Greenlight 1
An investor purchases 10 Eastman Kodak October 60 call options. One month later, Eastman Kodak stock splits 3 for 2. After the split, the investor will own: A 10 contracts for 100 shares, each with a $40 strike price B 10 contracts for 150 shares, each with a $40 strike price C 15 contracts for 100 shares, each with a $40 strike price D15 contracts for 150 shares, each with a $40 strike price
B 10 contracts for 150 shares, each with a $40 strike price Listed options are not reduced for cash dividends, but are adjusted for stock dividends and stock splits. Eastman Kodak options are listed options and are reduced for the 3-for-2 split. In an even split, the number of option contracts is increased -- each contract will still represent 100 shares, and the strike price is reduced proportionately. In an odd split (3 for 2 in this example), the number of contracts remains the same. The strike price is reduced and the number of shares in the contract is increased by the amount of the split. In this example, the number of contracts remains the same and the strike price is reduced to reflect the 3-for-2 split. The original strike price (60) times the inverse of the split ratio (2/3) equals the new strike price of 40. The number of shares in each contract will increase to 150 shares (3/2 x 100 = 150).
An investor buys a DEF April 35 put at 3 and simultaneously writes a DEF April 30 put at 1. What is the individual's breakeven point? A 35 B 33 C 32 D 28
B 33 The investor had a net debit of 2. Therefore, the stock needs to drop to 33 [strike price of the long put (35) minus the premium of (2)] for the investor to break even. If the market price is 33 at expiration, the investor can buy the stock at 33, exercise the 35 put, and sell the stock at 35. The 2-point profit is offset by the net debit of 2. The 30 put will expire worthless. The client will therefore break even.
Which of the following call features would be LEAST desirable for an investor on a 20-year municipal bond selling at a premium? A A 5-year premium call B A 5-year par call C A 15-year premium call D A 15-year par call
B A 5-year par call A premium bond will have the lowest yield (be affected most) if it is callable in the shortest time, 5 years, and at the lowest price, par.
A bond has a 6% coupon and is trading at a 6.78% basis. The bond is trading at which of the following price levels? A Par B A discount C A premium D 106 7/8
B A discount Basis is a different method of expressing yield-to-maturity. In this case, the yield-to-maturity is greater than the coupon rate. The only time a bond's yield-to-maturity is greater than its coupon is when the bond has been purchased at a price that's less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.
Which of the following is TRUE concerning transactions in a customer's account? A A registered representative must confirm a client's income before executing any transactions. B An unsuitable investment may be purchased in a customer's account if the order is unsolicited. C Only conservative investments may be recommended to clients who do not provide information regarding their personal profile. D There is no limit to the number of suitable investments that can be purchased in a customer's account.
B An unsuitable investment may be purchased in a customer's account if the order is unsolicited. FINRA rules require information concerning an investor's profile be obtained before making any recommendations. One can rely on the customer's answers to the financial needs and objectives questions and are not required to confirm the information prior to executing a transaction. Recommending any investments, even conservative, is prohibited if information pertaining the customer's profile is not obtained. However, unsolicited orders may be accepted, suitable or unsuitable. The number of suitable investments purchased in an account can be considered excessive and evidence of churning.
The relative of an 85-year-old account holder contacts the registered representative of the account and requests that funds be transferred to her account which is also held at the same firm. If the RR suspects financial exploitation, which of the following is the BEST course of action? A Process the transaction since both accounts are held at the same firm. B Attempt to resolve the matter with the customer prior to placing a temporary hold. C Immediately place a temporary hold on the account. D Contact the attorney for the 85-year-old account holder.
B Attempt to resolve the matter with the customer prior to placing a temporary hold. According to FINRA, if an RR suspects financial exploitation of a senior investor, he should first attempt to resolve the matter prior to placing a temporary hold on the account. The fact that both accounts are held at the same firm is irrelevant.
Confirmation statements must contain all of the following, EXCEPT the: A Date of the transaction B Date order was entered C Date of settlement D Name of the opposite party involved in the transaction
B Date order was entered Transaction dates, settlement dates, and the name of the contra-party must be either disclosed or in regards to the contra-party, offered to be disclosed on the confirmation. The date of order entry is not required to be disclosed on the confirmation statement, but is entered on the order ticket.
