Quiz questions
A bond convertible at $40 is selling in the market for 120. If the stock has a current market price of $50, the parity price for the bond is: A)$960 B)$1,200 C)$1,250 D)$1,500
C $1000 CONVERTION RATION:(PAR)/$40= 25 SHARES 25 SHARES X$50= $1250
Which of the following communications would most likely contain the legend "This material must be preceded by or accompanied by a prospectus"? A)Tombstone ad B)Omitting prospectus ad C)Generic advertising D)Supplemental sales literature
D Supplemental sales literature for a mutual fund must be preceded by or accompanied by a prospectus for that fund.
An individual received $500 in dividends from the common shares that she owns of an oil company. How much of this dividend income is subject to taxation? A)0 B)$350 C)$400 D)$500
D Under current tax law, all cash dividends that individuals receive are fully taxable.
On June 5, 2013, an investor purchased 100 shares of ABC at 20. On November 10, 2013, he purchased an additional 100 shares of ABC at 12. On January 20, 2014, he sold 100 shares of ABC at 15. For tax purposes, he would have reported a: QID: 1892070 Mark For Review A)$300 capital gain in 2013 B)$300 capital loss in 2014 C)$500 capital gain in 2014 D)$500 capital loss in 2014
D Using the FIFO method, sold in 2014, tax reporting for the year it was sold
A municipal bond with 10 years to maturity was purchased at 105. If an investor sold the bond six years later at 103, which of the following is TRUE regarding the tax result? A)The investor has a $20 long-term capital loss. B)The investor has no gain or loss. C)The investor has a $10 gain that's taxed at the investor's ordinary income rate. D)The investor has a $10 long-term capital gain.
D amortize, bond is purchased at a $50 premium and it has 10 years to maturity. This means that the bond's basis will be amortized by $5 per year ($50 ÷ 10 years). After six years, the bond's basis will have been reduced by $30 ($5 x 6 years), which would bring the adjusted cost basis to $1,020 ($1,050 - $30). When the bond is sold for $1,030, the customer realized a $10 long-term capital gain ($1,030 - $1,020).
During a period of stable interest rates, which bond has the most potential to show a significant change in price? A)A 7%, 30-year U.S. Treasury Bond B)An 8%, 5-year high-grade corporate bond C)A 6%, 6-month Revenue Anticipation Note D)A 7 1/2%, 10-year convertible subordinated debenture
D 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
An investor purchases an ABC Jan 40 call @ 4 and sells an ABC April 30 call @ 9. This is an example of a: A) Variable hedge B) Vertical spread C) Horizontal spread D) Diagonal spread
D A spread involves the purchase and sale of the same type of options (calls or puts). If the contracts differ in expiration, it is a horizontal spread. If the contracts differ in exercise (strike) price, it is a vertical spread. If both expiration and exercise price are different, it is a diagonal spread.
Under MSRB rules, which of the following documents do NOT need to be retained for a specific period? A)Customer confirmations B)Written customer complaints C)Issuers' official statements D)Customer related correspondence
C
When investors choose the shares that will make up their cost basis for tax purposes, they're using: A)First-in, first-out (FIFO) B)Last-in, first-out (LIFO) C)Specific identification D)Average cost
C
Who derives the MOST benefit from a put provision attached to a bond offering? A)Preferred stock holders B)Issuers C)Bondholders D)Common stock holders
C
A call notice is likely to be issued on a long-term CD if: A)It's trading at a premium to the call price B)It's trading at a discount to the call price C)The issuer needs to reduce revenue D)The issuer needs to increase reserves
A
A registered representative (RR) has discretionary authority over a customer's account and has determined a limited partnership investment is suitable for the customer. In order to invest in the partnership, the RR may: A) Do so with the written approval from the customer B)Do so with verbal approval from the customer C)Do so based on having discretionary authority D) Do so if the principal considers the investment to be suitable
A
On behalf of her firm, a registered representative is holding a seminar and the audience will consist of registered representatives from other member firms. This type of communication is considered: A)Institutional communication B)Retail communication C)Correspondence D)Internal communication
A
The credit rating agencies have downgraded an issuer of an exchange-traded note. Which of the following statements is TRUE? A) It will have a negative impact on the security B) It will have a positive impact on the security C) It will have no impact on the security D) The issuer will be obligated to repay the investor his principal immediately
A
The day-to-day business activities of a unit investment trust (UIT) are the responsibility of the: A) Trustee B) Board of directors C) Investment adviser D) Distributor
A
Which of the following investors is not a typical candidate for a variable annuity? A ) A senior investor B) An investor who's single C) An investor who's married and has young children D) An investor who's saving for retirement
A
Which of the following is NOT TRUE of private label CMOs? A)They are subject to less credit risk than agency CMOs B)They may be issued by investment banking firms C)They typically do not carry a AAA rating D)They are not considered obligations of the U.S. government
A
Which of the following risks is considered unique to an investor holding a CMO? A)Prepayment risk B)Credit risk C)Interest-rate risk D)Reinvestment risk
A
Which of the following statements is TRUE regarding interval funds? A) They offer limited liquidity due to the fact that clients are only able to redeem their shares at specified times. B) They can offer an above market interest rate to clients who have liquidity needs. C) They're considered a relatively safe investment due to the type of securities that are purchased by the funds. D) They're closed-end funds that are traded on the NYSE.
