S.I.E. Chapters 1-7 100Q (missed)
An investor purchasing 2 GMAC ZR 12's at 53 1/2 would receive annual interest of
$0 Explanation: The ZR in the quote indicates that this bond is a zero, it does not make semi-annual interest payments. Zero's sell at a deep discount and mature at par. The difference between the purchase price and the cash received at maturity is interest income.
The standard denomination in which banker's acceptances are sold is
$100,000 Explanation: The standard BA denomination is $100,000. Smaller amounts are called odd-lots
An investor purchased shares of a mutual fund two years ago for $3,500 and has since reinvested dividend distributions of $375 and $325. The investor's total cost basis in this fund is now
$4,200.00 Explanation: The investor's cost basis in this mutual fund is their original purchase price ($3,500) plus the reinvested dividends ($700), for a total of $4,200. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.
On February 1st a customer purchases a municipal bond for settlement on February 3rd. The bond pays semi-annual interest on January 15 and July 15. How many days of accrued interest are added to the buyer's price?
18 days Explanation: The calculation of accrued interest includes interest on the prior payment date up to, but not including the settlement date. Municipal bond accrued interest is calculated based on 30-day months. If you start counting on the 15th of a 30 day month, there are 16 days of interest. There are 2 additional days in February for a total of 18 days of interest.
An investor sells 10 XYZ June 30 puts at 3.5. The breakeven point is
26.5 Explanation: The breakeven point for the seller of a put option is the strike price of the option minus the premium received for the option.
What are typical maturities in banker's acceptances (BAs)?
30 to 180 days Explanation: Maturities of BAs typically fall between 30 and 180 days. Issues usually can be sold in the secondary market at any time prior to maturity.
An investor purchases 100 shares of XYZ stock at 56 and later buys 1 XYZ 54 put for 2.10 when the market price of ABC is 55. What is the investor's breakeven on the combined purchase?
58.1 Explanation: When an investor buys a put to protect a stock purchase, the investor will breakeven when the stock price is equal to the cost of the stock plus the put premium. 56 + 2.10 = $58.10.
When a redemption of mutual fund shares is requested, the fund must redeem shares within
7 calendar days Explanation: A mutual fund is required to respond to a written request for redemption of mutual fund shares within 7 calendar days.
Most hedge funds are offered to investors through
A private placement Explanation: Hedge funds are sold through private placements to accredited and institutional investors. They are exempt from the SEC registration process for public offerings.
All of the following projects are most likely funded by revenue bonds with the exception of
A public park Explanation: Public housing projects, airports and other major transportation facilities that are funded by user fees and housing for colleges and universities are typically funded by revenue bond issues.
Financing for which of the following is most likely supported by a revenue bond?
A public utility Explanation: User fee back revenue bond issues. Public utilities collect user fees which are used for payment of debt service.
Which of the following is not an example of a municipal note?
AON Explanation: AON (all or none) represents a type of underwriting, not a type of municipal note.
A structured product is best defined as which of the following?
An investment product that produces a return based on the performance of one or more underlying securities Explanation: Structured products produce a return based on the performance of one or more underlying securities. Market linked CDs and structured notes are common examples of structured products.
Features of ETNs include all of the following EXCEPT
An owner of an ETN holds equity securities with voting rights Explanation: ETNs are debt notes that are unsecured and backed by the credit of the issuer. They are designed to blend some of the features of ETFs with debt securities, and track performance of market indices to yield profits for investors. ETNs are traded on major exchanges, but investors can also hold these debt securities until maturity. They are considered more tax efficient than mutual funds or ETFs because there is no annual distribution of capital gains from the fund. Gains or losses are realized only when the investment is sold.
A "penny stock" generally refers to an unlisted security that trades
At less than $5 per share Explanation: A "penny stock" is a security typically issued by a very small company and trades for less than $5 per share
Company A and Company B are multinational corporations whose typical business interests are in the import/export fields. The international transactions in which these businesses engage might be financed through the use of
BAs Explanation: International transactions can be financed through the use of banker's acceptances (BA). These are typically checks drawn on a bank by an importer or exporter of goods and represents the bank's promise to pay the face amount of the note at maturity, which is usually within a three month time period. Banker's acceptances are frequent investments in money market funds.
