series 7 questions
7. Which of the following Moody's rated bonds are considered speculative? A. Aaa B. Aa C. Baa D. Ba
D - The most speculative (lowest) of the ratings listed is Ba.
11. Which of the following statements best defines the term duration? A. It is a measure of a fixed-income security's relative interest-rate risk B. It is a measure of a fixed income portfolio's average yield C. It is the period before a fixed-income security will be called D. It is the measure of volatility that compares an equity security to the S&P 500 Index
A - By definition, duration measure the interest-rate risk of fixed income securities.
35. Which of the following investors would be most suitable for a covered call writing strategy? A(n): A. 18-year-old who is saving for college B. 45-year-old who is attempting to increase the yield of a portfolio of equity securities C. Married couple that is saving for retirement D. Retired couple that is looking for additional income
B - A covered call writing strategy is most suitable for investors that hold equity securities and would like to generate additional income (increase the yield) of their portfolio.
72. What is the definition of the Bond Buyer's 20-Bond Index? The average: A. yield of 20 high-quality bonds B. yield of 20 high-quality GO bonds C. yield of 20 high-quality revenue bonds D. maturity of 20 high-quality municipal bonds
B - The Bond Buyer 20-Bond Index is defined as the average yield of 20 general obligation bonds having an average rating of AA.
78. When recommending IDRs, the register representative would be most concerned with: A. the impact of tax-free income on the investor's tax return B. the tax bracket of the individual and the alternative minimum tax C. the speculative nature of the bonds D. the potential for taxable capital gains
B - The interest received from Industrial development revenue bonds are defined as a tax preference item by the IRS; as such, the income received is subject to taxation under the Alternative Minimum Tax. This requirement applies to individuals who are in the higher tax brackets. This would be an important determinant when evaluating the appropriateness of the investment.
43. A customer purchased 500 shares of LKJ common stock at $42 and 11 months later sold 5 LKJ May 55 calls at 6. If the calls expire unexercised and the stock is liquidated at $54, which of the following statements is TRUE? A. The cost basis is $39, the sale proceeds are $54 B. The cost basis is $42, the sale proceeds are $54 and the customer has short term capital gains of $3,000 C. The cost basis is $42, the sale proceeds are $61 D. The cost basis is $42, the sale proceeds are $48 and $3,000 of ordinary income
B - The sale of the call options created an obligation to sell the LKJ stock at 5; however, since the option contracts expired, the premiums received would create a capital gain. Since the maximum life of a standard equity option is 9 months or less, the $3,000 of premiums would be treated as a short term capital gain. Otherwise, the customer has a cost basis of $42 per share and $54 as the proceeds of sale.
70. A syndicate member agrees to take 10% of a $5MM offering in an eastern account. At the termination of the offering $1MM remains unsold. The syndicate member sold $300,000. What is the syndicate member's remaining liability? A. 0 B. $100,000 C. $200,000 D. $1,000,000
B - The syndicate member's liability in an eastern account is defined as undivided. This means that the member's original percentage obligation is applied to the amount that remains unsold. In this instance, that would be 10% of $1,000,000.
83. All of the following statements are true regarding the VIX, EXCEPT: A. it is a real-time market indicator B. it is based on the S&P 500 C. it is also known as the 'fear index' D. a falling VIX indicates increased market volatility
D - A rising VIX indicates increased market volatility. Each of the other statements is correct.
34. Which of the following choices would represent the largest deduction in and oil and gas wildcat program? A. The depletion allowance B. Depreciation C. IDCs D. Recapture
. C - An oil and gas wildcat program is another name for an exploratory drilling program. The unpredictability and huge costs associated with this kind of program would make the intangible drilling costs (IDCs) the largest deduction in the program.
41. Co. Z has 100 million shares authorized and 80 million shares outstanding. Which of the following statements would be TRUE regarding addition shares to be issued? A. A stock dividend of 10% could be performed B. A 2:1 stock split could be performed C. Stock splits and stock dividends are not impacted by the authorized shares D. All of the statements are true
A - Additional shares issued in the case of stock splits and stock dividends are part of the issued and outstanding number of shares, which may not exceed the number of shares authorized. In this example, a 10% stock dividend would not cause the number of shares outstanding to exceed the authorized amount; however, a 2:1 stock split would exceed the 100 million shares authorized under Co. Z's charter. If Co. Z wished to conduct a 2:1 stock split, an amendment to the corporate charter, approved by the Board of Directors and the shareholders would be necessary.
30. In Apr 201X, a customer bought 500 shares of JGH @ 32. The following March, the stock had risen to 51 and the customer is concerned that the price might decline. If the customer wants to buy 5 JGH May 50 puts @ 3 each, what should the RR do? A. Advise the customer of the tax consequences and mark the order ticket unsolicited B. Advise the customer of the tax consequences and mark the order ticket as solicited if it is a discretionary account C. Refuse to accept the order until the customer has a holding period of more than 1 year D. Obtain prior written authorization from the ROP before accepting the order, due to the adverse tax consequences for the customer
A - If the customer purchases put options prior to the holding period of the stock becoming long-term, the prior holding period becomes tainted and resets to zero. The holding period does not subsequently begin until the hedge is lifted, or the put options expire. The best course of action is to advise the customer of the tax consequences and if the customer wishes to buy the puts, the RR should mark the order ticket as unsolicited.
60. An investor purchased a 2 times leveraged inverse ETF linked to the performance of the S&P 500 for $10,000. During the first period, the S&P 500 rose by 10%, while during the next period, the index fell by 10%. What is the investment value at the end of the second period? A. $9,600 B. $9,900 C. $10,000 D. $12,000
A - In a 2 times leveraged inverse ETF, the value of the shares would move in an opposite direction to an index by twice amount of movement of the index. When the S&P 500 rose by 10%, the leveraged inverse ETF would fallen by 20%, from $10,000 to $8,000 [$10,000 - ($10,000 x .2)]. When the S&P 500 fell by 10%, the leveraged inverse ETF would have increased by 20%, from $8,000 to $9,600 [$8,000 + ($8,000 x .2)].
47. Which of the following statements regarding principal protected notes is NOT TRUE? A. The instrument does not pay semiannual interest B. If held to maturity, the investor will receive at least as much as invested C. The investor may receive a bonus amount, based on the performance of a benchmark index, or pool of investments D. Principal is guaranteed regardless of the performance of the securities that underlie the investment
Answer D - Principal protect notes are a type of structured product where the investment, if held to maturity, should pay back to the investor at least the amount of capital invested. Since the underlying portfolio of securities is highly complex, investors incur risk that a collapse of the portfolio would reduce the amount of funds available to investors at maturity.
1. What is the term used to describe the excess of par above purchase price on a bond? A. Premium B. Discount C. Accretion D. Amortization
B - the key phrase in this deceptive question is 'par above purchase.' That describes a bond trading at a discount.
82. Company Y originally conducted an initial public offering of 10 MM shares of common stock. It is now conducting an additional registered offering of 2,000,000 shares of common. One of your institutional clients owns 500,000 shares of Company Y preferred stock. How many shares of the new issue will the institutional customer be permitted to buy? A. 0 B. 50,000 C. 100,000 D. 200,000
A - Pre-emptive rights allow an owner of common stock to maintain their proportionate equity ownership in a company; however, this does not apply to an owner of preferred stock.
33. A company previously had issued $200MM of common stock as an IPO. A year later, it issued 2MM shares of preferred stock at $25 per share. What is the companies leverage ratio? A. 0 B. 1% C. 20% D. 25%
A - Since the company has only issued common stock and preferred stock, it has no borrowed money within its capital structure and does not have any leverage. If instead of $50MM of preferred stock (2MM at $25), it had issued bonds, then its leverage ratio would have been 25% ($200MM/$50MM).
61. What does an underwriter receive as compensation for a mutual fund underwriting? A. Sales Charge B. Reallowance C. Spread D. Selling concession
A - The compensation received by the underwriter for a mutual fund is called the sales charge. In other types of new issues, the spread refers to the difference between the public offering price and the amount received by the issuer. A portion of the spread receive by selling group members is called the selling concession, which is sometimes referred to as the reallowance.
22. In May, a customer sells an AABB July 40 listed call for a $6 premium and buys an AABB October 40 listed call for a $10 premium. In June, the customer closes out the July 40 sale for which he received a $6 premium by buying back the call at $9. He sells the October 40 call, which he purchased at $10, for a premium of $12. The net result to the customer on the two transactions is a: A. $100 loss B. $100 profit C. $200 loss D. $200 profit
A - The customer would have a $100 loss Out In 6 10 9 12 19 18 -1 x 100 shares = $100 loss
18. A customer purchases a NVC November 60 call paying a $4 premium and a NVC November 60 put for a $4 premium. When NVC increased to $75 per share the put option expired unexercised, while the customer exercised the call option and simultaneously sold the stock at the market price of $75. As a result of the transaction, the customer has a net: A. $700 profit B. $700 loss C. $800 profit D. $800 loss
A - The customer would have a $700 profit Out In 4 4 60 75 68 75 +7 x 100 shares = $700 profit
31. An investor places $5,000 into a 200% leveraged index ETF. During the first period, the index rises by 10%, while in the second period, the index falls by 20%. What is the value of the investment at the beginning of the third period? A. $3,600 B. $4,400 C. $5,400 D. $5,600
A - The initial investment of $5,000 would have increased by 20% in the first period (2 x the change in the index) but would have fallen by 40% in the second period: $5,000 x 1.2 = $6,000; $6,000 x .6 = $3,600.
10. Of the following investors listed, which creditor would have the lowest claim to the assets of a corporation during it liquidation? The holder of: A. a subordinated debenture B. preferred stock C. a warrant D. a collateral trust certificate selling at
A - The lowest level of creditor of a corporation would be the holder of a subordinated debenture. Holders of preferred stock are owners. Holders of a warrant have the right to exercise at a specific price for the purchase of the company's common stock.
100. If a customer receives Form 1099-DIV from a mutual fund showing $800 of dividends distributed and capital losses of $4,000, how much may be deducted against ordinary income if the dividends were reinvested? A. $3,000 B. $3,200 C. $4,000 D. $4,800
A - The maximum amount of capital losses that may be annually offset against ordinary income is $3,000. The remaining amount of losses are then carried forward. The fact that dividends were distributed and reinvested has no bearing on the tax consequence of the capital loss. The dividends would be taxed at the ordinary income level, even if reinvested.
36. A customer sells 1 JRX November 60 call and buys 1 JRX February 60 call. Which of the following statements is TRUE? A. The customer will profit if the spread widens B. The customer will profit if the spread narrows C. This is an example of a diagonal spread D. This is an example of a butterfly spread
A - This is an example of a horizontal spread and it has been established as a debit spread. Since the maximum time frame of a standard equity option is nine months, the only way for both November and February options to be trading at the same time would be for November to be the near month expiration and for February to be the deferred month expiration. Since February would have more time until expiration, the option would have greater time value. Since the customer would have paid a higher premium than received, a debit spread would be the result. If the spread between the premiums widens (becomes greater), the customer will be able to unwind the spread by closing the positions at a profit, since they would receive a greater net amount than they amount paid when the original spread was established.
73. All of the following statements regarding competitive bids are TRUE EXCEPT: A. they are not reflected in visible supply B. it is a form of firm commitment underwriting C. they are most frequently associated with GO bonds D. a Notice of Sale is published in the Bond Buyer
A - Visible Supply reflects new issue municipal bonds that are expected to reach market within the next 30 days. It includes both general obligation and revenue bond issues. Each of the other choices are true statements.
84. A customer wishes to open an options account to write covered calls. All of the following would be required, EXCEPT: A. margin agreement B. social security number C. determination of investor experience D. level of income
A - When opening an options account to write covered calls, a margin agreement is not required. The customer must provide a social security number, or tax ID number. Additionally the registered representative should inquire about the customer's investment experience, level of income, net worth and objectives.
2. Regarding accrued interest as shown on a customer confirmation, which of the following choices is CORRECT? It is: A. added to the buyer's and seller's side B. added to the buyer's side and subtracted from the seller's side C. subtracted from the buyer's side and added to the seller's side D. subtracted from bother the buyer's and seller's side �
A - on customer confirmations, the amount of accrued interest is added to the buyer's confirmation to show the net amount to be paid and is added to the seller's confirmation to show the net amount that is to be received. the seller
86. If a municipal bond is issued at par and later purchased for $970, plus accrued interest of $32, what is the purchaser's cost basis? A. $938 B. $970 C. $1,000 D. $1,002
B - The cost basis represents the purchase price of the bond. The accrued interest paid by the buyer has no impact on the cost basis and represents the amount of interest that the seller is due, based upon the holding period of the bond from its last interest payment date. The buyer will receive the full six month interest payment the next time the coupon is paid, but in this example, has already paid $32 upfront to the seller.
