Series 6

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  1. Common Stock
    primary means of raising business capital. Investors who buy the stock buy a share of ownership in the company's net worth.
  2. Authorized shares
    as part of its original charter, a corporation receives authorization from the state to issue, or sell, a specific number of shares of stock.
  3. Issued Stock
    Once authorized, issued stock can be distributed to investors
  4. Treasury Stock
    Stock a corporation has issued and subsequently repurchased from the public. Does no carry the rights to vote and receive dividends
  5. Outstanding Stock
    Includes any shares that a company has issued but has not repurchased - that is investor owned stock.
  6. Book Value
    is a measure of how much a common stockholder could expect to receive for each share if the corporation were liquidated. the book value per share is the difference between the historical value of the corporation's tangible assets and liabilities, divided by the number of shares outstanding.
  7. Par Value
    is an arbitrary value the company gives the stock in its articles of incorporation, and it has no effect on the stock's market price/
  8. Market value =
    Book value =
    Par value =
    • Market value = supply and demand price
    • Book value = current hypothetical liquidation value of a share
    • Par value = an arbitrary accounting value
  9. Voting rights on common stock
    • stockholders exercise control by electing a BOD voting on corporation policy matters
    • - issuance of convertible securities or additional common stock
    • - substantial changes in the corporations business, such as mergers or acquisitions
    • - election of board members

    note: do not vote on dividends period
  10. Statutory voting
    shareholders can cast one vote for each share of stock owned for each item on the ballot, such as seats on the board of directors
  11. Cumulative voting
    cumulative voting may be advantageous for small shareholders by giving them a greater opportunity to offset the votes of large shareholders by combining all their shares on a single seat
  12. Preemptive right
    gives investors the right to maintain a proportionate interest in the company's stock by buying enough newly issued shares to maintain their proportionate ownership in the corporation.
  13. Limited liability
    protects stockholders from having to pay a corporation's debts in bankruptcy.
  14. Long the stock
    an investor who buys shares, which is considered bullish and is expecting the price to rise
  15. Short sale
    involves borrowing shares to sell that the investor must eventually replace, which is bearish and expects the stock to go down in price

    note: The difference in the price at which the shares are sold and the lower price at which they are bought to repay the broker/dealer is the investor's profit
  16. Capital appreciation
    an increase in the market price of shares
  17. Investors who receive dividends must pay_____% in dividend tax
    • 15%
    • note: corporations receive a 70% exclusion on dividend income
  18. stock market price is quoted in whole dollars known as _______?
    points
  19. Preferred stock
    is an equity security because it represents ownership in the corporation. Like a bond it is issued as an income security with a fixed or adjustable dividend
  20. Preferred stock benefits
    • - owners of preferred stock receive their dividends before common stockholders may be paid.
    • - if a corporation goes bankrupt, preferred stockholders have a priority claim over common stockholders

    note: preferred stock does not have voting or preemptive rights. Price is also sensitive to interest rates.
  21. Categories of preferred stock
    • Straight preferred - no special features beyond a stated dividend payment
    • Cumulative preferred - dividend is paid in arrears - make up for prior years
    • Convertible preferred - owner may exchange each preferred share for shares of common stock
    • Participating preferred - owners share of corporate profits that remain after all dividends and interest due are paid
    • Callable preferred - the company may buy back from investors at a stated price after a specified date
    • Adjustable-Rate preferred - tied to the rates of other interest rate benchmarks, such as Treasury bill and money market rates, and can be adjusted as often as semiannually.
  22. Cash dividends
    normally distributed by check and usually paid quarterly and taxed as dividend income in the year they are received.
  23. Stock dividends
    company issues shares of its common stock as a dividend to its current stockholders. a stock's market price per share declines after a stock dividend, but the company total market value remains the same

    note: not taxed when received
  24. Dividend yield
    is the annual dividend (four times the quarterly dividend) divided by the current price of the stock. Stock dividend yield may also be referred to as its current yield
  25. Total return
    combination of the dividend income and price appreciation or decline over a given period of time
  26. ADR's
    American depository receipts facilitate the trading of foreign stocks in US markets. ADRs are bought and sold in the US securities markets like stock.

    note: remember that the stock represented by the ADR is originally traded in a foreign currency, and that dividends are initially paid by the foreign company in that currency; the dividends are simply exchanged for dollars before being passed on to the ADR holder
  27. ADRs main points
    • - have no voting rights
    • - they allow domestic investors purchase foreign issues
    • - owners receive dividends in dollars
  28. Rights offering
    • - short term
    • - exercise below market value
    • - may trade with or separate from the common stock
    • - offered to exiting shareholders with preemptive rights
    • - one right issued per share outstanding
  29. Warrants
    • - long term
    • - exercisable above market value
    • - may trade with or separate from the units
    • - offered as a sweetener fro another security
    • - number issued is determined by corporation
  30. options
    is a contract that establishes a price and time frame for the purchase or sale of a particular investment instrument
  31. Call option contract
    gives the buyer the right to call ( buy) a security away from someone.
  32. Put option contract
    gives the buyer the right to put (sell) a security to someone
  33. Strike price
    bought in the case of a call, sold in the case of a put
  34. What are debt securities?
    can be issued not only by corporations, but by federal state, or local governmental bodies as well. can be secure or unsecured.
  35. Bond
    is a debt security whether issued by corporations, municipalities, the US government, or its agencies
  36. The trust indenture act of 1939 - requires corporate bonds of $5m or more to be issued under ______
    trust indenture - legal contract between the bond issuer and a trustee representing bondholders

    note: Federal and municipal governments are exempt from the trust indenture act provisions
  37. Interest on Bonds
    accrues daily and is paid in semiannual installments over the life of the bond. Final interest payment is made when the bond matures, and it is normally combined with repayment of the principal amount
  38. coupon or bearer bonds
    issuer kept no records of purchasers, and securities were issued without an investors name printed on the certificate. Because coupon bonds are not registered, whoever possesses them can collect interest on and either sell or redeem the bond.
  39. Registered bond
    buyers name appears on the bond certificate face
  40. Fully registered bond
    when a bond has both principal and interest, which are most corporate bonds.
  41. Principle-only registered bonds
    owner's name printed on the certificate, but the coupons are in bearer form.

