series 79 cl 1

Series 79 Investment Banking Representative Examination (Class 1 of 4) 1

BRIAN MARKS Office: 212.626.6899 Cell: 917.856.9946 Email: [email protected]

2

Series 79, Class 1 Version: January, 2012 © Knopman Financial Training

1

Series 79 Exam Details

5 hours, 185 total questions

Includes 10 experimental questions

Passing score fluctuates

Structure of the exam

Exhibit Book

3

Breakdown of the Exam Unit

Number of Questions

Collection, Analysis & Evaluation of Data

75

Underwriting/New Financing Transactions, Types of Offerings and Registration of Securities

43

Mergers & Acquisitions, Tender Offers and Financial Restructurings

34

General Securities Industry Regulations

23

Total

175

4


2

Best Way to Study

Take good notes

Focus on the concepts

Review concepts in the book, don’t only read rationales

Score 80% or higher on the last final exam

5

6


3

Overview of Federal Securities Regulations 7

Federal Securities Regulations

Securities Act of 1933

Regulates the new issue market

Requires registration of securities

8


4

Securities Exchange Act of 1934

Regulates secondary marketplace

Created SEC

Gives Federal Reserve Board the authority to regulate margin

Requires registration of B/Ds with SEC

9

Securities Exchange Act of 1934

Requires financial reports by publicly held corporations

Prohibits fraud

Defines & regulates corporate insiders

10


5

Trust Indenture Act of 1939

Requires corporate bonds to be issued with a Trust Indenture

Contents of Trust Indenture

Role of Trustee

11

Trust Indenture Act of 1939

Types of Covenants

Affirmative

Negative

Financial

12


6

Securities Investor Protection Corporation

Securities Investor Protection Corporation (SIPC)

Protects “separate customers”

Coverage limits

13

Insider Trading & Securities Fraud Enforcement Act of 1988

B/Ds have restrictions on trading

Annual compliance reviews

Information barriers

Restricted list

Penalties for Insider Trading (under the ’34 Act)

Civil:

Criminal:

14


7

Insider Trading & Securities Fraud Enforcement Act of 1988

Misappropriation of Information

Duty of Trust

15

Regulation FD

Purpose

Selective disclosure

Disclosure of insider information requires disclosure to the public

Intentional disclosure

Unintentional disclosure

16


8

The Financial Industry Regulatory Authority (FINRA)

17

Financial Industry Regulatory Authority (FINRA)

Registration requirements

Form U4

Statutory disqualification

18


9

Registered Representatives

Series 7:

General Securities Registered Representative

Series 79:

Investment Banking Representative

Series 6:

Investment Company Representative

Series 11:

Assistant Representative for Order Processing

19

Registered Principals

Series 24:

General Securities Principal

Series 9 & 10: General Securities Sales Supervisor

Series 4:

Registered Options Principal

Series 27:

Financial & Operations Principal

20


10


Additional registration requirements

Amended U-4

Form U-5

21


Continuing Education

Regulatory element

Consequences for lapse

Firm element

22


11

Brokerage Office Supervision OSJ

Branch Office

Branch Office

Non-branch office

Non-branch office

23

Brokerage Office Supervision

Office of Supervisory Jurisdiction (OSJ) Headquarters

and Regional Offices

Resident

Series 24 in place

Conduct

Annual Compliance Reviews

24


12


Office of Supervisory Jurisdiction (OSJ) Handle

Customer Accounts & Complaints

Engage

Annual

in Market Making and Underwriting

Internal Audit

25


Branch Offices

What is not a Branch Office?

