Available to Registered Reps.

Represents the Highest Bid & Lowest Asking Price

Prices not guaranteed.

INSIDE MARKET ONLY

Available to NASD-approved subscribers.

Provides current quote and quote size.

Must guarantee firm quote of 100 shares.

Provides subscribers with all services of 1 and 2.

Allows market makers to

update their quotes.

All-Or-None Underwritings

Applies to OTC Secondary market transactions in non-exempt securities.

Becomes a Limit order when triggered.

Occurs AT or BELOW stop limit price.

Pertains to SECONDARY mrkts. Regulates sale of control and restricted securities (owned by directors/officers of a company)

Stipulates holding period, quantity limits,

manner of sale, & filing procedures.

Protects stockholders of any company that proposes to reorganize its ownership structure.

MUST be sent FULL Disclosure (Proxy Statement)

Reclassification

Merger

Consolidation

Transfer of Assets

Applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. This requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing.

Rule 145 defines certain types of reclassifications of securities as sales subject to the registration and prospectus requirements of the Securities Act of 1933. Shares acquired through mergers, consolidations, and spinoffs involving exchanges of stock are all covered under the rule. The amount of shares is irrelevant.

Offerings that take place entirely in one state are exempt from Registration when:

1. Issuer's OFFICE/80% INCOME in state.

2. 80% of ASSETS are in state.

3. 80% OFFERING PROCEEDS in state.

4. Broker/Dealer as underwriter has office in state.

5. All PURCHASERS are residents in state

SEC does NOT require registration of an offering if it's privately placed w/

ACCR investors or

Maximum: 35 NON-ACCR investors

According to Regulation D, certain conditions must be met for the securities to be exempt from the provisions of the Securities Act of 1933. The offering must be restricted to persons who are knowledgeable and experienced in business and financial matters and who are able to afford the economic risks involved. The issuer must provide the buyer with detailed financial information (this offering document does not need to be filed with the SEC). The number of nonaccredited purchasers must be limited to 35, and the offering must be made in direct negotiations between the issuer and the buyer or his purchaser representative. Also, the buyer must sign an investment letter stating that the purchase was made for investment and not for short-term trading purposes. The size of the offering is not limited and there is no limit as to the number of accredited investors.

1. Concession

2. Underwriting Fee

3. Mananger's Fee

After holding shares FULLY paid for ONE year.

Can sell the greater of 1% total shares Outstanding

or Weekly Average of prior 4 wks trades

After TWO yrs, no Restrictions

The date a security trades, minus a dividend.

Orders entered BELOW market will be reduced.

(Buy Limit, Sell Stop, Sell Stop Limit)

-First regulation of SECONDARY trading and trading Markets.

For Example: NYSE, Nasdaq

-Created the SEC.

-Gives Federal Reserve Board (FRB) regulatory oversight of Margin

Keywords: Secondary Markets, Trading Markets, Antifraud Rules, Margin: Regulation T, Created the SEC, This act registers *persons*(exchanges, firms, individuals) 

- Regulation of transactions in the secondary market, including antimanipulation rules and regs of the extenstion of credit in securities transactions

-Registration and regulation of broker-dealers

-Oversight of industry self regulatory organizations

-Registration and regulation of companies with securities trading in the secondary market, including regular financial disclosures, proxy rules, and insider reporting.

-tender offers (a formal offer to buy shares at a fixed price)

- The Federal Reserve Board (FRB) has the power to establish margin requirements for B/Ds. They regulate the extension of credit in the securities industry under Reg T. (Also Reg U and Reg X)

- This prohibits mutual fund dealers from extending credit on mutual fund shares until 30 days after their purchase.

Regulates the Issuance of New Securities

Keywords: New Issues, Primary Markets, IPOs, Issuer Sales, Full Disclosure, Prospectus, Red Herring, "This act registers *paper*", The SEC never approves. This makes sense, because there isn't really a secondary exchange occuring in the primary markets.

New issues of securities must be registered under this Act.

The following securities are exempt from the filing reqs:

• U.S. government and municipal securities
• Securities of a small business investment company
• Securities of a nonprofit organization

Nonexempt are..:

• Securities of a publicly held finance company

Nonexempt securities are those that are subject to the registration requirements of the Securities Act of 1933.

Dealer acts as a principal in a transaction. (Takes ownership of assets and is exposed to inventory risk)

Agent facilitates a transaction on behalf of a client.

Sold at Public Offering Price WITHOUT Markup or Commission

When allocating bonds in a new municipal issue, presale orders normally have first priority. This is followed by group net, designated, and then member orders. The 5 MM in group orders and 5 MM in designated orders will be allocated. There are no bonds left for member orders.

• Pre-Sale: These orders are entered before the syndicate wins the bid. Customers are willing to commit to buying bonds without specific information on exact price/yield.

• Group Net: The proceeds of sales from these orders are placed in the syndicate bank account and distributed to members of the syndicate according to their participation upon completion of the underwriting.

• Designated: These orders specify which member of the syndicate is to receive credit for the order. Note that they are filled after the group orders.

• Member: Last place in the priority sequence are member orders. These are orders placed by members of the syndicate that want to buy bonds for their own proprietary inventory.

Traded on an Agency Basis(COMMISSION) or Principal Basis (MARK-UP/MARK-DOWN)

Allows Nonregistered foreign and domestic securities to be sold to certain institutional investors in the US w/o holding period requirements. Buyer must be Qualified Institutional Buyer (QIB)

Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144. Qualified institutional buyers must have at least $100 million dollars of investable assets.

Securities in a Margin Account used as collateral for money loaned from a brokerage.

B/D are allowed to Hypothecate customer securities up to 140% of the Customer's DEBIT BALANCE. 

Short-Term Yields are HIGHER

than Long-Term Yields. 

Investors Buying Long-Term Bonds &

Selling Short Term Bonds.

When IR's decline, investors want to lock current rates by buying Long-Term debt. Increased demand increases the price & causes Yield on Long-Term debt to FALL.

Selling Short-Term debt depresses prices, causing Yield on Short-Term debt to RISE. 

1. Transferring Rights to Family

2. Selling at the Market

3. Exercising Rights

Rights MAY NOT be redeemed for Cash 

The Underwriter agrees to purchase the portion of the new securities issue that remains after a public offering.

Used with Rights Offerings.

Standby would never be used with Municipal Bond offerings since stock is not issued. 

T+3 (3rd Business Day after the TRADE date)

Settle next business day after Trade.

Money Market Securities transactions

settle Same-Day.

Cash Settlements 

Does not specify the # of shares it will issue. Can raise unlimited amount of capital by issuing new shares.

Must redeem shares 

Investors purchase shares from the co. at the

Public Offering Price (POP).

Class A usually has front end loads but small or nonexistent 12b-1 fees. Breakpoints. Not all the investor's money is put to work in the portfolio b/c of sales charges. The max sales charge is 8.5%, but that can only be assessed if the MF offers breakpoints and Rights of Accumulation. For each of these features the fund omits, the maximum sales charge is lowered according to a set schedule. It is prohibited by FINRA for a RR to engineer purchases just below the dollar amount of a breakpoint. The client should be reminded that LOIs can be used if all the funds are not currently available.

Class B generally have CDSC and slightly higher 12b-1 fees. Once the specified # of years has passed so there is no back-end fee due, most funds convert the Class B shares to Class A shares. RR's should not place large orders in Class B Shares. The client would likely be better off purchasing Class A shares since only these shares qualify for available breakpoints.

Class C shares have an up-front sales charge usually 1% plus an annual 12b-1 fee or level load that is usually equal to 1% of the fund's assets. If sold in less than 12-18 months after acquisition, the investor may also be hit with a CDSC. No conversion to Class A.

Other Classes - exist for employees of B/Ds, institutional investors, retirement plans, or other special categories of investors. The fund must disclose fully each class of shares it offers and the different sales charges and applicable 12b-1 fees in its prospectus.

If Class B Shares convert to Class A shares, why not invest in Class B shares up to a specific breakpoint, then invest in Class A after the conversion occurs?

RR's should not allocate a client's investments into several different fun families. This practice may result in the client not receiving a breakpoint that would have been available if all the funds were allocated to a single family.

Invest in stocks of companies whose business are growing rapidly.

Tend to reinvest profits for research & developement instead of paying dividends.

Focused on generating capital gains

rather than income. 

Growth - Common stocks

Conservative Growth - Blue-Chip, Large-Cap stocks

Aggressive Growth - Small-Cap and Mid-Cap stocks

Stresses current income over growth.

Invests in stocks of companies w/ long histories of 

Dividend Payments

(Utility company, Blue-Chip stock & Preferred Stock) 

Less likely to decline in value and less likely to significantly appreciate in value than growth funds.

Assets (cash + current value of securities) - Liabilities / total number of shares outstanding.

MFs allow the investor to reinvest dividends and capital gains at the NAV.

Shares are redeemed at this price. This value must be calculated at least daily.

Requires a fund to distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed 10%.

If the fund distributes 89%, it pays taxes on 100% of net investment income.

Set by the Board of Directors.

The Day AFTER the Record Date 

These are a type of management company. These usually issue stock to the public once. Although they may issue additional shares later, they do not continuously issue new shares to the public or stand ready to redeem their shares for cash.

Once this investment company issues shares, these holdings trade in the secondary market, just like any other stock. If an investor wants to purchase shares in this company, he will need to buy them either on a traditional exchange or on Nasdaq. There is no prospectus delivery requirement on a secondary market purchase of these.

The price that an investor pays for his shares will be determined by the market forces of supply and demand. Unlike MFs, these may trade at a discount or a premium to their NAV. When buying or selling these in the secondary market, the investor pays a commission instead of a sales charge.

1. At least 75% of the assets are invested
2. No more than 5% of the invested assets may be invested in any one company
3. The company does not own more than 10% of the voting stock of any one company.

A diversified company must meet these standards at the time of investment. Subsequent market fluctuations or consolidations will not nullify the company's status as diversified. (This applies to #1 & #2, I don't see how it could apply to #3)

Displays trading interest at the Best price as well as the next 4 price levels (5 levels total) on bot the

Bid and Offer sides.

Increases Market Transparency

to allow for better Trading Decisions. 

Exempt from Registration with the SEC.

New Issue to ACCREDITED Investors and a

Maximum of 35 NON-ACCREDITED Investors 

Conversion Ratio

 &

Parity Price 

Conversion: Par Value / Conversion Price

Parity: Market Price / Conversion Ratio 

Bids are made by entities other than primary dealers.

