Part 2 Quiz 50+Q

An investor owns 400 shares of ABC common stock. ABC's board of directors has declared a 5:4 stock split. As a result, the investor will receive how many additional shares? A) 100 shares B) 500 shares C) 40 shares D) 80 shares

A) 100 shares Step 1: Find stock split factor SS Factor = first SS number / second SS number SS Factor = 5 / 4 SS Factor = 1.25 Step 2: Find amount of new shares New Shares = old shares x SS Factor New Shares = 400 shares x 1.25 New Shares = 500 shares Therefore, investor will receive 100 additional shares In a 5:4 stock split, the shareholder will own five shares for each four shares currently held. This investor owns 400 shares so, after the split, the account will have 500 shares in it. The difference between 400 and 500 is 100 additional shares. If you chose 500, that is the total number of shares that will be owned, but the question does not ask for that—it asks for the number of additional shares. LO 3.b

Ten municipal bonds were purchased with 9% nominal yield for settlement on February 1, 2015. The maturity date of the bonds is July 1, 2035. What is the number of days of accrued interest on the 10-bond trade? A) 30 B) 37 C) 29 D) 31

A) 30 The maturity month and day will always match one of the two semiannual coupon dates. Because maturity is July 1, the bond pays interest on January 1 and July 1 of each year. With settlement on February 1, the bond accrued interest from January 1 up to, but not including, settlement (30 days). LO 6.e

Which of the following is not generally associated with an existing real estate direct participation program? A) Appreciation potential B) Immediate income stream C) Known history of income and expenses D) Lower risk than other types of real estate programs

A) Appreciation potential Appreciation potential is generally not associated with existing real estate programs because most appreciation occurs in the earliest years for real estate assets. LO 11.e

Which of the following statements regarding index options are true? I. Exercise is settled in cash. II. Exercise settlement value is based on the value of the index at the time exercise instructions are received. III. Exercise settlement value is based on the closing index value on the day exercise instructions are tendered. IV. Exercise settlement is T+2. A) I and III B) II and IV C) I and II D) II and III

A) I and III All index option exercises are settled in cash. The amount a writer owes the holder is known as the intrinsic value of the option, and the settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is the next business day. LO 10.g

Financial footnotes found in which of the following would be of the greatest importance to your broker-dealer's retail customers? I. The broker-dealer's principal-approved advertising II. Balance sheets of stocks you've recommended to them III. Income statements of stocks you've recommended to them IV. Your broker-dealer's website page showing the history of the firm A) II and III B) II and IV C) I and III D) I and IV

A) II and III While footnotes found anywhere are of importance, those found in financial statements, such as balance sheets and income statements, would be the most important to your broker-dealer's customers when evaluating investment recommendations. LO 8.d

Which of the following statements regarding Ginnie Maes are true? I. They are quoted in 1/8ths. II. They are quoted in 1/32nds. III. They are traded with an accrued interest computed on an actual-day basis. IV. They are traded with an accrued interest computed on a 30/360 basis. A) II and IV B) II and III C) I and III D) I and IV

A) II and IV Like governments, Ginnie Maes are quoted in 1/32nds, but, like corporates, Ginnie Maes compute accrued interest on a 30/360-day basis. LO 7.c

Which of the following statements best describes a breakpoint sale? A) Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission B) Sale of investment company shares in dollar amounts above the point at which the sales charge is reduced C) Compensation generated by commissions from a client who has reached another breakpoint, paid to the registered representative after he no longer works for the member D) Sale of investment company shares in anticipation of a distribution scheduled to be paid shortly

A) Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint. LO 8.d

Which of the following securities would have a Moody's MIG rating? A) TANs B) GOs C) BAs D) T-bills

A) TANs TANs are tax anticipation notes. These are short-term municipal securities and that is what Moody's MIG ratings represent. MIG stands for Municipal Investment Grade. GOs are rated with the normal letter ratings and BAs (bankers' acceptances) and T-bills are not municipal securities. LO 6.f

A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100 even though she made no new investments. Which of the following statements regarding this situation is true? A) The representative should remind the customer that she signed a letter of intent 12 months ago. B) The letter of intent is considered to be fulfilled. C) The investment no longer qualifies for a breakpoint. D) Shares held in escrow will be liquidated at the appreciated value.

