Title Details

ABOUT THIS BOOK XXV

ABOUT THE TEST BANK XXVI

ABOUT THE SECURITIES INSTITUTE OF AMERICA XXVII

CHAPTER 1 EQUITY SECURITIES 1

What Is a Security? 1

Equity = Stock 2

Common Stock 2

Preferred Stock 14

Currency Risks 22

Functions of the Custodian Bank Issuing ADRs 22

Real Estate Investment Trusts (REITs) 23

Pretest 25

CHAPTER 2 DEBT SECURITIES 29

Corporate Bonds 29

Types of Bond Issuance 30

Bond Certificate 31

Bond Pricing 31

Corporate Bond Pricing 32

Bond Yields 32

Bond Maturities 36

Types of Corporate Bonds 37

Converting Bonds into Common Stock 40

Advantages of Issuing Convertible Bonds 41

Disadvantages of Issuing Convertible Bonds 41

Convertible Bonds and Stock Splits 42

The Trust Indenture Act of 1939 42

Bond Indenture 42

Ratings Considerations 42

Retiring Corporate Bonds 43

Collateralized Mortgage Obligation (CMO) 45

CMOs and Interest Rates 45

Types of CMOs 46

Private-Label CMOs 47

Exchange-Traded Notes (ETNs) 48

Pretest 49

CHAPTER 3 GOVERNMENT SECURITIES 53

Series EE Bonds 53

Series HH Bonds 54

Treasury Bills, Notes, and Bonds 54

Treasury Bond and Note Pricing 55

Treasury Strips 56

Treasury Receipts 56

Treasury Inflation-Protected Securities (TIPS) 57

Agency Issues 57

Government National Mortgage Association (GNMA) 57

Federal National Mortgage Association (FNMA) 58

Federal Home Loan Mortgage Corporation (FHLMC) 58

Federal Farm Credit System (FFCS) 58

Pretest 61

CHAPTER 4 MUNICIPAL SECURITIES 63

Municipal Bonds 63

Types of Municipal Bonds 64

Issuing Municipal Securities 68

Selecting an Underwriter 68

Creating a Syndicate 69

Syndicate Accounts 70

Submitting the Syndicate Bid 71

Determining the Reoff ering Yield 71

Awarding the Issue 72

Underwriter’s Compensation 72

Order Period 74

Allocation Municipal Bond Orders 74

Sale Date 75

When Issued Confirmations 76

Final Confirmations 76

Other Types of Municipal Underwritings 77

Syndicate Operation and Settlement 77

The Official Statement 78

Bond Counsel 79

The Legal Opinion 79

Potential Conflicts of Interest for Municipal Bond Underwriters 80

Acting as a Financial Adviser to the Issuer 80

Information Obtained While Acting as a Fiduciary 80

Acting as a Financial Adviser and an Underwriter 81

Municipal Bond Trading 81

Bona Fide Quotes 82

Informational Quotes 82

Out Firm Quotes 83

Executing a Customer’s Municipal Bond Orders 83

Customer Confirmations 84

Yield Disclosure 85

Sources of Municipal Bond Market Information 86

Recommending Municipal Bonds 86

Taxation of Municipal Bonds 87

Tax Equivalent Yield 87

Purchasing a Municipal Bond Issued in the State in which the Investor Resides 88

Triple Tax Free 88

Original Issue Discount (OID) and Secondary Market Discounts 88

Amortization of a Municipal Bond’s Premium 89

Bond Swaps 89

Analyzing Municipal Bonds 89

Analyzing General Obligation Bonds 90

The Debt Statement 90

Community Factors 91

Sources of Tax Revenue 92

Determining Property Taxes 92

Important Financial Ratios for General Obligation Bonds 93

Analyzing Revenue Bonds 93

Types of Revenue Pledge 93

Municipal Securities Rulemaking Board (MSRB) 94

Pretest 99

CHAPTER 5 MONEY MARKET 105

Money Market Instruments 105

Corporate Money Market Instruments 105

Government Money Market Instruments 107

Municipal Money Market Instruments 108

International Money Market Instruments 108

Interest Rates 108

Pretest 111

CHAPTER 6 ECONOMIC FUNDAMENTALS 113

Gross Domestic Product (GDP) 113

Recession 115

Depression 115

Economic Indicators 115

Economic Policy 117

