Passing Score:

Major Securities Laws:

Securities act of 1933
- new issues
- disclosures of the company- its a full disclosure law
- requires registration statement
- audited financial statement
- delineation of business risk
- prohibits fraud and misrepresentation
- RAD- Registration, Audited, Delineation of business risk
Securities Exchange Act of 1934:
- secondary sales
- creates the SEC to regulate exchanges, broker dealers and
securities trading
- oversight of the SRO- exchanges like NYSE
- FRB given oversight of credit in the securities industry
- Insider trading prohibited
- SOFI- SEC, Oversight, FRB, Insider Trading
Maloney Act of 1938:
- set up non exchange SROs or OTC SROs
- as opposed to exchanged SROs like the NYSE
- SRO- self regulatory org
- Maloney Act- deals with SROs
Trust
-

Indenture Act of 1939:

disclosure around bond issuances
similar to the 1933 act
and this one focuses purely on debt issuances above $10 million

Investment Compny Act of 1940:

- disclosures of material information and investing limitations
- firms that pool money for investment (register w/ SEC)
- 1. Mutal funds
- Face Amount Certificates- like discounted bond
- Unit Investment Trust- shares in a fixed, unmanaged portfolio
Investment Advisers Act of 1940:
- they sell their advice for a fee
- must register with the SEC and act in the clients best interest
SIPA Act of 1970:
- provides $500,000 coverage with up to $250,000 in cash

organizes the dissolution of the insolvent broker-dealer

SIPC- Securities Investor Protection Corporation

Securities Acts Amendment of 1975:

- established the SRO that oversees municipal bonds
- MSRB (municipal securities rule making board) just writes the
rules, it does not enforce them
Insider Trading Sanctions Act of 1984:
- penalty could be upto 3times the profit
- also applies to the person who provides information
- civil penalties
Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA):
- criminal fines up to $5 million individuals/ $25 million equities
- imprisonment up to 20 years
- broker-dealers must maintain and enforce insider policies
o system to monitor broker dealer accounts and employee
trading
o restricted list of securities
o protection of information and employee training
Federal Telephone Consumer Protection Act of 1991:
- don not call list maintained indefinitely
- call must be between 8am and 9pm
- caller must provide name, name and contact address
- or phone number on whose behalf the call is made
- caller must provide the purpose of the call
- unsolicited faxes are prohibited
- autodialers are pre-recorded messages are prohibited unless for
a pre-existing business relationship or for tax-exempt nonprofits
- DCCCUA
Penny Stock Rule of 1991:
- small cap securities
- risk disclosure must be provided
- disclosure fees and commissions
- small cap rules
FINRA OTC rules:
- uniform practice code- standardized dealer terms
- conduct rules- operational rules
- code of procedure- complaints and violation procedures
- code of arbitration- procedures for dispute resolution
FINRA 5% rule:

fair and reasonable pricing to the public for a plain vanilla trade
higher markups are justified for more difficult trade such as:
o exempt security
o speculative security
o low liquidity
o low market price

Equity Issuances:
Public Offering- primary offering
- must be registered with the SEC
- underwriting
- investment banker coordinates between the issuer and buyers in
the market
- exemptions from registration:
o us gov securities
o us gov agency securities
o offering by non-profits
o corporate debt of 270 days or less
o intrastate offerings
o offerings by US banks or trusts
o offering by small business investment companies
Underwriting Agreement:
- firm commitment- underwriter risks all shares
- best-efforts- takes no risk, shares returned to issuer
- best efforts all or none- all shares sold or canceled
- best efforts mini-maxi- min percentage or canceled
- standby- buys shares after preemptive offering
- agency vs principal
Syndicate:
- underwriting group for a new issue led by manager
- who is the selling group?
o The broker dealers who help market and sell securities
o Selling group agreement between syndicate and the group
o Establishes the commissions and responsibilities
o Western or divided account- individual responsibility
o Eastern or undivided account- group responsibility
Underwriting Spread:
- the spread is the difference between the sale price and the
amount received by the issuer

