Advertisement Upgrade to remove ads

An investor purchases a BAT Sept 30 put @ 2 and also writes a BAT Sept 40 put @ 8. The investor will profit if:

The spread widens to more than 6
The spread narrows to less than 6
Both options expire
Both options are exercised
I or III
I or IV
II or III
II or IV

C.
The position described is a spread. The investor received more (8) for the put that he sold than he paid (2) for the put that he purchased. The spread is therefore a credit spread and the investor wants the spread to narrow. If both options expire, the investor gets to keep the 6 points of net premium and would have a profit. (15-23)

A specialized or specialty fund invests in stocks that are primarily:

In many industries
In a particular industry or geographical area
Traded in the OTC market
Special situations

B.
A specialized or specialty fund is a type of a fund that invests primarily in a particular industry or geographical area.

A broker-dealer that is an MSRB member firm sells bonds to one of its customers. If the broker-dealer is NOT a member of the syndicate, the firm is entitled to the:

Total takedown
Additional takedown
Syndicate expenses
Concession

D.
A broker-dealer that is not a member of the syndicate selling part of a new issue of municipal bonds is entitled to the concession. A member of the syndicate is entitled to the additional takedown plus the concession, which is also known as the total takedown. (10-8)

Where would bid limitations for a new municipal bond issue be found?

Official Statement
Indenture
Notice of Sale
Syndicate Agreement

C.
The Notice of Sale is published by the issuer. It announces the issuer's intention to sell an issue and invites securities firms to compete for the issue. All information pertaining to the bidding would be contained in the Notice of Sale. (10-2)

A stock trades ex-dividend on Monday the 20th. What is the last day an investor can purchase the stock and be entitled to the dividend?

Monday the 13th
Thursday the 16th
Friday the 17th
Monday the 20th

C.
To be entitled to receive the dividend, the stock must be purchased prior to the ex-dividend date. Friday the 17th is the last day an investor could purchase the stock and be entitled to the dividend, since it is the business day prior to the ex-date. (4-7)

A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63.

The round-lot sale that activated the order was at:

18.25
18.38
18.50
18.63

A.
In order for a sell-stop order to be activated, a transaction must occur at or below the stop price. In this example, the stop was at 18.50. The first transaction was 18.25, which is at or below the stop price of 18.50, and that activated the order. (11-23)

A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63.

The trade was executed at:

18.25
18.38
18.50
18.63

C.
After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and would be the execution price. (11-23, 11-24)

Which of the following securities assist in financing importing and exporting operations?

Bankers' acceptances
Treasury bills
Eurodollar CDs
ADRs

A.
Of the choices given, a bankers' acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt) which facilitates the trading of foreign securities in U.S. markets. Eurodollar certificates of deposit pay interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and are not used to finance importing and exporting operations. (7-21)

A corporation has $125,000,000 of convertible bonds outstanding. The conversion price is $50. The corporation refunds $75,000,000 of the bonds for nonconvertible bonds. How many additional shares of common stock will be outstanding if the remaining bonds are converted?

1,000,000 shares
1,500,000 shares
2,000,000 shares
2,500,000 shares

A.
After the refunding, $50,000,000 of convertible bonds will remain outstanding. If these bonds are converted, there will be an additional 1,000,000 shares of common stock outstanding ($50,000,000 of bonds divided by the conversion price of $50 equals 1,000,000 shares of common stock). (6-6)

Which of the following corporations would be least affected by an increase in interest rates?

A manufacturing company
A utility company
A cosmetics company
An automotive company

C.
When interest rates are rising, industrial corporations that market "big ticket" items as well as utilities which are heavy borrowers would be adversely affected. Cosmetic companies, due to the nature of the business and low cost of their products, are not affected as much by rising interest rates. (22-5)

A corporation is in the 34% tax bracket. Which of the following choices would provide the best return if the corporation wanted to invest some of its surplus cash?

