Exam 6 Q&A
Under the Investment Company Act of 1940, which TWO of the following choices are considered investment companies?
A face amount certificate & a management company are 2 types of investment companies. The third type is a UNIT INVESTMENT TRUST.
Which of the following descriptions characterizes leveraged exchange-traded funds (ETFs)?
A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the DJIA seeks to deliver three times the performance of that index. So, if the DJIA rises or falls by 1%, a leveraged ETF would increase or decrease by 3% before fees and expenses. Choice (a) is a regular ETF, choice (c) is an inverse ETF which seeks to deliver the opposite of what it is tracking, and choice (d) is a leveraged inverse ETF.
A member firm is required to send duplicate account statements to FINRA:
A member firm is required to send duplicate account statements to FINRA when a customer of the firm is an employee of FINRA. The member firm would need written instructions from the employee of FINRA when opening an account in order to send the duplicate account statements.
An investor enters an order to buy 400 shares of HRJ @ 56 on the NYSE. Which of the following statements are TRUE regarding this order? The designated market maker may hold this order in his book The order may only be executed at 56 A portion of the 400 shares may be purchased The order must be executed immediately I and III only II and III only II and IV only I, II, III, and IV
A. Since a price is specified, it is a limit order. A limit order may be executed at the limit price or better (lower for a buy order). It does not need to be executed at exactly the limit price. A designated market maker is permitted to hold a stop, limit, and stop-limit order. A portion of the order may be executed since the order was not marked AON (all or none). It does not need to be executed immediately since it was not marked IOC (immediate-or-cancel).
Which of the following issues will most likely have a mandatory sinking fund? a. Serial issues b. Balloon issues c. Term issues d. Convertible issues
C. A term issue is one in which all the bonds mature in one specific year. To accumulate monies to help retire the bonds, the issuer will deposit monies (above the amount to pay interest) in a sinking fund. These monies will generally be used to retire some of the bonds prior to maturity. A serial issue is one in which a portion of the bond issue is paid off each year, versus all being paid in one specific year as with a term bond issue.
Which of the following statements does NOT describe an equity-indexed annuity? a. It offer a guaranteed minimum rate of return b. It provides a return based on the performance of a stock market index c. It is considered a security d. It provides tax-deferred growth
C. Equity-indexed annuities (EIAs) are annuities that provide a guaranteed minimum rate of return (unlike variable annuities), but can yield a greater rate of return based on the performance of a linked stock market index. They also provide tax-deferred growth. Currently, EIAs are not considered securities.
CFTC
Commodity Futures Trading Commission -- regulates the commodity & future markets.
Dividend payout ratio:
Dividends / EPS
To which of the following customers would a registered representative be LEAST likely to recommend an exchange-traded note (ETN)
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. An investor seeking income on a regular basis would not be a suitable candidate for an ETN. 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. Most ETNs are traded on a national exchange (e.g., NYSE) which has the feature of liquidity. Therefore, an investor seeking capital appreciation has the ablity to sell when advantageous.
A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 2,000 shares of EXA at $24. The client's maintenance requirement is:
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. 5% of $48,000 (2,000 shares x $24) equals $2,400.
There is a halt in the trading of a security that underlies option contracts. Who makes the decision to stop trading the option contracts?
Officials of the exchange on which the options trade make the decision to stop trading the options.
The Bond Buyer Municipal Bond Index is based on:
The Bond Buyer Municipal Bond Index represents the average of the prices of 40 long-term municipal bonds adjusted to a yield of 6%.
Reasons to Reject Municipal Bond Delivery:
1. The lack of legal opinion 2. A missing coupon 3. A mutilated certificate
Sarah would like to help fund her 10-year-old niece's future education. Which of the following choices is her best option?
Anyone may set up or deposit funds in a Coverdell Education Savings Account as long as the total amount deposited from all parties does not exceed $2,000 in any one year. Individuals without earned income may not contribute to an IRA. A minor may not participate in a joint account.
