Incorrect Answers - Series 7
An investor buys 2 LMN 40 calls and pays a premium of 4 each, and also buys two LMN 40 puts and pays a premium of 2.50 each. At the time of purchase, LMN is trading at $40.75. On the expiration date, LMN is trading at $32.50. If the investor closes his position for its intrinsic value. Excluding commissions, the investor realizes a: A) $200 profit. B) $200 loss. C) $100 loss. D) $100 profit.
A) $200 profit. Explanation Closing out a position is the opposite of the opening transaction. In this situation, the investor opened by buying 2 calls for a total of $800, and closed them out by selling for their intrinsic value (calls have intrinsic value when the market value is above the strike price; in this situation there is no intrinsic value). The investor also bought 2 puts for a total of $500 and closed them out by selling for their intrinsic value of $1,500 (puts have intrinsic value when the market value is below the strike price; in this situation the intrinsic value is $7.50 per contract) or 40 − 32.50 = 7.5 × 2 = 15 × 100 shares = $1,500). The resulting profit on the position is $200 ($1,500 − $1,300), the total of the premiums paid for all of the options.
ABC Corporation, whose common stock is trading at $32, has issued $40 million of 8-1/8% debentures due 10-1-14. Each bond issued with a $1,000 PAR value has a warrant attached enabling the holder to buy 4 shares of ABC common at $40 per share. If all of the warrants are exercised, ABC Corporation will receive: A) $6.4 million. B) $20 million. C) $10 million. D) $12.8 million.
A) $6.4 million. Explanation There are a total of 40,000 warrants outstanding ($40 million of debentures / $1,000 par value per bond). Each warrant entitles the holder to buy 4 shares of common stock. Therefore, if all warrants are exercised, holders will be purchasing 160,000 shares (4 × 40,000) at $40 per share. 160,000 × $40 = $6.4 million.
A stock pays a $.50 quarterly dividend. The company had earnings per share last year of $10. The companies dividend retention ratio is: A) 80%. B) 10%. C) 20%. D) 5%.
A) 80%.
What options trading program would be most appropriate for a retired customer with a portfolio of low cost basis blue-chip stocks who is seeking income from his portfolio? A) A covered call writing program. B) Selling straddles. C) An uncovered call writing program. D) An option purchasing program.
A) A covered call writing program. Explanation The most conservative option strategy is writing covered calls. In addition to the income from the call premium, this client could receive dividends on his stock if any were paid as well. Purchasing options brings no income to the account and uncovered call writing and short straddles have unlimited risk
Which of the following is TRUE concerning a 5:4 stock split? A) Each shareholder's proportionate equity will be unchanged. B) Retained earnings will be increased. C) The net worth of the company will be reduced. D) The par value will be unchanged.
A) Each shareholder's proportionate equity will be unchanged.
Which of the following statements are TRUE concerning hedge funds? I. They may not be suitable for discretionary accounts where account holders are not familiar with the risks associated with them. II. They are conservatively managed using no advanced or aggressive investment strategies without regulatory approval first. III. They may charge both an annual fee and a fee based on the funds' profits. IV. They are subject to the same rules as mutual funds. A) I and III B) I and IV C) II and IV D) II and III
A) I and III
If the Federal Reserve Board (FRB) decides that the rate of inflation is too high, which is it most likely to do? I. Tighten the money supply. II. Loosen the money supply. III. Lower the discount rate. IV. Raise the discount rate. A) I and IV. B) II and III. C) I and III. D) II and IV.
A) I and IV
Which of the following investors will purchase stock if an option is exercised? I. Owner of a call II. Owner of a put. III. Writer of a call. IV. Writer of a put. A) I and IV. B) III and IV. C) I and II. D) II and III.
A) I and IV.
Which of the following events will cause the special memorandum account to decrease? I. An increase in the SMV. II. A decrease in the LMV. III. The purchase of long securities on margin. IV. The short sale of securities. A) III and IV. B) I and II. C) I and III. D) II and IV.
