Series 7
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:
$1,250 It is necessary to find the conversion ratio to solve this problem. The bond is convertible at $40. $1,000 divided by $40 equals the conversion ratio of 25 shares of stock to one bond, or 25 to 1. To find the parity price of the bond, multiply the market price of the stock of $50 by the conversion ratio of 25 ($50 x 25 = $1,250). This means that the bond must sell for $1,250 to be equal in value to the stock when the stock has a market value of $50 per share. (72732)
For its most recent fiscal year, ABC Corporation had $20 million in net income. The company also paid a $5 million dividend to its preferred shareholders. The corporation has 7.5 million shares outstanding, but has warrants that permit holders to buy 2.5 million shares. What's the corporation's diluted earnings per share?
$1.50 To find a company's earnings per share (EPS), start with its net income, then subtract any preferred dividends, and divided by the common shares outstanding (i.e., EPS = (Net Income - Preferred Dividends) ÷ Common Shares Outstanding). Fully diluted earnings assumes that all convertible securities, rights, and warrants have been converted or exercised. This will typically increase the shares outstanding and lower the EPS. In this question, the net income is $20 million and the company pays out $5 million in preferred dividends; therefore, earnings available to common is $15 million. After the warrants are exercised into common shares, the shares outstanding is 10 million (7.5 million + 2.5 million). The resulting diluted earnings per share $1.50 ($15 million ÷ 10 million).
A client purchased 300 shares of Emily Airlines common stock at $28 a share in July of 2011. In June of 2012, the client writes 2 October 35 calls at 5 against the stock position. If the market price of Emily Airlines is trading at $39 at expiration, what is the client's realized gain?
$2,400 The question is asking for the client's realized gain. The investor is long 300 shares, but is writing only 2 covered calls. Since the market price of Emily Airlines (39) is above the strike price (35) at expiration, the call options will be exercised against the writer. The client will be obligated to deliver or sell 200 shares at $35. The realized gain on the stock is $1,400 (200 shares purchased at $28, which is sold at $35). The client received $1,000 from writing two covered call options (2 calls @ 500). Therefore, the total realized gain is $2,400. The client will still own 100 shares at a cost basis of $28.
In June, a client buys 100 shares of XYZ Corporation at $27 per share and writes an XYZ October 30 call at a $3 premium. The trade is executed in a cash account. What is the breakeven point for the writer?
$24 To find the breakeven point for the covered call writer, subtract the premium from the cost of the stock. The cost of the stock ($27) minus the premium ($3 per share), equals a breakeven point of $24
The minimum equity requirement for a pattern day trader is:
$25,000, which must be deposited before the client may continue day trading The minimum equity requirement for a pattern day trader is $25,000. This amount must be deposited in the account before the customer may continue day trading and must be maintained in the customer's account at all times. Day-trading buying power is limited to four times the trader's maintenance margin excess, determined as of the close of the previous day.
An account has $140,000 in fully paid marginable securities, $50,000 in non-marginable securities, and $80,000 of cash. What's the total amount of stock that can be purchased on margin?
$300,000 Customers can buy two times the amount of cash they have in their account (e.g., Buy $160,000 stock, pay cash for $80,000 and create a debit of $80,000 in margin account). Marginable securities have a loan value of 50%, which means the customer can use 50% of the marginable securities' market value instead of a cash deposit. This means a customer could use 100% of the marginable securities' value to buy another stock on margin. For example, a customer could buy $140,000 of XYZ stock on margin; using $140,000 of marginable ABC stock. The customer would get credit for 50% of ABC's market value for $70,000 (i.e., $140,000 ABC x 50% loan value). The customer could then borrow the remaining $70,000 and increase their debit balance to acquire the $140,000 of XYZ stock. In this question the customer could buy a total of $300,000 on margin ($160,000 using cash + $140,000 loan value from marginable securities). Non-marginable securities don't provide customers with any loan value. (21923
An investor writes 5 uncovered ABC May 35 puts for a premium of 3 per contract, when ABC has a market price of $36. At what market price will the investor break even?
$32 The writer of a put calculates his breakeven point by deducting the $3 premium from the $35 exercise price. The writer, therefore, breaks even at $32. The breakeven point is a per-share price. The fact that the investor writes 5 contracts is not relevant.
An investor purchased 100 shares of ABC at 62.25 and on the same day purchased an ABC Jan 60 put at 2.50. After the put expired, the investor sold the ABC stock at 68.75. The investor should report a profit of:
$400 When a married put (stock and put purchased on the same day) expires, the premium is added to the cost basis of the stock. The cost basis then becomes 64.75 (62.25 + 2.50). The sale at 68.75 results in a profit of $4 per share (68.75 - 64.75).
What is the SRO maintenance requirement on a $1 million short position of a 3x Inverse Gold Index ETF?
