Mock Test 3
A DMF convertible bond (convertible into 25 shares) has increased 20% above par in market value. Which of the following would you expect the price of the DMF's common stock to be? A) $48 B) $42 C) $40 D) $32
A) $48 $1,000 (par) + 20% = $1,200 / 25 shares = $48. Alternatively, it is ordinarily the 20% increase in the value of the common stock that has caused the bond to increase 20% in value. $1,000 divided by 25 shares equals $40 plus 20% equals $48.
Which of the following usually does not pay interest semiannually? A) Government National Mortgage Association (GNMA) B) Public utility bonds C) Treasury notes D) Treasury bonds
A) Government National Mortgage Association (GNMA) GNMA pass-through certificates pay principal and interest monthly. The others usually pay interest semiannually.
Which of the following would make an employee ineligible to participate in a company's qualified retirement plan? A) He is only 20 years old. B) He has been with the company for only two years. C) He is not a member of the company's management team. D) He works only 1,200 hours a year for the company.
A) He is only 20 years old Under the Employee Retirement Income Security Act, anyone over the age of 21—management or not—who has been with the company for at least one year and who works 1,000 or more hours per year or 500 hours per year for three consecutive years for the company, must be allowed to participate in the company's qualified plan.
Which of the following funds is most likely to contain within its portfolio those securities of issuers who have not specified the use of the capital they are raising? A) Hedge fund containing blank-check and blind pool offerings in its portfolio B) No load fund offered by a no load mutual fund company C) Income fund offered by an investment company registered under the Investment Company Act of 1940 D) Exchange-traded growth fund
A) Hedge fund containing blank-check and blind pool offerings in its portfolio Blank-check and blind pool securities are offerings where the issuer has not specified the use of the capital it is raising. While these securities are available individually to investors, some hedge funds will either target them or include them within their portfolios. The unique risks of these companies, coupled with the unique risks of hedge funds in general, must be considered in terms of suitability.
Designating a beneficiary with a transfer on death (TOD) provision may be done in which of the following accounts? A) Individual account and joint tenants with right of survivorship (JTWROS) B) Individual account only C) Individual account and joint tenants in common (TIC) D) Individual account, joint tenants with right of survivorship (JTWROS), and joint tenants in common (TIC)
A) Individual account and joint tenants with right of survivorship (JTWROS) The TOD designation is limited to the individual account and the JTWROS account.
A customer purchases a municipal bond in the secondary market at 84, and he holds the bond to maturity. Because the customer must accrete the discount, what are the tax consequences at maturity? A) No capital gain or loss B) Capital gain of $16 C) Capital loss of $16 D) Capital gain of $160
A) No capital gain or loss When a municipal bond is purchased in the secondary market at a discount, the discount must be accreted for cost-basis purposes. Note that the accretion on a discount municipal bond purchased in the secondary market is taxable as ordinary income. At maturity, the customer's cost basis has been accreted to par. Therefore, there is no reported gain or loss on redemption.
Which of the following mutual funds should an investment adviser representative recommend to a corporate client whose objective is current income with moderate risk? A) Preferred stock fund B) High-yield bond fund C) Money market fund D) Aggressive growth fund
A) Preferred stock fund Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high—rather than moderate—degree of risk.
A customer of a member transfers his account to another member firm. Under SEC rules, the transferring member must maintain copies of the customer's account records for how many years following the transfer? A) Six years B) Three years C) Five years D) Two years
A) Six years Under SEC Rule 17a-r, customer account records must be maintained for six years following the closing of an account.
A couple in a high tax bracket is interested in minimizing their tax liability while diversifying their portfolio. Which of the following best fits their investment objectives? A) Tax-exempt unit trusts B) GNMAs C) Corporate convertible bonds D) Preferred stock
A) Tax-exempt unit trusts Municipal unit trusts provide tax-free income to unit holders. Unit holders have an undivided interest in the underlying portfolio of municipal bonds. The trust consists of a number of different issues, and therefore has an element of diversification.
Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true? A) The bond's current yield is calculated by dividing its annual interest by its market price. B) The bond's current yield is lower than its yield to maturity. C) The bond is a discount bond. D) To determine the bond's current yield, its stated rate must be compared against other fixed-rate investments in the client's portfolio.
A) The bond's current yield is calculated by dividing its annual interest by its market price. A bond's current yield is calculated by dividing its annual interest by its current (market) price. The current yield will be higher than its yield to maturity, which will include the premium return. The determination of a bond's yield is unrelated to other bonds. In addition, this is a premium bond, not a discount bond.
Which of the following may not lead to an industrial development bond being called? A) The municipality is approaching a statutory debt limit. B) Funds are available in the surplus account to call the bond. C) Interest rates are falling. D) The facility is destroyed by a storm
A) The municipality is approaching a statutory debt limit. An issuer of industrial development revenue bonds is likely to call bonds to reduce interest costs when interest rates are falling, discontinue interest payments if the facility is destroyed by a natural disaster, or reduce debt if funds are available in a surplus account. Industrial development revenue bonds are not affected by the issuer's statutory debt limits, as they affect the issuance of general obligation bonds only.
Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in A) a JTWROS account with the Social Security number of the designated person used. B) an account opened as a partnership. C) a joint account with a TOD designation. D) a tenants in common account with the percentage ownership in the name of the designated person
A) a JTWROS account with the Social Security number of the designated person used In a JTWROS account, the assets are considered jointly owned. Only one tax identification number (Social Security number) is placed on the account. If it is the number of the nonemployed individual, the Form 1099 will go to that person and that is whom the IRS will expect to pay the taxes. That might be the correct answer to a test question. In the real world, it might not satisfy the IRS that the one in the lower tax bracket is being credited with all the income and gains. If the IRS audits the account and sees that the funds came from the working individual, there could be tax issues. However, the exam does not always deal with the real world and we won't either on this one.
If a customer wishes to change a day order to a good-til-canceled (GTC) order in the middle of the day, the registered representative should A) allow the day order to expire at the end of the day and put in the GTC order before the next day's opening. B) enter a change notice immediately. C) enter the new GTC order immediately and do nothing about the day order. D) enter the new order as GTC and immediately cancel the day order.
