series 7 -- final exam 5

A customer wishes to buy 100 shares of PDQ "when issued" stock at $25 as the initial transaction in a cash account. The customer must deposit:

$2,000 (The purchase of when issued stock is treated the same as if the security were already issued and trading. However, the customer is not required to put up 100% to purchase when issued securities in a cash account. Instead, the customer must maintain equity as if the position were in a margin account. (Once the security is issued, it must be paid in full). Thus, the minimum is the greater of 50% or $2,000 of equity in the account. Since this is the initial transaction, the customer buying $2,500 of "when issued" stock must deposit $2,000 to meet the minimum equity requirement.)

A customer buys a $100,000 - 30 year U.S. Government bond with 10 years left to maturity in the secondary market at 80. The customer does not elect to accrete the discount annually. At maturity, the customer will have:

$20,000 of taxable interest incomeThere is an option of accreting the discount and paying tax annually on the accretion amount at full tax rates; or of waiting until the bond is redeemed or sold to pay the tax on the earned market discount at full tax rates. If the holder accretes the bond and holds it until maturity, there is no capital gain or loss, since the entire discount has been accreted and taxed over the bond's life. If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains).)

A customer sells short 1,000 shares of ABC stock at $3.00 per share in an existing margin account. The customer must deposit:

$3,000 (Under the "cheap stock rule," if a customer sells a stock short under $5.00 per share, he or she must put up the greater of 100% or $2.50 margin per share. 100% of $3 per share x 1,000 shares = $3,000. $2.50 x 1,000 shares = $2,500. The greater amount is $3,000.)

A customer sells short 100 shares of ABC stock at $40 and buys 1 ABC Mar 40 Call @ $5. The maximum potential gain is:

$3,500 (If the stock falls, the customer gains on the short stock position. The customer sold the stock for $40. If it falls to "0," the customer can buy the shares for "nothing" to replace the borrowed shares sold and make 40 points. The customer lets the call expire "out the money" losing 5 points, so the maximum potential gain is 35 points = $3,500.)

A customer buys 10 OEX Feb 600 Calls with 24 months to expiration @ $6 in a margin account when the OEX is at 601. The customer must deposit:

$4,500 (The margin requirement to buy LEAP options with over 9 months to expiration is 75%. 75% of $600 premium per contract = $450 margin requirement per contract x 10 contracts = $4,500 deposit)

Distributions from Section 403(b) tax deferred annuities are:

100% taxable

Regular stock option contracts can be purchased with all of the following lives EXCEPT:

12 months (The maximum life of a regular stock option contract is 8 months (this may be tested as 9 months,)

A 12%, $1,000 par corporate bond is trading at $900. What is the current yield?

13.3% (annual interest / market price)

A customer buys a new municipal issue from an underwriter on Friday, January 16th, with settlement taking place on Tuesday, January 20th. The bond is dated January 1st. How many days of accrued interest must be paid by the customer to the underwriter?

19 (Interest accrues from the dated date on a new issue up to, but not including the date when the first trade settles)

The Bond Buyer Revenue Bond Index contains:

25 revenue bonds with 30 years to maturity, rated A or better

Which statement is FALSE about CMBs?

CMBs are sold at a regular weekly auction (CMBs are Cash Management Bills. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.)

All of the following statements are true about CMOs EXCEPT:

CMO issues have the same market risk as regular pass-through certificates (CMOs have a lower level of market risk (risk of price volatility due to movements in market interest rates) than do mortgage backed pass-through certificates)

A 60-year old man wants to trade in and out of the market on a daily basis. He has the investment objectives of income and capital gains. The best recommendation is a(n):

ETF (ETFs are index funds that are exchange traded. ETFs are actively traded and are quite liquid. By choosing the correct index, a match to the customer's investment objectives of income and capital gains can be achieved. ETNs are exchange traded structured products that are much less liquid. Both mutual funds and UITs do not trade - they are non-negotiable. Instead, they are redeemable with the sponsor at NAV.)

