s7 flashcards section 3
An investor buys 1 DEF May 50 call at 3 and buys 1 DEF May 40 put at 1. What are the breakeven points for the investor?
50 + 4 = 54 and 40 - 4 = 36. The combined premium of 4 is added to 50 (CALL UP) and subtracted from 40 (PUT DOWN).
Upon exercise, what must index option sellers deliver to the buyers?
The in-the-money amount of the contract (based on the close) multiplied by $100
Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim's maximum loss?
$3,550 (strike price minus the premium)
Eric sold a 50 call at 6 and was later exercised against. Eric would have sales proceeds of how much?
$5,000 + $600 = $5,600 or 56 (strike price plus the premium)
Al sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. What is Al's maximum loss?
$600. If XYZ rises, Al can buy stock back at 50 ($300 loss), plus he would lose the premium ($300 loss).
An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What is the investor's maximum gain?
$800. If stock falls and the put is exercised, the short stock is covered at 30 ($500 gain) plus premium ($300 gain).
An investor owns 1 ABC May 60 Call. If ABC declares a 25% stock dividend, what is the investor's new position?
1 ABC May 48 Call. The call is for 125 shares (100 x 25% = extra 25). Then, $6,000 (total value) ÷ 125 sh. = $48.
What are the three different types of investment companies?
1) Face Amount Certificate Companies 2) Unit Investment Trusts (UITs) 3) Management Companies
An investor sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. What is the investor's breakeven point?
47 - 3 = 44 (short sale proceeds - the premium paid)
An investor sells 1 ABC Mar 30 call at 7 and buys 1 ABC Mar 40 call at 3. What is the investor's breakeven point?
30 + 4 = 34 (always between strikes). For call spreads, the net premium is added to the lower strike (CALL UP).
An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What's the investor's breakeven point?
35 + 3 = 38 (short sale proceeds + premium received)
To determine whether a wash sale violation has occurred, what is the total time period used?
61 days; which includes the trade date and 30 days both before and after the trade date.
An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What are the breakeven points for the investor?
70 + 8 = 78 and 70 - 8 = 62. The combined premium of 8 is added to 70 (CALL UP) and subtracted from 70 (PUT DOWN).
According to industry rules, _____% is the maximum sales charge on mutual funds.
8.5%
An investor holds 1 XYZ January 80 Put at 5. What is her breakeven point?
80 - 5 = 75 (strike price minus premium or PUT DOWN)
What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?
98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.
An investor writes 1 DEF May 55 Call at 6. Later at expiration, if DEF has fallen to 53, is there a gain or loss?
A $600 gain on the premium
What is the highest credit rating?
AAA for S&P and Fitch, and Aaa for Moody's
If the OCC examines position limits on ABC, what contracts are added on the bullish side of the market?
ABC long calls and ABC short puts
What actions are considered a violation for the general partner of a limited partnership?
Admit another general partner, change the partnership, compete with the program, personally use partnership assets
What are some examples of rolling stock used to back a bond offering?
Airplanes, trucks, railroad cars
To find a stock's current yield, the formula is: ____________ ÷ ____________
Annual Dividend ÷ Current Market Price
How often must member firms send clients an account statement?
At least quarterly
___________ Drilling Programs drill in proven areas and also look for new oil.
Balanced
An investor sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. Is the investor bullish or bearish on XYZ?
Bearish since the investor is short the stock. The call is purchased to protect upside risk.
Name the program where the areas to be drilled have not been defined at the time the program is created?
Blind Pool
Name two issues on which common stockholders may vote.
Board of Directors elections and stock splits
Identify the acronym: VIX
CBOE's Volatility Index
What document is filed with the state of legal domicile to create a partnership?
Certificate of Limited Partnership
Who are considered the owners of a corporation?
Common and preferred stockholders
Calculate the price of a corporate bond quoted at 98 ¾.
Convert fraction into a decimal: 3 ÷ 4 = .75 and then multiply $1,000 by 98.75% = $987.50.
Sandra buys 1 ABC Dec 70 Call at 4. Does Sandra have a right or an obligation?
Right to buy at 70
Assuming a net revenue pledge bond, what is the second priority according to the flow of funds?
Debt Service (with Operating and Maintenance first)
If the Hi-Tech Fund has a NAV of $4.25 and a POP of $4.50, what is its sales charge percentage?
The formula is (POP - NAV) divided by POP ($4.50 - $4.25 = $.25 ÷ $4.50 = 5.5%).
What are some of the advantages of investing in open-end investment companies (i.e., mutual funds)?
Diversification, professional management, liquidity, and ability to reduce sales charges
What are Eurodollar bonds?
Dollar-denominated bonds issued outside the U.S.
What is the formula for determining the number of shares able to be purchased when reaching a breakpoint?
Dollars invested ÷ newly calculated offering price (based on the reduced sales charge)
Is the head and shoulders bottom formation the reversal of an upward or downward trend?
Downward
What is the formula for calculating return on equity (ROE)?
Earnings Available to Common ÷ Average Common Stockholders' Equity
What is an ECN?
Electronic Communication Network; any one of several systems which permit the entry and dissemination of quotes
True or False: When prices are RISING, switching from a FIFO to LIFO inventory method will INCREASE EBITDA.
False
True or False: A BD may stop sending customer statements if the account is profitable.
False. BDs must send customer statements regardless of account performance.
True or False: Fundamental analysis focuses on analyzing the market using charts, patterns, trends, and short interest.
False. Charts, trends, pattern analysis, and theories would be the focus of a technical analyst.
True or False: Custodian banks provide investment management service to a fund.
False. Custodian banks provide safekeeping for a fund's cash and securities.
True or False: Mutual fund shares may be purchased and sold in the secondary market.
