Series 7 Study

The best answer is C. The Specialist (now called the DMM - Designated Market Maker) is quoting the stock at $50.05 Bid with a size of 60 (good for 60 x 100 = 6,000 shares); and $50.06 Ask with a size of 30 (good for 30 x 100 = 3,000 shares). These are the next orders to be filled on the Specialist's/DMM's book. If the Specialist/DMM receives a market order to sell for 6,000 shares, the Specialist/DMM will fill that order in full at the current bid price of $50.05.

A Specialist (DMM) on the NYSE is quoting ABC stock as follows: A place the order on his book for execution Bfill 3,000 shares at $50.05 and place the unfilled portion of the order on his book Cfill 6,000 shares at $50.05 Dfill 6,000 shares at $50.06 Trading Market

The best answer is B. "5M" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). Annual interest on the bonds is 3.25% of $5,000 face amount equals $162.50. Since interest is paid semi-annually, each payment will be for $81.25. Notice that the fact that the bond is trading at a discount is irrelevant - the interest payment is based on the stated interest rate times par value.

A customer buys 5M of 3 1/4% Treasury Bonds at 98-8. How much will the customer receive at each interest payment? A $35.00 B$81.25 C$162.50 D$325.00 Debt

The best answer is B. If a facility is condemned, it can no longer generate revenues. Though the question is not clear as to why it was condemned, the best choice is that a catastrophe call provision would be activated. This requires the issuer to call in the bonds, repaying the bondholders if a disaster occurs.

A facility built with a revenue bond issue has been condemned. Which of the protective covenants found in the trust indenture would be activated? A defeasance covenant Bcatastrophe call covenant Cmaintenance covenant Dsinking fund covenant Debt

Bond Covenant Types Debt

Anti Dilutive- gives the bondholder the right to call bonds for the same percentage following a new issue of common stock (will not dilute) Maintenance- a promise to maintain the facility used to finance the bond Insurance- promise made by a bond issuer in a bond contract to insure the facility built with the proceeds of the issue against loss. Rate- a promise to increase rates as maintenance and operating costs increase.

What are ADRs (American Depository Receipts) Equities

ADRs are negotiable securities representing ownership of the common or preferred stock of a foreign company that is being held in trust. The securities of the company are deposited in a foreign branch of an American bank.

What is the difference between an ADR and a Banker's Acceptance Note?

ADRs are negotiable securities that allow investors to invest in foreign stock held in trust. They are held in foreign branches of American banks. (Are not MONEY MARKET INSTRUMENTS) Bankers Acceptance Notes are money market instruments used to finance international trade.

The best answer is C. Publicly traded fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange or NASDAQ. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is "closed end."

All of the following terms apply to publicly traded fund shares EXCEPT: A one-time issuance Bmanaged Credeemable Dnegotiable Investment Companies

The best answer is B. An unqualified legal opinion is a "clean" opinion, where the bond counsel has found no legal problems. Thus, the opinion is an unconditional affirmation of the legality of the issue.

An "unqualified" legal opinion is one which: A gives a conditional affirmation of the legality of the securities Bgives an unconditional affirmation of the legality of the securities Cis given by an unqualified bond counsel Ddisqualifies the issue from legal issuance Debt

The best answer is D. Basically real estate that makes money. (Makes money from rent(s) paid.) An equity REIT invests in income producing real estate. These include apartment buildings, shopping centers, and office buildings. The key here is that these have a large, diverse tenant pool. If any one tenant moves out, that will not have a great impact on the income stream. Industrial parks usually have only a few large tenants, not a lot of smaller tenants.

An Equity REIT would most likely invest in all of the following EXCEPT: A apartments Boffice buildings Cshopping malls Dindustrial parks

The best answer is A. If the customer directs that the trade be sent to a different trading venue, follow the customer's instructions. When the ECN gets the order, it must either fill the order at the best price available in all markets; or it must re-route the order to the better-priced market (the "trade-through" rule); so the customer will get the best price, no matter where the order is actually sent!

