Passing Score Series 7

8/20/2019 Passing Score Series 7

1/23

Passing Score:

Major Securities Laws:Securities act of 1933

- new issues

- disclosures of the company- it’s a full disclosure law- reuires registration statement- audited !nancial statement- delineation of "usiness ris#- prohi"its fraud and misrepresentation- $%&- $egistration' %udited' &elineation of "usiness ris#-

Securities ()change %ct of 193*:- secondary sales- creates the S(+ to regulate e)changes' "ro#er dealers and

securities trading- o,ersight of the S$- e)changes li#e ./S(- 0$ gi,en o,ersight of credit in the securities industry- 2nsider trading prohi"ited- S02- S(+' ,ersight' 0$' 2nsider rading

Maloney %ct of 1934:- set up non e)change S$s or + S$s- as opposed to e)changed S$s li#e the ./S(- S$- self regulatory org- Maloney %ct- deals with S$s

rust 2ndenture %ct of 1939:- disclosure around "ond issuances- similar to the 1933 act- and this one focuses purely on de"t issuances a"o,e 516 million

2n,estment +ompny %ct of 19*6:- disclosures of material information and in,esting limitations- !rms that pool money for in,estment 7register w8 S(+- 1 Mutal funds- 0ace %mount +erti!cates- li#e discounted "ond

- ;nit 2n,estment rust- shares in a !)ed' unmanaged portfolio-

2n,estment %d,isers %ct of 19*6:- they sell their ad,ice for a fee- must register with the S(+ and act in the client’s "est interest

S2P% %ct of 19


2/23

- organi?es the dissolution of the insol,ent "ro#er-dealer- S2P+- Securities 2n,estor Protection +orporation

Securities %cts %mendment of 19= million euities

- imprisonment up to >6 years- "ro#er-dealers must maintain and enforce insider policies

o system to monitor "ro#er dealer accounts and employee

tradingo restricted list of securities

o protection of information and employee training

0ederal elephone +onsumer Protection %ct of 1991:- don not call list maintained inde!nitely- call must "e "etween 4am and 9pm- caller must pro,ide name' name and contact address- or phone num"er on whose "ehalf the call is made

- caller must pro,ide the purpose of the call- unsolicited fa)es are prohi"ited- autodialers are pre-recorded messages are prohi"ited unless for

a pre-e)isting "usiness relationship or for ta)-e)empt nonpro!ts- &+++;%

Penny Stoc# $ule of 1991:- small cap securities- ris# disclosure must "e pro,ided- disclosure fees and commissions- small cap rules

02.$% + rules:- uniform practice code- standardi?ed dealer terms- conduct rules- operational rules- code of procedure- complaints and ,iolation procedures- code of ar"itration- procedures for dispute resolution

02.$% =@ rule:


3/23

- fair and reasona"le pricing to the pu"lic for a plain ,anilla trade- higher mar#ups are justi!ed for more diAcult trade such as:

o e)empt security

o speculati,e security

o low liuidity

o low mar#et price

(uity 2ssuances:

Pu"lic Bering- primary oBering- must "e registered with the S(+- underwriting- in,estment "an#er coordinates "etween the issuer and "uyers in

the mar#et

- e)emptions from registration:o us go, securities

o us go, agency securities

o oBering "y non-pro!ts

o corporate de"t of >


4/23

- share priceE166- spreadE<- issuer proceedsE93- managers fee >6@- underwriting fee >6@

- concession fee F6@- underwriting feeG ta#edown concessionE 46@- M;+

.ew 2ssue $ule:- aArmati,e statement that account may purchase new issues- written or electronic statement ,eri!ed e,ery 1> months- records of the representation must "e #ept at least 3 years- restricted person cannot ha,e a "ene!cial interest- %D$

.ew 2ssue $ule restricted Person:

- any"ody associated with euity issuance- mem"ers of associated person- lawyers' accountants- immediate family mem"er- any"ody with 16@ or more owner of a "ro#er dealers

