series 7
A customer's short margin account is properly margined and shows a credit balance of $40,000. Interest would be charged on a balance of:
$0 --Interest is only charged on debit balances, which are monies loaned by the firm to the customer. Credit balances in short margin accounts are not subject to any interest charges (however, the firm may charge a rate of interest for the stock loan).
A customer, age 50, invests $50,000 in a variable annuity. The account has grown in value to $60,000 and at age 55, the customer takes a lump sum withdrawal of $15,000. Which statement is TRUE about the taxation of the withdrawal?
$10,000 of the withdrawal is subject to regular income tax plus a 10% penalty tax; $5,000 of the withdrawal is not taxable --Lump-sum distributions from variable annuity contracts are taxed on a LIFO (Last in; First out) basis. The first-in dollars are the non-deductible (already taxed) premium payments (capital contribution). The earnings in the account then build tax-deferred. These are the last-in dollars that have not been taxed. When a distribution is taken, the first dollars out represent the untaxed build-up. The last dollars out represent the already taxed premium payments. This customer withdrew $15,000. The first $10,000 of the distribution represents the build-up and this is taxable at ordinary income tax rates, plus a 10% penalty tax is due because the customer is under age 59 1/2. The remaining $5,000 of the distribution represents the return of capital (the "already taxed" investment dollars).
A customer's margin account shows: LONG 100 ABC @ $50 100 XRX @ $40 SHORT 100 PDQ @ $80 200 ERF @ $70 Debit Balance = $4,000 Credit Balance = $33,000 What is the equity in the combined account?
$16,000 --The equity in the combined account is: Long Market Value - Debit = $9,000 - $4,000 = $5,000 equity in long positions Credit - Short Market Value = $33,000 - $22,000 = $11,000 equity in short positions The combined equity is $16,000.
In May, a customer buys 100 shares of ABC stock at $50 and buys 1 OEX Aug 500 Put @ $5. In August, the OEX is at 470, while the stock is at $45. The put is exercised and the stock position is sold at the current market price. The customer has a:
$2,000 profit --The stock is bought at $50 and sold for $45, for a 5 point ($500) loss. The index put option is purchased at a premium of 5 and then exercised when the contract is 30 points in the money (500 strike price versus 470 index value = 30 points "in the money"). Since index options settle in cash when exercised, the holder will receive 30 points or $3,000. The gain on option is 30 - 5 initial premium = $2,500. The net gain on both positions is: -$500 on the stock and +$2,500 on the option = +$2,000.
A customer owns 100 shares of ABC stock in a margin account, valued at $40 per share. The customer sells 3 ABC Jul 40 Calls @ $4. The stock moves to $60 and the calls are exercised. The customer has a:
$2,800 loss --If the stock moves to $60, all 3 calls will be exercised. Since 1 of the calls is covered, 100 shares of the stock that was bought at $40 will be delivered at $40, for no gain or loss. On the 2 remaining calls, 200 shares must be delivered at $40. Since the market price is $60, there is a 20 point loss times 2 contracts for a total of $4,000 loss. Because 12 points were collected in premiums, the net loss is 28 points or $2,800. This is an extremely difficult question.
On the same day in a margin account, a customer buys 1 ABC Jan 50 Put @ $6 and sells 1 ABC Jan 40 Put @ $2. Later, the positions were closed - the ABC Jan 50 Put was closed at $3 and the ABC Jan 40 Put was closed at $1. The customer has a:
$200 loss The opening position is: Buy 1 ABC Jan 50 Put@ $6 Sell 1 ABC Jan 40 Put@ -$2 $4 Debit The closing position is: Sell 1 ABC Jan 50 Put@ $3 Buy 1 ABC Jan 40 Put@ -$1 $2 Credit The net loss is $200 since the spread between the premiums narrowed from 4 to 2. Remember, debit spreads are only profitable if the spread between the premiums widens.
On the same day in a margin account, a customer sells 1 ABC Jan 50 Put @ $6 and buys 1 ABC Jan 40 Put @ $2. Later, the positions were closed - the ABC Jan 50 Put was closed at $3 and the ABC Jan 40 Put was closed at $1. The customer has a:
$200 profit --The opening position is: Sell 1 ABC Jan 50 Put @ $6 Buy 1 ABC Jan 40 Put @ $2 $4 Credit The closing position is: Buy 1 ABC Jan 50 Put @ $3 Sell 1 ABC Jan 40 Put @ $1 $2 Debit The net gain is $200 since the spread between the premiums narrowed from 4 to 2. Remember, credit spreads are profitable if the spread between the premiums narrows.
As the initial transactions on the same day in a new margin account, a customer: Buys 200 shares of ABC at $50 (NYSE listed security) Buys 1,500 shares of ACME Fund @ $10 (Open-end investment company) Buys 10 PDQ Jan 50 Calls @ $5 (CBOE listed security) The customer will receive a margin call for:
$25,000 --Both mutual fund shares and option purchases are not marginable - they must be paid in full (because mutual fund shares are sold with a prospectus and technically are new issues; and long options expire, hence they are not marginable). For the mutual fund shares, $15,000 is required; for the options, $5,000 ($500 premium per contract x 10 contracts) is required. To buy listed stock, the margin is set at 50%. 50% of $10,000 = $5,000 margin. Thus, the total margin requirement is $5,000 + $5,000 + $15,000 = $25,000.
On the same day in a margin account, a customer: Buys 100 shares of ABC @ $80 Sells 1 ABC Jan 80 Call @ $4 The customer must deposit:
$3,600 --To buy stock in a margin account, Regulation T margin is 50% of $8,000 = $4,000. No margin is required to sell the call since it is covered by the long stock position. Since $400 of premiums are received from selling the call, the deposit is: $4,000 - $400 = $3,600.
