Practice Exam #8
Customer A and Customer B both have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? 1. Receiving cash distributions may reduce Customer A's proportional interest in the fund. 2. Customer A may use the cash distributions to purchase shares later at net asset value (NAV). 3. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. 4. Due to compounding, Customer B's principal will be at greater risk.
1 & 3 *If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, the customer's proportional interest in the fund will decline. The option to have distributions automatically reinvested allows those purchases to be made at NAV, but a purchase made later would be made at the public offering price like any other new purchase.
Which of the following orders are reduced on the ex-dividend date for a cash dividend? 1. Buy 100 XYZ 60 DNR 2. Sell 100 XYZ 70 3. Sell 100 XYZ 60 STOP 4. Buy 100 XYZ 70 STOP A) III only B) III and IV C) I and II D) II and IV
A
If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax (AMT), which of the following securities should an agent recommend? A) General obligation (GO) bond B) Treasury bond C) Corporate bond D) Industrial revenue bond
A *Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A GO bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT.
A customer purchases $50,000 of bonds at a discount in the secondary market. The bonds mature in 10 years and are callable in five years at par. Under industry rules, the customer's confirmation will show A) YTM B) YTC. C) either the YTM or YTC. D) both the YTM and YTC.
A *With callable bonds, the confirmation must show the lower of the yield to maturity (YTM) or yield to call (YTC). For a bond bought at a discount, the YTM is lower than YTC. On the exam, you will never encounter a call on a bond selling at a discount—it is less expensive to purchase the bond in the open market than pay the call price (which is always at least par).
A corporate offering of 200,000 additional shares to existing stockholders may be made through A) a secondary offering. B) a rights offering. C) a tender offer. D) a warrant.
B
All of the following may be used to verify a customer's identity except A) a valid military ID card. B) a certified birth certificate. C) a valid passport. D) a current drivers license.
B
Which of the following would not be eligible for a tax-sheltered 403(b) annuity? A) Professor at a land grant college B) Student at a private college C) Employee of a county high school D) Custodian at a municipal public school
B
Which of the following can be rolled over into an IRA? 1. Another IRA 2. Balances from savings accounts 3. A corporate profit-sharing plan 4. Judgments from lawsuit settlements A) II and III B) I and III C) I and IV D) III and IV
B: 1 & 3
Which of the following regarding T-bills are true? 1. T-bills trade at a discount to par. 2. T-bills have maturities of 1 to 10 years. 3. Most T-bill issues are callable. 4. T-bills are a direct obligation of the U.S. government. A) II and III B) I and IV C) I and III D) II and IV
B: 1 & 4
All of the following are Trade Reporting and Compliance Engine (TRACE)-eligible and require reporting, except A) corporate bonds. B) collateralized mortgage securities (CMOs). C) new issue primary market securities. D) asset-backed securities (ABS).
C
Cutting Edge Securities is the managing underwriter for a new issue of 1 million shares of ABC common. While the underwriter has agreed to sell as much stock as possible in the market, ABC will cancel the offering if any portion of the stock remains unsold. This arrangement is known as what type of underwriting? A) Standby B) Best efforts C) All or none D) Mini-max
C
An investor has an established margin account with a long market value of $6,500 and a debit balance of $3,750, with Regulation T at 50%. A maintenance call would be triggered if the long market value decreased below A) $8,666.67. B) $2,812.50. C) $4,875.00. D) $5,000.00.
D
An option investor might do all of the following except A) make a closing purchase. B) make an opening sale. C) hedge a short stock position with a long call. D) hedge a long stock position with a short put.
D
From time to time, an investor's situation arises where they may need to liquidate a portion of the portfolio. It could be a medical need, an emergency repair, or a joyous event such as a wedding. Getting the necessary cash would be most difficult from which of the following holdings? A) A listed option B) A unit investment trust C) A mutual fund D) A DPP
D
Obtaining all of the following complies with the regulations regarding customer identification programs except A) name. B) date of birth. C) taxpayer identification number. D) post office box, instead of a physical address, if it is the primary mailing address.
D
Other than the 52-week bills, the U.S. Treasury conducts auctions for Treasury bills A) monthly. B) bimonthly. C) only when the U.S. Treasury Department deems it necessary. D) weekly.
