Series 7 - Exam 7 Closed
Mordecai is a 73-year-old retired machine lathe operator. He earns $35,000 in retirement benefits. Last year he earned $1,650 as a pitching instructor for the Altoona Miners and received $800 in dividend income. What is the maximum contribution he may make to his Roth IRA?
$1650 -- because it's the only earned income
An investor established the following positions. Long 100 shares of XYZ at $37 per share Long 1 XYZ 35 put at 1.75 This investor breaks even when XYZ is at:
$38.75 per share The investor purchased the stock at $37 per share and protected it by purchasing the right to sell XYZ at $35, paying a premium of 1.75 (long XYZ 35 put). The investor will break even when the price of XYZ is at $38.75 ($37 purchase price of the stock + the 1.75 premium on the put).
A designated market maker places a GTC order in his book to buy 1,000 shares of XYZ at $30. XYZ declares a 50% stock dividend. The designated market maker should adjust the order when the stock sells ex-dividend to:
1,500 shares at $20 The order must be adjusted to reflect the change in XYZ stock. The number of shares will be increased to reflect the dividend and will now be 1,500 shares (1,000 shares plus 50% of 1,000). The price of ABC will be adjusted downward to $20. The total value of the order before the dividend (1,000 shares at $30 = $30,000) must equal the value after the dividend (1,500 shares at $20 = $30,000).
An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit?
95 The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices).
An investor established the following positions. Long 100 shares of XYZ at $37 per share Long 1 XYZ 35 put at 1.75 This investor prefers XYZ to: a. Appreciate significantly b. Depreciate significantly c. Fluctuate d. Not change
A. appreciate significantly The investor purchased the stock at $37 per share and protected it by purchasing the right to sell XYZ at $35, paying a 1.75 premium (long XYZ 35 put). The investor loses money if the stock falls below the breakeven price of $38.75 ($37 purchase price of the stock + the 1.75 premium on the purchase of the put). The investor prefers XYZ to appreciate significantly since there is the potential for unlimited gains.
A customer has $350,000 to invest and would like to hold a diversified portfolio of stock, bonds, and money-market instruments. She wants the percentage invested in each of these asset categories to be adjusted as financial markets change. However, her business keeps her too busy to adequately monitor her holdings and make the appropriate changes. Which of the following investments are MOST suitable for this customer? a. An asset allocation fund b. An S&P Index fund c. A bond index fund d. A variable annuity
A. asset allocation fund Asset allocation funds hold diversified portfolios of stocks, bonds, and money-market instruments. The percentage of the portfolio invested in each of these categories is shifted by the fund manager from time to time, often according to computer models.
Which of the following statements regarding the Roth IRA is NOT TRUE? a. Contributions are tax-deductible b. Qualified distributions are not included in an individual's gross income c. Qualified distributions are not subject to the 10% early withdrawal penalty d. An individual may contribute up to $5,500 per year
A. contributions are tax-deductible While contributions to traditional IRAs are tax-deductible under certain conditions, contributions to a Roth IRA are nondeductible. Individuals may contribute up to $5,500 per year if they have earned income and if they meet certain income eligibility requirements. Qualified distributions are tax-free and are not subject to the 10% early withdrawal penalty.
The largest deduction generated by a DPP in real estate is: a. Depreciation b. Depletion c. Recapture d. Tax credit
A. depreciation The largest deduction in a real estate program is generally depreciation.
Which annuity settlement option provides a payout period of at least 20 years or for the annuitant's lifetime, whichever is greater? a. Life annuity with period certain b. Life annuity c. Joint and last survivor life annuity d. Unit refund life annuity
A. life annuity with period certain This is a description of a life annuity with period certain (in this case, 20 years). It is the best settlement payout option. This option will provide monthly or other periodic payments to the annuitant for life. However, if the annuitant dies prior to the end of the specified period, the beneficiary will receive a lump-sum payment or continue to receive installments until the end of the period certain. A life annuity is a contract in which an annuitant receives payments for as long as she lives, but this method makes no provision for a designated beneficiary. Under a unit refund life annuity, periodic payments are made during the annuitant's lifetime. If the annuitant dies before an amount equal to the value of the annuity units is paid out, the remaining units will be paid to a designated beneficiary. A joint and last survivor life annuity is an option in which payments are made to two or more persons.
How long after a new issue is registered for sale will it be shown on the Nasdaq system? a. On the effective date b. 10 days after the effective date c. 30 days after the effective date d. 45 days after the effective date
A. on the effective date A new issue will appear on the Nasdaq system on the effective date of the issue. The effective date, which is determined by the SEC upon completion of the registration process, is the first date that the securities may be sold to the public.