Tools of The Federal Reserve Board 117

Fiscal Policy 120

Consumer Price Index (CPI) 121

Inflation/Defl ation 121

Real GDP 121

International Monetary Considerations 122

Pretest 123

CHAPTER 7 OPTIONS 127

Option Classification 127

Option Classes 128

Option Series 128

Bullish vs. Bearish 128

Possible Outcomes for an Option 129

Characteristics of All Options 130

Managing an Option Position 130

Buying Calls 131

Selling Calls 132

Buying Puts 134

Selling Puts 135

Option Premiums 137

At the Money Options 137

Out of the Money Options 138

Intrinsic Value and Time Value 138

Using Options as a Hedge 139

Long Stock Long Puts/Married Puts 139

Long Stock Short Calls/Covered Calls 141

Maximum Gain Long Stock Short Calls 142

Maximum Loss Long Stock Short Calls 143

Short Stock Long Calls 143

Maximum Gain Short Stock Long Calls 144

Maximum Loss Short Stock Long Call 145

Short Stock Short Puts 145

Maximum Gain Short Stock Short Puts 146

Maximum Loss Short Stock Short Puts 147

Multiple Option Positions and Strategies 148

Long Straddles 148

Short Straddles 150

Spreads 152

Combinations 163

Using a T Chart to Evaluate Option Positions 164

Index Options 168

Interest Rate Options 170

Price-Based Options 170

Rate-Based Options 172

Foreign Currency Options 172

The Option Clearing Corporation 174

The Options Markets 175

The Chicago Board Option Exchange 175

Opening and Closing Option Prices 177

Order Execution 177

Expiration and Exercise 178

American vs. European Exercise 178

Position and Exercise Limits 179

Stock Splits and Stock dividends 179

Taxation of Options 180

Closing an Option Position 180

Exercising a Call 180

Exercising a Put 181

Protective Puts 181

Covered Calls 181

Option Compliance 181

Option Agreement 181

Pretest 183

CHAPTER 8 MUTUAL FUNDS 189

Investment Company Philosophy 189

Types of Investment Companies 190

Open-End vs. Closed-End Funds 191

Diversified vs. Nondiversifi ed 192

Investment Company Registration 193

Investment Company Components 195

Mutual Fund Distribution 197

Selling Group Member 197

Distribution of No-Load Mutual Fund Shares 198

Distribution of Mutual Fund Shares 198

Mutual Fund Prospectus 198

Characteristics of Open-End Mutual Fund Shares 199

Mutual Fund Investment Objectives 200

Other Types of Funds 202

Bond Funds 202

Valuing Mutual Fund Shares 204

Changes in the NAV 205

Sales Charges 205

Calculating a Mutual Fund’s Sales Charge Percentage 207

Finding the Public Offering Price 208

Sales Charge Reductions 208

Breakpoint Schedule 209

Letter of Intent 209

Backdating a Letter of Intent 210

Breakpoint Sales 210

Rights of Accumulation 210

Automatic Reinvestment of Distributions 211

Other Mutual Fund Features 211

Cost Base of Multiple Purchases 215

Purchasing Mutual Fund Shares 216

Sales Charges 219

45-Day Free Look 219

Withdrawal Plans 219

Pretest 221

CHAPTER 9 VARIABLE ANNUITIES 227

Annuities 227

Equity Indexed Annuity 230

Annuity Purchase Options 231

Accumulation Units 231

Annuity Units 232

Annuity Payout Options 232

Factors Affecting the Size of the Annuity Payment 233

The Assumed Interest Rate (AIR) 233

Taxation 234

Types of Withdrawals 234

Annuitizing the Contract 235

Expenses and Guarantees 235

Other Charges 236

Pretest 237

CHAPTER 10 ISSUING CORPORATE SECURITIES 241

The Securities Act of 1933 241

The Prospectus 242

The Final Prospectus 242

Prospectus to Be Provided to Aftermarket Purchasers 243

SEC Disclaimer 243

Misrepresentations 243

Tombstone Ads 244

Free Riding and Withholding/FINRA Rule 5130 244

