CHAPTER ONE:

Number of votes= shares owned times vacancies on board

Statutory voting= must divide votes equally among candidates

Cumulative voting= divide anyway you want

Class b stock= non-voting

Company issuing new security= corporate charter + registration statement with the
SEC

Shelf registration= authorized shares can remain unissued for 2 years

Preferred stock= fixed income security

Participating preferred= get fixed preferred dividend + common dividend

Cumulative preferred= missed payments must be made up

ADR (American depository receipt) = bank holds foreign securities and receipts
trade in place(div. paid in U.S. dollar)

Warrant= long term call option

Standby underwriter= sells securities that were not sold through preemptive rights

Cumulative right value= (market price of stock-discount price)/(number of rights+1)

Ex- rights (without rights= (market price of stock-discount price)/(number of rights)

Stockholder cannot vote for dividends

CHAPTER TWO:

Bonds pay interest Semiannually (interest/2)

Indenture for a bond (deed of trust) = legal agreement between issuer and bond
holder (includes: maturity, par, rate, collateral, callable/convertible features and
trustee who delivers interest payments)

Bearer (coupon) bond= whoever holds it gets interest

Fully registered= no coupons, whoever is registered collects interest

Book entry bond= owner only receives a receipt, and automatically receives
payments through database

Term bond= bonds issued at the same time with the same maturity (called
randomly)(sinking fund)
Serial bonds= bonds issued at the same time with equal amounts maturing at
different dates (called by longest maturity first)

Balloon bonds= more bonds mature at a later date (called by longest maturity first)

Series bond= issued in successive years with the same maturity date

Sinking fund= bank account that issuer deposits money to pay off debt (term bonds
usually have mandatory)

Pre- refunded= issuer has deposited money needed to pay off the bond already in a
sinking fund

Refunding= issues new bonds to repay outstanding bonds

Senior bonds= paid first

Open ended mortgage bond= can borrow money using same property as collateral

Collateral trust= backed by stocks and bonds owned by company

Guaranteed bond= backed by the assets of the issuing company as well as a

second company

Unsecured bonds (debentures) = last to be paid in bankruptcy since no collateral

Unsecured bond (income bond/adjustment) = don’t pay interest until company

become profitable (bankruptcies)

Equipment Trust= backed by equipment (used by transportation companies)

Zero coupon= discount bond (interest + principal not received until maturity
(“trades flat”)

Bond in default= when interest payments are late

Eurodollar bonds= foreign securities which pay interest and principal in dollars

In bonds: a point= $10 and a basis point= $0.10

U.S. Bonds are quoted in 32nds (“95.8”=95 and 8/32) can be shown as 95:08 or 95-
08

Nominal yield (coupon rate) = face interest rate on bond (face interest x par)

Current yield= face interest/ market price

PR^ NY! CY! YTM! YTC! (!=down ^=up)

If bond is trading at par then premium, nominal yield (coupon rate), current yield,
yield to maturity and yield to call would all be equal

Junk bonds= moody Ba/ s+p BB

Corporate and muni bonds calculate interest using 30 day month 360 day year

Corp + muni bonds settle T+3 (business days)(360 day years)

U.S. bonds settle T+1 (actual days 365 day years)

First coupon if longer than 6 months= long coupon less= short

Accrued interest= add settlement date and then subtract from previous coupon
date
(assume 30 day months) (be careful to remember business days)

Calendar= Jan+1 Feb-2 Mar+1 Apr+0 May+1 June+0 July+1 Aug+1 Sep+0 Oct+1
Nov+0 Dec+1

Put bonds= right to sell bond back to issuer

Ex: ABC 7s015-20= 7% callable 2015 and matures 2020

ZR20= zero coupon maturing in 2020

Conversion ratio for bond= par (usually $1000)/ conversion price

Parity= stock and bond are trading equally (worth the same)

T- Bills= mature in 6 months or less (sold at discount +non callable) (not quoted in
32nds)

T- Notes= 1-10 year maturity (pay semi- annually)

T- Strips (receipts)= 10-30 year maturity (sold at a discount + don’t pay interest)

Non marketable: Series EE (DISCOUNT) +Series HH (semi annual interest)

Moral obligations= not directly backed by government

Mortgage Backed securities= Ginnie Mae ($25,000 min. + pays interest and
principal monthly) + Fannie Mae ($10,000 min.)/ Freddie Mac ($25,000 min.)

CMO= Diversifies between Fannie, Freddie and Ginnie (usually AAA)

PSA (public securities association)= Publishes statistics on prepayment + extension

risk

Prepayment= early payment because of refinancing (interest rate decline)

Extension risk= bonds repaid later than expected (interest rate increase)

Plain vanilla Tranche= no special features

PAC (planned amortization class) Tranche= safest because has sinking fund

TAC (Targeted amortization) Tranche= sinking fund but is also callable

Companion (Support) Tranche= Absorbs risk of extension + repayment from other

tranches and there for has a higher interest rate and uncertain repayment date

IO (interest only) tranche= only pays interest never repays through principal

PO (principal only) tranche= pays principle but no interest

Z (zero coupon) tranche= longest maturity

Money Market= less than a year maturity

Capital market= Over a year

Commercial Paper= unsecured debt that is sold at discount and matures in under
270 days

Bankers Acceptance= Postdated checks used for import + export

Jumbo CD’s= minimum of $100,000 and can be traded like regular bonds (pays
interest)

Fed Funds Rate= rate of loans between financial institutions (fastest to change)

Effective Fed Fund Rate= average fed fund rate of all commercial banks

Libor= Average fed fund rate of foreign banks’ lending money to each other in U.S.
dollars

REPO (repurchase agreement) = overnight loan (up to 90 days) that is secured by

T-bills as collateral (fed lends banks)

Reverse Repo (matched sale) = banks lend to fed and hold T- Bills as collateral

Interbank market= unregulated market for foreign currency transactions

CHAPTER THREE:

Selling group= helps syndicate sell new issues without buying the securities (no
risk)

Underwriting agreement types:

1) Firm commitment= unsold securities are retained by syndicate

 2) Best effort= unsold securities returned to issuer----All or Non
3) Best effort= Mini- Max (minimum # issues must be sold)

Stand by rights= back up underwriter in case any left-over shares (only for stocks)

Primary Offering= authorized but previously unissued shares (within 2 years of

authorization)

Secondary Offering= treasury shares or shares held by insiders)

Combined offering=primary + secondary offering

Preliminary Prospectus (red herring) = Post SEC filing but pre-issuance

Prospectus = includes relevant info + earnings of current and 3 previous years +

use of money +business description + officers + potential benefits and risks (can’t
be used as an advertisement)

