Series 7 QBank Review Set 6
An investor with no other positions sells 1 ABC Jun 25 put at 1.50. If the put is exercised when the stock is trading at 24, and the investor immediately sells the stock in the market, what is the investor's profit or loss? A) $50 loss B) $150 profit C) $50 profit D) $150 loss
C) $50 profit The investor has the obligation to buy the stock at the strike price of 25. The stock is currently worth 24, which is a loss of 1. The investor's premium of 1.50 minus the loss of 1 leaves a net profit of 0.50 (0.50 × 100 = $50).
Which of the following permits the highest annual contributions? A) A traditional spousal IRA for which the contribution has been deducted B) A Coverdell Education Savings Account C) A SEP IRA D) A traditional nondeductible IRA
C) A SEP IRA Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for education savings accounts or traditional or Roth IRAs.
A) II, IV, III, I B) I, II, III, IV C) III, I, IV, II D) III, II, IV, I
C) III, I, IV, II The standard order priority for allocation of municipal bond issues is (as stated within the syndicate letter) as follows: presale, syndicate, designated, and member. Orders that benefit all syndicate members have the highest priority.
Which of the following strategies is intended to be profitable with either a significant upside or significant downside move in the underlying stock? A) Horizontal spread B) Vertical spread C) Long straddle D) Short straddle
C) Long straddle If the stock moves sharply up or down, the customer will profit from owning a long straddle.
The working capital of a corporation includes all of the following except A) cash. B) marketable securities of other companies. C) convertible bonds. D) accounts receivable.
C) convertible bonds. The working capital of a corporation is equal to its current assets minus its current liabilities. A current liability is payable within 12 months. Because convertible bonds are long-term (not short-term) liabilities, they are not included as working capital.
One of the advantages of writing a call option covered by shares of the underlying stock is A) the underlying stock can be purchased on margin. B) the investor has protected most of the downside risk. C) immediate income is generated. D) the investor retains all of the upside potential.
C) immediate income is generated. When an investor writes a call option and owns the underlying shares, the premium is credited to the account on the next business day (T+1). For this benefit, the investor has given up most of the upside potential because once the stock rises above the exercise price, it will likely be called away. That places a limit on the upside potential. There is downside protection, but it is limited to the extent of the premium received. The underlying stock can be purchased on margin, regardless of writing the call.
An affiliate or insider holding unregistered shares can sell under Rule 144 A) 1 time a year. B) 2 times a year. C) 12 times a year. D) 4 times a year.
D) 4 times a year. Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days, which would allow for as many as four filings per year.
A) Gentry violated the holding period requirements of Rule 144. B) Gentry violated the volume requirements of Rule 144. C) Gentry did nothing wrong because the stock was purchased in the open market. D) Gentry violated the short-swing profits rule.
D) Gentry violated the short-swing profits rule.
Which of the following is not considered a short-term investment vehicle? A) Repurchase agreements B) Negotiable CDs C) Commercial paper D) Treasury bonds
D) Treasury bonds Treasury bonds are long-term investment vehicles having maturities of 10 years or more.
A customer shorts 200 shares of XYZ and buys 2 XYZ at the money calls as a hedge. These transactions can be done in A) either a margin or a cash account. B) a cash account. C) a cash account, only if the calls are at the money. D) a margin account.
D) a margin account. When shorting stock under any circumstances, a margin agreement is required to borrow the stock. This transaction can be done only in a margin account. Remember that although options cannot be purchased using margin, they can be purchased in a margin account and must be paid for in full.
A) not permitted because Regulation A requires investors to be accredited. B) not permitted because it represents more than 10% of the customer's net worth. C) not permitted because it represents more than 10% of the customer's net income. D) permitted.
D) permitted. Under Regulation A, an offering of $20 million or less in a 12-month period is a Tier 1 offering. Unlike a Tier 2 (up to $75 million) offering, there are no restrictions based on net worth or net income. A separate question, but not relevant to this one, is the suitability of this investment. It is important to stick with the question being asked.
Rank the following in the usual sequence of order allocation. i. Syndicate ii. Member at the take down iii. Presale iv. Designated
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Which of the following affects the holding period of XYZ stock, a position that has been held for six months? i. Buying an in-the-money put ii. Buy an out-of-the-money put iii. Writing an in-the-money call iv. Writing an out-of-the-money call
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Which of the following statements regarding qualified retirement plans are true? i. Contributions are made with pretax dollars. ii. Contributions are made with after-tax dollars. iii. Distributions are 100% taxable. iv. Distributions are taxable only to the extent of earnings.
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You have a client who is an active trader in his margin account. Wishing to take advantage of the tax benefits of the Roth IRA, he asks for the form to open the Roth. While attempting to complete the form, he calls to ask, "How do I indicate margin trading on this form." You would respond,
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Your customer, age 29, makes $42,000 annually and has $10,000 to invest. Although he has never invested before, he wants to invest in something exciting. Which of the following should you suggest?
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A) Explain to the customer that you were able to obtain a five cent per share improvement. B) Remedy the problem by crediting $5 to the customer's account. C) Wait for the customer to file an official complaint. D) Report the error immediately to the designated principal.
The customer's price limit was $43 per share. That is the minimum acceptable price, and $42.95 is below that limit. That means an error has occurred. FINRA rules require that a record of any errors be reported to the person designated to receive such error reports by the firm. The report must be made immediately in writing.
