[1.1 Basic Characteristics]

- [ ] Common stock is also known as equity security

- [ ] Ownership of common stock can either have capital appreciation or the company can pay cash dividends

- [ ] Many companies will reinvest the retained earnings into the company that they did not pay out in dividends

[1.2 Rights of common stock]

- [ ] Stockholders do not have right to vote for dividends but have right to receive pro-rata share

- [ ] Common stocks can pay dividends in: Cash, stock, product

- [ ] Stock dividends increase shares but do not increase the value of stock position

- [ ] Stock dividend factor: SD +1

- [ ] To find price per share adjustment: old price/SD factor

[1.2.2 Board of directors]

- [ ] Board of directors can:

- [ ] Hire/fire senior level employees

- [ ] Manage senior level employee compensation

- [ ] Creating and implementing general company policies

- [ ] Approving dividend payouts to investors

- [ ] Stockholders can vote in and out BOD

- [ ] Voting structures for BOD:

- [ ] Statutory: stockholders apply only the amount of votes they have to each BOD position

- [ ] Cumulative: stockholders apply the total number of of votes they have to any BOD position

- [ ] One vote for every share owned

Stockholders can vote are at annual stockholder meeting or through a proxy (substitutes for voting at stockholder meetings)

[1.2.3 Inspection of books and records]

- [ ] Investors have right to inspect

- [ ] SEC enforces reporting requirements

- [ ] 10-K annual report : audited financial report

- [ ] 10-Q quarterly report: unaudited financial report

[1.2.4 Maintaining proportionate ownership]

- [ ] Company can dilute ownerships of shares owned

- [ ] Dilutive efforts: issuance of new shares and issuance of convertible securities

- [ ] Companies authorize certain amount of shares but can issue other amount

- [ ] Shares repurchased from the market: treasury stock

- [ ] Pre-emptive right: gives investors the right to buy newly-issued shares before they're publicly offered

- [ ] Can include different amount of "rights" needed to purchase one new share (fractional shares)

- [ ] Fractional rights may be rounded up to purchase a full additional share

- [ ] Rights have intrinsic value and can provide an immediate benefit

- [ ] Underwriters: help organization market and sell their securities (investment banks)

- [ ] Investors receiving rights can:

- [ ] Purchase new shares at the exercise price

- [ ] Sell rights in the market

- [ ] Let the rights expire (typically 60-90 days)

- [ ] Warrants: provide the right to purchase shares from publicly traded company at a fixed price

- [ ] Have time value, length of time they exist gives them value (can be valuable over longer time)

- [ ] Typically issued as a sweetener during the sale of another security (such as bonds, which allows investors to loan funds to organizations in return for interest

- [ ] Is a dilutive action, giving out new shares but not to everyone

- [ ] Convertible security: can convert things such as bonds into common stock

- [ ] Stock options: typical form of executive compensation

[1.2.5 Stock Splits]

- [ ] Stock splits: utilized by issues that believe their stock price ie either too high or too low

- [ ] Forward: increase number of outstanding shares, price decreases proportionately

- [ ] Done if felt the stock price is too expensive for average investor

- [ ] SS factor = first ss number/second ss number, new shares = old shares * ss factor, new price = old price/ss factor

- [ ] more shares at lower price

- [ ] Reverse: decrease number of outstanding shares

- [ ] Done if felt their price is too cheap

- [ ] fewer shares at higher price

- [ ] Stock splits affect a common stock's par value

[1.2.6 Assets Upon Liquidation]

- [ ] Liquidation: sale of all company assets

- [ ] Order of company liquidation:

- [ ] Unpaid wages

- [ ] Unpaid taxes

- [ ] Secured creditors

- [ ] Loans that are backed by a specific form of collateral

- [ ] Typically have a lien on building, equipment, or other assets

- [ ] Unsecured creditors

- [ ] Do not have lien on specific asset

- [ ] Junior unsecured creditors

- [ ] Similar to above but lower priority and is risky loan to make

- [ ] Preferred stockholders

- [ ] Common stockholders

[1.2.7 Transfer Ownership]

- [ ] Stockholders can freely sell their shares whenever they want

- [ ] Investments can be challenging to liquidate, common stock is not one of them

- [ ] When investors buys/sells stock, transfer agent is responsible for updating ownership. They also:

- [ ] Transfer ownership

- [ ] Maintain book of stockholders

- [ ] Make dividend payment to stockholders

- [ ] Distribute proxies

- [ ] Keep accurate count of shares outstanding

- [ ] Most securities today are book entry format, computer databases keep track of who owns that stock

- [ ] Typically takes two business days

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[[Trading]]

[1.3.1 Negotiable or redeemable]

- [ ] Common stock is negotiable, can be bought or sold among investors negotiation prices

- [ ] Redeemable: security that is bought and sold directly to the issuer, not with other investors

[1.3.2 Primary and Secondary Market]

- [ ] Primary

- [ ] Issuers offer securities to investors in return for capital in the primary market

- [ ] Private placements: when in initial growth stage, company sells securities privately to wealthy individuals and institutional investors (single entity representing group)

- [ ] IPOs are part of the primary market

- [ ] Secondary distributions: security is sold and party other than issuer receives sales proceeds

- [ ] Secondary

- [ ] First market: listed stocks traded on stock exchanges

- [ ] Over the counter: trade of security takes place between two parties not on an exchange

- [ ] Second market: unlisted stocks trade solely OTC

- [ ] Third market: also called market makers, trade securities directly with the public

- [ ] Fourth market: large institutions trade without brokers

- [ ] Operates through Electronic Communications Networks

[1.3.3 Settlement]

- [ ] Transactions do not occur instantaneously, take time to settle

- [ ] Broker-deals help customers buy and sell securities

- [ ] Introducing brokers: smaller broker-dealers that primarily maintain relationships with customers and facilitate trades

- [ ] Don't keep possession of securities

- [ ] Clearing brokers: maintain custody, process orders, provide clearing services, facilitate trades

- [ ] Act as intermediaries between customers and clearinghouses

- [ ] Clearinghouses: ensuring trades are properly finalized

- [ ] Depository Trust & Clearing Corporation is primary clearinghouse

- [ ] Ensures buyer receives the security and seller gets the cash

- [ ] Transfer agents: work on behalf of issuers to keep track of investors owning the securities

- [ ] Two types of settlement: regular-way and cash

- [ ] Regular: occurs two days after the transaction

- [ ] Cash: trade executes before 2:30 pm ET (broker-dealer may charge extra for this)

[1.3.4 Cash Dividends]

- [ ] Declaration date: day the BOD publicly declares the dividend

- [ ] Record date: stockholders must officially be on the books as a shareholder

- [ ] Ex dividend date: first day the stock trades without the dividend

- [ ] Controlled by the NYRSE or FINRA

- [ ] FINRA control settlement trades in OTC market

- [ ] Payable date: dividend payment made out to stockholders

- [ ] Order of dividend dates: DERP

[1.3.5 Selling Short]

- [ ] Make money if market values fall

- [ ] Determine if brokerage firm has access to security, borrows security from brokerage and agrees to return, goes to market and sell the security

- [ ] Must eventually buy back security and return it; the lower the repurchase price, higher the profit

- [ ] Must open a margin account

- [ ] Robert owns 100 shares, Jennifer wants to sell short 100 shares. Those shares are borrowed from Robert

- [ ] Investors are required to pay dividends on stocks held short

[1.3.6 American Depositary Receipts]

- [ ] Need BD with access to international investments

- [ ] Involves exchange rates and conversion fees

- [ ] Created by domestic financial firms with foreign branches

- [ ] Security act of 1933 requires registration when an investment is offered to public

- [ ] ADR investors do not receive pre-emptive rights

- [ ] Dividends declared by issuer must be concerted to US dollars (could have bad conversion rate)

- [ ] Foreign government tax withholding creates a US tax credit

[1.3.7 Tender offers and buybacks]

- [ ] Utilized when investor, group, or organization aims to obtain significant portion of issuers stock

- [ ] Used to attempt hostile takeover

- [ ] Majority ownership will be able to force actions, hand pick BOD

- [ ] In replace of buying shares from market, which would make acquisitions more expensive

- [ ] Short positions cannot tender their stock

- [ ] Investors with convertible securities can only tender once they've submitted irrevocable conversion instructions

- [ ] Investors must be provided provided 20 days to make decision, another 10 if aspects change

- [ ] Buybacks

- [ ] Issuer repurchases its shares from the market

- [ ] EPS increases with few shares outstanding

- [ ] EPS = Annual earnings/outstanding shares

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[1.4 Suitability]

- [ ] Securities benefits and risks

- [ ] Benefits: capital appreciation and income

- [ ] Risks

- [ ] Market risk

- [ ] Value declines due to a market or economic circumstance

- [ ] S&P 500 = 500 of largest US based stocks

- [ ] Russel 2000 = 2000 smaller US based stock

- [ ] Systematic risk (also called market risk)

- [ ] Event or circumstance negatively affects entire market

- [ ] Diversification does not protect against this

- [ ] Inflation risk

- [ ] "purchasing power risk"

- [ ] General prices rise more than expected

- [ ] Common stock tends to outpace inflation over long periods

- [ ] Non-systematic risk

- [ ] Affects specific investor or sector

- [ ] Reduced by diversification

- [ ] Concentration risk

- [ ] Lack of diversification

- [ ] Amplifies relevant non-systematic risks

- [ ] Financial risk

- [ ] High debt levels negatively affect company performance

- [ ] Business risk

- [ ] Products or services in low demand due to competition or mismanagement

- [ ] Regulatory risk

- [ ] Potential or current government regulation negatively affects an investment

- [ ] Legislative risk

- [ ] New domestic law or regulation negatively affects a security

- [ ] Political risk

- [ ] Foreign government instability negatively affects a security

- [ ] Liquidity risk

- [ ] Also known as marketability risk

- [ ] Inability to sell a security without dropping price dramatically

[1.5 Fundamental Analysis]

- [ ] Inspection of a company’s products/services, management, and finances

- [ ] Balance sheet

- [ ] Compares company assets and liabilities

- [ ] Indicates a company’s net worth

- [ ] Net worth

- [ ] Determines overall value of company or person

- [ ] NW=assets - liabilities

- [ ] Income (cash flow) statement

- [ ] Displays company income and expenses

- [ ] Footnotes

- [ ] Provides additional context for the information in financial statements

- [ ] PE ratio

- [ ] PE= market price/ earnings per share

- [ ] ​High PE ratios

- [ ] May indicate an overpriced investment

- [ ] Typical of growth companies

- [ ] Low PE ratios

- [ ] May indicate an underpriced investment

- [ ] Typical of value companies

((((END OF CHAPTER 1))))

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Preferred Stock

[2.1 Basic Characteristics]

- [ ] Is fixed income security unlike common stock, even if market price changes

- [ ] Dividend does not change, also called a coupon, always based on par (face value)

- [ ] All companies pay cash dividends on preferred stock, typically on semi-annual basis

- [ ] Most commonly influenced by interest rate changes

- [ ] Higher the preferred stock market price, lower the yield

- [ ] Yield is based on fluctuating market price

- [ ] CY: dividend annual income/market price

- [ ] Represents overall rate of return

- [ ] Based on market price and dividend rate

- [ ] Continually fluctuates

- [ ] Yield and market price are inverses

- [ ] Low market price = high yield

- [ ] High market price = low yield

- [ ] Dividend rate: dividend annual income/par

- [ ] Stock trade below par: discount (yield > dividend rate), above par: premium (yield < dividend rate)

- [ ] Bonds: have similarities to preferred stock, is a debt security, generally less risky than preferred stock due to no BOD approval (unlike dividends)

- [ ]Interest rate fluctuations vs. fixed income

- [ ]Interest rates up, market prices down

- [ ]Interest rates down, market prices up

- [ ] Rising interest rates

- [ ] Fixed income market prices decline

- [ ] Falling interest rates

- [ ] Fixed income market prices increase

[2.2 Features]

- [ ] Preferred stock features

- [ ] Added characteristics or functions

- [ ] Applied at issuance, stay through stock’s life

- [ ] Features beneficial to stockholders result in:

- [ ] Lower dividend rates

- [ ] Higher market prices

- [ ] Lower yields

- [ ] Features beneficial to the issuer result in:

- [ ] Higher dividend rates

- [ ] Lower market prices

- [ ] Higher yields

- [ ] Preferred stock dividends

- [ ] Must be approved by BOD

- [ ] Must be paid before common stock dividends

- [ ] Cumulative preferred stock

- [ ] Issuer must eventually pay skipped dividends

- [ ] Beneficial feature for investors

- [ ] Associated with:

- [ ] Lower dividend rates

- [ ] Higher market prices

- [ ] Lower yields

- [ ] Straight (non-cumulative) preferred stock

- [ ] Issuer does not pay skipped payments

- [ ] Beneficial feature for the issuer

- [ ] Associated with:

- [ ] Higher dividend rates

- [ ] Lower market prices

- [ ] Higher yields

- [ ] Participating preferred stock

- [ ] Eligible to receive more than the stated dividend rate

- [ ] Issuers pay more in profitable years

- [ ] Beneficial feature for the investor

- [ ] Associated with:

- [ ] Lower dividend rates

- [ ] Higher market prices

- [ ] Lower yields

- [ ] Call features

- [ ] Allow issuers to end an investment by paying back a specified amount

- [ ] Typically exercised when interest rates fall (refinance)

- [ ] Beneficial feature for the issuer

- [ ] Associated with:

- [ ] Higher dividend rates

- [ ] Lower market prices

- [ ] Higher yields

- [ ] Call protection

- [ ] Number of years before security can be called

- [ ] Call premium

- [ ] Amount above par required to call shares

- [ ] Convertible preferred stock

- [ ] Convertible into common stock of the same issuer

- [ ] Beneficial feature for investors

- [ ] Associated with:

- [ ] Lower dividend rates

- [ ] Higher market prices

- [ ] Lower yields

- [ ] Conversion ratio

- [ ] Determines how many common shares received at conversion

- [ ] Set at issuance and stays fixed

[2.3 Suitability]

- [ ] Benefits of preferred stock

- [ ] Fixed dividend rate provides income

- [ ] Potential for capital gains (especially if convertible)

- [ ] Preferred stock risks

- [ ] Dividends are not guaranteed

- [ ] No legal recourse for skipped dividends

- [ ] Lower liquidation priority

- [ ] Subject to:

- [ ] Interest rate risk

- [ ] Reinvestment risk

- [ ] Call risk

- [ ] Inflation risk

- [ ] Preferred stock typical investors

- [ ] Seeks income as the primary benefit

- [ ] Accepts moderate risk in return for higher income

- [ ] Long-term time horizons

(((((END OF CHAPTER 2)))))

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[Bond Fundamentals]

[3.1 Basic Characteristics]

- [ ] Loan that requires borrower to pay back principal and interest

- [ ] Essentially, investors are the bank

- [ ] Regardless of market price, issuer pays fixed amount of interested, based on par, to its bondholders

- [ ] When issuer sells bond, interest rate can be based on current market environment, type of bond, length until maturity, financial status.

