KAPLAN FINAL #2
To meet the initial Regulation T call in a margin account, a customer could deposit
200% of the call in fully paid-for marginable securities. With a loan value of 50%, delivering fully paid-for marginable securities in an amount twice the required cash call enables the brokerage firm to lend the client cash sufficient to meet the required call.
The item that is NOT true when you read a bond quote of 6.5s of 29 at 99 is A) if traded at this price, the yield to maturity rather than the yield to call would be shown on the confirmation. B) the bond is trading at a 1-point discount. C) the bond matures in 2029. D) if the price quote was changed to a basis quote, the yield would be less than 6.5%.
FALSE: if the price quote was changed to a basis quote, the yield would be less than 6.5%. This bond is trading at a discount of 1 point ($10); therefore, a basis quote, which is the bond's yield to maturity, will be greater than the 6.5% coupon, not less than 6.5%. YTC is only shown when it produces the lowest yield. That would never be the case with a bond traded at a discount.
A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments?
PSA The Public Securities Association (PSA) is the source of historical data for prepayment projections on CMOs.
An investor is long 300 shares of CTS stock and short 30 CTS May calls. This position can best be described as
RATIO SPREAD WITH AN UNLIMITED LOSS POTENTIAL. This position is a ratio call spread because more calls were sold (30) than the long stock position covers (only 300 shares). To cover 30 calls, 3,000 shares would be needed. This strategy generates additional premium income for the investor, but also it entails unlimited risk because of the short uncovered calls.
An immediate dilution to earnings per share (EPS) would be least likely to occur from A) a 10% stock dividend. B) conversion of debentures. C) a 2:1 stock split. D) refunding a bond at par.
REFUNDING A BOND AT PAR When a bond is refunded at par, the cash used is equal to the reduction in the liability resulting in no immediate corporate EPS (the number of shares remains the same). A stock split, a stock dividend, and conversion of a debenture increase the number of shares outstanding. Because the earnings haven't changed and there are more shares, the EPS is lower (diluted).
A bond is being issued to build a toll road. It has been identified that the state does not own all of the property that the road is going to be built upon. This would most likely be disclosed in
THE QUALIFIED LEGAL OPINION Any legal uncertainty of which bondholders should be informed is first identified by the legal opinion obtained by the municipality issuing the bond. Municipal bonds are exempt from registration with the SEC, and therefore, do not have a prospectus requirement. The full and fair disclosure document for municipal bonds is called the official statement (which would disclose this information as well).
A municipal securities advertising piece intended to be distributed to retail customers must be approved by
a municipal securities principal or a general securities principal.
Having been a customer of a broker-dealer for over 10 years, currently holding equity positions and cash in his account, Daryl Smith wants to purchase 1,000 shares of a penny stock. Smith is
exempt from the requirement to receive a suitability statement but subject to the disclosure requirement. Smith meets the criteria for an established customer under the penny stock rules. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements.
An investor's margin account has a short market value of $9,000 and a credit balance of $13,000. Assuming Regulation T is 50%, a maintenance call will be triggered if the short market value increases above
$10K CLIENT ALREADY HAS AN ACCOUNT!! Minimum maintenance rules require a minimum maintenance of 30% for a short margin account. The maintenance level is determined by dividing the credit balance by 1.3 ($13,000 ÷ 1.3 = $10,000).
An investor writes 1 XYZ 180 call at 6.65. If the investor makes a closing purchase at the call's intrinsic value when the stock is at $184.75, he realizes a gain of
$190 The investor received a premium of $665. The position was closed with a purchase at intrinsic value: $475. The net profit is the difference, or $190.
With ABC stock trading at 33.10, a customer buys 2 ABC Jun 35 puts at 4.35. What is the time value of each contract?
$2.45 Time value is the premium minus the intrinsic value ($4.35 − $1.90 = $2.45)
An investor contributes $200,000 in cash to an oil and gas partnership. The partnership has entered into a nonrecourse loan for $500,000. The customer's cost basis in the program is
$200K Cost basis in all direct participation programs (DPPs), other than real estate, consists of actual investment plus any recourse financing. Because this note is nonrecourse, it is not included in the customer's cost basis.
A customer has $10,000 of capital losses and $2,000 of capital gains in her portfolio this year. The tax consequences would be
$3K LOSS DEDUCTION WITH A $5K LOSS CARRIED FORWARD The customer's net tax consequence is a loss of $8,000. Each year, individuals are permitted to deduct $3,000 in losses from their income, and any excess may be carried over to the following year. In this case, after the $3,000 deduction, the excess carried over to the following year would be $5,000.
An investor with no other positions sells 1 ABC Jun 25 put at 1.50. If the put is exercised when the stock is trading at 24, and the investor immediately sells the stock in the market, what is the investor's profit or loss?
$50 PROFIT The investor has the obligation to buy the stock at the strike price of 25. The stock is currently worth 24, which is a loss of 1. The investor's premium of 1.50 minus the loss of 1 leaves a net profit of 0.50 (0.50 × 100 = $50).
An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 12.5 million shares outstanding, and, on average, 30,000 shares have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next three months is
125K The affiliate who has held the restricted shares beyond the six-month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the four weeks before the sale in any 90-day period. In this instance, 1% of the outstanding shares (125,000) is greater than the last four weeks' average trading volume (30,000).
