Custom Exam
A customer is short 100 XYZ shares at 26 and long 1 XYZ 30 call at 1. What is the maximum potential gain for the customer?
$2,500 The customer has hedged his short stock position from a market advance by buying the call. If the market falls, the investor can make a maximum of $26 per share if the stock price falls to zero, less the premium of 1 paid to buy the call, for a maximum gain of $2,500 (26 − 1 = 25).
Your firm is a member of an underwriting syndicate for an issue of municipal bonds. The municipal syndicate release terms letter states that the bonds are being offered net, with a two-point concession and a half-point additional takedown. If your firm sells $100,000 of these bonds to a retail customer, it will receive a credit of
$2,500. A syndicate member receives the bonds net of the total takedown (which consists of the concession plus the additional takedown). Therefore, the bonds are taken by the syndicate net of 2½ points (2.5% × $100,000 = $2,500).
Your client writes 2 ABC Nov 220 calls at 5 and buys 200 shares of ABC common stock at $220 in his margin account. What is the breakeven point for the client's position?
$215 The breakeven point for covered call writing is the cost of stock purchased less the premium (220 − 5). Breakeven is the same if it is one covered call, or 1,000.
A customer purchases 200 shares of XYZ at 17.50 and writes 2 XYZ Jan 20 calls at 1. At expiration, with the stock trading at 19, the options expire worthless. If the customer sells his long stock at the current market price, the gain is
$500. The customer buys stock at $17.50 and sells his shares at $19 for a gain of $300. In addition, the customer keeps the $200 in premiums, for an overall gain of $500.
If a customer buys 300 ABC at 53 and writes 3 ABC Jun 55 calls at 4, and the contracts expire unexercised, the customer's cost basis in ABC stock at expiration is
$53. The cost basis in the stock remains at the original purchase price. The premium received must be declared by the investor as a capital gain for tax purposes. Premiums on options will only affect the stock's cost basis or sales proceeds if the option is exercised, or if (on the same day) a customer buys stock and buys a put.
If a municipal bond is issued at par and later purchased for 97 plus accrued interest of $32, what is the purchaser's cost basis?
$970 The purchase price of 97 ($970) represents the cost basis of the bond.
Yield-based debt options are
-European style -settled in cash when exercised -no delivery of debt instruments when these contracts are exercised. All strike prices reflect yield. -bet on future interest rates, not prices. Calls are bought by those who believe rates are going up (prices down) and puts by those who believe rates are going down (prices up).
One of your customers purchased a municipal bond at a basis of 3.35%. Several weeks later, the bond's basis is now 3.21%. Which of the following statements is true? The bond's yield to maturity has fallen by 14 basis points The bond's price has fallen by 14 basis points Market interest rates have likely decreased The bond's rating has likely fallen
-The bond's yield to maturity has fallen by 14 basis points -Market interest rates have likely decreased The basis quote is the bond's yield to maturity. The difference between a basis of 3.35% and a basis of 3.21% is 14 basis points. What is it that causes a bond's yield to fall? It is the inverse relationship between interest rates and bond prices. The price has gone up because interest rates have fallen.
Technical market analysis
1. trading volume 2. support & resistance lvls 3. advances/ declines
Corporate Bond Quotes
1/8 = $1.25 (10/8) Numerator * 10
According to the Investment Company Act of 1940, a diversified mutual fund may hold, at most, what percentage of a corporation's voting securities?
100% To be considered a diversified investment company, 75% of the fund's assets must be diversified, such that the mutual fund owns no more than 10% of a target company's voting securities. Additionally, within that 75% of assets, no diversified investment company may invest more than 5% of its portfolio in a single company's securities. However, there are no restrictions on the other 25%. That can all be in one stock, making 30% of the fund's assets in one company. Those assets can theoretically buy all of the outstanding voting shares of a company and control 100%.
If the owner of a 529 plan (the donor) wishes to move the plan from one state to another, it can be done once in any
12 month period
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?
30 In this new issue, interest begins to accrue as of the dated date, so the customer (buyer) 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 is 30.
An abstract of a municipal securities issue official statement must be maintained on file for how long?
4 years
An options investor wishing to follow a market-neutral strategy would be most likely to find which of the following most appropriate?
A time spread Time spreads, also called calendar or horizontal spreads, consist of two options of the same type with the same strike price, but different expiration months. The strategy expects the market to stay relatively level. The profit arises from the time decay of the later expiration date. A long straddle is profitable only if there is market movement. The same is true with the long call - the market price must go up. A debit put spread is a bearish strategy, so this strategy requires the market price to decline.
Which of the following would be most likely to require a mandatory sinking or surplus fund?