A) III and IV.
Written notice of intent to deliver before the expiration date is required in which of the following transactions? A) In a seller's option. B) In a Regulation T delivery. C) In a delayed delivery. D) In regular way settlement.
A) In a seller's option.
A customer of a registered representative is considering a hedge fund investment and asks what the lock-up period means? The registered representative correctly explains it is A) a period of time during which liquidation of fund shares is prohibited by the fund, which means that there is an element of illiquidity to be considered B) the length of time that is required to have the hedge fund registered with the SEC during which time the fund may not sell any shares C) the minimum length of time the hedge fund portfolio manager intends to hold any single investment within the portfolio D) a period of time during which the fund manager will not make any changes (purchases or sales) within the hedge fund portfolio
A) a period of time during which liquidation of fund shares is prohibited by the fund, which means that there is an element of illiquidity to be considered Explanation Hedge funds generally employ a lock-up provision to ensure that capital invested by shareholders will remain with the fund long enough to ensure the manager's ability to implement the intended fund strategy and to begin to see the results of that strategy. There is no standard lock-up period, which can differ from fund to fund, and it should always be noted that during the lock-up period, the investment is essentially rendered illiquid.
All of the following information is included in a municipal bond resolution EXCEPT: A) compensation paid to the underwriters. B) restrictive covenants that are binding on the issuer. C) an authorization to sell the securities. D) any call provisions that allow the issuer to redeem the bonds before their scheduled maturity.
A) compensation paid to the underwriters.
A qualified legal opinion issued for a municipal bond underwriting means that the: A) legal opinion is qualified with restrictions and conditions. B) bond attorney is qualified to express his opinion on the bond. C) bond counsel is considered competent. D) revenue bond issue has certain debt limitations .
A) legal opinion is qualified with restrictions and conditions Explanation The word "qualified" describes the legal opinion, not the attorney (or bond counsel) who issued it. A qualified legal opinion is one in which the bond counsel expresses reservations about conditions that may affect the bond's status. An unqualified legal opinion is rendered without restriction or condition
If you are advised that the yield curve is currently inverted, this means that: A) long-term rates are lower than short-term rates. B) long-term and short-term rates move inversely. C) short-term rates are lower than long-term rates. D) long-term rates are significantly higher than short-term rates.
A) long-term rates are lower than short-term rates.
A registered representative employed by a broker dealer must notify the employer in writing and be permitted by the employer to do all of the following EXCEPT A) own a small financial interest in a publicly traded retail company B) take an evening job as a bartender C) serve as an officer of another business organization D) own an interest in any other organization engaged in the securities business
A) own a small financial interest in a publicly traded retail company
Your broker/dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is A) required at least 10 business days prior to first use or publication B) required within 10 business days of the time it is first used or published C) required to occur no later than the end of the month during which it was used D) not required
A) required at least 10 business days prior to first use or publication
A pension plan might invest in each of the following EXCEPT: A) tax-free municipal bonds. B) corporate bonds. C) variable annuities. D) equities.
A) tax-free municipal bonds.
New Housing Authority (NHA) bonds are a relatively safe investment because: A) the U.S. government guarantees a contribution to secure the bonds. B) rental income provides a hedge against inflation. C) they are backed by the full faith and credit of the issuing municipalities. D) banks buy these bonds.
A) the U.S. government guarantees a contribution to secure the bonds.
The 5% markup policy applies to which of the following? I. Exempt transactions. II. Agency transactions. III. Principal secondary market trade. IV. New issues. A) I and III. B) II and III. C) I and II. D) III and IV.
B) II and III. Explanation The 5% markup policy applies to all secondary market transactions. It does not apply to exempt transactions, transactions requiring the delivery of a prospectus, or issues sold at a fixed offering price.
One of your clients enters a sell stop order at $42.40, limit $42.15. Assume that the trades occur in the following sequence: 42.45, 42.40, 42.75, 42.27, and 41.91. At which of the following prices could this order be executed? I. $41.91. II. $42.27. III. $42.40. IV. $42.75. A) I and III. B) II and IV. C) III and IV. D) I and II.
