sic chapter 2 products

An investor is short 1 December 15 put at 6. The investor's maximum loss on this position is A) $60 B) $2,100 C) $1,500 D)/ $900 Explanation

A put writer's maximum loss is the put's strike price (15) less the premium received (6)—in this case, 9 points. Note that this is the same as the breakeven. This maximum loss occurs when the stock price drops to zero. The investor is forced to buy the worthless stock at the option's strike price of 15 and, therefore, has lost 15 points. The investor's total loss (15), however, is reduced by the premium (6) received, making the ML 9 points ($900). Reference: 2.1.3 in the License Exam Manual

It would be expected that a repurchase (repo) agreement contract would include A) / the repurchase price and the rate of return B) the maturity date only C) the repurchase price and the maturity date D) the rate of return and maturity date Explanation

A repurchase (repo) agreement contract would include the repurchase price (the price that the securities initially sold would be bought back at) and the maturity date (the date that the initial sale would be reversed). The return would be the difference between the initial sale price and the repurchase price. Reference: 2.1.2 in the License Exam Manual

For real estate program partners, tax credits will A) be applicable in all types of real estate programs B) / reduce tax liability dollar for dollar C) reduce taxable income from rents received dollar for dollar D) add to the appreciation of the real estate properties Explanation

Offered by the federal government for only certain types of real estate programs (not all), tax credits reduce tax liability dollar for dollar. In this light, credits are considered far greater benefits than deductions, which only reduce taxable income. Reference: 2.1.5 in the License Exam Manual

Which of the following are securities representing other securities held on deposit with a trustee where the principal and interest payments have been separated? A) / Treasury receipts and STRIPS B) Treasury bills and notes C) Treasury notes and bonds D) Treasury receipts, bills, and notes Explanation

Treasury receipts or STRIPS can represent U.S. T-bonds and notes held on deposit at a bank where essentially the coupon interest payments have been separated from the principal. When the Treasury Department does this, the resulting new issues are known as Treasury STRIPS, and when broker-dealers do this, the resulting new issues are known as Treasury receipts. Reference: 2.1.2 in the License Exam Manual

Transactions where the penny stock rules are applicable would be those that A) are unsolicited B) are either solicited or unsolicited C) / are solicited D) neither solicited or unsolicited transactions

Unsolicited transactions (those not recommended by the broker-dealer or registered representative) are exempt from the penny stock rules. Solicited transactions are nonexempt, and the rules therefore apply. Reference: 2.1.1 in the License Exam Manual

At expiration, for those who trade call options, which of the following is TRUE? A) Call writers want the contract to be in the money. B) Call writers want the contract to be trading with intrinsic value. C) Call buyers want the contract to be out of the money. D) / Call buyers want the contract to be in the money.

At expiration for all options (calls and puts), buyers want the contracts to have intrinsic value—therefore, be in the money. Writers, on the other hand, want the contracts to be either at or out of the money and therefore have no intrinsic value. Reference: 2.1.3 in the License Exam Manual

uestion #12 of 125 Question ID: 939633 A customer has held an account with a broker-dealer for over one year. A registered representative associated with the firm recommends the purchase of an unlisted security trading at $3.50. What documentation, if any, is required prior to the trade? A) No documentation is required. B) / A disclosure statement is required, but not a suitability statement. C) A suitability statement is needed, but not a disclosure statement. D) Both suitability and disclosure statements must be obtained.

Established customers are exempt from the suitability statement requirement but not from the disclosure requirements when penny stocks are being solicited. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made at least three penny stock purchases of different issuers on different days. Reference: 2.1.1 in the License Exam Manual

Which of the following are potential benefits associated with a real estate direct participation program? A) Depletion allowances B) Dividends and interest C) / Tax deductions and credits D) Intangible costs

For real estate programs, both deductions (from mortgage interest expenses and depreciation) and credits (for certain types of programs) are potential benefits. Depletion and intangible costs are associated with natural resource programs such as oil and gas, and DDPs do not pay dividends or interest. Reference: 2.1.5 in the License Exam Manual

n investor owns 1 November 15 put at 5. The 15 in this contract represents A) / the strike price, the price the investor can sell stock at B) the premium, the price the investor has paid for the contract C) the strike price, the price the investor has paid for the contract D) the premium, the price the investor can purchase stock at Explanation

For this put contract, 15 is the strike price, which represents the price at which the investor has the right to sell stock, and 5 represents the $500 premium paid for the contract.

