Series 7 QBank Review Set 15
In an existing margin account with special memorandum account (SMA) of $2,000, if a customer wishes to buy 300 shares of ABC at $20 per share, how much must the customer deposit? A) $1,000 B) $2,000 C) $3,000 D) $2,500
A) $1,000 The customer wishes to purchase $6,000 worth of stock, and the Regulation T requirement is $3,000. There are two ways to solve this question; pick the one you find easiest to understand. SMA represents money that may be borrowed to purchase additional securities. With a Regulation T requirement of $3,000 (50% of the new purchase) and $2,000 already in SMA, an additional $1,000 deposit is required to meet that $3,000 call. Alternatively, the SMA has buying power of 2:1 when Regulation T is 50%, so $2,000 of SMA will purchase $4,000 of stock. Of the remaining $2,000 balance, the broker will lend 50%, so the customer must deposit $1,000.
A customer's long margin account contains the following securities: 100 shares of DEF, CMV $40 per share 200 shares of AMF, CMV $50 per share 100 shares of KLP, CMV $80 per share The current debit balance in the account is $10,800. If each of the securities held in the account were to appreciate by $5 per share, the equity in the account would be A) $13,200. B) $8,200. C) $11,200. D) $12,700.
A) $13,200. Before the $5 increase, the total long market value in the account is $22,000 and, therefore, the equity is $11,200 ($22,000 - $10,800 = $11,200). If each of the 400 shares in the account increases by $5, which represents an increase of $2,000 in long market value, the equity will increase by the same amount. After the increase, the long market value is $24,000 and the equity is $13,200 ($24,000 - $10,800 = $13,200).
Assume that a customer has an established margin account with no special memorandum account, and the account is restricted. With the Regulation T requirement at 50%, the purchase of $10,000 worth of stock would generate a Regulation T call of A) $5,000. B) $20,000. C) $2,500. D) $25,000.
A) $5,000. The customer must deposit the full margin requirement of the purchase (50% of $10,000), whether the account is restricted or not; therefore, the call would be for $5,000.
A customer has a short margin account. In it, there is one stock currently trading at $14 per share. The minimum maintenance requirement for this account is A) $5.00 per share. B) 100% of the short market value. C) $2.50 per share. D) 30% of the short market value.
A) $5.00 per share. When it comes to short margin, for stock trading at $5 per share and above, the minimum requirement is the greater of $5 per share or 30% of the short market value. $5 is more than 30% of $14 ($4.20).
If at expiration for XYZ options, XYZ stock closes at 40.15, which of the following open option positions will automatically be exercised by the Options Clearing Corporation (OCC)? A) A customer long 1 XYZ 40 call B) A customer long 1 XYZ 40 put C) A member firm long 1 XYZ 40 put D) A member firm long 1 XYZ 45 call
A) A customer long 1 XYZ 40 call At expiration, the OCC will automatically exercise open option positions if those positions are in the money by 0.01 or more. In this case, the customer's long 40 call position is in the money by 0.15. The member firm 45 call and the 40 puts are out of the money.
There are many types of options spreads. Just as options can be bullish or bearish, there are bull spreads and bear spreads. Which of the following is an example of a bear spread? A) Long ABC Dec 150 call, short ABC Dec 140 call B) Long GHI Oct 270 call, short GHI Oct 290 call C) Long DEF Nov 130 put, short DEF Nov 140 put D) Long JKL Sep 50 call, short JKL Sep 50 put
A) Long ABC Dec 150 call, short ABC Dec 140 call The easiest way to detect a bear spread is to remember that bears buy high and sell low (just the opposite of bulls who buy low and sell high). Look at the strike prices. When the strike price of the long position is higher than the strike price of the short position, it is bearish. The DEF and GHI are bull spreads because the strike price of the long is lower than the strike price of the short. The JKL is a straddle, not a spread.
Which of the following types of business organizations does not protect owners' personal assets from losses incurred by the business? A) Sole proprietorship B) LLC C) S corporation D) C corporation
A) Sole proprietorship Corporations, whether organized as C or S corporations, and LLCs (limited liability companies), afford their owners limited liability. That means they have protection of their personal assets from losses incurred by the businesses. Sole proprietorships subject their owners to personal liability for losses of the business.
