Series 7 - Closed Book 3

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A type of offering in which whatever is not sold is retained by the issuing corporation is:

A firm commitment
A best efforts
An all or none
A standby underwriting

B.
A type of offering in which whatever is not sold is returned to the issuing corporation is a best-efforts underwriting. (9-2)

A type of offering in which the issuing corporation is assured of receiving the full amount of the offering, and whatever is not sold is retained by the underwriter, is:

A firm commitment
A best efforts
An all or none
A standby underwriting

A.
type of offering in which the issuing corporation is assured of receiving the full amount of the offering and whatever is not sold is retained by the underwriter is a firm commitment. (9-1)

A customer's margin account has a credit balance of $20,000 and a debit balance of $15,000. On what amount will the customer be charged interest?
0
$5,000
$15,000
$20,000

C.
Customers are charged interest on the average daily amount of the debit balance in their account. (13-2, 13-6)

Variable annuities sold by insurance companies must be registered with the:

SEC
FRB
FINRA
State Insurance Commissions

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

B.
SEC
State Insurance Commissions

Variable annuities are generally sold by RRs of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered to be securities by the SEC, and therefore must be registered with the SEC and the State Insurance Commission. (19-2)

When looking at a newspaper listing for foreign currency options, the spot prices for the underlying foreign currencies are quoted in:

European terms
U.S. terms
1/32 of a point
1/8 of a point

B.
For foreign currency options, spot prices are quoted in U.S. terms (the cost in U.S. dollars to purchase one unit of the foreign currency). All of the spot prices are quoted in cents per unit except the Japanese yen (1/100th cent per unit). (15-42)

The Barge Towing Corporation has announced in a tombstone ad that it will issue $5,000,000 of 10% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2020 and are being issued at a $1,000 par value.
If the bonds were subsequently trading in the market at $1,020, the market price of the common stock, to be on parity with the bond, would have to be:

$9.54
$10.20
$10.74
$12.04

C.
To find parity (equality in dollar value) for the stock, divide the market price of the bond by the conversion ratio. The market price of the bond is 102 ($1,020) and the conversion ratio is 95 to 1. Therefore, $1,020 divided by 95 would equal approximately $10.74. This would be the parity price for the stock. (6-7)

Which statement best describes an indenture?

It is a contract between the issuer of bonds and the trustee for the benefit of the holder of the bonds.



An indenture is a written contract between the issuer of bonds and the trustee under which bonds and debentures are issued. Listed in the indenture are: the maturity date, the coupon rate, and other terms for the benefit of the bondholder. (6-1)

he American Telephone Company announced in an ad in The Wall Street Journal that it intends to call for redemption all of its outstanding 10% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. Which alternative is most advantageous to the bondholder?

Redeem the bonds.
Sell the bonds at the current market price.
Do nothing and hope for a takeover bid from another company.
Hold the bonds to maturity and continue to earn interest.

A.
When bonds are called for redemption, the bondholder can only redeem the bond at the callable price or sell them in the market. The bondholder cannot continue to hold the bonds in anticipation of a better offer or until maturity. (5-17)

When you purchase an option contract, according to Regulation T, the transaction must be paid for in:

1 business day
3 business days
5 business days
7 business days

C.
According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is three business days, payment is required within five business days from the trade date. Therefore, while option transactions settle next day, the customer has five business days in which to pay for a purchase. (11-3)

Which of the following is NOT TRUE as it relates to a bond selling at a discount?

The yield-to-maturity is greater than the nominal yield.
The nominal yield is less than the current yield.
Interest rates most likely decreased after the bonds were issued.
The par value exceeds the market price.

C.
If the par value of a bond is greater than the bond's market price, it is selling at a discount. A bond sells at a discount because of an increase in interest rates since the bond was issued. For a discount bond, the yield-to-maturity is highest, followed by the current yield, with the nominal yield being lowest. (5-9)

When securities are sold in a restricted margin account:

The debit balance is decreased
The SMA is increased
The equity is increased
The market value of the account is decreased

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

D.
When securities are sold in a restricted account, 100% of the sale proceeds will be used by the broker-dealer to reduce the customer's debit balance and the broker-dealer will, in turn, credit the customer's SMA for an amount equal to the Reg T requirement (50%) multiplied by the sale proceeds. The market value of the account will be reduced since securities have been sold. (13-13)

A FINRA member subscribing to CQS, calls a market maker displaying a quote on the system and executes a trade. This transaction would be considered to have occurred in the:

Primary market
Private market
Third market
Fourth market

C.
CQS displays quotations by members for NYSE and AMEX listed securities. Transactions in listed securities between FINRA members in the over-the-counter market are considered third market transactions. Although executed in the over-the-counter market, such transactions must still be reported to the Tape. (12-8)

Pennsylvania Power Company has announced it will refund $100 million of its outstanding 12% bonds that were to mature in 2020. The bonds will be refunded at 106.75% of par value from the proceeds of a $100 million refunding issue. The refunding issue has a 6% coupon rate and matures in 2012.
The refunding will reduce all of the following EXCEPT the:

Interest cost to the issuer
Company's maturity schedule
Company's annual debt service obligation
Amount of outstanding debt

D.

Pennsylvania Power has reduced the interest charges (from 12% to 6%) by advancing the repayment of its existing debt. The company is paying off the 12% bonds, due in 2020, with the issuance of another bond. It is also improving its debt service by reducing the interest rate from 12% to 6%, thereby reducing its fixed charges each year. However, the amount of debt outstanding will remain the same at $100 million. (5-17)

Pennsylvania Power Company has announced it will refund $100 million of its outstanding 12% bonds that were to mature in 2020. The bonds will be refunded at 106.75% of par value from the proceeds of a $100 million refunding issue. The refunding issue has a 6% coupon rate and matures in 2012.
Bondholders who owned 12% bonds maturing in 2020 will receive:

$1,067.50 plus accrued interest
The new 6% bonds being issued plus accrued interest
$1,000 plus accrued interest
The new 6% bonds being issued without accrued interest

A.
The company is refunding the bonds at 106.75% of its par value. The bondholders who owned the 12% bonds will receive 106.75% of the $1,000 par value (106.75% x $1,000) for a total of $1,067.50 plus accrued interest. (5-17)

An outstanding municipal bond would most likely be called when interest rates:

Rise above the bond's nominal yield
Rise above the bond's yield to maturity
Fall below the bond's nominal yield
Fall below the bond's yield to maturity

C.
Bonds may contain a provision that allows the issuer, at its option, to redeem the bonds before they mature. Call provisions usually benefit the issuer, which has the option of calling in the bonds when interest rates decline. The issuer may then refinance the debt at a lower rate of interest. For instance, if an issuer's outstanding bond is paying a coupon rate (nominal yield) of 9% at a time when similar bonds are paying only 5%, it can reduce its interest costs by calling in the 9% bonds and issuing new ones at 5%. As rates decline, the bond's yield to maturity or yield to call also would decline. (5-17)

The call feature on callable bonds would be most relevant when the economy is:

Experiencing a slowdown and the FRB is trying to stimulate growth
Experiencing a slowdown and inflation is increasing
Growing and the FRB is trying to slow down the economy
Growing and inflation is stable

A.
The call feature on callable bonds are most relevant when the general level of interest rates are declining. Rates will tend to decline when the FRB is trying to stimulate the economy by increasing the money supply. The goal would be to bring down interest rates to allow the economy to grow. Rising inflation usually causes the FRB to decrease the money supply to drive up interest rates. If the economy is growing and inflation is stable, this is a beneficial situation and the FRB may simply leave rates unchanged. (22-12, 5-17)

A bond secured by other bonds and securities is referred to as a:

Debenture bond
Guaranteed bond
Mortgage bond
Collateral trust bond

D.
A bond secured by other bonds and securities is called a collateral trust bond. (6-2)

Under the Investment Company Act of 1940, which of the following are considered investment companies?

A bank holding company
A face-amount certificate
An insurance company
A management company

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

C.
A face-amount certificate and a management company are two types of investment companies. The third type is a unit investment trust. The Investment Company Act of 1940 does not consider holding companies and insurance companies to be investment companies. (18-1)

A registered representative should know all the essential facts about a customer's financial status, investment objectives, ability to assume risk, age, occupation, and other pertinent information:

For the registered representative to determine if option trading is suitable for the customer
For the brokerage firm to determine if it should approve the customer's account for option trading
For the brokerage firm to determine if it should send an options risk disclosure document to the customer

