Mastery 1 (customized)
All of the following statements are true regarding warrants EXCEPT: A. Warrants generally have a life of 2 months B. At issuance, the exercise price of the warrant is set higher than the current market price of the underlying common stock C. The price of the warrant will vary with the price movements of the underlying stock D. The price of the warrant will vary depending upon the time to expiration of the warrant
A. Warrants generally have a life of 2 months Warrants generally have a life of 5 years - rights have very short lives (e.g., 1 or 2 months). At issuance, the exercise price of the warrant is set higher than the current market price of the underlying common stock. Thus, the warrant is issued at a price that is "out the money" and the market price of the stock must rise to at least this level for it to be worthwhile to exercise the warrant. The price of the warrant will vary with the price movements of the underlying stock. As the stock's price rises, the warrant becomes more valuable; as the stock's price falls, the warrant becomes less valuable. The price of the warrant will vary depending upon the time to expiration of the warrant. The greater the time to expiration, the greater the value of the warrant, since there is a greater probability that the price will rise in the remaining time to expiration.
Which of the following statements are TRUE regarding American Depositary Receipts? I Non-sponsored ADRs trade over-the-counter II Non-sponsored ADRs trade on exchanges III Non-sponsored ADRs provide quarterly reports to shareholders IV Non-sponsored ADRs provide annual reports to shareholders A. I and III B. I and IV C. II and III D. II and IV
B. I and IV All exchange listed ADRs are sponsored. Issuers that sponsor ADRs provide quarterly and annual financial reports to shareholders in English. Sponsored ADRs are often called American Depositary Shares or ADSs. Non-sponsored ADRs are assembled by banks and broker-dealers without the issuer's participation. An unsponsored program may have more than one depositary bank, since the issuer does not participate in any way. Holders of non-sponsored ADRs only receive annual reports in the language of the issuer. Non-sponsored ADRs trade over-the-counter.
Voting of the common stockholder is required for which of the following? I When a corporation wishes to issue convertible securities II When a shareholder decides to accept a tender offer for the company's shares III When a corporation declares a stock split IV When a corporation declares a cash dividend A. III and IV B. I, II, III C. I, II, IV D. I, II, III, IV
B. I, II, III Dividend decisions are made by the Board of Directors - no shareholder approval is required. Changes in the equity capitalization of a company require shareholder approval. A stock split changes par value per share, which requires a shareholder vote. The issuance of convertible securities (which can be converted to equity) is potentially dilutive to the existing common shareholders. They must vote to permit this. A tender offer is when someone outside the company makes an offer to the existing shareholders to buy their shares, typically at a premium to the current market price. The shareholder can choose to tender or not. If the shareholder chooses to tender, he or she is "voting" to sell the shares to the maker of the offer.
During periods of stable interest rates, which type of preferred stock will have the greatest price volatility? A. Cumulative B. Participating C. Callable D. Adjustable Rate
B. Participating Participating preferred gives the preferred shareholder the right to participate with common in any "extra" dividends declared by the Board of Directors. If these extra dividend payments are made, this can cause the preferred stock price to rise even though interest rates have not fallen.
A customer has bought a "book entry" bond which pays interest semi-annually. The customer will receive interest payments: A. from the paying agent once a year B. from the paying agent twice a year C. by clipping coupons once a year D. by clipping coupons twice a year
B. from the paying agent twice a year
All of the following are likely to purchase dealer commercial paper EXCEPT: A. Insurance Companies B. Trust Companies C. Individuals D. Open-end Investment Companies
C. Individuals Dealer commercial paper is sold for corporations by dealer firms such as Goldman Sachs. The minimum purchase amount is generally $100,000. This eliminates most individuals from the market. The dealer commercial paper market is primarily an institutional market, with purchasers including insurance companies, trust companies and money market mutual funds. As compared to "dealer" paper, many corporations sell their commercial paper directly to the investing public. "Direct" paper is sold directly to the investing public, usually via the web. It also sells in $100,000 and $500,000 minimum amounts, so the individual investor is pretty much cut out.
During a period of stable interest rates, which type of preferred stock would show the greatest price volatility? A. Cumulative B. Adjustable rate C. Participating D. Callable
C. Participating Preferred stock is interest rate sensitive, since it is a fixed income security. As market interest rates rise, preferred stock prices fall. As market interest rates fall, preferred stock prices rise. If market interest rates are stable, preferred stock prices should be stable as well. However, participating preferred stock gives the preferred participation in any "extra" dividends declared by the company to its common shareholders. Thus, the declaration of such an extra dividend would make the preferred stock more valuable and its price would go up in the market - and this did not happen because market interest rates fell.
