Practice Exam #3

A customer's restricted margin account shows the following: LMV $30,000 DB $16,000 SMA $0 If the customer sells $2,000 of securities, how much could be withdrawn from the account?

$1,000 In this restricted account, half of the sales proceeds will be used to reduce the DB balance to $15,000 and half of the sales proceeds are released to the special memorandum account (SMA). Therefore, when $2,000 of stock is sold, $1,000 is credited to SMA. This is the amount that can be withdrawn from the account.

In a margin account, your customer's long market value is $22,000. The debit balance is $8,000. If the customer enters an order to purchase $12,000 of stock, the margin call will be

$3,000. LMV - Debit = equity (22-8= 14) 50% LMV =11 (14-11=3 excess equity) after this purchase LMV = 34 50% New LMV= 17 (17-14=3)

If a customer sells short 100 XYZ at 79 and simultaneously writes 1 XYZ Jan 80 put at 5, the maximum gain potential is

$400 Short stock combined with a short put is an income strategy that carries unlimited loss potential. Although gain will occur if the stock moves downward, the customer wrote an in-the-money put that will be exercised, forcing the customer to buy stock at $80 for a $100 loss on the stock shorted at $79. However, the customer received $500 in premiums, resulting in an overall gain of $400. Breakeven for short stock-short put is the short sale price plus the premium. In this case, breakeven is 84, and maximum gain is four points—from 84 to 80.

Control Person

(1) A director, an officer, or another affiliate of an issuer. (2) A stockholder who owns at least 10% of any class of a corporation's outstanding securities. Related item(s): affiliate; insider.

FINRA's Rule 2310 lists a few suitability standards necessary for recommending DPPs

-Among those is the need for the investor to have a net worth sufficient to sustain the risks of the DPP, including loss of the investment. -Although many DPPs, but not all, are limited to accredited investors, that is not a FINRA suitability standard; that is an SEC requirement -It is the general partner who cannot be in a business that competes with the DPP.

Municipal Finance Professional (MFP)

-Associated person of a broker dealer who is primarily engaged in municipal securities activities -subject to the political contribution rules as outlined in MSRB Rule G-37.

Treasury Bills

-Stable principal, unstable interest (fluctuate with market) -Treasury bills are purchased at a discount and mature at face value. This feature provides principal stability to investors who own them. The discount on bills is determined by current market interest rates and fluctuates accordingly

When are warrants issued?

-issued along with a debt instrument, which is an enhancement that allows the issuer to offer a slightly lower interest rate. -Long Term

401k

-not considered payroll deduction plan BUT salary reduction plan

ERISA

-private employer (nongovernmental) qualified retirement plan, it must be ERISA compliant. -*most common 401k -The "E" in ERISA stands for employee. - IRAs are individual retirement accounts; there is no employer-employee relationship. Nonqualified plans are retirement plans that do not have to follow ERISA regulations. These non-qualified plans include deferred compensation plans, individual annuities, and some payroll deduction plans.

Wash Sale Rule

-securities trading at a loss -Sell these securities at a loss, then rebuy within 30 days prior to or after CANNOT use loss

On Monday, June 1, an investor pays 92 to purchase a 5% J&J municipal bond maturing on July 1, 2030. Purchasers of bonds pay accrued interest to the seller, in addition to the market price of the bond. How many days of accrued interest will this seller receive?

152 -Therefore, with a June purchase date, the most recent interest payment was on the previous January 1, the day that interest begins to accrue. The trade date is June 1 with a settlement date of June 3 (T+2). The buyer of the bond becomes the owner of the bond on June 3, and from that date forward, the buyer is entitled to the interest. That is why interest payable to the seller stops accruing on June 2. -Here is the math. We have 5 months (January, February, March, April, and May) plus 2 days of accrued interest in June. With each month counting as 30 days, that is 150 days + 2 more in June equaling 152 days.

A margin account with a short credit balance of $39,000 will receive a call for additional funds if the SMV rises above

39000/1.3 = 30000

An investor holds 3,000 shares of a stock with a current market value of $12 per share. After a 1:6 stock split, the investor's position will be

500 shares with a market value of $72 per share. This is an example of a reverse split. For each share owned, the investor will now have 1/6 of a share. That turns 3,000 shares into 500. At the same time, the market price per share will increase approximately by a factor of six. The key to any stock split question is that the total value of the account remains the same. Presplit, it was 3,000 × $12 = $36,000 and postsplit it is 500 × $72 = $36,000.

An investor sells short 100 shares at 50 and sells a 50 put at 5. If the put is exercised when the stock is trading at 45, the investor realizes

A gain of $500 When the short put is exercised, the investor buys stock at $50 that she can use to cover the $50 short sale. The investor realizes no gain or loss on the stock, but she collected $500 in premiums, for a gain of $500.

