Trading Markets: Customer Disclosure and Settlement Rules

Which callable municipal bond issue MUST be priced to a "refunding call" date? A premium bond callable in 5 years at 100 B premium bond callable in 5 years at 105 C discount bond callable in 5 years at 100 D discount bond callable in 5 years at 105

A. Municipal bonds trading in the secondary market must be priced on a "worst scenario" basis. It would be inappropriate to quote a municipal customer a yield to maturity, and then have the bond called early, reducing the customer's promised yield. This will always occur if a bond is priced at a premium, and is called early at par. In this case, the price computed must give the customer the promised yield computed to the call date. If the premium bond is called early and there is a substantial call premium, the customer's yield may be improved by that call premium. In this case, the bond would be priced to maturity. If a bond is priced at a discount, it will always be priced to maturity. If the bond is called early, the customer earns the discount faster and the customer's effective yield increases.

An open order is on the member firm's internal order entry system to sell 200 XYZ at 30 Stop GTC. The company has declared a 50% stock dividend. On the morning of the ex date, the order on the book will be: A Sell 300 XYZ at 20 Stop GTC B Sell 300 XYZ at 30 Stop GTC C Sell 300 XYZ at 40 Stop GTC D Sell 300 XYZ at 60 Stop GTC

A. To adjust the order for the 50% stock dividend, the number of shares is multiplied by a factor of 1.50 (since there are 50% extra shares) while the order price is divided by a factor of 1.50. 200 shares x 1.50 = 300 The price would change to: $30 price / 1.50 = $20 adjusted order price

Accrued interest on municipal bonds is computed: A 30/360 B 30/actual C actual/360 D actual/actual

A. When a bond is traded, because interest payments are made only 2 times a year, the buyer must pay the seller any "accrued interest" due for the period that the seller held the bond between those interest payment dates. Interest accrues from the date of the last interest payment made, up until, but not including, settlement date (which is the date that the money actually changes hands). For corporate and municipal bonds, the method of accruing interest is "standardized" so that each month only counts 30 days. Thus, for corporates and municipals, interest accrues on a "30 day month/360 day year" basis. Note that on the SIE, you do not actually have to calculate the number of days of accrued interest due.

Which of the following would make a stock certificate a good delivery? I An unsigned stock certificate with a signed stock power II An unsigned stock certificate with an unsigned stock power III A signed certificate without a signed stock power IV A signed stock power without a stock certificate A I and III B I and IV C II and III D II and IV

A. A stock power represents a legal transfer document, when accompanied by the stock certificate. The proper procedure is to send the customer a stock power for his signature. When this is returned to the broker-dealer, it is attached to the unsigned certificate, and makes that certificate a "good delivery." Otherwise, the customer can just sign the stock certificate (and have no stock power) and this would be considered good delivery. Review

Cash settlement is: A same day settlement before 2:30 PM B same day settlement after 2:30 PM C next day settlement before 2:30 PM D next day settlement after 2:30 PM

A. Cash settlement is same day settlement, before 2:30 PM.

What entity was created to maintain an electronic book entry record of stock ownership and to handle a high volume of daily transactions? A DTC B FINRA C OCC D MSRB

A. Depository Trust and Clearing Corporation (DTCC, sometimes just called DTC), is owned by U.S. banks and brokerage firms. It is the central clearing house for stock and bond transactions, and also maintains custody of both physical certificated securities and electronic book-entry securities. The OCC (Options Clearing Corporation) performs a similar function for the options markets.

A company whose stock price has declined greatly decides to reverse split its stock 1:5. Prior to the split, the stock traded at $1.00 per share. As of the ex date, the price per share will be: A $.20 B $1.00 C $5.00 D $20.00

C. In a reverse split, the number of outstanding shares of the corporation is reduced. After the reverse split, each shareholder's proportionate ownership interest remains the same. The only difference is that the shareholder's ownership interest is represented by fewer shares. Thus, an individual who originally had 500 shares at $1, would now have 100 shares (1/5th of 500) at $5 (5 x $1).

A "Right of Reclamation" can be used when: A the buyer accepts delivery of securities that later prove to have a problem B the seller refuses to deliver securities by the settlement date C a trade settles after the record date and the buyer refuses to accept the securities because the price has fallen D the buyer refuses to accept securities on the settlement date because there is a problem with the securities

A. If the buyer has failed to detect an irregularity upon settlement, and accepts a delivery that later proves to have a problem, the buyer may use the "right of reclamation" to correct the problem. The buyer completes a "reclamation form" detailing the error; attaches it to the securities with the problem; and returns both to the seller. Upon receipt of the securities with the reclamation form, the seller must correct the problem within stated time periods.