A) allow the day order to expire at the end of the day and put in the GTC order before the next day's opening. The GTC is treated as a new order. The registered representative should wait until the close of trading so as not to lose the time priority of the original order that day.
Due to an escalating trade war, the portfolio manager of an equity mutual fund anticipates a negative impact on his fund's assets. To protect her investment portfolio, the fund manager would A) buy S&P 500 index puts. B) buy S&P 500 index calls. C) sell S&P 500 index calls. D) sell S&P 500 index puts.
A) buy S&P 500 index puts. A portfolio manager who expects a decline in the market as a result of a trade war (or any factor that might hurt stock prices) would buy puts on a broad market index, such as the S&P 500, to protect her position. Selling calls limits upside potential and only protects the portfolio to the extent of the income received from the sale of the calls.
All of the following would flow through as a loss to limited partners except A) principal repayment on recourse debt. B) interest payments on recourse debt. C) depletion. D) accelerated depreciation.
A) principal repayment on recourse debt. Principal repayments are not deductible for tax purposes. The interest is deductible.
A registered representative is preparing a PowerPoint slide presentation, to be delivered in a live seminar, for a group of invited institutional clients. To use the slides, they may have to be A) reviewed by a principal of the broker-dealer. B) submitted to the SEC for review and approval. C) approved by FINRA in writing. D) submitted to both FINRA and the SEC for preuse approval.
A) reviewed by a principal of the broker-dealer. Communications material that is intended for use with institutional customers only need be supervised and reviewed by a principal of the member firm. Alternatively, if the member's procedures do not require review of institutional communications, they must include a provision for the education and training of associated persons so that they will understand the firm's requirements. Though FINRA can request spot checks of any material used to communicate with the public, submission of institutional communications to FINRA or the SEC for review or approval is not required.
With the advent of the horseless carriage (a.k.a. the automobile), the Acme Buggy Whip Corporation's revenues fell to the point where it could no longer cover expenses. This led to an involuntary bankruptcy. The priority of payout was A) senior notes, general creditors, preferred stock, common stock. B) common stock, preferred stock, general creditors, senior notes. C) senior notes, preferred stock, common stock, general creditors. D) general creditors, senior notes, preferred stock, common stock.
A) senior notes, general creditors, preferred stock, common stock. Senior debt refers to obligations that have priority in the event of default. It parallels the use of senior when comparing preferred stock to common stock, the most junior of all securities.
The bond resolution includes all covenants between A) the issuer and the trustee acting for the bondholders. B) the issuer and the Municipal Securities Rulemaking Board. C) the issuer and the bond counsel. D) the bond counsel and the bondholders.
A) the issuer and the trustee acting for the bondholders. The bond resolution describes not only the characteristics of the proposed offering, but also the obligations the issuer has to its bondholders.
Regulation FD covers A) the selective disclosure of material nonpublic information by issuers. B) customer notification requirements regarding a firm's privacy policies. C) standardization of financial reporting to the SEC. D) certifications required of research analysts who make public appearances.
A) the selective disclosure of material nonpublic information by issuers. Regulation FD was enacted to curb the selective disclosure of material nonpublic information by issuers to financial analysts and institutional investors. The rule helps ensure that all investors receive equal access to a company's material disclosures at the same time.
In recent years, the regulators have increased their concern over the financial exploitation of senior adults. FINRA's Rule 2165 became effective on February 5, 2018, and defines financial exploitation as A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult's funds or securities. B) excessive trading in the account of a specified adult. C) charging markups or commissions on transaction in a specified adult's account that are excessive. D) making recommendations to a specified adult that are not suitable based on the client's objectives.
A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult's funds or securities. Although each of these choices represents improper activity, only one of them relates specifically to the stated rule. A careful reading of the text in your LEM indicates that the actions against the account that the firm has to monitor are those from persons outside of the broker-dealer who are attempting to create activity in the specified adult's account. That is the purpose of the "trusted contact" person for the firm to get in touch with when there is a suspicion that someone may be taking advantage of the specified adult. Excessive trading (churning), unsuitable recommendations, and excessive charges are issues created by the member firm and can lead to disciplinary action.
All of the following statements regarding government and agency securities are true except A) they are always directly backed by the federal government. B) they are authorized by Congress. C) interest paid is always subject to federal income tax. D) they are considered safer than corporate debt securities.
A) they are always directly backed by the federal government. Only GNMAs are directly backed by the federal government. FNMAs and FHLMCs are only indirectly backed but are still considered less risky than corporate debt. All are subject to federal taxation, and all were authorized by Congress.
If an investor interested primarily in speculation does not expect the price of DWQ stock to change, she will A) write an uncovered straddle. B) buy a straddle. C) write a straddle and short the stock. D) write a straddle and buy stock.
A) write an uncovered straddle. An investor who expects prices to remain stable writes an uncovered straddle (short straddle). In selling the put and call at the same terms, the writer collects double premiums. Both expire if the price remains stable, but if the price moves, one side loses money. Short straddles carry unlimited loss potential because of the uncovered call.
In early September, a customer buys 100 shares of QRS stock for $83 per share and simultaneously writes 1 QRS Mar 90 call for $4 per share. If the QRS Mar 90 call was exercised and the QRS stock delivered, what would be the customer's per-share profit? A) $0 B) $11 C) $7 D) $4
B) $11 If the stock rises above $90, the writer will be exercised and make $700 on the stock (buy at $83, deliver at $90) and keep the $400 received in premiums. Alternatively, the breakeven point is $79 ($83 − $4), and the stock was sold (delivered) at $90 for an 11-point gain.
An individual purchases a variable life insurance policy. Under federal law, the individual is entitled to a complete refund of all premiums paid if the request is made within A) the first 24 months after the policy was delivered to the owner. B) 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. C) the first 30 days after the policy was delivered to the owner. D) 10 days from the execution of the application, or for 45 days from the time the owner receives the policy, whichever is long
B) 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer The Investment Company Act of 1940 specifies a free-look period for the purchaser of a variable life insurance policy. That period is the longer of 45 days after the execution of the application or 10 days after the actual policy is delivered to the owner. The 24 months is the minimum time limit for the exchange of the variable policy into another form of permanent insurance.
