Practice Exam #2

A corporation has $12 million net income after taxes, 5 million common shares outstanding, and $10 million of 6% preferred stock ($100 par). What is the corporation's earnings per-share (EPS)?

$2.28 Begin by calculating how much of the net income is available for common stockholders (net income after taxes minus preferred dividends equals earnings available for common stockholders). The preferred stockholders received $600,000 in dividends (100,000 pfd shares × $6 per share dividends = $600,000). After subtracting $600,000 from the net income of $12 million, this leaves $11.4 million (earnings available for common stockholders). Compute EPS (earnings available for common stockholders / number of common shares outstanding = $11.4 million / 5 million shares = $2.28 per-share EPS).

If a customer buys 500 shares of ABC at 48 and writes 5 ABC 50 calls at 2, what is the maximum loss?

$23,000 (48-2=46*500=23,000)

Tender Offer testable dates

- must remain open for at least 20 business days - if terms of offering are changed, the revised offer must remain open for at least 20 business days from start & 10 business days from time it was changed -target completion within 10 business days of the announcement (accept/reject, no opinion, or unable to take position)

Disclosure of Risks Penny Stocks

-Rule 15gs -Before initial txn signed by customer -provide penny stock purchasers w/ current bid & asked quote on the stock -provide penny stock purchasers w/ info. On the compensation to be earned by member & RR -monthly statements -suitability statement or est customer exception

Exempt from SEC Registration

-U.S Gov't -U.S municipalities & territories -Nonprofit religious, educational, and charitable organization -Banks and Savings and loans -Public utilities and common carriers whose activities are regulated as to rates and other items by a state or federal regulatory body

Regulation Full Disclosure (FD)

-almost all for unintentional leaks affect price of stock -SEC➡️ Public conference calls, press release, press conferences, webcasts, methods of public disclosure

What affects SMA?

-cash dividends deposited -sale of securities -market appreciation of securities

Securities exempt from Securities Act of 1933

-commercial paper -bankers acceptance -securities acquired in private placement (Regulation D)

What doesn't affect SMA?

-decrease In value of securities

Tax preference items are used for the purpose of computing the alternative minimum tax. They include

-excess intangible drilling costs (wages, fuel, repairs). -accelerated depreciation. -percentage depletion in excess of basis. straight-line depreciation is not a tax preference item.

The Indenture of a Revenue Issue includes:

-insurance -maintenance covenant

Chicago Board Options Exchange (CBOE)

-market makers may trade for their own accounts. -limit orders are maintained in an order official's book. -floor brokers may execute orders for others on a commission basis.

U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are

-stripped bonds (Zero coupon bonds) -subject to annual taxation on the per gear accreted amount

Margin Risk Disclosure Document

1. Customers not entitled to choose which securities can be sold if a maintenance call is not met 2. customers can lose more money than initially deposited 3. customers are note titled to an extension of time to meet a margin call 4. firms can include their in-house margin requirement w/o advance notice

What has no effect of SMA?

1. Fall in LMV 2. Interest charges to account 3. stock dividend or split

3 Primary systematic risk

1. Market risk 2. Interest rate risk 3. Inflation/ Purchasing Power

How to generate SMA

1. Non required cash deposits 2. dividends 3. loan value 4. sale of stock

What decreases SMA?

1. Purchase of securities 2. withdrawal of cash

Exempt from SEC registration & prospectus requirement

1. Regulation A+: Small & medium corporate offerings 2. Regulation D: Private Placement 3. Rule 147: Securities offered and sold exclusively intrastate 4. Regulation S: Offers & sales made outside the US by U.S issuers 5. Other exempt transaction, incl Rule 144A and Rule 145

What increases SMA?

1. Rise in mkt value 2. sale of securities 3. deposit of cash 4. dividends or interest

The amount of the spread varies by issue and can be influenced by any of the following:

1. Type of commitment 2. security's marketability 3. issuers business 4. offering size

What is included on a customer confirmation?

1. Whether member acted as agent or principal (capacity) 2. Whether member acted as dual agent 3. source & amt of commission in agency trade 4. whether control relationships exists b/w issuer and member 5. description of deferred sales load (if any) 6. Markup or markdown charged retail customers when acting as principal 7. total par value of trade of debt securities 8. accrued interest In trade of debt securities 9. if member is mkt maker in security 10. date & time of ten execution or stmt upon request 11. the lower YTC or YTM when a txn in a debt security is done on yield or dollar basis 12. handling fees or mailing charges (if applicable)

5 Primary Unsystematic Risk

1. business 2. financial 3. liquidity 4. political 5. regulatory

3 Phases of Underwriting

1. file registration stmt with SEC 2. cooling off period 3. effective date- offering period may begin

Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within

10 business days of the announcement

One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 21, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due?

