Series 7 Prac exam 5
Which of the following is not considered when trying to diversify a municipal bond portfolio? A) Geographical location B) Maturity C) Quality D) Price
D Explanation One of the purposes of diversifying a municipal bond portfolio is to spread the risk among the portfolio's issues. This can be accomplished by buying bonds of differing maturities, geographical locations, and quality.
A mutual fund portfolio consists entirely of stocks of companies with either new products just released in the marketplace or companies holding patents pending. This mutual fund is best described as A) a Dow theory fund. B) a combination fund. C) an index fund. D) a special situation fund.
D Explanation Special situation funds buy securities of companies that are considered to be in a position to benefit from special nonrecurring situations. Those could be new management, new products, patents pending, takeover, or turnaround situations.
Which of the following governmental bodies receive the least amount of their revenues from property taxes? A) School districts B) State governments C) Municipalities D) County governments
B Explanation State governments generally do not assess property (ad valorem) taxes. These are assessed by local governments. Generally, state governments receive most of their income from sales and income taxes.
An investor opens the following position: Write 1 CDE Oct 30 call at 3.30 Buy 1 CDE Oct 40 call at 0.10 The maximum gain is A) $680. B) $320. C) unlimited. D) $1,000.
B Explanation The maximum gain on a credit spread is the net credit received (3.30 − 0.10 = 3.20 × 100 shares = $320).
In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is A) $5,400. B) $5,600. C) $2,400. D) $2,000.
B Explanation The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000; therefore, the credit balance is $5,600 ($3,600 + $2,000 = $5,600)
Which of the following documents sets forth the priority of sale of securities? A) A tombstone B) The syndicate letter C) An offering circular D) The official notice of sale
B Explanation The syndicate letter lists the terms under which members will conduct the sale of the bonds. It also describes each member's sharing of profits and expenses, the type of business entity (i.e., joint venture or partnership), and the good faith deposit required.
When considering the amount of commission or markup to charge, a member firm should consider all the following except A) the price the member firm paid. B) the services offered by the member firm. C) the liquidity of the security. D) the price of the security.
A Explanation Member firms should never consider the price they paid as the basis for a markup. Instead, the inside market should be used when making a markup determination. Services offered by the firm, liquidity of the security, and the price of the security (in the open market) can all be used when determining the amount of commission or markup/down to charge.
The true interest cost (TIC) method of evaluating municipal bids A) is required by the MSRB if a financial advisory relationship exists. B) considers the time value of cash flows. C) is required by the MSRB if a control relationship exists. D) can only be used for term bonds.
B Explanation The calculation of TIC (as opposed to net interest cost) takes the time value of money into account. The Municipal Securities Rulemaking Board has no requirement as to which method is used.
Which items would change if a company buys equipment for cash? The working capital The total assets The total liabilities The shareholders' equity A) III and IV B) I only C) IV only D) I and II
B Explanation The general balance sheet formula is assets equals liabilities plus shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it affects neither total liabilities nor equity.
A quote on Nasdaq is as follows: Bid Ask 10 10.50, 1300 × 1,500 The market maker is obligated to execute all of the following customer transactions in his entirety except A) buy 1,400 shares at $10.50. B) sell 1,500 shares at $10. C) sell 1,300 shares at $10. D) buy 1,500 shares at $10.50
B Explanation This market maker has quoted a size of market of 1,300 − 1,500, which means it stands ready to buy a maximum of 1,300 shares at $10 and sell a maximum of 1,500 shares at 10.50. A sale of 1,500 shares at 10 is outside the size of this quote.
Which of the following may be affected when a company declares a cash dividend? Shareholders' equity Total assets Total liabilities Current assets A) II and IV B) I and III C) III and IV D) I and II
B Explanation When a company declares a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Assets are not affected until the cash is paid out several weeks later.
When a corporation completes a stock split, it will not have any impact on A) the par value of the stock. B) the retained earnings. C) the earnings per share. D) the number of shares outstanding.
B Explanation When a stock splits, the par value splits accordingly. Obviously, the number of shares outstanding increases. Because there are now more shares outstanding, there is a reduction to the earnings per share. This split will have no effect on retained earnings because there have been no monetary changes to assets or liabilities.
Securities transactions take place in the primary and secondary markets. Which of the following investment companies can trade in both? A) A unit investment trust B) An open-end fund C) A closed-end fund D) A face amount certificate company
C Explanation All of these can have primary market transactions. In the case of the closed-end investment company (CEF), it is the initial public offering and, if desired, an additional public offering. The CEF is the only one of these choices where shares trade in the secondary markets. Investors holding shares of a CEF can trade the shares freely, just like any other stock. However, owners of the other types of investment companies will find there is no market for their shares if they wish to sell. That is not a problem, though, because these investment companies stand ready to redeem shares continuously. Technically, when the UIT buys back its shares, it is considered a secondary market transaction. However, for exam purposes, because the trust is the only buyer in the marketplace and the price is not subject to negotiation, it is not a true secondary market transaction.
Which of the following is least likely to be part of an equipment leasing partnership? A) Railroad cars B) Aircraft C) Oil well casing and piping D) Computers
C Explanation Casing and piping are materials used in oil and gas well-drilling programs.
An investor has a short margin account. The current market value of the stock is $1.50 per share, and the investor owns 1,000 shares. Compliance with SRO minimum maintenance requirements is met with account equity of A) $2,000. B) $1,950. C) $2,500. D) $1,500.
C Explanation For stock trading under $5 per share, a customer must maintain 100% of SMV or $2.50 per share, whichever is greater. $2,500 (1,000 shares @$2.50) is greater than 100% of $1,500.
A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be A) tax free. B) treated partly as ordinary income and partly as a tax-free return of principal. C) taxed as ordinary income. D) taxed as a capital gain if the underlying mortgage is prepaid.
C Explanation Interest-only payments made by CMOs are taxed as ordinary income.
A summary statement of all interest and dividends credited to a customer's account must be sent to the primary accountholder each year in A) December. B) April. C) January. D) July.
