Practice 6
A corporate bond is quoted at 102⅝. A customer buying 10 bonds would pay
$10,262.50. Ex: Par ($1,000) × 102% = $1,020. Five-eighths of one bond point ($10) equals 0.625 times $10 equals $6.25. Therefore, the quote reading 102⅝ equals $1,026.25 per bond ($1,020 + $6.25). Because we are told the customer is buying 10 bonds, we multiply $1,026.25 by 10 bonds, which equals the amount the customer will need to pay to make the entire purchase: $10,262.50.
Your firm is a member of an underwriting syndicate for an issue of municipal bonds. The municipal syndicate release terms letter states that the bonds are being offered net, with a two-point concession and a half-point additional takedown. If your firm sells $100,000 of these bonds to a retail customer, it will receive a credit of
$2,500. Ex: A syndicate member receives the bonds net of the total takedown (which consists of the concession plus the additional takedown). Therefore, the bonds are taken by the syndicate net of 2½ points (2.5% × $100,000 = $2,500).
A margin account customer buys 100 shares of HEX at $70 and writes a HEX Oct 70 call for a premium of 8. What must he deposit? (Regulation T is 50%.)
$2,700 Ex: The normal call would be 50% of $7,000, or $3,500. In this example, subtract the premium of $800 that the customer received. (Remember, in a covered call situation, no margin is required for the call.)
Morgan Pierce has recently opened a new margin account. The initial purchase was for 100 shares of KAPCO common stock at $120 per share. A week later, KAPCO stock is trading at $90 and Pierce is concerned about receiving a call for additional funds. You respond that a margin maintenance call would be issued once the price of the KAPCO shares falls below
$80 per share. Ex: The purchase of $12,000 of stock on margin results in a debit balance (DR) of $6,000. Computing the point to which an account's value can decline before reaching the minimum maintenance level is done by dividing the debit balance by 0.75. $6,000 divided by 0.75 = $8,000. With 100 shares, that is $80 per share.
Which of the following affects the holding period of XYZ stock, a position that has been held for six months?
- Buying an in-the-money put - Buy an out-of-the-money put
An initial Regulation T margin call may be met by depositing
- cash equals to the call. - listed marginable securities with a loan value equal to the call.
A broker-dealer can rehypothecate (repledge) up to
140% of the debit balance in a customer's margin account. Ex: In a margin account, hypothecation is the pledging of customer securities as collateral for the margin loan the customer will receive. The broker-dealer repledges (rehypothecates) the securities as collateral to the lending bank. Broker-dealers are permitted to pledge up to 140% of the debit balance in the customer's account.
If a customer has a margin account with a long position worth $20,000 and a debit balance of $8,000, what is the purchasing power of this customer's account?
4,000 Ex: The account has $12,000 of equity. If 50% of the market value is $10,000, the account has $2,000 of excess equity. When Regulation T is 50%, the purchasing power of excess equity is 2:1.
An inverted head and shoulders formation would mean which of the following to a chartist?
A reversal of a downtrend Ex: To chartists, head and shoulders formations indicate the reversal of market trends. An inverted formation would forecast the reversal of a downtrend. A head and shoulder's top formation would forecast the reversal of an uptrend.
Which department in a brokerage firm handles payments for securities transactions?
Cashiering
Excess equity and SMA
Excess equity creates SMA in the account. Excess equity is created when the stock in a margin account moves in a favorable direction. In the case of a short margin account, the equity goes up as the market value of the securities goes down. In the case of a long account, a decline in the market value causes the equity to decrease. The purchase of securities in a long account may decrease SMA if SMA is used to meet the margin call. If not, SMA remains the same; it does not increase. Withdrawing cash will cause the SMA to go down if the funds are withdrawn from the SMA. Otherwise, the SMA remains the same; it does not increase.
The holder of a variable annuity receives the largest monthly payments under which of the following payout options?
Life annuity Ex: Life annuity has the largest payout because less risk is assumed by the insurance company; there is no beneficiary in the event the annuitant dies.
An investor opens the following options position: Long 1 KAP Jul 50 call @ 4½ and short 1 KAP Jul 45 call @8¼. What is the investor's maximum gain, maximum loss, and breakeven point?
Maximum gain = $375; maximum loss = $125; breakeven point = $48.75.