Which municipal bond quoted on a yield basis MUST be priced to the "refunding call" date? A 8% coupon; 7% basis; callable at 100 B 8% coupon; 7% basis; callable at 105 C 8% coupon; 9% basis; callable at 100 D 8% coupon; 9% basis; callable at 105

A. Municipal bonds trading in the secondary market must be priced on a "worst scenario" basis. It would be inappropriate to quote a municipal customer a yield to maturity, and then have the bond called early, reducing the customer's promised yield. This will always occur if a bond is priced at a premium, and is called early at par. The question that you have to ask yourself is: "Which bond is the premium bond?" The only bonds listed with a basis lower than the nominal yield are Choices A and B. The worst case is for a premium bond to be called early, and for the issuer to pay no call premium. Therefore, Choice A is the worst case scenario; and this bond must be priced to the refunding call date. If the issuer is paying a large call premium to call in the issue early (Choice B); then this additional payment to the bondholder may raise the yield to call above the yield to maturity - thus, this is not the worst case scenario. If the discount bonds (Choices C and D) are called early, their yield improves. These bonds would be priced as if held to maturity (the worst case scenario for discount bonds). Finally, another way to look at this question is to ask "Which bond is an issuer most likely to call?" - because that is the one that must be priced to the call date. Issuers want to call bonds with high coupons trading at premium because market interest rates have fallen and they want to pay nothing or very little to call in the bonds in (no call premium) - Choice A!

Under MSRB rules, which of the following call provisions can affect the yield that is shown on a customer's municipal bond confirmation? I In-whole call II Sinking fund call III Extraordinary mandatory call A I only B III only C II and III D I, II, III

A. The MSRB requires that dollar prices of bonds quoted on a yield basis be computed to the lowest dollar amount of Yield to Maturity or Yield to Call. The only calls that must be considered are those where there is reasonable certainty that specified bonds will be called. Under an "in whole" call, the issuer establishes dates when the entire issue can be called. This meets the reasonable certainty test. Sinking fund calls are handled by random choice. It is not known which bonds will be called - only that a preset dollar amount of bonds will be called at the call dates. This does not meet the reasonable certainty test. Extraordinary calls, such as a calamity call, also do not meet the reasonable certainty test.

The only order listed that is reduced on the ex date is an open: A buy limit B buy stop C sell limit D buy limit DNR

A. The orders that are reduced on ex date are "OBLOSS" - Open Buy Limits and Open Sell Stops. These are the orders below the current market. The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. Therefore, Choice A would be reduced. If the order is DNR, this means Do Not Reduce and on ex date the order would NOT be adjusted.

The proper procedure when receiving mutilated certificates from a customer is to: A hold the mutilated certificates and request a validation letter from the issuer or transfer agent before crediting the account B accept all the certificates and immediately credit them to the customer's account C reject all the certificates and return them to the customer D reject the mutilated certificates and return them with a "due bill" to the customer

A. The proper procedure when receiving mutilated certificates from a customer is to validate the certificates with the issuer or transfer agent. Once they are validated, they can be deposited to an account for the customer.

An 8% general obligation bond is issued with 20 years to maturity. A customer buys the bond on a 7.50% basis. The bond contract allows the issuer to call the bonds in 5 years at 102 1/2, with the call premium declining by 1/2 point a year thereafter. The bond is puttable in 5 years at par. The price of the bond to a customer would be calculated based on the: A 5 year call at 102 1/2 B 5 year put at 100 C 10 year call at 100 D 20 year maturity

A. This is a very difficult question. Since the bond has a stated rate of interest of 8%, but is priced to yield 7.50%, the bond is being sold at a premium. The amount of the premium that this equates to is about $100 (you do not need to know how to do this, but you should understand the concept that follows). The dollar price of the bond would be $1,100 to yield 7.50% to maturity. Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the premium ($100 in this case) is lost in the shortest time period. This premium will be lost in the shortest period of time if the bonds are called early. Thus, under MSRB rules, premium bonds must be priced to the near term call date. Then, the customer will get, at a minimum, the yield promised. If the bonds aren't called, the yield actually improves on the bonds. Put options are not considered when pricing municipal bonds, since it is up to the holder to decide whether he or she wishes to "put" the bond.

A municipal term bond with 13 years remaining has been pre- refunded at 103 to a call date 3 years in the future. If a customer buys this bond, the yield shown on the confirmation will be computed to: A the call date including the 3 point call premium B the call date excluding the 3 point call premium C maturity including the 3 point call premium D maturity excluding the 3 point call premium

A. When a municipal bond is pre-refunded, the issuer escrows sufficient government securities to pay the interest on the bonds until the earliest call date, at which point the bonds are called (with any applicable call premiums being paid) and paid off with the escrowed governments. A customer who buys advance refunded bonds knows they will be called. Any yield that is shown must be computed to the call date, including any call premiums - in essence, the call date becomes the new maturity date for the issue.