C Explanation Member firms must provide an IRS Form 1099 to the primary account holder of all the interest and dividends credited to the account in January. This form is used in the customer's tax return preparation.
What is used to disclose all material information about the issuer that an investor would need to know to make a decision regarding issue purchase. A) Trust indenture B) Bond resolution C) Official statement D) Notice of sale
C The official statement is used to disclose all material information about the issuer that an investor would need to know to make a decision regarding issue purchase.
A bank doing which of the following would not be required to register as a municipal broker-dealer with FINRA? A) Engaging in transactions to purchase or sell municipal securities for public customers B) Providing investment research regarding municipal securities to public investors C) Underwriting municipal securities for municipal issuers D) Holding municipal securities as custodian for public customers
D Explanation A bank simply holding municipal securities as custodian for public customers need not register as a municipal securities broker-dealer with FINRA.
In the partnership agreement of a limited partnership, all of the following would be disclosed except A) how the general partners will be compensated. B) what matters the limited partners can vote on under the democracy provisions. C) how the operating profits will be distributed. D) the procedures for the annual election of general partners.
D Explanation Limited partners have limited liability. General partners have unlimited liability. Only in specific situations can the limited partners elect a new general partner. Such situations would include the resignation, death, incapacity, or removal of the general partner.
If a customer has a restricted margin account with special memorandum account (SMA) of $2,500, how much must he deposit to purchase $10,000 worth of stock? A) $10,000 B) $5,000 C) $0 D) $2,500
D Explanation The purchase of $10,000 requires a $5,000 deposit, which can be reduced dollar for dollar by the existing SMA.
Other than the 52-week bills, the U.S. Treasury conducts auctions for Treasury bills A) only when the U.S. Treasury Department deems it necessary. B) bimonthly. C) monthly. D) weekly.
D Explanation With the exception of the 52-week bills, T-bills are auctioned by the U.S. Treasury weekly. The 52-week T-bills are auctioned every four weeks (which is not the same as monthly).
Trade confirmations must show yield to call on which of the following callable bonds? A) 5.5%, 5% basis, maturing 2038 B) 6.5%, 7% basis, maturing 2038 C) 5.5%, at par, maturing 2038 D) 6.5%, at par, maturing 2042
A Bond confirmations must disclose the lower of the yield to maturity or yield to call. On a bond selling at a premium, the yield to call is the lower of the two. The 5.5% bond with a 5% basis is the only bond trading at a premium. We know that because the yield to maturity (or basis) is lower than the coupon.
A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100 even though she made no new investments. Which of the following statements regarding this situation is true? A) The representative should remind the customer that she signed a letter of intent 12 months ago. B) The investment no longer qualifies for a breakpoint. C) Shares held in escrow will be liquidated at the appreciated value. D) The letter of intent is considered to be fulfilled.
A Explanation A letter of intent must be met with dollars invested within 13 months. The customer needs to invest an additional $7,000 to fulfill her letter of intent. The representative should remind the customer of her intention to qualify for the reduced sales charge.
Variable-rate municipal bonds are subject to all of the following risks except A) interest rate. B) default. C) liquidity. D) market.
A Explanation A variable-rate bond is one whose coupon is adjusted periodically (semiannually or annually) to reflect current interest rates. Therefore, if rates rise and force prices down, the coupon on a variable-rate bond will be adjusted upward, thereby tending to keep the bond's price at or near par. Therefore, no interest rate risk is associated with these bonds. However, if rates fall, the coupon will be adjusted downward, keeping the bond's price at or around par. Normally, a fall in rates will force prices up, but not with variable-rate bonds.
An investor wants to invest $20,000 but anticipates needing those funds in five years for a business investment. Currently, with inflation rising, the government is expected to take action to push interest rates up to reduce the money supply. Given these conditions, which of the following securities would be the least suitable for this investor who needs a specific amount of money in five years? What is most suitable? A) Zero-tranche collateralized mortgage obligation (CMO) with an estimated five years of life B) U.S. Treasury bonds maturing in six years C) Corporate bonds maturing in five years D) Zero-coupon bond maturing in four years
A Explanation A zero-tranche CMO is subject to interest rate risk as well as extension risk when interest rates rise, and therefore, it would not be suitable for a customer that needs her investment back at a specific point in the future. By contrast, a four-year zero coupon bond will mature within the anticipated time frame for needing the funds and would be the most suitable choice of the answers given.
Parents planning to save for their children's education would probably find all of these suitable except A) money market mutual funds. B) Coverdell ESAs. C) Treasury STRIPS. D) Section 529 plans.
A Explanation Although money market mutual funds are safe investments, they offer no potential growth of capital and provide low income. The 529 and ESA plans offer tax benefits and investment options that can provide the necessary growth. The Treasury STRIPS are the safest zero-coupon securities available and promise a definite return until maturity.
For a customer who has purchased stock and wants to write a call option, the option ticket would be marked A) opening sale. B) closing sale. C) closing purchase. D) opening purchase.
A Explanation An opening transaction is used when establishing a new option position. It is an opening purchase if your client is buying the option. It is an opening sale if your client is writing the option. Closing is the term used when the client eliminates an existing option position through a trade of the contract.
A highly leveraged company has the smallest percentage of its total capitalization in A) common stock. B) long-term debt. C) preferred stock. D) short-term debt.
A Explanation Common stock, which represents ownership, would account for the smallest amount of capitalization of a highly leveraged company. Highly leveraged companies have the largest amount of their capitalization in debt instruments. Preferred stock, although an equity, is more like a debt instrument because of the stated dividend rate.
A registered representative is preparing a PowerPoint slide presentation, to be delivered in a live seminar, for a group of invited institutional clients. To use the slides, they may have to be A) reviewed by a principal of the broker-dealer. B) submitted to the SEC for review and approval. C) approved by FINRA in writing. D) submitted to both FINRA and the SEC for preuse approval.
