Series 7 Tutor sessions
Formula for Tax-Equivalent Yield
municipal yield/(100%-tax bracket)
Define the two stages of Prospectus (what do they show?)
(FILED WITH SEC) Preliminary/RedHerring: (Investor interest) Final/Summary: (Share Quantity and pricing) IPO released
Net overall debt of a municipality is A) net direct debt plus overlapping debt. B) funded debt plus overlapping debt. C) net direct debt minus overlapping debt. D) funded debt minus overlapping debt.
A Explanation Net overall debt of a municipality is defined as net direct debt plus overlapping debt.
with two puts, the one with the _________ strike price has the higher premium Why?
A put with a higher strike price has a higher premium because a put represents the right to sell
Define Surrender charge -How many years
A surrender charge is a fee levied on a life insurance policyholder upon cancellation of their life insurance policy. The fee is used to cover the costs of keeping the insurance policy on the insurance provider's books (replacement of commissions that would be earned on the NOW sold securities) (before 7-10 years)
Ask vs Bid who buys and who sells
ASK: -company sells/Investor buys BID: -Investor sells/Company buys
Suitability Know your client what are the 5 points you're looking for?
Age Income Investment objective Risk tolerance Time horizon
KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an antidilution feature. If KLM declares a 10% stock dividend, the new conversion price will be A) $50.00. B) $22.73. C) $22.50. D) $45.45.
B Explanation Before the stock dividend, an investor would have received 40 shares of stock for each $1,000 bond ($1,000 / $25). A 10% stock dividend would now give an investor 44 shares on conversion (40 shares + 10% = 4 shares more). $1,000 / 44 shares = $22.73 per share for the new conversion price.
Define: (which is most important; when is it declared?) declaration date ex-dividend date record date payment date
Declaration: Board of Directors announces the next dividend payment to shareholders. (Declared Quarterly) Ex: two days BEFORE the record date qualifies you. Record: who is eligible to receive the company's future dividend payment. Payment: date on which corporate cash is actually paid to shareholder as a dividend.
What are the following formulas? -Network/Equity -Working Captial -Retained earning
Equity/Networth= total assets - total liabilities Working Capital= Current assets - Current liabilities (current is 1yr or less) Retained earning= Net income - dividend
Define the following STOCK FUNDS -Equity -Growth/income -Sector fund (% needed) -Blend/core -Asset Allocation -International vs Global -Target date
Equity: Blue chip/Preferred stock Growth/income: increase capital appreciation and value stock Sector fund: 25% Blend/core: diff classes of stock (diversify risk) Asset Allocation: balancing/reallocating to hit % goal International: foreign only Global: both foreign and US based Target: 401k/529 (starts aggressive, ends conservative)
EPIC and IPEC When is it reversed to
Export buy Puts Import buy Calls Import buy Puts Export buy calls Because there are no options on the U.S. dollar, the Swiss company should buy calls on its own currency to hedge In other words, EPIC works in reverse if the question is dealing with a foreign company. Then it is IPEC for Importers buy Puts and Exporters buy Calls.
Define differences: Fixed vs Variable Annuity -Payment source/security -SEC -Risk
Fixed: -guaranteed return (percentage) -No SEC -inflation risk (% same $ change) Variable: -Hybrid (Insurance contract/market returns) -YES SEC (license for both securities and insurance) -value-based on separate mutual fund account; pay for life -Market risk (mutual fund portfolio could go down)
Define Fundamental vs Technical Analysis
Fund: (Company earnings)- measure a security's intrinsic value. Tech: (price and volume movements of stocks) statistical trends
Define GNMA vs FNMA/FHLMH -What do they invest in? -Are they backed? -When do they pay? -What are their main risks?
GNMA: -invest in basket of mortgages -Gov backed (Can't lose more than what you put in) -Pay monthly -Reinvestment/refinance risk (if IR Down) FNMA/FHLMH -invest in basket of mortgages -Privately owned; Not backed (Can lose everything) -Pay semi-annually -Reinvestment/credit/market risk
What are the three types of companies -Give examples of each -What do they track?
