Municipal Debt
What are the components of the total takedown?
Additional takedown + Selling Concession
Define Good Delivery of physical certificates.
Provide 2 examples of Good Delivery for a 400-share trade.
Stock certificates must be delivered in round lots of 100 shares
A customer invests $55,050 in 3,000 shares of a mutual fund. Over the next 3 years, they invest an additional $15,000 and reinvest $3,709 in distributions, adding 1,291 shares. What is the average cost basis per share?
$17.19/share
(Total investment amount/total number of shares)
Tip: Find the important info and write it down!
Your client has a business in the US exporting luggage to Japan. They are concerned the dollar is going to increase in value. What option should they use as a currency hedge?
Buy Japanese Yen Puts
Hint: think EPIC (exporters buy puts, importers buy calls)
Place these Suitability Considerations in order from most important to least important:
Risk Tolerance
Age
Specific Goals & Objectives
Tax Bracket
Time Horizon
Specific Goals & Objectives, Risk Tolerance, Time Horizon/Age, Tax Bracket*
*not always present in questions.
Which types of orders occur during the order period and specify that specific syndicate members receive the sales credit?
Designated Orders
(Tip: we designate the credit to certain syndicate members)
The Board of Directors for XYZ company has set the record date for Tuesday, April 8th. An investor is looking to buy XYZ stock and receive the dividend. What is the last day they could buy XYZ stock and receive the dividend?
Monday, April 7th.
Regular way settlement is T+1 and it must settle by the Record date to receive the dividend.
An investor is in the 28% tax bracket and can invest in an 8% corporate bond or a 6% municipal bond. What bond would you recommend to this investor?
6% Municipal Bond
After-tax Yields:
Muni Bond: 6%
Corp: 5.76% (8% x (1-28%))
Identify this position and market attitude:
L 1 BRB Jan 40 call
S 1 BRB Jan 30 call
Bearish Credit Vertical/Price Call Spread
Hint: Find the dominant position first!
An investor wants to buy $10,000 of a Class A mutual fund. The NAV is $10.75 and the sales charge is 6.5%
What is the public offering price (POP)?
$11.50
POP = NAV/(100% - Sales Charge %)
Tip: Don't forget to convert your percentages into real numbers before plugging them into your calculator!
What type of refunding occurs when the proceeds from the new bonds are used to pay off the old bonds within 90 days of the issuance of the new bonds?
What if it's longer than 90 days?
1. Current Refunding
2. Advance Refunding or Pre-refunding
Note: Another way to think of refunding is RETIRING old debt with new debt (out with the old amirite?)
List 3 forms of market manipulation and what they mean.
Trading Pools (pump and dump): artificially inflating price of the issue
Wash Trades/Painting the Tape: firm buying and selling a security over and over to create appearance of trading activity
Marking the Close/Open: falsely reporting trades at close/open to affect stock's price
Issuer Manipulating its own Stock: trading it's own security near the open/close. Rule 10b-18 sets trading volume limits
Spoofing: placing large orders but canceling at the last minute and placing a trade in opposite direction
Which of the following municipal issues would be exempt from taxation of interest by the Federal Government?
i. San Francisco, CA - Convention Center Revenue Bond
ii. Miami, FL - Sewer and Water Revenue Bond
iii. Nassau Co, NY - Pollution Control Bond
iv. Des Moines, IA - Baseball Stadium Revenue Bond
ii & iii
Tip: Watch out for AMT (private purpose bonds)! They add back any tax-preferential items so the wealthy can't avoid paying taxes.
An investor has a portfolio with a high percentage of Treasury Bonds. They are concerned with the price of the bonds dropping; what should the investor do to hedge their position?
Buy yield-based call options; TYX
Tip: Since we are dealing with yield-based options, we are betting on the movement of the interest rate (instead of the resulting price movement).
A client places a sell stop limit at 36 when the stock is trading at 40. If the trades occur in the following sequence, at what price will the order be triggered? What price will the order likely be filled?
38, 37.25, 35.95, 34, 33.50, 32, 31
Trigger: 35.95 (looking for 36 or lower)
Execution: No execution (looking for 36 or higher)
Hint: Use SLoBS/BLiSS
The bond counsel provides objective legal opinions on what three items regarding municipal issues?
If there are any problems found, what type of legal opinion would the bond counsel give on that issue?
1. Legality: it is legally binding on the issuer
2. Validity: it is fully authorized and issued by the municipality
3. Tax-exempt status: the interest is exempt from federal tax under current law.
They would say it is a QUALIFIED Legal Opinion
What type of debt security is NOT eligible for TRACE?
What reporting system is used instead and how quickly must transactions be reported?
Municipal Bonds; use RTRS: must be reported ASAP but no later than 15 minutes.
(Money market debt securities, exchange-listed debt securities traded on an exchange and options also don't have to be reported on TRACE)
An investor went long 1 JKL Jan 40 Put @ 3. Six months later, ABC is trading at $30, and the investor purchases the shares in the market and exercises the option. What are the tax consequences?
$700 Short-Term Capital Gain
A customer buys 1 PHLX Canadian Dollar Jan 98 Call @ 2 and 1 PHLX Canadian Dollar Jan 98 Put @ 3 when the Canadian Dollar is trading at $0.9875. The contract size is 10,000 Canadian Dollars. The breakeven point(s) is:
BEs: $0.93 and $1.03
Hint: pay attention to strategy type and contract size!
What is the difference between Strategic and Tactical Asset Allocations?
Strategic: Passive strategy, long-term investment portfolio, rebalanced overtime
Tactical: Active strategy, short-term investment portfolio, depends on current market conditions
Which debt types MAY be accreted or amortized?
Original Issue Premium Corp/US Gov't, Secondary Market Discount Corp/US Gov't, Secondary Market Discount Municipal bonds, Secondary Market Premium Corp/US Gov't
Hint: Think Mayhammer!
List the specific department in charge of each operation:
1. Handles billing information; posts transactions to internal accounting systems
2. Maintains custody of customers' securities and assets
3. Settles transactions; rejects delivered securities that are not in good form
4. Manages dividend payments, mails proxy information
1. Purchase and Sales
2. Custody
3. Cashiering
4. Corporate Action/Reorg and Dividends
Five years ago, your client purchased 100 shares of ABC at $60 per share. ABC completed a 3:1 stock split 6 months ago when the stock was trading at $90 per share. Your client sold all the shares at $25 per share. What are the tax consequences?
$1,500 Long-Term Gain
Tip: Your total investment amount is unaffected by stock splits and dividends!
An investor opens the following options position:
Long 1 FOZ Mar 40 call @ 3
Long 1 FOZ Mar 40 put @ 2
What is the customer's MG, ML, and BE?
MG: unlimited (long call)
ML: $500 (premiums paid, both option expire)
BE: $35 & $45 (40-5 (put) & 40+5 (call))
Tip: Identify the options strategy first! This can help with thinking through what we want to happen (MG) and what we don't want to happen (ML)
To make suitable recommendations, a registered representative must ask for certain information about their customer. List 2 Financial and 2 Nonfinancial considerations we should ask to get to Know Your Customer?
Financial: Income, Value of home, Liquid net worth, Debt payments, Total debt
Nonfinancial: Age, Marital Status, Number of Age of Dependents, Employment status, Employment of immediate family members