Q&A Test 9 (Part 2)
A customer wants to purchase a security that invests primarily in private companies that have difficulty raising capital in public markets. Which of of the following investments would you recommend?
A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.
Morris Investments, a private equity firm, is engaged in a leveraged buyout deal to purchase Simon Entertainment Group. The fundamental financing for the deal will consist mostly of:
A leveraged buyout (LBO) involves the one company (typically a private equity firm) acquiring another company and primarily utilizing debt to finance the purchase. The assets of the company being purchased or acquired are generally used as collateral for the borrowed funds. This type of acquisition allows the acquiring company (the private equity firm) to make the purchase without using a significant amount of its own equity. In many circumstances, since a large amount of borrowed funds are being used to make the purchase, the securities being issued may be non-investment-grade.
How long after a new issue is registered for sale will it be shown on the Nasdaq system?
A new issue will appear on the Nasdaq system on the effective date of the issue. The effective date, which is determined by the SEC upon completion of the registration process, is the first date that the securities may be sold to the public.
Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the:
A variable-rate demand obligation (VRDO) can be redeemed prior to maturity on any date the interest rate on the obligation is reset. Rates can be reset on a monthly, weekly, or daily basis. The obligation will be redeemed at par value plus accrued interest.
Which of the following securities are considered nonexempt according to the Securities Act of 1933?
Nonexempt securities are those that are subject to the registration requirements of the Securities Act of 1933. Securities of a publicly held finance company are the only nonexempt securities. All of the other securities listed are exempt from the registration requirements of the Securities Act of 1933.
A retail salesperson has helped his firm win the role as the lead underwriter for a local municipal bond issue. If the underwriting is being conducted on a negotiated basis, which of the following statements is TRUE?
Since the retail salesperson has helped his firm obtain negotiated municipal bond business, he is defined as a municipal finance professional (MFP). A two-year look-back period applies to any political contributions that are made by municipal finance professionals. If a person has made contributions to a political candidate that would have resulted in a violation of MSRB Rule G-37 (contributing more than $250 to a candidate for whom he is entitled to vote), the firm that employs the person is subject to the underwriting ban, but only if the person was employed in the role of an MFP within two years of the contribution. A retail salesperson is not required to register as a Municipal Securities Principal and is permitted to solicit elected officials of municipal bond issuers as long as the person does not contribute more than $250 to the official for whom he is entitled to vote.
An investor has recently rolled over his 401(k) into an IRA at your firm. Which of the following securities will be MOST suitable if the investor wanted diversification and a higher return?
Since this is a tax-deferred (retirement) account, the municipal security would not be suitable and, since the investor wants a higher return, the Treasury note would not be the best choice. Although either REIT may be suitable, the hybrid REIT is a better choice since the investor wants diversification. There are three types of REITs: mortgage REITs which provide funds to real estate owners in the form of lending them funds (i.e., a mortgage), equity REITs which own and operate income producing real estate (for example, apartment buildings, commercial property, shopping malls and other types of retail property, and vacation resorts), and hybrid REITs, which invest in both of these ventures. By purchasing a hybrid REIT, the investor can take advantage of buying a security that invests in actual equity ownership of real estate as well as investing in an interest-rate-sensitive security such as a mortgage REIT.
A registered representative is using a social networking site that permits real-time communication. FINRA would BEST define this type of communication as a(n):
Social media sites that permit real-time communication or interactive, electronic forums fall under the guidelines of a public appearance, according to FINRA. Examples include Facebook, Twitter, and LinkedIn. Most firms do not permit their RRs to use these types of systems to communicate with customers to conduct business because they are not able to monitor the sites. Correspondence is any oral or written communication distributed or made available to 25 or fewer retail investors.
Mr. Jones purchases a Canadian dollar September 85 call option for a premium of .82. At what price (spot rate) would the Canadian dollar need to be trading in order for Mr. Jones to exercise the option and break even? (Assume 10,000 Canadian dollars per contract.)
The breakeven formula for call buyers is the strike price plus the premium. The strike price is 85 (0.8500) and the premium is .82 ($0.0082). Therefore, the spot rate for the Canadian dollar would need to be $0.8582 for Mr. Jones to break even.