Final Prospectus = available after securities are issued

SEC puts a disclaimer on the prospectus saying: does not guarantee+ judge+
approve + recommend anything

Effective date= first day the security trades (decided by the SEC)

Investor buys security within 90 days after effective date in an IPO

Other types of offerings=within 40 days after effective date

New offerings must be paid in full (no margin) within the first 30 days

Trust indenture act 0f 1939= newly issued corporate bonds file an indenture with
the SEC

Rule 145= in the event of major change a company must file a new registration
statement with the SEC

Exemptions from listing with the SEC= U.S. securities+ muni + commercial paper +
non-profit +banks issues+ insurance and annuity policies+ rule 147 offerings (only
within corporations own state) +reg A offering ($5million or less within 12 months)
+ reg D (private placement/up to 35 unaccredited investors and unlimited
accredited)

Accredited investors= Financial institutions+ insiders and family or owners of more

than %10+ annual income over 200,000/ (300,000 joint) +Net worth over a
million+ Corporation worth over 5 million

Restricted stock= Private placement

Rule 144= Restricted stock must be held for at least 1 year

After waiting period you can sell up to %1 of outstanding shares or average weekly
trading volume of the last four weeks whichever is greater

Must file a 144 w/ sec when selling and it is valid for 90 days

If selling 500 shares or less worth $10000 or less then exempt from filing a 144

Portal Market (rule 144a)= able to sell before a year to a qualified institutional
buyer ($100mm+ in assets)

Blue Sky= Must be registered in the customers state

“Cooling off period”= 20 day period between registration of new issue and the
approval of the SEC

Green shoe clause= Underwriters can indicate interest for up to %15 more than
securities available

Rule 145= Major changes in a company must re-file with SEC

Order of allocation= Pre-sale/ syndicate/designated/member (“please give Dave

money”)

Takedown= Profit for syndicate members

Reallowance= profit of non-syndicate sellers

Concession= Profit for selling group member

Managers fee= Fee received by managing under writer for a sale by anyone

Spread= Takedown+ Managers fee

Western Account Syndicate (divided) = each syndicate member sells what they are
responsible for

Eastern Account (undivided) = If a firm sells all of their own they are responsible for
a percentage of the unsold (percentage of their allotment in respect to total offering
is reapplied to leftover shares)

Stabilization= Agreement to be a market maker

Market out clause= ability to withdraw from offering due to negative market
conditions

Sticky issue= hard to sell

Hot issue= easy to sell

Debentures must be filed with the SEC

CHAPTER FOUR

Unlisted Securities= only trade on the OTC

Muni +Gov’t bonds always trade on the OTC

Within the secondary markets:

1) First market= listed securities trading on an exchange

2) Second market= unlisted securities trading OTC
3) Third Market= Listed security trading OTC
4) Fourth market= Trading of securities between institutions without using a
broker-dealer
Instinet= reporting system for the fourth market

Broker (agent)= does not use own inventory to execute trades

Dealer (principal/market maker)= uses own inventory

A firm must disclose if they are a broker or dealer for each trade (on receipt) and
cannot be both for same trade

Commissions must be disclosed (markups/markdowns don’t have to be disclosed)

A specialist order of priority= 1) best price 2) which order was placed first 3) if same
time and price then bigger order goes first

Stopping Stock= Specialist guaranteeing a certain price (only done with public
orders)

Stops= immediately executed (becomes market order when triggered)

Limits= Specific price or better

Sop limit= when entered starts as a stop order and when triggered becomes a limit
order (wont execute until at a better price than order)

Buy limit and Sell stops (bliss) are reduced on dividend days (SLoBS remain the
same)

Inside the market= highest bid and lowest ask (does not include stops)

Size of the market= number of shares available “inside the market”

Specialist can only bid inside the market

Immediate or cancel order= fill as much as possible and cancel the rest
Discretionary order= order without prior verbal permission carried out by broker
(need power of attorney)

If an order does not include one of the following it is discretionary: which security/
buy or sell/ quantity

Not held order= order which the rep has the ability to decide when to execute an
order at a price he thinks is right (power of attorney is NOT needed) (can’t be
executed by specialist)

Either Or= Execute one order and cancel the other

Market on Close= Execute as close to the market close as possible (cancelled if not
executed at the close)

Market on Open= If order not executed on the opening price or better it is cancelled

Unsolicited order= customer order that rep never suggested

Tape A= NYSE listed stocks (shows all secondary market)

Tape B= Amex listed stocks (shows all secondary market)

Round lot= normal unit (100 shares)

ABC 9s15.50= 900 shares of ABC @ $15.50

.P/PR=preferred

.R/RT= Rights

.W/WT= warrant

.X=mutual fund

“SLD” on a ticker means a trade occurred out of sequence (can’t trigger stop or
limit)

Super dot= System that by passes floor brokers and goes straight to specialist
(used for 3 million shares or less and is only available to public customers) (Large
orders CANT be broken up)

NASQAQ is divided into two parts:

NASDAQ Global Markets= Largest and mostly actively traded stocks that are OTC
(majority of stocks) (can be bought on margin)

NASDAQ Capital Markets= actively traded stocks that don’t meet earning
requirements of NGM
Level 1= shows inside of the market

Level 2= shows all bid and asks entered

Level 3= Allows market makers to enter their own quotes

Super Montage= System used by NASDAQ to automatically execute orders of under

1 million shares (bigger orders may be broken down)

OTCBB (OTC bulletin board)= FINRA’s quotation system for non- exchange traded
securities

Pink sheet= newsletter for non- NASDAQ securities

Yellow sheet= newsletter for OTC corporate bonds

Blues list= newsletter for quotes of municipal bonds

Non-NASDAQ stocks are not marginable

Firm Quotes= entered by market makers

Backing Away= Failure to honor a firm quote

Subject (nominal) quotes= are subject to change

Workable indication= likely bid price

Firm with a recall option= used by a firm to give another broker-dealer a chance to
sell the firms inventory and then both firms split commission. (Recall= time the
lending firm, must give before taking back the loaned security)(firm cant change
quote)

Long sale= sale of security an investor owns

Reg SHO= uptick rule on short sales

Threshold Security= FINRA determined non- liquid security. (If sold short must be
delivered to buyer within 10 business days of settlement)

Tender offer= Arbitrage for Mergers and Acquisitions

Risk arbitrage= in anticipation of an acquisition or merger being short the buyer

and long the one being acquired

Selling short against the box= selling short a security you already own

Securities Exchange act of 1934= created the SEC and made price manipulation
illegal
Bonds are not shown on consolidated tape

CHAPTER FIVE

Progressive tax= more you make the more you are taxed

Regressive tax= flat rate

Capital gains= profit when selling a security above price you paid

Short term= Capital gains made in 1 year or less

If net capital gains loss you can deduct up to $3000 dollars per year against
ordinary income and rollover the rest (no limit to how much you can roll over)

