Kaplan Series 7 Dump Sheet

Trading

Time-Sensitive Orders

Markets

Fill or Kill (FOK)

Securities Markets

Listed or Concepts Unlisted

Exchange

Listed

Over-thecounter (OTC)

Unlisted

Third market

Listed, traded OTC

Physical location ■■ Auction market ■■

No physical location ■■ Negotiated market ■■

No physical location ■■ Negotiated market ■■

Fourth market Listed and Unlisted

Direct trading between financial institutions ■■ Use Electronic Communication Networks (ECNs) ■■

Day orders Cancel any unexecuted portion at end of day

Good till canceled (GTC) Any unexecuted portion remains working until the last trading day of April or October

Order Types

Execute entire order immediately or cancel entire order

Immediate or Cancel (IOC) ■■ ■■

Execute any portion available immediately Cancel any balance remaining

All or None (AON) ■■ ■■

Execute all if available If entire order can not be executed hold order as good-till-canceled (GTC)

Market at Open ■■ ■■

Execute at or near the open of the day Not guaranteed exact opening price

Market on Close ■■ ■■

Execute at or near the close of the day Not guaranteed exact closing price

Markup Policy

Guide for listed and unlisted transaction charges. Applies to markups, markdowns, and commissions.

Brokerage support services Order Tickets

Approved by a principal promptly after execution. Changes to tickets must be approved by a principal.

Order

Entered Concept

Order Flow After Execution:

Market

At the market

■■

Buy limit

Below CMV

■■

1. Order department or wire room: After execution order with trade details returns to order department 2. Purchase and sales: Issues confirmation with trade details to customer 3. Margin department: Calculates any margin requirement due 4. Cashier: Takes receipt and delivery of cash and securities

(Buy or Sell)

Sell limit

Buy stop

Buy stop limit

Sell stop

Sell stop limit

Above CMV Above CMV Above CMV

Execute immediately at next available price

Buy at limit price or better (lower) ■■ Execution not guaranteed Sell at limit price or better (higher) ■■ Execution not guaranteed ■■

Triggered at or above stop price ■■ Execute immediately at next available price ■■

Triggered at or above stop price ■■ Execute at limit price or better (lower) ■■ Execution not guaranteed ■■

Below CMV

■■

Below CMV

■■

Triggered at or below stop price ■■ Execute immediately at next available price Triggered at or below stop price ■■ Execute at limit price or better (higher) ■■ Execution not guaranteed

Settlement Dates Type of Settlement: Regular way (corporate and municipal): Trade date + 3 business days (T+3) Regular way (government): Trade date + 1 business day (T+1) Cash: Same day; BD approval required Receipt or delivery vs. payment RVP or DVP: Up to 35 calendar days Seller’s option: No sooner than first day after regular way (4th business day for corporate and municipal); no later than date specified in settlement contract

INVESTMENT ANALYSIS Fundamental Analysis Formulas Net worth: Assets – Liabilities Book value: Net worth – (Preferred and intangibles)

Book value per share: Book value / # of Outstanding shares Current assets: Cash and equivalents + Accounts receivable + Inventory Current liabilities: Accounts payable + Accrued wages and taxes payable Working capital: Current assets – Current liabilities Current ratio: Current assets / Current liabilities Total capitalization: Long-term debt + Net worth Debt ratio: Long-term debt / Total capitalization Earnings per share (EPS): Earnings available to common / total outstanding common shares Price to earnings ratio (PE): CMV / EPS Dividend payout ratio: Common dividends / EPS

Technical Analysis Concepts Uses price and volume history to forecast future price movements. ■■ Use of charts to plot movement and establish points of entry or exit. ■■

Ex: Trend lines, levels of resistance and support, breakouts, consolidation, and head and shoulder patterns (for reversals)

Regulatory Acts Securities Act of 1933 ■■ ■■

Paper act, prospectus act Regulates new issues, requires registration of securities

Securities and Exchange Act of 1934 People and places act Regulates BDs and associated persons, requires registration ■■ Antifraud provision, defined inside information ■■ ■■

Trust Indenture Act of 1939 Applicable to corporate bond offerings of greater than $5 million in 12 months ■■ Establishes a contract between the issuer and the trustee for the benefit of the bondholder ■■

Investment Company Act of 1940 ■■ ■■

Classified three types of ICs Regulates ICs

Investment Advisors Act of 1940 ■■

Requires the registration of investment advisors who charge fees for investment advice

