ABOUT THE SERIES 65 EXAM XXI
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
Euro and Yankee Bonds 50
Variable Rate Securities 51
Retiring Corporate Bonds 51
Municipal Bonds 53
Types of Municipal Bonds 54
Taxation of Municipal Bonds 58
Tax-Equivalent Yield 58
Purchasing a Municipal Bond Issued in the State in Which the Investor Resides 59
Triple Tax Free 59
Original Issue Discount (OID) and Secondary Market Discounts 59
Amortization of a Municipal Bond’s Premium 60
Bond Swaps 60
Analyzing Municipal Bonds 60
Analyzing General Obligation Bonds 61
Duration 61
Convexity 62
Bond Portfolio Management 62
Pretest 65
CHAPTER 3 GOVERNMENT AND GOVERNMENT AGENCY ISSUES 69
Series EE Bonds 69
Series HH Bonds 70
Treasury Bills, Notes, and Bonds 70
Purchasing Treasury Bills 70
Treasury Notes 71
Treasury Bonds 71
Treasury Bond and Note Pricing 71
Treasury STRIPs 72
Treasury Receipts 72
Treasury Inflation Protected Securities (TIPS) 73
Agency Issues 74
Government National Mortgage Association (GNMA) 74
Federal National Mortgage Association (FNM) 75
Federal Home Loan Mortgage Corporation (FHLMC) 75
Federal Farm Credit System 76
Collateralized Mortgage Obligation (CMO) 76
CMOs and Interest Rates 76
Types of CMOs 77
Pretest 79
CHAPTER 4 INVESTMENT COMPANIES 81
Investment Company Philosophy 81
Types of Investment Companies 82
Open End vs. Closed End 83
Diversified vs. Nondiversified 84
Investment Company Registration 85
Registration Requirements 85
Investment Company Components 87
Mutual Fund Distribution 89
Selling Group Member 89
Distribution of No-Load Mutual Fund Shares 90
Distribution of Mutual Fund Shares 90
Mutual Fund Prospectus 90
Characteristics of Open-End Mutual Fund Shares 91
Mutual Fund Investment Objectives 92
Other Types of Funds 94
Bond Funds 94
Valuing Mutual Fund Shares 96
Sales Charges 97
Other Types of Sales Charges 99
Calculating a Mutual Fund’s Sales Charge Percentage 99
Finding the Public Offering Price 100
Sales Charge Reductions 100
Breakpoint Schedule 101
Letter of Intent 101
Breakpoint Sales 102
Rights of Accumulation 102
Automatic Reinvestment of Distributions 103
Other Mutual Fund Features 103
Dollar Cost Averaging 104
Mutual FUnds Voting Rights 106
Mutual Fund Yields 107
Portfolio Turnover 107
Pretest 109
CHAPTER 5 VARIABLE ANNUITIES AND RETIREMENT PLANS 113
Annuities 113
Bonus Annuity 115
Equity-Indexed Annuity 116
Annuity Purchase Options 117
Accumulation Units 118
Annuity Units 118
Annuity Payout Options 119
Factors Affecting the Size of the Annuity Payment 120
The Assumed Interest Rate (AIR) 120
Taxation 121
Types of Withdrawals 121
Annuitizing the Contract 121
Sales Charges 122
Investment Management Fees 122
Variable Annuity vs. Mutual Fund 122
Retirement Plans 122
Individual Plans 123
Individual Retirement Accounts (IRAs) 123
Corporate Plans 131
Types of Plans 132
Rolling Over a Pension Plan 134
Employee Stock Options 134
Employee Retirement Income Security Act of 1974 (ERISA) 135
ERISA 404C SAFE HARBOR 136
Life Insurance 137
Pretest 141
CHAPTER 6 FUNDAMENTAL AND TECHNICAL ANALYSIS 145
Fundamental Analysis 145
Balance Sheet 146
Capitalization 148
Changes in the Balance Sheet 148
The Income Statement 152
Industry Fundamentals 154
Top Down and Bottom Up Analysis 154
Dividend Valuation Models 155
Technical Analysis 155
Market Theories and Indicators 159
Efficient Market Theory 160
Statistical Analysis 161
Market Capitalization 162
Pretest 163
CHAPTER 7 ECONOMIC FUNDAMENTALS 165
