Series 7 missed part 5
Which of the following stocks would NOT be considered defensive? A construction company A tobacco company A food distributor A clothing manufacturer
a A defensive stock is the stock of a company that is not drastically affected by a downturn in the economy. Those companies involved in the necessary areas of life are considered defensive. In addition to the choices given-- tobacco, food, and clothing-- soft drink and candy companies are examples of defensive stocks. Construction, mining, steel, and heavy equipment manufacturing companies are dramatically affected by an economic downturn.
A registered representative, when selling a limited partnership, is NOT required to: Certify that the customer is an institutional investor as defined by SRO rules Certify that she has disclosed that the investment has a lack of liquidity Make sure the customer has a net worth to sustain a total loss of the investment Make sure this type of limited partnership is suitable for the customer
a A registered representative would be required to certify that she informed the customer of all relevant facts relating to the lack of marketability and liquidity of the limited partnership. In addition, after obtaining information about the customer's investment objectives, financial and tax status, other investments, and future financial needs, the RR must have reasonable grounds to believe the customer has sufficient net worth and income to lose his entire investment, or has other liquid assets. The RR must certify that the customer is suitable, and is in a financial position to be investing in this limited partnership. There is no requirement to certify that the customer is an institutional investor. There is a difference between an accredited investor (having at least $1,000,000 net worth or $200,000 of annual income), which is defined under Regulation D, and an institutional investor (a financial institution or an account with at least $50,000,000 of invested assets), which is defined by FINRA.
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 I and III I and IV II and III II and IV
a 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 option positions is an example of a spread? Buy an XYZ June 60 call and sell an XYZ June 65 call Buy an XYZ June 60 call and buy an XYZ June 60 put Buy an XYZ June 60 call and buy an XYZ June 65 put Sell an XYZ June 60 call and sell an XYZ June 60 put
a A spread is defined as the simultaneous sale and purchase of two options of the same class (same stock and same type of option), but it will have different strike prices and/or expirations. A long straddle is defined as the simultaneous purchase of two options that have the same expiration and strike price, but consist of one call and one put. A short straddle is defined as the simultaneous sale of two options that have the same expiration and strike price, but consist of one call and one put. Choice (b) is a long straddle and choice (d) is a short straddle. A combination is similar to a straddle, however, the strike prices and/or expirations must be different. Choice (c) is a long combination.
Company AZX has announced a partial tender offer for Company BHQ. A shareholder of Company BHQ is long 1,000 shares of stock and long 2 BHQ puts. For the purpose of tendering shares, the stockholder may tender: 1,000 shares 800 shares 500 shares 300 shares
a An investor who holds stock in a company that is the subject of a tender offer may tender only stock that he holds long. Short tendering is not permitted. The long puts do not affect the client's net long position. If a shareholder had written call options positions against the long stock, the options positions will reduce his net long holdings in the stock.
Because of its multiplier effect on the economy, the Federal Reserve Board is reluctant to change: The reserve requirement Margin requirements The discount rate Its open market policy
a Changing bank reserve requirements has a multiplier effect. This means that a small change in the reserve requirement can have a large effect on the money supply and the economy. This makes the results of changing the reserve requirement difficult to control, and the FRB is hesitant to use this tool.
A new municipal bond issue has a total par value of $80,000,000. A member of the underwriting syndicate has sold its entire commitment of $10,000,000. If the syndicate is organized as a divided (western) account and there is an unsold balance of $2,000,000, what is the member's remaining liability? 0 $250,000 $1,250,000 $2,000,000
a In a divided account, a member is responsible for selling only its participation. The member's responsibility ends once the firm has sold its $10,000,000 commitment. In an undivided (eastern) account, a syndicate member retains liability for unsold bonds. Regardless of the amount of bonds sold, the member is still liable for an amount of bonds equal to its percentage participation.
Which of the following statements is TRUE concerning the suitability of a Section 1035 exchange? Exchanges made within 36 months of a previous exchange are generally considered inappropriate The exchange is suitable if the new contract provides a higher return New surrender periods are not considered important when making an exchange The representative need not sign off on the recommended exchange
a In order for a 1035 exchange to be considered appropriate, the individual must benefit from the new contract, and the representative must sign off on its suitability. Exchanges made within 36 months of a previous exchange are generally considered inappropriate. Higher returns do not guarantee suitability. Surrender periods on the new contract are one of the major factors in determining suitability.