A) The representative should remind the customer that she 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 her letter of intent. The representative should remind the customer of her intention to qualify for the reduced sales charge. LO 8.d

A municipal bond dealer gives your firm's trading desk an estimate of a municipal security's market value. This is A) a nominal quote. B) holding a quote. C) a firm quote. D) a workable indication.

A) a nominal quote A nominal, or subject, quotation indicates a dealer's estimate of a security's market value. Nominal quotations are provided for informational purposes only and are permitted if the quotes are clearly labeled as such. A workable indication is usually a firm bid price from a dealer and holding a quote is one that is firm for a specified time. LO 6.a

A mutual fund's expense ratio is found by dividing its expenses by its A) average annual net assets. B) income. C) dividends. D) public offering price.

A) average annual net assets. A mutual fund's expense ratio is calculated by dividing its expenses by its average annual net assets. LO 8.d

All of the following actions must be completed before a customer entering her first option trade except A) completion of the options agreement. B) completion of the new account form. C) delivery of an Options Clearing Corporation disclosure booklet. D) approval by a sales supervisor.

A) completion of the options agreement. Customers do not have to complete (sign) the options agreement before entering an order, although under exchange rules, the agreement must be signed and returned by the customer within 15 days of account approval. LO 10.j

When you hear your firm's traders talking about institutions trading with a lack of transparency, they are probably referring to A) dark pools. B) the over-the-counter market. C) the third market. D) the OTC Bulletin Board.

A) dark pools. Dark pools, sometimes referred to as dark pools of liquidity, is trading volume that occurs that is not openly available to the public. The bulk of this volume represents large trades engaged in by institutional traders and trading desks away from the exchange markets. Trading in the other choices is relatively transparent. LO 3.h

Your customer, a resident of New York, wants to open up a Section 529 plan for his 10-year-old son. Because his son wants to attend Notre Dame, your customer wants to start a plan sponsored by the state of Indiana. You should A) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. B) not open the plan. C) open the plan as instructed by your customer. D) explain that the potential federal tax benefits available to residents of New York may not be available when opening out-of-state plans.

A) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. Many states offer tax benefits to residents who open 529 plans in their home state. These benefits are generally not available when opening out-of-state plans. Federal tax benefits are available regardless of the state where the plan is opened. LO 6.g

An investor would assume all of the following risks when investing in a collateralized mortgage obligation (CMO) except A) regulatory risk. B) extension risk. C) interest rate risk. D) prepayment risk.

A) regulatory risk Regulatory risk is generally not associated with investing in CMOs. All of the other risks are associated with CMOs. Extension risk is the uncertainty that the mortgages will be paid off later than expected. This typically happens when interest rates rise. After all, who is going to refinance a mortgage at a higher rate? Prepayment risk is just the opposite; the mortgages might be paid off more quickly and the income stream will cease. This typically happens when interest rates decline, but they are also factor in people moving and selling their homes. CMOs are subject to interest rate risk just like other debt securities. LO 12.d

A corporation has gone out of business and the assets are being liquidated. Investors of the corporation have claim to those assets, including common stockholders. All the following terms apply to the common stockholders' claim except A) senior. B) last. C) residual. D) junior.

A) senior Creditors, such as bondholders and general creditors, as well as preferred stockholders of the corporation, would have a prior or senior claim to corporate assets in liquidation. Common stockholders have the last claim to assets in liquidation. This also known as the most junior or residual claim. LO 3.b

Net asset value (NAV) per share for a mutual fund can be expected to decrease if A) the fund has made dividend distributions to shareholders. B) the fund has experienced a net redemption of shares. C) the issuers of securities in the portfolio have made dividend distributions. D) the securities in the portfolio have appreciated in value.