    note: no longer issued
  42. Book entry bonds
    owners do not receive certificates. All US government and municipal bonds are available only in book-entgry form
  43. What form a bond must be for an investor to receive interest and principal payments by mail?
    Bonds must be fully registered or book-entry, not bearer - the issuer must have the name of the investor entitled to both principal and interest payments on its ownership list. New bonds are issued only in registered form or book-entry form.
  44. what is a debenture?
    an unsecured bond
  45. in the event of a company goes bankrupt, the hierarchy of claims on the company's assets are as follows:
    • - unpaid wages
    • - IRS, state, and county taxes
    • - Secured debt (bonds and mortgages)
    • - Unsecured bonds (debentures)
    • - Subordinated debt
    • - Preferred stockholders
    • - Common Stockholders
  46. Once bonds are issued they are bought and sold in the ________ market
    secondary
  47. Par
    represents the dollar amount of the investors loan to the issuer on a bond, and amount is repaid at maturity.
  48. What is an accumulation unit?
    Accumulation units are used as an accounting measure to determine the annuitant's proportionate interest in the separate account during the growth phase of an annuity, referred to as the accumulation phase. When you contribute premium to your annuity these monies purchase accumulation units. As you continue payments you buy more and more accumulation units, which increase or decrease in value according to the performance of the insurance company's separate account.
  49. How do an annuity's accumulation units and annuity units differ?
    Accumulation units help determine the annuitant's proportionate interest in the separate account during the growth (accumulation) phase, and are purchased when premium contributions are made. The actual number accumulated will vary, depending upon the amount and number of the policyowner's premium contributions. Annuity units help determine the amount of each payment during the distribution (annuitiaztion) phase. Upon annuitization of the contract, the policyowner's accumulation units are converted to a fixed number of "annuity units". The value of both units will vary based upon the actual performance of the separate account.
  50. What is the AIR for a variable annuity?
    The AIR stands for assumed interest rate, and is the rate of interest an annuity provider uses in calculating the amount of each variable annuity income payment. It is conservatively estimated and projected over the estimated life of the contract, but it is not a guarantee of a specific return.
  51. What is the difference between a General Obligation Bond (GO) and a Revenue Bond?
    Both are municipal securities. GOs are issued to benefit the entire municipality and their interest and principal repayment comes from taxes collected. Revenue's are issued to finance a particular municipal facility that will generate income and be self supporting. Revenue bond interest and principal is repaid from the revenue generated by the facility.
  52. What is the cooling-off period, and is it always a 20 day period?
    The cooling-off period is the time period between when a securities registration statement is filed and that registration becomes effective, meaning it has been cleared for sale to the public. During this time period sales of the security and related activities are prohibited, but a preliminary prospectus (red herring) can be used to solicit indications of interest. In regards to advertising, the only form of advertising allowed during this period is a tombstone advertisement. The time period involved with the cooling-off period is a minimum of 20 calendar days, but it typically takes longer than that for a security to clear registration statements.
  53. What factors are involved in determining a mutual funds expense ratio, and exactly how is it determined?
    A mutual fund's expense ratio compares the fund's expenses (management fees and operating expenses) with the fund's average net assets. The expenses of the fund are: 1) the Board of Directors, 2) the Fund/Portfolio Manager (Investment Advisor), 3) the Custodian, and 4) the Transfer Agent. The expense ratio is always expressed as a percentage and is determined by dividing the fund's total expenses by the fund’s average net assets. Note that the Underwriter's fees are not part of the formula for determining the expense ratio. The Underwriter is compensated separately through the sales charges paid by investors and therefore is not considered an expense of the fund.
  54. What is the custodian, and what part does it play for an investment company?
    In order to protect the investors' assets, the Investment Company Act of 1940 requires each investment company to place its portfolio securities in the custody of a qualified third party (i.e. bank or similar financial institution). The custodian fills this role, and is responsible for the safekeeping of the fund assets, keeping asset records and performing the necessary bookkeeping and clerical functions at the fund level. The custodian must also keep the investment company's assets physically segregated at all times and is paid a fee for its services.
  55. What is a diversified investment company?
    In order for an investment company to be defined as a diversified investment company, and advertise itself as such, it must meet all the requirements of what is referred to as the 75-5-10 rule or test. A minimum of 75% of the investment company's total assets must be invested in securities of companies other than the investment company or its affiliates. No more than 5% of the investment company's total assets can be invested in any one issuer. In addition, no more than 10% of the outstanding voting securities of any one issuer. The remaining 25% of the investment company's total assets may be invested in any manner in which the investment company deems appropriate as related to its investment objective. This means that the fund's overall portfolio could involve having more than 5% of its total assets invested in one company as well as owning more than 10% of the voting shares of one company. As long as the portion that is designated for the 75-5-10 rule meets those necessary requirements the fund would still be defined as a diversified investment company.
  56. What are the differences between the ex-dividend date for an open-end investment company and a closed-end investment company?
    The dividend disbursing process for both open-end investment companies and closed-end investment companies involves the declaration date, the ex-dividend date, the record date and the payable date. The differences between these two types of investment companies in regards to this process basically lie with the record date and ex-dividend date. For open-end investment companies the ex-dividend date is set by the Board of Directors and is typically one business day after the record date. For closed-end investment companies the ex-dividend date is set by FINRA and is typically two business days before the record date.
  57. What does forward pricing mean in regards to mutual funds?
    Mutual funds must calculate the net asset value (NAV) of fund shares at least once per business day. While this calculation usually takes place at the close of the business day it can occur at any time during the business day as well. Purchases occur at the NAV plus a sales charge and sales generally occur at the NAV. At the time an order is placed to either buy or sell shares an investor will not know the price they will receive for the transaction until the next calculated NAV. This is what is referred to as forward pricing.
  58. How does the AIR determine the relative size of the monthly payment in an annuitized account?
    In any given month, if the separate account's performance is higher than the AIR, next month's payment will be higher than this month's. If it is lower than the AIR, next month's payment will be lower than this month's. If it is the same as the AIR, next month's payment will be the same as this month's.
  59. How does the taxation of an annuity work once it is annuitized?
    Contributions to an individual annuity are typically done with after-tax dollars, meaning taxes have already been taken out. These after-tax dollars are considered the investor's cost basis and will not be taxed again upon distribution. The earnings, however, have grown tax-deferred and will be taxable upon distribution. After the contract is annuitized, each payment is considered part cost base (untaxable), and part return (taxable as ordinary income). The relative percentage, called the exclusion ratio, is determined by an IRS formula and is the percentage of the distribution that is not taxable to the annuitant.
  60. What are the basic concepts I need to understand regarding the buyer of call option contracts?
    There are two parties involved with option contracts, a buyer and a seller. For a call option, the buyer (also known as the holder, owner, or being long the option – as in a long call) pays a premium and has the right to buy the underlying security at the strike/exercise price that has been set in the option contract. Buyers of call options have the rights in regards to their call option, and have three choices available to them. They can exercise the option contract, sell it to another investor, or let it expire. Call buyers are hoping that the market price of the underlying security will rise, thus enabling them to exercise their call option and purchase the security at the lower strike price stated in the option contract.
  61. Are ADRs (American Depositary Receipts) US securities or foreign securities?
    ADRs are US securities used to facilitate investing in foreign stocks. Like all US securities they trade in US markets.
  62. The study materials state that many (but not all) ADRs allow holders the right to vote. Would you please clarify, and can you give me any advice on how I should answer this question if it appears on my exam?
    Just as the study material states, many ADRs, but not all ADRs, have voting rights. Holders of ADRs do not have voting rights, however, unless the issuer of the ADR has stipulated that the voting rights associated with the shares held in escrow by the issuer of the ADR will be passed on to the holder. For test questions you do not want to assume that the particular ADR in question has voting rights unless the question specifically tells you they do. With that in mind, on test day we recommend you approach these types of questions with the understanding that an ADR holder has no voting rights unless it is specifically stated that they do regarding the particular ADR in question.
  63. How can someone who invests in an ADR have a foreign currency risk when from their standpoint everything is done in U.S. dollars?
    You are correct in stating that from the U.S. investor’s standpoint that everything is done in U.S. dollars. This is done to facilitate Americans trading in foreign equity securities. It is important to remember, however, that the stock represented by the ADR is originally traded in the foreign currency, and that dividends are initially paid by the foreign company in their currency. This is then exchanged into U.S. dollars before being passed on to the ADR holder, which means that the exchange rate at that time will definitely have an effect on how many U.S. dollars this foreign currency amount converts to. Because of this fact, ADR holders have not only the normal business risks that are characteristic of owning stock; they also have currency risk as well.
  64. For retirement accounts is there a difference between "rollovers" and "transfers"?
    Yes. With a rollover the account owner takes possession of the assets when moving them from one qualified account to another. This may only be done once per year and must be completed within 60 calendar days. Transfers allow assets to move directly from one qualified plan custodian to another without the account owner taking possession of the assets. There is no limit to the number of times per year a transfer can occur.
  65. What is a short sale?
    A short sale is the sale of a security the investor does not own. The investor initially borrows stock from a broker/dealer and then sells it at the market price. With a short sale the investor is hoping for a decline in the stock’s price so they can then purchase the stock at a lower price (than what they sold it for) and replace the borrowed shares to close their position. Keep in mind, however, that if the stock price increases rather than decline the investor is still obligated to replace the borrowed stock. Since theoretically the price of a stock can rise without limit, the investor in a short sale position has unlimited risk.
  66. What is the difference between a defined contribution plan and a defined benefit plan?
    A defined benefit plan is designed to provide a specific benefit to the participant(s) at some time in the future. In other words, the participant(s) know what the outcome of their retirement plan will be. The amount of benefit is determined by a complicated formula which incorporates various information (including years of service, compensation, and retirement age) and is typically a percentage of the participant’s preretirement compensation. Making sure that specific benefit is there for the participant at that future date is the responsibility of the plan sponsor, meaning the plan sponsor assumes the investment risk. Due to the calculations and procedures involved, defined benefit plans could benefit the more senior and highly compensated employees.With defined contribution plans the participant(s) know what is being contributed to the plan. In other words, the participant(s) know what their input is. These plans also involve the use of a formula, in this case a contribution formula which typically involves a percentage of the participant’s income and could include matching on the part of the plan sponsor up to a certain percentage of the participant’s contribution. These contributions then accumulate until a future date, typically retirement, when the funds will be withdrawn. With these plans the participant does not know what their actual benefit will be and the participant does assume the investment risk. The actual benefit amount will depend upon the amount that has been contributed and the account performance. Defined contribution plans could benefit the younger employees due to the longer time involved that they would have to contribute to the plan.
  67. In order for a customer’s account to be considered discretionary, which and how many decisions must the agent actually be making on behalf of the customer?
    Any decisions made on behalf of the customer regarding the asset (the security), the action (buy or sell), and/or the amount (number of shares, bonds, etc.) constitute discretion. Although in the typical discretionary account the agent or investment adviser representative will do all three, the rules state that as long as one has the power to make any one of those decisions, or a combination there of, the account is discretionary. In order to exercise discretion in a customer’s account, written authorization must be received from the client. Time and price are not considered discretionary.
  68. Which types of communication with the public must be approved by a principal before its first use and which types are to be approved in a timely fashion?
    Advertising, sales literature, communications sent to 25 or more prospective retail customers within a 30 calendar day period, and communications sent to 25 or more current retail customers within a 30 calendar day period that contain investment recommendations or which promote the services of the broker/dealer firm must all be approved by a principal before it is used. Other correspondence (other than that already covered above) to customers and communications sent to fewer than 25 prospective retail customers within a 30 calendar day period are to be approved by a principal in a timely fashion after its use.
  69. What is the difference between a form letter and correspondence?
    A form letter is an email or letter sent to 25 or more prospective retail clients within a 30 calendar day period. Form letters are considered to be sales literature and must be approved by a principal before its use. Correspondence is a letter or email sent to one or more existing retail customers and fewer than 25 prospective retail customers within a 30 calendar day period. Correspondence is to be approved by a principal in a timely fashion after its use.
  70. What is the difference between UGMA and UTMA?
    These are custodial accounts. With UGMA (Uniform Gift to Minors Act) the assets are managed by a custodian until the minor reaches legal age of majority in the state that the account is titled. With UTMA (Uniform Transfer to Minors Act) when the minor reaches legal age of majority the custodian can withhold transfer of the assets to the new adult up to a certain specified age (25 in most states, 21 in some states).
  71. Any bond below a BB/Ba rating is considered?
    Speculative (non-investment grade) bond
  72. Any bond rated BBB/Baa or higher is?
    Bank grade (investment-grade) bond
  73. The terms used interchangeable that refer to how quickly a security can be converted into cash
    liquidity and marketability
  74. The schedule of interest and principal payments due on a bond issue
    Debt service
  75. When a bond's principal is repaid, the bond is?
    redeemed or redemption
  76. To facilitate the retirement of its bonds
    Sinking fund
  77. An issuer that calls a bond before its maturity date usually pays bondholders a premium, a price higher than par
    Call premium
  78. Bonds are called when general interest rates are lower than they were when the bonds were issued. During a 5 to 10 year period there is a safety measure in place called ________ that prevents an issuer from calling the bond early.
    Call protection
  79. a practice of raising money to call a bond
    Refunding bonds
  80. What expresses the cash interest payments in relation to the bond's value?
    Bond yield
  81. What measures a bond's annual interest relative to market price (annual dividend divided by market price)
    Current Yield
  82. What reflects the annualized return of the bond if held to maturity?
    Yield to maturity
  83. The highest degree of safety is in securities backed by the full faith and credit of the US government that include:
    • - US treasury bills, notes, and bonds, and Series EE, HH, and I Bonds
    • - New housing Authority bonds (NHAs)
    • - Securities of the GNMA
  84. The second highest degree of safety is in securities issued by government sponsored corporations, but not backed by US government include:
    • - Federal Farm Credit Bank (FFCB)
    • - Federal Home Loan Mortgage Corporation (Freddie Mac)
    • - FNMA or Fannie Mae
  85. what are securities issued by municipalities, backed by the taxing power of the issuer, from the facility financed by the bond issued?
    General obligation bonds (GOs)
  86. What would the proper ranking be for corporate debt securities from safety to risky:
    • - Secured bonds
    • - Debentures
    • - Subordinated debentures
    • - Income bonds
  87. __________ _____ securities are classified as bills, notes, and bonds to distinguish an issue's term to maturity
    Treasury debt
  88. Bonds issued by the government that are short term obligations and sell below par for a discount rate. dominations of $1,000 to $1M and deal in weeks and they do not provide semiannual interest payments?
    T-Bills
  89. Pays interest every six months, is an intermediate-term bond maturing 2 to 10 years. They deal in 1/32 and sell at par
    T-Notes
  90. These are long-term government bonds that pay interest every six months. Denominations in $1000 to $1M and are for 10 years or more. sells at par
    T-Bonds
  91. Broker/Dealer buy Treasury securities, place them in trust at a bank and sell separate receipts against the principal and coupon payment They are not backed by full faith and credit of US government and sell at discount?
    Treasury receipts
  92. What are backed by the full faith of US government and the Treasury designates certain Treasury issues as suitable for stripping
    STRIPS
  93. What non-marketable government bonds are bought at a discount and can be redeemed for the face value at maturity. Issued at 50% of face value in dominations of $50 and $10,000
    EE Bonds
  94. What non-marketable government bond pays semiannual interest, come in denominations of $500 to $10,000, and mature in 10 years?
    HH Bonds
  95. What non-marketable government bonds help protect a US government security holder from inflation. also interest accrues monthly and compounds semiannually. Help protect agains inflation?
    I Bonds
  96. What certain federal governments may also issue debt securities to finance their public sector operations and they tend to have higher yields than direct obligations of the federal government but lower yield then corporate debt. May be exempt from state and local taxes but not federal?
    Agency Issued Bonds
  97. GNMAs?
    • - only agency security backed in full by the US government
    • - issues pass-through certificates
    • - investors receive interest and principal on a monthly basis
    • - yields are slightly higher than on Treasury
    • - subjected to interest rate and prepayment risk
  98. Freddie Mac?
    is a public corporation whose stock trades on the NYSE and was created to promote the development of a nationwide secondary market
  99. Fannie Mae?
    is a publicly held corporation that provides mortgage capital
  100. CMOs?
    • - Mortgage backed securities that pool a large number of mortgages, usually on single family residences
    • - pools of mortgage structures into maturity classes called tranches
    • - issued by private sector financing corporations and government-sponsored corporations
    • - Yield is higher then Treasury and interest/principle paid monthly
    • - interest is subject to federal, state, and local taxes
  101. What security best suits an investor in a high tax bracket from those in a lower tax bracket?
    Municipal Bonds
  102. What bonds would be used to raise funds for municipal capital improvements that benefit the entire community-public schools or courthouse?
    GOs bond
  103. What taxes are collected when GOs are issued at the state level?
    • - income taxes
    • - license fees
    • - sales taxes
  104. What taxes are collected when GOs are issued at the town, city, or county level?
    • - property taxes
    • - license fees
    • - fines
    • - other sources of funds to the municipality
  105. Revenue Bonds
    used to finance any municipal facility that generates enough income to support its operations and debt services

