Series 7 Part 2
In trading municipal securities, the terms "all or none" and "multiples of" most commonly refer to:
"All or None" or "multiples of" are terms used by dealers offering bonds for sale.
Mr. Smith has been bearish about ABC common stock and decides to sell short 1,000 shares @40 in his margin account. The stock later declines to $35. What is Mr. Smith's equity in his margin account after the decline in the market value of the stock?
$40,000 Proceeds of the short sale +20,000 Reg T Deposit $60,000 Credit Balance -35,000 Market value of short stock $25,000 Equity in the Short Account
A dealer concession of 1/2 on a municipal bond indicates that the dealer reallowance is:
$5 per $1,000 of par value (ANSWER) A concession of 1/2, means 1/2 of point. 1 point = $10, therefore 1/2 point = $5.
ETNs - Exchange Traded Notes represent which of the following?
****Debt of the bank which issued the ETN ETNs are debt instruments issued by a bank that promises to repay the principal amount less investor fees therefore the units of an ETN would represent debt of the issuing bank. ETNs are linked to a specific index but do not represent equity in the index, they simply participate in the performance of the underlying index
A decline in which of the following would probably cause the Federal Reserve to increase the money supply?
- CPI - Gross National Product (GNP)
NASDAQ Level 3 quotations are
- Level 3 is used only by market makers - firm quotes for at least 100 shares of the stock.
Muni Bond Attorney (Bond Counsel)
- establish that issue qualifies for tax exempt interest income - determine that bonds are legally issued in accordance with statutes of muni issuer - prepare/examine original draft and proceedings of issuer before they are formally adopted - to examine bonds to see they are properly executed - DOES NOT pay for printing of the bonds
Negotiated Underwriting (Revenue Bonds)
- muni hires a managing underwriter to handle distribution of a new issue (Revenue Bonds) - use underwriting agreement (not bid form)
Competitive Underwriting (GO Bonds)
- muni requests sealed bids from underwriters or underwriting syndicates. - Bid Form (document included with notice of sale that is sent to bidders) - awards bonds to group which offers lowest net interest costs. - official notice of sale (used with competitive)
Difference between amount invested and Surrender?
- taxed as ordinary income The difference between the amount invested and the cash surrender value is considered interest and is taxed as ordinary income for federal income tax purposes.
Trends in Municipal Markets can be determined by:
- the 30 day visible supply - the bond buyer index - the Blue list
over-the-counter market
-The number of securities traded in this market is greater than on all organized exchanges in the United States combined. -Stocks of most insurance companies and banks are traded in this market. -Prices of securities in this market are determined by buyers and sellers negotiating with a broker/dealer. -It makes it easier to trade publicly held securities not traded on an organized exchange.
Broker's Broker
1. trade for and with other broker dealers and banks 2. provide confidentiality/anonymity 3. provide wider exposure for the bonds. They Do NOT: a. maintain their own inventory/trade their own positions b. deal with the public c. bid on new issues or act as underwriters d. charge commissions - but may charge fees e. require sellers to sell all bonds for which it solicits bids
The Dow Jones COMPOSITE Average is composed of
65 common stocks from the industrial, transportation, and utility averages.
Under SEC Rules, which of the following sell orders must be marked "short"?
A customer who is short against the box sells part of the long position. If a customer is short against the box and wishes to sell all or part of the long position, it MUST be done as a short sale.
Loan Consent Agreement
A Loan Consent Agreement provides the firm with the authority to lend the customer's margined securities to other firms and customers for purposes such as short selling.
Which one of the following types of investment companies pays out 90% of its net investment income to shareholders pursuant to Subchapter M of the IRS Code?
A Regulated Investment Company
Balance of Deficit would improve:
A U.S. balance of deficit would be improved by money coming into the U.S., therefore since choice "c" shows money going out of the country, that action would increase the deficit.
A basis point equals:
A basis point equals 1/100 of 1% (i.e., .01%). Thus, 100 basis points equal 1%. It is the smallest measure in quoting yields on bills, notes, and bonds. For example, if a bond's yield increased from 7% to 7.40%, it has 40 basis points.
