Customer Disclosure and Settlement Rules

What entity was created to maintain an electronic book entry record of stock ownership and to handle a high volume of daily transactions? A. DTC B. FINRA C. OCC D. MSRB

The best answer is A. Depository Trust and Clearing Corporation (DTCC, sometimes just called DTC), is owned by U.S. banks and brokerage firms. It is the central clearing house for stock and bond transactions, and also maintains custody of both physical certificated securities and electronic book-entry securities. The OCC (Options Clearing Corporation) performs a similar function for the options markets.

Aside from market movement, the price of a stock will fall as of the: A. morning of the ex-date B. evening of the ex-date C. morning of the payable date D. evening of the payable date

The best answer is A. On the morning of the ex-date, the price of a stock is opened reduced by the dividend amount. This is the first day where anyone purchasing the stock in a regular way trade will no longer get the dividend, so they don't pay for it! The regular way ex-date for stocks is set at the business day prior to the record date. Anyone who purchases on this date or later will no longer show on record to get that dividend.

All of the following dates are needed to compute the total purchase price of a municipal bond traded on a yield basis in the secondary market EXCEPT: A. dated date B. maturity date C. settlement date D. interest payment date

The best answer is A. When a municipal dealer gives a basis quote, he is promising the purchaser a certain yield on the bond. MSRB rules require that when the actual dollar price is determined, that the dollar price be computed to the lowest dollar amount of yield to call or yield to maturity. The only calls that are considered are optional calls, meaning the issuer has the option of calling in the entire issue at preset dates and prices, as set forth in the bond contract. This is an "in whole" call. The last interest payment date and the settlement date are needed to compute the amount of accrued interest. The dated date has no meaning for pricing a bond trading in the secondary market. It is simply the legal date of issuance of the bond, and is the date from which interest started accruing on the issue.

Which of the following would be found on a "when, as, and if issued" confirmation? I Trade Date II Settlement Date III Execution Price IV Amount of Accrued Interest A. I and II only B. I and III only C. II and IV only D. I, II, III, IV

The best answer is B. "When, as, and if issued" trades are used for new issues where the certificates are not as yet physically printed and delivered. For example, after a municipal syndicate wins a competitive bid, it will confirm sale of the issue to its customers with "when, as, and if issued" confirmations. When the securities are printed and delivered to the underwriter (about a month later), final confirmations will be sent and settlement will be take place 2 business days after final confirmation date. At the time of the "when issued" trade, the final settlement date is not known. Therefore, the amount of accrued interest due to the underwriters is not known. Of course, the trade date is known and the trade price is known at the time of the "when issued" confirmation.

A mutilated security is considered a good delivery if validated by the: I Issuer II Contra-broker III Customer IV Transfer Agent A. I only B. I or IV C. II or III D. II or IV

The best answer is B. A mutilated security is a "good delivery" if it is accompanied by a letter of validation from the issuer or transfer agent. It is not acceptable to have the customer or delivering broker tell you that the mutilated security is "OK."

A customer owns 1,000 shares of ABC preferred stock trading at $120 per share. Following a 2:1 common stock split, the customer will have: A. 1,000 shares at $60 per share B. 1,000 shares at $120 per share C. 2,000 shares at $60 per share D. 2,000 shares at $120 per share

The best answer is B. Be careful! Only common stock is affected by a stock split or stock dividend. The intent of a stock split or stock dividend is to reduce the price of the common stock to make it more marketable. It has NO effect on the preferred stockholder. Preferred stockholders receive a fixed dividend rate based on par value. Just like a bondholder, the price moves inversely to market interest rates. When there is a stock split or stock dividend, the price of preferred stock and bonds of that company are unaffected.

A customer owns 500 shares of ABC preferred stock trading at $90 per share. Following a 3:1 common stock split, the customer will have: A. 500 shares at $30 per share B. 500 shares at $90 per share C. 1,500 shares at $30 per share D. 1,500 shares at $90 per share

The best answer is B. Be careful! Only common stock is affected by a stock split or stock dividend. The intent of a stock split or stock dividend is to reduce the price of the common stock to make it more marketable. It has NO effect on the preferred stockholder. Preferred stockholders receive a fixed dividend rate based on par value. Just like a bondholder, the price moves inversely to market interest rates. When there is a stock split or stock dividend, the price of preferred stock and bonds of that company are unaffected.