(con't) An investor opens the following options position: Long 1 RAV Mar 50 put @5¾; short 1 RAV Mar 45 put @3. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $225; maximum loss is $275; breakeven point is $47.25. B) Maximum gain is $275; maximum loss is $225; breakeven point is $47.25. C) Maximum gain is $275; maximum loss is $225; breakeven point is $47.75. D) Maximum gain is $225; maximum loss is $275; breakeven point is $47.75.
A) Maximum gain is $225; maximum loss is $275; breakeven point is $47.25. For example, if the market price of RAV should fall below 45, the owner of the 45 put will exercise, causing the seller to purchase the stock for $4,500. The seller can then exercise the long 50 put and deliver the stock purchased at 45 for 50. That is a profit of $500 less the cost of the options (the debit of $275). The breakeven point follows the put-down rule. Subtract the net premium (the $2.75 debit) from the higher strike price resulting in a breakeven point at $47.25.
When a registered representative recommends a municipal bond purchase to a customer, which of the following would be of least consideration regarding suitability? A) The intended use of funds raised by the issue B) The bond's rating C) The customer's tax bracket D) The customer's state of residence
A) The intended use of funds raised by the issue The customer's state of residence and tax bracket are important because these factors help establish the tax benefits offered by the municipal bond. The bond's rating is important in evaluating the credit risk assumed by the investor. While the intended use of the funds may be of interest to the customer, it would be of little consideration when making a purchase recommendation.
A FINRA member firm specializes in the sale of mutual funds. The firm runs an advertisement in the local newspaper suggesting that mutual funds are a simple way to save for retirement. The advertisement includes the name, address, and website of the member firm, but no specific mutual fund is mentioned. Under SEC Rule 135a, this is known as A) a generic advertisement. B) a preliminary advertisement. C) a tombstone advertisement. D) an unethical advertisement.
A) a generic advertisement. When an advertisement is published without the name of a specific investment, just like the goods you buy in the supermarket or drugstore, it is known as a generic ad. A tombstone ad is used to advertise a new issue, and the name of the issue is always shown (just like a tombstone in a cemetery).
A) II and III B) I and II C) III and IV D) I and IV
B) I and II Buying a put (in or out of the money) on a stock held short term (one year or less) erases the holding period until the put is disposed of. At that time, the holding period starts over.
A) II and III B) I and III C) II and IV D) I and IV
B) I and III With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable.
An investor long 100 shares of stock writes a call against the long stock position. If the call is exercised, and the investor must deliver the stock, which of the following tax consequences will occur? A) There are no adjustments for cost basis or sales proceeds for tax purposes. B) The investor's sales proceeds are the strike price plus the premium. C) Both cost basis and sales proceeds must be adjusted. D) Cost basis is adjusted for the stock.
B) The investor's sales proceeds are the strike price plus the premium. When the call is exercised, the owner of the stock will be obligated to sell the shares owned at the strike price. The sales proceeds for the stock will be adjusted upward by the amount of the premium received when the call was sold.
A) $4,000 net capital gains B) $13,000 net capital gains and a $4,000 loss carryover into 2023 C) $6,000 net capital gains D) $13,000 net capital gains
A) $4,000 net capital gains The first thing to remember is that there is no limitation on the amount of capital loss that may be carried over to use against capital gain. The $3,000 limitation is against income. In determining an investor's capital gain or loss for the tax year, all gains and losses must be aggregated and offset against each other. In this situation, all of the prior year's loss carryover of $9,000 is added to the current year's loss of $2,000. The total loss of $11,000 is offset against the total capital gains of $15,000, for a net capital gain of $4,000.
A) A single joint with last survivor contract B) Two separate joint with last survivor contracts C) Two separate life income contracts, one for each spouse D) A single life with period certain contract on one of the spouses with the other the named beneficiary
A) A single joint with last survivor contract The most suitable option, and one considered effective for married couples, is a single joint and last survivor contract. These contracts cover both lives and will continue to make payments until the last spouse dies. Dividing the funds available so as to fund two separate contracts, whether they be joint with last survivor or life income, would not be cost efficient for spouses. A life with period certain contract guarantees payments for a specified number of years to a named beneficiary if the annuitant dies during that time. However, at the end of the period certain, the payments to the named beneficiary (the spouse) will stop. This would not align with the couple's criteria for coverage as long as they both live.
Who of the following is not permitted to contribute to an IRA? A) An individual whose sole income consists of dividends and capital gains B) A person divorced in 2017 whose sole income is alimony and child support C) A self-employed attorney who has a Keogh plan D) A corporate officer covered by a 401(k) plan
A) An individual whose sole income consists of dividends and capital gains An IRA contribution can be made only from earned income. Dividends and interest are investment income, but alimony received as part of a divorce settlement entered into before January 1, 2019 is considered compensation for purposes of an IRA by the IRS. Individuals can contribute to an IRA even if they are already covered by a corporate pension plan or Keogh plan. Although a contribution can be made, it may or may not be deductible, depending on the individual's income.
A) I and II B) II and III C) III and IV D) I and IV
A) I and II The scale, or reoffering scale, represents the prices and/or yields at which new issue securities are offered for sale to the public by the underwriter. The syndicate uses this scale to determine its bid on the issue.
A) II and III B) I and III C) I and IV D) II and IV
A) II and III The issuer is ultimately responsible for filing registration statements with federal and state regulatory bodies and has already determined how the money will be used. The underwriter confines his activities and advice to the type and sale of the securities.