New
-

share price=100
spread=7
issuer proceeds=93
managers fee 20%
underwriting fee 20%
concession fee 60%
underwriting fee+ takedown concession= 80%
MUCT
Issue Rule:
affirmative statement that account may purchase new issues
written or electronic statement verified every 12 months
records of the representation must be kept at least 3 years
restricted person cannot have a beneficial interest
AWR

New
-

Issue Rule restricted Person:

anybody associated with equity issuance
members of associated person
lawyers, accountants
immediate family member
anybody with 10% or more owner of a broker dealers

New
-

Issue Rule Exemptions:

all debt offerings
secondary offerings
private offerings
preferred stock and rights offerings
investment company offerings
REITs
DPP- direct participation program
Exempt securities under the 33 act
Equity offerings

Registration Statement:
- 20 day cooling off period
- blue sky- register in states where securities are offered
- due diligence meeting between issuer and underwriters
Red Herring:
- preliminary prospectus
- used to generate awareness of issuance
- and who can be possible buyers
- it cannot be used for orders
- just to gauze interest
- indications only

Tombstone:
- add allowed after registration is effective
- standard clause- not an offer to sale offering is made only by
prospectus
- after registration
Accredited Investor:
- eligible for private investments
- financial institutions
- indivs who have income over $200,000 or joint income over
$300,000 for past 2 years
- or $1 of liquid assets
- partnerships need to have $5 m in assets
SEC Rule 144:
- regulates transactions of restricted and control stock
- restricted- private shares not registered with SEC
- control- insiders who acquire stock
- a control person is an officer or director of the firm or owns 10%
+ of shares
SC Rule 144A:
- exemption from rule 144 restrictions for QIBs
- no holding period
- debt or equity securities included
- whats QIBs- qualified institutional buyer has $100 m or more
invested in securities not related to the QIB
- domestic or foreign institutions
- audited financial statements and a certification from the issuer
SEC Rule 145:
- has to do with transfer of securities
- stock splits dont count
- merger or consolidation involving securities
SEC Rule 147:
- exemption from SEC registration for intrastate offerings
- issuer has 80% of revenue, assets are in state
- 80% of funds are used in state
- all investors have their principal residence in the state
- 80/80/80/All

SEC Regulations- session 4

Session 5,6,7,8
Session 9 Customer Accounts:
Ownership Types:
Individual- 1 person on the account
Joint- 2 or more ppl on the account
Corporate- corporate resolution on file specifies authorized personnel
Partnership- partner signatures and info required
Fiduciary- client acting for benefit of another
Must be in a prudent manner
Documentation kept on file
Minors- not allowed to open accounts
Joint Accounts:
- JTWROS- joint tenants with right of survivorship
- Ownership shared jointly and passes to survivor in the event of
the death of one of the owners
- TIC- tenants in common
- Proportional ownership that passes to the estate in the event of
death
Trading Authorization:
- power of attorney needed for 3rd party
- limited authorization for buys and sells
- full authorization includes cash and securities withdrawals
- fiduciaries, minors or incompetents may not grant trading
authorizations
Suitability:
- solicited orders or discretionary trades:
- trades beyond ability to pay
- excessive activity
- unsuitable mutual funds
COD:
- how securities are paid for
- DVP:
o Delivery vs payment
o Security delivered at the same time as payment ins made
from the custodian bank
- RVP:

o Receivs vs payment
o Institutional COD process in which dealer makes payment
and receives security at the same time
Customer Death:
- account marked as deceased
- open orders cancelled
- assets frozen
- account closed and transferred to estate for executor or
administrator to manage
Statements:
- quarterly for inactive accounts
- monthly for active accounts
- must show:
o account balances
o current long and short positions
o debits and credits
o all activity
Transferring Account:
- carrying firm- original firm
- receiving firm- new firm
- 1. Written instruction from client to receiving firm
- receiving firm submits transfer request
- 1 business day to either validate to take exception
- instructions for non transferrable assets
- 3 business days to complete transfer
Confirmations:
- name of security
- bought or sold
- price
- shares, units or principal
Margin account:
- commissions received
- date of transaction
- time of execution
- settlement date
- capacity agent (broker) or principal (dealer)
Bond confirmations:
- Dollar price
- Par value
- Maturity

Coupon rate
Yield
Issuer name
Bond type
Accrued interest
Cal features

Markup and Commissions:

- commission- charge for executing a trade
- markup- price difference charged to the client
- must be fair and reasonable determined by:
o market price
o transaction-related expenses
o firms right to earn profits

Session 11
Cash Equivalent:
What
-

is a cash equivalent?
high quality (low risk), short-term debt securities
almost as safe as cash
uncorrelated with bonds
eg- money market funds
negotiable CDs
commercial paper
repos

Money market funds:

- fund of short term debt securities
- securities maturing under 13 months
- weighted avg maturity under 60 days
- less than 5% in any one issuer except governments or repos
- stable value of $1
Negotiable CDs:
- jumbo Cds with secondary markets
- min of $100,000 usually > $1 m
- not FDIC insured due to size
- min maturity is 7 days with no max

Brokered CDs:
- issued by banks
- SIPC coverage if B-D files bankruptcy
- Maturity of 2-20 years
- Not considered market security
Long
-

term CDs:
have additional risks than short term CDs
limited or no liquidity
loss of principal if sold prior to maturity
call features increase reinvestment irsk
features such as variable rates and step-ups
FDIC insurance may not apply

Commercial Paper:
- unsecured corporate debt
- maturity of 270 days or less
- exempt from prospectus requirements
- zero coupon discount usually- no interest payments
- directly placed or dealer placed
Bankers acceptances:
- secured draft to facilitate foreign trade
- time draft secured using letter of credit
- letter of credit guaranteed by bank
- used as a payment for goods delivered
- draft can be cashed early at a discount which the bank can sell
Fed Funds:
- overnight borrowing between banks
- bank with extra reserve lends to bank that needs to meet
reserve requirements
- fed funds rate fluctuates daily and indicates interest rate trends
- fed reserve influences but does not set the rate
Repos:
- agreement to sell a security and later repurchase it
- usually overnight borrowing purposes
- return is the difference in prices
- future date and price is fixed
- reverse repo is the lending or buying side of the transaction
- reverse repo- lender of the transaction
Session 12 Bond Overview:

Bonds:
- contract to lend money between issuer and investor
- issuer- debtor
- investor- creditor
- contract- debenture
- coupon- nominal yield
Registered bond:
- record of owner and address
- registered as to principal
o notice of principal payment
o coupons are deposited at bank
- fully registered
o notice of interest and principal payments
- book entry form
o no physical bond- all digital
Price
-

below par:
interest rates have risen since issuance
bond prices move inverse to interest rates
bond sells for less than par value
lowe price equates to a higher yield
market price of 95.5= 95.5% of par value
price= bond price* par value
955=95.5%*1000

Premium Bond:
- interest rates have decreased since issuance
- bond prices move inverse to interest rates
- bond sells for more than par value
- higher price equates to a lower yield
- market price of 102.7= 102.7% of par value
- price= bond price* par value
- 1027=102.7%*1000
Maturity Types:
- serial bond- maturities over regular time periods
- term bond- one maturity date for total
- ballon bond- serial maturities with a large maturity at one period
Zero
-

coupon bond:
no coupon or interest payments
issued at a discount to par value
return is difference between price and par
zero coupon bonds are more volatile than equivalent coupon
bearing bond

Yield Methods:
Nominal yield
- stated rate of the bond
- stable over the life of the bond
current yield
- return relative to current market price
- current yield= total annual div/ current market price
yield
-

to maturity:
yield assuming bond held to maturity
interest reinvested and compounded
similar to yield to call

Par bonds:
- Nominal yield- fixed for life of the bond
- Current yield- since bond is selling at par then same as nominal
yield
- Yield to maturity- bond purchased and redeemed at par is same
as nominal yield
Discount Bonds:
- nominal yield- fixed for life of bond
- current yield- higher than the nominal yield since bond sold at a
discount
- yield to maturity- higher than current yield since discount will be
redeemed at full value
Premium Bonds:
- nominal yield- fixed
- current yield- lower than nominal yield
- yield to maturity- less than current yield
- since premium will be redeemed at full value
Normal yield curve:
- interest rate goes up as maturity goes longer
flat yield curve:
- flat
inverted yield curve:

interest rate goes down as maturity goes longer

inflation risk:
- reak interest rate= yield- inflation
- the inflation rate may rise higher than assumed in the bond price
- the higher inflation reduces the return of the bond
Credit Risk:
- risk of default of interest or principal
- bond ratings are a measure of the willingness and ability of the
issuer to meet debt obligations
- us gov bonds are considered to have no credit risk
- ratings services are moodys, S&P and fitch
Call provisions:
- Issuer can redeem before maturity
- Pays principal and accrued interest at call
- Incentive to call when rates have declined
- Continuous call can be exercised any time after the first call date
- Refunding replaces the financing from the call
Call features:
- call protection restricts when a call can be exercised usually 5-10
years from issuance
- call premium is an amount paid above par when the bond is
called
- reinvestment risk is the lower rate that the investor must accept
after the call
Prefunding:
- prefunded amounts from a refunding issue are deposited in an
escrow account
- escrow account guarantees use for debt services
- defeasance is when the debt is completely covered by escrow
Put Provision:
- bondholder can redeem bond at specified times
- redemption can be at a discount or premium
- investor can reinvest at a higher rate
- put feature means the bond has a lower yield

SESSION 13 Treasury Maturities

Treasury bonds

10+ year maturities

Treasury notes
- 2-10 years
Treasury bills
- 1 year or less and sold at a discount
Treasury Types:
STRIPS:
- separate trading of registered interest and principal securities
TIPS:
-

treasury inflation-protected securities

interest rate fixed
principal value is adjusted semi-annually
face value*(1+ CPI increase)
or $1000*1.01=1010 paid at maturity
increases are taxed as ordinary income
will never decrease below face

CMBS:
- cash management bills

Savings Bonds:
- non marketable treasury for retail savings
- Series EE
o 30 yr bonds issued from $50-$10,000
o purchased at 50% discount
- Series HH
o 20 yr bonds issued from $500-$10000
o not sold since aug 2004
- Series I
o Inflation indexed 30 yr bonds
o Interest reset 2* a year based on inflation
Tax Treatment of Treasuries:
- attractive to investors
- because exempt from state and local taxes

series EE and I deferred until maturity or redemption

T-bills taxed in year of maturity
Notes and bonds taxed in the year interest is received
STRIPS taxed each year

FED Auctions:
Mon:
- 3 and 6 month t-bills
- issued thu
Tue:
- 4 week and 1 yr t-bills
- issued thu
Monthly:
- 2 yr and 3 yr treasury notes
- issued at the end of the month
Quarterly:
- 5 yr treasury notes
- issued 15th of month
- usually Feb, May, Aug, Nov
Semi-annually:
- usually Feb and Aug
- 30 yr treasury bonds
- issued on the 15th
Accrued interest:
- interest since the last payment
- seller paid by buyer for accrued interest
- us bonds use actual days
- corporate use 360 day yr
Treasury Offers:
Competitive tenders:
- large institutional investors
- highest bidders get securities
Non competitive tenders:
- small investors
- avg bid price for all competitive bids
- non competitive bids before competitive bids

Corporate Bonds:
Unsecured bonds:
- high yield or junk bonds
o non investment grade
o higher coupon for higher risk tolerance
- guaranteed bonds:
o additional pledge by another corporation
o usually an affiliate or parent company
Secured Bonds:
Mortgage bonds:
- secured by real property
Equipment trust certificates:
- secured by a piece of equipment in operation
- trustee has legal title
Collateral trust bonds:
- secured by securities placed in escrow
- stocks and bonds owned by firm
Convertible bonds:
- bond that can be traded in for stock
- conversion price is the stock price that will be used for the trade
in
- conversion rate determines the number of shares you will get for
each bond you convert
shares= bond per value/ conversion price
Conversion Value:
- value of stocks received
- number of outstanding shares increase which dilutes equity
- lower coupon due to option of potential equity unside
conversion value= conversion ratio*market price
stock
-

splits and conversion:

decreases the conversion price
increases the conversion ratio
3-1 split means the conversion price is divided by 3 and
conversion rate is 3*