Which investment does NOT have purchasing power risk? I STRIPS II TIPS III Treasury Bonds IV Treasury Bills A. I and III B. I and IV C. II and III D. II and IV
D. II and IV TIPS and T-Bills do NOT have purchasing power risk STRIPS and T-Bonds DO have purchasing power risk
A corporation has issued 10% convertible debentures, convertible into 40 shares of common stock. The current market price of the common stock is $25.25. If the bonds are trading at parity, they are priced at: A. 100 B. 101 C. 106 D. 107
The best answer is B. The bonds are convertible into 40 shares of stock. The current market value of the stock is $25.25, so the parity price of the bonds is 40 x $25.25 = $1,010 = 101.
Fixed UITs offer all of the following benefits EXCEPT: A. negotiability B. redeemability C. diversification D. low expenses
The best answer is A. A fixed UIT is an investment company structure where the sponsor assembles a fixed portfolio of securities that is transferred into trust, and then $1,000 units of the trust are sold to investors. For a relatively small investment amount, the buyer gets a piece of a diversified portfolio. Once the portfolio is assembled, it does not change. There is no ongoing management and no management fees - which is the largest expense of running any investment company type. The trust sponsor makes a market in the units and will buy them back from the initial purchaser at current NAV. Then the sponsor will resell these "slightly used" trust units to another investor for their current NAV. Note that there is no trading of UITs - they are non-negotiable. If the portfolio consists of bonds (a very popular type of fixed UIT), then the portfolio self-liquidates as the bonds mature. If the portfolio consists of stocks (such as an Energy Trust consisting of various oil and gas stocks), then there is a fixed life set on the trust (say 10 years) at which point the stocks in the portfolio are sold and the proceeds distributed to the unit holders.
Banker's Acceptances are: I time drafts II demand deposits III used to finance imports and exports IV used to finance the issuance of ADRs A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Banker's Acceptances are time drafts on a bank used to finance imports and exports. BAs trade at a discount to their face amount until maturity, but the trading market is rather thin.
The maximum maturity on commercial paper is 270 days (9 months) because: A. this is the longest maturity for the security to be exempt from the provisions of the Securities Act of 1933 B. this is the maximum maturity for the security to be defined as a money market instrument C. longer duration issues are not readily marketable to institutional investors D. longer duration issues will not be rated by a nationally recognized ratings agency
The best answer is A. Commercial paper is an exempt security under the Securities Act of 1933. It does not have to be registered and sold with a prospectus if its maturity is 270 days or less. This makes it much less expensive for an issuer to market the securities, since the regulatory burden is much lower.
Initial Public Offerings (IPOs) are sold for the first time in the: A. primary market B. first market C. third market D. fourth market
The best answer is A. Initial Public Offerings (IPOs) are sold for the first time in the primary market. The First Market is trading of exchange listed securities on that exchange floor. The Third Market is trading of exchange listed securities in the over-the-counter market. The Fourth Market is trading of securities directly between institutions via ECNs - Electronic Communications Networks - such as Instinet.
Management companies are subclassified as either: A. open-end or closed-end B. managed or unmanaged C. registered or unregistered D. fixed or participating
The best answer is A. Management companies are either open-end or closed-end. An open-end management company is a mutual fund. A closed-end management company is a publicly traded fund.
Money market discounts are quoted on a: A. yield basis B. percentage of par basis in 1/8ths C. percentage of par basis in 32nds D. percentage of par basis in 64ths
The best answer is A. Money market instruments are original issue discount obligations quoted on a yield basis that are priced at a discount to par (with the exception of negotiable certificate of deposit that are priced at par plus accrued interest). The discount from par is the interest earned.
If an issuer defaults on a moral obligation bond, payment can only be made by: A. legislative apportionment B. judicial edict C. legal authorization D. municipal injunction
The best answer is A. Moral obligation bonds are backed by pledged revenues and also by a non-binding pledge to report any revenue deficiencies to the state legislature. The legislature is authorized to apportion the funds necessary to service the debt, but is under no obligation to do so.
If a corporation wishes to sell additional shares, which of the following persons can subscribe using pre-emptive rights? A. Common stockholders B. Preferred stockholders C. Convertible preferred stockholders D. Bondholders
The best answer is A. Only common stockholders have pre-emptive rights. Holders of senior securities (preferred stock and bonds) do not have pre-emptive rights; nor do warrant holders since they do not own the common stock unless the warrants are exercised.
