S7
Which of the following debt instruments would likely be suitable for sophisticated investors only?
Despite the misleading name, ELNs are debt instruments. When traded on an exchange, they are exchange-traded notes (ETNs). In either case, these are considered alternative products with unique risks, and therefore, not suitable for most investors. Although debentures are corporate debt without any pledged collateral, some of the financially strongest companies in the country issue them and receive high ratings. Even though jumbo CDs require a minimum of $100,000, no sophistication is required to understand the product.
Under the Securities Act of 1933, the Securities and Exchange Commission (SEC) has the authority to issue stop orders regarding a new issue registration filing. approve new issues. review standard registration forms. guarantee the accuracy of the information contained in the registration forms.
During the cooling-off period, the SEC reviews registration statements and can issue stop orders if the registration is not complete or was not filed properly. The SEC does not approve securities or guarantee that any information found within a prospectus is accurate; it only clears the securities for distribution (sale) to the public.
A representative wishes to execute an order for a customer's discretionary account. The municipal dealer has a control relationship with the issuer of the security to be purchased. Under Municipal Securities Rulemaking Board rules, the representative
Even in a discretionary account, a registered representative may not exercise discretion when a control relationship exists between the issuer and the dealer without first receiving the customer's permission.
A customer, long 100 shares of ABC at 73, writes 1 ABC Apr 75 call at 2 to generate additional income. ABC stock subsequently moves higher, at which time, the customer is exercised. For tax purposes, which of the following statements are true? Cost basis is $73 per share Cost basis is $71 per share Sales proceeds are $75 per share Sales proceeds are $77 per share
If a covered call writer is exercised, cost basis (for tax purposes) is the cost of stock purchased. Sales proceeds are adjusted (strike price plus premium) to reflect the premium received.
Bob Smith, who is in his 40s, has just become covered by an extremely generous defined benefit retirement plan at his company. He has decided he no longer needs his variable annuity for retirement purposes and wants to use the money for a trip to Africa. Over the past 10 years, he has invested $60,000 in the annuity, and its net value is now $80,000. If Bob should go ahead and surrender the annuity, the tax consequences will be
If an annuity is cashed in, the growth and accumulation portion of its value ($20,000 in this case) is taxable as ordinary income. If the annuitant is under the age of 59½, he must also pay a 10% penalty on the growth withdrawn, a penalty of $2,000 in this case.
Which of the following option strategies, besides going long a call, can be used to purchase stock below its current market value?
If the put is exercised by the owner, the writer of the put will be obligated to purchase the stock. The cost of the stock is reduced by the amount of premium taken in when the put was written, allowing the investor to purchase the stock at a net cost lower than the stock's current market value.
TCB Corporation wants to offer $75 million worth of common stock solely to residents of its home state. The issue will not be registered at the federal level. What type of registration will TCB use to register with the state?
If the registration is just with one state, the registration will be done through qualification. Qualification means that the state will collect all the information and decide whether or not to clear the offering for sale in the state.
Which of the following competitive bids on a new municipal issue is most likely to be awarded the bid?
In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the 6% coupon on the bonds.
Obtaining higher income returns from specific stock, a basket of stocks, or an equity index upon which the return is based would most likely be described as
In the term equity-linked note (ELN), equity refers to a specific stock, a basket of stocks, or an equity index upon which the return is based. Therefore, the return is not fixed and can be higher or lower than anticipated depending on the selected equity's performance. There are no such products as exchange or equity-leveraged notes.
Which the following statements concerning taxes on corporate bonds is true?
Interest income from corporate bonds is just income, so it is taxed as ordinary income. Capital gains and losses come from trading the security. If a bond has been held to maturity, it was not traded and therefore cannot be a capital gain. Short term capital gain never applies to interest income.
Which of the following describes Nasdaq Level 3 service?
It allows market makers to enter quotations into the system for a security in which they are registered.
