Series 65 Class - 65 Material Flashcards Preview

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Flashcards in Series 65 Class - 65 Material Deck (148):

Common stock represent ownership

A share is a claim on the company's assets and earnings


Voting rights

right to vote for the Board of Directors - in person or by proxy - casting a vote by absentee ballot
- can freely sell/transfer shares


Rights of Common Stockholders

- Examine books and records of company
- Limited Liabilities - maximum loss in an equity investment is the amount invested - no personal assets are at risk
- Paid after bondholders, creditors, and


Risks and Benefits of Common Stock

Why invest in Common Stock

- growth (capital appreciation)
- income (dividends)
- hedge against inflation

- market risk
- business risk


Authorized Shares

maximum number of shares the company is authorized to sell as provided by the corporate charter (arbitrary)


Outstanding shares

shares that are investor owned


Treasury Stock

shares that have been issued and are subsequently repurchased by the company


Rights & Warrants

- standalone securities
Key characteristic: the holder can exercise and buy additional shares of common stock
- freely tradable
- issued directly by corporation


Structure and Features of Rights
Purpose, Exercise Price, Time-Frame

Purpose: Allow shareholders to maintain their proportionate ownership

Exercise price: below current market value

Time-frame: Short-term (30-45 days)


Structure and Features of Warrants
Purpose, Exercise Price, Time-Frame

Purpose: Used as sweetener

Exercise Price: above current market value

Time-Frame: long-term (5+ years)


Preferred Stock

Preferred stock is an equity security it represents ownership but has debt-like characteristics
- trades like a bond

Features: Issued at Par value
Pays a fixed dividend on quarterly basis (6% of Par, $6)
Limits: No voting rights; No fixed maturity date
Priority: Preference at liquidation over common stock


Why Issue Preferred Stock

Raise Capital
- less risky than debt for the issuer: issuer can skip dividend payments
- but, more expensive than debt

Investors: Generate income (more than similar debt income). May miss dividend payment


Cumulative preferred stock
Participating preferred stock
Convertible preferred stock

- all missed accrued dividend payments must be paid before an dividend is paid to common shareholders
- preferred shareholder receive an additional dividend based on a predetermined condition
- the holder can convert the preferred share into a fixed number of common shares


Callable (redeemable) preferred stock

the issuer has the right to call away (buy back) the preferred stock at a certain price and retire it
- when called, all dividend payments cease


Adjustable rate preferred

the dividends issued will adjust based on a predetermined benchmark, such as T-bill rate


Benefits and Risks of Preferred Stock?

- Income (fixed dividend)
- No maturity date (perpetual income)
- Preference in liquidation (but still weak claim)

- Inflationary Risk (Purchasing power risk)
- Interest rate risk
- Business risk (no legal guarantee of dividend)


American Depositary Receipts (ADRs)

allow trading of foreign securities in US markets

issued by domestic branches of US banks


Rights of holders of ADRs:

similar to those holding common stock
- dividends paid in US dollars
- but ADRs still have currency risk. The foreign company's dividends must be converted to dollars
- annual financial reports in English


Why invest in ADRs? Benefits / Risks

- Appreciation (capital gains)
- Income (dividends)
- Diversity - low correlation with domestic securities

- Market Risk
- Political & legislative risk
- Currency Risk



Trading Characteristics

A company that manages a portfolio of real estate investments to earn profits for shareholders.
- Equity REITs - own real estate (leasing)
- Mortgage REITs - own morgages on real estate (interest earned)
- Hybrid REITs - do both

Trade on exchanges and OTC. REITs are highly liquid


REITs Taxation

Taxation: REITs pass-through income but not losses to investors (i.e. no corporate tax)

- 75% of income comes from real estate investments
- 75% of assets are invested in real estate
- 90% of income is distributed to shareholders


Risks & Benefits of REITs

- Income (dividends)
- Potential for capital gains
- Diversification - low correlation with general stock market