A) the fund has made dividend distributions to shareholders. The NAV per share will rise or fall relative to the value of the underlying portfolio. If dividends are distributed to shareholders, the fund's assets decrease, and their per-share value will decline accordingly. Appreciation of the portfolio and dividends received will increase the value. Redemption of shares will have no impact on the NAV per share, as the money paid out is offset by a reduced number of shares outstanding. LO 8.c

A mother makes a gift of appreciated securities to her 10-year-old son. The son's cost basis in the stock is A) the original cost of the securities to the mother. B) the market value of the securities on April 15 of the year the gift is made. C) the market value of the securities on December 31 of the year the gift is made. D) the market value of the securities on the date of the gift.

A) the original cost of the securities to the mother. When a gift of securities is made while the donor is alive, the original cost of the securities is the cost basis, not the value of the security on the date of the gift. Market value on the date of the gift is used to determine if gift taxes are applicable. Side Note: When mom transferred her VOO stock to me, I kept her original cost basis LO 13.h

A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $18,000. B) $16,450. C) $25,200. D) $11,750.

B) $16,450. Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $47,000. LO 9.d

What is the breakeven point on the following position? Buy 1 CDE Apr 30 put at 3.10 Write 1 CDE Apr 35 put at 5.85 A) $32.75 B) $32.25 C) $33.10 D) $30.10

B) $32.25 This is a put spread established at a credit of 2.75. To find the breakeven point on a put spread, subtract the net premium from the higher strike price (in this case, 35 − 2.75 = 32.25). LO 10.e

A May and November Treasury bond is traded the regular way on Wednesday, June 8. The number of days of accrued interest is A) 45. B) 39. C) 38. D) 44.

B) 39 Accrued interest on government bonds is based on actual days in a year. Settlement occurs on the next business day. This bond pays interest in May and November, with the most recent payment on May 1. Interest has accrued on this bond for 31 days in May and 8 days in June, for a total of 39 days. The settlement date is Thursday, June 9. LO 6.e

ABC Corporation owns stock in XYZ Corporation. What percentage of dividends paid by XYZ to ABC is taxable to ABC? A) 100% B) 50% C) 70% D) 65%

B) 50% The corporate dividend exclusion permits a corporation receiving dividends from another corporation to exclude 50% of those payments. Therefore, the corporation will only pay tax on the remaining 50%. This exclusion applies only to dividends, not interest. LO 13.g

Which of the following actions would cause a corporation's earnings per share (EPS) to increase? A) A 3:2 stock split B) A reduction in the number of shares outstanding C) An increase in cost of goods sold (COGS) D) The exercise of outstanding warrants

B) A reduction in the number of shares outstanding There are two primary ways to increase EPS. The most obvious is to increase the company's earnings. That is accomplished either by increasing revenue or reducing costs. The second is to reduce the number of outstanding shares. The math behind the EPS formula is net income divided by the total number of common shares outstanding. If the denominator (the number of shares) is reduced, the EPS increases. A stock split and the exercise of warrants have the opposite effect because there are now more shares outstanding. An increase to COGS reduces the net income. LO 13.d

For which of the following would the net revenue-to-debt service ratio be applicable? A) School bonds B) Hospital bonds C) Tax anticipation notes D) General obligation bonds

B) 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. LO 6.b

A registered municipal bond salesperson at your firm has obtained discretionary power for the account of a physician in Gloucester County, New Jersey. The customer is conservative, avoids investment risk, and seeks principal with long-term growth potential. Given the following choices, the salesperson would most appropriately invest the customer's money in A) Michigan Upper Peninsula revenue bonds rated AA. B) New Jersey Turnpike revenue bonds rated AA. C) high-yield municipal bonds rated BB. D) Delaware Wetlands Developments municipal bonds rated AA.

