Exam 1

ABC Company declared a fifty cent ($0.50) per share dividend on August 15th to shareholders of record Friday, September 15th. On which two of the following days can an ABC Company stockholder sell his shares and still receive his fifty cent ($0.50) per share dividend? Monday, September 11 for regular way settlement. Wednesday, September 13 for regular way settlement. Friday, September 15 for cash settlement. Monday, September 18 for cash settlement. (A) I and III (B) II and IV (C) I and IV (D) II and III

(A) I and III

Mr. Smith, your client, has maintained about 80% of his portfolio in fixed income securities. Interest rates are expected to decline over the next 12 month period. Mr. Smith calls you because he is concerned about this prediction and his portfolio. Which of the following recommendations would be appropriate for you to give to Mr. Smith? (A) Move 50% of his portfolio into equity securities (B) Leave his portfolio the way it is now (C) Move 60% of his portfolio into Money Market funds (D) Move 25% of his portfolio into Limited Partnerships

(A) Move 50% of his portfolio into equity securities

One of your customers wants to sell a security that they have held for a lengthy period of time, but they wish to receive the already-declared dividend. The company declared the dividend to shareholders of record on Thursday, January 15th. What is the EARLIEST that your client can sell their shares and still retain the anticipated dividend? (A) The client can sell with a cash settlement as early as Tuesday, January 13th. (B) The client can sell with a regular settlement no earlier than Monday, January 19th. (C) The client can sell with a cash settlement as early as Friday, January 16th. (D) The client can sell with a regular settlement on Thursday, January 21st.

(A) The client can sell with a cash settlement as early as Tuesday, January 13th.

One of your clients holds a preferred stock which has not paid dividends for the past two quarters. The paperwork for the preferred stock REQUIRES that dividends that were not paid must be paid prior to any dividends are paid to stockholders of common shares. What kind of preferred stock does your client hold? (A) Your client has a cumulative feature on their preferred stock. (B) Your client has a conversion feature on their preferred stock. (C) Your client has a participating feature on their preferred stock. (D) Your client has a call feature on their preferred stock.

(A) Your client has a cumulative feature on their preferred stock.

All of the following are defensive except: (A) automobile repair service (B) tool and die manufacturer (C) natural gas supplier (D) Supermarket chain

(A) automobile repair service

Which of the following securities transactions would NOT be permitted in a customer's cash account? (A) A customer enters an order to sell a block of preferred stock that the customer currently holds long in the account. (B) A customer enters an order to sell short a block of common stock that the customer currently does not hold long in the account. (C) A customer enters an order to sell a covered put option in the account. (D) A customer enters an order to sell a block of municipal bonds that the customer currently holds long in the account.

(B) A customer enters an order to sell short a block of common stock that the customer currently does not hold long in the account.

Which two of the following statements would be correct regarding Regular Way settlement on common stock and Reg T settlements? Reg T settlement is trade date plus 3 business days Reg T settlement is trade date plus 5 business days Regular Way settlement is trade date plus 3 business days Regular Way settlement is trade date plus 5 business days (A) I and III (B) II and III (C) I and IV (D) II and IV

(B) II and III

Prior to making a recommendation to a client regarding an option position, an RR must have a reasonable basis for believing each of the following, EXCEPT: (A) That the customer is financially capable of handling the risks associated with the trade (B) That the customer can expect to see significant profits related to the level of risk taken (C) That the customer has the ability to evaluate the risks associated with the trade (D) That the customer is knowledgeable concerning the products used and financial matters related

(B) That the customer can expect to see significant profits related to the level of risk taken

A customer performs the following transactions when DEF is trading at $54.50 per share: - Purchases 1 DEF July 55 call for 4 - Purchases 1 DEF July 60 put for 6 The market price of DEF then moves to $52.50 per share. At this point in time, the customer sells the put option for the in-the-money amount. The call remains outstanding until it expires. What is this customer's profit or loss in this scenario? (A) The customer will have a gain of $250. (B) The customer will have a loss of $250. (C) The customer will have a gain of $800. (D) The customer will have a loss of $800.

