Series 7 Terms Flashcards
Progressive taxes are also referred to as _____ taxes
Graduated
What 2 documents are needed for a corporation to open an options or margin account?
1) Corporate Resolution
2) Corporate Charter
True or False: BDs are responsible for determining client suitability and providing best execution.
True
What happens to the deceased’s portion in a joint account with tenants-in-common?
Goes to their estate
True or False: In a DVP transaction, payment is made by a client’s agent when the securities are delivered and accepted.
True
Name two requirements that must be followed with CMO-related retail communication.
1) Can’t be compared to other investments
2) Educational material must be offered
Define pattern day trading
Executing four or more day trades over a five-day period
Who may enter orders in a joint account?
Any owner named on the account
True or False: On request, institutional communication may be provided to a retail client.
False (Institutional communication may never be provided to a retail investor)
What program must be established by BDs to verify the identity of each customer opening an account?
Customer Identification Program (CIP)
True or False: RRs are always prohibited from sharing in a customer’s account.
False. RRs may share in a customer’s account if they have permission and sharing is proportionate to their investment.
What retail communications are required to be filed with FINRA at least 10 business days PRIOR to first use?
Those for INVESTMENT COMPANIES and SECURITY FUTURES
A public appearance does NOT include large ________ meetings.
Internal
What is the formula for calculating an individual’s personal discretionary income?
Discretionary Income = Income - Expenses
True or False: Institutional communication must be preapproved by a principal and filed with FINRA.
False. Institutional communication is not required to be preapproved or filed with FINRA.
List some retirement accounts that have required minimum distributions.
-IRA
-401(k)
-457
-403(b)
True or False: Suitability rules do not apply when clients makes their own investment decisions.
True
All forms of communication with the public must be kept for _____ years, but easily accessible for the first ___ years.
3 ; 2
Regressive taxes are also referred to as _______ taxes.
Flat taxes
Define an insider.
Officers, directors, partners, greater than 10% owners, and immediate family members of all listed
A gathering of fewer than ____ separate investors is not considered a public appearance.
15
If a BD’s investment company communications include self-created rankings, when must they be filed with FINRA?
At least 10 business days prior to use
May a wife enter trades in a husband’s account?
Yes, but only with written 3rd party authorization
What is not pertinent when opening an account, a client’s educational or financial background?
Educational
Who is responsible for authorizations and disclosures on independent third party research?
The member firm that produces the research
True or False: Using a P.O. Box as an address is not acceptable to open an account.
An actual address is required; however, mail may be sent to a P.O. Box.
What should an agent consider when determining suitability for an institutional client?
Whether the client is acting independently and has the capability to understand the risks
What is the maximum tax rate for long-term capital gains tax?
20%
Who is responsible for determining the suitability of orders placed in a discretionary account?
Individual placing the order
What regulation protects the non-public personal information of customers?
Regulation S-P
True or False: RRs are typically not permitted to lend money to a client.
True. While exceptions existing, personal loans to clients are typically prohibited.
Define the term public appearance.
A speaking engagement with 15 or more persons or with one or more media representatives
What forms of communication are required to be approved by a principal, but NOT filed with FINRA?
Email recommendations, telemarketing or sales scripts, independently prepared reprints, and ads promoting products (retail)
If an RR suspects that a client may be showing signs of dementia, what is the best course of action?
To request a meeting with both the client and a family member
Based on written instructions, a B/D may hold customer correspondence (mail) for _____ months
3 months
Define churning
Excessive trading solely for the purpose of generating commissions or fees
What three items must be specified on a not held order?
Action (buy/sell), Amount (quantity), and Asset (security)
Income and estate tax are examples of a ___________ or __________ tax.
Progressive ; Grauduated
How large can a gift be between spouses and remain exempt from the gift tax?
Unlimited amount
Under FINRA’s communication rules, what is meant by the term broadly disseminated?
That material has been created for generally accessible Web sites, print media, and television or radio (retail)
True or False: A prime broker provides centralized clearing and custodial services, as well as consolidation of reports.
True. For margin customers, it also allows for the consolidation of positions resulting in lower interest costs.
Define vesting.
The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
What retail communications are required to be filed with FINRA within 10 days of first use?
Retail communications related to DPPs, CMOs, and ETNs
How are withdrawals from Roth IRAs treated for tax purposes?
Withdrawals are tax-free if the account is open for at least five years and is not considered an early withdrawal.
_____________________________ protects customers from BD bankruptcy.
Securities Investor Protection Corporation (SIPC)
Retail communication generally requires who’s pre approval?
Principal preapproval
True or False: Firms writing research reports must disclose potential conflicts of interest.
True (e.g., firm makes a market in the stock or has had or will have an investment banking relationship with the issuer)
When must customer confirmations be sent?
By the completion of the transaction (usually the settlement date)
Define institutional communication.
Written or electronic communication that is distributed or made available only to institutional investors
True or False: Names appearing on the OFAC List are customers who had a previous business relationship with the firm.
False. The list shows the names of suspected terrorists and criminals.
Is a gift of $36,000 per married couple, per year, exempt from gift tax?
