All three practice tests
If the strike price of a yield-based option is 62.50, this represents a yield of:
0.0625 To calculate the percentage yield of the underlying Treasury security, divide the strike price by 10 (62.50 / 10 = 6.25%).
Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which of the following are insiders for purposes of insider trading? -Attorney who writes an offering circular for a company. -An investor holding 4% of the company's stock. -The next-door neighbor of a board member of a company. -Brother of a company's president.
1 & 4 The Securities Exchange Act of 1934 defines an insider as an officer, director, or stockholder owning more than 10% of a company's outstanding voting equity. The definition also includes anyone else who has or could have access to insider information, such as immediate family members. Merely being someone's neighbor does not automatically classify someone as an insider. Any professional who takes part in preparing the registration statement is automatically considered to have insider information.
A specialist (designated market maker) must refuse: not-held orders. good-for-a-month orders. stop limit orders. market orders.
1&2 Specialists (designated market makers) cannot accept not-held orders or good-for-a-month orders. Not-held orders are the responsibility of floor brokers (commission brokers); these orders give the floor broker discretion as to time and price. Good-for-a-month orders are not standard orders. A time-qualified order must be day or GTC.
Leading indicators of economic growth.
A leading indicator predicts economic trends. Such indicators include steel shipments, stock market indices, manufacturing orders, and housing starts.
Which of the following statements regarding joint accounts/tenants in common are TRUE? Each party specifies a percentage of interest in the account. Each party has an equal interest in the account. The interest of a deceased tenant passes to the estate of the decedent. The interest of a deceased tenant passes to the co-tenant.
1&3 In a TIC account, each party must specify a percentage of interest in the account. If one party dies, his percentage of ownership passes to his estate, not to any other party to the account.
Which of the following may be affected when a company declares a cash dividend? Shareholders' equity. Total assets. Total liabilities. Current assets.
1&3 When a company declares a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Assets are not affected until the cash is paid out several weeks later.
U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are: clipped bonds. stripped bonds. subject to annual taxation on the per year accreted amount. subject to taxation at maturity.
2 & 3 U.S. government securities that are deposited with a trustee and against which certificates are sold representing principal payments only on the securities are referred to as Treasury STRIPS. These are zero-coupon bonds issued by the U.S. government and are subject to annual taxation on the per-year accreted amount.
A taxable gain or loss on a long call option transaction would be recognized when the option is purchased. the option expires. the option is sold. the option is exercised.
2+3 In addition to being exercised, call options can either be sold or allowed to simply expire. If either of these situations occurs, the owner of the call would determine his gain or loss (for tax purposes) at the time of expiration or sale. This would be determined by comparing what he paid for the call versus the price at which he sold the call. If it expires, the entire amount of the premium originally paid is considered a loss. Gains or losses are not determined at the time that calls are exercised. Once exercised, the underlying security must then be sold at the CMV. Then the owner of the call would calculate his profit or loss, taking into account the premium paid, what he paid for the stock, and what he subsequently sold the stock for.
A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. Which of the following statements are TRUE? For gift-tax purposes, the value of the gift is $3,000. For gift-tax purposes, the value of the gift is $7,000. The son's cost basis on the stock is $3,000. The son's cost basis on the stock is $7,000.
2+3 When making a gift of securities, the market value at date of gift is used to determine if any gift taxes are due. However, when making a noncharitable gift of securities, the donor's cost basis is passed to the recipient.
For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is: A) 25 odd lots. B) 25 round lots. C) 1 odd lot. D) 1 round lot.
25 round lots. For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading. Therefore all last sale information will be disseminated for any transaction of one share or more.
If a customer is short 100 XYZ shares at 54 and long 1 XYZ 55 call at 2, what is the maximum potential loss?
300 The customer has protected his short stock position from a market advance by purchasing the call. If the market rises, the call is exercised, allowing the customer to buy stock at the options strike price of 55 to cover the short position. Therefore, the most the customer can lose is $100 on the stock position (the difference between the option strike price and short sale price), plus the premium paid for the option ($100 + $200 = $300).
The secondary trading of securities is comprised of how many markets?