- [ ] Payment intervals:

- [ ] J&J 1, pays interest on January 1st and July 1st

- [ ] F&A 15, pays interest on February 15th and August 15th

- [ ] Zero coupon bond: pays interest only at maturity. Issuers sell at discounts, they they mature at par

- [ ] Short-term maturities

- [ ] Safer than long-term bonds

- [ ] Lower rates of return

- [ ] Money markets

- [ ] Debt securities with one year or less to maturity

- [ ] Long-term maturities

- [ ] Riskier than short-term bonds

- [ ] Higher rates of return

[3.2 Features]

- [ ] Loans can be secured or full faith and credit (unsecured)

- [ ] Backed by something of value vs. backed by promise to repay the loan

- [ ] If secured, bond is collateralized

- [ ] Secured bonds are safer, lower return and vice versa

- [ ] Call feature: allows bond issuer to pay back principle before maturity

- [ ] Most common motivation is for refinancing

- [ ] Call risk: change in interest rates affecting bond

- [ ] Call protection: years in which the bond cannot be called

- [ ] Call premium: any amount of money above par the issuer must pay to call a bond

- [ ] Put feature: allows bondholders to sell bonds back to issuer for par value plus any interest before maturity

- [ ] Used when interest rates rise to lock in higher rates of return

[3.3 Issuance & underwriting]

- [ ]Issuance

- [ ] Term: all bonds issued on same day and mature on same day (quoted in price, or percentage of par form)

- [ ] Serial: all bonds are issued on same day, but mature on different days (quoted in yield)

- [ ] Series: bonds issued on different days, but all mature on same day

- [ ] Balloon maturities: specific type of serial issuance, unique because of number of bonds maturing at very end

- [ ] Corporate and US government bonds issued in term format, municipal bonds issued in serial format, construction related projects issued in series (generalities)

- [ ] Basis point: 1 basis point = 0.01%

- [ ] Underwriting

- [ ] marketing securities to the public on behalf of issuers

- [ ] Firm commitment underwritings

- [ ] Underwriter keeps unsold securities

- [ ] Riskier for underwriter

- [ ] Larger fees for underwriters

- [ ] Best efforts commitment underwritings

- [ ] Issuer keeps unsold securities

- [ ] Riskier for the issuer

- [ ] Smaller fees for underwriter

[3.4 Trading]

- [ ] Bond values decrease when interest rates rise (vice versa)

- [ ] Bonds trading at <$1000 are at discount, gives investors ongoing semi annual interest and difference between purchase price and maturity

- [ ] Bonds trading >$1000 are at premium, gives investors conflicting returns and losses. Investor loses money on difference between purchase price and maturity (purchase because higher interest payments)

- [ ] Volatility

- [ ] Bonds with longer maturities and lower coupons experience most price volatility

- [ ] Long maturities and low coupons: more sensitive to interest rates because time has compounding effect on market values (price volatility)

- [ ] Rate volatility: short-term rates

- [ ] Bonds issuers

- [ ] US Government:

- [ ] Settles one business day after trade

- [ ] Settles through Federal Funds system

- [ ] Municipal and corporate bonds

- [ ] Settle two business days after trade

- [ ] Settles through clearing house system

- [ ] Accrued interest

- [ ] Paid by the buyer to the seller during a bond transaction

- [ ] Interest accrues up to, but not including the settlement date

- [ ] 30/360 method

- [ ] Used for corporate & municipal bonds

- [ ] Assumes 30 days in every month "counted over"

- [ ] Actual/365 method

- [ ] Used for US government bonds

- [ ] Counts actual days in every month

- [ ] Trading flat

- [ ] Bonds that trade without accrued interest

- [ ] Examples of flat bonds:

- [ ] Zero coupon bonds

- [ ] Bond trades settling on the payment date

[3.5 Yield]

- [ ] Nominal yield= annual income/par

- [ ] Current yield: calculates overall rate of return

- [ ] Downfall is disregarding time

- [ ] "Quick and sloppy"

- [ ] annual income/market price

- [ ] YTM

- [ ] Overall rate of return assuming held until maturity

- [ ] More accurate representation of return

- [ ] Discount bonds YTM > coupon

- [ ] Premium bonds YTM < coupon

- [ ] YTC

- [ ] Only applies to callable bonds

- [ ] Assumes they will be held until callable

- [ ] Discount bonds YTC > coupon

- [ ] Premium bonds YTC < coupon

- [ ] Discount bond yield relationships

- [ ] Current yield, YTM, and YTC are higher than the coupon

- [ ] Order of all yields (lowest to highest)

- [ ] Nominal yield (coupon)

- [ ] Current yield

- [ ] Yield to maturity (YTM)

- [ ] Yield to call (YTC)

- [ ] Premium bond yield relationships

- [ ] Current yield, YTM, and YTC are lower than the coupon

- [ ] Order of all yields (lowest to highest)

- [ ] Yield to call (YTC)

- [ ] Yield to maturity (YTM)

- [ ] Current yield

- [ ] Nominal yield (coupon)

- [ ] Par bond yield relationships

- [ ] All yields are the same

[3.6 Suitability

- [ ] Bond benefits

- [ ] Primary benefit is interest income

- [ ] Interest payments are legal obligations of the issuer

- [ ] Capital appreciation may occur, especially if interest rates fall

- [ ] Interest rate risk

- [ ] Interest rates rise, forcing bond market prices down

- [ ] Type of systematic risk

- [ ] Most susceptible bonds:

- [ ] Long maturities

- [ ] Low coupons

- [ ] Avoided by variable rate bonds

- [ ] Inflation (purchasing power) risk

- [ ] Prices of goods and services rise, forcing bond prices down

- [ ] Typically results in higher interest rates due to Federal Reserve actions

- [ ] Avoided by short-term securities

- [ ] Reinvestment risk

- [ ] Market returns reinvested at lower rates

- [ ] Occurs when interest rates fall

- [ ] High coupon bonds are most susceptible

- [ ] Avoided by zero coupon bonds

- [ ] Call risk

- [ ] Bond called when interest rates fall

- [ ] The worst form of reinvestment risk

- [ ] Default risk

- [ ] Also known as credit or repayment risk

- [ ] Issuer unable to make required interest and/or principal payments

- [ ] Bond ratings

- [ ] Only consider default risk

- [ ] Three bond rating organizations:

- [ ] Standard & Poors (S&P)

- [ ] Moody’s

- [ ] Fitch

- [ ] Investment grade bonds:

- [ ] BBB or above

- [ ] Low default risk

- [ ] Speculative (junk) grade bonds:

- [ ] BB or below

- [ ] High default risk

- [ ] Liquidity (marketability) risk

- [ ] Security is difficult to sell or requires a large discount to sell

- [ ] Legislative risk

- [ ] New domestic law or regulation negatively affects a security

- [ ] Political risk

- [ ] Foreign government instability negatively affects a security

- [ ] Bond typical investors

- [ ] Seeking income

- [ ] Generally older, risk-averse (conservative)

(((((END CHAPTER 3)))))

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Corporate Debt

[4.1 Short-term products]

- [ ] Commercial paper: primary security issued when corporation plans to borrow short-term funds

- [ ] One of few prominent zero coupon debt securities

- [ ] Typically issued at par values of $100,000 or more

- [ ] Large denominations most suitable for institutional investors (entity investing a pool of capital on behalf of investors)

- [ ] Debt securities issued with 270 days or less to maturity are exempt from SEC registration req.

[4.2 Long-term products]

- [ ] Funded debt: long-term corporate debt

- [ ] Debentures:

- [ ] long-term, unsecured, typically issued with higher coupons and trade at higher yields( (lower prices)

- [ ] Guaranteed bonds:

- [ ] "guaranteed" through subsidiaries (parent companies responsible for paying)

- [ ] Are considered unsecured (promise by parent company does not mean secured)

- [ ] Income bonds:

- [ ] Sometimes referred to as adjustment bonds, risk debt securities that emerge from bankruptcy

- [ ] A bond defaults/business is bankrupt, suing bondholders can force issuer to liquidate or "restructure debt" (offer income bonds that replace old bonds and only pay interest when company has sufficient earnings)

- [ ] Most bankrupt companies don't recover, meaning most of the time income bonds are useless.

- [ ] Mortgage bonds:

- [ ] Secured bond, pledges real estate as collateral

- [ ] Way for companies to lower overall cost of borrowing money

- [ ] Commonly used by utility companies

- [ ] ETCs and CTCs

- [ ] ETCs:

- [ ] Secured bonds, use equipment as collateral

- [ ] Typically issued in serial format due to depreciation

- [ ] CTCs:

- [ ] Secured by marketable assets (portfolio investments or subsidiary)

[4.3 Convertible products]

- [ ] Corporate bonds can be convertible into stock

- [ ] Issuer sets conversion ratio and conversion price

- [ ] Conversion ratio: par/conversion price

- [ ] Conversion price: par/conversion ratio

- [ ] Conversion cost per share: bond price/conversion ratio

- [ ] Stock parity price: describes equivalent stock cost if bond is bought and converted

- [ ] Stock PP: bond market price/conversion ratio

- [ ] Bond parity price: stock price * conversion ratio

- [ ] Mezzanine debt

- [ ] Maintains liquidation priority between senior level debt and equity/stock

- [ ] Holders are paid out after senior debt holders, but before stockholders

- [ ] PIK (payment in kind): adds payable interest to loans principle rather than semi-annually, only payable at redemption or maturity

[4.4 Liquidation Policy]

- [ ] Liquidation priority

- [ ] Unpaid wages

- [ ] Unpaid taxes

- [ ] Secured creditors

- [ ] Unsecured creditors

- [ ] Junior unsecured creditors

- [ ] Preferred stockholders

- [ ] Common stockholders

- [ ] Creditors

- [ ] Person or organization lending money

- [ ] Bondholders are creditors

[4.5 The market & quotes]

- [ ] OTC trade

- [ ] One that takes place outside of an exchange

- [ ] Corporate bond market

- [ ] Most trades occur in the OTC markets

- [ ] A small number of trades occur on exchanges

- [ ] Corporate bond quotes

- [ ] Provided in the percentage of par format

- [ ] Must be in eighths or reduced from eighth

- [ ] M = $1,000 par unit when used in quotes

- [ ] 5M = $5,000 par bond

- [ ] s = coupon (interest rate)

- [ ] 10s = 10% coupon

- [ ] Zr = zero coupon bond

- [ ] M’ = references maturity year

- [ ] M’40 = matures in the year 2040

[4.6 Bank issues]

- [ ] Certificates of deposit (CDs)

- [ ] Only issued by banks

- [ ] Pay fixed rate based on principle deposited

- [ ] Do not trade in the market

- [ ] Jumbo (negotiable) CDs

- [ ] Traded in secondary market

- [ ] Minimum denomination of $100,000 or more

- [ ] Short term, high rates, maturing within a year

- [ ] Used by pension plans, mutual funds, large corporations

- [ ] FDIC insurance

- [ ] Covers loss of funds due to bank failure

- [ ] Most banks maintain 10% reserve requirement (not investing 10% of deposits)

- [ ] Covers up to 250k of deposits when banks cannot supply withdrawals

- [ ] Coverage provided per bank, per customer

- [ ] Bankers acceptances

- [ ] Facilitates international trade

- [ ] Considered money markets

- [ ] 270 days or less to maturity

[4.7 Eurodollars & Eurobonds]

- [ ] Eurodollar deposit

- [ ] US dollar is held in an account outside US

- [ ] Eurobond

- [ ] Debt security that pays interest and principle in different currency than country it was issued in

- [ ] Currency risk (converting into strong currency, converting out of weak currency)

- [ ] Spot price (todays exchange rate) and forward price (exchange rate agreed upon today, but for conversion in future)

- [ ] Forward prices help companies protect against currency risk

- [ ] Eurodollar bonds

- [ ] Pays interest and principle in US dollars but is issued outside of US

- [ ] Issued by:

- [ ] US corporations

- [ ] US municipalities

- [ ] Foreign corporations

- [ ] Foreign governments

- [ ] No currency risk for US organizations

- [ ] Currency risk applies to foreign issuers and investors

- [ ] Not subject to SEC jurisdiction or registration

((((END OF CHAPTER 4)

======================================================================================================================================================

Municipal Debt

[5.1 Foundations & taxation]

- [ ] Municipality

- [ ] ssued by state, city, county and political subdivisions

- [ ] Corporate bond interest

- [ ] Subject to federal, state, and local taxation

- [ ] Municipal bond interest

- [ ] Exempt from federal taxation

- [ ] Subject to state and local taxation

- [ ] US government bond interest

- [ ] Subject to federal taxation

- [ ] Exempt from state and local taxation

- [ ] If investor is resident of municipality, can avoid state and local taxes (vice versa)

- [ ] US territory bond interest

- [ ] tax free regardless of residence

[5.2 General obligation (G.O.) bonds

- [ ] Type of municipal bond, support city, state, local projects that don't generate revenue (public school, parks, etc)

- [ ] Uses property taxes to repay borrow funds

- [ ] Full faith, credit, and taxing power of municipality

- [ ] Issuance

- [ ] Exempt from SEC registration

- [ ] Typically require voter approval

- [ ] Issued in serial form (entire offer simultaneously, maturing on different days

- [ ] Steps: hire financial adviser, bond counsel (legal aspects of bond), bond counsel determines if it will be tax free if purchased by residents, hire underwriter to sell bond to investors

- [ ] Financial adviser cannot be underwriter

- [ ] Legal if no constitution law or regulation prevents it, typically subject to debt limits to prevent overspending taxpayer money

- [ ] Unqualified legal opinion: bond is valid, legal, tax-free without qualifier

- [ ] Sold through competitive bidding process

- [ ] Official statements provided to investors that include benefits and risk of investment

- [ ] Issuers are not required to create them

- [ ] Underwriters must deliver them by settlement (if created)

