General Info Flashcards

Question

GDP/GNP- elasticity CPI Yield curves

Answer 1

GDP- how's your stuff selling? Elastic goods & svcs "we can wait"- house, car, fridge Inelastic "we need it" Medical supplies, concert tix CPI- how expensive is your stuff? Sign of inflation Yield curve- normal= growth (short term =low yield, long term =high yield) Flat= uncertainty Inverted/ descending = recession = short term higher yield (high yield =high risk)

Answer 2

Expansion: Decreased unemployment Increased GDP -inflation risk if growing too quickly (higher prices & COL) Peak: Beginning of downturn Contraction: Increased unemployment Decreased GDP, manufacturing output, hold income, bz profits, investment spending Trough: Lowest point. Contraction turns to expansion here. Stagflation- slow economic growth plus rising prices, inflation, & relatively high unemployment Recession =GDP decline 2 consecutive quarters (6mo) Depression = GDP decline 6 consecutive quarters (1.5yrs)

Answer 3

-bond yields (yield curve) -S& P 500 -INITIAL claims for unemployment (weekly)/layoff rates -Index of NEW manufacturing orders -# of NEW building permits -Consumer confidence index -Spread between 10 yr Tnote & Fed Funds Rate Recession indicator= Fed Funds Rate HIGHER than 10 year T note

Answer 4

-#employees on non farm payrolls -avg hours worked -personal income levels -industrial production levels -manufacturing sales -unemployment rate

Answer 5

-changes in CPI levels -corporate profits -CHANGE in labor cost per unit of output -avg DURATION of unemployment -Prime Rate & other interest rates -commercial & industrial loans outstanding -inventory/sales ratio

Answer 6

Comparing yield of low risk T bonds to comparable non- Treasury bonds Remember: High yield = high risk Spread widens- market forecasting more risk of default on lower grade bonds *Flight to quality- could drive up price of Treasuries, decreasing yield (annual dividends/market price) Spread narrows- market forecasting less risk, possibly due to growing economy

Answer 7

Increased inflation (higher interest rates) leads to decreased bond prices Interest rates & bond prices have inverse relationship

Answer 8

Cash- higher savings rates but lower purchasing power (inflationary risk) Bonds- prices drop when interest rates rise. Lower market value Stocks- moderate inflation can increase values. High or unpredictable levels can hurt corporate profits Real estate- positive relationship between R/E and inflation due to higher cash flows and asset values

Answer 9

Cyclical- mirror the economy Elastic goods & services= cars, large appliances Defensive- resistant to downturns- supply basic needs Inelastic goods & svcs- utility stocks, medical supply stocks, stocks of staple consumer items, stocks of discount retailers *Note that concert tix are considered inelastic, as well as alcohol & tobacco

Answer 10

AKA net worth **SE= Total assets- total liabilities** **WC= current assets- current liabilities** Measure of firm's liquidity *Current Asset*-expected to be converted to cash within the next 12 mo *Current Liability*-due for pmt within the next 12 mo **shareholder equity**- 3 types -*capital stock at par* -*capital stock above par*- most stocks are sold above par when initially issued -*retained earnings* **Capitalization = long term debt + equity securities** **Capital structure**: relative amounts of debt vs equity composing a company's capitalization

Answer 11

Interest rates: up Dollar value: up Exports: down (costs more for others to buy from us) Imports: up (cheaper for us to buy from others) Note: our $ leaving is a debit, pushing towards a deficit Interest rates: down Dollar value: down Exports: up (our stuff is cheap when Dollar is weak) Imports: down (our money doesn't have much purchasing power) Note: exporting our stuff & bringing currency into the country is a credit Balance of trade= difference between a country's exports and imports **Overall trade deficit** Because we import more than we export (oil, cheap consumer goods)

Answer 12

Sell/go short in an OPTION with a stock position. Can get income in flat market, but quite risky in volatile market *Market sentiment- neutral* Major opportunities for losses!! **covered call** **long shares and short call** Gain the premium. Make a little if market goes up- plus the premium. *If market goes down & contract expires, still major loss (but you got your premium)* **covered put** **short shares and short put** Gain on the premium. If market drops, have to buy stock back & make a little money (plus premium). *If market rises, contract expires. Eventually have to buy back at higher price & take an almost unlimited loss- partially offset by the premium*

Answer 13

**3 years** Employee records (U4,U5,fingerprnts) **4 years** Customer complaints (FINRA) **5 years** CIP info (Cust ID program) CTRs (file within 15 days) SARs (file within 30 days) **6 years** Cust acc records (agreements, new acc forms) Blotters Customer complaints (MSRB) **lifetime** Stock certificates Partnership agreements Articles of incorporation Meeting minutes