When a stock is at its resistance price, a technical analyst will most likely say that it is: a. Overbought b. Oversold c. Inverted d. Upward sloping
A. overbought A stock is overbought at its resistance level and oversold at its support level.
An investor purchases a U.S. Treasury bond in the secondary market. When is settlement? a. The next business day b. 3 business days c. 5 calendar days d. 5 business days
A. the next business day Transactions for Treasury securities in the secondary market settle on the next business day.
Municipal bearer bonds that are in default of interest, trade: a. With unpaid coupons attached b. Without unpaid coupons attached c. In registered form only d. Without a legal opinion attached
A. with unpaid coupons attached Municipal bonds that are in default, trade flat (without accrued interest) and must be delivered with all unpaid coupons attached. If the bonds begin paying interest, the present holder is entitled to the past interest payments.
If a mutual fund changes or adds a portfolio manager, the GREATEST effect would be on the fund's
ALPHA 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 ABC July 40 put option is exercised, the writer: a. Is obligated to deliver 100 shares of ABC stock b. Is obligated to purchase 100 shares of ABC stock c. Pays the in-the-money amount d. Receives the in-the-money amount
B is obligated to purchase 100 shares of ABC stock If the ABC put option is exercised, the writer is obligated to purchase 100 shares of ABC stock.
A customer purchases $10,000 of stock on margin. Before depositing the required amount, the stock rises to a market value of $12,000. How much will the customer be required to deposit? a. $4,000 b. $5,000 c. $6,000 d. $7,000
B. $5,000 Regulation T requires 50% of the purchase price to be deposited by the customer within two business days after the settlement date of the transaction (five business days from the trade date). Any market price change during this period will not affect the amount of the deposit. The requirement will be $5,000 (50% of the purchase price of $10,000).
A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the bond is sold six years later, what will be its cost basis? a. 100 b. 101.50 c. 104.50 d. 106
B. 101.50 When a bond is purchased at a premium (above par value), the premium must be amortized (reduced) over its life. The premium in this example is six points, which must be amortized over its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity). After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101 1/2 (106 original cost - 4 1/2 points amortized premium).
If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's: a. Expense ratio b. Alpha c. Rating d. Beta
B. alpha 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.
A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client? a. A managed closed-end fund b. An S&P 500 Index mutual fund c. An S&P 500 Index exchange-traded fund d. An DJIA exchange-traded fund
B. an S&P 500 index mutual fund Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.
Which of the following choices is NOT TRUE about buying listed put options versus selling the underlying stock short? a. Buying a put will require a smaller capital commitment b. Buying a put has a larger potential loss than selling the stock short c. The put has time value that gradually dissipates d. Buying a put is not subject to the Regulation SHO requirement to borrow shares
B. buying a put has a larger potential loss than selling the stock short Choice (b) is not true. Buying a put has a smaller potential loss than selling the underlying stock short. The maximum loss when buying a put is limited to the premium paid. The loss when selling short is unlimited. All of the other statements are true. The cost for the premium of a put is substantially less than the Regulation T margin requirement for a short sale. The purchase of puts is not subject to the borrowing requirements of Regulation SHO, whereas short sales of equities are. An option's premium consists of intrinsic value and/or time value. Time value gradually dissipates as an option nears its expiration.
Which of the following statements is TRUE about treasury stock? a. It receives dividends b. It is treated as a deduction from outstanding shares c. It has voting power d. It is part of unauthorized stock
B. it is treated as a deduction from outstanding shares Treasury stock is issued stock that has been repurchased by the corporation and is retired. It is treated as a deduction from the outstanding shares of a corporation and is no longer part of the capitalization of the corporation. It has no voting rights and does not receive dividends.
A customer buys a 6 3/4% municipal bond at 101 3/4. The yield to maturity on the bond is: a. 6 3/4% b. Less than 6 3/4% c. More than 6 3/4% d. Par plus 1 3/4%
B. less than 6 3/4% The customer bought the bond at 101 3/4, which is at a premium over the $1,000 par value of the bond. If she holds the bond to maturity, her yield will be less than 6 3/4%, since a bond bought at a premium will have a yield to maturity that is less than the coupon rate.