A customer owns 500 shares of ABC preferred stock trading at $90 per share. Following a 3:1 common stock split, the customer will have: I 500 shares II 1,500 shares III at $30 per share IV at $90 per share A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Be careful! Only common stock is affected by a stock split or stock dividend. The intent of a stock split or stock dividend is to reduce the price of the common stock to make it more marketable. It has NO effect on the preferred stockholder. Preferred stockholders receive a fixed dividend rate based on par value. Just like a bondholder, the price moves inversely to market interest rates. When there is a stock split or stock dividend, the price of preferred stock and bonds of that company are unaffected.

Which of the following are disclosed on a customer confirmation? I Commission if an agency trade was executed II Mark-up if a principal transaction in a non-NASDAQ OTC security III Inventory position of the dealer IV Amount of accrued interest for a bond trade A. I and II B. I and IV C. II and IV D. I, II, III, IV

The best answer is B. Customer confirmations must disclose the commission in an agency trade. The mark-up is not disclosed in principal transactions in OTC stocks (OTCBB or Pink Sheets) and is included in a net price. However, it must be disclosed for principal transactions in NASDAQ stocks. The confirmation does not disclose the inventory position of the dealer - this has no bearing on the customer. The amount of accrued interest on a bond trade must be on a confirmation, since the buyer pays this amount to the seller.

If a customer buys a security that is part of the DTC DRS program, the customer will receive: A. physical stock certificates registered in customer name B. uncertificated book-entry registration in customer name C. physical stock certificates held in "street name" D. any of the above as designated by the customer

The best answer is B. DTC (Depository Trust Corporation) safekeeps almost all physical securities certificates for member firms. It is based in New York and has an underground, airtight bunker that goes 8 stories into the ground for this purpose. Computer systems keep track of the "transfer" of these certificates from one owner to another - they are no longer physically moved, unless the customer actually wants delivery of the physical certificate (for which DTC now imposes a substantial charge). Once DTC could track change of ownership by computer, the next step was to create a "book entry" registration system for stocks, where there are no more physical certificates (saves time and money). This is called "DRS" - the Direct Registration System. Because the owner's name is electronically recorded on the books of the transfer agent, payments of dividends and interest are made directly from the transfer agent to the customer/owner.

If a stockholder wishes to receive a common dividend, that person must sell the stock in a regular way trade no earlier than the: A. business day prior to the ex date B. ex date C. business day following the ex date D. record date

The best answer is B. If a person owns common stock and wishes to receive the dividend, that person cannot sell prior to the ex date. If the stock is sold prior to the ex date, the buyer pays for the dividend and would receive that dividend. If the stock is sold on the ex date or later, the buyer does not pay for the dividend and does not receive the dividend. Thus, if the stock is sold on the ex date or later, the seller would receive the dividend.

All of the following information appears on a municipal bond trade confirmation EXCEPT: A. Agency or principal capacity B. Paying agent name C. Broker-dealer name D. Accrued interest

The best answer is B. Paying agent name does not appear on a bond confirmation. The name of the broker-dealer, the accrued interest, and the capacity in which the transaction was executed, all appear.

Regular way trades of U.S. Government securities settle: I next business day II in 2 business days III in Clearing House funds IV in Federal Funds A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Regular way trades of U.S. Government securities settle next business day in Federal Funds.

Under MSRB rules, if the yield to call is lower than the yield to maturity, the bond must be priced based on: A. yield to maturity B. yield to call C. current yield D. nominal yield

The best answer is B. The MSRB requires that dollar prices of bonds quoted on a yield basis be computed to the lowest dollar amount of Yield to Maturity or Yield to Call.

The only order listed that is reduced on ex date is an open: A. buy stop B. sell stop C. sell limit D. sell stop DNR

The best answer is B. The orders that are reduced on ex date are "OBLOSS" - Open Buy Limits and Open Sell Stops. These are the orders below the current market. The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. Therefore, Choice B would be reduced. If the order is DNR, this means Do Not Reduce and on ex date the order would NOT be adjusted.