79. Which of the following statements is TRUE regarding IRA rollovers. A. Rollovers may be conducted annually, but must be done within 60 days B. Rollovers may be conducted every 12 months, but must be done within 60 days C. Rollovers may be conducted annually, but must be done within 90 days D. Rollovers may be conducted every 12 months, but must be done within 90 days
B - Rollovers from an IRA to IRA, or from another retirement plan to an IRA, must be completed within 60 days of the money received by the holder of the account to avoid being considered a taxable distribution. Additionally, rollovers may only be conducted once in any 12-month period.
17. An investor writes 10 ZPF April 70 calls at a premium of 3 for each contract and shorts 10 ZPF April 70 puts at a premium of 1. This strategy is known as a: A. short combination B. short straddle C. bull spread D. bear spread
B - A customer who writes (sells) a call and a put on the same underlying security having the same strike prices and same expiration month has created a short straddle.
99. Which of the following choices describes a mark to market? A determination of: A. excess equity in a customer's account, calculated daily B. an account's value, calculated daily C. dividends payable for money market accounts, calculated monthly D. the net capital requirement of a broker dealer, calculated daily
B - A mark to market is a determination of the value of an account, based on the closing market values. It is calculated each day, based upon the close of the market.
67. The return of which of the following indicators is used as a proxy for the U.S. stock market performance? A. Nasdaq Stock Market B. S&P 500 C. Russell Index D. Wilshire Index
B - The Standard and Poor's 500 is used as a proxy, or substitute to indicate the result of the U.S. stock market.
58. A money market manager expects interest rates to increase. Rather than liquidating securities and creating portfolio volatility, she wishes to offset unrealized losses by generating additional income. Which of the following strategies using yield-based options would be MOST suitable? A. Buy T-bill calls B. Write T-bill puts C. Short T-bill calls D. Sell T-bond calls
B - A money market manager would sell T-bill puts to generate income. In the case of yield-based options, when interest rates rise, yields increase; therefore, the money market manager would have been bullish on yields. In order to generate income using options, it would be necessary for her to sell (write) the contracts. The appropriate bullish strategy would be the sale of puts. Additionally, T-bills are more appropriate than T-bonds, due to the maturity of the instruments in the money market portfolio (one-year, or less).
3. A municipal F&A 15 bond settles on Friday, April 1. How many days of interest accrue? A. 45 B. 46 C. 49 D. 50
B - An F&A 15 bond pays interest each February 15 and August 15 and municipal bonds use a 30-day month and a 360-day year for accrued interest. To determine the number of days that interest has accrued, subtract the last interest payment date from the settlement date using the short cut. Settlement: 4 / 1 Last int. paid: 2 / 15 2 - 14 This works out to: (2 months x 30 days) = 60 minus 14 days, or 46 days of interest accrued.
23. An ADC corporate bond is convertible at $50 into shares of ADC common stock. The bond contains an antidilutive covenant and if ADC pays a 10% stock dividend, what would be the conversion price of the bond? A. $45.00 B. $45.45 C. $50.00 D. $55.00
B - An antidilutive feature on a convertible bond will cause the conversion rate of a convertible bond to be adjusted in the case of a stock split, or stock dividend. This will also result in a change in the conversion price of the bond. The conversion rate before the stock dividend was 20 shares ($1,000/$50). Based on a 10% stock dividend, the conversion rate would increase by 10% to 22 shares. The conversion price would then be calculated as $1,000/22 = $45.45.
90. An investor has made periodic payments into a deferred variable annuity. Due to her monthly investments, her accumulation units have steadily risen, but in recent months, the value of each unit has declined. She is now considering annuitization and wonders about the market's effect on her annuity units. You would inform her that once annuitized the number of annuity units: A. will increase if the performance of the market exceeds a preset benchmark. B. Will remain the same, regardless of the performance of the separate account. C. will decline if the performance in the separate account falls below the assumed interest rate D. is fixed, due to the mortality guarantee
B - At annuitization, the value of the contract holder's accumulation units are used to determine a fixed number of annuity units. The number of annuity units will not change, but the value of each unit will fluctuate, based upon the return of the separate account as measured against the assumed interest rate. If the monthly return in the separate account exceeds the assumed interest rate, the contract holder's next monthly payment will go up.
59. Which of the following option strategies using listed contracts is most appropriate to hedge a portfolio of preferred stock? A. Write yield-based T-note calls B. Buy yield-based T-bond calls C. Buy yield-based T-bond puts D. Buy preferred stock puts
B - Buying yield-based T-bond calls would be the most effective hedge for a portfolio of preferred stock. Preferred stock is an interest rate sensitive investment; therefore, as interest rates rise, preferred stock prices decline. In the case of yield-based options, when interest rates rise, yields increase; therefore a bullish strategy using options would be employed. The best method to hedge in that case would to purchase a bullish option. Since preferred stock does not mature, the price volatility would be most closely matched to the options that are based on instruments having the longest maturities, in this case T-bonds. Also take note that there are no preferred stock option contracts in the listed market.
13. AUP Corporation is offering $750,000,000 of 8% bonds at a price of 95% of par value. An investor purchasing one of the bonds would expect to receive interest payments of: A. $38 B. $40 C. $76 D. $80
B - Corporate bonds pay interest semiannually. The nominal yield of the bond (8%) would pay $80 annually, representing two payments of $40 each.
76. If securities are not in good deliverable form, but are accepted by the broker dealer representing the buyer, which of the following statements is TRUE? The receiving broker dealer must: A. go through the process of rejection B. go through the process of reclamation C. notify the transfer agent within 2 business days D. notify the transfer agent within 3 business days
B - If securities are determined to be incorrect as delivered, the process of correction is called reclamation. The receiving broker dealer notifies the delivering broker dealer (rather than the transfer agent). The amount of time allowed for notification of the delivery irregularity varies according to the nature of the problem, but is generally either 15 days, or 45 days.
71. Which of the following types of companies is least likely to be affected by a change in interest rates? A. Utility B. Cosmetic C. Steel manufacturer D. Airline
B - Interest rate sensitive companies are highly leveraged. A significant portion of their capital structure is through debt financing, as such, a change in interest rates has a direct impact on their ongoing financial requirements. Utilities and heavy industry are classic examples of interest rate sensitive industries. Although airlines tend to be highly affected by changes in fuel, most are relatively highly leveraged. Cosmetics on the other hand have far lower production expenses that most manufacturers and generally have little debt.
62. What type of preferred stock would be most advantageous if the issuing company had strong revenue and earnings, which exceeded industry estimates? A. Exchange-listed B. Participating C. Convertible D. Cumulative
B - Participating preferred stock may receive an additional amount paid to shareholders, based on superior performance of the issuer. Since the price of the common stock and a conversion rate for convertible preferred was not provided, there is no way to determine whether the convertible feature would be most advantageous. Cumulative refers to unpaid dividends which accrue on a preferred issue, which must be paid before common stockholders receive a dividend.