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.
A client is long and short 1,000 shares of the same security. If the current market value is $80,000, the client is permitted to borrow up to:
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.
Your firm is the managing underwriter of an initial public offering. How many days must the firm's research analyst wait before issuing a research report on this IPO?
If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 40 days following an IPO or 10 days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 25 days.
Crossover Point
In a direct participation program, the point at which revenues begin to exceed deductions.
Which of the following lists assists a broker-dealer in making a reasonable determination that a security is available to be borrowed from another broker-dealer in order to effect a short sale transaction?
In order to aid in the process of locating securities, the SEC has accepted the use of Easy-to-Borrow lists. These lists, which must be less than 24 hours old, provide reasonable grounds for belief that a security on the list will be available to be borrowed. The securities on the list must be readily available to avoid fails to deliver. Use of an Easy-to-Borrow list expedites the fulfillment of the locate provision. A Hard-to-Borrow list refers to securities that a clearing broker-dealer may have difficulty in borrowing.
Treasury arbitrage restrictions generally prohibit issuers of municipal securities from:
Investing bond proceeds in higher-yielding Treasury securities
Level I of Nasdaq indicates the:
Nasdaq Level 1 provides subscribers with the highest bid & the lowest offer for a security (the inside market) in which there are at least two market makers. Although nonmembers can also subscribe to Nasdaq Level I, it is typically used by branch offices of member firms.
The term opening sale applies to:
The terms opening sale applies to the seller (writer) of a listed option. This designation must be written on the order ticket.
What is the maximum allowable percentage that may be sold above the original size of the offering through a Greenshoe option?
he overallotment provision of an underwriting agreement may contain a Greenshoe clause that allows the syndicate to increase the number of shares sold by 15% over the original number of shares in the offering.
A bond swap is done to:
1. Increase the overall yield of the bond portfolio 2. Increase the current income of a bond portfolio 3. Establish a tax loss to offset income. NOT TO: Take advantage of a large amount of accrued interest
Preferred stock generally has which TWO of the following characteristics?
1. The dividend received is taxable 2. The dividend is paid in after-tax dollars
Advertising for municipal fund securities investments must be approved prior to its official use by:
A 529 College Savings Plan is a type of municipal fund security. All advertising regarding municipal securities and municipal fund securities must be approved by a municipal securities principal of the firm prior to its initial use.
A collateralized debt obligation (CDO) is BEST defined as a type of:
A collateralized debt obligation (CDO) is a type of asset-backed security. A CDO is issued as a bond, which is backed (collateralized) by a pool of bonds, loans, and various other assets. Ownership of this type of security is typically in the form of a tranche (slice), with any given tranche from the CDO carrying a different maturity and risk level. The return an investor can expect from this type of investment is based on the credit quality of the underlying assets contained in the pool. CDOs are similar in structure to collateralized mortgage obligations (CMOs). These investment vehicles are broadly categorized as asset-backed securities.
A corporation wishes to open a cash account. Which of the following documents is required?
A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account.
Which TWO of the following activities are normally functions of the investment banking department of a broker-dealer?
A corporation that wishes to raise capital will typically employ the services of an investment banker and engage in an underwriting process. Investment bankers provide financing for corporations by bringing an issue, whether debt or equity, to market for the issuer. The investment banking department will also assist companies with mergers and acquisitions. Investment bankers do not make a secondary market for new issues or sell securities to institutional investors.
ABC Corporation has net income of $10,000,000 and 5,000,000 common shares outstanding. ABC Corporation pays out $1,000,000 in dividends annually. ABC Corporation's dividend payout ratio is:
ABC Corporation has net income of $10,000,000 and 5,000,000 common shares outstanding. ABC Corporation pays out $1,000,000 in dividends annually. ABC Corporation's dividend payout ratio is:
A new municipal bond issue is dated January 1 and pays interest each April 1 and Oct. 1. An investor purchased bonds from the issuer with a Thursday, January 31 settlement date. How many days of accrued interest does the investor owe?