All of the following dates are needed to compute the total purchase price of a municipal bond traded in the secondary market that is quoted on a yield basis EXCEPT: A dated date B maturity date C settlement date D in whole call date

A. When a municipal dealer gives a basis quote, he is promising the purchaser a certain yield on the bond. MSRB rules require that when the actual dollar price is determined, that the dollar price be computed to the lowest dollar amount of yield to call or yield to maturity. The only calls that are considered are optional calls, meaning the issuer has the option of calling in the entire issue at preset dates and prices, as set forth in the bond contract. This is an "in whole" call. Settlement date is needed to compute the amount of accrued interest. The dated date has no meaning for pricing a bond trading in the secondary market. It is simply the legal date of issuance of the bond, and is the date from which interest started accruing on the issue.

A municipal dealer purchases securities. The securities are delivered on settlement date and the dealer finds that the wrong securities were delivered. The municipal dealer refuses the delivery of the securities by what action? A Right of rejection B Right of reclamation C Right of arbitration D Right of reparation

A. When securities are delivered on settlement date, the buyer inspects the delivery to ensure that the proper securities are being delivered in "good form." If the buyer finds that the wrong securities are being delivered, or that there is a problem, such as the securities not having a proper assignment, or a coupon bond missing coupons, then the buyer may reject the delivery. This is the right of rejection.

A customer owns 1,000 shares of ABC preferred stock trading at $120 per share. Following a 2:1 common stock split, the customer will have: I 1,000 shares II 2,000 shares III at $60 per share IV at $120 per share A I and III B I and IV C II and III D II and IV

B. Be careful! Only common stock is affected by a stock split or stock dividend. The intent of a stock split or stock dividend is to reduce the price of the common stock to make it more marketable. It has NO effect on the preferred stockholder. Preferred stockholders receive a fixed dividend rate based on par value. Just like a bondholder, the price moves inversely to market interest rates. When there is a stock split or stock dividend, the price of preferred stock and bonds of that company are unaffected.

A customer owns 500 shares of ABC preferred stock trading at $90 per share. Following a 3:1 common stock split, the customer will have: A 500 shares at $30 per share B 500 shares at $90 per share C 1,500 shares at $30 per share D 1,500 shares at $90 per share

B. Be careful! Only common stock is affected by a stock split or stock dividend. The intent of a stock split or stock dividend is to reduce the price of the common stock to make it more marketable. It has NO effect on the preferred stockholder. Preferred stockholders receive a fixed dividend rate based on par value. Just like a bondholder, the price moves inversely to market interest rates. When there is a stock split or stock dividend, the price of preferred stock and bonds of that company are unaffected.

ABC Corporation declares a dividend on June 15th with a Record Date of Friday, August 1st. If the stock is bought on Thursday, July 31st, which of the following statements are TRUE? I If the stock is purchased for cash, the customer will receive the dividend II If the stock is purchased for cash, the customer will not receive the dividend III If the stock is purchased regular way, the customer will receive the dividend IV If the stock is purchased regular way, the customer will not receive the dividend A I and III B I and IV C II and III D II and IV

B. If the record date is set at Friday, August 1st, then the ex date is 1 business day prior or Thursday July 31st. In order to receive the dividend, the shareholder must be on record for owning the shares as of the evening of August 1st. If the shareholder purchases on July 31st and settles for cash, settlement is same day and he or she will receive the dividend (the price of the trade is adjusted up by the amount of the dividend that will now be received, since the ex date reduction has already taken place). If the stock is purchased on the July 31st regular way, the trade will settle after the record date of August 1st, since regular way settlement takes 2 business days. In this case, the purchaser will not receive the dividend (but he or she has not paid for the dividend either, since the price was already reduced on the ex date as of the morning of July 31st).

The FINRA 5% Policy applies to: A purchases of mutual funds B offerings of DPPs from dealer inventory C trades of municipal securities D purchases of IPOs

B. The 5% Policy applies to all over-the-counter and exchange transactions, except for transactions in municipal securities, which are covered by a similar MSRB rule. It only applies to secondary market transactions, not to primary market (new issue) transactions. Mutual funds are new issues and do not fall under the policy. Regarding DPPs (Direct Participation Programs), an initial offering of a DPP does not come under the rule. If a dealer repurchases a DPP unit from a client, places it into inventory, and then sells it to another client, this is a secondary market transaction and the policy applies. The 5% Policy is a guide, not a rule. Under this policy, depending upon the circumstances, a 1% mark-up can be considered excessive; while a 10% mark-up can be reasonable.

