Series 65 Class - 65 Material Flashcards Preview

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Flashcards in Series 65 Class - 65 Material Deck (148):
1

Common stock represent ownership

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

2

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

3

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

4

Risks and Benefits of Common Stock

Why invest in Common Stock

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

Risks:
- market risk
- business risk

5

Authorized Shares

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

6

Outstanding shares

shares that are investor owned

7

Treasury Stock

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

8

Rights & Warrants

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

9

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)

10

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)

11

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

12

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

13

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

14

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

15

Adjustable rate preferred

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

16

Benefits and Risks of Preferred Stock?

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

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

17

American Depositary Receipts (ADRs)

allow trading of foreign securities in US markets

issued by domestic branches of US banks

18

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

19

Why invest in ADRs? Benefits / Risks

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

Risks:
- Market Risk
- Political & legislative risk
- Currency Risk

20

REITs

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

21

REITs Taxation

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

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

22

Risks & Benefits of REITs

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

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

23

REIT Taxation

all REITs taxed the same regardless of time period

24

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

25

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

26

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)

27

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)

28

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

29

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

30

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)

31

Nominal Yield

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

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

32

Current Yield

calculated annual interest / market price of bond

33

Yield to Maturity

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

Also Referred to as Basis, trading, yielding

34

Yield to Call

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

35

Easy way to know if Bond is at Discount or Premium

Discount:
YTC > YTM > CY > NY
Premium:
NY > CY > YTM > YTC

36

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)

37

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

38

T-Notes and T-Bonds

Maturities
- 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

39

Strips

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

40

Inflation protected issues - TIPS

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

41

Government Agencies

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

42

Government Sponsored Enterprises

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

43

Corporate Bonds Secured / Unsecured

Secured
- equipment trust certificates
- mortgage bonds
- collateral trust bonds

Unsecured
- debenture bonds

44

Unsecured Corporate Debt

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

45

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

46

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

47

Demand Deposits

investor can withdraw funds immediately
- checking account

48

Bank Products:
Certificates of Deposit

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

49

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

50

Municipal Bonds can be issued by?

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

51

States sources of income

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

52

Cities sources of income

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

53

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)

54

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)

55

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%

56

Mortgages

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

57

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

58

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

59

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

60

Portfolio Income - Interest Income

Taxation on Interest Received from Bonds

61

What are the three types of Investment Companies

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

62

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)

63

ETFs

Often organized as UITs

Replicate an entire index

64

Direct Participation Programs

Suitability

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.

Types:
- joint venture
- subchapter S-Corporation
- limited partnership

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

65

Options

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

66

Options Contracts

Listed options trade on exchanges
- Chicago board options exchange

Options clearing corporation
- issues and guarantees all listed options

67

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

68

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

69

Writing Calls / Covered Call

Covered call - writer owns the underlying stock

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

70

Trading Options

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

71

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

72

Intrinsic Option Value

The in-the-money amount

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

73

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

74

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

75

Limit Orders

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

76

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)

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

77

Orders entered at or BELOW the Market

buy limit
sell stop
sell stop limit

78

Orders entered at or ABOVE the market

sell limit
buy stop
buy stop limit

79

NYSE

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

80

NASDAQ

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

81

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

82

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

83

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.

84

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

85

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

86

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

87

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

88

Qualified Corporate Retirement Plans

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

89

Defined Benefit Plan

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

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

90

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

91

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

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

92

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

93

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

94

IRA Acceptable Investments

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

Muni's inappropriate investment in IRA

95

IRA Distributions

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

Exceptions:
- 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

96

ROTH IRAs

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

97

ROTH IRA Income Contributions

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

98

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

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

99

Coverdell Education Savings Account (ESA)

Minor beneficiary (under 18)

Contributions:
- 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

100

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

101

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

102

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

103

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

104

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

105

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

106

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

107

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

108

"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

109

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)

110

Duty of Impartiality

all beneficiaries treated equality

111

Total Return

Income + Dividends + Capital Appreciation / Initial Purchase Price

112

Inflation-Adjusted Return (aka Real-Return)

Nominal return - inflation rate

113

Expected Return

Investments estimated return

114

After-Tax Return

Investment Return ( 1 - tax bracket )

115

Future Value

FV = PV x (1 + r)^t

116

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

117

Market Risk

Changes in the overall market that adversely impact an investment.

Systemic or Systematic Risk

Non-Diversifiable

118

Current Ratio

Current Assets / Current Liabilities

119

Quick Ratio

(Current assets - inventory) / Current liabilities

120

Debt to Equity Ratio

Debt / Equity

121

Sharpe Ratio

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

Expected return - Risk Free Rate / STD

122

Duration

- 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

123

Monte Carlo Simulation

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

124

R-Squared

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

125

Geometric Mean

weighted average - more appropriate for financial returns

126

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

127

Strategic Asset Allocation

is passive management strategy
- Periodically rebalanced

128

Tactical Asset Allocation

- more active strategy

making short term adjustments based on market conditions

129

Client financial profile considerations

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

130

Client Potential Goals

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

131

Balance Sheet

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

132

Income Statement

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

133

Statement Cash Flows

reports the sources and uses of cash over a time period

134

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%

135

Portfolio Income - Offsetting Lossess

$3000 of capital losses are deductible from ordinary income

136

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

137

Gifts to Charity

Donor gets a deduction equal to the FMV of the donation

138

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

139

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

140

Alimony

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

141

Child support

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

142

C Corporation

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

143

S Corporations

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

owned by individuals

144

Economic Cycle

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

Peak:
stable defensive

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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

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Economic Theories
- Classical
- Keynesian
- Monetarist

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

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

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

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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

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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