Yes ($18,000 gift x 2 people)
The ___________________ must sign the account form
Supervising Principal
What list must be checked to identify suspected terrorists and criminals?
OFAC List
What must be done by the carrying firm when opening an account for an employee of another Finra member firm?
The carrying firm must receive written consent from the employer
What is needed to exercise discretion over a client’s account?
Written power of attorney
True or False: Principals must approve discretionary orders prior to entry
False. The orders must be approved promptly afterward.
List the three forms of communications with the public.
Retail communication, institutional communication, and correspondence
What are the benefits of setting up an irrevocable trust?
Reduces estate taxes and avoids probate
List some of the information to be included on a municipal customer confirmation.
Description, price and yield (lower of YTM or YTC), BD capacity (commission for agency), trade and settlement dates
Anyone with __________ income may contribute to an IRA.
Earned
What is some of the important information to obtain when opening a new client’s account?
Name, address, age, occupation, SSN, citizenship, income, net worth, objectives, risk tolerance, investment experience
In a public appearance, what is offered by an analyst?
Recommendations and opinions concerning equity securities
True or False: Not held orders may only be executed in a discretionary account.
False. Discretionary power of attorney is not required.
Define correspondence.
Material that a member firm makes available to 25 or fewer retail investors within any 30-calendar-day period.
True or False: FINRA’s suitability rules for institutions are less stringent when compared to the rules for retail investors.
True
Explain a prime-brokerage arrangement.
A situation in which multiple BDs execute a client’s trades and report them to one independent BD for settlement
List some important considerations when determining the suitability of recommendations made to customers.
Investment objectives, financial situation, risk tolerance, tax status
An owner of utility stocks, preferred stocks, and bonds would be most concerned about changes in ______________.
Interest Rates
If a client refuses to provide certain information, may the account still be opened?
Yes (but name and address are required)
What is the benefit of establishing a revocable trust?
Avoids probate
True or False: A BD has no responsibility to determine suitability for institutional investors.
False. A BD is never relieved of its suitability obligation.
True or False: FINRA regulates accounts of member firm employees opened at another firm.
True. The rule also covers accounts for the employee’s spouse or dependent children.
To determine suitability, what information must be obtained to complete an investor’s profile?
Age, current investments, tax rate, objectives, investment experience, time horizon, liquidity, needs, risk tolerance
A ___________________ is required to open an account for a partnership.
Partnership Agreement
For a joint account, how many account numbers and SSNs are used for tax reporting?
1
The __________ is the person who has fiduciary control over a trust.
Trustee
What happens to the deceased’s portion in a joint account with right of survivorship?
Passes to the survivor
True or False: Firms may NOT use proprietary names when selling variable contracts.
False. Proprietary names are permitted as long as the policy is described as either variable life or variable annuity.
What forms of communication are NOT required to be approved by a principal or filed with FINRA?
Retail communications that do not recommend or promote a BD’s services, institutional communications, and correspondence
True or False: Money may be withdrawn from a joint account in one owner’s name.
False. Any checks should be in both parties’ names.
Options-related retail communication must be filed with a regulator at least _____ calendar days prior to use.
10
Sales tax is an example of a _____________________ tax.
Regressive (flat)
True or False: Only one person must provide information to open a joint account.
False. Each owner must provide information to open a joint account.
There is a ____% penalty for early withdrawals from an IRA.
10%
When an individual reaches age ______, they may begin withdrawing from an IRA without penalty.
59 1/2
For how long may a not held order be maintained?
End of day
RRs must examine what document to open any corporate account?
Corporate Resolution
A client executes seven day trades over a two-business-day period. Is this client a pattern day trader?
Yes. A pattern day trader executes four or more day trades over a five-day period.
True or False: Options-related retail communication that is sent to existing clients must be filed with a regulator.
False. Retail communication sent to a person who has received the ODD (e.g. existing customers) need not be filed.
What is the difference between a revocable and irrevocable trust?
Revocable trusts can be changed after they’re established, while irrevocable trusts cannot be changed.
What are some of the acceptable investments for IRA contributions?
Stocks, bonds, mutual funds, and CDs
According to FINRA rules, list some of the persons that are considered institutional investors.
Banks, insurance companies, investment companies, investment advisers, FINRA members and their RRs
Why is a client’s profession relevant when determining suitability?
It may indicate the client’s level of sophistication and the potential need for liquidity
For accounts opened for employees of another member firm, what is provided to the individual’s employer upon request?
Duplicate confirmations and statements
What three suitability obligations does FINRA impose on broker-dealers?
1) Reasonable basis 2) Customer specific 3) Quantitative
When must insiders report their transactions?
Within 2 business days of the trade
What specialized services does a prime broker offer to its clients?
Custody, securities lending, margin financing, clearing, processing, research, customized reporting
If a client seems confused and demands an unsuitable change of objective, what step should an RR take?
Confusion and/or dementia are concerns that may warrant an RR to request a meeting with the client and a family member.
Is correspondence subject to principal approval?
No, but it must be reviewed by the firm.
Individuals must register with the SEC within __________ of becoming an insider.
10 days
True or False: Clients need not sign the account form for a cash account.
