Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Series 65 > Series 65 w2 > Flashcards

Series 65 w2 Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 65 flashcards
1
Q

What are the 3 types of registered bonds?

A
  1. Fully registered - Have owner’s name recorded for both interest and principal payments. Owner is not required to clip coupons and issuer will send out interest payments directly to holder on semi-annual basis. Issuer will also send out principal amount at maturity. Most bonds issued in fully registered from in US.
  2. Principal-only registered - bonds have owner’s name printed on bond certificate and issuer knows who owns the bond and who is entitled to receive principal payment at maturity. However, bondholder will still be required to clip coupons to receive semi-annual payments
  3. Book entry/Journal entry - No physical certificate, bonds are fully registered and issuer knows who is entitled to receive interest payments and principal amount at maturity. Only evidence of ownership is the trade confirmation generated by brokerage firm when the purchase order has been executed.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a registered bond?

A

A bond issued in registered form; bond has owner’s name recorded on the books of the issuer and the buyer’s name appears on bond certificate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What must a bond certificate include? (10)

A
  1. Name of issuer
  2. Principal amount
    3, Issuing date
  3. Maturity date
  4. Interest payment dates
  5. Place where interest is payable (paying agent)
  6. Type of bond
  7. Interest rate
  8. Call feature (if any or noncallable)
  9. Reference to the trust indenture
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Once issued, where do convertible bonds trade?

A

Trade in the secondary market similar to other equity securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What does the price of a bond in the secondary market depend on? (8)

A
  1. Interest rate
  2. Coupon rate
  3. Rating
  4. Term
  5. Type of bond
  6. Issuer
  7. Supply and demand
  8. Other features (callable, convertible)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How are corporate bonds always priced? What is par?

A

Always priced as percentage of par value; par value is always $1000 unless otherwise stated. Par value of a bond is equal to the amount the investor has loaned to the issuer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are 2 other names for par value?

A

Principal amount, Face value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the the 3 ways you can pay for bonds in the secondary market? (pricing)

A
  1. Pay $1000 - paid par for the bond

2. Pay $1000 - investor paid a premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How are all corporate bond priced? What is terminology?

A

Priced as a percentage of par into fractions of a percent. Ex: Corporate bond reading 95 actually tranlates into 95% x $1000 = $950.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the 6 bond yield factors?

A
  1. Current interest rates
  2. Term of the bond
  3. Credit quality of the issuer
  4. Type of collateral
  5. Convertible or callable
  6. Purchase price
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What 3 things must an investor know when considering investing in a bond?

A
  1. Nominal yield
  2. Current yield
  3. Yield to maturity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is nominal yield? What is another name? What is the value of nominal yield?

A

The interest rate printed on the bond; coupon rate; stated as percentage of par

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is current yield? What is formula?

A

Relationship between annual interest generated by the bond and the bond’s current market price.
Current yield = Annual income/Market price
Ex: 8% corporate bond if we paid $1100 for bond
Annual income = 8% x $1000 = $80
Market price = 110% x $1000 = $1100
Current yield = $80/$1100 = 7.27%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is yield to maturity?

A

Investor’s total annualized return for investing in the bond. Takes into account annual income received by investor along with difference between the price the investor paid and par value that will be received at maturity, also assumes reinvestment of the semiannual interest payments at the same rate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is calculation for yield to maturity? For discounted bond? For premium bond?

A

(Annual income + annualized discount)/[(Price paid + PAR)/2]; Annualized discount = Difference in amount paid vs. par divided by number of years until maturity
(Annual income - annualized premium)/[(Price paid + PAR)/2]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Calculation for yield to call?

A

Use approximate number of years left until the bond may be called (Yield to call will always extend past the yield to maturity)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is realized compound yield returns?

A

Measures a bond’s annual return based on the semi-annual compounding of coupon payments. (This will largely depend on the purchase price of the bond and the rate at which interest payments are reinvested.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is yield spread? What does its value indicate?

A

Difference of yields offered by 2 bonds. Increase in spread can be seen as an indication that the economy is going into a recession and that the issuers of lower quality debt will likely default; Decrease in spread can be predictor of an improving economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is nominal interest rate, real interest rate, and inflation premium?

A

Nominal interest rate - interest rate on bond (real interest rate + inflation premium)
Real interest rate - interest rate taking into account inflation
Inflation premium - Factors in expected rate of inflation during bond maturities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What do you get paid when bond matures?

A

Principal amount and last semi-annual interest payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are the 3 types of maturity?

A
  1. Term maturity - Payment is made on specific date (most common type of corporate bond)
  2. Serial maturity - portion of the issue maturing over a series of years (typically has larger portions of principal maturing in later years)
  3. Balloon maturity - Repays portion of the issue’s principal over a number of years, just like a serial issue, however with a balloon maturity, largest portion of principal amount is due on last date.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is a series issue?

A

Issuance of bonds spread over a period of years.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What are the corporate bond categories (2)?

A

Secured and Unsecured

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is a secured bond?

A

Backed by a specific pledge of assets (assets become known as collateral for the bond issue or the loan). Trustee holds title to the collateral and in event of default, bond holders may claim assets that have been pledged, trustee will attempt to sell assets in effort to pay bondholder

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What are 3 types of secured bonds?

A
  1. Mortgage bonds - use real estate for collateral
  2. Equipment trust certificates - backed by pledge of large equipment that corporation owns.
  3. Collateral trust certificates - backed by pledge of either securities that issuer has purchased for investment purposes or backed by shares of wholly owned subsidiary (both stocks and bonds are acceptable forms of collateral as long as another issue has issued them.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is an unsecured bond? What is another name for it? How is the holder treated in event of a default?

A

An unsecured bond has no specific asset pledged as collateral for the loan; only backed by good faith and credit of the issuer. Known as debentures. Treated like a general creditor (in event of default).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What are 3 types of unsecured bonds?

A
  1. Subordinated debentures - unsecured loan to the issuer that has a junior claim on the issuer in the event of default relative to the straight debenture. Should the issuer default, the holders of the debentures and other general creditors will be paid before the holders of the subordinate debentures will be paid anything.
  2. Income/adjustment bonds - Corporations usually in severe financial difficulty, issue income or adjustment bonds. The bond is unsecured and the investor is only promised to be paid interest if the corporation has enough income to do so. Because of large risk, interest rate is very high and bonds are issued at a deep discount to par. An income bond is never appropriate recommendation for an investor seeking income or safety of principle.
  3. Zero-coupon bonds - Bonds that pay no semiannual interest. Issued at deep discount from par value and appreciates up to par at maturity. This appreciation represents the investor’s interest for purchasing the bond. Corporations, US government and municipalities all issue zero-coupon bonds to finance their activities. The annual appreciation of the bond is subject to federal income tax (which is known as phantom income).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is a guaranteed bond?

