Series 7 II

Which of the following customer accounts are NOT SIPC insured? I. Customer margin account; Ii. JTWROS account with spouse; Iii. JTIC commoditities account with son; IV. JTIC account with business partner; A. I only B. II and III; C. II, III and IV; D. III only

SIPC coverage applies only to accounts holding securities; therefore, commodities accounts re not covered. Chapter 16

Which of the following stocks is regarded as a defensive stock?

a. Aerospace stock; b. stock selling close to its support level; c. stock with a strong cash psition and a low ratio of debt; d. electric utility stock; Answer: D. Analyst regards a defensive stock as one that is in an industry that is least affected by business cycles. Most defensive industries produce nondurable consumer goods (e.g., the food industry or the utility industry). chapt 14

If XYZ Corporation sells an additional 1 million common stock with a par value f $1 for $10 per share, which is of the following is TRUE?

a. its EPS will increase; b. its paid-in surplus will increase; c. its liquidity ratio will decrease; d. Current ratio will decrease. Answer:B. Paid-in surplus is a balance sheet entry that accounts for money raised from the issuance of stock in excess of par value. When more shares are sold, paid-in surplus will increase. chapt. 14

Which of the following are used by the Federal Reserve to control the money supply?

i. Open Market operations; ii. Setting reserve requirements for member banks; iii. Setting the discount rate; iv. Setting the federal fund rate; a. i, ii, and iii b. i and iii c. ii and iv d. iii and iv Answer: A the federal funds rate is a market rate of interest heavily influenced by, but not set by, the Fed. chapt 14

When the FOMC purchases T-Bills in the open market, which of the following scenarios likely to occur?

1. Secondary bond prices will rise. 2. Secondary bond prices wil fall. 3. Interest rates will rise. 4. Interest rates will fall. Answer: 1&4. Chapter 14.B

Decode the bond quote 5M ABC J&J 15 8s of '21

5M ~ Five $1,000 bonds for a total of $5,000; ABC ~ company name; J&J 15~ interest is paid bi-yearly January 15 and July 15; 8s ~ interest amount; 21 ~ bond maturity is 2021.

All of the following situations could cause a fall in the the value of the U.S. dollar in relation to the Japanese yen except?

A. Japanese nvestor buing the U.S. Treasury securities. B. U.S. investors buying Japanese securities C. Increase in Japan's trade surpolus over that of the United States. D. General decrease in the U.S. interest rates. Answer: a. Increased investment would raise the US dollar would rise. Chapter 14.B

Disintermediation is most likely to occur when

A. Money is tight; B. Interst rates remain low across all saving institution and investments; C. Margin requirement are high; D. The interest ceilings on the certificates of deposit have been raised. Chapter 14.B

Which of the following is the narrowest measure of the market?

A. NYSE Composite Index; B. Value Line Index; C. DJIA D. Standard Poors 500 Answer: C Dow Jones Industrial Average charts the performance of 30 industrial stocks.

Of the following S&P ratings shown here, below which one of them would all other S&P ratings be considered speculative? A. A B. B C. BB D. BBB

Answer D. A rating of BBB is the lowest investment grade rating assigned by Standard & Poor's. Moody's equivalent score is Baa. All ratings under are considered speculative and noninvestment grade. For S&P the ratings are BB, B, C, D. For Moody's they are Ba, B, Caa and D. ~ chapter 2

Which of the following corporations is most likely a growth company? 1. ABC EPS $1.10 Dividend $0; 2. DEF EPS $1.25 Dividend $0.25 3. GHI EPS $1.50 Dividend $0.75 4. JKL EPS $1.90 Dividend $1.33

Answer. 1. A growth company pays out very little in dividends and retains mos of its earnings to fund future growth. ABC has the highest retained earnings ratio and is most likely to be a growth company. chapt 14

During periods when the yield curve is normal, as market interest rates change, which of the following is true? A. Both short-term and long-term bonds prices move equally. B. Short-term bond prices more more sharply. C. Long-term bonds prices move more sharply. D. There is no relationship between the relative price movements of short-term and long-term bonds.