An investor purchases stock at $21 and pays a $1.05 commission. The stock is later sold for $19, paying a $.95 commission. In order to determine a gain or loss, the investor will use proceeds of: A $18.05 B $19 C $21 D $22.05
A $18.05 In order to determine a gain or loss on an investment, you must determine the cost basis and the proceeds. The proceeds are equal to what the stock was sold for less any commission. In this example, the proceeds would be $18.05 = $19.00 - $.95.
A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond. Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for its risk on selling group sales. A $2.50 per bond for a total of $50,000 B $2.50 per bond for a total of $100,000 C $4.00 per bond for a total of $80,000 D $4.00 per bond for a total of $160,000
A $2.50 per bond for a total of $50,000 The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for its risk on those bonds ($2.50 per bond on 20,000 bonds).
An investor purchases 100 shares of XYZ at 60 and also writes an XYZ 65 call @ 3. What is the investor's maximum potential loss? A $5,700 B $6,300 C $6,500 D $6,800
A $5,700 The investor will suffer a loss if the price of XYZ declines. XYZ could go bankrupt and the price of the stock would decline to zero. The investor will have a loss of $6,000 (his original cost) on the stock, which will be partly offset by the $300 premium received from writing the call. His net loss is then $5,700.
A convertible bond has a conversion price of $40 and is currently selling in the market at $950. The conversion ratio is: A 25 B 23.75 C 40 D 38
A 25 To find the conversion ratio of a convertible bond, the bond's par value ($1,000) is divided by the conversion price ($40). In this question, the conversion ratio is $25 ($1,000 ÷ $40). To calculate the conversion ratio, the market price of the bond is irrelevant.
Which choice BEST describes The Bond Buyer's Revenue Bond Index? A Average yield on a list of bonds with 30-year maturities B Average yield on a list of 11 bonds C Average yield on a list of 20 bonds D Average yield on a list of new revenue issues
A Average yield on a list of bonds with 30-year maturities The Bond Buyer publishes different indexes. They include: 1. The 20-Bond Index -- The average yield to maturity on a particular day of 20 specific GO bonds with 20-year maturities 2. The 11-Bond Index -- The average yield to maturity on a particular day of 11 of the 20 specific GO bonds from the 20-Bond Index 3. The Revenue Bond Index (Revdex) -- The average yield to maturity on a particular day of 25 specific revenue bonds with 30-year maturities
Three bonds have been issued, each with a coupon rate of 6.0%. Bond A has a five-year maturity. Bond B has a one-year maturity. Bond C has a six-month maturity. If interest rates change, which bond would be expected to have the greatest dollar change in price? A Bond A B Bond B C Bond C D All the bonds would change equally in price
A Bond A The greatest change in dollar price would be expected for Bond A, which has the greatest duration (longest maturity). When the general level of interest rates changes, long-term bonds have greater price fluctuations than short-term bonds.
When a broker-dealer is not acting for its own account but is making securities transactions for the accounts of others, the firm is acting as a(n): A Broker B Principal C Underwriter D Dealer
A Broker When a broker-dealer is making securities transactions for the accounts of others, the broker-dealer or brokerage firm is acting as a broker (agent). When the firm is selling from its own inventory, it is acting as a principal (dealer).
A tax payment is required for which of the following events? A Cash dividend B Unrealized gain C Stock dividend D Return of capital
A Cash dividend Cash dividends are taxable in the year in which they are received. However, any tax implication for a stock dividend is delayed until the additional shares are subsequently sold. Taxes are paid on realized gains, but unrealized capital gains or losses (paper profits or losses) have no impact on an investor's tax situation. Return of capital occurs when an investor receives a portion of her original investment back. Since this return is not considered either income or a capital gain, it's not a taxable event.
A corporation has $10,000,000 of a 5% preferred stock issue outstanding. If the corporation is able to replace the preferred stock with $10,000,000 of 5% subordinated debentures, what effect will it have on earnings per share (EPS)? A EPS will increase B EPS will decrease C EPS will remain the same D The effect cannot be determined
A EPS will increase The company will pay the same amount ($500,000) whether it was interest on the subordinated debentures or dividends on the preferred stock. However, interest is deducted before taxes while dividends are taken from net income. Therefore, there will be a tax savings if the $500,000 payment is bond interest, which will result in higher earnings per share.