$900,000 Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverage factor by the standard SRO maintenance requirement. In this case, the standard short requirement is 30% multiplied by a factor of 3, so the client must maintain a 90% margin. $1,000,000 x 30% = $300,000. $300,000 x 3 = $900,000.
A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%. How much cash may the customer withdraw from the account?
0 The long account is restricted because the equity of $10,000 is less than the initial FRB requirement ($30,000 market value times 50% FRB requirement equals $15,000 required equity). There is no excess equity in the short account since the equity of $3,000 ($10,000 credit balance minus $7,000 market value) is less than the FRB requirement of $3,500 (50% of $7,000 market value).
A customer enters an immediate or cancel (IOC) buy limit order for 500 shares of ABC stock at $15.70. The broker-dealer also receives a market order to buy 1,000 shares for another customer. If the chart below shows the bids and offers before the market order is executed, how much of the customer's IOC order gets filled? Bid Shares Offer Shares $15.65 300 $15.72 800 $15.62 500 $15.70 300 $15.59 300 $15.68 400 $15.57 400 $15.66 400
100 shares Broker-dealers are obligated to execute market orders before they execute limit orders. In this question, since both customers are buying, the broker-dealer will choose the lowest offers first. This means the market order will be executed for 400 shares at $15.66, then will buy another 400 shares at $15.68, and finally 200 shares at $15.70. Notice, that the offer at $15.70 originally had 300 shares, but only 200 were executed. The IOC order is next to be filled, and will pick up the remaining 100 shares in the offer at $15.70. However, the IOC cannot be executed against the offer at $15.72 because the IOC has a limit of $15.70 or lower. As a result, the IOC only receives a partial fill for 100 shares.
Use the following quote to answer this question. ABC25.13 + .25B 25A 25.25 Excluding any markups, what price will a customer pay to purchase the security?
25.25 When purchasing stock, a customer will pay the ask (offer) price. A customer selling stock will receive the bid price.
An investor owns 12,000 shares of restricted stock. There are 1,000,000 shares outstanding and the stock's average weekly trading volume over the previous four weeks is 4,000 shares. After filing Form 144, if the client had sold 2,000 shares one month ago, how many shares could be sold today?
8,000 After filing Form 144, an investor has 90 days to sell the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks. In this example, 1% of the 1,000,000 outstanding shares is 10,000 shares, which is greater than the average weekly trading volume for the past four weeks of 4,000 shares. As a result, the investor is able to sell an additional 8,000 shares after having sold 2,000 shares in the previous month. (17065)
Which of the following bonds has the most interest-rate risk?
A 30-year Treasury STRIP The bond with the most interest-rate risk or price volatility is the bond with the longest maturity and the lowest coupon.
A customer wants to purchase an investment that will allow him to profit from his belief that interest rates will decline over the next 15 years. The recommendation of which of the following securities is NOT consistent with the customer's belief?
A floating rate note Buying a floating rate note is not consistent with this strategy since the interest rate will change (i.e., float) over the bond's life.
For a corporation that's in the 21% tax bracket, which of the following choices will provide the best return if the corporation wants to invest some of its surplus cash?
A preferred stock paying a 7.50% dividend If a corporation owns at least 20% of the distributing corporation, it's only required to declare only 35% of the dividends received as income (i.e., the remaining 65% is excluded). If a corporation owns less than 20% of the distributing corporation, it's only required to declare 50% of the dividends received as income (i.e., the remaining 50% is excluded). In order to answer this question, the after-tax return on each investment must be found. To calculate each answer, let's assume that the corporation is simply investing $100 (please note, the amount chosen will not impact the correct answer). A $100 investment in the 7.50% preferred stock will generate $7.50 of total income. However, only $3.75 is taxable income ($7.50 x 50%). Therefore, after paying $0.79 in taxes ($3.75 x 21% tax rate), the after-tax return is $6.71 ($7.50 - $0.79).
Regarding variable annuities, which of the following statements is TRUE?
A registered principal is required to review and approve a transaction in a variable annuity
An investor owns stock that has increased in value. Which of the following is the most suitable recommendation for an RR to make if the investor wants to protect her profit?
A sell stop order that's placed below the current market price or a long put position
An XYZ Corporation convertible bond is selling in the market at $1,248.75. It is convertible at $30. XYZ common stock's market price is 37.50. The bond has been called at 103. Which of the following activities is the LEAST attractive alternative for a holder of the bond?
Allow the bond to be called The holder could sell the bond and receive $1,248.75. If he converted, he would receive 33 1/3 shares ($1,000 par divided by $30 per share conversion feature) with a total value of $1,249.88 (33 1/3 x $37.50). The least attractive alternative is to allow the bond to be called and receive $1,030.