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

A.
Option trading is not suitable for all investors because of the risks involved. The registered representative must obtain all the essential facts about the customer to determine if option trading meets the customer's investment objectives, financial background, and ability to assume the added risk. An option order (to buy or write the option) may not be accepted from a customer unless the customer's account has first been approved for options trading by the brokerage firm. Whether the account would be approved or not would depend upon the essential facts about the customer. The answer therefore is (I) and (II) only. A customer must be sent a current option disclosure document at or prior to the time the account is approved for option transactions. (16-11)

Joseph Carlyle is a customer of a municipal securities firm. Based on his existing account documentation, he is clearly unsuitable for any securities with a speculative credit rating. However, he has entered an order to purchase a bond that is rated BB by Standard and Poor's. His representative, Bob Thomas, has communicated to him that this transaction is not in his best interest based on the information that the firm has on file. Regarding this situation, which of the following statements is TRUE?
Bob should process the order because a BB rating is not speculative.
Bob should process the order because MSRB rules allow the order to be filled if the rep explains to Joseph that the trade is unsuitable.
Bob should process the order because registered reps are not fiduciaries and therefore must always do what the customer says.
Bob should not process the order because MSRB rules prohibit the processing of a clearly unsuitable transaction.

B.
According to recent interpretations of the MSRB's suitability rule, Bob should process the customer's order as long as he takes the time to explain to Mr. Carlyle why he believes the investment is unsuitable for him. (12-30)

A tombstone ad states that the McGee Oil Company is offering $200,000,000 of 8 1/2% bonds due July 1, 2026 at 99 1/2% of their par value. The yield-to-maturity on the bond is:

8%
Less than 8 1/2%
8 1/2%
Greater than 8 1/2%

D.
The 8 1/2% bonds are being offered at a discount at 99 1/2% of their $1,000 par value. An investor who purchased the bonds at the offering and held the bonds to maturity would receive the par value of $1,000. The investor would therefore have a yield-to-maturity that is greater than 8 1/2%. (5-9)

Which of the following would not be available to pay interest on a revenue bond issue?

Special taxes
Lease payments
Ad valorem taxes
Capitalized interest

C.
Ad valorem (property) taxes secure a general obligation bond, not a revenue bond. (8-2)

A corporation's earnings per share on its common stock, after paying preferred dividends of $3.00 per share, is $5.00 per share. The corporation also paid out a dividend of $2.00 per share on the common stock. The dividend payout ratio is:

25%
40%
60%
100%

B.
Since the earnings per share on the common stock is given, the $3.00 preferred dividend can be disregarded. To find the dividend payout ratio, divide the yearly dividend on the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%. (22-29)

A municipal bond is currently trading at 92 and is callable in 10 years at par. What would be the effective yield that must be disclosed on a customer's confirmation?

Yield to call
Yield to maturity
Fixed yield
Current yield

B.
The MSRB regulates the effective yield that must be disclosed on a client's confirmation. The effective yield on a bond trading at a discount is the yield to maturity. (8-24)

On October 25, Mr. Smith purchased 5 listed XYZ Corporation July 50 calls and paid a $3 premium on each call. The current market price of XYZ Corporation is $48 per share.
If the market price of XYZ Corporation was $45 and the calls expired, Mr. Smith would lose:

$1,000
$1,500
$2,000
$4,000

B.
Mr. Smith, the buyer of the calls, will not exercise the options. The market price is $45 which is $5 less than the exercise price. Therefore, the options would expire worthless. Mr. Smith would then lose the entire amount of the premiums paid ($1,500). (14-12)

Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being offered by Briana Corporation.
The effect of this offering will be:

A dilution in the earnings per share
An increase in the earnings per share
The number of shares outstanding will increase by 500,000
The number of shares outstanding will increase by 250,000

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

B.

A dilution in the earnings per share
The number of shares outstanding will increase by 250,000

After the offering is completed, there will be 250,000 new shares outstanding (the shares sold by the selling stockholders were already outstanding). This will result in the earnings per share being diluted because the earnings will now be divided by a greater amount (250,000 shares) of new outstanding stock. (4-6, 22-28)

Which TWO of the following statements are TRUE regarding the maintenance requirements for selling short stock that is trading at less than $5 per share?

The maintenance requirement for shorting a stock at $2.00 per share is 100% of the market value.
The maintenance requirement for shorting a stock at $2.00 per share is $2.50 per share.
The maintenance requirement for shorting a stock at $4.00 per share is 100% of the market value.
The maintenance requirement for shorting a stock at $4.00 per share is $2.50 per share.