B) New Jersey Turnpike revenue bonds rated AA. The Michigan revenue bonds, the subinvestment-grade municipal bonds, and the Delaware municipal bonds have possible state disadvantages or are less than investment grade. LO 6.f

Which type of risk is a mortgage-backed security most likely to experience? A) Market risk B) Reinvestment rate risk C) Business or corporate risk D) Exchange rate risk

B) Reinvestment rate risk A mortgage-backed security, such as a collateralized mortgage obligation, is most likely to experience reinvestment rate risk. As mortgages are paid off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower yielding securities. This is the practical effect of prepayment risk. LO 7.c

A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences? A) Two-thirds of the withdrawal is taxable as ordinary income. B) The entire $10,000 is taxable as ordinary income. C) There is no tax, as the withdrawal is considered return of capital. D) Any tax due is deferred.

B) The entire $10,000 is taxable as ordinary income. The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or last-in, first-out). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59½, there will be an additional tax penalty of 10%. LO 9.d

An investor sold a corporate bond with a 5% coupon at a net price of 101. The bond had accrued interest for 45 days. Which of the following statements regarding the confirmation of this trade is correct? A) The total amount due on the purchaser's confirmation will appear as $1,035.00. B) The total amount due on the purchaser's confirmation will appear as $1,016.25. C) The total amount received on the seller's confirmation will appear as $1,003.75. D) The confirmation will indicate the current yield based on the price of the bond.

B) The total amount due on the purchaser's confirmation will appear as $1,016.25. Accrued interest is always added to the price of a bond. When you buy the bond, you pay that accrued interest, and when you sell a bond, you receive that accrued interest. The principal value is 101, or $1,010. Forty-five days of accrued interest is ⅛ of a 360-day year, or ¼ of a 180-day semiannual interest payment. With a 5% coupon, the bond pays $25 every 6 months. One-quarter of that is $6.25, so the total proceeds to the seller (and cost to the purchaser) is the $1,010 plus the $6.25, or $1016.25. One of the details included on a bond confirmation is the yield to maturity based on the price of the bond, but not the current yield. LO 6.e

All of the following statements regarding a municipality's collection ratio are true except A) a high collection ratio is more favorable than a low collection ratio. B) a poor collection ratio might mean the municipality is likely to default on its revenue bonds. C) the collection ratio is calculated as follows: taxes collected divided by taxes assessed. D) the collection ratio measures the municipality's property tax collections.

B) a poor collection ratio might mean the municipality is likely to default on its revenue bonds. The collection ratio measures taxes collected versus taxes assessed. It is a tool used in analyzing general obligation bonds, which are backed by the taxing authority of the issuer. Revenue bonds are backed by user fees, not taxes. LO 6.b

All of the following statements regarding the 5% markup policy are true except A) the markup policy does not apply to securities sold at a specific price and with a prospectus. B) a riskless transaction is not generally covered by the 5% markup policy. C) the type of security is a factor to consider. D) a transaction in common stock customarily has a higher percentage markup than a bond transaction of the same size.

B) a riskless transaction is not generally covered by the 5% markup policy. Riskless transactions are covered by the 5% markup policy. The 5% markup policy applies to transactions in equity securities. It applies in both the OTC and the exchange markets. It applies when customers buy or sell securities. It does NOT apply to prospectus offerings. If a member must give a customer a prospectus in any transaction, that transaction is outside the scope of the 5% policy (e.g., new issues, mutual funds, variable annuities, and DPPs) LO 3.j

If an indenture has a closed-end provision, this means A) a sinking or surplus fund must be established. B) additional issues will have junior liens. C) additional issues have no lien on the revenue stream. D) the bonds must be called before maturity.

B) additional issues will have junior liens. These additional issues are also known as junior lien bonds. Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility. LO 6.b

It is not uncommon for municipal revenue bonds to have a catastrophe call provision. Another term that might be used to refer to this provision is A) a premium call. B) an extraordinary call. C) an unexpected call. D) an unplanned call.

B) an extraordinary call. An extraordinary call can occur at an unknown point in time prior to maturity. The issuer has the right to call the bonds, generally at par, when a certain event occurs, typically a catastrophe. Because catastrophe calls are unplanned or unexpected, the term that will often be used is extraordinary. LO 6.b

ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should A) continue to hold the bonds and receive interest payments. B) tender the bonds. C) sell the bonds at the current market price. D) convert the bonds into common and sell the converted shares.