The KPL Corporation is considering having its stock listed on the New York Stock Exchange (NYSE). Who will make the final decision as to whether it will be listed? A) The NYSE B) FINRA C) The SEC D) The Board of Directors of KPL
A) The NYSE The NYSE has certain requirements that a company must meet before its stock can be considered for listing. Because the NYSE sets the requirements, it must make the final decision.
Which of the following is limited in the case of a limited tax municipal bond? A) The type of tax that can be used to service the debt B) The number of bonds issued C) The number of buyers D) The number of taxpayers
A) The type of tax that can be used to service the debt A general obligation (GO) bond may be backed by a specific tax. For example, a limited tax GO may be serviced only from sales tax revenue, not income tax revenue. As the source of debt service is limited (it is not backed by the full taxing authority of the issuer), these bonds are sold with higher yields than conventional GOs.
A registered representative is trying to determine the total capital gains made by one of her customers over the last three years. Which of the following would not be helpful in the representative's research effort? A) W-2 forms B) Brokerage account reports C) Tax returns D) An interview with the customer
A) W-2 forms W-2 forms only give an account of the wages the customer has received but say nothing about any capital gains she has made.
Which of the following would be considered a bullish strategy? A) Writing a put B) Writing a call C) A debit put spread D) A credit call spread
A) Writing a put Those who write put options benefit when the price of the underlying asset increases (bullish). It is just the opposite for those who write a call. Spreads are bearish when the low strike price is sold and the high strike price is bought. That results in a debit when it is a put spread and a credit when it is a call spread. Credit put spreads and debit call spreads are bullish because it is the low strike that is purchased and the high strike that is sold.
A customer has sold short 100 GM at 70. GM is selling for 81. The customer had previously placed a good-til canceled buy stop order at 83. GM announces a stock split and an increase in the dividend. The stock starts to move up and the customer decides to cover the short sale at a loss and instructs his broker to buy 100 shares of GM at the market. The registered representative will A) buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop good til canceled. B) sell 100 GM at 83. C) buy 100 GM at the market. D) sell 100 GM at the market.
A) buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop good til canceled. It is incumbent upon the registered representative to cancel the old order.
Your client informs you that a signed discretionary account form is in the mail. Before receiving the form, and unable to contact the client, you notice that one of her stocks is dropping sharply on adverse news. You A) cannot enter a discretionary order. B) can enter a discretionary order with written permission of a principal of the broker-dealer. C) can enter a discretionary order with instructions that the order is not held. D) can enter a discretionary order with written documentation of the situation.
A) cannot enter a discretionary order. A discretionary order cannot be entered until the signed discretionary account form has been received.
Earlier in the day, you entered a customer order to buy 300 XYZ at 26.45 good til canceled (GTC). By late afternoon, you notice that XYZ is trading at your customer's limit price. At the close of trading, you contact the order desk and get a Nothing Done report because A) of stock ahead. B) the order was canceled at the close of trading. C) of the small size of the order. D) of the normal time delay between execution and execution reports.
A) of stock ahead. All limit orders stand in time priority.
Without an exemption, member firms are required to provide purchasers of penny stocks each of the following except A) quarterly statements. B) current inside bid and ask quotation. C) compensation to be earned by both the member firm and the associated person. D) a risk disclosure document.
A) quarterly statements. If an exemption is not available, purchasers of penny stocks must receive the risk disclosure document, current inside bid and ask quotation, information on the compensation to be received by both the representative and the member in connection with the transaction, and monthly, not quarterly, statements.
Joe Johnson is a founding partner of Ground Break Realty. The company was impacted negatively by rising interest rates and falling property values. There was concern that the firm needed an injection of liquidity to prevent failure, and Johnson lent the company funds to forestall bankruptcy. If the company goes bankrupt, Johnson will A) receive his loaned money before any of the equity investors in the company. B) receive his money after the secured creditors but before the holders of standard debentures. C) receive his loaned money first over any other investor because he is a founder of the company. D) not receive any money back because he is an owner of the company, and the loaned money is considered equity (the money represents an equity interest in the company).
A) receive his loaned money before any of the equity investors in the company. It is not uncommon for founders of companies to lend money to the business to keep the company going. However, this is typically subordinated debt. Subordinated debt has priority over equity investors but goes behind all other creditors including unsecured debt such as debentures.