An institutional customer places a marketable order to buy 10,000 shares of ABCD stock, a NASDAQ listed company. The customer directs that the trade be routed to an ECN for execution and not be sent to the NASDAQ. Which statement is TRUE about this? A The customer's instructions are to be followed and the order must be sent to the designated ECN BThe order must be sent to the NASDAQ for execution CThe order must be sent to the market with the largest display size DThe order cannot be accepted from the customer Trading Market

What is the difference between, "duration" and "maturity"? Debt

"Duration" means "length of time" while "maturity" denotes "the extent to which something is full grown." When bond investors talk about duration it has a very specific meaning: The sensitivity of a bond's price to changes in interest rates.

What is the par Value of a bond (most common par value)? Debt

$1,000 Although other par values exist, $1,000 must be known for the test.

What is the par value of a stock (most common par value)? Equities

$100

Bond Price Representations Debt

105 means $1,050 which is higher than $1,000. (Trading at a premium) 95 means $950 which is lower than $1,000 (Trading at a discount)

Business Development Company Usually purchased by high net worth client seeking high dividends payment The best answer is C. A BDC (Business Development Company) is a type of investment company that makes private equity investments in small, privately-held start up companies. These are higher risk investments that pay the private equity investors high dividend payments (remember, these are small private companies that cannot access the public markets, so they must pay a higher return to their investors). The BDC shares are listed and trade like any other stock. As a corporate security, they are not a tax sheltered investment, making Choice Dincorrect.

BDC "Business Development Company"

a money market instrument that is a time draft used to finance international trade. A bank issues a draft payable at face amount to the seller of the goods at a future date (typically 30 - 90 days in the future; the time that it takes to ship the goods to their destination). This draft can be traded at a discount to the face amount. The difference between the discount price and the face value is the interest on the banker's acceptance.

Banker's Acceptances are:

Macaulay Duration Explanation Debt

Basically, two bonds with the exact same maturity can have different duration (sensitivity to changes in interest rates) based on coupon rate. The smaller coupon rate has the longer duration of the two bonds. Thus, the longer the coupon rate, the shorter the duration. i.e. Zero coupon bonds have THE LONGEST DURATION

Bid Price=BUY: Price to buy (The bid price represents the maximum price that a buyer is willing to pay) Ask Price=Sell: Price to sell (The ask price represents the minimum price that a seller is willing to take for that same security

Bid Price vs Ask Price Trading Market

Trust Indenture Definition Debt

Bond contract for debt obligation that enlists the use of a trustee to ensure that the rights (bond covenants) promised to the bondholders are kept and protected.

Bond Basics (What is a bond?) Debt

Bonds are debt obligations. People pay into bonds and finance whatever the issuer needs to be paid. In return the bondholders receive a bond payment of varying coupon rates. The higher the coupon the higher the interest payment

Derivative accounts that help mitigate the risk associated with mortgage debt obligations. PAC Protects against extension and prepayment risk TAC Protects against prepayment risk Companion Class Most risk highest yielding (absorbs risks from PAC Tranche.

CMO (Collateralized Mortgage Obligation) Debt

The best answer is B. Commercial paper is a short term money market instrument. Short term debts are said to be "unfunded" debts. Long term debts are said to be "funded" (as in a "long term funding").

Commercial paper is a(n):I Money market instrumentII Capital market instrumentIII Funded debtIV Unfunded debt A I and III BI and IV CII and III DII and IV Debt

a municipal debt offering with a two-to-three year maturity whose proceeds are used to finance a large construction project. Upon completion of the facility, the CLN is taken out - i.e., is paid off - using the proceeds from issuing a long term bond.

Construction loan note (CLN) Debt

acronym for Exchange Traded Fund, a type of investment company that invests in stocks in a benchmark index. The shares of the ETF are listed on an exchange and trade like any other stock.

ETF

bonds issued outside the United States whose principal and interest will be paid in dollars. The bonds can be issued by an American or European corporations, and by sovereign governments and municipal governments

Eurodollar bonds are: Debt

Bond Yields From Lowest to Highest (At par) Debt

Nominal, Current, Yield to Maturity and Yield to Call

If a corporation with outstanding callableconvertible preferred stock, calls these shares in a "forced conversion" which of the following will happen? I The number of common shares outstanding will increase II The number of common shares outstanding will decrease III Earnings per share will decrease IV Earnings per share will increase A I and III BI and IV CII and III DII and IV Equities

The best answer is A. In a "forced conversion," a corporation calls outstanding preferred stock or bonds that are trading at a price well above par, typically with no call premium (or a very small call premium). The better choice for the preferred shareholder is to convert into common, since the equivalent number of shares of common are worth more than the price at which the securities will be called. Thus, this forces the senior security holder to convert. When conversion occurs, the number of common shares increases, and hence, earnings per common share decreases.

