S7 Flashcards
Who attests to the legality of a bond issue and issues a legal opinion on a proposed new municipal bond issue?
Bond counsel - The issuer hires a firm or an individual to act on its behalf as bond counsel
If a customer buys a municipal bond at 110, maturing in eight years, but sells the bond six years later at 103½, the customer will have
a$10 per bond gain.
Municipal bonds that are purchased at a premium must be amortized. This bond has a premium of $100, which over eight years, amounts to $12.50 per year. The cost basis of the bond at the time of the sale is $1,100 − (6 × $12.50), or $1,025. If the bond is sold for $1,035, the customer has a gain of $10 per bond.
From time to time, an investor’s situation arises where they may need to liquidate a portion of the portfolio. It could be a medical need, an emergency repair, or a joyous event such as a wedding. Getting the necessary cash would be most difficult from which of the following holdings?
A)A unit investment trust
DPP
A mutual fund
A listed option
When it comes to liquidity, at least for the exam, DPPs rank near the bottom of the list. Mutual funds and UITs are redeemable by the issuer, and closing a position in an option contract settles the next day.
Which of the following best describes how a syndicate determines the amount to bid for a new municipal issue?
The average reoffering price minus the spread
A spread is analogous to the gross profit margin in other businesses. A syndicate’s bid is based on the average reoffering price (the price the public will pay) less the syndicate’s spread (the amount the syndicate will charge for bringing the issue to market).
According to investment company rules, open-end investment companies may not distribute long-term capital gains to their shareholders more frequently than
Annually, Under the Investment Company Act of 1940, investment companies may not distribute long-term capital gains more frequently than once per year.
There are several conditions found in the Securities Act of 1933 permitting the offering of control stock to the public without filing a Form 144. Included in that list are
5,000 shares or fewer are sold.
the dollar amount is $50,000 or less., de minimus
When must a new options customer return a signed option agreement?
Within 15 days of the account approval
Better Bond Sales (BBS) is participating in a firm underwriting of some GO municipal bonds. Their role is that of a syndicate member with a 10% commitment. Should BBS sell some of the bonds, its earnings would be
the total takedown.
The syndicate manager is the only participant who earns the spread when it makes the sale. Syndicate members earn the total takedown (all the spread other than the manager’s fee) when they sell the bonds. That includes the takedown plus the additional takedown. The selling group members earn the selling concession.
ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should
tender the bonds.
The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50). Once the call date passes, the issuer ceases interest payments making it unattractive to continue to hold the bonds.
According to MSRB rules, a control relationship would exist between a municipal securities firm and an issuer when
an officer of the firm is in a position of authority over the issuer.
MSRB Rule G-22 deals with control relationships. Their interpretive letters indicate that it is only when the individual has the authority to exercise control that the disclosure rules apply. Here is how they put it: “For example, rule G-22 applies if the associated person is the chairman of an issuing authority and, in that capacity, actually makes the decision on behalf of the issuing authority to issue securities. The rule does not apply if the associated person as chairman does not make that decision and does not have the authority alone to make the decision, or if the decision is made by a governing body of which he is only one of several members.”
Which of the following are part of the depreciable basis of a limited partner in a real estate direct participation program?
Buildings and A/C equipment
Only fixed plant (buildings) and equipment can be depreciated. Land, as well as any up-front costs charged to the limited partners, cannot be depreciated. Those nondepreciable costs, however, are part of the limited partner’s beginning basis but not part of the depreciable basis.
Under what circumstances will a dilution of equity occur?
The conversion of convertible bonds into common stocks
Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued, and the shareholder’s equity is diluted. A stock dividend or stock split does not change a stockholder’s percentage of ownership. Refunding debts has no effect on stockholders.
A C corporation’s income statement renders the following information:
Earnings before taxes (EBT): $2 million
Interest paid on its outstanding debentures: $200,000
A footnote indicates that the corporation received $100,000 in dividends from preferred stock issued by other corporations.
Based on this information, this corporation will be taxed on income of
$1,950,000
The EBT of $2 million represents the bottom line after all expenses other than taxes have been paid. If the question referred to EBIT (earnings before interest and taxes), then the $200,000 of interest would be deducted, but EBT has already subtracted that expense. Part of the $2 million is the $100,000 of preferred stock dividends from other issuers. Remember the 50% dividend exclusion available to C corporations. That means only $50,000 of that $100,000 will be taxable, leaving the corporation obligated to pay taxes on $1,950,000.
An investor opens the following options position: Buy 1 BOB Jan 60 call @4; Buy 1 BOB Jan 55 put @2½. What is the investor’s maximum gain, maximum loss, and breakeven point?
