S7 Benchmark Exam
The city of Austin (population 10,000) has just issued $1 million in general obligation bonds and already has an outstanding debt of $2 million. The city is located in a municipal county with $1,500,000 in debt outstanding, most of which is funded from ad valorem taxes. Austin makes up 70% of the county. What is the net direct debt per capita of Austin?
$300 Net direct debt = self-supporting debt sinking fund accumulations. Self-supporting debt = $3,000,000. There are no sinking fund accumulations. Net direct debt per capita = $3,000,000/10,000 = $300
Max Jones writes 1 ABC Jul 50 put at 7. The put is exercised when the market price is 40. For tax purposes, what is the effective cost basis of the stock put to the writer?
$43 When the put is exercised, the stock is put to (sold) to Max Jones at the strike price of 50. However, since he earned the $7 premium per share, the effective purchase price (or cost basis) is actually 50 7 = $43
Marjorie has purchased 20 XYZ July 50 puts when XYZ is trading at 51.50. She paid 1.75 for each put. Subsequently, XYZ declines to 46.22 and Marjorie decides to exercise 10 of her puts. For tax purposes, her sales proceeds resulting from the exercise of her puts is
$48,250.00 Marjorie will have sales proceeds of $48,250, which results from the sale of 1,000 shares (at the strike price of 50), minus the premium on the 10 puts ($1,750).
A 52-year-old investor living in California purchases a $50,000 25- year Treasury bond with a 4.5% coupon. The California tax rate is 7% and the investor's marginal tax bracket is 24%. The tax liability on a single year of interest is
$540.00 As interest income on Treasury bonds is taxed at the federal level only, the interest income received for one year of $2,250 ($50,000 X 4.5%) is taxed at the rate of 24%, which results in a tax liability of $540.
Amy's father purchased 100 shares of ABC stock ten years ago for $40 per share. Amy's father dies when the stock is worth $65 per share and gifts it to Amy in his will. If Amy sells the shares a year later when they are worth $70 per share, her cost basis would be
$65 per share When a person dies and leaves stock to their beneficiaries, the cost basis for their heir is the market value of the stock at the time of death.
Which of the following is the most stringent test of liquidity?
(Cash + Marketable securities) divided by current liabilities The most stringent test of liquidity subtracts out all current assets other than cash and marketable securities.
A corporation has $12MM net income after taxes, 5MM common shares outstanding and $10MM of 6% preferred stock ($100 par). What is the corporation's EPS?
(net income - preferred dividends) / # shares outstanding $2.28
With an initial margin requirement at 50%, a customer purchased 100 shares of ABC Corp. at $100 per share and deposited $5,000. ABC Corp. then increases in value to $150 per share. What is the excess equity in the account?
2,500 When the LMV increases to $15,000, Reg T required equity is 50% x $15,000 = $7,500. The equity balance is $10,000, so excess equity = $10,000 - $7,500 = $2,500. This also creates SMA of $2,500 as SMA equals the greater of excess equity or the last SMA balance.
Please consider the following information to find the dividend yield of ABC Inc. Net income: $100,000,000 Shares Outstanding 200,000,000 Annual Dividend $80,000,000 Stock price $18 The dividend yield of ABC is:
2.2% Dividend yield is found by dividing the annual dividends per share by the price per share. In this question, we must determine the annual dividend per share. To do so, divide the annual dividend by the outstanding shares (80,000,000 / 200,000,000 outstanding shares = .40). We then divide the annual dividend per share by the current stock price (.40 / 18 = 2%).
Which of the following investment options would be least appropriate for an investor who is concerned about inflation?
20- year debenture of a highly rated tech company. An investor who is concerned about inflation would not invest in bonds, as these instruments carry purchasing power risk owing to their fixed coupon.
A corporate client has an equity portfolio valued at $10,000,000. The portfolio has a beta of 1.4. There are SPX May 2000 options available. To adequately hedge this portfolio, the client should
Buy 70 puts To adequately hedge this portfolio, the client should buy 70 puts. We divide the value of the portfolio by the cash value of the strike price (2000 x 100 = $200,000). This gives us a quotient of 50. Since the portfolio has a beta of 1.4, we multiply 50 by the 1.4 beta to arrive at 70 contracts. Put differently, the investor needs $10,000,000 x 1.4 = $14,000,000 worth of protection. This requires 70 SPX 2000 puts.
