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5 Written questions

5 Matching questions

  1. 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
  2. Which of the following insure municipal bonds?


    I and II only
    II, III, and IV only
    III and IV only
    I, II, III, and IV
  3. Which of the following Moody's ratings is the most speculative?

  4. In May a customer sells a STC July 40 listed Call for a $6 premium and buys a STC July 30 listed Call for $10. The customer has created a:

    Bullish spread
    Bearish spread
    Debit spread
    Credit spread

    I and III
    II and III
    I and IV
    II and IV
  5. 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
  1. a A.
    The investor bought the more expensive call; therefore, this is a debit spread. A call debit spread is a bullish strategy.
  2. b 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.
  3. c D.
    Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.
  4. d C.
    The Municipal Bond Investors Assurance Corporation (MBIAC) and AMBAC Indemnity Corporation (AMBAC) are two insurance companies that insure new municipal issues. The insurance policy guarantees that should the issuer fail to pay interest or principal, the insurance company will meet all interest and principal payments when due. S&P and Moody's typically assign an AAA rating to any insured issue. Another insurer is Financial Guarantee Insurance Company (FGIC).
  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. B.
    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.
  2. B.
    A major difference between open-end and closed-end investment companies is their capitalization, the types of securities they issue to raise money. Open-end companies may only issue common stock. Closed-end companies may issue common stock, preferred stock, or bonds.
  3. A.
    The largest deduction in a real estate program is generally depreciation.
  4. A.
    When an index option is exercised, the writer must pay the buyer the in-the-money amount of the option in cash.
  5. 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.

5 True/False questions

  1. MSRB rules require that a municipal securities principal must approve all of the following, EXCEPT:

    All municipal transactions
    Municipal advertising
    Finalized bid forms
    Correspondence sent to customers
    A municipal securities principal does not have to approve a bid form. A bid form is submitted by a municipal syndicate in relation to a competitive bid.


  2. 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
    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. 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
    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).


  4. 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:

    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.


  5. A brokerage firm's research department has issued a buy recommendation on XYZ Corporation common stock. The report must contain all of the following information, EXCEPT:

    The firm was the managing underwriter in a recent public offering of the stock
    The number of shares the firm owns of the stock
    Partners of the firm hold options to purchase the stock
    The firm makes a trading market in the stock
    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.


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