A hedge fund that does not disclose the investments it will make, giving full authority to the fund manager, is called a
Blind pool Explanation: A blind pool hedge fund permits the fund manager to make the determination of how assets will be invested. The investments that will be made are not disclosed.
A general partner in a limited partnership is prohibited from
Competing with the partnership through another entity for personal gain Explanation: General partners cannot engage in conflicts of interest with the partnership they manage. Competing directly for personal gain with the partnership is a prohibited conflict of interest. GPs may loan money to their partnership, but may not borrow from the partnership. They must hold a minimum interest of 1% in the partnership but are not prohibited from holding a larger interest.
Which of the following assets would be LEAST likely to be structured into an asset-backed security?
Corporate equipment Explanation: Only financial assets can be securitized into asset-backed securities (ABS). Corporate equipment is a hard asset and, as such, would not be securitized into an asset-backed security. Home equity loans, student loans, auto loans and credit card receivables are all financial assets that are commonly structured into asset-backed securities.
A risk of investing in an international bond UIT that is not commonly associated with other bond UITs is
Currency risk Explanation: International bond UITs hold debt in foreign companies and governments that is denominated in foreign currencies and then converted into U.S. dollars. The dollar does not always hold strong value against other foreign currencies.
The inputs for calculating yield to call (YTC) include the bond's current market price, par value, and what else?
First call date and any call premium Explanation: YTC is calculated the same as yield to maturity (YTM) with two exceptions. First, the first call date is used instead of maturity date. Second, any call premium on the first call date must be added to par value.
A municipality is planning to raise money to finance a large government building complex. It hires a financial advisor to provide assistance in planning the new issue. If the advisor believes that interest rates may soon trend higher, the advisor would most likely recommend which one of the following?
GO bonds with long-term maturities Explanation: Because interest rates are on the rise, the financial advisor will most likely recommend locking in the lowest possible rate for the long-term. Therefore, it is likely to recommend long-term bonds to finance the project. GO bonds are used to finance public projects like government buildings.
An investor purchases a 6% bond for 115. Rank the yield computations for this bond from highest to lowest. I. Current yield II. Nominal yield III.Yield to call IV. Yield to maturity
Highest -- Nominal Yield -- Current Yield -- Yield to Maturity -- Yield to Call Lowest When a bond is trading at a premium, the nominal yield (i.e. coupon) is the highest rate, followed by the current yield, yield to maturity, and yield to call.
The responsibility of the sponsor of a unit investment trust includes which of the following? I. Selection of the securities for the trust II. Organizing the formation of the trust III. Tax reporting for the trust IV. Recordkeeping for the trust
I and II The sponsor of a UIT organizes the trust and is responsible for the selection of the portfolio securities. The trustee handles administrative functions, including the recording keeping, accounting and tax reporting duties.
Limited partnership interests which are sold without specific definition of the assets that are held are I. blind pool programs II. blank check programs III. More risky than other LP investments IV. Less risky of LP investments
I and III Explanation: Blind pool programs are limited partnerships that don't define the assets that are held. Because investors don't know what they are getting into they have higher risk.
A customer purchased a 5% U.S. government bond yielding 6%. A year before the bond matures, new U.S. government bonds are being issued at 4%, and the customer sells the 5% bond. The customer probably I. bought it at a discount II. bought it at a premium III. sold it at a discount IV. sold it at a premium
I and IV When the customer purchased the bond the YTM was greater than the nominal yield. This means that the bond was purchased at a discount as the investor will realize a capital gain upon maturity. Interest rates and bond prices move in opposite directions, so when interest rates decrease to 4% the price of the 5% bond will increase as it has a higher coupon and is more attractive to investors. The customer will then be able to sell the bond at a premium.
