Mastery Exam II
Individual Retirement Account contributions can be made with: A. Cash B. Exempt Securities C. Non-Exempt Securities D. All of the above
The best answer is A. Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).
A high earning individual can open and contribute to which of the following accounts? I UGMA Account II Roth IRA III Coverdell ESA A. I only B. I and II C. II and III D. I, II, III
The best answer is A. Custodian accounts opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can be opened by any adult for any minor, with no limitation on the income of the donor in determining whether the account can be opened. On the other hand, high earning individuals are prohibited from opening either a Roth IRA or a Coverdell Education Savings Account.
Which of the following statements are TRUE regarding a defined benefit plan? I The smallest contributions are for those individuals who are far away from retirement II The smallest contributions are for those individuals who are nearing retirement III The largest benefits will be paid to high salaried employees nearing retirement IV The largest benefits will be paid to low salaried employees the furthest away from retirement A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Defined benefit plans calculate annual contributions based on expected future benefits to be paid. The largest benefits will be paid to high salaried employees nearing retirement so these are the largest contributions. The smallest benefits are owed to low salary employees far away from retirement, so these are the smallest contributions.
If an individual is extremely bearish on the market, which strategy is appropriate? A. Buy VIX calls B. Buy VIX puts C. Sell VIX calls D. Sell VIX puts
The best answer is A. The VIX is an extremely successful index option traded on the CBOE that is commonly called the "fear gauge." The VIX is an index that tracks S&P 500 Index volatility. VIX values have ranged from a low of about 10 to a high of about 80 since the product was introduced in 2006. Increased volatility occurs in falling markets, so VIX values increase when the market is falling - the index moves counter to the general market. Therefore, in a falling market, volatility increases and VIX calls become more valuable as the VIX rises; while in a rising market, VIX values tend to fall. In a rapidly falling market, VIX values will keep increasing as the market is falling, so buying VIX calls will give a larger gain than selling VIX puts, where the gain on the expiring VIX puts would just be the premium collected.
The purchase of a call has which of the following advantages over buying the underlying security? I Lower capital requirement II The call holder receives the same dividends as does the holder of the underlying stock III The call holder does not lose time value as the position is held A. I only B. I and II C. II and III only D. I, II, III
The best answer is A. The advantage of buying a call over buying the underlying security is a lower capital requirement (paying 100% of the premium is lower than paying for the full value of the stock position). Call holders do not receive dividends as do stockholders, so this is a disadvantage. Another disadvantage of holding an option is that every day its time value decreases, to zero at expiration. This does not occur with stock positions, since there is no finite life on the position.
A customer buys 100 shares of ABC stock at $64 and buys 1 ABC Oct 65 Put @ $3. ABC stock falls to $58 and just prior to expiration, the customer exercises the put, delivering the stock position. The customer has a: A. $200 loss B. $300 loss C. $400 loss D. $700 loss
The best answer is A. The customer bought the stock at $64 and sold at $65 by exercising the put. There is a 1 point gain on the stock position. However, the customer lost the $300 premium paid, so the customer loses the net amount of $200.
A customer buys 100 shares of ABC stock which is trading at $65. The customer thinks the market will remain at $65 in the following months, so he decides to sell 1 ABC Sept 65 Call @ $3. ABC then goes to $60 and the customer's call contract expires and the customer decides to liquidate his stock position at the current market price. The customer has a: A. $200 loss B. $300 gain C. $500 loss D. $500 gain
The best answer is A. The customer bought the stock at $65 and sells it at $60 for a $5 loss. However, the customer collected $3 in premiums for selling the call. The net loss is $2 or $200 on 100 shares.
A customer sells 1 ABC Jul 40 Put at $6 when the market price of ABC is $38. The customer's maximum potential gain is: A. $600 B. $3,400 C. $4,000 D. unlimited
The best answer is A. The maximum gain for the writer of a naked call or put is the premium collected. This happens if the contract expires "out the money."
The option premium is: I the price of the contract II the strike price of the contract III determined by supply and demand in the marketplace IV determined by the Options Clearing Corporation A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. The option premium is the price of the contract. The price is determined on the floor of the options exchange, based upon market conditions for that contract.
The requirement for independent verification of a customer's identity when opening an account CANNOT be satisfied by examining a copy of the customer's: A. birth certificate B. driver's license C. passport D. military ID
The best answer is A. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information. A birth certificate does not have the required information needed for matching.
Call loans made by banks to broker-dealers are secured by: A. fully paid securities held in margin accounts for customers of the broker-dealer B. partially paid securities held in margin accounts for customers of the broker-dealer C. fully paid securities held in cash accounts for customers of the broker-dealer D. any security position held in the broker-dealer's inventory or held in a customer account
The best answer is B. Call loans are secured by customer margin securities. Fully paid customer securities cannot be pledged for these loans - they must be segregated and placed in safekeeping. The loans are not secured by cash nor do firm securities positions collateralize these loans. Loans using firm securities as collateral (proprietary positions) must be kept separate from loans using customer securities as collateral.
Which of the following statements are TRUE when describing the "build-up" in a variable annuity separate account during the accumulation phase? I All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more accumulation units II All interest, dividends, and capital gains from the securities in the account can either be paid to the contract holder or can be automatically reinvested to buy more accumulation units III All interest, dividends, and capital gains from the securities in the account are taxable IV All interest, dividends, and capital gains from the securities in the account are tax deferred A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. During the accumulation phase, all interest, dividend, and capital gains realized from the securities held in the separate account must be automatically reinvested to buy more accumulation units for the contract holder. The "build-up" of these reinvested dividends, interest and capital gains is tax deferred during this period. This is the major tax advantage of buying a variable annuity over making a direct investment in a mutual fund.
If the writer of a put contract is assigned, the put writer must: A. pay the strike price for the security in next business day B. pay the strike price for the security in 2 business days C. deliver the security the next business day D. deliver the security in 2 business days
The best answer is B. If the writer of a put is "assigned," this means that the OCC has assigned an exercise notice to that put writer. The put writer is then obligated to buy the stock from the put holder in a regular way trade, with the transaction price being the strike price. Regular way settlement of stock trades occurs 2 business days after trade (exercise) date.
A customer places an order to buy 100 shares of ABC at the market. The execution report shows the trade occurring at $45.63. The firm sends out a confirmation which states that the trade occurred at $45.38. Which statement is TRUE? A. The customer will pay $4,538 plus any applicable commissions B. The customer will pay $4,563 plus any applicable commissions C. The customer can DK the trade D. The customer will pay $4,538 and can submit a claim to arbitration for an additional $25.00.
The best answer is B. The customer placed a market order to buy which was executed at $45.63. The firm erroneously reported the trade as occurring at $45.38. If there is an error in confirmation (as happened in this case), the customer gets the actual trade price. All the firm must do is send a corrected confirmation to the customer. If the firm made an error in execution, any loss due to the firm's error must be absorbed by the firm.
A couple earning $70,000 in 2019 makes a contribution of $6,000 to a Traditional IRA. Which statement is TRUE? A. This couple can contribute a maximum of $3,000 to a Roth IRA B. This couple can contribute a maximum of $6,000 to a Roth IRA C. This couple can contribute a maximum of $12,000 to a Roth IRA D. This couple is prohibited from contributing to a Traditional Individual Retirement Account in that year
The best answer is B. The maximum permitted annual contribution to a Traditional IRA or Roth IRA for a couple is $12,000 total in 2019. This can be divided between the 2 types of accounts. In this case, since $6,000 was contributed to the Traditional IRA, another $6,000 can be contributed to a Roth IRA for that tax year. Also note that this couple's income is too low for the Roth IRA phase-out (which occurs between $193,000 and $203,000 for couples in 2019).
To open a cash account for a partnership, in addition to the new account form, which document is required? A. Authorizing resolution B. Partnership agreement C. Corporate charter D. Joint account agreement
The best answer is B. To open a partnership account, a copy of the partnership agreement must be obtained. This document will have a paragraph that authorizes the opening of such an account; and which specifies the partners that are permitted to effect transactions in the account.
Which of the following statements are TRUE regarding order tickets? I Order tickets must be prepared prior to entry of the order II Order tickets must be prepared by the close of business on the day the order was entered III Once an order has been executed, alterations are permitted as long as they are done by the market close IV Once an order has been executed, no alterations are permitted to the ticket unless a manager approves A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Under FINRA rules, order tickets (which are now electronic) must be prepared in writing prior to order entry. Once an order has been executed, no alterations are permitted to the ticket unless a manager approves in writing.
Covered call writing is an appropriate strategy in a: A. declining market B. rising market C. stable market D. fluctuating market
The best answer is C. A covered call writer owns the underlying stock position. The customer sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If the customer expects the market to rise, he or she would not write the call against the stock position because the stock will be "called away" in a rising market. If the customer expects the market to fall, he or she would sell the stock or buy a put as a hedge.
ABC Jan 50 call contracts are trading in the market at 3.40. What is the dollar price that a customer would pay for 2 contracts at this price? A. $34.00 B. $340.00 C. $680.00 D. $1,360.00
The best answer is C. A premium of 3.40 is $3.40 per share. Equity contracts cover 100 shares, so the total premium is $3.40 x 100 = $340.00 per contract. Since there are two contracts, the total premium would be $680.
LGIPs offered by municipal broker-dealers are: A. investment vehicles available to the general public that permit tax-deferred saving for higher education B. investment vehicles available to the general public that permit tax-deferred saving for education below the college level C. investment vehicles available to local government entities that permit investment of excess funds D. investment vehicles available to local government entities that permit borrowing of funds as needed
The best answer is C. An LGIP is a "Local Government Investment Pool." It is an investment fund set up under state law that is only offered to local municipal governmental entities in that state. For example, if a town in a state has collected its real estate taxes, but has not yet spent those funds, it can put the balance in that state's LGIP. The LGIP is managed to provide a safe investment return. The MSRB takes the stance that if an LGIP retains a broker-dealer to market its offerings in that state, then it is a municipal fund security subject to MSRB rules. On the other hand, if the LGIP uses its own employees to market itself to local state governmental entities, then it is not subject to MSRB rules.
Which of the following option positions is used to hedge a long stock position? A. long call B. short call C. long put D. short put
The best answer is C. Buying a put allows the owner of stock to sell it a fixed price (strike price) if the market falls. This limits downside risk on the long stock position.
Regarding arbitration agreements between member firms and customers, which statements are TRUE? I FINRA requires each customer to sign an arbitration agreement as part of the account opening process II Each member firm can require each customer to sign an arbitration agreement as part of the account opening process III Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster IV If an arbitration agreement is signed, a copy must be sent to the customer annually for reconfirmation A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. FINRA does not require arbitration agreements between customers and member firms. However, each member firm can require this (and usually does). FINRA does require that if a customer signs an arbitration agreement as part of the account opening process, then the customer must be sent a separate "stand alone" copy of the agreement and must sign an acknowledgement of receipt within 30 days of account opening. Note that there is no requirement to resend the customer a copy of the arbitration agreement annually. Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster.
A registered representative that has completed the certified financial planner designation has a customer base consisting mainly of senior citizens. The registered representative may refer to him- or herself as a: A. "Certified Senior Adviser" B. "Certified Financial Gerontologist" C. "Certified Financial Planner" D. None of the above
The best answer is C. FINRA is concerned about registered representatives using "bogus" certifications when making presentations to senior citizens. Stating that one is a "Certified Senior Adviser," "Certified Financial Gerontologist," "Senior Specialist," or "Retirement Specialist" is prohibited since these are not true professional designations. However, the "Certified Financial Planner" (CFP) designation requires formal certification with procedures that include a detailed and rigorous curriculum and exam, so this is a "real" certification and a representative that completes it can call him- or herself a "Certified Financial Planner."
Under FINRA rules, numbered accounts are: A. prohibited B. permitted with the prior approval of FINRA C. permitted if the firm maintains a written statement of the customer attesting to ownership D. permitted without any additional supporting documentation
The best answer is C. FINRA requires that accounts be maintained in customer name; however it will allow a numbered account to be maintained if the firm keeps on file a written statement by the customer attesting to ownership. For example, professional traders might worry that if their trades are seen in their name in the firm, that unscrupulous employees might try to "ghost" their trades. If the account is maintained as a numbered account, then whoever sees the order does not know the identity of the customer.
Which of the following statements are TRUE regarding initial and minimum maintenance margins for a long margin account? I Initial margin is 25% II Initial margin is 50% III Maintenance margin is 25% IV Maintenance margin is 50% A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Initial margin for a long margin account is set by the Federal Reserve (FRB is the Federal Reserve Board) under Regulation T at 50%. Maintenance margin is set by FINRA at 25%.
Which of the following statements are TRUE regarding tax sheltered annuities for employees of non-profit organizations? I These are known as 401(k) plans II These are known as 403(b) plans III Monies contributed to this plan are excluded from taxable income IV Monies contributed to this plan are included in taxable income A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Tax deferred annuities for employees of non-profit organizations are 403(b) plans. These retirement plans allow employees of non-profit institutions such as hospitals and universities to establish their own retirement plans if none is provided by the employer. The monies contributed are excluded from taxable income, and must be used to purchase "tax sheltered" annuities or mutual funds; direct stock investments are prohibited.