(B) The customer will have a loss of $250.

One of your clients purchases a callable corporate bond. The bond is callable at 106.55. What will the customer receive if the corporation calls the bonds and the customer tenders them back to the corporation? (A) The customer will receive $1,065.50 for the bond and accrued interest up to the call date will be subtracted from that figure. (B) The customer will receive $1,065.50 for the bond and accrued interest up to the call date will be added to that figure. (C) The customer will receive par value for the bond of $1,000 and will receive $65.50 in accrued interest. (D) The customer will receive par value for the bond of $1,000 and will receive $106.55 in accrued interest.

(B) The customer will receive $1,065.50 for the bond and accrued interest up to the call date will be added to that figure.

On Tuesday, February 11th, one of your clients calls in and is curious about a stock that they purchased the previous business day of Monday, February 10th. The stock was purchased regular way and the client wants to know when the transaction will settle. What is the anticipated settlement date for this trade? (A) The stock will settle T+5, so settlement should be expected no later than Monday, February 17th. (B) The stock will settle T+3, so settlement should be expected no later than Thursday, February 13th. (C) The stock will settle T+1, so settlement should take place no later than the end of the business day on which the client called, Tuesday, February 11th. (D) The stock should have settled same day, on Monday, February 10th.

(B) The stock will settle T+3, so settlement should be expected no later than Thursday, February 13th.

Which of the following statements by an RR is TRUE regarding dividends? (A) "It is possible for a long-term equity anticipation security to pay dividends." (B) "An investor can expect to receive dividends on the underlying security in the event that they own a call option." (C) "An investor who owns an American Depositary Receipt can expect to receive dividends from their investment when declared and paid." (D) "When an investor owns a warrant or right, they are entitled to receive dividends in accordance with these securities."

(C) "An investor who owns an American Depositary Receipt can expect to receive dividends from their investment when declared and paid."

An investor buys 100 shares of ABC at 50 in May. He also buys an August 80 put for 3 on an index with a multiplier of 100. In August, the ABC shares decline to 45 and the index declines to 70. If the investor closes out his stock position and exercises his put, what is his profit or loss? (A) $200 profit (B) $500 profit (C) $200 loss (D) $500 loss

(C) $200 loss

All of the following statements about municipal auction-rate securities are TRUE EXCEPT: (A) At auction, a rate is determined which will be the lowest interest rate which would provide for the sale of all of the securities in the market. (B) The rates on these securities typically are reset at regular intervals such as 7 days, 28 days, 35 days, or another pre-determined interval. (C) All auction-rate securities are putable, meaning investors can force the selling dealer to buy them back at any time. (D) When selling auction-rate securities, the broker/dealer seeks buyers who are interested in holding the securities over the next period after the rate has been reset.

(C) All auction-rate securities are putable, meaning investors can force the selling dealer to buy them back at any time.

Which two of the following are true of stock index options? Exercise prices are standardized. Premiums are standardized. Expiration dates are standardized. On exercise, stock is delivered or received. (A) I and II (B) III and IV (C) I and III (D) I and IV

(C) I and III

REITs (Real Estate Investment Trusts) have which of the following features? Much like limited partnerships, REITs pass profits and losses on to their shareholders. 90% of all investment income must be passed on to shareholders in order to ensure special tax treatment. Any profits passed on to shareholders of a REIT are not taxable until the REIT shares are sold. Investment in other REITs is acceptable as a real-estate-related activity. (A) I and II (B) I and III (C) II and IV (D) III and IV

(C) II and IV

When an investor in the U.S. owns an ADR (American Depositary Receipt), what does that mean? (A) It means that the investor owns U.S. bank-issued CDs (Certificates of Deposit). (B) It means that the investor has an equity position in an U.S. company, but that equity position is not tied to common stock. (C) It means that the investor holds a certificate representing ownership of a foreign company which is held by a custodian who is a third party to the ownership. (D) It means that the investor holds U.S. index fund shares.

(C) It means that the investor holds a certificate representing ownership of a foreign company which is held by a custodian who is a third party to the ownership.

