Securities Industries Essentials Exam (SIE)

Securities and Exchange Commission (SEC)

The securities industry's primary regulatory body. Broker-Dealers that transact securities business with customer or with other broker-dealers must apply and be approved for registration.
SEC regulates all exchanges and trading markets.

Self-regulatory organizations

SROs - function UNDER the SEC's oversight. Each SRO is accountable to the Commission for enforcing federal securities laws, as well as supervising securities practices within an assigned jurisdiction.

Largest SRO?

FINRA (Financial Industry Regulatory Authority)
regulates all matters related to investment banking, trading in the OTC market, trading in NYSE-listed securities, and the conduct of FINRA member firms and associated persons.

Chicago Board Options Exchange (CBOE)

regulates all matters related to trading in standardized options and related contracts listed on that exchange

Municipal Securities Rulemaking Board (MSRB)

regulates all matters related to the underwriting and trading of state and municipal securities.
Regulates but does NOT have enforcement powers--it depends on other SROS (finra) to enforce its rules.

Federal and State regulatory agencies:
Department of the Treasury/IRS

is an executive department and and the treasury of the US federal government.
Collection of taxes = IRS

The Federal Reserve Board (FRB)

consists of 12 regional federal reserve banks and hundreds of national and state banks that belong to the system.
The FRB determines monetary policy and takes actions to implement its policies

The Securities Investor Protection Corporation (SIPC) was created under the Securities Investor Protection Act of 1970:

The corporation is a nonprofit membership organization. SIPC members pay assessments into a general insurance fund that is used to meet customer claims in the event of a broker-dealer bankruptcy

All broker/dealers registered with the SEC must be SIPC memebrs except?

-banks that deal exclusively in municipal securities
-firms that deal exclusively in U.S. government securities
-firms that deal exclusively in redeemable investment company securities

Basic coverage under SIPC?

no more than $500,000 per separate customer
NOT per separate account
(of that 500K, SIPC covers no more than 250,000 in cash.

SIPC does not cover what?

commodities or commodities futures contracts, because they are not considered securities

Federal Deposit Insurance Corporation (FDIC)

Created during the great depression in response to bank failures.
an independent agency of the US federal government that preserves public confidence in the banking system by insuring deposits.

The FDIC guarantees what

$250,000 for each deposit ownership category in each insured bank.


someone who provides money or resources for an enterprise, such as a corp, with the expectation of financial or other gain.

Retail investors-

an individual who makes investments such as the purchase of securities for his or her own personal account rather than for an organization

Institutional investor-

an entity that pools money to purchase securities and other investment assets. (banks, insurance companies, pensions, hedge funds, and mutual funds)

Accredited Investor-

defined as:
a net worth of 1 million or more
has an annual income of 200K or more in each of the two most recent years


each member firm broker-dealer operates under an individualized membership agreement with FINRA or other SRO. The membership agreement explains with lines of business the broker-dealer undertakes.

Full service BDs

offer all types of investment products: stocks, bonds, mutual funds, options and many others

Carrying Firm

carries customer accounts and accepts funds and securities from customers; carrying and clearing firms typically rank among the larger broker-dealers.

A fully disclosed firm (introducing BD)

one that introduces its customers to a clearing firm

Prime Brokers

Prime account allows a customer to select one member firm (prime broker) to provide custody and other services, while other firms -called executing brokers- handle all trades placed by the customer.
Key Advantage: trading with multiple brokerage houses wh

Capital Markets

The stock and bond markets.
Both public and private sectors sell securities in order to raise funds.

Primary Markets

Where securities are sold to investing public in what are known as issuer transactions.

Secondary Market

where securities trade between investors; have one investor selling securities to another and the issuer is not involved in the transaction

Third Market

Or NASDAQ Inter market
trading market in which exchange listed securities are traded in the OTC market.
All sec's listed on the NYSE and most sec's listed on the regional exchanges are eligible for OTC trading.

Fourth Market

a market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers
These take place through ECNs (electronic communication networks) and are open 24 hours a day and act solely

The FRB affects the money supply through its use of three policy tools:

1. open-market ops (buying/selling government securities)
2. changes in the discount rate (on loans to member banks)
3. changes in reserve requirements

Monetary Policy:

is what FRB engages in when it attempts to influence the money supply. The money supply is the capital available to be lent to consumers and ultimately the money supply.

Fiscal Policy:

refers to governmental budget decisions enacted bu our President and Congress including increases and decreases in:
1. federal spending
2. money raised through taxes
3. federal budget deficits or surpluses
(NOT considered the most efficient means to solve

FOMC (Federal Open Market Committee)

meets regularly to determine whether they need to buy or sell securities to or from banks

FRB (Federal Reserve Board)
BUY securities when they want?

The economy to expand. Securities comes out of the economy and money goes in

FRB (Federal Reserve Board) SELLS securities when they want?

The economy to contract. Money supply goes down, interest rates go up, borrowing and spending for consumers becomes more difficult and the economy contracts.

The cost of money is called?


Federal Funds Rate:

the rate the commercial money center banks charge each other for overnight loans of 1 million or more.
It is considered the a barometer of the direction of short term interest rates

Discount Rate:

the rate the Federal Reserve charges for short term loans to member banks
indicates direction of FRB monetary policy
A decreasing rate indicates an easing of FRB policy and vice versa.

