Mock Exam 5
A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account?
Equity will remain the same. -Even though the investor receives more shares, the price per share falls; there is no effect on the market value of the customer's holdings.
Which of the following order types is permitted in Nasdaq markets but NOT in NYSE equity markets?
Fill-or-kill (FOK) and all-or-none (AON) orders may no longer be entered in the NYSE equity market but are still accepted in both the bond market and Nasdaq.
Which of the following usually does NOT pay interest semiannually?
GNMA pass-through certificates pay principal and the interest monthly. All other choices usually pay interest semiannually.
The letter of intent in a corporate underwriting is typically signed by which of the following parties? Issuer. Managing underwriter. Syndicate members. Selling group members.
I & II
Which of the following transactions in the same security will affect the holding period of a security held for 12 months or less? Buy a put. Buy a call. Sell short. Sell a put.
I & III -The holding period of a capital asset is based on the amount of time the asset is held at risk. When there is no longer the possibility of a loss, there is no longer any risk. Buying a put or selling short effectively removes the risk from a transaction and destroys any short-term holding period. The short-term holding period will not become a long-term holding period for tax purposes, as long as the offsetting position (put or short) is maintained.
If a customer establishes a debit spread, the customer profits if the: I. spread widens. II. spread narrows. III. option expires. IV. options are exercised.
I & IV -Because debit spreads are closed as credits, the customer profits if the spread widens. In addition, to realize maximum profit, both contracts must be exercised. If they expire, the customer loses the net debit paid for a maximum loss.
A specialist (designated market maker) must refuse: not-held orders. good-for-a-month orders. stop limit orders. market orders.
I and II. -Specialists (designated market makers) cannot accept not-held orders or good-for-a-month orders. Not-held orders are the responsibility of floor brokers (commission brokers); these orders give the floor broker discretion as to time and price. Good-for-a-month orders are not standard orders. A time-qualified order must be day or GTC.
The issuance of a debenture by a company would have an immediate effect on which of the following balance sheet items? The total assets. The total liabilities. The working capital. The shareholders' equity.
I, II and III. -The cash received from the sale of the bonds is a current asset of the company and as such would increase assets and working capital on the balance sheet. The debentures are debts of the company and would increase the liabilities of the company. Shareholders' equity is only affected by gains, losses, new invested capital, and cash distributions (dividends) to shareholders.
Your client is interested in a direct participation program (DPP) limited partnership. Which of the following two are most likely to factor into a discussion on suitability of such an investment? Beta. Liquidity. Duration. Age.
II & IV -The key here is to recognize that with DPPs, the customer's age is a relevant consideration in determining suitability. DPPs are long-term and illiquid. For example, it is unlikely that DPPs would be suitable for a customer near retirement age, regardless of the customer's financial situation. Beta, having to do with measuring an investment's volatility as related to the overall market, and duration having to with bonds are not factors that would be associated with DPPs.
Last-sale information is always available for all of the following securities EXCEPT
OTC, non-Nasdaq Last-sale information is available for listed (exchange traded) securities and for all Nasdaq securities. While there are a number of sources for last sale information in general, it may not always be available for a security that is OTC non-Nasdaq.
Under NYSE rules, a not-held order:
Under NYSE rules, a not-held order where a customer gives you authority over the price or timing of the order is good for that day only.
A customer buys a 5% bond at par. The bond is callable in 5 years at par and matures in 10 years. Which of the following statements is TRUE?
YTC is the same as YTM. -If a bond is trading at par, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.
A customer sells short 100 shares of GHI on February 26, 2000, at $40 per share. He covers his short on March 10, 2002, at $32 per share. For tax purposes, the $800 will be treated as
a capital gain in 2002 -Investors profit on short positions when the market value of the stock falls. In this situation, the market value of the stock has fallen from 40 to 32 for a profit of $8 per share. This gain of $800 (100 shares) is reportable when the shares are delivered to cover the short position. Uncovered short sales are reported as short-term gains and losses no matter how long the holding period.
