Midterm 1 missed #7

designation on the tape for a cabinet stock?

"s/s"

Interest income from which of the following bonds is most likely to be considered a "tax preference item" in the Alternative Minimum Tax calculation? A. Airport revenue bond B. Hospital revenue bond C. Water revenue bond D. General obligation bond

A.

An over-the-counter firm has traded stock with another dealer. Barring any unusual circumstances, settlement will take place in A. 2 business days in clearing house funds B. 2 business days in Federal Funds C. 5 business days in clearing house funds D. 5 business days in Federal Funds

A. 2 business days in clearing house funds

Which security does not earn interest? A. Treasury Strip B. Treasury Stock C. Treasury Note D. Treasury Bond

B.

Which of the following bonds trades "flat"? A. Unsecured bonds B. Income bonds C. Reset bonds D. Mortgage bonds

B. When a bond is trading "flat," it is trading without accrued interest. Income bonds trade flat since they do not pay interest unless the corporation meets a specific earnings target. The other bonds make periodic interest payments. Unsecured bonds, such as corporate debentures, trade with accrued interest. (They only trade flat if they have defaulted.) Reset bonds establish dates when the interest rate can be reset to a given index value. Mortgage bonds pay interest semi-annually, and have a lien on real property as collateral.

Listed REITs offer all of the following benefits to purchasers EXCEPT: A. diversification of investments B. ready marketability of shares C. capital gains potential D. preferential taxation of dividends received

D.

An investor buys $10,000 of a "regulated" mutual fund investing solely in municipal securities. Which statement is TRUE regarding the Federal tax treatment of the interest income? A. The investor must pay Federal income tax on all interest received, since payments come from the investment company B. The investor must pay tax on any distributions received from the investment company, while the company has no tax obligation C. The investor has no tax liability on any distributions received, while the investment company must pay tax on any retained income D. The investor has no tax liability on distributions received, and the investment company has no tax liability on retained income

D. Since this mutual fund invests solely in municipal securities, there is no Federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income.

Interest earned on corporate bonds is: I Subject to Federal tax II Subject to State and Local tax III Exempt from Federal tax IV Exempt from State and Local tax

I and II

Net Asset Value per share for a mutual fund can be expected to decrease if which of the following occur(s)? I The fund has made dividend distributions to shareholders II The securities in the portfolio have depreciated in value III The securities in the portfolio have paid dividends

I and II only. If a fund distributes a dividend to shareholders, the Fund shares are reduced by the value of the distribution. If the securities in the fund portfolio pay dividends, these are received by the Fund. The receipt of these monies into the Fund increases NAV per share. However, because the shares were reduced by the exchange for the dividend where they were traded on the ex date, the net effect of the dividend receipt to the fund is "0" (tricky, huh!). Depreciating securities in the Fund portfolio will also decrease NAV per share.

Which statements are TRUE regarding closed end investment companies? I The initial offering of shares is made under a prospectus \II Shares are redeemable with the issuer at Net Asset Value III Shares trade in the secondary market at prevailing market prices IV The portfolio of investments is not managed

I and III only. The initial offering of closed end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. The portfolio of investments is managed - this is a closed-end management company.

Regulation SHO requires that if a stock falls by 10% or more: I it can only be sold short on an up bid II it can only be sold short on a down bid III short sales of that security are subject to the "bid test" rule for the remainder of that trading day IV short sales of that security are subject to the "bid test" rule for the remainder of that trading day and the entire next trading day

I and IV

Which of the following quotes are found in the Pink Sheets? I Firm Bid II Firm Ask III Bids Wanted (BW) IV Offers Wanted (OW)

I, II, III, IV

Which statements are TRUE about a Certificate of Participation (COP)? I COPs are considered to be a general obligation of the issuer II COPs are considered to be backed by a revenue pledge III Payments to security holders are contingent on the governing body making an annual appropriation from budgeted funds IV Payments to security holders are not contingent on the governing body making an annual appropriation from budgeted funds

II and III

Which statements are TRUE regarding Real Estate Investment Trusts? I Mortgage REITS can only invest in long term mortgages, but not short term loans II To be regulated under Subchapter M, 90% of Net Investment Income must be distributed to shareholders III Equity REIT income is derived from the difference between net rental income and interest paid on loans IV REIT losses can be passed through to shareholders under the "conduit" rules

II and III

A municipal bond dealer buys 100M of 30 year non-callable 9% General Obligation bonds at par less 1 point. After holding the bonds in inventory for a week, the dealer reoffers the bonds on a 9.10 basis. The dealer's approximate profit or loss on this transaction is: A. loss of $100 B. loss of $1,000 C. gain of $300 D. gain of $3,000

Loss of $100

Formula for current yield

annual interest / Bond market price