Current yield formula
CY = annual div (dollar amount)/current market price
What are the four dividend dates?
- Dividend/declaration date: the date the dividend is announced
- Payment Date: date on which the dividend is distributed
- Record Date: date on which you must own the stock to receive a dividend (trade must settle on/before record date)
- Ex-Div Date: one business day before the record date
- Stock begins to sell w/o its dividend
What are the impacts of stock dividends?
- No economic gain/loss or capitalization for share holders, and no change to equity ownership
- Stated in % terms
How is a stock dividend treated for tax purposes?
Shares not taxed as income, total basis is unchanged (basis per share is decreased). S1P1 = S2P2
Formula for current yield of bond
Annual interest/current market price
What is YTM?
Yield to maturity of a bond. This includes 1) interest payments 2) interest from reinvesting the interest (compound interest) 3) gain/loss on the difference between current value and par value.
Price vs yield relationship: Market Rates go up
Price goes down, CY and YTM go up
Price vs yield relationship: Market Rates go down
Price goes up and CY/YTM go down
Capital Gains: what are the difference bertween short and long term gains?
- Short term is due to assets held for <=1 yr [taxed at ordinary rate]
- Long-term is due to assets held for >1 yr [maximum of 20% tax]
What are the types of investment companies?
- FACs: Face Amount Certificate Companies - guaranteed growth rates
- UITs: Unit Investment Trusts - fixed portfolios with passive management
Management Companies - have closed end and open end products (open = mutual = not exchange traded, closed = exchange traded)
Benefits of a mutual fund:
- Professional management
- Liquidity (required by law to be liquid)
- Convenience and cost
- Exchanges at NAV
What is the structure of a mutual fund?
- Underwriter: Fidelity
- Board: Both Fidelity/non Fidelity
- Investment Advisor: Fidelity employee
- Custodian Bank: Prevents stealing, hold's cash and securities
- Transfer Agent: Issues, redeems, and cancels shares--distributes securities
NAV formula and calculation time?
- NAV = (Assets - Liabilities)/#Shares Outstanding
- 4:00 PM each day
What is POP?
- NAV + any sales charges
- NAV = bid POP = ask [fund company's perspective]
Sales charge formula? Maximum sales charge?
- Maximum 8.5%
Front vs back-end Loads?
- Front end load--sales fee charged right away upon buying
- Back-end load--Assessed at redemption, percentage decreases as its been held for longer (called CDSC)
Fees that a fund levies against the fund's assets.
What are the fees that a mutual fund can charge?
- Management fee: paid to investment advisor, not tied to PnL
- Admin Fee: Bank payments and transfer agent costs
- Redemption Fee: Remains in the fund and benefits owners
What does an expense ratio not include?
Sales charges. It includes opex and management fees (including 12b-1 and admin). Just no sales charges.
Class A vs B vs C shares?
- A: front-end load, low 12b-1 fees, breakpoints available for large purchases
- B: sales charge at time of sale, higher 12b-1, can convert to class A after 6-8 years
- C: may have both front-end and deferred charge, higher 12-b1 fees (same as B), no conversion to class A
- Never recommend b shares
What is a no load fund?
A mutual fund with no sales charges that may only charge annual 12b-1 fees up to 0.25%.
What is an LOI in the context of mutual funds?
- A non-binding provision that lets investors have extra time to qualify for breakpoint sales charges.
- 13 month duration, may be backdated 90 days
What are ROAs?
- Rights of Accumulation--right to add up all purchases made from the same family of funds
- When a breakpoint is crossed, current and future purchases may be able to get the better sales charge
- Available to: purchaser, immediate family, fiduciary for account, trustee for trust, pension plans, investment clubs
What's a withdrawal plan?
- This allows investors to receive regular, periodic paymetns from their accounts.
- NEVER advise a client to engage in a purchase and withdrawal plan at the same time.
- Fixed dollar amount, fixed percentage, fixed time, fixed number of shares
- Payments not guaranteed
What are the sales practice violations for mutual funds?
- Breakpoint sales: soliciting sales of amounts just below breakpoints
- Recommending different fund families to get higher sallles charges
- Switching between fund families to get funds (must justify why it's ok)
- Excessive class b share purchases (since they don't qualify for breakpoints)
Differences between closed-end and open ended funds?
- Closed: one time issuance, may trade +/- NAV, sponsor doesn't have to redeem, secondary market, may be sold short
- Open: Continually issue new shares (with prospectus), shares sold at POP, shares must be bought at the NAV, shares remain in the primary market, cannot be sold short