Accrued interest on a new municipal issue is calculated from the dated date up to, but not including the settlement date. Since the investor's settlement date was January 31, he owes from January 1 to January 30 (30 days).
Ms. Thomas calls her registered representative with an order to buy up to 2,000 shares of XYZ at $35 per share right now and do not leave the unexecuted portion as a day or open order. Ms. Thomas has entered a(n)
An order that dictates to fill as much of the order as you can right now and cancel the rest is called an immediate-or-cancel order. Limit orders are placed as either day or GTC orders and the unexecuted portions are placed on the designated market maker's book.
A customer has $350,000 to invest and would like to hold a diversified portfolio of stock, bonds, and money-market instruments. She wants the percentage invested in each of these asset categories to be adjusted as financial markets change. However, her business keeps her too busy to adequately monitor her holdings and make the appropriate changes. Which of the following investments are MOST suitable for this customer?
Asset allocation funds hold diversified portfolios of stocks, bonds, and money-market instruments. The percentage of the portfolio invested in each of these categories is shifted by the fund manager from time to time, often according to computer models.
An individual purchases one XYZ 40 call for 4 and one XYZ 50 call for 2. The market price of XYZ stock is currently 43. The individual's breakeven price is:
Buying two calls with different strike prices is a bullish strategy. In this example, since one of the strike prices is higher and out-of-the-money, it is less expensive than buying two calls with the same strike price. The total cost of the XYZ options is 6. The 40 call would be exercised first, resulting in a total cost of 46 (40 + 6). This is the amount at which the individual would need to sell XYZ stock to break even. If the market price of the stock is trading at any other value, the client would either have a profit or loss. For example, if the market price at expiration is $52, the client will have a $1,200 gain on the 40 call (52 - 40) and a $200 gain on the 50 call (52 - 50). The total gain of $1,400 less the combined $600 premium equals an $800 profit.
A member of a municipal new issue syndicate is entering an order for an accumulation account being used for a unit investment trust that the firm underwrites. This order must be entered as a(n):
MSRB rules require a syndicate member to disclose to the syndicate an order for a unit investment trust or an accumulation account to be used for a unit investment trust. The disclosure is accomplished by entering the order as a related portfolio order.
The most detailed financial information regarding a municipal securities issuer is found in the:
Municipal securities are exempt from the registration provisions of the SEC. Therefore, a registration statement and prospectus are not required. Municipal issuers voluntarily provide the same financial information that would be found in a prospectus. This detailed financial information is found in the official statement. The notice of sale contains information pertaining to a competitive offering of bonds such as the time, place, date of sale, and type of offering.
Which of the following securities are guaranteed by the federal government? a. Fannie Mae securities b. Ginnie Mae securities c. Freddie Mac securities d. Federal Home Loan Bank securities
Of the choices given, only Ginnie Mae securities or the Government National Mortgage Association securities (GNMAs) are fully guaranteed as to principal and interest by the federal government.
Which of the following securities may not be used as collateral in a margin account?
Option contracts have no loan value and therefore may not be used as collateral in a margin account. The exception is LEAPS, which can be bought on margin and, therefore, have loan value. LEAPS are equity options that can have a maximum life of 39 months.
A customer purchases 10 MMS May 20 puts at 2 in a cash account when the market price of MMS is 24. Which TWO of the following statements are TRUE regarding this transaction?
Option transactions settle on the next business day between brokerage firms and the Options Clearing Corporation. According to Regulation T, payments for transactions in cash and margin accounts must be made by the customer within two business days following the regular-way settlement date. Since regular-way transactions settle in three business days, customers have five business days in which to pay for purchases. Therefore, while option transactions settle next day, the Reg T payment requirements are based on a regular-way transaction. Hence, customers have five business days in which to pay for option purchases.
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:
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.