Securities Investors Protection Act of 1970 Protects customers from BD failure and insolvency ■■ Created SIPC ■■

Insider Trading and Securities Fraud Enforcement Act of 1988 ■■

Specifies penalties for inside trading and securities fraud

The Employee Retirement Income Security Act of 1974 (ERISA) Established to prevent abuse or misuse of pension funds ■■ Applicable to private sector retirement plans ■■ Mandates guidelines for plan; participation, funding, vesting, communication, nondiscrimination and beneficiaries ■■

Telephone Consumer Protection Act of 1991 Administered by the Federal Communications Commission (FCC) ■■ Protects consumers from unwanted telephone solicitations ■■ Defines the requirements and limitations applied when making unsolicited calls ■■

Bank Secrecy Act ■■

Establishes the US Treasury as the lead agency for developing anti-money laundering programs

Sarbanes-Oxley Act of 2002 Established enhanced standards for US public company boards, management and accounting firms ■■ Requires SROs in the securities industry to establish research analysts conflict of interest rules for its members ■■

The Uniform Securities Act Establishes a framework for state registration ■■ Applies to securities, broker/dealer (BDs), registered representatives (RRs), investment advisers (IAs), and IA reps ■■

Regulations Regulation S-P Enacted by SEC to protect the privacy of customer information ■■ Requires privacy notice describing privacy policies ■■

Regulation SHO ■■

Mandates a locate requirement for securities to be sold short prior to the short sale

Regulation NMS Enacted to bring trading and reporting uniformity to US securities markets ■■ Order Protection Rule prohibits a trade-through ■■ Minimum Increments Pricing Rule establishes minimum price increments allowed depending on the price of the security ■■

Regulation A ■■

Small offerings exempt transaction allowing issuers to raise up to $5 million in a 12-month period without full registration

Percentages to Know 0.25%

Maximum 12b-1 fee for no load fund

0.75%

Maximum 12b-1 fee 100 basis points for bonds ■■ Rule 144 sale volume limit ■■

5% ■■

Minimum of net investment income that a mutual fund must distribute by year end under Subchapter M ■■ Minimum amount of profits that must be distributed by a REIT by year end

100%

1%

■■

90% ■■

Markup policy guideline No more than 5% of investment company’s assets invested in any one company

6%

Penalty for excess IRA contributions

8.5%

Maximum sales charge for open-end (mutual fund) company

Required equity when purchasing new issues, options, and mutual fund shares ■■ Amount of non required cash deposit credited to SMA in margin accounts ■■

300%

Maximum penalty amount of profit made or loss avoided under the Insider Trading Act of 1988

Business Days, Calendar Days, and Months to Know Same Business Day

10%

Settlement date for cash transactions

Penalty for premature IRA distribution Affiliate or control person if owning 10% or more of outstanding shares ■■ Maximum sales charge on public limited partnerships ■■ Maximum amount of one company’s stock a mutual fund can own

1 Business Day

■■ ■■

25%

Minimum maintenance for long stock position

30%

Minimum maintenance for short stock position

40%

Minimum percentage of mutual fund board members that must be noninterested members

50% Regulation T Penalty for insufficient IRA distribution after age 70½ ■■ Amount of sales proceeds credited to SMA in a margin account ■■ Required cash deposit when withdrawing stock from a margin account ■■ ■■

Regular way settlement for US Government securities and Options

2 Business Days

Ex-dividend date relationship to record date for stock

3 Business Days

Regular way settlement for corporate and municipal securities

5 Business Days

Regulation T: cash purchases must be paid in full

15 Calendar Days

Maximum length of time a customer can place options orders before the signed option agreement is required

20 Calendar Days

Cooling off period: minimum time between filing date and registration

30 Calendar Days

IRS wash sale period before and after a trade

70%

Corporate dividend exclusion

75% Minimum amount of ICs assets that must be invested in securities of other issuers to be diversified ■■ Amount of limited partnerships assets that must be identified to be a specified program ■■

PPN: 10000477

Regulation D

60 Calendar Days

Maximum period of time to roll over holdings from one qualified plan to another

90 Calendar Days Maximum time for a letter of intent to be backdated ■■ Length of time cash account can be frozen for nonpayment ■■

6 Months

Frequency IC’s are required to send reports to shareholders

Private placement exempt transaction ■■ Up to 35 non-accredited investors ■■ Accredited investors must meet minimum net worth or annual income criteria ■■

13 Months

Length of time covered by a letter of intent

16 Months www.kfeducation.com

800-824-8742 © 2010 Kaplan, Inc. All rights reserved.

Maximum length of time an IC’s prospectus is valid

series securities QuickSheet

TM

7

Securities Products and Concepts Outstanding shares

Issued shares – Treasury shares

(Shares repurchased by corp.)

Treasury shares

(Shares repurchased by corp.)

Issued shares – outstanding shares

Dividends payable as Cash, stock, or property Annual Dividend

Most recent quarterly dividend × 4 quarters

Dividend (Current) Yield

Annual dividend / Current market value

Ex: XYZ stock trading @ $42 pays a $2 annual dividend $2 / $42 = 4.76% dividend yield

4 Dividend Dates

Determined by

Declaration Date

Declaration Date

Board of Directors

Date dividend is declared

Ex-Dividend Date

FINRA or SRO

2 business days before record date

Record Date

Board of Directors

Date trade must settle by for buyer to receive current dividend

Payable Date

Board of Directors

Date dividend is distributed

Stock Dividend Adjustment Price of stock adjusts down for dividend Investor receives addition shares ■■ Aggregate value remains the same ■■ ■■

Ex: 100 shares @ $55 = $5,500 After 10% dividend, position becomes: 110 shares @ $50 = $5,500 Note: 100 shares × 10% = 10 additional shares

Stock Split Adjustment Price of stock adjusts down for split ■■ Investor receives addition shares ■■ Aggregate value remains the same ■■

Ex: Even split: 100 shares @ $30 = $3,000 After 2-for-1 even split, position becomes: 200 shares @ $15 = $3,000 Note: $3,000 / 200 shares = $15 adjusted stock price Ex: Uneven split: 100 shares @ $30 = $3,000 After 3-for-2 uneven split, position becomes: 150 shares @ $20 = $3,000 Note: $3,000 / 150 shares = $20 adjusted stock price

Reverse Stock Split Adjustment Price of stock adjusts up for reverse split ■■ Investor will have fewer shares ■■ Aggregate value remains the same ■■

Preferred Shares Fixed par value (assume $100 unless stated different). ■■ Dividends are fixed stated rate (% of par).

■■

Ex: XYZ 3.5% Preferred .035 × $100 par value = $3.50 annual dividend

DEBT Par Value ■■

Bond Yields

Rights and Warrants Rights

Warrants

Available to existing shareholders

Offered with other securities as “sweeteners” Sold as units (Ex: Bond with warrant)

CY YTM YTC

Premium

Preferred Share Types Straight (noncumulative): Missed dividends are not payable. Cumulative: Missed dividend (dividends in arrears and current preferred dividend must be paid before common). Callable: Issuer may buy back shares after a specified date at a specified price. Participating: Issuer may pay more than stated dividend. Adjustable rate: Dividend tied to another rate (Ex: T-bill rate).

Assume $1,000 unless specified differently

Par Discount

Coupon

Coupon, Nominal, or Stated Yield ■■

Annual interest / Par value

Ex: Bond pays $60 annual interest $60 / $1,000 = 6% coupon yield

Current Yield ■■

Annual interest / Current market value

Ex: Bond trading @ $1,200 pays $60 annual interest $60 / $1,200 = 5% current yield

Bond Quotes ■■ ■■

Price quote: 1 bond point = 1% of par = $10 Yield quote: 1 basis point = .01 of yield

Ex: Price quote: Bond trading @ 92 = 92% of par = .92($1,000) = $920

Short term (30 to 45 Long term (2 to 5 years) days)

Ex: Yield quote: Bond trading to yield 3.70 .01(3.70) = .037; 3.7%

When issued exercise price is below CMV (allows purchase at a discount)

When issued exercise price is above CMV (anticipated value with time)

Callable Bonds

Not marginable

Marginable

American Depositary Receipts (ADRs) Facilitate US citizens owning foreign shares Foreign shares held by bank (bank issues receipt) ■■ ADR is US security traded in US markets, (quoted in US dollars) ■■ Dividends declared in foreign currency but paid in US dollars (ADR holder has currency risk) ■■ ■■

