Transcript for:
Series 7 Exam Overview

well greetings and salutations series 7 test takers this is the series 7 guru coming to you from my off-grid studio getting our kicks on historic Route 66 i have a very popular v video that has contributed to many many testing victories called your series 7 and 60 minutes and people have been asking me for many many many months to update that uh video it's still relevant it's still appropriate and I didn't want to make a series 7 and 60 minutes part D or part two so uh I thought instead I would uh continue to build out updated versions of those which are we're now count calling the mighty 90 so this is your series 7 and 90 minutes the mighty 90 on the series 7 to get you in the flow night before or morning of your exam or both this isn't designed if you are listening to this video and you don't know these things that would be bad right so this is a a fly over uh before you stick the landing tomorrow on your series 7 all right let's get uh our 90 minutes the mighty 90 starting with uh types of communication and the distinction on your exam about retail versus correspondence so you should know correspondence is 25 or fewer whether your principal can approve that pre- or post distribution that's a 30-day period right that's correspondence retail communication is going to be more than 25 and that requires principal approval predistribution uh what else would require a principal approval well remember in the options account the registered option principal would approve that account and once that account is approved approved the customer has to back have back to us within 15 days of that account approval the option agreement right that they read the booklet they understood it all that kind of stuff they understand what level uh they've been approved for in terms of capital markets and underwritings if we're doing a traditional initial public offering we're going to make our registration statement we should know that once we enter into that registration statement we're are in inter make that registration statement we enter into what's called the cling period of quiet time you should definitely know that's a minimum of 20 days you should know that during the cling period we're trying to make sure that all the information is truthful relevant most importantly we've made no omissions of material facts during that cooling off period we can send you a red herring also known as a preliminary perspectus it has pretty much everything you need to know except the final offering price based on that we can accept indications of interest IOIs which are non-binding on all parties we're not allowed to advertise the new issue but we certainly can place a tombstone a tombstone is just a matter of record right tombstone says it's neither an offer to sell nor solicitation to buy the following security an offering is made only by a copy of the perspectus um make sure you understand which documents are which right so the underwriting agreement is between the issuer and the underwriters the selling group agreement is between underwriters and their selling group members the selling group members that are in that underwriters bracket and merge selling group members are never liable for unsold securities only sending members are liable based on whether it's divided or undivided divided is also known as western undivided eastern right so it's either going to be individually responsible or based on percentage participation uh we have to make sure just because we've registered with the SEDC doesn't mean we're necessarily okay in the state right so securities need to be blue skyed with the state administrator through either coordination that's the same time we're doing our IPO or 33 registration if we're not doing 33 then we would qualify that security through qualification with the state administrator registering the securities with the state if it's federally covered security we can make notification Uh again the idea here would be there's a whole laundry list of exempt securities i wouldn't worry too much about that now immunis if we're going to do immunity uh underwriting remember that's either going to be negotiated or competitive you know in a negotiated transaction the issuer selects the underwriter in a competitive transaction the issuer is going to publish a notice of sale a notice of sale means it's a competitive underwriting attention investment bankers we'd like help selling these securities that notice of sale is going to be uh published in the bond buyer the bond buyer is a paper newspaper wide read in the municipal market right you should definitely know that in underwritings the difference between what the investors pay and the issuer receives is the spread spread always means difference you know whether it's the bid and the ask whether it's the NAB and the POP whether here it's what the issuer receives what the investor pays whether it's difference in the premiums that's what the word spread means now in terms of components of the spread you should know that the management fee is the single uh smallest individual component of the spread and the selling concession is the largest individual component of the spread be careful in munis the total takedown is not an individual component of the spread spread so if they say largest component in munis it's the total takedown but please note that is not an individual component right uh we talked about uh that what about some exempt transactions we should be aware of we should be aware of the definition of a quib a qualified institutional buyer of securities under 144A that definition is they have assets under management of a 100red million or more and what they're allowed to do is buy unregistered foreign and domestic securities we should know that another definition we're held accountable for is an accredited investor who can accept an invitation to a regggd private placement good way to remember that is one two three right one a million dollars net worth exclusive of primary residence or $200,000 for the last two years with the expectation 200 grand this year or merit and filing jointly 300 grand for the last two years with the expectation of uh 300 this year 1 2 3 i got some good news for you too uh once you pass your series 7 and you're a series 7 in good standing you two meet the definition of an accredited investor uh another exempt offering exempt transaction how we're selling it another safe harbor is rule uh reggga A regulation A has two tiers we have tier one up to $20 million tier 2 up to $75 million the difference between tier one and tier two is if I go into that uh you know tier two then it becomes uh suitability I shouldn't say suitability yeah we'll use that word for lack of a better term uh and then you can only put 10% of your net worth or 10% of your annual income into a rego offering that is a public offering exempt transaction safe harbor under 33 and we go to that second tier they're going to have to uh have audited financial statements the issuer We uh should know the distinction between under regggd 506b where we can have up to 35 nonacredited investors but we can't solicit and 506c where we have no uh redd506c no nonacredited investors uh but we can solicit uh 147 an exempt transaction is an intrastate offering of securities for us to use this exempt transaction this save harbor without registering under 33 right s S1 is the I wouldn't worry about it but S1's that traditional uh IPO registration statement so we're not doing that here here we have to uh only can sell it within the state to residents of that state and the issuer has to have the 80% test 80% of their business and assets within the state just because we're not registering with the SEC does not mean that we don't have to register our 147 entry state offering with the state administrator we most certainly do right and the way we're going to do that is qualifications now after uh a resident of that particular state has held it for 6 months they can sell it to someone else all right so let's talk about uh types of accounts that we have so you know types of customers one thing we get uh tested on is what is a day trader what meets the definition right if they've done four or more trades in a 5day period they're a day trader and then their minimum becomes $25,000 you know there are irregular ways to settle trades you know in terms of settlement trade settlement it's T+1 but sometimes we open up an account called DVP delivery versus payment this is typically institutional customer and here we have up to 35 calendar days to make delivery of that security to the commercial bank for payment you should definitely be able to contrast joint tenants with rights or survivorship with tenants in common in terms of what happens to the deedent share and joint tenants with rights or survivorship the deedent share goes to the surviving party with tenants in common the deedent share goes to their state or beneficiary very testable uh to open the account we need a picture ID something that verifies that you are who you claim to be we need a physical address people don't live in PO boxes we're more than happy to send things after we get the original documentation in place to a PO box but on the original we need to make sure we have that physical address right who needs to approve that account a principal approves that account and then one of the questions on that new account form does are you or do you or your spouse work at a broker dealer right and if they say yes then we make written notice to the employing firm and we follow any instructions they may have about uh you know uh duplicate confirms and statements in retirement plans we should definitely know that retirement plans are cash accounts meaning that the securities transactions need to be paid for in full no margin we should know that retirement plans if we take physical possession of those assets we have to have them back in the appropriate spot within 60 days so a rollover has to be accomplished in 60 days it's important we can distinguish between retirement plans that are funded pre-tax you know is funded with money you've never paid taxes on because that means everything everything coming out is taxed at ordinary income tax rates as uh contrasted to a non-qualified plan that is being funded