Answer 14

*"Regular way" T+2* Clearinghouses, ex: DTCC *US government & options trades* T+1 Government- federal funds system (trade OTC only) Options- OCC (trade on CBOE, NYSE, Nasdaq, PHLX) **OCC does not set the premium** *Exercise of equity options contract:* Most- American- exercise at any time- T+2 with delivery of cash vs securities *Index options*- European- exercise at expiration only- T+1 for cash equivalent of the value of the stocks in the index (VIX index is Inverted to market) *OEX index is the only American style index option*

Answer 15

Pretty good Dino movie Pre-sale Group (net) Designated Member

Answer 16

TIC True interest cost Considers time value of money. Weights early interest costs more heavily NIC Net interest cost Does not factor in time value

Answer 17

*Mortality risk fee* covers risk that insured lives longer or shorter than actuarial est. *Investment mgt fee*- manage separate acc *Right to exchange for a normal life insurance policy*- **at least 2 years** No medical underwriting/ evidence of insurability. New policy issued as ID retroactive (p.242) *Sales charges*- **max 9% up to 20 yrs** (Renewal commissions pd up to 20 yrs) *Free look period*- **45 days from application** or **10 days from receiving the policy** (whichever is longer). Receive back all pmts made. *Refund provision*- **within 2 yrs**, early termination = return of cash value plus % of sales charge. **After 2 years**, only return cash value. Insurer keeps sales charges. *If separate account outperforms AIR target*, death benefit & cash value increase (& vice versa- but death benefit never below guaranteed minimum) *Policy loans*- after policy in place **3 years** and **at least 75% of "cash value"** must be made available

Answer 18

Most are "non-qualified": after tax contributions, tax deferred growth, growth & earnings taxed as ordinary income **No max sales charge** Separate account acts as a UIT/ security- **prospectus** must be delivered *Initial payment determined by insurance Co actuaries.* If separate acc outperforms AIR (target), the next month's payment to annuitant increases. At AIR? Stays same. Below AIR? Payment drops Annuitization: -Fixed # annuity units -Fixed # units liquidated per month -Variable payment based on unit's value Withdrawals: 3 kinds, pre- annuitization is typically LIFO- Last in (earnings) first out **random** LIFO **lump sum** LIFO **annuitization** monthly combo of (after tax) principal & (taxable) growth *exclusion ratio* taxable percent of monthly payments Death benefit fee- if annuitant dies during *Accumulation period*, beneficiary gets the greater of: MV or amount invested Beneficiary of annuity? Carryover basis (same basis as the annuitant paid originally) Stepped up basis only applies to Inverted stocks/bonds etc.

Answer 19

Life: Separate- daily Cash value- monthly Death benefit- yearly (never below guaranteed minimum)

Answer 20

**syndicator** oversees selling and promo of DPP. Max fees 10% of gross dollars of securities sold.* *Max 10% comp includes any amounts paid to wholesalers p. 313& 328* Total max: 15% *Additional 5% for administrative, organization, & offering expenses* Private placement (Accredited investors) w/ **Private placement memo** Or public offering with **prospectus** 3 additional docs: **cert of limited partnership** file in partnerships home state. *For legal recognition. Includes dissolution details.* **partnership agreement** given to each partner. *Lists rights/responsibilities of GP & LP, dissolution details* **subscription agreement** Each interested investor fills out. GP is given POA over partnership. *GP must sign to approve.* **Recourse loan**- all partners proportionately liable **Non-recourse loan**- only GP liable *Non-recourse loan (GP) and real estate DPPs- add to investor's basis* Key features- **GP** has unlimited liability & does the management- *has at least 1% financial interest* **LP** have limited liability Pass through of income, gains, *losses*, and *tax benefits* (depreciation, depletion, tax credits)

Answer 21

Combo/reorg of limited partnership(s) into securities of a successor corporation Disclosure docs needed. If fail to disclose negative opinion re: fairness, this is fraud IF partner's comp is: -**unrelated to vote** -no more than **2% of value of securities to be received** THEN solicitation of votes on roll up is not prohibited

Answer 22

Negative correlation to stock market Publicly traded= liquidity Pass through gains if 90% NII distributed & 75% income from RE Taxation: Dividend = ordinary income Cap gains = long term Trusts!,

