Q&A Test 1 (Part 2)
Deflation will generally cause existing bond prices to
Deflation is an economic situation in which the prices of goods and services are declining. It is an unusual occurrence which results in the consumer price index (CPI) decreasing and the economy contracting. In order to stimulate the economy the FRB often lowers interest rates, which causes existing bond prices to rise. Long-term zero coupon bonds tend to perform best during periods of deflation.
An investor writes an uncovered RST May 25 put for a premium of 4. The maximum loss the investor could sustain is:
If RST Corporation's market price declines to pennies per share, the owner of the put could buy the RST stock for pennies and put it to the writer for $25 per share, or $2,500. This is the price that the writer would be required to pay for the stock. However, since the writer received $400 in premium, the maximum loss he could have will be $2,100 ($2,500 loss - $400 premium = $2,100 loss).
A registered representative receives an order from her customer to sell 600 shares of BWGF to be executed in her IRA account. The RR mistakenly executes the order in the wrong account. What action should be taken to correct the error?
If a trade is executed in the wrong account due to an error on the part of the registered representative, the best course of action is to cancel the trade and reenter it to the correct account. This action must be approved by a registered principal or supervisor.
If an ABC July 40 put option is exercised, the writer:
If the ABC put option is exercised, the writer is obligated to purchase 100 shares of ABC stock.
A Swiss company that is expecting payment from a customer in U.S. dollars is concerned that the dollar will decline in value. To hedge against a decline in the U.S. dollar, the Swiss company should:
If the value of the U.S. dollar declines, the value of the Swiss franc will increase. The company should buy Swiss franc calls since it will profit on the calls if the U.S. dollar declines, leading to a Swiss franc increase. The profit on the call could help to offset the loss on the U.S. dollars it is expecting to receive as payment.
Two brothers open a joint account to trade options. Who will be required to sign the options agreement?
In a joint options account, it is necessary for both parties to sign the options agreement. It is also necessary to record financial information for both parties.
When pricing a bond in the secondary market, what information is NOT required?
In the secondary market, when a bond is being priced (determining the yield when price is known or determining the price when yield is known), the coupon, settlement date, and maturity date are all required. However, the name of the lead underwriter that conducted the bond offering is unnecessary.
An individual purchases $100,000 of a 2x leveraged Exchange-Traded Fund (ETF). If the underlying index appreciates by 10% on the first day and then depreciates by 10% on the second day, the value of the individual's investment will be:
A 2x leveraged ETF is designed to reflect twice the performance of the underlying index or benchmark. In this case, a 10% increase in the underlying index would result in a 20% increase in the value of the investment, $100,000 x 20% = $20,000, or a value of $120,000 on the first day. A 10% decrease on the second day would result in a 20% decrease in the value of the investment, $120,000 x 20% = $24,000, or a value of $96,000 ($120,000 - $24,000).
A double-barreled municipal bond is backed by the:
A double-barreled municipal bond is backed by two sources of income, which would be the revenues of a project and the taxes of a municipality.
Which annuity settlement option would provide the greatest monthly return for an individual?
A life annuity with a short period certain settlement option would have a greater monthly payout than a unit refund life annuity settlement option since choice (a) only guarantees payments for five years whereas choice (d) guarantees payout of all accumulated value less expenses. The shorter the period certain the greater the risk the annuitant's beneficiary will not receive any payments, which will be rewarded with a higher payment to the annuitant.
One of your clients anticipates a significant decline in XYZ stock. The client wants to establish a position to take advantage of a large decline, but not expose himself to significant risk. Which of the following actions best satisfies your client's needs?
A long put will allow your client to realize a gain determined by the amount the stock falls below the option's strike price, less the premium. The investor is at risk only for the amount paid for the put, i.e., the premium. In selling XYZ short, an investor exposes himself to unlimited risk. When purchasing a straddle, the investor pays a premium greater than when purchasing only one put on the stock. While the debit put spread is bearish, the gain is limited to the difference between the strike price on the long put and the strike price on the short put, less the net premium.
All of the following municipal securities are suitable for a resident of New Jersey who is subject to the alternative minimum tax, EXCEPT:
A private activity bond is a specific type of municipal bond whose income is subject to federal taxation under the alternative minimum tax (AMT). This type of bond is not suitable for a person who is subject to the AMT.