Maximum gain is unlimited; maximum loss = $650; breakeven points are $48.50 and $66.50.
The first step is to identify the position. This is a long combination—a long put and a long call with different terms. That means we are going to have two breakeven points. The maximum gain is unlimited because one of the positions is a long call. The maximum loss is the amount paid for the combination (the two premiums totaling $650). Breakeven follows the call-up and put-down rules. Add the premium to the strike of the call ($60 + $6½ = $66.50) and subtract the premium from the strike of the put ($55 ‒ $6½ = $48.50).
An investor opens the following options position: Long 1 RAV Mar 50 put @5¾; short 1 RAV Mar 45 put @3. What is the investor’s maximum gain, maximum loss, and breakeven point?
Maximum gain is $225; maximum loss is $275; breakeven point is $47.25.
The first step is to identify the position. This is a debit put spread. It is a debit spread because the option purchased cost more than the one sold. The debit of $275 is the most the investor can lose. This is a bear put spread. We know that because the investor purchased the option with the higher strike price and sold the one with the lower strike price. The goal is for the stock’s price to decline to the point where both options are exercised. For example, if the market price of RAV should fall below 45, the owner of the 45 put will exercise, causing the seller to purchase the stock for $4,500. The seller can then exercise the long 50 put and deliver the stock purchased at 45 for 50. That is a profit of $500 less the cost of the options (the debit of $275). The breakeven point follows the put-down rule. Subtract the net premium (the $2.75 debit) from the higher strike price resulting in a breakeven point at $47.25.
A municipal bond, issued with a covenant that states, “If revenue collections are not sufficient to meet debt service requirements, the issue will be backed by the full faith and credit of the municipality,” is known as
a double-barreled bond.
When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, this is referred to as a double-barreled bond.
A corporation coming out of a bankruptcy proceeding would probably find it most attractive to issue
an income bond.
Income (or adjustment) bonds carry the unique characteristic of requiring payment of interest only when the issuer’s income is sufficient. They are used primarily for companies undergoing a financial restructuring, usually after a bankruptcy filing. Each of the other choices would require timely payment, and failure to do so could result in the company’s failure.
Your customer wishes to invest in a security that will pay a specific level of dividends, but may also receive additional dividend amounts, should the underlying company have outstanding performance. Which of the following securities would best match this customer’s objectives?
Participating preferred stock
Participating preferred stock provides a stated dividend amount (as a percentage of par value) plus the opportunity to receive additional dividends, based on predetermined conditions, such as the profitability level of the underlying company. Although the convertible stock offers the possibility of capital appreciation due to its linkage to the common stock, that has no effect on the dividend.
Accretion
Increase in value by means, represents the amount of “imputed interest
Breakpoint
Occurs when an investor receives a reduced sales charge based on a quantity of investment
Rights of reinstatement (ror)
A fund family may allow customers to redeem or sell shares in a fund and reinvest some or all of the proceeds without paying a sales charge or recoup some or all of a contingent deferred sales charge.
To be eligible for a ROR all just apply.
- Reinvestment must be made within a specified period of time. Example 90. But vary a reps find families
- The redemption and reinvestment must take place I. The same account.
- The redeemed shares must have been subject to a front end of deferred sales charge
- The redemption and reinvestment must comply with any other terms and conditions required by certain investment companies. (Reinvestments must be made in the same share class of the redeemed.
Nav transfers.
Transfers within a family of funds without paying another sales charge.
Short form registration
Limited size offering.
Tier 1. 20m
Tier 2. 75m
Insider provision
An officer. Directory. Or principle stockholder (owns more than 10% of the outstanding shares) I.e. affiliated or control person.
Regulation crowdfunding (reg c)
The jobs act allows start-up companies to offer up to 5m worth of common shares with thin a 12 month period without being required to register with the SEC.
Good till canceled (GTC)
The order reminds in effect until it is executed or cancelled and is also called an open order.
Stop order
Memorandum order from a customer that becomes a market order if a trade takes place at or through the price stated in the memorandum. A stop order will protect a profit or limit losses on an existing position but cannot assure a specific price of execution.
A stop order can be used to protect a
Long position by using a sell stop order
Short position. By using a buy stop order
Sell stop order
A stop order. Also referred to as a stop-loss order is an order to but buy or sell a stock once the price of the stock reaches a specified price. Known as the stop price. When the stop price is reached, a stop order becomes a market order.
Buy stop order
Am instruction from an investor to a broker to buy a certain amount of a security. Buy orders may take various forms. For example l, an investor may instruct the broker to buy immediately at the best available price, or to wait until a certain price is reached.
Taping rules.
FINRA RULE 3170. To record conversations between clients and registered persons.