A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 1 share of preferred stock and a 1/4 warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have: A. 100,000 preferred shares and 25,000 common shares B. 100,000 preferred shares and 50,000 common shares C. 200,000 preferred shares and 100,000 common shares D. 20,000 preferred shares and 200,000 common shares
The best answer is A. Since each unit consists of 1 preferred issue, 100,000 units X 1 = 100,000 preferred shares. Since a warrant which enables one to buy 1/4 additional share is also attached to each unit, 100,000 units X 1/4 = 25,000 common shares issued if the warrants are exercised.
Market makers in the Third Market trade: A. listed stocks B. unlisted stocks C. dual listed stocks D. foreign stocks of companies located in Third World countries
The best answer is A. The "Third Market" is OTC trading of exchange listed securities. These Third Market Makers (firms such as Weeden and Co. and Jefferies and Co.) now account for about 40% of trades in NYSE listed issues. Thus, these are competitors for stock exchange specialist firms (now called DMMs - Designated Market Makers). For example, a trade of IBM (NYSE listed) that takes place OTC, instead of on the NYSE floor, is a Third Market trade. Note that much of the Third Market's trading volume takes place when the NYSE floor is closed in the so-called "after hours" market.
The current yield of a bond: A. increases as bond market prices decline B. increases as bond market prices increase C. is unaffected by changes in market interest rates D. will vary with the earnings of the issuer
The best answer is A. The current yield is the stated rate of interest as a percentage of market value. It will change as bond prices move - if bond prices rise, the current yield falls; if bond prices fall; the current yield rises.
A mutual fund has a computed Net Asset Value per share of $9.30 and a Public Offering Price of $10.00. The fund has a sales charge percentage of: A. 7% B. 7 1/2% C. 8 % D. 8 1/2%
The best answer is A. The formula for the sales charge percentage is: A - B / A => ($10.00 - $9.30) / $10.00 => $.70 / $10.00 = 7%
The underwriter of a mutual fund is known as the: A. Sponsor B. Manager C. Custodian D. Guardian
The best answer is A. The fund underwriter is also known as the fund sponsor. The sponsor is responsible for establishing the fund in compliance with the requirements of the Investment Company Act of 1940.
A government bond dealer is making good delivery to another government dealer. Payment is to be made in: A. 1 business day in federal funds B. 1 business day in clearing house funds C. 2 business days in federal funds D. 2 business days in clearing house funds
The best answer is A. Trades of U.S. Government bonds settle through the Federal Reserve System in Fed Funds. Settlement of government securities trades takes place the business day following trade date. "Non-eligible" securities settle through national clearing houses of which broker/dealers are members. These trades settle in 2 business days in clearing house funds.
When a bond trades at a premium, which bond yield will be the highest? A. Nominal B. Yield to maturity C. Current D. Basis
The best answer is A. When bonds are trading at a premium, the stated yield or nominal yield will be the highest, since it is the annual income divided by par value. Current yield is lower because it is annual income divided by the current market price (which is at a premium to par). Basis (or yield to maturity) is even lower because it not only considers that the current market price is at a premium to par; it also pro-rates the loss of the premium over the life of the bond, reducing the annual yield below the current yield.
Bonds with a call feature benefit the: A. bondholder B. issuer C. trustee D. transfer agent
The best answer is B. A call feature allows the issuer to call in the bonds if market interest rates fall. Then the issuer can refund those bonds at lower current market rates. This is a benefit to the issuer and is disadvantageous to the bondholder. The bondholder who had the bond called away gets the principal back (and maybe a call premium), but then is put in the situation where he or she must now reinvest those funds - and rates are lower.
Which of the following investment company securities is NOT redeemable? A. Open end fund shares B. Closed end fund shares C. Fixed unit investment trusts D. Participating unit investment trusts
The best answer is B. Closed-end fund shares are not redeemable - they are listed on an exchange and trade like any other security. Open-end fund shares are redeemable with the fund itself and do not trade. Unit trust interests are also "redeemable" securities, in the sense that the trust sponsor makes a market in trust units, and will buy them back from the purchaser. There is no "trading" of trust units, however.
Common dividends are usually paid: A. monthly B. quarterly C. semi-annually D. annually
The best answer is B. Common dividends are usually declared and paid quarterly.