Prime Rate:

the interest rate that large US money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans.

Broker Loan Rate:

the interest rate banks charge broker-dealers on money that they borrow to lend to margin account customers; Margin accounts allow customers to purchase securities without paying in full. The amount not paid is essentially loaned to the customer by banks

The broker loan rate is also known as what?

call loan rate OR call money rate

The Business Cycle 4 stages:

1. Expansion
2. Peak
3. Contraction
4. Trough

1. Expansion

characterized bu increased business activity -- increasing sales, manufacturing, and wages--throughout the economy

2. Peak

the economy can expand for only so long, when it reaches its upper limit, it has reached its peak

3. contraction

when business activity declines from its peak, the economy is contracting.
Economists call short-term contractions Recessions
Longer more severe contractions are depressions

4. Trough

When business activity stops declining and levels off is known as Trough

Recession vs. Depression

Recession= lasts for 6 months are more
Depressions= 18 months or more (6 quarters)

Leading indicators

are spot checks of business activity that reliably predict trends in the economy
e.g. money supply, building permits, etc.

Coincident Indicators

Confirm where it is
e.g. number of hours worked
employment levels

lagging Indicators

factors that change after the economy has begun a new trend but serve as confirmation of the new trend.
e.g. average duration of unemployment
labor cost per unit of output


a general increase in prices
mild inflation can encourage economic growth bc gradually increasing prices tend to stimulate business investments


general decline in prices
usually occurs during severe recessions


economic stagnation refers to prolonged periods of slow or little economic growth, accompanied by high unemployment


term used to describe the unusual combo of inflation and high unemployment.
occurs when the economy isn't growing and there is a lack of consumer demand and business activity, but prices for goods are still rising

The 4 types of industries and investments are?

1. Defensive Industries
2. Cyclical Industries
3. Growth Industries
4. Special Situation Stocks

1. Defensive industries

least affected by normal business cycle; companies in defensive industries generally produce non-durable consumer goods, such as food, drugs, tobacco, etc. or supply services such as utility companies. remains fairly steady;
Investments into these is LOW

2. Cyclical Industries

highly sensitive to the business cycle;
produce durable goods such as heavy machinery, raw materials, etc.

3. Growth industries

every industry passes through 4 phases during its existence; intro, growth, maturity, and decline.
computers and bio-engineering are current growth industries bc the industry is growing faster than the economy as a whole
growth stocks pay little or no div

4. Special Situation stocks

stocks of a company with unusual profit potential resulting from nonrecurring circumstances. Theses situations might include new management, the discovery of a valuable natural resource, patents pending or the intro of a new product

Economic Theories:
Keynesian theory-

government involvment in the economy is vital to the health and stability of a nation's economy

Monetarist Theory-

believe that the quantity of money, the money supply, is the major determinant of price levels. They believe a well-controlled, moderately increasing money supply leads to price stability.

Supply-Side Economic theory-

holds that government should allow market forces to determine prices of all goods. Reduce federal gov. spending as well as taxes.

Balance of payments?

The flow of money between the United States and other countries is known as Balance of payments
May be a surplus or a deficit
Deficit when interest rates are higher in other countries bc money flows to where it earns the highest return

Balance of trade?

the export and import of goods and services
the LARGEST component of the balance of payments

When debits exceed credits, a deficit in the balance of payments occurs:

when credits exceed debits, a surplus exists

Gross Domestic Product (GDP)

All of the goods and services produced within a nation
Location based.

Gross National Product (GNP)

Ownership based.
If a foreigner creates a company in the US this will count as GDP, but not GNP.
if a US company opens a new plant abroad, this investment will be included in GNP but not GDP.

Exchange Rates:

The value of one currency against another.
The value of the US dollar against foreign currencies affects the balance of trade. More money flows into the US --surplus. When the dollar is strong, foreign currency buys fewer US goods and vice versa.

Primary Offering:

one in which the proceeds raised go to the issuing corporation
Done in the Primary market.
Corporation increases its capitalization by selling stock

Public vs. Private Securities offering

Regulated under the Securities Act of 1933.
Securities are offered and sold to the investing public.
This can raise relatively large amounts of capital via the sale of stocks or bonds and may attract investors with smaller budgets


occurs when the issuing company, usually with the assistance of an investment bank, sells securities to private investors as opposed to the general investing public.
Accredited investors only
Generally exempt from the registration requirements of the Secu

The Securities Act of 1933?

is to require full and fair disclosure in connection with the sale of securities to the public.
Requires that a new issue, unless specifically exempted from the Act, must be registered with the SEC

Initial Public Offering (IPO)

The first time an issuer distributes securities to the public is called IPO
Any subsequent issuance of new shares to the public is called a subsequent public offering (SPO) or additional public offering (APO)

Initial Public Offering Rules and Regulations:

-members make a bona fide public offering of sec's to the public offering price
-members do not withhold sec's in a public position to direct future business to the member
-industry insiders such as members and their associated persons, do not take advant

Secondary Offering:

is one which one or more stockholders in the corporation are selling all of a major portion of their holdings to the public;
The proceeds of course are then paid to the stockholders not the corporation;

Best Efforts Underwriting

calls for UWs to buy sec's from the issuer acting simply as an agent, not as the principal. This means that the UW is not committed to purchase the shares themselves and therefore not at risk.