True, but signature would be required for an option or a margin account.
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
Private Pension
True or False: All corporate officers may effect transactions for the corporation.
False, only those named in the Corporate Resolution
For a firm’s first year as a FINRA member, when must its broadly disseminated retail communications be filed with FINRA?
10 business days prior to their first use
True or False: Clients have to sign the account form for a margin account.
True
What items are acceptable as proof of identity under the Customer Identification Program (CIP)?
Passport or driver’s license (both have a picture)
What may an RR do with full discretion, but not with limited discretion?
Withdraw money from the account
When must IRA withdrawals begin in order to avoid the late withdrawal penalty?
By April 1st of the year after an individual turns the age of 73
Regulation S-P requires clients be provided with a ______________ detailing how BDs handle personal client information.
Privacy Notice
A client executes three day trades over a five-business-day period. Is this client a pattern day trader?
No. A pattern day trader executes 4 or more day trades over a 5-day period
If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?
No, the overall position stays the same. Forward = more shares at lower price; Reverse = fewer shares at higher price.
What is the maturity type where a portion of principal is retired each year?
Serial Bond
True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.
True
The money held in escrow from a pre-refunding is invested in _________________________.
U.S. Government securities
What is forced conversion?
An issuer calls bonds at a point where the stock is worth more than the bond’s call price.
A bond trading at a price above par is a ____________ bond.
Premium
True or False: Investors may exercise a bond’s call privilege any time after issuance.
False. Only issuers may exercise the call privilege after the call protection period has passed.
What can be determined if given the following bond information? 7% bond, due 6/1/20XX, yielding 8.7%.
$70 interest ($35 each 6/1 and 12/1), matures on June 1, 20XX, is a discount since YTM (8.7%) is above the nominal (7%)
To determine whether a wash sale violation has occurred, what is the total time period used?
61 days; which includes the trade date and 30 days both before and after the trade date.
Accrued interest on municipal bonds is calculated using ____ days in the month and _____ days in the year.
30 days in the month and 360 days in the year
True or False: Interest paid on corporate bonds is entirely tax-exempt
False. Corporate bond interest is taxed at the federal, state, and local level.
What is a step-down, long-term CD?
A CD that offers an interest rate that’s higher than current rates, with subsequent interest rates paid being lower
Will a bond’s conversion price and conversion ratio be adjusted for stock splits or stock dividends?
Yes, due to a bond’s non-dilutive feature.
Name 2priorities that preferred stock has over common stock.
1) Order of Liquidation
2) Dividends
A bond backed by machinery or rolling stock is called a(n) ______________________.
A bond backed by machinery or rolling stock is called a(n) Equipment Trust Bond.
What is level debt service?
Each year’s debt service payments remaining generally equal.
Pete just inherited securities from his grandfather and is asking about his basis. What is the correct response to Pete?
His basis is the market value at the time of his grandfather’s death (stepped up basis).
List some of the risks associated with brokered CDs.
Call risk, interest rate risk, and limited liquidity
What happens to losses that remain after offsetting gains and also taking $3,000 against ordinary income?
They are carried forward to subsequent years.
Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe’s cost basis is:
$40 + 5 point loss = $45 (The disallowed loss is added to the new purchase.)
If securities are inherited, a beneficiary’s holding period is automatically ____________ (long/short-term)
Long-term (regardless of previous owner’s holding period)
A type of maturity where all bonds mature on one specific date is called a _______ bond.
Term
What does yield-to-maturity (YTM) take into account that current yield does not?
Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money
What yield would be disclosed for a bond purchased at a premium and callable at par?
YTC
What happens if a bond is convertible at $20 (ratio is 50 shares) and the company issues a 10% stock dividend?
Conversion ratio increases to 55 shares (50 x 10% = extra 5) and the new conversion price would be $18.18 ($1,000 ÷ 55).
Name some of the different types of money-market instruments.
T-Bills, Bankers’ Acceptances (BAs), Commercial Paper, Negotiable CDs
$______ is the par value for bonds.
$1,000
Name two issues on which common stockholders may vote.
1) BOD elections
2) Stock splits
Into what does an issuer periodically set aside money for retiring debt?
Sinking fund
How does S&P and Moody’s further differentiate their ratings?
S&P uses + or - , while Moody’s uses 1, 2, 3.
Calculate the price of a corporate bond quoted at 98 ¾.
Convert fraction into a decimal: 3 ÷ 4 = .75 and then multiply $1,000 by 98.75% = $987.50.
Rank in order, from highest to lowest, the three yields on a bond priced at a premium.
Nominal Yield, Current Yield, YTM
The maximum maturity of commercial paper is ____ days.
270
Does the receipt of a stock dividend create a taxable event?
No, not until the stock is actually sold.
If not designated by a client at the time of sale, what method will the IRS use to determine which shares were sold?
FIFO
What yield would be disclosed for a bond purchased at a premium and callable at a premium?
The lower of the YTM or YTC
A sale for a loss would trigger the wash sale rule if the same security is repurchased within ____________________.
30 days of the sale
Refunding would most likely occur when interest rates have _________.
Fallen
If a bond is converted to stock, what is the investor’s basis?