A) II and IV B) III and IV C) I and II D) I and III
A) II and IV According to FINRA rules, when an employee of a member firm opens an account with another member broker-dealer, duplicate confirmations and account statements must be sent to the employer by the broker-dealer establishing the account when the employer requests it to do so. An officer of a broker-dealer is considered an employee.
An investor opens the following options position: Long 1 RAV Mar 50 put @5¾; short 1 RAV Mar 45 put @3. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $225; maximum loss is $275; breakeven point is $47.25. B) Maximum gain is $275; maximum loss is $225; breakeven point is $47.25. C) Maximum gain is $275; maximum loss is $225; breakeven point is $47.75. D) Maximum gain is $225; maximum loss is $275; breakeven point is $47.75.
A) Maximum gain is $225; maximum loss is $275; breakeven point is $47.25. The first step is to identify the position. This is a debit put spread. It is a debit spread because the option purchased cost more than the one sold. The debit of $275 is the most the investor can lose. This is a bear put spread. We know that because the investor purchased the option with the higher strike price and sold the one with the lower strike price. The goal is for the stock's price to decline to the point where both options are exercised.
Which of the following statements regarding collateralized mortgage obligations (CMOs) is true? A) They can be purchased for as little as $1,000. B) There is no extended maturity risk. C) Yield is locked in. D) There is no prepayment risk.
A) They can be purchased for as little as $1,000. CMOs can be purchased for as little as $1,000 but mainly trade in minimum amounts of $25,000. Both prepayment risk and extended maturity risk apply to these mortgage-backed securities. The only security where yield is locked in is a zero-coupon bond.
A 2× leveraged inverse ETF tracks an index that recently fell 2%. If the ETF was priced at $25 per share before the drop in the indices price, where should the ETF be priced now, assuming the ETF portfolio performed as intended? A) Up $1 per share B) Down $1 per share C) Down $2 per share D) Up $4 per share
A) Up $1 per share An inverse fund portfolio attempts to mirror returns that are the opposite of the index it is tracking. Therefore, if the index falls, this ETF should be up. A leveraged ETF attempts to produce returns that are a multiple of those produced by the index it is tracking. Therefore, if this index falls by 2%, the 2× leveraged fund should move twice as much (4%). With the index dropping by 2%, this inverse fund will rise by 4%; that is, $1 on a $25 index.
One of the most common retail options positions is called A) a covered call. B) a naked write. C) a covered put. D) a collar.
A) a covered call. The covered write or covered call is the most common retail options position. It is the only short options position that is not required to be in a margin account. It does not offer the protection of a long put; however, it does provide additional income. One of the drawbacks of writing calls against a long stock position is that it limits upside potential.
A FINRA member firm sends a promotional piece to 35 individuals over a three-day period. Twenty of these individuals are current customers of the firm. The other 15 are prospects whose names came from a commercially available mailing list service. Under the FINRA rule on communications with the public, this promotional piece would be considered A) retail communication. B) correspondence to the existing customers, retail communication to the prospects. C) direct mail. D) correspondence.
A) retail communication. Retail communication means any written communication that is distributed or made available to more than 25 retail investors, whether current or prospective customers within any 30-calendar-day period. The fact that some of the recipients are customers and others are prospects is irrelevant. It is simply the number of people during the 30-day period.
One of the unique benefits of an employee stock purchase plans is A) the employer compares the price of the stock at the beginning of the purchase period and the end of the period and the purchase is discounted from the lower of the two. B) participants can sell the stock immediately and any gains are taxed at the favorable long-term rate. C) Money is automatically taken out of a participant's paycheck every pay period. D) both the employer and the employee receive a tax deduction.
A) the employer compares the price of the stock at the beginning of the purchase period and the end of the period and the purchase is discounted from the lower of the two. A wonderful advantage to the employee stock purchase or stock option plan offered by many employers is the opportunity to "play the market." In most cases, the purchase period is every six months and the company will use the employees' escrowed funds to purchase the stock at the lower of the current market price or the price six months earlier. In addition, there is usually a discount applied to that price. Neither receives a tax deduction, and the only way for the employee to receive the long-term capital gains tax rate is to hold the stock more than 12 months. True, the money is automatically taken out of the participant's paycheck every pay period, but there is nothing unique about that—that is the procedure for 401(k) and 403(b) plans.
A member firm is assigned an exercise notice by the Options Clearing Corporation (OCC). The member firm may assign the exercise notice to its customers by any of the following methods except A) to the customer having the largest short position. B) to the customer having the oldest short position. C) in any way that is fair and equitable. D) on a random-selection basis.
A) to the customer having the largest short position. While the OCC can assign exercise notices using only the random selection basis, a member firm may use any method that is fair and equitable. The two most common methods are first-in, first-out and random selection. It would not be considered fair to assign customers based on the size of their short position.
Under SEC rules, firms must do all of the following except A) update customer account records within 36 months of a change in investment objectives. B) create a record containing the dated signature of each customer granting discretionary authority. C) create a record for each written agreement entered into with a client. D) provide a customer with an updated customer account record within 30 days of a change in investment objectives.
A) update customer account records within 36 months of a change in investment objectives. Under SEC rules, firms must provide a customer an updated account record reflecting any change in investment objectives within 30 days of the change. Firms must create a record for each written agreement entered into with a client and a record containing the dated signature of each customer granting discretionary authority.
