Series 7 Final BANG
A client purchased 500 shares of JSSP common stock at $28 a share in July of 202X. The following June, the client wrote 2 October 35 calls at 5 each against the stock position. If the market price of JSSP was $39 at expiration, what was the client's realized gain? A) $4,300 B) $2,400 C) $1,700 D) $1,000
$2,400 Investors have a gain or loss only upon the sale of an asset. In this case, the only shares involved are the 200 shares covering the two short call options. The investor paid $5,600 ($28 times 200 shares). With the stock selling at 39 at expiration date of those two calls, they will be exercised because they are 4 points in-the-money. That means the investor will receive $7,000 ($35 times 200). The investor adds to that the $1,000 premium ($500 times 2) when the calls were written. The total credit to the account is $8,000. That is $2,400 more than the $5,600 the investor paid for those 200 shares. See the T-chart below. Bear in mind that although the customer was long 500 shares of JSSP stock, only two (covered) calls were written. When the market price reached 39 at expiration, the two calls were in-the-money and were exercised; however, the customer was not obligated to sell the remaining 300 shares of stock and there was no indication in the question that the customer liquidated the entire position.
A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) $8.57 B) $8.42 C) $7.80 D) $8.30
$8.30 The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. In this case, the NAV is $7.80 and we are told the sales load is $0.50. Adding the two numbers together equals the public offering price of $8.30. The underwriter's concession of $0.12 is part of the $0.50 as is the $0.15 administrative fee.
If LMN, Inc., has filed for bankruptcy, in what order would interested parties be paid? Holders of secured debt Holders of subordinated debentures General creditors Preferred stockholders
) I, III, II, IV.
If a customer has a margin account with a long market value of $140,000 and a debit balance of $60,000, what is the buying power in the account? A) $5,000 B) $0 C) $20,000 D) $10,000
20000 With Regulation T at 50% (always assumed), the buying power of a margin account is twice the amount of the SMA. With a long market value of $140,000 and a debit balance of $60,000, this account has equity of $80,000. The Regulation T requirement is $70,000 (50% times $140,000). Therefore, there is excess equity (or SMA) of $10,000. The purchasing power is double that ($20,000).
Which of the following regarding a municipal bond broker's broker are true? Protects customer identity Must disclose the identity of customers Has no inventory Maintains an inventory A) I and III B) II and IV C) I and IV D) II and III
A) I and III Municipal brokers' brokers generally purchase and sell securities on an anonymous basis for institutional clients. They are not in the business of making a market; therefore, they maintain no inventory.
Badentown is planning to raise money in three months to build a new city hall. The mayor wishes to start ground preparation immediately. How could money be raised to fund the work? A) Bond anticipation note (BAN) B) Limited tax bond C) Construction loan note D) Special assessment bond
Bond anticipation note (BAN)
Decline in US Dollar
Buy foreign call
A new client, age 26, has a $15,000 inheritance to invest and notes that it is for long-term savings. He tells you that it won't be needed for many years and wants to simply see it grow over time. Given his age and the small amount to invest, you recommend a balanced fund. Which share class would be most suitable? A) Class A shares B) Class C shares C) Class B shares D) Class A or C shares
Class B shares are generally most suitable for smaller investments made with a longer investment time horizon such as this one. These shares have a back-end load (sales charge) known as a contingent deferred sales charge (CDSC) only payable when the shares are redeemed. Those sales charges typically decline over the first six to eight years, and they eventually disappear completely.
Which of the following types of retirement plans would be most beneficial to a young employee of a corporation?
Defined contribution pension plan
A quote of 2.20 bid 2.18 offered would most likely be a quote on A) a T-bill. B) a general obligation bond. C) a Ginnie Mae bond. D) a T-bond.
Discounted instruments (such as T-bills) are quoted on a discount yield basis. Even though the number representing the bid is higher than the ask, it would be lower when converted into dollars. The greater the yield, the lower the price. LO 6.a
A resident of Minnesota is in the 28% federal tax bracket and the 4% state tax bracket. This person must pay both federal and state taxes on A) Minneapolis Housing Authority bonds. B) federal home loan bank notes. C) Federal National Mortgage Association (FNMA) pass-throughs. D) Treasury bills.