A customer writes an XYZ June 60 straddle for a 5-point premium. At expiration, the market price of XYZ is 50 and the put side is exercised. The customer then sells the stock that was put to her at the current market price. The customer has realized a:
The customer has received a total of $5 in premiums or $500 for the straddle. The call side of the straddle expires, but the put is exercised. The writer must buy the stock at $60 per share (the exercise price). The stock is then sold at the $50 market price, which results in a $1,000 loss ([$60 - $50] x 100 shares). However, since the customer initially received a premium when she wrote the straddle, the loss is only $500 ($1,000 loss from exercising the put - $500 premium).
Which TWO of the following metrics can be calculated by examining the balance sheet statement of a company? I.The earnings before interest and tax (EBIT) II.The debt-to-equity ratio III.The operating profit margin IV.The amount of working capital
The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). Working capital is found by subtracting current liabilities from current assets. All of these numbers may be found in a company's balance sheet. EBIT and the operating profit margin can be calculated by examining the income statement.
Calculate the SMA for the following margin account. Long Account Short Account $150,000 Market Value $45,000 Market Value $50,000 Debit Balance $75,000 Credit Balance
The formula for calculating SMA is: Actual equity - Reg T Requirement = SMA •The equity in the long account is $100,000 ($150,000 LMV - $50,000 DR). •The equity in the short account is $30,000 ($75,000 CR - $45,000 SMV). •Total equity is $130,000. •The Reg T requirement for the long account is $75,000 ($150,000 LMV x 50%). •The Reg T requirement for the short account is $22,500 ($45,000 SMV x 50%). •The total Reg T requirement is $97,500. The combined SMA is, therefore, $32,500 ($130,000 Actual equity - $97,500 Reg T requirement).
The quarterly dividend of ABC company is 32 1/2 cents. The market price is $24.00 a share. What is the current yield?
The formula for computing current yield (also known as the dividend yield) is: Annual Dividend / Market Price of the Stock Since the quarterly dividend is 32 1/2 cents, the annual dividend is $1.30 (32 1/2 x 4 = $1.30). $1.30 divided by the $24 market price equals 5.41%.
Place the following ratings in the proper order from highest to lowest. I.A II.Aa III.Aaa IV.Baa
The highest Moody's rating is Aaa followed by Aa, A, and Baa.
The provisions for the flow of funds of a revenue bond issue appear in the:
The indenture contains all the agreements and covenants pertaining to a bond issue, and also contains the provisions for the application and allocation of funds of a revenue bond.
Which of the following terms relates to the graph that is used to determine optimal portfolios resulting from a comparison of risk and return?
The key to this question is the reference to the term graph. According to the Modern Portfolio Theory, a graph of optimal portfolios can be created on what is referred to as the efficient frontier. As for the wrong answers, the yield curve (choice a) represents the plotting of a bond's yield against the length of time until its maturity. Duration (choice c) measures the sensitivity of a bond's price due to small changes in interest rates. Alpha (choice d) is a form of risk-adjusted return for an asset.
A customer in his early 50s who recently received a sizeable bonus has an investment objective of maximizing his tax-free income. He has two children attending college. Which of the following choices would be the BEST method of investing the funds?
This customer is seeking to maximize his tax-free income and would like to invest in different types of municipal securities. A portfolio of 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds would be suitable for this investor. There is no reason why a small percentage (20%) cannot be invested in high-yield municipal bonds. Choice (b) contains equities and Treasury Inflation-Protected Securities (TIPS), which are taxable, fixed-income securities. Choice (c) also contains taxable, fixed-income securities (corporate bonds and Treasury bonds) as well as short-term municipal securities (tax anticipation notes). Since the customer's children are already attending college, the tax-free growth available with a 529 plan would not be advantageous or a suitable investment when seeking tax-exempt income.
Under which of the following situations may two municipal securities dealers form a joint account and publish a quote in the secondary market?
Two or more municipal securities dealers may form a joint account in order to purchase and distribute a large block of securities and spread the risk of the transaction in the secondary market. However, these dealers are only permitted to display one single quote on any position that they jointly hold. Both new issue and secondary joint accounts may only operate according to an account agreement that contains details regarding the takedown and concession. A good faith deposit only relates to new issues, since it is the amount that the syndicate gives to the issuer along with its bid.
According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased?
Under industry rules, the following items MUST be obtained when opening an account. 1. The customer's name and residence 2. Whether the customer is of legal age 3. The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account 4. If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity The name of the beneficiary is not required when opening an account.
