Title Details

ABOUT THIS BOOK XXV

ABOUT THE TEST BANK XXVII

ABOUT THE SECURITIES INSTITUTE OF AMERICA XXIX

CHAPTER 1 EQUITY SECURITIES 1

What Is a Security? 1

Equity = Stock 2

Common Stock 2

Corporate Time Line 2

Values of Common Stock 4

Book Value 4

Par Value 5

Rights of Common Stockholders 5

Preemptive Rights 5

Characteristics of a Rights Offering 6

Determining the Value of a Right Cum Rights 7

Determining the Value of a Right Ex Rights 7

Voting 8

Limited Liability 9

Freely Transferable 9

The Transfer Agent 10

The Registrar 10

CUSIP Numbers 11

Inspection of Books and Records 11

Residual Claim to Assets 11

Why Do People Buy Common Stock? 11

Income 11

What Are the Risks of Owning Common Stock? 12

How Does Someone Become a Stockholder? 12

Preferred Stock 14

Features of All Preferred Stock 14

Types of Preferred Stock 15

Callable Preferred 17

Types of Dividends 17

Dividend Distribution 18

Taxation of Dividends 20

Selling Dividends 20

Dividend Disbursement Process 21

Warrants 21

How Do People Get Warrants? 21

American Depositary Receipts (ADRs)/American Depositary Shares (ADSs) 22

Currency Risks 22

Functions of the Custodian Bank Issuing ADRs 23

Real Estate Investment Trusts/REITs 23

Direct Participation Programs and Limited Partnerships 23

Limited Partnerships 24

Tax Reporting for Direct Participation Programs 27

Limited Partnership Analysis 28

Tax Deductions vs. Tax Credits 28

Other Tax Considerations 28

Dissolving a Partnership 29

Pretest 31

CHAPTER 2 CORPORATE AND MUNICIPAL DEBT SECURITIES 35

Corporate Bonds 35

Types of Bond Issuance 36

Bond Pricing 37

Par Value 38

Discount 38

Premium 38

Corporate Bond Pricing 38

Bond Yields 39

Yield to Maturity: Premium Bond 40

Yield to Maturity: Discount Bond 41

Calculating the Yield to Maturity 41

Calculating the Yield to Call 42

Realized Compound Yield Returns 42

Yield Spreads 43

The Real Interest Rate 43

Bond Maturities 43

Series Issue 44

Types of Corporate Bonds 44

Guaranteed Bonds 46

Convertible Bonds 46

Converting Bonds into Common Stock 47

Parity Price 47

Advantages of Issuing Convertible Bonds 48

Disadvantages of Issuing Convertible Bonds 48

Convertible Bonds and Stock Splits 48

The Trust Indenture Act of 1939 49

Bond Indenture 49

Ratings Considerations 49

Exchange Traded Notes (ETNs) 50

Retiring Corporate Bonds 50

Municipal Bonds 52

Types of Municipal Bonds 53

Taxation of Municipal Bonds 57

Tax-Equivalent Yield 57

Purchasing a Municipal Bond Issued in the State in Which the Investor Resides 58

Triple Tax Free 58

Original Issue Discount (OID) and Secondary Market Discounts 58

Amortization of a Municipal Bond’s Premium 59

Bond Swaps 59

Analyzing Municipal Bonds 59

Analyzing General Obligation Bonds 60

Duration 60

Convexity 61

Bond Portfolio Management 61

Pretest 63

CHAPTER 3 GOVERNMENT AND GOVERNMENT AGENCY ISSUES 67

Series EE Bonds 67

Series HH Bonds 68

Treasury Bills, Notes, and Bonds 68

Purchasing Treasury Bills 68

Treasury Notes 69

Treasury Bonds 69

Treasury Bond and Note Pricing 69

Treasury STRIPs 70

Treasury Receipts 70

Treasury Infl ation Protected Securities (TIPS) 71

Agency Issues 71

Government National Mortgage Association (GNMA) 71

Federal National Mortgage Association (FNM) 72

Federal Home Loan Mortgage Corporation (FHLMC) 72

Federal Farm Credit System 73

Collateralized Mortgage Obligation (CMO) 73

CMOs and Interest Rates 73

Types of CMOs 74

Pretest 77

CHAPTER 4 INVESTMENT COMPANIES 79

Investment Company Philosophy 79

Types of Investment Companies 80

Open End vs. Closed End 81

Diversified vs. Nondiversified 82

Investment Company Registration 83

Registration Requirements 83

Investment Company Components 85

Mutual Fund Distribution 87

Selling Group Member 87

Distribution of No-Load Mutual Fund Shares 88

Distribution of Mutual Fund Shares 88

Mutual Fund Prospectus 88

Characteristics of Open-End Mutual Fund Shares 89

Mutual Fund Investment Objectives 90

Other Types of Funds 92

Bond Funds 92

Valuing Mutual Fund Shares 94

Sales Charges 95

Other Types of Sales Charges 97

Calculating a Mutual Fund’s Sales Charge Percentage 97