Which TWO of the following choices are characteristics of GNMA pass-through certificates? I Interest and principal payments are received monthly II The investor will receive her principal back at maturity III Timely payment of interest and principal is guaranteed by the U.S. government IV Interest is subject to federal tax but exempt from state and local tax A I and III B I and IV C II and III D II and IV
A I and III GNMA pass-through certificates are guaranteed by the U.S. government. Interest and principal payments are received monthly and, therefore, the investor will receive principal payments before, not at maturity. The interest is subject to federal, state, and local taxes.
A customer is considering the purchase of a bond fund in hopes of profiting from appreciation in the bond market. The customer is LEAST likely to receive a capital gain distribution if: I The bonds in the portfolio have short maturities II The bonds in the portfolio have long maturities III Interest rates are rising IV Interest rates are falling A I and III only B I and IV only C II and III only D II and IV only
A I and III only A bond fund investor is MOST likely to receive a capital gain distribution when bonds are appreciating substantially in value. This would occur if interest rates were falling. When rates fall, long-term bonds appreciate more than short-term bonds. Therefore, the investor is LEAST likely to receive a capital gain distribution if rates are rising and the portfolio contains short-term bonds.
An investor purchased a municipal bond at a discount. If the investor holds the bond to maturity, a gain will be considered: I Tax-free interest if the bond is an OID II A capital gain if the bond is an OID III Ordinary income if the bond is not an OID IV Tax-free interest if the bond is not an OID A I and III only B I and IV only C II and III only D II and IV only
A I and III only For an OID (original issue discount), the discount is considered interest. Because this is a municipal bond, the interest is tax-exempt. For a non-OID (a secondary market discount), the discount is reported as ordinary income.
A municipal dealer gives another dealer a firm quote of par for a block of municipal bonds. The dealer that gave the quote: A Must do the trade at par B Must give the other dealer ten minutes to accept the quote C Has given a nominal quote to the other dealer D Has given a subject quote
A Must do the trade at par The dealer that gave the firm quote must do the trade at par
A variable annuity application sent by a FINRA member does not include a principal's approval. The insurance company: A Must reject the application B Can process the application C Must notify FINRA before processing D Can only process the application after contacting the client
A Must reject the application Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company. If a principal does not approve the application, it must be rejected
Section 1035 of the Internal Revenue Code: A Permits the tax-free exchange of one annuity contract for another B Forbids the tax-free exchange of an insurance policy for a new life insurance policy C Forbids the tax-free exchange of an insurance policy for a new annuity contract D Permits the tax-free exchange of an annuity contract for a life insurance policy
A Permits the tax-free exchange of one annuity contract for another 1035 exchanges permit an individual to exchange one variable annuity contract for another, during the accumulation period, without tax consequences.
A client creates an opening sale in a LEAP and closes out the position 15 months later by buying back the option. The tax consequence is a: A Short-term gain or loss B Long-term gain or loss C Passive gain or loss D Gain or loss that may not offset other trading positions or ordinary income
A Short-term gain or loss A LEAP is a long-term option that can have an expiration of up to 39 months. The client held the position for more than one year, but any gain or loss on a short position is treated as short-term. The IRS does not recognize a holding period on a short sale of a stock or an opening sale of an option. If the client created an opening purchase by buying a LEAP and held the position for 15 months before closing it out, the resulting gain or loss would be long-term.
Which method of calculating taxes on an investment typically offers an investor the lowest amount of tax on a capital gain when shares of stock are sold? A Specific identification B First in, first out (FIFO) C Last in, last out (LIFO) D Average cost
A Specific identification The IRS only recognizes two methods for calculating gains or losses on stock transactions—FIFO and specific identification (versus the purchase of). Many brokerage firms allow alternative methods, such as LIFO, which is a variation of specific identification. Average cost may only be used for sales of mutual fund shares. Although LIFO could offer a lower gain if the price of a security was rising, that gain may be considered short-term and taxed at a higher rate, which makes the specific identification method the best choice for an investor who is seeking the lowest amount of tax.
What information would NOT be found in a subscription agreement in a direct participation program (DPP)? A The name of the limited partner's certified public accountant B The suitability standards C The signature of the limited partner D To whom the check is made payable to
A The name of the limited partner's certified public accountant The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he understands the ramifications of the investment and can meet the financial requirements of this investment. The name of the limited partner's accountant would not need to be included in this agreement.
A customer is concerned about an investment in his portfolio. He will be traveling for the day and wants his registered rep to sell 500 shares of the stock whenever the rep feels the time is right. Which of the following is true regarding these instructions? A The registered rep can determine the time to sell the shares. B The registered rep must have written discretionary authority in order to decide the time to sell. C The registered rep can determine the time to sell, but a principal must approve the transaction prior to execution. D The registered rep must have written permission from the customer before making the decision.
