Q&A Test 3 (Part 2)
An investor would NOT purchase an oil and gas limited partnership for which of the following reasons?
All of the choices would be reasons for investing in an oil and gas limited partnership except recapture. Recapture is the amount added back to income for tax purposes that was allowed as a deduction in a prior period.
Which of the following statements is not a characteristic of a 529 plan?
Although contribution limits are considerably higher than for a Coverdell Education Savings Account (limited to $2,000 per year), contributions to a 529 plan are not unlimited.
An investor in an equipment leasing DPP would NOT expect:
A DPP equipment leasing program purchases equipment and leases it to a user. The lease provides a consistent income. The limited partnership is permitted to depreciate the equipment. The equipment would not normally increase in value (i.e., appreciation).
Which of the following transactions qualifies a customer as a pattern day trader?
A customer is considered a pattern day trader if 4 or more day trades are executed over any 5-business-day period. The minimum equity required for a pattern day trader is $25,000.
Which TWO of the following securities are considered debt obligations of municipal governments? Revenue bonds issued by the Port Authority of NY and NJ First mortgage bonds issued by a utility company Special tax bonds issued by a city agency A closed-end bond fund containing general obligation bonds
A revenue bond and a special tax bond are both considered debt obligations of a municipal government. A special tax bond is a type of revenue bond that is backed only by a specific tax source, such as an excise tax. A mortgage bond is a type of corporate bond. Any closed-end fund that is issued by an investment company is considered a debt obligation of that investment company, not the issuer of the bonds it holds. The fact that the fund owns municipal bonds is not relevant.
Which of the following is primarily found on a broker's broker communication system?
Broker's broker communication systems are primarily used to carry bids and offers in the secondary market.
For which of the following is there no secondary market?
Federal funds are short-term funds (usually overnight) that one bank lends to another to correct a deficit reserve position. Federal funds are not traded in the secondary market since they are not securities.
Wireless Communications is offering 2,000,000 common shares (par value $.10) at $15. Which TWO of the following choices describe the financial impact on the company? I.An increase in paid-in capital II.A reduction in the long-term debt ratio III.A reduction in liquidity IV.An increase in fixed assets by $30,000,000
The company will receive cash from the sale of the stock, so liquidity will increase. The common stock account and the paid-in capital account, which are part of stockholders' equity, will also increase. The long-term debt ratio will fall as the equity capital rises and, since the company is raising cash, current assets will increase. Finally, fixed assets will be unchanged.
The marketability of a municipal bond would NOT be affected by the:
The dated date of a municipal bond is the date that interest begins to accrue and will not affect its marketability. The marketability of a municipal bond will be affected by the rating it received by either Moody's or Standard and Poor's. The marketability of a municipal bond will also be affected by the block size. A block is considered to be a large quantity of municipal bonds (minimum of $100,000 par value). The maturity of the bond will also affect the marketability of the bond. The closer the bond is to maturity, the more liquid it becomes.
An investor expects the market price of a security to fluctuate widely over a short period. The investor will most likely:
The investor should buy a straddle, which consists of a put and a call at the same exercise price and same expiration. The investor could exercise or sell the call side of the straddle if stock prices increase, and could exercise or sell the put side of the straddle if stock prices decrease.
The amount of new issues sold, compared to those offered for sale, as of the close of business each Friday is reported in the The Bond Buyer's:
The placement ratio is a means of gauging the amount of bonds that have been underwritten recently on a new-issue basis that have moved into the hands of the ultimate investor. In other words, it is the percentage of new bonds that were sold compared to those that were originally available for sale. The higher the placement ratio, the more bonds there are moving into the hands of investors. The visible supply is the total par value of all negotiated and competitive issues scheduled to come to market during the next 30 days. The 20-Bond Index is the average yield on 20 selected municipal bonds.
An investor purchases an EPG Jan 40 put at 5 and writes an EPG Jan 50 put at 13. The investor would profit in all of the following situations, EXCEPT:
This is an example of a credit spread (more premium received for the option sold than paid for the option purchased). In a credit spread, the investor will profit if the spread (difference in premium) narrows.