- [ ] Information disclosed includes:

- [ ] The bond’s interest rate

- [ ] Timing of interest payments

- [ ] Length of the bond (maturity)

- [ ] Specific features of the bond (e.g., call features)

- [ ] Source of repayment funds (e.g., property taxes)

- [ ] The municipality’s finances

- [ ] Legal matters, including the legal opinion

- [ ] Limited tax bonds

- [ ] If costs prevent public approval

- [ ] Only have access to predetermined tax allotments

- [ ] Riskier than typical G.O. bonds

[5.3 Revenue bonds]

- [ ] Support projects that make money (toll roads, airports, stadiums, city zoos, convention centers, water treatment)

- [ ] Self-supporting ventures

- [ ] Make revenue to pay off borrowed funds

- [ ] Revenue bonds

- [ ] Paid off with revenues from municipal ventures

- [ ] Finance self-supporting municipal ventures

- [ ] No voter approval is required

- [ ] Not subject to debt limits

- [ ] Feasibility studies

- [ ] Forecast profitability of a municipal venture

- [ ] Created by independent consultants

[5.4 Short-term notes]

- [ ] Municipalities requiring short term funding typically issue notes

- [ ] Anticipation notes

- [ ] Short-term municipal debt

- [ ] Paid off with future municipal cash flows

- [ ] Tax anticipation notes (TANs)

- [ ] Paid off with future tax collections

- [ ] Typically property tax-related

- [ ] Revenue anticipation notes (RANs)

- [ ] Paid off with future revenues from municipal ventures

- [ ] Tax and revenue anticipation notes (TRANs)

- [ ] Combination of TANs and RANs

- [ ] Bond anticipation notes (BANs)

- [ ] Paid off with money raised by a future bond issue

- [ ] Grant anticipation notes (GANs)

- [ ] Paid off with future federal grants

- [ ] Variable rate demand notes

- [ ] Long-term municipal debt with short-term redemption options

- [ ] Resetting interest rates on a periodic schedule

- [ ] Contain a put option at par

[5.5 Trading]

- [ ] Municipal bond market

- [ ] Liquidity risk, cannot be sold or requires discount to sell

- [ ] Generally not sold short due to liquidity risk

- [ ] Municipal bond quotes

- [ ] Typically quoted in yields (7% trading at 5% basis)

- [ ] Municipal dollar bonds quotes in 1/8ths like corporate bonds

[5.6 Suitability]

- [ ] Seeking income

- [ ] Due to tax benefits, maintain low interest rates and yields (high tax bracket to justify investment)

- [ ] To compare municipal bond to corporate:

- [ ] TFEY = corporate yield * (100% - tax bracket)

- [ ] Not suitable for retirement plans

- [ ] Why put low yielding, tax free bond in account when retirement account is already tax sheltered?

((((END OF CHAPTER 5))))

======================================================================================================================

US Government Debt

[6.1 Foundations]

- [ ] Largest securities issuer in the world

- [ ] Virtually no liquidity/default risk (AAA-rated)

[6.2 Treasury Products]

- [ ] Department of Treasury responsible for running finances

- [ ]Maintain $100 minimum denomination for debt securities

- [ ] Treasury Bills

- [ ] Short term, zero coupon, can be issued weekly

- [ ] Maturities include: 1-6 months/1 year

- [ ] Typically issued at slight discounts

- [ ] Treasury Notes

- [ ] Intermediate term, issued monthly, at par, pay semiannual interest, mature 2-10 years

- [ ] Treasury Bonds

- [ ] Long term (30 years), issued monthly, at par, semi annual interest

- [ ] STRIPS

- [ ] Long term (30 years), deep discounts, zero coupon, not suitable for income investors,

- [ ] Treasury Receipts: portfolio of of treasury notes and bonds, zero coupon, not backed by US Gov

- [ ] Both above subject to phantom tax

- [ ] TIPS

- [ ] Long term (30 years), pay semiannual interest, make higher payments when inflation rises (adjust every 6 months based on CPI)

- [ ] Par value is adjusted, coupon stays fixed

[6.3 Federal agency products]

- [ ] Federal Farm Credit System

- [ ] loans to farmers seeking short term or long term financing

- [ ] Mortgage Agencies

- [ ] Gov incentivizes home ownership through:

- [ ] Ginnie Mae: only purchase VA or FHA insured loans, direct GOV backing, default risk free

- [ ] Fannie Mae: purchases VA, FHA, conventional (non-insured) mortgages (riskier than Ginnie Mae, publicly traded)

- [ ] Freddie Mac: only purchases conventional mortgages (riskier than Ginnie Mae, publicy traded)

- [ ] Will buy mortgages from bank to allow for more loans to be given out

- [ ] Finance activities by selling MBS (type of ABS), common one is PTC (pass through mortgage payments to investors, denomination of $1k-$25k)

- [ ] Investors will receive monthly payments of varying interest and principle

- [ ] MBS subject to prepayment and extension risk

- [ ] Will not know exact maturity (pay off early, refinance, sell

- [ ] MBS had higher yield that current market offers but ended earlier than expected (PR)

- [ ] Keep mortgages longer, investors have lower yielding MBS that last longer (ER)

- [ ] Interest from US Gov securities subject to federal but state/local are exempt

- [ ] Interest from agency created MBS is fully taxable (IRS won't allow tax benefits for investors receiving payments)

- [ ] Sallie Mae: offers student loans, no GOV backing, publicly traded

[6.4 The Market]

- [ ] Treasury Auctions

- [ ] GOV securities initially offered to investors

- [ ] Must submit two types of bids:

- [ ] Competitive: large financial institutions buying a lot for portfolios, declare amount with lowest yield they'll accept

- [ ] Non-competitive: small retail investors, max bid is $10 mil, all are filled

- [ ] Quotes

- [ ] US GOV debt quoted in percentage of par format (32nds)

- [ ] 95-8,95:8,95:8, numbers to right mean 8/32 (no reduction of fraction)

- [ ] 97-8 * 97-12, left side is bid price (dealer willing to buy at), right side is ask price (dealer willing to sell at)

- [ ] Treasury bills are quoted in discount yield form

[6.5 The Federal Reserve]

[6.5.1 Monetary Policy]

- [ ] Fed controls monetary policy

- [ ] Goals: economic growth, manageable inflation levels

- [ ] Loosening policies

- [ ] Encourage economic growth

- [ ] More currency placed in economy

- [ ] Goal: drive interest rates down

- [ ] Typically pursued in recessions

- [ ] Tightening policies

- [ ] Manages inflation levels

- [ ] Less currency in economy

- [ ] Goal: drive interest rates up

- [ ] Typically pursued during high inflation

- [ ] Monetarist theory

- [ ] Fed's actions are most significant economic influence

[6.5.2 Rates]

- [ ] Monetary policy directly impacts interest rates

- [ ] Federal funds rate

- [ ] Average bank to bank lending rate

- [ ] Subject to reserve requirements

- [ ] Discount rate

- [ ] Fed charges discount rate as its own interest rate

- [ ] Used when banks do not have lenders to meet reserve requirements

- [ ] Slightly higher than federal funds rate

- [ ] Broker loan rate (call money market rate)

- [ ] Reflects cost broker-dealers pay when borrowing from banks

- [ ] Prime rate

- [ ] Interest rate charged when lending to best customers (large corp./insti.)

- [ ] Typically only available to institutions

[6.5.3 Tools of the FED]

- [ ] Discount rate

- [ ] Large bank borrows from Fed directly

- [ ] Only rate that it controls directly

- [ ] Lowering: lossens money supply, decreases interest rates (vice versa)

- [ ] Open market operations

- [ ] Buying and selling securities with banks

- [ ] Buying: lessens money supply, called repurchase agreements (bank will buy back at some point)

- [ ] Selling: tighten money supply, called reverse purchase agreements

- [ ] FOMC oversees open market operations

- [ ] OMO is most utilized tool

- [ ] Reserve requirements

- [ ] Banks hold portion of deposits in reserves

- [ ] Lowering:

- [ ] Loosens money supply

- [ ] Decreases interest rates

- [ ] Raising:

- [ ] Tightens money supply

- [ ] Increases interest rates

- [ ] Margin requirements

- [ ] Borrow money to invest in the market (leveraging)

- [ ] Regulation T created to prevent investors from borrow too much money

- [ ] Requires deposit 50% of initial margin transactions

- [ ] Lowering:

- [ ] Loosens money supply

- [ ] Increases interest rates

- [ ] Raising:

- [ ] Tightens money supply

- [ ] Increases interest rates

(Summary of above info)

Tools of fed = D.O.R.M

Loosening (growing) the money supply

Lower the discount rate

Pursue repurchase agreements

Lower reserve requirements

Lower margin requirements

Tightening (shrinking) the money supply

Raise the discount rate

Pursue reverse repurchase agreements

Raise reserve requirements

Raise margin requirements

[6.5.4 Economic Factors]

- [ ] GDP/GNP

- [ ] Measure of goods and services produced and sold domestically

- [ ] Reported in constant (inflation-adjusted) dollars

- [ ] Tracks economic growth

- [ ] Recession

- [ ] two consecutive quarters (6 months) of GDP decline

- [ ] Depression

- [ ] six straight quarters (year 1/2) of GDP decline

- [ ] Elastic good or service

- [ ] Demand falls drastically as price rises

- [ ] Is not a necessity or has competition

- [ ] Inelastic good or service

- [ ] Demand is generally not affected as price rises

- [ ] Is a necessity with little or no competition

- [ ] Economic peak typically involves:

- [ ] Low interest rates

- [ ] High GDP/GNP levels

- [ ] Low unemployment levels

- [ ] Economic trough typically involves:

- [ ] High interest rates

- [ ] Low GDP/GNP levels

- [ ] High unemployments levels

Cycle: expansion, peak, recession, trough, recovery

- [ ] Consumer Price Index

- [ ] Gauge inflation levels

- [ ] Yield curves

- [ ] Visual representation of bond yields

- [ ] Typically covers similar quality bonds of varying maturities

- [ ] Normal (ascending) yield curve

- [ ] Short-term securities have lower yields than long-term securities

- [ ] Typical for normal economic conditions (expansion)

- [ ] Flat yield curve

- [ ] Short-term securities have the same yields as long-term securities

- [ ] Sign of uncertainty in the economy

- [ ] Inverted (descending) yield curve

- [ ] Short-term securities have higher yields than long-term securities

- [ ] Sign of economic recession

- [ ] Comparative yield curves

- [ ] Compares yield curves of US Government vs. corporate securities

- [ ] Widening is a sign of recession

- [ ] Narrowing is a sign of prosperity

- [ ] Leading indicators

- [ ] S&P 500 level

- [ ] Average weekly initial claims for unemployment

- [ ] Index of new manufacturing orders

- [ ] Number of new building permits

- [ ] Consumer confidence index

- [ ] Interest rate spread between 10 year Treasury notes and fed funds rate

- [ ] Coincident indicator: some insight into economy's current strength (average hours worked, personal income levels, man. Sales, etc)

- [ ] Lagging indicators

- [ ] Insight into economy's past performance

- [ ] Changes in CPI levels

- [ ] Corporate profits

- [ ] Change in labor cost per unit of output

- [ ] Average duration of unemployment

- [ ] Market structures

- [ ] Perfect competition: Large number of buyers and sellers, Virtually identical goods/services, Price is the primary demand factor, Price manipulation is impossible

- [ ] Monopolistic competition: Large number of buyers and sellers, Similar products, but unique characteristics, Consumers maintain preferences for certain goods, Price manipulation is very difficult

- [ ] Oligopoly: Large number of buyers, but only 3-5 sellers, Consumers have limited choices, Significant barrier to entry as a vendor, Price manipulation is fairly easy

- [ ] Monopoly: Large number of buyers, only 1 seller, Consumers only have one choice, Price manipulation is very easy, Typically involve heavy government regulation

[6.5.5 Fiscal Policy]

- [ ] Controlled by US Congress, how our government collects and spends money

- [ ] Gov revenue mainly collected through taxes

- [ ] IRS: collect taxes, assist taxpayers, investigate tax fraud

- [ ] Progressive taxes: personal income taxes, higher income levels pay more taxes

- [ ] Estate and gift taxes: distributed to heirs, taxed when Estes above $12.92M and gifts above $17K

- [ ] Regressive taxes: flat tax system, such as sales tax or excise tax

- [ ] Keynesian (demand-side) Theory

- [ ] States increase government spending drives economy's growth, decrease to stabilize when inflation rises

- [ ] Tax rates could be used to influence economy

- [ ] Supply-side theory

- [ ] encourage growing supply of goods and services through reduced taxation and government spending

- [ ] Demand side (demand for good/services from Gov is is the catalyst), supply side (supply of goods/services from private sector is)

((((END CHAPTER 6))))

====================================================================================================

Investment Companies

[7.1 Foundations]

- [ ] Investment companies

- [ ] Financial institutions that invest their customers’ money

- [ ] Regulated by the Investment Company Act of 1940

- [ ] Investment company classifications

- [ ] Management companies

- [ ] Unit investment trusts (UITs)

- [ ] Face amount certificates

- [ ] Types of management companies

- [ ] Open-end management companies (mutual funds)

- [ ] Closed-end management companies (closed-end funds)

- [ ] Unit investment trusts (UITs)

- [ ] Fixed portfolios of securities

- [ ] At maturity, portfolio is liquidated and proceeds passed to investors

- [ ] Face amount certificates (FACs)

- [ ] Periodic payment or lump sum contribution

- [ ] Redeemable securities

- [ ] Fixed payout at maturity

[7.2 Types of funds]

- [ ] Growth Funds

- [ ] Attain cap. Appreciation (buy low, sell high) through growth-focuses common stocks, convertible preferred stock, and bonds

- [ ] Market Cap: outstanding common stock shares * market value (Micro-cap to Mega cap, <$250M to >$200B)

- [ ] Aggressive growth funds: invests in common stock that provides higher return potential (small and micro-cap stocks)

- [ ] Growth and income funds

- [ ] Same as growth funds but also invest in income-producing common and preferred stocks

- [ ] Balanced funds

- [ ] Seeks even distribution between growth focused and income producing (includes debt securities, unlike two before)

- [ ] Income funds

- [ ] Only income producing securities, more conservative and less risky (bonds, preferred stocks, dividend paying common stocks)

- [ ] Include: corporate bond funds, municipal bond funds, US government bond funds (high yield bond funds)

- [ ] Ginnie Mae, Fanni Mae, Freddie Mac funds, fed agencies that purchase mortgages

