FINRA Series 7

Commercial Paper

aka: promissory note. raises cash to finance accounts receivable and seasonal inventory shorts. Low interest rates, maturity up to 270 days; book entry form

Repurchase agreement is what?

an agreement between a buyer and seller to conduct a sale then reverse that in the future. includes price and maturity date. similar to a fully collateralized loan. interest is difference between sale and repurchase prices Risk: interest rate

Premium bond YTM = ?- (?/?) / ?

annual interest - (premium / years to maturity) / average bond price

Discount Bond YTM = ? + (? / ?) / ?

annual interest+(discount/years to maturity)/average bond price

ABC Corporation declares a 5-4 stock split. On the ex-date, the price of ABC common will be reduced by: A) 0.25. B) 0.8. C) 0.2. D) 0.5.

correct answer: 0.2. As a result of a stock split, an investor will have more shares at less value per share, but overall value of the investment will remain the same. For example: an investor owns 100 shares at $50 per share worth $5,000. After a 5-4 split, the investor will have 125 shares (100 × 5/4); the total ownership interest of $5,000 is divided by the new number of shares to determine the per share price of $40. The decrease of 50 to 40 is a 20% reduction. Generally, the percent decrease in price will always be less than the percent increase in the number of shares. The percent increase in shares in a 5-4 split is 25%.

If Flying Horse Corp. splits 5:4, the presplit $.40 par value of the common stock would now be adjusted to: A) 0.48. B) 0.4. C) 0.3. D) 0.32.

correct answer: 0.32. Stock splits will change the par value of the stock. To calculate the new value multiply the original par by the inverse of the split: 4/5 × $.40 = $.32

ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders, each preferred share must be paid a dividend of: A) 25. B) 5. C) 15. D) 10.

correct answer: 10. Because this is noncumulative preferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shares.

While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation ".15q." If you owned 1,000 shares, you could anticipate annual dividends of: A) 60. B) 150. C) 600. D) 15.

correct answer: 600. The notation .15q indicates a quarterly dividend of $.15. Therefore, the annual dividend is $.60 per share. 1,000 shares × .60 = the annual dividend of $600.

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. Which of the following is NOT an advantage of investing in REITs? A) Using real estate as a potential hedge against the movement of other equity securities the customer owns B) Having a professionally managed portfolio of commercial real estate assets C) Being able to divest of the shares easily D) Dividend treatment

correct answer: Dividend treatment 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.

Which of the following statements regarding ADRs are TRUE? I. Dividends are payable in the underlying foreign currency. II. Dividends are payable in U.S. dollars. III. Holders have voting rights. IV. Holders do not have voting rights. A) I and III. B) II and III. C) II and IV. D) I and IV.

correct answer: II and IV. The holder of an ADR does not hold the shares of the underlying security but instead holds a receipt for those shares and therefore does not have voting rights. ADRs are U.S. securities traded in U.S. markets in U.S. dollars, with dividends payable in U.S. dollars as well.

Reverse repurchase agreement is what?

dealer agrees to buy the securities and sell them back at a higher price

CD - Certificate of Deposit

fixed interest rate; minimum value of $100K; sold in the secondary market; call risk; loss of principal risk;

EE Bond

fixed rate; 30 years; issued @ PAR; denominations of $25; encourage long term holding (over 5 years)

Money-Market

is a debt issues with maturities less than a year; highly liquid; short term; Tbill; repo; reverse repurchase; banker's acceptance; commercial paper; negotiable cert of deposit; federal funds

Debenture

is an unsecured bond, backed by general credit of the issuer

Yield Ranking High to Low Discount Premium YTC Nominal YTM CY CY YTM Nominal YTC

memorize

Pre-refunding:

new issue of bonds sold at a lower coupon, proceeds put into escrow until the call date of the original issue. Usually have a high rating, this is a form of Defeasance - NO longer part of the issuers debt.

