Money Market Debt / Structured Products
A husband has a brokered CD titled in his name in the amount of $500,000 held at Bank A. Both the husband and his wife have a brokered CD in the amount of $500,000 titled in both their names held at Bank B. Additionally, the wife has a brokered CD in the amount of $500,000 titled in her name held at Bank "B." What is the total coverage offered by FDIC on all of these CDs?
$750,000
A customer buys a $1,000 par reverse convertible note with a 1 year maturity and a 6% coupon rate. At the time of purchase, the reference stock is trading at $50 and the knock-in price is set at $40. If, at maturity, the reference stock is trading at $25, the customer will receive:
20 shares of the reference stock (the share price has fallen from $50 to $25, which is below the "$40 knock-in" price. Thus, at maturity, the holder of the note will get the stock - not par value. The original conversion ratio was based on the reference price of $50. $1,000 par / $50 conversion reference price = 20 shares per note. Thus, at maturity, the customer gets 20 shares, currently worth $25 each = $500 worth of stock. This customer has lost $500, partially offset by any interest)
Which of the following money market instruments is eligible for Fed trading? A. A 10-year T-Note which matures within a year B. Negotiable CD C. Commercial Paper D. Banker's Acceptances
A. A 10-year T-Note which matures within a year (The eligible securities are U.S. Government debt, Government Agency debt, and prime Banker's Acceptances. These are the securities that the Fed trades with the primary U.S. Government dealers (the major commercial banks and brokerage firms) to control credit availability in the economy.)
Which of the following securities would be assigned a "P" (Prime) rating? A. Commercial Paper B. Tax Anticipation Notes C. Common Stock D. Corporate Bond
A. Commercial Paper
When comparing an ETN to a structured product, which statement is TRUE? A. ETNs can be traded at any time while structured products cannot B. ETNs offer current income while structured products do not C. ETN income is taxable at higher rates than income from structured products D. ETNs are equity securities that are exchange listed
A. ETNs can be traded at any time while structured products cannot (a regular structured product is non-negotiable and, if redeemed prior to maturity, imposes an early-redemption penalty. ETNs make no interest or dividend payments. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates.)
A customer wants to know the principal difference between a market index linked CD and a regular CD. As the registered representative, you should inform the customer that: A. Market index-linked CDs give a rate of return tied to the S&P 500 Index, whereas regular CDs give a rate of return tied to market interest rates B. Market index-linked CDs can have a loss of principal if held to maturity whereas regular CDs cannot have a loss of principal if held to maturity C. Market index-linked CDs do not qualify for FDIC insurance whereas regular CDs do qualify for FDIC insurance subject to the $250,000 limit D. Market index-linked CDs have a minimum life of 10 years, whereas there is no minimum life for regular CDs
A. Market index-linked CDs give a rate of return tied to the S&P 500 Index, whereas regular CDs give a rate of return tied to market interest rates
The Federal Reserve would enter into a transaction involving which of the following with a primary U.S. Government securities dealer? A. Overnight repurchase agreement B. Federal Funds C. Eurodollars D. Banker's Acceptance
A. Overnight repurchase agreement (By using repurchase agreements, each day the Fed can deposit "cash" into the primary dealers (most of whom are the large commercial banks). This eases credit availability.)
All of the following are complex products EXCEPT: A. Treasury Inflation Protection Security B. Reverse Convertible Note C. Asset-Backed Product D. Structured Note
A. Treasury Inflation Protection Security (FINRA states that a complex product is one where investment returns vary under differing scenarios. 1) Asset-Backed Securities such as CMOs, where changing market interest rates affect the rate at which principal is repaid (prepayment and extension risk) 2) Reverse Convertible Notes, which give a higher yield, but convert to equity if the stock falls below a pre-set level; 3) Structured Notes, which offer a return tied to an equity index, subject to a floor and a cap; 4) Principal Protected Notes, where the principal protection may be lost based on stated events;)
All of the following statements are true regarding repurchase agreements EXCEPT: A. investors in repurchase agreements have no interest rate risk B. investors in repurchase agreements have no price risk C. repurchase agreements are used by the Federal Reserve to influence money supply levels D. repurchase agreements typically mature in 1 to 90 days
A. investors in repurchase agreements have no interest rate risk (Repurchase agreements are used by the Federal Reserve to inject funds into the money supply. The agreement stipulates that the Fed buys government securities from the dealer, with an agreement to sell back those securities at a pre-agreed price (hence there is no price risk) at a pre-set future date. The dealer gets a temporary infusion of cash, which the dealer can use to buy other securities or (if the dealer is a bank) which may be loaned to someone else. Most repos are "overnight," though durations can extend for longer periods. Repos expose the dealer to interest rate risk because, even though the agreement stipulates that the securities will be repurchased at a pre-agreed price; if interest rates rise substantially, the actual value of those repurchased securities can fall dramatically.)