Two types of best effort UWing:
1. All or None

in an all or none UWing, the issuing corp has determined that it wants an agreement outlining that the UW must either sell all of the shares or cancel the UW.

2. Mini-Max

setting a floor or minimum which is the least amount the issuer needs to raise in order to move forward with the UWing and a ceiling or maximum on the dollar amount of securities the issuer is willing to sell

Firm Commitment Underwriting:

Widely used UW contract.
the UW's contract with the issuer to buy the securities. Here the UWs are acting as principals rather than agents.

The Securities Act of 1933

The Acts main purpose is to ensure that the investing public is fully informed about a security and its issuing company when the security is first sold in the primary market.

The Registration Statement must contain:

-a description of the issuer's business
-the name and addy of company officers and directors, their salaries, and a five year business history of each
-the amount of corporate securities company officers and directors own
-the company's capitalization, in

The Cooling-Off Period:

-after the issuer files with the SEC, a 20 day cooling off period occurs before the registration becomes effective.
-SEC usually takes longer than the 20 days, however the minimum is 20 calendar days.
*no one can solicit sales during the cooling off perio

tombstone advertisement

this type of ad relating to new issue is allowed to be run prior to the effective date.
Bare Bones aka minimum info offered on them
Only AD allowed in the cooling off period
DO NOT need to be filed with the SEC

what are Tombstone Ads limited to?

-name of issuer
-type of security being offered
-number of shares to be sold
-at a particular offering price
-names of the UW members

The Uniform Securities Act

provides legal framework for the state registration of securities.
Registrations must be renewed annually

2 Exemptions to state registration

1. Isolated Non issuer Transactions- transactions occurring in the secondary market that occur infrequently. generally do not involve security professionals.
2. Unsolicited Transactions- transactions initiated by the client not the agent or representative

2 ways to register securities in a state:
1. Coordination-

the issuer files with the state at the same time it files with the SEC. Can only be used for IPOs (sec's that have not been previously registered with the SEC)

2. Qualification-

The issuer must respond to any requirement the state specifies. This method is effective only when so ordered by the state sec's administrator

Notice FIling

(1) Method by which a registered investment company and certain other federal covered securities file records with state securities Administrators. (2) SEC-registered advisers (federal covered) may have to provide state securities authorities (the Adminis

preliminary prospectus (red herring)

can be used as a prospecting tool. allowing issuers and UW's to gauge investor interest and gather indications of interest.

The Effective Date

The Date on which you may sell securities but it is PROHIBITED before.

What UW's CANNOT do during that cooling off period?

make offers to sell
take orders
distribute sales literature or ads

What UW's CAN do during the cooling off period?

take indications or interest
distribute preliminary prospectuses
publish tombstone ads

Final Prospectus

When the registration becomes effective, the issuer amends the prelim prospectus and adds info, including the final offering price for the final prospectus

What must the Final Prospectus include?

1. Description of offering
2. offering price
3. selling discounts
4. offering date
5. use of the proceeds
6. description of the UWing, but not actual contract
7. stmnt of the possibility that the issue's price may be stabilized
8. history of the business

Does the SEC approve any offering for sale?

No; they simply clear, or release the offering for sale

Prospectus Delivery Requirement Period:

A final prospectus must be delivered to all buyers in the secondary market for a specified time following the effective date.

Number days if the security is to be quoted on the OTC or OTCBB (NON NASDAQ)?

90 days

Number of days if the security is to be listed on the NASDAQ?

25 days

If the security is NON-NASDAQ, number of days?

45 days

Exempt from registration securities are?

-US government sec's
-municipal bonds
-commercial paper and banker's acceptances that have maturities of less than 270 days
-insurance policies and fixed annuity contracts (BUT NOT VARIABLE ANNUITIES)
-national and state bank sec's
-building and loan sec'

Official Statement is used in place of prospectus for EXEMPT securities and says:

contains any material information an investor might need about a municipal bond issue.

Who sets monetary policy?

The FOMC (Federal Open Market Committee)

Common Stock-

Voting Rights
Capital appreciation
Current Income
Freely transferable to anyone who wants to buy it
Can sell or give away without permission from the company
hedge against inflation

rights of common stockholders

Common stockholders have the right to vote for corporate directors.
-can view meeting minutes
-can view a list of stockholders
-can request set of audited financial statements
-usually have the preemptive right to maintain their proportionate share of own


An absentee ballot;
made available for those shareholders who want to vote but cant attend the shareholder meeting

Growth (capital gains)

an increase in the market price of securities is capital appreciation.


many corps pay regular quarterly cash dividends to stockholders.
Dividends are declared by the BOD and may increase over time as profitability increases. Dividends, which can be a significant source of income for investors, are a major reason why people i

Limited Liability:

One of the most important features of equity ownership.
One can not be made to sell any personal assets to help pay the debts in the event of a bankruptcy.

Market Risk:

the chance that a stock will decline in price is one risk of owning common stock. Fluctuates daily as perceptions of the company's business prospects change and influence the actions of buyers and sellers

Decreased or no dividend income

a risk of stock ownership is the possibility of dividend income decreasing or ceasing entirely if the company loses money
The decision to pay a dividend is up to the BOD and not guaranteed

Low Priority at dissolution:

if a company enters bankruptcy, the holders of its bonds and preferred stock have priority over common stockholders.

