Flashcards

Subchapter M is a part of the Internal Revenue Code setting out the tax treatment of a regulated investment company. It is sometimes referred to as the conduit theory or the 90% rule.

A subordinated debenture is a debenture that is junior to regular debentures in a corporate liquidation.

FINRA rule 2111 is the suitability rule. The suitability rule requires that a firm or associated person have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.  The customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation. A broker’s recommendation is the triggering event for the application of this rule. The three main suitability obligations are reasonable-basis, customer-specific, and quantitative suitability.

The support is the lowest the security’s price has been over time. Support is used by technical analysts.

A suspicious activity report must be filed any time a firm or its registered representatives notice a client whose behavior is commercially illogical. SARs are filed with FinCEN electronically within 30 calendar days of the initial behavior.

A syndicate is a group of broker-dealers that is formed to handle the distribution and sale of an issuer’s security. The syndicate typically has one firm managing the underwriting effort. Each member of the syndicate is then assigned the responsibility for the sale and distribution of the issue. The syndicate is bound by the terms of the underwriting agreement.

TRANs are short-term loans that municipalities issue to address cash flow issues that are created when expenditures must be incurred before tax revenues are received. Cities may issue TRANs to aid the city in meeting its financial obligations before the receipt of property tax revenues. School districts may issue TRANs to pay for necessary expenditures before tax revenue is received.

TANs are used to finance the current operations of a municipality before receipt of taxes.

The investment’s tax basis is the amount of money in the investment that has already been taxed. Also called cost basis or just basis.

The tax equivalent yield is the rate of return that a taxable bond would have to earn to be equal to the yield found on a municipal security.

Tax-exempt commercial paper is a short-term, unsecured debt instrument issued by states and municipalities. Generally, the maturities range from 30 to 90 days, although there are maturities of up to 270 days that are possible. Interest payments on tax-exempt commercial paper are exempt from federal, state, and local taxes.

A TSA is an annuity program available to employees of certain non-profit organizations and public school systems.  In a TSA part of the employee’s income is excluded from current taxation and used to purchase an annuity.  The employee pays taxes when he begins to draw the annuity.  Tax-sheltered annuities are also referred to by the IRC, 403b.

Tenants in common is a form of joint ownership. Each owner has an undivided interest in the property but all the interests need not be equal.  There is no right of survivorship. When one of the tenants dies, the interest passes on to the decedent’s estate, going through the probate process.

A tender offer is an offer from the issuer to the securities holders to buy the securities for cash or for cash and securities.

With a term bond issue there is a single maturity date for all of the bonds in the issue.

The third market is the trading of exchange-listed securities in the OTC market, done to facilitate after-hours trading.

Time value is a component of the cost of an option (premium). The longer that is left until the expiration of the option, the more the premium will be comprised of time value. Time value is determined by subtracting the option’s intrinsic value from the premium paid.

A tombstone is an advertisement that announces a securities offering. It identifies the name of the issuer, the type of security, the underwriters, and where additional information is available. It may be published as soon as the issue is cleared for sale.

A company’s total capitalization includes all of the stock and all of the debt issued.

The trade confirmation must be sent to the client no later than on or before the settlement date. It is usually sent the business day after the trade date. The trade confirmation includes the settlement date, details of the transactions, and any amount of monies owed.

The trade date is the day on which the terms of a transaction, such as price and quantity, are established.  The transaction will be completed at settlement.

A traditional IRA is a retirement vehicle that may be funded annually, up to the limit, by anyone with earned income. The contributions made into a traditional IRA may or may not be tax-deductible, depending upon the client’s situation and current tax code. Traditional IRAs are subject to the required minimum distribution rules. Earnings in a traditional IRA are taxable as ordinary income.

The transfer agent is the person responsible for issuing and redeeming shares of a mutual fund. The transfer agent will have custody of clients’ shares if certificates are not issued. The transfer agent also sends confirmations, distributions, and tax forms to the client.

Treasury bills are short-term government debt sold at a discount from face value. T-bills mature in periods of 4, 13, 26, or 52 weeks. T-bills do not pay periodic interest payments. The interest income is the difference between the purchase price and the face value of the bills at maturity. The bills are sold at auction, at which time the discount is determined.  The bills do not carry a stated interest rate. Treasury bills make up the bulk of the money market.

Treasury bonds are long-term debt issued by the Treasury at face value. Bonds pay interest semi-annually and mature in a period of ten years to thirty years.