Even in the best firms, there are times when a customer files a complaint. FINRA recordkeeping requirements for those complaints is
4 YRS Although the general recordkeeping requirements are three years, with some of the corporate-type documents being six years, FINRA has selected four years as the retention period for customer complaints.
The following information has been reported for ABC stock: Annual dividend = $2 PE ratio = 20 Closing price = $100 What is the dividend payout ratio?
40% The dividend payout ratio is computed by dividing the dividend by the earnings per share ($2 ÷ $5 = 0.4, or 40%).
XYZ County Sewer Revenue 6.5% municipal bonds mature in 20 years. If they are currently offered at 92, they have a yield to maturity of approximately
7.19% Because this bond has a nominal yield of 6.5% and is selling at a discount (92), the yield to maturity has to be greater than 6.5%. Remember: price down, yield up. REMEMBER DISCOUNT BOND!!!
Your customer wants to buy 1,000 shares of XYZ stock and has entered a not-held order with instructions to you to purchase the stock when you feel the price looks right. Under the rules, this order will be treated as
A DAY ORDER Unless the customer designates that the order is GTC, a not-held order is treated as a day order, and any unexecuted portion of the order remaining at the end of the day will be canceled.
A group of underwriters has agreed to engage in a mini-max underwriting for a new issue of equity securities with the issuer of those securities. Which of the following best describes this underwriting agreement?
A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. A mini-max agreement is a type of best efforts underwriting agreement. In a best efforts agreement, the underwriters are not purchasing unsold shares from the issuer. There are two components to a mini-max agreement. The first sets a floor, or minimum, amount the issuer needs to raise to move forward with the underwriting, and the other sets a ceiling, or maximum, dollar amount of securities the issuer is willing to sell.
ABC stock is going ex-dividend today, and certain orders on the order book must be reduced prior to the opening. For a cash dividend of 0.12, which of the following orders would be reduced? A) Sell 100 ABC at 45 stop. B) Buy 100 ABC at the market. C) Sell 100 ABC at 50. D) Buy 100 ABC at 50 stop. Explanation
A) Sell 100 ABC at 45 stop. OSLOBS (ABOVE MKT) = SELL LIMIT, BUY STOP OBLOSS (BELOW MKT) = BUY LIMIT, SELL STOP Orders that are entered below current market value would be reduced unless do not reduce (DNR) instructions are received. Those orders are buy limits, sell stops (BLiSS) orders. These orders are reduced by the amount of the dividend on the ex-dividend date for a cash dividend distribution.
Because of their unlimited potential loss, short positions A) are marked to the market at the close of each day. B) must be approved by a designated principal before execution. C) require a higher initial margin deposit. D) can only be taken by those who are accredited investors.
A) are marked to the market at the close of each day. TO MAKE SURE THERE IS MIN. MAINTENANCE MARGIN AMOUNTS!!! Although most securities positions are marked to the market on a daily basis, it is more important that this be done with short positions because of how quickly they can reach the maintenance margin level. The initial margin is the same as long purchases, and the term accredited investors applies principally to private placements. Short sales, just as with any transaction, must approved by a principal, but not in advance.
A customer of a broker-dealer has a portfolio of investments where expected payments from mortgages back the securities via a process known as securitization. These securities are best described as
ASSET-BACKED SECURITIES Asset-backed securities are ones whose value is backed by the expected cash flow from a pool of assets such as mortgages, other types of loans, credit card debt, and leases. Pooling individual smaller and sometimes less liquid assets into larger securities allows them to be sold easier to investors. This process is known as securitization, and when done with mortgages, are sold as collateralized mortgage obligations (CMOs). LO 12.c
A registered representative (RR) has prepared a sales piece for one of his retail customers demonstrating a trading strategy. Regarding the piece, which of the following statements is true? A) The piece will be regulated as a retail communication with the public. B) The piece will be regulated as correspondence. C) The piece must be approved by a principal before being sent to the customer. D) All material sent to individual clients must be submitted to FINRA before use.
B) The piece will be regulated as correspondence. A sales piece that is being sent to one customer will be regulated as correspondence (25 or fewer recipients = correspondence). While it must be reviewed and approved by a principal in accordance with the firms rules and procedures, there is no requirement to be approved in advance by a principal or FINRA.
For an oil and gas limited partnership (LP), allowances in the form of deductions are allowed by the IRS to be taken to compensate for a depleting resource. The allowance can be taken based on A) the condition or grade of the natural resource. B) the amount of the natural resource sold. C) the amount of the natural resource extracted. D) the cost of moving the natural resource to refiners and distributors.
B) the amount of the natural resource sold. Depletion allowances may be taken only once the oil or gas is sold and is based on the amount sold (depleted).
A U.S. importer orders computer components from a Japanese manufacturer with payment to be made in yen upon delivery. To hedge against the dollar weakening against the yen before payment is due, the importer should
BUY YEN CALLS EPIC: US Exporters buy Puts, Importers buy Calls IPEC: Foreign Importer buys Puts, Exporter buys Calls
A technical trader tells you that while looking at a chart, he sees a primary trend of higher highs and higher lows. What would this be an indication of, and according to what theory?