20 Interest started accruing from the dated date of the bond (March 1). Interest accrues up to, but not including, settlement. Therefore, 20 days of accrued interest are due. The customer's first interest payment the following August will represent interest that has accrued from the dated date.

The board of directors of DMF, Inc., announces a 5, for-4 stock split. The market price of DMF after the split should decrease in value by

20%. The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5-for-4 stock split, the new price should be about four-fifths of the old price. A one-fifth change equals 20% (100% / 5 = 20%).

Each retail customer who opens a new account must receive copy of account record within:

30 days of account opening, then at least every 36 months thereafter

The minimum maintenance requirement on short stock selling above $5 is

30% of the market value or $5 per share, whichever is greater. The minimum maintenance in a short account is 30% of the market value or $5 per share (whichever is greater) for stocks trading above $5. For stocks trading below $5, the minimum maintenance is $2.50 per share or 100% of market value (whichever is greater).

Customer Complaints are retained for:

4 years

What is inappropriate for individual retirement accounts?

A covered call (selling a call option on a stock owned within the IRA)

Currency Transaction Report (CTR)

A report that must be filed for each transaction in currency of more than $10,000 by or through a bank & transfers of $3,000 or more. These reports are required in an effort to detect and prevent instances of fraud and money laundering.

What is a security?

A security is any investment for profit with management performed by a third party. In addition, an element of risk must be present It is a note, stock, bond, investment contract, variable annuity, profit-sharing or partnership agreement, certificate of deposit, option on a security, or other instrument of investment.

What covers a short put?

A short put can be covered with a long put. The long put must have an exercise price the same or higher than the short put and an expiration date at least as long as the short put Two other ways to cover a short put is with short stock and cash

A customer goes long an MMM Jan 40 put at 5 and writes an MMM Jan 50 put at 13. The customer will break even or profit when the market price is at all of the following except

Anything less than 42 (50-8) This is a bull spread; the investor wants the stock to rise. Breakeven for put spreads is computed by subtracting the net premium (8) from the higher strike price (50). If it stays above the breakeven price of $42, they will profit.

Which of the following is not generally associated with an existing real estate direct participation program? A) Immediate income stream B) Appreciation potential C) Known history of income and expenses D) Lower risk than other types of real estate programs

Appreciation potential Appreciation potential is generally not associated with existing real estate programs because most appreciation occurs in the earliest years for real estate assets.

Which of the following would be in compliance with the Chicago Board Options Exchange and Options Clearing Corporation rules concerning the nondiscriminatory assignment of an option exercise notice by a firm to one of its customers?

Assignment to the customer with the oldest position in the option You cannot discriminate between large and small customers. First-in, first-out is not considered to be discriminatory.

When does the customer receive the confirmation?

At or before settlement

Reg T can be fulfilled

Cash or 2x marginable securities

unrealized gain/loss

Client doesn't have to report for tax purposes

What debt securities does not have a fixed maturity date?

Collateralized mortgage obligation (CMO)

The OCC sets standard

Contract sizes (100), exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market.

A 5% bond is trading at a premium. Which of the following would be the bond's highest yield?

Coupon yield If a bond is trading at a premium, its coupon rate will represent the highest of its yields. Bonds do not have a dividend yield.

Interest accrues from

Dated date to first interest payment

What risks would benefit most from portfolio diversification?

Default risk

The members may choose the customers to be exercised on

Either random or FIFO basis

What organizations determines which over-the-counter securities are eligible for purchase on margin?

Federal Reserve Board

Which of the following real estate limited partnerships allows tax credits to the investor?

Historic rehabilitation Raw land partnerships seek appreciation. Existing property and new-construction partnerships seek passive income and tax deductions from business operations. Historic rehabilitation partnerships allow not just deductions, but actual tax credits.

Auction Rate Securities

In essence, an auction rate security is a long-term debt issue, but it acts as if it were a shorter term issue. This is because interest rates are reset approximately every month, depending on whether the issue is tax exempt, and the interest is paid either shortly after the auction yield is settled or every quarter or half year.

Which of the following actions of XYZ Corporation would raise additional capital? Issue callable preferred stock Declare a stock dividend Make a rights offering Encourage convertible bondholders to convert to common stock

Issue callable preferred stock Make a rights offering Issuing new stock either through an underwriting or a rights offering allows a corporation to raise capital. Stock dividends represent more shares given to existing shareholders, but no money is raised. Conversion results in the exchange of one security for another, and no money is raised.

