Series 7 QBank Review Set 12
If a customer has a long margin account with a market value of $12,000, a debit balance of $8,000, and special memorandum account (SMA) of $2,000, how much can the customer withdraw from the account? A) $1,000 B) $1,500 C) $2,000 D) $0
A) $1,000 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),0 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 Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000.
A customer is short 100 XYZ shares at 26 and long 1 XYZ 30 call at 1. What is the maximum potential gain for the customer? A) $2,500 B) $500 C) $2,600 D) $5,200
A) $2,500 The customer has hedged his short stock position from a market advance by buying the call. If the market falls, the investor can make a maximum of $26 per share if the stock price falls to zero, less the premium of 1 paid to buy the call, for a maximum gain of $2,500 (26 − 1 = 25). Let's look at this on a T-chart.
If a customer has a margin account with a long market value of $140,000 and a debit balance of $60,000, what is the buying power in the account? A) $20,000 B) $0 C) $5,000 D) $10,000
A) $20,000 With Regulation T at 50% (always assumed), the buying power of a margin account is twice the amount of the SMA. With a long market value of $140,000 and a debit balance of $60,000, this account has equity of $80,000. The Regulation T requirement is $70,000 (50% times $140,000). Therefore, there is excess equity (or SMA) of $10,000. The purchasing power is double that ($20,000).
If a customer fails to meet a Regulation T margin call of $2,500, securities may be sold out of the account with a value of A) $5,000. B) $3,333. C) $2,500. D) $8,000.
A) $5,000. Securities valued at twice the Regulation T cash call must be sold out if a customer fails to meet a Regulation T margin call ($2,500 × 2 = $5,000).
A customer sells short 100 shares of XYZ Corporation at $78 per share. The support and resistance levels for XYZ are at $70 and $80, respectively. If he wishes to protect his position, which of the following is the best place to put in a buy stop order? A) $80.10 B) $69.85 C) $78.10 D) $70.10
A) $80.10 The client will want to place a buy stop a little above the resistance level to protect himself against an upside breakout. Entering a buy stop order too close to the purchase price (78.10) would not afford the client an opportunity for gain.
A stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which six candidates are running for three seats on the board, the stockholder could cast the votes in which of the following ways? A) 200 votes for each of three directors B) 100 votes for each of six directors. C) 600 votes for any one director D) 300 votes for each of two directors.
A) 200 votes for each of three directors A stockholder has one vote per seat for each share of stock he owns. Thus, in this case, the stockholder has a total of 600 votes. Under the statutory voting method, he must allocate an equal number to each seat, or 200 for each of three seats.
A customer entered an order to sell short 100 shares of ABC. The stock closed on Friday at $48. The stock will trade ex-dividend $0.50 on Monday. At what price can the order be executed at the opening? A) Any price B) $47.49 C) $47.50 D) $47.51
A) Any price The stock's price is adjusted for the dividend at its opening the next morning. The adjustment in the stock does not limit where the short sale can be executed. The former requirement for short sales on an exchange floor (or Nasdaq) to be made on a plus or zero-plus tick was eliminated in 2008. Therefore, a customer short sale can be executed at any time in the trade sequence.
Municipal Securities Rulemaking Board (MSRB) rules for NYSE member firms are enforced by A) FINRA. B) the MSRB. C) the NYSE. D) the SEC.
A) FINRA. The board's rules are enforced by FINRA for securities firms. The MSRB has rulemaking authority but no enforcement or examination authority.
Which of the following are fair and equitable methods for the assignment of options contracts by a brokerage firm to a customer? A) First-in, first-out or random selection B) Last-in, first-out or random selection C) First-in, first-out or to the customer with the largest open position in that option D) Last-in, first-out or to the customer with the largest open position in that option
A) First-in, first-out or random selection Options Clearing Corporation (OCC) rules allow broker-dealers to assign customers using first-in, first-out or random selection methods. In addition, the OCC also states that any other fair method is allowed.
A) I and II B) I and IV C) II and III D) III and IV
A) I and II A broker's broker helps sell the bonds a syndicate has left and does not disclose the identity of the firm on whose behalf it is acting. Broker's brokers do not charge fees for quoting a security, do not maintain inventory, and act solely as agents earning a commission for their services.
Which of the following actions of XYZ Corporation would raise additional capital? i. Issue callable preferred stock ii. Declare a stock dividend iii. Make a rights offering iv. Encourage convertible bondholders to convert to common stock A) I and III B) I and II C) II and III D) II and IV
A) I and III Issuing new stock either through an underwriting or a rights offering allows a corporation to raise capital. Stock dividends represent more shares given to existing shareholders, but no money is raised. Conversion results in the exchange of one security for another, and no money is raised.
A) I and IV B) I and II C) II and IV D) II and III
A) I and IV A long straddle is the purchase of a put and a call on the same stock when both options have the same terms. The long call is profitable if the market rises, while the long put is profitable if the market falls. An investor purchases a straddle if sharp market movement is expected, but the direction is uncertain. A short straddle is the sale of a put and a call on the same stock with both options having the same terms. If the market value remains stable, the options expire, and the seller keeps the premium, thereby generating income.
SEC Regulation SHO mandates a locate requirement for short sales that is applicable to i. corporate bonds. ii. NYSE issues. iii. Nasdaq securities. iv. municipal bonds. A) II and III B) II and IV C) I and III D) I and IV
A) II and III This regulation mandates a locate requirement: before the short sale of any equity security, firms must locate the securities for borrowing to ensure that delivery will be made on settlement date.
