60 Series 7 Exam Concepts You Need to Know Before Test Day

Rule 2210 sorts written communications into three buckets. A retail communication reaches more than 25 retail investors within 30 calendar days; correspondence reaches 25 or fewer; an institutional communication goes only to institutional investors. Retail communications generally require an appropriately qualified principal's approval before the earlier of use or filing, while correspondence and institutional communications follow risk-based supervisory review. Filing is a separate, product- and member-status-specific question: new members prefile certain public-media retail communications during their first year, and specified product communications may require pre-use or post-use filing. Count the audience first, decide the category second, then analyze approval and filing separately.

Memory hook:Twenty-five stays correspondence; twenty-six becomes retail. Classify first, then ask approval and filing separately.

Research reports are retail communications with extra strings attached. Analysts must be walled off from investment banking, and compensation can't tie to specific deals. Quiet periods restrict when analysts can publish: after an IPO, analysts at underwriters participating in the offering generally cannot publish or distribute research until 10 days after the effective date, with different windows for other syndicate participants and secondary offerings. Third-party research is the exception worth knowing: a member may distribute another firm's research without treating it as its own, provided the member has no reason to believe it is unfair or lacking objectivity, doesn't alter it, and discloses that it was prepared by someone else. Emerging growth companies get special treatment that loosens restrictions on underwriter research.

Memory hook:Ten days quiet after IPO; third-party research passes through with disclosure, not adoption.

Section 5 of the Securities Act of 1933 creates three windows, and every communication question lives in one of them. Pre-filing: no offers of any kind — the registration statement hasn't been filed, so even hints of a deal are off limits. Cooling-off period: typically about 20 days, though the SEC can accelerate; oral offers are permitted, but written offers can only go through the preliminary prospectus, the red herring, which omits the public offering price and underwriting compensation. Tombstone ads are permitted under Rule 134. Post-effective: the final prospectus with the actual price is available, and sales can be completed. The decision rule: identify the window, then test each communication against what that window allows.

Memory hook:Before filing, silence; during cooling-off, talk but only the red herring writes; after effectiveness, the final prospectus sells.

Reg D exempts private placements from registration. Rule 506(b) bars general solicitation; Rule 506(c) allows it only if every purchaser is a verified accredited investor. Form D is filed within 15 days of first sale. Reg A is a mini-registration, not a full exemption: Tier 1 caps offerings at $20 million, Tier 2 at $75 million, using an abbreviated filing and offering circular. Rule 144 is the resale safe harbor for restricted and control securities — generally a six-month holding period for reporting companies, twelve months for non-reporters, plus volume limits. Rule 144A creates a resale market for unregistered securities sold only to qualified institutional buyers. Intrastate Rule 147 offerings must involve resident issuers and resident purchasers, with resales restricted.

Memory hook:D raises private money, A mini-registers, 144 resells after holding, 144A trades QIB to QIB.

A pattern day trader executes four or more day trades within five business days in a margin account, and that activity must represent more than 6% of the account's total trades. Once tagged, the account needs a minimum of $25,000 in equity, and the customer must get the day-trading risk disclosure. DVP/RVP accounts are institutional: payment and securities move simultaneously through a custodian bank, so no margin is extended — the institution pays the full amount at settlement. Prime brokerage serves hedge funds: the fund executes through multiple brokers, but one prime broker provides custody, financing, margining, and clearing. Fee-based accounts charge periodic fees instead of commissions, which raises a suitability red flag for customers who trade rarely, since fees can exceed what commissions would have cost.

Memory hook:Four flips in five days needs twenty-five thousand; DVP pays in full.

Registration determines who owns, who signs, and who inherits. Tenants in common: each owner holds a separate percentage, there is no survivorship, and a deceased tenant's share passes to the estate. Joint tenants with rights of survivorship: the survivor takes everything. Community property, recognized in nine states: spouses own equally regardless of who contributed, and a deceased spouse can will their half. Custodial accounts under UGMA/UTMA are irrevocable gifts to the minor; the custodian manages until the age set by state law, and only the custodian signs. Trust accounts trade under a trustee's authority, so get the trust document or certificate of trust. Corporate accounts require a corporate resolution naming the officers authorized to trade.

Memory hook:TIC splits to the estate; ROS rolls to the survivor; custodial gifts can't come back.

Rollovers come in two flavors. A direct, trustee-to-trustee rollover avoids withholding entirely. An indirect rollover must be completed within 60 days, and qualified plan distributions suffer 20% mandatory withholding that the customer must replace out of pocket to avoid tax on the shortfall. Plan types matter: 401(k) plans take salary deferrals, 403(b) plans serve nonprofits and schools, and governmental 457 plans have no 10% early-withdrawal penalty. Defined benefit plans promise a payout; defined contribution plans depend on contributions and performance. For education savings, 529 plans are state-sponsored with high contribution limits, no income phase-outs, and beneficiary changes within the family allowed. Coverdell ESAs cap contributions at $2,000 per year, impose income limits, can fund K-12 expenses, and generally must be used by age 30.

