Exam 7
If a customer's objectives are safety of principal and income, you as the account executive could suggest all of the following EXCEPT: AAA rated corporate bonds High-grade preferred stocks High-grade mortgage bonds Income bonds
D. All of the bonds and preferred stocks listed would provide safety of principal and income except income or adjustment bonds. Income bonds generally come into existence in the reorganization of a company after bankruptcy. The company is only required to pay the interest on these bonds if the company earns money. Income bonds are one of the riskiest types of bonds available. (6-12)
The major provisions of ERISA provide protection for: Investors in limited partnerships Employers against fraud by their employees Government employees against improper investments by their employer Private sector employees against improper investments by their employer
D. ERISA provides private sector employers with guidelines for proper investments in employee pension plans. This provides protection for employees against improper investments by their employer. ERISA does not apply to public sector (government) plans. (17-9)
When a market maker gives a quote for a stock without qualification, the quote is a: Subject quote for 100 shares Workout quote for 100 shares Nominal quote for 100 shares Firm quote for 100 shares
D. When a market maker gives a quote for a stock without qualification, the quote is a firm quote for 100 shares. The market maker is obligated to buy or sell 100 shares at his quoted price. Subject, workout, or nominal quotes are given for informational purposes only. (12-1)
American Telephone Company of Ohio is offering $50,000,000 worth of 9% bonds at a price of 99.25% of par value. The State of Ohio has a state income tax. A buyer of the bond would be: Subject to state income tax Exempt from state income tax Subject to federal income tax Exempt from federal income tax I and III I and IV II and III II and IV
A. American Telephone Company of Ohio is a corporation. Therefore, interest paid on its debt obligations is subject to federal and state income tax. (6-15)
A client would like to actively trade, purchase on margin and have broad exposure to the U.S. equity market. Which of the following recommendations would be the least suitable? An S&P 500 mutual fund An S&P 500 Exchange Traded Fund A DJIA Exchange Traded Fund A managed closed-end fund
A. Most exchange traded funds (ETFs) and closed-end funds are traded on the NYSE, AMEX or NASDAQ. These securities can be actively traded and purchased on margin and would allow a client to have broad exposure to the U.S. equity market. A mutual fund cannot be purchased on margin and generally prices its portfolio only once a day, making it suitable for an investor that has a buy-and-hold strategy. (18-8)
Municipal notes are used for: Interim financing Long-term financing Taxable financing Permanent financing
A. Municipal notes are used for interim (temporary) financing. (8-18)
When examining an earnings report for National Corporation, a registered representative sees that earnings per share is reported on both a primary and fully diluted basis. This indicates that: The company has convertible bonds or convertible preferred stock outstanding The company has cumulative and participating preferred stock outstanding Earnings per share is calculated using current shares outstanding and also assuming that all convertible securities were converted Earnings per share is calculated on a pretax and after-tax basis I and III only II and IV only I, III, and IV only I, II, III, and IV
A. The calculation for earnings per share on a primary basis (before the possible dilution of convertible bonds, convertible preferred stock, stock options, or warrants) is computed based upon the number of outstanding common shares only. The calculation for earnings per share on a fully diluted basis would include the outstanding shares if convertible bonds and preferred stock were converted into common stock. (22-28)
A corporation has raised money to use for expansion of its plant within the next six months. In which of the following securities should the corporation invest the funds until they are utilized? High-quality commercial paper Long-term municipal zero-coupon bonds U.S. Treasury bonds High-quality preferred stocks
A. The corporation intends to use the money in a short period of time and would not want to assume undue investment risks. Of the choices given, the most suitable investment would be high-quality commercial paper since it is extremely safe and could be purchased with a short maturity to match the corporation's needs. (7-20)
A NYSE bond order ticket shows the following: Buy 5m @ 101 GTC The customer has placed a: Limit order to buy $5,000 of bonds Stop order to buy $5,000 of bonds Limit order to buy $50,000 of bonds Market order to buy $5,000,000 of bonds
A. The symbol "m" is used to indicate a $1,000 face value bond ("mm" stands for million). A customer placing an order for 5m bonds would be placing an order to purchase bonds with a face value of $5,000. Since the order specifies a price, it is a limit order. (11-22, 8-24)