Spoofing
A form of market manipulation i which a trader places one or more highly visible orders but has no intention of keeping them.
Structured cds
Are tied to seers such as equities, commodities, currencies, and are held for 5-7 years. Usually held to maturity
Forex markets
The spot or cash price of each currency is used to determine the value or each currency being traded. The interbank market is a component of the broader forex market.
RMD
Must begin no later than April 1st following the Calendar year in which the owner reaches age 72. Late distributions are subject to a 50% penalty tax on insufficient distributions.
Traditional ira’s have an RMD
Roth IRA does not have an RMD
Reg d rule 504
Any trust or charitable organization. With total assets in excess of 5m is considered to be an accredited investor for purposes of private placements. (Changed to 10m)
Two types of voting for shareholders
Regular / statutory - receive one vote per share per director. Beneficial to large stockholders
Cumulative / block voting - shareholder receive or vote per share times the number of directors. Beneficial for smaller stockholders.
If a company goes into liquidation. Here is the order.
TSUPC
taxes / secured debt / unsecured debt / preferred stockholders / common stockholders
What type of stock has the best capital appreciation against inflation
Common stock
What is a normal round lot
100 shares of common stock.
What type of stock is callable
Preferred
How do you calculate outstanding stock.
Issued stock - treasury stock
Authorized stock
Max number of shares of stock that is slowed to be sold (issued) usually an ipo. You usually don’t sell (issue) more than is authorized
Issued stock.
Amount of stock taken from authorized stock that is sold or issued to the public in a primary distribution. Usually I’m a secondary market
Treasury stock
Repurchased stock from the company. Appears in the balance sheet as a deduction from issues stock basically buying its own shares back from the market.
Appears on the balance sheet as a deduction from issued stock.
The board of directors makes the decision to repurchase shares.
What are the reasons to buy back a stock into treasury
- Increase earning per share
- Finance future acquisitions
- Provide stock for employee stock option plans
- Fight a takeover attempt.
Treasury securities
Treasury notes and bonds.
Remember bnb
Long
Buys. Expects to go up.
Short
Borrow, expects to go down. Bearish
How much is a point on a stock
$1
what is regular way settlement on a stock
the day in which a common stock is settled (t+2) two business day after trade date
what is reg T settlement
requires that payment for purchases of securities must be received by t+4 4th business day
what is a cyclical stock
auto manufactures steel companies, appliance manufactures, housing companies, paper companies, tool and die manufactures (moves with the economy)
counter cyclical stock
gold/silver mining companies, budget retailers, temp agencies
defensive / non-cyclical stock
no growth or increase. example coca cola, tobacco, companies, pharma
Utility Stock
not afraid of loosing customer base. companies that provide gas, water, electricity. offer high dividends but less capital appreciation (growth)
what type of stock dividends would be impacted by interest rates the most
utility stock dividends
what form is used to report dividends paid
US dollar form 1099b
what is the primary purpose of stock splits
increase marketability of the stock by reducing the market price
investors will receive new certificate for additional shares
par value decreases
*outstanding common shareholder must vote to approve stock split
when publicly traded company approves a stock split, the transfer agent maintains an accounting of the shareholders who are entitled and not entitled to the split
applies to options as well
what is a forward stock split
2:1 larger number in front / price of the share goes down
formula 2/1 (split ratio) x #of shares /1 = new shares
new price orig shares x price/ new amount of shares
reverse split
larger # in the back 2:3 / price of shares goes up
formula 2/3 (split ratio) x #of share / 1 = new shares
new price orig shares x price / new amounts of shares
warrants
long term
right
short term
debentures
bond not backed by any hard assets
rights formula
outstanding shares / new shares = # of rights needed to purchase each new share of stock
the if a client has x share, divide that by the # of rights needed
example.
1M shares outstanding, the company wants to issue 250k new shares
1m / 250k = 4 rights.
stock holder owns 1,000 share
1000 / 4 rights = 250 new shares
warrants
always a want to, no initial value,, warrants guarantee’s to buy a common stock at a certain price usually for 10/20/30 years
example a company IPOs at $20 you buy warrants guaranteeing you can buy a share at $30 in the future. basically, the warrants hold no value, unless the stock price goes up in the future.
rights
always a have to- short term privaledge granted by a corporation to existing common shareholders which gives them the opportunity to subscribe to a proportionate number of newly issued shares. receive one right per share, max maturity of 90 days
equity options
a contract that entitles the buyer to either buy or sell shares of the underlying stock for a specific period of time at a set price
preferred stock
is a fixed income security, dividend is fixed. pays a set dividend stated as a % o par ($100) or in a fixed dollar amount
preferred stock has priority over common stock in receiving dividends and sharing assets if the corporation is dissolved.