D
The child of one of your recently deceased clients comes to your office with several properly signed stock certificates inherited from a parent. The child does not have an account and wishes to sell the securities. An account is opened for the purpose of the liquidation. Regulation S-P would refer to this child as A) a beneficiary. B) a covered person. C) a customer. D) a consumer.
D
Which of the following are a direct obligation of the U.S. government? A) Fannie Maes B) Government bond mutual funds C) Treasury receipts D) Ginnie Maes
D
One of your customers, age 52, wishes to open an IRA. His annual income is more than $200,000 and consists entirely of income from rental real estate and income from a trust fund. What amount may your customer contribute to his IRA this year? A) $5,500 B) $6.000 C) $7,000 D) $0
D *To open an IRA, a person needs earned income. Income from rental real estate is passive income, while income from a trust fund is portfolio income. This customer has no earned income.
Démodé Classic Investments (DCI) is planning a direct mail campaign to several thousand potential investors. The topic of the campaign deals with owning real estate through direct participation program limited partnerships. Under FINRA Rule 2210 on communications with the public, this is considered A) a retail communication that needs approval, but not filing, by a designated DCI principal. B) correspondence and needs review, not approval, by a designated DCI principal. C) a retail communication and must be filed with FINRA at least 10 business days before first use or publication. D) a retail communication and must be filed with FINRA within 10 business days of first use or publication.
D *a retail communication and must be filed with FINRA within 10 business days of first use or publication.
A customer buys 1 LMB Aug 70 put for 4 and 1 LMB Aug 70 call for 4. The customer will break even at 1. $62 2. $66 3. $74 4. $78 A) II or III B) I or III C) II or IV D) I or IV
D: 1 & 4 *To break even, the customer must recover $800 paid in premiums. On the long 70 call, this occurs if the market price rises to 78. On the long 70 put, this occurs if the market price falls to 62.
Amortization of a municipal bond premium does which of the following? 1. Increases cost basis 2. Decreases cost basis 3. Increases reported interest income 4. Decreases reported interest income A) I and IV B) II and III C) I and III D) II and IV
D: 2 & 4 *Tax law requires municipal bond premiums to be amortized. The effect of amortization is to decrease reported interest income and cost basis. If held to maturity, the cost basis will have been amortized down to par. Therefore, at maturity, there is no reported capital loss.
If LEAPS options positions are maintained for more than 12 months, which of the following statements are true? 1. The LEAPS writer's gains are taxed as short-term gains. 2. The LEAPS writer's gains are taxed as long-term gains. 3. The LEAPS buyer's gains are taxed as short-term gains. 4. The LEAPS buyer's gains are taxed as long-term gains.
1 & 4 *The LEAPS writer's premium is taxed as a short-term gain. The LEAPS buyer took a position for longer than 12 months, so any profits are considered long-term capital gains. The writer's gain is short term because by opening with a sale, a holding period is never established.
An investor wants to invest $20,000 but anticipates needing those funds in five years for a business investment. Currently, with inflation rising, the government is expected to take action to push interest rates up to reduce the money supply. Given these conditions, which of the following securities would be the least suitable for this investor who needs a specific amount of money in five years? A) Zero-tranche collateralized mortgage obligation (CMO) with an estimated five years of life B) Zero-coupon bond maturing in four years C) Corporate bonds maturing in five years D) U.S. Treasury bonds maturing in six years
A
An officer of a broker-dealer firm would be categorized as a restricted person if she attempted to purchase A) a new issue. B) call options on a stock she believed was going down in price. C) a municipal bond in a state where she does not reside. D) closed-end funds on the secondary market.
A
Each of the following would be disclosed to potential municipal bond buyers in the official statement of a new municipal bond issue except A) the disclosure that it was prepared by the underwriters. B) the issue's purpose. C) the source from which interest and principal will be paid. D) the creditworthiness of the issue.
A
QED Corporation, whose common stock is currently selling for $90 per share, is having a rights offering. The terms of the offering require seven rights plus $83 to subscribe to one share of stock. Compute the theoretical value of a right on the ex-rights date. A) $1.00 B) $1.125 C) $0.875 D) $7.00
A Because this is ex-rights (without the rights), the formula does not include the "+1." The formula is (M ‒ S). Plugging the numbers in, we have ($90 ‒ $83) = $7.00 ÷ 7 = $1.00 (N) (7)
A customer writes 1 OEX (S&P 100) Jun 820 call at 13 and buys 1 OEX Jun 830 call at 6 when the index is trading at 826. The breakeven point is A) $823. B) $827. C) $830. D) $826.