Primary residence

Administrative back office

Location of convenience

26


13

FINRA Miscellaneous Rules

Selling Away / Private Securities Transactions

Outside Employment

Transactions for personal accounts

27


Sharing in customer accounts

Loans involving customers

28


14


Gift Limitations

Customer Complaints

29

Anti-Money Laundering Compliance (AML)

Bank Secrecy Act (1970)

Purpose

FinCEN

30


15


Bank Secrecy Act

Currency Transaction Report (CTR)

Suspicious Activity Report (SAR)

31


Designated Compliance Person

Annual Reviews

32


16

Financial Crime Regulations

Customer Identification Program (CIP)

Office of Foreign Assets Control (OFAC)

Foreign Corrupt Practices Act (FCPA)

33

Research Analyst Regulations

Equity Research & Investment Banking

Required Disclosures

34


17

FINRA Code of Procedure

Purpose

Penalties

Censure Fine Suspension Retake a test Revoke registration

35

FINRA Code of Procedure

Appeal Process

National Adjudicatory Council first…

36


18

FINRA Code of Arbitration

Purpose

Intra-industry disputes

37

FINRA Code of Arbitration

Disputes involving a customer

Simplified Arbitration

Other Details

38


19

FINRA Code of Mediation

Role of Mediator

Interactions & Disclosures

39

40


20

Overview of Equity & Debt Securities

41

Overview of the U.S. Capital Markets

Issuers of Securities

U.S. Government

U.S. Government Agencies/GSE’s

Municipalities

Corporations

Foreign Governments

Foreign Corporations

42


21

Corporations Raise Capital

Sell Equity Securities (stock)

The investor is an “owner” of the corporation Preferred Stock Common Stock

Subject to systemic risk

Sell Debt Securities (bonds)

The investor is a “creditor” of the corporation

Bondholders have a senior claim (lien)

43

44


22

Equity Securities

Rights of Common Stockholders

Splits

Dividends

Cash dividends

Company stock

Stock of a subsidiary

Company product

46


23

Dividend Procedures

Important dates set by the company

Declaration date

Record date

Payable date

Trade Settlement

47

Finding the Ex-Dividend Date

Settlement date for regular way trade is T+3

Record date = Wednesday, the 25th M M

T T

W W

T

F F

14

15

16

17

18

21

22

23

24

25

Record date

48


24

Finding the Ex-Dividend date

Cash trades settle same day

Record date = Wednesday, the 25th M M

T T

W W

T T

F F

14

15

16

17

18

21

22

23

24

25

Record date

49

Dividend Procedures

Ex-dividend date

Effect on price

50


25

Dividend Procedures

Order of Dates for Regular Way Trade

51

52


26


Voting Rights

Statutory

Cumulative

53


Voting Rights

Example: Individual holding 100 shares

Board Seat

1

2

3

4

5

6

Statutory Voting Rights Cumulative Voting Rights

54


27


Preemptive rights

55

Preferred Stock

Purpose

Provides income

Based off par value

Trading characteristics

56


28

Types of Preferred Stock

Cumulative preferred stock

Dividends in arrears

Participating preferred stock

Convertible preferred stock

57

Types of Preferred Stock

Callable preferred stock

Adjustable rate preferred stock (ARPs)

58


29

American Depositary Receipts (ADRs)

Purpose

American Depositary Shares

Sponsored vs. Unsponsored

59

American Depositary Receipts (ADRs)

Rights of shareholders

Annual reports

Dividends

Currency risk

60


30

Global Depositary Receipts (GDRs)

Typical listing venues

Sponsored vs. unsponsored

61

Warrants

Benefit

Issuance

62


31

Stock Appreciation Rights (SARs)

Incentivize employees

SARs do not pay dividends

Different than employee stock options

63

64


32

Debt Securities

Bonds

Issuers Corporations Municipalities

Buyers Individual

Investors Institutional Investors

U.S.

Government Foreign Corporations Foreign Governments

66


33

Bond Basics

$1,000 Par value

Quotes are a percentage of par 100 (100% of par) $1,000 95

(95% of par) $950

105

(105% of par) $1,050

67

Bond Basics

Coupon Values are quoted as a percentage of Par Example: 9% Coupon 9% of $1000 $90 annual interest (coupon) 9% nominal yield 2 $45 semi-annual interest payments (including at maturity)

J&J F&A M&S A&O M&N J&D

68


34

Yield Curve

Normal Yield Curve

Inverted Yield Curve

Humped Yield Curve

69

Bond Basics

Basis points 1

bp = .01% = .0001

100

bp = 1.00%

7.52%

- 7.53%: 1 basis points

6.20%


5.37%


70


35

General Characteristics of Bonds

Bonds can be called away

Issuer will return investor’s money prior to maturity

Why would the issuer call away a bond?

