Mock Exam 4/29
A corporation in the 35% tax bracket reports operating income of $4 million for the year. The firm also received $200,000 in preferred dividends. Assuming no other items of income or expense, what is the company's tax liability?
$1,421,000. The corporation's $4 million operating income is taxed at a rate of 35%. For tax purposes, corporations can exclude 70% of all dividends received from domestic common and preferred stocks. Thus, 30% of the $200,000 received from preferred dividends is taxed at the 35% tax rate ($200,000 times 30% equals $60,000). The $4 million in income plus the $60,000 in taxable dividends equals $4,060,000 ($4,060,000 multiplied by a 35% tax rate equals taxes of $1,421,000). Reference: 15.5.11.1
A foreign currency investor is long 40,000 Swiss francs at $.81. If the investor buys 4 July 80 SF puts at 1.25 to hedge, the breakeven point is:
0.8225. When hedging with puts, the breakeven point is the cost of the underlying investment plus premium paid ($.81 cents plus $.0125 equals $.8225, or 82¼ cents). Ref. 4.3
A customer has a margin account which shows a market value of $190,000 and a debit balance of $90,000. In addition, the account has SMA of $5,000. The long market value at maintenance is:
120000. Long market value at maintenance is the point to where an account must fall (in market value) to reach minimum maintenance (25% of market value). To compute, divide the debit balance by .75 ($90,000 / .75 = $120,000). If the market value were to fall to $120,000, the account would look like this: $120,000 − $90,000 = $30,000 (25%) (MV − DB = EQ). Reference: 6.2.1.4
A broker/dealer can rehypothecate (repledge) up to:
140% of the debit balance in a customer's margin account. In a margin account, hypothecation is the pledging of customer securities as collateral for the margin loan the customer will receive. The broker/dealer re-pledges (rehypothecates) the securities as collateral to the lending bank. Broker/dealers are permitted to pledge up to 140% of the debit balance in the customer's account. Reference: 6.4
A schoolteacher has a 403(b) tax-qualified deferred retirement plan, into which she has deposited $100,000 over a 12-year period. At retirement, if the teacher withdraws the total value of the account (now $220,000), how much of the withdrawal will be subject to taxation as ordinary income?
220,000. The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn. Reference: 11.4
A customer buys XYZ Oct 75 put at 7 when XYZ is trading at 72. The stock falls to 69 and the customer exercises the put. For tax purposes, sales proceeds are:
6800 When a put is exercised, the holder is selling stock at the strike price (75). However, the tax rules require that, if exercised, the cost basis of stock purchased or sales proceeds of stock sold, is adjusted to the breakeven point of the option. For puts, breakeven is strike price minus premium (75 − 7 = 68).
An example of a taxable bond issued by a municipal government is:
A Build America Bond (BAB). Build America Bonds (BABs) are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations. Reference: 3.1.2.5
Which of the following is NOT a source of revenue for a municipal revenue bond issue?
Ad valorem taxes. Fund generators, such as tolls, assessments, and fees, subsidize revenue bonds. Ad valorem taxes support general obligation bonds. Reference: 3.1.2.2.2
Which of the following orders may be left with a designated market maker on the New York Stock Exchange?
Good-till-canceled. The designated market maker on the NYSE will accept GTC (good-till-canceled orders) and hold them on the order display book until they are executed or are canceled. Reference: 8.4.2.5
Assume that a corporation issues a 5% Aaa/AAA rated debenture at par. Two years later, similarly rated debt issues are being offered in the primary market at 5.5%. Which of the following statements regarding the outstanding 5% debenture are TRUE? The current yield on the debenture will be higher than 5%. The current yield on the debenture will be lower than 5%. The dollar price per bond will be higher than par. The dollar price per bond will be lower than par.
