series 79 cl 1
TRANSCRIPT
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Series 79, Class 1
Version: January, 2012
© Knopman Financial Training 1
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Series 79Investment Banking
Representative Examination(Class 1 of 4)
BRIAN MARKS
Office: 212.626.6899
Cell: 917.856.9946
Email: [email protected]
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Series 79, Class 1
Version: January, 2012
© Knopman Financial Training 2
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Series 79 Exam Details
� 5 hours, 185 total questions
� Includes 10 experimental questions
� Passing score fluctuates
� Structure of the exam
� Exhibit Book
Breakdown of the Exam
UnitNumber 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
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Version: January, 2012
© Knopman Financial Training 3
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
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Series 79, Class 1
Version: January, 2012
© Knopman Financial Training 4
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Overview of Federal Securities
Regulations
Federal Securities Regulations
� Securities Act of 1933� Regulates the new issue market
� Requires registration of securities
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Version: January, 2012
© Knopman Financial Training 5
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
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Securities Exchange Act of 1934
� Requires financial reports by publicly held corporations
� Prohibits fraud
� Defines & regulates corporate insiders
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Version: January, 2012
© Knopman Financial Training 6
� 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
Trust Indenture Act of 1939
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Version: January, 2012
© Knopman Financial Training 7
� Securities Investor Protection Corporation (SIPC)
� Protects “separate customers”
� Coverage limits
13
Securities Investor Protection Corporation
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:
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Version: January, 2012
© Knopman Financial Training 8
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
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Series 79, Class 1
Version: January, 2012
© Knopman Financial Training 9
The Financial Industry Regulatory Authority (FINRA)
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Financial Industry Regulatory Authority (FINRA)� Registration requirements
� Form U4
� Statutory disqualification
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Version: January, 2012
© Knopman Financial Training 10
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
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Registered Principals
� Series 24: General Securities Principal
� Series 9 & 10: General Securities Sales Supervisor
� Series 4: Registered Options Principal
� Series 27: Financial & Operations Principal
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Version: January, 2012
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Financial Industry Regulatory Authority (FINRA)� Additional registration requirements
� Amended U-4
� Form U-5
21
Financial Industry Regulatory Authority (FINRA)� Continuing Education
� Regulatory element
� Consequences for lapse
� Firm element
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Version: January, 2012
© Knopman Financial Training 12
Brokerage Office Supervision
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OSJ
Branch Office
Non-branch office
Non-branch office
Branch Office
24
Brokerage Office Supervision
� Office of Supervisory Jurisdiction (OSJ)
� Headquarters and Regional Offices
� Resident Series 24 in place
� Conduct Annual Compliance Reviews
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Brokerage Office Supervision
� Office of Supervisory Jurisdiction (OSJ)
� Handle Customer Accounts & Complaints
� Engage in Market Making and Underwriting
� Annual Internal Audit
Brokerage Office Supervision
� Branch Offices
� What is not a Branch Office?� Primary residence
� Administrative back office
� Location of convenience
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Version: January, 2012
© Knopman Financial Training 14
FINRA Miscellaneous Rules
� Selling Away / Private Securities Transactions
� Outside Employment
� Transactions for personal accounts
27
FINRA Miscellaneous Rules
� Sharing in customer accounts
� Loans involving customers
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Version: January, 2012
© Knopman Financial Training 15
FINRA Miscellaneous Rules
� Gift Limitations
� Customer Complaints
29
Anti-Money Laundering Compliance (AML)
� Bank Secrecy Act (1970)� Purpose
� FinCEN
30
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Anti-Money Laundering Compliance (AML)
� Bank Secrecy Act� Currency Transaction Report (CTR)
� Suspicious Activity Report (SAR)
31
Anti-Money Laundering Compliance (AML)
� Designated Compliance Person
� Annual Reviews
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Version: January, 2012
© Knopman Financial Training 17
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
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© Knopman Financial Training 18
� Purpose
� Penalties� Censure� Fine� Suspension� Retake a test� Revoke registration
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FINRA Code of Procedure
� Appeal Process� National Adjudicatory Council first…
36
FINRA Code of Procedure
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Version: January, 2012