19. Which of the following statements is TRUE regarding the purchaser of a call option? A. The yield on the purchaser's portfolio increases by purchasing the option B. The purchaser's loss is limited to the premium if the underlying stock declines C. The purchaser benefits if the underlying stock declines D. The purchaser exercises the option if the stock declines
B - The buyer of a call can only loose the premium, should the option expire.
52. An investor sold short 1,000 shares of JJLM at 52 on January 10th. If the investor covered the short position at 43 on January 11th of the following year, which if the following statements is TRUE? A. Only $3,000 of the investor's loss is deductible against ordinary income B. The investor has a short term capital gain C. The investor has a long-term capital gain of $9,000 D. The interest paid for the short position in the margin account is deductible
B - The customer would have generated a short term capital gain on the position by selling short at 52 and covering (buying the stock) at 43. Although the period of time that the investor remained short exceeded one year, there is no holding period for the stock (the customer did not own the stock for more than one year). Choice A is incorrect, because the customer had a capital gain. Choice D is incorrect because there are no interest charges associated with a short position (a customer has a credit balance). Interest charges in a margin account on based on a debit balance and would be deductible, except in the case of interest charges those associated with the purchase of a municipal bond. Since the interest received is federally tax-free, the interest charges paid in a margin account to maintain the municipal bond portfolio are not deductible.
68. What formula is used to determine equity in a combined margin account? A. SMV + Credits - LMV + Debits B. (LMV + Credits) - (Debits + SMV) C. Debits + Credits ÷ LMV - SMV D. (Credits - Debits) + SMV - LMV
B - The equity in a combined margin account is determined by subtracting the debit from the long market value (LMV) and subtracting the short market value (SMV) from the credit balance. The equity from the long and short positions is then added together.
75. Which of the following choices best describes the formula to determine EPS? A. Net income/number of shares of common authorized B. [EBIT - (interest + taxes)] - preferred dividends/number of shares of common outstanding C. (Net income + preferred dividends)/(number of shares of common issued - number of shares of treasury stock) D. Retained earnings/number of shares of common issued
B - The formula for earning per share is: (net income - preferred dividends) divided by the number of shares of common stock outstanding. EBIT is earnings before interest and taxes. Subtraction of each results in net income.
48. Which of the following choices would be the last to be paid during the liquidation of a limited partnership? A. Senior debt holders B. General partners C. Limited partners D. General creditors
B - The general partner would be the last party to be paid during the liquidation of a partnership. The order of priority is: senior debt, general creditors, limited partners and finally general partners.
Use the following information to answer the questions 96 and 97 Co X common shares issued 6,500,000; shares outstanding 6,000,000 Wk Ending Trading Vol 3/31 66,000 3/24 64,000 3/17 60,000 3/10 58,000 3/3 56,000 2/24 52,000 96. If an insider of Co X holding 70,000 shares of its common stock wishes to sell, how many shares may he sell? A. 60,000 B. 62,000 C. 65,000 D. 70,000 97. If an insider of Co X holding 58,000 shares of its common stock wishes to sell, how many shares may he sell? A. 58,000 B. 60,000 C. 62,000 D. 65,000
B - The insider could sell 62,000 shares. An insider must sell according to the provisions of Rule 144 which permits the sale of the greater of 1% of the shares of common stock outstanding, or the average of the most recent four weeks trading volume. The 1% amount would equal 60,000 shares (6,000,000 x .01), while the average of the most recent four weeks trading volume would equal 62,000 shares ([66,000 + 64,000 + 60,000 + 58,000] ÷ 4). Note also that the number of shares issued is not relevant in this rule application. A - An insider must sell according to the provision of Rule 144 which permits the sale of the greater of 1% of the shares of common stock outstanding, or the average of the most recent four weeks trading volume; however, in this question, the number of shares held by the insider is less than the maximum that is permitted to be sold. The insider may sell the entire 58,000 shares owned, but may not sell more than that amount. Any amount sold in excess of the long position would represent a short sale, which is a prohibited activity for insiders.
25. The annuitant of a variable annuity has an assumed interest rate of 4% applied to the payouts from the separate account. In the first month following her initial payout, the performance in the separate account had an annualized return of 7%. During the next four months, the performance declined by 1% each month, such that in the 5th month, the performance was 3%. Which of the following statements regarding the third payment received by the annuitant is TRUE? A. The monthly payment is guaranteed B. The monthly payment increased C. The monthly payment decreased D. The monthly payment would stay the same
B - The monthly payment increased. The AIR describes the annualized return necessary to maintain equal monthly payments, which are not guaranteed. The present month's performance impacts the next monthly payment. If the performance is above the AIR, the next monthly payment would increase. In month 1, the return was 7%, declining to 6% in month 2, which was above the AIR. The performance in month 2 would determine the amount of payment in month 3, which would go up.
51. If Company X has a return on investment of 10.4% and a beta of 1.2, what would the alpha be if the return on the Standard & Poor's 500 was 9% and the T-bill rate was 3%? A. -.4% B. +.2% C. +1.4% D. +10.2%
B - To calculate the alpha for a stock, or a portfolio, it is first necessary to calculate the expected return of using the Capital Asset Pricing Model: E(R) = [(Expected Market Return - Risk-free rate) x Beta] = Risk-free rate, where the proxies used for the market return are the S&P 500 and the Risk-free rate equals the yield on the T-Bill. This would be calculated as [(9-3) x 1.2] + 3 = 10.2. Alpha represents the difference between the company's actual return and the CAPM derived expected return, in this case 10.4% - 10.2% = .2%
9. Which of the following would increase most in price if interest rates decline? A. Short-term bonds selling at a discount B. Long-term bonds selling at a discount C. Short-term bonds selling at a premium D. Long-term bonds selling at a premium
B- Long term bond prices are more volatile than shorter term maturities and would change by a greater percentage of price when interest rates fluctuate. Additionally, lower priced bonds are more volatile than higher-priced bonds.
5. A municipality might refund a revenue bond issue for all of the following reasons, EXCEPT to: A. reduce interest charges B. issue new bonds at lower interest rates C. reduce the market value of outstanding bonds that are not refunded D. eliminate restrictions in the bond resolution
C - A municipality would not refund a bond issue to reduce the outstanding price of its outstanding bonds. Refunding is advantageous to the issuer to reduce its interest charges, by having the ability to issue new bonds at a lower coupon rate. Once the issue is refunded, the older bond issue has been called and any of the restrictive covenants in the bond no longer apply, since the bond has been paid off and retired.