Bullish market according to the Dow theory According to the Dow theory, the primary trend in a bull market is a series of higher highs and higher lows. Conversely, in a bear market, the primary trend is a series of lower highs and lower lows.
Under the Investment Company Act of 1940, the term investment company would include A) a holding company and a management company. B) a variable annuity and a closed-end management company. C) a unit investment trust and a management company. D) a unit investment trust and a holding company.
C) a unit investment trust and a management company. The Investment Company Act of 1940 categorizes investment companies as either face amount certificate companies, unit investment trusts, or management companies (open or closed end). The separate account of a variable annuity is characterized as an investment company, but the actual annuity is not.
A customer's confirmation of a municipal securities transaction must include A) the lowest potential yield the customer may receive and information regarding the catastrophic call provision. B) the highest potential yield the customer may receive and information regarding the catastrophic call provision. C) the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax. D) the highest potential yield the customer may receive and the amount of markup or markdown in a principal transaction.
C) the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax. Customer confirmations always reflect a worst-case scenario (lowest) regarding yield. Any possible tax ramifications, such as the bond being designated as an AMT bond, must also be disclosed. Catastrophe call provisions need not be disclosed on a confirmation. Commissions and markups/markdowns are disclosed, but not the highest yield.
When an analyst adds back the current year's depreciation to the net income, she is computing the company's
CASH FLOW FROM OPERATIONS WHEN CALCULATING CASH FLOWS FROM OPERATING ACTIVITIES, THE DEPRECIATION EXPENSE IS USUALLY ADDED BACK TO THE NET INCOME, BECAUSE DEPRECIATION IS NOT A CASH TRANSACTION AND WAS NOT ACTUALLY INCURRED, WHICH MEANS THAT NET INCOME WAS REDUCED BY THE AMOUNT OF DEPRECIATION EXPENSE.
A corporation has issued debt securities backed by the securities of other companies that it holds in its corporate investment portfolio. These debt securities are known as
COLLATERAL TRUST BONDS
BOND RESOLUTION (BOND INDENTURE)
CONTRACT BETWEEN BOND ISSUER AND BONDHOLDER. DESCRIBES HOW MUCH INTEREST AND PRINCIPAL WILLBE PAID TO BONDHOLDERS, WHEN AND HOW PYMTS MADE, HOW BONDS ARE REDEEMED, AND WHAT HAPPENS IN THE EVENT OF DEFAULT.
The possibility of losing all or part of a person's invested principal in a debt security because of the issuer's failure best describes
CREDIT RISK Credit risk, also called default risk, involves the danger of losing all or part of one's invested principal through an issuer's failure. Although credit risk is most often associated with debt securities, when a company cannot pay its debt, the equity securities can wind up worthless. This is the risk taken by investors buying stock in highly leveraged companies. The higher the rating, the lower the credit risk.
When investing in a direct participation program (DPP), an investor should know that some asset types cannot be depreciated or depleted. One example of such an asset would be A) buildings. B) oil. C) crops. D) gas.
CROPS Natural resources like oil and gas can be depleted and buildings are a depreciable asset, but farm crops are considered to be renewable assets.
Certain account types must be opened as cash accounts, including IRAs and A) individual investment accounts. B) custodial accounts. C) corporate investment accounts. D) partnership accounts.
CUSTODIAL ACCOUNTS Included in the types of accounts that must be opened as cash accounts are personal retirement accounts (IRAs and tax-sheltered annuities), corporate retirement accounts, and custodial accounts (Uniform Gift to Minors Act [UGMA] and Uniform Transfers to Minors Act [UTMA] accounts).
A customer has substantial passive income from a real estate investment. Which of the following limited partnership (LP) programs is most suitable for this customer if he wishes to offset this income? A) A government-assisted housing program B) An oil and gas income program C) An equipment leasing program D) An oil and gas exploratory program
D) An oil and gas exploratory program Passive income may be offset by passive losses. Of the programs listed, the one most likely to have significant losses, particularly in the early years, is an exploratory or wildcat drilling program.
Your client, age 52, is considering taking distributions from her qualified retirement plan. A portion of her contributions were made with after-tax dollars. Which of these is correct? A) Distributions of earnings are tax free, but a 10% penalty will be applied to the distributions. B) Distributions of cost basis is 100% taxable, and a 10% penalty will be applied to the distributions. C) Distributions of earnings are tax free, and there will not be a penalty applied to the distributions. D) Distributions of earnings are 100% taxable, and a 10% penalty will be applied to the distributions.
D) Distributions of earnings are 100% taxable, and a 10% penalty will be applied to the distributions. For qualified plans, distributions of earnings are tax deferred until taken. When taken, those earnings are 100% taxable. Unless meeting one of the exceptions (e.g., death, disability), distributions taken before age 59½ will have a 10% penalty applied. When there is a cost basis (after-tax contributions), that portion is always returned tax and penalty free.
A registered representative (RR) at a broker-dealer mentions continuity of life as it pertains to limited partnerships (LPs). The reference can best be explained by which of the following statements? A) LPs will exist until the last partner is deceased. B) LPs have continuity of life, which means they will exist in perpetuity. C) Continuity of life is a characteristic of LPs because they are scheduled to end on a predetermined date. D) LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date.
D) LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date. Continuity of life is a corporate characteristic that must be avoided for a partnership to qualify as a direct participation program. The phrase refers to the fact that a corporation should exist in perpetuity. LPs, however, are all scheduled to end on a predetermined specific date.
Under the Securities Act of 1933, SEC registration is required for A) a commercial paper offering of $30 million maturing in 180 days. B) a municipal revenue note offering of $4 million. C) a private placement offering of $60 million by a brokerage firm. D) an offering of $25 million of a corporate bank holding company.
D) an offering of $25 million of a corporate bank holding company. While some banks and savings and loans are exempt, issuers' corporate bank holding companies are not. Private placements, municipal securities, and commercial paper (short term) are all exempt from federal registration.
A customer of your broker-dealer wants to grant his registered representative the right to make investment decisions for his account. This would be done by A) authorizing the registered representative to determine the price or time of the trade once the client has entered the order. B) providing the registered representative with the prescribed discretionary authorization form not later than settlement date of the first discretionary trade. C) providing FINRA with the prescribed discretionary authorization form before the first discretionary trade. D) providing the registered representative with the prescribed discretionary authorization form before the first discretionary trade.
D) providing the registered representative with the prescribed discretionary authorization form before the first discretionary trade. A discretionary account always requires prior written authorization from the customer in the form of a limited power of attorney. The limited power of attorney is the document that grants the registered representative the authorization to trade, and it is sometimes known as the trading authorization.
To achieve its goals, an inverse ETF uses A) short selling. B) arbitrage. C) derivatives and debt. D) preemptive rights.
DERIVATIVES AND DEBT An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to the advantage of temporary imbalances between the ETF's net asset value and market price.
An investor wishes to save for her retirement. She arranges to have $250 per month withdrawn from her account to be invested into a commodity fund. This type of savings plan is called
DOLLAR COST AVERAGING (DCA) This is the classic DCA. You have to go back to the 1970s to know the old NYSE MIP.
A client, age 52, wants to know if there are any circumstances that will allow withdrawals from her IRA without having to pay the 10% penalty. One example you could give is
EDUCATION EXPENSES FOR GRANDCHILD Distributions before age 59½ are subject to a 10% penalty, as well as regular income tax. The 10% penalty is not applied in the event of the following: death; disability; purchase of a principal residence by a first-time homebuyer (up to $10,000—lifetime); education expenses for the taxpayer, a spouse, a child, or a grandchild; medical premiums for unemployed individuals; medical expenses in excess of defined AGI limits; and Rule 72(t): substantially equal periodic payments.
A registered representative (RR) is explaining characteristics of equity-linked notes (ELNs) and exchange-traded funds (ETFs) to a new client. All of the following statements are true except A) ELNs are equity instruments. B) ELNs can be traded OTC or on a listed exchange. C) ETFs trade on listed exchanges much like stocks. D) ETFs can hold assets like stocks, bonds, or commodities, or can track an index. Explanation
FALSE: A) ELNs are equity instruments. EQUITY-LINKED!! ELNs are debt instruments. Their final payment at maturity is based on the performance of a single stock, a basket of stocks, or an equity index. These notes can be traded OTC or on listed exchanges. ETFs trade on listed exchanges and have many of the same trading characteristics as stocks. Their portfolios can hold assets such as equity securities, debt securities, or commodities, and many ETF portfolios are structured to track the performance of a specific index.
You are listening to another registered representative (RR) speak about Rule 147 offerings and recognize that one of his statements is incorrect. Which of these is not correct? A) Under one Rule 147 provision that can be met, an issuer must derive 80% or more of its revenue from the state in which its principal office is located. B) Rule 147 applies to intrastate stock offerings. C) Stock sold under Rule 147 is sold in an exempt transaction. D) Buyers of stock issued under Rule 147 are subject to a one-year holding period before selling to a nonresident.
FALSE: Buyers of stock issued under Rule 147 are subject to a one-year holding period before selling to a nonresident. Holders of shares issued under Rule 147, the intrastate offering exemption, cannot resell their shares to nonresidents of the state for a period of six months from the date of purchase.
All of the following statements regarding municipal advertising are true except A) it must not be misleading. B) it must be approved by a principal. C) copies must be kept for four years. D) copies must be sent to the Municipal Securities Rulemaking Board (MSRB).
FALSE: Copies must be sent to the Municipal Securities Rulemaking Board (MSRB). All municipal advertising must be approved, in writing, by an appropriate principal before the first use and kept on file for four years. It need not be filed with the MSRB because the MSRB has no enforcement authority.
With the underlying stock at $37, an ABC Jan 35 call is trading at $2. All of the following statements regarding the option are true except A) it is in the money. B) it is at parity. C) it has time value. D) it is trading at breakeven.
FALSE: IT HAS TIME VALUE This option is at parity or breakeven, which occurs when the premium equals the in-the-money amount. An option trading at parity has no time value. When an option has no time value remaining, it is very near or at the moment of expiration.
