Test #4
Each of the following are generally used to service state general obligation bond issues except A) real estate taxes. B) income taxes. C) motor vehicle license fees. D) sales taxes.
A
Which of the following order types is permitted in Nasdaq and NYSE equity markets? A) Market B) Stop C) Fill or kill (FOK) D) Good til canceled (GTC)
A
Preferred stock comes with many different options. What type of preferred stock would be most advantageous to the investor if the issuing company had strong revenue and earnings that exceeded industry estimates? A) Cumulative B) Participating C) Adjustable-rate D) Callable
B - Participating preferred stock may receive an additional amount paid to shareholders based on superior performance of the issuer. Cumulative refers to unpaid dividends that accrue on a preferred issue. Those must be paid before common stockholders receive a dividend. That could be a benefit if the company had dividends in arrears and these higher earnings made it possible to pay them. However, unless something in the question indicated that these higher earnings followed several years of losses, there is no way to infer that the company is behind on its dividends.
One of your clients has a margin account with the following balances: long market value $50,000, debit balance $24,000, short market value $40,000, and credit balance $65,000. The account will be at the minimum maintenance level when A) the long market value is $32,000 and the short market value is $52,000. B) the long market value is $32,000 and the short market value is $50,000. C) the long market value is $37,500 and the short market value is $50,000. D) the long market value is $37,500 and the short market value is $52,000.
B - When there is a combined (mixed) margin account, the maintenance is computed separately for the long and the short positions. The maintenance level on a long margin account is reached when the equity is only 25% of the market value. To find that level, divide the debit balance by 75% or multiply the debit by 4/3. In a short margin account, the maintenance level is when the equity is 30% of the market value of the short stock. To find that level, divide the credit balance by 130% (or 1.3). The math for our question becomes the debit balance of $24,000 ÷ .75 resulting in a quotient of $32,000. Alternatively, multiplying $24,000 times 4 and then dividing by 3 = $96,000 ÷ 3, or $32,000. Continuing to the short account, the credit balance is $65,000. Dividing that by 130% (or 1.3) results in a quotient of $50,000.
The board of directors of DMF, Inc., announces a 5, for-4 stock split. The market price of DMF after the split should decrease in value by A) 30%. B) 20%. C) 10%. D) 25%.
B - With a 5-for-4 stock split, the new price should be about four-fifths of the old price. A one-fifth change equals 20% (100% / 5 = 20%).
Long an ABC Apr 60 call and short an ABC Apr 70 call is A) a calendar spread. B) a straddle. C) a net debit spread. D) a net credit spread
C For call options with the same expiry month, the lower strike price will always have a higher value. In this case, the investor is long the higher valued option, which gives a net outflow of cash to enter the entire position. (More money was spent on the lower strike price call than received for the higher strike price call.) Therefore, the investor has a net debit for her account.
The amount paid into a defined contribution plan is set by A) the employer's profits. B) the ERISA-defined contribution requirements. C) the trust agreement. D) the employee's age.
C - A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.
When comparing a short call to a credit call spread, all of the following are true except A) both positions are bearish. B) both positions generate premium income. C) maximum loss is limited in both positions. D) maximum gain is limited in both positions.
C - In any spread, both maximum gain and maximum loss are limited. In a short call, gain is limited to the premium received, but loss is unlimited.
In terms of the number of issues traded, the largest secondary market for securities is the over-the-counter market (OTC). Which of the following securities cannot be traded OTC? A) Exchange traded funds B) U.S. Treasury bills C) Mutual funds D) Preferred stock listed on the NYSE
C - mutual funds cannot be traded OTC
A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has a net asset value (NAV) of $12 and a public offering price (POP) of $12.50, and that the ABC Fund has an NAV of $11.50 and a POP of $10.98. The customer should conclude that A) both are open-end funds. B) ABC is an open-end fund and GEM is a closed-end fund. C) ABC and GEM are both unit investment trusts. D) GEM may be an open- or closed-end fund, and ABC is a closed-end fund.
D - The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have a POP less than its NAV; therefore, ABC cannot be an open-end fund.
Each of the following securities trade and interest except A) Treasury bonds. B) municipal revenue bonds. C) negotiable CDs. D) zero coupon bonds.
D - Trading and interest means trading with accrued interest. Debt instruments that pay interest periodically (e.g., municipal bonds or Treasury bonds) trade with accrued interest.
An investor mentions the term level load fund shares to a registered representative. The investor is referring to A) Class C shares. B) Class B shares. C) shares of a closed-end fund. D) Class A shares.
A
A corporation with an outstanding convertible debenture issue could force conversion by A) issuing new debentures with a higher coupon rate. B) publishing an announcement that the debenture holders have thirty days to tender their bonds at the call price. C) soliciting proxies from the common shareholders asking them to vote for mandatory conversion. D) decreasing the coupon rate on the debenture to a level where the dividend on the common stock provides a higher return.