A stock certificate that has been damaged with a large ink stain has been authenticated by the issuer. The next buyer of the stock receives that certificate and does not believe the authentication. Which statement is TRUE? A. The customer can demand a new replacement stock certificate and will not be charged for this B. The customer can demand a new replacement stock certificate and will be charged for this C. The customer has no recourse since the certificate has been authenticated D. The customer can break the trade since the certificate was not delivered in good form

The best answer is B. This is a reality-based question. While the certificate is a good delivery because it has been authenticated by the issuer (it could also be validated/authenticated by the transfer agent, registrar or paying agent), the customer is concerned about the authentication. In the same manner as taking old money to a bank to replace it with new money, the stock certificate can be canceled by the transfer agent and a nice crisp new certificate issued. The only problem is that there is a not-so-small fee for this and the customer must pay the fee, since the securities were actually delivered in good form when they were authenticated.

When a corporation splits its stock, which of the following statements are TRUE? I An existing shareholder's proportionate ownership in the corporation will remain the same II An existing shareholder's proportionate ownership in the corporation will be increased III Individual investors are less likely to buy the stock IV Individual investors are more likely to buy the stock A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. When a corporation splits its stock, each shareholder's proportionate ownership in the corporation remains the same. For example, if a customer owns 100 shares at $50 and the corporation splits its stock 2 for 1, the customer will now own 200 shares at $25 (in both cases, it's a $5,000 investment). It is more likely for a customer to buy a $25 stock than a $50 one, since cheaper stocks are more affordable.

Under MSRB rules, pricing of callable municipal premium bonds quoted on a yield basis is based upon: A. best case scenario B. worst case scenario C. yield to maturity D. nominal yield

The best answer is B. When municipal serial bonds are quoted on a yield basis, the dealer must compute the dollar price shown on the customer confirmation. This dollar price must assure, that at a minimum, the customer will receive the promised yield. This is known as pricing to the "worst case" scenario. For a premium bond, the "worst case" scenario is having the bond called early (which is the likely case). Bonds trade at a premium because market interest rates have dropped, so the issuer can refund the issue at lower current market rates by calling in the bonds. In this case, the bond is priced based on giving the customer the promised yield using the near-term in whole call date as the redemption date. If the bond were not called, the customer's actual yield would improve, because the annual loss of premium incorporated into the yield would be spread over a longer time frame. For a discount bond, the "worst case" scenario is having the bond held to maturity (which is the likely case). Bonds trade at a discount because market interest rates have risen, so the issuer would not call these bonds. In this case, the bond is priced based on giving the customer the promised yield using the maturity date. If the bond were called early, the customer's actual yield would improve, because the annual earning of the discount incorporated into the yield would be spread over a shorter time frame.

A customer has an open order to sell 1,000 shares of ABC at $50 Stop. ABC declares a 10% stock dividend. After the ex date, the adjusted order on the member firm's internal order entry system would be: A. Sell 1,000 shares of ABC at 45.45 Stop B. Sell 1,100 shares of ABC at 45.45 Stop C. Sell 1,000 shares of ABC at 50.00 Stop D. Sell 1,100 shares of ABC at 50.00 Stop

The best answer is B. When there is a stock dividend or split, the order must be adjusted on the firm's internal order entry book on "ex date." The price of the stock is reduced and number of shares covered by the order is increased. In this case, the 10% stock dividend results in a new price of $50/1.1 = $45.45. Adjusting the order for the 10% stock dividend would result in 1.1 x 1,000 = 1,100 share order.

A customer owns 100 shares of XYZ stock valued at $50. If the company declares and pays a 5:4 stock split, the customer will have: A. 100 shares of XYZ at $50 B. 120 shares of XYZ at $40 C. 125 shares of XYZ at $40 D. 125 shares of XYZ at $48

The best answer is C. A 5:4 stock split means that 5/4 = 1.25, which means that 25% additional shares will be issued. A customer who has 100 shares will now have 125 shares after the additional shares are distributed. The adjusted price will be $50 / 1.25 = $40. Notice that before the split, the value of the customer's aggregate holding was 100 x $50 = $5,000; and that after the split the value of the aggregate holding is 125 x $40 = $5,000. The aggregate value does not change.

