Series 7 Closed Book Exams 1-3
A secondary market exists for: Dealer-placed commercial paper Federal funds Repurchase agreements U.S. savings bonds
A A secondary market exists for owners of commercial paper to sell their investments to dealers or other investors. There is no secondary market for federal funds, repos, or U.S. savings bonds.
An investor purchases a Canadian dollar September 80 call and writes a Canadian dollar September 82 call. This position is a: Bullish spread Bearish spread Long straddle Credit combination
A A spread is the simultaneous sale and purchase of two options of the same class (same underlying interest and same type), on the same underlying security, with different strike prices and/or expiration months. The challenge to this question is that the premium for each option is not provided. To handle these types of questions, remember that call options gain intrinsic value as the movement of the underlying interest rises. For that reason, the 80 call will have a higher premium than the 82 call. Since the premium is larger on the option being purchased than the option being sold, this is a debit spread. Also, since buying calls is bullish, a call debit spread is a bullish strategy. Keep in mind, for call spreads, the lower strike price is always the dominant leg; however, for put spreads, the higher strike price is the dominant leg.
Mr. Jones is a small business owner who has purchased Treasury bills and other short-term securities during times when he has excess funds available in the business. He likes the aspects of liquidity and safety. A friend has told him he can get higher rates from auction rate securities. He wants to know why you have not recommended this investment to him. Which TWO of the following explanations would you cite as your reasons? Auction rate securities are long-term investments Interest or dividend rates are reset at established intervals based on a Dutch auction If the auction fails, the client may not have immediate access to his funds The interest or dividend rate is set as the lowest rate to match supply and demand at the auction I and III I and IV II and III II and IV
A Although auction rate securities are usually sold as an alternative to other short-term securities, they are long-term securities. An RR must disclose to a client that, if the auction fails, the client may not have immediate access to his funds. The RR also has a duty to disclose to clients any material fact relating to the specific features of the auction rate securities and the customer's need for a liquid investment when recommending this type of product. The fact that the interest or dividend rate is reset at specified intervals is a material fact, but is not a reason to avoid recommending the investment. The same reasoning applies to the fact that the rate is set at the lowest rate that matches supply and demand. These investments may not be suitable for investors who have a need for liquidity.
A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE? The director is permitted to sell the shares if the trade is reported The director is permitted to sell the shares only if they are held for three additional months and the trade is reported The director is permitted to sell the shares and no report is required The director is permitted to sell the shares only if the transaction will result in a loss
A An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of her ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company's stock). Since the director owned the shares for nine months, there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock, and are not subject to the six months' holding.
James Hendricks wants to open a Coverdell Education IRA for his three-year-old son. Which of the following statements is TRUE? James may contribute up to $2,000 per year At least 50% of the investments in the account must be conservative The account becomes the property of the child upon reaching the age of majority Only parents or grandparents may contribute for the benefit of the minor child up to the age of majority
A Anyone may contribute to a Coverdell Education IRA for a child, but the total contributions to the account are limited to $2,000 per year. Choice (c) is true of a UGMA or UTMA account, not a Coverdell Education IRA. There is no percentage requirement for investments in the account.
An investor would purchase an inverse exchange-traded note if: She anticipates a decrease in the benchmark that is being tracked She anticipates an increase in the benchmark that is being tracked She is interested in obtaining a long-term capital gain She is interested in obtaining income on a regular basis
A Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. These securities are not like traditional fixed-income securities since they typically do not make interest payments to investors. The returns are linked to the performance of an index, currency, or commodity and would be suitable for investors who want to speculate on the value of an index. An inverse ETN would pay the opposite of the benchmark that is being tracked and would be suitable for a person interested in short-term trading. Most ETNs are traded on a national exchange (NYSE) and, therefore, an investor can quickly sell the security to earn a short-term gain.
A customer purchases a municipal security in the secondary market at a discount. At maturity the customer will: Treat the discount as ordinary income Treat part of the discount as a capital gain and part as ordinary income Treat the discount as a capital gain Not have to pay tax on the amount of the discount
A If a municipal bond is purchased at a discount in the secondary market and held to maturity, there will be reportable taxable income. The discount is taxed as ordinary income, not a capital gain. The investor may pay the tax each year or elect to report the entire amount at maturity. If a municipal bond is purchased at an original issue discount and held to maturity, there will be no federal tax liability.