Any amount remaining is auctioned to Primary Dealers with the Highest Bid (Lowest Yield) filled first.

Employees of 501(c)3 and 403(b):

• Charities,
• Religious Groups,
• Sports Organizations
• School Systems

ARE eligible for TSA

Includes all the information necessary for a Dealer to make a bid (COMPETITIVE) on an issue.

1. Size of the Offering
2. Maturity Dates
3. Date/Time/Place of Sale 

The amount of good faith deposit and expenses to be borne by the purchaser or issuer would be found in this.

Investment for Profit with management by a 3rd Party. An element of Risk must be present.

Variable Annuity

Options 

Makes debt instruments more marketable.

Allows the issuer to pay slightly lower interest rates. 

Charged by Banks to other Banks

Due to deposits, withdraws, and loan demands, a bank may find itself with either an excess reserve position or a deficit reserve position. If a bank has excess reserves, it may lend additional funds to borrowers, including commercial banks that are in a deficit reserve position.

These short-term loans of excess reserves that banks lend each other are called the ______. The _____ is determined by supply & demand. Since _____ are short-term, they are considered money market instruments. Due to the short duration of the loan, the ______ is normally considered to be the most volatile interest rate. The effective ______ is published daily and shows the average rate charged the previous night for ______. Although the FRB does not directly set the ______, it does set a target. The open market operations of the FRB are designed to maintain the ____ within this prescribed range.

OTC market is a Negotiated Market (market makers bargain during the trade).

Stock Exchanges like NYSE are Auction Markets.

Value is dependent on the value of another security.

Equity Option: Underlying stock

CMO: Underlying Mortgages

Private purpose bonds.

Interest could subject the holder to

Alternative Minimum Tax (AMT).

-This act enabled the creation of nonexchange SROs (Self Regulatory Organizations), such as the NASD created in 1939 to oversee OTC trades.

-The NASD is one of the precursors to FINRA, created in 2007.

-Also enabled the creation of the MSRB (Municiple Securities Rulemaking Board) in 1975.

Covers Mutual Funds (Open-End Management Companies) and other organizations that pool money from investors to make investments. This defines three different types of investment companies: face-amount certificate companies, unit investment trusts, and management companies. It further divides management companies into two categories: closed-end companies and open-end companies.

Mutual Funds must register with the SEC as an investment company.

Applies if the organization has more than 100 shareholders and a minimum of $100k in assets (the MF company needs to have at least this much in assets to be traded publically.) The organization must make annual reports to the SEC, and semiannual reports to shareholders. The organization may be exempt from this requirement if all of the investors are qualified investors.

MFs are required to pay the redemption proceeds (NAV) within 7 calendar days.

-Defines an Investment Advisor and requires them to register as such with the SEC.

-Portfolio Managers count as investment advisors, but accountants, professors and others that give investment advice incidental to their profession without charging a separate fee for this service do not qualify. 

-Keywords: ABC Test: Advice, Business, Compensation; Incidental advisors excluded from requirements.

Excludes: -Accountants and lawyers who provide advice in a manner incidental to their profession

-Publishers

-Broker-dealers and their representatives

Enabled the creation of the SIPC (Securities Investor Protection Corporation). The SIPC is an industry-funded, not-for-profit insurance entity that covers the customers of brokerage firms incases where a firm becomes insolvent.

THE SIPC DOES NOT PROTECT THE CUSTOMERS AGAINST MARKET LOSSES.

Keywords: $500K coverage per single customer, $250K cap on cash coverage. Industry funded, not part of US Gov.

Lots of scandals in the 80s led to criminal penalties as high as $5 million and/or 20 years in prison for insider trading convictions. This practice was already prohibited, but did not have specific penalties prescribed.

Keywords: Misues of Material, Nonpublic Information; Treble (3x) Damages; $5mil max fine; 20 Years Max Prison; Tippers & Tippees; Any Person Can Be In Violation Of Insider Trading Laws. 

Cold calling restricted to people not on their Do Not Call List, which every entity is required to personally keep and maintain.

Calling times restricted to from 8 AM to 9 PM in the customer's time zone.

Call in / help lines are exempt from the regulation.

Anti Money Laundering

(>$10k) Currency Transaction Reports (CTRs)

Suspicious Activity Report (SAR)

CIP Procedures 

When a broker-dealer wants to hire an individual who is subject to stauatory disqualification, it must request permission through a/an __________.

If granted, the individual is subject to heightened supervision and a plan must be tailored to the specific person being supervised.

Normally, an employee of a FINRA member firm who wishes to open an account at another member firm must notify his firm and the executing firm, in writing, prior to opening a securities account. An exception is made if the employee effects transactions only in

_________

________

________

$100

MSRB rules prohibit gifts in excess of $100 per year to a person other than an employee or partner of the gifting individual, if such payments or services are in relation to the municipal securities activities of the employer or the recipient. (Therefore, a Christmas gift to the client valued at $125 would not be allowed.) However, costs incurred for business lunches or hotel accommodations for clients at business seminars are business expenses and are allowed as long as they are not frequent or excessive.

SIPC covers up to...

SIPC does not cover...

$500k in assets, of which up to $250k may be cash.

more than this and the client becomes a general creditor, and will have a claim to the remainder of the company.

SIPC does not cover commodities accounts. Securities registered in the names of customers are not part of SIPC coverage and are returned to the appropriate individuals regardless of the amount.

Traveling in the US: 2 months

Traveling outside the US: 3 months.

General creditors - 

Secured creditors - 

Unsecured creditors - 

Preferred Stockholders -

Common Stockholders -

Treasury Stock

Outstanding Stock

-Stock reacquired by the corporation after it has been issued.

-Stock not reacquired by the corporation after it has been issued- receives dividends and has voting rights.

-Declaration Date

-Record Date

-Ex-Dividend Date

-The date dividends are paid for a stock

-The date you must own the stock by to receive the next dividend

-Two business days before the Record Date - you must buy the stock by this date to receive the next dividend. One business day AFTER the Record Date for cash settlements (since they settle same day). For stock splits the ex-div date is the business day after the payment date. 

When a share of stock was purchased before the ex-div date but was not received before the record date, then the seller will receive the next dividend, but will not be entitiled to it. A Due Bill will accompany the stock, demonstrating that the purchaser is owed the dividend.

Due Bills also accompany the shares traded that will undergo a stock split to ensure that the proper owner receives the shares.

steel, cement, machine tools, automobiles

These stocks have earnings that fluctuate with the business cycle. Common stock price follows the earnings.

ADRs

Sponsored and Unsponsored

American Depository Receipts

Used to represent a claim to foreign securities which are held in US Banks abroad. They are priced in US Dollars and issue USD Dividends. Shareholders are not protected from foreign currency risk.

The company can pay a depositary bank to issue ADR shares in the US. If they do not do this, the shares are unsponsored and will trade OTC on the OTC Pink Market.

-Voting rights

-Greater potential for capital appreciation than preferred stock

-Ownership stake in the company

-Right to a Stock Certificate

-Right of Transfer

-Right of Inspection

-Right to receive dividend (not guaranteed-decided by the board of directors)

-More likely to receive regular dividend payments than common stock

-Higher priority if the company goes bankrupt

-Issued with a specific dividend rate

-Ownership stake in the company

-Right to a Stock Certificate

-Right of Transfer

-Right of Inspection

-Right to receive dividend (not guaranteed, but more likely)

1. Participating preferred stock - This allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than that amount based on the profits of the issuing company. 
2. Cumulative preferred stock - This will add all unpaid dividends to a future payment if a cash dividend is to be paid to common shareholders. A collateral secured bond provides the holder with safety due to it being backed by a specific asset of the issuer; however, the issuer will pay no more than the bond's stated rate of interest. Common stock will pay only cash dividends if they are declared by the company s board of directors.

<20% of shares of the other corporation => 70% of dividend income is tax free

>= 20% of shares of the other corporation owned => 80% of dividend interest is tax free

Par Value is $1000, trading at 110 pts is $1100, etc.

Corporate Bonds trade in 1/8 pts ($1.25), Treasury Notes and Bonds trade at 1/32 pts ($0.3125)

Treasury Note Ex: 99.08 = 99 8/32 % = $992.50

A contract between two parties that gives one of them the right to buy or sell a security at a set price for a limited period.

Sometimes referred to as derivatives because they derive value from the underlying value of the security.

Uses: Hedging, speculation, or income.

The lifespan of an option is usually <9months, but can be <=3 years

Minimum Price Per Share as stated in the Corporate Charter.

Has no relation to market price.

Today many stocks are issued without a par value, or if they are required to have one, the corporation sets it at the lowest possible monetary increment (ex. $0.01)

PIPE Offering

Private Investment in Public Equity

A private placement of unregistered securities by a corporation that already has publicly traded securities outstanding. A Broker-Dealer assists in distributing these securities to a small group of accredited investors.

When a PIPE offering is announced, the company's share price will often decline due to public perception that the company is in need of capital but has limited means to obtain it.

A PIPE offering will also dilute the publicly held stock.

This allows a company to split into two companies. For example, Sears and Sears Canada. The corporation does this by issuing a stock dividend of 100% of its ownership interest as shares of the new corporation to all of the owners of the original corporation stock.

Usually the Spin Off Corporation and the Original Corporation do better seperately than they would have done had they remained one corporation.

A Broker-Dealer that helps corporations or municipalities raise money by arranging for a new offering of stocks or bonds. An investment banker buys the full new issue from the issuing corporation and resells it to the public.

Lead Broker Dealer [performs due diligence]

|

Syndicate Manager (managing underwriter)

/\

Syndicate [financial liability]

/   \

Selling Group [no financial liability]

[placement agents]

Munis 

This entity assists the issuer in pricing the securities and sometimes helps to structure the financing and preparing the official statement (the disclosure document used in muni offerings.)

This entity can be chosen as part of a negotiated sale, or this entity can be assigned as a result of winning with the lowest bid in a competitive sale. If the issuer wants to sell bonds through a competitive bid, it will advertise by means of a Notice of Sale. This will contain info like sizem maturity and coupon rate of the issue and info related to the bidding process.

If the issue was not negotiated, then the syndicate members are bound together by the syndicate letter, which indicates the preliminary amount of bonds to be sold by each member, how long this entity will last, and the liability (divided/undivided) of each syndicate member. The return of the signed syndicate letter indicates the member's acceptance of the terms.

Public document filed with the SEC. Provides full disclosure of all material information about the issuer and the offering. The prospectus is an abbreviated version of this document. The managing underwriter will be held liable for all omissions and inaccuracies.