A

Bond whose interest and principal payments are guaranteed by a third party such as a parent company. The higher the credit rating of the company who is guaranteeing the bonds, the better the guarantee.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is a convertible bond?

A

Corporate bonds that may be converted or exchanged for common shares of the corporation at a predetermined price known as the conversion price. Because the bond is convertible, it usually will pay a lower rate of interest than nonconvertible bonds. An investor in this bond maintains senior position as creditor while enjoying the potential for capital appreciation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Converting bonds into common stock equation?

A

Par value/conversion price = Number of shares

Ex: Bonds are convertible into XYZ stock at $25/share, how many shares upon conversion? $1000/$25 = 40 shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What is a stock’s parity price? What are the 2 steps to determine it?

A

Stock’s parity price determines the value at which the stock must be priced in order for the value of the common stock to be equal to the value of the bond that the investor already owns. “Value of stock upon conversion must be equal, or at parity with, the value of the bond”
Determining parity price - 2 steps
1. Determine number of shares (par value/conversion price)
2. Calculate price of each share at parity price (Parity price = Current market value of the convertible bond/Number of shares to be received
Ex: conversion price $25/share and convertible bond quotes at 120
Parity price = $1200/40 = $30 (price stock needs to be in order to be equal.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What are the advantages (4) and disadvantages (4) of issuing convertible bonds?

A

Advantages:
1. Makes the issue more marketable
2. Can offer a lower interest rate
3. If the bonds are converted, the debt obligation is eliminated
4. The issuance of the convertible bonds does not immediately dilute ownership or earnings per share
Disadvantages:
1. Reduced leverage upon conversion
2. Conversion causes the loss of tax-deductible interest payments
3. Conversion diluted shareholder’s equity
4. Conversion by a large holder may shift control of the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What happens if a corporation declares a stock split or stock dividend?

A

Conversion price of the bond will be adjusted accordingly. Trust indenture of a convertible bond will state the maximum number of shares that the corporation may issue while the bonds are outstanding, as well as the minimum price at which additional shares may be issued.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What is Trust indenture act of 1939? Who does this apply to and needs to issue trust indenture for an issue? Who is the trustee?

A

Trust indenture is a contract between issuer and the trustee. States that corporate bond issues in excess of $5M that are to be repaid during a term in excess of 1 year need to issue a trust indenture for the issue. This act only applies to corporate issuers, both federal and municipal issuers are exempt.
Trustee acts on behalf of all the bondholders and ensures that issuer is in compliance with all of the promises and covenants made to the bond holders (Trustee is appointed by the corporation and is usually a bank or trust company).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What are the 2 types of bond indentures?

A

Corporate bonds may be issued with either an open-end or closed-end indenture.
Bonds issued with open end indenture - allow corporation to issue additional bonds secured by the same collateral and whose claim on the collateral is equal to the original price.
Closed end indenture - does not allow additional bonds having equal claim on the collateral; if corporation wants to issue new bonds, their claim must be subordinate to claim of the original issue or secured by other collateral.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What are the 6 factors that affect rating? Who are the two biggest rating agencies? What must a company do to get a debt rated?

A

Rating agencies must look at many factors when assigning a rating to a debt issue:
1. Cash flow
2. Total amount and type of debt outstanding
3. Ability to meet interest and principal payments
4. Collateral
5. Industry and economic trends
6. Management
S&P and Mood’s are the two biggest rating agencies (in order to have debt rated, issuer must request it and pay for the service)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

What are Exchanged traded notes (ETNs)? What are two other names? What is the risk?

A

Debt securities that base a maturity payment in the performance of an underlying security or group of securities such as an index. These do not make coupon or interest payments. These may be purchased and sold at any time during the trading day and may be purchased on margin and sold short.
Sometimes called equity-linked notes or index-linked notes.
Risk factor: ETNs are unsecured and carry the credit risk of the issuing bank or broker dealer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

What are principal protected notes (PPNs)

A

Guarantee return of investor principal if note is held until maturity, these carry guarantee that is only as good as issuer’s credit rating and therefore are never 100% guaranteed (type of ETN).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

What is a Eurobond? Eurodollar bond? Yankee bond?

A

Eurobond = bond issued in domestic currency of the issuer but sold outside of the issuer’s country
Eurodollar = bond issued by a foreign issuer denominated in US dollars and sold to investors outside of the US and outside of issuer’s country
Yankee bond = similar to Eurodollar bond except these are dollar denominated bonds issued by a foreign issuer and sold to US investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

What are the 2 types of variable rate securities?

A
  1. Auction rate securities - long term securities that are traded as short-term securities; interest rate paid wil be reset at regularly scheduled auctions for the securities every 7, 28, or 35 days
  2. Variable Rate Demand Obligations (VRDO) - have interest rate reset at set intervals daily, weekly, or monthly. Interest rate is set by dealer to rate that will allow instruments to be priced at par; investors may elect to put securities back to issuer on reset date.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

What can variable rate securities be issued as? (2)

A

Debt securities or as preferred stock offerings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

What are the 7 ways that a corporate bond can be retired?

A

Retiring corporate bonds:

  1. Redemption - bonds are redeemed upon maturity and principal amount is repaid to investors (also receive last semi-annual interest payment)
  2. Re-funding - Many times corporations will use sale of new bonds to pay off the principal of outstanding bonds (known as refunding corporate debt
  3. Prerefunding - Proceeds from the new issue of bonds are placed in an escrow account and invested in government securities. Interest generated in escrow account is used to pay the debt service of the outstanding or prerefunded issue. One the issue has been prerefunded, the issuer’s obligation under the indenture are terminated (this is known as defeasance)
  4. Exercise of a call feature by the company - call feature gives corporation ability to manage the amount of debt outstanding as well as take advantage of favorable interest rate environments. Most bonds are not callable in the first several years after issuance (call protection.
  5. Exercise of a put feature by the investor - under a put option, holder of the bonds may tender the bonds to the company for redemption. Some put features will allow bond holders to put he bonds to the company for redemption if their rating falls too low or if interest rates rise significantly.
  6. Tender offering - company may make a tender offer in effort to reduce its outstanding debt or to take advantage of low interest rates; companies usually will off a premium for the bonds in order to make the offer attractive to bond holders
  7. Open market purchase - in effort to reduce amount of outstanding debt, may simply repurchase bonds in the marketplace
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

What are municipal bonds? How safe are these, what affects risk?