Which of the following statements is TRUE when comparing the purchase of a put and selling a security short? A. The maximum potential loss for both positions is unlimited B. The capital requirement to purchase a put and the capital requirement to sell a security short are the same C. Both positions will have the maximum potential gain if the market falls to "0" D. There is the same amount of risk in owning a put and in selling a security short
The best answer is C. The maximum potential loss when buying a put is just the premium paid, whereas in selling a security short, the individual is exposed to an unlimited loss potential. Paying the premium to buy a put is less than the 50% margin requirement needed to sell a security short. If the market value of the security falls to "0," both the holder of a put and the individual who shorted shares will achieve the maximum profit. Choice D is false since selling a security short exposes the customer to unlimited loss potential; the maximum loss potential for the holder of a put is the premium paid.
Under MSRB rules, to make a suitable recommendation, the registered representative must have sufficient knowledge of the customer. Regarding recommendations to a customer, which of the following statements are TRUE? I If the customer refuses to disclose sufficient financial information, recommendations are still allowed II If the customer refuses to disclose sufficient financial information, recommendations are not permitted III If the customer insists upon executing an unsuitable trade, the registered representative should execute the trade, denote his exception to the trade in his book, and mark the order ticket as "unsolicited" IV If the customer insists upon executing an unsuitable trade, the registered representative must submit the issue to industry arbitration A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. The registered representative should inquire as to the customer's "financial background" under MSRB rules, asking information such as income and net worth. The customer may refuse to provide this information, stating that it is an invasion of privacy. The account can still be opened, however when the customer fails to provide sufficient personal information on his financial status or investment objective, no recommendations can be made. If the customer wishes to execute an unsuitable trade, the registered representative should note this and mark the order ticket as "unsolicited" and execute the order. The registered representative is obligated to do what the customer instructs.
A customer sells 1 ABC Jul 45 Put at $5 when the market price of ABC is $41. The maximum potential loss to the writer is: A. $500 B. $3,300 C. $4,000 D. unlimited
The best answer is C. The worst case for the writer of a put is being exercised and being forced to buy worthless stock at the strike price. In this case, the put writer agrees to buy the stock at $45, but collected $5 of premiums, for a net outlay of $40. If the stock is worthless, this is the maximum loss per share ($4,000 for the contract).
What is the maximum potential loss for a customer who is long 100 ABC at $39 and short 1 ABC Jan 40 Call at $5? A. $500 B. $600 C. $3,400 D. $3,900
The best answer is C. This is a covered call writer. The maximum potential loss occurs when the market for ABC goes to zero. If it does, the customer loses $3,900 on the stock position, however, the customer received $5 in premiums for the now worthless call contract. The net maximum loss is $3,400. If the market rises, the call will be exercised and the customer will be obligated to sell stock at $40 that was purchased for $39. In addition to the $1 stock profit, the customer earns the premium of $5, for a total profit of $6 per share.
To sell variable annuities, salespersons must be registered with (the): I FINRA II State Insurance Commission III State Banking Commission A. I only B. II only C. I and II D. I, II, III
The best answer is C. To sell a variable annuity, a salesperson must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level). Banking regulators have nothing to do with securities.
An ABLE account: I must be established prior to the beneficiary reaching age 18 II must be established prior to the beneficiary reaching age 26 III is used to pay only for the medical expenses incurred by a disabled individual IV is used to pay for the qualified ongoing expenses incurred by a disabled individual A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. ABLE accounts were enacted by Congress in late 2014. ABLE stands for "Achieving a Better Life Experience Act." It allows each state to set up a "municipal fund security" regulated by the MSRB that permits an account to be established to pay for the ongoing expenses of a disabled person. One of the key features of an ABLE account is that accumulated savings do not affect that person's eligibility for other Federal benefits (it used to be the case that having too much in assets would disqualify that person from other Federal benefits such as Medicaid). Up to $15,000 per year (the Federal gift tax exclusion amount) can be contributed to an ABLE account, with no tax deduction. The account grows tax-deferred, and payments to pay for qualified expenses are tax-free. Qualified expenses include medical care, transportation, housing, education, and assistive technology. The account must be established before the disabled individual reaches age 26, and proof that the beneficiary is disabled or blind must be provided. ABLE accounts are permitted under Section 529A of the Internal Revenue Code. Do not confuse these with 529 Plans, which are a municipal fund security to save for education expenses.