Growth: companies ahead of the economy (Tesla) Cyclical: Tracks w/ economy (manufacturing/automotive) Defensive: Steady throughout (Food/pharma)
Define Index investing Value investing Dollar cost averaging
Index Investing: -index mutual fund or exchange traded fund (ETF) that itself closely tracks the underlying index/overall market Indexing seeks to match the risk and return of the overall market, on the theory that over the long-term the market will outperform any stock picker. Value Investing: Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Avg: Investors put in a fixed dollar amount into an investment on a regular schedule (Same $ amount buys different #share depending on Market value)
Define Act of 1940-what did it do, who was it for
Investment advisors (B/D and Advisors) -fiduciary duties of investment companies. -must register with the SEC before they can offer their securities in the public market. -
What are the two ways to get income (investment objectives) What are their respective %'s (3 in total)
Long term capital gain (15% reg, 20% corp) through dividends and fixed rates Interest (30%) through bonds
Define: (CALCULATED BASED ON) Nominal Yield (NY) Current Yield (CY) Yield-to-maturity (YTM) Yield-to-maturity (YTC)
NY: Calculated based on the actual dollar amount of interest paid on the bond annually. CY: Calculated based on the current market value of the bond. YTM: difference between the purchase price and par value. YTC: reflects the overall return on the bond if it is called away prior to maturity.
Which gov debt value on 1/32 of a point? Solve the ex: What is 90-16/32 and 90-4/32
Notes and Bonds -16/32 = 900.50 -4/32 = 900.125
Open-end investment companys are always priced at what? Which is higher (Nav/Ask)? what % is max sales charge?
Open-end investment companies are always priced at net asset value (NAV) plus sales charge (if any). Ask is Higher is a maximum sales charge of 8.5%
Pricing methods Open vs closed end funds
Open: forward pricing principle That is, whenever an order, whether to purchase or redeem shares, is received, the price is based on the next computed NAV per share. closed-end companies, they trade in the secondary markets at prices determined by supply and demand.
sales charge is always a percentage of the _____ -How is it calculated?
POP, not the NAV. (100%-sales charge)
Treasury Securities List the three, time, trading points Par?
Par: 1000 Bills: (odd duck) 4-52 weeks (1yr), trades at discount, pays at maturity (no interest) Notes: 1-10 years trades on bid of 32nd of point Bonds: 10-30yrs trades on bid of 32nd of point
Define STRIPS vs TIPS -backed? -Principal vs Coupon
Strips: (discount) Zero-coupon; bonds that have had the interest payments stripped away and sold separately, -principal amount is still paid out at maturity (at par). -backed by the full faith and credit of the U.S. government; good cash flow TIPS (principal protected): Consumer price index that pays (semi-annually) on inflation -(coupon stays, principal changes) -protects against purchasing power/inflation risk
What is the formula for Tax equivalent yield
Tax free muni yield DIVIDED BY (1-Tax rate)
Define Act of 1933-what did it do, who was it for?
The primary market (Companies), Create transparency in the financial statements of corporations, and laws against misrepresentation and fraudulent activities in the securities markets.
What is the cum-rights (with rights) formula? When would it be used? EX: The terms of the offering require six rights plus $60 to purchase one share. With the stock's current market price at $74 per share
Used to find value before ex-rights market price minus the subscription price divided by the number of rights it takes to buy one share plus one. (74-60) DIVIDED BY (6+1) =2
Define double taxation
corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just like individuals. When corporations pay out dividends to shareholders, those dividend payments incur income-tax liabilities for the shareholders who receive them, even though the earnings that provided the cash to pay the dividends were already taxed at the corporate level. When Corporations are taxed on earning and on dividends to shareholders
FDIC insures only up to $__________ with negotiable jumbo certificates of deposit
$250,000
Define Rule of 72
72 divided by expected growth rate EQUALS number of Years for your money to double
A technical analyst is least concerned with A) declaration of increased dividends. B) open short positions. C) new highs and lows. D) trading volume.
A Explanation A technical analyst is interested in statistics about market or price performance, not the fundamental factors, the market, or the company's dividend policy. Technical analysts are interested in trading volume as a market statistic, new highs and lows, and open short positions, which could indicate future buying potential in the security.
A customer is long 200 shares of MTN at 30 and 400 shares of DWQ at 20 in a margin account. If the debit balance in the account is $8,000, and the customer sells 200 DWQ shares for $4,000, the credit to special memorandum account (SMA) is A) $2,000. B) $4,000. C) $1,000. D) $0.
A Explanation Because this account is below 50% margin, the account is restricted ($6,000 equity divided by $14,000 market value equals 42.8% equity). When securities are sold in a restricted account, 50% of the proceeds are released to SMA. Because $4,000 worth of securities were sold, $2,000 (50%) is credited to SMA.
A customer sells short 1,000 XYZ at 60. Three months later, XYZ is at 44. Which two of the following strategies are the most likely the customer would use to protect her unrealized gain? Sell 1,000 XYZ 45 stop Buy 1,000 XYZ 45 stop Buy 10 XYZ Mar 45 calls Buy 1,000 XYZ 45 stop limit A) II and III B) I and III C) II and IV D) I and IV
A Explanation In this short position, the customer currently has an unrealized gain of 16. She stands to see her unrealized gain begin to erode if the stock price rises, so she could enter a buy stop order above 44 to allow herself to buy and cover her position if a price rise occurs. Purchasing calls would also be effective, because the right to exercise would allow the investor to buy stock at 45 and protect a gain of 15 points less the premium paid. If the buy stop at 45 is correct, why isn't the buy at 45 stop limit correct as well? Good question. Remember, when a stop limit order is triggered, the order becomes a limit order. When the stock rises to 45 (or higher), the customer now has a buy at 45 limit which means pay no more than 45. Once triggered, the stock may never get as low as 45 and the customer's order to buy will not be executed.
Toby Jensen originally purchased 400 shares of CSC stock on margin at a price of $60 per share. The initial margin requirement is 50%, and the maintenance margin is 25%. CSC stock price has fallen dramatically in recent months, and it closed today with a sharp decline, bringing the closing price to $40 per share. Based on FINRA requirements, will Jensen receive a maintenance margin call? A) No, the account meets the minimum maintenance margin requirement. B) Yes, because the account is below the house maintenance requirement. C) Yes, the account does not meet the minimum maintenance margin requirement. D) No, the account meets the minimum initial margin requirement.
A Explanation Minimum maintenance requires equity equal to 25% of the current market value. If the price per share is $40, then the value of the 400 shares is $16,000. That would make the minimum equity requirement $12,000. The initial purchase was $24,000 resulting in a debit balance of 50%, or $12,000. If the LMV is $16,000 and the debit balance is $12,000, the account is right at the minimum maintenance level. Toby might be below the house maintenance, but because that is not given in the question, there is no way to tell.
With no other positions, a customer sells short 100 TIP at 40 and sells 1 TIP Oct 40 put at 5. At what stock price will the customer break even? A) $45 B) $50 C) $35 D) $40
A Explanation On the downside, the short position fully covers the short put, and the profit is the $500 premium. On the upside, above $40, the short put expires, and the short stock position loses money. The first five points of loss (40 to 45) on the short stock position are offset by the premiums received. Above $45, losses begin and are potentially unlimited. The other way to look at this is with the T-chart. When the stock is sold short, $4,000 is credited to the account. When the put is sold, $500 is credited to the account. That means $4,500 has been credited. How much needs to go on the debit side (the other side of the T to make things even?) $4,500, so when the stock rises to $45 per share, the investor breaks even. Anything above that and losses begin.
An investor owns ten ABC 6s of 2045. The debentures have a conversion price of $50 with an anti-dilution provision. After ABC distributes a 20% stock dividend, the investor's position will be A) ten ABC 6s of 2045 with a conversion price of $41.67. B) ten ABC 6s of 2045 convertible into 16.67 shares. C) ten ABC 6s of 2045 convertible into 20 shares plus forty additional shares. D) twelve ABC 6s of 2045 with conversion price of $50.
A Explanation This question deals with the anti-dilution provisions of a convertible security. When there is a stock dividend or a stock split, the holder of the convertible maintains the same equity proportion as before. With a conversion price of $50, the debenture is convertible into 20 shares ($1,000 ÷ $50). After a 20% stock dividend, the holder should be able to acquire 20% more shares. That makes the security convertible into 24 shares. Divide the $1,000 par value by 24 shares and the conversion price is now $41.67.
What type of order provides that market activity can cause activation, but it is possible that the trade itself may or may not be executed? A) A stop limit order B) A market order C) A stop order D) An open buy order
A Explanation With a stop limit order, if the stock price trades at or through the specified stop price, the order will be triggered or activated and become a limit order. But remember, a limit order may not be executed because the limit price may never be reached.
A corporation is having a rights offering. The terms of the offering require six rights plus $60 to purchase one share. With the stock's current market price at $74 per share, the theoretical value of one right before the ex-rights date is A) $2.00. B) $0.20. C) $0.23. D) $2.33.
A value before ex-rights, it means we use the ;cum-rights (with rights) formula that is, the market price minus the subscription price divided by the number of rights it takes to buy one share plus one. Plugging in the numbers gives us ($74 - $60) ÷ (6 + 1) = $14 ÷ 7 = $2.00.
Define a real estate investment trust (REIT) -Managing style -which market -tax
A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and over the counter, which provides liquidity. The IRS does not permit tax deferrals on REIT investments.
Define Tender Offer
A tender offer is a public solicitation to all shareholders requesting that they tender their stock for sale at a specific price during a certain time. The tender offer typically is set at a higher price per share than the company's current stock price, providing shareholders a greater incentive to sell their shares.