Answer. C. Long-term bond prices are more volatile than similar short-term prices, in large part because of the added risk of owning a longer-term debt security.

Which of the following is considered sources of debt service for GO Bonds? I. Personal Property taxes Ii. Real estate taxes Iii. Fees from delinquent property taxes Iv. Liquor l'intense fees A. I and IV B. II and III C. II, III and IV D. I, II, III and IV

Answer. D. All of the fees and taxes listed are payments received by the municipality that are not the result of a revenue producing facility. General revenues of the municipality may be used to pay the debt service on a general obligation bond.

A customer buys 1 XYZ Nov 70 put and sells 1 XYZ Nov. 60 Put when XYZ is selling for 65. This position is A. Bull spread; B. A bear spread C. A combination D. A straddle

Answer.B This put Spread is establish as a debit because the customer pays more for the 70 put than he receives for the 60 put; bears buy puts. A debit spread is a net buy, whereas a credit spread is a net sale. therefore, a debit put spread is like buys a put which is bearish

An order confirmed for the benefit of the entire underwriting syndicate place after the bid is awarded is called? A. A group net order; B. A net designated order; C. A pre-sale order; D. A member at the takedown order;

Answer: A A municipal group net order is credited to syndicate members according to their percentage participation in the account. This order type is given priority over designated or member takedown orders, but not overs pré-salé orders. By placing this type of order, syndicate members are stipulating that they want those bond order to have the highest priority still available. Note that pré-salé orders are also confirmed for the benefit of the entire syndicate, but these are placed before the time the winning bid is awarded.

Which of the following statements regarding Rule 144 sale of restricted stock are true? I. Stock sold through a 144 sale is considered registered stock after the sale. Ii. After holding the stock for 6 months , the holding period is satisfied for nonaffiliates. Iii. After holding the stock for 2 years, there are no volume restriction for affiliates. Iv. Form 144 must be filed with the SEC at least 10 business days before a 144 sale. A. I and II B. I and III C. III and IV D. I, II, III and IV

Answer: A After stock is sold by an affiliate or a non affiliate, it is considered register stock and affiliates are always subject to volume restrictions. Form 144 must be files wth theSEC on or before date of sale. After holding the stock fully paid for a total of 6 months, nonaffiliates may sell the stock completely unrestricted.

If a municipality wants to even out its cas flow, it is most likely to issue which of the following securities? A. TANs B. BANs C. RANs D. CLNs

Answer: A Property taxes are a primary source of cash flow for most municipalities, but property taxes are collected at established intervals. Issuing tax anticipation notes ~TANS, backed by future tax revenues can help a municipality. Maintain an even cash flow throughout its fiscal year. ~ chapter 3

Accrued Interest on a bond confirmation is I. Added to the buyer's contract price; Ii. Added to the seller's contract price; Iii. Subtracted from the buyer's contract price; Iv. Subtracted from the seller's contract price; A. I and ii B. I and iv C. II and iii D. III and Iv

Answer: A the accrued interest calculation is made to determine the seller's share of the upcoming interst payment. It is added to the buyer's contract price ~ the buyer pays; And it is added to the seller's contract price ~ the seller receives.

How much is 80 basis points? I. $8 II. $80 III. 0.8% IV. 8% A. I and III B. I and IV C. II and III D. II and IV

Answer: A. 100 basis points =$10 and 1% of a bonds face value. Therefore, 80 basis points = $8 and .8%

An investor buys a convertible bond at par with a conversion price of $25, and the current market value of the common stock is $23. Interest rates fall significantly, increasing the bond's price to 110; the stock market responds and the stock's price appreciates to $27 a share. Which of the following is the best option? A. Do not convert the bonds at this time; B. Convert on a plus tick; C. Convert and sell the stock at a profit; D. Convert and sell the stock short exempt;

Answer: A. The bond's value is $1,100; the stock is worth $1,080 [1,000 par divided by $25 conversion price = 40 shares; 40 shares x 27$= 1,080]. Chapter 2.