92. An institutional customer is interested in purchasing a new issue of Kalamazoo general obligation bonds. She has requested a 1-2 page summary of the official statement outlining the city's direct debt obligations. The registered representative: A. must request that a municipal analyst compile the information for the customer B. may not provide a summary of the prospectus C. must obtain a municipal principal's approval of the summary to be sent D. must send a copy to the MSRB and obtain written authorization
C - Although it is true that the prospectus associated with the new issue of a non-exempt security may not be altered in any manner, the disclosure document associated with a municipal bond is an official statement. According to MSRB rules, any summary, abstract or excerpt from an official statement must be approved by a municipal securities principal prior to being sent to a customer.
50. An investor who in her late 40s seeks an investment that will generate current monthly income. She is in a high tax bracket and makes maximum contributions to her 401(k) and IRA. Which of the following investments would be most suitable? A. A single-payment immediate annuity B. An investment grade GO bond C. A CMO D. An issue of cumulative preferred stock
C - An investment in a CMO would provide monthly income to the investor. A single-payment immediate annuity would require a lump contribution, with monthly payouts beginning immediately. However, the investor is in a high tax bracket and based upon her age, distributions would be subject to a 10% early withdrawal penalty. An investment grade GO bond would provide federally tax-free income, but it is paid on a semiannual basis. Similarly, an issue of preferred stock does not match her requirement for monthly income, since dividends are paid on a quarterly basis.
64. What type of company does a business development company invest in? A. Emerging B. Growth C. Small-mid cap D. Blue chip
C - By definition, business development companies invest in small and mid-cap sized companies, generally companies capitalized at $2 to $10 billion.
80. Which of the following statements BEST describes changes to the cost basis for holders of mutual fund shares? A. Capital gains that are reinvested have tax-deferred status B. Investment income that is reinvested has tax-deferred status C. Reinvestments of capital gains and investment income result in a higher cost basis D Distributions by a mutual fund do not affect cost basis
C - Distributions of investment income and capital gains by a mutual fund will result in an increased cost basis (a higher after-tax investment) by the holder of the shares. Even if distributions are reinvested, the investor still bears the annual tax burden, since reinvestment does not provide tax deferral.
16. Customers will have unlimited risk if they are: A. long 1 ABC Jan 50 put B. short 1 ABC Jan 50 put C. short 1 ABC Jan 50 put and short 100 shares of ABC stock D. short 1 ABC Jan 50 put and long 100 shares of ABC stock
C - Even though the position described in choice C is called a covered put, the term 'covered' means that the option is not at risk. A customer who sells short stock and also sells a put still has all of inherent risk of a short stock position, in other words, unlimited potential for loss.
46. Which of the following choices represents the greatest risk of an ETN linked to a broad market index? A. A decline in interest rates B. A decline in the S&P 500 C. The issuer's credit worthiness D. An increase in liquidity risk
C - Exchange Traded Notes (ETNs) are an unsecured promise to pay by an issuer. In that respect, ETNs are similar to debentures. When linked to an index, the value of the bond will rise and fall as the value of the index changes, but the greatest risk is based in the creditworthiness of the issuer. A decline in interest rates will normally have a positive impact on the value of an ETN. As an exchange listed instrument, liquidity risk is generally not a significant risk.
91. An insider who owns restricted stock filed Form 144 on May 2. On May 11, he sold the max amount permitted. When may he sell additional shares of restricted stock? A. 60 days after May 2 B. 60 days after May 11 C. 90 days after May 2 D. 90 days after May 11
C - Form 144 may be filed every 90 days. The window during which sales may take place begins on the date that the form is filed, rather than the date that sales occur.
77. A Japanese company exports stereos to the United States and is paid in dollars. If the exporter is concerned about a decline in the U.S. dollar, its most effective hedge would be to: A. buy U.S. dollar calls B. buy U.S. dollar puts C. buy Japanese yen calls D. buy Japanese yen puts
C - If an exporter receives U.S. dollars and is concerned that the dollar will weaken, this is an indication that the exporter's host currency will strengthen. Since options on the U.S. are not available in the listed markets, the appropriate hedge would be to purchase calls on the Japanese yen.
24. The Mobile Tunnel Authority has net revenue of $36MM, operations and maintenance expenses of $16MM, debt service requirements of $18MM and surplus funds of $2MM. What is the debt service coverage ratio for the Mobile Tunnel Authority? A. 1:1 B. 1:11:1 C. 2:1 D. Cannot be determined from the information
C - In the absence of a described revenue pledge, assume that a net revenue pledge is used. This means that the debt is serviced after the expenses for operations and maintenance have been satisfied, which is essentially the net revenue of the project. The debt service coverage ratio is determined by dividing the debt service requirements by the net revenue. In this question, net revenue has already been provided; therefore, the debt service coverage ratio would be 2:1 ($36MM/$18MM).
27. A 6% bond is purchased at a 6.5% basis. If the bond is held to maturity, which of the following statements is TRUE? The customer's effective yield: A. was 6% B. was 6.5% C. was less than 6.5%, but more than 6% D. cannot be estimated, unless the number of years to maturity is provided
C - In the question, the basis equals the customer's yield to maturity; however, since the nominal yield is lower than the yield to maturity, it is important to note that the bond was purchased at a discount. If the bond was held to maturity, the customer would have a taxable capital gain, which would reduce the effective yield to a level below the yield to maturity, but still above the nominal yield.
26. A municipal 5.75% bond was purchased in the secondary market at 105. The bond had 5 years to maturity but was sold after 3 years at 103. What is the customer's capital gain, or capital loss? A. 1-point capital loss B. 2-point capital loss C. 1-point capital gain D. No gain or loss
C - Municipal premium bonds must amortize the premium over the life of the bond. In this example, the 5-point premium would be amortized over the five years until maturity, resulting in a 1-point reduction in cost basis for each year that the bond was held. After 3 years, the bond's adjusted cost basis would have been 102 (105-3). Since the bond was sold for 103, the customers would have had a 1-point capital gain.
28. A municipal bond purchased as an original issue discount of 50 had 20 years to maturity. If the bond was sold after 7 years for 75, what would be the tax consequence for the seller? A. No gain or loss B. $25 capital gain C. $75 capital gain D. $250 capital gain
C - Original issue discount bonds must accrete the discount over the life of the bond. In this example, the amount of the discount (par value minus purchase price) is $500. The discount divided by the number of years to maturity is the amount of accretion that will added to the cost basis annually, which in this example is $25 ($500/20). The adjusted cost basis would be the original purchase price ($500) plus seven years of accretion (7 x $25 = $175) for a total of $675. Since the proceeds of sale were $750, the customer has realized a capital gain of $75.