with after tax money and you do have a cost basis now in terms of the retirement plans you get to your employer there's two types we should be able to distinguish between a defined benefit plan where the employer assumes the investment risk and a defined contribution plan the one that most people are uh you know uh familiar with is a 401k right defined contribution the employee assumes the uh risk oh we should know that uh we have definitions you know uh definitions are pretty important sometimes I say man if you somebody told me I had to take a test and I have to take it tomorrow I'd probably go to the glossery and look at some definitions we talked about the definitions of an accredited investor the definition of a qualified institutional buyer of securities uh another definition we're held accountable for is the definition of a control person you know all the stock a control person owns is called control stock you know that's synonymous I think for chess purposes with this concept of an insider anyone who can influence the decisions of the corporation and their immediate family members right so this would be officers directors and principal stockholders and where there are rules that apply to control persons as well as to control stock with stock they own and where they probably own some stock that they bought in the public marketplace at one point was registered registered securities they probably have some stock they got directly from the issuer and regardless of how they got that stock they're not allowed to sell short uh they're not allowed to short swing profit at 6 months and most importantly this concept of 144 and whether they can sell the stock right they'll file the form no later than concurrently and if once that form is in place over the 90-day period they can sell up to 1% of the outstanding shares or the average last trading volume whichever is greater I think a good memory aid device is 144 1% of the outstanding stock average of the four last four weeks trading volume whichever is greater four times a year every 90 days so we need to be able to distinguish between limited power of attorneys and full power of attorneys we should know that all powers of attorney all trading authorizations cease upon the customer's death with a limited power of attorney or limited trading authorization I can make decisions about action asset or amount with 3A I don't need discretionary authority to make decisions about time and price with full trading authorization full power of attorney not only can I make investment decisions I can also withdraw monies and securities and we have to have the document and take uh documentation in place for discretionary authority uh prior to that first trade so the principal has to approve that discretionary uh account uh prior to that first trade you know uh in terms of suitability we need to know about the customer we have an obligation to the customer i say for me to do a really good job for you over time I need to know a lot about you more I know about you the better I'm going to be determining suitability yeah they say "Well D it's not your damn business." I said "Well actually it is because my regulars required me to know my customers." KYC you can know your customer now I also it's important because I might want to determine as I do your personal balance sheet and we start our financial journey whether you are accredited uh I might want to know on your income statement that 200 or 300 right so this would be important in terms of a data gathering you know in terms of uh what happens once I open the account right I mean I find the customer I open the account and I do the trade you know we do get tested on the flow of an order flow you know a good memory a device here is order peanuts Mr carter or other people's money's count you know the first place it goes to is the order department who transmits the order to the appropriate market center for execution order being Mr carter then it goes to the PNS department purchase and sales you know they generate the confirmations which have to be in the mail by settlement uh they match trades and then it goes to the margin department who determines whether monies or securities are due and then cashiering department actually takes receipt of monies and securities so that's the orderful if we have all those departments well then we're clearing broker or we can clear trade if we don't have those departments we're typically going to use somebody if we're doing general securities to do that for us whether it's you know clearing firm like Persing or National Financial whatever the case may be uh in terms of uh customers who are 65 or older all firms that are WSPs our written supervisory procedures should say "Okay what are we doing to protect seniors?" And one thing that a lot of firms are going to recommend to our senior customers 65 or older is that they appoint a trusted contact person and this allows us as broker dealers to put a temporary hold on transactions while we reach out to that trusted contact person uh by the way the WSPs have all kinds of things in them besides this thing about seniors insider trains found there all kinds of things all new hires have to read our WSPs and then they sign that they've acknowledged them and they understood them right and it also tells us you know like how we're going to close accounts and we can't I verify your identity all that kind of stuff the big ones for test purposes are in the WSBs this uh exploitation of seniors the uh insider trading money laundering those are some big ones that would be found and uh the written supervisory procedures of the broker dealer all right so uh the biggest part of your exam is the third part right we said there's four functions of your broker can you find a customer right can you open the account function two can you make an investment 91 questions on investments right so this is target rich and a lot of times when people struggle with suitability it's because they're not well grounded in the investment vehicles themselves right so this is big all right let's talk about systematic risk and nonsistatic risk risks in the system non-sistatic risk is also known as selection risk you know the easiest way to avoid selection risk desk question non-sistatic risk is to diversify and the easiest way for most retail clients to diversify is in the context of a mutual fund now in a mutual fund you're still going to be exposed to systematic risk risk in the system the tendency of securities prices to move together you know I think of it as when bad things happen to good stocks right and risk prevails there despite your diversification now in terms of our expected return the idea is we would expect to be paid for the volatility the risk and the volatility we take and the measurement of a stock or funds volatility is compared to the market as a whole is beta so if I tell you it has a beta 1 and a half that means it's one and a half times all the market right so if the market return is 10 it has a beta 1 and a half our expected return would be 15% so if I call you I say hey good news we got 18 you got more than the expected return 13 would be nothing to chat up that excess return over beta is called alpha right this is part of you know port modern portfolio theory right uh again if you're going onto your 66 this is going to be a lot more testable there than it is on your series 7 okay so uh there's kind of when we're doing stuff we're trying to make decisions about investments you know one of the valuation techniques we're going to use is called fundamental analysis you know to say you're fundamentalist does not mean you're a member of the religious right to say you're fundamentalist means you're going to look at the in uh financial statements you know the financial statements would be the balance sheet the income statement and we're going to get that be able to get that if it's a public company we're going to get uh access to 310 Q's quarterly reports and 110K the fourth quarter in the annualized results that 10K is audited and what we're doing is looking there doing some balance sheet calculations to hopefully find a margin of safety in terms of making the investment so there are some balance sheet calculations you're held accountable for most of the time it shows up as recognition but you know we may ask you to do it and uh one thing we'd be concerned with when conducting fundamental analysis is liquidity you know what is the company's liquidity one thing we'd be interested in is working capital working capital is current assets minus current liabilities now what Mr describes working capital our working capital can best be described as you know another thing is the current ratio that would be the current assets divided by the current liabilities uh the asset test or quick ratio you know we don't really want to have to sell off our inventory to pay our bills right so the quick assets would be the current assets less inventory again we divide once again and that gives us the quick or acid test ratio a more stringent definition of uh liquidity in that particular corporation now we're also interested in how is the business capitalized how leveraged is it you know capitalization in a corporation consists of the equity common and preferred stock and the bonds and we would be interested in perhaps knowing what percentage of that capitalization uh is bond holders how leverages it so we might want to take the bond money long-term debt divide by total cap shareholder equity and that would give us that number what is the gear rate you know leverage is financial speed and if the company's leveraged it's going to make money faster and it's going to lose money faster now I'm not going to ask you to calculate earnings per share but remember again a valuation technique is a PE ratio a multiple you know the PE is 12 you know you might have to do that exam 48 divide by four I tell you the stock is 48 it has $4 in earnings per share what is the PE you say 12 now again if you're a value investor you'd be interested in a lower PE 12 years to get back in earnings what I paid for the price if I'm a growth investor I'm willing to pay a higher PE multiple on the business because I assume that you know the earnings are going to grow and so it just depends on what kind