A water and sewer revenue bond Sinking or surplus funds force revenue bond issuers to set aside a portion of their revenue for debt retirement.
Your new customer lists tax-free income as an investment objective but notes that he will need access to $50,000 within the next four to six months for a down payment on a vacation home he is purchasing. To meet the objective of tax-free income, a registered representative considers municipal securities for the $50,000. Which of the following municipal securities recommendations would be the least suitable?
An auction rate security (ARS) An ARS is a long-term instrument tied to short-term interest rates, and therefore, would not be suitable for someone with a short-term time horizon. Each of the remaining answer choices are short-term notes aligning better with the customer's need to access the funds in the next four to six months.
Which of the following would not be a suitable recommendation to an investor with a liquidity constraint?
An interval fund Interval funds do not trade in the secondary market. Shares may only be redeemed at the specified intervals and, even then, only a portion of the holding will be repurchased by the issuer. Closed-end funds are publicly traded and open-end funds and UITs offer daily redemption at NAV.
Reggie owns a convertible bond that converts into 20 shares of common stock. The current market value of the bond was 118½ at the close on Friday, April 1. A 30-day call is announced before the opening on Monday, April 4, at a price of 102. The stock is trading at $57.75. What should Reggie do?
Cant sell because its being called so Convert the bond into the stock
A customer recently approved to trade options writes an OEX put for the account's initial transaction. If the customer fails to return the signed option agreement within 15 days of account approval, which of the following transactions is the customer permitted to make?
Closing purchase
As a registered representative, you recommend the purchase of the ABC Fund family corporate bond mutual fund to a customer whose objective is current income. The customer agrees to the purchase and you enter the order. What type of securities has the investor purchased?
Common stock
ETNs and ETFs are both exchange-traded but
ETN --> debt security ETF --> Equity
Special "events" are reported to the SEC on
Form 8-K
An investor and his father own 8% and 5%, respectively, of a corporation's outstanding shares, and the father wants to sell his holding. According to Rule 144, which of the following statements are true? He must file Form 144 to sell the shares. He does not have to file Form 144 to sell the shares. He is considered an affiliated person. He is not considered an affiliated person.
He does not have to file Form 144 to sell the shares. He is not considered an affiliated person. Under Rule 144, an affiliate is a person in a control relationship with an issuer. Because neither of the investors own at least 10% of the stock, they are not control persons under Rule 144 and do not have to comply with the rule. Certain family members, such as a spouse or other immediate family member residing in the same home, are required to combine holdings. If the question indicated that the father and son share the same residence, then the filing requirements of the rule would apply because the 13% total would make them control persons.
Who is now included as an Accredited Investor?
Individuals with a Series 7, Series 65, or Series 82 registration are included regardless of income or net worth
Alpha
It is a measure of performance that adjusts for risk, relative to a known benchmark.
A customer opens the following positions: Buy 100 shares of ABC @$60; sell 1 ABC Jun 60 call @3. What is the customer's maximum gain, maximum loss, and breakeven point?
Maximum gain is $300; maximum loss is $5,700; breakeven point is $57. The first step is to identify the position. This is long stock with a short call. This is a covered call position. Breakeven is the customer's net cost. The price of the stock ($60) minus the premium ($3) received equals the $57 per share breakeven point. The strategy is to generate some income with a little protection against a decline in the price of the ABC stock. The premium income is the most this client can make. If the stock's price should rise well above the cost of $60 per share, the short call will be exercised and the customer will deliver the stock purchased at $60 and receive $60. Regardless of how high the stock price rises, this customer can never make more than the $3 premium. If the stock's price should decline, the call will expire unexercised. That 3-point premium protects the long stock, but only for those 3 points. Once the market price falls below $57 (the breakeven point), it is all a loss for the customer down to a maximum $5,700 if the price drops to zero. Why doesn't the breakeven follow the "call-up" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.
Odd Lot Theory
Odd lot traders buy --> bearish Odd lot traders sell --> bullish
Where must the SEC's no-approval clause appear in a prospectus?
On the cover
Which of the following would be of least interest to a technical analyst?
Price-to-earnings (P/E) ratio Technical analysts rely on price and trading trends to determine when to buy or sell stock. They are not interested in the specific financial information of an issuer. P/E ratios are of greater interest to fundamental analysts.
An investor, with a well-diversified portfolio oriented toward growth, has 60% invested in the stocks of 28 different companies. She would like to hedge the downside risk for the equities and is comfortable using options to do so. Which of the following is most suitable?