B
An investment adviser who switches among investment classes based upon anticipated market changes is using a technique known as A) value investing. B) asset allocation. C) indexing. D) dollar cost averaging.
B
From the viewpoint of a fundamental analyst, which of the following has little, if any, significance? A) A company reporting higher or lower sales B) A company's stock reaching new highs or lows C) A company's CEO resigning D) A company reporting higher or lower earnings
B
If ALFA Securities, a broker-dealer, is a position-trading firm, which of the following statements is true? A) It is violating NYSE rules. B) It is trading for its own account. C) It is acting as a broker for customers. D) It is underwriting securities in the primary market.
B
Most mutual funds have elected to comply with Subchapter M of the Internal Revenue Code. Complying means A) sending shareholders an annual statement of the source and amount of the distributions. B) distributing to shareholders at least 90% of the fund's net investment income. C) requiring shareholders to reinvest at least 90% of the fund's distributions. D) distributing to shareholders at least 90% of the fund's gross investment income.
B
Municipal bonds that are backed by the income from specific projects are known as A) income bonds. B) revenue bonds. C) general obligation bonds. D) debenture bonds.
B
Which of the following characteristics are applicable to real estate investment trusts (REITs)? A) REIT shares cannot be bought or sold in the secondary market and are therefore considered illiquid. B) Dividends from REITs are taxed as ordinary income. C) Any losses from the real estate portfolio flow through to the REIT shareholders. D) REITs have guaranteed minimum dividends.
B
A 5% bond is trading at a premium. Which of the following would be the bond's highest yield? A) Yield to maturity B) Coupon yield C) Dividend yield D) Current yield
B *If a bond is trading at a premium, its coupon rate will represent the highest of its yields. Bonds do not have a dividend yield.
All of the following are suitable objectives for a covered call writer except A) providing downside protection for a long stock position. B) increasing return on a long stock position. C) profiting from an increase in the price of stock. D) speculating that a stock will not rise in price.
C
All of the following statements regarding collateralized mortgage obligations (CMOs) are true except A) CMOs are a derivative security. B) interest payments are distributed pro rata when received. C) interest is paid semiannually. D) principal repayments are applied to earlier tranches first.
C
For the purpose of reporting sales to the IRS, the method available to investors by the IRS that offers the most flexibility in anticipation of the investor's year-end tax needs is A) first in, first out. B) average cost basis. C) share identification. D) none of these.
C
In which of the following investment strategies would it be illegal for a mutual fund's portfolio manager to engage? A) Going long U.S. Treasury bonds B) Liquidating a position in shares of a small-cap company C) Taking a short position in shares of a mid-cap company D) Taking a long position in shares of a large-cap company
C
It would be fair and equitable for a brokerage firm to assign an option exercise notice to a customer A) who last wrote that option. B) with the smallest open position in that option. C) who first wrote that option. D) with the largest open position in that option.
C
Which of the following investment companies is limited to offering investors a single class of common stock representing ownership in the company? A) A closed-end management company B) A face amount certificate company C) A mutual fund D) A unit investment trust
C
Which of the following orders is reduced on the order book on the ex-dividend date for a cash dividend? A) Buy stop limit order B) Sell limit order C) Limit order to buy D) Buy stop order
C
Your client owns stock in the TXR Fund and has received dividends of $950 this year. The client has taken $450 of this and used it to purchase additional shares of TXR. For tax purposes, your client must report A) $500. B) $1,400. C) $950. D) $450.
C *All of the dividends received must be reported. Reinvesting any or all of the money in TXR shares does not reduce the client's tax liability on dividends received.
Which of the following is least important to a municipal bond analyst? A) Debt service to annual revenues B) Tax collection ratio C) Legality of the issue D) Revenue collection record
C *Municipal bond analysts are concerned with the financial aspects of municipal bonds to ensure that they do not default. Various financial ratios and collection records are critical to their analysis. The legality of the municipal issue, as determined by the legal opinion, is important to issuers.
If a customer's margin account shows a long market value of $6,000 and a debit balance of $5,000, the maintenance margin call will be for A) $3,000. B) $2,000. C) $500. D) $1,000.