B
Which of the following statements regarding callable municipal bonds are true? Call premiums tend to increase over time. Call premiums tend to decrease over time. Call prices are stated as a percentage of the principal amount to be called. Call prices are stated as a percentage of the market value of the bonds to be called. A) II and IV B) II and III C) I and IV D) I and III
B
A municipal bond originally issued at 90 with a 10-year maturity will have a compound accreted value (CAV) after five years equal to A) 100. B) 95. C) 5. D) 10.
B - CAV is the cost basis of the bond, in this case, after five years accretion. There are 10 points to accrete (the difference between the issue price of 90 and par) over 10 years. One point each year will be added, so after five years, the adjusted cost basis will be 90 + 5, or 95.
An investor purchased an XYZ Oct 50 put for a premium of 4. On the expiration date, XYZ is selling for 42, and the investor closes the position at the option's intrinsic value. For tax purposes, the investor has A) broken even. B) realized a $400 short-term capital gain. C) realized $800 of ordinary income. D) realized an $800 short-term capital gain.
B - With the stock selling at 42, a 50 put has an intrinsic value of 8 points (put-down rule). That would represent sales proceeds of $800 to the owner of the put. Subtracting the $400 cost results in a short-term capital gain of $400.
Gargantuan Computers, Inc., (GCI) conducts a rights offering to its current shareholders at $50 per share, plus one right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights? A) 15 B) 10 C) 3 D) 5
B = CMV minus subscription price divided by the number of rights to purchase one share plus 1. Therefore, one right is valued at $10, computed as ($70 − $50) / 2 = $10.
Penalties resulting from a Code of Procedure hearing may include all of the following except A) expulsion. B) censure. C) a prison sentence. D) suspension.
C
The function of a broker's broker in the municipal bond business is to do which of the following? Help sell municipal bonds that a syndicate has been unable to sell Protect the identity of the firm on whose behalf the broker's broker is acting Help prepare bids for an underwriting syndicate Serve as a wholesaler, offering bonds at a discount from the current bid and offer A) III and IV B) I and IV C) I and II D) II and III
C - A broker's broker helps sell the bonds a syndicate has left and does not disclose the identity of the firm on whose behalf it is acting. Brokers' brokers do not charge fees for quoting a security, do not maintain inventory, and act solely as agents earning a commission for their services.
When determining whether a tax swap of municipal bonds will result in a wash sale, which of the following is not considered? A) Issuer B) Maturity C) Principal amount D) Coupon
C - In judging whether bonds purchased are substantially identical to bonds sold for a loss, the tax code considers maturity, issuer, and coupon rate. If at least two of the three are different, a wash sale will generally not result.
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are A) 100% taxable. B) 100% tax free. C) partially a tax-free return of capital and partially taxable. D) 100% tax deferred.
C - The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.
Which of the following would be most likely to issue an equipment trust certificate? A) A social media company installing new servers B) A company using specialized equipment on an oil drilling rig C) An airline company D) A user of farming equipment
C - When you see "equipment trust certificate," think transportation companies such as airlines and railroads.
Which of the following assets would be least likely used to back a collateralized debt obligation (CDO)? A) Auto loans B) Corporate receivables C) Mortgages D) Credit card debt
C -Unlike CMOs, which are backed by mortgages (as the M indicates), CDOs are invariably backed by some other form of asset. Remember that what someone owes is their debt, while it is an asset to the creditor.
A customer wishes to close a short option position. The order ticket must be marked as A) a closing sale. B) an opening purchase. C) an opening sale. D) a closing purchase.
D
A due diligence meeting occurs between A) the underwriter and the SEC before the issuance of a final prospectus to insert the public offering price and make any last-minute changes at the SEC's request. B) all of these. C) the FINRA member firm and FINRA's Corporate Finance Department to discuss the fairness of the underwriting spread on a pending public offering. D) the issuing corporation and the underwriters to review and re-examine the full details of the pending underwriting and negotiate final terms to be included in the formal underwriting contract.
D
A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal, and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why? A) The municipal bond because its equivalent taxable yield is 6.6%. B) The municipal bond because its equivalent taxable yield is 6.3%. C) The corporate bond because the after-tax yield is 4.5%. D) The corporate bond because the after-tax yield is 6.25%.
A
An investor in a limited partnership generating passive losses can offset these against passive income from other partnerships. rental income from direct investments in real estate. dividends received from listed securities. capital gains from the sale of unlisted securities. A) I and II B) I and III C) II and III D) III and IV
A
Real estate investment trusts (REITs) can distribute all of the following to their shareholders except A) capital losses. B) capital gains. C) cash dividends. D) stock dividends.
