Exam 7 & 8

Having held 100 shares of GHI stock for 15 months, a customer purchases 1 GHI Jan 50 put in December. If the put is exercised before the expiration date and the long stock is delivered, which of the following statements are true? 1. The premium is added to the sale proceeds. 2. The premium is deducted from the sale proceeds. 3. Any gain is long term. 4. Any gain is short term.

2&3. Because the customer already held the stock long term when he purchased the put, he was not trying to stretch a short-term gain into a long-term gain. There is no effect on his established holding period of 15 months. Whenever a put is exercised, the stock's sale price (exercise price) is reduced by the premium paid for buying the put. LO 10.i

Given the current business climate, an investor believes that a number of industries will be going through a consolidation over the next two to three years. Willing to invest $30,000 in the opportunity to profit if the consolidation occurs, which of the following would be the most suitable recommendation? A) Corporate bond fund B) Special situation fund C) Sector fund D) Buy call options on select stocks

A special situation fund can be specific to mergers and acquisitions within a particular industry or among many and would be a suitable choice, given the investor's opinion that consolidation may occur. Sector funds focus on only one industry or area, and corporate bond funds would have no advantages in cases of industry consolidation

American depositary receipt (ADR) owners have all the following rights except A) the right to sell the ADR in the foreign market. B) the right to sell in the secondary market. C) the right to receive dividends in U.S. dollars. D) the right to receive the underlying foreign security.

A. The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded in the United States. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas. LO 3.g

Which of the following statements regarding savings incentive match plans for employees (SIMPLEs) is not true? A) Catch-up contributions for those age 50 and older are permitted. B) SIMPLEs are retirement plans for small businesses with fewer than 100 employees. C) Employers cannot make matching contributions for employees. D) Employee contributions are pretax.

C. The employer is permitted to make matching contributions for employees.

Your customer has made a margin purchase of 100 shares of DMF at 50. Two days later, before the customer has met his call, the current market value of DMF is 60. How much must your customer now deposit? (Regulation T is 50%.) A) $1,500 B) $2,000 C) $3,000 D) $2,500

D. The investor must come up with the initial call of $2,500. The amount of margin required for a new purchase is based on the current market value of the security at the time of purchase. LO 16.d

Which of the following will halt trading in listed options when there is a trading halt in the underlying stock? A) The Options Clearing Corporation B) The options exchange on which the option is listed C) The exchange on which the stock is listed D) The Securities and Exchange Commission

If trading is halted in any stock on which options trade, trading in those options is also halted by the Chicago Board Options Exchange. LO 10.i

Ginnie Mae vs T-Notes characteristics

Interest from U.S. T-notes is taxed at the federal level only, while interest on Ginnie Maes is taxed at all levels. GNMA bonds are treated like corporate bonds in many ways. T-notes settle next day, while Ginnie Maes normally settle T+2. Interest on T-notes is computed on an actual-day basis, and Ginnie Mae interest is computed on a 30-day month/360-day year basis. Both Ginnie Maes and T-notes are quoted in 32nds.

When analyzing a company's balance sheet, you notice that it is using the first in, first out accounting method to value its inventory. This information is most likely shown A) next to the inventory listing in the current assets portion of the balance sheet. B) at the end of the balance sheet in a summary statement required by the SEC. C) on the cover of the balance sheet or at the top of the first page. D) in a footnote to the balance sheet.

Notations regarding accounting methods used, such as those for valuing inventory, would generally be found in the footnotes of the balance sheet. LO 8.d

The call provisions of a municipal issue would be detailed most completely in A) the official notice of sale. B) the bond resolution. C) The Bond Buyer. D) the legal opinion.

The bond resolution is the document that authorizes the issuance of a municipal bond. The resolution also describes the proposed issue's features and the issuer's responsibilities to its bondholders. LO 6.b

Reasons why a corporation might engage in a stock buy-back program would include all of these except A) having stock available for future acquisitions. B) using the stock for employee stock options. C) reducing annual interest expense. D) increasing earnings per share.

There is no interest expense with stock. When a company buys back its stock, it becomes treasury stock. That stock is no longer outstanding. Buying back the stock should cause the earnings per share to increase (there are now fewer shares outstanding). Many times one company will acquire another one by paying for the purchase with its treasury stock rather than cash. Many companies offer employees ownership opportunities through employee stock options. This is a way to ensure that the company has enough stock to meet the needs. LO 3.a

Which of the following debt instruments trades with accrued interest? A) Bankers acceptances B) Negotiable CDs C) Treasury bills D) Zero-coupon issues

To trade with accrued interest, the security must pay interest. Of the choices, the only one that is interest bearing is the negotiable (jumbo) CD. All of the others are issued at a discount and return the face value at maturity. LO 4.c

A municipal revenue bond indenture contains a net revenue pledge. The following are reported for the year: $30 million of gross revenues, $18 million of operating expenses, $4 million of interest expenses, and $2 million of principal repayment. What is the debt service coverage ratio? A) 5:1 B) 3:1 C) 2:1 D) 9:1

Under a net revenue pledge, bondholders are paid from net revenue, which equals gross revenue minus operating and maintenance expenses. In this example, net revenue is $12 million ($30 million − $18 million). Debt service is the combination of interest and principal repayment. Here, debt service is $6 million ($4 million + $2 million). To compute the debt service ratio, divide net revenue by debt service: $12 million divided by $6 million equals a ratio of 2:1. LO 6.c