Federal National Mortgage Association (FNMA) pass-throughs. The interest income from most U.S. government and agency securities is exempt from state and local—but not federal—taxes. Mortgage-backed securities (such as FNMA and GNMA obligations) are subject to federal, state, and local taxes. The interest on municipal issues (like the Minneapolis Housing Authority bonds) is exempt from federal taxes and, because this investor is a Minnesota resident, state taxes as well.
A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has a net asset value (NAV) of $12 and a public offering price (POP) of $12.50, and that the ABC Fund has an NAV of $11.50 and a POP of $10.98. The customer should conclude that A) both are open-end funds. B) ABC is an open-end fund and GEM is a closed-end fund. C) GEM may be an open- or closed-end fund, and ABC is a closed-end fund. D) ABC and GEM are both unit investment trusts.
GEM may be an open- or closed-end fund, and ABC is a closed-end fund.
In a new municipal bond offering, which of the following orders is placed after the bid is awarded and credits the entire syndicate with the takedown? A) Group B) Member C) Designated D) Presale
Group A presale order is entered before the bid is awarded. If the syndicate wins the bid, the takedown is credited to all syndicate members. A group order is entered after the bid is awarded and the takedown is credited to all syndicate members. A designated order, entered after the bid is awarded, credits some, but not all, syndicate members with the takedown. A member order, entered after the bid is awarded, credits only the syndicate member entering the order with the takedown.
An investor in a limited partnership generating passive losses can offset these against passive income from other partnerships. rental income from direct investments in real estate. dividends received from listed securities. capital gains from the sale of unlisted securities
I and II Passive losses can be deducted from passive income and income from certain real estate investments; it cannot be deducted from active or portfolio (investment) income.
In a bull call spread, an investor buys the lower exercise price and sells the higher exercise price. buys the higher exercise price and sells the lower exercise price. anticipates the spread will narrow. anticipates the spread will widen. A) II and IV B) I and IV C) I and III D) II and III
I and IV In a bull call spread (debit spread), a call with a lower strike price is purchased and a call with a higher strike price is sold. Because the long call has a lower strike price than the short call, it is more expensive, resulting in a net debit. In a bull call spread, the investor hopes the market prices rise. Maximum profit occurs if both calls are exercised, and because this is a debit spread, the spread is profitable if it widens.
An immediate-or-cancel order (IOC) must be executed in its entirety. may be executed in part or in full. must be executed in one attempt. may be executed after several attempts.
II and III
Which of the following are exempt from the registration provisions of the Securities Act of 1933? Variable contracts issued by life insurance companies Bonds issued by the State of Alaska Shares of mutual funds registered under the Investment Company Act of 1940 Commercial paper maturing in 90 days A) I and III B) I and IV C) II and IV D) II and III
II and IV Municipal bonds are always exempt from registration under federal law, as is commercial paper with a maturity of 270 days or less. It is state law that adds the $50,000 minimum denominations and top three rating categories to the exemption requirements. Variable contracts issued by insurance companies (i.e., variable annuities and variable life) are not exempt from registration with the SEC. Mutual fund shares must comply with the registration requirements of the Securities Act of 1933 (they are a continuous new issue). They also register as open-end management investment companies in accordance with the Investment Company Act of 1940.
SEC regulations for securities issued by investment companies prohibit which of the following? Closed-end funds from issuing preferred stock Open-end funds from issuing preferred stock Closed-end funds from issuing bonds Open-end funds from issuing bonds
II and IV Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock. They may not issue senior securities.