A
The function of the Federal National Mortgage Association (FNMA) is to A) purchase FHA-insured, VA-guaranteed, and conventional mortgages. B) issue conventional mortgages. C) guarantee the timely payment of interest and principal on FHA and VA mortgages. D) provide financing for government-assisted housing.
A
Which of the following are characteristics of commercial paper? It is registered with the SEC. It is a short-term debt instrument. It is issued by commercial banks. It is unsecured debt. A) II and IV B) I and II C) I and III D) III and IV
A
Which of the following would not be a valid use of the partnership democracy? A) Deciding which partnership assets should be liquidated to pay creditors B) Consenting to an action of a general partner that is contrary to the agreement of limited partnership C) Consenting to a legal judgment against the partnership D) Removing the general partner
A
An investor purchases one ABC Jul 50 put and sells one ABC Oct 50 put. This strategy is A) a calendar spread. B) a debit spread. C) a combination. D) a diagonal spread.
A - A calendar (or time or horizontal) spread is one where the options are of the same type (long and short puts or long and short calls) on the same security, but with different expiration dates
A dealer that quotes a concession of half to another dealer means A) $5 per $1,000 of par. B) a 50% commission split. C) 0.5% of the market price. D) 0.5% of the dealer's price.
A - A concession between broker-dealers on secondary market transactions is a discount from the yield that the broker-dealer is quoting. It is common for a broker-dealer to offer bonds to other broker-dealers at a price, less the concession. The net price becomes the purchase price for the buying broker-dealer. If simultaneously sold to a retail account, the markup is from the net price paid. If not simultaneously retailed but held in the broker-dealer's inventory, it is fair for the broker-dealer to market her inventory and mark up from there for retail sale.
Limited partners have the right to do all of the following except A) choose the assets for the partnership. B) vote to remove the general partners. C) inspect and copy partnership records. D) sue the general partners for damages if he acts outside of his authority.
A - All of these are rights of the limited partner except choosing the assets to be purchased for the partnership, which is a function of the general partner.
Which of the following is not under governance of the Municipal Securities Rulemaking Board (MSRB)? Issuers of municipal fund securities Broker-dealers that sell municipal fund securities Issuers of municipal bonds Banks that sell municipal securities A) I and III B) I and II C) II and III D) II and IV
A - Issuers of municipal or municipal fund securities are exempt issuers and are not regulated or under the guidance of the MSRB or any other self-regulatory organization.
All of the following must be sold with a prospectus except A) closed-end funds in the secondary market. B) open-end funds in the primary market. C) closed-end funds in the primary market. D) an IPO of common stock.
A - Securities sold in the secondary market do not have a prospectus delivery requirement.
The breakeven point for covered call writers is A) cost of stock less premiums. B) cost of stock plus premiums. C) strike price less premiums. D) strike price plus premiums.
A - The breakeven point for an investor who owns the underlying stock and writes a call is the cost of that stock less the premium received from the sale of the call.
One of your clients has a margin account with the following balances: long market value $50,000, debit balance $24,000, short market value $40,000, and credit balance $65,000. The combined equity in the account is A) $51,000. B) $75,000. C) $1,000. D) $66,000.
A - The math is $50,000 plus $65,000 = $115,000 minus ($24,000 + $40,000) = $115,000 - $64,000 = $51,000 equity.
An investor in which of the following products may not receive dividends? A) Oil and gas limited partnership interests B) Shares of common stock C) Units in a UIT D) Shares of preferred stock
A - The structure of a limited partnership does not allow for the payment of dividends. If there is income, it flows through to the investor, but it is not considered a dividend. Common stock can pay dividends and preferred stock is purchased for its dividend payout. UITs pay dividends in a manner similar to mutual funds.
Dollar cost averaging (DCA) will always result in a lower cost per share than the price paid per share except A) when the price for each purchase is the same. B) when the price for each purchase is increasing. C) when the price for each purchase is fluctuating.. D) when the price for each purchase is decreasing.
A - There are two requirements for a dollar cost averaging program to work. The first is that the same amount must be invested at each specified interval. The second is that the price per transaction does not remain the same. If that is the case, then the average cost per share and average price paid per transaction are the same. The price needs to move for DCA to show a benefit.
If an investor with no other positions buys 2 DWQ Jun 45 calls at 3, and he exercises the calls when the stock is trading at 47.25 and immediately sells the stock in the market, what is the investor's profit or loss? A) $75 loss B) $150 loss C) $150 profit D) $75 profitB
B
One of your customers has decided to commit $10,000 to fixed income. She is trying to decide if it makes more sense to invest in the bonds of a single corporate issuer or to buy an exchange-traded fund (ETF) tracking a corporate bond index. You could explain that the purchase of the ETF results in the greatest reduction of A) currency risk. B) liquidity risk. C) inflation risk. D) interest rate risk.