A customer has purchased a new municipal issue during the underwriting period. According to MSRB rules, the customer must receive which TWO of the following documents? The final confirmation showing the aggregate price A copy of the notice of sale A copy of the official statement, if prepared A list of syndicate members I and III I and IV II and III II and IV
a MSRB rules require that a copy of the official statement be sent to each purchaser of a new issue. A confirmation must be sent on every transaction, whether a new issue or a secondary market trade. A copy of the indenture and a list of the syndicate members do not need to be sent.
Which of the following choices is found in a variable annuity but not in a mutual fund? Mortality expenses A management fee A sales charge Administrative expenses
a Mortality expenses are charged against the account to provide the death benefit found in annuities, as well as to cover the cost of potentially providing the annuitant with payments for life. All other expenses or fees can be found in both mutual funds and annuities.
Public orders on a designated market maker's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63. If the designated market maker wanted to offer stock, what is the highest price at which he may offer the stock? 42.62 42.63 42.64 42.88
a On the offer side, the DMM must be willing to sell for at least one cent lower than the offer on his book. There is an offer of 42.63 on his book. He must offer at least one cent lower, which is 42.62.
A fundamental analyst is NOT interested in which TWO of the following metrics? Short interest The P/E ratio Trading volume EPS I and III I and IV II and III II and IV
a Short interest and trading volume are technical indicators. EPS and the P/E ratio are fundamental indicators.
One of your clients who makes a comfortable living, has set aside funds in a money-market account in case of emergency and has contributed the maximum amount to her company's 401(k) and her IRA. She is looking to set aside additional funds for retirement and would like a vehicle that does not subject her to taxation on any growth until she begins taking distributions. Which of the following choices would be most suitable for your client? A variable annuity Variable Life Insurance A Roth IRA A 529 Plan
a Since your client has already contributed the maximum to her retirement plans, contributing to a variable annuity would be her remaining retirement option. While the contributions would be after-tax, the account will grow tax-deferred and will not be taxed until she begins taking distributions. She would not be eligible to contribute to a Roth IRA. While variable life insurance has investment characteristics, it is used to provide death benefits and not for retirement purposes. 529 plans are used to satisfy the need to cover higher education expenses.
Which of the following choices is Standard and Poor's (S&P's) best rating for a municipal note? SP-1 SP-3 Aaa AAA
a Standard and Poor's best rating for notes is SP-1 and its worst rating is SP-3. AAA is S&P's best rating for bonds.
The Bond Buyer Revenue Bond Index is: A 30-year index A 20-year index A 25-bond index A 30-bond index I and III only I and IV only II and III only II and IV only
a The Bond Buyer Revenue Bond Index (commonly referred to as the Revdex) is an index of the yields on 25 revenue bonds. It is compiled on a weekly basis by The Bond Buyer and contains 30-year maturity bonds with an average rating on S&P of A+ and on Moody's of A1.
Which one of the following persons is permitted to purchase an equity IPO in her personal account? The cousin of a registered representative The mother-in-law of a registered representative A portfolio manager of a mutual fund A person employed by an insurance company who buys and sells securities
a The prohibition against IPO purchases by restricted persons includes: Member firms and any associated person (i.e., an employee) of the member firm. An immediate family member of an employee of a member firm if the equity IPO is purchased from the employee's firm or there is material support between the immediate family member and the employee of the member firm. 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. Portfolio managers, which include persons who can buy or sell securities on behalf of institutional investors (e.g., banks, investment companies, investment advisers, insurance companies, savings and loan institutions), as well as anyone whom they materially support. These are people who are in a position to direct future business to the firm, which is the reason for their restricted status. They also may not purchase equity IPOs in their personal accounts. Since, under the rule, a registered representative's cousin is not considered an immediate family member, she is permitted to purchase an equity IPO.
An investor is long 1,000 shares of XYZ at $32 per share. The current market value of XYZ is $38. While the investor believes the stock is not likely to fluctuate over the next few months, she also feels the long-term outlook is bullish. Which of the following positions will allow the investor to increase the portfolio's yield without increasing the downside risk? Short 10 XYZ 40 calls Long 10 XYZ 40 calls Short 10 XYZ 40 puts Long 10 XYZ 40 puts
a This investor is a perfect candidate to establish a covered call position. Since she owns 1,000 shares of XYZ, 10 XYZ calls could be sold in her account without exposing her to the risk of having to go to the market to purchase stock should the calls be exercised. The total premiums received will reduce the amount she needs to receive when ultimately selling XYZ to recover her initial investment ($32 per share). Also, since she believes the stock is not likely to fluctuate over the next few months, she is not overly concerned that XYZ will appreciate to a point at which the short calls will be exercised ($40). If the investor had purchased either the calls (b) or the puts (d), it would have cost her money. While selling the puts (c) would generate income, it would expose her account to the risk of having to purchase 1,000 shares of XYZ at $40 per share if the puts were exercised.