Ordinary income= Interest on bonds+ dividends

Cash dividends are taxed a maximum of %15 if stock is held for more than 60 days

In order to calculate loss/gain for taxes you must determine LIFO or FIFO and match
the stocks sold with the first/last one bought

If claiming a stock as a loss cannot by back within 30 days (you can buy bonds+
preferred)

Tax (bond) swap= selling a capital loss bond and buying a new bond (higher coupon
rate/shorter maturity/ better rating) while using as tax write off

If corporation buys stock (common or preferred) of another company %70 of

dividends are tax free (if corp. owns over %20 then %80 tax free)

Up to $13,000 per year in gifts per person is tax free

Cost basis gets transferred if gain but if market loss then new cost basis of recipient
is market price on day of transfer (for gift and inheritance)

Withdrawals on retirement plans are taxed as ordinary income

Money withdrawn from a retirement plan before age 59 and a half has a %10 tax
penalty

Exempt from penalty if death or disability

Some plans allow early withdrawal in case of buying a 1st time home/ medical
expenses/ college tuition

Payout must start the April that the investor has turned 70 and a half (% 50 tax
penalties on what should have been withdrawn)
Qualified retirement plans= pretax dollars+ withdrawals are fully taxed at investors
tax bracket

Non-Qualified retirement plans= after tax dollars + withdrawals are only taxed for
money beyond contributions (capital gains) (both plans are only taxed after
withdrawal)

Keogh Plan (Hr-10)= self-employed income only + may deposit $49k per year and
up to %20 of gross income max.

IRA’s= for employed people+ max contribution of $5k w/ excess contribution taxed
an extra %6 + joint account treated like two single accounts with a $10k max

If covered by another retirement plan deductions are only possible for those making
under $56k or jointly making under $89k

Ira’s can only invest in securities and not: commodities/ life insurance/ stamp and
coin collections

Educational IRA (Coverdell)= $2k per child under 18 + must be used before student
turns 30

529 educational plan= by the state and similar to a Coverdell

SEP IRA= small business IRA where contributions are made by employer and
employee (all contributions are vested)

Vesting= pension benefits belong to employee even if they leave the company

Fixed annuity= fixed amount of payout

Variable annuity= variable and based on underlying portfolio

ERISA= act that regulates qualified retirement plans (only private pensions)

Defined contribution= variable benefit (based on portfolio)

Defined benefit= variable contribution

401k= percentage of salary is contributed by employee and sometimes employer

Profit sharing plans= percentage of company profits are placed in tax deferred
accounts for employee retirement

Deferred compensation= receives part of salary after retirement

Payroll reduction plan= part of employee salary is used to pay for mutual funds etc.
that the company has the ability to acquire at a cheaper price
Rollover= transferring between retirement plans (must be done within 60 days of
withdrawal) (have to wait one year to rollover again)

Trustee to trustee transfer is without withdrawal

Accretion= difference between market value and par(when buying at a discount)-

difference is split over time until maturity and every year that amount of accretion
is taxed as ordinary income and there is a new cost basis every time you add
accretion

Amortization= difference between market value and par (when buying at a

premium) - difference is split over time until maturity and every year that amount of
amortization may be written as a tax write off while lowering the cost basis yearly

CHAPTER SIX

Fundamental analysis=what to buy

Technical analysis= when to buy

Market risk= systematic risk

Business risk= non systematic risk which is based on company performance

Liquidity (marketability risk)= possibility of future illiquidity

Interest rate risk= possibility that interest rates will increase causing value of bonds
owned to decrease

Reinvestment risk= risk of dividends and interest received

Purchasing power risk= risk of inflation

Capital risk= risk of losing all money invested (options)

Regulatory risk= legislative risk

Assets= liabilities + equity

Current assets = assets that are convertible into cash within one year

Fixed assets= assets that are not easily convertible into cash (land + equipment)

Intangible assets= assets based on reputation of a company

Current liabilities= debt owed within the year

Long term liability= debt maturing in over a year

Working capital= current assets – current liabilities

Current ration= current assets/ current liabilities (ratio of over 2 means liquid)

Quick ratio (acid test)= quick assets( current assets- inventory)/ current liabilities
(ratio over 1 means liquid)

Net worth= total assets- total liabilities

Paid in capital= amount received over par for stock issue

Retained earnings= after expenses + interest+ taxes + dividends

Inventory turnover ratio= sales/ inventory cost (low turnover ratio means
inefficiency)

Read pages 173 - 177 (balance sheet + income statement + EPS ratios…) (empire
training institute)

Blue chip stock= high earnings and high dividends consistently for several years

Cyclical company= performance depends on economy

Counter cyclical= companies that do well when economy is slow

Defensive= company that remains stable regardless of the economy

Utilities= are high leveraged and have good ratings (stock price is sensitive to
interest rates)

PE= Market price / EPS

Growth companies have high PE’s

Fed controls monetary policy (12 regional fed banks)

Interest rate increase= decrease in money supply (tight money)

Reserve requirements= percentage of a banks money that can’t be lent out

Discount rate= rate fed charges banks for loans (lowest possible rate)

Fed funds rate= rate that banks and financial institutions charge each other (usually
overnight loans)

Call loan rate= rate that banks charge brokerage firms to use for customer margin
accounts

Prime rate= rate that banks charge their best customers (usually corporations)
Open market operations= most common tool that fed uses to control money supply
(controlled by the FOMC) Fed increases money supply by buying T-bills and other
securities from banks

M1= currency+ checking deposits+ NOW accounts (interest paying accounts)

M2= everything in M1 + savings + money market accounts

M3= everything in M2+ jumbo CD’s

Trade deficit= strong dollar + more imports than exports

Trade credit= weak dollar+ more exports than imports (more competitive)

Recession= mild 6 month decline in business and stock activity

Depression= 18 month economic decline

CPI= measures change in prices of consumer goods

Deflation= price of consumer goods decrease

Disinflation= when inflation rates decrease

Stagflation= increased inflation in a slow economy (price of commodities increase is

common cause)

Gross domestic product= sum of all goods and services produced in an economy
(considers inflation)

Disintermediation= people take money out of savings to put in to short term money
markets (tight money is common cause)

Fiscal spending= taxes and government spending and use towards controlling the
economy

Keynesian= theory that government should stay active through spending and
intervention to ensure economic growth

Supply side= theory that governments should stay inactive and let the economy
grow by itself

Monetarist= theory that money supply needs to be controlled for economy to

prosper

Moral suasion= when chairmen of the fed asks banks to expand or contract their
lending levels