.ew 2ssue $ule ()emptions:- all de"t oBerings- secondary oBerings- pri,ate oBerings- preferred stoc# and rights oBerings

- in,estment company oBerings- $(2s- &PP- direct participation program- ()empt securities under the 33 act- (uity oBerings

$egistration Statement:- >6 day cooling oB period- "lue s#y- register in states where securities are oBered- due diligence meeting "etween issuer and underwriters

$ed Herring:- preliminary prospectus- used to generate awareness of issuance- and who can "e possi"le "uyers- it cannot "e used for orders- just to gau?e interest- indications only


5/23

om"stone:- add allowed after registration is eBecti,e- standard clause- not an oBer to sale oBering is made only "y

prospectus- after registration

%ccredited 2n,estor:- eligi"le for pri,ate in,estments- !nancial institutions- indi,s who ha,e income o,er 5>66'666 or joint income o,er

5366'666 for past > years- or 51 of liuid assets- partnerships need to ha,e 5= m in assets

S(+ $ule 1**:

- regulates transactions of restricted and control stoc#- restricted- pri,ate shares not registered with S(+- control- insiders who acuire stoc#- a control person is an oAcer or director of the !rm or owns 16@

G of shares

S+ $ule 1**%:- e)emption from rule 1** restrictions for I2s- no holding period- de"t or euity securities included

- whats I2s- uali!ed institutional "uyer has 5166 m or morein,ested in securities not related to the I2

- domestic or foreign institutions- audited !nancial statements and a certi!cation from the issuer

S(+ $ule 1*=:- has to do with transfer of securities- stoc# splits don’t count- merger or consolidation in,ol,ing securities

S(+ $ule 1*


6/23

S(+ $egulations- session *

Session ='F'


7/23

o $ecei,s ,s payment

o 2nstitutional +& process in which dealer ma#es payment

and recei,es security at the same time+ustomer &eath:

- account mar#ed as deceased

- open orders cancelled- assets fro?en- account closed and transferred to estate for e)ecutor or

administrator to manage

Statements:- uarterly for inacti,e accounts- monthly for acti,e accounts- must show:

o account "alances

o current long and short positions

o de"its and creditso all acti,ity

ransferring %ccount:- carrying !rm- original !rm- recei,ing !rm- new !rm- 1 Dritten instruction from client to recei,ing !rm- recei,ing !rm su"mits transfer reuest- 1 "usiness day to either ,alidate to ta#e e)ception- instructions for non transferra"le assets

- 3 "usiness days to complete transfer

+on!rmations:- name of security- "ought or sold- price- shares' units or principal

Margin account:- commissions recei,ed- date of transaction

- time of e)ecution- settlement date- capacity agent 7"ro#er or principal 7dealer

ond con!rmations:- &ollar price- Par ,alue- Maturity


8/23

- +oupon rate- /ield- 2ssuer name- ond type- %ccrued interest

- +al features

Mar#up and +ommissions:- commission- charge for e)ecuting a trade- mar#up- price diBerence charged to the client- must "e fair and reasona"le determined "y:

o mar#et price

o transaction-related e)penses

o !rm’s right to earn pro!ts

Session 11

+ash (ui,alent:

Dhat is a cash eui,alentC- high uality 7low ris#' short-term de"t securities- almost as safe as cash- uncorrelated with "onds

- eg- money mar#et funds- negotia"le +&s- commercial paper- repos-

Money mar#et funds:- fund of short term de"t securities- securities maturing under 13 months- weighted a,g maturity under F6 days- less than =@ in any one issuer e)cept go,ernments or repos

- sta"le ,alue of 51

.egotia"le +&s:- jum"o +ds with secondary mar#ets- min of 5166'666 usually 51 m- not 0&2+ insured due to si?e- min maturity is < days with no ma)


9/23

ro#ered +&s:- issued "y "an#s- S2P+ co,erage if -& !les "an#ruptcy- Maturity of >->6 years- .ot considered mar#et security

Long term +&s:- ha,e additional ris#s than short term +&s- limited or no liuidity- loss of principal if sold prior to maturity- call features increase rein,estment irs#- features such as ,aria"le rates and step-ups- 0&2+ insurance may not apply