B) II and IV
Active government manipulation of the economy through tax and budget policies is referred to as: A) monetarist. B) Keynesian. C) soft landing. D) supply side.
B) Keynesian.
The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. New orders for durable goods is what kind of economic indicator? A) Coterminous. B) Leading. C) Coincident. D) Lagging.
B) Leading.
The Options Clearing Corporation uses which of the following methods to assign exercise notices? A) First in, first out (FIFO). B) Random selection. C) Assign it to the member firm holding a long position that first requests an exercise . D) Assign it on the basis of the largest position.
B) Random selection.
The trust indenture of a revenue bond includes a statement explaining rates will be maintained at a level sufficient to cover the debt service and operating expenses. This statement would be found in that part of the indenture dealing with the: A) official statement. B) bond covenants. C) flow of funds. D) feasibility study.
B) bond covenants. Explanation The trust indenture of a bond contains the protective bond covenants. Within the bond covenants can be found the rate covenant which is a statement explaining that rates or user fees will be maintained at a level sufficient to cover the debt service and operating expenses for the bond issue.
The put-call ratio can be used to A) calculate how many options contracts are needed to hedge a stock position B) gauge investor sentiment as being either bullish or bearish C) determine a stocks beta D) determine which institutional trading desks are trading options
B) gauge investor sentiment as being either bullish or bearish
An investor buys 2 RST 40 calls and pays a premium of 4 each. He also buys 2 RST 40 puts and pays a premium of 2.50 each. When purchased, RST is trading at $40.75. On the expiration date, RST is trading at $32.50 and the investor closes his positions for intrinsic value. Excluding commission, the investor realizes a: A) $200 loss. B) $100 loss. C) $200 profit. D) $100 profit.
C) $200 profit. Explanation The cost of opening these two straddles is $1,300. On the expiration date, the puts are worth $750 each, for a total of $1,500, giving the investor a $200 profit. The calls will expire worthless. Alternatively, the breakeven points for this long straddle are 33.50 and 46.50 (add the combined premiums of 6.50 to the call strike and subtract combined premiums from the put strike). The investor profits in a long straddle when the stock moves outside the breakeven points. As the stock is at 32.50, the customer makes 1 point (33.50 − 32.50) on each straddle, resulting in a $200 profit.
If an investor has an established margin account with a short market value of $24,000 and a credit balance of $30,000, the maintenance call will be for A) 6000. B) 2000. C) 1200. D) 7200.
C) 1200. Explanation Minimum maintenance requirement in a short margin account is 30% of the current market value. In this case, 30% of $24,000 is $7,200. The equity in the account is currently $6,000 ($30,000 − $24,000). Therefore, the amount of the maintenance call is $1,200.
Which of the following is NOT an advantage of buying listed call options as compared to buying the underlying stock? A) Buying a call would require a smaller capital commitment. B) Buying a call has a lower dollar loss potential than buying the stock. C) The call has a time value beyond an intrinsic value that gradually dissipates. D) Buying a call allows greater leverage than buying the underlying stock.
C) The call has a time value beyond an intrinsic value that gradually dissipates. Explanation Call options allow greater leverage than buying the underlying stock and the capital requirements are smaller, allowing for a smaller loss potential. The fact that options expire (i.e., have a time value that erodes as the option nears expiration) is a disadvantage of options. Stock purchases have no time value component-there is no expiration and no resulting value erosion.
An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is: A) the yield is always higher than bond yields. B) the yield is always higher than mortgage yields. C) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. D) the safety of the principal invested.
C) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. Explanation Because common stocks are not fixed dollar investments, they have the opportunity to keep pace with inflation.
All of the following are derivative securities EXCEPT: A) warrants to purchase publicly traded common stock. B) collateralized mortgage obligations. C) general obligation bonds. D) equity options.
C) general obligation bonds.