Which of the following strategies is considered most risky in a strong bull market? A. Buying calls B. Writing naked calls C. Writing naked puts D. Writing either naked calls or puts

Answer: B Writing naked calls gives unlimited risk, and writing naked puts results in the puts expiring if the market rises. In the latter case, the write profits by the premium received.

An ADR represents: A. A US Security in a foreign market B. A foreign security in a domestic market C. A US security in both a domestic and a foreign market D. A foreign security in both a domestic and a foreign market;

Answer: B. ADR stands for American depositary receipts. ADRs are receipts issue by the US banks,. They represent ownership of a foreign security and a trade in the US securities market.

An offering of securities in compliance with Rule 144a is sold primarily to A. American individual investors; B. Qualified institutional buyers; C. Foreign individual investors; D. All of the above.

Answer: B. Rule 144a allows securities to be sold to institutional buyers ~qualified institutional buyers, without having to meet the holding period or volume requirements of Rule 144.

A client has a cash account with stock valued at $460,000 and $40,000 in cash. The same client has a joint account with a spouse that has a market value of $100,000 and $300,000 IN CASH . SIPC coverage is A. $460,000 for the cash account and $300,000 for the joint account; B. $500,000 for the cash account and $350,000 for the joint account; C. $500,000 for the cash account and $250,000 for the joint account; D. A total of $1 million for both accounts.

Answer: B. SIPC coverage is $500,000 per separate customer account, with cash not to exceed $250,000. Thus, in the single-name account, SIPC provides full coverage, whereas in the joint account, SIPC covers the full $100,000 value of the securities but only $250,000 of the $300,000 in cash for total coverage of $350,000. The remaining $50,000 in uncovered cash becomes a general debt of the bankrupt broker/dealer.

Stock market indexes such as the SP 500 and DJIA are declining daily, but the number of declining stocks relative to advancing stocks is falling. A technical analyst would conclude that the market is? a. overbought; b. oversold; c. becoming volatile; d. unstable;

Answer: B. The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. it looks like the advance/decline line is moving in a direction away from decliners. A techinical analyst would conclude that the market is oversold and is approaching a bottom. chapter 14

ABC Common Stock is currently selling for $150 per share with a quarterly dividend of $1.50. The current yield for ABC common stock is a. 1% b.4% c.12.5% d.25%

Answer: B. to calculate current yield, the quarterly dividend must be annualized (1.50 times 4 = $6. $6 divided by $150 = 4%.

If an insured municipal bond defaults, the insurance company must pay A. Interest only B. Principal only C. Both a and b D. Neither a and b

Answer: C

In which of the following situations must a broker/dealer registered with the SEC under the Act of 1934 also be registered as an investment adviser under the Investment Advisers Act of 1940? A. It's registered representatives provide investment advice as part of its service. B. It's publications make purchase and sale recommendations without charge. C. It provides a financial planning service for a separate fee. D. No additional registration requirement applies.

Answer: C A broker/dealer who receives special compensation for providing investment advice ~ separate from any commissions, markups or markdown, must register as an investment adviser.

A company has filed a registration statement for an initial public offering of its common stock with the SEC. As a registered representative, you can: I. Send out a research report on the company to your customers; Ii. Take indications of interest from your customers; Iii. Send a preliminary prospectus to each of your customers; Iv. Take orders for the stock from customers in cash accounts only. A. I and II B. I and III C. II and III D. I, II, III and IV.

Answer: C New issues can be sold only by prospectus, and indications of interest can be taken when the issue is in registration. During the registration period, only the preliminary prospectus may be sent to clients. Sales literature, such as research reports, may not be distributed nor may orders be taken while the IPO is in registration.