The yield to maturity of a bond will: I increase as bond prices fall II decrease as bond prices rise III remain unchanged as bond prices fall IV remain unchanged as bond prices rise AI and II BIII and IV CI and IV DII and III Debt

The best answer is A. There are two Yield to Maturity formulas, one for a discount bond and one for a premium bond: Since both the Annual Interest and Annual Capital Gain are fixed, as the cost of the bond falls, the Yield to Maturity must rise. Since both the Annual Interest and Annual Capital Gain are fixed, as the cost of the bond rises, the Yield to Maturity must fall.

A client owns 500 shares of a company with 5,000,000 shares outstanding. The company will issue 1,000,000 shares through a rights offering. If the client subscribes to the offering, he or she will now own: Equities

The best answer is B. Because the company is issuing 20% additional shares (1,000,000 new shares/5,000,000 outstanding shares = 20%), a stockholder with 500 shares will be allowed to subscribe to 100 of the new shares, for a total holding of 600 shares

Preferred stocks are most often suitable investments for the: A individual Bcorporate investor Cpartnership investor Dfiduciary investor Equities

The best answer is B. Corporations that receive dividends from investments held generally are allowed to exclude 50% of the dividends received from taxation. This exclusion does not apply to individual investors (however, individual investors get the benefit of taxation of cash dividends received at a substantially lower rate - 15% (or 20% for those in the highest tax bracket) - than do corporate investors). Thus, a corporation that receives dividends from common stock holdings, preferred stock holdings, or mutual fund holdings where the fund's income is from common and/or preferred stock investments, is allowed to exclude 50% of that income from taxation.

A corporation issues $100 par convertible preferred stock, convertible at $20 per share, when the market price of the common is currently $10. Which statement is TRUE? A The conversion ratio is 10:1 BThe conversion ratio is 5:1 CThe conversion ratio is 2.5:1 DThe conversion ratio is 2:1 Equities

The best answer is B. The conversion ratio is Par Value / Conversion Price. $100 Par / $20 Conversion Price = 5:1 Conversion Ratio. Conversion Ratio = Par/Conversion Price

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 2 shares of preferred stock and a warrant to buy one half additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have outstanding: A100,000 preferred shares and 100,000 common shares B200,000 preferred shares and 100,000 common shares C200,000 preferred shares and 50,000 common shares D50,000 preferred shares and 100,000 common shares Equities

The best answer is C. Each unit consists of 2 preferred shares x 100,000 units equals 200,000 preferred shares issued and a warrant for 1/2 common share. If the warrants are exercised, 100,000 units x 1/2 common share = 50,000 common shares issued.

Debenture Definition Subordinated Debenture Definition Debt

a long-term, unsecured corporate bond backed by the full faith and credit of the issuer. Subordinated- a bond whose claim on the company's assets in a liquidation is lower than that of all other bondholders. Most subordinated debentures are convertible debentures, that have been issued after the company has already sold non-convertible debentures. (Lower level debenture which is usually convertible to make more attractive)

What are Bankers Acceptance Notes

a money market instrument that is a time draft used to finance international trade (NOT TO BE CONFUSED WITH ADRs)

Nominal Yield Debt

is the yield at par. (Also known as the stated yield or face value)

Reinvestment risk Debt

the risk that the dividends, interest, and principal received from securities can only be invested at a lower rate of return than that earned from the previous investments. In other words, as the investment is being held, interest rates are going down, and reinvested monies are not earning as high a rate of return as the original investment.

. Legal opinion Debt

the written opinion of the municipal bond attorney attesting to the fact that a municipal bond issue is valid, legal under the terms of the municipality's charter and that the interest on the bond is federally tax-exempt

The minimum denomination on a mortgage backed pass through certificate is: A $1,000 B$10,000 C$25,000 D$100,000 Debt

The best answer is C. Mortgage backed pass through certificates are sold in minimum denominations of $25,000 (instead of the typical $1,000 for other bonds and $100 for Treasury issues). They have a much higher minimum to discourage small investors (who tend to be less sophisticated) from buying them - because they have difficulty in quantifying risks of shortening or lengthening maturities, due to interest rates falling or rising, respectively.