A due bill is required when: I a stock is purchased before the ex date in a regular way trade II a stock is purchased after the ex date in a regular way trade III the trade settles before the record date IV the trade settles after the record date A I and III B I and IV C II and III D II and IV

B. A due bill is required when a stock is purchased in time to receive the dividend (that is, purchased prior to the ex date in a regular way trade); and for some reason, settlement is delayed beyond the normal regular way time frame of 2 business days (so that the trade settles after the record date). When this occurs, the buyer pays for the dividend in the price of the stock; but does not show on the record books to receive the dividend. Instead, the issuer sends the check to the seller - and the seller does not deserve the dividend! When the stock is delivered, a due bill check, payable from seller to buyer, is attached. This gives the dividend to the rightful owner.

Riskless or simultaneous transactions performed in the over-the-counter market are: A permitted if they are effected with the prior approval of the registered principal B permitted if they comply with the provisions of the FINRA 5% Policy C permitted only if they are effected in an arbitrage account D a prohibited practice

B. A riskless or simultaneous transaction, as performed in the "over-the-counter" market occurs when a broker-dealer receives an order to buy a stock from one customer; and then the firm buys the security into its inventory account to sell to that customer. Because the firm did not hold the position in advance, it has no "inventory risk" of falling prices - hence the term "riskless transaction." Under FINRA rules, such transactions must comply with the 5% Policy. Any mark-up must be "fair and reasonable" under the 5% Policy.

For municipal transactions effected on a yield basis, how are these bonds generally priced? I Discount bonds are priced to maturity date II Discount bonds are priced to the near-term call date III Premium bonds are priced to maturity date IV Premium bonds are priced to the near-term call date A I and III B I and IV C II and III D II and IV

B. For transactions in callable issues effected on a yield basis, discount bonds are priced to maturity while premium bonds are priced to the near term call date. Thus, the customer is always given a dollar price that ensures he will, at a minimum, get the promised yield.

A municipal dealer purchases securities and accepts them for delivery on settlement date. The dealer later finds that the delivery of the securities should not have been accepted as there were missing coupons. The municipal dealer can correct this error through the right of: A rejection B reclamation C arbitration D reparation

B. If the buyer has failed to detect an irregularity upon settlement, and accepts a delivery that later proves to have a problem, the buyer may use the "right of reclamation" to correct the problem. The buyer completes a "reclamation form" detailing the error; attaches it to the securities with the problem; and returns both to the seller. Upon receipt of the securities with the reclamation form, the seller must correct the problem within stated time periods.

All of the following must be disclosed on a municipal agency confirmation EXCEPT: A commission B tax equivalent yield C yield basis D redemption date used to compute dollar price

B. Paying agent name does not appear on a bond confirmation. The name of the broker-dealer, the accrued interest, and the capacity in which the transaction was executed, all appear.

If a municipal bond is purchased regular way on Monday, January 3rd, when does the trade settle? A Tuesday, January 4th B Wednesday, January 5th C Thursday, January 6th D Friday, January 7th

B. Regular way settlement for municipal securities takes place T + 2 or trade date plus 2 business days. So, the trade will settle on Wednesday, January 5th.

Regular way trades of U.S. Government securities settle:

B. Regular way trades of U.S. Government securities settle next business day in Federal Funds.

ABC Corporation has declared a 3:1 stock split to shareholders of record on November 10th. The price of the stock will be reduced on ex date by: A 33% B 67% C 75% D 133%

B. Since the stockholder has 3 times the number of shares after the split, the market price will be reduced on ex date by a factor of 3. Assume the market price of the stock is $60 before the split. After the split the new market price if $60 / 3 = $20. The new price is $40 less than the original $60 OR $40 / $60 = 67% reduction from the original price.

Which is NOT a good delivery for a 225 share trade of stock? A Two 100 share certificates and one 25 share certificate B Three 75 share certificates C Four 50 share certificates and one 25 share certificate D Nine 25 share certificates

B. To be a good delivery, certificates must be in round multiples of 100 shares on one certificate or must be delivered in certificates that add up to 100 share units. If there is an odd lot (a portion of the order that is less than 100 shares), it can be delivered in any form. Certificates of 75 shares each are not good because 75 + 75 = 150. A round lot of 100 shares cannot be created from these units. The other choices either allow for the creation of 100 share units; or are in multiples of 100 on 1 certificate; with the odd lot being delivered as a separate unit.

A stock is quoted at $18 - $19. If a customer sells 100 shares to the dealer, under the FINRA 5% Policy, a fair and reasonable mark-down is based upon which price? A $17.50 B $18.00 C $18.50 D $19.00

B. Under the 5% Policy, commissions and mark-up / mark-down percentages are computed from the inside market. If a customer buys, any mark-up is calculated from the inside ask price of $19. If the customer sells, any "mark-down" is computed from the inside bid price of $18.

