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Series 7 > Series 7 Chapters 11-13 > Flashcards

Series 7 Chapters 11-13 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

a company that manages a portfolio of real estate investments in order to earn profits for its shareholders, subject to registration requirements of 1933 act. shares trade in secondary market and are marginable. distributions don’t qualify for the dividend exclusion rule.

A

REITs

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2
Q

types of reits

A

Mortgage / debt (issue secured loans that are backed by real estate purchases) Equity (own and operate income producing real estate) and Hybrit

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3
Q

Tax benefits of REITs

A

Reits are not taxed if 90% of income is distributed. doesn’t pass through losses. 20% of distributed income is tax-deductible

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4
Q

methods of offering reits

A
  1. exchange listed (registered) 2. registered but non-exchange listed OTC 3. unregistered - private placement
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5
Q

a passthrough venture that is designed to pass through income and losses

A

DPP akas LP

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6
Q

examples of DPP

A

LLCs, Subchapter S, join venture, LPs,

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7
Q

Advantages of LPs

A

flow through of income (no double tax) and expenses. Income flows as passive income. A portion is taxed as ordinary income (20% is deductible) and have limited liability

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8
Q

disadvantages of LPs

A

NOT liquid, required general patterns approval to sell, not publicly traded, lack of control, complex tax,

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9
Q

what percentage of interest must the General partner have.

A

1%

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10
Q

Liquidation order for LPs

A

Creditors, Limited Partner, General partner

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11
Q

rights of limited partner and ways to endanger limited status

A

right to lend money, inspect books, complete. endanger limited status - negotiate contacts, hire / fire employees, lend name

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12
Q

offering of DDPs

A

Registration is required under 1933 act, underwriter is used, prospectus is used. unless private placement then securities qualify for an exemption under Regulation D (more common)

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13
Q

Types of LPs

A
  1. Real Estate (raw land, new construction, existing, low income / gov sponsored) and 2. Gas (exploratory, developmental, balanced, income) 3. equipment leasing partnerships (good for consistent income and depreciation tax benefits but risk but bad for appreciation of underlying assets)
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14
Q

public equity and public debt programs

A

DPPs invest in public equity or debt of existing issuers,. small cap debt (many of these are illiquid, unrated, above average yields). small cap equity - publicly traded but may be illiquid, programs often concentrated in specific industry that GP has expertise in

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15
Q

formed as a registered investment company (closed-end) and invest in both the equity and debt of typically non-public companies, including small developing companies, financially troubled, private, they are risky . can buy and sell on exchange

A

Business Development Companies BDC

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16
Q

requirements of RR for DPPs

A

Required to certify that they have informed their customers of all relevant facts and lack of liquidity. Investors must have sufficient net worth and income to absorb loss of entire investment. RRs are NOT permitted to exercise discretion with DPPs

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17
Q

Investment fund for wealthy investors, offered under Reg D to accredited investors. Not considered a registered investment company under 40act. Uses exotics strategies. charge a management fee and performance fee.

A

Hedge Fund

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18
Q

Fund which allocates money to hedge fund manager, suitable for wealthy investors. pay place restrictions on withdrawing money

A

Fund of Hedge Fund

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19
Q

Type of closed-end fund, their shares are continuously offered however, and don’t trade in the secondary market. only can redeem are certain intervals. Fees and expenses are higher and offer limited liquidity that are more suitable for long term inventors. invest in risky investments.

A

Interval funds

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20
Q

who is the buyer of an option

A

the owner, long the option, pays the premium, acquires right

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21
Q

who is the seller of an option

A

short the option receives the premiums, assumes the obligations

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22
Q

in a call, what is the buyers right and sellers obligation

A

buyer has the right to buy the stock seller has the obligation to sell. buyer hopes the stock increases, seller hopes the stock decrease

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23
Q

in a put, what is the buyers right and sellers obligation

A

buyer has right to sell, seller has obligation to buy, buyer hopes stock decreases, seller hopes the stock increases

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24
Q

Equity option example - buy 1 ABC June 50 CAll at 5

A

Right to buy ABC stock 100 shares, for $50 a share, for a $500 premium , expiring third Friday in June

