Exam 5
On a when issued municipal bond transaction, the interim confirmation would show which of the following?
D. A bond trades when issued (WI) because a final settlement date has not been established. Without a settlement date, accrued interest cannot be calculated and therefore the final money amount cannot be calculated. The broker-dealer must disclose the capacity (principal or agent) in which it acted. (10-9)
When a manager of a municipal underwriting syndicate determines the priority of orders to be allocated, the orders would include all of the following EXCEPT: Group net Designated Member takedown Opening purchase
D. An opening purchase is an order to establish an option position and is not related to municipals. The priority of orders in a municipal syndicate becomes important when marketing the bonds. If the offering is oversubscribed, low priority orders may not get filled. The typical priority of orders from the highest to the lowest is as follows:
The securities that are deposited in an escrow account for an advanced refunding are: Revenue bonds General obligation bonds Federal agency bonds Treasury bonds
D. Only Treasury obligations are acceptable securities as escrow when a bond is being advanced refunded. (5-17)
Who is permitted to participate in a tax-sheltered annuity established under Internal Revenue Code Section 403(b)? A student of a school district that has an established plan Only self-employed individuals Any employee of a corporation who meets the eligibility standards An employee of a nonprofit organization that has an established plan
D. Tax-sheltered annuities are funded with pretax dollars and represent an immediate deduction to the investor. They are made available to employees of public school systems (not students) and to employees of certain nonprofit organizations under IRS Code 501(c)(3). (17-11)
T-bills purchased at the weekly auction will have a settlement date on the: Next business day Fifth business day Monday following the auction Thursday following the auction
D. The auction for 13- and 26-week T-bills is held each Monday. Settlement is on Thursday of the same week. (10-12)
Which of the following option strategies has the greatest risk? Buying a long straddle Writing an uncovered put Writing an uncovered call Buying a long combination
C. An uncovered (naked) call has unlimited risk. The underlying stock could theoretically continue to rise in price. If the option were exercised, the writer would have to buy the stock to deliver. In choices A and D, the investor has purchased options and the maximum loss is the premium. In choice B, the investor has written an uncovered put which has a limited loss potential (strike price minus the premium received). (14-14)
Which of the following pertain to ADRs? They facilitate the trading of foreign securities in U.S. markets. They facilitate the trading of U.S. securities in foreign markets. They are receipts issued for foreign securities. They are receipts issued for U.S. securities. I and III I and IV II and III II and IV
A. American Depositary Receipts (ADRs) are receipts issued for foreign stock. The actual stocks are deposited in foreign branches of American banks and the receipts are traded in the U.S. The issuance of the receipts aids in the transfer of ownership and facilitates the trading of foreign securities in U.S. markets. (4-19)
A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares. Assuming that all of the shares are sold, what amount will the syndicate members receive for their risk on shares sold by the selling group? $0.25 per share for a total of $250,000 $0.25 per share for a total of $1,000,000 $0.40 per share for a total of $400,000 $0.65 per share for a total of $650,000
A. The members of the syndicate receive $0.25 per share for their risk. Since the selling group was allocated 1,000,000 shares, the syndicate will receive $0.25 per share on 1,000,000 shares for a total of $250,000. (9-3)
Your client owns a portfolio of blue chip equity securities and would like to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to: Write covered calls Buy calls Write covered puts Buy puts
A. The most conservative strategy for the investor to achieve his objective is to write covered calls. The call premium received will increase the yield on his portfolio of stocks because it will add to the income generated by the dividends received from the stock. (15-2)
The purpose of depreciation is to: Spread the cost of an asset over the recovery period of the asset Increase the cash flow of a corporation Reduce taxes Increase net income
A. The purpose of depreciation is to spread the cost of an asset over its recovery period. (20-4)
A customer sells XYZ short at $40 and sells one XYZ October 40 put at 5. What would the customer's profit or loss per share be if the put is exercised when the market value of the stock is $35, and the stock received pursuant to that exercise is used to cover the short stock position? $10 profit $5 profit 0 $5 loss
B. If the put is exercised when the market price is less than $40, the stock acquired by the writer will be used to close out the short position. There is no profit or loss on the short sale (sell short at $40 and cover at $40). The entire profit is the premium income of $5. The seller of a put who sells short can never profit by more than the premium when the short sale price and the strike price are the same. (15-7)
What kind of investment company makes no provision for future purchases or redemptions? An open-end fund A closed-end fund A unit investment trust An exchange traded fund
B. A closed-end fund makes no provision for future purchases or redemptions from the issuing fund. Shares are bought and sold in the open market in the same manner as the common stock of corporations. All of the other types of funds listed do provide for future purchases and redemptions from or back to the fund. (18-2)
A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares. What amount will the issuer receive? $11.95 per share for a total of $59,750,000 $12.20 per share for a total of $61,000,000 $12.35 per share for a total of $61,750,000 $13.00 per share for a total of $65,000,000
B. In a new stock offering, the underwriting syndicate assumes risk and is therefore entitled to make a profit on the shares sold. Members of the selling group do not assume risk and therefore make a profit on only the shares they sell. The profit on shares sold is the $0.40 which the selling group receives. The members of the underwriting syndicate receive $0.65 for shares they sell. This is composed of the $0.40 concession plus $0.25 ($0.65 - $0.40) for their underwriting risk. The total spread is $0.80 ($0.15 manager fee plus $0.25 to the syndicate for risk plus $0.40 profit for sale of shares). The issuer will receive $12.20 per share ($13.00 offering price minus $0.80 underwriting spread) for a total of $61,000,000 ($12.20 x 5,000,000 shares). (9-3)
A Water & Sewer revenue project has $15,000,000 in total revenues. The operating and maintenance expenses are $9,000,000, bond interest is $2,000,000, and principal repayment is $1,000,000. How much is available for debt service? $3,000,000 $6,000,000 $9,000,000 $15,000,000
B. Revenue issues are referred to as being net revenue issues since expenses are deducted from income prior to paying debt service. (The one exception to this are hospital revenue issues which are gross revenue issues). The amount available to pay debt service (interest and principal due) is $6,000,000 ($15,000,000 gross income minus $9,000,000 operating and maintenance expenses). If the question had asked for the coverage or debt service ratio, you would compare the amount available, $6,000,000, to the debt service of $3,000,000 ($2,000,000 interest + $1,000,000 principal). The coverage would have been 2:1. (8-12)
Which of the following is an indicator of the demand for municipal bonds in the primary market? The Wilshire Index The Visible Supply The Placement Ratio The Bond Buyer Index
C. The Placement Ratio is published weekly in the Bond Buyer and Credit Markets. It shows the percentage of new competitive issues that have been placed (sold) to investors for the week. It is considered to be an indicator of demand in the new issue market. (12-26)
A guaranteed bond is: Insured One that has a mandatory sinking fund Backed by a pledge of another corporation to pay principal and interest Backed by a pledge of a federal agency to pay principal
C. The definition of a guaranteed bond is a corporate bond guaranteed by a corporation other than the issuer. (6-3)
A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares. When the issue is completely sold, the managing underwriter's fee will total: $150,000 $600,000 $750,000 $2,600,000
C. The syndicate manager receives $0.15 for every share. The manager will receive, in total, $750,000 (5,000,000 shares x $0.15 per share). (9-3)