Memory hook:Sixty days to redeposit or the IRS keeps twenty percent; Coverdell caps at two thousand.

The Customer Identification Program under the BSA requires collecting name, date of birth, address, and taxpayer ID before the account opens. KYC under FINRA Rule 2090 requires knowing the essential facts about every customer relationship. Regulation S-P governs privacy: an initial notice at account opening plus annual notices, and customers may opt out of having nonpublic personal information shared with nonaffiliated parties — though servicing and joint-marketing exceptions exist. Trading authority splits on one line: written power of attorney is required when the rep chooses which securities to trade; discretion limited to price and time needs no written authorization. For seniors, FINRA requires reasonable efforts to obtain a trusted contact, and Rule 2165 permits temporary holds on suspicious disbursements for specified adults — 65 and older, or 18-plus with suspected impairment.

Memory hook:Pick the stock, get it in writing; pick the price and time, just say so.

Reg BI under Exchange Act Rule 15l-1 applies whenever a rep recommends a securities transaction or investment strategy to a retail customer, including a recommendation to hold. Four obligations structure everything: disclosure (material facts and conflicts, delivered through Form CRS), care, conflict of interest, and compliance. The care obligation stacks three duties. Reasonable-basis: the rep must understand the product and its risks through diligence. Customer-specific: the recommendation must fit that customer's profile. Quantitative: costs must not be excessive, and the rep must ask whether a lower-cost alternative achieves the same objective. The governing standard is that the rep acts in the customer's best interest and never places the firm's or the rep's interest ahead of it. FINRA Rule 2111 mirrors the three suitability prongs.

Memory hook:Disclosure, care, conflicts, compliance — and never put your interest first.

Common stockholders hold preemptive rights, letting them subscribe to new share issuances to preserve their proportional ownership; they also receive pro rata dividends, can inspect corporate books, and hold residual claims on assets after everyone senior is paid. Voting mechanics drive the exam questions. Under statutory voting, each share gets one vote per director, so a majority bloc elects every seat. Cumulative voting lets a shareholder stack votes — shares owned multiplied by the number of director seats — and pour them all onto one candidate, which is how minority holders win board representation. Cumulative voting favors minority shareholders; statutory voting favors the majority. One nuance worth holding: the preemptive right protects ownership percentage, not market value.

Memory hook:Cumulative stacks: shares times seats; minorities finally get a director.

Preferred stock is a hybrid: a fixed dividend, priority over common for dividends and liquidation proceeds, but behind every bondholder in the capital structure. The types carry distinct mechanics. Cumulative preferred accumulates missed dividends as arrears that must be paid before common shareholders receive anything. Participating preferred pays its stated rate plus a share of leftover earnings. Convertible preferred swaps into common at a fixed ratio, trading yield for growth potential. Callable preferred lets the issuer recall shares, usually at a premium — that feature caps appreciation and favors the issuer. Adjustable-rate preferred resets its payout. Most preferred has no maturity date and carries no vote. Par is typically $100, with the dividend quoted as a percentage of par, so a 5% preferred pays $5 per year.

Memory hook:Cumulative clears arrears first; callable caps your gain; convertible trades yield for growth.

Rights and warrants both let holders buy stock at a set price, but their origins and terms diverge. Rights are short-lived certificates, typically expiring in 30 to 45 days, issued to existing shareholders so they can buy new shares at a subscription price below the current market — this is the preemptive right in action, protecting against dilution of ownership percentage. Warrants are long-term instruments, often running for years, usually attached to bond offerings as sweeteners, with exercise prices set above the market at issuance. Rights are effectively costless to the holder because the value comes from the discount; warrants can expire worthless. The theoretical value of a right in a rights-on market equals the market price minus the subscription price, divided by the number of rights needed plus one.

Memory hook:Rights: short, cheap, for shareholders. Warrants: long, above market, sweetening bonds.

American Depositary Receipts are negotiable receipts issued by U.S. banks for foreign shares held on deposit abroad. They trade in dollars on U.S. markets, pay dividends in dollars, and spare investors the mechanics of foreign settlement. But the currency exposure does not disappear: the underlying shares are denominated in a foreign currency, so a strengthening dollar reduces ADR returns even when the foreign stock is flat. Sponsored ADRs are created with the issuer's cooperation and may carry voting rights; unsponsored ADRs are initiated by the depositary bank, with fees passed to holders and typically no vote. Dividends arrive net of foreign withholding taxes. The holder owns the receipt, not the foreign shares directly.

Memory hook:ADRs translate the currency, they don't erase it.

A penny stock trades under $5 per share and is not listed on a national exchange or Nasdaq. Because these markets are illiquid and easily manipulated, layered sales practice requirements apply. The customer must receive the risk disclosure document before the first purchase, the firm must disclose current quotations and its own compensation in the transaction, and a suitability determination plus written agreement is required for non-established customers before their first purchase. The exceptions matter as much as the rules: established customers, institutional accredited investors, and exempt transactions such as unsolicited orders escape various requirements. Also remember the exclusion — a stock trading under $5 that is listed on Nasdaq or a national exchange is not a penny stock under the rules.

