1 - Equities

Common stock
●​ returns come from dividends and cap gains
●​ limited liability → you can only lose what you’ve invested

Example questions
●​
○​ The answer was C → it is NOT TRUE that repurchased shares cannot be
reissued to the public
●​ CS vote on the following
○​ BOD - TRUE
○​ management - FALSE (BOD chooses)
○​ dividend distributions - F
○​ corporate events T
●​ Proxy statements are where investors get info on BOD etc.
●​ statutory vs cumulative voting
○​ i picked D -
■​ cumulative voting = you have 100 shares. if there’s 3 board seats, you
can pool together all your votes (100*3) and put however many votes you
want per seat
■​ statutory voting = you have 100 shares and 3 BOD, can only allocate 100
votes per seat
○​ E

Equity classification
●​ Income Stock
○​ mature industries
○​ consistent dividends
○​ utilities
○​ objective → income thru divs
●​ Growth Stock
○​ reinvest earnings into business
○​ more volatility
○​ tech, biotech
○​ objective → capital gains realized on sale
●​ Defensive Stock
○​ stable across econ cycles and serve basic needs
○​ food, hygiene, medicine
○​ objective → stability
●​ Cyclical Stock
○​ mirrors econ cycle
○​ captures discretionary spending patterns
○​ retail, auto, restaurants, entertainment
○​ objective → outperform the market
●​ income/defensive less risky than cyclical and defensive
Risks of owning CS
●​ systematic risk (market risk) = indiv security is impacted by overall market performance
○​ all boats float or sink causing your security to rise or sink
○​ best protection = hedging (e.g. using options)
●​ non-sys risk or biz risk = risk of a spec business doing poorly
○​ best protection = diversification

CS liquidation priority
●​ CS is repaid last, they’re at the bottom of cap stack

American Depositary Receipts (ADRS)

●​ ADRS allow domestic trading of foreign stock
○​ foreign company sells American depositary SHARES to US bank
○​ US bank will sell those shares as ADRs to US investors on exchanges or OTC
●​ Note: foreign company can pay a dividend to US bank, but in that moment foreign
government may withhold some of the dividend as tax
○​ the bank won’t hold the dividend, they’ll pay it out in USD to investors
●​ What risk are ADR holders exposed to
○​ B - not exposed to call risk because ADRs are not callable
○​ exposed to political (esp bc it’s a foreign stock), currency (bank does conversion),
and inflation risk

Preferred stock
●​ equity security with regular, steady income
●​ investor holding pref stock expects a return based on fixed quarterly payments
(dividend?)
●​ dividends on PS must be paid before dividends to CS (above CS on cap stack)
●​ preferred stock has NO voting rights
○​ CS gets to vote on BOD and major corp events but PS does not
●​ questions
○​ XYZ 5 % PS w/ 100 par value
■​ what dividend to expect
■​ 1.25 → 100*.05/4 = 1.25
■​ if XYZ has an awesome year or a rlly bad year, they should still expect the
1.25 and probably won’t share in down/upside (that falls to CS)
○​ if XYZ skips a div payment (quarterly)
■​ then they will still get 1.25 in the next div payment
■​ PS is non-cumulative pref stock unless refereed to otherwise
○​ CS vs PS
■​ CS
■​ PS
■​ CS
■​ PS - cumulative pref will combine any skipped dividends
 ■​ CS

Penny Stock
●​ less than $5 a share and quoted OTC (unlisted)
●​ characteristics:
○​ speculative, illiquid, volatile, more concern for fraud
●​ is this a penny stock? → NO, YES
●​ Penny stocks are common stock so they can vote!

Preemptive rights
●​ allows existing investors to get the first look at any new shares being issued to help
avoid dilution
●​ shareholder is given short term opportunity to buy additional shares at a slight discount
to current market price - the additional shares would match the % they own currently
under the new number of shares
●​ it operates under an options structure so the investor has the right to exercise or not

Warrants
●​ holder can buy issuer’s stock at a specified exercise price (kinda like an LT IOU)
●​ characteristics:
○​ long term instruments lasting 5+ years
○​ issued in connection w/ other securities to sweeten the deal
○​ freely tradable in secondary market as well
●​ question: client issued 10 ABC corp warrants with 20$ exercise price and expiration in 5
years
○​ client can purchase shears of ABC for 20$ per share - TRUE
○​ value of warrant is tied to price of underlying shares - TRUE?
○​ warrant was issued at an exercise price below share price - FALSE
○​ client can sell warrant - TRUE

Dividends
●​ distribution of co profits to shareholders
●​ dates to know
○​ declaration date → the board ANNOUNCES a dividend
○​ Ex-date → first date a security trades without the dividend included in the
contract price (a buyer on or after the ex-date will not get that dividend)
■​ if you buy on ex-date, you won’t get the div (excluding dividend)
■​ if you sell on the ex-date but you owned before, you still get the dividend
○​ record date - the date a shareholder must legally own the stock to receive the
dividend
■​
○​ payment date - the dividend is paid out
○​ (DERP! declare, ex, record, pay)
●​ settlement
 ○​ the date a transaction is completed
○​ reg settlement is T+1, one day after trade date
■​ if you trade a stock today, you don’t own it (record date) until the next day
○​ cash settlement is same-day
■​ special kind of settlement that does it same day
○​ on settlement
■​ ownership transfers to buyer, payment delivered to seller
●​ are cash dividends taxable to investors?
○​ YES, EVEN IF REINVESTED (a drip plan where you take dividend profits and
put it back into shares)
●​ questions
○​ trade is executed 5/1 monday
■​ trade settles 5/2
○​ trade is executed on 5/2 friday
■​ trade settles 5/5 monday
○​ company established may 24 as the record date, when does investor need to buy
■​ tuesday, may 23 (so that they legally own as of may 24)

●​ question: abc declares dividend and establishes record date of november 4

○​ who receives the dividend payment?
■​ reg trade on nov 2, BUYER
■​ reg trade on nove 3, BUYER
■​ reg trade on nov 4, SELLER even though buyer now owns it
■​ what happens to price of stock on morning of ex-date
●​ price of the stock on the ex-date is reduced by the dividend
amount
●​ this is for fairness? or to not cuck demand probably
●​

Stock split
●​ does not create/destroy value, just adjusts stock price and number of shares
●​ Question
○​ 2 for 1 split at $20 bucks
■​ $10 bucks per share bc u have 2x more shares
○​ 4 for 1 at 60
■​ 4x more shares at 15$ per share
○​ 1 for 10 (reverse split) at 3$
■​ 10x less shares at 30$
●​ Question
○​ economic ownership remains unchanged
○​ 200 shares at 20$
○​ 1000 shares at 2.5$
●​ are stock splits / stock dividends taxable to investors
○​ no, these don’t change how much of the company you own / economic value
Short Sale
●​ sale of stock that client doesn’t own (shorting)
○​ market view of short seller?
●​ the way it works
○​ short seller borrows shares from a stock lender (who owns it) and sells it
○​ short seller waits for the price to go down, buys back those shares, and returns it
to the stock lender, making the margin between sale price and buyback price
●​ question
○​ client sells 100 shares of abc short at $50 believing it is overvalued
○​ client now has 5k in proceeds and obligation to return 100 shares
○​ what happens if ABC drops to 35$ per share
■​ client buys 35*100 = 3500 worth of stock and returns it to the lender
■​ 5000 - 3500 = 1500, short seller made 1500
○​ what happens if ABC goes to 80 dollars
■​ client buys 80*100 = 8000 worth of stock to return
■​ loses 3000
●​ the maximum loss on shorting is UNLIMiTED because stock price can rise indefinitely

EQUITY REVIEW
●​ Common
●​ preferred
●​ rights
●​ warrants
●​ ADRs
○​ american depository receipts
chapter quiz
●​ pref shares are like debt because they have fixed payments and have inverse
relationship between price and IR
●​ omnibus account - BD account to hold securities for another BD
●​ escrow account - account by a neutral third party that holds money until certain
conditions are meant (think RE closings, IPO lockups, etc)
●​ negotiable name - its nothing
●​ street name - securities registered in the BD’s name but customer is still the owner
○​ so if customer endorses a stock certificant to brokerage firm = street name
registration for ease of training
●​ never mind these are PROXY FILINGS not c reports
2 - Bonds Intro
Bonds
●​ loan from investor to issuer
○​ investor: individuals, institutional
○​ borrower: corporations, governments, munis
○​ investors lend money because they get paid interest and get par returned at
maturity
■​ usually semiannual interest (coupons)
○​ bonds have par of 1k or multiple
○​ bond prices fluctuate above/below par from market demand throughout its life

Parts of a bond
●​ Coupon: annual rate paid on face (par) amount
○​ quoted as % of par, paid semi-annually
○​ question: 10y, 1k par bond w/ 6% coupon
■​ interest per payment: 6%*1000*½ = $30
■​ interest cumulative: $30*20 = $600
●​ life of a bond:
○​ what happens if a bondholder wants to sell the bond after two years? what price
■​ B - at market price
■​ the investor holding it at maturity gets back par value alongside the final
semi-annual coupon
Bond prices + interest rates
●​ IR affects bond prices (what an investor COULD earn in the market)
○​ as rates change, outstanding bond prices adjust so their yield is similar to what
new bonds are paying (because the coupon doesn’t change, but the price can)
○​ if interest rates rise to 12% and you have a 9% bond, then I won’t be willing to
buy your bond until you lower the price to equal 12% rate
■​ RATES GO UP, BOND PRICES GO DOWN
○​ if interest rates fall to 7%, then you can afford to raise the price
■​ RATES GO DOWN, BOND PRICES GO UP
○​ This inverted relationship is called INTEREST RATe RISK
●​ what features make a bond more sensitive to interest arte risk
○​ low coupon
○​ long maturity
○​ (= long duration)
○​ Duration is a measure in years of how much a bond’s price is likely to
change when interest rates move
●​ which would appreciate the most during falling interest rates
○​ 30 year, zero coupon
○​ has the longest duration!
■​ duration is related to ur discount rate changing the value of the bond
■​ discount rate change more greatly magnifies cash flows in the future
because it’s a divisor → (1+r)^n in which n is number of years
■​ low coupon = more of value comes from future end payment
 ■​ long maturity = more of ur cash flow comes in thru the future
●​ question: if 9% bond is sold two years later at 12% rates, the bond will
○​ sell at a DISCOUNT (rates up, prices down)
●​ 3% coupon, at a market rate of 2%
○​ sell at a premium
●​ 3% coupon, MR 4%
○​ sell at a discount

Bond Yields
●​ Coupon = nominal yield
○​ this yield DOES NOT CHANGE
●​ Current yield
○​ annual interest / current market value
●​ yield to maturity (YTM)
○​ overall return if bond is held until maturity
○​ (income + capital gain / loss) / amount of money invested
●​ yield to call (YTC)
○​ if the bond is callable, what might your yield be
○​ i.e. if you get your money back early

(12:03 start video 2)

Bond yield review

●​ If you’re trading at a DISCOUNT
○​ lowest yield → NY - nominal yield
■​ 9’s of ‘25 = 9% bond with maturity in 2025
■​ this is the coupon
○​ current yield
■​ either write out or make you calculate
■​ annual interest / CURRENT market price (within 1 year)
■​ so 1 year interest / amount i paid for it
○​ YTM
■​ return an investor would achieve if they held it to maturity
■​ YTM basis
■​ trading at YTM
■​ yielding YTM
○​ YTC
■​ yield to call
■​ makes no sense for the co to call it back early, they’re gonna take a hit bc
rates are low ?
●​ its inverted for premium
●​ if trading at par, all rates are the same!
Bond quotation
●​ state the price of a bond as a percentage of par value
●​ quote of 100 = price of $1000
○​ YTM = coupon
●​ quote of 97 = price of 970$
○​ YTM > coupon
●​ quote of 83 = 830$
○​ you get back extra 170$ so your YTM > coupon
●​ quote of 105 = 1050$
○​ you lose 50, YTM < coupon

Bond Yields
●​ you might have to ID the nominal yield
○​ which will never change, it’s the thing printed on the cert
○​ aka coupon
●​ current yield for 8% coupon bond
○​ quoted at 90
■​ YTM > coupon
■​ better because you pay less to continue getting 80$
■​ 80/900 = 8.9%
○​ quoted 100
■​ YTM = coupon
■​ no change at 8%
 ○​ quoted 132
■​ YTM < coupon
■​ worse
■​ 80/1320 = 6%
Zero-coupon bonds
●​ 20 year 1000 par value zero coupon bond bought at 350
○​ quoted at 35
○​ annual interest = 0
○​ bonds at issuance pricing: AT A DISCOUNT (because pv of cash flows)
○​ owner at maturity receives 1000
○​ profit earned if held to maturity: 1000 - 350 = 650
○​ investment objective: long term, no need for current income (retirement, college)
○​ risks:
■​ 1) higher interest rate risk, higher duration = higher volatility
■​ 2) investors are subject to phantom tax on annual accretion
●​ accretion = upward adjustment of a discount bond’s cost basis
●​ basically the IRS spreads out your zero coupon bond’s profit as if
you were earning that money equally over the maturity of the bond
●​ you have to report that money bc you earned it even if you didn’t
receive it and then get taxed on it
●​ you can solve for it by putting it in tax deferred accounts like
retirement or college funds

Fixed income features

●​ benefits issuer:
○​ callable → can take the bond back at a set price and stop paying interest before
maturity (usually par)
■​ does = higher coupon for investor to compensate for tht risk
■​ bonds can’t be called during call protection period
●​ benefits investor:
○​ puttable → investor can demand early repayment of principal
■​ = lower coupon for investors
○​ convertible → investor can convert bond into fixed number of common
shares/stock
■​ = lower coupon for investors

●​
○​ first the call gives you 1020 (quote at 102)
○​ then you receive the coupon you would’ve received on payment date: .1*1000/2
= 50
○​ YOU GET THE MONEY FROM THE LAST COUPON PAYMENT DATE
●​ end (12:29)
Bond Risks:
●​ interest rate risk
○​ bond price volatility to IR
○​ measured by duration
●​ call risk
○​ risk that bond is redeemed before maturity
○​ bonds will be called be issuer when interest rates are low (thus prices are higher)
because they would rather re-issue bonds at that lower rate
●​ reinvestmen rate risk
○​ risk that investor can’t reinvest capital at previously earned rate of return (e.g.
interest payments, principal return)
●​ inflationary risk
○​ return is fixed but costs are rising
●​ credit risk
○​ risk of default - issuer can’t make interest or principal payments
○​ rating agencies evaluate credit risk
○​ credit rating is a huge liquidity factor
■​ bonds with higher liquidity if thy have higher credit rating (more investors
willing to buy)
●​ questions
○​ INFLATIONARY RISK
○​ CALL RISK and REINVESTMENT RISK
■​ rates r going down so co might call
○​ INTEREST RATE RISK
■​ price goes down so if you tried selling it’d take a hit
○​ CREDIT RISK, LIQUIDITY RISK