Economic indicators:
 1) Leading indicators= how the economy is going to do: money supply/ stock
prices/ fed funds rate/ discount rate/ reserve requirements/ housing and new
construction+ unemployment+ orders for durable goods
2) Coincidental indicators= how the economy is performing right now: industrial
production+ personal income+ GDP
3) Lagging indicator= mirror leading indicators but reach peaks and trough at
later dates: prime rate+ call loan rate + corporate profits+ credit cards+
duration of unemployment

Contraction= high levels of consumer debt+ bearish stock market+ decreasing

GNP+ rising corporate inventories+ rising number of bond defaults and
inventories

Expansion then peak then contraction then trough

Whip theory= change in interest rates cause long term bonds to change more in
price than short term debt however short term debt changes more quickly

Breakout= when price breaks out of normal trading range by at least %3

Trading channel= area between resistance (upper portion of trading range) and
support (lower portion)

Advance-decline ratio= determines whether the majority of stocks are up or down

Odd lot theory= small investors are usually wrong so if odd lot volume increases
you should be bearish

Short interest theory= based on number of short sales because investors must
eventually cover their shorts (if shorts increase then bullish)

Random walk/ dartboard/ efficient market theory= every security is correctly priced
and undervalue/ arbitrage does not exist

Beta = volatility in respect to overall market (beta>1 more volatile if beta=1 then
equally volatile if beta<1 then less volatile)

Alpha(Sharpe ratio)= volatility of a stock in comparison to that companies

industry(large alpha means performed better than expected compared to its beta)

Accumulation/distribution line= tracks relationship between stock price and trading

volume

Moving average chart= line graph of prices of a security over a period of time

Capital asset pricing model= model that prices stock by evaluating risk to expected
return

Narrow based index= tracks performance of a particular industry

Broad based= tracks an overall market

S+P 500=500 listed and OTC common

Wilshire= largest index tracking 6000 listed and OTC

Russell 2000 = index of small cap

Lipper= mutual fund index

DJ composite= 65 common stock (63 NYSE and 2 OTC)

DJ: Industrial (30) transportation (20) utilities (15)

Circuit breaker=NYSE will restrict trading if DJIA moves up or down dramatically

Rule 80a= restricts program trading if DJIA changes up or down by more than 2%

Rule 80b= all trading is halted for a period of time because of dramatic decreases in
the DJIA

Decreases in DJIA:

1) Level 1= declines by> 10%

2) Level 2= declines by >20%
3) Level 3= declines by at least 30% exchange halts for remainder of the day

CHAPTER SEVEN

Self-regulatory organizations: NYSE +NASD= FINRA

FINRA cannot imprison since note affiliated with the government

MSRB= regulates municipal bonds (can’t enforce its own rules)

Maloney act= created the NASD

Securities amendment Act established the MSRB

Discretionary account= registered rep can execute trades without verbal approval
of client (needs written power of attorney)

Limited power of attorney= reg. rep cant withdraw securities or cash without
permission of customer

Full power of attorney= no restriction on transfer of assets

Corporate account needs: 1) tax ID of Corp. +copy of corporate resolutions+

corporate charter when opening a margin account
Trust account= grantor opens account for a beneficiary with the trustee managing
the account+ need a trust agreement when opening that specifies details on what
type of assets+ when to transfer

Transfer on death= investor designates a beneficiary which avoids going to court

upon death

Omnibus account= opened in name of reg. rep for customer

Uniformed gifts to minors account (UGMA)= 1 minor and 1 custodian per account+
minor is responsible for taxes (14 and over =pays at minors tax rate)+ registered in
name of custodian for the benefit of minor+ securities can’t be sold on margin or
sold short+ anyone can give cash or securities and the custodian cannot refuse+
custodian cannot allow rights received by account to expire+ custodian cannot give
anyone else power of attorney

UTMA= extension of UGMA that allows the account to receive art, real estate etc.

Fiduciary= anyone who makes decisions for another investor

Prudent man rule= fiduciary must act in the best interest of the investor (diversify)

Legal list= state guideline of investments for fiduciary accounts

If customer dies firm needs copy of the following:

1) Affidavit of domicile
2) Letters of testamentary
3) Death certificate
4) An inheritance tax waver

Joint with rights of survivorship= if one investor dies the remainder of the account
belongs to survivor

Joint with tenants in common= if one investor dies their portion is transferred to
their estate

Partnership account= if one partner dies: freeze account+ cancel open orders+
cancel power of attorney

Account transfer= customer must give notice to firms receiving assets+ new firm
notify old firm+ old firm must verify instructions within 3 business days of
notification+ old firm must deliver securities within 3 business days of verification

Street name accounts (numbered accounts)= accounts registered in the name of a

broker dealer with an ID# (can be changed to regular accounts at any time)

Reg rep needs written statement attesting to ownership of account

Margin accounts must be in street name

Transfer and ship = certificates are printed in the name of and delivered to the
investor

Transfer and hold= printed in name of investor and held by brokerage firm

Cash accounts are opened in street name or transfer and hold/ship accounts

All accounts need a street address but can have certificates mailed to a P.O box

Broker dealer can hold mail for 2 months if traveling and 3 months if over seas

Even if a customer has multiple accounts it is as if they have 1 account

Insiders= officers/directors/anyone with over 10% of outstanding shares/ anyone

who has access to non- public info and their immediate family

Control stock= stock held by insiders that was purchased publicly

Form 3= when buying enough stock to become an insider must notify SEC within 10
business days

Rules for insiders= all trades must be reported to SEC within 2 business days after
the trade by filling a form 4 (form 3= when becoming / form 4= after becoming)

Insiders cannot short their corporation

Insiders cannot sell short against the box unless covering their short position within
20 days

Insiders must hold onto their stock for at least 6 months (only if at a capital gain/
may sell at loss earlier)

NASDAQ Market watch= system that monitors unusual price and volume activity for
insider trading

Regulation FD (full disclosure)= insider information must be released to entire

public simultaneously (8k)

Max criminal penalty for insider trading= 1 million (2.5 million for a business) or
years in prison per violation

Max civil penalty= 3 times gains or losses avoided based on inside information or 1
million dollar fine (whichever is greater)

SEC may offer bounties of up to 10% of penalty charged

Trade date= date a trade is executed

Settlement date= day issuer updates its records and the delivery of certificates is
completed

Payment date= day that the buyer must pay for trade

Corp stocks+ bonds : settlement- t+3 and payment-t+5

Muni: t+3 for both

U.S. bonds: t+ 1 for both

Option: settlement t+1 payment- t+5

Cash trades always settle same day

Stocks+ corp. bonds+ muni= settle in clearinghouse funds

U.S. gov. bonds= settle in federal bonds

Extension from payment date may be acquired from NASD/ FED/ any exchange

Sell out= when customer fails to pay for trade by the payment date the brokerage
sells securities that customer did not pay for and the customer’s account is frozen
for 90 days