B
Under the USA PATRIOT Act of 2001, member firms must maintain records of reports of currency transactions involving more than $10,000 for A) 1 year. B) 5 years. C) 6 years. D) 3 years.
B
A letter of intent for a mutual fund does not contain which of the following provisions? A) The letter can be backdated 90 days to include a previous deposit. B) The fund can halt redemption during the time the letter of intent is in effect. C) The fund will keep some of the initially issued shares in an escrow account to ensure payment of the full sales load. D) The time limit is 13 months.
B - A letter of intent is not binding on the client in any way. Should the client decide to liquidate the account before completing the letter, the company will reduce the redemption by the amount of shares held in escrow.
Benefits of a municipal bond advance refunding include A) a higher rating and lower coupon rate. B) a higher rating and greater marketability. C) tax savings. D) a decrease to the issuer's current interest cost.
B - Advance or prerefunding is refinancing an existing municipal bond issue before its maturity or call date by using money from the sale of a new bond issue. Because the proceeds of the new issue are placed into special U.S. government securities, the rating is automatically at the top. The higher rating increases the marketability. The current bond still exists until the specified call date. As such, the coupon has not changed. There are no taxes to be saved.
Your 65-year-old client owns a nonqualified variable annuity. He originally invested $29,000 four years ago, and it now has a value of $39,000. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? A) $3,800 B) $2,800 C) $4,200 D) $0
B - Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). The tax on this is $2,800 ($10,000 × 28%).
In which of the following types of offerings does a brokerage firm have no financial obligation for unsold securities? All or none Best efforts Standby A) I, II, and III B) I and II C) I and III D) II and III
B - In a best efforts underwriting, the underwriter serves as an agent with no financial obligation for unsold securities. In an all-or-none offering, the underwriter agrees to devote its best efforts to sell the issue, but the entire offering is canceled if all shares cannot be sold. In a standby underwriting, the underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment)
When comparing a short call to a credit call spread, all of the following are true except A) both positions generate premium income. B) maximum loss is limited in both positions. C) both positions are bearish. D) maximum gain is limited in both positions.
B - In any spread, both maximum gain and maximum loss are limited.
On Friday, September 15, an investor goes long 1 OEX Dec 575 call at 7 when the index is at 581.96. At expiration, the investor closes out the long position at intrinsic value when the index is at 580. What amount of money will be deposited in the investor's account on the following Monday, and what will the profit or loss be to the investor? A) $500 is deposited and there is a $200 gain for the investor. B) $500is deposited and there is a $200 loss to the investor. C) $696 is deposited and there is a $196 gain for the investor. D) $500 is deposited and there is a $196 loss to the investor.
B - Index options settle in cash on the next business day. Each point in an index option is valued at $100. On settlement, the investor will receive the difference between 580 and 575 (5 × 100 or $500). With a cost of 7 ($700), this will create a $200 loss.
An investor purchased a single premium deferred variable annuity 20 years ago. The premium deposit was $50,000. The account is now worth $200,000 and the investor is still working. When does the investor have to begin taking required minimum distributions? A) At age 72 B) Never with a nonqualified annuity C) At age 72 or when no longer working, whichever is later D) At age 59½
B - On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates. Nonqualified - THEY ALREADY TAXED YOU
You have a 70-year-old client who is in excellent health. Both parents lived into their late 90s and the client is concerned about outliving her money. What product guarantees that she will receive monthly payments for life, no matter how long that will be? A) Whole life insurance B) An annuity C) An index fund D) A 30-year term policy
B - One of the unique characteristics of an annuity (variable or fixed) is that it guarantees monthly payments for the life of the annuitant. Life insurance provides a death benefit, but not income. An index fund carries no guarantees.
In light of the many cases involving variable annuities where there was failure to supervise egregious unethical behavior, FINRA's Rule 2330, Members' Responsibilities Regarding Deferred Variable Annuities, evolved. One of the specific concerns that the regulators have with deferred variable annuities is sales personnel recommending that an investor switch from an existing contract to a new one. In the case of variable annuities, these exchanges are normally done under the provisions of IRS Section 1035. One of the factors in determining if the exchange is suitable is whether the customer has had another deferred variable annuity exchange within the preceding A) 30 months. B) 36 months. C) 24 months. D) 12 months.
B - One requirement Rule 2330 covers is the suitability of a deferred annuity exchange for a particular customer, considering whether the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits, or be subject to increased fees or charges, or if the customer has had another exchange within the preceding 36 months, in addition to other factors.