An investor anticipating that the FRB is likely to increase its target fed funds rate would likely take which of the following actions?
Buy US listed EUR put options When interest rates rise, the USD is likely to strengthen. Therefore, foreign currencies would be expected to weaken.
A customer has been notified that the limit order placed at the open this morning has been executed. The trade report submitted to FINRA may exclude which of the following items?
Common charged to the customer Trade reports submitted to FINRA are not required to include the commission, mark-up or mark-down charged to the customer.
An investor has a significant position in various money market instruments, comprising a substantial portion of his overall portfolio. Amongst the various risks that investors generally face, which of the following risks may be the most prominent in this investor's portfolio?
Inflation risk Money market securities will offer very low returns, compared to other investment alternatives. These returns may not be able to keep pace with any inflationary pressure that may exist.
With respect to a margin account, which of the following statements is correct?
Interest charges and purchases using SMA will increase the debit balance Payments of cash dividends or interest will reduce the debit balance, while interest charges and additional purchases will increase the debit balance.
Which of the following best describes the Alternative Minimum Tax (AMT)?
It is a process that determines tax liability by including certain tax preference items into adjusted gross income. The AMT recalculates income tax after including certain tax preference items into adjusted gross income. The main purpose of AMT is to ensure that all taxpayers pay a minimum amount of taxes every year.
Broker-dealer M is serving as a financial advisor to County P. May it serve as an underwriter for the bonds of County P at this time?
No, serving in both roles simultaneously is prohibited by MSRB rules.
An investor seeking a high degree of cash flow predictability while being willing to accept relatively lower yields would be most likely to purchase a
PAC tranche. The Planned Amortization Class (PAC) is a type of CMO structure that provides a high degree of cash-flow certainty, as compared to other CMO structures. In return for these steadier cash flows, investors typically agree to accept a lower return.
Horace purchased 2,500 shares of MNO Inc. in March at $18.50 per share. In June he gave half of his position away as a graduation gift to his niece Jill while MNO was trading at $21.75. Jill sold these shares at $24.25 in November. For tax purposes, Jill sold these shares using a cost basis of
The cost basis of shares given as a gift is generally the donor's original purchase price, so in this case Jill would be using a cost basis of $18.50.
The marketability of a municipal bond would be least affected by
The par value: NOT significant
A customer maintains a non-discretionary account at a BD and leaves a voicemail message for his RR to execute a trade, specifics of the order left in the message. The rep may execute this order
Upon receiving confirmation from the customer that this order should be executed. A RR may not act strictly upon instructions left in a voicemail message. The order must be reconfirmed over the phone with the customer.
Which of the following is considered an accredited investor?
a board member of the company Under Regulation D, accredited investors include officers and directors of the issuer, institutional investors with at least $5 million in assets, and individuals that have a net worth of at least $1 million excluding their primary residence or those that have earned at least $200,000 in each of the past two years ($300,000 for married couples).
In a client's margin account, a dividend of $150 was credited, while during the same period an interest charge of $85 was applied. The effect of these actions is
a reduction of $65 to the debit balance In a margin account, payments of interest or dividends reduce the debit balance, whereas interest charges increase the debit balance. In this example, the debit balance would be decreased by the net difference, which is $65.
When the general partner signs the subscription agreement, this indicates
acceptance of the limited partner as a member of the partnership.
As the result of a series of trades this year, an investor has amassed $7,500 in capital losses. If this investor's ordinary income for the year was $85,000, they would be able to
adjust their income down to $82,000.
According to MSRB rules, all of the following are required customer account information EXCEPT the
age and birth date. MSRB rules do not require the age or birth date for a new customer account. However, FINRA rules do require this information
A municipal bond issue would be non-rated when the
amount of the issue is too small to be rated. A municipal bond issue is not rated when the issuance is too small, meaning that there is not enough public interest to merit a rating for the bond. This situation also applies to corporate bonds. It is possible that other issues by the same municipality would be larger, and therefore be rated.
A financial institution that has issued an equity linked CD is likely to calculate the return of the instrument by using
average closing price of the underlying index over a specified period of time. Returns on equity linked CDs are generally calculated using the average closing price of the underlying index over a specified period of time.