A customer has placed an order to sell 500 shares of XYZ stock, which the customer is holding in a safe deposit box. When the certificates are received by the brokerage firm, four 100 share certificates have been signed by the customer, and one 100 share certificate is unsigned. The proper procedure is to: A. return all certificates to the customer by registered mail with instructions that they must all be signed B. return only the unsigned certificate to the customer by registered mail with instructions that it must be signed C. retain all the certificates and send the customer a stock power with instructions that it must be signed D. retain and deliver all the certificates, since they are acceptable once they have been guaranteed by the broker-dealer

The best answer is C. A stock power represents a legal transfer document, when accompanied by the stock certificate. The proper procedure is to send the customer a stock power for his signature. When this is returned to the broker-dealer, it is attached to the unsigned certificate, and makes that certificate a "good delivery." While the customer could be returned the unsigned certificate (Choice B), this is not the best answer. It is imprudent to send stock certificates through the mail. This can be avoided by using a stock power instead.

All of the following securities deliveries are "good" EXCEPT: A. Trust securities with an assignment performed by the Trustee B. Guardian securities with an assignment performed by the legal guardian C. Custodian securities with an assignment performed by the recipient of the gift D. Partnership securities with an assignment performed by a partner designated in the Partnership Agreement

The best answer is C. Custodian account securities cannot be assigned by the minor. The minor has no legal authority. Any assignment must be made by the custodian.

Comparisons and "Don't Know" notices are sent from: A. dealer to customer B. customer to dealer C. dealer to dealer D. dealer to regulatory authority

The best answer is C. DK or "Don't Know" notices are sent dealer to dealer to reconcile unmatched trades. The dealer knows that there is a problem when he or she receives a comparison from the contra broker that does not agree with the trading record. These notices are sent the same day as the trade. Comparisons are dealer-to-dealer trade confirmations.

An over-the-counter firm has traded municipal bonds with another dealer in a regular way trade. Settlement will take place in: A. 1 business days in clearing house funds B. 1 business days in Federal Funds C. 2 business days in clearing house funds D. 2 business days in Federal Funds

The best answer is C. Generally, regular way settlement takes place in 2 business days in clearing house funds for all trades except U.S. Government securities and options. Trades of U.S. Government securities settle next business day in Federal Funds. Trades of options settle next business day in clearing house funds.

ABC Corporation declares a $1 dividend, payable to stockholders of record as of Monday, July 29th. The last day that a customer can get the dividend if he or she is willing to buy the stock "for cash" is: A. July 24th B. July 25th C. July 29th D. July 30th

The best answer is C. If a customer buys the stock "cash settlement," the stock is delivered and paid for that day. Therefore, a purchase settled for cash on the 29th settles that day and places the buyer on the record books to receive the dividend as of the close of business. Note that customers pay more to buy stock in a cash settlement than in a regular way settlement, because the dividend amount deducted on the regular way ex date is added back to the trade price.

A customer places an order to sell 100 ABC at 12 Stop Limit, when ABC stock is trading at $13. The company is restructuring and has announced a special dividend of $2.85 to be paid to shareholders of record. On the ex date, the order will be: A. canceled B. reduced to $9.00 C. reduced to $9.15 D. executed at $12.00

The best answer is C. On ex dividend date, all open orders placed lower than the current market are reduced for cash dividends (except for orders placed DNR - Do Not Reduce). The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. The order was originally placed at $12. The adjusted order price is $12 - $2.85 reduction = $9.15 adjusted order price.

ABC corporation has set the record date for a cash dividend at Tuesday, July 16th. The last day to buy the stock "regular way" and receive the dividend is: A. July 10th B. July 11th C. July 12th D. July 13th

The best answer is C. The last day to purchase the stock in a regular way trade and receive the dividend is 2 business days prior to record date or the 12th. Ex date - or the very first day the stock trades without the value of the dividend - is the 15th.