Sell Out
A selling climax normally occurs at the end of a bear market. It is a sharp drop in stock prices accompanied by increasing volume after a lengthy market decline.
municipal bonds the term "concession
ALL APPLY [A] The amount of syndicate profit a dealer may be allowed if he sells bonds for another account. [B] The amount of take-down allowed to a dealer not an account member. [C] A discount from the public offering price.
Which of the following are types of underwriting contracts?
ALL: Firm Best Efforts All or None Standby
An investment banker can engage in all of the following activities EXCEPT:
Accept time and demand deposits (only commercial banks)
IOC (Immediate or Cancel)
An IOC (Immediate or Cancel) order is good for one stock. It will result in the purchase of all shares available at or below the limit price up to the specified amount in the order that are immediately available, followed by the cancellation of the remainder of the order.
fidelity bond
An insurance bond that protects broker/dealers from losses due to theft or embezzlement by employees.
Municipal security issuers and market participants are subject to which of the following?
Anti-Fraud Provisions of the Securities and Exchange Act of 1934. Not subject to SEC
The bid and ask on mutual fund shares which charge a sales load represents which two of the following:
BID = NAV = Redemption Price ASK = NAV + Max Sales Load = Offering Price
"breakpoint selling"
Breakpoint selling is the practice of failing to tell prospective investors about breakpoints that would lower their sales charges. Investors may qualify for breakpoints by investing additional funds, signing a letter of intent or benefiting from rights of accumulation.
An increase in the Federal Reserve's Discount Rate would most likely lead to an increase in which of the following?
Broker Loan Rate Discount on Treasury Bills Availability of Bank Loans The discount rate is an interest rate and all interest rates tend to move in the same direction at the same time thus if the discount rate increased, the: Broker Loan rate would increase Yields on T-Bills would increase thus increasing the discount in price
reduced by the designated market maker on the ex-date for a cash dividend?
Buy Limit and Sell Stop orders are reduced by the amount of the dividend on the morning of the ex-date.
limit order.
Buy or selling at a specific price or better is a Limit Order.
Buy Stops
Buy stops are always entered above the current market price
What happens to the NAV per share (net asset value) of a mutual fund on an ex-dividend date?
On the morning of the ex-date, the market value of securities receiving a cash dividend will be reduced by the amount of the dividend being paid.
Activities of Open Market Operations of the Federal Reserve Board include:
The Federal Reserve Board's Open Market Operations' actions influence interest rates and the money supply.
Which of the following is a government entity that does NOT issue agency securities traded in the secondary market?
Federal Reserve Banks do not issue securities. U.S. Government securities are issued by the U.S. Treasury. The Federal Reserve cannot issue or carry its own debt.
Which of the following must appear on an order ticket which is sent to the floor of a stock exchange for execution?
Designation of the customer's account Type of order Time of entry
Characteristics of an ECN (Electronic Communications Network) include:
ECN's display and match buy and sell orders for execution away from an exchange or market-makers. ECN's are able to handle orders on both listed and OTC securities. Electronic Communication Networks (ECNs) are privately owned order execution systems that display, match, and execute orders on listed and OTC securities and do not maintain inventory in the securities.
term life insurance policies
Term life insurance is not a security and provides no cash values available at retirement. CANNOT invest in IRA (An IRA is intended to provide retirement benefits)
firm for one hour with a ten-minute recall to a second dealer
Firm for one hour with a ten minute recall means the second dealer has the bonds for one hour, but if the dealer comes back with a "fill or kill," the second dealer has only ten minutes to purchase the bonds at the price established.
Bankers Acceptances are normally traded
OTC
The best source for current market level information on municipal securities would be
The Blue List
The authority for the tax exemption of the discount on an "original issue discount" municipal bond is:
IRS
Full employment and robust consumer spending usually results in:
Inflation
S&P Bond Ratings
Investment Grade - AAA, AA, A, BBB Speculative - BB, B, CCC, CC, etc.