    note: debt service payments do not come from general or real estate taxes and are not backed by the full faith and credit of the municipality.
  106. What says that issue conforms with applicable laws, the state constitution, and is tax free at the federal level?
    Legal opinion
  107. Corporate bonds
    are issued to raise working capital or capital for expenditures such as plant construction and equipment purchases
  108. What are the two primary types of corporate bonds?
    Secure and unsecure
  109. When is a bond labeled secure?
    • when the issuer has identified specific assets as collateral for interest and principal payments
    • - Mortgage bonds have real property
    • - collateral trust bonds own securities of other companies
    • - equipment trust certificates such as railroad, airlines, trucking companies
  110. What are bonds that have no specific collateral backing and are classified as either debentures or sub-debentures?
    Unsecured bonds
  111. What bonds are backed by a company other than the issuer, such as a parent company?
    Guaranteed bonds
  112. What bonds are used when a company is reorganizing and coming out of bankruptcy and not suitable investments for customers seeking income?
    Income bonds or adjustment bonds
  113. Zero-coupon bonds
    • - a security that has no reinvestment risk because no semiannual interest payment
    • - only way to lock in a return

    notes: even though zeros pay no regular interest income, an investor will still owe income tax each year on the amount by which the bond have accreted.
  114. Convertible Bonds
    are corporate bonds that may be exchanged for a fixed number of shares of the issuing company's common stock
  115. Duration
    is often used to assess the volatility of a bond in response to interest rate changes - the longer the duration, the greater the volatility, and thus the risk
  116. Money market funds
    - are short-term, liquid debt obligations
  117. Money Market Instruments
    provide businesses, financial institutions, and governments a means to finance their short-term cash requirements
  118. Money market securities issued by the US government and its agencies include:
    • - T-bills that trade in secondary markets
    • - Treasury and agency securities with remaining maturities of less than a year
    • - Short-term discount notes issued by various smaller agencies
  119. Corporations and banks have a number of ways to raise short-term funds in the money market such as:
    • - Banker's acceptance (BA)
    • - Commercial paper (prime paper)
    • - negotiable certificates of deposit
    • - federal funds loans
    • - Loans to broker/dealers
  120. Banker's acceptance (BA)
    • - Time draft or letter of credit for foreign trade
    • - Maximum maturity of 270 days
  121. Commercial Paper
    • - Issued by corporations
    • - Unsecured promissory note
    • - Maximum maturity of 270 days
  122. Negotiable CDs
    • - Issued by banks
    • - Minimum face value of $100,000
    • - Mature in one year or less
    • - Unsecured
    • - Interest bearing
  123. What is the study of supply and demand?
    Economics
  124. GDP
    • Our nations annual economic output, all of the goods and services produced within it.
    • - personal consumption
    • - government spending
    • - gross private investment
    • - foreign investment
    • - total value of exports
  125. Price leveling
    - Economist adjust GDP figures to constant dollars rather than compare actual dollars
  126. CPI
    Measures the rate of increase or decrease in a range of consumer prices (e.g., food, housing, transportation, medical care, clothing, electricity, entertainment, and services).