A customer has $24,000 to invest in mutual fund shares. The registered representative advises the customer to invest $8,000 on ABCD fund; $8,000 in DEFF fund; and $8,000 in XYZZ fund; to give the customer complete diversification and reduce risk. These 3 funds all have different sponsors. This action is: A. appropriate for the customer B. a violation known as a breakpoint sale C. a violation known as spinning D. a violation known as interpositioning
The best answer is B. Dividing customer purchase amounts will deny the customer the benefit of the breakpoint. This is a violation known as a breakpoint sale. The entire amount should be invested in one fund or one fund family to give the customer the lowest possible sales charge. Since mutual funds hold diversified portfolios, the argument that splitting the purchases further increases diversification, and thus will reduce risk, is dubious.
A customer holds 100 shares of ABC Corp $100 par convertible preferred stock convertible at a 10 to 1 ratio. If ABC declares and pays a 10% stock dividend, then as of the payable date, the customer will now have: A. 90 shares of ABC preferred stock B. 100 shares of ABC preferred stock C. 100 shares of ABC preferred stock and 10 shares of ABC common stock D. 110 shares of ABC preferred stock
The best answer is B. If ABC declares and pays a 10% "common" stock dividend, the customer who holds convertible preferred stock still would have 100 shares. However, the conversion ratio which was initially 10 to 1 would reflect the stock dividend and would get adjusted to an 11 to 1 ratio (10% additional common shares into which the preferred is convertible). With a new conversion ratio of 11 to 1, the conversion price per share becomes: $100 par / 11 shares = $9.09 per share.
A market maker that compensates a retail member firm for sending its customer orders to that market maker is: I paying for order flow II interpositioning III engaging in a prohibited practice under SEC rules IV permitted to do so, subject to best execution requirements A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. If a retail member firm chooses a market maker to execute its orders in return for compensation from that market maker, then the retail firm is earning so-called "payment for order flow." The SEC permits this practice, subject to the retail member firm always executing its trades at the best available price.
In a developmental oil and gas program which of the following statements are TRUE? I There is lower risk than an exploratory program II There is higher risk than an exploratory program III The cost of drilling is not deductible IV The cost of drilling is 100% deductible A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. In a developmental program, a well is drilled near an existing field. The cost of drilling is an "Intangible Drilling Cost" (IDC) and is 100% deductible as drilled. This drilling program has lower risk than an exploratory program, since there is a higher probability of finding oil near an existing field.
For an investor seeking a tax sheltered investment, the primary advantage of a real estate direct participation program is the: A. high level of liquidity provided by the investment B. ability of the program to generate losses for tax purposes but provide positive cash flow C. ability to offset passive losses generated by the program against the investor's earned income D. ability of the program to generate increasing losses until liquidation
The best answer is B. Limited partnership interests are not liquid. To avoid the corporate characteristic of "free transferability of shares," most partnership agreements place restrictions on transfer. The ideal structure for a partnership is to generate losses for tax purposes (in a real estate program, through mortgage interest and depreciation deductions), yet show positive cash flow (since depreciation is a "paper" write-off). Since real estate is considered a passive investment, any losses can only be offset against passive income - not earned income. The structure of partnerships generates higher losses in the early years, and lower losses in the later years. This gives people with "tax problems" the incentive to buy such a program, since the deductions are "front loaded," and the potential purchaser needs those deductions today.
An investor seeking a high level of income and a moderate level of risk would buy: A. common stock B. mortgage bonds C. income bonds D. convertible bonds
The best answer is B. Mortgage bonds pay interest semi-annually and are backed by a mortgage on real property - so these bonds are secure. Convertible bonds pay lower interest rates because of the value of the conversion feature and are not as suitable for a person seeking a high level of current income. Income bonds are unsuitable since they pay only if the company has sufficient earnings. Common stock is unsuitable since the dividend decision is discretionary on the part of the Board of Directors.
Municipal variable rate demand notes: I have a minimum value which will never go below par II have a maximum value which will never go above par III are subject to market risk IV are not subject to market risk A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Municipal variable rate demand notes are issued by a municipality. The interest rate is reset to the market rate weekly; and at the reset date, the holder can "put" the bonds back to the issuer at par. Here, the minimum value of the bond is par - because of the put feature. Because the price of the bond cannot go below par, these bonds are not subject to market risk. However, if interest rates fall, the price can go above par (by a small amount) until the next reset date.
New issues of short term municipal notes and bonds are available in which forms? I Bearer II Book Entry III Registered to Principal and Interest A. I only B. II only C. III only D. I, II, III
The best answer is B. New issues of municipal notes are available only in "book entry" form. The same is true for new issues of municipal bonds.