Two Types:

the entity will likely be able to retain property and continue doing business but MUST submit and stick to a plan that will allow repayment or some or all debt.


means that keeping property or continuing business will not occur and all property will be taken and sold to repay all debts.

In Liquidation the priority of claims is?

-Secured Debt
-Unsecured liabilities and general creditors
-Subordinated debt
-Preferred Stockholders
-Common stockholders

Preferred Stock:

An equity security bc it represents a class of ownership in the issuing corporation.
it is an EQUITY SECURITY, however, it shares some characteristics of debt security

Features of Preferred Stock:

Like debt Securities:
the rate of return is fixed rather than subject to variation
its annual dividend represents its fixed rate of return
Normally a preferred stock is identified by its annual dividend payment stated as precentage of par.
ALWAYS assume p

Do preferred stockholders have voting rights or preemptive rights?


Benefits of owning preferred stock?
Dividend Preference:

when the BOD declares dividends, owners of preferred must be paid prior to any payments to common

Risks of owning preferred stock:
Purchasing power risk-

the potential that, because of inflation, the fixed income produced will not purchase as much in the future as it does today

Interest Rate Sensitivity

like a fixed income security, when interest rates rise, the value of preferred shares declines

Decreased or no dividend income:

like common stock ownership, there is the possibility of dividend income decreasing or ceasing entirely if the company loses money. the decision to pay a dividend rests with the BOD

Why include preferred stock in a client's portfolio?

-fixed income
-prior claim ahead of common stock
-convertible preferred sacrifices
-income in exchange for potential -appreciation
-possible loss of purchasing power
interest rate risk
-business difficulties leading to
possible reduction or elimination of

Types of preferred Stock:
- Straight (Non cumulative)
- Cumulative Preferred
- Callable Preferred
- Convertible Preferred
- Adjustable Rate Preferred

Straight- no special features beyond the stated dividend payment.

Cumulative Preferred:

accrues payments due its shareholders in the event dividends are reduced or suspended.

Callable Preferred:

corporations often issue callable preferred, which a company can buy back from investors at a stated price after a specified date. The right to call the stock

Convertible preferred:

if the owner can exchange the shares for a fixed number of shares of the issuing corporations common stock


some preferred stocks are issued with adjustable dividend rates. This helps keep the stock price relatively stable

Participating Preferred:

offers its owners a share of corporate profits that remain after all dividends and interest due other securities are paid.

Control and Restricted Securities (SEC Rule 144):

regulates the sale of control and restricted securities, stipulating the hold period, quantity limitations, manner of sale, and filing procedures.

Control Securities:

those owned by directors, officers, or persons who own or control 10% or more of the issuers voting stock

Restricted Securities:

those acquired through some means other than a registered public offering. A security purchased in a private placement is a restricted security. They may not be sold until they have been held fully paid for 6 months.

Penny Stocks:

a penny stock is an unlisted security trading less than $5 per share. Equity securities defined as penny stocks are considered highly speculative so the SEC requires a copy of risk disclosure be given before purchase.

Penny Stock Cold Calling Rules

The representative must determine suitability on the basis of info about the buyer's financial situation and objectives. The customer must sign and date this suitability statement before any initial penny stock trades can be effected.
The Broker Dealer mu

Established Customer Exemption:

established customers are exempt from the suitability statement requirement but not from the disclosure requirements.

what is an established customer?

-Has held an account with the broker-dealer for at least one year
-has made at least three penny stock purchases of different issuers on different days

Debt Securities (bonds)

Debt capital represents money borrowed by corporations, the federal government, or local governments from investors.
When an investor buys a bond, the investor is lending the borrowing entity money for a set period of time at a fixed annual interest rate.

Bond Characteristics

each bond has its own maturity date. This is the date the investor receives the loan principle back. While common maturities are in the 5-30 year range some can be much shorter and others longer.

Maturities come in different types:

Term bond is structured so that the principle of the whole issue matures at once.


a serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid

Balloon (serial & term)-

an issuer sometimes schedules its bonds maturity using elements of both serial and term maturities. The issuer repays part of the bond's principal before the final maturity date but pays off the major portion of the bond at maturity.


The coupon represents the interest rate the issuer has agreed to pay the investor.
The stated or Nominal Yield
It is calculated from the Bond's par value, usually stated as a percentage of par.

Par Value:

Also known as face value; is normally $1000 per bond, meaning each bond will be redeemed for $1000 when it matures. Therefore a bond with a 6% coupon is paying $60 in interest per year.


Once a bond is trading in the secondary markets they can trade at a price of par, a premium to par, or a discount to par.


A bonds yield expresses the cash interest payments in relation to the bond's value. Yield is determined by the issuer's credit quality, prevailing interest rates, times to maturity, and any features the bond may have.

Bond's Yield:
Nominal Yield-

coupon, nominal, or stated yield is set at the time of issue.

Current Yield-

measures a bond's annual coupon payment (interest) relative to its market price, as shown in the following equation:
Annual Coupon payment / market price = current yield

Yield to Maturity-

a bond's yield to maturity (YTM) reflects the annualized return of the bond if held to maturity. In calculating yield to maturity, the bondholder takes into account the difference between the price that was paid for a bond and par value received when the

Yield to call-

some bonds are issued with what is known as a call feature. A bond with a call feature may be redeemed before maturity at the issuer's option.

The coupon yield never changes regardless of price, but the CY, YTM, and YTC do.