In a period of loose money, corporate bond prices: A) decrease. B) stay the same. C) increase. D) fluctuate.
C) increase. Explanation In a period of loose money, interest rates fall. When interest rates fall, bond prices rise.
Stop orders may be used for each of the following EXCEPT: A) protect profits on long positions. B) protect profits on short positions. C) lock in a specific price to close out a position. D) establish positions.
C) lock in a specific price to close out a position. Explanation Stop orders are contingent orders that are triggered when the stock trades at or through a stated price. When triggered, they become market orders to buy or sell. They are used by technical traders to establish positions above or below resistance and support levels, respectively. Stop orders never guarantee a specific execution price.
For dividends to be taxed as qualified dividends, the dividend paying investment must be held for A) more than 120 days B) at least 45 days C) more than 60 days D) at least 30 days
C) more than 60 days
In rating a general obligation (GO) bond, all of the following factors would be considered by an analyst EXCEPT A) the tax collection ratio B) the total outstanding debt C) the flow of funds D) the public's attitude toward debt
C) the flow of funds Explanation General obligation bonds are backed by the full faith and credit of a municipal issuer which is based on its ability to levy and collect taxes. Therefore, among the considerations for an analyst, total outstanding debt, the tax collection ratio, and the public's attitude toward more municipal debt are prominent. The flow of funds is one of the protective covenants associated with municipal revenue bonds.
Which two statements are TRUE regarding margin calls? I. Customers are entitled to an extension of time. II. Customers are not entitled to an extension of time. III. Firms can sell securities without first contacting the customer. IV. Firms cannot sell securities without first contacting the customer. A) I and III. B) II and IV. C) I and IV. D) II and III.
D) II and III.
Which of the following statements regarding puttable bonds is TRUE? A) The bondholder can expect to receive a premium over par if he chooses to put the bonds. B) The put feature is likely to be exercised when interest rates are falling. C) The issuer may require that the put feature be exercised if interest rates drop significantly. D) Their yields are usually lower than those of nonputtable bonds.
D) Their yields are usually lower than those of nonputtable bonds. Explanation A put feature is advantageous to the bondholder, and therefore carries with it a lower yield. Exercise of the put feature is at the discretion of the bondholder, not the issuer, and will most likely be used if interest rates are rising.
Institutional managers are moving to increase their cash position. This action would be viewed as: A) neutral bull. B) neutral. C) bullish. D) bearish.
D) bearish.
Level I Nasdaq service provides subscribers with all of the following information EXCEPT: A) the inside market. B) volume information. C) last sale information. D) bid and ask quotes for each market maker
D) bid and ask quotes for each market maker. Explanation Level I Nasdaq service provides subscribers with information on the inside market, last sale, and volume. The bid and ask quotes of each market maker in a particular security are shown over Level II.
An investor who buys a stock and wishes to limit the potential downside risk should: A) enter a buy stop order. B) enter a sell limit order. C) buy a call. D) buy a put.
D) buy a put.
All of the following may be cited to justify a markup on a stock sold from a broker/dealer's inventory EXCEPT: A) the security's price. B) overall value of the transaction. C) availability. D) dealer's cost.
D) dealer's cost.
Trading in expiring options series concludes the same day as expiration at A) 11:00 pm ET B) 5:00 pm ET C) 12:00 pm ET D) 4:00 pm ET
D) 4:00 pm ET
If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder? A) $600 cash. B) $325 cash. C) $381 in securities. D) $600 in stocks.
A) $600 cash. Explanation Index options settle in cash. Physical delivery does not occur. The call buyer receives cash equal to the difference between the strike price and the index closing value on the day the option is exercised.
Which of the following choices lists Treasury bills, Treasury bonds, and Treasury notes in ascending order of maturity? A) Bonds, notes, bills. B) Bills, bonds, notes. C) Notes, bills, bonds. D) Bills, notes, bonds.
D) Bills, notes, bonds.
If interest rates increase, the interest payable on outstanding corporate bonds will: A) change according to the inverse payout theory. B) remain unchanged. C) increase. D) decrease.
