Others Flashcards
Alternative Minimum Tax (AMT)
To ensure that high-income taxpayers do not escape federal income taxes
When a couple sells their primary residence, you can exclude how much capital gains from your income if you are single, and married jointly
$250k if you are single
$500k if you are married
criteria: primary residence for at least 2 of the past 5 years
If adviser solicitor is getting paid, they have to do what?
provide adv
provide solicitor disclosure which must be signed by the client
when they get paid, they have to be registered
Can a business property be placed into IRA?
Yes. Like a rental house … that income goes into IRA
Straddles
You don’t know if the price is gonna go up or down, so you buy both call and put to profit from the volatility.
What are 1, 2, and 3 standard deviations?
68%, 95%, 99.7%
Warrants
Warrants: option to buy shares at a slightly premium price, but with a long period (10 years). They are not sent to shareholders. They are usually attached as a sweetener.
Options vs Warrants/Rights
Options originate from exchanges, rights/warrants originate from issuer
US vs European Options
US: can exercise option at any time
European: last trading day before the expiration
Workers’ compensation
a government-mandated program that pays benefits to workers who become injured on the job
Credit spread
difference between yields of bonds with similar maturities but different ratings
Alimony tax
Before 1/1/2019: alimony is income to the recipient and tax deduction for the payor
Inflation risk vs Interest risk vs Purchasing power risk
Interest risk is related to changes in principal due to interest. But if a security can’t be traded, then there is no impact on the principal. So CD has no interest risk.
Inflation risk = purchasing power risk
Margin accounts and its minimums
You borrow money to trade
25% long
30% short
Commingling
securities that are held in a customer’s name must not be mixed with securities of the firm
When can you take money out of IRA without the 10% penalty?
A distribution from an IRA taken in equal annual amounts over the owner’s life is not subject to the 10% premature distribution penalty even if started before age 59½.
What happens to your IRA when you die?
Spouse: can roll it into their own or continue
Non Spouse:
Withdraw all the funds immediately
Open a separate inherited IRA
Withdraw over a 10 year period
Muni bonds are best fit for whom?
High tax bracket people
What type of security is best for inflation protection?
TIPS
Mid cap stocks
What do books/records mean? The two numbers …
maintained in readily accessible place for 5 years. 5 year period will run from the end of the fiscal year during which the last entry was made on the record. During the first two of the first 5 years, records be maintained in the principal office of the adviser.
How much of your capital loss can you apply against ordinary income?
$3k
Cumulative preferred
you continue to accumulate dividends even if the company stops for a while due to some difficulties. When it starts paying again, yours is accumulated.
Entanglement vs Adoption
Entanglement: material posted to social media by a 3rd party but the securities pro has helped prep for
Adoption: firm has endorsed it but played no part in its prep
Strategies: Bullet vs Ladders vs Barbells
Bullet: aiming at a target
kid ‘s fund: kid’s 8 today, target is 18, so 10 years
Today you buy a bond that matures in 10 yrs
Next year you buy one that matures in 9
Ladders
Bonds are bought at the same time but mature at different times
Barbells:
Some mature in 1 year, some mature in 10, nothing in between
ESG
environmental, social, corporate governmence
Financial leverage
A company’s ability to use long term debt to increase its return on equity. Like buying a house or borrowing money to buy a larger house. Use debt to equity ratio … if it’s 50% or higher then it’s highly leveraged.
REITS needs to have X% of its assets in real estate assets?
75%
Junk bonds
high yield bonds offered by those with low credit ratings
Wash sale – how many days?
if you sell and then buy a security within 30 days, the loss can’t be used as realized loss
What are 3 items on cash flow statement?
operating activities, investing activities, and financing activities
On the cash flow statement, what is income from interest/dividend considered as?
Operating activities
On the cash flow statement, what is purchase/sale of land/buildings considered as?
Investing activities
On the cash flow statement, what is issuing bonds or repurchase stock considered as?
Financing activities
QDRO only applies to what kind of retirement fund?
401k, not IRA
Books/records: apply for BD/IA, or Agents/IARs?