4. The secondary trading of securities takes place in four markets: the first market is listed securities traded on an exchange floor; the second market deals with unlisted securities; the third market is where listed securities trade over the counter; and the fourth market is where financial institutions trade directly with each other, utilizing electronic communications networks (ECNs).
A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is
5%. The current yield formula is annual dividends per share divided by current market price. The dividends per share are $36 million / 20 million shares = $1.80 per share. Current yield is $1.80 / $36.00 = 5%.
An official statement has a dated date of March 1, but the first interest payment is October 15. This most likely reflects:
A long coupon. This is a long coupon, and, after the first payment, subsequent payments will be made every 6 months.
A customer invests $20,000 in a DPP and signs a recourse note for $50,000. During the first year of operation, the customer receives a cash distribution from the partnership of $15,000. At year end, the customer receives a K-1 statement reporting his share of partnership losses of $75,000. How much of the loss may the customer deduct from passive income?
55,000 A limited partner can only deduct partnership losses to the extent of his basis. To determine basis, add the original investment ($20,000). to any recourse debt assumed by the investor ($50,000). Recourse debt adds to basis as the partner is liable for this amount. Cash distributions received reduce basis ($15,000). At year end, the investor's basis and the amount he can deduct from passive income is $55,000.
Money Market Maturity
A money market instrument is short-term debt with 1 year or less to maturity.
Nominal municipal bond quotation
A nominal quote is an indication of the approximate market value of a municipal bond, provided for informational purposes only. A nominal quote does not represent an actual bid or offer.
If an investment representative gave her retail customers copies of sales literature for a variable annuity she was recommending and promised to send the prospectus soon, which of the following statements are TRUE? She should not have distributed sales literature without the prospectus. It was okay to distribute the sales literature and send the prospectus later to those who were interested. She should not have recommended a specific variable annuity without having the prospectus available. Because she only answered questions about the investment, she was not required to provide a prospectus.
A prospectus must precede or accompany any solicitation, including distribution of sales literature to retail customers.
Front end sales load
A sales load is the difference between the public offering price and the net asset value per share of the fund.
Variable annuities
A variable annuity does not guarantee an earnings rate because earnings will depend on the performance of the separate account. However, it does guarantee payments for life (mortality).
At the open orders
An at-the-open order is to be filled at the opening price or not at all. An at-the-open order arriving later must be canceled.
Regarding rules addressing acting in concert, each of the following must observe position and exercise limits EXCEPT: A) two or more individuals who have an agreement to act together. B) an individual with accounts at several brokerage firms. C) a registered representative accepting unsolicited orders to exercise options. D) an investment adviser placing exercise orders for his discretionary accounts.
An individual investor or a group of investors acting in concert must observe position and exercise limits. These limits apply to an individual adviser acting for a group of discretionary accounts and to an individual who has accounts with several firms. Acting in concert does not apply to a registered representative (RR) simply accepting exercise order instructions from customers.
Regulation T
An investor may meet a Regulation T margin call either by depositing cash or by sending in securities equal to the loan value of the call. With Regulation T at 50%, the investor would have to deposit securities with a value equal to twice the amount of the call.
All of the following will affect SMA in a short account EXCEPT: A) a decline in CMV. B) the purchase of securities. C) appreciation of CMV. D) the sale of securities.
Appreciation of CMV. In a short account, the customer benefits if the CMV falls. If the CMV is falling, the equity is increasing, thus increasing SMA. If the CMV is rising, the equity is falling, with no effect on SMA.
A limited partner assisting the general partner to solicit new investors.
Could jeopardize his limited partner status. If limited partners, either individually or as a group, become too involved with the business of the partnership, they could be considered to be general partners and lose their limited liability.
The spread in a municipal competitive bid is the difference between the takedown price and reoffering price.
Bid refers to the winning bid and is the price the syndicate pays to buy the bonds from the issuer. The term "production" is a sales term and refers to the price at which the bonds are reoffered to the public. The difference between the two is the spread.
A UK company exports sweaters to the U.S. and will be paid in U.S. dollars on delivery. To hedge foreign-exchange risk using listed currency options, the UK company should: A) buy British pound calls. B) buy British pound puts. C) sell British pound calls. D) sell British pound puts.