Buy in= when seller fails to deliver certificates to brokerage and the customer’s
account is frozen for 90 days

Sellers option= extension of normal settlement date arranged between firms (if
seller can deliver earlier than agreed upon then must give 1 day written notice)

Comingling= mixing a customer’s fully paid and margined securities

Inter positioning= executing a trade through a third party

Reg. reps can’t give or receive gifts of over $100

Free riding= buying a security with intention of selling a security to pay for trade
(freeze account up to 90 days)

Backing away= failure to honor a firms quote

Churning= excessive trading for the purpose of generating commission

Matching orders (wash sales)= illegal manipulation of the price of a security(trading

a security back and forth (painting the tape))

Front running= trading based on knowledge of an upcoming block trade

Pre arrange trades= a firm cannot make a deal with a client to buy back a security
at a fixed price

Trading ahead= firm cannot trade its inventory based on forthcoming research
reports unless unsolicited

Marking the close/ open= can’t manipulate the open/ close price

Paying the media= brokerage firms cannot pay employees of the media to affect
the price of a security

Freeriding and withholding= hot issues cannot be withheld for firm employees or
family members

Rule 2790= IPO’s can’t be sold to brokerage firms or affiliates (lawyers, accounts
etc.)

Telephone act of 1991= (excluding non-profit) calls to potential customers

(excludes current clients) can’t be made before 8 am and after 9pm of the potential
customers local time

Caller must give name +company name+ company address+ phone number

If person requests then must put on “do not call list”

Moonlighting= if receiving outside employment the employee must notify the firm

Private securities transaction (selling away)= if reg rep executes trades outside of
their employment they must notify their firm in writing and if compensated they
must receive permission in writing

If a reg. rep enters bankruptcy they must notify their firm. The firm must send them
an updated u-4 form

Office of supervisory jurisdiction= compliance office or any office in which

marketing/structuring/holding of assets takes place (needs principle w/ series 24)
and inspected annually by FINRA and the firm

Principals must approve: new accounts+ all trades (same day)+ advertisement+
complaints

Principals do not need to improve a prospectus or recommendations over the phone

FINRA rules are divided into rules of fair practice (member+ customer) and uniform
practice code

Fines over $2,500 are major fines

Person being complained against has 25 days to respond to a complaint

Arbitration (mandatory between members) is binding and non-appealable

Statue of limitations for arbitration is 6 years

Simplified arbitration is used fir disputes under $25k

Mediation= arbitration alternative where fee is split between both parties

In case of corporate distribution occurs in the following order: 1)IRS 2)Unpaid

workers 3) secured creditors 4) general creditors 5) subordinated creditors
6)preferred stock 7)common stock

SIPC= protects each customer account up to $500k of which no more than $100k is
cash in the case of a broker-dealer bankruptcy (does not cover commodities
accounts) (cash and margin accounts are 1 account)

Regularity of sending out account statements: active accounts= monthly // inactive

accounts= quarterly// mutual funds = semi annually

Firm must send copy of balance sheets to costumers semiannually (if requested
send immediately)

Declaration date=date that corporation announces that a dividend will be paid to

investors

Ex- dividend date= first day that a stock trades without dividends

Record date= day the corporation inspects records to see who gets dividends (2
business days after ex- dividend date) (trade must settle on or before record date to
receive dividend)

Payment date=day the corporation pays the dividend

Registrar= financial institution hired by issuer to maintain a list of shareholders

Transfer agent= sends items to investors (proxies/dividends etc.)+ can act as a

rights agent

Rights agent= if investor wants to exercise rights

Stock denominations= multiples of 100/ divisors of 100/ units that add up to 100

Mutilated certificates may only be validated by issuer

CUSIP#= ID of securities that were issued at the same time

Stock power= signing on separate piece of paper instead of on certificate

Rejection= refusal of securities at time of delivery

Reclamation= refusal of securities previously accepted at delivery

Nine bond rule= any order for 9 listed bonds or less must be executed on the
exchange unless 1)the customer wants OTC 2)there is a better price OTC 3)it’s a
muni/ govt. bond

Flow of order through brokerage:

1) Wire room= execution of all orders

2) Purchasing and sales= enter all transactions into firms blotter and sends out
confirmation date
3) Margin= determines the status of margin account after trades executed
4) Cashier= determines the cost of the trade and how much the investor gets
back (also responsible for receiving and delivering securities)

Rule 405 (suitability)= reg. rep should know customers investment objectives+
employment+ financial background+ marital status

Reg rep does not need to know= Investment experience+ educational background+
previous employment

Currency and foreign transactions reporting act of 1970= must report cash/money
withdrawals of over $10k through the CTR to FINCEN (must be reported within 15
calendar days)

Suspicious activity of $5k or more must be reported to FINCEN immediately

3 stages of money laundering= Placement/ Layering/ Integration

CIPs= customer identification program which is required to be implemented by

brokerage firms

Employees of financial institutions need written permission from employer when

opening a margin account (officers and cash accounts don’t)

Reg. rep can only open a joint account with a customer if he gets written permission
from principle

%5 markup maximum on transactions is a guide line not a rule

Dealer cost= price dealer paid for a security

Don’t know notice= when a firm receives a confirmation for a trade that it does not
recognize

Corp. must always pay for mailing costs

Proxy contest= when a group of shareholders try to throw out the board of directors
Form 13d= filed by an investor who becomes a 5% owner of a company who is
trying to gain control of a company (tender offer)

Form 13g= filed by an investor who becomes a 5% owner of a company who is

planning on remaining a passive investor

Factors that a company needs to be listed on NYSE: pretax earnings+ number of

outstanding shares+ total market value of outstanding shares+ national interest
(spread out share holders geographically)+ trading volume+ common stock must
be voting

If a company wants to delist from the NYSE: approval from the majority of the board
of directors+ majority of accountants+ notification to 35 largest shareholders+
application to the SEC

To be listed on the NASDAQ a company needs at least 3 market makers initially and
2 continuing

Penny stock= stock valued under $5 that’s not traded on an exchange

Customers must receive a risk disclosure document when purchasing penny stocks

Exceptions to risk disclosure= accredited investor/unsolicited/established customer

Advertisements must be filed with FINRA within 10 days after first use (new
firms=10 days prior)