B) remain unchanged. Explanation The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year regardless of the prevailing interest rates in the market. It is the market price of bonds, not the interest payable, that responds inversely to changes in interest rates
A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true EXCEPT: A) the bond issue will mature within the useful life of the sewage plant. B) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. C) there is no debt limitation on the issue. D) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used.
B) the disbursement of principal and interest payments must be approved semiannually by the state public service commission.
Under the Code of Arbitration, all monetary awards must be paid within how many days of the decision date? A) 60. B) 15. C) 30. D) 45.
C) 30.
A corporation buys back its stock on the open market for all of the following reasons EXCEPT: A) use it for stock options. B) use it for future acquisitions. C) reduce interest charges. D) increase earnings per share.
C) reduce interest charges.
A customer's restricted margin account shows the following: LMV $30,000 DB $16,000 SMA $0 If the customer sells $2,000 of securities, how much could be withdrawn from the account? A) $1000. B) $2000. C) $15,000. D) $0.
A) $1000 Explanation In this restricted account, half of the sales proceeds will be used to reduce the DB balance to $15,000 and half of the sales proceeds are released to SMA. Therefore, when $2,000 of stock is sold, $1,000 is credited to SMA. This is the amount that can be withdrawn from the account.
A municipal bond is purchased at a discount in the secondary market at 90. The face amount is $10,000 and the bond has 10 years to maturity. If the bond is sold for 97 after 5 years, what is the taxable gain? A) $200. B) $300. C) $700. D) Capital gains are not taxable on municipal issues.
A) $200. Explanation When a municipal bond is bought at a discount in the secondary market, the discount is accreted and taxable as ordinary income. Accretion increases cost basis. Therefore, 5 years later, the bond's cost basis is 95. At that point, the customer has a 2-point capital gain. Had the bond been bought as an OID, the annual accretion is considered interest income and is not taxable.
An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12, the NAV was $11.08. If the current POP is $12.50 and the NAV is $11.80, the investor receives: A) 3540. B) 3750. C) 3600. D) 3324.
A) 3540. Explanation Shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80).
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 corporate bond because the after-tax yield is 6.25%. C) The municipal bond because its equivalent taxable yield is 6.3%. D) The corporate bond because the after-tax yield is 4.5%.
A) The municipal bond because its equivalent taxable yield is 6.6%. Explanation This is calculated using the tax-equivalent yield formula; Municipal yield / (100% − investors tax bracket) 4.75 / (1 − .28) = 6.6%. By comparison, the 6.6% tax-equivalent yield of the municipal bond is higher than the 6.25% yield of the taxable corporate bond making the municipal bond the higher yielding investment given the investors 28% tax bracket.
A client who is a manager of a pension plan has recently liquidated approximately $1 million in securities and now has only cash and cash equivalents in the account. This client's outlook concerning the market is: A) bearish. B) neutral. C) bullish. D) unknown.
A) bearish. Explanation Since the investor has moved all assets into cash or cash equivalents, the investor must expect a bear market and is taking this action in an attempt to protect against incurring losses from the anticipated market decline.
If an index option is exercised, the holder's account will be: A) credited the in-the-money amount. B) debited the in-the-money amount. C) debited the out-of-the money amount. D) credited the out-of-the money amount.
A) credited the in-the-money amount. Explanation When index options are exercised, settlement is in cash rather than stock. The option writer delivers cash to the option buyer equal to the amount that the option is in-the-money.
All of the following statements are true with respect to a limited partnership subscription agreement EXCEPT: A) the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs. B) the investor's signature indicates that he has read the offering document. C) the general partner endorses the subscription agreement, signifying that a limited partner is acceptable. D) the investor's registered representative must verify that the investor has provided accurate information.
A) the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs.
A customer owns 10M of 7% U.S. Treasury bonds. He is in the 28% federal tax bracket and the 10% state tax bracket. What is his annual tax liability on these bonds? A) $266. B) $196. C) $70. D) $98.