Trading Flat means?

no accrued interest

Long Put: what are the max gain, max loss and break even?

on a long put the max gain is the SP- premium x100; Max loss is the premium; breakeven is the SP - premium

Short Put: what are the max gain, max loss, and breakeven?

on a short put the max gain is the premium, max loss is SP-premium x 100; breakeven is SP - premium

Tranche

pool of mortgage organized by maturity class

Securitization

pooling of assets

Callable funds usually have higher?

premiums/interests because the investor could lose the income at any time after the call date

Noncompetitive bids are ALWAYS filled

remember Dutch Auction pg. 79

investors of callable bonds have what risks?

risk of the call; loss of income; reinvestment risk

T-Bond pays interest how often? What are the denominations? What is the maturity time frame?

semi annually, $100 - $5 mill, 10-30 year maturity; priced just like a T-Note

Banker's Acceptance

short term, specific payment date drawn on a bank (like a post dated check or line of credit) usually payable within 270 days. Quoted in Yield

Current Yield is?

the coupon payment relative to market price ex

What is the Dated Date

the day interest starts to accrue

Crossover refunding

the revenues pledged from the original issue "crossover" to now pay debt service on new bonds

When does an issuer call a bond?

when interest rates decline

Investor buys 1 xyz Nov 50 call @4 and is long 1 xyz Nov 50 put @3 what are the break even points?

First of all this is a Straddle. Use the T chart - add the premiums together, this plus the 50 = the breakeven positive or negative for the call or the put.

GNMA

$1000 minimum, Monthly interest and principal payments, taxed at all levels, Pass-through certs, Sig. reinvestment risk

Bond: 1 point = ? 100 basis point = ?

1 point = 1% of $1000 or $10.00 100 basis point= 1 pt = $10

Par value of a Bond is?

1000

GC, Inc., is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus 5 rights. If the market price of GCI is $70 after the ex-rights date passes, what is the value of 1 right? A) 5. B) 3. C) 15. D) 2.5.

3. Since the stock is selling ex (after ex-rights), the formula is ($70 − $55) / 5. ($70 − $55 = $15) ($15 / 5 = $3).

What is the CY of a 6% bond trading for $800

60/800 = 7.5%

What is the size of one LEAPS contract? A) 100 shares. B) 1,000 shares. C) More than 1,000 shares. D) There is no standard LEAPS contract size.

Answer: A

an investor is long 1 XYZ Dec 40 call at 3. just prior to the close of market on the final trading day before expiration, xyz stock is trading at 47. what is the gain/loss to the investor?

ANSWER: The investor is long the contract so they have already paid a premium. if the investor bought to close a position they will need to sell to offset the open long position. This investor will sell the contract for its intrinsic value because there is no time value. bought for $300, sells for intrinsic value of $700 they will have a profit of $400.

If XYZ stock is trading at 25.75 and XYZ Jul 25 calls are trading at a premium of 2, what is the time value of the Jul 25 calls? A) 125. B) 0. C) 75. D) 200.

Answer: A The time value is the premium minus the intrinsic value. The premium is 2 (or $200), and the intrinsic value is $75 ($200 − $75 = $125).

Your client sells 1 naked MAV Oct 40 call at 2 when the market price of MAV is $41. What must MAV be selling at for the client to break even? A) 40. B) 43. C) 42. D) 38.

Answer: C The breakeven point for a call is the strike price plus the premium. The breakeven point is the same for both the buyer and writer.

If MCS is trading at 43 and the MCS Apr 40 call is trading at 4.50, what is the intrinsic value and the time value of the call premium? A) Intrinsic value 3; time value 1.50. B) Intrinsic value 4.50; time value 0. C) Intrinsic value 3; time value 4.50. D) Intrinsic value 1.50; time value 3.

Answer: A The option is in-the-money by 3 points (the strike price on the call is 40 and the market price is 43). This sets a minimum premium of $3 per share. Since the actual premium is 4.50, the balance of 1.50 represents time value.

If an investor with no other positions buys 2 DWQ Jun 45 calls at 3, and he exercises the calls when the stock is trading at 47.25 and immediately sells the stock in the market, what is the investor's profit or loss? A) $150 loss. B) $75 profit. C) $75 loss. D) $150 profit.

Answer: A The investor exercised the right to buy the stock for 45, and can sell the stock in the market for 47.25 for a gain of 2.25. The gain of 2.25 minus the premium of 3 gives the investor a loss of .75 per share. Multiplying the .75 loss by 200 (the number of shares), results in a loss of $150.

All of the following would affect option premiums EXCEPT the: A) the number of contracts a client is long or short. B) volatility of the underlying security. C) price of the underlying security. D) time to expiration.

Answer: A The number of contracts a client is long or short would not affect option premiums. The volatility of the stock, the price of the stock, and the time to expiration would all affect option premiums.

If a customer is long 10 ABC Jul 50 calls at 4.50, the contracts give the holder the: A) obligation to sell stock. B) right to buy stock. C) right to sell stock. D) obligation to buy stock.

Answer: B A long call gives the holder the right to buy stock.