Accrued interest
●​ interest investor earned but not yet received
●​ interest accrues to the seller up to but excluding settlement
○​ because you only get payments very 6 months, but every day you’re technically
earning money
○​ corp and muni bonds accrue using 30 day months, 360 day years and settle T+1
○​ gov bonds accrue using actually days in months and years, settling T+1
●​ What happens if I sell my bond in between coupon payment days?
○​ the buyer pays the seller for any earned but unreceived interest (accrued
interest)
■​ and then the buyer will receive the full interest payment at the end of the
period, but since the buyer already fronted the interest from prior payment
to day T, the interest is fairly split
●​ question: 10% march and september corp bond is traded on monday, june 2
○​ so i get paid in march and sept
○​ how many days of interest have accrued as of june 2?
 ■​ corp bond = 30 days each month
■​ march → may = 3*30 = 90
■​ trade day is june 2 = 90 + 2 = 92 days accrued
○​ is accrued interest taxed?
■​ yes, it’s ordinary income just fronted by the next guy
○​ a bond that trades with no accrued is called a bond that trades flat
■​ e.g. zero coupon bonds
BOND WRAP UP
●​ what is a bond
○​ a loan an investor buys from issuer
●​ how does an investor earn a turn
○​ thru interest payments
●​ bond call
○​ issuer takes back the bond early
○​ they do it bc low interest rates = better funding market so they call higher rate
bonds back and then re-issue at lower rates
●​ interest rate risk
○​ risk of bond prices changing due to IR changing
○​ other risks: call risk, reinvestment risk, inflationary risk, credit risk, liquidity risk
○​ most sensitive to IR risk = low coupon long maturity bonds
●​ bond yields, accrued interest
●​ (end 12:45)
3 - Types of Bonds
Fixed income types
●​ US government
○​ treasuries, (notes, bills, bonds)
○​ no credit risk
■​ it can just print money to make payments
■​ but this can lead to inflation
○​ safety of principal
○​ low yield
■​ because low risk
○​ interest is taxed at federal level
■​ (but not at state)
■​ not tax-advantaged
●​ Municipalities
○​ tax-free interest income
●​ corporations
○​ range from safe to high risk
○​ interest is taxable as ordinary income

Corporate Bonds
●​ secured vs unsecured
○​ secured are backed by collateral
■​ mortgage bond (RE), collateral trust bond (backed by another portfolio of
securities), equipment trust obligations (e.g. airplanes, rail cars) → ETOs
are also known as ETCs
●​ the OWNER, not the MANUFACTURER would use ETCs
○​ unsecured bonds = debentures
■​ backed by good faith and credit of the issuing corporation
●​ does the security have a legal obligation to make regular payments?
○​ secured, unsecured (debenture), sub debt → YES
■​ a skip = default
○​ preferred stock, common stock → NO
■​ even with preferred, it’s a promise of a fixed dividend but ult up to board
on if it wants to skip
●​ Risk/return tradeoff
○​ more risk = more possible return

Eurodollar bonds
●​ bonds traded outside of USA but DENOMINATED in US dollars
 ○​ nothing to do with EURO just denom in USD
○​ coupons made in USD
○​ bonds are NOT registered with the SEC as they are issued outside of USA
○​ used by companies to make their securities more marketable
■​ e.g. because the companies’ home currency is unstable
●​ for example argentina has unstable currency, might raise capital
by raising USD bonds
■​ the company has more currency risk as a result
●​ eurodollar deposits = US dollars deposited or held in a bank abroad

Convertible Bonds
●​ CB converts into CS
○​ debt features of a bond, with upside of equity if favorable
○​ conversion price (CP) = price paid per share on conversion
■​ set at the time CB is issued
■​ price you pay per share when you convert
○​ conversion ratio (CR) = number of shares received on conversion per bond
■​ fixed at issuance as well
■​ CR = par value of bond / conversion price
■​ a 4% bond at 1000 par with a CP of $50
■​ CR= 1000/50 = 20 shares per bond
○​ these are FIXED at issuance! does not change over time
●​ questions: CB with 3% coupon and a conversion price of $40
○​ CR = 1000 / 40 = 25 shares per bond
○​ how many shares will an investor receive on the conversion if the bond is bought
at different prices
■​ still 25 shares per bond right? it’s about the rate at issuance, being bought
at a discount/premium doesn’t matter
●​ the point where price of CB = market value of stock received on conversion is
○​ the parity price → when price of bond = value of stock
■​ we generally assume CB trades at parity, else there’s arbitrage opp
■​ because CR is fixed at issuance! if the CB is trading lower or higher then
it’ll get converted into stock with higher or lower value
●​ yield on a CB vs non-CB bond is
○​ usually lower because it has potential for equity upside

US Government Securities
Types of US securities
●​ T-bills
○​ 4 - 52 week maturities
■​ 4,13,26,52
○​ no semiannual interest
○​ quoted as an annualized discount percentage
■​ so basically like zero coupons, just sold at a discount
●​ T-notes and T-bonds
○​ maturity of 2-10 years (notes), 30 years (bonds)
○​ pay semi-annual coupon
○​ quoted as a percentage of par in 32nds of a point..?
■​ a quote of 95:16 means 95 and 16/32 or 95 and a half which means 95.5
= 955/1000 of par
●​ STRIPS
○​ separately traded registered interest and principal of securities
○​ US gov issued zero coupon bonds
○​ takes a treasury note and strips it into every single individual cash flow
■​ so you could pay for just one coupon payment, say the year 3 payment of
a coupon
○​ treasury receipts
■​ the same thing BUT it was issued by banker dealers rather than gov.
pretty much defunct after the gov started doing it
●​ TIPS
○​ coupon bonds that adjust based on the inflation rate
●​ Risks of STRIPS and TIPS
○​ credit risk: neither (us gov issued)
■​ but treasury receipt does bc its BD issued not us gov issued
○​ interest risk:
■​ STRIPS - yes, low coupon = more risk!
■​ TIPS - yes
■​ STRIPS probably more sensitive as it has lowest coupon
●​ and long term STRIPS will be riskier
○​ call risk:
■​ neither can be called
■​ US bonds in general are not callable
○​ reinvestment risk:
■​ not on STRIPS → there’s nothing to be re-deployed because no interest
payment
■​ yes on TIPS because you get a coupon that can be redeployed
○​ inflationary risk:
■​ STRIPS - yes
■​ TIPS - no, the whole point is to adjust inflation
●​ question:
○​ series I bond question
■​ FALSE: series I bonds can be traded on secondary market
 ●​ series I is basically a savings bond
■​ TRUE:
●​ series I is a us government savings bond
●​ they pay a combo of fixed and variable interest
●​ and they are a non-marketable instrument!

Government Agencies and GSEs

●​ government agencies
○​ subsidiaries of the US government
○​ they have the EXPLICIT guarantee / backing from teh gov
○​ e.g. ginnie mae
●​ GSEs
○​ created/chartered/spun off from the US gov but NOT part of the US gov
○​ there is an implied guarantee
■​ not legally required to backstop debt even tho they have historically done
so and imply they will continue to do so
○​ fannie mae, freddie mac
●​ shared characteristics
○​ “agency security” can reference either of the above
○​ if it says “gov agency” then its the former
○​ these are second in safety to treasuries
●​ they operated in mortgage-backed securities (MBS)
○​ MBS = bonds secured by mortgages and other real estate loans
○​ homeowners with mortgages are effectively paying back off a loan, like a bond
○​ the bank gives all these loans to GAs and GSEs and they sort the mortgages by
safety / riskiness and then package them up into a bunch of bonds
■​ now, if one homeowner defaults, there wouldn’t be a material impact
because everything is spread out across many homeowners
●​ questions about MBS
○​ MBS does NOT pay semi-annual interest, it comes MONTHLY (you pay your
mortgage monthly!)
○​ MBS average life is often shorter than its stated maturity
■​ TRUE - most mortgages are paid off before their full term
■​ so your bond of 30 year mortgages is probably gonna be paid off after 12
years
■​ during low interest rates:
●​ mortgage people can borrow money for cheaper which means
they’ll borrow at lower rate, pay you back at your higher rate
●​ this means your maturity is shorter because they pay you back
faster / more people will refinance their debt
 ●​ which means you have REINVESTMENT RISK (you might get
paid back at a point where your money can only be reinvested into
lower rate things)
■​ during high rates
●​ no refinancing = fewer prepayments = longer maturities =
extension risk
●​ average life of MBS is closer to the state of maturity
○​ investors seeking dependable and consistent income should purchase MBS
■​ nope, MBS cash flows vary each month

Municipal Bonds
●​ Muni bonds finance projects for the public good
●​ what kind of munis?
○​ states, cities, counties, towns, villages
○​ interstat authorities (e.g. multi-state groups like port authority of NY and NJ)
○​ intrastate authorities (e.g. school districts)
○​ US territories, possessions, commonwealths (e.g. guam, puerto rico)
●​ primary muni objective of bond
○​ tax-free interest income
○​ muni bonds are federally tax free, and in-state munis are TRIPLE tax free (free of
local, state, and fed income)
■​ if you buy your own state’s muni bonds (across any level) it’s totally tax
free
■​ but if you buy another state’s bond it may be taxed by your own state (but
still not federally!)
■​ so when investors buy, they want to buy from their home state
○​ US territories etc bonds are always triple tax free
●​ two types of bonds
○​ general obligation bonds (GO)
■​ interest/principal are paid from general tax receipts
■​ you use GO bonds to finance things that aren’t going to make any money:
schools, libraries, parks
●​ so the cash flow for the bond is basically taxes
■​ backed by full faith and credit of issuer and its taxing power - so if the
muni couldn’t pay back something it might dial up the taxes
○​ revenue bonds
■​ interest/principal are paid from the revenue produced by the project the
bond financed
■​ NOT BACKED BY TAXES
■​ e.g. roads/bridges/tunnels - paid by tolls
■​ hospital - patient feeds
■​ power/water system - user feeds
 ■​ industrial dev bonds – lease payments by corporations
●​ for jobs/econ growth
●​ based on credit quality of corp determines risk level of these
bonds
●​ comparing muni and corporate yields
○​ compare the best after-tax return!
○​ question: which provides the best after-tax return for an investor in the 22% tax
bracket?
○​ 7% corporate bond
■​ PTI = 70 bucks
■​ post = 70*(1-.22) = 54.6
○​ 5% in state muni bond
■​ PTI = post
■​ PTI = 50 bucks
○​ what about if tax = 35%?
■​ corp bond: PTI = 70*(1-.35)= 45.5
■​ vs 50 bucks w/ the muni
○​ the higher the tax bracket ur in, the more desirable the muni gets!
●​ bond interest taxation - is this being taxed at fed or state/local level?
○​ US treasuries
■​ ONLY FEDERAL TAX
■​ but federal tax is still giant tax burden, not tax advantaged
○​ GSEs and GAs
■​ taxed at both
○​ corporate bonds
■​ both
○​ foreign debt securities
■​ both, plus the foreign government tax
○​ muni in instate
■​ NONE
○​ muni out of state
■​ just state
○​ muni in territories
■​ NONE

Money Market Instruments

●​ short term debt instruments (1 year or less)
●​ investment objective:
○​ safety + liquidity → short term with high confidence of repay
●​ examples
○​ T-bills
 ○​ commercial paper (unsecured paper from high credit firms with max maturity of
270 days)
○​ certs of deposits (large denomination, negotiable time deposits)
○​ bankers’ acceptances - international transactions of goods/services
●​ if investors want MM stuff, they’ll invest in a money market mutual fund
●​ questions
○​ ADRs are not MM
○​ how come bonds with less than 10 months remaining in maturity count?
■​ even if the bond itself is meant for 30Y maturity, at its last year it shares
characteristics with the T Bill so is considered as such
●​ question
○​ true, true, true, false, FALSE
■​ in the MM, there’s constant roll over getting returns at the prevailing
interest rate
■​ the principal you get will go up yes, but the interest you get is dependent
on wtv the market is, so its technically not stable
●​ objectives
○​ treasuries: safety of principal, credit worthy
○​ munis: tax free interest income (best for high tax bracket ppl)
○​ TIPS: no inflation risk, maintain purchasing power
○​ MBS: low risk, monthly income and diversification
○​ MM instruments: safe short term returns, LIQUIDITY
○​ corp bonds: higher upside debt instruments – INCOME
○​ CBs: you want equity upside
●​
4 - investment companies
Investment companies
●​ investment companies act of 1940
○​ legally defined an ICs + formalized model to raise capital from investors
●​ management companies
○​ open end funds (mutual funds)
○​ closed end funds
○​ have boards etc.?
●​ unit investment trusts (UITs)
○​ board of trustees
○​ usually like ETFs ?
●​ face amount certificates (FAC)
○​ not really favored anymore
○​ just know that it’s a type
○​ lost its tax favorable stuff so
●​ what do ICs do?
○​ raise capital from investors and deploy it to achieve a certain goal

Management Investment Companies

●​ ACTIVELY managed portfolios to achieve stated investment objectives
●​ Open-end fund
○​ unlimited number of shares
○​ sell their shares in a continuous offering registered under sec act of 1933
■​ that’s how they raise capital!
○​ secondary market
■​ there’s not really a secondary market, you have to purchase and redeem
with the open end mutual fund
○​ pricing
■​ buy at public offer price (POP = NAV + sales charge), sell at NAV
■​ formulaic prices that are not determined by the market price
●​ closed end fund
○​ fixed number of shares
○​ one time IPO to raise capital
○​ robust secondary market in exchange and otc
○​ pricing is driven by market demand and done on a bid-ask spread
●​ underlying economics of the two are very similar
●​ questions
○​ what can mutual funds invest in?
■​ stocks, bonds, mm → all of the above!
■​ but mutual funds can only ISSUE common stock
○​ mutual funds can engage in what activities?
 ■​ they can pursue a non-diversified investment objective (as long as they
disclose it in the prospectus)
■​ but they CANNOT short, buy on margin, or provide advice