An investor purchased a municipal bond at par to yield 5.5% to maturity. If, two years later, she sold the bond at a price equivalent to a 5% yield to maturity, the investor incurred A) a capital loss. B) a capital gain. C) taxable interest income. D) no taxable result at this time.
B Explanation Because the investor sold the bond at a price that will yield less than the yield when she purchased the bond, the bond must have been sold for more than the investor paid for it. Therefore, the investor profited by that difference. Remember, the higher the price, the lower the yield.
You have a client who plans to liquidate some CDL stock to help pay for an upcoming family vacation. When checking the account record, you find the following transactions: Jan 4, 100 shares @ $48 Feb 8 100 shares @ $39 May 11, 200 shares @$43 The client needs about $4,000 and the CDL is currently selling for $44 per share. From a tax standpoint, you should probably recommend that the client A) sell half of the shares purchased on January 4 and half of the shares purchased on February 8. B) sell all of the shares purchased on January 4. C) sell 100 of the shares purchased on May 11. D) sell all of the shares purchased on February 8.
B Explanation By using FIFO, the default method of the IRS, and selling the shares purchased in January at $48 per share, the client realizes a loss of $400. Selling either of the others results in a short-term capital gain, taxed at ordinary income rates. Don't get hung up on the fact that the investor will receive $300 more than needed— the question is looking for tax considerations.
The Profligate Perpetual Growth Fund's prospectus states that the fund meets the Investment Company Act of 1940's qualifications of a diversified management company. If the fund has net assets of $1 billion, A) no more than $50 million can be invested in the voting shares of any single issuer. B) no more than $300 million can be invested in the voting shares of any single issuer. C) no more than $100 million can be invested in the voting shares of any single issuer. D) no more than $250 million can be invested in the voting shares of any single issuer.
B Explanation Diversified management companies must follow the 75-5-10 rule. That means, of 75% of the fund's net assets, no more than 5% of the fund's total assets can be in the voting shares of a single issuer. There are no restrictions on the other 25%; it can be invested as desired. Five percent of the $1 billion total is $50 million. The other 25% of the total assets ($250 million) can be invested in this stock without limitation. That makes the total possible investment into the voting shares of one issuer 30% of the total net assets or $300 million.
A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) an intermediate-term government bond fund. B) an intermediate-term, high-grade corporate bond fund. C) a long-term government bond fund. D) a large-cap growth fund.
B Explanation In all these cases, liquidity should not be a problem because mutual funds have a seven-day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolios offer that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection.
One of your customers would like to purchase a government agency security for the UTMA account of her daughter. The daughter worked in construction over the summer and would like to use $1,275 of her savings for the purchase. Securities issued by which of these agencies could be purchased for this account? A) Federal Home Loan Mortgage Corporation B) Federal National Mortgage Association C) Federal Farm Credit System D) Student Loan Marketing Association
B Explanation Of this group, the only agency that would be able to sell $1,275 of securities is Fannie Mae. Their securities are available with a minimum denomination of $1,000 and then increments of $1. FHLMC also has the $1,000 initial minimum, but with $1,000 increments. The same numbers apply to the FCS, and Sallie Mae's minimum is $10,000. Another agency that would have met the investor's need is GNMA.
Which of the following mutual funds should an investment adviser representative recommend to a corporate client whose objective is current income with moderate risk? A) Aggressive growth fund B) Preferred stock fund C) Money market fund D) High-yield bond fund
B Explanation Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high—rather than moderate—degree of risk.
A customer buys five municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has A) a $50 capital loss. B) a $50 capital gain. C) a $100 capital loss. D) a $100 capital gain.
B Explanation The premium on the municipal bonds must be amortized. The tax rules require that when you purchase a bond at a premium, you have to reduce the cost basis of the bond each year. Even though there are five bonds in the question, here's the math on one bond and then we'll multiply by five to get the total amount. The investor buys the bond at 104 or $1,040 and the bond is due to mature in 20 years. Take the $40 premium divided by the 20 years to maturity and that will tell us the amount that we amortize/reduce the cost basis by each year. $40/20=$2. It then tells us that the bond is sold after 10 years. Ten years of amortization is $2 per year x 10 years = $20. That lowers the basis of the bond to $1,020 ( $1,040 - $20 = $1,020). The bonds are sold at 103 or $1,030, so the gain is $10 per bond times five bonds for a total gain of $50.
Define Beta Vs Alpha
BETA (RISK/VOLATILITY) is an indication of the volatility of a stock, a fund, or a stock portfolio in comparison with the market as a whole. (1+ Beta is higher risk) Alpha (RETURNS/VALUE) shows how well (or badly) a stock has performed in comparison to a benchmark index.