If Dealer A offers bonds on a firm basis to Dealer B with a recall, which of the following statements is NOT TRUE?
A time to sell the bonds has not been set. When a dealer (e.g., Dealer B) wants to buy bonds, it requests for another dealer (e.g., Dealer A) to make a firm offer which will be held good for a specified time (e.g., one hour). At this point, the bonds are considered to be out firm. Dealer B is not committing to buying the bonds right away, but can buy the bonds from Dealer A before anyone else within the preset time. A recall privilege is often set, which gives Dealer A the right to notify Dealer B that it has only a preset time (e.g., five minutes) to buy the bonds. The recall is typically exercised if Dealer A has another interested buyer. If Dealer B doesn't buy the bonds after the recall expires, the firm pricing is cancelled.
The rights and obligations of limited and general partners are found in the:
Agreement of Limited Partnership The Agreement of Limited Partnership (also referred to as the Partnership Agreement) defines the responsibilities of the limited and general partners in the program. The filing of the Certificate of Limited Partnership starts the business or is considered to give the business life. The Subscription Agreement is the document through which an individual "applies" to become a limited partner. For private placements, the Offering Memorandum is a disclosure document that serves the same purpose as a prospectus.
The sponsor of the ABC Funds wants to publish some advertisements in several personal finance magazines which describe the past performance of ABC's Balanced Fund. Which of the following documents can contain the fund's performance?
An omitting prospectus and supplemental sales literature Performance information may be included in omitting prospectus ads and supplemental sales literature. Performance data must include the fund's total return for the past one-, five-, and 10-year periods. (25082)
An investor had purchased a municipal bond at a discount which is currently selling at a premium. This is an example of:
Appreciation The bond has appreciated (increased) in value. The investor will not have a capital gain unless the bond is sold. Accretion is associated with increasing the value each year of an original issue discount bond. Amortization is associated with decreasing the value of a premium bond.
Cash dividends declared by a corporation:
Are a current liability to the corporation when declared Cash dividends are considered a current liability to a corporation when declared by the board of directors. The board of directors of the corporation has the authority to declare dividends. Working capital (current assets - current liabilities) is reduced since current liabilities are increased. Although dividends are currently taxed at the same rate as capital gains, they are not capital gains. Dividends are taxed as dividends.
An advisory client has a portfolio that consists of a diversified group of domestic securities with different maturities. Diversification protects the client from which risks?
Business risk, financial risk, and liquidity risk All portfolios, including diversified portfolios, are subject to market risk. In order to manage this systematic risk, an investor can hedge (e.g., buy puts on stock). Diversification does minimize non-systematic, such as business, financial, and liquidity risks. (25059)
An American business is importing goods from Europe. Which option position would BEST hedge the firm's currency risk?
Buy euro calls If the euro rises against the U.S. dollar, American importers will be forced to pay more for their imports. As a result, the best hedge is to buy euro call options. If the euro rises, the calls will become profitable and offset the importer's cost. Selling options is not an effective hedge since the maximum gain is limited to the premium and that amount is unlikely to offset all of the importer's rising costs. Remember, there are no U.S. dollar calls and/or puts available for U.S. investors.
An investor is considering writing an XYZ June 70 call for a $4 premium, but is concerned about the risk of an unlimited loss. If added, which of the following positions provides the BEST protection?
Buying an XYZ June 75 call for a premium of 1 The short call position alone has unlimited risk since there's no limit to how high the underlying stock's price can rise. However, if the investor also buys an XYZ June 75 call for 1, it creates a credit spread. With both credit and debit spreads, the maximum gain and the maximum loss are limited. In this example, the potential loss is only $200, which is equal to the 5-point difference between the strike prices (75 - 70) subtracted by the net premium received of 3. Let's assume that XYZ stock rises to 80 and the investor is exercised against on the 70 call that was sold. She would be obligated to sell XYZ stock at 70. However, by being long the 75 call, she has reduced her upside risk because she's able to exercise it, buy the stock at 75, and deliver the shares to cover the short call.
A customer is currently long an XYZ May 40 Put option. A straddle is created if she:
Buys an XYZ May 40 Call A straddle is created by buying both or selling both a call or a put on the same underlying security, with the same expiration, and with the same strike price. Since this investor is currently long an XYZ May 40 Put, buying an XYZ May 40 Call will create a straddle.
Which of the following will not influence the calculation of fully diluted earnings per share?
Call options Convertible bonds, convertible preferred stock, warrants, and rights are convertible into additional shares of an issuer's stock. Fully diluted EPS assumes that all convertible securities have been converted into additional shares of common stock. The exercise of call options doesn't result in the creation of additional shares of common stock. (17073)
If the auction for auction rate securities fails, the current holder will:
Continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents A failed auction occurs when there are an insufficient number of bids to cover the amount of auction rate securities being sold. If this happens, the holders will continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents. This rate is normally higher than the rate that would have cleared a successful auction.