●​ Purchasing open ended mutual funds

○​ have to buy from the fund family, there is no secondary market
■​ these securities are redeemable only to that fund
○​ All shares are new shares registered under the sec act of ‘33
○​ sales price may include a sales charge
○​ sales charge can be reduced thru:
■​ breakpoints - reduced sales charge for large investments
■​ letters of intent - achieve a breakpoint over time (13 months)
●​ you might invest a lot over an aggregate time
■​ rights of accumulation → share appreciation / aggregate investments to
reach a breakpoint
●​ calculating pricing (NAV)
○​ calculate NAV on a daily basis
○​ calc
■​ sum of # of shares * price for each holding = portfolio value
■​ portfolio value - fund liabilities = NAV
●​ fund liabs are like paying for the employees etc.
■​ NAV / shares outstanding = per share NAV
○​ so owning one share of a fund = per share NAV value
●​ purchasing mutual funds
○​ investors pay
■​ POP = NAV + Sales charge
■​ if sales charge = 0
●​ the mutual fund is called a no-load fund
■​ calculating it, you might get a % of nav for sales charge
○​ investors sell
■​ and receive just NAV
●​ forward pricing
○​ NF orders are executed on forward pricing → it’s based on the next calculated
NAV + sales charge
○​ You can order MF orders at any time throughout the day
○​ but MF orders are executed at 4PM ET so, when a new NAV is calculated, so
you don’t exactly know how much each share will be worth until then
○​ an order placed on monday at 6PM will get NAV pricing from Tuesday’s close
●​ breakpoints
○​ breakpoint = reduced sales charge based on amount invested
○​ NAV stays the same but POP gets smaller because sales charge is reduced
 ○​
○​ this is represented by a % of the POP, not on top of the NAV!
○​ just know that the more volume u put in, the closer POP gets to NAV
○​ takeaways
■​ different investors get different POPs depending on the day’s NAV and
their buy volume
○​ LOIs in MFs
■​ based on commitment to invest a specified amt over a period of time
■​ term is usually 13 months, backdated up to 90 days
■​ with an LOI their first few investments will get to be done at a lower sales
charge
■​ if you don’t meet LOI reqs, your sales charge reduction might get rolled
back as if you didn’t have an LOI
■​ LOI is NOT legally binding
○​ rights of accumulation
■​ loyalty program - if you’e been with them for awhile and have lots of their
shares
●​ you can calc sales charge based on total investments held in
related accounts
■​ can aggregate w/ fam members and with diff accounts owned by investor
■​ rights of accumulation can be based on how much of the fund you and
fam OWNs, rather than just what you’re buying
●​ Mutual fund expense ratio
○​ annual fee to run the fund that you pay
○​ management fees
■​ pays the portfolio manager (esp w/ active funds!), usually largest expense
○​ 12b-1 fees
■​ pays for marketing and shareholder services
■​ e.g. like a call center or marketing to other ppl
○​ other expenses
■​ misc fees outside of 12b-1
○​ takeaway: all mutual funds have an expense ratio
■​ even a no-load fund has one and will be passed to investors thru this ratio
○​ expense ratio = operating expenses / average value of assets
●​ MF share classes
○​ class A shares
■​ upfront sales charge and offers breakpoints
 ■​ this is what retail investors should be in!
■​ lowest 12b-1 and you can get breakpoints (volume, aggregate value, and
LOIs)
■​ cheaper way for LT ownership than B class
○​ class B
■​ has back-end sales charge (paid on redemption), there are no
breakpoints
■​ your proceeds are skimmed off for sales charge
○​ class C
■​ have a level load (assessed each year) and no breakpoints
○​ all classes have 12b-1 fees but class A has lowest
■​ so class A is best for long term, lowest ongoing expenses
●​ TYPES of MFs
○​ MM funds
■​ super liquid, cash equivalent, no load
○​ Bond funds
■​ US gov bond fund → low income + risk and tax at fed level
■​ corp bond fund → moderate income + risk, tax at all lvls
■​ HY bond fund → higher income + risk, tax at all lvls
■​ munis fund → mod income/risk, tax free interest
○​ stock funds
■​ growth fund → higher risk/return, less income more so for small and mid
caps
■​ value fund → lower risk/return, undervalued stocks (low PE ratios), more
income thru dividends
■​ income fund → income product/dividend equities, less tax efficient, lots of
pref stocks/blue chips/utilities
●​ question: which about MM MFs is true?
○​ they target a NAV of $1 per share, but the price can fluctuate above/below that
amount
■​ not inherently an issue but could reveal economic troubles
■​ called “breaking the buck” if that happens

Unit investment Trusts

●​ holds fixed portfolio
●​ sell redeemable shares / units to investors, typically in a one-time public offering
○​ no secondary market
●​ passively managed
○​ fixed portfolio of bonds
○​ or tracks an index, like SPY
●​ distributes portfolio income to investors - no reinvestment back into the UIT
 ●​ on the trust’s maturity date, any remaining securities in the portfolio are liquidated and
distributed to the investors

Exchanged Traded Funds

●​ track an underlying index
●​ trade intra day in the market
●​ tracks an index, sector, or commodity (95% fo ETFs are passive, 5% active)
○​ VTI - broad equity
○​ BND - broad bond
○​ TIPS - all TIPS
○​ GLD - gold
●​ process of updating an ETF portfolio as companies are added/subtracted from the index
is called reconstitution

IC comparison

●​
○​ ETFs and CEFs can trade above their NAV bc there’s a secondary market
○​ ETFs are more liquid and have lower fees for investors
■​ mutual funds do not have intraday pricing/selling
○​ mutual funds are traditionally open end! CEFs are separate for the most party
●​ Investment company cost basis
○​ cost basis = the amt you invested
○​ investors who reinvest dividends into an IC must adjust their basis upward by
amount reinvested
○​ question: i buy 700 of MF, receive 100 in divds, and i want the mutual fund to
reinvest the divs
■​ the investor pays tax on the 100$ div (it’s a cash dividend!)
■​ there’s no sales charge on reinvested dividends! buy right at NAV
■​ adjusted cost basis = $800, 700 + 100
 ■​ so if you sold those shares for $950, your taxable gains are 950 - 800 =
150
○​ question
■​ primary consideration for investor selecting an MF investment?
●​ investment objectives
■​ which will decrease a mutual fund’s NAV
●​ if dividends are distributed to shareholders of the fund
○​ another row of the NAV is cash the MF holds from
company dividends
●​ more shares = NAV split across more shares
●​ redeemed shares = NAV split across less
●​ MF receives dividends from portco = NAV goes up!
●​ its about cash in and out, not shares
○​ question
■​ B, market risk
●​ specific risk - business risk / non-div risk
●​ credit risk - for debt
●​ interest rate risk - for debt
■​ market price + commission (intra-day selling!)
●​ NAV and POP - mutual fund
●​ unit price - UIT
■​ D - not all investment companies need to provide summary prospectus,
only mutual funds
●​ MFs are always in continuous sale so a summary of prospectus
less wasteful / more efficient, but full prospectus shoulds till be
made available
■​ C - mfs receive shareholder reports semi-annually
■​ B - custodian safekeeps securities and cash
●​ investment advisor - chooses whats in portfolio
●​ transfer agent - registration, ownership of shares
●​ sponsor - ???
●​
UNITS 1-4 Assessment
●​ interest is considered on non-business days as well!
●​ buyer’s price will include accrued interest up to but not including t+1 so up to sunday in
this case!

●​ they taught us jack shit about UITs

●​ what is a sponsor!!!
●​ i got it right tho heh its II and IV
●​ whoops issued stock minus treasury stock = outstanding
●​
●​ record date = ex-div date. they meant the date of record was june 24 lol

●​ STRIPs are inherently zero coupon cuz its just a single cash flow!
●​ reinvestment risk only applies to if you get an interest payment back and you put it
straight back into the same asset i think
5- other managed products
Other Managed Products
●​ Reits
●​ direct participation programs
●​ limited partnerships
●​ master limited partnerships
●​ hedge funds
●​ PE
●​ municipal fund securities

THESE ARE NOT INVESTMENT COMPANIES as they were not formalized under th 1940 act
for investment companies

REITS
●​ Real estate investment trusts
●​ companies that manage portfolios of real estate (RE) investments
●​ 3 kinds
○​ Equity REIT - own real estate, collect rent/lease payments
○​ Mortgage REIT - make loans for RE and collect interest
○​ Hybrid REIT - you own and lend, so collect both
●​ REIT taxation
○​ if you meet 3 tests:
■​ 75% income is from RE
■​ 75% of assets are in RE
■​ 90% taxable income is distributed to Shareholders
○​ THEN only the shareholder is taxed on the dividend - there’s no corporate
income tax
●​ question
○​ REIT owners hold an undivided interest in a pool of RE investments (no
ownership over a spec condo, but rather bits of the whole thing)
○​ REITs are more liquid than direct RE ownership - makes sense, easier to sell a
cash flow on an exchange than the tangible building
○​ REITs are investment companies - NOPE they aren’t formalized under the 1940
act
○​ REITs are direct participation programs - they not the same
○​ REITs pass gains and losses to investors - FALSE they only pass thru gains! if
they lose money apparently they don’t pass it on and can instead use if for NOL
shit even tho they don’t get taxed
●​ question: do REITs satisfy
○​ diversification - yes, within RE and across asset classes
 ○​ income - sure, 90% of income is flowed to you and dividends are always taxed as
ordinary income
○​ conservation of principal - no
■​ REIT share price can fluctuate significantly
○​ liquidity - yea, pretty easy to exit

Direct Participation Programs

●​ umbrella term
●​ structure that offers flow-through tax treatment, passing INCOME, GAINs, LOSSES,
DEDUCTIONS, CREDITS directly to investors
○​ no corporate level taxation
○​ passive losses will offset passive gains but not other gains
■​ so if you lose money on one DPP you can use it to offset tax on another
DPP that gained, but not stuff like your wage income or portfolio income
○​ limited liability for investors
●​ disadvantages of DPP
○​ limited secondary market - liquidity risk
○​ change in tax laws can significantly reduce value → legislative risk
○​ can lose entire investment → capital risk
●​ In a DPP, everything has tax flow-through whereas REIT only has gains

●​ DPPs are LIMITED PARTNERSHIPS

○​ LPs:
■​ contribute capital
■​ LL
■​ no management responsibility
○​ GPs:
■​ active investors
■​ run business on day to day basis
■​ UNLIMITED PERSONAL liability - can lose all personal assets
●​ Pass through question: which doesn't pass thru gains/losses to investors
○​ LLCs
○​ Limited Partnerships
○​ C corp
■​ = large corporation and they can retain gains/losses within company
■​ corporate structure with double taxation → they get corp tax,
shareholders get taxed on dividends
○​ S corp
Master Limited Partnerships (MLPs)
●​ usually energy -related businesses → producing/processing/transporting oil&gas
●​ exchange traded
○​ more liquid/exitable
●​ partnership taxation
○​ pass-through and no corporate tax
●​ limited liable - unit holders are not liable for MLP debts
●​ investment objective - INCOME stream
●​ risks - business/specific risk cuz ur basically just buying one company like if Ibuy apple

Question
●​ claim prio
○​ A, secured lenders → GPs
●​ Raw land limited partnership
○​ nothing on it = no depletion, no depreciation, no reg income stream
○​ but will appreciate! (has appreciation potential)

Hedge Funds
●​ investment vehicles with flexible investment strategies for financial sophisticated
investors
●​ can do risky investment strategies (derivatives, commodities, distressed companies)
●​ unregistered securities so no mandated disclosure necessary
●​ lack of liquidity and can have lock up periods
●​ high min investments for u to invest
●​ high fees (2% AUM, 20% of profits)

Private Equity
●​ PEs are vehicles that make direct investments to fully/partially buy existing companies
●​ long term investments (5-10 years)
●​ lack of liquidity
●​ compan may not be able to support debt
●​ high min investments
●​ is not a suitable investment for most people
Structured Products
●​ securities made by BDs that provide a return based on market performance with limited
downside exposure
○​ provides a spec exposure to their clientele such as equity index
○​ e.g. exchange traded notes (ETNs)
■​ products that have a bond (principal protection) and a derivative like an
S&P 500 call (a market linked return w/ a participation rate)
●​ gimme 1000 dollars now i give it back to u, and if the market does
well you get more returns from that
●​ risks of ETNs
○​ credit risk - yes, BD could default
○​ liquidity risk - YES, even tho they trade on exchanges, demand is low on these
products

Municipal Fund Securities

●​ such as local government investment pools (LGIPs)
○​ they’re like MFs but issued by local governments for local governments
○​ vehicle that pools capital to achieve investment obj
○​ sells shares/units and is offered by and for state/local govs
●​ munis can invest idle cash into an LGIP investment vehicle (w/ ST debt eg MM MF)
○​ so if ur town has idle cash sitting around they can invest in LGIPs for MFS

describe features, risks, investment objectives

6 - options
Options

Call options
●​ every options contract is a security with two parties
○​ one guy is buyer, one guy is seller
●​ example
○​ say DAL is trading at $50 per share in march 2019
○​ there exists a call option contract where:
■​ the underlying asset is DAL. it expires in Jan 2020 at a strike price of 55
at a premium of 3 dollars to buy 100 shares (1 contract = 100 shares i
think)
○​ there are two parties, the OWNER (buyer) and the WRITER (seller)
●​
Owner Writer

Owner has the RIGHT to perform. counterparty → the seller has the
-​ you can choose to exercise or let it OBLIGATION to..
expire -​ you cannot exercise, or “let” it
-​ you can choose to close the expire
position or trade the contract to -​ but you CAN close position by
someone else trading the contract to someone
else and have them be the writer

since it’s CALL then you have the RIGHT … sell 100 shares of DAL at $55
to BUY 100 shares of DAL at $55

since it’s a right, you PAY a premium of 3$ at an EARNED premium of $300

a share, so the contract premium is 100*3
= $300

you hope the option is EXERCISED by with hopes that the option EXPIRES
Jan 55, when the stock price is HIGHER come Jan, meaning the price does not
than $55 and you can buy it at a cheaper ever go above $55
price
●​ number of shares per contract is 100

Moneyness
●​ Options can be in, at, or out of the money (ITM, ATM, OTM)
●​ ITM → strike price <= market price
○​ intrinsic value
 ○​ always exercised
●​ ATM → strike price = market price
○​ indifferent to exercising them
●​ OTM → strike price > market price
○​ no intrinsic value
○​ always expire
●​ question: ABC 50 call @ 4
○​ buyer of call has the right to buy 100 shares at $50 each and paid $4 per share
premium (or $400 premium)
■​ at ABC = 52 → ITM
●​ $2 of intrinsic value
■​ ABC = 48 → OTM
●​ no value
■​ ABC = 50 → ATM
●​ indifferent
○​ ITM / OTM does NOT show profitability because it doesn’t include premium cost!
only talks about if the option has intrinsic value!
■​ the premium of $4 is still more than the $2 intrinsic value per share!
●​ The table, where ABC = 50
●​
Market val 46 54 70

1st position OTM → 0 ITM → 4 ITM → 20

net premium -4 per share -4 -4

(you have to
pay!)

P/L -4 0 16

More questions
●​ 2 ABC Jan 30 Calls @ 3
●​ what MV will position break even?
○​ Market value must be ITM
■​ if premium is $3, the profit must be $3 to break even → MV = 30+3 = $33
■​ it’s on a PER SHARE basis, number of contracts does not affect it
●​ What’s max loss?
○​ the cost of the position is 3*100*2 = $600
○​ that’s the max loss - the contract expires and all you paid was the premium

●​ Long 1 ABC 50 call @ 6 (THE OWNER)

○​ market view - bullish (you hope it goes up)
○​ max gain = unlimited if the stock price goes up indef
○​ max loss = premium paid on a per share basis, or -6
○​
 mv 0 44 50 56 60 100

1st pos 0 0 0 6 10 50

premium -6 -6 -6 -6 -6 -6

P/L -6 -6 -6 0 4 44
○​
●​ Short 1 ABC 50 call @ 6 (THE WRITER)
○​ market view - bearish (you hope it goes down)
○​ max gain = the premium (if it stays out of the money)
○​ max loss = unlimited
○​
mv 0 44 50 56 60 100

1st pos 0 0 0 -6 -10 -50

premium +6 +6 +6 +6 +6 +6

P/L 6 6 6 0 -4 -44
○​
●​ notice how L/S are reversed where max gain and loss are swapped

Put Options
●​ also has owner and writers
●​ let’s use same example: DAL Jan 55 PUT @ 8
●​
Owner Writer

Owner has the RIGHT to perform. counterparty → the seller has the
-​ you can choose to exercise or let it OBLIGATION to..
expire -​ you cannot exercise, or “let” it
-​ you can choose to close the expire
position or trade the contract to -​ but you CAN close position by
someone else trading the contract to someone
else and have them be the writer

You have the right to SELL 100 shares of you have the OBLIGATION to BUY 100
DAL at $55 shares of DAL at $55

paying a premium of $800 receiving a premium of $800

you hope the option is EXERCISED by with hopes that the option EXPIRES
Jan in which the the price of the stock is come Jan, meaning the price doesn’t drop
 LESS than $55 (cuz then you make below $55
money off selling)
○​ No matter call/put, you pay a premium as the owner of the contract
●​ There’s still ITM, ATM, OTM but it’s reversed
○​ ITM → strike price > market price
○​ ATM same
○​ OTM → strike price < market price
●​ ABC 50 put @ 4
○​ at MV = 52 → OTM
○​ at MV = 48 → ITM
○​ at MV = 50 → ATM
●​ again, this doesn’t show profitability, only intrinsic value