In periods of easy money, when interest rates are declining, yield curves tend to: Slope upward from the shorter to the longer maturities Slope downward from the shorter to the longer maturities Remain flat Slope upward from the longer to the shorter maturities
A In periods of easy money when interest rates are declining, yields on shorter maturities would be less than those of longer maturities. Yield curves tend to slope upward from the shorter to the longer maturities.
Which TWO of the following persons may be permitted to purchase issuer-directed shares of an equity IPO? An employee of a FINRA member whose spouse is a director of the issuer A portfolio manager of a mutual fund purchasing for his personal account Employees of the issuer if the issuer is a FINRA member An outside attorney assisting in the IPO I and III I and IV II and III II and IV
A Issuer-directed securities provide an exemption for certain individuals under the New Issue Rule. Under this provision, issuers may direct securities to the parent company of the issuer, the subsidiary of an issuer, and employees and directors of an issuer. The issuer-directed provision also permits immediate family members of employees and directors to participate in the offering. Registered representatives are also allowed to purchase shares of an equity IPO if the issuer is that person's employing broker-dealer or is the parent or subsidiary of the broker-dealer. An attorney hired to assist in the IPO is also restricted and, since he is not employed by the issuer, he is not eligible to buy issuer-directed shares. A portfolio manager of a fund may not purchase for his personal account. A purchase may be made on behalf of the fund.
XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20. The market capitalization of the outstanding common stock is: $90,000,000 $7,000,000 $5,000,000 $4,500,000
A Outstanding shares are issued shares minus treasury stock (shares repurchased by the company). There are 4,500,000 shares outstanding with a market value of $20.00 per share. Therefore, the market capitalization is $90,000,000.
Which of the following risks for an agency-backed CMO is LEAST important to an investor in a rising interest-rate environment? Prepayment risk Credit risk Interest-rate risk Extension risk
A Prepayment risk is associated with a falling interest-rate environment in which mortgage holders refinance or repay their mortgages at a faster rate. The holder of a CMO, therefore, receives a larger portion of the principal earlier than anticipated and is forced to reinvest at lower rates. Many CMOs are created from government agency mortgage-backed securities (MBS), which have a minimal amount of credit risk. Some CMOs are constructed without this backing and, therefore, credit risk is a greater concern. CMOs, as with most fixed-income securities, carry interest-rate risk. Extension risk is the opposite of prepayment risk, where interest rates are rising and the CMO holder receives a smaller portion of her principal back.
Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? It issues securities that can be redeemed to pay for college education It issues securities that are not backed by the U.S. government It purchases federally sponsored student loans It provides loans to educational institutions
A The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.
A customer wishes to close out a short option position by liquidating the option. The registered representative should mark the order ticket: Closing purchase Closing sale Opening purchase Opening sale
A The client initially had an opening sale transaction. To liquidate the short option position, the client must purchase the option contract. The registered representative should, therefore, mark the order ticket closing purchase.
When referring to call option contracts, the term open interest means the: Number of contracts that have not been closed out through a sale or by expiration Number of opening purchases that have been liquidated with a closing sale Number of opening sales that have been liquidated with a closing purchase Total number of contracts of the same series that were traded on a given day
A The term open interest, when referring to call option contracts, means the number of contracts that have not been closed out through a sale or by expiration.
A client expresses an interest in purchasing a mutual fund. The client already has a joint account with her spouse and a UTMA account for her son that has assets in the same fund family held at another broker-dealer. Which of the following statements is TRUE? -The client is not entitled to a reduced sales charge based on the value of the UTMA and joint accounts under any circumstances -The client is entitled to a reduced sales charge based on the other two accounts -The client is entitled to a reduced sales charge based on the value of the other two accounts only if the account is held at the same broker-dealer -The client is entitled to a reduced sales charge based only on the value of the joint account
B A client is entitled to a reduced sales charge (breakpoint) based on the value of the accounts of other family members within the same fund family. Examples include joint accounts, minors' accounts, and certain retirement accounts. The accounts can be held at multiple broker-dealers.