A) "Let me check with our operations department for that information." B) "IRAs, traditional or Roth, can only be opened as cash accounts." C) "Because our minimum for margin accounts is $20,000 is above the IRA maximum contribution, you will have to open it in a cash account." D) "Only traditional IRAs can be opened as margin accounts."
B) "IRAs, traditional or Roth, can only be opened as cash accounts." IRAs, and other retirement accounts, cannot be opened in margin accounts. They are limited to cash accounts only.
If a customer buys 1 OXY Oct 50 call at 3, and the holder exercises the option when the stock is trading at 60, what is the cost basis of the 100 shares? A) $5,000 B) $5,300 C) $6,000 D) $6,300
B) $5,300 The cost basis of acquiring the shares is 100 multiplied by the strike price of 50, which equals $5,000, plus the cost of the call, which is $300. Total cost or cost basis is $5,300.
An investor has an established margin account with a short market value (SMV) of $4,000 and a credit balance of $6,750, with Regulation T at 50%. How much excess equity does the investor have in the account? A) $2,000 B) $750 C) $2,750 D) $1,50
B) $750 The Regulation T requirement and equity must be calculated before excess equity can be determined. The Regulation T requirement is 50% of the SMV of $4,000 ($2,000). Equity is calculated by subtracting the SMV of $4,000 from the credit balance of $6,750 ($2,750). Excess equity is calculated by subtracting the Regulation T requirement of $2,000 from the equity of $2,750 ($750).
Which of the following statements regarding a bond ladder strategy is correct? A) A bond ladder strategy involves the purchase of very long-term and very short-term bonds. B) A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk. C) A bond ladder strategy works best when interest rates are stable. D) A laddered portfolio of bonds will provide lower yields than a portfolio consisting entirely of short-term bonds.
B) A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk. A bond ladder strategy is a relatively easy way to immunize (protect) a portfolio against interest rate risk. By holding many positions across the yield curve, the individual is diversified in the event that yields behave differently in one part of the curve than in another. The laddered portfolio will generally provide higher, not lower yields than a portfolio consisting entirely of short-term bonds. Buying bonds with very short maturities and bonds with long maturities is the concept behind the barbell strategy.
Securities transactions take place in the primary and secondary markets. Which of the following investment companies can trade in both? A) An open-end fund B) A closed-end fund C) A unit investment trust D) A face amount certificate company
B) A closed-end fund All of these can have primary market transactions. In the case of the closed-end fund (CEF), it is the initial public offering and, if desired, an additional public offering. The CEF is the only one of these choices where shares trade in the secondary markets. Investors holding shares of a CEF can trade the shares freely, just like any other stock. However, owners of the other types of investment companies will find there is no market for their shares if they wish to sell. That is not a problem, though, because these investment companies stand ready to redeem shares continuously. Technically, when the UIT buys back its shares, it is considered a secondary market transaction. However, for exam purposes, because the trust is the only buyer in the marketplace and the price is not subject to negotiation, it is not a true secondary market transaction.
A) A registered broker-dealer B) An investment adviser registered and in good standing under the laws of the state of its principal office C) A licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law D) A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office
B) An investment adviser registered and in good standing under the laws of the state of its principal office It is only investment advisers registered with the SEC, not the state(s), for whom the written confirmation of their accredited investor status is acceptable.
A retiree is paid an annual amount equal to 30% of the average of his last five years' salary. Which of the following retirement plans offers this type of payment? A) Deferred compensation B) Defined benefit C) Profit-sharing D) Defined contribution
B) Defined benefit A defined benefit retirement plan establishes, in advance, the payout to be received by the retiree. The formula is based on earnings and years of service.
Upon notification of the death of a client, which of the following actions would not need to be taken by the registered representative assigned to the account? A) Canceling all day orders currently entered for the account B) Obtaining the names of the beneficiaries of the estate for the purpose of notifying all parties C) Marking the account Deceased until all proper documentation has been received D) Canceling all good-til-canceled (GTC) orders currently entered for the account
B) Obtaining the names of the beneficiaries of the estate for the purpose of notifying all parties Upon being notified of the death of a client, the registered representative assigned to the account should cancel all open orders (GTC and day) and mark the account Deceased. The firm should not permit any trades until proper documents are received from the estate representative. There is no requirement, nor is it the responsibility of the firm to contact the decedent's attorney or beneficiaries.
A quotation on a municipal security between dealers is assumed to be A) a nominal quote. B) a bona fide quote. C) an indication of interest. D) a workable quote.
B) a bona fide quote. Municipal bond quotations between dealers are required to be bona fide, or firm, quotes. They are required to be fair and reasonably related to the current market.
Most business development companies (BDCs) are classified as A) a unit investment trust. B) a closed-end investment company. C) an exchange-traded fund. D) an open-end investment company.
B) a closed-end investment company. Most BDCs register as closed-end fund (CEF) and trade in a similar fashion in the secondary markets. Federal law places some restrictions on the investment flexibility of a BDC that are not required of regular CEFs. A major difference between BDCs and the other investment companies is the active role played in the management of the businesses in the portfolio. That is what business development is about: helping smaller businesses develop into larger ones.
If an index option is exercised, the holder's account will be A) debited the out-of-the money amount. B) credited the in-the-money amount. C) credited the out-of-the money amount. D) debited the in-the-money amount.