A customer owns an AMF October 30 call option. If AMF should split 2 for 1, the customer will own:
When a stock splits 2 for 1 (an even split), the number of contracts increases and the strike price is reduced proportionately. The number of shares representing each listed option remains at 100 shares. The customer will now have 2 calls for 100 shares each at the adjusted strike price of $15 or 2 AMF October 15 calls for 100 shares each of AMF. Listed options are adjusted for stock splits, stock dividends, and rights offerings, but are not adjusted for cash dividends.
Which of the following proxy rules is TRUE regarding customer securities held in street name by a brokerage firm?
A publicly held company must provide a means for shareholders who cannot attend company meetings to vote on important matters. This is done through a proxy, which is a delegation of the shareholder's vote. The corporation will send the proxy to all stockholders of record who can then cast their votes without attending the meeting. When stock is held in street name (i.e., in the name of the brokerage firm), the corporation sends the proxy to the brokerage firm, which is the stockholder of record on the corporate books. The brokerage firm sends the proxy to the customer and the corporation then pays the additional expenses. The SEC regulates the solicitations of proxy material.
When opening a new account, what is the order in which the following actions take place? I.Determining customer suitability II.Obtaining a signed options agreement III.Entering the initial order IV.Obtaining approval from the ROP
When opening an account, the first step is to obtain the essential facts regarding the customer's investment objectives and financial means in order to determine suitability. The account is then approved by the ROP and the initial order is entered. The member firm has 15 days to obtain the signed options agreement.
An investor purchased a municipal bond at a discount. If the investor holds the bond to maturity, a gain will be considered: I. Tax-free interest if the bond is an OID II. A capital gain if the bond is an OID III. Ordinary income if the bond is not an OID IV. Tax-free interest if the bond is not an OID
For an OID (original issue discount), the discount is considered interest. Because this is a municipal bond, the interest is tax-exempt. For a non-OID (a secondary market discount), the discount is reported as ordinary income.
A registered representative wants to open a new account for a client who is a resident of Mexico. Which TWO of the following statements are TRUE? I.Customer verification of the client's personal information is not required if the customer was referred by an existing client II.Customer verification of the client's personal information is required under any circumstances III.The client may have either a taxpayer identification number or a passport number and country of origin IV.The client must have a taxpayer identification number to open the account
If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its AML procedures under its customer identification program (CIP). For non-U.S. citizens, the firm must obtain the client's name, address, date of birth and one of the following: passport and country of issuance, taxpayer identification number, or any other government issued document with a photograph. An RR always needs to verify the client's personal information regardless of whether the customer was referred by an existing client.
If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be:
If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be a capital loss at the time the option expires.
A customer contacts his registered representative to purchase a security in a custodial account. The RR executed the transaction in the custodial account of the son, but the customer wanted to purchase the security in the account for her daughter. Which of the following actions should be taken?
If a transaction is executed but the wrong account is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, an error is made using the correct customer but transferred to a different account (e.g., a wrong custodial account or a joint account instead of an individual account).
An investor who is currently in the 15% tax bracket receives a promotion that puts her in the 33% tax bracket. If an RR offers to sell her a 3.75% tax-free municipal bond, what yield would the investor need in a taxable bond to receive the same after-tax yield as the municipal bond?
If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is now in the 33% tax bracket. (The 15% rate is no longer relevant). The municipal bond has a yield of 3.75%. 3.75% (Municipal Bond Yield) / 67% (100% - 33%) = 5.60% Equivalent Taxable Yield
If the federal tax exemption for municipal bond interest were eliminated, expectations are that yields on newly issued municipal bonds would:
If the tax-exempt status were eliminated, yields on newly issued municipal bonds would need to increase to compete with the higher yields of non-tax-exempt bonds.
When comparing variable annuities to fixed annuities, investment risk is assumed by the: I.Investor in a variable annuity II.Annuity company in a variable annuity III.Investor in a fixed annuity IV.Annuity company in a fixed annuity
In a fixed annuity, the annuity company guarantees a fixed monthly payment. The company, therefore, must invest the monies and assume the investment risk. In a variable annuity, the annuity company makes no guarantee. The company will invest the investor's money and the investor's annuity benefits will depend on the value of the investments. The investor, therefore, assumes the investment risk.
Which of the following choices would be found in the subscription agreement for a direct participation program (DPP)?
