Series 7 Flashcards
1
Q
Outstanding Shares
A
Issued shares - Treasury shares (shares repurchased by corp)
2
Q
Treasury shares (shares repurchased by corp)
A
Issued shares - outstanding shares
3
Q
Dividends payable as
A
cash, stock or property
4
Q
Annual Dividend
A
most recent quarterly dividend x 4 quarters
5
Q
Dividend (current) yield
A
annual dividend / current market value
6
Q
Declaration date
A
determined by BOD
date dividend is declared
7
Q
Ex-dividend date
A
determined by FINRA or SRO
one business day before record date
8
Q
Record date
A
determined by BOD
date trade must settle by for buyer to receive current dividend
9
Q
Payable date
A
determined by BOD
date dividend is distributed
10
Q
Cash Dividend
A
Received by shareholders
Market price of stock declines by the amount of the dividend on the ex-dividend date
Taxable when received
Qualified taxed @ capital gains rate
Non-qualified taxed as ordinary income
11
Q
Stock Dividend Adjustment
A
Market price and cost basis of stock adjusts lower for dividend
Investor receives additional shares
Aggregate value remains the same
Taxable when shares are sold
12
Q
Stock Split Adjustment
A
Market price and cost basis lower for split
Investor receives additional shares
Aggregate value remains the same
Taxable when shares are sold
13
Q
Reverse Stock Split Adjustment
A
Market price and cost basis of stock adjusts up for reverse split
Investor will have fewer shares
Aggregate value remains the same
14
Q
Preferred Stock
A
Fixed par value (assume $100 unless stated different)
Dividends are fixed stated rate (% of par)
15
Q
Straight (noncumulative) Preferred Stock
A
missed dividends are not payable
16
Q
Cumulative Preferred Stock
A
missed dividend (dividends in arrears and current preferred dividend must be paid before common)
17
Q
Callable Preferred Stock
A
Issuer may buy back shares after a specified date at a specified price
18
Q
Participating Preferred Stock
A
Issuer may pay more than stated dividend
19
Q
Adjustable Rate Preferred Stock
A
dividend tied to another rate (e.g., T-bill rate)
20
Q
Rights
A
Available to existing shareholders
Short term (30-45 days)
When issued exercise price is below CMV (allows purchase at a discount)
Not marginable
21
Q
Warrants
A
Offered w/ other securities as “sweeteners”, sold as units (e.g., bond w/ warrant)
Long term (2-5 years or longer)
When issued exercise price is above CMV (anticipated value w/ time)
Marginable
22
Q
American Depository Receipts (ADRs)
A
Facilitate U.S. citizens owning foreign shares
Foreign shares held by bank (domestic bank issues receipt)
ADR is U.S. security traded in U.S. markets (quoted in U.S. dollars)
Dividends declared in foreign currency, but paid in U.S. dollars (ADR holder has currency risk)
23
Q
Real Estate Investment Trusts (REITs)
A
Traded on exchanges or OTC
Provide liquidity for real estate investors
75% of assets must be invested in operating income producing real estate or mortgages to qualify as a REIT
90% of net operating income must be distributed for REIT to avoid taxation as a trust
24
Q
Par Value
A
Assume $1,000 unless specified differently
25
Premium Bond Yields
Coupon > CY > YTM > YTC
26
Par Bond Yields
Coupon = CY = YTM = YTC
27
Discount Bond Yields
Coupon < CY < YTM < YTC
28
Coupon, Nominal, or Stated Yield
annual interest / par vale
Example: bond pays $60 annual interest $60 / $1,000 = 6% coupon yield
29
Current Yield
annual interest / current market value
Example: bond trading @ $1,200 pays $60 annual interest $60 / $1,200 = 5% current yield
30
Yield to Maturity
annualized return if held to maturity
31
Yield to Call
return reflecting early redemption and acceleration of discount gain or premium loss
32
Bond Quotes: Price Quote
1 bond point = 1% of par = $10
Example: price quote --- 6s of '43 @ 92 = 92% of par = .92($1,000) = $920
33
Bond Quotes: Yield Quote
1 basis point = .01 of yield
Example: Yield quote --- bond trading to yield 3.70 means the YTM is 3.7%
34
Callable Bonds
Issuer can buy back bonds as of a specified date before maturity at a specified price
Issuer will call bonds in anticipation of current interest rates falling
Allows issuer to lower the cost of borrowing
Facilitates "refunding", replacing one issue w/ another at a lower net interest cost to the issuer