- Business risk
- Default risk
- Dividends taxed as ordinary income


REIT Taxation

all REITs taxed the same regardless of time period


Fixed Income

Bonds and fixed income securities represent a loan to a borrower they do not represent ownership

The borrower has a legal obligation to pay the investor:
- a stated interest payment
- for set period of time

After set period of time the principal is returned


Types of Risk with Fixed Income - Credit Risk

Investment grade - institutional investors may be limited to investment grade (bank grade) bonds
- Baa3 - BBB- (most speculative investment grade bond)

High-yield bonds - more risk, more reward (higher coupon)
- Ba1 - BB+

Moody's & S&P / Fitch


Par Value

face value of the bond
amount of principal the investor receives at maturity
always assume par is $1000
quoted as % of par (100% of par - $1000)


Coupon Values

are quoted as percentage of par
- example: 9% coupon (aka 9% nominal yield)
- interest payment: 9% of Par = 9% of 1000
Bondholders receives $90 annual interest (coupon)
- paid in two $45 semi-annual interest payments (included at maturity)


Investor owns 9% bond, purchased at par. Similar bonds with 10% coupon are issued

investor prefer the 10% bond, so the price of the 9% bond decreases
- MV = 95
- MV < Par
- The bond trades at a discount


Investor owns 8% bond, purchased at par. Similar bonds with 7% coupon are issued

investors prefer 8% bond, so the price increases
- MV = 103
- MV > Par
- The bond trades at a premium


Who benefits from changing interest rates:

When rates go up... New bond buyers (bonds become cheaper)
When rates go down (existing bondholders - their bonds increase in value)


Nominal Yield

fixed coupon on the bond - could also be called nominal yield

AT&T 9-25 - 9 is coupon and 2025 maturity


Current Yield

calculated annual interest / market price of bond


Yield to Maturity

Reflects not only the interest but also gain or loss recognized at maturity

Also Referred to as Basis, trading, yielding


Yield to Call

Reflect the yield earned on bond if the bond is redeemed by issuer prior to maturity


Easy way to know if Bond is at Discount or Premium



Yield Curve

Graphs the relationship between interest and time to maturity
- normal yield curve - long term maturity pay the highest yield
- inverted yield curve - short-term maturities pay the highest yields (generally sign of recession)


Treasury Bills

maturity of one year or less, no fixed coupon, quotes 4.9% - 4.85% - on discounted yield basis - bid price will always be greater than ask

Issue at discount and mature at par - they are like zeros

Such short duration there is no coupon


T-Notes and T-Bonds

- T-Notes - have maturity of 2-10
- T-Bonds - have maturity of 30 years
Fixed Coupons
Trade with interest
Quoted as % of Par Value in increments of one / 32
101:16 = 101 16/32% of par = 101.5% of par



Are long-term 0 coupon bonds that are backed by federal government
- no credit risk
- no reinvestment risk (entire return earned at maturity)

As rates fall - your semi-annual coupon payments will be reinvested at lower rate


Inflation protected issues - TIPS

Treasuries that protect against inflation
- no credit risk
- no inflationary risk (no purchasing power risk)


Government Agencies

- Subsidiary of US government
- Explicit Guarantee (US gov backs them)
- GinnieMae


Government Sponsored Enterprises

- Created / Chartered by US Government
- Implied Guarantee
- FannieMae / FreddieMac


Corporate Bonds Secured / Unsecured

- equipment trust certificates
- mortgage bonds
- collateral trust bonds

- debenture bonds


Unsecured Corporate Debt

Debenture Bonds - a debt obligation backed by the general credit of the issuing corporation
- senior
- senior subordinated
- junior
- junior subordinated


Bond Redemption Features
- Refunding Debt
- Call Protection
- Put Feature
- Sinking Fund

Refunding Debt - issuing new debt at lower rate to retire older, more expensive debt before maturity

Call protection - a time period when the issuer may not call its bonds

Put Feature - Provision allows investor to sell bond back to issuer under certain circumstances

Sinking Fund - an account where the issuer makes periodic deposit that are used to redeem its bonds at maturity