To apply for a securities registration, a previously unregistered individual must: Complete Form U5 Complete Form U4 File the necessary form with FINRA File the necessary form with the SEC
To apply for a securities registration, a person must file Form U4 with FINRA.
Which of the following securities are NOT backed by the credit of the U.S. government?
Treasury bills and Treasury notes are direct obligations of the U.S. government. GNMAs are guaranteed by the U.S. government. FNMA bonds are not guaranteed by the U.S. government.
A market maker has displayed a firm quote of 15 - 15.50, 5 x 8 for a stock. If a broker-dealer contacts the market maker and wants to purchase 1,000 shares, how many shares is the market maker obligated to sell at 15.50?
When a market maker gives a firm quote, the market maker is obligated to buy or sell up to the number of shares at the price quoted. The number of shares that are firm is based on round lots of 100 shares, first the number for the bid and then the number for the offer. The market maker is obligated to buy 500 shares at $15.00 and obligated to sell 800 shares at $15.50. The market maker is permitted to sell 1,000 shares, but only obligated to sell 800 shares.
All of the following actions create a conflict of interest for a general partner, EXCEPT if the general partner:
A general partner is not permitted to compete with the limited partnership. Accepting a payment not to compete would be a conflict of interest. Selling property to the partnership is a definite violation of the conflict of interest provisions, as is commingling partnership funds. While partners are not allowed to borrow from the partnership, lending money to the partnership is permitted.
Which of the following statements is NOT TRUE regarding municipal bond quotes?
All of the choices given about municipal bond quotes are true except they must be written quotes. MSRB rules relate to quotes that are communicated or published in any manner.
Which TWO of the following statements are TRUE regarding account statements that are sent by member firms to customers? I.Active accounts receive monthly statements II.Active accounts receive quarterly statements III.Inactive accounts receive monthly statements IV.Inactive accounts receive quarterly statements
Brokerage firms are required to send customer statements quarterly for accounts with no activity. If there is activity, statements are sent monthly.
Federal funds are: I.Excess reserves loaned by commercial banks to other commercial banks II.Funds used by the government to pay principal on retiring Treasury securities III.A lagging money-market indicator IV.A leading money-market indicator
Federal funds are excess reserves loaned by commercial banks to other commercial banks and are a leading money-market indicator.
Historically, a decline in the Real GDP for two consecutive quarters is an indication that the economy is in a(n):
Gross Domestic Product (GDP) is the total value of goods and services produced by the U.S. economy over a given period. It is one of the most significant measures of economic activity. Traditionally, economists considered a decline in Real GDP for two consecutive quarters to indicate a recession. Real GDP is the Gross Domestic Product adjusted for inflation.
MSRB rules state that subject or nominal quotes may be given for:
MSRB rules state that a dealer who does not wish to buy or sell securities based on a quote given, must identify the quote as a subject or nominal quote. Such quotes can be given for informational purposes only.
If a municipal bond has a basis of 6.35 and a coupon rate of 6.15%, the bond is selling at:
Municipal bonds may be quoted on a yield to maturity basis, which in this example is a 6.35 basis. This means the bond has a yield to maturity of 6.35%. If the nominal yield (coupon rate) is 6.15%, this means that the bond is selling at a discount, below the par value ($1,000). If the yield to maturity (6.35%) is greater than the nominal yield (6.15%), the bond is selling at a discount.
An investor buys an 8% municipal bond in the secondary market at a 10.00 basis. If the bond is held to maturity, the investor's after-tax return will be:
Since the yield (10%) is higher than the coupon (8%), the bond was purchased at a discount. Since the bond was purchased in the secondary market at a discount, the interest on the bond is exempt from federal taxation but the discount will represent ordinary income at maturity. Since the investor must pay federal income tax on the ordinary income, the after-tax return will be between 8% and 10%.