Which of the following money market instruments trades "and interest" ? A. Commercial Paper B. Certificates of Deposit C. Banker's Acceptance D. Treasury Bills
B. Certificates of Deposit (Negotiable Certificates of Deposit are issued at par and mature at par plus accrued interest. Though most CDs are held to maturity, if they are traded before this date, the instrument trades at par plus any accrued interest due.)
Which of the following ratings is applicable to commercial paper? A. MIG-1 B. P-1 C. BBB D. AAA
B. P-1 (MIG ratings are assigned by Moody's to short-term municipal notes. "ABC" ratings are used by both Moody's and Standard and Poor's for long-term corporates and municipals.)
A customer purchases a reverse convertible note. Under which scenario will the customer receive less than par value at maturity? A. The market price of the reference stock has declined, but is not below the knock-in price B. The market price of the reference stock has declined and is below the knock-in price C. The market price of the reference stock has risen above the knock-in price but is below par D. The market price of the reference stock has risen above the knock-in price and is above par
B. The market price of the reference stock has declined and is below the knock-in price (Reverse convertible notes were created for customers looking for enhanced yield in a low interest rate environment (comes with higher risk.) The note is linked to the price movements of an underlying stock (or an underlying index). At maturity, the holder will receive par value, as long as the price of the reference stock is above the "knock-in" price (typically 70-80% of the initial reference price). On the other hand, if at maturity, the reference stock falls below the "knock-in" price, then the holder will receive the shares of stock.
All of the following are money market instruments EXCEPT: A. Tax Anticipation Notes B. Treasury Notes C. Certificates of Deposit D. Commercial Paper
B. Treasury Notes
In order to recommend a structured product to a customer, all of the following statements are true EXCEPT: A. the member firm must perform a "reasonable basis" suitability determination evaluating the characteristics of the product to be recommended against competing products B. completion of the "reasonable basis" suitability determination means that the structured product can be recommended to all the firm's customers C. the member firm must perform a "customer specific" suitability determination prior to recommending a structured product to a customer D. the member must use its expertise to determine if the potential yield of the structured product is an appropriate rate of return in relation to the volatility of the reference asset
B. completion of the "reasonable basis" suitability determination means that the structured product can be recommended to all the firm's customers
All of the following statements are true regarding repurchase or reverse repurchase agreements EXCEPT: A. under a reverse repurchase agreement, the dealer is buying securities from the Federal Reserve B. if a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement C. repurchase agreements are used by dealers to reduce the carrying cost of Government securities held in their inventory D. repurchase agreements are initiated by the Federal Reserve to loosen the money supply
B. if a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement (No longer permitted)
Generally, which statement is FALSE about market index linked CDs? A. There can be a penalty applied to the principal amount of early withdrawals of funds B. The annual rate of return may be capped to an amount that is lower than the actual index return C. A market index linked CD can be redeemed at any time D. A market index linked CD is FDIC insured
C. A market index linked CD can be redeemed at any time (a type of "structured product" that consists of a "zero-coupon" synthetic bond component that grows based on the returns of an equity index; and that has a maturity established by an embedded option; 3-5% penalty for early withdrawal; min. life is 3 years; BOTH reg and market index CDs are FDIC insured)
All of the following securities are quoted on a yield basis EXCEPT: A. Commercial Paper B. Treasury Bills C. American Depository Receipts D. Banker's Acceptances
C. American Depository Receipts (American Depositary Receipts are not a money market instrument. They are essentially shares of a foreign company, traded domestically similar to equity securities. They are dollar price quoted in 1/8ths.)