The penny stock rules would apply under which of the following circumstances? The stock is listed on Nasdaq The stock is quoted on the OTC Bulletin Board The transaction is not recommended by the broker-dealer The customer is an active trader in penny stocks
B A penny stock, according to SEC rules, is a stock that sells for less than $5.00, that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions. -The customer is defined as an existing customer, which is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks) -In nonrecommended or unsolicited transactions -In transactions by a broker-dealer that is not a market maker in that security -In transactions by an institutional accredited investor
An equity security that is distributed under the provisions of Regulation S may be resold in U.S. markets: Immediately After a one-year waiting period is satisfied After regulatory approval is obtained from an SRO After a six-month waiting period is satisfied
B Before a security that is sold under the provisions of Regulation S may be resold in the U.S., there is a distribution compliance period (waiting period) that must be satisfied. For debt securities, the waiting period is 40 days, but for equity securities (as referenced in this question), the waiting period is one year. However, if an overseas investor acquires securities through a Regulation S offering, she may immediately sell the securities overseas through a designated offshore securities market.
An investor would like to trade exchange-traded funds (ETFs) in her brokerage account. Which TWO of the following statements are TRUE concerning purchasing and selling short ETF shares? Purchases may be executed in a cash or margin account Short sales may be executed in a cash or margin account Short sales may be executed only in a margin account Leveraged ETFs may be purchased only in a margin account I and II I and III II and III II and IV
B ETFs may be purchased in a cash or margin account. This applies to long positions in regular ETFs, inverse ETFs, or leveraged ETFs. If an investor sells short an ETF, this transaction must be executed in a margin account similar to selling short any equity security.
Federal funds are: Excess reserves loaned by commercial banks to other commercial banks Funds used by the government to pay principal on retiring Treasury securities A lagging money-market indicator A leading money-market indicator I and III only I and IV only II and III only II and IV only
B Federal funds are excess reserves loaned by commercial banks to other commercial banks and are a leading money-market indicator.
If a company declares a cash dividend, which of the following is TRUE? Shareholders' equity increases Shareholders' equity decreases Current assets decrease Current assets increase
B It is important to note that this question refers to the declaration of a cash dividend, not the payment of a cash dividend. If a company declares a cash dividend, dividends payable (a current liability) will increase by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. The announcement has no impact on the assets of the company; however, assets will be reduced once the company actually pays the cash dividend. Regardless of the specific corporate transaction, the balance sheet must remain balanced.
A customer in the highest tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will need to pay taxes of: $150 $300 $420 $525
B Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 20%. Although the investor is in the highest tax bracket, the investor will be taxed at a rate of 20%. Therefore, the customer will need to pay taxes of $300 ($1,500 x 20% = $300).
Level I of Nasdaq indicates the: Cumulative trading volume of the security listed Inside market for the security listed Price of transactions as they occur Market makers for the security listed
B Nasdaq Level I provides subscribers with the highest bid and the lowest offer (i.e., the inside market) for a security that has at least two market makers; however, the actual market makers are not listed. Level I does not display the cumulative trading volume or the prices of the transactions as they occur. Although non-members firms can also subscribe to Nasdaq Level I, it is typically used by the branch offices of member firms.
An individual purchased a British pound June 160 call at 0.80. If the contract size is 10,000 British pounds, what is the individual's total cost? $8 $80 $800 $8,000
B Premiums for British pound options are quoted in cents per unit. To express the premium in dollar terms, the decimal must be moved two places to the left. The total cost is the contract size (10,000) times the premium expressed in dollars (decimal moved two places to the left, $0.0080), which equals $80.
An investor has an equity portfolio that consists mainly of domestic companies. If an RR wants to diversify the client's portfolio to include foreign companies, which of the following investment products would MOST closely achieve this goal? A mutual fund that tracks the FTSE Index A mutual fund that tracks the EAFE Index An ETF that tracks the S&P 500 Index A mutual fund that tracks the Wilshire Index
B The MSCI EAFE (Morgan Stanley Capital International Europe, Australasia, and Far East) Index follows the equity performance of the developed markets but excludes the U.S. and Canada. The FTSE Index mostly follows the stocks of companies trading on the London Stock Exchange.
A brokerage firm's research department has issued a buy recommendation for XYZ Corporation's common stock. The report need not contain which of the following information? The firm was the managing underwriter in a recent public offering of the stock The number of shares of the stock the firm owns The partners of the firm who hold options to purchase the stock The firm makes a market trading in the stock
B The report must contain all of the items listed except the number of shares of the stock the firm owns. The firm does need to disclose that it owns shares of the stock, but not the actual number.