B) tender the bonds. The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50). Once the call date passes, the issuer ceases interest payments making it unattractive to continue to hold the bonds. LO 5.d

Other than the 52-week bills, the U.S. Treasury conducts auctions for Treasury bills A) only when the U.S. Treasury Department deems it necessary. B) weekly. C) bimonthly. D) monthly.

B) weekly. With the exception of the 52-week bills, T-bills are auctioned by the U.S. Treasury weekly. The 52-week T-bills are auctioned every four weeks (which is not the same as monthly). LO 7.b

A limited partner (LP) invests $100,000 in a movie production limited partnership with a nonrecourse note for $300,000. The partnership liquidates, and the LP receives $100,000. His loss, for tax purposes, is A) $300,000. B) $200,000. C) $0. D) $100,000.

C) $100,000 LPs are liable for their investments and any shares of recourse debt. They are not liable for nonrecourse debt. Because the LP received the full amount of his original investment at the liquidation of the partnership, he has no loss to declare. LO 11.f

A municipal bond dealer purchased $100,000 of municipal revenue bonds at a 3% yield less 3/8ths. The dealer marks the bond up by ½ point and reoffers them to his customers. The compensation to the firm on each bond is A) $8.75. B) $3.75. C) $5.00. D) $10.00.

C) $5.00. The price paid for the bonds is irrelevant. The important fact is that the dealer put on a markup of ½ point. That is $5 per bond. LO 13.g

A municipal A & O bond is issued on October 1, 2010, with a 10-year stated maturity. If a trade in this bond settles on April 1, 2020, how many days' worth of accrued interest will be added to the price of the bond? A) 90 B) 1 C) 0 D) 180

C) 0 Interest on a municipal bond begins to accrue on the previous payment date and ends the day before settlement date. Always assume a bond pays interest on the first of the month unless told differently. In this case, interest is payable on April 1 and October 1 each year. Whenever a bond trade settles on a payment date, it trades flat (without accrued interest). Side Note: Bonds pay interest semi-annually. Oct to April is 6 months LO 6.e

An abstract of a municipal securities issue official statement must be maintained on file for how long? A) There is no requirement to file abstracts of official statements. B) 5 years C) 4 years D) 12 months

C) 4 years The Municipal Securities Rulemaking Board requires firms to retain abstracts of official statements for four years—the same as all pieces intended to communicate with the public. LO 6.h

ADJ Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. How many shares of common stock are currently outstanding? A) 9,000,000 shares B) 6,000,000 shares C) 4,000,000 shares D) 5,000,000 shares

C) 4,000,000 shares Shares outstanding are those that are in the hands of the public. To determine the number of outstanding shares, take the number issued minus the number in the treasury. Outstanding Shares = Issued Shares - Treasury Shares Outstanding Shares = 5mil - 1mil = 4mil In this question, that is 5 million minus 1 million = 4 million. If, at a later time, ADJ should decide to issue some of the authorized, but unissued shares, the number of outstanding shares will obviously increase. The same would happen if the company sold some of the treasury stock in the open market or used it to pay stock dividends to current shareholders. LO 3.a

Which of the following regarding a municipal bond broker's broker are true? I. Protects customer identity II. Must disclose the identity of customers III. Has no inventory IV. Maintains an inventory A) I and IV B) II and IV C) I and III D) II and III

C) I and III Municipal brokers' brokers generally purchase and sell securities on an anonymous basis for institutional clients. They are not in the business of making a market; therefore, they maintain no inventory. LO 6.d

With ABC trading at 39, a customer buys 1 ABC Mar 40 call and sells 1 ABC Mar 35 call. A profit occurs if I. the spread widens. II. the spread narrows. III. ABC declines sharply. IV. both contracts are exercised. A) II and IV B) III and IV C) II and III D) I and III