When comparing a Variable Rate Demand Obligation (VRDO) to an Auction Rate Security (ARS), which statement is FALSE? A. Both are long-term bonds that have interest rates reset weekly or monthly B. Both are issued by corporations and municipalities C. Both can be put back to the issuer at par at the reset date D. Both have minimal market risk
C. Both can be put back to the issuer at par at the reset date (The interest rate on a VRDO is typically set to a market index and the issue can be put back to the issuer at the reset date. With an ARS, the interest rate is reset by Dutch auction, and the owner can only sell at the auction to another buyer - there is no embedded put option. These DO have marketability risk if credit markets start to freeze and buyers don't turn up at auction)
All of the following are complex products EXCEPT: A. Collateralized Mortgage Obligation B. Reverse Convertible Note C. Exchange Traded Fund D. Structured Product
C. Exchange Traded Fund (have price movements that directly track the underlying securities in the fund.)
All of the following statements are true about Auction Rate Securities EXCEPT: A. Auction Rate Securities have an interest rate that steps up or steps down with the market B. The Dutch Auction method is used to set the interest rate C. Failure of an auction is not possible because of broker-dealer bidding D. Auction Rate Securities are issued by corporations and municipalities
C. Failure of an auction is not possible because of broker-dealer bidding
All of the following can initiate repurchase agreements with government and agency securities as collateral EXCEPT: A. Government securities dealers B. Federal Reserve Banks C. Federal Home Loan Banks D. Commercial banks
C. Federal Home Loan Banks (Federal Home Loan Banks sell bonds to obtain funding. With the funds, it buys mortgages from Savings and Loans, making a secondary mortgage market and injecting fresh funds into the S&L's.)
Which of the following items is NOT true about Jumbo Certificates of Deposit? A. Jumbo CDs are traded in the secondary market B. Jumbo CDs are backed by the issuing financial institution C. Jumbo CDs are fully insured by the Federal Deposit Insurance Corporation D. Jumbo CDs are considered to be negotiable instruments
C. Jumbo CDs are fully insured by the Federal Deposit Insurance Corporation (Jumbo Certificates of Deposit are issued in minimum $100,000 amounts and many banks only offer them in $1,000,000 minimums. Any amount in excess of $250,000 does not get FDIC insurance; can be traded in the secondary market prior to maturity but most are held)
Trades of all of the following securities will settle in Fed Funds EXCEPT: A. Treasury Bills B. Treasury Notes C. Municipal Bonds D. Agency Bonds
C. Municipal Bonds (Municipal bond trades and trades in corporate securities are not eligible for trading and settling through the Federal Reserve system; these securities settle in "clearing house" funds.)
A customer wishes to buy a $50,000 certificate of deposit offered by your firm. The customer wishes to know if the CD is FDIC insured. As the broker handling the account, you should tell the customer that: A. the CD is insured because the amount is less than the $100,000 maximum permitted amount that qualifies for FDIC coverage B. CDs sold through brokerage firms do not qualify for FDIC insurance regardless of the amount, but they are SIPC insured C. as long as the CD is titled in the customer's name and the customer does not have accounts at the issuing bank totaling more than $200,000, then the CD is FDIC insured D. as long as the CD is held in the custody of an FDIC member bank and the amount is $100,000 or less, then FDIC insurance covers the CD
C. as long as the CD is titled in the customer's name and the customer does not have accounts at the issuing bank totaling more than $200,000, then the CD is FDIC insured (Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply!)
Customer "A" buys a Credit Default Swap (CDS) from Customer "B," with the reference loan being one made to Customer "C." If Customer "C" continues to pay interest and principal on a timely basis, then:
Customer B benefits (In a Credit Default Swap (CDS), the buyer pays a premium to the seller, where the seller agrees that if the reference loan defaults, the seller will pay the face amount of the loan to the buyer. The buyer pays an annual "insurance-like" premium for this. If the loan does not default, the seller wins - collecting the premiums without having to make a payout. If the loan does default, the buyer wins - since the seller must pay the buyer the face amount of the loan in cash.)
Which money market instruments are marginable? A. Banker's Acceptances B. Treasury Bills C. Commercial Paper D. All of the above
D. All of the above (Because money market instruments are "safe," they can be margined - Gov./agency securities, investment grade money market instruments, investment grade corp. bonds, and listed stocks )
The investment performance of an ELN (Equity Linked Note) is determined by all of the following EXCEPT: A. Cap on the investment return B. Floor on the investment return C. Participation rate in the investment return D. Interest rate credit set by weekly auction
D. Interest rate credit set by weekly auction (Equity Linked Note (ELN) or Exchange Traded Note (ETN) is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. The annual return is not going to be the actual return of the reference index, because there is a participation rate (usually 80%), where the note is only credited with 80% of the return of the reference index. So if the reference index increases by 10%, the note will only be credited with 8% interest.)