Holders of both XYZ preferred stock and common shares are paid an annual dividend of $5 per share and then share equally in further dividends up to $1 per shares in any one year. In these circumstances, the preferred stock is know as A. Cumulative B. Adjustable C. Participating D. Convertible

Answer: C Participating preferred stock allows for an increase in the stated dividend when the common dividend is increased. Cumulative preferred requires that dividends in arrears be paid before the current dividend can be paid. Adjustable refers to an adjustable dividend rate. Convertible preferred can be converted into the issuer's common shares.

Shareholder approval is required for all of the following corporate events except A. Stock splits B. The acceptance of a tender offer C. Stock dividend D. The issuance of convertible bonds

Answer: C Shareholders approval is not required for the payment of dividends. shareholders approval is normally required for action that increase or potentially increase the number of shares outstanding, such a stock splits and the issuance of convertible bonds. A corporations acceptance of a tender offer requires shareholder approval.

An investors wants to purchase TCB Stock (currently trading at 38) and he expects the price of the TCB stock to decline in the short term before rising. If he wants to purchase the stock below its current 'market value and generate additional income, he should: A. Write a call at 35; B. Buy a put and exercise the option; C. Write a put at 35; D. Buy a 40 call and exercise the option;

Answer: C. If the investor writes a put, he collects a premium. If the stock price rises, the put expires worthless and the investor keeps the premium. However, if the stock price declines, as the customer anticipates, the put will be exercised, forcing the customer to buy stock at 35. His effective cost of the stock is the breakeven point, which is strike price minus premium.

A customer sells an FLB Mar 35 call. To establish a straddle, he would A. Sell an FLB Mar 40 call B. Buy an FLB Mar 35 put C. Sell an FLB Mar 35 put D. Buy an FLB Mar 40 call

Answer: C. Straddles involve options of different types, but both options must be long or both must be short. They must have the same expiration date and strike price.

A Japanese exporters wants to hedge a recent sale of stereo equipment to a US buyer. The exporter will be paid in US dollars upon delivery of the goods. The best hedge would be to? A. Sell Japanese yen calls B. Sell Japanese yen puts C. Buy Japanese Yen calls D. Buy Japanese Yen puts.

Answer: C. The Japanese exporters will be paid in US dollars upon delivery of the equipment. He would be adversely affected if the dollar dropped in value in relation to the yen. therefore, to protect his position in the dollar from galling agains the yen, he should buy calls on his own currency, the yen. Then, if the yen appreciates, his loss on the dollar will be offset by his gain ont eh calls. Remember, exporters buy puts on the foreign currency to hedge. But there are no options on the US dollar, so the best strategy is to buy calls on the home currency.

Which of the following persons require state registration? I. In-state salesperson; Ii. In-state broker/dealer; III. Out-of-state salesperson doing business i that state; IV. Out-of-state broker/dealer doing business in that state; A. I and II B. II and IV C. III and IV D. I, II, III and IV

Answer: D Any broker/dealer or salesperson doing business in the state must be registered in that state. Chapter 16

If ABC Corp. has a 6% participating preferred, the 6% represents the: A. Dividend payment B. Maximum dividend payment C. Maximum dividend, but not the minimum D. Minimum dividend, but not the maximum

Answer: D If ABC Corp has a 6% participating preferred the 6% represent the minimum expected dividend payment. Although this dividend is not guaranteed, no dividends can be paid on common if any of the preferred is unpaid. The key to participating preferred is that it also shares in the common dividend to which, theoretically there is not maximum.

A final prospectus must include: I. The effective date of the registration; Ii. Where the underwrites intends to stabilize the issue; Iii. A statement indicating that the SEC has not approve the issue; IV. Disclosure of material information concerning the issuer's financial condition; A. I and II B. I and Iv C. II and III D. I, II, III and IV.