On May 25, the president of MaxCo bought 3,000 shares of MaxCo stock in the open market at $33. Two months later, the stock has increased to $40. If the president now wants to sell the shares:
The Securities Exchange Act of 1934 prohibits insiders from making short-swing profits. A short-swing profit is a profit made on stock held by insiders for less than six months. If the president of MaxCo sold stock two months after it was purchased, MaxCo could sue for recovery of the profit. Under Rule 144, the six-month holding period applies only to restricted stock and, since the stock was purchased in the open market, the shares would be considered control stock.
The PSA Model is used when pricing:
The cash flows, future payments that a bondholder will receive, determine the market price of the bond. Collateralized mortgage obligations (CMOs) have uncertain cash flows due to the prepayments (early retirement) of mortgages. Prepayment risk is the risk that homeowners will pay off their mortgages early and the clients who invested in the securities backed by the mortgage will receive their principal prior to maturity. The Public Securities Association (now SIFMA), an association of financial services firms, created a standard model for estimating the prepayment rate for mortgage-backed securities including CMOs. This is called the PSA Model.
Pennsylvania Power Company has announced that it will refund $800 million of its outstanding 6 1/4% bonds that were to mature in 2040. The bonds will be refunded at 106.75% of par value from the proceeds of an $800 million refunding issue. The refunding issue has a 4 1/2% coupon rate and matures in 2030. Bondholders who own 6 1/4% bonds maturing in 2040 will receive:
The company is refunding the bonds at 106.75% of its par value. The bondholders who own the 6 1/4% bonds will receive 106.75% of the $1,000 par value (106.75% x $1,000) for a total of $1,067.50 plus accrued interest.
Regarding cash and margin accounts, which of the following statements is NOT TRUE?
The provisions of Regulation T apply to both cash and margin accounts. In both accounts the required customer deposit must be made by the fifth business day after the trade date. However, the required customer deposit amount is different based on whether the purchase is made in a cash or margin account. For any purchases that are made in a cash account, a customer must make full payment (no credit is extended by the B/D); on the other hand, for any purchases that are made in a margin account, a customer is only required to pay 50% (50% credit is extended by the B/D).
A registered representative is sending an email to both existing individual and potential customers promoting the broker-dealer's products and services. Which TWO of the following statements are TRUE? I.This is considered correspondence II.This is considered retail communication III.This activity requires principal approval prior to use IV.This activity should be reviewed
This activity is considered retail communication since there is no limit mentioned in the question as to the audience expected to be reached by the RR. Retail communication is any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. If the communication is directed to 25 or less individuals, it is considered correspondence. If the retail communication makes a recommendation, or promotes a product or service, prior principal approval is required.
Bert is the custodian for a Uniform Transfers to Minors Act (UTMA) account for his niece Betty. Betty has just reached the age of majority. Which of the following statements is TRUE under the UTMA?
Under the UTMA, when the minor reaches the age of majority as determined by the state, the custodian must transfer the account to the owner's individual name. If the owner wishes the former custodian to continue to manage the account, third-party trading authorization can be granted. However, the UTMA does not provide for the continuation of the account as a custodial account.
A customer buys 10 ABC January 50 calls paying a $3 premium and 10 ABC January 50 puts also paying a $3 premium when the market price of the stock is $49 per share. The buyer will need to deposit:
When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $3 ($300) premium for the call and a $3 ($300) premium for the put (a $6 premium for one straddle). The customer purchased 10 straddles and paid $600 per straddle for a total of $6,000. (10 straddles x $600 = $6,000).
Which of the following investments will permit a customer to purchase publicly traded shares of a company that is MOST similar to a private equity fund?
A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.
Which TWO of the following financial products are defined as derivatives? I.Collateralized mortgage obligations II.Commercial paper III.Call options IV.Corporate high-yield bonds
A derivative is a financial product that derives its value from movements in another financial product. If the price of the underlying security changes in value, the price of the derivative will fluctuate. For example, a CMO is a security backed by other mortgage-backed securities. If changes occur to the prices of these securities due to fluctuating interest rates and other factors, the price of the CMO will change. The price of an option contract is based on changes in the underlying security. A call option provides the holder the right to buy a security at a specified price. If the underlying security increases in value, the value of the call option will rise. Other types of derivatives include warrants and convertible bonds.
