ch 12-15

If a customer buys a new issue municipal bond at a discount in the primary market, which of the following statements are true? The discount must be accreted. The discount may not be accreted. At maturity, there is a capital gain. At maturity, there is no capital gain. A) I and III B) II and IV C) II and III D) I and IV

If a new issue municipal bond is bought at a discount in the primary market, the discount must be accreted. The accretion is considered interest income, and, as an original issue discount bond, is not taxable.

All of the following statements about trading index options on the Chicago Board Options Exchange are true except A) market makers may trade for their own accounts. B) limit orders are maintained in an order official's book. C) floor brokers may execute orders for others on a commission basis. D) market orders entered by a market maker have priority over public orders.

Public orders must be filled before member orders. This is true if it is stock, bonds, and options of any kind.

A portfolio manager using index options is trying to reduce which of the following types of risks? A) Systematic B) Purchasing power C) Financial D) Selection

Systematic risk refers to the impact the overall market has on an equity portfolio's value. Index options help insure portfolios against systematic risk. The purchase of index puts to protect a portfolio is called portfolio insurance. LO 14.a

BAKE-ALL, a U.S. manufacturing corporation, has purchased shares of stock in RE-FORM, a U.S. corporation that refines raw materials. RE-FORM pays a dividend to its shareholders. For BAKE-ALL corporation, taxes will be due on what percentage of the dividends received from RE-FORM? A) 70% B) 100% C) 50% D) 0% (all dividends received are tax free)

When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, 50% of the remaining dividends received are taxable.