Practice Exam #4
If an investor has an established margin account with a short market value of $24,000 and a credit balance of $30,000, the maintenance call will be for
$1,200. Minimum maintenance requirement in a short margin account is 30% of the current market value. In this case, 30% of $24,000 is $7,200. The equity in the account is currently $6,000 ($30,000 − $24,000). Therefore, the amount of the maintenance call is $1,200.
A dealer in U.S. government securities quotes a 5-year Treasury note at 89.12-89.16. In dollars, that represents a spread of
$1.25 Treasury notes and bonds are quoted in fractions of 32nds. The spread between the bid and the ask is 4/32nds. In simpler terms, that is 1/8th. Each point is $10.00, so this 1/8th of $10.00 is equal to $1.25.
The Class A shares of the GEMCO Balanced Fund carry a sales charge of 4.5%. If the next computed net asset value per share is $32.74, purchase orders will be filled at a price of
$34.28 per share Mutual funds sell at the public offering price (POP). That POP includes the sales charge—in this case, 4.5%. The sales charge is a percentage of the POP, not the NAV. The computation is the NAV divided by (100% - the sales charge). In our question, that is $32.74 ÷ 0.955, or $34.28 per share.
If a customer buys 100 XYZ at 49 and writes 1 XYZ Nov 50 call, receiving $350 in premiums, the breakeven point is
$45.50. This is a covered call, so the investor is protected against declining stock prices to the extent of the premium received, and the breakeven is $45.50 $49 − $3.50).
If an investor buys 1 TIP Jul 60 call at 4 and sells 1 TIP Jul 50 call at 8.50, what will be the investor's overall net profit or loss if both calls expire unexercised?
$450 profit This is a credit call spread because the larger premium of the two options is associated with the short call. The best possibility for this investor is expiration, when the maximum gain is realized. The maximum gain on a credit spread is the net credit. In this example, the investor paid 4 and received 8.50 for a net premium and maximum gain of 4.50.
A customer buys 10 Dec 91.50 calls on the Canadian dollar for 6.70. ($10,000 CD per contract). At the time of purchase, the spot rate for the Canadian dollar was 92.25. What is the margin requirement for the purchase?
$6,700 (6.70*10=67) ; 67*100=6,700 The client purchased 10 calls at 6.70 for a total of $6,700. Because—with the exception of LEAPS—options cannot be purchased on margin, the margin requirement is 100% of the premium.
On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes?
$75 Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule. Investors who sell a security at a loss, and repurchase it, including its equivalent (e.g., convertible bond, warrant, or call option), 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 / 40) of KLP common stock. Hence, the investor has "bought back" the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed. Look at this question as if it said, "On September 15, he purchased 25 shares of KLP stock." That washes out $25 of the loss, but the rest is okay.
A customer buys 200 XYZ at 39 and writes 2 XYZ Feb 40 calls at 3. When the stock rises to 44, the customer is exercised for a gain of
$800. The customer bought 200 shares at 39 and was forced to sell them at 40 for a $200 gain. In addition, the customer received $600 in premium income, so the overall gain is $800. Alternatively, the breakeven point for covered call writing is cost of shares purchased less premium received (39 − 3 = 36). As the customer is bullish, gain occurs above 36. However, for this customer, the stock can go no higher than 40 because she will be exercised (40 − 36 = 4 points × 200 shares = $800).
objectives in a direct participation program (DPP)
-LTCG -deferment of taxes -deductions against passive income
Which of the following statements regarding exchange-traded funds (ETFs) are true? I. The SEC has classified them as mutual funds. II. The SEC has classified them as a type of open-end fund. III. They have operating costs and expenses that are higher than most mutual funds. IV. They have operating costs and expenses that are lower than most mutual funds.
-The SEC has classified them as a type of open-end fund. -They have operating costs and expenses that are lower than most mutual funds. The SEC has classified ETFs as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds.
A registered representative explaining variable annuities to a customer would be correct in stating that: a variable annuity guarantees an earnings rate of return. a variable annuity does not guarantee an earnings rate of return. a variable annuity guarantees payments for life. a variable annuity does not guarantee payments for life.
-a variable annuity does not guarantee an earnings rate of return. -a variable annuity guarantees payments for life.
Five main brokerage records must be retained for six years
1. blotters 2. general ledgers 3. customer ledgers 4. stock records 5. customer account records
Call buyers objectives are:
1. protect short stock positions 2. speculate on the upward movement of a stock's price 3. diversify their holdings, and 4. delay the decision to buy stock because of the expiration period.