The FINRA 5% Policy applies to: A the primary market B mutual fund offerings C trades of corporate securities D trades of municipal securities

C. The FINRA 5% Policy applies to trades that take place in the secondary market. This means that it applies to trades or corporate stocks and bonds. It also applies to trades of government and agency bonds. However, it does not apply to trades of municipal bonds because these are covered under a similar MSRB rule. The policy also does not apply to any transaction that requires a prospectus - meaning new issues, mutual funds, and initial offerings of limited partnerships.

Which statement is TRUE about accrued interest? A Both corporate bonds and Treasury bonds accrue interest on a 30/360 basis B Both corporate bonds and Treasury bonds accrue interest on an actual/actual basis C Corporate bonds accrue interest on a 30/360 basis while Treasury bonds accrue interest on an actual/actual basis D Corporate bonds accrue interest on an actual/actual basis while Treasury bonds accrue interest on a 30/360 basis

C. When a bond is traded, because interest payments are made only 2 times a year, the buyer must pay the seller any "accrued interest" due for the period that the seller held the bond between those interest payment dates. Interest accrued from the date of the last interest payment made, up until, but not including, settlement date (which is the date that the money changes hands). For corporate and municipal bonds, the method of accruing interest is "standardized" so that each month only counts 30 days. Thus, for corporates and municipals, interest accrues on a "30 day month / 360 day year" basis. In contrast, U.S. Treasury Obligations accrue interest on an "actual day month / actual day year" basis. Note that on the SIE, you do not actually have to calculate the number of days of accrued interest due.

Which statement is TRUE about accrued interest? A Both municipal bonds and Treasury bonds accrue interest on a 30/360 basis B Both municipal bonds and Treasury bonds accrue interest on an actual/actual basis C Municipal bonds accrue interest on a 30/360 basis while Treasury bonds accrue interest on an actual/actual basis D Municipal bonds accrue interest on an actual/actual basis while Treasury bonds accrue interest on a 30/360 basis

C. When a bond is traded, because interest payments are made only 2 times a year, the buyer must pay the seller any "accrued interest" due for the period that the seller held the bond between those interest payment dates. Interest accrues from the date of the last interest payment made, up until, but not including, settlement date (which is the date that the money changes hands). For corporate and municipal bonds, the method of accruing interest is "standardized" so that each month only counts 30 days. Thus, for corporates and municipals, interest accrues on a "30 day month/360 day year" basis.

A customer places an order to sell 100 ABC at 12 Stop Limit, when ABC stock is trading at $13. The company is restructuring and has announced a special dividend of $2.85 to be paid to shareholders of record. On the ex date, the order will be: A canceled B reduced to $9.00 C reduced to $9.15 D executed at $12.00

C. On ex dividend date, all open orders placed lower than the current market are reduced for cash dividends (except for orders placed DNR - Do Not Reduce). The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. The order was originally placed at $12. The adjusted order price is $12 - $2.85 reduction = $9.15 adjusted order price.

Under MSRB rules, yield to worst means that: A all municipal bonds quoted on a yield basis must be priced to maturity B municipal par bonds quoted on a yield basis must be priced to maturity C municipal discount bonds quoted on a yield basis must be priced to maturity D municipal premium bonds quoted on a yield basis must be priced to maturity

C. When municipal serial bonds are quoted on a yield basis, the dealer must compute the dollar price shown on the customer confirmation. This dollar price must assure, that at a minimum, the customer will receive the promised yield. This is known as pricing to the "worst case" scenario. For a premium bond, the "worst case" scenario is having the bond called early (which is the likely case). Bonds trade at a premium because market interest rates have dropped, so the issuer can refund the issue at lower current market rates by calling in the bonds. In this case, the bond is priced based on giving the customer the promised yield using the near-term in whole call date as the redemption date. If the bond were not called, the customer's actual yield would improve, because the annual loss of premium incorporated into the yield would be spread over a longer time frame. For a discount bond, the "worst case" scenario is having the bond held to maturity (which is the likely case). Bonds trade at a discount because market interest rates have risen, so the issuer would not call these bonds. In this case, the bond is priced based on giving the customer the promised yield using the maturity date. If the bond were called early, the customer's actual yield would improve, because the annual earning of the discount incorporated into the yield would be spread over a shorter time frame.

All of the following securities deliveries are "good" EXCEPT: A Trust account securities with an assignment performed by the Trustee B Guardian account securities with an assignment performed by the legal guardian C Custodial account securities with an assignment performed by the recipient of the gift D Partnership account securities with an assignment performed by a partner designated in the Partnership Agreement

C. Custodial account securities cannot be assigned by the minor. The minor has no legal authority. Any assignment must be made by the custodian.

Comparisons and "Don't Know" notices are sent from: A dealer to customer B customer to dealer C dealer to dealer D dealer to regulatory authority

C. DK or "Don't Know" notices are sent dealer to dealer to reconcile unmatched trades. The dealer knows that there is a problem when he or she receives a comparison from the contra broker that does not agree with the trading record. These notices are sent the same day as the trade. Comparisons are dealer-to-dealer trade confirmations.