False. Mutual funds are always considered new issues and are bought and sold through the fund.
True or False: Both common and preferred stockholders are offered preemptive rights.
False. Preemptive rights are only offered to common stockholders.
True or False: Maximum gains and maximum losses could be unlimited with vertical spreads.
False. Spreads limit both gains and losses. Remember, net premium is the loss for the buyer and the gain for the seller.
Interest on Federal Farm Credit system and FHLB securities is subject to which taxes?
Federal only, and exempt from state and local
What condition must exist for a municipal bond's interest to be exempt at the state and local level?
Investors must buy the bond from the state in which they reside.
Regarding limited partnerships, what is the difference between a managed and non-managed offering?
Managed use an underwriting syndicate; non-managed offerings use a wholesaler rather than a syndicate.
What is a Construction Loan Note (CLN)?
Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing
What are some examples of tax-free money-market instruments?
Municipal notes and tax-exempt commercial paper
To calculate the POP for a mutual fund, the formula is: ______ ÷ (______ - ___________)
NAV ÷ (100% - Sales Charge %)
Does the receipt of a stock dividend create a taxable event?
No, not until the stock is actually sold.
Are life insurance death benefits taxable?
No. Death benefits are received tax-free.
Rank in order, from highest to lowest, the three yields on a bond priced at a premium.
Nominal Yield, Current Yield, YTM
What advertises that municipal bonds are available and invites underwriters to bid on a new competitive issue?
Notice of Sale
What are the requirements for being considered a Regulated Investment Company?
The fund must be a domestic company that distributes at least 90% of its net investment income.
Define earnings before interest and taxes (EBIT).
Operating income (adjusted for other income (or expenses) that is not generated by normal operations
The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________
Par ÷ Conversion Price (par for preferred is $100)
What is the tax consequence if a municipal Original Issue Discount (OID) bond is held to maturity?
Since the basis must be accreted up to par, there is no capital gain or loss when an OID is held to maturity.
Into what does an issuer periodically set aside money for retiring debt?
Sinking fund
__________ level is the price level at which point a stock stops decreasing.
Support level is the price level at which point a stock stops decreasing.
Where can Visible Supply figures and the Placement Ratio for municipals be found?
The Bond Buyer
If earnings are falling while the price of the stock remains the same, what happens to its P/E ratio?
The P/E ratio will rise.
Which tranche has the most predictable cash flow and maturity?
The PAC (Planned Amortization Class) tranche
What ratio tests a company's ability to pay its current liabilities with its current assets, but excludes inventory?
The Quick Asset Ratio (the Acid Test)
What can a U.S. investor do when foreign taxes are paid on dividends received on foreign stocks?
The amount of the foreign tax can be claimed as a credit or deduction on her U.S. return.
The money invested in a variable annuity is used to buy _____________ _____.
The money invested in a variable annuity is used to buy accumulation units (similar to mutual fund shares).
An investor holds 1 XYZ Jan 80 Put at 5. What is her maximum loss?
The premium of $500.
Given the same expiration months and no premiums, how is the more valuable option in a put spread identified?
The put option with the higher strike price is always more valuable.
What is a covered call position?
The sale of a call (obligation to sell) against stock that is owned
What generates a capital gain or loss?
The sale of an asset at a price that exceeds its basis (gain) or at a price lower than its basis (loss)
Define the term basis.
The total cost to acquire an asset.
Sell 1 BKS July 40 call at 6 and buy 1 Oct 40 call at 10. Is the spread vertical or horizontal? Is it a debit or credit?
This is a horizontal spread (different expirations) and it is a debit spread (paid out more than what was received).
What is the primary use of VIX options?
To give individual investors the ability to trade market volatility
What is a major advantage to investing in a bond issued by the Commonwealth of Puerto Rico?
Triple-tax-exempt interest
True or False: A 95 put with the market at 90 is in-the-money.
True
True or False: Diversification is one method by which an investor may avoid non-systematic risk.
True
True or False: Treasury stock has no voting rights and receives no dividends.
True
True or False: Investors can buy fractional shares of a mutual fund.
True. Investors are not required to purchase full shares of a mutual fund.
True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV.
True. Shares can trade at a premium or discount to NAV based on supply and demand forces.
For most world currency quotes, the decimal must be moved how many places to the left to convert to U.S. dollars?
Two places to the left
There is an inverse relationship between the movement of a world currency and the _____________.
U.S. dollar.
Identify the acronym: UIT
Unit Investment Trust
An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. What is the investor's maximum gain?
Unlimited, since the stock's upside is infinite
Jim has owned BNB stock for 9 months and now buys a BNB put to hedge. Does the put purchase affect Jim's holding period?
Yes, the put purchase terminates the stock's holding period.
Does a variable life policy have a guaranteed minimum death benefit?
Yes. Regardless of account performance, the minimum DB is paid (typically, the initial DB listed on the policy's face).
When discussing a bond, the YTM may also be referred to as _______.
basis.
The ____________________ is the point at which a program stops losing and starts making money.
cross-over point
The _________ partner is in charge of management and decision-making for the partnership.
general
A company with more debt than equity outstanding is considered ____________.
leveraged.
If a client eliminates unsystematic or diversifiable risk in his portfolio, he is willing to accept ______ risk.
market
A bond trading at a price of $1,000 is a ______ bond.
par
Prior to selling a DPP, passive losses can only be used as deductions against ____________________.
passive income.
Debt service represents the total of all ____________ and ____________ payments.
principal ; interest
A competitive bid placed at a Treasury auction will indicate both ___________ and _________.
quantity and price.
Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.
short
Revenue bonds are backed by ___________________ generated by ________________________.
specific revenue (user fees) ; a project or facility.
A type of maturity where all bonds mature on one specific date is called a _______ bond.
term