With a bearish outlook on the market, an investor would like to purchase something that will generate income now during current bearish conditions but would also be able to take advantage of capital appreciation should market sentiment turn bullish. Which of the following would be a suitable purchase recommendation that puts the investor in a position to do both? A) Cumulative preferred stocks B) Convertible bonds C) Common stock D) Nonconvertible bonds
B) Convertible bonds A convertible bond would generate income from interest payments during the bear market, but if market sentiment becomes bullish, the bond can be converted into common stock, taking advantage of the change in market conditions. None of the remaining choices could fulfill both of these investment objectives.
Which of the following types of oil and gas limited partnership programs is the most risky? A) Developmental B) Exploratory C) Existing property D) Income
B) Exploratory For oil and gas partnerships, exploratory programs are considered the riskiest because they involve drilling new wells in areas where oil has not yet been discovered. These programs would be followed by developmental, with income programs being the least risky. Existing property is a type of real estate program
John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability? A) The entire amount is taxed as ordinary income because it is not life insurance. B) It is the proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. C) It is the ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59½ years old. D) None because it is the proceeds from a life insurance company
B) It is the proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment.
Which of the following is an equity security? A) Collateralized mortgage obligation B) Real estate investment trust (REIT) share C) Mortgage-secured bond D) Government National Mortgage Association pass-through certificate
B) Real estate investment trust (REIT) share A REIT share is an equity security that represents undivided ownership in a portfolio of real estate investments. The other choices are debt securities.
A municipality is seeking an underwriter for a bond offering. What is the common step taken to engage the services of an underwriter? A) The municipality will generally use an underwriter that they have used in the past and who was successful underwriting previous issues. B) The municipality will place an official notice of sale in The Bond Buyer and accept bids from underwriters interested in the offering. C) The municipality will place a preliminary official statement in The Bond Buyer to identify underwriters that are interested in the offering. D) The municipality will set up appointments with various underwriters directly and interview them for the position.
B) The municipality will place an official notice of sale in The Bond Buyer and accept bids from underwriters interested in the offering. Municipalities seek the best deal for those that live in the municipality, and therefore, will place an official notice of sale in The Bond Buyer to attract an underwriter that submits a bid for the offering.
A municipal bond dealer is making a bona fide quote. Which of the following statements regarding such a quote is true? A) The quote may not take into consideration any anticipated market movement. B) The quote must have a reasonable relationship to fair market value. C) The quote cannot represent an offer to sell bonds that the dealer does not currently own. D) The quote need not be one that the dealer is prepared to act upon (buy or sell).
B) The quote must have a reasonable relationship to fair market value. A bona fide quote must have a reasonable relationship to fair market value and can be made in consideration of any anticipated market movement. A bona fide quote is one the dealer is prepared to buy or sell on, as opposed to a workable, nominal, or subject quote. On the offer side of a bona fide quote, a dealer may make an offer to sell bonds that it does not hold in its own inventory, but it must know where to obtain the bonds if they are needed to complete the transaction.
Which of the following is true with respect to excess capital losses realized by an individual taxpayer? A) They may be carried back up to three years and carried forward indefinitely until exhausted. B) They may be carried forward indefinitely until exhausted. C) No more than $3,000 per year may be used against capital gains. D) They may be carried forward with a time limit of five years.
B) They may be carried forward indefinitely until exhausted. Any taxpayer is permitted to reduce capital gains with realized capital losses. If the capital losses exceed the capital gains, up to $3,000 may be deducted against taxable income. Anything in excess of that is carried forward and used against gains, or, if there are no gains, taxable income, again with a $3,000 annual limit. Those losses can be carried forward with no time limit until they are all used against gains or income.
A sharing arrangement in which only deductible costs are apportioned to the investor, with the sponsor bearing all capitalized costs is called A) a reversionary sharing arrangement. B) a functional allocation. C) an overriding royalty arrangement. D) a carried interest.
B) a functional allocation. Functional allocation is a sharing arrangement in which the general partner pays for all tangible drilling costs (capitalized costs), and the limited partners pay for all intangible drilling costs (deductible costs).
A broker-dealer informs a customer that her order was not executed because of stock ahead. The order was most likely A) a short sale. B) a limit order. C) a market order. D) a margin purchase.
B) a limit order When there are a number of limit orders entered at the same price, they are filled in the order in which they have been received. It is possible that those orders received later could not be executed because the execution of the earlier orders has caused the market price to move away from the limit price. Market orders are always executed at the best price in the market (even though that might be far away from what the investor expected). If the investor wants immediate execution—turn in a market order. If the client wants a specific price—turn in a limit order but give the warning that it might never be executed.
A general partner may do all of the following except A) sell property to the limited partnership. B) borrow money from the partnership. C) make general management decisions regarding the partnership. D) act as an agent for the partnership in managing partnership assets.
B) borrow money from the partnership. All these situations offer the potential for conflicts of interest. However, the general partner is not forbidden by law to engage in any of these acts, except for borrowing money; the general partner may never borrow money from the partnership.
All of the following are characteristics of both oil and gas, as well as real estate limited partnerships, except A) limited liability. B) depletion. C) deferral of benefits. D) depreciation.
B) depletion. A depletion allowance makes up for the using up of a natural resource. Real estate limited partnerships do not have depletion allowances. Both real estate and oil and gas partnerships offer limited liability, depreciation allowances, and deferred receipt of income and capital
In a 3-for-2 stock split, an investor will A) have 50% more shares at half the price. B) have 50% more shares at two-thirds the price. C) have two-thirds fewer shares at a 50% higher price. D) have 50% fewer shares at twice the price.
B) have 50% more shares at two-thirds the price. If a stock splits 3 for 2, an investor will receive an additional 50 shares for every 100 shares owned. The price will decline by one-third, but the total value of the position will stay the same. For example, if a shareholder owns 100 shares before the 3 for 2 split, the shareholder will have 150 shares after the split (3/2 × 100 = 150).
Using listed options to reduce the market risk in a stock position by taking an opposing position in the options that represent an equivalent number of shares is known as A) market timing. B) hedging. C) straddling. D) spreading.