Answer 23

Hedge fund: Unregulated, **usually org. as limited partnership** with **Private placement memo**, <100 *Accredited* investors -lack of transparency -aggressive, speculative -lock up periods - high management fees (2&20) May target: **Blank check company (SPAC/ special purpose acquisition co)** with no business operations & focus of mergers & acquisitions. No proposed investment intent disclosed **Blind pool** some indication of industry or sector, but no disclosure of specific use of proceeds Fund of hedge funds- registered mutual fund. Lower entry cost & accessible to regular investors. Still: high risk, high management fees, low liquidity

Answer 24

Securitization of underlying assets such as mortgage, auto loan, CCs, leases, royalties etc *Title to assets is transferred to an SPE/ special purpose entity. SPE then issues the ABS.* **CMO**- asset is residential mortgage, often backed by federal agencies so usually highly rated **suitability form** required from client Principal is repaid to one **tranche** at a time. p.336 **CDO**-not backed by a specific kind of debt, but usually non-mortgage **Amortizing**- ex: auto loan CDO Investor's return includes both principal & interest **Nonamortizing**- ex: credit card CDO. Debt has no fixed ending date

Answer 25

Pools of mortgages on residential properties. Repaid in tranches. Interest is applied across all tranches, but *principal only paid towards ONE until it is PIF*. Then principal is all paid towards the next tranche. Min investment $1000 Interest portion of payment is taxable as ordinary income. (Principal portion only taxed if sold at a discount.) *Not suitable for small or unsophisticated investors due to complexity.* Investors must sign **suitability statement** **Standard CMO** P&I pmts- see above **PO**- principal payments only *sold at deep discount- volatile* More valuable when rates fall & more of pmts go to principal **IO**- interest only *sold at discount* More valuable when rates rise & more of pmts go to interest. Note- never know how long income stream will last **PAC**- planned amortization class Paid off first Protection from prepayment risk & extension risk **TAC**- targeted amortization class Protection from prepayment risk only

Answer 26

Short stock Short call (naked) *Always cover your shorts!*

Answer 27

Very risky Use to generate income in a flat mkt Stock position with a short/sold option Sentiment? Look at the stock position **covered call** Long stock with short call Bullish/ neutral **covered put** Short stock with short put Bearish/ neutral

Answer 28

Where did the investor put their money? Which one would make the most money for the investor? **Premium** Leg with higher Premium is dominant . Investor put the most money/ emphasis here. **Strike price/ price**-[VP, vertical] Which can make the most $$? *call spread* Lowest strike price is dominant - "Call up" the furthest *put spread* Highest strike price is dominant - "Put down" the furthest **Expiration/ time** [HT horizontal] More time for market to move =more value for investor Later expiration is dominant

Answer 29

-Who are you? -Are you 5 letters (buyer, debit, widen, user, owner) or 6 letters (seller, credit, narrow, expire, writer)? -Bullish or Bearish based on dominant leg? **1- net the premiums (NP) This is either max loss or max gain, depending who you are.** If you're the buyer, buyers lose= ML If you're the seller, sellers gain=MG **2- Net strike prices (NSP)** **3- NSP- NP This is your "other side" of max gain or max loss** **4- SP +/- NP** *Strike price +(call up) or - (put down) Net premium* **This is your breakeven** Dominant leg strike price linked to Net premium of the two contracts

Answer 30

AKA hedge wrapper Protective of the *stock position* Stock can't move too far, like dog with collar & leash -Short call- OTM -Long *stock* -Long put- OTM

Answer 31

-**Buy & Sell** -Same underlying security -Same class (ex ABC call & ABC call) -**Time (expiration)** and / or -**price (strike price) are different** VP= **vertical spread**- price is different *vice president* HT=**horizontal spread**- time is different *Harry Truman* DTP- **diagonal spread**- time & price are different *Drink the prosecco*

Answer 32

-**Call & put** -all other elements identical, including time & price (expiration, strike price) **Long straddle**= buy (Long/buy/own) Buy.......**call** Buy.......**put** *Only appropriate for:* **-Sophisticated investor -Volatile markets** Or **Short straddle**= sell (Short, Sell, owe) Sell......**call** Sell......**put** *Only appropriate if:* **-Aggressive options trader w high net worth -Flat market expected**

Answer 33

Contract quote is identical **except it's a call and a put** Only suitable for: **-Flat market** **-Aggressive trader w wealth** (Think- ride out flat/neutral mkt) *Short straddle is seller- Sellers gain...the premium* **Max gain= combined premiums** Max loss= unlimited **2** breakevens= Strike + combined premiums Strike - combined premiums **Profit where?** Seller/narrow *Profit between the breakevens*