In order to purchase an interest in a direct participation program, the investor must complete the subscription agreement. It will specify who is required to sign the agreement. The other choices given are found in the offering documents.
Andrew, a client of yours, anticipates that the value of the U.S. dollar is weakening in relation to the euro and decides to purchase 10 March 95 euro call options at 1.30 when the spot price is 95.55. The contract size of each euro contract is 10,000. Andrew is required to deposit:
In order to take advantage of the anticipated increase in the value of the euro, Andrew is purchasing 10 euro calls at a premium of 1.30. Euro options are quoted in cents per unit, so the decimal must be moved two places to the left to convert the quote to dollars ($.0130). To calculate the cost of the euro call, multiply the contract size (10,000) times the dollar value of the premium ($.0130). 10,000 x $.0130 = $130 Since Andrew is purchasing 10 options, the total cost is $1,300
During a period of stable interest rates, which bond has the most potential to show a significant change in price?
The key to this question is to recognize that if interest rates are stable, then most bond prices will experience little movement. However, to identify the bond that is still expected to fluctuate the most, find the answer that is the most unique. In this question, the convertible debenture may still experience a significant change in price based on the changing value of the underlying equity (i.e., the security into which the bond may be converted). For example, if the value of the underlying stock increases, the value of the bond will also increase to keep the bond's price in the vicinity of conversion parity. Parity is achieved when the value of the bond is equal to the value of the common stock which is able to be obtained at conversion.
A broker-dealer receives a confirmation for a trade that does not appear on its records. The broker-dealer should send a DK notice to:
A DK notice is sent to the contrabroker upon receipt of the confirmation for an uncompared trade. The broker-dealer sending the DK notice states that the trade does not appear on its records and, therefore, denies any responsibility for the settlement of the trade unless the contraparty can prove that the trade did indeed take place.
A municipal broker's broker will MOST likely participate in which of the following activities?
A broker-dealer may ask another firm to assist it in buying or selling municipal bonds in the secondary market. The firms that provide this assistance are referred to as broker's brokers and they deal exclusively with other brokerage firms and banks. Broker's brokers do not underwrite new issues, carry inventory positions, or deal with public customers. Instead, they act as agents when buying and selling for brokers and dealers, receive commissions for the services they provide, and preserve the anonymity of their customer.
A municipal bond trader does NOT:
A municipal bond trader is not involved in underwritings of new issues.
The additional bonds covenant for a revenue bond is found normally in the:
All protective covenants for a revenue bond are found in the bond's indenture. Also included in the indenture are the rights and obligations of the issuer and the bondholders. The official notice of sale contains the information and procedures necessary for syndicates that wish to bid on a competitive issue of bonds. The syndicate agreement is a contract among the underwriters that defines their working relationship and addresses such items as the priority of orders and sharing of the underwriting spread. A prospectus is a disclosure document for issues that are registered under the Securities Act of 1933. Municipal revenue bonds are exempt from that Act.
A customer in her late 40s, who is currently in the 15% tax bracket, has recently inherited $6,000,000. She informs you that she considers herself a conservative investor and wants your advice in investing the inheritance. Which of the following choices would be the BEST method of investing the funds?
Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor's age as a guide to the percentage of the investor's portfolio that should be allocated to equities. As such, a 50% allocation in equities is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return to this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds to a money-market fund. Having 100% of the funds in equities or fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best mix of investing the funds.
Lindsay Depaul is a client seeking a balance between income and capital growth. Which of the following investment strategies MOST closely achieves this goal?
An investor seeking income and capital growth would want her assets allocated evenly between equity and fixed-income investments. Choice (b) has a 60%/40% mix of equity and fixed-income. Choice (a) is 100% fixed-income, choice (c) is 100% equity, and choice (d) is 80% equity and 20% in fixed-income.
A registered representative is sending an email to 20 individual investors. This is defined as a(n):
FINRA's Communications with the Public Rule defines different types of communication. • Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. • Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. • Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. • Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn). Since the e-mail is being sent to 25 or fewer individual (retail) investors, it is defined as a correspondence. It makes no difference whether the investors have an account with the RR or the member firm.
The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of Depaul Corporation stock at $70 per share and makes the necessary deposit. If the stock increases in value to $78 per share and later declines to $67 a share, how much SMA would the customer have in the account?