A registered representative is discussing investment objectives with one of his clients. The client wants her young children to eventually have access to higher education; she has identified government bonds as the best investment to ensure that they will. Such bonds, she feels, are the only instrument safe enough to protect the portfolio from capital loss. The representative explains that A) the client's goal requires growth with some risk. B) utility stocks may provide a higher level of income. C) government bonds are appropriate, but they must be long-term. D) short-term bonds are the safest, so the portfolio should be confined to those.
A) the client's goal requires growth with some risk. The client is confusing goals with objectives. Her goal is to provide funds in the future for higher education. At least for this part of her portfolio, her investment objective must be growth, for which she will have to accept some risk.
There are many different types of asset-backed securities, but the common theme uniting all of them is A) they are supported by a contractual obligation to pay. B) they tend to be exchange traded. C) they are a form of equity financing. D) they are usually backed by a single source of payment.
A) they are supported by a contractual obligation to pay. Asset-backed securities (ABS) are structured debt financing backed by a contractual agreement to pay. They are "first cousins" to MBS (mortgage-backed securities), with the primary difference being that the collateral is not real estate. These securities trade in the OTC market. One of the benefits of the structured package is that the investor is not relying on payments from a single borrower; rather, there is a pool of loans, whether they be auto, credit card, or others.
If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A) $90,000 B) $0 C) $100,000 D) $50,000
B) $0 Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.
If a customer buys 500 shares of ABC at 48 and writes 5 ABC 50 calls at 2, what is the maximum loss? A) $1,000 B) $23,000 C) Unlimited D) $4,600
B) $23,000 The investor pays $48 per share for the stock and receives $2 for selling the calls. That means the investor's out-of-pocket cost is $46 per share ($48 minus $2). The worst that can happen is the stock becomes worthless. In that case, the option will expire unexercised (who wants to buy stock at 50 when it is worth $0?). With a maximum potential loss of $46 per share and owning 500 shares, the total loss could be as much as $23,000 ($46 times 500).
When purchasing a new issue, investors generally receive a disclosure document. This document contains the essential information (material facts) necessary to make an investment decision. An investor purchasing which of the following new issues would not receive a prospectus? A) A mutual fund B) A municipal revenue bond C) A unit investment trust D) A closed-end investment company
B) A municipal revenue bond The disclosure document for a municipal bond, revenue, or general obligation is the official statement. The difference in terminology—prospectus or official statement—is frequently tested.
Which of the following types of retirement plans would be most beneficial to a young employee of a corporation? A) Profit-sharing plan B) Defined contribution pension plan C) Keogh plan D) Defined benefit pension plan
B) Defined contribution pension plan The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years in the workforce, so the investments made with the defined contributions will have a maximum amount of time to grow.
There is a type of municipal revenue bond known as a special tax bond. Which of the following might be used as backing for a special tax bond? A) Ad valorem tax B) Gasoline tax C) Property tax D) Income tax
B) Gasoline tax Common taxes backing special taxes include fuel (gasoline) taxes, sales tax, business license taxes, and tobacco taxes. Ad valorem are property taxes, and those are used to back GO bonds. Income taxes are generally used to back state-issued GO bonds.
(con't) 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? A) Maximum gain is $300; maximum loss is $5,700; breakeven point is $63. B) Maximum gain is $300; maximum loss is $5,700; breakeven point is $57. C) Maximum gain is $300, maximum loss is unlimited; breakeven point is $57. D) Maximum gain is unlimited; maximum loss is $5,700; breakeven point is $57.
B) Maximum gain is $300; maximum loss is $5,700; breakeven point is $57. 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.
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? A) Maximum gain is $300; maximum loss is $5,700; breakeven point is $63. B) Maximum gain is $300; maximum loss is $5,700; breakeven point is $57. C) Maximum gain is $300, maximum loss is unlimited; breakeven point is $57. D) Maximum gain is unlimited; maximum loss is $5,700; breakeven point is $57.
B) Maximum gain is $300; maximum loss is $5,700; breakeven point is $57. 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.
The name of the FINRA system that tracks both NYSE and NASDAQ transactions is A) TRACE (Trade Reporting and Compliance Engine). B) TRF (Trade Reporting Facilities). C) DMM (Designated Market Maker). D) ECNs (Electronic Communications Networks).