Memory hook:Under five, off the big boards: disclose, quote, and get the customer's signed okay.

The holding period sets the tax rate. One year or less is short-term and taxed as ordinary income; more than one year is long-term and taxed at preferential rates. The clock starts the day after purchase and stops on the sale date. The wash sale rule under IRC Section 1091 is the exception that trips people: if you sell at a loss and buy a substantially identical security within 30 days before or after the sale, the loss is disallowed. It isn't gone — it defers into the basis of the replacement shares, and the original holding period tacks onto the new shares. The full window spans 61 days, so buying back even before the loss sale triggers the rule. Loss netting separates short-term from long-term before rates apply.

Memory hook:Wash sale: thirty days either side; the loss hides in the new basis.

Cost basis rules follow the money, not the market. Stock dividends and splits: total cost stays fixed and spreads over more shares — buy 100 shares at $50, take a 2-for-1 split, and your basis becomes 200 shares at $25. Conversion of a bond into stock: the bond's basis carries over to the shares received. Gifts: the donee takes the donor's carryover basis for calculating gains; if the donee sells at a loss, the basis is the lower of the donor's basis or the fair market value on the gift date. Inheritance is the sweetest case: basis steps up or down to fair market value at death, and the holding period is automatically long-term regardless of how long the deceased held the shares.

Memory hook:Splits spread the cost; gifts carry it over; death steps it up.

Qualified dividends earn long-term capital gains rates instead of ordinary income rates, but only if two tests are met. First, the dividend must come from a U.S. corporation or a qualified foreign corporation. Second, the shareholder must hold the stock more than 60 days during the 121-day window that begins 60 days before the ex-dividend date — a holding requirement designed to stop dividend-capture strategies. Non-qualified dividends, taxed as ordinary income, include distributions from REITs, money market funds, and most foreign corporations that don't qualify, plus dividends on which the holding period test fails. Mutual funds pass through qualified dividends to shareholders only when the fund itself held the underlying stock long enough to satisfy the rule.

Memory hook:Sixty days inside one hundred twenty-one makes the dividend qualified.

Open-end funds continuously issue and redeem shares. Investors buy at NAV plus any sales charge and redeem at NAV, with forward pricing meaning orders execute at the next calculated NAV, typically the 4 p.m. Eastern close — never at an intraday price. Closed-end funds raise a fixed number of shares once, at IPO, and after that the shares trade in the secondary market at whatever supply and demand dictate, producing premiums or discounts to NAV. Closed-end funds can be purchased on margin and can issue debt or preferred shares to add leverage; open-end funds can do neither. NAV equals assets minus liabilities divided by shares outstanding. The pricing distinction is the whole concept: the market prices closed-end shares, while the fund itself prices open-end shares.

Memory hook:Open-end redeems at NAV; closed-end trades wherever the crowd says.

Sales charges decline as investment dollars rise — those dollar thresholds are breakpoints, and every fund must disclose its schedule. A letter of intent lets an investor claim a breakpoint immediately based on intended purchases over the next 13 months, with up to 90 days of backdating credit for prior purchases. If the letter isn't fulfilled, shares equal to the shortfall are held in escrow to cover the higher charge the investor skipped. Rights of accumulation work differently: the current value of existing holdings in the same fund counts toward the breakpoint, and appreciation counts too. The pricing formula ties it together: POP equals NAV divided by 1 minus the sales charge percentage, so a 6% charge means POP equals NAV divided by 0.94.

Memory hook:LOI promises, escrow protects; ROA counts what you already own.

Share classes exist to match sales charges to holding periods. Class A charges a front-end load with breakpoints — best for large investments and long horizons. Class B carries no front load but a contingent deferred sales charge that declines over several years, higher 12b-1 fees, no breakpoints, and typically converts to Class A after a period. Class C charges a level load — roughly a 1% 12b-1 fee plus a small CDSC that usually disappears after about one year — with no conversion and no breakpoints, making it best for short holding periods. 12b-1 fees are annual distribution and servicing costs: the distribution portion is capped at 0.75% plus 0.25% for shareholder servicing. If the 12b-1 fee exceeds 0.25%, the fund is treated as a load fund and the maximum sales charge drops to 6.25%.

Memory hook:A pays up front, B pays on the way out, C pays every year.

ETFs trade continuously on exchanges at market-determined prices, unlike mutual funds, which are priced once daily at NAV. The arbitrage mechanism keeps ETF prices near NAV: institutional investors assemble large blocks called creation units, typically tens of thousands of shares, and exchange them in kind with the fund for the underlying portfolio, or redeem units for the portfolio. This create-and-redeem feature lets authorized participants profit from any premium or discount, pulling the price back toward NAV. UITs are the opposite of managed: a fixed portfolio selected at inception, held with little or no change until a stated termination date. Both ETFs and UITs trade intraday in the secondary market, but neither is actively managed.

Memory hook:Creation units keep ETFs honest; UITs are frozen portfolios with an expiration date.