The recommendation to purchase a private activity bond would NOT be appropriate for a:
A private activity bond is a type of municipal bond in which the funds being raised will be used to benefit a non-public (private) company (e.g., an airport terminal for an airline). If the person receiving the bond's interest payment is subject to the alternative minimum tax (AMT), the interest is taxable at the federal level. For this reason, these bonds are the least suitable for a client who is subject to the AMT.
Which TWO of the following taxes would best describe income taxes and estate taxes? Flat taxes Graduated taxes Regressive taxes Progressive taxes
A progressive tax is graduated (the tax rate increases as the taxable amount increases). Income taxes, estate taxes, and gift taxes are progressive. A flat tax is a situation where the tax rate remains constant regardless of the taxable amount. Flat taxes tend to be regressive in nature, which means that they have a greater effect on lower wage earners. Therefore, flat taxes are often categorized as regressive. Examples of regressive taxes are sales taxes and gasoline taxes.
A secondary market exists for:
A secondary market exists for owners of commercial paper to sell their investments to dealers or other investors. There is no secondary market for federal funds, repos, or U.S. savings bonds.
An investor owns stock that has increased in value. To protect his profit, he can: I.Enter a buy stop order II.Enter a sell stop order III.Buy put options on the stock IV.Buy call options on the stock
A sell stop order can be used to protect a profit or limit a loss on an existing long position. It is not activated until the market declines to or below the stop price. By purchasing put options, the investor will have the right to sell his stock at a set price (strike price) and will establish a specific sales price.
Which of the following positions exposes an investor to the most risk?
A short straddle consists of a short call and a short put, on the same underlying stock, with the same strike price and expiration month. The investor has an unlimited loss potential on the short call leg of the straddle. Spread positions limit the potential loss to the investor. For debit spreads (i.e., bullish call spreads and bearish put spreads), the loss is limited to the difference between the premiums. For credit spreads (i.e., bearish call spreads and bullish put spreads), the loss is limited to the difference between the strike prices minus the credit. The owner of a put option is only at risk for the premium paid to purchase the option.
Which of the following short positions violates SEC rules?
A tender offer takes place when an entity offers to buy a corporation's shares at a premium to the current market price. It is normally done for the purpose of acquiring control of the company. According to SEC rules, a customer may not tender short (borrowed) shares.
A type of order that becomes a market order when a round-lot trades at or through a particular price is called a:
A type of order that becomes a market order when a round-lot trades at or through a particular price is called a stop order. A variation of a stop order is a stop-limit order, which is activated when a round-lot trades at or through a particular price, along with the requirement that the limit price be satisfied.
A variable annuity would be MOST suitable for which of the following customers?
A variable annuity is most suitable for an investor seeking long-term, tax-deferred income for retirement. A tax-deferred investment, as with a variable annuity, becomes more advantageous for an investor with a higher tax bracket. A variable annuity is unsuitable for customers that have short-term needs since the insurance company may impose surrender charges if the annuity proceeds are withdrawn early. It would also be unsuitable for a client purchasing the annuity in a tax-qualified account such as a 401(k) or IRA, since these accounts already have the benefits of tax-deferred growth. If a client withdraws the proceeds of a variable annuity prior to age 59 1/2, a 10% tax penalty applies.
A registered representative receives an order from the president of XYZ Corporation to sell unregistered XYZ shares. The client purchased the shares in a private placement 90 days ago. This order:
According to Rule 144, an affiliated person (e.g., the president of a company) must hold unregistered (restricted) stock for at least six months before it may be sold. Since the president of XYZ Corporation owned the stock for only 90 days, the order to sell violates Rule 144, if executed.
Which TWO of the following time limitations must be complied with regarding the delivery of a risk disclosure document? I.A brokerage firm must deliver a risk disclosure document to a customer at the time the account has been approved for options trading II.A brokerage firm must deliver a risk disclosure document to a customer prior to the time the account has been approved for options trading III.A brokerage firm must deliver a risk disclosure document to a customer after the account has been approved for options trading IV.A brokerage firm must deliver a risk disclosure document to a customer after the first order has been entered
According to the rules of the exchanges where options are traded, a brokerage firm must deliver a risk disclosure document to a customer at or prior to the account being approved for options trading.
Which TWO of the following statements are TRUE regarding a variable annuity accumulation unit?