The same as the basis of the converted security.
To what is a reverse convertible structured product linked?
To the performance of an unrelated reference asset - often a single stock or basket of stocks, or an index
True or False: Treasury stock has no voting rights and receives no dividends.
True
Are serial or term bonds more likely to have a sinking fund?
Term
What is the formula for calculating a bond’s current yield?
Annual Interest ÷ Current Market Price
How is interest on corporate bonds treated for tax purposes?
Fully taxable (taxed at the federal, state, and local level)
A bond trading at a price of $1,000 is a ______ bond.
Par
Describe call protection.
The # of years after issuance during which bonds may not be called by the issuer
What does one basis point represent as a percentage?
0.01%
True or False: Bonds with call features have higher yields, while bonds with put features have lower yields.
True
When discussing a bond, the YTM may also be referred to as _______.
Basis
True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.
False
What is the advantage existing stockholders receive through rights offerings?
The ability to maintain their percentage of ownership and buy additional shares at a discount (Anti-Dilution).
Joe owns 100 shares of MNO at $20 (total cost $2,000). If MNO declares a 10% stock dividend, what is Joe’s new basis?
Original cost ÷ new total number of shares ($2,000 ÷ 110 shares = $18.18)
What are some examples of rolling stock used to back a bond offering?
Airplanes, trucks, railroad cars
Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $__________.
$100,000
Define parity.
The value of two investments being equal, even, or the same
The process of adjusting the basis of a premium bond down to par over its life is called _______________.
Amortization
When executing a pre-refunding, into what account would the new issue proceeds be placed?
An escrow account managed by a trustee.
What are some of the special standards that firms follow in regard to soliciting sales of penny stocks?
Determine suitability, principal approval, send risk disclosure, client’s written authorization for the first 3 trades
A bond trading at a price below par is a __________ bond.
Discount
May Eurodollar bonds be issued in the U.S.?
No, and they are not registered with the SEC.
If an investor does not use Specific Identification when selling securities, the IRS assumes __________________.
FIFO
What is the proper order of liquidation for a corporation at bankruptcy?
Secured creditors, unpaid workers, IRS, unsecured creditors, preferred, and then common.
What is the tax consequence for an investor who receives a stock dividend?
Cost basis must be adjusted
At what rate are long-term capital gains on option positions taxed?
At the investor’s tax bracket up to a maximum of 20%
$______ is normally the par value for preferred stock.
$100
The corporate dividend exclusion rule applies to dividends paid on both ____________ and ____________ stock.
Common ; Preferred
Is the conversion of a bond a taxable event?
No, it is a tax-free exchange. The taxable event would occur when the stock is sold.
True or False: A favorable arbitrage situation occurs when a bond is trading at a discount to parity.
True
The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________
Par ÷ Conversion Price (par for preferred is $100)
The formula for finding conversion ratio for a bond is: ______ ÷ ____________
Par ÷ Conversion Price (par for a bond is $1,000)
What is the impact on bonds that have been prerefunded?
Credit is improved and the issue is considered defeased for the issuer.
What is a step-up, long-term CD?
A CD that offers an interest rate that is lower than current rates, with subsequent interest rates paid being higher
For wash sale purposes, what would cause the loss on the sale of a municipal bond to be disallowed by the IRS?
Purchasing a substantially identical bond at any point within the wash sale period
How is basis determined for the recipient of gifted securities?
Basis will be the donor’s cost or market value, whichever is lower.
____________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.
Refunding
Describe cumulative preferred stock.
Stock that requires payment of any missing dividends before common stockholders are paid
What is the method to calculate the number of shares that can be purchased through a rights offering?
(# of rights received) ÷ (# of rights needed to buy each additional share)
May bonds be called early due to an event which destroys the source of revenue backing the bond?
Yes, when using a catastrophe call
True or False: Convertible preferred stock may be converted into a bond.
False. Convertible securities are convertible into common stock.
____________ stock is stock that was issued and repurchased by the issuing corporation.
Treasury
What is the typical life of a reverse convertible security?
1 year or less
What can a U.S. investor do when foreign taxes are paid on dividends received on foreign stocks?
The amount of the foreign tax can be claimed as a credit or deduction on her U.S. return.
The type of bond where bondholders have a lien on real property is called a __________________.
Mortgage Bond
How can an even split be identified?
Any split to 1 (e.g., 2:1, 3:1, 4:1, 5:1)
What instruments are used to facilitate trading of foreign securities in the U.S.?
American Depositary Receipts (ADRs)
A client selling shares would like to determine the specific shares being sold, he should use ________________________.
Special Identification
May a warrant be detached and traded separately?
Yes
When warrants are attached to bonds, will the issuers pay a higher or lower rate of interest?
Lower, due to the added opportunity
The strike price for conversion on a reverse convertible is also called the _________ price.
Knock-In
If a bond is referred to as trading flat, this means it trades ___________________________.
Without accrued interest
A bond with an 8% coupon would pay how much interest per year?
$80.00. Par x Rate ($1,000 x 8%)
What are two synonymous terms for a bond’s interest rate?
Coupon rate and nominal yield
What yield would always be disclosed for a bond that has been prerefunded?
