Series 7- EXAM # 1
You have a customer who purchases many corporate bonds. One of his bonds increased by 1/2 point during the day. How much is this?
1/2 point is .5% of $1,000. Multiply this and you get 5, or $5. An easier way is to logically work it out: 1/2 point is .5 and since one point is equal to $10, half of that is $5. [Module 4, Debt Securities Basics & Corporate Bonds, Section 2.0]
A couple in their 50s has just come into some extra cash from a death in the family. They have moderate income and less than five years to retirement. Which of the following would be a suitable investment for them?
10-year government bonds. With only five years to retirement, growth stocks are too aggressive; bonds would be more appropriate. They cannot produce the income again; since bonds are safe, pick the government bonds. [Module 17, Suitability & Supervision, Section 3.1]
Which of the following can be paid by the 12b-1 fees assessed by a mutual fund on its shareholders?
12b-1 fees are to be used only for advertising and other costs involved in the sales of fund shares — including the fund's advertising costs and the cost of producing and mailing prospectuses to investors interested in purchasing fund shares, but not to present shareholders. Management fees are paid from the management fee collected by the fund, not from 12b-1 fees. [Module 8, Investment Companies, Section 9.8]
QCOM is trading at 56.75 in October. An investor purchases a Dec 50 call for a premium of 9.25. What is the time value of the 50 call option?
2.50. The time value is the premium less the intrinsic value; the intrinsic value is the difference between the strike price and the market price. This is the value that could be extracted by exercising the option. In this question, the premium is 9.25, and the intrinsic value is 6.75. 9.25 - 6.75 = 2.50.
A B/D firm is the lead manager of a stock underwriting that has a public offering price of $33 per share. The offering is not completely sold and the price in the secondary market starts to drop. The B/D can enter a stabilizing bid at which of the following prices?
33.00. This is the best choice. The stabilizing bid must be at or below the public offering price. A stabilizing bid is permitted to allow the underwriters to sell the remainder of an offering, and it is in the underwriters' best interest to stabilize as close to the offering price as possible. For the test, choose the price that is equal to the offering price, or the highest price that does not exceed the offering price. [Module 1, Investment Banking, Section 4.2]
A customer enters a limit order to sell at 38. The stock closes at 35 on an uptick, and goes ex-dividend with a $.52 dividend the next day. At what price must the stock sell to execute the order?
38. This is a sell limit, and it is not reduced on the ex-dividend date — the price stays the same. This type of order is entered above the present market, and cash dividends do not affect it. Orders that are entered below market value are reduced on the ex-dividend date. [Module 21, Orders & Exchange Trading, Section 1.3]
An institutional investor has 5,000,000 shares of a company that has 50,000,000 shares outstanding. The company is going to be issuing another 10,000,000 shares and will have a rights offering prior to the sale of the new shares. How many rights does the institutional investor receive, and how many new shares will it be able to purchase?
5,000,000 rights and 1,000,000 new shares. The institutional investor receives one right for every share it owns, and must be given the opportunity to maintain its proportional ownership of the company. Since it currently owns 10% of the company, it will have the right to buy 10% of the new shares, or 1,000,000 of the 10,000,000 shares being offered. [Module 3, Equity Securities, Sections 7.0 & 7.1]
A U.S. Treasury bond quotation in the newspaper shows a net change of .8. How much did the dollar value change?
8/32. Government notes and bonds are quoted in points and thirty-seconds of points (32nds). Therefore, a government note/bond quote contains a period as a place marker between whole points to the left, and 32nds of points to the right of that period. A bond that moved 0.8 moved 8/32 of a point or $2.50. [Module 6, Government Securities, Section 1.7]
Which of the following is NOT professionally managed?
A UIT's portfolio is not actively managed; instead, the UIT buys a relatively fixed portfolio of securities as directed by the trust indenture and holds them with little or no change during the life of the UIT. Changes to the UIT's holdings may be necessary due to a company filing for bankruptcy or one company merging with another, but such changes are not common. [Module 8, Investment Companies, Section 2.2]
CAPT
A theory of investing that is based on the fact that the return on an asset is directly related to the risk of the investment. The capital asset pricing theory (CAPT) is based on and uses the capital asset pricing model (CAPM) to compare risks with expected returns. The model assumes that investors can earn risk-free return by investing in savings accounts, bank CDs, or Treasury bills, and that most other investments carry risk. An investment's return must be sufficient to compensate the investor for the additional risk.
Which of the following transactions would be the least likely to be executed as an after-hour transaction?
A transaction on the NYSE. Transactions on the NYSE must take place during market hours, and therefore are not executed after hours. Primary market transactions, including private placements, are often sold after hours. A secondary market transaction that takes place on Nasdaq or the OTC could take place after hours.
Which of the following statements are true regarding ADRs?