Buy British Pound Puts. Normally, exporters buy puts on foreign currency in order to hedge. There are no listed currency options available on the U.S. dollar, so the British company should buy calls on its own currency.
If a Japanese exporter wants to hedge a recent sale of stereo equipment to a U.S. buyer, and the exporter will be paid in U.S. dollars upon delivery of the goods, the best hedge would be to: A) sell Japanese yen puts. B) buy Japanese yen puts. C) buy Japanese yen calls. D) sell Japanese yen calls.
Buy Japanese Yen Calls. The Japanese exporter will be paid in U.S. dollars upon delivery of the equipment. He would be adversely affected if the dollar dropped in value in relation to the yen. To protect his position he should buy calls on his own currency, the yen. Then, if the yen appreciates, his loss on the dollar is offset by his gain on the calls. Exporters buy puts on foreign currency to hedge, but there are no options on the U.S. dollar. The next best strategy is to buy calls on the home currency.
A customer sold 100 shares of QRS short when the stock was trading at 19. If QRS is now trading at 14, and he wants to protect his gain, which of the following orders should he place?
Buy stop at 14,25. A buy limit order is used to buy at a lower price (when the market moves down). A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading.
A customer is long 10 XYZ Jan 60 calls, and XYZ declares a 20% stock dividend. On the ex-date, the customer will have: A) 10 XYZ Jan 50 calls (100 shares per contract). B) 12 XYZ Jan 60 calls (120 shares per contract). C) 10 XYZ Jan 50 calls (120 shares per contract). D) 10 XYZ Jan 60 calls (100 shares per contract).
C When adjusting options contracts for stock dividends and fractional splits, the number of contracts held will not change. The number of shares covered by each contract is increased (100 shares × 120%) so that in this example each adjusted contract now represents 120 shares. The effective exercise price is adjusted so that the position value remains the same before and after the adjustment. Therefore the new strike price will be 50 ($6,000 / 120 shares = $50).
Mutual Fund Shares
Class A shares, in most mutual funds, provide breakpoint sales charge discounts so there is no sales charge when purchasing $1 million worth of shares (or less in some cases). Class A shares also have lower operating expenses than Class B shares. This retired investor would be subject to back-end loads with Class B shares if the funds were needed unexpectedly within a few years.
Commercial Paper
Commercial paper is short-term, unsecured corporate debt. It is issued and traded at a discount of face value and does not pay periodic interest. Like all zeroes, it is quoted on a discounted yield basis.
Under SIPC, when a trustee is appointed, customer claims are filed with the: A) failed broker/dealer's SRO. B) court-appointed trustee. C) Securities Investor Protection Corporation. D) Securities and Exchange Commission.
Customer claim forms are filed with the trustee.
An underwriting spread is the: A) amount a syndicate receives. B) amount a selling group receives. C) amount a managing underwriter receives. D) difference between an offering price and the proceeds to an issuer.
D A spread is the difference between the public offering price and the price an underwriter pays an issuer.
All of the following are oil and gas program sharing arrangements EXCEPT: A) reversionary working interest. B) functional allocation. C) disproportionate sharing. D) all or none underwriting arrangement.
D Functional allocation, disproportionate sharing, and reversionary working interest are all types of oil and gas sharing arrangements. All or none is a type of best efforts underwriting agreement.
The capital structure of an open-end investment company can include: A) only debt issues with no bank borrowing allowed. B) preferred and common stock with no bank borrowing allowed. C) preferred stock, common stock, and bonds. D) one issue of common stock and limited bank borrowing.
D Open-end investment companies may only issue redeemable common stock. Preferred stock, bonds, and other forms of senior securities are not allowed. Bank borrowing is allowed subject to certain limitations.
A short sale of stock directed to an exchange must observe all of the following EXCEPT: A) the locate requirement for borrowed shares. B) a minimum maintenance requirement of 30%. C) a margin requirement of 50%. D) the symbol "ss" on the consolidated tape.
D The symbol "ss" does not designate "short sale." It is used to identify stocks traded in 10-share units.
A retiree is paid an annual amount equal to 30% of the average of his last 3 years' salary. Which of the following retirement plans offers this type of payment?