The FINRA suitability rule requires which of the following? I Before a product or strategy can be recommended, a reasonable basis suitability determination must be completed, evaluating the investment's features, returns, costs and risks II Before a product or strategy can be recommended to a customer, it must be determined that the investment is suitable, based on that client's new account profile III Before a product or strategy can be recommended to a customer, it must be determined that the customer has the ability to meet the financial commitment required by the recommendation IV Before a product or strategy can be recommended, the registered representative must understand and be able to communicate the investment's features, returns, costs and risks A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is D. FINRA requires that suitability determinations include multiple levels of review. These are: Reasonable Basis Suitability: This is a review of the features, returns, costs and risks of the recommended product or strategy. Only those products with the best combination can be recommended to clients. In essence, this rule requires that firms have an internal "recommended list" that has completed this review. In addition, in order to recommend the product, the registered representative must understand, and be able to communicate, the investment's features, returns, costs, and risks. Customer-Specific Suitability: Once the recommendation has completed "reasonable basis" suitability, that does not mean that it can be recommended to all customers. To recommend it to a customer requires that "customer-specific" suitability be determined. Quantitative Suitability: A single recommendation might be suitable for a customer, however a large number of similar recommendations might not be. It all depends of the customer's objectives, needs, and ability to pay for the recommended transactions. Note that the "Suitability" rule only applies to recommended transactions. It explicitly does not apply to unsolicited trades; and it also does not apply to institutional customers - only to retail customers.
Which of the following statements are TRUE regarding joint accounts? I If a party in a Joint Tenants With Rights of Survivorship account dies, his or her share is excluded from his taxable estate II If a party in a Joint Tenants With Rights of Survivorship account dies, his or her share is included in his taxable estate III If a party in a Tenancy in Common account dies, his or her share is excluded from his taxable estate IV If a party in a Tenancy in Common account dies, his or her share is included in his taxable estate A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. If a joint account owned as "Tenancy In Common," then if one person dies, that person's share goes into his estate, and is subject to estate tax. Even though a "Joint Tenancy with Rights of Survivorship" gives each owner a legally undivided interest in an account, if one owner dies, the IRS assigns a portion of the account to that person and taxes it (nothing is so certain in life as death and taxes!) If the owners are married, then the unlimited marital exclusion stops the tax bill from hitting until the second spouse dies.
A customer buys 100 shares of ABC stock at $39 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The customer's maximum potential gain until the option expires is: A. $200 B. $300 C. $700 D. $800
The best answer is D. If the market rises above $45 the short call will be exercised. The customer must deliver the stock that he bought at $39 for the $45 strike price, resulting in a $600 gain. Since $200 was collected in premiums as well, the total gain is $800. This is the maximum potential gain while both positions are in place.
A customer sells 10 ABC Jan 50 Calls @ 4.75 when the market price of ABC is $51 per share. The maximum loss potential is: A. $4,750 B. $45,125 C. $50,000 D. unlimited
The best answer is D. If the market rises, the calls will be exercised, requiring the writer to deliver stock that he does not own. The writer must go into the market to buy the stock at the higher market price. Since the market price can rise an unlimited amount, the loss potential is unlimited.
The requirement for broker-dealers to disclose their privacy policies to customers, and to permit customers to "opt out" of having their information disclosed to third parties, is outlined under SEC: A. Regulation SB B. Regulation FD C. Regulation SK D. Regulation SP
The best answer is D. Regulation SP ("Statement of Privacy") requires financial institutions to provide retail customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to "opt out" of any such disclosures.
A new customer comes to your firm to open a cash account, wishing to deposit a $20,000 cashiers check. When completing the new account form, you discover that the customer is 14 years old. The action that should be taken is to: A. use whatever other information you can obtain from the customer to determine if it is appropriate to open the account B. deposit the check and freeze the account until the customer reaches legal age in that state C. appoint yourself as custodian, and open the account as a regular custodian account D. inform the minor that the account cannot be opened unless a custodian effects the transaction
The best answer is D. Since this customer is not of legal age, he does not have the legal capacity to open the account. A custodian must be present to open the account for the minor. It would be unethical for you to appoint yourself as custodian, making that choice incorrect.