ADRs (American depositary receipts) facilitate trading of foreign stock in the U.S. If dividends are declared, they are collected by the bank in the foreign currency, but are subsequently exchanged and paid in U.S. dollars. ADR shares trade on an exchange or OTC. The bank holding the shares typically votes for the board of directors and is typically entitled to receive any preemptive rights as well. [Module 3, Equity Securities, Section 12.1]
Which of the following will have the highest payout on a monthly basis for a person starting the annuity period at age 63?
Life annuity. This will always have the greatest payout because if the person lives for one payment and then dies, the insurance company keeps all of the money left in the account. It is a straight bet — the insurance company is betting the person dies and the annuitant is betting on living at least until the predicted age per the mortality schedules used at the start of the annuity period. [Module 9, Variable Annuities, Section 6.2]
What is the greatest concern with investing in limited partnerships?
Liquidity
Short against the box
Long a Security and Sells the same security Short - For arbitrage purposes - to hedge an anticipated decline in their long stock position (but maintain long-term investment status for tax purposes)
The writer of an uncovered call is exercised. In response, the writer enters an order to purchase the stock to deliver. How would the order be entered?
Opening purchase. Always remember — an opening transaction has to take place before a closing transaction can take place. Since the option was exercised, the investor must now purchase the stock to complete the contract. Then the sale, as demanded by the exercise notice, becomes a closing sale. [Module 21, Orders & Exchange Trading, Section 1.21]
Which of the following can be most accurately said of options?
Options are derivative securities. Options are securities that are defined as derivatives.
An investor has been watching BOC for the last year. About 10 months ago, the stock was trading in a range of $52-$58, a new high for the stock. Now in October, the stock is trading at $48 per share. The investor thinks that BOC will return to the $55 range over the next year. You suggest that he purchase and sell LEAPS. The investor agrees and you buy 10 Jan 45 calls for a premium of 9.50 and sell 10 Jan 55 calls for 1.25. If the stock rises to the high price for that stock, the investor will have which of the following upon closing both positions for the amount they are in the money?
$1,750 gain. The drawing looks like this: S 55 c +1.25 58 mkt L 45 c -9.50 ----55---- -8.25 + 53.25 BE - ----45---- Always go from the BE to the market price, but not above the higher strike price. From 53.25 to 55 is 1.75. However, there are 100 shares and 10 contracts, so 1.75 × 100 × 10 = $1,750 on the plus side, so it is a gain. [Module 7, Options, Sections 8.1 & 8.2]
1. Your customer sells 20 IBM Dec 110 calls for a premium of 3. At the same time, he purchases 20 IBM Dec 100 calls for 8. Later, he closes the 100 calls for 14 and closes the 110 calls for 4. What is your client's profit or loss?
$10,000 profit. The investor is closing the calls, which means he must do the opposite transaction on each side. Since he sold the 110 calls, he will now be purchasing them; since he purchased the 100 calls, he will now be selling those. Remember, there are 20 contracts of each. S 110 c + 3 = close for -4 = -1 × 100 × 20 = -2,000 L 100 c - 8 = close for +14 = +6 × 100 × 20 = +12,000 +10,000, a $10,000 profit or gain
On what amount does a customer pay interest in a balanced margin account with a credit balance of $50,000 and a debit of $60,000?
$10,000. Firms offset the debit balance with the customer's credit balance for the purpose of calculating the interest due on the outstanding debit balance. In this case $60,000 Dr - $50,000 Cr = $10,000 debit. [Module 16, Margin, Section 2.0]
A customer's margin account has a short market value of $120,000 and a credit balance of $200,000. What is the minimum maintenance of the account?
$36,000. Minimum maintenance in a short account is 30% of the market value. In this case, $120,000 × 30% = $36,000. [Module 16, Margin, Section 4.3]
A customer has an existing margin account with a long market value of $90,000 and a debit balance of $40,000. At what point in market value will the investor have a maintenance call?
$53,300. The question is asking at what point the investor would have a maintenance margin call. Since the debit balance is given, divide the debit balance by 75%, or in this case, $40,000 ÷ 75% = $53,333, rounded-off to $53,300. A simpler method is to choose the only answer that is between the market value and the debit balance. All the other answers are below the debit balance, and the broker/dealer will never allow the market value of the stock get below the amount the customer owes. [Module 16, Margin, Section 3.5]
An investor has 1,000 shares of 3% cumulative preferred stock. If the company paid her $2 per share in 2017 and $1 in 2018, how much must it pay the investor in 2019 to give the common stockholders a $.10 dividend in 2019?:
$6 per share. This is a 3% cumulative preferred, so it pays $3 each year. Since this is a cumulative preferred stock, the investor is entitled to the unpaid dividends of $1 for 2017, $2 for 2018, and $3 for 2019. [Module 3, Equity Securities, Section 4.2]
The dollar value of a U.S. government bond selling at 98.8 is:
$980.00 + (8/32 × $10) = $980 + 2.50 = $982.50. Try it this way: Put down the whole number price and then a blank, period, blank, and blank: 98 .__ Now, change the .8 to fraction and then to a decimal: .8 = 8/32, which is 8 ÷ 32 = .25, and then fill in the blanks: 982.50 or $982.50
Rule 147 Intrastate Offerings
-offerings that take place in entirely one state are exempt from registration when: >the issuer has its principal office and receives at least 80% of its income in the state >at least 80% of the issuer's assets are located within the state >at least 80% of the offering proceeds are used within the state >the B/D acting as underwriter is a resident of the state and has an office in the state >all purchasers are residents of the state
Which of the following requires a written statement of the customer's net worth?