A

State and local governments will issue municipal bonds in order to help local governments meet their financial needs. Most municipal bonds are considered to be almost as safe as treasury securities by the federal gvmt. However, unlike the federal gvmt, from time to time an issuer of municipal security does default. Degree of safety varies from state to state and from municipality to municipality.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

What can issue municipal securities (4)?

A
  1. States
  2. Territorial possessions of the US, such as Puerto Rico
  3. Legally constituted taxing authorities and their agencies
  4. Public authorities that supervise ports and mass transit.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

What are the types of municipal bonds? (10)

A
  1. General obligation bond (GOs)
  2. Revenue bonds
  3. Industrial development bonds/Industrial revenue bonds
  4. Lease rental bonds
  5. Special tax bonds
  6. Special assessment bonds
  7. Double-barreled bonds
  8. Moral obligation bonds
  9. New housing authority/Public housing authority (NHA/PHA)
  10. Short term municipal financing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

What is a General obligation bond? What are 2 other names? What are they typically backed by and what are they generally for?

A

Bonds that are backed by full faith and credit of the issuer and by their ability to raise and levy taxes. Also called full faith and credit bonds. In essence, tax revenues back the bonds. Usually fund projects that benefit entire community. GO bonds that have been issued by state are backed by income and sales tax while GOs that have been issued by local governments or municipalities by property tax.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

What do General obligation bonds require? What is statutory debt limit?

A

Voter approval - GO bonds are a drain on tax revenue of state or municipality that issues them; amount of GO bonds that may be issued must be within certain debt limits and requires voter approval. The maximum amount of GO debt that may be issued is known as statutory debt limit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

GOs backed by local governments or municipalities are backed by property taxes, how are these property taxes assessed?

A

Based on the assessed value of the property, not on its actual market value; homeowner will have to pay assessment rate at certain percentage determined by town (Ex: 75% assessment rate of $100K is $75K).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

What is overlapping debt? What is it also called?

A

Overlapping debt is when taxpayers are subject ot the taxing authority of various municipal authorities that draws revenue from same base of taxpayers. Also called coterminous debt.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

What is a revenue bond? What 9 things must a revenue bond spell out?

A

A revenue bond is a municipal bond that has been issued to finance a revenue-producing project such as a toll bridge. Proceeds from issuance of the bond will construct or repair the facility and the debt payments will be supported by revenue generated by the facility. Municipal revenue bonds are exempt from the Trust Indenture Act of 1939, but all revenue bonds must have indenture that spells out

  1. Rate covenant
  2. Maintenance covenant
  3. Additional bond test
  4. Catastrophe clause
  5. Call or put features
  6. Flow of funds
  7. Outside audit
  8. Insurance covenant
  9. Sinking fund
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

What are Industrial development bonds/Industrial revenue bonds?

A

Municipal bonds issued for benefit of a private corporation - proceeds will go toward purchasing equipment of building a facility for the corporation. The facility or equipment then will be leased to corporation and lease payments will support debt service of the bonds. Interest earned may be subject to investor’s alternative minimum tax. States are limited to the amount of industrial revenue bonds that may be issued based on population of the state.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

What are lease rental bonds?

A

Lease back arrangement is created when a municipality issues a municipal bond to build a facility for an authority of agency such as a school district.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

What is a special tax bond?

A

A bond issued to meet a specific goal; bond’s debt service is paid only by revenue generated from specific taxes. These are revenue bonds, not general obligation bonds; most supported by “sin” taxes such as taxes on alcohol, tobacco, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

What is a special assessment bond?

A

These will be issued in order to finance a project that benefits a specific geographic area or portion of a municipality (Ex. Sidewalks and reservoirs). Homeowners in the area that benefit will be subject to a special tax assessment, the assessment will be then used to support the debt service of the bonds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

What is a moral obligation bond? Why are two reasons a state may cover shortfall?

A

Issued to build or maintain a revenue-producing facility such as a park that charges an entrance fee. If revenue generated is insufficient, state legislature may vote to allocate tax revenue to cover the shortfall. It doesn’t require that state cover shortfall, but gives option to. Reasons why a state may cover shortfall:

  1. Keep a high credit rating on all municipal issues
  2. Ensure that interest rates on their municipal issues do not rise
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

What is a new housing authority/public housing authority bond (NHA/PHA bond)?

A

Bonds issued to build low income housing. Government will cover any shortfall. Because guaranteed by the federal gvmt, these are considered safest type of municipal bond. Not considered double-barreled bonds because any shortfall will be covered by the federal gvmt, not the state or municipal gvmt.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

What is a double-barreled bond?

A

Bonds that have been issued to build or maintain a revenue-producing facility such as a bridge or a roadway. Initial debt service is supported by use fees generated by facility, however if revenue is not enough, payments will be supported by general tax revenue of state or municipality. Rated and traded like GO bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

What is short term municipal financing? (2) What rating are they given? What are the 4 types of short term notes a state or municipality may issue?

A
  1. Sell short term notes and tax exempt commercial paper. Short term notes are sold in anticipation of receiving other revenue and are issued an MIG rating (1-4) by Moody’s investor service. The types of short term notes a state of municipality may issue are:
  2. Tax anticipation notes (TANs)
  3. Revenue anticipation notes (RANs)
  4. Bond anticipation notes (BANs)
  5. Tax and revenue anticipation notes (TRANs)
    Municipal tax-exempt commercial paper matures in 270 days or less and will usually be backed by a line of credit at a bank.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

What is equation for tax-free yield?

A

(100%-investor’s tax bracket)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

What is equation for tax equivalent yield? What does it mean?

A

The rate at which a corporate bond yield makes more financial sense than a bond offering a tax break
Tax equivalent yield = Rate/Tax free yield
Ex: 7% coupon rate and 30% tax bracket
7%/(100-30%) = 7%/.7 = 10% (corporate bond yield should be >10% otherwise municipal bond has better return)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

What is triple-tax free?

A

Municipal bonds that have been issued by a territory such as Puerto Rico or Guam are given tax-free status for interest payments from federal, state and local income taxes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

What are original issue discount (OID) bonds and secondary market discount bonds?