C *The account equity is $1,000, which is below the minimum maintenance requirements of 25% of market value. The maintenance call will be an amount necessary to bring the account back to minimum, which is $1,500 (25% × $6,000). Therefore, the call will be for $500.
An Eastern account underwriting of $100 million in municipal bonds is established. ALFA Securities agrees to underwrite 10% of the issue and sells out its allotment of $10 million. However, some of the other firms participating in the deal are not as successful, and $15 million worth of bonds remain unsold. What is ALFA Securities' financial obligation? A) $150,000 B) $0 C) Pooled responsibility for $15 million D) $1.5 million
D
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 mortgage yields. B) the safety of the principal invested. C) the yield is always higher than bond yields. D) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices.
D
An investor believes that the U.S. dollar will rise in value against the British pound. To profit with limited risk, which of the following foreign currency option transactions would you recommend? A) Buy British pound calls B) Sell British pound puts C) Sell British pound calls D) Buy British pound puts
D
Which of the following is not considered a short-term investment vehicle? A) Commercial paper B) Negotiable CDs C) Repurchase agreements D) Treasury bonds
D
If an agent is assigned to an account previously handled by an agent who has since left the firm, which of the following actions should the agent take first? A) Verify the account information. B) Liquidate the portfolio for immediate reinvestment in stocks the firm is currently recommending. C) Require the customer to sign a trading authorization naming the agent as the party with authority. D) Suggest the customer buy one of the stocks the firm is currently recommending.
A
SEC Regulation 14E requires that tender offers be open for at least A) 20 business days. B) 10 business days. C) 30 calendar days. D) 15 calendar days.
A
Under NYSE rules, a not-held order A) is good for the day only. B) is a limit order. C) is good til canceled. D) requires discretionary authority from the customer.
A
When a securities professional refers to a bond as a full faith and credit issue, it is A) a general obligation bond. B) a moral obligation bond. C) a special tax bond. D) a revenue bond.
A
Which of the following bonds is most affected by interest rate risk? A) 7.6s of '45 B) 7.3s of '37 C) 7.8s of '42 D) 7.5s of '39
A
How much would the special memorandum account (SMA) price increase if a customer bought $22,000 worth of marginable stock in the existing margin account and fully paid for the transaction? A) $11,000 B) $0 C) $5,500 D) $22,000
A *Assuming the customer paid for the securities in full, he would generate $11,000 in SMA. Because the customer needs to pay only half of the securities' value ($11,000), the additional cash paid ($11,000) would be considered a nonrequired cash deposit and be credited to SMA. Another way to view the transaction is the customer has fully paid securities with a loan value of 50%, or $11,000.
A customer buys a 20-year, 7% bond on a 7.35 basis. The bond is callable in six years at 103, in eight years at 102, in 10 years at 101, and at par beginning in the 12th year. The customer's confirmation will show yield to A) the 20-year maturity. B) the 6-year call. C) the 12-year put. D) the 10-year call.
A *The confirmation of a bond trade must disclose the lower of yield to call or yield to maturity. This bond is being bought at a discount because the basis is higher than the coupon. Because the yield to maturity on a discount bond is lower than the yield to call, this is the yield that will be shown on the confirmation.
In a variable life annuity with 10-year period certain, a contract holder receives A) 10 years of variable payments. B) fixed payments for 10 years, followed by variable payments for life. C) a minimum of 10 years of variable payments, followed by additional variable payments for life. D) variable payments for 10 years, followed by fixed payments for life.
C
Jennifer bought 500 shares of Wolfe Industries common stock on October 1, 2019, at $50 per share. On October 24, 2019, she sold all the stock at $40 per share. On November 12, 2019, she buys 200 shares of Wolfe Industries common stock at $42. How much of a loss will Jennifer be able to claim for 2019? A) $5,000 B) $2,000 C) $3,000 D) $0.00
C
On the morning of the ex-date for a cash dividend, which of the following orders on the order book will not be reduced? A) Buy limit B) Sell stop C) Sell limit D) Sell stop limit
C
Once a variable annuity has been annuitized A) each annuity unit's value is fixed, but the number of annuity units varies with time. B) the number of annuity units is fixed, and their value remains fixed. C) each annuity unit's value varies with time, but the number of annuity units is fixed. D) each annuity unit's value and the number of annuity units vary with time.