Each of the following are generally used to service state general obligation bond issues except A) real estate taxes. B) income taxes. C) sales taxes. D) motor vehicle license fees.
Real estate taxes Ex: State-issued municipals are backed by state revenues, including sales and income taxes, as well as fees for state-issued licenses and permits. States do not normally levy property (real estate) taxes. Real estate taxes—known as ad valorem taxes—are typically levied by local municipalities such as cities and counties.
All of the following terms are associated with the holder of an option except A) buyer. B) owner. C) long. D) seller.
Seller Ex: The seller of an option contract, put or call, is not the holder of the option. The holder of an option is also known as the buyer. Buyers have a long position in the option, making them the owner of the option. As buyers, they pay the premium for the option. The seller of the contract is the writer of the option and has a short position. The writer of the option receives the premium the buyer pays.
Strips
are Treasury bonds with the coupons removed. STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.
The main purpose of dividend reinvestment in a mutual fund accumulation plan is to
compound the growth of a mutual fund investment. Ex:Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. Taxes are due on dividends whether or not they are reinvested. Capital gains or losses will occur whether or not dividends are reinvested. The purchase of additional shares with reinvested dividends may increase the capital gain or loss in proportion to the dividends reinvested. Avoiding commissions or sales charges is not the main rationale for reinvesting dividends, even though sales charges are not applied to reinvested dividends.
A registered representative of a FINRA member firm uses her personal smartphone to send a client a text message about a security in the client's portfolio. This practice is
considered an electronic communication and must be reviewed by a principal. Ex: Although many member firms do not permit use of personal devices, that is a firm's decision, not a FINRA rule. When permitted, a single message like this is considered correspondence delivered electronically. As with all correspondence, review by a principal is required. This review may be on a pre- or post-use basis. A text message sent to more than 25 persons within a 30-day period becomes retail communication.
Under FINRA rules, members are prohibited from soliciting votes from limited partners in connection with a proposed rollup unless any compensation to be received by the member
does not exceed 2% of the value of the securities to be received in the exchange. Ex: In connection with a DPP rollup, member firms may not solicit votes from limited partners unless the compensation is 2% or less. The 10% limitation is the maximum compensation in the sale of a DPP. The 15% limitation is the maximum percentage of the gross proceeds of a DPP that may be used for the organization and offering expenses. The 5% is likely an attempt to make you think about the FINRA 5% markup policy. That does not apply to DPPs.
Annuities vs mutual funds
only annuities. variable and fixed, have payout plans that provide the client income for life. If the holder selects the straight life option, payments (although not the amount in the case of the VA) are guaranteed to continue until dealth. One could even have payments after death by choosing a period-certain payout (ie.,10-year certain) where payments continue after death should the holder die before the 10 years is over. They both have the advantage of professional management, whether it is the mutual fund portfolio or the variable annuity separate account. Because the investor's money is invested in the "market", the risk that the investment will underperform or even lose money, is that of the investor. In the case of a mutual fund, shareholders vote at the annual meeting for the fund's board of directors. Likewise, holders of units in a variable annuity have the right to vote for the board of managers. Both also have the right to vote on a change in investment objectives.
Yield-based options expire on
the last day of trading. Ex: Yield-based options expire like stock options—on the third Friday of the expiration month, which is the last day of trading.
A registered representative of a FINRA member firm is going to present a seminar on retirement planning. It will be a slide show, and no specific advice will be given. The expected attendance is approximately 50 people. Under the FINRA rule on communications with the public,
the slides are considered a retail communication and need principal approval before first use. Ex: Under the FINRA rule on communications with the public, it is only an unscripted presentation that needs no principal approval. The use of slides changes things, and once more than 25 individuals will see them within a 30-calendar-day period, those slides are retail communications. As such, principal approval is required. Because the question states that no specific advice will be given, suitability of recommendations is irrelevant. However, all presentations at seminars should consider the nature of the audience and keep the presentation at the appropriate level.
Each of the following securities trade and interest except A) Treasury bonds. B) zero coupon bonds. C) negotiable CDs. D) municipal revenue bonds.
zero coupon bonds. Ex: Trading and interest means trading with accrued interest. Debt instruments that pay interest periodically (e.g., municipal bonds or Treasury bonds) trade with accrued interest.
