Mock Exam 2

If a customer purchases $10,000 worth of stock in a cash account on Monday, May 15, under Regulation T how much must the customer deposit, and when must the deposit be made?

$10,000 no later than Monday, May 22. -Under Regulation T, payment in a cash account must be made in full within 5 business days of the trade date.

Your client writes 2 ABC November 220 calls at 5, and buys 200 shares of ABC common stock at $220 in his margin account. What is the breakeven point for each covered call position?

215 -The breakeven point for covered call writing is the cost of stock purchased less the premium (220 − 5).

Which of the following may NOT normally assign authorization to a third party?

A fiduciary -Assigning authorization to a third party is giving away the fiduciary authority that had been legally assigned to someone else. This is not permitted. In some instances, custodians of an account may delegate specific investment decision authority to a third party, but that authority must not be left unsupervised by the fiduciary.

Which of the following factors will NOT increase SMA in a customer's short margin account?

An increase in current market value -An increase in current market value will cause a loss of equity in a short account. Short sellers hope markets go down. SMA represents excess equity.

Which of the following persons must sign a stock or bond power to effect good delivery of securities sold from an account set up under the Uniform Transfer to Minors Act?

Custodian -The custodian must sign securities in a custodial account to effect good delivery.

A bond convertible at $50 is selling at 105% of parity, while the common stock has a current market value of $45. What is the market value of the bond?

Each $1,000 bond would allow conversion into 20 shares of stock ($1,000 divided by $50). Parity is 20 × $45 (CMV) or $900; 105% of parity is $945.

Leveraged index funds I.can be exchange-traded (ETFs) II.can never be exchange-traded (ETFs) III.can be inverse or reverse funds IV.can never be inverse or reverse funds

I & III

If a customer buys 5 ABC Jan 40 puts and writes 5 ABC Jan 45 puts, which of the following statements are TRUE? I. The customer profits if the spread widens. II. The customer profits if the spread narrows. III. The customer is a bull. IV. The customer is a bear.

II & III -Because a put is a right to sell, the premium on the 45 puts is higher than that of the 40 puts. The customer is writing the put with the higher premium, so this is a credit spread and the bullish investor will profit at expiration if the difference between the two premiums narrows as the contracts lose value.

The interest from which of the following bonds is subject to federal income tax?I. State of Nebraska. II. City of Duluth. III. Treasury notes. IV. FNMA.

III & IV Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax.

Which of the following bonds may be secured by a leaseback arrangement?

Lease-rental bonds. -Certain revenue bonds, called lease-rental bonds, are secured by a leaseback arrangement. For example, the state may set up an agency to construct a new office complex to house all state agencies. This authority issued the bonds. Once the facility is built, the state leases the complex from that authority. The bonds are backed by the lease payments.

In a contested proxy (proxy contest) solicitation, all those soliciting proxies from shareholders must register with

SEC -In a contested proxy solicitation all those soliciting proxies from shareholders must register with the Securities Exchange Commission (SEC).

The sale of securities in a restricted margin account affects all of the following EXCEPT:

SMA, debit balance, market value -Equity is not affected unless the customer elects to withdraw half the proceeds of the sale.

All of the following must be part of a registration statement EXCEPT:

identification of investors who own 5% or more of the company. -The registration statement must identify investors who own 10% or more of the company.

All of the following are required to be registered with the SEC EXCEPT:

insurance companies offering fixed annuities to investors.

A member of a $5 million Eastern account that has a $500,000 participation fails to sell $200,000 of bonds. At the close of the offering, if $1 million of bonds remains unsold, the member must take down:

100000 -In an undivided (Eastern) syndicate, each member is responsible for its portion of the offering regardless of how many bonds it has already placed. If the member was liable for 10% of the issue's original dollar value, it is committed to take down 10% of any bonds remaining unsold (10% of $1 million equals $100,000).

Which of the following is NOT good delivery for 470 shares of stock?

2 100-share certificates and 3 90-share certificates. -Shares must add up to 100 or be in multiples of 100, with the exception of odd lots.

Which of the following ratios is normally considered adequate coverage of interest and principal charges for a municipal revenue bond?

2 TO 1 Generally, a sound debt service (interest and principal) coverage ratio for municipal revenue bonds is 2 to 1. In other words, $2 of revenue is collected for every $1 of debt service.

Which of the following statements regarding a death in a tenants in common account are TRUE?I. The decedent's interest in the account goes to his estate. II. The decedent's interest in the account goes to the remaining tenant. III. The member firm must freeze both the account and acceptance of orders until the required documents are presented. IV. The member may immediately accept orders from the remaining tenant.

I & III -If one party in a TIC account dies, the decedent's interest in the account goes to his estate, not to any other party to the account. The member firm must freeze the account and acceptance of all orders until the required documents are presented.