Margins on government and municipal securities are set by (the):

FINRA

Which of the following are equity security holders of a company? I Common shareholders II Preferred Shareholders III Convertible Bondholders IV Warrant Holders

I and II (Convertible bondholders are creditors of a company. Their position only becomes equity if they convert to common shares. Warrant holders have long term options to buy stock. They only become equity holders if they exercise their options.)

Which of the following issues would be overlapping debts? I School district bond issue where the school district is coterminous with the town that 100% uses that school district II School district bond issue where the school district encompasses three neighboring townships III Water revenue bond issue where the water district is coterminous with the town that 100% uses that water system IV Water revenue bond issue where the water district encompasses three neighboring townships

I and II only (An overlapping debt is a GENERAL obligation of a municipal issuer that is the responsibility of other municipal units. An example would be a school district bond issue covering a number of townships - the property tax collections of all 3 towns would be used to service the school district debt. A school district that only covers one township ("coterminous" means sharing the same geographic boundaries) overlaps that one township and the property tax collections within that township pay for that school district debt. Revenue bonds are never overlapping debts - rather they are self-supporting debts that pay their own way through collected usage fees.)

Which time(s) must be recorded on unexecuted order tickets? I Time of order receipt II Time of order execution III Time of order cancellation, if canceled

I and III

Which of the following individuals CANNOT buy options for his own account? I Order Book Official II Specialist (DMM) III Market Maker IV Floor Broker

I and IV

Which statements are TRUE about stock dividends on short stock positions? I The lender of the securities receives the stock dividend II The lender of the securities pays the stock dividend III The borrower of the securities receives the stock dividend IV The borrower of the securities pays the stock dividend

I and IV

Which statements are TRUE regarding Treasury Inflation Protection securities? I In periods of deflation, the amount of each interest payment will decline II In periods of deflation, the amount of each interest payment is unchanged III In periods of deflation, the principal amount received at maturity will decline below par IV In periods of deflation, the principal amount received at maturity is unchanged at par

I and IV

From an issuer's standpoint, as the years progress, "level debt service" serial bond issues have: I Decreasing interest payment amounts II Increasing interest payment amounts III Decreasing principal repayment amounts IV Increasing principal repayment amounts

I and IV Level debt service means that the issuer pays the same amount each year, with the funds being used to pay both interest and a portion of principal on the issue (similar to a mortgage amortization schedule). Since bonds are retired annually, the amount of the payment representing interest declines annually. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases)

Which of the following statements are TRUE regarding options sales literature that is accompanied or preceded by delivery of the ODD (Options Disclosure Document)? I It must be approved prior to use by the designated Registered Options Principal II It can recommend a specific options contract III The use of recommendations, or of past or projected performance, is permitted IV The illustration of annualized rates of return achieved from various options strategies is permitted

I, II, III, IV

Which of the following are TRUE statements regarding Treasury Bills? I The maturity is 52 weeks or less II Treasury Bills are callable at any time at par III Treasury Bills trade at a discount to par IV Payment is backed by the full faith and credit of the U.S. Government

I, III, IV

Exchange Traded Funds (ETFs) are: I registered under the Investment Company Act of 1940 as closed-end management companies II registered under the Investment Company Act of 1940 as open-end management companies III regulated by the SEC and FINRA IV regulated by FDIC and the Department of Treasury

II and III

Which statements are TRUE regarding the weekly Treasury Bill auction? I The minimum competitive bid has no dollar limit II The minimum competitive bid amount is $5,000,000 III The maximum competitive bid has no dollar limit IV The maximum competitive bid amount is $5,000,000

II and III

Which of the following information would be found in a new issue "tombstone" announcement? I The net proceeds to the issuer II Type of security offered III Names of the underwriters IV Aggregate offering price

II, III, IV

Which of the following would be purchasers of Eurodollar bonds? I United States investors II British investors III French investors IV Japanese investors