A municipal securities dealer informed XYZ municipal bond fund that it was the leading retailer of XYZ shares and that, in return, XYZ should employ the dealer in effecting more transactions for the fund's portfolio. Which of the following statements regarding the request is true?
It is not permissible because municipal securities dealers are not allowed to execute trades for the portfolios they underwrite.
A customer establishes the following positions: Buy 100 ABC for 63 Write 1 ABC Jan 70 call for 1 What is the customer's maximum gain?
Maximum gain on the covered call position occurs when the stock's market value rises. The short call is exercised when the stock is above 70, so the stock bought for 63 will be sold for 70-a profit of $7 per share. In addition, the customer receives the premium of $1, so the total profit is $800 ($700 + $100).
Toby Jensen originally purchased 400 shares of CSC stock on margin at a price of $60 per share. The initial margin requirement is 50%, and the maintenance margin is 25%. CSC stock price has fallen dramatically in recent months, and it closed today with a sharp decline, bringing the closing price to $40 per share. Based on FINRA requirements, will Jensen receive a maintenance margin call?
Minimum maintenance requires equity equal to 25% of the current market value. If the price per share is $40, then the value of the 400 shares is $16,000. That would make the minimum equity requirement $4,000 ($16,000 times 25%). The initial purchase was $24,000 resulting in a debit balance of 50%, or $12,000. If the LMV is $16,000 and the debit balance is $12,000, the account is right at the minimum maintenance level of $4,000. Toby might be below the house maintenance, but because that is not given in the question, there is no way to tell.
Which of the following statements regarding mutual fund dividend distributions are true?
Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash.
Your firm is interested in submitting a bid on a forthcoming general obligation municipal bond issue. Your firm could obtain the appropriate bid worksheets through a service provided by
Official notices of sale announcing the offering of municipal issues to competitive bidders are published in The Bond Buyer. The Bond Buyer offers a service to subscribers (called the New Issue Worksheet and Record Service) that summarizes each notice. It provides information about new issues put up for bid and worksheets for underwriters to determine yields and prices when bidding.
One of your customers purchased a fixed premium variable life insurance policy five years ago. The face value of the policy is $2 million and the current cash value is $107,237. The customer calls you and asks about taking a policy loan. Although the exact details are in the prospectus, you know that the minimum amount that could be borrowed is
Once a variable life insurance policy has been in effect for at least three years, the policy must allow for a policy loan equal to a minimum of 75% of the current cash value. 80,427
A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus was that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken?
One of the key distinctions of a UIT is its lack of management. Once the portfolio has been created, it is fixed until maturity, in the case of debt securities, or until some predetermined liquidation point, in the case of an equity trust.
One way in which open-end investment companies differ from closed-end investment companies is that an open-end investment company's shares
Open-end investment companies are capitalized with a continuous offering of new shares. As a result, the number of shares outstanding is constantly changing. It is the closed-end company, traded in the secondary markets, whose share prices are based on supply and demand, which causes them to be bought or sold at a premium or discount to the NAV.
For tax-reporting purposes, qualified dividends are considered to be what type of income?
Portfolio
Which of the following would be considered an equity security?
Preemptive rights
Which of the following exemption provisions of the Act of 1933 may not be used for an initial offering of securities?
Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.
Rules regarding restricted persons state that each of the following is considered immediate family except
Rules regarding restricted persons define immediate family as spouses, parents, brothers, sisters, in-laws, and children. Aunts and uncles are among those excluded.
An important feature of scheduled premium variable life insurance policies is that
Scheduled (fixed) premium variable life always has a guaranteed death benefit. Cash values cannot be guaranteed, only the death benefit. Better than expected performance of the separate account will lead to increased cash values, but it will not affect the premiums.
What is the order of liquidation in the event of a corporate bankruptcy?
Senior bonds are those with collateral pledged to protect the investors. They always come first. They are followed by general creditors with the last of those being holders of subordinated debt. Last in line are the equity holders. That would be preferred stock and common stock at the end. Senior bonds, general creditors, preferred stock, common stock
If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are true?