A
Which of the following statements is TRUE regarding spreads? A ) put spread created for a net debit is bearish B) A put spread created for a net credit is bearish C) A call spread created for a net credit is bullish D) A call spread created for a net debit is bearish
A
Your firm has completed an underwriting of Zylo Plastics subordinated debentures. The bond indenture contains a five-year call protection provision. This covenant would be most valuable to bond purchasers if, during the five years following issuance: A)Interest rates decline B)Interest rates increase C)Interest rates remain stable D)The yield curve slopes downward
A
A customer buys 100 shares of a fund and pays the market price plus a commission. The investor has bought: A) ETF shares B) Open-end investment company shares C) Fixed-load fund shares D) A Commissionable Trust Fund (CTF)
A An Exchange Traded Fund (ETF) lists its shares in the secondary market and is purchased in the same manner as a common stock. The buyer pays the market price plus a commission.
A bank sells its credit card receivables to a trust. If the trust creates a bond backed by these receivables: A)This is an asset-backed security B)This is a collateral trust bond C)The bank is responsible for paying back the credit card receivables D)This type of security is backed by the FDIC
A Securities that are secured by mortgages, car loans, and credit card receivables are called asset-backed securities.
A corporation intends to raise additional funds from its existing shareholders rather than use the services of an underwriter. The corporation is engaging in a: A)Rights offering B)Secondary distribution C)Special offer D)Private placement
A The corporation is engaging in a rights offering. It will issue rights to all existing shareholders enabling them to subscribe to new stock below the current market price of the outstanding securities, thereby saving the corporation the costs involved in using an underwriter.
The ABC Growth Fund has been in existence for six years. An advertisement that refers to its ranking based on total return must refer to the total return for: A)The one- and five-year periods by the same ranking entity B)At least one year C)The one- and five-year periods by all ranking entities D)Since the fund has not been in existence for at least 10 years, it may not use ranking based on total return in its advertising
A The standards set forth by the SEC and FINRA regarding mutual fund communications (advertising) are that performance statistics should cover 1-, 5- and 10-year periods. If the fund has not been in existence for 10 years, then disclosure must be made for the relevant for 1- and/or 5-year periods. In addition, the total return exhibited and the specific ranking must be determined by the same ranking entity.
A mutual fund that invests in stocks that are currently trading below their intrinsic market value is a(n): A) Value fund B) Growth fund C) Index fund D) Exchange-traded fund
A Value funds invest in stocks that their managers believe are currently undervalued -- selling for less than they are really worth.