    Note: most commonly used tool to measure rate of inflation.
  127. Inflation
    continual increase in prices at the consumer level.

    notes: increased inflation drives up interest rates of fixed-income securities, which drives down bond prices. Decrease in the inflation rate have the opposite effect: inflation declines, bond yields decline and prices rise

    • example:
    • - IF inflation increases AND interest rates go up THEN bond prices go down THUS bond yields go up
    • - IF inflation decreases AND interest rates go down THEN bond prices go up THUS bond yields go down
  128. Deflation
    is a decline in prices and usually takes place during a severe recession when unemployment is on the rise
  129. Business cycle
    periods of economic expansion are historically followed by periods of economic contraction in a pattern
  130. Business cycles go through four stages
    • - Expansion
    • - Peak
    • - Contraction (decline)
    • - Trough
  131. Business cycle expansion is
    an increased business activity - increasing sales, manufacturing, and wages
  132. Business cycle peak is
    business will grow and reach its upper limit
  133. Business cycle contracting is
    when business activity begins to decline from peak
  134. What is a recession?
    Occurs when the GDP declines for six consecutive months (two quarters)
  135. Business cycle trough is
    When business activity stops declining and levels off
  136. What is a depression?
    When a decline in real output of goods and services (GDP) last for six consecutive quarters.
  137. Federal Reserve Board (FRB)
    conducts monetary policy by influencing the money supply, which in turn affects interest rates and the economy
  138. FRB uses 3 Monetary Policy tools to help affects the money supply
    • - Changes in reserve requirements
    • - Changes in the discount rate (on loans to members banks)
    • - Open-market operations (buying and selling Treasury securities)
  139. Reserve requirements?
    Commercial banks must deposit a certain percentage of their depositors money with the Federal Reserve
  140. Multiplier effect?
    A small change in the reserve requirement may have an exaggerated result in terms of the money supply
  141. Federal Funds Rate?
    The interest rate that banks charge each other for such loans
  142. Discount Rate?
    The interest rate the Fed charges its members for short-term loans

    note: Lowering the discount rate reduces the cost of money to banks, which increases the demand for loans. Raising the discount rate increases the cost of money and reduces the demand for loans.
  143. Federal Open Market Committee (FOMC)?
    was created to direct the FRB's pen market operations

    notes: When the Fed wants to expand (or loosen) the money supply, it buys securities from banks. When the Fed wants to contract (tighten) the money supply, it sells securities to banks.
  144. Fiscal policy refers to legislative decisions of Congress and the President which include:
    • - Federal spending
    • - Money raised through taxation
    • - Federal budget deficits or surpluses
  145. Through fiscal policies, increasing or decreasing taxes, and spending, the government can:
    • - Reduce the rate of inflation by reducing aggregate demand for goods and services if price levels are excessive
    • - Increase the rate of inflation by increasing aggregate demand if low inflation is causing unemployment and economic stagnation

    note: If the FRB eases interest rates, the money supply increases, making credit easier to obtain and increasing overall liquidity. Fiscal policy is considered an inefficient way to solve short-term economic problems
  146. Prime Rate?
    Base rate on corporate loans at large US money center commercial banks
  147. Broker call loan rate?
    Charge on loans to broker/delers with stock as collateral
  148. Balance of Payments?
    The flow of money between the US and other countries
  149. Currency Exchange Rate?
    If the US dollar strengthens in value from 1.3 Swiss francs to 1.4, then goods priced in the Swiss francs will look cheaper to a US importer of Swiss goods. Exporters, on the other hand, profit if their own currency becomes weaker. If the US dollar weakens in value from 1.3 Swiss francs to 1.2, then goods priced in the US dollars look less expensive to Swiss buyer and a US exporter will be able to sell more.
  150. Investment company?
    Is a corporation or trust that pools investors money and then invests that money in securities on their behalf. Like corporate issuers, investment companies raise capital by selling shares to the public
  151. What are the three types of investment companies?
    • - Face-amount certificate (FAC)
    • - Unit investment trust
    • - Management investment companies
  152. Face-amunt certificate (FAC)?
    Is a contract between an investor and an issuer in which the issuer guarantees payment of a stated (face amount) sum to the investor at some se date in the future
  153. What are face-amount certificate companies?
    • - are classified as investment companies
    • - pay a fixed rate of return
    • - do not trade in the secondary market but are redeemed by the issuer
  154. Unit investment trust?
    Is an investment company organized under a trust indenture

    note: The advantage to the investor is that they own a diversified interest but do not pay a management fee
  155. What do Unit investment trusts not do?
    • - They do not have BOD (they have trusts)
    • - They do not employ investment advisors
    • - They do not actively manage their own portfolios
    • - UIT are investment companies as defined under the Investment company act of 1940
  156. Fixed UIT
    purchases a portfolio of bonds and terminates when the bonds in the portfolio mature.
  157. Nonfixed UIT
    Purchases shares of an underlying mutual fund
  158. Management investment company?
    They actively manages a securities portfolio to achieve a stated investment objective.

    note: two types of management investment companies - open-end and close-end
  159. Close-end management companies?
    • - Capitalization fixed; single offering of shares
    • - Issues common and preferred stock and debt securities
    • - Share traded full only
    • - Offerings and trading initial primary offering; secondary trading OTC or on an exchange; does not redeem shares
    • - Pricing CMV + commission; price determined by supply and demand
    • - Shareholders rights dividends (when declared); does not redeem shares
    • - Ex Date SEt by SRO

    note: Bid price (price at which the investor can sell) and the ask price (price at which the investor can buy.
  160. Open-End management companies?
    • - Unlimited; continuous offering of shares
    • - Issues common stock only; no debt securities; permitted to borrow
    • - Share traded fractional
    • - Offerings and trading sold and redeemed by the fund only; continuous primary offering; must redeem shares
    • - Pricing selling price determined by formula in the prospectus
    • - Shareholders rights dividends (when declared); voting
    • - Ex Date set by BOD
  161. Diversified investment company?
    Under the Investment Company Act of 1940 one must meet the requirements of the 75-5-10 test
  162. What is the 75-5-10 test?
    • - At least 75% of the funds total assets must be invested in securities issued by companies other than the investment company itself or its affiliates
    • - The 75% must be invested in such a way
    • - no more than 5% of the funds total assets are invested in the securities of any one issuer
    • - The fund may not own more than 10% of the outstanding voting securities of any one issuer

    note: there are no conditions attached to the remaining 25%
  163. Specialized funds?
    Some investment companies choose to concentrate their assets in an industry or a geographic area, such as health care stocks, technology stocks
  164. Hedge Funds?
    do not currently have to register with the SEC, and it requires that its buyers be accredited investors

    note: Hedge funds are indirectly available to ordinary investors through mutual funds called funds of hedge funds
  165. Exchange-traded funds (ETF)?
    Similar to an index mutual fund. The difference is that the ETF trades like a stock on the floor of an exchange and, in this way, is similar to a closed-end investment company. Can be purchased on margin and sold short.