A business that is traded on an exchange, owns properties in its portfolio, and makes mortgage loans to developers is an example of a(n):
A real estate investment trust (REIT) that owns properties (e.g., office buildings) and also makes loans to real estate developers is a hybrid REIT. These business structures are a combination of an equity REIT and a mortgage REIT.
Which of the following communications is NOT required to be filed with FINRA?
A registered investment adviser is a type of institutional customer, and any communication directed only to institutional customers does not need to be filed with FINRA. Retail communications concerning direct participation programs (DPPs), collateralized mortgage obligations (CMOs), and investment companies are all required to be filed with FINRA. Investment companies include variable insurance products, mutual funds, closed-end funds, unit investment trusts (UITs), and exchange-traded funds (ETFs).
A registered representative's broker-dealer is an underwriter of an initial public offering of stock. The RR's father-in-law may purchase
A restricted person is not permitted to purchase any shares of a new issue unless an exemption applies. There is no exemption for restricted persons to purchase limited quantities of an IPO. An immediate family member of an employee (an RR) of a member firm may be a restricted person. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. An exception exists if a nonsupported, immediate family member buys the IPO from a different broker-dealer. There is no requirement to purchase the shares only from a selling group member.
A writer of an uncovered call option will profit in which TWO of the following circumstances? I.The underlying common stock goes up II.The underlying common stock goes down III.The call expires unexercised IV.The call is exercised
A writer or seller of an uncovered call option does not own the underlying stock. If the underlying stock goes down, the call will not be exercised. If the call option expires, the writer will keep the premium paid by the buyer of the option and will no longer be exposed to a possible loss if the stock goes up. If the underlying stock goes up, the option will be exercised and the writer will be obligated to deliver stock. The writer will need to purchase the stock at the current market value and will incur a loss due to the difference between the market value and the strike price less the premium received. The answer, therefore, is a writer of an uncovered call option will make money if the underlying common stock goes down and/or the call expires unexercised.
A firm's suitability responsibilities for sales of variable annuities do NOT apply to recommendations in which of the following situations?
According to FINRA Rule 2330, suitability requirements for recommendations concerning the purchase of variable annuities apply to: New purchases Exchanges Initial subaccount allocations These rules do not apply to the reallocation of subaccount assets after the initial purchase, nor do they apply to purchases of employer-sponsored qualified plans unless a recommendation is made regarding the allocation of subaccount assets in the initial purchase. Many states and brokerage firms require documentation of a customer's acknowledgment of a replacement transaction. These switch acknowledgement forms are typically signed by the annuity contract owner and the salesperson. The acknowledgement form provides a comparison of the features and costs of an existing contract to a proposed contract, and points out the relevant factors to be considered when contemplating an exchange.
If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's:
Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. On the other hand, beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In other words, it is the tendency of an investment's return to respond to swings in the market (i.e., the S&P 500 Index). Essentially, the market has a beta of 1.0 and security and portfolio values are measured based on how they deviate from the market.
If an investor wrote an ETF call option and is exercised against, he would:
An ETF option is similar to an equity option since the writer of an ETF call, after being exercised against (assigned), is obligated to deliver shares of the underlying ETF. On the other hand, if the writer an index option call (not an ETF call option) and is exercised against, the writer would be obligated to deliver the cash difference between the option's strike price and the index's closing value (or the index's opening value if it uses AM settlement).
Which of the following choices is NOT a type of overlapping debt?
Debt issued between two states is not considered overlapping debt. Overlapping debt is general obligation debt of other governmental units for which residents of a particular municipality are responsible. It is the debt shared by residents of a municipality for services or facilities shared by several municipalities. Examples of overlapping debt include debt for an adjoining road district or school district, or debt issued between two counties.
An investor purchased stock at $40/share that currently has a market price of $60/share. The investor thinks that the long-term prospects for the stock are attractive, but that the price will decline temporarily. The customer could take advantage of the temporary decline, by:
If the investor were to sell a call and the price declined, the call will expire and he will generate premium income. The long stock position will still be maintained, and the investor will profit if the anticipated price advance occurs.