If a customer buys a fully-paid security that is enrolled in DTC's DRS system, the customer will receive a(n): A physical certificate B escrow receipt C statement of ownership D depository receipt

C. DTC (Depository Trust Corporation) has a relatively new "book entry" registration system for stocks, where there are no more physical certificates issued (saves time and money). This is called "DRS" - the Direct Registration System. Instead of getting physical certificates, the customer gets a "statement of ownership" - essentially an account statement.

An option trade confirmation discloses all of the following EXCEPT: A Type of option and name of underlying security B Expiration and strike price C Open interest and trading volume D Execution price and commission

C. Disclosed on an options confirmation are the type of option and name of underlying security; the expiration and strike price; the execution price and any commission; the trade date and settlement date. Trading volumes and open interest figures are not disclosed, nor is there any logical reason to disclose them.

If a municipal bond, callable at par, is quoted on a yield basis that is lower than the nominal yield, the price of the bond to a customer would be calculated based on: A nominal yield B current yield C yield to call D yield to maturity

C. If a bond is purchased at a premium, its yield to call will be the lowest effective yield. Under MSRB rules, bonds are priced on a worst case basis, meaning, in this case where the premium is lost in the shortest time period. This premium will be lost in the shortest period of time if the bonds are called early. Thus, under MSRB rules, premium bonds must be priced to the near term call date. Then, the customer gets, at a minimum, the yield promised. If the bonds aren't called, the yield actually improves on the bonds.

The last day that a customer can buy stock and receive a dividend if he or she is willing to settle "for cash" is: A two business days prior to record date B three business days prior to record date C the record date D the payable date

C. If a customer buys the stock "cash settlement," the stock is delivered and paid for that day. The customer is entitled to the dividend if he is on Record of owning the shares on record date. Therefore, a purchase settled for cash settles that day and places the buyer on the record books to receive the dividend as of the close of business. Note that customers pay more to buy stock in a cash settlement than in a regular way settlement, because the dividend amount deducted on the regular way ex date is added back to the trade price.

ABC Corporation declares a $1 dividend, payable to stockholders of record as of July 29th. The last day that a customer can get the dividend if he or she is willing to buy the stock "for cash" is: A July 24th B July 25th C July 29th D July 30th

C. If a customer buys the stock "cash settlement," the stock is delivered and paid for that day. Therefore, a purchase settled for cash on the 29th settles that day and places the buyer on the record books to receive the dividend as of the close of business. Note that customers pay more to buy stock in a cash settlement than in a regular way settlement, because the dividend amount deducted on the regular way ex date is added back to the trade price.

Under the FINRA 5% Policy, proceeds transactions are subject to: A one mark-up based on the sell side only B one mark-up based on the buy side only C one mark-up based on the buy and sell side combined D two mark-ups; one for the buy side separately and the other for the sell side separately

C. In a proceeds transaction, the customer directs the firm to sell an existing position, and to use the proceeds to buy another position. Under the FINRA 5% Policy, proceeds transactions are subject to a "combined mark-up" that must be fair and reasonable. In a combined mark-up, the compensation earned for liquidating the existing position is added to the mark-up that the firm earns on the new purchase.

ABC corporation has set the record date for a cash dividend at Tuesday, July 23rd. The last day to buy the stock before it goes ex dividend is: A July 17th B July 18th C July 19th D July 22nd

C. The last day to purchase the stock and receive the dividend is 2 business days prior to record date or the 19th. Ex date - or the very first day the stock trades without the value of the dividend - is the 20th.

ABC corporation has set the record date for a cash dividend at Tuesday, July 16th. The last day to buy the stock "regular way" and receive the dividend is: A July 10th B July 11th C July 12th D July 13th

C. The last day to purchase the stock in a regular way trade and receive the dividend is 2 business days prior to record date or the 12th. Ex date - or the very first day the stock trades without the value of the dividend - is the 15th.

A corporation declares a cash dividend on Friday, December 5th, payable to holders of record on Friday, December 19th. The local newspaper publishes the announcement on Monday, December 8th, while Standard and Poor's reports the dividend on Friday, December 12th. The ex date for regular way trades will be set at: A Friday, December 5th B Wednesday, December 17th C Thursday, December 18th D Friday, December 19th

C. The regular way ex date for cash dividends is set at 1 business day prior to record date. Since the record date is Friday, December 19th, the ex date is 1 business day prior and is Thursday, December 18th.