Corporate/partnership documents must be kept for the lifetime of the firm

Blotters (records of trades)+ ledgers(customer account statements)= must be kept

for 6 years

All records must be easily accessible for 2 years

CHAPTER EIGHT

Unit investment trusts= invests in fixed portfolio of securities with no management

fee

Net asset value= indicates the performance of a fund

If NAV>public offering price then must be a close ended fund

Regulated investment company= not taxed like a corporation of at least 90% of

income is derived from interest/capital gains/dividend and it distributes at least 90%
of dividends and interest received to investors each year
Diversified investment company= at least 75% of assets are diversified : <5% of
75% is put into any one company’s security+ can’t own more 10% of outstanding
shares of the any company that is owned

A mutual fund must have at least 80% of assets meeting the objectives of the fund

Hedge fund is most speculative

Aggressive growth fund= speculative in new companies

ETF= close ended and traded between investors

Breakpoint= reduced sales charge for large investments in a mutual fund

Letter of intent= allows you to receive breakpoint immediately (valid for

13months+ may be backdated for up to 90 days)

Rights of accumulation = allows investor to contribute money at their own pace to

qualify for a breakpoint later

Dollar cost averaging= depositing a fixed dollar amount into the same mutual fund
periodically

Fixed share averaging= buying a fixed amount of shares periodically

Constant dollar plan= invest a constant dollar amount invested at all times

Sales charge=( POP- NAV)/POP = (ASK-BID)/ASK

Mutual funds cannot charge more than 8.5% of the amount invested

No load funds usually charge redemption fees

Types of mutual fund shares:

1) Class A= front end load

2) Class B= back end load
3) Class C= level load (pays a sales charge each year)

Investment Company must have at least $100,000 from at least 100 investors
before public offering

Board of directors must be at least 75% outsiders

12b-1 fees= investor must pay for all advertising+ promotional expenses of fund

Investment company distributions are taxed as income and capital gains

Distributions are taxed even if reinvested

Reinvested capital gains cannot have a sales charge

If fund charges 8.5% sales charge they must offer reinvestment of distributions and
rights of accumulation for free

A fund is not required to provide a letter of intent

New prospectus of mutual fund must be filed annually with the SEC

Redemption of mutual fund must be completed in 7 calendar days

Break point sales= selling right below breakpoint without telling client about option
to qualify (illegal)

Anti-reciprocal rule= recommendations can’t be based on sales charges or

commissions

Continuing commission= automatic commission given to a reg. rep who promotes

the fund

REIT= (not redeemable) at least 75% must be invested in real estate + at least 90%
of net income must be distributed annually

Fixed annuities do not have to register with the SEC variable annuities do

Accumulation units= units purchased during the paying period of an annuity

Annuity units= units liquidated during the payout period

Annuitize= withdrawing money

Assumed interest rates= annual rate of interest rate necessary to receive expected
payouts

Single payment immediate= pay lump sum and immediately start receiving
payments

Deferred= start receiving payments at a later date

Straight life (life annuity)= stops payout when investor dies (highest payout)

Life with period certain= minimum period of payout even if investor dies

Joint and survivor= in case of death payments are transferred (lowest payout)

Investors cannot outlive their annuities guaranteed

403b (public school) + 501c3(non profit)= only qualified annuities (can contribute
pre tax)
 CHAPTER NINE

Fed determines what can be traded on margin (OTCBB+ Pink Sheets stocks are
usually not marginable)

New issues can’t be purchased on margin for the first 30 days

Current market value – debit balance (DR) = equity

Reg T= Margin requirement (50% unless otherwise stated)

Margin call= amount investor must deposit when buying on margin

Sma (special memorandum account) = taking excess equity after reg t of new cmv

Withdrawing sma is borrowing (DR increases and equity decreases)

You can also use sma to buy more stock on margin

You cant lose SMA even if the stock goes down in price (like line of credit)

You cant use SMA to lower a debit balance

Restricted account= when equity is below reg T requirement (same calculation as

SMA)

Investor cant use sma to pay off a restricted account (can still withdraw)

When selling stock from a reg T account the money received pays off DR
(although equity stays the same SMA increases which they can borrow)

In long margin account EQ must be at least 25% of the CMV (FINRA) if goes below
then maintenance call is required for the difference

1.33 x DR= minimum value before maintenance call

If investor fails to meet margin call then the broker must sell double the securities
worth of the call (within 5 days of trade)

U.S. + Muni bonds don’t have the same reg T (between 1-6%)

If customer does not pay enough for a security by less than $1000 the deficiency is
added to DR

Withdrawing SMA= DR increases

Depositing cash= DR decreases

Buying stock on margin= DR increases

Selling stock= DR decreases and EQ decreases

Interest charges= DR increases

Cash dividends= DR decreases and SMA increases by the full amount of the
dividend (stock dividend makes no impact)

New long margin account= minimum $2000 (for reg T) deposit or pay trade in full

If EQ falls below $2000 no money is necessary until making another trade

Hypothecation= firm lends money to a customer to buy a security

All margin accounts require a Hypothecation agreement to be signed by customer+

credit agreement which sets terms for loans (interest rates etc.)

Re- Hypothecation= brokerage firm uses margined securities as collateral to borrow

money from a bank (up to 140% of DR can be re hypothecated in case of decreased
value of customers securities)

Max amount of money that can be borrowed through using customer’s securities as
collateral through re-hypothecation is 100% of the DR

Amount that must be segregated and cant be used=CMV- 140% of DR

When selling short (reg T is 50% unless otherwise stated)= CMV+ EQ=CR (credit
balance stays the same even if CMV changes)

Maintenance requirement in a short account is 30% of CMV

10/13 of CR is the highest the market value can increase too in a short account
before maintenance call

To open a new short margin account= minimum requirement is $2000 no matter

what

Cheap stock rule= when selling short a low priced stock= $0-$2.50 the
maintenance requirement is automatically $ 2.50…..from $2.50-$5.00 requirement
is 100% of CMV…..$5-%10 req. is $5.oo per share

Combined account (both long and short) find maintenance requirement for each
separately then add

Securities in lieu of cash= fully paid securities deposited to meet margin call
=Margin call/%100- Reg. T

Reg U= using securities as collateral to borrow money from a bank

Reg. G= using securities as collateral to borrow money from another financial

institution besides for a bank or broker dealer
Loan consent agreement= optional agreement by customer allowing the firm to
loan their securities to short sellers

Loan value= max a broker dealer can lend to customer ( 100%- Reg. T)

Margin requirements= Arbitrage 10% Short against the box 5%

CHAPTER TEN

Option= derivative

Sell/short/write= investor has obligation to meet terms of the contract

@#= premium of option

Same type options= both calls or both puts

Same class= same stock + same type

Same series= same stock+ same type+ same expiration+ same strike price

When deciding if in or out of the money ignore the premium

At the money= stock price= strike price

Premium= Intrinsic value (how much in the money…can never be 0) + Time value

More volatile the higher the premium

If out if the money then Premium= Time value

(For anyone using these notes, I did not include option gain/ loss pages 333-338)

