Exam 1A

A convertible bond has a conversion price of $40 and is currently selling in the market at $950. The conversion ratio is: A) 25 B) 23.75 C) 40 D) 38

A) 25 (To find the conversion ratio of a convertible bond, the bond's par value ($1,000) is divided by the conversion price ($40). In this question, the conversion ratio is $25 ($1,000 ÷ $40). To calculate the conversion ratio, the market price of the bond is irrelevant)

The FDIC provides coverage for: A) Certificates of deposit (CDs) B) Fixed annuities C) Life insurance D) Variable annuities

A) Certificates of deposit (CDs) (The Federal Deposit Insurance Corporation (FDIC) provides coverage for deposits at a bank, in the event the bank has financial troubles. FDIC will cover CDs, but not insurance, or fixed and variable annuities)

Which of the following investments is the MOST suitable for a person who is interested in aggressive growth? A) Common stock B) High-yield bond fund C) High-rated bond D) Preferred stock

A) Common stock (Of the choices listed, common stock has historically provided the greatest potential for growth. Bonds and preferred stock are typically suitable for investors who are seeking income.)

A brokerage firm purchases 600 shares of stock from a customer and places the securities into its inventory. In this case, the firm likely acted as a(n): A) Dealer B) Designated market maker C) Agent D) Underwriter

A) Dealer (When a B/D buys a security from a customer by using its own funds and places the securities into its inventory, it has acted as a dealer (principal). In this situation, the customer is charged a markdown on the transaction. If the firm bought the security for a customer or sold a security to a customer without being the other side of the transaction, it would be acting as a broker (agent) and it would charge the customer a commission. An underwriter assists an issuer in raising capital in the primary market by purchasing the securities from the issuer and selling them to customers. The firm that controls trading on an exchange for a specific stock is referred to as a designated market maker (DMM))

When a bond is called, the bondholder receives the: A) Call Price B) Call Price plus Accrued Interest C) Market Price D) Market Price Plus Accrued Interest

B) Call Price plus Accrued Interest (The bondholder receives the call price (either at par or at a premium) plus accrued interest earned up to the call date.)

Banks savings account are guaranteed and insured by the: A) SIPC B) FDIC C) Federal Reserve Board D) Department of the Treasury

B) FDIC (In the event that a bank is unable to pay its depositors, the FDIC guarantees bank accounts up to $250,000. SIPC protects brokerage customers against broker-dealer bankruptcy)

Which of the following statements is TRUE concerning electronic communication networks (ECNs)? A) They can be used only by retail investors. B) They can be used by investors who want to trade anonymously. C) They can be used only by institutional investors. D) They can be used by clients who don't want to use a broker-dealer.

B) They can be used by investors who want to trade anonymously (ECNs are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients)

A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is: A) $950.87 B) $952.80 C) $958.75 D) $9,587.50

C) $958.75 (U.S. government bonds are quoted as a percentage of par with a fraction in 32nds of a point. Therefore, a T-bond quoted at 95.28 is equal to 95 28/32. By converting the fraction to a decimal, the quote becomes which is 95.875% of the par value of $1,000. $1,000 x 95.875% = $958.75.)

Which of the following organizations enforces municipal securities regulations for broker-dealers? A) The FRB B) The FDIC C) FINRA D) The MSRB

C) FINRA (Although the MSRB creates rules governing municipal securities broker-dealers, its rules are enforced by other regulatory bodies. The appropriate regulatory agencies are the: The SEC or FINRA for broker-dealers The comptroller of the currency for federal banks The FRB for state banks that are members of the FRB The FDIC for member banks of the FDIC)

The purpose of a depository facility is to: A) Clear transactions in equity securities B) Clear transactions in fixed-income securities C) Hold securities in book-entry form D) Ensure that dividend payments are sent to investors by the issuers of the securities

C) Hold securities in book-entry form (The DTC is a subsidiary of the DTCC and its primary function is to hold securities in book-entry form. This allows broker-dealers to buy and sell securities on behalf of their customers without the costs and time associated with physical certificates. A change of ownership is made from the account of the selling broker-dealer to the account of the buying broker-dealer. The DTC is not a clearing facility)

When purchasing Treasury notes, an investor should understand: A) Delivery is in either book entry or physical form B) Interest is paid at maturity C) Interest is paid semi-annually D) Principal is adjusted for inflation

C) Interest is paid semi-annually (Treasury notes and bonds pay interest semi-annually. Treasury securities are only issued in book entry form. Treasury Inflation Protected Securities (TIPS) are adjusted for inflation.)