.Which of the following statements are TRUEregarding mortgage bonds?I Mortgage bonds are issued in term maturitiesII Mortgage bonds are secured by real propertyIII Default of mortgage bonds is common during recessionary periodsIV Mortgage bonds are commonly issued by utilities A I and III only BII and IV only CI, II, and IV DI, II, III, IV Debt

The best answer is C. Mortgage bonds originated in the 1890s as a means of financing the growth of utility companies. As a means of lowering the interest cost to the issuer, bondholders were given a lien on all real property of the utility. In theory, if the issuer defaulted, the bondholders could sell that real property to repay the outstanding debt balance. Mortgage bonds are term issues; all of the bonds are issued at the same date and mature on the same date. A serial structure is not required since real property is not a depreciating asset (as is the case with rolling stock pledged as collateral for equipment trust certificates). At maturity, it is common for mortgage bond issuers to sell a "refunding" bond issue. A new mortgage bond issue is floated, with the proceeds used to retire the maturing debt. In essence, the issuer is rolling over the debt. Historically, mortgage bond defaults have been very low

Which of the following securities would be used as "collateral" for a collateralized mortgage obligation?I "Ginnie Maes"II "Fannie Maes"III "Sallie Maes"IV "Freddie Macs" A I only BII and III CI, II, IV DI, II, III, IV Debt

The best answer is C. Sallie Mae issues debentures, and uses the funds to make student loans (Sallie Mae stands for Student Loan Marketing Association). Only mortgage backed pass-through certificates are used as the backing for CMOs - and Ginnie Mae (Government National Mortgage Assn.), Fannie Mae (Federal National Mortgage Assn.), and Freddie Mac (Federal Home Loan Mortgage Corp.) all issue pass-throughs.

Which of the following actions taken by a corporation will raise additional capital? A Declaration of a stock split BAnnouncement of a call of all convertible preferred shares at par CDeclaration of a stock dividend DAnnouncement of a rights distribution allowing existing shareholders to buy the additional stock Equities

The best answer is D. The declaration of a stock split will not raise additional capital. The call of a convertible security will either use the cash of the company if the security is handed in on the call notice; or will have no effect at all on the cash position of the company if the preferred stockholders convert to common stock. Declaring a stock dividend increases the number of shares outstanding with no dollar change in total stockholders' equity (as the market price of the shares will fall). A rights distribution will raise additional capital, since the existing shareholders are asked to "subscribe" and therefore, pay, for more shares.

The best answer is D. The secondary market is the trading of issues outstanding in the market. The individuals making the secondary market are the market makers (also known as dealers) and traders. Both market makers (dealers) and traders deal with the public through registered representatives (retail brokers).

The individuals who make a secondary market in corporate bonds include all of the following EXCEPT: A market makers Bdealers Ctraders Dregistered representatives Trading Market

Bond Volatility Explanation Debt

The longer the bond has to maturity, the more volatile the bond becomes. Additionally, the smaller the coupon rate. i.e. Zero coupon bonds and bonds with the longest maturity are the most volatile.

The best answer is C. Under NYSE trading rules, bids and offers must be for the minimum 100 share size trading unit; the highest bid and lowest offer have priority (the same as NASDAQ's "inside market" - now renamed the NBBO - National Best Bid and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side deals allowed). Bids and offers are always set by market participants; they are not set by floor officials (the regulators) under any circumstances.

Under NYSE rules, every broker or dealer who communicates bids and offers on the exchange floor must comply with which of the following rules? I The highest bid and the lowest offer have precedence in all casesII Bids and offers must be publicly announcedIII Any bid or offer for less than the normal trading unit has no standing in the trading crowdIV Bids and offers must be set by floor officials A I and II only BIII and IV only CI, II, III DI, II, III, IV Trading Market

The best answer is A. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house, which are usually not good funds for three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation.

Which of the following trades settle in "clearing house" funds?I General Obligation BondsII U.S. Government BondsIII Agency BondsIV GNMA Pass-Through Certificates A I only BI and II CII and IV DIII and IV Debt

Prospectus

A legal document verifying registration with the SEC for all non exempt securities under the Securities Act of 1933.