Which of the following dates may be needed to compute the total dollar price of a municipal bond traded on a yield basis in the secondary market? I Dated date II Maturity date III Call date IV Put date A I only B II only C II and III only D I, II, III, IV

C. When pricing a municipal bond traded in the secondary market on a yield basis, the MSRB requires that the dollar price be computed on a "worst case" basis. For premium bonds, having the bond called early (losing the premium faster) is worst; so premium bonds must be priced to the nearest "in whole" call date. For discount bonds, having the bond last until the maturity date is worst, earning the discount slower. Thus, these dates are employed when pricing municipal bonds quoted on a yield basis. Put options have no effect on bond pricing, because exercise is at the option of the bondholder; not the issuer.The dated date has no meaning for pricing a bond trading in the secondary market. It is simply the legal date of issuance of the bond, and is the date from which interest started accruing on the issue.

ABC stock has just closed at $70.50. A customer has an open order on the firm's internal order system to sell short 100 shares of ABC at $71. ABC stock goes ex dividend $.55. The order on the firm's book the next morning will be: A Sell short 100 ABC at 70.45 Stop B Sell short 100 ABC at 70.50 Stop C Sell short 100 ABC at 70.55 Stop D Sell short 100 ABC at 71.00

D. Orders placed BELOW the market are adjusted for cash distributions on ex date. The orders below the market are OBLOSS - Open Buy Limits and Open Sell Stops. The intent is to make sure that these orders do not become executable due to the fact that the stock's opening price is reduced by the dividend amount. This is an open sell limit order, which also happens to be a short sale. This order is placed above the current market (OSLOBS - Open Sell Limits and Open Buy Stops are the orders above the market), and are NOT adjusted as of ex dividend date for cash dividend. Thus, the order remains unchanged.

At the time of a "when, as and if issued" trade the: I trade date is known II settlement date is not known III trade price is known IV total transaction price is not known A I and III only B II and IV only C I, II, III D I, II, III, IV

D. "When, as, and if issued" trades are used for new issues where the certificates are not as yet physically printed and delivered. At the time of the "when issued" trade, the final settlement date is not known. Therefore, the amount of accrued interest due to the underwriters is not known, thus the total transaction price is not known. Of course, the trade date is known and the trade price is known at the time of the "when issued" confirmation.

ABC Corporation declares a $1 dividend, payable to stockholders of record as of July 17th. The last day that a customer can get the dividend if he or she is willing to buy the stock "for cash" is: A July 10th B July 12th C July 16th D July 17th

D. If a customer buys the stock "cash settlement," the stock is delivered and paid for that day. Therefore, a purchase settled for cash on the 17th settles that day and places the buyer on the record books to receive the dividend as of the close of business. Note that customers pay more to buy stock in a cash settlement than in a regular way settlement, because the dividend amount deducted on the regular way ex date is added back to the trade price.

A regular way municipal bond trade is performed on Tuesday, January 13th. The interest payment dates are January 15th and July 15th. All of the following statements are true EXCEPT: A settlement takes place on January 15th B the trade is "flat" C the seller must deliver the bonds to the buyer's office D the buyer must pay accrued interest to the seller

D. If the municipal bond is traded on Tuesday, January 13th, the trade settles on the Thursday, January 15th. Since the interest payment date is the 15th, the trade is settling on the exact cut off point where the seller gets the six month interest payment from the issuer and the buyer assumes ownership at the exact beginning of the next 6 month period. No accrued interest is due from buyer to seller - this trade will be "flat." Also, note that this can only happen twice per year.

Which of the following must be disclosed, or made available, on agency trade confirmations? I Name, address, and telephone number of broker II Name, address and telephone number of contra-broker III Amount of commission charged IV Time of trade A I and III only B II and IV only C I, II, III D I, II, III, IV

D. In an agency trade confirmation, the name, address and phone number of the broker must be on the confirmation. The amount of the commission must be on the confirmation. Also, the name of the contra broker and time of the trade must be made available to the customer upon written request (the fact that this information is available is in the fine print on the back of the confirmation).

If a municipal bond, callable at par, is quoted on a yield basis that is higher than the nominal yield, the price of the bond to a customer would be calculated based on: A yield to call B yield to put C current yield D yield to maturity

D. Regarding a bond purchased at a discount: the yield to call will be the highest effective yield. Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the discount is earned over the longest period of time. This occurs if the bonds are held to maturity. If the bonds are called, the yield actually improves on the bonds, since the customer earns the discount faster.

All of the following securities deliveries are "good" EXCEPT: A Trust account securities with an assignment performed by the Trustee B Guardian account securities with an assignment performed by the legal guardian C Custodial account securities with an assignment performed by the custodian D Estate account securities with an assignment performed by the deceased person

D. Securities held in the name of an estate must be assigned by the executor of the estate. When a person dies, their signature dies with them!