The prospectus for a variable annuity contract: I. Must be filed with the SEC II. May be delivered electronically III. Must provide full and fair disclosure IV. Must detail all sales charges and ongoing expenses of the contract
ALL THE ABOVE
A limited partner has contributed capital to a direct participation program. Two years later, he extends a loan. Which of the following statements is TRUE if the DPP declares bankruptcy? A) The LP is considered a limited partner for both the capital contribution and the loan B) The LP is considered a limited partner for the capital contribution and a creditor for the loan C) The LP is considered a creditor for the capital contribution and a limited partner for the loan D) The LP is considered a creditor for both the capital contribution and the loan
B
A bond has a 6% coupon and is trading with an 8.34% basis. The bond is trading at which of the following price levels? A)Par B)A discount C)A premium D) Cannot be determined
B
A client redeems shares of a mutual fund. According to current regulations, a check must be sent within how many days of submitting a redemption notice? A) 5 days B) 7 days C) 10 days D) 15 days
B
A collateralized debt obligation (CDO) is BEST defined as a type of: A)REIT B)Asset-backed security C)Closed-end investment company D)Municipal revenue bond
B
A municipal dealer has a customer's order to purchase bonds on an agency basis. According to MSRB rules, the customer's order must be executed at: A)A price that does not exceed 5% of the last reported transaction B)A price that is fair and reasonable C)The average price obtained from all dealers contacted D)The first price obtained
B
An individual has invested in a nonqualified variable annuity. If she withdraws the entire value of the annuity, the tax treatment will be: A) Ordinary income on the entire amount B) Ordinary income on the amount in excess of the original investment C) Ordinary income on the amount in excess of the original investment and a capital gain on the original investment D) A capital gain on the entire amount
B
If an investor owns Treasury bonds that will mature in 20 years, she is exposed to: A)Credit risk B)Inflationary risk C)Political risk D)Capital risk
B
In regard to recruitment advertising by member firms, which of the following statements is TRUE? A)Recruitment advertising is not permitted B)Recruitment advertising may not contain exaggerated claims about opportunities in the securities business C)Recruitment advertising is subject to FINRA filing rules D)Recruitment advertising may be published only once per month
B
The call premium of a bond refers to the amount: A)An investor must pay above par to buy a callable bond B)Over par value that the issuer must pay to exercise the call privilege C)The issuer must add to the semiannual interest payments to offset the call feature D)Added to the price at issuance to compensate for the call privilege
B
When comparing long-term bonds to short-term bonds, all of the following statements about long-term bonds are TRUE, EXCEPT: A)They usually have higher yields than short-term bonds B)They usually provide greater liquidity than short-term bonds C)They usually are more often callable than short-term bonds D)Their market prices are more sensitive to interest-rate changes than short-term bonds
B
When engaging in a 1035 exchange, an individual should be aware that: A) The exchange is a taxable event B) The exchange is not a taxable event, but the new annuity may come with additional restrictions C) The exchange is not a taxable event and the policies of the old annuity remain in place D) The exchange is only permitted if it's unsolicited
B
Which of the following transactions would NOT take place on an exchange? A)The sale of an options contract B)The purchase of a municipal bond C)The short selling of an equity security D)The purchase of an exchange-traded fund
B
Which of the following investments will permit a customer to purchase publicly traded shares of a company that is MOST similar to a private equity fund? A) An exchange-traded fund B) A business development company C) An exchange-traded note D) A real estate investment trust
B A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company
An advertisement for municipal securities states the following: "15-year 10% tax-free bond priced to yield 12% to maturity. Call us now for more details." According to MSRB rules, this advertisement should also state that: A)The tax-free return is actually greater than 12% if the bond is held to maturity B)A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% C)The tax-free return is actually less than 10% if the bond is held to maturity D)A principal approved the advertisement
B According to MSRB rules, the advertisement must state that a portion of the yield to maturity for a discount bond may be subject to taxation and, therefore, does not represent a fully tax-free yield.
A bond has a 5% coupon and is trading at a 5.55% basis. The bond is trading at which of the following price levels? A)Par B)A discount C)A premium D)101 3/4
B Basis is a different method of expressing yield-to-maturity. In this case, the yield-to-maturity is greater than the coupon rate. The only time a bond's yield-to-maturity is greater than its coupon is when the bond has been purchased at a price that's less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.
An individual is interested in an investment that offers annual income, has the potential of appreciating in value if interest rates decline and, in the event that the issuer fails to make a payment, having the missing amount added to future distributions. For this investor, which of the following securities is the most suitable? A)Callable preferred stock B)Cumulative preferred stock C)Participating preferred stock D)Convertible preferred stock
B Cumulative preferred stock will add all unpaid dividends to a future payment if a cash dividend is to be paid to common shareholders
All of the following statements concerning hedge funds are TRUE, EXCEPT the funds: A) May engage in short selling B) Must register under the Investment Company Act of 1940 if offered to U.S. residents C) May borrow funds in an attempt to boost returns D) May concentrate assets in a few positions
B Hedge funds are investments that resemble mutual funds, but are typically only offered to wealthy investors.
