Series 7 Mock Exam #5 Missed Questions
In a margin account, your customer's long market value is $22,000. The debit balance is $8,000. If the customer enters an order to purchase $12,000 of stock, the margin call will be A) $3,000. B) $0.00. C) $4,000. D) $6,000.
A) $3,000. We determine the excess equity in this account by comparing the equity in the account with the Reg. T requirement. With a LMV of $22,000, Reg. T requires 50% equity, or $11,000. This account has equity of $14,000 ($22,000 minus the $8,000 debit balance). That is how we note the excess equity is $3,000 ($14,000 minus $11,000). Unless stated otherwise, that $3,000 will be journaled to SMA.
In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is A) $5,600. B) $5,400. C) $2,000. D) $2,400.
A) $5,600. The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000; therefore, the credit balance is $5,600 ($3,600 + $2,000 = $5,600).
Trading in expiring options series concludes the same day as expiration at A) 4:00 pm ET. B) 5:00 pm ET. C) 11:00 pm ET. D) 12:00 pm ET.
A) 4:00 pm ET. The official close is 4:00 pm ET on the third Friday of the expiration month. Expiring options may be exercised until 5:30 pm ET on the same day.
If a customer buys 1 OEX Feb 350 call at 5 and sells 1 OEX Feb 335 call at 16 when the underlying index is at 344, she will profit if 1. the spread narrows. 2. the spread widens. 3. the underlying index does not change. 4. the underlying index rises in value. A) I and III B) II and IV C) III and IV D) I and IV
A) I and III
Which of the following statements regarding the flow of funds found within a municipal trust indenture are true? 1. It describes the disbursement of funds for revenue bond issues. 2. It describes the disbursement of funds for general obligation issues. 3. It is found within the official statement. 4. It is found within the bond contract. A) I and IV B) II and III C) I and III D) II and IV
A) I and IV The term flow of funds relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts, as specified in the trust indenture found in the bond contract.
Which of the following provisions govern the offering of control stock to the public without filing a Form 144? 1. The dollar amount is $1 million or less. 2. 100,000 shares or fewer are sold. 3. 5,000 shares or fewer are sold. 4. The dollar amount is $50,000 or less. A) III and IV B) I and II C) II and IV D) I and III
A) III and IV Under Rule 144, when shares are sold by an affiliate (control), Form 144 need not be filed if 5,000 or fewer shares are sold, and the dollar amount is $50,000 or less. This de minimis rule applies to sales in any 90-day period.
When XYZ stock trades at 40, and an XYZ Oct 35 call trades at 5, which of the following is true? A) The time value is zero. B) The option's time value equals its intrinsic value. C) The option is out of the money. D) The option is at the money.
A) The time value is zero. An option's premium consists of time value and intrinsic value. In this situation, the call is in the money by 5 (intrinsic value is 5), because the market value of 40 exceeds the strike price of 35 by 5. If the total premium is 5, and the intrinsic value is 5, the time value must be zero. The option is at parity, which means the premium equals the intrinsic value. Remember P - I = T (Premium minus intrinsic value equals the time value).
The City of Columbus issued a 20-year general obligation bond at a price of 50. An original purchaser sold the bond at 75 after holding it for 7 years. For tax purposes, that sale generated A) a $75 capital gain. B) a $25 capital gain. C) a $250 capital gain. D) no gain or loss.
A) a $75 capital gain. The customer has realized a capital gain of $75. Original issue discount bonds must accrete the discount over the life of the bond. In this example, the amount of the discount (par value minus purchase price) is $500 ($1,000 − $500 = $500). The discount divided by the number of years to maturity determines the annual accretion added to the cost basis. In this question, the annual accretion is $25 ($500 divided by 20 = $25). The adjusted cost basis would be the original purchase price ($500) plus seven years of accretion (7 times $25 = $175) for a total of $675. Because the proceeds of the sale were $750, the customer has realized a capital gain of $75 ($750 − $675 = $75).
A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as A) part earnings and part cost basis. B) all return of cost basis and nontaxable. C) earnings only and taxable. D) exempt from taxes.
A) part earnings and part cost basis. Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable, but the cost basis is returned tax free.