Currency values in a floating-rate system are established by: Supply and demand for the currency Government regulations The World Bank The International Monetary Market
a Under a floating-rate system, currency values are established by supply and demand for the currency. Supply and demand for a currency may be influenced by the country's rate of inflation, level of interest rates, gold reserves, and trade deficit. The opposite of a floating-rate system is a fixed-rate system whereby countries agree to a currency exchange rate that will not fluctuate.
What information would NOT be found on a municipal bond confirmation? Whether the bonds are subject to the alternative minimum tax (AMT) Whether the bonds are subject to state income tax Whether the bonds were issued as original issue discount securities Whether the bonds are subject to federal income tax
b A municipal bond confirmation must disclose certain tax information such as whether the bonds are subject to the alternative minimum tax (AMT), whether the bonds are issued as an original issue discount security, and whether the bonds are subject to federal income tax.
Municipal bond unit investment trusts do NOT include which of the following characteristics? Investors can buy units in the fund, usually in multiples of $1,000 The certificates have coupons attached and are in bearer form Investors can redeem the units at any time through the fund's trustee The value of the unit will decline if interest rates rise
b All of the characteristics listed are true, except that the certificates have coupons attached and are in bearer form. Some unit investment trusts are funds that buy bonds for a portfolio and usually hold the bonds until maturity. The life of these funds is usually limited to the life of the bonds in the portfolio. Units can be bought in multiples of $1,000. The units can be redeemed at any time. If the general level of interest rates change, so will the price of the units. The funds are issued in book-entry form and registered form.
A registered representative writes a letter to see if his clients have any interest in trading options. The letter is generic and describes the advantages and disadvantages of options trading. This letter: Must be approved prior to use by a ROP Need not be approved prior to use as long as it does not contain recommendations Must be accompanied by a risk disclosure document Need not be accompanied by a risk disclosure document I and III only I and IV only II and III only II and IV only
b All retail communications concerning options must be approved by a ROP prior to being sent to a customer. Since there are no specific recommendations, the OCC disclosure document does not need to precede or accompany the letter. However, the customer must receive the risk disclosure document at or before the account is approved for options trading.
The major disadvantage to a limited partner in a DPP is: Lack of control Lack of liquidity Flow through of income and expense Limited liability
b An investor has limited control (management) in equity investments and no control (management) in bond or DPP investments. The major disadvantage of a DPP is the lack of liquidity, meaning that the investor cannot easily sell his portion of ownership.
Which of the following statements BEST describes a banker's acceptance (BA)? It facilitates the trading of foreign stocks in the United States It helps to finance foreign trade between importers and exporters It is used by a municipal issuer in raising funds to meet a seasonal need for cash It is issued by nondomestic banks and is secured by Eurodollar deposits
b Bankers' acceptances (BAs) help facilitate foreign trade. ADRs permit the trading of foreign stocks in the U.S.
Which TWO of the following activities are typically performed during the cooling-off period of an initial public offering (IPO)? A preliminary prospectus is prepared by the issuer The issuer will publish research on the securities to be offered The SEC reviews the issuer's registration statement and evaluates the investment merit of the issue The issuer and underwriters hold a due diligence meeting I and III I and IV II and III II and IV
b During the cooling-off period, the SEC will review the issuer's registration statement for completeness. The SEC does not evaluate (pass on) the investment merits of the issue. Also, during the cooling-off period, the issuer will blue-sky the issue, send out a preliminary prospectus, and hold a due diligence meeting. Research is not permitted to be published by a broker-dealer until after the effective date of an IPO.
A registered representative is sending an e-mail to banks and investment advisers in anticipation of a new product being offered by the firm. This is defined as a(n): Correspondence Institutional communication Retail communication Public appearance
b FINRA's Communications with the Public Rule defines different types of communication. Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn). An institutional investor under this rule is any bank, S&L, insurance company, registered investment adviser or investment company (mutual fund), any person with total assets of at least $50 million, government entity, employee benefit plan, any member firm or registered person of the firm, and any person acting solely for any institutional investor. Since the e-mail is being sent only to institutional investors, it is defined as an institutional communication.
Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT: They trade in the over-the-counter market All are government guaranteed Short-term securities are quoted on a discount yield Long-term securities are quoted as a percentage of par
b Government-sponsored enterprise securities are not guaranteed by the government. The other statements are true.
Which TWO of the following statements regarding straddles are TRUE? An investor who does not anticipate that the price of the stock will change may sell a straddle An investor who anticipates a substantial advance in the price of a stock will buy a straddle An investor who anticipates a substantial decline in the price of a stock will buy a straddle An investor who anticipates substantial fluctuations in the price of a stock will buy a straddle I and III I and IV II and III II and IV
b If investors wish to generate premium income, they will consider selling a straddle in order to generate income on both the put and the call. They will sell the straddle only if they do not anticipate significant price changes in the market price of the underlying security. The investor who anticipates significant changes in the price of a stock, but does not know if the price will advance or decline, will buy a straddle in order to be able to profit on both sides of the market. An investor who anticipates a substantial advance in the price of a stock will buy a call. An investor who anticipates a significant decline in the price of a stock will buy a put. Neither investor will buy a straddle if they anticipate that a price will move in only one direction, since the premium will be lost (assuming they are right) on the other side of the market. For example, an investor anticipates that XYZ stock will advance from $50 to $80. If a straddle is bought and the price did advance, there would be a profit on the call but there would be a loss of the entire put premium.
Which TWO of the following actions may an RR engage in when selling shares of a mutual fund? Tell a customer to invest in a family of funds to take advantage of a breakpoint Sell dividends Explain that the exact value can be determined at redemption Allow a customer to sign a letter of intent two months after his initial investment I and III I and IV II and III II and IV
b Selling dividends means to suggest purchasing shares just prior to the ex-date and is a violation of securities rules since it does not benefit the investor. A letter of intent may be backdated up to 90 days. When redeeming shares, the price is based on the next calculated NAV so it is not known at the time of redemption. A family of funds allows an investor to take advantage of breakpoints although investing in more than one fund.
A married couple both have full-time jobs and are covered by their employers' pension plans. If they file a joint tax return and each wanted to open an IRA: They may open a joint IRA to consolidate their savings Each may do so in separate accounts and may contribute up to $5,500 in each account Each may do so in separate accounts with the maximum contribution for both accounts combined being $11,000 They would be prohibited from doing so since each is covered by their companies' pension plans
b Since they both have earned income, they may each establish an IRA and contribute $5,500 to each account. Joint accounts are not permitted for IRAs. A person who is covered by a corporate pension plan may continue to make contributions to an IRA.
Structured products may: Offer returns linked to equity securities Not offer returns linked to commodities Not offer returns linked to interest rates Be formulated to provide principal protection I and III I and IV II and III II and IV
b Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to equity securities, commodities, or interest rates. The products may also be structured to provide principal protection. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.
The Dow Theory states that a major trend is confirmed when which of the following indicators reach new highs or lows? The S&P 500 Index and the NYSE Composite Average The Dow Jones Industrial Average and the Dow Jones Transportation Average The Dow Jones Industrial Average and the Dow Jones Utility Average The Dow Jones Composite and the NYSE Composite Average
b The Dow Theory holds that a confirmation of a bullish or bearish trend is made when the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction and reach new highs or new lows.
A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%. What is the minimum equity requirement for the short position? 0 $2,100 $9,000 $11,000
b The SRO minimum maintenance requirement for a short position is 30% of the market value. The market value is $7,000, and 30% of $7,000 equals $2,100.
Someone who wishes to hedge a portfolio of preferred stocks will: Buy yield-based puts Buy yield-based calls Write a yield-based straddle Write a yield-based combination
b The prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. Therefore, if the investor is concerned that rising interest rates will erode the value of the preferred stock portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based calls (which are yield-based options) increase in value when interest rates rise, also creating a viable hedge.
Which of the following actions by the Federal Reserve Board results in a decrease in the money supply? The purchase of securities in the open market The sale of securities in the open market A decrease in the discount rate A decrease in the reserve requirements
b The sale of securities by the Federal Reserve Board in the open market results in the withdrawal of reserves from the banking system, thereby decreasing the money supply. All the other actions by the FRB result in an increase in the money supply.