As it relates to a Nasdaq market maker, the term spread is BEST defined as which of the following? a. The difference between the price that an issuer will receive for its securities and the price that the public will pay for the securities b. The difference between the price at which a firm will buy a security and the price at which it will sell a security c. The amount of profit that a firm will make when it buys a security from or sells a security to a customer d. The amount of the firm's markup or markdown to a customer who buys or sells a security
B. the difference between the price at which a firm will buy a security and the price at which it will sell a security When used in reference to a Nasdaq market maker, the spread represents the difference between the price at which the firm is willing to buy (bid) and the price at which the firm is willing to sell (ask or offer) a security. For example, if the bid price is $21.20 per share and the offer price is $21.30 per share, the market maker's spread is $.10. Choice (a) is the spread or profit that an underwriter makes when it sells an IPO to a customer. Choice (c) is a market maker's profit based on its inventory cost for a security (i.e., the price at which it purchased a security from a customer compared to the price at which it was sold to a different customer. The markup or markdown is the difference between the prices the customer paid or received compared to the best bid or offer price of all Nasdaq market makers (the inside market). For example, if the inside market is $25.50 - $25.70 and the customer paid $25.90 to purchase the stock, the markup is $.20
Which of the following factors is the LEAST useful when analyzing the credit risk of an issuer of revenue bonds? a. An engineering study b. The ratio of the amount of net overall debt to assessed valuation c. The debt service coverage ratio d. The feasibility study
B. the ratio of the amount of net overall debt to assessed valuation The ratio of the amount of net overall debt (both direct and overlapping) to assessed value is useful in analyzing the credit risk of an issuer of general obligation (not revenue) bonds. In order for a municipal revenue bond issuer to raise funds for a project, it will conduct a feasibility and engineering study.
A designated market maker places a GTC order in his book to buy 1,000 shares of XYZ at $30. XYZ declares a 50% stock dividend. The designated market maker should adjust the order when the stock sells ex-dividend to: a. 1,000 shares at $20 b. 1,000 shares at $30 c. 1,500 shares at $20 d. 1,500 shares at $30
C. $1,500 shares at $20 The order must be adjusted to reflect the change in XYZ stock. The number of shares will be increased to reflect the dividend and will now be 1,500 shares (1,000 shares plus 50% of 1,000). The price of ABC will be adjusted downward to $20. The total value of the order before the dividend (1,000 shares at $30 = $30,000) must equal the value after the dividend (1,500 shares at $20 = $30,000).
An investor purchased $100,000 face value of a 12% municipal bond that matures December 1, 2041. The transaction settles on August 1. The investor owes accrued interest of: a. $200 b. $800 c. $2,000 d. $8,000
C. $2,000 The bonds purchased by the investor will generate yearly interest of $12,000 ($100,000 par multiplied by 12%). The fact that the bonds mature on December 1, 2041 signifies that interest payments are made every December 1 and June 1. The investor will, therefore, owe 60 days of accrued interest (from June 1, the last coupon, up to but not including the settlement date of August 1). Since the yearly interest is $12,000, accrued interest would be $2,000 (60/360 x $12,000).
A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond. When the issue is completely sold, the managing underwriter's fee will total: a. $160,000 b. $260,000 c. $60,000 d. $600,000
C. $60,000 1.50 x 40,000 = $60,000 The syndicate manager receives $1.50 for every bond. The manager will receive, in total, $60,000 (40,000 bonds x $1.50 per bond).
A customer purchases 10 M Dade Co. Florida 7.50% G.O. bonds at a 9.50 basis. How much interest will she collect each year? a. $75 b. $95 c. $750 d. $950
C. $750 10 M equal's $10,000 par value of bonds (the symbol M refers to thousands). The coupon rate is 7.50%. Therefore, the annual interest is $750 ($10,000 x 7.50%).
Company R has announced a tender offer for Company T. A shareholder of Company T is long 1,000 shares of stock and has written 5 covered calls against the stock. For the purpose of tendering shares, the shareholder may tender: a. 1,000 shares b. 800 shares c. 500 shares d. 300 shares
C. 500 shares An investor who holds stock in a company that is the subject of a tender offer may tender only stock that he holds long. If a shareholder has written call option positions against the long stock, the options positions will reduce his net long holdings in the stock
A customer wishes to establish a tax loss and sells 100 shares of XYZ Corporation. The loss would not be allowed if the customer, within 30 days: a. Bought an XYZ Corporation put b. Sold an XYZ Corporation straddle c. Bought an XYZ Corporation call d. Sold an XYZ Corporation call
C. bought an XYZ corporation call The IRS will not allow the loss if the same security or any security convertible into the same security is repurchased within 30 days of the sale. The customer must wait until the 31st day to buy back the security or its equivalent. In this example, the only choice given that could be converted into 100 shares of XYZ Corporation would be a call on XYZ Corporation. The loss would not be allowed if the customer, within 30 days, bought an XYZ Corporation call. This is known as a wash sale.