A

Purchasers in OID bonds as well as those that have been purchased in the secondary market are required to accrete the discount over the number of years remaining to maturity. That is to say the investor must step up their cost by the annualized discount each year.
Annualized discount = Total discount/No. of years to maturity (Ex: $100/10 years = $10 year; Investor who bought $900 with 10 years remaining that sold the bond at year 3 at $925 would have a loss of $5 because cost base would be $930)
If sold as profit, capital gain is taxable as ordinary income for the investor.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

How does amortization of a municipal bond work bought at a premium?

A

Investors who purchase municipal bonds at a premium are required to amortize the premium over the number of years remaining to maturity.
Annualized premium = Total premium/No. of years to maturity (Ex: $100/10 years = $10/year; Investor who buys $1100 with 10 years and in year 3 sold bond at $1075 would have again of $5 because cost base is $1070)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

What is a bond swap/ What is a wash sale?

A

If an investor wishes to sell a bond at a loss for tax purposes, loss will be realized when bond is sold, but can’t repurchase bond that is the same for 30 days after sale is made. New bond must have new issuer, coupon, or maturity which creates a bond swap and not a wash sale.
Wash sale would result in loss being disallowed by IRS whereas bond swap is OK.

65
Q

How do you analyze investing in municipal bonds?

A

It varies from issuer to issuer, investors need to be able to mine the risk of particular issuer or particular bond.

66
Q

How should investor analyze general obligation bonds?

A

Quality of GO bond is largely determined by financial health of issuing state or municipality. Since it is supported through tax revenue received by issuer, therefore risk depends on ability of issuer to levy and collect tax revenue which varies from state to state and municipality to municipality. Should read a state or municipality report before purchasing these bonds.

67
Q

How does duration affect bond rate? What is bond’s duration a measure of and what value is it stated in?

A

In normal interest rate environments, longer term bonds will pay investors a higher interest rate than short term bonds of equal quality. Bond’s duration (stated in years) is a measure of the bond’s price sensitivity to a small change in interest rates.

68
Q

How do longer term bonds relate to shorter term bonds?

A

Longer term bonds with low coupons will generally have higher duration than shorter term or higher yielding bonds (the higher the bond’s duration, the greater the bond’s interset rate risk and greater its volatility).

69
Q

What 2 ways can duration be stated as?

A

Modified duration - assumes a change in interest rate will not affect bond’s expected cash flow
Effective or Call-adjusted duration - change in interest rates may affect the bond’s cash flow if the bonds are callable or have other options for early retirement - this is always lower than duration to maturity.

70
Q

What is formulat for “bond price change percentage”?

A

Bond price change percentage = Duration x (change in yield in basis points/100)
Bond portfolio with average duration of 7 years and interest rates rise 1% (or 100 basis points), portfolio manager can expect price of bonds to fall by 7%.

71
Q

What is Convexity? How do bond prices change in response to interest rate changes?

A

Measures bond’s price volatility to large changes in interest rate.
Bond prices tend to increase in price more and faster when interest rates fall than they would fall in price and slower if interest rates were to rise in a similar amount. Bonds that react in this way are thought to have positive convexity.

72
Q

What are two types of bonds that are thought to have negative convexities? (2)

A

Mortgage backed and callable bonds (as interest rates increase both mortgage prepayments and likelihood the bonds will be called increase).

73
Q

When is convexity a good risk management tool? (2)

A

Convexity is better risk management tool than duration in volatile interest rate environment or when interest rates are low. Also convexity is only important when companies two investments with similar durations.

74
Q

What are the three ways to measure bond portfolio total return? When should each of these metrics be used (what type of holding period)?

A
  1. Coupon return - total of all interest payments received by portfolio plus accrued interest earned during a specific holding period (most important for 2-10 year term holding periods)
  2. Reinvestment return - total interest earned from the reinvestment is in payments during a specific holding period (most important for long term and 2-10 year holding periods).
  3. Price return - the total of the portfolio’s appreciation or depreciation during a specific holding period (most important for short term holding periods).
75
Q

US government is largest issuer of ____ with least amount of ______.

A

Debt

Default risk

76
Q

What is default risk? What is another name?

A

Risk that issuer will not be able to meet its obligations under the terms of the bond in a timely fashion. Also known as credit risk

77
Q

What time period do US government debt security maturities range from?

A

1 month to 30 years

78
Q

What department issues securities on behalf of the federal government?

A

Treasury Department (These are legally binding obligation of the federal government)

79
Q

What level is interest earned by investors from US government taxed?

A

Federal.

State and local governments do not tax the interest income.

80
Q

What are Series EE Bonds (how are they bought, how is interest made, what is taxed?? What else are they known as?

A

Typically purchased directly from US government at discount from face value (typically 50%). Investor may elect to roll the matured Series EE bonds into Series HH bonds and continue to defer taxes.
Interest: These pay no semiannual interest and may be redeemed at maturity for face value.
Taxed: Interest earned through appreciation is taxable by the federal government and the investor may pay taxes on this money each year or may wait until the bond matures.
Also called Savings bonds

81
Q

What are Series HH bonds? (How are they bought, interest, redeemed?) What denominations are they available in?

A

Only can be purchased by trading in matured Series EE bonds.
Interest: These pay semiannual interest
Redeemed: Series HH bonds may be redeemed at their face value at any time.
Denominations: $500-$10K and mature in 10 years.

82
Q

What are the 3 most widely held US government securities?

A

Treasury bills, notes, and bonds

83
Q

What is a treasury bill? (How are they issued, Maturity length, how are they bought, interest, denominations)

A

Issued: Issued at a discount from par, bill appreciates up to par at maturity and the appreciation represents the investors interest
Maturity: Treasury bills range in maturity from 4-52 weeks
Bought: They are auctioned off by the Treasury Department through a weekly competitive auction. (Large banks and broker deals, known as primary dealers, submit competitive bids or tenders for the bills being sold). Treasury awards to the highest bidders and works the way down to lower bidders until all of the bills are sold.
Interest: Pay no semiannual interest
Denominations: $100 to $1M

84
Q

How are noncompetitive vs. competitive tenders prioritized with treasury bills?

A

All noncompetitive tenders (agreeing to accept average of all yields accepted by the Treasury) area ccepted before competitive tenders (these are limited to a max amount of $500K)

85
Q

Where are bids for treasury bills settled?