All of the following are credit spreads except A) buy 1 ABC Apr 40 call, write 1 ABC Apr 30 call. B) buy 1 ABC Jul 50 call, write 1 ABC Jul 60 call. C) buy 1 ABC Jan 50 put, write 1 ABC Jan 60 put. D) write 1 ABC Nov 35 put, buy 1 ABC Nov 30 put.
B - Starting at the beginning, a spread is always a long and a short position in the same option class (two puts or two calls on the same underlying security). That is, the investor buys a call and sells a call (a call spread) or buys a put and sells a put (a put spread). In the case of a credit spread, the premium received for the option sold is higher than the premium paid for the option bought. That is why there is a credit to the investor's account. The opposite is true with a debit spread. The premium paid for the option purchased is higher than the premium received for the option sold. Therefore, there is a debit (a charge) against the investor's account. The lower the strike price, the higher the premium for a call option. In the case of the long 50 call and the short 60 call, the investor has purchased the option with the lower strike price (50) and sold the option with the higher strike price (60). Investors will pay more for the right to be able to buy stock at 50 than at 60, so this is a debit spread; the exception the question is looking for. With puts, the higher the strike price is, the more expensive the option premium will be. Specifically looking at our four choices: Buy 1 ABC Jul 50 call, write 1 ABC Jul 60 call - Debit, because buying the lower priced call costs more than selling the higher priced call. Net debit to the account. Write 1 ABC Nov 35 put, buy 1 ABC Nov 30 put - Credit to the account, because as the writer I receive more for the put I sold (wrote) than the put I bought (investors will pay more for the right to be able to sell stock at 35 than at 30). Buy 1 ABC Apr 40 call, write 1 ABC Apr 30 call - Credit to the account, because selling the lower priced call generates more of a credit than buying the higher priced call. Buy 1 ABC Jan 50 put, write 1 ABC Jan 60 put - Credit to the account, because selling the higher priced put generates more credit to the account than buying the lower priced put.
Which of the following would be considered an inappropriate investment for your client's traditional IRA? A) A taxable municipal bond B) A unit investment trust whose portfolio consists solely of tax-free municipal bonds C) A mutual fund whose portfolio consists solely of shares of over-the-counter stocks D) A valuable collection of rare postage stamps
B - Tax-free bonds, whether purchased individually or through a mutual fund or UIT, are considered inappropriate investments because the tax-free benefit is lost. On the other hand, taxable municipal bonds benefit from the tax deferral offered in an IRA. What about the stamp collection? That is an ineligible investment, not merely inappropriate.
Many parents find that opening an UTMA account for their child is not only a good way to accumulate funds for the future but also a good way for the child to gain an appreciation for investing. The account custodian may use principal as well as income generated in the account to pay for all of the following for the child except A) private school. B) new clothes. C) summer camp. D) the latest model smartphone.
B - The Uniform Transfer to Minors Act permits the custodian to use the funds for almost anything that is a benefit to the minor. The primary exceptions are those that most states consider to be the parental obligations of food, clothing, and shelter.
Before making any recommendations to a client, basic client suitability information must be gathered. Many suggest beginning with a family balance sheet. Which of the following would be found on that document? A) Goals B) Net worth C) Expenses D) Salary
B - The balance sheet includes the client's assets and liabilities. From these, the net worth is determined. It is the income statement that contains the salary and expenses. Goals are a nonfinancial consideration.
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are A) 100% tax deferred. B) partially a tax-free return of capital and partially taxable. C) 100% taxable. D) 100% tax free.
B - The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.
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) A bank sector mutual fund B) A bank sector exchange-traded fund (ETF) C) Stocks in the three largest U.S. banks D) A money market fund holding short-term bank notes
B - 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.
When an investor sells stock short on the ex-dividend date, the dividend belongs to A) the buyer of the stock. B) the lender of the stock sold. C) the short seller. D) the issuer of the stock.
B - The key here is that the sale is taking place on the ex-dividend date. That means that the buyer is not entitled to the dividend. Rather, it belongs to the seller. However, in this question, the seller does not own the stock because this is a short sale. W
All of the following terms are associated with the holder of an option except A) owner. B) seller. C) long. D) buyer.
B - The seller of an option contract, put or call, is not the holder of the option. The holder of an option is also known as the buyer. Buyers have a long position in the option, making them the owner of the option. As buyers, they pay the premium for the option. The seller of the contract is the writer of the option and has a short position. The writer of the option receives the premium the buyer pays.
What is the profit to a syndicate member if a syndicate is offering an 8½% bond at 100, the syndicate manager is giving a 0.75 concession and a one-point total takedown, and the syndicate member sells 1,000 bonds? A) $17,500 B) $10,000 C) $7,500 D) $1,000
B - When a member of the syndicate sells a bond, they are entitled to the total takedown—in this case, one point ($10) per bond (1,000 bonds sold × $10 per bond = $10,000 profit). Remember that the concession would only go to those who are part of the selling group instead.