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 prior to its final maturity date, the outstanding bond is said to be: Escrowed to maturity Escrowed to call A Treasury arbitrage bond Noncallable
B 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 at a future call date (prior to maturity), the outstanding bond is said to be escrowed to call. 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.
Compare/Contrast 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 market sectors. Hedge funds typically have high minimum investment requirements.
The tax treatment of a business development company is similar to which TWO of the following securities? A municipal bond A real estate investment trust A closed-end investment company A variable annuity I and III I and IV II and III II and IV
C A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. For tax purposes, they are regulated similar to investment companies (mutual funds and closed-end funds) and to REITs that also must distribute a minimum of 90% of their income. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.
According to MSRB rules, the delivery of a mutilated certificate is considered a good delivery: Under no circumstances If the seller informs the buyer about the mutilation in writing If the certificate is authenticated by the issuer or transfer agent If the certificate is authenticated by the MSRB
C A mutilated certificate may be authenticated by the issuer or an agent of the issuer (e.g., a transfer agent or paying agent). If authenticated, it is considered a good delivery. A mutilated coupon may be guaranteed by any commercial bank as well as the issuer or its agent.
Dedicated Securities has been invited to join a syndicate selling a new offering of common stock. The head of the firm's syndicate department notices that the agreement among underwriters mentions a penalty bid. Which of the following choices is an example of a penalty bid? If Dedicated fails to sell its allotment, it will be liable for twice its normal commitment If Dedicated fails to solicit a certain number of indications of interest, it will be required to pay a fee to the syndicate manager If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated will forfeit the concession on those shares If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated could be penalized for failure to maintain the public offering price
C A penalty bid is an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member when securities originally sold are repurchased by the syndicate in stabilizing transactions.
A person who is employed by a brokerage firm and responsible for maintaining an inventory of stock to buy from and sell to the firm's customers, is a(n): Registered representative Trader Market maker Institutional salesperson
C A person who is employed by a brokerage firm and responsible for maintaining an inventory of stock to buy from and sell to the firm's customers is typically defined as a market maker. The term trader is a broad term with multiple definitions which include a person who trades for the firm's own account, but does not trade with the firm's customers.
If a stock index option has a multiplier of 100, this represents: The number of securities in the index The number of securities which are required to be delivered if the option is exercised The dollar value of each point The dollar value of the index
C A stock index option with a multiplier of 100 represents the dollar value for each point. As an example, if the premium of an S&P 100, S&P 500, or DJIA index option is quoted at 3.00, this represents a dollar value of $300; (3.00 x $100). If the premium increases to a value of 3.20, it would then have a value of $320; (3.20 x $100).
An announcement in The Wall Street Journal states that New York State plans an advance refunding of its 7 1/2% Dormitory Bonds through the issuance of a special $50,000,000 bond issue. This means that: -Existing bondholders will receive a new bond with a lower rate of interest -Existing bondholders will receive a new bond with a higher rate of interest -Proceeds from the sale of a new bond issue will be put in an escrow account to retire the existing bond issue -The Dormitory bonds will be convertible into Treasury bonds
C Advance refunding means that proceeds from the sale of the new bond issue will be put in an escrow account to retire the existing bond issue. If a municipality wants to engage in advance refunding, as is the case in this example, the municipality will sell the new issue with the proceeds of the sale going into an escrow account containing U.S. government securities. The U.S. government securities would be purchased with a maturity date that coincides with the issue's call date. This allows the refunded issue to be retired using the proceeds from the matured government securities.
What information would an analyst be MOST concerned with when evaluating a revenue bond? The population growth of the municipality Debt to assessed valuation A rate covenant Property taxes
C An analyst would be most concerned with rate covenants. This is an agreement made by the municipal issuer to maintain rates high enough to cover maintenance and operating charges and to meet annual debt service requirements. The other terms are applicable to general obligation bonds.
With no other securities position, a customer sells short 100 shares of ABC at $40 and sells 1 ABC October 40 put for $500. The customer will break even when the price of the stock is at: $35 $50 $45 $40
C An individual who sells short risks a loss if the price of the stock rises. If the price rises to $50 and the stock is bought in the open market to cover, the loss will be $1,000 minus the premium, for a net loss of $500. If the market price rises to 45, the loss of $500 is exactly matched by the premium income of $500 and the investor breaks even. The breakeven point for a short seller who writes a put is the market price of the short sale plus the premium.
Closing spot prices for foreign currencies are disseminated daily by: The NYSE The IMM The FRB FINRA
C The Federal Reserve Board disseminates the closing spot prices of foreign currencies daily. The NYSE only has information about exchange traded securities (e.g. common stock, convertible bonds, and preferred stock). The International Monetary Market (IMM) is a division of the Chicago Mercantile Exchange (CME). The CME is a futures exchange and only disseminates futures prices, rather than the underlying currency.
Ashton purchased 100 shares of XYZ common stock in January 2003, at a price of $25 per share. XYZ pays a quarterly dividend of $.25 per share. Today, XYZ closed at $30 per share. What is the dividend yield of XYZ common stock? .83% 1.25% 3.33% 4.00%
C The dividend yield for a stock is equal to the annualized dividend divided by the current market price. Since dividends are paid quarterly, the annual dividend is $1 per share ($.25 x 4). The annualized dividend of $1 divided by the current market price of $30 per share results in a dividend yield of 3.33%.
Which TWO of the following statements are TRUE regarding the maintenance requirements for selling short stock that is trading at less than $5 per share? The maintenance requirement for shorting a stock at $2.00 per share is 100% of the market value The maintenance requirement for shorting a stock at $2.00 per share is $2.50 per share The maintenance requirement for shorting a stock at $4.00 per share is 100% of the market value The maintenance requirement for shorting a stock at $4.00 per share is $2.50 per share I and III I and IV II and III II and IV
C The industry maintenance requirement, when shorting stock that is trading at less than $5.00 per share, is the greater of $2.50 per share or 100% of the market value. When shorting stock less than $2.50 per share, the maintenance requirement is $2.50 per share, while the maintenance requirement for shorting stocks between $2.50 and $5.00 per share is 100% of the market value.
The department of a brokerage firm that advises a corporation regarding the structure and timing of a future issue of stock, and assists in the underwriting of the securities is the: Purchase and sales department Reorganization department Investment banking department Sales and trading department
C The investment banking department assists issuers who need to sell new securities to the public. The sales and trading department is involved in the secondary market trading of securities. The purchase and sales department and the reorganization department are both part of a firm's operations area involved in processing the trades and maintaining the books and records pertaining to customer accounts.
A customer's initial transaction in a margin account is the purchase of 100 shares of XYZ at $15 per share. What amount must be deposited by the customer in this new account? $375 $750 $1,500 $2,000
C The key to this question is recognizing that this represents the customer's initial purchase of securities in the new margin account. The minimum initial equity requirement is 100% of the purchase or $2,000, whichever is less. Since the transaction represents a $1,500 purchase (which is less than $2,000), the customer must deposit the full $1,500. A broker-dealer will not provide a loan in a new margin account unless the customer has equity of at least $2,000.
Lyle, Molly, and Seena have a joint account registered as Tenants in Common. In the event that Seena dies, which of the following statements is TRUE? The account would be liquidated as soon as the brokerage firm learns of Seena's death Lyle and Molly must change the arrangement to a Joint Tenants with Right of Survivorship Seena's estate has a claim on her portion of the account's assets Seena's share of the assets in the account are automatically transferred to Lyle and Molly
C Upon learning of Seena's death, the brokerage firm will freeze the account. Seena's executor will then provide documentation to establish authority to act on behalf of the estate. Typically, Seena's estate will become the third joint owner in the existing Tenants in Common arrangement.
On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is: 24 27 30 31
C When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.
An investor must pay accrued interest for a secondary market purchase of: Zero-coupon bonds Series EE savings bonds Tax anticipation notes Treasury bills
C Zero-coupon bonds and Treasury bills are original issue discount securities and trade without accrued interest. While Series EE bonds are also OID securities, they do not trade in the secondary market. Tax anticipation notes (TANs) are typically interest-bearing securities and trade with accrued interest.
An investor is seeking an investment that will outperform the market, but does not involve buying and holding individual securities. All of the following are considered suitable, EXCEPT: A hedge fund A liquid alternative investment A global allocation fund A business development company
D A business development company (BDC) raises capital by selling securities to investors and then using the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing them with funding when they are unable to raise capital for themselves.
