Simulated Exam 1

Which of the following terms are associated with over-the-counter trading?I. Market maker. II. Specialist. III. Auction market. IV. Negotiated market.

1 and 4 Explanation The over-the-counter market is a negotiated market. Within it, market makers are broker/dealer firms that provide a source for stock that customers wish to buy and a repository for stock that customers wish to sell.

Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA-rated debentures at par. Which of the following statements regarding the outstanding 4% issue are TRUE?I. The dollar price per bond will be higher than par. II. The dollar price per bond will be lower than par. III. The current yield on the issue will be higher than the coupon. IV. The current yield on the issue will be lower than the coupon.

2 and 3 Interest rates in general have risen since the issuance of the 4% bonds, so the bond's price will be discounted to produce a higher current yield on the bonds. Remember that as interest rates go up, the price of outstanding debt securities goes down.

A registered representative is registered in Iowa. One of his customers moves to Texas, where neither the employing broker/dealer nor the representative are registered. Under these circumstances, which of the following statements are TRUE?I. The representative may solicit trades for this customer. II. The representative may not solicit trades for this customer. III. The representative may accept an isolated unsolicited order from this customer. IV. The representative may not accept an isolated unsolicited order from this customer.

2 and 3 Registered representatives may not solicit business in states in which they are not registered. However, isolated unsolicited transactions are exempt from state registration requirements, so an isolated unsolicited trade can be accepted.

A retail customer purchases a municipal bond from your firm. According to MSRB rules, the confirmation must disclose which of the following?I. Where your firm acquired the bonds. II. Whether your firm acted as agent or principal. III. Your firm's address. IV. The price your firm paid for the bonds.

2 and 3 The broker/dealer must always disclose the capacity in which it acted (principal or agent). The confirmation must show the name of the person for whom the trade was executed (the customer). The name, address, and telephone number of the broker/dealer must be shown so the customer may easily contact the firm. The settlement date is also required. The broker/dealer is not required to disclose where it acquired the bonds or the price it paid.

If the Fed begins selling securities in the open market to tighten credit, what is the first interest rate to feel this change in the Fed policy? A) Discount rate. B) Interest rate on long-term debentures. C) Federal funds rate. D) Prime rate.

A) The Federal Reserve Board's actions to influence the money supply are first felt on the federal funds rates.

Assuming ABC is subject to a 60,000 contract position limit, which of the following customer accounts are in violation of the exchange's position limits?I. Long 35,000 ABC January calls; long 30,000 ABC January 08 LEAP calls. II. Long 35,000 ABC March calls; long 30,000 ABC March puts. III. Long 35,000 ABC March calls; short 30,000 ABC January 08 LEAP calls. IV. Long 35,000 ABC March calls; short 30,000 ABC March puts.

A) 1 and 4 The maximum limit for ABC is 60,000 contracts on the same side of the market. The upside is long calls and short puts; the down side is long puts and short calls. LEAPs are included in the calculation.

Who signs an official statement for a new municipal issue?

B) An official of the issuer, for example, a county treasurer, signs the official statement.

What has a customer established who buys 5 XYZ Jan 40 calls at 6 and writes 10 XYZ Jan 50 calls at 1 when XYZ is trading at 43? A) Ratio straddle. B) Ratio spread. C) Long combination. D) Short combination.

B) In theory this position is just like ratio call writing where more calls are written (sold) than stock is owned. When a ratio spread is established a customer writes (sells) more contracts than are being purchased. In this case, the customer is buying 5 calls and selling 10 calls. In a ratio call spread, potential loss is unlimited because the additional calls sold are uncovered (naked).

Within a firm commitment underwriting, which document details the responsibilities and liabilities of each firm? A) Registration statement. B) Agreement among underwriters. C) Underwriting agreement. D) Letter of intent.

B) The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly-issued securities.

When a member firm sells municipal bonds to a customer out of its inventory, it must: A) indicate the amount of markup on the customer's confirmation. B) take into consideration the total dollar amount of the transaction when determining the markup. C) comply with the 5% markup policy. D) disclose the amount of commission on the customer's confirmation.

B) Under the MSRB Rule G-30, the amount of markup charged by a dealer must take into consideration a number of relevant factors, including the total dollar amount of the transaction. In a principal transaction (out of its inventory) the markup need not be disclosed on a confirmation and because it is a principal transaction, commissions would not apply. The 5% markup policy does not cover exempt securities.

Which of the following is nonnegotiable? A) Treasury bills. B) Ginnie Mae bonds. C) Series EE bonds. D) Treasury notes.

C) Series EE bonds, usually known as savings bonds, are sold at face value to the purchaser and are nonnegotiable. Since EE bonds must be redeemed by the original purchaser, ownership cannot be transferred, which makes them a nonmarketable security. Series EE bonds may not be used as collateral for a loan.

Which of the following would be most likely to require a mandatory sinking or surplus fund? A) A TAN. B) A PHA. C) A water and sewer revenue bond. D) A GO.

C) Sinking or surplus funds force revenue bond issuers to set aside a portion of their revenue for debt retirement.

Through its open market operations, the Federal Reserve trades all of the following EXCEPT: A) Ginnie Maes. B) Treasury bills. C) Grant anticipation notes. D) Treasury notes.

C) The Federal Open Market Committee (FOMC) trades U.S. government and agency securities in the secondary market. Grant anticipation notes (GANs) are municipal securities.

What is the breakeven point on the following position? Buy 1 CDE Apr 30 put at 3.10. Write 1 CDE Apr 35 put at 5.85.

C) This is a put spread established at a credit of 2.75. To find the breakeven point on a put spread, subtract the net premium from the higher strike price (in this case, 35 − 2.75 = 32.25).