A limited partner would be in jeopardy of losing her limited liability if the partner: A) Received a portion of the project's income and deductions B) Assisted in the decision of which properties to acquire C) Insisted on examining the partnership's financial records D) Made a loan to the partnership
B Limited partners have the right to receive their portion of income and losses, examine books and records, and make loans to the partnership. If they get involved in the management of the program, such as deciding which properties to acquire, they could be considered general partners and lose their limited liability.
As it relates to convertible bonds, which of the following provides an arbitrage opportunity? A)Stock trading at a discount to parity. B)Stock trading at a premium to parity. C)Stock trading at parity. D)Bond trading at a premium to parity.
B Parity exists when a convertible security is trading at a price that's equal to the total value of the stock into which it's convertible. If the stock is trading at a premium to the parity price, the bond can be converted into the stock and then sold at the higher price. This results in an arbitrage opportunity.
Mr. Jones purchases 100 shares of IBM at $116 per share and writes an IBM June 115 call option at 5. Mr. Jones' breakeven point is: A) 110 B) 111 C) 120 D) 121
B The writer of a covered call will have a breakeven point equal to the purchase price of the stock (116) less the premium received (5). Therefore, his breakeven point is $111 ($116 - $5 = $111).
An investor writes an XYZ October 70 call at 3 and an XYZ October 70 put at 1. This strategy is known as a: A) Short combination B) Short straddle C) Bull spread D) Bear spread
B A long straddle consists of purchasing a put and a call, on the same underlying security, with the same strike price and same expiration. A short straddle consists of selling a put and a call, on the same underlying security, with the same strike price and expiration.
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: A) $500 profit B) $500 loss C) $1,000 profit D) $1,000 loss
B 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).
During periods of deflation, which of the following investments tends to perform the best? A)Common stock B)Treasury inflation-protected securities C)Long-term debt D)Short-term debt
C
If a mutual fund has been in existence for 17 years, the longest average annual return that's required to be shown in an advertisement is: A)Three years B0Five years C)10 years D)17 years
C
A stock's price has risen due to an overall market increase. This increase in price is considered: A)A non-taxable capital gain B)A taxable capital gain C)An unrealized capital gain D)Amortization
C
A type of security that is issued in the U.S. by foreign governments and corporations, trades in U.S. markets, and is denominated in U.S. dollars is called a: A)Global mutual fund B)Eurodollar bond C)Yankee bond D)Repurchase agreement
C
All of the following government agencies are involved in the housing market, EXCEPT: A)FNMA B)FHLMC C)SBA D)GNMA
C
An investor might take advantage of a Section 1035 exchange if: A) The new contract carries a new or longer surrender period B) The enhanced features do not apply to her C) Her investment objectives have changed and she is unable to obtain new benefits by switching to another subaccount in the same contract D) The total cost of the exchange outweighs the benefits of the exchange
C
An official statement for a general obligation bond says that property taxes may not be raised above a certain level. This is known as a: A)Level debt service bond B)Double-barreled bond C)Limited tax bond D)Moral obligation bond
C
Collateralized mortgage obligations (CMOs) make interest payments to investors: A)Daily B)Weekly C)Monthly D)Quarterly
C
During an inflationary period when interest rates are rising, the market value of existing bonds would: A)Remain stable B)Increase C)Decrease D)Fluctuate
C
Retail communications that pertain to mutual fund shares must be: A)Filed with the issuer at least 10 business days prior to use B)Filed with the SEC at least 10 business days prior to use C)Filed with FINRA within 10 business days of first use D)Retained by the firm in an easily accessible location for two years, but there is no requirement for the communications to be filed since that is the responsibility of the underwriter
C All retail communications pertaining to mutual funds must be filed with FINRA within 10 business days of first use or publication.
A convertible bond has a conversion price of $50 and is currently selling in the market at $1,100. The conversion ratio is: A)22 B)20 C)50 D)55
C CONVERSION RATIO= $1000 (PAR)/ $50= 20 SHARES
Which of the following would be considered the most volatile mutual fund? A) A balanced fund B) A municipal bond fund C) An emerging markets fund D) A U.S. government securities fund
C Emerging markets funds invest in securities issued by countries with unsure economic, political, and social climates. This leads to significant volatility in share prices.