The ex date for a stock split is set at: A 2 business days prior to the Record Date B 1 business day following the Record Date C 2 business days prior to the Payable Date D 1 business day following the Payable Date

D. The regular way ex date for cash dividends is 1 business day prior to the record date. However, the ex date for stock dividends, stock splits and rights offerings is different. For non-cash distributions, the ex date is set at the business day following the payable date.

A 7% general obligation bond is issued with 20 years to maturity. A customer buys the bond on a 7.50% basis. The bond contract allows the issuer to call the bonds in 5 years at 102 1/2, with the call premium declining by 1/2 point a year thereafter. The bond is puttable in 5 years at par. The price of the bond to a customer would be calculated based on the: A 5 year call at 102 1/2 B 5 year put at 100 C 10 year call at 100 D 20 year maturity

D. This is a very difficult question. Since the bond has a stated rate of interest of 7%, but is priced to yield 7.50%, the bond is being sold at a discount. The amount of the discount to which this equates is about $140 (you do not need to know how to do this, but you do need to understand the concept that follows). The dollar price of the bond would be $860 to yield 7.50% to maturity. Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the discount ($140 in this case) is earned over the longest period of time. This occurs if the bonds are held to maturity. If the bonds are called earlier, the yield actually improves on the bonds, since the customer earns the discount faster.

Regular way trades of all of the following securities settle "next business day" EXCEPT: A Options B U.S. Government Bonds C U.S. Government T-Bills D Municipal Debt

D. Trades of government debt and listed options settle "regular way" next business day. Trades of corporate securities and municipal bonds settle "regular way" 2 business days after trade date.

When a corporation declares a reverse stock split, all of the following will occur EXCEPT: A the market price per share will be increased B the number of outstanding shares will be reduced C institutional investors are more likely to buy the stock D each shareholder's proportionate ownership in the corporation will be decreased

D. When a corporation declares a reverse stock split, each shareholder's proportionate ownership in the corporation remains the same. For example, if a customer owns 5,000 shares at $1 and the corporation splits its stock 1 for 5, the customer will now own 1,000 shares at $5 (in both cases, it's a $5,000 investment). The other statements are true. If there is a reverse stock split, the market price per share will be increased and the number of outstanding shares will be reduced. Also, institutional purchasers are often restricted by their investment policy guidelines from buying "cheap" stocks. Corporations will declare a reverse stock split so that the stock price increases to an acceptable level to institutional investors.

When a corporation splits its stock, all of the following will occur EXCEPT: A the market price per share will be reduced B the number of outstanding shares will be increased C individual investors are more likely to buy the stock D each shareholder's proportionate ownership in the corporation will be increased

D. When a corporation splits its stock, each shareholder's proportionate ownership in the corporation remains the same. For example, if a customer owns 100 shares at $50 and the corporation splits its stock 2 for 1, the customer will now own 200 shares at $25 (in both cases, it's a $5,000 investment). The other statements are true. Splitting the stock will cause the market price per share to be reduced and the number of outstanding shares will be increased. Also, individual investors are more likely to buy a $25 stock than a $50 one, since cheaper stocks are more affordable. Review

A "Right of Rejection" can be used when: A the buyer accepts delivery of securities that later prove to have a problem B the seller refuses to deliver securities by the settlement date C a trade settles after the record date and the buyer refuses to accept the securities because the price has fallen D the buyer refuses to accept securities on the settlement date because there is a problem with the securities

D. When securities are delivered on settlement date, the buyer inspects the delivery to ensure that the proper securities are being delivered in "good form." If the buyer finds that the wrong securities are being delivered, or that there is a problem, such as the securities' not having a proper assignment; or a coupon bond missing coupons; then the buyer may reject the delivery. This is the "right of rejection."

When a corporation declares a reverse stock split, which of the following statements are TRUE? I Each shareholder's proportionate ownership in the corporation will remain the same II Each shareholder's proportionate ownership in the corporation will be reduced III Institutional investors are more likely to buy the stock IV Institutional investors are less likely to buy the stock A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. When a corporation declares a reverse stock split, each shareholder's proportionate ownership in the corporation remains the same. For example, if a customer owns 5,000 shares at $1 and the corporation reverse splits its stock 1 for 5, the customer will now own 1,000 shares at $5 (in both cases, it's a $5,000 investment). Institutional purchasers are often restricted by their investment policy guidelines from buying "cheap" stocks. Corporations will declare a reverse stock split so that the stock price increases to an acceptable level to institutional investors.

ABC Corporation has declared a 3:2 stock split to shareholders of record on November 10th. The price of the stock will be reduced on ex date by: A 13% B 33% C 50% D 150%

zB. Since the stockholder has 1.5 times the number of shares after the split, the market price will be reduced on ex date by a factor of 1.5. Assume the market price of the stock is $60 before the split. After the split the new market price is $60 / 1.5 = $40. The new price is $20 less than the original $60 OR $20 / $60 = 33% reduction from the original price.