B) $196. Explanation His tax liability is as follows: $1,000 × 7% = $70 annual interest per bond; $70 × 10 = $700 annual interest, which is taxable only by the federal government; $700 × 28% = a $196 tax liability.
An options trader goes long 1 XYZ Oct 60 put at 6 and purchases 1 XYZ Oct 60 call for 6. If XYZ is at 68 at expiration, what is the investor's gain or loss? A) $400 gain. B) $400 loss. C) $200 gain. D) $1,200 loss.
B) $400 loss. Explanation If the market price of XYZ is at $68 per share, the put is out-of-the-money and will expire worthless. The call could be sold for the intrinsic value of 8. (There is no time value, since the option is at the expiration date.) Since the investor originally spent $1,200 (a premium of $600 was paid for each option), the net result is a loss of $400.
For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is: A) 1 round lot. B) 25 round lots. C) 1 odd lot. D) 25 odd lots.
B) 25 round lots. Explanation For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading. Therefore all last sale information will be disseminated for any transaction of one share or more.
Which of the following would be considered funded debt? A) Commercial paper maturing in 270 days. B) Corporate debt maturing in 10 years. C) Municipal revenue bonds maturing in 10 years. D) U.S. Treasury bonds maturing in 20 years.
B) Corporate debt maturing in 10 years.
Which of the following is least likely to impact an underwriter's considerations when establishing the offering price for a new issue? A) Demand for the security by the investing public. B) Geographic location of the company headquarters. C) Earnings multiples for other companies in the market in the same industry. D) Projected earnings for the company.
B) Geographic location of the company headquarters.
SEC Rule 145 exempts which of the following from registration? I. Stock resulting from a stock split. II. Stock resulting from a stock dividend. III. Stock issued in connection with an acquisition. IV. IPO in which the entire amount is being sold by officers. A) I and III. B) I and II. C) II and IV. D) III and IV.
B) I and II.
Of the following system characteristics which can be associated with TRACE (Trade Reporting and Compliance Engine)? I. Both sides of the transaction must report. II. Only the buyer is required to report . III. Municipal securities are excluded from the reporting system. IV. It is an execution and trade reporting system. A) II and III. B) I and III. C) II and IV. D) I and IV.
B) I and III.
A customer calls his registered representative and asks that the firm hold his mail as he will be traveling for an extended period of time. Under the rules governing requests to hold mail, which of the following statements are TRUE? I. The request must be made in writing with a specific time period designated. II .For the sake of convenience, the customer can request any length of time for mail to be held. III. Under the rules, the broker dealer is obligated to grant any reasonable request to hold mail. IV. During the time that mail is being held, the broker dealer must still be able to communicate with the customer. A) I and III B) I and IV C) II and IV D) II and III
B) I and IV
Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA-rated debentures at par. Which of the following statements regarding the outstanding 4% issue are TRUE?I. The dollar price per bond will be higher than par. II. The dollar price per bond will be lower than par. III. The current yield on the issue will be higher than the coupon. IV. The current yield on the issue will be lower than the coupon. A) I and III. B) II and III. C) II and IV. D) I and IV.
B) II and III.
Which of the following would make a corporate bond more subject to liquidity risk? I. Short-term maturity. II. Long-term maturity. III. High credit rating. IV. Low credit rating. A) II and III. B) II and IV. C) I and III. D) I and IV.
B) II and IV.
All of the following are oil and gas program sharing arrangements EXCEPT: A) functional allocation. B) all or none underwriting arrangement. C) disproportionate sharing. D) reversionary working interest.
B) all or none underwriting arrangement.