Defined benefit. A defined benefit retirement plan establishes, in advance, the payout to be received by the retiree.
A syndicate member in a municipal underwriting wishes to place an order with the manager for its own portfolio. Under MSRB rules, an order for a related portfolio must be:
Disclosed to a manager. Disclosure is necessary to allocate orders. An order for a related portfolio will be accorded member status, the lowest priority.
Dollar Bond Quotes
Dollar bond quotes are based on a percentage of face amount (Par $1,000). Therefore, a quote of 85½ is 85½% of $1,000, or $855.
REIT's
Equity REITs can hold residential and commercial property, mortgage REITs hold mortgages on property, and hybrid REITs do both. Dividend disbursements made by the trusts are not recognized as qualified dividends and, therefore, will be taxable to the investor at their ordinary income tax rate.
Margin account sales
Equity is only affected by changes in market prices and never by sales of securities in the account.
A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account? A) Equity will increase. B) The debit balance will be reduced. C) Equity will remain the same. D) Market value will increase.
Equity will remain the same. Even though the investor receives more shares, the price per share falls; there is no effect on the market value of the customer's holdings.
Firm Quotes
Examples of firm quotes include: "It is 30-31," "We can trade it 30-31," "The market is 30-31," and "We will do it 30-31."
OATS
For an equity stock listed on Nasdaq, the source that would provide the most complete information regarding the handling of the order and its execution, including a timeline of all relevant entry and execution events, would be the Order Audit Trail System (OATS).
What ratio is normally considered adequate coverage of interest and principal charges for a municipal revenue bond?
Generally, a sound debt service (interest and principal) coverage ratio for municipal revenue bonds is 2 to 1. In other words, $2 of revenue is collected for every $1 of debt service.
Employer sponsored defined benefit plan
In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc.
An arbitration proceeding involving a customer in an amount over $100,000 has been agreed to. In such an arbitration dispute, which of the following is TRUE? A) Disputes in amounts greater than $100,000 are always heard by a single arbitrator. B) Both parties must agree before three arbitrators can be used in disputes involving amounts greater than $100,000. C) Only nonpublic (industry) arbitrators can be used for disputes in amounts greater than $100,000 D) The customer can request that all three of the arbitrators selected be from the public sector.
In disputes involving a customer for amounts greater than $100,000 three arbitrators will be used unless both parties agree to one. In the case where three arbitrators are used, the customer can request that all three arbitrators be selected from the public sector.
When a company issues additional bonds, which of the following is true? A) Leverage is decreased B) Leverage is increased C) It can not be determined only knowing that additional bonds have been issued D) Leverage is not affected when debt securities are issued
Leverage is the use of someone else's money at a fixed cost to benefit the common shareholders. Issuing additional bonds increases the company's debt (money borrowed from someone else) and therefore increases leverage for shareholders.
In determining a violation of position limits, short calls are aggregated with: A) short puts. B) all of these. C) long calls. D) long puts.
Long Puts Position limits are measured by the number of contracts on the same side of the market. Long calls and short puts are on the bull side; short calls and long puts are on the bear side.
An investor has losses on the sale of municipal bonds. Which of the following is TRUE for tax purposes? A) The losses can be applied only against gains on the sale of other municipal bonds. B) No losses on municipal bonds can be applied against gains on sales of any securities. C) The losses can be applied against the gains on the sale of any other security. D) The losses can be applied only against gains on the sale of other debt instruments (bonds).
Losses on the sale of one investment can generally be deducted against gains on the sale of any other investment.
Customer confirmation
MSRB rules require that all confirmations include the firm's capacity in the trade (agent/principal). The amount of the dealer's markup or markdown on a principal trade need not be disclosed. The commission on an agency trade must be disclosed. The official statement must include the location of the trust indenture and a statement that bondholders may review it if they choose.
A mutual fund that charges 12b-1 fees may use the money to cover all of the following EXCEPT: A) printing costs. B) promotion costs. C) sales fees. D) management fees.
Management fees. 12b-1 fees may not be used to pay for the portfolio manager's fees, only for sales promotions and fees, and other activities relating to the distribution of the fund's shares.