ABC Corporation has declared a rights offering to stockholders of record on Thursday, October 22nd, payable on Friday, November 6th. Under the offer, shareholders need 20 rights to subscribe to 1 new share at a price of $60. Fractional shares can be rounded up to purchase 1 full share. The last day to buy ABC shares before they go ex rights is: A. Monday, October 19th B. Tuesday, October 20th C. Friday, November 6th D. Monday, November 9th

The best answer is C. The regular way ex date for cash dividends is 1 business day prior to the record date. However, the ex date for stock dividends, stock splits and rights offerings is different. For non-cash distributions, the ex date is set at the business day following the payable date. The payable date is Friday, November 6th, therefore the ex date is Monday, November 9th. To buy the shares before they go ex rights, the shares must be purchased before Monday, November 9th, meaning they must be purchased on Friday, November 6th.

A corporation declares a cash dividend on Friday, December 5th, payable to holders of record on Friday, December 19th. The local newspaper publishes the announcement on Monday, December 8th, while Standard and Poor's reports the dividend on Friday, December 12th. The ex date for regular way trades will be set at: A. Friday, December 5th B. Wednesday, December 17th C. Thursday, December 18th D. Friday, December 19th

The best answer is C. The regular way ex date for cash dividends is set at 1 business day prior to record date. Since the record date is Friday, December 19th, the ex date is 1 business day prior and is Thursday, December 18th.

An open order is on the member firm's internal order entry system to sell 500 XYZ at 60 Stop GTC. The company has declared a 20% stock dividend. On the morning of the ex date, the order on the book will be: A. Sell 500 XYZ at 50 Stop GTC B. Sell 500 XYZ at 60 Stop GTC C. Sell 600 XYZ at 50 Stop GTC D. Sell 600 XYZ at 60 Stop GTC

The best answer is C. To adjust the order for the 20% stock dividend, the number of shares is multiplied by a factor of 1.20 (since there are 20% extra shares) while the order price is divided by a factor of 1.20. 500 shares x 1.20 = 600 The price would change to: $60 price / 1.20 = $50 adjusted order price

Which of the following statements are TRUE about a stock trade effected "for cash" in a cash account? I Payment is required in part II Payment is required in full III Settlement occurs the same business day IV Settlement occurs in 2 business days A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Trades effected for cash settle the same day. If the trade is effected in a cash account, payment is required in full on settlement. If the trade is effected in a margin account, partial payment is required on settlement.

Which statement is TRUE about accrued interest? A. Both municipal bonds and Treasury bonds accrue interest on a 30/360 basis B. Both municipal bonds and Treasury bonds accrue interest on an actual/actual basis C. Municipal bonds accrue interest on a 30/360 basis while Treasury bonds accrue interest on an actual/actual basis D. Municipal bonds accrue interest on an actual/actual basis while Treasury bonds accrue interest on a 30/360 basis

The best answer is C. When a bond is traded, because interest payments are made only 2 times a year, the buyer must pay the seller any "accrued interest" due for the period that the seller held the bond between those interest payment dates. Interest accrues from the date of the last interest payment made, up until, but not including, settlement date (which is the date that the money changes hands). For corporate and municipal bonds, the method of accruing interest is "standardized" so that each month only counts 30 days. Thus, for corporates and municipals, interest accrues on a "30 day month/360 day year" basis. In contrast, U.S. Treasury obligations accrue interest on an "actual day month/actual day year" basis. Note that on the SIE, you do not actually have to calculate the number of days of accrued interest due.

When a corporation declares a reverse stock split, which of the following statements are TRUE? I The market price per share will be reduced II The market price per share will be increased III Institutional investors are more likely to buy the stock IV Institutional investors are less likely to buy the stock A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. When a corporation declares a reverse stock split, the market price per share will be increased and the number of outstanding shares will be reduced. Institutional purchasers are often restricted by their investment policy guidelines from buying "cheap" stocks. Corporations will declare a reverse stock split so that the stock price increases to an acceptable level to institutional investors.