C) II and III Whenever there is a question where the choices are widen or narrow, you first need to determine if the spread is a debit or a credit. The premiums are not given, so we have to figure out which is the more expensive option. We have a 35 call and a 40 call. Which of those is more valuable? The ability to buy the stock at 35 or buy it at 40? The lower the exercise (strike) price of a call, the greater the value, so we know the premium on the 35 call will be higher than that of the 40 call. Therefore, selling the 35 and buying the 40 is going to be a credit spread because more money will come from the sale of the 35 that will go out for the purchase of the 40. Once we know it is a credit spread, we go to the answer choice narrow. And, when we want the spread to narrow, we want the options to expire, so IV cannot be correct. That sort of backs us into knowing that III is true, but let's be sure. We identify spreads as bullish or bearish, and the way to see that is, bulls buy low and sell high. When looking at this question, we see the option bought is the high strike price, and the one sold is the low strike price, so this must be a bearish position. Bears want the market price to fall, so yes, III is accurate. LO 10.e

Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true? A) The bond's current yield is lower than its yield to maturity. B) To determine the bond's current yield, its stated rate must be compared against other fixed-rate investments in the client's portfolio. C) The bond's current yield is calculated by dividing its annual interest by its market price. D) The bond is a discount bond.

C) The bond's current yield is calculated by dividing its annual interest by its market price. A bond's current yield is calculated by dividing its annual interest by its current (market) price. The current yield will be higher than its yield to maturity, which will include the premium return. The determination of a bond's yield is unrelated to other bonds. In addition, this is a premium bond, not a discount bond. LO 4.e

A married couple both hoping to retire within the next five to seven years have expressed having a low-risk tolerance regarding the stock market. They have a combined income of $350,000. Given this information, which of the following portfolio mixes would be most suitable? A) Treasury bills, common stock, options B) Treasury bills, corporate bonds, preferred stock C) Treasury notes, municipal bonds, GNMAs D) Direct participation programs, real estate investment trusts, preferred stock

C) Treasury notes, municipal bonds, GNMAs T-Bills (i.e., money market) are short term and would not be suitable. T-Notes are middle term (Min: 2 years, Max: 10 years) and would be suitable In light of their low risk tolerance, U.S. government securities would certainly be suitable, and the time frame noted for retirement allows for middle term T-notes to be useful. Given their higher income level, tax-free municipal bonds could also have a place in the portfolio. Longer term GNMAs would accommodate monthly income, should that be desirable upon retirement. The remaining product suggestions are either illiquid (DPPs) or do not align with their risk aversion (common, preferred, options, and REITs). LO 11.

Which of the following statements regarding preferred stock is not true? A) The dividend is fixed except in the case of adjustable preferred. B) Unlike debt, preferred stock has no set maturity date. C) Voting rights of preferred shareholders take precedence over those of common shareholders. D) Because there is no set maturity value or redemption date, the holder of preferred stock has to sell her shares in the open market to close out her position.

C) Voting rights of preferred shareholders take precedence over those of common shareholders. Preferred shareholders do not generally have voting rights. Voting rights are characteristic of common stock, not preferred. Preferred stock is unlike debt securities in that it has no set maturity date. It is true that the dividend on a preferred stock is fixed, except in the case of an adjustable preferred where the dividend can be tied to a market interest rate and readjusted. The holder of a preferred has to sell the shares in the open market to close out her position. LO 3.e

At year's end, your client reports $12,000 in capital gains and $20,000 in capital losses. The net effect of this on his taxes would be A) a $3,000 deduction from ordinary income with a $2,500 loss carryforward. B) a $4,000 deduction from ordinary income with a $4,000 loss carryforward. C) a $3,000 deduction from ordinary income with a $5,000 loss carryforward. D) an $8,000 deduction from ordinary income.

C) a $3,000 deduction from ordinary income with a $5,000 loss carryforward. The customer may offset all of the gains with the losses. This leaves a new loss of $8,000. Because the maximum net capital loss that may be deducted against ordinary income is $3,000 per year, we take off the $3,000 and have a carryforward of the balance ($5,000). LO 3.i

Covered put writing is a strategy where an investor A) sells a put and sells a call on the same stock. B) sells a put on a stock that he owns. C) sells a put on a stock he has sold short. D) sells a put and buys a call on the same stock.