A The registered rep can determine the time to sell the shares. Once verbal authorization is received from a customer, an RR may select the price and/or time of execution if the customer has specified (1) whether to buy or sell, (2) the specific security, and (3) the amount to be bought or sold. Without these three details, written discretionary authority is required. However this only applies to transactions on one day. In order to initiate transactions for more than one day the registered representative would have to have written discretionary authority.
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1. An owner of Foremost Corporation who sold the stock on November 30 for regular-way settlement: A Would be entitled to receive the dividend B Would not be entitled to receive the dividend C Would be entitled to receive the dividend only if the stock was delivered before the ex-dividend date D None of the above
A Would be entitled to receive the dividend The record date is given as December 1. The ex-dividend date is on the first business day preceding the record date. Therefore, anyone who owned Foremost Corporation and sold it on November 30 for regular-way settlement, is entitled to receive the dividend because the stock is selling ex-dividend (without the dividend) and the buyer is not entitled to the dividend.
An investor purchasing a reverse convertible security would be MOST interested in: A Preservation of capital B High current income C Capital appreciation D Conservative income
B High current income An investor purchasing a reverse convertible security is seeking an above-market coupon rate. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). The investor will not be able to participate if the underlying asset increased. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.
Customers who want to transfer their securities account from one broker-dealer to another fill out a form provided by the: A Carrying broker-dealer B Receiving broker-dealer C Automated Customer Account Transfer Service (ACATS) D Depository Trust Corporation (DTC)
B Receiving broker-dealer In order to transfer the accounts, the customer would need to complete a Transfer Initiation Form (TIF) with the receiving (new) broker-dealer who would send it to the carrying (former) broker-dealer for validation and transfer. The account is transferred using ACATS.
A branch office has recently hired a group of RRs from another member firm. Some of the clients have mutual funds and annuities that are proprietary products of the carrying firm. If the client chooses to liquidate these assets, who has the responsibility to notify the clients of any surrender fees? A The receiving broker-dealer B The carrying broker-dealer C The mutual fund company D The principal located at the branch office
B The carrying broker-dealer Firm-specific or proprietary products, such as mutual funds or annuities, are considered nontransferable assets. When a customer changes broker-dealers, the account is transferred to a new broker-dealer (the receiving firm), and the client may choose to liquidate these assets. Since the asset is a proprietary product, the carrying firm (the former broker-dealer) is required to notify the client of any fees (surrender charges) that may result if the client liquidates the assets.
If a REIT generates at least 75% of its income from rents or mortgage interest, and pays out at least 90% of its income to the shareholders, for tax purposes the income distributed by the REIT will be taxable to: A The REIT and not the shareholders B The shareholders and not the REIT C Both the shareholders and the REIT D Neither the shareholders nor the REIT
B The shareholders and not the REIT To qualify as a REIT, it must receive no more than 25% of its revenue from subsidiary (non-real estate) activities and must be structured and established as a trust. Also, the REIT must distribute a minimum of 90% of its income. Shareholders are responsible for paying taxes on the income distributed by the REIT. This income is treated as a nonqualifying dividend for tax purposes.
One of the major differences between an open-end and closed-end investment company is: A The composition of their portfolios B The types of securities that each may issue C The method of calculating net asset value D A closed-end investment company is exempt from new issue registration requirements
B The types of securities that each may issue Both open and closed-end investment companies must register when they issue securities. A major difference between open-end and closed-end investment companies is their capitalization (i.e., the types of securities they issue to raise money). Open-end companies, also referred to as mutual funds, may only issue common stock. However, closed-end companies may issue common stock, preferred stock, or bonds
If a municipal bond is selling at a discount and is callable at par, the customer's confirmation will disclose which of the following? A The greater of the yield-to-maturity or yield-to-call B The yield-to-maturity C The fact that if rates decline, the bond will most likely be called D The yield-to-call
B The yield-to-maturity MSRB rules require dealers to quote the lower of the yield-to-call (YTC) or the yield-to-maturity (YTM). If the bond is selling at a discount, the bond will be quoted on a yield-to-maturity basis (since the YTM is lower than the YTC). On the other hand, if the bond is selling at a premium and is callable at a premium, the bond will be quoted on the basis of yield-to-call or yield-to-maturity, whichever is lower. The yield for a municipal bond that is selling at a premium and is callable at par is calculated to the call date. The yield-to-call measures the yield that will be earned if the bonds are called at the call price and not held to the maturity date.