On the morning of the ex-date for a cash dividend, which of the following orders on the order book will not be reduced? A) Sell stop B) Sell stop limit C) Sell limit D) Buy limit
C Explanation It is sell limit and buy stop orders that are placed above the market and are not reduced. Orders entered below the prevailing market [unless marked DNR (do not reduce)] are reduced on the morning of the ex-date by the amount of the cash dividend. Those orders are buy limits and sell stops, including sell stop limits.
Define efficient market theory: what are three arguments to why it may be incorrect? Assuming the theory is correct, what should investors do?
Beating/predicting the market (either through technical or fundamental) is impossible because stocks are already accurately priced (reflecting all relevant info/data) 1. people interpret information differently; thus different stock valuations 2. Stocks take time to act on new information; first-come gets best benefit 3. Stock prices can be changed due to human emotion/errors assume: Investors should place all assets in index funds that match the overall returns of the market
A registered representative has a client who wants to save for college for her child. The child will be entering college in five years. This would be an example of A) planning too late. B) tactical asset allocation. C) an investment constraint. D) an investment objective.
C Explanation Time constraints include such conditions as liquidity and time horizon, both of which are in play here. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer. This is an investment goal, not an investment objective.
A customer wants to buy $12,000 worth of stock using other marginable securities owned as collateral for the purchase. With Regulation T at 50%, what must the current market value of the securities deposited be? A) $18,000 B) $6,000 C) $12,000 D) $24,000
C Explanation Stock buys stock dollar for dollar. With $12,000 worth of fully paid marginable securities, the customer can borrow $6,000 against them. The $6,000 can be the 50% initial requirement for the additional $12,000 purchase.
An investor wishes to invest $5,000 into the KAPCO Balanced Fund, an open-end investment company. How many shares will the investor receive if the next computed NAV per share after receipt of the order is $41.30 and the fund has a sales charge of 4%? A) 43.021 B) 116.414 C) 116.225 D) 121.065
C Explanation The investor will pay the POP (public offering price) of $43.02 per share. That price is computed by dividing the NAV of $41.30 by (100% ‒ 4%). Remember, the 4% sales charge is a percentage of the offering price, not the NAV. Dividing the $5,000 investment by the POP of $43.02 results in a purchase of 116.225 shares.
The dividend payout ratio of common stock is found by dividing the annual dividend per share by A) the book value. B) the market price. C) the earnings per share. D) the capitalization per share.
C Explanation The key to the question is ratio, which in this case is the relationship between dividends per share and their source of earnings per share.
A municipal bond is purchased at a discount in the secondary market at 90. The face amount is $10,000, and the bond has 10 years to maturity. If the bond is sold for 97 after five years, what is the taxable gain? A) Capital gains not taxable B) $300 C) $200 D) $700
C Explanation When a municipal bond is bought at a discount in the secondary market, the discount is accreted and taxable as ordinary income. Accretion increases cost basis. Therefore, five years later, the bond's cost basis is 95. At that point, the customer has a two-point capital gain. Had the bond been bought as an original issue discount, the annual accretion is considered interest income and is not taxable.
If a customer gives his broker-dealer an order to sell his stock if it falls to or below 69 and will not accept a price below 69, the order is A) a stop order. B) a sell limit order. C) a stop limit order. D) a buy limit order.
C Explanation When an order is entered this way, the client has specified that it should not be triggered until the stock is at or below 69, a stop order. Because the client will not accept an execution below 69, it is a stop limit order.
Name the five objectives for investors
Capital Appreciation Growth Value Income Capital preservation
Define Conduit theory of Taxation -Who are the two examples
Conduit theory states that an investment company that passes all capital gains, interest, and dividends to its shareholders shouldn't be taxed at the corporate level. -S corps and LPs
Define the Objectives of these BOND FUNDS -Corp -Tax-free (2) -ETF's: -Leveraged -Inverse
Corp: high risk, higher reward without stock Tax free: muni or UIT (unit investment trusts) ETF's: balance funds that trade like stock, cheaper than mutual funds and are passively managed Leveraged: multiply returns Inverse: Preform opposite of the market benchmark
An investor owns $100,000 of convertible bonds with a conversion price of $50. By depositing these bonds into her account, how many covered calls could she write? A) 50 B) 2,000 C) None D) 20
D Explanation A covered call means that the seller of the options has 100 shares (every option) of stock to cover each call. These bonds are convertible into 20 shares for each $1,000, making a total of 2,000 shares. At 100 shares per contract, that's enough stock to cover 20 calls.