Convertible Bonds

8% convertible corporate bond - conversion price = $25

Benefits - the investor may convert the bond into a Fixed number of common shares

Impact on yield - yield is reduced

conversion ratio


Demand Deposits

investor can withdraw funds immediately
- checking account


Bank Products:
Certificates of Deposit

CDs - a time deposit where investors receive their funds after a set period of time


Money Market Instruments

Short term debt instruments with maturity of one year or less
- commercial paper - unsecured short term corporate debt - matures in less than one year (270 days or less)
- treasury bills - short-term US government obligations


Municipal Bonds can be issued by?

U.S. territories, possessions, & commonwealths
- Guam, Samoa, Puerto Rico, and US Virgin Islands


States sources of income

- income taxes
- sales taxes
- excise taxes
- license taxes


Cities sources of income

Ad Valorem Taxes - property taxes
- assessed in mils
- based on assessed value of property (not based on market value)


General Obligation Bonds
- Use of proceeds
- Redemption
- Restrictions

Use of proceeds used to finance non-revenue producing facilities (parks, libraries, city hall)

Redemption - the interest and principal is backed by the issuer's taxing power (i.e. the issuers full faith and credit)

Restrictions - statutory debt limits - laws limiting the amount of debt a muni may have outstanding (protect residents against overbaring tax burden)


Revenue Bonds
- special-tax revenue bonds
- moral obligation bonds

Issued for and back by revenue producing facility
- transportation infrastructure
- healthcare facility
- utility services

Special-tax revenue bond - a type of revenue bond redeemed by a special tax on a complimentary product associated with the bond

Moral obligation bonds - a revenue bond with a non-binding pledge from the legislature to make missed interest or principal payments (law-makers at own discretion can make up short-fall)


Which of the following securities would product the greatest after-tax income in the 28% tax bracket?
- 9% muni
- 10% corporate
- 11% corporate
- 12% high yield bond

Calculate taxable equivalent yield
- tax free yield / (100-tax bracket)

= .09 / .72 = 12.5%



100k purchase price
- 20k down payment
= 80k mortgage

Bank takes mortgages and sells to Ginnie / Fannie / Freddie - buy up all mortgages - pool them together - special-purpose vehicles - sell to broker dealers - investors

Referred to as pass-throughs


Prepayment Risk on MBS - if interest rates decrease

Interest rates decrease - prepayment increase - to reduce interest expense - speed of prepayments will increase - will not remain outstanding for as long - average life of MBS decreases - characteristics of ST bond

Consequences - market value increases slightly - reinvestment rate risk


Extension Risk - if interest rate increase

interest rate increase - prepayment decrease - average life of MBS increases - characteristics of LT bonds - bonds increasing in life - we wont get money back when we thought we would

Consequences - market value decreases significantly - extension risk


Collateralized Mortgage Obligations

Protect against prepayment risk
- Tranches - each of these different tranches will have unique characteristics as it relates to credit quality, maturity and exposure to pre-payment risk

CMO Advertising - reps and agents can't compare them to government securities and say they are as safe as government securities


Portfolio Income - Interest Income

Taxation on Interest Received from Bonds


What are the three types of Investment Companies

- Face amount certificate - don't exisit
- UITs
- Management Companies


Unit Investment Trust

investment company that issues redeemable (no secondary market) securities representing an undivided interest in a portfolio

- UITs do NOT have a board of directors (have board of trustees)

Portfolio composition - the portfolio is fixed, there is no active management

Municipal Bond Trust (fixed portfolio of muni bonds)



Often organized as UITs

Replicate an entire index


Direct Participation Programs


All types of DPPs benefit from pass through all income and losses to its owners.

Corporate entity does not pay taxes only individual shareholders pay tax. Not taxed twice.