A limited partnership requires a written statement of the customer's net worth.
Which of the following does not represent an open option position?
A long call that is exercised. This does not represent an open option position. Since the call has been exercised, the option position is no longer open, although the stock position is an opening transaction
preliminary prospectus
A preliminary prospectus of a new corporate offering. The preliminary prospectus (and the subsequent prospectus) is not considered to be an advertisement, or retail communication, nor is the official statement. However, a summary of the prospectus or OS is a retail communication, and is subject to approval. The write-up, although found on the website, is still advertising and is subject to the retail communications rules. Of those listed here, only the actual prospectus or official statement is not advertising. [Module 18, Communications, Sections 1.1 & 2.1]
All the following will be quoted on the yield to maturity of the bond and not the yield to call of the bond, except:
A premium bond callable at par. Since the lower of the yield to call or the yield to maturity must be given, the only time a bond will be quoted on the yield to call is when the call or redemption price is lower than the purchase price. The two discounted bonds and the premium bond callable at a greater premium will be quoted on the YTM because the YTM is less than the YTC. A premium bond callable at par has a yield to call that is lower than the YTM, so the yield to call must be quoted.
When updating a customer's file, a registered representative must update the:
A registered representative must update all information about a client as often as is necessary, immediately upon receipt of new information. [Module 19, Books & Records, Section 6.3]
Wash Sale
A sale of securities at a loss with the subsequent disallowance of the loss by the IRS. If an individual sells a security at a loss and within 30 days, repurchases substantially the same security, the IRS will consider it a wash sale and will disallow the loss
Armcircle, Inc. is a large company with a number of smaller companies as part of the corporation. One of the smaller companies is not doing well, so the board of directors decides to divest the small company from the large corporation by issuing shares of the small company to the existing stockholders. What is this called?
A spin-off. A spin-off is when the large corporation pushes the small company out of its umbrella and gives the small company its own shares. When this happens, the existing shareholders of the large corporation are losing part of the value of the corporation, and are compensated by receiving shares of the small company. If the small company had issued stock and bonds and bought itself out of the large corporation, it would be a leveraged buyout. [Module 3, Equity Securities, Section 10.2]
correspondence
Correspondence includes a group text, letter, or email that is sent to a maximum of 25 retail investors in a 30-day period. If it is directed to 26 or more during a 30-day period, it is classified as retail communications. Correspondence may be approved by a principal after its first use, while retail communications must be approved before first use.
Awarded bidders at U.S. Treasury options pay which of the following?
All awarded bidders pay the lowest accepted competitive bid.
Which of the following can purchase commercial paper?
All these investors can purchase commercial paper. [Module 4, Debt Securities Basics & Corporate Bonds, Section 9.2]
Which of the following is considered a recommendation?
An online portfolio analysis tool where clients input personal and financial information, including their current holdings, objectives, and risk tolerance; the analysis tool then returns a list of specific securities the clients could buy or sell to meet their goals. This is considered a recommendation, because the analysis tool suggests the client takes action.
How often must the holder of open-end investment company shares receive a copy of the mutual fund's unaudited financial reports?
At least every six months (semiannually). A report to stockholders must be sent semiannually and must list current portfolio holdings, including the number of shares and/or bonds in the mutual fund's portfolio as well as their current market values. [Module 8, Investment Companies, Section 10.2]
When must you send the options disclosure document to this investor?
Before opening the account. Always pick the earliest time that you can. Did you notice all of the extra information in the question? The question is all wrapped up in the final sentence: When must you send the options disclosure document? Choose the earliest time given, and always prior to opening the account. [Module 14, Customer Accounts, Section 2.3]
A customer in a high tax bracket is subject to the alternative minimum tax (AMT) under certain situations. He invests in municipal bonds, but does not want bonds in which the interest is subject to the AMT. Which of the following municipal investments is the least likely to cause the investor to file the alternative minimum tax?
Bonds issued for pollution control. Pollution control bonds benefit the entire community and are not subject to AMT. Bonds issued to finance a stadium are the most likely to be considered private activity bonds, subject to the AMT. Bonds for water revenues and highway construction may also be subject to AMT, depending on who issues them. If the highway will be a private highway run by a corporation or other entity that charges tolls, then the interest is subject to AMT. However, if it is for the public good and paid for through gasoline taxes, the interest is not subject to AMT. The water bond depends on whether a private corporation or a municipal entity is issuing the bond; if issued by a corporation, it is subject to AMT, and if by the municipality with municipal control, it is not subject to AMT. [Module 5, Municipal Securities, Section 1.3]
Interest rates have started to rise in the last three months. A customer is looking to purchase a yield-based option to take advantage of the situation. Which of the following option strategies would you suggest to the customer?