The best answer is C. Companion tranches are the "shock absorber" tranches, that absorb prepayment risk out of a TAC (Targeted Amortization Class) tranche; or both prepayment risk and extension risk out of a PAC (Planned Amortization Class) tranche. Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. A Plain Vanilla tranche is not relieved of either extension risk or prepayment risk, so it will offer a yield that is higher than a PAC or a TAC, but lower than the yield on a companion. A TAC is only relieved of prepayment risk, so its yield will be lower than a Plain Vanilla tranche. However, the TAC yield will be higher than the yield on a PAC, which is relieved of both extension and prepayment risk, while the TAC is only relieved of prepayment risk.

Arrange the following CMO tranches from highest to lowest yield: I Plain vanilla II Targeted amortization class III Planned amortization class IV Companion A I, II, III, IV BIV, III, II, I CIV, I, II, III DII, III, IV, I Debt

What is the basic relationship between bond prices and interest rates? Debt

As bond prices rise interest rates are lowered and vice versa. ( Think bond seesaw.)

The best answer is B. The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share.

Assets - Liabilities for a mutual fund equals: A Net Worth BNet Asset Value CNet Operating Margin DNet Investment Income Investment Companies

The risk of default of the issuer.

Credit risk Debt

Do preferred stockholders have voting rights? Equities

No

An SEC rule effective in 2005 that imposes new short sale requirements.

Regulation SHO Trading Market

The specialist on the NYSE trading floor. The "DMM" maintains a "fair and orderly market" in each assigned stock

DMM (Specialist Designated Market Maker) Trading Market

The risk that mortgages will be extended and refinanced

Extension Risk Debt

a type of Unit Investment Trust under the Investment Company Act of 1940, in which a portfolio, usually containing one type of security (bonds), is set up and does not change - so the portfolio composition is fixed (hence the name). Units of the portfolio are sold to the public. Interest from the bonds held in the portfolio is distributed to the unit holders periodically. As the securities mature, or are called, the portfolio self-liquidates.

Fixed UIT (Made with fixed income securities)

Long term debt of 5 years or more. Short term debt is said to be unfunded.

Funded debt/ Unfunded debt Debt

The DMM's book is read by taking the lowest bid and matching it in sequence with the highest ask price. Bid X Ask or Bid by Ask. i.e. if you have 500 shares and the quote is in a round lots of 100, each 100 shares will be matched in sequence until all 500 shares are priced!

How to read the DMM Display Book Trading Market

each market center to prepare monthly electronic reports about its quality of executions and effective spreads

Rule 605 of Regulation NMS requires: Trading Market

The best answer is D. REITs offer diversification of investments similar to investment companies, except that the investments are being made in various types of real estate. REIT shares are listed and trade on an exchange (like a closed-end fund), so they are readily marketable. If real estate does well as an investment, the shares will appreciate, giving the investor a capital gain. Finally, REIT dividend taxation is truly "not that great." While dividends received from common stock investments, including mutual funds, qualify for the lower 15% or 20% tax rate, the tax law specifically denies this benefit to REIT dividend distributions. These are taxed at ordinary income tax rates of up to 37%.

Listed REITs offer all of the following benefits to purchasers EXCEPT: A diversification of investments Bready marketability of shares Ccapital gains potential Dpreferential taxation of dividends received

Makes a secondary market in bonds. (Market makers are dealers and traders)

Market Makers Trading Market

The best answer is C. Most corporate bond and municipal bond trades take place dealer-to-dealer in the OTC market. The municipal market is quite illiquid and the corporate bond market is not very active either. Such illiquid markets are better handled by dealers that will buy bonds into inventory when there are no other buyers; or sell bonds out of inventory to customers when there are no other sellers.

Most corporate bond trades are executed: I on exchange floorsII over-the-counterIII by bond dealersIV by specialists (DMMs) A I and III BI and IV CII and III DII and IV Debt

What is a money market instrument?

Negotiable securities held for (one) 1 year or less.

Net Asset Value is the difference between assets-liabilities =NAV.

Net Asset Value (NAV)

a unit investment trust that invests in the shares of mutual funds, this is the typical investment company form for variable annuity separate accounts.