Ms. Brown owns a variable annuity that has a life annuity payout option with a 20-year period certain. If Ms. Brown dies after 14 years of payments:
If the owner of a 20-year period certain annuity dies, the annuity company will pay a named beneficiary for the time remaining on the 20-year period. Since Ms. Brown died after 14 years, the remaining 6 years will be paid to a beneficiary and then payments cease. If Ms. Brown had survived the 20-year period, payments would continue for her life, but there is no beneficiary.
A broker-dealer has two municipal bonds in its inventory. One is a non-AMT bond that yields 4.50% and the other is an AMT bond that yields 4.85%. Which of the following statements is TRUE of a recommendation that is made to a client who is subject to the AMT and is in the 28% tax bracket?
If the person receiving the bond's interest payments is subject to the alternative minimum tax (AMT), the interest is taxable at the federal level. The after-tax yield on the AMT bond is 3.49% (4.85% x [1.00 - 28%]), while the after-tax yield on the non-AMT bond is 4.50%. Ultimately, these types of bonds are unsuitable for an investor who is subject to the AMT.
An individual is interested in an investment that offers annual income, has the potential of appreciating in value if interest rates decline and, in the event that the issuer fails to make a payment, having the missing amount added to future distributions. For this investor, which of the following securities is the most suitable?
Individuals generally purchase preferred stock for income. As with any security that pays a fixed rate, there is the potential for appreciation if interest rates decline. There are several types of preferred stock. Cumulative preferred stock will add all unpaid dividends to a future payment if a cash dividend is to be paid to common shareholders. Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than that amount based on the profits of the issuing company. Convertible preferred stock allows the owner to convert the stock into a fixed number of common shares. Callable preferred stock allows the issuer to retire (call) the stock in at a predetermined price.
If an investor was primarily interested in safety of principal, which of the following securities would you LEAST likely recommend?
Industrial development revenue bonds are secured by a lease agreement with a corporation and are only as secure as the corporation. State GOs are generally of high quality and a GNMA is secured by the U.S. government. The holder of an equipment trust bond has a lien on the equipment that secures the issue.
A person who has been granted power of attorney over a customer's account contacts the RR and indicates that she wants to start receiving the trade confirmations. For the RR, what is the BEST action to take?
Industry rules permit a person who has power has power of attorney (POA) over a customer's account to receive confirmations, account statements or any other communication if the following conditions are met: The account owner provides written approval to send the communications to this person and, Duplicate copies of any communications are sent to the account owner at another address that is designated in writing by the customer
Which of the following is TRUE regarding contingent deferred sales charges?
Industry rules require that the following disclosure be printed on the front of a confirmation for the purchase of a mutual fund that assesses a contingent deferred sales charge: "On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus." Funds that assess such charges may not be represented as no-loads and may not be referred to as no initial load without further explanation. Sales charges are fees that are used to pay sales-related expenses, such as commissions and advertising costs. A redemption fee that reverts to the fund's portfolio is not considered a contingent deferred sales charge.
A limited partner would be in jeopardy of losing her limited liability if the partner:
Limited partners have the right to receive their portion of income and losses, examine books and records, and make loans to the partnership. If they get involved in the management of the program, such as deciding which properties to acquire, they could be considered general partners and lose their limited liability.
Private label mortgage-backed securities are issued by which of the following entities?
Mortgage-backed securities (MBS) may be issued by a U.S. government agency, such as the Government National Mortgage Association (GNMA or Ginne Mae), or a government-sponsored enterprise (GSE), such as the Federal National Mortgage Association (FNMA or Fannie Mae) or the Federal Home Loan Mortgage Association (FHLMC or Freddie Mac). The securities issued by these three entities are commonly referred to as agency securities and receive high ratings (e.g., AAA). A collateralized mortgage obligation (CMO) is an example of this form of MBS. Mortgage-backed securities are also issued by financial institutions such as commercial banks, investment banks, and home builders. These securities are referred to as private label MBS and may contain some agency securities, however, they typically contain other types of mortgage loans that are not agency securities. A private label MBS is not an obligation of the U.S. government or any GSE and its credit rating is assigned by an independent credit agency. A private label MBS has a higher degree of credit risk and is generally not given a AAA rating.
