Unit 1-8 review

the value of ADRs fluctuate….

throughout the day

how are ADR dividends taxed?

by the foreign country, then as capital gains in the US

stocks held for 1 year or less are taxed as

ordinary income

stocked held for over 1 year are taxed as

capital gains

Rule 144 rules

over 90 days, control person can only sell the greater of:

• 1% of outstanding shares

• the avg trading volume over the previous 4 weeks

Rights allow shareholders to

maintain % ownership and purchase below market price. 1 right for every share. Subscription period of 30-45 days

Warrants allow you to

purchase a stock at a fixed price, higher than the current market price

Forward stock split =

more shares, lower price/share

Reverse stock split =

less shares, higher price/share

Unregistered shares must be held for

6 months, then rule 144 volume restrictions apply if control person/company affiliate

Per rule 144, unregistered shareholders can sell up to how many times per year?

4

unregistered stock is obtained via

private placements or corporate stock option

Bankers acceptances

money market instrument used for international trade

Commercial paper

money market to fund short term expenses inventory, payroll, etc

Repurchase agreement

sells part of their asset with the intention of buying it back fully later

Federal Funds Loans

money market instrument - banks who have excess federal funds (imposed by the FED) can lend to banks who don’t

When do treasury receipts pay interest and are they sold at par/premium/discount

don’t pay interest until maturity, sold at a discount

difference between GNMA/FNMA/FHLMC certificates and bonds

certificates pay interest monthly, bonds pay interest semi annually

Distinction between Ginnie Mae, Fannie Mae, and Freddie Mac

Ginnie Mae owned by the government, Fannie/Freddie are owned by investors but backed by the government

Yield is determined by (4)

1. time to maturity

2. coupon rate

3. Bond rating/credit quality

4. Bond features (call/put/convertible/

issuance of new stocks and bonds take place in the

Capital/Primary market

Promissory notes are

a form of commercial paper used by corps. money market

How are municipal bonds taxed?

Dividends/interest rates are tax free, capital gains are taxable

Current Yield =

Annual Coupon $ / current market price

Face Amount Certificate (FAC)

issuer promises a face amount at a certain date

max sales charge for a mutual fund

8.5%

mutual fund shareholders vote on (5)

1. BOD

2. approving an advisor

3. change in objectives

4. changing sales charge

5. liquidating fund

Class A shares

front loaded sales charge. Good for large investments over long period of time

Class B shares

backloaded sales charge

Class C shares

0.25% service fee paid quarterly

No load shares have no sales charge, but do have

transaction fees

LOIs must be paid within

13 months

NAV per share =

Assets - Liabilities / outstanding shares

Public offering price =

NAV + sales charge

Instead of DERP, mutual funds are

DRPE

full prospectus has (7)

1. fund objective

2. investment policies

3. sales charges

4. management expenses

5. expense ratio

6. services offered

7. 1,5,10 year performance history

Statements of additional information have (4)

1. balance sheet

2. statement of operations

3. income statement

4. current portfolio

(3) criteria for investment company to be taxed as a conduit

1. qualify under IRS subchapter M

2. calculates NII using formula

3. distributes at least 90% of the funds NII in dividends

Net Investment Income (NII) =

Dividends + Interest - Expenses

How are annuities taxed

grow tax deferred and taxed at withdrawal

Formula for annuity payments are based on (5)

1. sex

2. age

3. amount in annuity

4. payout option

5. interest rate from the separate account

How are VA payments taxed

• principal amount is tax free

• growth is taxed at withdrawal

Exclusion Ratio

the portion of a VA payment that is made up of the principal - excluded from tax

1035 exchange

tax free transfer from one annuity to another

Shares of a closed-end company can trade…

above or below their NAV

Mutual funds have _______ pricing, which means

forward, NAV calculated at EOD

If a fund doesn't distribute 90% of its dividends and therefore doesn't qualify as a conduit under Subchapter M, the funds shareholders would have to…

pay income taxes on the income they receive from the fund

Options Premium =

Intrinsic Value + Time Value

Breakeven point for calls =

Strike Price + Premium

Breakeven point for puts =

Strike price - premium

non-equity options pay in

cash

non-equity options are typically used to

hedge against a downturn in the market

Steps for adding options trading (5)

1. rep must have reasonable ground for suitability

2. investor is given options disclosure agreement

3. Account must be approved by registered options principal

4. option trades can be entered

5. investor must return disclosure agreement within 15 days

Who sets the contract size, strike price, expiration date, and premium for options?