YTC
What voting method permits one vote for each share owned to be voted for each director?
Statutory
What are Eurodollar bonds?
Dollar-denominated bonds issued outside the U.S.
What yield would be disclosed for a bond purchased at a discount?
YTM
Issued stock - Treasury stock = ____________________
Outstanding Stock
If an asset was held for one year or less prior to its sale, any gain or loss would be ____________ (short/long term)
Short-term
Rank in order, from highest to lowest, the three yields on a bond priced at a discount.
YTM, Current Yield, Nominal Yield
Bonds rated ___________ and higher are considered investment grade.
Bonds rated BBB (for S&P and Fitch) or Baa (for Moody’s) and higher are considered investment grade.
Are debentures considered secured or unsecured?
Unsecured. They are backed only by the issuer’s full faith and credit.
If there are losses remaining after offsetting gains, what amount may be used against ordinary income?
A maximum of $3,000.
What bonds are dollar-denominated, U.S. registered, and issued by multinational companies and foreign governments?
Yankee Bonds
What voting method permits common shareholders to vote in any manner in which they choose?
Cumulative Voting
True or False: Collateral Trust Bonds are backed by the stock of the issuing corporation.
False. The stock pledged must be that of a separate company.
According to the wash sale rule, what securities are considered substantially the same?
Same stock, rights, warrants, a bond or preferred stock convertible into the stock, or the purchase of a call option
Existing stockholders receive ______ right for every one share owned.
1
Does interest that is paid by one corporation to another corporation qualify for the corporate dividend exclusion?
No. The rule only applies to dividends.
A bond convertible at $50 is trading at $1,200. For parity, where should the stock be trading?
Conv. ratio = $1,000 ÷ $50 = 20 shares. The stock needs to trade at $60 to be at parity with the bond ($1,200 ÷ 20 = $60).
True or False: Long-term CDs are considered money-market instruments.
False. Since long-term CDs mature in over one year, they are not money-market instruments.
A corporation that issues convertible bonds is borrowing money at a _______ rate (higher/lower)
Lower (convertibles pay lower interest rates)
Money-market securities have a maturity of __________________.
1 year or less
Who are considered the owners of a corporation?
Common and preferred stockholders
True or False: A stockholder is able to vote for a director, but not an officer.
True
Accrued interest on corporate bonds is calculated using _____ days in the month and ______ days in the year.
30 days ; 360 days
What is the first use of capital losses?
They are first used as deductions against capital gains
Accrued interest on T-Notes and T-Bonds is calculated using ______ days in the month and _____ days in the year.
Actual days ; 365 days
A reverse convertible typically contains what 2 components?
1) A debt instrument that pays an above-market coupon
2) A derivative (often a put option)
ABC = $50. ABC’s bond is convertible at $40 and callable at 105. Is the call or conversion and sale more profitable?
Conversion and sale equals $1,250 (25 shares x $50), while the call only provides $1,050.
True or False: All owners have the right to vote.
False. Only common stockholders have the right to vote.
Debt service represents the total of all ____________ and ____________ payments.
Principal ; Interest
True or False: Corporations receiving dividends from other corporations qualify for the dividend exclusion rule.
True (50% are tax-free)
What is the highest credit rating?
AAA for S&P and Fitch, and Aaa for Moody’s
True or False: A wash sale is triggered if the only difference in a bond sold and then repurchased is accrued interest.
True. To not trigger the wash sale rule, the bond’s issuer, coupon, or maturity must be changed.
Warrants are a ______-term right to buy stock at a preset price.
Long-term
Zero coupon bonds are purchased at a __________ and mature at ____________.
Discount ; Par Value
A bond convertible at $25 is trading at $1,150, and the stock is trading at $30. Is the bond at parity with the stock?
No, the bond’s parity price is $1,200. The bond can be converted to 40 shares selling at $30, which equals $1,200.
Bondholders are also referred to as ____________.
Creditors
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages
True or False: Both common and preferred stockholders are offered preemptive rights.
False. Preemptive rights are only offered to common stockholders.
Ken covers a short position at a loss and re-shorts the same position within 30 days. Is the wash sale rule triggered?
Yes
What does a put feature on a bond allow?
Bondholders may put (redeem) the bond back to the issuer prior to maturity.
For a gain to be considered long-term, the asset must be held for ______________________.
More than 1 year
What is the IRS method for accreting the basis of a bond?
Constant yield or constant interest method
Cash dividends received by individuals are generally taxed at a maximum rate of ____%.
20%
What is the longest duration for a warrant?
Perpetual
Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.
Short-term
True or False: Warrants are generally attached to the delivery of another security (stock or bond).
True
A bond has a 12% coupon and is trading for $1,200. What is a realistic YTM for this bond?
YTM must be less than 10% since the current yield ($120 ÷ $1,200) is 10%.
What are some examples of odd splits?
3:2, 5:4, 12:5 (denominator greater than 1)
What are the capital gains tax rates for Short-term gains and Long-term gains
1) Short-term gains are taxed at ordinary income rates
2) Long-term gains are taxed at a maximum of 20%.