Moody's Bond Ratings
Investment Grade - Aaa, Aa, A, Baa Speculative - Ba, B, Caa, Ca, C
A _______ is an order which is used to obtain a specific price of execution or better
Limit Order
Which of the following is true for an investor with a short margin account?
Market value of securities decrease - Equity increases Remember that when selling short, you want the market value to DECREASE. This causes the equity in the account to INCREASE.
On municipal bonds traded regular way between dealers, the settlement is normally one:
Municipal bonds normally settle in 1 business days in clearing house funds.
The placement ratio compiled by the Bond Buyer for municipal securities is calculated by comparing:
New issue bonds sold as a percentage of total new issue volume for the week
Not Held Orders
Not held orders are handled by floor brokers and not by designated market makers.
secondary market for municipal securities
Retail. Broker's broker. Institutional. Interdealer. All of these terms are associated with a secondary market for municipal securities.
Which of the following would lead to disintermediation?
Savings bank rates are below money market rates. The FRB has adopted a tight money policy. Disintermediation refers to large scale withdrawals of deposits from low yielding bank accounts by depositors and the investment of those funds into higher yielding alternative investments. Savings bank rates below money market rates would lead to the transfer of funds because of the extra yield available in the money market funds. If the Fed adopts a tight money policy, interest rates would rise. Money market funds and new bonds would pay higher yields. Passbook savings accounts are usually the last to be credited with increased interest rates.
Secondary Market Joint Accounts
Secondary market joint accounts may not participate in the distribution of primary offerings of municipal securities.
The yield curve for bonds during a period of easy credit will
Slope upward from the shortest maturity to the longest
best describes an order to buy or sell after a stock trades at or through a specific price?
Stop Order
Stopping Stock
Stopping stock is a favor that a designated market maker can do for a floor broker. The floor broker knows they have the stock sold if they are "stopped" but they can still try to get a better price in the market place.
M1 Component (Money Supply)
The M1 component of the money supply consists of currency in circulation, commercial bank demand deposits, NOW and ATS accounts, credit union share drafts, mutual savings bank demand deposits, and non-bank traveler's checks. It does NOT include CDs.
Where would an investor look to see if a municipal bond had been called?
The Standard & Poor's Repository
During the accumulation phase of a variable annuity, which is true?
The account is tax deferred.
INCREASE the net asset value of mutual fund shares?
The net asset value of mutual fund shares is calculated by adding up the value of all the cash and securities in the portfolio and subtracting all liabilities, then dividing the result by the number of shares outstanding. The receipt of interest income on portfolio securities would increase the NAV. The payout of realized capital gains would decrease the NAV.
The Blue List Total is:
The par value of municipal securities offered for sale in the blue list
Stock index options are used for which of the following purposes?
To hedge a stock portfolio from market risk To be sure that the stock portfolio will not decline in value To profit in a rising market To profit in a declining market
Which of the following provides the greatest protection of purchasing power?
Variable Annuity would provide the greatest protection of purchasing power because its value is variable whereas the value of all other choices is a fixed amount.
The term "yield" as applied to municipals means:
When discussing municipals remember yield means yield to maturity, which is also called BASIS.
immediate effect on the earnings per share on the common stock?
Whenever a company goes from an after tax deduction to a pre-tax deduction on there income statement there would be an immediate increase in the earnings of the company.
"out firm" quote from another dealer on a block of municipal bonds. This means that:
Your firm can sell these bonds before buying them. Your firm has been given a firm price on a block of municipal bonds. Because you know the bonds are available at a specific price, you can sell them to your clients before you buy them from the other dealer.
When an issue is "Blue-Skyed", it means that
a new issue is qualified for sale within the state where it will be offered for sale.
Municipal Securities 'Dealer' or 'Trader'
a. controls their inventory 'positions' b. provides appraisals and c. provides quotations
The custodian of a mutual fund generally can do which of the following functions?
act as transfer agent act as dividend disbursing agent receive investor payments act as registrar
Bond Buyers Revenue Bond Index
average yield of 25 specific revenue bonds, each with 30 year maturities.
Regulation T requires that an option purchased in a margin account be paid for
by the fifth business day following trade date.