Answer 34

Matching quotes **except it's a call & a put** Suitable for: **-aggressive options traders -volatilty expected** (Think- take control in volatile mkt) Long=Own= buyers lose. Lose what? The premium **Max loss= combined premiums** Max gain= unlimited **2** breakevens= Strike + combined premiums Strike- combined premiums **Profit where?**: *outside of breakevens (above or below)* Remember- 5 or 6 letters- Buyer, widen

Answer 35

Looks like a straddle **(call & put)** But **Time &/or price** are different Long combo= call & put are both BUY Sentiment= volatility MG=(buyers lose)= combined premium ML= unlimited B/E (2)= Strike (put) - combined premiums Strike (call) + combined premiums Short combo= call & put are both SELL Sentiment = flat MG(seller)= combined premiums ML= unlimited B/E (2)= Strike (put) - combined premiums Strike (call) + combined premiums

Answer 36

Long or short combination where both legs are "out of money" *Recall: combo is a straddle where T +/- P are different*

Answer 37

Options with indices as underlying asset can be used *to hedge against market risk* Indices- most are **European** *Exercise at close* -SPX -DJX -RUT -VIX (inverse to market) -OEX- **American style** *Exercise anytime* Trade the contract T+1 Exercise the contract T+1 for cash equivalent of the underlying index

Answer 38

Measure of portfolio volatility vs. Market Higher beta? Need more protection (more volatile than mkt) *9.6.2 achievable* "Market risk is measured by a security's beta" P.376 High beta- tech, autos Low beta- utilities, consumer Basic staples

Answer 39

Index option, so **European** exercise & T+1 for both "the deal" and "the underlying asset" **Sentiment questions**- VIX moves inverse to market **Expiration**: The Wednesday 30 days *before the 3rd Friday* of the following calendar month

Answer 40

**Normal** 1=100 **Mini options** 1=10 **Foreign currency** 1=10,000 (1K) **Yen** 1= 1,000,000 (1MM) Foreign currency- **premium is in cents**, not dollars *NOTE: USD options do not exist* If this is offered as an answer, it's wrong **yield options (interest rate options)** After your T chart is done, adjust by moving decimal one place to left **Strike= 10 x YTM** *Yield based **TYX index** is based on the most **recently** auctioned Treasuries, so **interest rates and yields move together***

Answer 41

Long call & short put (matching) Behaves as if you owned the stock

Answer 42

Set by OCC Position & exercise- Usually 250,000 on each side (bull v bear) Exercise limits- max # contracts exercised on either side of market **within 5 consecutive bz days** 🐄 Bullish: Long call, short put 🐻 Bearish: Long put, short call

Answer 43

If **stock** was already held OVER a year (**long term**), then proceeds at sale are still long term capital gain/loss If **stock** was **short term** (one year or less), then holding period **resets to zero** when you buy the put. Doesn't begin aging again **until put expires** **married put** basis of Stock is the net cost of both. Holding period is unaffected by put- starts on settlement date

Answer 44

Securities in portfolio should have a negative correlation *Diversify out of (non-market) risk by:* -Combining volatile & price stable securities -Including assets whose prices move inversely or at different times *Note: MPT & CAPM assume no nonsystematic risk- only market risks*

Answer 45

**CAPM**- Theoretically appropriate required rate of return based on level of risk in an investment. Calculates a required rate of return based on the beta **Beta**- level of volatility vs. market; a risk multiplier. Analyst calculates expected return based on beta **Alpha**- ACTUAL return vs expected return. *Negative Alpha*- investor's return was too low for the risk taken *Positive alpha*- investor's return was better than expected in comparison to level of risk they took on. indicates a 'buy' recommendation **CAPM and Alpha** alpha= portfolio outperforms CAPM required return (based on beta). Positive alpha is desired, points to skill of portfolio manager **was the fund manager's performance sufficient to justify the risks taken to get the return?**

Answer 46

**Balance sheet**- snapshot of financial position at a specific point in time. *total assets- total liabilities =owners' equity* *Balance sheet does not indicate whether bz is improving or deteriorating* **Income statement** aka P&L statement Summarizes revenues and expenses for a fiscal period. *used to judge efficiency & profitability of a company's operation* **Revenues**- gross sales, money in **COGS** cost of goods sold, money out **Pretax Income** what's left *Pretax Income = operating income - interest pmt expenses (corporate debt)* **Revenue - COGS= gross operating profit**