A customer has an existing margin account that shows the following: Long Market Value: $200,000 Debit Balance: $120,000 If the market value declines to $120,000, the customer will receive a maintenance call for:
$30,000 --This customer account sets up as: Long Market Value - Debit = Equity % $200,000 $120,000 $80,000 40% If the market value declines to $120,000, the account will now show: Long Market Value - Debit = Equity % $120,000 $120,000 $0 0% Minimum margin is 25% of market value, or 25% of $120,000 = $30,000. This account will receive a maintenance call for $30,000. After the money is deposited, it is applied against the customer's debit balance. The end result will be: Long Market Value - Debit = Equity % $120,000 $120,000 $0 0% -30,000 +30,000 $120,000 $90,000 $30,000 25%
A customer sells short 100 shares of ABC at $35 and buys 1 ABC Jul 35 Call @ $3. The stock falls to $30 and the customer closes the option contract at $1 and buys the stock at the current market price. The customer has a:
$300 gain --The customer sold the stock for $35 bought a call, paying a premium of $3 per share. The customer closes the stock position by purchasing the stock in the market at $30 for a gain of 5 points ($35 sale; $30 purchase). The customer closes the option position by selling the option at $1, for a loss of 2 points ($3 purchase; $1 sale). The net gain is: 5 - 2 = 3 points or $300.
A waste disposal revenue bond issue is being underwritten on a negotiated basis. The offering consists of $10,000,000 par value of term bonds. The underwriter has agreed to a spread of $40 for each $5,000 bond. The manager has set the additional takedown at $15.00 per bond and the selling concession at $20.00 per bond. If a syndicate member sells a $5,000 par value bond directly to the public, the syndicate member earns:
$35.00 --When selling a bond directly to the public, a syndicate member earns the "Total Takedown," which is the total of the additional takedown and the selling concession. The additional takedown is $15 and the selling concession is $20, so the syndicate member earns $35.
A customer sells 1 ABC Jul 65 Put @ $7 and 1 ABC Jul 55 Call @ $7 when the market price of ABC is $60. Just before expiration, ABC is trading at $62 and the contracts are closed at intrinsic value. The customer has a:
$400 gain --The customer has sold a combination. Sell 1 ABC Jul 65 Put @ $ 7 Sell 1 ABC Jul 55 Call @ $ 7 $14 Credit If the market is at $62, the 65 Put is 3 points "in the money" while the 55 Call is 7 points "in the money." Closing the contracts at these premiums results in: Buy 1 ABC Jul 65 Put @ $ 3 Buy 1 ABC Jul 55 Call @ $ 7 $10 Debit The net profit is: $14 Credit - $10 Debit = $4 or $400 on the positions.
An investor has sold short stock worth $45,000 in a margin account, depositing the margin requirement. If the market value of the stock falls to $30,000, what is the Selling Power in the account?
$45,000 Credits-Short Market Value =Equity % Sale $45,000 $45,000 0 Margin $22,500 $22,500 Total $67,500 $45,000 $22,500 50% If the market value falls to $30,000, the account will show: Credits-Short Market Value =Equity % $67,500 $30,000 $37,500 125% To support a $30,000 stock position at 50% margin, equity of $15,000 is required. Since the account has $37,500 of equity, the excess of $22,500 may be borrowed and is the SMA amount. With $22,500 of SMA, twice this amount may be purchased or sold short in other marginable securities.
On the same day a customer buys 100 shares of ABC stock at $30 and sells 1 ABC Jan 30 Call @ $3 and sells 1 ABC Jan 30 Put @ $2. The maximum potential loss is:
$5,500 --The customer has created a long stock/short straddle position. This is shown below: Buy 100 Shares of ABC at $30 Sell 1 ABC Jan 30 Call @ $3 Sell 1 ABC Jan 30 Put @ $2 $5 Credit The credit of $500 is the maximum potential gain occurring if both contracts expire "at the money." If the market rises above $30, the short call is exercised, while the short put expires "out the money." The stock that was purchased at $30 is delivered for $30 - there is no further gain or loss on this position. Thus, in a rising market, the maximum gain is $500. If the market falls below $30, the short put is exercised (requiring the customer to buy another 100 shares at $30), while the short call expires "out the money" As the market falls, the customer now owns 200 shares purchased at $30. Since $500 was collected in premiums, he can afford to lose 2.5 points per share and will still breakeven. Thus, the breakeven occurs at $30 - $2.50 = $27.50. If the market continues to drop to zero, the customer will lose the full value of the 200 shares purchased at $30, net of $500 collected in premiums, for a net loss of $5,500 ($27.50 per share).
A brokerage firm offers the following 4 products to customers: A flat commission rate of $50 per equity trade that includes the services of a dedicated representative $15 commission per equity trade without a dedicated representative $2,500 per year fee-based account that includes unlimited trading with the services of a dedicated representative $1,000 per year fee based account that includes unlimited trading without a dedicated representative The best choice for a customer that is new to investing, who needs heavy guidance, and who trades 1 or 2 times per month, would be the:
$50 per trade commission charge --Since this customer needs heavy guidance, the best choice must include the services of a dedicated representative. If the customer chooses the $50 per trade commission fee that includes guidance, he would expect to pay $50 x 18 expected trades per year (1.5 trades per month x 12 months) = $900 in annual commission costs. If the customer chose the $2,500 flat fee per year account, it would cost the customer $1,600 more. The other 2 choices do not make sense since there is no registered representative "hand holding" included.
Swiss Franc Jan 94 Calls on the PHLX are quoted at .50. The contract size is 10,000 Swiss Francs. What is the total premium for 10 contracts?
$500 --World Currency options are standardized, using a multiplier of 100 applied to the premium. A premium of .50 x multiplier of 100 = $50 total premium per contract. Since 10 contracts are purchased, 50 x 10 contracts = $500 total premium. (Another way of doing this - but not necessarily recommended - is contract size = 10,000 units of currency x a premium of 1/2 cent ($.005) = $50 per contract x 10 contracts = $500.)
A husband and wife wish to open a spousal IRA. The wife works while the husband does not. What is the permitted maximum contribution to this spousal IRA for the year 2019?
$6,000 for the wife; $6,000 for the husband --For the year 2019, the maximum contribution to a spousal IRA, is $6,000 each, in two accounts, for a total of $12,000. It makes no difference if the spouse works or not.
A customer buys 100 shares of ABC stock at $80 and sells short 100 XYZ stock at $90 on the same day in a margin account. The initial margin requirement is:
$8,500 --The initial margin to buy stock is 50%. 50% of $8,000 = $4,000. The initial margin to short stock is 50%. 50% of $9,000 = $4,500. The total initial margin requirement is $8,500.
