s7 practice exam 2

For every $1 decrease in market value, SMA created is equal to...

$1.50

Corporate stocks trade in...

- OTC - Third market - Stock exchanges they do NOT trade in the COMMODITIES MARKET (where physical assets such as agricultural products, industrial metals, and precious metals are traded)

Restricted persons include...

- parents - spouses - supervisor at member firm NOT considered immediate family includes: -grandparents, -aunts, -uncles ^ they ARE allowed to buy shares of a new issue.

An underwriting bid for a municipal general obligation issue would include which of the following? The dollar amount The coupon rate The yield to maturity The underwriting spread

-dollar amount (of bid, how much the issuer will receive) -coupon rate (amount of interest ISSUER will pay) The ONLY info the underwriter must furnish to the ISSUE is those two. These two components allow the issuer to determine the LOWEST NET INTEREST COSt and award bonds on that basis.

PREREFUNDING a bond issues means...

-greater marketability -higher rating -bonds will be called in more than 90 days NOT a reduction to the coupon rate. The coupon does not change. If done in 90 days or less, it's called "current refunding" Prerefunding is refinancing an exisiting bond BEFORE its maturity/call date by using money from the sale of a new bond.

Max. compensation to a limited partnership ROLL UP

2% - must be paid to brokerage firm whether partners vote for or against the proposed roll up

FINRA max sales charge (relating to mutual funds)

8.5%

Max. sales charge allowed (Investment Company act of 1940)

9%

If a customer buys 1 FLB Oct 50 call at 3 and she exercises the option to buy 100 shares when the market is at 60, what is the cost basis of the 100 shares? A) $5,300 B) $5,000 C) $6,300 D) $6,000

A Cost basis of the 100 shares = total amount investor spent to acquire them. This customer paid $300 to purch. call option. When exercised the call, she purch. 100 shares of FLB at $50 per share (for $5,000 total) Thus, $300 to purch call PLUS $5,000 for FLB shares = $5,300

A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be A) taxed as ordinary income. B) taxed as a capital gain if the underlying mortgage is prepaid. C) tax free. D) treated partly as ordinary income and partly as a tax-free return of principal.

A Interest-ONLY payments made by CMOS are taxed as ORDINARY INCOME.

An investor with a relatively low risk tolerance for loss of principal wishes to make a long-term investment that will meet his needs and provide some protection against inflation. Which of the following mutual funds is likely the most suitable for him? A) A U.S. government bond fund B) A balanced fund C) A municipal bond fund D) An S&P 500 index fund

A Most suitability questions are not this cut and dry. U.S gov bond funds are the only applicable answer. Why? - Balanced funds: mix of equities and fixed-income securities offer some downside protection with bonds and upside (inflation-beating) growth from equities. Both balanced and municipal bond funds protect against iflation. Muni bonds are NEVER a suitable choice, unless it refers to a HIGH-TAX BRACKET INVESTOR. The Index fund for sure provides inflation protection, but as demonstrated historically, losses of 30% or more are possible.

For both U.S. Treasury notes and Ginnie Maes, A) quotes are as a percentage of par in 32nds. B) interest income is taxed at the federal level only. C) interest is computed on an actual-day basis. D) settlement is next business day.

A T-notes taxed only at fed. level, GMNA on all levels. GMNA bonds treated like corp. bonds. T-notes settle NEXT day, GMNA settle T+2. Interest on T-notes compute on actual-day basis. GMNA interest computer on 30 day month/360 day year basis. BOTH GMNA and T-notes ARE quoted in 32nds.

One of the goals of target date funds is to help manage A) inflation risk. B) liquidity risk. C) investment risk. D) retirement risk.

A Target date funds adjust the ASSET ALLOCAITON as the investor gets closer to retirement age (or selected date), though not always successful. The goal of this is to REDUCE INVESTMENT RISK. As it is a mutual fund, liquidity is not a concern and do not do a great job of managing inflation risk since the portfolio is heavily invested in fixed income as target date approaches. This leaves the investor with little in equities to protect against inflation. *"Retirement risk" is not a term used in the industry.

