S7 missed 5 & 8
A Treasury bond with a par value of $1,000 has a quote of 95.15. The dollar value of this T-bond is:
$954.68 decimals are in 32nds for treasuries
A bond is convertible into stock at $50 per share. The market price of the stock is 65. The market price of the bond is 120. To profit from this arbitrage opportunity, an investor should: Buy 5 bonds Buy 100 shares of stock Sell 5 bonds short Sell 100 shares of stock short
1 & 4
Regular-way settlement for equity options is normally completed within:
1 bus day
A 65-year-old individual has retired and started receiving money from a qualified variable annuity. Which TWO of the following statements are TRUE concerning the distributions from the annuity? It is treated as ordinary income for tax purposes It is fully taxable at the investor's tax bracket It is treated as a capital gain for tax purposes It is partially taxable at the investor's tax bracket
1&2 "Qualified" meaning contributions are pre tax so when paid out they are fully taxable
An individual may roll over a lump-sum distribution from a corporate pension plan to an IRA without tax consequences if it is done within: how many days
60 days When a lump-sum withdrawal from a corporate pension plan, Keogh, or IRA is deposited in an IRA, it is referred to as a rollover. If the rollover is done within 60 days, the investor will avoid a taxable event. Only one rollover is permitted each year.
The BG mutual fund has an NAV of $11.72 and a maximum offering price of $12.67. What is the maximum sales charge for this fund?
7 1/2% The maximum sales charge for the fund is calculated by dividing the difference between the offering price and the NAV ($12.67 - $11.72 = $0.95) by the offering price ($0.95 divided by $12.67 equals 7 1/2%).
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. 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 a group, limited partners may NOT: Sue the general partner Sell assets to pay creditors Vote to remove the general partner Inspect the partnership's books
B. Limited partners are not permitted to be involved in management and could not sell assets to pay a creditor (a management decision). They do have the right to inspect the books, as well as sue and/or remove the general partner.
In which of the following documents are bid limitations for a new municipal bond issue found? The official statement The indenture The notice of sale The syndicate agreement
The notice of sale is published by the issuer. It announces the issuer's intention to sell an issue and invites securities firms to compete for the issue. All information pertaining to the bidding would be contained in the notice of sale.
An investor buys 200 shares of TDX at $20 per share. TDX declares a 10% stock dividend. The investor's cost basis per share for tax purposes would be:
$18.18 An investor's cost basis must be adjusted downward upon receiving additional shares when a stock dividend is paid. In this example, the investor receives 20 additional shares (10% x 200). The investor's new cost basis per share would be found by dividing the initial cost of $4,000 by the total number of shares now owned (220). This equals a cost basis per share of $18.18.
An individual's home has a resale value of $500,000 and an assessed value of $200,000. If the tax rate is 10 mills, the property tax is:
$2,000 Property tax is computed by multiplying the assessed value by the millage rate. A mill equals 0.001 or $1 per $1,000 assessed value. The tax is $2,000 ($200,000 x .001 x 10 mills).
On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is:
$30 When the wash sale rule (within 30 days)is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.
A municipal revenue bond is secured by the revenues of a toll road system showing the following information. Annual Debt Service $3,000,000 Annual Gross Revenues $6,000,000 Annual Operating and Maintenance Expenses $2,000,000 Based on this information, the annual debt service coverage ratio is:
1.33 to 1 The formula for the debt service coverage ratio is net revenues divided by the annual debt service. 6M-2M = 4M net rev --> % 3M annual debt
An investor who wants a tax-free return but does not want a high risk of principal should invest in which TWO of the following? Treasury bills A tax-exempt money-market fund Short-term revenue anticipation notes Long-term revenue bonds with a high rating
2 and 3 A tax-exempt money-market fund would invest in short-term tax-exempt obligations such as tax anticipation notes and revenue anticipation notes. There is an expectation of stable principal as these notes have short-term maturities (less than one year). A long-term revenue bond is federally tax-free but subject to market risk, interest-rate risk, and some credit risk.