Real Estate Investment Trusts (REITs) Traded on exchanges or OTC Provide liquidity for real estate investors ■■ 75% of assets must be invested in operating income producing real estate or mortgages to qualify as a REIT ■■ 90% of net operating income must be distributed for REIT to avoid taxation as a trust ■■ ■■

Issuer can buy back bonds as of a specified date prior to maturity at a specified price. ■■ Issuer will call bonds in anticipation of current interest rates falling. ■■ Allows issuer to lower the cost of borrowing. ■■ Facilitates “refunding”; replacing one issue with another at a lower net interest cost to the issuer. ■■

Convertible Bonds ■■

Conversion Ratio: Par / conversion price

Ex: Bond convertible @ $40 $1,000 / $40 = 25 share conversion ratio ■■

Parity price of common: Market price of bond / conversion ratio

Ex: Bond trading @ $1,100 Conversion ratio = 25 shares $1,100 / 25 shares = $44 parity price of common ■■

Parity price of bond: Conversion ratio × common stock price

Ex: Bond has 25 share conversion ratio Common stock trading @ $44 25 shares × $44 = $1,100 bond parity price

Bond Maturities Term: Entire issue matures on one date Serial: Issue matures over a period of years

Balloon: A repayment schedule over a period of years having the largest number of bonds maturing at the final maturity date

Bond Registrations Bearer: Possession proves ownership, no owner name on certificate, interest coupons attached Registered as to principal only: Registered owner on certificate, interest coupons attached Fully registered: Owner registered with transfer agent, interest paid directly to owner Book or journal entry: No certificate, confirmation proves ownership, interest paid directly to owner

Corporate Debt Securities Secured Mortgage bond: Backed by real estate Collateral trust bond: Backed by other securities the issuer owns (Ex: government debt) Equipment trust certificate: Backed by equipment used in the issuers business

Unsecured Debenture: Backed by issuers full faith and credit Subordinated debenture: Paid last of all debt if issuer is in default Guaranteed bond: Guaranteed by a third party (parent company guarantees subsidiary’s debt) Income (adjustment) bond: Interest payable only if earned (risky; not suitable for investors seeking income)

Liquidation Priority Wages ■■ Taxes ■■ Secured bonds ■■ Debentures ■■ General creditors ■■ Subordinated debentures ■■ Preferred stock ■■ Common stock ■■

Zero Coupon Bond Treasury Receipts Issued and backed by broker dealers Mature at par ■■ Discounts: Accrete (add, adjust cost basis up) ■■ Premiums: Amortize (subtract, adjust cost basis down) ■■ ■■

Treasury STRIPS Issued by US Treasury ■■ Mature at par ■■ Discounts: Accrete (add, adjust cost basis up) ■■ Premiums: Amortize (subtract, adjust cost basis down) ■■

Collateralized Mortgage Obligations (CMOs) Sold by financial institution Backed by pool of mortgage securities ■■ Associated with refinancing risk ■■ Securities separated into Tranches ■■ Each tranche has different risk characteristics ■■ Investor chooses tranche and signs suitability statement ■■ ■■

Government Securities

Eurodollar Deposits ■■

US dollars invested outside of the US Generally higher risk than US deposits

Security

Maturity Quoted

Callable

■■

T-bill

1 year or less

Annualized % discount from par

No

Euro Bonds

T-note

2 to 10 years

% of par in 32nds

No

T-bond

10 years and over

% of par in 32nds

Yes

Any issuer issuing bonds outside the country of origin ■■ Payable in any currency (except US dollars) ■■ Currency risk for US investors ■■

Ex: T-bill quoted @ 1.3% (discount from par) Par – discount = 100% – 1.3% = 98.7% of PAR or $987 Ex: T-note or T-bond quoted @ 94.08 94% of par + 8/32nds = $940 + ¼ point ($2.50) = $942.50

Government & Quasi-Government Agency Securities Government National Mortgage Association (GNMA) Backed by the full faith and credit of the US government ■■ Issues pass-through certificates created from a pool of FHA and VA insured mortgages ■■ Monthly check to investor includes both principal and interest ■■

Federal Farm Credit System Backed by the issuing agency Loans to farmers ■■ Finance land purchases ■■ Finance farm equipment purchases ■■ Establishes buying co-ops to achieve economies of scale when purchasing agricultural goods

Eurodollar Bonds Any issuer except the US Payable in US currency ■■ No currency risk for US investors ■■ ■■

Money Markets Generally high-quality One year or less to maturity ■■ Highly liquid ■■ ■■

Ex: Government Treasuries and agencies with one year or less to maturity, municipal revenue notes, corporate commercial paper, negotiable CDs, bankers acceptances (BAs), repurchase agreements, Federal fund loans, and money market funds.

