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5 Written questions

5 Matching questions

  1. An investor purchases $10,000 face value of an 8-year municipal bond at a price of 108 and holds the bond to maturity. The investor would report:

    No loss or gain
    $800 capital loss
    $800 capital gain
    $800 accreted interest
  2. 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:

  3. 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

    II only
    I and III only
    I and IV only
    II and III only
  4. A customer shorts 100 shares of ABC at 16 in a new margin account. How much must he deposit?

    $2.50 per share
  5. All of the following are money-market instruments, EXCEPT:

  1. a 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).
  2. b B.
    Because the transactions took place on different days, each component is treated separately. The client owns stock at a cost basis of 42. When the put expires, the client has realized a $300 capital loss. If the trades were done on the same day, the strategy is referred to as a married put and the cost basis of the stock is 45. With the married put, no loss would be taken if the put expired worthless.
  3. c A.
    The premium paid on a municipal bond must be amortized over the life of the bond. If held to maturity, the cost basis is reduced to par value and there is no loss.
  4. d D.
    The minimum equity requirement for a short account is $2,000. Since this is a new account, the customer must deposit $2,000.
  5. e 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.

5 Multiple choice questions

  1. B.
    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.
  2. 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.
  3. C.
    To find the conversion ratio, divide the par value of the bond by the conversion price ($1,000 divided by 40 = 25). The common stock is selling at $41. Converting the bond to common stock and selling the stock would give the client $1,025 (25 shares x $41 = $1,025). Since this is less than the client would receive by selling the bond ($1,070) or allowing the bond to be called ($1,040), it represents the least attractive alternative.
  4. A.
    If a municipal bond is purchased at a discount in the secondary market (not an original issue discount), there will be a taxable gain at maturity. A taxable gain would also result if the bond was sold prior to maturity, above the original cost.
  5. 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).

5 True/False questions

  1. A fundamental analyst, evaluating the common stock of a corporation, would examine all of the following, EXCEPT the:

    a. Sales of the corporation
    b. Management of the corporation
    c. Current amount of earnings paid out as dividends to the shareholders
    d. Current amount of short interest positions for the stock
    A fundamental analyst would examine all of the factors listed relating to a common stock except the current amount of short interest positions for the stock. Short interest is a statistic examined by a technical analyst. It represents the total amount of shares sold short that will be covered in the future.


  2. A stock index call option is exercised. The writer must:

    Deliver cash
    Deliver the underlying index
    Purchase the underlying index
    Close out his position
    When an index option is exercised, the writer must pay the buyer the in-the-money amount of the option in cash.


  3. Choose from the items below, the one that is best described by the following.

    Tax credit

    The largest deduction generated by a DPP in real estate.

    Tax credit
    The underwriting spread includes the manager's fee, the additional takedown, and the concession. The additional takedown plus the concession equals the total takedown. A member of the syndicate is entitled to the total takedown for bonds it sells. The manager's fee always goes to the managing member of the syndicate.


  4. 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
    IV only
    I and III only
    I and IV only
    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. For tax purposes, corporations may exclude a portion of the dividends received from:

    Corporate bonds
    Municipal bonds
    Preferred stocks
    Common stocks

    I only
    I and III only
    II only
    III and IV only
    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.


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