Call Feature:

a feature that allows the corporation to call in, or buy, outstanding bonds from current bondholders before the maturity date.
Usually done when interest rates are falling

Put Feature:

opposite of call feature; the investor can put the back to the issuer before it matures. Investors will generally do this when interest rates are rising.


convertible bonds are issued bu corporate issuers allowing the investor to convert the bond into shares of common stock.

Treasury Securities

The federal government is the nation's largest borrower as well as the best credit risk.
Securities issued by the US government are backed by its full faith and credit, based on its power to tax.
They are classified as bills, notes, and bonds


direct short term obligations of the US government. They are issued weekly with maturities of 4, 13, 26, or 52 weeks.
Always 1 year or less;
T Bills pay NO interest, rather, they are issued at a discount from par value and redeemed at par.

Key Points on T-Bills:

T Bills are:
-the only treasury sec issued at a discount
-are the only treasury security issued without a stated interest rate
-are highly liquid
-13-week T-Bills are used in market analysis as the stereotypical "risk-free" investment


Direct debt obligations of the US Gov.
They pay semiannual interest as a percentage of the stated par value and they mature at par value.
2-10 years


direct debt obligations to the US government
They pay semiannual interest as a percentage of the stated par value and mature at par value.
greater than 10 years and up to 30 years

Testable Features:

Treasury Receipts

Broker-dealers buy treasury securities, place them in trust at a bank and sell separate receipts against the principal and coupon payments.
Essentially separating the coupon from the principal.

Treasury STRIPS

Separate Trading of Registered Interest and Principal of Securities.
The treasury department's own version of receipts.
They designate certain issues as suitable for stripping into interest and principal.

Treasury Strips vs. Treasury Receipts?

STRIPS are backed by the US government. Receipts are not.

Farm Credit System:

A federal agency of the Department of Agricultural that offers programs to help families purchase or operate family farms.

GNMA (Government National Mortgage Association)

(Ginnie Maes)- the only agency securities backed by the full faith and credit of the federal government.
Supports the Department of Housing and Urban developement

Freddie Mac (Federal Home Loan Mortgage Corporation)

a public corporation. It was created to promote the development of a nationwide secondary market in mortgages by buying residential mortgages from financial institutions for sale to investors.

Fannie Mae (Federal National Mortgage Association)

A publicly held corporation that provides mortgage capital. FNMA purchases conventional and insured mortgages from agencies such as the FHA and the VA. Backed by FNMA's general credit

Corporate Bonds:
6 types-

May be either secured or unsecured;
Secured= backed by various kinds of assets owned by the corp
unsecured= backed by corps full faith and credit

Mortgage Bonds-

Money borrowed backed by real estate and physical assets of the corp. Secured loan

Equipment Trust Certificates-

Titles to newly acquired equipment are held in a trust; until the certificates have been paid in full

Collateral Trust Bonds-

Company wants to borrow money but has no real estate or equipment;
Instead it will deposit securities it owns into a trust to serve as collateral for lenders.


Debt obligation of the corporation backed ONLY by its word and general creditworthiness

Guaranteed Bonds:

backed by a company other than the issuing corporation;
DONT BE FOOLED; this is still an UNSECURED loan

Income Bonds:

used when a company is reorganizing and coming out of bankruptcy; they pay interest only if the corporation has enough income to meet interest on debt. (Unsecured)

Senior Subordinated Debt

Every debt has a senior claim to preferred stock;
Secured bonds have a senior claim to unsecured bonds.

Order of securities due in event of bankruptcy:

1. Secured Creditors
2. unsecured creditors
3. Subordinated debt (debt holders who agree to be paid back last of all debt)
4. preferred stock
5. common stock

Municipal Securities:

Municipal bonds are securities issued either by state or local governments or by U.S. territories, authorities, and special districts.
Investors who buy these are lending money to the issuers for the purpose of public works E.G. roads, hospitals, etc.

Two Categories of Municipal Securities:
1. General Obligation Bonds-

GOs are municipal bonds issues for capital improvements that benefit the entire community.
Generally do not produce revenue so investors are paid back in taxes collected.
Backed by Full Faith and Credit Issues and are backed by the municipality's taxing p

2. Revenue Bonds:

used to finance any municipal facility that generates sufficient income. These municipal bonds are considered to be self-supporting debt because principal and interest payments made exclusively from revenues generated by the project or facility for which

Short Term Municipal Obligations (Anticipation Notes)

Short term securities that generate funds for a municipality that expects other revenues soon;
usually less than 12 month maturities;

Section 529 Plans:

A specific type of education savings account available to investors. The plans allows money saved to be used for qualified expenses for K-12 and post secondary education.
up to 10K a year;
2 types:
Pay not and lock in tuition costs = Prepaid Plans

Local Government Investment Pools (LGIPs)

these are established by states to provide other government entities, such as cities, counties, school districts, etc. with a short term investment vehicle to invest funds.
not subject to the SEC's registration requirements

Achieving a Better Life Experience (ABLE) accounts-

ABLE accounts are TAX ADVANTAGED savings accounts for individuals with disabilities and their families.
Income earned from the accounts are TAX FREE

Money Market Instruments:

A distinction is made between the capital market and the money market.
The capital market serves as a source of intermediate-term to long-term financing usually in the form of equity or debt.
The Money Market provides short-term funds to corporations, ban

Types of Money Market Instruments:

Banks issue and guarantee CDs with fixed interest rates and minimum face values of 100k. Most mature in one year or less;
Ones traded in the secondary market are known as Negotiable CDs. Only these kind are considered to be MM instruments.