BD/IA
IA: what are the rules regarding maintaining record for website?
3 yrs. If you make a change, it restarts
Market risk = ?
Business risk = ?
Reinvestment risk = ?
Market risk = systematic risk
Business risk = single company
Reinvestment risk: a variable of interest rate risk … i buy a bond w/10% coupon, reinvest my interest at 5%
Investment Company Act of 1940
all investment companies to register w/SEC
Are wills, estates, and trusts not securities?
no
Name 2 ways to get a discount on mutual fund sales charges
Breakpoints: tiers, you get a discount
LOI: sign LOI that you’ll reach the breakpoint in a time frame
What is a minus beta?
+1.2: if SP500 moves up by 10%, this will move up by 12%
-1.2: if SP500 moves up by 10%, this will move down by 12%
Formula for alpha
[actual portfolio return - risk free rate] - [portfolio beta * (market return-risk free rate)]
Can IA registration fee be prorated?
No
What does SIPC cover?
If you own cash, they cover up to $250k cash.
If you own securities, they insure assets, not value.
Rule 144
if a married couple (individually or jointly) owns a combined 10% or more of a corporation’s voting shares, they are considered affiliates and have to file form 144 to sell
What’s great about money market fund?
Liquidity – you can write checks
Margin accounts: what happens if the client can’t be reached to satisfy the margin maintenance?
The only way to satisfy the margin maintenance call is through the liquidation of shares in the account. The broker-dealer determines which securities are to be liquidated.
What is churning?
conducting excessive transactions in a customer’s account for the purpose of generating commissions and is prohibited
Formula for working capital
working capital = CA - CL
Key here is current!
Formula for expected return
Expected return = [return of the market - risk free rate]*beta + risk free rate
In order for an individual to receive Social Security benefits based on the earnings of the ex-spouse, the couple must have been married for at least X years?
10
How are dividends taxed?
Ordinary dividends: income tax
Qualified dividends: as capital gains, max rate of 15%
Options: draw the 2 graphs for selling a call and selling a put to show max loss/gain
How do variable annuity units work?
When you buy variable annuity, you buy a fixed number of annuity units. During payout, the number of these units don’t change. The value changes.
Variable to whole life, how do you exchange?
You can exchange it, for up to 2 years after getting VLI
What does discretionary cover and don’t cover?
Covers: # of shares, what securities
Don’t cover: time and place
Covered accounts
bank accounts for personal stuff, like checking. Covered to prevent you from id theft/fraud.
What’s not allowed in IRA
Collectibles (minus some treasury coins)
Life insurance
Bonds
Who can give UTMA?
Any custodian
What does Customer Identification Program ask?
name
address
DOB
ssn
Is REITS an investment company?
no
Matched orders
manipulation – when one or more broker-dealers engage in buying and selling between themselves for the purpose of creating the misleading appearance of increased activity in a security – it’s volume manipulation
Wash trades
manipulation – manipulate a security’s price by creating an apparent interest in the security that really does not exist !!! wash sale is different from wash trades!!! Volume and price manipulation
Dividend Payout Ratio
(dividend per share) / (earnings per share)
Futures vs Forwards
Forwards are used by producers. Futures are used by speculators. That explains why such as a small percentage of futures contracts ever end with delivery.
Keogh plans
retirement plan for self-employed and owner/employees of unincorporated
Qualified plan
refers to employer sponsored plan such as 401k, pension plan, or Keogh plan. Not IRA
Direct Participation Program (DPP)
is a type of alternative investment: limited partnerships … all the economic consequences of a business to flow through to investors.
Film partnerships is an example
Can an IA can charge both advisory fee and commission?
Yes
Sell stop-limit order at 60: trades occur at 62.12, 60, 59.95, 60.06, 61
60.06
Name 3 investment objectives
Growth
Income
Preservation
Investment constraints
Time horizon
Liquidity
Taxes
Law/regs
Preferences
Comprehensive plan
a comprehensive always includes securities. So anyone advising them, whether it’s a financial planner or insurance agent, needs to be registered as IAR.