Buy calls on interest-rate options. This is the best way to take advantage of the rising interest rates. Buying puts and selling calls would be wise if the interest rates were falling. An increase in interest rates would make Treasury bonds less valuable, causing a bear market for Treasury securities. Buying a call is utilized for bull markets, not bear markets; therefore, buying a call on Treasury bonds would not work in this situation. [Module 7, Options, Sections 2.0, 13.0, & 13.1]
ABC Corporation has issued a convertible bond, convertible into 20 shares of stock per bond. The stock is presently selling at $56 per share and the bond is selling at parity. What is the best way for an investor who believes the stock will continue to perform to take advantage of the situation?
Buy the bond and buy puts on the stock. There are two things the investor can do in this situation: Buy the bond and buy puts on the stock for downside protection, or buy the bond and sells calls for income on the stock. The only one offered is purchasing puts for protection.
Leveraged ETFs with rest of portfolio
Leveraged ETFs attempt to realize a stated multiple (two or three times) of the underlying index's daily return and the annual return may be significantly different than the ETF's intended return. Leveraged ETFs have three categories of expenses — management, interest, and transaction costs — resulting in a higher expense ratio compared to other ETFs. Inverse ETFs, not leveraged ETFs, are more commonly used to hedge a portfolio. [Module 11, Alternative Investments, Section 2.1]
source of funds
Capital sources include funds raised from equity and debt offerings and previous earnings that the issuer has retained rather than paid as dividends to shareholders. [Module 3, Equity Securities, Section 2.0]
Leveraged ETFs
Leveraged ETFs use margin (borrow capital) and invest in short-term derivatives to generate a multiple (two or three times) of the underlying index's return on a daily basis. Leveraged ETFs also hold cash positions to meet financial obligations of the derivatives. The drawback is that there are higher expense ratios, including management (higher than regular ETFs), interest cost on the borrowing, and all the transaction costs.
Your customer wants to invest in a DPP oil program. If the program is successful, which of the following programs would have the highest rate of return?
Exploratory program. The important statement here is if the program is successful. Since the exploratory program pays the least for drilling on the property and is the riskiest of the oil programs, it will return the most per barrel if oil is found. [Module 10, DPPs & REITs, Sections 6.2 - 6.5]
403b
Retirement plan found in nonprofit organizations, such as churches, hospitals, and schools.
Amber Corporation has issued 40 million shares of common stock and 2 million shares of preferred stock. What rights do the common stockholders have?
Common stockholders have the right to vote on the election of the board of directors and on any major issues, such as a takeovers, changing or keeping the company's course of action, and any other major issues that the owners should make. The board of directors appoints the officers and declares the dividends. [Module 3, Equity Securities, Section 6.0]
Debit Put Spread
Debit put spreads are used by investors to reduce the cost of a long put position. The investor who establishes a debit put spread is bearish. Short a May 70 put and long a Jul 70 put. This is a debit put spread. This means the net position is a debit (or long) put; long puts are bearish. According to the Options Navigator, a debit put spread is bearish.
Which of the following indexes has the narrowest sampling of stocks to represent an indication of the market trend?
Dow Jones Industrial Average. This is the smallest index with 32 industrial stocks. Wilshire Index is the largest with over 6,000 stocks. The S&P has two indexes — 100 (stocks) and 500 (stocks). The Nasdaq varies according to the number of stocks it has at any given time. [Module 12, Securities Analysis, Sections 5.0 - 5.4]
Eve is a registered rep at Beatem Securities, Inc. Eve's customer, Sam, owns 500 shares of ABC stock. He lets her know he will be out of town for the next two weeks, and says, "Watch my ABC stock." Three days later ABC begins to decline in value. Which of the following actions should Eve take on Sam's account?
Eve should contact Sam for further instructions. A customer who asks his rep to watch a stock is not giving the rep an order to trade. Had Sam given Eve written trading authorization, she could act without first contacting him. [Module 14, Customer Accounts, Section 6.0]
ETN
Exchange Traded Note / Equity Linked Note -Index linked note -Debt security -Maturity payment based on underlying security / group of securities -No coupon or interest payments to investor during ownership -Purchased / sold any time during trading day -Purchased on margin and sold short -Risk: unsecured and credit risk of issuing bank or broker dealer -PPN is principal protected note - held to maturity, carry principal guarantee = issuer's credit rating - not 100% guaranteed
ETNs can best be described as:
Exchange traded notes (ETNs) are senior debt securities representing a loan to the issuer. At maturity, investors receive an amount commensurate with the performance of the underlying benchmark; ETNs do not pay interest or dividends, and there are no underlying assets as is the case with a pooled investment vehicle. [Module 11, Alternative Investments, Section 2.3]
In order to maintain pass-through tax status, most limited partnerships avoid which two of the following corporate characteristics?