A research analyst at a broker-dealer is preparing a research report recommending ABC common stock. Which of the following situations need not be disclosed? A)ABC Corp is an investment banking client of the broker-dealer B)The broker-dealer has a 1% or greater beneficial ownership in ABC common stock C)The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds D)The broker-dealer makes a market in ABC common stock
C The broker-dealer is required to make certain disclosures in its research reports, such as whether the firm has an investment banking relationship or makes a market in the common stock of ABC. It must also disclose its ownership in a subject security if the ownership is equal to or greater than 1% beneficial ownership in common equity. Since nonconvertible debt is not considered common equity, disclosure is not required.
Which of the following choices would be the MOST advantageous tax benefit that an investor will receive from an oil and gas direct participation income A) Liquidity B) Depreciation of equipment C) Depletion D) Depreciation of land
C The most advantageous tax benefit that an investor will receive from an oil and gas program is the depletion deduction.
A bond is selling at a premium. This indicates that: A)The yield to maturity is greater than the nominal yield B)The market price is less than the par value C)Interest rates have decreased since the bond was issued D)The nominal yield is less than the current yield
C rates go down, prices go up
An individual purchases two BP (British pound) 150 calls @ 7.50. The contract size is 10,000 BP. The total cost for the contracts is: A) $15,000.00 B) $7,500.00 C) $1,500.00 D) $750.00
C The total cost is calculated by multiplying the contract size (10,000) by the premium expressed in dollars ($0.0750), yielding $750.00 per contract. Since the individual purchased two contracts, the total cost is $1,500.00.
An investment in which of the following securities requires a customer to sign a statement attesting to her annual income and net worth? A) A variable annuity B) A collateralized mortgage obligation C) A variable-rate demand obligation D) A direct participation program
D
An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25 and has a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, the cost basis per share for the newly acquired common stock is: A)$27.75 B)$27.50 C)$26.50 D)$28.00
C) 26.50 To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). The formula for calculating conversion ratio is the par value of the preferred stock ($100) divided by the conversion price ($25). As a result, four shares of common stock are received if the preferred stock is converted into common stock. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4) ($106 ÷ 4 = $26.50).
All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT: AInterest rates are set at specified intervals BThey are often issued by municipalities CThey are long-term securities with short-term trading features DThey have a put feature allowing the holder to redeem the security at par
D
An individual purchased an index call option that's now in-the-money. If exercised, the investor will receive: A) Cash in an amount equal to the value of the index B) Securities represented in the index with a value based on the in-the-money amount C) Securities represented in the index with a value based on the value of the index D) Cash in an amount equal to the in-the-money amount
D
An inverse equity exchange-traded fund (ETF) is most similar to which of the following? A) A straddle B) Buying on margin C) An equity mutual fund D) Selling short
D
A 65-year old individual invested $240,000 into a variable annuity, which has since grown to $400,000. If she wants to withdraw $150,000, what's the tax implication of taking the withdrawal? A) She will be taxed on $60,000 as a capital gain. B) She will be taxed on $60,000 as ordinary income. C) She will be taxed on $150,000 as a capital gain. D) She will be taxed on $150,000 as ordinary income.
D
A retirement housing program has just been completed in a small town. The income generated by the program will most likely be used to pay the debt service on a(n): A)General obligation bond B)Special tax bond C)Industrial development revenue bond D)Revenue bond
D
For the following size transactions, ABC mutual fund has a bid price of $8.50 and an asked price of $9.26. Which of the following sales is allowed under the Conduct Rules? A) A member sells 250 shares of ABC fund at $9.10 to a nonmember firm B) A member sells 250 shares of ABC fund at $9.10 to another firm through a nonmember firm C) A member sells 250 shares of ABC fund at $9.10 to one of the firm's customers D) A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients
D
If the purchaser of a non-qualified annuity dies at the age of 56, which of the following BEST describes the tax impact? A) There is a 10% penalty assessed and the difference between the amount invested and the death benefit is considered a non-taxable return of capital B) There is no penalty assessed and the difference between the amount invested and the death benefit is considered a non-taxable return of capital C) There is a 10% penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates D) There is no penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates
D
The spot prices of foreign currencies are determined: A) On the New York Stock Exchange B) On the Philadelphia Stock Exchange C) In the third market D) In the Interbank market
D