B) hedging. This describes hedging, which is a technique used to reduce the market risk or adverse price movement in a stock position using options. Each standardized listed equity option contract represents 100 shares, so the number of contracts needed to hedge an existing stock position is determined by the number of shares the investor is currently long or short.
Municipal brokers' brokers deal with all of the following except A) bank dealers. B) individuals. C) municipal dealers. D) institutions.
B) individuals. As the term suggests, a municipal broker's broker deals with other dealers and institutions, not with the general public.
A city's day-to-day operational expenses may be met by the issuance of A) grant anticipation notes (GANs). B) tax anticipation notes (TANs). C) credit-linked notes (CLNs). D) bond anticipation notes (BANs).
B) tax anticipation notes (TANs). When a city needs short-term cash flow to meet ordinary operating expenses (e.g., to meet the payroll for city employees), it issues TANs. These notes are paid off when the city collects the expected tax revenues.
All of the following would be found in a bond resolution for a new municipal issue except A) covenants to which the issuer must adhere. B) the costs to be incurred by the issuer in connection with the offering. C) the issuer's obligations to bondholders. D) a description of the issue.
B) the costs to be incurred by the issuer in connection with the offering. The bond resolution (or the bond contract) spells out the characteristics of the issue (maturities, call features, etc.), the issuer's responsibilities to bondholders, and any restrictive covenants to which the issuer must adhere. Costs to be incurred by the issuer have no impact on bondholders.
When a registered representative submits a customer order, all of the following information would be shown except A) the number of shares. B) the price of a market order. C) a time stamp. D) the stock symbol.
B) the price of a market order. Price would not be included on a ticket for a market order because that is unknown. When a customer enters a market order, it will be executed at the best prevailing price in the market. On the other hand, price would be on the ticket for a limit, stop, or stop limit order.
Your client's position is Long 1 CYR 120 call at 4 Long 1 CYR 120 put at 3 Long 100 CYR purchased at 120 If the current market price of CYR is 120, what is the client's maximum possible loss?
C) $700.00 If the CYR stock drops to $0, the customer loses $12,000 on the long stock position but retains the right to put the stock to someone at $12,000 to prevent loss beyond the premium of $300. The call would expire out of the money, for a total loss of $700.
One of your clients who is interested in purchasing some investment company shares brings to your attention a fund with a net asset value per share (NAV) of $22.13 and an asking price of $21.02. The client asks for an explanation, and you would respond, A) "This is obviously a mistake because an investment company never sells at a price below its NAV." B) "This is an open-end investment company with a front-end load of 5%." C) "This is a closed-end investment company whose selling price is based on supply and demand, not NAV." D) "This is a closed-end investment company with a front-end load of 5%."
C) "This is a closed-end investment company whose selling price is based on supply and demand, not NAV." One of the characteristics of closed-end investment companies is that their selling price is frequently at a discount to the NAV. Because the shares are not continuously offered, as is the case with an open-end company, the shares are priced based on supply and demand. That means they can sell at, above, or below the net asset value per share. They trade in the secondary markets like any stock and one usually pays a commission, not a sales load when buying or selling.
If a member wishes to appeal an adverse decision in a Code of Procedure hearing, the member first must appeal to the National Adjudicatory Council within how many days of the decision date? A) 30 B) 40 C) 25 D) 45
C) 25 If either side is displeased with a Code of Procedure decision, an appeal must be made within 25 days of the decision date.
U.S. Treasury bills are issued for all of the following maturities except A) 13 weeks. B) 4 weeks. C) 39 weeks. D) 26 weeks.
C) 39 weeks. As of the authoring date of this question, Treasury bills are issued for terms of 4, 8, 13, 26, and 52 weeks. The Treasury auctions the 52-week bill every four weeks and the 4-, 8-, 13-, and 26-week bills every week.
To reduce a client's exposure to systematic risk in his equity portfolio, you would look at which of the following factors? A) Credit rating B) Investment return compared to the inflation rate C) Beta D) Earnings history
C) Beta Beta is a measure of a portfolio's volatility compared to the volatility of the overall market. Because systematic risk is risk associated with investing in the market, lowering the client's volatility (beta) relative to that of the market should lower her exposure to market risk. Credit rating is used to measure default risk on debt securities, and earnings history would assist you in the measurement of business risk (unsystematic risk).
Under the USA PATROIT Act of 2001, which of the following must be maintained by financial institutions, such as banks and broker-dealers, to prevent the financing of terrorist operations and money laundering? A) Do-not-call lists B) Specially Designated Nationals and Blocked Persons list C) Customer identification programs (CIPs) D) Privacy notices
C) Customer identification programs (CIPs) The USA PATRIOT Act of 2001 requires financial institutions to maintain CIPs to protect against financing terrorist operations or activities and potential money laundering activities. The Office of Foreign Asset Control (OFAC) publishes and maintains the Specially Designated Nationals and Blocked Persons list, which financial institutions use to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money-laundering activities.
All of the following statements about the special memorandum account (SMA) are true except A) nonrequired cash deposits generate SMA. B) it is a line of credit. C) SMA in a long margin account decreases when the market value decreases. D) the SMA balance may be used to meet the Regulation T requirement for purchases.
C) SMA in a long margin account decreases when the market value decrease The amount of SMA in a long account decreases only when it is used, and is unaffected by market value decreases.
In a restricted margin account, a sale of $5,000 of stock will create A) SMA of $5,000. B) buying power of $10,000. C) SMA of $2,500. D) a $5,000 decrease in the debit balance.
C) SMA of $2,500. When securities are sold in a restricted margin account, half the proceeds go to reduce the debit and the other half are journaled into SMA. Therefore, a $5,000 sale will generate SMA of 50% of the sale, or $2,500. Buying power is the SMA × 2, or $5,000.
A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal, and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why? A) The corporate bond because the after-tax yield is 6.25%. B) The municipal bond because its equivalent taxable yield is 6.3%. C) The municipal bond because its equivalent taxable yield is 6.6%. D) The corporate bond because the after-tax yield is 4.5%.