Which of the following statements regarding qualified retirement plans are true? Contributions are made with pretax dollars. Contributions are made with after-tax dollars. Distributions are 100% taxable. Distributions are taxable only to the extent of earnings. A) I and IV B) I and III C) II and III D) II and IV
B - With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable.
An investor opens the following positions: Sell short 100 shares of BAF @61; short 1 BAF Sep 60 put @3¼. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $425; maximum loss is $5,775; breakeven point is $57.75. B) Maximum gain is $325; maximum loss is unlimited; breakeven point is $57.75. C) Maximum gain is $425; maximum loss is unlimited; breakeven point is $64.25. D) Maximum gain is $5,775; maximum loss is $425; breakeven point is $64.25.
C
Some limited partnership programs provide potential tax credits to partners. Which of the following typically provide potential tax credits? Rehabilitation of historic properties Equipment leasing Developmental oil and gas programs Government-assisted housing programs A) III and IV B) II and III C) I and IV D) I and II
C
The sale of securities in a restricted margin account affects all of the following except A) debit balance. B) special memorandum account. C) equity. D) market value.
C
Which department in a brokerage firm handles payments for securities transactions? A) Reorganization B) Purchases and sales C) Cashiering D) Trading
C
ZYX Corporation has 100 million shares of common stock authorized in its charter, with 80 million shares outstanding. The board of directors of ZYX could vote to take which of the following actions? A) Declare a 2:1 stock split B) Announce an additional public offering of 40 million shares of common stock C) Declare a stock dividend of 10% D) Issue 20 million shares of a 4%, $100 par preferred stock, convertible at $50
C - A corporation cannot issue more shares than authorized. True, there could be a vote to amend the charter, but be careful not to read anything into the question that is not given. A 10% stock dividend will require issuing 8 million more shares. That will bring the total outstanding to 88 million. A 2:1 stock split would need an additional 80 million shares and ZYX has only 20 million left. With only 20 million authorized, but unissued shares remaining, where is ZYX going to get 40 million shares for the additional public offering? Likewise, the convertible preferred is convertible into two shares each ($100 par divided by the $50 conversion price). That would also require 40 million shares to be available if everyone elected to convert. As mentioned in the beginning, if Company ZYX wished to conduct a 2:1 stock split, or offer 40 million additional shares, either through a public offering or the issuance of convertible preferred stock, an amendment to the corporate charter, approved by the board of directors and the shareholders, would be necessary.
In a direct participation program, a general partner is all of the following except A) one who appoints the property manager. B) one who buys and sells the program's property. C) one who has limited liability. D) a key executive who makes day-to-day business decisions.
C - A general partner of a limited partnership is a key executive of the program who purchases and sells the property and/or appoints someone to manage the property. The general partner does not have limited liability. By not allowing the general partner to have limited liability, the program is able to rule out limited liability as a corporate characteristic.
Which of the following would protect a short May 50 call? A) Long Apr 55 call B) Long Apr 45 call C) Long Jun 45 call D) Long Jun 55 call
C - For a long call to cover a short call, it must have the same or lower strike price and the same or longer expiration. This ensures that the investor may purchase the stock without financial loss and deliver it at 50 if the short call is exercised.
If interest rates fall, which of the following statements regarding collateralized mortgage obligations are true? Prepayment risk will increase. Prepayment risk will decrease. Prices of each tranche will rise. Prices of each tranche will fall. A) II and III B) I and IV C) I and III D) II and IV
C - Prepayment risk is the risk that the underlying mortgages will be paid off sooner than expected. If rates fall, mortgage holders will refinance, paying off the existing high-rate mortgages with lower rate mortgages. Thus, a tranche with an expected average life of 5.5 years may be extinguished in two years because of an acceleration in prepayments. As rates fall, prices of the remaining tranches will rise.
An investor purchases investment company shares paying an ask price that is a 5% premium to the company's net asset value (NAV). Two years later, the investor liquidates the position at a bid price that is 10% below the NAV. This investment was in A) a unit investment trust (UIT) B) an open-end investment company C) a closed-end investment company D) a face amount certificate (FAC)
C - Pricing of closed-end investment company shares is based on supply and demand. That is because they trade in the secondary markets. Therefore, the investor's buying price and selling price could be a premium or discount to the net asset value per share (NAV). All the other investments here are redeemable at the NAV. As a consequence, the ask price would not be a discount to the NAV nor could the redemption price (the bid) be at a discount to the net asset value.