A client is interested in investing in the real estate sector, but shows great concern about the possibility of depreciation within the sector and more specifically within certain geographic areas. What recommendation should an RR handling this client's account make in relation to achieving the HIGHEST amount of diversification in real estate-related investments? (A) The client should invest in securities issued by the Federal National Mortgage Association (FNMA). (B) The client should invest in ETFs that are issued on a REIT index. (C) The client should focus investments in one REIT. (D) The client should invest in securities issued by the Government National Mortgage Association (GNMA).

(C) The client should focus investments in one REIT.

Which of the following investment strategies is BEST suited for an investor who believes that the market will have large amounts of volatility in the coming months, but that despite the volatility, the market will remain stable or only go down slightly? (A) The investor should sell short the SPY ETF. (B) The investor should purchase the SPY ETF. (C) The investor should purchase call options on VIX. (D) The investor should purchase an index fund for the NYSE.

(C) The investor should purchase call options on VIX.

The Trust Indenture Act of 1939 regulates corporate debt issues and requires the designation of a trustee. What duty does this trustee have? (A) The trustee is charged with ensuring that the proper filing procedures take place with relation to the issue and SEC registration. (B) The trustee is charged with allocating any remaining bonds that may not have been sold in the initial issuance. (C) The trustee is charged with acting on behalf of bondholders and ensuring that the rights of these bondholders are not infringed upon. (D) The trustee is charged with being the liaison to the SEC in relation to all matters associated with the bond issue.

(C) The trustee is charged with acting on behalf of bondholders and ensuring that the rights of these bondholders are not infringed upon.

An investor who is long a put option on ABC and wants to offset the position would enter: (A) an opening sale (B) a closing purchase (C) a closing sale (D) an opening purchase

(C) a closing sale ^WRONG (B) a closing purchase

The final tranche of a CMO is generally known as (A) A companion bond (B) PAC (Pac Amortization Class) (C) TAC (Targeted Amortization Class) (D) A Z-bond

(D) A Z-bond

Of the following options transactions, which MUST be labeled either "Uncovered" or "Covered" on the ticket? (A) A closing purchase transaction (B) A opening purchase transaction (C) A opening sale transaction (D) A closing sale transaction

(D) A closing sale transaction

ABC Corporation has experienced growth in recent years and it is anticipated that the company will continue to grow. Even with higher earnings, the company has consistently paid little or no dividends. With these factors in mind, how would ABC's balance sheet be affected? (A) Investors should expect to see consistently low levels of working capital with these factors in mind. (B) Investors should expect to see the market price of ABC common stock declining over time. (C) Investors should expect to see the stockholders' equity portion of the balance sheet increasing with these factors in mind. (D) Investors should expect to see paid-in surplus increasing substantially.

(D) Investors should expect to see paid-in surplus increasing substantially.

An individual walks into your branch and wishes to open an account. In this account, the individual wishes to trade options and indicates that she would like to be approved for the sale of uncovered puts and calls. Industry regulations dictate that this customer must receive an Options Disclosure Document in what time frame? (A) The ODD must be provided when the margin agreement is provided and signed. (B) The ODD must be provided no later than when the confirmation of the first transaction in the account is delivered to the client. (C) The ODD must be provided to the new client no later than the third business day following their first transaction. (D) The ODD must be provided to the new client before the client is approved for options trading.

(D) The ODD must be provided to the new client before the client is approved for options trading.

Which of the following option related material could be sent by a registered representative without prior written approval from the firm's registered option principal? (A) 30 letters to prospective clients regarding options (B) form letters to all established clients discussing covered call writing strategies (C) a research report regarding options strategies (D) a monthly statement about a client's account that includes options transactions throughout the month

(D) a monthly statement about a client's account that includes options transactions throughout the month

Which of the following risks is NOT normally a major factor when analyzing ADRs (American Depositary Receipts)? (A) Risks associated with changes in inflation (B) Risks associated with changes to legislators and political climate (C) Risks associated with the call of such securities by the issuers (D) Risks associated with fluctuations in currency exchange rates

C) Risks associated with the call of such securities by the issuers