Accumulation units are an accounting measure used to determine an owner's interest in the separate account during the accumulation or pay-in phase. Their value will vary based on the performance of the separate account. (Annuity units are used during the annuity or payout phase.)
An announcement in The Wall Street Journal states that New York State plans an advance refunding of its 7 1/2% Dormitory Bonds through the issuance of a special $50,000,000 bond issue. This means that:
Advance refunding means that proceeds from the sale of the new bond issue will be put in an escrow account to retire the existing bond issue. If a municipality wants to engage in advance refunding, as is the case in this example, the municipality will sell the new issue with the proceeds of the sale going into an escrow account containing U.S. government securities. The U.S. government securities would be purchased with a maturity date that coincides with the issue's call date. This allows the refunded issue to be retired using the proceeds from the matured government securities.
When analyzing a general obligation bond, which of the following factors is NOT a positive indicator of the bond's quality?
An increasing population trend and a mixture of diverse businesses (both new and established) are positive demographic indicators that reinforce the quality of general obligation issues. User fees are generally associated with revenue bond issuers.
The major disadvantage to a limited partner in a DPP is
An investor has limited control (management) in equity investments and no control (management) in bond or DPP investments. The major disadvantage of a DPP is the lack of liquidity, meaning that the investor cannot easily sell his portion of ownership.
A variable annuity application sent by a FINRA member does not include a principal's approval. The insurance company:
Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company. If a principal does not approve the application, it must be rejected.
James Hendricks wants to open a Coverdell Education IRA for his three-year-old son. Which of the following statements is TRUE?
Anyone may contribute to a Coverdell Education IRA for a child, but the total contributions to the account are limited to $2,000 per year. Choice (c) is true of a UGMA or UTMA account, not a Coverdell Education IRA. There is no percentage requirement for investments in the account.
An investment that outperforms the market as it goes up but underperforms the market as it goes down would have a beta:
Beta is a measure of a stock's or portfolio's volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If an investment has a beta of greater than 1, it will outperform the market as it goes up and underperform the market as it goes down. Negative betas are associated with stocks or portfolios that move in an opposite direction of the market.
A buyer of a call option is subject to which TWO of the following choices? Unlimited risk Protection for a short position A position that provides leverage An obligation to buy stock
Buying a call option provides leverage because the buyer controls 100 shares of stock for a relatively small cost (the premium). The risk is limited to the premium since that is the maximum potential loss. If an investor is short stock, he risks a loss if the market price of the stock increases. Buying a call provides protection against this situation since he could buy stock at a set price by exercising the call. A buyer of a call option has a right to buy stock, not an obligation.
A portfolio's mix of investments and two potential investors are described below: 20% Investment-grade corporate bonds 30% Blue-chip common stock 20% Variable annuity 20% Equity mutual funds 10% Money-market funds Investor A: A 35-year-old single individual who earns a good salary, makes the maximum contribution to his employer's 401(k), and is willing to assume a moderate degree of risk. Investor B: A 40-year-old married female who, along with her spouse, works and earns a good salary. She chooses not to contribute to her employer's 401(k) and is willing to assume a moderate degree of risk. The total portfolio is MOST suitable for:
In this question, the fact that this portfolio includes an investment in variable annuities is the determining factor for which investor is the most suitable. Generally, an annuity should only be considered after a person contributes the maximum amount to the qualified plan that is sponsored by his employer. The reason for this is that it provides for deductible contributions, tax-deferred growth, and the potential for a company match. Investor A has contributed the maximum amount to his employer's 401(k) plan and could use the variable annuity as an additional retirement vehicle. Since Investor B is not contributing to her employer's pension plan, she should probably not include a variable annuity in her portfolio.
Charlene contacts her registered representative to buy an OTC stock. Rather than buying it directly from a market maker, Charlene's broker-dealer contacts another broker-dealer, who buys it from a market maker creating two levels of transaction fees. This is known as:
Interpositioning occurs when a broker-dealer, executing an order for a customer, places another broker-dealer between itself and the market. This is generally prohibited.
A client is interested in obtaining the expense ratio of a mutual fund recommended by the RR. Which of the following actions would be BEST for the RR to take?
Mutual funds are required to disclose in the front of a prospectus a standardized fee table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio.
Which of the following transactions may be executed in a cash account?
Options and stocks may be purchased in a cash or margin account. Uncovered calls and puts, as well as selling stock short, must be executed in a margin account.