A customer makes an initial investment of $75,000 in a high-yield bond fund with a purchase of 3,850 shares. Over the next four years, the customer deposits another $48,000 and also reinvests $17,000 of distributions for a total of 2,895 additional shares. If the fund is currently valued at $26.51, what is the customer's cost basis using the average cost method? $19.48 $20.76 $20.90 $22.45
b To calculate the cost basis using the average cost method, divide the sum of all investments (including reinvested distributions) by the total number of shares owned by the investor. The investor purchased $75,000 of the fund, giving him 3,850 shares. Over the next five years, the customer deposited another $48,000 and also reinvests $17,000 of distributions for a total of 2,895 additional shares. The sum of all investments is $140,000 ($75,000 + $48,000 + $17,000) and the total shares owned is 6,745 (3,850 + 2,895). Therefore, the average cost is $20.76 ($140,000 ÷ 6,745). The current value of the fund is not relevant.
To diversify a corporate bond portfolio, which of the following factors is NOT a concern? Coupon Maturity Price Geographic location
c A corporate bond portfolio may be diversified with different issuers, coupons, maturities, and geographic locations. The price of the bonds does not help to diversify.
When trading equity securities, the term dark pool is BEST defined as trading: Prior to an exchange's normal market hours After an exchange ends its normal market hours Between investors, allowing them to buy and sell securities anonymously without quotes being displayed Between investors, allowing them to buy and sell securities anonymously with quotes being displayed
c A dark pool is a source of liquidity for large institutional investors and high-frequency traders, and this system would not disseminate quotes. The system can be operated by broker-dealers or exchanges, and allows these investors to buy and sell large blocks of stock anonymously. The objective is to allow these investors to trade with the least amount of market impact, with low transaction costs. Some dark pools provide matching systems and can also allow for participants to negotiate prices. Normal market hours are 9:30 a.m. to 4:00 p.m. and trading outside these times is referred to as extended-hours trading.
Which of the following choices is NOT a reason for a broker-dealer to reject delivery of a municipal bearer bond? A mutilated coupon Lack of a legal opinion No endorsement by the owner Lack of a seal on the certificate
c A municipal bearer bond does not require endorsement (signature) by the owner.
The recommendation to purchase a private activity bond would NOT be appropriate for a: Husband and wife, both of whom have recently retired High-net-worth client who has an advisory account Client who is subject to the alternative minimum tax Client with a large portfolio of municipal bonds
c A private activity bond is a type of municipal bond in which the funds being raised will be used to benefit a non-public (private) company (e.g., an airport terminal for an airline). If the person receiving the bond's interest payment is subject to the alternative minimum tax (AMT), the interest is taxable at the federal level. For this reason, these bonds are the least suitable for a client who is subject to the AMT.
Which of the following securities may NOT be purchased in a discretionary account without prior written approval by the customer? An exchange-traded note A variable-rate demand obligation A direct participation program A collateralized mortgage obligation
c A registered representative may not purchase a direct participation program in a discretionary account without prior written approval by the customer.
An employee who is leaving a firm wishes to receive a distribution from a qualified pension plan so that she can move the funds into her IRA. Which TWO of the following choices will allow her to avoid withholding tax? The check is made payable to her The check is made payable to the IRA trustee The transfer is made on a trustee-to-trustee basis The transfer is made to the employee's personal bank account I and III I and IV II and III II and IV
c A withholding tax of 20% may apply when a person moves funds from one retirement account to another. Withholding tax can be avoided when funds are transferred from one retirement account to another. There are two methods of transfers, one in which the funds are sent directly between custodians (trustee-to-trustee) and the other is when the check is made payable to the new trustee. If the check is made payable to the plan participant, it is defined as a rollover and a withholding tax may apply. Funds from a retirement plan may not be transferred directly to the employee's personal bank account.
An accountant earns $200,000 and wishes to make the maximum IRA contribution for himself and his nonworking spouse. He can contribute a maximum of: $5,500 and it must be in his name $5,500 and it must be in the wife's name $5,500 in her account plus $5,500 in his account $11,000 in a joint account
c An individual with earned income and a nonworking spouse may contribute a total of $11,000 for himself and his wife. However, the contribution must be made in two separate accounts, each housing $5,500.
Buy-stop orders or sell-stop orders can provide all the following features, EXCEPT: Provide price protection for a short position Provide price protection for a long position Give a broker discretion when the order is activated Possibly cause a fluctuation in the market price of a stock
c Buy-stop or sell-stop orders do not give a broker discretion when the order is activated. When activated, the order becomes a market order and should be executed immediately. All of the other choices are correct.
For tax purposes, corporations may exclude a portion of the dividends received from: Municipal bonds Corporate bonds of other corporations Preferred stocks of other corporations Common stocks of other corporations I and II only II and III only III and IV only II, III, and IV only
c Corporations may exclude a portion of the dividends received from equity investments in other corporations. This includes common stock and preferred stock.