of an style of investor you are now as a value investor or fundamentalist I'm interested in margin of safety as we said and one thing I might want to try and do is buy the stock as close to the book value as possible and book value is the theoretical liquidation value of the corporation right you know A book value B par value C market value right par value is the arbitrary number we set up the books with thousand for bonds 100 for preferred dollar for common stock and then remember that's par market value is the supply demand relationship uh in the marketplace and then as the as I said book value is that theoretical liquidation value of the corporation all right so we talked about that you know it depends on your draw i'm wishing for you tomorrow or today depending on when you're listening to this at dream draw everything you studied shows up and uh I'm not going to go into balance sheets and exhibits and all that kind of stuff but if you tell me you Mr mark because of balance sheets I'm going to say you know what else did you have you had bigger problems elsewhere right you had bigger problems elsewhere now we associate dividends with mature stable businesses so as a value investor I'd like to have a potential to make money from the income stream from the stock dividends as well as some price appreciation those two concepts together are called total return and one component of my total return would be dividends and I'd be interested in knowing what is the dividend payout policy of the company how much of their earnings if any does the board declare or distribute as a dividend because remember you don't have a right to a dividend you just have a right to a dividend if declared right and so for example the company in my previous example has $4 in earnings pays out $2 that would be a 50% dividend payout ratio we associate dividends with mature stable businesses i would be able to do current yield on a stock or a bond and the way we do that is an AMP the annual dividend or annual interest divided by the market price so in my example I told you the stock was 48 i told you paid a $2 dividend 2 / 48 what it pays me by what it cost me 4.2% now tomorrow or today whenever you're watching this if you can't decide what to do in terms of math divide i would be doing you a great service to cover every key on your calculator except the divide key if you're not dividing you know you're typically doing the wrong math so for what it's worth all right so remember uh now in terms of what we can invest in in the capital structure of the corporation where can we invest we can invest in the common stock the preferred stock assume they have preferred stock available we can invest in their bonds secured or unsecured and in a corporation we have a corporate charter and in that corporate charter we're going to stipulate the maximum number of shares the corporation can issue that's the authorized shares and then the corporations will issue some amount of those shares those are shares been placed with investors now we wouldn't expect early in the company's life stage that they have excess capital and have retired shares or bought shares into the treasury but that would be called treasury stock so issued less treasury is outstanding we should know that if the company buys stock into the treasury the shares that are in the treasury treasury stock pay no dividends and have no voting rights right and we said par value of a common stock is a dollar now you do have rights and privileges as a common stockholder because you own the business and one right you have is your preemptive right remember your preemptive right is your first right of refusal on the new issuance of stock right you have a right to maintain proportion ownership the mechanism for that is a rights offering and you definitely want to be able to know that rights are shortterm and at issuance exercisable below the current market price what you've got to do to be able to do is contrast that with warrants which are long-term and exercisable above right uh you're entitled to dividend if declared your pro share you're entitled to access to the corporate books the 10 Q's and the 10K you are have a right to vote on matters pertaining to the corporation and depend on the corporate charter will depend on what kind of voting the company is using you know we have statutory we have cumulative and we have super voting statuto is pretty straightforward you know I have 500 chairs i have 500 votes you know if we're voting on three board seats 500 yes no 500 yes no 500 yes no if it's cumulative 3* 5 I have 1500 votes i could spend them in any fashion I'd like you know if board ZA is important to me I put all my votes there and I don't vote anywhere else you the the cumulative voting protects minority shareholders because they have greater impact on any one day super voting test question is more than one vote per share so these are the shares that that Meta and Zuckerberg owns everybody else who owns Meta has one vote per share he gets 10 votes per share because he has a different class of equity called super voting you know the Ford family right super voting is uh the uh shares that have more vote more than one vote per share uh we talked about uh you have a residual claim right residual claim means we sell off all the assets we pay off the liabilities that you know book value thing concept if there's money left over you have it now some companies might do a spin-off right so if a corporation does a spin-off you know for example uh they're talking about Alphabet uh splitting off YouTube or spinning off YouTube so now YouTube would be an independent entity and uh you know the holding company Alphabet would say Dean for every hundred shares of Alphabet here's you know 20 shares of YouTube now you are not taxed on the shares you receive from the spin-off until you sell right and you only get taxes if you know your you tender shares for cash so that would be a spin-off um and again they would tell you what the issue would tell you what your your cost basis is so again I said if it's not a spin-off maybe it's uh you're tendering your shares to the corporation you own Twitter and you're accepting the cash tender from X Holdings that's a 5420 uh cash offer once the uh acqu the person making the acquisition makes you that tender offer that tender offer would have to be open for 20 days here since it's cash you're going to owe taxes on the 5420 right if it was uh you know they're offering me shares you know that Disney is acquiring Fox I'm a Fox shareholder and they offer me Disney shares that would not be taxable very defestable though the definition of a penny stock a penny stock is a non a NASDAQ OTC stock under five very testable if you have a non-NASDAQ OTC stock under five in your portfolio instead of getting a quarterly statement you're getting a monthly statement if you've been solicited for a penny stock as a customer you're going to have to give a suitability statement saying you understand that you're buying a speculative lowpric security that suitability statement doesn't apply if you're an established customer an established customer would be somebody who's done three trades with us or somebody who's had funds with the broker dealer uh for more than a year i always get on debrief people who tell me that they got more test questions on preferred stock than they were expecting i'm not sure what to make of that because I you know I don't know what they were expecting from it so anyways here uh we should definitely know that par value is 100 unless otherwise stipulated the reason that's important is see if you don't know par value is 100 you're going to be fumbling around with 5% would be $5 annually you're going to be fumbling around that a conversion price of 20 would be five shares so it's important that that par value is 100 now it's called preferred stock because you have preferential treatment in two areas you know the uh corporation can't pay a dividend to common if it's in a rears to the preferred stockholders so you have preferential treatment in dividends and you have preferential treatment in liquidation now there's two types of preferred stock straight non-cumulative where it doesn't go into a rears right you know if they miss it this year they just try better next year or cumulative where it does go into a rears right and they have to take care of all the rears that a dividend before they can pay dividend to common we also have convertible preferred a convertible preferred allows you to switch your status from being a preferred stockholder to becoming a common stockholder and remember whenever you get a conversion price whether it's convertible preferred stock or whether it's a convertible bond you have to establish the conversion ratio so the minute you get a conversion price you got to go bastards man i don't need that conversion price i need that conversion ratio so if they tell me two today on my test or tomorrow on my test the conversion price is 20 that's based on par 100 divide by 20 my conversion ratio is five shares you know what you're going to be asked to do whether it's here or it's a convertible pond is calculating par in other words what would you be paying for the stock if you convert it the way we're going to do that is we're going to take the current market price of the convertible we're going to divide by the conversion ratio and that gives us parity of the common that's what we would be paying for the common equals what par means if we decide to convert and again the economics may make make that make sense it may not you know whatever the case may be you know a preferred stock is a fixed income investment vehicle like a bond and so preferred stock might have call risk you know if it's callable and interest rates go down the issuer may want to replace that high cost preferred with low cost preferred you know as a preferred stockholder you're hoping that you have protection that you have a call protection that's time and price how long before they can call away from you if I say my call protection is three years that means they can't call for three years and at what price can they call it that would be a boredom what price you know is it callable 102 103 104 whatever the case may be you know as we said it's very testable to know