© Knopman Financial Training 19
� Purpose
� Intra-industry disputes
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FINRA Code of Arbitration
� Disputes involving a customer
� Simplified Arbitration
� Other Details
38
FINRA Code of Arbitration
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© Knopman Financial Training 20
� Role of Mediator
� Interactions & Disclosures
39
FINRA Code of Mediation
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Version: January, 2012
© Knopman Financial Training 21
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
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Version: January, 2012
© Knopman Financial Training 22
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)
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Equity Securities
Rights of Common Stockholders
� Splits
� Dividends� Cash dividends
� Company stock
� Stock of a subsidiary
� Company product
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Version: January, 2012
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Dividend Procedures
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� Important dates set by the company
� Declaration date
� Record date
� Payable date
� Trade Settlement
Finding the Ex-Dividend Date
48
242321 22 25
1817161514
FTWTMM T W T F
Record date
� Settlement date for regular way trade is T+3
� Record date = Wednesday, the 25th
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Version: January, 2012
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Finding the Ex-Dividend date
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� Cash trades settle same day
� Record date = Wednesday, the 25th
23 242221 25
1817161514
FTWTMM T W T F
Record date
Dividend Procedures
50
� Ex-dividend date
� Effect on price
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Dividend Procedures
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� Order of Dates for Regular Way Trade
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Rights of Common Stockholders
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� Voting Rights� Statutory
� Cumulative
Rights of Common Stockholders
� Voting Rights� Example: Individual holding 100 shares
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5
Cumulative Voting Rights
Statutory Voting Rights
64321Board Seat
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Rights of Common Stockholders
� Preemptive rights
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Preferred Stock
� Purpose
� Provides income� Based off par value
� Trading characteristics
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Version: January, 2012
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Types of Preferred Stock
� Cumulative preferred stock� Dividends in arrears
� Participating preferred stock
� Convertible preferred stock
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Types of Preferred Stock
� Callable preferred stock
� Adjustable rate preferred stock (ARPs)
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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
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Global Depositary Receipts (GDRs)
� Typical listing venues
� Sponsored vs. unsponsored
61
Warrants
� Benefit
� Issuance
62
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Stock Appreciation Rights (SARs)
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� Incentivize employees
� SARs do not pay dividends
� Different than employee stock options
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Debt Securities
Bonds
� Issuers
�Corporations�Municipalities�U.S. Government�Foreign Corporations�Foreign Governments
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� Buyers
� Individual Investors� Institutional Investors
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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
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Yield Curve
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Normal Yield Curve Inverted Yield Curve Humped Yield Curve
Bond Basics
� Basis points
� 1 bp = .01% = .0001
� 100 bp = 1.00%
� 7.52% - 7.53%: 1 basis points
� 6.20% - 6.70%: 50 basis points
� 5.37% - 6.37%: 100 basis points
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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
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� Example 1:� Investor owns 9% bond, purchased at par� Similar bonds with 10% coupon are issued
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Changing Interest Rates
Changing Interest Rates
� Example 2:� Investor owns 8% bond, purchased at par� Similar bonds with 7% coupon are issued
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uemarket val
interest annual (CY) yieldCurrent =
DiscountMV = $950Annual interest = 9%10 yrs to maturity
PremiumMV= $1,050Annual interest = 9%10 yrs to maturity
Bond Yields
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Discount PremiumNY
CY YTM
YTC
NY
CYYTM
YTC
Bond Yields
NY YTMCY
Par
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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?
77
Discount PremiumNY
CY YTM
YTC
NY
CYYTM
YTC
Bond Yields
� An investor buys a 7% coupon bond at 97. What is the yield-to-maturity?� 7.0% = NY
� 97 – discount bond
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Discount PremiumNY
CY YTM
YTC
NY
CYYTM
YTC
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Corporate Bond Quotes
� ATT 55/8 16 5.80% 97 -1
� ATT ZR 13 54 +3
79
CY Close Change
General Characteristics of Bonds
� Zero Coupon Bonds� Do not pay a coupon
� Why buy a zero?