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25
Q

Calls are in the money when

A

market price is above the strike price

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26
Q

puts are in the money when

A

market price is below the strike price

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27
Q

what is the premium calculation

A

Premium = intrinsic value + time value

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28
Q

when does an option have intrinsic value

A

if it is in the money. the intrinsic value equals the in the money amount, it will never be negative. remainder amount is time value

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29
Q

max time for options

A

9 months unless a “leap” then 39 months

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30
Q

even stock splits

A

anything that ends in 1 so 3-1 or 2-1

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31
Q

stock splits and options

A

adjustments are done different for even splits - the one time that you increase the number of contracts that you were long or short (2 for 1 now you have 2 contracts). for odd splits and stock dividends the number of contacts stays the same and the underlying shares change. aggregate value always remains constant. strike price is not adjusted for a cash dividend on ex dividend date

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32
Q

liquidating an option

A

if you are long in the option, you can sell it. if you short the option, you would have to buy it back to close out the position

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33
Q

who issues and guarantees listed option contacts, eliminates counterparty risk by acting as the third party in all options transactions and regulate exchange traded options.

A

The OCC

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34
Q

who creates the options disclosure document

A

the OCC

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35
Q

when is trade settlement between broker dealer and OCC

A

T+1

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36
Q

who is bullish in options contracts

A

Buyers of calls and sellers of puts

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37
Q

who is bearish in options contacts

A

Buyer of put and seller of calls

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38
Q

who is bearish in options contacts

A

Buyer of put and seller of calls

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39
Q

breakeven for calls and puts

A

For calls strike price plus premium and puts strict price minus the premium. this is true for buyers and sellers

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40
Q

What is the most you can lose if you bought the option and most you can make if you sell the option

A

the premium

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41
Q

what are the gains and loss for long and short in puts and calls

A

Buyers of call - max gain unlimited max loss limited Buyer of put - max gain limited, max loss limited. Sellers of call - max gain limited max loss unlimited sellers of puts - max gain limited, max loss limited

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42
Q

what is the strategy for straddles and combinations (buying both call and put )

A

Buyer of calls and puts are looking for volatility. Sellers of call or puts are looking for stability

43
Q

buying / selling two options with same expiration month and same strike price (buy call and put)

A

Straddle

44
Q

buying / selling two options with different expiration months and or strike prices

A

Combination

45
Q

Positions which allow an investor to limit losses in exchange for limiting gains. Created for sale and period of two options of same class (same type of same underlying security) but different series (class, expiration and strike price) aka buy both calls or buy both puts

A

Spread

46
Q

Price/dollar/vertical spread -

A

the price is the difference : buy 1 ABC June 40 Call and Sell 1 ABC Jun 50 Call

47
Q

Time/Calendar/horizontal spread

A

the expiration is the difference: buy 1 abc Dec 40 Call and sell 1 ABC Sep 40 calls

48
Q

Diagonal spread

A

both price and expiration are the difference: buy 1 abc Dec 40 Call and sell 1 ABC Sep 50 calls

49
Q

Premiums for combination and straddles vs premium for spraed

A

Combine premiums for straddle and subtract for spread options

50
Q

for call spreads, the dominant leg is always determined by the what strike price

A

LOWER or for horizontal spread, the dominant leg is the longer expiration

51
Q

for put spreads, the dominant leg is always determined by the what strike price

A

HIGHER or for horizontal spread, the dominant leg is the longer expiration

52
Q

For spreads, if you pay more than you receive is it debit or credit

A

debit and widen

53
Q

what is a spread that is the combination of two spreads, one is a debit and one is a credit, can be created with either calls or puts. neutral strategy 1-2-1 strategy.

A

Butterfly spread (short body and two long wings). you short at the money and long two calls (one in the money one out of the money) max gain is at middle strike price

54
Q

what are hedging strategies with options

A

if you are long in a stock position, you can use long put. If you are shorting a stock, you can use long calls to protect the upside

55
Q

what are income strategies with options

A

Short calls may generate income on long stock positions, short positions may generate income on short stock positions.

56
Q

what is a covered call

A

A call written against a stock that is already owned. Limited risk . For a put, its a put that you have sufficient cash to cover.

57
Q

what is an uncovered call

A

call for stock that you dont own. unlimited potential risk. uncovered options are done in margin accounts not cash accounts.