II, III, IV (Eurodollar bonds are purchased by foreign investors worldwide. They are bonds issued in Europe that pay in U.S. currency; and are attractive to investors who wish to receive payments in U.S. Dollars. U.S. investors cannot buy Eurodollar bonds because they are not registered with the SEC, and hence cannot be offered within the United States. Issuers use Eurodollar bond financing because there are fewer regulatory hassles (and costs) in issuing these securities, than with doing a similar bond offering in the United States)

Variable annuity contracts contain which of the following guarantees? I Interest Rate Guarantee II Investment Guarantee III Mortality Guarantee IV Expense Guarantee

III and IV (ariable annuity contracts contain a mortality guarantee and an expense guarantee. If one dies later than expected, the company continues to pay the annuity. If expenses rise, the company absorbs them above a set percentage. However, no guarantee is given for the rate of return (investment guarantee or interest rate guarantee) - this is only given for a fixed annuity.)

For bonds trading at a premium, rank the yield measures from lowest to highest? I Nominal II Current III Basis IV Yield to Call Basis

IV, III, II, I (When bonds are trading at a premium, the yield to call will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be "lost" over the life of the bond to the call date. The next highest yield will be the yield to maturity, since the premium will be lost over a longer "life" than if the bond is called early. Current yield will be higher than yield to maturity, since it does not include the annual premium loss. Stated yield will be the highest since it is the return based on par value.)

A customer holds 1,000 shares of ABC stock valued at 80 in a margin account. The debit balance in the account is $35,000. ABC declares and pays a 20% stock dividend. After the distribution is received in the account, the:

aggregate market value will stay the same (If a stock dividend is "paid," the stockholder gets additional shares. However, each share is now worth proportionately less (and the price in the trading market is reduced on "ex" date to reflect this). Thus, in aggregate, the shareholder has the same share value. For a position held in a margin account, the number of shares will increase, but the aggregate market value will remain the same. The debit is unchanged, as is the equity and the SMA in the account.)

An investor has a portfolio of diversified blue chip stocks with a current market value of $1,000,000. The portfolio has a computed beta factor of 2. The customer wants to protect the portfolio from a declining market with the use of OEX contracts. The OEX closed this day at 500. To hedge with "at the money" contracts, the customer should:

buy 40 OEX puts (If the portfolio were as volatile as the market, 20 put contracts would be needed to hedge. (500 OEX strike price x multiplier of 100 = $50,000 value covered per contract. $1,000,000 portfolio divided by $50,000 coverage per contract = 20 contracts) However, this portfolio moves 2 times as fast as the market, so 2 times the number of contracts is needed to hedge. 2 x 20 contracts = 40 contracts.)

Individual Retirement Account contributions can be made with:

cash (Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).)

All of the following statements are true about the NYSE Super Display Book System EXCEPT:

commissions charged to retail customers for display book executions are lower than for manual executions

A customer buys $10,000 of Government Bond Fund shares from Acme Investors, a fund sponsor and broker-dealer. Acme is the sponsor for a variety of funds within the Acme "family." The ACME family has an "exchange feature" at NAV. The customer decides to exchange his Government Bond Fund shares for Growth Fund shares within the same family. All of the following statements are true EXCEPT the:

customer will pay a sales charge (This fund family has an "exchange feature" at NAV, which means that shares of one fund can be redeemed and reinvested in shares of another fund within the family without any sales charge. For the customer exchanging Government Bond Fund shares for Growth Fund shares, a tax event has occurred. It would be expected that the customer's yield will decrease but that capital gains will increase, since he or she is moving from an "income" fund to a "growth" fund)

Which of the following does NOT affect SMA in a long margin account?

decrease in market value

Which of the following best describes a stock that pays out most of its earnings as dividends?

income stock

All of the following are features of variable annuities EXCEPT:

insured against losses (Because the separate account is invested in a mutual fund, the portfolio that funds the annuity is professionally managed. The unit holder has the right to vote to change the objectives of the separate account, just like a fund shareholder. Variable annuity purchasers take on investment risk - the separate account can lose money, causing the annuity payments to fall. There is no insurance against losses in the separate account (unless a separate rider is purchased for this). Variable annuities offer a "death benefit" during the accumulation phase. If the owner dies before annuitization, the insurance company will return the greater of all payments made, or NAV, to a beneficiary.)