A mutual fund's expense ratio is found by dividing its expenses by its A) public offering price. B) income. C) dividends. D) average annual net assets.
D Explanation A mutual fund's expense ratio is calculated by dividing its expenses by its average annual net assets.
An underwriter in an Eastern syndicate has a 15% participation. The underwriting is for $20 million, and the underwriter has sold its $3 million allotment. The underwriting closes with $1 million remaining unsold. This underwriter's liability is WHAT IF IT WAS A WESTERN? A) $15,000. B) $0.00. C) $1,000,000. D) $150,000.
D Explanation An Eastern syndicate is an undivided account. That means that each member is responsible for its share of any unsold portion. This underwriter's commitment is 15%, so that percentage of the $1 million remaining is $150,000. If this were a Western syndicate (divided), the underwriter would have had no liability.
A fundamental analyst is reviewing GEMCO's financial statements. The company has a current ratio of 4:1, a price-to-earnings (P/E) ratio of 12:1, $10 million in 5% debentures, and net income after preferred dividends of $4 million. If the current market price of GEMCO stock is $60 and the company pays dividends at a rate of $0.75 quarterly, the dividend payout ratio is A) 20%. B) 5%. C) 40%. D) 60%.
D Explanation As with many computational problems, there is some unnecessary information given. The current ratio is irrelevant, and so is the information on the debentures. What is needed is the amount available to pay the common so that we can compare that to the amount actually paid. We see that $0.75 in quarterly dividends are paid. That is equal to $3 per year. The next key is determining the earnings. With a market price of $60 per share and a price-to-earnings ratio of 12:1, the earnings per share must be $5. The dividend payout ratio should be thought of as "dividends paid out of earnings made." The dividends paid are $3; the earnings made are $5. That is a 3 to 5 ratio, or, as usually expressed in percentage form, 60%.
An investor has a short margin account. The current market value of the stock is $1.50 per share, and the investor owns 1,000 shares. Compliance with SRO minimum maintenance requirements is met with account equity of A) $2,000. B) $1,500. C) $1,950. D) $2,500.
D Explanation For stock trading under $5 per share, a customer must maintain 100% of SMV or $2.50 per share, whichever is greater. $2,500 (1,000 shares @$2.50) is greater than 100% of $1,500.
Which of the following orders is reduced on the order book on the ex-dividend date for a cash dividend? A) Sell limit order B) Buy stop order C) Buy stop limit order D) Limit order to buy
D Explanation Only orders placed below the market price are reduced for cash dividends on the order book. Buy limits and sell stops are entered below the market price.
Under Rule 506(c) of Regulation D, advertising is permitted when A) the advertisements have been approved by a principal. B) the advertisements have been filed with FINRA. C) the issue is limited to accredited investors. D) there are no more than 35 nonaccredited investors.
D Explanation Rule 506 of Regulation D of the Securities Act of 1933 has two parts. Rule 506(b) prohibits any advertising of the private placement, while Rule 506(c) permits it. The primary condition to be met is that the issue is offered solely to accredited investors. It is Rule 506(b) that has a limit of 35 nonaccredited investors, but that has nothing to do with the advertising restriction. Regulation D applies to issuers, not broker-dealers, so there is no principal to go to for approval. In the same vein, because issuers are not FINRA members, filing with FINRA is irrelevant.
An investor has an established margin account with a current market value of $13,500 and a debit balance of $4,775, with Regulation T at 50%. How much excess equity does the investor have in the account? A) $4,775 B) $8,725 C) $13,500 D) $1,975
D Explanation The Regulation T requirement is 50% of the current market value of $13,500 ($6,750). Equity is equal to the current market value of $13,500 minus the debit balance of $4,775 ($8,725). Excess equity is calculated by subtracting the Regulation T requirement of $6,750 from the equity of $8,725 ($1,975).
The name of the FINRA system that tracks both NYSE and NASDAQ transactions is A) DMM (Designated Market Maker). B) TRACE (Trade Reporting and Compliance Engine). C) OATS (Order Audit Trail System). D) TRF (Trade Reporting Facilities).
D Explanation The TRF is the only FINRA system that tracks transactions on the NYSE and Nasdaq, including OTC (over-the-counter) transactions. OATS only tracks Nasdaq transactions. TRACE tracks corporate and government agency bond transaction in the OTC market. DMM's are the specialists who work at each of the trading posts on the NYSE. They are responsible for maintaining a liquid and orderly market for stocks.