A fundamental analyst could use a corporation's balance sheet to determine all of the following metrics, EXCEPT: a. Net working capital b. Common stock ratio c. Cash flow d. Debt-to-equity ratio
C. cash flow Cash flow (net income or loss plus depreciation expense) is found by using an income statement. All of the other choices are derived from the balance sheet.
Treasury arbitrage restrictions generally prohibit issuers of municipal securities from: a. Selling municipal securities with coupon rates that are lower than Treasury securities b. Selling municipal securities with coupon rates that are higher than Treasury securities c. Investing bond proceeds in higher-yielding Treasury securities d. Investing bond proceeds in lower-yielding Treasury securities
C. investing bond proceeds in higher-yielding Treasury securities Because of the tax exemption allowed on municipal bond interest, municipalities are normally able to issue bonds with coupon rates below those of Treasury securities. This presents an excellent arbitrage opportunity. A municipality can borrow at a low rate of interest and invest the money in higher-yielding risk-free Treasury securities. Congress has enacted laws, known as Treasury arbitrage restrictions, that prevent state and local governments from misusing the tax exemption.
Which of the following positions best enables an investor to take advantage of a significant appreciation in DEF stock? a. A debit DEF call spread b. A credit DEF put spread c. Long a DEF straddle d. Short a DEF straddle
C. long a DEF straddle The long straddle offers an investor the ability to realize unlimited gains since the client is long a call option. The gains are determined by the amount the stock appreciates. While a debit call spread is bullish, the gain is limited to the difference between the strike price on the long call and the strike price on the short call. The credit put spread is also bullish, but the gain is limited to the net premium received. The short straddle exposes an investor to unlimited risk if the stock rises.
Which of the following CMOs has the LEAST prepayment risk? a. Sequential pay tranches b. Accrual or Z tranches c. Planned amortization class (PAC) tranches d. Support or companion tranches
C. planned amortization class (PAC) tranches The planned amortization class (PAC) is a type of CMO that is designed for more risk-averse investors and provides a predetermined schedule of principal repayment, as long as mortgage prepayment speeds are within a certain range. This greater predictability of maturity is accomplished by establishing a sinking-fund type of schedule. The PAC tranche has top priority and receives principal payments up to a specified amount. Any excess principal goes to a companion or support tranche that has lower priority. Holders of the companion tranche are generally compensated for this risk with higher yields.
Which of the following money-market instruments does NOT trade in the secondary market? a. Directly placed commercial paper b. Eurodollar CDs c. Repurchase agreements d. Bankers' acceptances (BAs)
C. repurchase agreements Repurchase agreements typically are not traded in the secondary market. Eurodollar CDs are certificates of deposit payable in Eurodollars (U.S. currency on deposit in foreign banks). Eurodollar CDs, commercial paper, and BAs are traded in the secondary market.
Industrial development revenue bonds are backed by: a. The local municipal district in which the facility is domiciled b. The state in which the facility is domiciled c. The corporate guarantor d. Both the corporate guarantor and municipality
C. the corporate guarantor The corporation that uses the facility that was built by the industrial development revenue bond becomes the party that is backing the bonds. The credit rating of these bonds is dependent on that corporation, not on the municipality issuing the bonds.
Which of the following rates is set by the Federal Reserve Board? a. The broker loan rate b. The federal funds rate c. The discount rate d. The prime rate
C. the discount rate Of the choices given, only the discount rate is set by the Federal Reserve Board. The prime rate is the rate of interest that commercial banks charge their best-rated customers and is established by each bank. The broker loan rate, which is the rate of interest charged to brokerage firms for margin loans, is set by each bank. The federal funds rate is the charge for overnight loans between banks and is set by each bank.
Which of the following choices best represents the placement ratio? a. The total par value of new issues sold during the previous week, divided by the total par value of new issues issued during the previous month b. The total par value of new issues sold during the upcoming month, divided by the total par value of new issues issued during the previous month c. The total par value of new issues sold during the previous week divided by the total par value of new issues issued during the previous week d. The total par value of new issues scheduled during the upcoming 30 days
C. the total par value of new issues sold during the previous week divided by the total par value of new issues during the previous week The placement ratio is published weekly by The Bond Buyer. It expresses the amount of bonds sold by new issue syndicates as a percentage of the total amount of new issues brought to market during that week.