    note: Expenses fee is quite low
  166. REIT?
    Real estate investment trust is a company that manages a portfolio of real estate investments to earn profits for shareholders. Shareholders receive dividends from investment income or capital gains distributions.
  167. REIT can avoid being taxed as a corporation by:
    The guidelines of Subchapter M of the Internal Revenue Code, by receiving 75% or more of its income from real estate and distributing 90% or more of its taxable income to its shareholders
  168. A company must register with the SEC as an investment company if:
    • - The company is in the business of investing in, reinvesting in, owning, holding, or trading securities
    • - 40% or more of the companies assets are invested in securities (government securities and securities of majority-owned subsidiaries are not used in calculating the 40% requirement)
  169. An investment company may not issue securities to the public unless it has:
    • - Net assets of at least $100,000
    • - A clearly defined investment objective
    • - A registration statement, which includes the prospectus, must be filed with the SEC before securities may be sold to the public
  170. Three important points regarding the investment company prospectus are:
    • - Mutual funds must always be sold with a prospectus because they are continuous primary offerings. New securities must always be sold with a prospectus
    • - Closed-end funds must be sold with a prospectus in their IPO only. When they are trading in the secondary market, closed-end funds need not be sold with a prospectus
    • - Financial information in a prospectus in use for more than nine months may be no more than 16 months old. The Securities Act of 1933 requires that information disclosed to an investor is reasonably current.
  171. Margin?
    Is the use of money borrowed from a bank through a brokerage firm to purchase securities.

    note: SEC rules prohibit the purchase of mutual fund shares on margin.
  172. The Investment Company Act of 1940 requires open-end companies to:
    • - Issue no more than one class of security
    • - Maintain a minimum asset-to-debt ratio of 300%

    note: asset-to-debt ratio, the answer to the question is 3:1 or 300%. but, if you are asked about the debt-to-asset ratio, the correct answer would be 1:3 or 33 1/3%
  173. The registration of shares takes place under who?
    The Securities Act 1933
  174. There are two parts to the registration statement?
    • - The prospectus that must be furnished to every person to whom the company offers the securities
    • - The document containing information that need not be furnished to every purchaser but must be made available for the public inspections.
  175. The SEC prohibits a mutual fund from engaging in the following activities unless the fund meets stringent disclosure and financial requirements:
    • - Purchasing securities on margin
    • - Selling securities short
    • - Participating in joint investment or trading accounts
    • - Acting as distributor of its own securities (except through underwriter)
    • - Selling uncovered options
  176. Shareholder right to vote?
    One shareholder holding 51% of all the shares outstanding can determine a vote's outcome

    note: not a majority vote of shareholders
  177. Annuity?
    Is an insurance product designed to provide retirement income. The term annuity refers to a stream of payments guaranteed for some period of time - for the life of the annuitant, until the annuitant reaches a certain age, or a specific number of years
  178. What happens if you withdrawal from annuity prior to age 59 1/2?
    It will result in a 10% penalty in addition to full income tax on anything over cost basis
  179. Fixed Annuity?
    Investors pay premiums to the insurance company that are invested in the company's general account

    note: this product is not a security
  180. Equity Indexed Annuities?
    Are currently popular among investors seeking market participation but with a guarantee against loss

    note: If the index does well, the annuitant is credited with a specified percentage of the growth of the index - typically 80% or 90% of the growth. This is known as the participation rate. If the index does poorly the annuitant may receive the EIA's minimum guaranteed return - typically 3% or 4%. There is a cap and they have longer surrender charge
  181. Variable Annuities?
    Keeps pace with inflation and the investor assumes the investment risk rather than the insurance company. Agent must be licensed for both security and insurance
  182. Combination Annuity?
    To have the advantage of both the fixed and variable annuities. The investor contributes to both the general and separate accounts, which provides for guaranteed payments as well as inflation protection
  183. what are the key features to a Mutual Fund?
    • Pricing - NAV calculated once per business day
    • Share value - Depends on performance of fund
    • Regulated by - Act of 1933, Act of 1934, investment company Act of 1940, Investment Advisers Act of 1940
    • Fees paid to - Portfolio manager
  184. what are the key features to a Variable Annuity?
    • Pricing - Unit value calculated once per business day
    • Share value - Depends on performance of separate account
    • Regulated by - Act of 1933, Act of 1934, investment company Act of 1940, Investment Advisers Act of 1940
    • Fees paid to - Separate account manager
  185. Bonus Annuities?
    Insurance company contributing an additional 3 -5% to the premium payment. Bonus Annuities also allow withdrawal of 10-15% of premiums, or all of earnings, whichever is greater, without a penalty from the insurance company (though there may be the federal 10% penalty and income tax to be paid)
  186. Sales Charge on Annuities?
    Most annuities, both fixed and variable, are sold with little or no sales charge. Instead there is a surrender charge for early termination

    note: surrender period is longer for bonus annuities and generally the longest for index annuities
  187. Annuity accumulation phase?
    This is known as the annuities growth phase
  188. Annuity phase?
    This would be the annuity payout phase
  189. What are the differences between the Accumulation units and the annuity units?
    Accumulation unit values are computed daily on a forward pricing basis. The annuity unit values are computed monthly based on actual performance versus the assumed interest rate (AIR)
  190. AIR?
    Assumed interest rate is a conservative projection of the performance of the separate account over the estimated life of the contract

    note: AIR only applies if the investor annuitizes
  191. To determine whether the monthly payment will increase, decrease or stay the same as the previous month, the following rules apply:
    • - If separate account performance is greater than the AIR, next months payment is more than this months
    • - If separate account performance is equal to the AIR, next months payment stays the same as this months
    • - If separate account performance is less than the AIR, Next months payment is less than this months
  192. What happens if an annuitant wishes to surrender early?
    His cost base is the total amount he has invested. He will be liable for income tax on the growth plus a 10% penalty on the growth if he is under the age of 59 1/2
  193. What are the payout options when an annuitant wishes to receive scheduled payments for life:
    • - Life annuity (also known as straight life or life only)
    • - Life annuity with period certain
    • - Joint life with last survivor annuity
    • - Unit refund option
  194. Life Annuity/Straight Life?
    The insurance company will pay the annuitant for life. When the annuitant dies, there are no continuing payments to a beneficiary. Money remaining in the account reverts to the insurer.
  195. Life Annuity with period certain?
    The annuitant is guaranteed monthly income for life with this option, but if death occurs within the period certain, a named beneficiary receives payments for the remainder of the period.
  196. Unit Refund Option?
    If value remains in the account after the death of the annuitant, it is payable in a lump sum to the annuitants beneficiary.
  197. Whole Life Insurance (WLI)?
    Also known as permanent or cash value insurance and provides protection for the whole of life
  198. Cash value?
    Unlike term insurance, which provides only a death benefit, whole life insurance combines a death benefit with an accumulation, or a savings element referred to as cash value

    note: insurer invest reserves in conservative investments (bonds, real estate, mortgage loans)
  199. Variable life insurance?
    The purpose is to let the customer assume some investment risk in an attempt to get inflation protection for his death benefit. Contains both a general account and a separate account.
  200. Minimum guaranteed death benefit?
    Variable life policies provide policy owners on investment results but may never fall below a certain amount and is invested in the general account

    note: The death benefit will never be less than the minimum guaranteed, even if the separate account performs poorly.
  201. Scheduled-premium (or fixed -premium) VLI contract?
    Is issued with a minimum guaranteed death benefit

    note: The premium is calculated according to the policy owners age and sex and the policy face amount at issue
  202. Universal variable life insurance (UVL)?
    Is a type of variable life insurance with flexible premiums (and thus flexible death benefit.
  203. What are the characteristics of Whole Life?
    • - Scheduled premium
    • - Fixed death benefit
    • - Premiums to general account
    • - Guaranteed cash value
  204. What are the characteristics of Variable Life (VLI)?
    • - Scheduled premium
    • - Minimum guaranteed plus variable death benefit
    • - Premiums to general and separate account
    • - No guaranteed cash value
  205. What are the characteristics of Universal Variable Life (UVL)?
    • - Flexible premium
    • - Variable death benefit
    • - Premiums to separate account
    • - No guaranteed cash value
  206. What are the deductions from the gross premium in a Life policy?
    • - The administrative fee
    • - The sales load
    • - The state premium taxes

    note: The allowable sales load on variable life insurance is the equivalent of an average of 9% of premium per year, computed over a 20-year period. The sales charge may be front-end loaded to 50% of the first years premium, but must average out to 9% over 20-years.
  207. What are the deductions for the separate account in a Life policy?
    • - Mortality risk fee (cost of insurance)
    • - expense risk fee
    • - investment management fee

    note: mortality risk fee covers the risk that the policy owner may live for a period other than that assumed
  208. S-A-S?
    The quick way of remembering the charges deducted from the gross premium
  209. What are the two parts that the death benefit is payable under for a variable life insurance policy?
    • - a Guaranteed minimum provided by the portion of funds invested in the general account
    • - a variable death benefit provided by those invested in the separate account

    note: The variable death benefit is typically adjusted annually, while the cash value is computed monthly. Should the separate account returns be less than the AIR, the contracts death benefit may decrease; however, it may never fall below the amount guaranteed at issue
  210. What are the certain calculations associated with variable life insurance and how often must they be calculated?
    • - Death benefits are calculated annually
    • - Cash value is calculated monthly
    • - Unit values are calculated daily
  211. What are the rules for the death benefits with variable life policy's?
    • - If the separate account performance for the year is greater than the AIR, the death benefit will increase
    • - if the separate account performance for the year is equal to the AIR, the death benefit will stay the same
    • - If the separate account performance for the year is less than the AIR, the death benefit will decrease

    note: The AIR has no effect on cash value accumulation in a variable life policy.
  212. What are important facts to know about life policy loans?
    • - 75% of the cash value must be available for poliy loan after three year
    • - The insurer is never required to loan 100% of the cash value. Full cash value is obtained by surrendering the policy to the insurer
    • - If, due to poor separate account performance, the loan exceeds the policy cash value, the policy owner must make payment to the insurer within 31 days
    • - If the insured dies with a loan outstanding, the death benefit is reduced by the amount of the loan
    • - If the insured surrenders his contract with a loan outstanding, cash value is reduced by the amount of the loan.
  213. What are the two facts about the contract exchange provision?
    • - The contract exchange provision must be available for a minimum of two years
    • - No medical underwriting (evidence of insurability) is required for the exchange

    note: The new WLI policy has the same contract date and death benefit as the minimum guaranteed in the VLI contract. The premiums equal the amounts guaranteed in the new WLI contract (as if it were the original contract)
  214. What are facts about sales charges and refunds when it comes to variable life policy's?
    • - Because variable life is considered a contractual plan, the maximum sales charge over the like of the contract is 9%
    • - A policy owner who wants a refund within 45 days receives all money paid
    • - Refund provisions are for two years
    • - For the first year, the refund is sales charges in excess of 30% of the premiums paid plus the cash value
    • - For the second year, the refund is sales charges in excess of 10% of the premium paid plus the cash value
    • - Thereafter, the policy owner has access to the cash value only
  215. What are the voting rights for variable life policy's?
    Contract holders receive one vote per $100 of cash value funded by the separate account. Contract holders must be given the right to vote on matters concerning separate account personnel at the first meeting of contract holders within one year of beginning operations.

    note: Do not confuse the voting rights of variable annuities and variable life. Variable annuities and mutual funs are the same: one vote per unit (share). Variable life is one vote per $100 of cash value
  216. What is Life insurance settlement?
    Upon the death of the insured, the beneficiary(s) generally have several choices as to how they would like to receive the proceeds
  217. What are the life insurance settlement options?
    • - Lump sum
    • - Second to Die
    • - Annuity
  218. What is the lump sum life insurance settlement option?
    The proceeds are paid out as one lump sum
  219. What is the second to die life insurance settlement options?
    The policy pays upon the death of the second of two insured people.

    note: technically this is not a settlement option; it is a form of policy
  220. What is the annuity life insurance settlement option?
    The beneficiary may opt to either place the proceeds into a deferred annuity or take an immediate annuity

    note: the beneficiary my choose interest only by leaving the principal with the insurance company and receives a monthly check based on interest earned in the account
  221. What is the marginal income tax bracket for mutual funds?
    The tax bracket is defined as the percent tax due on the next dollar the individual will receive
  222. What would capital gains tax be?
    Receipts from selling securities for a more than was originally paid for it falls under the capital gains tax.
  223. Where do mutual fund dividend distributions paid from and how often?
    The dividend distributions are paid from net investment income and are paid on a quarterly basis
  224. Net investment income?
    Includes gross investment income- dividend and interest income from securities held in the portfolio - minus operating expenses

    net investment income = dividends + interest - expenses of the fund (D+I-E=)

    note: dividends from net investment income are taxed as ordinary income to the shareholder. Maximum income tax rate is 15%. A short-term gain is identified distributed, and taxed as a dividend distribution, not qualifying for the 15% tax rate
  225. How does a corporation avoid taxation under subchapter M by using the conduit theory?
    A fund must distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed amount
  226. What would a mutual fund ordinary income referring to?
    Ordinary income is income that is received from dividends from stock and interest from bonds
  227. What is the 1099 form?
    Is sent to shareholders after the close of the year, details tax information related to distributions for the year. This enables the investor to enter the proper information on the investors form 1040

    note: Dividends must be reported as ordinary income; long-term capital gains distributions must be reported on the investor's capital gains schedule
  228. How do you calculate current yield for mutual funds?
    Divide annual dividend paid from net investment income by the current offering price

    Annual dividend divided by POP

    note: Mutual fund yield is found exactly like the current yield on common stock. Never include capital gains in the calculation of current yield
  229. What would the total return in a mutual fund be?
    If dividends and capital gains distributions were reinvested
  230. Ex-dividend date for mutual funds?
    The day after the record date

    note: the ex-date and ex-dividend date are interchangeable for mutual funds and would be determined by the BOD; however, is the next business day after the record date
  231. What is selling dividends?
    A registered representative encourages an investor to purchase funds shares before a distribution because of this tax liability and would be a violation under FINRA

    note: Not only are investors subject to taxation, they have also experienced an immediate depreciation in the value of their shares.
  232. What is mutual fund cost basis?
    Is the amount of money invested on which taxes have been paid. Upon liquidation, cost base represents a return of capital and is not taxed again.

    note: To find the cost basis of mutual fund shares, add the price paid and all reinvested distributions.
  233. What is the formula for valuing fund shares?
    Total value of funds shares - cost base = taxable gain or loss
  234. What are the three accounting methods used for mutual funds?
    • - FIFO
    • - Share identification
    • - Average basis
  235. What is the FIFO accounting method in a mutual fund?
    When shares are sold, the cost of the shares held the longest is used to calculate the gain or loss

    note: If the investor fails to choose the accounting method, the IRS assumes the investor liquidates shares on a FIFO basis
  236. What is the Share Identification accounting method in a mutual fund?
    The investor keeps track of the cost of each share purchased and used this information when deciding which shares to liquidate. He then liquidates the shares that provide the desired tax benefit.
  237. What is the Average Cost Basis accounting method in a mutual fund?
    The shareholder calculates average basis by dividing the total cost of all shares owned by the total number of shares.
  238. What other mutual fund Tax Considerations are there?
    • - If an investor neglects or fails to include their tax ID number (social security number) when purchasing mutual funds shares, the fund must withhold 28% of the distributions to the investor as a withholding tax.
    • - Corporations that invest in other companies stock may deduct 70% of dividends received from taxable income
  239. What are the summarized key points for mutual fund dividend and capital gains taxes?
    • - Funds that comply with subchapter M (conduit theory) are known as regulated investment companies
    • - Mutual fund yield is calculated by dividing the annual dividend by the POP. Capital gains distributions are not included
    • - If asked the ex-date of a mutual fund, the best answer is as determined by the BOD; otherwise, choose the business day after the record date
    • - Dividends and capital gains are taxable whether reinvested or taken in cash
    • - An investor's cost basis in mutual fund shares is what was paid to buy the share plus reinvested dividends and capital gains distributions
    • - The IRS always assigns FIFO for share liquidation unless the investor chooses a different method
    • - $3,000 of net capital loss may be used as deduction against ordinary income each tax year. Unused capital loss may be carried forward indefinitely.
    • - There is no tax exclusion available on dividends paid to individuals but corporations may exclude 70% of dividends received from taxation.
    • - Although an exchange from one fund to another within the same family is not subject to a sales charge, it is a taxable event. Any gain or loss on the shares sold is reportable at the time of the exchange
    • - When a shareholder dies, this shares are assigned a cost basis equal to the value of the shares on the date of death
  240. What are the two types of Retirement Plans in the US?
    • Qualified plan - allow pretax contributions to be made
    • Non qualified plan - contributions only with after-tax money
  241. What are the major features of a Qualified Retirement Plan?
    • - Contributions currently tax deductible
    • - Plan approved by the IRS
    • - Plan may not discriminate
    • - All withdrawals taxed
    • - Plan is a trust
    • - Strict IRS and labor department reporting and disclosure
    • - Plan must be in writing
    • - Tax on accumulation is deferred
  242. What are the major features of a Non-Qualified Retirement Plan?
    • - Contributions not currently tax deductible
    • - PLan does not need IRS approval
    • - Plan may discriminate
    • - Excess over cost base taxed
    • - Plan is not a trust
    • - Limited reporting and disclosure
    • - PLan must be in writing
    • - Tax on accumulation is deferred
  243. What are the Non-Qualified Retirement Plans?
    • - Deferred compensation
    • - Payroll deduction programs
    • - Section 457 plans

    note: Both plans may be used to favor certain employees (typically executives) and because these plans may be discriminatory plans, the employer may choose to provide benefits to certain employees but exclude others.
  244. Non-Qualified Deferred Compensation Plan?
    Is a contractual agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement. It is assumed that the employee will be in a lower tax bracket at retirement age.

    Note: these plans are not available to company board members because they are not considered employees for retirement planning purposes
  245. Payroll Deduction Plan?
    Allow employees to authorize their employer to deduct a specified amount for retirement savings from their paychecks. The money is deducted after taxes are paid
  246. Section 457 Plans?
    Are non-qualified retirement plans set up by state and local governments and tax-exempt employers for their employees. They function as deferred compensation plans in which earning grow tax deferred and growth and accumulation are taxed only at the time of distribution.

    note: 401(k) plans are considered salary reduction plans, not payroll deducted plans
  247. Why were Individual Retirement Arrangements (IRA) created?
    IRAs were created to encourage people to save for retirement in addition to other retirement plans in which they participate. Anyone who has earned income is allowd to make an annual contribution of up to $5,000 or 100% of earned income, whichever is less.

    notes: Earned income is work from wages, salaries, bonuses, commissions, tips, and alimony. If contribution limit is exceeded, a 6%excess contribution penalty applies to the amount over the allowable portion.
  248. What are the Distribution rules around IRAs?
    Distribution may begin without penalty after age 59 1/2 and must begin by April 1 of the year AFTER the individual turns 70 1/2. Distribution before age 59 1/2 are subject to a 10% penalty as well as regular income tax
  249. What Events are exempt for early IRA distribution?
    • - Death
    • - Disability
    • - Purchase of a principal residence by a first-time homebuyer
    • - Education expenses for the taxpayer, a spouse, child, or grandchild
    • - Medical premiums for unemployed individuals
    • - Medical expenses in excess of defined AGI (Adjusted gross income

    note: If distributions do not begin by April 1 of the year after the individual turns 70 1/2, a 50% insufficient distribution penalty applies
  250. What investments are not permitted for funding IRAs?
    • - Collectables (antiques, gems, rate coins, works of art, stamps
    • - Life insurance contracts
    • - Municipal bonds
  251. What Investment Practices are also considered inappropriate for IRAs?
    • - Short sales of stock
    • - Speculative option strategies
    • - margin account trading
  252. What Investments are appropriate for IRAs?
    • - Stocks and bonds
    • - Mutual funds (other than municipal bond funds)
    • - UIT
    • Government securities
    • - US government-issued gold and silver coins
    • - Annuities
  253. What are Rollovers and Transfers within Retirement accounts?
    Individuals may move their investments from one IRA to another IRA or from a qualified plan to an IRA. Rollovers may take place once in a 12-month period and must be completed within 60 days; 100% of the funds withdrawn must be rolled into the new account or they will be subject to tax and a 10% early withdrawal penalty if applicable. Transfers occur when the account assets are sent directly from one custodian to another, and the account owner never takes possession of the funds. There is no limit on the number of transfers that may be made during a 12 month period.
  254. What are key features in a Roth IRAs?
    • - Maximum contribution of $5,000 per year per individual
    • - $6,000 after age 50
    • - Contributions are not tax deductible
    • - Any "qualified distribution" from a Roth IRA is free from federal income taxes
    • - Distributions are not required to begin at age 70 1/2
    • - No 10% early distribution penalty for death, disability, and first-time home purchase
  255. What are the key features in a Coverdell Education Savings Account (CESAs)?
    • - Contribution limit is $2,000 per year per child under age 18
    • - Contributions may be made by adults other than parents; total for one child is still $2000
    • - Contributions must cease after the child's 18th birthday
    • - Contributions are not tax deductible
    • - Distributions are tax free if taken before age 30 and used for education expenses
    • - Under most circumstances, if the money is not used, the money is distributed to the beneficiary (the child), and earnings are subject to ordinary income tax plus a 10% penalty.
  256. What are the two types of Section 529 Plan?
    • - Prepaid tuition plan: allow donors to lock in current tuition rates by paying now for future education costs.
    • - College savings plan
  257. What are the key features in the 529 plan?
    • - College savings plan may be set up in more than one state, though the allowable contribution amount varies from state to state
    • - There are no income limitations on making contributions to a 529 plan
    • - Contributions may be made in the form of periodic payments, but contributions follow the tax rules for gifts, They are thus limited to $13,000 per year per donor, though the donor may contribute $65,000 in one year (or married couple may contribute $130,000 in one year) but then may make no more contributions for five years.
    • - There are few restrictions on who may be the first beneficiary of a 529 plan. However, if the beneficiary is redesignated, the new beneficiary must be a close family member of the first
    • - The assets in the account remain the property of the donor, even after the beneficiary reaches legal age. However, if the account is not used for higher education, and the IRS concludes that the plan was not established in good faith, it may impose fines and other sanctions
  258. Money-purchase Plan?
    The employer simply contributes a specified fraction of the employee's compensation up to an indexed maximum
  259. Simplified Employee Pension (SEP) Plan?
    Is a qualified plan that offers ease of administration to small-business owners. Employees open IRAs and the employer makes contributions on their behalf.

    note: An employer is allowed to contribute up to 25% of an employee's salary. Any employee that is at least 21 years of age, has worked for the employer for three of the past five years, and has received a minimum level of compensation in the current year.
  260. Savings Incentive Match Plans for Employees (SIMPLEs)?
    Are retirement plans for business with fewer than 100 employees that have no other retirement plan in place. The employee makes pretax contributions into a SIMPLE up to the indexed contribution limit. The employer makes matching contributions, with no upper limit as to the percentage matched, as long as the total contributed does not exceed the indexed dollar limit.
  261. Keogh Plans?
    Are qualified plans intended for self-employed persons and owner-employees of unincorporated business or professional practices who file Schedule C, such as doctors or lawyers. Business must show a profit to qualify
  262. What are the Contribution requirements for Keogh Plans?
    A person may make contributions to a Keogh until age 70 1/2. Employers must make contributions into the plans of their eligible employees in an amount equal to their own post contribution percentage
  263. What eligibility rules must an employee have to qualify for Keogh Plans?
    • - Have worked at least 1000 hrs in the year
    • - Have completed one or more years of continuous employment
    • - Is at least 21 years of age
  264. Self-Employed 401(k) Plan?
    May be set up by a business with no full-time employees - only the owner(s), Spouse(s), and part-time employees. Plans offer higher contribution limits than other plans, greater flexibility as to when and how often contributions will be made, and penalty-free loans from the plan's funding, provided the loan is paid back on time. The business can be a sole proprietorship, a partnership, or a C Corporation, S Corporation, limited liability corporation.
  265. 403(b) Plans and who are they available to?
    • Are a form of Tax-sheltered Annuity (TSA)
    • - Public educational institutions
    • - Private schools
    • - Tax-exempt organizations
    • - Religious organizations

    note: The deferred amount is excluded from the employee's gross income and earnings accumulate tax free until distribution. Students may not participate in a 403(b) because it is only available to employees
  266. There are two categories that a Corporate Retirement Plan fall into and they are?
    • - Defined benefit plan: promises a specific benefit at retirement that is determined by a formula involving typical retirement age, years of service, and compensation level achieved
    • - Defined contribution plan: are easier to administer. The current contribution amount is specified by the plan; however, the benefit that will be paid at retirement is unknown.
  267. Corporate 401(k) Plan?
    Are type of defined contribution plan that allows the employee to elect to contribute a specific percentage of salary to a retirement account. Contributions are excluded from the employee's gross income and accumulate tax deferred
  268. Corporate Roth 401(k) Plans?
    Requires after-tax contributions but allows tax-free withdrawals, provided the plan owner is at least 59 1/2- though unlike a Roth IRA, there are no income limitations on who may have such a plan.
  269. What is the "Required Beginning Date" in corporate retirement plans?
    • A participant must begin to receive distributions from his qualified retirement plan by April 1 of the later of the following year
    • - The first year after the calendar year in which he reaches age 70 1/2
    • - The first year after the calendar year in which he retires from employment with the employer maintaining the plan

    note: If you are still working for that employer and are over 70 1/2 minimum distributions are not required until after you retire.
  270. Employee Retirement Income Security Act (ERISA)?
    • Was established to prevent abuse and misuse of pension funds. ERISA guidelines apply to private sector (corporate) retirement plans and certain union plans - not public plans like those for government workers
    • - set up the guidelines such as 21 years or older and have performed one year of full-time service (1000 hrs) to participate.
    • - Funds must be kept separate from other corporate assets.
    • - Employees are entitled to their entire retirement benefit within a certain number of years of service, even if they leave the company
    • - The plan document must be in writing, and employees must be given annual statements of account and updates of plan benefits
    • - All eligible employees must be treated impartially through a uniformly applied formula.
    • - Beneficiaries must be named to receive an employees benefits at death

    note: ERISA applies to private sector plans (corporate) only.
  271. Ethical Business Practices Rule 8210?
    Member firms and their personnel are required to cooperate in any investigation conducted by FINRA, giving information verbally or in writing or making records available in a timely fashion.
  272. Private Securities Transaction?
    Any sale of securities outside an associated person's regular business and his employing member.

