Flashcards

The initial margin requirement is set by Federal Reserve Board Regulation T. Currently, it is 50% of the value being purchased, or $2,000, whichever is greater, not to exceed the market value of the securities being purchased.

In an initial public offering shares of stock are sold for the very first time to the general public. Shares in an IPO are sold at a fixed price in the primary market, one time only. After the shares trade in the primary market, they will trade in the secondary market at a price set by the market.

Inside information is material information that is not known by the general public that if known would affect the stock price.

The inside market is the difference between the bid and the ask in the over-the-counter market. The closer the two prices are, the more active the issue.

An insider includes any person who has material nonpublic information about a publicly traded company. According to the l934 Act, directors, officers, and stockholders who own at least 10% of any class of equity security issued by the corporation are all considered insiders.

An institutional account is an account held for the benefit of others. Institutional accounts include banks, pension plans, insurance companies, mutual fund companies, and profit sharing plans.

An institutional communication is a written communication (including electronic) that is distributed or made available to only institutional investors, not to retail investors. The term institutional communication does not include a firm’s internal communications.

Institutional investors include broker-dealers, banks, pension plans, insurance companies, mutual fund companies, profit sharing plans, and any entity with $50 million or more in total assets. Most regulations are written to protect retail investors and not written towards institutional investors, with the belief that institutional clients should know what they are doing.

Intangible assets are assets of a business that do not have a physical quality, but they do have value. Intangible assets include goodwill, intellectual property, and patents pending.

Interest is the charge for the borrowing of money, usually expressed as an annual percentage rate.

Interest rate risk is the risk that the cost of borrowing money will change over time. This term is generally associated with bond prices, but it applies to all investments. In the bond market, it is the bond’s market price that has interest risk. If interest rates in the market change, relative to the nominal yield on the bond, the bond’s market price will move in an inverse direction. Interest rate risk is a type of risk that is systematic and cannot be avoided by diversification. Diversification by asset class would help to reduce interest rate risk.

The Investment Company Act of l940 requires that at least 40% of the board of directors remain independent from the operations of the investment company. The law states that no more than 60% of the directors may also hold an affiliated position within the fund (an affiliated position would be a director who is also the fund’s investment adviser, custodian, etc).

An interstate offering is a securities offering that will be sold across state lines. Interstate offerings must be registered, prior to sale, with the SEC, as well in each state in which the security will be sold.

A call option has intrinsic value when the market price is above the strike. A put option has intrinsic value when the market price is below the strike price. An option with intrinsic value is said to be in-the-money. An option with intrinsic value may be exercised by the owner of the option.

An inverse ETF is an exchange-traded fund designed to capitalize on intraday bearish movements in the markets. An inverse ETF trades on the stock market and is designed to perform the inverse (opposite) of the index it tracks. When the underlying target index goes down, the value of the inverse ETF is designed to go up. The target index may be broad-based, like the S&P 500, or it could be a basket chosen to follow a specific area of the economy, such as the financial sector.

An investment adviser is a firm that manages money for the accounts of others. An investment adviser files Form ADV to register as an investment adviser, either with the SEC or at the state level, depending upon current rules. An investment adviser to a mutual fund has the day-to-day responsibility of investing the cash and securities held in a mutual fund’s portfolio. The adviser must adhere to the objective as stated by the client or found in the fund’s prospectus.

Amended by the Dodd-Frank Act in 2010, investment advisers are required to register at the federal level (with the SEC) if they manage a mutual fund or have $100 million or more in assets under management (AUM). Investment advisers with assets under management under $100 million are required to register at the state level. Investment advisors are the firms that either charge a flat fee for investment advice or an asset-based advisory fee.  The investment advisory fee of a mutual fund is the fund’s largest expense.

The investment banker is a broker-dealer that is hired by a corporation or government to raise capital by marketing new issues.  Sometimes called the underwriter, sponsor, or distributor.

An investment company is engaged primarily in the business of investing and trading in securities. There are three types of investment companies under the Investment Company Act of 1940: face-amount certificate companies, unit investment trusts, and management companies. All mutual funds are management companies. Management companies employ investment advisers (investment managers) to manage the assets in the portfolios.

The Investment Company Act of 1940 regulates investment companies.  The act requires any investment company that is engaged in interstate commerce to register with the SEC.

Investment grade securities are debt instruments that are rated BBB/Baa or higher. They are often purchased by fiduciaries.

The investment objective is the goal of the client or the goal of the mutual fund portfolio. There are many different investment objectives including safety/preservation of capital, income, and growth.

A person’s income may affect how much they pay in premiums for Medicare Part B and Part D. This adjustment is commonly referred to as IRMAA – income-related monthly adjustment amounts. IRMAA is calculated based on a person’s MAGI on their tax returns two years prior. For example, in 2023 an individual with MAGI over $97,000 (over $194,000 if MFJ) will pay higher premiums for Medicare Part B and D. The income that is used for the IRMAA calculation is a person’s MAGI from their tax return two years prior, in this case 2021. Most people do not pay any premium for Medicare Part A, but even if they do, there is no income-related surcharge, so Medicare Part A premiums are not affected by income. How much IRMAA affects Part B premiums depends on the household’s income. In 2023, Medicare Part B’s premium is $164.90. IRMAA can add up to $395.60 a month to the Part B premium. In 2023, IRMAA can increase Part D’s premium by as much as $76.40.

