FINRA Series 7 flashcards

An investment company that continuously issues new shares and redeems existing shares at their Net Asset Value (NAV). They are professionally managed and offer diversification.

• Shares are bought from and sold back to the fund directly.
• Priced once per day at NAV.
• Offer professional management and diversification.
• Most common type of investment company.

Memory trick: Open-end: Open to buy/sell at NAV, Always managed.

Direct Participation Programs (DPPs) are generally illiquid investments, meaning there is no active secondary market for units, making them difficult to sell quickly or without significant loss.

• Common characteristic of most DPPs.
• Units are not easily transferable.
• Investors must be prepared to hold the investment for the long term.
• Risk is particularly high with raw land due to lack of income.

Memory trick: DPP Risks: Don't Participate Poorly, Prepare for Problems.

The percentage of the purchase price of securities that a customer must deposit when buying on margin, as set by the Federal Reserve Board.

• Currently 50% for most equity securities.
• Applies to the total market value of the securities purchased.
• FINRA also has a minimum initial equity requirement of $2,000, but Reg T's 50% usually takes precedence for larger trades.

Memory trick: Reg T sets the initial 'tab' at half.

The largest potential loss an investor can experience with a covered call strategy, which occurs if the underlying stock price declines to zero.

• Results from owning stock and selling a call option against it.
• Calculated as the stock's purchase price minus the premium received for the call.
• This loss is realized if the stock becomes worthless.

Memory trick: Stock crash, but premium cushions the fall.

The taxable equivalent yield (TEY) for a triple tax-exempt municipal bond is the yield a taxable bond would need to offer to provide the same after-tax return as the municipal bond, considering federal, state, and local tax exemptions.

• Formula: Municipal Yield / (1 - Combined Tax Rate).
• Combined Tax Rate = Federal Rate + State Rate (assuming local is included or zero).
• Used to compare tax-exempt and taxable investments.
• Assumes the municipal bond is exempt from all three tax levels.

Memory trick: Munis Yield divided by One Minus Total Tax.

Interest rate risk is the risk that a bond's price will decline due to an increase in prevailing interest rates. Bonds with longer maturities and lower coupon rates generally have higher interest rate risk.

• Inverse relationship between bond prices and interest rates.
• Longer maturities = Higher interest rate risk.
• Lower coupon rates = Higher interest rate risk.
• Zero-coupon bonds have the highest interest rate risk for a given maturity.

Memory trick: Longer term, lower coupon, higher rate risk.

A collar strategy is an options strategy used by investors who own an underlying stock to protect against a significant decline in its price while also generating income. It involves buying a protective put and simultaneously selling an out-of-the-money call.

• Components: Long Stock + Long Put + Short Call.
• Protects against downside (via long put).
• Generates income (via short call).
• Limits upside potential to the call's strike price.

Memory trick: Protect with put, Pay with call, Collar your stock.

Interest income from municipal bonds is generally exempt from federal income tax. It may also be exempt from state and local taxes if the bondholder resides in the state or locality that issued the bond (the 'triple tax-exempt' feature).

• Federally tax-exempt.
• State/local tax-exempt if investor resides in issuing state/locality (triple tax-exempt).
• Capital gains are always taxable.
• Interest on private activity munis may be subject to AMT.

Memory trick: Fed's Free, State's Home, Capital's Cash.

Current yield measures the annual income (coupon payment) an investor receives from a bond relative to its current market price. It does not consider capital gains or losses if the bond is held to maturity.

• Calculated as Annual Interest / Current Market Price.
• Does not account for bond's maturity or capital gains/losses.
• Higher than YTM if bond is trading at a discount, lower if trading at a premium.

Memory trick: Coupons Pay Market Price Profit.

A variable annuity rider that guarantees the owner can withdraw a certain percentage of their initial investment (or a benefit base) annually for life, even if the account value drops to zero.

• Protects against market downturns impacting income stream.
• Benefit base may step up with market gains, locking in higher withdrawal amounts.
• Allows for continued market participation while guaranteeing an income floor.

Memory trick: GMWB: Guaranteed Money Withdrawn for life, a Benefit.

A front-end load is a sales charge paid when an investor first purchases shares in a mutual fund. The load is deducted from the initial investment, and the remaining amount is used to purchase shares at the fund's Net Asset Value (NAV).

• Sales charge deducted upfront.
• Reduces the actual investment amount.
• Calculated before shares are purchased.

Memory trick: Load Off First, Then Buy Shares.

A short straddle is an options strategy where an investor sells both a call option and a put option on the same underlying asset, with the same strike price and expiration date. It is a neutral strategy that profits from low volatility and a stable stock price.

• Selling both a call and a put.
• Same strike price, same expiration.
• Profits from low volatility and time decay.
• Unlimited risk if stock moves significantly.

Memory trick: Short Straddle for Stable Stock, Long for Leap.

Specific information that must be included on a trade confirmation when a broker-dealer acts as an agent for a customer.

• Capacity (Agent) and commission must always be shown.
• Time of execution must be available upon written request (for equities).
• Yield to maturity (for bonds), settlement date, and CUSIP number are also common.

Memory trick: CAPacity, Commission, Time (if asked), but NOT the Other Party's name!

The point at which a covered call strategy (long stock + short call) will neither profit nor lose money.

• Calculated as: Stock Purchase Price - Premium Received.
• Protects against a limited downside move in the stock.
• Limits upside profit potential.

Memory trick: Covered Calls: Stock Price Minus Premium's where your break-even gleam!

An order to sell a security that becomes a market order once a specified stop price is reached or passed.

• Used to limit losses or protect a profit on a long position.
• Always placed below the current market price for a sell order.
• Once triggered, it executes at the best available price.

Memory trick: Stop, Drop, Market Pop!

The customer's ownership interest in a long margin account, representing the value of securities minus the amount borrowed.

• Calculated as Long Market Value (LMV) - Debit Balance (DR).
• Must meet minimum maintenance requirements to avoid a margin call.
• Increases with rising stock prices, decreases with falling stock prices.

Memory trick: LMV minus DR, that's your equity star!

The minimum equity percentage that must be maintained in a margin account for a short position.

• FINRA's minimum is 30% of the current market value.
• Broker-dealers can set higher house maintenance requirements.
• If equity falls below this level, a maintenance margin call is issued.

Memory trick: Short sale's 30% shield, keeps your account yield!