Which of the following orders are NOT placed on the order display book? Buy stop limit. Buy stop. Market. Not held.
Market and not held. Market orders are executed immediately and are not placed on the order book. Not held orders are not presented to the order book.
When do govt. agency securities settle?
Most government agencies are treated as a corporate issue. Trades of corporate securities settle regular way (in 3 business days).
If a customer purchases new stock from a syndicate member, they will pay no commission or markup.
New issues are sold at the public offering price without a commission or mark-up. In the secondary market, securities are traded on an agency basis (commission) or on a principal basis (mark-up or mark-down).
Newspaper quotes of mutual funds
Newspaper quotes of mutual fund shares always show the net asset value (NAV), often referred to as the bid price.
Which of the following statements regarding nonsystematic risk are TRUE? It is the risk that an individual stock will not perform well. It is the same as market risk. Diversification reduces it. Diversification does not reduce it.
Nonsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most nonsystematic risks.
A customer is considering adding a real estate investment trust (REIT) to their portfolio. They list all of the following as "plusses" or advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. What is NOT an advantage of investing in REITs?
Of those listed, only dividend treatment can be identified as not being an advantage. While the expectation of receiving dividends is inherently good, dividends paid by REITs to their shareholders are not recognized as qualified and are, therefore, taxable to the investor at their full ordinary income tax rate. The shares are traded on exchanges or OTC and considered liquid, and having professionally managed assets should be a plus. While real estate valuation and price movements are subject to many forces, historically, real estate has provided some hedge against the movements of other equity securities.
Reduced orders
Orders on the book adjusted on the ex-date for a cash dividend are those below the current market: buy limits and sell stops. The buy limit at 50 is marked DNR (do not reduce) so the only order reduced is the sell stop at 50.
In a portfolio containing common stock, preferred stock, convertible preferred stock, and ADRs, changes in interest rates would most likely affect the market price of the
Preferred stock has the closest characteristics to bonds and would be most affected by a change in interest rates. Convertible preferred stock would also be affected by price changes in the underlying common stock.
Public housing authority bonds
Public Housing Authority bonds are backed by the full faith of the U.S. government, which guarantees rent payments on these low-income properties.
Margin Suitability
Remember that while most firms require that options trades be done in margin accounts, options purchases are not marginable. Therefore, of the choices listed, the ability to meet margin calls would be the least considered factor regarding suitability.
Which of the following exemption provisions of the Act of 1933 may NOT be used for an initial offering of securities? A) Rule 147. B) Regulation D. C) Rule 144. D) Regulation A.
Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.
Rule 145
Rule 145 exempts (from registration) additional shares resulting from stock splits or stock dividends. Stock issued in connection with an acquisition must be registered, as must stock in an IPO.
What best describes a breakpoint sale?
Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission. A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint.
All of the following are advantages of buying a put versus selling stock short EXCEPT: A) buying a put has a lower dollar-loss potential than does selling stock short. B) one need not locate securities to be borrowed to buy a put. C) buying a put would require a smaller capital commitment. D) the put's time value, which gradually dissipates, is added to the intrinsic value.
Selling short could result in unlimited loss, whereas buying a put limits loss to the premium and requires a smaller capital outlay than does selling short. Remember that short sales must be done in a margin account and 50% of the short market value (SMV) is required to be deposited by the short seller. Short sales require locating the securities to be borrowed; buying a put does not. The time value that erodes in a put option is a disadvantage because for each day that elapses, the option's time value decreases.
Covered put writing is a strategy where an investor:
Sells a put on a stock he has sold short
When can one sell short?
Short sales can occur any time during the trading day, including the opening and the close. In this case, the sale would take place at the best bid, which is 15.25.
Which of the following listed option orders can be combined to form a spread order? Buy 1 XYZ Jul 30 put. Sell 1 XYZ Jul 35 call. Sell 1 XYZ Jul 35 put. Buy 1 ABC Jul 30 call.
Spreads are deemed to be of the same class; class is defined as the same underlying security and the same type of option. Choices II and III would be a short straddle. The ABC call cannot be combined with anything, since you'd be combining ABC stock with XYZ stock.
