Series 7 Missed Questions - Test 5

To qualify for the quantity discount, which of the following may NOT be joined together under the definition of "any person"? (Breakpoints Sales)

Father and his 35-year-old son investing in separate accounts ****For the purpose of qualifying for breakpoints, the definition of "any person" includes family units, but only minor children. Adults, other than a husband and wife, are separate persons.****

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

Interest is generally paid semiannually. Interest is exempt from state and local taxation.

Which of the following are TRUE of the GO "Bond" Index?

It includes only GO bonds. It is computed weekly ****The Bond Buyer Index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, each with approximately 20 years to maturity. The index is updated each week.****

An investor has losses on the sale of municipal bonds. Which of the following is TRUE for tax purposes?

The losses can be applied against the gains on the sale of any other security ****Losses on the sale of one investment can generally be deducted against gains on the sale of any other investment.****

A customer buys a 5% bond at par. The bond is callable in 5 years at par and matures in 10 years. Which of the following statements is TRUE?

YTC is the same as YTM ****If a bond is trading at par, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.****

A municipal bond is purchased in the secondary market at 102½. The bond has 5 years to maturity. Two years later, the bond is sold for 102. The tax consequence to the investor is:

a capital gain of $5 per bond ****Municipal bonds bought at a premium, either in the new issue or secondary market, must be amortized. The amount of the premium is 2½ points or $25. As the bond has 5 years to maturity, the annual amortization amount is $5 per bond. After 2 years, the bond's basis has been amortized down to 101½. At that point, a sale at 102 generates a capital gain of $5 per bond****

Stabilizing bids may be entered at:

a price no higher than the public offering price ****Stabilizing bids cannot be used to raise the market price of an issue. Stabilization may only be used to support a new issue security at or below the public offering price.****

Under Regulation T, action by the broker/dealer is NOT required when the:

amount due does not exceed $1,000 ****Regulation T permits a broker/dealer to disregard any amounts due less than $1,000****

The TIC method of evaluating municipal bids

considers the time value of cash flows ****The calculation of TIC (as opposed to NIC) takes the time value of money into account. MSRB has no requirement as to which method is used.****

All of the following municipal securities are quoted on a yield basis EXCEPT:

term bonds ****Term bonds, or dollar bonds, are quoted like corporate bonds as a percentage of par. All other municipals are quoted in basis.****

With ABC trading at 39, a customer buys 1 ABC March 40 call and sells 1 ABC March 35 call. A profit occurs if:

the spread narrows. ABC declines sharply ****This investor established a credit spread because the premium he received for the 35 call is more than he will pay for the 40 call; a call with a lower strike always carries a higher premium. As a general statement, credit spreads are bearish, and are profitable if the spread narrows between the premiums or the contracts expire unexercised (this will happen if the stock falls).****

If an investor interested primarily in speculation does not expect the price of DWQ stock to change, he or she will:

write an uncovered straddle ****An investor who expects prices to remain stable writes an uncovered straddle (short straddle). In selling the put and call at the same terms, the writer collects double premiums. Both expire if the price remains stable, but if the price moves, one side loses money. Short straddles carry unlimited loss potential because of the uncovered call.****

A corporation has $12 million net income after taxes, 5 million common shares outstanding, and $10 million of 6% preferred stock ($100 par). What is the corporation's earnings per share (EPS)?

$2.28 ****Begin by calculating how much of the net income is available for common stockholders (net income after taxes minus preferred dividends equals earnings available for common stockholders). The preferred stockholders received $600,000 in dividends (100,000 pfd shares × $6 per share dividends = $600,000). After subtracting $600,000 from the net income of $12 million, this leaves $11.4 million (earnings available for common stockholders). Compute EPS (earnings available for common ÷ number of common shares outstanding = $11.4 million / 5 million shares = $2.28 per share EPS).****

A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be:

$25.25 ****To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1010 / 40 = $25.25)****

A bank purchases a municipal bond that is bank qualified. This allows the bank to deduct what percentage of the interest expense incurred to carry the bond?

0.8 ****The expenses associated with purchasing or holding municipal bonds are not deductible. However, the exception is when banks purchase certain issues of municipal GO bonds (i.e., bank qualified), for which the rules allow the bank to deduct 80% of the interest-carrying cost.****

A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into 5 shares of common stock. The conversion price of the common stock is:

20 ****Par value divided by conversion price equals the number of shares into which the security is convertible. If this security is convertible into 5 shares, we need to know what number goes into $100 5 times. That number is $20. The current market value of the preferred stock is unnecessary information.****

A stock mutual fund wishes to advertise itself as diversified. To be able to do so, the fund must invest:

All of these choices comprise the 75-5-10 rule for diversified investment companies under the Investment Company Act of 1940. At least a minimum of 75% of the total assets must be invested in securities other than those of the investment company. Of the assets invested, no more than 5% of the fund's total assets can be in any one company nor can the percentage ownership of any one company be more than 10%.

Cutting Edge securities is the managing underwriter for a new issue of 1 million shares of ABC common. While the underwriter has agreed to sell as much stock as possible in the market, ABC will cancel the offering if any portion of the stock remains unsold. This arrangement is known as what type of underwriting?

All-or-none ****All-or-none underwritings require the underwriter to either sell the entire issue of stock or cancel the offering completely.****

Which of the following securities are exempt from the registration and disclosure provisions of the Securities Act of 1933?

Any interest in a railroad equipment trust certificate. Municipal bonds. U.S. government securities. Commercial paper maturing in 270 days or less. ****All the securities listed are exempt from the registration and disclosure provisions of the Securities Act of 1933.**** ***Yo this question is dog dick but its good for a list of exemptions****

In which of the following strategies would the investor want the spread to widen?

Buy 1 RST May 30 put; write 1 RST May 25 put. Write 1 RST Apr 45 put; buy 1 RST Apr 55 put. ****An investor wants a debit spread to widen (choices I and II). As the difference between premiums increases, so does potential profit because the investor may sell the option with the higher premium and buy back the option with the lower premium. With credit spreads, investors profit if the spread between the premiums narrows.****