S7 Unit 2 - Unit 6

One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 21, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due? A) 20 B) 55 C) 24 D) 19

A) 20 Interest started accruing from the dated date of the bond (March 1). Interest accrues up to, but not including, settlement. Therefore, 20 days of accrued interest are due. The customer's first interest payment the following August will represent interest that has accrued from the dated date.

Which of the following refers to the primary market for municipal securities? A) A notice of sale B) The Real-Time Transaction Reporting System (RTRS) C) A sale from inventory D) A broker's broker

A) A notice of sale A notice of sale is published to provide syndicates with information on proposed new (primary market) issues. When bond dealers sell inventory, they are acting as principals in the secondary market. RTRS is the reporting system for secondary market trades. A broker's broker executes trades in municipal securities for or on behalf of another MSRB member firm. Transactions by a broker's broker could be in both the primary and secondary markets.

An investor is looking to purchase securities that are exempt from registration under the Securities Act of 1933. Which of the following securities would not fit the investor's condition? A) Debentures of First Newtown Bank Holding Corporation B) New Jersey Turnpike revenue bonds C) GNMA pass-through certificates D) 10-year Treasury notes

A) Debentures of First Newtown Bank Holding Corporation Bank holding company securities are not exempt from registration requirements under the Securities Act of 1933. Treasury securities, agency securities (such as GNMA pass-through certificates), and municipal securities (such as revenue bonds) are exempt from registration requirements under the act.

For which of the following would the net revenue-to-debt service ratio be applicable? A) Hospital bonds B) General obligation bonds C) Tax anticipation notes D) School bonds

A) Hospital bonds

A corporation has 1 million shares of common stock outstanding. There is also a $100 par 6% cumulative convertible preferred issue with 100,000 shares outstanding. If the corporation wishes to use a rights offering to raise additional capital by selling 500,000 new shares of common, which of the following statements is true? A) It will require two rights to buy one new share. B) Each preferred share would receive five rights. C) Each common share will receive half of a right. D) It will require five rights granted to the preferred stockholders to buy one new share.

A) It will require two rights to buy one new share. The number of rights necessary to acquire one new share is computed by dividing the number of outstanding shares of common stock by the number of new shares being issued. In this question, that is 1,000,000 ÷ 500,000 = 2. Preferred stock does not receive preemptive rights; the information about the 100,000 shares is included as irrelevant information (makes the question more difficult for some and is something the test loves to do).

Which of the following is a debt instrument that pays no periodic interest? A) STRIPS B) Treasury bond C) GNMA D) Treasury note

A) STRIPS STRIPS are Treasury bonds with the coupons removed. STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.

The visible supply may be found in A) The Bond Buyer. B) The Wall Street Journal. C) the S&P Bond Guide. D) the electronic OTC Pink.

A) The Bond Buyer. The Bond Buyer, a daily publication dealing primarily with the new issue municipal market, publishes information on the visible supply, the estimated amount of new municipal bonds to be sold over the coming month.

Which of the following is not an advantage of purchasing American depositary receipts (ADRs)? A) They eliminate exchange rate risk. B) Transactions are done on an organized exchange in the U.S. C) Foreign taxes withheld can be claimed as a credit to offset income taxes on dividends received. D) They allow U.S. investors to buy foreign country stock denominated in dollars.

A) They eliminate exchange rate risk.

Which of the following is true with respect to excess capital losses realized by an individual taxpayer? A) They may be carried forward indefinitely until exhausted. B) They may be carried back up to three years and carried forward indefinitely until exhausted. C) They may be carried forward with a time limit of five years. D) No more than $3,000 per year may be used against capital gains.

A) They may be carried forward indefinitely until exhausted.

The term for the annual increase of cost basis of a municipal bond purchased at a discount is A) accretion. B) amortization. C) internal rate of return. D) basis adjustment.

A) accretion.

In a 3-for-2 stock split, an investor will A) have 50% more shares at two-thirds the price. B) have 50% fewer shares at twice the price. C) have two-thirds fewer shares at a 50% higher price. D) have 50% more shares at half the price.

A) have 50% more shares at two-thirds the price.