If a company pays a cash dividend, which of the following is TRUE?
Current assets decrease As it relates to the payment of a dividend, the funds being paid out come from the corporation's cash (a current asset). It is important to distinguish the difference in the treatment of a dividend being declared compared to a dividend being paid. When a company declares a cash dividend, dividends payable (a current liability) will be increased by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. Regardless of the specific corporate transaction, the balance sheet must remain balanced.
If an analyst wants to determine a company's ability to pay its liabilities that will be maturing in one year with its liquid assets, he will be most interested in the:
Current ratio The current ratio is a comparison of current assets to current liabilities for a one-year period and is used as an indicator of a company's ability to pay those liabilities. On the other hand, the acid-test (quick asset) ratio excludes the company's inventories and is usually for a one- to three-month period.
A customer buys 100 shares of a fund and pays the market price plus a commission. The investor has bought:
ETF shares 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.
In mutual fund advertising, it is NOT permissible to state that:
Dollar cost averaging assures long-term growth Mutual fund advertising may not state that any systematic method of investing will assure a profit or a specific rate of return.
A reverse convertible security would be MOST suitable for an investor who:
Desires higher yield and is anticipating the value of the underlying asset will remain stable
Which of the following terms relates to the graph that is used to determine optimal portfolios resulting from a comparison of risk and return?
Efficient frontier The key to this question is the reference to the term graph. According to the Modern Portfolio Theory, a graph of optimal portfolios can be created on what is referred to as the efficient frontier. As for the wrong answers, the yield curve represents the plotting of a bond's yield against the length of time until its maturity. Duration measures the sensitivity of a bond's price due to small changes in interest rates. Alpha is a form of risk-adjusted return for an asset.
When the proceeds of a refunding issue are deposited into an account that will be used to pay the interest and principal on the issue being refunded to its maturity date, the outstanding bond is said to be:
Escrowed to maturity When the proceeds of a refunding issue are deposited in an escrow account used to pay the interest and principal on the issue being refunded to its final maturity date, the outstanding bond is said to be escrowed to maturity. The process is referred to as advance refunding. The new issue of bonds would be referred to as the refunding issue. The outstanding bond would be referred to as being prerefunded.
An individual who's interested in putting aside funds for retirement, opens an account and purchases a variable annuity. Two months later, the customer contacts his RR because he's concerned that the variable annuity may not be the best product. During the discussion, the RR explains the surrender fees and, as a result, the customer states that he wants to transfer the variable annuity to another broker-dealer. What's the BEST course of action for the RR to take?
Fill out the necessary forms to transfer the account to the other broker-dealer. The best course of action is to follow the customer's instructions and to fill out the necessary forms for transferring the account to the other broker-dealer.
A broker-dealer is NOT required to maintain a record of which of the following items?
Final prospectuses According to FINRA rules, all retail communications, institutional communications, research reports, and correspondence (including e-mail and instant messages) that are used by a member firm must be kept on file for a minimum of three years. SEC registration statements (i.e., Form S-1 or S-3), prospectuses, and other documents that are written by an issuer are not required to be kept on file by member firms. (17024)
An elderly woman never chose to participate in her work-sponsored, tax-advantaged retirement plan. She's now interested in investing for her retirement, but doesn't want to be obligated to take a required minimum distribution (RMD). She also needs a plan into which she's able to continue contributing even after she turns age 73. Which of the following is the MOST suitable?
Fixed annuity Fixed annuities are the most suitable because the woman is able to contribute an unlimited amount, even after she turns the age of 73 (in 2022, the age was 72). Also, retired individuals cannot contribute to employer-sponsored plans; instead, contributions are only permitted for current employees. Similarly, only individuals who have earned income are permitted to contribute to an IRA, even after the age of 73. Since the question seems to indicate that the woman is no longer working, she will not have earned income and is therefore be ineligible to contribute to a qualified plan.
Which of the following new bond issues will MOST likely be purchased through competitive bidding?
General obligation bonds 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.
A customer is considering an investment in a hedge fund since many of his business associates have been receiving high returns over the last few years. A registered representative may make which of the following statements?
Hedge funds often use higher degrees of leverage than mutual funds Mutual funds and hedge funds both pool investors' money to manage assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and often employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.
Various tranches of a long-term speculative bond issue are called by the issuer. The effect on the remaining outstanding bonds is likely to be:
Improved quality When part of an issue of long-term speculative bonds is called, the effect on the remaining outstanding bonds will be an improvement in their quality. The issue will have less debt outstanding and there will be less interest charges to pay, which improves the quality of the issue.