B) credited the in-the-money amount. When index options are exercised, settlement is in cash rather than stock. The option writer delivers cash to the option buyer equal to the amount that the option is in the money.
Investor information about the financial condition of a municipal issuer is most likely found in A) The Bond Buyer. B) the official statement. C) the legal opinion. D) the official notice of sale.
B) the official statement. The official statement, which is the disclosure document used in new municipal offerings, will describe the issue's financial condition in detail.
Stop orders may be used for each of the following except A) to protect profits on long positions. B) to lock in a specific price to close out a position. C) to protect profits on short positions. D) to establish positions.
B) to lock in a specific price to close out a position. Stop orders are contingent orders that are triggered when the stock trades at or through a stated price. When triggered, they become market orders to buy or sell. They are used by technical traders to establish positions above or below resistance and support levels, respectively. Stop orders never guarantee a specific execution price.
A DMF convertible bond (convertible into 25 shares) has increased 20% above par in market value. Which of the following would you expect the price of the DMF's common stock to be? A) $32 B) $42 C) $48 D) $40
C) $48 The math is as follows: $1,000 (par) + 20% = $1,200 ÷ 25 shares = $48. Alternatively, it is ordinarily the 20% increase in the value of the common stock that has caused the bond to increase 20% in value: $1,000 ÷ 25 shares = $40 + 20% = $48.
Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per share. The date of the purchase was April 22, 2021. Simultaneously, the customer purchased one SLP Dec 90 put for 3. At the expiration date of the option, SLP's market price is $101 and the option expires unexercised. What is the customer's cost basis in SLP? A) $92 per share B) $95 per share C) $98 per share D) $101 per share
C) $98 per share If, on the same day, a customer buys stock and buys a put option on that stock as a hedge, the put is said to be married to the stock. For tax purposes, irrespective of what happens to the put, the cost basis of the stock is adjusted upward by the premium paid. Even if the put expires worthless, there is no capital loss on the put. Rather, the premium paid is reflected in the cost basis of the stock. Therefore the initial cost of $95 per share is now increased by the $3 premium paid resulting in a new cost basis of $98 per share.
The current quote for a stock on the NYSE is 37.54-37.59. The highest price at which a designated market maker (DMM) may sell from inventory is A) 37.60. B) 37.55. C) 37.58. D) 37.54.
C) 37.58. The highest price at which the DMM may sell is 37.58. A DMM on the NYSE is charged with maintaining a fair and orderly market. If the DMM wishes to sell from inventory, it may not compete with a public order; as such, the DMM must sell at a lower price than the current asking price. If the DMM wishes to purchase shares of stock for inventory, it may only do so at a price that is higher than the current bid.
One of your customers is in the 37% federal income tax bracket. The customer prefers purchasing corporate bonds over municipal bonds because the corporation's financials are much easier to understand. On the customer's next purchase, the instructions are to find a corporate bond that will yield the same after-tax return as would be received from a municipal bond with a 3.20 coupon. The bond you suggest must have a coupon of A) 4.38%. B) 8.65%. C) 5.08%. D) 3.20%.
C) 5.08%. This is a tax-equivalent yield question. The interest paid on a corporate bond is taxable, while that of the municipal bond is tax free. The formula is: The coupon of the municipal bond divided by (100% − tax bracket). In our question, that would be 3.20% divided by 63%, or 5.08%
Which of the following is not a characteristic of closed-end funds? A) Closed-end funds can trade at a premium or discount to their net asset value. B) Closed-end fund shares can be bought on margin or sold short. C) A closed-end fund stands ready to redeem shares from investors. D) Closed-end funds trade like common stocks.
C) A closed-end fund stands ready to redeem shares from investors. Closed-end investment companies issue shares of common stock. Those shares generally trade on the exchanges and are not redeemable by the issuer. They can be bought on margin and sold short like other listed shares. Because the price is determined by supply and demand, closed-end shares can trade at the NAV, above the NAV, or below the NAV.
If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered? A) Two limit orders B) Two stop orders C) A spread order D) A straddle order
C) A spread order A spread involves the simultaneous purchase and sale of different option contracts of the same type. A spread incurs a gain or loss depending on what happens to the difference in the premiums between the two contracts. Because this investor wants to limit his risk to $300, he would buy the spread at a net debit of $300 or less. (This is one order, not two.)
A municipal bond in default is in good delivery form if i. past-due and current coupons are attached. ii. the bond is insured. iii. subsequently due coupons are attached. iv. the issuer files a default guarantee letter with the Municipal Securities Rulemaking Board. A) II and IV B) II and III C) I and III D) I and IV
C) I and III To be in good delivery form, a municipal bond must be accompanied by all unpaid coupons: past due, currently due, and subsequently due. Insurance or letters of guarantee do not constitute good delivery.
Which of the following registers the securities and packages the program for a limited partnership? A) General partner B) Property manager C) Syndicator D) Limited partners
C) Syndicator A syndicator handles the registration of the limited partnership units.
Which of the following is an automated system of delivering information relating to the market for municipal securities? A) The Blue List B) INSTINET C) The Municipal Market Monitor (TM3) D) The Bond Buyer
C) The Municipal Market Monitor (TM3) The Municipal Market Monitor (TM3) supplies up-to-the-minute information to its subscribers.
If a fund has a fixed portfolio of municipal bonds with long maturities, how will substantial changes in general interest rates affect the fund's portfolio? A) Both the income and the current value will remain unchanged. B) The current value will not change, but the investment income will fluctuate significantly. C) The current value will fluctuate significantly, but the investment income will remain relatively unchanged. D) Both the income and the current value will fluctuate significantly.