C
The type of brokerage account that does not pass assets to other participants at the death of a participant is A) transfer on death. B) community property. C) tenants in common. D) joint tenants with rights of survivorship (JTWROS).
C
With a bearish outlook on the market, an investor would like to purchase something that will generate income now during current bearish conditions but would also be able to take advantage of capital appreciation should market sentiment turn bullish. Which of the following would be a suitable purchase recommendation that puts the investor in a position to do both? A) Cumulative preferred stocks B) Nonconvertible bonds C) Convertible bonds D) Common stock
C
A bank doing which of the following would not be required to register as a municipal broker-dealer with FINRA? A) Underwriting municipal securities for municipal issuers B) Providing investment research regarding municipal securities to public investors C) Holding municipal securities as custodian for public customers D) Engaging in transactions to purchase or sell municipal securities for public customers
C *A bank simply holding municipal securities as custodian for public customers need not register as a municipal securities broker-dealer with FINRA.
A municipal bond dealer gives your firm's trading desk an estimate of a municipal security's market value. This is A) a workable indication. B) a firm quote. C) a nominal quote. D) holding a quote.
C *A nominal, or subject, quotation indicates a dealer's estimate of a security's market value. Nominal quotations are provided for informational purposes only and are permitted if the quotes are clearly labeled as such. A workable indication is usually a firm bid price from a dealer and holding a quote is one that is firm for a specified time.
Although there are general suitability rules that always apply, FINRA's Rule 2330 on variable annuity suitability specifies that, to be considered suitable, there is a reasonable basis to believe that the customer has been informed—in general terms—of various features of A) immediate variable annuities. B) deferred annuities of all types. C) deferred variable annuities. D) single premium variable annuities.
C *FINRA's primary suitability concern is with deferred variable annuities. That does not mean there are no requirements for being careful with the others, it is just that most of the violations have involved the deferred VA.
The Interstate Bridge Authority has an outstanding revenue bond. For the most recent operating period, the Authority has net revenue of $36 million, operations and maintenance expenses of $16 million, debt service requirements of $18 million, and surplus funds of $2 million. The debt service coverage ratio for the Interstate Bridge Authority's revenue bond is A) 1:11:1. B) 1:1. C) 2:1. D) 2.25:1.
C *In the absence of a described revenue pledge (net or gross), the net revenue pledge should be used. This means that the debt is serviced after the expenses for operations and maintenance have been satisfied. The net revenue of the project is revenues after subtracting those expenses. In this question, that is the $36 million figure given. The debt service coverage ratio is determined by dividing the net revenue by the debt service requirement. In this question, the debt service coverage ratio would be 2:1 ($36 million divided by $18 million = 2). If you subtracted the $16 million of expenses because you did not notice that we gave you the net revenue, your ratio was 20 divided by 18 = 1.11 to 1. If you added the surplus (not an expense), your ratio was 18 divided by 18 = 1:1. It is not uncommon to have information in a question that is not needed to arrive at the solution.
The board of directors of DMF, Inc., announces a 5, for-4 stock split. The market price of DMF after the split should decrease in value by A) 25%. B) 30%. C) 20%. D) 10%.
C *The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5-for-4 stock split, the new price should be about four-fifths of the old price. A one-fifth change equals 20% (100% / 5 = 20%).
Which of the following statements regarding callable municipal bonds are true? 1. Call premiums tend to increase over time. 2. Call premiums tend to decrease over time. 3. Call prices are stated as a percentage of the principal amount to be called. 4. Call prices are stated as a percentage of the market value of the bonds to be called. A) II and III B) I and IV C) II and IV D) I and III
A: 2 & 3 *Call premiums tend to decrease over time. The longer a customer has to hold the bond (and receive semiannual interest), the less of a premium an issuer will pay to take away the bond before maturity. Call prices are always stated as a percentage of the principal amount (par) to be called. For example, a call price of 103 means the issuer will pay $1,030 for each bond called.
A customer calls the brokerage firm and turns in an order to buy 400 shares of Oscillate Pharmaceuticals, Inc. The instructions are for the firm to use its best judgement as to the right time to place the order. Which of the following are true about this order? A) It requires written discretionary authorization. B) It is good only for the day entered. C) It may be executed at any price or any time the broker-dealer feels is best. D) It cannot be accepted without a price being specified.