A

Federal funds

86
Q

How does a quote for a treasury bill appear compared to an offer?

A

A quote for Treasury bill appears higher than offer but bills are quoted on a discounted yield basis, therefore higher bid actually represents a lower dollar price than the offer.

87
Q

What are Treasury notes? (Interest, Denominations, what happens at maturity?)

A

US government’s intermediate-term security and range in term from 1-10 years; These are auctioned off by the Treasury every 4 weeks
Interest: These pay semi-annual interest
Denominations: $100-$1M
If Treasury note is refunded, the government will offer the investor a new Treasury note with a new interest rate and maturity. The investor may always elect to receive their principal payment instead of accepting a new note.

88
Q

What are Treasury bonds (Maturity, Interest, Denominations)? What sometimes happens with Treasury bonds?

A

US government long term bonds
Maturity: Range from 10-30 years
Interest: Pay semi-annual interest and are issued in denominations form $100-$1M
Some Treasury bonds may be called in at par by the treasury. If the Treasury Department calls in a bond issue, they must give holders 4 months notice before calling the bonds.

89
Q

How are treasury bond and note priced?

A

Quoted as a percentage of par down to 32nds of 1% (Number after decimal points represent 32nds of a percent)
Ex: Treasury bond quote of 92.02 translates into 92 2/32% x $1000 = $920.625

90
Q

What are Treasury STRIPs?

A

Stands for “Separate trading of registered interest and principal securities”; Separated into 2 parts: a principal payment and semiannual interest payment.
A Treasury STRIP is a zero-coupon bond that is backed by US gvmt securities.
An investor can purchase the principal payment component of $1000 due on a future date at a discount. An investor seeking some current income may wish to purchase the semi-annual coupon payments due over the term in the Treasury securities.
A STRIP may be purchased by an investor who needs a certain amount available on a known date in the future. By purchasing the STRIP, the investor will be guaranteed to have $1000 on that date in the future for each STRIP purchased.

91
Q

What are Treasury receipts?

A

Similar to Treasury STRIPs, except that broker dealers and banks create them. Broker dealers and banks will purchase large amounts of Treasury securities, place them in a trust, and sell off the interest and principal payments to different investors.

92
Q

What are “TIPS”? How do you calculate adjusted principal? How do you calculate compounded interest?

A 
Treasury Inflation Protected Securities - offer investor protection against inflation. Offered at fixed interest rate and principal amount is adjusted semiannually to reflect consumer price index. During times of inflation, principal amount of TIPS will be increased and investor's interest payments will rise, while during times of alling prices, the principal amount of bond will be adjusted down and investor will receive a lower interest payment. 
Adjusted principal = principal x 1/2 of inflation rate (because of semi-annual payment); then coupon rate is taken on this number
Compounded interest (shortcut) = Take inflation rate over time and multiply it by principal, round up to answer (should be within $5)
93
Q

What are agency issues? (what revenues support them, interest, how are they quoted?)

A

Federal government has authorized certain agencies to issue debt securities
Revenues generated through taxes, fees, and interest income back these agency securities.
Interest: Usually offer interest rates between treasury securities and corporate securities
Quoted: Quoted on a percentage of par just like corporate issue.

94
Q

What is GNMA? (what are they backed by, what are their purpose, what is interest, denomination, risk)?

A

“Government National Mortgage Association” - often referred to as Ginnie Mae
Wholly owned government corporation that is the only agency who securities are backed by full faith of US government
Purpose is to provide liquidity to the mortgage market.
Ginnie Mae buys up pools of morgages from Federal Housing Association (FHA) and VA (Veteran’s Association) and sells off pools to private investors in form of pass-through certificates.
Interest: Receive monthly interest and principal payments based on their investment.
Risk: Only real risk is risk of early refinancing.
Taxable: Interest is taxable at all levels.
Denomination - minimum of $1000
Yield quotes: Based on 12-year prepayment assumption because most mortgages are repaid early as a result of refinancing, moving or a homeowner paying off mortgage.

95
Q

What is Federal National Mortgage Association (FMN)? What is it also known as? What denominations, interest, tax?

A

Public For-profit corporation that stock trades publicly and is in business to realize a profit by providing mortgage capital. Also known as Fannie Mae. Fannie Mae purchases mortgages and in turn packages them to create mortgage backed securities
Called an agency security because Fannie Mae has a credit facility with the government and receives certain favorable tax considerations
Denominations: Issued from $5000 to $1M
Interest: Pay interest semiannually
Taxable at all levels
Fannie Mae also issues debentures with a minimum denomination of $10K that mature in 3-25 years. Interest and tax is same.

96
Q

What is federal home loan mortgage corporation (FHLMC)? What is it also known as? Interest and tax?

A

Also known as Freddie Mac
Publicly traded company in business to earn profit on its loans. Purchases residential mortgages from lenders and, in turn, package them into pool and sells off interest in those pools to investors. Interest earned from investors from FHLMC-issued securities is taxable at all levels: federal, state and local

97
Q

What is federal farm credit system? (FFCS)

A

Group of privately owned lenders that provide different types of financing for farmers. FFCS sells off far credit securities in order to obtain the funds to provide to the farmers. Securities are the obligations of all the lenders in the system and are not backed by the US govenment.
Interest: Securities pay interest every 6 months and are only available in book-entry form.
Several lenders:
1. Federal Land Bank provides mortgage money
2. Bank of the Cooperatives provides money for fees and grain
3. Federal Intermediate Credit Bank provides money for tractors and equipment

98
Q

What is a CMO? What is risk and how are payments organized?

A

Collateralized Mortgage Obligation - mortgage backed security issued by private finance companies, as well as FHLMC and FNMA. The securities are structured much like a pass-through certificate and their term is set into different maturity schedules known as tranches.
Pools of mortgages on one family to four-family homes collateralize CMOs.
Risk: Because CMOs are backed by mortgages on real estate, they are considered relatively safe investments and are given an AAA rating. Only real risk is risk of early refinance.
Payments: CMOs pay interest and principal monthly. However they pay the principal to only one tranche at a time in $1000 payments. The CMO pays off each tranche until final tranche known as a “Z tranche” is paid off - this is most volatile CMO tranche.

99
Q

What are the 3 reasons a CMO’s interest rate may change?

