Chapter 6/7/8 Flashcards
(82 cards)
1
Q
Declaration date vs payment date vs record date vs ex-dividend date
A
Declaration date: the date on which the dividend is authorized by the BOD.
Payment date: The date where the declared dividend will be paid.
Record date: the date where an investor must officially own the stock to be entitled to receive the dividend. The BOD sets this.
Ex-dividend date: the date where a stock begins to trade without its dividend.
- A stock will typically trade ex-dividend one business day prior to the record date
- On the ex-dividend date, the stock’s price will be reduced by an amount equal to the dividend to be paid. For example, if a stock paying a $.50 dividend closes at $20 per share on the day before the ex-date, it will open at a price of $19.50 on the ex-dividend date.
2
Q
Due bills
A
Before the ex-dividend date, but delivery is made after the record date. A financial instrument used to document and identify a stock seller’s obligation to deliver a pending dividend to the stock’s buyer.
3
Q
Current yield
A
1/3 ways to determine a bond’s return.
Annual dividend ÷ current market price
- Current yield does not take into account the payment at maturity.
4
Q
Nominal yield
A
1/3 ways to determine a bond’s return. A bond’s nominal yield is the same as its coupon rate. This does not take into account whether a bond was sold at a discount/premium.
5
Q
Yield-to-maturity (YTM)
A
1/3 ways to determine a bond’s return. This takes everything into account
6
Q
YTM example:
A
7
Q
True or false: If an investor purchases a bond at a discount, the bond’s YTM > current yield > nominal yield?
A
True, and vice versa for premiums. If a bond trades at par, all three measures of yield will be equal.
8
Q
Yield-to-call (YTC)
A
Represents a bond’s yield if it’s called prior to maturity.
- If a bond is trading at a discount, the yield-to-call is higher than the yield-to-maturity; however, if a bond is trading at a premium (and callable at par), the yield-to-maturity is higher than the yield-to-call.
9
Q
Yield-to-worst (YTW)
A
Since it’s unknown whether an issuer will call a bond or not, the YTM and YTC must be reported and the lower of the two MUST be reported to the investor. The lower of the two is the YTW.
10
Q
Cost basis
A
The total amount that an investor has paid to purchase a security. The calculation typically includes the commissions or other fees which are paid to the brokerage firm when the securities are purchased.
11
Q
Capital gains
A
When an investment is sold for higher than its cost basis.
- If the investment had been held for one year or less prior to its sale, the gain is considered short-term and is taxed at the same rate as the investor’s ordinary income rate (marginal tax rate). However, if the investment had been held for more than one year prior to its sale, the gain is considered long-term and is taxed at a lower rate.
- Capital losses can be used as reductions against capital gains.
12
Q
Return of capital
A
When an investor receives a portion of her original investment back. Since this payment is not considered either income or a capital gain, it’s not a taxable event. Any return of capital will lower an investor’s cost basis since she now has less money at risk.
13
Q
Total return
A
This measure takes into account all of the CF received from dividends and/or interest, plus any appreciation or depreciation in the value of the investment.
Calculation: [ (ending value - beginning value) + investment income ] ÷ beginning value
14
Q
Inflation-adjusted return
A
Nominal yield - rate of inflation
15
Q
Risk-adjusted return
A
Measures how much an investment returns in relation to the risk that was assumed to attain it.
16
Q
Down Jones Averages
A
he Dow Jones Composite Average consists of 65 stocks and is broken down into the following three categories:
1. Dow Jones Industrial Average: 30 stocks - most commonly quoted measure. The DJIA contains 30 of the leading blue-chip companies that represent the backbone of industry in the United States.
2. Dow Jones Transportation Average: 20 stocks
3. Dow Jones Utility Average: 15 stocks
17
Q
S&P 500
A
Contains stocks that are listed on the NYSE and Nasdaq. Contians 400 industrial stocks, 20 transportation stocks, 40 financial stocks, and 40 utility stocks.
18
Q
NYSE Composite Index
A
The NYSE Composite Index contains all of the common stocks that are listed on the NYSE. The index is further divided into four sub-indexes for industrial, transportation, financial, and utility issues.
19
Q
The Wilshire Associates Equity Index
A
Consists of stocks that trade on the NYSE and Nasdaq. The Wilshire Index represents the dollar value of all the stocks and is considered the broadest of all indexes and averages.
20
Q
True or false: T-bonds are usually used to represent Rf?
A
False, T-bills
21
Q
Example:
A client buys 400 shares of ABC stock at $25 per shares and pays a commission of $220. What’s the adjusted cost basis per share?