- joint venture
- subchapter S-Corporation
- limited partnership

Extremely risky and illiquid. Like energy partnership 'wildcat program' subject to regulatory and legislative risk



Call Options
- buyer: the right to buy stock at a set price
- seller: the obligation to sell stock at a set price

Put Options
- buyer: the right to sell stock at a set price
- seller: the obligation to buy stock at a set price


Options Contracts

Listed options trade on exchanges
- Chicago board options exchange

Options clearing corporation
- issues and guarantees all listed options


Buy 10 ABV Nov 50 Calls @ 5

# of contracts

100 shares / contract
10 contracts x 100 shares / contracts

Market value below $50 - out of the money
at $50 - at the money - indifferent
$50-55 - in the money - yes but not profitable because you paid $5 to buy the option
above $55 - in the money - yes


Buy 1 XYZ Jan 30 put @ 3

When you buy a put you are bearish

Above $30 - Out of the money - no
$30 - At the money - indifferent
$27-30 - in the money - yes but not profitable
Below $27 - in the money - yes


Writing Calls / Covered Call

Covered call - writer owns the underlying stock

Uncovered call (naked) - writer does not own the underlying stock


Trading Options

1) Exercise Option
2) Do Nothing, allow expiration
3) Liquidate Position
- opening purchase -> closing sale
- opening sale -> closing purchase


Options Premium

Premium = time value + intrinsic value
Time value: the change the option will go deeper in the money before expiration
- decays as expiration approaches


Intrinsic Option Value

The in-the-money amount

intrinsic value is based on the market price of the underlying stock


Forward Contracts

Contract to sell an asset (commodities) at a set date in the future at an agreed upon price

- Direct contract between one buyer and one seller - individually negotiated

Forwards are:
- unique
- non-standardized
- illiquid
- subject to counter-party credit risk

No traded on exchange


Future Contracts

Exchange traded obligations for a specific commodity
- buyer: obligated to take delivery of the commodity
- seller: obligated to deliver the commodity

Standardized Parts of a Future Contract
- quantity
- quality
- delivery price / time and date / location

Benefit of the exchange: liquidity / guaranteed


Limit Orders

Guarantees a price
- does not guarantee execution
- only execute at limit price or better
- executed at first trade, satisfying limit price


Stop Orders

Two-step process
- if the stock price is reached the order is activated / elected / triggered and
- the order becomes market order for immediate execution (market order)

- protect an existing position lock in profits or limit losses
- Sell stock: protect a long position
- Buy stock: protect a short position


Orders entered at or BELOW the Market

buy limit
sell stop
sell stop limit


Orders entered at or ABOVE the market

sell limit
buy stop
buy stop limit



Auction marketplace - buyers compete to buy low sellers compete to sell high

Member of exchange are the designated Market Maker
- each NYSE stock has EXACTLY ONE designated market maker
- their role is the BD that makes a market on the floor of the exchange - maintain a fair and orderly market in a security



Many market makers per security - have inventory of stock stand ready to trade share

Can conduct two different types of trades
- position trading - from their own inventory
- agency transactions - conduct trades on behalf of customers


Dividend Procedures

Important dates set by the company
- declaration date (date that board declares dividend)
- record date (date by which at the end of trading an investor must be on the books and records of the company to receive the dividend)
- payable date (future date when the dividend is actually paid)

Trade settlement: when payment is due and legal ownership changes hands

T+3 settlement of equities


Finding the ex-dividend date

First day when the investor receives the stock they won't receive the dividend.

Regular way - trades executed on the 17th will settle 3 days later on the 22nd

Record date is 23rd - buyers will receive the dividend

If it settles on the record date - the buyer still will receive the dividend.

Therefore 21st ex-dividend date - first day when bought the stock still don't get dividend


Ex-dividend date

morning of the ex date the price of the stock will fall by the amount of the dividend

All orders entered at or below the market are also reduced morning of ex dividend date.