Many investors diversify by adding foreign securities to their portfolios. Those who do so with ADRs are least likely to be concerned with A) liquidity risk. B) political risk. C) market risk. D) currency risk.

A) liquidity risk.

American depositary receipt (ADR) owners have all the following rights except A) the right to sell the ADR in the foreign market. B) the right to receive the underlying foreign security. C) the right to sell in the secondary market. D) the right to receive dividends in U.S. dollars.

A) the right to sell the ADR in the foreign market. The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded in the United States. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas.

SEC rules require that customers be given a copy of the risk disclosure document before their first transaction in a penny stock. The member firm must receive a signed and dated acknowledgment from the customer that the document has been received. In addition to obtaining the client's signature, the SEC requires the firm to wait at least A) two business days after sending the statement before executing the first trade. B) five business days after receiving the statement before executing the first trade. C) two business days after receiving the statement before executing the first trade. D) five business days after sending the statement before executing the first trade.

A) two business days after sending the statement before executing the first trade.

When a registered representative recommends a municipal bond purchase to a customer, which of the following would be of least consideration regarding suitability? A) The customer's state of residence B) The intended use of funds raised by the issue C) The customer's tax bracket D) The bond's rating

B) The intended use of funds raised by the issue

When a municipal bond has a net revenue pledge, what is the first item that gets paid from the revenue received?

B) The operations and maintenance fund Under a net revenue pledge, operations and maintenance expenses are paid before all debt service. Payments are made in the following order: operating and maintenance expenses, debt service, debt service reserve, and surplus.

One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that A) agency issues frequently trade on the NYSE, while Treasuries never do. B) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing. C) agency issues are more likely to be issued in larger amounts. D) agency issues are taxable on the federal level, while Treasury issues are not.

B) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing.

Customers starting a Section 529 plan for higher education must receive A) an offering statement. B) an official statement. C) a prospectus. D) a brochure prepared by the MSRB explaining the plan.

B) an official statement. Section 529 plans are legally municipal fund securities. As such, just as with any new issue municipal security, an official statement must be provided.

If your client has a $21,000 net capital loss this year and plans to apply the maximum deduction toward his ordinary income for the year, after this year he may A) carry the loss forward indefinitely and offset capital gains only. B) deduct a maximum of $3,000 per year and carry the remaining loss forward indefinitely. C) carry $3,000 of the loss forward. D) not carry the loss forward.

B) deduct a maximum of $3,000 per year and carry the remaining loss forward indefinitely. Capital losses may be used to offset capital gains. Once all capital gains have been offset, $3,000 of net capital losses may be used to offset ordinary income annually. Remaining losses may be carried forward in future years until the loss is exhausted.

Information found in The Bond Buyer would include all of the following except A) Revdex. B) secondary market volume. C) the placement ratio. D) the 30-day visible supply.

B) secondary market volume. The Bond Buyer is a source of information for new (primary market) municipal bond issues. It contains Revdex, an index for revenue bonds, as well as general obligation bond indexes. Additionally, it includes the 30-day visible supply and the placement ratio.

After an extensive feasibility study on the viability of a new shopping mall, the City of Mount Vernon decided to issue bonds that depend on the earning requirements of the facilities. All of the following statements are true except A) that the city is issuing revenue bonds. B) that the bonds are backed by the full faith and credit of the City of Mount Vernon. C) that investor risk depends on the specific characteristics of the project. D) that rental revenues collected from shop owners within the mall will pay the bonds' debt service.

B) that the bonds are backed by the full faith and credit of the City of Mount Vernon.

A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true except A) there is no debt limitation on the issue. B) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. C) the interest on these bonds is not considered a preference item for the alternative minimum tax. D) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used.

B) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. Because this is an "except" question, we are looking for the false statement. The public service commission would have no approval power over revenue bond interest and principal payments. Because the bond is not backed by the taxing authority of the city, it is a revenue bond rather than a general obligation bond. The funds for payment of interest and repayment of principal are generated through the fees paid by those using the city's water and sewage facilities. Being a public rather than private facility, these would not be alternative minimum tax bonds.

For an investor who needs regular income, a GNMA pass-through certificate would be attractive because A) the security has the direct backing of the U.S. government. B) the investor would receive a monthly check. C) the income is not taxable on the state or local level. D) each check is for the same amount.