On the same day in a margin account, a customer buys 1 ABC Jan 45 Put @ $4 and sells 1 ABC Jan 60 Put @ $11 when the market price of ABC is $56. The customer must deposit:
$800 -->The customer has created a short put spread resulting in a $700 credit. This position is profitable if the market should rise (bullish). The positions set up as: Sell 1 ABC Jan 60 Put @ $11 Buy 1 ABC Jan 45 Put @ $4 $7 Credit If the market should rise, both contracts expire "out the money" and the customer keeps the $700 credit (maximum potential gain). On the other hand, if the market drops, the short put is first to be exercised, requiring the customer to buy the stock at $60. If the market continues to fall, the long put allows the customer to sell the stock at $45, for a maximum loss on the stock of 15 points. Since 7 points were received in premiums, the maximum potential loss is $800. Margin rules require that the customer put up the $800, since this is his or her maximum loss exposure.
ABC Corporation stock is being sold in a primary offering. The total offering is $10,000,000, of which $7,000,000 is allocated to the syndicate and $3,000,000 is allocated to the selling group. The public offering price is set at $10.00 per share. The issuer received $9.00 per share from the underwriters. The management fee has been set at $.10 per share; the selling concession is $.30 per share. The issuer will receive:
$9,000,000 --The underwriter is paying the issuer $9.00 per share for 1,000,000 shares = $9,000,000 received by the issuer in total.
Which Bond Buyer Index contains the highest quality issues?
11 Bond Index --The Bond Buyer 11 Bond index contains 11 G.O. bonds rated AA or better. The other indexes contain lower rated (A) issues.
The loan value of a LEAP option contract with over 9 months to expiration is:
25% --Since the margin to buy a LEAP option with over 9 months to expiration is 75%, it qualifies for a loan equal to 25% of its value.
Under FINRA rules, copies of order tickets must be kept for:
3 years --Order tickets must be kept for 3 years. As a general rule, all records that you come in contact with must be kept for 3 years. The only notable exception is customer complaints, which must be retained for 4 years.
An investor holds 1 ABC Jan 40 Call. ABC splits 4 for 1. On the ex date, the contract becomes:
4 ABC Jan 10 Calls --For 2:1 and 4:1 whole share splits, the number of contracts is increased and the strike price reduced proportionately. 1 ABC Jan 40 Call becomes (after the 4 for 1 split) 4 ABC Jan 10 Calls (the new strike price is 40/4).
Under Regulation T, the maximum time period to collect monies owed by a customer prior to an extension request is:
4 business days --Regulation T of the Federal Reserve Board requires that customers pay for securities purchases "promptly" but no later than 2 business days past settlement date. Since regular way settlement is 2 business days after trade date, monies must be collected by the 4th business day. If payment is not received on the 4th business day, under extraordinary circumstances, a Reg. T extension may be requested from the exchange where the security trades. This extension gives another 2 business days for collection. If no payment is made, the unpaid position must be liquidated and the account "frozen" for 90 days. When the account is frozen, the customer must pay in advance for purchases.
Distributions from Roth IRAs are subject to a penalty if withdrawals are made within:
5 years of the original contribution --Contributions to Roth IRAs are not tax deductible. If the monies remain invested in the Roth IRA for at least 5 years, they can be withdrawn with no tax due (assuming that the beneficiary is at least age 59 1/2 when distributions commence).
Catch-up IRA contributions are permitted for individuals who are at least age:
50 -->For the year 2019, the maximum contribution for an individual into an IRA is $6,000. However, individuals age 50 or older can make an extra "catch up" contribution of $1,000, for a total permitted contribution of $7,000.
The Regulation T initial margin required to buy LEAP options with over 9 months to expiration is:
75% --The margin requirement to buy LEAP options with over 9 months to expiration is 75%. Once the LEAP has 9 months or less to expiration, the margin "bumps up" to 100%.
What is the first age at which distributions must commence from a 401(k) Plan?
April 1st of the year after reaching age 70 1/2 --Just like IRA accounts, RMDs (Required Minimum Distributions) from 401(k) accounts must start by April 1st of the year after the beneficiary reaches the age of 70 ½. If the RMD is not taken each year thereafter, a penalty tax of 50% (ouch!) is applied to the under-distributed amount.
Contributions to Keogh Plans must be made by:
August 15th tax filing date permitted under an automatic extension of the calendar year after which the contribution may be claimed on that person's tax return --Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
All of the following are provisions of Regulation T EXCEPT: A. initial margin requirement of 50% on stocks Correct Answer B. minimum maintenance margin requirement of $2,000 per account C. payment required promptly but no later than 4 business days after trade date D. retention requirement of 50% in restricted accounts
B --Minimum maintenance margins are set by FINRA. Regulation T of the Federal Reserve Board sets initial margins, defines the types of accounts (cash, margin, arbitrage) and rules for payment. It also sets the rules for accounts that are below initial margin (restricted accounts).
The Chairman of XYZ Corporation, while playing golf with a neighbor, casually mentions that this quarter's earnings are likely to be lower than expected. Based on this information, the neighbor sells short XYZ stock the next day. Which statement is TRUE?
Both the neighbor and the Chairman have violated insider trading rules --Under the Insider Trading Act of 1988, any person who uses material non-public information to trade in a company's stock for profit can be considered to be an "insider". In addition, the Act extends the definition of an insider to "controlling" persons - in this case, the provider of the information. A person who "communicates" material non-public information can be held liable under the Act unless "that person acted in good faith and did not directly or indirectly induce the act constituting the violation." Therefore, both the person trading on the inside information (the "tippee") and the communicator of the information (the "tipper") can be held liable under the Act.
Which position is profitable in a rising market?
Bull call spread --> A bull call spread is profitable in a rising market. A bear put spread is profitable in a falling market, as is a short naked call. A short straddle is profitable in a flat market.
Which statement is TRUE about the tax deductibility of 529 Plan contributions?
Contributions are generally deductible at the state level --529 Plan contributions are not deductible at the federal level. However, most states that have income taxes allow a deduction for contributions made to a plan established by that state (and a handful of states allow a tax deduction for contributions made to any state's 529 plan!). This is a tax benefit of making 529 Plan contributions.