58
Q

a position that consists of long stock position but more calls written than number of shares owned. neutral strategy. writing includes an uncovered call so the risk is unlimited

A

Ratio call writing

59
Q

options that provide the opportunity to speculate on or hedge against the movement of the market rather than a specific stock

A

Index options

60
Q

broad based v narrow based index

A

broad based reflects the performance of the entire market, narrow based reflects the performance of a specific sector. settlement for index is next business day where equity is two business days. and with index options, exercise style is European and you receive cash

61
Q

VIX Index Options

A

volatility index options - a barometer of investor sentiment and expected market volatility based on the premiums for S&P 500 index options over next 30 days. volatility increases when the market drops

62
Q

if an investors believes that the S&P 500 index will fall in in value, what will an investor do?

A

buy VIX calls

63
Q

what are world currency options

A

provide the opportunity to speculate on or hedge against the movement of exchange rates on foreign currencies compared to the US dollar. settle in 2 BD in USD and usually in 1,000 united (except yen which is 1m) quoted $.01 and uses a multiplier of 100. NO OPTIONS ON US DOLLAR

64
Q

currency spot prices are established in the what market

A

Interbank market - has unlimited trading hours (spot trades) and unregulated and decentralized

65
Q

what exchange do the currency options trade on

A

PHL which is owned by NASDAQ

66
Q

yield based option strategies

A

Similar to index options but use yields on securities. Preferred stock and bond prices and yields are inversely related. when bond prices fall, investors expect a rise in bond yields.

67
Q

what are the tax implications if an option expires

A

it will be a cap loss for buyer and cap gain for seller. generally short term

68
Q

what are the tax implications if an option is liquidated, offset, or closed out

A

short term cap gain or loss unless help for more than year.

69
Q

what are the tax implications if an option is exercised

A

will not generate a gain or loss. the calculate the cost basis of sale proceeds of an exercised call the premium is added to strike price, of exercised put, the premium is subtracted from strike price

70
Q

puts and holding periods

A

If a stock’s long term holding period is already established, a put purchase does not change it. if it has not been established the purchase of the put terminates the holding period for the stock

71
Q

what is a married put

A

a put purchased on the same day that stock is purchased, the premium paid becomes part of the stock’s basis even after expiration.

72
Q

Types of underwriting

A
  1. Firm commitment (syndicate takes entire offering acts like principal ) 2. best efforts acts like agent 3. best efforts all or nothing 4. best effort mini maxi 5. stand-by syndicate agrees to buy any shares that are not brought through a rights offering acts like principal
73
Q

underwriting spread

A

the difference between the public offering price and the amount to the issuer. includes a manager fee, a member / underwriter fee, and sales concession

74
Q

what happens during pre-registration

A

documents prepared, underwriter due diligence, complete registration statements, BD and RRs can have NO communication with public

75
Q

what happens during the cooling off period

A

file registration statement with SEC then starts cooling off period. RR can distribute prelim prospectus (red herring), blue sky the issue, no orders accepted and no pricing info, final due diligence meeting

76
Q

what happens during post registration period

A

effective date, sales confirm and final prospectus delivered, must contain the SEC no-approval clause

77
Q

what is the max period of time for shelf registration

A

3 years

78
Q

what is a market out clause

A

provides underwriter the ability to cancel the agreement based n events that make marketing the issue difficult or impossible.

79
Q

crowdfunding

A

allows small business to raise capital using the internet. capital can only be raised through an online platform of a broker deal or approved funding portal. amount that a person may invest is limited based on her income and or net worth

80
Q

types of prospectuses

A

statutory prospectus - condensed form of registration statement that provides detailed information on the offering. preliminary prospectus - aka red herring used during cool off period, does not include offer price, underwriting and dealer discounts. summary prospectus - short form prospectus typically used for a mutual fund offering, investor must be informed of statutory prospectus. free writing prospectus - any communication that does not meet standards of statutory prospectus

81
Q

after market prospectus requirements

A

exchange listed IPO - 25 days, exchange listed follow on - none non listed IPO - 90 days non-listed follow on 40 days

82
Q

what is the new issue rule

A

FINRA prohibits member firms from selling equity IPOs to any account in which restricted persons make have a beneficial interest . restricted = member firms and BDs and any immediate family members if there is material support (25% of persons income) sharing of a household, or the purchase is made through the family member’s firm. also finders and fiduciaries and PMs purchases for own acct.