There are several conditions found in the Securities Act of 1933 permitting the offering of control stock to the public without filing a Form 144. Included in that list are the dollar amount is $1 million or less. 100,000 shares or fewer are sold. 5,000 shares or fewer are sold. the dollar amount is $50,000 or less. A) I and III B) I and II C) II and IV D) III and IV
III and IV Under Rule 144, when shares are sold by an affiliate (control), Form 144 need not be filed if 5,000 or fewer shares are sold or the dollar amount is $50,000 or less. Meeting either of these conditions is considered the de minimis exception. This de minimis rule applies to sales in any 90-day period.
In an annuity with a life income option, A) the money remaining in the account reverts to the beneficiary's estate. B) when the annuitant dies, there are continuing payments to a beneficiary. C) the insurance company will pay the annuitant for life. D) all of these.
If an annuitant selects the life income option, the insurance company will pay the annuitant for life. When the annuitant dies, there are no continuing payments to a beneficiary. Money remaining in the account reverts to the insurer.
In a margin account, the broker-dealer lends money to the customer to assist in the purchase of a marginable security. Instead of delivering the security to the purchaser, the broker-dealer holds it as collateral for the loan. The form signed by the customer agreeing to this is A) the stock pledge agreement. B) the hypothecation agreement. C) the credit agreement. D) the loan consent agreement.
In a margin account, the broker-dealer lends money to the customer to assist in the purchase of a marginable security. Instead of delivering the security to the purchaser, the broker-dealer holds it as collateral for the loan. The form signed by the customer agreeing to this is A) the stock pledge agreement. B) the hypothecation agreement. C) the credit agreement. D) the loan consent agreement. Explanation There are three special margin account agreement forms. The hypothecation agreement is the one in which the customer agrees to allow the broker-dealer to keep the securities purchased as collateral for the margin loan. The credit agreement contains the terms of the loan, such as interest to be charged, and the loan consent agreement is an optional form agreeing to let the broker-dealer lend out those securities.
Mutual fund
Lower net asset value reduction in proceeds payable
In the underwriting of a municipal bond, which of the following is determined by the issuer rather than the underwriter? A) Net interest cost B) Yield to maturity C) Maturity D) Underwriting spread
Maturity The maturity is determined by the issuer and stated in the official notice of sale before bids are received.
TRF deals with
NASDAQ & NYSE
The breakdown of a board for a management investment company must meet which of the following criteria? No more than 60% of the directors may be interested persons. No more than 40% may be non-interested persons. Fewer than 40% of the directors must be non-interested persons. No less than 60% of the directors may be interested persons.
No more than 60% of the directors may be interested persons. Another way of stating that no more than 60% of the directors may be interested persons is to say that at least 40% must be non-interested (that is, outside directors). Non-interested persons are individuals who have no connection to the fund other than a position on the board (and maybe owning some shares of the fund as would any investor).
One of your customers takes a short position in 300 shares of LOP common stock. The sale price is $70 per share. One month later, with the stock selling at $73 per share, the investor purchases 3 LOP Sep 75 calls at a premium of 3.25. What is the investor's breakeven point? A) $71.75 per share B) $60.25 per share C) $66.75 per share D) $69.75 per share
One of your customers takes a short position in 300 shares of LOP common stock. The sale price is $70 per share. One month later, with the stock selling at $73 per share, the investor purchases 3 LOP Sep 75 calls at a premium of 3.25. What is the investor's breakeven point? A) $71.75 per share B) $60.25 per share C) $66.75 per share D) $69.75 per share Explanation The customer is looking for the price of the stock to decline. The proceeds from the sale were $70 per share and the cost of the "insurance" (the call option) was 3.25. That means that the customer will not start making money until the stock falls below proceeds minus the cost or 66.75. The current market price of the stock and the strike price of the option are irrelevant. Breakeven on short stock and a long call position is the proceeds minus the premium. When computing breakeven, the number of shares and number of option contracts is meaningless: breakeven is the same price for one or one thousand.
One of your customers has become nervous about current stock market conditions and calls to discuss the matter with you. Which of the following would not meet Regulation BI's definition of a recommendation? A) This is not the time to sell. Hold what you have. B) Liquidate some of the losers for the tax benefit. C) You need to reallocate some of the equity portion of the portfolio to cash. D) Our top analysts tell us that the market is about to strengthen.
