Simulated Exam 1
A company reported annual earnings of $2.40 per share and paid annual dividends of $.60. If the dividends were distributed quarterly, what was the amount and payout rate?
$.15 at 25% One quarter of $.60 is $.15 $.60 is 25% of $2.40
An options trader goes long 1 XYZ Oct 60 put at 6 and purchases 1 XYZ Oct 60 call for 6. If XYZ is at 68 at expiration, what is the investor's gain or loss?
$400 loss If the market price of XYZ is at $68 per share, the put is out-of-the-money and will expire worthless. The call could be sold for the intrinsic value of 8. (There is no time value, since the option is at the expiration date.) Since the investor originally spent $1,200 (a premium of $600 was paid for each option), the net result is a loss of $400.
Your client's position is: Long 1 CYR 120 call at 4 Long 1 CYR 120 put at 3 Long 100 CYR purchased at 120 If the current market price of CYR is 120, what is the client's maximum possible loss?
$700 If the CYR stock drops to $0, the customer loses $12,000 on the long stock position, but retains the right to put the stock to someone at $12,000, to prevent loss beyond the premium of $300. The call would expire out of the money, for a total loss of $700.
A customer in the 28% tax bracket owns a 9% ABC Corporation 20-year bond that currently is yielding 8.7%. He is considering buying tax-exempt securities. What is the comparable yield for a municipal bond?
.0626 comparing the yield of a taxable corporate bond to a tax-free municipal bond, use the formula: interest on corporate bond × (100% − tax bracket). In this case, 8.7% × .72 = 6.264%. Remember to use the yield to maturity, not the coupon rate. The bond is currently priced to yield 8.7%. In this case, a tax-exempt bond yielding more than 6.264% will provide a higher after-tax return.
An investor redeems 200 shares of ABC Fund, which has no redemption fee. If the quote is $12.05 bid $13.01 asked, what amount will the investor receive?
2410 If a mutual fund has no redemption fee, the investor will receive the bid price per share (net asset value) multiplied by the number of shares being redeemed. In this case, the investor would receive $2,410 ($12.05 x 200 shares).
Under the Uniform Practice Code, regular way transactions for common stock settle on the:
3rd business day following the trade date
Which of the following provisions govern the offering of restricted shares to the public without filing a Form 144?
5,000 shares or fewer are sold and The dollar amount is $50,000 or less Under Rule 144, Form 144 need not be filed if 5,000 or fewer shares are sold and the dollar amount is $50,000 or less. This de minimis rule applies to sales in any 90-day period.
If a client bought 100 shares of GM at 88.50, and the same day he went long a put at 90 for 4.25 on GM due to expire within the month, what is the breakeven point?
92.75 The stock is the dominant position. The breakeven point is calculated by adding the cost of the option to the cost of the stock. The stock must rise to 92.75 to break even.
Regulation T governs the purchase of:
ADRs, Corporate convertible bonds, and listed options. Not US govt bonds Reg T applies only to nonexempt securities
On the morning of the ex-date for a cash dividend which of the following orders on the order book will be reduced?
All: Sell stop, sell stop limit, and Buy limit Orders entered below the prevailing market (unless marked DNR) are reduced on the morning of the ex-date by the amount of the cash dividend. Those orders are buy limits, sell stops, and sell stop limits
An accumulation unit in a variable annuity contract is:
An accounting measure used to determine the contract owner's interest in the separate account
Which of the following can be a custodian under UGMA?
Any legally competent adult Only an individual adult can be the custodian in a minor's account. Neither a broker/dealer nor an investment advisory firm can be the custodian for an account under UGMA. The beneficial owner of an UGMA account is a minor and cannot be the custodian of their own account or any other fiduciary account.
All of the following may be used to service special tax bond issues
Business license taxes, gas taxes, excise taxes NOT: real estate taxes
Japan discovers oil in the Pacific, while earthquakes in England cause havoc, a customer who reads this would be most likely to take which of the following actions?
Buy yen calls and Buy pound puts. Because The yen will go up (good news in Japan) and the pound will fall (crisis in England).
When a customer wants to open a guardian account, which of the following is needed?
Copy of the court-ordered guardianship papers
If the current OEX is valued at 487.95, which of the following option positions will be considered to be in the money?