An investor purchased 200 shares of DCAST common stock at $200 per share. What is the adjusted cost basis per share of this position after the company pays a 100% stock dividend? A) $400 B) $200 C) $100 D) $50

A The TOTAL VALUE OF INITAL position is unchanged, remaining at $40,000 (200 times $200) AFTER the stock dividend, the investor owns 400 shares (200 times 100% = 200 + 200 = 400) THUS, the adjusted cost basis is $100 per share ($40k / $400 = $100) *the 100% stock dividend has same effect as 2:1 split. Thus, stock's cost basis is cut in HALF. *anytime there is a distribution resulting in ADDITIONAL shares (Stock split or dividend), the COST BASIS is REDUCED while TOTAL ACCOUNT VALUE remains the SAME.

Which of the following occurs in a partnership account if one partner dies? A) The account is frozen until a new or amended partnership agreement is received. B) The surviving partners are considered joint tenants. C) The surviving partners are considered joint tenants and receive the deceased partner's share. D) The surviving partners receive the deceased partner's share.

A Upon a partners DEATH, the partnership account is AUTOMATICALLY FROZEN until a NEW or AMENDED partnership AGREEMENT is received. *deceased partner's share usually goes to ESTATE, not other partners.

Calendar Spread

A calendar (or time, or horizontal) spread is where the options are: - of the same TYPE (long and short puts, long and short calls) - DIFFERENT exp. dates i.e; purchases 1 ABC Jul 50 put sells 1 ABC Oct 50 put

A customer purchases 10 8% Treasury notes at 101-16. What is the dollar amount of this purchase? A) $10,150 B) $10,116 C) $10,015 D) $10,812

A) $10,150 Always assume par is $1,000 (unless question states otherwise). **REMEMBER: gov. notes & bonds are quoted in 32nds. Therefore, a quote of 101-16 means: 101 + (16/32) 101 + 1/2 = $1,015 $1,015 x 10 bonds = $10,150.

If a customer buys 1 XYZ Aug 50 put at 1 and sells 1 XYZ Aug 65 put at 10 when XYZ is at 58, what is the maximum risk? A) $600 B) $100 C) $900 D) $1,500

A) $600 This is a CREDIT put SPREAD. Max loss = difference between strike prices and net credit. Strike price difference is 15. (65-50) Net prem. is 9 (10-1) SO... 15 - 9 = 6 6 x $100 = $600 max loss. Credit put spreads are BULLISH (buy low, sell high) If stock price rises about $65 per share, both options expire worthless. (question #78 on exam 2 for more info)

A municipal dollar bond is quoted at 98¼ to 98¾. The municipal dealer's spread is equal to $5.00 $50.00 5 basis points 50 basis points

A) I and IV - $5.00 and 50 basis points The spread here is HALF A POINT. Each point worth $10 = 100 basis points. Therefore, HALF A POINT is worth $5, which is representing 50 basis points.

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) a loss of $180. B) a gain of $180. C) a loss of $450. D) a gain of $450.

A) 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.

Each of the following statements concerning fill-or-kill (FOK) orders and all-or-none (AON) orders are true except A) an AON order must be canceled if the whole order cannot be executed immediately. B) an FOK order must be filled in its entirety. C) an AON order must be filled in its entirety. D) an FOK order must be canceled if the whole order cannot be executed immediately.

A) an AON order must be CANCELED if the WHOLE ORDER cannot be executed IMMEDIATELY. A FOK order must be executed immediately in entirely or else it is canceled. An AON order must be executed in its entirety, but is NOT canceled if whole order cannot be executed immediately.

An investor begins a periodic payment deferred variable annuity purchase program. One respect in which this differs from purchasing a mutual fund is that A) there is a minimum guaranteed return with the variable annuity, while there are no guarantees with the mutual fund. B) the investor in the variable annuity contract reports no taxable consequences during the accumulation period. C) the mutual fund will generally have a surrender charge for early withdrawal and variable annuities only charge for surrender when annuitizing. D) the variable annuity contract will generally have lower expenses than the mutual fund.