Why is S-corp not ideal for fundraising?
because it’s limited to 100 US residents
Commercial paper vs bonds
Commercial paper is short term, purpose is to meet short term liquidity needs
What exactly is Money market?
high quality, short term debt security with maturity of 1 year or less
Tactical vs Strategic
Tactical: short-term adjustments in consideration of current market conditions
Strategic: proportions of investments composing a long term investment portfolio.
Can agents register as IAR with other firms?
Yes
Wrap accounts
firm provides a group of services (asset allocation, management, executions) for a single fee
What happens to your estate if you die without a will?
state will appoint someone as admin of the estate
What’s safe harbor?
The trustee of 401k can reduce her ERISA fiduciary exposure and meet the safe harbor if the plan includes a broad index fund, bond, and cash equivalents.
Can IAR or Agents share gains/losses in a customer account?
Agents yes
IARs no
Front running
unethical practice of placing a personal order ahead of a previously received customer order
SEC suspending trades
all trades: must notify POTUS
individual security: 10 days w/o notification
Equity REIT vs Mortgage REIT
stock vs bonds … Equity REIT gives both income and growth
Price to book ratio
market price of a stock / book value of a stock
low ratio = value stock
Prime rate
“friendly” interest offered by banks
Nonqualified stock options (NSO) vs Incentive Stock Options (ISO)
Nonqualified Stock Options (NSO)
Profit you earn shares*(market price - exercise price) is treated as income
Incentive Stock Options (ISO)
When you exercise, no income is recognized
If held for more than 2 years after grand and 1 year after exercise: taxed as capital gains
Otherwise it’s taxed as ordinary income
Can you sell muni bond from State Y to a resident in State X?
Yes
Name 6 types of investment companies
Open ended
Close ended
UIT
ETF
Money Market
Hedge funds
Can an investment company hire an outside firm to manage its portfolio?
Yes.
The contract is for 2 years and must be renewed every year, and must state the adviser’s compensation.
Can an investment company own another investment company’s shares?
Yes, max 3%
GNMA
Kinda like a CMO but offered by US government, provides monthly income
GNMA vs Treasury/Corporate bonds
GNMA pays monthly
Treasury/Corporate bonds pay semiannually
Can 2 agents from the same BD share commissions?
Yes
Can you be an IAR and an agent?
Yes, but you have to disclose to customers and get consent
What part of the ADV form can you use as a brochure?
Part 2
How are nonqualified annuities taxed?
Income tax on the gains + 10% penalty on the gains (if you withdraw before 59.5)
Sharpe Ratio
Sharpe ratio = (actual return - risk free return)/sd
It provides risk-adjusted returns
Higher the better
Custody
Adviser must send quarterly report to the client
And arrange annual audit and forward that to the SEC
And be named as agent/trustee for a client’s account
Dividend Growth Model
It’s like dividend discount model, but assuming that dividends grows at a rate
Discretion of time and day
Only good for that day!
401k loans, repay period?
5 yrs
Constant dollar
inflation adjusted dollar to measure true GDP
Efficient frontier vs optimal portfolio
frontier is a graph, optimal portfolio lies on the graph
Government agency bonds
they are not direct obligation of the US government (except for GNMA)
Distributable Net Income (DNI)
when it comes to a trust or estate, the taxable income is DNI
= all minus reinvested capital gains - fees
Ex:
Taxable interest = 1.5k
Dividends = 2k
Tax exempt interest = 3k
Reinvested cap gains = 3.5
So DNI = 6.5k, … when distributed, only 3.5k is taxable
Block trade
10,000 shares or $200k, whichever is less
Annual operating budget for the US - how does it get approved?
The president submits a proposed budget to Congress. Once Congress comes up with an approved version, it is sent to the president. Once signed by the president, we have an approved budget.
Private placements
can be offered to no more than 10 non institutional investors in 12 consecutive months
Is depreciation/amortization on the cash flow statement? If so, where?
Yes, operating activities
Must an IA disclose if his personal securities are inconsistent with the advice given to clients
Yes
$ Limits for Roth and Traditional IRA
6.5K (if older than 50, you can add 1k)
Age Limits for Roth and Traditional IRA
None. As long as you have income.
