FINRA Series 66 Free Practice Questions Quiz 57

Yield to maturity is the amount that an investment, usually a bond, is expected to produce if held to maturity. When a bond is purchased at a price other than par, the eventual profit or loss is affected by more than just the regular interest payments received, since bonds are always redeemed at par. When a bond is bought at a discount to par, the yield to maturity increases, because when the bond is redeemed, the investor will receive the difference between the purchase price and par value and add that to the interest received to determine the return on investment. If a bond is traded at par, yield to maturity will equal the coupon rate, since it will be redeemed without profit or loss. If a bond is purchased at a premium, the yield to maturity will be lower than the sum of the coupon payments, because the bond will be redeemed at par and the investor will lose the premium paid.

Current yield is an expression of the income a security produces. Equities produce income by paying a dividend. Bonds produce income by paying a coupon. To calculate the current yield produced by equities, the investor divides the annual dividends received by the share price of the underlying security. This can be expressed as follows: annual dividends received per share/share price = current yield.

Benchmark portfolios are portfolios designed to mimic the volatility of the benchmark they purport to track. As an example, a portfolio benchmarked to the Dow Jones Industrial Average would reasonably be expected to rise 10 percent if the Dow Jones rose 10 percent. The same applies to other benchmarks such as the S&P 500 or the Russell 2000. Benchmark portfolios are often viewed as a product of the efficient market theory, the theory that it is impossible to outperform the market. Benchmarked portfolios are often less expensive to manage and less expensive for investors to participate therein. This is because once the portfolio is indexed to the benchmark, little to no additional cost associated with investment management is incurred.

Joint accounts are accounts owned by multiple adult clients. Each adult owner retains some measure of power over the account. The advisor should collect suitability information for all owners of a joint account. Joint account agreements are required for all joint accounts as well as the designation of each account owner. The joint owners may be designated either as tenants in common or joint tenants with rights of survivorship. All forms related to the account require signatures from all parties with account ownership. Additionally, checks made payable to the account must be made payable to all account owners and endorsed by all owners as well. When securities are sold from joint accounts, all owners must sign for the securities for the transaction to be qualified as delivery in good form.

An affiliated person is a person who owns (either directly or indirectly), controls, or holds the power to vote five percent or greater of issued stock of an investment company. This definition also includes people who control or are controlled by employees and directors of the investment company. Although greater than five percent voting power makes the person an affiliated person, it does not contribute to the limit of interested persons on the board of the investment company.

Annual reports are documents that are required to be made available to stockholders of a publicly traded firm. The document details the endeavors undertaken by the firm and the financial health of the firm. The information contained in the annual report is highly detailed and discusses in depth the condition of the firm. The investor may make use of the annual reports and the information contained therein to produce financial ratios, understand future endeavors of the firm, and gather an understanding of the general condition of the firm.

Usually contained in the document are items of financial note, the board’s letter to the firm’s stockholders, presentation of current and future endeavors to be undertaken, where management feels that the company currently is and is going, financial statements and any notes related thereto, a publishing of the auditors’ findings concerning the report, and a summary of the company’s financial data.

Rule 147 is a rule under the Uniform Securities Act (USA) that provides an exemption from federal registration of a security if the security is sold to a person within the same state as the issuer’s location and place of business. Rule 147 applies exclusively to those offerings made exclusively to residents within a single state in which the issuer is located and conducts business. It is called the 80-80-80 rule because 80 percent of the issuing company’s gross revenue must come from business activities within the state, 80 percent of the proceeds of the new issue must be invested in business ventures within the same state where the investors live and the firm does business, and 80 percent of the issuing firm’s assets must be within that same state.

Rule 147 applies exclusively to those offerings made exclusively to residents within a single state in which the issuer is located and conducts business. It is called the 80-80-80 rule because 80 percent of the issuing company’s gross revenue must come from business activities within the state, 80 percent of the proceeds of the new issue must be invested in business ventures within the same state where the investors live and the firm does business, and 80 percent of the issuing firm’s assets must be within that same state.

The time value of money is a quantitative measure that attempts to describe the difference between the value of a given amount of money in the present versus its value at a future time. These concepts are also referred to as present value and future value. The time value of money is calculated by assigning an interest rate to an investment, and may also be used as a discount rate to determine the decline in value of an investment. The time value of money is useful to investors in determining whether or not an investment is worth the expenditure of capital. If the expected rate of return of an investment does not keep up with inflation or is much lower than the reasonably expected return of another investment, the investor will reject the proposed investment because the opportunity cost of accepting the investment is too high.