Call premium

71

72


36

Changing Interest Rates

Example 1: Investor owns 9% bond, purchased at par Similar bonds with 10% coupon are issued

73

Changing Interest Rates

Example 2:

Investor owns 8% bond, purchased at par Similar bonds with 7% coupon are issued

74


37

Discount MV = $950 Annual interest = 9% 10 yrs to maturity

Bond Yields

Current yield (CY) =

Premium MV= $1,050 Annual interest = 9% 10 yrs to maturity

annual interest market value

75

Bond Yields Discount

YTC

Premium

NY

YTM

CY YTM

CY NY

YTC NY

CY

YTM

Par 76


38

Bond Yields

An investor buys a 6% coupon bond trading on a 6.5% basis. Is the bond purchased at a discount or a premium?

Discount

YTC

YTM

NY

Premium

CY

CY

YTM

NY

YTC

77

Bond Yields

An investor buys a 7% coupon bond at 97. What is the yield-to-maturity?

7.0% = NY

97 – discount bond

Discount

YTC

YTM CY NY

NY

Premium

CY YTM YTC

78


39

Corporate Bond Quotes CY

55/

ATT

8 16

ATT ZR 13

5.80%

Close

Change

97

-1

54

+3

79

General Characteristics of Bonds

Zero Coupon Bonds

Do not pay a coupon

Why buy a zero?

Additional risks of zeroes

80


40

Accrued Interest Interest due on a bond sold between coupon dates Muni/Corp bonds

Treasury bonds

30/360 basis T+3 settlement

Actual days/365 day year T+1 settlement

81

Accrued Interest 8% F&A 15 Corporate Bond Purchased: Monday, November 1st 8/15

11/1 11/4

2/15

82


41

Accrued Interest

8% F&A 15 Treasury Bond

Purchased: Monday, November 1st

Answer: $17.32

83

Types of Risk

Interest Rate Risk

Call Risk

Reinvestment Rate Risk

Inflationary Risk

Credit Risk

84


42

Types of Risk

Interest Rate Risk – comparing volatility

Case 1: 30 Year Coupon Bonds vs. 30 Year Zero Coupon Bonds

Case 2: 30 Year Coupon Bond vs. 5 Year Coupon Bond

Case 3: Low Coupon Bonds vs. High Coupon Bonds

85

Types of Risk

Interest Rate Risk – comparing volatility

Case 4: 30 Year Coupon Bond vs. 5 Year Zero Coupon Bond

Duration

Convexity

86


43

Types of Risk

Call risk

Reinvestment rate risk

87

Types of Risk

Inflationary risk (purchasing power risk)

Real Interest Rate = Nominal Yield – Inflation

Other adverse effects of inflation

88


44

Types of Risk - Credit Risk

Investment Grade

High Yield Bonds

Moody’s Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 ------------Ba1

S&P/Fitch AAA AA+ AA AAA+ A ABBB+ BBB BBB------------BB+ 89

Bond Maturity Terminology Year

Term Bond

Serial Bond

Balloon Bond

2021 2022 2023 2024 2025

90


45

Bond Redemption Features

Call Protection

Refunding Debt

Pre-refunding Debt

91

Bond Redemption Features

Put Feature

Sinking Fund

Yield-to-Worst

92


46

Corporate Bonds

Corporate Bonds Secured Equipment Trust Certificates

Unsecured Debenture Bonds

Mortgage Bonds

Income Bonds

Collateral Trust Bonds

94


47

Secured Corporate Debt

Equipment Trust Certificate

Underlying Asset

Issuer

95


Mortgage Bond

Underlying asset

Liens on property

96


48


Collateral Trust Bond

97

Unsecured Corporate Debt

Debenture Bonds

Senior Senior Subordinated Junior Junior Subordinated

Income Bonds

98


49

Convertible Bonds

Benefit

Impact on yield

99

Convertible Bonds - Parity

Definition

Parity price of bond (conversion ratio 25:1)