Our top analysts tell us that the market is about to strengthen. Nothing in the statement about the analysts is telling the customer the steps to take. Regulation BI uses the phrase "a call to action" to describe the essence of a recommendation and there is no "call" in that statement. The firm or associated person must use language explicitly suggesting that the customer follow a certain behavior for it to be a recommendation. Regardless of the reason, telling a customer to sell specifically identified stock is a recommendation. Reallocating a portfolio means selling some assets and buying others. Although we tend to think of recommendations as a buy or a sell, Regulation BI points out that an explicit recommendation to hold a security (or securities) is a recommendation.
Depletion allowances apply to all of the following except A) copper mining. B) oil and gas. C) real estate. D) timber.
Real estate Depletion is applicable to natural resources such as mining or timber. It is not applicable to real estate. However, buildings can be depreciated.
If a limited partner in a real estate direct participation program becomes involved in the management of the office building acquired by the partnership, which of the following is true? A) That limited partner's limited liability is jeopardized. B) This is allowed, but only with a majority vote of the other limited partners and written approval of the sponsor. C) The limited partner's participation is disallowed and the program continues as before, but the remaining partners are required to prorate the remaining unit. D) There are no adverse consequences if, in performing management functions, the limited partner's expertise benefits the program.
That limited partner's limited liability is jeopardized. While the limited partners usually have limited liability, that benefit can be lost if a limited partner engages in certain activities, including the day-to-day management of the property, representing himself as a general partner, and financial control of the partnership.
An investor purchased a corporate zero-coupon bond on the offering at a price of 51. The bond matures in 17 years and has a yield to maturity of 4.04%. Seven years later, the bond is sold at a price of 73 ¾. What are the tax consequences of the sale? A) Loss of $262.50 B) Gain of 227.50 C) Gain of $25.76 D) No gain or loss until maturity
The amount of the discount is $490 ($1,000 − $510). This must be accreted over the 17 years until maturity. The annual accretion is $28.82 ($490 ÷ 17 years). After seven years, there is $201.74 of accretion (7 × $28.82). Because the annual accretion is added to the investor's cost basis, the basis is now $711.74 ($510 + $201.74). The bond's sale price of $737.50 is $25.76 above the accreted basis, meaning a gain of $25.76. The yield to maturity has nothing to do with the question.
One of your clients has a margin account with the following balances: long market value $50,000, debit balance $24,000, short market value $40,000, and credit balance $65,000. The combined equity in the account is A) $51,000. B) $66,000. C) $1,000. D) $75,000.
The combined equity in a mixed margin account (long and short positions) is determined by adding the market value of the long positions to the credit balance of the short positions and then subtracting the debit balance and the market value of the short position. The math is $50,000 plus $65,000 = $115,000 minus ($24,000 + $40,000) = $115,000 - $64,000 = $51,000 equity.
A husband and wife wish to open a Roth IRA in 2024. She is 48 years old and earns $99,000 per year; he is 52 and earns $49,000 per year. What is the maximum permitted contribution for the married couple based on age and income for that year? A) Husband $7,000 and wife $0 B) Husband $8,000 and wife $7,000 C) Husband $6,000 and wife $6,000 D) Husband $6,000 and wife $0
The husband may contribute $8,000, and the wife may contribute $7,000.
A customer of a broker-dealer is long 1 MMS July 60 call and short 1 MMS July 70 call. Which of the following is true? A) The position has a limited gain and loss potential. B) The position has an unlimited gain potential. C) The position has an unlimited loss potential and a limited gain potential. D) The position has an unlimited loss potential.
The position has a limited gain and loss potential. This is a spread position. All spreads (debit or credit), whether put or call spreads, have a limited gain and loss potential.