Qualified Corporate Retirement Plans (ERISA)

Employee Retirement Income Security Act
- Eligibility - 21 years or older been with company for at least one year (full time 1000 hours)
- Funding - assets of plan must be held separate from assets of the company
- Vesting Schedule - details what % of the employers contribution the employee gets to keep if they leave the company
- Communication - plan must be in the writing and participants must recieve account statements as well as information about vesting policy
- Nondiscrimination - same formula used for contributions for everybody


ERISA Guidelines (section 404) requires plan trustees

Uniform Prudent Investor Act: has to be trustee that governs the plan and the trustee has to act in best interest of stakeholders of plan

primary consideration risk vs. return trad-off
requires assets are diversified
permits delegate management to investment adviser

The standard of prudence is applied across the entire portfolio


ERISA Section 404 and 407 Prohibits

Section 404 Prohibits:
- self-dealing
- transactions with parties adverse to the plan
- personal competition for plan transactions (i.e. kickbacks)

Section 407 Prohibits:
a plan holding 10% or more of its assets in the employer's securities or real property


Section 404(c) - 401(k) Safe Harbor

Section 404(c) provides a fiduciary is NOT liable for plan losses if the participant has:
- investment selection - minimum of 3 investment choices with varying risk/reward profiles
- investment control - participants independent select where to invest the assets in their account
- adequate communication - plan documents, prospectuses, financial statement and real-time access to account information


Qualified Corporate Retirement Plans

Tax Benefits:
- pre-tax contributions (employer & employee)
- tax-deferred earnings & growth


Defined Benefit Plan

Pension plan - know exactly what you will get when you retire

Retirement income - set by formula (age, tenure & position)


Defined Contribution Plan

401k - Retirement income based on amount contributed and the account performance
- pretax contributions from salary
- sometimes company will match

Profit Sharing - company will contribute towards the employees retirement based on companies profits

Employee Stock Ownership Plan (ESOP) - company contributes its stock towards employees retirement

Simplified employee pension (SEP-IRAs) - plan favored by small business, easy to set up and maintain

Keogh Plan (HR-10) - available for self employment income only

All Qualified Corporate Plans - meaning pre-tax


Non-Qualified Plans
- Taxation

Not subject to ERISA (don't have to be offered to everyone)
- discriminatory in nature
- risk of default
- types: payroll deduction plan / deferred compensation plan

Employer: post-tax contributions
Employee: Taxable when benefit is received (upon retirement)
Earnings & growth: tax-deferred (generally)
Distributions: taxed at ordinary income


Traditional Individual Retirement Accounts

Opening accounts (can only be open by individuals)
- only earned income can be contributed to IRA
- investment income can not be contributed

Contributing to accounts
- maximum contribution - $55k a year; if 50 or order can contribute $65k instead
- Deadline for contribution: tax filing deadline of the next tax year
- The deadline for contributions for 2015 IRAs will be April 15th 2016


IRA Tax Scenarios

Post-tax contributions (generally)
- can have pre-tax contributions if individual is ineligible for any corporate plan
- tax-deferred earnings & growth
- earnings taxed as ordinary income


IRA Acceptable Investments

- stocks
- bonds
- mutual funds
- UITs
- US governemnt issued gold and silver coins

Muni's inappropriate investment in IRA


IRA Distributions

Distribution can begin 59.5
- if you take the money out before pay 10% penalty + taxes

- Death
- Disability
- First time homebuyer
- Major medical
- Education

Must take distributions at 70.5 can not contribute over this age
- taxed as ordinary income and if required minimums not met 50% penalty on the amount not distributed



Contributions of max $5,500, always after tax - earnings & growth are tax-free, distributions are tax-free, Restrictions at least 59.5 when you take money out and plan must be open at least 5-years ago.