One of your customers is speaking to you about spread strategies for equity options and makes several statements about spreads. Which of her statements is false? A) "With a time or horizontal spread, both options expire at the same time, which means the position expires completely." B) "No spread can ever have an unlimited maximum loss potential." C) "If a position, whether long or short, begins to move against me, I can always close it out in the market." D) "With spreads, I always know exactly how much I can lose or gain once the position is established."
FALSE: With a time or horizontal spread, both options expire at the same time, which means the position expires completely. Spreads have a defined maximum gain and loss, and neither can ever be unlimited. Spreads like single option positions can be closed in the market before expiration. Time or horizontal spreads have contracts that expire in different months, not the same time.
The Securities Act of 1933 does not regulate A) the use of a preliminary prospectus during the cooling-off period. B) the delivery of a prospectus when selling a municipal bond mutual fund. C) municipalities registering a revenue bond for building an airport terminal. D) review of a registration form submitted to the SEC before a public sale of stock. Explanation
FALSE: municipalities registering a revenue bond for building an airport terminal. Municipal securities are exempt from the registration requirements of the Securities Act of 1933.
Your client asks you to explain a not-held order. You could correctly explain that a not-held order can only be done in a discretionary account. B) can be filled only on the last trade of the day. C) gives time or price discretion to the floor broker. D) must be executed immediately and in its entirety.
Gives time or price discretion to the floor broker. With a not-held order, the customer gives the firm's time or price broker the discretion as to time or price. Remember, however, that time and price alone do not require the order to be done in a discretionary account.
Which of the following statements regarding hedge funds is correct? A) Hedge funds are passively managed in an attempt to provide predictable returns for investors. B) Hedge funds are usually structured as a partnership. C) Hedge funds are typically registered with the SEC as open-end investment companies. D) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management.
Hedge funds are usually structured as a partnership. Hedge funds are usually structured as a partnership with the general partner as investment manager and the investors as limited partners. In general, hedge funds are exempt from registration with the SEC. Hedge funds are actively and aggressively managed, seeking superior returns—and they are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management.
An investor wanting to purchase municipal bonds should be aware that in most instances, if she buys the bond and then later sells it for a profit, then
INTEREST RECEIVED WILL BE EXEMPT FROM TAXATION, BUT NOT THE CAP GAINS. INTEREST ON MUNICIPAL DEBT IS LARGELY EXEMPT FROM TAXATION, BUT NOT THE CAPITAL GAINS
Which of the following does the capital asset pricing model (CAPM) assume?
Investors are averse to risk and believe that diversification can be used to reduce risk. (RIDICULOUS!) The CAPM takes into account systematic risk, the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it. Therefore, the pricing of an asset must reflect that. SYSTEMATIC RISK IS MARKET RISK!!!
A debt securities analyst is examining a municipality's statutory debt limit, which he knows can limit the issuer from
Issuing general obligation bonds.
Which of the following is an interest-bearing instrument? A) Treasury bill B) Commercial paper C) Jumbo CD D) Zero-coupon bond
JUMBO CD Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing. COMMERCIAL PAPER IS UNSECURED ST DEBT ISSUED BY A CORP AT A DISCOUNT
Your customer wants you to recommend an option strategy that will prove profitable in a highly volatile stock, regardless of which direction the stock price moves. To suit the client's objective, you should recommend
LONG STRADDLE A long straddle consists of a put and a call on the same security with the same strike price and the same expiration date. Should the stock increase, the call will increase in value. If the stock declines, the put will increase in value, making the position profitable if the stock moves in either direction.
An associate of a broker-dealer engaged in municipal securities activities such as soliciting municipal bond business but is not involved in retail sales
MUNICIPAL FINANCE PROFESSIONAL (MFP) An MFP is an associate of a broker-dealer engaged in municipal securities representative activities, other than retail sales. Those activities can include the solicitation of municipal bond business. Though someone employed by a broker-dealer is not prohibited from being an elected official of a municipality, there is no requirement that an MFP must be. Being employed by a broker-dealer dealing in municipal bonds and the MSRB simultaneously would be prohibited as a conflict of interest.
While looking at a report of trades that had been executed for your customers in the secondary market, you would not see included A) American depositary receipts (ADRs). B) agency securities. C) municipal bonds. D) mutual fund shares.
MUTUAL FUND SHARES There is no secondary trading market for mutual funds. All purchases and redemptions are done through the issuer or underwriter. All shares sold are newly issued shares (primary market).
A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be
NO TAX IS DUE Investors in variable annuities are only taxed on the earnings of the account. This account lost money—there were no earnings to be taxed.
Which of the following statements regarding the sale of restricted stock under Rule 144 is true?
Non-affiliates are not subject to volume restrictions on stock held for more than six months. Sellers of restricted stock who are not defined as affiliated persons may sell freely after meeting a six-month holding period. Affiliates may also sell after meeting the six-month holding period but are subject to volume restrictions as mandated in Rule 144. Form 144 must be filed no later than concurrent with the sale
An individual is covered under his employer's 401(k) plan. The plan provides for 100% employer matching of the first 3% of the employee's contribution. The employee decides to contribute 7% of his pay to the plan. Under ERISA, which of the following statements is correct?