An investor writes 10 ZPF April 70 calls at a premium of 3 for each contract and shorts 10 ZPF April 70 puts at a premium of 1 for each contract. This investor's strategy is _______ and what is the MAX PROFIT? A) a short combination. B) a bear spread. C) a bull spread. D) a short straddle.
D Explanation The customer has created a short straddle. A customer who writes (sells or shorts) a call and a put on the same underlying security, having the same strike prices and same expiration month, has created a short straddle. The investor's belief is that the market price of ZPF will remain stable and that will cause both options to expire. The investor's maximum profit is the combined premiums of $4,000 ($300 + $100) times 10 contracts.
ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should A) continue to hold the bonds and receive interest payments. B) convert the bonds into common and sell the converted shares. C) sell the bonds at the current market price. D) tender the bonds.
D Explanation The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50). Once the call date passes, the issuer ceases interest payments making it unattractive to continue to hold the bonds.
The minimum maintenance requirement on short stock selling above $5 is A) 50% of the market value or $5 per share, whichever is greater. B) the same as the initial margin requirement. C) 25% of the market value or $5 per share, whichever is greater. D) 30% of the market value or $5 per share, whichever is greater.
D Explanation The minimum maintenance in a short account is 30% of the market value or $5 per share (whichever is greater) for stocks trading above $5. For stocks trading below $5, the minimum maintenance is $2.50 per share or 100% of market value (whichever is greater).
Your firm has just assigned you a new client. Wanting to do the best job you can, you review the current investment holdings of the client. Included are the following mutual fund accounts: $50,000 in Class B shares of the STU Growth Fund $25,000 in Class A shares of the STU International fund $15,000 in Class A shares of the TUV Utility Fund STU and TUV offer rights of accumulation and breakpoints at $25,000, $50,000, and $100,000. If the client wishes to invest $20,000 into the Class A shares of the TUV Technology Fund, the sales charge would be based on A) the $100,000 breakpoint. B) the next computed net asset value. C) the $50,000 breakpoint. D) the $25,000 breakpoint.
D Explanation There are several important points in this question. Rights of accumulation provide that a new purchase is added to the value of existing accounts to determine the breakpoint reached. However, only Class A shares count because the Class B shares never paid a front-end load. Of course, only shares in the same fund family are used - we cannot combine STU shares with TUV shares. As far as the math, we have $15,000 in one TUV fund and are adding another $20,000. That brings the investor's account in TUV funds to $35,000, which is enough to meet the $25,000 breakpoint. Finally, the sales charge is computed as a percentage of the public offering price (POP), not the NAV.
A customer has a margin account with a market value of $20,000, a debit balance of $12,000, no special memorandum account (SMA), and Regulation T at 50%. If the customer sells $2,000 worth of stock, the amount released to SMA is A) $400. B) $300. C) $500. D) $1,000.
D Explanation This is an example of a restricted account with equity below the 50% Regulation T requirement. In a restricted account, 50% of the sale proceeds is released to SMA (50% × $2,000 = $1,000).
A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be A) $25.00. B) $40.00. C) $43.91. D) $25.25.
D Explanation To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1,010 / 40 = $25.25).
In a new margin account, a customer sells short 1,000 shares of XYZ at $30 per share and deposits the required margin. If the stock subsequently falls to $25 per share, the equity in the account is A) $15,000. B) $10,000. C) $25,000. D) $20,000.
D Explanation When selling short, the initial credit balance is the sum of the proceeds of the sale ($30,000) plus the 50% Regulation T margin requirement ($15,000) or $45,000. The beginning equity is $15,000 (CR − SMV = EQ, or $45,000 − $30,000 = $15,000). If the market value falls to $25,000, equity is determined as $45,000 minus $25,000 equals $20,000.
Last week, your customer's margin account showed SMA of $6,000. As of the close of business yesterday, the margin account client had a long market value of $50,000 and a debit balance of $40,000. This client A) will receive a maintenance margin call for $5,000. B) can meet the maintenance margin call by using a portion of the SMA. C) can meet the maintenance margin call by depositing $2,500 of paid for securities. D) will receive a maintenance margin call for $2,500.
D Explanation When the equity in a long margin account falls below 25% of the market value, the customer receives a maintenance margin call for the amount necessary to bring the account back to 25%. A market value of $50,000 requires at least $12,500 in equity. The account currently has only $10,000 in equity ($50,000 minus $40,000). Therefore, a call will go out for a prompt deposit of an additional $2,500. SMA cannot be used to meet a maintenance call, only an initial margin call. Depositing fully paid marginable securities is another option. In our question, it would be enough securities to bring the LMV in the account up to 4/3 times the debit balance. $40,000 × 4/3 = $160,000 ÷ 3 = LMV of $53,333.33. With LMV of $50,000, the additional needed is $3,333.33
Yield-based debt options are -What styled contracts -When exercised -what do they settle in
European-style contracts, meaning that they can only be exercised on the last day of trading. All yield-based contracts, when exercised, are settled in cash.