Municipal Securities Two classifications:

Backed by

■■ ■■

General Obligation Bonds (GOs)

Revenue Bonds

Issuing municipality (taxes)

User fees (selfsupporting)

Voter approval Required

Not required

Limits

Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation

May be subject to statutory debt limits

May be subject to additional bonds test

Underwritings

Backed by the issuing agencies Lines of credit with the US Treasury ■■ Mortgage-backed paper associated with prepayment risk

Generally competitive bid

Generally negotiated

Maturities

Generally serial

Serial or term

Analysis based on

Tolerance to taxes, debt statement, and debt ratios

Feasibility studies and debt service coverage ratio

■■ ■■

Interest rates, Money markets, and Euro instruments Yield Curves

Normal: Yields increase farther out in time. Inverted: Yields decrease farther out in time.

Interest Rates

Federal funds: The rate Fed. member banks charge each other for overnight loans Prime: The rate large US money center banks charge their best corporate customers Discount: The rate charged by the FRB for loans to depository institutions Broker call loan: The rate banks charge broker/ dealers for funds borrowed to lend to margin account customers

Specific General Obligation (GO) Bonds

Limited tax bond: Issued when issuer’s ability to raise taxes is limited Double-barreled bond: Bond issue debt funded by project revenue but backed by issuers full faith and credit (taxes)

Specific Revenue Bonds

Industrial development revenue bonds: Backed by corporations with lease back payments made to issuer Special tax bonds: Backed by taxes other than real estate; Ex: alcohol and tobacco taxes Special assessment bonds: Only assess property owners who benefit from the bond issue

Moral obligation bonds: Legislative authority is required to pay back bond holders if revenues are insufficient Public and New Housing Authority bonds (Section 8): Bonds provide financing for low and moderate income housing and are backed by the full faith and credit of the US government Anticipation notes: Short-term borrowing in advance of receiving funds from long-term debt; Ex: tax, revenue, bond and grant anticipation notes

Investment Company Products Management Company Portfolio managed by specific objective ■■ Ex: Growth, income, specialized (banking, technology, geographic area) ■■

Open- vs. Closed-End Management Companies Open-End Company

Closed-End Company Number of shares fixed

Municipal Indices and Ratios

Continuous primary offering; Every share is an IPO

Found in Daily Bond Buyer

Prospectus required

No prospectus required after IPO

Common shares only

Can issue common and preferred shares Can issue debt instruments

Company must redeem shares

Shares are not redeemable

No secondary market trading

After IPO shares trade in the secondary markets (exchanges and OTC)

GO index: 20 specific GO bonds each with 20-year maturities Revdex: 25 specific revenue bonds each with 30-year maturities 30-day visible supply: Total par value of all new municipals to be offered in the next 30 days Placement ratio: Total par value of all municipals sold/total par value of all municipals offered within the previous week

Municipal Taxation Interest

Taxation

Federal level

Exempt

State level—in-state investor

Exempt

State level—out-of-state investor

Taxable

Note: Territorial bonds are exempt at all levels; Ex: Puerto Rico, US Virgin Islands

Capital gains ■■

Adjust cost basis

■■

Adjust cost basis down

Discounts accrete ■■

Commissions

Fund Assets – Fund Liabilities / Number of Outstanding Shares

Public Offering Price (POP)

Adjust cost basis up

Net asset value (NAV) + $ Sales Charge (SC)

Ex: Original issue discount (OID) bond sold @ $950, maturing in 10 years $1,000 par – $950 price = $50 discount Annual accretion = $50 discount / 10 years = $5 Calculate cost basis for each year: Cost + annual accretion = cost basis each year

Year

Cost

Accretion

Cost Basis

1

$950

$5

$955

2

$950

$5 + $5

$960

3

$950

$10 + $5

$965

Note: adding annual accretion for 10 years brings cost basis to $1,000 (Par) No gain if held to maturity

Tax Equivalent Yield ■■

8.5% maximum sales charge

Net asset value (NAV)