A 1/2-point dealer's concession in a municipal bond equals: A $ .05 on a $1,000 par value bond B $ .50 on a $1,000 par value bond C $5.00 on a $1,000 par value bond D $50.00 on a $1,000 par value bond
C $5.00 on a $1,000 par value bond A 1/2-point dealer's concession is the equivalent of 1/2 of 1% of the par value. This is the dollar equivalent of $5.00 on a $1,000 par value bond.
A doctor receives an inheritance of $250,000. She is concerned how this may affect her tax situation. The doctor inquires about where she should park the money while she obtains professional tax advice. Which of the following recommendations is the MOST appropriate? A A short-term municipal bond fund B A money-market account C A municipal money-market mutual fund D A U.S. government inflation-protected bond fund
C A municipal money-market mutual fund Whenever a person is looking to park her cash, the most viable option is some form of money-market account. Parking implies a very short-term time horizon (perhaps as little as a few weeks), so the short-term municipal bond fund and the U.S. government inflation-protected bond fund are poor selections. In both cases, those choices involve a fund that purchases bonds and, therefore, is subject to principal fluctuation. This would not suit her needs. However, this question also has an extra dimension to it. The person in this question is a doctor, which implies a high income level. Furthermore, she is inheriting a large sum of money and expressly states she is worried about taxes. These are trigger phrases, which means you should be looking for something that provides some tax relief. In this case, the municipal money-market mutual fund is the BEST answer. It provides both the safety of principal and tax relief the doctor needs. The tax relief comes from the short-term municipal (federally tax-free) securities in the account. The money-market account, only offers principal safety.
Which of the following choices need NOT be preapproved by the firm? A Sales literature B Advertising C A public appearance D Research reports
C A public appearance Unscripted participation in live events is considered a public appearance and is not subject to preapproval or filing with FINRA. Advertising and sales literature is considered retail communication and needs approval by the firm. Research reports also require firm approval.
What information would an analyst be MOST concerned with when evaluating a revenue bond? A The population growth of the municipality B Debt to assessed valuation C A rate covenant D Property taxes
C A rate covenant An analyst would be most concerned with rate covenants. This is an agreement made by the municipal issuer to maintain rates high enough to cover maintenance and operating charges and to meet annual debt service requirements. The other terms are applicable to general obligation bonds.
A client currently has $75,000 in cash he does not envision needing for the next 18 months. He is interested in seeing if he can receive a greater return on this cash than the money market fund it is currently in. Which of the following choices would be MOST suitable? A A municipal income fund B A GNMA fund C A short-term bond fund D An equity income fund
C A short-term bond fund
Which of the following sources of revenue would NOT be available to pay interest on a revenue bond issue? A Special taxes B Lease payments C Ad valorem taxes D Capitalized interest
C Ad valorem taxes Ad valorem (property) taxes secure a general obligation bond, not a revenue bond. Special taxes, fees, lease payments, and capitalized interest may be used to pay interest on a revenue bond. Capitalized interest is earned on a portion of the proceeds of a bond offering that is not immediately being used by an issuer.
Which of the following choices BEST describes the Bond Buyer's Municipal Bond Index? A An indication of the average yield on 25 general obligation bonds with 30-year maturities B An indication of the average yield on 20 selected municipal revenue bonds with 20-year maturities C An estimate of the prices of 40 long-term municipal bonds D An indication of the average yield on 11 selected municipal revenue bonds with 20-year maturities
C An estimate of the prices of 40 long-term municipal bonds The Bond Buyer Municipal Bond Index provides an estimate of the prices of 40 recently issued, long-term general obligation and revenue bonds. Three other Bond Buyer indices provide an indication of the average yield on selected municipal bonds. The 25 Revenue Bond Index shows average yield on 25 revenue bonds with 30-year maturities, the 20 Bond Index shows average yield on 20 general obligation bonds with 20-year maturities, and the 11 Bond Index shows average yield on 11 general obligation bonds with 20-year maturities. These three choices each incorrectly described these other three Bond Buyer indices, which leaves the remaining choice as the correct answer.