Required by the Securities Act of 1933 when issuing securities.

Must include:

-The character of the issuer's business

-A balance sheet no older than 90 days prior to the filing of the registration statement

-Financial statements that show profits and losses for the latest three fiscal years.

-The amount of capitalization and use of the proceeds of the sale

-Monies paid to affiliated persons or businesses of the issuer

-Shareholdings of senior officers, directors, and underwriters

-Identification of individuals holding at least 10% of the company's securities

Blue-Sky Laws

Applicable state laws codified in the Uniform Securities Act (USA)

3 Types of State Registration for the issue of securities:

1. Filing (Notification) - Submit an application to the State Administrator requesting approval to offer securities.
2. Coordination - Done simultaneously with a federal registration and becomes effective at the same time.
3. Qualification - Meet specific state requirements. Becomes effective at the discretion of the Administrator

These apply to :

Registered representatives & Securities issued by a REIT

But not to:

Commercial paper Securities issued by the City of Chicago

Prospectus Delivery Requirements:

1. Nonlisted IPO
2. Nonlisted Follow-On Offering
3. IPO of a security to be listed on an exchange or Nasdaq
4. Exchange-listed or Nasdaq follow-on offering
5. Mutual Funds

If a security is sold in the aftermarket within a certain time period after the stock issue, the final prospectus must be provided to the purchaser. All buyers of the primary offering receive the final prospectus at the time of their purchase.

1. 90 days

2. 40 days

3. 25 days

4. No requirement

5. Must be received prior to any purchase orders being processed.

Securities that are exempt from the registration and prospectus requirements of the 1933 Act.

NOT exempt from the antifraud provisions of the act

Ex:

• US Government and US Government Agency Securities
• Municipal securities
• Securities issued by nonprofit organizations
• Short Term Corporate Debt Instruments w/ maturity <=270 days
• Securities issued by domestic banks and trust companies
• Securities issued by small business investment companies

Regulation A: <= $5,000,000 sold over 12 months - still requires the fililing of an offering statement, and an offering circular must be given out to prospective purchasers.

Regulation D: Private Placements where 1. the issuer has reason to believe the buyer is a sophisticated investor 2. The buyer has access to a private placement memorandum which contains the same information that a prospectus would contain. 3. the issuer is assured (perhaps through a lock-up agreement) that the buyer does not intend to make a quick sale of the securities. 4. The securities may not be sold to more than 35 nonaccredited investors.

Rule 147: for an instate only offering 

Regulation S: for a non-US offering by a US security. No Debt resales to US investors for 40 days, no Equity resales to US investors for 1 year.

An immediate family member of an employee (an RR) of a member firm may be a restricted person. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. An exception exists if a nonsupported, immediate family member buys the IPO from a different broker-dealer.

A financial institution (such as a bank), a large tax-exempt plan, or a private business development company. Could also be a director, executive officer, or general partner of the issuer, or an individiual who has either...

• A Net worth of $1mil or
• An income of at least $200K (or $300K combined with a spouse) for each of the past two years with the anticipated continuation of this income level

Under Rule 144A of the Securities Act of 1933, unregistered securities may be resold only to qualified institutional buyers (QIBs). Qualified institutional buyers are entities that have at least $100 million of investable assets. The term institution includes insurance companies, trust funds, investment advisers, investment companies, employee benefit plans, or other types of institutional investors. Individual investors, even if they are deemed to be accredited investors, are not considered to be QIBs.

Rule 144: 

Concerned with the sale of restricted stock and affiliate (control) stock.

Holding periods - restricted stock must be held for 6 months. control stock - no holding period

Filing Requirement - Must file Form 144 to notify the SEC at the time of placing the order to sell the securities. Filing not required if <5000 shares and <=$50,000. If shares are not sold within 90 days of filing, an ammended notice must be filed.

Volume Limitation:

Max( 1% of shares outstanding,

Avg_{last 4 weeks}(weekly trading volume) ) [if on nasdaq]

Applies to control stock 4eva, applies to restricted stocks from 6 months after going public to 1 year after.

Broker-Dealers may solicit using Rule 144 if the client has indicated an unsolicited interest in the last 10 business days, or if another broker has indicated an interest in the security in the last 60 days.

Rule 144A: 

Permits the sale of restricted securities to QIBs (Qualified Institutional Buyers) without the conditions imposed by Rule 144. Unable to be used if the securities are in the same class as those listed on Nasdaq, like convertibles and warrants. Cannot be used if the securities are issued by a registered investment company.

Ex of QIBs: Insurance companies, Registered Investment Companies, Small Business Development Companies, Pension Plans, Certain Bank Trust Funds, Corporations, partnerships, certain non-profits, registered investment advisors...

The QIB must be purchasing for their own account or for the account of another QIB. The QIB must own $100 mil "of securities of issuers not affiliated with the QIB." Exception: Broker-Dealers need only $10 mil "..."

The seller must have a reasonable belief that the buyer is a QIB, and must inform the buyer that they are selling using Rule 144A.

Rule 145: 

In the case of mergers or when stocks are reclassified, or when assets are transferred from one corporation to another, it is classified as sales that are subject to the registration and prospectus requirements of the 1933 Act.

Must file using Form S-4

Can be used to provide an excempt offering of securities in the borders of one state if:

• 80% of the company's gross revenues are derived from operations within that state.
• 80% of the company's assets are located within that state
• 80% of the proceeds of the offering are used to expand facilities within that state
• 100% of the purchasers are principal residents of that state. 

Rule 147 stock may not be sold out of state until 9 months after the last Rule 147 sale.

Restricted Persons [New Issue Rule]

&

Exemptions

Member firms and all associated persons (employees)

An immediate family member of an employee of a member firm IF

• the family member lives in the same household, or gives/receives material support consisting of >25% of income. 
• the employee is employed by the member firm that is selling the new issue
• The employee has the ability to control the allocation of the new issue (Portfolio Managers)

Also restricted are Portfolio Managers, Finders and Fiduciaries, Persons who own >10% of a broker dealer.

Exemptions

• Investment companies registered under the Investment Company Act of 1940
• The general or separate account of an insurance company
• A common trust account
• An account in which the beneficial interest of all restricted persons does not exceed 10% of the account.
• Publicly traded entities other than a broker-dealer or its affiliates that engage in the public offering of new issues
• foreign investment companies
• ERISA accounts, state and local benefit plans, other tax exempt plans under IRS Code 501(c)(3)
• Broker Dealers may purchase shares if the offering is undersubscribed.
• if a restricted person had already owned shares for a year prior to the offering date, then they may participate in the offering if doing so will keep their equity interest at the same level. If this exemption is used, then the new shares may not be sold for 3 months after their acquisition.
• Employees of the issuer, parent company of the issuer, or subsidiary of the issuer may purchase shares of a new issue if the issuer specifically directs securities to them.

QIU

Qualified Independent Underwriter

May be required by FINRA in cases of self underwriting or underwriting of an affiliate (ownership of >=10% either way.) The QIU would have no conflicts of interest with the issuer.

Must have been manager of comanager of 3 public offerings of a similar size and type during the three years prior to the filing of the registration statement for the offering. The disclosures must explain the conflicts of interest & the name and role of the QIU & a brief statement regarding the role and responsibilities of the QIU. The Member Firm must notify FINRA once the offering is complete.

If a broker-dealer that is controlled by a public company has a customer who wishes to purchase the stock of that company, the broker dealer must disclose the control relationship to the customer prior to accepting the order. If the initial disclosure was verbal, a written disclosure must be provided to the client prior to settlement.

A registered representative for ABC Brokerage has just been elected president of the Harper Valley School Board. The school district is going to float a new serial issue of general obligation bonds backed by ad valorem taxes. ABC Brokerage's relationship to the school district can be described as a control relationship. 

A control relationship exists when a brokerage firm or an employee of a firm is in a position to control or influence the issuance of securities by an issuer.

If a firm sells the stock to the customer from its own inventory, then it is acting as a dealer (principal). 

• The firm is a principal
• it is taking a risk
• the firm is acting as a dealer
• it earns a markup or markdown

If the firm does not have the inventory to act as the principal, the firm's job is to go out and obtain the stock for the client and place it in that client's account. This action is also known as brokering a trade.

• The firm is acting as an agent
• The firm is acting as a broker
• It is not at risk
• It earns a commission

Agency Cross counts as a commision based trade although both clients are with the same firm.

If a firm is a manager or comanager of a recent offering by a public company, neither they nor their analysts may publish research reports or make public appearances for the security for 40 days after the offering for IPOs, or for 10 days for secondary offerings.

Other firms participating in the deal (syndicate and selling group members) must maintain a quiet period for 10 days after an IPO. No restriction for secondary offerings.

An exception exists for "Hot News" when the issuer is subject to certain unexpected news events.

The client does not own any shares of the security. They must first borrow the shares of securities from the firm and then execute a sale.

Executed from a margin account. Broketage firms provide short sellers with stock they have borrowed from other margin customers. The short seller is obligated to return the borrowed shares as well as any dividends received.

Sell Stop Order - Placed below the market price of the position. Once the position trades at or below x price, the sell stop order is activated and the position is sold at the market price.

Buy Stop Order - Placed above the market price of the position. Once the position trades at or above y price, the position is sold at the market price.

Sell Stop Limit Order - the same as a Sell Stop Order, but will not execute unless the price is at or higher than the stop price.

Buy Stop Limit Order - the same as a Sell Stop Order, but will not execute unless the price is at or lower than the stop price.

The price will be reduced by the amount of the dividend on the ex-div date for the following order types:

• Buy Limit
• Sell Stop
• Sell Stop Limit

Because they are all orders that are placed below the market price. On the ex-div date the value of the stock drops by the amount of the dividend, so if this adjustment were not made, then these orders would activate prematurely.

The order price is adjusted in a similar way for shares that are Ex-Rights. (The price of the stock will be diluted by the introduction of new shares, so if 25% more shares are introduced, the share price should reduce by ~25%)

Market on Close

(MOC Order)

Limit on Close

(LOC Order)

Bid Wanted (BW)

Offer Wanted (OW)

When a seller asks the buyer to suggest a purchase price.

When a dealer asks a seller to suggest a sell price.

• a majority of the issuer's board of directors must be independent
• an audit committee consisting solely of independent directiors must be maintained
• Shareholders must be provided with annual reports and quarterly and other reports must be made available
• proxies must be solicited and statements provided to shareholders for all meetings
• issuers must refrain from taking certainactions or issuing securities that would unfairly reduce or restrict the voting rights of existing shareholders

provides quotations for listed securities that are traded in markets outside of the primary marketplace where the security is listed.

 provides subscribers with bid/asked quotations for securities listed on national exchanges, including quotes from OTC market makers in those securities (the third market).