Closing an option= trading the opposite way of first trade

Closing purchase= buying an option to cover an option you wrote

Options are considered capital gains/losses

Long straddle (volatility) = buying a call and a put with the same stock, expiration
and strike price

Short straddle (stability) = selling a call and a put with the same stock, expiration
and strike price

Long Combination (volatility) = Buy a call and buy a put with the same stock, but
different expiration dates and/or strike price

Short combination (stability) = Sell a call and a put with the same stock, but
different expiration dates and/or strike price
Spread= buying and selling a call or put of the same class

Vertical spread= different strike prices

Horizontal spread = different expiration dates

Diagonal spread= different expiration dates and different strike prices

Bullish spread= buying at a lower strike price and selling at a higher strike price

Bearish= Buy high sell low

An investor who is receiving more from premiums then paying wants premiums to
narrow and remain unexercised in a spread

To determine if credit (more money coming in from premiums) or debit (more going
out) in a situation where there is no premiums listed, use difference in expiration
dates to determine

When bullish you can reduce risk by either buying a put or selling a call

If reducing risk by buying an option= protection

If reducing risk by selling an option= partial hedge (“increase yield”)

Married put= when an investor buys and a put on the same day (holding period
starts immediately)

If buying a put option after buying a stock the holding period for the stock doesn’t
start until put is closed or expired

Covered option= when seller has a position to reduce the risk of the trade (owning
stock/convertible/option, If the option you bought is in the money first)

Naked= uncovered (must be executed in a margin account, as do selling short+

spreads)

When buying an option you must pay in full

Options cant be used as collateral to borrow money

Cash dividends do not affect options

Stock dividend= # of shares per contract increases and the strike price decreases

Even split (2:1) = # of contracts increase (# of shares per contract stays the same)
+ strike price decreases

Uneven split (3:2) = # of contracts remains the same+ number of shares increase+
strike price decreases
Options Clearing Corporation= issuer and guarantor of all listed options (decides
which stocks may have publicly traded options) also establishes contract size+
expiration dates+ strike price

When opening a new options account:

1) Reg. rep must send client a copy of the “options risk disclosure document” at
or prior to the approval of a new account
2) Reg. rep determines the suitability of a customer by way of a new account
form
3) The registered options principal approves the account
4) Execute the transaction
5) The reg. rep must send an “options account agreement” to the customer
(must be signed within 15 days after approval of the account)

Options trade on the Chicago Board Options Exchange

Expiration= 11:59 pm on the Saturday after the third Friday of the expiration month
(last trade=4:02 and last exercise=5:30 pm of the business day prior to expiration)

Any option that is at least a penny in the money will be automatically exercised by
the OCC at expiration

An investor can’t have more the 75,000 option contracts on the same side of the
market for a particular stock (buying calls and selling puts count together)
order support system= used for smaller orders on the CBOE and is used to bypass
floor brokers

Index options:

1) OEX- S+P 100= 100 Blue chip companies

2) SPX- S+P 500=S+P 500 INDEX
3) MMI (major market index)20 stocks= based on 15 DJIA stocks and 5 other
large cap NYSE stock

Index options always settle in cash (index options can only be exercised at the close
of the market)

Capped index option= automatically exercised once 30 points in the money (if not
in the money by 30 points then can only be exercised the business day before
expiration (European style)

Leaps= long term option which expire in 39 months instead of 9 months like a
regular option

Debt option= option based on bond

Yield options= based on interest rates (buy calls if believe imminent interest rate
hike)

Foreign currency options= traded on the Philadelphia exchange (PHLX) and the
Pacific Exchange (PSE)

Priced by units in which each point= $0.01 besides for the Yen which is in
denominations of $0.0001

CHAPTER ELEVEN

Direct participation programs (limited partnerships)= allows partners to participate

and use for write offs and often invests in real estate/ oil and gas (must have at
least 1 general partner (manages) + 1 limited partner (invests)

DPPs’ can be used as tax shelters and are considered “passive” income/losses

Must file K-1 tax form that shows the income and write offs passed through
investors

DPP needs:

1) Certificate of limited partnership (like a corporate charter)

2) Agreement of limited partnership (includes rights and responsibilities)
3) Subscription agreement (general partner signs application given upon
payment to accept new partner )

General partners make decisions for partnership (can demand money from other
partners if needed)

General partners can’t compete and have unlimited liability

Limited partners cannot make management decisions+ limited liability+ can

compete+ voting rights

Corporate characteristics a DPP must avoid at least 2 of in order not to be taxed:

1) Profit directed business

2) Providing limited liability
3) Having 2 or more individuals
4) Having a central management (hardest to avoid)
5) Having perpetual life (easiest to avoid)
6) Have free liquidity of shares (second easiest to avoid since application need
for new partner)

Land can’t be written off for depreciation

Accelerated (ACRS/MACRS)= depreciates more in the early years

Write offs= interest payments+ business expenses+ depreciation+ depletion of
natural resources

Revenue- write offs = Net income

Cash flow= net income+ write offs

Passive loses can only be used to offset passive gains

Alternative minimum tax= mostly used by DPPs’ when write offs cause to low of a
tax base

Cost basis= maximum loss for limited partnership (tax deduction limit= any money
put in and then decreased by cash distribution/depreciation/depletion

Types of partnership:

Real estate:

1) Raw land= looking for long term capital appreciation (riskiest +no cash flow
cannot depreciate)
2) New construction= appreciate property by constructing (risk of higher than
expected cost+ no cash flow)
3) Condominiums= cash flow depends on economy (according to IRS limited
partners cannot stay for more than 14 days or 10% of the days rented out per
year whichevers greater)
4) Public housing (section 8)= backed U.S. govt. subsidies (receives tax
deductions on income received)(govt. subsidizes any deficient payment +
safest+ guaranteed cash flow)
5) Existing properties= cash flow depends on economy, buys property that is
fully operating already (high maintenance cost)
6) Blind pool= offers diversification of different types of properties

Oil and Gas:

1) Exploratory(wildcatting)= drilling in unproven areas (riskiest+ long term

appreciation potential+ high intangible drilling cost)
2) Developmental= drilling in proven areas(high drilling cost+ lower risk since
proven)
3) Income= drilling in an area which is already producing and developed(no
risk)
4) Combination= diversified between three above

Operating lease= buy equipment and lease it out for a short time

Full payout lease= lease payments cover the entire cost of equipment
Functional agreement= general partners are responsible for tangible costs and
limited partners are responsible for intangibles

The reg rep must make sure client is suitable for DPP= proof of financial
background+ ability to tie up money for long periods of time+ ability to sustain
loss+ need for tax benefits