A customer buys 100 shares of ABC at 56.50 and writes 1 ABC Aug 60 call at 2. If the call is exercised, the consequences are a cost basis of $56.50 per share. a cost basis of $58.50 per share. sales proceeds of $60 per share. sales proceeds of $62 per share. A) I and III B) II and III C) I and IV D) II and IV
The premium of the option affects the basis of the stock (bought or sold) as a result of exercise, adding the premium per share ($2) to the price per share ($60), for total sales proceeds of $62. The original cost basis is not affected by the exercise, so it remains $56.50.
Better Bond Sales (BBS) is participating in a firm underwriting of some GO municipal bonds. Their role is that of a syndicate member with a 10% commitment. Should BBS sell some of the bonds, its earnings would be A) the total takedown. B) the spread. C) the takedown. D) the selling concession.
The total takedown Explanation The syndicate manager is the only participant who earns the spread when it makes the sale. Syndicate members earn the total takedown (all the spread other than the manager's fee) when they sell the bonds. That includes the takedown plus the additional takedown. The selling group members earn the selling concession.
Under SEC Rule 17a-4, all of the following records must be retained for 6 years except A) blotters. B) the stock record. C) trial balances. D) the general ledger.
Trial balances Trial balances are a 3-year record. Six-year records include blotters, the general ledger, the stock record, customer statements, and customer account information. LO 18.c
You are analyzing a company's financial statements, including the balance sheet. You are specifically focusing on the company's liquidity, using the formula current assets minus current liabilities. What liquidity calculation are you using? A) Current ratio B) Working capital C) Quick asset ratio D) Acid-test ratio
Working capital You are calculating working capital (current assets − current liabilities). There are three liquidity calculations using the balance sheet. They are as follows: Working capital = current assets − current liabilities Current ratio = current assets / current liabilities Quick asset ratio (acid-test ratio) = (current assets − inventory) / current liabilities
Prerefunded
Yield to call
A client writes 1 Dec 45 put and buys 1 Dec 60 put. This is A) a credit bear spread. B) a debit bear spread. C) a credit bull spread. D) a debit bull spread.
a debit bear spread. This is a debit bear spread, and bears buy puts. The 60 put is worth more than the 45 put because it has a higher strike price. LO 9.f
A corporate bond with a nominal yield of 6% is currently trading at a yield to maturity (YTM) of 5.8%. It would be accurate to state that this bond is trading at A) a premium. B) parity. C) par. D) a discount.
a premium. If YTM is less than the nominal or coupon yield, the bond is trading at a premium.
Which of the following terms refer to municipal bond underwritings? Standby Best efforts Preliminary prospectus. Firm commitment. A) II and IV B) II and III C) I and IV D) I and III
best efforts and firm commitment
All of the following are credit spreads except A) buy 1 ABC Jul 50 call, write 1 ABC Jul 60 call. B) write 1 ABC Nov 35 put, buy 1 ABC Nov 30 put. C) buy 1 ABC Jan 50 put, write 1 ABC Jan 60 put. D) buy 1 ABC Apr 40 call, write 1 ABC Apr 30 call.
buy 1 ABC Jul 50 call, write 1 ABC Jul 60 call. Starting at the beginning, a spread is always a long and a short position in the same option class (two puts or two calls on the same underlying security). That is, the investor buys a call and sells a call (a call spread) or buys a put and sells a put (a put spread). In the case of a credit spread, the premium received for the option sold is higher than the premium paid for the option bought. That is why there is a credit to the investor's account. The opposite is true with a debit spread. The premium paid for the option purchased is higher than the premium received for the option sold. Therefore, there is a debit (a charge) against the investor's account. The lower the strike price, the higher the premium for a call option. In the case of the long 50 call and the short 60 call, the investor has purchased the option with the lower strike price (50) and sold the option with the higher strike price (60). Investors will pay more for the right to be able to buy stock at 50 than at 60, so this is a debit spread; the exception the question is looking for. With puts, the higher the strike price is, the more expensive the option premium will be. Specifically looking at our four choices: Buy 1 ABC Jul 50 call, write 1 ABC Jul 60 call - Debit, because buying the lower priced call costs more than selling the higher priced call. Net debit to the account. Write 1 ABC Nov 35 put, buy 1 ABC Nov 30 put - Credit to the account, because as the writer I receive more for the put I sold (wrote) than the put I bought (investors will pay more for the right to be able to sell stock at 35 than at 30). Buy 1 ABC Apr 40 call, write 1 ABC Apr 30 call - Credit to the account, because selling the lower priced call generates more of a credit than buying the higher priced call. Buy 1 ABC Jan 50 put, w
A confirmation to a customer purchasing a new issue of bonds must disclose all of the following except A) settlement date. B) coupon rate and maturity date. C) current yield. D) customer's name.