B
A customer has a margin account with a market value of $20,000, a debit balance of $12,000, no special memorandum account (SMA), and Regulation T at 50%. If the customer sells $2,000 worth of stock, the amount released to SMA is A) $500. B) $1,000. C) $300. D) $400.
B
A town's ad valorem tax rate is 20 mills on 60% of the assessed value. Your client owns a property with a market value of $500,000, and the town has assessed it at $400,000. The taxes due on this property are A) $480. B) $4,800. C) $800. D) $8,000.
B
If an investor who has owned FLB stock for two years buys 1 FLB Oct put, this will A) end the holding period and cause any gain or loss to be long term. B) have no effect on the holding period. C) end the holding period and cause any loss to be long term and any gain to be short term. D) end the holding period and cause any gain or loss to be short term.
B
Which of the following statements is true? A) All retail communications require submission to the FINRA Department of Advertising. B) Institutional communications do not require prior principal review if associated persons receive training in the firm's procedures governing institutional communications. C) All retail communications require prior principal approval. D) Institutional communications material always requires prior principal approval.
B
While reviewing a new customer's investment profile, you determine that the customer is willing to tolerate a high degree of risk and does not anticipate utilizing the invested funds for at least 15 years. What would be a suitable recommendation regarding asset allocation for the customer's portfolio, given the customer's risk tolerance and time horizon criteria? A) 25% debt, 25% equities, 25% money market instruments, and 25% real estate B) 70% equities, 20% debt, and 10% money market instruments C) 65% debt and 35% equities D) 45% debt, 45% equities, and 10% money market instruments
B
Your customer wants to know what portion of earnings one of the companies held in her portfolio has available to pay interest expense on bonds the company currently has outstanding. You would be able to find this information A) by contacting the IRS. B) on the firm's income statement indicated as earnings before interest and taxes (EBIT). C) on the firm's most recent balance sheet. D) on a firm's income statement by subtracting preferred dividends from EBIT.
B
All the following would be considered current assets except: A) cash. B) a warehouse. C) inventory. D) marketable securities.
B *Current assets are those that are either cash or expected to generate cash within the next year. Warehouses are fixed assets used for many years.
An agent has recommended investments in the XYZ Fund family to her customers for 10 years. She is referred by one of her customers to a prospect who has inherited $500,000 as the beneficiary of a life insurance policy. The prospect tells the agent he has never invested in the market before, is risk averse, and wants safety of principal to be the first priority, with liquidity second. The agent recommends the following investments: XYZ government bond fund, B shares: $200,000 XYZ large-cap growth and Income B shares: $150,000 XYZ liquid reserve money market: $150,000 The recommendation is A) suitable because it addresses the customer's safety objective. B) unsuitable because it does not address the customer's two primary objectives. C) suitable because she recommended conservative investments. D) suitable because it addresses the customer's liquidity objective.
B *The customer's objectives of safety and liquidity are not satisfied by these recommendations. The government bond fund and large-cap growth and income fund are both subject to market risk and, as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. The back-end load is not consistent with the customer's liquidity objective.
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 total of both sides. C) the buy side only. D) the sell side only.
B *The firm must consider the entire transaction (a proceeds transaction) when calculating the markup.
DJX Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. How many shares of DJX common stock are authorized but unissued? A) 9,000,000 B) 5,000,000 C) 4,000,000 D) 6,000,000
B *This company has 10 million shares of common stock authorized. It has issued 5 million shares. The other 5 million are authorized, but unissued. Treasury stock is authorized and issued stock that is no longer outstanding.
An investor owns ten ABC 6s of 2045. The debentures have a conversion price of $50 with an anti-dilution provision. After ABC distributes a 20% stock dividend, the investor's position will be A) twelve ABC 6s of 2045 with conversion price of $50. B) ten ABC 6s of 2045 convertible into 16.67 shares. C) ten ABC 6s of 2045 with a conversion price of $41.67. D) ten ABC 6s of 2045 convertible into 20 shares plus forty additional shares.
C *This question deals with the anti-dilution provisions of a convertible security. When there is a stock dividend or a stock split, the holder of the convertible maintains the same equity proportion as before. With a conversion price of $50, the debenture is convertible into 20 shares ($1,000 ÷ $50). After a 20% stock dividend, the holder should be able to acquire 20% more shares. That makes the security convertible into 24 shares. Divide the $1,000 par value by 24 shares and the conversion price is now $41.67.