First, determine the amount of the debit balance. If the customer purchased $70,000 worth of stock at a 50% margin requirement and deposited $35,000, the debit balance is $35,000 ($70,000 market value - $35,000 margin requirement = $35,000 debit balance). Depaul increased to $78 per share, making the market value $78,000. The equity increases to $43,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $39,000 (50% of $78,000) from the actual equity in the account, $43,000. The SMA is, therefore, $4,000. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increases in value can create excess equity (SMA). However, if these securities later decline in value, this will not decrease SMA.
Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?
If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock that it owns (70% is excluded). The company would need to add $30,000 (30% of $100,000) to its taxable income. The total taxable income, therefore, is $2,030,000. The tax liability is $690,200 ($2,030,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.
Mr. Jones buys an XRX October 50 put when the market price of XRX is also $50 per share, and pays a premium of $5. If XRX declines sharply and Mr. Jones exercises the put, what is the maximum profit Mr. Jones can have?
If the stock became worthless, Mr. Jones could then buy 100 shares and put it (sell it) to the writer for the $50 per share strike price, which equals $5,000 ($50 x 100 shares = $5,000). Mr. Jones would then make a profit of $5,000 minus the $500 premium paid for the put, which would be $4,500. The $4,500 is the maximum profit Mr. Jones could have since the stock could go no lower than zero.
Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as:
Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as unit investment trusts (UITs). Investors can receive a reduced sales charge if they purchase a certain amount of a UIT.
Which of the following choices is NOT allowed under MSRB rules?
MSRB rules prohibit gifts in excess of $100 per year to a person other than an employee or partner of the gifting individual, if such payments or services are in relation to the municipal securities activities of the employer or the recipient. (Therefore, a Christmas gift to the client valued at $125 would not be allowed.) However, costs incurred for business lunches or hotel accommodations for clients at business seminars are business expenses and are allowed as long as they are not frequent or excessive.
Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)?
Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.
Municipal serial bonds are priced on the basis of
Municipal serial bonds are quoted on a yield-to-maturity basis. Municipal term bonds are quoted on the basis of a dollar price.
Which of the following securities assist in financing importing and exporting operations?
Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt), which facilitates the trading of foreign securities in U.S. markets. Eurodollar certificates of deposit pay interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and are not used to finance importing and exporting operations.
Which of the following choices would be LEAST suitable for an investor seeking liquidity?
Of the choices listed, the hedge fund would be the least suitable since it does not offer liquidity. Hedge funds are not subject to the same regulations for requiring access to their funds as are mutual funds. The shares are not redeemable on a daily basis and are not suitable for an investor requiring a certain degree of liquidity. The preferred stock and REIT are exchange-traded and may be sold at any time.
A registered representative is the owner of a marina on the North Shore of Long Island. She wants to build an apartment complex on this property in order to increase the property's cash flow. If she receives a loan from family members, which of the following statements is TRUE?
Registered individuals may not borrow money from, or lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures permitting such activity and satisfying one of the following provisions. 1. The customer and the registered person are immediate family members. 2. The customer is a financial institution regularly involved in the business of extending credit or providing loans. 3. Both parties are registered with the same firm. 4. The loan is based on a personal relationship between the customer and the registered person. 5. The loan is based on a business relationship independent of the customer-broker-dealer relationship. If the loan is based on provision 1 (borrowing from family members), firm notification or firm approval is not required. If the conditions indicated in provisions 3, 4, or 5 apply, the firm must approve the lending activity prior to the execution of the loan.
A registered representative has a dispute with his firm over compensation. This dispute will be resolved by:
Registered representatives agree to arbitrate any disputes with their employer, with the exception of statutory discrimination and harassment claims.
Which of the following individuals are NOT permitted to trade on the floor of the NYSE?
Registered representatives of a broker-dealer are not permitted to trade on the floor of the NYSE.
If a broker-dealer is preparing sales literature on CMOs, which TWO of the following statements is TRUE? I.The term collateralized mortgage obligation must be included within the name of the product II.The basis point spread that a client will receive in interest above a comparable Treasury security must be included III.The lower of the yield-to-call or yield-to-maturity must be included IV.The backing of a government agency only applies to the face value of the securities
Retail communications (e.g., sales literature) and correspondence that relate to collateralized mortgage obligations (CMOs) are subject to special rules. The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the backing of a government agency only applies to the face value of the securities (not any premium paid). In other words, if the client paid a premium to purchase a CMO, only the par value is backed by the entity backing the security. Only the actual coupon rate, not the spread above Treasuries, is required to be disclosed. Due to the prepayment risk of CMOs, the yield to average life is required to be disclosed, not the yield-to-call or yield-to-maturity
A customer has sold stock, but he has failed to complete the transaction by delivering the securities. The latest date on which the broker-dealer may buy in the securities is:
SEC Rule 15c3-3 (the Customer Protection Rule) sets forth rules for broker-dealer reserve requirements and for maintaining custody of securities. Under the custody of securities section, a brokerage firm must buy in securities within 10 business days from settlement if a customer has failed to deliver the securities that were previously sold.