During accumulation, purchase payments buy accumulation units in the separate account; their value rises and falls with subaccount performance, and total value equals units times unit value. At annuitization, the insurer converts the accumulation value into annuity units based on the payout option chosen, life expectancy, and the assumed interest rate (AIR). The AIR is an actuarial assumption, not a guarantee. Each payment equals annuity units times unit value. If the separate account actually earns exactly the AIR, payments stay level; actual return above the AIR means payments increase; below the AIR means payments decrease. The AIR is set at annuitization and does not change afterward.

Memory hook:AIR is the yardstick: beat it and payments grow, miss it and they shrink.

Money goes in after tax, investment growth compounds tax-deferred, and at withdrawal the earnings come out first and are taxed as ordinary income, never capital gains. Withdrawals before age 59 and a half generally add a 10 percent tax penalty on the earnings portion. Surrender charges typically start around 7 or 8 percent of withdrawals and decline each year until they vanish, which is why early exits are costly. A 1035 exchange lets a client swap an annuity or life contract for another without recognizing gain, but the new contract restarts the surrender schedule, and the representative must document suitability for the exchange.

Memory hook:Earnings out first, taxed as income; 1035 swaps are free but restart the clock.

Variable life invests premiums in a separate account, so both cash value and death benefit fluctuate with subaccount performance. The premium is generally fixed, but the policy guarantees a minimum death benefit, typically at least the face amount, no matter how poorly the subaccounts perform. Cash value carries no guaranteed minimum, which distinguishes variable life from whole life. Policy loans are available against cash value. Common riders include waiver of premium, which keeps the policy funded if the owner becomes disabled, and guaranteed minimum income or death benefit riders. Death proceeds pass to beneficiaries free of income tax, and the separate account must be registered under the Investment Company Act.

Memory hook:Death benefit has a floor; cash value does not.

REITs raise a fixed number of shares in a primary offering and then trade in the secondary market, often at premiums or discounts to net asset value, much like closed-end funds. Equity REITs own and manage properties and earn rental income; mortgage REITs lend money or buy mortgages and earn interest; hybrid REITs do both. To keep its tax status, a REIT must distribute the bulk of its taxable income to shareholders, commonly cited as at least 90 percent. Distributions are taxed as ordinary income to the extent of earnings, capital gain distributions get capital gain treatment, and any excess is a nontaxable return of capital that reduces basis.

Memory hook:REITs pass income, never losses; return of capital cuts your basis.

A DPP limited partnership has a general partner who runs the program with unlimited liability, and limited partners who contribute capital, enjoy liability limited to their investment, and must remain passive or they risk losing that protection. The key tax feature is flow-through: income, expenses, gains, and losses pass directly to partners and are reported on their personal returns. Real estate programs offer depreciation write-offs; oil and gas programs offer depletion and intangible drilling cost deductions. When evaluating a program, look at whether the objectives match the client, the general partner's expertise and financial strength, and economic soundness, meaning how the venture will actually generate cash to cover distributions.

Memory hook:GP runs it and risks all; LPs stay passive or lose their shield.

Hedge funds are typically private placements sold to accredited investors under Regulation D, and they rely on exemptions from Investment Company Act registration, commonly Section 3(c)(1) or 3(c)(7) of that act. Expect limited or no liquidity, lock-up provisions that tie up money for a set period, and far less disclosure than a registered fund. Fees usually combine a management fee with an incentive fee based on performance. A fund of funds spreads money across multiple hedge funds for diversification, but that adds a second layer of fees on top of the underlying funds' charges. Some hedge funds are registered and sold to retail investors, which changes the disclosure picture.

Memory hook:Hedge funds lock you in; funds of funds charge you twice.

A standard listed equity option covers 100 shares of the underlying stock. The premium the buyer pays and the writer receives has two parts: intrinsic value, which is the amount the option is in the money, and time value, which is everything left. A call is in the money when the market price is above the strike; a put is in the money when the market price is below the strike. At-the-money and out-of-the-money options have no intrinsic value, only time value. Equity options are American style, exercisable any business day before expiration, and exercise settles the next business day. The OCC stands between buyers and writers, guaranteeing performance and assigning exercises randomly.

Memory hook:Call in the money above the strike; put in the money below it.

A covered call pairs long stock with a short call; the premium cushions a decline but caps the upside. Break-even equals stock cost minus the premium received. Maximum gain is the premium plus the difference between the strike and the stock cost, reached when the stock is at or above the strike at expiration. Maximum loss is the full stock cost minus the premium, if the stock falls to zero. A protective put pairs long stock with a long put, functioning like insurance. Break-even equals stock cost plus the premium paid. Maximum loss is the difference between the stock cost and the strike, plus the premium, and the upside stays unlimited minus that premium.

Memory hook:Covered call: subtract the premium. Protective put: add it. Stock cost is the anchor.