B) the investor would receive a monthly check.

Lambda Corporation has received a donation of 100,000 shares of its common stock from the spouse of the deceased founder of the company. This would appear on the company's books as A) reacquired stock. B) treasury stock. C) unissued stock. D) authorized but unissued stock.

B) treasury stock.

A municipal A & O bond is issued on October 1, 2010, with a 10-year stated maturity. If a trade in this bond settles on April 1, 2020, how many days' worth of accrued interest will be added to the price of the bond? A) 90 B) 1 C) 0 D) 180

C) 0 Interest on a municipal bond begins to accrue on the previous payment date and ends the day before settlement date. Always assume a bond pays interest on the first of the month unless told differently. In this case, interest is payable on April 1 and October 1 each year. Whenever a bond trade settles on a payment date, it trades flat (without accrued interest).

An investor purchases five Mount Vernon Port Authority J & J 1 bonds in a regular way transaction on Wednesday, October 18. How many days of accrued interest are added to the bond's price? A) 114 B) 110 C) 109 D) 108

C) 109 Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. This bond pays interest on January and July 1 (J & J 1). Therefore, July, August, and September each have 30 days of accrued interest, and October has 19 days of accrued interest; this totals 109 days. Settlement date is Friday, October 20. The easiest way to do these accrued interest questions is to set the dates up numerically. That is, the settlement date is 10/20 and the previous interest payment date is 7/01. Do the subtraction: 10/20 -7/01 3/19 3 × 30 = 90 +19 = 109

Your client owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? A) 125 shares at $18.75 B) 100 shares at $31.25 C) 125 shares at $20 D) 100 shares at $25

C) 125 shares at $20 Stock dividends make the number of shares owned increase and the cost per share decrease. The overall value should remain unchanged before and after the adjustment: 125 shares × $20 = $2,500, and 100 shares × $25 = $2,500.

Which of the following statements regarding negotiable certificates of deposit (CDs) are true? I. The issuing bank guarantees them. II. They are issued at a discount. III. Minimum denominations are $1,000. IV. They are traded in the secondary market.

C) I and IV Negotiable CDs are issued primarily by banks and backed by the issuing bank. They are issued at face value, and the minimum denomination is $100,000. These are sometimes referred to as jumbo CDs.

An official statement has a dated date of March 1, but the first interest payment is October 15. This most likely reflects A) a normal payment cycle on the bond of 7.5 months. B) a when-issued transaction. C) a long coupon. D) a misprint in the official statement.

C) a long coupon.

The RJN Corporation has issued warrants where each warrant offers the holder the right to purchase one share of RJN's common stock for $20 per share. The warrants are exercisable anytime within the next five years. Chelsea purchases 80 warrants for $2 each. If three years after the purchase, the market price of RJN common stock has risen to $25 per share and Chelsea sells the warrants for their intrinsic value, she has realized A) a short-term capital gain of $400. B) a short-term capital gain of $240. C) a long-term capital gain of $240. D) a long-term capital gain of $400.

C) a long-term capital gain of $240. The intrinsic value of a warrant is the difference between the exercise price and the current market price. Being able to purchase stock at $20 per share when the market price is $25 per share means the warrant is intrinsically worth $5. With 80 warrants, the sale proceeds are $400 (80 × $5 each). Don't forget that Chelsea paid $2 for each warrant, a cost of $160 (80 × $2). That makes her net gain $240 ($400 proceeds − $160 cost). The gain is long-term because she held the warrants longer than 12 months.

Synapse Communication Corporation (SCC) is growing. To finance the expansion, the company has a $100 million debenture offering. Attached to the offering are five-year warrants to purchase SCC common shares. Each warrant allows for the purchase of one SCC share at a price of $53 per share. Three years after the issue date, SCC stock is trading at $63 per share. Each warrant has A) an intrinsic value of $20 per warrant. B) an intrinsic value of $5 per warrant. C) an intrinsic value of $10 per warrant. D) no intrinsic value, only time value.