Issued stock is the stock that has been sold to the public. The corporate charter lists authorized stock, which is the maximum number of shares that the issuer may sell.

The issuer is a corporation, municipality, or the U.S. government that offers or proposes to offer its securities for sale.

In a joint account there are two or more individuals who possess power over the account. Joint accounts must be designated as either tenants in common or joint tenants with right of survivorship.

A joint and last survivor life annuity is an annuity that pays until the last party dies. After the death of the first party, the payments will continue for the lifetime of the survivor, usually at a reduced rate.

Joint tenants in common is an ownership designation where two or more individuals hold fractional interests in an undivided asset. At the death of one of the tenants, the decedent’s interest passes to his or her heirs, not to the other tenants, going through the probate process. The asset may be owned unequally.

Joint tenants with right of survivorship is an ownership designation whereby the entire asset is owned by two or more individuals equally.  At the death of one of the tenants, the decedent’s interest passes to the survivor(s), avoiding probate.

A Keogh plan is a qualified tax-deferred retirement plan for persons who are self-employed and unincorporated or who earn extra income through personal services aside from their regular employment. Keoghs are also called HR 10 plans.

FINRA rule 2090, Know Your Customer, requires firms to use reasonable diligence in regard to the opening and maintenance of every account, and to know the essential facts concerning every customer. The know your customer obligation arises at the beginning of the customer-broker relationship and does not depend on whether or not the broker has made a recommendation.   Essential facts include those required to; effectively service the customer’s account, act in accordance with any special handling instructions for the account, understand the authority of each person acting on behalf of the customer, and comply with applicable laws, regulations, and rules.

A lagging economic indicator will take 3-12 months to change after the economy has entered a new phase. Lagging indicators include the duration of unemployment and corporate profits.

Last in, first out is an accounting method in which the assets sold are assigned a cost basis from the most recent purchases, generally resulting in the smallest gain, thus the smallest tax bill due.

Leading economic indicators change 3-12 months before the economic cycle changes. They predict where the economy is heading. Building permits, new orders for durable goods, and initial unemployment claims are all leading indicators.

Regardless of the type of municipal bond issued, the bond must be accompanied by a legal opinion of counsel.  The opinion of counsel affirms that the issue is a municipal issue and that interest is exempt from federal taxation, among other items.

Legislative risk is the risk that tax law could change.

A letter of intent allows the investor to qualify for the reduced sales charge currently by promising to invest an amount qualifying for a breakpoint within 13 months from the date of the letter. The letter is a unilateral agreement; the client is not bound to the terms of the letter.  A letter of intent may be back-dated up to 90 days, leaving 10 months going forward. Shares will be held in an escrow account to pay the additional sales charge owed if the client does not fulfill the letter of intent. Reinvested dividends and capital gains distributions do not count toward a letter of intent.

Leverage financing is the process of raising capital through the sale of bonds. Leverage is the use of borrowed funds for investment. A highly leveraged company would represent a type of financial risk to the client.

For more than 40 years, the London Interbank Offered Rate—commonly known as LIBOR—was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages, and corporate debt. LIBOR was set each day by collecting estimates from up to 18 global banks on the interest rates they would charge for different loan maturities, given their outlook on local economic conditions. LIBOR was based upon estimates, not actual transactions. Over the last decade, LIBOR has been burdened by scandals and crises. LIBOR has been replaced by the Secured Overnight Financing Rate (SOFR), which many experts consider a more accurate and more secure pricing benchmark.

A life annuity is a type of annuity that pays the annuitant monthly, until death. A life annuity has the highest risk to the annuitant, thus it will pay the highest monthly payment. There is no beneficiary on a life annuity. Life annuities are also called life only or straight life annuities.

A life annuity with a period certain has a guarantee that payments will continue for a set number of years.   If the annuitant dies before the set period has expired, payments will be made to a beneficiary for its duration.

A limited partner, also called a subscriber, is an investor in a limited partnership. Limited partners have no say in how the partnership is managed. Limited partners have limited liability, they can lose whatever they have invested as well as any amount related to a recourse note. Limited partners receive form K-1 with their portion of profits or losses that flow through onto their individual tax returns.

A limited partnership is a form of business with one or more general partners and one or more limited partners. The general partners have unlimited liability. The limited partners have limited liability. It is a flow through tax entity that files Form 1065, as an information return only.

The limited partnership agreement spells out the responsibilities of the partners.

A limited power of attorney grants a third party limited trading authority. It allows a person other than the account owner to place trades in the account, but they cannot withdraw money or securities. Often referred to as a limited trading authorization.

Liquidation is the process of redeeming mutual fund shares. Also called redemption. Liquidation can also refer to the process of settling debts after a corporate bankruptcy.

In the event of a corporate liquidation who gets paid when is the liquidation priority. Secured creditors are paid first, then unsecured creditors (back wages, taxes, and debentures), preferred stock, common stock, and lastly foreign investors.

Liquidity refers to how easily can an asset be turned into cash.

Liquidity risk is the risk that the asset may not be easily sold. Liquidity risk is also referred to as marketability risk. Direct participation programs (DPPs) have the greatest liquidity risk since they do not trade in the secondary market.

Listed securities are those securities that meet the requirements to be listed on one of the national securities exchanges. There are many nationally registered securities exchanges in the United States.  Listing requirements vary amongst the different exchanges.  The three exchanges that conduct the largest volume of trades in the United States include the NASDAQ Stock Market, the NYSE, and the BATS Exchange.