Spreads are two options of the same type with different strikes. A debit spread means you pay money up front; a credit spread means you receive money. For calls, buying the lower strike and selling the higher strike is a bull call debit spread; selling the lower strike and buying the higher is a bear call credit spread. For puts, buying the higher strike and selling the lower is a bear put debit; reversing it creates a bull put credit. In any spread, the difference between the strikes and the net premium sets the extremes: max loss on a debit is the debit itself, and max gain on a credit is the credit itself.

Memory hook:Debit: you paid, so that is your max loss. Credit: you received, so that is your max gain.

A straddle is a call and a put on the same stock, same strike, same expiration. A long straddle bets on volatility in either direction; the buyer pays both premiums and profits only if the stock moves beyond the combined premium on either side. Break-evens are the strike plus and minus the total premium, and maximum loss is the combined premiums. A short straddle takes the opposite view, expecting stability; the writer keeps both premiums if the stock settles at the strike, faces a large loss if the stock rallies, and loses down to the strike minus premiums if it falls. Combinations pair a call and put with different strikes or expirations.

Memory hook:Straddle same strike both ways; movement pays the long, calm pays the short.

Naked writing means selling options without owning the underlying or an offsetting position. The uncovered call writer faces unlimited loss, because there is no ceiling on how high the stock can rise; the uncovered put writer's maximum loss is the strike minus the premium, reached if the stock goes to zero. Because writers can lose more than the premium, margin is required, generally the premium plus a percentage of the underlying's value, subject to exchange and firm minimums. Position limits cap the number of contracts an investor can hold on one side of the market, and exercise limits cap exercises over a short period. Limits are set by the exchange and vary by security.

Memory hook:Naked call risk has no ceiling; naked put bottoms out at strike minus premium.

Index options settle in cash, not shares. At exercise or expiration, the holder receives the difference between the index settlement value and the strike, in dollars, times the contract multiplier, and no stock changes hands. Style matters: broad-based index options are generally European style, exercisable only at expiration, while narrow-based index options are often American style, exercisable early. Settlement values may be based on opening or closing prices of the component stocks, depending on the contract. Broad-based indexes cover many industries, so their options carry higher position limits than narrow-based industry indexes. Cash settlement also means no delivery or assignment of securities, only a cash transfer.

Memory hook:Index options pay cash, not shares; broad ones wait until expiration.

Equity option premiums produce capital gains and losses. Writers report the premium when the position is closed or the option expires; premiums received on short options are always short-term. Exercising a call adds the premium paid to the stock's basis, and the stock's holding period starts fresh. Exercising a put adds the premium paid to the stock's basis, reducing the gain or increasing the loss on the shares delivered. Broad-based index options fall under Section 1256: they are marked to market at year end, gains and losses are treated as 60 percent long term and 40 percent short term regardless of holding period, and losses can be carried back.

Memory hook:Index options get 60/40; equity options ride the normal capital gain rules.

Nominal yield is the coupon rate on the face of the bond. Current yield is annual interest divided by the current market price. Yield to maturity adds the coupon plus the accretion of a discount or the amortization of a premium to reach par at maturity. The hierarchy is mechanical: for a discount bond, yield to maturity is highest, then current yield, then nominal yield; for a premium bond, the order reverses, with nominal highest. Yield to call is computed the same way but to the call date. Yield to worst is the lowest of yield to maturity and every yield to call, which is how premium bonds are typically quoted.

Memory hook:Discount: YTM tops the list. Premium: nominal leads. Worst yield is the one quoted.

When a bond trades between coupon dates, the buyer pays the seller the accrued interest, and the convention depends on the issuer. Corporate and municipal bonds use a 30/360 convention, treating each month as 30 days; government bonds use actual days elapsed. Interest accrues up to, but not including, settlement day. T-bills pay no coupon; they are pure discount instruments. The discount yield is the discount divided by face value, annualized on a 360-day basis: discount yield equals discount divided by par, times 360 divided by days to maturity. Because it uses par rather than price and a 360-day year, the discount yield understates the bill's true rate of return.

Memory hook:Corporates pretend months have 30 days; T-bill yield uses par and 360, so it reads low.

Corporate bonds come secured and unsecured. Mortgage bonds are backed by real property; equipment trust certificates pledge the equipment; debentures are backed only by the issuer's full faith and credit. Income bonds pay interest only when the issuer earns it, making them the most speculative. Zero-coupon and other original issue discount bonds are issued below par, and the OID is the key tax feature: the discount is accreted over the life of the bond and taxed as ordinary interest income each year, even though the investor receives no cash until maturity. That phantom income is why zeros fit best in tax-deferred accounts. Market discount bought later is taxed differently, generally on sale.

Memory hook:OID: pay tax every year on interest you never receive.

The conversion ratio is fixed at issuance: par value divided by the conversion price, so a 1,000 dollar bond convertible at 40 converts into 25 shares. Parity connects the bond and the stock: the parity price of the stock equals the bond's market price divided by the conversion ratio, and the parity price of the bond equals the stock price times the conversion ratio. A convertible trades like a bond when the stock is below parity and like stock above it. Forced conversion happens when the issuer calls the bond while the conversion value exceeds the call price; holders convert rather than accept the lower call amount. Conversion is always at the holder's option.