Purchase index option puts
When used on the exam, the term "nonexempt security" refers to a security that must register with the SEC. There are cases, however, when registration may be avoided. In most cases, that would be when the transaction involving that security is exempt. Each of the following is a transaction exemption found in the Securities Act of 1933 except
Regulation M This is a process of elimination question. There is a Regulation M under the act, but it has no relevance to your exam (which is why it is nowhere in your material). It sometimes happens that the correct answer choice is something you've never heard of. That happens most often when the question ends with the word except. Regulation A+ is the exemption for small and medium corporate offerings. Regulation D is the most significant private placement exemption. Regulation S is the exemption for offers and sales made outside the United States by both U.S. and foreign issuers.
The VIX relates to
S&P 500,
A margin account is shown with equity above 50%. Instead of asking for the SMA, the question asks for the maintenance point
Simply take the debit balance and divide by .75.
Which of the following types of mutual funds has capital appreciation as its investment objective?
Specialized An objective of high-capital appreciation is most likely realized by a stock fund. A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation.
In an interdealer trade, if the seller delivers before the settlement date, which of the following statements is true?
The buyer may accept the stock or refuse it without prejudice. In a regular way trade, the firm is not obligated to accept securities delivered before the settlement date (two business days after the trade date), but it may do so if it wishes.
Which of the following does not participate in the syndicate (joint account) for a municipal underwriting?
The issuing municipality
As a registered representative, you have a customer that is concerned about losing principal when investing in a mutual fund. Because the customer is risk averse, you recommend a principal-protected fund. Which of the following statements is not correct?
The portfolio is limited to bonds. Most principal-protected funds investments are in both stocks and bonds, not just bonds. The principal is guaranteed, typically by an insurance policy. In order for the investor to receive the guarantee, the money invested is subject to a lock-up period, usually 5-10 years. If any redemptions take place during the lockup period, the investor would lose the guarantee. That could result in a loss.
Which of the following statements best describes the effect of reinvesting mutual fund distributions?
The reinvestment of capital gains and dividends results in a higher cost basis. Because reinvested distributions are taxed in the year received, the investor's cost basis is increased by the amount of the distribution. This is to prevent those distributions from being taxed twice. They are taxed once as the dividend or capital gain and then, if not added to the cost basis, would be taxed a second time when the shares are sold. Reinvestment of these distributions does not avoid or defer current taxation. This is not the same as receiving a stock dividend where the taxes are deferred until those shares are sold.
Which of the following is true with respect to excess capital losses realized by an individual taxpayer?
They may be carried forward indefinitely until exhausted. Any taxpayer is permitted to reduce capital gains with realized capital losses. If the capital losses exceed the capital gains, up to $3,000 may be deducted against taxable income. Anything in excess of that is carried forward and used against gains, or, if there are no gains, taxable income, again with a $3,000 annual limit. Those losses can be carried forward with no time limit until they are all used against gains or income.
An investment company that holds which of the following does notmeet the definition of a diversified investment company under the Investment Company Act of 1940?
Thirty-three percent of its assets in securities issued by a small-cap new issue An investment company that has invested 33% of its assets in any issue, small-cap or not, exceeds the limits set in the 75-5-10 test. This test requires that 75% of the assets be invested in securities issued by companies other than the investment company (regardless of the type of companies) so that no more than 5% of total assets are invested in any one company and no more than 10% of an outside corporation's voting securities are owned by the investment company.
If a registered rep suspects senior abuse who should be contacted?
Trusted Contact or supervisor if their is no trusted contact
A client writes 1 Jan 60 put and buys 1 Jan 50 put. This is
a credit bull spread; the investor wants the price to stay above 60. This is a put credit spread, and bulls sell puts. The 60 put is worth more because it has a higher strike price. Long the lower put is bullish; short the lower put is bearish.
For the underwriting of a municipal bond issue, competitive bids are submitted by underwriters as
a firm commitment. For new municipal bond issues, underwriters must submit bids for the entire bond offering—a firm commitment. Standby commitments are used only for corporate stock rights offerings. Best efforts commitments are used for corporate securities, and an all-or-none commitment is a type of best efforts commitment.
A customer buys 1 XYZ Aug 60 call at 4 and 1 XYZ Aug 60 put at 2 when XYZ is at 61.25. If the stock rises to 68, and the customer lets the put expire and closes out the call at intrinsic value, the result is
a gain of $200. The customer has established a long straddle. To determine profit or loss, compute the breakeven points by both adding and subtracting the combined premiums (6 points) from strike (breakeven points are 54 and 66). Because the customer profits if the stock moves outside these points, at 68, the customer has a two-point ($200) gain.
revenue bond backed by gasoline taxes is
a special tax bond.