C) GNMA originates loans to home buyers and sells the mortgage-backed securities to private lending institutions. D) Lending institutions apply to GNMA for funds to lend to residential home buyers.
A) Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors. GNMA is a government-owned corporation that approves private lending institutions, such as banks and mortgage companies, to originate eligible loans, pool them into securities, and sell the GNMA mortgage-backed securities to investors. GNMA does not originate loans, and it does not issue or sell securities.
C) The market maker guarantees that a customer buy order can be filled no higher than 60. D) The quote is firm and the customer can sell an unlimited amount of stock at 60 or buy at 63.\
A) The quote is tentative (nominal), merely suggesting a range in which the order is likely to be filled. The term work out means that the quote is approximate, or nominal. As with a subject quote, the OTC trader that supplied the quote will most likely negotiate with a number of market makers to get the customer's securities sold or bought.
A) a short-term capital gain of $300. B) a long-term capital gain of $300. C) a short-term capital gain of $500 and a short-term capital loss of $200. D) a long-term capital gain of $500.
A) a short-term capital gain of $300. The investor purchased a protective put against a long position that had a short-term holding period. That means the holding period of the stock is erased and does not restart until the earliest of the date the investor disposes of the stock, exercises the put, sells the put, or the put expires. That means this investor's gain will be short term. The gain is the difference between the cost and the proceeds. When exercising a put, the cost of the stock is the investor's cost basis. The exercise price minus the option premium paid is the sale price. In our question, the cost is the $50 initial purchase price ($5,000 total). The sale price is the 55 strike minus the $2 premium, or $5,300. That results in a short-term capital gain of $300.
Level 1 Nasdaq service provides subscribers with all of the following information except A) bid and ask quotes for each market maker. B) last-sale information. C) the inside market. D) volume information.
A) bid and ask quotes for each market maker. Level 1 Nasdaq service provides subscribers with information on the inside market, last sale, and volume. The bid and ask quotes of each market maker in a particular security are shown over Level 2.
If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold A) for a maximum of 55 business days. B) until the need for the hold ends. C) for a maximum of 55 calendar days. D) for one month.
A) for a maximum of 55 business days. FINRA Rule 2165 permits a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted to place a temporary hold on the disbursement of funds or securities from the account of a specified adult customer. The maximum length of the hold is 55 business days. Do we expect the exam will ask you to choose between 55 business and 55 calendar days? No, that is not FINRA's style, but we do want you to know the correct count.
A) two business days after sending the statement before executing the first trade. B) five business days after sending the statement before executing the first trade. C) two business days after receiving the statement before executing the first trade. D) five business days after receiving the statement before executing the first trade.
A) two business days after sending the statement before executing the first trade. It is SEC Rule 15g-2 that requires the firm wait at least two business days after sending the risk disclosure document before executing the first penny stock trade for a new customer.
If a customer is long 1 GGZ Oct 50 call at 11 and short 2 GGZ Oct 60 calls at 5, the maximum loss potential is A) unlimited. B) $1,000. C) $100. D) $1,100.
A) unlimited. Because the customer is short 2 calls and long 1 call, one of the short calls is uncovered. The loss potential for a naked call writer is unlimited on the upside.
If a customer is long 1 ABC Oct 50 call at 11 and short 2 ABC Oct 60 calls at 5, the maximum loss potential is A) unlimited. B) $1,000. C) $1,100. D) $100.
A) unlimited. The customer is short two calls and long one call, leaving one of the short calls uncovered. The loss potential for a naked call writer is unlimited on the upside. If exercised, the writer must buy the stock at the current market price so it will be delivered at the strike price.
One of your customers owns five JLO 5s of 2042. The debentures have a conversion price of $15. When the market price of the convertible is 80, the parity price of the stock is A) $5.33. B) $12.00. C) $15.00. D) $18.00.
B) $12.00. A debenture with a conversion price of $15 is convertible into 66.66 shares ($1,000 ÷ $15). It is always the par value that is used, not the market price. To determine the parity price of the stock, divide the current market price of $800 by 66.66 and the answer rounds off to $12. Some students find it easier to recognize that the bond is 20% below its par value. To be equal (and that is what parity means), the stock must be 20% below the $15 conversion price (or 80% of it). Reducing $15 by 20% is a $3 reduction to $12 or taking 80% of $15 equals $12.
A client enters a buy stop order for 100 shares of XYZ at 40. Trades then occur at 38, 39, 39.90, 40.05, 40.10, and 39.78. At what price is the order triggered? A) $39.00 B) $40.05 C) $39.78 D) $40.10
B) $40.05 The order is triggered as soon as the price gets to 40 or higher. That would be the trade at 40.05. A typical use of a buy stop order is to protect a short stock position. Because the short stock position has unlimited potential loss, the short seller can gain protection by entering a buy stop order. That order is entered at a price above the current market (the short seller is hoping the price will fall), but if the price reaches or exceeds the stop price, the stop will be triggered. At that time, a market order is entered and the client pays the next price (which could be more or less than 40). In this case, the next price is 40.10, and although not the answer to our question, that is the likely price per share paid by the client.
A customer buys $10,000 worth of new issue municipal bonds at a price of 104, and the bonds have 10 years to maturity. Four years after purchasing the bonds, she sells them at 99. What is the tax loss on these bonds? A) 400 B) 340 C) 500 D) 160
B) 340 To arrive at adjusted cost basis, the premium on a new issue municipal bond must be amortized (subtract). To amortize the premium annually, divide the premium amount (in this case, $400 on the total purchase of 10 bonds) by the number of years until maturity (10). Thus, the customer writes down the initial cost by $40 per year. After four years, the bonds purchased at a cost of $10,400 will be written down to $10,240 (4 years × $40 per year = $160). If the bonds are sold for $9,900, the tax loss is $340 ($10,240 − $9,900 = $340).
C) An attorney who has represented an investor in an arbitration case once in the past five years D) Private investors who have substantial mutual fund holdings
B) Any person who worked in the financial industry for any portion of her career Those who have worked in the financial industry for any duration during their careers will always be classified as nonpublic arbitrators. Certain professionals, such as attorneys and accountants, can be considered nonpublic if at least 20% of their revenues comes from representing financial industry firms or any parties to an arbitration. One time in five years is certainly not going to be 20% of their revenues.
Which of the following risk factors would be least important to disclose in recommending collateralized mortgage obligation (CMO) securities to public customers? A) Interest rate risk B) Credit risk C) Prepayment risk D) Extended payment risk
B) Credit risk Most CMOs offered to the public are backed by mortgages held by government-sponsored corporations like Fannie Mae, Ginnie Mae, Freddie Mac, et cetera. Credit risk would be a minimal consideration. The other risks are inherent to mortgage-backed securities.
The over-the-counter (OTC) market could be characterized as what type of market? A) Primary B) Dealer C) Auction D) First
B) Dealer The OTC market is a dealer market.
A) New Jersey Turnpike revenue bonds rated AA. B) Delaware Wetlands Developments municipal bonds rated AA. C) high-yield municipal bonds rated BB. D) Michigan Upper Peninsula revenue bonds rated AA.
B) Delaware Wetlands Developments municipal bonds rated AA. There is no requirement to know the specific differences among states related to taxation of their municipal offerings. However, registered representatives (RRs) do need to know that, broadly speaking, there are differences. When discussing possible municipal bond purchases, RRs should tell customers that differences do exist and those differences must be considered before making a decision. In this question, we do not know the differences, but because the customer is a resident of New Jersey, the best choice would be investment-grade bonds from that state, knowing that municipal bonds from other states, even with the same rating, would provide a yield equal to or less than the New Jersey bonds. The safest course of action is to choose the investor's home state. The Michigan subinvestment-grade municipal bonds are out of the question for this customer.
Which of the following types of business organizations do not protect owners' personal assets from losses incurred by the business? i. General partnership ii. Sole proprietorship iii. S corporation iv. C corporation A) I only B) I and II C) II and III D) III and IV
B) I and II Corporations, whether organized as C or S corporations, afford their owners limited liability, which is the protection of their personal assets from losses incurred by the businesses. General partnerships and sole proprietorships subject their owners to personal liability for losses of the business.
A) I and IV B) II and III C) II and IV D) I and III
B) II and III The process used to reset the interest rate each period for ARS is called a Dutch auction, which is the lowest bid rate at which all of the bonds can be reset—or sold for new issues—at par. This newly established rate is known as the clearing rate, and bidders who bid at or below the clearing rate will now pay that rate. This means that those who bid above the established clearing rate will have their orders go unfilled.
If a customer buys a Mount Vernon Port Authority municipal bond in the secondary market at 109 and holds the bond to maturity, what are the tax consequences? A) Capital gain of $9 B) No capital gain or loss C) Capital loss of $90 D) Capital loss of $9
B) No capital gain or loss. The investor's cost basis of bonds purchased at a premium is adjusted by amortization of the premium. In this case, there is a $90 premium that will have been completely amortized at maturity. At maturity, the adjusted cost basis equals the face value, and no loss or gain is realized.
(con't) C) The firm proposes to transfer the client account into a wrap-fee program administered by its affiliated registered investment advisory firm. D) The firm has invited select clients to attend a seminar describing highly sophisticated alternative investments.
B) The firm, directly or through a registered representative, individually contacts a former customer of that registered representative to transfer assets to the firm. However, former customers may not be aware of other important factors to consider in making a decision whether to transfer assets to the recruiting firm, including direct costs that the customer may incur. Therefore, to provide former customers with a more complete picture of the potential implications of a decision to transfer assets, Rule 2273 requires delivery of a FINRA-created educational communication by the recruiting firm highlighting key considerations for former customers in transferring assets to the recruiting firm, and the direct and indirect impacts of such a transfer on those assets.
C) The firm proposes to transfer the client account into a wrap-fee program administered by its affiliated registered investment advisory firm. D) The firm has invited select clients to attend a seminar describing highly sophisticated alternative investments.
B) The firm, directly or through a registered representative, individually contacts a former customer of that registered representative to transfer assets to the firm. Registered representatives who leave their firms often contact former customers and emphasize the benefits the former customers would experience by transferring their assets to the firm that recruited the registered representative (recruiting firm) and maintaining their relationship with the representative. In this situation, the former customer's confidence in and prior experience with the representative may be one of the customer's most important considerations in determining whether to transfer assets to the recruiting firm.
If three individuals have a tenants in common account with your firm, and one individual dies, which of the following statements is true? A) The account must be liquidated and the proceeds split evenly among the two survivors and the decedent's estate. B) Two survivors continue as cotenants with the decedent's estate. C) Trading is discontinued until the executor names a replacement for the deceased. D) The account is converted to joint tenants with right of survivorship.
B) Two survivors continue as cotenants with the decedent's estate. The decedent's estate becomes a tenant in common with the survivors.
(con't) A) a short-term capital gain of $2,700. B) a short-term capital gain of $2,500 and a short-term capital loss of $200. C) a long-term capital gain of $2,300. D) a long-term capital gain of $2,500 and a short-term capital loss of $200.