Memory hook:Ratio is par over conversion price; bond parity is stock price times ratio.

T-bills mature in one year or less, are sold at a discount, and pay no coupon. T-notes run 2 to 10 years and pay semiannual interest; T-bonds are the longest coupon issues. STRIPS are zero-coupon Treasuries: the interest and principal are separated and each piece is sold at a deep discount, paying face value at maturity with no interim cash, which creates annual taxable phantom income. TIPS adjust the principal with the CPI; the coupon rate stays fixed, but the interest payment changes because it is applied to the adjusted principal, and at maturity the investor receives at least par. All Treasuries carry the full faith and credit of the U.S. government.

Memory hook:Bills discount, notes and bonds pay coupons, STRIPS strip the interest, TIPS inflate the principal.

Agency pass-through securities pool mortgages and pass monthly principal and interest to investors. The guarantee is the hinge: Ginnie Mae pass-throughs are backed by the full faith and credit of the U.S. government, and Ginnie Mae guarantees timely payment of both principal and interest. Fannie Mae and Freddie Mac are government-sponsored enterprises, not full faith and credit; their securities carry only the creditworthiness of the agency, which is why they yield slightly more. All pass-throughs share prepayment risk, since homeowners refinancing return principal early, which is why CMOs were created to redistribute that risk across tranches. For safety questions, Ginnie Mae is the answer.

Memory hook:Ginnie is the only full faith and credit guarantor among the mortgage agencies.

A CMO carves mortgage cash flows into tranches that receive principal in a set order. Prepayment risk means principal comes back faster than expected, forcing you to reinvest at lower rates; contraction risk is the same idea in price terms, since faster paydowns hurt longer tranches. Extension risk is the opposite: prepayments slow, and your principal is locked up longer, which hurts shorter tranches expecting quick return. Support tranches absorb both risks to protect the structure, so they carry the most prepayment and extension exposure. Principal-only strips gain from fast prepayments, since principal comes back sooner; interest-only strips gain from slow prepayments, because interest keeps accruing on a larger outstanding balance. The exam hinges on matching the risk to the tranche, not just defining the terms.

Memory hook:Support tranches take the hits so the structure stays standing; PO loves fast paydowns, IO loves slow ones.

A general obligation bond is backed by the issuer's full faith, credit, and taxing power, so you analyze it through debt ratios: debt per capita, debt to assessed value, and debt to real estate value. A revenue bond is backed only by the project's earnings, so you analyze the feasibility study and the indenture covenants. The key covenants are the rate covenant, which forces rates high enough to cover expenses and debt service; the maintenance and upkeep covenant; and the additional bonds test, which restricts issuing new debt against the same revenues unless coverage is met. Coverage itself is net revenue divided by annual debt service, and higher coverage means stronger credit.

Memory hook:GO equals taxing power and debt ratios; revenue equals project income, rate covenant, and coverage.

Short-term municipal notes bridge cash flow gaps. TANs anticipate tax collections, RANs anticipate revenue, BANs anticipate proceeds of a later bond sale, GANs anticipate federal grants, and TRANs anticipate both taxes and revenues. Tax-exempt commercial paper covers very short needs with maturities under about nine months. On the structure side, know the hybrids: a double-barreled bond is a revenue bond with a GO pledge behind it; a moral obligation bond has a nonbinding state promise; a special tax bond is backed by a specific levy like a cigarette or gasoline tax; and a special assessment bond finances improvements and charges the benefited property owners. Pre-refunded bonds are backed by Treasuries held in escrow and are among the safest munis.

Memory hook:TAN taxes, RAN revenue, BAN bonds to come, GAN grants coming, TRAN both taxes and revenue.

The taxable equivalent yield tells you what a taxable bond must pay to match a muni: TEY equals the municipal yield divided by 1 minus the investor's tax bracket. A 4% muni for an investor in the 30% bracket gives 4 divided by 0.70, or about 5.71%. Premium munis get no tax break on the premium: since the interest is already tax-exempt, you must amortize the premium, which reduces cost basis each year. Market discount, however, is taxed as ordinary income when the bond is sold or redeemed. Bank-qualified bonds come from small issuers, and because commercial banks can deduct a portion of the carrying cost, they carry lower yields and appeal to bank buyers.

Memory hook:TEY divides by what you keep: muni yield over 1 minus tax bracket.

In a competitive sale, the issuer publishes a notice of sale and syndicates submit sealed bids; the winner is usually the bidder offering the lowest net interest cost. The official statement is completed after the award. In a negotiated sale, the issuer picks an underwriter early and works with it on structure, timing, and pricing, which suits weaker or complex credits. Syndicate economics run on the takedown: the manager buys at the bid price, and the total takedown is the discount from the public offering price. From that, the additional takedown goes to selling group members, and a reallowance is a further discount offered to other dealers. Priority of orders typically runs group net first, then designated, then member orders.

Memory hook:Group net first, designated second, member last; takedown equals additional takedown plus concession.

An exchange-traded note is a senior unsecured debt obligation whose return tracks an index, currency, or commodity, minus an investor fee. The issuer promises the index return at maturity, so you carry the issuer's credit risk, not ownership of any underlying assets. There are no periodic interest payments and no dividends, and the note can be called or accelerated by the issuer. Equity-linked notes are similar debt instruments whose payoff is tied to a single stock or basket, often with a capped upside and some downside protection. Both trade like securities but are legally loans to the issuer, which is why credit quality drives the real risk. If the issuer fails, the index performance is irrelevant.

Memory hook:ETN means a note, a loan, a promise; no assets, no dividends, just the issuer's credit.

The income statement runs from sales down to net income, and the exam tests the derived ratios. EPS equals net income minus preferred dividends, divided by common shares outstanding; always subtract the preferred dividend first. The P/E ratio is market price divided by EPS, and it tells you how much investors pay per dollar of earnings; growth companies carry high P/Es. The dividend payout ratio is dividends per share divided by EPS, showing how much income is returned versus retained. EBITDA strips out interest, taxes, depreciation, and amortization, which makes it useful for comparing operating performance across firms with different capital structures and is often used in leveraged buyout analysis.

Memory hook:Preferred dividends come off the top before common EPS gets its share.

The balance sheet shows assets, liabilities, and net worth at a point in time, and the ratios sort into families. Liquidity: working capital is current assets minus current liabilities; the current ratio is current assets over current liabilities; the quick or acid test ratio drops out inventory, leaving cash, receivables, and marketable securities. Leverage: the debt-to-equity ratio compares total debt to shareholder equity, and higher leverage means more fixed obligations and more risk. Coverage: bond interest coverage is EBIT divided by annual interest expense, measuring how comfortably earnings service the debt. The decision rule is simple: higher liquidity and coverage mean safety, while higher leverage cuts both ways, magnifying gains and losses.

Memory hook:Acid test burns away inventory; coverage uses EBIT because interest has not been paid yet.

CAPM prices expected return as the risk-free rate plus beta times the market risk premium: expected return equals rf plus beta multiplied by (market return minus rf). Beta measures a stock's sensitivity to the market; a beta of 1.5 should move 150% of the market's swing, and beta only captures systematic risk, which diversification cannot remove. Nonsystematic risk is company-specific and shrinks as you add uncorrelated holdings, which is the entire point of diversification. Alpha is the reward for skill: actual return minus the CAPM expected return. A positive alpha means the manager beat what the risk level predicted. The model's practical use is deciding whether a stock's expected return compensates for its beta.

Memory hook:Expected return equals risk-free plus beta times the market's excess; alpha is the leftover beat.

Technical analysis studies price and volume rather than fundamentals, on the theory that supply and demand patterns repeat. Key chart concepts include trend lines, support and resistance levels, breakouts, consolidation, and reversal patterns like head-and-shoulders or its inverted form. Moving averages smooth price data, and when a shorter average crosses a longer one, technicians read momentum. Sentiment indicators gauge crowd positioning: short interest shows how many shares are sold short, and a high short interest is technically bullish because those shares must eventually be bought back. The put/call ratio works the same way; heavy put volume signals pessimism, which contrarians read as a bullish sign. Advance-decline breadth shows whether the rally is broad or narrow.

Memory hook:Contrarians fade the crowd: heavy shorts and heavy puts mean fuel for a rally.

Systematic risk hits the whole market and cannot be diversified away; nonsystematic risk is specific to one issuer and can be. Other named risks matter on the exam: call risk means the issuer redeems the bond when rates fall, cutting your income; reinvestment risk means you cannot redeploy proceeds at the same rate; timing risk means your holding period works against you. On the return side, tax-exempt interest is income free of federal tax, while return of capital is not income at all and reduces basis. Soft dollars involve an adviser paying a higher commission in exchange for research; the safe harbor under Section 28(e) of the Exchange Act protects this, but only for bona fide research and brokerage, never for items like office equipment or travel.

Memory hook:Return of capital is not income; soft dollars buy research, never carpet.

A trade confirmation discloses the trade details: security, price, quantity, capacity of the firm as agent or principal, commissions or markup, and settlement date. Firms must send confirms at or before completion of the transaction. Account statements go out at least quarterly, and monthly when there is activity in the account. Third-party mailings require written authorization from the customer. For transfers, ACATS standardizes the process: the customer signs the transfer form, the receiving broker validates account information with the carrying broker, and the carrying broker must either affirm or object within the prescribed timeframes before assets move. The customer, not the firm, initiates the transfer, and the old firm may not condition release on unrelated balances.

Memory hook:Confirm shows agent or principal; statement monthly with activity, quarterly without.

FINRA's books and records rules set retention periods by record type: most books and records must be kept for six years, others for three, and the most recent two years must be easily accessible, with many firms keeping records in a readily retrievable electronic format. Customer complaints must be recorded in a separate file under FINRA Rule 4513, and specified complaints and events must be reported to FINRA under Rule 4530. Form U4 is the registered person's application, and it must be amended when material changes occur, including customer complaints alleging misrepresentation or fraud, certain regulatory actions, and specified criminal events. The firm files through the registration system, and the obligation to update falls on the firm promptly upon learning of the event.