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's original basis was $20,000. B) the investor's original basis was $100,000. C) the investor has a passive loss deduction of $100,000. D) the investor's basis is now $0.00.
A) the investor's original basis was $20,000.
All of the following statements describe stock rights except A) they are most commonly offered with debentures to make the offering more attractive. B) they are traded in the secondary market. C) they are short-term instruments that become worthless after the expiration date. D) they are issued by a corporation.
A) they are most commonly offered with debentures to make the offering more attractive. Warrants, not rights, are often issued with debentures to sweeten the offering.
A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $11,750. B) $16,450. C) $25,200. D) $18,000.
B) $16,450. Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $47,000.
If XYZ common stock has a $4 dividend, a yield of 4.2%, a price-to-earnings (P/E) ratio of 12, and it is trading at $96, its approximate earnings per share (EPS) is A) $48.00. B) $8.00. C) $4.00. D) $50.40.
B) $8.00. Dividing the stocks price by P/E ration will give you EPS. 96 / 12 = 8
It is not uncommon for one company to attempt to take over another by acquiring a significant percentage of its voting shares. Under SEC rules, if the terms of the offer are changed, the revised offer must remain open for at least A) 10 business days from the commencement and 10 business days from the date the terms are changed. B) 20 business days from the commencement and 10 business days from the date the terms are changed. C) 20 business days from the commencement and 20 business days from the date the terms are changed. D) 10 business days from the commencement and 20 business days from the date the terms are changed.
B) 20 business days from the commencement and 10 business days from the date the terms are changed. The rule is that the offer must remain open for at least 20 business days from the time the tender offer begins, and if there should be a change to the terms of the offer, if must be held open for 10 business days from the change.
A significant increase in which of the following types of orders may cause a bull market to accelerate? A) Sell stops B) Buy stops C) Buy limits D) Short sales
B) Buy stops If the market is rising, only those orders on the order book above the current market will be executed. Buy stops and sell limits are both entered above the prevailing market price. Of these two, only buy orders (in this case buy stops) will accelerate a rise in the market.
Interest rate risk is intrinsic to all types of fixed-income investments, including debt securities and preferred stock. When interest rates go up, market prices decline. Although not commonly associated with common stock, some common stock investments are subject to interest rate risk. The common stock of which of the following companies would be most affected by interest rate risk? A) Common stock shares of a company that has recently filed for bankruptcy B) Common stock shares of public utility companies C) Common stock shares of ABC High Tech Company D) Common stock shares of investment company growth funds
B) Common stock shares of public utility companies Interest rate risk affects the shares of public utility common stock in two ways. First, for most investors, public utility stocks are attractive because of their dividend yield. Therefore, if market interest rates rise, unless the utility can increases the dividend, the price of the stock will decline. That is where the second part comes into play. Public utilities are known for their highly leveraged capital structures. Put simply, they borrow a lot of money. An increase to market interest rates will likely cause their borrowing expenses to rise.
Which of the following would not be a valid use of the partnership democracy? A) Consenting to an action of a general partner that is contrary to the agreement of limited partnership B) Deciding which partnership assets should be liquidated to pay creditors C) Consenting to a legal judgment against the partnership D) Removing the general partner
B) Deciding which partnership assets should be liquidated to pay creditors Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in being treated as general partners with respect to liability and possible loss of limited partner status.
Dale Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. Wells is looking for favorable tax treatment of earnings and losses. Wells also wants to limit the number of investors but is willing to share control of the enterprise with others to attract them. What business form would you advise? A) Limited partnership B) General partnership C) C corporation D) S corporation
B) General partnership Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. Although an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.
Which of the following statements regarding corporate zero coupon bonds are true? 1. Interest is paid semiannually. 2. The discount is in lieu of periodic interest payments. 3. The discount must be accreted and is taxed annually. 4. The discount must be accreted annually with taxation deferred until maturity. A) I and IV B) II and III C) I and III D) II and IV
B) II and III The investor in a corporate zero coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. That discount from par represents the interest that will be earned at maturity date. However, the discount is accreted annually, and the investor pays taxes yearly on the imputed interest.