+ommercial Paper:- unsecured corporate de"t

- maturity of > ond ,er,iew:


10/23

onds:- contract to lend money "etween issuer and in,estor- issuer- de"tor- in,estor- creditor- contract- de"enture

- coupon- nominal yield

$egistered "ond:- record of owner and address- registered as to principal

o notice of principal payment

o coupons are deposited at "an#

- fully registeredo notice of interest and principal payments

- "oo# entry formo no physical "ond- all digital

Price "elow par:- interest rates ha,e risen since issuance- "ond prices mo,e in,erse to interest rates- "ond sells for less than par ,alue- lowe price euates to a higher yield- mar#et price of 9==E 9==@ of par ,alue- priceE "ond priceN par ,alue- 9==E9==@N1666

Premium ond:

- interest rates ha,e decreased since issuance- "ond prices mo,e in,erse to interest rates- "ond sells for more than par ,alue- higher price euates to a lower yield- mar#et price of 16>


11/23

/ield Methods:

.ominal yield

- stated rate of the "ond- sta"le o,er the life of the "ondcurrent yield

- return relati,e to current mar#et price- current yieldE total annual di,8 current mar#et price

yield to maturity:- yield assuming "ond held to maturity- interest rein,ested and compounded- similar to yield to call

Par "onds:- .ominal yield- !)ed for life of the "ond- +urrent yield- since "ond is selling at par then same as nominal

yield- /ield to maturity- "ond purchased and redeemed at par is same

as nominal yield

&iscount onds:- nominal yield- !)ed for life of "ondcurrent yield- higher than the nominal yield since "ond sold at a

discount- yield to maturity- higher than current yield since discount will "e

redeemed at full ,alue

Premium onds:- nominal yield- !)ed- current yield- lower than nominal yield- yield to maturity- less than current yield- since premium will "e redeemed at full ,alue

.ormal yield cur,e:- interest rate goes up as maturity goes longer

at yield cur,e:- at

in,erted yield cur,e:


12/23

- interest rate goes down as maturity goes longer

ination ris#:- rea# interest rateE yield- ination- the ination rate may rise higher than assumed in the "ond price

- the higher ination reduces the return of the "ond

+redit $is#:- ris# of default of interest or principal- "ond ratings are a measure of the willingness and a"ility of the

issuer to meet de"t o"ligations- us go, "onds are considered to ha,e no credit ris#- ratings ser,ices are moody’s' SP and !tch

+all pro,isions:- 2ssuer can redeem "efore maturity

- Pays principal and accrued interest at call- 2ncenti,e to call when rates ha,e declined- +ontinuous call can "e e)ercised any time after the !rst call date- $efunding replaces the !nancing from the call

+all features:- call protection restricts when a call can "e e)ercised usually =-16

years from issuance- call premium is an amount paid a"o,e par when the "ond is

called- rein,estment ris# is the lower rate that the in,estor must accept

after the call

Prefunding:- prefunded amounts from a refunding issue are deposited in an

escrow account- escrow account guarantees use for de"t ser,ices- defeasance is when the de"t is completely co,ered "y escrow

Put Pro,ision:- "ondholder can redeem "ond at speci!ed times- redemption can "e at a discount or premium

- in,estor can rein,est at a higher rate- put feature means the "ond has a lower yield

S(SS2. 13 reasury Maturities

reasury "onds


13/23

- 16G year maturities

reasury notes- >-16 years

reasury "ills- 1 year or less and sold at a discount

reasury ypes:

S$2PS:- separate trading of registered interest and principal securities

2PS:- treasury ination-protected securities

- interest rate !)ed- principal ,alue is adjusted semi-annually- face ,alueN71G +P2 increase- or 51666N161E1616 paid at maturity- increases are ta)ed as ordinary income- will ne,er decrease "elow face-