Underwriting Corporate Securities 245

Types of Underwriting Commitments 246

Types of Off erings 247

Awarding the Issue 248

The Underwiting Syndicate 248

Selling Group 248

Underwriter’s Compensation 248

Private Placements/Regulation D Off erings 251

Rule 144 251

Regulation A Offerings 252

Rule 145 253

Rule 147 Intrastate Offering 253

Pretest 255

CHAPTER 11 TRADING SECURITIES 259

Types of Orders 259

The Exchanges 263

Priority of Exchange Orders 263

The Role of The Specialist/DMM 263

The Specialist/DMM Acting as a Principal 264

The Specialist/DMM Acting as an Agent 264

Crossing Stock 266

Do Not Reduce (DNR) 267

Adjustments for Stock Splits 267

Stopping Stock 268

Commission House Broker 269

Two-Dollar Broker 269

Registered Traders 269

Super Display Book (SDBK) 269

Short Sales 270

Rule 200 Definitions and Order Marking 270

Rule 203 Security Borrowing and Delivery Requirements 271

Threshold Securities 272

Listing Requirements for the NYSE 273

Over the Counter/Nasdaq 274

Market Makers 274

Nasdaq Subscription Levels 275

Nasdaq Quotes 275

Nominal Nasdaq Quotes 276

Automated Confi rmation System (ACT)/Trade Reporting Facility (TRF) 276

Nasdaq Execution Systems 277

The Nasdaq Market Center Execution System (NMCES) 277

The Nasdaq Opening Cross 277

Non-Nasdaq OTCBB 278

Pink Sheets 278

Third Market 278

Fourth Market 279

Reading the Consolidated Tape 279

Exchange Qualifi ers 281

Broker vs. Dealer 281

FINRA 5% Markup Policy 281

Markups/Markdowns When Acting as a Principal 282

Riskless Principal Transactions 283

Proceeds Transactions 284

The Order Audit Trail System (OATS) 284

Trade Reporting and Compliance Engine (TRACE) 284

Circuit Breakers 285

Arbitrage 286

Pretest 287

CHAPTER 12 CUSTOMER ACCOUNTS 291

Holding Securities 293

Mailing Instructions 294

Types of Accounts 294

Commingling Customer’s Pledged Securities 304

Wrap Accounts 304

Regulation S-P 304

Pretest 305

CHAPTER 13 MARGIN ACCOUNTS 309

Regulation of Credit 309

Regulation T 309

House Rules 312

Establishing a Long Position in a Margin Account 312

An Increase in the Long Market Value 313

Special Memorandum Account (SMA) Long Margin Account 315

A Decrease in the Long Market Value 317

Minimum Equity Requirement Long Margin Accounts 317

Establishing a Short Position in a Margin Account 318

A Decrease in the Short Market Value 319

Special Memorandum Account (SMA) Short Margin Account 320

An Increase in the Short Market Value 321

Minimum Equity Requirement Short Margin Accounts 322

Combined Margin Accounts 323

Portfolio Margin Accounts 323

Margin Accounts 325

CHAPTER 14 RETIREMENT PLANS 329

Individual Plans 329

Individual Retirement Accounts (IRAs) 330

Traditional IRAs 330

Roth IRAs 331

Simplified Employee Pension IRA (SEP IRA) 332

Educational IRA/Coverdell IRA 334

Tax-Sheltered Annuities (TSAs)/Tax-Deferred Accounts (TDAs) 336

Corporate Plans 338

Rolling Over a Pension Plan 340

Employee Retirement Income Security Act of 1974 (ERISA) 341

Pretest 343

CHAPTER 15 BROKERAGE OFFICE PROCEDURE 347

Executing an Order 347

Customer Confirmations 349

Clearly Erroneous Reports 350

Execution Errors 350

Corporate and Municipal Securities Settlement Options 350

RVP/DVP/COD 351

When-Issued Securities 351

Government Securities Settlement Options 351

Accrued Interest 352

Calculating Accrued interest 352

Accrued Interest for Government Notes and Bonds 354

Rules for Good Delivery 355

Delivery of Round Lots 355

Delivery of Bond Certifi cates 356