35
Convertible Bonds: Conversion Ratio
par / conversion price
Example: bond convertible @ $40 $1,000 / $40 = 25 share conversion ratio
36
Convertible Bonds: Parity Price of Common
market price of bond / conversion ratio
Example: bond trading @$1,100
Conversion ratio = 25 shares
$1,100 / 25 shares = $44 parity price of common
37
Convertible Bonds: Parity Price of Bond
conversion ratio x common stock price
Example: bond has 25 share conversion ratio
common stock trading @ $44
25 shares x $44 = $1,100 bond parity price
38
Bond Maturities: Term
entire issue matures on one date
39
Bond Maturities: Serial
Issue matures over a period of years
40
Bond Maturities: Balloon
a repayment schedule over a period of years having the largest number of bonds maturing at the final maturity date
41
Coporate Debt Securities: Secured (3)
1. Mortgage bond: backed by real estate
2. Collateral trust bond: backed by other securities the issuer owns (e.g., government debt)
3. Equipment trust certificate: backed by equipment used in the issuer's business, most commonly rolling stock
42
Corporate Debt Securities: Unsecured (4)
1. Debenture: backed by issuer's full faith and credit
2. Subordinated debenture: paid last of all debt if issuer is in default
3. Guaranteed bond: guaranteed by a third party (parent company guarantees subsidiary's debt)
4. Income (adjustment) bond: interest payable only if earned (risky; not suitable for investors seeking income)
43
Liquidation Priority (5)
1. Secured bonds and senior notes
2. Debentures and general creditors
3. Subordinated debentures
4. Preferred stock
5. Common stock
44
Zero-Coupon Bonds
Issued at a discount
Mature at par
Often used for target date goals
High price sensitivity to interest rate movement
45
Treasury Receipts
Issued at a discount and backed by broker dealers (BDs)
Mature at par
Discounts: accrete (add, adjust cost basis up)
Premiums: amortize (subtract, adjust cost basis down)
46
Treasury STRIPS
Issued at a discount and backed by U.S. Treasury
Mature at par
Discounts: accrete (add, adjust cost basis up)
Premiums: amortize (subtract, adjust cost basis down)
47
Collateralized Mortgage Obligations (CMOs)
Sold by financial institution
Backed by pool of mortgage securities
Associated w/ refinancing and prepayment risk
Securities separated into tranches
Investor chooses tranche and signs suitability statement
48
T-bill
52 weeks or less
Annualized % discount from par
Not callable
49
T-note
2-10 years
% of par in 32nds
Not callable
50
T-bond
10 years and over
% of par in 32nds
Not callable
51
Government National Mortgage Association (GNMA)
Backed by full faith and credit of U.S. government
Approves lenders who issue pass-through certificates created from a pool of FHA- an VA- insured mortgages
Monthly check to investor includes both principal and interest
52
Federal Farm Credit System
Backed by the issuing agency
Loans to farmers
Finance land purchases
Finance farm equipment purchases
Establishes buying co-ops to achieve economies of scale when purchasing agricultural goods
53
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
Backed by the issuing agencies
Lines of credit w/ the U.S. Treasury
Mortgage backed paper associated w/ prepayment risk
54
Modern Portfolio Theory (MPT)
diversifies a portfolio using negative correlation of securities to all but eliminate unsystematic risk
Perfect negative correlation is -1.0
55
Capital Asset Pricing Model (CAPM)
Used to derive expected return of an asset on the basis of the asset's systematic risk
systematic risk cannot be diversified away
56
Alpha
The actual returns that a portfolio manager generates in excess of the risk adjusted returns as defined by the CAPM
If the risk adjusted return that is expected is 8% and the actual return is 9%, then the alpha is a positive 1% and indicates investor's return was greater than the risk they took
57
Beta
Measures the volatility of a security compared to the market as a whole
The beta of the market is 1.0
A security w/ a beta > 1 is more volatile than the market
A security w/ a beta < 1 is less volatile than the market
58
2 Classifications of Municipal Securities
General Obligation Bonds (GOs) and Revenue Bonds