When the economy is peaking, what will be the expected sequence of the next three stages of the business cycle? Trough Expansion Contraction I, II, III II, III, I III, I, II III, II, I
c Historically, the business cycle has moved sequentially through four stages. An expanding economy will peak once the supply of goods and services surpasses demand. As the economy contracts, demand for products decreases causing a reduction in business activity. The economy will bottom out (forming a trough), leading the way to expansion and the beginning of a new cycle. Thus, if the economy is at its peak, the next three stages in succession will be contraction (recession), trough, and expansion.
What is the SRO maintenance requirement on a $1 million short position of a 3x Inverse Gold Index ETF? $3,000,000 $1,000,000 $900,000 $300,000
c Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverage factor by the standard SRO maintenance requirement. In this case, the standard short requirement is 30% multiplied by a factor of 3, so the client must maintain a 90% margin. $1,000,000 x 30% = $300,000. $300,000 x 3 = $900,000.
All of the following documents must be accompanied or preceded by an OCC risk disclosure document, EXCEPT: Options research reports A standardized options worksheet discussing straddles Options advertising that appears in the newspaper Options sales materials discussing projections
c Options advertising is a type of retail communication, which must make the offer to send the OCC risk disclosure document upon the customer's request. Options retail communications must be approved by a registered options principal (ROP) prior to use. Options-related retail communications that discuss projections, must be approved by a ROP prior to use and preceded or accompanied by a risk disclosure document.
Compared to selling short, buying a put option: Requires a larger capital commitment Has a larger loss potential Does not require the client to arrange to borrow the stock Requires a margin account
c Short selling requires the deposit of margin, whereas the premium on a put is usually substantially less than the Regulation T margin requirement. On a short sale, the seller's risk is unlimited, whereas on a put purchase, the risk is limited to the premium. Although a short sale may be effected only if the stock can be borrowed under Regulation SHO, a put may be purchased at any time. Puts can be purchased in a cash account, while selling short requires a margin account.
A customer who has purchased an exchange-traded fund (ETF) may be extended credit by a broker-dealer: If the position has been held for at least 10 days If the position has been held for at least 30 days Immediately Under no circumstances
c Some investment companies, such as mutual funds, are marginable under Reg. T. However, they are considered new issues of securities. The Securities Exchange Act of 1934 prevents a dealer from extending credit on a new issue for at least 30 days. Once the mutual fund shares have been held for 30 days, these securities may be used as collateral for a loan in a margin account at the dealer. In this question, the client is purchasing an ETF, which is not considered a new issue. In this case, credit may be extended immediately.
The American Telephone Company announced in an ad in The Wall Street Journal that it intends to call for the redemption of all its outstanding 10% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. All of the following statements are TRUE about this redemption, EXCEPT: The company's outstanding debt will be reduced The company's interest expense will be reduced Dividends to the stockholders will be increased Investors redeeming the bonds receive a premium to the market price
c The effect of the redemption will be to reduce the company's outstanding debt, thereby also reducing the interest expense. Investors will receive 103 1/4 for redeeming the bonds, which is a premium to the 102 3/4 market price. The redemption of the bonds will not affect dividends paid to stockholders.
An XYZ Corporation convertible bond is selling in the market at $1,248.75. It is convertible at $30. XYZ common stock's market price is 37.50. The bond has been called at 103. Which of the following activities is the LEAST attractive alternative for a holder of the bond? Sell the bond Convert to common and sell the common Allow the bond to be called Convert common stock to a bond
c The holder could sell the bond and receive $1,248.75. If he converted, he would receive 33 1/3 shares ($1,000 par divided by $30 per share conversion feature) with a total value of $1,249.88 (33 1/3 x $37.50). The least attractive alternative is to allow the bond to be called and receive $1,030.
A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield? A 6.25% in-state municipal bond A 7.10% out-of-state municipal bond A 11.65% investment-grade corporate bond A 10.85% mortgage bond
c The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.10% and the equivalent taxable yield is 10.92% (7.10% / 65%). The investment-grade corporate bond has the best or highest after-tax yield.
Which of the following statements is TRUE concerning a customer who purchases an out-of-state original issue discount (OID) general obligation bond? Each year the customer will pay both federal and state income tax Each year the customer will pay only federal income tax Each year the customer will pay only state and local income tax The customer will not pay any tax
c The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amount accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on an out-of-state municipal security is exempt from federal tax, but subject to state and local income tax. The tax rate is based on the state in which the customer maintains his primary residence.