Rejection of Delivery 356

Don’t Know (DK) Procedures 357

Fail to Deliver/Fail to Receive 357

Due Bills 357

Customer Account Statements 357

Carrying of Customer Accounts 358

Proxies 359

Pretest 361

CHAPTER 16 FUNDAMENTAL AND TECHNICAL ANALYSIS 367

Fundamental Analysis 367

The Balance Sheet 368

Industry Fundamentals 375

Technical Analysis 376

Market Theories and Indicators 379

Efficient Market Theory 380

Pretest 381

CHAPTER 17 DIRECT PARTICIPATION PROGRAMS 383

Limited Partnerships 383

Structuring and Off ering Limited Partnerships 385

Types of Limited Partnerships 386

Oil and Gas Sharing Arrangements 388

Equipment Leasing Programs 388

Tax Reporting for Direct Participation Programs 389

Limited Partnership Analysis 389

Tax Deductions vs. Tax Credits 390

Other Tax Considerations 390

Dissolving a Partnership 390

Pretest 391

CHAPTER 18 CUSTOMER RECOMMENDATIONS, PROFESSIONAL CONDUCT, AND TAXATION 395

Professional Conduct in the Securities Industry 396

Fair Dealings with Customers 396

Periodic Payment Plans 401

Mutual Fund Current Yield 401

Information Obtained from an Issuer 401

Disclosure of Client Information 402

Borrowing and Lending Money 402

Gift Rule 402

Outside Employment 402

Private Securities Transactions 403

Customer Complaints 403

Investor Information 403

NYSE/FINRA Know Your Customer 404

Investment Objectives 405

Risk vs. Reward 407

Alpha 408

Beta 409

Tax Structure 409

Investment Taxation 409

Calculating Gains and Losses 410

Cost Base of Multiple Purchases 410

Deducting Capital Losses 411

Wash Sales 411

Taxation of Interest income 412

Inherited Securities 412

Donating Securities to Charity 413

Gift Taxes 413

Estate Taxes 413

Withholding Tax 413

Corporate Dividend Exclusion 414

Alternative Minimum Tax (AMT) 414

Taxes on Foreign Securities 414

Pretest 415

CHAPTER 19 SECURITIES INDUSTRY RULES AND REGULATIONS 421

The Securities Exchange Act of 1934 421

The Securities and Exchange

Commission (SEC) 422

Extension of Credit 423

The National Association of

Securities Dealers (NASD) 423

Becoming a Member of FINRA 425

Registration of Agents/Associated Persons 425

Disciplinary Actions Against a Registered Representative 426

Resignation of a Registered Representative 426

Termination for Cause 427

Retiring Representatives/Continuing Commissions 427

State Registration 427

Registration Exemptions 428

Persons Ineligible to Register 428

Communications with the Public 428

FINRA Rule 2210 Communications with the Public 429

Broker Dealer Websites 432

Blind Recruiting Ads 432

Generic Advertising 433

Tombstone Ads 433

Testimonials 434

Free Services 434

Misleading Communication with the Public 434

Securities Investor Protection Corporation Act of 1970 434

Net Capital Requirement 435

Customer Coverage 435

Fidelity Bond 436

The Securities Acts Amendments of 1975 436

The Insider Trading & Securities Fraud Enforcement Act of 1988 436

Firewall 437

The Telephone Consumer Protection Act of 1991 437

Exemption from the Telephone Consumer Protection Act of 1991 438

The Penny Stock Cold Call Rule 438

The Role of the Principal 439

Violations and Complaints 439

Resolution of Allegations 439

Minor Rule Violation 440

Code of Arbitration 440

The Arbitration Process 441

Mediation 442

Currency Transactions 442

The Patriot Act 443

U.S. Accounts 443

Foreign Accounts 444

Annual Compliance Review 444

Business Continuity Plan 444

Sarbanes-Oxley Act 444

The Uniform Securities Act 446

Pretest 447

ANSWER KEYS 453

GLOSSARY OF EXAM TERMS 471

INDEX 537