Order Protection Rule - Electronic trades must take place on the market with the best price

Locked Markets - occurs when a market center displays a bid at the same price as the current lowest offer made by another market center

Crossed Markets - occurs when a market center displays a bid above the ask price for another market or vice versa.

Limitations on Quote Increments - Broker Dealers are prohibited from accepting bids, offers, or indications of interest for NMS stocks at certain increments. if the stock is trading >$1, the increments must be pennies. If less than a dollar, it must be increments of at least $0.0001.

must include whether the B/D acted as agency or as a principal. The contrabroker also generates a confirm, and the two confirms should be compared to see if they agree. If an error is discovered, the party in error should send out a corrected confirmation within one business day.

The MSRB requires a municipal dealer to indicate to a customer through a written confirmation the capacity in which the dealer acted. The municipal dealer must disclose if it acted as an agent for the customer, as a principal for its own account, or as an agent for a third party. If the municipal dealer acted as an agent for a third party, the municipal dealer must disclose the name or promise to provide the name of the third party. Also, the amount of money received from the third party by the municipal dealer is required. 

If the municipal dealer is a market maker, this is not required to show up on the confirm.

the attmept to prevent a stock from

(1. rising above / 2. falling below) a certain price.

Not permitted to make short swing profits in the stock of the corporation in which they are insiders. If an insider sells the stock at a profit within 6 months of its acquisition, or sells stock for a profit that was held 6 months or longer and then repurchases it within 6 months of the sale, the corp may sue for recovery of the profit (disgorgement.)

Insiders may not short the stock of the company in which they are insiders unless they are shorting against the box.

Insiders cannot write uncovered calls, but can write covered calls.

• Physical seperation of trading, investment banking, and sales areas.
• Limiting employee access to certain restricted areas of the firm such as trading desks
• Limiting employee access to electronic and physical records
• Making sure sensitive material is not left out in the open
• Requiring employees to wear identification badges to prevent unauthorized persons from entering the firm
• Supervision of interdepartmental communications
• Supervision of employee email and phone communication
• Education and training of employees regarding these procedures.

Insider Trading Sanctions of 1984 (ITSA)

Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA)

requires B/Ds to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of the B/D's business, to prevent the use of material nonpublic info by the BD or associated person. Any individual who uses insider information may be laible for trading violations.

• a system for monitering employee's personal trading and trading in firm proprietary accounts
• restriction or monitering of trading in securities where the firm has access to insider information
• procedures to restrict access to files containing confidential information, including the establishment of information barriers
• education of employees regarding insider trading issues

Consequences:

• Civil Penalties<=3x amount of gain or loss avoided in the transactions. The insider trader may also have to give up the profits earned.
• Criminal Penalties: Subject to fines up to $5mil and/or imprisonment for 20 years for EACH violation.
• Bounties: The bounty for providing info about insider trading may be rewarded by the SEC <=10% of penalty.

If Senior Company Officials communicate nonpublic material info to analysts or investors, the company must also disclose the info to the public at large at the same time if intentional, or within 24 hours if unintentional, or at the opening of the market if it happens on a holday or over the weekend.

The company must file form 8-K with the SEC or by some other method that is reasonably designed to reach a broad spectrum of the investing public.

US equities experience higher volatility when there is a natural disaster or terrorist attack. Under certain circumstances, trading may be suspended.

Level 1: 7% decline

9:30 AM - 3:25 PM

15 minute trading halt

Level 2: 10% decline

9:30 AM - 3:25 PM

15 minute trading halt

Level 3: 20% decline

ANYTIME

Trading halts for the remainder of the day

If there is a halt in the trading of a security that underlies option contracts, then the exchange on which the option trades makes the decision to stop trading the option contracts.

Bonds issued by states and local governments

Traders establish positions in secondary market municipal bonds for a broker-dealer. An underwriter is involved in the distribution of new issues.

No Trading ahead of research

Information barriers between the research and trading departments.

The amount that the issuer agrees to pay the investor when the bond matures.

Most bonds are sold initially at this value, but they can be sold for less (selling at a discount) or more (selling at a premium)

109 days, $302.78

• Corporate & Municipal bonds assume all months have 30 days.

• Use the Maturity Date to figure out the last interest payment date, June 1st

• Settlement is 3 business days from the purchase date, so the bond settles on Sept 20th. Interest is accumulated up to but not including the settlement date.

June - 30 days

July - 30 days

August - 30 days

September 19 days

= 109 days

Treasury bonds is calculated based on actual days of months of the year, unlike C/M bonds, which calculate it as if months had 30 days each. 

January - 31 days

February - 28 days

March - 31 days

April - 30 days

May - 31 days

June - 30 days

July - 31 days

August - 31 days

September - 30 days

October - 31 days 

November - 30 days

December - 31 days

1. all bonds issued at the same time mature on the same date. These  are quoted on the basis of a dollar price.
2. the bonds issued at the same some mature on sequential years. These are quoted on a yield-to-maturity basis. 

No longer issued in the US. The bond holder holds a physical certificate with interest coupons that they clip off and bring to the bank to receive their payment. The name of the bond holder is not recorded. When the bond matures, the certificate is turned in for the maturity amount.

A municipal bearer bond does not require endorsement (signature) by the owner.

Bonds registered as principal only

vs

Fully registered bonds

1. like bearer bonds, interest coupons are clipped off and redeemed at the bank, but the owners name and address is recorded for the purposes of receiving written notices and payment of the principal amount at maturity.
2. name and address recorded for purposes of receiving written notices, payment of the principal, and payments of interest. The interest payments are received as a check from the issuer ever 6 months.

measures the annual interest that the investor receives from the bond compared to its current market price.

Annual Interest Rate * Par Value

Market Price

This one is a big old mystery - Neither the book nor the internet want to give me a relaiable equation for it. However, when the bond is bought at a discount, it is higher than the nominal yield and the current yield, and when it is bought at a premium, it is less than both of those. If the bond is bought at par, it is apparently equal across the board.

≈ 2*(Yearly interest payment + [Par - Market Price])

Par + Market Price

• Prices of Long Term Bonds tend to fluctuate more (have longer duration) than bonds with shorter maturites (with shorter duration) because they are more sensitive to interest rate swings.
• The price of bonds selling at a discount fluctuate more than bonds selling at a premium
• Yields of newly issued short term bonds will fluctuate more than yields for long term bonds.

Normal Yield Curve

Inverted Yield Curve

Flat Yield Curve

1. Lower yields in shorter maturities and higher yields in the longer maturities (because yields increase as maturities lengthen)
2. Unusual. Seen when the demand for money exceeds the supply. When interest rates are high (such as when there is high inflation) you might see this.
3. Similar yields across all maturities. 

If an issuer wishes to lock in an interest rate before they can call the previously issued bonds, they can issue new bonds (called the refunding issue), use the proceeds of the issue to buy government securities, place those securities in an escrow account in a bank that ensures that the securities on deposit as well as their earnings will be used to pay the interest and principal on the outstanding issues.

Since the issue is now secured by escrowed securities, the issuer is no longer responsible for payment of interest and principal. Also, the original rights and liens the bondholders had under the bond agreement are eliminated. This is referred to as defeasance. The original issue is defeased.

If a bond is callable, both the yield to maturity and the yield to call must be calculated. The bond investor must be told the lower of the two outcomes. This disclosure is placed on the client's confirmation.

In order to comply with this disclosure rule, bonds selling at a discount must be quoted on a yield to maturity basis. Conversely, bonds selling at a premium must be quoted based on thee lower of the yield to maturity or the yield to call.

A corporation issuing more than $10 million of debt must provide an indenture (agreement) between the issuer and the trustee (usually a bank or trust company) who will act on behalf of the bondholders. All the terms of the issue must be spelled out in detail in the indenture, which the trustee signs on the bondholders' behalf.

Some terms that the indenture will include:

• assets pledged (if any)
• redemption features

1. The corporation is not allowed to issue new bonds secured by the same claim on the same assets as the bonds of the original issue. This prevents the security behind the the bonds from being diluted.
2. The corporation is permitted to issue additional bonds secured by the same assets as the original issue. Because the protection of the bondholders is able to be diluted, the indenture will usually require that the corporation meet a specific level of earnings before new bonds can be issued. (Earnings test or additional bonds test)

A type of corporate bond that is backed by certain assets that the corporation owns, as well as the corporation's full faith and credit. In the event of a bankruptcy, the trustee will take possession of the assets and liquidate them on the bondholders' behalf.

Ex:

• Mortgage Bonds: secured by a first or second mortgage on real property. Usually issued serially over a number of years. Once a group of bonds is paid off, new bonds are issued, backed by the same property. (Real Estate)
• Equipment Trust Certificates: secured by a specific piece of equipment that the corporation owns that is used in its business. The trustee holds legal title to the equipment until the bonds are paid off. Usually used by railroads, airlines, shipping companies. (Equipment)
• Collateral Trust Bonds: secured by third party securities owned by the issuer. The securities are placed in escrow as collateral for the bonds. (stocks or bonds)

Known as notes or debentures. Secured only by the corporation's full faith and credit. If the issuer defaults, the holders of these securities have the same claim to assets as any other general creditor, before the stockholders, but after the secured bondholders.

Sometimes a new issue of this type of bond can have an even lesser claim to assets than the company's other bonds of this type issued earlier. These are called subordinated debentures.

1. wages
2. taxes
3. secured creditors including secured bonds
4. general creditors including debentures
5. subordinated creditors including subordinated debentures
6. preferred stockholders
7. common stockholders

Similar to convertible preferred stock, these bonds allow the investor to convert them into shares of the company's common stock, at a predetermined ratio.

Traditionally, these issues offer lower coupons than similar bonds without the option to convert.

Often issued by companies with weaker credit ratings. If converted, the debt becomes equity, and the issuer's capital structure is deleveraged.

The price of these bonds will be

max(inherent value, conversion value)

If the market price of the bond is less than the conversion price, it is unlikely that bondholders will want to convert.

=

Par value

Conversion Price

The DMM may not accept market orders (because they must be immediately executed) and not-held orders on his book. The term not-held means the floor broker is not held to a specific price for the stock. The DMM is not involved with not-held orders.

A designated market maker may accept open GTC orders and day orders on his book.