C) The municipal bond because its equivalent taxable yield is 6.6%. This is calculated using the tax-equivalent yield formula: municipal yield / (100% − investors tax bracket) 4.75 / (1 − 0.28) = 6.6%. By comparison, the 6.6% tax-equivalent yield of the municipal bond is higher than the 6.25% yield of the taxable corporate bond, making the municipal bond the higher yielding investment, given the investor's 28% tax bracket. Alternatively, you could solve this by simply deducting the taxes due on the corporate bond and comparing that to the coupon on the tax-free municipal bond. It would go like this: 6.25% minus 28% tax equals 6.25 minus 1.75 equals 4.50%. That is less than the 4.75% received after taxes (because there are no taxes) on the municipal bond. So, either way, the municipal bond is a better deal for this client.
A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to A) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee. B) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee. C) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and 0.75% 12b-1 fee. D) decline the transaction because short-term trading of funds is not allowed.
C) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and 0.75% 12b-1 fee. If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares.
An investor wanting to know about the tax consequences of a direct participation program should know which asset types can be depleted or depreciated. All of the following asset types can be depleted or depreciated except A) buildings. B) gas. C) crops. D) oil.
C) crops. Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered renewable assets.
A 27-year-old client is in the lowest tax bracket and seeks an aggressive long-term growth investment. If his investment adviser representative recommends a high-rated general obligation municipal bond, the investment adviser representative (IAR) has A) recommended a suitable investment because general obligations are good long-term investments. B) made an unsuitable recommendation because a municipal revenue bond would have been more appropriate. C) made an unsuitable recommendation based on the client's needs and objectives. D) committed no violation because municipal bonds are well suited for the market's volatility.
C) made an unsuitable recommendation based on the client's needs and objectives. In recommending a conservative, tax-exempt investment to this customer, the IAR has failed to make a suitable recommendation given the client's objectives. Municipal bonds are better suited for individuals in high tax brackets and offer little upside appreciation potential.
An investor buys a GO bond with a coupon of 3½% that has a basis of 3¾%. If the bond is held until maturity, the investor's actual yield will be A) more than 3¾% . B) 3¾%. C) more than 3½% but less than 3¾%. D) 3½%.
C) more than 3½% but less than 3¾%. This is tricky, so follow along. With a coupon of 3½% and a basis (yield to maturity) of 3¾%, we know the bond was purchased at a discount. GO bonds are municipal bonds, and when a municipal bond is purchased in the secondary market at a discount, the accretion of the discount is taxed as ordinary income. Therefore, a portion of the investor's return will be taxable, making the actual return slightly less than the yield to maturity.
A customer asks her registered representative to exercise discretion over her account. To do so, the representative must do each of the following except A) obtain evidence of written acceptance of the account by a registered principal of the firm. B) have a principal initial each order promptly, which may be before or after execution. C) obtain approval from FINRA. D) obtain written authorization from the customer.
C) obtain approval from FINRA. The requirements for a discretionary account include a written authorization from the customer, a written acceptance by a principal of the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation. No approval from FINRA is required.
A person wishing to grant a registered representative the right to make investment decisions for her account does so by A) providing a letter from an attorney. B) providing a full power of attorney to someone other than the registered representative who will then instruct the representative as to investment decisions. C) providing a limited power of attorney giving discretionary powers. D) calling the representative each time she wants to place an order.
C) providing a limited power of attorney giving discretionary powers. A discretionary account always requires prior written authorization from the customer in the form of a limited power of attorney (trading authorization).
In the context of municipal bond underwritings, the true interest cost (TIC) is different from the net interest cost (NIC) because it A) reflects the credit risk. B) is the method required by the IRS. C) reflects the time value of money. D) produces a lower cost of borrowing for the issuer.
C) reflects the time value of money. The TIC method uses present value calculations that consider the time value of money (as opposed to NIC, which does not consider the timing of interest payments). It is a more complicated calculation than NIC. The IRS is not concerned with this issue.
The FINRA rule on communications would consider communications that are posted on an online interactive electronic forum (i.e., a chat room) to be A) correspondence. B) institutional communications. C) retail communications. D) a public appearance.
C) retail communications. This type of communication is included in the definition of retail communications. Unlike most retail communications, these chat room appearances do not need approval of a principal (although the firm would be wise to monitor the activity).
All of the following are examples of short-term municipal obligations except A) tax anticipation note (TAN). B) bond anticipation notes (BAN). C) state and local government securities (SLGS). D) tax and revenue anticipation note (TRAN).
C) state and local government securities (SLGS). SLGS are issued not by a municipality, but by the U.S. Treasury Department to assist local governments in complying with arbitrage restrictions imposed by the IRS. The other choices are examples of short-term funding used by municipalities.
As defined by FINRA, all of the following are considered a restricted person except A) the sibling of a member firm employee. B) employees of member firms. C) the aunt of a member firm employee. D) member firms.
C) the aunt of a member firm employee. Member firms, their employees, and their immediate family members—such as parents and siblings—are considered restricted. Aunts, uncles, and grandparents are not considered immediate family and therefore, are not restricted unless they live in the same household as a restricted person.
When an investor purchases Class A shares of a mutual fund in their brokerage account at a FINRA member firm, the sales charge is apportioned to all of the following except A) the member firm underwriting the offering of the shares. B) the broker-dealer holding the account. C) the mutual fund. D) the registered representative making the sale.
C) the mutual fund. The sales charge (sales load) on a mutual fund is shared by those who had a hand in making the sale. The majority goes to the broker-dealer holding the customer's account. That is the source of compensation to the broker-dealer's registered representative handling the customer's account. As a continuous new issue, there is a FINRA member firm underwriting (distributing, sponsoring) the mutual fund and it retains a small portion. No mutual fund ever receives any of the sales charge.
In a margin account, if a client purchases $15,000 of LMN preferred shares, $15,000 of money market mutual fund shares, and $2,500 of call options, what is the Regulation T call? A) $17,500 B) $32,500 C) $16,250 D) $25,000
D) $25,000 The amounts that must be deposited are as follows: $7,500 for the preferred shares, $15,000 for the mutual fund, and $2,500 for the options. Mutual fund shares cannot be hypothecated for 30 days, and option purchases are never marginable.