Dec 490 Put A put is in the money if the current market value is below the strike price. A call is in the money if the current market value is above the strike price.
The function of a broker's broker in the municipal bond business is to do which of the following?
Help sell munis that a syndicate has been unable to sell and protect the identity of the firm on whose behalf the broker's broker is acting
For which of the following would the net revenue to debt service ratio be applicable?
Hospital bonds This is the Coverage ratio. Because revenue bonds are only backed by funds generated by a specific source, it is important that net revenues exceed debt service requirements. Hospitals are often built with the proceeds of revenue bond issues.
An improvement in economic conditions is indicated by an increase in all of the following EXCEPT
Inventories Increases in Inventories is due to a decrease in customer demand, when econ conditions are deteriorating
Which of the following positions violate the rules governing position limits? (Assume SSS stock is subject to a 100,000 option position limit.)
Long 50,000 SSS Aug 40 calls; short 55,000 SSS Aug 40 puts and Long 50,000 SSS Aug 40 calls; short 55,000 SSS Jan 40 puts The expiration dates and strike prices may be different or the same. However, the total number of contracts on the same side of the market is limited to 100,000 for this stock; long calls and short puts are on the same side of the market (the bull side); short calls and long puts are on the same side of the market (the bear side).
Which of the following is always affected by a change in the market value of securities in a long margin account?
Maintenance request SMA is only affected if the CMV increases. In terms of dollars, the maintenance requirement will continuously fluctuate with the market value since it is a percentage of the CMV.
If ABC Fund pays regular dividends, offers a high degree of safety of principal and appeals especially to investors seeking tax advantages, ABC is a
Municipal bond fund
Which of the following transactions is subject to the 5% markup policy on markups and markdowns?
NYSE listed stock traded in the 3rd market The 5% policy applies to all exchange and OTC transactions in nonexempt securities. It does not apply to prospectus offerings (new issues and mutual funds). It does, however, apply to third-market trades.
A company set up to invest in real estate, mortgages, construction, and development loans that must distribute at least 90% of its net income to avoid paying taxes on the income distributed is called:
REIT
For municipal bond transactions, data captured and made available to the market place is done by which of the following?
Real Time Transaction Reporting system
Your investor decides he would like to open an options account. Which if the following is your responsibility as his registered rep?
Review with the client the risks involved when trading options and determine what types of options trading are appropriate for this client before the first options trade
Which of the following acts requires full disclosure of all material information about securities offered for the first time to the public?
Securities Act of 1933
The determination of a broker/dealer's financial failure is made under the provisions of the
Securities investor protection Act of 1970
Which of the following factors is (are) considered when determining whether underwriting compensation is fair and reasonable?
Size of the offering & type of underwriting commitment Relevant factors considered by FINRA in determining the fairness of underwriting compensation include the size of the offering (total dollar amount), the type of commitment (firm commitment or best efforts), the type of securities (i.e., stocks or bonds), the form of compensation (i.e., cash or stock), the total value of all forms of compensation, the underwriter's relationship to the issuer, and any form of potential conflicts of interest.
Which of the following best describes the disciplinary actions a self regulatory organization (SRO) such as FINRA or an exchange can impose upon a registered representative who has violated its rules?
The SRO has authority to censure, fine, or expel the registered representative.
All of the following must be included in a testimonial made on behalf of a member firm and distributed to potential clients EXCEPT:
The length of time the testimonial covers When a member firm uses a testimonial, it must be accompanied by a statement that this person's results do not necessarily represent those of other customers; a disclosure regarding compensation paid; and the testimonial giver's qualifications if an expert opinion is implied. There is no time-of-coverage requirement.
ABC Inc. has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-1 stock split?
The par value will decrease to $5 per share A stock split results in more outstanding shares at a lower par value per share. The total value of stock outstanding is unchanged. Retained earnings are not affected by a stock split.
A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 in order to qualify for a breakpoint. One year later, the shares are valued at $25,100 even though he has made no new investments. Which of the following statements regarding the above situation is TRUE?
The rep should remind the customer that he signed a letter of intent 12 months ago A letter of intent must be met with dollars invested within 13 months. The customer needs to invest an additional $7,000 to fulfill his letter of intent. The representative should remind the customer of his intention to qualify for the reduced sales charge.