59
General Obligation Bonds (GOs)
backed by issuing municipality (taxes)
voter approval required
may be subject to statutory debt limits
generally competitive bid underwritings
analysis based on tolerance to taxes, debt statement, and debt ratios
60
Revenue Bonds
backed by user fees (self supporting)
voter approval NOT required
may be subject to additional bonds test limits
underwritings generally negotiated
analysis based on feasibility studies and debt service coverage ratio
61
Types of GOs (2)
1. Unlimited tax bond: Issuer pledges all of its unrestricted resources to meet debt service, including an unlimited property tax on all taxable property w/in the district
2. Limited tax bond: Issued when issuer's ability to raise taxes is limited to a specified tax
62
Types of Revenue Bonds (6)
1. Industrial development revenue bonds: Backed by corporations w/ lease back payments made to issuer
2. Special tax bonds: Backed by taxes other than real estate; examples include alcohol and tobacco taxes
3. Special assessment bonds: Only assess property owners who benefit from the bond issue
4. Moral obligation bonds: Legislative authority is required to pay back bondholders if revenues are insufficient
5. Public and New Housing Authority bonds (Section 8): Bonds provide financing for low and moderate income housing and are backed by the full faith and credit of the U.S. government
6. Anticipation notes: Short term borrowing in advance of receiving funds from long term debt; examples include tax, (TANs), revenue, (RANs), and bond (BANs) anticipation notes
63
Municipal Indices and Ratios: Found in the Bond Buyer
GO index:
20 specific GO bonds each w/ 20-year maturities
64
Municipal Indices and Ratios: Found in the Bond Buyer
Revdex
25 specific revenue bonds each w/ 30-year maturities
65
Municipal Indices and Ratios: Found in the Bond Buyer
30-day visible supply:
total par value of all new municipals to be offered in the next 30 days
66
Municipal Indices and Ratios: Found in the Bond Buyer
Placement ratio:
total par value of all municipals sold / total par value of all municipals offered w/in the previous week
67
Municipal Taxation:
Federal Level
Exempt
68
Municipal Taxation:
State level -- in state investor
Exempt
69
Municipal Taxation:
State level -- out of state investor
Taxable
70
Municipal Taxation:
Local level -- local municipality investor
Exempt
71
Municipal Taxation:
Local level -- out of municipality investor
Taxable
72
Municipal Taxation:
Territorial Bonds
exempt at all levels (e.g., Puerto Rico, U.S. Virgin Islands)
73
Capital Gains
Taxable -- compare cost basis to proceeds
74
Premiums Amortize
adjust cost basis down
75
Discounts Accrete
adjust cost basis up
76
Tax Equivalent Yield
Municipal yield /
(100% - investor's tax bracket)
77
Tax Free Equivalent Yield
Corporate yield x
(100% - investor's tax bracket)
78
Management Company
Portfolio managed by specific objective
Examples: growth, income, specialized (banking, tech, geographic area)
79
Open-End Company
Continuous primary offering; every share is an IPO
Prospectus required
Can issue common shares only
Company must redeem shares
No secondary market trading
Priced by formula, forward pricing
Public Offering Price (POP) = NAV + $SC
8.5% maximum sales charge
80
Closed-End Company
Number of shares fixed
No prospectus required after IPO
can issue common and preferred shares; can issue debt instruments
Shares are not redeemable
After IPO, shares trade in secondary markets (exchanges and OTC)
Priced by supply and demand
Commissions
81
Net Asset Value (NAV) Per Share
(Fund assets - fund liabilities) / number of outstanding shares
82
Public Offering Price (POP) Per Share
NAV + $SC (sales charge)
or
NAV / (100% - SC%)
83
$SC
POP - NAV
84
%SC
(POP - NAV) / POP
85
Variable Annuity
Insurance company product
Priced like mutual fund (NAV + SC = POP)
No maximum sales charge
Early redemption fees
All earnings (dividends and capital gains) reinvested
Earnings grow tax deferred
Non-qualified unless stated otherwise
86
VA Withdrawal Type
Lump Sum
all earnings above cost basis taxed
cost basis returned tax free
87
VA Withdrawal Type
Random
LIFO
all earnings withdrawn first and are taxable