What is the cost basis to the recipient of an inherited securities position? A. The cost basis of the deceased person B. The market value as of the date of death of the deceased person C. The market value as of the date the recipient liquidates the position D. The greater of the cost basis of the deceased person or the market value as of the date of death
The best answer is B. One benefit built into the tax code is that inherited securities are given a new cost basis to the recipient, using the date of death to value the securities. Thus, if the securities have appreciated, there is no capital gains tax due on death. This is called a "stepped up" basis.
The manager of a pension plan would most likely invest in which of the following debt issues? I Corporate Bonds II Municipal Bonds III Government Bonds A. I only B. I and III only C. II and III only D. I, II, III
The best answer is B. Pension plans are "tax qualified" retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower interest rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds, both of which have higher interest rates because their interest income is taxable by the Federal government.
Trades of which of the following securities will settle in Fed Funds? I Treasury Bills II Treasury Notes III Municipal Bonds IV Corporate Bonds A. I only B. I and II only C. III and IV only D. I, II, III, IV
The best answer is B. Securities that are eligible to be traded by the Federal Reserve are those backed by the guarantee of the U.S. Government as well as certain agency obligations. Both Treasury Bills and Treasury Notes are eligible securities. Trades in eligible securities settle through the Federal Reserve system, and therefore settle in "Fed Funds." Municipal bond trades and trades in corporate securities are not eligible for trading and settling through the Federal Reserve system; these securities settle in "clearing house" funds.
Which of the following corporate distributions are taxable to the recipient? I Cash dividend II Stock dividend III Product dividend IV Stock split A. I only B. I and III C. III and IV D. I, II, III, IV
The best answer is B. Stock dividends and stock splits are not "taxable," the recipient reduces his or her cost basis per share for the additional shares received. Cash dividends and product dividends received, are taxable.
Which of the following designates "primary" U.S. Government securities dealers? A. Securities and Exchange Commission B. Federal Reserve C. Office of the Comptroller of Currency D. Congress
The best answer is B. The Federal Reserve designates a dealer as a "primary" dealer - meaning one entitled to trade with the Federal Reserve trading desk. There are about 20 primary dealers (such as Cantor Fitzgerald, Nomura Securities, Citibank, Goldman Sachs, Royal Bank of Scotland, etc.) The rest of the government dealers are termed "secondary" dealers. They do not enjoy a special relationship with the Federal Reserve.
ABC corporation has set the record date for a cash dividend at Monday, July 22nd. The last day to buy the stock before it goes ex dividend is: A. July 17th B. July 18th C. July 19th D. July 21st
The best answer is B. The last day to purchase the stock in a regular way trade and receive the dividend is 2 business days prior to record date or the 18th. Ex date - or the very first day the stock trades without the value of the dividend - is the 19th.
Orders that are placed lower than the current market are: I buy limits II buy stops III sell limits IV sell stops A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. The orders that are placed lower than the current market are "OBLOSS" - Open Buy Limit orders and Open Sell Stop orders. Buy limit orders allow the purchase of a security at a price that is cheaper than the current market; sell stop orders allow the sale of a security at a price that is cheaper than the current market. Both of these orders are filled in falling markets. Conversely, the orders that are placed higher than the current market are "OSLOBS" - Open Sell Limits and Open Buy Stops. Sell limit orders allow the sale of a security at a price that is higher than the current market; buy stop orders allow the purchase of a security at a price that is higher than the current market. Both of these orders are filled in rising markets.
A security which gives the holder an undivided interest in a pool of mortgages is known as a: A. unit investment trust B. pass through certificate C. first mortgage bond D. face amount certificate
The best answer is B. The question defines a pass through certificate - an undivided interest in a pool of mortgages, where the mortgage payments are passed through to the certificate holders.
All of the following investments give a rate of return that cannot be affected by "reinvestment risk" EXCEPT: A. Treasury Bill B. Treasury Bond C. Treasury Strips D. Treasury Receipts
The best answer is B. Treasury "STRIPS" and Treasury Receipts are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. Because no interest payments are received, the bond is not subject to reinvestment risk - the risk that interest rates will drop and the interest payments will be reinvested at lower rates. Conventional Treasury Bonds are subject to this risk, since interest payments are received semi-annually. Treasury Bills are not subject to reinvestment risk because they are essentially short term "zero-coupon" obligations.
Bonds quoted on a yield to maturity basis are generally: A. term bonds B. series bonds C. serial bonds D. short term maturities
The best answer is C. Bonds quoted in basis points (yield quotes) are serial bonds - this is the usual case for municipal bonds. Bonds quoted on a percentage of par basis are term bonds.