B) a short-term capital gain of $2,500 and a short-term capital loss of $200. Because the investor disposed of the stock at the same time the put expired, there is no holding period, so any gains will be short term. As far as the math, the stock was purchased for $4,000 (100 shares @ $40 per share). The stock is sold for $6,500 (100 shares @ $65 per share). That is a gain of $2,500 (short term). When a long put expires, it is a capital loss in the amount of the premium. In our question, the premium was 2 points ($200) and that is a complete loss. Because the put has a five-month holding period (May to October), the loss is short term. In the real world, most accountants would just net the $2,500 short-term gains and the $200 short-term loss and report a $2,300 short-term gain. It is possible that could appear on the exam, but unlikely that you would have both choices. Please let us know if you do see something like this.
A) a short-term capital gain of $2,700. B) a short-term capital gain of $2,500 and a short-term capital loss of $200. C) a long-term capital gain of $2,300. D) a long-term capital gain of $2,500 and a short-term capital loss of $200.
B) a short-term capital gain of $2,500 and a short-term capital loss of $200. The investor purchased a protective put on the long RAVAD position. At the time of the purchase of the put, the holding period of the stock was less than the long-term requirement of more than 12 months. When that happens, the IRS rules that the short-term holding period (June to May is short term) is erased. Your new holding period for the underlying stock begins on the earliest of the date you dispose of the stock, the date you exercise the put, the date you sell the put, or the date the put expires.
A designated market maker is permitted to do all of the following except A) buy and sell for a proprietary account. B) accept a not held order. C) accept a limit order. D) represent a bid and offer simultaneously.
B) accept a not held order. A specialist (designated market maker) on the floor does not deal directly with the public. Therefore, a designated market maker cannot accept any order that requires the exercise of discretion. A not held order is one in which the floor broker can choose the price or time of execution.
The best way to cover a short put is to A) sell a straddle. B) buy another put in the same class. C) sell another put in the same class. D) buy a straddle.
B) buy another put in the same class. A short put can be covered by a long put (the short put is no longer naked). This strategy offers limited protection for a short stock seller.
When compared to statutory voting, cumulative voting gives an advantage to A) participating preferred stockholders. B) minority stockholders. C) majority stockholders. D) management rather than the board of directors.
B) minority stockholders. Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board.
A corporation has an IPO of its $5 par common stock. The public offering price (POP) is $15 per share. The difference between the par value and the POP represents A) retained earnings. B) paid-in surplus. C) capitalized profit. D) net income.
B) paid-in surplus. When a corporation issues new stock at a price in excess of the par value, the excess is listed on the balance sheet as paid-in or capital surplus.
Covenants in the trust indenture of a municipal revenue bond are promises made by the issuer to the bondholders. All of the following are potential covenants except A) the insurance covenant. B) the interest rate covenant. C) the maintenance covenant. D) the rate covenant.
B) the interest rate covenant. There is no such thing as an interest rate covenant in a trust indenture. The interest rate will be stated, but not in the form of a covenant. In the maintenance covenant, the bond issuer promises to perform proper maintenance on the facility the bonds are financing. The insurance covenant requires the issuer to maintain property insurance on the facility to repair or replace the facility. The rate covenant requires the issuer to maintain the user fee for a revenue bond at a level sufficient to service the debt.
A confirmation sent to a customer must include all of the following except A) markup or markdown if the member acted as a principal in a Nasdaq security. B) the name of the registered representative handling the account. C) whether the member acted as an agent or principal. D) the amount of any commission.
B) the name of the registered representative handling the account. There is no requirement to provide identifying information for the registered representative. A customer confirmation must disclose the amount of markup for a principal transaction in a Nasdaq security, whether the member acted in an agency or principal capacity, and the amount of commission if the member acted as an agent.
A corporation is having a rights offering. The terms of the offering require four rights plus $40 to purchase one share. With the stock's current market price at $50 per share, the theoretical value of one right before the ex-rights date is A) $2.50. B) $0.20. C) $2.00. D) $0.25.
C) $2.00. Because the question is asking about the value before ex-rights, it means we use the cum-rights (with rights) formula. That is, the (market price minus the subscription price) divided by the (number of rights it takes to buy one share plus one). Plugging in the numbers gives us ($50 - $40) ÷ (4+1) = $10 ÷ 5 = $2.00
A customer has the following accounts: Market value: long account $35,000; short account $40,000 Balance: long account (DR) $23,000; short account (CR) $60,000 SMA: long account $3,000 Regulation T: 50% What is the combined minimum maintenance requirement for the long and short margin positions? A) $18,750 B) $12,750 C) $20,750 D) $8,750
C) $20,750 The minimum maintenance for long accounts is 25% of the LMV (25% × $35,000 = $8,750). The minimum maintenance for short accounts is 30% of the SMV (30% × $40,000 = $12,000). In this case, $8,750 plus $12,000 equals a combined maintenance of $20,750.
The OEX index (Standard & Poor's 100) closes at 379.70, up 0.60 from the prior day's close. The holder of 10 in-the-money calls makes an unrealized gain of A) $6,000. B) $60. C) $600. D) $6.
C) $600. This unrealized gain is $600 (10 calls × 0.60 × $100 = $600).
The market price of fixed-income securities, especially bonds, is highly sensitive to changes in market interest rates. Based on that knowledge and assuming that all of these bonds were purchased at par value, which of the following will have the greatest price change when market interest rates decrease? A) 10-year maturity, 6% coupon B) 10-year maturity, 4% coupon C) 20-year maturity, 4% coupon D) 20-year maturity, 6% coupon
C) 20-year maturity, 4% coupon Bonds with longer maturities tend to be more sensitive to interest rate changes. Bonds offering lower coupons are generally more sensitive to interest rates than higher-yielding counterparts.