Free transferability of interest and continuity of life. To avoid continuity of life, a limited partnership must dissolve within a certain time period. To avoid free transferability of interest, the partners must vote on admitting or withdrawing other partners. These two are easily done under the agreement of an LP and are the two that almost all limited partnerships avoid. [Module 10, DPPs & REITs, Section 1.5]
1. All the following bonds are AAA-rated. An investor lives in California and is in the 33% federal tax bracket and the 16% state tax bracket. Rank the after-tax yield of the bonds from high to low. I. 7% FNMA bond II. 7% State of Nevada bond III. 7% Treasury bond IV. 7% State of California bond
IV, II, III, I. Since she is a resident of California, the investor is exempt from both state and federal taxes on the California bond. She is exempt from federal (but not state) taxes on the Nevada bond, and exempt from state (but not federal) taxes on the Treasury bond. Because FNMA is a corporation, the investor will pay both state and federal taxes on it. [Module 13, Risk Disclosure & Tax Considerations, Sections 7.0 & 8.0]
A buyer of an UMM Aug 80 call has exercised the call. UMM has declared a dividend to holders of record on August 1. When would the buyer of the call be entitled to receive the dividend?
If the notice to exercise is sent to the OCC before the ex-dividend date. To receive the dividend, investors must purchase the stock before the ex-date. When options are exercised, the sale or purchase of the underlying stock settles regular way, and investors must buy the stock before the ex-dividend date so that they will be the owner of record on the record date. [Module 7, Options, Section 11.1]
What is the mathematical way to measure the performance of a group of securities?
Index. An index is composed of securities, usually stocks, with a mathematical formula basis that takes a certain number of shares per stock times the stock price times a multiplier. Delta, beta, and R-squared all measure volatility. [Module 12, Securities Analysis, Section 5.0]
In variable policies, any and all market risk is borne by the:
Insured. In variable policies, any and all market risk is borne by the insured, not by the insurance company. More accurately, the owner of the policy or contract assumes the market risk.
Inverse ETFs
Inverse ETFs, not leveraged ETFs, short shares of the index funds or any of the investments. Inverse ETFs are used as hedges for a portfolio, while leveraged ETFs are typically not. [Module 11, Alternative Investments, Section 2.1]
Keynesian Theory
Keynesian theory supports an increase in government spending to stimulate the economy. The supply-side supports less government spending and lower taxes, while the monetarist theory supports changing the money supply. Macroeconomics is the study of economics. [Module 12, Securities Analysis, Section 1.2)
The Investment Company Act of 1940 allows a mutual fund to do which of the following in its investing activities?
Lend money to venture capital investments. Funds may not purchase on margin or sell short (which requires margin), nor can they join other mutual funds or broker/dealers in a trading account.
An investor buys 1,000 shares of RPL, Inc. stock at $59. Eight months later, he sells the stock at $55 per share. In looking at the sale of the stock at a loss, which of the following option positions would create a wash sale for the customer?
Long calls on the stock. Two option positions cause a wash sale if executed within 30 days before or after the sale at a loss — buying calls and selling puts. However, the puts have to be in the money when selling them, requiring the customer to purchase the stock. The calls do not have to be in the money — just purchasing the calls gives the investor the opportunity to buy the stock, which means the investor can, but does not have to, buy the stock. The short puts are an obligation to the writer; thus, they have to be in the money to cause a wash sale. [Module 13, Risk Disclosure & Tax Considerations, Section 12.3]
Whose social security number will be on an UGMA/UTMA?
Minors
1. GENRA, Inc. will be paying a $0.20 dividend with a record date of Wednesday, July 5. What is the first day that an investor holding shares of GENRA stock can sell the stock and still retain the $0.20 dividend?
Monday, July 3 in a regular way trade. To retain the dividend, the investor must still own the stock on the record date of July 5. If the trade takes place on Monday, July 3rd in a regular way trade, it will settle in two business days. Since the 4th of July is a holiday, it is not counted. Therefore, the second business day after July 3rd is Thursday, July 6. If the trade settles on July 6, the seller will still own the stock on July 5 and retain the dividend.
Rule 147
Offerings under Rule 147 are exempt from registering with the SEC if all the investors are residents of the state in which the security is being sold. For the purposes of this rule, residency is established by driver's license, voter registration, or tax situs. Investors need not be accredited to purchase a security offered under Rule 147. [Module 2, Exempt & Municipal Offerings, Section 3.0]
Step-Up CD
Permits periodic upward adjustments in the promised interest rate. Step-up CDs guarantee a fixed rate of return for a period of time, and then it rises three or four times during the life of the CD.
The bond counsel is retained by the issuer to do which of the following?