- [ ] Money market funds: small amounts of income, fixed income securities, monthly dividend, very liquid

- [ ] Specialized funds

- [ ] Only invest in industry or region specific (sector funds)

- [ ] Index funds

- [ ] list of securities that track averages, determine general trends in the market

- [ ] Active management: picking best investments within a market

- [ ] Passive management: tracking index as closely as possible

- [ ] Asset allocation funds

- [ ] Invest in specific asset classes

- [ ] Life cycle funds

- [ ] Type of asset allocation fund

- [ ] Asset mix becomes more conservative over time

- [ ] International funds

- [ ] Invest in securities issued outside the US

- [ ] Global funds

- [ ] Invest in securities worldwide (including US)

[7.3 Open-end management companies] [Mutual Funds]

- [ ] Characteristics

- [ ] Legally classified as open-end management companies

- [ ] Investors are known as shareholders

- [ ] Manage and invest shareholder assets according to fund’s objective

- [ ] “Open-ended” (variable) amount of shares outstanding

- [ ] Purchases are considered primary market transactions

- [ ] Prospectus delivery required at sale

- [ ] $100k minimum capital to launch

- [ ] Provides diversification to investors

- [ ] Fund sponsor (underwriter)

- [ ] Creates the fund’s structure

- [ ] Registers the fund with the SEC

- [ ] Develops marketing strategy

- [ ] Investment adviser

- [ ] Responsible for fund investments

- [ ] Employs and appoints fund manager

- [ ] Fund manager

- [ ] Investment adviser employee(s)

- [ ] Implements investment strategy

- [ ] Diversification

- [ ] Investing in many different securities

- [ ] Reduces non-systematic risks

- [ ] Diversified funds

- [ ] 75%+ invested with no more than:

- [ ] 10% of an issuer’s voting power

- [ ] 5% of its assets in one issuer

- [ ] Expense ratio

- [ ] Represents total fund expenses

- [ ] Includes: Management fees. Custodian fees Legal fees Administrative fees

- [ ] Efficient funds have low expense ratios

- [ ] Management fee

- [ ] Cost of investment adviser’s services

- [ ] Typically is the largest part of the expense ratio

- [ ] Custodian fee

- [ ] Paid to financial firm holding fund assets

- [ ] Mutual fund transaction limitations

- [ ] Cannot be purchased on margin

- [ ] Cannot be sold short

- [ ] Shareholder rights

- [ ] Shareholder rights

- [ ] Right to vote for Board of Directors

- [ ] Right to approve investment adviser contract

- [ ] Right to vote on fund-specific matters, including:

- [ ] Fund’s objective

- [ ] Changes to fund structure

- [ ] Changes to fee schedule

- [ ] Changes to diversified status

- [ ] Right to receive pro-rata share of dividends

- [ ] Right to fund disclosures

- [ ] Prospectus

- [ ] Statement of additional information

- [ ] Annual SEC filing

- [ ] Semi-annual shareholder report

- [ ] Board of Directors (mutual fund)

- [ ] Represents shareholder interests

- [ ] Oversees overall operation of the fund

- [ ] 40%+ must be independent (non-interested)

- [ ] No more than 60% “interested”

- [ ] Approve dividend and capital gain distributions

- [ ] Statutory prospectus

- [ ] Primary fund disclosure document

- [ ] Must be delivered when:

- [ ] Financial professionals solicit investors

- [ ] An investor purchases shares unsolicited

- [ ] Information disclosed includes:

- [ ] The investment objective

- [ ] Shareholder fees

- [ ] Past performance (at least 1, 5, and 10-year returns)

- [ ] Details on investment adviser and fund manager

- [ ] Related risks

- [ ] Fund policies

- [ ] Financial highlights

- [ ] Summary prospectus

- [ ] Condensed version of the prospectus

- [ ] May be delivered instead of statutory prospectus

- [ ] Statement of additional information (SAI)

- [ ] Provides micro-details on fund operations

- [ ] Annual SEC report

- [ ] Required disclosure report to regulators, which includes:

- [ ] Market recaps over the previous year

- [ ] Fund manager comments

- [ ] Investment summary (details on fund portfolio)

- [ ] Financial statements (balance sheet, income statement)

- [ ] Financial highlights (income, expenses, returns)

- [ ] Semi-annual shareholder report

- [ ] Required disclosure report to shareholders, which includes:

- [ ] Investment summary (details on fund portfolio)

- [ ] Financial statements (balance sheet, income statement)

- [ ] Financial highlights (income, expenses, returns)

- [ ] Transactions

- [ ] Known as redeemable securities (investor to issuer trades, trades occur at NAV, sales charges may apply)

- [ ] Investor buys shares: money goes into funds portfolio

- [ ] Investor sells shares: fund must pay value of shares using cash in fund (if short, manager must liquidate securities to make payment)

- [ ] When transaction occurs: foundation for price per share is Net Asset Value

- [ ] NAV = net assets/shares outstanding

- [ ] Calculated once per trading day

- [ ] Forward pricing

- [ ] Mutual funds only allow transactions to occur once daily at market close (cut off is 4 pm ET)

- [ ] Investors do not know NAV price subjected to (calculated in the future)

- [ ] Shares purchased = overall purchase / NAV

- [ ] NAV vs. POP

- [ ] To compensate other financial firms selling the mutual fund, sales charges can be assessed on mutual funds

- [ ] Selling group purchases shares at NAV from sponsor, resells with added sales charge

- [ ] Front end load and back end load: customers purchase shares vs selling shares

- [ ] Purchase front end loaded shares at public offering price

- [ ] POP = NAV + SC

- [ ] Maximum sales charge is 8.5% of POP

- [ ] If sales charge is in percent: POP = NAV / 100% - SC%

- [ ] If sales charge in dollars: POP = NAV + SC

- [ ] If provided NAV and POP and asked for sales charge percentage: SC% = POP - NAV / POP

- [ ] Redemption fees may be charged if shares are liquidated (usually small and must be disclosed in prospectus)

- [ ] Added requirements

- [ ] If fund assesses highest sales charge:

- [ ] Allowed to reinvest their dividend and gains at NAV

- [ ] Dividend and interest distributions occur frequently, capital gains generally once per year

- [ ] Any distribution requires BOD to set record date, payable date, ex-dividend date

- [ ] Mutual funds must fulfill redemption requests within seven days

- [ ] No new sales charge is assessed if investor sells shares and used proceeds to purchase new fund with some fund

- [ ] Returns

- [ ] Mutual fund return potential

- [ ] Capital gains (growth)

- [ ] Dividend distributions

- [ ] Capital gains distributions

- [ ] Total return

- [ ] Measures overall rate of return on a security or portfolio

- [ ] Total return formula

- [ ] Total return = All gains and/or losses / original cost

- [ ] Share Classes

- [ ] Class A shares

- [ ] Front-end loaded funds

- [ ] Sales charge assessed at purchase

- [ ] Subject to breakpoint schedules

- [ ] Low or no 12b-1 fees

- [ ] Suitable for:

- [ ] Longer-term investors

- [ ] Larger investments of money

- [ ] Letter of intent (LOI)

- [ ] Pledge to deposit breakpoint shortfall

- [ ] Lower sales charge assessed

- [ ] Lasts 13 months

- [ ] Can be backdated up to 90 days

- [ ] Retroactive charge if not fulfilled

- [ ] Breakpoint sales

- [ ] Failure to notify investors of breakpoint

- [ ] FINRA violation subject to penalties

- [ ] Combination privilege

- [ ] Allows merger of multiple purchases for lower sales charge

- [ ] Class B shares

- [ ] Back-end loaded funds (CDSCs)

- [ ] Sales charges assessed at redemption

- [ ] Moderate 12b-1 fees

- [ ] Suitable for:

- [ ] Longer-term investors

- [ ] Smaller investments of money

- [ ] Class C shares

- [ ] No sales charge or a 1-year CDSC

- [ ] High 12b-1 fees

- [ ] Suitable for:

- [ ] Short-term investors

- [ ] 12b-1 fees

- [ ] Marketing and promotion fees used to reduce expense ratio

- [ ] Maximum fee of 1%

- [ ] Distribution fee max = 0.75%

- [ ] Service fee max = 0.25%

- [ ] Funds limited to 7.25% loads if charging maximum 12b-1 fee

- [ ] Cannot market fund as “no load” if charging higher than 0.25%

- [ ] Subchapter M

- [ ] "Conduit rule" allows funds to avoid taxation

- [ ] Requires funds to distribute at last 90% of net investment income to shareholders to qualify

- [ ] Can include: cash dividends from equity securities, interest income from debt securities, realized capital appreciation

- [ ] Passes taxation to shareholders

- [ ] Funds engaged in Subchapter M are called regulated funds

[7.4 Closed-end management companies]

- [ ] During primary offering:

- [ ] Sold in the primary market

- [ ] Prospectus delivery required

- [ ] After primary offering:

- [ ] Traded in the secondary market (negotiable)

- [ ] No prospectus delivery is required

- [ ] Closed-end fund transactions

- [ ] Purchased at market price

- [ ] Subject to commissions

- [ ] NAV represents the fund’s book value

- [ ] Market price could be:

- [ ] Higher than NAV

- [ ] Same as NAV

- [ ] Lower than NAV

- [ ] Can be purchased on margin (with borrowed money) and sold short

- [ ] Market ultimately determines price

​

[7.5 Exchange trades products]

- [ ] Passive ETFs

- [ ] Structured as an open-end management company, but not a mutual fund

- [ ] Large portfolio, daily calculated NAV, instant diversification when obtained

- [ ] Prices typically follow NAV closely, can be bought on margin and sold short, commissions involved

- [ ] Passive investments bet on the market average

- [ ] ETFs can include: Spyders, DIAmonds, Qubes

- [ ] Negotiable

- [ ] Lower expense ratios

- [ ] More tax efficient

- [ ] Other ETFs

- [ ] Actively managed ETFs

- [ ] allow fund manager to deviate from benchmark index

- [ ] Higher expense ratios

- [ ] Inverse ETFs

- [ ] Provide an opposite return of index

- [ ] Only suitable for sophisticated investors (withstand losses, high net worth)

- [ ] Leveraged ETFs

- [ ] Amplified gains and losses

- [ ] Amplify at 200% and 300% rates

- [ ] Only suitable for sophisticated investors

- [ ] Best return for bull market

- [ ] Leveraged inverse ETFs

- [ ] Opposite return of index with amplified gains and losses

- [ ] Amplify at 200% and 300% rates

- [ ] Only suitable for sophisticated investors

- [ ] Best return for bear market

- [ ] Exchange trades notes

- [ ] Debt instruments

- [ ] Promise to pay the return of an index

- [ ] Subject to default risk (credit risk)

- [ ] Negotiable securities

- [ ] Can be bought on margin

- [ ] Can be sold short

[7.6 Unit investment trusts]

- [ ] Fixed portfolios of securities

- [ ] No ongoing portfolio management

- [ ] No management fees

- [ ] Redeemable with the issuer

- [ ] Some UITs may trade in the secondary market

- [ ] UIT & mutual fund similarities

- [ ] Registered investment companies

- [ ] Prospectus provides key disclosures

- [ ] Redeemable with the issuer

- [ ] *UIT & mutual fund differences

- [ ] UITs may trade in the secondary market

- [ ] Mutual funds are only redeemable (no secondary market)

- [ ] UITs maintain fixed portfolios

- [ ] Mutual fund portfolios are managed*

- [ ] UITs have no management fee

- [ ] Virtually all mutual funds have management fees

((((END CHAPTER 7))))

=================================================================================================================

[Alternative Pooled Investments]

[Real Estate Investment Trusts]

- [ ] Equity REITs

- [ ] Invest directly into real estate properties

- [ ] Usually focused on commercial real estate

- [ ] Makes money through leases, selling property, and property value rising

- [ ] Mortgage REITs

- [ ] Buy and offer mortgages on commercial properties

- [ ] Make interest from mortgages they own and pass on income to investors

- [ ] Hybrid

- [ ] Combination of properties and mortgages

- [ ] Utilizing REITs as a hedge

- [ ] Unlike real estate transactions, which involve broker, inspections, negotiations, etc. REITs can be bough and sold in secondary market

- [ ] Real estate typically acts as a hedge against market downturns

- [ ] Trading and regulation

- [ ] Listed REITs

- [ ] Non listed REITs at not on national exchanges

- [ ] May be subject to more liquidity risk

- [ ] Some REITs are offered privately therefore exempt from SEC registration

- [ ] Subchapter M

- [ ] Avoid paying taxes on income if at least 90% of net investment income goes to investors

- [ ] REITs must have 75% assets invested in real estate and 75% of income come from real estate to qualify

[Hedge Funds]

- [ ] Unregulated investment funds

- [ ] Only wealthy investors participate

- [ ] High risk and high gain potential

- [ ] Subject to lock-up periods (do not allowed withdrawal requests for lengthy period)

- [ ] Subject to liquidity risk and legislative risk

[Direct participation programs]

- [ ] Allows investor to "directly" participate in profits and losses

- [ ] Share in all finances of issuer

- [ ] Can pass through losses to its owners

- [ ] Providing tax deduction

- [ ] Limited structure is type of DPP

- [ ] One or more general partners plus one or more limited parters

- [ ] General: running and managing, unlimited liability

- [ ] Limited: investors

- [ ] Considerable amount of liquidity risk (no secondary market trading)

- [ ] Two types: Real estate limited partnerships and oil gas programs

- [ ] RELPS: market returns based on real estate holdings, capital appreciation, income, tax credits (government subsidized projects), tax deductions (interest payments and depreciation of properties), liquidity risk

- [ ] Oil and gas programs

- [ ] Intangible drilling costs (IDCs): tax deductible expenses not associated with drilling (limited partnerships can fully write these off and pass them through to limited partners)

- [ ] Depletion allowances: tax deductions for every barrel of oil pulled from ground

- [ ] Income wells (stripper wells)

- [ ] investments in proven oil wells, low risk, low potential for returns, no IDCs

- [ ] Developmental wells (step out wells)

- [ ] invest in drilling projects near proven oil wells, intermediate risk, mid-level potential for returns, some IDCs

- [ ] Exploratory wells (wildcat wells)

- [ ] invest in drilling projects near unproven areas, high risk, potential for high returns, hight IDCs

((((END OF CHAPTER 8))))

======================================================================================================================================================

OPTIONS

[9.1 Funadmentals]

- [ ] Used to speculate (bet) on market price movements

- [ ] Maintains expiration date, usually nine months after issuance (weekly options and LEAPS are also used)

- [ ] Premium: cost of option that is higher if it is more valuable

- [ ] Equity options and index options

- [ ] Equity: derive value from specific stock price fluctuation

- [ ] Index: fluctuations in specific index value

- [ ] Long options

- [ ] means buying a contract that gives specific right (buy or sell an asset at particular price)

- [ ] Right to exercise the contract

- [ ] Bought option contract (debit)

- [ ] Investors are “holders”

- [ ] Seek intrinsic value

- [ ] **option purchasers are “long” options and are known as holders. Holders pay premiums (creating a debit) to gain the right to transact at a fixed price before expiration and hope to exercise the option if it goes “in the money” (gains intrinsic value).**

- [ ] Short options

- [ ] Obligation to do the transaction if assigned (exercised)

- [ ] Sold option contract (credit)

- [ ] Investors are “writers”

- [ ] Want to avoid intrinsic value

- [ ] option sellers are “short” options and are known as writers. Writers receive premiums (creating a credit) in return for obligating themselves to perform a transaction at a fixed price. Option sellers hope their options remain “out of the money” (without intrinsic value) and expire worthless.