new price= conversion price/ stock split ratio

Conversion Arbitrage:
- profit from price differentials at no risk
- convertible bond trading at a discount means
- the bond is trading below the underlying stock price
- buy the bond and convert immediately
Income bond:
- firm pays interest only if sufficient earnings
- offered by firms in bankruptcy
- sell below par
- speculative investment
Eurodollar bond:
- denominated in US dollars
- issued outside the US
- not registered with the sec
- may be sold in the US 40-90 days after issuance
- does not need to be in Europe- maybe different countries
Yankee bond:
- issued in us by foreign company
- registered with sec
- principal and interest in us dollars
Accrued interest:
- interest accrued since last payment
- corporates accrue on a 360-day yr
- accrual up to but not including the settlement date (T+3)
eg:
accrued interest formula= (par value*coupon*days of accrued
interest)/ 360
5% corporate bond
jan 1 2006 maturity date
thu sept 7 sale date
1000*5%*(72/360)= 10

Session 15 Annuities:

What
-

is an annuity?
a one time payment in exchange for a future stream of payments
issuer invests to fund the income stream
usually for retirement needs
maybe tax deferred or after tax plan
return may be fixed or variable

Fixed
-

annuities:
insurance products under state insurance laws
not regulated as a security
fixed dollar payments over a lifetime
not protected agiainst inflation
issuer invests in a general fund and guarantees payments
regardless of returns or losses

Variable Annuities:
- unlike fixed annuities, they are regulated as securities
- investor can choose different investment objectives
- variable dollar payments over a lifetime
- no guarantees on return
- annuity buyer assumes risk of loss
Accumulation Period:
- if there is some delay between when investor makes payments
- growth period while payments are deferred
- contract owner will reinvest the funds
- returns will affect the accumulation units
- gains are tax deferred
- can be partially or fully withdrawn
- tax penalty on withdrawals prior to 50 yrs
Annuity Period:
- this is the time when the payment scheme starts paying back
- to the investor
- accumulation units become annuity units
- cannot surrender or withdraw any longer
- contract owner known as the annuitant
- annuitant receives one annuity unit per expected payment over
their lifetime
Annuity Payouts:
- straight life annuity
o monthly lifetime payments
o highest risk of payments ceasing
- life annuity with period certain

o periodic payments plus beneficiary payments

o payment through min contract term
o lifetime if exceeds contract term
unit refund annuity
o monthly lifetime payments
o beneficiary receives payments only if annuity value is
remaining
joint and last survivor life annuity
o tw separate payment to two ppl until death
o death of one does not affect payment of the other

Assumed Interest Rate:

- projected return specified in the annuity
o first payment based on the air
o payments based on air will increase or decrease depending
on the actual returns going forward
- eg, during a payment period
- air is 5%
- actual return is 6.4%
- annuity payment is higher
Taxes:
- after tax contributions withdrawn tax-free
- gains are tax deferred
- dividends and capital gains are reinvested and tax deferred
- non-qualified annuities
o accumulation period withdrawals are taxes as if gains are
taken first then contributions
o initial payments are tax-free as return of cost basis then
taxed as ordinary income
- all payments from qualified are tax deferred
Expense guarantee
- annuity expenses limited to a specified level
- variable annuities must provide a prospectus
o prospectus must clearly state expenses
o no limit but must be reasonable
- expenses include
o management fees for each subaccount
o admin expenses
o expense risk charges
Voting Rights:
- election of the board of managers

approval of independent accountant

approval of changes to objectives or policies

session 16 Agencies
federal agencies:
- direct arms of the US gov
- explicitly backed by the full faith and credit of the us gov
gov sponsored enterprises (GSEs)
- publicly chartered and privately owned
- provide low cost financing
- lends to banks to spur lending
- implicit us backing
FFCB:
- federal farm credit banks
- provides lower cost funding for agricultural and farm producers
- they produce short term securities which are exempt from state
and local tax
- but subject to federal tax
Federal Home Loan Banks:
- provides liquidity for financial institutions
- focus on mortgage, small business and rural
- 12 fhlbs 1 for each fed reserve district
- issues are exempt from state and local taxes
Sallie Mae- SLMA
- student loan marketing association
- liquidity for
o student loan providers
o state student loan agencies
o loans to educational institutions
- loans insured through guaranteed student loan program
- maintains a line of credit with US but not directly backed
- state and local tax varies by state
Freddie Mac- FHLMC
- federal home loan mortgage corporation
- purchases mortgages to facilitate financing of new housing
- issues participation certificates and guaranteed mortgagebacked certificates
- securities trade on the NYSE