A trust indenture is required for a(n):
Corporate debenture --The Trust Indenture Act of 1939 requires a trust indenture for all non-exempt bond offerings in excess of $50,000,000. Because Treasuries, Agencies, and Municipals are exempt securities, they are not required to have a trust indenture. Corporate bonds are non-exempt securities, so these must be issued with a trust indenture. Also, please note that most municipal revenue bonds have a trust indenture, not because it is legally required, but rather, because the market demands it.
A distribution from a Section 529 Plan would be taxable if the beneficiary:
Does not go to college --Payments from Section 529 plans made to colleges, universities, vocational schools, and any other accredited post secondary education institution are not taxable. Starting in 2018, up to $10,000 per year can be withdrawn to pay for education below the college level. In addition, refunds made because of death or disability of the beneficiary, or because the beneficiary received a scholarship, are not taxable. Distributions made for any other reason are taxable.
All of the following are primary purchasers of Treasury securities EXCEPT:
Federal reserve board --Commercial banks and broker-dealers bid at Treasury auctions to buy securities for their inventories. Investment companies such as government bond mutual funds and unit investment trusts bid at auction to buy large blocks of Treasury securities directly, bypassing a dealer or broker and therefore saving commissions or markups. The Federal Reserve Board is not a primary purchaser of Treasury securities - it does not bid at Treasury auctions. However, it does trade them in the secondary market to influence the availability of credit.
Which of the following are synonymous terms for the "parties" to a brokerage account?
First party / Broker -->The "First Party" to a brokerage account is the brokerage firm; the "Second Party" to a brokerage account is the customer; the "Third Party" to a brokerage account is anyone other than the broker or customer.
Which TWO choices would create a "spread"? I Long 1 ABC Jan 50 Call; Short 1 ABC Jan 60 Call II Long 1 ABC Jan 60 Put; Short 1 ABC Jan 50 Put III Long 1 ABC Jan 50 Call; Long 1 ABC Jan 60 Put IV Short 1 ABC Jan 60 Call; Short 1 ABC Jan 50 Put
I and II --A "spread" is the purchase and sale of either 2 calls or 2 puts with differing strike prices and/or differing expirations. Spreads are gain limiting and risk limiting positions.
Which of the following statements are TRUE about Keogh Plans? I Contributions are 100% deductible II Contributions are not deductible III Distributions are 100% taxable IV Distributions are partially taxed, with only the amount above what was contributed being taxed
I and III --Keogh contributions are tax deductible (up to $56,000 in 2019), so the original investment was made with "before tax" dollars. In addition, earnings on Keogh investments are tax deferred. Once distributions commence from the Keogh, they are 100% taxable at that individual's tax bracket.
A tender offer is announced for ABC common stock. Which of the following customer accounts can tender 100 shares of ABC on the offer? I Long 100 shares of ABC II Long 100 shares of ABC; Short 100 shares of ABC III Long 200 shares of ABC; Short 100 shares of ABC IV Long 100 shares of ABC; Short 200 shares of ABC
I and III --Under the "short tender rule," a person cannot tender borrowed shares. To tender stock, the person must be in a "net long" position in that security. Choice I is net long 100 shares and can tender; Choice II is net "0" and cannot tender; Choice III is net long 100 shares and can tender; Choice IV is net short 100 shares and cannot tender.
Portfolio margining: I uses standardized stress-testing of probable price declines or increases to compute margins II uses fixed percentages established by Regulation T to compute margins III is mainly used by hedge funds and institutional investors seeking to increase leverage IV is mainly used by smaller investors seeking to increase leverage
I and III I uses standardized stress-testing of probable price declines or increases to compute margins III is mainly used by hedge funds and institutional investors seeking to increase leverage --Portfolio margin is a "risk" based margin method that gives substantially lower margin requirements for lower risk positions. It recognizes that if positions are hedged, such as a stock position hedged by the purchase of a put, then the loss potential of the combined position is much lower, and a lower margin is applied. It also applies margin to unhedged positions based on the probable price movement of a given security in "stress" conditions of large overall market price movements. In essence, it will produce a lower margin for a low beta stock; and a higher margin for a high beta stock. Lower margin requirements mean that customers who use portfolio margin get greater leverage. Note that portfolio margin can only be used by institutional or wealthy sophisticated individual customers.
Which TWO of the following choices would create a bull price spread? I Long 1 ABC Jan 50 Call; Short 1 ABC Jan 60 Call II Long 1 ABC Jan 60 Put; Short 1 ABC Jan 50 Put III Long 1 ABC Jan 50 Call; Long 1 ABC Jan 60 Put IV Short 1 ABC Jan 60 Put; Long 1 ABC Jan 50 Put
I and IV --A "Bull Spread" is the purchase and sale of either 2 calls or 2 puts with different strike prices and/or different expirations. Since it is a bull spread, it must be profitable in a rising market. Long Call Spreads (buy the lower strike price, sell the higher strike price, resulting in a debit) and Short Put Spreads (sell the higher strike price, buy the lower strike price, resulting in a credit) are profitable in a rising market.
Which of the following statements are TRUE regarding the sale of a long position in a restricted long margin account? I 50% of the proceeds of the sale are credited to SMA II 100% of the proceeds of the sale are credited to SMA III There is a 0% retention requirement of the sale for a restricted account IV There is a 50% retention requirement of the sale for a restricted account
I and IV --If stock is sold out of a restricted account, 50% of the proceeds are credited to SMA and can be borrowed out. The other 50% must be retained in the account (the retention requirement).
Which of the following statements are TRUE regarding joint accounts? I Orders can be given by either party II All parties must enter orders together III Checks can be made out in the name of either party IV Checks can only be made out to all parties together
I and IV I Orders can be given by either party IV Checks can only be made out to all parties together -->Any party in a joint account can enter orders. However, any checks drawn on the account must be made out to all names on the account.
Which of the following statements are TRUE regarding new issue U.S. Government and Agency securities? I U.S. Government securities are sold at auction conducted by the Federal Reserve II U.S. Government securities are sold through a selling group III Agency securities are sold at auction conducted by the Federal Reserve IV Agency securities are sold through a selling group
I and IV U.S. Government securities are sold at auction conducted by the Federal Reserve Agency securities are sold through a selling group of BD's assembled by the agency
PHLX traded option contracts are available on which of the following currencies? I Euro II Canadian Dollar III Japanese Yen IV U.S. Dollar
I, II, III I Euro II Canadian Dollar III Japanese Yen -->The PHLX World Currency options are available on the 6 major foreign currencies - Euro, British Pound, Swiss Franc, Japanese Yen, Australian Dollar, and Canadian Dollar. Note that there is no trading of U.S. Dollar options in the U.S. markets because U.S. law prohibits speculation in its own currency.