Combined ROTH and IRA $5,500 in a year


ROTH IRA Income Contributions

Max contribution based on Adjusted Gross Income
- Single $132k


IRA - Transfer and Rollovers

Rollovers: owner takes possession of the funds
- have 60 days to take check and bring to new bank
- withholding tax (initial custodian will withhold 20% of your money)
- once per year

- old firm sends funds directly to new firm
- no withholding tax
- no frequency limitations


Coverdell Education Savings Account (ESA)

Minor beneficiary (under 18)

- post-tax contributions
- max: $2000 per year per beneficiary

Tax Benefits
- earnings & growth are tax-free for qualified distributions

Qualified Distributions
- education expenses (elementary, secondary & college)

Income Limitations
- eligibility (to contribute) phases out at higher income


529 Plan

Way to save for college and grade school
- administered by each state so each one will offer own plan with different contribution level
- individual can open plan in any state and the child does not have to go to school in that state
- money goes into plan after tax
- grows tax free
- and distributions for education are tax free at federal level
- can transfer plan once per year to family member
- reps must disclose fees and expenses and tax consequences will vary by state
- incentive to invest in own state plan


Margin Agreement Account Opening

Customer must receive risk disclosure document prior to account opening
- must be signed and returned by customer promptly after initial trade

Margin agreement
- Hypothecation - pledging securities as collateral for a loan
- Credit - dictates how interest in charged on the loan
- Loan consent - optional - however if signed by customer would allow firm to lend customer securities for short sales


Joint Tenants with Rights of Survivership

A husband and wife opening an account together

Undivided ownership account

All owners own 100% of the assets

Upon death of account owner the asset pass to surviving account owner nothing passes to deceased owner's estate


Joint Tenants in Common

A divided ownership account (two or more owners)

Each owner must specify their ownership stake

Upon death the owners proportionate share of the assets are distributed in accordance with the owner's will

nothing passes to survivers goes to estate


Transfer on Death

Upon death - account assets are passed to named beneficiary and avoid probate (legal process where will is declare genuine by court)

Corporate Account - Corporate Resolution
Required - authorizes the opening of the account
Identifies who has trading authority

Corporate charter - required to trade on margin


Uniform Gifts to Minor Act (UGMA) and Uniform Transfer to Minors Act (UTMA)

Account is owned by ONE minor (can not have joint)

One custodial manages the account (fudicuary responsibility)

Taxes minor is responsible for taxes on any gains in the account

Age of majority
- UGMA 18 years old
- UTMA - varies by state


Trading Authority

Discretionary of third party trading authority:
- discretionary Agent / IAR
- third party: attorney, accountant any 3rd party

Required documentation
- limited power of attorney: allows holder to trade the account
- full power of attorney

Durable power of attorney - survives a court findings of legal incompetence


Discretionary Accounts

All discretionary accounts have to be approved by supervisor or principal

discretionary trades must be approved by principal promptly after execution

And accounts are reviewed by principal frequently to ensure customer investment objectives are being meet


"Not Held" Orders

Examples: Buy me 100 shares of Ford when the price is right

What is not discretionary?
- Time
- Price

Who is "not held" responsible? the Agent / IAR is not held responsible as the price or timing


Trust Accounts

Trusts are established through trust agreement
- Settlor - granter or donor (person who supplies the property)
- Trustee - fiduciary that holds legal title to property in the trust (must administer the trust per the instructions of the trust agreement)
- Beneficiary - (person who's benefits from the trust)


Duty of Impartiality

all beneficiaries treated equality


Total Return

Income + Dividends + Capital Appreciation / Initial Purchase Price


Inflation-Adjusted Return (aka Real-Return)

Nominal return - inflation rate


Expected Return

Investments estimated return


After-Tax Return

Investment Return ( 1 - tax bracket )


Future Value

FV = PV x (1 + r)^t


TIPS Example
Years to maturity - 2
Principal - 1000
Nominal Yield - 3%
CPI - 4%

Nominal Yield - (1.5% semi-annual coupon)
(2% semi-annually)

Year 0.5 = 1000 beginning accrued principal, growth rate 1.02 ending accrued principal =$1020 x 0.015 = $15.30 Coupon


Market Risk

Changes in the overall market that adversely impact an investment.