Payment for U.S. Government securities that are sold through auction is made on:

issue date

A person who makes a secondary market in securities is called a(n):

market maker

Which statement is FALSE about a SIMPLE IRA?

max annual contribution is the same as for a traditional IRA (Each employee contributes up to $13,500 (in 2020) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary)

All of the following are suitable investments for an Individual Retirement Account EXCEPT:

municipal bonds (Municipal bonds are not suitable for tax deferred accounts such as pension plans and IRAs. These accounts are already tax deferred, so putting taxable investments in them that generate a higher rate of return than municipals is appropriate. Furthermore, these higher returns will compound tax deferred as long as they are held in the pension account. Municipals give a lower rate of return than governments or corporates because of the federal tax exemption on their interest income. They are a bad choice for retirement accounts. Finally, zero-coupon governments and corporates give a higher rate of return than municipals, since the annual accretion of the discount on these is taxable; and they are great investments to put in a retirement account; since then the annual accretion of the discount will build tax-deferred.)

A variable annuity is a(n):

participating UIT

A registered representative presents a seminar to a group of 35 prospective retail investors about investing in mutual funds. At the seminar, he makes recommendations of various funds, based on their objectives and performance. The seminar is defined by FINRA as:

sales literature (Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites)

What is a characteristic of a Unit Investment Trust?

securities that are redeemable with the sponsor

An investor becomes a limited partner when the general partner accepts the limited partner by signing the:

subscription agreement (The subscription agreement essentially is an "application" by an investor to become a limited partner in the venture)

A registered representative is notified verbally by an immediate family member of one of her customers that the customer has passed away. Which statement is TRUE regarding freezing the assets in the account?

the assets in the account can be frozen based on this verbal information

Which statement is BEST regarding participating preferred stock?

the dividend rate is fixed as to minimum but not as to maximum

Many years ago, a father opened a UGMA account for his young son. The son has just turned 17 and the father believes that the son is now old enough to start handling the account. The father wants to give trading authorization to the son and asks his representative over the phone to do this. What should the registered representative do?

the registered rep should decline the transaction (Because the kid is not of legal age (he is only 17), he cannot be given a power of attorney over the account.)

An order is placed on the NYSE to buy 100 ABC shares at $50 Day. If the order is not executed on that day, who cancels the order?

the specialist (DMM)

Which statement is TRUE about the liquidity and risk associated with federal agency securities?

there is minimal marketability risk (Agency bonds have little marketability risk; the trading market for U.S. Government and Agency Bonds is the most active in the world. As with any fixed income security, there is market risk associated with these securities. If interest rates rise, their prices will drop, with longer maturity and lower coupon issues dropping much faster than shorter maturity and higher coupon issues (making Choices A and D incorrect). Credit risk for federal agency securities is a bit higher than for U.S. Governments because they are not directly backed, they are only implicitly backed)

Under SEC Rule 605 of Regulation NMS, market centers, in their monthly reports on order execution, must disclose all of the following information EXCEPT:

trading volumes (SEC Rule 605 of Regulation NMS requires that market centers prepare, and make available to the public, monthly standardized reports summarizing their order executions. Included in the report is data on: Effective spreads (narrow spreads are better!); How market orders of various sizes were executed relative to the public quote (executions at, or very close, to the public quote are better!); Speed of execution (fast execution is better!); Fill rates (a larger percentage of orders being filled is better!); and Price improvement or disimprovement (getting a better price than expected is better!).)

Which index broadly measures activity in New York Stock Exchange, NYSE American (American Stock Exchange) and NASDAQ Stock Market?

value line index (he Value Line Index covers 1,700 stocks that are listed on the NYSE, NYSE American(AMEX) and NASDAQ. The Dow Jones Industrial Average consists principally of NYSE listed issues - but only includes 30 stocks. The Standard and Poor's 500 Average includes 500 issues, most of which are NYSE listed. The Major Market index only includes 20 NYSE listed issues.)