Under FINRA rules, if a member firm wishes to offer a structured product to its customers, all of the following statements are true EXCEPT the member: A. has an obligation to perform a reasonable basis suitability determination before recommending the product to any of its B. must use its expertise to determine if the potential yield of the structured product is an appropriate rate of return in relation to the volatility of the reference asset C. must determine that its recommendation to purchase a structured product is suitable for that particular investor D. must determine that an investment in the reference asset is suitable for that particular investor
D. must determine that an investment in the reference asset is suitable for that particular investor (There is no requirement to determine whether an investment in the reference asset (say a NASDAQ 100 Exchange Traded Fund) is suitable for the investor.)
Which of the following statements are TRUE regarding repurchase agreements? I Repurchase agreements are used by dealers to reduce the carrying cost of Government securities held in their inventory II Repurchase agreements are initiated by the Federal Reserve to loosen the money supply III If a repurchase agreement specifies a date and price at which time the trade will be reversed, the agreement is known as a "Reverse" repurchase agreement IV If a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement
I and II
When comparing an ETN to a structured product, which statements are TRUE? I ETNs can be traded at any time while structured products cannot II Structured products can be traded at any time while ETNs cannot III ETN income is taxable at lower rates than income from structured products IV Structured product income is taxable at lower rates than income from ETNs
I and III
Which statements are TRUE when the Federal Reserve enters into a repurchase agreement with a U.S. Government securities dealer? I The Fed buys U.S. Government securities from the dealer II The Fed sells U.S. Government securities to the dealer III The Federal Reserve is loosening credit in the banking system IV The Federal Reserve is tightening credit in the banking system
I and III
Banker's Acceptances are: I time drafts II demand deposits III used to finance imports and exports IV used to finance the issuance of ADRs
I and III (BAs trade at a discount to their face amount until maturity, but the trading market is rather thin.)
Which of the following statements are TRUE regarding Federal Funds? I Federal funds are overnight loans between member institutions of the Federal Reserve System II Federal funds are overnight loans of reserves from the Federal Reserve Bank to a member institution III The interest rate charged on Federal Funds is the Federal Funds Rate IV The interest rate charged on Federal Funds is the Discount Rate
I and III (When the Federal Reserve Bank lends directly to a member bank, it does so at the discount rate.)
Auction Rate Securities: I have the interest rate reset weekly via Dutch auction II have a fixed interest rate for the life of the issue set by competitive bid auction III have an embedded put option IV do not have an embedded put option Incorrect answer A. You did not choose this answer. A I and III
I and IV
Which statements are TRUE about commercial paper? I The most common maturity is 30 days II The most common maturity is 270 days III The maximum maturity is 30 days IV The maximum maturity is 270 days
I and IV
Eurodollar deposits are: I denominated in U.S. currency II denominated in foreign currency III held in banks in the U.S. IV held in banks in foreign countries
I and IV (Eurodollar deposits are U.S. currency held in banks in foreign countries, mainly in Europe. The Eurodollar market is centered in London - and the interest rate paid on these deposits is "LIBOR" = London Interbank Offered Rate.)
The "Effective" Federal Funds Rate is composed of rates offered by: I selected commercial banks across the United States II selected thrift institutions across the United States III the designated primary U.S. Government securities dealers
I only
Which of the following are money market instruments? I REPOs II BAs III CDs IV ADRs
I, II, III (BAs (Banker's Acceptances) are time drafts used to finance imports and exports with typical 30 - 90 day maturities. CDs (Certificates of Deposit) are Jumbo instruments with a fixed maturity date, typically 6 months, that are issued by banks in units of at least $100,000. REPOs (Repurchase Agreements) are generally overnight agreements between government securities dealers to buy securities and sell them back the next day. ADRs (American Depositary Receipts) are equity, not short term debt, and hence are not a money market instrument.)
If a member firm wishes to offer structured products to its customers, which of the following procedures are required? I The member must perform a reasonable basis suitability determination before the product can be recommended to some of the member's customers II The member must perform a customer specific suitability analysis in order to make a recommendation of a structured product to an individual customer III The member must have procedures to determine that the account is eligible to purchase structured products and generally must have the account approved for options trading
I, II, III (Structured products are securities based on, or derived from, a basket of securities, an index, or other securities, commodities or currencies. There are many types of structured products, but generally they consist of a "bond" portion, which pays interest based on the performance of a well known index such as the S&P 500 Index; have a derivative component (embedded option) that allows holder to sell security back to issuer (at par) at maturity.)