Which of the following events will cause the special memorandum account (SMA) to decrease? An increase in the short market value (SMV) A decrease in the long market value (LMV) The purchase of long securities on margin The short sale of securities A) I and III B) I and II C) III and IV D) II and IV
C - SMA, once created, does not go away until used. Using the SMA to buy more securities or sell more securities short will decrease the amount of SMA.
A customer enters an order to sell 100 TCB at 49 stop limit. Before the order, TCB was trading at 49.25. Subsequent trades are reported on the tape as follows: TCB 49.10, 48.75, 48.85, 49, 49.25 What trade triggered the order? A) 48.85 B) 49.25 C) 48.75 D) 49
C - Sell Stop Limit below
An investor purchased 100 shares of Paradigm Publishing Corporation (PPC) on October 17, 2020. The price was $83 per share. On April 11, 2021, the investor wrote one PPC Nov 85 call for 3. At expiration date, the PPC stock is selling for $90 per share, and the investor liquidates the stock at the market price and closes the option at its intrinsic value. The net tax consequences are A) $500 short-term capital gain. B) $200 long-term capital gain. C) $500 long-term capital gain. D) $900 long-term capital gain.
C - The stock is purchased for $83 and sold for $90. That is a $700 long-term gain (Oct 2020 to Nov 2021). The option is sold for $300 and closed (bought back) at the $5 intrinsic value (the difference between the 85 strike and the 90 market) for a short-term capital loss of $200. The net of the two (+700 and -200) is a $500 long-term capital gain. If you thought that writing the call when the stock's holding period was still short-term had an impact, you were thinking of the effect of buying a put on stock held short-term. Buying or selling a call does not affect the holding period of the underlying stock.
The City of Podunk has an outstanding 25-year maturity issue that is callable in seven years. It has prerefunded the issue and established an escrow account containing the proper government securities with face amounts and maturities approximating the call provisions of the original issue. In quoting the original issue, which of the following must be used? A) Current yield B) The lower of the yield to call or the yield to maturity C) Yield to call D) Yield to maturity
C - When a bond issue is prerefunded, the issuer is going to redeem the bond on the first call date. The yield must be quoted to call.
The customer relationship summary (Form CRS) is an integral part of Regulation Best Interest. For an existing cash account customer who received the initial Form CRS in early July 2020, a new Form CRS must be delivered no later than A) a change to the customer's investment objectives. B) the temporary withholding of a disbursement from the account under Rule 2165. C) a change to the beneficiary of an existing Roth IRA. D) the opening of a new margin account.
D
Parents planning to save for their children's education would probably find all of these suitable except A) Section 529 plans. B) Coverdell ESAs. C) Treasury STRIPS. D) money market mutual funds.
D - Although money market mutual funds are safe investments, they offer no potential growth of capital and provide low income. The 529 and ESA plans offer tax benefits and investment options that can provide the necessary growth. The Treasury STRIPS are the safest zero-coupon securities available and promise a definite return until maturity.
A customer's confirmation for a municipal bond callable at par and quoted higher than the nominal yield would show A) current yield. B) yield to call (YTC). C) coupon yield. D) yield to maturity (YTM).
D - Because the quoted yield is higher than the nominal yield, the bond is offered at a discount; the lower of YTM or YTC is the bond's yield to maturity.
Your customer wants to know what portion of earnings one of the companies held in her portfolio has available to pay interest expense on bonds the company currently has outstanding. You would be able to find this information A) on the firm's most recent balance sheet. B) on a firm's income statement by subtracting preferred dividends from EBIT. C) by contacting the IRS. D) on the firm's income statement indicated as earnings before interest and taxes (EBIT).
D - EBIT is the amount of money a company has retained before paying taxes and interest on outstanding debt issues. This can be found by looking at the income statement for the company.
Which of the following statements is an accurate interpretation of FINRA Conduct Rules governing the use of communications with the public? A) Sales and product promotion materials distributed to registered representatives and other employees are retail communications and must be submitted for FINRA review, even though such materials are not intended for public distribution. B) All retail communications must be filed with FINRA before first use. C) All communications with individual clients are considered retail communications. D) Institutional communications need not be preapproved by a principal.
D - FINRA does not require principal preapproval of institutional communications. The same is true for internal communications. Not all communications with individual clients are retail communications. Many times, they are correspondence. There could even be an individual client with assets of at least $50 million, and then it would be institutional communication. Prefiling with FINRA can depend on a number of factors such as the product. For example, prefiling of retail communications is required for certain pieces having to do with investment companies and variable annuities, but not for pieces having to do with direct participation programs or collateralized mortgage obligations.
