Series 7 - Questions answered wrong

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Flow of Orders in a Brokerage Firm

1) Wire Room 2) Purchase dept 3) Margin dept 4) Cashiering dept

Characteristics of TBILLS

1) always trade less a discount to yield 2) zero coupons 3) max maturity of 6 months Treasury bills are sold in minimum denominations of $100 and are not callable before maturity. They mature in 4, 13, or 26 weeks from issuance and are sold at a discount. Interest on Treasury bills is taxable at the federal level only.

The issuer of a limited tax bond is limited to a specified...

1) max rate 2) tax source

Information Needed for Suitability

1) tax bracket 2) Investment objectives 3) Net Worth

Current Yield

Annual Divi / CMV

This SRO sets the initial margin requirements on nonexempt securities

FRB

Stopping stock is only permitted when...

It is a public order

MSRB is an SRO that does not enforce it's own rules

It's empowered and accountable to the SEC, rules are enforces by FINRA, the SEC, FRB, and the comptroller of the currency

Attractive Bond Feature for Issuer

Low Call premium

Interest expense incurred from buying securities on margin cannot be offset with income from...

MUNIs, b/c interest is not taxed, and therefore is not deductible

A quote in the OTC Pink indicates that a dealer is...

Prepared to make a firm "bonafide" quote for 100 shares

Depression

Severe downturn in Economy for 18+ months & Extremely high level of unemployment (+15%)

Not affected by issuance of bonds: Assets, total liabilities, Working Cap, or Shareholder's Equity?

Shareholder's equity

Securities listed on NYSE & other SEC regulated Exchanges are exempt from registration on the...

State level

To convert Tax Equivalent Yield (TEY)...

TEY = tax-free yield / (100-tax bracket)

Negotiated Bidding Process

Revenue Bonds; Muni chooses the investment bank that it wants

Sarbanes-Oxley

The research analyst conflict of interest rules were mandated by the Sarbanes-Oxley Act

Municipal bond analysts

concerned with financial aspects of municipal bonds to ensure that they do not default. Various financial ratios and collection records are critical to their analysis.

MSRB Rule G-28

a muni dealer must notify firm and send the firm duplicate confirms if an employee, or spouse of employee, opens acct with the dealer

Reg A

applies to new issue of $5mm or less - good candidate would be a small manufacturing company; venture capital firms, private equity funds and hedge funds are specifically excluded.

Best efforts commitments

are used for corporate securities - an all or none commitment is a type of best efforts commitment.

Standby commitments

are used only for corporate stock rights offerings; allows a corporation to sell as much of a new issue to current stockholders as possible, backed by the underwriter's promise to purchase any unsold rights

Stop Orders & Ex-Divi Dates

automatically adjusted on ex-dividend date

SEP-IRAs

set up by SMALL corps to allow employees to make contributions toward an employee's retirement

Investment Company Act of 1940

to ensure the individual investor is fully informed about affairs of invt co and is treated fairly

Coincident, or current, indicators

GDP & Industrial Production

For company to call a bond at par before maturity, the investors return would be?

Greater than the yield to maturity

Increasing prices amid high unemployement

Stagflation

Mary bought a 7% J&J 15 Muni Bond on Tues, March 18th in Regular Way Trade... how much accrued interest will she pay?

- 15 - Indicates January 15th - T+3, so settles on Friday 3/21 - 30/360 Basis = 66/360 x 70 = 12.83

How many days until a mutual fund can be used for margin purposes?

30 days

Pattern Day Trader

4 trades in 5 days, must maintain 25,000 in margin acct - has same minimum margin requirement as margin acct aka 25% of CMV

What is the MAX maturity for TBILLS?

6 mo's

Any distribution from a corporate pension plan can be rolled over into an IRA within XXX days to maintain its tax-deferred status?

60 days

At the request of an SRO or law agency, RR's must provide...

ALL documents or evidence at their request

A broker's broker

Acts as agent in transactions by facilitating the movement of blocks of bonds. The broker's broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker's broker does not make a market in securities

Matching, Pegging, Fixing, Attempt to create the appearance of active trading in a security

All illegal according to the Sec Act of 1934

How much can a customer withdraw from SMA in cash?

All of it

defensive industry stocks

Are non-cyclical; generally produce nondurable consumer goods, such as food, pharmaceuticals, and tobacco.

Gov Bonds & Notes are quoted...

As an annualized percentage of par in 1/32nd

Special Assessment Bonds

Backed by taxes or charges against those who benefit from the proceeds of the bond

Wilshire 5000

Broadest measure of market of all US headquartered Economy

Manufacturing Sales

Coincident Indicator

Bond counsel examines WHAT in validity of municipal issue?

Confirns the LEGAL DEBT of muni and it's tax exempt status by evaluating... 1) municipal statutes 2) State constitution and amendments (for restrictions) 3) Judicial edicts 4) legislative authority

3 Truths of Convertible Bonds

Coup rates lower than nonconvertible bonds, creditors of the corporation, if underlying stock price declines to point where converting is disadvantageous, bonds trade at inherent value

The Telephone Consumer Protection Act

Covers all Telemarketing companies (not universities, NPOs, nor small businesses) and enforces the 8-9 pm rule of the customer's location, does not need to disclose the DNR list unless asked.

Fed Funds quoted for Business news every....

Day

The date on which the interest on a new muni will begin accruing interest

Dated Date

Debt Service Ratio

EBIT / (Principal + Interest Due) or NET-INCOME / Total Debt Due Net income = sales - expenses Total Debt

Eurodollars & which government is the income from eurodollar bonds always taxed?

Eurodollars is US currency deposited in foreign banks; The income from a foreign investment is taxable to the investor under the rules of the country in which he pays taxes.