When disposable income decreases,
consumption and savings decrease. When disposable income decreases, individuals have less cash available for spending and saving, therefore consumption and savings will decrease.
Your client Rodney calls you one day and asks you to sell 1,000 shares of XYZ. The first thing you should do is
determine whether Rodney owns the stock or not. Upon receipt of a client order to sell a security, Regulation SHO requires that a determination be made as to whether the seller owns the security or not. This is known as making an affirmative determination. The order memorandum must be marked either "long" or "short". A "long" sale is one where the seller owns the security, whereas in a "short" sale the seller does not own the security. This determination should be made before any other actions are taken.
State GO bonds are secured by
income, excise and sales taxes. Local GO bonds, such as those issued by cities and counties, are backed by property taxes and license fees.
A 35-year old investor is considering the purchase of a Z-tranche but does not want to incur a tax liability for investment payments that will not be received until maturity. To help this investor achieve his goal, a RR might recommend that this security be carried in an
individual retirement account (tax-deferred retirement account, such as an IRA or 401(k) plan)
Jane has invested $100,000 in the ABC non-qualified variable annuity. The assumed interest rate on this annuity is 1.75%. The contract is structured to annuitize in 20XX. During the accumulation period Jane
is not required to pay taxes on the interest credited to her account. During the accumulation period of a variable annuity, whether qualified or non-qualified, the investor will not incur a tax liability. Applicable taxes will be due at the time any distributions are taken during the annuitization phase of the contract. Distributions will be taxed as ordinary income.
Bond equivalent yield
is the annual percentage yield for a bond which does not make annual payments
A life-cycle fund would best be characterized as one which
makes automatic adjustments to its portfolio as an investor approaches retirement. A life cycle fund, also known as a target date fund, is one which makes automatic adjustments to its portfolio as investors' approach retirement. The fund would reduce its equity exposure while increasing its focus on fixed income investments.
State governments receive the least amount of revenue from
property taxes. State governments would receive the least amount of their revenue from property, or ad valorem, taxes. Cities and other localities get most of their funding from property taxes.
An institutional investor is making a tender offer for the common stock of ABC. During the period of this offer, this investor may not
purchase a convertible bond of ABC in the secondary market. When a tender offer is being made, the party making the offer may not purchase the same or substantially same security in the secondary market, as this would be considered manipulative activity. If the tender offer is for common stock, the party would not be able to purchase the common stock or convertible bond of the same issuer while the tender offer is in progress
Your client Barbara has investment objectives of growth and aggressive income. Her portfolio consists of blue-chips stocks, high yield bonds, and treasuries. Barbara has been generally unhappy with the performance of her portfolio and is seeking your advice. You should tell her to
sell the Treasuries and buy more blue-chip stocks paying a steady dividend.
A client holding an individual account has requested that their spouse be added to the account, thereby enabling the spouse to place trades for the account. The registered representative handling this account
should inform the client that this change will need to be approved by a principal of the firm. Changes to account name or designation must be approved in writing by a registered principal of the firm.
A client has a restricted margin account. To place additional trades in this account,
the client would need to deposit the full purchase price on any trades until the restriction is lifted.
In order for a person associated with a FINRA member firm to open a securities account at a different FINRA member firm,
the person must receive written consent from their employer prior to opening such account. An associated person of a FINRA member firm must receive prior written approval from their firm in order to open or maintain a securities account at a firm other than their employer.
Your client Jim has received a dividend from his real estate investment trust. He asks you if this dividend is treated the same way as the dividend he receives from his XYZ common stock, which he has owned for several years. You should tell Jim that
the tax rate that applies to his XYZ common stock investment does not apply to his REIT.
An investor may begin taking distributions from his qualified retirement plan this year without incurring a penalty. Once distributions begin,
this investor will be responsible for ordinary income taxes on all distributions taken during the year. Distributions from a qualified retirement plan, such as a 401 (k) plan, are subject to ordinary income taxes. A qualified retirement account is one that is funded with pre-tax dollars, effectively making it a tax deduction for that year, up to federal limits. Since no taxes were paid on these funds at the time of their investment, all distributions from these plans are fully taxable as ordinary income.
An investor might construct a bond ladder if they
were concerned about interest rate risk