FINRA holds broker-dealers to certain general standards regarding all member firm communications considering:
1. whether all statements in a communication are clear and not misleading 2. are balanced regarding the representation of risk and reward 3. do not omit material facts or make exaggerated claims 4. do not imply that past performance can be projected to future outcomes
Which of the following pooled investment vehicles would most likely be structured as a limited partnership?
A hedge fund For a number of legal reasons, one of those being avoiding the need to register with the SEC, hedge funds are generally structured as limited partnerships with a maximum of 100 investors.
All of the following are true regarding a fail to deliver except A) even though a fail to deliver has occurred and is still outstanding, FINRA mandates that the seller still be paid. B) the broker-dealer representing the seller can also be liable for buying in the securities if the broker-dealer's customer has not made good delivery on the securities sold. C) the buyer may buy in the securities owed to her and charge the seller for any loss incurred. D) fail to deliver occurs when the selling broker-dealer does not deliver the securities in good deliverable form.
A) even though a fail to deliver has occurred and is still outstanding, FINRA mandates that the seller still be paid. The seller cannot be paid as long as the fail to deliver exists. Fail to deliver occurs when the selling broker-dealer does not deliver the securities in good deliverable form. The buyer or the selling broker-dealer can buy in the securities to complete the transaction, and any loss incurred to do so will become the responsibility of the seller who failed to deliver.
A client writes 1 Apr 30 call and buys 1 Apr 40 call. This is
Bear spread/ credit spread This is a call credit spread, and bears sell calls. The 30 call is worth more because it has a lower strike price. Long the lower is bullish; short the lower is bearish.
Which of the following terms does not apply to municipal unit investment trusts (UITs)? A) Redeemable B) Regulated C) Managed D) Registered
C) Managed Municipal UITs buy bonds and hold them until redemption or call. The bonds are not actively traded, so the portfolio is not managed, but rather, overseen by a trustee.
All of the following sources of revenue could be used to service general obligation debt except A) sales taxes. B) fines. C) ad valorem taxes. D) user charges.
D) user charges. Historically, municipalities get most of their revenues from property taxes (ad valorem taxes). Other sources of revenue include sales taxes, income taxes, gasoline taxes, license fees, fines, and assessments. User charges would be used to service revenue bonds.
Which of the following order types is permitted in Nasdaq markets but not in NYSE equity markets?
Fill-or-kill (FOK) FOK and all-or-none orders may no longer be entered in the NYSE equity market but are still accepted in both the bond market and Nasdaq.
A high-net-worth investor with substantial annual income likes real estate as a potential investment. The investor notes that any investment potentially offering tax credits would be most interesting to consider first. Which of the following would be suitable investments to discuss?
Historic rehabilitation and government-assisted housing direct participation programs (DPPs) REITs, either equity or mortgage, should be eliminated, as they offer no tax credits. Given the customer's high net worth and income, a discussion of DPPs is suitable. Of those DPPs shown here, only historic rehabilitation and government-assisted housing offer tax credits, and either should be suitable for discussion.
government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 101 + 1/2 = $1,015; $1,015 × 10 bonds = $10,150.
If there's a dash divide by 32
Tax Preference Items
Items added to regular taxable income when determining alternative minimum tax. Tax-exempt interest on private activity bonds and excess intangible drilling costs in an oil and gas DPP are included as tax preferences. In addition, state and local taxes and accelerated depreciation are in the list of preference items.
When determining a position limit, a member firm aggregates which of the following customer positions?
Long calls and short puts (bullish) Short calls and long puts(bearish)
An investor opens the following positions: Buy 100 shares of RJN @46; buy 1 RJN Mar 45 put @2½. What is the customer's maximum gain, maximum loss, and breakeven point?
Maximum gain is unlimited; maximum loss is $350; breakeven point is $48.50. -Breakeven is when the long stock can be sold at the customer's total cost. That cost is the price of the stock ($46) plus the price paid for the option ($2½), or $48.50. -An investor with a long stock position has unlimited potential gain -the maximum loss is the premium paid for the option, ($250) plus the difference between the cost of the stock and the proceeds from the put ($100), or $350 *Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven
OTC market is a
Negotiated market (not an auction market as is the case with an exchange) in which dealers negotiate stock trades with each other.
Which of the following municipal securities are backed by the full faith and credit of the U.S. government?
Public Housing Authority bonds (PHAs)
What is a possible benefit of purchasing shares of a closed-end investment company in the secondary market?