A) there is a minimum guaranteed return with the VARIABLE ANNUITY, while there is NO guarantee with the mutual fund. One of the features of annuities is the tax deferral of all earnings until the money is withdrawn. Mutual fund distributions are taxable when received. On the other hand, when the annuity accumulation is withdrawn, everything above the cost basis is taxed as ordinary income (10% penalty if younger than 59½)—there is never any capital gains treatment with annuities. Variable annuities invariably have higher expense ratios than mutual funds with similar portfolios. Surrender charges are found with annuities. *Do not confuse those with the conditional deferred sales charge (CDSC) applied to certain mutual fund share classes.

If a municipal firm purchases a block of municipal bonds in anticipation of a price increase, the firm is engaged in A) position trading. B) arbitrage. C) short selling. D) hedging.

A. POSITION TRADING is when a dealer is buying for its own inventory. *although the term market maker is not gen. used, muni bond trading takes place when muni dealers buy & sell out of their own inventory

When auction rate securities (ARS) reset the yield to be paid in the upcoming period, the process used I. is a stop loss system. II. is a Dutch auction. III. establishes a clearing rate. IV. guarantees that every bidder will have their order filled.

ARS is used to reset the interest rate each period, which is done by a Dutch Auction. A Dutch auction is the lowest bid rate at which ALL of the bonds can be RESET OR SOLD (for new issues) at par. Newly established rate is called the CLEARING RATE. Bidders who bid AT OR BELOW the clearing rate will now pay that rate. Those that bid ABOVE will have their orders go unfilled.

A customer has entered an option order with your broker-dealer. At which of the following locations could such an order be executed? NYSE CBOE Nasdaq PHLX None of these

All of these! (NYSE, CBOE, Nasdaq PHLX) Option orders can be executed on the NYSE, CBOE, and Nasdaq PHLX which offer a hybrid of electronic and on-floor execution availability.

Prime Brokerage Account

An account in which the customer (gen. an institution) selects one member firm (who is the prime broker) to provide: - custody - trading - other services *other firms called executing brokers typically execute most of the trades placed by the customer.

If an investor practices value investing, which of the following stock types is he least likely to purchase? A) A stock that is presently selling for two-thirds of net current assets B) A stock with a low (P/E) ratio C) A stock with an above-average price-to-earnings (P/E) ratio D) A stock that has exhibited a high dividend yield in the past

B A stock with a LOW (P/E) ratio A growth investor looks for stocks with ABOVE AVG (P/E) ratios. Conversely, a VALUE investor focuses on stocks with LOW (P/E) ratios, low price-to-book value, and historically high dividend yields.

Two bonds currently quoted at a 5.50 basis mature in exactly 15 years. Their coupons are 6% and 7%, respectively. Which bond would experience the greatest appreciation in value if the yields dropped to a 5.20 basis? A) The 6% bond B) The 7% bond C) Neither because both would decline in value D) Both would appreciate the same amount

B The bonds are selling at a PREMIUM. So, if the YTM DECLINES to 5.20, this indicates the bond prices went UP. In order for both bonds to have the same basis (of 5.20), the 7% coupon must have HIGHER PRICE because the $10 per yr additional interest has to be OFFSET by a LARGER ANNUAL LOSS. **the higher the coupon, the bigger the changes**

Which risk is generally lower when holding a municipal bond ETF instead of individual municipal bonds? A) Interest rate risk B) Liquidity risk C) Purchasing power risk D) Inflation risk

B) Liquidity risk Muni bonds do not have the liquidity that many other securities do. The bond ETF (exchange-traded) does NOT have that issue. Both investments have other risks (inflation risk and purchasing power risk are the same).

An investor purchased a new issue corporate zero-coupon bond for $600. The bond has a maturity of 20 years. Six years later, the investor sells the bond for $700. For tax purposes, this would result in A) a capital gain of $20. B) a capital loss of $20. C) a capital loss of $280. D) a capital gain of $100.

B) a capital loss of $20 The $400 discount is accreted over the 20 years to maturity. *that is an annual accretion of $20. After 6 years, that is $120, making the tax basis of the bond $720. Because the sale at $700 is $20 less than the basis, the investor has a long-term capital loss.