A Explanation Communications material that is intended for use with institutional customers only need be supervised and reviewed by a principal of the member firm. Alternatively, if the member's procedures do not require review of institutional communications, they must include a provision for the education and training of associated persons so that they will understand the firm's requirements. Though FINRA can request spot checks of any material used to communicate with the public, submission of institutional communications to FINRA or the SEC for review or approval is not required.
Customer account records (such as the new account form) must be maintained for not less than A) 6 years commencing from the date the account is closed. B) 3 years commencing from the date the account is closed. C) 6 years commencing from the date the account is opened. D) 3 years commencing from the date the account is opened.
A Explanation Customer account records (such as the new account form) are 6-year records. The six years toll from when the account is closed. Think about this logically. A firm has a customer for 20 years. Were the account records discarded 14 years ago? As long as the account is open, the records must be on file. Similarly, do you throw away your income tax returns after you've filed?
Which of the following would not be a valid use of the partnership democracy? A) Deciding which partnership assets should be liquidated to pay creditors B) Consenting to an action of a general partner that is contrary to the agreement of limited partnership C) Consenting to a legal judgment against the partnership D) Removing the general partner
A Explanation Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in being treated as general partners with respect to liability and possible loss of limited partner status.
An investor buys a municipal bond at a discount. The bond carries a 3% coupon. At maturity, the bond will pay the face amount to the holder of the bond on the maturity date. In the meantime, the IRS requires accretion of the discount. That accretion is tax-exempt income when the bond is A) an original issue discount bond. B) a bond purchased in the secondary market at a discount. C) a bond issued at par, but purchased in the secondary market at a discount. D) a general obligation bond.
A Explanation If the discount is an original issue discount (OID), the annual accretion is not taxable. An OID means that the bond's issuance price in the primary market was below par (a discount). As an OID, the annual accretion is considered part of the interest being paid by the issuer and that is why it is tax exempt. However, if the discounted transaction were in the secondary market, then the annual accretion would be taxable as interest income. That does not affect the tax-exempt status of the coupon interest paid. Please note: It is highly unlikely that your exam will ask about the tax treatment of the accretion when a secondary market purchase of an OID municipal bond occurs at a price above or below its accreted value. As we show you in the LEM, the test could ask about capital gain or loss, but we do not expect a question about figuring the tax on the accretion in this unusual case.
Recent years have shown an enormous growth in the sales of exchange-traded funds (ETFs). Some of the benefits of using ETFs in your clients' portfolio would include A) greater tax efficiency than most comparable mutual funds. B) greater diversification than most comparable mutual funds. C) greater management flexibility than most comparable mutual funds. D) lower risk than most comparable mutual funds.
A Explanation In general, largely because of the lack of need to rebalance the portfolio to meet investor redemption requests or market changes, ETFs have fewer taxable events. That translates into fewer taxes to their shareholders. Because an ETF is generally restricted to those securities in the index it tracks, there will be the same diversification as a mutual fund tracking that same index. Because the mutual fund is not necessarily tied to an index, the greater management flexibility can offer greater diversification. The risk is based on the portfolio, not the structure of the company.
When the broker-dealer is acting in a principal capacity, which of the following does the Municipal Securities Rulemaking Board (MSRB) require on customer confirmations? A) Amount of markdown or markup B) The current credit rating of the issuer C) The source of the bond if the broker-dealer did not have an inventory of the bond D) The bond's current yield
A Explanation MSRB rules require that customer confirmations provide the name, address, and telephone number of the broker-dealer and the capacity of the firm in the trade (agent or principal). The amount of commission is required if the firm acted as agent, and the markup or markdown if the firm acted as principal.
When discussing mutual funds with a customer, which of the following statements is not prohibited? A) Buy shares of different funds in the same fund family, and you may qualify for a breakpoint on the total purchase. B) The income yield of the fund consists of both dividends and capital gains. C) Buy the shares on record date to receive the dividend. D) Get a few friends to join with you to form an investment club, and you may qualify for a breakpoint.
A Explanation Most funds provide a combination privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. The income yield of a mutual fund includes dividends only. A group of friends is not eligible for a breakpoint. (Investment clubs are not eligible.) Selling dividends is a prohibited practice because of the immediate tax liability incurred with the dividend and the share price adjustment that results after the dividend distribution.
All of the following would flow through as a loss to limited partners except A) principal repayment on recourse debt. B) depletion. C) interest payments on recourse debt. D) accelerated depreciation.
A Explanation Principal repayments are not deductible for tax purposes. The interest is deductible.
Which of the following would not be examples of overlapping debt? Debt to build a state office building within city limits Debt to maintain a county park district serving a municipality Debt backed by two states cooperating in the construction of a bridge Debt for a high school district within city limits A) I and III B) II and III C) II and IV D) I and II
A Explanation State debt cannot overlap with any other municipal entity.
For an investor in the 37% federal income tax bracket, the tax-equivalent yield of a general obligation municipal bond with a coupon rate of 4.17% is A) 6.62%. B) 5.72%. C) 11.27%. D) 2.63%.
A Explanation The computation for tax-equivalent yield is done by dividing the coupon rate by (100% - tax bracket). In this question, that is 4.17% ÷ (100% - 37%) = 4.17% ÷ 63%. That equals 6.62%.
A corporation in the 35% tax bracket reports operating income of $4 million for the year. The firm also received $200,000 in preferred dividends from domestic corporations. Assuming no other items of income or expense, what is the company's tax liability? A) $1,435,000 B) $1,360,000 C) $1,370,200 D) $1,756,000
A Explanation The corporation's $4 million operating income is taxed at a rate of 35%. For tax purposes, corporations can exclude 50% of all dividends received from domestic common and preferred stocks. Thus, 50% of the $200,000 received from preferred dividends is taxed at the 35% tax rate ($200,000 × 50% = $100,000). The $4 million in income plus the $100,000 in taxable dividends equals $4.1 million, and $4,100,000 multiplied by a 35% tax rate equals taxes of $1,435,000.
If a 42-year-old customer has been depositing money in a variable annuity for five years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding A) accumulation units. B) mutual fund units. C) annuity units. D) accumulation shares.