Which TWO of the following statements are TRUE concerning bank-qualified municipal bonds? To qualify, the municipality may only issue up to $10,000,000 every six months To qualify, the municipality may only issue up to $10,000,000 annually Commercial banks may receive a 70% tax deduction of the interest costs Commercial banks may receive an 80% tax deduction of the interest costs
2 and 4 Bank-qualified bonds are issued by small municipalities and, to qualify, a municipality may only issue up to $10,000,000 annually. This is done to encourage commercial banks to invest in locally issued municipal securities. Commercial banks that purchase this type of security are permitted to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds.
A client owns 3,000 shares of stock in a company headquartered outside the U.S. The client receives a cash dividend and tax is withheld by the country where the company is located. Which TWO of the following statements are TRUE concerning the U.S. tax implications for the client? The dividend received is treated as a return of capital The taxes paid may be used as a credit The dividend paid is exempt from taxes The taxes paid may be used as a deduction
2 and 4 U.S. citizens and corporations owning foreign stock may receive dividends from which foreign taxes have been withheld. The investor still owes U.S. income tax on the net dividend. The amount of the foreign tax, however, may be claimed by the investor as a deduction against income or may be applied as a credit against U.S. income tax.
Once an Automated Customer Account Transfer Service (ACATS) transfer request has been validated, depository-eligible securities should be transferred within:
3 bus days If notified of a customer's intent to transfer an account through ACATS, the carrying firm must either validate or reject the request for a valid reason within one business day. If the account is validated, the transfer of depository-eligible securities should be completed within three business days.
Mr. Smith sells short 100 shares of MNP @ 39 and also purchases 1 MNP May 40 call @ 3. Mr. Smith's breakeven is:
36
A customer owns a municipal bond that has been escrowed to maturity. Which of the following statements is TRUE? A. The issuer has deposited money in an escrow account that will contain U.S. government securities used to pay off the municipal bonds at maturity B. The issuer has deposited money in an escrow account that will contain U.S. government securities used to pay off the municipal bonds prior to maturity C. The issuer has deposited money in an escrow account that will contain other municipal bonds used to pay off the municipal bonds at maturity D. The issuer has deposited money in an escrow account containing U.S. government securities that will create a tax liability for the municipal bondholder at maturity
A. When interest rates fall, a municipality may want to engage in advance refunding. In this case, the municipality will sell a new issue with the proceeds of the sale going into an escrow account containing U.S. government securities. Since the municipal bond has been escrowed to maturity, the U.S. government securities would be purchased with a maturity date that coincides with the maturity date of the municipal bonds.
Which of the following choices is considered a qualified retirement plan? A 401(k) plan An IRA A 529 plan A Roth IRA
A. Qualified (grow tax deferred) is an ERISA term associated with certain work sponsored retirement plans. Typically, these qualified plans grow tax-deferred and are funded with pretax dollars through employee and/or employer contributions. Traditional IRAs, Roth IRAs, and 529 plans are individually funded vehicles that have nothing to do with the client's employer or ERISA.
A person is completing a Form U4 to become registered and notices that the document requires his signature. The person has an aversion to signing legal documents that he doesn't fully understand. For clarification on the details of the form, he calls his brother who is a lawyer and specializes in employment law. The brother indicates that if Form U4 is signed, a person is agreeing to: A. Submit potential disputes with the firm, other member firms, customers, or associated persons to arbitration rather than litigation B. Avoid trading on or distributing material, non-public information C. Provide the brokerage firm with a Form U5 if he terminates his registration D. Avoid competing with the brokerage firm for a period of one year following termination
A. The Form U4 is the application for registration and must be completed by individuals who are registering with a broker-dealer. The registrant must disclose his employment history for the previous 10 years as well as any felony convictions or convictions for securities-related misdemeanors that have occurred within the previous 10 years. By signing a U4, the registrant agrees to use arbitration as a means of resolving any disputes that involve the employer, other members, customers, or associated persons. By agreeing to arbitration the registrant waives his right to civil litigation. However, according to SRO regulations, predispute arbitration agreements do not apply to claims involving employee discrimination or sexual harassment.