Common dividends can be paid in which of the following forms? I Rights II Product III Stock IV Cash A. I and IV B. I, III, IV C. II, III, IV D. I, II, III, IV
The best answer is C. Common dividends can be paid in the form of cash, stock, or the products of a company (this last method is obsolete). The distribution of rights is not a method of dividend payment. In a rights offering, the corporation attempts to raise additional capital by allowing existing shareholders to subscribe to new shares at a discount to the current market price.
Common stockholders have which of the following rights? I Inspecting minutes of executive meetings II Maintaining proportionate ownership in the company III Voting for the Board of Directors IV Transferring share ownership without restriction by the issuer A. I and III only B. I, II, IV C. II, III, IV D. I, II, III, IV
The best answer is C. Common shareholders have the right to maintain proportionate ownership in the company, to vote, and to sell their shares without restriction. They do not get to inspect the minutes of executive meetings.
Why does a no-load mutual fund have lower expenses than a load mutual fund? A. Because it does not charge an annual management fee B. Because it cannot charge an annual 12b-1 fee C. Because it can only charge a maximum annual 12b-1 fee of .25% D. Because it can only charge a maximum annual 12b-1 fee of .75%
The best answer is C. FINRA allows a mutual fund to call itself "no load" (as in no sales charge) as long as the maximum annual 12b-1 fee does not exceed .25%. Otherwise, the fund is subject to a FINRA maximum annual 12b-1 fee limitation of .75%. Note, in contrast, that if a fund wishes to advertise itself as a "pure no-load fund" then it cannot charge any 12b-1 fees. Finally, generally all mutual funds charge management fees.
Under IRS rules, if a customer selling shares of stock wishes to use specific identification instead of FIFO for cost basis reporting, the broker-dealer effecting the trade must be notified of this no later than: A. Trade Date B. Confirmation Date C. Settlement Date D. Statement Date
The best answer is C. If a customer says nothing at the time of a stock sale, IRS rules requires that FIFO be used to determine which shares are sold. If the customer wishes to use specific identification instead, this must be chosen by the customer no later than settlement date.
A corporation has issued 100,000,000 shares of common stock at $1 par. The corporation has 25,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is: A. $12,500,000 B. $25,000,000 C. $75,000,000 D. $100,000,000
The best answer is C. Outstanding stock is: Issued stock (100,000,000 shares) minus Treasury stock (25,000,000 shares) = 75,000,000 shares outstanding at $1 par = $75,000,000.
Preferred stock has which of the following features? I Fixed rate of return II Priority claim to assets upon dissolution compared to common stock III Priority claim to dividends declared compared to common stock IV Fixed maturity A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is C. Preferred stock has a fixed rate of return (the dividend rate), has priority claim to assets upon dissolution, and has priority claim to dividends if declared by the Board of Directors. Preferred stock does not have a fixed maturity date - it has an indefinite life.
The orders that are higher in price than the current market are: I Open Buy Limits II Open Buy Stops III Open Sell Limits IV Open Sell Stops A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Sell limits and buy stops are the orders that are placed above the current market and are elected as the market rises. Remember OSLOBS - Open Sell Limits and Open Buy Stops as the orders placed above the current market.
Which of the following are defined as "investment companies" under the Investment Company Act of 1940? I Face Amount Certificate Company II Unit Investment Trust III Management Company IV Oil and Gas Leasehold Partnership A. I and II only B. III only C. I, II, III D. I, II, III, IV
The best answer is C. The Investment Company Act of 1940 defines 3 types of investment companies; face amount certificate companies, unit investment trusts, and management companies.
An investor believes that interest rates are peaking and wishes to buy long term fixed income securities that will assure the investor of receiving periodic payments at today's rates. The best recommendation is high grade: A. zero coupon bonds B. premium bonds with low call premiums C. non-callable bonds D. puttable bonds
The best answer is C. The investor wishes to receive periodic interest payments, so zero coupon obligations are not appropriate. Furthermore, if interest rates are currently high and the investor wants to "lock-in" these high rates, he or she will want a non-callable issue. If rates drop, the issuer cannot call these bonds. Puttable bonds are of no value unless interest rates rise, devaluing the bond. Then, the holder could exercise the put option and "put" the bond back to the issuer - usually at par.
A corporation wishes to raise funds to build a new manufacturing facility. Which method is suitable for the issuer to obtain financing? A. Force conversion of outstanding convertible preferred B. Split the outstanding shares of common stock 2 for 1 C. Issue rights to outstanding shares of common stock D. Call outstanding convertible preferred
The best answer is C. The only method listed that will raise new funds for the corporation is to sell additional common shares through a rights offering. Forcing conversion of outstanding convertible preferred does not raise new capital. It simply converts preferred stock into common stock. Splitting shares does not raise new capital. After the split, the company has more shares outstanding, worth half the original amount. Calling outstanding preferred uses cash and reduces capital.
Which of the following statements are TRUE about an order to: Buy 100 ABC @ 50 Stop 53 Limit? I The order is elected at $50 or lower II The order is elected at $50 or higher III The order is executed at $53 or lower IV The order is executed at $53 or higher A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. This is a Buy Stop Limit order. Buy Stop orders are placed higher than the current market, and are filled as the market rises. The guidelines of the stop price must be adhered to first. A buy stop is elected as the market rises to the stop price ($50) or higher. As soon as the market hits $50 or higher, the order is elected, and turns into a limit order to buy at the limit price of $53. An order to buy at $53 means to buy at $53 or lower. Thus, the order is elected at $50 or higher; and executed at $53 or lower.
A "fund of hedge funds" is: I a closed end fund that invests in a selection of hedge funds II generally registered with the SEC and sold by prospectus only III subject to an extra layer of fees, including not only fund management fees, but also the fees charged by the underlying hedge fund managers IV tax inefficient as compared to traditional fund investments because aggressive trading by the underlying hedge fund managers typically results in ordinary income and short term gains; not long term gains A. I and II B. III and IV C. I, II, III D. I, II, III, IV
The best answer is D. A "fund of hedge funds" is a closed end fund registered under the Investment Company Act of 1940 (and therefore sold with a prospectus) that makes investments in selected hedge funds. These "funds of funds" allow smaller investors to participate in alternate investments like hedge funds, though they generally have a minimum $25,000 investment amount, cutting out the truly small investor. In addition, these closed end funds are not listed on an exchange - they do not trade. Rather, they are issued either monthly or quarterly, and they are redeemed through tender offer by the sponsor. Since the underlying investments are hedge funds, these "funds of funds" are characterized by aggressive trading, high risk, and potentially high reward. The underlying hedge fund manager is compensated with management fees, in addition to the closed-end fund manager that selects the hedge fund investments earning management fees, so there is a double layer of fees to this investment. Because the underlying hedge funds are aggressively traded, resulting gains (and losses) tend to be short-term, making these tax-inefficient investment vehicles.
To smooth out cash flow, a corporation will issue: A. TANs B. RANs C. BANs D. Commercial paper
The best answer is D. Commercial paper is a short term unsecured IOU issued by corporations. TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes) are municipal short term notes.
A member that has knowledge of a client order that has not been entered on a marketplace that could reasonably be expected to affect the market price of the security is prohibited from: I entering a proprietary order for the purchase or sale of that security II soliciting an order from another person for the purchase or sale of that security III informing any other person, other than in the necessary course of business of the client order A. I only B. I and II C. II and III D. I, II, III
The best answer is D. Consider this question to be a learning lesson in everything that is prohibited about "front running." Prior to entering a customer order that is likely to have market impact (meaning a big institutional order), a member firm cannot place an order in that security for the firm's account; cannot solicit others to place orders; and cannot inform others about the existence of the market-impact order so that they can "front run" it.
Once a securities trade occurs, clearance and settlement of the transaction, along with the maintenance of physical custody of the position, will be performed by: A. OMB B. FRB C. SEC D. DTC
The best answer is D. Depository Trust and Clearing Corporation (DTCC, sometimes just called DTC), is owned by U.S. banks and brokerage firms. It is the central clearing house for stock and bond transactions, and also maintains custody of both physical certificated securities and electronic book-entry securities. The OCC (Options Clearing Corporation) performs a similar function for the options markets. The SEC (Securities Exchange Commission) is the federal agency responsible for oversight of the securities markets. The OMB is the Office of Management and Budget, the federal agency thats responsible for preparing and overseeing the annual federal spending budget.
The exchange traded fund(s) based on indexes by industry sector or country are known as: A. DIAs B. QQQs C. SPDRs D. I-Shares
The best answer is D. Exchange traded funds based on indexes by industry sector, country, or market capitalization, are known as "I-Shares," as in "Index Shares." Other Exchange traded funds are SPDRs (Standard and Poor's 500 Index - symbol = SPY), DIAmonds (Dow Jones Industrial Average Index - symbol = DIA), and QUBES (NASDAQ 100 Index - symbol = QQQ).
Which of the following statements are TRUE regarding fixed unit investment trusts (UITs)? I Fixed UITs are managed II Fixed UITs are unmanaged III The composition of the portfolio can be changed IV The composition of the portfolio cannot be changed A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. Fixed unit investment trusts are not managed; the portfolio is fixed and does not change. These are typically bond trusts, where a diversified portfolio of bonds is assembled and placed into trust; with units of the trust sold to investors. These are non-exempt securities that must be registered with the SEC and sold with a prospectus. They are regulated under the Investment Company Act of 1940 and are redeemable with the sponsor, who makes a market in trust units.
Which of the following terms apply to mutual fund shares? I Negotiable II Redeemable III One-time stock issuance IV Continuous stock issuance A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. Mutual fund shares do not trade - they are not negotiable. The shares are redeemed by the fund at Net Asset Value. The fund continuously issues and redeems its shares.
ABC Company has outstanding 6% cumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend. Last year, ABC paid a 4% preferred stock dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive: A. 0% B. 2% C. 6% D. 8%
The best answer is D. On cumulative preferred stock, all back unpaid dividends PLUS this year's preferred dividend must be paid before a common dividend is paid. Thus, 2 years ago the full 6% preferred dividend was paid, so there is no arrearage; last year only 4% was paid, so 2% was missed. Before a common dividend can be paid this year, the missing 2% plus this year's 6% preferred dividend, or a total of 8% must be paid.
Which of the following statements are TRUE regarding REITs? I The REIT issues common shares representing a proportional interest in the investment company II The REIT issues shares of beneficial interest representing an undivided interest in a pool of real estate investments III REITs are similar to open end investment company shares IV REITs are similar to closed end investment company shares A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. REITs issue shares of beneficial interest with each certificate representing an undivided interest in the pool of real estate investments. Other than this difference, the trust is run in a similar fashion to a corporation. REITs are registered securities under the Securities Act of 1933 and trade on an exchange or OTC. Thus, they are similar to closed-end investment companies under the Investment Company Act of 1940, except that investments are made in real estate and mortgages, instead of in securities.
All of the following are evaluated in the feasibility study prepared prior to the issuance of revenue bonds EXCEPT: A. expected demand for the facility B. effect of competing facilities C. expected operating costs of the facility D. bond trust indenture
The best answer is D. The feasibility study performed prior to the issuance of revenue bonds is an economic study that projects revenues and costs for the facility to determine if there will be sufficient net revenues to service the debt. The effect of any competing facilities is included in the study. Legal aspects, such as the trust indenture, are not included in the feasibility study. These are evaluated by the bond counsel. The rest would be evaluated in the feasibility study.
The individuals who make a secondary market in corporate bonds include all of the following EXCEPT: A. market makers B. dealers C. traders D. registered representatives
The best answer is D. The secondary market is the trading of issues outstanding in the market. The individuals making the secondary market are the market makers (also known as dealers) and traders. Both market makers (dealers) and traders deal with the public through registered representatives (retail brokers).
Under MSRB rules, yield to worst means that: A. all municipal bonds quoted on a yield basis must be priced to the near-term in whole call date B. municipal par bonds quoted on a yield basis must be priced to the near-term in whole call date C. municipal discount bonds quoted on a yield basis must be priced to the near-term in whole call date D. municipal premium bonds quoted on a yield basis must be priced to the near-term in whole call date
The best answer is D. When municipal serial bonds are quoted on a yield basis, the dealer must compute the dollar price shown on the customer confirmation. This dollar price must assure, that at a minimum, the customer will receive the promised yield. This is known as pricing to the "worst case" scenario. For a premium bond, the "worst case" scenario is having the bond called early (which is the likely case). Bonds trade at a premium because market interest rates have dropped, so the issuer can refund the issue at lower current market rates by calling in the bonds. In this case, the bond is priced based on giving the customer the promised yield using the near-term in whole call date as the redemption date. If the bond were not called, the customer's actual yield would improve, because the annual loss of premium incorporated into the yield would be spread over a longer time frame. For a discount bond, the "worst case" scenario is having the bond held to maturity (which is the likely case). Bonds trade at a discount because market interest rates have risen, so the issuer would not call these bonds. In this case, the bond is priced based on giving the customer the promised yield using the maturity date. If the bond were called early, the customer's actual yield would improve, because the annual earning of the discount incorporated into the yield would be spread over a shorter time frame.