[9.2 Contracts and the market]

- [ ] Issuance and the market

- [ ] OCC is responsible for issuing, standardizing contracts, guaranteeing performance, and execute properly

- [ ]Secondary market

- [ ]Primarily takes place on Chicago Board Options Exchange

- [ ]Trade settles T+1 if buying or selling

- [ ]Trade settles T+2 if stock (equity) options is exercised

- [ ]Option market closes at 3PM CT

- [ ]Option holders have until 4:30 CT to contact broker-dealer to request exercise

- [ ] Opening & closing transactions

- [ ] Opening: beginning of contract (long options position is purchase, short option position is sales)

- [ ] Closing: getting out of current position

- [ ] Option holders (the long side) sell their contracts to close their positions, while option writers (the short side) buy their contracts to close their positions.

[9.2.2 Options Contracts]

- [ ] First, establishes either long (purchase, provides right) or short (sale, creates obligation)

- [ ] Covers 100 shares of stock per contract

- [ ] Long 1 ABC Jan 40 call @ $5

- [ ] This investor is long one contract that gives them the right to buy 100 shares of ABC stock at $40 per share. The cost of the contract was $500.

- [ ] Calls

- [ ] Right to buy at fixed price, exercised if price rises above strike price

- [ ] Holders have the right to buy

- [ ] Writers have the obligation to sell

- [ ] In the money (ITM) when the market rises above the strike price

- [ ] Out of the money (OTM) when the market falls below the strike price

- [ ] Holders seek ITM options

- [ ] Writers seek OTM options

- [ ] Puts

- [ ] Right to sell at fixed price

- [ ] 1 BCD Aug 70 put @ $3 while the market price is $71

- [ ] The holder pays $300 to gain the right to sell 100 shares of BCD stock at $70. The writer receives $300. If the holder exercises the contract, the writer must buy 100 shares of stock at $70.

- [ ] Holders have the right to sell

- [ ] Writers have the obligation to buy

- [ ] In the money (ITM) when the market falls below the strike price

- [ ] Out the money (OTM) when the market rises above the strike price

- [ ] Holders seek ITM options

- [ ] Writers seek OTM options

[9.2.3 Premiums and exercise]

- [ ] Option premiums

- [ ] Premium = intrinsic value + time value

- [ ] Longer expiration, higher time value

Market Calls Puts

Up ITM. OTM

Same ATM. ATM

Down OTM. ITM

- [ ] American style options

- [ ] Can be exercised at any time

- [ ] Typical for stock (equity) options

- [ ] European style options

- [ ] Can only be exercised at expiration

- [ ] Typical for index options

[9.2.4 Stock split & dividend adjustments]

- [ ] Option contract adjustments

- [ ] Required for stock dividends or splits

- [ ] Even forward stock splits

- [ ] Stock splits with a ratio ending in 1

- [ ] Option contract adjustments:

- [ ] More contracts

- [ ] Lower strike price

- [ ] Same shares delivered at exercise (per contract)

- [ ] Uneven forward stock splits

- [ ] Stock splits with a ratio not ending in 1

- [ ] Option contract adjustments:

- [ ] Same number of contracts

- [ ] Lower strike price

- [ ] More shares delivered at exercise (per contract)

- [ ] Reverse stock splits

- [ ] Option contract adjustments:

- [ ] Same number of contracts

- [ ] Higher strike price

- [ ] Fewer shares delivered at exercise (per contract)

- [ ] Stock dividends

- [ ] Option contract adjustments:

- [ ] Same number of contracts

- [ ] Lower strike price

- [ ] More shares delivered at exercise

- [ ] Cash dividends

- [ ] Options are not adjusted for regular cash dividends

- [ ] Options are adjusted for special cash dividends

- [ ] Same number of contracts

- [ ] Strike price reduced by the amount of dividend

- [ ] Same shares delivered at exercise

[9.3.1 Long Calls]

- [ ] Bullish on underlying security market price

- [ ] Right to buy the stock at the strike price

- [ ] Long call formulas

- [ ] Maximum gain = unlimited

- [ ] Maximum loss = premium

- [ ] Breakeven = strike + premium

[9.3.2 Short Calls]

- [ ] Bearish investments

- [ ] Obligation to sell stock at the strike price

- [ ] Considered “naked” without a hedge

- [ ] Covers a short call

- [ ] Long shares

- [ ] Long call

- [ ] Rights or warrants

- [ ] Convertible securities

- [ ] Short call formulas

- [ ] Maximum gain = premium

- [ ] Maximum loss = unlimited

- [ ] Breakeven = strike + premium

[9.3.3 Long Puts]

- [ ] Bearish investments

- [ ] Right to sell stock at the strike price

- [ ] Long put formulas

- [ ] Maximum gain = strike - premium

- [ ] Maximum loss = premium

- [ ] Breakeven = strike - premium

[9.3.4 Short Puts]

- [ ] Bullish investments

- [ ] Obligation to buy the stock at the strike price

- [ ] Considered “naked” without a hedge

- [ ] Short puts can be covered by:

- [ ] Short shares

- [ ] Long put

- [ ] Cash

- [ ] Short put formulas

- [ ] Maximum gain = premium

- [ ] Maximum loss = strike - premium

- [ ] Breakeven = strike - premium

[9.3.5 Hedging Strategies]

- [ ] Long option with a stock position

- [ ] Long option protects stock from risk

- [ ] Long stock hedge

- [ ] Long stock & long put

- [ ] Market sentiment: bullish

- [ ] Put shields long stock from risk

- [ ] Short stock hedge

- [ ] Short shares & long call

- [ ] Market sentiment: bearish

- [ ] Call shields short stock from risk

[9.3.6 Income Strategies]

- [ ] Short option with a stock position

- [ ] Short option provides income in a flat market

- [ ] Covered call

- [ ] Long shares & short call

- [ ] Market sentiment: bull/neutral

- [ ] Short call acts as a partial hedge

- [ ] Covered put

- [ ] Short shares & short put

- [ ] Market sentiment: bear/neutral

- [ ] Short put acts as a partial hedge

- [ ] Opportunity cost

- [ ] A missed opportunity to profit

[9.3.7 Index Options]

- [ ] Derive value from index fluctuations

- [ ] Most are European style

- [ ] Can be exercised only at expiration

- [ ] OEX is the only American style option

- [ ] Can be exercised at any time

- [ ] Can be used to hedge against market risk

======================================================================================================================================================

Chapter 10 - Taxes

[10.1 Dividends]

- [ ] Cash dividends

- [ ] Taxable income received from equity investments

- [ ] Dividend-paying investments include:

- [ ] Common stock

- [ ] Preferred stock

- [ ] Mutual funds

- [ ] REITs

- [ ] Reported on tax form 1099-DIV

- [ ] Taxable in the year received

- [ ] Qualified dividends

- [ ] Tax rates

- [ ] 0% (low income)

- [ ] 15% (moderate income)

- [ ] 20% (high income)

- [ ] To be considered qualified:

- [ ] Distributed by a US corporation or qualified foreign corporation

- [ ] The investor must meet a specific unhedged holding period

- [ ] Non-qualified dividends

- [ ] Tax rate equal to federal marginal income tax bracket (up to 37%)

- [ ] REITs pay non-qualified dividends

- [ ] Stock dividends and splits

- [ ] New shares received are not taxable until sold

[10.2 Interest]

- [ ] Potentially taxable income from debt securities

- [ ] Reported on tax form 1099-INT

- [ ] Tax rate equal to federal marginal income tax bracket (up to 37%)

- [ ] US Government debt tax status

- [ ] Subject to federal taxes

- [ ] Exempt from state and local taxes

- [ ] Municipal debt tax status

- [ ] Exempt from federal taxes

- [ ] Subject to state and local taxes

- [ ] 100% tax-free if:

- [ ] Resident

- [ ] Territory bond

- [ ] Corporate debt tax status

- [ ] Subject to federal, state, and local taxes

- [ ] Mortgage-backed securities tax status

- [ ] Subject to federal, state, and local taxes

[10.3 Capital Gains]

- [ ] Securities sold for more than the basis

- [ ] Reported on tax form 1099-B

- [ ] Long-term capital gain

- [ ] Gain on security held more than 1 year

- [ ] Tax rate: 0%, 15%, or 20%

- [ ] Short-term capital gain

- [ ] Gain on security held for 1 year or less

- [ ] Tax rate: up to 37%

- [ ] Inherited securities

- [ ] Cost basis is stepped up to the value on the date of death

- [ ] Holding period is always long term

======================================================================================================================================================

Chapter 11 - The Primary Market

[11.1 Roles]

- [ ] Initial sale of a security by the issuer to investors

- [ ] Proceeds always go to the issuer

- [ ] Issuers

- [ ] Sell securities to raise capital

- [ ] Underwriters

- [ ] Hired by issuers to sell new issues

- [ ] Also known as investment banks

- [ ] Securities Exchange Commission (SEC)

- [ ] Requires issuers to register securities unless an exemption exists

[11.2 Underwriting Commitments]

- [ ] Underwriter liable for unsold shares

- [ ] Also known as:

- [ ] Principal transactions

- [ ] Dealer transactions

- [ ] Best efforts underwriting commitments

- [ ] Issuer liable for unsold shares

- [ ] Also known as agency transactions

- [ ] Mini-max commitments

- [ ] Type of best efforts commitment

- [ ] Minimum shares must be sold, up to a maximum

- [ ] All or none commitments

- [ ] Type of best efforts commitment

- [ ] All shares must be sold

[11.3 Types of Offerings]

- [ ] Initial public offerings (IPOs)

- [ ] First public sale of a security

- [ ] Additional public offerings (APOs)

- [ ] Also known as a follow-on offering

- [ ] Public sale of security after initial sale

- [ ] Private placements

- [ ] Security sales to private audiences

- [ ] Primary offerings

- [ ] Sales proceeds go to the issuer

- [ ] Examples:

- [ ] IPOs

- [ ] APOs

- [ ] Private placements

- [ ] Secondary offerings

- [ ] Sales proceeds go to a party other than the issuer

- [ ] Typically involve officers or directors selling personally-owned shares

[11.4 The IPO Process]

[11.4.1 Overview]

- [ ] Securities Act of 1933

- [ ] Governs the primary market

- [ ] Requires disclosures on new issues

[11.4.2 Preparing for the sale]

- [ ] Registration form

- [ ] Issuers file with SEC prior to IPO

- [ ] Details issuer’s background and financials

- [ ] SEC checks for completeness

- [ ] SEC does not check the accuracy

- [ ] Prospectus

- [ ] Created with registration form info

- [ ] Gives investors details on security

- [ ] 20-day cooling off period

- [ ] Begins when the registration form is filed

- [ ] Legal activities:

- [ ] Distribute preliminary prospectus

- [ ] Take indications of interest

- [ ] Publish a tombstone

- [ ] Illegal activities:

- [ ] Recommend the new issue

- [ ] Advertise the new issue

- [ ] Sell the new issue

- [ ] Take a deposit for the new issue

- [ ] Indications of interest

- [ ] Collected to forecast demand

- [ ] Allowed during cooling off period

- [ ] Not binding on customer or firm

- [ ] Tombstones

- [ ] Legal advertising in cooling off period

- [ ] Contain this information:

- [ ] Name of issuer

- [ ] Type of security

- [ ] # of shares or units to be sold

- [ ] Gross proceeds of the offering

- [ ] Name of lead underwriter

- [ ] Name of syndicate members

- [ ] Estimated public offering price

- [ ] Deficiency letter

- [ ] Issued by SEC

- [ ] Pauses the cooling off period

- [ ] Provided if the registration form incomplete

[11.4.3 Effective Registration]

- [ ] Effective date

- [ ] The first day the new issue can be legally sold

- [ ] SEC provides when the registration form is reviewed and deemed complete

- [ ] Common stock IPO investor restriction

- [ ] Industry insiders may not purchase common stock IPOs

- [ ] Industry insiders are known as “restricted persons”

- [ ] Restricted persons

- [ ] Member firms

- [ ] Member firm employees, and:

- [ ] Immediate family members

- [ ] Dependents

- [ ] Exception to common stock IPO restriction

- [ ] Accounts not exceeding 10% ownership by a restricted person

- [ ] Public offering price (POP)

- [ ] Sale price of new issues

- [ ] Prospectus

- [ ] Provided to investors buying IPOs

- [ ] Access equals delivery

- [ ] Prospectus considered delivered if available publicly online

- [ ] Issuers post prospectuses to EDGAR

[11.4.4 Exemptions]

- [ ] Exempt securities

- [ ] Not required to register in any circumstance

- [ ] List:

- [ ] Government securities

- [ ] Insurance company securities (unless a variable contract)

- [ ] Bank securities (not bank holding company securities)

- [ ] Non-profit securities

- [ ] Commercial paper and banker’s acceptances

- [ ] Railroad ETCs

- [ ] Bank holding companies

- [ ] Companies that own banks

- [ ] Not exempt from SEC registration

- [ ] Exempt transactions

- [ ] Security is exempt only if sold in a specific way

- [ ] List:

- [ ] Regulation A+

- [ ] Regulation D

- [ ] Rule 147

- [ ] Regulation A+

- [ ] Small-dollar offering rule

- [ ] Sell up to $75 million in 12 month period

- [ ] Disclosures made in offering circular

- [ ] Regulation D

- [ ] Private placement rule

- [ ] Unlimited sales to accredited investors

- [ ] No more than 35 non-accredited investors

- [ ] Disclosures made in offering memorandum

- [ ] Accredited investors

- [ ] Income-based (annual)