priority you know I said that preferred stock has priority preferential treatment dividends liquidation so if we liquidate the business the common stock is junior preferred stock is senior to the common in liquidation but the preferred stock is junior to the bond holders right you You need to be able to do that from junior to senior common preferred unsecured bonds secured bonds or senior to junior secured bonds unsecured bonds preferred common right uh I told you that a lot of times uh you have to contrast rights with warrants and sometimes uh we'll add warrants to either the uh uh convert to as a sweetener to bonds but the warrants would provide additional equity financing if they are exercised And so we said you have to go to contrast the rights and warrants so you know in terms of equity capitalization kind of hard to where you're going to put things but remember this when people exercise rights or warrants they're providing additional equity financing uh to that corporation all right well where do these stocks trade right the two major market centers on your exam are the New York Stock Exchange which can best be characterized as an auction order driven market and the other major uh market center is NASDAQ and NASDAQ remember is the National Association of Securities Dealers automated quotation system and that is a negotiated quote driven market right little different they're a little different in how they're organized uh you're definitely going to get tested on American depository receipts american depository receipts uh allow foreign securities to be traded in US domestic markets it filitates US investors owning those foreign securities you know the underlying business if it's conducted in the foreign currency very testable ADRs have currency risk all right tax treatment of equity securities so your tax treatment is based on how long you've been at risk if you've been at risk for more than 12 months you qualify for long-term capital gain and that long-term capital gain is typically going to be at a lower rate than your ordinary income tax rate so it would behoove you to kind of think okay you know I want my investment mind says so my tax mind says eh now I can use up to $3,000 in losses in my portfolio to offset my paycheck or earned income so you know let's say I net all my gains and losses to my portfolio and I got a $12,000 loss and let's say I made $90,000 i'm going to be able to adjust my uh income from 90 to 87 90 minus three that means 9,000 is I'm going to have forward now cash dividends are taxable well there's two types of cash dividends qualified and non-qualified both are taxable qualified is if I've own the stock 60 to 90 days who cares prior to the record right and the point is it's just going to be taxed at a lower rate than a non-qualified dividend which would be taxed just like my at my ordinary income tax rates and then remember a dividend of one corporation paid to another corporation is 50% tax excludable you know if I sell a security to take a loss and I say "Yeah man i really think that could come back and I think I'll buy it back tomorrow." The RA says "Well Dean if you sell the security and take a loss and buy it back tomorrow we don't really think you were through with it as an investment." They're right so I would have to wait more uh 30 days on the other side of 30 days to reestablish that all right so uh if we convert that's not a taxable end until I actually uh sell right so when I switch my status from being a preferred stockholder to a common stockholder a bond I convert the bond and I convert that's not a taxable event it'll be uh based on when I actually sell remember stock dividends and stock splits same deal not taxable i just have just my cost basis i hope you remember me telling you this for tonight today or tomorrow depending on when you're watching this you always end up with more shares at a lower price so before I jump in and try and do math and I'm not you know I've got plenty of videos you can watch do me do the math if you want put it in the search bar uh in this video the Mighty 90 I'm just going to tell you that you can sometimes just shop the answer set so I bought a 100 shares at 50 and they pay me a 10% stock dividend i go okay I need more shares at a lower price i just shop my answer set right you can do the math you want 10% times 100 110 5,000 divide by 110 45 I think you'll find there will only be one answer that has more shares at a lower price right uh very testable about what happens when shares are inherited you know so when somebody dies and somebody else receives those shares there's a step up in the cost basis right mar value of death versus gifted securities and gifted securities the recipient assumes the cost base of the donor right so you know when you sell your shares let's say you've been buying shares of the same company over several time frames so I've been buying you know Exxon for the last 30 years and I decide I want to sell Exxon you know I have different cost valuation techniques i have I can say the first shares in Exxon are the first shares I'm selling i typically don't want to do that because that's going to be the ones I have the lower cost basis and will generate the biggest tax i could do LIFO last Exxon shares I bought or the first Exxon shares I'm selling typically a higher cost basis the best would be sheer identification where I actually identify the shares in Exxon in which I have the highest cost basis as the shares I'm selling generates the lowest tax i can do it any way I want remember test question though the IRS will impose FIFO if I don't have the proper uh record retention and documentation all right well most people get where they're going without crashing and burning in uh mutual funds right so I joke when you pass your series 7 you go back to your manager you say "Man I know I have a series 7 but it is okay if I just sell mutual funds." He's going to say "That would be wonderful." Right so you know uh there are some things that uh people don't like about the tried andrude traditional plain vanilla mutual fund you know a lot of people don't like this idea that we're always doing business based on the next calculation of the NAV forward pricing you know a lot of people don't like the idea that you can't buy an open-end mutual fund on margin and so ETFs test question change traded funds trade in the secondary market i got to be able to contrast a ETF with a traditional lane vanilla you know open-end fund etfs can be bought on margin they're marginable eligible for purchase on margin for test purposes ETFs are passive that means they have a lower cost structure and more tax efficient i UITS unit investment trusts unit investment trusts are professionally selected the assets in the portfolio are professionally selected but the portfolio is fixed it has passive management and what follows from that again is this idea of a lower cost structure passive management because you're not paying a manager buy and sell you know we say "What would you like to do with your idol monies at our broker dealer would you like to put it in a traditional uh checking account demand masit or would you like to put it in a money market fund a money market mutual fund you should definitely know that money market mutual funds would be appropriate for somebody who has a short time horizon like you know hey Dean I sold my home in California uh what should I do with the money i'm moving to Texas and I'm going to be buying a home there soon and I say well why don't we put in a money market right um the enemy is a dollar and then you should definitely know what are money market instruments money market instruments are high quality debt maturing in less than 12 months so what would be found in this money market fund uh commercial paper large unsecured borrowing by corporations max maturity 270 days issued at a discount banker acceptances used to facilitate foreign trade issued at a discount max maturity 270 days t bills no better credit quality the US T bill and then negotiable jumbo CDs right all those would be found in there now in an open-end mutual fund we're continually offering new shares to the public and so that means we have to give them a perspectus right we're going to have to comply with 33 with a closed end fund we do a one-time initial public offering and then those shares are going to be trading in the secondary market it's very testable to be able to contrast open in and closed end funds now in the investment company act of 1940 we have to calculate the NAV at least once per business day we're always doing business based on that next calculation of the NAV the maximum sales charge in an open end mutual fund is 8 and a.5% so you know the formula that we do business based on is the NAV plus the sales charge so if a mutual fund has an NAV of $9.15 a sales charge of 85 the public offering price would be 10 the largest single expense to the fund is the investment advisor be careful RTFQ today or tomorrow you know if I ask what's the largest extinguishing expense of the client it's the low 8 and a half% in my example I just had different than what's the largest exaling expense of the fund you know some funds have a promotional expense promotional expense for advertising marketing sales literature key point promotional expense not an expense for managing the money and if you want to refer to yourself as a no load fund can you still have a promotional expense the answer is yes but that promotional expense can't be more than one quarter of 1% if it's one quarter 1% you can still hold yourself out to the public and refer to yourself as a no-load fund and if you go past that then you can't refer to yourself or hold yourself out as no load and in any case over the life you can't go past 3/4 of 1% now we have A shares B shares and C shares now A shares are typically the ones you're going to get tested on and A shares out typically have a quantity discount so they would be appropriate for somebody who has a long-term time horizon and uh may be able to qualify for the breakpoint a breakpoint is a wonderful thing it's a quantity discount that's good again be careful a breakpoint sale is bad right breakpoint is good breakpoint sale is bad a breakpoint sales when you try and avoid the quantity discount the break point to