15. A client purchased 300 shares of JSSP common stock at $28 a share in July of 2017. In June of 2018, the client wrote 2 October 35 calls at 5 against the stock position. If the market price of JSSP was $39 at expiration, what is the client's realized gain? A. $1,000 B. $1,700 C. $2,400 D. $4,300
C - See the 'T' account below, but keep in mind that although the customer was long 300 shares of JSSP stock, only two (covered) calls were written. When the market price reached 39 at expiration, the two calls were exercised, but the customer was not obligated to sell the remaining 100 shares of stock. Out In 28 5 35 _________ 28 40 +12 x 100 shares x 2 contracts = $2,400
65. What are the tax implications of owning TIPS? Income is: A. fully taxable B. tax-deferred C. exempt from state tax D. exempt from federal tax
C - TIPS are treasury inflation protected securities. Income received from TIPS is subject to federal tax, but excluded from state and local taxes.
20. Mr. Hamilton purchases 100 shares of XYZ at $80 per share and writes an XYZ June 85 call receiving a $3 premium. If XYZ increased to $90 and the call option is exercised, Mr. Hamilton's profit is: A. $300 B. $500 C. $800 D. $1,800
C - The customer would have an $800 profit Out In 80 3 85 80 88 +8 x 100 shares = $800 profit
88. One of your customers calls and says he read in the Bond Buyer that there is an increase in the level of short sales for municipal bonds. He wants to use inverse theory to take advantage of a possible price movement. You would tell the customer: A. buy call options on municipal bonds B. buy put options on municipal bonds C. buy shares of a municipal bond index fund D. sell short shares of a municipal bond index fund
C - The inverse (contrarian) application described in this question is called the short interest theory. The theory asserts that an increase in the level of short sales is a bullish indicator for prices. In practice, it is fundamentally very difficult to sell short municipal bonds. More commonly, investors who are bearish on municipals would short a municipal bond index ETF; however, in this instance since the investor is bullish on municipal bond pricing, the appropriate recommendation would be to buy the shares of the municipal bond index fund. Option contracts are not available on municipal bonds.
54. JGH 6.0% bonds are convertible into 25 shares of JGH common stock and are trading at 106. Later, when the JGH common is trading at $42, the bonds are called at 104. Which of the following choices would maximize the investment value for a holder of the JGH convertible bonds, once the call is announced? A. Tender the bonds for the call B. Sell the bonds in the market C. Convert the bonds into common stock and sell the stock D. Continue to hold the bonds and receive 6% interest
C - The maximum value would be achieved by converting the bonds into JGH common stock and selling the stock. To lock-in the maximum value, the investor should sell the JGH stock short and then cover the position once the conversion is completed. The bonds are convertible into 25 shares of common, each of which is priced at $42; this equals a value of $1,050 (25 x $42); this is more than the $1,040 value that would have been received had the investor tendered the bonds for the call. Choice B is a bit challenging; although the bonds had been trading at 106, once the call is announced, the bonds would trade no higher than the call price. Choice D is inaccurate. Once bonds are called, the issuer will only pay interest up until the call date.
6. Which of the following ratings represents the most speculative of Moody's investment grade ratings? A. Aaa B. Aa C. Baa D. Ba
C - The most speculative (lowest) of the investment grades is Baa.
63. An established customer wants to purchase shares of a speculative issue of stock. He tells the registered representative "Get it at a good price, but get it today." There are no reports or research regarding the issue and the RR has been unable to reach the customer to advise him of this finding. With the market closing in 15 minutes, what should the RR do? A. Conduct the trade if she has a limited POA and mark the ticket 'discretion not applied' B. Execute the trade C. Do not execute the trade unless additional information had been specified by the customer D. Enter the order as Not Held and send it to the trading desk
C - The registered representative does not have sufficient information from the customer to enter the order as Not Held, since the amount of shares was not specified in the question. Choice A indicates that if the RR had a limited power of attorney, that the trade could be entered and executed; however, if the RR had selected the quantity of shares for the trade, the ticket must be marked as discretionary.
42. A customer purchased 1,000 shares of ITY common stock at $42 and 11 months later sold 10 ITY March 55 calls at 3. If the calls were exercised, which of the following statements is TRUE? A. The cost basis is $39, the sale proceeds are $55 B. The cost basis is $42, the sale proceeds are $55 and the customer has short term capital gains of $3,000 C. The cost basis is $42, the sale proceeds are $58 D. The cost basis is $42, the sale proceeds are $52
C - The sale of the call options created an obligation to sell the ITY stock at 55. If exercised, the premium received would be added to the strike price of the option, making the proceeds of sale $58 ($55 + $3). The cost basis in this example is unaffected by the sale of the option contracts and remains at $2 per share.
Use the following information to answer questions 93 and 94 The syndicate manager of a new issue of municipal bonds has provided the following compensation information: NYC GO 3.75% '39s Mgr Fee $.75; Total Takedown $5; Add'l Takedown $2 93. A syndicate member selling 2,000 of the bonds would receive: A. $4,000 B. $6,000 C. $10,000 D. $16,000 94. If a selling group member sold 500 of the bonds, how much would the member receive? A. $500 B. $1,000 C. $1,500 D. $2,000
C - The syndicate member would earn the total takedown for each bond sold. In this case, the sale of 2,000 bonds would provide $5 of compensation for each bond, totaling $10,000. to MSRB C - A selling group member would receive a selling concession of $3 for each bond sold. This amount equals the total takedown minus the additional takedown ($5 - $2 = $3). For 500 bonds sold, the selling group member would receive $1,500.
53. One of your customers purchased a municipal 6.5% revenue bond that had 18 years until maturity for $1,100. If two years later, the bond was called at par, this is an example of: A. Legislative risk and reinvestment risk B. Interest rate risk and purchasing power risk C. Capital risk and call risk D. Money rate risk and inflation risk
C - This is an example of capital risk and call risk. Capital risk is the risk of losing some, or all of an investment. Although most frequently associated with the purchased of common stock and options, it also can occur when a bond is purchased for a substantial premium. If the bond is called much earlier than its maturity date, the amount of loss realized is significantly more than the amount of the adjusted cost basis. Legislative risk occurs when there is a change in the law that negatively affects the value of a security. Interest rate risk and money rate risk are synonymous terms. In the case of bonds, if interest rates rise, bond prices fall. This was not evident in this example. The bond was selling for a premium; therefore, the expectation is that interest rates have fallen, providing a benefit to the issuer to call the bonds in. Purchasing power risk and inflation risk are also synonymous terms, but there is insufficient information to judge what changes had occurred regarding inflation.
