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Series 7 > Unit 3 > Flashcards

Unit 3 Flashcards

Customer Information, Risk and Suitability, Product Information

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Series 7 Top-off Exam flashcards
1
Q

Non-financial Investment Considerations

A 
>Age
>Marital Status
>Number of ages of dependents
>Employment
>Employment of family members
>Current family educational/health needs
>Risk tolerance
>Attitude towards investing
>Tax status
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2
Q

Preservation of capital

A 
Usually recommend:
Money market securities
Money market mutual funds
Certificates of Deposit (CD)
Government securities
Principal-protected funds
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3
Q

Dividend Dates

A

Declaration, Ex-Dividend, Record, Payable

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4
Q

Regular way settlment

A

T+2

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5
Q

Capital Growth

A

Refers to an increase in an investments value over time.

Growth oriented investments are EQUITY ORIENTED.

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6
Q

Tax advantaged products for Investors

A

IRAS and annuities allow interest to accumulate tax deferred.

Muni-bonds offer tax free interest income (not suitable for retirement accounts)

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7
Q

Liquid investments - keep in mind this means sell quickly at close to current market value

A

Securities on exchange or NASDAQ
Mutual funds
ETF
REIT

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8
Q

Illiquid investments

A 
Annuities - when investor is under 59.5
Real estate
DPP
Hedge fund
Funds of hedge funds
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9
Q

Speculation investments

A

Higher risk / Higher return

>Options
>High-yield
>unlisted stocks or bonds
>sector funds
>precious metals
>special situation funds
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10
Q

Recommendations for Preservations of Capital

A 
CD
MM Funds
Fixed Annuities
Govt Securities
Investment Grade Bonds
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11
Q

Recommendations for Growth

A 
Common stock / common stock mutual funds
Blue chip stock
Tech stock
Sector stock
Defensive stock
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12
Q

Recommendations for Income

A 
Bonds
REIT
CMO
Muni Bonds
Below investment grade bonds
Preferred stock
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13
Q

Recommendations for Liquidity

A

Securities on exchange
Bonds
Mutual funds
Public REITS

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14
Q

Recommendations for Diversification

A 
Mutual funds
Equity porfolios 
Domestic portfolios
Bond portfolios 
Some foreign portfolios
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15
Q

Speculation

A 
Options contracts
DPP
High yield bonds
Unlisted stocks
Sector funds
 Precious metals
Commodities
Futures
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16
Q

Capital risk

A

risk of losing all of your invested capital

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17
Q

Timing risk

A

buying or selling at wrong time

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18
Q

Interest rate risk

A

Sensitivity of investments price of value due to interest rates - usually associated with bonds. Shorter the tenor the less risky!!

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19
Q

Credit risk

A

Risk of default on bond

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20
Q

Investment grade bond

A

BBB or higher

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21
Q

Liquidity risk

A

not being able to convert investment into cash immediately at CMV

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22
Q

Advantages of Call feature to investor

A

> Refinance for lower interest rate
Reduce its debt at any time
Replace short term debt with long term
Force the conversion of convertibles

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23
Q

Asset allocation

A 
the spreading of portfolio funds among different asset classes such as:
Stocks
Bonds
Cash
Can include RE and other asset classes
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24
Q

Strategic asset allocations

A

Refers to the proportion of various types of investments composing a long-term investment portfolio

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25
Q

Re balancing porfolio

A

Adjusting investment decisions based on customer’s needs. More fixed for older clientele.

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26
Q

Modern portfolio Theory

A

Scientific approach to measuring risk to choose investments.

Involves calculating projected returns of various portfolio calculations to identify best performers.

The concept is to minimize risk by combining volatile and price stable investments.

Believes portfolio with lower volatility performs better than portfolio with higher volatility.

DIVERSIFICATION REDUCES RISK

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27
Q

MPT Negative correlation

A

MPT looks for securities with a negative correlation.

Perfect negative correlation is -1.0 which states that one security that goes up, the other will go down by the same amount.

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28
Q

Capital Asset Pricing Model

A

Used to calculate the return that an investment should achieve based upon risk.

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29
Q

Beta Coefficient

A

Measure of portfolios volatility in relation to the overall market.

A security with a beta of 1 = more volatile than market
Security with a beta of <1 = less volatile than market
Securities with no market correlations would be 0

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30
Q

Stock with a Beta of 1

A

IF S&P rises about 10%, a stock with Beta of 1 rises or falls about 10%

Same with 15% and 1.5.

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31
Q

Alpha

A

Extent to which an asset or portfolio return exceeds or falls short of expected returns.

A Positive alpha (not negative) is desirable.

If actual return is 10% and expected beta was 1.5, investor took more risk than was actually returned. Negative alpha.

Conversely, if investment rose by 17% and expected beta was 1.5 - positive alpha.

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32
Q

Fundamental analysis

A

study of the business prospects of an individual company within the context of its industry and overall economy.

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33
Q

Capital structure - capitalization

A

Combined sum of long-term debt and equity securities.

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34
Q

Book Value Per Share

A

Shares of common stock outstanding

Note: Basically shows the liquidation value of firm

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35
Q

Earnings Per Share

A

Number of shares outstanding

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36
Q

Earnings per share after dilution

A

assumes all convertible securities such as warrants and convertible bonds and preferred stock have converted into common

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37
Q

Current Yield

A

Market value per common share

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38
Q

Dividend payout ratio

A

earnings per share

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39
Q

Cash flow from operating activities

A

includes interest and dividends

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40
Q

Technical analysis

A

attempts to predict the direction of prices on the basis of historic price and trading volume patterns when laid out graphically

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41
Q

Fundamental analysts

A

Concentrate on broad based economic trends; current business conditions within industry and quality of particular corporations’s business

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42
Q

Support level

A

bottom of the trading range

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43
Q

Resistance level

A

Top of the trading range

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44
Q

Bearish breakout

A

decline in the support level

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45
Q

Bullish breakout

A

rise in resistance level

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46
Q

Market breadth

A

The number of issues closing up or down on a specific day

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47
Q

Market trend - consolidation

A

When the tread line is horizontal and moves sideways and not up or down

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48
Q

Reversal

A

Indicates that an upward or downward tredline has haltered and the stock price is moving in the opposite direction

Reversal of downtrend - saucer
Reversal of uptrend - inverted saucer

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49
Q

Head and Shoulders top

A

Bearish - reversal in uptrend

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50
Q

Head and Shoulders bottom

A

Bullish - reversal in downtrend

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51
Q

Oversold Market

A

When market indexes are declining
Number of declining stocks / number of advancing stocks is failing (fewer stocks declining)

Usually means oversold market

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52
Q

Overbought market

A

Indexes are rising, but number of declining stocks / number of advancing stocks is rising (fewer stocks rising)

Usually means overbought

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53
Q

Dow Theory

A

used to confirm the end of a major market trend.

3 types of changes in stock prices:

Primary Trends (1 year or more)
Secondary trends (3-12 weeks)
Short term fluctuations (hours/days)
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54
Q

Primary trend of bull market

A

series of higher highs and higher lows (dow theory)

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55
Q

Primary trend bear market

A

seriers of lower highs and lower lows (dow theory)

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56
Q

Odd lot theory

A

small invstors invariably buy and sell at wrong times.

When odd lot buyers buy - odd lot analysts are bearish. When odd lot buyers sell - odd lot analysts are bullish.

Odd lot is buying something less than 100 shares (100 is round lot)

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57
Q

Authorized stock

A

refers to a set number of shares the company has authorization to issue or sell. Laid out in company’s original charter.

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58
Q

Issued stock

A

Stock that has been authorized and distributed to investors

Usually occurs when:
Raising new capital
Paying stock dividends
providing stock purchase plans for employees
exchanging common stock for convertible bonds
satisfying outstanding stock warrants

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59
Q

Treasury stock

A

stock the corporation has issued and repurchased from public. Can hold, reissue, or retire the stock. Does not carry rights of outstanding shares. Can be used to reissue to employees.

Reasons for buying back:
increase EPS
Have an inventory to distribute
use for future acquisitions

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60
Q

Voting rights of common shareholders

A

Common shareholders can vote on issues such as

Issuance of convertible securities
substantial change in business such as M&A activity
declarations of stock splits

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61
Q

Calculation of number of votes

A

Statutory or Cumulative

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62
Q

Statutory voting

A

allows the stockholder to cast one vote per share FOR EACH ITEM ON BALLOT. Best for smaller shareholder.

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63
Q

Cumulative voting

A

allows stockholders to allocate their total votes in a manner they choose.

Shareholder may allocate all shares into one direction.

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64
Q

Nonvoting common stock

A

Class A = voting rights

Class B = nonvoting

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65
Q

Preemptive rights

A

Allows shareholder to maintain proportionate share. Usually below market value

Shareholder can:
Exercise, sell, or let expire

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66
Q

Stockholder residual right to claim

A

Stockholder has claim to corporate assets after all debts and other security holders have been paid

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67
Q

Preferred stock

A

issued at fixed rate of return. Can be variable depending on current rates.

Preferred prices move inversely to interest rates (if rates rise, people invest money elsewhere).

No fixed maturity - unlike bond.

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68
Q

Convertible perferred

A

owner can exchange for common stock

Since it is tied to common - price usually fluctates with common.

Lower dividend rate - given feature.

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69
Q

Participating preferred

A

In addition to fixed dividends, participating allows shareholder to share in profits of corporate profits after all dividends and interest due are paid.

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70
Q

Callable preferred (redeemable)

A

company can buy back from investors at stated price on the call date or thereafter. Usually higher dividend rate

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71
Q

Subscription right

A

Certificate representing a short-term privilege to buy additional shares of corporation. One right issued for each common share outstanding.

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72
Q

How to find value of rights

A

number of rights to purchase 1 share + 1

Example:

ABC price per share is $41, subscription per share is $30. You need 10 rights to purchase 1 share of stock. So….

41 - 30 11
——- = — = $1 is the value of one right.
10+1 11

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73
Q

Ex rights formula

A

Used to determine the value of the right after the ex-date.

Number of rights to purchase 1 share

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74
Q

Warrant

A

grating the owner right to purchase security at a specified price at a later date. Usually above market price.

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75
Q

American Depository Receipts

A

Foreign branches of large US banks issue ADRS.

A custodian (bank of issuers country) holds shares of foreign stock that the ADR’s represent.

Currency risk….

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76
Q

Rights of ADR owners

A

Usually have same rights as common stockholders

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77
Q

Taxes on ADRs

A

Pertains to foreign income tax. Foreign income tax may be taken as a credit against any US income taxes.

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78
Q

Sponsored ADRs

A

Foreign company sponsors the issue to increase its ownership base. All exchange listed ADR’s are sponsored.

Non-sponsored are issued by banks without participation of issuer.

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79
Q

Penny stock disclosure requirements

A

Name of stock
Number of shares purchase
Current quote
Amount of commission

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80
Q

Penny stock account statement frequency

A

Monthly

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81
Q

Established customers (penny stock)

A

Held account with BD at least a year
OR
Made at least three penny stock purchases of different issuers on different days

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82
Q

Speculative Bond

A

BB or lower

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83
Q

Unrated bond

A

Might not mean bad quality - could just be too small to justify expense of seeking rating

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84
Q

S&P vs Moody’s

A

SP = AAA, AA, A etc

Moody’s Aaa, Aa, A, Baa, etc

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85
Q

Secured bond

A

Issuer has identified specific assets to secure the note

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86
Q

Collateral trust bonds

A

issued by corporations that own other company’s securities. May be backed by:

Another company’s stocks/bonds
stock and bonds of partially/wholly owned subs
company’s prior lien long term bonds
short term bonds
Installment payments or other obligations of corporations clients

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87
Q

Collateral trust bonds

A

issued by corporations that own other company’s securities. May be backed by:

Another company’s stocks/bonds
stock and bonds of partially/wholly owned subs
company’s prior lien long term bonds
short term bonds
Installment payments or other obligations of corporations clients

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88
Q

Equitment trust certificates

A

Used by railroads, airlines, trucking companies, and oil companies to finance purchase of capial equipment.

Secured by equipment - held in trust.

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89
Q

Debentures

A

Backed by general credit of issuing corporation. Below secured bonds and above sub debentures, preferred, and common stock

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90
Q

Guaranteed bonds

A

Backed by a company other than the issuer such as parent corp

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91
Q

Income bonds (adjustment bonds)

A

Usually during reorg. Pay interest only if corp has enough income to meet payments.

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92
Q

Zero coupon bond

A

issuers debt obligations that do no make regular payment. bought at discount, sold at face value.

Advantage: Requires relatively small payment up front. No reinvestment risk
Disadvantage: Since no cash interest, seroes a are mor volatile than traditional bonds. Prices fluctuate based on interest rates.

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93
Q

Taxes of Zero coupon

A

Investors who own zeroes woe income tax each year by the aomount that the investor would have received.

Example: bought for $400 will received $600 in 10 years. $600/10 = $60 in interest each year, so $60 added to principal each year. $460, $520, $580, etc which is cost basis.

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94
Q

Advantages of convertible bonds (Issuer)

A

Sold at lower coupon
Can eliminate fixed charges by removing debt
No adverse effect on stock price, since it occurs over time
Avoids immediate dilution to EPS
Conversion price is higher than market price of common stock

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95
Q

Disadvantages of convertible bonds (issuer)

A

When converted, equity is diluted
Common stockholders have voice in decisions
Reducing corp debt = loss of leverage
Less interest, which increases taxes

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96
Q

Market for convertible securities (advantage for investor)

A

Fixed rate of interest, redeemable for face value at maturity
Convertible bondholders have priorty at liquidation over common shareholders
Market price tends to move up with common stock
Conversion has NO TAX LIABILITY
Stable rates usually result in stable bond market

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97
Q

Conversion price

A

price at which convertible bond can be exchanged for shares of common stock

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98
Q

Conversion ratio

A

Bond with a price of $40 has a conversion ratio of 25:1.

$1,000 / $40 = $25

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99
Q

Conversion parity

A

If bond is convertible at $50, conversion ratio is 20:1

If bond is selling for 104 ($1,040) is convertible into 20 shares, the common stock price would be $52.

IMPORTANT:
If common stock is selling below $52, the convertible bond is worth more than stock. If stock is selling above $52, the investor can make more money by buying bond, converting to common, and selling stock

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100
Q

Calculation of conversion parity

A

Market price of common x conversion ratio = parity price of convertible

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101
Q

Equity-linked notes

A

debt instruments where final payment at maturity is based on return of a single stocks, multiple stocks, or equity index.
ELN’s exchange rated or not, are considered non-conventional products and not suitable for most investors.

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102
Q

Collateralized Mortgage Obligation

A

Large pool of mortgages, usually singl-family homes. CMOS are issued by private secotor financeing corps and often backed by Ginnie Mae, Fannie Mae, and Freddie Mac.

Pays principal and interest monthly, ONLY REPAYS ONE TRANCE AT A TIME

Not backed by Government, Trade OTC

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103
Q

Payment of CMOs

A

Interest is paid on all tranches simultaneously. Principal pays one trance at a time.

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104
Q

Principal only CMO

A

Income stream comes fully from principal payments of underlying mortgages.

PO sells at a discount from par.

Volatile to interest rates = as rates are higher people do not prepay as fast, as rates drop people pay off mortgages quicker and investor has better return

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105
Q

Interest only CMO

A

Sells at a discount and cash flow declines over time (similar to interest paid on mortgage).

can be a hedge against interest rate risk, interest payments on mortgages rise as rates increase = more income for IO CMO

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106
Q

Planned Amortization class CMO PAC

A

PACs have targeted maturity dates, retired first and offer protection from prepayment or extension risk (payments are slower than expected).

Reduced prepayment and extension risk

107
Q

Targeted Amortization Class CMO (TAC)

A

Transfers prepayment risk only to a companion tranche and does not protect from extension risk. Investors accept extension risk and resulting greater price risk fro slightly higher interest rate.

protected against prepayment risk, not extension.

108
Q

Zero tranche CMO

A

No payment until preceding cmo tranches are retired (Most volatile).

109
Q

CMO Charageristics

A

Rate of principal varies
If interest rates fall and homeowner refinancings increase, principal is received sooner
If interest rates rise and refinancing declines, the CMO investor may have to hold investment longer

110
Q

CMOs yield

A

Usually pay investors interest and principal monthly. Made in $1,000 increments to investors for each tranche.

111
Q

Liquidity

A

Active secondary market for CMOs. Market for CMOS with more complex characteristics may be limited or nonexistent.

112
Q

Suitability

A

Customer is required to sign suitability statement before buying any CMO. Potential investors must understand that rate of return on CMOs

113
Q

Collateralized Debt Obligations

A

Do not specialize in any single type of debt. usually consist of nonmortgage loans or bonds.

Can be pool of bonds, loans or other assets such as leases.

114
Q

Cautions of CDOs

A

Can be very complex - investors don’t fully understand what they are investing in

Sale of individual assets from originators of the loans - ie adverse selection…

115
Q

Treasury securities (taxes)

A

Typically exempt from state but pay federal.

116
Q

T Bills

A

Denominations of $100 to $5MM. 4,13,26 weeks are auctions weekly. No interest issued at discount.

117
Q

T Notes

A

$100 to $MM. 2-10 years. quoted at 1/32.

118
Q

T Bonds

A

Denominations of $100 to $5MM. 10-30 years.

119
Q

Treasury receipts

A

BD buy treasury securities and place them in a trust at bank and sell receipts against principal and interest payments.

120
Q

Seperate Trading of Registered Interest and Princial of Securities (STRIPS)

A

Securities of underlying treasury strips are in USD, major banks and dealers perform the actual separation of trading. Backed in full by US Government. Receipts ARE NOT.

121
Q

Treasurty Inflation Protection Securities

A

Helps protect against purchasing power risk

issued with fixed interest rate, pricnipal is adjusted to the change in Consumer Price Indext (measurement of inflation).

122
Q

Money Market Instruments

A

Debt securities with short-term maturities, typically one year or less.

Usually highly liquid and provide a high degree of safetey becasue most issues are highly rated.

123
Q

US Govt MM securities

A

T Bills
Treasury securities with <1 year maturity remaining
Short term discount notes issued by smaller agencies
Muni securities are considered tax-exmept MM securities

124
Q

Money Market mutual funds

A

For retail investors are designed to have a stable NAV of $1 per share. Not guaranteed or protected by FDIC.

125
Q

Banker’s Acceptance

A

Corporations use BA as short term time draft for import/export business. Payment date of BA is normally between 1-270 days.

Typically pays for goods and services in a foreign country

126
Q

Commercial Paper

A

Unsecured. issued by corporation to raise cash to finance accounts receivable and seasonal inventory overages.

Lower interest rates. Maturities typically 90 days, can be up to 270. .

Primary buyers are money market funds, banks, pension funds, insurance companies, corporations

127
Q

Negotiable CD’s

A

Time deposits that banks offer. They have minimum face values of $100,000. Most are issued for $1MM or more.

Mature in 1 year or less. Can be traded on secondary market.

128
Q

Investment Company

A

corporation or trust that pools investors money together then invests the money on their behalf.

129
Q

Unit Investment Trusts

A

UIT sets its portfolio, it remains the same for life of fund.

Raises money by selling units (shares) to its investors. Typically one time offering.

Many are publicly traded.

130
Q

Exchange Traded Funds

A

Open-ended company. Issue shares in large blocks (creation units). Shares can be split later.

131
Q

Ways to sell ETF Shares

A

Sell individual shares to other investors
Can sell back to the ETF which they usually receive securities instead of cash.

NOT MUTUAL FUND SHARES

132
Q

Advantages of ETFS

A

Pricing and ease of trading - intraday trading
Margin - can be bought and sold on margin
Operating costs - lower than mutual funds
Tax efficiency - no consequence until investors sell

133
Q

Disadvantage to ETF

A

Commissions - each purchase or sale is commissionable

Over trading - easy to do.

134
Q

REIT

A

Not an investment company, but regulated by act of 1940.

Pools money and forms a trust to invest into real estate

135
Q

Equity REIT

A

When the trust owns their own property

136
Q

Mortgage REIT

A

Own mortgages on property

137
Q

Hybrid REIT

A

Combination of equity and mortgage REIT

138
Q

REIT Advantages

A

Allows investor to invest in RE without incurring high liquidity risk
Hedge price movements in other equity markets
REITS provide reasonable expectation of income

139
Q

REIT Disadvantages

A

No control over the portfolio
Problematic loans can diminish returns
Dividends paid by trust do not meet requirements of qualified dividends - taxable at ordinary income

140
Q

REIT Distribution

A

Must distribute more than 90% of income to shareholders to avoid taxation as corporation

141
Q

Open end company

A

Mutual funds. Only issues one class of security.

No specific amount of shares.

Mutual funds can purchase common stock, preferred stock and bonds for their portfolio. Investor buys common shares of mutual funds

Not traded in secondary market

142
Q

Diversified investment company (75-5-10)

A

75% Total assets invested in securities issued by companies other than the investment company itself OF WHICH:
> no more than 5% funds total assets are invested in the securities of any one issuer
> No more than 10% of outstanding voting securities of any one issue is owned by the 75%

If capital appreciation causes allocation to pass 5% threshold - no action required

143
Q

Sector Fund

A

Must have at least 25% of assets invested in a particular economy or geographic area

Can still be diversified if it meets 75-5-10 rule

144
Q

Types of mutual funds

A

Stock funds - stocks
Bond funds - bonds
Balance funds - stock and bonds
Money market funds - short term funds (cash equivalents)

145
Q

Performance disclosure

A

Law requires disclosure of annual returns for 1, 5, and 10 year periods. If fund is less than 10 years old then must disclose since inception.

146
Q

Fund Costs of mutual funds

A

Funds typically charge front loads of up to 8.5% to compensate salseforce.

147
Q

Expense Ratio of mutual funds

A

Average net assets

A ratio of 1% means the fund charges $1 for every $100 invested.

Aggressive funds have higher ratios.

DOES NOT INCLUDE LOAD CHARGES

148
Q

Taxation of mutual fund

A

Mutual fund investors pay taxes on any dividends or cap gains fund distributes. Taxed in year earned.

149
Q

Portfolio Turnover of mutual fund

A

Costs of buying and selling securities including markups or markdowns are reflected in portfolio turnover.

Not uncommon for aggressive growth fund to reflect annual turnover of 100% or more. 100% turnover means fund replaces portfolio annually.

25% turnover rate - turns over every 4 years.

150
Q

Mutual fund services

A 
Retirement account custodianship
Investment plans
Check-writing privileges
Telephone transfers
Conversion privileges
Withdrawal plans
151
Q

Stock funds

A

Uses stock to meet stated objectives.

Historically have outpaced inflation for most 10 year horizons

152
Q

Growth funds

A

Invests in stocks of companies who are growing rapidly.

reinvest all or most of profits for R&D rather than paying dividends.

Focused on cap gains.

Higher level of risk

153
Q

Blue chip funds

A

invest in more recognized companies - less risk

Companies with large market cap

154
Q

Large cap funds

A

Companies with market cap of >$10Bn

155
Q

Aggressive growth funds (performance funds)

A

willing to take on more risk. Invest in newer/smaller cap companies

156
Q

Mid cap fund

A

Somewhat aggressive

Targets $2bn - $10bn in market cap

157
Q

Value funds

A

Focus on companies whose stock are undervalued (earnings not shown in price)

Higher dividend yields than growth

More conservative than growth

158
Q

Income funds (Equity fund)

A

Stresses current income over growth

Investing in companies that pay dividends.

Target value not growth. Lower risk.

PAY MONTHLY DIVIDENDS

159
Q

Option Income Fund

A

investes in securities on which call options can be sold (covered calls)

Eqarn premium income from writing options.

Earn capital gains from trading options for profit.

160
Q

Growth and income funds

A

Combined objectives of both.

161
Q

Special situation funds

A

buy securities of companies that may benefit from a change within the company or economy

162
Q

Blend/Core funds

A

Portfolio comprising of a number of different classes of stock.

Includes blue chip and high risk.

163
Q

Index Funds

A

Invests in securities that mirror market index such as S&P.

Low turnover low cost

164
Q

Foreign Stock fund

A

Invest only in companies that have a principal interest outside of US

Objective is long term capital appreciation

165
Q

Global funds

A

Invests in securities in both US and foreign companies.

Huge amount of currency and political risk.

166
Q

Balanced funds (hybrid)

A

Invests in stocks for appreciation and bonds for income.

Might be 60% stock. 40% income.

167
Q

Asset allocation funds

A

Split investments between stocks for growth, bonds for income, and MM instruments for stability.

Usually target a specific goal such as retirement. Similar to balanced fund

168
Q

Target date funds (life cycle or interval)

A

Offered by most benefit plans.

Designed to help manage risk with a SPECIFIC TARGET DATE IN MIND.

169
Q

Bond Funds

A

Funds invest solely in investment grade funds. Do pay dividends if BOD declares such

170
Q

Tax Free Bond Funds

A

Municipal bond funds invest in muni bonds/notes

**Appropriate to investors which high tax bracket seeking income

171
Q

US Government Funds

A

Purchase securities issued by UST or agency of USG (GNMA)

Investor seeking maximum safety

172
Q

Agency Funds

A
  1. Bonds issued or guaranteed by US Fed Government
  2. Bonds issued by government sponsored enterprises

Bonds issued by GSE’s inclue GNMA(USG bakced), FNMA, FHLM

173
Q

Principal protected fund

A

Offers investor a guarantee of principal adjusted for dividends and distributions on set future date (maturity)

Provides opportunities for higher risk investements such as equityes

Protection can be insued by 3rd party

174
Q

Features of Principal Protected Fund

A

Guarantee principal - guarantee initial investment minus front end charges even if markets fall

Lock up period - typically 5-10 year period. If you withdraw you can lose guarantee (if below market)

Hold a mixture of bonds stocks - mostly invested in zero coupon bonds when rates or low and markets are volatile. Provides less exposure to volatility if it exists

175
Q

Index tracking funds - differences from mutual funds

A

Intra day trading

Margin availability

Short selling

176
Q

Leveraged funds

A

Funds attempt to deliver multiple on the return of the benchmark index they are tracking

Most of the funds use derivative products such as options, futures, swaps to enable them to reach goal

Not suitable for all investors. No leverage limitations

177
Q

Inverse funds

A

attempt to deliver returns taht are opposite of benchmark index.

Can also be leveraged fund.

178
Q

Hedge fund

A

investments are pooled and professionally manged, they have more flexibility and more aggressive on investment objectives.

Unregulated - usually private partnerships

Not liquid - investments can have minimum timeline

Most investors must be sophisticated

179
Q

Hedge fund strategies

A 
Highly leveraged portfolios
use of short positions
Utilizing derivative products
Currency speculations
Commodity speculations
Investing in unstable markets
180
Q

Hedge Fund lockup provisions

A

Period where investor cannot withdraw dollars. Generally associated with new funds. Dependent on investment strategy

181
Q

Blank check hedge fund

A

Special Purpose Acquisition Companies (SPACS)

Blank check - Companies without business operations that raise money through IPO with sole purpose of finding a business or combination of businesses

182
Q

Blind Pool fund

A

usually provide an indication of general industry but not much other detail.

Similar to blank check

183
Q

Mutual fund Dividends

A

pay dividends to each shareholder similar to any other company. Requires written statement

Qualified dividends - taxed at long term rate

Non-qualified dividends - ordinary income

184
Q

Net investment income

A

Dividends + interest - expenses of fund

D+I-E= NII

185
Q

Avoiding Triple Taxation

A

Avoided by mutual fund qualifying as a subchapter M company

if the fund acts as a conduit for distribtuions it may qualify as a regulated investment company only subject to retained income.

To be subchapter M fund must distribute at lease 90% of its net investment. Only pays taxes on remaining income (so if distributes 95%, taxed on 5%)

186
Q

Triple Taxation

A

1 Mutual fund taxed on income, 2 GEM pays tax on dividend received, and 3 finally investor pays income tax on distribution from fund

187
Q

Capital gains example

A

Investor purchases shares of a mutual fund

3 months later fund has a long-term cap gains distribution, this is taxed to the investor as…

Long term capital gain - makes no difference how long the investor has held shares, the investment is a long-term and will be taxed such.

188
Q

Reinvestment of distributions

A

In mutual fund investor can elect to reinvest distributions which will be without sales charge

189
Q

1099 DIV

A

Allows shareholder to report realized distribution capital gains for the year

190
Q

Cost basis of inherited shares

A

Either stepped up or down at the date of decedents death.

Subject to more favorable long-term tax rates no matter the duration

191
Q

Inherited shares example

A

Grandpa bought $10K of stock 20 years ago; current value is $50K at death. Grandaughter’s cost basis is $10K.

192
Q

Donor taxes

A

When a person dies, tax is due on their estate. Payable by the estate not heirs.

Gift tax is payable by the donor NOT recipient

193
Q

Gift tax exemption

A

Individuals are allowed to give up to a certain $ amount per year without incurring gift tax.

Inter spousal gifts are not subject to tax.

194
Q

Progressive taxes vs. Regressive taxes

A

Progressive: increase with the size of the estate or gift (example is income tax)

Regressive: flat taxes impact lower income individuals for a higher degree

195
Q

Wash sales

A

Capital losses used to offet gains or income

investor sells security at a loss and purchases the same or substantially idential within 30 days

Substantially refers to other security with same investment performance (securities convertible into the one being sold, warrants to purchase same security)

196
Q

Wash rule timeline

A

30 days before and 30 days after and wash day

61 days total

197
Q

Valuing fund shares Mutual fund (liquidation)

A

cost base of mutual fund share includes shares’ total cost including sales charges + reinvested dividendand cap gains distributions

198
Q

Liquidating shares FIFO

A

cost of the shares held the longest is used to calculate gain or loss

199
Q

Share Identification (Liquidation)

A

investor keeps track of the cost of each share and uses information to decide which shares to liquidate

200
Q

Average basis

A

Use the average cost basis when redeeming the shares.

201
Q

Price of mutual fund shares

A

Total assets - liabilities = net assets

Based off of NAV

202
Q

NAV does not change

A

Manager buys or sells securities, fund issues shares, fund redeems shares

203
Q

Purchasing Mututal fund shares

A

Forward pricing. Always have to wait until NEXT AVAILABLE no matter if they are being redeemed or purchased

204
Q

Class A shares Mutual fund

A

Front end loads. Load charges are taken out of investment amount.

205
Q

Breakpoints

A

Keep in mind that if they sign an LOI then they will have benefit of full purchase amount ,not individual transaction

206
Q

Backdating letter - breakpoints

A

allows LOI to be back dated up to 90 days but may not cover more than 13 months total

Customer who backdates 60 days has 11 months to complete

207
Q

Rights of accumulation

A

allow investor to qualify for reduced sales charge

Difference from Breakpoint:
Available for subsequent investment and do not apply to initial transactions
Allow investor to use prior share appreciation
Do not impose limits

Allows addition and accumulation over time

208
Q

Combination privilege

A

with mutual funds managers may allow investor to combine investments to reach a breakpoints

209
Q

Exchanges with family mutual funds

A

May be purchased at NAV under a no-load privilege when:

Purchase may not exceed proceeds generation by redemption of other fund
redemption may not involve a refund of sales charges
sales personnel and dealers must receive no compensation
gains or losses from redemption must be reported

210
Q

Computing sales charge - always based off POP NOT NAV

A

PoP - NAV = sales charge amount

Sales Charge Amount
——————————– = sales charge percentage
POP

211
Q

Mutual fund prospectus must contain a formula that explains how the fund computes NAV

A

Sales charge is always based on POP NOT NAV

212
Q

Class B Shares

A

No front-end sales charge

Have 12b-1 fee (75bps)

Convert to class A shares over time

213
Q

Class C Shares

A

Level load

Typiucally have one year 1% CDSC, 75bps 12b-1 fee and a 25bps shareholder services fee

Higher fees, shorter horizons

214
Q

12b-1 fees

A

cover costs of marketing.

Deducted quarterly - reflected annually

RULES:
Maximum fee is 75 bps
Fee must anticipated level of distribution services

215
Q

If designated as no-load fund

A

May not charge more than 25bps on avg net assets for 12b-1 fee.

216
Q

No load fund

A

permitted to charge purchase fees, account fees, exchange fees, and redemption fees (none considered sales load)

217
Q

Voluntary accumulation plan (mutual fund)

A

Allows customer to deposit regular periodic investments on a voluntary basis

Designed to help customer for regular investment habits

218
Q

Dollar cost averaging

A

Form of investing that allows individual to purchase more shares when prices are low and fewer shares when prices are high

Does not guarantee profits in declining markets because prices may continue to decline

219
Q

Fix dollar withdrawal

A

Liquidates enough shares each period for that set sum

220
Q

Fixed percentage or fixed share withdrawal

A

either a fixed number of shares or percentage of the account is liquidated

221
Q

Fixed time withdrawal

A

customer liquidates their holdings over a fixed period. Funds require a customers account to be worth a minium amount before this may begin

222
Q

Withdrawal plan discloser

A

Withdrawal plans are never guaranteed

Registered rep MUST:
Never promise guaranteed rate of return
stress to investor that it is possible to exhaust account by overdraw
State during down market that account will be exhausted even if withdraw is small
Never used charts or tables unless permitted

223
Q

Withdrawal plan discloser

A

Withdrawal plans are never guaranteed

Registered rep MUST:
Never promise guaranteed rate of return
stress to investor that it is possible to exhaust account by overdraw
State during down market that account will be exhausted even if withdraw is small
Never used charts or tables unless permitted

224
Q

Annuity

A

Insurance contract designed to provide retirement income.

Refers to a stream of payments guaranteed for some period of time - for life, certain age, or number of years

Amount paid out may not be guaranteed but the stream of payments are

Annuitant makes an after tax lump sum or periodic payments to insurance company which invests the money into an account, grows tax referred

225
Q

Annuity pauyout

A

Can be either lump sum or periodic payments, typically for life

Withdrawals before 59.5 have 10% penalty in addition to full income tax.

226
Q

Fixed annuity

A

Investor payz premium the insurance company is obligated to pay in a guaranteed amount of payout (monthly) to annuitant based on original paid in.

Insurer guarantees rate of return and bears investment risk

Purchasing power risk present

227
Q

Index annuity

A

Way to overcome purchasing power risk

Popular amongst investors seeking market participation but with a guarantee against loss

Performance is based on specific index such as SP 500

Annuitant is credited with a % of growth (typically 80-90%).

Total growth payout can be capped at 12%.

228
Q

Variable annuities

A

Designed to keep place with inflation

Investor assumes investment risk. Considered a security

Must be sold with prospectus

Premium payments are invested into a separate account of issuer. The separate account is comprised of various sub-accounts which act like mutual funds with different objectives.

Monthly income either increases or decreases based upon performance of separate account.

229
Q

Combination annuity

A

Investors received advantages of both the fixed and variable annuities. Contribute to both plans

230
Q

Purchasing annuities

A

Usually no load to purchase, but if surrendered there are significant penalties

Payments to insurance company can be lump, monthly, quarterly or annual

231
Q

Single premium deferred annuity

A

purchased with lump sum, payments of benefits is delayed

232
Q

Periodic public payment deferred annuity

A

allows investments over time. Benefit payments are always deferred until later date

233
Q

Immediate annuity

A

purchased with a lump sum and payout benefits commence within 60 days

234
Q

Bonus annuities

A

Financial benefits offered with with annuities

Benefits include enhancement to the buyer’s premium with the insurance company contributing an additional 3-5% to the premium.

Comes with a cost, higher fees, longer surrender periods (7-10 years)

235
Q

Annuity Sales charge

A

No maximum sales charge - must adhere to FINRA fair and reasonable rules

236
Q

Accumulation phase

A

Growth phase, payout phase is the annuity phase

237
Q

Payout phase

A

When payments commence, money will be distributed per the payout option chosen

accumulation units purchased over time are converted into annuity units

238
Q

Distributions from annuities

A

Monthly payments dependent on the following:

Amount in contract
Age
Sex (females live longer - smaller check)
Paout option
Investment return
239
Q

Assumed Interest Rate

A

AIR is the conservative projection of the performance of the separate account of the estimated life of the contract

240
Q

AIR effect on payout

A

If separate account performance is > than AIR, next month payment is more than this month
If separate account performance is = to AIR then payment stays the same
If separate account performance is less than the AIR, next months payment is less than this month

                               AIR                    Payment Month 1                       4%                   $ 1,000 Month 2                      6%                   $ 1,100 Month 3                      4%                   $ 1,100 Month 4                      3%                   $ 1,000 Month 5                      3%                   $ 950
241
Q

Surrender of annuity

A

annuitant may simply cash in annuity.

Cost basis is total amount invested.

Liable for income tax plus 10% fee if before 59.5

242
Q

Death of annuitant

A

If dies during accumulation period, death benefit takes effect

Beneficiary is guaranteed either the total value of the annuity or amount invested. Whatever is greater

Still liable for income tax on growth

243
Q

Annuitization payment options

A

Life annuity (straight life)_
Life annuity for certain period
joint life with last survivor
unit refund

244
Q

Life annuity (straight life)

A

Guarantees a minimum of certain year period.

Annuitant is still guaranteed monthly income for life, if death occurs within the period the beneficiary receives payments

245
Q

Joint life wit hlast survivor annuity

A

Agrees to payments over two lives

Often used for spouses.

Insurance company is obligated to pay a check over two lifetimes and is considered to be smaller than a life with a certain option.

Survivor receives deceased’s payments

246
Q

Unit Refund Option

A

Minimum number of payments are made upon retirement. Value remains in the account after death to annuitant and payable to beneficiary.

247
Q

Taxation of annuities

A

All contributions are made with after tax dollars unless part of employer sponsored retirement plan

Taxed as ordinary income when withdrawn on gains.

248
Q

Variable annuity suitability

A

Most suitable for someone who can fund contract with cash. Refinancing home is not suitable

Not suitable for who might need lump sum with anticipation of needing for an upcoming expense

Investing using funds from a tax deferred account such as IRA is not smart - provides no additional savings

Maximum contributions to all other retirement savings vehicles should be made beforehand

249
Q

1035 exchange

A

Is a tax-free exchange between like contracts

IRS allows annuity and life policyholders to exchange their policies without tax liability

Cannot be used for transfers from an annuity to life insurance policy

250
Q

Possible abuses with 1035 exchange

A

Possible surrender charges on old policy

New surrender charge period on new policy

Possible loss of a higher death benefit that existed on old policy

251
Q

Life Insurance

A

Permanent life is designed to last until at least age 100 or the death of insured. Policies accrue cash value that may be borrowed for living needs.

252
Q

Variable life insurance

A

Fixed schedule premium bu differs from whole life in that the premiums paid are split

Part of the premium is placed in the general assets of insurance company - used to guarantee minimum death benefit

balance of premium is placed in separate account - represents value of the policy. Fluctuates and not guaranteed.

253
Q

Variable life prospectus delivery

A

Considered a security, prospectus is required

254
Q

AIR Variable death benefit

A

Does have AIR and is dictated by performance.

Benefits of VL is that death benefit may adjust upward and keep pace with inflation

255
Q

Loans on VL contract

A

Not considered to be constructive receipt of income and are received tax free.

256
Q

Loans on VL contract restrictions

A

Minimum % that must be available is 75% after being in force for 3 years

No scheduled repayment of loan, but if death benefit becomes payable then loan amount is deducted first

If outstanding loan reduces cash value to negative amount, insured has 31 days to deposit funds

257
Q

VL contract exchange

A

For a WL contract

Length of time privilege is in effect varies by insurer but can never be less than 24 months

Exchange is allowed without evidence of insurability

258
Q

VL sales charges

A

may not exceed 9% of the payments made over the life of contract

259
Q

Refund providsions VL

A

45 days from execution or for 10 days from the time the owner receives the policy (whichever is longer)

Refund provisions extend for 2 years but refund is the cash value

260
Q

Suitability of Variable life insurance

A

There must be a need for life insurance
Must be comfortable with separate account
Applicant must understand the variable death benefit
Prospectus must be delivered at time of solicitation

261
Q

Section 529 Plan

A

Defined as Muni securities.

Funded with after tax dollars earnings grow tax deferred. State sponsored

Withdrawals taken for qualified expenses are tax free (10% penalty for non qualified)

Pentalty is not charged if you terminate because beneficiary has died

Any person can open account for future student- does not have to be related

262
Q

Prepaid tuition plans

A

Allow donors to lock in future tuition rates at today’s prices

263
Q

College savings plan

A

Donor invests a lump sum or preiodic payments

Typically invested in target dat funds

Up to 10,000 per year can be used for K-12 education purposes
College plans may be set up in more than one state
No age limitations for contributions
no income limitations
Can be contributed via periodic payments - limited to $15,000 per year per donor

If beneficiary is predesignated they must be a close family member of first

264
Q

Coverdell Education Savings Account

A

Not muni security.

Funded with traditional types of securities.

After tax contributions of up to 42,000 per student per year until 18th birthday.

Contributions can be made by any person and are NOT tax deductible. Distributions are tax free if taken before 30 for education expenses.

Series 7 (4 decks)

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