Series 7 Stuff to Know

Due Bill

A statement of money owed. They are used between broker-dealers to adjust for correct dividend payments

Div yield/ yield

Current yield is also called a what?

Utility stocks

A type of stock that offers above average dividend yields, however they are usually highly leveraged (debt) andt fluctuate a lot due to interest rate changes.

50%

Blue chips dividend yield is what?

more than 75%

Utility stocks dividend yield is what?

Participating stock

Dividends are fixed as to a minimum, but not a maximum

B

Which of the following is not chosen by the board of directors?

A Declared date

B Ex-dividend date
C. Record date

D. Payable date

Serial Bonds

Same issue date but different maturity dates

Series bonds

Different issue dates but same maturity dates

Sinking fund

Money set aside to redeem the company’s bonds or indentures. MAY BE A MANDATORY debt retirement provision. Frequently used for term bonds.

Funded debt

The term used to describe corporate debt that is due more than 1 year from the issue date and includes corporate bonds, notes, and bank loans. Funded debt does not include preferred stock, government bonds, or municipal bonds.

Bearer bonds

bonds not registered in the investor’s name and have interest coupons attached.

Registered “as to Principal only”

Bonds registered in the investors name with interest coupons attached.

Government

A security quoted at 98.16 is a government security or corporate?

Corporate

A bond quoted at 98 1/8 is a government security or corporate?

30/365

Accrued interest is calculated how with corporate/municipal bonds?

actual/365

Accrued interest is calculated how with government bonds?

True

True or false: Current yield is also called “YIELD”?

Market manipulation

Involves creating a false or misleading appearance of active trading in a security or a false or misleading appearance with some respect to the market for a security.

Capital risk

Risk of getting or not getting back the principal you invested.

Non-managed fee based accounts

Generally used by customers that trade and benefit by having a fixed fee or percentage of account charged rather than being charged based on each individual transaction.

Refunding bonds

The sale of a new issue of bonds, the proceeds of which are used to retire an outstanding issue. Generally, done when there is a sharp decline in interest rates.

Forced Conversion

Issuers can effectively force the conversion of callable convertible securities (preferred stock and bond), by issuing a call for the bonds at that price that is below the parity price of the common stock. This would case investors to convert, rather than tender their securities at the call.

Call price below conversion price, so convert the shares!

Call price

The tendering price equals what?

Collateralized Mortgage obligations (CMOS)

Bond that is secured by a pool of mortgage loans. Are mortgage backed securities, provide secure income to investors on a monthly basis, safe for people in all tax brackets.

- Interest paid at a fixed coupon rate

- Principal is paid in varying amounts over the life of it

- Each tranche has varying levels of risk

- Backed by government agencies like GINIIE MAE/FREDDIE MAE

Planned amortization class

Are the CMOS that most resemble bonds because they have a sinking fund feature, which means investors will receive payments over a pre-determined period with stable cash flow. Have less than average exposure to call risk.

Z bond

The final tranche of a CMO bond.

Brokered CD

A type of CD thats sold through a brokerage firm or investment company rather than directly by banks.

Commercial paper

Unsecured promissory note issued at a discount. Typically 9 months (or 270 days).

Fall

Bondholders want interest rates to rise or fall during the call protection period?

Rise

Bondholders want prices to fall or rise during the call protection period?

Closed-end mortgage bonds

Mortgage bonds in which the property used to secure the loan cannot be used as collateral to secure other future loans, unless the subsequent loan(s) are lesser in claim (ex: second or third mortgages bonds).

Collateral trust certificates

Instruments of debt issued by a company that use securities (stocks and/or bonds) of other corporations owned by the issuer as collateral. The securities used as collateral are placed on deposit with a trustee. Generally issued by parent corporations that use the securities of a wholly owned subsidiary as collateral.

Subordinated debentures

Debenture bonds that hold lesser (“junior”) claims than other debenture bonds, and thus, would be paid only after more senior debenture claims have been satisfied.

Government

Corporate, municipal, or government bonds are the ONLY ones to quote in decimals?

D

Income bond

The product of a bankruptcy proceeding or debt renegotiation. It is very speculative and not suitable for an investor with a low risk tolerance.

ytm

yield(s) means what?