Question
●​ Long 1 ABC 40 put @ 3 (THE OWNER)
○​ market view = bearish (hope price goes down)
○​ max gain = strike price of put - premium = 40 - 3 = 37
○​ max loss = premium → 6
○​
mv 0 25 37 40 43 100

1st pos +40 +15 3 0 -3 -60

premium -3 -3 -3 -3 -3 -3

P/L 37 12 0 -3 -6 -63
○​
●​ Short 1 ABC 40 put @ 3 (THE WRITER)
○​ market view = bullish (price doesn’t go down)
○​ max gain = premium → 3
○​ max loss = 37
○​
mv 0 25 37 40 43 100

1st pos -40 -15 -3 0 +3 +60

premium +3 +3 +3 +3 +3 +3

P/L -37 -12 0 3 6 63

○​
Advanced Options Strategies
●​ combining stock and option positions to reduce risk / enhance returns
○​ protective put
○​ covered call
○​ short stock hedge
●​ call up, put down = what way things gotta move to be ITM
■​ this term doesn’t work with hedging…

Hedging a Long Stock Position

●​ stock pos: LONG 100 shares ABC at $50
○​ you have 100 shares of ABC you bought at 50
PROTECTIVE PUT
●​ hedge w/ puts: LONG 1 ABC 45 PUT @ 6
○​ you have the RIGHT to sell at a strike price of 45 by exercising put (caps the
downward loss if stock keeps dropping) at $11 loss
○​ worst case: you lose 6 dollars on the premium and then another $5 on selling at
50-45 = 5 → 6+5 = 11
●​
mv 0 39 45 50 56 100

1st pos -50 -11 -5 0 6 50

(stock pos)

2nd pos +45 +6 0 ATM OTM OTM OTM

(long put)

premium -6 -6 -6 -6 -6 -6

P/L -11 -11 -11 -6 0 44

COVERED CALL (more neutral)

●​ hedge w/ calls: Sell 1 ABC 55 call @ 2
●​ selling options = YOU ARE THE WRITER! your upside is the premium
○​ you automatically generate income from long position of $2 per share meaning
you offset losses by $2
○​ BUT you give up any upside because the moment MV goes up 55 you HAVE to
sell your long position
mv 0 39 48 50 56 100

1st pos -50 -11 -2 0 +6 +50

(stock pos)
 2nd pos OTM OTM OTM OTM -1 -45
(sell call)

premium +2 +2 +2 +2 +2 +2

P/L -48 -9 0 2 7 7
●​ notice how you forfeit all that upside :((((

Hedge a short stock position

●​ SHORT 100 shares ABC at $32
●​ hedge: LONG 1 ABC 35 call @ 3
○​
mv 0 29 32 38 50 100

1st pos 32 3 0 -6 -18 -68

(stock pos)

2nd pos OTM OTM OTM 3 15 65

(long call)

premium -3 -3 -3 -3 -3 -3
(long call)

P/L 29 0 -3 -6 -6 -6
●​
○​ you’re hedged so that you max lose 6 dollars per share
○​ because for every dollar up, the hedge collects +1 and the short collects -1,
except between the range of 32 to 35, where you lose the premium AND the
money on the short bc the call is still OTM. so at 35, you lose 2 dollars on the
short plus another 3 o the premium.
○​
Protect Longs:
●​ short Calls, long puts

Protect shorts:
●​ long calls (but not short puts which add risk)

Options Expiration
●​ Options contracts expire on the 3rd friday of their expiration month, nine months after
ISSUANCE
○​ not “each trade” because the contract doesn’t reset after each trade (e.g if
someone closes out)
 ●​ Two styles of expiration:
○​ american style
■​ exercise at ANY time (land of the free!!)
■​ most equity options use this style
○​ european style
■​ exercise at expiration ONLY, that third friday of the month of exp
■​ most index options use this
○​ but remember, an investor can liquidate to close out at any time including for
european style options

Index Options
●​ index options use the value of an index as the underlying asset (S&P 500, DJIA, russell
2000)
○​ investment objective similar to equity options - u can use long puts to protect the
portfolio
○​ UNLIKE equity options, index options are settled for cash
■​ no physical settlement
■​ physical settlement = after you exercise equity option the shares are
literally settled with those shares
■​ but the writer can’t go and buy nth % of every stock out in the index so
they just give you the cash instead and vice versa
●​ example: VIX (volatility market index)
○​ measures the volatility of S&P 500 index options
○​ referred to the fear index
○​ it works in an inverted manner to S&P (market up, VIX down and vv)

Options clearing corporation

●​ OCC issues and guarantees options contracts
○​ stands between buyers/sellers of contracts
○​ you buy and write contracts from OCC; they are technically your counterparty on
either side of the trade
○​ when someone exercises an option contract, the OCC assigns the contract to an
appropriate counterparty
●​ benefits of OCC
○​ increase liquidity - OCC standardizes things so there’s more participation
○​ reduced credit/counterparty risk - as a buyer you know that OCC will find a
counterparty OR use the collateral from a BD to exercise it
○​ does not reduce market or capital risk, that’s on the actual macroeconomic state
of the world / you lose your whole premium!
Trading Options
●​ Options trade on exchanges as well like the CBOE
●​ aside from exercising and expiring the contract, you can also buy/sell the contract
●​ Buying the option = paying the premium // Selling the option = collect premium and vice
versa!

○​
●​ reg way settlement for trading listed options is also T+1
○​ exercising an option is also T+1
●​ most contracts aren’t exercised or expired
○​ they are instead closed by trading the contract
●​ a “purchase” of a contract = owning a put or call (you pay out a premium)
●​ a “sale” of a contract = writing the put or call (you receive a premium)
●​ you can purchase or sell first, but you must to the other after to close out

Least impact on a corporation’s cap structure:

●​ listed options (bc its the OCC issuing and two people speculating on stock movement)
Options position summary

●​
●​
options quiz
buy call → right to buy stock
●​ closing sale..? omg idk
●​ time value = excess between premium and intrinsic value
●​ intrinsic value = mp - strike price
●​ 5*3.25 =

selling puts
●​ 3.5*10*100= 3500
●​ if you were to lose 3.5 dollars then you would buy for 33.5

tech index price will go UP

●​ aggressive position to provide leverage..?
●​ long call
●​ short put
○​ if its OTM then i only get my premium?
OPTIONS CHEAT SHEET

Long Short

Call strike price < market price SP < MP

RIGHT TO BUY OBLIGATION TO SELL
BULLISH BEARISH

Buy to open breakeven = strike price +

sell to close premium

faces unlimited risk esp if

naked!

sell to open
buy to close

Put SP > MP SP > MP

RIGHT TO SELL OBLIGATION TO BUY
BEARISH BULLISH

Buy to open Breakeven = option strike

sell to close price - premium

sell to open
buy to close

●​ LONG STOCK
○​ protected put (long put)
○​ covered call (short call)
●​ SHORT STOCK
○​ protected call (long call)
7 - suitability
Suitability
Possible investment objectives, from high to low risk:
●​ speculation objective
○​ high returns for high risk
●​ growth
○​ long term portfolio appreciation instead of current cash gen
●​ current income
○​ generate current cash for investor, less focus on growth and long-term
appreciation
●​ tax-free income
○​ muni bonds basically
●​ liquidity objective
○​ immediate access to funds/cash to meet a short term goal
●​ preservation of capital
○​ no decline in value of investment or portfolio

Vocab
●​ asset allocation - mixing investments across classes (stocks, bonds, cash) to reduce risk
●​ diversification - making investments in different sectors within a portfolio to hedge
●​ not the same thing:
○​ AA = how to we move portfolio across large categories of assets
○​ D can also include within-sector diversification (e.g. diversified within equities
only)

Suitability requirements
●​ FINRA says all recs must be SUITABLE and based on INVESTMENT PROFILE fo client
and also be in BEST INTEREST
○​ brokers can’t place their own interests ahead of the customer’s interests!
○​ customers must must be placed first

question
●​ B - growth = lower prio on div producing investments
○​ long term bonds not liquid
○​ capital pres is low risk objective
○​ equities don’t generate real cash flows
●​ REITS are most liquid
○​ ppl don’t rlly trade ETNs, DPPs, or penny stocks (categorized as illiquid)
○​ REITs are exchange traded
Asset allocation + risk

stocks: -​ market risk

-​ higher return = higher risk
-​ more volatile
-​ LT investment horizon

bonds -​ credit risk

-​ mod return/risk -​ interest rate risk
-​ lots of diff types​ ​ -​ call risk
-​ inflation risk

cash -​ inflation risk

-​ low risk/return
-​ inflation can reduce real return

●​ a fund manager who believes there will be a ST market decline will allocate in cash right
now, wait for the decline, and then buy the dip
●​ conservative / moderate / aggressive growth allocations
○​ conservative = more bonds, mod/agresive = more stock
○​ rule of thumb → stock % = 100 - age

Investment Returns - Yield

●​ current yield = annual income / current market price
○​ applies to all securities now
●​ CY of ABC securities
○​ ABC trades $10 w/ 10 cent quarterly div
■​ .4 / 10 = 4%
○​ 8% debentures trading at 110
■​ 80 / 1100 = 7.3%

Total return
●​ total return measures all income (dividends and interest) and capital gains(losses) over a
time period

●​
○​ money invested = $20
○​ income = 20 cents
○​ cap gains = $3
○​ 3.2 / 20 = 16% (should’ve multiplied everything by 100 bc it was 100 shares
bought but % return should be the same)
MIDTERM EXAM
Notes
●​ Bill - note - bond
○​ only notes and bonds trade w/ 32nds
○​ why not bills?
●​ Need more review on
○​ preferred stock
○​ stock dividends
○​ UITs
______________________

●​ Is a DPP a partnership..?
●​ we didn’t learn this..?

●​ idk jack shit about PS!

●​ but you’d offer a higher rate for callables
●​ i picked voter referndums?

●​ i think its pretty liquid cuz u can go redeem ur shares whenever

●​ Call → buying stock
○​ strike price < market price to be ITM
○​ +3 - 6 = -3 not profitable ]
●​ TANS??
●​ put feature → i can sell this if the market price is lower than the strike price (but falling
rates = higher prices so wouldn’t it be OTM)
●​ a put = you hope for the price to move lower so that you sell off of a higher price and
make a profit
○​ maximum you just lose your premium if its OTM
○​ if the price goes up, the Put is more likely to be OTM bc strike price > mp to be
ITM
○​ puts are selling related
○​ so it must be D?
●​ i picked C
●​ just can’t remember if they receive cash or not - thought that was related to index options
○​ OH WAIT NVM IT SAYS ITS AN INDEX OPTION LOL
●​ why doesn’t POP decline by distribution amt..?
Finished 50 questions, with bathroom break, in 1 hour 3 minutes

84%

Incorrect Questions Review

●​ cumulative = catch up on missed dividends

●​ participating = participate in extra profits (> than stated div)
●​ convertible = convert to common stock
●​ callable = company can redeem early
●​ so everything else, there’s an adjustment to the price
●​ for reverse splits, any open order must be CANCELLED before the ex-date
○​ stock dividends = more shares exist = stock price adjusts downward
○​ forward stock split = more shares exist, stock price goes down to reflect same
investment value
○​ a reverse split would lead to fracitonal shears and other bullshit → cancel them
instead
■​ MORE SHARES = ADJUST, LESS SHARES = CANCEL
●​ cost-basis = how much money did you spend PER SHARE on all ur stuff
○​ if you got more stocks for basically free, your investment is spread out over more
shares so cost basis goes down
●​ because technically you only get cap gains on bonds if you buy low sell high!
●​ 75-75-90 → 75% of assets must b from RE/cash/gov securities, 75% of annual gross
income must be in RE, 90% of income mustbe distributed to investors
●​ types of REITs
○​ equity
■​ they own and manage the properties and make money from rent ​
○​ mortgage
■​ THEY LEND MONEY TO REAL ESTATE OWNERS or buy
mortages/MBS and make money from interest
○​ hybrid
■​ they do both
●​ Partnership = firm level
●​ the partners get taxes on their own tax return
●​ DPPs usually operate in income producing businesses so like oil/gas, equipments, etc
○​ the P&L from that passes onto investors
○​ DPPs are kinda like investment vehicles in that sense
●​ issuer = underlying security that the option is based on
●​ Type = call / put
●​ so strike price, expiration month, premium doesn’t matter
●​ basically:
○​ exercise notice = obligation to do something
○​ this is therefore for the people shorting / writing the option (they received a
premium and have ot deliver on it
●​ The OCC assigned the notices to clearing members based on its procedures
○​ the clearing members (brokerages) assign notices to specific contracts on a FIFO
or random basis
○​ long option – OCC – brokerage – short option
●​
8 - issuing securities
Issuing Securities
Raising Capital
●​ businesses can raise capital by selling securities
●​ but to do so:
○​ must be registered with the SEC (act of ‘33) or
○​ conducted under an exemption
●​ options for stock:
○​ register with SEC / go public / IPO
○​ do an exempt offering (with exempt security or transactions)

Securities Act of 1933

●​ securities must be registered for lawful public sale, unless exempt
○​ you registered by filling a registration statement that provides disclosures to
investors
■​ biz description + details
■​ insiders and >10% shareholders
■​ underwriters, legal counsel
■​ amt to raised and use of proceeds
■​ legal proceedings against issuer
■​ audited financials
○​ from stock market crash of 1929 they found investors didn’t have enough
information to make informed decisions, hence disclosure regime of 1933!
●​ underwriting timeline for offerings
○​ (1) pre - registration / quiet period
■​ issuer hires underwriting bank
■​ underwriter preps registration statement/disclosure
■​ NO GUN JUMPING (discussing/marketing the deal)
■​ and then file the red herring/preliminary doc with the SEC
○​ (2) cooling off / waiting period
■​ SEC reviews registration statement
■​ underwriter - MARKETS the new securities and distributes the preliminary
prospectus
■​ no sales/orders/money
■​ at effective date, can start doing real sales stuff
○​ (3) post-effective
■​ actually start selling shares
 ■​ final prospectus: deliver to all investors who buy IPO and any investors
who buy on exchange for first 25 days
■​ S-1 is FINAL prospectus, red herring is prelim / amendable version

Types of offerings
●​ Timing-wise
○​ IPO = first time company offers shares to gen public
○​ Follow-on offering = any subsequent offering of securities to public after the IPO
■​
●​ proceeds
○​ primary offering = the company creates new shares and gets all proceeds from
sale
○​ Secondary offering = so like founders, VC, angel investors cashing out (doesn’t
go to company)
○​ Split offering = company and existing shareholders sell shares
●​ distinguish by timing: IPO vs follow-on
●​ distinguish by where proceeds go: primary, secondary, split

Going public - underwriting process

●​ decides to go public
●​ Hire an investment bank to underwrite the deal!
○​ bookrunner, lead left, managing underwriter - main bank on the deal
■​ name on upper left of prospectus
●​ other IBs will join the syndicate
○​ “co managers” or “selling group” to help w/ distribution
●​ the syndicate will offer a commitment to underwrite, buy, and sell their shares
○​ “firm commitment” - guarantee to buy and sell all shares, financial liability
○​ “best efforts” - no financial liability, all or none, part or none (we’ll try and sell the
shares)
●​ the underwriter then sells shares
○​ UW helps to stabilize the price of the stock at or below IPO price to prevent a
decline in price!
○​ how to stabilize
■​ price going up like crazy: greenshoe
■​ price plummeting: they buy the stock or something idk i forgot