Which of the following transactions are NOT exempt from the penny stock disclosure rules? A. Transactions with established customers B. Transactions that are not recommended by the broker-dealer C. Transactions with institutional accredited investors D. Tranasctions by a broker-dealer whose commissions and markups from penny stocks do not exceed 5% of its total commissions and markups
A. While transactions with established customers are exempt from the account approval requirements, they are not exempt from the penny stock disclosure rules.
Which of the following situations requires a DK (don't know) notice? A. The firms do not have a clearing agreement B. The firms disagree on the amount of shares in the trade C. One of the firms is not a market maker D.The trade is executed on an ECN
B. A DK notice is used for a don't know trade. This occurs when one side does not recognize the trade or the firms disagree on the details. The only situation that would require a DK notice would be if the firms disagree on the amount of shares in the trade.
A method of voting that gives smaller, less substantial stockholders a greater degree of voting power over the larger, more substantial stockholders is: Statutory voting Cumulative voting Voting by proxy Special majority voting
B. A method of voting that gives larger, more substantial stockholders a greater degree of voting power over smaller, less substantial stockholders is statutory voting.
Regarding variable annuities, which of the following statements is TRUE? A. If a client exchanges a variable annuity, there is no penalty assessed B. A principal of a broker-dealer is not required to review the subaccounts that are recommended by an RR if the client meets the suitability requirements for a variable annuity C. If a client withdraws the proceeds from a variable annuity before the age of 59 1/2, any penalty is waived by the insurance company D. A registered principal is required to review and approve a transaction in a variable annuity
B. A registered principal is required to review and approve transactions in securities, including variable annuities. When a client exchanges an annuity, the insurance company may charge a surrender fee. A principal of a broker-dealer is required to review subaccounts if both a deferred variable annuity and any particular subaccounts are suitable for the investor. If a client withdraws the proceeds from a variable annuity prior to the age of 59 1/2, the IRS imposes a 10% penalty regardless of whether the insurance company charged a surrender fee.
A mutual fund shareholder is NOT required to report which of the following events for tax purposes? A. Receiving a dividend that is subsequently reinvested in the fund at the net asset value B. Appreciation in the value of the shares C. Exchanging shares of one fund for another fund within the same family of funds D. Receiving a capital gains distribution that was not reinvested in the fund
B. Dividends and capital gains distributions are taxable to the investor regardless of whether they are reinvested in the fund. Exchanging shares for another fund within the same family of funds must also be reported on the investor's tax return since shares of one fund are being sold to buy shares in another fund. Appreciation in the value of fund shares is not taxable until the shares are sold to establish a capital gain.
Which of the following bonds has the most interest-rate risk? A. A three-month Treasury bill B. A 30-year Treasury STRIP C. A 6%-coupon, 30-year Treasury bond D. A 3%-coupon, five-year Treasury note
B. The bond with the most interest-rate risk or price volatility is the bond with the longest maturity and the lowest coupon.
On February 13, an investor sold 700 shares of ABC stock for a loss. On the next day, the investor purchased 3 ABC February calls. Which of the following statements is TRUE? A. The entire loss from the sale of stock will be disallowed B. A portion of the loss from the sale of the stock will be disallowed C. The loss from the sale of stock will not be affected D. Any future loss on the options will be disallowed
B. The wash sale rule states that all (or part) of a loss will be disallowed if the same (or substantially the same) security is purchased within 30 days (before and after) of the sale. The purchase of a call option on a security is considered substantially the same as the security, thus causing a wash sale. In this question, the purchase of 3 call options will disallow the loss on 300 of the 700 shares that were sold for a loss on February 13.