An individual wishes to sell restricted securities according to the Rule 144 exemption. There are 6,000,000 shares outstanding. The trading volume for the last 5 weeks prior to the sale are:

April 1..........45,000 
April 8..........62,000 
April 15........70,000 
April 22........75,000 
April 29........72,000

If the customer were to sell the securities as of May 6, how many shares may he sell?

69,750

AVERAGE THE PRIOR 4 WEEKS OF TRADING VOLUME

Aunts, uncles, and cousins are not defined under the rule as immediate family members and are, therefore, not considered restricted persons.

 A buy-side trader has the ability to make trading decisions and is defined as a portfolio manager, who is considered a restricted person under the rule.

When a broker-dealer or RR buys or sells stock or options before the public release of proprietary information concerning a large block order, it is considered a prohibited practice that is referred to as front-running. Another form of front-running is exemplified by an RR buying a stock and then recommending that her clients buy the same stock. After the recommendation to her clients, the RR would likely benefit from the potential increase in the stock's price. Even if the client recommendations are suitable, it is unethical for the RR to put her own interests before her clients' interests.

Placing proprietary orders (orders for the account of the RR or broker-dealer) ahead of customer orders is a prohibited practice that is referred to as ____________. An institutional buy order has the potential of moving the market price of a security higher. Having advance knowledge of the order would allow the broker-dealer to purchase the security or a derivative for that security prior to executing this order and profit when the market reacts to the institutional order. 

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Serves as an indicator of a company's profitability

 A shelf registration under Rule 415 will make it so that:

• The company will to be ready to sell the bonds quickly.
• The bonds will be as liquid as possible in order to attract investors.

An individual owns restricted stock. He would not be required to file a Form 144 for a sale of less than:

$ _______ and _______ shares

Eurodollar Bonds - Issued in a foreign country using USD. Not registered with the US SEC. Subject to the 40 day trading restriction.

Eurobonds - Sold in one country in the currency of another country. Affected by the interest rates of the country's currency that they are denominated in.

Yankee Bonds - Allow foreign entities to borrow money in the US Marketplace. Registered with the SEC and sold primarily in the US.

Seller / Writer - Has the obligation to buy the underlying asset at the strike price if the holder exercises the option.

(Sell -> Must Buy)

Buyer / Holder -  Has the right to sell the underlying asset at the strike price before the expiration date.

(Buy -> Can Sell)

Loss = Strike Price of Short Put - Price of Underlying - Premium Received + Commissions Paid

Loss = limited

Seller / Writer - Has the obligation to sell the underlying security at the strike price if the option is exercised before the expiration date.

(Sell -> Must Sell)

Buyer / Owner - Has the option to buy the underlying security at the strike price before the expiration date. (Buy -> Can Buy)

Short term notes issued by banks and B/Ds. Not issued by a traditional corporate borrower. Usually pay a coupon rate above prevailing market rates. Considered structured products. The buyer may have to purchase shares of an underlying asset at a fixed price. (Underlying Call??) The underlying asset may be an equity security unrelated to the issuer or a basket of stock, or an index. The B/D is willing to pay the higher coupon rate to guarantee the purchase of the underlying asset.

The investor is required to purchase the underlying asset at the predetermined fixed price if the asset falls below a price known as the knock-in level. If the investor has to purchase the underlying security, they will incur a loss.

These securities are only suitable for investors who understand their inherent risk.

Interest payment date = 6/1/2015

Purchase Date = Thursday 9/15/2015

Settlement Date = Tuesday 9/20/2015

30 days / month  =>

3 months = 90 days

19 days (settlement - 1) + 90 days = 19+90 = 109 days

5000*.1*109/180=302.78

Note: Bonds in default and Zero-Coupon Bonds do not accumulate interest

Corporate Bonds - Interest (including accrued interest) is subject to federal, state, and local taxation in the year received at the investors tax bracket.

OID Securities - Original Issue Discount - Investors are required to adjust their tax basis annually to account for the discount and they are taxed annually on the "income." For example - a zero-coupon bond purchased@60 with 20 years until maturity will have its cost basis adjusted upward each year by 2 points

[(100-60)/20], and the accreted amount is treated/taxed as ordinary interest income. (This rise in cost basis is not actually linear, but it can be assumed to be linear for the exam) This phantom income can be avoided by purchasing zero-coupon bonds in tax deferred accounts (or by purchasing muni bonds.) Any capital gain or loss is calculated against the bond's accreted cost basis.

SMD Securities - Second Market Discount Securities. These are discunted when they are obtained on the market. There will be a taxable gain at maturity that will be reported as ordinary income.

Premium Bonds - The cost basis of bonds bought at a premium is also adjusted on a yearly basis through a process called amortization - BUT the downward adjustment cannot be claimed as a loss. If sold prior to maturity any capital gain or loss will be calculated against the bond's adjusted cost basis.

1. Funded Debt / Capital Market Securities
2. Money Market Securities / Short Term Debt Securities

1. Debt with a maturity of more than one year.
2. Debt with a maturity of less than one year. Usually maturity ranges from overnight to a few months. Most of these are not required to register under the Trust Indenture Act of 1939 since their maturities do not often exceed 9 months.

Since the closer the investor is to needing cash, the less risk s/he can take with their principal, the funds should be held in money market positions if price stability is desired.

Any associated person of a broker dealer primarily engaged in municipal underwriting, trading, sales, financial advisory and consulting services, and research or investment advice on municipal securities. Registered Reps who recommend Muns to retail investors are generally excluded from this definition, unless munis are being solicited from issuers.

These professionals are not allowed to make any political contributions >$250 lest they incur a 2 year ban. If they cannot vote for the official, then they cannot make any contribution. Spouses can do whatever as long as the contribution is not from a jt acct. If this professional makes a larger contribution than what is allowed, the entire firm is banned for a 2 years.

• Commercial paper
• Bankers' acceptances
• Negotiable certificates of deposit
• Federal funds
• Repurchase Agreements (Repos)

These are all examples of what type of security?

• P-1 (Prime 1) is the highest, P-2 and P-3 are intermediate, and speculative commercial paper receives a rating of NP (Not prime)
• A1 (highest) to A3
• F1+ (highest) to F3

Used to facilitate foreign trade. If a company in Country A (CA) wishes to pay for an imported product after delivery, they can issue a time draft secured by a letter of credit from a bank in CA. Company B importing the product can hold the draft until it is due, or cash it immediately at a bank at a discount. This bank then has the draft guaranteed by the issuing bank and it is now called a ______________. The bank can hold it until it is due, or can sell it in the market.

___________s are actively traded and are considered safe sine they are secured by both the issuing bank and by the goods originally purchased by the importer.

Repurchase Agreements (Repos)

Reverse Repo / Matched Sale

In this sort of agreement, a dealer sells securities, usually T-Bills (government backed money market alternatives), to another dealer and agrees to repurchase them at a specific time at a specified price. This is basically a collateralized loan. The second dealer (the lender) receives the difference between the purchase price and the resale price of the securities in return for making the loan.

When a dealer purchases securities and agrees to sell them back to the other dealer at a specific date and price. The first dealer would lend money (with securities as collateral) to the second dealer and earn the difference in sales prices.

These transactions are typically short-term, most being overnight transactions.

Step Up CDs

Step Down CDs

1. These initially offer a lower interest rate than other CDs of the same maturity, but the subsequent coupons will be higher.
2. These initially offer a higher interest rate than other CDs of the same maturity, but the subsequent interest payments will be at a lower rate, and they can be adjusted more than once.

Banks and savings and loans issue time deposits carrying fixed rates of interest that mature after a specified period. While most of these time deposits mature in a year or less, the minimum maturity is 7 days, and there is no maximum. Holders of these time deposits are penalized if they redeem them prior to their stated maturity.

These time deposits have a minimum denomination of $100K, but often trade in denominations of $1mil or more. There is an active secondary market for these securities. Because they often exceed $250K, they may only be partially insured by the FDIC.

Banks and savings and loans issue time deposits carrying fixed rates of interest that mature after a specified period. These time deposits mature from 2 to 20 years. Obviously, these are not considered money-market securities. Holders of these time deposits are penalized if they redeem them prior to their stated maturity.

 Risks:

• There may be limited liquidity, or potentially no liquidity.
• Investors may experience a loss of principal (but actually the penalty is from the interest, not the principal) if these securities are sold prior to maturity
• FDIC insurance may not cover the full investment
• Unique features, such as variable rates, step-ups and step-downs, may affect future interest payments.
• May be callable

Federal Funds (Fed Funds)

& Fed Funds Rate

1. Money borrowed overnight from one bank that cannot meet its federal reserve requirement from another bank that has funds available above and beyond the federal reserve requirement. This allows the bank with excess reserves to earn interest on those otherwise dormant funds.
2. The interest rate chaged on these overnight loans. This rate fluctuates on a daily basis and reflects the availability of funds in the system. This rate is a leading indicator of interest-rate trends. The federal reserve does not set this rate, but attempts to influence it through purchases and sales of government securities in the secondary market.

Due to deposits, withdraws, and loan demands, a bank may find itself with either an excess reserve position or a deficit reserve position. If a bank has excess reserves, it may lend additional funds to borrowers, including commercial banks that are in a deficit reserve position.

These short-term loans of excess reserves that banks lend each other are called the ______. The _____ is determined by supply & demand. Since _____ are short-term, they are considered money market instruments. Due to the short duration of the loan, the ______ is normally considered to be the most volatile interest rate. The effective ______ is published daily and shows the average rate charged the previous night for ______. Although the FRB does not directly set the ______, it does set a target. The open market operations of the FRB are designed to maintain the ____ within this prescribed range.

Nonmarketable / Nonnegotiable Treasury Securities

AKA Savings Bonds

These bonds may not be sold in the secondary market. They may only be redeemed by the US Government.

There are 3 types.

Series EE Bonds - Up to 30 year investments, denominations of $50 to $10,000. The goal is for the value of these bonds to at least double over time. Prior to May 1, 2005, the interest rate was equivalent to 90% of the average yield on five year treasury bonds during the last 6 months. Now the rate is set for the first 20 years at purchase, and then adjusted on the 20 year anniversary to ensure that the bond value doubles before 30 years are up. The fixed interest rate for new savings bonds is calculated twice a year. For Ex. Interest rates of these bonds are currently at 0.3%. This means for 20 years you will get this interest rate, then on the 20th anniversary the interest rate will be adjusted to ~7% to make sure the initial amount put in is doubled. Tax on interest can be deferred until the bond either matures or is redeemed. 

Interest is added to the bond every month. and compounded semiannually.