In most cases, municipal bond investors may obtain which TWO of the following choices? I.Reduced interest-rate risk by investing in issues with different maturities II.A federal tax exemption by investing in private activity bonds III.A state and local tax exemption by investing in bonds in their state of residency IV.A reduced risk of default by investing in bonds in their state of residency
Municipal bond investors can obtain reduced interest-rate risk by investing in issues with different maturities. Bonds with short-term maturities will only experience a small decline in price if the general level of interest rates increases. Although most municipal bonds are exempt from federal income tax, they are not exempt from state income tax unless the owner is a resident of the state that issued the bonds, and the state elects not to tax the purchaser of the bond. The interest on municipal private activity bonds is subject to federal income tax if the investor is subject to the alternative minimum tax (AMT). The risk of default is not reduced by investing in bonds in the investor's state of residency.
Which TWO of the following statements are normally TRUE regarding the pricing of municipal bonds? I.Serial bonds are priced on a yield-to-maturity basis II.Serial bonds are priced on a dollar basis III.Term bonds are priced on a yield-to-maturity basis IV.Term bonds are priced on a dollar basis
Normally, traders quote municipal bonds issued in a serial maturity on a yield basis, where the yield quoted is the lower of yield to call or yield to maturity. Term bonds are normally quoted using the dollar pricing (percentage of par) method and are sometimes referred to as dollar bonds. For example, a trader may quote a serial bond at a basis price of 5.35, which means a yield to maturity of 5.35%. A term bond would be quoted at a price of 98, which means that the bond is quoted at 98% of par value, or $980 ($1,000 par x 98%).
All of the following statements are TRUE concerning preconditions for sale requirements under the New Issue Rule, EXCEPT:
Prior to selling a new issue to an account, a firm must meet certain preconditions for sale. A firm must obtain representation from an account holder or an authorized party of an account, stating that the account is eligible to purchase new issues in accordance with the New Issue Rule before distributing a new issue to that account. The representation from the account holder may be in the form of an affirmative statement that positively declares that the account is eligible. A firm may use electronic communications to verify account eligibility for new issues, but may not rely on oral statements. A member firm that sells new issues must reverify eligibility every 12 months and must retain copies of all information and records used in the verification for a minimum of three years. This is known as a negative consent letter which satisfies the pre-conditions for sale requirements.
If an investor wrote one OEX March 725 put option and the option was exercised when the index was 722.00, the writer is obligated to deliver:
Remember, sellers of puts are bullish (which in this example means that they wants the index to rise) and will profit if the option expires unexercised. However, if the writer of a stock index option is exercised against, the writer is obligated to deliver the cash difference between the exercise price and the index value (i.e., the intrinsic value). Remember, puts are in-the-money (have intrinsic value) if the underlying interest declines. In this question, the exercise price of the put option is 725 and the index value has declined to 722.00; therefore, the writer is obligated to deliver the cash difference of $300.
XYZ Corporation has 4,000,000 shares of common stock authorized and 2,500,000 shares issued, of which 100,000 shares are treasury stock. The corporation is issuing an additional 1,000,000 shares through a standby underwriting. If only 600,000 shares are subscribed to in the corporation's offering, the number of outstanding shares will:
Since 100,000 shares of the 2,500,000 shares issued is treasury stock (repurchased by the corporation), there are 2,400,000 shares outstanding prior to the new issue. On a standby underwriting, the underwriting syndicate agrees to purchase any shares that the corporation does not sell. Since the corporation only sold 600,000 shares, the underwriters will purchase the remaining 400,000 shares. After the new issue, there will be 3,400,000 shares outstanding (2,400,000 + 1,000,000).
A corporation's earnings per share on its common stock, after paying preferred dividends of $3.00 per share, is $5.00 per share. The corporation also paid a dividend of $2.00 per share on the common stock. The dividend payout ratio is:
Since the earnings per share on the common stock is given, the $3.00 preferred dividend can be disregarded. To find the dividend payout ratio, divide the yearly dividend on the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%.
