Series 7

Syndicate members earn the total takedown

(all the spread other than the manager's fee) when they sell the bonds.

de minimis level

(no more than 5,000 shares and less than $50,000)

What is the current yield of a 6% bond trading for 800?

60/800= 7.5% (Current yield = annual income / current market price)

Which of the following statements regarding yield shown on a bond confirmation for a bond that has been called is true? A bond confirmation will show the lower of YTC or YTM if the bond has been called under an in-whole call provision. A bond confirmation will show YTC if the bond has been called under an in-whole call provision. A bond confirmation will show the higher of YTC or YTM if a bond has been called under an in-part call provision. A bond confirmation will show YTM if the bond has been called under an in-whole call provision.

A bond confirmation will show YTC if the bond has been called under an in-whole call provision A bond confirmation for a bond called under an in-whole call provision will show yield to call (YTC), as the bond being called away is certain. However, in the event of an in-part call, there is uncertainty as to whether that particular bond will be called. Therefore, the lower of the YTC or yield to maturity would be shown on the confirmation.

A concern of bond investors when interest rates are high is that the bond may be called in when those rates decline. An investor looking for the maximum call protection would purchase the PRO 6s of 2040. the LRW 6s of 2040 callable in 2032 at 104. the TYQ 7s of 2050 callable in 2033 at 105. the GHR 7s of 2038 callable in 2027 at par

A) The PRO 6s of 2040 The ultimate in call protection is a bond that is not callable. Regardless of changes to interest rates, the holder of the PRO bonds knows the issuer cannot call them for redemption before the maturity date.

The phrase "not prime" would apply to a bond with a Moody's rating of

Ba1 High-yield bonds, also known as not prime or junk, are those with ratings below investment grade. Investment grade is the top four ratings. Using specifically Moody's descriptions, ratings run from Aaa to Aa to A to Baa to Ba to B and then below. The first rating below the top four is Ba1. The 1 simply means that it's the highest in the Ba ranking, which is equivalent to a BB rating from Standard & Poor's (the question asks about Moody's).

XYZ Corporation, whose common stock is currently selling for $40 per share, is having a rights offering. The terms of the offering require 10 rights plus $35 to subscribe to one share of stock. Compute the theoretical value of a right before the ex-rights date. What is the formula?

Because the stock is trading with rights (before the ex-rights date), the formula is (M ‒ S ) divided by (N + 1)

refers to the winning bid and is the price the syndicate pays to buy the bonds from the issuer.

Bid

A new client, age 26, has a $15,000 inheritance to invest and notes that it is for long-term savings. He tells you that it won't be needed for many years and wants to simply see it grow over time. Given his age and the small amount to invest, you recommend a balanced fund. Which share class would be most suitable? A) Class A shares B) Class C shares C) Class B shares D) Class A or C shares

Class B shares are generally most suitable for smaller investments made with a longer investment time horizon such as this one. These shares have a back-end load (sales charge) known as a contingent deferred sales charge (CDSC) only payable when the shares are redeemed. Those sales charges typically decline over the first six to eight years, and they eventually disappear completely.

What are exempt from the registration provisions of the Securities Act of 1933

Government securities, money market instruments, interstate offerings

Nickelplate Manufacturing Corporation (NMC) is capitalized with 1 million shares of a 6% $50 par callable preferred stock and 10 million shares of $1 par common stock. Your customer's required rate of return on fixed income investments is 8%. The NMC preferred stock would be an appropriate addition to this customer's portfolio only if the stock was not priced in excess of A) $40.00. B) $66.66. C) $75.00 D) $37.50.

How does a 6% preferred stock return 8%? Remember the inverse relationship between interest rates and fixed income security prices. As one goes up, the other goes down. An increased return results from a decreased price. The math is basic algebra. We know the annual dividend is $3 per share (6% of $50 = $3); that is fixed. What number results in a payment of $3 providing an 8% return? Divide 3.00 by $8 and the answer is $37.50. You could also do this question by working backwards. Multiply each of the choices by 8% and the one where the product is $3 is correct.

It would be most unusual to see which of the following issued at a discount? Commercial paper Bankers acceptance Treasury bill Jumbo CD

Jumbo CD, Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.

Regulation S (think shore line)

Offers and sales made outside the United State by US

or tax-reporting purposes, qualified dividends are considered to be what type of income? A) Phantom B) Earned C) Portfolio D) Passive

Passive, Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities.

Regulation D

Private placements

Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true? A) To determine the bond's current yield, its stated rate must be compared against other fixed-rate investments in the client's portfolio. B) The bond's current yield is calculated by dividing its annual interest by its market price. C) The bond is a discount bond. D) The bond's current yield is lower than its yield to maturity

The bond's current yield is calculated by dividing its annual interest by its market price.