after all earnings are withdrawn, cost basis is returned tax free
88
VA Withdrawal Type
Annuitize
lifetime monthly income
each payment represents part earnings and part cost basis being returned
only taxed on earnings portion; cost basis is returned tax free
89
Annuitization: Life Only
monthly payment
payments end w/ life of annuitant
90
Annuitization: Period Certain
protects heirs
period certain length specified in contract
payments continue for length of period certain, even if annuitant dies
if annuitant outlives period certain length, payments continue until annuitant dies
91
Annuitization: Joint and Last Survivor
annuity on more than 1 life
payments continue until last annuitant dies
92
Annuitization: Assumed Interest Rate (AIR)
conservative estimate of return on investments in the separate account
each period, the actual earnings of the separate account are compared w/ AIR
Greater than AIR, greater than previous month's payment
Same as AIR, same as previous month's payment
Less than AIR, less than previous month's payment
93
Direct Participation Programs (DPPs)
Business structure that reports to the IRS, but is not taxed as a business entity
All tax consequences flow through to partners
Net operating income is passive income to investors
Net operating loss is passive loss to investors
Interests in partnerships considered illiquid (not easily transferable)
Partnership dissolves on predetermined date or event; assets liquidated, and proceeds distributed to partners
94
General Partners
Manages the partnership
May appoint others to manage the assets
Unlimited liability; can lose more than invested
Fiduciary responsibility to partners; can be sued
May not compete w/ the partnership
95
Limited Partners
No management responsibility; passive investors only
Limited liability; cannot lose more than invested
No fiduciary responsibility
No limitations applied to other investments
96
Real Estate: Raw Land
Appreciation potential only objective
very speculative
no depreciation deductions for raw land
97
Real Estate: New Construction
no immediate cash flow
rental income potential can only be estimated
tends to appreciate faster than older properties
depreciation deductions allowed
98
Real Estate: Existing Properties
immediate cash flow
tends to be safer than new construction because cash flow is known
depreciation deductions allowed
99
Real Estate: Government-Assisted Housing
tax credits for investing in public housing
cash flow via rental income can be suspect
appreciation is minimal
100
Equipment Leasing
typically airline and railroad equipment or computers
high depreciation potential of equipment due to obsolescence
101
Oil and Gas Drilling: Exploratory
drilling in new areas
high risk and reward
102
Oil and Gas Drilling: Developmental
drilling in areas where resource has been previously found
103
Oil and Gas Drilling: Balanced
both exploratory and developmental drilling
104
Oil and Gas Income
buying existing producing wells
immediate production and income
safest of all oil and gas partnerships
105
Qualified Plans
IRS approval required
Contributions tax deductible
Plan cannot discriminate
Tax on accumulation is deferred
All withdrawals taxed
Plan is set up w/ trustee
106
Nonqualified Plans
No IRS approval needed
Contributions NOT tax deductible
Plan may allow only certain employees to participate
Tax on accumulation may be deferred
Only excess over cost basis is taxed at time of withdrawal
No plan trustee required
107
Tax Favored (Individuals)
Individual retirement accounts (IRAs, both traditional and Roth)
108
Qualified Plans (Employer Sponsored)
Simplified employee pension plans (SEPs)
Tax sheltered annuities (TSAs), both 403(b) and 501(c)(3)
Savings incentive match plans for employees (SIMPLEs)
401(k)s, both traditional and Roth
109
NonQualified Plans Examples
Payroll deduction
deferred compensation
section 457 plans
110
Regulation T
50% initial margin
set by the Federal Reserve
111
Long Account
Long market value - debit = equity
LMV - Dr = equity
Dr = 50% LMV
112
Short Account
Credit - short market value = equity
Cr - SMV = equity
Cr = SMV + 50%SMV
113
Combined Account
LMV - Dr + Cr - SMV = equity
114
Minimum Maintenance Long Account 25%
How low can LMV fall before a maintenance call?