B) TRF (Trade Reporting Facilities). The TRF is the only FINRA system that tracks transactions on the NYSE and Nasdaq, including OTC (over-the-counter) transactions. ECNs are electronic trading systems that automatically match buy and sell orders at specified prices; they are not a tracking system. TRACE tracks corporate and government agency bond transaction in the OTC market. DMM's are the specialists who work at each of the trading posts on the NYSE. They are responsible for maintaining a liquid and orderly market for stocks.
A representative enters a customer's immediate-or-cancel (IOC) order to sell 1,000 shares at $12. If only 500 shares can be sold at $12, which of the following will occur? A) Because 500 shares can be sold, the balance of the order will remain as a sell limit order for 500 shares at $12. B) The 500 shares will be sold at $12; the remainder of the order will be canceled unexecuted. C) None of these. D) Because the entire order cannot be filled, the entire order will be canceled unexecuted.
B) The 500 shares will be sold at $12; the remainder of the order will be canceled unexecuted. An IOC order will take a partial fill. Time is the limiting factor in an IOC.
Parker has been a client of Enigma Mathematical Portfolio Modeling (EMPM), a FINRA member broker-dealer, for 10 years. Parker has decided that it is time to move the account to a new firm, Turing Technical Analytics (TTA). Which of the following statements accurately reflects the requirements when using the ACATS system? A) The transfer initiation form (TIF) is sent to ACATS by the carrying firm. B) The transfer initiation form (TIF) is sent to ACATS by the receiving firm. C) The transfer initiation form (TIF) is sent to the carrying firm by the receiving firm. D) The transfer initiation form (TIF) is sent to ACATS by the customer.
B) The transfer initiation form (TIF) is sent to ACATS by the receiving firm. When a customer wishes to transfer an account from one member firm to another, the customer's signature is required on the TIF. That TIF is then sent to ACATS by the receiving firm (the one who will be getting the new account—Turing Technical Analytics (TTA).
An investor, long 100 shares of XYZ at $23.50, writes 1 XYZ May 25 call at 2. At expiration, if XYZ is trading at $20, the investor has A) an unrealized loss of $50. B) an unrealized loss of $150. C) an unrealized gain of $50. D) an unrealized gain of $150.
B) an unrealized loss of $150. Breakeven is 21.50 (23.50 − 2). If the stock is trading at 20, the customer has an unrealized loss of $150.
A customer asks her registered representative to exercise discretion over her account. To do so, the representative must do each of the following except A) obtain written authorization from the customer. B) obtain approval from FINRA. C) obtain evidence of written acceptance of the account by a registered principal of the firm. D)have a principal initial each order promptly, which may be before or after execution.
B) obtain approval from FINRA. The requirements for a discretionary account include a written authorization from the customer, a written acceptance by a principal of the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation. No approval from FINRA is required.
The City of Concord has floated a new bond issue to expand the public library. Concord has arranged for these bonds to be insured. If Concord defaults on these bonds for any reason, the insurance company will A) immediately pay the bondholders the principal and the interest that has accrued thus far. B) pay the bondholders the principal and interest as scheduled. C) pay the city treasurer the principal so that the city has the funds to pay the principal and interest to the bondholders. D) demand additional premiums to maintain the coverage.
B) pay the bondholders the principal and interest as scheduled. Bond insurance is a feature offered by many municipal bonds. The effect of the bond insurance is that both interest and principal will be paid as scheduled, over time, through the life of the bond. Payments are made to the bondholders by the insurance company.
All of the following are excluded from the FINRA filing requirement for communications with the public except A) retail communications posted on an interactive forum online. B) retail communications posted online that require a login to access. C) correspondence. D) retail communications that only identify the member firm.
B) retail communications posted online that require a login to access. Retail communications, unless specifically exempted, must be filed with FINRA. There is no exemption for requiring a login to access. Correspondence does not need to be filed with FINRA nor does retail communications only identifying the member firm or posted on an online interactive forum.
Reasons to suggest that your customers name a beneficiary for their accounts would include all of the following except A) ensuring the property goes to the proper person. B) saving income taxes. C) the assets generally get into the hand of the heir(s) without delay. D) avoiding probate.
