Series 7 #4

Which of the following statements is NOT TRUE concerning VIX options? A. An investor will buy VIX puts if he expects an increase in the volatility on the S&P 500 Index B. An investor will buy VIX calls if he expects the S&P 500 Index to fall c. An investor will buy VIX calls as a hedge if he expects the S&P 500 Index to fall D. VIX options can be used if an investor expects an increase or decrease in the volatility on the S&P 500 Index

A. An investor will buy VIX puts if he expects an increase in the volatility on the S&P 500 Index The VIX (volatility index) is often referred to as a gauge of investors' fear. **The index tends to move inversely with the S&P 500 Index**. The VIX usually rises when the S&P 500 Index falls, and falls when the S&P 500 Index increases. An investor will buy calls when he expects the market to decline and volatility to increase. An investor will buy puts on the VIX if he expects the market to rise and volatility to decrease. Many investors will buy VIX call options as a hedge against a possible decline in the market. The VIX option can be used by investors who expect either an increase or a decrease in volatility.

Which TWO of the following statements concerning The Bond Buyer 20-Bond Index are TRUE? I. It is compiled weekly II. It consists of 20 GO and revenue bonds, with an average rating of AA III. It is used to show a trend in interest rates IV. It is used as an indication of the primary market in municipal securities A. I and III B. I and IV C. II and III D. II and IV

A. I and III The Bond Buyer 20-Bond Index is compiled each week. It is calculated from the yields on 20 specific general obligation issues with an average rating of AA. There are no revenue bonds in the 20-Bond Index. The purpose of this index is to show trends in interest rates.

In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30 listed call for $10. The customer has created a: I. Bullish spread II. Bearish spread III. Debit spread IV. Credit spread A. I and III B. I and IV C. II and III D. II and IV

A. I and III The investor bought the more expensive call. Therefore, this is a debit spread. A call debit spread is a bullish strategy.

Which TWO of the following statements are TRUE concerning the characteristics of preferred stock? I. The securities do not have a fixed maturity date II. The price of these securities is more volatile than common stock III. The dividend will be paid annually IV. The price will fluctuate based primarily on changes in interest rates A. I and III B. I and IV C. II and III D. II and IV

B. I and IV Most preferred stock does not have a maturity date and, therefore, one of the risks of purchasing this type of security is that there is no fixed date when you will receive your principal back. These securities are less volatile than common stock, and the prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. The dividend usually is paid quarterly, not annually.

Which TWO of the following metrics may be calculated by examining the income statement of a company? I. The debt-to-equity ratio II. The operating profit margin III. The bond coverage ratio IV. The current ratio A. I and III B. I and IV C. II and III D. II and IV

C. II and III The operating profit margin is found by dividing the sales by the operating income or profit. The bond coverage ratio is found by dividing the interest expense by EBIT. All of this information can be found in the income statement. The debt-to-equity ratio and current ratio can be calculated by examining a company's balance sheet.

A registered representative is reviewing a corporation's financial statements. Which TWO of the following statements are TRUE concerning an issuer's bond interest expense? I. The annual interest payments are found on the balance sheet II. The annual interest payments are found on the income statement III. The interest payment is deducted from net income IV. The interest payment is deducted from EBIT A. I and III B. I and IV C. II and III D. II and IV

D. II and IV The annual interest payment or bond interest expense may be found on a company's income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars.

Which TWO of the following statements are TRUE regarding mutual funds? I. The maximum sales charge is 7% II. Investors can receive a reduced sales charge if they sign a 10-month letter of intent to purchase a certain dollar amount of mutual fund shares III. Under the right of accumulation, investors can receive a reduced sales charge on new purchases when a breakpoint is reached IV. No-load funds may charge a liquidation fee when an investor sells the fund A. I and II B. I and III C. II and III D. III and IV

D. III and IV The only true statements regarding mutual funds that are listed are that under the right of accumulation option, mutual fund investors can receive a reduced sales charge on new purchases when a breakpoint is reached, and no-load funds may charge a liquidation fee when an investor sells the fund. Under industry rules, the maximum sales charge for a mutual fund is 8 1/2%, not 7%. A letter of intent for a reduced sales charge is for 13 months, not 10 months.

How can you identify an open end mutual fund and a close end mutual fund using the relationship between the NAV and the offering price?

Open-end companies are not offered below their current net asset value. According to the Conduct Rules, the maximum sales charge permitted for an open-end company is 8 1/2%. The sales charge calculation (sales charge divided by offering price), will help determine if the company is open ended or not.

Which index would provide the best indication of current interest rates on revenue bonds?

The Bond Buyer's Revenue Bond Index which is **the average yield of 25 revenue bonds with 30-year maturities**

A customer contends that his registered representative made unauthorized trades in his account and will take this matter to an arbitration panel. Regarding the makeup of this panel, which of the following statements is TRUE? a. A majority of the arbitration panel must come from outside the securities industry b. A majority of the arbitration panel will come from within the securities industry c. All arbitrators must come from inside the securities industry or must be attorneys d. All arbitrators must come from outside the securities industry

a. A majority of the arbitration panel must come from outside the securities industry Under the Code of Arbitration, if a public customer takes a member firm to arbitration to resolve a dispute, the majority of the panel must come from outside the securities industry, unless the customer requests a panel with a majority of industry arbitrators. Neither the broker-dealer nor the customer may actually pick the arbitrators and arbitrators do not need to be attorneys.

Your firm is a syndicate member and an underwriter of an initial public offering (IPO). How many days must the firm's research analyst wait before issuing a research report in this IPO? a. There is no waiting period and research may begin anytime after the effective date b. 25 days c. 40 days d. 90 days

b. 25 days If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 40 days following an IPO or 10 days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 25 days.

In order to implement a portfolio margin program, the firm must obtain approval from: a. The options exchange b. FINRA c. The SEC d. The OCC

b. FINRA Firms establishing a portfolio margin program are required to obtain approval from FINRA.

A customer's margin account has a credit balance of $20,000 and a debit balance of $15,000. On what amount will the customer be charged interest? a. 0 b. $5,000 c. $15,000 d. $20,000

c. $15,000 Customers are charged interest on the average daily amount of the debit balance in their account. Generally, they are not charged interest in a short account.

The number of times the earnings of a municipal facility exceeds the interest charges and principal payments of a revenue bond for a period is called the: a. Working capital ratio b. EBITDA ratio c. Debt service coverage ratio d. Price-earnings ratio

c. Debt service coverage ratio The number of times the earnings of a revenue bond of a municipal facility exceeds the interest charges and principal payments (debt service) for a period is the debt service coverage. Earnings before interest, tax, depreciation, and amortization (EBITDA) is a term associated with corporate bond issuers, not municipal bond issuers.

The advance-decline theory states that: a. A bull market exists if the Dow industrials and transportations averages make new highs b. A bear market exists if more put options have been purchased by investors than call options c. It is bullish if more stocks go up than go down during the day d. A large number of shares sold short is bullish

c. It is bullish if more stocks go up than go down during the day A technical indicator that measures the strength of the market by comparing the number of stocks that increase and decrease is called the advance-decline theory. It shows the general direction and breadth of a market movement on a given day.

A reverse repurchase agreement is sometimes called a(n): a. Repo b. Arbitrage c. Matched sale d. Treasury sale

c. Matched sale A reverse repurchase agreement (matched sale) occurs when the Federal Open Market Committee (FOMC) sells securities to dealers with the intention of buying the securities back at a future date. This has the short-term effect of absorbing (removing) funds from the money supply.

The Consumer Price Index: a. Measures the average level of food and utility prices over a given period b. Measures the average prices paid by U.S. consumers over a six-month period c. Measures the average change in prices for specific goods and services purchased by consumers in certain cities d. Measures the total amount of dollars paid by consumers in the U.S. for goods and services Explanation: Incorrect. The Consumer Price Index (CPI) measures the average change in prices for selected goods and services purchased by consumers in certain cities. The CPI measures the change from a previous base period and is computed monthly.

c. Measures the average change in prices for specific goods and services purchased by consumers in certain cities The Consumer Price Index (CPI) measures the average change in prices for selected goods and services purchased by consumers in certain cities. The CPI measures the change from a previous base period and is computed monthly.

According to FINRA, the maximum sales charge on a variable annuity contract is: a. 0% b. 5% c. 8.5% d. An amount that is fair and reasonable

d. An amount that is fair and reasonable There is no statutory maximum sales charge on variable annuities or variable life insurance policies. The sales charges must be fair and reasonable.

Which of the following ratios would be used by an analyst examining the capital structure of an industrial corporation? a. The current ratio b. The dividend payout ratio c. The price/earnings ratio d. The debt-to-equity ratio

d. The debt-to-equity ratio The capital structure of a corporation is the dollar amount of the corporation's capitalization (equity and debt securities). An analyst will, therefore, be interested in the debt-to-equity ratio. This is actually the ratio of those securities creating fixed charges (bonds plus preferred stock) to common stock.

A listing of coincident economic indicators includes: a. Expenditures for capital goods b. The S&P Index c. Housing starts d. The industrial production index

d. The industrial production index The industrial production index is a coincident indicator. Coincident indicators tend to move directly with the business cycle and show what is currently happening in the economy.