ONLY THE 7% CONTRIBUTED BY THE EMPLOYEE IS IMMEDIATELY VESTED Under ERISA rules, any contribution by an employee is immediately vested. It is only employer contributions that may subject to a vesting schedule.
Which of the following collateralized mortgage obligation (CMO) tranches tends to have low extension and reinvestment risk?
PACs PACs have targeted maturity dates. They are retired first, and offer protection from prepayment risk and extension risk (the chance that principal payments will be slower than anticipated) because changes in prepayments are transferred to companion tranches, also called support tranches.
A bond is quoted as QRS Zr 39. This quote tells an investor that the bond
PAYS NO INTEREST UNTIL MATURITY The initials Zr in the bond quote indicate that this is a zero-coupon bond. Zero-coupon bonds pay all interest at maturity even though the investor is taxed annually as if he had been receiving the interest over the life of the bond. (PHANTOM INCOME)
A violation of MSRB rules would occur if
REP GAVE $250 GIFT TO AN ASSOCIATED PERSON OF ANOTHER B/D. MSRB rules limit gift-giving to a maximum of $100 per person per year in cash or value. The $250 is the amount a municipal finance professional can make as a political contribution to a candidate for whom the MFP is eligible to vote.
A mutual fund portfolio consists primarily of shares of companies considered to be prime candidates for a takeover attempt. Of these choices, this mutual fund is best described as
SPECIAL SITUATION FUND Special situation funds buy securities of companies that are considered to be in a position to benefit from special, nonrecurring situations. Those could be new management, new products, patents pending, takeover, or turnaround situations.
Regarding risk, traders in broad index options are most exposed to
SYSTEMATIC RISK Systematic risk is sometimes referred to as market risk. Because an index tracks the market, or a segment of the market, index options expose traders to systematic or market risk more than other risks.
XYZ, Inc., has 5 million shares outstanding and will issue 1 million shares of new stock through an upcoming rights offering. Regarding the rights offering, a registered representative (RR) should know that A) the value of the right will generally increase after the ex-date. B) the exercise price is generally lower than the current market price at issuance. C) XYZ will issue 1 million rights. D) a shareholder will generally have two to three weeks to exercise the rights.
THE EXERCISE PRICE IS GENERALLY LOWER THAN THE CURRENT MKT PRICE AT ISSUANCE The exercise price is generally below the current market price at issuance. None of the other choices are true because the value of the right drops on the ex-rights date. Each existing share receives 1 right, so in this case, XYZ will issue 5 million rights. An investor must exercise the rights within 30-45 days of issuance; otherwise, they will expire.
The IRS has determined that the NYNY real estate existing property limited partnership is abusive. The most likely reason would be because A) there was no viable profit motive. B) each partner received enough in losses to shelter all income. C) all of the assets were found to be rental properties. D) no net profit was generated after losses were taken.
THERE WAS NO VIABLE PROFIT MOTIVE To qualify as a limited partnership direct participation program (DPP), above all else, there must be a viable chance to make a profit. Any DPP established without a profit motive or with the intention of only generating tax losses for investors may be determined abusive by the IRS subjecting the partners to penalties including prosecution for fraud.
A customer asks if there are any debt instruments providing income that might at least keep pace with inflation and offer some tax advantages. What suitable recommendation could be made that would meet the customer's criteria? A) TIPS B) U.S. T-bills C) ADRs D) GNMAs
TIPS Treasury Inflation Protection Securities (TIPS) are debt instruments specifically designed to provide income that keeps pace with inflation. Issued by the U.S. Treasury, the interest is tax exempt at the state and local level. Neither GNMAs nor Treasury bills (T-bills) meet all of these criteria, and American depositary receipts (ADRs) are not debt instruments.
You use fundamental analysis to help make investment decisions. For this type of analysis, you would not be interested in A) positioning of a company within its industry. B) trading volume and price patterns. C) current business conditions. D) corporate financial statements.
TRADING VOLUME AND PRICE PATTERNS Fundamental analysis looks at the company itself or the economy, whereas technical analysis looks at trading patterns. The words charts, price, and volume are usually indicators that the analysis is technical.
A registered representative (RR) is recommending to his client a newly issued debt security backed by the U.S. government with a maturity of seven years. This security is most likely A) a GNMA pass-through security. B) a guaranteed note. C) a Treasury note. D) a Treasury bond.
TREASURY NOTE Backed by the U.S. government, Treasury notes are intermediate-term bonds maturing in 2-10 years. T-bonds have longer maturities, and maturities on GNMA pass-through securities generally run 15 or 30 years. When the term guaranteed is used as an adjective, it refers to a security whose principal and interest, or dividends if equity, is guaranteed by someone other than the issuer. It is not used in reference to Treasury issues because the issuer is the guarantor.
A client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They have a maximum maturity of 365 days. B) They are all auctioned on a monthly basis. C) They are quoted with a bid higher than the ask. D) They are generally callable after the first 6 months.