A
(400 * $25) = $10,000
$10,000 + $220 = $10,220
$10,220 ÷ 400 = $25.55
22
Q
Open-end management company
A
More commonly referred to as a mutual fund. a mutual fund provides a means for investors with similar goals (e.g., long-term growth) to pool their money and invest in a portfolio of securities. Mutual funds hire BOD. Mutual funds’ obvious advantage is diversification.
- Mutual funds are extremely liquid investments.
- Shareholders may exchange the shares they own in one fund for shares of another fund at the net asset value (the fundamental value of the shares) as long as both funds are in the same family (brand name).
- The fund takes care of most of the recordkeeping and ensures that shareholders receive regular reports that show their purchases, redemptions, and end-of-the-year tax summaries
- every investment company w/ > 100 shareholders must register with the SEC
- a fund must have a minimum net worth of $100,000 in order to offer its shares to the public.
- the ex-dividend date for a mutual fund is actually determined by the fund or its principal underwriter. Typically, a mutual fund’s ex-dividend date is the business day following the record date.
22
Q
Diversified fund
A
A diviersified fund has at least 75% of the assets must be invested in a diversified manner w/ no more than 5% of assets invested in one company and no more than 10% of the voting stock of any company at one time.
23
Q
True or false: an investment adviser (IA) is the management company, while investment adviser representatives (IARs) are the individuals who work for the IA?
A
True
24
Mutual fund prospectus
A document detailing the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. A prospectus is a legally binding contract between the fund and the fundholder.
25
Statement of Additional Information (SAI)
Provides more detailed information than the prospectus about a fund and its investment policies and risks.
## Footnote
* Unlike the prospectus, the SAI is not required to be given to any person who simply expresses an interest in purchasing the fund’s shares. However, the fund is required to provide a copy of the SAI to any person who requests it.
26
True or false: All mutual funds are corporations?
False, most are corporations but some are structured as trusts
27
Roles within a mutual fund:
* BOD
* IA
* Custodian bank
* Transfer agent: performs a number of recordkeeping functions, such as issuing new shares and canceling the shares that investors redeem. The transfer agent also distributes capital gains and dividends to the funds' shareholders.
* Principal underwriter (a.k.a: sponsor/wholesaler/distributor)
28
Categories of mututal funds
* Aggressive groth funds: Invest in smaller companies
* Growth funds
* Specialized or sector fund
* International and global funds: funds that invest in foreign companies
* Equity income funds: funds that pay high dividends
* Growth and income funds: funds that have both capital appreciation and current income as their investment objectives.
* Bond funds
* Index funds
* Value funds: These funds invest in “out-of-favor” companies that are considered undervalued and are often in the process of restructuring. Due to the nature of their investments, value funds are most suitable for investors with long time horizons.
* Balanced funds: maintain some % of their assets in stocks, bonds, and money-market instruments
* Asset allocation funds: Similar to balanced funds but reweighted their asset allocation based on market conditions.
* Money-market funds
29
Public offering price (POP) vs net asset value (NAV) vs sales charge/load
POP/ask price/offer price = what mutual fund shares are purchased at
* POP = NAV + sales charge
NAV/bid price = What mutual fund shares are redeemed at
* Calculation: Total net assets ÷ # of shares outstanding
* NAV must be computed at least once per day
Sales charge/load= The difference between pop & NAV
* Sales charge = (POP - NAV) ÷ POP
## Footnote
* Maximum sales charge allowed by FINRA is 8.5%.
30
True or false: Mutual funds trade throughout the day?
False, they can only be traded at the end of each trading day.
31
Contingent Deferred Sales Charge (CDSC)
Rather than assessing a sales charge at the time of purchase, some funds allow investors to buy shares at the NAV and will then assess a sales charge when the investors redeem their shares. Usually, the longer the investor owns the shares, the greater the decrease will be in the back-end load. In fact, if the investor holds the shares long enough, there may be no sales charge imposed at the time of redemption.
32
No-load funds
Mutual funds that do not have sales charges. POP = NAV.
33
12 B-1 charges
An annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund's expense ratio. It is generally between 0.25% and 1% (the maximum allowed) of a fund's net assets.
34
Service fees for a mutual fund
Charges that are deducted under a 12b-1 plan and used to pay for personal services or the maintenance of shareholder accounts.
35
Administrative charges for a mutual fund
Charges that are deducted from the net assets of an investment company and used to pay various costs including the payments that are made to custodian banks and/or transfer agents.
36
Fee disclosure for a mutual fund
In the front of its prospectus, a mutual fund is required to disclose all of its fees using a standardized table.