Which of the following new bond issues will MOST likely be purchased through competitive bidding? Corporate bonds General obligation bonds High-yield bonds Revenue bonds
B. this is usually the method by which most general obligation bonds are sold. Corporate, revenue, and high-yield bonds are usually sold on a negotiated basis.
Which of the following positions is the MOST conservative strategy? A. Long stock, long call B. Long stock, short call C. Short stock, long put D. Short stock, short put
B. A conservative investor is a person who's not looking to create undue risk in the portfolio. This excludes either of the choices which include a short stock position since they both present the possibility of unlimited loss from upside risk. A long call position together with a long call involves two bullish positions, but also exposes the investor to greater downside risk. Of the choices given, the most conservative position is taken by an investor who is long a stock position and uses the income from selling the call to lower the breakeven point, and still has upside gain potential. If the market price falls, the investor will make the premium on the expiring call. However, if the market price rises, the stock will be called away at the call strike price, and the investor will have a limited profit potential.
On May 25, the president of MaxCo bought 3,000 shares of MaxCo stock in the open market at $33. Two months later, the stock has increased to $40. If the president now wants to sell the shares: Permission must be granted by the MaxCo board of directors The profit from the trade must be forfeited according to the short-swing profit rule Notification must be made to the corporation's legal counsel Permission must be granted by FINRA
B. The Securities Exchange Act of 1934 prohibits insiders from making short-swing profits. A short-swing profit is a profit made on stock held by insiders for less than SIX MONTHS. If the president of MaxCo sold stock two months after it was purchased, MaxCo could sue for recovery of the profit. Under Rule 144, the six-month holding period applies only to restricted stock and, since the stock was purchased in the open market, the shares would be considered control stock.
A customer opens a margin account and signs the basic customer margin agreement, which consists of a credit agreement, loan consent agreement, and hypothecation agreement. If the customer's initial transaction in the account is to buy 100 shares of XYZ stock at a price of $36, the customer: A. May personally take delivery of all of the shares that are purchased B. Will pledge the stock to her broker-dealer in order to secure the loan he is receiving C. Will be obligated to pay interest on a debit balance of $1,800 D. Will allow the brokerage firm to lend some of the stock, but only to other customers on a case-by-case basis
B. in a margin account, customer securities are always held in street name so that the broker-dealer is able to liquidate shares if necessary. By completing the hypothecation agreement, the customer agrees to pledge the securities to the broker-dealer as collateral for the loan. As for the other parts of the margin agreement, the loan consent agreement permits the firm to lend the securities to other customers or other broker-dealers. The credit agreement establishes the customer's responsibility to pay interest on the debit balance. For a new account, the minimum initial margin requirement is $2,000 or 100% of the purchase, whichever is less. Since the initial trade was for $3,600, the customer is required to deposit $2,000 which means that he can borrow $1,600.
The purpose of a sinking fund is to redeem a corporation's:
Bonds A sinking fund is used by an issuer to set aside funds that will be used for the purpose of redeeming a corporation's bonds prior to or at maturity.
The interest paid on special assessment bonds is derived from: Ad valorem taxes Toll road revenues Charges on the benefitted property Excise taxes
C The interest paid by the issuer to holders of special assessment bonds is derived from charges made to the users of the benefitted property. These bonds are issued to finance the construction of water and sewer systems, sidewalks, and streets.
A customer owns shares of restricted stock and now intends to sell them. If the proper forms are filed with the SEC, the customer may sell these shares: A. At any time B. Over a 35-day period C. Over a 90-day period D. Over a 180-day period
C. Under Rule 144, an investor who intends to sell either restricted or control stock must notify the SEC by filing Form 144 at the time the sell order is placed. Once the filing is made, the customer may sell these shares within 90 days.