The issuer of listed options contracts is the: A. holder of the contract B. writer of the contract C. exchange where the contract is traded D. Options Clearing Corporation
The best answer is D. The Options Clearing Corporation (O.C.C.) is the legal issuer and guarantor of all exchange traded options. Thus, the purchaser of an option contract is relieved of the worry that a writer will not perform on an exercise - since technically, the O.C.C. is the writer of the contract. (The O.C.C. requires that member firms deposit daily monies to ensure that the firms, if their customers are writers who have been exercised, can perform on the exercise.)
A customer buys 100 shares of ABC stock at $48 and buys 1 ABC Jan 50 Put @ $7. The maximum potential gain is: A. $700 B. $4,300 C. $5,500 D. unlimited
The best answer is D. The customer has paid $48 for the stock and $7 for the put, for a total outlay of $55. If the stock declines, the customer is hedged, since he or she has the right to sell for $50 with the long put; so only 5 points can be lost (bought at $55 total; sold at $50 upon exercise). However, if the stock rises, the customer lets the put expire "out the money" and he or she can ride the price of the stock up, with theoretically unlimited gain potential.
The January stock option contracts of a company assigned to Cycle 3 have just expired. Which contracts will commence trading on the CBOE? A. February B. March C. July D. September
The best answer is D. The options cycles are: Cycle 1 Jan Apr Jul Oct Cycle 2 Feb May Aug Nov Cycle 3 Mar Jun Sep Dec Cycle 3 contracts are issued for the months of Mar - Jun - Sept - Dec. One can always get a contract for this month, next month, and the next 2 months in the Cycle. In January, prior to expiration, the contracts that will trade are January (this month), February (next month), March and June (the next 2 months in the cycle). After January contracts expire, the contracts that will trade are February (this month), March (next month), June and September (the next 2 months in the cycle).
Which of the following statements are TRUE regarding Trust Accounts? I A copy of the trust agreement must be obtained before any transactions are allowed II A new account form must be completed III The trust agreement will specify the transactions that the trustee is allowed to perform IV The account cannot be a margin account unless authorized by the trust agreement A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is D. To open a trust account, a new account form must be completed and a copy of the trust agreement must be obtained before any transactions are allowed. The trust agreement will also specify what transactions are allowed. As a general rule fiduciary accounts must be cash accounts. A trust account will be opened as a cash account unless the agreement specifically authorizes the opening of a margin account.
Which of the following option positions is used to generate additional income against a short stock position? A. long call B. short call C. long put D. short put
The best answer is D. When one has a short stock position, borrowed shares have been sold with the agreement that the customer will buy back the position at a later date. If the customer thinks that the market will remain flat, he can sell a covered put against his stock position to earn extra income during that time period. If the stock is sold short and a put is sold with the same strike price, then if the market stays the same, the put expires "at the money" and the premium collected is retained. If the stock falls, the short put is exercised, obligating the customer to buy the stock at the same price at which it was sold. In this case, only the premium is earned. If the put had not been sold, then the customer would have had an increasing gain on the short stock position as the market fell - so he does not make as much in a falling market. On the other hand, if the market rises, the short put expires "out the money" and the customer is exposed to unlimited upside risk on the short stock position that remains.
A 50 1/2 year old self-employed individual has a balance of $200,000 in his HR 10 plan. This balance is composed of $140,000 of contributions and $60,000 of earnings. The individual decides to withdraw $100,000 from the plan. Which statement is TRUE? A. There will be no tax liability B. There will be regular tax liability, but no 10% penalty tax liability C. There will be a 10% penalty tax liability, but no regular tax liability D. There will be both regular tax liability and a 10% penalty tax liability
The best answer is D. Since this individual is younger than age 59 1/2, any distribution from the Keogh plan is subject to both ordinary income tax plus the 10% penalty tax. If the distribution is made after age 59 1/2, it is subject only to ordinary income tax - there is no penalty tax. Please note that 100% of all distributions from Keoghs are taxable - these are tax qualified plans where all of the investment dollars were never taxed. Once distributions commence, both the original investment (that was never taxed), and the tax deferred build-up, are now taxable in full
A customer buys 100 shares of ABC stock at $41 and buys 1 ABC Oct 40 Put @ $4. The breakeven point is: A. $36 B. $37 C. $44 D. $45
The best answer is D. The customer paid $4 for the put and $41 for the stock, for a total of $45. To breakeven, she must sell the stock at $45. To summarize, the formula for breakeven for a long stock / long put position is: Long Stock/ Long Put B/E = Stock Cost + Premium