Which of the following are acceptable methods for opening an investment adviser account? I Each client opens a cash account and gives a Third Party Trading Authorization to the investment adviser II Each client opens a margin account and gives a Third Party Trading Authorization to the investment adviser III The adviser opens an Omnibus cash account holding all of his clients' funds and securities IV The adviser opens an Omnibus margin account holding all of his clients' funds and securities
I,II,III,IV --the parties to an account are: First Party: Brokerage Firm Second Party: Customer Third Party: Someone Other Than the Broker or Customer An Investment Adviser can have each of his individual clients open an account at a brokerage firm, with the client giving the investment adviser Third Party power of attorney. The account is held in the name of the Second Party - that is, the customer. The other way for an investment adviser to open an account is on an Omnibus basis. In this situation, the Investment Adviser is the Second Party, opening a "group account." The names of the individual customers in the account are not known to the brokerage firm. From the brokerage firm's standpoint, the customer is the Adviser. Both types of accounts can be opened either as cash or margin accounts - there is no restriction on this.
If the market price of the underlying security remains the same as the strike price of the option contract, which of the following will have a profit? I The buyer of an "at the money" straddle II The seller of an "at the money" straddle III The seller of an "at the money" call
II and III --If the market price remains the same as the strike price, then there is no reason for the holder of an option contract to exercise. The contracts will expire and the holder will lose the premium, while the writer will gain the premium. Sellers of contracts and straddles (the sale of a call and a put on the same stock with the same strike price and expiration) will profit. Holders of contracts and straddles will lose the premiums paid.
Which of the following positions would "cover" the sale of 1 ABC Jan 30 Put? I Long 100 shares of ABC at $30 II Short 100 shares of ABC at $30 III Long 1 ABC Jan 40 Put IV Short 1 ABC Jan 40 Put
II and III II Short 100 shares of ABC at $30 III Long 1 ABC Jan 40 Put --A long stock position is not considered a "cover" for a short put since as the market goes down, the short put is exercised and the customer must buy another 100 shares of stock in addition to the shares already owned - so there is double downside risk. A short put is covered if the individual is short 100 shares of the security. As the market goes down, the short put is exercised and the customer is forced to buy back shares that have previously been sold "short." The credit from the short sale is used to buy the shares, so there is no loss to the put writer. The O.C.C. also accepts as "cover," a long put with the same strike price or higher (thus creating a long put spread), a bank guarantee letter (where the bank assumes responsibility for loss), or an escrow receipt for cash sufficient to pay for the stock should the short put be exercised.
Which statements are TRUE about meeting a Regulation T call for initial margin? I 50% of the call amount must be deposited in cash II 100% of the call amount must be deposited in cash III 100% of the call amount must be deposited in fully paid securities IV 200% of the call amount must be deposited in fully paid securities
II and IV --To meet a Regulation T call, either the entire call amount must be deposited in cash; or twice the call amount must be deposited in fully paid securities (which have a loan value of 50% of the market value that is used to meet the call).
A customer wishes to purchase $4,000 worth of marginable stock in an initial transaction in a margin account. Which of the following will satisfy the initial margin call? I Deposit of $2,000 of fully paid marginable securities II Deposit of $4,000 of fully paid marginable securities III Deposit of $4,000 of fully paid option contracts IV Deposit of $2,000 cash
II and IV --To meet an initial margin call for $2,000, a customer can deposit $2,000 of cash or $4,000 of fully paid marginable stocks (which have a loan value of $2,000). $4,000 of fully paid options are not acceptable since their loan value is zero. A $2,000 deposit of fully paid marginable securities is not enough, as the loan value is $1,000.
Which of the following statements are TRUE regarding Roth IRA? I Contributions are tax deductible II Contributions are not tax deductible III Distributions are taxable IV Distributions are not taxable
II and IV II Contributions are not tax deductible IV Distributions are not taxable -->Roth IRAs, unlike Traditional IRAs, do not permit a tax deduction for the amount contributed. On the other hand, when distributions are taken, unlike a Traditional IRA, the distributions are not taxable (given that the investment has been held for at least 5 years). The maximum contribution cannot be made to both a Traditional IRA and a Roth IRA in the same year. But the amount can be divided between the 2 types of accounts: one half of the amount contributed to a Traditional IRA, and the other half contributed to a Roth IRA for that tax year.
403(b) Plans are permitted to invest in which of the following? I Common stocks II Mutual Funds III Fixed Annuities IV Variable Annuities
II, III, IV --403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. Such plans allow for a tax deductible contribution of 25% of income (statutory rate), up to $19,000 for 2019. The plans allow for investment in tax deferred annuity contracts, that can be funded by mutual fund purchases, as well as by traditional fixed annuities. Direct investments in common stocks are not allowed; the investments must be managed by a professional manager.
Which of the following statements are TRUE statements about variable annuities? I Investors get an interest rate guarantee II The portfolio funding the separate account is professionally managed III The portfolio is invested in other management company shares IV Dividends and capital gains must be reinvested until annuitization occurs
II, III, IV --Variable annuity holders do not get an interest rate guarantee. The amount of any annuity depends on the performance of the separate account. Only fixed annuities give an interest rate guarantee. Variable annuity separate accounts are professionally managed; distributions must be reinvested; and the portfolio is invested in the shares of other management companies.
To opine on a new issue of Turnpike Revenue bonds, the bond counsel will evaluate which of the following documents? I Feasibility Study II Enabling Legislation III Internal Revenue Regulations IV Relevant Judicial Decisions
II, III, IV II Enabling Legislation III Internal Revenue Regulations IV Relevant Judicial Decisions --The bond counsel examines new municipal issues to render an opinion on the validity, legality, and tax exempt status of the issue. To make its determination, the counsel will examine the "enabling legislation" - that is, the statutes that allow the issuer to sell debt and any restrictions placed by these statutes on the issuer. The counsel also examines the Internal Revenue Code and Revenue Rulings that interpret the Code, to determine the true tax status of the issue. The counsel will also examine relevant court cases that pertain to both the legality and tax status of the issue. The Bond Counsel will not examine the Feasibility Study. This is an economic forecast for the project, comparing projected revenues against projected costs. Bond attorneys make legal evaluations, not economic evaluations.