B) saving income taxes. While naming a beneficiary may save on estate taxes by using the marital deduction (not tested), passing property through death does not incur income taxes. With a named beneficiary, probate can be avoided and, of course, it limits the disputes on how the property is to be divided when there are multiple heirs. Another benefit is the relatively short time it takes for the assets to be transferred to the heir or heirs.
The Municipal Securities Rulemaking Board (MSRB) is authorized to adopt rules concerning all of the following except A) the form and content of price quotations. B) the information to be provided by municipal issuers. C) the sale of new issues to related portfolios. D) the regulation of municipal securities advertising.
B) the information to be provided by municipal issuers. The MSRB does not regulate issuers. Rather, it regulates the underwriting of municipal securities and subsequent secondary market trading. Disclosure requirements for issuers are mandated by the SEC.
If a customer purchases a new issue of stock from a syndicate member, the customer will pay the public offering price A) plus the spread. B) with no markup or commission. C) plus a markup. D) plus a commission.
B) with no markup or commission. New issues are sold at the public offering price without a commission or markup. In the secondary market, securities are traded on an agency basis (commission) or on a principal basis (markup or markdown).
A customer's restricted margin account shows the following: LMV $30,000 DB $16,000 SMA $0 If the customer sells $2,000 of securities, how much could be withdrawn from the account? A) $2,000 B) $15,000 C) $1,000 D) $0
C) $1,000 In this restricted account, half of the sales proceeds will be used to reduce the DB balance to $15,000 and half of the sales proceeds are released to the special memorandum account (SMA). Therefore, when $2,000 of stock is sold, $1,000 is credited to SMA. This is the amount that can be withdrawn from the account.
An investor has an established margin account with a long market value of $6,500 and a debit balance of $3,750, with Regulation T at 50%. A maintenance call would be triggered if the long market value decreased below A) $8,666.67. B) $4,875.00. C) $5,000.00. D) $2,812.50.
C) $5,000.00. To determine long market value at maintenance, divide the debit balance of $3,750 by 75% ($5,000).
Which of the following would be the least considered factor in determining if a particular type of options trading is suitable for a customer? A) Willingness to assume risk B) Understanding the strategy being employed C) Ability to meet margin calls D) Understanding maximum gain or loss potential
C) Ability to meet margin calls Remember that while most firms require that options trades be done in margin accounts, options purchases are not marginable. Therefore, of the choices listed, the ability to meet margin calls would be the least considered factor regarding suitability.
The phrase "not prime" would apply to a bond with a Moody's rating of A) Baa3. B) BBB. C) Ba1. D) BB.
C) Ba1. High-yield bonds, also known as not prime or junk, are those with ratings below investment grade. Investment grade is the top four ratings. Using specifically Moody's descriptions, ratings run from Aaa to Aa to A to Baa to Ba to B and then below. The first rating below the top four is Ba1. The 1 simply means that it's the highest in the Ba ranking, which is equivalent to a BB rating from Standard & Poor's (the question asks about Moody's).
(con't) An investor opens the following positions: Sell short 100 shares of FAB @72; buy 1 FAB Jun 70 call @5. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $300; maximum loss is unlimited; breakeven point is $77. B) Maximum gain is $300; maximum loss is $6,700; breakeven point is $67. C) Maximum gain is $6,700; maximum loss is $300; breakeven point is $67. D) Maximum gain is $6,700; maximum loss is $300; breakeven point is $77.
C) Maximum gain is $6,700; maximum loss is $300; breakeven point is $67. That means the maximum loss is the $500 premium paid for the protection less the difference between the sale proceeds ($7,200) and the cost of exercising the call ($7,000). That is $500 minus $200, resulting in a maximum loss of $300. If the stock's price falls, and it can decline to zero, the investor's cost to cover is zero, resulting in a profit of $7,200 minus the premium of $500 ($6,700). 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.
An investor opens the following positions: Sell short 100 shares of FAB @72; buy 1 FAB Jun 70 call @5. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $300; maximum loss is unlimited; breakeven point is $77. B) Maximum gain is $300; maximum loss is $6,700; breakeven point is $67. C) Maximum gain is $6,700; maximum loss is $300; breakeven point is $67. D) Maximum gain is $6,700; maximum loss is $300; breakeven point is $77.