Which of the following are TRUE of the GO "Bond" Index?I. It includes only GO bonds. II. It includes both GO bonds and revenue bonds. III. It is computed weekly. IV. It is computed monthly.

I & III -The Bond Buyer Index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, each with approximately 20 years to maturity. The index is updated each week.

To determine the winning bid on an NIC (net interest cost) basis, an issuer will do which of the following? I.Add any premium to total interest cost. II.Subtract any premium from total interest cost. III.Add any discount to total interest cost. IV.Subtract any discount from total interest cost.

I & III Interest cost to the issuer is reduced by any premiums received by the issuer when the bonds are initially sold or is increased by any discounts the issuer must accept when the bonds are initially sold. Reducing interest cost by the amount of any premium received or increasing interest cost by the amount of the discount the bonds are sold at, is how the issuer will arrive at the net interest cost (NIC).

Which of the following are characteristics of negotiable (sometimes referred to as jumbo) CDs? I.Issued in amounts of $100,000 to $1 million. II.Always FDIC insured to face value. III.Always mature in 1 to 2 years. IV.Trade in the secondary market.

I & IV -Negotiable jumbo CDs are issued for $100,000 to $1 million and trade in the secondary market. Most jumbo CDs are issued with maturities of less than a year. The FDIC insures up to $250,000 per account.

Assuming ABC is subject to a 60,000 contract position limit, which of the following customer accounts are in violation of the exchange's position limits? I. Long 35,000 ABC January calls; long 30,000 ABC January 08 LEAP calls. II. Long 35,000 ABC March calls; long 30,000 ABC March puts. III. Long 35,000 ABC March calls; short 30,000 ABC January 08 LEAP calls. IV. Long 35,000 ABC March calls; short 30,000 ABC March puts.

I & IV -The maximum limit for ABC is 60,000 contracts on the same side of the market. The upside is long calls and short puts; the down side is long puts and short calls. LEAPs are included in the calculation.

Which of the following are required to be given to retail customers at settlement in municipal new issue transactions? I. Confirmation showing the purchase price. II. Official statement. III. Names of syndicate members with their participation amounts. IV. Copy of the agreement among underwriters.

I and II. -MSRB rules state that a confirmation and an official statement must be sent to the investor no later than at settlement.

Which of the following securities are exempt from the registration and disclosure provisions of the Securities Act of 1933? I. Any interest in a railroad equipment trust certificate. II. Municipal bonds. III. U.S. government securities. IV. Commercial paper maturing in 270 days or less.

I, II, III and IV. -All the securities listed are exempt from the registration and disclosure provisions of the Securities Act of 1933.

In March, a customer sells 1 ABC Oct 50 put for 3 and buys 1 ABC Oct 60 put for 11. The customer will experience a pretax profit from these positions if: I. the difference between the premiums narrows to less than $8 II. the difference between the premiums widens to more than $8 III. both puts are exercised at the same time IV. both puts expire unexercised.

II & III -This debit spread becomes profitable if the spread widens between the premiums. Credit spreads are profitable if the spread narrows between the premiums. If both puts are exercised, the spread is profitable. If the short 50 put is exercised, the customer buys the stock and sells it for 60 by exercising the long 60 put ($1,000 profit − $800 premiums = net $200 profit).

SEC regulation SHO mandates a locate requirement for short sales that is applicable to I. corporate bonds. II. NYSE issues. III. Nasdaq securities. IV. Municipal bonds.

II & III This regulation mandates a locate requirement: before the short sale of any equity security, firms must locate the securities for borrowing to ensure that delivery will be made on settlement date.

Which of the following accurately depicts communications with the public designated as correspondence? I.Review by a principal must occur before use II.Review by a principal can occur either before or after use in accordance with the firm's written procedures III.Filing with FINRA is required IV.Filing with FINRA is not required

II & IV Correspondence review by a principal can occur either before or after use in accordance with the firm's written procedures. Filing of correspondence with FINRA is not required.

Which of the following trade actively in the secondary market? I.Open-end funds. II.Closed-end funds. III.Unit investment trusts. IV.REITs.

II & IV II & IV -Closed-end funds and REITs trade actively in the secondary market. Open-end funds and unit investment trusts do not trade in the secondary market; instead, shares are redeemed by the issuer.

Which of the following is true regarding exchange traded funds (ETFs)? I.The SEC has classified them as mutual funds. II.The SEC has classified them as a type of open-end fund. III.They have operating costs and expenses that are higher than most mutual funds. IV.They have operating costs and expenses that are lower than most mutual funds.

II and IV -The SEC has classified exchange traded funds as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds.

Two conservative customers in their 50s are interested in preserving principal and high-current income from their investments. In which order, from first to last, are the following bonds ranked in meeting your customer's needs? I.A1 Fort Worth Gas 9¼s of '25. II.AA+ San Antonio Transit 9¼s of '25. III.Aaa Texas Telecom 9¼s of '25. IV.AA- Dallas Electric 9¼ of '25.