Premiums amortize ■■

Priced by supply and Priced by formula, forward pricing demand Net asset value + $ sales charge = public offering price (NAV + $SC = POP)

Municipal yield / (100% – investors tax bracket)

Or Net Asset Value (NAV) 100% – SC% Ex: Net asset value = $18.50, $SC = $1.50 POP = NAV + $SC = $18.50 + $1.50 = $20 POP Ex: Net asset value = $18.50, SC% = 7.5% POP = NAV / (100% – SC%) = $18.50 / 92.5% = $20 POP

$ Sales Charge = Public offering price – Net asset value % SC =

Public offering price – Net asset value / Public offering price Ex: NAV = $18.50, POP = $20 SC % = (POP – NAV) / POP = ($20 – $18.5) / $20 = .075 = 7.5% SC

Ex: Municipal bond yielding 3.5%, investor in 15% tax bracket 3.5% / (100% – 15%) = 4.12% taxable equivalent yield

Variable Annuities

Tax-Free Equivalent Yield

Variable Annuity (VA)

■■

Corporate yield × (100% – investors tax bracket)

Ex: Corporate bond yielding 7.2%, investor in 15% tax bracket 7.2% × (100% – 15%) = 6.12% tax-free equivalent yield

Insurance company product Priced like mutual fund (NAV + SC = POP) ■■ No maximum sales charge ■■ Early redemption fees ■■ ■■

■■ ■■

Must reinvest all dividends and gains Earnings grow tax deferred

Payout Options Withdrawal Type

Tax Consequences

Lump sum

■■

Random

■■

Annuitize

■■

All earnings above cost basis taxed ■■ Cost basis returned tax free Last-in, first-out accounting basis ■■ All earnings withdrawn first and are taxable ■■ After all earnings are withdrawn cost basis is returned tax free Lifetime monthly income ■■ Each payment represents part earnings and part cost basis being returned ■■ Only taxed on earnings portion, cost basis returned tax free

Anuitization: 3 Ways to Annuitize Life Only ■■ ■■

Monthly payment Payments end with life of annuitant

Period Certain Protects heirs Period certain length specified in contract ■■ Payments continue for length of period certain even if annuitant dies ■■ If annuitant outlives period certain length, payments continue until annuitant dies ■■ ■■

Joint and Last Survivor ■■ ■■

Annuity on more than one life Payments continue until last annuitant dies

Assumed Interest Rate (AIR) Conservative estimate of return on investments in the separate account ■■ Each period, the actual earnings of the separate account are compared with AIR ■■

Ex: Separate Account Performance

Monthly Payment

Greater than AIR

Greater than previous month’s payment

Same as AIR

Same as previous month’s payment

Less than AIR

Less than previous month’s payment

DIRECT PARTICIPATION PROGRAMS (dpps) Direct Participation Programs Business structure that reports to the IRS but is not taxed as a business entity ■■ All tax consequences flow through to partners ■■ Income is reportable ■■ Expenses are deductible ■■

Interests in partnerships considered illiquid (not easily transferable) ■■ Partnership dissolves on predetermined date, assets liquidated, and proceeds distributed to partners ■■

Partners General

Limited

Manages the partnership ■■ May appoint others to manage the assets

■■

■■

No management responsibility ■■ Passive investors only

■■

Unlimited liability, can lose more than invested

■■

Limited liability, cannot lose more than invested

■■

Fiduciary responsibility to partners, can be sued

■■

No fiduciary responsibility

May not compete with the partnership

■■

■■

No limitations applied to other investments

Types of Programs Real Estate: Raw Land Appreciation potential only objective Very speculative ■■ No depreciation deductions for raw land ■■ ■■

Real Estate: New Construction No immediate cash flow Rental income potential can only be estimated ■■ Tends to appreciate faster than older properties ■■ Depreciation deductions allowed ■■ ■■

Real Estate: Existing Properties Immediate cash flow Tends to be safer than new construction because cash flow is known ■■ Depreciation deductions allowed ■■ ■■

Retirement Plans Qualified vs. Nonqualified Plans Qualified

Nonqualified

IRS approval required

No IRS approval needed

Contributions tax deductible

Contributions not tax deductible

Plan cannot discriminate

Plan may allow only certain employees to participate

Tax on accumulation Tax on accumulation is deferred may be deferred All withdrawals taxed