Participating UIT

The risk that mortgages will be paid off early

Pre-Payment Risk Debt

How often are common and preferred dividends paid? Equities

Quarterly

Real Estate Investment Trust regulated as a closed-end management company, REITs purchase different kinds of real estate investments such as buildings, mortgages, and short-term construction loans. REITs can invest in property (Equity REIT) or can buy mortgages and other real estate loans (Mortgage REIT). This security trades on the exchanges or in the OTC market.

REIT

The best answer is C. REITs do not invest in limited partnerships, which are tax shelter vehicles. This makes sense because REITs cannot pass losses to their shareholders.They invest primarily in real estate and mortgages (under the tax code, at least 75% of the REIT's assets must be invested in real estate or mortgages). Any excess funds can be invested in securities, such as U.S. Governments and can also be invested in the shares of other REITs, though this rarely happens.

REITs can invest in all of the following EXCEPT: A mortgages Breal estate Climited partnerships Dother REITs

How often are bond payments received? Debt

Semi Annually (Twice per year)

for municipal bond issues, a separate account where periodic deposits are made by the issuer to meet required debt service payments of both interest and principal

Sinking fund Debt

his is the NYSE's automated order entry, order matching and trade reporting system. It accepts market and limit orders, with a maximum order size of 3 million share

Super Display Book Trading Market

The best answer is A. Since the offer is contingent on 64% of the shares being tendered, the customer has no assurance of being paid for the shares if he decides to tender.

The Master Manufacturing Company has just announced a tender offer for its own common stock. Master is offering to buy up to 100% of the company's stock at $20 per share contingent on at least 64% of the outstanding shares being tendered. After the announcement of the offer, the stock closed on the NYSE up 2.50 at $18.75. If a customer were to tender 100 shares held long, the customer is assured of receiving: A$0 B$250 C$1,875 D$2,000 Trading Market

Which stockholder has the right to claim assets in the case of a liquidation first? I Common Stockholders II Preferred Stockholders a I, II b II I c none Equities

The answer is B The order of liquidation is, wages, unsecured debt holders, preferred stockholders then common stockholders.

Treasury Receipts pay interest: A quarterly Bsemi annually C annually D Date of maturity Debt

The answer is D Pre cursor to Government Stripped Zero Coupon Bonds Once the Federal government started "stripping" bonds itself (in 1986) and selling them to investors, the market for broker-created T-Receipts evaporated. However, you still must know the basics of these securities for the exam.

Which statement is TRUE regarding American Depositary Receipts? A Exchange listed ADRs are sponsored BNon-sponsored ADRs trade exclusively offshore CAll ADRs must provide quarterly and annual reports to shareholders in English DNon-sponsored ADRs are not required to provide quarterly and annual reports to shareholders Equities

The best answer is A. All exchange listed ADRs are sponsored. Issuers that sponsor ADRs provide quarterly and annual financial reports to shareholders in English - basically the same financial disclosure required by the SEC for all publicly traded companies. Sponsored ADRs are often called American Depositary Shares or ADSs. Non-sponsored ADRs are assembled by banks and broker-dealers without the issuer's participation. An unsponsored program may have more than one depositary bank, since the issuer does not participate in any way. Holders of non-sponsored ADRs only receive annual reports in the language of the issuer. Non-sponsored ADRs trade in the U.S. over-the-counter market, not on exchanges.

Which of the following would be a rating for short term municipal debt? AMIG 1 BP 1 CP 3 DMUN 1 Debt

The best answer is A. MIG (Moody's Investment Grade) ratings are used for short term municipal paper; P (Prime) ratings are used for short term corporate commercial paper. There is no such thing as MUN 1 rating.

At what price did the Con Edison bonds close at on the preceding trading day? A 99 1/2 B100 C100 1/2 D101 1/2 Debt

The best answer is A. The Con Edison bonds closed this day at 100 1/2, up 1 from the preceding trading day. Therefore, yesterday the bonds closed 1 point lower at 99 1/2.

Interest earned on corporate bonds is: A 100% taxable at the Federal level B80% taxable at the Federal level C70% taxable at the Federal level D0% taxable at the Federal level Debt

The best answer is A. The interest earned from corporate bonds is 100% subject to Federal, State and Local tax for all investors except for tax qualified retirement plans (where the plan itself is tax deferred).