Which of the following statements regarding Treasury receipts are true? 1. Interest is paid annually. 2. Interest is paid at maturity. 3. Interest is taxed annually. 4. Interest is taxed at maturity. A) I and IV B) II and III C) II and IV D) I and III
B) II and III Treasury receipts are zero-coupon bonds issued by broker-dealers. Zero-coupon bonds pay all of their interest at maturity. They are issued at a discount and redeemed at par, and the difference represents the interest earned. For zeroes with a maturity of more than one year, the interest (or discount) must be accreted each year—and is taxable that year as income. This is called imputed interest.
U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are 1. clipped bonds. 2. stripped bonds. 3. subject to annual taxation on the per-year accreted amount. 4. subject to taxation at maturity. A) II and IV B) II and III C) I and IV D) I and III
B) II and III U.S. government securities that are deposited with a trustee and against which certificates are sold representing principal payments only on the securities are referred to as Treasury STRIPS. These are zero-coupon bonds issued by the U.S. government and are subject to annual taxation on the per-year accreted amount.
Which of the following statements regarding Treasury receipts is not true? A) Treasury receipts are not backed by the faith and credit of the U.S. government. B) Interest income is taxed at maturity. C) Treasury securities held in trust collateralize the receipts. D) Treasury receipts pay interest at maturity.
B) Interest income is taxed at maturity.
A technical analyst has been charting ABC stock and notes that the support/resistance levels are $20 and $30, respectively. If the analyst expects ABC to fall through support, which of the following orders should he enter? A) Sell 100 ABC 29.75 stop B) Sell 100 ABC 19.50 stop C) Buy 100 ABC 20.50 stop D) Buy 100 ABC 30.25 stop
B) Sell 100 ABC 19.50 stop An analyst who expects a stock to fall through support is anticipating that the stock will decline. He can take advantage of this trend by establishing a short position at the top of the decline. He will enter a sell stop order just below the support price.
An investor purchases 100 shares of a bond ETF at a price of $50 per share on September 5, 2019. On November 1, 2019, and February 1, 2020, the fund distributes a $0.50 per share dividend. On May 11, 2020, the investor sells all the shares at $57 per share. What are the 2020 tax consequences of the sale? A) Short-term capital gain of $700, dividend income of $50 B) Short-term capital gain of $700 C) Short-term capital gain of $700, interest income of $50 D) Short-term capital gain of $600
B) Short-term capital gain of $700 Taxation of an ETF is similar to that of a mutual fund. The question asks about the tax consequences of the sale, so we ignore the dividend distributions. Buying at $50 per share in September and selling at $57 per share the next May is a $700 capital gain over a period of less than one year.
Which of the following types of business organizations does not protect owners' personal assets from losses incurred by the business? A) S corporation B) Sole proprietorship C) C corporation D) LLC
B) Sole proprietorship Corporations, whether organized as C or S corporations, and LLCs (limited liability companies), afford their owners limited liability. That means they have protection of their personal assets from losses incurred by the businesses. Sole proprietorships subject their owners to personal liability for losses of the business.
When a broker-dealer sends a communication to its customers that the sweep account used for customer credit balances will be changed from one money market fund to a different one, the communication must include A) a description of the objectives of the new fund and its prospectus. B) a tabular comparison of the nature and amount of the fees charged by each fund. C) a detailed explanation of the reason for the change. D) a statement that the change will not take place until at least 45 days after the communication was sent.
B) a tabular comparison of the nature and amount of the fees charged by each fund. The only one of these meeting FINRA's requirement when a negative response letter is sent is the tabular comparison. While a description of the new fund and its prospectus is required, the communication must also include a comparison of the objectives of the two funds. The minimum time is 30 days (not 45) and there is no requirement to include an explanation.
Programs allowing for the direct pass-through of losses and income to investors include all of the following except A) S corporations. B) real estate investment trusts (REITs). C) oil and gas drilling direct participation programs. D) new-construction real estate direct participation programs.
B) real estate investment trusts (REITs). REITs allow for the direct pass-through of income, but not losses. The other choices are forms of business that allow for pass-through of income and losses.
In a customer's margin account, a broker-dealer must segregate A) 50% of the equity balance. B) the excess securities above 140% of the accounts debit balance. C) 100% of the long market value. D) 140% of the debit balance.
B) the excess securities above 140% of the accounts debit balance. A broker-dealer may hypothecate (pledge) 140% of a customer's debit balance. Any customer securities in excess of 140% of the debit balance must be physically segregated.