Under the provisions of Rule 10b-10, a confirmation sent to a customer must disclose all of the following items, EXCEPT: A. The time of the transaction or a statement that the time of the transaction will be furnished on request B. The yield at which the transaction was effected C. Unusual expenses incurred that will justify a higher markup D. Odd-lot differentials or fees paid
C.
An individual transferring an IRA from one trustee to another: A. Must be at least 59 1/2 to avoid penalties B. Will receive a check that must be rolled over within 60 days of receipt to avoid taxes C. Is not subject to taxes or penalties D. May only do so once each year
C. A transfer of funds from one trustee to another is not considered a distribution or a rollover. There is neither a limit to the number of transfers that an individual may do, nor are there any taxes or penalties. This differs from receiving a distribution from a retirement plan. The distribution must be rolled over into another qualified plan, within 60 days of receiving the money, in order to avoid taxes and penalties. Rollovers may be done only once each year.
A registered representative works for a brokerage firm that is a dealer for a mutual fund complex. The RR has prepared a script and a slide presentation for a seminar on the funds in the complex and also intends to hand out prospectuses for the funds and a brochure that was created by her firm. In this situation, all of the following should be filed with FINRA, EXCEPT: The script The slide presentation The prospectus The brochure
C. Prospectus is filed with the SEC
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? A. $680,000 B. $686,800 C. $697,000 D. $714,000
C. If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 50% of the dividends it receives on stock that it owns (remaining 50% is excluded). The company would need to add $50,000 (50% of $100,000) to its taxable income. The total taxable income, therefore, is $2,050,000. The tax liability is $697,000 ($2,050,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 35% of the dividends would be taxable (65% is excluded).
Which the following actions would affect the NAV of a mutual fund? A. Client redemptions B. Client deposits C. A portfolio manager liquidating a $1 million position she has held for 14 months at a 35% loss D. None of the above
D. Client deposits or redemptions do not affect the net asset value per share. When a client deposits funds, more assets are in the portfolio but additional shares are issued. When a client redeems shares, fewer assets are in the portfolio but the number of shares is proportionately reduced. A portfolio manager selling a large position at a loss would not affect the NAV since the position has been marked to market (adjusted to reflect current market value) each day and the loss is already reflected in the fund's NAV long before the sale takes place. The net effect of the sale is simply the realization of the loss for income tax purposes.
All of the following information is found in a municipal revenue bond resolution, EXCEPT: A. Restrictions on the sale of additional bonds B. Rate covenants C. Sinking-fund provisions D. The yields to maturity of the bonds
D. The indenture or resolution is basically the contract between the issuer and the bondholder. It will specify the rights of the bondholders and the provisions to protect the bondholders' interest. One of the provisions included is a rate covenant in which the issuer pledges to charge rates that are sufficient to cover expenses and debt service. An additional bonds test is included that sets requirements that must be met before additional bonds can be issued. The method of funding and the operation of the sinking fund (used to retire some bonds prior to maturity) are also included. Another important provision is flow of funds, which states how the income generated by the project will be used.
Which of the following statements is characteristic of a closed-end investment company? A. Shares may not sell below the net asset value B. The investment company must distribute all income to shareholders C. Shares are redeemed at the net asset value minus a redemption fee D. Shares may sell at a premium or discount to the net asset value
D. The market price for a closed-end investment company is based upon supply and demand for the shares in the marketplace. A closed-end investment company share may sell at, above, or below its net asset value. Open-end investment company shares may never sell below the current net asset value. Shares are sold at the current market price; they are not redeemed like in an open-end fund.
All of the following may be included in investment company advertising EXCEPT: A. An application for a prospectus B. Information that is contained in the full prospectus C. A current yield quotation D. An application to invest
D. Under SEC Rule 482, which addresses mutual fund advertising, an application to invest may not be contained within an advertisement. The investor must receive a prospectus before investing in funds.