Firm commitment
●​ Underwriting syndicate with firm commitment
○​ Lead manager (lead left)
 ■​ manages deal
■​ runs DD, roadshow, marketing, distributes shares
○​ syndicate members
■​ financially committed to underwrite shares, will buy and own unsold
shares
○​ selling group
■​ helps sell shares as AGENT, no financial commitment to deal

Question:
●​ shelf registration
○​ I think it’s B or D
○​ D is correct - its valid for three years and can be used for follow-ons but not IPOs
○​ Shelf registration = you can do the pre-reg and waiting period and then pause
before you actually start the effective period for up to three years but you must
have already IPO’s
●​ buying common stock IPO shares
○​ IPO shares MUST be sold to the public
○​ FINRA prohibits RESTRICTED PERSONS from investing in CS IPOs
○​ who’s restricted?
■​ BD firms - yes, no buying IPO stocks
■​ employees of BDs - yes also restricted, no IPOs!
■​ family members of BD employees - Y,
spouds/children/siblings/parents/inlaws cannot buy IPO shares
■​ extended family members of BDs - N, they can do wtv (grandparents,
aunts/uncles etc)

Exemptions under ‘33

●​ exempt offerings = sell exempt securities or exempt transactions
●​ Exempt securities:
○​ US gov securities
○​ US gov agency securities
○​ muni bonds
○​ securities by nonprofits
○​ commercial bank securities
○​ commercial paper (<270 day maturity)
●​ notice how like. none of these rlly work for corporations except com paper
●​ Exempt transactions:
○​ reg D
○​ rule 144
○​ rule 144A
○​ rule 147 - intrastate offerings
○​ reg A
 ●​ most of corps doing exempt stuff is thru transactions

Reg D - Private Placement

●​ why not register? expensive + lots of disclosure
●​ who raises capital?
○​ any business
●​ how much?
○​ unlimited
●​ how often
○​ no limit
●​ who can invest
○​ ACCREDITED investors and up to 35 non-accredited investors
○​ accredited = officers and directors of the issuer, institutional investors w/ over
$5m in total assets, or HNWI (net worth >1m excluding home, income of at least
$200K or $300k if married)
○​ question
■​ no, not accredited bc as a couple don’t make enough, and with home
included they are less than 1m
■​ can participate if 1 of 35
●​ can a public co raise cap w/ a PP → YES, called a PIPE (priv investment in public equity

Who raises how much how who can invest

capital/sells often

Reg D anyone unlimited no limit accredited investors

and <=35
non-accredited

Rule 144 allows insiders to sell whichever is 90 days

holdings of company greater: (so
stock 1% of there’s no
outstanding dumping
holders of control shares in the
stock = officers like market by
CEO, board members, avg weekly ppl in
>10% shareholders trading control!)
volume in
last 4 weeks

Rule 144 - holders of unregistered unlimited after a 6 the company must

restricted stock sell their shares month already be public
stocks holding
restricted stock = stock peeriod
 that was given by
compensation or wtv

shares can be both

control and restricted
(e.g. if CEO gets
restricted shares)

Rule 144A any business unlimited no limit as long as they are

selling to Qualified
institutional buyers
(QIBs)

QIBS = institutions
with at least $100m in
discretionary assets

Rule 147 in-state business unlimited no limit in-state residents

in state business not a lot of practical

means at least one: uses ..?
-​ 80% of
revenue are in
state
-​ 80% of assets
in state
-​ 80% of net
proceeds used
in state
-​ majority of
employees
based in state

regulation A small business

regulation S overseas offerings

●​ regulation M - market manipulation of new issues
●​ Regulation T - margin rule
Tender Offer
●​ offer by issuer (share buyback) or outsider (takeover) to buy at least 5% of company’s
shares director from company shareholders
●​ price = typically fixed price at a premium to market
○​ “all holders best price” - you can change the price of the deal throughout the deal
but ALL investors must get that price even if you tendered earlier
●​ net long - you must be net long to tender
○​ meaning more long than short on that stock
●​ conditional
○​ tender offer might require qualifications and require min number of shares
●​ question - under subscribed
○​ cancelled and no shares tendered because min tender wasn’t hit
●​ what if oversubbed
○​ amount investor wanted to tender / number of shares willing to be tendered
○​ = 10% → 10million *.1 = 1000 shares accepted
●​
9 - secondary market
secondary market

Securities Exchange Act of 1934

●​ Sec act of 1933: first law and governs only the first sale
○​ so stuff related to pre-registration, cool-off, primary market shit like IPOs
●​ 1934 is related to the secondary market
○​ exchange trading, OTC trading
○​ market making
○​ broker dealers

Broker Dealers
●​ BDs can execute as a broker or a dealer
●​ broker = agent
○​ BD finds a counterparty for their client and charges client a commission
○​ Role: match two parties as if you were a real estate agent
●​ dealer = principal
○​ BD can also buy or sell from a client
○​ the BD gets a markdown if buying or markup if selling to the client
○​ Role: trade for its own account, like a car dealership

Market Maker
●​ subset of BDs
●​ Market makers are ready to buy/seel a particular stock on a reg and continuous basis of
a publicly quoted price
●​ market maker quote generally represents 100shares → a “round lot”
●​ market makers can be brokers or dealers!
●​ you’re called a market maker because when people want to buy or sell you are willing to
honor your buy/sell
●​ question
○​ when does a MM have to post its quote
■​ 9:30AM - 4PM (normal market hours)
○​ if a market maker fails to honor a firm quote
■​ its called “backing away”
Inside Market
●​ Limit order book:
○​ that’s where all market makers put their quotes (their bids on the left and asks on
the right – what they’re willing to buy or sell for)
■​ there can be multiple rows of the same MM cuz they can represent
themselves or clients

■​
●​ What is the “inside market”
○​ the highest bid and lowest ask
○​ this is at the top line of the book
○​ size is shares / 100 so 100 shares = size of 1
●​ What price would a market order to buy be filled?
○​ you need to talk ot sellers (askers) on the right
○​ so it would get filled at 89.95 from MMBB
●​ If you wanted to sell then you would sell to MMAA at 89.90

Orders and quotations

●​ if a market maker is quoting 92.16 x 92.24 (thats their bid ask)
○​ they must sell at 92.24 and buy at 92.16
○​ they make money off of that spread
○​ if a CLIENT places market order to buy then they get the 92.24 price (they are
your customer)
○​ if a CLIENT places market order to sell then they get the 92.16 price
○​ MM sells, client buys and vice versa

Fees and Commissions

●​ D → you cannot charge both a commission AND a markup/down because you can only
be Broker or Dealer, not both. doing both = Hidden profit violation
●​ A → fees must be fair and reasonable
○​ 5% is a guide for how much fees should be. its only a guide, not a rule
Equity Marketplaces
●​ Listed exchanges:
○​ NYSE - physical floor, designated MM, auction marketplace
○​ NASDAQ - electronic exchange/venue, many market makers per stock with the
limit order book model in something called a negotiated marketplace
○​ on national exchanges, MM quotes must be TWO SIDED (both bid and ask)
●​ OTC quotation facilities
○​ stuff that’s under ‘33 but not qualified to list
○​ OTC Pink
■​ no listing requirements and no need to be SEC filers
○​ OTCBB
■​ closed in nov 2021
○​ characteristics of OTC
■​ illiquid, speculative, penny stocks (<5$ and OTC)
○​ OTC MM quotes can be 1 sided (so they only buy or sell)

Order Types
●​ Buy order
○​ customer buys securities
○​ bullish
●​ Long sell order
○​ customer sells stuff they own
○​ bearish market view OR profit taking
●​ Sell Short order
○​ selling stuff they borrowed/doesn’t own
○​ bearish view
○​ shares must be delivered T+1
○​ shares delivered are borrowed shares and the close position is to buy shares
○​ OPEN SALE CLOSE PURCHASE

Market and Limit Orders and Stop orders

●​ market order = immediate execution at best avail price during trading hours
○​ guarantees execution but not a spec price
●​ limit order = only executes at a specific price or better
○​ buy limit $15 - execute at 15 or less
○​ sell limit $40 - execute at 40 or more
○​ risk
■​ you don’t execute
 ●​ stop order = two step process
○​ trade occurs at/thru the stop price and THEN the order becomes a market order
○​ e.g. Sell stop $40 = activate any trade at or through $40, then execute as a
market order
■​ this protects long positions: say you long stock at $60, sell stop 40 means
if the stock hits 40 then sell
○​ buy stop 15
■​ buy stops protect shorts
■​ if the stock goes up or above 15 just buy as market order
○​ stop orders limit losses, limit orders just guarantee price on an order
●​ question
○​ on the ex div date the price is adjusted downward to account for the div payout
○​ thus, BLiSS orders are reduced by the dividend amount
■​ Buy LImit and Sell Stop
■​ because if the price drops that doesn’t mean anything actually happened
so we don’t want to trigger either

Lifecycle of a trade
1.​ customer places trade
a.​ market, limit, stop
2.​ BD executes trade
a.​ as a dealer (from inventory with mark up/down)
b.​ as a broker (commission, thru exchange)
3.​ Executes on T
4.​ Settled on T+1
a.​ buyer gives cash, seller gives securities

Market Protections
●​ front running violations
○​ trader’s client wants to buyu 17100 shares of XYZ in a block trade (insider info!)
■​ the trader CANNOT enter a buy order in his personal account that
represents <10% of the block trade that’s insider
■​ CANNOT call other clients and suggest to buy the stock provided he
doesn’t disclose the block trade tht’s insider
■​ CANNOT call other clients and suggest they sell put options → also
insider
●​ selling puts = writing puts = you earn a premium but an obligation
to buy if the market price dips.
 ●​ large buy order will push the price up, not down, which means
OTM = clients collect a premium
■​ the above three are called FRONT RUNNING VIOLATIONs
●​ take info from a pending order and take advantage of it so kinda
like insider trading
●​ you CAN enter a client order to buy the stock that was received on an unsolicited basis
○​ e..g another client come sin and wants to buy the same stock, it’s chill there’s no
fraud

●​ order splitting (allowed)

○​ A trader can split a customer’s order into multiple small orders for best execution
○​ caled order splitting, so you don’t disturb the market and cause big price swing
●​ trade shredding (not allowed)
○​ BUT a trade cannot order split to increase comissions
○​ this is called trade shredding
○​ so intent matters
●​ market manipulation
○​ a firm cannot pay a website to discuss a security it makes markets in wtf
○​ market manipulation
○​ firms cannot give ANYTHING OF VALUE to media to influence price of a security
●​ You cannot pay a BD to serve as a MM
○​ “an issuer (corp) may mek reasonable payments to a firm in exchange for them
publishing quotes and being an MM”
○​ ^^ false!

Trading violations:
●​ “trading ahead”
○​ firm cannot change its position in a stock before the market has had time to
digest a research report
●​ “pump and dump”
○​ investor hypes up the value of a stock price so they can sell for more of a profit
○​ “hype up” and “inflate” indicates scammy
●​ spoofing
○​ trader puts in quotes to give the impression that there’s a lot of interest on one
side and just keeps putting quotes up and down

Question
●​ arbitrage, permitted → this is helping with price discovery
10 - econ and monetary policy
Econ and Monetary Policy

Economic Factors
●​ consumer spending
○​ interest rates
○​ inflation/deflation by CPI
○​ unemployment
●​ GDP and GNP
○​ GDP - value of foods produced in a country regardless of nationality
○​ GNP - value produced by residents of country regardless of where they live
○​ econ stabilizers are used to increase GDP during a recession
●​ Business cycle
○​ expansion, peak, contraction, trough
●​ econ indicators
○​ leading indicators change before economy changes (stock market)
○​ lagging changes after (interest rates)
○​ coincident changes during (GDP)
●​ question - deflationary environment
○​ B - outstanding bonds will have higher coupons than new bonds
■​ because deflation -> fed lowers rates -> lower coupons

Yield curve
●​ graphs interest rates against time until maturity
●​ Normal yield
○​ longer treasuries have higher yield than ST
●​ inverted yield
○​ ST yield has higher yield
○​ indicative of recession → you don’t want your money back right away
●​ flat curve
○​ ST and LT trade close, signals econ transition into or out of the above two curves

●​

Question
●​ least sensitive to interest rates:
 ○​ probably utility stocks → defensive
○​ growth stocks → they don’t pay dividends
○​ utility, REITs, and preferred stocks pay dividends → when rates move people are
more spurred to change decisionmaking on income-producing equity

Federal Reserve and Economic Policy

●​ Classical economics
○​ founded by adam smith
○​ laizzez faire
○​ no gov interference
●​ Keynesian theory
○​ by keynes
○​ fiscal policy
○​ use gov tools to affect economy
■​ gov spending
■​ taxation
●​ Monetarist Theory
○​ fed reserve
○​ use money supply to affect economy
○​ discount rate
■​ rate that banks borrow money from them
■​ ease rates to up money spend and vice versa
○​ open market operations
■​ OMO = buy bonds (ease, put more cash in market to push growth) // sell
(tighten, take away cash from econ to curb inflation)
○​ bank reserve requirement
■​ ease (less money required to be held = more cash in economy), tighten
(more money requires curbs cash in economy)

Interest Rates (from low to high)

1.​ Federal funds rate
a.​ banks charge each other this for overnight loans
2.​ Discount rate
a.​ rate fed charges banks for short term loans
b.​ banks go to other banks first and then go to fed to borrow money
3.​ Broker call rate
a.​ rate for BD to borrow money to facilitate margin loans (re-lend to customers in
the form of these loans so they can buy on margin)
4.​ Prime rate
 a.​ rate that banks charge their most credit worthy institutional customers

Economic Cycle
●​ Expansion: auto and tech stocks (growth)
●​ Recession: utilities, healthcare, staples (defensive)
●​ two consecutive quarters of negative GDP growth = recession
●​ Fiscal policy
○​ increase gov spending to spur economic growth
●​ if policy makers want to increase money supply they would:
○​ stimulate growth
○​ (lower discount rate, fed could buy treasuries with OMO, or lower bank reserve
requirement)

Financial Statements
●​ IS
○​ revenues, expenses , NI
○​ over a period of time (annual, quarterly)
●​ BS
○​ assets = liabilities + SHE
○​ moment in tend, year and quarter end
●​ CFS
○​ sources and uses of cash
○​ over a period of time (a, q)

Working Capital
●​ Uses BS:
○​ current assets - current liabilities = WC
○​ CA = cash and stuff gonna be cash in 1 year
○​ CL = payments due in 1 year
○​ WC is OWC plus cash and interest bearing ST debt

Exchange Rate
●​ purchasing power parity - how much it costs to buy a basket of goods in diff currencies
 ●​ who wants Strong US dollar
○​ US importers
○​ Foriegn exporters
●​ weak USD
○​ US exporters
○​ foreign importers
●​ if you EARN REVENUE IN USD, you want strong dollar
○​ (when i go to japan i want my dollar to be worth more)
●​ what happens to USD during moderate inflation
○​ interest rates → fed might raise rates / rates go up a bit
○​ USD → STRENGTHENS, rates going up = more demand in the dollar cuz people
want to invest in like bonds more
○​ bond prices → higher rates = lower bond prices on OUTSTNANDING BONDS

Currency Strength
●​ Strong
○​ foreign oil company
○​ US importer on goods
●​ Weak
○​ US food exporter
○​ foreign importer
11 - customer accounts
Customer Accounts

Opening Brokerage Accounts

●​ who can open an account?
○​ individuals
○​ multiple people on one account
○​ businesses
○​ trusts
○​ investment clubs
○​ foreign entities
○​ BUT NOT MINORS
●​ register with a “new account form”

Cold Calling
●​ 8AM - 9PM in the customer’s time zone for BDs to cold call clients to open an account
●​ anyone can be called except for the firm or FTC do not call list (two lists)
○​ you’re on that list indefinitely
●​ info to disclose
○​ “this is a telemarketing call”
○​ the rep and the firm’s name and address/phone
○​ reason for the call (e.g. securities solicitation)
Question
●​ When can a BD call someone on the do not call list?
○​ individual is an existing client of the firm
○​ individual has provided WRITTEN prior consent tobe called
■​ e.g. if someone signs up for a newsletter and consents to marketing
○​ individual has a personal relationship with the registered rep
■​ not a referral, you actually know them!
●​ you cannot call them if they are a referral from an existing client!