Which of the following would not be considered institutional communications with the public? A) A communication with an individual designated to act on behalf of your institutional customer B) A letter to a municipality offering your firm's services as an underwriter C) A letter to another broker-dealer D) An internal memo promoting a new product that will be offered to your firm's institutional customers only
D) An internal memo promoting a new product that will be offered to your firm's institutional customers only Institution communications specifically exclude internal communications. Communications with another member firm, a government entity such as a municipality, or with someone designated to act on behalf of one of your firm's institutional customers would all fall within the definition of institutional communications.
Which of the following employer-sponsored plans is not required to meet the nondiscrimination provisions of ERISA? A) Keogh plans B) Defined benefit plans C) 401(k) plans D) Deferred compensation plans
D) Deferred compensation plans Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to who may participate. In any question on the exam, a qualified plan sponsored by a business will most likely have to comply with ERIS
When a company issues additional bonds, which of the following is true? A) Leverage is not affected when debt securities are issued. B) It cannot be determined by only knowing that additional bonds have been issued. C) Leverage is decreased. D) Leverage is increased.
D) Leverage is increased. Leverage is the use of someone else's money at a fixed cost to benefit the common shareholders. Issuing additional bonds increases the company's debt (money borrowed from someone else), and therefore, increases leverage for shareholders.
A customer opens the following options position: Long 1 ALE Feb 40 put @3¼; short 1 ALE Feb 45 put @6¼. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $300; maximum loss is $200; breakeven point is $43. B) Maximum gain is $200; maximum loss is $300; breakeven point is $43. C) Maximum gain is $200; maximum loss is $300; breakeven point is $42. D) Maximum gain is $300; maximum loss is $200; breakeven point is $42.
D) Maximum gain is $300; maximum loss is $200; breakeven point is $42. The first step is to identify the position. This is a credit put spread. It is a credit spread because the option sold brought in a higher premium than the one purchased. The credit of $300 is the most the investor can make. This is a bullish spread (the customer bought the low strike price and sold the high strike price). If the customer is correct and the stock rises above $45, the options will expire unexercised and the customer will keep that net credit of $300. If the customer is wrong and the price of the ALE stock falls below $40, the short put at 45 will be exercised, causing the customer to purchase the stock at $45. Then, the customer will exercise the long 40 put and sell that stock at $40. This results in a loss of $500 reduced by the $300 net credit, or $200 maximum loss. It is always easier to recognize that the maximum loss is the difference in strike prices minus the maximum profit. In this question, the spread is 5 points and the maximum profit is the credit of 3 points. That makes the maximum loss the remaining 2 points. Breakeven follows the put-down rule. Subtract the net premium from the higher strike price ($45 - 3 = $42).
Which of the following investments is most suitable for an investor seeking monthly income? A) Zero-coupon bond B) Mutual fund investing in small-cap issues C) Growth stock D) Money market mutual fund
D) Money market mutual fund The money market mutual fund is the most suitable investment for an investor seeking monthly income. The other securities offer higher long-term growth potential, but they are not designed to provide monthly income.
The manager of ABC Municipal Securities is interested in bidding on some general obligation bond issues that will be available in the coming months. Where would the manager find information about these forthcoming issues? A) Electronic Municipal Market Access (EMMA) B) The Washington Post C) Standard & Poor's Bond Guide D) The Bond Buyer
D) The Bond Buyer Municipalities publish their official notices of sale soliciting bids from interested parties in The Bond Buyer. The notice gives the details of the bonds put up for bid and how to bid on the issue. The Standard & Poor's Bond Guide gives details of outstanding issues and their ratings. The EMMA is an online site primarily for retail nonprofessional investors.
If a writer of an XYZ equity call option is assigned, which of the following should be delivered to the Options Clearing Corporation? A) Cash equal to the market value of the underlying XYZ security B) Any listed security of comparable value to XYZ C) Rights or warrants exercisable to purchase the underlying XYZ security D) The underlying XYZ security
D) The underlying XYZ security When a call is exercised, that specific security must be delivered by the assigned writer. The option contract does not allow for exercise settlement in cash, securities of equivalent value, or securities exercisable to purchase the underlying securities such as rights or warrants.
When does pension payment liability affect the credit rating of a municipality? A) When the return on funds invested to meet future needs exceeds anticipated payments B) When funds are invested presently to meet future pension needs C) Never D) When funds needed to make payments exceed funds available
D) When funds needed to make payments exceed funds available The credit rating for a municipality's debt would be adversely affected if funds needed to make payments exceeded funds available. This is an unfunded pension liability and can result if monies set aside to make future payments are not enough or if poor investment decisions deplete the funds.
In a proceeds transaction for a customer where the proceeds from the liquidation of one stock are used to purchase another stock, the 5% markup policy is computed on the basis of A) the markup on the buy side only. B) each side of the transaction separately. C) the markdown on the sell side only. D) a combination of both the buy side and the sell side.
D) a combination of both the buy side and the sell side. In a proceeds transaction (sell one position; take the proceeds and buy another), the 5% 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
With bonds subject to a gross revenue pledge, the first priority will be to pay A) the sinking or surplus fund. B) the first lien on the property. C) operation and maintenance. D) bond interest and principal.
D) bond interest and principal. Bonds subject to a gross revenue pledge (gross lien revenue bonds) are backed by the gross revenues of the facility (meaning revenues before expenses). In this case, the first money disbursed is for payment of interest and principal. However, most revenue bonds only pledge net revenues to pay off revenue bonds. In the more common net revenue pledge, the first priority is operation and maintenance; the second priority is interest and principal.
Regulation T applies to A) margin accounts only for nonexempt securities. B) margin accounts only for listed securities. C) both cash and margin accounts for all unlisted securities. D) both cash and margin accounts for nonexempt securities.
D) both cash and margin accounts for nonexempt securities. Regulation T controls the credit that broker-dealers extend in all types of accounts and only applies to nonexempt securities.