Under FINRA rules, a written power of attorney is NOT required for a registered representative to choose which of the following order related items? I Security to be traded II Size of the order III Price of execution IV Time of execution
III and IV III Price of execution IV Time of execution
Which of the following statements are TRUE regarding indications of interest received during the "cooling off" period for a registered initial public offering? I The indication is binding on the customer II The indication is binding on the underwriter III The indication may be changed or canceled by the customer IV The indication may be changed or canceled by the underwriter
III and IV --An indication of interest is taken during the 20 day cooling off period before a new issue's registration is effective. The issue may never "go effective" and the indication can be canceled by the underwriter. Thus, the underwriter can cancel or change the indication. Similarly, the customer can also cancel or change his indication. These are not binding because the issue cannot be legally "offered or sold" until the effective date.
A customer purchases an equity option contract at 1:00 PM Eastern Standard Time on Tuesday, October 10th in a cash trade. If the customer wishes to exercise, the customer may place an exercise notice with the Options Clearing Corporation:
Immediately -->An exercise notice may be placed by a customer immediately upon the purchase of a call or put contract. The Options Clearing Corporation does not assign the exercise until the transaction settles, which is the same day for a cash trade. Once the assignment occurs, the stock must be delivered to the holder of the call; or the stock must be delivered to the writer of the put; 2 business days after assignment.
The ultimate authority for determining the amount of the discount that must be accreted on a "market discount" bond is the:
Internal Revenue Service (IRS) --The final determination of the amount of discount that must be accreted on an original issue discount bond is made by the Internal Revenue Service. While one might think it, the municipality is NOT the one.
Which of the following is acceptable as a custodian for a minor on an account?
John Smith as Custodian for............ --Only an individual can be a custodian. Joint custodians are not permitted, nor are partnerships or corporations allowed to be custodians.
A customer who is long 1 ABC Jan 50 Call wishes to create a "long straddle." The second option position that the customer must take is?
Long 1 ABC Jan 50 Put -->A long straddle consists of a long call and a long put on the same stock, with both contracts having the same strike price and expiration. With a long straddle, the customer is hoping that the market moves either up or down; he loses if the market stays the same. If the market rises, the customer gains on the call and the put expires. If the market falls, the customer gains on the put and the call expires. If the market stays the same, both contracts expire "at the money" and the customer loses both premiums paid.
What position can an investor take to hedge a short stock position?
Long call --When one has a short stock position, borrowed shares have been sold with the agreement that the customer will buy back the position at a later date. If the market rises, the loss potential is unlimited. The purchase of a call allows the stock to be bought in at a fixed price, limiting upside risk.
Shares are purchased in a custodian account, and are later sold at a profit. Tax liability rests with the:
Minor --Tax liability in a custodian account is the responsibility of the minor - it is the minor's social security number that is on the account. Thus, all income is reported to the IRS on the minor's number. Tax is due on income reported each year - there is no waiting until the minor reaches adult age (the IRS wants its money now!)
In the weekly auction of Treasury Bills, which orders are always filled?
Non-Competitive bid -->In the weekly T-Bill auction, the amount of non-competitive bids is set aside from the total securities to be auctioned and is filled at the average winning rate. The remaining T-Bills to be auctioned are filled from the lowest interest rate bid on up. Once the issue is "sold out," all of the winning bidders are filled at the highest interest rate bid that completed the sale (so all winning bidders get the same interest rate - this is a "Dutch Auction"). Once the issue is "sold out," the remaining higher rate bids are void.
All of the following are types of accounts in which securities transactions can be effected under Regulation T EXCEPT:
Non-securities credit account --Regulation T defines 3 types of accounts in which securities transactions can occur - a cash account where full payment is required; a margin account where partial payment is required; and an arbitrage account for going "short against the box." A non-securities credit account is an account to do futures transactions (which are NOT securities). These do not fall under Regulation T because they do not hold securities.
Which statement is TRUE about entering trades into a custodian account?
Only the custodian can enter trades --Anyone can donate into such an account.
An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Home Loan Bank bonds with a 20 year maturity. An investor who purchases the new issue of Federal Home Loan Bank bonds can expect to pay:
Par --New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public. Out of the proceeds, a selling concession is paid to the selling group by the agency. In contrast, direct U.S. Government obligations are sold through auction.
Based off of the offering below, it is a: New Issue Dated: 3/1/15 This is neither an offer to sell nor a solicitation to purchase the securities. The securities may lawfully be offered only through Prospectus. $35,000,000 Mega-tronics Company Subordinated Convertible Debentures 4 3/4 % Certificates Non-Callable To mature on 3/1/35 $ 25,000,000 Offered In The United States $ 10,000,000 Offered Outside The United States These certificates are offered, subject to prior sale, when, as, and if issued and received by us. Preston, Tucker, Inc.
Primary distribution --For companies in which there is worldwide interest, it is common for underwriters to sell the issue in both the U.S. market and foreign markets. Since this is the first issue of these securities, this is a primary distribution. Secondary distributions are "managed offerings" of shares that are already issued and outstanding - such as the offer through underwriters of a large block of shares held by a founding stockholder. This cannot be a private placement, since the offering has been registered and is being sold under a prospectus.
A customer buys 100 shares of ABC stock at $50 and sells 2 ABC Jan 50 Calls @ $5. This is a:
Ratio call write --If a customer who is long stock sells call contracts against the stock position, then as long as the contract amount does not exceed the long stock position, the call writer is "covered." This means that if the short call is exercised, the customer already has the stock for delivery. Hence the customer is covered against the risk of having to go to the market to buy the stock at a sky high price to make delivery. If a customer sells more call contracts than the stock position owned, this is a "ratio" call write. In this example, the customer is selling calls against the stock position at a 2:1 ratio.