Richard Smith, a variable life insurance policyholder, dies. Which of the following statements best describes the tax consequences of his variable life insurance policy? a. There are no tax consequences to his beneficiary and the death benefit is not included in his taxable estate b. There are gift taxes due from his beneficiary in the year he died c. The value of the policy will be included in Richard's estate for tax purposes d. The policy proceeds are federally taxable to the beneficiary
C. the value of the policy will be included in Richard's estate for tax purposes Although there are no tax consequences to Richard Smith's beneficiary, the death benefit is included in his estate for tax purposes.
The minimum denomination for negotiable certificates of deposit is: a. $1,000 b. $5,000 c. $10,000 d. $100,000
D. $100,000 The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more.
An investor established the following positions. Long 100 shares of XYZ at $37 per share Long 1 XYZ 35 put at 1.75 This investor breaks even when XYZ is at: a. $33.25 per share b. $35.25 per share c. $36.75 per share d. $38.75 per share
D. $38.75 per share The investor purchased the stock at $37 per share and protected it by purchasing the right to sell XYZ at $35, paying a premium of 1.75 (long XYZ 35 put). The investor will break even when the price of XYZ is at $38.75 ($37 purchase price of the stock + the 1.75 premium on the put).
A customer has the following accounts with a brokerage firm. Cash Account $20,000 securities (market value) $10,000 cash Long Margin Account $60,000 securities (market value) $30,000 debit balance $10,000 SMA Short Margin Account $40,000 securities (market value) $60,000 credit balance The Federal Reserve Board margin requirement is 50%. The total equity in all the accounts is: a. $50,000 b. $60,000 c. $70,000 d. $80,000
D. $80,000 The equity in the cash account equals $20,000 market value of the securities plus $10,000 in cash, for a total of $30,000. The equity in the long margin account is the market value of the securities ($60,000) minus the debit balance ($30,000). This equals $30,000. The $10,000 SMA is not taken into account when computing equity. The equity in a short margin account is computed by subtracting the current market value of the securities ($40,000) from the credit balance ($60,000). This equals $20,000. Adding the equity in all of the accounts, the total equity is equal to $80,000. ($30,000 equity in the cash account + $30,000 equity in the long margin account + $20,000 equity in the short margin account = $80,000.)
A notice of sale appears showing that RFQ corporation is selling 800,000 units at $60 per unit. Each unit consists of 2 shares of preferred stock and a warrant for 1/2 share of common stock. If all of the warrants are exercised, how many shares will be outstanding? a. 400,000 shares of preferred and 400,000 shares of common b. 800,000 shares of preferred and 400,000 shares of common c. 800,000 shares of preferred and 800,000 shares of common d. 1,600,000 shares of preferred and 400,000 shares of common
D. 1,600,000 shares of preferred and 400,000 shares of common Each unit was composed of 2 shares of preferred stock and a warrant for 1/2 share of common stock. There will immediately be 1,600,000 (800,000 x 2) shares of preferred outstanding. If the warrants are exercised, there will be 400,000 (1/2 of 800,000) shares of common stock outstanding.
An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit? a. 90 b. 92 c. 94 d. 95
D. 95 The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices).
A company based in Europe with offices located in New Jersey would like to have its stock traded on the NYSE. This most likely will be accomplished through the issuance of: a. Yankee bonds b. Eurodollar bonds c. Bankers' Acceptances d. American Depositary Receipts
D. American Depository Receipts American Depositary Receipts (ADRs) facilitate U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.
If a customer is currently short ABC stock and also short an ABC put, this position is referred to as: a. A covered call b. Short against the box c. An uncovered put d. A covered put
D. a covered put A covered put is created when an investor sells (writes) a put against an existing short stock position. This position is suitable for a client who believes that the stock will remain stable or decline slightly. However, due to the potential risk of the stock's increase in value against the short stock position, a covered put should only be created by clients with a high risk tolerance.
An investor who is in his late 80s wants tax-free income and the ability to provide funds for his children after his death. Which of the following choices should an RR recommend? a. An asset allocation mutual fund b. A portfolio of long-term municipal bonds c. A laddered corporate bond portfolio d. A laddered municipal bond portfolio
D. a laddered municipal bond portfolio Through municipal bond purchases, investors receive tax-free income. A laddered portfolio is one that invests in the same type of bonds with different maturity dates. When the first bond matures, the proceeds are then reinvested in the long side (i.e., longest maturity) of the ladder. By laddering the portfolio, investors will have greater access to money if the need arises. For instance, if short-term funds are needed (e.g., a person wants to provide funds for his children), the investor may use the amount that is maturing rather than being forced to sell the longer term bonds in the secondary market.