� Additional risks of zeroes
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Accrued Interest
Interest due on a bond sold between coupon dates
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Muni/Corp bonds
30/360 basisT+3 settlement
Treasury bonds
Actual days/365 day yearT+1 settlement
Accrued Interest
82
8% F&A 15 Corporate Bond Purchased: Monday, November 1st
8/15 2/1511/1 11/4
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Accrued Interest
� 8% F&A 15 Treasury Bond
� Purchased: Monday, November 1st
� Answer: $17.32
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Types of Risk
� Interest Rate Risk
� Call Risk
� Reinvestment Rate Risk
� Inflationary Risk
� Credit Risk
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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
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Types of Risk
� Call risk
� Reinvestment rate risk
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Types of Risk
� Inflationary risk (purchasing power risk)
� Real Interest Rate = Nominal Yield – Inflation
� Other adverse effects of inflation
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Types of Risk - Credit RiskMoody’s S&P/Fitch
89
AaaAa1Aa2Aa3A1A2A3Baa1Baa2Baa3-------------Ba1
AAAAA+AAAA-A+AA-BBB+BBBBBB--------------BB+High Yield Bonds
InvestmentGrade
90
2025
2024
2023
2022
2021
Balloon BondSerial BondTerm BondYear
Bond Maturity Terminology
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Bond Redemption Features
� Call Protection
� Refunding Debt
� Pre-refunding Debt
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Bond Redemption Features
� Put Feature
� Sinking Fund
� Yield-to-Worst
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Corporate Bonds
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Secured Unsecured
Equipment Trust Certificates
Debenture Bonds
Mortgage Bonds Income Bonds
Collateral Trust Bonds
Corporate Bonds
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Secured Corporate Debt
� Equipment Trust Certificate
� Underlying Asset
� Issuer
95
� Mortgage Bond
� Underlying asset
� Liens on property
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Secured Corporate Debt
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Secured Corporate Debt
� Collateral Trust Bond
97
Unsecured Corporate Debt
� Debenture Bonds
� Senior � Senior Subordinated� Junior� Junior Subordinated
� Income Bonds
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Convertible Bonds
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� Benefit
� Impact on yield
Convertible Bonds - Parity
� Definition
� Parity price of bond (conversion ratio 25:1)
100
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Convertible Bonds - Parity
� Parity price of stock(conversion ratio 25:1)
� MV(bond) = 110
101
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U.S. Government & Agency Securities
U.S. Government Securities
� Treasury bills � Maturity
� No fixed coupon
� QuotesBid Ask
4.87% 4.82%
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U.S. Government Securities
� T-Notes & T-Bonds� Maturities
� T-Notes� T-Bonds
� Fixed Coupons� Trade with interest� Quotes
105
U.S. Government Securities
� Zero coupon bonds � Treasury receipts
� Direct obligations of Broker Dealers
� STRIPS
� Inflation protected issues� TIPS
106
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� Subsidiary of US Government
� Explicit guarantee
� GinnieMae
107
� Created/chartered by US government
� Implied guarantee
� FannieMae� FreddieMac
GovernmentAgencies
GovernmentSponsored Enterprises
Mortgages
108
$100,000 purchase price-$ 20,000 down payment$ 80,000 mortgage
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Prepayment Risk
109
Prepayment Risk
110
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Collateralized Mortgage Obligations
� Structured by Broker Dealers
� “Tranches”
111
Asset Backed Securities
112
� Purpose� Borrower
� Lender
� Underwriter
� Investor
� Underlying assets
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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
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� Auction marketplace
� Members of Exchange� Designated Market Makers
� Floor Brokers
� Independent Brokers
115
New York Stock Exchange
Nasdaq Stock Market
� Nasdaq Global Select Market
� Nasdaq Global Market
� Nasdaq Capital Market
� Listing Requirements� Initial Listing Requirements:� Continued Listing Requirements:
116
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Nasdaq Stock Exchange
117
� Market Makers provide liquidity
� Negotiated market
BID ASK SIZE
10.42 10.57
10.41 10.53
25 x 42
18 x 27
MMAA
MMBB
The OTC Market – Executing Trades
� Acting as a dealer (principal)
� Acting as a broker (agent)
118
Customer Broker/Dealer
Customer
Broker/Dealer
Customer
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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
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Other Trading Venues
� Third Market
� Electronic Communication Networks (ECNs)
121
Secondary Market Participants
� Individual Investors
� Institutional Investors� Examples of Institutional Investors
122
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Secondary Market Participants
� Suitability Requirements� Reasonable Basis Suitability
� Quantitative Suitability
� Customer Specific Suitability� Individual Investors
� Institutional Investors
123
Averages and Indices
124
� Dow Jones Averages
� S&P 500
� Wilshire 5000
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Foreign Currency Market
125
� Interbank market
� Participants
� Spot vs. forward price
Foreign Exchange Market – Key Drivers
126
� Monetary policy / interest rates
� Inflation
� Political risk
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Foreign Exchange Market:Impact on Imports & Exports
127
� Who wants a strong dollar?
Bonds Denominated in Other Currencies
128
� Eurodollars
� Eurodollar Bonds
� Yankee Bonds
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Economics & Analysis
Economic Terms & Measurements
130
� Gross Domestic Product (GDP)
� Inflation
� Retail Inflation
� Wholesale Inflation
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131
Business Cycle
132
Economic Indicators
� Leading
� Lagging
� Coincident
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133
� Fed Funds Rate
� Discount Rate
� Broker’s Call Rate
� Prime Rate
Interest Rates
Tools of the Fed
134
� Open Market Transactions� Easy Money:
� Tight Money:
� Discount Rate� Easy Money:
� Tight Money:
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Tools of the Fed
135
� Bank Reserve Requirement� Easy Money:
� Tight Money:
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