of funds or securities from the account of a specified adult.
FINRA considers *temporary* to be up to _ business days.
15 business days
99
A type of account where the proceeds of a sale are deposited into a money market mutual fund where it will earn income until the money is either withdrawn or used for a new purchase
Sweep account
100
A type of account where the proceeds of a sale are deposited into a money market mutual fund where it will earn income until the money is either withdrawn or used for a new purchase
Sweep account
101
- no tax advantages other than that the pay is not received until sometime later when the individual should be in a lower tax bracket
- can also apply to an annuity purchased on an individual basis outside of a retirement plan
Non-qualified plan
102
A contribution made to a qualified plan or an IRA (Trad or Roth) which is made with after-tax dollars.
Nondeductible contribution
103
True or false. 401K plans are considered salary reduction plans, not payroll deduction plans.
True. For exam questions, assume that payroll deduction plans are non-qualified whereas 401K plans are qualified
104
True or false. An extension allows you more time to pay your taxes
False. It only extends the time that you have to file your return
105
True or false. A Coverdale ESA is an education savings account that allows contributions to be made with after-tax money. Although the annual limit is $2,000, more than one individual can contribute to this account.
True. The important thing to remember is that the annual limit is based off the beneficiary. So per beneficiary there is an annual maximum limit of $2,000. No matter how many donors contribute this amount cannot be exceeded in any given year. Remember that contributions can only be made before and on the date at which the beneficiary turns 18 ( Unless the beneficiary is of special needs).
remember that contributions must be made in cash.
106
All qualified corporate plans must be established under a
All qualified corporate plans must be established under a **trust agreement**
107
True or false. Regardless of investment performance, the promised benefit is paid under the contract terms for a defined benefit plan. Also, the plans annual return must be signed by an actuary.
True
108
Allows employees to participate in the business's profits.
- must have substantial and recurring contributions, according to the IRC to be considered qualified
Profit sharing plan
The ability to skip contributions during years of low profits appeals to corporations with unpredictable cash flows
109
The following features apply to what type of plan?
- the employer's match must be deposited into a regular 401k plan and be fully taxable upon withdrawal
- employees May contribute to either account but may not transfer money between accounts once the money has been contributed
- have no income limit restriction on who may participate
- however, these plans require withdrawals to begin no later than age 73
Roth 401k
110
True or false. If you are still working over the age of 73 you need not take an RMD until you retire.
True. The same rmd distribution requirements apply. The first year after the calendar year and which the employer retires they must take their first distribution by April 1st
111
Which type of plan has the following features?
- allows share to be sold without affecting the transactions themselves
- money is taken out of a participant's paycheck automatically on an after-tax basis every pay period
- purchase period of every 6 months
- contributions should be 1% - 10% of salary
- no tax deduction available
Employee stock purchase plan (ESPP) or simply, Stock Purchase Plans
112
Applies to private sector plans only. It does not apply to plans for federal or state government workers, nor is it applicable to non-qualified plans
ERISA regulations
113
The difference between the individuals assets and the individual's liabilities
Net worth
114
An objective that can be maximum income or maximum growth without regard to stability
Speculation
115
Limitations or restrictions that are specific to your client. These can include liquidity needs, time horizon, taxes, laws and regulations, unique circumstances and or preferences such as personal ethical choices.
Investment constraints
116
Describe the steps in opening an options account preferably in order
(1.) Obtain essential facts about the customer (2) obtain approval from a qualified supervisor (3) enter the initial order (4) obtain a signed options agreement
117
An order is discretionary if any one of the Three A's is missing. What are these three A's
Activity (action), amount, and asset
118
True or false. Discretion does not apply to decisions regarding the timing of an investment or the price at which it is acquired
True. This is the time/ price exclusion good for only day orders. Orders exceeding a day must be authorized by hand written Letter by the customer
119
Is one who has the legal power to act on behalf of another person
Fiduciary
120
In regards to accrued interest, when payment dates within the month are not specified, always assume the ___ of the month.
1st of the month (e.g., J&J, assume January 1 and July 1)
121
A short-term unsecured paper issued by corporations to raise working capital
- usually companies with excellent credit ratings
- often referred to as a *promissory note*
- range from 1 - 270 days
- most mature within 90 days (3 months)
- issued at a discount to face value
Commercial Paper (CP)
122
True or false. Negotiable CDs are insured up to the FDIC limit of $250,000, but they are not secured by any Bank asset
True. These are also the only money market instruments issued at face value (no discount). Also commonly called jumbo CDs
123
Bankers acceptances are also referred to as
Bills of exchange or a letter of credit
124
True or false repurchase agreements trade as money market instruments
True. The same can be said for reverse repos
125
Is any long-term debt instrument issued and sold outside the country of the currency in which it is denominated
Euro Bond
126
Is a bond issued by non-american company or government, sold outside the United States and the issuers country, but for which the principal and interest are stated and paid in US dollars
Euro dollar Bond
127
Return/investment
Current yield or current return. If a client asks for the current return on a stock return in this case would mean the dollar amount of the dividend payment divided by the current market price of the stock.