Debit / (1 -.25) = Dr / .75
115
Minimum Maintenance Short Account 30%
How high can SMV rise before a maintenance call?
Credit / (1 + .3) = Cr / 1.3
116
Excess Equity
Equity above Reg T (50%) = equity
credits special memorandum account (SMA)
117
Restricted account
Equity below Reg T (50%)
Buy stock: deposit 50%
Sell stock: 50% retention to pay down debt
Withdrawal securities: deposit into account 50% of securities value
118
Maintenance Call
Equity below minimum maintenance
Deposit cash (1 x call amount)
Deposit securities (2 x call amount)
119
Special Memorandum Account (SMA)
applicable to long and short accounts
line of credit for future purchases or loans
buying power = 2 x SMA
loan value = 1 x SMA
generated by the increase in market value, nonrequired deposit, sale of stock (50% to SMA), dividends, or interest
decreased by the purchase of securities or cash withdrawal
Note: market value increases, add to SMA; market value decreases, do not take SMA away; to lose SMA, account holder must use SMA
120
Margin Account Agreement Form Agreement Type:
Credit
required agreement
truth in lending statement
details all margin account requirements and obligations
121
Margin Account Agreement Form Agreement Type:
Hypothecation
required agreement
investor pledges collateral (securities) to BD
122
Margin Account Agreement Form Agreement Type:
Loan consent
optional agreement
allows BD to lend customer securities to other customers
123
Exchange
listed securities
physical location, auction market
124
Over the counter (OTC)
unlisted negotiated market
125
Day Orders
cancel any unexecuted portion at end of day
126
Good Til Canceled (GTC) Orders
any unexecuted portion remains working until the last trading day of April or October
127
SLoBS / BLiSS
Sell Limit and Buy Stop / Buy Limit and Sell Stop
128
Market (buy or sell)
entered at the market
execute immediately at next available price
129
Buy limit
entered below CMV
buy at limit price or better (lower)
execution not guaranteed
130
Sell limit
entered above CMV
sell at limit price or better (higher)
execution not guaranteed
131
Buy stop
entered above CMV
triggered at or above stop price
execute immediately at next available price
132
Buy stop limit
entered above CMV
triggered at or above stop price
execute at limit price or better (lower)
execution not guaranteed
133
Sell stop
entered below CMV
triggered at or below stop price
execute immediately at next available price
134
Sell stop limit
entered below CMV
triggered at or below stop price
execute at limit price or better (higher)
execution not guaranteed
135
Fill or Kill (FOK)
execute entire order immediately or cancel entire order
136
Immediate or Cancel (IOC)
execute any portion available immediately
cancel any balance remaining
137
All or None (AON)
execute all if available
if entire order can not be executed, hold order as good til canceled (GTC)
138
Market at Open
execute at or near the open of the day
not guaranteed exact opening price
139
Market on Close
execute at or near the close of the day
not guaranteed exact closing price
140
Markup Policy
guide for listed and unlisted transaction charges
applies to markups, markdowns, and commissions
141
Order Tickets
approved by a principal promptly after execution
changes to tickets must be approved by a principal
142
Regular way settlement (corporate and municipal)
trade date + 2 business days (T+2)
143
Regular way settlement (government)
trade date + 1 business day (T+1)
144
Cash Settlement
same day; BD approval required
145
Receipt or delivery vs payment RVP or DVP Settlement Type
up to 35 calendar days
146
Seller's option/buyer's option Settlement Type
no sooner than first day after regular way (3rd business day for corporate and municipal); no later than date specified in settlement contract
147
Net worth
assets - liabilities
148
Book value
net worth - (preferred and intangibles)
149
Book value per share
book value / number of outstanding common shares
150
Current assets
cash and equivalents
accounts receivable
inventory
151