A
  1. If interest rates fall, homeowners will refinance more quickly and the holder of the CMO will be paid off more quickly than they had hoped
  2. If the rate of principal payments may vary
  3. If interest rates rise, refinancing may slow down and investors will be paid off more slowly
100
Q

Do most CMOs have an active secondary market?

A

Yes, but some more complex CMOs may not.

101
Q

How is interest earned from CMOs taxed?

A

At all levels: federal, state and local.

102
Q

What are the 4 types of CMOs?

A
  1. Principal only (PO) - receives only principal payments made on underlying mortgage (receive both scheduled principal payments as well as any prepayments made by home owners in the pool). Sold at a discount to its face value and appreciation of CMO represents investor’s return. Price of principal only CMO will be sensitive to changes in interest rate. As interest rates fall, value of CMO will rise as prepayments accelerate.
  2. Interest only (IO) - receive interest payments made by homeowners in pool of underlying mortgages. These also sell at a discount to their face value due to the amortization of the underlying mortgages. Interest only CMOs will increase in value as interest rates rise and decrease as interest rates fall (as a result of changes in prepayments on the underlying pool of mortgages).
  3. Planned amortization class (PAC) - These are paid off first and offer the investor th emost protection against prepayment and extension risk. If prepayments come in too quickly, principal payments will be deferred to another CMO known as a support class to protect the owner of the PAC from prepayment risk. If principal payments are made more slowly, principal payments will be taken from a support class to protect the investor against extension risk.
  4. Targeted amortization class (TAC) - these only offer investor protection from prepayment risk. If principal payments are made more quickly, they will be transferred to support class. However, if come in more slowly, payments will not be taken from a a support class and will be subject to extension risk.
103
Q

What are private-label CMOs? Who are they issued by? What are these backed by?

A

Issued by investment banks and payment of interest and principal payments are responsibility of the issuing investment bank.
Payments due to a holder of private-label CMOs are not guaranteed by government agency, credit rating of these CMOs is based on collateral that backed the CMO and the credit rating of the issuer. If the private label CMO uses agency issues as collateral, these agency issues still carry the guarantee of the issuing government agency.

104
Q

6 Test focus points on investment comapnies

A
  1. Type of investment companies
  2. Investment company structure
  3. Investment company registration
  4. Investment company taxation
  5. Investment strategies and recommendations
  6. Investor benefits
105
Q

How is an investment company organized (2)? How is an investment company’s money used? What are rights of individual investors?

A

As either a corporation or a trust
Individual investor’s money is poole together in a single account and used to purchase securities that will have the greatest chance of helping the investment company reach its objectives.
All investors jointly own the portfolio that is created through these pooled funds and each investor has an undivided interest in the securities. No single shareholder has any right or claim that exceeds the rights or claims of any other shareholder regardless of the size of the investment.

106
Q

What two laws are all types of investment companies subject to?

A
  1. Securities Act of 1933 - requires the investment company to register with the SEC and to give all purchasers a prospectus
  2. Investment Company Act of 1940 - sets forth guidelines on how investment companies operate.
107
Q

The Investment Company Act of 1940 breaks down investment companies into what 3 types?

A
  1. Face-amount company (FAC) - investor may enter into contract with FAC to receive a stated or fixed amount of money at a stated date in the future. In exchange for this future sum, the investor must deposit an agreed lump sum or make scheduled installment payments. These are rarely offered today as most of the tax advantages have been lost through changes in the tax law.
  2. Unit investment trust - either invest in a fixed portfolio of securities or in a nonfixed portfolio of securities
    Fixed UIT traditionally invests in a large block of government or municipal debt. Bonds will be held until maturity and the proceeds will be distributed to investors in the UIT. Once proceeds are distributed, UIT will ahve achieved objective and cease to exist.
    Nonfixed UIT (contractual plan) will purchase mutual fund shares in order to reach a stated objective.
  3. Management investment company (mutual funds) - a management investment company employs an investment advisor to manage a diversified portfolio of securities designed to obtain its stated objective. Can be organized as open-end or closed-end company. Main difference is how shares are purchased and sold.
108
Q

Fixed and nonfixed UIT have these 4 qualities.

A
  1. Are organized as a trust and operate as a holding company for the portfolio
  2. Are not actively managed and do not have BOD or investment advisors
  3. Issue units or shares of beneficial interest to investors which represent as undivided interest in the underlying portfolio of shares
  4. Must maintain a secondary market to offer some liquidity to investors.
109
Q

What is open end vs. closed-end?

A

Main difference is how shares are purchased and sold.
Open end company - offers new shares to any investor who wants to invest (known as continuous primary offering). Capitalization is unlimited because offering is continuous. Open-end must repurchase its own shares from investors who want to redeem them. There is no secondary market. Shares must be purchased from the fund company and redeemed from the fund company.
Closed end fund - offers common shares to investors through an IPO just like a stock. Its capitalization is limited to a number of authorized shares that have been approved for sale. Shares will trade in secondary market in over the counter market just like common shares.

110
Q

What are differences in open vs closed-end in types of shares, types of securities, how they are priced and rights?

A

Open vs. Closed
Full and fractional shares vs. full shares only
Common shares only vs. Common and preferred shares and debt securities
Shares priced by formula NAV + SC = POP vs. Shares priced by supply and demand
Dividends and voting vs. Dividends, voting and preemptive

111
Q

What is asset allocation model that must be followed to call fund a diversified mutual fund? What Act laid this out?

A

Investment Act of 1940 laid out an asset allocation model that must be followed in order for the fund to call itself diversified mutual fund.
75-5-10 Test
75% of fund’s assets must be invested in securities of other issuers. Cash and cash equivalents (can be a T-bill or a money market instrument) are counted as part of the 75%
5% - investment company may not invest more than 5% of its assets in any one company
10% - The investment company many not own more than 10% of any company’s outstanding voting stock

112
Q

When must an investment company register with the SEC?

A

Must register if the company operates to own, invest, reinvest, or trade in securities. A company must also register as an investment company if the company has 40% or more of its assets invested in securities other than those issued by the US government or one of the company’s subsidiaries.

113
Q

What are the 3 SEC registration requirements?

A

1) Minimum net worth of $100K
2) At least 100 shareholders
3) Clearly defines investment objectives
(Can register if they will meet these requirements within 90 days)

114
Q

When is it that the company is considered to have registered with the SEC?

A

The date the SEC receives its notice of registration

115
Q

What 7 things must the company’s registration statement contain?