If a new customer is preparing to buy his first home within the next year, and his investment objective is aggressive growth, which of the following investments would be most suitable for your customer's portfolio? A) Blue-chip equity fund. B) Growth stocks. C) High-yield bond fund. D) T-bills.
T bills While his profile indicates aggressive growth, the fact that he will need his funds in a year or less to purchase a home is the major consideration. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund. Of the choices, T-bills make the most sense.
Technical analysis
Technical analysts are more interested in forecasting market trends and securities prices than in studying individual corporations. Therefore, they are concerned with market prices, trading volumes, changes in the Dow Jones Industrial Average, reversals, support and resistance levels, advance/decline lines, short interest, and many other factors that might help them time buying and selling decisions. Fundamental analysts, on the other hand, concentrate on a stock's intrinsic quality and are concerned with PE ratios and earnings per share.
5% markup policy
The 5% markup policy applies to secondary market transactions in nonexempt securities.
First interest rate to change if credit is tightened by the FRB
The Federal Reserve Board's actions to influence the money supply are first felt on the federal funds rates.
In a new margin account, if a customer buys 300 shares of XYZ for 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the margin call will be for:
The Regulation T requirement is $7,200 (50% × $14,400). There is no Regulation T requirement for writing covered calls. The requirement to establish both positions is $7,200. However, the question asked for the margin call (a margin deposit). The requirement of $7,200 is reduced by the premium income received ($300). By depositing $6,900, the customer will have $7,200 in the account, the difference being the premium income credited to the account on settlement date.
Agreement among underwriters
The agreement among underwriters describes the rights, duties, and commitments of the syndicate members regarding the securities being underwritten. It appoints the syndicate manager to act on behalf of the syndicate and includes provisions dealing with underwriting compensation (takedown and concession). The legal opinion is a document prepared by the bond counsel, and the appointment of the bond counsel is the issuer's responsibility. The agreement among underwriters does not include the legal opinion or the appointment of the bond counsel. The legal opinion and the appointment of the bond counsel would be found in the official statement.
MSRB rules and enforcement
The board's rules are enforced by FINRA for securities firms. The MSRB has rule-making authority but no enforcement or examination authority.
The bond resolution includes all covenants between the: A) issuer and the MSRB. B) issuer and the trustee acting for the bondholders. C) issuer and the bond counsel. D) bond counsel and the bondholders.
The bond resolution describes not only the characteristics of the proposed offering, but also the obligations the issuer has to its bondholders.
A 61-year-old wanting to take a lump-sum distribution from his Keogh will:
The distribution described here would be taxed as ordinary income. A 10% penalty would apply if the individual were under age 59½.
Which of the following would not be found within the protective covenants for a municipal revenue bond issue?
The issuer's rating. There are different sources for bond ratings but they would not be found within the revenue issues protective covenants. The municipality agrees to abide by the covenants and a trustee appointed in the bond indenture supervises the issuer's compliance with them. Some common covenants are: rate or fee (promise to maintain user fees high enough to pay expense and debt service) maintenance, insurance, additional bonds test, sinking fund, catastrophe, flow of funds, books and records, and call or put features.
The management fees paid by an investment company are part of: A) the operating expense of the fund. B) the custodial fees. C) the underwriting agreement. D) the sales load.
The management fees paid by an investment company are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement.
Minimum maintenance in a short account
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 customer owns 100 shares of DWQ trading at $50 per share. He hears that DWQ has declared a 25% stock dividend and wants to know how that will affect his holdings after the stock dividend is paid. You should advise the customer that based on the current price he will own
The number of shares increased by 25%, or 25 shares. Total market value remains the same. To calculate the new market price, divide $5,000 (total market value) by 125 to get the after-dividend price of $40 per share.
The time value of an option that is at-the-money equals
The option has no intrinsic value if the strike price equals the market price (at the money). The only value an option has is its time value, which equals the premium.
If an investor buys 1 DWQ Apr 70 call at 5, giving him the right to buy 100 shares of DWQ at $70 per share, which aspect of the transaction is NOT set or standardized by the OCC? A) Contract size of 100 shares. B) Premium of 5. C) Expiration date in April. D) Exercise price of 70.