Banker's Acceptance:

Short term draft with a specified payment date drawn on a bank. Like a postdated check or LOC.
Normally between 1 and 270 days.
Used mostly to finance international trade by corporations
(Pays for good and services in foreign countries)

Commercial paper:

Corporations issue short-term, unsecured commercial paper, known as promissory notes, to raise cash to finance accounts receivable and seasonal inventory gluts. Range from 1 to 270 days, although most mature in 90 days.

US Treasury Bills

Direct short term debt obligations of the U.S. government. They are issued weekly with maturities of 4 weeks, 13 weeks, 26 weeks and at times 52 weeks.


Though TNOTES and TBONDS are issued with longer maturities than TBILLS once the notes and bonds have only a year left to maturity they are considered to be MM instruments

Repurchase Agreements: REPOS

a financial institution raises cash by temporarily selling some of the securities it holds with an agreement to buy back the securities at a later date at a slightly higher price

Federal Funds

The FRB mandates how much money its member banks must keep on reserve at the FRB. Any deposits in excess of the required amount are known as federal funds. These excess reserves or federal funds can be loaned from one member bank to another for the purpos

Why would you place money market securities in a client's portfolio?

Highly Liquid
very safe
a good place to invest money that will be needed soon (short-term)
In doing so the client would be incurring the following risks:
rate of return is very low due to safety


Options are derivative securities.
They derive their value from that of an underlying instrument, such as stock, stock index, interest rate, or foreign currency. Option contracts offer investors a a means to hedge or protect an instrument's value or specu

The Most common options created are those on?

Common stock; They are called Equity options.

Two types of Equity Options Contracts?

1. Calls
2. Puts


Long Call- a call buyer owns the right to buy 100 shares of a specific stock at the strike price before the expiration if he chooses to exercise the contract.
Short Call- a call writer (seller) has the obligation to sell 100 shares of a specific stock at


Long Put- a put buyer owns the right to sell 100 shares of a specific stock at the strike price before the expiration of he chooses to exercise the contract
Short Put- a put writer has the obligation to buy 100 shares of a specific stock at the strike pri


a call buyer is a BULLISH investor bc he wants the market to rise
a call wirter is a BEARISH investor bc he wants the market to fall


A put buyer is a BEARISH investor bc he wants the market to fall
A put writer is a BULLISH investor bc he wants the market to rise or remain unchanged

A call is "in-the-money" when?

the price of the stock exceeds the strike price of the call.
Buyers want this and sellers DO NOT

A call is "At-The-Money" when?

the price of the stock equals the strike price of the call.
Sellers want at-the-money contracts at expiration, Buyers DO NOT

A call is "out of the money" when?

when the price of the stock is lower than the strike price of the call
Sellers want contracts to be out of the money and buyers DO NOT

Intrinsic Value

the same as the amount a contract is in-the-money. A call has intrinsic value when the market price of the stock is above the strike price of the call.
Options NEVER have a negative intrinsic value. Options at-the-money or -out-of-the-money have an intrin

A Puts "In-the-money" means?

when the price of the stock is lower than the strike price of the Put.
Buyers want this and sellers DO NOT

A Puts "At-the-money" means?

when the price of the stock equals the strike price of the put.
Sellers want this and Buyers DO NOT

A Puts "Out of the money" when?

when the price of the stock is higher than the strike price of the put

Intrinsic Value (puts):

Intrinsic value is the same as the amount a contract is in-the-money.


A put option is at Parity when the premium equals intrinsic value

Long Call:

Call Buyers are Bullish;
Break even BE- for calls, the BE is found by adding the strike price and the premium
Maximum Gain MG- the potential gains available to to call buyers are unlimited bc there is no limit on how far a stock's price can rise
Maximum L

Short Call:

Call sellers are Bearish;
BE- for calls the BE is found by adding the strike price and the premium
MG- a call writer's maximum gain is the premium received
ML- Call writers max loss is is unlimited bc the writer could be forced to buy the stock at a poten

Long Put:

Buyers are Bearish;
BE- found by Subtracting the premium from the strike price.
MG-the max potential gain available to put owners is the option's strike price less the amount of the premium
ML-the most the put buyer can lose is the premium paid

Short Put:

Sellers are Bullish;
BE-found by Subtracting the premium from the strike price
MG- a put writers max gain is the premium received.
ML-a put writer's max loss is the put's strike price less the premium recvd.

Options Clearing Corporation OCC:

the clearing agent for listed options contracts; that is those listed for trading on US options exchanges.
Primary functions are to standardize, guarantee the performance of, and issue option contracts.

Trading Times of Options:

Listed Options trade from 9:30am-4pm ET

Settlement of Options:

Listed options settle on the next business day after the trade (T+1)

Expiration of Options:

Listed options expire on the 3rd Friday of the expiration month at 11:59pm

Exercise of Options:

listed options can be exercised by the owner from the time of purchase until they expire.

Automatic Exercise of options:

any contract that is in-the-money by at least 0.1 will be exercised automatically at expiration fir the holder unless the holder gives "do not exercise" instructions

Assignment of Options:

When the OCC receives an exercise notice they assign the exercise notice to a short broker-dealer; that is one who has a customer who is short the contract.
This is done on a random basis.