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

C.
The industry maintenance requirement when shorting stock that is trading at less than $5.00 per share, is the greater of $2.50 per share or 100% of the market value. When shorting stocks less than $2.50 per share, the maintenance requirement is $2.50 per share, while the maintenance requirement for shorting stocks between $2.50 and $5.00 per share is 100% of the market value. (13-16)

The Federal Reserve Board's Open Market Committee (FOMC) buys and sells which of the following securities most often to accomplish its aims?

Treasury bills
Treasury notes
Treasury bonds
Agency bonds

A.
The Federal Reserve Board's Open Market Committee (FOMC) purchases and sells U.S. government securities in the open market to accomplish the Federal Reserve Board's aims of influencing the money supply. The securities most often used are Treasury bills. (22-10)

A 3-month Treasury bill is issued at a discount to yield 9.5% and a corporate bond is issued to yield 9.5%. The bond is to mature in 10 years. If both are offered on the same day on a bond equivalent yield basis, which of the following statements is true?

The bill would have a greater yield than the bond.
The bond would have a greater yield than the bill.
The yield would be the same for both.
The bond equivalent yield and tax equivalent yield are equal.

A.
T-bills are issued and quoted on a discount yield basis, whereas corporate bonds are quoted on a yield-to-maturity basis. These yields are calculated in different manners. The bond equivalent yield of a T-bill is always higher than its discount yield. (7-3)

A new municipal bond issue is dated January 1st and pays interest each April 1st and Oct. 1st. An investor purchased bonds from the issue with a Thursday, January 31st settlement date. How many days of accrued interest did the investor owe?

29
30
33
34

B.
Accrued interest on a new municipal issue is calculated from the dated date up to but not including settlement date. Since the investor's settlement date was January 31st, he owes from the 1st to the 30th of January (30 days). (8-24)

A customer owns a call on ABC Corporation that has a $60 strike price. ABC Corporation has announced a 5-for-4 split. After the split, the customer will own:
Two calls for 100 shares at a $30 strike price
One call for 125 shares at a $60 strike price
One call for 125 shares at a $48 strike price
One call for 100 shares at a $60 strike price

C.
The company has announced a 5-for-4 split. After the split, the customer will own one call contract representing 125 shares with a $48 strike price. In an odd split, the number of contracts remains the same. The number of shares per contract is increased by multiplying 100 times the split ratio (100 x 5/4 = 125). The strike price is reduced by multiplying it by the inverse of the split ratio (60 x 4/5 = 48). (16-9)

A corporation has income before taxes of $2 million and additionally has received $100,000 in preferred dividends. If the corporation owns 25% of the distributing company and is in the 34% tax bracket, it will pay taxes of:

$340,000
$510,000
$686,800
$1,020,000

C.
A corporation is exempt from paying taxes on 80% of dividends received from common and preferred stock of another corporation if it owns at least 20% of the distributing corporation. The corporation would only have to pay taxes on $20,000 of the dividends received (20% of the $100,000 in preferred dividends) plus the $2,000,000 of income the corporation earned. Since the corporation is in the 34% tax bracket, the tax would be $686,800 (34% of $2,020,000 = $686,800). (21-3)

Dow Chemical bonds are listed in the NYSE bond table as having a nominal yield of 6.6% and having closed the previous day at 91 7/8. An owner of 10 bonds would receive a yearly interest payment of:
$600
$660
More than $660
Less than $660

B.
A nominal yield of 6.6% for a corporate bond with a $1,000 par value would equal $66 in interest payments. If an investor owned 10 bonds, he would receive an annual interest payment of $660. (5-3)

Industrial Development Revenue Bonds are backed by:
The local municipal district in which the facility is domiciled
The state in which the facility is domiciled
The corporate guarantor
Both the corporate guarantor and municipality

C.
The corporation that uses the facility that was built by the industrial development revenue bond becomes the party that is backing the bonds. The credit rating of these bonds is dependent upon that corporation, not on the municipality issuing the bonds. (8-10)

In periods of easy money, when interest rates are declining, yield curves would tend to slope:

Upward from the shorter to the longer maturities
Downward from the shorter to the longer maturities
Remain flat
Upward from the longer to the shorter maturities

A.
In periods of easy money when interest rates are declining, yields on shorter maturities would be less than that of longer maturities. Yield curves would tend to slope upward from the shorter to the longer maturities. (22-10, 5-14)