A legal opinion evaluates which of the following features of a municipal issue? -Marketability -Legality -Tax-exempt status -Economic feasibility

Legality Tax-exempt status A legal opinion rendered by bond counsel deals with the tax-exempt status of the proposed issue and its legality. The marketability of the new issue of bonds is dealt with by the syndicate. Economic feasibility relates to revenue bond issues and is performed by independent consultants.

Disclosure of Risk - Mutual Fund Withdrawal Plan

MF W/D plans not guaranteed so RR must: 1. Never promise guaranteed rate of return 2. stress possible exhaust the acct by over-W/D 3. state during a down mkt acct can be over exhausted w/ even small w/d 4. NEVER use charts/tables unless SEC specifically clears their use.

Allowable activity during cooling-off period

May: -distribute red herring -publish tombstone advertisements -gather indications of interest May not: -offer securities for sale -distribute final prospectuses -disseminate advertising material -disseminate sales literature -take orders -accept postdated checks

industrial development bonds (IDBs)

Municipal revenue bonds that are issued by private companies. The municipality assumes no legal liability in the event of default

What securities have no secondary market and therefore can't be traded OTC?

Mutual funds (and variable annuities)

A registered representative executes the following trades for an options account: Buy 1 FLB Apr 40 call at 9 Sell 1 FLB Apr 45 call at 4 Are these suitable trades?

No, because the customer cannot make a profit on these trades. These trades are not suitable because the customer will not make a profit. In any price spread, the net debit represents maximum loss; in this case, the net debit is five points, or $500. Maximum loss added to maximum gain will always equal the difference between the strike prices. In this example, the difference between the strike price is five points; therefore, the maximum gain is zero.

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

The OCC assigns exercise notices on a:

Random basis

Disclosure of Risk - Leveraged ETFs

Reset daily, not suitable for buy- hold investors

Sell Stop Limit

Sell stop limits are placed below the current market and will be elected when the stock trades at or through (lower than) the stop price. Once elected, the order becomes a limit order to sell at that price or better (higher).

-variable-rate demand note (VRDN) -A bond anticipation note (BAN) -A tax anticipation note (TAN) are what type of securities?

Short term notes

What is not considered overlapping debt?

State debt cannot overlap with any other municipal entity

how does a syndicate determines the amount to bid for a new municipal issue?

The average reoffering price minus the spread

Bond Resolution

The bond resolution is the document that authorizes the issuance of a municipal bond. The resolution also describes the proposed issue's features and the issuer's responsibilities to its bondholders.

When-Issued Confirmations

The capacity of the firm, principal or agent, must be disclosed on all confirms. The settlement date, accrued interest, and total price would not appear on a when-issued confirm.

Under the Uniform Transfer to Minors Act (UTMA), how can stock subscription rights be handled in a custodial account?

The custodian can exercise or sell the rights as he deems prudent. One thing that is never considered prudent is to let the rights expire. Custodians in these accounts are able to sell or exercise the right, regardless of any relationship existing between them and the donor.

Treasury Receipts

Treasury receipts are zero-coupon bonds issued by broker-dealers. Zero-coupon bonds pay all of their interest at maturity. They are issued at a discount and redeemed at par, and the difference represents the interest earned. For zeroes with a maturity of more than one year, the interest (or discount) must be accreted each year—and is taxable that year as income. This is called imputed interest.

When you encounter a Rule 144 question, always look for 2 things:

What kind of stock is being sold? (Restricted or control) who is selling it? (Insider or noninsider) only restricted stock has a holding period. Control stock, unless it is restricted, can be sold immediately, but volume limits always apply

What does it mean when a bond is prerefunded?

When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be prerefunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of prerefunded bonds is AAA, as they are now backed by U.S. government securities.

FINRA Rule 3310 (AML Program)

Written rules to achieve compliance with Bank Secrecy Act approved by senior management

A customer buys five municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has

a $50 capital gain. The investor buys the bond at 104 or $1,040 and the bond is due to mature in 20 years. Take the $40 premium divided by the 20 years to maturity and that will tell us the amount that we amortize/reduce the cost basis by each year. $40/20=$2. It then tells us that the bond is sold after 10 years. Ten years of amortization is $2 per year x 10 years = $20. That lowers the basis of the bond to $1,020 ( $1,040 - $20 = $1,020). The bonds are sold at 103 or $1,030, so the gain is $10 per bond times five bonds for a total gain of $50.

The price paid for a listed REIT is most similar to the pricing of

a closed-end investment management company.