There is no way that a waiver of legal rights is ever enforceable? Is that right? Even if I sign a waiver?
Yes
Anytime there is an incentive involved in a security offering, the potential conflict of interest shall be disclosed to the potential investor?
Yes
Negotiable CDs
jumbo cds that have a face amount of $100k. Usually institutions buy them
Supervised vs Associated Person at IA
Supervised: every employee
Associated: exclude admin people
Capital goods
tools and equipment that businesses use to make other goods and services
Bond duration
measure of sensitivity of bond to interest rates. So a bond duration of 5 is less sensitive to a bond duration of 10
Brady bond’s collateral
US treasury zero coupon bonds
Supply side theory
heavy taxing and government intervention have a negative effect on the economy
How do you get the risk free rate?
91-day T-bill
Segment rotation
portfolio management that rotates between sectors based on business cycles
Hypothecation Agreement
this document allows the firm to pledge the customers’ margin securities as collateral
Anchoring
base expectations upon the first information received
Regret aversion
preparing yourself in such a way as to avoid distress over a bad outcome
Gift tax limit
an individual can gift up to $16k per person in one year w/o gift tax liability
Whose job is it to supervise IARs?
IA
Liquidy priority
Secured creditors / senior debt like mortgage bonds
Unsecured creditors (debenture)
Subordinated debt holders
Preferred stockholders
Common stockholders
Warrants and Rights can be traded in the secondary market?
Yes
Mutual funds: what’s the price?
The NEXT NAV
Currency Transaction Report
any cash transaction >$10k within 15 days
What’s another leading indicator?
Money supply
Breakpoints (limited to whom?)
unaffiliated groups (like investment clubs) can’t pool their money to receive a breakpoint. Spouses for example can.
Mutual funds: Class A, B, C?
Class A: pay upfront fees (most common)
B: pay at the end
C: ongoing charge
Admins or anyone appointed by the admin have the power to subpoena records/testimony without court approval?
Yes
Coverdell vs 529 vs UTMA
Coverdell:
Pro: earnings are tax deferred
Pro: can do k-12, whereas 529 is only for higher education
Con: limit to $2k per child per year
Pro: broad option of investments
529
Pro: earnings are not subject to federal tax
Pro: parents can use it too
Con: limited choices of mutual funds
UTMA
Earnings taxed to the child in the year earned
Limited partners: their involvement and liability
Do not have the option to manage the business ops
Their liability is limited to the amount they invested or commit to invest
ISOs vs NSOs: can non employees get those?
ISOs can be granted only to employees, but NSOs can be granted to anyone.
The only time an agent can use the word guarantee is …
guarantee of interest, principal, or dividends by a party other than the issuer
Highly leveraged means what?
long term debt > 50% of total capital
Principal transaction
Either the BD buys securities from customers and takes them into own inventory or sells securities to customers from its inventory
When an IAR acts as an agent (or principal), what happens?
BOTH disclosure AND consent are required
Bankruptcy priority
secured debt is also called senior debt (commercial paper is unsecured debt)
To be fully eligible for Social Security:
Min of 40 covered quarters of employment
Agents must be registered w/a state where
he solicit/place orders
coordination/qualification apply to securities that
are not federal covered
ROTH IRA distribution rules
No minimum distribution rules unless the person dies
Tax free if you have contributed for 5 years and you are older than 59.5
Widening yield spread signals recession … why?
because maybe corporate feels that people are getting nervous, and that they need to increase their interest rate to attract you
When selling a security to a public customer, the broker-dealer adds his markup to
ask price
Custody … how to notify?
notify the admin through form ADV
Investment constraints: Name all 5
Liquidity
Time horizon
Regulatory
Unique needs
Taxes
When the rate of inflation slows, the Fed increase or decrease interest rate?
decrease
CAPM
Expected Return = Risk-Free Rate + Beta × (Market Risk Premium)
Deferred tax credits
liability, tax that you owe
What makes the yield of a bond go up?
when the price of a bond falls
What causes the bond prices to fall
supply/demand
If your BD’s registration is revoked, the agent’s registration is
in suspense
Closed-end investment price
price based on supply and demand, not by NAV
The contract between an investment company and its adviser - can’t be terminated with more than X days’ written notice.