Which of the following securities would you LEAST likely recommend to an investor requiring a fixed sum of funds to be received in 10 years? A A zero-coupon municipal bond B A high-yield corporate bond C Collateralized mortgage obligations (CMOs) D Treasury Inflation-Protected Securities (TIPS)
C Collateralized mortgage obligations (CMOs) The risk that an investor will receive her principal earlier than projected instead of at one time (i.e., prepayment risk) is the most important risk pertaining to mortgage-backed securities such as CMOs. Since the investor wants to receive a fixed amount of funds in 10 years, a CMO would be the least suitable of the securities listed.
A writer of an uncovered call option will profit in which TWO of the following circumstances? I The underlying common stock goes up II The underlying common stock goes down III The call expires unexercised IV The call is exercised A I and III B I and IV C II and III D II and IV
C II and III A writer or seller of an uncovered call option does not own the underlying stock. If the underlying stock goes down, the call will not be exercised. If the call option expires, the writer will keep the premium paid by the buyer of the option and will no longer be exposed to a possible loss if the stock goes up. If the underlying stock goes up, the option will be exercised and the writer will be obligated to deliver stock. The writer will need to purchase the stock at the current market value and will incur a loss due to the difference between the market value and the strike price less the premium received. The answer, therefore, is a writer of an uncovered call option will make money if the underlying common stock goes down and/or the call expires unexercised.
A direct participation program is sold as a private placement. Which TWO of the following choices are required of an individual to be classified as an accredited investor? I $200,000 net worth II $1,000,000 net worth III $200,000 annual income IV $400,000 annual income A I or III B I or IV C II or III D II or IV
C II or III To qualify as an accredited investor, an individual must have $1,000,000 net worth or $200,000 annual income ($300,000 for a married couple) with the anticipation that income will continue at that level.
A member firm's response to a customer complaint may be: A In written form only B In oral form only C In either written or oral form D Unnecessary
C In either written or oral form The member's response to a customer complaint may be in either written or oral form.
The real interest rate is best defined as the: A Interest earned by an investor after taxes B Interest earned that is less than the rate of inflation C Interest earned that exceeds the inflation rate D Amount that LIBOR exceeds the fed funds rate
C Interest earned that exceeds the inflation rate The real interest rate received by an investor is the amount of interest received minus the inflation rate. If an investor is receiving a 10% interest rate when inflation is at 6%, the real interest rate received is 4% (10% - 6%).
If interest rates decline, which of the following securities is likely to have the greatest increase in market value? A Short-term bonds B Intermediate-term bonds C Long-term bonds D All bonds will experience the same change in market value
C Long-term bonds When interest rates decline, the bonds with the longest maturities will have the greatest price increase
To open an account and determine suitability for a new client who would like to invest in an exploratory drilling oil and gas direct participation program, the RR must obtain all the following information, EXCEPT the customer's: A Address B Social Security or Tax ID number C Number of dependents D Net worth
C Number of dependents When opening a new account, the RR should obtain the customer's address and Social Security or Tax ID number, among other items. To determine suitability, the RR would obtain the customer's income and net worth.
In the case of a severe business decline, income payments under a fixed-dollar annuity contract will probably: A Increase B Decrease C Remain the same D Fluctuate rapidly
C Remain the same Benefit payments from a fixed-dollar annuity will always remain the same, regardless of the performance of the economy or the stock market.
All of the following documents are needed to open a new discretionary margin account, EXCEPT a: A New account form B Basic customer margin agreement C Trust agreement D Power of attorney
C Trust agreement A new account form, a basic customer margin agreement, and a power of attorney are needed to open a new discretionary account. The basic customer margin agreement includes the hypothecation, loan consent, and credit agreements. A trust agreement is needed to open a trust account.
Mrs. Jones owns stock from which she received $3,000 in cash dividends. Mr. Jones owns stock from which he received $400 in cash dividends. How much of the cash dividends received are Mr. and Mrs. Jones liable for when filing their joint return? A 0 B $400 C $2,600 D $3,400
D $3,400 Cash dividends received by individuals are fully taxable and, therefore, the entire $3,400 total of dividends is liable for taxes.
An individual owns an ARF corporation 8% convertible debenture. The debenture is convertible at 20 and is currently selling in the market at 97 1/2. If ARF common stock is trading in the market at 18, at what price should the debenture sell to be at a 10% premium to parity with the common? A $900.00 B $965.25 C $975.50 D $990.00
D $990.00 Since the conversion price is $20 per share, the debenture can be converted into 50 shares ($1,000 par divided by $20 per share). If converted, the stock will have a total value of $900 (50 shares x $18 per share market price). To be at a 10% premium to parity, the debenture should be trading at $990 ($900 parity plus 10% of $900).