An individual's home has a resale value of $500,000 and an assessed value of $200,000. If the tax rate is 10 mills, the property tax is:
Property tax is computed by multiplying the assessed value by the millage rate. A mill equals 0.001 or $1 per $1,000 assessed value. The tax is $2,000 ($200,000 x .001 x 10 mills).
Which of the following advantages is NOT a benefit of owning a real estate investment trust (REIT)?
Real estate investment trusts (REITs) offer investors a stable dividend based on the income being produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange and offer investors liquidity. Since investors typically purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive.
If the economy is experiencing rising inflation, this will generally lead to:
Rising inflation will usually lead to the FRB increasing short-term rates. This increase in rates will cause outstanding bond prices to decrease. Choice (d) is incorrect since when interest rates rise, long-term bond prices will decrease more than short-term bond prices.
ABC Corporation intends to make an initial public offering of 10,000,000 shares of common stock, 7,500,000 shares of which will be new stock being issued by ABC Corporation and 2,500,000 shares will be for selling stockholders. Which TWO of the following statements regarding this offering are TRUE? I.It is a primary distribution II.It is a primary and secondary distribution III.The proceeds of the sale will be shared by the corporation and the selling stockholders IV.The corporation will receive all of the proceeds of the sale
Since both the corporation and existing shareholders are selling stock, it is both a primary and secondary distribution. In a primary distribution, proceeds go to the corporation. In a secondary distribution, proceeds go to the selling shareholders.
The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered:
Since the bonds have a yield to maturity of 5.60% (that is greater than the 5 1/2% coupon rate), the bonds are being offered at less than their face (par) value. These bonds were, therefore, issued at a discount.
A tombstone ad states that the McGee Oil Company is offering $200,000,000 of 8 1/2% bonds due July 1, 2038 at 99 1/2% of par value. The yield to maturity on the bonds is:
The 8 1/2% bonds are being offered at a discount at 99 1/2% of their $1,000 par value. An investor who purchased the bonds at the offering (at $995) and held the bonds to maturity will receive the par value of $1,000. The investor will, therefore, have a yield to maturity that is greater than the coupon rate (nominal yield) of 8 1/2%.
Bergen County has issued Build America Bonds to improve its transportation system. Which TWO of the following statements are TRUE concerning these bonds? The interest income on these bonds is exempt from federal income tax The interest income on these bonds is subject to federal income tax The issuer will not receive a federal reimbursement The issuer will receive a federal reimbursement
The Bergen County bonds are an example of Direct Pay Build America Bonds (BABs). BABs are a type of municipal bond that pay taxable interest, but the Treasury will reimburse the issuer for 35% of the interest paid on the bonds. The reimbursement thereby reduces the issuer's cost of borrowing and allows it to compete with corporate issuers when raising capital.
The Federal Reserve Board's Open Market Committee (FOMC) buys and sells which of the following securities most often to accomplish its aims?
The Federal Reserve Board's Open Market Committee (FOMC) purchases and sells U.S. government securities in the open market to accomplish the Federal Reserve Board's aims of influencing the money supply. The securities most often used are Treasury bills.
T-bills purchased at the weekly auction will have a settlement date on the:
The auction for 13- and 26-week T-bills is held each Monday. Settlement is on Thursday of the same week.
Which of the following bonds has the most interest-rate risk?
The bond with the most interest-rate risk or price volatility is the bond with the longest maturity and the lowest coupon. This price sensitivity is based on the concept of duration. The first step is to identify the bond or bonds that have the longest maturity. In this question, there are two bonds with 30-year maturities, which eliminates the possibility of the three-month and five-year bonds as the answer. The second step is to find the long-term bond that offers the lowest coupon rate. Since a T-STRIP is a form of zero-coupon bond, it clearly has more interest-rate risk than another long-term bond that offers a 6% coupon.
A municipal tombstone ad shows bonds maturing serially from 2012 through 2030. The 2030 maturity is a 6.00% bond offered at a 6.75 basis. The bonds maturing in 2020 and thereafter are callable beginning in 2018 @ 102, at 101 in 2019, and at par on any interest date after 2019. The bonds maturing in 2030 should be priced to the:
The bonds are being offered at a discount since the yield to maturity (6.75%) is greater than the coupon rate (6.00%). A discount bond is always priced to maturity.