A customer enters an order to sell 100 TCB at 49 stop limit. Before the order, TCB was trading at 49.25. Subsequent trades are reported on the tape as follows: TCB 49.10, 48.75, 48.85, 49, 49.25 What trade triggered the order? A) 49 B) 48.85 C) 48.75 D) 49.25
C) 48.75 A stop order remains dormant until there is a transaction at or better than the stop price. Our example is a sell stop limit order where the stop price and limit price are the same. A sell stop order is triggered (elected) by the first trade that is at or below the stop price of 49. In this case, it is 48.75. At that point, a limit order to sell at 49 or better (higher) is entered. If this question asked for the execution price, it would be the trade of 49.
A customer of the firm called to ask about closing out an option position. The customer is short 10 MNO Dec 60 puts. Each contract was purchased at $300. The underlying stock's price is currently 63, with only 20 business days until the options expire. What is the breakeven price? A) 63 & 57 B) 63 C) 57 D) Unlimited
C) 57 Not considering commissions and other fees, the stock must fall to $57 for the customer to break even on this investment. If the stock falls in the remaining time to $57, the customer may purchase the stock and sell it (put it) to those short the puts at 60, making $3 per share, which covers the cost of the options.
A) 150 shares of common at $100 per share and 100 shares of the preferred at $90 per share. B) 300 shares of common at $50 per share and 200 shares of the preferred at $45 per share. C) 600 shares of common at $25 per share and 100 shares of the preferred at $90 per share. D) 600 shares of common at $25 per share and 200 shares of the preferred at $45 per share.
C) 600 shares of common at $25 per share and 100 shares of the preferred at $90 per share. A stock split is always of common stock. In a 2:1 split, the number of shares doubles, and the price is 50% of the presplit price, which means 600 shares at $25 per share. The stock split has no effect on the preferred stock.
A profitable company distributes 70% of its earnings in the form of cash dividends. What is the effect on the balance sheet of the 30% earnings that are not distributed? A) A decrease to retained earnings B) A decrease to capital surplus C) An increase to retained earnings D) An increase to capital surplus
C) An increase to retained earnings Capital surplus comes from original investors. Retained earnings are created by undistributed company profits.
An investor purchases 200 shares of ABC common stock, but is concerned about market risk. While the investor cannot use diversification to reduce market risk by investing in the same asset class, they can hedge against the risk. Which of the following options positions would be used as such a hedge? A) Sell 1 ABC put B) Sell 1 ABC call C) Buy 2 ABC puts D) Buy an ABC put
C) Buy 2 ABC puts The investor should buy two ABC put options (the investor is long 200 shares). Options can be used as a hedge (protection) against risk or can be used to provide income. To use as a hedge, the investor should buy (go long) the option. To use as income, the investor should sell (go short) the option. Here the investor is using the option to hedge, so they will be buying the option, not selling. Investors use long puts to hedge a long stock position and long call options to hedge a short stock position.
Which of the following statements about partnerships is not correct? A) General partners can buy and sell property for the partnership. B) Limited partners can vote on the sale or refinancing of partnership property. C) General partners can borrow from the partnership. D) Limited partners are not able to make decisions that bind the partnership.
C) General partners can borrow from the partnership.. General partners cannot borrow from the partnership. General partners can buy and sell property for the partnership. Limited partners can vote on the sale or refinancing of partnership property. Only a general partner can make decisions that legally bind the partnership.
Which of the following is not under governance of the Municipal Securities Rulemaking Board (MSRB)? i. Issuers of municipal fund securities ii. Broker-dealers that sell municipal fund securities iii. Issuers of municipal bonds iv. Banks that sell municipal securities A) II and III B) II and IV C) I and III D) I and II
C) I and III Issuers of municipal or municipal fund securities are exempt issuers and are not regulated or under the guidance of the MSRB or any other self-regulatory organization.
A) I and IV B) II and IV C) I and III D) II and III
C) I and III Under the conduit (or pipeline) theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level) and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.
If a customer buys 5 ABC Jan 40 puts and writes 5 ABC Jan 45 puts, which of the following statements are true? i. The customer profits if the spread widens. ii. The customer profits if the spread narrows. iii. The customer is a bull. iv. The customer is a bear. A) I and III B) II and IV C) II and III D) I and IV
C) II and III Because a put is a right to sell, the premium on the 45 puts is higher than that of the 40 puts. The customer is writing the put with the higher premium, so this is a credit spread, and the bullish investor will profit at expiration if the difference between the two premiums narrows as the contracts lose value.
Having held 100 shares of GHI stock for 15 months, a customer purchases 1 GHI Jan 50 put in December. If the put is exercised before the expiration date and the long stock is delivered, which of the following statements are true? i. The premium is added to the sale proceeds. ii. The premium is deducted from the sale proceeds. iii. Any gain is long term. iv. Any gain is short term. A) I and III B) I and IV C) II and III D) II and IV
C) II and III Because the customer already held the stock long term when he purchased the put, he was not trying to stretch a short-term gain into a long-term gain. There is no effect on his established holding period of 15 months. Whenever a put is exercised, the stock's sale price (exercise price) is reduced by the premium paid for buying the put.
Over-the-counter (OTC) trading practices in corporate securities are supervised by i. the Securities Investors Protection Corporation (SIPC). ii. the Securities and Exchange Commission (SEC). iii. the Federal Open Market Committee (FOMC). iv. the Financial Industry Regulatory Authority (FINRA). A) I and IV B) I and III C) II and IV D) II and III
C) II and IV The SEC is responsible for regulating securities trading throughout the United States. FINRA is the authorized SRO for the OTC market. The SIPC is a nonprofit member sponsored entity to protect customer assets in the event a broker-dealer fails. The FOMC determines the course of open market purchases and sales by the Fed in effecting monetary policy.