- [ ] Single: $200k income for 2+ years

- [ ] Joint: $300k income for 2+ years

- [ ] $1 million of net worth, excluding residence

- [ ] Holding the Series 7, 65, or 82 licenses

- [ ] Officer or director of the issuer

- [ ] Institution with $5 million+ in assets

- [ ] Any entity where all owners are accredited investors

- [ ] Rule 147 offerings

- [ ] Avoid SEC registration if sold intrastate

- [ ] No holding period for resale within the state

- [ ] 6-month holding period for resale out of state

[11.5 Rule 144]

- [ ] Rule 144

- [ ] Rule covering restricted and control stock

- [ ] Restricted stock

- [ ] Stock not registered with the SEC

- [ ] Subject to a 6 month holding period, no volume limits

- [ ] Control stock

- [ ] Stock owned by an affiliate (insider)

- [ ] Subject to volume limitations, no holding period

- [ ] Affiliate

- [ ] Officer, director, or 10% shareholder

- [ ] Security sales subject to volume limitations

- [ ] Form 144

- [ ] Filed if control or restricted stock intended to be traded in the next 90 days

- [ ] Only must be filed if more than

- [ ] 5,000 shares, or

- [ ] $50,000 total value sold

- [ ] Form 4

- [ ] Filed if an insider trades control stock

- [ ] Must be filed within 2 business of trade

- [ ] EDGAR

- [ ] Electronic filing system for SEC forms

- [ ] Form 144 and Form 4 are filed on this system

- [ ] QIB (qualified institutional buyer)

- [ ] $100 million or more of investable assets

- [ ] Rule 144A

- [ ] QIBs are not subject to rule 144

- [ ] QIBs avoid holding periods and volume limitations

[11.6 Shelf Registration]

- [ ] Shelf registration rule

- [ ] Allows issuers to quickly offer securities

- [ ] Issuer files “blank” registration form

- [ ] Reviewed by the SEC

- [ ] Granted as effective if all required disclosures provided

- [ ] The security may be sold quickly within the next 3 years

- [ ] When the security is ready to be sold:

- [ ] Issuer contacts SEC, provides information left “blank”

- [ ] The security can then be sold 48 hours later

- [ ] Allows avoidance of the 20 day cooling off period

======================================================================================================================================================

Chapter 12- The Secondary Market

[12.1 Agency vs. principal capacity]

- [ ] Agency capacity

- [ ] Firms matching buyers & sellers

- [ ] Commission earned

- [ ] Associated terms

- [ ] Brokers

- [ ] Agents

- [ ] Principal capacity

- [ ] Firms buying and selling with inventory

- [ ] Mark-ups and mark-downs earned

- [ ] Associated terms:

- [ ] Dealer

- [ ] Market maker

[12.2 Roles]

- [ ] Traders

- [ ] Buy and sell securities for clients

- [ ] Typically work on behalf of large portfolios (e.g. mutual funds, hedge funds)

- [ ] Broker-dealers

- [ ] Buy and sell securities for clients

- [ ] May act in an agency or principal capacity

- [ ] Market makers

- [ ] Buy and sell securities with the public

- [ ] Acts only in a principal capacity

[12.3 Bid & Ask]

- [ ] Bid/ask spreads

- [ ] Maintained by market makers

- [ ] Provide best buy & sell prices

- [ ] Bid

- [ ] Market makers buy at the bid

- [ ] Customers sell at the bid

- [ ] Ask

- [ ] Market makers sell at the ask

- [ ] Customers buy at the ask

- [ ] Round lot

- [ ] 100 shares of stock

- [ ] Efficient market

- [ ] A large number of market participants

- [ ] Small spreads and active trading

[12.4 The Markets]

-------------------

[12.4.1 NYSE]

- [ ] New York Stock Exchange

- [ ] Auction market

- [ ] DMM acts as the NYSE auctioneer

- [ ] All trades occur in the first market

- [ ] Trading ahead

- [ ] DMM places principal trade in front of a public order

- [ ] Prohibited action

- [ ] Does not apply to:

- [ ] Executions at better prices

- [ ] Institutional orders

- [ ] Designated market maker (DMM)

- [ ] Also known as the ‘specialist’

- [ ] Facilitates trading in NYSE stocks

- [ ] May act in an agency or principal capacity

- [ ] Dual-listed stock

- [ ] Listed on a national and regional exchange

[12.4.2 NASDAQ]

- [ ] NASDAQ

- [ ] Negotiated market

- [ ] Made up of numerous market makers

- [ ] Considered an OTC market

- [ ] Self-regulatory organizations (SROs)

- [ ] Granted the power to regulate markets

- [ ] FINRA

- [ ] A self-regulatory organization (SRO)

- [ ] Regulates financial professionals

[12.4.3 Other OTC markets]

- [ ] OTC Markets Group

- [ ] OTC market trading non-listed stocks

- [ ] Made of three sub-markets:

- [ ] OTCQX

- [ ] OTCQB

- [ ] OTC Pink Market

- [ ] OTCQX

- [ ] Highest listing standards of OTC Markets Group

- [ ] Financial and reporting requirements exist

- [ ] OTCQB

- [ ] Also known as a venture market

- [ ] The trading market for smaller developing companies

- [ ] OTC Pink Market

- [ ] Least prestigious of OTC Markets Group

- [ ] No listing or financial requirements

- [ ] Market for bankrupt and distressed companies

[12.5 The Securities Exchange Act of 1934]

- [ ] Securities Exchange Act of 1934

- [ ] Regulates the secondary market

- [ ] Applies to non-exempt securities

- [ ] Applies to market participants

- [ ] Required broker-dealers to provide:

- [ ] Balance sheets

- [ ] Net capital computations

- [ ] Anti-fraud rule

- [ ] Part of the Securities Exchange Act of 1934

- [ ] Applies to all securities

- [ ] Applies to all market participants

- [ ] Insider (affiliate) rules

- [ ] Cannot sell short company stock

- [ ] Must return short swing profits

- [ ] Short swing profit

- [ ] Capital gain made within 6 months

- [ ] Penny stock

- [ ] Non-listed stock trading for less than $5

- [ ] Investors must receive:

- [ ] Risk disclosure document

- [ ] Monthly statements

- [ ] Penny stock suitability statement

- [ ] Required for solicitations

- [ ] Not required for established customers

- [ ] Established customer:

- [ ] Account open for 1+ year

- [ ] 3 unsolicited penny stock trades

[12.6 Customer Orders]

------------------------

[12.6.1 Market Orders]

- [ ] Transaction request at the next possible price

- [ ] Guarantees execution, not price

- [ ] Always day orders

- [ ] Day orders

- [ ] Cancelled at end of the day if not executed

- [ ] GTC orders

- [ ] Cancelled when customer requests

[12.6.2 Limit Orders]

- [ ] Seek better prices for investors

- [ ] Guarantee price, but not execution

- [ ] Day or GTC orders

- [ ] Buy limit orders

- [ ] Execute when the price falls to or below the limit price

- [ ] Sell limit orders

- [ ] Execute when the price rises to or above the limit price

[12.6.3 Stop Orders]

- [ ] Typically utilized to “stop losses” on stock

- [ ] Do not guarantee price or execution

- [ ] Trigger (elect) first, then execute

- [ ] Become market orders after trigger

- [ ] Day or GTC orders

- [ ] Sell stop orders

- [ ] Trigger when the price falls to or below the stop price

- [ ] Buy stop orders

- [ ] Trigger when the price rises to or above the stop price

[12.6.4 Stop Limit Orders]

- [ ] Normal stop orders up until the trigger

- [ ] After the trigger, becomes a limit order

- [ ] Day or GTC orders

[12.6.5 Summary of the order types]

- [ ] Orders placed above current market

- [ ] Sell limits

- [ ] Buy stops

- [ ] Not adjusted for cash dividends

- [ ] Orders placed below current market

- [ ] Buy limits

- [ ] Sell stops

- [ ] Adjusted for cash dividends

- [ ] Cash dividend adjustments

- [ ] Orders below the market adjusted downward by the amount of the dividend

- [ ] DNR (do not reduce) orders

- [ ] Never adjusted for cash dividends

[12.6.6 Additional Order Specifications]

- [ ] All or none (AON)

- [ ] Fill all shares or none at all

- [ ] Multiple attempts allowed

- [ ] Immediate or cancel (IOC)

- [ ] Fill as many shares as possible

- [ ] One attempt allowed

- [ ] Fill or kill (FOK)

- [ ] Fill all shares immediately

- [ ] One attempt allowed

[12.6.7 Customer Order Rules]

- [ ] Order tickets

- [ ] Must be prepared prior to order entry

- [ ] Promptly reviewed by principals

- [ ] Changes subject to principal approval

- [ ] Unsuitable customer orders

- [ ] Must be placed if the customer insists

- [ ] Marked unsolicited

- [ ] Should note interaction in the customer file

Chapter 13 - Brokerage Accounts

[13.1.1 Statements]

- [ ] Quarterly statements

- [ ] Sent if there is no investment activity

- [ ] Can be sent by mail or electronically

- [ ] Monthly statements

- [ ] Sent if there is any investment activity or penny stocks held in account

- [ ] Can be sent by mail or electronically

- [ ] Holding mail

- [ ] Can hold customer mail for up to 3 months

- [ ] May be held indefinitely for legitimate reason (e.g., safety, security)

[13.1.2 Trade Confirmations]

- [ ] Trade confirmations

- [ ] Provides trade details after the transaction

- [ ] Sent by completion of the transaction

- [ ] Can be sent by mail or electronically

- [ ] Includes:

- [ ] Customer’s name

- [ ] Account number

- [ ] Security bought or sold

- [ ] Number of shares or units traded

- [ ] Date and time of the transaction

- [ ] Fees and/or commissions

- [ ] Capacity of firm (agency or principal)

- [ ] Accrued interest (if applicable for bond trades)

[13.1.3 Customer complaints]

- [ ] Dissatisfaction submitted in writing, including:

- [ ] Letters

- [ ] Emails

- [ ] Texts

- [ ] Instant messages

- [ ] FINRA Rule 4513

- [ ] Forwarded to a principal for review

- [ ] Representative and principal work together to resolve

- [ ] Must be kept on file for 4 years at OSJ

[13.2 New Accounts]

---------------------

[13.2.1 Required Customer Information]

- [ ] Four critical pieces of information

- [ ] List:

- [ ] Name

- [ ] Date of birth (DOB)

- [ ] Address

- [ ] SSN or TIN

- [ ] Must be collected as per Patriot Act

- [ ] Must be verified through:

- [ ] Valid government-issued ID

- [ ] Credit bureau database

- [ ] Customer occupation

- [ ] Must confirm if the customer is:

- [ ] An affiliate of a publicly traded company

- [ ] A registered financial representative

[13.2.2 Optional Customer Information]

- [ ] Suitability questions

- [ ] Not required to be answered

- [ ] Firms cannot make recommendations without this information

[13.2.3 Account Opening]

- [ ] Cash accounts

- [ ] Require full payment for transactions

- [ ] Signatures on new account form

- [ ] Customer does not sign

- [ ] Registered representative may sign if servicing account

- [ ] Principal must sign to approve the account

- [ ] Required firm actions

- [ ] Must confirm customer info within 30 days of account opening

- [ ] Must confirm customer info every 3 years

- [ ] Arbitration agreements

- [ ] Forces customer disputes to binding arbitration facilitated by FINRA

[13.3 Account Registration]

----------------------------

[13.3.1 Individual Accounts]

- [ ] Accounts owned by one party

- [ ] Subject to probate without TOD

- [ ] Transfer on death (TOD)

- [ ] Account with a listed beneficiary

- [ ] Avoids probate

- [ ] Probate court

- [ ] Determines the distribution of estate assets

- [ ] Dying testate

- [ ] A person dies with a valid will in place

- [ ] Will appoints estate executor

- [ ] Executor petitions probate court for letters testamentary

- [ ] Letters testamentary confirm executor’s status to firm maintaining custody

- [ ] Dying intestate

- [ ] A person dies without a valid will in place

- [ ] Probate court appoints estate administrator

- [ ] Letters of administration confirm administrator’s status to firm maintaining custody

- [ ] Death reporting to firm

- [ ] All open orders canceled

- [ ] Account marked as deceased and restricted

- [ ] Firm awaits death certificate and estate documents (if necessary)

- [ ] Typical document requirements to claim accounts

- [ ] Certified death certificate

- [ ] Letters testamentary (if no TOD and died testate)

- [ ] Letters of administration (if no TOD and died intestate)

- [ ] Inheritance tax waiver (if decedent resided in state with estate tax)

- [ ] Numbered accounts

- [ ] Account owner or account referred to by string of numbers (e.g., Customer #45295923)

- [ ] Allows the customer to maintain anonymity

- [ ] Customer must provide written attestation of ownership

[13.3.2 Joint Accounts]

- [ ] Joint WROS accounts

- [ ] Provide equal ownership to all parties

- [ ] Surviving owner(s) inherit the account

- [ ] Avoids probate

- [ ] Joint TIC accounts

- [ ] Provide specific ownership allotments

- [ ] Deceased owner portions go to the estate

- [ ] Subject to probate

- [ ] Joint accounts

- [ ] Any joint owner can:

- [ ] Trade

- [ ] Receive mail

- [ ] Manage the account

- [ ] All joint owner names must be on checks

[13.3.3 Power of Attorney]

- [ ] Allows a third party to act on behalf of account owner(s)

- [ ] Referred to as trading authorization

- [ ] Ceases at account owner’s death

- [ ] Can be revoked at any time

- [ ] Limited POA

- [ ] Third party can place trades in the account

- [ ] Third party cannot request withdrawals

- [ ] Full POA

- [ ] Third party can place trades

- [ ] Third party can request withdrawals

- [ ] Non-durable POA

- [ ] Ceases at account owner incapacitation

- [ ] Durable POA

- [ ] Survives account owner incapacitation

[13.3.4 Discretionary Accounts]

- [ ] Provide POA to financial professionals

- [ ] Type of fiduciary account

Discretionary trade

- [ ] Involves professional choosing one of:

- [ ] Asset

- [ ] Action.