When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's: a. Market maker b. Principal c. Designated market maker d. Agent
D. agent A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type of transaction. When acting in a principal capacity, the client is charged a markup or markdown.
The transfer of bonds from one party to another may be accomplished by an endorsement on the back of the bond certificate or through a: a. Letter of credit b. Legal opinion c. Bid form d. Bond power
D. bond power A customer who sells a security is required to sign the certificate. The usual method of endorsing a stock (or bond) certificate is to sign on the back and then mail the certificate to the broker-dealer. In order to safeguard the certificate, the seller can send the certificate by registered mail. An alternate method is for the customer to send the certificate, unsigned, in one envelope and to send a signed bond (or stock) power in a separate envelope. In this way, if the certificate were to fall into unauthorized hands, it would have no value since it would not be negotiable.
A fundamental analyst, evaluating the common stock of a corporation, will examine all of the following choices, EXCEPT the: a. Sales of the corporation b. Management of the corporation c. Current amount of earnings paid as dividends to shareholders d. Current amount of short interest positions for the stock
D. current amount of short interest positions for the stock A fundamental analyst will examine all the factors listed relating to a common stock except the current amount of short interest positions for the stock. Short interest is a statistic examined by a technical analyst. It represents the total amount of shares sold short that will be covered in the future.
For which of the following is there no secondary market? a. Bankers' acceptances b. Treasury bills c. Treasury notes d. Federal funds
D. federal funds 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.
A company currently has $125,000,000 of 3 1/4% convertible bonds. The company is going to offer bondholders $125,000,000 of 3 1/4% nonconvertible bonds plus cash of $15,000,000 for the convertible bonds. How will this transaction, if successful, affect the company's financial status? a. It will reduce the cash and debt position and reduce the potential dilutive effect on the common stock b. It will reduce the cash position and increase the debt position c. It will increase the cash position and reduce the potential dilutive effect on the common stock d. It will reduce the cash position and the potential dilutive effect on the common stock
D. it will reduce the cash position and the potential dilutive effect on the common stock The effect of the transaction will be to reduce the cash position and the potential dilutive effect on the common stock. The company is paying out cash and is also issuing nonconvertible bonds in place of convertible bonds (which could have been converted into common stock). This will reduce the cash position and the potential dilutive effect on the common stock.
The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2/% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. The bonds are secured by: a. The barges and equipment of the Barge Towing Corporation b. The common stock of the Barge Towing Corporation c. The underwriter of the Barge Towing Corporation d. The full faith and credit and no specific collateral of the Barge Towing Corporation
D. the full faith and credit and no specific collateral of the Barge Towing Corporation The tombstone ad states the bonds to be issued are subordinated debenture bonds, which are unsecured bonds. The bonds are secured by the full faith and credit and no specific collateral of the Barge Towing Corporation.
Which of the following BEST describes the term, payment for order flow? a. The concession paid to a member of a selling group b. The prohibited practice of mutual fund distributors paying kickbacks to registered representatives c. The portion of a mutual fund's 12b-1 fee that is paid to a third-party salesperson d. The payment to a broker-dealer by a market maker in return for routing orders to that market maker
D. the payment to a broker-dealer by a market maker in return for routing orders to that market maker It is permissible for broker-dealers to receive payments from a market maker in return for executing orders through that market maker. Any payments for order flow must be disclosed to customers.
When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T? a. On the settlement date b. Two business days after the trade date c. When the securities are delivered d. Two business days after the settlement date
D. two business days after the settlement date Regulation T states that payment for a new issue in a cash account is due within two business days following the settlement date of the transaction. When buying shares of a new issue, an investor will receive a when-issued confirmation. Payment is due two business days following the date that the securities are ready for delivery.
