US Treasury also Issues FRNs or Floating-Rate Notes

Even though buying a 2-year US Treasury Note was never a big risk, investors did face the risk of watching interest rates rise right after they buy. Buying new T-Bills every single week at auction is totally impractical for retail investors. Luckily, the Treasury now sells a floating-rate debt security whose interest rate re-sets each week based on the yield established through the weekly T-bill auction. Investors now don't have to worry if interest rates go up each week if they own a Floating-Rate Note, or FRN, since investors will receive whatever rate is established each week for 13-week Treasury Bill yields. The key facts on Floating-Rate Notes or FRNs include:

• Interest payments on FRNs rise and fall, based on discount rates for 13-week bills.
• FRNs are sold in increments of $100. The minimum purchase is $100.
• FRNs are issued in electronic form.
• You can hold an FRN until it matures or sell it before it matures.
• In a single auction, a bidder can buy up to $5 million in FRNs by non-competitive bidding or up to 35% of the initial offering amount by competitive bidding.

Floating-Rate Notes or FRNs provide liquidity and protection against capital risk/default risk, and interest-rate risk.

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Mini-Options

The CBOE is rolling out some new "mini-options" allowing investors to buy contracts that cover just TEN shares . . . for the really high-per-share-priced stocks including AMZN, APPL, GOOG, SPDR Gold Trust, and the good ole SPDR S&P 500. Ordinary options use a multiplier of 100, of course, but these mini-options use a multiplier of ’10.' The #7 at the end of each stock symbol denotes ‘Mini,' so, the mini-option might look like this: AMZN7 or APPL7. A customer who owns just 40 shares of APPL could now hedge by writing 4 APPL7 mini-options (4 X 10 = 40 shares). Always innovating, this industry. Series 7 Tutoring Available Here

What IS a Series 7?

Maybe you're wondering what a Series 7 is, what it's used for, and why you might or might not want to go there. Click on the video below if you're curious . . .

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Risk Tolerance

So, an investor might have the primary objective of growth/capital appreciation. He may also have a time horizon of 20 years. However, if he doesn’t have the risk tolerance required of the stock market, we have to keep him out of stocks. Remember that risk tolerance has to do with not only the financial resources, but also the psychological ability to sustain wide fluctuations in market value, as well as the occasional loss of principal that makes investing so much fun in the first place. The terms “risk-averse,” “conservative,” and “low risk tolerance” all mean the same thing—these investors will not tolerate big market drops. They invest in safe, boring things like fixed annuities, US Treasuries, and investment-grade bonds. In order to invest in sector funds or emerging market funds the investor needs a high risk tolerance. Moderate risk tolerance would likely match up with balanced funds, equity income funds, and conservative bond funds.

Putting the three together (investment objectives, time horizon, risk tolerance), then, if we know the investor in the question seeks growth, we then have to know his time horizon and risk tolerance. If he’s a 32-year-old in an IRA account, his time horizon is long-term. Unless he has a low risk tolerance you would almost have to recommend growth funds. If the investor is 60 years old and living on a pension income, she might need to invest in common stock to protect her purchasing power. If so, her time horizon is long, but maybe her risk tolerance is lower than the 32-year-old's. So, we’d probably find a conservative stock fund—not a small cap growth or “international discovery” fund—maybe a growth & income or equity income fund. If another investor seeks income primarily, we need to know her time horizon and risk tolerance. We don’t buy bonds that mature beyond her anticipated holding period. If she has a 10-year time horizon, we need bonds that mature in 10 years or sooner. Her risk tolerance will tell us if we can maximize her income with high-yield bonds, or if we should instead be smart and buy investment-grade bond funds. If she needs tax-exempt income, clearly, we put some of her money into municipal bond funds. For capital preservation nothing beats US Treasury securities. GNMA securities are also very safe. Money market mutual funds are safe—though not guaranteed by the US Government or anyone else—but they pay low yields. Money market mutual funds are for people who not only want to preserve capital but also make frequent withdrawals from the account. See, even though your money is safer in a 30-year Treasury bond than in a money market mutual fund, the big difference is that the market price of your T-bond fluctuates (rates up, price down), while the money market mutual fund stays at  $1 per share.

Seriously. So if liquidity is a major concern, the money market mutual fund is actually better than T-bonds, T-notes, and even T-bills, all of which have to be sold at whatever price. With the money market mutual fund, you can write checks, and the fund company will redeem the right number of shares to cover it.

Total liquidity. And totally boring, just as many investors like it.Suitability Questions for Series 7

Big 3: Objectives, Time Horizon, and Risk Tolerance

When presented with a suitability question on the Series 7 Exam, try to think as you will once you get your license. First, what are the goals of the investor? What are her investment objectives? Investment objectives include: capital preservation, income, growth & income, growth, and speculation. If the individual is in his 30’s and is setting up a retirement account, he probably needs growth to build up his net worth before reaching retirement age. If he’s already in retirement, he probably needs income. He might need income almost exclusively, or, to protect his purchasing power, he might also need growth. And, as you might expect, this is where growth & income funds come in very handy. But, any blue chip stock that pays regular dividends would fit that bill, also. Or, even a bond that is convertible—that would be income plus potential growth. This test—you’ll see—likes to make you think way outside the box. Some firms separate growth from aggressive growth.  Aggressive growth investments include international funds, sector funds (healthcare, telecommunications, financial services, etc.) and emerging market funds (China, India, Brazil, etc.). For speculation, there are options and futures, and most investors should limit their exposure to these derivatives to maybe 5-15% of their portfolio.Some folks are already rich, and they wisely just want to preserve their capital (capital preservation). We won’t tell them about buying US Treasury securities all on their own, without commissions. Instead, we’ll put them into a US Treasury mutual fund. Even though the fund is not guaranteed, the securities the fund owns are.Need Help Passing the 7?

What Does the Series 7 Mean by Suitability?

When the Series 7 Exam asks 70 questions on "suitability," what does that actually mean? Well, as you would assume, it covers recommendations to customers that you will make through short-story questions. But, the suitability questions also expect you to know about economic factors, industry news sources, and product features/benefits/risks/costs. This is from the Series 7 Exam outline:

TASKS:

T4.1 Obtains information regarding current domestic and global market events, economic/financial news, industry sectors, and the status of markets and securities from various appropriate sources to assess how this information may impact the markets, issuers and customers’ accounts
T4.2 Communicates relevant market, investment and research data to customers
T4.3 Makes suitable investment recommendations
T4.4 Provides appropriate disclosures concerning products, risks, services, costs and fees
T4.5 Provides customers with information on investment strategies and explains how the risks and rewards of a particular investment or strategy relate to the customer’s financial needs and investment objectives

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