5 Written questions
5 Matching questions
- An insurance company has a portfolio of long-term government securities. The portfolio manager anticipates that interest rates will rise and would like to hedge the portfolio. He should sell:
- Which of the following Moody's ratings is the most speculative?
- Which TWO of the following statements are TRUE regarding Eurodollar bonds?
They are denominated in U.S. dollars only.
They are denominated in foreign currencies only.
They are only traded outside of the U.S.
They are traded in the U.S. and international markets.
I and III
I and IV
II and III
II and IV
- A customer gives his registered representative the following instructions. Buy 100 shares of General Motors "whenever you think the price is right." Under current regulations the order:
Can be accepted
Must be marked "discretionary" and approved by a branch manager
Cannot be accepted
Must be executed as soon as possible after it is received
- a B.
If interest rates rise, bond prices will fall, so that the manager should sell calls (or buy puts). Since the portfolio is made up of long-term government securities, selling T-bond calls is the best answer.
- b D.
Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.
- c A.
The order can be accepted and is not a discretionary order which requires written power of attorney. The customer told the registered representative which stock to buy (GM) and the amount (100 shares). The phrase "whenever you think the price is right" means the registered representative can use his or her judgement as to when the stock should be purchased. The order is not a market order and does not have to be executed as soon as possible after it is received. The order, however, should be executed sometime during the day it was received.
- d B.
Eurodollar bonds are dollar denominated bonds issued and sold outside the U.S. They may trade in the U.S. after a period of at least three months after issuance.
- e An account in which the customer gives the broker or someone else authorization to buy and sell securities or commodities. Discretionary authority includes control over selection, timing, amount, and price to be paid or received.
5 Multiple choice questions
GNMA pass-through certificates are guaranteed by the U.S. government. Interest and principal payments are received monthly. The interest is subject to federal, state, and local taxes. GNMAs are secured by residential, not commercial mortgages.
The customer has the right to call the stock at $50. The customer paid a $600 premium per straddle. The breakeven point on the call is determined by adding the $50 strike price to the premium of $6. This equals a breakeven of $56. The customer also has the right to sell the stock to the writer at $50, but has paid a $600 premium. The breakeven point on the put would be six points below the strike price of $50, which equals $44. The buyer's breakeven points will therefore be $44 and $56.
The dated date is only used to calculate accrued interest on a new issue. When pricing a bond (determining the yield when price is known or determining the price when yield is known), the coupon, settlement date, and maturity are required.
Corporations may exclude a portion of the dividends received from investments in the common and preferred stocks of other corporations.
To find the new number of shares, multiply the shares owned by the ratio of the split (280 x 5/4 = 350). To find the new dividend per share, multiply the dividend by the reciprocal of the split ($.15 x 4/5 = $.12). The investor would receive a 12 cent dividend on 350 shares for a total of $42.00. Note that the stock split did not alter the total dividend received.
5 True/False questions
A 65-year-old individual receives money from a qualified variable annuity. This payment would be:
Subject to a 10% penalty
Fully taxable at the investor's tax bracket
Treated as a capital gain for tax purposes
Partially taxable at the investor's tax bracket
a II only
I and III only
I and IV only → B.
When a bond is pre-refunded, the only applicable date is the first call feature. Therefore, the bond must be priced to the first call date.
State governments receive the least amount of revenues from:
Property taxes → D.
State governments receive the least amount of revenues from property taxes. States raise money primarily from income taxes, sales taxes, excise taxes, and license fees. Local municipalities raise most of their funds from property taxes (real estate taxes).
A client buys 100 shares of Miramar at $42/share. One week later she buys 1 Miramar Nov 40 put and pays a premium of $300. In November the stock is at $48/share and the put expires worthless. The tax consequences of these trades are:
Miramar stock has a basis of 42
Miramar stock has a basis of 45
There is a capital loss of $300 on the put
No loss is reported on the put until the stock is sold
I and III only
I and IV only
II and III only → D.
The minimum equity requirement for a short account is $2,000. Since this is a new account, the customer must deposit $2,000.
All of the following are TRUE about "stopping stock" on the NYSE, EXCEPT that it:
Is permitted only for public orders
Requires permission of an exchange official
Is done by the specialist
Will guarantee a price for the order → C.
T-bills, BAs, and CDs are money-market instruments (short-term debt securities). ADRs represent a claim to foreign securities and are used to facilitate the trading of foreign stocks in the United States.
An investor purchases Swiss francs in the spot market at 61. As a hedge, the investor buys a Swiss franc June 60 put at 0.50. This strategy will be profitable if:
The U.S. dollar weakens
The U.S. dollar strengthens
The spot price for the Swiss Franc is 61.75
The spot price for the Swiss Franc is 59.25
I and III only
I and IV only
II and III only
II and IV only → A.
Since the investor purchased Swiss francs, the investor is predicting that the price of the Swiss franc will rise. The investor also bought a put for protection in case the value declined. This strategy will be profitable if the U.S. dollar weakens and the spot price of the Swiss franc rises above 61.50 (cost of the Swiss francs plus the premium for the put).