If an issuer is seeking an exemption from the registration provisions of the Securities Act of 1933 under Regulation D (the private placement exemption), which TWO of the following statements are TRUE? I. The purchasers must sign an investment letter attesting to the fact that resales of the securities are restricted II. The size of the offering must be limited III. The number of accredited buyers is unlimited IV. The issuer must file a registration statement with the SEC
I and III According to the Regulation D private placement exemption, certain conditions must be met for the securities to be exempt from the registration provisions of the Securities Act of 1933. The offering must be restricted to persons who are knowledgeable and experienced in business and financial matters and who are able to afford the economic risks involved. The issuer must provide the buyer with detailed financial information (this offering document is not required to be filed with the SEC). In a private placement, the number of non-accredited buyers must be limited to 35 and the offering must be directly negotiated between the issuer and the buyer or his purchaser representative. Also, the buyer must sign an investment letter which states that the purchase is being made for investment purposes and not for a short-term resale. To answer this question correctly, it is important to note that the size of the offering is unlimited and that there is no limit to the number of accredited buyers that are involved.
Which TWO of the following statements are TRUE concerning the Securities Act of 1933? I. Registration provisions apply if the securities beings sold are listed on the NYSE II. Antifraud provisions do not apply if the securities being sold are listed on the NYSE III. Registration provisions do not apply to securities issued by a municipality IV. Antifraud provisions do not apply to securities issued by a municipality
I and III The registration provisions of the 1933 Act apply if securities sold are listed on the NYSE or Nasdaq, but do not apply to securities issued by a municipality. The antifraud provisions of the Securities Act of 1933 apply to all securities, even those exempt from registration
A corporation would choose to refinance its debt for which TWO of the following reasons? I. To reduce its overall interest costs II. To be able to borrow funds at a higher rate III. To be able to reduce the number of persons on the board of directors IV. To remove restrictive provisions from the indenture
I and IV A corporation would most likely refinance its debt to reduce its overall interest cost. This is most likely to happen when interest rates have declined and/or the credit strength of the issuer increases. It may also refinance to remove a restrictive provision from a bond's indenture. This restriction may have been included when the issuer sold bonds and it was not easy for the issuer to borrow funds. Refinancing does not alter the number of persons on the board of directors.
Which of the following choices represent logical strategies for a technical analyst? I. Buy calls when a stock breaks through a resistance level II. Buy calls when a stock breaks through a support level III. Buy puts when a stock breaks through a resistance level IV. Buy puts when a stock breaks through a support level
I and IV A technical analyst believes that if a stock's price breaks through a resistance level, it will continue to rise until it reaches the next resistance level. The analyst will purchase calls if the stock's price breaks through a resistance level. The analyst will buy puts if the stock's price breaks through a support level, since the analyst believes the stock's price will continue to decline until the next support level.
Which of the following choices represent logical strategies for a technical analyst? I. Buy calls when a stock breaks through a resistance level II. Buy calls when a stock breaks through a support level III. Buy puts when a stock breaks through a resistance level IV. Buy puts when a stock breaks through a support level a. I and III b. I and IV c. II and III d. II and IV
I and IV A technical analyst believes that if a stock's price breaks through a resistance level, it will continue to rise until it reaches the next resistance level. The analyst will purchase calls if the stock's price breaks through a resistance level. The analyst will buy puts if the stock's price breaks through a support level, since the analyst believes the stock's price will continue to decline until the next support level.
When the market price of MMS is $24, a customer purchases 10 MMS May 20 puts at 2 in a cash account. Which TWO of the following statements are TRUE regarding the option purchase? I. The settlement date for the option purchase is one business day II. The settlement date for the option purchase is three business days III. The Regulation T payment date is three business days IV. The Regulation T payment date is five business days
I and IV Option transactions (purchases or sales) settle on the next business day following the trade date (T+1). On the other hand, stock transactions settle three business days following the trade date (T+3). According to Regulation T, payment for transactions that are executed in cash and margin accounts must be made by the customer within five business days (i.e., both stock and option trades must be paid for in five business days).
When the market price of MMS is $24, a customer purchases 10 MMS May 20 puts at 2 in a cash account. Which TWO of the following statements are TRUE regarding the option purchase? I. The settlement date for the option purchase is one business day II. The settlement date for the option purchase is three business days III. The Regulation T payment date is three business days IV. The Regulation T payment date is five business days a. I and III b. I and IV c. II and III d. II and IV
I and IV Option transactions (purchases or sales) settle on the next business day following the trade date (T+1). On the other hand, stock transactions settle three business days following the trade date (T+3). According to Regulation T, payment for transactions that are executed in cash and margin accounts must be made by the customer within five business days (i.e., both stock and option trades must be paid for in five business days).