A bond with a 4% coupon is priced at a 3.20 basis. If the bond's yield-to-maturity decreased by 10 basis points, the yield would be: A 3.90% B 3.30% C 4.10% D 3.10%
D 3.10% If a bond is priced at a 3.20 basis, this means that it is priced to yield 3.20 or has a YTM of 3.20%. If the bond's basis decreased by 10 basis points, the new yield-to-maturity is 3.10%. The fact that the bond has a 4% coupon rate is relevant for determining whether the bond is trading at a premium or discount to par value. Since the bond's YTM is less than 4%, the bond is trading at a premium.
Based on the size of the issue, which of the following issuers could seek a registration exemption under Regulation A? A A $60,000,000 aggregate offering of common stock, that includes $15,000,000 sold on behalf of existing shareholders B A $100,000,000 offering of newly issued common stock C A $50,000,000 offering of newly issued common stock and a $15,000,000 sale on behalf of existing shareholders D A $45,000,000 aggregate offering of common stock, that includes $12,500,000 sold on behalf of existing shareholders
D A $45,000,000 aggregate offering of common stock, that includes $12,500,000 sold on behalf of existing shareholders The maximum size of an offering under a Regulation A exemption is $50,000,000 as an aggregate offering, with no more than $15,000,000 of the $50,000,000 being sold on behalf of existing shareholders. If the $15,000,000 is being sold on behalf of existing shareholders is in addition to the $50,000,000 new shares being offered by the company, the exemption would not apply.
Tactical asset allocation is a type of:' A Buy-and-hold strategy B Systematic rebalancing strategy C Illegal scheme used to gather assets D Active asset allocation
D Active asset allocation In tactical asset allocation, an investment adviser changes a portfolio's asset mix in an attempt to time the market. This is considered an active asset allocation strategy. Buy-and-hold and systematic rebalancing are passive asset allocation strategies.
An investment company that diversifies its portfolio among different investment classes based on computer modeling techniques and forecasts of changes in the economy is called a(n): A Speculative fund B Aggressive growth fund C Hedge fund D Asset allocation fund
D Asset allocation fund An asset allocation fund invests its portfolio among a variety of investment classes, such as equities, bonds, and "cash" (money-market investments). The fund manager might change the allocation based on computer modeling techniques and forecasts of economic changes.
Which of the following choices would NOT be subject to the holding period restriction under Rule 144? A Restricted stock acquired under an investment letter B Restricted stock acquired under a stock option plan C Control stock acquired under a private placement D Control stock acquired through an open-market purchase
D Control stock acquired through an open-market purchase There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period.
The U.S. government does NOT guarantee the payment of interest and principal for which of the following securities? A GNMA (Ginnie Mae) securities B Treasury notes C Treasury Receipts D FHLMC (Freddie Mac) securities
D FHLMC (Freddie Mac) securities The U.S. government guarantees the payment of interest and principal on all Treasury securities as well as securities that are issued by the Government National Mortgage Association (GNMA or Ginnie Mae). Securities that are issued by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), which is a government-sponsored enterprise (GSE), are not guaranteed or backed by the U.S. government.
A pension fund manager wants to protect the fund's diversified stock portfolio against a market downturn. To best meet this objective, he should write: A Yield-based calls B Covered puts C Uncovered calls D Index options
D Index options Index options will move with the market as a whole and, therefore, provide a better hedge than the other choices.
Treasury bills are issued to mature in all the following time frames, EXCEPT: A One month B Three months C Six months D Nine months
D Nine months Treasury bills mature in one month, three months, six months, or twelve months. They do not have nine-month maturities at issuance.
A customer owns 1,000 shares of LRR preferred stock and the company is in the process of conducting a rights offering for its common stock. Under the terms of the rights offering, two rights are required to buy one new share and the subscription price is $25 (the stock's current market price is $26.50). This customer would be entitled to which of the following? A 1,000 shares if the customer pays $25 per share B 500 shares if the customer pays $25 per share C 500 shares if the customer pays $26.50 per share D No additional shares
D No additional shares As far as rights offerings are concerned, preferred stockholders do not have the right to subscribe to the offering. Instead, rights offerings are made available to common stockholders.