Physically examine one of the bond certificates to be issued, and attest to the tax-exempt status of the interest on the issue. The main function of the bond counsel is to attest to the tax-exempt status, and thus the validity of the issue. The bond counsel also examines one of the bond certificates to ensure the correct language is used. The bond counsel does not attest to the creditworthiness or solvency of the issuer. [Module 5, Municipal Securities, Section 6.5]
ABC Corporation is issuing 5,000,000 additional shares of stock. It is having a rights offering prior to the offering. An investor holding 2,000 shares of stock would be able to do all of the following with the preemptive rights she will receive, except:
Redeem the rights for cash. The issuer will not allow an investor to redeem rights for cash. The only value the rights have is what another investor is willing to pay for them in the open market, which is based on the intrinsic value of the rights and the market price of the underlying securities. The investor may give the rights away to another party, exercise the rights, or sell the rights in the open market. [Module 3, Equity Securities, Section 7.0]
Which of the following statements is true about removing and replacing an arbitrator?
Refusal of an arbitrator can be requested by any party for good cause. The arbitration director may remove an arbitrator if requested by one party, or by the director's own initiative. This does not result in the other arbitrators being removed and replaced. FINRA's DOE sanctions member firms and APs for violations of the Conduct Rules, and is uninvolved in arbitration. The director must notify all parties before removing the arbitrator, and the parties have five days to respond. [Module 23, Trade Errors & Customer Complaints, Section 5.4]
VFM has issued a convertible bond, convertible at $25. The stock is presently selling at $35. What is the parity price of the bond?
Remember that parity is when the value of the bond is equal to the value of the shares to which it can be converted. Knowing that the conversion price of the stock is $25 and understanding that par value on a bond is $1,000, we can determine the conversion ratio using the formula: CR = Par ÷ CP: $1,000 ÷ $25 = 40. If the bond can be converted to 40 shares of stock currently selling at $35, the bond would have to trade at $1,400 (40 × $35) to be at parity with the common stock. [Module 4, Debt Securities Basics & Corporate Bonds, Sections 7.1 & 7.2]
When there is a dispute between parties, which of the following may require the use of arbitration to resolve the issue?
Remember that the first person is the complainant and the second is the respondent. Per FINRA rules, a dispute between industry persons (i.e., a registered rep and a firm) must be resolved through arbitration. A customer may choose to have a dispute with a firm settled through arbitration, though they are not required to do so and may use other means to resolve the issue. Disputes between two customers are not handled through arbitration as neither party is a member of or registered with FINRA. A firm may not require that a customer use arbitration to resolve a dispute (unless the customer has signed a predispute arbitration agreement). [Module 23, Trade Errors and Customer Complaints, Section 5.3]
Short stock at 58 and long a 60 call for 2. What is the breakeven point?*
S stk +58 L 60 c -2 Net = +56 (BE) --60-- - 56 BE + Breakeven: 56 Maximum gain: 56 (down to zero) Maximum loss: 4 (BE to ceiling 60)
Inverse ETN Time Horizon
Short term. Inverse ETFs are designed to perform in an inverse manner relative to an index or benchmark. As such, inverse ETFs are designed for short-term holding periods. They are used to make a bearish bet or hedge a portfolio. ETFs are for sophisticated investors, with the ability to sustain substantial losses in a short period of time. [Module 11, Alternative Investments, Section 2.1]
A customer of yours has invested $95,000 into a qualified annuity. The annuity is now worth $105,000. Your customer is 54 years old and has decided to build a house that will be his first home. He withdraws $20,000 for use in building the home. What will his tax be if he is in the 24% tax bracket?
Since this is a qualified annuity, all of the money that is taken out is taxed at the investor's ordinary income rate — in this case, $20,000 is being taxed at 24% for a total of $4,800. In addition, since the investor is under age 59 1/2, there is a penalty of 10% on all taxable withdrawals, with some exceptions. One of the exceptions allows the investor to take up to $10,000 for a first-time home purchase (or construction, in this case); therefore, the investor must pay the 10% penalty on only $10,000 of the $20,000 withdrawal, equaling a $1,000 penalty. $4,800 in taxes + $1,000 in penalty = $5,800. [Module 13, Risk Disclosure & Tax Considerations, Section 16.0]
In 2012 the city of San Francisco, CA issued a 15-year general obligation bond. Starting in 2017, the city has been calling in some of the bonds in installments. What type of call is this?
Sinking fund call. Since the call is in installments, it is a sinking fund call. If the call were part or all of the issue and at a premium, then it would most likely be an optional or "in-whole" call. A catastrophe call occurs when the project has a major breakdown and is unable to continue to function; this call would be at par. The extraordinary call is usually in the first few years due to excess funds from the proceeds of the bond issue and is usually at par. [Module 5, Municipal Securities, Section 6.3]
Working in your firm's municipal underwriting department, you are concerned about other municipal bonds being issued in your area. Which of the following will help you locate other issues being brought to market?
The 30-Day Visible Supply. This is found in the Daily Bond Buyer, but only on Mondays. The other four days it would not contain timely information. Notices of sale are published to solicit bids from underwriters for issues that are still a long way from being issued. The Blue List listed issues trading in the secondary market, but is no longer being published. [Module 2, Exempt and Municipal Offerings, Section 5.3]
An issuer of an auction rate security has had a successful auction. What is the reset rate for the issue?