TRUE

True or false: When interest rates fall and prices of bonds go up, discount bonds will ACTUALLY appreciate more than premium bonds because they would have the greatest upside potential.

Collateralized debt obligation

A structured debt security backed by a pool of assets, including mortgages, auto loans, corporate debt, and credit card debt. It is a type of asset-backed security (ABS). Generally, trade according to their average life rather than their state maturities.

Zero coupon bonds

• Issued at deep discount to par and pay no interest while the bonds are outstanding

• Taxed annually even though no income is received

• Earnings are imputed income via Acretion

Income bonds

The product of a bankruptcy proceeding or deb renegotiation. It is very speculative and not suitable for an investor with a low risk tolerance. They promise to pay interest only if they have sufficient earnings and the Board of Directors declares that interest will be paid.

True

True or false: Listed options are NOT adjusted for Cash Dividends

American Style

Can be exercised anytime after they are purchased.

European Style

Can be exercised only at expiration

Class of options

All options of the same type on the same underlying stock.

EX: All IBM calls or All IBM puts

Series of options

All options of the same class with same expiration and same exercise price.

EX: All IBM OCT 90 calls.

True

True or false: When just the number of shares change, for example: 109 shares or 118 shares instead of the standard 100, ALWAYS think stock dividend.

B

An option contract for ABC is for 109 shares. What most likely caused this?

A Stock split

B Stock dividend

C Warrant

D Cash dividend

True

True or false: When BOTH the number of shares changes and the exercise price change, then this indicates that a stock split occurred.

True

True or false:

The four following ways are considered ways to cover a call writing

1. Own stock + short call

2. Obtain an escrow or depository receipt from a bank certifying that the stock is at the bank will be delivered if the call is exercised

3. Long call (lower or equal long call price) + short a call (high short call price)

4. Owned convertible bonds, preferred stock, or warrants

Escrow receipts

used in connection with writing call options

Position limit rule

Restricts the maximum number of option contracts on the same side of the market that an investor can control for a single underlying security.

True

True or false:

Under the exchange position limit rules, options are affected by options which are on the same side of the market.

EX: Long call + Short put or Long Put + Short Call

True

True or false: When an investor buys call options, they are required to deposit the full amount of the premium.

Interesting one!

True

True or false: Long calls can be used to protect or “hedge” short stock positions.

Debit

A negative total premium equals a net debit or credit?

Credit

A positive total premium equals a net debit or credit?

True

True or false:

Covered puts

1. Have the funds equal to the aggregate exercise price on deposit

2. Obtain a bank guarantee letter from an approved bank stating that the bank will guarantee the investor the money they need to buy the stock if the option is exercised.

3. Are short an equal amount of the stock they would be obligated to buy

4. Long put (at a equal or higher price) + short put (lower priced

True

True or false: Options are classified as “capital assets.” Therefore, all gains and losses will be short capital gains/losses. They are NEVER treated as ordinary income or loss.

B

Which of the following best describes an American Style option?
a. It may be exercised any time after purchase until expiration

b. It must be exercised before expiration week

c. It must be exercised before expiration week

d. It may only be exercised in the final month

B

Which statement correctly describes an American-style option?

a. It can only be exercised on the expiration date

b. It can be exercised at any time before expiration

c. It automatically exercises at expiration only

d. It must be exercised during the final trading week

True

True or false: For American style options, it must say anytime before expiration or anytime after purchase until expiration. Both are correct.

True

True or false: Premiums are determined by supply and demand.

Spreads

Refers to an options strategy involving 2 options of the same type (both calls or both puts) on the same underlying security. (Both calls or both puts). Refers to the difference between premiums of 2 contracts (Generally, investors intend to make or lose their money in premiums. The spread will profit if the price of the underlying security moves in right direction. Do it when an investor feels certain about the direction the stock price will move.

EX: Buy a call + Short a call

Calendar spread

A spread that has different expiration months.

EX: Long 1 ABC May 50 Call

Short 1 ABC Aug 50 Call

Vertical spread

Spread that has different strike prices:

EX: Bull spread vertical (Long position < Short)

Long 60 call

Short 70 call

Bear spread vertical (Long position > Short)

Long 25 call

Short 20 call

Diagonal Spread

A spread which has different exercise prices and different expiration months.