When a corporation goes bankrupt, which of the following creditors would be the last to be paid? Internal Revenue Service Debenture holders Preferred stockholders Common stockholders
B. A creditor is someone to whom the corporation owes money. A stockholder is an owner of the corporation, not a creditor. (6-1, 6-4)
In reference to the previous question, what is the dollar amount of accrued interest that the investor is required to pay? $75.55 $208.88 $213.33 $1,008.88
B. Accrued Interest Formula = (Principal x Rate x Days of Interest) / 360 = ($20,000 x 8% x 47) / 360 = $208.88
A customer sells short 100 shares of ABC at 40 and also writes an ABC Jan 40 put @ 4. What is the margin requirement for these transactions? $1,600 $2,000 $3,200 $5,200
B. The margin requirement for the short sale of stock is 50% or $2,000. The put is covered and there is no margin requirement. If the question asked for the required deposit, the $400 premium received would be deducted. (16-7, 13-14)
XYZ Corporation is selling 100,000 shares of common stock through an underwriter, at $15 per share. The underwriting spread is $1.00 and the selling concession is 30 cents. Selling group members have been allocated 50,000 shares. XYZ Corporation will receive: $13.40 per share $14.00 per share $14.40 per share $15.00 per share
B. XYZ Corporation will receive the offering price ($15) minus the underwriting spread ($1.00), which equals $14. (9-3)
Which of the following is an example of a collateralized time draft? Debenture ADR BA Eurodollars
C. A BA (banker's acceptance) is used to facilitate foreign trade. It is a time draft which has been guaranteed (collateralized) by a bank. (7-21)
The purchase price of a no-load fund is determined by: The net asset value plus a sales charge The net asset value plus a commission The net asset value as computed at the end of the business day The supply and demand for the fund
C. A no-load fund has no sales charge. The purchase price is determined by the net asset value as computed at the end of each business day. (18-21)
Mr. Smith, a self-employed computer analyst, earned $125,000 during 20XX. What is the maximum permissible deductible contribution to his Keogh Plan for 20XX? $2,000 $5,500 $25,000 $51,000
C. A self-employed individual may make a deductible contribution of 20% of self-employed income, up to a maximum of $51,000, to a Keogh account. Twenty percent of Mr. Smith's income ($125,000) is $25,000. (17-11)
An individual transferring an IRA from one trustee to another: Must be at least 59 1/2 to avoid any penalties Will receive a check that must be rolled over within 60 days of receipt to avoid taxes Is not subject to any taxes or penalties May only do so once each year
C. A transfer of funds from one trustee to another is not considered to be a distribution or a rollover. There is neither a limit to the number of transfers that an individual may do, nor are there any taxes or penalties. This differs from receiving a distribution from a retirement plan. The distribution must be rolled over into another qualified plan, within 60 days of receiving the money, in order to avoid taxes and penalties. Rollovers may only be done once each year. (17-3)
A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling at its par value. If the bond increased in value by 20 points, what is parity for the stock? $25 $40 $48 $50
C. If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity for the stock would be found by dividing the market value of the bond ($1,200) by the conversion ratio (25). This is equal to $48 ($1,200 divided by 25 equals $48). (6-7)
The following is a listing of breakpoints on a mutual fund. Amount Sales Charge 0 - $ 9,999 8% $10,000 - $24,999 6% $25,000 - $39,999 5% $40,000 and above 4% The current net asset value is $9.20. The current offering price is $10.00. If a customer invests $50,000, how many shares will he be able to purchase? 4,227 5,000 5,219 6,000
C. Since the customer has $50,000 to invest, he will only be subject to a 4% sales charge. First, calculate the offering price by dividing the net asset value ($9.20) by the complement of the sales charge percent (96%) which equals approximately $9.58. Next, divide the amount to be invested ($50,000) by the offering price ($9.58) which equals the number of shares that can be purchased (5,219). (18-20, 18-22)
The Consumer Price Index: Measures the average level of food and utility prices over a given period of time Measures the average prices paid by U.S. consumers over a six-month period of time Measures the average change in prices for specific goods and services purchased by consumers in certain cities None of the above
C. The Consumer Price Index measures the average change in prices for selected goods and services purchased by consumers in certain cities. The CPI measures the change from a previous base period and is computed monthly. (22-1)