TRUE: THEY ARE QUOTED WITH A BID HIGHER THAN THE ASK. T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly. BID PRICE ON A TBILL IS THE INTEREST RATE BUYER WANTS TO BE PAID FOR THE BOND. QUOTED IN 32ND, ACTUAL, 365
One of your clients is an executive with a corporation that covers him under a qualified defined benefit pension plan. In addition, the client has maxed out his IRA contributions. With retirement coming up in about a decade, he decides to make a $100,000 lump sum deposit to a single premium deferred annuity. Then, he will begin monthly investments of $5,000 into a periodic payment deferred annuity. He does not plan to annuitize. Instead, he will withdraw funds from the annuities as needed. When those withdrawals are made, how will they be taxed?
The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. Because this is a nonqualified annuity, there are no contribution limits and, once the earnings have been received, the balance is a tax-free return of the original principal. Annuities never receive capital gains treatment.
Which of the following statements regarding real estate investment trusts (REITs) and limited partnerships (LPs) is true? A) They both pass through investment gains and losses to the investor. B) They both pass through investment gains to the investor and have centralized management. C) Only the REIT has centralized management, but both pass through investment gains to the investor. D) They both trade on securities exchanges and OTC and have centralized management.
They both pass through investment gains to the investor and have centralized management. However, REITs are not considered direct participation programs, as are LPs, because there is no pass-through of losses. In addition, although REITs are actively traded in the secondary markets, most LPs are sold in private placements with no active secondary market trading. Both have centralized management.
An investor has purchased American depositary receipts (ADRs) to achieve portfolio diversification. Holding the ADRs in a portfolio entitles the investor to dividends paid in
U.S. dollars and the ability to trade ADRs on U.S. securities markets. Dividends on ADRs are declared in the foreign currency, and are paid to investors in U.S. dollars. This is why ADR investors bear currency risk. ADRs trade on U.S. markets, either on an exchange or OTC.
A 2X leveraged inverse ETF tracks an index that has recently fallen 2%. If the ETF was priced at $25 per share before the drop in the indices price, where should the ETF be priced now, assuming the ETF portfolio performed as intended? $25 * 2% = .50 * 2 (2X LEVERAGE) = $1
UP $1 PER SHARE An inverse fund portfolio attempts to mirror returns that are the opposite of the index it is tracking. Therefore, if the index has fallen, this ETF should be up. A leveraged ETF attempts to produce returns that are a multiple of those produced by the index it is tracking. Therefore, if this index has fallen by 2%, the 2x leveraged fund should move twice as much (4%). With the index dropping by 2%, this inverse fund will rise by 4%; that is, $1 on a $25 index.
A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) U.S. Treasury bonds with 18 years to maturity date B) AAA rated municipal bonds maturing in 18 years C) U.S. Treasury STRIPS maturing in 18 years D) Blue-chip stocks
US TREASURY STRIPS MATURING IN 18 YRS. STRIPS are issued at a discount, and are backed by the U.S. Treasury. Purchasing these maturing in 18 years gives the client a guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bonds will certainly pay off at maturity, but there is no growth potential. The same problem plagues the municipal bonds. Common stock, no matter how respectable the company is today, offer no guarantees for the future.
Your customer has established the following spread: Long 1 ABC Jan 60 call at 5 Short 1 ABC Jan 70 call at 2 The customer will realize a gain at expiration if the spread
WIDENS TO MORE THAN 3 POINTS AND ABC TRADES ABOVE 63 This is a bull call spread (established at a net debit), so the customer wants the spread to widen and the stock price to rise above the breakeven, which is 63.
Which items would change if a company buys equipment for cash? The working capital The total assets The total liabilities The shareholders' equity
WORKING CAPITAL The general balance sheet formula is assets = liabilities + shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it does not affect total liabilities, nor does it affect equity.
Your customer contacts you proposing to invest a large sum of money in five different mutual fund families using Class A shares. Which of the following is correct and important to disclose to your customer regarding suitability and her proposal?
Your customer may not be able to receive sales breakpoints if she divides the investment among five different fund families. The larger the investment amount, the greater the breakpoint sales charge discount on Class A shares would likely be at a single fund company. While Class A shares are appropriate for larger investments because of breakpoint discounts, Class B (back-end load) shares, which offer no breakpoint discounts, are not. Therefore, the most important disclosure would be to explain that the advantage of breakpoint discounts on Class A shares could be lessened or lost if the investment is divided among so many different fund families. Diversification can occur within one fund family or across many, and moving funds from one fund to another within a single fund family is still possible.
Your customer wrote a September 918 index call at 4.15 five months ago. The option expired, and the customer received no assignment notice. For tax purposes, it should be taxed and reported as
a $415 short-term capital gain. When options contracts expire, writers (sellers) report a capital gain equal to the premium amount received; in this case, the amount is $415. Because options only have a nine-month life cycle, all capital gains and losses are short term.
In what is commonly known as a proceeds transaction, one of your clients is using the proceeds from the liquidation of one stock to purchase another stock. In compliance with the 5% markup policy for these transactions, the markup will be computed based on
a combination of both the buy side and the sell side compensation to the dealer. This is known as a proceeds transaction, which is the sale of one position, and the purchase of another with the proceeds of the sale. The 5% markup policy is applicable to proceeds transactions. In compliance with the policy, the markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side, and applying the total to the inside market on the buy side.
A customer is trying to understand any differences between a rollover and a trustee-to-trustee transfer as they relate to his qualified retirement plans. An accurate explanation would be that
a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes.