maximize your commission so the easiest way to stay out of trouble here is to tell the client all the ways he can qualify for the reduced sales charge and I say "Listen I understand you have $80,000 not a h 100red the break point's at 100 why don't we fill out a letter of intent if you will tell the mutual fund family the fund distributor or sponsor that you are intend to come up with the additional 20 grand within the next 13 months LOI is good for 13 months." They'll give you the reduced sales charge woohoo right you say ' Dean there's no chance I'm going to do it oh whatever you know you call me said 'D damn I should have done it i just came into some money the yellow eye can be backdated 90 days that 90 days is inclusive of that 13 months you say "Hey Dean my investment club we want to you know get a break point." I said "Nope no quity discounts no break points for investment clubs." As I said this is an investment vehicle where more people get where they're going financially without crashing and burning than any other kind of investment vehicle and one thing we can add to this is dollar cost averaging now what makes dollar cost averaging work fixed dollars invested regularly what is the uh end result if you're going to have a lower average cost the underlying shares doesn't guarantee a profit right so uh mutual funds tax consequences of mutual funds the IRS has been kind enough to say that as long as a mutual fund or a REIT now REITs are very similar you know mutual funds provide professional management diversification ease of ownership professional management of a portfolio of securities rests are very similar professional management diversification ease of ownership but it's a portfolio of real estate investments both of them must pass through at least 90% of their net investment income a good memory aid device for this is D90 die 90 that stands for dividends on the stocks in the portfolio plus interest on the bonds in the portfolio plus expenses they have to pass through at least 90% now a lot of mutual funds have what are called drips you may hear the term drip today or tomorrow depending on when you're watching this and drip stands for dividend reinvestment program and so I tell the mutual fund that I don't need the dividends or the capital gains just to go ahead and reinvest those in the fund well the IRS says as far as they're concerned I could have got the money and that's the same as getting it constructive receipts i'm going to owe taxes on the reinvestments of the dividends and capital gains distributions i'm going to get $1099 and I'm going to owe taxes on that variable life if I don't know if it's helpful you know don't don't leave my channel and tell your compliance officer what Dean said on his YouTube channel you know we're just trying to pass the test anyways I think of a variable annuity as a mutual fund with an insurance rapper a mutual fund with an insurance wrapper right so in a variable annuity we refer this as a nonqualified retirement plan for test purposes what that means is we're using after tax money we're not getting this through an employer so you know you have a large amount to invest you've taken care of all of your other retirement plans you've maxed out everything available work you've maxed out you know IRAs all that other stuff you still want to add some more money for retirement you say "Dina how about I give you $100,000 for this variable annuity?" That $100,000 is money you've already paid taxes on that money is going into a separate account a mutual fund and so you the annuitant are assuming the investment risk in a variable annuity now in that variable annuity what you're buying is accumulation units which are the same as shares intellectually you say I have 6,000 accumulation units is the same thing as I have 6,000 shares and when it's over 59 and a half right like all retirement plans I would know the 59 and a half then you can decide what you would like to do would you like to turn this into an income stream that you can't outlive that'd be kind of cool and what we're going to do is turn your accumulation if that's what you want to do into annuity you know maybe you want to do a random distribution and so let's say now there's a million in there you say "Dina send me $100,000 of my million dollars i said ' Okay you say ' Dean do I owe taxes on that i said 'You most certainly do.' He said 'Well then send me the hundred I put in there.' No no no i say it's LIFO last money's in our first monies out so if you're doing a random distribution you're not going to get back to your 100 till you get you know 900 out of it all retirement plans are taxed at ordinary income tax rate there's no way in a retirement plan of any kind to turn it into anything other than ordinary income you know you said "Well geez Steve you should have told me that." I go "Absolutely that's important right because if you were in like an index fund you held it for more than 12 months you'd qualify for that." Now let's say you say "Dean I'd like to annuize i'd like to turn it in an income stream." I say "Okay so we're going to turn your accumulation units into annuity units and the largest monthly check will be test question you choose life only if you tell the insurance company you just want to be paid for your life and your life only that'll give you the largest check now the check is going to go up and down based on the assumed interest rate the air you know whatever the air is we do better check goes up we do worse it goes down we get the air it remains the same i got to bump you all over the place because you know you're in retirement you know uh another investment vehicle we have is partnerships oh man I too late now because you know these mighty 90 videos are for the night before or morning of your actual investment so too late now but people overdose on partnerships test prep vendors right i would expect today or tomorrow you're going to get a couple questions on part partnerships you tell me Mark because of partnerships right participation program eh what is very very testable and angels weep for you in fact if you miss this today or tomorrow depending on you're watching this I would flunk you immediately on the entire exam your seat should just shoot you into the ceiling and say hey if you can't get this partnerships are not liquid you do not have a freely transferable interest you can't be admitted or emitted without the permission of the general partner emit means leave right now partnerships direct participation programs have a flow through of the tax consequences so as an investor in a partnership you're going to get a K1 who cares that shows your pass through of income or losses now remember we said in your portfolio you can take $3,000 against your income your paycheck not so with partnerships what happens in a partnership it has to stay over there in that area right so you can't use passive losses to offset anything other than passive income in that part of your portfolio right flow through uh I would have a couple questions to be ready for a couple questions on types of direct participation programs partnerships you know uh I would be prepared to know that an oil and gas exploratory or wildcap program is the riskiest uh type of partnership we have i would know that we have partnerships that have tax credits if we organize a direct participation program that's going to do low income housing or historic real estate there would be some tax incentive direct participation programs private uh partnerships are either sold as public investments or as private placements right so if it's a private placement that means you have to be credited if it's a public program well anybody can get in there options so in terms of investments the three biggest categories uh are mutual funds munis and options right so this video the mighty 90 I'm going to fly high here uh because we're not trying to relecture the 150 videos I have on options but boy you know make sure you get all the aim and shoot point andclick questions you're entitled to so you should definitely know that the options clearing corporation is the issuer and guaranter of all option contracts you should be able to distinguish American style as contracts that can be exercised any time which is typical of equity option contracts and European styles where you can only exercise at the end at expiration right uh in all uh option contracts and resulting stock trades is T+1 now when you want to establish a position you're either going to be doing an opening purchase to go long opening purchases are used to establish or add to long positions opening sales are used to establish or add to a short position so there's three things that can happen to the option contract and so most questions if they're going to give you a question like this are going to end with one of these three events the option contract got traded the option contract got exercised the option contract expired ter if you're trading the contract you're going to be doing an offsetting transaction a closing transaction you're liquidating that option position and the way you eliminate or reduce or offset a long position is with what we call a closing sale this will be ABCD on the exam and the way you eliminate offset or reduce a short position is a closing purchase so you're trading the option the option contract can be traded it can be exercised or it can expire there's two components to the premium on an option there's intrinsic value and time value and for you today or tomorrow intrinsic value is more important because they like to sometimes say you close out at intrinsic value you know if you don't know what intrinsic value is you might kind of get stuck trying to close something out so remember intrinsic value is synonymous with saying in the money in call contracts what we're asking about is the relationship of the market price the strike price and so call up the market price is up from the strike price in an option contract has intrinsic value now be careful that's good news or bad news is a different question you know put contracts put down the market price is down from the strike price has intrinsic value now time value erodess I mean options are wasting asset at ex at expiration the option contract is only going to be worth its intrinsic value if