REITs- taxed as? suitable for?
REITs invest in many different types of residential and commercial income-producing real estate such as apartment buildings, hotels, shopping centers, office complexes, storage facilities, hospitals, and nursing homes. Income is received from the rental income paid by the tenant leasing the real estate owned by the REIT. REITs must pay a minimum of 90% of their taxable income and the dividends received by investors are taxed at the same rate as ordinary income. The dividends paid to shareholders of REITs do not qualify for the lower 20% tax rate given other types of common and preferred stock. They can be suitable for both retail and institutional investors.
A brokerage firm accepted delivery of securities on settlement. Upon further inspection of the securities, the brokerage firm discovers a problem and wishes to return the securities to the selling dealer. The process of returning securities that have previously been accepted is known as:
Reclamation is the process of returning securities that were previously accepted on the settlement date. Rejection is when the brokerage firm refuses delivery of the securities on the settlement date.
Which TWO of the following choices are characteristics of reverse convertible securities?
Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.
All of the following statements are TRUE concerning a municipal bond issue having a serial maturity, EXCEPT: a. All of the bonds mature on one date in the future b. The bonds are priced on a yield-to-maturity basis c. The issue has a decreasing outstanding principal d. The issue has decreasing total interest payments
Serial bonds mature in successive years and are priced on a yield-to-maturity basis. As a serial issue nears its final maturity, the outstanding principal and total interest payments decrease. Term bonds mature at one date in the future and are priced at a dollar price (percentage of par).
A fundamental analyst is NOT interested in which TWO of the following metrics?
Short interest and trading volume are technical indicators. EPS and the P/E ratio are fundamental indicators.
The net borrowing cost to a municipal issuer of a Direct Pay Build America Bond (BAB) with a 7% interest rate is:
The Treasury will reimburse 35% of the interest payment, which results in a net borrowing cost of 4.55% (7.00% x [100% - 35%]). These bonds may be suitable for taxable, fixed-income investors. BABs allow a municipality to issue a bond with a higher interest rate, but pay an equivalent tax-free rate.
Regarding a company's financial statements, total assets are equal to:
The balance sheet formula is Total Assets = Total Liabilities + Stockholders' Equity. Total Assets is, therefore, equal to Total Liabilities + Stockholders' Equity.
Subordinate Debenture holders
The bonds are subordinated debenture bonds and are issued at par value. If the company should go bankrupt, the subordinated debenture holders will be paid after all other bondholders and general creditors, but before common stockholders.
Death Benefit on a variable annuity
The death benefit on a variable annuity skips the probate process. Probate is a lengthy legal process in which the decedent's bills are paid and remaining assets distributed based on instructions generally left in a will. The recipient of a death benefit from a variable annuity may need to pay taxes on any amount above the contract's cost basis. For example, if a client invested $100,000 and died when the contract was worth $150,000, a nonspouse beneficiary may be required to pay taxes on the $50,000 above the decedent's contributions.
Which TWO of the following metrics can be calculated by examining the balance sheet of a company?
The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The current ratio is found by dividing the current assets by the current liabilities. The operating profit margin and the bond coverage ratio can be calculated by examining the income statement.
Which of the following statements is TRUE regarding stock index options? The index is affected if a stock in the index should split All index options use the European style of exercise The shortest initial expiration is three months An exercise is settled by cash instead of the delivery of securities
The exercise of a stock index option is settled by cash instead of the delivery of securities. An index will not be affected if one of its components should split. Some index options are American style (may be exercised any day up to expiration), while others use the European style (may only be exercised on the last trading day prior to expiration). Stock index options have a monthly expiration cycle.