C) Maximum gain is $6,700; maximum loss is $300; breakeven point is $67. The first step is to identify the position. This is a short sale with a protective call. That is, the customer has shorted the stock and purchased a call to protect the upside. This investor will break even when the stock's price is equal to the sale price ($72) minus the premium paid ($5), or $67. Short sellers lose when the price of the stock goes up. That means a short sale has potentially unlimited risk of loss. A way to ensure that the loss is limited is to purchase a call on the stock. If the stock should rise significantly above the $72 received on the short sale, instead of having to cover the short in the market at that high price, the investor will exercise the long call and be able to cover at $70.
Typically, new municipal bond issues are sold to investors before the bonds are issued and available for delivery. An investor receives a when-issued confirmation describing the bonds. What information is included on this confirmation? A) The accrued interest B) The settlement date C) The trade date D) The total amount due
C) The trade date The trade is known, so it is on the confirmation. Because the bonds are not available for delivery, the settlement date is unknown. Without a settlement date, accrued interest cannot be computed. Without accrued interest, there is no way to compute the total price.
If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, she will pay A) no tax until she liquidates the shares. B) ordinary income tax rates on the capital gains and dividends. C) capital gains rates on capital gains distributions and ordinary income rates on dividends. D) long-term or short-term capital gains rates, depending on the length of time the customer has held the fund shares.
C) capital gains rates on capital gains distributions and ordinary income rates on dividends. Capital gains distributions are taxed as capital gains, with their holding status depending on how long the fund has held the securities, not how long the investor has held the mutual fund shares. Dividend distributions are taxed as ordinary income.
Customer statements must be sent at least A) semiannually. B) monthly. C) quarterly. D) annually.
C) quarterly. The SEC and FINRA require member firms to send customer account statements at least once per calendar quarter. There is an exception when the account contains penny stocks. In that case, the frequency is monthly.
Many options traders give attention to the VIX. The VIX A) was created by the Options Clearing Corporation (OCC). B) tends to rise during periods of high investor confidence. C) rises when put buying on the SPX (the S&P 500) increases. D) rises when call buying on the SPX (the S&P 500) increases.
C) rises when put buying on the SPX (the S&P 500) increases. The VIX is an indication of volatility. When there is more put buying than call buying, the VIX increases. Conversely, more call buying than put buying results in a decrease to the VIX. It is often called the "fear" index and, in fact, had its highest reading during the Covid-19 crisis of 2020. It was created by the CBOE, not the OCC.
A customer is short 100 XYZ shares at 26 and long 1 XYZ 30 call at 1. What is the maximum potential loss on the positions? A) Unlimited B) $400 C) $2,500 D) $500
D) $500 The customer has protected his short stock position from loss by purchasing a call. If the market rises, the call is exercised, allowing the customer to buy his stock at the option strike price of 30 to cover the short position. The most the customer can lose is $400 on the stock position (the difference between the option strike price and the stock price) plus the premium paid for the option ($400 + $100 = $500).
Ten municipal bonds were purchased with 9% nominal yield for settlement on February 1, 2015. The maturity date of the bonds is July 1, 2035. What is the number of days of accrued interest on the 10-bond trade? A) 37 B) 29 C) 31 D) 30
D) 30 The maturity month and day will always match one of the two semiannual coupon dates. Because maturity is July 1, the bond pays interest on January 1 and July 1 of each year. With settlement on February 1, the bond accrued interest from January 1 up to, but not including, settlement (30 days).
Which of the following callable municipal bonds trading on a 7% basis is most likely to be called? A) 6.5% coupon, callable at 100 in 2030 B) 6.5% coupon, callable at 105 in 2030 C) 7.5% coupon, callable at 105 in 2030 D) 7.5% coupon, callable at 100 in 2030
D) 7.5% coupon, callable at 100 in 2030 An issuer will call the higher coupon bonds before calling the lower coupon bonds. Of the two bonds with coupons of 7.5%, the one with the lower call price will likely be called first.
Interest received from which of the following federal agency securities is exempt from all state and local taxation? A) Government National Mortgage Association pass-through securities B) Federal National Mortgage Association bonds C) Federal Home Loan Mortgage Corporation bonds D) Farm Home Loan Banks bonds
D) Farm Home Loan Banks bonds Federal Home Loan Bank securities are part of a small group of federal agency securities where the interest is exempt on a state and local (but not federal) level. A key to remembering is that the interest on any agency with the term mortgage in its title is taxable on all levels.