Morgan is a successful registered representative with a well-known broker-dealer. An equally prominent firm has made Morgan an offer that is too good to refuse. Under FINRA Rule 2273, if Morgan wishes to recommend that any existing customers move their accounts to the new firm, A) this would be considered a violation of the Conduct Rules. B) no contact can be made until at least three months after Morgan's registration is transferred. C) approval from Morgan's current supervising principal would be required before this recommendation could be made. D) certain disclosures have to be made in an educational format using a FINRA template
D) certain disclosures have to be made in an educational format using a FINRA template. FINRA Rule 2273 states, "A member that hires or associates with a registered person shall provide to a former customer of the registered person, individually, in paper or electronic form, an educational communication prepared by FINRA when the member, directly or through that registered person, individually contacts the former customer of that registered person to transfer assets." This educational communication has to be delivered to any former customer who transfers during the first three months of Morgan's new association.
Investors in collateralized mortgage obligations (CMOs) tend to choose a tranche meeting their maturity expectations. Should the debt continue past the expected payoff date, it is an example of A) reinvestment risk. B) default risk. C) prepayment risk. D) extension risk.
D) extension risk. A CMO's yield and maturity are estimates based on historical data or projections of mortgage prepayments from the Public Securities Association (PSA). The particular tranche an investor owns determines the priority of their principal repayment. When the debt continues beyond the projected date, the investor has encountered extension risk. Prepayment risk is that the debt will be paid off early rather than later.
All of the following activities in a customer's mutual fund account may be considered a violation of the Conduct Rules except A) switching Class A shares between fund families. B) short-term trading in mutual fund shares. C) excessive activity in the customer's account. D) granting discretionary authority to a new registered representative.
D) granting discretionary authority to a new registered representative. Mutual funds are considered a long-term investment. Thus, switching Class A shares of funds, short-term trading of funds, and excessive activity in a customer's account very likely indicate that the registered representative is churning. There is nothing unlawful about granting discretionary authority to a new registered representative.
Sell order tickets must be A) marked only if they are long sales. B) marked only if they are short sales. C) executed in accordance with the appropriate rules, but not necessarily marked. D) marked as either long or short.
D) marked as either long or short. Every sell order must be marked as either a long sale or a short sale.
With regard to a variable annuity, all of the following may vary except A) value of annuity units. B) number of accumulation units. C) value of accumulation units. D) number of annuity units.
D) number of annuity units. During the accumulation phase, the number of accumulation units will increase as additional money is invested. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Once annuitized, the number of annuity units does not vary. The value of accumulation and annuity units varies with the investment performance of the separate account.
A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be A) tax free. B) taxed as a capital gain if the underlying mortgage is prepaid. C) treated partly as ordinary income and partly as a tax-free return of principal. D) taxed as ordinary income.
D) taxed as ordinary income. Interest-only payments made by CMOs are taxed as ordinary income.
Your client invests $20,000 to purchase a 10% interest in a movie production limited partnership. At the time of subscribing, the investor signs on an $800,000 recourse loan to the partnership. After completing the first year of operations, the program shows a loss of $1,200,000. All of the following statements are correct except A) the investor has a passive loss deduction of $100,000. B) the investor's basis is now $0.00. C) the investor's original basis was $100,000. D) the investor's original basis was $20,000.
D) the investor's original basis was $20,000. Let's take this step by step. The original check for $20,000 is all cost basis. But, it doesn't stop there. When becoming a limited partner, the investor signed on to the recourse loan. The 10% share of that loan is $80,000, bringing the initial basis up to $100,000. When the end-of-year report shows a loss of $1,200,000, it would appear that the investor takes 10% of that ($120,000) as a passive loss. The problem is that IRS rules do not allow a loss greater than the investor's basis (in this case, $100,000). Once that loss is taken, the basis is wiped out. The extra $20,000 may be carried forward. Unless the investor contributes more money, or the partnership has earnings, this investor cannot use that $20,000 or any further losses.
In a competitive offering of municipal bonds, the issue is usually awarded to the syndicate that offers to sell the bonds A) with the smallest spread. B) at the highest price. C) in the shortest possible time. D) with the lowest net interest cost to the issuer.
D) with the lowest net interest cost to the issuer. In a competitive underwriting for municipal bonds, competing syndicates submit bids to the issuer. The issuer (or representative) examines the bids to determine which bid provides the issuer with the lowest net interest cost.
If at expiration for XYZ options, XYZ stock closes at 40.15, which of the following open option positions will automatically be exercised by the Options Clearing Corporation (OCC)? A) A member firm long 1 XYZ 40 put B) A customer long 1 XYZ 40 put C) A member firm long 1 XYZ 45 call D) A customer long 1 XYZ 40 call
D)A customer long 1 XYZ 40 call At expiration, the OCC will automatically exercise open option positions if those positions are in the money by 0.01 or more. In this case, the customer's long 40 call position is in the money by 0.15. The member firm 45 call and the 40 puts are out of the money.
All of the following must meet the nondiscrimination provisions of the Employee Retirement Income Security Act (ERISA) except A) 401(k) plans. B) defined benefit plans. C) profit-sharing plans. D) deferred compensation plans.
D)deferred compensation plans. Deferred compensation plans are nonqualified, and therefore, do not have to meet the nondiscrimination provisions of ERISA.
Which of the following statements about municipal original issue premium bonds are true? I. The original issue premium must be amortized. II. If the bond is held to maturity, there will be no capital loss reportable. III. The cost basis of the bond is adjusted downward by the amortized amount.
I, II, and III Original issue premium municipal bonds (as well as those purchased in the secondary market) must be amortized by an amount each year so that, if held to maturity, there is no reported capital loss.
If your client writes a combination of a DWQ 45 call and a DWQ 50 put, and the premiums total $650, he breaks even when the price of the underlying stock is I. $43.50. II. $50.50. III. $51.50. IV. $56.50.
I. $43.50. III. $51.50. Combinations and straddles have two breakeven points. To calculate these breakeven points, add the combined premiums to the call strike price and subtract the combined premiums from the put strike price.
Which of the following statements regarding Section 529 education savings plans are true? I. Contributions are considered gifts under federal law. II. Contributions are tax deductible under federal law. III. Earnings generated are taxable each year. IV. Earnings generated are tax deferred.
I. Contributions are considered gifts under federal law. IV. Earnings generated are tax deferred. Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level. Furthermore, earnings generated each year are tax deferred and, on withdrawal, are tax free at the federal level—if used for qualified education expenses.