Account opening
●​ You can do everything on the phone entirely with the BD
●​ information needed:
○​ basis stuff: name, addy, phone num, DOB, SSD, citizenship
○​ SUITABILITY INFO
■​ employment status + occupation
 ●​ if you have insider status on any public company or BD
■​ holders of control stock = officers like CEO, board
members, >10% shareholders
■​ annual income
■​ net worth
●​ excluding primary residence value
■​ tax bracket
●​ good to know for muni bonds
■​ investment objectives
■​ investment experience
■​ risk tolerance
●​ Suitability standard vs best interest standard
○​ suitability (old) - make recs that are suitable
○​ best interest standard (new, as of 2020) must be BEST POSSIBLE STANDARD

●​ Client trying to maintain privacy can name their account

○​ a symbol or a name if they use a written statement of ownership
○​ but not an alias

Account opening process continued

●​ New Account Form
○​ rep confirms info w/ client
●​ Who approves and signs?
○​ a principal approves and signs
○​ REP AND CLIENT IS NOT REQUIRED TO SIGN UNDER FINRA
●​ Within 30 days, request for verification
○​ customer verifies account info is accurate
●​ Every 36 months
○​ client re-verifies account information

Account Types
●​ Cash account
○​ all securities are paid for in full
●​ Margin account
○​ securities purchased with borrowed funds
○​ margin agreement
■​ hypothecation agreement - pledge securities as collateral for any loan that
you make
■​ credit agreement - terms of the loan (interest rates)
■​ loan consent agreement (optional) - firm may lend custoerm securities to
others
 ●​ you are giving consent to your BD for them to come and take
YOUR existing seucrities to lend out to other people to short sell
○​ margin disclosure statement
■​ you get this at account opening and annual thereafter
■​ to make sure we have the info to continue doing this cuz its a risky thing
to do

Payment for Securities

●​ settlement?
○​ Trades settle T+1 business day
●​ When is payment due?
○​ settlement date!
●​ Reg T (margin rule, grace day rule)
○​ gives us 2 business days after settlement (fed reserve rule)
○​ Reg T is like a margin / borrowing rule
■​ in the two days after T+1 if you didn’t pay but still own, the BD has
effectively paid for you
●​ if you fail to pay by Reg T deadline
○​ called a “free-ride”
■​ if you buy 100 shares for 1k, then sell for 1.1k, and then use the 1.1k you
made to settle the 1k trade
○​ leads to a frozen account for 90 days
■​ can buy if cash is paid upfront
■​ can sell no restriction
●​ FREE RIDING IS A CASH ACCOUNT VIOLATION UNDER REG T
○​ but not for margin accounts

●​ Reg T sidebar
○​ regulation that governs extension of credit by BD
○​ initial margine requirements
○​ payment for securities in cash accounts
■​

Margin Accounts
●​ = you can buy securities using money borrowed from a BD
○​ Reg T requires the customer deposit 50% of the purchase price
○​ the BD can loan the other 50%
●​ example:
○​ you think ABC stock will go up
○​ in Reg T, you can leverage up to 50%
 ■​ you can spend 25k and get a 25k loan from a BD to buy ABC stock
■​ now you own 50k of that stock
○​ on going maintenance
■​ the customer’s equity needs to be more than 25% of current market value
(long) or 30% (short)
●​ basically the CMV - loan the BD gave = customer’s equity
●​ if that equity is less than 25% of the overall market value the BD
will make you deposit more cash/securities or sell securities to
bring the quity back up

Initial and Maintenance Margin

●​ On day 1 using your margin account / initial requirements
○​ Reg T: long and short is 50%
○​ Finra:
■​ 2000 initial minimum equity from the customer
■​ except if you’re 100% equity longing something
●​ maintenance requirements
○​ min maintenance by FINRA
■​ long = 25%
■​ short = 30%
○​ if dropped below maintenance
■​ maintenance call or margin call
■​ you need to contribute cash / securities or we’re gonna sell the position
○​ account balance is marked to market DAILY
●​ Initial Margin Questions
○​ 30000 stock in a margin account
■​ fund 15k → reg T in play
■​ “initial margin requirement” = how much the customer needs to fund
○​ 3000 stock in margin account
■​ initial margin requirement is 2000
■​ the FINRA rule is in play!
○​ 300 in margin account
■​ all 300 needs to be paid
■​ FINRA rule in play, 100% must be paid under 2k
○​ a way to think about it:
■​ <4k investment = finra land, >4k = Reg T land
●​ maintenance margin question
○​ 30000 stock long
■​ maintenance = .25*30000 = 7500
○​ short 30000
■​ maintenance = .3*30000 = 9000
●​ customers must execute short sales in MARGIN ACCOUNTS
 ○​ they can’t do it in cash accounts!
○​ cus margin accounts let you sign a loan consent agreement

Marginable securities
●​ Reg T and Fed reserve determine this
●​ Marginable
○​ exchange listened stock
○​ OTC issues APPROVED BY FED
○​ closed end funds (CEF)
○​ ETFs
○​ LEAPS options (> 9 months)
■​ basically just options with >9 month expiration date
○​ fixed income securities (e.g. treasuries, munis)
○​ Reg T 50% compass into play for all of this
●​ NOT marginable
○​ non approved OTC
○​ standard options
○​ annuities contracts
○​ new issues (IPOs, follow-ons) (they are marginable after 30 days)
■​ bc new issues are riskier
○​ mutual funds
■​ are technically always new shares!

Opening an options account

●​ perform DD on customer
●​ provide disclosure (ODD - options disclosure document)
●​ approve account (registered options principal - s4)
○​ you can start trading options at this point
●​ 15 days later → return signed account agreement (customer agrees to follow all options
rules)
○​ failure to sign the account agreement limits the customer to executing closing
transactions only
○​ so in these 15 days, if you have any opening sales / purchases all you can now
do is close out on those

Discretion
●​ discretionary account = customer gives trading authorization to a registered rep (RR)
 ●​ client can give the RR firm power of attorney in writing
○​ now RR can do things on behalf of client
○​ steps:
■​ RR has investment idea
■​ RR selects assets, the amount, and buy/sell action
■​ RR then trades on behalf of client
■​ WITHOUT communicating to client
●​ what can RR do (without talking to client) even if not give POA:
○​ price and time of orders → flexibility on what time to execute and at what price
■​ of course the client can request a certain price
○​ “not held” orders

Account Type questions:

●​ buy and hold investor:
○​ cash account → wtv, just means you trade cash
○​ discretionary account → gave RR control over ur stocks? idk i thought this would
be bad
○​ fee-based account → flat fee for infinite trades (you’re not doing many
trades in buy/hold)
○​ commission based account → you pay a fee everytime you trade a stock
(opposite of fee based)

●​ RR places a trade w/o client knowledge on a discretionary basis..

○​ the client is responsible for all brokerage charges and fees associated with the
trade
○​ churning: excessing trading based on customer investment objectives
■​ because each trade could result in fees to the RR, there’s a conflict of
interest here

Customer Account Titles

●​ indiv account = single ownership
○​ total account authority
○​ death = money goes in accordance to will
●​ joint tenants in common (JTIC)
○​ divided ownership, specific on how much they own
○​ if an owner dies then their ownership stake gets passed to named beneficiaries
○​ business partnerships, investment clubs
●​ joint tenants with rights of survivorship (JTWROS)
○​ if an owner passes away, nothing passes to beneficiaries
○​ everyone technically owns 100%
○​ married couples
 ○​ assets remain int he account and avoid probate (probate = distributing a dead
person’s stuff, bc it no longer belongs to that dead person)
●​ minor account
○​ UTMA, UGMA → allows minors to own securities
○​ custodial accounts
■​ minor is the account owner
■​ ONE custodian - manages account, low risk tolerance, fiduciary to minor
■​ usually a parent. CANNOT HAVE BOTH, ONLY ONE
●​ trust accounts
○​ legal entity to benefit another person
○​ settlor → maker, granter, donor
■​ contributes property/assets into the trust
■​ donor can limit the use of the assets (e..g only for college fund)
○​ trustee
■​ holds legal title to the property in the trust for beneficiaries
○​ beneficiaries
■​ property is held in trust for trust’s beneficiaries
■​ there can be multiple beneficiaries
○​ grandpa puts 100K in a trust → third party holds it for his grandchildren’s college

Minor Account Question

●​ minor’s SS is listed on the account
●​ minor is liable for taxable gap gains
○​ not responsible for filing the taxes, but custodian needs to file on behalf of kid
●​ gifts to the minor’s account are irrevocable (can’t take it back)
●​ custodian can be the same person that donates assets to the account (eg cash) - so the
parent could be custodian and the person giving money

Customer Trade Confirmation

●​ firms must send a written trade confirmation BY SETTLEMENT = completion of the
transaction
●​ items on a written trade confirmation
○​ Trade date, settlement date (T+1)
○​ name of security, CUSIP ID
○​ amount of securities
○​ transaction price
○​ time of trade
○​ execution market (e.g. the exchange)
○​ BD capacity
○​ fees
Customer statements
●​ offer a snapshot of the account
○​ purchases, sales, interest/dividends received, funds in or out
●​ how frequently must you send account statements
○​ QUARTERLY!!!
○​ monthly - for penny stock/options
○​ with each transaction – trade confirmation
○​ annually - risk docs, disclosures
●​ can customer and firm assets be mixed together in one account
○​ comingling violation (NO!)

Holding customer mail

●​ when can firms hold customer mail on written request?
○​ customer mail = account statements, trade confirmations, disclosures
○​ aka DONT SEND ME DOCUMENTS!
○​ they have to:
■​ request a mail hold with WRITTEN INSTRUCTIONS
■​ the hold will last up to 3 months
■​ firm will notify client of alternate ways to access account info

Regulation S-P (security and privacy)

●​ establishes privacy standards to ensure security/confid of data
●​ Reg SP privacy notice
 ○​ firms deliver this to customers at ACCOUNT OPENING and ANNUALLY
THEREAFTER
○​ customers have at least 30 days to opt out of disclosing info to third parties

Securities investor protection corporation

●​ Not for profit corporation that protects against losses of cash and securities held by a
brokerage firm in case of firm’s failure
○​ protects against the CUSTODIAL services so like lehman brothers holding your
shit, not like your stake in lehman bro stock
●​ no SIPC coverage for:
○​ market losses
○​ inappropriate recommendations
○​ fraud by issuers (ponzi scheme)
○​ currency and commodities
■​ “non-securities”
●​ each separate customer is protected for 500k
○​ 250k is the limit for CASH coverage
●​ protection is divided by “customers”
○​ so the protection is based on account title
○​ the indiv account is 1 customer, a joint account with that same person has the
same SIPC protection so each one is covered up to 500k
○​ things like:
■​ indiv account
■​ joint account
■​ IRA
■​ roth IRA
■​ minor’s account (UTMA UGMA)
●​ if customer claim exceeds SIPC coverage limits wha thappens?
○​ you become a GENERAL CREDITOR of the BD
○​ say you had 300k in cash, you get covered 250k
○​ and then the rest of your 500k is security coverage
●​ In a SIPC proceeding, your securities will be valued at “SIPC filing date” aka when the
firm filed for SIPC bankruptcy

Question
●​ SIPC covers:
○​ indiv account: 250k cash, 200k securities → 450
○​ joint account: 125k in cash, 375k securities → 500
○​ C
Federal Deposit Insurance Corporation
●​ FDIC is US GOV BACKED
●​ insures deposits in banks like checkings and savings accounts
●​ FDIC protects 250k in cash
●​ FDIC protects BANK ACCOUNTS
○​ checking, saving, mm, bank issued CDs
●​ you can get protect from both

SIPC vs FDIC
●​ SIPC:
○​ stocks in IRA
○​ treasury bonds
○​ gold ETFs
●​ FDIC
○​ banks CDs
○​ cash in HY
●​ Neither
○​ Fixed annuities
○​ gold coins
●​

Protection of vulnerable investors

●​ when opening account, firms need to make reasonable efforts to include name and info
of a trusted contact person
○​ esp for those >65 age
●​ how firms protect vulnerable investors
○​ temp hold of up to 15 business days on distributions if there is reasonable belief
of financial exploitation
●​ in the event of possible exploitation / imposition of temp hold on an account, the firm
should contact
○​ all of the following: all parties authorized to do biz on account, the trusted contact
person, account owner
12 - tax advantages accounts
tax-adv accounts

●​ TAA offer incentives for those who invest and save towards retirement or education
goals
●​ two main mechanisms
○​ tax - deferral
■​ income contributed in these years is not taxed in the year it was earned,
taxed when funds are withdrawn down the line
■​ use when taxes down the line is less
○​ tax - free
■​ contributions are not deductible / taxes must be paid the year of
contribution / earned
■​ but once put i the account, all future earnings/growth is tax free
■​ use when taxes probs gonna go up
○​ technically if you held all variables constant and assume tax rate, time period,
rates at the same, then the two mechs should be the same
■​ choose for when you think your taxes will be the lowest

Tax Deferred Tax deferred #2 Tax Free (Roth)

contributions pre tax (qualified) post tax (non qualified) post tax
(not tested very often and
just not very attractive as
a vehicle)
 earnings and tax deferred tax deferred tax free
growth (deductible from
income)

distributions taxed - everything is contributions are taxed tax free

after 59.5 taxed as ordinary before they get put in
years income when you pull ALL distributions are tax
it out post retirement earnings and growth are free because you already
(both contributions taxed at ordinary income paid taxes on it (including
and earnings/growth) rates gains)

account types traditional IRA non qualified corp plans Roth IRA
401k post tax IRAs 529 college savings
pension non qualified annuities coverdell (edu)
qualified annuities ABLE

Qualified corporate retirement Plan

●​ lets employees contribute to retirement account
●​ contributions are PRE TAX
●​ earnings/growth are TAX DEFERRED
●​ distributions after u r 59.5 years old are TAXED AS ORDINARY INCOME
●​ to be qualified, must me ERISA guidelines
○​ must be non-discriminatory: offered to every FT/PT employee at least 21 years
old with one year of employment
○​ vesting schedule:
■​ specifics when participants have ownership rights to employer
contributions
■​ you have to stay xyz years in order to get the employee matched amount