The rules on opening an options account contain a number of differences from the normal cash account at a broker-dealer. One of those differences is, if applicable, A) obtaining the name of the customer's employer (if employed). B) the requirement to obtain the signature of the registered representative handling the account. C) the requirement to obtain the signature of the principal approving the account. D) the need to determine if the customer is of legal age.
B) the requirement to obtain the signature of the registered representative handling the account. For a normal account, FINRA requires the signature of the principal approving the account, but not that of the registered representative who will be handling that account. For options, that additional signature is necessary. The other choices are required on any new account form, options or not.
A customer bought a 10% interest in a real estate limited partnership by investing $100,000. The partnership buys a $4 million property with the funds, making a down payment of $800,000 and financing the balance with a nonrecourse mortgage of $3.2 million. Subsequently, the partnership cannot meet the mortgage payment; the lender forecloses when the remaining mortgage balance is $3 million, auctioning off the property for $1 million. How much of the investment will the customer recover? A) $32,000 B) $10,000 C) $0 D) $100,000
C) $0 There is a lot more information in this question than necessary. Simply put, the deal went bankrupt—the asset was sold for less than the mortgage. That means the investor's $100,000 is totally lost.
Elisha purchased 100 shares of RMBN common stock on June 6, 2019, at $60 per share. On February 11, 2020, RMBN paid shareholders a 20% stock dividend. Elisha sells the shares received as the stock dividend on December 5, 2020, at $55 per share. What are the tax consequences of this trade? A) $100 long-term capital loss B) $100 short-term capital gain C) $100 long-term capital gain D) $100 short-term capital loss
C) $100 long-term capital gain
If a customer has a margin account with a long position worth $20,000 and a debit balance of $8,000, what is the purchasing power of this customer's account? A) $2,000 B) $8,000 C) $4,000 D) $6,000
C) $4,000 The account has $12,000 of equity. If 50% of the market value is $10,000, the account has $2,000 of excess equity. When Regulation T is 50%, the purchasing power of excess equity is 2:1.
A customer has a short margin account. In it, there is one stock currently trading at $14 per share. The minimum maintenance requirement for this account is A) 100 % of the short market value. B) $2.50 per share. C) $5 per share. D) 30% of the short market value.
C) $5 per share. When it comes to short margin, for stock trading at $5 per share and above, the minimum requirement is the greater of $5 per share or 30% of the short market value. $5 is more than 30% of $14 ($4.20).
Collateralized mortgage obligations (CMOs) are a type of asset-backed security. What type of securities are frequently the assets behind a CMO? A) Mutual funds B) Stocks and bonds C) Ginnie Mae, Fannie Mae, and Freddie Mac products D) Real estate
C) Ginnie Mae, Fannie Mae, and Freddie Mac products CMOs usually bundle Ginnie Mae, Fannie Mae, and Freddie Mac products into a single product that passes through monthly payments from these investments to investors. They have been highly rated historically and are good income producers. REITs are created with real estate. Mutual funds and ETFs buy stocks and bonds.
Which of the following statements regarding joint accounts/tenants in common (TIC) are true? 1. Each party specifies a percentage of interest in the account. 2. Each party has an equal interest in the account. 3. The interest of a deceased tenant passes to the estate of the decedent. 4. The interest of a deceased tenant passes to the cotenant. A) II and IV B) II and III C) I and III D) I and IV
C) I and III 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.
Which of the following circumstances must be met for a fiduciary to trade options in a trust account? 1. Special circumstances are determined by the broker-dealer. 2. The trust agreement states the trustee has the power to trade options. 3. The trust's investment objectives are determined to be compatible with options trading. 4. Only covered options may be traded by a fiduciary. A) I and III B) I and IV C) II and III D) II and IV
C) II and III A fiduciary account may only trade options if expressly authorized to do so and if suitable for the beneficial owner of the account.
Which of the following is federally tax exempt for a corporation? A) Foreign corporate stock dividends B) Preferred stock dividends C) Municipal bond interest D)Capital gains
C) Municipal bond interest Municipal bonds are tax exempt for corporations as well as for individuals. Preferred stock dividends are taxable but at a reduced rate for corporations due to the 50% dividend exclusion. That break does not apply to the dividends on foreign securities. Regardless of the security, capital gains are taxable.