The definition of Treasury stock is: A authorized shares minus issued shares Bissued shares minus outstanding shares Cauthorized shares minus outstanding shares Dcapital in excess of par value minus par value Equities

The best answer is B. If a company has the same number of issued shares as the number of shares outstanding, then no shares have been repurchased for the company's Treasury. However, if the company repurchases shares, the number of outstanding shares decreases. Thus, the definition of Treasury stock is issued shares minus outstanding shares.

ABC Company has issued 13%, $100 par cumulative preferred stock. Two years ago, ABC paid a preferred dividend of $8. Last year, it paid a preferred dividend of $12 per share. This year, ABC wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of: A $14 B$19 C$20 D$26 Equities

The best answer is B. Since the preferred stock is cumulative, to make a dividend distribution to common shareholders, the company needs to pay all back, unpaid dividends plus this year's dividend (before a common dividend can be paid). The stated dividend rate on the preferred is 13% based on $100 par. Two years ago, 8% was paid, so 5% was omitted that must be paid. Last year, the corporation only paid 12%, so there is another 1% that must be paid. Also, this year's dividend of 13% must be paid. The total dividend that must be paid is 19% or $19 per preferred share before a common dividend can be paid.

For bonds trading at a premium, rank the yield measures from lowest to highest? I Nominal II Current III Basis A I, II, III BIII, II, I CII, I, III DI, III, II Debt

The best answer is B. When bonds are trading at a premium, the yield to maturity will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be "lost" over the life of the bond. Current yield will be higher than yield to maturity, since it does not include the annual premium loss. Stated yield will be the highest since it is the return based on par value.

If interest rates fall, issuers most likely will call: A all preferred issues Bany preferred issue close to maturity Cpreferred issues trading at a premium Dpreferred issues trading at a discount Equities

The best answer is C. If interest rates fall, issuers most likely will "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. High rate preferred will sell at a premium if market interest rates are dropping. Preferred stocks do not have a stated maturity.

FINRA sets which date? A Declaration date BRecord date CEx date DPayable date Equities

The best answer is C. The ex date is set by FINRA (the self regulatory organization or SRO that oversees the securities markets in the U.S.) once the Board of Directors sets the Record date. The Board of Directors, when it announces a dividend, sets the Declaration date, Record date, and Payable date.

American Depositary Receipts pay dividends in: A LIBOR Units BEuropean currency Units CForeign Currency DU.S. Dollars Equities

The best answer is D. American Depositary Receipts pay dividends in U.S. Dollars only. The dividends are declared and paid in the foreign currency by the issuer. The bank that issues the ADR exchanges the dividend into U.S. Dollars and pays this to the U.S. ADR holders.

When the yield spread between U.S. Government and lower grade corporate bonds is widening, which of the following statements are TRUE?I Yields on lower grade corporate bonds are lower than average relative to yields on U.S. Government bondsII Yields on lower grade corporate bonds are higher than average relative to yields on U.S. Government bondsIII Investors are increasing their purchases of corporate issuesIV Investors are increasing their purchases of U.S. Government issues AI and III BI and IV CII and III DII and IV Debt

The best answer is D. If the yield "spread" between Government bonds and lower medium quality corporate bonds is widening, this means that yields on lower grade corporate bonds are higher than normal relative to yields on Government bonds. This occurs because an excess of investors are buying Governments, pushing their yields down; or an excess of investors are selling lower grade corporate bonds, pushing their yields up. This behavior is typical when investors expect a recession. When a recession is expected, there is a "flight to quality." Investors liquidate holdings that are vulnerable in a recession (low grade corporate bonds) and put the money into safe havens such as government bonds.

Which of the following investments has the lowest level of reinvestment risk? A Preferred Stock BMunicipal Bond CCollateralized Mortgage Obligation DTreasury Bill Debt

The best answer is D. Reinvestment risk is an issue for investments that make periodic payments held over long time horizons. If interest rates drop during the investment time horizon, the periodic payments received from these long-term securities must be reinvested at lower and lower current market rates, reducing the overall rate of return on the portfolio. Short-term investments have minimal reinvestment risk; and zero-coupon obligations have no reinvestment risk.

