Series 79

Investment Banking Representative Examination (Class 1 of 4)

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BRIAN MARKS Office: 212.626.6899 Cell: 917.856.9946 Email: brian@knopman.com

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

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

Unit Collection, Analysis & Evaluation of Data Underwriting/New Financing Transactions, Types of Offerings and Registration of Securities Mergers & Acquisitions, Tender Offers and Financial Restructurings General Securities Industry Regulations Total Number of Questions 75 43 34 23 175

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

Best Way to Study

Take good notes Focus on the concepts Review concepts in the book, dont only read rationales Score 80% or higher on the last final exam

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

Overview of Federal Securities Regulations

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Federal Securities Regulations

Securities Act of 1933
Regulates the new issue market

Requires registration of securities

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

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

Securities Exchange Act of 1934

Requires financial reports by publicly held corporations

Prohibits fraud

Defines & regulates corporate insiders

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Trust Indenture Act of 1939

Requires corporate bonds to be issued with a Trust Indenture

Contents of Trust Indenture

Role of Trustee

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Trust Indenture Act of 1939

Types of Covenants
Affirmative

Negative

Financial

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Securities Investor Protection Corporation

Securities Investor Protection Corporation (SIPC)

Protects separate customers

Coverage limits

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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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Insider Trading & Securities Fraud Enforcement Act of 1988

Misappropriation of Information

Duty of Trust

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Regulation FD
Purpose

Selective disclosure

Disclosure of insider information requires disclosure to the public

Intentional disclosure

Unintentional disclosure

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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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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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Financial Industry Regulatory Authority (FINRA)

Additional registration requirements
Amended U-4

Form U-5

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Financial Industry Regulatory Authority (FINRA)

Continuing Education
Regulatory element

Consequences for lapse

Firm element

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Brokerage Office Supervision

OSJ

Branch Office

Branch Office

Non-branch office

Non-branch office

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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

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Brokerage Office Supervision

Branch Offices

What is not a Branch Office?

Primary residence

Administrative back office

Location of convenience

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FINRA Miscellaneous Rules

Selling Away / Private Securities Transactions

Outside Employment

Transactions for personal accounts

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FINRA Miscellaneous Rules

Sharing in customer accounts

Loans involving customers

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FINRA Miscellaneous Rules

Gift Limitations

Customer Complaints

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Anti-Money Laundering Compliance (AML)

Bank Secrecy Act (1970)
Purpose

FinCEN

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Anti-Money Laundering Compliance (AML)

Bank Secrecy Act
Currency Transaction Report (CTR)

Suspicious Activity Report (SAR)

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Anti-Money Laundering Compliance (AML)

Designated Compliance Person

Annual Reviews

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Financial Crime Regulations

Customer Identification Program (CIP)

Office of Foreign Assets Control (OFAC)

Foreign Corrupt Practices Act (FCPA)

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Research Analyst Regulations

Equity Research & Investment Banking

Required Disclosures

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FINRA Code of Procedure

Purpose

Penalties
Censure Fine Suspension Retake a test Revoke registration

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FINRA Code of Procedure

Appeal Process
National Adjudicatory Council first

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FINRA Code of Arbitration

Purpose

Intra-industry disputes

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FINRA Code of Arbitration

Disputes involving a customer

Simplified Arbitration

Other Details

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FINRA Code of Mediation

Role of Mediator

Interactions & Disclosures

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Overview of Equity & Debt Securities

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Overview of the U.S. Capital Markets

Issuers of Securities
U.S. Government U.S. Government Agencies/GSEs Municipalities Corporations Foreign Governments Foreign Corporations

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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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Dividend Procedures
Important dates set by the company
Declaration date

Record date

Payable date

Trade Settlement

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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

F F

14 21

15 22

16
Record date

17 24

18 25

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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 21

15 22

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Record date

17 24

18 25

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Dividend Procedures
Ex-dividend date
Effect on price

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Dividend Procedures
Order of Dates for Regular Way Trade

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Rights of Common Stockholders

Voting Rights
Statutory

Cumulative

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Rights of Common Stockholders

Voting Rights
Example: Individual holding 100 shares Board Seat Statutory Voting Rights Cumulative Voting Rights 1 2 3 4 5 6

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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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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

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American Depositary Receipts (ADRs)

Rights of shareholders

Annual reports

Dividends

Currency risk

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Global Depositary Receipts (GDRs)

Typical listing venues

Sponsored vs. unsponsored

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Warrants
Benefit

Issuance

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Stock Appreciation Rights (SARs)

Incentivize employees

SARs do not pay dividends

Different than employee stock options

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Debt Securities

Bonds
Issuers Buyers

Corporations Municipalities U.S. Government Foreign Corporations Foreign Governments

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) 105 (105% of par) $950 $1,050

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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

Normal Yield Curve

Inverted Yield Curve

Humped Yield Curve

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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 investors money prior to maturity

Why would the issuer call away a bond?