A bond is selling at a premium. This indicates that: A) The yield to maturity is greater than the nominal yield B) The market price is less than the par value C) Interest rates have decreased since the bond was issued D) The nominal yield is less than the current yield

C) Interest rates have decreased since the bond was issued (The amount that the market price exceeds the par value is known as a premium. One reason for selling at a premium is a decrease in interest rates after the bonds were issued. When looking at the yields for premium bonds, the nominal yield is the highest, followed by the current yield, with the yield to maturity being the lowest yield of the three.)

Which of the following regulates the resale of restricted securities? A) Rule 147 B) Regulation D C) Rule 144 D) Rule 145

C) Rule 144 (Rule 144 and 144A regulate the process by which restricted (unregistered) securities may be resold. Regulation D sets the regulations for raising capital through private placements. Rule 147/147A establish the requirements for intrastate offerings. Rule 145 establishes the registration requirements for the reclassification of securities)

How often do Treasury notes pay interest to investors? A) Quarterly B) Annually C) Semiannually D) At maturity

C) Semiannually (Both Treasury notes and Treasury bonds pay interest semiannually, just like corporate and municipal bonds. However, since Treasury bills are short-term instruments, they're issued as zero-coupon bonds and don't pay interest periodically. Instead, investors who buy Treasury bills receive their interest when the T-bills mature)

Which of the following securities trades in fractional units of 1/32 of a point? A) Convertible bonds B) Municipal bonds C) Treasury bonds D) Corporate bonds

C) Treasury bonds (Corporate and municipal bonds trade in increments of 1/8 of a point, while Treasury notes and Treasury bonds trade in increments of 1/32 of a point. A convertible bond is a type of corporate bond)

Which bonds are considered the most liquid? A) Corporate bonds B) Municipal bonds C) Treasury bonds D) Mortgage bonds

C) Treasury bonds (Liquidity represents the ability to buy and sell a stock or bond quickly. Since the U.S. Treasury is one of the largest issuers in the world, T-Bonds are extremely liquid with a significant number of buyers and sellers. Corporate bonds and municipal bond issuers are smaller than the U.S. government and their bonds will have less liquidity)

Which of the following securities has the longest period until expiration? A) Rights B) Options C) Warrants D) Repurchase agreements

C) Warrants (Warrants are typically created with long-term expirations; in fact, some warrants never expire (i.e., they're perpetual). On the other hand, rights are short-term and typically expire in a few weeks or months after they're issued. Exchange-traded options often have nine-month expirations. Repurchase agreements are short-term loans (often overnight))

A common shareholder is not entitled to: A) Vote for the board of directors B) Receive dividends if voted for by the board of directors C) Give or sell shares to anyone she wishes D) Appoint officers of the corporation

D) Appoint officers of the corporation (Shareholders have the right to vote for the board of directors, but not to appoint officers of the corporation)

A corporation wants to offer its shareholders the ability to obtain shares at a fixed price. Which security should the corporation issue? A) Puts B) Preferred stock C) Futures D) Rights

D) Rights (Rights (preemptive rights) are issued by corporations and offer existing shareholders the ability to purchase additional shares at a fixed price. Exchange-traded options (e.g., calls and puts) are not directly issued by an issuer as a means of raising capital.)

If a municipal bond is backed by the revenues of a facility and the income is insufficient to make the debt service payment, which of the following statements is TRUE? A) The bond's indenture will need to be amended. B) The bond's interest rate will increase. C) The issuer is required to close the facility. D) The issuer will default on its next payment.

D) The issuer will default on its next payment (A municipal bond that's backed by revenues of a project or facility is referred to as a revenue bond. When the income is insufficient to make the debt service payments, the issuer will default on that bond)