Treasury notes are medium-term Treasury debt sold at face value. Notes pay interest semi-annually and mature in one to ten years.

Treasury stock is issued stock that has been repurchased by the company. While the stock is held in the company’s treasury, it has no dividend or voting rights.

Trough is a phase of the business cycle. The trough follows the contraction. It is the low point of economic decline. It precedes the expansion (recovery).

The Trust Indenture Act of 1939 governs debt offerings. It requires all publicly offered, non-exempt issues to be registered under the Securities Act of 1933. Additionally, it requires that the debt be issued under a trust indenture that protects the bondholders.

A trustee is a person who is appointed to act on a beneficiary’s behalf. A trustee may be an individual of legal age and a sound mind. A business may also be granted trusteeship.

The underwriter is a broker-dealer in charge of selling securities. For mutual funds, the underwriter is the person or company in charge of distributing and selling the fund shares to the public.

The underwriting spread is the difference between the price the underwriter pays the issuer for the new shares and the public offering price.  The underwriting spread is also known as the load or sales charge.

UGMA is a law adopted in most states that permits a direct gift to a minor without a trust or guardianship. The donor appoints a custodian to manage the gift until the minor reaches the legal age. There are certain tax rules for these accounts. Some states are UGMA states while others are UTMA states (Uniform Transfer to Minors Act). The major differences between UGMA and UTMA states are the age at which the asset can belong to the minor and the type of investments that can be held.

The Uniform Practice Code is the FINRA code designed to make uniform the customs, practices, and trading techniques among members in the securities business, such as regular way settlement.

The Uniform Securities Act is a state’s securities law. State securities laws are also called blue-sky laws. States have the option of adopting the legislation in its entirety or adapting it as needed.

A unit is the basis of the valuation of an annuity, similar to a share of a mutual fund. During the pay-in, the annuity is valued in accumulation units. During pay-out, the annuity is valued in annuity units.

A unit investment trust is an investment company that invests in a fixed portfolio of securities. An investor will purchase units in the trust representing an undivided interest in the securities held.  A UIT has no management fee or board of directors.

A unit refund life annuity is a life annuity that provides that a guaranteed number of units will be paid. If the annuitant dies before they are paid, the remaining units are paid to a beneficiary.

An unsecured bond is not secured by the pledge of some specific asset or assets of the issuing corporation. Unsecured bonds are also known as debentures. Unsecured bonds represent a higher level of risk to the investor than a secured bond so their nominal yields will be correspondingly higher.

A variable annuity is a type of annuity issued by life insurance companies.  Like fixed annuities, variable annuities guarantee monthly payments for life once the contract is annuitized. The insurance company accepts the mortality risk for the client. However, unlike fixed annuities, the variable annuity contract does not guarantee the amount of the annuity payment or the performance of the account. The annuitant accepts the investment risk, not the company.

A vertical spread is either the purchase and sale of two calls or two puts with different strike prices (same class, same expiration month).

Vesting refers to ownership. An employee vests immediately in their contributions into a qualified plan. They will vest in the employer’s contribution over a period of time. Some qualified plans require immediate vesting of employer contributions (SIMPLE), but many have a vesting schedule to encourage employee retention.

The visible supply is the list of new municipal offerings announced for sale within the next 30 days.

Volatility is the magnitude and frequency of price changes within the securities industry over a given period of time.

A warrant is a stock purchase option similar to rights because it allows the holder to purchase stock at a predetermined price. Warrants are usually attached to bonds to make them easier to sell (sweeteners). Warrants are long-term options, expiring in up to 30 years.

A wash sale occurs when the investor sells a security at a loss but has purchased substantially identical securities within a certain time period. The IRS will disallow a loss if the investor repurchases substantially identical securities within 30 days before or after the sale of the security in which the loss was claimed, for a total of 61 days.

The Wilshire 5000 is the broadest U.S. index.

Some mutual funds will offer withdrawal plans to clients whose account balances meet a minimum requirement. With a withdrawal plan, the client requests the systematic withdrawal of his or her account periodically. Withdrawals may be based on a fixed dollar amount, a fixed number of shares, a fixed percentage, or a fixed period of time.  A withdrawal plan is different from an annuity in the fact that the client may outlive the payments.

Working capital is a dollar amount that is found by subtracting a company’s current liabilities from its current assets. Working capital is not good for comparison purposes. It is a measurement of liquidity.

XMI is NYSE Arca’s major market index (20 blue-chip industrial stocks).