EX: Long 1 ABC May 30 Call

Short 1 ABC Aug 40 Call

Net Credit in the premiums, if the options expire worthless.

Max profit for credit spreads is what?

The difference between the 2 exercise prices and the net premium

Max profit for debit spreads is what?

True

True or false: Breakeven on a long stock on a debit spread is ALWAYS determined from the long (buy). LONG ALWAYS.

Call = long exercise price + net prem

Put = long exercise price - net prem

Straddle

An equal number of puts and calls, both long or both short on the same stock, with same expiration date and same expiration date.

Long straddle = long call + long put

Short straddle = short call + short put

Short call + short put

Short straddle looks like what?

Long call + long put

Long straddle looks like what?

True

True or false: Generally speaking, straddles are used in advance of a major event, the outcome of which is uncertain.

True

True or false: Long straddles are only profitable if the market price of the stock is either:
- Above the upside breakeven

or

- below the downside breakeven

True

True or false: Short straddles are only profitable if:

- Market price of stock stays within breakeven points

Strangle

A straddle that has different exercise prices but the same expiration months.

Collar

Also known as “Fences”. It consists of 3 positions, the underlying asset (stock), a put, and a call. The purpose of it is to lower the cost of a hedge and neutralize adverse market fluctuations.

A long collar: A bullish strategy because the investor is long the stock with the same or different stock prices and/or expiration months.

EX: Buy stock

buy put

sell call

A short collar: A bearish strategy because the investor is short the stock with the same or different strike prices and/or expiration months.

EX: Sell short stock

Buy call

Sell put

Iron Condor

Strategy consists of 4 option positions. 2 calls and 2 puts. All 4 typically have the same expiration but different exercise prices.

Long iron condor: Used when the investor expects a big move in either direction.

EX: Sell 1 ABC Jul 65 call

Buy 1 ABC Jul 60 call

Buy 1 ABC Jul 50 put

Sell 1 ABC July 45 put

Short iron condor: A neutral option strategy. Investors who establish one expect the stock’s price to remain unchanged. Usually done with net credit.

EX: Buy 1 ABC Jul 65 call

Sell 1 ABC Jul 60 call

Sell 1 ABC Jul 50 put

Buy 1 ABC Jul 45 put

True

True or false: Short term is 12 months or less.

Constructive sales

Term used to describe a hedging position that has appreciated in value.

• Buy a put on a long stock position that has appreciated in value OR

• Sells short the same security they are long

Interest rate/yield based options

Used by bond portfolio managers to hedge movement in interest rates.

• If an investor expects a rise in interest rates, they would buy interest rate/yield based call options.

• If an investor expects a decline in interest rates, they would buy interest rate/yield based put options.

Spot yield

Reflect the current yield to maturity or a bond with the current market price considered.

True

True or false: The Philadelphia Stock exchange lists and trades dollar settled foreign currency options.

Forex market

A decentralized worldwide marketplace established for the trading and conversion of various currencies that exist in the world. The spot or cash price of each currency is used to determine the value of each currency being traded.

Leaps (Long term equity anticipation securities)

Long term options on stocks and stock indexes (39 months or 3 plus years).

American

Equity and SP100 (OFX) leaps equals what American or European style.

European

SPX ( SP500) leaps equals what European or American style?

True

True or false: If you trade options and your investment objectives change, the account must be reapproved.

True

True or false: If a firm loses their only registered options principal (ROP), the firm would be allowed to execute closing transactions.

True

True or false: Confirmations do not have to show the following:
- A limit price

- Holding volume

- Open interest

True

True or false: If a customer wants to send an options worksheet to a customer, it must be proceeded or accompanied by an ODD.

4 years

You must maintain customer complaints on record for how long?

True

True or false: Sales literature to institutional clients does not require pre-approval.

C

In forming a selling group, members are chosen based on:
A Financial Strength

B Underwriting ability

C Marketing ability

D Personality

Very good fucking question daddy

True

True or false: If the combination doesn’t go together like a bear call spread or a bull put spread then it is a net credit spread.