III, II, IV, I. -Because the maturity and coupon rates are all the same, we can rank the bonds by rating. Based on the ratings given, the highest-quality bond is the Texas Telecom, rated Aaa, followed in order by the bonds rated AA+, AA-, and A1.

All of the following are regulated by the MSRB EXCEPT:

Issuers -Quotes, dealers, and sales representatives are regulated by the MSRB; issuers are not.

In which of the following situations must a broker/dealer registered with the SEC under the Act of 1934 also be registered as an investment adviser under the Investment Advisers Act of 1940?

It charges a fee specifically for investment advice.

If a customer buys a Mt. Vernon Port Authority municipal bond in the secondary market at 109 and holds the bond to maturity what are the tax consequences?

No capital gain or loss. -The investor's cost basis of bonds purchased at a premium is adjusted by amortization of the premium. In this case, there is a $90 premium that will have been completely amortized at maturity. At maturity the adjusted cost basis equals the face value and no loss or gain is realized.

Last-sale information is always available for all of the following securities EXCEPT

OTC, non-Nasdaq -Last-sale information is available for listed (exchange traded) securities and for all Nasdaq securities. While there are a number of sources for last sale information in general, it may not always be available for a security that is OTC non-Nasdaq.

Which of the following mutual funds should an investment adviser representative recommend to a corporate client whose objective is current income with moderate risk?

Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.

Which of the following statements regarding a discretionary account is NOT true?

Securities in a discretionary account may not be rehypothecated. -No limits are placed on the rehypothecation of securities in an account based solely on its discretionary status. Both cash and margin accounts may be discretionary.

The writer of a combination expects the market to be:

Stable -The writer, or seller, of a combination expects the market to be stable. The buyer of a combination expects the market to be volatile. Combinations and straddles are never bullish or bearish, as there are always both calls and puts involved in the strategy, which are both bullish and bearish. Remember, the definition of a combination is a put and a call on the same underlying security with the strike prices and/or the expiration months being different.

If an investor in the 27% federal marginal income tax bracket invests in municipal general obligation public purpose bonds nominally yielding 4.5%, what is the tax equivalent yield?

The formula for computing tax equivalent yield is: nominal yield divided by (1 − federal marginal income tax rate) .045 / (1 − .27) = 6.16%.

One of your customers has maintained a traditional IRA for the past 15 years. Some of his annual contributions were not tax deductible due to his income level and participation in another qualified plan. At age 60, the customer elects to make a lump-sum withdrawal. Which of the following statements is TRUE?

The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. -All earnings, whether from deductible or nondeductible contributions, are tax deferred. Therefore, all earnings are taxable as ordinary income on withdrawal. Only the nondeductible contribution is returned tax free.

Which of the following statements best describes banker's acceptances?

They are used primarily to finance imports and exports. -Banker's acceptances are used primarily to finance imports and exports. They are short-term time drafts with a specified payment date drawn on a bank—essentially lines of credit.

A customer purchases New York State GOs at a discount in the secondary market. The bonds mature in 10 years and are callable in 5 years at par. Under MSRB rules, the customer's confirmation will show

With callable municipal bonds, the confirmation must show the lower of the YTM or YTC. For a bond bought at a discount, the YTM is lower than YTC.

An underwriting spread is the:

difference between an offering price and the proceeds to an issuer.

ADRs are used to facilitate the:

domestic trading of foreign securities -An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.

All of the following statements regarding a transfer on death (TOD) account are correct EXCEPT:

estate taxes are reduced. -A TOD account avoids probate, but not estate taxes. The owner of the account may change beneficiaries and their percentages as he wishes. The TOD account is an account at a specific broker/dealer and only relates to the assets in that account.

A variable-rate municipal bond investment's main advantage is that:

its price should remain relatively stable. -A variable-rate bond has no fixed coupon rate. The coupon is tied to a market rate (for example, T-bond yields) and subject to change at regular intervals. Because the interest paid reflects changes in overall interest rates, the bond price remains relatively close to its par value. Its coupon is always representative of the current market rate. As rates rise, the coupon is adjusted upward. As rates fall, the coupon is adjusted downward.

All of the following are suitable objectives for a covered call writer EXCEPT:

profiting from an increase in the price of stock. -Covered call writers sell stock at the strike price if exercised. This strategy provides downside protection to the extent of the premium received, increases the rate of return on a long stock position (because of the premium collected).

Equipment trust certificates are commonly issued by:

transportation companies. -Equipment trust certificates are corporate bonds commonly issued by transportation companies, such as railroads and airlines. These bonds are backed by equipment (e.g., aircraft) the issuer uses in their business.

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as a:

unit investment trust. -A UIT issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded.