CFP Exam - Investments

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1. National (NYSE, AMEX)
2. Regional (Philadelphia, Midwest, Pacific)
3. Over the Counter (NASDAQ)
4. Third market (OTC for large institutional investors)
5. Fourth market (Instinet)

Short-term securities have less than one year to maturity and are sometimes called money market instruments. Interest income is considered ordinary income subject to state and federal tax.

1. Certificate of deposit (CD)
2. Negotiable certificate of deposit (jumbo CD)
The rate and the term are individually negotiated by the bank and the investor. Jumbo CDs have denominations exceeding $100,000 and are easily resold as long as the bank's credit quality does not decline. Maturities are usually one to three months.
3. Commercial paper
A short-term, unsecured promissory note issued by a corporation.
4. Repurchase agreement (repo)
The sale of a security with the agreement to buy back the security at a specified price and date in the future. The repurchase price is higher than the initial sale price. The difference between the sale price and the repurchase price is the interest paid to the investor, and the securities are the collateral.
5. Bankers’ acceptances
A type of bank draft typically used in international trade transactions to pay for goods purchased in import/export transactions.
6. Eurodollar CDs
A U.S. dollar denominated CD issued by a foreign bank or foreign branch of a U.S. bank, with interest paid in U.S. dollars, but the interest rate tied to a foreign rate, such as the LIBOR.

Securities Act of 1933

Securities Exchange Act of 1934

Investment Company Act of 1940

Investment Advisers Act of 1940

Securities Investors Protection Act of 1970

SIPC protects investors against brokerage failures.

The Insider Trading and Securities Fraud Enforcement Act of 1988

National Securities Markets Improvement Act of 1996

Regulation FD

The Sarbanes-Oxley Act of 2002

1. SEC registers and monitors RIAs with managed assets exceeding $25 million.
2. NASD licenses and monitors securities brokers.

1. Progressive
A tax rate that increases as the tax base rises.
2. Regressive
A tax rate that declines as the tax base rises.
3. Proportionate
A tax in which the rate stays the same as the tax base goes up or down; a flat tax rate.
4. Marginal tax rate
The tax rate at which the last dollar of taxable income is taxed; an individual's tax bracket.

Any asset that defers, reduces, or avoids taxation.
examples:
municipal bonds - avoid
prop tax, mortgages - reduce
IRA - defer

Capital gains tax is deferred until it is sold, at which time the donee's tax basis is the cost basis of the investment to the donor. If the holder of an investment dies and the investment is passed on to an heir, the heir's cost basis is the asset's price at the deceased's date of death.

dividends received from credit unions, mutual insurance companies, real estate investment trusts, farmers' cooperatives, tax-exempt entities, deductible dividends from employer securities owned by an ESOP, and stock owned for less than 61 days in the 120-day period surrounding the ex-dividend date do not qualify.

US Treasury is taxed at the federal level but not state.
Municipal bond is taxed at neither if you are a resident of the state.

GDP=C+I+G+E

C=consumption expenditures
I=gross private domestic investment (including new housing)
G=government spending (excluding transfer payments)
E=net exports

CPI, PPI, GDP price deflator

Deposits in foreign banks denominated in U.S. dollars.

1. Current account
Value of goods and services imported and exported. Includes merchandise trade, service trade, net income from investments, and net unilateral transfers.
2. Capital account
Measures capital and short-term financial investments made between countries. Outflows of domestic capital are netted with inflows of foreign capital.
3. Official reserve account
Reflects changes in a country's international reserves. Changes are the result of current account and capital account transactions.

Recovery-->Expansion-->Peak-->
Contraction/Recession-->
Trough-->Recovery-->etc

* Investment leads GDP equation
* Moderate GDP increases
* Low unemployment
* Labor productivity declines, wages increase
* Business profits peak and begin to decline
* Business capacity utilization nears high
* Businesses increase investment in plant and equipment
* Loan demand strong
* Inflation rises and then peaks
* Fed tightens money supply
* Interest rates rise

* Prices of fixed-income securities decline
* Fixed-income investors switch from long-term bonds to short-term bonds and adjustable-rate bonds
* Stocks rise, but process is more selective
* P/E ratios relatively high
* New issues proliferate
* Investors move from growth stocks to value stocks, defensive stocks, and quality issues with low volatility

Prices for commodities, real estate, collectibles, and natural resources rise

* Government spending leads GDP equation to offset decline in private sector
* GDP slows and may decline
* Unemployment rises
* Consumer spending declines
* Businesses cut costs to maintain profit margins
* Business capacity utilization declines
* Business investment declines
* Business and consumer lending decline
* Inflation declines
* Fiscal and monetary policy expansionary
* Interest rates peak and then decline
* A recession is considered to occur when the GDP declines for two successive quarters

* Prices of fixed-income securities rise
* Fixed-income investors switch from short-term bonds to long-term bonds to lock in high coupons; buy convertible bonds
* Stocks decline, build a base, and move off lows

Prices for commodities, real estate, natural resources, and securities become stable or decline

* Consumer spending leads GDP equation
* Rapid GDP increases
* Unemployment high, but slowly declining
* Labor productivity rises rapidly
* Business profits recover sharply
* Business capacity utilization begins to rise
* Credit demand rises
* Inflation low
* Fed holds monetary policy steady
* Interest rates low

* Fixed-income prices relatively stable
* Investors buy bonds for yield, not for price appreciation
* Investors switch from long-term bonds to intermediate-term bonds
* Investors buy junk bonds
* P/E ratios relatively low
* Stocks rebound briskly from lows
* Investors switch from value and defensive stocks to growth stocks
* Investors buy cyclical stocks

Investors buy real estate at low prices and at low mortgage rates

Demand (by causing it to either expand or retract)

The amount of money the bank has to lend to individuals and businesses is reduced. The effect will be to raise the cost of loans as the banks ration their supply of funds. Higher borrowing costs tend to reduce bond prices.

The Fed pursues economic goals of full employment, stable prices, and economic growth

1. Reserve requirement-changed infrequently
2. Discount rate-changed periodically
3. Open market operations-used daily

Open market operations involve the buying and selling of government securities by the Federal Reserve in the open market.

1. The Fed purchases securities to increase the money supply and the reserves of the banking system.
2. Likewise, the Fed sells securities to decrease the money supply and reserves of the banking system.
3. This tool is used frequently (daily).