Upon written request, duplicate account statements would be required under which TWO of the following circumstances? I. The customer is an employee of a member firm and is opening a brokerage account at a bank II. The customer is an employee of a mutual fund and is on the board of directors III. The customer is an employee of a bank and is opening an account at a broker-dealer IV. The customer is an employee of a member firm and is opening a brokerage account at a financial institution
I and IV Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens a brokerage account at another member, investment adviser, bank, or other financial institution. There is no requirement to send duplicate statements if the customer is an employee at a financial institution.
An investor in the U.S. purchases the debt of a German company. The bonds are denominated in euros. Which of the following risks will the investor be exposed to? I. Interest-rate risk II. Credit risk III. Currency risk
I, II and III An investor in the U.S. will face all of these risks .
An insider of XYZ Corporation buys XYZ stock in the open market at $63 per share. Now, 10 months later, the insider intends to sell the stock at its current market price of $68 per share. Which TWO of the following statements are TRUE regarding this transaction? I. The sale is subject to the six-month holding period under Rule 144 II. This sale is not subject to the six-month holding period under Rule 144 III. The sale is subject to the volume limitations under Rule 144 IV. The sale is not subject to the volume limitations under Rule 144
II and III The key to this question is to realize that the investor is an insider who acquired his shares through an open market purchase; therefore, he is holding control stock. Under Rule 144, control stock is not subject to the holding period requirement. However, both control and restricted stock are subject to the volume limitations that are imposed by the rule. If an investor is holding restricted (unregistered) stock, Rule 144 requires that it be held for six months before it may be resold.
The State of North Carolina is offering $50,000,000 of 5 1/2% sewer improvement bonds. Which TWO of the following choices apply to the bonds? I. They are subject to the margin requirements of Regulation T II. They are subject to the antifraud provisions of the Securities Act of 1933 III. They are subject to the Trust Indenture Act of 1939 IV. They are exempt from the registration requirements of the Securities Act of 1933
II and IV Municipal bonds are exempt from the registration provisions of the '33 Act, but are subject to the antifraud provisions. They are also exempt from Regulation T and the Trust Indenture Act of 1939.
New Issue $50,000,000 City of Denver, Colorado Par Value $1,000 Amount Rate Maturity Date Price $50,000 5 1/2% July 1, 2027 101 $60,000 6 1/2% July 1, 2028 101 Based on the above information, which of the following statements may be made about the bonds maturing in 2027? I. The yield to maturity will be greater than 5.50% II. The yearly interest payment is $55 per bond III. The amount of principal the investor will receive at maturity will be greater than $1,000 IV. An investor holding the bond until maturity will have a yield of less than 5.50%
II and IV The bonds maturing on July 1, 2027 have a nominal yield of 5 1/2% and have been issued at 101, which is 101% of their par value of $1,000, or $1,010. The yearly interest payment is 5 1/2% of par, or $55. The bonds are offered at a premium and an investor paying $1,010,will receive $1,000 at maturity. A bond offered at a premium and held to maturity will have a yield of less than the coupon (nominal yield) of 5.50%.
An investor has been making payments to a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE? I. The investment risk is assumed by the insurance company II. The investment risk is assumed by the customer III. The amount of the payment to the customer is guaranteed by the insurance company IV. The amount of the payment to the customer is not guaranteed
II and IV Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity. The amount of the payment depends on the performance of the separate account. The payment may increase, decrease, or remain the same, since the amount of the payment is not guaranteed. In addition, since a straight-life settlement option was chosen, payments will stop when the investor dies, regardless of the amount left in the contract.
When computing the dollar price of a municipal bond sold on a yield basis, which of the following call features will be used? I. Sinking fund call II. Catastrophe call III. In-whole call
III only When pricing a bond, only a call feature that allows the issuer to call the entire issue is used.
When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T?
Two business days AFTER the settlement
A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client?
a DIJA-exchange-traded fund Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.
If a customer is currently short ABC stock and also short an ABC put, this position is referred to as:
a covered put A covered put is created when an investor sells (writes) a put against an existing short stock position. This position is suitable for a client who believes that the stock will remain stable or decline slightly. However, due to the potential risk of the stock's increase in value against the short stock position, a covered put should only be created by clients with a high risk tolerance.
A type of security which combines a sophisticated, non-traditional investment strategy with the liquidity of a mutual fund is:
a liquid alternative investment to investments that use non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage
The interest rate that fluctuates the MOST is
federal funds rate
A broker-dealer may reject a delivery of municipal bonds IF
the bonds are missing a legal opinion
Under SRO rules, the carrying firm MUST complete the transfer of a customer account
within 3 business days of validation of the transfer instructions
