SERIES 65 — INVESTMENT VEHICLE CHARACTERISTICS

Cheat Sheet (Section II: 25% of exam, ~32 questions)

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FIXED INCOME

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Bond Pricing & Yield Rules

• Bond price ↔ Interest rate: INVERSE relationship

- Rates ↑ → Bond price ↓ | Rates ↓ → Bond price ↑

• Yield hierarchy (highest to lowest): YTM > Current yield > Coupon

• Duration: Measure of interest rate sensitivity (in years)

- Higher duration = Higher rate risk - Modified duration = % price change per 1% rate change

• Convexity: Accounts for curvature in price/yield relationship (reduces losses in falling rate environment)

Municipal Bond Types

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EQUITY SECURITIES

Common Stock Rights

• Voting rights on significant matters (board election, mergers)

• Dividend rights (if declared)

• Liquidation rights (last claim after debt)

• Preemptive rights (maintain ownership % in new issuance; NOT automatic)

Preferred Stock

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Dividend Date Mechanics

Declaration Date: Board declares dividend

Ex-Dividend Date: Last day to own to receive dividend (stock price drops by ~dividend amount)

Record Date: Must be owner on this date

Payment Date: Dividend paid

Equity Valuation Methods

• Dividend Discount Model (DDM): Stock price = D₁ / (r − g), where D₁ = next dividend, r = required return, g = growth rate

• P/E Multiple: Stock price / Earnings per share (higher P/E = growth premium)

• Book Value (Per Share): Total equity / Shares outstanding

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POOLED PRODUCTS

Mutual Funds

• NAV = (Assets − Liabilities) / Shares outstanding

• Forward pricing: Buy/sell at NAV calculated at end of trading day

• Expense ratio: Annual operating costs as % of AUM

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Exchange-Traded Funds (ETFs)

• Intraday pricing: Trade on exchange throughout day (vs. mutual fund daily NAV)

• Creation/Redemption: Authorized participants create/redeem in-kind blocks

• Tax efficiency: In-kind redemption avoids capital gains recognition

• Lower expense ratios than comparable mutual funds

Closed-End Funds

• Fixed number of shares (issued at IPO only)

• Trade on secondary market at premium/discount to NAV

• Managed actively (unlike ETFs, which can be passive or active)

Unit Investment Trusts (UITs)

• Unmanaged, fixed portfolio of securities

• Fixed termination date (not perpetual)

• Lower fees (no active management)

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DERIVATIVES

Options: Calls & Puts

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Instrument	Issuer	Risk Level	Tax Treatment
Treasuries	U.S. Government	Lowest	Fed taxable; state exempt
Municipal Bonds	State/local govt	Low	Fed + state exempt (if in-state)
Corporate Bonds	Corporation	Higher	Fully taxable
Type	Backed By	Default Risk	Yield
General Obligation (GO)	Full taxing power of issuer	Lower	Lower
Revenue Bond	Specific project revenue	Higher	Higher
Feature	Cumulative	Convertible	Callable
Dividends	Unpaid accrue; must pay before common	Standard	Standard
Conversion	N/A	→ Common stock	N/A
Redemption	N/A	N/A	Issuer can call
Share Class	Sales Load	Expense Ratio	Best For
A	Front-end load	Lower	Lump sum investors
B	Back-end load (CDSC)	Higher	Regular contributors
C	Level load or none	Highest	Short-term investors
I/Institutional	None	Lowest	Large AUM
Strategy	Max Gain	Max Loss	Breakeven	Use Case
Buy Call	Unlimited	Premium paid	Strike + Premium	Bullish
Sell Call	Premium only	Unlimited	Strike + Premium	Bearish/income
Buy Put	Strike − Premium	Premium paid	Strike − Premium	Bearish
Sell Put	Premium only	Strike − Premium	Strike − Premium	Bullish/income

Protective Put = Long stock + Long put → Downside protection (insurance)

Covered Call = Long stock + Short call → Capped upside; collect premium

Option Value Components

• Intrinsic value: MAX(0, stock price − strike for call) or MAX(0, strike − stock price for put)

• Time value: Option premium − Intrinsic value (decays as expiration approaches)

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INSURANCE PRODUCTS

Fixed Annuities

• NOT a security (no SEC registration required)

• Guaranteed rate of return from insurance company

• Tax-deferred growth

• 1035 exchange: Swap one insurance product for another tax-free

• LIFO taxation: Last-in-first-out (gains taxed first on withdrawal)

Variable Annuities

• IS a security (SEC registered; requires prospectus)

• Return tied to underlying investment accounts (subaccounts)

• Investment risk borne by annuitant (not insurer)

• Tax-deferred growth; LIFO taxation on withdrawals

• Mortality & expense risk charge (in addition to management fees)

Life Insurance

• Term: Pure insurance; no cash value; lowest premium

• Whole/Universal/Variable: Permanent insurance