I & IV Because interest rates have risen after the issue of the 5% debenture, the bond's price will be discounted to result in a higher current yield (computed as annual income divided by current market price). Accordingly, the discounting of the issue will make the 5% debenture competitive with new issues offered with a 5.5% coupon. Reference: 2.2.7.6
Which of the following are TRUE of an over-allotment option or provision for a new issue? One is found in every underwriting agreement. It allows the underwriters to sell up to 15% more than the original number of shares offered. It allows the underwriters to sell up to 2 times the original number of shares offered. It is a way for underwriters to address demand exceeding the number of shares originally offered.
II & IV The over-allotment option found in the underwriting agreement is a process allowed by the SEC to handle demand for new issues exceeding the number of shares originally intended to be offered by the issuer. Not all underwriting agreements contain an over-allotment option, but for those that do, the option or provision allows the underwriters to sell up to 15% more than the original number of shares offered. Reference: 7.5.5
The interest from which of the following bonds is subject to federal income tax? State of Nebraska. City of Duluth. Treasury notes. FNMA.
III & IV Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax. Reference: 3.4.8.1
Written notice of intent to deliver before the expiration date is required in which of the following transactions?
In a seller's option. A seller's option trade gives the seller a specified date that exceeds the regular way delivery date to deliver the securities. If the seller wishes to deliver them before the agreed on settlement date, he must provide 24-hour notice to the buyer. Reference: 9.1.2.3
An investor purchases 5 Mt. Vernon Port Authority J & J bonds in a regular way transaction on Wednesday, October 18. How many days of accrued interest are added to the bond's price?
Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. Therefore, July, August, and September each have 30 days of accrued interest and October has 22 days of accrued interest; this totals 112 days. Settlement date is Monday, October 23. Reference: 2.7.2.1.1
If an investor has a fixed-annuity contract with an insurance company, which of the following risks is assumed by the investor?
Purchasing power risk. An investor who purchases a fixed annuity contract assumes purchasing-power risk. Fixed annuities pay a fixed monthly benefit which loses purchasing power if there is inflation. Reference: 12.1.1
The Options Clearing Corporation uses which of the following methods to assign exercise notices?
Random selection. The OCC assigns exercise notices to member firms on a random basis; the members may choose the customers to be exercised on either a random basis or FIFO basis. Reference: 4.6.3
Which of the following orders on the order book will NOT be filled if the stock rises?
Sell stop. Those orders on the book which are above the current market will be executed if the stock rises. Those open orders above the current market are buy stops (including buy stop limits) and sell limits. Reference: 8.4.2.4.2
If a member firm acting as a proxy solicitor for LRK Corporation is given a shareholder list by LRK, which of the following statements is TRUE?
The member firm cannot use the list for any purpose other than to solicit proxies. A member given a shareholder list can use the list only to solicit proxies. It can be used for no other purpose. Reference: 9.1.3.3
Which of the following is TRUE of principal protected notes?
They are unsecured debt obligations backed by the full faith and credit of their issuer. A principal protected note (PPN) is a fixed-income security that promises a minimum return equal to the investor's initial investment if held to maturity. It is considered to be a structured product and is comprised of a bond and an option component. PPNs are unsecured debt obligations backed only by the full faith and credit of their issuer Reference: 2.12.1.1
Which of the following is NOT a factor when a communication to be distributed to the public is either being reviewed or approved within the broker/dealer?
Whether the piece will be distributed in written form or via electronic media FINRA holds BDs to certain general standards regarding all member firm communications. Consideration must be given to whether all statements in a communication are clear and not misleading, are balanced regarding the representation of risk and reward, do not omit material facts or make exaggerated claims, and do not imply that past performance can be projected to future outcomes. These standards would apply, and be the same, whether the communication was distributed in written or electronic form. Reference: 17.5.3
The interest that municipal securities pay is:
federally tax exempt. Interest paid on securities issued by municipalities is generally exempt from taxation at the federal level. It may also be exempt from state and local taxation if the purchaser resides in the issuing state. Reference: 3.1.1.1
The 30-day visible supply published in The Daily Bond Buyer contains:
general obligation and revenue bonds. The 30-day visible supply consists of new issue GO and revenue municipal bonds expected to be offered in the next 30 days. It does not include short-term anticipation notes. Reference: 3.2.3.1
A registered person leaves the securities industry and 18 months later reassociates with another member firm. FINRA requires that this person's cycle for determining the dates for the regulatory element portion of continuing education be based on:
his initial registration date. If reassociation occurs within 2 years, the cycle date remains associated with his original registration date. If it occurs after 2 years have elapsed, the new cycle is based on the reassociation date. Reference: 17.2.4.1
All of the following characteristics describe a joint tenants with right of survivorship account EXCEPT
orders may be given only by the party listed first on the account In a JTWROS account, where the surviving party assumes control of the entire account in the event of death of one of the tenants, any party named on the account may enter orders for the account. While distributions from the account must be sent in the names of all of the owners, mail could be sent to one party only with the permission of all other parties to the account. Reference: 5.2.1.2.2
A registered representative is preparing a power point slide presentation to be delivered in a live seminar for a group of invited institutional clients. To use the slides, they must be
reviewed by a principal of the broker/dealer
The opening quote for issues listed on the NYSE is set by the:
specialist (designated market maker). The specialist (designated market maker) is responsible for setting the opening quote for issues listed on the NYSE. The set quote is based on orders in hand. Reference: 8.4.1
The economic philosophy that believes in controlling the money supply to stimulate economic growth is often referred to as:
the Monetarist Economic Theory. Controlling the money supply implies a hands-on theory that is referred to as the Monetarist Theory. Reference: 14.1.2.2
All of the following statements regarding industrial revenue bonds are true EXCEPT:
the credit rating of the bonds is dependent on the credit rating of the municipality. The debt service for industrial revenue bonds (IDRs) is derived from the lease payments made by the leasing corporation to the issuing municipality. Therefore, the credit rating of the bonds is dependent on the credit worthiness of the leasing corporation, not the issuing municipality. Reference: 3.1.2.2.5
A municipal bond rating service would consider all of the following when evaluating a revenue bond EXCEPT:
the public's attitude toward debt. Debt service coverage ratio, feasibility studies, and projected operating revenues are important to the analysis of a municipal revenue bond. The public's attitude toward debt is relevant in evaluating GO bonds, which are backed by the taxing authority of the issuer. Reference: 3.3.2
Rule 144A regulates:
the sale of restricted stock to institutional investors. Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs). Reference: 7.6.2.5
A short sale of stock directed to an exchange must observe all of the following EXCEPT:
the symbol "ss" on the consolidated tape. The symbol "ss" does not designate "short sale." It is used to identify stocks traded in 10-share units. Reference: 8.4.4
All of the following statements describe stock rights EXCEPT:
they are most commonly offered with debentures to make the offering more attractive. A corporation issues rights to existing shareholders to allow them to purchase enough stock, within a short period and at less than current market price, to maintain their proportionate interest in the company. Rights need not be exercised but may be traded in the secondary market. Warrants, not rights, are often issued with debentures to sweeten the offering. Reference: 1.7.1
Yield quotes on CMOs are based on the:
tranche's expected life. Yield quotes on CMOs are based on the tranche's expected life, not the average life of the mortgages in the pool backing all of the tranches. Reference: 2.8
A corporate profit-sharing plan must be set up under a(n):
trust. All corporate pension and profit-sharing plans must be set up under trust agreements. A plan's trustee assumes fiduciary responsibility for the plan. Reference: 11.5.2.1
The reoffering yield on a new municipal bond issue is the:
yield at which the bonds are offered to the public. In a competitive bidding situation, each underwriter submits a sealed written bid. Once the bid has been awarded, the bonds are repriced to give the underwriters a profit when selling them to the public. The yield at which the bonds are sold is called the reoffering yield. Reference: 3.2.5
If a bond is sold to a customer at par, under MSRB rules, all of the following must be disclosed to the customer on his confirmation EXCEPT
yield based on price Information on call features, total monies due, and the number of bonds purchased are all important disclosure items for a confirmation. For a bond sold at par, there is no requirement to show yield. Reference: 3.4.5.1