A working interest in an oil and gas partnership entitles the holder to

A working interest is a right to revenues from production, but it also carries the responsibility for extraction costs. A royalty interest carries no responsibility for extraction costs.

short-term money market instruments (Ban, Tan, Ran, Tran) Interest is paid

At maturity

Freeriding

Buying and immediately selling securities with- out making payment. This practice violates the SEC's Regulation T. The penalty for freeriding in a cash account is that the account will be frozen for 90 days, and orders will not be accepted without cash or securities on deposit in advance

Catastrophe call

Catastrophe call provisions associated with municipal revenue bond issues are not included on customer confirmations.

Covered call writing strategy

Covered call writing is selling calls on stock held in the portfolio. The premium received from the sale represents income. This income adds to whatever other income (dividends) the portfolio is generating. It is a low-risk strategy because the downside movement of the stock is protected to the extent of the premium received -Writing covered calls is an active strategy (calls always expire in nine months or less) -Writing covered calls is a neutral strategy, tilted very slightly bullish. The strategy would not serve a strongly bullish investor well because the increasing prices to the underlying assets would lead to exercise of the options. In general, those who write options want them to expire unexercised.

Funding Policy

Covers how an employer contributes to, or funds, a retirement plan.

In a functional allocation oil and gas program

GP - tangible drilling cost LP- intangible drilling cost *common

Rule 144 with spouses

If there is a 10% or more ownership interest among members of an immediate family, then only those who live in the same home, or receive significant financial support, are combined and are considered control persons (affiliates) who are subject to Rule 144.

Listed equity options, if exercised, settle

In 2 Business Days

Which of the following statements regarding Sallie Mae debentures are true?

Interest is tax exempt at the state and local levels. Interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation. As a general rule, debentures pay interest every six months. Sallie Mae is not backed by the taxing power of the U.S. government, and money is used for student loans for higher education.

Hedge - puts

Investors use long puts to hedge a long stock position and long call options to hedge a short stock position.

stock dividend

Just like with stock split, no real change to the overall value

Value Of right after ex-date

MP-SP/N before ex date +1m after ex date without 1

Value Of right before ex-date (cum rights)

Market Price - Subscription Price/# of rights to purchase 1 share + 1

An investor opens the following options position: Buy 1 FOZ Mar 40 call @3; buy 1 FOZ Mar 40 put @2. What is the investor's maximum gain, maximum loss, and breakeven point?

Maximum gain is unlimited; maximum loss is $500; breakeven points are $35 and $45. The first step is to identify the position. This is a long straddle—a long put and a long call with identical terms. That means we are going to have two breakeven points. The maximum gain is unlimited because one of the positions is a long call. The maximum loss is the amount paid for the straddle (the two premiums totaling $500). Breakeven follows the call-up and put-down rules. Add the premium to the strike of the call ($40 + $5 = $45) and subtract the premium from the strike of the put ($40 ‒ $5 = $35).

To determine the number of shares after a split:

Multiply the number of shares owned by the first number of the split and then divide by the second number.

Debt Service Coverage Ratio (DSCR)

NOI (gross revenue -operating expenses) /Debt Service (Interest + principal)

cash flow from operations

Net sales + depreciation- COGS - interest - income tax

Issued stock - Treasury stock = ____________________

Outstanding stock

Calculation Stock Dividend

Par value/ conversion price = #of shares #shares x 1. (Stock dividend) =new #of shares Par value/ new #shares=New price

Market interest rates have risen steadily over the past several months. The market price of which two of the following shares would probably reflect the biggest impact of this change? Growth stock Money market mutual fund Preferred stock Public utility stock

Preferred stock Public utility stock Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Preferred stock, with its fixed dividend, and utility stocks, with their high degree of debt leverage, are considered interest rate sensitive. The yield of the money market fund will change, but the price is fixed at $1 per share.

Which of the following are considered sources of debt service for general obligation (GO) bonds? Tolls on roads Real estate taxes Revenue generated by a hospital Liquor license fees

Real estate taxes, liquor license fees General revenues of the municipality, such as real estate taxes or licensing fees, may be used to pay the debt service on a GO bond. Usage revenue, such as that generated from toll roads or hospitals, would be associated with funding revenue bonds.

which would the net revenue-to-debt service ratio be applicable?

Revenue bonds

In a restricted margin account, a sale of $5,000 of stock will create

SMA of $2,500 When securities are sold in a restricted margin account, half the proceeds go to reduce the debit and the other half are journaled into SMA. Therefore, a $5,000 sale will generate SMA of 50% of the sale, or $2,500. Buying power is the SMA × 2, or $5,000.

A technical analyst has been charting ABC stock and notes that the support/resistance levels are $20 and $30, respectively. If the analyst expects ABC to fall through support, which of the following orders should he enter?

Sell 100 ABC 19.50 stop An analyst who expects a stock to fall through support is anticipating that the stock will decline. He can take advantage of this trend by establishing a short position at the top of the decline. He will enter a sell stop order just below the support price.

Substantially identical securities in wash sale rules:

Substantially identical securities include those convertible or exchangeable into the common stock sold at a loss *pay attention to name of security

An investor owns a convertible debenture with a conversion price of $10. If a 10% stock dividend is paid on the company's common stock, which of the following is true?