She may choose to receive monthly payments for the rest of her life. The accumulation unit's value is used to calculate the total value of the account.
All of the following are true of stockholders' equity except A) that it is reflected in the book value of the stock. B) that it is carried as an asset on the balance sheet. C) that it is also called net worth. D) that it consists of stock issued, capital surplus, and retained earnings.
Stockholders' equity or net worth (total assets less liabilities) is what a stockholder is entitled to should a company liquidate.
Which of the following securities is frequently offered with a 50-year maturity?
Tennessee Valley Authority bonds are the only government security available today with a maturity as long as 50 years. Most of the agencies don't offer anything longer than 20 years, and the maximum on Treasury bonds is usually 30 years.
The Bond Buyer compiles several indexes of municipal bonds. Which of the following is limited to bonds with the highest ratings?
The 11 Bond Index
A corporate bond is quoted in the Wall Street Journal as follows: Bid: 100½ Asked: 100¾ Bid Chg.: -⅛ YTM: 5.75% From this information, you know the nominal yield is
The bid and asked prices show that the bond is being quoted at a premium (above par), with a yield to maturity of 5.75%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.
ABC Company issues a 10% bond due in 10 years. The bond is convertible into ABC common stock at a conversion price of $25 per share. The ABC bond is quoted at 90. Parity of the common stock is
The bond is quoted at 90, so it is selling for $900. The parity price of the common stock is $22.50, calculated as follows: the bondholder could convert the bond into 40 shares of stock ($1,000 face amount ÷ $25 per share = 40 shares). Because the bond has a current price of $900, divide $900 by 40 to get the underlying parity price (90% × $25 = $22.50).
A bond was issued 3 years ago with a coupon of 6%. The bond matures in 21 years and is callable at 103. Current market interest rates are 8%. Which of the following is most likely true?
The bond is selling at a discount.
An investor purchased 10 GO bonds at a discount of 2 points per bond. The bonds mature in 10 years. After holding the bonds for 5 years, they were sold at par. For tax purposes, the investor has
The cost per bond is $980. The accretion amount each year is $20. $20 ÷ 10 years = $2 per year. $2 per year × 5 years = $10 per bond accretion, making the adjusted cost basis $990 per bond. When the bonds are sold at par ($1,000), there is a profit of $10 per bond × 10 bonds, which equals a $100 gain.
If a customer is short 100 XYZ shares at 54 and long 1 XYZ 55 call at 2, what is the maximum potential loss?
The customer has protected his short stock position from a market advance by purchasing the call. If the market rises, the call is exercised, allowing the customer to buy stock at the options strike price of 55 to cover the short position. Therefore, the most the customer can lose is $100 on the stock position (the difference between the option strike price and short sale price), plus the premium paid for the option ($100 + $200 = $300).
An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for three years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer?
The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best, because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the three years of his investment.
You have a client who invested in the PQR Growth Fund 10 years ago and now, as retirement age approaches, asks you about using the exchange privilege to move into the PQR Balanced Fund. The client should know that
The exchange privilege allows for an exchange at net asset value (NAV) between funds that are members of the same "family." The exchange is considered a taxable event. Because the exchange is made at NAV, the concept of breakpoint is irrelevant.
Which of the following statements describing Section 529 plans is true?
The features of Section 529 plans, including their contribution limits and fees, vary widely from state to state. Section 529 plans have no age limits as to participation; they are open to both children and adults who plan to attend college or graduate school. For college savings plans, there is no state residency requirement for either owners or beneficiaries of Section 529 plans. not tax deductible income limitation
Under which of the following terms does the underwriter act in a dealer capacity?
The firm commitment is the most commonly used type of underwriting contract. Under its terms the underwriter commits to buy the securities from the issuer, and as such is acting in a dealer capacity.