OCC sets size, XP, expiration

Market sets the premium

regular way settlement

1 business day after trade date (T+1)

529 funds are for

education saving

529s are considered a ________ security

Municipal. They’re sponsored by state

Local Gov Investment Pools (LGIP)

for govs to park money short term

how are ABLE accounts taxed

after tax dollars, growth tax deferred, withdrawals tax free

In partnerships, taxes are paid at

individual level, not collectively

Are LPs/DPPs considered a security?

yes

who has higher priority at dissolution: GPs or LPs?

LPs

LPs can use depreciation and losses to

lower taxable income

because?

they are PASSIVE losses/gains

LPs are very….

illiquid

Cash flow =

depreciation + Profit/Loss

REITs

manage a portfolio of real estate/mortgages for investors

how are REITs taxed

as a conduit

how do REITs pass gains/losses to their investors?

pass gains but not losses

ETFs

invest in a specific group of stocks to mimic an index/mutual fund

Unlike mutual funds, ETFs trade…

in the secondary market, investors take advantage of intraday price changes

ETFs can be purchased on…

margin

ETFs are typically _______ than mutual funds

cheaper

each ETF transaction has a

commission fee

ETNs

unsecured debt issued by financial institution, pays on a stated maturity date

What determines how much ETNs pay?

Cash linked to the performance of a market index fund

For oils and gas LPs/DPPs, tangible drilling costs are considered

to have some salvage value at the end of the program and can be depreciated

LPs do NOT act in any sort of __________ capacity. If they do so, they assume full liability of the business

managerial.

Can’t even choose the type of assets purchased by the business

do 529 beneficiaries need to be under 18?

no

LGIPs maintain a $___ NAV

$1

what is the official disclosure document for a municipal security

official statement

ABLE act of 2014 allowed disabled people whose onset was before __ to open accounts

46

securities act of 1940 defines…

an investment company

securities act of 1933 says (3)

1. new issues must register with SEC

2. full and fair disclosure required

3. corporate investors receive full prospectus, municipal receive official statement

Underwriter

works with issuer to bring securities to market

Institutional investor

pools money

Secondary offering

when stockholders sell their portion of shares to the public for the first time

criteria to be an accredited investor (1) and (5)

1. insider/Institutional investor

or 1 of the following

1. 200k income (last 2 years, on track for 3)

2. 300k income if joint account

3. $1m+ net worth, not including primary residence

4. education institution credentials

5. holder of series 7, 65, 82

Best efforts underwriter

tries to sell as much as they can

All or none (AON)

underwriter must sell all securities or canceled

Mini-max

underwriter has a minimum # of securities they must sell or canceled

Firm commitment underwriting

underwriters buy the entire issue and are liable for selling them

joint venture of underwriters are called a

syndicate

what is the underwriters “cut” in a firm commitment

the spread - difference between the discount price they buy for and the price they sell for

Selling group

BDs brought in to help sell the issue. Assume no liability

(3) timeline for new issues under securities act of 1933

1. registration of S-1 statement with SEC

2. Colling off period of 20 calendar days

3. Effective date - sec releases for sale, prospectus released

During cooling off period:

• Tombstone advertisements

• Preliminary prospectus "red herring"

• Interest gathered

• NO offers, collections, or promises

• NO sales literature

Tombstone ads can be placed by

the issuer directly or the underwriters

shelf offering

approved, but shelfed for up to 2-3 years

NMS securities

nationally listed (NASDAQ, NYSE)