A Explanation The customer, in the accumulation stage of the annuity, is holding accumulation units. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract.
A separate account will invest in a number of different securities. The separate account is not likely to invest in A) municipal bonds. B) money market funds. C) equity funds. D) corporate stock.
A Explanation The earnings on dollars invested into a variable annuity accumulate tax deferred, which is why variable annuities are popular products for retirement accumulation. As with all tax-deferred accounts, municipal bonds are not appropriate investments because interest earned on municipals is already tax exempt at the federal level.
An investor who wants a long-term tax-free bond with the highest possible safety should invest in A) a New Housing Authority bond. B) a double-barreled bond. C) a AAA-rated general obligation bond. D) a Aaa-rated revenue bond.
A Explanation The one advantage that NHA bonds (sometimes called PHAs) have is that they are the only municipal bonds with the full backing of the U.S. government. Even a GO or revenue bond with the highest S&P or Moody's rating doesn't have that safety.
A municipal bond is purchased at a discount in the secondary market at 90. The face amount is $10,000, and the bond has 10 years to maturity. If the bond is sold for 97 after five years, what is the taxable gain? A) $200 B) Capital gains not taxable C) $700 D) $300
A Explanation When a municipal bond is bought at a discount in the secondary market, the discount is accreted and taxable as ordinary income. Accretion increases cost basis. Therefore, five years later, the bond's cost basis is 95. At that point, the customer has a two-point capital gain. Had the bond been bought as an original issue discount, the annual accretion is considered interest income and is not taxable.
All of the following information, if missing from the delivery of a municipal bond certificate registered for principal only, would fail to meet good delivery standards except A) a proper assignment. B) the CUSIP number. C) the legal opinion. D) the bond number.
B Explanation A missing CUSIP number for a bond will still meet good delivery standards. The CUSIP number is an alphanumeric designation for an issue and is distinct from the bond number, which is unique to the bond certificate. For bonds that are registered for principal only, assignmentthe signature of the selleris required for delivery. A municipal bond certificate always requires a legal opinion, unless ex-legal (without the legal opinion) is specified at the time of the trade. Please note that unless something in the question says the sale is ex-legal, it is not.
Peyton has been a client of Turing Technical Analytics (TTA), a FINRA member broker-dealer, for 10 years. Peyton has decided that it is time to move the account to a new firm, Enigma Mathematical Portfolio Modeling, (EMPM). Which of the following statements accurately reflects the requirements when using the ACATS system? A) EMPM has one business day to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). B) TTA has one business day to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). C) EMPM has three business days to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). D) TTA has three business days to validate or take exception to the positions listed on the Transfer Initiation Form (TIF).
B Explanation ACATS requires the carrying firm (TTA) to validate or take exception to the securities listed on the TIF within one business day. If all is in order, the transfer must be completed within three business days. The receiving firm, EMPM, is responsible for sending the signed TIF to ACATS.
According to industry rules, if a customer purchases a bond from your firm, the confirmation must disclose where your firm acquired the bonds if acting as a principal. whether your firm acted as agent or principal. your firm's address. the price your firm paid for the bonds. A) I and IV B) II and III C) II and IV D) I and III
B Explanation Customer trade confirmations must make explicit disclosures regarding the terms of the transaction and the parties involved. The broker-dealer must always disclose the capacity in which it acted (i.e., principal or agent.) The confirmation must show the name of the person for whom the trade was executed (i.e., the customer). The name, address, and telephone number of the broker-dealer must be shown so a customer may contact the firm easily. The settlement date is also required, but the broker-dealer is not required to disclose where it acquired the bonds or the price it paid.
If a bond is sold to a customer at par, under Municipal Securities Rulemaking Board rules, all of the following must be disclosed to the customer on his confirmation except A) number of bonds purchased. B) yield to maturity. C) total monies due. D) information on call features.
B Explanation Information on call features, total monies due, and the number of bonds purchased are all important disclosure items for a confirmation. For a bond sold at par, there is no requirement to show yield because the yield is equal to the coupon. What about if the bond is callable? Doesn't the confirmation have to show the lower of yield to call (YTC) or yield to maturity (YTM)? Yes, it does, but this bond is sold at par, and bonds are never called below par. That means the YTC could never be below the YTM. Indeed, because most bonds are called at a premium, the YTC would be the highest yield.
Which of the following is not under governance of the Municipal Securities Rulemaking Board (MSRB)? Issuers of municipal fund securities Broker-dealers that sell municipal fund securities Issuers of municipal bonds Banks that sell municipal securities A) II and IV B) I and III C) II and III D) I and II
B Explanation Issuers of municipal or municipal fund securities are exempt issuers and are not regulated or under the guidance of the MSRB or any other self-regulatory organization.
Which of the following risk factors would be least important to disclose in recommending collateralized mortgage obligation (CMO) securities to public customers? A) Extended payment risk B) Credit risk C) Prepayment risk D) Interest rate risk
B Explanation Most CMOs offered to the public are backed by mortgages held by government-sponsored corporations like Fannie Mae, Ginnie Mae, Freddie Mac, et cetera. Credit risk would be a minimal consideration. The other risks are inherent to mortgage-backed securities.
ll of the following identify exemptions from the registration statement and prospectus provisions of the Securities Act of 1933 except A) Regulation A. B) Regulation U. C) Rule 147. D) Regulation D.
B Explanation Regulation U regulates loans from lenders other than broker-dealers for the purpose of purchasing securities and is not related to exempt transactions under the Securities Act of 1933.
Each of the following are generally used to service state general obligation bond issues except A) sales taxes. B) real estate taxes. C) motor vehicle license fees. D) income taxes.
B Explanation State-issued municipals are backed by state revenues, including sales and income taxes, as well as fees for state-issued licenses and permits. States do not normally levy property (real estate) taxes. Real estate taxes—known as ad valorem taxes—are typically levied by local municipalities such as cities and counties.