Danielle is the CFO of the XYZ Manufacturing Company. XYZ's shares are listed on the NYSE. She purchased shares of XYZ common stock through her registered representative of a FINRA member firm 165 days ago and, wishing to add on to her home, sold the stock and realized a $50,000 profit. Under SEC rules, how will this transaction be treated?
The first point to understand is that this question has nothing to do with Rule 144 concerning the sale of control or restricted stock. It relates to another SEC rule that also deals with control stock. As an executive officer, Danielle is subject to the short-swing profits rule involving the sale of control stock. When control stock is sold prior to a six-month holding period, any profits are defined as short-swing profits and must be returned to the issuer.
A customer opens the following positions: Buy 100 shares of ABC @$60; sell 1 ABC Jun 60 call @3. What is the customer's maximum gain, maximum loss, and breakeven point?
The first step is to identify the position. This is long stock with a short call. This is a covered call position. Breakeven is the customer's net cost. The price of the stock ($60) minus the premium ($3) received equals the $57 per share breakeven point. The strategy is to generate some income with a little protection against a decline in the price of the ABC stock. The premium income is the most this client can make. If the stock's price should rise well above the cost of $60 per share, the short call will be exercised and the customer will deliver the stock purchased at $60 and receive $60. Regardless of how high the stock price rises, this customer can never make more than the $3 premium. If the stock's price should decline, the call will expire unexercised. That 3-point premium protects the long stock, but only for those 3 points. Once the market price falls below $57 (the breakeven point), it is all a loss for the customer down to a maximum $5,700 if the price drops to zero. Why doesn't the breakeven follow the "call-up" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.
If interest rates increase, the interest payable on outstanding corporate bonds will
The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year regardless of the prevailing interest rates in the market. It is the market price of bonds, not the interest payable, that responds inversely to changes in interest rates.
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%.)
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.
An investor wants to invest $200,000 in the banking industry sector. The investor would like to use leverage and make this purchase in a margin account. Additionally, she stresses wanting to avoid year-end tax statements showing capital gains liabilities. You would suggest which of the following as suitable, given the investor's criteria?
The investor's criteria eliminates mutual funds as suitable. Mutual funds make annual capital gains distributions for which the owner incurs a tax liability, and mutual funds cannot be purchased on margin. Conversely, an ETF will rarely make a capital gains distribution, and because they trade like all exchange-traded products, they can be purchased on margin, making them more suitable for this investor. Buying only a few select bank stocks is not a good representation of the entire sector.
Acme Pharmaceuticals previously had issued $200 million of common stock in an IPO. A year later, it issued $50 million of debentures at par value. Acme's leverage is what percentage of its total capital?
The leverage is the extent to which borrowed funds make up the company's total capital. Total capital is the value of the equity and debt financing combined. Acme has issued $50 million of debentures (debt capital) and $200 million of equity capital (the common stock). That makes the total capitalization of Acme equal to $250 million. The leverage is $50 million divided by $250 million, or 20%. An analyst would consider this conservative leverage
An official notice of sale publicizes all of the following except
The notice of sale is the advertisement placed by a municipality soliciting bids from underwriters for an issue it wishes to sell. It does not include the bond's rating.
Which of the following is contained in an official notice of sale?
The official notice of sale contains the information a syndicate needs to prepare a bid, including the amount of the good-faith deposit the syndicate must submit with the bid. The delivery date has not been determined. The syndicate develops the yield for each maturity and the agreement among underwriters.
A municipal bond underwriter looking in The Bond Buyer would recognize the percentage of new issues sold versus new issues offered for sale the prior week as
The placement ratio, also known as the acceptance ratio, is compiled weekly and reflects the municipal bonds sold divided by the municipal bonds offered in the previous week.
The writer of a combination expects the market to be
The writer, or seller, of a combination expects the market to be stable. The buyer of a combination expects the market to be volatile. Combinations and straddles are never bullish or bearish, as there are always both calls and puts involved in the strategy, which are both bullish and bearish. Remember, the definition of a combination is a put and a call on the same underlying security with the strike prices and/or the expiration months being different.