    note: Private Securities Transactions are known as "selling away"
  273. What must an Associated person do first if he/she wishes to enter into a Private Securities Transaction?
    • - Provide prior written notice to his employer
    • - Describe in detail the proposed transaction
    • - Describe in detail his proposed role in the transaction
    • - Disclose if he has or may receive compensation for the transaction
  274. Passive Investment?
    The purchase of a limited partnership unit or mutual fund shares, is not considered an outside employment or business activity.
  275. What activities violate the Fair Dealing Rules?
    • - Recommending any investment unsuitable for the customers financial situation and risk tolerance
    • - Short-term trading of mutual funds
    • - Setting up fictitious accounts to transact business that otherwise would be prohibited
    • - Making unauthorized transactions or use of funds
    • - Recommending purchases that are inconsistent with the customers ability to pay
    • - Committing fraudulent acts, such as forgery or the omission or misstatement of material facts
  276. How many years is the Statue of Limitations and is there a dollar limit under the Securities Exchange Act of 1934?
    • - 3 years from the alleged violation and within one year of its discovery.
    • - No dollar limit is placed on damages in lawsuits based on allegation of manipulation
  277. Churning?
    Excessive trading in a customer's account and is an abuse of fiduciary responsibility
  278. What does the FINRA Rule 3220 state regarding Influencing or Rewarding Employees of other firms?
    States that no member or person associated with a member broker/dealer shall, directly or indirectly, give or permit to be given anything of value, including gratuities, in excess of $100 per individual per year to any principal, employee, or representative of another member firm where the payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity.
  279. What Compensation from Fund Underwriters with following non-cash compensation arrangements are permitted?
    • - gifts that do not exceed annual amount per person currently fixed at $100 and are not preconditioned on achievement of a sales target (pens, calendars are ok)
    • - An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target. Season tickets would not be acceptable.
    • - Payment or reimbursement by fund underwriters in connection with meetings held by the underwriter or by a member for the purpose of training or education of associated person of a member
  280. Selling Dividends?
    Is when a registered representative encourages an investor to purchase shares before a distribution because of this tax liability
  281. Breakpoint sale?
    A customer unknowingly buys investment company shares in an amount just below an amount that would qualify the investment for a reduction in sales charges. As a result, the customer pays a higher dollar amount in sales charges, which reduces the number of shares purchased and increases the cost basis per share
  282. FINRA Rules permit certain lending and borrowing and there are five types of arrangements?
    • - There is an immediate family relationship between the representative and the customer.
    • - The customer is in the business of lending money (e.g. banks)
    • - The customer and the representative are both registered persons with the same firm
    • - The customer and the representative have a personal relationship outside of the broker-customer relationship
    • - The customer and the representative have a business relationship outside of the broker-customer relationship.

    note: other than the first two cases above, before borrowing from or lending to a customer, a representative must advise his firm in writing and receive written permission
  283. What are examples of such Conflicts of Interest within the Ethics rules of FINRA?
    • - Affiliations between an adviser and any product suppliers
    • - Compensation arrangements for advisory services to clients in addition to compensation from such clients fro such services
    • - Charging a client a fee for providing investment advice when the adviser or the advisers employer will receive a commission for executing securities transactions based on that advice
  284. What are the Ethic rules for Sharing in customer accounts?
    An agent may share in an account with a customer if the agent has written consent from both the customer and the employing firm and shares in profit and losses proportionate to his contribution. In this situation, it is permissible to commingle agent and customer funds.

    note: A firm and a customer may never have a joint account.
  285. According to the Ethic rules who may not divulge any personal information about customers without a customer's express permission?
    Broker/dealer and investment advisor
  286. Matching or matched buy-sell orders?
    Transactions intended to portray an artificial market for a stock.
  287. Painting the Tape?
    The practice consists of arranging for a deceptively large volume of trades to generate the illusion that there is more interest in a particular security than there really is.
  288. Capping?
    Consists of selling simply to keep the price below a certain level.
  289. Supporting?
    Consists of buying simply to keep the price above a certain level

    note: This is lawful with new issues if it is done by the underwriter and if it is provided for in the prospectus)
  290. Pegging?
    Is buying and/or selling to keep the price within a certain range
  291. Front Running?
    Is the unethical business practice of a broker/dealer or one of its representatives placing a personal order ahead of a previously received customer order
  292. What are the Criminal Penalties when a person is convicted of willfully violating federal securities regulations, or of knowingly making false or misleading statements in a registration document?
    Fined up to $1 million, sentenced to prison for up to 10 years, or both. The maximum fine is $2.5 million for other than a natural person (broker/dealers or other businesses)
  293. What are the key points on Code of Procedures?
    • - COP handles complaints
    • - COP handles trade practice complaints
  294. What are the key points on Code of Arbitration?
    • - COA handles disputes between members, or any problem between parties associated with the securities industry
    • - Is the industry choice over civil court because it is cheaper. There are no appeals, and decisions are binding on all parties
  295. US PATRIOT Act?
    Established the US Treasury Department as the lead agency for developing regulations in connection with anti-money laundering programs and requires broker/dealers to establish internal compliance procedure to detect abuses.

    note: more concerned with where the funds are going
  296. USA PATRIOT Act instituted a Customer Identification Program (CIP) designed to?
    • - verify the identity of any new customer
    • - Maintain records of the information used to verify identity
    • - Determine whether the person appears on any list of known or suspected terrorist or terrorist organizations.
  297. What information must you gather for CIP before opening an account?
    • - Customer name
    • - Date of birth
    • - Address
    • - SSN
    • - For non-US person taxpayer ID, passport #

    note: An exception is granted to persons who do not currently have, but who have applied for SSN
  298. How much money would need to be involved with a Currency Transaction Report (CTRs) on FinCEN Form 104?
    -Excess of $10,000 ($10,001)

    note: Any electronic fun transfer (wire transfer) in excess of $3,000 must be reported.
  299. How much money is involved to trigger a Suspicious Activity Report (SARs)?
    $5,000 or more
  300. What are some examples when filing a SAR occur?
    • - Customers are not concerned about accounts or products losing value or alternates, which offer better potential returns or lower transactions costs
    • - Clients supply inadequate, false, or misleading information
    • - Clients decline to engage in a transaction when they know that a CTR will be filed, or they attempt to structure smaller transactions to avoid the filing of a CTR
    • - Funds are moved in and out of accounts in short period of time
    • - There are wire transfers to foreign countries or offshore accounts, particularly when coming from the proceeds of a loan
    • - Customers with a known criminal background begin to conduct transactions substantial in number or size
  301. Anti-Money Laundering generally takes place in three sages?
    • Placement - is the stage when funds are moved into the system (most vulnerable to detect)
    • Layering - is the stage when a confusing set of transactions is conducted to make the origin of the funds unclear
    • Integration - is the stage when the funds are invested in legitimate enterprises
  302. What are the minimum provisions, under the anti-money laundering rules, must a firm be required to follow?
    • - Establish and implement policies and procedures that can be reasonably expected to detect and cause reporting of suspicious transactions
    • - Establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with anti-money laundering requirements
    • - Provide for independent testing for compliance to be conducted by member personnel or by a qualified outside party
    • - designate an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program
    • - Provide ongoing training for appropriate personnel.
  303. Office of Foreign Assets Control?
    Within the US Treasury Department and maintains a list of individuals and entities viewed as a threat to the US
  304. Specially Designated Nationals (SDNs)?
    Those identified on the list are subject to specific governmental sanctions

    note: Each blocked transaction must be reported to OFAC within 10 days of their occurrence.

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