- [ ] Amount

- [ ] Not discretionary trade (if same day):

- [ ] Price

- [ ] Time

- [ ] Must be reviewed promptly by a principal

Fiduciaries

- [ ] Act in the best interest of the account owner

Wrap accounts

- [ ] Type of discretionary account

- [ ] All fees wrapped into one

- [ ] Investment adviser product

[13.3.5 Custodial Accounts]

- [ ] UGMAs (Uniform Gifts to Minors Act) and UTMAs (Uniform Transfer to Minors Act)

- [ ] Custodial accounts set up for minors

- [ ] Type of fiduciary account

- [ ] One custodian per account (cannot pursue short sales, margins, and some options)

- [ ] One minor per account

- [ ] Taxes reported under the minor’s SSN

- [ ] Contributions are irrevocable gifts to minor

- [ ] Account may not be transferred to another beneficiary

[13.3.6 Guardianship accounts]

- [ ] Accounts for the incapacitated

- [ ] Managed by court-appointed guardians

- [ ] Type of fiduciary account

[13.3.7 Trust Accounts]

- [ ] Setup for the benefit of a specific party

- [ ] Type of fiduciary account

- [ ] Eligible for margin if specifically authorized in the trust agreement

- [ ] Grantor

- [ ] Creates and funds the trust

- [ ] Trustee

- [ ] Manages the trust for beneficiaries

[13.3.8 Business Accounts]

- [ ] Partnership account

- [ ] Business account for a partnership

- [ ] Requires a partnership agreement

- [ ] Corporate account

- [ ] Business account for a corporation

- [ ] Required to open:

- [ ] Corporate resolution

- [ ] Corporate charter

- [ ] Corporate resolution

- [ ] Names employees who can act on behalf of the business account

[13.3.9 Prime Brokerage Accounts]

- [ ] Provide services to large customers:

- [ ] Maintain custody

- [ ] Record keeping

- [ ] Send trades to various firms

[13.4 Margin Accounts]

------------------------

[13.4.1 Overview]

- [ ] Borrow money for investment (leverage)

- [ ] Only suitable for risk-tolerant investors

[13.4.2 Opening a Margin Account]

- [ ] Margin agreement components

- [ ] Hypothecation agreement

- [ ] Credit agreement

- [ ] Loan consent form (customer not required to sign)

- [ ] Hypothecation agreement

- [ ] Investor pledges securities as collateral

- [ ] Must be signed by the customer

- [ ] Firms rehypothecate securities to the bank

- [ ] Regulation U

- [ ] Governs B/D to bank relationship

- [ ] B/Ds can rehypothecate 140% of debit

- [ ] Credit agreement

- [ ] Margin loan details and specifics

- [ ] Must be signed by the customer

- [ ] Loan consent form

- [ ] Allows B/D to lend out securities

- [ ] Does not have to be signed

- [ ] Commingling securities

- [ ] Allowed for margin account securities

- [ ] Prohibited for cash account securities

[13.4.3 Deposit Requirements]

- [ ] Regulation T

- [ ] Requires 50% deposit for margin trade

- [ ] May deposit 2x Reg T requirement in fully-paid securities

- [ ] Regulation T settlement

- [ ] 2 business days after regular-way settlement

- [ ] FINRA margin requirement

- [ ] Minimum equity of $2,000

- [ ] Marginable securities

- [ ] Exchange-listed stocks

- [ ] Federal Reserve approved OTC stocks

- [ ] Debt securities

- [ ] Primary offerings after 30 days of ownership

- [ ] LEAPS options with more than 9 months to expiration

- [ ] Warrants

- [ ] Non-marginable securities

- [ ] OTC stocks not approved by the Federal Reserve

- [ ] Primary offerings held less than 30 days

- [ ] Any option with 9 months or less to maturity

- [ ] Insurance products

- [ ] Rights

- [ ] Frozen accounts

- [ ] Implemented if the customer misses Reg T settlement

- [ ] Purchases only occur if cash is in the account

- [ ] Lasts for 90 days

[13.4.4 Equity]

- [ ] Long equity formula

- [ ] LMV - debit = equity

- [ ] LMV is the long market value

- [ ] Debit is the amount borrowed

- [ ] Equity is the account’s net worth

- [ ] Short equity formula

- [ ] Credit - SMV = equity

- [ ] Credit is the amount sold short plus the amount deposited

- [ ] SMV is the short market value

- [ ] Equity is the account’s net worth

[13.4.5 Minimum Maintenance]

- [ ] Minimum maintenance for long accounts

- [ ] 25% equity requirement

- [ ] If falling below, must:

- [ ] Deposit cash

- [ ] Deposit fully paid securities

- [ ] Sell securities

- [ ] Restricted accounts

- [ ] Below 50% equity

- [ ] Half of sales proceeds must pay down debit balance

- [ ] Minimum maintenance for short accounts

- [ ] 30% equity requirement

- [ ] If falling below, must:

- [ ] Deposit cash

- [ ] Close short position

[13.5 Options Accounts]

- [ ] Five steps to open an options account

- [ ] Customer fills out the new account form

- [ ] Financial representative provides ODD

- [ ] Account is approved by an options supervisor

- [ ] First trade “opens” the account

- [ ] Customer returns signed options agreement within 15 days

- [ ] Customer information & suitability

- [ ] Firm must request background and financial information

- [ ] Information will be used to determine if:

- [ ] Account will be approved

- [ ] What level of option trading will be allowed

- [ ] Information is confirmed by a negative confirmation letter

- [ ] Sent to the customer within 15 days

- [ ] Customer only responds if the information is incorrect

- [ ] Options disclosure document (ODD)

- [ ] Discloses characteristics, risks, and benefits of options

- [ ] Must be delivered prior to options discussion with retail investors

- [ ] Options agreement

- [ ] Confirms the investor:

- [ ] Received the ODD

- [ ] Will abide by OCC rules

- [ ] Signed & returned within 15 calendar days

- [ ] Closing transactions only if not returned within 15 calendar days

- [ ] Registered options principal (ROP)

- [ ] Series 4 license holder

- [ ] Principal supervisor overseeing options activity

- [ ] May approve options accounts

- [ ] General Securities Sales Supervisor

- [ ] Series 9/10 license holder

- [ ] Principal supervisor overseeing general brokerage activity

- [ ] May approve options accounts

[13.6.1 SIPC Insurance]

- [ ] Coverage in case of broker-dealer failure

- [ ] Coverage:

- [ ] Up to $500k per registration

- [ ] No more than $250k in cash

- [ ] Confirmation of SIPC insurance required:

- [ ] At account opening

- [ ] Annually after account opening

[13.6.2 Business Continuity Plans]

- [ ] Protocols during business disruptions

- [ ] Provided to customers:

- [ ] Upon account opening

- [ ] Upon written request

- [ ] On the firm’s website

((((END CHAPTER 13))))

======================================================================================================================================================

Retirement & education plans

[14.1 Generalities]

- [ ] Tax-deferred growth

- [ ] Central benefit of:

- [ ] Retirement plans

- [ ] Education savings plans

- [ ] Retirement account contributions

- [ ] Must be made in cash

- [ ] Retirement account suitability

- [ ] Avoid strategies with unlimited risk

- [ ] Cannot utilize short sales

- [ ] Cannot utilize margin

- [ ] Municipal bonds are unsuitable

- [ ] Excess contribution penalty

- [ ] 6% on the amount over-contributed

- [ ] Early withdrawal penalty

- [ ] Retirement distributions before 59 1/2

- [ ] Subject to a 10% penalty

- [ ] Exceptions:

- [ ] Disability

- [ ] Death

- [ ] First-time home purchase

- [ ] Educational expenses

- [ ] Certain medical expenses

- [ ] Required minimum distributions (RMDs)

- [ ] Retirement withdrawal requirement

- [ ] Applies at age 73

- [ ] Annual amount must be distributed year-end

- [ ] First RMD can be postponed to April 1st of the following year

- [ ] 25% penalty if not taken (10% if taken within 2 years)

[14.2 Rules]

- [ ] ERISA

- [ ] Legislation governing qualified plans

- [ ] General ERISA requirements

- [ ] Minimum participation standards/non-discrimination

- [ ] Must offer the plan to all full-time employees

- [ ] Cannot offer the plan to executives only (this would be discrimination)

- [ ] Reporting and disclosure

- [ ] Details of retirement plan available in writing

- [ ] Employees provided annual updates

- [ ] Funding

- [ ] Defined benefit plans must be funded appropriately

- [ ] Vesting

- [ ] Employees must earn employer-provided benefits in a reasonable amount of time (five years or less)

[14.3 Workplace Plans]

- [ ] Defined benefit plans

- [ ] Varying contributions made over time

- [ ] Defined retirement benefit

- [ ] Most beneficial for employees:

- [ ] With higher salaries

- [ ] Closest to retirement age

- [ ] Pensions

- [ ] Common form of defined benefit plan

- [ ] Pay retirement income until death

- [ ] Unfunded pension liabilities

- [ ] Payouts exceed assets (forecasted)

- [ ] Defined contribution plans

- [ ] Defined contributions

- [ ] Unknown benefit at retirement

- [ ] 401(k) plan

- [ ] Qualified retirement plan

- [ ] For private (non-government) companies

- [ ] Solo 401(k) plan

- [ ] Qualified retirement plan

- [ ] For private (non-government) self-employed businesses with no employees

- [ ] Working spouses do not count

- [ ] 403(b) plan

- [ ] Qualified retirement plan

- [ ] For non-profit organizations

- [ ] Also known as tax-sheltered annuities

- [ ] Keogh (HR-10) plans

- [ ] Qualified retirement plan

- [ ] For self-employed businesses

- [ ] 2023 contribution limit is lesser of:

- [ ] $66,000

- [ ] 25% of income

- [ ] Profit-sharing plans

- [ ] Qualified retirement plan

- [ ] Employer shares a portion of profits

- [ ] Employer under no obligation to contribute

- [ ] Money purchase plans

- [ ] Qualified retirement plan

- [ ] Employer must contribute a fixed percentage of salary annually

- [ ] SEP and SIMPLE IRAs

- [ ] Qualified retirement plans

- [ ] For small businesses

- [ ] Higher contribution limits than traditional or Roth IRAs

- [ ] Deferred compensation plan

- [ ] Non-qualified retirement plan

- [ ] Allows senior employees to defer compensation, invest it, and receive it in retirement

- [ ] 457 plan

- [ ] Government & certain non-profit retirement plan

- [ ] Allows pre-tax contributions and tax-deferred growth

- [ ] No early withdrawal penalty

[14.4 Individual Retirement Accounts (IRAs)

- [ ] Traditional IRAs

- [ ] Potentially deductible contributions

- [ ] 100% taxable distributions

- [ ] Traditional IRA contributions

- [ ] 2023 contribution limit is lesser of:

- [ ] $6,500

- [ ] Annual earned income

- [ ] Age 50+ can contribute $1,000 more

- [ ] Spousal IRA allows non-working spouse contribution

- [ ] Deductible traditional IRA contributions

- [ ] Always allowed if not covered by a qualified plan

- [ ] If covered by a qualified plan:

- [ ] Deductible if mid-low income

- [ ] Non-deductible if high income

- [ ] Roth IRAs

- [ ] Non-deductible contributions

- [ ] 100% tax-free distributions if:

- [ ] Age 59 1/2 or older

- [ ] Roth IRA is aged 5 years

- [ ] Roth IRA contributions

- [ ] 2023 contribution limit is lesser of:

- [ ] $6,500

- [ ] Annual earned income

- [ ] Contribution limits apply to both Roth and traditional IRAs combined

- [ ] Cannot contribute if high income

- [ ] Age 50+ can contribute $1,000 more

- [ ] Spousal IRA allows non-working spouse contribution

- [ ] Roth 401(k)s

- [ ] Qualified workplace plan

- [ ] Similar tax structure to a Roth IRA

- [ ] Subject to RMDs unless rolled over to an IRA

[14.5 Variable Life Insurance]

- [ ] Coverage for the entire life of the policyholder

- [ ] Fixed premiums

- [ ] Guaranteed death benefit

- [ ] Cash value invested in the separate account

- [ ] Cash value grows based on investment performance

- [ ] Policyholder subject to investment risk

- [ ] Cash value may be

- [ ] Withdrawn or borrowed

- [ ] Returned to the insurance company upon death

- [ ] Kept upon surrender of the policy

- [ ] Retained and potentially paid with a death benefit

- [ ] Considered a security

[14.6 Variable Annuities]

- [ ] Unlimited non-deductible contributions

- [ ] Contribution options:

- [ ] Lump sum

- [ ] Periodic contributions

- [ ] Offers tax-deferred growth

- [ ] Distributions taxable above basis

Immediate annuity

- [ ] Investor contributes a large lump sum

- [ ] Immediately annuitizes and receives payments

Deferred annuity

- [ ] Investor contributes over time

- [ ] Takes withdrawals or annuitizes later in retirement

Accumulation phase

- [ ] When contributions are made

- [ ] Death benefit applies

Death benefit

- [ ] Beneficiary keeps GREATER of:

- [ ] Amount invested

- [ ] Account value

- [ ] Applies if the account owner dies during the accumulation phase

Variable annuity insurance company risks

- [ ] Mortality risk

- [ ] Investor dies earlier than expected, triggering the death benefit

- [ ] Expense risk

- [ ] Business expenses rise

- [ ] Longevity risk

- [ ] Investor lives longer than expected, forcing annuity payments to be paid longer

Separate account

- [ ] Where assets are held

- [ ] Customer in control of investing

- [ ] Investment choices:

- [ ] Equity-based portfolios

- [ ] Hedge against inflation

- [ ] Debt-based portfolios

- [ ] Subject to inflation risk

Distribution phase

- [ ] Investor receives income in retirement

- [ ] Non-annuitization options

- [ ] Lump sum

- [ ] Periodic payments

- [ ] Annuitization options:

- [ ] Straight life annuity

- [ ] Life with period certain

- [ ] Joint and last survivor

Non-qualified annuity taxation

- [ ] Growth is taxable as ordinary income

- [ ] Withdrawals (non-annuitization)

- [ ] Growth is distributed first (LIFO)

- [ ] Annuitization

- [ ] Basis and growth distributed simultaneously

- [ ] Taxed on a “pro-rata” basis (a.k.a. exclusion ratio)

- [ ] Not subject to RMDs

Qualified annuity taxation

- [ ] All distributions taxed (growth and basis) as ordinary income

- [ ] Subject to RMDs starting at age 73

Fixed annuities

- [ ] Like a variable annuity, but:

- [ ] Not a security

- [ ] General account instead of a separate account

- [ ] More exposed to inflation risk

[14.7 Education & other plans]

- [ ] Coverdell ESAs

- [ ] Savings accounts for child’s educational expenses

- [ ] Cover virtually all types of education

- [ ] Assets grow tax-deferred

- [ ] Coverdell ESA contributions

- [ ] $2,000 per person per year limit

- [ ] Non-deductible

- [ ] Can no longer be made at age 18

- [ ] Coverdell ESA distributions

- [ ] Not taxable if used for education

- [ ] Full distribution or rollover by age 30

- [ ] Rollovers only to family members

- [ ] Penalties if not used for education:

- [ ] Ordinary income taxes on gains

- [ ] Additional 10% penalty

- [ ] 529 plans

- [ ] Also known as qualified tuition programs (QTPs)

- [ ] State-sponsored education savings plans

- [ ] Assets grow tax-deferred

- [ ] Assets invested in state-approved funds

- [ ] Plan participant may make two changes annually

- [ ] Cover college expenses

- [ ] Cover up to $10,000 of non-college tuition expenses annually

- [ ] May move to another state plan once per calendar year

- [ ] 529 plan parties

- [ ] Plan participant

- [ ] Controls and manages plan for a beneficiary

- [ ] Beneficiary

- [ ] Person receiving plan assets to pay for education

- [ ] Prepaid tuition plans

- [ ] Pays for future tuition costs at today’s rates

- [ ] College savings plans

- [ ] Assets grow tax-deferred in funds

- [ ] 529 plan contributions

- [ ] Subject to gift taxes

- [ ] $17,000 annual gift tax exemption

- [ ] Generally non-deductible

- [ ] Some states allow for state tax deduction

- [ ] 529 plan distributions

- [ ] Tax-free if used for education expenses

- [ ] Penalties if not used for education:

- [ ] Ordinary income taxes on gains

- [ ] Additional 10% penalty on gains

- [ ] ABLE accounts

- [ ] Savings plans for people with disabilities

- [ ] Must be disabled by age 26 to qualify

- [ ] After-tax contributions

- [ ] Tax-sheltered growth

- [ ] Qualified distributions are tax-free

((((END CHAPTER 14))))

====================================================================================================================================================

Chapter 15 Rules & Ethics

[15.1 The regulators]

- [ ] Securities and Exchange Commission (SEC)

- [ ] Prominent securities industry regulator

- [ ] Regulates the primary and secondary markets

- [ ] Enforces:

- [ ] Securities Act of 1933

- [ ] Securities Exchange Act of 1934

- [ ] Investment Company Act of 1940

- [ ] Main goals:

- [ ] Protect investors

- [ ] Maintain fair, orderly, and efficient markets

- [ ] Facilitate capital formation

- [ ] Financial Industry Regulatory Authority (FINRA)

- [ ] Regulates the financial industry and its participants

- [ ] U-4

- [ ] Registration form for persons in finance

- [ ] Filled out and filed when joining a firm

- [ ] Requires extensive background information

- [ ] Must be updated if information changes

- [ ] Arbitration agreement is embedded

- [ ] Fingerprinting

- [ ] All applicants must submit fingerprints during the registration process

- [ ] Fingerprints used in FBI background checks

- [ ] Fingerprints must be submitted within 30 days of U-4 submission

- [ ] Statutory disqualifications

- [ ] Events that may prevent or revoke a registration

- [ ] Most commonly cited:

- [ ] Any felony conviction in the past 10 years

- [ ] Securities-related misdemeanor in the past 10 years

- [ ] Punishment from other regulators

- [ ] U-4 updates

- [ ] General updates - filed within 30 days

- [ ] Statutory disqualification event - filed within 10 days

- [ ] U-5

- [ ] Removes registration status

- [ ] Filled out and filed when leaving a firm

- [ ] U-6

- [ ] Reports the following:

- [ ] Disciplinary actions

- [ ] Reportable events

- [ ] Arbitration results

- [ ] Municipal Securities Rulemaking Board (MSRB)

- [ ] Self-regulatory organization governing the municipal markets

- [ ] Writes municipal regulations, does not enforce

- [ ] Enforces MSRB rules (securities firms):

- [ ] SEC

- [ ] FINRA

- [ ] Enforces MSRB rules (banks):

- [ ] The Federal Reserve Board

- [ ] Office of Comptroller of the Currency

- [ ] Federal Deposit Insurance Corporation (FDIC)

- [ ] Municipal finance professional

- [ ] Firm employee involved in municipal:

- [ ] Research

- [ ] Advising

- [ ] Underwriting

- [ ] Communications

- [ ] Not an MFP if limited to retail sales only

- [ ] Political contributions by firms and MFPs

- [ ] $250 contribution limit for campaigns

- [ ] 2-year ban is imposed if the limit is surpassed

- [ ] Any amount given to a non-local campaign automatically creates a ban

- [ ] North American Securities Administrators Association (NASAA)

- [ ] Regulates financial industry at the state-level

- [ ] Enforces provisions of the Uniform Securities Act

[15.2 Prohibited activities]

--------------------------

[15.2.1 Market Manipulation]

- [ ] Market manipulation

- [ ] Artificially influencing security prices

- [ ] Painting the tape

- [ ] Creating a false appearance of trading activity

- [ ] Also known as:

- [ ] Matched orders

- [ ] Wash trade

- [ ] Marking the open

- [ ] Placing orders prior to market open solely to influence the price

- [ ] Marking the close

- [ ] Placing orders prior to market close solely to influence the price

- [ ] Spreading rumors

- [ ] Spreading misinformation in order to manipulate a security price

- [ ] Pump and dump

- [ ] Spreading information in order to manipulate a security price upwards

- [ ] Once the price rises, the culprit sells and “cashes in”

[15.2.2 Unethical activities]

- [ ] Interpositioning

- [ ] Creating an unnecessary middleman

- [ ] Backing away

- [ ] Providing firm quote, but not fulfilling it

- [ ] Frontrunning

- [ ] Placing a personal order just prior to a large customer order

- [ ] Trading ahead

- [ ] Placing a personal order just prior to a research report release

[15.2.3 Insider trading]

- [ ] Trade based on material non-public info

- [ ] Both tipper and tippee liable for penalties

- [ ] Subject to treble damages in civil court

- [ ] Individual criminal penalties:

- [ ] Up to a $5 million fine

- [ ] Up to 20 years in jail

- [ ] Firm criminal penalties:

- [ ] Up to a $25 million fine

[15.3 Ethical duties]

---------------------

[15.3.1 Protecting vulnerable investors]

- [ ] Trusted contact person

- [ ] Close friend or family member of the investor

- [ ] May be contacted if the representative suspects exploitation, fraud, or diminished capacity

- [ ] Must be at least 18 years old

- [ ] Fund disbursement holds

- [ ] Firm may restrict transactions & withdrawals if suspecting fraud or exploitation

- [ ] Original hold is 15 business days

- [ ] May extend hold another 10 business days if additional time is needed

- [ ] May extend hold another 30 business days if authorities are notified

- [ ] “Red flag” investments

- [ ] Investments with:

- [ ] High risk

- [ ] Low liquidity

- [ ] Complex components

- [ ] Generally avoid recommending these to senior investors

- [ ] Unethical activities with senior investors

- [ ] Creating fake designations

- [ ] Elder abuse

- [ ] Abuse of a senior citizen in some form

- [ ] Must be reported if suspected

[15.3.2 Recognizing illegal activities]

- [ ] Money laundering

- [ ] Concealing the source of illegal funds

- [ ] Stages:

- [ ] Placement

- [ ] Layering

- [ ] Integration

- [ ] Bank Secrecy Act

- [ ] Requires firms to implement anti-money laundering programs

- [ ] Anti-money laundering (AML) programs

- [ ] Trains professionals to identify money laundering

- [ ] Firms must appoint an AML officer

- [ ] Currency transaction reports (CTRs)

- [ ] Filed with FinCEN (15 days of activity)

- [ ] Filed if more than $10,000 cash is involved in a transaction

- [ ] Structuring

- [ ] The illegal act of transferring funds just under $10,000 to avoid CTR reporting

- [ ] Suspicious activity reports (SARs)

- [ ] Filed with FinCEN (30 days of activity)

- [ ] Filed if suspicious activity is identified

- [ ] Specifically designated nationals (SDN) list

- [ ] Determined by OFAC

- [ ] List of people identified as:

- [ ] Controlled by hostile countries

- [ ] Terrorists

- [ ] Drug traffickers

- [ ] Maintained by OFAC

15.4 Other law & regulations

-----------------------------

[15.4.1 Regulation S-P]

- [ ] Safeguards non-public customer info

- [ ] Firms must disclose when giving non-public info to third parties

- [ ] Privacy notices provided:

- [ ] At account opening

- [ ] Annually after

- [ ] Firms must provide easy “opt-out”

[15.4.2 Telephone consumer protection act]

- [ ] Telephone Consumer Protection Act (TCPA)

- [ ] Prevents unwanted phone calls

- [ ] Covers phone transmissions, including:

- [ ] Phone calls

- [ ] Robo-calls

- [ ] Faxes (facsimile)

- [ ] Financial professionals must check do-not-call lists prior to calling

- [ ] Calls must be made between 8:00am and 9:00pm in the time zone of the prospect

- [ ] Financial professionals must disclose:

- [ ]Name

- [ ]Firm’s name

- [ ]Phone number or address

- [ ] Does not apply to:

- [ ] Existing relationships (18 months)

- [ ] Non-profits

- [ ] Non-business ventures

[15.4.3 Public communications]

- [ ] Correspondence

- [ ] Written communication sent to 25 or fewer retail investors in 30 days

- [ ] Not filed with FINRA

- [ ]No principal pre-approval is required

- [ ] Subject to review

- [ ] Retail communications

- [ ] Written communication sent to more than 25 retail investors in 30 days

- [ ] Filed with FINRA

- [ ] Principal pre-approval required

- [ ] Institutional communications

- [ ] Written communications with institutions

- [ ] Not filed with FINRA

- [ ] No principal pre-approval is required

[15.4.4 Proxy rules]

- [ ] Proxy disbursement

- [ ] Requirement for firms if securities held in street name

- [ ] Firms are reimbursed for forwarding costs

- [ ] Firms may vote on minor issues if proxy not returned

- [ ] Firms will vote according to issuer’s recommendation if signed proxy returned with no votes

[15.4.5 Licenses & CE]

- [ ] Regulatory Element CE

- [ ] Facilitated by FINRA

- [ ] Educates and tests rep’s understanding of ethics and compliance

- [ ] Must be completed annually

- [ ] If not completed on time, rep’s registration becomes inactive

- [ ] Firm Element CE

- [ ] Facilitate by member firms

- [ ] Educates and tests rep’s understanding of ethics and compliance

- [ ] Specifically focuses on the firm’s products and services

- [ ] Must be completed annually

- [ ] FINRA’s Financial Professional Gateway (FinPro)

- [ ] Online registration resource platform, which allows:

- [ ] Access to CRD information

- [ ] Scheduling of qualification exams

- [ ] Enrollment in the Maintaining Qualifications Program (MQP)

- [ ] Taking required Regulatory Element CE

- [ ] Review and downloading of Form U-5

- [ ] Financial license lapse

- [ ] Occurs if out of the industry for more than 2 years (most licenses)

- [ ] SIE exam license lapses after 4 years out of the industry

- [ ] Maintaining Qualifications Program (MQP)

- [ ] Extends lapse period on FINRA licenses to 5 years

- [ ] Requirements:

- [ ] Must be registered for at least one year before termination

- [ ] Must participate within two years of termination

- [ ] CE must be completed by due dates

[15.4.6 Registered representative rules]

- [ ] Outside brokerage accounts

- [ ] Must be disclosed to firm within 30 days of association

- [ ] Includes accounts the representative maintains a “beneficial interest” in

- [ ] Outside business activities

- [ ] Agents must inform their employer if making money outside of the firm

- [ ] Firm can bar an employee from activity if a conflict of interest exists

- [ ] Private securities transaction

- [ ] Securities transaction facilitated by rep outside of employing firm

- [ ] Requirements:

- [ ] Must notify firm in writing

- [ ] Firm must keep a record of the transaction

- [ ] Written approval is required if the rep is compensated

- [ ] Selling away

- [ ] Performing a private securities transaction without notifying the firm

- [ ] FINRA violation / prohibited action

- [ ] Business gifts

- [ ] Limited to $100 per person, per year

- [ ] Business entertainment

- [ ] Costs related to entertaining clients

- [ ] May exceed the $100 gift limit

- [ ] Cannot be excessive

- [ ] Lending arrangements with customers

- [ ] Reps generally cannot borrow from or lend money to customers

- [ ] Does not apply to:

- [ ] Clients in the business of lending money

- [ ] Personal relationships

- [ ] Sharing accounts with customers

- [ ] Reps generally cannot share accounts with customers, unless:

- [ ] Written approval granted by firm

- [ ] Written approval granted by customers

- [ ] Gains and/or losses are shared proportionately

- [ ] Disputes with employing firms

- [ ] Typically subject to arbitration

- [ ] Workplace discrimination and sexual harassment may involve lawsuits

- [ ] Payments to unregistered persons

- [ ] Firms may continue to pay retired personnel

- [ ] Written agreement must be in place

- [ ] Former representative may not:

- [ ] Solicit new business

- [ ] Open new accounts

- [ ] Service old accounts

[15.4.7 Record retention requirements]

- [ ] The documents that must be kept on file for at least 3 years include:

- [ ] Employee records

- [ ] Form U-4

- [ ] Form U-5

- [ ] Fingerprint records

- [ ] Trade confirmations

- [ ] Statements

- [ ] Public communications

- [ ] Correspondence

- [ ] Retail communications

- [ ] Institutional communications

- [ ] Trial balances*

- [ ] 4 YEARS

- [ ] Customer complaints

- [ ] 5 years

- [ ] Currency transaction reports (CTRs)

- [ ] Suspicious activity reports (SARs)

- [ ] Customer identification program (CIP) information

- [ ] 6 Years

- [ ] Customer account records

- [ ] New account forms

- [ ] Customer agreements, (like the margin agreement)

- [ ] Trading authorization forms

- [ ] Customer complaints (MSRB)

- [ ] Blotters*

- [ ] Lifetime

- [ ] Stock certificates

- [ ] Partnership agreements

- [ ] Articles of incorporation

- [ ] Meeting minutes

((((END CHAPTER 15))))

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