An investment company registered with the SEC under the Investment Company Act of 1940 that allows investors to sell their shares back to the company at net asset value on a quarterly basis is
an interval fund. The unique feature of interval funds is that at certain intervals, which may be anything from monthly to annually, investors are allowed to sell a portion of their shares back to the fund at net asset value (NAV). In the case of open-end funds and UITs, shareholders can redeem their holdings at NAV at all times, not just specified intervals -Interval fund is a closed-end fund
deferred sales load =
back-end load Class B shares carry a deferred sales load. This is sometimes referred to as a back-end load. Class A shares carry a front-end load. Class C shares charge a 12b-1 fee quarterly with a small back-end load in the first year.
A major way in which private CMOs differ from agency CMOs is the
backing full backing by the Treasury (GNMA) or the agency (FNMA/FHLMC), so-called "private label" CMOs are the sole obligation of their issuer.
Under the rules regarding the purchase of new issues _______ would be characterized as restricted persons. They may not, therefore, purchase new issues.
bank officers
Institutional managers are moving to increase their cash position. This action would be viewed as
bearish.
A registered principal must approve all orders
by the end of the trading day.
When you exercise an index option, settlement is made in
cash
A customer wanting to invest in an oil and gas limited partnership wants to know what her cost basis would be for tax purposes. While there can be a number of variables, cost basis for a limited partner (LP) is best defined as
cash investment made plus recourse debt minus distributions. Nonrecourse debt would only be included for real estate programs. Real estate programs are the only types where LPs can be responsible for both recourse and nonrecourse debt.
When the SEC rules that an offering has become effective, the SEC has
cleared the offering for sale. An offering becomes effective when it is released by the SEC for sale. The SEC does not approve or disapprove of new offerings; it releases them for sale after determining that enough information is available for public investors to make sound investment decisions.
A legal contract—known as an indenture—between a bond issuer and a trustee appointed to represent the bondholders is required for
corporate bond issues of $50 million or more sold interstate. U.S. governments are exempt. The Trust Indenture Act of 1939 requires corporate bond issues of $50 million or more sold interstate to be issued under a trust indenture, which is a legal contract between the bond issuer and a trustee representing bondholders.
Cannot put a DPP in a
discretionary account
All new municipal bonds are issued either in
fully registered or book entry form.
A competitive bid underwriting is the standard for
general obligation municipal bond underwritings
Losses from direct participation programs can be used to offset
income from limited partnerships. Passive losses can be used only to offset passive income, which is earned from direct participation programs and rental real estate.
head & shoulders bottom
indication of a bullish reversal of a downtrend
head & shoulders top
indications of a bearish reversal of an uptrend
J.B. Collingsworth is the CEO and largest single shareholder in Collingsworth Industries, Inc. (CII). Three years ago, J.B. purchased 15,000 shares of CII in the secondary market. J.B. has decided to purchase a vacation home and is going to use the proceeds from a sale of 5,000 of those 15,000 shares as a down payment for the home. With CII selling at $8 per share,
it is not necessary for J.B. to file a Form 144. As a control person, J.B. must comply with Rule 144 when selling shares of CII. Rule 144 has a de minimis exception when 5,000 or fewer shares are sold and the dollar amount is $50,000 or less. In this case, the 5,000 shares at $8 per share is $40,000, so J.B. is within the limits. Form D is used by the issuer of a private placement. Although it is true that no additional filing is required, the reason has nothing to do with the holding period. Having purchased these shares in the secondary market, J.B. could have sold them the next day if desired.
Debt service on an industrial revenue bond is secured by
lease payments paid by a corporation. Industrial revenue bonds are issued by a municipality or an authority established by a municipality. No municipal assets or general revenues are pledged to secure the issue. The net lease payments by the corporate user of the facility are the only source of revenue for debt service.
BANs are issued in anticipation
long-term financing but is a short-term notes
negotiated underwriting is the standard in
municipal revenue bonds. & corporate issues
The writer of an equity call option who is assigned
must deliver stock within two business days. If exercised, the assigned call writer must deliver the underlying stock within two business days (regular way settlement for equity transactions).
An investor opens a long position in one XYZ Nov 140 call @7. Disregarding any commissions, on settlement date, the investor
must pay $700. When an investor takes a long position in an option, it means the investor has purchased the option. As a buyer, the investor must pay the premium on the settlement date.
Of all the DPPs, it is only the RELP (Real Estate Limited Partnership) where
non-recourse debt adds to the investor's basis.