128
Annual interest - (premium/discount / years to maturity)
/ average price of the bond (price paid + par value /2)
Yield to Maturity
129
The higher the coupon rate, the shorter the duration, and the lower the coupon, the longer the duration
Note. The longer the duration, the greater the market price movement and vice versa. Long duration debt Securities have greater interest rate risk than those with a short duration
130
The following are general characteristics of what?
- the lower the coupon rate, the longer a bonds duration; the higher the coupon rate, the shorter the duration.
- the longer a bonds maturity, the longer the bonds duration.
- for coupon bonds, duration is always less than the bonds maturity
- duration for a zero coupon Bond is always equal to its maturity
Duration
131
Ordinary income includes:
Wages, interest, and qualified withdrawals from retirement plans.
132
- the discount in price must be accreted
- this accreted interest is then added to the cost basis each year
Original Issue Discount (OID) bonds
Note. The accreted interest is not taxable. Remember, municipal don't pay owe federal tax on interest payments.
133
A client purchased an OID. What are the tax implications if held to maturity?
At maturity, since the cost basis is equal to the redemption price (par), there's no capital gain.
134
A zero-coupon municipal bond, should be considered an ?
OID bond.
135
True or False. If a municipal bond is purchased at a discount in the secondary market (a discount caused by market conditions) and held to maturity, there will be a taxable gain at maturity. The gain is reported as ordinary income
True
136
In finding the breakeven points in Spreads, remember CAL and PSH:
- for **C**all spreads: **A**dd the net premium to the **L**ower SP
- for **P**ut spreads: **S**ubtract the net premium from the **H**igher SP
Note
137
Determine the breakeven for a credit put spread
An investor establishes a spread by going long 1 XYZ MAR 30 put for a premium of 2 and short 1 XYZ MAR 40 put at 9.
Breakeven = 33 (40 -7)
Take the net premium and subtract from the higher strike price (40)
Example
At 33
The investor would have to buy at 40 making this a 7 point loss offset by the 7 net premium.
138
Calculate tax basis in an LP (DPP)
Investment in partnership + share of recourse debt (+ non-recourse debt in real estate DPPs) - cash or distributions
139
Is the point at which the program begins to generate taxable income instead of losses.
Cross over point.
Tends to occur in later years when income increases and deductions decrease.
140
Dividends are paid out of ___ income.
**Net income** after taxes have been paid.
141
Tangible assets - liabilities - preferred shares
÷
Share of common stock outstanding
Book value per share.
Basically the liquidation value of the enterprise
142
Current assets - inventory / current liabilities
Quick ratio or acid test ratio
Measures a company's ability to meet its short-term obligations
143
Annual dividends per common share
÷ EPS
Dividend payout ratio
Measures how much of retained earnings is paid out to investors
144
The statement of cash flow reports a business's sources and uses of cash and the beginning and ending values for cash and cash equivalents each year.
What are the three components generating cash flow?
- operating activities
- investing activities
- financing activities
145
Current market price of a common share / EPS
P/E ratio
Provides investors with a rough idea of the relationship between the prices of different Common Stocks compared with the earnings that accrue to one share of stock
146
If a Stock's market price and PE ratio are known, the EPS can be calculated as follows:
Current market price of common stock / P/E ratio
147
Growth managers expect to see high PE ratios or high price to book ratio with little or no dividends. On the other hand, value managers expect to see a low PE ratio or low price to book ratio and dividends offering a reasonable yield
Note
148
One round lot = _, anything less than _ = an odd lot
One round lot = $100, anything less than $100 = an odd lot
149
How do I calculate the market maintenance ?
Meaning, how do I know my margin balance has become a problem and I may be called?
Debit balance / (1 - .25)
This gives us the long market value at its reg t requirement of 25%
150
Maintenance calls in a margin account are due?
Promptly
Remember, a maintenance call is when the bank issues you a call to maintain your account.
A margin call is the initial purchase requirement of 50% which the investor has T+4 to meet.
151
What is a margin call?
The initial purchase requirement of 50% for a Long purchase.
Aka reg t requirement.
Investor has T+4 to meet this requirement
152
Calculate NAV per share
A funds total assets - minus total liabilities / # of shared currently helf by all investors.
153
Federal law requires redemption at NAV within _ days
7 days
154
An active and widespread solicitation by a company or third party to purchase a substantial percentage of the company's securities
Tender offer
Bitters May conduct tender offers to acquire equity in a particular company or debt issued by the company
155
Explain the dividend exclusion rules
- if a C corporation has ownership stake of 20% or more, but less than 80%, it can deduct 65% of dividend income received
- 50% of dividends can be excluded if the ownership stake is less than 20%
- ownership stake of 80% or more can the dock the full amount of dividend received and have no income tax liability on that portion of their income
156
The rights and obligations of limited and general partners are found in the
Agreement of limited partnership
157
The document through which an individual applies to become a limited partner
Subscription agreement
158
For private placements, this document is a disclosure that serves the same purpose as a prospectus
Offering memorandum
159
- have an ongoing requirement to calculate their net asset value
- shares don't trade in the secondary Market on Exchange instead, investors are allowed to sell a portion of their shares back to the fund at the current net asset value only at preset intervals
- can provide individual investors with access to Alternative Investments
- their fees and expenses tend to be much higher than other closed-end funds and mutual funds
Interval funds