The spouse of a customer of a registered representative has $90,000 invested in shares of the XAM fund family at another broker-dealer. The RR's customer wants to invest an additional $60,000 in the XAM fund family with the RR's firm. The RR should explain to his customer that: A) Breakpoints are only permitted for investments in the same fund B) Breakpoints are only allowed if both accounts are held at the same broker-dealer C) Breakpoints are only allowed for investments made by the same customer D) Breakpoints are allowed for investments in the same fund family, even if invested in different specific funds and at different broker-dealers
D
The term all-or-none, in trading municipal bonds, applies to: A)Agency transactions B)Premium bonds C)Discount bonds D)Sellers' offering terms
D
When an option contract is exercised, the writer: A) May retransmit the assignment notice B) May close out the position upon receipt of the assignment notice C) Will establish a capital loss D) Must fulfill the obligation to buy or sell the underlying instrument
D
Which of the following municipal entities would NOT issue overlapping debt? A)A park district B)A library district C)A school district D)A turnpike authority
D
Which of the following securities are quoted and traded at a discount? A)Common stocks B)Corporate bonds C)U.S. Treasury notes D)U.S. Treasury bills
D
Which of the following securities is NOT backed by the credit of the U.S. government? A)Treasury bills B)Treasury STRIPS C)Government National Mortgage Association (GNMA) bonds D)Federal National Mortgage Association (FNMA) bonds
D
Your client is considering purchasing a fund of hedge funds. Which of the following statements concerning this investment is TRUE? A) These securities may be purchased only by investors who meet accreditation standards established by the SEC. B) These securities may be redeemed at the conclusion of each trading day. C) These securities will outperform traditional mutual funds. D) These securities are not liquid investments.
D
An open-end investment company with a NAV of $22.20 and a sales charge of 8% would have an offer price of what amount? A) $20.42 B) $22.20 C) $23.98 D) $24.13
D 22.20/(100%-8%) The asked price is also referred to as the public offering price (POP).
A bond swap is done for all of the following reasons, EXCEPT to: A)Increase the overall yield of the bond portfolio B)Increase the current income of a bond portfolio C)Establish a tax loss to offset income D)Take advantage of a large amount of accrued interest
D A bond swap occurs for all of the reasons given except to take advantage of accrued interest. The amount of accrued interest is not a factor in a municipal bond purchase or sale.
Which of the following statements is TRUE concerning the disclosure requirements in CMO correspondence? A) comparison between a CMO and an highly rated corporate bond is permitted B)A comparison between a CMO and a municipal bond is permitted if the client is in a high tax bracket C)A comparison between a CMO and a bank certificate of deposit is permitted if the bank is FDIC-insured D)A comparison between a CMO and a bank certificate of deposit is not permitted under any circumstances
D Due to their unique characteristics, CMOs may not be compared to any other types of investment, including a certificate of deposit. This prohibition applies to any communications with the public about CMOs, which includes retail communications and correspondence.
The securities that are deposited in an escrow account for an advance refunding of a municipal bond are: A)Revenue bonds B)General obligation bonds C)Federal agency bonds D)Treasury bonds
D Only Treasury obligations are acceptable securities as escrow when a municipal bond is being advance refunded.
Ms. Jones reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 10 rights plus $10.50 are required to subscribe to one new share of stock Fractional shares become whole shares The record date is Friday, October 17 JPMorgan Chase and Bank of America are the transfer agents Goldman Sachs and Morgan Stanley are the standby underwriters If Ms. Jones currently owns 87 shares of the preferred stock of the XYZ Corporation, how many additional shares can she subscribe to and at what cost? A)8.7 shares plus $91.35 B)9 shares plus $91.35 C)9 shares plus $94.50 D)Preferred stockholders are not permitted to participate in a rights offering
D Preferred stockholders are not permitted to participate in a rights offering. Pre-emptive rights are only made available to common stockholders. By participating in rights offerings, common stockholders are able to maintain their percentage of ownership.
All of the following characteristics are TRUE of REITs, EXCEPT that they: A) Are not exempt from the Securities Act of 1933 B) Are not regulated investment companies C) Cannot pass losses through to the investors D) Are always exchange traded
D REIT shares may be traded either OTC or on an exchange
An investor makes an opening sale of 10 option contracts when the bid price was $7.00 and the offer price was $7.10. Later in the day, the investor makes a closing purchase of 10 contracts when the bid price was $6.50 and the offer price was $6.55. Assuming both trades were market orders, what is the investor's gain or loss on these transactions? A) $600 capital loss B) $600 capital gain C) $450 capital loss D) $450 capital gain
D An investor who places a market order will normally buy at the offer and sell at the bid. In this case, the investor sold 10 contracts at the bid price of $7.00, for sales proceeds of $7,000 (10 contracts x $700 per contract). To close out the position, the investor bought 10 contracts at the offer price of $6.55, for a total cost of $6,550 ($655 x 10 contracts). The $450 capital gain is based on the difference between the cost basis and sales proceeds.