Shares are frequently trading at a discount to the NAV. NOTES: -closed-end funds Price is determined by the supply and demand for their shares -no sales loads or redemption fees, there are brokerage commissions -Closed-end funds do not redeem their shares
What is not included in the visible supply?
Short-term notes
One of your customers would like to begin an investment program calling for regular monthly contributions of $200. Which of the following would be the best source for determining if this plan is reasonable?
The investor's income statement When it comes to the ability to make ongoing contributions to an investment program, the income statement is usually going to be the most reliable tool for verification. It is from the income statement that discretionary income (the amount left over after paying expenses) is determined. The balance sheet indicates any lump sum availability. The savings account is a part of the balance sheet. Objectives are important, but they are not a financial measurement.
An investor purchased an interest in a limited partnership, paying $10,000 in cash and signing a recourse note to the partnership under a letter of credit for $40,000. What's the investors tax basis & maximum loss?
The investor's tax basis will be $50,000. The investor's maximum loss will be $50,000. A recourse note means that the limited partner agrees to pay the note no matter what happens. He is legally liable for the $40,000, which makes both his tax basis and maximum loss potential $50,000.
A company is offering a private placement, with the intent of selling shares to nonaccredited investors up to the 35 allowed for in Regulation D. Which of the following is true?
The offering may not be advertised. Advertising private placements is considered a solicitation to sell. If the securities are advertised, all purchasers must be accredited, or the company must reasonably believe they are. In this instance, the intent is to sell to up to 35 allowable nonaccredited investors; with that intent clearly stated, the offering could not be advertised to anyone.
What type of account allows for the irrevocable transfer of almost any kind of asset, including works of art and real estate, for the benefit of a minor?
UTMA Assets within an UGMA are limited to cash (bank deposits), stocks, bonds, mutual funds, and other securities and insurance policies. UTMAs allow almost any kind of asset, including works of art and real estate -UGMA (18) UTMA (21)
bearish breakout
a decline through the support level
A customer buys 200 XYZ at 32, 2 XYZ JUN35 calls at 3, and 1 XYZ JUN 35 put at 6.50. Two months later, the customer purchases 1 XYZ JUN 35 put at 4. Before expiration, with XYZ trading at 37, he sells his stock and closes his calls at 2.10 and his puts at 0.25 for
a loss of $180. The customer opens four positions with debits to his account: 200 shares at $32 per share equals a debit of $6,400; two calls at $300 each equals $600; one put at $650 equals a debit of 650; and finally, an additional put at $400. The stock position is sold for $37 per share for a credit of $7,400. The calls are closed for 2.10 each (a credit of $420), and the puts are closed for a credit of $25 each.
bullish breakout
a rise through the resistance level
UTMAs can be used to pay for:
almost anything that is a benefit to the minor. The primary exceptions are those that most states consider to be the parental obligations of food, clothing, and shelter.
As on exchanges, short sales on the Nasdaq Stock Market can occur
at any time in the trade sequence.
A buy stop order is elected (triggered) when the underlying stock trades
at or above the stop price
A customer opens an account, and payment and delivery instructions are established. Beyond the opening of the account, these instructions may
be changed for individual transactions, or going forward, for all transactions. Once payment and delivery instructions are established at the time the account is opened, they can be changed for any individual transaction or for all transactions going forward.
Institutional managers are moving to increase their cash position. This action would be viewed as
bearish. When investment managers liquidate securities to increase their cash positions, stock prices are likely to fall.
You sell a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield must be stated as the yield to
call Municipal Securities Rulemaking Board rules require that, when a call date has been fixed by a prerefunding, the yield to call so fixed must be reflected on the confirmation statement. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event. Therefore, it is appropriate to price the bond to the call date. The old maturity on the bond has no further significance.
When the SEC rules that an offering has become effective, the SEC has
cleared the offering for sale. An offering becomes effective when it is released by the SEC for sale. The SEC does not approve or disapprove of new offerings; it releases them for sale after determining that enough information is available for public investors to make sound investment decisions.
Limited partners assisting the general partner to solicit new investors
could jeopardize their limited partner status. If limited partners—either individually or as a group—become too involved with the business of the partnership, they could be considered general partners and lose their limited liability.
A customer's long margin account has a market value of $60,000, a debit balance of $35,000, and special memorandum account (SMA) of $5,000. To eliminate the restriction, the customer can: I. deposit $5,000 in cash. II. borrow $5,000 from the account utilizing the SMA. III. deposit $5,000 in fully paid securities. IV. sell $10,000 of securities in the account.
deposit $5,000 in cash. sell $10,000 of securities in the account.