MSRB rules state that subject or nominal quotes may be given for:
Informational purposes MSRB rules state that a dealer who does not wish to buy or sell securities based on a quote given, must identify the quote as a subject or nominal quote. Such quotes can be given for informational purposes only.
A portfolio composed of five different state G.O. issues will NOT provide an investor with protection from:
Interest-rate fluctuations A diversified portfolio will provide protection from a variety of risks, but cannot protect against fluctuating interest rates. All bonds, regardless of the issuer's location, are subject to interest-rate risk. (74192)
What's the FINRA filing requirements for communication that's exclusively made available to institutions?
It is NOT required to be filed with FINRA. As with correspondence, institutional communication is NOT required to be filed with FINRA or preapproved by a principal of the broker-dealer. Instead, institutional communication must simply be reviewed internally. Only retail communications are required to be filed with FINRA.
Which of the following statements is TRUE regarding dollar cost averaging?
It is a systematic method of investing Dollar cost averaging is a systematic method of investing that results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits are not obtained with funds that have a stable asset value, such as money-market funds.
Which of the following statements is NOT TRUE regarding a bond's nominal yield?
It must be approved by the company's board of directors. The nominal yield is set at the time of issuance and does not change. It indicates the dollar amount of income the bondholder will earn on each $1,000 of principal invested. For example, a 6% nominal yield indicates a return of $60 per year. Prices of bonds will rise or fall inversely to the falling or rising of interest rates; however, the nominal yield will remain the same. The interest rate on a bond is not required to be approved by the issuer's board of directors. (25060)
What are the characteristics of a business development company (BDC)?
It's an exchange-traded registered investment company that primarily invests in small issuers that are not exchange-traded. Business development companies (BDCs) are registered investment companies that are also listed on stock exchanges. Unlike traditional mutual funds, BDCs invest in non-listed issuers that are smaller (i.e., developing). They offer a way for non-accredited investors to invest in non-public companies that are typically only available through private placements.
A purchaser representative must be:
Knowledgeable and experienced in financial and business matters A purchaser representative must be knowledgeable and experienced in business and financial matters. His function is to assist a nonaccredited investor in evaluating the risks of the product. A purchaser representative may not be an affiliate or an employee of the issuer unless he is related to the client
The Dow Jones Industrial Average is considered an index of:
Large-capitalized stocks The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the largest and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE.
Which annuity settlement option would provide the greatest monthly return for an individual?
Life annuity with a 5-year certain The shorter the period certain the greater the risk the annuitant's beneficiary will not receive any payments, which will be rewarded with a higher payment to the annuitant.
For customers who are subject to the alternative minimum tax, a registered representative should understand the implications of investing in:
Limited partnerships The alternative minimum tax (AMT) is a method of calculating a tax return to ensure that a person is not able to avoid paying taxes altogether. The AMT lists certain deductions and income as tax preference items that lose their benefits under normal tax filings. This has the greatest impact on a person who invests in limited partnerships and certain municipal bonds. (15675)
When comparing long-term bonds and short-term bonds, all of the following statements are TRUE, EXCEPT:
Long-term bonds generally provide greater liquidity than short-term bonds
The Bond Buyer Index is based on which of the following securities?
Municipal bonds Municipal bond indices are created by The Bond Buyer. The Bond Buyer is a financial publication that specializes in the municipal market.
A customer who has historically invested in mutual funds is, for the first time, considering an investment in a hedge fund. When comparing mutual funds to hedge funds, all of the following statements are TRUE, EXCEPT:
Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately.
Which of the following conditions apply and would permit the sale of securities outside the U.S. without registration with the SEC?
No direct selling effort may occur in the U.S. Regulation S is an exemption from SEC registration for companies that are headquartered in the U.S. and selling securities outside the United States. There are two general conditions that must be met in order for this safe harbor to apply. Any offer, sale, or resale is made in an offshore transaction. No direct selling effort may be made in the U.S. in connection with the transaction. QIBs are relevant to Rule 144A offerings, while accredited investors are a part of Regulation D. (25047)
A broker-dealer wants to create a sales contest for its registered representatives (RRs) based on the sale of shares of mutual funds that invest in environmental, social, and governance (ESG) criteria. For the winner of the contest, the firm will provide a trip to Hawaii. Is this type of sales contest permitted?
No, since the contest is based on the sale of a specific type of mutual fund. According to FINRA rules and Regulation Best Interest (Reg BI), a sales contest is permitted as long as it's based on total products sold or asset growth. However, sales contests, bonuses, and non-cash compensation cannot be based on the sale of specific products or specific types of securities. An example of non-cash compensation is a vacation trip.
A client has reached retirement age and decides to annuitize her nonqualified variable annuity. What amount of the payments made to her would be considered her cost basis?