Current liabilities
accounts payable
accrued wages
taxes payable
152
Working capital
current assets - current liabilities
153
Current ratio
current assets / current liabilities
154
Total capitalization
long term debt + net worth
155
Debt ratio
long term debt / total capitalization
156
Earnings per share EPS
earnings available to common / total outstanding common shares
157
Price to earnings ratio P/E
CMV / EPS
158
Dividend payout ratio
common dividends / EPS
159
Technical Analysis Concepts
Uses price and volume history to forecast future price movements
Use of charts to plot movement and establish points of entry or exit
Example: trend lines, levels of resistance and support, breakouts, consolidation, and head and shoulder patterns (for reversals)
160
Securities Act of 1933
Paper Act; Prospectus Act
Regulates new issues; requires registration of securities
161
Securities and Exchange Act of 1934
People and Places Act
Regulates exchanges, BDs, and associated persons; requires registration
Created SEC
Antifraud provision; defined inside information
162
Trust Indenture Act of 1939
Applicable to corporate bond offerings of greater than $50 million in 12 months
Establishes a contract b/t the issuer and the trustee for the bondholder's benefit
163
Investment Company Act of 1940
Classifies and regulates the three types of ICs
164
Employee Retirement Income Security Act of 1974 (ERISA)
Established to prevent abuse or misuse of pension funds
Applicable to private-sector retirement plans
Mandates guidelines for plan: participation, funding, vesting, communication, nondiscrimination, and beneficiaries
165
Regulation S-P
Enacted by SEC to protect the privacy of customer information
Requires initial and annual privacy notice describing privacy policies and simple opt-out method
166
Regulation SHO
Mandates a locate requirement for securities to be sold short before the short sale
167
FINRA Rule 2330
Applies to recommended purchases and 1035 exchanges of deferred variable annuities (NOT immediate) and initial subaccount allocations
Disclosure of features, costs, and surrender charges
Must note if a 1035 exchange of a variable annuity has occurred w/in the last 36 months
168
Regulation A+
Small and medium offerings exempt transaction allowing issuers to raise up to $75 million in a 12 month period w/out full registration
Two tiers:
1. Tier 1 allows offerings up to $20 million
2. Tier 2 allows offerings up to $75 million
169
Regulation D
Private placement exempt transaction
Up to 35 nonaccredited investors for 506(b); all accredited investors for 506(c)
Accredited investors must meet minimum net worth or annual income criteria
170
Communications with the Public Types (3)
FINRA defines three categories of communications (written or electronic):
1. Retail
2. Correspondence
3. Institutional
171
Retail Communications
Available to more than 25 retail investors w/in any 30 calendar day period
172
Correspondence Communications
Available to 25 or fewer retail investors w/in any 30 calendar day period
173
Institutional Communications
Available only to institutional investors
Examples: other member firms, banks, insurance companies, registered investment companies, any entity including individuals, with $50 million or more in total assets
174
0.25%
maximum 12b-1 fee for no load fund
175
1%
100 basis points for bonds
Rule 144 sale volume limit
Maximum asset-based fee (12b-1 maximum of 0.75% plus FINRA 0.25% servicing fee)
176
5%
Markup policy guideline
Of 75% of a diversified management company's assets, no more than 5% of total assets invested in a single company (no restrictions on the other 25%)
177
6%
Penalty for excess IRA contributions
178
8.5%
Maximum sales charge for open end (mutual fund) company
179
10%
Penalty for premature IRA distribution
Affiliate or control person if owning 10% or more of outstanding shares
Maximum sales charge on public limited partnerships
Of 75% of a diversified management company's assets, no single holding more than 10% of the voting control of a single company (no restrictions on the other 25%)