Two big kinds of retirement plans

●​ Defined benefit
○​ promises specific retirement benefits
○​ set by formula based on years of service, avg salary, position/title
○​ plan sponsor (not employee) determines required contributions
○​ plan sponsor (AKA THE EMPLOYER) selects investments and bears investment
risk
○​ example → pension plans, like for teachers! (there’s a trustee for that)
○​ it cane be very expansion because you promise a certain amt of money post
retirement for each retiree and you have to achieve returns to make that promise
true
●​ Defined contribution
○​ retirement benefits vary based on amt invested / performance of investments
selected
 ○​ current contributions are decided by each participant
○​ plan participant selects investments and bears investment risk
○​ example → 401k

Non qualified plans

●​ didn’t meet ERISA guidelines
●​ contributions are non deductible
●​ earnings and growth are tax deferred
●​ distributions are taxed as ordinary income
●​ why would a company offer a non qualified plan
○​ it’s discriiminatory → e.g. only to executives
○​ contribute much larger amounts than permitted in qualified plans → e.g. execs
getting top performance bonus
●​ non qualified plan is NOT PROTECTED → have credit risks
●​ qualified plans are protected under ERISA → general creditor can’t go after the money in
case of bankruptcy

Individual Retirement Accounts

●​ allows individuals to contribute EARNED INCOME to personal retirement accounts
○​ not tied w/ employment
○​ EARNED income only
●​ annual contribution limit is 7.5k
○​ if you are >= 50, you can add 1.1k → $8.6k into the IRA
○​ excess contributions penalty → putting more = 6% penalty on the excess amount
●​ distributions:
○​ may begin at 59.5 years
○​ if you have
●​ distributions may begin age 59.5
○​ age distributions must begin at age 73 if there are required minimum distributions
(RMDs) → traditional IRA, which the contributions will get taxed at distribution
○​ IRAs without RMDs → ROTH IRA, because it’s post tax
●​ What can be invested into an IRA?
○​ stocks, bonds, mutual funds
○​ you can only invest in securities - things BDs can hold
○​ not ALL investments can be invested → stamps, collectibles, insurance
●​ IRA question - married couple
○​ If you’re a married couple, the earnings of one spouse can be considered the
other spouse’s IRA
○​ so if a spouse makes 150k, then they can put 7.5k in an IRA, and their spouse
can put 7.5k in a SPOUSAL IRA
●​ ira question - moving money
 ○​ IRA movements uses a ROLLOVER → must be completed in 60 days to avoid
tax liabilities and early withdrawal penalties
■​ otherwise you are subjected to ordinary income taxes and a 10% penalty
(on the entire balance, assumedly)
■​ 1035 exchange is how you exchange insurance products like annual
annuities and life insurance prodcuts

Retirement Plan Questions

●​ income that can be put into IRAs → earned income (not passive, not anything else)
○​ exception is spousal IRAs!
●​ can an investor contribute to traditional and roth at the same time?
○​ YES!
○​ total limit for ALL of your IRAs is 7.5k, up to you for how to split
○​ if you are 50 or older, you can contribute up to 8.6k
●​ who CANNOT contribute to ROTH IRAs?
○​ Modified Adjusted Gross Income (MAGI) reaches $168,000 or more for single
filers, or $252,000 or more for married couples filing jointly.
●​ what are two requirements for roth IRA withdrawal to be tax free
○​ age 59.5, and at least 5 years since contribution!
●​ Employees of public hospitals, public schools, tax exempt organizations are often offered
what type of retirement plan?
○​ 403b (aka tax sheltered annuity)
■​ because 401k is limited to CORPORATES → hosp/schools are not corps
●​ 403b
○​ contributions - are PRE TAX
○​ Earnings and growth are tax deferred
○​ distributions are taxed as ordinary income
○​ in other words, they are treated like 401ks tax-wise
●​ IRA question
○​ earnings in a roth IRA are tax free, earnings in a traditional IRA are taxed as
ordinary income
○​ ROTH IRA contributions are always post tax, but trad IRA contributions are not
ALWAYS pre-tax. if you make too much money then your contribution to a tIRA is
also post tax.
Education Savings Accounts

(529)
●​ Eligibility: opened on behalf of any individual NO AGE LIMIT
○​ you want to invest in your home state’s 529
●​ contributions: post tax
●​ annual limit:
○​ no federal contribution limit per child (states set limits that vary)
○​ donors may have to pay taxes on large gifts to the account
●​ earnings/growth: tax free
●​ distribution: tax free
○​ for education only
■​ elementary, middle, HS tuition
■​ college/graduate/proff school tuition
■​ tuition, room/board, books, computers, school supplies
●​ unused assets in account:
○​ transfer to a family member’s 529 ESA
■​ so i can set up 1 529, let kid 1 burn thru it, and rollover the rest to kid 2
○​ distribute it out as cash, but subject to ordinary income tax and 10% penalty

Coverdell
●​ Eligibility: opened for any student under the age of 18, MUST BE WITHDRAWN
/TRANSFERRED WHEN THEY ARE 30
●​ contibutrutions: post tax
●​ annual limit: 2k per child per year
○​ to the account, not per donor
●​ e&g: tax free
●​ distributions: tax free, education only
●​ unused assets: same as 529
●​ why use coverdell over 529?
○​ more flexible investment options - 529 have to choose from plans the state offers
whereas coverdell you can invest in anything

ABLE
●​ eligibility: plan can be opened by individuals diagnosed with a disability before the age of
46
●​ contributions: post tax
●​ e&g: tax free
●​ distributions: qualified disability expense
 ○​ education, housing, transportation
○​ employment training, support, assistive tech
○​ support services, HC, fin management
●​ basically this is like a coverdell or 529 but for disabilities

Quick Summary
●​ pre tax accounts → taxed as ordinary income upon distribution
○​ 401k
○​ 403b
○​ trad IRA, most of them time
●​ post tax accounts → contributions are taxed first, tax free upon distribution
○​ roths
○​ 529, coverdell, able

Annuities
●​ contract between investor and life insurance company
○​ investor = annuitant
○​ provides retirement income for life and address longevity risk
○​ longevity risk = outliving your funds
○​ return profile depends on whether the contract is fixed vs variable
●​ fixed
○​ not securities
○​ return is guaranteed at a fixed rate by the issuing insurance company
○​ credit risk + purchasing power risk (fixed rate of return but cost of goods go up,
purchasing power does down)
○​ fixed annuity premiums are invested into the insurance company’s general
account
●​ variable
○​ securities!
○​ return varies with performance that investor chooses (subaccounts)
■​ credit risk + market risk
■​ sub accounts kind of act liek a securities specific mutual fund
○​ annuity premiums are invested into insurance company’s SEPARATE account
■​ (Securities, Separate)
■​ separate account because the assets are legally separated from the
insurance company’s
variable annuities
●​ tax deferred earnings and growth
●​ withdrawals at 59.5 years old
●​ so very similar to like a 401k
●​ the timeline
○​ accumulation period (money in)
■​ paying your insurance premiums → the number and value of units will
vary because market value changes and also you can invest diff amounts
in
■​ so how much money you put it
○​ annuitization period (money out)
■​ when you start getting payments back from the company
■​ accumulation units convert into a FIXED number of annuity units
■​ value of each unit will fluctuate and you don’t choose the underlying
security on it but the number you get is FIXED
●​ Surrender charge
○​ fee to withdraw capital prior to annuitization
○​ declines annually until there is no surrender charge
●​ 1035 exchange
○​ tax free transfer of one annuity contract for another
○​ so like if i wanted to surrender my policy but didn’t like the annuity/investment
opps being afforded to me, i could pull my money out and put it into a different
variable annuity using that exchange and avoid getting penalized (10% penalty)
○​ it doesn’t avoid a possible surrender charge! only taxation stuff!

●​ payout options
○​ at time of annuitization // once the investor is 59.5 years old, they just go to the
firm and say hey im gonna stop making payments i want to start getting cash
outflow
○​ the insurance firm lets you choose payout structure
■​ you can choose to have us pay you for as long as you live / what your life
expectancy is
■​ or you have a certain period of payments and even if you die you’ll get
payments either to you, or if you die early, to your beneficiaries (you just
get paid a lil less)
■​ or you can have it for when you and your spouse has died – just becomes
a map out of expected longevity for two people
○​ imagine some guy passes away 8 years later and spouse 12 years after that
(expected)
■​ life annuity: pays 8 years
■​ life annuity w/ 5 years certain: 8 years → just means we guarantee 5
years and if you outlive certain pay they’d pay until 8
■​ jointlife w/ last survivor → 20 (8+12)
○​ Windfall
■​ you die early and they don’t have to payout as much
■​ but certain period and joint life reduces windfall opportunity so your
payments are also less
Hey Peter, thanks for checking in! Quick update on my end:

The balance verification letter finally came this morning but is only reflecting last Friday’s
balance, before the recent funds wire. I’m requesting the bank for a new letter, but it likely won’t
arrive until mid next week. Moreover, B+T noted that they couldn’t guarantee approval even with
the liquidity documentation and won’t provide a concrete processing timeline post-approval.

With this frustrating uncertainty, my parents insisted that I tour a few other places this weekend
to keep options open as it will be my last free weekend before work starts.

I’ll still be calling the bank to try to make this work, but I also wanted to be upfront with you
about looking for other places — I totally understand if you resume looking for another tenant as
well.

Again, really sorry that this situation has become so uncertain and I appreciate how patient and
understanding you’ve been throughout.

Hey Peter — thanks for checking in! Quick update on my end:

The balance letter that arrived today didn't reflect the recent transfer, so requesting a new one
pushes things to mid-next week. On top of that, ST rejected using my parents as co-signers or
guarantors, won't guarantee approval even with 16x liquidity, and can't provide a processing
timeline.

With these delays and uncertainty, my parents insist that I tour a few other places this weekend
to keep options open. I feel terrible about this shift after committing to your lease, so I
completely understand if you resume looking for another tenant as well.

You’ve been amazingly supportive throughout this, and I really appreciate your patience!
13 - finra registration
Finra Registration

●​ SEC = big picture work / big goals

●​ FINRA / MSRB = more down in the weeds oversight
●​ NASAA = each state has one
○​ blue sky laws are state specific securities law

SEC
●​ goverfnemnt agency - mission is to maintain integrity of the US markets and protect
investors
●​ empower self-regulatory orgs (SROs) w/ enforcement responsibilities within the
securities industry:
○​ FINRA (SRO) - regulates broker dealers and registered reps
○​ MSRB (SRO) - regulates municipal securities markets
●​ SEC must approve of FINRA / MSRB rules before they are effective

RR Registration Process
●​ SIE exam
○​ required but not sufficient to conduct securities business
○​ you can take it on your own and then get hired
●​ U4 form
 ○​ personal disclosure form
○​ done by the firm ur hired by
●​ Other Series Exams + SIE if needed
○​ Series 79 for IB rep
○​ so that you can be PAID
●​ when you pass you become an RR
●​ form U5 terminates you from the firm
●​ Takeaways
○​ SIE alone is not enough
○​ to associate w/ a firm you need a U4
○​ termination uses a U5
●​ Arbitration
○​ means of settling financial disputes outside of court system
○​ all RRs must sign a pre-dispute arbitration agreement as part of the form U4
○​ so this means that disagreements must be privately arbitrated
■​ cases with the public must include arbitrators from outside the industry
■​ industry only cases are aribtrated by industry arbs
○​ exceptions
■​ disputes related to harassment and discrimination can be in court (unless
both parties prefer to keep it private)
■​ disputes involving the public can be in court (unless customer agrees to
arbitrate, which usually happens when they sign on)

●​ question:
○​ form U5 is for termination – must be done within 30 days (usually ordinary course
stuff so like people retiring or leaving the industry)
○​ firm U4 to start working as RR in new form
●​ registration q:
○​ if you are taking on an outside business activity (e.g. consulting position) you
need to amend a form U4 within 30 days
○​ You terminate with a U5, how long must you maintain an updated residential
address in FINRA’s CRD system– 2 YEARS
 ●​
○​ if you are in financial distress as an RR you’re more likely to commit financial
fraud
●​ fingerprinting
○​ a silent partner of the firm who has made significant capital contribution does
NOT need to be fingerprinted
■​ no operational role in the form
○​ people who need fingerprints:
■​ ANYONE WHO TOUCHES SECURITIES
■​ associated person processing stock withdrawals/deposits
■​ employee who handles cash
■​ registered rep even if online

BrokerCheck Disclosure
●​ discloses backgrounds of brokers, advisors, investment firms to the public!!!
●​ it’s like Yelp for RR - can check for indivs or firms
●​ includes:
○​ employment history
○​ licensing info / regulatory actions
○​ arbitrations
○​ complaints
●​ annual notification to customers
○​ finra brokercheck hotline
○​ web address
 ○​ investor brochure

Statutory Disqualification
●​ stops a person from becoming RR unless u get a waiver from FINRA
●​ it PREVENTS YOU from becoming RR!!
●​ During application, FINRA will look back 10 years and check for:
○​ felony CONVICTION
■​ an arrest doesn’t count!
○​ misdemeanor conviction involving securities, investments, or fraud
○​ expulsion from other SROs
○​ violations of federal securities laws
●​ ^FINRA can require RR to submit to interiews/meet w/ regulators as part of the
investigation

Continuing education:
●​ two reqs to complete by 12/31 each year
●​ regulatory element
○​ trainings created by regulators
○​ focuses on regulatory requirements and industry standard
●​ firm element
○​ provided by firms
○​ focuses on firm’s specific securities, products, services, strategies, policies,
indsutry trends
●​ what happens if you don’t do CE?
○​ you get CE inactive status
○​ basically your license is suspended until you do your CE, can’t be paid!
●​ Can an RR continue doing work w/ a client that moved to a diff state?
○​ RR’s are registered per state
○​ the RR can forward trades to someone at the firm who is registered in CA
(because blue sky laws!) and cannot conduct trades with her client anymore bc
not the same state
■​ there are exceptions to this rule! so be careful to not pick any extreme
positioning
●​ traditional qualification termination period
○​ if you leave the firm: U5 terminates
○​ you do carry with you the SIE even if unaffiliated – for FOUR years
○​ for registered / principal exams you keep for TWO years
■​ if you are unaffiliated for two years you have to take it again
○​ after 4 years of unaffiliated you must fully requality
●​ There is now a new program: maintaining qualifications program (MQP)
 ○​ avail for people who have been registered with a firm for more than 1 year
○​ within 2 years of termination you can elect to participate in MQP via finpro
■​ this lets you do CE requirements and no need to re-register for exams for
the next FIVE years but u must do it every year
●​ reg element
●​ PRACTICAL ELEMENT (not firm element)
●​ and u have to pay $100 a year
■​ but after 5 years must requal by exam

Investment Advisers
●​ IA firms provide securities related ADVICE for compensation
○​ they register with SEC or states based on AUM
○​ IAs have fiduciary duty - must act in BEST interests of clients
●​ RECOMMENDATIONS are not advice, so BD/RR that recs you a stock is not an IA
○​ you’re paying them to execute on trades
14 - business conduct rules
Business Conduct Rules

Insider Trading
●​ misappropriation
○​ you took information you weren’t allowed to have and used it
●​ duty of trust
○​ you got information by legal means but you used it to place a trade
●​ if you trade on the info and then get caught:
○​ treble damages → pay 3x damages of whatever you made from the trade in the
form of a fine
○​ up to 5m fine and/or 20 years in jail
●​ what policies/procedures do BDs need to take to prevent misues of info
○​ information barriers (physical + electronic)
■​ e.g. keycards to walk onto floor of the bank
■​ computer sytesm that are password protected
○​ banks have a RESTRICTED LIST
■​ list of securities the firm has inside info about
■​ if the bank has info on the firm, EVERY employee is blocked from trading
it
●​ questions
○​ if i insider trade and make 250k what are my max penalties?
■​ 750k civil penalty
■​ 5m criminal fine
■​ 20 years in jail
○​ if an RR has knowledge of MNPI, they can still accept unsolicited orders from
customers

