Unit 1
A bond is convertible at $25. The market value of the stock is $30. What is the parity price of the bond?
$1,200 If a bond is convertible at $25, each $1,000 bond will convert to 40 shares. 40 shares × $30 = $1,200 parity of the bond
Harris sells 200 shares of BigCo stock short at $52 a share. Three months later he purchases 200 shares of BigCo at $45 to cover the short. What is the result of the trade?
$1,400 gain Harris sold the shares for $52 and bought them for $45, gaining $7 a share on the 200 shares for a total gain of $1,400.
A preliminary prospectus must include all of the following except
the underwriting contract.
All of the following are criteria for a Rule 147 (Intrastate Offering Rule) except
100% of the issuer's assets are located in the state.
Sales of Tier 1 securities under Regulation A require the distribution of
an offering circular.
If interest rates in general are rising, the price of T-bills should
fall.
The disclosure document most commonly used in a municipal securities offering is called
official statement.
Which of the following terms describe a third-market transaction?
Listed securities trading OTC
Three years ago, your client invested $10,000 in the RIF Fund. During this time, the fund has distributed $700 in dividends and $1,100 in capital gains, all of which have been reinvested in additional shares. If the client decides to liquidate his position of 1,173.452 shares when the POP is $12.00 and the NAV is $11.52, the client's cost base is
$11,800.00.
Three years ago, your client invested $10,000 in the RIF Fund. During this time, the fund has distributed $700 in dividends and $1,100 in capital gains, all of which have been reinvested in additional shares. If the client decides to liquidate his position of 1,173.452 shares when the POP is $12.00 and the NAV is $11.52, the client's cost base is
$11,800.00. A mutual fund investor's cost base is the total of all investments, including reinvested distributions. In this case, the initial $10,000 is increased by the $1,800 total of distributions.
Three years ago, your client invested $10,000 in the RIF Fund. During this time, the fund has distributed $700 in dividends and $1,100 in capital gains, all of which have been reinvested in additional shares. If the client decides to liquidate his position of 1,173.452 shares when the POP is $12.00 and the NAV is $11.52, the client's cost base is A) $11,100.00. B) $11,800.00. C) $10,000.00. D) $10,700.00.
$11,800.00. A mutual fund investor's cost base is the total of all investments, including reinvested distributions. In this case, the initial $10,000 is increased by the $1,800 total of distributions.
Your customer purchases a 6% corporate bond at 101. After one year the bond matures. What is the total return on this position?
5.0% The formula for calculating capital gains is income received plus gains (or minus losses) divided by cost basis equals total return. In this example the bond paid $60 in interest. The bond cost $1,010 and matures at par ($1,000). (60 - 10) / 1010.
A resident of a state who acquires stock pursuant to Rule 147 (intrastate offerings) is prohibited from selling the stock to a nonresident of that state for how many months?
6
Seabird Airlines pays a $1.20 quarterly dividend. If the current yield is 4% the stock must be trading at which of these prices?
A dividend yield is an annual figure. $1.20 × 4 = $4.80 (the annual dividend). Divide this figure by the yield (0.04) to find the market price of $120.00.
A best efforts underwriting where a minimum portion of the offer must be sold or the entire offer is cancelled is called what?
Mini/max
A company has negative operating revenues for the year. It would not be required to make interest payments on which of its following issues? A) Mortgage bonds B) Subordinated convertible debentures C) Adjustment bonds D) Collateralized debt
Adjustment bonds Adjustment bonds are sometimes called income bonds because they only pay interest when the company has sufficient income (as determined by the board of directors).
Under Rule 506(b) of Regulation D, when is advertising permitted?
Advertising (general solicitation) is never permitted under Rule 506(b).
A best efforts underwriting in which the entire issue must be sold or the entire offer is cancelled is called what?
All-or-none
ABC stock is quoted at 67.75 bid 67.85 ask. If an investor wishes to purchase one round lot from the broker-dealer, excluding commissions, the investor would pay
An investor purchases stock at the ask price or, in this case, at $67.85. Because the investor is purchasing a round lot, or 100 shares, the amount payable is $6,785 (100 × $67.85). A round lot is defined as part of the SIE.
Duration would be considered in evaluating which of the following investments?
Bonds
Which of the following is not true regarding Regulation A Tier 1 offerings?
Investors must be qualified investors
Which of the following is not true regarding Regulation A Tier 1 offerings? A) Investors must be qualified investors B) General solicitations are allowed C) Offering must not exceed $20 million D) The general public may invest
Investors must be qualified investors
Which of the following must be filed with the SEC to raise capital in a private placement?
Form D
Electronic communications networks are the primary venue for which market? A) Second market B) Third market C) First market D) Fourth market
Fourth market
Your customer likes to day trade stocks. On one day they make the following trades Buy 100 shares of ABC at 23½ Buy 100 shares of DEF at 45 Sold 100 shares of DEF at 46 Buy 200 shares of MNO at 6¼ Sell 200 shares of MNO at 6 What are the gain/loss results for the day?
Gain of $50 The customer made $100 on DEF and lost $50 on MNO (note that they traded 200 shares of DEF). They are still holding the ABC shares.
A client could be assured of federal government backing for an investment issued by which of the following entities?
Government National Mortgage Association
An investor is considering purchasing a bond. He has settled on either a 6% municipal bond offered by the state in which he lives or an 8% corporate bond offered by a company with headquarters in his state. He would like you to help him decide which bond will get him the greatest return for his investment. Which of the following items of information must you obtain before you can make a specific recommendation? A) How long he has been a resident of his state B) His tax bracket C) His county of residence D) What other securities he owns
His tax bracket
All of the following entities may issue municipal bonds except A)Territory of Puerto Rico. B)City of Little Rock, Arkansas. C)New York/New Jersey Port Authority. D)Holy Name Cathedral Church, Chicago.