All of the following are exempt issues under the Securities Act of 1933 EXCEPT: A. U.S. Government Bonds B. Savings and Loan Issues C. Real Estate Investment Trusts D. Municipal Revenue Bonds
Real estate investment trusts (REIT's) --Real Estate Investment Trusts are regulated similarly to Investment Companies, and their securities are non-exempt and must be registered under the Securities Act of 1933. U.S. Government issues, savings and loan issues, and municipal issues are exempt.
Selling a put against a stock position sold short is a suitable strategy when the market is expected to:
Remain stable --Selling stock short alone is a bearish position. Selling a put alone is neutral or bullish strategy. Selling a put against a short stock position is a neutral strategy (as is any income strategy). If the stock is sold short and a put is sold with the same strike price, then if the market stays the same, the put expires "at the money" and the premium collected is retained. If the stock falls, the short put is exercised, obligating the customer to buy the stock at the same price at which it was sold. In this case, only the premium is earned. If the put had not been sold, then the customer would have had an increasing gain on the short stock position as the market fell - so he does not make as much in a falling market. On the other hand, if the market rises, the short put expires "out the money" and the customer is exposed to unlimited upside risk on the short stock position that remains.
A customer owns ABC stock, purchased at $50 per share, and believes that the market can decline to $45 per share. The customer wishes to generate extra income from the stock position, but also wishes to protect the position from a large downside movement. The customer should:
Sell an ABC 50 Call and buy an ABC 45 Put --This customer has a stock position from which he wishes to generate income - therefore the sale of a covered call is appropriate. In addition, he wishes to protect against the possibility of a sharp downward price movement giving him a loss on the stock. For this, the purchase of a put option is appropriate, allowing the customer to "put" the stock if the market price should decline sharply. The customer has placed a "collar" on the stock position.
Under IRS rules, if a customer selling shares of stock wishes to use specific identification instead of FIFO for cost basis reporting, the broker-dealer effecting the trade must be notified of this no later than:
Settlement date --If a customer says nothing at the time of a stock sale, IRS rules requires that FIFO be used to determine which shares are sold. If the customer wishes to use specific identification instead, this must be chosen by the customer no later than settlement date.
The setting of specific goals for an investment plan to be created for a customer is known as:
Strategic asset management --Strategic asset management is the setting of the investment "strategy" under an asset allocation scheme. Tactical asset management is the permitted variation to the established strategy, to take advantage of market opportunities. Dollar cost averaging is the periodic (say monthly) investment of a fixed dollar amount into a given security. By using dollar cost averaging, the average cost per share purchased can be lower than the arithmetical average cost of the security over the same time frame - as long as the security's price has been moving up and down (as the security's price drops, the fixed periodic dollar amount buys proportionately more shares than when the security's price rises). Portfolio rebalancing is used in an asset allocation scheme when a chosen asset class outperforms the others, so that its percentage allocation increases beyond the strategic limit. The excess in that class is sold off and the proceeds reinvested in the other asset classes to rebalance the portfolio back to its strategically set percentages.
In a municipal securities underwriting, the agreement among underwriters is signed by the:
Syndicate members --The agreement among underwriters is also known as the syndicate agreement. It establishes the syndicate account as either an Eastern or Western account and sets the terms for the running of the syndicate. It is signed by each syndicate member.
If an individual, aged 69, takes a withdrawal from his IRA, which statement is TRUE?
The amount withdrawn is subject to regular income tax only --Before age 59 1/2, distributions from an IRA are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.
A father gives a $22,000 gift of securities to his son; and a $22,000 gift of securities to his daughter. Which statement is TRUE?
The father has gift tax liability on both gifts --The first $15,000 of a gift per person in 2019 (other than to a spouse) is excluded from tax. Any amount above this is subject to gift tax, to be paid by the donor. Since the gift to both the son and the daughter was valued at $22,000 each, the amount above the gift limit exclusion is subject to gift tax, paid by the donor (the father).
A customer has a long OEX call contract position in his account and wishes to exercise the option. Which statement is TRUE?
The holder will receive an amount of cash that is equal to the intrinsic value times the contract multiplier -- If an index option is exercised, the writer must pay the holder the "in the money" amount. There is no physical delivery of the securities that are in the index.
A mother, aged 60, wishes to withdraw monies from her variable annuity to pay for her son's college education. Which statement is TRUE regarding the taxation of the withdrawal?
The withdrawal is partially taxable; and a partial tax free return of invested capital --Since this person is above age 59 1/2, any withdrawals from the retirement plan are not subject to the 10% penalty tax for a premature distribution. Since the contribution amount into the variable annuity contract was not tax deductible, this portion of the investment is returned without any tax consequence. Any earnings above this amount are taxed at the customer's bracket.
An officer of a listed company calls his registered representative and tells him to sell the maximum amount of that company's common shares in accordance with Rule 144. Prior to placing the order to sell, the registered representative calls five of his customers and tells them to sell that company's stock. Which statement is TRUE?
This action violates the insider trading provisions of the Securities Exchange Act of 1934 --When the registered representative received the sell order from the officer, he is obligated to execute that order before acting on the information he has received. Once the order is executed, the Form 144 has been filed (it must be filed either at or prior to execution of the order) and the order is public information. At this point, he can trade for himself or his customers, and he is no longer considered to be an "insider." In effect, the registered representative is "front running" the officer by telling his other customers to sell before placing the officer's sell order. This is a violation of the Securities Exchange Act Rule 10b-5. This is not a violation of the Securities Act of 1933, which solely covers the registration and sale of new issues.
Which of the following annuity payment options will pay the estate of the annuitant if the full value of the account was not received?
Unit refund annuity --If the holder of a unit refund annuity dies before receiving the full investment value from the separate account, his or her estate gets a "refund" of the remaining value.
Any changes in value of a variable annuity accumulation unit are directly related to changes in the:
Value of the securities funding the separate account --Since the separate account of investments funds a variable annuity, accumulation unit values are directly influenced by changes in the values of the securities in the separate account.
The Federal Reserve conducts Treasury Bill auctions:
Weekly -->The Federal Reserve conducts weekly auctions for 4, 13, and 26 week T-Bills and monthly auctions for 52 week T-Bills. The auction takes place on either Monday or Tuesday. The T-Bills are issued to the winning bidders and must be paid for on the Thursday immediately following the auction date.