100


50

Convertible Bonds - Parity

Parity price of stock (conversion ratio 25:1)

MV(bond) = 110

101

102


51

U.S. Government & Agency Securities

U.S. Government Securities

Treasury bills

Maturity

No fixed coupon

Quotes Bid 4.87%

Ask 4.82%

104


52


T-Notes & T-Bonds

Maturities T-Notes T-Bonds Fixed Coupons Trade with interest Quotes

105


Zero coupon bonds

Treasury receipts Direct obligations of Broker Dealers

STRIPS

Inflation protected issues

TIPS

106


53

Government Agencies

Government Sponsored Enterprises

Subsidiary of US Government

Created/chartered by US government

Explicit guarantee

Implied guarantee

GinnieMae

FannieMae FreddieMac

107

Mortgages $100,000 purchase price -$ 20,000 down payment $ 80,000 mortgage

108


54

Prepayment Risk

109

Prepayment Risk

110


55

Collateralized Mortgage Obligations

Structured by Broker Dealers

“Tranches”

111

Asset Backed Securities

Purpose

Borrower

Lender

Underwriter

Investor

Underlying assets

112


56

Securities Trading Markets

113

Overview of the Securities Trading

Secondary Market

Market Centers for Equities

New York Stock Exchange Nasdaq Stock Market OTC Marketplace

Trading Desks for Bonds

114


57

New York Stock Exchange

Auction marketplace

Members of Exchange

Designated Market Makers

Floor Brokers

Independent Brokers

115

Nasdaq Stock Market

Nasdaq Global Select Market

Nasdaq Global Market

Nasdaq Capital Market

Listing Requirements

Initial Listing Requirements: Continued Listing Requirements:

116


58

Nasdaq Stock Exchange

Market Makers provide liquidity

Negotiated market BID

ASK

SIZE

MMAA

10.42 10.57

25 x 42

MMBB

10.41 10.53

18 x 27

117

The OTC Market – Executing Trades

Acting as a dealer (principal) Customer

Broker/Dealer

Acting as a broker (agent) Customer Broker/Dealer

Customer

118


59

OTC Securities – OTC Pink

Highly illiquid, thinly traded OTC stocks

What are the eligibility criteria?

119

OTC Securities – The OTC Bulletin Board

What are the eligibility criteria?

120


60

Other Trading Venues

Third Market

Electronic Communication Networks (ECNs)

121

Secondary Market Participants

Individual Investors

Institutional Investors

Examples of Institutional Investors

122


61

Secondary Market Participants

Suitability Requirements

Reasonable Basis Suitability

Quantitative Suitability

Customer Specific Suitability Individual Investors

Institutional Investors

123

Averages and Indices

Dow Jones Averages

S&P 500

Wilshire 5000

124


62

Foreign Currency Market

Interbank market

Participants

Spot vs. forward price

125

Foreign Exchange Market – Key Drivers

Monetary policy / interest rates

Inflation

Political risk

126


63

Foreign Exchange Market: Impact on Imports & Exports

Who wants a strong dollar?

127

Bonds Denominated in Other Currencies

Eurodollars

Eurodollar Bonds

Yankee Bonds

128


64

Economics & Analysis

Economic Terms & Measurements

Gross Domestic Product (GDP)

Inflation

Retail Inflation

Wholesale Inflation

130


65

Business Cycle

131

Economic Indicators

Leading

Lagging

Coincident

132


66

Interest Rates

Fed Funds Rate

Discount Rate

Broker’s Call Rate

Prime Rate

133

Tools of the Fed

Open Market Transactions

Easy Money:

Tight Money:

Discount Rate

Easy Money:

Tight Money:

134


67

Tools of the Fed

Bank Reserve Requirement

Easy Money:

Tight Money:

135

1120 Avenue of the Americas New York, NY 10036 TEL: 212.626.6899 • FAX: 212.626.6848 www.knopman.com

Questions: [email protected]


68

series 79 cl 1

Recommend Documents