Growth companies have
have high P/E ratios and a low dividend payout ratio because they retain most, if not all, of their earnings. -Investors select growth companies for capital gain potential, not for investment income.
In the case of a real estate direct participation limited partnership program, nonrecourse financing will
increase a limited partner's original cost basis.
To be exempt under Regulation D of the Securities Act of 1933, the sale of securities must be limited with respect to the number of
nonaccredited investors to whom the security is sold. Regulation D provides a private placement exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued or the number of accredited investors who may purchase the shares.
If a municipal firm purchases a block of municipal bonds in anticipation of a price increase, the firm is engaged in
position trading The dealer is buying for its inventory (position trading). Although the term market maker is not generally used, most municipal bond trading take place when municipal securities dealers buy and sell out of their own accounts.
All the following retail communications must be prefiled with FINRA except
retail communications concerning public DPPs. Retail communications concerning public DPPs do not need to be prefiled. Retail communications for all new member firms, concerning investment companies with custom ratings or options without previously providing an ODD must be prefiled with FINRA. New member firms, defined as being in their first year of business, must file retail communications with FINRA 10 business days in advance of use.
nonsystematic risk
risk that can be eliminated by diversification
A producer of fine French wines has just signed a contract to export $10 million of wine to a distributor in the United States. Using listed foreign currency options, this producer would have the best protection against currency risk by
taking a long position in euro calls. There are no listed options in the U.S. dollar. That reduces your choice to a long euro put or call. Because the contract will be paid for in dollars, the producer is concerned that the dollar will fall against the euro. Or, stated another way, the concern is that the euro will rise against the dollar so that the $10 million will not buy as many euros as on the day the contract was signed. When one is afraid the price of asset will rise, such as those who take a short position in a stock, the best protection is buying a call. The easiest way to remember this is through the acronym, IPEC - Importers buy Puts and Exporters buy Calls. This is used when the party involved in the question is in a foreign country. Because we are dealing with a French exporter, buying calls on the local currency offers the best protection.
Assumed Interest Rate (AIR)
the annual rate of return required to maintain the level of annuity payments. The assumed interest rate (AIR) is the rate the insurance company assumes the separate account will earn during the payout period. If the assumption is wrong, the monthly payments will be adjusted accordingly. If the separate account earns more than the AIR, the next month's payment is increased. If the separate account earns less than the AIR, the next month's payment is reduced. If the account earns the assumed rate, monthly payments will not change.
The SEC has just declared the registration of XYZ Corporation's IPO effective for sale. If XYZ wanted to run a tombstone ad, it would notinclude
the dated date. A tombstone ad for a stock offering, published on or after the effective date, will always include the effective date. It will not include the dated date. That is only relevant to bonds and represents the date from which interest begins to accrue. How did we know this was not a debt issue? An IPO can only be of stock. That is, a company can only "go public" once and that is with the issuance of stock.
What does the visible supply measure?
the dollar amount of new issues scheduled over the coming month.
In the partnership agreement of a limited partnership, all of the following would be disclosed except
the procedures for the annual election of general partners.
A municipality's net total debt is calculated as
the total debt minus self-supporting debt minus sinking fund accumulations plus overlapping debt.
An agent has recommended investments in the XYZ Fund family to her customers for 10 years. She is referred by one of her customers to a prospect who has inherited $500,000 as the beneficiary of a life insurance policy. The prospect tells the agent he has never invested in the market before, is risk averse, and wants safety of principal to be the first priority, with liquidity second. The agent recommends the following investments: XYZ government bond fund, B shares: $200,000 XYZ large-cap growth and Income B shares: $150,000 XYZ liquid reserve money market: $150,000 The recommendation is
unsuitable because it does not address the customer's two primary objectives. The customer's objectives of safety and liquidity are not satisfied by these recommendations. The government bond fund and large-cap growth and income fund are both subject to market risk and, as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. The back-end load is not consistent with the customer's liquidity objective.
Last week, your customer's margin account showed SMA of $6,000. As of the close of business yesterday, the margin account client had a long market value of $50,000 and a debit balance of $40,000. This client
will receive a maintenance margin call for $2,500. When the equity in a long margin account falls below 25% of the market value, the customer receives a maintenance margin call for the amount necessary to bring the account back to 25%. A market value of $50,000 requires at least $12,500 in equity. The account currently has only $10,000 in equity ($50,000 minus $40,000). Therefore, a call will go out for a prompt deposit of an additional $2,500. SMA cannot be used to meet a maintenance call, only an initial margin call.