The clearing rate of those received. Only the clearing rate is the rate for a successful auction. The highest rate received is the rate only if the auction took every bid entered. Then the highest rate and the clearing rate are the same. The maximum rate is always for a failed auction, and that rate is set by the issuer. The minimum rate is always accepted, but is never used. [Module 4, Debt Securities Basics & Corporate Bonds, Section 11.0]
All the following are required under Regulation AC, except:
The analyst's educational background must be disclosed. This is not a requirement of Regulation AC. Disclosure on the front page, disclosure of compensation related to a recommendation, and a certification of truthfulness are all requirements of Regulation AC. [Module 18, Communications, Section 9.1]
In-whole call
The redemption of a bond issue in its entirety at the option of the issuer, as opposed to its redemption based on a lottery held by an independent trustee. Related item(s): in-part call.
A registered rep is showing a 20-year municipal revenue bond to her customers. The bond is a State of Florida 2039 6% revenue bond that will be used to build a bridge across the inland waterway. Which of the following is the most important information when looking at the issue?
The feasibility study conducted by the county. The feasibility will tell how much use the bridge is expected to have, and thus, if sufficient revenues will be made to pay the principal and interest of the bond funding the project. This is a revenue bond, so the tax base and the net direct debt are of no value — those are for GO bonds. The engineer's report is important, but the feasibility report makes the determination of how much it will cost, how much it will be used, and how much revenue it will generate, which is what most concerns the bondholders. [Module 5, Municipal Securities, Section 6.4]
When an annuitant dies during the annuity period of a straight life annuity, the remaining value of the separate account goes to which of the following?
The insurance company. When an annuitant dies during the annuity period of a straight life annuity, any remaining value of the separate account goes to the insurance company. The insurance company gets all of the proceeds in a life annuity after the death of the annuitant. [Module 9, Variable Annuities, Section 6.2]
A customer's auction rate securities have just been paid off. He would like to use these funds to reinvest in auction rate securities. When can he do this?
The investor may reinvest at any successful reset period of the ARS. New investors cannot purchase ARS when there is a failed auction, since the holders keep their ARS at a higher yield. Reinvestment can only occur at reset periods that have a successful auction, not at just ANY reset period. [Module 4, Debt Securities Basics & Corporate Bonds, Section 11.0]
When bonds trade with accrued interest, the accrued interest is calculated for which of the following time periods?
The last pay date up to but not including the settlement date. The buyer of the bond pays the seller the accrued interest the seller has earned but hasn't yet been paid; the buyer will be repaid when the bond next pays interest. Accrued interest is calculated by adding up the days starting with the last pay date up to, but not including, the settlement date. The buyer of the bond becomes the owner on the settlement date and begins accruing interest. [Module 4, Debt Securities Basics & Corporate Bonds, Section 8.1]
One of your clients in his early 30s has some experience purchasing investments. He currently has four months of income to live on and wants to invest it. A friend tells him about leveraged ETFs and how they can double or triple the investor's money. He asks you how he could enter into these investments. What do you tell him?
The leveraged ETF is not a good strategy, given his circumstances. Leveraged ETFs are for sophisticated investors who can withstand substantial losses. This investor wants a quick fix to make big dollars, but could lose it all just as quickly. He is not a qualified investor for ETFs. [Module 11, Alternative Investments, Section 2.1]
A registered representative retires and assigns all his customer accounts to a new registered representative.
The new registered representative should call all the customers and update their account information.
Based on the assumed interest rate (AIR) of 3% on her separate account, Mrs. Robertson receives a payment of $400 in the first month after annuitizing her variable annuity. In the second month, the separate account performance is 5% and her second monthly payment is $500. If the separate account drops to 4% in the third month, how much can Mrs. Robertson expect to receive that month?
The payment will be more than $500. Be very careful with questions regarding the assumed interest rate (AIR). In any given month, if the performance of the separate account is more than the AIR, the payment will be greater than the last payment. The previous payment was $500 and the performance of the separate account in the third month was 4%, which is greater than the AIR of 3%. Therefore, the payment will continue to increase from the previous month's payment, which was $500. Therefore, Mrs. Robertson can expect to receive more than $500 in the third month. [Module 9, Variable Annuities, Section 6.6]
A broker/dealer firm primarily sells mutual funds and variable annuities. A registered representative who sells variable annuities must be registered with which of the following organizations?