A portfolio that invests in blue-chip stocks and growth stocks can best be described as:
a growth and income portfolio. -A growth and income portfolio typically combines conservative blue-chip securities for their stability and capital preservation with growth stocks for their appreciation potential. An aggressive portfolio contains securities of smaller companies that have the potential for significant capital appreciation. A balanced portfolio invests in both stocks and bonds.
If a municipal bond with 10 years to maturity is purchased from the issuer for 110, and after 2 years it is sold for 110, the bondholder must report:
capital gain of 2 points. -Municipal bonds bought at a premium must be amortized. The amount of the premium is 10 points. With 10 years to maturity, the annual amortization is 1 point. After 2 years, the bond's cost basis has been amortized down to 108. If at that point, it is sold for 110, there is a 2-point capital gain.
When calculating net investment income, an investment company includes:
dividends plus interest, minus operating expenses. Net investment income equals gross investment income minus operating expenses. Gross investment income is interest and dividends received from securities in the investment company's portfolio.
All of the following are minimum requirements for listing on the NYSE EXCEPT:
earnings per share. -While the numerical values are not tested, it is important to know that there is no minimum earnings per share requirement. However, there is a minimum earnings requirement.
The interest that municipal securities pay is:
federally tax exempt. -Interest paid on securities issued by municipalities is generally exempt from taxation at the federal level. It may also be exempt from state and local taxation if the purchaser resides in the issuing state.
Communications with the public include all of the following EXCEPT:
informational material on a new mutual fund intended for sales personnel. -Material intended for internal use only is not considered a communication with the public.
A blind pool offering:
is one in which 25% or more of the properties are not specified. Many times, large real estate or oil and gas programs are offered in the form of a blind pool. In a blind pool, 25% or more of the specific properties (in real estate) or sites (in oil and gas) have not been identified at the time of the offering. When investing in a blind pool, the participants are relying on the expertise of the program sponsor to select locations that will prove profitable.
All of the following are true regarding interest received from a CMO investment EXCEPT
it is non-taxable at the local level -Interest received from CMOs is fully taxable at the federal, state, and local levels.
A new client holds unregistered securities purchased offshore from a US issuer in an exempt Regulation S transaction. These securities
must be held 1 year before they can be resold in the United States -Securities offered under Regulation S in an exempt transaction (US issuers offering securities offshore to non-US residents) must be held for 12 months (1 year) before they can be resold in the United States.
Broker to broker confirmations must be sent no later than
next business day -Confirmations between brokers (broker to broker confirms) must be sent no later than the next business day following the transaction (T + 1).
The Nasdaq stock market permits listing for all of the following EXCEPT:
nonconvertible debt securities. -The Nasdaq stock market is an equity and equity equivalent market. Listed are common stock, preferred stock, warrants, limited partnerships, ADRs, and convertible bonds. Straight debt securities are not part of Nasdaq.
The capital structure of an open-end investment company can include:
one issue of common stock and limited bank borrowing. -Open-end investment companies may only issue redeemable common stock. Preferred stock, bonds, and other forms of senior securities are not allowed. Bank borrowing is allowed subject to certain limitations.
A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports a:
tax credit on the investor's U.S. tax return. An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability.
If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder?
$600 cash. -Index options settle in cash. Physical delivery does not occur. The call buyer receives cash equal to the difference between the strike price and the index closing value on the day the option is exercised.
How many business days after an index option is exercised should a cash settlement occur?
1 -Exercised stock index options settle on the next business day.
Your manager notifies you that a new municipal revenue bond issue you have been working on has been oversubscribed. How is the order acceptance priority for this issue determined?
As outlined in the agreement among underwriters. -The priority of filling municipal orders is established by the managing underwriter in the release terms letter sent to the syndicate once the bid is won. This letter is an amendment to the agreement among underwriters. The priority is also disclosed in the official statement.
When discussing mutual funds with a customer, each of the following statements are prohibited EXCEPT:
Buy shares of different funds in the same fund family and you may qualify for a breakpoint on the total purchase. 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 share price adjustment that results after the dividend distribution.