True or False: Common stockholders have the right to vote for the payment of dividends.
False. Dividend payments are determined by the board of directors.
Currently, long-term capital gains are taxed at a maximum rate of ____%.
20%
A reverse convertible is a type of ___________ product.
Structured Product
What generates a capital gain or loss?
The sale of an asset at a price that exceeds its basis (gain) or at a price lower than its basis (loss)
The __________________ represents the amount above par that issuers pay to redeem bonds early.
Call Premium
Bond interest is stated ___________ and paid ________________.
Annually ; Semi-annually
May Eurodollar bonds later trade in the U.S.?
Yes
When securities are gifted, the recipient’s holding period will be _______________________.
Same as the donor’s
What is the original issue that is being refunded called?
Prerefunded bonds
Bonds rated BB (Ba) or lower are considered _______________________ bonds.
Speculative/Junk bonds
If the Green Fund has a NAV of $12.70 and a sales charge of 5.5%, what is the POP?
The formula is NAV ÷ (100% - Sales Charge %). $12.70 ÷ 94.5% = $13.44.
MIG stands for ___________________________.
Municipal Investment Grade
In a bond swap (bond sold at a loss and another purchased), what features need to be changed to not trigger a wash sale?
Change the issuer, or the coupon, or the maturity
What are Auction Rate Securities (ARS)?
Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction
General Obligation (GO) bonds are backed by the issuer’s ________________________ and their ability to levy _______.
Full faith and credit ; taxes
The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called ____________.
Accretion
What price is paid for closed-end management company shares?
Market price plus a commission
A mutual fund’s POP = ___ + ____________.
NAV + Sales Charge
After the initial offering, where are shares of a closed-end management company purchased?
Secondary Market
What is the tax consequence if a municipal bond is purchased at a premium and sold prior to maturity?
A capital gain/loss determined by the difference between the adjusted basis and the proceeds of the sale
A _______________________ fund is one that invests in a specific industry or geographic region.
Sector/Specialized
Is a redemption fee the same as a CDSC?
No. The CDSC is a sales charge, not a fee.
True or False: The settlement date for T-Bills purchased at the auction is the next business day.
False. Settlement at auction is the Thursday following the auction. Next business day is for secondary market trading.
What price do non-competitive bidders agree to pay at a Treasury auction?
The lowest price (highest yield) of the accepted competitive bids
True or False: The credit rating of an IDB (Industrial Development Bond) is based on the credit of the municipality.
False. The rating is based on the corporation making the lease payments.
What price is paid for mutual fund shares?
The Public Offering Price (POP). POP = NAV + Sales Charge (if applicable).
An OID (Original Issue Discount bond) is sold prior to maturity. Is the capital gain (or loss) based on the original cost basis or accreted value?
The accreted value of the bond.
The principal value of TIPS may be adjusted based on changes to the __________________________.
CPI (inflation)
A competitive bid placed at a Treasury auction will indicate both ___________ and _________.
Quantity ; Price
_____ Plans are college savings plans with high contribution limits set by the state sponsor.
529
What are 3 distinct advantages to investing in an open-end investment company?
1) Diversification
2) Professional Management
3) Liquidity
What is a fund’s net investment income?
Dividends + interest - expenses
What is a Construction Loan Note (CLN)?
Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing
Interest paid on bonds issued by U.S. territories or possessions is ___________________.
Triple-tax-exempt
What is the formula for determining the number of shares able to be purchased when reaching a breakpoint?
Dollars invested ÷ newly calculated offering price (based on the reduced sales charge)
How often will VRDOs (Variable Rate Demand Obligations) adjust their interest rate?
At specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.
What risk is primarily associated with mortgage-backed securities?
Prepayment risk
Though subject to federal tax, interest on Treasuries is exempt from ________ and ________ tax.
State ; Local
For a municipal bond to be considered good delivery, is a Legal Opinion mandatory?
Yes. A Legal Opinion must be imprinted or attached (unless identified as ex-legal).
Describe a typical index fund’s expenses (low/high) and management style (active/passive)
Low ; Passive
Since mutual funds are considered primary market issues, they must be sold by ____________.
Prospectus
A Regulated Investment Company’s net investment income will ultimately be taxed to the __________________.
Shareholders
What does the following quote indicate about the fund? NAV: $9.20 POP: $9.20
It’s a no-load fund.
What 2 restrictions exist in describing a fund as no load?
1) No front-end load
2) 12b-1 fees cannot exceed .25%
If the Hi-Tech Fund has a NAV of $4.25 and a POP of $4.50, what is its sales charge percentage?
The formula is (POP - NAV) divided by POP ($4.50 - $4.25 = $.25
($.25 ÷ $4.50 = 5.5%).
What are T-STRIPS?
Any T-Note/T-Bond where a BD has stripped the interest and principal payments to sell separately as zero-coupons
How is interest on Treasuries treated for tax purposes?
Exempt at the state and local level, but subject to federal tax
______ is the mortgage-backed agency that is fully backed by the U.S. Government.
GNMA
True or False: T-Bills are quoted on a dollar basis.
False. T-Bills are quoted on a discount yield basis.