Finding the Public Offering Price 98

Sales Charge Reductions 98

Breakpoint Schedule 99

Letter of Intent 99

Breakpoint Sales 100

Rights of Accumulation 100

Automatic Reinvestment of Distributions 101

Other Mutual Fund Features 101

Dollar Cost Averaging 102

Mutual Funds Voting Rights 104

Mutual Fund Yields 105

Portfolio Turnover 105

Pretest 107

CHAPTER 5 VARIABLE ANNUITIES AND RETIREMENT PLANS 111

Annuities 111

Bonus Annuity 113

Equity-Indexed Annuity 114

Annuity Purchase Options 115

Accumulation Units 116

Annuity Units 116

Annuity Payout Options 116

Factors Affecting the Size of the Annuity Payment 117

The Assumed Interest Rate (AIR) 118

Taxation 118

Types of Withdrawals 119

Annuitizing the Contract 119

Sales Charges 119

Investment Management Fees 120

Variable Annuity vs. Mutual Fund 120

Retirement Plans 120

Individual Plans 121

Individual Retirement Accounts (IRAs) 121

Corporate Plans 128

Types of Plans 129

Rolling Over a Pension Plan 131

Employee Stock Options 131

Employee Retirement Income Security Act of 1974 (ERISA) 132

Pretest 135

CHAPTER 6 FUNDAMENTAL AND TECHNICAL ANALYSIS 139

Fundamental Analysis 139

Balance Sheet 140

Capitalization 142

Changes in the Balance Sheet 142

The Income Statement 145

Industry Fundamentals 147

Technical Analysis 148

Market Theories and Indicators 152

Efficient Market Theory 152

Pretest 155

CHAPTER 7 ECONOMIC FUNDAMENTALS 157

Gross Domestic Product 157

Recession 159

Depression 159

Economic Indicators 159

Economic Policy 161

Tools of the Federal Reserve Board 161

Reserve Requirement 161

Changing the Discount Rate 162

Federal Open Market Committee 162

Money Supply 163

Disintermediation 163

Moral Suasion 164

Fiscal Policy 164

International Monetary Considerations 166

Pretest 167

CHAPTER 8 RECOMMENDATIONS, PROFESSIONAL CONDUCT, AND TAXATION 171

Professional Conduct by Investment Advisers 172

The Uniform Prudent Investors Act of 1994 172

Fair Dealings with Clients 173

Recommending Mutual Funds 177

Periodic Payment Plans 177

Disclosure of Client Information 178

Borrowing and Lending Money 178

Developing the Client Profi le 178

Types of Advisory Clients 179

Investment Objectives 180

Capital Asset Pricing Model (CAPM) 182

Risk vs. Reward 183

Alpha 185

Beta 185

Expected Return 186

Time Value of Money 187

Modern Portfolio Theory 189

Tax Structure 190

Investment Taxation 190

Calculating Gains and Losses 190

Cost Base of Multiple Purchases 191

Deducting Capital Losses 192

Wash Sales 192

Taxation of Interest Income 193

Inherited and Gifted Securities 193

Donating Securities to Charity 194

Trusts 194

Gift Taxes 194

Estate Taxes 195

Withholding Tax 195

Corporate Dividend Exclusion 196

Alternative Minimum Tax (AMT) 196

Taxes on Foreign Securities 196

Pretest 197

CHAPTER 9 SECURITIES INDUSTRY RULES AND REGULATIONS 201

The Securities Act of 1933 201

The Prospectus 202

The Final Prospectus 202

SEC Disclaimer 203

Misrepresentations 203

The Securities Exchange Act of 1934 203

The Securities Exchange Commission (SEC) 204

Extension of Credit 205

Public Utilities Holding Company Act of 1935 205

Financial Industry Regulatory Authority (FINRA) 205

The Trust Indenture Act of 1939 206

Investment Advisers Act of 1940 206

Investment Company Act of 1940 206

FINRA Member Communications with the Public 207

FINRA Rule 2210 Communications with the Public 208

Corporate Websites 210

Blind Recruiting Ads 211

Generic Advertising 211

Tombstone Ads 211

Testimonials 212

Free Services 213

Misleading Communications 213

Securities Investor Protection Corporation Act of 1970 (SIPC) 213

Net Capital Requirement 214

Customer Coverage 214

Fidelity Bond 215

The Securities Acts Amendments of 1975 215

The Insider Trading and Securities Fraud Enforcement Act of 1988 215

Firewall 216

The Telephone Consumer Protection Act of 1991 216

Exemption from the Telephone Consumer Protection Act of 1991 217

National Securities Market Improvement Act of 1996 217

The Uniform Securities Act 218

Pretest 219

CHAPTER 10 TRADING SECURITIES 223

Types of Orders 223

The Exchanges 227

Priority of Exchange Orders 227

The Role of the Specialist/DMM 227