ABC Corporation has issued two $1,000 par value bonds with the same coupon rate, one paying interest annually and the other paying interest semiannually. If both bonds are held to maturity in 10 years, the bond paying interest annually will have a total return that is:
Less than the bond paying interest semiannually
More than the bond paying interest semiannually
The same as the bond paying interest semiannually
Two times greater than the bond paying interest semiannually

A.
The bond paying interest annually will have a yield-to-maturity which is less than the bond paying interest semiannually. Yields-to-maturity assume a reinvestment and compounding of interest. The compounding of interest will be greater for the bond paying semiannual interest. (5-7)

Interest on all of the following may be subject to state taxes EXCEPT:
GNMA bond
Municipal bond
Corporate bond
Treasury note

D.
Interest on all of the following may be subject to state taxes EXCEPT:
GNMA bond
Municipal bond
Corporate bond
Treasury note

A corporation intends to raise additional funds from its existing shareholders rather than using the services of an underwriter. The corporation would be engaging in a:
Rights offering
Secondary distribution
Special offer
Private placement

A.
The corporation would be engaging in a rights offering. It will issue rights to all existing shareholders enabling them to subscribe to new stock below the current market price of the outstanding securities thereby saving the corporation the costs involved in using an underwriter. (4-10)

Which of the following would have the least capital risk for a client?
Options
Bonds
Warrants
Stocks

B.
When compared to the other securities, bonds have the least capital risk. At maturity, the investor would receive the principal amount of the bond thus minimizing the capital risk. (5-1, 4-2, 4-11, 14-19)

A customer owns stock of a corporation that has declared a $1 dividend to holders of record Monday, December 22nd. If the customer wishes to sell the stock but still be entitled to the dividend, he should sell the stock on:
Wednesday, December 17th, regular-way settlement
Thursday, December 18th, regular-way settlement
Monday, December 22nd, cash settlement
Tuesday, December 23rd, cash settlement
I or III
I or IV
II or III
II or IV

D.
The customer should sell the stock Thursday, December 18th on a regular-way settlement basis or Tuesday, December 23rd on a cash settlement basis. The ex-dividend date is Thursday, December 18th. This is two business days preceding the record date of December 22nd. This means that a seller on the ex-dividend date will receive the dividend because on this date the stock is selling without the dividend. If the stock is sold on December 23rd on a cash contract basis (which requires a same-day payment, same-day delivery), the seller would be entitled to receive the dividend. The buyer will not receive the dividend because the last day a buyer could receive the dividend on a cash contract would be the record date, which is December 22nd. (4-7)

A convertible debenture is convertible at $25. It has a nondilutive feature in its indenture. If a stock dividend is distributed, which of the following will be true?
The conversion price will be reduced.
The conversion price will be increased.
The conversion ratio will be reduced.
The conversion ratio will be increased.
I and III
I and IV
II and III
II and IV

B.
A nondilutive feature means that if there is a stock split or stock dividend, the bond's conversion features must be adjusted. The bondholder would receive more shares upon conversion because the conversion ratio would be increased. The conversion price would be reduced to permit this increase in the conversion ratio. (6-6)

Which of the following orders will be reduced when XYZ Corporation sells ex-dividend?
A GTC order to sell 100 XYZ at $50
A GTC to buy 100 XYZ at $50 stop
A GTC to buy 100 XYZ at $50
A GTC to sell 100 XYZ at $50 stop
I and II
II and III
II and IV
III and IV

D.
Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked do not reduce (DNR). Orders that are entered below the current market at the time they are entered are buy limit orders, sell stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit orders, buy stop, and buy stop-limit orders. The GTC buy limit and sell stop orders are entered below the market, and are reduced on the ex-dividend date. (11-24)

Dorothy Hill is 53 and her annual income is $63,000. What is the maximum annual amount Dorothy is permitted to contribute to her IRA?
$2,000
$3,500
$5,000
$6,000

D.
Dorothy is allowed to contribute $6,000 to her IRA. The annual contribution limit to an IRA is $5,000. Also, there is a catch-up provision for people who are age 50 and older, which allows for an additional $1,000 increase in contributions. (17-1)

A corporate bond has a 12% nominal yield. To be equivalent, an investor in the 28% tax bracket would need a municipal bond with a yield of:
7.9%
8.6%
9.4%
10.2%

B.
To determine the net yield of a taxable bond, multiply the yield times the complement of the tax bracket. The net yield would be 8.6% (12% yield times 72%, which is the complement of the tax bracket). (8-26)

The three bonds listed have the same maturity. Place them in their order of yield, from highest to lowest.