Compensation of underwriter for DPP can be up to 10% of the gross amount of the
securities+.5% of due diligence cost

Crossover point= point in which partnership income exceeds the deductions

(becomes profitable)

Recourse debt= loans taken by partnership which the limited partners can be
personally responsible for

Non- recourse debt= lender has no claims on limited partners personal assets

Recapture= IRS takes back excessive deductions claimed in the previous year

Abusive shelter= when a partnership does not attempt to make a profit

In the dissolution of a partnership the limited partners are paid before general
partners (creditors first)

CHAPTER TWELVE

General obligation bond= issued to fund non-revenue projects (backed by full taxing
power of muni) voter approval is required

Ad valorem tax (property tax) = largest source of revenue for GO bonds (based on
assessed value)

Mills=.001

There is a maximum that a muni can borrow

Limited tax bond= type of GO that limits tax rates used to pay off bonds

Unlimited tax bond= normal type of GO

Revenue bond= issued to fund revenue producing projects (voter approval not
necessary)

Industrial development revenue bond= issued to fund construction of a commercial

facility for the benefit of a corporation (riskiest because not backed by muni)

Substantial user rule= company cant buy its own IDR and receive tax free interest

Private purpose (activity) bond= interest is taxable at a regular tax rate on all levels
Qualified private purpose bond= interest is taxable only to investors subject to the
Alternate Minimum Tax

Double barrel bond= combo if revenue + GO bond (if revenue fails then backed by
taxing power)

Special tax bond= backed by regressive (excise)taxes (sales/tobacco)

Special assessment bond= backed by charges on those that benefit from project

More obligation bond= if muni fails to pay the state has a moral obligation to pay

Public housing authority (PHA)= backed by U.S. govt. (considered safest)

All muni’s must be issued with a legal opinion(validates+ makes sure indenture is
binding+ verifies federally tax exempt)

Unqualified legal opinion (unconditional)= issuer meets all conditions without

restrictions

Qualified legal opinion= issuer meets conditions with potential restrictions (lean on
property etc.)

Ex legal= Bond delivered without legal opinion

Muni notes= mature in less than a year

TAN (tax anticipation note)= issued with expectation of receiving

corporate/individual tax in next few months

RAN (revenue anticipation notice)= anticipation of revenue producing facility in the

next few months

TRAN= tax and revenue anticipation note

BAN= bond anticipation note (anticipation of writing long term bonds)

CLN (construction loan note)= notes issued to finance large construction projects
for muni

PLN (principal note)= provides interim financing from public housing projects

Rating for muni notes:

Moody’s investment grade= MIG 1-4

Standard and Poor’s= SP 1-4

Prime= P1-4 (only used for tax exempt commercial paper (short term IDR)
Interest+ accretion+ amortization on muni are federally tax free

State tax free if investing in home state/ or Protectorates(Puerto Rico, Guam etc.)

Muni have the lowest yields of all bonds

TEY= yield that investor needs on a taxable investment to be equal to a muni yield
after taxes

TEY= Muni yield/(100%-tax bracket)

Muni equivalent yield= taxable bond yield x (100%- investor tax bracket)

Margin requirements for muni= 7% of total par value or 15% of CMV whichever is
greater

Negotiated offering= issuer chooses an underwriter directly with no competition

(revenue bonds/IDR)

Competitive offering= auction (GO bonds) (muni advertises through “notice of sale)

TIC (true interest cost)= considers inflation

Good faith deposit= entry fee and partial payment for bond issue(1-2% of par value
of bonds being auctioned)(winners use towards money necessary to buy
bonds/losers get deposit back)

Official statement= disclosure of facts about muni issuer (does not have to be filed
with SEC)+included in advertisements and brochures

GO bonds have a higher rating and lower yield than revenue bonds

Direct debt= outstanding debt that a muni owes which has not matured

Overlapping debt (coterminous)= debt that muni has to assist a higher gov’t(state)
in paying

Overall debt= direct +overlapping

Debt per capita= debt per person

Traffic fines+ licensing fees can be used to pay off GO bonds

Feasibility study= engineering report done by independent consultants to see if

facility can generate enough revenue to pay off revenue bonds

Covenants= promise on indenture meant to protect

investors(rates/maintenance/insurance)

Catastrophe call= call used when facility can no longer produce revenues
Project completion clause= allows issuer to borrow more money to properly
construct facility

Flow of funds=

1)Net=operating and maintenance fund>sinking fund(debt)>reserve fund(principal

and net for next 2 years)> renewal and replacement fund(improvements)

2) Gross= sinking fund> operating and maintenance fund> reserve fund (principal
and net for next 2 years)> renewal and replacement fund(improvements)

Assume net

Debt service coverage ratio= net or gross revenue/ principal+ interest

Debt per connection= debt per person using the facility

The “Bond Buyer” is the best source of information for new muni bonds

Bond buyers index= average yield of 20 , 20 year GO bonds that are investment
grade

Eleven bond index= average yield of 11 , 20 year GO bonds that are rated AAA or
AA

Revdex(revenue bond index)= average yield of 25 revenue bonds with 30 year

maturity

Visible supply= par value of all new issues expected to become public within the
next 30 days

Placement ratio= percentage of competitive issues in which the auction was

completed (measured weekly)

“blue list”= best source of info for outstanding bonds

Blue list total= total par value of all muni bonds in the blue list except for zero
coupon bonds

50M Chicago P/R @ 102 AON 3/1/07 M12 : Pre refunded+ All or none+ 3/1/07= 1st
call date M12 = years to maturity

Quotron= wire service for muni

Muni insurance agencies= MBIA+ AMBAC+FGIC

MSRB= self regulatory(does not apply to issuers)

Reg reps have to do 90 day apprenticeship during which they cant discuss any thing
with public customers+ cant earn commission
Confirmation (receipt of trade)= must disclose YTM or YTC whichever is lower
(discount bond YTM is lower)

In whole call= first time entire issue is callable

All MSRB complaints are kept for 6 years (FINRA for 3 years) and must be settled
through arbitration

Control relationship= firm/employee has a position of authority over issuer being

recommended (must be disclosed)

Completion of the transaction= buyer= payment date + seller= settlement date

If an advisor is chosen to underwrite an offering:

Negotiated offering= relationship must terminate+ disclose potential conflict of

interest+ disclose spread

Competitive offering= relationship does not need to be terminated+ adviser needs

written permission from issuer to participate in the auction

G- rules (page 441+442 of the empire stock broker institute)

This is a summary of the EMPIRE STOCKBROKER INSTITUTE TRAINING INSTITUTE

and should only be used after reading the actual book at least once.

Good luck!! YY 6/7/2010