Congress passed the Trust Indenture Act of 1939 to protect bondholders. It requires that issuers of eligible bonds appoint a trustee to ensure that promises (covenants) between the issuer and the trustee who acts solely for the benefit of the bondholders are carried out. The Trust Indenture Act of 1939 applies to which of the following issues offered on an interstate basis?
There are four basic elements qualifying a bond issue for coverage under the Trust Indenture Act of 1939. Those are as follows: It is a corporate issue, The issue size is more than $50 million within 12 months. The maturity is 9 months or more. It is offered interstate. A $200 million corporate bond issue with a 20-year maturity would be covered under the act
A customer purchases $10,000 worth of stock in a regular way trade in a cash account on Monday, May 15. To avoid violating Regulation T, how much must the customer deposit, and when must the deposit be made?
There are two questions in one. The first deals with the amount to be paid when making a purchase in a cash account. As opposed to margin accounts, where borrowing is permitted, purchases in a cash account must be paid in full. In this question, that would be the full $10,000. The second part deals with Regulation T's rule on the final time for payment. The required payment must be made no later than the second business day after the settlement date (S+2). The trade was made for regular way settlement which is the second business day after the trade date (T+2). With the settlement date being Wednesday, May 17 and the Regulation T date being S+2 (two days later), the deposit of the full $10,000 is due no later than Friday, May 19. Whenever a trade in stock is made regular way, the Reg T date can be figured as T+4.
An investment company that holds which of the following does not meet the definition of a diversified investment company under the Investment Company Act of 1940?
Thirty-three percent of its assets in securities issued by a small-cap new issue
If a customer buys 200 XYZ at $58 and writes 5 XYZ Jan 60 calls at 2, the maximum potential loss is
This is an example of ratio writing. Short calls are covered by long stock, but in this example, it would take 500 shares of stock to cover the five calls written. Because there are three uncovered calls, the maximum loss is unlimited.
Which of the following is an example of sovereign debt? A) Royal Bank of Canada CDs B) U.S. Treasury bonds C) Bank of England notes D) Sony Corporation debentures
U.S. Treasury bonds Sovereign debt represents loans to governments. On the exam, it is likely that the examples will be foreign governments, not U.S. Treasury securities. The Royal Bank of Canada is a privately owned corporation and its debts are not those of the Canadian government. Bank of England notes are the paper currency issued
Which of the following equity securities has the longest expiration date?
Warrants commonly have expiration dates that are one, five, or even more years in the future. Preemptive rights generally expire in a maximum of 45 days, and common and preferred stock do not have expiration dates.
An investor anticipating a rise in interest rates would likely purchase
When interest rates increase, the market price of all fixed-income securities declines. In the case of variable-rate or reset bonds, the interest rate on those is adjusted based on the movements of market interest rates. As a result, when interest rates increase, the rate paid by the variable rate security increases as well. This tends to keep the market price stable rather than declining and it provides increased income to the investor. A callable bond works to the issuer's advantage when interest rates fall but offers no added benefit to an investor when interest rates rise. Corporate or government-issued bonds offer no advantage for an investor anticipating a rise in interest rates because with fixed interest rates, their price will decline.
In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC announced a long-term capital gains distribution. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for tax purposes?
When long-term capital gains are distributed, the length of time an investor has owned the fund is not relevant; it's still a long-term distribution. However, redemption of shares follows the normal holding period rules. Therefore, when this customer sold shares 10 months (July to May) after the purchase, the gain, like any other gain from a holding period that does not exceed 12 months, is short term.
KAPCO Manufacturing Corporation declares a 5-for-1 stock split on its outstanding shares of $20 par value common stock. This split will cause
Whenever there is a stock split (forward, such as this, or reverse), the par value is adjusted for the split. With a $20 par and a 5-for-1 split, the par value now becomes $4 per share. A way to visualize this is to think of changing a $5 bill for five $1 bills. The overall value hasn't changed, but the face or par value of each bill is now ⅕ of what it was originally. The stock's market value will drop by approximately 20% (⅕) of the pre-split price. The question only tells us the par value, not the market value (and those two values are unrelated). A split to the common stock has no effect on the preferred stock. The net worth remains the same because no money is involved.