A

1) Type of investment company (open-end, closed-end, etc)
2) Biographical information on the officers and directors of the company
3) Name and address of each affiliated person
4) Plans to concentrate investments in any one area (sector fund)
5) Plans to invest in real estate or commodities
6) Borrowing plans
7) Conditions under which investment objective may be changed through a vote of shareholders

116
Q

Once registered, what 3 things can an investment company do?

A

1) raise money though sale of shares
2) Lend money to earn interest
3) Borrow money on a limited basis

117
Q

Once a company is operating, how can it lend money? How can it borrow money? What is the rule with borrowing money?

A

Once company is operating, it may lend money to earn interest such as by purchasing bonds or notes.
An investment company may borrow money for such business purposes as to redeem shares.
If the investment company borrows money, it must have $3 in equity for every dollar it want to borrow (must have asset-to-debt ratio of at least 3-to-1 or at least 300%)

118
Q

What 4 things is an investment company prohibited from doing?

A

1) Taking over or controlling other companies
2) Acting as a bank of a savings loan
3) Receiving commission for executing orders or for acting as a broker?
4) Continuing to operate with less than 100 shareholders or less than $100K net worth

119
Q

What 4 things must investment companies not engage in (unless it meets strict capital and disclosure requirements)?

A

1) Selling securities short
2) Buying securities on margin
3) Maintaining joint accounts
4) Distributing its own shares

120
Q

What 6 things are exempt from registration requirements of an investment company?

A

1) Broker dealers
2) Underwriters
3) Banks and savings and loans
4) Mortgage companies
5) Real estate investment trusts (REITs)
6) Security holder protection committees

121
Q

What are the investment company components?

A
  1. Board of Directors
  2. Investment adviser
  3. Custodian bank
  4. Transfer agent
122
Q

What 3 functions does the board of directors have? How are they elected?

A

1) Defines investment objectives
2) Hires the investment adviser, custodian bank and transfer agent
3) Determines what type of funds to offer (i.e. growth income, etc)
BOD is elected by a vote of the shareholders

123
Q

How is the makeup of the board determined?

A

Makeup of board is determined by Investment Company Act of 1940 which states that majority or at least 51% of board must be noninterested persons (person whose only affiliation with the fund is as a member of the board). Therefore 49% of board may hold another position within the fund company or may otherwise be interested in the fund.

124
Q

What is an affiliated person? What 5 roles can these include?

A

Anyone who could exercise control over the company, can be 1) accountant 2) broker dealer 3) attorney 4) immediate family of an affiliated person 5) anyone else the SEC designates

125
Q

What are both affiliated and interested parties prohibited from doing?

A

Selling securities or property to the investment company or any of its subsidiaries.

126
Q

Who cannot serve on the BOD? (2)

A

Anyone who has been convicted of any felony or securities-related misdemeanor or who has been barred from the securities business

127
Q

What is bonding of key employees? What is blanket bond? What does this cover?

A

Investment company is required to obtain a bond to cover itself and each officer, director and employee with access to the investment company’s assets. Blanket bond covers all employees that are required to be bonded (names of employees must be listed).
Bond only covers the employees for negligence, not criminal acts or acts of bad faith.

128
Q

Who hires the investment adviser? What does the investment adviser do? (2)

A

The BOD hires the investment adviser to manage the fund’s portfolio. Investment adviser is a company, not a person, which must also determine the tax consequences of distributions to shareholders and ensure that the investment strategies are in line with the fund’s stated investment objectives.

129
Q

What is compensation of investment adviser? What can’t the investment adviser do (2)?

A

Percentage of net assets of the fund, not a percentage of the profits, although performance bonuses are allowed. Investment adviser’s fee is typically the largest expense of the fund and the more aggressive the objective, the higher the fee.
Investment adviser may not borrow from the fund or have any security-related convictions.

130
Q

What does the custodian bank do? What is another name? Who hires the custodian bank?

A

Holds all of the fund’s assets (cash and securities) for safekeeping and provides other bookkeeping and clerical functions for the investment company, such as maintaining books and records for accumulation plans for investors. Must be done in line with SEC guidelines and ensure that only approved persons have access to account.
Another name is “exchange member broker dealer”
Hired by investment company

131
Q

What does the transfer agent do? (2) Where can the transfer agent come from?

A

1) Handles issuance, cancellation and redemption of fund shares
2) Handles name changes
Transfer agent may be part of the fund’s custodian or a separate company.

132
Q

Distribution of shares for mutual funds is normally the responsibility of who? What is another name (2)? Who is the underwriter selected by?

A

The underwriter.
The underwriter for a mutual fund is also known as the sponsor or distributor.
Underwriter selected by BOD

133
Q

How is the underwriter paid?

A

Receives a fee in the form of a sales charge for the shares it distributes.

134
Q

How does the underwriter purchase shares? How does sales charge get factored in? What is mutual fund pricing formula?

A

As underwriter receives orders for the mutual fund shares, it purchases the shares directly from the fund at the net asset value (NAV).
The sales charge then is added to the NAV as the underwriter’s compensation. (This process of adding sales charge to the NAV is responsible for the mutual fund pricing formula, which is NAV + SC = POP (public offering price)

135
Q

What is rule for underwriter purchasing shares?

A

The underwriter may purchase shares from the mutual fund only to fill customer orders, may not hold mutual fund shares in inventory in anticipation of receiving future customer orders

136
Q

What are selling group members? What do you need to be a member of to be a selling group member?

A

These can purchase mutual fund shares at a discount from public offering price (POP) and then sell the mutual fund shares to investors at the POP and earn part of the sales charge.
Must be member of FINRA, otherwise treated as members of the general public and pay POP.

137
Q

What is a no-load mutual fund?

A

No-load mutual funds do not charge a sales charge to investors who invest in mutual fund; therefore mutual fund may sell shares directly to investors at the NAV.

138
Q

Describe distribution of mutual fund shares and price that is paid by sponsor underwriter, selling group member, and investor?

A
  1. Mutual fund company -> (NAV) Sponsor underwriter distributor -> (Discount from POP) Selling group member -> (POP) Investor
  2. Mutual fund company -> (NAV) Sponsor underwriter distributor -> (POP) Investor
  3. Mutual fund company -> (NAV No-load fund) Investor
139
Q

What is a mutual fund prospectus?

A

The prospectus is the official offering document for open-end mutual fund shares. The prospectus must be presented to all purchasers of the fund either before or during the sales presentation.

140
Q

What must the prospectus provide details for (5)?