A customer is planning to liquidate shares owned in a public REIT. Which two of the following are TRUE? I. The share value is calculated by a formula II. The share value is determined by market supply and demand III. The value received may be more or less than the NAV IV. The value received will never be less than the NAV
II and III Explanation: When a customer liquidates shares in public REIT, their value is determined by market supply and demand, and may be more or less than the NAV of the shares.
When must proxy materials be filed with the SEC?
In advance of the shareholder solicitation Explanation: The information contained in proxy materials must be filed with the SEC in advance of the shareholder solicitation, and it must disclose all important facts upon which shareholders are asked to vote.
All of the following are characteristics of listed options EXCEPT
Limited liquidity Explanation: Listed options are puts and calls that are exchange traded. They have standardized strike prices and expiration dates which make them marketable and liquid for buyers and sellers.
A speculative investor has a strong bearish outlook on ABC stock. Which of the following positions is most suitable for this investor?
Long ABC put Explanation: A long put is the most bearish of the options strategies. When not used to protect a stock position it allows an investor to benefit from a declining market.
A customer sells short 200 shares of XYZ stock for 43 and buys 2 XYZ 47 calls for 2.50. The stock price rises to 50 and the option is exercised. The profit or loss to the investor is
Loss of $1,300 Explanation: The stock is sold short for $8,600. To protect the position the investor buys 2 calls for $500. The calls are exercised when the market price of the stock rises, so the investor buys the stock to cover the short position for $9,400. The customer received $8,600 from the short sale, but paid a total of $9,900 (premium + stock purchase price) for a loss of $1,300.
An investor writes a call to increase income to his portfolio. In establishing this position this investor has engaged in an
Opening sale Explanation: This investor enters the market by writing a call. Creating an opening sale to establish the position.
U.S. based hedge funds are subject to which of the following tax consequences on income that is distributed?
Pass through without taxation Explanation: Like other investment companies, hedge funds are set up as flow-through tax structures and are not taxed on the income they distribute.
Municipal bonds with taxable interest payments that are issued to fund a non-essential service are
Private activity bonds Explanation: Private activity bonds are issued for the benefit of a private enterprise or a non-essential service. Their interest is taxable. While Build America Bonds have taxable interest, they are not for the benefit of private enterprise. They funded public infrastructure projects and jobs creation.
A customer buys 100 shares of XYZ stock for 57 and writes a 60 call for 4. The stock price rises to 65 and the option is exercised. The profit or loss to the investor is
Profit of $700 Explanation: The stock is purchased for $5,700 and sold for $6,000. In addition, the customer received a premium of $400 for writing the call. The investor has a profit of $700.
A municipal bond is issued by a highway authority to build new toll roads and bridges. Money collected from tolls will be used to repay bondholders, and no general tax revenues stand behind the authority's promise to repay debt. What type of bond is this?
Revenue bond Explanation: Municipal revenue bonds are backed by the cash flows generated by financed facilities. For example, tolls generated by a bridge or fees generated by a hospital.
At exercise a customer is obligated to buy stock in which of the following positions?
Short put Explanation: Short options positions have obligations that must be performed if the holder exercises the contract. Put writers have the obligation to buy stock at exercise when the put holders exercise the right to sell at the strike price.
Provisions of the Trust Indenture Act of 1939
The Trust Indenture Act of 1939 applies to corporate issues of $50 million and above, and requires a formal written agreement (an indenture), signed by both the bond issuer and the bondholder, that fully discloses the particulars of the bond issue. The act also requires that a trustee be appointed for all bond issues, so that the rights of bondholders are not compromised.
An investor purchases an XYZ Apr 73 call for 4.50 when XYZ is trading for 72.75. In November, the contract is sold for its intrinsic value when XYZ is trading for 75. Which of the following statements is TRUE?
The investor has a loss of $250 Explanation: The call was purchased for $450 and sold prior to expiration for its intrinsic value of $200. The call is in the money by $200 because the market price of the stock is more than the exercise price. However, the difference between the purchase price and sales price of the call results in a loss of $250.