Only the amount she paid when accumulating units, since reinvestments of distributions were in pretax dollars When purchasing a nonqualified variable annuity, the purchases made by the individual are in after-tax dollars and thus, the cost basis. Reinvestment of distributions is automatic and done in pretax dollars.
When a stock is at its resistance price, a technical analyst will most likely say that it is:
Overbought A stock is overbought at its resistance level and oversold at its support level.
Money received by a corporation when it sells its stock above its par value is called:
Paid-in capital Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends. (72384)
According to anti-money laundering (AML) procedures, a member firm, when opening a new account for a non-U.S. citizen, is required to obtain a:
Passport number and country of issuance For non-U.S. citizens, the firm must obtain the client's name, address, date of birth, and one of the following: passport and country of issuance, taxpayer identification number, or any other government-issued document with a photograph.
Which of the following CMOs has the LEAST prepayment risk?
Planned amortization class (PAC) tranches The planned amortization class (PAC) is a type of CMO that is designed for more risk-averse investors and provides a predetermined schedule of principal repayment, as long as mortgage prepayment speeds are within a certain range. This greater predictability of maturity is accomplished by establishing a sinking-fund type of schedule. The PAC tranche has top priority and receives principal payments up to a specified amount. Any excess principal goes to a companion or support tranche that has lower priority. Holders of the companion tranche are generally compensated for this risk with higher yields.
An investor has an investment portfolio with 40% invested in U.S. equities, 20% invested in equities in emerging markets, 30% invested in high-grade corporate bonds, and 10% in money market securities. Since the investor is concerned about the overall risk in the portfolio, he decides to decrease the emerging market equity holdings to 10% of the portfolio and increase the high-grade corporate bond holdings to 40% of the portfolio. What risks have increased or decreased after the reallocation?
Political risk decreases, while credit risk increases Emerging market equities have more political risk than U.S. corporate bonds. By decreasing emerging market holdings in exchange for U.S. corporate debt, the political risk decreases. However, increasing bond investments will increase the level of credit risk.
Which of the following situations BEST describes acting in a net basis capacity?
Prior to filling a customer's buy order, a dealer buys stock into inventory and resells it to the customer at a higher price In a net basis transaction, a dealer holding a customer order to buy, acquires the stock on a principal basis and executes the customer's order at a different price than the dealer's acquisition price. If the dealer executes the transaction at the same price and charges the customer a markup, the capacity is disclosed on a riskless principal basis. The markup in a riskless principal transaction must be disclosed. A dealer selling from inventory is acting in a principal capacity. Selling stock without a markup or commission is unlikely to occur. A broker-dealer is entitled to receive compensation for executing customer orders.
An investor sold two July 20 puts for 10 each and simultaneously sold two July 20 calls for 5 each. What's the result if the puts were exercised and assigned to the investor, the calls expired, and the investor sold the stock for $8 per share?
Profit of $600 The investor sold a straddle for a premium of $1,500 ($10 put + $5 call = $15) and since the customer sold two straddles, the total premium is $3,000 ($15 combined premium x 2 straddles). When the puts were exercised, the investor was obligated to buy stock at $20, which was then sold for $8, creating a $12 loss per share ($8 sale - $20 purchase = $12 loss) and since the customer sold two straddles, the total loss is $2,400 ($12 loss x 2 straddles). The $3,000 premium received is reduced by the $2,400 loss for a total profit of $600 ($3,000 - $2,400 = $600). (23385)
A corporation announced in an ad in The Wall Street Journal that it intends to call for the redemption of all its outstanding 7.25% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. Which of the following alternatives is MOST advantageous to an existing bondholder?
Redeem the bonds When bonds are called for redemption, the bondholder can only redeem the bonds at the callable price or otherwise sell them in the market. The bondholder cannot continue to hold the bonds in anticipation of a better offer or until maturity.
Which of the following is an expense or charge NOT normally associated with a variable annuity?
Redemption fees Investment management fees, expense risk charges, and administrative expenses are all charges associated with variable annuities. A redemption fee is assessed upon redemption of a mutual fund.
A municipality will refund a revenue bond issue for all of the following reasons, EXCEPT to:
Reduce the market value of outstanding bonds that are not refunded A municipality will refund a revenue bond issue if interest rates declined to reduce interest charges, to issue new bonds at lower interest rates, and to eliminate restrictions in the bond resolution.
A municipality may issue a Direct Pay Build America Bond to finance all of the following activities, EXCEPT to:
Refund a mass transportation bond A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt, except for refundings, working capital, and private activity bonds.