no voting rights
less volatile than common
less appreciation
may be converted into common stock at the option of the stock holder
preferred stock call options
callable by the corporation that issued it. may be redeemed by the issuer at a set premium over the par value, after a specified date. most preferred stock is callable.
characteristics of preferred stock
cumulative
convertible
participating - dividends are fixed to a minimum but not a maximum amount
callable
how are dividends paid on common and preferred stock
cash
company owned stock
stock owned of other companies
treasury stock
products
dividend paying securities
common stock
preferred stock
mutual fund shares
ADR
not on warrants or bonds
interest payments on bonds ae a have to
DERP
declaration date - date the dividend is declared by the BOD. becomes a liability on the balance sheet of the issuer
ex-dividend date - must own the stock before the ex dividend date to claim dividend. if you own a stock after the ex dividend date, you will not claim the dividend
record date - date the corporation closes the updating of the stock book
payable date - date the dividend is actually paid out.
exception - the ex date for “cash” transactions is the business day after the record date.
dividend per share preferred stock formula
par value x dividend% = dividend per sahre
x # of shares
example
Mr. Jones owns 100 shares of 5% XYZ preferred stock, trading at $50 per share. Par value of the preferred stock is $100. How much will Mr. Jones receive in annual dividends from his stock position?
$100 par value x .05 = $5 per share
$5 per share x 100 shares = $500 annual dividend income
for stock dividend
An investor owns 200 shares of ABC common stock purchased at $50 per share. ABC decides to pay a 5% stock dividend. ( KEY WORD)
How many shares would the investor own after the dividend?
10 shares 200 x .05= 10 shares answer is 210 shares
What would be the new market price of the stock?
200 shares x 50 = $10,000
10,000/210 shares = $47.62 new market price
Current Yield on Common stock
Annual Dividend = Current yield %
Market Price
what is a REIT
Real Estate investment trust
invests in long term mortgages
own real property
make short term real estate construction and development loans
invest in others REITS
how does a REIT avoid double taxation
pays 90% of income to shareholders
75% of assets in real estate related activities
if satisfies, REIT don’t pay corp taxes
considered to be an income equity security. seek income and capital appreciation.
how are REITS taxed
ordinary income tax, regulated under investment act of 1940
Direct Participation Programs DPP
DPP are investments which allows certain tax advantages.
limited partnership is the primary vehicle used for DPP
General Partners - manage the entity and have unlimited liability
Limited partners - limit their liability to the amount of their risk investment in the entity
Adjust cost basis - an investor cost of basis in a partnership interest is increased and decreased but certain items and is referred to as adjusted basis.
adjusted basis in important to a limited partner because limited partners can never write off more than the adjusted basis
Advantages / disadvaages of DPP
taxation
Single tax status
File federal tax return, but does not pay federal income taxes.( Limited Partnership)
No double taxation of profits.
Form K-1 are issued for tax purposes.
Limited liability- capital risk is normally limited to the investors initial cash investment
Depreciation- capital costs (building and machinery) can be depreciated
Flexibility- DPPs have flexibility concerning the types of investments available.
Diversification- financial risk and professional management.
Disadvantages of Dpps
Lack of liquidity- limited partners may not sell their interest in the partnership back without restriction(unlisted).( Investors who do not need liquidity)
Lack control- limited partners lack control over management( general management)
Tax code changes- possible changes in the tax code.
Loss of investment- loss of all or part of the investment.
Assessment- possible assessment of additional funds.
IRS scrutiny- additional IRS scrunty(abusive tax shelters)
AMT consequences- potential alternative minimum tax consequences.
Considerations-
possible loss of principal
general partner ability with potential conflicts of interest between partners
possible changes in the federal tax code
projected rate of return
The financial condition of other limited partners would not be a consideration in the customers evaluation of a DPP.
Dividends per share
Dividends paid to common shareholders / Outstanding common shares
Dividend Payout Ratio
measurement of what percentage of a company’s earning(not income) it pays out to its shareholders in the form of dividends.
dividends per share / earnings per share
Retained Earning
Retained Earning- net income minus dividends paid to shareholders. An increase in Retained Earning would result in an increase to shareholders equity on the company balance sheet.
net income - dividends paid = retained earnings
When an investor purchases a bond, they pay
Market Price + Accrued Interest
- Calculated on a 30 day month/360 day year / for corp and muni
- Paid up too but not including settlement date
Settlement date is 2 business days after the trade date.
Municipal Bonds
( TAX FREE)
Bonds issued by state and local government entities such as cities, counties, school districts, authorities and the state.
Interest is exempt from federal income tax
May also be exempt from state and local income taxes.