A

1) Fund’s investment objectives
2) Sales charges
3) Management expense
4) fund services
5) Performance data for the past 1, 5, and 10 years or for life of the fund

141
Q

Investors can request additional information regarding the mutual fund (not located in prospectus), what additional information is included (5)?

A

1) Fund’s securities holdings
2) Balance sheet
3) Income statement
4) Portfolio turnover data
5) Compensation paid to the board of directors and investment advisory board

142
Q

What is an advertising prospectus?

A

Summary prospectus that contains past performance data

143
Q

What are the timelines for the mutual fund prospectus (updates, used by representative, and when should be discarded)?

A

Mutual fund prospectus:

  1. Should be updated by the fund every 12 months
  2. Must be updated by the fund every 13 months
  3. May be used by a representative for up to 16 months
  4. Should be discarded after 16 months from publication
144
Q

What information are mutual funds required to disclose either in prospectus or in annual report to shareholders (4)?

A
  1. Performance graph showing performance of fund
  2. Names of officers and directors who are responsible for the portfolio’s day-to-day management
  3. Disclosure of any factors that materially affected performance over the latest fiscal year.
  4. Summary information at front of prospectus which includes fund’s investment objectives, past performance, costs, and biographical info for management of fund. Also includes investment strategies, compensation, purchase and redemptions and tax implications
145
Q

For open-end mutual fund shares, investors purchase shares at ______ price and redeem at _______?

A

Public offering price and net asset value

146
Q

How long does mutual fund have to forward proceeds to an investor after receiving a redemption request? When is there a suspension of this rule (4)?

A

Seven calendar days.
Suspension of seven day rule may be allowed only if:
1. NYSE is closed for an extraordinary reason
2. NYSE trading is restricted or limtied
3. Liquidation of the securities would not be practical
4. An SEC order has been issued

147
Q

What are the 7 additional characteristics of open-end mutual funds?

A
  1. Diversification
  2. Professional management
  3. Low minimum investment
  4. Easy tax reporting, Form 1099
  5. Reduction of sales charges through breakpoint schedule, letter of intent and rights accumulation
  6. Automatic reinvestment of dividends and capital gains distributions
  7. Structured withdrawal plans
148
Q

What are the 7 mutual fund investment objectives?

A
  1. Equity funds - growth funds seeking capital appreciation, do not produce significant dividend income
  2. Equity Income Fund - Purchase both common and preferred shares that have long record of paying dividends
  3. Sector fund -higher risk/reward since these concentrate 25% or more of their assets in one business area or region
  4. Index funds -generally passively managed (comprised of stocks that are included in the index that fund is designed to track)
  5. Growth and income (combination fund) - Invests to achieve both capital appreciation and current income (common and preferred shares that pay high dividends)
  6. Balanced funds - invests in both stocks and bonds, according to a predetermined formula
  7. Asset allocation funds - invest in stocks, bonds, and money market instruments, according to expected performance for each market
149
Q

What are other types of funds (3)?

A
  1. Foreign stock funds - invest outside US
  2. Special situation funds - invest in takeover candidates and restructuring companies
  3. Option income fund - purchases common shares and sells call options against the portfolio in order to generate premium income for investors
150
Q

What are bond funds?

A

Investors who purchase equity security that represents their undivided interest in a portfolio of debt. Bond funds invest mainly to generate current income for investors through interest payments generated by the bonds in the portfolio.

151
Q

What are 4 types of bond funds?

A
  1. Corporate bond funds - invest in debt securities issued by corporations. Subject to all taxes.
  2. Government bond funds - invest in debt securities issued by the US government such as Treasury bills, notes, and bonds. Many also invest in government agencies such as Ginnie Mae. Dividends only subject to federal taxation
  3. Municipal bond funds - portfolios of municipal debt. Investors receive dividend income, free from federal taxes. Investors are still subject to taxes for any capital gains distributions or for any capital gains realized through sale of mutual fund shares
  4. Money market funds - invest in short-term money market instruments such as banker’s acceptances, commercial paper, and other debt securities with less than one year remaining to maturity. These are no-load funds, NAV is always equal to $1, however this is not guaranteed. Interest is earned by investors daily and is credited to their accounts monthly.
152
Q

What are the 6 money market guidelines?

A
  1. Prospectus must clearly state that fund is not insured or guaranteed by US government and fund’s NAV may fall below $1
  2. Securities in the portfolio may have a maximum maturity of 13 months
  3. The average maturity for securities in the portfolio may not exceed 90 days.
  4. No more than 5% of fund’s assets may be invested in any one issuer’s debt securities.
  5. Investments are limited to the top two ratings awarded by nationally recognized ratings agency (S&P, and Moody’s)
  6. 95% of portfolio must be in the top ratings category with no more than 5% being invested in second tier
153
Q

What are alternative funds? What are 2 other names?

A

(also known as alt funds or liquid alts) invest in nontraditional assets or illiquid assets and may employ alternative investment strategies

154
Q

How often must a mutual fund determine net asset value of the fund’s shares? When do most price their shares? What is pricing used for?

A

1x/day; Most price at close of business of NYSE (4pm EST), this is listed in mutual fund prospectus when fund calculates price.
Calculation is required to determine both redemption price and purchase price of fund’s shares

155
Q

How do you calculate fund’s NAV? NAV/share?

A

Assets - liabilities = net asset value

NAV per share = Total NAV/Total # of outstanding shares

156
Q

What 2 things will increase NAV, what 2 things will decrease NAV and what 3 things have no effect on NAV?

A

Causes increase in NAV:
1. Value of securities in the portfolio increase
2. Portfolio receives investment income, such as interest payments from bonds
Causes decrease in NAV:
1. Value of securities in portfolio fall
2. Fund distributes dividends or capital gains
No effect on NAV:
1. Investor purchases and redemptions
2. Portfolio purchases and sales of securities
3. Sales charges

157
Q

What is the maximum allowable sales charge than an open end fund may charge of the POP?

A

8.5%

158
Q

What do sales charges pay for (2)?

A
  1. Underwriters commission
  2. Commission to brokerage firms and registered representatives
    * It is important to note that the sales charge is not an expense of the fund; it is a cost of distribution, which is borne by the investor
159
Q

Do closed end funds charge sales charge? What does investor who wants to purchase a closed-end fund pay?

A

No sales charge.

Investor will pay current market price + the commission their brokerage firm charges them to execute the order

Series 65 (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions