Series 7 B chapter 1 Flashcards
customers not obligated to arbritate unless
they have agreed to the process in writing
code of arbitration
settles monetary disputes
pay up in 30 days
no appeals
code of procedure
customer complaints can lead to fines suspension expulsion no jail time
are there appeals in arbitration
no
correspondence
personal communications
25 or fewer retail customers(once 26 it is sales literature)
can be electronic
does not require prior principal approval
sales literature includes
research reports market letter reprint of article tv radio ads
retail communication
communication electronic or written to 25 or more retail customers
requires prior principal approval
Must maintain records of this for 3 years
institutional investing
Written or electronic communication to institutional investors
No prior principal approval required.
securities act of 1933
Requires full and fair disclosure through a prospectus
timeline
Securities must be registered with SEC
20 day cooling off period
Due dilligance meeting(everyone except sec)
SEC clears
each transaction must provide Final prospectus
during 20 day period, you cannot
solicit
accept orders
advertise sales literature
during 20 day cooling off period you can
tombstone ads
take nonbinding indications of interest
deliver preliminary prospectus(red hering)
due diligence meeting
everyone shows up to meeting except the sec
Final prospectus vs preliminary
Final has the offer price
best efforts underwriting
no financial obligation or liability forany remaining unsold shares for underwriter
firm commitment underwriting
underwriters do have financial liability
firm commitment usually pays more
how is offering price determined
we can look at PE ratio of other companies within our industry
look at how much interest has been generated
how are underwriters compensated
underwriters get percentage.
if for example a new issue is 20$ per share. the underwriter may get 1$ for every share sold
offering price - proceeds to the issuer is the
spread
who pays spread
the issuer
managers fee
lead underwriter takes about 10% of spread
firm who actually sold share gets
majority (largest portion of spread
this is called selling concession
what is smallest portion of underwriting spread
managers fee
what is largest portion of underwriting spread
selling concession
underwriting fee
fee paid out to other sydicates for taking on risk
signatures that are required for new account form
principal
required to send new account form to customer within how long
and must be updated?
30 days
every 36 months
JTWROS who has authority to place trades
if one dies what happens to defendants portion of the assets
ether spouse can place trades
does not go through probate and spouse receives assets
JTIC(non spouses)
if one owner dies what happens to there assets
percentage ownership must be designated
goes to the estate
corporate customer needs what if just cash account
if they want to open a margin account
corporate resolution (designates who has authority to place trades)
need corporate bylaws and corporate resolution
partnership accounts require
what happens if one partner dies
partnership agreement and resolution no matter what type of account it is.
need an amended partnership agreement
numbered account
can do this with
this is useful for well know public figures
signature card on file which links numbered account with the customer
discretionary accounts (requirements)
does principal need to approve each trade
principal must however
written authorization from the customer
requires principal approval
no
frequently review suitability and churning(frequent transactions trying to generate commissions and the size of the trade(larger than normal transactions))
3 as or discretionary authority
amount(dollars or shares)
action(buy or sell)
asset
time and price does or does not require discretionary authority
does not
UGMA
whose SS is the account registered to
all gifts to account are
when can we register this account in the minors name soley
what is limit that a minor can be gifted in any one year
the minor
irrevocable
age of majority. The answer is different per state
no limit (tax consequence applies if it is over $14000) gift tax on the donor
UTMA uniform transfer to minors
whats the difference
The age of transfer into the minors single name can be designated up to 25 years of age
what is most important factor when determining suitability
making sure that everything matches with the investment objective
Growth recommendation
risks
100 equities(common stock)
common stock :
Large cap Small cap(aggressive)
can diversify with international stocks (ADRS)
risk includes:
market risk which is quantified by beta
business risk based on alpha
Income recommendation
risks
70/30
coporate bonds
preferred stock
Blue chip stocks (large older stable companies that provide solid dividends)
REITS
risks:
interest rate sensitive.
credit risk
inflation risk
safety (preservation of capital)
30/70
Us government securities
bills
notes
bonds
investments should be spread around all the different maturities. this creates bond latter
liquidity
money market
tax advantages(high bracket)
muni bonds
long term(college savings)
zero coupon
what paperwork is required for margin
Margin agreement
hypothecation agreement-customer pledging securities as collateral for the loan.
Consent to loan agreement (optional)
credit agreement- stated interest rate customer is paying for loan amount
Where would you find credit agreement
where would you see information pertaining to interest rate charged
in margin agreement
in the the credit agreement
bank employee opens a margin account at their favorite broker dealer
all all required except
margin agreement
hypoth agreement
bank supervisors approval
credit agreement
bank supervisors approval
what securities are elibigle to be margined
anything listed on exchange
any nasdaq security
any other security that shows up on FRB list
ipos
mutual funds
uits
AFTER 30 days these 3^^
ineligible marginable securities
options
what is the loan value for options
none because they are ineligible
other securities not on FRB approved list
penny stocks
qualified plan vs non qualified plan
qualified plans are made with pre tax dollars
comes off of gross salary which reduces taxable income
non qualified plans are after tax dollars like a variable annuity or deferred compensation plan. Taxed on monies that are in excess of what we put into it.
what is the max contribution for Traditional IRA
11000
contributions can be made until
april 15
RMD
year after you turn 70 1/2 no later than april 1
traditional ira vs roth
T IRA grows tax deffered
RMD
Roth is tax free when distributions happen
no rmd
contributions can be made after 70 1/2(must be earned income)
403b(tax sheltered annuities)
Who is eligible
school employees
religious organizations
non profit organizations
ERISA
guidelines for private corporations
eligibility guidelines for ERISA. which employees must be eligible for retirement plans
the employee must be 21 and worked a minimum of 1000 hours in the past 12 months.
erisa defines this as full time
college savings plans differences
529
based on a formula
for college education only
or covernel max contribution 2000 per child must stop contributing once child is 18 must take distribution once child is 30 can be used for primary or secondary education
they both grow tax free if used for education
the donor retains control of the assets
margin
customer buys 1000 shares of xyz at 40$ per share
what is customer required deposit
if stock goes up to 50
How much buying power does excess credit give? withdraw?
does line of credit go away
what is stock goes down
reg t requires min deposit of 50%
so 20,000
customer debit balance is 20,000= what they owe
equit =market value- amount owe
Loan mv50000 - 20000= 30000 equity
Loan val(regt value) =25000 (50% of MV)
loan value=amount which we can borrow
eq 30000-25000loan value= Excess equity 5000
excess credit gives 2 times the buying power
can only withdraw in cash amount of credit
no line of credit stays
lma=30,000 DB=20,000 EQ=10,000 Loan value=15000 (=half of Loan value) E.E.=0 SMA=5,000 from earlier
regu u
broker dealers rehypothecating to banks
how often will broker dealer recalculate math
once a day at the close of the market
Finra mimiumum maintaince requirment =
25%
=db/.75
when shares are sold
half goes to sma
(i think this is long)
in a new margin accct. cust byt 100 shares of xyz at 18 per share
what is required deposit
1800 because finra minimum deposit is 2000 or 100% of the transaction.
short margin accounts
a customer selling stock they do not own
this is done by borrowing the shares from BD
BD got shares from other customers margin accounts who signed the loan agreement
Customer is required to deposit 50% of the proceeds.(reg T)
Credit balance= cash generated in account from selling shares and 50%. This money eventually used to buy back.
if stock goes down its good in a short account. CR balance stays the same but the money that has to be paid back is less. EQ increases.
We want the price to go down.
Equity cant go below 30% of market value because thats finras requirement for SHORT ACCOUNTS
We can determine minimum by Credit balance/1.30
in a new margin account, customer sells short 100 shares at 18. what is the required deposit
2000 is the minimum in any short account regardless of what the stock price is.
long vs long
min maintaince
mkt val at min maintaince
min deposit req
for long its 25…..short its 30
DR/.75 CR/1.3
2000 or 100% (whichever is less) 2000(L)
combination of long and short positions
how would we determined combined equity.
what is formula used to determine combined equity
LMV 10k CR 12k
dr=6k smv 9
LMV+CR -SMV-Br= COMB EQ
in a combined margin account, LMV increases while at the same time the SMV decreases. Combined equity will do what
increase because these are both good events
fundamental analysis
means financials
balance sheet
income statement
balance sheet formula
assets=liabilities+ owners equity
balance sheet
currents assets such as cash
accounts receivables
inventories
Fixed asset
plant & equipment
current assets
cash, inventory, accounts recievables
current liability
interest on any outstanding loans
This years interest only
things owed in one year or less
accounts payable
wages
all things owed this year
Long term liability
this years interest
interest on outstanding bonds (excluding this years(
owners equity
common stock
retained earnings
retained earnings
this is from where cash dividends are paid
what if a company declares a cash dividend
because its just declared it becomes a liability that hasn’t been paid
becomes a current liability probably being paid less than a year
for declared dividends only owners equity and liabilities are effected
what if a corporation pays cash dividend
liabilities decrease and current assets goes down because cash is used to pay the dividend
Income statement
current picture of company
this is where current sales are
sales -cost of goods sold =gross profit -interest on loans -taxes -preferred dividends =net earnings
earnings/shares outstanding
gives us Earnings per share
PE
current price/eps
technical analysis
stock charts that may help us forecast price or time
head and shoulders formation
indicates reversal of trend
means its going down
head and shoulders bottom formation
indication of reversal of trend but going up
which technical indicator states that small investors are always wrong?
odd lot theory
odd lots are bought by smaller investors.
if you track number of odd lot purchases you will find when that increases, market tendancy is to go down. basically saying smaller investors buy high and sell at lows(they suck )
small investors always wrong.
indexes are all
technical indicators
indexes that track stocks on nyse, amsx, and otc
is what
wilshire tracks 5000 stocks. by far broadest index
IPO
for example when a mom and pop shop wants to raise capital by issuing shares to the public
now there is shares outstanding(shares held in public hands)
less shares outstanding
shares are worth more
treasury stock
company (issuer)repurchases outstanding shares
instead of paying out dividends
How do we determine number of shares oustanding
number of shares issues
- shares that were repurchased
=outstanding shares
which of the following debt securities pays no interest
bills
bonds
notes
treasury stock
all following are back by government except
bills
treasury stock
rights of shares holders
voting rights
rights to dividends IF DECLARED
proportional ownership
share holders can’t vote for
officers
xyz declares 75 cent cash dividend. Dividend declaration date on dec 8
for all share holders of record as of jan 8
payable on february 8
3 days before record date.
ex dividend date is
2 days before record date.
2 late 2 days.
first day security can be sold(that is owned)
but would like to receive dividend.
when could they do this
after ex dividend date if they own it.
declaration date
ex div date
record date
payable date
boad determine all the following dates except
ex div determined by finra/nyse.
selling the dividend
is a
prohibited practice
selling the dividend is the idea that
registered rep recommending buying a stock before the ex dividend will result in a favorable dividend or rebate
types of dividends
cash dividends stock dividend (%)
customer owns 100 shares at 50$ per share
company declares 10% stock dividend
how much additional does the customer receive
10
start calling a split when its
5 for 4 split
which is 25%
1 for 5 would be what type of split
reverse
how are stock dividends taxed
when sold it is then going to affect capital gain or less because it now adjusts the investors cost basis.
taxed as capital gain or less when sold using an adjusted cost basis.
property dividend
product or
pay shares of stock from another company
xyz pays to existing shareholders shares of stock from abc inc. This is know as
Spin off(property dividend
A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.
warrants
right to buy common stock at a specific price at specific time
issued by corporations
generally warrants can go all the way out to 7 years.
issued at price above market value
when issued, warrents have what type of value
time value
intrinsic value
time and intrinsic value
only value is time
rights
always issued at price below market and very short term.
preferred stock
pays fixed stated dividend
this is for income
pays 8% of par value(typically 100$)
compare preferred stock with common stock
common stock for long term appreciation(growth)
Risk for CS Market risk(systematic) Business risk(unsystematic risk)
preferred stock
market price is interest rate sensitive
very bond like in respect to being sensitive to interest rates
Beta is a measure of
market volatility
alpha
difference in comparable betas
what may effect alpha of stock
products mgt (changes in management)
whats a beta of 1.0=
equals overall market
s and p
straight preferred stock
pays fixed dividend but is not guaranteed
cumulative preferred stock
they promise to pay dividends even if they miss them
participating preferred
Additional dividends that must be declared by the board
convertible preferred
changes from debt to equity
Which of these types of preferred would be least interest rate sensitive
straight
cumulative
participating
convertible
convertible least interest rate sensitive.
ADRS
purpose to facilitate domestic trading of foreign securities
trade on our exchange
you can buy and sell in us dollars
value of ADR is tied to foreign security in foreign market
exchange rate can have effect(currency risk)
good for diversification
debt investors part owners?
principal amount?
amount investor receives at maturity
no,
they are creditors(loaners) they are loaning corporation capital
principal amount(par,face) is 1000
they receive interest which is fixed and stated.(coupon rate, nominal rate.
what does coupon rate tell us
6% pays what
tells how much interest investor paid on annual basis
semiannual a 6% coupon pays 30$ semi
corporate bonds have
invest objective
highest income
max income
whats the risk of corporate bonds
how do we lose principal
interest rate risk
inverse relationship
if interest rates go above coupon
bond price will fall
if interest goes below coupon
price will rise and become attractive
if an investor buys a bond at discount(920 for example) which of the following statements are true concerning the bonds income to the investor
increase
decrease
stay same
the income is fixed and stays the same.
no matter what price you pay you will get 60$ for 6% coupon
if the investor buys bond at discount how does that effect return on investment or “Yield”
if you pay less than par then your yield increases
current yield
annual income/ current market price
XYZ inc reports 3$ in earnings, pays a 25 cent quarterly dividend and is trading at 20$ per share. what is the current yield.
1/20=5%
25 cents (quarterly) *4=1 dollar
xyz inc was trading at 50
it is now at 80 dollars a share
if the CY is 5% what is the quarterly dividend.
4 bucks is annual
1$ is the quarterly dividend.
if we buy bond at discount(920), receive 60% a year, cy is 6%
what if we hold to maturity and get par value which would be a 80 profit, could we factor that profit into yield equation
yes that is the YTM (apparently we won’t need to calculate)
factor in profit yearly. so whatever 80 in how many years is plus
we need to know if its greater than or less than CY
Draw the premium par discount chart relative to cy ytm and ytc
draw it
what yield is BD required to disclose on customer confirm
defends on price that was paid
ytc if premium
if discount its lowest between ytm and ytc because cy doesnt matter in this case.
call provisions for bonds
good or bad
call provisions are a good thing.
Which of the following bonds would an issuer most likely refund
9% nominal mat 2025 callable at par
9% nom mat 2024 call at
101 1/2
- 5% nom mat in 2025 call at par
- 5 nominal mat 2024 call at 101 1/2
start with debt that has highest rate
refinance at lowest cost
par is lowest
answer is A
least likely do
opposite for this so it would be bottom D
mat is irrelevent
Investor side of call provisions. good or bad from this point
bad because of the risk of call risk.
With call risk, you are reinvesting the principal at a lower rate.
it effects YTC
what is the only bond that doesn’t pay interest/reinvestment risk
zero coupon bonds
All bonds will be issued in
term or serial maturities
term maturity
all matures on the same date.(all corporate bonds have this)
some can be munis
all term bonds are quoted
as a percentage of par
serial bonds
quoted
matures over a series of years
quoted as basis(yield)(YTM)
munis predominately
how do you make money on zero coupon bond
no interest but usually purchased at high discount and then when it matures you make a profit
how are zero coupon bonds taxed
when are we taxed
taxed as ordinary income
every year
taxes calculated using straight line accretion
who would be most suitable for zero coupon bond
saving for college tuition
what is jj
interest payments dates
jan and july 1rst
accrued interest
owed interest that has accrued since last payment date
what basis do corporate bonds and municipal bonds
those bonds will accrue interest on a 30/360 basis.
so february would count as 30 days
receive interest up to day before settlement (T +3)
settlement does not include______
Accrued interest ____
weekends
does
gov securities use actual
gov securities accrues up to
days
up to day before settlement (T+1)
Interest on us gov securities will accrue up to and including which day
First day
settlement
trade date
independence day
Trade date
Which of the following bonds trade flat
trading at par
not trading
trading w/o accrued interest
trading at a discount
trading flat means trading without any accrued interest.
because they are ether in default and arent paying interest
or are a zero coupon bond
which bonds trade add interest except (what does this mean)
means trading flat
still trading with out accrued interest
risks of corporate bonds
interest rate sensitive in inverse way
credit risk(default risk)
long term bonds vs short term bonds
those with longer maturities will fluctuate in price far me then short
how determine bond risk when bonds have same maturity
look at bond price that is farthest from 1000(par)
how can determine bonds for their credit risk
ratings from moodys or standard and poor
junk bonds
non investment grade
or high yield bonds(high risk)
investment grade sometimes referred to as
bank grade
wheres the line between investment grade and junk
if a bond starts with letter B it must have 3 letters to be considered investment grade
according to the office of comptroller of currency which of the following would be considered bank grade
Ba3
BB+
BBB-
B++
BBB-
rapidly decreasing rates does what to a curve based on maturity and interest rates
it flips it short term
every time inverted yield curve occurs it leads to recession.
eurodollar CD
prefix euro means non us
pays interest and principal in us dollars
euro bond
in foreign currency. Notice its missing dollar.
which of the following may represent currency risk for a us investor
Eurodollar cd
eurodollar bond
euro bond
adr
Euro bond
what if kingdom of norway issues a bond in our country trying to raise capital in us markets. us investor purchases bond and kingdom of norway takes norweigin taxes from your interest payments.
If i pay taxes to foreign country then i would get foreign tax credit on my us tax bond
convertible securities
bond that allows you to convert into common stock at a set price
to calculate a parity price on bond
take the percentage price change of one and apply to other
customer owns an xyz inc 8% convertible debenture. it has a conversion price of 50 dollars a share. Market price of bond decreases to 90. The common stock is trading currently 2 pts below the parity price. what is the market price of the stock.
for stock to remain equal it go down 10% as well. 10% of 50 is 5$. parity of price is 45.
answer is 43 because stock is trading 2 points below parity
john owns xyz at 8% convertible debenture with a conversion price of 50$. BOD of xyz announce a call in 30 days at 103. current market price of bond is 101. Current market price of stock is at 55. As a Registered rep which would you recommend ?
sell bond
convert into stock
tender bond 30 days
sell short again the box
this is a forced conversion. If convertible bond is called
convert
what determines what kind of investments go into pool for investment company
investment companies must have clearly defined investment objective
found in prospectus
every share that customers buy in investment pool(Fractional of whole) is
a brand new share and because of this a prospectus is required
how do we determine price of investment pool shares
based off all stocks or bonds in portfolio
we take net asset value/number of shares outstanding
nav = assets- liabilities
when you sell your shares back to original issuer
redeemable
closed end investment company
IPO where prospectus is used and then shares are bought and sold in secondary markets.(NYSE ,OTC)
NOT redeemable
ETF
always track an index(like s&P)
Shares issued to public in IPO with prospectus
shares are bought and sold in secondary market
LOW cost
levered ETFS
Attempting to get 200% or 300% of the daily return on the index
buy on margin
use options
futures
achieved 200% leveraged ETF. on day 1 its goes up 5%. day 2 it does nothing. day 3 it goes down 10%. current market value is 50$ a share. what is current market price as of day 3
if index goes up 5% then cmv goes up 10% which would be 55
day 2 55 ‘
day 3
goes down twice as much which is 20%
which is 44
reverse (inverse) ETF
if index goes down in value, the reverse etf will do what inc dec stay same cannot be determined
means they are shorting market. Hoping it goes down.
increase
Open end investment company
mutual funds
ran by board of directors
non interested board of directors
whether or not they are employed by investment company or not.
Done so that outsiders can have an non biased views. To represent views of investing public
don’t worry about percentage on test
investment advisor represent
the largest expense of running the fund. they get paid based on a percentage of assets under management
where are the assets physically held of investment company
at the local bank who act as custodian(safe guarder/keeper)
transfer agent
they sell and redeem shares and keep track of the number of shares outstanding.
mutual funds will employee
broker dealers to issue the shares to their customers
fund sponsors/distributers
class a shares
front load funds. Paying sales charge up front.
class B shares
back end load
pay sales charge at end
sales charge decreases over time and completely go away(contingent deferred sales charge)
breakpoints (quantity discount)
who may be eligible to receive quantity discounts
Jon doe John and mary doe(joint married) john doe inc john doe(31) and John sr (58) jan doe cust FBO jimmy doe
all except 1 can be eligible
everyone except investment clubs
otherwise its john and his dead. they are independent adults like retired guys forming a club.
investing investor money right up to breakpoint to maximize sales charge
this is a breakpoint sale and is illegal
rep invests their customers monies in 7 different fund companies with the same objective and risk profile.
this is suspected breakpoint sale violation because they are using different funds for same objective.
fixed annuity general account
investors moneys are co mingled with insurance companies moneys as well
if this is case, insurance company will guarantee fixed stated rate
would not recommend to someone with long
time horizon or someone adverse to inflation risk because of purchasing power risk
variable annuity separate account
can invest in stocks, bonds, or any security product. our returns from these investments will vary.
we do have risk. little to no purchasing power risk.(testable topic)
separate account has clearly defined investment objective. we find this in prospectus.
this is registered as a UIT and mutual fund like (not a mutual fund tho. Its like a mutual fund inside of a insurance product)
variable annuity qualified or non
non qualified
earnings will grow tax deferred
any withrdraws prior to 59 1/2 result in 10% penalty
vehicle for saving for retirement
accumulation units
basically shares
will constantly change
value of these units are dependent on NAV
variable annuity when money comes out
which moneys come out first in distribution
because these are non qualified it means they are already taxed. initial deposit is cost basis
over time we hope investment grows, when we take money out, taxed on LIFO basis. all taxable earnings come out first.
what if you annuitize variable annuity
means income for life until you die.
accumulation units transform themselves into annuity units.
once you annuitize, the number of units now become fixed
what determines value of my annuity units
it is somewhat based on NAV, but actuaries then take over because they have to determine when you will die. They try to determine how assets will do until you die.
come up with assumed the assumed investment rate
lets say our actuaries make an assumption that our assets will grow 5% per year
this is bench mark to compare to actual value(nav) so if actual value only 3%, then the value of units decline as does your monthly check. Check will vary. if actual value is higher then assumed rate then value increases and so does monthly check
value of the check during annuity stage based on value of
assets vs Assumed investment rate
annuity payout options
life only- check every month until you die
no beneficiaries
largest monthly income option
life only w/ period certain
if i die within certain period of time then bene continues to get payments for that period of time and then it ends. if you live beyond period then you get a check still until you die.
who is most suitable for variable annuity
a. 57 year old about to retire
b. 75 year old who wants fixed income
c. 36 year old who has maxed out qualified plans and still has money to invest tax deferred
d. 28 year old who wants down payment on a home in 5 years.
non qualified retirement plan
C. 36 year old who has maxed out qualified plans and still has money to invest tax deferred
Investor buys 1 xyz june 30 call at 2 When xyz stock is trading at 27$ a share. Why does he do this. How much did this cost investor
200 dollars
people buy opens because
leverage
allows us to profit from stock going up but at far less capital
premium depends on
how much time we have to underlying stock to go up or down or whatever.
more time =higher premium
also fluctuates based on underlying price of stock.
intrinsic value for call options
when market price of price is greater than strike price of option.
nothing to do with premium
the investor closes their position. whats this mean
doesn’t mean exercising
buy ibm october 90 call at 3 when ibm is trading at 86 dollars per share. at expiration ibm is trading at 98 dollars per share. investor closes their position. what is the net profit or loss.
breakeven
800-300 prem
=500
when it trades at 93
investor sells ibm october 90 call at 3 when ibmis trading at 87$ per share. at expiration ibm trading at 98$ per share. what is intrinsic value. what if investor closes position
regardless of buy or sell. its 800
then investor loses 500
buy 1 xyz jan 70 put at 2 when the stock is trading at 73$ per share.. intrinsic value is when . at expiration xyz is now trading at 61$ per share and the investor closes their position. what is profit or loss.
when stock price falls below strike price(in the money)
700 net value
whenever you buy option most u can lose is
premium
sells xyz jan 70 call at 2 and xyz is trading at 73$ per share. at expiration xyz is now trading at 61$ per share. they close position, what is profit or loss.
700 dollar loss
when you sell most you ever gain is
premium
hedges
investing in stock and using an option to do one of two things.
protect that stock
or to enhance profit on stock
hedges only position with stock
protect=
guard against risk
or term hedge itself
hedge means protect
profit=
increase return
or to generate income
chester buys 100 shares of ibm at 90 at 2
whats breakeven
- 9000
- 200$
breakeven is
9200
covered call for
neutral, bearish market
sally long 100 shares xyz at 50. she fears a near term correction, but overall remains bullish. as registered rep, which would you recommend so that sally could profit from situation.
buy 50 call
buy 50 put
sell 55 call
sell 55 put
sell because of the word profit in there
remember buy for protection and sell to profit
sells short 100 sh xyz at 80
and wants to protect stock what do we do
buy call
investor and he sells short 100 shares xyz at 80 and investor simultaneously writes october 75 put at 3. the stock declines to 72$ a share and the put is then exercised. for tax purposes what is the gain or loss
a 1100 gain
b800 gain
c300 loss
dunlimited loss
8000 in
300 in
-7500
+800 dollars
hedges cheat sheet draw it
draw it
investor buys 300 shares of xyz at 60 and simultaneously writes xyz 65 calls at 2. what is investors break even
if you see multiple, just solve if it were one.
out 60
in 2
BE is 58 dollars per share
buy 300 shares xyz at 60, writes 5 xyz 65 calls at 2
what is max loss
unlimited because 3 are covered and 2 are not
this is called ratio right
straddle
buying both types or selling both types
calls and puts
an investor is long 1 xyz sep 40 call at 3 and simultaniously is long 1 xyz sept 40 put @ 2
be
hes bullish and bearish. this is a long straddle. anticipate volatility
out 300
out 200
be is 45 for call
35 for put
needs to move a lot to break even
short straddle
selling 1 xyz sept 40 call at 3
selling 1 xyz sept 40 put at 2
be
don’t want stock to move at all, that way we go home with the 500$ premium
be is 45 and 35
don’t want volatility
unlimited loss for both
an investor is long in xyz 40 call at 4 and long xyz 45 put at 2.
be
called a combination
46 and 39
Sally writes a combination. she is a bullish b bearish c neutral d consolidated
c neutral
spread
buying and selling same type
ether call or put
long 1 xyz oct 30 call at 4
short 1 xyz oct 40 call at 1
BE
MAX gain MAX loss
out 400
in 100
net out 300
this is called the spread
basically this is buying calls
so this is a bullish call spread because of the -300 premium
spread determines which it is
-300 is the max loss
CAL
call add premium
lower sp
30+3=33 ignore the + or - this is BE
max gain
max gain always = difference in strike prices. so basically use the 3 to determine its 700 because the spread between the strike prices is 10.
long xyz 60 call at 5
short xyz 70 call at 3
out 500
in 300
net -200
long most we can lose is -200
max gain 800
be = 2+60=62
straddle
buying both types or selling both types
calls and puts
an investor is long 1 xyz sep 40 call at 3 and simultaniously is long 1 xyz sept 40 put @ 2
be
hes bullish and bearish. this is a long straddle. anticipate volatility
out 300
out 200
be is 45 for call
35 for put
needs to move a lot to break even
short straddle
selling 1 xyz sept 40 call at 3
selling 1 xyz sept 40 put at 2
be
don’t want stock to move at all, that way we go home with the 500$ premium
be is 45 and 35
don’t want volatility
unlimited loss for both
an investor is long in xyz 40 call at 4 and long xyz 45 put at 2.
be
called a combination
46 and 39
Sally writes a combination. she is a bullish b bearish c neutral d consolidated
c neutral
spread
buying and selling same type
ether call or put
long 1 xyz oct 30 call at 4
short 1 xyz oct 40 call at 1
BE
MAX gain MAX loss
out 400
in 100
net out 300
this is called the spread
basically this is buying calls
so this is a bullish call spread because of the -300 premium
spread determines which it is
-300 is the max loss
CAL
call add premium
lower sp
30+3=33 ignore the + or - this is BE
max gain
max gain always = difference in strike prices. so basically use the 3 to determine its 700 because the spread between the strike prices is 10.
long xyz 60 call at 5
short xyz 70 call at 3
out 500
in 300
net -200
long most we can lose is -200
max gain 800
be = 2+60=62
long xyz 70 call at 3
short xyz 60 call at 6
bearish 3
be=63
max loss=700
max gain =300
short calls bearish
long 1 xyz 80 put at 7
sell a xyz 70 put at 3
out 7
in 3
net debit 400 dollars
buying put (bearish) most you can lose is premium=400 max gain =600
be= subtract premium from higher sp
be=80-4=76
buy xyz 30 put at 3
sell 40 put at 5
out 3 in 5 =credit 200 be=40-2=38 max gain 200 max loss 800
spreads be
if t chart ends in a net debit that is our what
dominant(higher premium) determines
cal and psh
max loss(we can determine the other from this)
market attitude
spreads without premiums
for calls the lower strike price will have the higher premium
puts- higher strike price has higher premium
investor writes one xyz 70 put
buys xyz 60 put
can make up numbers but higher strike must have higher premium for puts
in 5
out 1
bullish
credit
customer long xyz 40 call at 4 short xyz 50 call at 2 to max profit customer would a want spread to widen b wants spread to narrow c exercise both options d allow both to expire
depends if its debit(widen) or credit(narrow)
-2
debt so we will execise and widen
cust owns 1 xyz 30 call. BOD announce a 12% stk div
on ex div date cust will own
1 xyz 28.80 call(100 shares)
2 xyz 28 80 call(112)
1 xyz 28.80 call (112)
2 xyz 28.80 call
shares is only thing that changes so its c
what happens to options contract with cash div
no change
investor buys 1 oex call 420 @12
CMV=445
what does investor recieve
exercise price- int value
445-420=25 or 2500.
intrinsic value does not take premium into consideration
VIX used
what index does it track
to help track volatility of underlying stocks. helps determine price of option
s and p 500
american vs european option
euro can only be exercised at expiration
american options can be exercised anytime
foriegn currency options
boeing wants to import raw materials from a tokeyo manufactor with payment expected from boeing in yeng in 30 days
boeing concerned us dollar value will decrease. what could they use to hedge
buy y call
buy yen put
buy us dollar calls
buy us dollar puts
fear is really y will go up
buy call
xyz inc exports hats to longdon corp w payments in pounds in 30 days. fear is us dollar increases
buy p call
buy p put
buy us dollar call
buy us dollar put
buy put because fear is pound goes down
Draw the max gain max loss for each
lc gain Pre Loss u
sc gain u loss pre
lp sp-p pre
sp pre sp -p
closing the position or selling the option
holder can sell option for a premium: there is no purchase or sale of underlying stock in this situation. the investor has profit or loss based on the increase or decrease of the options premium from the time the option was purchased
exercises of listed equity options settle
two business days from exercise date
price spread or vertical spread
is one that has different Strike prices but the same expriation date.
time spread, calander spread, horizontal spread
includes option contracts with different expiration dates but the same SP
diagonal spread
one in which option positions differ in both time and price
debit=
widen narrow exercise exprie
widen and exercise
credit =
widen narrow exercise exprie
narrow expire
breakeven for spreads
CAL
PSH
Call ADD premium Lower SP
Puts Subtract premium from Higher SP
debit call spreads used
by investors to reduce the cost of a long option position. potential reward is reduced. This investor is bullish
credit call spread
created by investors to reduce the risk of a short option position. Potential reward is reduced. this guy is bearish
debit put spread
used by investors to reduce cost of a long put position. Bearish
credit put spread
created by investors to reduce risk of a short put position. reward reduced
bullish
max gain and loss for credit spread
net credit
difference between the strikes prices-net credit
max gain and loss for debit spread
difference between sp- net debit
determining a spread investors market attitude
If you are buying the lower SP, you are bull
do T chart to determine credit or debit
combination
composed of a call and a put with different SPS expiration months or both.
index multiplier typically uses
100
how to start limited partnership
partnership agreement
private placement
what makes partnership effective
not a limited partner until GP signs off on
investment objective for each
new construction-
existing property
exploratory(wildcatting)
income wells (programs)
capital appre
income, depreciation
very high risk
conservative(safest)
reit vs vs real estate limited partnership
reit passes only gains and not tax benefits.
lp for re passes taxe benefits and losses
what is idcs
intangible drilling costs, wages fees
Dpps are the only
investment whee losses past through to investor
what is the most difficult to avoid
centralized management
continuity of life
centralized management
which characteristic is easiest to avoid
centralized management
continuity of life
continuity of life
which two corporate characteristics are most likely to be avoided by a DPP
continuity of life and freeley transferable interests
when considering the purchase of an lp, an investor should be most concerned with
economic variability which is the number 1 reason to purchase a limited partnership
documents needed to limited partnership
partnership agreement
certificate of limited partnership
subscription agreement
Lps are liable for a _____ assumed by partnerships.Lps have no liability for
proportionate share of recourse loans
non recourse loans except in real estate partnerships
capital growth-
cash flow(income)
tax deductions-
tax credits-
appreciation of property
rent collection
mortgage interest expense and depreciation allowances for wear and tear of building and capital improvements
government assisted housing and historic rehabilitation
intangible drilling cost
no salvage value
tangible drilling costs
have salvage value
depletion allowances
decreasing supply of oil or gas
tax credits are
dollar for dollar
the interest paid by margin customers on money borrowed is a variable rate based on
the broker call rate
long margin account
customers purchase securities and pay interest on the money borrowed until loan is repayed
short margin account
borrowed and then sold short, enabling customer to profit if value declines
(long)when buying options customers must deposit
100% of premium.
(long)covered call premium amount
50%
(long)in a cash account premium is
100%
(long)equity in long margin account formula
LMV-DR=EQ
Dr is debit register and lmv is long market value
(long)in long margin account, minimum maintenance is
25% of LMV
(long)Reg T=
50% of LMV
whenever market value of securities goes up what doesnt change
DR
(long)if equity in the account is less than reg T but greater than or equal to min maintance the account is
restricted
(long)if securities are sold in restricted account, what is effected
everything except equity
(long)restricted account rules
to purchase additional securites, put up 50%
To withdraw securites, customer must deposit cash equal to 50% of value of securites being withdrawn
if securities are sold in a restricted account, at least half the proceeds must be retained in the account to reduce the debit balance. This is called retention requirement, also 50% of proceeds credited to SMA
(long)when equity in the account falls below the min maintence requirement, the customer recieves a
maintance margin call. this is a demand that the customer make a payment to bring account back to minimum
(long)SMA
special memorandum account. this is a line of credit that customer can borrow from or use to purchase securities
(long)sma can be borrowed
sma can be spend
dollar for dollar
2 for 1
(long)SMA cannot be used
to meet a margin call
(long)exempt securities are
not subject to reg t but are subject to min maintance requirments
exampt securities are bill bonds notes
gov agency securites
municipal securities
short margin accounting formula
CR-SMV=EQ
short margin min deposit
2000
min maintance for short
30%
short reg t
50%
municipals securities traded on exchange or dealer to dealer
dealer to dealer
specialist belong on
exchanges
otc is where who lives
market makers
nasdaq is
quotation service
what potential risks are with ecns
enough liquidity and volume in trades
sally has a large gain in xyz stock, shes concerned about downturn in market.