What are the requirements for being considered a Regulated Investment Company?
The fund must be a domestic company that distributes at least 90% of its net investment income.
What is the annual fee levied against a fund’s assets and used to pay expenses of commissions and retail communications?
12b-1 fees
What is the maturity range of a T-Note?
2-10
What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?
98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.
What is a major advantage to investing in a bond issued by the Commonwealth of Puerto Rico?
Triple tax advantaged
A fund whose portfolio is created to mirror the composition of a particular index is referred to as an ________ fund.
Index
What does ownership of a GNMA pass-through certificate represent?
An undivided interest in a pool of residential mortgages
True or False: Interest paid on GNMA, FNMA, FHLMC, and SLMA agency bonds is fully taxable to investors.
True. The interest is taxed at the federal, state, and local level.
Is a UIT considered managed or unmanaged?
Unmanaged, since the holdings are supervised as opposed to actively managed
Define overlapping debt.
Debt of a municipality that is shared with another political entity (e.g., school district debt)
An investor has been purchasing mutual fund shares using dollar cost averaging. Is she guaranteed against loss?
No. The market may never recover.
What is a Tax Anticipation Note (TAN)?
Municipal note issued in anticipation of future tax receipts (e.g., real estate taxes)
Are mutual funds considered marginable securities?
No. Investors must pay 100% of the purchase price.
According to industry rules, _____% is the maximum sales charge on mutual funds.
8.5%
Is a CMO considered a derivative?
Yes
What bond would be issued to build a facility for a private company?
Industrial Development Revenue (IDR) bond
Assuming a net revenue pledge bond, what is the first priority according to the flow of funds?
Operating and maintenance fund
How often do GNMA pass-throughs make payments?
Monthly
Municipal bond interest is exempt from __________ tax.
Federal
When a fund distributes a capital gain, is it the fund’s or shareholder’s holding period that is considered?
Fund’s holding period
What are 2 examples of tax-free money-market instruments?
Municipal Notes and Tax-Exempt Commercial Paper
In what covenant does the issuer pledge to keep the project in good working order?
Maintenance and Operation Covenant
A muni. bond is bought at a secondary market discount and sold for a gain before maturity. What is the tax consequence?
The gain is taxable as ordinary income up to the accreted value, and a capital gain for any amount above that.
Corporate and municipal bonds are quoted in 8ths, while T-Notes and T-Bonds are quoted in ______.
32nds
What is a Bond Anticipation Note (BAN)?
Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond
What is the net (after-tax) yield for an investor in the 28% tax bracket who owns an 8.5% corporate bond?
The formula is: Taxable Yield x (100% - Tax Bracket %). 8.5 x 72% = 6.12%.
True or False: Custodian banks provide investment management service to a fund.
False. Custodian banks provide safekeeping for a fund’s cash and securities.
Identify the acronym: CDSC
Contingent Deferred Sales Charge
A ______ is a type of investment company which has a fixed portfolio of securities and is supervised, not managed.
A UIT is a type of investment company which has a fixed portfolio of securities and is supervised, not managed.
Standard & Poor’s four ratings for municipal notes are ______, ______, ______, ______.
SP-1+, SP-1, SP-2, SP-3.
What terms are synonymous with a mutual fund’s Net Asset Value (NAV)?
Bid price/Redemption price
Funds offer ______________________ to allow buyers to add all purchases made from a fund family to reduce sales charge.
Rights of Accumulation
If $25,000 is invested in an inverse ETF, what is the value if the market drops 10% on day 1, then rises 10% on day 2?
Day 1: $25,000 x 1.10 = $27,500 and Day 2: $27,500 x .90 = $24,750
What two sources are used to pay debt service on a double-barreled bond?
Revenue dollars and tax dollars
A fund distributes a gain on shares held for 3 yrs. Joe has owned the fund shares for 6 months. How is Joe’s gain taxed?
As a long-term capital gain, since the fund held the shares for three years. Joe’s holding period is irrelevant.
What is a municipal OID?
An Original Issue Discount (OID) bond.
A __________________ is a revenue bond backed by one specific tax.
A special tax bond is a revenue bond backed by a specific tax (e.g., bonds issued for highway repair backed by gas tax)
True or False: Agency-backed CMOs have high credit ratings.
True. They are usually highly rated because of the collateral backing them.
Revenue bonds are backed by ___________________ generated by ________________________.
Specific Revenue (User Fees) ; Project/Facility
At a Treasury auction, __________________ bids are awarded first.
Non-competitive
The following would be a quote for what security? Bid 4.26 Asked 4.22
T-Bill
What’s stated in a municipal indenture (bond resolution)?
Issuer’s responsibilities, bondholders’ rights, and the different covenants (pledges) made to protect bondholders
By what types of taxes are state general obligation bonds backed?
Income, sales, or gasoline tax, but also licensing fees and fines.
True or False: The interest rate reset periods on Auction Rate Securities range from 7, to 28, or 35 days.
True
What is the maturity range of a T-Bond?
More than 10 years
True or False: An increase in unfunded pension liabilities is a negative sign of the municipality’s creditworthiness.
True
What is the tax consequence if a municipal bond is purchased at a secondary market discount and held to maturity?