C) an intrinsic value of $10 per warrant. A warrant has intrinsic value when the exercise price is lower than the stock's current market price. In this question, each warrant allows the holder to purchase one share of a $63 stock for $53 per share. That is a $10 per share difference. Therefore, intrinsically, the warrant is worth $10. With two years to go, it also has time value, but the question is not dealing with that.

All of the following are examples of short-term municipal obligations except A) tax and revenue anticipation note (TRAN). B) bond anticipation notes (BAN). C) state and local government securities (SLGS). D) tax anticipation note (TAN).

C) state and local government securities (SLGS). SLGS are issued not by a municipality, but by the U.S. Treasury Department to assist local governments in complying with arbitrage restrictions imposed by the IRS. The other choices are examples of short-term funding used by municipalities.

Covenants in the trust indenture of a municipal revenue bond are promises made by the issuer to the bondholders. All of the following are potential covenants except A) the insurance covenant. B) the maintenance covenant. C) the interest rate covenant. D) the rate covenant.

C) the interest rate covenant.

A syndicate is underwriting $200 million in municipal bonds and sets up an Eastern underwriting account with 10 syndicate members with equal commitments. Only one syndicate member sells out its 10% commitment, amounting to $20 million sold by it. The remaining nine syndicate members leave $12 million of the bonds among them unsold. For the member who met its 10% allocation commitment, what is the member's financial obligation regarding the unsold bonds? A) $12 million B) $12 million divided by the other nine syndicate members C) $0 D) $1.2 million

D) $1.2 million An Eastern account means undivided liability where each member has liability for any remaining bonds left unsold by other syndicate members. The responsibility is in the same percentage as their allocation. Because this member was committed for 10%, the responsibility is $1.2 million.

A municipal fund security that provides tax-advantaged savings accounts for individuals with disabilities is the ABLE account. Eligibility is available to those whose disability occurred before turning age A) 30. B) 21. C) 18. D) 26.

D) 26.

One of your customers calls and asks you about a security with an S&P rating of SP-2. The customer is most likely asking about which of the following? A) Commercial paper B) Your firm's privacy notice C) A municipal bond D) A municipal note

D) A municipal note The three major rating services each have their own rating system for short-term municipal debt (notes). In the case of Standard and Poor's, the ratings are SP-1, SP-2, and SP-3 in declining order of quality. Regulation S-P (with the hyphen between the S and P) deals with privacy notices. Although it is unlikely to be tested, commercial paper is rated A-1, A-2, A-3, and then into the Bs.

Which of the following statements concerning the Federal National Mortgage Association (FNMA or Fannie Mae) is true? A) Its pass-through certificates are guaranteed by the U.S. government. B) Interest on FNMA certificates is tax free at all levels. C) FNMA is a municipal entity. D) It provides liquidity to the U.S. housing finance market primarily by securitizing mortgage loans on residential properties into mortgage-backed securities that it guarantees.

D) It provides liquidity to the U.S. housing finance market primarily by securitizing mortgage loans on residential properties into mortgage-backed securities that it guarantees. FNMA is a publicly held corporation; it is not owned by the federal government. The interest income on all mortgage-backed securities is fully taxable on the local, state, and federal levels. Although FNMA is a government agency, FNMA pass-through certificates are not guaranteed by the U.S. government. The only tested U.S. agency whose securities are considered direct obligations of the U.S. government is the Government National Mortgage Association (GNMA).

Because money market instruments are designed to meet the short-term cash needs of issuing institutions, which of the following is not a money market instrument? A) Municipal construction loan note B) Federal Farm Credit Bank note maturing in one year or less C) Commercial paper issued by the finance corporation of a major automobile manufacturer D) Newly issued Treasury notes issued to meet a specific government funding requirement

D) Newly issued Treasury notes issued to meet a specific government funding requirement

All of the following might be used to measure the marketability of a new municipal general obligation issue except A) visible supply. B) S&P's ratings. C) placement ratio. D) Revdex.

D) Revdex. Revdex is an index of yields on 25 revenue bonds with 30-year maturities that are traded in the secondary market.