reccomend buy limt sell limit buy stop sell stop
what do we need to ask ourselves
SL BS
CMV
BL SS
slobs and bliss
do they own or want to own?
what is anticipated market movement
Answer is sell stop
bill has been researching abc stock and has noticed stock has down nothing and would like to take advantage if the stock should break out
what would you reccomeend
slobs bliss
he wants to own
anticipates going up
Buy stop
which of the following orders may excelarate a bear market
Sell stop
you want to sell in a bear market
which of the following orders may excelarate a bull market
buy stop
xyz trading at different prices
- 75
- 58
- 65
- 60
- 48
customer places sell stop at 49.60
when would this be executed
49.58 triggered into market order
executued at 49.65
Finra 5% markup policy
rule
policy
law
guidline
guideline
does the 5% markup policy apply to agency transactions or principal transactions or both
what about ipos and mutual funds
applies to both
which orders are reduced for cash dividends
only those placed below the market price are automatically reduced.
bliss( buy limits and sell stops) are placed below the market price and are reduced
fill or kill or immediate or all or none
fill or kill
markups and markdowns are charged when a market maker
is acting as a principal(dealing from inventory with financial risk
firm quotes are good for
round lot only
nominal quotes can be
given for informational purposes and can be printed only if clearly labeled as such
a relatively widespread indicates
a thin trading market for the security
securities identified as otc non- nasdaq may
not always have last-sale information readily available as that information may be difficult to find for these thinly traded securities
the 5 % policy applies to
markups, markdowns, and commissions, meaning it is applicable to principal and agency transactions
in the 5 percent policy what is the limit
5 % is not the limit. a transaction charge of more than 5% might be fine if it is reasonably based on the circumstances of the trade
settlement same day
cash settlement
settlement next day
regular way- trading options
regular way-trading or exercising nonequity options
regular way- bills notes bond
2 business days settlement
regular way-equity
regular way- corporate and muni bonds
reg way-us gov agency
2 days after regular way settlment
reg T
no sooner than T +3 settlement
Seller’s option
if question asks when customer confirmations must be sent answer is
when the broker to broker confirmations must be sent
no later than settlement date
no later than the business day following the trade date(T+1)
Muni bond
Exempt from federal taxes. Exempt from state taxes(if resident of that state). Tax exemption is solely on income. Can still be capital gains taxes
Who is most suitable for muni bond
those in the highest tax brackets
General obligation bonds
State issues gos
other
backed by full faith and taxing of the federal government
income taxes, sales taxes, drivers fees
ad valorem(preoperty taxes)
gos have voter approval and debt limits
double barrel bond
remember city
What backs revenue bonds
User fees such as tolls, concessions(buying beer at stadium), leases
referred to as self-supportive
Do not require voter approval.
Trust indenture act of 1939
Federal law that requires these trust indentures for all corporate bonds with face value greater than 50 million. It’s like a prospectus for corporate bonds specifically.
Trust indenture(bond contract)
contract between issuer of bond and trustee for the benefit of the bondholder. Contains protective covenants(promises or obligations of issuer)
Which comes with trust indenture
rev bonds because they are more risky because you are relying on beer drinkers instead of taxes. Trust indenture makes the bond more marketable
rate covenants
We have to charge sufficient user rate to insure that the bond gets paid. Maintaince also has to be maintained. Insurance also needs to be met. This is where rate covenant comes in.
Additional Bonds Covenants
used to expand facilities. Ether open end(can we issue additional bonds)(yes with test). Closed end (yes but any additional bond will be junior in claim to the original bond.
call provisions
whole
partial
catastophe
call whole
call part
Natural act that helps when an earthquake or natural event happens. Would have to condemn legal facility.
flaw of funds
*Prioritize in a net pledge and gross.
Prioritizes all the user fees and how they get dispersed. Trust indenture will come as gross revenue pledge or net revenue pledge(this describes priority of payments). In gross pledge, interest and principle(debt service) is paid first. Any and all op expenses are then paid. In net pledge, workers paid first and then rest used for debt service. Left over money moved into a sink fund( rainy day fund)
Sink, debt, op. answer is op expenses, debt, sink. For gross its debt, op, sink
IDRS
ndustrial development revenue bonds-lease. These bonds are for “private purpose” of corporation. Interest these bonds pay may be taxable.
Your customer subject to the alternative minimum tax, which would be least suitable-
IDRS or private purpose.
Other thing effected by Alternative minimum tax is-
Intangible drilling costs
Special Tax Bond
backed by alcohol, tobacco, gasoline,
Moral obligation bond
what would be required to issue
no voter approval. This is rev bond backed by user fee. If user fee is insufficient then state legislature has obligation to pay this. Backed by state legislature ultimately.
Auction Rate Securities
Money market alternative. Very liquid. Created portfolio of short term municipal notes. Investors invested money in. Broker dealer would ask underwriting investment firms to bid on the securities (Dutch auction) highest bid is the reset rate.
What is the risk of auction rate securities
what if no underwriters show up to bid(failed auction)
Municipal notes
Tans bans and rans. Purpose is cash flow. Fills in gaps for periods of low cash flow
Analysis of different municipal bonds(quality) For gen obligation bond
Population growth, Income per capita of community, tax collection rate, / tax delinquency rate
Overlapping debt (coterminous debt)
direct debt is what matters. Find direct debt and pick it for test.
conterminous refers to two or more taxing agencies that share the same geographic boundaries and are able to issue debt separetly
overlapping debt is when 2 or more issuers are taxing the same property to service their respective debt
Determine quality of revenue bond
Economic justification for say a convention center. Feasibly study(if we build it..will they come) Do we have any competing facilities. *Coverage ratio(debt service coverage ratio)(are the user fees sufficient to cover the debt)
Coverage ratio
2:1 is the minimum. calculated on net basis
3 things that bond counsil needs to issue muni bonds(legal opinion)
Authority to issue
IRS officially signs off that interest is exempt from federal taxes
Bond is exempt from securities act of 1933(no registration and no prospectus)
Opinion comes to us qualified or unqualified. We would prefer unqualified.