Which of the following municipal issues would least likely involve overlapping debt? A) A library district B) An airport district C) A park district D) A school district

B) an airport district Overlapping debt refers to PROPERTY TAX DISTRICTS (areas.) Airport issues are generally REVENUE issues of an authority, which has NO property taxing powers.

Under the USA PATRIOT Act of 2001, member firms must maintain records of reports of currency transactions involving more than $10,000 for A) 1 year. B) 5 years. C) 6 years. D) 3 years.

B. 5 years for currency transactions involved more than $10k to be reported on a Form 112 Currency Transaction Report (which are maintained for 5 years)

A new client, age 25, earning $41,000 annually has saved $20,000 to allocate to an investment portfolio for the first time. The client conveys that while he would like to see some growth, an investment with moderate risk and some downside protection are important objectives for his first time investing. Aligning with the client's investment experience and objectives, which of the following would be the most suitable? A) Municipal bond fund B) Equities index fund C) Balanced fund D) Money market fund

C A BALANCED FUND (consists of both equities and debt instruments) aligns with the growth objection and also offers some downside protection against falls in the market due to the debt portion of its portfolio. *equity index funds move w/ mkt and no downside protection. *money market fund does not align with growth *muni bond fund has no benefit for investor in lower income bracket.

A customer buys 200 ABC at 76 and simultaneously writes 2 ABC Mar 80 calls at 2. If the stock rises to 83, and the customer is assigned on the short calls, the customer has a gain of A) $800. B) $1,800. C) $1,200. D) $1,400.

C Customer BOUGHT 200 SHARES AT 76 was ASSIGNED (forced) to sell shares at 80 for a GAIN FOR $800. Also, received $400 for writing the calls. Adding those together, overall gain is $1,200. B/E for covered call writing = COST OF STOCK LESS THE PREM. (76 - 2) = 74 is the breakeven point. Customer sold at 80. (6 points x 200 shares = $1,200)

All of the following would affect a customer's equity balance except A) withdrawal of special memorandum account (SMA). B) interest charged. C) stock dividends. D) cash dividends.

C Stock dividends do NOT affect TOTAL EQUITY. *Withdrawal of SMA and interest charges assessed against the account DO decrease equity.

Class A shares of the JILCO Fund are offered to the public at the NAV per share PLUS a sales charge of 4.25%. If the NEXT computer NAV per share is $39.39, an investment of $10,000 will acquire A) 265.816 shares B) 253.871 shares C) 243.072 shares D) 243.546 shares

C The FIRST STEP: - computer the POP: when NAV & sales charge percentage are given, to COMPUTE: *NAV / (100% - sales charge %)* SECOND STEP: Purchase amount / POP = shares. ***Sales charge is ALWAYS A % OF POP (not NAV)*** For this specific problem: -Step one: $39.39 (NAV) / (100% - 4.25%) = $41.14 per share. -Step two: $10,000 / $41.14 = 243.72 shares.

Popular Investment Securities, a FINRA member firm, produces short videos describing the general characteristics of different types of securities. Periodically, an interstitial appears during the video. Under FINRA's rules on communications with the public, A) as long as the presentation is strictly generic, filing with FINRA is not required. B) interstitials may not be used in public communication without the consent of the viewer. C) the appearance of the interstitial defines the video as retail communication requiring filing. D) video presentations of any kind must be filed with FINRA within 10 days after first use.

C The best example of an INTERSTITIAL is the "pop-up ad", which sometimes shows up full-page, req. the viewer to see the ad before viewing the full page of content. Without the interstitial, a generic video describing general characteristics of a type of security would not need filing, but once the ad pops up, it is now retail comm and must be filed.