Holy Name Cathedral Church, Chicago.
Which of the following would not trade in the money market? 1. Newly issued debentures rated Aaa 2. Treasury notes 3. Commercial paper 4. Treasury bonds maturing in six months
I and II
If a customer does not pay for securities purchased in a cash account within the stated time limit and owes the firm more than $1,000, Regulation T requires that the firm 1. freeze the account for 60 days. 2. freeze the account for 90 days. 3. liquidate the unpaid positions in the account. 4. close the customer's account.
II and III
When comparing a short-term bond fund to a long-term bond fund, which of the following is generally true? The short-term fund has a higher yield. The long-term fund is less volatile. The long-term fund has a higher yield. The short-term fund is less volatile.
III and IV
A bond is convertible at $25. The market value of the stock is $30. What is the parity price of the bond?
If a bond is convertible at $25, each $1,000 bond will convert to 40 shares. 40 shares × $30 = $1,200 parity of the bond
How soon after an investor purchases securities under Rule 147 (intrastate offer rule) may the investor resell the security?
Immediately
A single premium immediate annuity will pay $2,000 a month for life. What is the annuitant's greatest risk?
Inflation risk
Which of the following securities has a duration shorter than maturity? A) NewCorp, Inc., 8% 10-year bond maturing in 5 years B) DEF zero-coupon bond maturing in 8 months C) ABC zero-coupon bond maturing in 5 years D) Treasury STRIP maturing in 4 years
NewCorp, Inc., 8% 10-year bond maturing in 5 years Zero-coupon bonds, because they make no interim payments, have duration equal to maturity. A bond that makes interim payments has a duration that is shorter than its maturity. Only the NewCorp bond is interest-bearing.
According to the Conduct Rules, a FINRA member firm may give certain selling concessions to which of the following?
Other member firms
What happens to outstanding fixed-income securities when market interest rates drop?
Prices increase
Green Thumb Nurseries, Inc., is headquartered in Nevada and has stores throughout the state. Green Thumb wants to issue $100 million in secured bonds with the assistance of Washoe Securities acting as an underwriter. Washoe is a broker dealer registered in Reno, Nevada. Green Thumb intends to sell the security exclusively to investors from the same state. Green Thumb may receive an exemption from registering the offering with the SEC under which of these?
Rule 147
Which of the following statements is true of Treasury STRIPS? A) STRIPS are backed by the full faith and credit of the federal government. B) STRIPS may be stripped and issued by a securities broker-dealer. C) Investors may purchase it at its face amount. D) Its stripped-off interest coupons are retained by the federal government.
STRIPS are backed by the full faith and credit of the federal government.
Which of the following federal acts governs the issue of new securities?
Securities Act of 1933
Under federal law, which act regulates the activities of broker-dealers and associated persons?
Securities Exchange Act of 1934
Which of the following regarding T-bills is true?
T-bills trade at a discount to par.
In order to advertise a private placement offering, the issuer must do which of the following?
Take reasonable steps to insure all investors are accredited investors
Your customer purchased the common stock of GEM Corporation for $30 a share. The stock pays $1 in dividends annually. After the year the stock is trading at $35 a share. What is the total return for the holding period?
The formula for calculating capital gains is income received plus gains (or minus losses) divided by cost basis equals total return. In this example, (1 + 5) / 30 = 20%.
Which of the following statements is true of the Securities Act of 1933? A) The act only applies to listed securities traded over the counter. B) The act regulates exchanges and the OTC market. C) The purpose of the requirements for registration and a prospectus is to provide full disclosure of pertinent information to the public. D) The act is designed to facilitate fraud in the sale of newly issued securities.
The purpose of the requirements for registration and a prospectus is to provide full disclosure of pertinent information to the public.
A broker-dealer that buys a security for a customer and charges a commission for the service is acting as A) a dealer. B) a broker. C) an issuer. D) an underwriter.
a broker.
The New York Stock Exchange is characterized as A) an auction market where the lowest bid and highest ask prices prevail. B) an auction market where the highest bid and lowest ask prices prevail. C) a primary market where new issues are introduced at a preset bid price. D) a primary market where new issues are introduced at a preset ask price.
an auction market where the highest bid and lowest ask prices prevail.
Sales of exempt securities under Regulation A require the distribution of
an offering circular.
All of the following must be sold with a prospectus except A) an IPO of common stock. B) closed-end funds in the secondary market. C) closed-end funds in the primary market. D) open-end funds in the primary market.
closed-end funds in the secondary market.
The Securities Act of 1933 addresses A) Regulation T. B) the regulation of exchanges and the OTC market. C) the establishment of FINRA. D) full and fair disclosure.
full and fair disclosure The Securities Act of 1933 requires a prospectus and registration statement disclosing the relevant facts concerning a new issue to be filed with the SEC. The act further requires a prospectus to be distributed before or during a solicitation for sale so that a prospective purchaser will be fully informed and fairly treated.
An investor has secured bonds maturing in two weeks. He plans to purchase some unsecured bonds he has identified on the secondary market that have a 6% coupon rate. If interest rates decline before the investor can purchase the new bonds, he can expect the income he will receive from the new bonds to
remain at $60 per year.
The market price of a convertible bond depends on all of the following except
the conversion prices of bonds from similar companies.
The first date on which the buyer would not be entitled to receive a declared dividend being paid by a corporation is
the ex-date.
Under Rule 506(c) of Regulation D, advertising is permitted when
the issue is limited to accredited investors.