The premium. The OCC sets standard exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market.
Registrars Function
The registrar's function is to ensure that the number of shares outstanding does not exceed the number accounted for on the corporation's books. The transfer agent records the names of stockholders on the corporation's books, cancels old shares, and transfers shares into a new owner's name.
The Federal Reserve sets which of the following? The reserve requirement The federal funds rate The prime rate Initial margin requirements for nonexempt securities
The reserve requirement and initial margin requirements for non exempt securities. The Fed is responsible for setting the reserve requirement, the discount rate, and the initial margin requirement for nonexempt securities. The federal funds rate, charged in bank-to-bank borrowing, is a market rate of interest. While it is heavily influenced by Fed action, it is not set by the Fed. and neither is the prime rate, which is the rate large banks charge their most creditworthy customers for unsecured loans.
All of the following statements are true regarding the federal Farm Credit System securities EXCEPT: A) the proceeds are used to make loans to farmers. B) interest is tax exempt at the state and local levels. C) they issue short-term notes and long-term bonds. D) they are direct obligations of the U.S. government.
They are direct obligations of the US Government. With the exception of Ginnie Mae, all agency securities are indirect obligations of the U.S. government.
FRB lowers rates
To spur the economy forward, the Federal Reserve Board lowers interest rates. Lowering the interest rates causes the prices of outstanding bonds to rise in the secondary market.
Federal Funds
Trades in securities backed by the federal government are settled in federal funds, not clearinghouse funds.
All of the following are covered under the Securities and Exchange Act of 1934 EXCEPT: A) trust indentures. B) margin. C) short sales. D) proxy solicitation.
Trust Indentures are covered under the trust indenture act of 1939.
529 and coverdell
Under Coverdell rules, an eligible educational institution includes colleges as well as elementary or secondary schools. Distributions from Section 529 plans are limited to higher education only.
Net revenue pledge
Under a net revenue pledge operations and maintenance expenses are paid before all debt service. Therefore payments go out to cover expenses in the following order: (1) operating and maintenance expenses, (2) debt service, (3) debt service reserve, and (4) surplus.
Warrants
Warrants are commonly used to make debenture offerings more attractive and have long lives (generally 2 to 10 years). Warrants need not be exercised, but may be traded in the secondary market.
Options and dividends
When adjusting options contracts for stock dividends and fractional splits, the number of contracts held will not change. The number of shares covered by each contract is increased (100 shares × 120%) so that in this example each adjusted contract now represents 120 shares. The effective exercise price is adjusted so that the position value remains the same before and after the adjustment. Therefore the new strike price will be 50 ($6,000 / 120 shares = $50).
A broker/dealer with a sales agreement with a mutual fund must return all concessions to the underwriter if a customer redeems his shares:
Within 7 Days of purchase. If any security issued by a mutual fund is tendered for redemption within 7 business days after the date of the transaction, the broker/dealer must refund to the underwriter the full concession allowed to the broker/dealer on the original sale.
The market attitude of a customer who establishes a debit put spread is
bearish
If your client has a $21,000 net capital loss this year and he plans to apply the maximum deduction toward his ordinary income for the year, after this year he may:
deduct a maximum of $3,000 per year and carry the remaining loss forward indefinitely. Capital losses may be used to offset capital gains. Once all capital gains have been offset, $3,000 of net capital losses may be used to offset ordinary income annually. Remaining losses may be carried forward in future years until the loss is exhausted.
Net overall debt of a municipality
is defined as net direct debt plus overlapping debt.
All of the following can be advantages of buying an option contract EXCEPT A) to limit risk B) to position against a written option C) time value dissipation D) leverage
time value dissipation. The purchase of an option allows an investor to speculate and fully participate in the price movement of the underlying security at a fraction of the cost of the shares involved, thus leveraging his investment. When used to position against a written option (a spread), the purchase of an option will reduce the risk of loss involved with a single written option. Used in conjunction with a securities position, the purchase of an option can act as an insurance policy to reduce the risk of loss (hedging); therefore, options offer all of these advantages but only for a limited period of time. As the contract gets nearer to expiration its time value dissipates. This is not considered an advantage of owning options contracts.