Competitive Bidding Process

General Obligation Bonds; firm commitement - issuer awards deal to the bank offering the lowest net interest costs

Classical Economic Theory

If left alone, economy's health will balance

Summarization of Preliminary & Final Prospectus

Illegal - cannot be summarized in any way

The money contributed to SEP vests when?

Immediately

Indications of Economic conditions

Industrial production, inventories, S&P 500, Consumer orders

Increasing prices amid expanding economical period

Inflation

All of the following are regulated by the MSRB EXCEPT: A) dealers. B) quotes. C) issuers. D) sales representatives.

Issuers

Commercial loans outstanding are what kind of indicator?

Lagging

FOMC's short term effect on the economy

Making credit more or less available

Underwriting Spread

Managers fee + underwriters fee + concession

Regulation D of the Securities Act of 1933

Marks the exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued nor the number of accredited investors who may purchase the shares.

Least important debt obligation of MUNI

Matured Debt

Buying Power

Multiplying excess equity by 2

Municipal Securities adverts are approved by whom?

Municipal Securities Principal - not MSRB

Securities exempt from Act of 1933

Munis - US - Domestic Bank securities (not held by holding companies)

Net Direct Debt per Capita

NDD = (self supporting debt - sinking fund accumulation) / population

What would the MSRB NOT consider advertisements?

Official Statements

Gov Bills are quoted...

On a discounted yield basis. I.E. 6.31 - 6.18

In a cash transaction on the record date, when is the ex-divi date?

One business day after the record date - for non-cash transactions, the ex-divi date is 2 business days prior to record date

Contributions to IRA

Only earned income can be contributed to IRA, Soc. Security & Trust income not eligible.

OIDs

Original issue discount; IRS is the ultimate authority for determining the amount of the discount on OID bonds, as they set the guidelines for OIDs and is under their jurisdiction for taxes; Because the bond is being issued by a syndicate, it is a new issue (i.e., an original issue). Because the yield (4%) is higher than the coupon (3%), it is an original issue discount.

Losses from DPPs can be used to offset...

Passive gains, such as income from Limited Partnerships

"300 over"

Refers to yield of bond being 300 basis pts over that of a comparable security

Finding Excess Equity

Reg T is 50% of CMV, excess equity is if the equity balance exceeds the Reg T requirement

Objectives of Call Buyers

Speculating, Delaying, Diversifying, Hedging Short position

Who sets the margin requirement for OTC stock?

The FRB; sets requirements for marginable stocks and decides which OTC securities are marginable on a case-by-case basis

The MSRB is accountable to...

The MSRB is accountable to the SEC

Truth in Securities Act

The Securities Act of 1933; requires full & fair disclosure

Advantage of Callable Convertible Preferred Bonds?

The oppty to participate in any appreciation in the value of common stock. In return for advantage, the preferred pays lower rate than nonconvertible preferred. Stockholders must surrender stock when it is called, but they will usually receive a premium over par value. Divis cease on call date.

Systematic risk

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.

Banker's Acceptances

Time draft used to facilitate trading of foreign goods

Which of the following balance sheet entries may be affected when a company pays a cash dividend? 1) Shareholders' equity. 2) Total assets. 3) Total liabilities. 4) Working capital.

Total Assets & Liabilities decrease; When a company pays a cash dividend, the dividends payable (a current liability) and the cash account (current assets) are reduced by the same amount. Because liabilities and assets are each reduced by the same amount, working capital is not affected. Shareholders' equity, or net worth, is also not affected when the dividend is paid.

Sell-out

When a BUYER if security fails to complete contract and the BD closes the contract by selling the security of the account for the BUYER

Stock Index Call Options

When excercised, Buyer receives cash equal to the difference between the strike price and CMV of the index (this diff is the intrinsic value) multiplied by 100$

Constant Dollar Plan

When investor maintains fixed amount of monies in a portfolio regardless of CMV - if MV increases, cap is withdrawn, if decreases, movies contributed

When must a Municipal Dealer notify a client in writing regarding an underwriting?

When the deal has any financial interest in the underwriting of a security being solicited for sale

Max Gain on Long Stock & Short Straddle when call is exercised...

add premiums, subtract dollar amount between MV and SP

State Registration applies to...

all in-state sales persons and BD's and out-of-state salespeople and BD's doing business in that state

To hedge against a decline in the market, a customer should...

buy puts or sell calls

What is the taxable gain for the sale of discounted bonds on a cost-basis accretion?

cost basis = the price at purchase (i.e. premium or discount to par) sell price - bought price

Current Ratio

current assets / current liabilities

If a company redeems outstanding debentures, working capital...

decreases; working cap = current assets - current liabilities

ADRs

domestic trading of foreign securities, issued by domestic banks and represent interest in a foreign corp; An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities. Dividends on ADRs are subject to both federal and state income tax. In addition, the country of origin will frequently levy a tax which may be used as a credit on the investor's federal income tax return; ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities

FINRA Rule 5130

ensures underwriters make a bona fide public offering of all new issues by prohibiting selling new issues to accounts of restricted persons

Banker's acceptances

imports & exports

Uniform Practice Code

maintains similarity of business practices among member organizations in the securities industry

Dow Jones Industrial Average

narrowest measure of market, 30 industrial stocks

SIPC

non-profit, funded by members, subject to SEC oversight

Regulated by MSRB

underwriters, traders, and sales of MUNIs; not the actual municipality

T-Bills = Principal stable, interest is fluctuated

upon maturity, investor receives par value, but amount of interest may fluctuate based on prevailing interest rates

Collar

used to protect profits from long stock position; long stock, long puts, short out of the money calls on same security; options are usually out of the money when position is opened


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