Only owners of options contracts, those who are long the contracts, have the right to exercise them.

Writers of contracts, those who are short the contracts, will be assigned to fulfill their obligation to preform; either sell, if short a call, or buy if short a put

OCC Options Disclosure Document (ODD):

Must be provided at or before the time of account approval.
This Document explains options strategies, risks, and rewards and is designed to provide full and fair disclosure to customers before they begin options trading.

Who must ultimately approve all options accounts?

A Firm's registered options principle (ROP)

How long before the customer must return the signed Options Agreement?

15 Days

Covered Vs. Uncovered (naked):

if the contract is covered, the writer already owns the underlying security. This ensures the writer's ability to perform, should the owner exercise the contract

Uncovered (naked)-

If the contract is uncovered, the writer does not own the underlying security. If the contract is exercised by the owner the writer will need to purchase the underlying security at the current market price in order to deliver.

Which is more riskier?

Uncovered- due to the uncertainty in price regarding the security the writer does not own

Investment Company

a corporation or trust that pools investors money and then invests that money in securities on their behalf.

Investment Company Act of 1940:

investment companies are subject to regulations regarding how their shares are sold to the public, and they are regulated by the-- investment company act of 1940

Investment Company Act of 1940 classifies investment companies into three broad types:

Face-amount certificate companies (FACs)
Unit investment trusts (UITs)
Management investment companies

Face Amount Certificates:

is a contract between an investor and an issuer in which the issuer guarantees payment of a state sum to the investor at some set date in the future.
In return, the investor agrees to pay the issuer a set amount of money either as a lump sum or in periodi

if the investor pays for the certificate in a lump sum it is called?

Fully-paid face amount certificate

Unit Investment Trust (UITs)

an investment company organized under a trust indenture. unit investment trusts do not have boards of directors. (they have trustees)
UITs create a portfolio of debt or equity securities designed to meet the company's objectives. They then sell REDEEMABLE

UITs may be fixed or nonfixed:

Fixed= purchases a portfolio of bonds and terminates when the bonds in the portfolio mature.
Non-Fixed= purchases shares of an underlying mutual fund.

FACs and UITs are not?

once the portfolio is composed, they do not change

FACs and UITs do not?

Trade in the secondary market; they are redeemable only through the issuer

Managed Investment Companies:

actively manages a securities portfolio to achieve a stated investment objective.

Two types of Managed Investment Companies:
Closed End-

will raise capital for its portfolio by conducting a common stock offering.
In the initial offering, the company registers a fixed number of shares with the SEC and offers them to the public with a prospectus for a limited time through UW's. Once all the

Open End (Mutual Funds)-

only issues one class of security, which is common stock (no preferred shares or bonds);
it does not specify the exact number of shares its intends to issue but registers an open offering with the SEC.
they can continuously issue new shares

Closed End investment companies are the only investment company security that trades in what market?

the secondary market

Comparison of open-end and closed-end investment companies:


an insurance contract designed to provide retirement income;

Mutual funds do not trade in the secondary market because they are?

Redeemable Securities; offer guaranteed marketability; if an investor wants to sell shares previously purchased in a mutual fund, it is the mutual fund that stands ready to buy them back

Share Classes:
Class A (Front-End Load) Shares-

Class A shares have front-end sales charges (loads). With A shares, the sales charge are paid art the time the investor buys shares and the sales charge is taken from the total amount invested.
Most common way of paying for mutual fund shares******

Class B (Back-End load) Shares-

Class B shares have a back-end sales load, also called a Contingent Deferred Charge (CDSC).
A back end sales charge is paid at the time an investor sells shares previously purchased (has them redeemed).
The sales load, a declining percentage ( 8%, first y

Class C (level load) shares-

Class C shares typically have a one-year, 1% contingent deferred sales charge, a .75% 12b-1 fee and a .25% shareholder services fee. These fees never go away, C shares are commonly referred to as having a level load.

No-Load Shares-

some companies market their shares directly to the public eliminating the need for UW's and thus sales charge.
This type charges no sales charge

Net Asset Value (NAV):

Because mutual funds do not trade in the secondary market,, the value of shares is not determined by supply and demand, but rather by formula. Everything begins with NAV per share.
To calculate NAV
Total assets - total liabilities - total asset value of t

NAV Cont:

it must be calculated once per business day;
the price the customer receives is the next NAV calculated after receipt of his redemption request. This practice is known as FORWARD PRICING

POP (Public Offering Price)


When can you edit a Prospectus?

NEVER; no highlighting, no writing in, nothing!

Summary Prospectus:

A mutual fund can provide a summary prospectus to investors that may include an application that investors can use to buy the fund's shares.
it is a standardized summary of key info in the funds full or final prospectus sometimes referred to as the funds

Summary Prospectus must contain:

-the funds name and the class or classes of shares
-The exchange ticket symbol for the fund's shares; and if the fund is an ETF, identification of the principal US market on which the fund shares are traded.
-A legend must appear on the cover page

SAI (Statement of Additional Information)

Mutual funds as well as closed funds are required to have a statement of additional information available for delivery within 3 business days of an investors request without charge.
-The balance sheet
-Statement of operations
-an income statemen

Financial Reports

The Investment company act of 1940 requires that shareholders receive financial reports at least SEMIANNUALLY

12b-1 asset based fee-

Investment company act of 1940 permits a mutual fund to collect a fee for promoting, selling, or undertaking activity in connection with the distribution of its shares. The fee is determined annually as a flat dollar amount or as a percentage of the funds

Direct Participation Program

DPPs are unique forms of business that raise money to invest in real estate, oil and gas, equipment leasing, and other similar things
Highly Liquid!!