Which of the following is considered a source of debt service for a city-issued general obligation (GO) bond? A) Revenue generated by a hospital B) Tolls on roads C) Real estate taxes D) Sales taxes
C) Real estate taxes General revenues of a city municipality, such as real estate taxes or licensing fees, may be used to pay the debt service on a GO bond. State-issued GO bonds will also include sales taxes as a source of money. Usage revenue, such as that generated from toll roads or hospitals, would be associated with funding revenue bonds.
A taxpayer's most advantageous tax benefit is A) a tax deduction. B) a depletion allowance. C) a tax credit. D) straight-line depreciation.
C) a tax credit. A tax credit reduces a person's tax liability dollar for dollar. Deductions, depreciation, and depletion reduce taxable income.
In the assessment of a company's stock, a technical analyst takes into consideration all of the following except A) market price. B) volume. C) earnings. D) price momentum.
C) earnings. A market technician (technical analyst) deals primarily with the timing of activity and market trends, while a fundamental analyst centers on a particular industry or company within an industry and its relative health and market potential.
DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be A) the stock's current market price. B) higher than $50. C) lower than $50. D) $50.
C) lower than $50. With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This means the bondholder must be able to convert it to more shares, which requires a lower conversion price.
If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are advancing daily, and the number of advancing stocks relative to declining stocks is falling, a technical analyst will conclude that the market is A) becoming volatile. B) oversold. C) overbought. D) unstable.
C) overbought. The momentum of the market advance seems to be easing as the number of advancers to decliners is leveling out. It looks like the decline/advance line is moving in a direction away from advancers. A technical analyst would conclude that the market is overbought and approaching a top.
Filing with FINRA within 10 business days of first use is required for all of the following except A) retail communications concerning collateralized mortgage obligations (CMOs) registered under the Securities Act, B) retail communications concerning public direct participation programs (DPPs), C) retail communications that promote or recommend a specific real estate investment trust (REIT). D) retail communications that promote or recommend a specific registered investment company or family of registered investment companies including exchange-traded funds (ETFs).
C) retail communications that promote or recommend a specific real estate investment trust (REIT). Real estate investment trusts (REITs) are not included in FINRA's list of retail communications requiring postfiling.
Traders in stock index options are exposed to A) credit risk. B) redemption risk. C) systematic risk. D) call risk.
C) systematic risk. Systematic risk is the possibility that an overall decline in the market will cause a loss in an investment. Index options investors are exposed to the risk that market movement will cause the option positions to move adversely.
PDQ Corporation has a 6.25% $100 par value convertible preferred stock (conversion ratio of 4) outstanding. The stock has an antidilution covenant. If PDQ declares a 10% stock dividend, the antidilution covenant will adjust A) the par to $110. B) the par to $90. C) the conversion price to approximately $22.73. D) the conversion price to approximately $27.50.
C) the conversion price to approximately $22.73. When a $100 par value preferred stock is convertible into four shares of common stock, the conversion price is $25 per share, ($100 ÷ 4 = $25). The antidilution covenant means the investors will have the same conversion rights after a stock split or stock dividend as they had before. After a 10% stock dividend, each share of preferred stock will be convertible into 4.4 shares (4 shares x 110% = 4.4). The par value of the preferred stock does not change. Divide that $100 par value by the new number of shares to get the new conversion price. It looks like this: $100 ÷ 4.4 = 22.73. Alternatively, you can divide the original conversion price of $25 by 110% arrive at the same answer.
All of the following statements regarding Section 529 plans are true except A) contributions to a 529 plan may be subject to gift taxation. B) states impose very high overall contribution limits. C) the income level of the contributor can affect the annual contribution amount. D) the assets in the account are controlled by the account owner, not the child.
C) the income level of the contributor can affect the annual contribution amount. Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529 plan.