current yield To conform with industry rules, confirmations must include the customer's name, trade and settlement dates, coupon rate and maturity, and the yield to maturity or yield to call (whichever is lower). The current yield (annual interest / current market price) is not included on confirmations.
A corporation must have stockholder approval to A) declare a 15% stock dividend. B) declare a cash dividend. C) repurchase 100,000 shares of stock for its Treasury. D) issue convertible bonds.
issue convertible bonds. Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholders' proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its Treasury, declaration of a stock dividend, and declaration of a cash dividend.
A broker-dealer registered with the SEC for 10 years would be required to have on file A) customer order memorandums from the first three years. B) its charter or articles of incorporation. C) copies of all communications sent to customers since the firm started its business. D) copies of bank statements and canceled checks for the past seven years. Explanation The retention requirement for articles of incorporation and corporate charters is the life of the firm. The retention requirement for customer communications, bank statements, and canceled checks is three years. In general, if you see the term blotter or ledger, it will be a six-year retention requirement. The "odd man out," so to speak, is customer complaints. Those have a four-year retention requirement.
its charter or articles of incorporation.
Bond counsel does what?
legality of bond issue
Anti money laundering - how often do firms need to be compliant
ongoing basis
For a customer who has purchased stock and wants to write a call option, the option ticket would be marked A) opening purchase. B) closing purchase. C) opening sale. D) closing sale.
opening sale Explanation An opening transaction is used when establishing a new option position. It is an opening purchase if your client is buying the option. It is an opening sale if your client is writing the option. Closing is the term used when the client eliminates an existing option position through a trade of the contract.
The amount paid in excess of par value on the sale of common shares by an issuer is reflected in which of the following accounts on the corporate financial records? A) In the retained earnings B) In the capital stock C) In the earned surplus D) In the paid-in surplus
paid in surplus Paid-in surplus, or capital surplus, is the excess over par value that investors pay for stock on its original issue. Generally, par value on common stock is a matter of record for accounting purposes.
A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as A) earnings only and taxable. B) exempt from taxes. C) part earnings and part cost basis. D) all return of cost basis and nontaxable.
part earnings and part cost basis. Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable, but the cost basis is returned tax free.
An investor takes a short position in one XYZ Nov 140 call @ 7. Disregarding any commissions, if the option is exercised, on settlement date, the investor A) receives $700. B) must pay $700. C) must pay $14,000. D) receives $14,000.
receives $14,000. When an investor takes a short position in an option, it means the investor has sold, or written the option. When a call option is exercised, the seller is obligated to deliver the stock at the exercise (strike) price. A strike price of $140 for 100 shares results in the seller receiving $14,000 on settlement date.
If a customer buys 100 shares of stock and writes one out of the money call against her long position, the breakeven point is
the cost of the stock purchased less the premium
All of the following may be cited to justify a markup on a stock sold from a broker-dealer's inventory except A) the availability. B) the overall value of the transaction. C) the dealer's cost. D) the security's price.
the dealer's cost. The dealer's cost is not a legitimate factor in determining the markup on a stock.
Under SEC Rule 17a-4, all of the following records must be retained for 6 years except A) blotters. B) trial balances. C) the general ledger. D) the stock record.
trial balances. Trial balances are a 3-year record. Six-year records include blotters, the general ledger, the stock record, customer statements, and customer account information.