In a soft-dollar arrangement between an investment adviser and a broker-dealer, the broker-dealer would be permitted to pay:
Soft dollars are products and services that an investment adviser receives from a broker-dealer in exchange for customer order flow. It is a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be invested. Travel costs and any costs that should be paid by the adviser (e.g., salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement. Whereas the cost of the computer terminals could not be paid for with soft dollars, the cost of the data services would be covered by soft dollars.
An investor shorts a stock at $6 per share. What is the SRO minimum maintenance requirement for this position?
The SRO minimum maintenance requirement for a stock sold short at $5 per share or above is $5 per share or 30% of the market value, whichever is greater.
An investor feels the economy is improving and wants to structure her portfolio to focus more on stocks with greater growth potential. She will typically be looking for stocks with which TWO of the following characteristics? High price-earnings ratios High dividend payout ratios Low price-earnings ratios Low dividend payout ratios
The term growth stock applies to a company that has shown a consistent high rate of growth for earnings over a given period. Historically, investors have been willing to pay more for one dollar of earnings for these stocks and they usually sell at higher price-earnings ratios. Since the company is in a growth stage, a large percentage of the profits will be retained by the company resulting in a low dividend payout ratio. Growth stocks have high price-earnings ratios and low dividend payout ratios.
If a municipal bond is selling at a premium and is callable at par, how is the yield calculated?
The yield for a municipal bond that is selling at a premium and is callable at par is calculated to the call date. The yield to call measures the yield that will be earned if the bonds are called at the call price and not held to the maturity date. MSRB rules require dealers to quote the lower of the yield to call or the yield to maturity. If the bond is selling at a discount, the bond is quoted on a yield to maturity basis. If the bond sells at a premium and is callable at a premium, the yield may be to the final maturity or the call date, whichever is lower.
A doctor, who is covered under a corporate pension plan, retires. The doctor can roll over the distribution received from the pension plan into an IRA, with no tax consequences, within:
When a lump-sum withdrawal is made from a qualified retirement plan and the check made payable to the participant is deposited in an IRA, it is referred to as a rollover. If the rollover is done within 60 days, it will be tax-free. Only one rollover is permitted once every twelve months. However, the distributing corporation will withhold 20% of the distribution for the IRS.
An investor has made the following purchases of XAM stock: Shares bought at $39 in May 2013 Shares bought at $56 in September 2013 Shares bought at $36 in January 2014 Shares bought at $36 in June 2014 The investor sells some of his XAM shares in March 2015 at $51. Based on the various purchases, which shares may be sold to result in the greatest gain with the lowest tax liability?
When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. To find which shares should be sold to generate the largest gain with the lowest tax liability, let's consider each possibility separately. Choice (a) results in a 12-point long-term gain. Choice (b) results in a long-term loss, not a gain. Choice (c) results in a 15-point long-term gain. Choice (d) results in a 15-point short-term gain (due to the shares having been held for one year or less). Since the tax rate on long-term gains (20%) is lower than the tax rate on short-term gains (as ordinary income), selling the shares that were held the longest is the best option. Although the sale of shares that were purchased in January 2014 will result in the same gain as the sale of shares that were purchased in June 2014, the tax liability will be lower.
If personal income is decreasing, which of the following companies will be most affected?
When personal income is decreasing, consumers still require electricity, heating oil, and food. (These are considered defensive.) However, the purchase of a household appliance such as a dishwasher or washing machine (considered luxury items) could be put off and, therefore, a household appliance company will be most affected.
A customer bought an 8% debenture at a 7.20 basis. If the bonds are currently trading 15 basis points higher:
When the customer bought the bond, he established a yield to maturity of 7.20%. A 7.20 basis is used to quote a bond that is offered at a price equivalent to a YTM of 7.20%. This will remain the same over the life of his investment. The coupon rate was established when the bonds were issued and will never change. However, when yields in the market increase, the market price of outstanding bonds decreases. The bond is now trading at a price equivalent to a YTM of 7.35%.
