series 79 cl 1

Series 79, Class 1

Version: January, 2012

© Knopman Financial Training 1

1

Series 79Investment Banking

Representative Examination(Class 1 of 4)

BRIAN MARKS

Office: 212.626.6899

Cell: 917.856.9946

Email: [email protected]

2

Series 79, Class 1



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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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Series 79, Class 1



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

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Series 79, Class 1



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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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Series 79, Class 1



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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Series 79, Class 1



� 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

Series 79, Class 1



� 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:

14

Series 79, Class 1



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



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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Series 79, Class 1



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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Series 79, Class 1



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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Series 79, Class 1



Brokerage Office Supervision

23

OSJ

Branch Office

Non-branch office

Non-branch office

Branch Office

24


� Office of Supervisory Jurisdiction (OSJ)

� Headquarters and Regional Offices

� Resident Series 24 in place

� Conduct Annual Compliance Reviews

Series 79, Class 1



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� Office of Supervisory Jurisdiction (OSJ)

� Handle Customer Accounts & Complaints

� Engage in Market Making and Underwriting

� Annual Internal Audit


� Branch Offices

� What is not a Branch Office?� Primary residence

� Administrative back office

� Location of convenience

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Series 79, Class 1



FINRA Miscellaneous Rules

� Selling Away / Private Securities Transactions

� Outside Employment

� Transactions for personal accounts

27


� Sharing in customer accounts

� Loans involving customers

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Series 79, Class 1




� Gift Limitations

� Customer Complaints

29

Anti-Money Laundering Compliance (AML)

� Bank Secrecy Act (1970)� Purpose

� FinCEN

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Series 79, Class 1




� Bank Secrecy Act� Currency Transaction Report (CTR)

� Suspicious Activity Report (SAR)

31


� Designated Compliance Person

� Annual Reviews

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Series 79, Class 1



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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Series 79, Class 1



� Purpose

� Penalties� Censure� Fine� Suspension� Retake a test� Revoke registration

35

FINRA Code of Procedure

� Appeal Process� National Adjudicatory Council first…

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FINRA Code of Procedure

Series 79, Class 1



� Purpose

� Intra-industry disputes

37

FINRA Code of Arbitration

� Disputes involving a customer

� Simplified Arbitration

� Other Details

38

FINRA Code of Arbitration

Series 79, Class 1



� Role of Mediator

� Interactions & Disclosures

39

FINRA Code of Mediation

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Series 79, Class 1



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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Series 79, Class 1



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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Series 79, Class 1



Equity Securities

Rights of Common Stockholders

� Splits

� Dividends� Cash dividends

� Company stock

� Stock of a subsidiary

� Company product

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Series 79, Class 1



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

Series 79, Class 1



Finding the Ex-Dividend date

49

� 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

Series 79, Class 1



Dividend Procedures

51

� Order of Dates for Regular Way Trade

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Series 79, Class 1




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� Voting Rights� Statutory

� Cumulative


� Voting Rights� Example: Individual holding 100 shares

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5

Cumulative Voting Rights

Statutory Voting Rights

64321Board Seat

Series 79, Class 1




� Preemptive rights

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Preferred Stock

� Purpose

� Provides income� Based off par value

� Trading characteristics

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Series 79, Class 1



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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Series 79, Class 1



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

Series 79, Class 1



Global Depositary Receipts (GDRs)

� Typical listing venues

� Sponsored vs. unsponsored

61

Warrants

� Benefit

� Issuance

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Series 79, Class 1



Stock Appreciation Rights (SARs)

63

� Incentivize employees

� SARs do not pay dividends

� Different than employee stock options

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Series 79, Class 1



Debt Securities

Bonds

� Issuers

�Corporations�Municipalities�U.S. Government�Foreign Corporations�Foreign Governments

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� Buyers

� Individual Investors� Institutional Investors

Series 79, Class 1



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

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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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Series 79, Class 1



Yield Curve

69

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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Series 79, Class 1



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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Series 79, Class 1



� 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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Series 79, Class 1



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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

76

Discount PremiumNY

CY YTM

YTC

NY

CYYTM

YTC

Bond Yields

NY YTMCY

Par

Series 79, Class 1



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?

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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

Series 79, Class 1



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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Series 79, Class 1



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

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

8/15 2/1511/1 11/4

Series 79, Class 1



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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Series 79, Class 1



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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Series 79, Class 1



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

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Series 79, Class 1



Types of Risk - Credit RiskMoody’s S&P/Fitch

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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

Series 79, Class 1



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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Series 79, Class 1



Corporate Bonds

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Secured Unsecured

Equipment Trust Certificates

Debenture Bonds

Mortgage Bonds Income Bonds

Collateral Trust Bonds

Corporate Bonds

Series 79, Class 1



Secured Corporate Debt

� Equipment Trust Certificate

� Underlying Asset

� Issuer

95

� Mortgage Bond

� Underlying asset

� Liens on property

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Series 79, Class 1




� Collateral Trust Bond

97

Unsecured Corporate Debt

� Debenture Bonds

� Senior � Senior Subordinated� Junior� Junior Subordinated

� Income Bonds

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Series 79, Class 1



Convertible Bonds

99

� Benefit

� Impact on yield

Convertible Bonds - Parity

� Definition

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

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Series 79, Class 1



Convertible Bonds - Parity

� Parity price of stock(conversion ratio 25:1)

� MV(bond) = 110

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Series 79, Class 1



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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Series 79, Class 1




� 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

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Series 79, Class 1



� 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

Series 79, Class 1



Prepayment Risk

109

Prepayment Risk

110

Series 79, Class 1



Collateralized Mortgage Obligations

� Structured by Broker Dealers

� “Tranches”

111

Asset Backed Securities

112

� Purpose� Borrower

� Lender

� Underwriter

� Investor

� Underlying assets

Series 79, Class 1



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

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Series 79, Class 1



� Auction marketplace

� Members of Exchange� Designated Market Makers

� Floor Brokers

� Independent Brokers

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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:

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Series 79, Class 1



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

Series 79, Class 1



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

Series 79, Class 1



Other Trading Venues

� Third Market

� Electronic Communication Networks (ECNs)

121

Secondary Market Participants

� Individual Investors

� Institutional Investors� Examples of Institutional Investors

122

Series 79, Class 1



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

Series 79, Class 1



Foreign Currency Market

125

� Interbank market

� Participants

� Spot vs. forward price

Foreign Exchange Market – Key Drivers

126

� Monetary policy / interest rates

� Inflation

� Political risk

Series 79, Class 1



Foreign Exchange Market:Impact on Imports & Exports

127

� Who wants a strong dollar?

Bonds Denominated in Other Currencies

128

� Eurodollars

� Eurodollar Bonds

� Yankee Bonds

Series 79, Class 1



Economics & Analysis

Economic Terms & Measurements

130

� Gross Domestic Product (GDP)

� Inflation

� Retail Inflation

� Wholesale Inflation

Series 79, Class 1



131

Business Cycle

132

Economic Indicators

� Leading

� Lagging

� Coincident

Series 79, Class 1



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:

Series 79, Class 1



Tools of the Fed

135

� Bank Reserve Requirement� Easy Money:

� Tight Money:

1120 Avenue of the Americas

New York, NY 10036

TEL: 212.626.6899 • FAX: 212.626.6848

www.knopman.com

Questions:

[email protected]

series 79 cl 1

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