38. JJQQ trades in the Nasdaq Stock Market and has announced a tender offer for 10% of the outstanding shares of the company at a 10% premium to the stock's closing price as of Friday, September 1, the cutoff date to tender shares. All of the following investors could participate in the tender offer EXCEPT an investor who: A. purchased the stock on Thursday, August 31 for regular way settlement B. tendered JJQQ convertible bonds on Friday, September 1 C. bought call options on Wednesday, August 30 D. bought JJQQ common stock for cash settlement on September 1
C - To participate in a tender offer, investors must have engaged in an irrevocable action to acquire the common stock by the time of the cutoff for the tender offer; in this case, September 1. The action does not require that the customer's transaction (to acquire the stock) has settled by the tender date. Choices A, B and D each involve an action to acquire the JJQQ common stock. Choice C, the purchase of the call options, provides the right, but not the obligation to purchase the stock. In order to participate in the tender offer, the holder of a call option would have to exercise the option by the cut-off date of the tender offer.
95. A customer with a restricted margin account has a current market value of $150,000 and a debit balance of $90,000. The customer wishes to know how low the current market value could decline before she receives a maintenance margin call. You would inform her that a maintenance margin call will be issued should the current market value fall to: A. $119,699 B. 119,700 C. 119,999 D. 120,000
C- To determine the minimum market value in a long position, the debit balanced is multiplied by 4/3; alternatively, the debit balance can be divided by .75. In this example, the minimum market value before a maintenance margin call would be issued is $120,000 ($90,000 x 4/3) and the customer would be required to deposit additional equity if the market value fell to $119,999.
21. An investor purchases a GFC Jan 40 call @ 4 and sells a GFC April 30 call @ 9. This is an example of a: A. Variable hedge B. Vertical spread C. Horizontal spread D. Diagonal spread
D - A customer who buys and sells the same type of option has created a spread. If the strike prices and the expiration months are different, it is a diagonal spread.
45. All of the following characteristics are advantages of a sinking fund EXCEPT: A. it will improve credit worthiness B. it will lower the interest rate on a bond issue C. it will provide funds to retire debt D. early redemption of bonds reduces reinvestment risk
D - A sinking fund covenant requires an issuer to place funds aside for the retirement of bonds. This provision is used to increase the credit quality of the issue, reducing the interest expenses to the issuer. In a sinking find call, the bonds are selected on a random selection basis, but this does not change the reinvestment risk for bondholder, since the bonds will be called on specific dates, irrespective of whether interest rates have risen, or have declined.
89. A registered Representative has just purchased a new Galactic 15 phone. May she use it for work? A. Yes B. No C. Yes, but only for text messaging and phone calls D. Yes, but only for phone calls
D - According to FINRA's latest rules regarding customer communications, personal cell phones that are not linked to the broker dealer's system may only be used for phone calls. Any business-related text messages must be retained by the broker dealer and therefore would be prohibited in use by registered representatives to contact customers on non-linked electronic devices.
69. Which of the following activities will not cause a change in SMA? A. Cash dividends are paid into a restricted account B. Securities are voluntarily liquidated in an account C. A customer engages in a same day substitution sale in a margin account D. An increase in the value of a short market position
D - An increase in the value of a short market position will cause the customer's equity to decline. This results in SMA locking (remaining the same) at its present value. Each of the other actions result in money that may be withdrawn by the customer. As a result, each of those actions will cause SMA to increase.
14. When KLO Co. common stock was trading at 108, a customer wrote a KLO June 120 call and received a $4 premium. She also bought a KLO June 100 call, paying a $12 premium. Later the customer sold the KLO June 100 call for $20, while the KLO June 120 call expired unexercised. The customer will realize a: A. $400 loss B. $400 profit C. $1,200 loss D. $1,200 profit
D - As can be determined using the 'T' account, the customer would have a 12-point gain, which would equate to a $1,200 profit. CHART Out In 12 4 0 20 _______ 12 24 +12
74. One of the primary differences between rights and warrants is: A. warrants provide the ability to purchase shares of common stock at a specified price B. the exercise of rights will result in a decline in EPS C. rights may be sold in the secondary market D. warrants do not need to specify an expiration date
D - Both rights and warrants provide the holder with the ability to acquire shares of common stock at a specified price. Since the exercise of each will result in additional shares outstanding, once exercised, each will cause earnings per share to decline. Both instruments are marketable and may trade in the secondary market; however, rights have a short life of only a few weeks, while warrants are issued with a long term life and may even be perpetual.
81. Company Z had originally conducted a public offering for 1 MM shares of common stock. It is now conducting a registered follow-on offering of 2 MM shares of common. One of your institutional investors owns 500,000 of Company Z common stock. How many shares will it be permitted to purchase of the new issue? A. 0 B. 250,000 C. 500,000 D. 1,000,000
D - Company Z will provide pre-emptive rights to the current owners of its common stock. As such, Company Z will issue one right for each share of common stock outstanding and will define the number of rights and the dollar amount required to subscribe to each new issue share of stock. In this instance Company Z will distribute 1,000,000 rights and since it is issuing 2,000,000 additional shares of common, one right will permit the purchase of two shares of the new issue of common stock. The institutional customer that owns 500,000 shares of common stock would be permitted to buy 1,000,000 shares of the new issue.
49. An investor places a market order to create a debit spread based on the following quotations: AABB January 50 call bid 4.25 ask 4.40 AABB January 55 call bid 1.35 ask 1.55 Disregarding commissions, how much would the customer be required to deposit? A. $270 B. $285 C. $290 D. $305
D - Creating a debit spread would have the investor purchasing the more expensive option (January 50 call) and selling the less expensive option (January 55 call). Since the customer placed market orders for the spread, the purchase of the 50 call would have been executed at the asking price of 4.40 and the sale of the 55 call would have been executed at the bid of 1.35. This would create a debit of 3.05 per share or $305 in total, which would be the required deposit amount.
87. How long must a broker dealer retain a customer's new account form? A. Four years after the account is opened B. Four years after the account is closed C. Six years after the account is opened D. Six years after the account is closed
D - Customer new account forms must be retained by a broker dealer for six years following the closure of the account.
98. On May 1, a 37-year-old individual opened a Roth IRA with a deposit of $5,000. During the next five months, the account rose in value to $7,600, but subsequently declined to $4,900 on April 10. The individual then closed the retirement account and used the money to pay federal taxes. Which of the following statements is true? A. There is no penalty if the money is withdrawn from an IRA to pay federal incomes taxes B. The customer will have to pay a penalty of $490 C. The customer will have to pay a penalty of $500 D. The customer has no penalty
D - Early withdrawals from retirement accounts (prior to age 59 ½) are subject to a 10% penalty on the taxable amount withdrawn. In a Roth IRA, the contribution is made with after-tax dollars and grows tax-deferred, subject to tax-free distributions. Since the amount withdrawn is less that the amount contributed, the account did not realize any capital appreciation; therefore the withdrawal may be made without a penalty.