Most mutual funds have elected to comply with Subchapter M of the Internal Revenue Code. Complying means A) sending shareholders an annual statement of the source and amount of the distributions. B) distributing to shareholders at least 90% of the fund's net investment income. C) requiring shareholders to reinvest at least 90% of the fund's distributions. D) distributing to shareholders at least 90% of the fund's gross investment income.
B Explanation Subchapter M established the concept of a regulated investment company (RIC). It saves investors from triple taxation by having the investment company avoid tax on its income as long as the minimum percentage (90%) is distributed to shareholders. This is frequently called the conduit theory because the investment company is simply acting as a conduit between the issuer paying the dividend or interest to the fund and the shareholder receiving it. The annual statement regarding the source and amount of the distributions is a requirement of the Investment Company Act of 1940.
Information found in The Bond Buyer would include all of the following except A) the placement ratio. B) secondary market volume. C) Revdex. D) the 30-day visible supply.
B Explanation The Bond Buyer is a source of information for new (primary market) municipal bond issues. It contains Revdex, an index for revenue bonds, as well as general obligation bond indexes. Additionally, it includes the 30-day visible supply and the placement ratio.
If your client expected short-term interest rates to fall, you might recommend that the client A) write a Treasury bill yield-based call. B) buy a Treasury bill yield-based put. C) buy a Treasury bond yield-based put. D) buy a Treasury bill yield-based call.
B Explanation The key to debt options is that the investor is betting on the movement of interest rates, not the price of the security. As with any other investment based on downward movement (put down), the strategy called for here is buying a U.S. Treasury bill put option. Why not the Treasury bond put? Because the question refers to short-term rates and Treasury bonds are a play on long-term ones.
An investor purchased 100 shares of ABC common stock at $60 per share on March 2, 2019. With the stock selling at $80 per share on January 2, 2020, the investor purchased an ABC Apr 75 put for a premium of 2. On June 2, 2020, the investor sold the stock for $85 per share. As a result, the tax consequences are A) $2,500 short-term capital gain. B) $2,300 short-term capital gain. C) $2,500 long-term capital gain. D) $2,300 long-term capital gain.
B Explanation The purchase of the put on stock that had a holding period of less than long term (March to January is only 10 months) erases the holding period. The holding period begins again once the put expires. In this case, we have a holding period from expiration in April until June 2. That is clearly a short-term holding period. As far as the math, the cost is $62 per share ($60 cost of the stock plus $2 for the put). The sale price was $85, the gain is $23 per share, $2,300. Alternatively, the sale price of $85 created a $2,500 gain (85-60) and the put was a $200 loss. That is a net of + $2,300. Either way is fine.
If a customer buys 1 XYZ Jan 40 call and 1 XYZ Jan 40 put, paying total premiums of $650, and XYZ becomes worthless, the result is A) a loss of $3,350. B) a gain of $3,350. C) a gain of $650. D) a loss of $650.
B Explanation This is a long straddle in which breakeven points are established by adding and subtracting the combined premiums (6½ points) from strike (breakeven points are 46½ and 33½). The customer makes money if the stock moves above 46½ or below 33½. As the stock becomes worthless, the customer earns a 33½ point gain on 100 shares, or $3,350.
Your client is considering two bonds: an ABC Corporation mortgage bond with a yield to maturity of 9% and a municipal bond issued by the state that she resides in. If your client is in the 32% tax bracket, what is the tax-free equivalent yield for the corporate mortgage bond so that she will be able to compare it to the tax-free municipal bond she is considering? A) 4.10% B) 6.12% C) 13.24% D) 2.88%
B Explanation When the yield on the corporate taxable bond is given and the question asks for the equivalent after-tax yield of a tax-free municipal bond, we calculate that as follows: corporate rate × (1 − investor's tax bracket). In this case, 0.09 × (1 − 0.32) = 0.09 × 0.68 = 0.0612, or 6.12%. Without all of those zeros, it is 9% × 68% = 6.12%.
All of the following will affect the working capital of a corporation except A) declaration of a cash dividend. B) payment of a cash dividend. C) a decrease in liabilities. D) an increase in assets.
B Explanation Working capital is defined as current assets minus current liabilities. Payment of a cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.
Which of the following statements regarding a bond ladder strategy is correct? A) A laddered portfolio of bonds will provide lower yields than a portfolio consisting entirely of short-term bonds. B) A bond ladder strategy works best when interest rates are stable. C) A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk. D) A bond ladder strategy involves the purchase of very long-term and very short-term bonds.
C Explanation A bond ladder strategy is a relatively easy way to immunize (protect) a portfolio against interest rate risk. By holding many positions across the yield curve, the individual is diversified in the event that yields behave differently in one part of the curve than in another. The laddered portfolio will generally provide higher, not lower yields than a portfolio consisting entirely of short-term bonds. Buying bonds with very short maturities and bonds with long maturities is the concept behind the barbell strategy.
The function of a broker's broker in the municipal bond business is to do which of the following? Help sell municipal bonds that a syndicate has been unable to sell Protect the identity of the firm on whose behalf the broker's broker is acting Help prepare bids for an underwriting syndicate Serve as a wholesaler, offering bonds at a discount from the current bid and offer A) III and IV B) II and III C) I and II D) I and IV
C Explanation A broker's broker helps sell the bonds a syndicate has left and does not disclose the identity of the firm on whose behalf it is acting. Brokers' brokers do not charge fees for quoting a security, do not maintain inventory, and act solely as agents earning a commission for their services.
Which of the following is limited in the case of a limited tax municipal bond? A) The number of taxpayers B) The number of bonds issued C) The type of tax that can be used to service the debt D) The number of buyers
C Explanation A general obligation (GO) bond may be backed by a specific tax. For example, a limited tax GO may be serviced only from sales tax revenue, not income tax revenue. As the source of debt service is limited (it is not backed by the full taxing authority of the issuer), these bonds are sold with higher yields than conventional GOs.
With respect to municipal discretionary accounts, all of the following statements are true except A) unless a customer gives her express authorization, the broker-dealer cannot effect transactions to the customer's account for securities in which it has a control relationship with the securities' issuer. B) a municipal securities principal must approve all transactions in the account promptly after execution. C) if a control relationship exists between the broker-dealer and issuer, that relationship must first be terminated in order for the broker-dealer to effect transactions of the issuer's securities in their customer's discretionary account. D) all activity in the account must be reviewed at frequent intervals by a municipal securities principal.
C Explanation As with all discretionary accounts, a principal must approve transactions promptly after execution, and the account must be reviewed frequently by a principal. Because this is a discretionary account that allows municipal securities to be traded in it, these functions must be performed by a municipal securities principal. Without the customer's consent, the broker-dealer cannot effect transactions in the customer's account for municipal securities in which a control relationship exists between the broker-dealer and the issuer. To effect such transactions, the broker-dealer must make full disclosure of the relationship and obtain the customer's consent, but termination of the relationship is not required.
Debt service is best described as A) total of the direct debt of a municipality and the debt of its political subdivisions. B) services provided by the paying agent for a bond issue. C) the total of interest and principal payable by the issuer plus any amount required to be deposited into a sinking fund. D) net interest on a new issue of a municipal bond.
C Explanation Debt service is the total of interest and principal payable by the issuer plus any amount required to be deposited into a sinking or surplus fund.
A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that ETFs can be purchased throughout the trading day. ETFs use forward pricing, the same as mutual funds. real-time quotes are available for ETFs. the net asset value (NAV) calculated at the end of the day, plus a sales charge, will equal the trading price A) I and IV B) II and IV C) I and III D) II and III
C Explanation ETFs can be traded throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have a NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions.
ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's P/E ratio is higher, that would indicate that A) ABC's net income is higher than MNO's. B) ABC sales are lower than MNO's. C) ABC's net income is less than MNO's. D) ABC's sales are higher than MNO's.
C Explanation If ABC's P/E ratio is higher than MNO's, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO's. Let's use some hypothetical numbers to prove this. The stock price of both companies is $60 per share. Both companies have 1 million shares outstanding. The P/E ratio compares the market price ($60) to the earnings per share. If ABC earned $5 per share and MNO earned $6 per share, their respective P/E ratios would be 12:1 ($60 ÷ $5) and 10:1 ($60 ÷ $6). From that we see, that given the same market price and the same number of shares outstanding, the higher the P/E ratio, the lower the earnings. Taking this one step further, if there was a third company with the same price and number shares and it had earnings per share of $1, the P/E ratio would be much higher at 60:1 ($60 ÷ $1). The information provided does not provide enough detail to know whether ABC or MNO had higher sales.
The Municipal Securities Rulemaking Board (MSRB) has rules regarding quotations on callable municipal bonds. For which of the following would the customer confirmation be required to show the yield to call? A) 6s of 37 with a basis quote of 7.5% B) 7s of 35 with a basis quote of 9.5% C) 9s of 35 with a basis quote of 7.0% D) 8s of 38 with a basis quote of 8.0%
C Explanation MSRB Rule G-15 deals with customer confirmations. Under that rule, callable bonds sold on a yield basis must reflect the lower of the yield to maturity (YTM) or the yield to call. When a bond is selling at a premium, the YTC is always going to be the lower yield. No calculations are necessary for this question because there is only one bond selling at a premium—the bonds with a 9% coupon maturing in 2035. We know this because whenever the basis (the YTM) is lower than the coupon, the bond must be selling at a premium. The 8% bonds yielding 8% are at par, and the other two choices are selling at a discount because their yields are higher than their coupons.
Investors looking for preservation of capital will find money market mutual funds and bank-insured CDs to be appropriate vehicles. When comparing the two, it is important for a registered representative to point out that A) money market funds are eligible IRA investments while bank-insured CDs are not. B) broker-dealers sell money market mutual funds, but not CDs. C) the bank CDs are insured by the FDIC while there is no assurance that the value of the money market fund will not lose money. D) the redemption fees charged by money market mutual funds are comparable to the early withdrawal penalties on a CD.
C Explanation One of the key points that must be made when comparing a money market mutual fund investment to an insured bank CD is the FDIC insurance that applies only to the CD. Other than in very unusual (and not tested) circumstances would there be a redemption charge for a money market mutual fund; there generally is a penalty for early withdrawal from a CD. Many broker-dealers sell brokered CDs. These may or may not be FDIC insured and have other differences from those purchased directly from banks. They are issued by banks, with the broker-dealer serving as an intermediary. Both of these are eligible IRA investments.
Because municipal bonds do not trade on any exchange, there is frequently a concern about their marketability. According to most industry experts, which of the following bonds would be the most marketable? A) $50,000 of State M general obligation bonds rated Aa B) $10,000 of State N general obligation bonds rated AA C) $100,000 of State L general obligation bonds rated AA D) $5,000 of State O general obligation bonds rated Aa
C Explanation One of the many factors in the marketability of municipal bonds is the size of the block. With the normal block size being $100,000, municipal dealers will have an easier time trading the State L bonds. Note that S&P and Moody's ratings are the same.
A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $18,000. B) $11,750. C) $16,450. D) $25,200.
C Explanation Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $47,000.
Which of the following mortgage-backed securities would provide investors with the most predictable maturity date? A) Fannie Maes B) Targeted amortization classes (TACs) C) Planned amortization classes (PACs) D) Ginnie Maes
C Explanation PACs are planned amortization class collateralized mortgage obligations and have established maturity dates. Prepayment risk is transferred to the PAC companion—or support—class bonds.
Your customer owns a leveraged ETF, having a performance goal of 200% of the underlying index. When purchased two weeks ago, the ETF was priced at 50. If the index was up 10% the first week and down 20% the second week, what is the value of the ETF today if it performed as it was intended to? A) 40 B) 44 C) 36 D) 45
C Explanation Priced at 50 when purchased, after the first week's 10% increase in the index, the 2× leveraged ETF would be up 20% (20% × 50 = 10 point increase) to 60. After the second week's 20% decline in the index, the 2× leveraged ETF would be down 40% (40% × 60 = 24 point decrease) to 36.