Which of the following statements regarding joint accounts/tenants in common (TIC) are true? I. Each party specifies a percentage of interest in the account. II. Each party has an equal interest in the account. III. The interest of a deceased tenant passes to the estate of the decedent. IV. The interest of a deceased tenant passes to the cotenant.
I. Each party specifies a percentage of interest in the account. II. Each party has an equal interest in the account. In a TIC account, each party must specify a percentage of interest in the account. If one party dies, his percentage of ownership passes to his estate, not to any other party to the account.
A firm may assign option exercises using which of the following methods? I. First-in, first-out (FIFO) II. Last-in, first-out (LIFO) III. Random assignment IV. Based on holders of the smallest positions
I. First-in, first-out (FIFO) III. Random assignment A firm may assign an exercise either randomly or using the FIFO accounting method. LIFO is not permitted, nor is assigning by position size, smallest, or largest.
Freddie Mac does which of the following? I. Issues pass-through securities II. Purchases student loans III. Purchases conventional residential mortgages from financial institutions IV. Issues securities backed directly by the full faith and credit of the U.S. government
I. Issues pass-through securities III. Purchases conventional residential mortgages from financial institutions Freddie Mac is a publicly owned and traded U.S. government agency that issues pass-through securities based on a pool of conventional residential mortgages purchased from financial institutions. Ginnie Mae is the only U.S. agency that issues securities backed by the full faith and credit of the U.S. government.
Which of the following statements regarding the Bond Buyer 20 bond index are true? I. It includes only GO bonds. II. It includes both GO bonds and revenue bonds. III. It is computed weekly. IV. It is computed monthly.
I. It includes only GO bonds. III. It is computed weekly. The Bond Buyer 20 bond index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, and each with approximately 20 years to maturity. The index is updated each week.
Which of the following covers a short call? I. Long stock II. Short stock III. Long put IV. Stock rights
I. Long stock IV. Stock rights Covering a short call requires taking action to eliminate the risk of being exercised. If the customer owns the stock or has the right to acquire it, the customer is covered. Stock rights (preemptive rights) give the holder the right to purchase the stock. Short stock and long puts both have the same market attitude as a short call (bearish), and therefore, would not cover the risk associated with a short call.
KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? I. Tax rate II. Cash dividend III. Allowance for bad debts IV. Retained earnings
I. Tax rate III. Allowance for bad debts Higher taxes mean less net income. The allowance for bad debts is an expense item, and increasing it lowers operating income. Dividends are paid out of retained earnings, which have no effect on the net income the company reports.
Which items would change if a company buys equipment for cash? I. The working capital II. The total assets III. The total liabilities IV. The shareholders' equity
I. The working capital The general balance sheet formula is assets equals liabilities plus 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 affects neither total liabilities nor equity.
Which of the following would be the usual use of a stop order? I. To protect the profit on a long position II. To prevent loss on a short position III. To buy at a specific price only IV. To guarantee execution at or near the close
I. To protect the profit on a long position II. To prevent loss on a short position A buy stop could be used to protect an investor who is short, and a sell stop could be used to protect an investor who is long. Stop orders never guarantee execution price.
Investors placing zero-coupon bonds in their portfolios are most likely to be looking to provide I. accumulation of capital. II. current income. III. protection against reinvestment risk. IV. tax deferral.
I. accumulation of capital. III. protection against reinvestment risk. Zero-coupon bonds are always purchased at a discount because they pay no interest. At maturity, the bondholders receive the maturity value. That represents the initial investment plus interest. Therefore, the investors are receiving more capital than invested (capital accumulation). Zero-coupon securities avoid reinvestment risk because there are no periodic interest payments to be reinvested. When you purchase one of these securities, the quoted yield to maturity is exactly what you will earn if you hold it to the end. With no interest payments, there is no current income. There is no tax deferral with a zero. In fact, unless it is a zero coupon municipal bond, there is phantom income; income not currently received but currently taxable.
To create a credit calendar spread, an investor should I. buy the near expiration. II. buy the distant expiration. III. sell the near expiration. IV. sell the distant expiration.
I. buy the near expiration. IV. sell the distant expiration. A credit calendar spread occurs when premium received exceeds the amount paid out. An investor creates a credit spread by selling the distant expiration and buying the near expiration. The distant expiration has more time value, and therefore, a higher premium.
A customer is long an ABC Apr 40 call and is short an ABC Jul 40 call. Which of the following best describe his position? I. Bullish II. Bearish III. Calendar spread IV. Vertical spread
II. Bearish III. Calendar spread The July call will have a higher premium than the April call because it has more time value. Because the customer is selling the call with the higher premium, he is counting on the July call to go unexercised, which would allow him to keep the premium as a profit. That means the market value of the underlying security must either stay the same or decline. Therefore, this customer's position is bearish. Because the options expire in different months, the trade is a calendar spread.
While watching the financial news on TV, you hear an internationally recognized economist say that she expects a significant devaluation of the U.S. dollar. If she is correct, what would be the likely effect on foreign trade? I. The price of foreign goods would decrease, leading to an increase in imports. II. The price of foreign goods would increase, leading to a decrease in imports. III. The price of U.S.-made goods would decrease, leading to an increase in exports. IV. The price of U.S.-made goods would increase, leading to a decrease in exports.
II. The price of foreign goods would increase, leading to a decrease in imports. III. The price of U.S.-made goods would decrease, leading to an increase in exports. If the dollar is devalued, it becomes less valuable in foreign countries. That means that more dollars are required to purchase the same amount of foreign goods. The increased cost of those foreign goods will reduce imports of them. On the other side, because the foreign currency now goes further in the United States, goods made here become cheaper to buy, so exports will increase.
Which of the following circumstances must be met for a fiduciary to trade options in a trust account? I. Special circumstances are determined by the broker-dealer. II. The trust agreement states the trustee has the power to trade options. III. The trust's investment objectives are determined to be compatible with options trading. IV. Only covered options may be traded by a fiduciary.
II. The trust agreement states the trustee has the power to trade options. III. The trust's investment objectives are determined to be compatible with options trading. A fiduciary account may only trade options if expressly authorized to do so and if suitable for the beneficial owner of the account.