An investor buys a 6.0% coupon bond to yield 6.1%. What will most likely happen to the price of the bond as maturity approaches?
The price will increase towards par. Explanation: This bond has a coupon of 6.0% and a yield-to-maturity of 6.1%, indicating that the bond is trading at a discount. The price of a bond will always trend towards par as maturity approaches. Given that this bond is trading at a discount (e.g. 90% of par), the price would need to increase to arrive at par value.
Which of the following is true regarding U.S. Government Agency Securities?
Their credit quality is second to that of U.S. Treasuries. Explanation: Agency securities such as Ginnie Mae and Fannie Mae are second in credit quality to that of U.S. Treasuries. Due to the underlying mortgages, they do carry pre-payment risk. Also, they are quoted in 1/32nds.
Which of the following statements is true about both equipment trust bonds and collateral trust bonds?
They are collateralized by equipment or assets of the corporation Explanation: Equipment trust and collateral trust bonds are both backed by corporate assets. Equipment trust bonds are usually collateralized by transportation equipment such as airplanes. Collateral trust bonds are usually secured by financial assets that are held by a trustee for the corporation. Both are long term debt obligations, and neither are debentures because they are secured by assets.
All of the following may be used to pay the debt service on general obligation bonds EXCEPT:
Tolls collected for the use of a bridge Explanation: General obligation (GO) bonds are backed by the full faith and credit of the municipality, which means its taxing authority. Taxes that back GOs include property taxes, income taxes, sales taxes, traffic fines and license fees. Tolls, concessions and lease rental payments usually back revenue bonds.
An investor in a high tax bracket is subject to federal, state and local income taxes. If the investor is seeking current income with minimum tax liability, which of the following choices is most appropriate?
US. Virgin Island Utility bonds Explanation: Bonds issued by U.S. Virgin Islands and other U.S. territories and possessions are exempt from federal, state, and local taxes. Double-barreled bonds, like other municipal bonds, are exempt from federal and possibly state taxes. Private activity bonds may be subject to alternative minimum taxes. Treasury STRIPS are subject to federal income tax, and do not provide current income.
The secondary market for ETFs is generally
While both ETFs and ETNs offer secondary market trading, the market for ETNs tends to be more limited than that for ETFs.
An investor who lives in the state of Minnesota purchases municipal bonds that are issued in the state of Wisconsin. The interest on the bonds
Will probably be more than the investor would have received from an investment in US government bonds. Explanation: Interest on municipal bonds is generally higher than US Government bonds because munis are considered less safe than government bonds. The interest payments on municipal bonds do not fluctuate; they are fixed at issue. If the interest on an outstanding bond is more than the coupon for similar new issues, the outstanding bond will trade at a premium; if less, the bond will trade at a discount. The interest on municipal bonds may be exempt if the bondholder lives in the state of issue only.
Private label mortgage securities
may be issued by commercial banks Explanation: Private label mortgage securities are commonly issued by commercial banks, investment banks and their subsidiaries, as well as other financial institutions. The underlying collateral for these securities will typically be assets other than traditional agency securities. These "private-label" securities are not guaranteed by the federal government and are the sole obligation of their issuer. These securities are usually assigned credit ratings by independent rating agencies based on their structure, collateral, and other factors.
A convertible bond's conversion price is
the price at which a convertible bond can be converted into shares of the company's stock. Explanation: The conversion price is the price at which a convertible bond can be converted into shares of the company's stock. This is calculated as par value of the bond divided by the conversion ratio. A convertible bond's conversion price will be defined in the offering memorandum and the indenture. The conversion premium is the spread between the market price of the convertible bond and the price at which it can be converted, expressed as a percentage. The conversion ratio is the number of shares of stock that can be exchanged for each bond. This is calculated as the par value of the bond divided by the conversion price. The conversion value is the current value of the bond if it is was converted today.
