Mock Exam 6

A customer sells 3 ABC Feb 25 puts at 4 when ABC is at 24. If the contracts are closed out at intrinsic value when ABC is at 19, the customer has a: $200 gain. $600 gain. $600 loss. $200 loss.

$600 loss. Because the investor sold the puts for a total of $1,200 to open his position, he must buy the options to close out his position. If he buys back the puts when ABC is at 19, the intrinsic value at that time is 6 because puts are in-the-money when the market price is below the strike price (25 − 19 = 6). He pays a total of $1,800 to close out his 3 contracts and, because he paid more than he received, incurs a loss of $600. Reference: 4.2.8 in the License Exam Manual

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days? 0.04. 0.03. 0.05. 0.01.

0.01. Rule 144 (sale of restricted or control stock) allows for the sale of 1% of the outstanding shares or the weekly average of the last 4 weeks' trading volume (whichever is greater), every 90 days. Reference: 7.6.2.4 in the License Exam Manual

If a customer buys 500 shares of ABC at 48 and writes 5 ABC 50 calls at 2, what is the maximum loss? 23000. Unlimited. 4600. 1000.

23000. The investor pays $48 per share for the stock and receives $2 for selling the calls. The maximum loss is $48 per share minus the option premium collected, or ($48 − $2) × 500 shares = $23,000. Reference: 4.3.2 in the License Exam Manual

A self-employed individual has 2 full-time employees and makes the maximum allowable contribution to his own Keogh (HR-10 plan). What percentage of each employee's earned income must he contribute to their plans as eligible employees? There is no requirement to contribute to the employees' plans 15% 10% 25%

25% When a self-employed individual makes the maximum contribution to his own Keogh (HR-10 plan), he must contribute 25% of any eligible employees' earned income to their plans. Reference: 11.3.1 in the License Exam Manual

In a margin account, if a client purchases $15,000 of LMN preferred shares, $15,000 of money-market mutual fund shares, and $2,500 of call options, what is the Regulation T call? 17500. 16250. 32500. 25000.

25000. The amounts that must be deposited are: $7,500 for the preferred shares, $15,000 for the mutual fund, and $2,500 for the options. Mutual fund shares cannot be hypothecated for 30 days and option purchases are never marginable. Reference: 6.1.3.1 in the License Exam Manual

The real value of property within the city limits is $100 million. The city uses a 50% assessment rate. A 10 mill tax rate will provide tax revenues of: 500000. 5000. 50000. $1 million.

500000. 1 mill = $.001. 10 mills = .01 (10 X .001). $100 million × 50% assessment rate = $50 million. $50,000,000 X .01 = $500,000. Reference: 3.1.2.1.2 in the License Exam Manual

The following chart shows the capital transactions of ABC Corporation. Date Event Amount 10-19-96 Initial Offerings 6 million shares 4-1-2000 Treasury Purchase 500,000 shares ABC wants to raise additional capital by selling 2 million shares through a rights offering and engages an underwriter on a standby basis. By the expiration date, ABC was only able to sell 1 million shares to existing shareholders. After expiration, how many shares does ABC have outstanding? 8 million. 7.5 million. 7 million. 6.5 million.

7.5 million. Before the rights offering, the company had 5.5 million shares outstanding (6 million issued minus 500,000 Treasury shares). In connection with the offering, ABC engages a standby underwriter that commits to purchase any unsold shares. Therefore, regardless of the number of shares initially subscribed to, all 2 million shares will be sold. Reference: 1.7.1.1 in the License Exam Manual

Which of the following callable municipal bonds trading on a 7% basis is most likely to be called? 6.5% coupon, callable at 105 in 2010. 7.5% coupon, callable at 105 in 2010. 7.5% coupon, callable at 100 in 2010. 6.5% coupon, callable at 100 in 2010.

7.5% coupon, callable at 100 in 2010. An issuer will call the higher coupon bonds before calling the lower coupon bonds. Of the two bonds with coupons of 7.5%, the one with the lower call price will likely be called first. Reference: 3.4.1.1 in the License Exam Manual

Regarding a bond's duration, which measures the time it takes for a bond to pay for itself, which of the following statements is TRUE? A zero coupon bonds duration is equal to its maturity Interest bearing bonds have no measurable bond duration A zero coupon bonds duration is less than the bonds maturity For interest bearing bonds duration is greater than the bonds maturity

A zero coupon bonds duration is equal to its maturity A zero coupon bonds duration is equal to its maturity. For interest bearing bonds duration is less than the bond's maturity. Reference: 15.3.3.2 in the License Exam Manual

If a Nasdaq market maker is selling stock to a customer from inventory and the firm has held the shares to be sold for several months, what price should the dealer use as a basis for a markup? Price at which it purchased the securities. Offer price shown in the electronic "OTC Pink" on the day of the current sale. Broker/dealer's own current offer price. Best offering price quoted in the interdealer market.

Best offering price quoted in the interdealer market. FINRA rules require that a dealer's markup to a customer be based on the current market rather than the dealer's cost in an active, competitive market. The dealer's potential loss on inventory is considered to be a risk of making a market. Reference: 8.10.2.1 in the License Exam Manual

If IDBs are called because of condemnation, this would be covered under which of the following clauses in the bond indenture? Defeasance. Refinancing. Catastrophe. Refunding.

Catastrophe. Condemnation is considered a catastrophe and only applies to revenue bonds. Reference: 3.1.2.2.4 in the License Exam Manual

If a couple has a long-term growth objective and is willing to accept a reasonable amount of risk, which of the following mutual funds is most suitable for them? Corporate bond fund. Municipal bond fund. Money market fund. Common stock fund.

Common stock fund. A common stock fund will help the couple meet their long-term growth objective. Reference: 10.5.1.1 in the License Exam Manual

Which of the following types of retirement plans would be most beneficial to a young employee of a corporation? Defined contribution pension plan. Keogh plan. Profit-sharing plan. Defined benefit pension plan.

Defined contribution pension plan. The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years to go in the workforce, so the investments made with the defined contributions will have a maximum time period to grow. Reference: 11.5.2 in the License Exam Manual

Which of the following statements regarding a Rule 144 sale of restricted stock are TRUE? I. Stock sold through a 144 sale is considered registered stock after the sale. II. After holding the stock for 6 months, nonaffiliates may sell unrestricted. III. After holding the stock for 6 months, there are no volume restrictions for affiliates. IV. Form 144 must be filed with the SEC at least 10 business days before a 144 sale made by an affiliate. I and III. III and IV. I and II. II and III.

I and II. Stock sold through a 144 sale is considered registered stock after the sale. When required to be filed by affiliates or insiders, Form 144 must be filed with the SEC on or before the date of sale. After holding the stock fully paid for 6 months, nonaffiliates may sell unrestricted but affiliates are subject to the volume restrictions of Rule 144. Reference: 7.6.2.4 in the License Exam Manual

Which of the following positions violate the rules governing position limits? (Assume SSS stock is subject to a 100,000 option position limit.) I. Long 50,000 SSS Aug 40 calls; short 55,000 SSS Aug 40 puts. II. Long 50,000 SSS Aug 40 calls; short 55,000 SSS Jan 40 puts. III. Long 50,000 SSS Aug 40 calls; short 30,000 SSS Jan 40 calls. IV. Long 50,000 SSS Sep 40 puts; short 45,000 SSS Sep 40 calls. I and II. II and III. III and IV. I and IV.

I and II. The expiration dates and strike prices may be different or the same. However, the total number of contracts on the same side of the market is limited to 100,000 for this stock; long calls and short puts are on the same side of the market (the bull side); short calls and long puts are on the same side of the market (the bear side). Reference: 4.6.1.5 in the License Exam Manual

In a municipal underwriting, the scale is I. used by the syndicate to determine the bid on a new issue. II. a list of the yield or prices at which the bonds will be offered to the public. III. used by the syndicate to determine the allocation priority of orders. IV. only used when underwriting term bonds. III and IV. I and II. I and IV. II and III.

I and II. The scale, or reoffering scale, represents the prices and/or yields at which new issue securities are offered for sale to the public by the underwriter. The syndicate uses this scale to determine its bid on the issue. Reference: 3.2.5 in the License Exam Manual

Compared to defined contribution plans, defined benefit plans give the highest return to employees who: I. are highly compensated. II. receive lower compensation. III. have fewer years until retirement IV. have many years left until retirement II and IV. I and IV. II and III. I and III.

I and III. Highly compensated employees who have fewer years until retirement will experience advantages over other employees with this type of plan. Their retirement benefits are predefined and generally linked to the compensation level they attained while employed. After a short time with the company, a person may qualify for benefits comparable to those it would have taken many years to attain under a defined contribution plan. Reference: 11.5 in the License Exam Manual

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 and III. II and IV. I and IV. II and III.

I and 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. Reference: 3.2.3.1 in the License Exam Manual

The Trade Reporting and Compliance Engine (TRACE): I. requires that both sides of a transaction report the trade. II. requires only the sell side of a transaction report the trade. III. is a reporting system for corporate bonds trading in the OTC market. IV. is an execution system for corporate bonds trading on exchanges. II and III. I and III. I and IV. II and IV.

I and III. The Trade Reporting and Compliance Engine (TRACE) is the FINRA approved trade reporting system for corporate bonds trading in the OTC secondary market. It is not an execution system. Both sides of a TRACE eligible transaction are required to report a trade when it occurs. Reference: 2.11.1.1 in the License Exam Manual

A married couple with a two-year-old child wants a suitable investment to help meet the financial obligations for the child's college education. Which of the following choices are the most suitable alternatives? I. A CMO tranche scheduled to mature in 5 years II. A STRIP scheduled to mature in 15 years III. Treasury receipts IV. A money-market fund II and IV II and III I and III I and IV

II and III STRIPs and treasury receipts are forms of zero-coupon bonds. STRIPs are backed in full by the US government and treasury receipts by the financial institutions that issue them. Purchased at a discount and maturing at face value in the future, they are suitable investments for those wishing to save for anticipated expenses such as college tuition sometime in the future. A CMO maturing in five years doesn't align with the time horizon for this child's college education and carry other unsuitable risks. A money market fund would hardly meet the growth requirement needed to meet college tuition needs. Reference: 2.6.1.4.1 in the License Exam Manual

When comparing exchange-traded funds (ETFs) to mutual funds, some features available in ETFs that are NOT found in the mutual funds would include the ability to: I. correlate to a specific index. II. sell short. III. be bought and sold on margin. IV. represent an entire portfolio, or basket of securities. III and IV. I and IV. I and II. II and III.

II and III. Unlike mutual fund shares, ETF shares can be traded on margin and sold short. They are similar in that they both represent an entire portfolio or basket of securities and both can have portfolios correlated to a specific index. Reference: 10.1.1.3.4 in the License Exam Manual

Which of the following terms refer to municipal bond underwritings? I. Standby. II. Best efforts. III. Preliminary prospectus. IV. Firm commitment. I and III. II and III. I and IV. II and IV.

II and IV. Negotiated municipal underwritings can be performed on a firm commitment, best efforts or all-or-none basis. Standby underwritings are used only for corporate underwritings. The term preliminary prospectus, or red herring, refers to a corporate underwriting. In a municipal underwriting, the issue is described in the official statement or, if prepared, a preliminary official statement. Reference: 3.2.5.0.1 in the License Exam Manual

The Fed is making purchases in the open market. What are the effects of this action? I. The money supply will become tighter. II. The federal funds rate is likely to go down. III. Bank reserves are likely to decrease. IV. Bond prices are likely to rise. II and III. II and IV. I and III. I and IV.

II and IV. When the Federal Reserve Board purchases securities in the open market, money flows into the economy. Because there is more money available, interest rates such as the federal funds rate are likely to fall. When interest rates fall, bond prices rise. Reference: 14.2.1.2.1 in the License Exam Manual

The amount paid in excess of par value on the sale of common shares by an issuer is reflected in which of the following accounts on the corporate financial records? In the capital stock. In the paid-in surplus. In the earned surplus. In the retained earnings.

In the paid-in surplus. Paid-in surplus, or capital surplus, is the excess over par value that investors pay for stock on its original issue. Generally, par value on common stock is a matter of record for accounting purposes. Reference: 14.6.1.3.2 in the License Exam Manual

A 3% bond with 20 years to maturity is being issued by a syndicate with a reoffering yield of 4%. What is the term used to describe this bond? High-yield bond. Original issue premium. Secondary market discount. Original issue discount.

Original issue discount Because the bond is being issued by a syndicate, it is a new issue (i.e., an original issue). Because the yield (4%) is higher than the coupon (3%), it is an original issue discount. Reference: 15.5.7.2 in the License Exam Manual

Which of the following types of municipal bond issues is associated with a flow of funds? School district bond. Revenue bonds. TANs. General obligation bonds.

Revenue bonds. The flow of funds only relates to municipal revenue bonds. It describes the priority of disbursing revenues from the project. TANs are backed by taxes to be collected, while GO bonds are backed by the issuer's taxing authority. School districts are funded by GO bonds. Reference: 3.1.2.2.4 in the License Exam Manual

Your broker/dealer is not self-clearing but instead is an introducing broker/dealer. Therefore all extension requests made to your broker/dealers SRO on behalf of customers would be made by: Any party who represents the customer such as an attorney. The broker/dealer. The broker/dealers clearing agent. The customer.

The broker/dealers clearing agent. While extension requests are gotten on behalf of customers, the request to the SRO cannot come directly from the customer or anyone representing them. For self-clearing broker/dealers, the extension request will come from the broker/dealer. However, for introducing firms, those that do not clear their own trades, the request comes from the clearing agent. Reference: 6.1.5 in the License Exam Manual

ABC Inc. has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-1 stock split? The market price of the stock would double. The retained earnings would be decreased by $10 million. The par value would decrease to $5 per share. . The number of shares outstanding would decrease by 50%.

The par value would decrease to $5 per share. . A stock split results in more outstanding shares at a lower par value per share. The total value of stock outstanding is unchanged. Retained earnings are not affected by a stock split. Reference: 1.2.4.1 in the License Exam Manual

ABC Corporation has outstanding a 7-¾% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is TRUE? To profit in this situation, the investor should buy the stock and short the bonds. An arbitrage opportunity does not exist in this situation. The bond is at parity with the stock. To profit in this situation, the investor should buy the bonds and short the stock.

To profit in this situation, the investor should buy the bonds and short the stock. With a conversion price of $40, the bond is convertible into 25 shares of ABC common stock ($1,000 / $40 = 25 shares). As the common stock is currently trading at $45 per share, the value of the stock as converted would be $1,125 (25 shares × $45 = $1,125), which is greater than the current price of the bond ($1,020). Therefore, the bond and the stock are not at parity. An investor could profit in this situation by shorting the stock and buying an equivalent number of bonds. A bond could be purchased for $1,020 and immediately converted into stock worth $1,125, a risk-free profit opportunity. Reference: 2.5.2.5 in the License Exam Manual

A municipal finance professional (MFP) is employed by a municipality to oversee the issuance of municipal bonds an employee of the MSRB specializing in seeing that broker/dealers adhere to the MSRB rules and regulations regarding the sales of municipal bonds to retail customers an elected official of a municipality having some decision-making authority regarding new municipal bond issues an employee of a broker/dealer engaged in municipal security representative activities other than retail sales or who solicits municipal securities business for the broker/dealer

an employee of a broker/dealer engaged in municipal security representative activities other than retail sales or who solicits municipal securities business for the broker/dealer As per the Municipal Securities Rulemaking Board (MSRB) a municipal finance professional (MFP) is an associated person of a broker/dealer who is primarily engaged in municipal securities representative activities other than retail sales to individuals, who solicits municipal securities business for the broker/dealer, or who is in the supervisory chain above MFPs as described. Reference: 3.5.1.0.2 in the License Exam Manual

The market attitude of an investor with no other position who writes an at-the-money call is: bearish/neutral. bearish. bullish. bullish/neutral.

bearish/neutral. Writers of calls are bearish. However, when an investor writes an at-the-money call, the investor profits even if the market price of the stock does not move (neutral) because the option will expire worthless. The customer profits to the same degree if the stock falls out-of-the-money. Reference: 4.2.2 in the License Exam Manual

Debt normally issued by big corporations with reliable credit ratings who seek to finance short-term needs best describes: T-bills. step-up CDs. revenue anticipation notes. commercial paper.

commercial paper. Also known as promissory notes this is the definition of commercial paper. They are short-term corporate issued instruments sold at a discount and maturing at par. Reference: 2.10.2.4 in the License Exam Manual

An employer-sponsored retirement plan that pays a specific benefit to participants at their normal retirement age is a: supplemental employee retirement plan. section 401(k) plan. defined benefit plan. defined contribution plan.

defined benefit plan. A traditional defined benefit plan promises to pay a specific benefit to a participant at his normal retirement age as specified by the plan document. Reference: 11.5.1 in the License Exam Manual

A corporation must have stockholder approval to: repurchase 100,000 shares of stock for its treasury. issue convertible bonds. declare a 15% stock dividend. declare a cash dividend.

issue convertible bonds. Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholder's proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its treasury, declaration of a stock dividend, and declaration of a cash dividend. Reference: 1.2.3.1 in the License Exam Manual

A supplemental liquidity provider is located on the exchange trading floor and is required to be available if needed to make a two-sided market throughout the trading day located on the exchange trading floor and is required to maintain a two sided market at least 10% of the trading day located off floor and is required to maintain a bid or offer at least 10% of the trading day located off floor and is required to maintain a bid or an offer throughout the trading day

located off floor and is required to maintain a bid or offer at least 10% of the trading day A supplemental liquidity provider is located off floor and is required to maintain a bid or an offer at least 10% of the trading day. Reference: 8.4.1.1.1 in the License Exam Manual

A customer creates a long straddle by buying 5 ABC Nov 50 calls and 5 ABC Nov 50 puts paying premiums of $3,750. If ABC is at 56.50 at expiration, the customer has a: gain of $500. loss of $1,000. gain of $1,000. loss of $500.

loss of $500. While the puts would expire, the customer may close out the calls by selling them at 6.50 (56.50 − 50) for $3,250 (6.50 × 5 × $100). The result is a loss of $500 ($3,750 − $3,250). Reference: 4.4.2.1 in the License Exam Manual

If a company issues $10 million in par value convertible debentures, all of the following balance sheet items will be affected EXCEPT: liabilities. assets. net worth. working capital.

net worth. Net worth is not affected by the issuance of long-term debt because it does not represent ownership. Assets will be affected (increased) by the issuance of long-term bonds. Liabilities will be affected (increased) by the amount of the issuance. Working capital will also increase. Reference: 14.6.2 in the License Exam Manual

A customer, concerned about a possible pull-back in XYZ stock, instructs his broker, to "Sell my XYZ stock if it falls to 40, but I don't want less than 39.75 for my shares." The broker should enter a: market order to sell. sell stop order. sell limit order. sell stop limit order.

sell stop limit order. A sell stop limit order would be appropriate (sell 100 XYZ 40 stop 39.75). Once the price of XYZ trades at or through (below) 40, the order is elected and becomes a limit order to sell at 39.75 or better (higher). Reference: 8.4.2.4.3 in the License Exam Manual

In a rising market, all of the following strategies are appropriate EXCEPT: debit call spreads. long calls. short stock/short put. short puts.

short stock/short put. Investors who short stock have sold borrowed shares, and profit when the market price declines. Reference: 4.3.4 in the License Exam Manual

Registered corporations are required to file certain reports with the SEC. All of the following statements regarding those reports are true EXCEPT: copies of the annual report must be sent to shareholders of record. the audit may be performed by the corporation's Chief Financial Officer. the financial statements must be audited. the annual report contains both a balance sheet and income statement.

the audit may be performed by the corporation's Chief Financial Officer. An independent auditor must perform the audit. Reference: 16.1.2 in the License Exam Manual

All of the following statements regarding government and agency securities are true EXCEPT: they are considered safer than corporate debt securities. interest paid is always subject to federal income tax. they are always directly backed by the federal government. they are authorized by Congress.

they are always directly backed by the federal government. Only GNMAs are directly backed by the federal government. FNMAs and FHLMCs are only indirectly backed but are still considered less risky than corporate debt. All are subject to federal taxation, and all were authorized by Congress. Reference: 2.6.2 in the License Exam Manual

All of the following are covered under the Securities and Exchange Act of 1934 EXCEPT: trust indentures. proxy solicitation. margin. short sales.

trust indentures. Trust Indentures are covered under the trust indenture act of 1939. Reference: 7.1.1.2 in the License Exam Manual

When a customer enters a sell order and the customer is in possession of the certificates, a broker/dealer must determine all of the following EXCEPT: whether the client can make delivery promptly . whether the transfer agent has accepted the securities. the location of the securities. whether the securities are in deliverable form.

whether the transfer agent has accepted the securities. A firm must make an affirmative determination and be reasonably sure the client can make prompt delivery. Conversely, approval of the transfer agent is not a factor when accepting a sell order. Reference: 9.1.1.1 in the License Exam Manual