Which of the following regarding revenue bonds are true? They are secured by a specific pledge of property. They are a type of general obligation bond. They are not subject to the statutory debt limitations of the issuing jurisdiction. They are analyzed primarily on the project's ability to generate earnings. A) I and IV B) II and III C) III and IV D) I and II
C Explanation Revenue bonds are not secured by a specific pledge of property and are not a type of general obligation bond. They are backed by project revenue.
In general, investors pay a commission rather than a sales charge when purchasing shares of A) a front-end load fund. B) an open-end investment company. C) a closed-end investment company. D) a mutual fund.
C Explanation Sales charges could be paid on all types of open-end funds. Commissions are paid on securities traded in the secondary market, such as closed-end investment company shares. On the exam, open-end investment company will always refer to a mutual fund unless the question is about the stucture of an exchange-traded fund (ETF).
Which of the following taxes is considered regressive? A) Inheritance B) Estate C) Sales D) Income
C Explanation Sales tax is considered regressive because the rate remains constant irrespective of the amount being taxed. Income taxes, for example, take more from a person with a high income than from a person with a low income.
XYZ Technology Fund permits rights of accumulation. A shareholder has invested $9,000 and signed a letter of intent for a $15,000 investment. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent? A) $9,000 B) $5,280 C) $6,000 D) $15,000
C Explanation The shareholder must contribute the full $15,000, so he owes an additional $6,000. Reinvested dividends and changes in the net asset value do not count toward a breakpoint during the period of a letter of intent.
A municipal dollar bond is quoted at 98¼ to 98¾. The municipal dealer's spread is equal to $5.00 $50.00 5 basis points 50 basis points A) II and IV B) I and III C) I and IV D) II and III
C Explanation The spread is half a point. In each point, which is worth $10, there are 100 basis points. Therefore, half a point is worth $5 and represents 50 basis points.
Under SEC Rule 134, a tombstone advertisement includes all of the following except A) the public offering price. B) the names of the syndicate members. C) the net proceeds to the issuer. D) the number of shares to be sold.
C Explanation Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering's effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members. Please note: you did not have to know that Rule 134 deals with tombstone ads because the question tells you so.
When comparing exchange-traded funds (ETFs) to mutual funds, some features available in ETFs that are not found in the mutual funds would include the ability to correlate to a specific index. sell short. be bought and sold on margin. represent an entire portfolio, or basket of securities. A) I and IV B) I and II C) II and III D) III and IV
C Explanation Unlike mutual fund shares, ETF shares can be traded on margin and sold short. They are similar in that they both represent an entire portfolio, or basket of securities, and both can have portfolios correlated to a specific index.
When a mutual fund computes its net investment income, all of the following are included except A) interest. B) expenses. C) long-term capital gains. D) dividends.
C Explanation When calculating NII, capital gains are not included. It is solely income from dividends and interest that make up the gross investment income. NII is the gross investment income minus the expenses. A regulated investment company is required to distribute a minimum of 90% of its NII to shareholders if it wishes the special tax treatment offered by the IRS. This requirement is also true when it comes to distributing long-term capital gains. The treatment of short-term gains is beyond the scope of the exam.
Real estate investment trusts (REITs) offer investors an opportunity to pool their money with others to receive professional management of real estate. Generally available types of REITs include all of the following except A) hybrid REITs. B) mortgage REITs. C) preferred REITs. D) equity REITs.
C Explanation While some corporations may issue preferred stock, there is no such term as a preferred REIT. Equity REITs take ownership positions in real estate properties. Mortgage REITs make loans to real estate properties. Hybrid REITs do both.
All of the following are redeemable securities except A) mutual funds. B) variable annuities. C) unit investment trusts. D) real estate investment trusts (REITs).
D Explanation A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITs trade in the secondary markets either on exchanges or over the counter.
Which of the following investment company portfolios is supervised rather than managed? A) Real estate investment trust B) Regulated open-end fund C) Closed-end bond fund D) Unit investment trust
D Explanation A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A real estate investment trust is not considered an investment company.
When assets are pooled into financial instruments such as collateralized mortgage obligations (CMOs) to better facilitate selling them to the general public, the process is known as A) structuring. B) diversification. C) best efforts. D) securitization.
D Explanation Asset-backed securities represent a pool of assets that were combined into a financial instrument such as a CMO for the purpose of better facilitating sales to the general investing public. The process of pooling assets into a single financial instrument for this purpose is known as securitization.
When compared to statutory voting, cumulative voting gives an advantage to A) majority stockholders. B) participating preferred stockholders. C) management rather than the board of directors. D) minority stockholders.
D Explanation Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board.
Morgan is a successful registered representative with a well-known broker-dealer. An equally prominent firm has made Morgan an offer that is too good to refuse. Under FINRA Rule 2273, if Morgan wishes to recommend that any existing customers move their accounts to the new firm, A) this would be considered a violation of the Conduct Rules. B) no contact can be made until at least three months after Morgan's registration is transferred. C) approval from Morgan's current supervising principal would be required before this recommendation could be made. D) certain disclosures have to be made in an educational format using a FINRA template.
D Explanation FINRA Rule 2273 states, "A member that hires or associates with a registered person shall provide to a former customer of the registered person, individually, in paper or electronic form, an educational communication prepared by FINRA when the member, directly or through that registered person, individually contacts the former customer of that registered person to transfer assets." This educational communication has to be delivered to any former customer who transfers during the first three months of Morgan's new association.
One of the specific concerns that the regulators have with variable annuities is sales personnel recommending that an investor switch from an existing contract to a new one. It would generally raise a "red flag" if the customer A) has had another deferred annuity exchange within the preceding 36 months. B) has had another deferred variable annuity exchange within the preceding 60 months. C) elects to make the exchange under the provisions of IRS Section 1035. D) has had another deferred variable annuity exchange within the preceding 36 months.
D Explanation FINRA Rule 2330 frowns on recommending the exchange of one deferred variable annuity for another within a period of 36 months. This only applies to deferred variable annuities. When an exchange takes place, it is generally under the provisions of IRS Section 1035 - no red flag raised there.