Series I Bonds - Up to 30 year investments, denominations of $50 to $10,000. Interest rate is reset twice a year depending on the rate of inflation. Tax on interest can be deferred until the bond either matures or is redeemed. Interest is added to the bond every month. and compounded semiannually.

Series HH Bonds - 20 year investments. Face values ranging from $500 to $10,000. Pay interest semiannually. 

These may be sold in the secondary market:

• Treasury Bonds
• Treasury Notes
• Treasury Bills
• Treasury Separate Trading of Registered Interest and Principal Securities (Treasury STRIPS)
• Treasury Inflation-Protected Securities (TIPS)
• Treasury Cash Management Bills (CMBs)

Both referred to as Interest-Bearing Securities. Both sold in denominations that are multiples of $100*n with n>=1. Both currently issued in Book-Entry form. Both quoted in increments of 1/32. For ex: 18:18 = 18 18/32, and a change of -11 = -11/32.

1. Issued with maturities of >10 years.
2. Issued with 2 years <= maturities <= 10 years.

Interest bearing, marketable securities whose principal is adjusted based on changes in the Consumer Price Index (CPI.) If inflation occurs, then the principal increases accordingly. If deflation occurs, the principal will decrease. Upon maturity, this security pays max(inflation_adjusted_principal, original principal)

This seems like a really good deal!

Downside: The adjustment made each year is taxed as ordinary income at the federal level. Interest Payments are also taxed at the federal level. Whatever, these are still awesome.

Note: If deflation occurs, the adjustment to principal can be reported as an ordinary income tax loss IF the total loss is less than the total gain from interest since the owner obtained this security. Note2: please do the math to figure out when the loss could exceed the interest gain.

Measures the rate of inflation by measuring the prices of a fixed basket of goods bought by a typical consumer. If prices are rising, then the economy is experiencing inflation. Inflation occurs when the demand for goods and services in the market increases at a faster rate than the supply of these items.

Inflationary periods are usually characterized by rising interest rates. Interest-rate-sensitive stocks, such as utilities, and financial service companies, react to changes in interest rates. Since utility companies are highly leveraged, it becomes more expensive for these companies to raise money when interest rates increase. Interest charges increase, causing a drain on earnings, resulting in a decline in prices of these securities.

Historically, equity securities or other related products such as equity mutual funds, equity ETFs and variable annuities have provided the best protection against inflation. Inflationary risk is also referred to as purchasing-power risk.

Not all equities will hedge against inflation risk since investors assume the FED may raise interest rates to curb inflation (???). If the Fed raises rates, consumer borrowing and consumption may fall. This will negatively affect cyclical companies. Also, under the dividend discount model the net present value of earnings would be reduced since a larger discount rate would be applied. (???)

Historically, certain commodities such as gold and silver have performed well during inflationary periods. Customers can gain exposure to these asset classes through direct investments in commodities or futures, or in derivative products such as ETFs and MFs.

Fixed-income securies are more vulnerable to inflation. Inflation represents a dual risk for bonholders -- Interest rates rise causing the market price of their holdings to fall while the purchasing power of their interest payments also decreases. If higher rates are anticipated, bond investors will move to shorten maturities (decrease portfolio duration) to mitigate the effect of downward pricing pressure. Some bondholders may also try to innoculate their portfolios by purchasing inflation-indexed bonds such as TIPS.

The real interest rate is the rate of interest an investor expects to receive after allowing for the decline in his purchasing power (inflation). This rate is computed as:

Nominal Yield - Inflation Rate.

Remember:

Nominal Yield is the interest rate of the bond.

This is one of the reasons why bond investors demand higher nominal returns during an inflationary period -- they are factoring in the decline in their future payment's purchasing power.

Deflation is a persistant and appreciable decline in the general level of prices. If the supply of goods and services was greater than the demand for those items, then producers would need to lower their prices to compete for the limited demand. If this was the case on a broad scale, deflation would take place.

Deflation should not be confused with disinflation. While deflation is a drop in prices, disinflation is a reduction in the rate of inflation. (??? How is this different? Inflation is computed based on the prices of items...... Oh right, disinflation is a reduction in the rate of inflation, but prices are still being inflated. Got it.)

Stagflation is a prolonged period of a high rate of inflation at the same time as a high rate of unemployment. This does not happen often since high unemployment usually leads to a period of low inflation or even deflation (falling prices) and the possibility of a recession. A period of low unemployment usually leads to rising prices and increased inflation.

DEFLATION IS OFTEN CAUSED BY A REDUCTION IN THE SUPPLY OF MONEY OR CREDIT, INTEREST RATES TREND DOWNWARD

INFLATION HAPPENS WHEN THERE IS TOO MUCH MONEY CHASING TOO FEW GOODS. THIS LEADS TO THE RISE IN PRICES OF GOODS AND SERVICES. HIGH INFLATION USUALLY ACCOMPANIES HIGH INTEREST RATES.

Mature in <= one year. Only issued in Book-Entry Form. These securities are always sold at a discount and do not make interest payments. Referred to as discount securities and non-interest-bearing securities.

Quoted on a discounted yield basis, thus bid > asked. A higher discount yield indicates a lower buying price. The Ask Yield indicates the bond or coupon equivalent yield, which allows investors to compare the yield on these securities with the yield available on other interest-bearing securities. Ask Yield is always > Discount Yield. ( for ex, a discount of $200 from a $1000 security of this type would have a discount yield of 20, but the annual ask yield is 200/800 * (between 12 and 1) >= 25. )

These securities were issued by broker dealers but backed by US Treasury Notes and Bonds. B/Ds took the interest payments from the US Treasury Securities and sold these securities as Zero Coupon Bonds. 

General versions of these securities are called Treasury Receipts, which include STRIPS.

Treasury STRIPS

(Separate Trading of Registered Interest and Principal Securities)

 The treasury department issues these. Dealers may purchase T-Notes and T-Bonds, and separately resell the coupon and principal payments as zero-coupons after requesting the treatment through a federal reserve bank.

These securities are sold at a discount, the discount can be accounted for by the withheld interest payments. These securities are quoted on a yield basis.

Regular way settlement for treasuries is 1 business day => Wednesday, March 9 is the settlement date. December 1 maturity => semiannual payment on June 1.

31+31+28+8 = 98 days accrued interest. 

January - 31

February - 28

March - 31

April - 30

May - 31

June - 30

July - 31

August - 31

September - 30

October - 31

November - 30

December - 31

3 or 6 month (AKA 13 & 26 week) T-bills are auctioned on Monday and 4 week bills are auctioned on Tuesdays. All bills are issued the Thursday after the auction. These bills are all auctioned weekly.

T-bills a year in length will be auctioned every 4 weeks on tuesday and they are issued on thursday.

Two and five year notes are sold monthly (the auction date varies) and they are issued at the end of the month.

Ten-year Treasury notes & 30-year treasury bonds are sold quarterly (Feb, May, Aug, Nov) and they are issued on the 15th of the month.

1. Competitive Tenders
2. Noncompetitive Tenders
3. Dutch Auction

1. Large securities firms which submit offters to buy Treasuries to the Federal Reserve Board. These firms specify the price and/or yield at which they are willing to buy the Treasuries.
2. An individual who wants to purchase Treasuries submits one of these. These bidders are then guaranteed a security (these orders are filled first), but they must agree to the yield and price determined by the auction.
3. The large securities firms bid against each other at this auction, and then the individuals who submitted #2 will pay the price determined by the bids of the large securities firms. The winning firm is also able to buy Treasuries at this price. This single price auction process is called a _______ auction.

include debt instruments issued and/or guaranteed by federal agencies and by GSEs (Government Sponsored Enterprises.) These securities are unrated, but they can be assumed to be AAA. They are perceived to be very safe investments because although they are not backed directly by the federal government, they are backed by agencies created by the federal government, and it is assumed that the fed would not allow these agencies to default on their obligations.

issued in book-entry form and quoted in increments of 1/32nd of one percent. yields are somewhat higher than for corresponding U.S. Treasury securities (which to me implies that they are less safe, but that's just me)

Appropriate for conservative customers. These are also very liquid, so there is little, if any, marketability risk. Many of these instruments pay interest monthly, which gives them an advantage over US Treasuries.

these are the direct arms of the United States govt. any securities they issue or guarantee are backed by the full faith and credit of the U.S. government.

This includes GNMA AKA Ginnie Mae (Government National Mortgage Association), which is part of the Dept of Housing and Urban Development. Its purpose is to provide financing for residential housing. Interest paid on GNMA securities are subject to alllll the taxes, even though their securities are direct obligations of the US govt.

GNMA issues mortgage-backed securities, participation certificates, and modified pass-through certificates. GNMA guarantees monthly payments to the owners of the certificates, even if it has not been collected from the homeowners. Mortgages in the pool have a maturity of 25 to 30 years. The average life of the pool tends to actually be from 12 to 14 years due to prepayments, foreclosures, and refinancings.

Publicly chartered but privately owned. Created by congress to provide low-cost loans for certain segments of the population.

This entity issues securities through a selling group of dealers. The proceeds of the offering are lent to a bank or other lender. The bank then lends the money to the individual seeking the financing (for ex: students, homeowners, farmers.)

Their securities are not backed by the US Govt, however, their default risk is considered minimal.

Some examples:

• FFCBs (Federal Farm Credit Banks)
• FHLBs (Federal Home Loan Banks)
• SLMA or Sallie Mae (Student Loan Marketing Association)

Provides funds for three separate entities: Banks for Cooperatives, Intermediate Credit Banks, and Federal Land Banks. These all make agricultural loans to farmers. 

Consolidated Systemwide Banks of this type issue short-term discount notes and interest-bearing bonds with both short and long maturities. Interest paid on these obligations is subject to federal taxes, but exempt from state and local taxes.

There are twelve of these. They help to provide liquidity for savings and loan institutions which may need extra funds to meet seasonal demands for $$$. THe two types of securities they issue are discount notes which have maturities of less than 1 year, and consolidated bonds, which have maturities from 1 to 30 years. 

The securities issued by these are not backed by the US govt, but the Treasury is allowed to by up to $4 billion of this entity's issues. Interest paid on these securities is subject to federal taxes, but is exempt from state and local taxes.

Provides liquidity to student loan makers and financing for state student loan agencies. Authorized to deal in student loans insured in the federal GSLP (Guaranteed Student Loan Program) as well as uninsured student loans. Also lend funds directly to educational institutions. 

Originally created as a GSE, but it is now a private company and its stock is listed on the Nasdaq (?!?!!?!)