Many mutual fund investors elect to reinvest their dividends into additional shares of the fund. When an investor does this with dividends paid by a common stock fund, A) the additional shares are purchased at the public offering price. B) they are tax free until the shares are sold. C) the dividends are taxable in the year received. D) the investor's cost basis is reduced by the amount of the dividend.
C *Unlike dividends from a municipal bond fund or UIT, which are exempt from federal income tax, dividends from stock funds (or taxable bond funds) are taxable in the year paid, regardless of whether they are reinvested or taken in cash. The test wants you to know that there is no tax advantage to reinvesting distributions. There are other benefits, such as reinvestment at NAV instead of POP, but tax breaks is not one of them. As it happens, when dividends are reinvested, the investor's tax basis increases by the amount of the dividend.
If a U.S. corporation exports machine tools to Switzerland and will be paid in Swiss francs (SF), to protect against foreign-exchange risk, it should A) buy SF calls. B) sell SF puts. C) buy SF puts. D) sell SF calls.
C *What is the concern of this corporation? If, when the Swiss company pays for the tools, the value of the SF has fallen against the U.S. dollar, the company will receive less money. For example, if the bill is for 100,000 Swiss francs and, at the time of the sale, that amount of SF is worth $110,000 (each SF is worth $1.10), a decline in the value of the SF to $1.05 means the exporter will receive $105,000 instead of the expected $110,000. To hedge against a decline value (regardless of the asset), we buy puts. In the case of exporters from the Unitred States, they buy puts on foreign currency. There are two important acronyms to remember, EPIC and IPEC. Referring to U.S. based companies, Exporters buy Puts and Importers buy Calls. Because there are no options on the U.S. dollar, the Swiss company should buy calls on its own currency to hedge In other words, EPIC works in reverse if the question is dealing with a foreign company. Then it is IPEC for Importers buy Puts and Exporters buy Calls.
Customers seeking to open an options account may have the account approved by A) the registered investment adviser managing the client's portfolio. B) the registered representative handling the account. C) the branch manager initially as long as it is subsequently approved by a principal who has a Series 10 registration or is a Registered Options Principal (ROP). D) the branch manager, only as long as they have a Series 10 registration or are a Registered Options Principal (ROP).
C *the branch manager initially as long as it is subsequently approved by a principal who has a Series 10 registration or is a Registered Options Principal (ROP).
A customer purchases a municipal bond in the secondary market with a settlement date of August 1. If the next interest payment is September 1, which of the following statements regarding interest on this bond are true? 1. The bond pays interest on March 1 and September 1 each year. 2. The seller must pay accrued interest no later than settlement day. 3. Accrued interest on this bond is computed using actual days elapsed. 4. On September 1, the buyer will receive from the issuer interest for the period March 1 through August 31. A) I and III B) I and IV C) II and IV D) II and III
B: 1 & 4 *Municipal bond accrued interest is calculated using a 30-day month and a 360-day year, with interest paid every six months. On settlement day, August 1, the buyer will pay the seller five months accrued interest from March 1 through July 31. Then on September 1, the next interest payment date, the buyer will receive payment for the full semiannual interest directly from the issuer.
A customer buys 300 LMN at $45 per share and writes 3 LMN Aug 45 calls at 4. The customer will profit under all of the following circumstances except A) if LMN is between $41 and $45 at expiration. B) if LMN rises, and the calls are exercised. C) if LMN is below $41 at expiration. D) if LMN remains at $45 through expiration.
C
A customer wanting to invest in an oil and gas limited partnership wants to know what her cost basis would be for tax purposes. While there can be a number of variables, cost basis for a limited partner (LP) is best defined as A) noncash contribution plus nonrecourse debt minus recourse debt. B) recourse debt minus cash contributions. C) cash investment made plus recourse debt minus distributions. D) cash investment made minus distributions.
C
A fiduciary acting under the prudent investor rule should recognize that one of the following transactions would not be acceptable or meet the standards of the rule. Which is it? A) Buying sector funds B) Purchasing shares of a tech sector mutual fund C) Writing uncovered calls D) Purchasing BBB-rated debentures
C
A municipal bond dealer is making a bona fide quote. Which of the following statements regarding such a quote is true? A) The quote cannot represent an offer to sell bonds that the dealer does not currently own. B) The quote may not take into consideration any anticipated market movement. C) The quote must have a reasonable relationship to fair market value. D) The quote need not be one that the dealer is prepared to act upon (buy or sell).