A supervising principal of the firm uncovers during a hiring interview that a candidate for a registered position was convicted in a court-martial of felony DUI/DWI (driving while under the influence/driving while impaired). The conviction occurred 15 years ago. The manager would tell the candidate, A) "You cannot be registered." B) "Felonies need only be reported if charged or convicted within the past 10 years." C) "The only available position for a convicted felon would be to fill a nonregistered clerical position." D) "You must disclose the conviction on the Form U4, but you may register."
D Explanation Felony charges and convictions, no matter how long ago they occurred, are reportable. Because the conviction, in this case, occurred more than 10 years ago, it is no longer a statutory disqualification. Had it been within the last 10 years, because it was a DUI (often referred to as an "other felony"), which is a crime unrelated to the securities industry and unlikely to be a threat to the investing public, the firm willing to sponsor such a person may apply for approval to enter or remain in the securities industry.
A customer receives a call from his registered representative (RR) telling him that he purchased 200 shares of RCA at 34.50 for the market order he had entered earlier that day. Later that day, his broker tells him that the report he received was in error, and the shares were bought for 34.75. The customer A) may require that his broker pay the difference. B) may cancel the order. C) must pay 34.50 per share. D) must pay 34.75 per share.
D Explanation If an error has been made in the notice of execution and reported to a customer, the customer must pay for the shares at the correct price. The correct price is the price at which the order was executed, either on the exchange or in the market where the execution occurred.
A customer, age 62, wants to retire at age 64 and has accumulated investments in an IRA currently valued at $500,000. The IRA portfolio consisting of all mutual funds is allocated as follows: 70% growth funds, 10% corporate bond funds, and 20% sector funds. Still wanting to use mutual funds, which might be the most suitable reallocation of the portfolio as this customer nears retirement? A) 30% municipal bond funds, 30% corporate bond funds, 40% growth funds B) 70% municipal bond funds, 20% broad market index funds, 10% sector funds C) 80% broad market index funds, 10% corporate bond funds, 10% U.S. government bond funds D) 60% U.S. government bond funds, 30% broad market index funds, 10% growth funds
D Explanation Moving toward retirement, the reallocation should move the portfolio away from equities and sector funds toward fixed-income funds. U.S. government securities funds accommodate that, and the U.S. government securities within the fund are considered safe with no default risk. Coupling the U.S. government bond funds with smaller percentages in broad market index and growth funds that mirror the market can help the portfolio keep pace with inflation. Remember that utilizing municipal securities in a tax-favored account, such as an IRA, would be considered unsuitable because the interest paid by municipal bonds is already tax free.
All of the following are true of real estate investment trusts (REITs) except A) they must, to qualify under Subchapter M, distribute at least 90% of their net investment income. B) they must invest at least 75% of their assets in real estate-related activities. C) shares are publicly traded. D) they must pass along losses to shareholders.
D Explanation REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not direct participation programs.
Filing with FINRA within 10 business days of first use is required for all of the following except A) retail communications concerning collateralized mortgage obligations (CMOs) registered under the Securities Act, B) retail communications that promote or recommend a specific registered investment company or family of registered investment companies including exchange-traded funds (ETFs). C) retail communications concerning public direct participation programs (DPPs), D) retail communications that promote or recommend a specific real estate investment trust (REIT).
D Explanation Real estate investment trusts (REITs) are not included in FINRA's list of retail communications requiring postfiling.
If a customer buys 500 shares of ABC at 48 and writes 5 ABC 50 calls at 2, what is the maximum loss? A) $4,600 B) $1,000 C) Unlimited D) $23,000
D Explanation The investor pays $48 per share for the stock and receives $2 for selling the calls. The maximum loss is $48 per share minus the option premium collected, or ($48 minus $2) times 500 shares equals $23,000.
Which of the following statements regarding variable annuities are true? The number of accumulation units is always fixed throughout the accumulation period. The number of accumulation units can rise during the accumulation period. The number of annuity units is fixed at the time of annuitization. The number of annuity units rises once annuitization begins. A) II and IV B) I and IV C) I and III D) II and III
D Explanation The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. When a variable annuity contract is annuitized, the number of annuity units is fixed.
A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has a net asset value (NAV) of $12 and a public offering price (POP) of $12.50, and that the ABC Fund has an NAV of $11.50 and a POP of $10.98. The customer should conclude that A) both are open-end funds. B) ABC and GEM are both unit investment trusts. C) ABC is an open-end fund and GEM is a closed-end fund. D) GEM may be an open- or closed-end fund, and ABC is a closed-end fund.
D Explanation The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have a POP less than its NAV; therefore, ABC cannot be an open-end fund.
An affiliate holding restricted stock wishes to sell shares under Rule 144. He has held the shares, fully paid, for six months, and the issuer has 2.4 million outstanding shares. Form 144 is filed on Monday, April 10, and the average weekly trading volume for the past four weeks is 24,500 shares per week. The maximum number of shares the customer can sell with this filing is A) 23,000. B) 24,250. C) 24,000. D) 24,500.
D Explanation Under Rule 144, after holding the fully paid restricted shares for six months, the affiliate can begin selling. For affiliates, volume restrictions always apply. They can sell the greater of 1% of the total shares outstanding or the weekly average of the past four weeks' trading volume (the four weeks preceding the Form 144 filing). In this case, 1% of the total shares outstanding is 24,000 (1% × 2.4 million). The weekly average of the past four weeks' trading volume is 24,500. Therefore, the most the affiliate can sell during the 90 days following the Form 144 filing is 24,500 shares.
An investor opens a short position in one XYZ Nov 140 put @7. Disregarding any commissions, if the option is exercised, on settlement date, the investor A) receives $700. B) receives $14,000. C) must pay $700. D) must pay $14,000.
D Explanation When an investor takes a short position in an option, it means the investor has sold, or written the option. In the case of a put option, the investor is obligated to accept 100 shares at the strike price if the holder of the option chooses to exercise. In this case, that would mean paying $140 per share for 100 shares, or $14,000 on the settlement date.