If convertible bondholders convert their bonds into the common stock of a corporation, the effect on the balance sheet of the corporation will be:
The conversion of bonds to common stock reduces the total debt of the corporation while increasing stockholders' equity (additional shares of common stock). The answer, therefore, will be a decrease in the total liabilities and an increase in stockholders' equity.
ABC Corporation bonds are convertible at $50. If the bonds are selling in the market for 90 ($900) and the common stock is selling for $43, which TWO of the following statements are TRUE? The stock is selling at a discount to parity with the bond The stock is selling at a premium to parity with the bond Liquidating the stock after converting the bond would be currently profitable Liquidating the stock after converting the bond would not be currently profitable
The conversion ratio, which is not given, is found by dividing the par value of the bond ($1,000) by the conversion price ($50). This equals 20 to 1 ($1,000 divided by $50 equals 20). The market price of the common stock is $43 per share. The stock is selling at a discount to parity with the bond ($43 stock x 20 shares = $860 which is below the $900 market price of the bond). If the bonds were converted and the stock was then sold at the market price, the investor would have a loss.
Which of the following statements is NOT TRUE regarding accounts established under the Uniform Gifts to Minors Act?
The custodian may not use securities in the custodian account to cover an options position in his own personal account. All securities in the custodian account must be used only for the benefit of the minor.
The record date for a company's cash dividend is Thursday, October 7. What is the latest date a customer may purchase the stock for regular-way settlement in order to receive this dividend?
The ex-dividend date is the first day on which a stock trades without its dividend. It is typically one business day prior to the record date, which in this question, is Wednesday, October 6. For a buyer to receive the dividend, the transaction must settle on or before the record date of Thursday, October 7. If a person purchases the stock on or after the ex-dividend date, he is not entitled to the dividend since regular-way settlement takes two business days and that would be after the record date. For the customer in this question to be entitled to the cash dividend, the latest date he may purchase the stock for regular-way settlement, must take place on the business day before the ex-dividend date, which is Tuesday October 5. Note; If the question does not state the type of settlement, assume regular-way.
Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which of the following bonds is most likely to be refunded?
The most common reason for a municipality to refund an outstanding issue is to save interest costs. If a municipality can borrow money at a lower rate than the outstanding issue, it can use this money to refund the outstanding issue and thus save interest cost. The bonds are selling at a 7.00% yield. The municipality can then expect to borrow new monies at a 7.00% interest rate. The municipality can only save money by refunding an issue with a higher interest rate, 7 1/2% (choice d).
A dividend has been declared on ATT common stock. Which TWO of the following investors are entitled to the dividend? The owner of an ATT call option who exercised the option prior to the ex-dividend date The owner of an ATT put option who exercised the option prior to the ex-dividend date The writer of an ATT put option that was exercised prior to the ex-dividend date The writer of an ATT call option that was exercised prior to the ex-dividend date
The owner of a call and the writer of a put are entitled to receive the dividend if the option is exercised before the ex-dividend date. In both cases, the exercise results in the individual buying stock. To be entitled to a dividend, stock must be purchased prior to the ex-dividend date.
Mr. Green is the manager for an asset allocation fund. In May, the fund's portfolio is allocated as follows. During the first week of June, Mr. Green shifted the assets in the portfolio to reflect.
The portfolio shift reflects significantly lower emphasis on stocks and a reduced position in bonds. If the manager anticipated a decrease in interest rates, he would be bullish on bonds. The bond allocation would then be expected to increase. Fundamental analysts are not market timers.
A registered options principal (ROP) must review: I. Retail communication concerning options II. General options prospecting letters III. Option seminar transcripts IV. Allocation of exercise notices
The registered options principal (ROP) is specifically responsible for the firm's compliance program with respect to its options activities. The ROP performs an audit function to determine that these activities are conducted in compliance with current applicable regulations and rules. Some of the ROP's principal duties include establishing guidelines for options retail communication, and reviewing all such material before it is used. The ROP also reviews the method of allocation of exercise notices.
The purchase of a new issue prior to settlement with the issuer can BEST be described as a:
The term when-issued covers the period of a new issue of municipal securities from the original date of sale by the issuer to the delivery of securities to the underwriter. The purchase or sale of new issue securities prior to registration may be a violation of the 1933 Act.