C
All of the following statements regarding the risks of investing in an oil and gas limited partnership are true except A) income programs have fewer tax benefits than exploratory programs. B) development programs may involve acquisition of expensive leases. C) development programs have higher risk than exploratory programs. D) wells may not have sufficient reserves to return drilling costs.
C
An investor seeking income combined with a conservative level of risk would purchase A) junk bonds. B) unrated income bonds. C) AA-rated mortgage bonds. D) AAA-rated convertible debentures.
C
Both mutual funds and hedge funds are pooled investment vehicles managed by a professional money manager. As their registered representative, one of your customers asks you to explain how these investment vehicles are different. You inform them that A) mutual funds use more aggressive investment strategies. B) mutual funds and hedge funds are equally liquid. C) hedge funds are less liquid than mutual funds. D) hedge funds are more liquid than mutual funds.
C
A customer has realized a capital gain from the sale of a municipal bond. To reduce her tax liability, the capital gain can be offset against a capital loss in which of the following investments? 1. General obligations 2. Equity securities 3. Corporate bonds 4. Collateralized mortgage obligation A) I and II B) I and III C) I, II, III, and IV D) II and III
C: 1, 2, 3, & 4. *Any capital loss will offset a capital gain.
When analyzing a direct participation program investment, a method that takes into account the revenues and expenses is A) liquidity analysis. B) fundamental analysis. C) technical analysis. D) cash flow analysis.
D
Which of the following securities issue is nonexempt, requiring registration under the Securities Act of 1933? A) Treasury bonds B) Debt instruments with maturities of 270 days or less C) Municipal bonds D) Corporate bonds
D
Which of the following would least likely occur when a corporation engaged in a rights offering? A) The corporation would use a standby underwriter. B) The number of outstanding shares would increase. C) After successful completion of the offering, the market price would decline slightly. D) After successful completion of the offering, the market price would rise slightly.
D
A direct participation program shows the following operations results: -Revenues: $3 million -Operating expense: $1 million -Interest expense: $200,000 -Management fees: $200,000 -Depreciation: $3 million -The profit or loss for the year is A) a profit of $1.6 million. B) a profit of $2.7 million. C) a loss of $3 million. D) a loss of $1.4 million.
D *Taxable income for a partnership is determined as follows: Gross revenue: $3 million less operating expense: $1.2 million equals net revenue: $1.8 million less interest: $200,000 less depreciation: $3 million equals taxable loss: $1.4 million
All of the following municipal securities are quoted on a yield basis except A) serial bonds. B) tax anticipation notes. C) secured bonds. D) term bonds.
D *Term bonds, or dollar bonds, are quoted like corporate bonds as a percentage of par. All other municipals are quoted in basis.
The Bond Buyer's revenue index is which of the following? A) A daily balance of municipal revenue bond prices B) A daily composite average of municipal revenue bond yields C) Yields of municipal revenue bonds with 20 years to maturity D) Yields of municipal revenue bonds with 30 years to maturity
D *The Bond Buyer's revenue index is an average yield of 25 revenue bonds with 30 years to maturity.
If an indenture has a closed-end provision, this means A) additional issues have no lien on the revenue stream. B) the bonds must be called before maturity. C) a sinking or surplus fund must be established. D) additional issues will have junior liens.
D *These additional issues are also known as junior lien bonds. Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility.
An investor purchases a U.S. Treasury bond put option. The option is in the money on the last trading day and the investor exercises the put. Which of the following statements is correct? A) On the settlement date, the investor will pay cash in the amount of the intrinsic value. B) The investor will sell the option for its intrinsic value. C) On the settlement date, the investor will deliver the bonds and receive cash in the amount of the intrinsic value. D) On the settlement date, the investor will receive cash in the amount of the intrinsic value.
D *Yield-based options settle in cash. The settlement amount is the intrinsic value. When an investor holding a put option exercises, the debt security is, in essence, being sold to (put to) the writer of the option. Instead of physical delivery of the bonds, settlement is made in cash. It is quite possible the investor will simply sell the option for its intrinsic value. That isn't the correct answer to this question because you are told the investor exercises the put.