+MS:- cash management "ills

Sa,ings onds:- non mar#eta"le treasury for retail sa,ings- Series ((

o 36 yr "onds issued from 5=6-516'666

o purchased at =6@ discount

- Series HHo >6 yr "onds issued from 5=66-516666

o not sold since aug >66*

- Series 2o 2nation inde)ed 36 yr "ondso 2nterest reset >N a year "ased on ination

a) reatment of reasuries:- attracti,e to in,estors- "ecause e)empt from state and local ta)es


14/23

- series (( and 2 deferred until maturity or redemption- -"ills ta)ed in year of maturity- .otes and "onds ta)ed in the year interest is recei,ed- S$2PS ta)ed each year

0(& %uctions:

Mon:- 3 and F month t-"ills- issued thu

ue:- * wee# and 1 yr t-"ills- issued thuMonthly:- > yr and 3 yr treasury notes

- issued at the end of the month

Iuarterly:- = yr treasury notes- issued 1=th of month- usually 0e"' May' %ug' .o,

Semi-annually:- usually 0e" and %ug- 36 yr treasury "onds- issued on the 1=th

%ccrued interest:- interest since the last payment- seller paid "y "uyer for accrued interest- us "onds use actual days- corporate use 3F6 day yr

reasury Bers:

+ompetiti,e tenders:- large institutional in,estors

- highest "idders get securities

.on competiti,e tenders:- small in,estors- a,g "id price for all competiti,e "ids- non competiti,e "ids "efore competiti,e "ids


15/23

+orporate onds:

;nsecured "onds:- high yield or jun# "onds

o non in,estment grade

o higher coupon for higher ris# tolerance- guaranteed "onds:

o additional pledge "y another corporation

o usually an aAliate or parent company

Secured onds:

Mortgage "onds:- secured "y real property

(uipment trust certi!cates:- secured "y a piece of euipment in operation

- trustee has legal title-

+ollateral trust "onds:- secured "y securities placed in escrow- stoc#s and "onds owned "y !rm

+on,erti"le "onds:- "ond that can "e traded in for stoc#- con,ersion price is the stoc# price that will "e used for the trade

in- con,ersion rate determines the num"er of shares you will get for

each "ond you con,ert

sharesE "ond per ,alue8 con,ersion price

+on,ersion Kalue:- ,alue of stoc#s recei,ed- num"er of outstanding shares increase which dilutes euity- lower coupon due to option of potential euity unside

con,ersion ,alueE con,ersion ratioNmar#et price

stoc# splits and con,ersion:- decreases the con,ersion price- increases the con,ersion ratio- 3-1 split means the con,ersion price is di,ided "y 3 and

con,ersion rate is 3N


16/23

new priceE con,ersion price8 stoc# split ratio

+on,ersion %r"itrage:- pro!t from price diBerentials at no ris#

- con,erti"le "ond trading at a discount means- the "ond is trading "elow the underlying stoc# price- "uy the "ond and con,ert immediately

2ncome "ond:- !rm pays interest only if suAcient earnings- oBered "y !rms in "an#ruptcy- sell "elow par- speculati,e in,estment

(urodollar "ond:

- denominated in ;S dollars- issued outside the ;S- not registered with the sec- may "e sold in the ;S *6-96 days after issuance- does not need to "e in (urope- may"e diBerent countries

/an#ee "ond:- issued in us "y foreign company- registered with sec- principal and interest in us dollars

%ccrued interest:- interest accrued since last payment- corporates accrue on a 3F6-day yr- accrual up to "ut not including the settlement date 7G3

eg:accrued interest formulaE 7par ,alueNcouponNdays of accruedinterest8 3F6

=@ corporate "ond jan 1 >66F maturity date

thu sept < sale date

1666N=@N783F6E 16

Session 1= %nnuities:


17/23

Dhat is an annuityC- a one time payment in e)change for a future stream of payments- issuer in,ests to fund the income stream- usually for retirement needs- may"e ta) deferred or after ta) plan

- return may "e !)ed or ,aria"le

0i)ed annuities:- insurance products under state insurance laws- not regulated as a security- !)ed dollar payments o,er a lifetime- not protected agiainst ination- issuer in,ests in a general fund and guarantees payments

regardless of returns or losses

Karia"le %nnuities:

- unli#e !)ed annuities' they are regulated as securities- in,estor can choose diBerent in,estment o"jecti,es- ,aria"le dollar payments o,er a lifetime- no guarantees on return- annuity "uyer assumes ris# of loss

%ccumulation Period:- if there is some delay "etween when in,estor ma#es payments- growth period while payments are deferred- contract owner will rein,est the funds- returns will aBect the accumulation units

- gains are ta) deferred- can "e partially or fully withdrawn- ta) penalty on withdrawals prior to =6 Q yrs

%nnuity Period:- this is the time when the payment scheme starts paying "ac#- to the in,estor- accumulation units "ecome annuity units- cannot surrender or withdraw any longer- contract owner #nown as the annuitant- annuitant recei,es one annuity unit per e)pected payment o,er

their lifetime

%nnuity Payouts:- straight life annuity

o monthly lifetime payments

o highest ris# of payments ceasing

- life annuity with period certain


18/23

o periodic payments plus "ene!ciary payments

o payment through min contract term

o lifetime if e)ceeds contract term

- unit refund annuityo monthly lifetime payments

o "ene!ciary recei,es payments only if annuity ,alue isremaining

- joint and last sur,i,or life annuityo tw separate payment to two ppl until death

o death of one does not aBect payment of the other

%ssumed 2nterest $ate:- projected return speci!ed in the annuity

o !rst payment "ased on the air

o payments "ased on air will increase or decrease depending

on the actual returns going forward

- eg' during a payment period- air is =@- actual return is F*@- annuity payment is higher

a)es:- after ta) contri"utions withdrawn ta)-free- gains are ta) deferred- di,idends and capital gains are rein,ested and ta) deferred- non-uali!ed annuities

o accumulation period withdrawals are ta)es as if gains are

ta#en !rst then contri"utionso initial payments are ta)-free as return of cost "asis then

ta)ed as ordinary income- all payments from uali!ed are ta) deferred

()pense guarantee- annuity e)penses limited to a speci!ed le,el- ,aria"le annuities must pro,ide a prospectus

o prospectus must clearly state e)penses

o

no limit "ut must "e reasona"le- e)penses includeo management fees for each su"account

o admin e)penses

o e)pense ris# charges

Koting $ights:- election of the "oard of managers


19/23

- appro,al of independent accountant- appro,al of changes to o"jecti,es or policies

session 1F %gencies

federal agencies:- direct arms of the ;S go,- e)plicitly "ac#ed "y the full faith and credit of the us go,

go, sponsored enterprises 7RS(s- pu"licly chartered and pri,ately owned- pro,ide low cost !nancing- lends to "an#s to spur lending- implicit us "ac#ing

00+:- federal farm credit "an#s- pro,ides lower cost funding for agricultural and farm producers- they produce short term securities which are e)empt from state

and local ta)- "ut su"ject to federal ta)

0ederal Home Loan an#s:- pro,ides liuidity for !nancial institutions- focus on mortgage' small "usiness and rural- 1> fhl"s 1 for each fed reser,e district

- issues are e)empt from state and local ta)es

Sallie Mae- SLM%- student loan mar#eting association- liuidity for

o student loan pro,iders

o state student loan agencies

o loans to educational institutions

- loans insured through guaranteed student loan program- maintains a line of credit with ;S "ut not directly "ac#ed- state and local ta) ,aries "y state

0reddie Mac- 0HLM+- federal home loan mortgage corporation- purchases mortgages to facilitate !nancing of new housing- issues participation certi!cates and guaranteed mortgage-

"ac#ed certi!cates- securities trade on the ./S(


20/23

- interest su"ject to federal' state' local ta)

0annie Mae- 0.M%- federal national mortgage association

- "uys fha' ,a and con,entional residential mortgages fromlenders- issues mortgage-"ac#ed securities 7MS- not e)plicitly us "ac#ed- interest su"ject to federal' local' state ta)