Systemic or Systematic Risk



Current Ratio

Current Assets / Current Liabilities


Quick Ratio

(Current assets - inventory) / Current liabilities


Debt to Equity Ratio

Debt / Equity


Sharpe Ratio

Measures a portfolio's risk in comparison of its expected return

Expected return - Risk Free Rate / STD



- the volatility of a bond for a given change in interest rates
- longer duration = greater volatility (for a given change in interest rates)

Long term low coupon have the longest duration


Monte Carlo Simulation

statistical method to determine the return profile (all possible outcomes) of a portfolio



The percentage of a portfolio's performance that is attributable to a standard benchmark


Geometric Mean

weighted average - more appropriate for financial returns


Modern Portfolio Theory

Goal: minimize risk while maximizing expected return

Method: Create a diversified portfolio that achieves the most return for a given amount of risk

Portfolio: all things being equal a portfolio with less volatility will outperform one with more volatility


Strategic Asset Allocation

is passive management strategy
- Periodically rebalanced


Tactical Asset Allocation

- more active strategy

making short term adjustments based on market conditions


Client financial profile considerations

- Current expenses
- Outstanding debt
- Tax status
- Income
- Balance sheet (including assets and liabilities) and overall net worth


Client Potential Goals

- Preservation of capital
- Current Income
- Capital Growth
- Speculation


Balance Sheet

A snapshot of a company's financial position at a specific point in time


Income Statement

summarizes a company's revenues and expenses over a time period


Statement Cash Flows

reports the sources and uses of cash over a time period


Capital Gains

Tax rate depends on holding period
- 1 year or less: short term holding period, taxed as ordinary income
- 1 year & 1 day or longer: taxed at preferred rate of 15%


Portfolio Income - Offsetting Lossess

$3000 of capital losses are deductible from ordinary income


Gift of Stock

- individual buys ABC stock at $18 per share
- gifts the stock at $30 per share
- the stock is sold at $42 per share

Cost basis is the donors original purchase price $18

Recipients taxable gain is $24 per share
Taxable gain $24 = proceeds $42 minus cost basis $18


Gifts to Charity

Donor gets a deduction equal to the FMV of the donation


Inherited Stock

individual buys XYZ stock at $80 per share

the individual dies when the stock is worth $100 per share. The individual wills the stock to an heir.

the stock is sold at $120 per share

cost basis is the market value at the time of death ($100)

Taxable income from sale of stock is $20 per share
proceeds $120 minus basis $100 = $20


Annual Gift Exclusion

Single: $14k to as many individuals as they want
Married: $28k
Other Combinations: married couple A - B $56k
Gift between spouses: unlimited



Alimony - Spousal support
- Payer: tax deductible
- Recipient: included in taxable income


Child support

financial support for a child
- Payer - not tax deductible
- Recipient (child or guardian)


C Corporation

Separate legal entity
- pays corporate income tax (double taxation)
- limited liability for owners
- allows large amounts of capital to be raised


S Corporations

- small businesses set up as S-corps
- pass through gains and losses to shareholders
- have limited liability

owned by individuals


Economic Cycle

characterized by increasing economic growth - cyclical stocks would be good investments - auto / tech /

stable defensive


Interest Rate Order from low to high

Fed Funds Rate -

Discount Rate - rate fed charges banks for short term loans

Broker's Call Rate - rate broker dealer pays a bank when a B/D borrows money

Prime Rate - what bank charge their best institutional clients


Economic Theories
- Classical
- Keynesian
- Monetarist

- Government should play a minimal role
- lower taxes and less government regulation

- Government can help maintain strong economy
- Fiscal policy: taxation and government spending

- economy is best controlled through changes in the money supply by the FED


Open Market Transactions (Tools of the Fed)

Discount Rate

Bank Reserve Requirement

Easy Money: Buying and selling of government securities
Tight Money: Fed sells treasuries

Discount Rate: Rate that the Fed charges banks for short term loans
- Easy money: fed lowers discount rate
- Tight money: fed raises discount rate

Bank reserve requirement
- easy money: lower the reserve requirement
- tight money: increases the reserve requirement


Securities Act of 1933

Regulates new issue market
- required registrants
- submission to SEC - registration statement

all securities must be registered with the SEC unless the security is exempt or the transaction is exempt