Which TWO of the following types of municipal securities does NOT require voter approval? A general obligation bond backed by income taxes A special tax bond A bond backed by ad valorem taxes A certificate of participation I and III I and IV II and III II and IV
D A general obligation bond would require voter approval since it is backed by the full faith and credit of the issuing municipality. A bond backed by ad valorem or real estate taxes is a type of general obligation bond. A special tax bond is financed by a tax other than an ad valorem tax, such as a tax on cigarettes, liquor, or gasoline, and would not require voter approval. A certificate of participation (COP) is a revenue bond backed by a lease payment that does not require voter approval.
A husband or wife may give a lifetime tax-free gift to a spouse of: $14,000 $70,000 $140,000 An unlimited amount
D A husband or wife may give a lifetime tax-free gift of an unlimited amount to a spouse. Any person may give a gift or $14,000 per person, per year without incurring a gift tax.
A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at: $28 $55 The same price as before the notice appeared A price near $60
D Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).
Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? ETFs may be traded in the secondary market and ETNs cannot ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note and ETFs do not have issuer credit risk ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate ETNs have a maturity date and ETFs do not I and III I and IV II and III II and IV
D ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs.
If an investor was primarily interested in safety of principal, which of the following securities would you LEAST likely recommend? State GO bond GNMA security Railroad equipment trust bond Industrial development revenue bond
D Industrial development revenue bonds are secured by a lease agreement with a corporation and are only as secure as the corporation. State GOs are generally of high quality and a GNMA is secured by the U.S. government. The holder of an equipment trust bond has a lien on the equipment that secures the issue.
A municipal securities principal must review and approve municipal transactions made with: Individuals Trust departments Commercial bank portfolios Casualty insurance companies I only I and IV only I, II, and III only I, II, III, and IV
D MSRB rules require a municipal securities principal to approve all transactions in municipal securities.
All of the following factors are of importance with regard to debt structure when analyzing a municipal bond, EXCEPT: Total bonded debt Total direct debt Overlapping debt Matured debt
D Matured debt is debt of the municipality that is no longer outstanding and, therefore, is not included in analyzing the debt structure of a municipal bond. Total bonded debt is all of the general obligation debt issued by a municipality, regardless of its purpose. Total direct debt is the sum of the total debt and any unfunded debt (i.e., short-term notes) of a municipality. Overlapping debt is that portion of the debt of other government units for which residents of a particular municipality are responsible, such as services or facilities shared by several municipalities.
Which TWO of the following statements are TRUE concerning gifts and gratuities? Gifts should be valued at the lower of the cost or the market value Gifts should be valued at the higher of the cost or the market value The rule would apply to a personal gift for the birth of a child The rule would not apply to a personal gift for the birth of a child I and III I and IV II and III II and IV
D Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. The gifts should be valued at the higher of the cost or market value. For example, if tickets to a concert have a face value of $90, but the tickets were purchased at a value of $150, the higher value would be used. The rule does not apply to personal gifts such as the birth of a child or a wedding gift, provided these gifts are not related to the business between the recipient and the broker-dealer.
A common shareholder is not entitled to: Vote for the board of directors Receive dividends if voted for by the board of directors Give or sell shares to anyone she wishes Appoint officers of the corporation
D Shareholders have the right to vote for the board of directors, but not to appoint officers of the corporation.
A research analyst who is about to appear on a television program must take which of the following actions regarding conflicts of interest? He must cancel the appearance if there are conflicts of interest He must avoid topics for which conflicts of interest exist He must explain, in detail, all conflicts of interest He must disclose conflicts of interest
D Television and radio interviews, as well as other public speaking activities (e.g., seminars and electronic interactive forums), are considered public appearances and require participating research analysts to disclose conflicts of interest and other information. However, conflicts of interest are not required to be explained in detail. Brokerage firms must develop a procedure for disclosing the required information simultaneously with public appearances.
A registered representative is reviewing a corporation's financial statements. Which TWO of the following statements are TRUE concerning an issuer's bond interest expense? The annual interest payments are found on the balance sheet The annual interest payments are found on the income statement The interest payment is deducted from net income The interest payment is deducted from EBIT I and III I and IV II and III II and IV
D The annual interest payment or bond interest expense may be found on a company's income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars.