83
Q

what is required when purchasing an IPO

A

confirming in written that the client is eligible to purchase IPO and re-verification every 12 months

84
Q

what exemptions for the new issue rule

A

an account that includes restricted persons if combined ownership does not exceed 10%, issuer direct sales where your spouse works for the IPO, firm commitment, pms purchases for the fund.

85
Q

accredited investors vs QIBs

A

accredited investor - institutional investor or individual with net worth of 1 m excluding primary residence or annual income of 200k in lst two years (300k for married). QIB - CANNOT BE PERSON and 100m of securities

86
Q

144a transactions are for what

A

QIB

87
Q

Regulation A Tier 1 registration exemptions vs Regulation A tier 2

A

Regulation A tier 1 - max offering size 20 m, time period of 12 months, max amount sold by existing shareholders 6m. Regulation A tier 2 - 75 mil in 12 months for max amount sold by existing shareholder of 22.5 million. these are public offerings and an offering circular must be provided

88
Q

what are exempt transactions

A

Regulation D - private placement to accredited investors (only 35 non accredited investors).

89
Q

what are accredited investors

A

officer or director of the issuer, institutions, individuals who meet the financial test

90
Q

for private placement, who is the purchaser representative and what is the disclosure document

A

anyone who is appointed by a non-accredited investor and may not be an officer, director, or greater than 10% shareholder. the doc is offering memo and not required if all investors are accredited, required if any non-accredited investors are included for all, includes proceeds, suitability, and financials

91
Q

what is rule 144

A

sale of restricted stock and control stock, must be filed at time sell order is placed, window for when you can sell for 90 days. max sale is the greater of 1% of outstanding shares of the average weekly trading volume over the past 4 weeks.

92
Q

what is the difference between restricted and control stock

A

restircte4d - unregister stock that is acquired through private placement or compensation for senior exec 2. control stock is registered stock that is part of an issuers public float and purchased by officers, directors, or greater than 10% shareholders of the issuer. can own both

93
Q

when is form 144 not required

A

if selling no more than 5k shares and $50k of securities

94
Q

what is rule 144a

A

exemption for restricted securities that are sold to QIBs, 144a securities may b e equity or debt securities which are offered by domestic or foreign issuers. if the same securities of the same class are listed on an exchange they are ineligible for 144a exemption. typically used for corp debt offerings

95
Q

what is rule 147 and 147a

A

provide exemption for sales of securities to residents of one stat is 80% of assets, revenues, or proceeds used or majority of employees are based in the state. resales to non-residents are prohibited for 6 months

96
Q

what is rule 145

A

this rule regulates the reclassification of one security into a new security. reclassifications are generally considered sales and subject to registration.

97
Q

what is subject to rule 145

A

substitutions of one security for another, securities are a result of a merger, securities issued after a transfer of assets from one corm to another. does not include stock splits and changes in par value

98
Q

what is regulation S

A

provides an exemption for the registration to US and foreign issuers that offer securities outside of the US and offer or sale an offshore transaction. no offer may be directed to a US person and the transaction must be effected through an oversees securities market. Reg S mat be resold immediately through a designated offshore securities market or in the US after 40 days if they are non convertible debt and after 1 year if equities of non reporting issuers / 6 months if reporting

99
Q

municipal debt issuers are exempt from registration and prospectus requirements

A

true

100
Q

how do municipalities select underwriters

A

through competitive sale (issue notice of sale) or negotiated sale

101
Q

what are the types of syndicate

A

undivided (eastern) each member is responsible for a specific percentage of unsold bonds. divided (western) members are not responsible for bonds that are left unsold by other members

102
Q

what is the hierarchy by which underwriters allocate orders among the distribution group

A
  1. presale in a competitive underwriting orders received before bonds are awarded and priced 2. group net - benefits all syndicate members to their percentage interest 3. designated 4. member - syndicate member placing order is only member to receive credit for the sale
103
Q

what documents are involved in muni offers

A
  1. official statement (not required) 2. legal opinion prepared by bond counsel (tax exempt status and issuer is legal and valid) does not give credit quality 3. new issue confirms 4. committee of uniform securities identification procedures (CUSIP)
104
Q

what is the MSRB site that issuers and underwriters use. has electronic access about muni market, provides official statement and other documents includes 529 plan info

A

Electronic Municipal Market Access EMMA

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