The person who sells variable annuities must be registered with FINRA and the state in which the customer resides. Variable annuities are hybrid products and are both securities and insurance products. The RR must register with FINRA in order to sell securities and with the state department of insurance to sell insurance products. [Module 9, Variable Annuities, Section 3.2]
Under Rule 144 of the Securities Act of 1933, all of the following are true regarding the sale of registered securities in the open market, except:
The purchaser of the securities cannot resell them for at least 90 days; in fact, the buyer of the securities may resell them at any time. If selling 5,000 or fewer shares, or if the aggregate value of the shares is $50,000 or less, the control person may sell at any time without filing a 144 notice. The seller may sell any amount of the securities to a QIB (qualified institutional buyer, such as a mutual fund, a bank, an insurance company, or a trust company). [Module 2, Exempt & Municipal Offerings, Section 2.2]
The bond counsel hired by a municipal issuer provides his opinion regarding all of the following aspects of a revenue bond, except:
The reasonableness of the re-offering yields. The re-offering yields are determined by the underwriters at the time the bond is issued and are usually very close to the going market price. The counsel opines on the tax-exempt status, the validity of the issue as a municipal bond, and the qualifying statements the bond counsel firm has made in determining the issue's validity. [Module 2, Exempt & Municipal Offerings, Section 5.8]
Suzi Quay tells her registered representative to buy 300 shares of TUF, Inc. stock and put it in her personal account. The registered representative enters the order and it is executed. The shares are purchased, but as the confirmation is being sent out, the registered representative notices that 800 shares of stock were purchased instead of only 300 shares. What must the registered representative do?
The registered representative must notify his manager immediately and have only the correct number of shares credited to the account. RRs should notify their manager whenever they discover a problem. Then the back office will work out the issue; it is not up to the RR to make the changes. The customer should not be involved with the firm's internal processes unless absolutely necessary. [Module 23, Trade Errors & Customer Complaints, Sections 4.0 & 4.1]
The City of Spokane is preparing to issue a bond on a new shopping mall. Spokane hires a bond attorney to give an opinion on the bond. The bond counsel sends back a "qualified legal opinion" on the issue. Which of the following statements is true?
There are elements of the bond that could cause it to lose its tax-exempt status. The bond counsel gives a qualified legal opinion if some aspect of the issue makes the bond interest taxable, or if it has a legal matter that may affect its value.
Which of the following could be used best as a hedge against inflation?
Variable annuity. Of the answers given, only the variable annuity could be used as a hedge against inflation. A face-amount certificate is based on real estate mortgages and fixed payments, which could not be expected to keep pace with inflation. Fixed annuities also have fixed payment amounts and are no hedge during inflationary times. Since municipal bonds also have fixed interest payments and the investor will only receive the principal back at maturity, they would not provide a good hedge against inflation either. [Module 9, Variable Annuities, Section 2.2]
BAT Securities is a broker/dealer that clears its trades through ABD Securities. A customer of BAT Securities places an order with his rep to buy 500 shares of BBDT stock, an OTC stock, at the market. BAT sends the trade to its clearing firm, thus interpositioning ABD in the trade. ABD purchases the stock at 65.50 and executes the trade for the customer at 65.50 plus a commission.
This is allowed only if it provides a better price for the customer. Interpositioning is not allowed unless a better price can be obtained for the customer. The firms may split the commission. [Module 20, OTC Trading & Quotes, Section 5.5]
Broker/dealers must retain records of principal-approved retail communications for at least:
Three years. Additionally, the records must be readily accessible for the first two years; the third year may be in long-term storage. Customer exception reports must be retained for 18 months. FINRA's written customer complaint retention period is four years. Records pertaining to anti-money laundering procedures mandated by the Bank Secrecy and U.S. Patriot Acts must be retained for five years. [Module 19, Books & Records, Section 2.0]
You have an investor who uses options to enhance his portfolio. He wants to enter into a spread, but does not want it to cost more than $3. How would you enter the order for the customer?
Two limit orders. Since the investor wants a spread (two orders) with a net of $3, he must enter a buy and a sell order (both calls or both puts); since he does not wish to pay more than a net $3 premium, he must use limit orders to keep the premiums close.
Maintenance Call
When the account value drops to a certain level
All retail communications distributed by an established B/D must be sent to FINRA
Within 10 days of first use. The requirement to file retail communications includes any new item that is used by either the B/D or a representative. Items that were previously filed may be subsequently used again without refiling. All retail communications must be maintained for three years, the first two in a readily accessible place.
A young man is in a low tax bracket. He has $10,000 to invest and wishes to make the best investment for his young children's college education. As his registered representative, you advise him to invest in which of the following?
Zero-coupon bonds. Since the investor's children are young, they have a long time horizon. Zero-coupon bonds are both long-term and safe and have a known maturity, making them good investments for college planning. T-bills and CDs are guaranteed by the government and banks respectively, but do not earn much interest. Tax-exempt issues would benefit investors in higher tax brackets; neither the investor, nor the children fit that profile. [Module 4, Debt Securities Basics & Corporate Bonds, Section 1.2]
zero coupon bond
a bond that makes no coupon payments and is thus initially priced at a deep discount
commercial paper
unsecured promissory notes of $100,000 and up that mature (come due) in 270 days or less
Sinking Fund Call
when part of the bond issue is called and paid by the sinking fund. used by the municipality to buy its own bonds in the open market if they are at a discount, or pay off bonds that are called. usually callable in the first years at a premium that reduces to par after 3-5 years.