it has intrinsic value it's going to get exercised if it has no intrinsic value it's going to expire worthless so you know kind of saying I don't have to tell you what happened you might have to figure it out right to the contract position limits apply to the same side of the market you know option contracts are derivatives and we don't want the tails wagging the dogs right the position limits apply to what we call the same side of the market and they apply to what's called a class a class is the type of stock apple calls is a class you know Apple puts is a class and the bullish or buy side of the options market is going to be long calls and short puts so you know I say assuming position limits are right now uh if they actually give you then don't me you know if you don't know position limit it's not a problem if you get this tomorrow it's simply going to be what is the buy side or sell side recognition if they ask you to do anything with position limits I doubt they will but if they do you know it would apply to the same uh this the class as I just said one other point though whether it's this or anything other just be careful for phraseology where they say a husband and wife acting in concert so when they say acting in concert that means you're supposed to consider whoever this is in the question as one party for purposes of the rule right by the way and we always assume husbands and wives are acting in concert so I don't even have to tell you that right if a husband owns 4% his wife owns 8% they own 12% of the company they're princ you know they're control persons right so that kind of thing the sell side or bare side now we remember we're talking about the stock right a long call buy side choice to buy the stock short put obligation to buy stock sell side we're talking about the stock long put choice to sell the stock uh short call obligation to sell the stock uh LEAPS leaps long-term equity appreciation potential securities technically a LEAP goes out 39 months but in practice 30 months and the LEAP is the only option contract if you're long you know the short leap doesn't matter how long you've been short the only option contract that may qualify for long-term capital gain would be a LEAP contract that you've been at risk for for more than 12 months you know another way I could test you on that is to know that longer term option contracts always have greater premiums i could say which one of these is most likely a leap give you the same strikes and you go wow look at the premium in that thing right uh you know kind of late in your study effort here right you know so if you're watching this video the night before or morning of you know the most important thing is to be confident in the execution of your study plan because that's come to an end be confident yourself and most importantly be confident in your answers today or tomorrow that being said uh mantra for option premium premiums is lower higher longer lower higher longer lower strike call contracts always have greater premiums higher higher strike put contracts always have greater premiums and then the one I just talking about now uh longer longer term option contracts always have greater premiums that leak is going to have a huge time value to it and a bigger much much bigger premium uh we have non-equity options i would be prepared uh to answer a question about a yield-based option contract which has a direct relationship with interest rates right and then I would be uh prepared to answer a question about VIX right the VIX is got a direct relationship in terms of what you're trying to do right you know the VIX is the fear gauge right so you know people are willing to pay more for puts so if the market is going down the VIX call would go up so you know low probability but it it could be there we definitely should know in terms of suitability when we're doing covered calls covered means I own the stock that we're doing that to generate additional income you do get tested on advanced option strategies you know and if you can't identify the strategy you're in trouble right so how do we identify spreads spreads are difference right soda same option different action same option two types of option contracts calls and puts same option call call put put different action buy sell straddles same action buy buy different option straddles with different strike prices are called combinations combinations in the spread category you're either buying the spread debit spread or you're selling the spread credit spread you got more money out than in or you got more money in than out if it's a debit spread we already know the max loss right because whenever you buy an option position buy a call buy a put buy a straddle buy a spread the max loss is what you pay right and if it's a debit spread we know exercise in widen would be profitable debit call spreads are going to be bullish and debit put spreads are going to be bearish right because that's what you're doing in a debit call spread you're selling the higher strike call to pay for the lower but the lower strike is going to be dominant same thing in a put spread you're buying the higher strike put selling the lower put to you know help you pay for it but you're bearish now if it's a credit spread we know credit expire narrow no search mist you're not going to be correct credit has six letters expire has six letters narrow has six letters and whenever we sell a spread credit spread more money in and out sell a call sell a put sell a straddle we should know that our max gain is what we've collected now credit call spreads are bearish i think a credit call spread is a smart bear that's where I'm selling the lower strike call but I'm buying that higher just to put in that ceiling so it doesn't blow up on and credit put spreads are bullish again I would want this stock to be above the higher strike so I can keep the money go nearer neer neer but I buy that lower strike just in case just in case you know uh straddles we have two versions of straddles long and short same action buy or sell sell different option so we need to be able to identify a straddle we need to be able to calculate the break evens we need to determine where it's profitable we have a great memory eight silo if it's a short straddle or combination we want the uh market price to be within those two break evens my upside break even and my downside break even you know if I'm long a straddle or long a combination I would want the market price to be either above or below those break evens very testable to know that a naked uncovered call right would expose a customer to unlimited risk right so you know an uncovered put you know it's definable may be a lot of money but I know worst case is you're going to pay the strike price for worthless stock so you definitely should know that naked calls short straddles you know exposed customers unlimited risk now you have remember four basic option positions and on all those option positions you need to know break even there's only two break evens call up and put down so for long or short call strike price plus premium what's the distinction where you want it from that for put strike price less premium and again what the distinction is where do you want it right now when you have more than one thing going on a covered call a spread a protective put what you're going to do is you're going to net the two numbers for break even right so a covered call I'm paying for the stock buy sell I'm selling the option the break even is the net of the numbers stock cost less premium protective put I'm buying a put to protect the stock position buy by right so I'm going to combine those numbers and that will be my break even stock cost plus right so you know in terms of uh break evens uh spreads we have some memory a devices that can be helpful for break evens uh you know the break evens as we said for the basic options are call up put We said for a covered call stock cost less premium uh for a protective put it's what you paid for the stock like plus you paid for the insurance straddles it's going to be strike price plus total premiums buy buy or sell sell when we combine strike price minus total premiums that's the only one where we're going to have two break evens now in spread a good memory a device for that is cal or push cal stands for call add to the lower call add lower put st push stands for put subtract from the higher so test taking trick we know that in a spread the break even has got to be somewhere between the two strikes because that's where all the action takes place so I can get a 50/50 today or tomorrow by just looking at the the answer set and say okay it's got to be something within those two strikes because that's the whole point of that transaction so in a call spread doesn't matter debit or credit i'm going to take that net premium add it to the lower strike and a put doesn't matter whether it's debit or credit puts bread i'm going to subtract it from the uh put uh tax treatment of options people overdose be careful today or tomorrow usually a tax question is a camouflage profit or loss question right all option trading is shortterm now the exception is you buy a leap and you hold it for more than 12 months but on that it's all shortterm now cost base typically follows break even so on your test if they ask you cost basis and you do break even 98 out of 100 times you're going to be correct so if I buy an Apple call Apple's at 200 as I'm making this video and let's say I buy an Apple call at nine and I exercise my break even's 209 my cost basis is 209 so for the most part the uh cost basis follows a break even uh exercise expire well if it expires it's either a short-term gain or loss being where they bought the contract or I sold the contract you know uh in the old days in the old days a lot of people would refer to the series 7 as a stock broker's exam and I always thought if there were truth in labeling it should be called the bond brokers exam because there's way more questions about bonds than there are about stocks you're held accountable for three issuers of debt securities corporate issuers of debt securities municipal issuers of debt securities and the US government as an issuer of debt securities right now we talked about foreign currency risk and we said you have foreign