State governments receive the LEAST amount of revenues from: A Sales taxes B Gasoline taxes C Excise taxes D Property taxes
D Property taxes State governments receive the least amount of revenues from property taxes. States raise money primarily from income taxes, sales taxes, excise taxes, and license fees. Very little is raised from property taxes. Local municipalities raise most of their funds from property taxes (real estate taxes).
Which of the following CMOs has the MOST prepayment risk? A Sequential pay tranches B Accrual or Z tranches C Planned amortization class (PAC) tranches D Support or companion tranches
D Support or companion tranches The planned amortization class (PAC) is a type of CMO that is designed for more risk-averse investors and provides a predetermined schedule of principal repayment, as long as mortgage prepayment speeds are within a certain range. This greater predictability of maturity is accomplished by establishing a sinking-fund type of schedule. The PAC tranche has top priority and receives principal payments up to a specified amount. Any excess principal goes to a companion or support tranche that has lower priority. Holders of the companion tranche are generally compensated for this risk with higher yields.
When opening an account for a person who is age 65 or older, which of the following is TRUE? A The account owner must provide information on a qualified guardian. B The account owner must provide information on a trusted contact person. C The RR is required to request information concerning the executor of the person's estate. D The RR is required to request the trusted contact person's name and contact information.
D The RR is required to request the trusted contact person's name and contact information. Although not required, a member firm should make a reasonable effort to obtain the name and contact information (e.g., mailing address, phone number, and email address) for the account owner's trusted contact person. Ideally, this information is obtained when the account is opened or updated. Acquiring this information should be included with all of the other customer-related information being obtained.
Which of the following statements is NOT TRUE for a bond trading at a premium? A The bond will trade with the current yield lower than the nominal yield. B The bond will trade at a basis below its coupon rate. C The bond will have a current yield that is higher than the yield basis. D The basis and coupon will be identical.
D The basis and coupon will be identical. Basis is a different way of saying yield to maturity. In the case of a bond trading at a premium, the nominal yield (coupon) will be higher than the current yield and the yield to maturity (basis). Additionally, the current yield will be larger than the yield to maturity.
A corporation may choose to pay its shareholders with cash dividends orstock dividends. Which of the following statements concerning the tax status of these events is the most accurate? A The cash and stock dividends are taxable in the year received B The cash dividends are taxable in the year received and the stock dividends are tax free C The cash and stock dividends are received tax free D The cash dividends are taxable in the year received and the stock dividends are subject to taxation when the stock is sold
D The cash dividends are taxable in the year received and the stock dividends are subject to taxation when the stock is sold Only cash dividends are taxable at the time of distribution. The payment of a stock dividend simply increases the number of shares held by each shareholder. Shareholders must, however, adjust their cost basis. For example, if a client owned 100 shares that she bought at $80 ($8,000 total) and the issuer pays a 10% stock dividend, she now owns 110 shares with a cost basis of $72.73 per share. Her $8,000 investment has now been spread over her 110 shares. (110 x $72.73 = $8,000.) The sale of the stock becomes a taxable event.
A municipality issues an original issue discount bond. If an investor buys the bond when it is first issued and holds the bond until it matures, what is the tax treatment on the discount? A The discount is treated as a long-term capital gain B The discount is treated as ordinary income C The discount is treated as interest income and is subject to federal tax D The discount is treated as part of the interest income and is exempt from federal taxes
D The discount is treated as part of the interest income and is exempt from federal taxes If a municipality issues an original issue discount bond and the investor holds the bond until it matures, the discount is treated as part of the interest income and is exempt from federal taxes. If the bond is sold prior to maturity, then an adjusted cost basis is determined and compared to sale proceeds to determine if there is a gain or loss on the transaction.
Which of the following securities will probably have the greatest fluctuation in price when interest rates move up or down? A Commercial paper B Treasury bills C Treasury notes D Treasury bonds
D Treasury bonds Treasury bonds have the longest maturity of the choices listed and will have the greatest fluctuation in price. Since they have the longest maturity, they will be exposed to the risks of the marketplace for the longest period.
According to the Customer Identification Program, broker-dealers are required to verify each customer's identity: A Before the account is opened B Before the privacy notice is given C Before the first trade D Within a reasonable period
D Within a reasonable period The Customer Identification Program (CIP) is part of a broker-dealer's overall anti-money laundering compliance program. Under this program, a customer's identity must be verified within a reasonable period following the opening of the account.