Which of the following details would not be found on the bond resolution for a revenue bond? A) The maintenance covenant B) The rate covenant C) The insurance covenant D) The tax covenant

D) The tax covenant Unless something in the question refers to special taxes, revenue bonds do not have tax backing. The other items are included in the bond resolution (or trust indenture). The rate covenant is a promise to maintain rates sufficient to pay expenses and debt service. The maintenance covenant is a promise to maintain the equipment and facility/facilities. The insurance covenant is a promise to insure any facility.

The computation for accrued interest on corporate and municipal debt obligations is based on A) a 30-day month and an actual-day year. B) an actual-day month and an actual-day year. C) an actual-day month and a 360-day year. D) a 30-day month and a 360-day year.

D) a 30-day month and a 360-day year. Accrued interest on corporate and municipal bonds is computed on a 30-day month and a 360-day year.

One of your customers owns 100 shares of GTS common stock. The purchase was made two years ago at a price of $51 per share. GTS has recently declared a 3:2 stock split. At the customer's request, as soon as the new shares are in the account, you sell them and $2,000 from the proceeds of the sale is credited to the customer's account. Based on this information, the tax impact of this transaction is A) a short-term capital gain of $300. B) a long-term capital loss of $1,333 and a short-term capital loss of $667. C) a long-term capital loss of $1,400. D) a long-term capital gain of $300.

D) a long-term capital gain of $300. Immediately after the stock split, the total investment of the initial position remains unchanged at $5,100 (100 shares at $51 per share). After the stock split, the customer owns 150 shares (3/2 × 100 = 150 shares). Therefore, the adjusted cost basis per share is $34 ($5,100 ÷ 150 shares). Those 50 shares were sold for $2,000 and have a cost basis of $1,700 ($34 × 50). That is a profit of $300. Alternatively, you could say that 50 shares sold for $2,000 represents a selling price of $40 per share ($2,000 ÷ 50 shares), which is a $6 per-share profit ($40 minus the $34 cost basis). Fifty shares times $6 equals a profit of $300. The gain is long-term because the holding period of securities received through a stock split (or stock dividend) is that of the original purchase. If you have to guess, or are running out of time, when you see two identical numbers with the only difference being short- or long-term gain, in almost all questions, one of those two is the correct answer. Now you have a 50% change of guessing correctly and, if you remember that the holding period always begins with the initial purchase, then the odds are 100% in your favor.

Variable-rate municipal bonds are subject to all of the following risks except A) liquidity. B) default. C) market. D) interest rate.

D) interest rate. A variable-rate bond is one whose coupon is adjusted periodically (semiannually or annually) to reflect current interest rates.

A city and school district are coterminous. When evaluating the debt issues of the city, the school district debt would be considered A) underlying debt. B) a double-barreled bond. C) secondary debt. D) overlapping debt.

D) overlapping debt. The term overlapping debt refers to the issuer's proportionate share of the debt of other local governmental units that either overlap it (the issuer is located either wholly or partly with the geographical limits of the other units) or underlie it (the other units are located within the geographical limits of the issuer). In this case, the school district is probably within the geographical limits of the city. That's what coterminous means.

The City of Concord has floated a new bond issue to expand the public library. Concord has arranged for these bonds to be insured. If Concord defaults on these bonds for any reason, the insurance company will A) demand additional premiums to maintain the coverage. B) immediately pay the bondholders the principal and the interest that has accrued thus far. C) pay the city treasurer the principal so that the city has the funds to pay the principal and interest to the bondholders. D) pay the bondholders the principal and interest as scheduled.

D) pay the bondholders the principal and interest as scheduled. Bond insurance is a feature offered by many municipal bonds. The effect of the bond insurance is that both interest and principal will be paid as scheduled, over time, through the life of the bond. Payments are made to the bondholders by the insurance company.

All of the following are used to determine the suitability of recommendations made to a municipal bond customer except A) the customer's state of residence. B) the customer's tax bracket. C) the structure of the customer's existing portfolio. D) the customer's marital status.

D) the customer's marital status.

Which of the following regarding T-bills are true? I. T-bills trade at a discount to par. II. T-bills have maturities of 1 to 10 years. III. Most T-bill issues are callable. IV. T-bills are a direct obligation of the U.S. government.

I and IV

A corporate offering of 200,000 additional shares to existing stockholders may be made through

a rights offering. A rights offering is an offering of additional shares of stock to existing shareholders.