85. All of the following are potential sources of funds backing a revenue bond issue, EXCEPT: A. concessions B. lease payments C. ticket revenues D. fines
D - Fines received by a municipality, or state may be used to service the debt of a general obligation bond. Often fines are levied for reasons including parking tickets, traffic violations and the late payments of taxes. Concessions and lease payments are sources of funds commonly associated with airport revenue bond issues. Ticket revenue is another term for user fees, as would be the case for the ridership revenue of a municipal bus service.
8. A client is seeking a safe investment that pays interest on a monthly basis. Which of the following securities would be an appropriate recommendation? A. STRIPS B. Preferred stock C. Treasury notes D. GNMA Pass-through Certificates
D - GNMA Pass-through Certificates pay interest (and a portion of principal) on a monthly basis. STRIPS are a form of zero-coupon instrument that are sold at a discount and pay face amount at maturity. Preferred stock pay dividends on quarterly, while Treasury notes pay interest semi-annually.
44. Your customer wishes to invest in a security that will pay a specific level of dividends, but may also receive additional amounts, should the underlying company have outstanding performance. Which of the following securities would BEST match this customer's objectives? A. Cumulative preferred stock B. An equity-linked annuity C. An ETN D. Participating preferred stock
D - Participating preferred stock provides a stated dividend amount (as a percentage of par value), plus the opportunity to receive additional dividends, based on predetermined conditions, such as the profitability level of the underlying company.
29. In Apr 201X, a customer bought 500 shares of JGH @ 32. The following March, the stock had risen to 51 and the customer, concerned that the price might slip lower, writes 5 JGH May 50 calls @ 5 each. At the option's expiration, the market price was 49. Which of the following statements is TRUE? A. The customer has a short-term capital gain of $11,000 B. The customer has a long-term capital gain of $11,000 C. The customer has a long-term capital gain of $2,500 D. The position breakeven point is 27
D - The customer had a breakeven point of 27. Out In 32 5 The customer is under no obligation to sell the stock if the call options expire out-of-the-money; additionally, there is no indication in the question that the customer closed the position at the market price (49). If the customer had closed the position at $49, then the result would have been a long-term capital gain of $11,000. Out In 32 5 49 +22 x 500 shares = $11,000 gain The gain would have been long-term, since the sale of the call would not affect the holding period of the stock, which was held for more than 1 year.
4. An individual owns a CVB corporation 8% convertible debenture. The debenture is convertible at $20 and is currently selling in the market at 97 ½. If CVB common stock is trading in the market at 18, at what price should the debenture sell for to be at a 10% premium to parity with the common? A. $900.00 B. $965.25 C. $975.50 D. $990.00
D - The first step is to determine the conversion rate for the bond. With a conversion price of $20, the conversion rate is 50 shares ($1,000/$20). To determine parity, multiply the current market price of the common stock by the conversion rate ($18 x 50 = $900). Since the price of the bond is trading at a 10% premium above par value, it is trading at $990 ($900 x 1.1 = $990).
32. Which of the following choices would incur the most reinvestment risk? Switching from a: A. T-note fund to a gold fund B. T-bill fund to a gold fund C. Gold fund to a t-note fund D. Gold fund to a T-bill fund
D - The greatest reinvestment risk is based upon reinvestment in the fund that will have the lowest rate of return, in this case it is moving from a gold fund (which generally has a higher rate of return than treasury bills) into a T-bill fund.
12. Which of the following statements describes the greatest risk associated with mortgage-backed securities? A. Borrowers might default on their mortgage payments B. The market for mortgage-backed securities is illiquid C. The market price of the bonds might fall due to a rating downgrade D. Falling interest rates might accelerate early repayment of principal
D - The greatest risk associated with mortgage-backed securities is prepayment risk. As interest rates decline, prepayments speed up. Additionally, if interest rates rise, payments slow down. This is referred to as extension risk.
66. Which of the following indices would be examined to see result of the overall stock market? A. Nasdaq Stock Market B. S&P 500 C. Russell Index D. Wilshire Index
D - The return of the overall stock market is measured by the Wilshire 5000 Total Market Index. Usually called the Wilshire 5000, it is a market-capitalization-weighted index of the market value of all actively-traded U.S. stocks.
37. An options trader has established the following positions: Bought 10 BXL April 75 calls Sold 20 BXL April 80 calls Bought 10 BXL April 85 calls All of the following statements are true, EXCEPT: A. this is a neutral market strategy B. the maximum gain will be realized if the market price at expiration is $80 C. this is called a butterfly spread D. this strategy is most profitable if the market is strongly bullish
D - This is an example of a butterfly spread, which is a neutral market strategy. The customer has overlaid two spreads: Long 10 BXL April 75 calls and short 10 BXL April 80 calls as one spread and short 10 BXL April 80 calls and long 10 BXL April 85 calls as another spread. Together, these two spreads create a butterfly. Based on the intrinsic value of the options, once trading ceases on the last trade date, the maximum gain will always be achieved when the market price is equal to the strike price of the options that have been sold, in this case at 80.
Use the following information to answer questions 56 and 57 Your customer is long 1,000 shares of GOZX common stock, purchased for $44 per share. The company has a dividend payout ratio of 20% and EPS of $4. When the stock reached $50 per share, GOZX paid a 10% stock dividend. The customer later sold the stock for $60. 56. What was the customer's capital gain for GOZX? A. $11,000 B. $16,000 C. $20,000 D. $22,000 57. If GOZX maintained the same dividend payout ratio and had a P/E of 12 at the time of the stock dividend, what would be the expected annual dividend? A. $.73 B. $.80 C. $.83 D. $1.00
D - To determine the amount of capital gain, it is first necessary to adjust the customer's original cost basis, due to the stock dividend. The original cost was $44,000 (1,000 x $44). The customer would have received an additional 100 shares, based upon the 10% stock dividend, bringing the total number of shares owned to 1,100. The original cost divided by the total number of shares would make the new cost basis $40 ($44,000 ÷ 1,100). The stock was sold for $60; therefore, the customer realized a capital gain of $20 per share, based on 1,100 shares, for a total of $22,000. C - At the time of the stock dividend, GOZX had a price of $50. If the price to earnings ratio was 12, the earnings per share would have been $4.17 ($50 ÷ 12). A dividend payout ratio of 20% would equal an annual dividend of $.83 ($4.17 x .2). tom:
