Mock Exam 3
The Bond Buyer
-published every business day -30 day visible supply (direct correlation to interest rates; the higher the more attractive) -compiles the 40, 20, 11 bond index & the Revdex 25
PAC - Planned Amortization Class CMOs
-targeted maturities -retired first and offer protection from Prepayment & Extension Risk
A broker/dealer that is a financial advisor to a municipal issuer: I. cannot act as an underwriter of the issuers bonds in a negotiated underwriting and receive compensation for both services. II. cannot act as an underwriter of the issuers bonds in a competitive bid underwriting and receive compensation for both services. III. may always act as an underwriter of the issuers bonds in a negotiated underwriting and receive compensation for both services. IV. may always act as an underwriter of the issuers bonds in a competitive bid underwriting and receive compensation for both service.
I & II
Which of the following is applicable to the NASDAQ OMX PHLX? I. Regional exchange operated by Nasdaq II. Offers trading in equity securities and options contracts III. Is a completely electronic exchange with no physical trading floor IV. Regional exchange operated by FINRA for the execution of OTC stocks only
I & II
In a competitive bid, which of the following would the issuer need to determine net interest cost? I. Coupon rates. II. Basis. III. Dollar price. IV. Spread.
I & III
Assume that a corporation issues a 5% Aaa/AAA rated debenture at par. Two years later, similarly rated debt issues are being offered in the primary market at 5.5%. Which of the following statements regarding the outstanding 5% debenture are TRUE? I. The current yield on the debenture will be higher than 5%. II. The current yield on the debenture will be lower than 5%. III. The dollar price per bond will be higher than par. IV. The dollar price per bond will be lower than par.
I & IV
The value of the Dow Jones Composite average would be most affected by a change in the value of which of the following market sectors?
The Dow Jones Composite Average consists of 65 stocks: 30 industrial, 20 transportation, and 15 utilities issues. Because industrials are the largest component, changes in their prices have the greatest effect on the averages.
All of the following will cover a short call EXCEPT:
cash equal to the aggregate exercise value.
All of the following characteristics are advantages of a REIT EXCEPT:
tax deferral. -A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments.
When one is calculating cost basis for a nonqualified variable annuity they are using
the after-tax dollars contributed -For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed.
All of the following are required by the MSRB on customer confirmations EXCEPT:
the amount of markdown or markup on a principal transaction. -The amount of markup or markdown must be fair and reasonable, but need not be disclosed.
Treasury Inflation Protection Securities (TIPS) offer which of the following benefits to an investor? Semiannual adjustments to principal based on the CPI. A Guarantee of profit upon sale. The interest payments will keep pace with inflation. TIPS provide investors with an income they can't outlive.
I & III -Treasury Inflation Protection Securities (TIPS), are issued by the government and designed to offer investors inflation protection by adjusting the principal of the TIPS semiannually based on the Consumer Price Index (CPI). In times of inflation the interest payments increase and they decrease during times of deflation. No security guarantees a profit upon sale and only an annuity can guarantee an income for life.
The market attitude of an investor with no other position who writes an at-the-money call is:
bearish/neutral.
If the FOMC sells government securities in the open market, it will:
decrease the money supply.
If a customer buys 1 XYZ Jan 40 call and 1 XYZ Jan 40 put, paying total premiums of $650, and XYZ becomes worthless, the result is a:
gain of $3,350. -This is a long straddle in which breakeven points are established by adding and subtracting the combined premiums (6-½ points) from strike (the breakeven points are 46-½ and 33-½). The customer makes money if the stock moves above 46-½ or below 33-½. As the stock becomes worthless, the customer earns a 33-½ point gain on 100 shares, or $3,350.
All of the following statements regarding a mark to the market are true EXCEPT:
it requires the use of a due bill.
The visible supply includes all of the following EXCEPT:
municipal notes.
An investor purchases an ABC Corporation convertible bond at 98 on June 18, 1997. The bond is convertible at $25 and the investor converts his bond into the stock on June 19, 1998, when the common stock is trading at $26 per share. For tax purposes, these transactions will result in:
neither gain nor loss.
All of the following deal with the secondary market EXCEPT:
notice of sale. -A notice of sale is published to provide syndicates with information on proposed new (primary market) issues.
A customer sells securities and uses the proceeds to buy more securities at the same cost. Under the 5% markup policy, the markup is calculated on:
the total of both sides. -The firm must consider the entire transaction (a proceeds transaction) when calculating the markup.
Which of the following statements regarding the economics of fixed-income securities are TRUE? I. Short-term interest rates are more volatile than long-term rates. II. Long-term interest rates are more volatile than short-term rates. III. Short-term bond prices react more than long-term bond prices given a change in interest rates. IV. Long-term bond prices react more than short-term bond prices given a change in interest rates
I & IV
Which of the following transactions in the same security will affect the holding period of a security held for 12 months or less? Buy a put. Buy a call. Sell short. Sell a put.
I and III. -The holding period of a capital asset is based on the amount of time the asset is held at risk. When there is no longer the possibility of a loss, there is no longer any risk. Buying a put or selling short effectively removes the risk from a transaction and destroys any short-term holding period. The short-term holding period will not become a long-term holding period for tax purposes, as long as the offsetting position (put or short) is maintained.
A customer writes 1 XYZ Jul 70 call at 5 when XYZ is trading at 72. If the stock subsequently rises to 76 and the contract is exercised, the customer has:
a loss of $100. -The customer was forced to sell stock at 70. To deliver the stock, the customer must buy it at the market for 76, for a $600 loss. However, the customer received a premium of $500 so the overall loss is $100. Alternatively, breakeven is 75 (strike price plus premium). Writers of calls, who are bearish, make money if the stock stays below the breakeven point. Above the breakeven point, writers of calls lose money. Because the contract was exercised when XYZ was 76 (1 point above the breakeven point), the customer has a $100 loss.
Each of the following individuals is eligible to participate in a Keogh plan EXCEPT:
an executive of a corporation who receives $5,000 in stock options from his company. -Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.
Nasdaq level 1
available to registered reps through public vendors. Displays the inside market only, highest bids and lowest ask prices
All of the following statements regarding a 6% municipal bond that is puttable at par are true EXCEPT the:
bond is likely to trade at a discount in the secondary market when it is puttable.
If a customer has sold 1,000 shares of XYZ at a loss, a wash sale will result within 30 days of the date of sale if your customer:
buys 10 XYZ at the money calls. -If, within 30 days of the date of sale, the customer buys back the security or the right to buy it back (a call option), the loss is disallowed. It will also be disallowed if the customer writes deep in-the-money puts on the security sold within 30 days. A deep in-the-money put will likely be exercised, forcing the customer to buy stock.
Nasdaq Level I service:
displays the inside market; highest bid and lowest ask. -Level I service provides subscribers with the inside market. The inside market is the highest bid price anyone is displaying and the lowest ask price anyone is displaying, via the Nasdaq quotation system.
When speaking to a customer about exchange-traded funds (ETFs), a registered representative could CORRECTLY state that these funds
do not have the same potential tax consequences as mutual funds, such as making capital gains distributions annually
All of the following are true regarding a fail to deliver EXCEPT
even though a fail to deliver has occurred and is still outstanding, FINRA mandates that the seller still be paid
Underwriters that reserve the right to stabilize the price of securities distributed to the public under an SEC registration statement may do so:
only if notice is given in the prospectus.
Nasdaq level 3
provides subscribers with all services of level 1 & 2 and allows registered reps to input and update their quote on any securities in which they make a market.
The POP for a mutual fund as quoted in the financial press reflects:
the maximum sales charge the fund distributor collects. -The public offering price for a quoted mutual fund includes the maximum sales charge the fund distributor can assess.
TAC - Targeted Amortization Class CMOs
-transfers prepayment risk only to a companion tranche -does NOT offer extension risk protection -greater price risk in exchange for a slightly higher interest rate
Accrued Interest Calculations - 2 methods
1. 30-day month (360 day year) - for all corporate and muni bonds 2. actual calendar days - US Gov. bonds.
A mutual fund's expense ratio is found by dividing its expenses by its:
A mutual fund's expense ratio is calculated by dividing its expenses by its average annual net assets.
If a customer purchases $10,000 worth of stock in a cash account on Monday, May 15, under Regulation T how much must the customer deposit, and when must the deposit be made?
$10,000 no later than Monday, May 22. -Under Regulation T, payment in a cash account must be made in full within 5 business days of the trade date.
A convertible bond callable at 101 is trading at 105. The bond is a 4% bond convertible at $25. The common stock is trading at $27. If an investor bought the bond and converted, his profit would be:
$30. -First, calculate the number of shares each bond will convert to: $1,000 (par) / $25 per share = 40 shares per bond. With market value at 105, each bond costs $1,050. What is the stock parity price? $1,050 / 40 shares = $26.25 per share stock parity price. CMV of the stock minus stock parity price equals profit (or loss). $27.00 − $26.25 = $.75 per share × 40 shares = $30.
Originators of fundamental economic theories
-Keynesian economists believe in government intervention -Laffer and supply-side believe the government should step aside and let the market forces takeover. -Milton Friedman-Montarist theory, moderately increasing money supply.
If a customer has a long-margin account with a market value of $12,000, a debit balance of $8,000 and SMA of $2,000, how much can the customer withdraw from the account?
1000 -SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. In this account, maintenance equity is $3,000 (25% of $12,000) and the current equity in the account is $4,000 ($12,000 MV − $8,000 DB). Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000.
If an investor wants to invest in the electronics industry but does not want to limit his investments to only one or two companies, which type of fund would be most suitable?
A specialized or sector fund invests 25% or more of its assets in a particular region or industry.
All of the following may transact business on the trading floor of the NYSE EXCEPT:
Allied members are executive officers, directors, or holders of more than 5% of an NYSE member firm's voting stock. They are not allowed to trade on the exchange floor.
SEC regulations for securities issued by investment companies prohibit which of the following? Closed-end funds from issuing preferred stock. Open-end funds from issuing preferred stock. Closed-end funds from issuing bonds. Open-end funds from issuing bonds.
II & IV
Which of the following best describes a nominal municipal bond quotation?
Approximate price reflecting current market value with no bid or offer.
Long term securities issued by municipalities that use a Dutch auction method to reset short term interest rates known as "clearing rates" are:
Auction Rate Securities (ARSs).
As the initial transaction in a new margin account, your customer shorts 100 shares of DMF at 30. With Regulation T at 50%, he will receive a margin call for:
Because the total market value of the transaction is $3,000, the initial margin would be $1,500 (50% of $3,000). However, minimum initial margin is $2,000.
Your customer is interested in purchasing a brokered CD and asks how they trade in the event he would want to sell it before it matures. Which of the following statements best describes how brokered CDs trade?
Brokered CDs trade at a market driven price that typically moves inversely to the movement of interest rates.
On the morning of the ex-date for a cash dividend which of the following orders on the order book will be reduced?
Buy limit. B) Sell stop. C) Sell stop limit. D) All of these. <<<<< -Those orders entered below the prevailing market (unless marked DNR) are reduced on the morning of the ex-date by the amount of the cash dividend. Those orders are buy limits and sell stops including sell stop limits.
A centralized online site intended for use by retail, non-professional investors to locate key information about municipal securities including real-time access to prices is known as:
Electronic municipal market access (EMMA)
When a customer sells $20,000 of securities from a margin account, all of the following are affected EXCEPT:
Equity is only affected by changes in market prices and never by sales of securities in the account.
An investor interested in monthly interest income should invest in:
GNMAs pay monthly interest and principal, treasury bonds pay semiannual interest, utility stocks pay quarterly dividends, and corporate bonds pay semiannual interest.
A customer sells 1 ABC Corporation put for 2 on February 22, 2007, with a strike price of 50 and an expiration date of March 16, 2007. On March 15, 2007, ABC is put to the customer. Which of the following statements about this transaction is CORRECT?
He has an acquisition cost of $4,800 and a date of acquisition of March 15, 2007.
Which of the following is NOT true regarding Treasury Receipts?
Interest income is taxed at maturity.
Active government manipulation of the economy through tax and budget policies is referred to as:
Keynesian
If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit to the corporation?
Reduction of the debt securities' interest rate.
As interest rates fall, prices of straight preferred stock will:
Rise -Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.
Which of the following is a debt instrument that pays no periodic interest?
STRIPS are Treasury bonds with the coupons removed. STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.
Which of the following types of mutual funds has capital appreciation as its investment objective?
Specialized. -An objective of high-capital appreciation is most likely realized by a stock fund. A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation.
A customer has his broker enter an order to buy GHI stock at the opening. Though transmitted promptly, the order does not reach GHI's trading post in time to be filled at the opening. How is the order handled?
The order is canceled.
Which of the following statements best describes banker's acceptances?
They are used primarily to finance imports and exports.
All of the following are fiduciary accounts EXCEPT:
Transfer on Death Accounts (TOD) are individual accounts with a designated beneficiary to receive account assets upon the death of the account owner.
Nasdaq level 2
approved subscribers only. provides current quote and quote size from each market maker in a security in the system. Market maker must guarantee the quote is firm for at least 100 shares
The federal funds rate has been decreasing. A likely cause would be:
heavy open market purchases by the Fed. -The Fed increases the money supply by buying securities in the open market. This causes interest rates to fall.