Debt issued by this entity is not guaranteed by the US govt. Interest paid on these securities is subject to federal taxes, but state and local taxation of interest varies by state. Although these securities are not backed by the full faith and credit of the U.S. govt, this entity maintains a direct line of credit w/ the US govt.

Debt instruments secured by pools of home mortgages. The agencies that issue these securities include the the FHLMC or Freddie Mac (Federal Home Loan Mortgage Corporation), FNMA or Fannie Mae (Federal National Mortgage Association) and the GNMA or Gennie Mae (Government National Mortgage Association.)

Example:

• Pass Through Certificate

Provides liquidity to federally insured savings institutions needing extra funds to finance new housing, especially when credit is tight (what's that mean? high interest rates??)

This is done by purchasing residential mortgages from the savings institutions.

Money is raised by issuing mortgage-backed bonds, pass-through certificates, and guaranteed morgage-backed certificates. None of these securities are backed by the US Government, but they are backed by other agencies and the mortgages purchased by Freddie Mac. Interest is subject to alllll the taxes.

Mortgage backed securities (pass through certificates issued by Fannie Mae and Freddie Mac in particular) are subject to this risk. It is similar to call risk. Because of this risk, cash flows from mortgage backed securities can be highly unpredictable.

Bonds and Notes with semiannual interest payments and a fixed maturity date issued by Fannie Mae and Freddie Mac are not subject to this risk.

Typically this risk is prevalent during low interest rates due to refinancing possibilities.

These are privately issued corporate mortgage backed derivative securities. They are classified as derivatived because their value is based on underlying mortgage securities. The interest and principal payments from the mortgages are used to create various classes of bonds called tranches. Each tranche has a different rate of interest, repayment schedule, and priority level. These securities allow investors to choose the yield, maturity structure, and risk exposure that best meets their needs. The tranches with the greatest risk pay the greatest returns. These securities are usually secured by Fannie Mae, Gennie Mae, and Freddie Mac pass-through securities but can be backed by pools of mortgage loans. These assets are placed in a protective trust for the exclusive benefit of the bondholders.

These securities are usually highly rated because of the quality of the underlying collateral and the safety provided by the trust. They are issued in denominations of $1000. Interest payments are generally paid monthly and are taxable on allll the levels. The principal payments are considered a return of capital and are NOT taxable.

Unlike treasuries and agencies, these securities are subject to the registration requirements under the act of 1933 and the Trust Indenture Act of 1939. Ongoing filings are required by the Act of 1934.

Types:

1. "Plain Vanilla" - Simplest. Each Tranche receives interest payments, but only one tranche at a time receives principal payments. This makes Tranche 1 more susceptible to prepayment/contraction risk than Tranche 3, but makes Tranche 3 more susceptible to extension risk than Tranche 1.
2. PAC (Planned Amortization Class) - As long as mortgage prepayment speeds are within a certain range, these tranches can provide a predetermined schedule of principal repayments. This greater predictability of maturity is accomplished by the existance of os a PAC Tranche which gets the top priority for principal repayments, and there is also a companion or "support" tranche which has lower priority that is used to pick up excess principal.
3. TAC (Targeted Amortization Class) - Provide protection only from contraction risk (shorter maturity schedule) but not extension rish (longer maturity schedule)
4. Companion or Support Bonds - These absorb the prepayment risk that has been reduced in the PAC and TAC tranches. These have greater volatility of cash flow and a high variability of average life. Holders are compensated for this risk with higher yields.
5. Z-Tranches AKA Z-Bonds - deferred interest bonds that have the longest average life of any tranche. During the initial phase in the life of the Z-tranche, the bond provides no cash flow. Interest will instead compound as with a Zero-Coupon Bond. Once all the other tranches have been retired, interest and principal payments are then made to the Z-tranche.
6. PO (Principal Only) Securities - Mortgage Bonds that are created by stripping the interest from the underlying mortgage. Sold at a deep discount to face value. The face value is ppaid to investors through scheduled and early payments of principal. So faster prepayments lead to a more rapid return of principal and therefore a higher yield.
7. IO (Interest Only) Securities - Interest only bonds receive some or all of the interest portion of the underlying collateral and little or no principal. As the principal payment is paid on the underlying mortgages, the cash flow declines on the IO. Once the principal of the underlying mortgages decreases to zero, no further payments are made on the IO. These increase in value when prepayment speeds are slow.
8. Floating-Rate Tranches - These have interest rates that are periodically reset to a margin above an interest-rate index, such as LIBOR or COFI (Cost of Funds Index), subject to a cap and floor rate. If the interest rate has an inverse relationship to the index it is called an inverse floater. If the interest rate moves in the same direction and is adjusted by more than one basis point for each basis point change in the index, it is called a super-floater. These are suitable investments for a rising rate environment.

• All correspondence sent to more than 25 investors must have the full name - Collateralized Mortgage Agreement - in the title.
• All correspondence sent to more than 25 investors must disclose that any applicable government agency backing relates only to the face value of the securities, not any premium paid. 
• Claims about safety, guarantees, product simplicity, and predictability must be accurate and not misleading.
• CMOs may not be compared to to any other types of investments, such as CDs.
• A statement must be included which indicates that a CMO's yield and average life will fluctuate depending on changes in interest rates and changes in the rate at which mortgage holders repay their mortgages.
• Required education materials - B/Ds must offer retail investors educational material about the features of CMOs and this material must include:

1. A discussion of the structure of a CMO which explains the different types of structures, tranches, and risks associated with each type of security. It is important to explain that two CMOs with the same underlying collateral may have different risks.
2. A discussion of the characteristics and risks of CMOs that details how changing interest rates may affect prepayment rates and the average life of the security, tax considerations, credit risk, minimum investments, liquidity, and transactions costs.
3. An explanation of the relationship betwwen mortgage loans and mortgage securities
4. Questions an investor in CMOs should ask before investing
5. A glossary if terms applicable to mortgage backed securities.

FINRA has created a standardized CMO print advertisement. All advertisements must be submitted to FINRA prior to release.

Retail communications must be approved before initial use by a principal and filed with FINRA within 10 business days of first use.

Similar in structure to CMOs, These are privately issued asset-backed securities that are issued as a bond that is collateralized by a pool of bonds, loans, and various other assets. Ownership of this type of security is usually in the form of a tranche (slice), with any given tranche carrying a different maturity and risk level. The return an investor can expect depends on the underlying assets contained in the pool. 

Generally not suitable for retail investors due to their highly complex nature.

Subject to filings under the Acts of 1933, 1934, and 1939. Interest on these securities is taxed at allllll the levels.

1. GNMA
2. FNMA
3. FHLMC
4. CMOs
5. CDOs
6. SLMA (in some states)

Basically, all the ones with fancy names + CDOs & CMOs

1. T-Bills
2. T-Note / T-Bond
3. TIPS
4. STRIPS
5. FFCBs
6. FHLBs
7. SLMA (in some states)

A client is seeking a safe investment that pays interest on a monthly basis. Which of the following securities would be an appropriate recommendation?

1. STRIPS
2. Preferred stock
3. Treasury notes
4. GNMA modified pass-through certificates

Which of the following would increase most in price if interest rates decline?

1. Short-term bonds selling at a discount
2. Long-term bonds selling at a discount
3. Short-term bonds selling at a premium
4. Long-term bonds selling at a premium

When interest rates decline, bond prices rise. The longer maturities rise more in price than the shorter maturities due to market risk. Bonds selling at a discount rise more sharply in price than those selling at a premium.

A bond with a high coupon would tend to trade at a premium and a bond with a low coupon would tend to trade at a discount. The bond with the high coupon will repay an investor sooner than a bond with a low coupon since the investor will be earning more money from the coupon on a bond selling at a premium. Therefore, bonds that have longer maturities and/or lower coupon rates will have a higher degree of interest rate risk. Due to this fact, if interest rates decline, the long-term bond selling at a discount will increase (in percentage terms) more than the long-term bond selling at a premium. Another way of looking at this is a $50 price change to a long-term bond selling at $900 is equal to a 5.55% change in price whereas a $50 price change in a long-term bond selling at $1,200 is equal to a 4.17% change in price.

If interest rates increase, which of the following securities has the most price change?

1. A Treasury note trading at a discount
2. A Treasury note trading at a premium
3. A Treasury bond trading at a discount
4. A Treasury bond trading at a premium

When interest rates increase, outstanding bond prices will decline in value. The prices of longer-term maturities will fall more than the shorter-term maturities. Treasury bonds have maturities of up to 30 years, whereas Treasury notes have maturities of up to 10 years. The prices of bonds selling at a discount will fall more sharply than those selling at a premium.

A bond with a high coupon would tend to trade at a premium and a bond with a low coupon would tend to trade at a discount. The bond with the high coupon will repay an investor sooner than a bond with a low coupon since the investor will be earning more money from the coupon on a bond selling at a premium. Therefore, bonds that have longer maturities and/or lower coupon rates will have a higher degree of interest rate risk. Due to this fact, if interest rates decline, the long-term bond selling at a discount will increase (in percentage terms) more than the long-term bond selling at a premium. Another way of looking at this is a $50 price change to a long-term bond selling at $900 is equal to a 5.55% change in price whereas a $50 price change in a long-term bond selling at $1,200 is equal to a 4.17% change in price.

Which of the following statements is TRUE concerning bonds issued by FNMA (Fannie Mae)?

1. They have yields that are lower than comparable Treasury securities
2. They are a direct obligation of the U.S. government
3. The value of these securities is highly dependent on current interest rates
4. They are generally not considered suitable for investors seeking income

A 5% $1,000 par value bond sells at $900 and matures in 10 years. What is the amount of each interest payment?

1. $25
2. $45
3. $50
4. $90

Which of the following CMOs has the MOST prepayment risk?

1. Sequential pay tranches
2. Accrual or Z tranches
3. Planned amortization class (PAC) tranches
4. Support or companion tranches

Four municipal bonds have the same maturity date. Which of the following bonds will cost an investor the greatest dollar amount when purchased?

1. A 4 3/4% coupon bond offered on a 5.10 basis
2. A 5 1/4% coupon bond offered on a 5.00 basis
3. A 5 3/4% coupon bond offered on a 6.00 basis
4. A 6 1/4% coupon bond offered on a 6.50 basis

Issued by states, territories, & possessions of the USA as well as other political subdivisions like counties cities school districts as well as public agencies such as authorities & commissions.

These do have default risk.. BUT they are generally not taxed at any level so long as the security was issued within state borders. They mayyy be taxed at the local level, but probably not.