A preferred stock paying a 7.50% dividend
A corporate bond yielding 8%
A common stock yielding 6%
A municipal bond yielding 6%

A.
Corporations have a tax advantage as to dividends received from investments in preferred stock and common stock of other corporations. If the corporation owns at least 20% of the distributing corporation, it must declare, as income, only 20% of the dividends received (80% is excluded). If the corporation owns less than 20% of the distributing corporation, it must declare as income only 30% of the dividends received (70% is excluded). The 7.50% preferred stock would provide the best return since at least 70% would be excluded for tax purposes. (21-3)

A stock closed at $44 on the NYSE on September 14th. It trades ex-dividend 50 cents a share on the opening of trading on September 15th. The specialist will reduce which of the following GTC orders on his book?

An open buy limit order
An open sell limit order
An open buy stop order
An open sell stop order

I and III
I and IV
II and III
II and IV

B.
(I and IV)
An open buy limit order
An open sell stop order

All GTC orders that are entered below the market (buy limit orders, sell stop orders, and sell stop-limit orders) are automatically reduced by the dollar amount of the dividend or right when the stock sells ex- (without the) dividend or right. These orders are reduced unless they are marked DNR (do not reduce) when they are entered. The open buy limit order and open sell stop order are entered below the market and will therefore be reduced. (11-24)

According to technical analysis, a head and shoulders top formation indicates a trend that is:

Bearish
Bullish
Neutral
Highly unpredictable

A.
A head and shoulders chart formation is one of the classical patterns agreed upon by technical analysts or chartists as being a reversal of a trend in the price of a stock. If the head and shoulders pattern appears at the top of an upward trend (head and shoulders top), as in this example, it would indicate the reversal of an upward trend (bearish indicator). If the head and shoulders pattern appeared at the bottom of a downward trend (head and shoulders bottom), it would indicate a reversal of a downward trend in the price movement of a particular stock (bullish indicator). (22-39)

If a corporation reports a loss, it would not have to pay interest on:

Mortgage bonds
Guaranteed bonds
Adjustment bonds
Debentures

C.
Corporations must pay interest on debt obligations whether they have earnings in a particular year or not. One exception would be for income (adjustment) bonds, which require the payment of interest only if the corporation has earnings to pay the interest. If the corporation has no earnings in a particular year, it is not required to pay the interest on these bonds. (6-12)

Which of the following would probably provide the greatest protection of purchasing power?

Fixed annuities
Variable annuities
Corporate bonds
Treasury bonds

B.
Variable annuities would theoretically provide the greatest protection against loss of purchasing power. The payout is based upon the securities in the separate account which historically have increased in inflationary periods. This would provide for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and would not offer any protection against the loss of purchasing power in inflationary periods. (19-2)

Who prepares the syndicate agreement for a municipal underwriting?

Counsel for the issuer
Counsel for the underwriters
Financial officer of the syndicate
Issuer

B.
The underwriter's counsel is an attorney who represents the interest of the underwriters. His duties may include negotiating the underwriting agreement, reviewing the issuer's bond resolution , and reviewing the official statement. (10-3)

A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is:

$950.87
$952.80
$958.75
$9,528.00

C.
U.S. government bonds are quoted in 32nds. 95.28 would be equivalent to 95 28/32nds (28/32 = .875). This is equivalent to 95.875 percent of the par value of $1,000, which is $958.75. (7-2)

If an investor had cash and securities in his account, why would the investor write call options against the securities?

To hedge his position
To engage in an arbitrage
To increase the overall rate of return of the portfolio
To postpone paying taxes

C.
The purpose of writing calls against securities owned is to increase the overall rate of return of the portfolio. The premium the purchaser of the call would pay the writer would be added to whatever dividends the writer was receiving to increase the yield of the portfolio to the writer. (15-2)

The initial FRB margin requirement is 50%. A customer has a margin account with a market value of $20,000, a debit balance of $12,000 and equity of $8,000. If the customer was to sell $1,000 worth of stock, the amount of the adjusted increase in the SMA would be:

$300
$400
$500
$1,000

C.
This account is restricted since the equity ($8,000) is less than the Reg T requirement of the account's market value ($20,000 x 50% = $10,000). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds times the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's SMA. The customer is then at liberty to borrow the credited amount. (13-13)

Which of the following would be considered creditors of a corporation?