A company declares a cash dividend that is 8% higher than the previous dividend rate. Prior to the announcement, the annual dividend yield was 6% and the stock was trading at $25 per share. What is the new dividend payment amount per share? Equities

The best answer is D. This question is more annoying than hard! The current annual dividend yield is 6% x $25 current share price = $1.50 per year. The dividend is now increasing by 8%, so the new annual dividend rate will be 1.08 x $1.50 = $1.62. Since common dividends are paid quarterly, the quarterly dividend will be $1.62 / 4 = $.405.

Unmanaged and Regulated Fixed unit investment trusts are not managed; the portfolio is fixed and does not change. These are typically bond trusts, where a diversified portfolio of bonds is assembled and placed into trust; with units of the trust sold to investors. These are non-exempt securities that must be registered with the SEC and sold with a prospectus. They are regulated under the Investment Company Act of 1940 and are redeemable with the sponsor, who makes a market in trust units.

Which of the following terms apply to fixed unit investment trusts?

Remember CD's can be brokered and traded. (Negotiable CDs.)

The purchase price of which of the following can be negotiated? I Treasury Bill II Certificate of deposit III Banker's acceptance IV Commercial paper AII, III, IV BI, II, III CI, III, IV Debt

The best answer is B. A publicly traded fund has a 1 time stock issuance; closes its books to new investment and then lists its stock on an exchange or NASDAQ. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a "closed-end" fund - that is, closed to new investment.

The term "publicly traded fund" is the common name for a(n): A open end management company Bclosed end management company Cfixed unit investment trust Dparticipating unit investment trust

National Market System Basically, (NYSE, AMEX and NASDAQ) to fill executable orders at the best price available in any market in 1 second

Trade Through Rule (Regulation NMS) Trading Market

The longest maturity is 52 weeks and the shortest is 4 weeks.

Treasury Bill Maturity Debt

Open End Funds (Mutual Fund) Closed End Funds (Tradable Exchange traded funds) Fixed Unit Investment Trust (UIT) Participating Unit Investment Trust (UIT)

Types of Investment Companies

Are stock prices affected by rising interest rates? Equities

When interest rates are rising, both businesses and consumers will cut back on spending. This will cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise.

The best answer is C. New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the original offering of a closed-end fund. Both are made with a prospectus. However, once closed-end fund shares trade in the market, they are marginable like any other listed stock.

Which of the following can be purchased on margin? A Mutual Funds BInitial public offerings of Closed End Funds CClosed End Funds trading on the NYSE DNew issues of stock Investment Companies

The best answer is D. The basic truths about bond price movements caused by changes in market interest rates are: 1. The longer the maturity, the greater the price will move for a given change in interest rates. 2. The deeper the discount on the bond (caused by the coupon being lower than the market rate of interest), the greater the price will move for a given change in interest rates. Choice D is both a very long maturity, and a relatively low coupon compared to current interest rates (the basis is the fairest representation of current market rates for that type of issue), so it would be trading at the deepest discount.

Which of the following municipal bonds should be trading at the lowest dollar price? A 4.80 coupon; 7.10 basis; M '20 B6.80 coupon; 8.30 basis; M '30 C7.20 coupon; 6.50 basis; M '35 D6.00 coupon; 8.60 basis; M '40 Debt

The best answer is C. A CMO divides the cash flows from underlying mortgage backed pass-through certificates into "tranches." Each tranche, in effect, represents a differing expected maturity, hence each tranche has a different level of market risk. Since each tranche represents a differing maturity, the yield on each will differ. New CMOs have special classes of tranches called PAC (Planned Amortization Class) and TAC (Targeted Amortization Class) tranches. These tranches are given a greater certainty of repayment at the projected date, by allocating earlier than expected repayments to so-called "companion" tranches, before prepayments are applied to these tranches. Credit risk for CMO tranches is the same for all tranches, since it is based on the quality of the underlying mortgage backed securities held in trust.

Which of the following statements regarding collateralized mortgage obligations are TRUE?I Each tranche has a different level of market riskII Each tranche has a different level of credit riskIII Each tranche has a different yieldIV Each tranche has a different expected maturity A I and II only BIII and IV only CI, III, IV DI, II, III, IV Debt

Bids and offers are always set by market participants; they are not set by floor officials (the regulators) under any circumstances.

Who sets the bid and offer (ask) prices on the market floor? Trading Market