Gain or loss on the sale of the limited partnership is determined by comparing what? (difference between these two
Difference between sales proceeds and adjusted basis.
Discount bond: (structure) Premium bond: What is the formula for CY
Discount bond: YTC > YTM > CY > NY Premium bond: NY > CY > YTM > YTC CY: Annual interest DIVIDED by Market Value
What are the three phrases of fixed annuities? -Tax style? Until when?
Investors can buy a fixed annuity with either a lump sum of money or a series of payments over time. The insurance company, in turn, guarantees that the account will earn a certain rate of interest. This period is known as the accumulation phase. When the annuity owner, or annuitant, elects to begin receiving regular income from the annuity, the insurance company calculates those payments based on the amount of money in the account, the owner's age, how long the payments are to continue, and other factors. This begins the payout phase. The payout phase may continue for a specified number of years or for the rest of the owner's life. accumulation phase, the account grows tax-deferred.
Define market order limit order Stop Order Stop/Limit order
Market: Immediate price after hitting P (best Ask) investors who want to buy or sell a stock without delay Limit: specifies a certain price at which the order must be filled (no guarantee to fill) Stop: Triggers market order when a stock moves above or below a certain level; they are often used as a way to insure against larger losses or to lock in profits. Stop-limit: Hit price, becomes a limit order that will only execute at the limit price or better.
Define Regulation P-what did it do, who was it for
Privacy of Consumer Financial Information -protects against the misuse of private, non-public information for both companies and customers.
Define: (which DOES NOT identify exemptions from the registration statement and prospectus provisions of the Securities Act of 1933) Regulation A. Regulation D. Regulation U.
Regulation A Regulation D Regulation U regulates loans from lenders other than broker-dealers for the purpose of purchasing securities and is not related to exempt transactions under the Securities Act of 1933.
Define -reinvestment risk -Credit risk -Interest rate risk
Reinvestment: the chance that cash flows received from an investment will earn less when put to use in a new investment. Credit: a borrower will be unable to pay the contractual interest or principal on its debt obligations. Interest rate: change in overall interest rates will reduce the value of a bond or other fixed-rate investment
What are the three things Statistical analysis are based on? What are the two things that lead to that center?
Risk-------->CENTER<--------Return (3) Mean: avg Medi: middle Mode: most common
Rule 506 of Regulation D of the Securities Act of 1933 has two parts: -506(b) -506(c) Which allows private placing advertising? What is the primary condition to be met for offering demographic? Which one has a limit? Who does Reg D apply to? Relation to FINRA?
Rule 506 of Regulation D of the Securities Act of 1933 has two parts. Rule 506(b) prohibits any advertising of the private placement, while Rule 506(c) permits it. The primary condition to be met is that the issue is offered solely to accredited investors. It is Rule 506(b) that has a limit of 35 nonaccredited investors, but that has nothing to do with the advertising restriction. Regulation D applies to issuers, not broker-dealers, so there is no principal to go to for approval. In the same vein, because issuers are not FINRA members, filing with FINRA is irrelevant.
The increase of these two indicators of analysis indicates a BEAR market, and the DECREASE indicates a BULL market
Short interest (borrowed stock) & Odd lot (half shares)
Standby underwritings are used only for _________ underwritings.
Standby underwritings are used only for corporate underwritings.
Define bond/stock power
Stock: Stock power is a power of attorney form that transfers share ownership to a new owner. Bond: a separate legal form that authorizes the transfer of ownership of a registered bond from one party to another, without endorsing the actual bond certificate.
Define taxable event -Formula for shareholder equity, what side of the balance sheet is it on? Define Intrinsic value (formula) Define Time value (formula)
Taxable event is anytime you get a profit or a loss Shareholder equity= Assets - Liabilities (it is on the liabilities side of balance sheet) IV: MKT - Strike Time: Intrinsic - Prem
What are the tax benefits for LP/GP with Functional allocation?
The LPs receive the immediate tax write-offs from the intangible drilling costs, GPs receive continued write-offs from the tangible costs over the course of several years.
Define Act of 1934-what did it do, who was it for
The Secondary Market (BD & Agents) Created the SEC, registration and disclosure, ensure an environment of fairness and investor confidence.
What are the two measures of economic viability of a DPP? What's the difference?
Those are cash flow analysis and internal rate of return (IRR). Cash flow analysis compares the income to the expenses, not the debt.