An investor wants to invest $200,000 in the banking industry sector. The investor would like to use leverage and make this purchase in a margin account. Additionally, she stresses wanting to avoid year-end tax statements showing capital gains liabilities. You would suggest which of the following as suitable, given the investor's criteria? A) Stocks in the three largest U.S. banks B) A bank sector mutual fund C) A money market fund holding short-term bank notes D) A bank sector exchange-traded fund (ETF)
D) A bank sector exchange-traded fund (ETF) The investor's criteria eliminates mutual funds as suitable. Mutual funds make annual capital gains distributions for which the owner incurs a tax liability, and mutual funds cannot be purchased on margin. Conversely, an ETF will rarely make a capital gains distribution, and because they trade like all exchange-traded products, they can be purchased on margin, making them more suitable for this investor. Buying only a few select bank stocks is not a good representation of the entire sector.
Which of the following factors is considered when determining whether underwriting compensation is fair and reasonable? 1. The size of the offering 2. The type of underwriting commitment 3. The market conditions 4. The profitability of the underwriter A) II and III B) II and IV C) I and III D) I and II
D) I and II Relevant factors considered by FINRA in determining the fairness of underwriting compensation include the size of the offering (total dollar amount), the type of commitment (firm commitment or best efforts), the type of securities (i.e., stocks or bonds), the form of compensation (i.e., cash or stock), the total value of all forms of compensation, the underwriter's relationship to the issuer, and any form of potential conflicts of interest.
Which of the following system characteristics can be associated with the Trade Reporting and Compliance Engine (TRACE)? 1. Both sides of the transaction must report. 2. Only the buyer must report. 3. Money market securities are excluded from the reporting system. 4. It is an execution and trade reporting system. A) II and IV B) II and III C) I and IV D) I and III
D) I and III TRACE requires that both sides of the transaction report corporate bond trades that occur in the over-the-counter (OTC) secondary market. Money market securities are one of the specific exclusions from the trade reporting system. Trace is not an execution system.
If a high-income customer is subject to alternative minimum tax (AMT), which of the following preference items must be added to adjusted gross income to calculate his tax liability? A) Interest on a municipal bond issued to finance highway construction B) Distributions from a corporate bond mutual fund C) Income from a municipal security issued to finance parking garages D) Interest on a private-purpose municipal bond
D) Interest on a private-purpose municipal bond If more than 10% of a bond's proceeds go to private entities, the interest on the bond is a tax preference item for AMT purposes.
A customer purchased 10 ABC 9s of 2045 convertible debentures at 99. The debentures are callable at 101. The conversion ratio is 40. Some time later, the debentures are called while the common is trading at $24 and the debenture is trading at 98. Which of the following options would be most beneficial to the customer? A) Wait for a better offer from the corporation B) Sell the bonds C) Convert the bonds and sell the common stock D) Tender the bonds to the corporation
D) Tender the bonds to the corporation
For the underwriting of a municipal bond issue, competitive bids are submitted by underwriters as A) an all-or-none commitment. B) a standby underwriting commitment. C) a best efforts underwriting commitment. D) a firm commitment.
D) a firm commitment. For new municipal bond issues, underwriters must submit bids for the entire bond offering—a firm commitment. Standby commitments are used only for corporate stock rights offerings. Best efforts commitments are used for corporate securities, and an all-or-none commitment is a type of best efforts commitment.
Under FINRA's rules governing the activities of member broker-dealers, prior notification to the employing firm and prior written consent from the employing firm would be required to open a brokerage account for all of the following except A) a clerical employee of another member opening a margin account. B) an officer of another member firm opening a cash account. C) a registered representative of another member opening an options account. D) a registered representative of another member opening a 529 plan.
D) a registered representative of another member opening a 529 plan. FINRA requires prior written notification be made and prior written consent be received before any employee can open a brokerage account with other members or financial institutions. Exceptions include accounts where the only activity will be in 529 plans, mutual funds, or variable annuities.
If your client expected short-term interest rates to fall, you might recommend that the client A) buy a Treasury bond yield-based put. B) write a Treasury bill yield-based call. C) buy a Treasury bill yield-based call. D) buy a Treasury bill yield-based put.
D) buy a Treasury bill yield-based put. The key to debt options is that the investor is betting on the movement of interest rates, not the price of the security. As with any other investment based on downward movement (put down), the strategy called for here is buying a U.S. Treasury bill put option. Why not the Treasury bond put? Because the question refers to short-term rates and Treasury bonds are a play on long-term ones.