Types: 

GOs / GO Bonds

&

Revenue Bonds

1. GOs (General Obligation Bonds)
2. Limited Tax GOs

1. May be issued to meet any and all needs of the issuer.

Secured by the full faith & credit & taxing power of the issuer. Only able to be issued by issuers with the power to levy & collect taxes.

The issuer of these bonds may be restricted in the amount of debt the issuer is able to incur, you've heard of the debt ceiling right? 

Constitutional powers to issue these bonds are derived from the state constitution. If the issuer lacks constitutional power to issue the bond, they may issue the bond with Statutory powers, ie, by passing a law granting them the power to issue the bond. (may require voter approval)

Typically secured by income, gasoline, excise & other taxes collected on the state level.

For local jurisdictions such as counties & cities, the most common source of tax revenue is levies on real property (Ad Valorem Taxation). School taxes also. Also nontax revenue such as parking fees, park & rec expenses, licensing fees.

2. Bonds that are issued by certain government entities like school districts which have a legal limit on the tax rate they may levy. 

As opposed to Unlimitied bonds of the same type, which are issued  by government units that have no legal limitation on their power to tax. Most are of this type.

Issued By: States or local municipalities

Issuance requires: Voter Approval

Source of funds backing bonds: Taxes, local - property tax, state - income, sales & other taxes.

Provide funding for: Roads, parks, schools, govt buildings, general operating expenses of a municipality and other state collected taxes.

Analysis should consider: Economic character of community, Assessed property values, Employment rates, Industries that constitute the community's employment, Issuer's fiscal responsibility, Existence of unfunded pension liabilities, Debt statement.

1. Debt Service
2. Level Debt Service

1. the total interest and principal payments owed to bondholders
2. When the annual payments above are consistently the same amount.

When evaluating this risk, analysts will look at factors such as:

• overal economic health of the community (changes in property values, largest employers, avg income, & other demographic info (see below)
• tax burden & source of payments
• budgetary structure & financial conditions of the issuer
• existing debt ( debt per capita, overlapping debt )

Demographics - a growing population is a sign of economic strength, declining population is a sign of deterioration in the tax base - but don't forget suburbs. Diversification of the industries of the employers signals ecomonic strength.

Nature of the Issuer's Debt - If the issuer has not been fiscally responsible in the past, it is unlikely that their attitudes have changed since then. Does the municipality use the debt to build new roads out to the suburbs (stimulating growth) or do they issue debt to pay off existing debt / increase spending in a weak local economy? Did they structure repayment serially or as a term issue? Future financing is better than a reactive financing to support an overburdened infrastructure.

Fiscal Responsibility - Is the budget balanced? Are rainy day funds created for use in business cycle downturns? Did the past 5 years show budget surplusses? Does the municipality reduce expenditures by monitoring the conditions upon which services are provided?

Financial Condition - if this is sound then the government entity is able to meet all its obligations to creditors, employees, taxpayers, suppliers, & others. Measuring the financial resources necessary to make payments as they come due determines this.

Unfunded Pension Liabilities - if these are pensions that are underfunded, this negatively impacts the quality of the issuers debt.

Ability to Collect Taxes - If the community's taxing power is limited, this positively influence these bonds because the projected revenues will service the already issued debt. Fiscal responsibility is imposed & the creditworthiness of the issuer is enhanced.

Other Red Flags:

• Tax Collection Record - A poor collection record may be a red flag indicating an inefficient local government & this results in bonds with low credit ratings.
• Property Taxes that are Increasing in the face of a decreasing population
• An increasing tax burden on the population in comparison to other regions
• GO debt that is increasing while property values remain stagnant
• Lawsuits against the municipality

 The debt statement is also looked at.

Direct Debt

&

Net Direct Debt

1. All the debt (bonds & notes) issued by the municipality
2. Does not include revenue issues or note issues. Includes only the GOs (bonds supported by taxation)

long term debt + short term debt + overlapping debt

Typically issued to fund a specific project such as a bridge or road, with cash flows from that project (tolls, usage fees, etc) pledged to repay bondholders. 

Can be used to finance airports, water & sewage systems, bridges, turnpikes, hospitals, etc.

Considered riskier than GOs since revenues may prove insufficient to fund debt service.

Issuers can be a commision or authority or a state govt or a local govt or an authority. Issued when voter approval for GOs cannot be obtained, or when limitations on debt prevent the municipality from issuing the bonds.

A feasibility study will be conducted to determine if the project will be competitive and able to generate revenues. An accounting firm is usually retained to help determine if the revenues will be sufficient to cover expenses and debt service. A consulting engineer is also hired to present a report to determine if the project can bring in the needed revenues.

Issued By: States or local governments, an authority, or agency

Issuance requires: Feasibility Study

Source of funds backing bonds: Collected revenues generated by the financed project

Provide funding for: Airports, water & sewage systems, bridges, turnpikes, hospitals etc.

Analysis should consider: Debt service coverage ratio, Bond's indenture, Covenants, Flow of funds.

1.  Housing Revenue Bonds - 
2. Dormitory Bonds - 
3. Health Care Revenue Bonds - 
4. Utility Revenue Bonds - 
5. Transportation Bonds -
6. Special Tax Bonds - 
7. Special Assessment Bonds - 
8. Moral Obligation Bonds - 
9. Education Bonds - 
10. Lease Rental Bonds - 
11. COPS (????) (Certificates of Participation) - 
12. IDR (Industrial Development Revenue)Bonds & PCR (Pollultion Control Revenue) - 
13. AMT (Alternative Minimum Tax) Bonds AKA Private Activity Bonds - 
14. Taxable Municipal Bonds - 
15. BABs (Build America Bonds) - 
16. Double-Barreled Bonds - 
17. Advance-Refunded Municipal Bonds AKA Prerefunded or Defeased Bonds - 
18. Escrowed to Maturity Bonds - 
19. Parity Bonds - 

1. help fund housing for moderate income families.
2. paid back with a portion of a student's tuition
3. for the construction of nonprofit healthcare facilities
4. used to finance utility systems owned by a government unit.
5.  used to create airports & other transit systems
6. payable only from the proceeds of a special tax ex: an excise tax on gasoline.
7. payable only from an assessment on those who directly benefit from the facilities.
8. If revenues are not sufficient to pay back this bond, the govt is morally obligated to help cover the difference.
9. secured by repayment of student loans, ins payments made by the govt, & money established by the bond's indenture.
10. One municipality leases a facility to another, the lease payment pays back the bond.
11. A method of monetizing existing surplus real estate through a lease that does not legally constitute a loan, thereby eliminating the need for public referendum or vote.
12. issued by a municipality & secured by a lease agreement w/ a corporation, issued to build a facility for a private company.
13. If the bondholder is subject to the AMT, these must be taxed at the federal level. These bonds use >=10% of bond proceeds to finance a project that will be used by a private entity & >= 10% of bond proceeds will be secured by property used in the private entity's business. Least suitable for a client that is subject to the AMT.
14. Not exempt from federal taxation, usually have higher yields to make up for this.
15. This program ended in 2010. They were issued under the American Recovery and Reinvestment Act of 2009. Designed to assist municipal issuers in raising funds for infrastructure projects. 35% of interest was covered by the US Govt.
16. Backed by a specific revenue source and the full faith and credit of a GO bond issuer (who has taxing powers)
17. outstanding obligations that have been collateralized by US Govt Securities. These will usually be paid off on their next call date.
18. The same as above, but they do not have a call feature.
19. Two or more issues of revenue bonds are backed by the same pledged resources.

Debt Service Coverage Ratio:

Annual Gross Revenue - Maintenance Expenses

Annual Debt Service

>=1 is good.

Trust Indenture Covenants

• Rate Covenant - issuer pledges to maintain rates at a level sufficient to meet operation and maintenance costs, debt service, and certain reserve funds.
• Maintenance Covenant
• Insurance Covenant
• Financial Reports and Audits
• Issuance of Additional Bonds (yea or nay?)
• Nondiscrimination covenant - no one gets special rates
• Insurance Rates - Catastrophe Calls

Short term issues normally used to assist in financing a project. They may also help a municipality manage its cashflow. Municipal notes are interest bearing securities that pay interest @ maturity.

1. TANs (Tax Anticipation Notes) - issued to finance current municipal operations in anticipation of future tax receipts from property taxes. GOs.
2. RANs (Revenue Anticipation Notes) - issued to finance current municipal operations in anticipation of federal or state subsidies. GOs. 
3. TRANs (Tax and Revenue Anticipation Notes) - TANs & RANs issued together
4. BANs (Bond Anticipation Notes) - Issued to obtain financing for projects that will eventually be financed through the sale of long-term bonds.
5. GANs (Grant Anticipation Notes) - Issued in expectation of receiving funds in the form of grants from the federal govt.
6. CLNs (Construction Loan Notes) - Issued by munis to provide funds for construction of a project that will eventually be funded by a bond issue.

Moody's Investment Grade 1 (the best) rating for municipal notes.

MIG 2 is second best

MIG 3 is 3rd best

SG is speculative grade

Similarly there is SP-1 SP-2 SP-3 for Standard & Poor's muni note ratings, with 3 being speculative.

Long term variable rate municipal securities that are marketed as short term investments. Priced by dutch auction. The interest or dividend rate is reset every week, 4 weeks or 5 weeks.

3 types of auction orders:

1. Hold order

2. Bid

3. Sell order

If no bid is placed that is sufficient to meet the quantity that is exposed for sale, the auction is considered a failure and everyone keeps their shares, but the interest rate is set as the maximum allowable in program docs.

The liquidity of these securities is uncertain, because the auction could fail.

A long term municipal security that is marketed as a short term investment. It will adjust its interest rate daily, weekly or monthly; and in many cases this allows the owner to sell or put the security back to the issuer or third party on the date that a new rate is established. The new rate is set by the dealer at a rate that allows the security to be sold at par value.

Muni bonds <=$10k per issue that are meant to encourage banks to invest. For banks, 80% of the interest carrying cost being paid to depositors on the funds used to purchase the bonds can be deducted against its income for tax purposes.

For ex. Bank account holders deposit $10k, bank invests that $10k in these types of bonds. The bank is paying the bank account holders some amount of interest, lets say 14%. This type of bond is paying the bank 10% interest, and the bank is allowed to deduct 8% of the principal against its income.

1. corporate
2. us govt 
3. muni
4. territorial

Interest subject to fed tax?

1. Yes
2. Yes
3. No
4. No

Interest Subject to State Tax?

1. Yes
2. No
3. Yes/No (mostly no, depends on the state)
4. No