Your margin account client whose account has a long market value (LMV) of $10,000 and a debit balance of $3,000 would have
With LMV of $10,000 and DR of $3,000, the account has equity of $7,000. The Regulation T requirement is 50% of the LMV, or $5,000. That means the account has $2,000 of excess equity that is journaled into SMA. Buying power is the SMA divided by the Regulation T requirement ($2,000 ÷ 50%), which equals $4,000
Your client lives in a state with a personal income tax. To minimize that tax liability, it would probably be best for this client to purchase
With few exceptions, securities issued by the U.S. Treasury are the only government securities carrying an exemption from state income tax. They are, however, taxable on the federal level. The other choices here are taxed at the local, state, and federal levels.
One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that
agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing.
An example of overlapping debt would be a school district and
county general debt.
Your client currently holds XYZ stock in her portfolio. You notice that the put-call ratio for options trading on XYZ stock has been increasing over the past several days. The increase in the ratio would indicate that
for the underlying XYZ stock, more puts than calls are being traded.
Municipal brokers' brokers deal with all of the following except
individuals As the term suggests, a municipal broker's broker deals with other dealers and institutions, not with the general public.
All of the following are exempt securities except
municipal bond mutual funds.
The interest on which of the following municipal securities may be considered preference income for alternative minimum tax purposes?
private issue bonds Interest on private activity municipal bonds is included in the taxable income of an investor who is subject to the alternative minimum tax.
Royal Duck Manufacturing Company (RDMC), located in the United States, exports about 25% of its high-quality down overcoats to distributors in Canada. To protect against currency risk, RDMC should
purchase put options on the Canadian currency. This would effectively hedge the currency risk with the only cost being the option premium. The acronym to remember for this is EPIC: U.S.-based Exporters buy Puts and Importers buy Calls. If the question is dealing with a foreign firm, it is the opposite: foreign based Importers buy Puts and Exporters buy Calls (IPEC). As far as this exam is concerned, there are no options on the U.S. dollar.
In a volatile market, which of the following option strategies carries the most risk?
short straddle sells a call - unlimited risk
An investor holding which of the following positions is exposed to a potentially unlimited loss? Short 1 IBS Jul 50 put Short 100 shares of IBS stock Short 1 IBS Jul 50 uncovered call Short 1 IBS Jul 50 covered call
short the stock short the uncovered call
All of the following are subject to the 5% markup policy except
spreads in new stock offerings.
A municipal bond underwriter looking in The Bond Buyer would recognize the percentage of new issues sold versus new issues offered for sale the prior week as
the acceptance or placement ratio.
The bond placement ratio, as shown in The Bond Buyer, is computed by taking
the dollar value of new issues sold divided by the dollar amount of the new issues offered.
A customer asks for sales literature for a money market mutual fund. Upon receiving the literature, she notices
the fund seeks to maintain a stable price but the fund can lose money.
A head and shoulders bottom formation is an indication of
the reversal of a downtrend. A head and shoulders bottom formation is also known as an inverted head and shoulders formation. It is that part of a graph in which a downtrend has reversed to become an uptrend. It is not, however, an indicator of the bullishness or bearishness of the market as a whole. It is an indication only of the direction of a trend, which may be either short or long in duration.
married couple accredited investor
$300K income
If an investor sold two BCD Feb 40 calls at 4 on August 4, 2021, and the call expired unexercised, what were the tax consequences?
$800 short-term capital gain for tax year 2022 For tax purposes, any premiums earned are recognized at the expiration date. In this case, the February call options sold in August 2021 for $400 each and expired in February 2022. Uncovered options writers always have short-term gains or losses.