180
25%
Minimum maintenance for long stock position
181
30%
Minimum maintenance for short stock position
182
40%
Minimum percentage of mutual fund board members that must be noninterested members
183
50%
Regulation T
Penalty for insufficient IRA distribution after age 72
Amount of sales proceeds credited to SMA in a margin account
Required cash deposit when withdrawing stock from a margin account
Corporate dividend exclusion
184
75%
Minimum amount of IC's assets that must be invested in securities of other issuers for IC to be classified as diversified
Amount of limited partnership assets that must be identified to be a specified program
185
90%
Minimum of net investment income that a mutual fund must distribute by year end under Subchapter M
Minimum amount of net operating income that must be distributed by a REIT by year end
186
100%
Required equity when purchasing new issues, options, and mutual fund shares
Amount of nonrequired cash deposit credited to SMA in margin accounts
187
Same Business Day
settlement date for cash transactions
188
1 Business Day
regular way settlement for U.S. government securities and options
ex-dividend date relationship to record date for stock
189
2 Business Days
regular way settlement for corporate and municipal securities T+2
190
4 Business Days
Regulation T: cash purchases must be paid in full (regular way settlement (T+2) and Regulation T payment (S+2))
191
15 Calendar Days
maximum length of time a customer can place options orders before the signed option agreement is required
192
20 Calendar Days
Cooling off period: minimum time b/t filing date and registration
193
30 Calendar Days
IRS wash sale period before and after a trade
194
60 Calendar Days
maximum time to roll over holdings from one qualified plan to another w/out penalty
195
90 Calendar Days
maximum time for a letter of intent to be backdated
length of time cash account can be frozen for nonpayment
196
13 Months
length of time covered by a letter of intent
197
Equity Option Contract
1 contract = 100 shares
198
Options Premiums
1 point = $100
Example: 1 XYZ January 35 call @ 2
Premium = 2(100 shares) = $200
199
Intrinsic Value
Difference b/t strike price and current market value of stock
CANNOT be negative, lowest value is 0
amount one is in the money
200
In, At and Out of the Money
an option is in the money by the amount of it's intrinsic value
201
Time Value
The amount of an options premium that exceeds intrinsic value
Time Value = premium - intrinsic value
Example: 1 XYZ July 30 call @ 3, XYZ stock trading @ 31
IV = in the money amount = 31-30 = 1
TV = premium - IV = 3-1 = 2 points time value
202
Long Call (Basic)
Buy; pay out premium
Bullish
RIGHT to BUY stock at the strike price
203
Short Call (Basic)
sell or write; receive premium
Bearish
OBLIGATION to SELL stock at the strike price
204
Long Put (Basic)
buy; pay out premium
Bearish
RIGHT to SELL stock at the strike price
205
Short Put (Basic)
sell or write; receive premium
Bullish
OBLIGATION to BUY stock at the strike price
206
Long call
Attitude?
Max Loss?
Max Gain?
BE?
Bullish
ML = premium paid
MG = unlimited
BE = SP + premium
207
Short call
Attitude?
Max Loss?
Max Gain?
BE?
Bearish
ML = unlimited
MG = premium received
BE = SP + premium
208
Long put
Attitude?
Max Loss?
Max Gain?
BE?
Bearish
ML = premium paid
MG = BE to zero
BE = SP - premium
209
Short put
Attitude?
Max Loss?
Max Gain?
BE?
Bullish
ML = BE to zero
MG = premium received
BE = SP - premium
210
Long straddle
Attitude?
Max Loss?
Max Gain?
BE?
Expect volatility, unsure of direction
ML = total premiums paid
MG = unlimited (long call)
BE = 2 BEs; SP + and - total premiums
211
Short straddle
Attitude?
Max Loss?
Max Gain?
BE?
do not expect volatility
ML = unlimited (short call)
MG = total premiums received
BE = 2 BEs; SP + and - total premiums
212
Debit call spread
Attitude?
Max Loss?
Max Gain?
BE?
Bullish
ML = net debit paid
MG = difference in SPs - net debit paid
BE = lower SP + net debit paid
213
Credit call spread
Attitude?