Parker has been a client of Enigma Mathematical Portfolio Modeling (EMPM), a FINRA member broker-dealer, for 10 years. Parker has decided that it is time to move the account to a new firm, Turing Technical Analytics (TTA). Which of the following statements accurately reflects the requirements when using the ACATS system? The transfer initiation form (TIF) is sent to ACATS by the receiving firm. The transfer initiation form (TIF) is sent to the carrying firm by the receiving firm. The transfer initiation form (TIF) is sent to ACATS by the carrying firm. The transfer initiation form (TIF) is sent to ACATS by the customer.

The transfer initiation form (TIF) is sent to ACATS by the receiving firm. When a customer wishes to transfer an account from one member firm to another, the customer's signature is required on the TIF. That TIF is then sent to ACATS by the receiving firm (the one who will be getting the new account—Turing Technical Analytics (TTA).

The XYZ Corporation has issued some 4% callable bonds maturing in 20 years. The bonds are callable at 102 commencing in 10 years. Regarding these bonds, which of the following statements is not correct? A) XYZ will most probably call these bonds when it can refund the issuer at a lower interest rate B) The call premium generally will not compensate the bondholder for the loss of interest if the bond is called. C) The bonds will likely be called in a declining interest rate market, forcing the b

These bonds will appreciate faster in declining interest rate markets than comparable bonds without a call feature. All things being equal, callable bonds will not show as much appreciation in a declining interest rate market as bonds without a call feature. Logically, as interest rates fall, those bonds will be called making them less attractive than bonds where the higher interest rate payments will continue until maturity. It is correct that the premium ($20 in this question) is generally not going to equal the amount of interest that the investor would have been able to earn on the bond. It is some compensation, but not full. The bonds will be called when interest rates have declined, and the investor will now have the cash but faces the reinvestment risk of having to put the money to work at those lower interest rates.

Which of the following statements regarding warrants is true? warrants are safer than corporate bonds Warrants are often issued with other securities to make the offering more attractive. Warrants' terms are generally shorter than rights' terms. Warrants give the holder a perpetual interest in the issuer's stock.

Warrants are generally issued with bond offerings to make the bonds more attractive. Warrants are long-term options to buy stock, and because they are equity securities, warrants, as investments, are considered less safe than bonds.

If a customer has $9,000 of capital losses and $2,000 of capital gains in a tax year, that year's consequences are

a $3,000 loss deduction with $4,000 carryforward, However, there is an annual capital loss deduction limit of $3,000. Therefore, the investor can deduct $3,000 this year and carry forward $4,000 to the following tax year.

A municipal bond that is issued with a covenant that states "If revenue collections are not sufficient to meet debt service requirements, the issue will be backed by the full faith and credit of the municipality" is known as a moral obligation bond. a Section 8 bond. a contingent liability bond. a double-barreled bond.

a double barreled bond When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, it is referred to as a double-barreled bond.

A customer who has, as part of her account holdings, unlisted REITS, as well as a limited partnership interest in an oil and gas program, may expect her servicing member firm to show an exact per share value as calculated on the last business day of the month. a per share estimated value of the securities. no valuation for the unlisted REITS and the original investment made in the DPP interest. the amount shown on Tape B the business day before the account statement closing date.

a per share estimated value of the securities

A limited partnership brought to market through a Rule 506(b) private placement may be sold to any of the following

an investor with over $1 million net worth, an unlimited number of accredited investors, 35 unaccredited investors.

All of the following information is included in a municipal bond resolution except an authorization to sell the securities. restrictive covenants that are binding on the issuer. compensation paid to the underwriters. any call provisions that allow the issuer to redeem the bonds before their scheduled maturity.

compensation paid to the underwriters. The bond resolution is the document in which the issuer authorizes the issuance of municipal securities. Among other things, the resolution describes the characteristics of the proposed issue and the issuer's duties to the bondholders. Compensation paid to the underwriters would be found in the official statement.

The Trust Indenture Act of 1939 requires that

corporate bond issues of $50 million or more sold interstate must be issued with a trust indenture.

Market interest rates have been rising, which means the price of bonds traded in the secondary market has

decreased.

Rule 144

does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.