The conversion price will be adjusted to $9.09. You can assume that any convertible security on the exam will have an anti-dilutive provision. That means that a stock dividend or stock split will not cause the investor's conversion privilege to be diminished. With a conversion price of $10, the investor was able to convert into 100 shares ($1,000 divided by $10). After the 10% stock dividend, the investor must be able to convert into 10% more shares (110 shares). To get 110 shares from a $1,000 principal, the price must be reduced. The computation is $1,000 divided by 110. That equals $9.09 per share.

Deferred Compensation

Usually benefit highly compensated employees who are just a few years from retirement

A municipality has prerefunded its bond issue maturing in five years. This would mean all of the following except A) the bonds will be called in more than 90 days. B) a higher rating. C) a reduction to the coupon rate. D) greater marketability.

a reduction to the coupon rate. The current bond still exists until the specified call date. As such, the coupon has not changed. Advance or prerefunding is refinancing an existing municipal bond issue before its maturity or call date by using money from the sale of a new bond issue. Because the proceeds of the new issue are placed into special U.S. government securities, the rating is automatically at the top. The higher rating increases the marketability. If the refunding is done in 90 days or less, it is called current refunding.

You have a customer who bought an XYZ Feb 35 put at 5. The current market value (CMV) of XYZ is $33 and the current option premium is $2. The option is trading

at parity This option is trading at parity, likely because it is about to expire. An option trades at parity when the premium is equal to the intrinsic value. An option's premium consists of intrinsic value (amount the option is in-the-money) plus time value (I + T = P). A put is in-the-money when the CMV is below the strike price. That makes this option in-the-money by $2 and the premium is $2. The only value this option has is intrinsic value; it has no time value. When the only value is intrinsic value, the option is trading at parity and is about to expire. The original purchase price of the option contract ($500) is only relevant to determining if the investor has a gain or a loss when the option is sold, expires, or is exercised

Bond trust indentures are required for:

corporate debt securities Municipal and government bonds are exempt from the trust indenture requirement of the Trust Indenture Act of 1939.

The interest that municipal securities pay is:

federally tax exempt.

IRA contributions must be made in what form?

from earned income, alimony received as part of a divorce settlement entered into prior to January 1, 2019, is considered compensation for IRA purposes NOT Investment income - Dividends & interest

For oil and gas programs, ranking from least risk to most would be as follows:

income, developmental, and exploratory. Raw land is a type of real estate program.

One of the goals of target date funds is to help manage

investment risk. mutual funds, liquidity risk is not a concern.

An individual with an investment objective of capital preservation should be investing in

investment-grade bonds and cash/cash equivalents, large-cap common stock

Index options, if exercised, settle

on the next business day—and in cash.

A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are

partially a tax-free return of capital and partially taxable. The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.

All of the following will affect the working capital of a corporation except A) declaration of a cash dividend. B) payment of a cash dividend. C) an increase in assets. D) a decrease in liabilities.

payment of a cash dividend. Working capital is defined as current assets minus current liabilities. Payment of a cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.

True Interest Cost

reflects the time value of money -considers The timing of interest payments

All of the following are excluded from the FINRA filing requirement for communications with the public except A) retail communications that only identify the member firm. B) retail communications posted online that require a login to access. C) correspondence. D) retail communications posted on an interactive forum online.

retail communications posted online that require a login to access. Retail communications, unless specifically exempted, must be filed with FINRA. There is no exemption for requiring a login to access. Correspondence does not need to be filed with FINRA nor does retail communications only identifying the member firm or posted on an online interactive forum.

Money market consists of

short-term, high-quality debt instruments. This would not include preferred stock, which is an equity instrument. NOT REPURCHASE AGREEMENTS

The opening quote for issues listed on the NYSE is set by

the designated market maker.

An investor begins a periodic payment deferred variable annuity purchase program. One respect in which this differs from purchasing a mutual fund is that

the investor in the variable annuity contract reports no taxable consequences during the accumulation period. One of the features of annuities is the tax deferral of all earnings until the money is withdrawn. Mutual fund distributions are taxable when received. On the other hand, when the annuity accumulation is withdrawn, everything above the cost basis is taxed as ordinary income (10% penalty if younger than 59½)—there is never any capital gains treatment with annuities. Variable annuities invariably have higher expense ratios than mutual funds with similar portfolios. Surrender charges are found with annuities. Do not confuse those with the conditional deferred sales charge (CDSC) applied to certain mutual fund share classes.

For even stock splits

the number of contracts owned will increase proportionately. The number of shares per contract will remain unchanged, and the strike price will decrease proportionately.

If a bond is sold to a customer at par, under Municipal Securities Rulemaking Board rules, all of the following must be disclosed to the customer on his confirmation except A) number of bonds purchased. B) yield to maturity. C) information on call features. D) total monies due.

yield to maturity. Information on call features, total monies due, and the number of bonds purchased are all important disclosure items for a confirmation. For a bond sold at par, there is no requirement to show yield because the yield is equal to the coupon