Memory hook:Six years for most records, two readily available; complaints live in their own file and flow to the U4.

Orders differ by instruction and duration. A market order executes immediately at the best available price; a limit order sets a maximum buy price or minimum sell price; a stop order becomes a market order once the stop price is touched. Size qualifiers matter too: all-or-none means fill the entire quantity or nothing, fill-or-kill demands an immediate full fill or cancellation, and immediate-or-cancel takes whatever fills right away and cancels the rest. Not-held gives the floor or trader discretion on price and time. Quotes are either firm, meaning the quoting party will transtract at that price, or subject, meaning confirmation is needed first. Best execution under FINRA Rule 5310 requires reasonable diligence so the customer gets the most favorable terms available.

Memory hook:AON all or nothing, FOK now or never, IOC take what is instant.

Regulation SHO governs short sales. The locate requirement forces a seller to have reasonable grounds to believe the security can be borrowed before selling short; a firm can rely on its own easy-to-borrow list for that reasonable belief. Order marking requires each sale to be marked long, short, or short exempt: long means the seller owns the stock and is delivering it, short means the seller is borrowing or intends to borrow. The close-out requirement targets fails to deliver, especially in threshold securities, which are stocks with persistent settlement failures. A firm that fails to deliver must purchase the shares to close out and may face restrictions on shorting that security again until the failure is resolved.

Memory hook:Locate before you sell, mark long or short honestly, close out persistent fails.

Regular-way settlement is T plus 1 for corporate securities, municipal securities, and options; government securities also settle the next business day. The ex-dividend date determines who gets the dividend: buy on or after the ex-date and you are not entitled, so the buyer pays less. A due bill runs the other way: if the buyer purchases before the ex-date but the seller is still holder of record on the record date, the seller receives the dividend and must remit it to the buyer. Good delivery means properly endorsed certificates or a stock power, in acceptable denominations, matching the trade exactly. When the receiving firm cannot match a delivery to a trade, it issues a DK notice, and the parties must reconcile or the trade breaks.

Memory hook:Buy before ex to get the dividend; a DK means the receiving firm does not know the trade.

TRACE is FINRA's reporting facility for transactions in corporate bonds, agency securities, and securitized products; reports must be entered within one minute of execution, and the data feeds public transparency. Municipal trades report through the MSRB's Real-Time Transaction Reporting System, RTRS, and the public sees those prices on EMMA, the Electronic Municipal Market Access site, which also hosts official statements and continuing disclosures. The Trade Reporting Facility handles trades in NMS stocks executed away from an exchange, so a dealer-to-dealer equity trade done internally still gets reported to the consolidated tape through the TRF. Each system exists so regulators and investors see real prices; the exam asks you to match the security to its reporting venue.

Memory hook:TRACE corporates, RTRS munis displayed on EMMA, TRF for off-exchange stock.

When a rep makes an error, the firm must act promptly: notify a supervisor, and if the customer was harmed, generally make the customer whole. Errors are corrected through cancel and rebill entries, and the trade goes to the firm's designated error account, which must be supervised and cannot be used to hide trading profits. Clearly erroneous transactions are handled under FINRA rules that let an exchange or FINRA nullify or modify a trade that deviates from the true market, based on factors like the reference price and the size of the deviation; the determination is objective, not a do-over for bad judgment. Customer complaints must be recorded and handled properly, and disputes resolve through mediation, which is nonbinding, or arbitration, which is binding and generally required by account agreements.

Memory hook:Errors get canceled and re-billed; clearly erroneous trades get nullified; mediation talks, arbitration decides.

In a long margin account, Regulation T sets the initial requirement at 50% of the purchase price, so buying 20,000 dollars of stock requires 10,000 dollars of equity, with the rest a debit loan. Maintenance requires the account to hold at least 25% of the long market value; if a decline pushes equity below that, the firm issues a maintenance call for the shortfall. The special memorandum account tracks buying power. When market value rises, half the appreciation flows into SMA as excess equity, and SMA buying power equals twice the SMA balance. SMA also grows with dividends and interest credited to the account, and it never declines due to market depreciation, which is why it is a line of credit, not equity.

Memory hook:Reg T takes half at the door, maintenance holds a quarter, SMA buys twice its balance.

In a short sale, the investor sells borrowed stock, so the account shows a short market value and a credit balance equal to sale proceeds plus the required deposit. Regulation T requires 50% of the short market value initially, and maintenance on shorts is higher than on longs, generally 30% of the short market value, with special minimums for low-priced stocks. As the short position loses money, the credit balance stays fixed while the short market value climbs, so equity erodes. Portfolio margin takes a risk-based approach, setting requirements on the net exposure of correlated positions, which often lowers requirements for hedged portfolios. Pattern day traders, defined as making four or more day trades within five business days, must maintain a minimum equity of 25,000 dollars in the margin account.

Memory hook:Shorts need 30 to maintain, longs 25; four day trades in five days makes you a pattern.