A) I and IV B) I and II C) III and IV D) II and III
C) III and IV An official statement is a document similar to a prospectus and is furnished, in most cases, to buyers of new issue municipal bonds. SEC rules require that an official statement be prepared for most—but not all—new municipal issues. The MSRB has no such requirement, as it does not regulate issuers.
If XYZ Corporation sells an additional 1 million common stock with a par value of $1 for $10 per share, which of the following is true? A) Its earnings per share will increase. B) Its liquidity ratio will decrease. C) Its paid-in surplus will increase. D) The current ratio will decrease.
C) Its paid-in surplus will increase. Paid-in surplus is a balance sheet entry that accounts for money raised from the issuance of stock in excess of par value. When more shares are sold, paid-in surplus will increase.
A customer sells short 100 shares of XYZ at 58 and buys 1 XYZ Jan 60 call for 3. If the stock price falls to $52, the customer buys back the stock and closes the option at 1 for A) a gain of $300. B) a loss of $400. C) a gain of $400. D) a loss of $300.
C) a gain of $400. The customer made $600 on the short stock position ($58 to $52) and lost $200 on the call (bought for 3, sold at 1). Overall, the gain is $400.
The term for the annual reduction of a municipal bond's cost basis purchased at a premium is A) compound amortization. B) straight-line accretion. C) straight-line amortization. D) compound accretion.
C) straight-line amortization. Amortization is the process by which the cost basis of a bond bought at a premium is decreased during the holding period. Because the cost basis is reduced by equal amounts every year, amortization is done on a straight-line basis. At maturity, the cost basis has been reduced to par.
PDQ Corporation has a 6.25% $100 par value convertible preferred stock (conversion ratio of 4) outstanding. The stock has an antidilution covenant. If PDQ declares a 10% stock dividend, the antidilution covenant will adjust A) the par to $90. B) the conversion price to approximately $27.50. C) the conversion price to approximately $22.73. D) the par to $110.
C) the conversion price to approximately $22.73. When a $100 par value preferred stock is convertible into 4 shares of common stock, the conversion price is $25 per share ($100 ÷ 4 = $25). The antidilution covenant means the investors will have the same conversion rights after a stock split or stock dividend as they had before. After a 10% stock dividend, each share of preferred stock will be convertible into 4.4 shares (4 shares × 110% = 4.4). The par value of the preferred stock does not change. Divide that $100 par value by the new number of shares to get the new conversion price. It looks like this: $100 ÷ 4.4 = 22.73. Alternatively, you can divide the original conversion price of $25 by 110% arrive at the same answer.
Which of the following would not be a suitable recommendation to an investor with a liquidity constraint? A) An open-end fund B) A closed-end fund C) A unit investment trust D) An interval fund
D) An interval fund Interval funds do not trade in the secondary market. Shares may only be redeemed at the specified intervals and, even then, only a portion of the holding will be repurchased by the issuer. Closed-end funds are publicly traded and open-end funds and UITs offer daily redemption at NAV.
KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? i. Tax rate ii. Cash dividend iii. Allowance for bad debts iv. Retained earnings A) I and II B) II and III C) II and IV D) I and III
D) I and III Higher taxes mean less net income. The allowance for bad debts is an expense item, and increasing it lowers operating income. Dividends are paid out of retained earnings, which have no effect on the net income the company reports.
A) I and III B) II and IV C) I and IV D) II and III
D) II and III When making a noncharitable gift of securities, the donor's cost basis is passed to the recipient.
A) It will be lower because July's 5.5% actual return is lower than June's 6% actual return. B) It will remain the same because anytime the actual return exceeds the AIR, payments will not decrease. C) It is impossible to determine until we know the actual return for August. D) It will be higher because July's 5.5% actual return exceeds the AIR of 5%.
D) It will be higher because July's 5.5% actual return exceeds the AIR of 5%. Each month's annuity payment depends on the value of the annuity unit. The annuity unit's value depend on how actual returns compare to the assumed interest rate (AIR). Because the annuity unit value is based upon the comparison of the previous month's actual return, we can state that anytime the actual return exceeds the AIR, the next month's payment will increase. Likewise, if the return equals the AIR, the next payment remains unchangedand if the actual return is less than the AIR, the next month's payment is reduced.
A) The board of directors determines the amount each quarter based on current interest rates. B) On a no-par preferred stock, the dividend is paid as a percentage of the common stock dividend. C) On a no-par preferred stock, the company has the flexibility to increase or decrease the dividend as earnings warrant. D) On a no-par preferred stock, the dividend is a stated rate.
D) On a no-par preferred stock, the dividend is a stated rate. When a preferred stock is issued without a stated or par value, the dividend rate is stated in dollars. For example, it could be a $2 preferred. That would mean quarterly dividends of $0.50; $2 per year. Although the company is under no obligation to pay a preferred dividend (unless it plans to pay a dividend on its common stock), and the board of directors can pay a partial dividend, that does not mean the dividend can be increased over the stated rate.
What is the total amount that may be invested in a Coverdell Education Savings Account (ESA) in one year? A) The current maximum per family member B) The current maximum per couple C) The current maximum per parent D) The current maximum per child
D) The current maximum per child An indexed maximum contribution may be invested in each child's Coverdell ESA every year. For instance, if a couple has three children, they may invest the current maximum into each of three accounts.