Which of the following debt instruments would likely be suitable for sophisticated investors only?

equity linked notes

Negotiated municipal underwritings can be performed on a

firm commitment, best efforts, all or none basis

Which of the following actions of XYZ Corporation would raise additional capital? Issue callable preferred stock Declare a stock dividend Make a rights offering Encourage convertible bondholders to convert to common stock

iisue callable preferable stock make a rights offering

The official notice of sale contains

information a syndicate needs to prepare a bid, including the amount of the good-faith deposit the syndicate must submit with the bid

A corporation must have stockholder approval to

issue convertible bonds, Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholders' proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its Treasury, declaration of a stock dividend, and declaration of a cash dividend.

As is the case with other fixed payment callable issues, whenever interest rates decline

it is generally beneficial to call in the older issue

All of the following statements regarding commercial paper are correct except interest is received at maturity. it is quoted as a percentage of par. it is unsecured. it is quoted on a discount yield basis

it is quoted as a percentage of par Commercial paper is short-term, unsecured corporate debt. It is issued and traded at a discount of face value and does not pay periodic interest. Like all zeroes, it is quoted on a discounted yield basis.

A market-out clause

may appear in a firm commitment underwriting. It releases the underwriters from their purchase requirement if there are negative developments in the securities markets or the issuer.

Moody's Investment Grade (MIG) ratings are applied to

municipal notes. Moody's Investment Grade ratings are applied to municipal notes, which are short-term municipal debts such as bond anticipation notes (BANs) and tax anticipation notes (TANs). Aren't these short term notes considered money market instruments? Yes they are, but as is so often the case on the exam, the correct answer is the one that is most specific. That is, MIG ratings apply only to muncipal notes. There are many other kinds of money market instruments that Moody's rates, but not using the MIG description.

Stock prices in the over-the-counter (OTC) market are determined by a competitive bid. an auction negotiation. the 5% markup policy.

negotiation , Explanation The OTC market is considered to be a negotiated market in contrast to a stock exchange, which is an auction market. The 5% markup policy regulates commissions and markup, not prices. Competitive bids are a type of underwriting agreement for new issues.

The coupon on a bond can be described as its

nominal yield.

An investor anticipating a fall in interest rates would likely purchase

noncallable bonds, If rates fall, bonds are likely to be called

The total takedown consists

of the additional takedown and the concession.

No matter how many new shares are being offered and how many rights it takes to buy each new share, on your exam, shareholders will always receive

one right for each share of common stock, With this client owning 200 shares, that is 200 rights. There are never rights with preferred stock.

issued stock - treasury stock

outstanding stock

A company that has issued cumulative preferred stock A) pays the preferred dividend before paying the coupons due on its outstanding bonds. B) pays past and current prefferred dividends before paying dividends on common stock. C) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends. D) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common.

pays past and current prefferred dividends before paying dividends on common stock. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid.

sales term and refers to the price at which the bonds are reoffered to the public

production

A statement of additional information (SAI) need not be in a

prospectus. It must be available for investors in open- and closed-end investment companies

Stock sold through a 144 sale is considered

registered stock after the sale

A corporate offering of 200,000 additional shares to existing stockholders may be made through A) a tender offer. B) a warrant. C) a secondary offering D) a rights offering.

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

Rule 147

securities offered and sold intrastate

Regulation A

small and medium corporate offerings

Restricted purchasers include

spouses, parents, children, siblings, and in-laws

difference between the bid and production

spread

. Qualification means that the

state will collect all the information and decide whether or not to clear the offering for sale in the state.

Treasury stock is

stock repurchased by the issuer.

When a bond is selling at a premium

the current yield will always be higher than the yield to maturity. When a bond is selling at a premium, all of the yields are lower than the nominal (coupon) yield. The sequence in descending order of yield is NY, CY, YTM, YTC.

When a corporation issues a debt security, the terms of the loan are expressed in a document known as the bond's indenture. The indenture is sometimes referred to as the loan agreement. the deed of trust. the debenture. the bond resolution.

the deed of trust The indenture, sometimes also referred to as the deed of trust, states the issuer's obligation to pay back a specific amount of money on a specific date. A debenture is a debt security containing an indenture. The bond resolution is a term used for municipal bonds not corporate debt.

In the firm commitment underwriting, the underwriters purchase

the entire offer with intent to resell to the public

When comparing preemptive rights and warrants, one similarity is

their voting priviledge, In an odd play on words, the only similarity here is that neither of them have voting rights. Warrants are long-term while rights are short-term. The exercise price of a right is below the current market while that of a warrant is above. Only rights are distributed to existing shareholders in proportion to the investor's current stock ownership. Warrants are not sent to shareholders; they are most often part of another issue.

The firm commitment is the most commonly used type of

underwriting contract. Under its terms the underwriter commits to buy the securities from the issuer, and as such is acting in a dealer

The syndicate develops the

yield for each maturity and the agreement among underwriters.