Which of the following disclosures must be made to customers who wish to purchase long-term negotiable certificates of deposit? I Sale prior to maturity can result in a price that is lower than the original purchase amount II Trading in the secondary market is limited III Step-Down CD yields may not reflect the actual market interest rate IV Callable CDs are subject to reinvestment risk
I, II, III, IV
Which of the following statements are TRUE about commercial paper? I Commercial paper has a maximum maturity of 270 days II Commercial paper matures on a pre-set date at a pre-set price III Commercial paper is quoted on a yield basis IV Commercial paper is an unsecured promissory note
I, II, III, IV
Which of the following statements are TRUE regarding overnight repurchase agreements? I The seller loses control of the underlying securities for the duration of the agreement II The interest rate charged is most similar to the Federal Funds rate III The investment has interest rate risk IV The investment has no liquidity risk
I, II, III, IV (Overnight repurchase agreements are typically effected between government securities dealers. A dealer who needs cash will "sell" some of its inventory overnight to another dealer, with an agreement to buy the position back the next day. The difference between the sale price and the repurchase price is the interest earned; no liquidity risk since loan is short term and secured by gov. pledged securities)
Which of the following are money market instruments? I Tax Anticipation Notes II Certificates of Deposit III Treasury Bonds IV Commercial Paper
I, II, and IV (A money market instrument is issued with a maturity of 1 year or less. Tax Anticipation Notes, Certificates of Deposit, and Commercial Paper are all money market instruments.)
Which of the following statements are TRUE about structured products? I Structured products offer an index-linked return and a fixed maturity II Structured products are principal protected III Structured products are highly liquid and actively traded IV Structured products have a credit rating based on that of the issuing bank
I, II, and IV (Structured products are a derivative security created by different banks such as Barclays, J.P. Morgan Chase, Deutsche Bank, etc. They are "bond-like" but they are not bonds. Simple versions of structured products are offered with a notional value of $1,000 (just like a bond). They offer a rate of return linked to a well known index, such as the S&P 500 Index (but this rate can be capped to an annual maximum). At the maturity date, say is 3 - 7 years, they are "redeemed" at par, but the redemption is based on the fact that there is an embedded option in the product.)
In a repurchase agreement, the initiating government securities dealer: I buys securities from another dealer II sells securities to another dealer III agrees to buy back the securities at a later date IV agrees to sell the securities at a later date
II and III
Which of the following statements are TRUE regarding Eurodollar deposits? I Eurodollar deposits are in European currency II Eurodollar deposits are in U.S. currency III The interest paid on these deposits is based on LIBOR IV The interest paid on these deposits is based on the Federal Funds rate
II and III
Which statements are TRUE regarding repurchase agreements effected between the public and government securities dealers? I The public customer is the seller of the government securities II The public customer is the lender of monies III The government dealer is the seller of the government securities IV The government dealer is the lender of the monies
II and III
Which statements are TRUE regarding a "step-down" certificate of deposit? I The interest payment is fixed II The interest payment may be reduced III The principal payment is fixed IV The principal payment may be reduced
II and III (A "step-down" CD is one that starts with a high introductory "teaser" interest rate. Then the rate "steps down" to the market rate of interest at specified intervals. Regardless, at maturity, the CD is redeemed at par)
Which statements are TRUE about Brokered CDs? I The secondary market is active II The secondary market is limited III The market value of the CD will decline if interest rates rise IV The market value of the CD is unaffected by interest rate movements
II and III (Most of these instruments are held to maturity, so the secondary market is very limited. Finally, brokered CDs qualify for FDIC insurance as long as the CD is titled in the customer's name.)
Commercial paper with a maturity of 270 days or less: I must be registered under the Securities Act of 1933 II does not have to be registered under the Securities Act of 1933 III is a non-exempt security IV is an exempt security
II and IV
Which of the following statements are TRUE about commercial paper? I Commercial paper has a maximum maturity of 90 days II Commercial paper has a maximum maturity of 270 days III Commercial paper is quoted on a dollar price basis IV Commercial paper is quoted on a yield basis
II and IV (all money market debt is quoted on a yield basis)
The effective Fed Funds Rate is the:
averaged rate of member banks throughout the United States
Federal Funds are overnight loans of reserves from:
commercial bank to commercial bank
To smooth out cash flow, a corporation will issue:
commercial paper (a short term unsecured IOU issued by corporations.)
A prime bankers acceptance is one which is:
eligible for trading by the Federal Open Market trading desk in New York
An ETN does NOT have which risk?
reinvestment risk - do not make interest or dividend payments (ETNs have credit risk - backed by full faith and credit, minimal marketability risk - they are listed on exchange and trade, market risk - if prices fall in market, value will fall)