A customer purchases an ABC $100 par 6½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is
1. 100 / 20 = 5 2. Parity Price of Common = Pref price / conversion ration = 80 / 5 = 16 . Minus 2 basis points = 14
ABC Company issued $20 million of convertible bonds with a coupon of 5% and a current market value of 120. The conversion price is $40. If all the bonds are converted, how many additional shares of common stock will ABC have outstanding?
1. 1000 / 40 = 25 2. 20,000,000 / 1000 = 20,000 3. 20,000 x 25 = 500,000
The following dividends were received by a husband, his spouse, and both of them jointly: husband, $160; spouse, $160; joint, $100. What amount of dividends that would be subject to taxation if they filed a joint tax return?
420
A bond with a 9% coupon, maturing in 18 years and 6 months, is selling at 120. The yield to maturity is closest to
7.05% Don't waste time trying to do the yield to maturity computation. This bond is selling at a premium (120% of par). Therefore, all of the computed returns must be lower than the 9% nominal (coupon) yield. Only two of them are. The 7.50% represents the current yield ($90 ÷ $1,200). We know from our charts that, just like a seesaw, the farther from the center you go, the bigger the move at the end. That means the nominal yield is the highest, followed by the current yield (CY), the yield to maturity (YTM), and finally the yield to call (YTC) as the lowest. Because only one choice is lower than the CY, you get the correct answer with minimal effort.
Under the Conduct Rules, the maximum sales charge on any transaction involving an open-end investment company share is
8.5% of the offering price.
An investor purchases a bond on its initial public offering. Even though the bond has a maturity value of $1,000 in 10 years, the offering price is only $600. If this investor holds the bond until it matures,
A bond issued at a significant discount from its maturity value is known as an original issue discount bond (OID). In the case of a corporate bond, the computation is more complex than can be tested, but there are two things you need to know: A portion of the discount is taxed as ordinary income each year until maturity, even though it is not actually received. This is called phantom income. Each year's taxable amount is reported on Form 1099-OID. Because a portion of the discount has been taxed each year, at maturity all $400 of the discount has been accreted. This results in no reported capital gain
Under the conduit theory of taxation, which of the following statements are true? A fund is not taxed on earnings it distributes if it distributes at least 90% of its net investment income. Investors are not taxed on earnings they reinvest. A fund is only taxed on interest income. Investors are taxed on earnings they receive in cash.
A fund is not taxed on earnings it distributes if it distributes at least 90% of its net investment income. Investors are taxed on earnings they receive in cash.
A group of underwriters has agreed to engage in a mini-max underwriting for a new issue of equity securities with the issuer of those securities. Which of the following best describes this underwriting agreement?
A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell.
An investor who is bearish on the outlook for Fernweh Travel Services (FTS) sells 100 shares short at $52 per share. Three months later, the market price of FTS shares is $58. Under FINRA rules, a maintenance call will be issued when the per share price of FTS
A short margin account reaches the maintenance level when the equity in the account reaches 30% of the market value of the short stock. To find that level, divide the credit balance by 130% (or 1.3). The credit balance is the sum of the sale proceeds plus the Regulation T initial margin requirement. In our question, sale proceeds are $5,200 ($100 shares times $52 per share). To that we add the 50% Regulation T requirement ($2,600) resulting in a credit balance of $7,800. Dividing that $7,800 by 1.3 = $6,000. That tells us that the highest the price of FTS shares can be is $60 per share. Anything above that will trigger the maintenance call. With the current market price of $58, anything in excess of a $2 per share increase will result in a maintenance call. Remember, when an investor sells short, losses occur as the market price rises.
Which of the following best describes how a syndicate determines the amount to bid for a new municipal issue?
A spread is analogous to the gross profit margin in other businesses. A syndicate's bid is based on the average reoffering price (the price the public will pay) less the syndicate's spread (the amount the syndicate will charge for bringing the issue to market).