If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that i. dividend distributions will be reinvested at net asset value. ii. dividend distributions will be reinvested at the public offering price. iii. capital gains distributions will be reinvested at net asset value. iv. capital gains distributions will be reinvested at the public offering price. A) II and IV B) II and III C) I and IV D) I and III
D) I and III Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at net asset value.
One of your clients enters a sell stop order at $42.40, limit $42.15. Assume that the trades occur in the following sequence: 42.45, 42.40, 42.75, 42.27, and 41.91. At which of the following prices could this order be executed? i. $41.91 ii. $42.27 iii. $42.40 iv. $42.75 A) I and III B) III and IV C) I and II D) II and IV
D) II and IV As a sell stop order with a limit of $42.15, no order may be executed below the limit price of $42.15. This order will be triggered at the price of $42.40. The only remaining prices that will meet the limit requirement after it is triggered are $42.27 and $42.75. Remember, it takes two trades for any stop order: one to trigger the order, the other for execution.
If an investor buys 300 shares of FLB, and one month, later buys 1 FLB Jul 50 put, how does this affect the holding period on his stock? A) It erases the holding period on 300 shares. B) It ends the holding period on the put. C) It has no impact on the holding period for any of the shares owned by the investor. D) It erases the holding period on 100 shares.
D) It erases the holding period on 100 shares. Because the stock has not been held more than 12 months, the put purchase erases the holding period for any shares the put subsequently allows the holder to sell. Because the holder owns one put, this erases the holding period on 100 shares owned. The other 200 shares are unaffected.
A registered representative has a recently married couple as clients. They are looking to purchase a home as soon as possible, no later than five years from now. In discussions with the representative, they expressed concern that their investments be restricted to low or moderate risk, and that they be able to convert them to cash in an emergency. What is the main investment constraint for this couple? A) Safety. There is no point in saving up for a goal if you lose the money. B) Liquidity. The representative's main concern must be the salability of what he recommends. C) Taxes. They reduce the amount available to invest and reduce the return on investment. D) Time horizon. Five years is not much time; this will profoundly affect their investment choices.
D) Time horizon. Five years is not much time; this will profoundly affect their investment choices. No one has just one investment objective, but a client's objectives and their constraints can be ranked in importance. Clearly, this couple cares most about acquiring a home. Liquidity and safety must be kept in mind, of course, but the main constraint is time.
U.S. exchange-listed foreign currency option premiums are quoted in which of the following? A) Both units of foreign currency and the percentage of value of the foreign currency B) Percentage of value of the foreign currency C) Units of foreign currency D) U.S. dollars
D) U.S. dollars Foreign currency option premiums are quoted in U.S. dollars. Because one point equals $100, a premium quote of 1.70 equals $170.
Regulation T governs the purchase of all of the following except A) American depositary receipts. B) corporate convertible bonds. C) listed options. D) U.S. government bonds.
D) U.S. government bonds. Regulation T applies only to nonexempt securities. Because governments and municipals are exempt, there is no federal regulation.
(con't) An investor purchased a newly issued convertible bond at par. The bond is convertible at $40. Three years later, the underlying common stock is trading at $50 per share. If the investor sells the bond at a $50 premium over the parity price, there is A) a long-term capital gain of $200. B) a long-term capital gain of $10 per share. C) a long-term capital gain of $1,050. D) a long-term capital gain of $300.
D) a long-term capital gain of $300. An alternative that might be easier for some is to look at the appreciation of the stock. It is $10 per share higher than the conversion price of $40. That represents an increase of 25% (10 ÷ 40). If the bond is at parity with the stock, its price must be 25% higher and that brings us again to the $1,250 parity price. Add the $50 premium to get to $1,300, $300 above the initial cost.
An investor purchased a newly issued convertible bond at par. The bond is convertible at $40. Three years later, the underlying common stock is trading at $50 per share. If the investor sells the bond at a $50 premium over the parity price, there is A) a long-term capital gain of $200. B) a long-term capital gain of $10 per share. C) a long-term capital gain of $1,050. D) a long-term capital gain of $300.
D) a long-term capital gain of $300. This question involves several steps. The first is to determine the conversion ratio in shares. A bond convertible at $40 per share has a share conversion rate of 25 shares ($1,000 ÷ $40). The second step is to compute the parity price. That is, what are those 25 shares worth? Multiply 25 shares times $50 per share and that equals $1,250. When the bondholder sells the bonds at parity plus a $50 premium, the bondholder receives $1,300, a $300 profit over the $1,000 initial cost is a long-term capital gain.