interest subject to federal, state, local tax

Fannie Mae- FNMA

- federal national mortgage association
- buys fha, va and conventional residential mortgages from
lenders
- issues mortgage-backed securities (MBS)
- not explicitly us backed
- interest subject to federal, local, state tax
Ginnie Mae- GNMA
- provide financing for residential housing
- under the dept of housing and urban dev
- securities issued
o mortgagebacked securities
o participation certificates
o modified pass through certificate
- payments guaranteed regardless of defaults
- interest subject to federal, state and local tax
CDO:
- collateralized debt obligation
- asset backed security
- they are pooled up and then sliced into layers of priority called
tranches
- complex structures for institutional or other sophisticated
investors
CMO:
- collateralized mortgage obligation
- mortgage pool divided into varios payment structures or
tranches
- interest rate, credit risk, avg life and prepayment risk can vary
significantly between tranches
- speculative tranches and very low risk tranches can be created
from the same pool
PAC
-

planned amortization class

predetermined repayment schedule
excess principal paid to support tranches
maintains avg life within a range of prepayment speeds

Session 17 Municipal Bonds:

-

debt issuances by state and local go

exempt from filing and registration
official statement in place of prospectus
legal opinion included in official statement
lower coupons due to tax exemptions

Types of muni bonds:

General obligation bonds
- full faith, credit and taxing power of issuer
- usually requires voter approval
revenue bonds
- financing and revenue from a specific project
- not otherwise guaranteed by issuer
- not restricted by issuer debt limits
GO bonds:
- limited tax- bond issued with legal limit on taxes
- unlimited tax- bond does not stipulate any tax limit
Muni
-

credit risk:
economic health
history of tax collections
current tax burden
sources of taxes
financial condition
fiscal responsibility
existing debt
debt trends

Debt service coverage:

- ratio of net revenue to debt service costs
- we want this ratio to be as high as possible
- amount of money available to pay debts
- major factor in determining risk of revenue bond issue
annual gross revenue- annual operating costs- annual maintenance
costs= annual debt service
Feasiblity study

report on ability of a project to generate revenue

project analyzed b outside consultants
includes an engineering report
analysis of trust indenture or bond resolution provisions

Flow of funds:
- what the priority of payments are coming out of a project
- funds or accounts such as operating fund, debt service fund and
replacement fund
- revenue goes to first fund up to a specified limit then to
subsequent funds
Debt
-

statement:
direct debt- all debt issued
net direct debt- direct debt less self-supporitng debt
overlapping debt
o gov debt with overlapping tax base
o coterminous cities and school districts

Private activity or AMT

- alternative min tax revenue bond
- 10% or greater of the proceeds will finance a private entity
project and
- 10% or greater of the proceeds are secured by private property
- interest income is subject to the AMT which means they may be
taxed as federal income
Municipal note types:
Tax anticipation notes- TANs
- funding for operations ahead of expected tax receipt
revenue anticipation notes- RANs
- operations needs ahead of revenue or subsidies
bond anticipation notes- BANs
- funds prior to a long term bond issue
Moodys municipal bond ratings
MIG1- best quality
MIG2- high quality
MIG3- favorable quality
MIG4- adequate quality
Standard and poor-s:

SP1- strong
SP2- satisfactory
SP3- speculative
VRDO- variable rate demand obligations
- resets at either daily, weekly or monthly periods
- rate is set so that bonds are sold at par
- bondholder can put shares to the issuer on the reset date for par
value plus accrued interest

session 18 municipal bonds 2:

Yield to call:
- Municipal bonds must be quoted according to yield to maturity or
yield to call
- Whichever is lower
- If a bond is trading at a premium, the yield to call is lower than
the yield to maturity
-