Under MSRB rules, yield to worst means that: A. all municipal bonds quoted on a yield basis must be priced to maturity B. municipal par bonds quoted on a yield basis must be priced to maturity C. municipal discount bonds quoted on a yield basis must be priced to maturity D. municipal premium bonds quoted on a yield basis must be priced to maturity

The best answer is C. When municipal serial bonds are quoted on a yield basis, the dealer must compute the dollar price shown on the customer confirmation. This dollar price must assure, that at a minimum, the customer will receive the promised yield. This is known as pricing to the "worst case" scenario. For a premium bond, the "worst case" scenario is having the bond called early (which is the likely case). Bonds trade at a premium because market interest rates have dropped, so the issuer can refund the issue at lower current market rates by calling in the bonds. In this case, the bond is priced based on giving the customer the promised yield using the near-term in whole call date as the redemption date. If the bond were not called, the customer's actual yield would improve, because the annual loss of premium incorporated into the yield would be spread over a longer time frame.

Accrued interest on Treasury bonds is computed: A. 30/360 B. 30/actual C. actual/360 D. actual/actual

The best answer is D. When a bond is traded, because interest payments are made only 2 times a year, the buyer must pay the seller any "accrued interest" due for the period that the seller held the bond between those interest payment dates. Interest accrued from the date of the last interest payment made, up until, but not including, settlement date. For U.S. Governments, interest accrues on an "actual day month / actual day year" basis. Note that on the SIE, you do not actually have to calculate the number of days of accrued interest due.

A company has declared a 1:5 stock split. A customer owns 100 shares of the stock, currently valued at $1 per share. On the ex-date, the new price of the stock will be: A. $.20 B. $1.00 C. $2.00 D. $5.00

The best answer is D. A company declares a reverse stock split to raise its share price. In this case, the stock is trading at $1. If there is a 1:5 reverse stock split, then every 5 shares now become 1 share and the stock will be worth 5x as much per share, so the new price will be $5. After all is said and done, the customer will have 1/5th the original number of shares (now he or she will have 20 shares) at 5 times the original price (so the new price is $5 per share). Note that the value of the customer's aggregate holding is unchanged at $100.

The record date to receive a dividend is set on Wednesday, June 15th. If a stockholder wishes to receive the dividend, he or she must sell the stock no earlier than: A. Thursday, June 9th B. Friday, June 10th C. Monday, June 13th D. Tuesday, June 14th

The best answer is D. If a person owns common stock and wishes to receive the dividend, that person cannot sell prior to the ex date, because then the trade would settle on the record date or before, and the seller would NOT be on record to get the dividend. To receive the dividend, the stock must be sold no earlier than the ex date (or after). The ex date is 1 business day prior to record date - or June 14th. Thus, if the stock is sold on June 14th or later, the seller would receive the dividend.

Which call covenant MUST be considered when computing the dollar price of a municipal premium bond quoted on a yield basis? A. Catastrophe call B. Extraordinary optional call C. Sinking fund call D. In whole call

The best answer is D. MSRB rules require that if a premium bond is quoted on a yield basis, that the dollar price that is computed be the lower of the price computed to any call dates or maturity. This usually means that the price is computed to give the yield to the near term call date, since the premium is lost in the fastest time. The only calls that must be considered are those that have a "reasonable" certainty of occurring. An "in whole" call means the issue or maturity is callable in whole at predetermined dates. These call dates must be considered. Sinking fund calls are chosen on a random order basis - since we don't know which bonds will be selected for call, there is not a "reasonable" certainty. Extraordinary optional calls, such as a mortgage revenue bond issue calling in bonds if mortgages are prepaid, also is not considered. Finally, a catastrophe call (for example, bonds are called if a facility is destroyed) does not have a "reasonable" certainty and is not considered.

If a municipal bond, callable at par, is quoted on a yield basis that is higher than the nominal yield, the price of the bond to a customer would be calculated based on: A. yield to call B. yield to put C. current yield D. yield to maturity

The best answer is D. Regarding a bond purchased at a discount: the yield to call will be the highest effective yield. Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the discount is earned over the longest period of time. This occurs if the bonds are held to maturity. If the bonds are called, the yield actually improves on the bonds, since the customer earns the discount faster.