37
Expense ratio
the % of a fund’s assets that are used to pay operating costs. The expense ratio includes the management fee, administrative fees, and 12b-1 fees, but doesn’t include sales charges.
Calculation: Total expenses ÷ avg. net assets
## Footnote
* Expense ratios typically range between .20% and 2% of a fund’s average net assets and must be disclosed in the fund’s prospectus.
38
Different classes of shares
Most mutual funds offer class A, B, and C shares.
39
Class A shares
Class A shares usually have front-end loads, but have small or nonexistent 12b-1 fees.
The disadvantage of Class A shares is that not all of the investor’s money is directed into the portfolio. For example, if an investor purchases $1,000 worth of Class A shares of a common stock fund that has a 5% sales charge, only $950 is invested in the fund. The $50 is deducted as a sales charge and benefits the selling brokers.
## Footnote
* This class is the best for long term investors.
* Sales charges: Front-end load
* 12B-1 fees: Low or none
* Other: Discounts for large purchases
40
Class B shares
Class B shares generally have no up-front sales charges, higher 12b-1 fees are usually assessed. Investors are subject to CSDC charges if the shares are redeemed before a certain period. These shares are most suitable for investors who intend to redeem their shares within five to seven years.
Once the specified number of years has passed and the back-end charge is reduced to zero, most Class B shares will convert to Class A shares. Unlike Class A shares, Class B shares don’t qualify for breakpoint (sales charge) discounts.
## Footnote
* Sales charges: CDSC charges if shares held for less than 6-8 years.
* 12B-1 fees: Higher than Class A
* Other: Often convert to class A
41
Class C shares
Class C shares assess what’s referred to as a level load, which means there’s an ongoing fee (typically 1.0%) for as long as the investor holds the shares. These shares are most suitable for investors who will hold their shares for a short period (more than one year, but less than three years).
Although there’s no front-end load, a back-end load may be assessed if shares are redeemed within one year. Class C shares typically have 12b-1 fees that are higher than those of Class A shares.
## Footnote
* Sales charges: Have an ongoing fee
* 12B-1 fees: N/A
* Other: N/A
42
True or false: Mutual fund shares must be quoted at the maximum sales charge percentage that the fund charges. However, most mutual funds offer sales breakpoints on shares that are purchased with a front-end load?
True
43
Front-end load vs back-end load
Front-end load: A commission or sales charge applied at the time of the initial purchase of an investment
Back-end load: paid by deducting it from profits or principal when the investor sells the investment.
44
True or false: mutual funds trade in the secondary market?
False
45
Breakpoint
When investors make big purchases in Class A shares, the sales charge can be reduced.
NAV w/ breakpoint= NAV ÷ (100% - sales charge %)
46
Letter of intent (LOI)
Qualifies an investor for a discount made available through breakpoints without initially depositing the entire amount required. The letter indicates the investor’s intention to deposit the required funds over the next 13 months. If an investor fails to invest the amount stated in the LOI, the fund will retroactively collect the higher fee.
47
Rights of accumulation (ROA)
Give investors the ability to receive cumulative quantity discounts in order to reduce sales charges when purchasing mutual fund shares.
48
True or false: Most mutual funds allow investors to reinvest dividends at NAV w/o a sales charge?
True
49
Dollar cost averaging (DCA)
A popular method of investing in mutual funds in which a person invests a fixed-dollar amount at regular intervals, regardless of the market price of the shares.
An investor who uses dollar cost averaging is ultimately buying more shares when the price is low and fewer shares when the price is high.
50
True or false: The Investment Company Act of 1940 requires mutual funds to pay the redemption proceeds to their investors within seven calendar days?
True
51
Redemption fees
When mutual fund shares are redeemed, some funds deduct a small redemption fee from the amount that’s paid to the investor. Redemption fees have a range of .5% to approximately 2%.
52
Systematic withdrawal plans
If investors elect to begin a systematic withdrawal plan, they will receive regular payments, typically on a monthly or quarterly basis. Payments are first made from dividends and then capital gains; however, if these amounts are insufficient, the fund will redeem the investor’s shares until the principal in the account is exhausted. Investors can choose from a fixed-dollar, fixed %, or fixed-time withdrawal plan.
53
Breakpoint sale
This is a prohibited practice where funds induce people to purchase shares at a level just below the dollar value at which a breakpoint is available. Funds also are not allowed to induce investors' money into different fund families in order to avoid the breakpoint sale. Funds may also not recommend buying Class B shares to a client who intends to place a large order. The client should be directed toward Class A shares since only this share class qualifies for breakpoints.