C) The current value will fluctuate significantly, but the investment income will remain relatively unchanged. For a fund with a fixed portfolio of long-term municipal bonds, the market value of the portfolio will fluctuate with changing interest rates, but the income will remain unchanged.
A couple in retirement wants to add income to their account. Which of the following would be the least suitable? A) Credit put spreads B) Credit call spreads C) Writing uncovered calls D) Writing covered calls
C) Writing uncovered calls It should be noted that, pending other factors, engaging in options transactions may not be suitable at all for someone in retirement. All of the selections would initially add income to the account, but based only on the information given, writing uncovered calls would be deemed the least suitable, as it is the only strategy listed with unlimited maximum loss potential. While the other strategies listed all have risk associated with them, the risk is limited to a defined amount.
A broker's broker does all of the following except A) assists in placing securities. B) conceals the identity of the principals. C) makes a market in securities. D) acts as agent for dealers.
C) makes a market in securities. A broker's broker acts as the agent in transactions by facilitating the movement of blocks of bonds. The broker's broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker's broker does not make a market in securities.
In an IRA, a 6% penalty will be levied if the account owner A) fails to make a contribution by April 15. B) changes the beneficiary designation more than once during any calendar year. C) makes an excess contribution. D) makes a premature withdrawal.
C) makes an excess contribution. Excess contributions to an IRA are subject to a 6% penalty tax.
C) member firm supervision over social media communication with clients and prospects. D) member firm supervision over social media communication with prospects only.
C) member firm supervision over social media communication with clients and prospects. Social media is a form of electronic communication. As communication with the public, it is subject to member firm supervision, including training of associated persons. In most cases, it fits the definition of retail communication but is generally exempt from the continuous approval requirements, as well as the need to file with FINRA. Remember that retail communication includes prospective customers, as well as existing ones.
If an investor interested primarily in speculation does not expect the price of DWQ stock to change, she will A) write a straddle and short the stock. B) buy a straddle. C) sell a straddle. D) write a straddle and buy stock.
C) sell a straddle. An investor who expects prices to remain stable will sell a straddle (short straddle). In selling the put and call at the same terms, the seller collects double premiums. Both expire if the price remains stable, but if the price moves, one side loses money. Short straddles carry unlimited loss potential because of the uncovered call.
The first step in transferring a customer's asset from one member firm to another is the submission of A) the Form D. B) the Form 144. C) the Form TIF. D) the Form 112.
C) the Form TIF. The receiving member sends the transfer initiation form (TIF) to ACATS, and that starts the account transfer process. Form 112 is the currency transaction reporting form used when more than $10,000 in currency is deposited. The Form 144 is used by control persons and also used by those with restricted stock. Form D is used to report sales of a private placement under Regulation D of the Securities Act of 1933.
A municipal revenue issue's flow of funds statement is contained in A) the agreement among underwriters. B) the notice of sale. C) the bond contract. D) the legal opinion.
C) the bond contract. The bond contract describes the nature of the contract and the issuers' duties to bondholders. The bond contract is a more expansive document than a bond resolution. The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance.
All of the following would be found in a bond resolution for a new municipal issue except A) covenants to which the issuer must adhere. B) a description of the issue. C) the costs to be incurred by the issuer in connection with the offering. D) the issuer's obligations to bondholders.
C) the costs to be incurred by the issuer in connection with the offering. The bond resolution (or the bond contract) spells out the characteristics of the issue (maturities, call features, etc.), the issuer's responsibilities to bondholders, and any restrictive covenants to which the issuer must adhere. Costs to be incurred by the issuer have no impact on bondholders.
All of the following are used to determine the suitability of recommendations made to a municipal bond customer except A) the structure of the customer's existing portfolio. B) the customer's tax bracket. C) the customer's marital status. D) the customer's state of residence.
C) the customer's marital status. To determine suitability when recommending municipal bonds, an agent would consider the customer's tax bracket, state of residence (intrastate issues may be double or triple tax exempt), and existing portfolio structure. Some students ask us, "Doesn't the marital status affect the customer's tax bracket?" Yes, it does, but that information is included in the choice the customer's tax bracket.
An outstanding municipal bond issue has the following characteristics: 7.50% coupon, maturity in 20 years, puttable in five years at 100, callable at 102 in 10 years, declining in a straight line to maturity, and yield to maturity is 6.50%. The issue should now be quoted A) yield to call at par. B) yield-to-put. C) yield to call at 102. D) yield to maturity.
C) yield to call at 102. Because the bond issue is selling at a premium, the yield to call is less than the yield to maturity. The bonds must be quoted as yield to call at the earliest maturity, which would be the 10-year call at 102. If the bonds were selling at a discount, yield to maturity would be the proper quote. Yield-to-put is not required to be quoted.
If an investor buys 1 TIP Jul 60 call at 4 and sells 1 TIP Jul 50 call at 8.50, what will be the investor's overall net profit or loss if both calls expire unexercised? A) $1,250 profit B) $1,250 loss C) $450 loss D) $450 profit
D) $450 profit This is a credit call spread because the larger premium of the two options is associated with the short call. The best possibility for this investor is expiration, when the maximum gain is realized. The maximum gain on a credit spread is the net credit. In this example, the investor paid 4 and received 8.50 for a net premium and maximum gain of 4.50.