All of the following would be considered either retail communications or correspondence EXCEPT A) a written communication to all of the firm's customers regarding a new mutual fund being offered B) an email to several municipalities sent out in a single day offering your firm's services for underwriting their municipal securities C) an electronic communication distributed through the firm's website regarding potential opportunities with the firm as a registered representative D) a letter to 10 individual investors within the past week regarding a new investment strategy
B) an email to several municipalities sent out in a single day offering your firm's services for underwriting their municipal securities Explanation Communications with government entities, which includes municipalities, fall under the heading of institutional communications. The others are all examples of either retail communications or correspondence depending on how many recipients there are within a 30 calendar-day period. (Retail—more than 25 retail investors within any 30 calendar-day period, and Correspondence—25 or fewer retail investors within any 30 calendar-day period.)
Trading is halted on a listed security on the NYSE because a large volume of orders created an order imbalance. A report of a transaction in the stock taking place on another exchange, will appear on the consolidated tape system (CTS): A) only after trading is resumed on the NYSE. B) as it occurs, despite the trading halt on the NYSE. C) None of these. D) never, because trading is halted on the NYSE.
B) as it occurs, despite the trading halt on the NYSE.
All of the following are characteristics of the Securities Investor Protection Corporation (SIPC) EXCEPT: A) investors are insured up to $500,000 in assets, up to which only $250,000 may be for cash. B) it protects against losses produced by fluctuations in the market. C) it is non-profit corporation funded by members. D) it is not a regulatory authority.
B) it protects against losses produced by fluctuations in the market
Which of the following is NOT good delivery for 470 shares of stock? A) 4 100-share certificates and 1 70-share certificate . B) 8 50-share certificates, 1 40-share certificate, and 1 30-share certificate. C) 2 100-share certificates and 3 90-share certificates. D) 47 10-share certificates.
C) 2 100-share certificates and 3 90-share certificates. Explanation Shares must add up to 100 or be in multiples of 100, with the exception of odd lots.
On January 18, your customer sold 500 shares of MNO for a loss of $5 per share. If on March 1 he bought 3 MNO calls, how much of the loss could he declare for tax purposes? A) $1,000. B) $1,500. C) $2,500. D) He may not declare any loss.
C) $2,500. Explanation Since the purchase of the calls took place more than 30 days after the sale, the transaction is not a wash sale. He may therefore declare the entire $2,500 as a loss.
An investor writes 1 TCB 320 put for 21.35 and the stock closes at 304.50. He makes a closing transaction at the intrinsic value and the result is a: A) $155 loss B) $155 profit C) $585 loss D) $585 profit
C) 585 loss Explanation The investor opened the position and received 21.35 for selling the option. He closed the position by buying the option at its intrinsic value, which equals the difference between the stock's market price and the option's strike price. In this example, 320 - 304.50 equals an intrinsic value of 15.50. The investor's gain is the difference between the sale price of 21.35 and the purchase price of 15.50, which equals 5.85, or $5.85. His profit is $5.85 multiplied by 100, or $585.00.
MSRB rules prohibit dealers from entering into which of the following transactions with a mutual fund? A) Acting as a broker's broker for a large block of bonds the fund wishes to sell. B) Accepting orders from a fund to buy a new municipal issue. C) Accepting portfolio trades from the fund as compensation for sales of the fund's shares. D) Purchasing the fund's shares to fill customers' orders.
C) Accepting portfolio trades from the fund as compensation for sales of the fund's shares.
When a registered representative opens a new options account, in which order must the following actions take place? I. Obtain approval from the branch manager. II. Obtain essential facts from the customer. III. Obtain a signed options agreement. IV. Enter the initial order. A) II, I, III, IV. B) I, II, III, IV. C) II, I, IV, III. D) I, II, IV, III.
C) II, I, IV, III.
Which of the following orders on the order book will NOT be filled if the stock rises? A) Buy stop. B) Sell limit. C) Sell stop. D) Buy stop limit.
C) Sell stop. Explanation Those orders on the book which are above the current market will be executed if the stock rises. Those open orders above the current market are buy stops (including buy stop limits) and sell limits.
Which of the following governmental bodies receive the least amount of their revenues from property taxes? A) Municipalities. B) School districts. C) State governments. D) County governments.
C) State governments.