A customer buys 10 ABC Jul 25 calls at 4.50. What is the total premium paid for the position? A) 29500. B) 4500. C) 450. D) 20500.

Answer: B A premium of 4.50 multiplied by 100 shares per contract, multiplied by 10 contracts equals $4,500.

An investor writes 1 IBS 280 put for 16.60. The position is closed and the put is bought for its intrinsic value when IBS is trading at 265.25. The investor realizes a: A) $185 loss. B) $145 profit. C) $185 profit. D) $235 loss.

Answer: C The opening sale of the IBS put was made for 16.60, and the closing purchase was made for the intrinsic value of 14.75. The put's intrinsic value is determined by how far the stock's market price is below the strike price. (In this case, 280 minus 265.25.) 16.60 − 14.75 = 1.85 × 100 shares = $185.00. The investor profits because the sale's proceeds exceed the purchase price.

ALFA closed at 37.50, the ALFA Jan 35 calls closed at 3.50, and ALFA Feb 35 calls closed at 4.60. What is the difference in the time values between the two options? A) 35 B) 37.5. C) 1.1. D) 2.5.

Answer: C The January premium is 3.50 and the February premium is 4.60 (the difference is 1.10). Each option is in the money by 2.50.

An investor buys an ABC May 45 put at 4.25 when the stock is trading at $43. The put is in-the-money when the stock is: A) below 40.75. B) above 47.25. C) below 45. D) below 38.75.

Answer: C A put is in-the-money when the underlying stock trades below the exercise price of the put. The put is in the money by 2 points.

4 Government Agency Issue

GNMA - mortgage Federal Farm Credit Bank; Freddie mac/FHLMC & Fannie Mae/FNMA

When XYZ stock trades at 40 and an XYZ Oct 35 call trades at 5, which of the following is TRUE? A) The option is at-the-money. B) The option is out-of-the-money. C) The option's time value equals its intrinsic value. D) The time value is zero.

Answer: D An option's premium consists of time value and intrinsic value. In this situation, the call is in-the-money by 5 (intrinsic value is 5), because the market value of 40 exceeds the strike price of 35 by 5. If the total premium is 5 and the intrinsic value is 5, the time value must be 0. The option is at parity, which means the premium equals the intrinsic value.

XYZ closed at 41 and the XYZ Mar 45 puts closed at 5.25. The puts are: A) at the money. B) out-of-the-money. C) at parity. D) in-the-money

Answer: D Put options are in-the-money when the market price is below the strike price. In this case, the puts are in-the-money by 4.

All of the following option contracts are in-the-money when XYZ is 54 EXCEPT: A) long XYZ 60 put. B) long XYZ 50 call. C) short XYZ 45 call. D) short XYZ 50 put.

Answer: D Call options are in-the-money whenever the market price is greater than the strike price. Put options are in-the-money whenever the market price is lower than the strike price.

The Only agency issue backed by the full faith of the federal government?

Ginnie Mae/GNMA

An investor with no other positions sells 4 DWQ Jun 45 calls at 4. The calls are exercised when the stock is trading at 47.25. What is the investor's profit or loss? A) $175 profit. B) $175 loss. C) $700 loss. D) $700 profit.

Answer: D When the calls were exercised, the investor had the obligation to sell the stock to the owner of the call at 45. Because the investor had no other positions we know that in order to fulfill the obligation to sell they will first need to purchase the stock in the open market for 47.25. 4 was received when the call was sold and 45 was received when the stock was sold to the owner of the call. Therefore a total of 49 was received. 47.25 had to be paid to purchase the stock in the open market. Therefore 47.25 paid and 49 received = 1.75 point profit ($175) per contract. $175 × 4 contracts = $700 total profit.

If TCB is trading at 43 and the TCB Apr 40 call is trading at 4, what are the intrinsic value and the time value of the call premium? A) Intrinsic value 4; time value 0. B) Intrinsic value 3; time value 4. C) Intrinsic value 1; time value 3. D) Intrinsic value 3; time value 1.

Answer: D The option is in-the-money by 3 points because the strike price is 40 and the market price is 43. This sets a minimum premium of $3 per share. Because the actual premium is 4, the balance of 1 represents time value.

The ex-date for NYSE-listed issues is set by: A) the issuer. B) the NYSE. C) FINRA. D) the SEC.

B NYSE

Bearish or Bullish? Buyer of a Put

Bearish

Straddle is:

Buying a call & put, same stock, same expiration, same strike prices

CMO is what?