Which of the following statements is true regarding the mediation rules of the Code of Arbitration Procedure? A) Once mediation begins, neither party may withdraw without the consent of the other party. B) If mediation is unsuccessful, the mediator will serve as an arbitrator. C) The decision of the mediator is final and binding. D) Both parties to a dispute must agree to mediation.
D) Both parties to a dispute must agree to mediation. If both parties agree, a meeting may be held in an attempt to mediate a settlement. Mediators do not make decisions regarding settlement. This is up to the parties involved. Either side may withdraw from mediation by providing written notice to the mediator and the other party. No consent is required. Finally, if the mediation is not successful, the mediator is prohibited from serving as an arbitrator in the subsequent arbitration.
When discussing a 35-year-old client's finances, which of the following is most important when recommending a lump-sum investment? A) Monthly mortgage payment B) Traditional IRA balance C) Current salary D) Cash in the bank
D) Cash in the bank A lump-sum investment requires available funds. Cash in the bank is an example of readily available funds. Salary is something received over time. Mortgage payments are also paid out over time and, being a debt, would not help make an investment. Money in the IRA is an asset, but withdrawing funds would incur immediate income tax plus a 10% penalty.
A) An aggressive growth fund because the customer is young and has many investing years ahead B) A balanced fund because when the stock market is declining, the bond market will perform well C) A growth and income fund because the customer has never invested before D) Customer should provide more information before you can make a suitable recommendation
D) Customer should provide more information before you can make a suitable recommendation It is necessary to get more information about this customer and his definitions of an exciting investment opportunity before making any recommendations. A suitability and risk-tolerance analysis should be performed before a recommendation is made.
Which of the following agencies approves private lending institutions to issue bonds that are backed by the full faith and credit of the U.S. government? A) Financial Guaranty Insurance Company (FGIC) B) Federal National Mortgage Association (FNMA) C) Federal Home Loan Mortgage Corporation (FHLMC) D) Government National Mortgage Association (GNMA)
D) Government National Mortgage Association (GNMA) GNMA bonds are issued by private lending institutions approved by GNMA and are backed by the full faith and credit of the U.S. government. They are considered to be default risk free.
A 3% bond with 20 years to maturity is being issued by a syndicate with a reoffering yield of 4%. What is the term used to describe this bond? A) High-yield bond B) Secondary market discount C) Original issue premium D) Original issue discount
D) Original issue discount Because the bond is being issued by a syndicate, it is a new issue (i.e., an original issue). Because the yield (4%) is higher than the coupon (3%), it is an original issue discount.
Which of the following governmental bodies receive the least amount of their revenues from property taxes? A) County governments B) Municipalities C) School districts D) State governments
D) State governments State governments generally do not assess property (ad valorem) taxes. These are assessed by local governments. Generally, state governments receive most of their income from sales and income taxes.
The Bond Buyer's revenue index is which of the following? A) A daily balance of municipal revenue bond prices B) A daily composite average of municipal revenue bond yields C) Yields of municipal revenue bonds with 20 years to maturity D) Yields of municipal revenue bonds with 30 years to maturity
D) Yields of municipal revenue bonds with 30 years to maturity The Bond Buyer's revenue index is an average yield of 25 revenue bonds with 30 years to maturity.
A corporate offering of 200,000 additional shares to existing stockholders may be made through A) a warrant. B) a tender offer. C) a secondary offering. D) a rights offering.
D) a rights offering. A rights offering is an offering of additional shares of stock to existing shareholders.
A gain on the sale of a long equity put option is A) always a long-term capital gain. B) a short- or long-term capital gain. C) ordinary income. D) always a short-term capital gain.
D) always a short-term capital gain. Any trading in options produces only short-term gains or losses; therefore, any gain on the sale of a long put option must always be a short-term capital gain. (If a question wishes you to consider LEAPS, the question will refer to them.)
A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a large-cap growth fund. B) a long-term government bond fund. C) an intermediate-term government bond fund. D) an intermediate-term, high-grade corporate bond fund.
D) an intermediate-term, high-grade corporate bond fund. In all these cases, liquidity should not be a problem because mutual funds have a seven-day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolios offer that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection.
All of the following are advantages of investing in American depositary receipts (ADRs) except A) dividends are received in U.S. currency. B) transactions are done in U.S. currency. C) ADRs fall under the oversight of the SEC. D) currency risk is virtually eliminated.
D) currency risk is virtually eliminated. ADRs carry currency risk because distributions on ADRs must be converted from foreign currency to U.S. dollars on the date of distribution. In addition, the trading price of the ADR is affected by foreign currency fluctuation.
When analyzing a company's balance sheet, you notice that it is using the first in, first out accounting method to value its inventory. This information is most likely shown A) at the end of the balance sheet in a summary statement required by the SEC. B) on the cover of the balance sheet or at the top of the first page. C) next to the inventory listing in the current assets portion of the balance sheet. D) in a footnote to the balance sheet.
D) in a footnote to the balance sheet. Notations regarding accounting methods used, such as those for valuing inventory, would generally be found in the footnotes of the balance sheet.
FINRA rules require broker-dealers to conduct anti-money laundering training A) quarterly. B) annually. C) biannually. D) on an ongoing basis
D) on an ongoing basis Rather than set a fixed schedule, FINRA rules require that anti-money laundering training be conducted on an ongoing basis.