When a securities professional refers to a bond as a full faith and credit issue, it is

a general obligation bond

Tender offers

a. are mergers b. are publicly advertised offers to shareholders to buy their shares at a certain price. c. are offers to buy companies. d. are publicly advertised offers by shareholders to investors to sell their shares at a certain price.

One of your customers calls for an explanation of the net amount due showing on a confirmation of a recent purchase transaction. The customer has multiplied the number of shares times the price per share, and that is lower than the amount the confirmation says is due. You would explain that the net amount is determined by

adding the commission and any firm-added fees to the principal amount.

To avoid penalty, a rollover of an IRA may occur no more frequently than

annually however Direct transfers from one account to another, where the account holder does not receive the funds during the transfer, are not restricted in frequency.

The number of rights necessary to acquire one new share is computed by

dividing the number of outstanding shares of common stock by the number of new shares being issued

One of your customers with a JTWROS account contacts you to remove the other tenant and put the account into the customer's own name. This can be done only

if the change has been authorized by a qualified and registered principal designated by the member. Under FINRA rules, no change in any account name(s) can be made unless the change has been authorized by a qualified and registered principal designated by the member.

For a long put to cover a short put

it must have the same or higher strike price and the same or longer expiration

One of your customers has decided to commit $10,000 to fixed income. She is trying to decide if it makes more sense to invest in the bonds of a single corporate issuer or to buy an exchange-traded fund (ETF) tracking a corporate bond index. You could explain that the purchase of the ETF results in the greatest reduction of

liquidity risk In general, the bond market has some liquidity risk because bonds, especially in quantities as low as $10,000, do not have the trading activity we see with listed securities. For ETFs, trading on an exchange significantly lessens their liquidity risk. If the ETF contains bonds with maturities similar to the individual bonds she is considering, the interest rate risk and inflation risk are essentially the same. Currency risk applies only when foreign securities are involved.

Which option positions have limited potential loss?

long puts. long calls. short uncovered puts

Regulation T allows a customer to pay for securities with all of the following except A) cash. B) check. C) marginable securities. D) newly purchased mutual funds pledged as collateral.

newly purchased mutual funds pledged as collateral. Regulation T does not allow mutual funds to be used as collateral until they have been owned, fully paid for, for 30 days.

On withdrawals from a nonqualified annuity, taxes are paid:

only on the amount that exceeds cost basis (the amount paid into the annuity)

A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as

part earnings and part cost basis. Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable, but the cost basis is returned tax free.

If an error has been made in the notice of execution and reported to a customer, the customer must pay

price at which the order was executed,

One of your customers owns a limited partnership interest in an oil and gas drilling program. The program was successful in finding oil and is expected to operate at a loss for the next year. The loss flowing through to the limited partner is generated by all of these except A) principal repayment on partnership debt. B) interest payments on partnership debt. C) accelerated depreciation taken on the drilling equipment. D) depletion on the sale of oil removed from the ground.

principal repayment on partnership debt. Losses occur when expenses exceed revenues. Principal repayments are not an expense. Interest on debt is a deductible expense. Natural resources deplete and the depletion allowance is an expense similar in concept to depreciation, another expense. From a personal standpoint, compare this to your home mortgage−the interest is a deductible expense, but the portion representing payment of principal is not.

Breakeven on short stock and a long call position

proceeds minus the premium. As is always the case when computing breakeven, the number of shares and number of option contracts is meaninglessbreakeven is the same price for one or one thousand.

Good Faith deposits

required when the syndicate places a bid on a competitive offering. It is generally 1%-2% of the par value of the bonds offered for sale. If the bid is unsuccessful, the deposit is returned by the issuer to the syndicate manager.

The FINRA rule on communications would consider communications that are posted on an online interactive electronic forum (i.e., a chat room) to be

retail communications FINRA Rule 2210 treats interactive electronic forum posts, such as social media status updates, as retail communications rather than public appearances. However, unlike most retail communications (and similar to public appearances), the rule specifically excludes these posts from both the principal pre-use approval requirements and the filing requirements.

Covered put writing is a strategy where an investor

sells a put on a stock he has sold short.

Which option position has unlimited potential loss?

short uncovered calls.

The customer relationship summary (Form CRS) is an integral part of Regulation Best Interest. For an existing cash account customer who received the initial Form CRS in early July 2020, a new Form CRS must be delivered no later than

the opening of a new margin account. Existing customers received their initial Form CRS no later than July 30, 2020. They must also be sent a revised copy at or before the opening of a new account that is different from the retail investor's existing account. An example of this would be the opening of a margin account.

The management & custodial fees paid by an investment company are part of

the operating expense of the fund.