A customer's margin account has a market value of $800,000 and a debit balance of $375,000. He also has a commodities account that has equity of $150,000. If the firm went bankrupt, SIPC would provide coverage to this customer for:
SIPC will cover the customer's equity in the margin account ($425,000). SIPC does not provide coverage for commodities or futures accounts.
Which of the following securities would NOT be found on the Consolidated Quotation System (CQS)?
The Consolidated Quotation System (CQS) displays quotations on all common stock, preferred stock, warrants, and rights that are listed on the New York Stock Exchange (NYSE) or the NYSE MKT (formerly NYSE Amex), and trading in the OTC market (third market). While an NYSE MKT stock, an NYSE MKT warrant, and a NYSE-listed bond typically appear on CQS, a non-Nasdaq stock does not appear.
An investor with an existing margin account sells short 1,000 shares of ABC at $42 and buys 10 ABC May 45 calls which each have a premium of 4. What is the customer's required deposit based on these transactions?
The FRB's Regulation T requirement of 50% applies to both purchase and short sales that are executed in margin accounts. For that reason, the $42,000 short sale creates a required deposit of $21,000 for the customer. Since options are not marginable, the $4,000 option purchase must be paid for in full. When the separate requirements of the two transactions are combined, the customer is required to deposit $25,000.
Which TWO of the following offerings are subject to the Trust Indenture Act of 1939? I.An offering of municipal revenue bonds II.An offering of convertible bonds being issued by a company that is listed on the NYSE III.An offering of corporate notes that have a maturity of three years IV.A private placement of bonds being issued by a corporation and sold by a broker-dealer
The Trust Indenture Act of 1939 regulates the public issuance of corporate debt securities that are sold on an interstate basis; it does not cover exempt securities such as U.S. government securities, municipal securities, or private placements. Both the sale of corporate convertible bonds and an offering of corporate notes are subject to the Trust Indenture Act of 1939. Please note that if the corporate debt has a maturity of 270 days or less (e.g., commercial paper) it is exempt from the both the Act of 1933 and the Act of 1939.
A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I.The bid price is equal to the net asset value II.The bid price is equal to the net asset value plus the redemption fee III.The offer price is equal to the net asset value plus the sales charge IV.The offer price is equal to the net asset value minus the sales charge
The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund.
An investor purchases 10 two-year ABC puts @ 12.25. The dollar amount the investor will pay is:
The cost of a long-term equity option is found by multiplying the premium quote by $100. The cost of 10 puts quoted at 12.25 is, therefore, $12,250 (12.25 x $100 x 10 = $12,250).
The market price of ABC Corporation common stock is $56. The quarterly dividend is 75 cents. What is the current yield of the stock?
The current yield of a stock is found by dividing the yearly dividend by the market price of the stock. The market price is $56. The yearly dividend is $3 ($.75 x 4 = $3.00). Therefore, $3 divided by $56 equals 5.3%.
The dated date of a municipal bond is January 1, 2014. The first coupon date is August 1, 2014. The first coupon will represent how many months of interest?
The first coupon will be paid in 7 months. This is known as an odd (in this case, long) first coupon payment. The interest will begin to accrue from the dated date but will be paid on the first coupon date.
A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield?
The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.10% and the equivalent taxable yield is 10.92% (7.10% / 65%). The investment-grade corporate bond has the best or highest after-tax yield.
An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit?
The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices).
Upon the sale of a limited partnership interest in a direct participation program, the broker-dealer should have the investor make his check payable to:
The subscription agreement will specify the party to whom the check should be made payable.
If a cash dividend is paid, how does it affect a margin account?
When a cash dividend is paid, the debit balance is reduced by the amount of the dividend. The SMA is also increased by the amount of the dividend. The market value changes due to fluctuations in the price of the security.