An investor purchases 1,000 shares of PLEX common stock at a price of $153 per share. Shortly afterward, with PLEX selling for 149 per share, a purchase of 10 PLEX 150 puts at 4 takes place. What is the investor's breakeven point? A) $113 per share B) $149 per share C) $157 per share D) $153 per share

C) $157 per share The investor is looking for the price to RISE. The purch. price was $153. The cost of the "insurance" (the put option) was 4. Thus, this means the investor will not start making money until the stock RISES ABOVE cost of stock PLUS the cost of the put. ($153 + $4 = $157) *The current market price and exercise price are irrelevant info. BREAKEVEN ON LONG STOCK AND LONG PUT: cost of stock + cost of put = B/E

A 7% convertible debenture is selling at 101, and it is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. What is the parity price of the debenture? A) $850 B) $929 C) $920 D) $910

C) $920 **DETERMINING PARITY PRICE OF THE BOND: FIRST, find # of shares debenture is convertible into (conversion ratio) / par val of conversion price ($1000 / $25 = 40 shares) THEN, multiple current price of common by conversion ratio (40 shares x $23 = $920) $920 is the parity price.

For which of the following business structures is the income taxed to the business? A) A limited partnership B) An S corporation C) A C corporation D) A general partnership

C) A C corporation C corporations are taxable entities, which must pay tax on their INCOME before they can distribute dividends to their shareholds. *Partnerships (limited or general) and S corporations do NOT pay income tax.

A customer with a moderate income from a secure job is in the 28% tax bracket. She has a small diversified portfolio and has $10,000 she would like to invest in a limited partnership. If she is willing to accept only a moderate amount of risk, which of the following limited partnerships would be the most appropriate recommendation? A) An exploratory oil and gas drilling program B) A raw land real estate limited partnership C) An oil and gas income program D) A new-construction real estate limited partnership

C) An oil and gas income program The customer is not in a high tax bracket and would not be able to take full advantage of the tax benefits produced by an exploratory oil and gas program or by new-construction real estate limited partnerships. A raw land real estate partnership is usually speculative. * Of the answers listed, the income and moderate risk from an oil and gas income program would be of greatest benefit to this investor.

Which of the following are qualified plans? Payroll deduction Deferred compensation Defined benefit Defined contribution A) II and IV B) I and III C) III and IV D) I and II

C) III and IV - defined benefit and defined contribution These are funded with PRETAX contributions, thus making them qualified plans. Payroll deduction and deferred compensation plans are funded with AFTER-tax dollars, thus nonqualified plans.

As interest rates fall, prices of straight preferred stock will A) remain unaffected. B) become volatile. C) rise. D) fall.

C) Rise Preferred stock interested rate is SENSITIVE. Rates FALL, prices of pref. stock RISE. vice versa^

If a customer buys a municipal bond at 110, maturing in eight years, but sells the bond six years later at 103½, the customer will have A) a $10 per bond loss. B) a $35 per bond gain. C) a $10 per bond gain. D) a $65 per bond loss.

C) a $10 per bond gain Muni bonds purch at a PREMIUM must be AMORTIZED. This specific bond has a prem. of $100, which over EIGHT years, amounts to $12.50 per year. The cost basis of the bond at the time of the sale is: $1,100 - ( 6 x $12.50) = $1,025. If it is sold at 103 1/2 (which is $1,035), the gain is $10 per bond.

A client with an options account contacts the registered representative handling the account with instructions to open the following spread: Buy 1 ABC 100 call and Sell 1 ABC 105 call at a 5-point debit. Under FINRA rules, this order A) should be turned in immediately. B) will be executed at the next available trade meeting the 5-point limit. C) should be refused. D) is for a bull call spread.

C) should be REFUSED. The order should be refused because it is impossible for it to be profitable. This is a bull call spread (but that is not the correct answer here because it has nothing to do with FINRA rules) and will become profitable when the spread widens. With strike prices of 100 and 105, it can never widen more than 5 points. If the client paid 5 points for the spread, once commissions are factored in, the client must lose money and certainly cannot profit. FINRA looks at this as an uneconomic position, and the firm should refuse to take the order.

A customer shorts 1 OEX (S&P 100) 935 call at 7. If the customer is assigned an exercise notice on the call when the OEX closes at 944, the customer realizes A) a $700 gain. B) a $200 loss. C) a $900 loss. D) a $1,600 loss.