The gain is taxed as ordinary income.
Mack, in the 35% tax bracket, is earning 5.4% on a tax-free municipal bond. What is his taxable equivalent yield?
The formula is: Tax-Free Yield ÷ (100% - Tax Bracket %). 5.4% ÷ 65% = 8.3%
A bond backed by a charge to benefiting property owners is called a __________________________.
special assessment bond (e.g., water/sewer system).
Does a unit investment trust (UIT) have a board of directors?
No. These entities are supervised by a board of trustees.
True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.
A fund’s management fee is typically calculated based on a percentage of _________________________.
AUM
What are TIPS?
Treasury Inflation-Protected Securities
What do the differences in mutual fund share classes represent?
Difference in how sales charge is collected
With CMOs, the term ____________ represents separate bond classes.
Tranche
True or False: A breakpoint sale is a prohibited action of selling shares at just under where breakpoints are available.
True
True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV.
True
What is the tax consequence if a municipal bond is purchased at a premium and held to maturity?
Since the basis must be amortized down to par, there is no capital gain or loss when a premium bond is held to maturity.
True or False: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation.
True. However, the purchases must all be from the same fund family.
Since T-STRIPS are sold at a discount and mature at par, what must be done to their basis each year?
The discount must be accreted each year
The tranche that is the last to receive cash flow is the ____________.
Z Tranche
Bonds subject to the AMT will trade with a _________ (higher/lower) yield.
Higher
What are the three different types of investment companies?
1) Face Amount Certificate Companies 2) Unit Investment Trusts (UITs) 3) Management Companies
Each payment from GNMA will represent both ____________ and ____________.
Principal ; Interest
Describe an asset backed security.
A security whose value and income are collateralized by group of assets, usually bank receivables (e.g. mortgages).
When do most mutual funds calculate their net asset value (NAV)?
4:00 p.m. ET, which is when the stock markets close.
Sales charge is always expressed as a percentage of the ________.
POP
Which tranche has the most predictable cash flow and maturity?
PAC Tranche (Planned Amortization Class)
Is a mutual fund’s redemption fee considered a sales charge?
No, since it does not go to selling brokers, but rather stays within the fund.
To calculate Debt Service Coverage Ratio, the formula used is: (________ - ________) ÷ ___________
(Gross Revenue - O/M Expenses) ÷ Debt Service
True or False: Regulated Investment Companies (under Subchapter M) may relieve their burden of paying tax on income.
True. Regulated Investment Companies will only be taxed on the income retained.
Identify the acronym: SAI
Statement of Additional Information
Describe dollar cost averaging (DCA).
DCA involves investing a fixed-dollar amount at regular intervals, regardless of the price of the asset.
Local general obligation bonds are backed by what type of tax?
Property tax (e.g., school district bonds)
True or False: If a mutual fund investor chooses to reinvest dividends, taxes will be deferred.
False
How does the Dutch Auction set the interest rate on Auction Rate Securities?
It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).
What types of municipal bonds are most likely subject to the Alternative Minimum Tax?
Private Activity bonds
What are some of the advantages of investing in open-end investment companies (i.e., mutual funds)?
Diversification, professional management, liquidity, and ability to reduce sales charges
$9 million gross revenue, $3 million oper./maint. expenses, and $2 million debt service. Debt service coverage ratio?
($9 million - $3 million) ÷ $2 million = 3:1 coverage.
___________________ is the balancing of investment classes according to an investor’s investment objectives.
Asset Allocation
Is a letter of intent binding on the investor?
No. However, the letter is binding on the investment company.
Is a letter of intent binding on the investor?
No. However, the letter is binding on the investment company.
Moody’s rates municipal notes using ______, ______, ______, ______.
Moody’s rates municipal notes using MIG1, MIG2, MIG3, SG.
True or False: The Flow of Funds covenant on a revenue bond describes the priority for distributing project revenue.
True
What funds are similar to an index fund, but trade in the secondary market like stock?
ETFs
True or False: Investors can buy fractional shares of a mutual fund.
True
Interest on Federal Farm Credit system and FHLB securities is subject to which taxes?
Federal only
What is a Revenue Anticipation Note (RAN)?
Municipal note that will eventually be paid from future federal or state subsidies
What is a Grant Anticipation Note (GAN)?
Municipal note issued in anticipation of receiving government funding in the form of a grant
Which security has no connection to CMOs - GNMA, FNMA, FHLMC or SLMA?
Student Loan Marketing Association (SLMA)
True or False: ETFs are marginable and may be sold short.
True
True or False: The interest rate on TIPS is fixed, but the principal may be adjusted.
True
Letters of Intent may be back-dated for _____ days.
90 days
To calculate the sales charge percentage for a mutual fund, the formula is: (______-______) ÷ ______
(POP - NAV) ÷ POP
The minimum face value of a T-Bill, T-Note or T-Bond is $______.
$100
Into what does a growth fund invest?
Common stock
How is the phantom interest on an OID treated for tax purposes?
It is considered interest income on a municipal bond, and therefore, tax exempt.
What system is used for the issuance of Treasury securities?
An auction