What document is similar to prospectus for municipal bonds
official statement (created by underwriters with the issuer to make bond more marketable because it gives the client something they can look at)
Looking for rating, where do u go
official statement
is there a law that requires official statement
no
How liability is spread in best efforts-
Western(divided)-10% only. No additional liability
Eastern(undivided)-10% liability + additional liability=initial=10%
How are munis traded
you have to find broker dealer who owns the bond or has customer who has bond and is willing to sell it. So were going dealer dealer(trading otc)
Brokers Broker vs Broker Dealer
BB provides list of available bonds to be bought and sold(subscribe to service) Broker dealer maintains inventory of securities.
Firm Quotes(out firm quote)
must stand behind this quote once issued for 1 hour with 5 minute recall(because someone else
Muni dealer purchases 7% muni at par. They now wish to reoffer to public according to msrb which would represent fair quote. 2 are correct
5% markup policy needs to be taken into consideration
3 is fair and 1 is fair.
What if we purchase bond issued by us territory (pureto rico, guam, us virgin islands)-
they are triple tax exempt(*fed,state, and local) for all us residents.
Investor purchases a muni at 110, holds to maturity receiving par.
0
Purchase muni bond at 110, matures in 20 years, we sell it however after 10 years at 106. What is gain or loss
have to adjust cost basis to 105
106-105 =10 gain
If we buy bond at 94 and we are not the original creditor then how do we compute cap gain or loss- cost vs sale no adjustments.
What you sold vs what you bought
What if we bought new issue at discount-
call original issue discounted bonds. If we buy one of these and hold to maturity then what. We have to adjust cost basis. We use straight line accretion. If held to maturity 0 gain or loss. Sold prior to maturity, sl accretion.
A customer purchases muni at 108. It matures in 20 years. However is sold in 10 years at 102.
What is capital gain or loss
20 loss
Adjust half of the 8 in premium which makes it 104, sold for 102 making it a 20 dollar loss
Cust wants highest after tax income possible and is considering several bonds, mix of ether munis or corporate bonds. As registered rep, which would be most important. What state they live in What is there time horizon Whose there mama What tax bracket they currently are in.
tax bracket they are currently in
They currently own 5% muni bond and in the 34% tax bracket. What would equivalent corp bond yield have to be.
Tax equivalent yield is muni yld/ 100-t.b so its 5%/100-34= 7.5%
All of the following may enforce frb rules except? MSRB FINRA NYSE Office of com controller of currency
msrb
What is required on muni confirmation statement-
Dates
Control relationships
Yield to worst
Capacity in which BD has. Do they act as agent or principal
What is the cusip #
every security has this number for identification and tracking purposes.
What if a customer refuses to disclose financial information
no recommendations
Control relationship
Someone who represents both the issuer as well as the broker dealer. Relationship must be disclosed
Political contributions
max contributions of up to 250 dollars.
Broker dealer is sponsoring a golf tournament and providing to muni officals a free golf club worth $69. What is allowed under msrb
both are allowed
Bond buyer-
specific to new munis
What is in Revdex
25 rev bonds with 30 year maturities
Visible supply
new munis issued 30 days
Placement ratio
amt sold/offered
PHAS or nhas
the only municipal issues backed in full by us government. also called section 8 bonds
which municipal publication includes the 30 day visible supply index
the bond buyer
which municipal publication provides the most up to minute information relevent to the secondary municipal bond market
thomson muni market monitor
mangers fee vs takedown in size
takedown biggest and managers fee the smallest
when can a syndicate member receive the full spread when a bond is sold
syndicate member recieves full spread if the member is also the syndicate manager.
takedown=
concession+additional takedown
7% bond 6.25 basis
7% bond 7.64 basis
premium or discount
premium
discount
brokers brokers protect
identity of their customers
msrb rule g-13
municipal brokers and dealers to give bona fide bids and offers for municipal securities (bona fide quotes are those good for trading)
what type ownership allows for 50% exclusion of dividends from taxation
corporate ownership
What is a bank-qualified municipal issue
One that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry the bonds.
All of the following are regulated by the MSRB EXCEPT: quotes. B) sales representatives. C) dealers. D) issuers.
issuers are not
According to the Dow theory, reversal of a primary bullish trend must be confirmed by:
the Dow Jones Industrial Average and Transportation Average.
When a member of the syndicate sells a bond they are entitled to
total takedown
Which of the following describes a quote on Nasdaq Level I? A) Inside market. B) Lowest bid/highest offer. C) Nominal. D) Available to traders only.
Nasdaq Level 1 quotes represent the highest bid and lowest asking prices of all dealers. This is known as the inside market.
A Designated Primary Market Maker on the floor of the CBOE may or may not trade for his own account
may
f the owner of a variable annuity dies during the accumulation period, any death benefit will:
be paid to a designated beneficiary
credit
Debit
narrow or wide
exercise or expire
credit-expire, narrow
debit- wide exercise
Municipal bonds known as dollar bonds are generally quoted:
as a percentage of par
Under which of the following circumstances may a member firm sell a new equity issue to one of its nonregistered employees?
under no circomstances
Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at
net asset value
Sell orders for equity securities must be marked
long or short
According to the Investment Company Act of 1940, a diversified mutual fund may hold, at most, what percentage of a corporation’s voting securities
100%
taxation on annuities
taxed as ordinary income when withdrawn.
interest rate options have what kind of relationship with interest rates
DIRECT
A variable-rate municipal bond investment’s main advantage is that:
it should remain relatively stable
For real estate limited partnerships, nonrecourse loans
are included in the limited partners cost basis.
Interest on funds borrowed to purchase municipal bonds is tax deductable or not
not
When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, this is referred to as
double-barreled bond.
muni bond at premium for adjusting cost basis
Amortization
reduceds cost basis and reduced reported interest income
muni bond discount adjusting cost basis
increases cost basis
increates reported interest income