Real Estate DPPs:

-Capital Growth potential- achieved through appreciation of property
-Cash Flow (income)- collected from rents
-Tax Deduction- from mortgage interest expense and depreciation allowances for wearing out the building and capital improvements

Oil and Gas DPPs:

Oil and Gas programs include speculative or exploratory programs to locate new oil deposits -- generally considered the riskiest** developemtn program.

Leasing Programs DPPs:

Equipment leasing programs created when when DPPs purchase new equipment leased to other businesses.

The most common type of DPPs?

Limited Partnership: investment opportunities that permit the economic consequences of business to flow or pass through to investors.
These programs pass through to investors a share in the income, gains, losses, deductions, and tax-credits of the busines

What two types of partners do limited partnerships have?

1. GP- General Partnership
2. LPs-Limited Partners

1. General Partners-

have unlimited liability, meaning that they can be held personally liable for business losses and debt.

2. Limited Partners-

Have limited liability, meaning that they cant lose more than they invested. They have no business management responsibilities.
-an investment managed by others (aka GP)
-limited liability
-flow-through of income and certain expenses

When dissolution occurs GPs must settle accounts in the following order:

1. secured lenders
2. other creditors
3. Limited partners
4. GPs

Real Estate Investment Trust (REIT)

Company that manages a portfolio of real estate, mortgages, or both to earn profits for shareholders. REITs pool money in a similar way to investment companies but ARE NOTTTT investment companies.
REITs normally:
-own commercial property
-own mortgages on

Registered Vs. Non registered REITs:

Registered with the SEC= subject to all disclosure requirements (PUBLIC REITs)
NONregistered = not subject and called PRIVATE REITs

Listed Vs. Non-Listed REITs:

Traded on stock exchange = LISTED
Traded in the OTC market - unlisted

5 important points to remember about REITs:

1. an owner of REITs holds an undivided interest in a pool of real estate investments
2. REITs may or may not be registered with the SEC
3. REITs may or may not be listed on exchanges
4. REITs are NOT investment companies
5. REITs offer dividends and gain

Hedge Funds:

A type of Private Investment Companies:
They are considered unregulated as they currently do not have to be registered with the SEC

Hedge Funds are only for?

Sophisticated Investors- meaning having a minimum annual income and net worth as well as considerable investment knowledge

Exchange-Traded Products (ETPS)-

securities that trade intra-day on a national securities exchange, and are priced so that the value of the product is derived from other investment instruments, such as commodity, a currency, a share price, or an interest rate.

2 Types of ETPS:
1. ETFs-

considered an EQUITY security, invests in a specific group of stocks and generally does so to mimic a particular index, such as S&P 500.
they trade like stock on the floor of an exchange, and is similar to a CLOSED-END investment company.
Greater Tax Effi


Exchange Traded Notes: are senior, UNSECURED DEBT securities issued by a bank or financial institution. They are backed by the good faith and credit of the issuer.
Bond-like instruments with a stated maturity date BUT THEY DO NOT pay interest. Instead ETN

Investment Risks:
Systematic Risk-

The risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances.
It is caused by factors that affect all business, such as war, global security threats, or inflation.

What type of risk is every portfolio of investments subject to no matter how diverse?


Interest Rate Risk:

Fluctuates in the market all the time. If market conditions or the FED push push up interest rate higher, the market price of bonds will be affected.

Reinvestment Risk:

The risk that a decline in interest rates will lead to a decline in income from a bond portfolio

Inflation Risk (Purchasing Power Risk):

inflation risk is the effect of continually rising prices on investment returns. If an investments yield is lower than the inflation rate, the purchasing power of the clients money diminishes over time.

Nonsystematic Risk:

These risks can be reduced through diversification (unlike systematic risk);
They are risks that are unique to certain industry, business enterprise, or investment type.

Capital Risk:

The potential for an investor to lose some or all of his money-under circumstances unrelated to an issuer's financial strenght

Business Risk:

An operating risk, generally caused by poor management decisions. At best, earnings are lowered; at worst, the company goes out of business and common stockholders could lose their entire investment

Financial Risk:

Relates primarily to those companies that use debt financing; an inability to meet the interest and principal payments of those debt obligations could lead to bankruptcy and total loss for the stockholders.

Call Risk:

the risk to bondholders that a bond may be called away from them before maturity

Repayment Risk:

The possibility of loss due to the repayment terms of a bond investment early and loss of future interest payments

Currency Risk:

The potential for loss associated with fluctuations in the foreign exchange market.

Liquidity Risk

The risk that an asset cannot be sold on short notice without incurring a loss

Regulatory Risk:

The risk that changes in regulations may negatively affect the operations of a company.

Legislative Risk:

The potential for an investor to be adversely affected by changes in investment or tax laws.

Political Risk:

The likelihood that political forces will cause drastic changes in a country's business environment that will adversely affect the profit and other goals of a particular business enterprise.