A customer enters a sell stop-limit order for 100 XYZ at 25.50. XYZ trades occur as follows: 25.50, 25.25, 25.13, SLD 25.50. The customer's order was
The first trade at 25.50 touched the stop price of 25.50 and the order became an active or live order to sell 100 shares of XYZ at a limit price of 25.50 or better. Thus, the stock must increase to at least 25.50 for an execution. The only other trade at 25.50 has the symbol SLD next to it, indicating that a trade occurred previously (assume prior to the other trades shown), was reported out of sequence, and is now being shown to indicate that fact. There is no trade at the customer's limit price of 25.50 after the customer's order became a live order. Therefore, the customer's order was not executed.
Which of the following annuity settlement options would provide the longest stream of income over the lives of two individuals?
The joint and last survivor settlement option would provide the longest stream of income as it guarantees payments until the last annuitant dies. The life annuity with 20-year certain would result in payments ending after 20 years even if the survivor was still alive. The unit refund life annuity will only refund the balance of what is left over after the annuitant dies. Payments cease after the annuitant dies in a straight-life annuity.
The maximum underwriting compensation for selling limited partnerships in public offerings is:
The maximum underwriting compensation for selling partnership units in a public offering is 10%. This is based on the gross dollar amount of the units sold. The 10% limit applies to all compensation, regardless of the source, if it is in connection with the offering.
A member bank wishes to borrow money from the Fed. What rate will be charged?
The member bank is charged the discount rate when it borrows from the Fed.
Which of the following CMOs has the LEAST prepayment risk? a. Sequential pay tranches b. Accrual or Z tranches c. Planned amortization class (PAC) tranches d. Support or companion tranches
The planned amortization class (PAC) is a type of CMO that is designed for more risk-averse investors and provides a predetermined schedule of principal repayment, as long as mortgage prepayment speeds are within a certain range. This greater predictability of maturity is accomplished by establishing a sinking-fund type of schedule. The PAC tranche has top priority and receives principal payments up to a specified amount. Any excess principal goes to a companion or support tranche that has lower priority. Holders of the companion tranche are generally compensated for this risk with higher yields.
Someone who wants to hedge a portfolio of preferred stocks will buy:
The prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. If the investor is concerned that rising interest rates will erode the value of the preferred stock portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based call options increase in value when interest rates rise, creating a viable hedge.
A broker-dealer is underwriting an initial public offering (IPO) for a company that will be listed on the NYSE. The broker-dealer is required to deliver prospectuses:
When a company that is the subject of an IPO is listed, on the effective date of the offering, prospectuses must continue to be delivered on all purchases in the aftermarket for 25 days. The prospectus delivery requirement for an IPO that will not be listed on an exchange continues for 90 days after the deal closes.
An investor owns 1,000 shares of an open-end investment company. The bid price is $11.00 and the offer price is $11.58. The investment company charges a 1/2% redemption fee. If the investor redeems his 1,000 shares, how much will he receive?
When redeeming shares of an open-end investment company (mutual fund), an investor receives the NAV (bid price) minus any redemption fee. The investor would receive $11,000 (1,000 shares x $11.00 NAV) minus the redemption fee of $55 ($11,000 x 1/2%), which equals $10,945.
An investor purchases 200 shares of STC at $35 and subsequently purchases 2 STC Jan 35 puts at 2. At what market price must STC trade for the investor to have a profit?
f an investor is long stock and long a put, he will have a profit if the market price exceeds the cost of his stock plus the premium for the option. The stock must trade above 37 (35 cost + 2 premium).
A bond convertible at $40 is selling in the market for 120. If the stock has a current market price of $50, the parity price for the bond is:
t is necessary to find the conversion ratio to solve this problem. The bond is convertible at $40. $1,000 divided by $40 equals the conversion ratio of 25 shares of stock to one bond, or 25 to 1. To find the parity price of the bond, multiply the market price of the stock of $50 by the conversion ratio of 25 ($50 x 25 = $1,250). This means that the bond must sell for $1,250 to be equal in value to the stock when the stock has a market value of $50 per share.
Best defines a tax swap:
the sale & purchase of bonds (or other securities) to realize a capital loss that can be offset against a capital gain.