Regarding convertible debentures, one characteristic of which your clients should be aware of is that
although they trade in line with the issuer's common stock, they are less volatile than the common shares. The lower volatility of a convertible debenture stems from the fact that it has fixed interest payments and will be redeemed at maturity as any other bond or debenture would. No such guarantees apply to common stock.
One of your clients has the opportunity to participate in his employer's employee stock purchase plan (ESPP). Before enrolling, he should be aware that funds will come out of his paycheck on
an after-tax basis, and those contributions are not deductible on his tax return. Contributions to an ESPP are payroll deductions. Though the contribution percentage is calculated on one's pretax salary, they are taken after tax. Contributions to ESPPs are not deductible on one's tax return.
A registered representative is the subject of a disciplinary action that results in a fine and a 60-day suspension of registration. During the 60-day suspension period, the registered representative may A) only perform clerical or administrative functions for the member. B) be paid for business that they refer to other registered representatives while serving the suspension. C) only perform investment advisory services. D) be paid for business generated before the suspension date.
be paid for business generated before the suspension date. During a period of suspension of registration, the individual may not perform any duties for the broker-dealer, whether they require registration or not. They may not be paid for business referred to other registered personnel, but they may receive commissions for business placed before the date of the suspension.
A broker-dealer that is a financial advisor to a municipal issuer
cannot act as an underwriter of the issuer's bonds in a negotiated or competitive bid underwriting and receive compensation for both services. Broker-dealers acting as financial advisors to a municipality regarding a municipal issue are prohibited by MSRB Rule G-23 to also act as underwriters for the same issue regardless of whether the underwriting process has been done by competitive bid or was negotiated. In the event that an exception is allowed, or the broker-dealer performs an advisory function specifically associated with the underwriting, the broker-dealer would be limited to accepting fees for the advisory service only and not be allowed to accept fees for any underwriting services.
A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes
contain information that doesn't have a place in the main body of the financial statements There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are: method of accounting used, collateral securing debt, pension liabilities, and many others. Footnotes are an integral part of the financial statements and are usually found with this notation, "The accompanying footnotes to the financial statements are an integral part of these statements.
With respect to elective deferrals, a 403(b) plan must meet the requirements of the universal availability rule. Under this rule, if any employee of the employer maintaining the 403(b) may participate, then all of the employer's employees must be given the opportunity to participate. Certain employees may be excluded, including A) individuals not contributing to an IRA. B) employees who normally work less than 1,200 hours per year. C) any substitute teacher. D) employees who normally work less than 20 hours per week.
employees who normally work less than 20 hours per week. The IRS considers 20 hours per week to be equivalent to 1,000 hours per year (where mandatory eligibility begins). Working less than that allows the employer to exclude the employee from participation. Although most substitute teachers are likely to fall short of the 1,000 hours per year, any who meet that requirement must be given eligibility. Contributing to an IRA has nothing to do with plan eligibility.
A website maintained by a fund company shows that one of the company's mutual funds currently has a NAV of $9.50 and a public offering price (POP) of $10 per share. Your client sees this information and enters an order to make a $10,000 purchase. He asks you to calculate the number of shares he will be able to buy with today's investment. You would respond that
it cannot be determined until after the order is processed by the fund at the next calculated (forward) price. Mutual funds use forward pricing, so the purchase or redemption price is never known until after the order is processed. This order will be executed at the next calculated POP.
You believe XYZ stock will be rising and want to recommend a spread position to your client that would be profitable if it does. Of the positions listed, you would recommend that the client go A) short 1 XYZ Jan 30 call and long 1 XYZ Jan 50 call. B) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put. C) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put. D) long 1 XYZ Jan 40 call and short 1 XYZ Jan 30 call.
long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put. Of the choices given, the correct answer is the credit put spread. Credit put spreads are bullish. Anytime the long option in a spread has a lower strike price than the short position, the spread is known as a bullish spread. We refer to that strategy as buy low, sell high (BLSH). SELLING A PUT WITH HIGHER STRIKE IS THE DRIVER, CREDIT PUT SPREAD, SELLING A PUT IS BULLISH
A customer has entered a day order to buy XYZ at 31.50. An hour before the market closes, she calls you and says that she is considering changing the order to a good-til-canceled (GTC) order. You tell her that
she should consider leaving the day order entered for the remainder of the day, and if left unexecuted, should enter a GTC order in the morning so that her existing day order would not lose its priority before today's close. Orders maintain priority on the order book on the basis of the time of entry. Canceling and reentry loses the existing priority. Leaving the day order for the remainder of the day, and if left unexecuted, entering a GTC the next day, is the best order replacement strategy in this situation.
A registered representative (RR) correctly explains to a new customer who wants to learn about the tax and risk characteristics of collateralized mortgage obligations (CMOs) that the securities are
taxable at all levels and subject the holders to prepayment risk.
An hour ago, you entered a sell limit order for your customer in XYZ stock. Looking at a current quote, you could expect the order to have been executed if
the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price. A sell limit order sets the minimum price an investor will accept. The order should have been executed if the current bid price is higher than the sell limit or the last reported price in the stock is higher than the sell limit.
FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for
trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor. FINRA's TRF is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent.