60
All IARs are registered w/their state, not SEC.
Prepayment rules for Fed vs State
Fed IA: $1200, 6 months or more in advance
State IA: $500, 6 months or more in advance
TIPS calculation
Payment is made every 6 months
That period payment = original principal * (inflation adjustment, which is made very 6 months) * (annual nominal yield / 2)
Unsolicited orders on unregistered, nonexempt security: is it an exempt transaction?
Yes
Form 13(f)
if you manage a discretionary account of $100M or more in equity securities, you have to file this
AMT vs regular tax
you compute both your regular tax and AMT, and pay whichever is the higher amount
If you had a misdemeanor in one state, and want to apply for IAR in another state where they consider that misdemeanor a felony, you can still apply.
yes
US Treasury quotes
they are quoted in 32nds. So a price of 96.18 is 96 and (18/32) percent of par, or 96.5625% of par value of $1000.
Promoter: 2 requirements
Can’t be statutorily disqualified from registration
Written agreement if >$1k in 12 months
Doesn’t have to deliver a solicitor’s brochure anymore
Coverdell - is there an income limit?
yes
BD fee disclosure template
Not on there are commissions, markups/downs, advisory fees
Who are exempt from Investment Adviser Brochure Rules
registered investment companies (both open and closed) and impersonal advice costing less than $500/year
Yield curve: what moves them
buy → price goes up → yield comes down
Securities that are nonexempt must register unless sold in exempt transactions — what are these exempt transactions?
Unsolicited brokerage transactions
Nonissuer transaction that occur infrequently
Underwriter transactions
bankruptcy/sheriff
Institutional
Private places (no more than 10 persons in 12 months)
2x leverage
this means the return/loss is amplified by 2
An investor purchased a 2x leveraged ETF at a price of $100 per share. So if the index goes up by 10%, your return is actually 20%.
Flexible Premium Variable
aka variable universal
advance/decline theory
advance (# of stocks that went up in value that day), decline (went down in value) … measures the breadth of the market.
name 4 precious metals
gold, silver, platinum, palladium
range for mirco, small, mid, large cap
300m
2b
10b
Par value
the price when it’s issued
Time horizon
length of time the plan is designed to serve. So for someone in their 50s, the time horizon is 30 years.
GNMA vs REITS
REITS pays via dividends, GNMA pays via a pass through of principal and interest.
REITS must pay out at least X% of its taxable income in the form of dividends in order to receive favorable tax benefits.
90
Nonqualified plan
is permitted to discriminate in favor of highly compensated employees
UGMA vs UTMA
UGMA permits only cash/securities, UTMA can hold other stuff like real estate and limited partnership interests
Keogh
unincorporated business, like independent contractors, consultants, freelancers, etc.
Insured bank CDs
have no interest risk because they can’t be traded
Zero-coupon bonds
can be traded, and have the highest interest risk because they have long maturity
Systematic risks
market: measured by a security’s beta … if a war break out, stock market could decline.
interest
reinvestment
inflation/purchasing power
exchange/currency
An IA must meet the capita requirement of its home state only
Giving a security as a bonus is considered a sales
Agent must register wherever they have retail clients or have an office
The internal rate of return is the required return to determine the time value of your money
Tangible goods are a hedge against inflation
Federally covered advisers must make
a notice filing with the state if they have a place of business in the state or have six or more clients in that state in a twelve-month period, regardless of place of business
After the assets have been liquidated, any remaining secured creditors then become general
creditors
TheCEOofXYZ,INC. offers securities of his companytothepublicandtoitsemployeesand receivesremunerationsforthesale.AccordingtotheUniformSecuritiesAct,theCEOA.must register as an agent of theIssuer
Value stocks are characterized by high dividends and stable earnings with low PE ratio
1041 form is to report estates/trusts
529: after tax dollars
There is no limit on gifts between spouses