In a functional allocation oil and gas program, which of the following statements are true? The general partner picks up all tangible drilling costs. The general partner picks up all intangible drilling costs. The limited partners pick up all tangible drilling costs. The limited partners pick up all intangible drilling costs. A) I and II B) III and IV C) II and III D) I and IV
D - In a functional allocation program, the general partner picks up all tangible drilling costs, while the limited partners pick up all intangible drilling costs. As intangible drilling costs are deductible as they are incurred, this type of program benefits the limited partners. Tangible drilling costs, however, are deductible pro rata over the estimated life of the well.
An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12, the net asset value (NAV) was $11.08. If the current public offering price is $12.50, and the NAV is $11.80, the investor receives A) $3,324. B) $3,600. C) $3,750. D) $3,540.
D - It is the open-end investment company (mutual fund) that redeems shares; there is no redemption with closed-end funds. The second clue is that the public offering price is stated. Only new issues have a POP. As a mutual fund, shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80).
All of the following items of information must be included in a municipal securities confirmation except A) the capacity in which the broker-dealer acted. B) whether the securities are fully registered or book entry. C) the date of maturity that has been fixed by a call notice. D) an extraordinary call provision.
D - Municipal Securities Rulemaking Board rules require that certain information be included on all municipal confirmations, including the capacity in which the firm acted in filling the order, whether the bonds are in registered or book entry form, and any relevant call provisions. Information on catastrophe or extraordinary call provisions is not included on a confirmation because catastrophes have no planned dates of occurrence.
An investor buys 100 shares of QRS stock at $60 and writes 1 QRS 60 call at 4 and 1 QRS 60 put at 5. If QRS stock is trading at $74 on the expiration date, the investor realizes a profit of A) $500. B) $100. C) $400. D) $900.
D - Step 1: $6,000 goes out for the purchase of the stock. Step 2: $400 comes in from the sale of the call and $500 comes in from the sale of the put. Step 3: We always assume that out-of-the money short option positions are closed out (bought back) at their intrinsic value on expiration date, and in-the-money options are exercised. That means, with the market value of $74, the 60 call will be exercised with the investor selling the stock for $6,000 (in on the T-chart). No one is going to put us the stock at 60 when it is selling at 74, so the put expires, resulting in zero going out to close it. Step 4: The realized profit means only from gains or losses realized. Because the call option is exercised, we know the stock was sold for the 60 strike price Step 5: Put these all together. We started with $6,000 out for the stock purchase and $900 in for the sale of the two options. The call is exercised, so $6,000 comes in and the put expires, so $0 goes out. The result? $6,000 out and $6,900 in, for a profit of $900.
The primary difference between an underwriting syndicate member and a selling group member in a firm commitment underwriting is that A) the size of a syndicate member firm will always be larger than a selling group member firm. B) the price per share paid by the public is more if purchasing new shares from a selling group member. C) the securities offered by each differs within the offering. D) the syndicate assumes liability for unsold shares, while the selling group does not.
D - The primary difference between an underwriting syndicate member and a selling group member in a firm commitment underwriting is that A) the size of a syndicate member firm will always be larger than a selling group member firm. B) the price per share paid by the public is more if purchasing new shares from a selling group member. C) the securities offered by each differs within the offering. D) the syndicate assumes liability for unsold shares, while the selling group does not.
In a new margin account, a customer sells short 1,000 shares of XYZ at $30 per share and deposits the required margin. If the stock subsequently falls to $25 per share, the equity in the account is A) $10,000. B) $15,000. C) $25,000. D) $20,000.
D - When selling short, the initial credit balance is the sum of the proceeds of the sale ($30,000) plus the 50% Regulation T margin requirement ($15,000) or $45,000. The beginning equity is $15,000 (CR − SMV = EQ, or $45,000 − $30,000 = $15,000). If the market value falls to $25,000, equity is determined as $45,000 minus $25,000 equals $20,000.
Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compare to an assumed interest rate (AIR). Which of the following statements reflects that determination? Actual performance compared to the AIR affects the cash value of a variable life insurance policy Actual performance compared to the AIR affects the death benefit of a variable life insurance policy Actual performance compared to the AIR affects the value of an accumulation unit of a variable annuity Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity A) I and III B) II and III C) I and IV D) II and IV
D - hen the actual performance of the separate account exceeds the AIR, the death benefit of a variable life insurance policy will increase. When the performance is less than the AIR, the death benefit reduces, but never below the guaranteed minimum. There is no assumed interest rate for the cash value. That is, the insurance company makes no projections as to its growth. With variable annuities, it is the annuity unit where the performance versus the AIR is important. In order to set up lifetime payments, the insurance company makes certain assumptions about returns. If the returns are higher, the value of the annuity (payout) unit increases and vice-versa. During the accumulation period, there are no assumptions; the insurance company never projects how much the money will grow.