Your customer establishes the following position: Long 1 XYZ January 50 put at 2. You can correctly inform the customer that the maximum potential gain on the position is A) $5,200 B) / $4,800 C) $200 D) unlimited

Maximum gain for a long put is calculated by subtracting the premium from the strike price (50 − 2 = 48 per share). One contract represents 100 shares, so the buyer's maximum gain is $4,800 (this occurs if the stock becomes worthless). Reference: 2.1.3 in the License Exam Manual

If a company files for bankruptcy, which of the following investors would be most likely to be paid first? A) Preferred stock B) Common stock C) Debentures D) / Mortgage bonds

Mortgage bonds are senior securities. Those who hold mortgage bonds expect to receive any assets from the dissolution of a bankrupt company before the holders of junior securities such as debentures and equity securities. Reference: 2.1.2 in the License Exam Manual

Which of the following require voter approval? A) Government agency bonds B) / Municipal general obligation bonds C) Treasury bills D) Municipal revenue bonds

Municipal general obligation (GOs) bonds require voter approval because the debt service for these bonds (principal and interest payments) is funded by the taxes collected by the municipal issuer. Voters pay these taxes. Reference: 2.1.2 in the License Exam Manual

Which of the following is TRUE for U.S. Treasury-issued securities? A) / T-bills are purchased at a discount, while T- bonds are purchased as a percentage of par. B) T-bills and T-bonds pay interest semiannually. C) T-notes are purchased at a discount to par, while T-bonds are purchased as a percentage of par. D) T-notes and T-bills pay interest annually.

T-bills are purchased at a discount, while T- bonds and T-note are purchased as a percentage of par. T-notes and T-bonds pay interest semiannually, but interest on T-bills is not paid until maturity (the difference between the discount paid and par value received). Reference: 2.1.2 in the License Exam Manual

A new customer tells you that her objective is to incur little risk because she is anticipating a new home within the next 12 months. Which of the following would be a suitable recommendation? A) High-yield corporate bonds B) Growth stocks C) / T-bills D) T-bonds

The investor's time frame for needing the funds (within 12 months) and low-risk objective are the key factors to consider. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund (higher the yield, greater the risk to attain it). Of the choices, T-bills are the shortest fixed term and are issued by the U.S. government, entailing little to no risk.

Your customer is long 1 October 75 put at 2. The customer's maximum gain potential is A) $2,000 B) / $7,300 C) $7,500 D) $7,700

The maximum potential gain for put owners is the option's strike price (75) less the amount of the premium paid (2)—in this case, 73. Note that this is the same as the contract's BE point. Remember that put owners are bearish and want to see the stock fall in price. A stock's price can potentially fall to zero; therefore, from the BE to zero (73 points) is the most that can be gained. Reference: 2.1.3 in the License Exam Manual

Question #11 of 125 Question ID: 939715 Which of the following regarding Treasury STRIPS, receipts, bills, notes and bonds is TRUE? A) They all pay semiannual interest payments. B) They are all sold at a discount to par. C) They are all backed by the good faith and credit of the U.S. government. D) / They all mature at par value.

The only commonality for all of these is that each matures at par. Only T-bills, receipts and STRIPS are sold at a discount to par. Only T-notes and bonds make semiannual interest payments, and though STRIPS, bills, notes, and bonds are all backed by the good faith and credit of the U.S. government, Treasury receipts issued by broker-dealers are not. Reference: 2.1.2 in the License Exam Manual

All of the following would be considered advantages of exchange traded funds as opposed to mutual funds EXCEPT A) ETFs are marginable B) ETFs are priced continuously throughout the trading day C) ETFs trade on exchanges D) / ETFs are commissionable

Trading on exchanges, ETFs are priced throughout the trading day making them easy to trade and liquid. They can also be bought or sold on margin. The purchase or sale of ETF shares is a commissionable transaction. However, the commissions paid can erode the low expense advantage of ETFs and this would have the greatest impact when trading in and out of ETF shares frequently, or when investing smaller sums of money.

In a leasing partnership program, loans are taken to purchase equipment that is then leased to companies in return for the lease payments. This process A) enables the partners to take tax credits against the income received from the lease payments B) / allows for the loan interest and equipment depreciation to be taken as deductions that will shelter the income from the lease payments received C) allows for the equipment to be depreciated, adding to the income realized by the partnership D) eliminates any possibility of sheltering the income from the lease payments received with deductions or credits Explanation

When a leasing program purchases equipment that it will lease to companies in return for the lease payments, the program can deduct over the life of the program any interest costs on the loans to purchase the equipment, as well as any depreciation on the equipment it owns and leases. These deductions shelter the income taken in from the lease payments. Reference: 2.1.5 in the License Exam Manual

A bond certificate represents A) / the borrower's obligation to repay the amount it borrowed plus interest B) the lender's right to receive an ownership share in the entity it leant the funds to C) the borrower's right to receive interest on the amount it received D) the lender's obligation to repay the amount it borrowed plus interest

When an investor lends money to an entity, the certificate evidencing the loan is known as a bond. This certificate represents the borrower's obligation to pay the investor back the amount it borrowed plus interest.

When an issuer has equipment trust certificates outstanding, title to the assets backing the certificates are held in trust the equipment is held in trust the assets can be repossessed and sold by the trustee the certificates are unsecured because they represent the debt owed on the assets A) / I and III B) II and IV C) I and IV D)

When equipment trust certificates have been issued, the titles to the assets (not the actual equipment) backing the certificates are held in trust. If the issuer fails to make the payments on the equipment, it can be repossessed and sold to pay off the debt held by the certificate holders. In other words, it is the equipment acting as the collateral that secures these loans. Reference: 2.1.2 in the License Exam Manual