If the actual interest rate earned in the separate account underlying a variable annuity contract is lower than the "AIR," the annuity payment:
Will decrease --The "AIR" is the "Assumed Interest Rate." This is used as an illustration of the annuity payment that will be received if the separate account grows at the AIR. If the assets grow at an interest rate that is higher than the AIR, then the annuity payment will increase. Conversely, if the assets grow at an interest rate that is lower than the AIR, then the annuity payment will decrease.
Under FINRA rules, if a member suspects that a senior citizen is being financially exploited:
a freeze can be placed for up to 15 business days on suspicious disbursements from the account, but not on other non-suspicious disbursements --FINRA permits member firms to place a temporary hold on disbursements from customer accounts if the firm suspects that the account owner is being financially exploited. The initial hold can be for up to 15 business days. In addition, if the member's review of the situation supports this, the member can extend the hold for another 10 business days. Also note that the temporary hold only applies to disbursements that are suspicious and not to other disbursements from the account.
The Placement Ratio has been steadily increasing over the last 30 days. This is an indication that: municipal
dealers have a decreasing inventory position --The Placement Ratio measures how well the market is absorbing the output of new bonds. A high Placement Ratio means that most of the new bonds are "being placed" or resold. A low ratio means that the market is not absorbing the bonds, therefore they are sitting on dealers' shelves.
A broker-dealer executes a large purchase transaction for an institutional customer. The institution directs that the securities be shipped to its custodian bank, who is authorized to pay on settlement. This is known as a:
delivery versus payment transaction --Regulation T does not cover "delivery versus payment" transactions. These are specified by mutual funds when they purchase securities. The fund specifies that the securities be delivered to the fund's custodian bank, which is authorized to pay upon delivery. FINRA requires that the funds to pay be on deposit at the custodian bank "promptly" (the same as the wording of Regulation T) and also requires that the transaction be settled no later than 35 days from trade date.
If a distribution from a Coverdell Education Savings Account in a given year exceeds the beneficiary's qualified education expenses in that year, the:
excess distribution is taxable and a 10% penalty is imposed -->Since contributions to Coverdell Education Savings Account are not deductible, normally, distributions from a Coverdell Education Savings Account to pay for qualified education expenses are not taxable. However, if distributions are taken in a given year in excess of the qualified education expenses incurred in that year, then the excess portion is taxable - with the taxable amount being the portion of the distribution that represents the "build-up" in the account above the original contribution amount. This "build-up" was never taxed. In addition, a 10% penalty tax applies as well. The moral of this tale is, use the money in the account to pay for qualified education expenses only; and use it all up for this purpose!
A tombstone announcement shows a corporate offering of $10,000,000 of common stock at $1 par. The price per share is $50. The tombstone shows the:
gross proceeds to the issuer --A tombstone announcement shows the gross proceeds of a new issue offering. It does not show the net amount received by the issuer (that is, the gross proceeds reduced by the underwriter's spread). It does not show the syndicate member participations, though it does show syndicate member names. It does not indicate whether the syndicate account is Eastern or Western. These items are found in the syndicate agreement.
The customer profile for Jack E. Chan is presented below: Age: 60 Marital Status: Married - Spouse is age 55 Dependents: 2 Children - Ages 21 and 23, both graduated from college, still living at home Annual Income: $75,000 per year Investment Objective: Safety of Principal and Retirement Income Risk Tolerance: Low Investment Experience: New Client - No Pre-existing Brokerage Accounts Net Spendable Income Available For Investment: $10,000 Federal Tax Bracket: 28% State Tax Bracket: 5% Client Balance Sheet: Assets Cash on Hand: $60,000 Marketable Securities: 0 Auto: $24,000 Residence Owned: $250,000 Liabilities Bills Payable: $10,000 Auto Loan Payable: $14,000 1st Mortgage: (6% interest rate 5 years left - monthly payment of $900) $52,000 Equity: $258,000 The customer is covered by a company defined benefit plan that will pay about $40,000 per year upon retirement at age 70. This customer wishes to maintain his current living standard upon retirement and intends on living in his current house. The customer will receive annual social security payments of about $8,000 per year. To meet the customer's goal of retiring in 10 years with an annual income of $72,000 per year, the best recommendation is to:
invest $10,000 per year for the next 5 years in Treasury Bonds and increase the annual investment in years 6-10 by another $10,800 per year since there are no more mortgage payments to be made --This customer is 10 years from retirement, so making risky investments in emerging markets stocks or in income bonds that only pay if the issuer has enough earnings (otherwise no interest payments are made) are completely inappropriate. Taking out a loan at 8% to invest in a security yielding 5% is a fast way to lose money - so Choice A is bad as well. Choice D is clearly the best - investing in nice safe Treasury bonds will give the customer an assured stream of income to supplement the customer's pension and Social Security payments that will be received at retirement.
The formula for equity in a combined margin account is:
long market value - short market value + credit balance - debit balance
If a customer's account is frozen:
purchases require cash in advance for 90 days --When an account is "frozen," for a 90 day period, the customer must pay cash in advance to buy. If the customer wishes to sell, the security must be delivered to the broker before the sell order is entered.
A variable annuity prospectus includes an AIR illustration using a 5% rate. This means that the:
return could be less than 5% -->The AIR in a variable annuity prospectus is the "Assumed Interest Rate." It is a conservative illustration of how much the contract holder will receive in payments if the separate account grows at the AIR. If the account grows faster than the AIR, the payments increase. If the account grows slower than the AIR, the payments will decrease.
A customer who purchases a "call spread" believes that the market will:
rise --A purchase of a "call spread" is similar to simply buying a call. The difference is that a long call gives unlimited upside gain potential; a long call spread gives limited upside gain potential (for a lower premium paid).
When a customer buys a new stock issue from a syndicate member, the customer pays:
the Public Offering Price --New stock issues are sold under a prospectus that states the Public Offering Price, which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.
If a corporation has an unfunded pension liability, this means that:
the expected future value of fund assets is less than projected benefit claims --An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded, but the plan trustee is responsible to ensure that future funding is adequate as needed.
Index options contracts expire on the:
third Friday of the month at 11:59 PM Eastern Standard Time
Under FINRA rules, an alteration to an order ticket for an order submitted to the NYSE trading floor is prohibited:
unless the alteration is approved in writing by Branch Office Manager -->Under FINRA rules, alterations to order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.