A registered representative invites 20 retail clients to a seminar and allows each client to bring one guest. The sales script that is used for the presentation is considered:
Retail communication
Along with his application, a customer makes an initial $3,000 contribution into a variable annuity. Five days later, he decides that he doesn't want the investment and surrenders the annuity. Because the surrender occurred within seven days of the application being accepted, the member firm must:
Return to the insurance company any commissions it earned Under FINRA's Conduct Rules, dealer agreements must include a provision which states that commissions on variable products will be returned by the broker-dealer to the insurance company if the variable contract is tendered for redemption within seven business days after the application is accepted. Some variable contracts may contain a free-look provision, but these clauses are typically included because of state insurance laws, not because they're mandated by FINRA.
If an investor is bearish on small-cap stocks, which of the following products should be avoided?
Russell Index ETFs The Russell Index is a benchmark for small-cap stocks. All of the other answer choices track something other than small-cap equities. MSCI Emerging Market Index ETFs track securities that are listed on foreign securities exchanges of emerging markets. Diamonds are ETFs that mirror the DJIA (i.e., large-cap equities). REITs primarily invest in real estate holdings.
Which of the following municipal securities are MOST likely to be backed by ad valorem taxes?
School district bonds Ad valorem tax is a tax whose amount is based on the value of property (i.e., property tax is a form of ad valorem tax). Local governments, such as school districts, secure their general obligation bonds by ad valorem taxes. On the other hand, state G.O. bonds are secured by forms of taxes other than property taxes (e.g., income and sales tax). Special assessment bonds are revenue bonds that are backed by assessments that are made on those who directly benefit from the facilities, such as developing or improving water and sewer systems, sidewalks, and streets. Certificates of participation (COPs) are lease financing agreements which are typically issued in the form of tax-exempt or municipal revenue bonds.
An inverse equity exchange-traded fund (ETF) is most similar to which of the following?
Selling short An equity inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. Similarly, a customer who sells short is anticipating a decline in the price of equity securities.
Which of the following option positions obligates the investor to sell shares if exercised against?
Short a call A short call position obligates the investor to sell shares if exercised against. Remember, buyers of options have the right to exercise, while sellers of options assume obligations if exercised against.
When an issuer is raising additional capital and conducts a rights offering, it may enter into an arrangement whereby a syndicate agrees to purchase all of the shares that the issuing corporation may not be able to sell. This is referred to as a(n):
Standby underwriting arrangement When an issuer conducts a rights offering in an attempt to raise additional capital and enters into an arrangement whereby an underwriting syndicate agrees to buy all of the shares that remain unsubscribed after the rights offering, it is referred to as a standby underwriting. The term syndicate refers to a group of underwriters that is formed for the purpose of buying securities from an issuer and selling them to investors. In a rights offering, the issuing corporation realizes that many of its existing shareholders may choose not participate, which will leave a large number of shares remaining unsold. If that is the case, the corporation will not receive the money for the shares that remain unsubscribed. A standby underwriter will actually standby to await the results of the rights offering and then purchase all of the unsubscribed shares at a slight discount. This type of an arrangement assures the issuing corporation that it will be able to raise the amount of capital it requires.
Which of the following factors is the most important to consider when deciding to recommend a municipal bond unit investment trust to a client?
Tax bracket tax advantages of municipal bonds are most important to clients in higher tax brackets. For clients in low tax brackets, a taxable investment is often more appropriate than a tax-exempt security.
When a beneficiary receives the death benefit from a variable annuity, the amount received is:
Taxable above the cost basis to the beneficiary When a beneficiary receives the death benefit from a variable annuity, the amount above the cost basis is taxable as ordinary income to the beneficiary.
A client contacts her broker-dealer with an order to buy securities that are not traded on a U.S. exchange. Since the broker-dealer will need to enter the order on a foreign stock exchange, which of the following statements is TRUE regarding the broker-dealer's execution of this trade?
The U.S. broker-dealer must establish its own written procedures which detail how to handle foreign transactions. In order to execute trades in foreign markets, U.S. broker-dealers must create written procedures for their employees to follow. Regulation Best Interest (Reg BI) creates enhanced suitability and disclosure requirements for retail customers when they open accounts and would apply in this situation. Regulation S is an exemption for U.S. issuers when they sell new securities outside of the United States. (10987)
When analyzing the benefits of a nonqualified deferred compensation plan, an individual would consider that the plan would have all of the following characteristics EXCEPT:
The accumulated funds can be used as collateral when purchasing a new home Nonqualified deferred compensation plans are often unfunded, meaning the employer does not actually set aside money to fund the promised plan benefits. The employer promises to pay the plan benefits when they are due to the employee, usually at retirement. This creates the risk that if the employer is in financial difficulty when the payments should be made, the employee might not receive them.
If a bond is currently selling at a premium, then:
The current yield is lower than the nominal yield Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield.
Which of the following statements is TRUE concerning a customer who would like to transfer an account held by a broker-dealer?