An investor purchased 100 shares of ABC stock at $53 and on the same day purchased an ABC June 50 put at 2. After the put expired, the investor sold the ABC stock at $60. The investor's: Cost basis for tax purposes was 53 Cost basis for tax purposes was 55 Profit was $500 Profit was $700 I and III only I and IV only II and III only II and IVonly
c When a married put (stock and put purchased on the same day) expires, the premium is added to the cost basis of the stock. The cost basis, therefore, will be $55 (53 + 2). The sale at $60 results in a profit of $5 per share (60 - 55), for a total of $500.
An uncle is the custodian for a nephew's account. When the nephew reaches majority, the uncle: May continue to be the custodian Must compensate the nephew for any losses incurred in the account during the time the uncle was the custodian Must transfer all the securities in the account to the nephew Must sell all securities at current market prices
c When the nephew reaches majority, the uncle must transfer all the securities in the account to the nephew.
A customer requests that a broker-dealer sell stock that she owns and use the proceeds of the sale to purchase a different stock. In determining the amount of markup that he will charge, the broker-dealer: Must consider each transaction separately May charge a markup on the sale only Should only consider the amount of money involved in the sale to the customer Is prohibited from charging a markup under these circumstances
c When the proceeds of the sale of one stock are used to purchase another stock from the same broker-dealer, the transaction is called a proceeds transaction. In determining the markup the broker-dealer will charge, industry rules state that the firm should consider only the amount of money involved in the sale to the customer.
A municipal bond trader who is looking for assistance in buying or selling a specific municipal bond issue in the secondary market will MOST likely use: The Wall Street Journal The Bond Buyer The OTC Pink Market A broker's broker
d A broker's broker is a primary source for a quote in the secondary market and assists the trader in finding the best price on a specific issue. The Bond Buyer and The Wall Street Journal are publications and do not provide quotes or pricing information on specific municipal bonds traded in the secondary market. The OTC Pink Market provides quotes for securities not listed on the NYSE or Nasdaq.
Which of the following choices is not a good delivery in the sale of 500 shares of common stock? One five-hundred-share certificate Five one-hundred-share certificates Ten fifty-share certificates Four fifty-share certificates and ten thirty-share certificates
d Delivery must be made in 100-share certificates, multiples of 100, or any combination that adds up to 100 shares. In choice (d), four certificates of fifty shares would be acceptable, but 10 thirty-share certificates would not be, since 30-share certificates cannot be combined to add up to 100 shares.
A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling currently trading at par and the stock is selling at $39.00. If the bond increased in value by 20 points, what is parity of the stock? $25.00 $30.00 $40.60 $48.00
d If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity price for the stock is found by dividing the market value of the bond ($1,200) by the conversion ratio of 25 ($1,000 or par value ÷ $40). This is equal to $48 ($1,200 ÷ 25 = $48). The current price of the stock is not relevant.
Which of the following statements is TRUE regarding dividend and capital gain distributions of mutual funds? They may be combined to determine the total yield The taxes may be deferred if they are invested in additional mutual fund shares Dividends are taxed as long-term capital gains They can be reinvested automatically in additional shares if the shareholder chooses to do so
d Of the choices listed, the only true statement regarding dividend and capital gain distributions from an open-end investment company (mutual fund) is that they can automatically be reinvested in additional shares if the fundholder chooses to do so. They may not be combined to determine yield. The taxes must be paid in the year that the distribution is realized, even if the distribution is reinvested. Qualified dividends are taxable at a maximum rate of 20% regardless of how long the fund is held and nonqualified dividends are taxed as ordinary income. Long-term capital gain distributions are taxable as long-term capital gains regardless of how long the fund shares are held.
Which of the following advantages is NOT a benefit of owning a real estate investment trust? Stable dividend income The ability to buy and sell shares easily Diversification Protection against rising interest rates
d Real estate investment trusts (REITs) offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange, offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income earnings securities become more attractive.
An investor selling a combination will profit if the price of the underlying security is: Rising Falling Volatile Neutral
d Selling a call and a put on the same security with different strike prices, or different expiration dates, is a short combination. The client expects the underlying security to trade within a narrow range or be neutral.
A DEF corporation convertible bond is convertible at $40. DEF common is selling at $50. At what price should the bond be selling for it to be at a 10% premium to the common? 80 88 125 137 1/2
d Since the bond is convertible at $40 a share, the bond can be converted into 25 shares of common stock ($1,000 par value divided by $40 per share). If the bond is converted, the total value of common stock will be $1,250 (25 shares x $50 market value). A 10% premium to the parity price is $1,375 ([10% x $1,250] + $1,250).