Call premium

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Changing Interest Rates

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

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Changing Interest Rates

Example 2:
Investor owns 8% bond, purchased at par Similar bonds with 7% coupon are issued

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Bond Yields

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

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

Current yield (CY) =

annual interest market value

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Bond Yields
Discount
YTC YTM CY NY NY CY YTM NY CY YTM YTC

Premium

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?
Discount

YTC

NY CY

Premium

YTM CY NY

YTM YTC

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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

NY CY

Premium

YTM CY NY

YTM YTC

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Corporate Bond Quotes

CY Close Change

ATT

55/

8 16

5.80%

97

-1

ATT ZR 13

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+3

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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 Muni/Corp bonds 30/360 basis T+3 settlement Treasury bonds Actual days/365 day year T+1 settlement

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Accrued Interest
8% F&A 15 Corporate Bond Purchased: Monday, November 1st
8/15 11/1 11/4 2/15

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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

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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 Risk

Moodys Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 ------------Ba1 S&P/Fitch AAA AA+ AA AAA+ A ABBB+ BBB BBB------------BB+
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Investment Grade

High Yield Bonds

Bond Maturity Terminology

Year 2021 2022 2023 2024 2025 Term Bond Serial Bond Balloon Bond

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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

Corporate Bonds
Secured Equipment Trust Certificates Mortgage Bonds Collateral Trust Bonds Unsecured Debenture Bonds Income Bonds

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Secured Corporate Debt

Equipment Trust Certificate
Underlying Asset

Issuer

95

Secured Corporate Debt

Mortgage Bond
Underlying asset

Liens on property

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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
Benefit

Impact on yield

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Convertible Bonds - Parity

Definition Parity price of bond (conversion ratio 25:1)

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Convertible Bonds - Parity

Parity price of stock (conversion ratio 25:1)
MV(bond) = 110

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U.S. Government & Agency Securities

U.S. Government Securities

Treasury bills
Maturity No fixed coupon Quotes Bid 4.87%

Ask 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

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U.S. Government Securities

Zero coupon bonds
Treasury receipts Direct obligations of Broker Dealers STRIPS

Inflation protected issues

TIPS

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Government Agencies
Subsidiary of US Government Explicit guarantee GinnieMae

Government Sponsored Enterprises

Created/chartered by US government Implied guarantee FannieMae FreddieMac

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

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Prepayment Risk

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Prepayment Risk

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Collateralized Mortgage Obligations

Structured by Broker Dealers

Tranches

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Asset Backed Securities

Purpose
Borrower Lender Underwriter Investor

Underlying assets

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Securities Trading Markets

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Overview of the Securities Trading

Secondary Market
Market Centers for Equities New York Stock Exchange Nasdaq Stock Market OTC Marketplace

Trading Desks for Bonds

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New York Stock Exchange

Auction marketplace Members of Exchange
Designated Market Makers

Floor Brokers

Independent Brokers

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Nasdaq Stock Market

Nasdaq Global Select Market Nasdaq Global Market Nasdaq Capital Market Listing Requirements
Initial Listing Requirements: Continued Listing Requirements:

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Nasdaq Stock Exchange

Market Makers provide liquidity

Negotiated market BID MMAA MMBB ASK SIZE 25 x 42 18 x 27

10.42 10.57 10.41 10.53

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The OTC Market Executing Trades

Acting as a dealer (principal)
Customer Broker/Dealer

Acting as a broker (agent)

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)

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Secondary Market Participants

Individual Investors

Institutional Investors
Examples of Institutional Investors

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Secondary Market Participants

Suitability Requirements
Reasonable Basis Suitability

Quantitative Suitability

Customer Specific Suitability Individual Investors Institutional Investors

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Averages and Indices

Dow Jones Averages

S&P 500

Wilshire 5000

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Foreign Currency Market

Interbank market

Participants

Spot vs. forward price

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Foreign Exchange Market Key Drivers

Monetary policy / interest rates

Inflation

Political risk

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Foreign Exchange Market: Impact on Imports & Exports

Who wants a strong dollar?

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Bonds Denominated in Other Currencies

Eurodollars

Eurodollar Bonds

Yankee Bonds

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Economics & Analysis

Economic Terms & Measurements

Gross Domestic Product (GDP)

Inflation
Retail Inflation

Wholesale Inflation

130

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Business Cycle

131

Economic Indicators
Leading

Lagging

Coincident

132

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Interest Rates
Fed Funds Rate

Discount Rate

Brokers Call Rate

Prime Rate

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Tools of the Fed

Open Market Transactions
Easy Money: Tight Money:

Discount Rate
Easy Money: Tight Money:

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Tools of the Fed

Bank Reserve Requirement
Easy Money: Tight Money:

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