A customer wishes to purchase 100 shares of ABC for $35 but does not wish to be charged a commission. To accommodate this request, the member firm purchases the shares for the customer in its proprietary trading account and sells the shares to the customer with a markup. This trade is A) a cross transaction. B) a proceeds transaction. C) an agency transaction. D) a principal transaction.
D) a principal transaction. This is an example of a riskless principal trade. The member firm that bought the shares already knows who it will sell to and did not incur inventory risk. While this may seem like an agency trade, the firm is still selling from its own inventory, making it a principal transaction.
When the SEC rules that an offering has become effective, the SEC has A) not verified the accuracy of each statement in the registration statement but has approved of the offering. B) verified the accuracy of the statements in the registration statement. C) approved the offering for registration. D) cleared the offering for sale.
D) cleared the offering for sale. An offering becomes effective when it is released by the SEC for sale. The SEC does not approve or disapprove of new offerings; it releases them for sale after determining that enough information is available for public investors to make sound investment decisions.
Among your customers is a happily married couple with several accounts between them. The wife called and requested that half of one of her husband's accounts be moved to her account. Your next step is to A) establish an escrow account to hold the funds until the husband can be reached. B) seek signed permission from a principal. C) promptly notify the husband about his wife's request. D) inform the customer that this is not permissible.
D) inform the customer that this is not permissible. This is not permissible. She cannot direct the removal of funds or securities from the account belonging entirely to someone else.
A blind pool offering A) is connected with oil and gas leases. B) generates nonallocated income. C) is one in which the properties are purchased on a lottery basis. D) is one in which 25% or more of the properties are not specified.
D) is one in which 25% or more of the properties are not specified. Many times, large real estate or oil and gas programs are offered in the form of a blind pool. In a blind pool, 25% or more of the specific properties (in real estate) or sites (in oil and gas) have not been identified at the time of the offering. When investing in a blind pool, the participants are relying on the expertise of the program sponsor to select locations that will prove profitable.
All of the following statements regarding a mark to the market are true except A) it occurs because of a change in the stock's market value covered by a contract. B) it often occurs in connection with margin transactions. C) it may result in a request for additional collateral. D) it requires the use of a due bill.
D) it requires the use of a due bill. A mark to the market occurs when one party to a contract becomes partially unsecured due to a change in the stock's market value covered by a contract. A mark to the market is a request for additional collateral.
Advertisements for the Abstemious Balanced Fund (ABF) describe the investment as a no-load fund. In order to make this claim, the fund must A) not have a front-end load in excess of 0.10%. B) have its first breakpoint no higher than $10,000. C) not have a 12b-1 charge in excess of 0.75%. D) not have a conditional deferred sales charge.
D) not have a conditional deferred sales charge. When a fund promotes itself as a no-load fund, not only must there be no front-end load, there cannot be a back-end load (CDSC) either. The 12b-1 charge maximum is 0.25%. The concept of breakpoints applies solely to Class A shares (front-end load).
The requirements of ERISA apply to pension plans established by A) municipal governments. B) both public and private sector organizations. C) public entities only. D) private sector organizations only.
D) private sector organizations only. ERISA was established to protect the retirement funds of employees working in the private sector only. It does not apply to employees of public sector entities such as city and state governments.
A customer sells an FLB Mar 35 call. To establish a straddle, she would A) sell an FLB Mar 40 call. B) buy an FLB Mar 35 put. C) buy an FLB Mar 40 call. D) sell an FLB Mar 35 put.
D) sell an FLB Mar 35 put. Straddles involve options of different types, but both options must be of the same series. An option series has the same strike price, expiration date, and underlying security.
A corporation has gone out of business and the assets are being liquidated. Investors of the corporation have claim to those assets, including common stockholders. All the following terms apply to the common stockholders' claim except A) residual. B) junior. C) last. D) senior.
D) senior. Creditors, such as bondholders and general creditors, as well as preferred stockholders of the corporation, would have a prior or senior claim to corporate assets in liquidation. Common stockholders have the last claim to assets in liquidation. This also known as the most junior or residual claim.