Answer: D If the underwriter intends to engage in activities designed to stabilize the security's market price, disclosure in the prospectus is required. The SEC disclaimer must appear on every prospectus and state that the SEC has neither approved nor disapprove the issue. The effective date must be printed on the final prospectus. It's purpose is full disclosure about the issuer and security being issued.

If a customer writes a 1 ABC April 60 put at 5 when ABC is trading at 58, which of the following statements are True? I. The time value of the option is 2 points; Ii. The time value of the option is 3 points; Iii. Breakeven is 65; Iv. Breakeven is 55; A. I and III; B. I and IV; C. II and III; D. II and IV;

Answer: D Puts (long or short) are in the money if the market price is below the strike price. In this case, the put is in the money by 2 points. Because the total premium is 5 point, the time value is 3 points. Remember, option premium consist of two components: intrinsic value and time value. Once the in the money amount is determined, it is easy to back into time value. Breakeven for puts (long or short) is strike price minus premium.

An affiliate holding restricted stock wishes to sell under Rule 144. The shares have been held fully paid for one year. The issuer has outstanding 2.4 million shares. Form 144 is filed on Monday April 10, and the weekly trading volume for the stock is shown below April 7 traded 23,000; March 31 traded 25,000; March 24th Traded 26,000; March 17 traded 24,000 and March 10 traded 22,000 The maximum number of share the customer can sell with this filing is A. 23,000 B. 24,000 C. 24,250 D. 24,500

Answer: D Under Rule 144, having held the fully paid restricted share for at least 6 months, the affiliate can begin selling subject to volume restrictions of Rule 144. The affiliate can sell the greater of 1% of the total shares outstanding or the weekly average of the prior 4 weeks' trading volume. In this case, 1% of the total shares outstanding = 24,000. [1% x 2.4 million] or the weekly average of the 4 weeks prior 24,500 [23,000+25,000+26,000+24,000 dividend by 4].

Which of the following would most likely be found in a money market funds portfolio? I. T-Bills; II. T-Bonds witgh less than 1 year to maturity; III. Negotiable CDs; IV. Common Stock A. I and ii; B. I, II, and III; C. III and IV; D. I, II, III and IV;

Answer: Money market instrument s are short-term, high quality debt securities. This includes treasuries with less than 1 year to maturity and negotiable CDs. Become common stock is equity, it is not found in money market funds. Negotiable CDs (over 100,000) are considered money market securities. Treasuries due to mature in less than a year are money market securities, but common stock is not. ~Chapter 2.

Stock holders must approve a. a declaration of a cash divided; b. a 3:1 stock split; c. a repurchase of 100,000 shares for the security; d. a declaration of a 15% stock dividend;

Answer: b Shareholder approval is required to change the state value of stock, which occurs with a stock split. Decisions regarding payment of dividends or repurchase of stock are made by the Board since these are considered operational decisions.

The holder of the yield based call option will profit if I. Rates rise Ii. Rates fall Iii. Debt prices rise Iv. Debt prices fall A. I and III B. I and IV C. II and III D. II and IV

B. Holders of yield-based call options profit if rates rise. If rates rise, price of debt security fall.

Which of the following strategies is considered most risky in a volatile market? A. Long Straddle B. Short Straddle C. Debit Spread D. Credit Spread

B. Short Straddle. To establish a short straddle, the investor sells a call and sells a put. The short call exposes the investor to unlimited loss potential.

In a municipal underwriting, the scale is. A. The first thing determined by the underwriting syndicate in calculating its bid; B. The yield at which the syndicate plans to reoffer the bonds to the public; C. Both A and B D. Neither A nor B.

C. the scale, or reoffering scale is the yields to maturity at which the syndicate will reoffer the bonds to the public. Syndicate participants consider the market for bons of similar quality in decking at what yield to market the issue on which they are bidding. Chapter 3

Investor who purchase callable bonds face what types of investment risks?

Call risk and Reinvestment risk.

Under what economic circumstances do issuers call bonds?

Calls occur when the interest rates fall.