Max Loss?
Max Gain?
BE?
Bearish
ML = difference in SPs - net credit received
MG = net credit received
BE = lower SP + net credit received
214
Debit put spread
Attitude?
Max Loss?
Max Gain?
BE?
Bearish
ML = net debit paid
MG = difference in SPs - net debit paid
BE = higher SP - net debit paid
215
Credit put spread
Attitude?
Max Loss?
Max Gain?
BE?
Bullish
ML = difference in SPs - net credit received
MG = net credit received
BE = higher SP - net credit received
216
Long stock, short call
Attitude?
Max Loss?
Max Gain?
BE?
covered call; neutral to slightly bullish
ML = CMV - premium received
MG = SP - CMV + premium received
BE = CMV - premium received
217
Long stock, long put
Attitude?
Max Loss?
Max Gain?
BE?
Bullish
ML = CMV - SP + premium paid
MG = unlimited
BE = CMV + premium paid
218
Short stock, long call
Attitude?
Max Loss?
Max Gain?
BE?
Bearish
ML = SP - CMV + premium paid
MG = CMV - premium paid
BE = CMV - premium paid
219
Short stock, short put
Attitude?
Max Loss?
Max Gain?
BE?
covered put; neutral to slightly bearish
ML = unlimited
MG = CMV - SP + premium received
BE = CMV + premium received
220
Index Options
Multiplier for strike prices and premium = 100
Cash settled, no delivery of underlying
221
Debt Options
Yield-based strike price
Premium multiplier = 100
Example: 1 T-bond 68 call @ 2
Premium = 2(100) = $200
Yield-based SP = 6.8%
BE = premium + stake price = 70 or 7%
222
Foreign Currency Options
Cash settled, no delivery of foreign currency
Stoke price in cents (except yen, in 1/100th of a cent)
Contract size = 10,000 units of currency
(except yen = 1,000,000 units of currency)
Example: 1 Canadian dollar April 80 call @ 2
SP in cents = $0.80
BE = premium + strike price = 82 or $0.82
223
Options Transaction Settlement
All options transactions (equity, index, debt, and currency) settle next business day (T+1)
224
Option Exercise Settlement
Settlement for the transaction resulting when an option contract is exercised will be the same as the underlying security
225
Closing Transaction (Tax Rules for Options)
Capital gain or loss when position is closed (except for LEAPS, always short term)
226
Expiration (Tax Rules for Options)
Capital gain or loss when position expires
227
Exercise (Tax Rules for Options)
Cost basis of stock position adjusted when option is exercised
No gain or loss reported until stock position is closed
228
Approval (Communications With The Public-Options)
All options advertising and sales literature (retail, correspondence, and institutional) must be approved by a Registered Options Principal (ROP)
229
Filing (Communications With The Public-Options)
Retail communications - 10 day profiling w/ FINRA required
Correspondence/Institutional communications - no FINRA filing required
230
Options more suitable for those with: (4)
options are considered speculative
higher incomes
higher net worth
more risk tolerance
more investment experience
231
Options less suitable for those with: (4)
lower or fixed incomes
lower net worth
less risk tolerance
less investment experience
232
Wrap Account
Bundles together brokerage and advisory services into a single account
233
Accredited Investors
Any individual w/ net worth over $1 million excluding primary residence
Any individual w/ income or joint income w/ spouse excess of required minimums
Any individual currently licensed w/ S7, S65 or S82 registration
234
Investment Constraints (5)
1. Time horizon
2. Liquidity
3. Taxes
4. Laws/regulations
5. Unique circumstances and/or preferences
235
Conversion Ratio
= par / conversion price
236
Tax free equivalent yield
= corporate yield x (100% - investor's tax bracket)
237
Tax equivalent yield
= municipal yield / (100% - investor's tax bracket)
238
Diversified Investment Company 75-5-10 Test
75% of assets invested so that:
1. No more than 5% of fund assets are invested in any one issuer
2. Fund owns no more than 10% of the voting stock of any one issuer
3. There are no restrictions on remaining 25%