Gross Domestic Product 165
Recession 167
Depression 167
Economic Indicators 167
Schools of Economic Thought 169
Economic Policy 170
Tools of the Federal Reserve Board 170
Reserve Requirement 170
Changing the Discount Rate 171
Federal Open Market Committee 171
Money Supply 172
Disintermediation 172
Moral Suasion 173
Fiscal Policy 173
International Monetary Considerations 175
Pretest 177
CHAPTER 8 RECOMMENDATIONS, PROFESSIONAL CONDUCT, AND TAXATION 181
Professional Conduct by Investment Advisers 182
The Uniform Prudent Investors Act of 1994 182
Fair Dealings with Clients 183
Recommending Mutual Funds 187
Periodic Payment Plans 187
Disclosure of Client Information 188
Borrowing and Lending Money 188
Developing the Client Profi le 188
Types of Advisory Clients 189
Investment Objectives 194
Capital Asset Pricing Model (CAPM) 196
Risk vs. Reward 196
Alpha 198
Beta 198
Expected Return 199
Time Value of Money 200
Weighted Returns 202
Modern Portfolio Theory 204
Predicting Portfolio Income 204
Tax Structure 206
Investment Taxation 207
Calculating Gains and Losses 207
Cost Base of Multiple Purchases 208
Deducting Capital Losses 209
Wash Sales 209
Taxation of Interest Income 209
Inherited and Gifted Securities 210
Donating Securities to Charity 210
Trusts 211
Gift Taxes 212
Estate Taxes 213
Withholding Tax 213
Corporate Dividend Exclusion 214
Alternative Minimum Tax (AMT) 214
Taxes on Foreign Securities 214
Pretest 215
CHAPTER 9 SECURITIES INDUSTRY RULES AND REGULATIONS 219
The Securities Act of 1933 219
The Prospectus 220
The Final Prospectus 220
SEC Disclaimer 221
Misrepresentations 221
The Securities Exchange Act of 1934 221
The Securities Exchange Commission (SEC) 222
Extension of Credit 223
Public Utilities Holding Company Act of 1935 223
Financial Industry Regulatory Authority (FINRA) 223
The Trust Indenture Act of 1939 224
Investment Advisers Act of 1940 224
Investment Company Act of 1940 224
FINRA Member Communications with the Public 225
FINRA Rule 2210 Communications with the Public 226
Corporate Websites 228
Blind Recruiting Ads 229
Generic Advertising 229
Tombstone Ads 229
Testimonials 230
Free Services 231
Misleading Communications 231
Securities Investor Protection Corporation Act of 1970 (SIPC) 231
Net Capital Requirement 232
Customer Coverage 232
Fidelity Bond 233
The Securities Acts Amendments of 1975 233
The Insider Trading and Securities Fraud Enforcement Act of 1988 233
Firewall 234
The Telephone Consumer Protection Act of 1991 234
Exemption from the Telephone Consumer Protection Act of 1991 235
National Securities Market Improvement Act of 1996 235
The Uniform Securities Act 236
Currency Transactions 236
The Patriot Act 237
Pretest 239
CHAPTER 10 TRADING SECURITIES 243
Types of Orders 243
The Exchanges 247
Priority of Exchange Orders 247
The Role of the Specialist/DMM 247
The Specialist/DMM Acting as a Principal 248
The Specialist/DMM Acting as an Agent 248
Crossing Stock 250
Do Not Reduce (DNR) 251
Adjustments for Stock Splits 251
Stopping Stock 252
Commission House Broker 253
Two-Dollar Broker 253
Registered Traders 253
Super Display Book (SDBK) 253
Short Sales 254
Regulation of Short Sales/Regulation SHO 254
Rule 200 Defi nitions and Order Marking 254
Rule 203 Security Borrowing and Delivery Requirements 255
Over the Counter/Nasdaq 256
Market Makers 257
Nasdaq Subscription Levels 257
Nasdaq Quotes 258
Nominal Nasdaq Quotes 259
Nasdaq Execution Systems 259
Nasdaq Market Center Execution System (NMCES) 259