In compliance with the Securities Act of 1933, a prospectus is always required when selling interests in
A unit investment trust has a one-time offering of its securities. After that, there is no public secondary market trading (the sponsor may engage in secondary trading solely to redeem units). Therefore, as a public offering of a new security, a prospectus is required when attempting to make a sale. Closed-end funds only require a prospectus on their initial offering. Once that is completed, all transactions are in the secondary market and no prospectus is used. Both municipal bonds and Treasury securities are exempt from the prospectus requirements of the Securities Act (although municipal bonds generally need an official statement).
Which of the following statements regarding ADRs is not true?
ADRs, with few exceptions, do not have voting rights. The sponsor of the ADR (the bank) holds the foreign securities and issues a receipt for them. That receipt is the ADR, and it is a U.S. security traded in the U.S. markets in U.S. dollars. Of importance to the holder is that everything is in English and dividends, if any, are received in U.S. currency. Therefore, it is correct to state that the holder of an ADR does not hold the shares of the underlying foreign security but instead holds a receipt for that security. There is both currency and political risk associated with ADRs.
A May and November Treasury bond is traded the regular way on Wednesday, June 8. The number of days of accrued interest is
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.
option settlement style
All index options on the exam use European-style exercise while all equity options on the exam use American-style exercise.
Each of the following statements concerning fill-or-kill (FOK) orders and all-or-none (AON) orders are true except
An FOK order must be executed immediately in its entirety or else it is canceled. An AON order must be executed in its entirety but is not canceled if the whole order cannot be executed immediately.
How much would the special memorandum account (SMA) price increase if a customer bought $22,000 worth of marginable stock in the existing margin account and fully paid for the transaction?
Assuming the customer paid for the securities in full, he would generate $11,000 in SMA. Because the customer needs to pay only half of the securities' value ($11,000), the additional cash paid ($11,000) would be considered a nonrequired cash deposit and be credited to SMA. Another way to view the transaction is the customer has fully paid securities with a loan value of 50%, or $11,000.
A Japanese manufacturer sells recorders to a U.S. retailing firm. The manufacturer is to receive USD$1 million in 90 days. How can he best protect himself against a decline in the dollar?
Because he is receiving U.S. dollars, his risk is that the U.S. dollar will go down in value against the Japanese yen. If the dollar goes down against the yen, the yen will rise. Therefore, to protect his risk against a rising yen, he should buy yen calls. The yen calls will increase in value if the yen rises
A corporation is having a rights offering. The terms of the offering require six rights plus $60 to purchase one share. With the stock's current market price at $74 per share, the theoretical value of one right before the ex-rights date is
Because the question is asking about the value before ex-rights, it means we use the cum-rights (with rights) formula; that is, the market price minus the subscription price divided by the number of rights it takes to buy one share plus one. Plugging in the numbers gives us ($74 - $60) ÷ (6 + 1) = $14 ÷ 7 = $2.00.
A 38-year-old investor places $25,000 into a single premium qualified deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $50,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is
Because this is a qualified annuity, the entire withdrawal is taxable. In this case, it is all $50,000. That $50,000 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 $50,000.
A new issue of bonds is offered to the public at a price of 100¾. What is the most likely reason for the issue being priced at a premium?
Bond prices and interest rates move inversely. It is likely that interest rates have fallen in the time lag between the syndicate's commitment being finalized and the issue actually taking place. That will benefit the syndicate rather than the issuer. If interest rates had increased during that time, the syndicate members would likely have had to price the issue at a discount. That would have had a negative effect on their earnings.
Stocks that are listed on the NYSE can also trade on all of the following except
CBOE
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 pre-refunding, the yield to call so fixed must be reflected on the confirmation statement. Because of the pre-refunding, 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.
All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements except
Contributions to a nonqualified variable annuity are not tax deductible. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan. Please note that all annuities are non-qualified unless something in the question indicates otherwise. For example, if the question deals with annuities in a 403(b) plan, it must be qualified.