C) sells a put on a stock he has sold short. The customer sells the put to generate income. The short stock position provides the necessary cash should his short put be exercised, forcing him to buy the stock. LO 10.d

TANs, RANs, GANs, and BANs are issued by municipalities seeking A) financing for low-cost housing. B) special tax assessments for general obligation bonds. C) short-term financing. D) bond insurance.

C) short-term financing. Municipal short-term notes (tax anticipation notes, revenue anticipation notes, grant anticipation notes, and bond anticipation notes) are used as interim financing until a permanent long-term issue is floated or until tax receipts increase or revenue flows in. LO 6.b

If DMF Corporation issues $10 million of convertible debentures at par, all of the following balance sheet items will be affected immediately except A) the liabilities. B) the assets. C) the net worth. D) the working capital.

C) the net worth. Net worth (equity in the company) remains unchanged. Assets and liabilities both increase, as does the working capital. LO 13.c

A municipality's net total debt is calculated as A) the total debt plus self-supporting debt plus sinking fund accumulations minus overlapping debt. B) the total debt minus self-supporting debt plus sinking fund accumulations plus overlapping debt. C) the total debt minus self-supporting debt minus sinking fund accumulations plus overlapping debt. D) the total debt plus self-supporting debt minus sinking fund accumulations minus overlapping debt.

C) the total debt minus self-supporting debt minus sinking fund accumulations plus overlapping debt. The net total debt of a municipality is the net overall debt (total debt minus self-supporting debt minus sinking fund accumulations) plus overlapping debt (shared with other municipalities). States cannot have overlapping debt; it is their municipalities that can. LO 6.c

A real estate limited partnership is created for $800,000 with 1 general partner and 10 limited partners. Each of the limited partners has an equal 10% share. The proceeds are used to purchase an office building for $2 million. The additional financing is provided by a nonrecourse bank loan. Economic conditions cause the occupancy rate to fall dramatically, and the partnership is dissolved as insolvent. Each limited partner may claim a loss of A) $2,000,000. B) $80,000. C) $120,000. D) $200,000.

D) $200,000. Losses may only be claimed to the extent of tax basis. The initial $800,000 was divided 10 ways, so each LP had a basis of $80,000. To this was added the share of the financing of $1.2 million. That is another $120,000 basis (10% of $1.2milion) bringing the total to $200,000 ($80,000 + $120,000). That is the maximum loss that can be claimed. It is important to note that nonrecourse financing adds to basis only in RELPs. Because the loan adds to the basis of all LPs equally, you could also solve this by taking the total $2 million investment and dividing it by 10 to arrive at the same $200,000. LO 11.f

An investor establishes the following positions: Long 1 XYZ Apr 45 call at 3.50 Long 1 XYZ Apr 45 put at 2.75 The investor's strategy will realize a gain if XYZ trades above A) $48.50. B) $45.00 C) $47.75. D) $51.25

D) $51.25 A long straddle is profitable if the stock price moves sharply in either direction. In this example, the investor paid a premium of 6.25 to establish the straddle. To realize a gain, the stock must either fall below the strike price minus the combined premium (45 − 6.25 = 38.75) or rise above the strike price plus the combined premium (45 + 6.25 = 51.25). LO 10.f

If the strike price of a yield-based option is 62.50, this represents a yield of A) 0.0625%. B) 0.00625%. C) 0.625%. D) 6.25%.

D) 6.25%. To calculate the percentage yield of the underlying Treasury security, divide the strike price by 10 62.50 / 10 = 6.25% LO 10.g

Which of the following terms or phrases does not apply to real estate investment trusts (REITs)? A) Managed B) Dividends taxed at full ordinary income rates C) Secondary market D) Redeemable

D) Redeemable REITs trade in the secondary market and are not redeemable. The real estate portfolio is actively managed, and dividends paid by REITs do not meet the requirements to be taxed as qualified dividends; therefore, they are taxed as ordinary income. LO 11.a

Index options are frequently used to protect a portfolio against which of the following risk types? A) Credit B) Inflation C) Business D) Systematic

D) Systematic Index options protect investor portfolios from the risk of overall market movement, also known as systematic risk. LO 10.g

Mutual fund Class B shares assess A) no load. B) a front-end load. C) a level load. D) a deferred sales load.