Regarding convertible debentures, one characteristic of which your clients should be aware of is that A) the conversion feature protects against an early call. B) they generally pay a higher interest rate than nonconvertible debentures. C) it is generally best to convert when the common stock is selling below its parity price. D) they trade in line with the issuer's common stock once the conversion price is reached.
D) they trade in line with the issuer's common stock once the conversion price is reached. The lower volatility of a convertible debenture stems from the fact that it has fixed interest payments and will be redeemed at maturity as any other bond or debenture would. No such guarantees apply to common stock.
A customer of a FINRA member firm submits an order to sell 100 shares of a stock at a price of $43 per share. The customer receives a trade report indicating that all 100 shares were sold at $42.95 per share. What should the registered representative handling the account do?
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A married couple intending to work another 2 to 4 years wants to fund a variable annuity to add monthly income during their retirement years. Having used all other available retirement investment vehicles, they want to invest $150,000 in savings toward the retirement objective. They note that these funds need to be paid out for as long as they live. Which of the following would be the most suitable and cost effective?
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According to FINRA rules, duplicate confirmations of transactions must be sent to an account owner's employer—if requested to do so by the employer—whenever establishing a margin account for i. a bank officer. ii. an employee of another broker-dealer. iii. an independent insurance agent. iv. an officer of another broker-dealer.
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An increasing percentage of registered representatives of FINRA member firms are using social media to increase their business. When using social media to reach out to clients and prospects, compliance with FINRA rules requires A) member firm supervision over social media communication with clients only. B) that social media not be used to prospect for clients.
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An investor has the following tax picture in 2021: i. Tax loss carryover from 2021: $9,000 ii. Capital gains realized in 2022: $15,000 iii. Capital losses realized in 2022: $2,000 What is the investor's reportable gain or loss for 2022?
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Gentry is the chief operating officer (CFO) of RMBM, a NYSE-listed corporation. Gentry has an account at your firm and five months ago purchased 1,000 shares of RMBM common stock at $50 per share. When the RMBM shares were $125 per share, Gentry exited the position at that price. Which of the following statements presents the view of the SEC?
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In a municipal underwriting, the scale is i. used by the syndicate to determine the bid on a new issue. ii. a list of the yield or prices at which the bonds will be offered to the public. iii. used by the syndicate to determine the allocation priority of orders. iv. only used when underwriting term bonds.
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One of your customers is interested in purchasing the shares of a new issue from a local manufacturing company. The issue is for $15 million of common stock. The investor's net worth is $95,000 and net income is $75,000 per year. The plan is to invest $15,000 into this stock. Under Regulation A of the Securities Act of 1933, this investment is
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One way in which this may be accomplished for natural persons is obtaining a written confirmation from certain persons or entities that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor. Confirmation from which of the following would not meet the SEC's requirements?
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Smith and Company, a FINRA member firm, is preparing to underwrite securities to be issued by KLC Corporation for a new business venture. For which of the following will Smith and Company be responsible? i. Filing the registration statement with the SEC and state regulatory bodies ii. Providing advice on the type of security to be issued iii. Distributing the security to the public iv. Providing advice on how KLC can best use the funds raised
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There are certain securities offerings that are limited to those who meet the definition of accredited investor. The SEC requires that the issuer shall take reasonable steps to verify that purchasers of securities sold in those offerings are accredited investors.
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(con't) (A) Gentry violated the holding period requirements of Rule 144. B) Gentry violated the volume requirements of Rule 144. C) Gentry did nothing wrong because the stock was purchased in the open market. D) Gentry violated the short-swing profits rule.
Section 16 of the Securities Exchange Act of 1934 contains the short-swing profits rule. This rule states that any insider of a publicly traded corporation (the CFO would certainly be included in the definition of insider or affiliate) is prohibited from profiting from any purchase or sale (or sale and purchase) of the company's equity securities within a period of less than six months. This rule authorizes the corporation to recover from a statutory insider any so-called short swing profits. The profit must be disgorged or given back. There is nothing illegal here, so there are no fines or penalties. However, we investors might consider returning a $75,000 profit to be a penalty. This stock was purchased in the secondary market, so the Rule 144 holding period does not apply. Rule 144 permits affiliates (like Gentry) to sell up to 1% of the outstanding shares over a 90-day period. RMBM is listed on the NYSE, and 1,000 shares is certainly much less than 1% of the shares outstanding.
A) Gentry violated the holding period requirements of Rule 144. B) Gentry violated the volume requirements of Rule 144. C) Gentry did nothing wrong because the stock was purchased in the open market. D) Gentry violated the short-swing profits rule.
Section 16 of the Securities Exchange Act of 1934 contains the short-swing profits rule. This rule states that any insider of a publicly traded corporation (the CFO would certainly be included in the definition of insider or affiliate) is prohibited from profiting from any purchase or sale (or sale and purchase) of the company's equity securities within a period of less than six months. This rule authorizes the corporation to recover from a statutory insider any so-called short swing profits. The profit must be disgorged or given back. There is nothing illegal here, so there are no fines or penalties. However, we investors might consider returning a $75,000 profit to be a penalty. This stock was purchased in the secondary market, so the Rule 144 holding period does not apply. Rule 144 permits affiliates (like Gentry) to sell up to 1% of the outstanding shares over a 90-day period. RMBM is listed on the NYSE, and 1,000 shares is certainly much less than 1% of the shares outstanding.