The Specialist/DMM Acting as a Principal 228

The Specialist/DMM Acting as an Agent 228

Crossing Stock 230

Do Not Reduce (DNR) 231

Adjustments for Stock Splits 231

Stopping Stock 232

Commission House Broker 233

Two-Dollar Broker 233

Registered Traders 233

Super Display Book (SDBK) 233

Short Sales 234

Regulation of Short Sales/Regulation SHO 234

Rule 200 Definitions and Order Marking 234

Rule 203 Security Borrowing and Delivery Requirements 235

Over the Counter/Nasdaq 236

Market Makers 237

Nasdaq Subscription Levels 237

Nasdaq Quotes 238

Nominal Nasdaq Quotes 239

Nasdaq Execution Systems 239

Nasdaq Market Center Execution System (NMCES) 239

Nasdaq Opening Cross 240

Non-Nasdaq OTCBB 240

Pink Sheets 240

Third Market 240

Fourth Market 241

Broker vs. Dealer 241

FINRA 5% Markup Policy 242

Markups/Markdowns when Acting as a Principal 242

Riskless Principal Transactions 243

Proceeds Transactions 244

Arbitrage 244

Pretest 245

CHAPTER 11 OPTIONS 249

Option Classification 249

Option Classes 250

Option Series 250

Bullish vs. Bearish 250

Possible Outcomes for an Option 251

Characteristics of All Options 252

Managing an Option Position 252

Buying Calls 253

Maximum Gain Long Calls 253

Maximum Loss Long Calls 253

Determining the Breakeven for Long Calls 254

Selling Calls 254

Buying Puts 256

Selling Puts 257

Option Premiums 259

In-the-Money Options 259

At-the-Money Options 259

Out-of-the-Money Options 260

Intrinsic Value and Time Value 260

Using Options as a Hedge 261

Long Stock Long Puts/Married Puts 261

Long Stock Short Calls/Covered Calls 263

Short Stock Long Calls 265

Short Stock Short Puts 268

Futures and Forwards 270

Correlation 271

Pretest 273

CHAPTER 12 DEFINITION OF TERMS 277

Security 277

Person 279

Broker Dealer 280

Agent 281

Issuer 281

Nonissuer 282

Investment Adviser 282

Pension Consultants 282

Form ADV 283

Investment Adviser Representative 284

Solicitor 284

Institutional Investor 284

Accredited Investor 285

Qualified Purchaser 285

Private Investment Company 285

Offer/Offer to Sell/Offer to Buy 285

Sale/Sell 286

Guarantee/Guaranteed 286

Contumacy 286

Federally Covered Exemption 286

Pretest 289

CHAPTER 13 REGISTRATION OF BROKER DEALERS, INVESTMENT ADVISERS, AND AGENTS 295

Registration of Broker Dealers and Agents 295

changes in an Agent’s Employment 299

Mergers and Acquisitions of Firms 299

Renewing Registrations 299

Canadian Firms and Agents 300

Investment Adviser Registration 300

Advertising and Sales Literature 304

Brochure Delivery 305

The Role of the Investment Adviser 305

Additional Compensation for an Investment Adviser 305

Agency Cross Transactions 306

Disclosures by an Investment Adviser 306

Investment Adviser Contracts 308

Additional Roles of Investment Advisers 308

Private Investment Companies/Hedge Funds 308

Fulcrum Fees 309

Wrap Accounts 309

Soft Dollars 309

Pretest 311

CHAPTER 14 SECURITIES REGISTRATION, EXEMPT SECURITIES, AND EXEMPT TRANSACTIONS 317

Exempt Securities 317

Securities Registration 318

Exempt Securities/Federally Covered Exemption 321

Exempt Transactions 322

Private Placements/Regulation D Offerings 322

Transactions with Financial Institutions 323

Transactions with Fiduciaries 323

Transactions with Underwriters 323

Unsolicited Orders 324

Transactions in Mortgage-Backed Securities 324

Pledges 324

Offers to Existing Securities Holders 324

Preorganization Certifi cates 324

Isolated Nonissuer Transactions 325

Nonissuer Transactions 325

Pretest 327

CHAPTER 15 STATE SECURITIES ADMINISTRATOR: THE UNIFORM SECURITIES ACT 331

Actions by the State Securities Administrator 331

Cancelation of a Registration 332

Withdrawal of a Registration 333

Actions Against an Issuer of Securities 333

Rule Changes 333

Administrative Orders 333

Interpretive Opinions 334

Administrative Records 334

Investigations 334

Civil and Criminal Penalties 335

Jurisdiction of the State Securities Administrator 336

Administrator’s Jurisdiction over Securities Transactions 336

Right of Rescission 338

Statute of Limitations 339

Pretest 341

ANSWER KEYS 347

GLOSSARY OF EXAM TERMS 361

INDEX 427