Only excess over cost basis is taxed at time of withdrawal

Plan is set up with trustee

No plan trustee required

Qualified Plans Individual Retirement Accounts (IRAs both traditional and Roth) ■■ Simplified Employee Pensions (SEPs) ■■ Keogh (HR-10) Plans ■■ Tax Sheltered Annuities (TSAs), both 403(b) and 501(c)(3) ■■ Savings Incentive Match Plans for Employees (SIMPLEs) ■■ 401(k) both traditional and Roth ■■

■■ ■■

Payroll deduction Deferred compensation

margin ■■

50% initial margin Set by the Federal Reserve

Tax credits for investing in public housing ■■ Cash flow via rental income can be suspect ■■ Appreciation is minimal

Long Account

Equipment Leasing

Ex: Customer purchases 100 shares XYZ at $24 LMV = $24(100 shares) = $2,400 Dr = 50% LMV = $1,200 LMV – Dr = Equity $2,400 – $1,200 = $1,200

Typically airline and railroad equipment or computers ■■ High depreciation potential of equipment due to obsolescence

Oil and Gas Drilling: Exploratory ■■ ■■

Drilling in new areas High risk and reward

Oil and Gas Drilling: Developmental ■■

Drilling in areas where resource has been previously found

Oil and Gas Drilling: Balanced ■■

Both exploratory and developmental drilling

Oil and Gas Income Buying existing producing wells Immediate production and income ■■ Safest of all oil and gas partnerships ■■ ■■

Ex: LMV = $35,000, Dr = $20,000 When will account be at minimum maintenance? Dr / .75 = $20,000 / .75 = $26,666.67

Minimum Maintenance Short Account, 30% ■■

How high can SMV rise before a maintenance call, Credit / (1 + .30) = Cr / 1.30

Ex: SMV = $45,000, Cr = $60,000 When will account be at minimum maintenance? Cr / 1.30 = $60,000 / 1.30 = $46,153.85

Account Status Status

Equity

Result or action

Excess equity

Equity above Reg. T (50%)

Credits Special Memorandum Account (SMA)

Restricted account

Equity below Reg. T (50%)

■■

Maintenance Equity call below minimum maintenance

Regulation T ■■

■■

How low can LMV fall before a maintenance call ■■ Debit / (1 – .25) = Dr / .75 ■■

Nonqualified Plans

Real Estate: Government Assisted Housing ■■

Minimum Maintenance Long Account, 25%

Long market value – Debit = Equity LMV – Dr = Equity ■■

Short Account Credit – Short market value = Equity ■■ Cr – SMV = Equity ■■

Ex: Customer sells short 100 shares XYZ at $30 SMV = $30(100 shares) = $3,000 Cr = SMV + 50% SMV = $3,000 + $1,500 = $4,500 Cr – SMV = Equity $4,500 – $3,000 = $1,500

Applicable to long accounts Line of credit for future purchases or loans ■■ Buying power = 2 × SMA ■■ Loan value = 1 × SMA ■■ Generated by: increase in market value, nonrequired deposit, sale of stock (50% to SMA), dividends, or interest ■■ Decreased by: purchase of securities, cash withdrawal ■■ ■■

Note: Market value increases, add to SMA. Market value decreases, do not take SMA away. To lose SMA, account holder must use SMA.

Margin Account Agreement Forms Agreement

Required Details

Credit

Yes

■■

Hypothecation

Yes

Investor pledges collateral (securities) to broker/dealer

Loan consent

Optional

Allows BD to lend customer securities to other customers

LMV – Dr + Cr – SMV = Equity

Ex: Account long 100 shares ABC at $20 Long 200 shares DEF at $50 Short 100 shares LMN at $26 LMV = $20(100) + $50(200) = $2,000 + $10,000 = $12,000 Dr = 50% LMV = 50% ($12,000) = $6,000 SMV = $26(100) = $2,600 Cr = SMV + 50% SMV = $2,600 + $1,300 = $3,900 Combined equity = LMV – Dr + Cr – SMV = $12,000 – $6,000 + $3,900 – $2,600 = $7,300

Deposit cash (1 × call) ■■ Deposit securities (2 × call) ■■

Special Memorandum Account (SMA)

Combined Account ■■

Buy stock: deposit 50% ■■ Sell stock: 50% retention to pay down debt ■■ Withdrawal securities: deposit into account 50% of securities value

Truth in lending document ■■ Details all margin account requirements and obligations