Debenture holders
Convertible bondholders
Common stockholders
Preferred stockholders

I and II only
I and IV only
III and IV only
II, III, and IV only

A.
Stockholders, both common and preferred, are owners of a corporation. Bondholders are creditors of a corporation; they have loaned the corporation money and received bonds as evidence of the corporation's debt to them. (6-1)

Which of the following would NOT require additional documentation to transfer stock?

Partnership account signed by a general partner
Corporate account signed by an authorized officer
Custodial account signed by the custodian
Executor signing for an estate

C.
The only authorized signature for a custodial account is that of the custodian. There would be no further documentation required. In each of the other choices, the transfer agent would require documentation showing that the person signing the certificate was authorized to do so. (2-9)

A legal opinion issued by a municipal bond attorney will state all of the following EXCEPT:

Interest is exempt from federal income taxes
Information about maturities, coupon rates, and call features if the bond is callable
A statement that the bond constitutes a legal and binding debt of the issuing municipality
A guarantee by the bond attorney that the interest will be paid when due

D.
A legal opinion will state all of the items listed except a guarantee by the bond attorney that the interest will be paid when due. (10-3)

All of the following are Bond Buyer Indexes EXCEPT:

The average yield on 25 revenue bonds with 30-year maturities
The average yield on 20 selected municipal bonds with 20-year maturities
The average yield on 11 selected municipal bonds with 20-year maturities
The total of all new issues scheduled to be sold during the upcoming 30 days

D.
The Bond Buyer computes and publishes a number of indexes which include the 20-Bond Index (choice B), the 11-Bond Index (choice C), and the Revenue Bond Index (choice A). Choice D is not an index, but is the Visible Supply. (12-27)

All of the following are true about a bond issue having serial maturities EXCEPT:

All of the bonds mature on one date in the future
The bonds are priced on a yield-to-maturity basis
The issue has a decreasing outstanding principal
The issue has decreasing total interest payments

A.
Serial bonds mature in successive years and are priced on a yield-to-maturity basis. As a serial issue nears its final maturity, the outstanding principal and total interest payments decrease. Term bonds all mature at one date in the future and are priced at a dollar price (percentage of par). (5-3)

An investor in the 35% tax bracket can buy a 5.10% tax-free municipal bond at par. What yield would the investor need in a taxable corporate bond to receive the same after-tax yield in the municipal bond?

6.90%
7.85%
8.80%
10.22%

B.
If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a corporate bond, it is necessary to find the equivalent taxable yield. The formula is:


Equivalent Taxable Yield =
Municipal Bond Yield/
100% - investor's tax bracket

The customer is in the 35% tax bracket. The municipal bond has a 5.10% coupon rate and since it is purchased at par, the yield is also 5.10%.

7.85% Equivalent Taxable Yield =
5.10% (municipal bond yield)/
65% (100% - 35%)


(8-26)

All of the following are TRUE of treasury stock EXCEPT it:

Is listed on the company's balance sheet
Has no voting rights and does not receive dividends
Is outstanding stock that has been repurchased by the corporation
Has been issued by the U.S. Treasury and was purchased by a corporation

D.
Treasury stock is stock that has been issued and outstanding and has been repurchased by the company. Treasury stock does not have voting rights nor the right to receive dividends. (4-6)

A revenue bond is backed by a pledge of net revenues. This indicates that:

All revenues are pledged to pay debt service on the bonds
Net revenues are pledged to pay operating and maintenance expenses
The first use of net revenues is to pay the debt service on the bonds
The issuer guarantees that net revenues from the facility will be sufficient to pay debt service on the bonds

C.
The flow of funds for a municipal net revenue issue requires that operation and maintenance expenses are paid first from gross revenues. Gross revenues minus operating and maintenance expenses leaves net revenues. Debt service (also called bond service) would then be the first item paid from net revenues. (8-12)

The bid price of a Treasury bond is $875. The bid price as quoted in The Wall Street Journal would appear as:

87.12
87.16
87.5
87.8

B.
U.S. Treasury bonds are quoted in 1/32nds of a point. If the bid price of a Treasury bond is stated at a dollar value of $875, it would mean that the bond is 87 1/2% of its par value of $1,000. Because 1/2 point in 32nds would be 16/32nds, the bid price as quoted in the paper would be 87.16. This would be the same as 87 1/2 or $875. In this question, we have to work backwards from the dollar value to the quote. In most other examples, you are given the quoted price of corporate or government bonds and are asked to find the dollar value. (7-2)

A customer in the 35% tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will have to pay taxes of:

$150
$225
$420
$525

B.
Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 15%. Although the investor's tax bracket is 35%, the investor will be taxed at a rate of 15%. Therefore, the customer would have to pay taxes of $225 ($1,500 x 15% = $225). (21-9)

A municipal broker's broker can:

Deal with broker-dealers
Deal with dealer-banks
Underwrite new issues
Trade from its own inventory

I and II only
I and III only
II, III, and IV only
I, II, III, and IV

A.
A municipal broker's broker is a broker (agent) that deals only with other municipal securities brokers or dealers. The broker's broker would never deal with individual investors, establish an inventory position, or be involved in the underwriting of a new issue. (12-25)

In which of the following situations would an investor have unlimited risk?

Sold a call and is long the stock
Sold a put and is long the stock
Bought a call and is short the stock
Sold a put and is short the stock

D.
Selling a put and being short stock would be the only example given where an investor would have unlimited risk. The short position would be the unlimited risk situation if the stock were to increase in value. If the market value of the stock is increasing, the purchaser of the put would not exercise the option. The short seller would lose money on the increase of the stock price. In choice (C), the short seller is protected against a rise in the stock by owning a call. In choice (A), the investor would have a loss if the price of his stock declined. However, the potential loss is limited since the stock's price can only decline to zero creating a loss equal to the stock's cost minus the premium received for selling the call. In choice (B), the loss would again be limited to the stock's value declining to zero. (15-7)

Relative to a custodian account, which of the following are TRUE?

The minor is responsible for tax consequences.
The custodian is responsible for tax consequences.
Income generated in the account is taxed as it is received.
Income generated in the account is taxed when the minor becomes an adult.

I and III
I and IV
II and III
II and IV

A.
The minor is responsible for any tax consequences in the account. Income is taxed as it is received, not when the minor becomes an adult. (2-9)

A customer owns 20 ABC Corporation October 30 calls in a cash account. The customer exercises the calls and the same day sells the stock at $32. The customer will have to deposit into the account:

$20,000
$30,000
$60,000
No cash deposit is required

C.
Since the option is exercised in a cash account, a deposit of cash is required even though the stock is sold on the same day. The client must deposit $60,000 (100 shares per contract x 20 contracts = 2,000 shares; 2,000 shares x 30 strike price). (13-13)

A customer opens a new margin account and buys 100 shares of XYZ Corporation at $40 per share and then writes a call option against the position and receives a $2 premium. The customer must deposit cash into the account of:

A.
The purchase of $4,000 worth of stock would require a $2,000 deposit (50% of $4,000 = $2,000). Since the call is covered, there is no margin requirement. The customer received $200 in premiums. This would be deducted from the $2,000 margin call, requiring a cash deposit of $1,800. (16-6)

Accrued interest on new municipal bonds is calculated from the:

Purchase date
Settlement date
Dated date
Last interest payment

C.
Interest on new municipal bonds is calculated from the dated date, which is the date from which interest starts to accrue on a municipal bond. (8-25)

Normally, the largest expense incurred by an open-end investment company is the:

Sales charge reallowed to the broker-dealers
Custodial fee
Investment advisory fee
Accountant's fee

C.
Management (investment advisory) fees are normally the largest expense incurred by an open-end investment company (mutual fund). (18-15)

When a gift of securities is purchased for a minor in a custodian account, the gift becomes the property of the minor:

When the custodian releases the account
When the donor approves the transaction
When the minor reaches the age of majority
At the time of the execution of the order

D.
According to the Internal Revenue Code, the gift becomes the property of the minor at the time of the execution of the order. (2-8)

When the underlying common stock sells ex-dividend, a GTC buy-limit order will:

Remain unchanged
Be reduced
Be increased
Change at the discretion of the specialist

B.
All GTC (good-until-cancelled) orders entered below the current market at the time they are entered are automatically reduced by the amount of the dividend on the ex-dividend date (unless they are market DNR -- Do Not Reduce). A buy-limit order is entered below the current market at the time it is entered and would be reduced. (11-24)

A registered rep holding limited discretionary authority over a customer's account may:

Buy or sell securities in the account without consulting the customer
Withdraw money from the account
Receive a fee for using his discretion in trading the account
Borrow assets from the customer's account

A.
A registered representative holding limited discretionary authority over a customer's account can buy or sell securities in the account without consulting the customer. Only full discretionary authority allows a registered representative to withdraw money from a client's account. A registered representative cannot receive a fee for using his discretion in trading a customer's account. Borrowing client assets is never allowed. (2-9)

Which of the following rates is the most volatile?

The prime rate
The discount rate
The call rate
The federal funds rate

D.
Rates fluctuate the most on short-term securities. The federal funds rate, which is the rate of interest one bank charges another bank for the use of excess reserves for short-term periods of time (usually overnight), would fluctuate the most since it has the shortest maturity. (22-10, 5-11)

The payment date for securities purchased in a cash or margin account as stated by Regulation T.

Use the following choices to answer this question.

One business day from the trade date
Three business days from the trade date
Two business days from the settlement date
Ten business days from the settlement date

C.
According to current FRB requirements, securities purchased in a cash or margin account must be paid for within two business days of the settlement date of the transaction. (11-3)

Which two of the following circumstances would lead to disintermediation?

When interest rates at savings banks are lower than money market instruments
When interest rates at savings banks are higher than money market instruments
When the FRB is pursuing a tight monetary policy which is causing a rise in interest rates
When the FRB is pursuing a loose monetary policy causing interest rates to decline
I and IV
II and IV
I and III
II and III

C.
The term disintermediation describes money being withdrawn from savings banks and savings and loan associations by depositors and reinvesting the funds in higher yielding money market instruments (Treasury bills, certificates of deposit, money market funds). This would occur when interest rates at savings banks are lower than money market instruments. The FRB is pursuing a tight monetary policy, which is causing a rise in interest rates, creating a demand for the higher yielding money market securities. (22-13)

Which of the following is 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

B.
Eurodollar bonds are issued by both U.S. and foreign companies and are denominated in U.S. dollars. Eurodollar bonds are actively traded in the U.S. Since the issuance of Eurodollar bonds does not comply with U.S. securities laws, they cannot be purchased as new issues in the U.S. (6-12)

MSRB rules apply to all of the following EXCEPT:

Salespeople
Firms
Underwriters
Issuers

D.
Municipal Securities Rulemaking Board (MSRB) rules apply to all of the parties listed except municipal bond issuers. The MSRB does not have the power to regulate municipal bond issuers. (10-9)

Closing spot prices for foreign currencies are disseminated daily by the:

NYSE
IMM
FRB
FINRA

C.
The Federal Reserve Board disseminates closing spot prices of foreign currencies daily. (15-41)

Rule 145 applies to which of the following situations?

A stock split
A stock dividend
An adjustment in par value
A merger

D.
Rule 145 applies to mergers, consolidations, reclassification of securities, or transfer of corporate assets. Stock splits, dividends and the resulting changes in par value are specifically exempted from filing under Rule 145. (9-22)

Please allow access to your computer’s microphone to use Voice Recording.

Having trouble? Click here for help.

We can’t access your microphone!

Click the icon above to update your browser permissions above and try again

Example:

Reload the page to try again!

Reload

Press Cmd-0 to reset your zoom

Press Ctrl-0 to reset your zoom

It looks like your browser might be zoomed in or out. Your browser needs to be zoomed to a normal size to record audio.

Please upgrade Flash or install Chrome
to use Voice Recording.

For more help, see our troubleshooting page.

Your microphone is muted

For help fixing this issue, see this FAQ.

Star this term

You can study starred terms together

NEW! Voice Recording

Create Set