A tombstone ad states that Southern California Gas is issuing 8 3/4% first mortgage bonds at a price of 96.35% of their par value. The payment of interest and principal on the bond is secured by: The general credit of the state of California The mortgages on property owned by the state of California The state of California A lien on property owned by Southern California Gas
D. The tombstone ad states the bonds are first mortgage bonds, which means they are secured by a lien on property owned by the Southern California Gas Company. The company is a publicly owned corporation. Therefore, the bonds are not secured by property owned by the state of California.
Treasury arbitrage restrictions generally prohibit issuers of municipal securities from:
Investing bond proceeds in higher-yielding Treasury securities Because of the tax exemption allowed on municipal bond interest, municipalities are normally able to issue bonds with coupon rates below those of Treasury securities. This presents an excellent arbitrage opportunity. A municipality can borrow at a low rate of interest and invest the money in higher-yielding risk-free Treasury securities. Congress has enacted laws, known as Treasury arbitrage restrictions, that prevent state and local governments from misusing the tax exemption.
An individual who's concerned about the alternative minimum tax may find it most suitable to invest in:
Public use municipal bond The alternative minimum tax (AMT) is a method of calculating a return to ensure that wealthy taxpayers pay at least a minimum amount of tax. When calculating the AMT, certain income and deductions are considered tax preference items and become taxable and non-deductible. Private use (activity) municipal bond interest is considered a tax preference item. In order to avoid interest on a municipal bond becoming taxable under the AMT, an investor should purchase a public purpose (use) municipal bond. (17049)
If a portfolio manager is focused on keeping a client's assigned asset allocation properly balanced over the long term, she is using a: Tactical asset allocation strategy Strategic asset allocation strategy Risk management approach of laddering Rebalancing approach
Strategic asset allocation Strategic asset allocation attempts to maintain the assigned allocation over a long period and is more passive in nature than a tactical asset allocation strategy.
Which of the following parties states that a municipality may legally issue bonds?
The issuer's bond counsel writes the legal opinion. It states that the interest is exempt from federal taxation and that the issue is valid and legal. Prior to giving an opinion as to the validity and tax exemption of the issue, the issuer's bond counsel examines all federal, state, and local legislation to be sure that the issue meets all requirements. Neither the MSRB, the SEC, nor any other regulatory agency states that a municipality may legally issue bonds.
A customer is in her late 40s and is currently in the 15% tax bracket, but has recently inherited $6 million. While meeting with a brokerage firm, she indicates to a registered representative that she considers herself a conservative investor and wants the RR's advice concerning investing the inheritance. Which of the following choices is the BEST method for investing the funds? A. 20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes B. 25% in-state municipal bonds, 25% in out-of-state municipal bonds, 25% in corporate bonds, and 25% in Treasury bonds C. 30% in-state municipal bonds, 30% in out-of-state municipal bonds, 25% in Treasury bonds, 15% in revenue anticipation notes D. 40% in equities, a 30% mixture of in-state and out-of-state municipal bonds, 15% in Treasury bonds, 15% in revenue anticipation notes
d. Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. To determine the percentage of an investor's portfolio that should be allocated to equities, many strategists recommend taking 100% and subtracting the investor's age. Using this formula, allocating 40% to equities is reasonable (lower than the roughly 50% result) since she's a conservative investor. The remainder can be invested in various fixed-income securities and cash. However, after investing in the different funds, the income/dividends/potential capital gains will have the effect of increasing her tax rate, which makes the municipal bonds an attractive investment. In fact, the in-state municipal bonds will offer a higher after-tax return for this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities will 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 in short-term municipal securities, such as tax or revenue anticipation notes and tax-exempt money-market funds. Choosing to allocate only 20% in equities and 50% in tax anticipation notes will offer no growth potential. Ultimately, allocating 100% of the funds in fixed-income investments doesn't offer the customer a balanced approach and, therefore, the other choices are not appropriate allocations for the investor's funds.