A customer buys stock in a regular trade on Thursday, October 5th. The trade will settle on: A. Friday, October 6th B. Saturday, October 7th C. Sunday, October 8th D. Monday, October 9th

The best answer is D. Regular way settlement is 2 business days following trade date. If a regular way trade takes place on a Thursday, 2 days later is Saturday. However, 2 business days later is Monday, and that is the date the trade would settle.

The ex date for a stock split is set at: A. 2 business days prior to the Record Date B. 1 business day following the Record Date C. 2 business days prior to the Payable Date D. 1 business day following the Payable Date

The best answer is D. The regular way ex date for cash dividends is 1 business day prior to the record date. However, the ex date for stock dividends, stock splits and rights offerings is different. For non-cash distributions, the ex date is set at the business day following the payable date.

PDQ Corporation has declared a rights offering to stockholders of record on Thursday, July 22nd, payable on Monday, August 9th. Under the offer, shareholders need 25 rights to subscribe to 1 new share at a price of $75. Fractional shares can be rounded up to purchase 1 full share. The last day to buy PDQ shares before they go ex rights is: A. Monday, July 19th B. Tuesday, July 20th C. Friday, August 6th D. Monday, August 9th

The best answer is D. The regular way ex date for cash dividends is 1 business day prior to the record date. However, the ex date for stock dividends, stock splits and rights offerings is different. For non-cash distributions, the ex date is set at the business day following the payable date. The payable date is Monday, August 9th, therefore the ex date is Tuesday, August 10th. To buy the shares before they go ex rights, the shares must be purchased before Tuesday, August 10th, meaning they must be purchased on Monday, August 9th.

A 7% general obligation bond is issued with 20 years to maturity. A customer buys the bond on a 7.50% basis. The bond contract allows the issuer to call the bonds in 5 years at 102 1/2, with the call premium declining by 1/2 point a year thereafter. The bond is puttable in 5 years at par. The price of the bond to a customer would be calculated based on the: A. 5 year call at 102 1/2 B. 5 year put at 100 C. 10 year call at 100 D. 20 year maturity

The best answer is D. This is a very difficult question. Since the bond has a stated rate of interest of 7%, but is priced to yield 7.50%, the bond is being sold at a discount. The amount of the discount to which this equates is about $140 (you do not need to know how to do this, but you do need to understand the concept that follows). The dollar price of the bond would be $860 to yield 7.50% to maturity. Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the discount ($140 in this case) is earned over the longest period of time. This occurs if the bonds are held to maturity. If the bonds are called earlier, the yield actually improves on the bonds, since the customer earns the discount faster.

Which is NOT a good delivery for a 400 share trade of stock? A. One 400 share certificate B. Twenty 20 share certificates C. Forty 10 share certificates D. Ten 40 share certificates

The best answer is D. To be a good delivery, certificates must be in round multiples of 100 shares on one certificate or must be delivered in certificates that add up to 100 share units. Certificates of 40 shares each are not good because 40 + 40 = 80; 80 + 40 = 120. A round lot of 100 shares cannot be created from these units. The other choices either allow for the creation of 100 share units; or are in multiples of 100 on 1 certificate.

Regular way trades of all of the following securities settle "next business day" EXCEPT: A. Options B. U.S. Government Bonds C. U.S. Government T-Bills D. Municipal Debt

The best answer is D. Trades of government debt and listed options settle "regular way" next business day. Trades of corporate securities and municipal bonds settle "regular way" 2 business days after trade date.

When a corporation declares a reverse stock split, all of the following will occur EXCEPT: A. the market price per share will be increased B. the number of outstanding shares will be reduced C. institutional investors are more likely to buy the stock D. each shareholder's proportionate ownership in the corporation will be decreased

The best answer is D. When a corporation declares a reverse stock split, each shareholder's proportionate ownership in the corporation remains the same. For example, if a customer owns 5,000 shares at $1 and the corporation splits its stock 1 for 5, the customer will now own 1,000 shares at $5 (in both cases, it's a $5,000 investment). The other statements are true. If there is a reverse stock split, the market price per share will be increased and the number of outstanding shares will be reduced. Also, institutional purchasers are often restricted by their investment policy guidelines from buying "cheap" stocks. Corporations will declare a reverse stock split so that the stock price increases to an acceptable level to institutional investors.