A special disclosure document may be required for investing in: A)Municipal bonds B)Convertible bonds C)Mutual funds D)Penny stocks
D) Penny stocks
A company that manufactures solar panels has approached an investment banker to help the firm raise capital for its new manufacturing plant in Colorado. The firm wants to raise capital in a private placement, and the CFO of the company wants to know the difference between convertible debt and debt with warrants attached. Which TWO of the following statements are TRUE? I. If convertible bonds are exchanged for common stock, the debt will no longer be part of the company's capital structure II. If the debt with warrants attached is exchanged for common stock, the debt will no longer be part of the company's capital structure III. If convertible bonds are exchanged for common stock, the company will raise additional capital IV. If the debt with warrants attached is exchanged for common stock, the company will raise additional capital
I & IV
Structured products may: I. Offer returns linked to equity securities II. Not offer returns linked to commodities III. Not offer returns linked to interest rates III. Be formulated to provide principal protection
I & IV
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
I & IV
Which of the following shares would be paid a dividend if the common stock were paid a dividend? Cumulative preferred Convertible preferred Participating preferred
I, II& III Dividends on preferred stocks must be paid prior to any common stock dividends. In this question, you are told that dividends were already paid to common stockholders. Therefore, all preferred stockholders must have been paid a dividend.
A company that manufactures solar panels has approached an investment banker to help the firm raise capital for its new manufacturing plant in Colorado. The firm wants to raise capital in a private placement, and the CFO of the company wants to know the difference between convertible debt and debt with warrants attached. Which TWO of the following statements are TRUE? I. Both convertible debt and debt issued with warrants attached will trade as one unit each II. Convertible debt trades as one unit, but debt issued with warrants attached trades as two separate units III. Both convertible debt and debt issued with warrants attached have a potential dilutive effect on the common stockholders IV. Convertible debt has a dilutive effect on common shares, but debt issued with warrants does not
II & III A convertible bond is a hybrid security consisting of a bond with an imbedded call option permitting the purchase of a share of common stock at a fixed price. A convertible bond trades as one unit. A bond issued with warrants attached will trade as two separate units. When the bond is issued, the warrants are detached from the bond and will trade as a separate unit.
Which TWO of the following choices must a principal approve prior to use? I.An advertisement concerning the appointment of new managing directors II.An advertisement promoting a new type of CMO III.An advertisement regarding covered call writing IV.An email from an RR to a client concerning a security in her account
II & III All retail communications concerning options and CMOs must be approved before initial use by a principal of the member firm.
XYZ Corporation has a 6 1/2% convertible bond outstanding that is convertible into 40 shares of common stock. The bond is currently selling in the market at 85 ($850) and the common stock is selling at 21. The XYZ Corporation is offering its existing bondholders a new straight (nonconvertible) bond paying 6 1/2% that matures at the same time as the convertible bond. The effect of the successful completion of the proposal would be to: I.Reduce interest costs II.Reduce potential dilution III.Have no effect on interest costs IV. Increase dilution
II & III Prior to the refunding, if all of the bonds were converted into common stock, outstanding shares would increase causing earnings per share to decrease (dilute). The effect of the successful completion of the proposal (refunding) would be to reduce potential dilution because the conversion provision is being eliminated. There would be no reduction in interest costs since the new bonds are paying the same rate of interest as the old bonds (6 1/2%).
An investor has been making payments into a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE? I. The investment risk is assumed by the insurance company II. The investment risk is assumed by the customer III. The amount of the payment to the customer is guaranteed by the insurance company IV. The amount of the payment to the customer is not guaranteed
II & IV
Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield. Current yield Nominal yield Yield to maturity Yield to call
Nominal yield Current yield Yield to maturity Yield to call
Which TWO of the following statements are TRUE regarding a variable life policy? I. Death benefits are calculated monthly II. Death benefits are calculated annually III. Policy loans are taxable IV. Policy loans are charged interest
II & IV The death benefits, which vary with the performance of the separate account, are calculated annually. Should an investor choose to take a loan against the accumulated value, interest would be charged.