The doctrine of reciprocal immunity most accurately describes:
The view that neither the state nor the federal govt may tax income received from securities issued by the other
Which of the following statements regarding investors who trade options that are American-style exercise is TRUE?
They can exercise their options any time prior to expiration
If the value of the U.S. dollar increases against other currencies, which of the following are TRUE?
US exports are less competitive in foreign countries and Foreign imports into the US are more competitive in US markets
One of your clients purchased shares of the Ajax Mutual Fund several months ago. At that time, the NAV of the fund was $17.20. Today, the NAV is $17.56 and your client wants to know what accounts for the difference. You should advise him that the difference likely represents:
Unrealized appreciation The NAV of mutual funds is marked to the market daily; the increase reflects higher market prices for the securities in the fund's portfolio.
A Municipal Finance Pro is
an associate broker dealer engaged in municipal securities rep activities other than retail sales Those activities can include the solicitation of municipal bond business. MFPs are subject to the MSRB reporting rules regarding gifts to elected officials and political parties (MSRB Rule G-37).
In a broker/dealer bankruptcy, a client has claims that go beyond SIPC coverage. Regarding the amount beyond SIPC coverage, the client:
becomes the general creditor If a customer's claim exceeds SIPC's $500,000/$250,000 (cash) coverage limits, the customer becomes a general creditor of the bankrupt broker/dealer for the balance.
All of the following statements regarding a 6% municipal bond that is puttable at par are true EXCEPT the:
bond is likely to trade at a discount in the secondary market when it is puttable Once a bond becomes puttable, the holder has the right to put the bond to the issuer at par. As a result, the bond would not trade below par in the secondary market. This effectively insulates the holder from interest rate risk-the risk that rising rates will force prices down.
Your firm is doing interviews of the top candidates from among those who responded to a recruiting advertisement. FINRA communications with the public rules for recruitment advertisements require that
both the job opportunity and the industry itself be represented honestly
If a new joint tenants with rights of survivorship account is opened, all of the following statements are true EXCEPT:
checks may be drawn in the name of either party While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.
All of the following would be found in a bond resolution for a new municipal issue
covenants to which the issuer must adhere, the issuer's obligations to bondholders, and the description of the issue NOT: the costs to be incurred by the issuer in connection with the offering
All of the following may be cited to justify a markup on a stock sold from a broker/dealers inventory EXCEPT
dealers cost
The IRS requires a bondholder to use straight-line amortization for the purpose of determining the annual
decrease to a premium bond's cost basis Premiums are amortized; discounts are accreted. For municipal bonds bought at a premium, the bondholder must adjust cost basis annually in such an amount that, if held to maturity, there is no reported capital gain or loss. The amortization is straight line, or the same amount must be amortized each year.
Arrangement in which broker has the authority, power of attorney, to make trades from funds in the account without prior approval from the investor is a
discretionary account
In the assessment of a company's stock, a technical analyst takes into consideration all of the following EXCEPT:
earnings Technical analysts deal with volume, market price, and price momentum Fundamental analysts deal with price momentum (particular industry or company within an industry and its relative health and market potential)
A customer opens a margin account by purchasing 300 shares of XYZ at $60 and deposits the required margin. The stock rises to $70 on the following day. On the third day, after the release of a disappointing earnings report, the stock falls to $50. Which of the following describes the account after the changes in market value?
equity of $6,000; SMA of $1,500 The account starts out as follows: $18,000 − $9,000 = $9,000 (LMV − DB = EQ). After the stock rises to 70, the account looks like this: $21,000 − $9,000 = $12,000; SMA = $1,500. For every $1 increase in market value, 50 cents of SMA is created. After the stock falls to 50, the account looks like this: $15,000 − $9,000 = $6,000; SMA = $1,500. An increase in market value creates SMA but a subsequent decline has no effect.
A customer is short 10 ABC Dec 50 calls at 2.50 and short 10 ABC Dec 50 puts at 3.50. Prior to expiration, ABC declines to 40.50 and the customer is assigned on his put position while his short calls expire worthless. A month later, he liquidates his long position at 45 for a:
gain of $1,000 The customer opens two short positions on 10 contracts each, so his account is credited with premiums of $2,500 for the calls and $3,500 for the puts. The calls expire worthless, but the short puts are exercised, so the investor is required to buy the stock at the strike price. This results in a debit of $50,000 ($5,000 per contract × 10 contracts), and the stock is then sold at a credit of $45,000.
If an investor wants to do a tax swap, he could reasonably expect to pay more money if he buys bonds with a:
higher coupon and similar rating higher coup = higher price
Which of the following describes a quote on Nasdaq Level I?
inside market Nasdaq Level 1 quotes represent the highest bid and lowest asking prices of all dealers. This is known as the inside market.
Most conservative means of raising capital in the issuers view is to
issue common stock
A corporation must have stockholder approval to:
issue convertible bonds Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholder's proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its treasury, declaration of a stock dividend, and declaration of a cash dividend.
the immediate effect o the Feds buying and selling securities in the market place is to
make credit more or less available
If a bond has a call provision, this will tend to:
make the bond less attractive to investors because a call would terminate the payments Callability is unattractive to the investor. It is attractive to the issuer because, with a call, the bonds are bought back at par or a small premium, and interest payments end.
If an investor opens a new margin account and sells short 100 shares of COD at 87.25, with Regulation T at 50%, what is the investor's required deposit?
mkt value x Reg T Requirement 87.25 x 100 shares = $8725 $8725 x .5 = 4362.5
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:
must pay 34.75 per share 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 actually executed, either on the exchange or in the market where the execution occurred.
the derivative based strategy known as portfolio insurance involves the
purchase of a put on the underlying security position The purchase of a put option to hedge the downside risk of an underlying security holding is called a protective put position one of many derivative-based strategies collectively known as portfolio insurance.
In the context of municipal bond underwritings, the true interest cost (TIC) is different from the net interest cost (NIC) because it
reflects the time value of money
Which of the following option strategies besides going long a call can be used to purchase stock below its current market value?
short put If the put is exercised by the owner the writer of the put will be obligated to purchase the stock. The cost of the stock is reduced by the amount of premium taken in when the put was written allowing the investor to purchase the stock at a net cost lower than the stock's current market value.
All of the following are required by limited partnerships:
subscription agreement, certificate of limited partnership, and partnership agreement. SEC approval is not needed
When a member firm sells municipal bonds to a customer out of its inventory, it must:
take into consideration the total dollar amount of the transaction when determining the markup
The document attesting to the formation of a limited partnership filed with designated authorities is called
the certificate of limited partnership filed with the state and is a public document
A registered representative's (RR) customer is speaking of a variable life insurance contract he owns. He makes several statements regarding the contract. Which of the following is NOT an accurate statement concerning a variable life insurance contract?
the death benefit cannot ever be more than the guaranteed benefit The minimum guaranteed death benefit is provided by that portion of the payment invested in the insurance company's general account. The remainder of the premium is invested in the separate account. While there is no guarantee on how investments in the separate account will perform, depending on its investment performance, the separate account could provide for a larger death benefit than the minimum guaranteed amount.
A securities exchange is where
the highest bid and lowest offer prevail and only listed securities can be traded
IRAs and Keogh plans are similar in each of the following ways EXCEPT:
the maximum allowable cash contribution is the same both IRAs and Keogh plans have maximum annual allowable contribution limits but they are significantly higher in the Keogh Plan
Regular way settlement for US government bonds is
the next business day
Rule 144A regulates
the sale of restricted stock to institution investors Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs).
All of the following statements regarding the 5% markup policy are true:
the type of security is a factor to consider, the markup policy doesn't apply to securities sold at a specific price and with a prospectus, and a transaction in CS customarily has a higher percentage markup than a bond transaction of the same size NOT: a riskless transaction is not generally covered by the 5% markup policy
A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among 5 different mutual funds within 2 fund families, as opposed to purchasing just 1 fund. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B $495,000 XYZ Research Class B $310,000 XYZ Investors Growth Stock Class B $495,000 ABC Capital Enterprise Class B $495,000 ABC Capital Opportunity Class b $310,000 Total $2,105,000 These recommendations are:
unsuitable because class A shares in either fund family could be purchased for a sales charge breakpoint discount at or near 0% Class A shares, in most mutual funds, provide breakpoint sales charge discounts so there is no sales charge when purchasing $1 million worth of shares (or less in some cases). Class A shares also have lower operating expenses than Class B shares. This retired investor would be subject to back-end loads with Class B shares if the funds were needed unexpectedly within a few years.