Rinnie Mae- R.M%- pro,ide !nancing for residential housing- under the dept of housing and ur"an de,- securities issued

o mortgage"ac#ed securitieso participation certi!cates

o modi!ed pass through certi!cate

- payments guaranteed regardless of defaults- interest su"ject to federal' state and local ta)

+&:- collaterali?ed de"t o"ligation- asset "ac#ed security- they are pooled up and then sliced into layers of priority called

tranches- comple) structures for institutional or other sophisticated

in,estors

+M:- collaterali?ed mortgage o"ligation- mortgage pool di,ided into ,arios payment structures or

tranches- interest rate' credit ris#' a,g life and prepayment ris# can ,ary

signi!cantly "etween tranches- speculati,e tranches and ,ery low ris# tranches can "e created

from the same pool

P%+- planned amorti?ation class- predetermined repayment schedule- e)cess principal paid to support tranches- maintains a,g life within a range of prepayment speeds


21/23

Session 1< Municipal onds:

- de"t issuances "y state and local go- e)empt from !ling and registration

- oAcial statement in place of prospectus- legal opinion included in oAcial statement- lower coupons due to ta) e)emptions

ypes of muni "onds:

Reneral o"ligation "onds- full faith' credit and ta)ing power of issuer- usually reuires ,oter appro,al

re,enue "onds

- !nancing and re,enue from a speci!c project- not otherwise guaranteed "y issuer- not restricted "y issuer de"t limits

R "onds:- limited ta)- "ond issued with legal limit on ta)es- unlimited ta)- "ond does not stipulate any ta) limit

Muni credit ris#:

- economic health- history of ta) collections- current ta) "urden- sources of ta)es- !nancial condition- !scal responsi"ility- e)isting de"t- de"t trends

&e"t ser,ice co,erage:- ratio of net re,enue to de"t ser,ice costs

- we want this ratio to "e as high as possi"le- amount of money a,aila"le to pay de"ts- major factor in determining ris# of re,enue "ond issue-

annual gross re,enue- annual operating costs- annual maintenancecostsE annual de"t ser,ice

0easi"lity study


22/23

- report on a"ility of a project to generate re,enue- project analy?ed " outside consultants- includes an engineering report- analysis of trust indenture or "ond resolution pro,isions

0low of funds:- what the priority of payments are coming out of a project- funds or accounts such as operating fund' de"t ser,ice fund and

replacement fund- re,enue goes to !rst fund up to a speci!ed limit then to

su"seuent funds

&e"t statement:- direct de"t- all de"t issued- net direct de"t- direct de"t less self-supporitng de"t- o,erlapping de"t

o go, de"t with o,erlapping ta) "aseo coterminous cities and school districts

Pri,ate acti,ity or %M- alternati,e min ta) re,enue "ond- 16@ or greater of the proceeds will !nance a pri,ate entity

project and- 16@ or greater of the proceeds are secured "y pri,ate property- interest income is su"ject to the %M which means they may "e

ta)ed as federal income

Municipal note types:

a) anticipation notes- %.s- funding for operations ahead of e)pected ta) receipt

re,enue anticipation notes- $%.s- operations needs ahead of re,enue or su"sidies

"ond anticipation notes- %.s- funds prior to a long term "ond issue

Moody’s municipal "ond ratingsM2R1- "est ualityM2R>- high ualityM2R3- fa,ora"le ualityM2R*- adeuate uality

Standard and poor-s:


23/23

SP1- strongSP>- satisfactorySP3- speculati,e

K$&- ,aria"le rate demand o"ligations

- resets at either daily' wee#ly or monthly periods- rate is set so that "onds are sold at par- "ondholder can put shares to the issuer on the reset date for par

,alue plus accrued interest

session 14 municipal "onds >:

/ield to call:

- Municipal "onds must "e uoted according to yield to maturity oryield to call

- Dhiche,er is lower- 2f a "ond is trading at a premium' the yield to call is lower than

the yield to maturity-

Documents

Passing Score Series 7