The record date for a company's cash dividend is Thursday, October 7. What is the latest date a customer may purchase the stock for regular-way settlement in order to receive this dividend? Friday, October 8 Thursday, October 7 Wednesday, October 6 Tuesday, October 5
D The ex-dividend date is the first day on which a stock trades without its dividend. It is typically one business day prior to the record date, which in this question, is Wednesday, October 6. For a buyer to receive the dividend, the transaction must settle on or before the record date of Thursday, October 7. If a person purchases the stock on or after the ex-dividend date, he is not entitled to the dividend since regular-way settlement takes two business days and that would be after the record date. For the customer in this question to be entitled to the cash dividend, the latest date he may purchase the stock for regular-way settlement, must take place on the business day before the ex-dividend date, which is Tuesday October 5. Note; If the question does not state the type of settlement, assume regular-way.
An investor purchases a zero-coupon municipal bond that matures in 15 years, but it is callable in five years at 102. If the bond is called, the investor will receive: Par value 102% of the par value 102% of the original cost 102% of the compound accreted value
D The key to this question is in realizing that the basis of a zero-coupon or original issue discount (OID) bond must be accreted (upwardly adjusted) on an annual basis. After the first year's accretion, the bond's original cost is no longer of importance. Also, any reference to the bond's par value will only become valid if the bond reaches maturity and the investor receives the par amount. Therefore, in this question, it is important to note that any reference to a call premium is based on the bond's compound accreted value. If this bond is called, the investor will receive 102% of the compound accreted value, which is equal to the original value of the bond plus the annual accretion (interest earned, but not received) to date. However, if the bond was not an OID bond and was called, the investor would receive 102% of par ($1,020).
The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called: Structured notes Double-barreled bonds Guaranteed bonds Prerefunded bonds
D The outstanding bonds are called prerefunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow funds at lower rates, thereby reducing its interest costs.
A registered representative is sending out electronic communication that has been prepared by her firm to 75 of her existing retail customers. The communication explains to the customers that their account statements are now available online. Which TWO of the following statements are TRUE? This is considered correspondence This is considered retail communication This activity requires principal approval prior to use This activity should be reviewed I and III I and IV II and III II and IV
D This electronic communication is considered retail communication since the registered representative is distributing it to more than 25 retail customers. Retail communication is considered any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. If the communication is directed to 25 or fewer individuals, it is considered correspondence. If the retail communication does not make a financial recommendation or does not promote a product or service of the firm (which the electronic communication in this question does not), prior principal approval is not required. In other words, FINRA does not consider announcing the availability of online account statements as promoting a product or service of the firm. However, this activity should be reviewed and supervised by the broker-dealer.
A client has a margin account in which she is long and short 1,000 shares of the same security. Based on this position, if the current market value of the stock is $80 per share, the client is permitted to borrow up to: $4,000 $20,000 $40,000 $76,000
D This is a tricky question and the answer is based on the margin maintenance requirement of a short against the box position. If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. The maintenance requirement is equal to $4,000 (5% of $80,000). Therefore, the client is permitted to borrow 95% of $80,000, or $76,000. Choice (c) which is $40,000 (the Reg. T requirement of $80,000) is incorrect since it fails to take into account the client's total position.
XYZ Corporation will need to borrow funds in the bond market soon. While current interest rates are not attractive from its viewpoint, the company knows that interest rates could drop suddenly. The company would like to be ready to sell the bonds quickly. It would also like the bonds to be as liquid as possible in order to attract investors. Which of the following choices is most appropriate for its needs? A private placement under Regulation D An intrastate offering under Rule 147 A traditional registration statement A shelf registration under Rule 415
D While the sales described in choices (a), (b), and (d) will usually be faster than a full registration, both Regulation D and Rule 147 place various restrictions on resales, reducing the liquidity of the issue. A shelf registration under Rule 415 will satisfy all of XYZ Corporation's needs.
A client buys 100 shares of MTB at $58 per share and writes 2 MTB October 60 calls at 3. Which of the following statements is TRUE? The breakeven point is $56 The maximum profit is $600 The maximum loss is $5,200 The maximum loss is unlimited
D You have to see that the client is selling 2 calls, meaning 100 shares isn't enough to make it a covered call.
What are the functions of the investment banking department of a broker-dealer?
Provide financing for corporations by bringing an issue to market for the issuer Assisting companies in mergers and acquisitions They do NOT make a secondary market for new issues
If a writer of a stock index option is exercised against, what is the writer obligated to deliver?
The cash difference between the exercise price and the index value (i.e. the intrinsic value)