Collateralized Mortgage Obligation: is asset backed security;

Current yield = ?/?

Coupon payment/market price

Coupon payment / market price = ?

Current yield

T-Bill

Debt Security; Government Security; Short Term; issued at a discount from Par

ABC J&J 15 8s of 09 is purchased on April 15th, in a regular way. How many days of accrued interest are owed to the seller?

Determine the settlement date; count the number of days up to the but not including the settlement date. January: 16 days; Feb 30; March 30; April 17 total is 93 days due. 93/360 = .2583x$80 = 20.67

Yield Curve is?

Difference in yields is short term and long term bonds of the same quality

Direct and Dealer Paper

Direct - sold by finance company; Dealer sold by issuer to dealer

Parity of Convertible =

Market Price of common x conversion ratio

Parity of Common Stock =

Market price of the bond/conversion ration (# of shares)

on a Long Call what are the: Max gain? Max loss? Breakeven?

Max Gain for a long call is unlimited, max loss is the premium, breakeven is the strike price plus premium

Pass-Through Certificate

Pooling of a group of mortgages, part of FHLMC/Freddie Mac. Fully taxed

Premium Par or Discount? Bond has YTC lower than its CY it is trading at? Bond has a YTM and CY that are equal, the bond is trading at? Bond has a YTM less than its YTC, the bond is trading at? Bond has a YTM greater than its coupon the bond is trading at?

Premium; Par; Discount; Discount

Classes of CMOs

Principal only (PO) Interest Only (IO) Planned Amortization (PAC) Targeted Amortization (TAC)

How do you calculate the Accrued Bond Interest?

Principal x interest rate x elapsed days / 360 days.

I Bond

Protect my purchasing power of my investment and earn a real rate of return. accrual security (interest paid at maturity) value increases each month exempt from State and local taxes

Mortgage-backed securities are susceptible to what risk?

Reinvestment

Rank Safety: Debenture, Subordinated Debenture; income bond, Secure bond

SB; D; SD; IB

With a Short Call what are the max gain max loss and breakeven points?

SHORT CALL: Max gain is received premium, Max loss is unlimited, breakeven is SP+Premium

Opposite of Buy Long Hold

Sell Short Write

T-Note pays interest how often? What are the denominations? What is the maturity time frame? What is the pricing?

Semi annually, sold monthly, $100 - 5 mill. mature in 2-10 years at PAR (or can be refunded) pricing is 1/32s of par.

Selling a call and selling a put Straddle is called a?

Short straddle

T bill - are issued in what denominations and what maturities?

T-Bills - Denominations of $100 up to $5 mill. Maturities at 4, 13, 26 weeks. Auctioned weekly. Zero Coupon

Customer wants to buy a security with periodic interest payments, safety of principal, protection from purchasing power risk, what should they invest in?

TIPS

A customer purchases an ABC 6-½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is: A) $14. B) $12. C) $18. D) $16.

The correct answer: $14. The conversion ratio is computed by dividing par value by the conversion price ($100 par / $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 / 5 = $16). $16 − 2 = $14

ABC Corporation, whose common stock is trading at $32, has issued $40 million of 8-1/8% debentures due 10-1-14. Each bond issued has a warrant attached enabling the holder to buy 4 shares of ABC common at $40 per share. If all of the warrants are exercised, ABC Corporation will receive: A) $10 million. B) $20 million. C) $6.4 million. D) $12.8 million.

The correct answer: $6.4 million. There are a total of 40,000 warrants outstanding ($40 million of debentures / $1,000 par value per bond). Each warrant entitles the holder to buy 4 shares of common stock. Therefore, if all warrants are exercised, holders will be purchasing 160,000 shares (4 × 40,000) at $40 per share. 160,000 × $40 = $6.4 million.

PUT is?

The right of the investor to sell the bond to the issuer for full face value - usually on a muni

TIPS

Treasury issue: Fixed interest rate, the principal amount is adjusted semiannually by an equal amount to the change in the CPI Exempt from State and Local income taxes Subject to Federal Taxation

a higher bond rating equals a lower?

Yield

STRIPS

Zero Coupon bond, backed by the GOV.

T-Receipt - is what type of a bond?

Zero Coupon, not fully backed by the Gov., priced at a discount from Par

nominal yield is?

a fixed percentage of the bonds par value

Refunding Bond

a new series of bonds sold to retire existing bonds. can occur in full or in part

What is an investment grade bond?

aaa, aa, a, bbb or Aaa Aa, A, Baa