D) a deferred sales load. Class B shares carry a deferred sales load. This is sometimes referred to as a back-end load. Class A shares carry a front-end load. Class C shares charge a 12b-1 fee quarterly with a small back-end load in the first year. LO 8.d

Although investing in mutual funds has many advantages, there are some risks. One risk that is generally greater with a bond fund than a portfolio of individual bonds is A) default risk. B) purchasing power risk. C) liquidity risk. D) interest rate risk.

D) interest rate risk. One disadvantage a bond mutual fund has is that there is no maturity date. At maturity, a bond returns the principal, regardless of what current market interest rates are. That is why as the bond approaches maturity, the interest rate risk declines (bonds with a shorter duration have less interest rate risk). The bond fund itself does not have that advantage because the fund does not mature. The risk of default is probably less with a bond fund because of the greater diversification than most individual portfolios can attain. The redemption at NAV feature of the mutual fund offers a liquidity that may not be available with some inactively traded individual bonds. Purchasing power risk would likely be similar in both cases. LO 8.i

An investor purchased 100 shares of Paradigm Publishing Corporation (PPC) on October 17, 2020. The price was $83 per share. On April 11, 2021, the investor wrote one PPC Nov 85 call for 3. At expiration date, the PPC stock is selling for $80 per share, and the investor liquidates the stock at the market price and the option at its intrinsic value. The net tax consequences are A) $300 long-term loss. B) $300 long-term gain. C) $200 short-term gain. D) no gain, no loss.

D) no gain, no loss. This is a long stock/short call position, better known as a covered call. Liquidating the stock at the market value of $80 per share results in a $300 long-term loss ($83 minus $80, held for 13 months). With the market price at $80, the 85 call expires worthless resulting in a $300 short-term gain (the entire $300 premium). The question asks for the net tax consequences. The $300 gain on the option is offset by the $300 loss on the stock (there is no intrinsic value to an 85 call when the market is 80). One could also arrive at the correct answer by computing the breakeven point (the $83 purchase price minus the $3 premium received) of $80. Because the stock was sold at the breakeven point, there is no loss or gain. LO 10.i

A municipality is allocating the revenues from an industrial revenue bond under a net revenue pledge. The first priority is A) reserve funds. B) bond interest. C) sinking fund payment. D) operation and maintenance.

D) operation and maintenance. Under a net revenue pledge, operations and maintenance are paid first, with debt service following. In a gross revenue pledge, debt service is paid before operations and maintenance. LO 6.c

If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are advancing daily, and the number of advancing stocks relative to declining stocks is falling, a technical analyst will conclude that the market is A) unstable. B) oversold. C) becoming volatile. D) overbought.

D) overbought. The momentum of the market advance seems to be easing as the number of advancers to decliners is leveling out. It looks like the decline/advance line is moving in a direction away from advancers. A technical analyst would conclude that the market is overbought and approaching a top. LO 13.e

An investor is looking to add some fixed-income securities to their portfolio. A registered representative suggests either the ABC 6s of 2050, or the XYZ 6s of 2043. Should there be an increase to market interest rates, A) the XYZ bonds will enjoy a price increase greater than the ABC bonds. B) the ABC bonds will enjoy a price increase greater than the XYZ bonds. C) the XYZ bonds will suffer a price decline greater than the ABC bonds. D) the ABC bonds will suffer a price decline greater than the XYZ bonds.

D) the ABC bonds will suffer a price decline greater than the XYZ bonds. This is a basic duration problem. When interest rates change, the bond with the longest duration will have the greatest price change. When there are two bonds with the same coupon rate (6%), the bond maturing latest has the longest duration. That tells us that the ABC bonds will fluctuate more than the XYZ bonds. Then, we need to remember that when interest rates increase, bond prices fall. That means that while both bonds will decline in price, the decline of the ABC bonds will be greater. LO 4.e