A customer has a nondiscretionary account at a broker-dealer. The customer received a research report and instructs the registered representative to purchase 500 shares of a specific stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take?
This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security. In some cases, a registered representative may accept the customer's verbal authorization to make certain decisions without it being considered discretionary. If a customer (1) selects the specific security, (2) decides whether to buy or sell the security, and (3) specifies the number of shares, leaving discretion only as to time and/or price, it would not be considered a discretionary order and written authorization would not be required. The customer mentioned all three of these details. This time and price discretion concerning the order is limited to the trading day on the day the order was placed, and must be noted on the order ticket. The client is permitted to give her RR written instructions for a longer period. There is no requirement to have the order preapproved by a principal.
When making a presentation on 529 plans, what information is NOT required?
Under MSRB rules, an RR is required to disclose certain information when promoting 529 plans. The RR must discuss the risks and costs involved with the different types of plans, must provide a disclaimer stating that, prior to investing in a plan, the customer should read the official statement, and must provide a disclaimer that the client should check with her home state to learn if it offers tax benefits to those who invest in its plan. There is no requirement to provide the name and contact information for the municipal securities principal who will approve the customer's investment in the plan.
A client of a broker-dealer is the president of XYZ Corporation and intends to sell XYZ shares under Rule 144. For the client to be able to sell these securities, a filing must be made with the SEC:
Under Rule 144, an investor who intends to sell either restricted or control stock must notify the SEC by filing Form 144 at the time the sell order is placed. Once the filing is made, it is effective for 90 days.
A customer sells short 1,000 shares of stock. A few weeks later the company declares a 5% stock dividend. When the customer covers the short sale, the customer will be required to deliver:
When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declared a 5% stock dividend. Therefore, a customer who sold short 1,000 shares would be required to deliver 1,050 shares (1,000 shares x 5% = 50 additional shares) when covering the short sale.
An investor owns $10,000 worth of XYZ Corporation convertible bonds that are callable at 102. The bonds are currently selling in the market at 103. If the corporation calls the bonds at the call price, the investor will receive
When bonds are called for redemption, the owner receives the call price. The call price is 102 for a total of $10,200 ($1,020 per bond x 10 bonds). If the investor were able to sell the bonds at the current price, she would receive $10,300 ($1,030 x 10 bonds). However, the question states that the bonds are called, which means the market price of the bond will gravitate to the call value of $10,200.
A customer has purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share. The buyer of these 10 straddles will need to deposit:
When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer purchased 10 straddles and paid $400 per straddle for a total of $4,000. (10 straddles x $400 = $4,000.)
Relative to stock index options, which of the following statements is NOT TRUE?
When exercised, a stock index option settles in cash on the next business day. On the other hand, if an equity option is exercised, settlement and the delivery of the underlying security must be made within two business days. For index options, the settlement amount is determined by the difference in the option's strike price and the exercise-settlement value on the day of exercise. Both index options and stock options have expirations that occur each month. All purchases and sales of options (i.e., option trades) settle on the next business day.
What is the margin requirement when purchasing options?
When purchasing options, the margin requirement is 100% of the premium.
A broker-dealer owns 100 shares of ABCO stock, which it purchased at three weeks ago at $28 per share. Today, if the stock is sold to a customer, the broker-dealer will report a markup to the customer based on:
When selling stock to a customer, the markup reported to the customer should be based on the lowest offer on the Nasdaq system, not the $28 price that the dealer paid three weeks ago when it purchased the stock. If the broker-dealer was purchasing stock from a customer who was selling stock, the markdown reported to the customer is based on the highest bid on the Nasdaq system. Remember, from a customer's perspective, he will buy at the offer (ask) price of the broker-dealer (since this is the price at which the firm will sell) and will sell at the bid price of the broker-dealer (since this is the price at which the firm will buy).
Which of the following choices BEST describes Eurodollars
Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe.
On Wednesday, March 11, a customer purchases 1,000 shares of an OTC equity security in a cash account through an online brokerage firm. The transaction will settle:
For corporate securities, regular way settlement is two business days following the trade date. In this question, the settlement occurs on Friday, March 13. The key to this question is understanding that any corporate transactions which are being executed in either cash or margin accounts will settle on a regular way basis (T + 2). However, if a question references a cash trade, a cash transaction, or a trade settling for cash, it has special treatment and will settle on the same day as the trade.