54
Switching shares
A prohibited practice where a fund recommends that a client sell the existing mutual fund shares that she owns of one fund family and invest the proceeds into another fund family in order to collect another sales charge.
55
Exchanging shares
Where clients can sell shares and buy shares within the same fund family and not be charged another sales charge.
56
Face-amount certificate company
A type of investment fund. These are very rare today. These funds issues debt certificates that pay a predetermined rate of interest. Investors purchase these certificates in either periodic installments or by depositing a lump sum and then receive a fixed amount if they hold the certificates until maturity. However, investors who cash in their certificates early will receive a lesser amount—referred to as a surrender value.
57
Unit investment trusts (UITs)
A type of investment fund that is formed under a legal document that’s referred to as an indenture and have trustees rather than boards of directors. UITs invest in a fixed portfolio of income-producing securities, such as bonds or preferred stocks. UITs issue SBIs that are securities available in denominations of $1,000. . Investors are able to buy or sell SBIs in the secondary market. Each unit entitles the holder to an undivided interest in the UIT’s portfolio that’s proportionate to the amount of money invested. UITs don’t utilize the services of investment advisers to determine what securities to buy and sell. Since these trusts are not managed, they don’t have associated management fees.
58
Closed-end investment funds
These funds conduct a one-time issuance of common shares to the public. Although they may issue additional shares later, they don’t continuously issue new shares or stand ready to redeem their shares for cash. After issuance, these shares trade in the secondary market. As these securities trade in the secondary market, there’s no prospectus delivery requirement. Additionally, the shares are able to be purchased on credit (i.e., they’re marginable).
## Footnote
* Beyond issuing common shares, closed-end funds may also issue senior securities (i.e., preferred stock or bonds).
* closed-end funds may trade at prices that are at a discount or a premium to NAV.
* When closed-end funds are purchased or sold in the secondary market, the investors pay commissions rather than sales charges.
59
Annuity
An agreement between a contract owner and insurance company where the owner gives the company a certain amt of money (either a lump sum or over time) and the company provides the person w/ income either immediately or at some point in the future.
## Footnote
* Annuities are tax deferred
60
Non-qualified annuity vs qualified annuity
Non-qualified annuity: Funded with money that's already been taxed. Only growth is taxed.
Qualified annuity: Available only for teachers, employees of non-profits, etc. With these, investors invest pre-tax dollars. Everything that comes out is taxed.
61
Fixed vs variable annuities
Fixed annuities: The investor receives a fixed rate of interest and the investment risk is assumed by the insurance company.
Variable annuities: offers returns that fluctuate and the investor assumes all of the investment risk. These annuities were designed to protect against inflation.
## Footnote
Fixed annuities are NOT considered securities and are only governed by state insurance law.
Variable annuities ARE considered securities and are subject to SEC, FINRA, and state insurance regulation. A firm that offers variable annuities must be a broker-dealer that’s registered with the SEC. Also, the registered representatives who sell variable annuities must obtain a state insurance license as well as either a Series 6 or Series 7 FINRA registration.
62
Subaccounts of variable annuities
Subaccounts offer variable annuity investors different options: such as income, growth, long-term growth, etc. Investors can switch their money from account to account as their goals change.
63
What are the two periods of a variable annuity's life?
1. The accumulation period
2. The annuity period: Begins when an annuitant decides to receive income payments from the annuity. Once a person decides to annuitize, they may no longer surrender the annuity. Instead, they receive payments based on the performance of the assets in the separate account.
64
Accumulation unit
Total net assets ÷ units issued
## Footnote
* Must be calculated at least once a day
65
Accumulation period
During the accumulation period, the value of the annuitant’s investment in the separate account is calculated as the accumulation unit. Investors can cancel (surrender) their annuities at any time and receive the annuities' current value, however there may be surrender charges.
## Footnote
* For variable annuities, insurance companies don’t guarantee a minimum cash surrender value so if a person surrenders the annuity, they may receive less than the total amount invested.
*
66
Death benefits
If an annuity holder dies, a beneficiary receives the sum of all of the contract owner’s payments into the annuity, or the value of the annuity on the day of the annuitant’s death.
67
Annuity units
Once the switch from accumulation period to annuity period happens, the accumulation units are converted into annuity units. To calculate the annuitant’s payment, the insurance company takes the following into account:
* Annuitant's age and gender
* Annuitant's life expectancy
* Assumed interest rate
* Settlement option selected
68
Methods for receiving payments from an annuity:
* Straight-life annuity: The investor receives payments for the remainder of their life. No death benefit, though.