currency risk and ADRs another area in which you have foreign currency uh risk would be a euro bond there are two types of bonds euro dollar bonds that are denominated in US dollars and again the test is pretty egocentric if I'm getting paid in dollars I don't have currency risk and a euro bond keyword missing dollar this is where the issuer has agreed to pay not dollars but euros or Swiss franks or British pounds or whatever the case may be and I'm going to have to turn those euros or Swiss Franks or British pounds into dollars so Euro dollar no currency risk euro bond I do have currency risk right uh another risk I have in bonds the two basic risks I have in all bonds is interest rate risk and default risk right but there's other ones as well right we have call risk associated with the declining interest rate environment we talked about that as it relates to preferred stocks and we said call protection consists of two things you don't have call risk in zero coupon bonds because zero coupon bonds are not callable and you don't have call risk in treasury bonds because treasury bonds are not callable uh on the test you have to be able to contrast debt security ETN debt security that's the test question an exchangeraded note is a debt instrument and you are a creditor right and to the sponsor the holder you know you they owe you this money and they may or may not pay you right so ETN is a debt instrument very testable so ETFs are equity investments ETN's test question is a a debt instrument with the risk associated with a debt instrument uh non US market securities so a sovereign uh debt the default risk you have two risks in the sovereign debt default and currency risk right think here I lend I buy some Turkish bonds sovereign debt of Turkey or sovereign debt of Argentina so I have two risks the risk they default but also turning the Turkish lera back into dollars right uh yields you should definitely know the nominal yield does not change that nominal yield is also known as the coupon rate or the fixed or stated rate of return we said you should definitely be able to calculate current yield and you are going to get asked not to calculate yield to maturity or yield to call but to understand that relationship the most testable version of this is going to be yield to call on the bond at a premium right so the bond at premium is very likely to be called because interest rates have gone down very test will know that inverse relationship of interest rates and bond prices and hopefully you know you've got your teeter totter and your seessaw and you're ready to kind of roll on this thing about the relationship right we should definitely know that bonds pay semi semianually we said there's two risks interest rate risk and credit risk we should be able to count current yield credit risk we should know is based on the risk that you don't get paid and we have firms that give credit ratings and the one they like on the test is standard imports and she should be prepared to tell me that a triple B an issuer with tripleB bonds those tripleB bonds are investment grade less than tripleB those bonds are less than investment grade now uh if you buy a bond at a discount a zero coupon bond oid you have to do straight line amortization upward called accretion each year and it kind of sucks because there's imputed interest you're receiving and remember you owe taxes on that so you're paying taxes on money you're not actually receiving so wouldn't be a good recommendation for somebody in a very high tax bracket might be a good recommendation for somebody who needs to set some money at some future date wants to lock at a rate of return you know something like that on the corporate bonds we should know secured bonds versus unsecured bonds right in the corporate setting we have secured bonds mortgage bonds secured by real property equipment trust certificates secured by major movable equipment uh we have collateral trust bonds secured by marketable securities placed in escrow uh we have unsecured bonds debentures you know the only the backs of debentures the full faith and credit of the issuer right uh we have zero coupon bonds we talked about that three issuers of those IDs are zero coupon bonds uh but we said they might be good for somebody has a target investment like college or something like that they're very very volatile with interest rates right because you know in a regular bond if there's an income stream somebody would buy it to capture the current yield and that's not true of a zero you know long and low longer term bonds are always more volatile and shorter term bonds long and low and bonds with low coupon bonds or no coupon bonds are going to be more volatile with changes in interest rates convertible bonds you're going to have to calculate parity maybe once maybe twice and remember we said when given the conversion price you got to say bastards I need the conversion ratio based on par so if I tell you in your test the conversion price is 40 you take a,000 get 25 shares right and then parody is typically going to be the current market price of the convertible right so if I tell you now the bond's trading at 1300 and we figured out it's 25 shares I say hey if we buy this convertible bond for 1300 and we divide by 25 we b 52 for the stock that's called parity par means equal uh par of the bond would be going the other way the numbers shares times the current markets uh we have income or adjustment bonds that trade flat trade flat means no calculation of acred interest that the buyer does not owe the seller the dollar amount of the acred interest that would treat be true for income or adjustment bonds that would be true of bonds in default and that would be true of zero coupon bonds income or adjustment bonds are used in bankruptcies and restructurings they only pay interest when and if earned so it's kind of counterintuitive the one thing you don't want to give somebody who wants income is an income bond right so municipal securities so you know you're basically going to get tormented with the two types of mini bonds geos and revenues right geos and revenues you know uh we want in a municipal security have a legal opinion done by a bond council and the better version of this would be unqualified without reservations you know the legal opinion bond guns is going to apply that they have the legislative authority to borrow the money that the bonds pay interest that is federally taxexempt and that the bonds are exempt from the perspectus act of 33 no perspectus when selling brand new munis we don't use perspectus is we have a perspectus like document called an official statement now over the many years some MUN bonds have lost their legal opinion and we say they're trading X X legal x is Latin for without when you have an expouse that means you're long trade with your spouse attached so if I tell you this MUN bond is trading X legal that means it's without a legal opinion you know uh we have serial maturity those are bonds that come due at different dates and if the bond is coming due at different dates we're going to quote that on a yield to maturity basis the fancy word for yield to maturity is basis so to say that a bond has a basis of or yield to maturity of those are terms term bonds all the bonds come due at the same time and all bonds trade over the counter in a negotiated quote driven market and my minimum spread trading corporates and munis is going to be an eighth if you get stuck on what an eighth is you can take one divide by eight on your calculator of a times 10 a bond point and you know what you're going to have to do is turn that into a dollar price right so I work with the bond desk I say I'll buy it into my inventory 98 and eth I'll sell it out of my inventory at 98 and 38 that's my spread now when it comes to goubbies my minimum spread's going to be at 32nd and we said all these bond pay so it's either J&J or J&J 15 that would be January and July or January July 15th or FNA or FNA 15 whatever the case may be now remember the buyer if you buy it I say listen on the if let's just say today I'm making this video April let's say it's April of uh 22nd I think and so if I sell the bond to you I say listen on July 1st we'll assume it's J&J I say listen uh these were my bonds for January February March and most of April so not all that money you're getting on July 1st belongs to you some of that belongs to me and you say well when I get the check I'll send you your prorated to share I No the uniform practice code which standardizes trading within the securities industry says you the buyer are going to pay me the seller of the bond the dollar amount of the acred interest calculated from last time the bond paid interest up to but not including uh you know uh settling it makes sense it'll settle tomorrow and then the year bonds right so then that interest is yours going forward right now when we're underwriting bonds you know bonds any bonds don't fly off the shelf right so syndicate could be open for quite a while and so the day to date is the date the bonds start to acrew interest right if you buy my bonds I say thank you very much from the syndicate and uh you know we're going to settle up with you at some point you're going to owe that dollar amount acrewed interest to the syndicate so dayto date just means start to acrew interest in that underwriting period all right so geos analysis of geos things that go with geos they love all the fall geos except or revenues except and so when we're talking about geos we should know some of the terms that go with geo bonds like overlapping debt overlapping debt is a concept of co-erminence meaning there are two or more taxing agencies sharing some of the same geographic boundaries able to issue debt separately we should know that property taxes are to support local government i joke taxes are the price you pay for civilization the more civilization on the more you're going to have to pay right uh states don't have property taxes so there's no overlapping debt right so you know Las Vegas is 100% co-minence with Clark County Nevada can't be in Las Vegas without being in Clark County you can be in Clark County and not be in Las Vegas so here's the point i'm paying some taxes property taxes for Las Vegas i'm paying some taxes that go to the county