Money Laundering
●​ 3 phases
○​ placement - depositing illegal funds into financial institutions
■​ this is the easiest point to catch it
○​ layering - washing th money / financial transactions that obscure source of funds
○​ integration -illegal funds are reintroduced into the economy
●​ anti-money laundering
○​ forms required under bank secrecy act filed with FinCEN
■​ currency transaction report (CTR)
●​ any currency transaction exceeding 10k per day
 ●​ customer may be informed of CTR filing/do the filing themselves
●​ filed within 15 calendar days of transactions
●​ just an initial flagging of big chunk of money being put into
financial system
○​ suspicious activity report (SAR)
■​ filed for suspicious transactions
■​ customer CANNOT be informed of SAR filing
■​ filed within 30 calendar days of determination that activity is suspicious
●​ USA Patriot Act
○​ fin institutions have to take extra steps to fight ML
○​ Specially designated nationals (SDN) list
■​ no accounts/transactions from any party or people on that list
■​ so like Iran, NK, known drug traffickers
○​ AML compliance programs
■​ FIs have to implement policies/procedures to detect money laundering
■​ ongoing training for employees
■​ subject to annual independent testing
○​ customer ID program
■​ verify customer ID within reasonable time after/before account opening

General Supervision
●​ Selling Away and Private securities transactions
○​ What if you sell securities unaffiliated from your firm? / outside associated party’s
employment
○​ IF YOU ARE BEING PAID
■​ need permission
■​ firm needs to supervise the transaction
○​ if doing for free
■​ just notification is required
○​ you may get a q is that AP is selling securities unaffiliated to firm
○​ Selling away = you’re getting paid to sell securities unaffiliated but WITHOUT
PERMISSION/SUPERVISION
○​ private sec transaction = you did it legally
●​ Outside Business Activities (OBA)
○​ defined as - any employment outside the scope of the relationship with the
member firm
○​ requirement
■​ notification to firm
■​ to be compliant with FINRA → firms usually have stricter rules
○​ the only exception is priv sec transaction in which you need perms/supervison
●​ Question
○​ managing an apt building - OBA
 ○​ raising equity cap for free - just notif, PST technically?
○​ issuer directed sales w/ promise of future deal flow (that’s considered comp) -
PST
●​ Transactions with other members
○​ employee of BD A wants an account at BD B
■​ employee must get written consent from employer member (BD A) //
NEEDS PERMISSION
■​ opening firm must send duplicate trade confirmations / account
statements upon written request (BD B needs to send shit over) – so that
they know ur not trading on sus stuff
■​ this is like me disclosing me personal brokerage
○​ accounts limited to the following securities are exempt for the above:
■​ mutual funds
■​ variable contracts / annuities
■​ 529s
■​ ^^ cuz the plans are basically picked out already
●​ Continuing commissions can be paid even if you’re retired/disaffiliated if
○​ you sign a continuing commission letter while still registered with the firm
○​ THEN you sign U5
○​ and while retired/disaffiliated you can still receive commissions from accounts of
customers you served while registered
■​ bc a lot of products pay trailing / continuous commissions
■​ for example, an annuity will pay commission to the rep every year a
premium payment is made
○​ you CAN”T solicity new business, open new accounts, service existing accounts
○​ allows older reps to comfofrtably retire and still get commissions from stuff they
sold
●​ sharing in customer accounts
○​ a joint account with the rep and customers each being an owner
○​ needs permission from the customer and from the firm
○​ sharing must be proportionate to contributions
■​ so if i put in 20% money and customer puts in 80% then i own 20% →
JTIC account
■​ exception: share accounts with immediate family (if I am RR and i open
an account with my spouse)
●​ Loans involving customers
○​ reps cannot make personal loans to clients
○​ exception, no permission needed:
■​ firm has WRITTEN procedures allowing such loans
■​ AND It either
●​ loan is to a bank (e.g. if they have a bank account with that bank)
●​ loan is to a family member
○​ exception, permission needed:
■​ firm has WRITTEN procedures allowing such loans
 ■​ loan is for outside personal / business relationship
■​ loan is for someone also registered at the same firm
●​ gifts and gratuities
○​ have to be careful between gifts vs bribes
○​ firms and reps can give gifts to potential customers
○​ gifts can be worth 300 dollars as of march
■​ so like a little token appreciation
○​ what’s not a gift
■​ travel and entertainment
■​ the difference is whether the rep is in attendance
■​ so if I want to send sports tix under $300 to a client, that’s fine, but i can’t
TAKE THEM there
●​ customer complaints
○​ = written grievance → has to be on paper
○​ the complaint cannot be dealt by the RR, m ust be forwarded to the principal
(ALWAYS HAS TO ESCALATE)
○​ even if the complaint has no merit, it must still be forwarded
○​ FINRA received QUARTERLY SUMMARIES of complaints
●​ annual compliance meeting
○​ firms have annual compliance meetings led by the CHIEF COMPLIANCE
OFFICER (CCO) and attended by all registered employees

Municipal Securities Rulemaking Board (MSRB)

Who do they regulate:
●​ municipal dealers, advisors, and finance professionals
○​ people that help raise capital and sell securities for the state
●​ NOT municipal issuers (because that’s the state itself)
●​ An MFP is an associated person who underwrites, trades, or sells securities

MSRB Rule G37 - political contributions

●​ limits political contributions by BDs, muni advisors, and mfps
●​ if you make a political contribution
○​ you cannot do financial advisory / underwritings with that Muni for TWO YEARS
○​ so basically they just don’t make political contributions (cuz it used to be pay to
play)
●​ exception
○​ for BDs and muni advisors → any competitive underwritings based purely on
lowest price, then you can even if u made political contributions (any bribes LOL
won’t have pay to play impact)
 ○​ for MFPs - de minimis contributions → $250 contribution per election as long as
you are someone who can vote in that race
■​ basically its okay to support ur politicans
○​ SPOUSES are not subject to that limit but if the MFP directed the contribution it’s
an issue

Comms with the public

●​
communication defined required approval

retail reaching > 25 retail clients principal needs to

in a 30 day period pre-approve it

correspondence (IMs, less than or equal to 25 spot check by principal

chats, texts, one off retail clients over 30 days
emails)

institutional if its an institutional clients spot check

only! even one retail client
in the list makes it
retail/correspondence
●​
●​ Verbal communication is not public comms so it doesnt matter (not written)
●​ Retail comms
○​ highly regulated!
○​ what can you send?
■​ CANNOT send projections of performance of a security
■​ CAN send target price ONLY in research reports
■​ cannot send exaggerated claims
■​ CAN send hypothetical illustration of mathematical principles (e.g. if w
assume this and this then you could return this and this) AS LONG AS it
does not specifically project investment performance (“actual rate of
return will vary”)

Social Media and other online Comms

●​ Static content
○​ rarely changed
○​ website copy
○​ info posted on fb wall/profile, blog posts
○​ treat like retail comms - pre approval
●​ interactive content
○​ dynamic, real time comms
○​ tweets
○​ fb comments
○​ responses to blog post comments
 ○​ treat as correspondence – spot check
●​ RRs can communicate w/ potentical/current clients thru personal addy/social media IF
THE FIRM ALLOWS IT and WITH FIRM MONITORING / SUPERVISION
○​ allowed under FINRA(?) but most firms don’t allow it

Business Continuity Plan

●​ firms need a BCP to show how it’ll meet its obligations to customers in case of an
emergency / biz disruption
●​ customers receive a summary of the BCP (not the full thing)
○​ at account opening, at request, and on the firm’s website
○​ THEY DO NOT GET IT ANNUALLY LIKE MOST OTHER THINGS

●​ question:
○​ BD records must be maintained for THREE YEARS
○​ and be EASILY ACCESSIBLE for TWO YEARS
○​ for records related to ads, the retention period restarts each time the ad is used
○​ electronic storage of records IS ALLOWED if certain conditions are met
diagnostic 1
 ●​ load vs no load mutual funds, expense ratios
●​ what is interpositioning?
●​ WTF is a keogh plan
○​ and are mutuals tax deductible? tax deductible is pre-tax i think
●​ what does “nominal price change” mean
●​ what is a depletion allowance (REITS)
●​ i need to memorize options hedging
○​ time value of options contract
○​ risk level of options positioning
●​ is preferred stock divs % based on par value
●​ review IPO steps
●​ finder fee??
●​ what’s a tombstone advertisement again
●​ are notes quoted in eighths
●​ expense ratio
●​ advertisements under MSRB\
●​ review closed end funds
●​ bond “close up”
●​ all the trading issues:
○​ free riding
○​ front running
○​ churning
○​ commingling
●​ ETNs?
●​ 403bs ??
●​ CMOs vs CLOs

Q. 16.3%
●​ 300 in interest → tax 28% = 84

33/80 unsure

67 correct, 13 wrong
Notes
●​ SEA of 1933 governs anything related to PRIMARY SALE
○​ IPO: pre-registration, cool-off/registration, post effective
●​ SEA of 1934 governs secondary market things
○​ exchange + OTC trading
○​ market making
○​ BDs
●​ trade flat = no accrued interest
○​ income bond - interest is only paid if the issuing company has enough earnings
(interest is not a fixed obligation)
○​ trade flat just means the price doesn’t include any accrued interest on top of the
market price
●​ load vs no load funds
○​ load fund = charges commission
■​ front end → % of the overall invested amount
■​ back end - pay commission when u sell, % is less longer u hold
○​ no load fund = no sales charge
●​ Interpositioning a customer =
○​ adding another broker to do the deal
○​ allowed if it gets the customer a better execution
●​ execuring firm order at better price than unexecuted customer order
○​ IS NOT ALLOWED
○​ Manning Rule / customer limit order protection rule:
■​ customer comes before the firm
●​ keogh plan: HR 10 plan
○​ tax advantaged retirement plan for SELF EMPLOYED INDIVIDUALS and
UNINCORPORATED BUSINESSES
○​ like a 401k for self employed people
○​ sole proprietor, self employed lawyers, etc
○​ alternatives: SEP IRA, solo 401ks
●​ thinly traded = low liquidity = small trades cause volatility
●​ shorting a put = obligation to buy = the close is a purchase
●​ Depletion allowance = depreciation for NR
○​ depletion is a thing for oil and gas
●​ cap gains in REITs
○​ REIT shares can go up in value
●​ that stupid call question
○​ buying a call = bullish on the stock
○​ delaying a decision to buy stock
■​ allows u to reserve the right to buy later at a better price
○​ hedging a long stock
■​ long call doubles down (expects the price to rise more, you’re bullish)
■​ SO THIS IS WRONG
○​ i guess options diversifies your holdings..?
 ○​ combinations of options hedging
■​ Long stock
●​ BUY/LONG PUT → protective put
●​ SELL/SHORT CALL → covered call
■​ Short stock
●​ BUY/LONG CALL → protective call
●​ Short puts double down, not hedge
■​ buying = protect, shorting = cover
●​ banker’s acceptance
○​ specific to international trade of goods tied to those goods
●​ pref stock divs are based on % of par ($100)
●​
●​ if you’re hedging long stocks then you should
○​ protect (buy) puts or sell calls, but buying puts is better bc sell call is bullish to
neutral and only give you premium as the mitigation

●​ options premium = intrinsic value + time value

●​ time value = premium - intrinsic value
●​ premium = amount you pay to buy the option
●​ the premium is worth two things
○​ intrinsic value: how much money you make by executing this option right now
(mp - strike price)
○​ time value: the premium is worth more than intrinsic, the difference is “time value”
because the stock could still move in the future
●​ SEC regulated
○​ exchanges, proxy stuff, customer vs firm asset separation
●​ Fed
○​ money, margin, credit, reg T
○​ CRE

●​ accredited investory =
○​ net worth >1m excluding prim residence
○​ earned income of at least 200k in the past two years each
●​ FINDERS FEE NOT ALLOWED
●​ ugh go with ur gut

●​ omh remember open end investment cos only let you redeem shares for NAV at close
(forward pricing)

●​ FRB = margin, credit, reg T, BD extension of credt

 ●​ accrued interest calculation is based on REAL DAYS so each month is 30,31,28

Expense ratio = Expenses / NAV

●​ OFFICIAL STATEMENTS are not ads
key concept email
●​ LGIPs
○​ mutual funds by governments, for governments
○​ safe, liquid investment for eligible govs
●​ for corporations to issue debt, only BOD approval is needed, not shareholder vote
●​ if an IRA has both pre and post tax contribution, distributions are PARTIALLY TAXABLE -
each withdrawn includes pro rata mix of tax/non tax amounts
●​ g20 gift rule is now 300$ per year for MSRB to align with finra
●​ 529 plans – withdrawal limit is now 20k
●​ wash trading = buying/selling to create artificial activity
●​ account statements must be sent quarterly if there is anything in the account
○​ if there is account activity a statement must be sent for that month
○​ if an account is empty then no statement is required
●​ cost basis = value of an asset for tax purposes
○​ cost basis = amount paid for security
○​ sales proceeds = amount you sold it for
○​ sales proceeds - cost basis = capital gains – taxable
○​ average cost basis determines cost of shares redeemed from mutual fund
■​ =total cost of shares / total shares owned
○​ higher the basis, lower the tax consequence (bc less gains)
●​ correlation risk - risk of alignment with market change (underestimated during stable
periods)
●​ PIPE = private investors buy shares of a public co directly from company at a discount to
market price
○​ under Reg D
○​ sold at a discount
○​ involves restricted securities
○​ faster, less expensive than pub offering
○​ common w/ smllaer cap or distressed cos
diagnostic 2
NY CY YTM YTC

●​ which law is for investment companies? like 1940?

●​ telephone consumer protection act
○​ what does it cover?
●​ redeemable?
●​ lock up provision in hedge funds
●​ domestic bank securities?
●​ review of leading/lagging indicators
●​ 12b-1
●​ all or non offering
●​ series HH bonds
●​ disclosure of job
○​ paid part time ?
●​ tender offer vs repurchase agreement
●​ what is a reg A offering

●​ 25.75-25=.75

●​ it’s not on the date it settles!!

●​ muni notes are any fixed income securities with <1 year maturity
○​ bonds are 30 year..
●​ redeemable securities = they are sold back to the issuer
○​ and NOT traded on the secondaries market!
●​ limited liability is a good thing for LPs
●​ reg A = small public offering
 ○​ do NOT have ot be accredited
●​ reg D:
○​ accredited investors only, would be contactly by a BD about it
○​ acc = 1m in net worth minus house, OR 200K per year in gross income for two
years (or 300k for joint spousal income)
●​ tender offer vs repurchase agreement
○​ THATS A REPO!!! lol
○​ tender offer = bank asks to tender shares and investors take the offer

Economic Indicators:
●​ 10.1.4 econ indicators
●​ Nonag employment → coincident indicator
●​ duration of unemployment → lagging
●​ personal income → coincidental economic indicator
●​ money sipply, stock prices, housing starts → leading
●​ how to determine:
○​ would they make this decision before econ changes / anticipating econ changes?
■​ houses, stocks, machine orders
○​ does this tell me what’s happening today?
■​ income, jobs, production
○​ would companies react to / wait before doing this?
■​ layoffs, inflation, interest rate stuff
●​ GTC = good til cancelled (indicates limit)
●​ Do Not Reduce = overrides ex div adjustment