A client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They have a maximum maturity of 365 days. B) They are all auctioned on a monthly basis. C) They are generally callable after the first 6 months. D) They are quoted with a bid higher than the ask.
D) They are quoted with a bid higher than the ask. T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly.
Which of the following securities can generate phantom income? A) GNMA pass-through certificates B) U.S. Treasury notes C) Common stock D) Treasury Inflation-Protected Securities (TIPS)
D) Treasury Inflation-Protected Securities (TIPS) One of the key features of a TIPS bond is that each six months, the principal value is adjusted by the inflation rate. When that adjustment is an increase, it is considered income and is taxed as such in that year. It is phantom income because the investor does not receive the added amount until maturity.
Which of the following investment strategies would be permitted in your customer's IRA? A) Buying stock on margin B) Selling uncovered put options C) Taking short positions on a stock D) Writing covered call options
D) Writing covered call options The covered call option is considered an appropriate investment strategy for an IRA and ERISA-compliant corporate plans as well. The risk is actually less than simple ownership of the underlying stock, and that is what makes it an eligible strategy. Margin (buying on credit) or selling short (unlimited potential loss) are never permitted in an IRA. The sale of uncovered options is another strategy considered too risky for an IRA.
When an individual who has been investing in a periodic payment variable annuity annuitizes, A) annuity units are exchanged for accumulation units. B) accumulation shares are exchanged for annuity shares. C) periodic payments continue as before. D) accumulation units are exchanged for annuity units.
D) accumulation units are exchanged for annuity units. During the investment period, investors acquire accumulation units. Once the decision is made to annuitize, those are exchanged for annuity units.
The primary difference between a full power of attorney (POA) and a limited power of attorney is that only the full POA A) is considered durable. B) allows the ability to make investment decisions in the account. C) continues after the death of the account holder. D) allows the withdrawal of funds and securities.
D) allows the withdrawal of funds and securities. When a full POA is granted, the holder has the additional ability to withdraw money and/or securities from the account. Neither power survives the death of the account holder (or the holder of the POA). The durable power of attorney will be the correct choice if the question is asking about a client who is mentally incompetent.
Each of the following statements concerning fill-or-kill (FOK) orders and all-or-none (AON) orders are true except A) an FOK order must be filled in its entirety. B) an FOK order must be canceled if the whole order cannot be executed immediately. C) an AON order must be filled in its entirety. D) an AON order must be canceled if the whole order cannot be executed immediately.
D) an AON order must be canceled if the whole order cannot be executed immediately. An FOK order must be executed immediately in its entirety or else it is canceled. An AON order must be executed in its entirety but is not canceled if the whole order cannot be executed immediately.
A) send a final official statement to the investor on or before the trade date. B) deliver a final official statement to the investor only if the investor requests it. C) send a final official statement to the investor before the order was placed. D) deliver a final official statement to the investor on or before the settlement date.
D) deliver a final official statement to the investor on or before the settlement date. MSRB rules require that the final official statement be delivered to investors on or before the settlement date.
A) Form D must be filed. B) this is the sale of control stock and must be accompanied by the filing of a Form 144. C) no additional filing is necessary because these shares have been owned for more than six months. D) it is not necessary for J.B. to file a Form 144.
D) it is not necessary for J.B. to file a Form 144. As a control person, J.B. must comply with Rule 144 when selling shares of CII. Rule 144 has a de minimis exception when 5,000 or fewer shares are sold and the dollar amount is $50,000 or less. In this case, the 5,000 shares at $8 per share is $40,000, so J.B. is within the limits. Form D is used by the issuer of a private placement. Although it is true that no additional filing is required, the reason has nothing to do with the holding period. Having purchased these shares in the secondary market, J.B. could have sold them the next day if desired.
A new client of yours indicates that they remember hearing stories from grandparents who lived through the Great Depression of the 1930s. Those relatives lost almost everything they had in the stock market, and the client is not interested in seeing a repeat of the family history. When doing your information gathering, this would be an indication of the client's A) values. B) net worth. C) employment stability. D) level of risk tolerance.
D) level of risk tolerance. Risk tolerance is one of the primary nonfinancial considerations that must be addressed. Those who do not wish to lose money in investments must be presented with recommendations offering a higher level of capital preservation. Values are more likely to be expressed by indicating industries not to be included (or the opposite). If the client's reference to the 1930s dealt with unemployment, then perhaps employment stability would be a correct choice.
If a customer purchases stock in an existing margin account and fails to make payment within the time period specified under Regulation T, the broker-dealer carrying the account can take all of the following actions except A) use existing special memorandum account (SMA) to meet the requirement. B) sell out the unpaid portion. C) request an extension of time from its designated examining authority (DEA). D) liquidate the entire account and remit any balance to the customer.
D) liquidate the entire account and remit any balance to the customer. If a customer does not meet a Fed call, the firm can use existing SMA to meet the call, request an extension of time from its DEA, or liquidate the unpaid portion. The firm would not close out the account.
The MSRB has no jurisdiction or authority to regulate A) municipal bond broker-dealers. B) municipal bond registered representatives. C) municipal bond quotes. D) municipal bond issuers.
D) municipal bond issuers. The MSRB has no jurisdiction over municipal issuers. It sets standards for quote and registration requirements for dealers and registered representatives.
All of the following kinds of orders may be turned over to the specialist (designated market maker) for execution except A) market orders. B) limit orders. C) stop orders. D) not-held orders.
D) not-held orders. A not-held order is a market order in which the investor has given the authority to choose the price and time to the floor broker to achieve the best possible execution.