When a higher interest rate is predicted for the future, a municipality will issue: A) none of these. B) an intermediate bond. C) a long-term bond. D) a short-term bond.
C) a long-term bond Explanation When interest rates are predicted to rise, a municipality will issue a long-term bond, because it can take advantage of the current lower rate.
Regarding rules addressing acting in concert, each of the following must observe position and exercise limits EXCEPT: A) an investment adviser placing exercise orders for his discretionary accounts. B) an individual with accounts at several brokerage firms. C) a registered representative accepting unsolicited orders to exercise options. D) two or more individuals who have an agreement to act together.
C) a registered representative accepting unsolicited orders to exercise options. Explanation An individual investor or a group of investors acting in concert must observe position and exercise limits. These limits apply to an individual adviser acting for a group of discretionary accounts and to an individual who has accounts with several firms. Acting in concert does not apply to a registered representative (RR) simply accepting exercise order instructions from customers.
The market attitude of an investor with no other position who writes an at-the-money put is: A) bearish/neutral. B) bullish. C) bullish/neutral. D) bearish.
C) bullish/neutral Explanation Writers of puts are bullish. However, an investor who writes an at-the-money put profits even if the market price of the stock does not move (neutral) because the option will expire worthless. The customer also profits if the stock rises out-of-the-money.
An investment adviser's contract must be approved by: A) the FINRA district committee. B) FINRA's National Adjudicatory Council. C) the fund's board of directors or outstanding shares. D) the SEC.
C) the fund's board of directors or outstanding shares.
A customer sells securities and uses the proceeds to buy more securities at the same cost. Under the 5% markup policy, the markup is calculated on: A) each side separately. B) the sell side only. C) the total of both sides. D) the buy side only.
C) the total of both sides.
If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as a: A) closed-end company. B) growth fund. C) unit investment trust. D) utilities fund.
C) unit investment trust.
Which of the following may be affected when a company buys machinery for cash? I. Shareholders' equity. II. Current assets. III. Total liabilities. IV. Working capital. A) II and III. B) I and III. C) I and IV. D) II and IV.
D) II and IV.
Which of the following statements regarding the good faith deposit submitted by interested bidders are TRUE? I. It is usually 1% to 2% of the total par value of the bonds offered. II. It is usually 10% of the total par value of the bonds offered. III. If the bid is unsuccessful, it is returned to the underwriting syndicate. IV. If the bid is unsuccessful, it is retained by the issuer. A) I and IV. B) II and III. C) II and IV. D) I and III.
D) I and III.
Universal variable life policies I. have investment risk that is assumed by the investor II. do not have a separate account III. can be sold by someone with only an insurance license IV. are purchased primarily for their insurance features A) II and III B) III and IV C) I and II D) I and IV
D) I and IV
A customer requests that their broker/dealer hold their fully paid for stock. Which of the following are required? I. A written stock power from the customer II. Full power of attorney from the customer to the broker/dealer III. The securities must be segregated from those of the firm and other customers. IV. The customer must be informed that the securities may be withdrawn by him at any time. A) II and III B) II and IV C) I and II D) III and IV
D) III and IV Explanation The broker/dealer is required to segregate customer fully paid for securities and inform the customer that the securities can be withdrawn at any time.
Which of the following would have the least market risk? A) AAA corporate debentures. B) Corporate or municipal bonds with long-term maturities. C) Fannie Maes. D) Revenue anticipation notes.
D) Revenue anticipation notes.
An investor wants to purchase TCB stock (currently trading at 38), and he expects the price of TCB stock to decline in the short term before rising. If he wants to purchase the stock below its current market value and generate additional income, he could: A) buy a put and exercise the option. B) write a call at 35. C) buy a 40 call and exercise the option. D) write a put at 35.
D) write a put at 35. Explanation If the investor writes a put, he collects a premium. If the stock price rises, the put expires worthless and the investor keeps the premium. However, if the stock price declines as the customer anticipates, the put will force the customer to buy stock at 35. The effective cost of the stock is the breakeven point (strike price minus the premium).
