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5 Written Questions

5 Matching Questions

  1. 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
  2. Broker-dealers are permitted to:

    I. Tell investors to buy mutual funds shortly before a dividend or capital gain distribution is to be paid
    II. Arrange for a customer to obtain credit to buy open-end investment company (mutual fund) shares
    III. Assign loan value to mutual fund shares owned by a customer for more than 30 days
    IV. Continue to compensate a retired registered representatives for contractual plan sales if a contract is signed with the registered representative who has retired

    a. I and IV only
    b. II and III only
    c. III and IV only
    d. II, III, and IV only
  3. All of the following should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction, EXCEPT the:

    Costs involved in executing the trade
    Dollar value of the security
    Cost price of the securities held in inventory by the dealer
    Availability of the security
  4. In periods of "easy money" when interest rates are declining, yield curves would tend to:

    Slope upward from the shorter to the longer maturities
    Slope downward from the shorter to the longer maturities
    Remain flat
    Do none of the above
  5. The Federal Reserve Board margin requirement is 50%. A customer, in his margin account, buys 100 shares of XYZ Corporation at $80 per share and 1 call option on XYZ Corporation at 2. The customer will have to deposit:

    $4,100
    $4,200
    $4,400
    $4,600
  1. a C.
    All of the choices given should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction except the purchase price of securities held in inventory by the dealer. The commission charged should be based on the current market price, not the cost of the inventory position.
  2. b 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.
  3. c C.
    Under industry rules, broker-dealers are permitted to continue to compensate retired registered representatives for contractual plan sales if a contract is signed with the registered representative who has retired. These commissions are known as "continuing commissions" or "trails." To induce an investor to buy mutual fund shares shortly before a dividend or capital gain distribution is to be paid is a violation of the Conduct Rules and is called "selling dividends." There is no benefit to the customer because the value of the mutual fund will decline when the fund sells ex- (without the) dividend or when there is a capital gain distribution. The customer can wait and receive the same value in shares. Although broker-dealers cannot obtain credit for a customer to buy open-end shares, loan value can be assigned to fully-paid shares which the customer has owned for more than 30 days.
  4. d B.
    The customer will have to deposit $4,200. Margin on the $8,000 stock purchase would be $4,000. The premium of $200 for the option has to be paid in full. Options cannot be purchased on margin, although they may be purchased in a margin account. The total deposit would be $4,200 ($4,000 margin purchase + $200 option premium).
  5. e A.
    In periods of "easy money" when interest rates are declining, yields on shorter maturities would be less than those of longer maturities. Yield curves would tend to slope upward from the shorter to the longer maturities.

5 Multiple Choice Questions

  1. D.
    ERISA gave the government jurisdiction over private pension plans and protects employees from improper investments by their employers. It does not apply to government employer plans.
  2. A buyer of Cummings Corporation would not be entitled to receive the 50-cent quarterly dividend because the purchase was made on May 10th. This was after the stock had sold ex-dividend (without the dividend). The ex-dividend date is not given but the record date is April 10th. Stocks sell ex-dividend on the 2nd business day preceding the record date. This would be two business days prior to April 10th, which is more than one month before the customer bought the stock. Even if the purchase was made "for cash" which requires a same-day payment, it would still be one month too late for the buyer to receive the dividend.
  3. 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).
  4. B.
    When a cash dividend is paid, current assets (cash) and current liabilities (dividends payable) are decreased. Since both are reduced proportionately, working capital (current assets minus current liabilities) remains the same.
  5. C.
    The loss would not be allowed if the customer purchased the same or substantially identical security within 30 days. Purchasing a call is considered substantially identical since it gives the investor the right to buy 100 shares of XYZ stock.

5 True/False Questions

  1. An investor owns 280 shares of XYZ Corporation. XYZ Corporation pays a 15 cents quarterly dividend. XYZ Corporation announces a 5 for 4 split with a corresponding decrease in the per share dividend. How much will the investor receive in dividends each quarter after the split?

    $40.00
    $42.00
    $52.50
    $80.00
    D.
    None of the choices listed would guarantee that there would be no loss on the position. A buy stop becomes a market order once triggered and does not guarantee a specific price. A buy limit does not guarantee execution. The purchase of the call would not totally prevent a loss since it would reduce the investor's sale proceeds to $29 and the strike price of the call only guarantees a purchase price of $30 (resulting in a one point loss if exercised).

          

  2. A customer buys 10 ABC January 50 Calls paying a $3 premium and 10 ABC January 50 Puts also paying a $3 premium when the market price of the stock is $49 per share. The buyer's breakeven points will be:

    $44
    $47
    $53
    $56
    I and III only
    I and IV only
    II and III only
    II and IV only
    B.
    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.

          

  3. Mr. Jones, a client of XYZ brokerage firm, buys $12,000 of ABC stock and, on the same day, sells short $10,000 of DEF stock. Regulation T margin requirement is 50%. The member firm will issue a margin call for:

    $2,000
    $6,000
    $7,200
    $11,000
    The client made two separate transactions that would each require a margin deposit. At a 50% margin requirement, the long purchase of $12,000 would require a cash deposit of $6,000 (50% of $12,000 = $6,000). The short sale of $10,000 would require a cash deposit of $5,000 (50% of $10,000 = $5,000). A total margin call of $11,000 must be met ($6,000 + $5,000 = $11,000). It is important to note that in this example there are two separate transactions. A margin call for each is necessary. This differs from other margin questions where there is a same-day substitution in a restricted margin account and offsetting transactions are made.

          

  4. A member of a municipal syndicate is entitled to which of the following?

    Underwriting spread
    Additional takedown
    Manager's fee
    Concession
    I and III only
    II and III only
    II and IV only
    I, II, III, and IV
    A.
    The largest deduction in a real estate program is generally depreciation.

          

  5. An individual may roll over a lump-sum distribution from a corporate pension plan to an IRA without tax consequences if it is done within:

    10 days
    30 days
    60 days
    90 days
    C.
    When a lump-sum withdrawal from a corporate pension plan, Keogh, or IRA is deposited into an IRA, it is referred to as a rollover. If the rollover is done within 60 days, the investor will avoid a taxable event. If the distribution is from a qualified plan other than an IRA, the distributing company must withhold 20% of the distribution for the IRS. Only one rollover is permitted each year.

          

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