* Life annuity w/ period certain: Investor receives periodic payments for a certain amt of time, and if the investor dies before the period ends, the payments will continue to be made in either a lump-sum or in installments to a designated beneficiary
* Unit refund life annuity: Periodic payments are made for the remainder of the investor's life, and if the investor dies an amount equal to the value of the annuity units is paid out to the beneficiary.
* Joint and last survivor annuity: an option in which payments are made to two or more persons. If one person dies, the survivor continues to receive only her payments. However, upon the death of the last survivor, payments cease.
69
Charges related to annuities
* Sales charges (no min. on variable products)
* Insurance company expenses: These expenses are deducted from the fund's investment income.
* Mgmt fee
* Expense risk charges: Since there's usually a guarentee that the insurance firm won't raise its cost for administering the contract, this charge protects the firm if expenses related to administering the contract turn out to be higher than normal.
* Admin expenses
* Mortality risk charges expected. This charge compensates for this risk that an investor might live a very long time.
70
Equity-indexed contracts (EICs)
NOT CONSIDERED A SECURITY. Combine the features of both fixed and variable annuities. Offers clients a minimum guaranteed rate of return or floor (similar to a fixed contract), but also offers upside potential (similar to a variable contract).
The insurance company links the return of these types of contracts to an equity index, so if the index does poorly, the investor will get paid the floor but if the index does well, the investor will get extra.
## Footnote
* EIAs should never be sold to short-term investors since the surrender period for an equity-indexed annuity may be as long as 15 years. If the surrender period is violated, all sorts of fees can be charged.
71
True or false: Variable annuities are suitable for senior investors
False, senior investors are more likely to have immediate expenses (ex: medial), so they need guarenteed cash.
## Footnote
* Under FINRA rules, prior to making a variable annuity recommendation, salespersons must make reasonable efforts to obtain certain client-related information
72
Process of obtaining a variable annuity
The registered representative will need to collect basic info (age, income, goals, etc.). Once this is complte, the representative will send the investment package to the Office of Supervisory Jurisdiction for approval. It takes up to 7 days for approval.
73
1035 exchange
Moving client assets from existing annuity contracts to new contracts. This provision permits the exchange of annuity contracts without creating a taxable event. A registered representative should determine if the proposed exchange will result in the client incurring a surrender charge, being subject to a new surrender period, losing existing benefits. Additionally, a principal must document whether another exchange has been executed for the client within the preceding 36 months since this may be evidence of churning.
74
True or false: Annuities typically have higher expenses than mutual funds?
True
75
Municipal fund securities
Provide investment returns and are valued based on the investment performance of an underlying pool of assets with an aggregate value that may increase or decrease from day-to-day.
| MUNI FUND SECURITIES ARE NOT UNLIKE MUNICIPAL SECURITIES
76
Local government investment pools (LGIPs)
A type of municipal fund. Trusts that are established by state and local governments and offer municipalities a place to invest their money. Government entities use their surplus cash to purchase interests in a trust, which invests the assets in a large portfolio of securities, according to the trust’s investment objectives and state laws.
| ONLY STATES, COUNTIES, AND CITIES MAY INVEST IN LGIPS
77
529 College Savings Plans
There are 2 types:
1. Prepaid tuition plans (PTPs)= Designed to cover in-state public universities. Many PTP plans require that the donor or the beneficiary be a resident of the state that offers the plan. If the student chooses an ineligible school, the funds in the plan can be transferred to another sibling or the original contributions will be returned but no interest will be received.
2. College savings plans= Offer mutual fund type investments that grow on a tax-deferred basis. contributions are made with after-tax dollars, but any earnings grow on a tax-deferred basis.
| CONTRIBUTIONS TO A 529 PLAN ARE GENERALLY IN THE FORM OF CASH
## Footnote
* Today, individuals are allowed to take up to $10,000 in distributions annually from their 529 plans to pay for private school.
* An individual is now permitted to withdraw up to $10,000 on a tax-free basis to repay a student loan as well as expenses for certain apprenticeship programs.
78
2 methods that 529 plans are sold to customers
1. Direct-sold: no salesperson and the plan is sold directly through the 529 savings plan’s website or through the mail.
2. Advisor sold: A salesperson is involved.
79
529 Able plans/529A
529 plans that are administered by the states. Designed for disabled people. Today, a 529A account will not impact Medicare or Social Security payments unless the current account value exceeds $100,000. Maximum contribution allowed is $17k a year.
80
An individual purchased a variable annuity, but passed away during the accumulation period. At the time of death, if the value of the annuity is less than the amount invested, a beneficiary is entitled to what?
The amt invested in the annuity
81
The account that determines the value of a variable annuity is what?
The separate account