Treasury bond
Aaa utility bond
Aaa municipal bond

I, II, and III
II, I, and III
II, III, and I
III, I, and II

B.
The municipal bond will typically have the lowest yield since it is exempt from federal income tax. The utility bond (a corporate bond) is of lower quality than the Treasury bond (a U.S. government obligation) and will therefore have a higher yield. (8-1, 6-15, 7-8)

When a bond is selling at a premium:
The market price is greater than the par value
The current yield is higher than the nominal yield
It is a better quality bond than one selling at a discount
The yield-to-maturity is greater than the current yield

A.
The only true statement given is the market price is greater than the par value. The other choices are incorrect. When a bond is selling at a premium, the current yield is lower than the coupon rate. Bonds that are selling at a premium are not necessarily of better quality than bonds selling at a discount. (5-10)

Mordecai is a 73-year-old retired machine lathe operator. He earns $35,000 in retirement benefits. Last year he earned $1,650 as a pitching instructor for the Altoona Miners and received $800 in dividend income. What is the maximum contribution he may make to his Roth IRA?
0
$1,650
$5,000
$6,000

B.
Roth IRAs do not have an age limitation placed on contributions or withdrawals. The annual contribution is limited to 100% of the individual's earned income, not to exceed $6,000 ($5,000 + $1,000 catch-up provision) per year. Mordecai may contribute up to $1,650. Earnings received as retirement benefits and investment income are not eligible for the calculation of Roth IRA contributions. (17-3)

An investor writes an ABC June 70 put at 4. If the option is exercised, the investor will have:

A capital loss of $400
A capital gain of $400
Sale proceeds of $6,600 for the stock sold in the exercise
A cost basis of $6,600 for the stock acquired in the exercise

D.
When a put is exercised, the premium received by the writer is treated as a reduction in the cost of the underlying stock. The strike price of the put (70), minus the premium received by the writer (4), equals the writer's cost basis in the underlying stock (66). The writer will have a gain or loss depending on the stock's price when it is sold. (21-18)

A client purchased 300 shares of Emily Airlines common stock at $28 a share in July of 2004. In June of 2005 the client writes 2 October 35 calls at 5 against the stock position. If the market price of Emily Airlines is trading at $39 at expiration, what is the client's realized gain?

$1,000
$1,700
$2,400
$4,300

The question is asking for the client's realized gain. The investor is long 300 shares, but is only writing 2 covered calls. Since the market price of Emily Airlines (39) is above the strike price (35) at expiration, the call options would be exercised against the writer. The client would be obligated to deliver or sell 200 shares at $35. The realized gain on the stock is $1,400 (purchased 200 shares at $28 which is sold at $35). The client received $1,000 from writing two covered call options (2 calls @ 500); therefore the total realized gain is $2,400. The client would still own 100 shares at a cost basis of $28. (15-3)

Mrs. Smith owns 100 shares of DEF stock. Mrs. Smith is concerned the stock is going to decrease in price temporarily, but does not want to sell the stock. Which option position would give Mrs. Smith the BEST downside protection?

Buy 1 DEF put
Sell 1 DEF put
Buy 1 DEF call
Sell 1 DEF call

A.
The best possible downside protection could be accomplished with choice (a), buy 1 DEF put. If Mrs. Smith is long a put, this would allow her to put the stock to the writer if the stock goes down, thus taking advantage of the price decline. (15-4)

A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000.
If the customer sold $1,000 of securities in the account, what amount could the customer withdraw after the sale?

C.
This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). 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 current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500. (13-13)

Municipal bearer bonds that are in default of interest trade:

With unpaid coupons attached
Without unpaid coupons attached
In registered form only
Without a legal opinion attached

A.
Municipal bonds that are in default, trade flat (without accrued interest) and must be delivered with all unpaid coupons attached. If the bonds begin paying interest, the present holder is entitled to the past interest payments. (12-29)

The spread for a new municipal bond issue is as follows:
Manager's fee: 1/4
Additional Takedown: 3/8
Concession: 3/8

A syndicate member who sold $25,000 of bonds would be entitled to:

$62.50
$93.75
$187.50
$250.00

C.
A member of the syndicate is entitled to receive the total takedown (concession plus additional takedown). The member would therefore receive 3/4 or $7.50 per $1,000 face value for a total of $187.50 ($7.50 x 25). (10-8)

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