An investor owns 4,000 shares of common stock that pays a quarterly dividend of 35 cents. If the investor purchases 500 additional shares prior to the first ex-dividend date of the year, what is the investor's expected annual income from the investment? $1,400 $1,575 $5,600 $6,300
d The annual income from the common stock is determined by multiplying the annual dividend by the number of shares owned by the client. Since the additional 500 shares were purchased prior to the first ex-dividend date of the year, the investor is entitled to four quarterly dividends on an ownership level of 4,500 shares. If the annual dividend is $1.40 (35 cents x 4), the annual income would be $6,300 (4,500 x $1.40).
The largest portion of the underwriting spread in a new municipal securities issue is the: Commission Additional takedown Concession Total takedown
d The largest portion of the underwriting spread in a municipal securities issue is the total takedown, which is made up of the additional takedown plus the concession.
A customer has a federal tax rate of 35% and a state tax rate of 5%. Which of the following investments would afford him the BEST after-tax yield? A 6.40% in-state municipal bond A 7.05% out-of-state municipal bond A 10.85% investment-grade corporate bond A 11.45% real estate investment trust (REIT)
d The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The investment grade corporate bond and REIT are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 40% for the in-state bond and the federal rate of 35% for the out-of- state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 40% combined tax rate. The municipal bond has a yield of 6.40%. 6.40% (Municipal Bond Yield) / 60% (100% - 40%) = 10.67% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.05% and the equivalent taxable yield is 10.85% (7.05% / 65%). The REIT has the best or highest after-tax yield.
Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which of the following bonds is most likely to be refunded? 5 1/2% callable in 2024 @ 103 6 1/2% callable in 2023 @ 100 7% callable in 2024 @ 103 7 1/2% callable in 2023 @ 100
d The most common reason for a municipality to refund an outstanding issue is to save interest costs. If a municipality can borrow money at a lower rate than the outstanding issue, it can use this money to refund the outstanding issue and thus save interest cost. The bonds are selling at a 7.00% yield. The municipality can then expect to borrow new monies at a 7.00% interest rate. The municipality can only save money by refunding an issue with a higher interest rate, 7 1/2% (choice d).
When making a presentation on 529 plans, what information is NOT required? Discussing the risks and costs involved with the different types of plans A disclaimer stating that, prior to investing in a plan, you should read the official statement A disclaimer that the client should check with her home state to learn if it offers tax benefits to those clients who invest in its plan The name and contact information for the municipal securities principal who will approve the customer's investment in the plan
d Under MSRB rules, an RR is required to disclose certain information when promoting 529 plans. The RR must discuss the risks and costs involved with the different types of plans, must provide a disclaimer stating that, prior to investing in a plan, the customer should read the official statement, and must provide a disclaimer that the client should check with her home state to learn if it offers tax benefits to those who invest in its plan. There is no requirement to provide the name and contact information for the municipal securities principal who will approve the customer's investment in the plan.
As it relates to an initial public offering, the term spread is BEST defined as which of the following? The amount of profit that a member of the syndicate will make when it sells a new issue to a customer The amount of the firm's markup or markdown to a customer who buys or sells a security The difference between the price at which a firm will buy a security and the price at which it will sell a security The difference between the price that an issuer will receive for its securities from its underwriter and the price that the public will pay for the securities
d When used in reference to an initial public offering, the spread represents the difference between the price that the issuer receives from an underwriter for its IPO and the price that a customer pays for the IPO (i.e., the public offering price or POP). For example, if the POP is $15.00 and the issuer receives $13.95, the spread is $1.05. Choice (c) is referring to the spread of a Nasdaq market maker which is 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. Choice (a) is not defined as the spread since it does not include the manager's fee component. 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.
A corporation declares a 2-for-1 stock split payable on November 30 to holders of record on November 1. The ex-date is December 1. The first day that the stock will trade without a due bill attached is: October 28 November 29 November 30 December 1
d Whoever is the stockholder of record on the record date (Nov. 1) will be credited with the additional shares resulting from the split. If that person liquidates the position prior to the ex-date (Dec. 1), the buyer must receive a due bill upon settlement of that trade. This is because on Dec. 1 the value of the stock will be cut in half. If the buyer does not receive the additional shares, then the position loses half its value on the ex-dividend date. The first day that the purchaser is not entitled to the additional shares is the ex-date, and this is the first day the stock will not trade with a due bill.