The customer is not required to use ACATS. If a customer wants to transfer his account to another member firm, the system used by most broker-dealers is known as ACATS, which is a service offered by the National Securities Clearing Corporation (NSCC). A customer is not required to use this system and is permitted to provide the carrying firm with alternative instructions.
When determining whether a customer is suitable to invest in a direct participation program, which of the following is NOT required?
The customer is or will be in an appropriate financial position that will enable him to benefit from passive losses which are significant aspect of the program.
Which of the following statements is TRUE concerning the tax treatment of CMOs?
The interest is fully taxable The principal payments are considered a return of capital and are not taxable. Investors receive their principal payments each month instead of receiving the entire amount of principal at maturity.
Which of the following statements is TRUE concerning reverse convertible securities?
The investor is anticipating that the price of the underlying asset would be above the knock-in value.
How are the gains and/or losses on leveraged exchange-traded fund (ETFs) calculated?
The leverage factor of the ETF multiplied by the return on the index A leveraged ETF is designed to provide a return that's a multiple of the index. A two times (i.e., 2x) leveraged ETF will provide a return that's twice the return on an index. The formula for calculating the minimum margin requirement is the leverage factor multiplied by the SRO minimum requirement (e.g., 25% for a long), not the ETF's return.
The most significant factor affecting the net asset value of a mutual fund on a day-to-day basis is:
The market value of the portfolio Changes in market value of the securities held by the fund are responsible for most of the change in a fund's net asset value. All funds hold cash to some degree, but it does not really affect the NAV calculation. Remember, if invested, the cash figure would be part of the market value of the portfolio.
Under which of the following situations may two municipal securities dealers form a joint account and publish a quote in the secondary market?
The two firms publish only one quote Two or more municipal securities dealers may form a joint account in order to purchase and distribute a large block of securities and spread the risk of the transaction in the secondary market. However, these dealers are only permitted to display one single quote on any position that they jointly hold. Both new issue and secondary joint accounts may only operate according to an account agreement that contains details regarding the takedown and concession. A good faith deposit only relates to new issues, since it is the amount that the syndicate gives to the issuer along with its bid.
If an individual withdraws money from an annuity during the accumulation period, what's the tax implication?
The withdrawal is considered income and taxable If an investor withdraws funds from an annuity during the accumulation period, the money being withdrawn is considered earnings first and taxable as ordinary income. (15679)
All of the following information is found in a municipal revenue bond resolution, EXCEPT:
The yields to maturity of the bonds
When comparing an Albany, New York hospital revenue bond to a Buffalo, New York hospital revenue bond, you notice that they have similar maturities but the Buffalo bond has a higher yield. A possible reason for this is:
There are more hospitals located in Buffalo than in Albany Competing hospitals could affect the project's revenue and, therefore, could reduce the bond's security. Each of the other choices relates to taxes, which do not secure revenue bonds.
The price of an equity REIT will NOT increase due to which of the following occurrences?
There is an increase in the amount of overbuilding The value of real estate will generally increase if the value of the property increases, the vacancy rates decrease (i.e., more people are renting apartments), occupancy rates increase, and due to less overbuilding. However, if too much rental property is being built, it may result in increased competition and cause rental rates to decline.
What are TWO characteristics of a warrant?
They're issued with a premium subscription price and they're relatively long-term.
Which of the following statements is NOT TRUE of treasury stock?
Treasury stock has been issued by the U.S. Treasury and was purchased by a corporation.
The day-to-day business activities of a unit investment trust (UIT) are the responsibility of the:
Trustee
All of the following trades may be executed in a cash account, EXCEPT the sale of a(n):
Uncovered call option All of the trades listed may be executed in a cash account except the sale of an uncovered call option. If the option is exercised, the writer must buy stock at an unknown market price. The sale of uncovered options may be executed only in a margin account.
Which type of insurance product has adjustable premium payments?
Variable universal life insurance Variable universal life insurance allows policyholders to adjust their premiums and death benefits. The owners may also decide how their net premiums are invested among the subaccounts that the insurance company offers in its separate account. Variable annuities, fixed annuities, and variable life insurance all have fixed premium payments.
While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a:
Varying number of accumulation units When investors purchase a variable annuity contract, they are purchasing accumulation units. Once a contract has been annuitized, distributions are made by liquidating annuity units. Since the value of the subaccounts will fluctuate, a client investing $1,000 per month will purchase a different number of accumulation units with each purchase.
A corporation purchases new machinery using cash. Which of the following choices are results of this transaction?
Working capital is reduced When a corporation purchases machinery with cash, current assets (cash) are reduced and fixed assets (machinery) are increased by the same amount. Overall, total assets remain unchanged. Working capital (Current Assets - Current Liabilities) is reduced since cash (a current asset) is reduced. (25035)