An investor, age 57, wants to amend an existing portfolio to have a greater percentage be in fixed-income (debt) instruments. Current market sentiment is that interest rates are very high and likely to begin contracting soon. The investor agrees and asks for your thoughts regarding what those debt instruments might be. The most suitably aligned with the market sentiment would be
noncallable corporate bonds. If one anticipates that interest rates will be falling, noncallable bonds would be better, as there is no risk of them being called and you can continue to earn the higher rate the bonds were issued with. Anything with a variable rate will have the interest payable adjusted to align with current rates, and therefore, would not desirable when rates are falling. Money market funds are not debt instruments, and again, the returns they pay reflect trending interest rates.
The LLAW Manufacturing Company issued a 6.25% (nominal yield) debenture 5 years ago. The bond is callable in seven years at 102 and matures in 15 years. The bond's current yield is 4.23%. If one of your customers decided to purchase this bond, they would have to understand they would be
paying a premium for the bond. The first thing to notice is that the current yield is below the nominal (coupon) rate. That automatically tell us the bond is selling at a premium
A broker-dealer's website is considered
retail communications
A foreign company that exports its products to the United States wishes to protect itself during a time in which the U.S. dollar is expected to be devalued. The company should
sell U.S. dollars. buy foreign currency. If the company expects the U.S. dollar to become devalued, that means that the foreign currency will increase in value. It would make sense at this time, therefore, for the company to get rid of its U.S. dollars, which are expected to decline in value, and acquire the foreign currency, which will appreciate relative to the U.S. dollar.
A newly issued municipal bond pays interest on March 1 and September 1. If the bond has a dated date of August 1, 2019, the bondholder's first interest payment (payable on March 1, 2020) would include interest for a period of
seven months. From the dated date of August 1, 2019, to the first payment date of March 1, 2020, is seven months.
A client with an options account contacts the registered representative handling the account with instructions to open the following spread: Buy 1 ABC 100 call and Sell 1 ABC 105 call at a 5-point debit. Under FINRA rules, this order
should be refused The order should be refused because it is impossible for it to be profitable. This is a bull call spread (but that is not the correct answer here because it has nothing to do with FINRA rules) and will become profitable when the spread widens. With strike prices of 100 and 105, it can never widen more than 5 points. If the client paid 5 points for the spread, once commissions are factored in, the client must lose money and certainly cannot profit. FINRA looks at this as an uneconomic position, and the firm should refuse to take the order.
sources of debt service for general obligation (GO) bonds
states: income tax, license fees, & sales tax towns, cities & counties: property (ad valorem) taxes, license fees, fines
A Mutual Fund can distribute capital gains once per
taxable (not fiscal) year.
Listed options on U.S. exchanges are available on all of the following currencies except
the U.S. dollar. In the U.S., exchange-listed currency option contracts exist on foreign currencies, not on the U.S. dollar. With U.S. exchange-listed currency option contracts, the U.S. dollar is the base currency to which movements in the foreign currency is compared.
Variable annuities generally include an assumed interest rate. This is
the annual rate of return required to maintain the level of annuity payments
The call premium represents
the difference between the call price and par. The farther away a call date, the lower the call premium.
When material information changes, especially in a mutual fund statutory or summary prospectus, instead of printing a new document,
the old one can be "stickered" with the new information
The management fees paid by an investment company are part of
the operating expense of the fund. The management fees paid by an investment company are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement.
A head and shoulders bottom formation is an indication of
the reversal of a downtrend.
If a customer buys 1 OEX Feb 350 call at 5 and sells 1 OEX Feb 335 call at 16 when the underlying index is at 344, she will profit if
the spread narrows the underlying index does not change. This is a credit spread because the investor received more premium than was paid. Sellers profit if both contracts expire or the spread narrows. The breakeven point is 346 (335 + 11, the net premium), and because the spread is bearish, the customer profits if the index is below 346.
If requested, a paper copy of the SAI (3) must be sent within
three days of the request.
A customer is long 100 XYZ currently trading at $40 per share. To generate income, the customer writes 2 XYZ Aug 40 calls at 4 for a maximum loss potential of
unlimited This is an example of ratio writing where a customer writes more calls than he has stock to cover. Because only one of the calls is covered, the other is uncovered, and loss potential is unlimited.
An investor anticipating a rise in interest rates would likely purchase
variable-rate demand obligations or reset bonds. Variable-rate or reset bonds have coupons that are adjusted based on the movements of other specified interest rates. A callable bond works to the issuer's advantage when interest rates fall but offers no added benefit to an investor when interest rates rise. Generic corporate or government-issued bonds offer no advantage for an investor anticipating a rise in interest rates.
FINRA Rule 2330 (deferred variable annuities) requires principal approval of any sale or exchange (including a 1035 exchange)
within 7 business days.