The Blue List
daily listing of municipal bonds for sale by dealers who had positions/inventories in various muni issues. - are primarily secondary market issues rather than new issues - it does NOT contain the bond's quality rating.
The Bond Buyer
daily newspaper giving news/happening in the muni market. - primarily provides info about new issues and new issue market for muni bonds.
Official Statement
disclosure docuement - can be provided by issuer (not required) - contains most details financial info on new issue of muni bonds -is exempt from prospectus registration req of '33 Act - issuer exempt from reporting req's of '34 Act It would include: a. purpose of the bond issue b. redemption provisions c. description of the new issue Would NOT include taxable equivalent yields
Wildcatting
drill for oil and gas in areas WITHOUT proven reserves.
Western Agreement
each member is responsible for their own bonds and not for any other members unsold bonds. - divided account (not shared responsibility)
Eastern Agreement
each member of the syndicate is severally/jointly responsible for the underwriting according to their fixed participation percentage - undivided Account ( undivided bond allocation, financial responsibility, financial liability)
MIG Ratings (Moody's Investment Grade)
evaluate level of quality of municipal notes. - MIG1 rating on a note is comparable to AAA rating
When a market maker is asked for a quote, prices quoted are assumed to be:
firm for 100 shares.
Under Federal Tax Law, an investor would have to pay the alternative minimum tax
if the alternative minimum tax due exceeded the investor's regular income tax liability.
Bond Buyer Index
index made up of 20 GO bonds each with 20 year maturities - published daily by the Bond Buyer - good indicator to buyers of the yield they would receive
Municipal bonds have historically been purchased by which of the following investors?
individuals Commercial banks Insurance companies
BondTrac and Bond Express
inventory and listing of muni bonds available in the secondary market.
Business Development Company (BDC)
is a type of registered closed end investment company that provides debt capital to small and mid-sized companies that cannot otherwise easily raise capital. Their shares are publicly traded on the NYSE and NASDAQ exchanges. The target market for BDC investors are retail clients with high risk tolerance and that BDCs pay relatively high dividend yields. (Like REITs, they are required to distribute at least 90% of their income as dividends.)
municipal bond joint account
is an account between two or more firms where the firms "take down" a group of bonds in the Secondary Market. Under such circumstances, quotes must be the same for all markets and cannot vary from market to market.
When a bond is trading at a discount, the current yield on the bond is:
less than its yield to maturity On a discounted bond, current yield is always going to be less than yield to maturity (YTM) because YTM includes the value of the future cash flows from the interest payments and principal, while current yield only focuses on the current year's coupon payment and the current market price.
Which of the following would best describe the term "Mark to the Market"? The difference between the
market value of a security and the contract value of a security. "Mark to the Market" is adjusting the value of securities in customer accounts to reflect the current market value.
Placement Ratio
measure percentage of new issues that have been sold each week to those available
30 Day Visible Supply
measure total number of new issues coming to market in next 30 days. - issues of muni notes are NOT included
The FINRA Rule on Best Execution (Rule 2320)
must be followed even when the order is for a foreign security not traded in the U.S. The other choices in this question are official interpretations of the rule.
S&P Repository
nationally recognized muni securities info center which collects data on muni bonds such as call notices, official statements, and financial statements.
Bloomberg
online platform where detailed lists of securities, including NEW MUNI bonds coming to market can be found
In a blind pool offering, the investors do not know:
the identity of the assets.
Which of the following would not be required for good delivery of a municipal bearer bond:
signature of holder is not required
Legal Opinion
statement from a reputable independent law firm hired by the issuer.
An investor incurs a loss on the sale of municipal bonds. For tax purposes, the investor may use this loss to offset a gain on:
stocks real estate municipal bonds government bonds Losses on the sale of municipal bonds can be used to offset gains on all of the options listed.
If a general partner in a limited partnership also registers limited partnership interests for sale in a state(s) as securities, he may be called a(n)
syndicator
Which of the following influence the premiums of a listed option?
the time remaining until the expiration of the contract. the market price of the underlying stock. the volatility of the underlying stock. interest rates.
For tax purposes, ownership of most securities is determined from the:
trade date