When a customer enters a sell order and is in possession of the certificates, a broker-dealer must determine all of the following except A) whether the securities are in deliverable form. B) whether the client can make delivery promptly. C) the location of the securities. D) whether the transfer agent has accepted the securities.
D) whether the transfer agent has accepted the securities. A firm must make an affirmative determination and be reasonably sure the client can make prompt delivery. It isn't until after delivery (after the sell order has been accepted and the trade has taken place) that the transfer agent receives the certificates.
A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer gifts the securities to his son. Which of the following statements are true? i. For gift-tax purposes, the value of the gift is $3,000. ii. For gift-tax purposes, the value of the gift is $7,000. iii. The son's cost basis on the stock is $3,000. iv. The son's cost basis on the stock is $7,000.
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A registered municipal bond sales representative at your firm obtained discretionary power for the account of a physician in Gloucester County, New Jersey. The customer avoids investment risk and seeks safety of principal with long-term growth potential. Given the following choices, the salesperson would most appropriately invest the customer's money in
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An investor just purchased $10,000 face amount of State of Georgia 3.2% general obligation bonds from a syndicate member. The bonds mature in 2043 and are callable five years before maturity. MSRB rules require the syndicate member to
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An investor owns 300 shares of XYZ common stock, currently selling for $50 per share. The investor also owns 100 shares of XYZ's 5% $100 par preferred stock currently trading at $90 per share. A 2:1 stock split is declared. After the payment date, the investor will own
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An investor purchased 100 shares of ABC common stock at $50 per share on June 17, 2019. On May 11, 2020, with the ABC selling at $60, the investor hedges by purchasing one ABC Oct 55 put at 2. Immediately prior to the expiration date, ABC is selling for $45 per share and the put option is exercised using the long stock for delivery. This would result in
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An investor purchased 100 shares of RAVAD common stock at $40 per share on June 17, 2019. On May 11, 2020, with the RAVAD selling at $60, the investor hedges by purchasing one RAVAD Oct 55 put at 2. The put expires with the RAVAD selling at $65 and the investor liquidates the long stock position at that price. This would result in
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An over-the-counter (OTC) trader's quote of "60 to 63, work out," in response to a broker holding a customer order to sell a block of stock, indicates which of the following? A) The quote is tentative (nominal), merely suggesting a range in which the order is likely to be filled. B) The quote is firm but the market maker must be given discretion over when the transaction will take place.
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J.B. Collingsworth is the CEO and largest single shareholder in Collingsworth Industries, Inc. (CII). Three years ago, J.B. purchased 15,000 shares of CII in the secondary market. J.B. has decided to purchase a vacation home and is going to use the proceeds from a sale of 5,000 of those 15,000 shares as a down payment for the home. With CII selling at $8 per share,
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One of your clients asks about a recent purchase of a preferred stock. When looking at online information about the stock, the client notices that no par value is assigned. How does the company determine the amount of dividend to be paid?
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SEC rules require that customers be given a copy of the risk disclosure document before their first transaction in a penny stock. The member firm must receive a signed and dated acknowledgment from the customer that the document has been received. In addition to obtaining the client's signature, the SEC requires the firm to wait at least
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The XYZ Insurance Company issued a variable annuity with an AIR of 5%. A contract holder retires and chooses the straight life payout option. The contract holder received the first check in January 2023. If the actual earnings in June 2023 are 6% and the 5.5% are in July, how would the August payment compare to the July payment?
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The function of a broker's broker in the municipal bond business is to do which of the following? i. Help sell municipal bonds that a syndicate has been unable to sell ii. Protect the identity of the firm on whose behalf the broker's broker is acting iii. Help prepare bids for an underwriting syndicate iv. Serve as a wholesaler, offering bonds at a discount from the current bid and offer
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Under the Code of Arbitration Procedure, arbitrators fall into one of two categories: public or nonpublic arbitrators. Which of the following persons could not be a public arbitrator? A) A retail investor who has filed a complaint against a broker-dealer in the last two years B) Any person who worked in the financial industry for any portion of her career
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When auction rate securities (ARS) reset the yield to be paid in the upcoming period, the process used i. is a stop loss system. ii. is a Dutch auction. iii. establishes a clearing rate. iv. guarantees that every bidder will have their order filled.
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Which of the following events requires a member firm to provide a client with a specific FINRA-designed educational communication? A) The firm is the subject of a disciplinary event resulting in the firm being suspended for a period of five business days or longer. B) The firm, directly or through a registered representative, individually contacts a former customer of that registered representative to transfer assets to the firm.
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Which of the following statements describe the conduit theory of taxation? i. A fund is not taxed on earnings it distributes, provided distributions equal 90% or more of net investment income. ii. Earnings distributed by a regulated investment company are taxed three times. iii. Dividends and interest are passed through to the investor without the fund being taxed. iv. Dividends and interest accumulate tax free to the shareholder.
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Which of the following statements regarding an official statement are true? i. It is required by the SEC for all new issues. ii. It is required by the Municipal Securities Rulemaking Board (MSRB) for all new issues. iii. It must be delivered to purchasers at or before settlement. iv. It is generally used by underwriters to help sell the issue.
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Which of the following statements regarding straddles are true? i. An investor who expects no change in a stock's price and wishes to generate income sells a straddle. ii. An investor who expects no change in a stock's price buys a straddle. iii. An investor who expects a substantial decline in a stock's price sells a straddle. iv. An investor who expects substantial fluctuations in a stock's price and is unsure as to direction buys a straddle.
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Which of the following statements regarding the Government National Mortgage Association (GNMA) is true? A) Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors. B) GNMA approves residential mortgages for home buyers.
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