Answer 47

Commission pmts to brokerage firm that are used, in part, to pay for other services such as research. Criticized for lacking transparency & hiding abuses. P.386 **Advisors must disclose soft dollar arrangements to clients (per SEC)** **What falls under sec 28(e) of '34 "safe harbor"?** -Research reports -Financial newsletters & trade journals -Analytical software -Seminars or conferences -Effecting & clearing trades *safe harbor for expenses paid with soft dollars that offer a direct research benefit*

Answer 48

**Odd lot theory**- *less experienced investors can't afford round lots (sets of 100 shares). Less experienced investors often guess wrong about the market.* If analyst sees odd lots doing an activity (ex. buying a security), they'll do the opposite. **Short interest theory**- *Short interest measures % stock sold short. Remember, these investors MUST buy back the security to return it.* **High short interest** is actually a 🐄 Bullish indicator bc closing purchases will have to start soon. **Low short interest** means normal sales. Nobody is obligated to buy, so this is 🐻 Bearish indicator. **efficient markets theory** *works within the Dow theory* Market prices instantly reflect new public info **Dow theory** If all of the Dow averages move in the same direction, new trend. If the 3 Dow averages move in different directions, there's uncertainty. *3 indices- DJIA -industrial DJTA -transportation DJUA -utilities* **3 types of mkt trends:** *within Dow theory* Main/ primary- 1yr+ Medium/secondary- 3-12 weeks Short/ST fluctuations- hours or days

Answer 49

*If investor has net capital losses, up to $3000 can be used as deduction against ordinary income* Selling security at a loss and purchasing **substantially identical security within 30 days** before or after the trade date If you do a wash sale, you lose tax benefits of the CL. Old basis & proceeds are factored into new basis. P.370 Substantially identical examples: -Securities *convertible* into one sold -*Warrants* to purchase the one sold -*Rights* to purchase the sold security -*Call options* to purchase the one sold *note- options of different series are not considered substantially identical (Ex different expiration months)*

Answer 50

IRS default- **FIFO**- may produce higher taxable CG in rising mkt Stocks- SH may elect **share identification**. SH tracks cost of each share purchased & liquidates shares that provide the lowest CG Mutual funds- SH may elect *not used for stock* **average cost basis**. Total cost divided by total shares. Can't use on stock SH can't change decision to use this method without IRS permission

Answer 51

Inheritance- Basis is FMV as of date of death (NAV, if open end investment co). This is known as **stepped up cost basis.** -**estate tax pd by estate** No estate or gift tax between spouses. Estate taxes are due at death of the survivor Gift- recipient's basis & holding period is the same as the donor's (received securities plus tax implications of CG) **carryover basis** -**gift tax pd by donor.** Amount of gift is the FMV as of date of the gift. *Note: can donate up to $17,000 per year to any number of individuals without incurring gift tax* **unified credit** Taxation of estate & gifts are unified. Whatever is used of lifetime gift exclusion before death reduces the estate tax exclusion Inherited **annuity** basis? **Carryover basis**

Answer 52

When corporation owns stock in another corporation & receives dividends from the investment, 50% of the dividends received are excluded from the owner corporation's income

Answer 53

**Asset allocation**- how is the pie divided? Mix of Asset classes (stocks, bonds, cash) **Diversification**- what's within that piece of the pie (asset class- ex lots of types of bonds)? Investing among different types of securities, markets, & industries

Answer 54

**Published each bz day** **Rising index= bond prices are rising** (yields are dropping) 40- *GO & Revenue*- **daily** 20- *GO*- mid rated & up- **weekly** 11- subset of the 20 GO- *higher rated*- **weekly** Revdex- *Revenue*- midrated- **weekly**

Answer 55

**Long margin**- borrow $$ to buy/ go long the securities. Must return $$ (+interest) Maintenance requirement= 25% equity **Short margin**- borrow securities (to sell for cash/ go short). Must return securities. Maintenance requirement= 30% equity

Answer 56

Margin securities may be commingled w securities owned by other customers (but not BD). Fully paid securities must be segregated.

Answer 57

FINRA- $2000 rule Maintenance of 25% (long) Maintenance of 50% (short) FRB- Reg T 50% initial funding

Answer 58

1 Priority- first in 2 Precedence- largest of those submitted 3 Parity (random)

Answer 59

Qualification- register with state only Coordination- register with state & SEC Notice filing- no registration w state Just file a notice stating: Going to offer in- state State can assess a fee

General Info Flashcards

(83 cards)