C. $900 Loss The call is IN THE MONEY by 9. (944 - 935) Writer delivers cash to buyer EQUAL TO INTRINSIC VALUE. In order to determine profit/loss, the INTRINSIC VALUE IS REDUCED BY THE PREMIUM PAID (9 - 7 = 2) Since each INDEX POINT = $100 Investor has a LOSS OF $200, since the money paid on the exercise EXCEEDED the premium received.

Backing for a SPECIAL TAX BONDS

Common taxes backing special taxes include: - fuel (gasoline) taxes - sales tax - business license taxes - tobacco taxes *NOT ad valorem tax (property taxes, used to back GO bonds) *NOT income tax (usually used to back state-issued GO bonds)

What retail communication is NOT required to be filed with FINRA? (excluded from filing reqs)

Correspondence (does need to be reviewed by a principal before or after use in accordance w/ firms written procedures, FINA not required) OR Retail comm. that has already been previously filed with FINRA and used without material change

Leveraged index funds I. can be exchange-traded funds (ETFs). II. can never be exchange-traded funds. III. can be inverse or reverse funds. IV. can never be inverse or reverse funds. A) II and IV B) I and IV C) II and III D) I and III

D Leverage funds (attempting to deliver a multiple of returns delivered) can be: - ETFS, or - Inverse (reverse) funds (attempt to deliver returns the OPPOSITE of those realized by the index they track)

Which of the following is an automated system of delivering information relating to the market for municipal securities? A) The Bond Buyer B) INSTINET C) The Blue List D) Thomson's Muni News or Muni Market Monitor (Munifacts)

D Thomson's Mui News OR Muni Market Monitor (Munifacts) supplies up-to-the-MINUTE info to its subscribers.

An investor places $100,000 into an oil and gas limited partnership program. To comply with FINRA rules, what is the minimum amount of the investment that must be received by the business? A) $90,000 B) $98,000 C) $95,000 D) $85,000

D) $85,000 Under FINRA Rule 2310, the MAX. in the total offering expenses is 15%. Thus, at least 85% (or $85k) MUST be put to work in the program.

What is a possible benefit of purchasing shares of a closed-end investment company in the secondary market? A) Redemption takes place on the day of the sale. B) Dividends are paid in cash rather than additional shares. C) Shares may be purchased and sold without any sales or redemption charge. D) Shares are frequently trading at a discount to the NAV.

D) Shares are freq. trading at a discount to the NAV. Closed-end funds compute their NAV, just as do open-end funds. However, by trading in the secondary markets, prices of closed-end funds are determined by the supply and demand for their shares. This can result in a fund selling for less than the value of its assets. We say the fund is trading at a discount to the NAV and, just like anytime we can buy something at a discount, we might be getting a better deal. Of course, this can work the other way if the fund shares were purchased at a premium or NAV and now are sold at a discount. Although there are no sales loads or redemption fees, there are brokerage commissions to pay just like with the purchase of any security in the secondary markets. Most would agree that the ability to reinvest your dividends in additional shares is a bigger benefit than taking the cash. Those additional shares create a compounding effect over time. Closed-end funds do not redeem their shares. When an investor sells the shares, they settle the same T+2 as other securities.

If a high-income customer is subject to alternative minimum tax (AMT), which of the following preference items must be added to adjusted gross income to calculate his tax liability? A) Distributions from a corporate bond mutual fund B) Income from a municipal security issued to finance parking garages C) Interest on a municipal bond issued to finance highway construction D) Interest on a private-purpose municipal bond

D) interest on a private-purpose muni. bond If more than 10% of a bond's proceeds go to PRIVATE ENTITIES, interest is a tax pref. item for AMT purposes.

A municipal revenue issue's flow of funds statement is contained in A) the legal opinion. B) the agreement among underwriters. C) the notice of sale. D) the bond contract.

D) the bond contract

If a customer fails to meet a Regulation T margin call of $2,500, securities may be sold out of the account with a value of A) $3,333. B) $8,000. C) $2,500. D) $5,000.

D. $5,000 When a customer fails to meet a Reg T all, securities valued at TWICE the Reg T call must be sold out. ($2,500 x 2 = $5,000)

FINRA's 5% markup policy does not apply to A) REITs. B) third-market trades. C) commissions. D) issues sold by prospectus.