Five years ago, the ABCD mutual fund bought 200,000 shares of Comet Industries at an average price of $42.25. After a series of accounting scandals, the shares are now trading at $6. If the fund decides to sell its shares, what will be the impact of the sale of Comet shares on the NAV of the ABCD fund? A) This depends on whether the fund can claim a tax loss on the sale. B) The NAV will fall. C) The NAV will not change. D) The NAV will rise.

C) The NAV will not change Portfolio holdings in a mutual fund are marked to the market each day. Therefore, the NAV of the fund already reflects the current value of each security in its portfolio, including Comet Industries. When the fund sells the position, the value of the stock is replaced by an equivalent amount of cash, so net asset value does not change.

A municipal bond rating service would consider all of the following when evaluating a revenue bond EXCEPT: A) the debt service coverage ratio. B) operating revenues. C) the public's attitude toward debt. D) feasibility studies.

C) The public's attitude toward debt Debt service coverage ratio, feasibility studies, and projected operating revenues are important to the analysis of a municipal revenue bond. The public's attitude toward debt is relevant in evaluating GO bonds, which are backed by the taxing authority of the issuer.

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as a: A) growth fund. B) utilities fund. C) unit investment trust. D) closed-end company.

C) Unit investment trust A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded.

Which of the following is least likely to be part of an equipment leasing partnership? A) Railroad cars. B) Aircraft. C) Computers. D) Oil well casing and piping.

Casing and piping are materials used in oil and gas well drilling programs.

If your client's real estate limited partnership goes bankrupt, which of the following are paid before your client?I. Fellow limited partners. II. Bank that holds the mortgage on the property. III. Bank that holds the unsecured loans on the property. IV. General partner.

D) Creditors, both secured and unsecured, have priority over partners. Your client's fellow limited partners are paid at the same time as your client; the general partner receives his money last.

A broker/dealer with a sales agreement with a mutual fund must return all concessions to the underwriter if a customer redeems his shares: A) within 5 business days of purchase. B) within 10 business days of purchase. C) under no circumstances. D) within 7 business days of purchase.

D) If any security issued by a mutual fund is tendered for redemption within 7 business days after the date of the transaction, the broker/dealer must refund to the underwriter the full concession allowed to the broker/dealer on the original sale.

If an investor opens a new margin account and sells short 100 shares of ABC at 32.50, with Regulation T at 50%, what is the investor's required deposit? A) 812.5 B) 2000 C) 3250 D) 1625

D) The Regulation T requirement is $1,625 ($3,250 × 50%). When selling stock short in a new account, an investor must meet the minimum requirement of $2,000 for any short sales of $4,000 or less. Above $4,000, the deposit is 50% of the short market value.

All of the following are true regarding a fail to deliver EXCEPT A) the BD representing the seller can also be liable for buying in the securities if the BD's customer has not made good delivery on the securities sold B) fail to deliver occurs when the selling BD does not deliver the securities in good deliverable form C) the buyer may buy in the securities owed to him and charge the seller for any loss incurred D) even though a fail to deliver has occurred and is still outstanding, FINRA mandates that the seller still be paid

D) The seller cannot be paid as long as the fail to deliver exists. Fail to deliver occurs when the selling BD does not deliver the securities in good deliverable form. The buyer or the selling BD can buy in the securities to complete the transaction, and any loss incurred to do so will become the responsibility of the seller who failed to deliver.

Hospital revenue bonds may be backed by:I. ad valorem taxes. II. operating revenues. III. special taxes. IV. tolls.

D) 2 and 3 Hospital revenue bonds are backed by the revenue generated by hospital operations. In addition, there is sometimes a special tax levied as a supplemental source of debt coverage.

ALFA Enterprises pays a quarterly dividend of $.15 and has earnings per share of $2.40. What is the dividend payout ratio?

Earnings per share are typically calculated for a year. So the annual dividend of $.60 ($.15 × 4) is divided by $2.40 to calculate what percentage of earnings is paid as a dividend; or rather, the dividend payout ratio (.60 / 2.40 = 25%).

A customer buys a new issue municipal bond with a dated date of January 1 for settlement on January 31. If the first interest payment date is March 1, how many days of accrued interest will the customer pay to the syndicate?

In this new issue, interest begins to accrue as of the dated date, so the customer must pay the syndicate interest from the dated date up to, but not including, the settlement date. The number of days from January 1 up to, but not including, January 31 equals 30.

A client places a sell stop order good for the day only. Under NYSE rules, you must: A) partially write an order ticket and complete the ticket before market close. B) write an order ticket only if the order is executed. C) write an order ticket upon receipt of the order. D) partially write an order ticket and complete only upon execution.

Order tickets must be written and time stamped upon receipt of the order.

MSRB rules for NYSE member firms are enforced by:

The board's rules are enforced by FINRA for securities firms. The MSRB has rule-making authority but no enforcement or examination authority

When a customer of a broker/dealer dies, all of the following documents may be required to release the decedent's assets EXCEPT A) a certified copy of the death certificate. B) an inheritance tax waiver. C) an affidavit of domicile. D) a power of attorney.

The power of attorney is the only document not required. If the decedent had executed a power of attorney, it would have become invalid upon death. An affidavit of domicile and an inheritance tax waiver may be required. A certified copy of the death certificate is always required

All of the following are covered under the Securities and Exchange Act of 1934 EXCEPT:

Trust Indentures are covered under the trust indenture act of 1939.

The market attitude of an investor with no other position who writes an at-the-money call is:

Writers of calls are bearish. However, when an investor writes an at-the-money call, the investor profits even if the market price of the stock does not move (neutral) because the option will expire worthless. The customer profits to the same degree if the stock falls out-of-the-money