Nasdaq Opening Cross 260
Non-Nasdaq OTCBB 260
Pink Sheets 260
Third Market 260
Fourth Market 261
Broker vs. Dealer 261
FINRA 5% Markup Policy 262
Markups/Markdowns when Acting as a Principal 262
Riskless Principal Transactions 263
Proceeds Transactions 264
Arbitrage 264
Pretest 265
CHAPTER 11 OPTIONS 269
Option Classification 269
Option Classes 270
Option Series 270
Bullish vs. Bearish 270
Possible Outcomes for an Option 271
Characteristics of All Options 272
Managing an Option Position 272
Buying Calls 273
Maximum Gain Long Calls 273
Maximum Loss Long Calls 273
Determining the Breakeven for Long Calls 274
Selling Calls 274
Buying Puts 276
Selling Puts 277
Option Premiums 279
In-the-Money Options 279
At-the-Money Options 279
Out-of-the-Money Options 280
Intrinsic Value and Time Value 280
Using Options as a Hedge 281
Long Stock Long Puts/Married Puts 281
Long Stock Short Calls/Covered Calls 283
Short Stock Long Calls 285
Short Stock Short Puts 288
Futures and Forwards 291
Correlation 291
Pretest 293
CHAPTER 12 DEFINITION OF TERMS 297
Security 297
Person 299
Broker Dealer 300
Agent 301
Issuer 301
Nonissuer 302
Investment Adviser 302
Pension Consultants 302
Form ADV 303
Investment Adviser Representative 304
Solicitor 304
Access Person 304
Institutional Investor 304
Accredited Investor 305
Qualified Purchaser 305
Private Investment Company 306
Offer/Offer to Sell/Offer to Buy 306
Sale/Sell 306
Guarantee/Guaranteed 306
Contumacy 307
Federally Covered Exemption 307
Power of attorney 307
Negotiable Certificate of Deposit 308
Pretest 309
CHAPTER 13 REGISTRATION OF BROKER DEALERS, INVESTMENT ADVISERS, AND AGENTS 315
Registration of Broker Dealers and Agents 315
Changes in an Agent’s Employment 319
Mergers and Acquisitions of Firms 319
Renewing Registrations 319
Canadian Firms and Agents 320
Investment Adviser Registration 320
Advertising and Sales Literature 324
Brochure Delivery 325
The Role of the Investment Adviser 325
Additional Compensation for an Investment Adviser 325
Agency Cross Transactions 326
Disclosures by an Investment Adviser 326
Investment Adviser Contracts 328
Additional Roles of Investment Advisers 328
Private Investment Companies/Hedge Funds 328
Fulcrum Fees 329
Wrap Accounts 329
Soft Dollars 329
Pretest 333
CHAPTER 14 SECURITIES REGISTRATION, EXEMPT SECURITIES, AND EXEMPT TRANSACTIONS 339
Exempt Securities 339
Securities Registration 340
Exempt Securities/Federally Covered Exemption 343
Exempt Transactions 344
Private Placements/Regulation D Off erings 344
Transactions with Financial Institutions 345
Transactions with Fiduciaries 345
Transactions with Underwriters 345
Unsolicited Orders 346
Transactions in Mortgage-Backed Securities 346
Pledges 346
Offers to Existing Securities Holders 346
Preorganization Certificates 346
Isolated Nonissuer Transactions 347
Nonissuer Transactions 347
Pretest 349
CHAPTER 15 STATE SECURITIES ADMINISTRATOR: THE UNIFORM SECURITIES ACT 353
Actions by the State Securities Administrator 353
Cancelation of a Registration 354
Withdrawal of a Registration 355
Actions Against an Issuer of Securities 355
Rule Changes 355
Administrative Orders 355
Interpretive Opinions 356
Administrative Records 357
Investigations 357
Civil and Criminal Penalties 358
Jurisdiction of the State Securities Administrator 358
Administrator’s Jurisdiction over Securities Transactions 359
Right of Rescission 361
Statute of Limitations 362
Pretest 363
ANSWER KEYS 369
GLOSSARY OF EXAM TERMS 383
INDEX 449