i pay for the Clark County Unified School District that's overlapping debt the state of Nevada does not have property taxes so there would be no concept there of overlapping debt uh the taxing authority right so to issue a geo bond you have to have taxing authority now in revenue bonds we'd be interested in competitive facilities right we'd want to have a feasibility study where the feasibility consultant uh addresses that we want to make sure that the promises are in written form so we have what's called a trust indenture that's the written covenants or promises between the issuer and the trustee for the benefit of the bond holders one of the things that we want to be addressed in the trust indenture is the flow of funds and you should always assume on your test today or tomorrow net revenue pledge you should tell me that the operations and maintenance fund has priority uh I'm not going to make you crunch debt service coverage ratio tomorrow but you should know that goes with a MUN you know some munis have credit enhancement have insurance and so you know Detroit was a major default and you call me and you say "Hey Dean do the bonds I own in Detroit were they insured?" I said "Well let me check the CQIP." Now every security has its own unique identified kind member known as a CQIP right and I say "Oh good news your bonds are insured they're going to continue to pay you the timely payment of interest and principal." Woohoo uh we also have uh municipal short-term debt instruments like TANS bands and rants tax anticipation notes bond anticipation notes revenue anticipation notes these are kind of like the mun equivalent of borrowing against receivables right so uh we have special tax bonds where the special tax pays the interest in principle we have moral obligation where the state may or may not use legislative aortionment to pay back the bonds we have double barrel bonds where we have two promises or pledges a user fee but if the user fee is insufficient you know the state uh the u the municipality will use its full faith and credit it's a type of go is the point but be careful there is some mini bonds that are subject to the alternative minimum tax very tested the bonds that are subject to the alternative minimum tax are industrial development revenue bonds or industrial development agency bonds adrs or IDAs very testable know those bonds are subject to the AMT also very testable know that corporate credit backs the bonds there's no stickiness to the city there's no stickiness to the city corporate credit backs that bond well the MSRB in its infinite wisdom has uh said the MSRB by the way remember municipal securities rulemaking board uh publishes rules A rules D rules G rules they don't have any enforcement power so who enforces MSRB rules if you're bank it's a FDIC Federal Reserve Board controller currency if you're a broker dealer SEC etc anyways they have decided that a 529 plan is a municipal security okay if they say it's a municipal security I and if you get a question about an ABLE account the able account would be the onset of the disability is age 26 before age 26 um we said that all of the bonds we said the acred interest is paid by the buyer to the seller and we didn't want to hear high talent men and women to rem have to remember nursery rhymes and knuckle humps about how many days have September so corporates every month has 30 days and that means the calendar has 360 days in it right uh we're going to get asked whether somebody should buy a corporate bond that's taxable or me bond that's tax-free so we should be prepared to take the taxable yield and times it by 100% minus the tax bracket to figure taxfree equivalent or take the mun bond yield taxfree yield divide by 100% minus the tax bracket the only component of mun bonds that is taxfree is the coupon the capital gains are always going to be taxable uh we have alternative investments so we have private equity funds we have venture capital funds we have hedge funds those are organized as private partnerships sold under REGD and they're allowed to do as a hedge fund for example all kinds of crazy things but those uh the the the model for payment freeze for all of those and I would know this is 2 and 20 so typically if you're in a private equity fund a venture capital fund or a hedge fund the general partner is going to want 2% of the assets under management and 20% of the profits uh we have CMOs collateralized mortgage obligations these are cash flows that cascading cash flows carved out of a pool of mortgages right the French word for that is a tunch we should know that plan amortization classes packs are the early cash flows and they have more predictability in that therefore less risk whereas tax targeted amortization classes are those back-end cash flows less predictability uh more risk we have treasury securities very lightly tested but we should know that T bills have no credit risk no interest rate risk uh T- notes are two to 10 10 years bonds are more than 10 right and again you still have interest rate risk uh we have treasury receipts and treasury strips treasury receipts are created zero coupons created by broker dealers and strips come directly from the US Treasury that's the government version of a zeroc bond we have tips treasury inflation protected securities where the government adjusts the principle they owe you every 6 months the principal not the coupon the coupon doesn't get changed the only thing gets changed semiannually is the principal based on the consumer price index right uh we have agency securities you're definitely going to get test on Jenny May jenny May unlike the other agencies government agencies has the full faith and credit of the US Treasury unlike the others it pays interest in principal monthly the only investment vehicle on your exam that pays interest in principal monthly is a Jenny May and Jenny May's test question are fully taxable fully taxable disclosures uh we have to contra disclose control relationships you know for example a broker dealer barrel lynch is controlled by a parent company Bank of America that control relationship always would need to be disclosed and we can't use discretionary authority when there's a control relationship when there's a control relationship um some broker dealers pay investment advisors compensation with what are called soft dollars you know we love investment advisors going to do a lot of business with us from the broker dealer and the question about soft dollars is we can't use soft dollars pay travel uh rent or furniture you know when you open your account it's very important to make sure we've got everything correct so within 30 days of opening account I'm going to say "Hey listen we're going to send you a copy could you please look that over and just make sure I've crossed every tea i've dotted every eye just to make sure that's you know okay now if there's any changes that are made to that document we'll also send you a copy and we know that your financial situation could change dramatically over 36 months so we'll also send it to you every 36 months just to make sure everything's still uh current or if it needs to be updated you can let us know if you leave us very testable you transfer your account so you know I'm your broker i receive a transfer instruction form a TIFF through what's called AEX i have one business day to validate the positions and I have three days to accomplish transfer uh types of orders i think a lot of uh test takers get hung up on the types of orders there's just two there's market orders and there's limit orders market orders immediate execution best available price uh limit orders my price or better right if I'm trading over the counter there's going to be a market maker who's going to give me a quote you know if I'm a market maker maybe uh you work at an order entry firm and you call me you say "Dean what's your quote?" I said "My quote is 1510 1520 5 by8 right?" And if you have a level two NASDAQ data feed you could actually see all the market makers and see their quotes and you know you might want to make sure you're doing business with the person who has the best price now not everybody needs to see all the market makers so very test will know that the inside market or inside boat is the highest bid and the lowest ask and if the customer is selling he's going to get the low price but he want the highest of the low the customer is buying he knows he's paying the high price but he want the highest of below very testable i say 15 10 15 20 by 8 you say Dean we're buying 800 shares i changed my mind they'll say on the test a market maker fails to honor firm quote this is a prohibited practice and I was backing away backing away okay so uh we talked about most of this stuff i hope you found this 90 minutes uh helpful for you uh this is the series 7 mighty 90 or series 7 and uh 90 minutes i just want to throw a couple more test questions in there you probably are familiar already with your U4 u4 is hello u5 is goodbye i would know that any amendments any no answer on your U4 that becomes a yes answer you have 30 days to actually uh you know make that adjustment uh margin I wouldn't worry about it at all uh maybe three or four questions very very lightly tested but I would certainly know the $2,000 trick right if you buy less than 2,000 your initial transaction SRO you pay in full two to four you pay two over four you pay 50 right definitely would know that I would know the additional documentation open a margin account the credit agreement mandatory the hypothecation agreement mandatory loan consent optional uh you know if you get the calculations um you know initial setup and mark to marks you just know the classical margin equation If you tell me that you missed your series 7 because of margin I'm going to say what were your other you know questions there right so um all right uh if you have any uh questions about the mighty 90 just go ahead send them my way i'm more than happy to help you with any questions you may have and remember inch by inch your series 7's a cinch yard by yard your exam is hard i'll see you hopefully I'll have the Mighty 90 for your next exam available by the time you take it whether it's a 63 or 66 or 65 usually that would be what you're up to next all right everybody uh bye-bye