D. Issues sold BY PROSPECTUS and MUNI SECURITIES *The FINA 5% markup policy DOES apply to: - secondary market trades -whether customers are charged markups, markdowns, or comissions.

Yield-based debt options are ______ Style Contracts...

European (only can be exercised on the last day of trading) These are all settled in cash. All strike prices reflect yield. (35 strike price represents 3.5% yield.) Yield-based options are a bet on future interest rates, not prices. Calls are bought by those who believe rates are going up (prices down) and puts by those who believe rates are going down (prices up).

Workable indication

Firm bid price from a dealer

Which of the following statements regarding tax-deferred, noncontributory, defined benefit plans are true? I. Contribution amounts are fixed. II. Contribution amounts vary. III.Benefit payments are fixed. IV. Benefit payments vary.

I and III In an employer-sponsored DEFINED BENEFIT PLAN... -contribution amounts vary according to assumptions used -benefit amount is FIXED per person, based on a formula (age, yrs of service, salary, etc.)

For a real estate DPP, NONRECOURSE financing will..

INCREASE a limited partner's original cost basis.

Municipal variable-rate demand obligation

Interest payments are tied to the movements of another specified interest rate. the coupon rate of the bond changes and the price remains stable.

NASDAQ Quote Levels

Level 3 is used by market makers. It contains the quotes from all market makers (as does Level 2), but it allows for the entry of quotes. That is the unique feature of Level 3. Level 1 shows the inside market (best bid and best offer), and there is no Level 4.

Is INTEREST ON FUNDS BORROWED TO PURCH. MUNI BONDS tax deductible?

NO.

Eurobond

Name given to a long-term debt instrument issued and sold outside of the country of the currency in which it is denominated.

An underwriter should consider these factors when determining the SPREAD on a new issue...

SPREAD = difference between reoffering price and amount bid on an issue in COMPETITIVE bidding Factors include: - prevailing interest rates in market place (mkt conditions) - amount of bid on issue - type and size of issue - dollar vol. of transaction - any extraordinary costs incurred by syndicate **NOT a factor = amount of good faith check deposited before bidding on the issue (no relevance to bid or reoffering prices)

Syndicate letter

Sent by a muni dealer to prospective members inviting them to join the syndicate, setting forth the conditions of the syndicate. Conditions include: - manager - percentage participate (each member's share) - amount of good faith deposit req.

Cumulative Voting

Shareholder multiples # of shares owned by the # of seats being voted on. i.e; 300 shares and 3 seats to vote on = 900 shares(votes) in anyway they want.

Flow of Funds statement is contained in...

The bond contract -describes

Municipal bonds are NOT sold short because...

The muni bond market is illiquid. There is no specific law/industry rule regarding the prohibition of short sale of muni bonds, BUT it is not common. To short a security, it must be borrowed. Muni securities are THINLY TRADED, thus it is often difficult to locate the specific issue needed to cover the position.

If a customer buys 100 shares of stock and writes one out-of-the-money call against her long position, the breakeven point is A) the strike price plus premium. B) the strike price less premium. C) the cost of stock purchased plus premium. D) the cost of stock purchased less premium.

c. Cost of stock purchased PLUS the premium. When investor OWNS STOCK and SELLS A CALL, it is COVERED. *Breakeven is computed by: premium - stock purchase price

Nominal (subject) quote

indicates a dealer's estimate of a security's market value. These are provided for INFOMATIONAL PURPOSES ONLY, permitted if quotes are CLEARLY LABELED as such.

A similarity between PREEMPTIVE RIGHTS and WARRANTS is their...

voting privilege

An outstanding municipal bond issue has the following characteristics: 7.50% coupon, maturity in 20 years, put-able in five years at 100, callable at 102 in 10 years, declining in a straight line to maturity, and yield to maturity is 6.50%. The issues should now be quoted

yield to call at 102. The bond issue is selling at a PREMIUM, the YTC is LESS than the YTM. Bonds must be quoted as a YTC at the EARLIEST maturity (which is the 10 yr call at 102) If selling at a DISCOUNT - YTM is the proper quote. Yield-to-put is never required to be quoted.