Series 7 - Closed Book 4

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Wholesale corporate bond quotes can be found in the:
Pink sheets
White sheets
Green sheets
Yellow sheets

D.
Wholesale corporate bond quotes can be found in the yellow sheets. (6-13)

Investment companies with no management fee and low sales charges, that invest in a fixed portfolio of municipal or corporate bonds, are categorized as:
Open-end investment companies
Closed-end investment companies
Unit investment trusts
Face amount certificate companies

C.
Investment companies with no management fee and low sales charges that invest in a fixed portfolio of municipal or corporate bonds are categorized as unit investment trusts. Investors can receive a reduced sales charge if they purchase a certain amount of a UIT. (18-1)

All of the following statements are TRUE regarding an official statement for a new issue of municipal securities EXCEPT:

Issuers do not have to make an official statement available
If one is prepared, an official statement must be filed with the SEC prior to the offering
An official statement provides purchasers of the new issue with detailed financial information about the issue
If an official statement is prepared, MSRB rules require that it be sent out to customers at or prior to settlement date

B.
Municipal issuers are exempt from the full disclosure and prospectus requirements of the Securities Act of 1933. They cannot be required to prepare an Official Statement by the SEC, MSRB, or any other regulatory body. If one is prepared, it does not have to be filed with any regulatory body. The issuer will usually provide an official statement because the underwriting syndicate wishes to provide information to prospective investors and thereby help market the issue. (10-1)

A customer is short 100 ABC at $120. The market is moving up sharply and the customer decides to cover his short position. The customer instructs his registered representative to cover the short position at the market on the close. The order will be executed:

At or as near as possible to the closing price
On the closing price of the day
At the closing bid price
At the closing offer price

B.
The order will be executed at the closing price. If the order cannot be executed, it is cancelled. (11-25)

The NYSE Composite Index is composed of:

The common and preferred stocks listed on the NYSE
The common stocks, preferred stocks, and bonds listed on the NYSE
Only the common stocks listed on the NYSE
Preferred stocks and bonds listed on the NYSE

C.
The NYSE Composite Index is composed of only the common stocks listed on the NYSE. (22-36)

ABC mutual fund has an NAV of $11.00 and a public offering price of $11.88. For investments of $25,000 to $50,000, there is a 6% sales charge. An investor with $40,000 can purchase:

3,167 shares
3,367 shares
3,419 shares
3,636 shares

C.
The investor can purchase 3,419 shares as follows.

Step 1: Find the new offering price based on a 6% sales charge. Use the complement of the sales charge which would be 94% (100% - 6% = 94%). Divide the bid of $11.00 by the complement of the sales charge percentage (94%). This equals an offering price of $11.70.

Step 2: Divide the $40,000 to be invested by the offering price of $11.70. This indicates that 3,419 shares can be purchased.

(18-22)

A customer entered a GTC sell-stop order for GM at $35. GM was selling at $38 when the order was entered. GM sells ex-dividend by the amount of the dividend which is $1.60. The customer's order will appear on the specialist's book after the stock goes ex-dividend as:

33.40
35
36.40
38

A.
All GTC orders that are entered below the current market on the specialist's book (buy limit, sell-stop, and sell-stop limit orders) will be reduced by the amount of the dividend when the stock sells ex-dividend. The stock will always be reduced by an amount to entirely cover the dividend. The dividend is $1.60, so the order will be reduced 1.60, which will reduce the stop price on the order to 33.40. (11-24)

Relating to a secondary market municipal joint account, which of the following would not apply?

Order period
Account agreement
Good faith deposit
Takedown and concession

C.
Both new issue and secondary joint accounts act according to an account agreement which will contain takedown and concession. An order period will also be used for both. Good faith deposits relate only to a new issue, since that is the amount that the syndicate gives to the issuer along with the bid. (10-7)

An investor owns 1,000 shares of a mutual fund. The offering price is $12 per share. The fund charges an 6% sales charge and has a 1% redemption fee. If the investor redeemed his shares, he would receive approximately:

$11,167
$11,280
$11,880
$12,000

A.
The investor owns 1,000 shares of the fund. The offering price is $12 per share. The sales charge is 6% or $0.72 ($12.00 offering price x 6% sales charge = $0.72). The net asset value is equal to $11.28 ($12.00 offering price minus the sales charge of $0.72 = $11.28 net asset value). The investor is selling 1,000 shares of the fund at the net asset value of $11.28. This equals $11,280 less the redemption fee of 1% or $112.80. Deducting the redemption fee of $112.80 from the net asset value of $11,280 equals approximately $11,167 that the customer receives from the fund. (18-23)

***

The following transactions appear on the NYSE ticker tape:

PM 4s 51.25 ..... VMO SLD 18 ..... FTRpr 40ss 81.50

The trade FTRpr 40ss 81.50 indicates:

40 shares of FTR preferred sold at 81.50
400 shares of FTR preferred sold at 81.50
40 shares of FTR preferred sold short at 81.50
400 shares of FTR preferred sold short at 81.50

B.
The symbol ss represents a 10 share round lot. Some stocks which are thinly traded issues trade in 10 share round lots rather than the standard 100 share round lots. To determine the total number of shares traded, add a zero (multiply by 10) to the volume shown.

Therefore, 40ss represents 400 shares. (11-29)

A fundamental analyst could use a corporation's balance sheet to determine all of the following EXCEPT:

Net working capital
Common stock ratio
Cash flow
Debt to equity ratio

C.
Cash flow (net income or loss plus depreciation expense) is found by using an income statement. All of the other choices are derived from the balance sheet. (22-25)

The tool most commonly used by the FRB to regulate the amount of money and credit in the banking system is:

Open market operations
The discount rate
Moral suasion
Reserve requirements

A.
Of all of the tools of the Federal Reserve Board listed, the one most commonly used is open market operations. This is the most flexible tool and can be changed or fine tuned very easily by buying or selling more or less U.S. government securities in the open market. The other choices are not as flexible, but are used to implement FRB policy. The margin requirement is another tool the FRB can use, but the margin requirement is the least likely tool the FRB would use since it only affects a small segment of the economy. (22-10)

A customer owns 50 shares of ABC Corporation. ABC Corporation is engaging in a rights offering. The terms of the offering are that 10 rights plus $35 is required to buy one new share of stock. If the customer wanted to subscribe to the rights offering, how many additional rights would he need to buy 100 shares of stock?

95
100
350
950

D.
The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. If an investor wanted to subscribe to 100 shares of stock, the investor would need 1,000 rights (10 rights x 100 shares = 1,000 rights). The investor owns 50 shares of stock and will receive 50 rights from the corporation (one right for each share owned). If the customer wanted to subscribe to 100 shares through the rights offering, the investor would have to purchase an additional 950 rights. (4-10)

A customer enters an order for 150 shares of OTC stock. The order:

Must be entered on two separate tickets
Can be entered on one order ticket
Must be entered as a round-lot and an odd-lot
Must be executed through the odd-lot firm

B.
The order can be entered on one order ticket. (11-17)

A municipality borrowing for a short-term period to finance a capital project would issue:

Commercial paper
Tax anticipation notes
Debentures
Bond anticipation notes

D.
A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes . Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures. (8-18)

Use the following section of the NYSE tape to answer this question.


ABC wt STC pr
52s5 11
Relative to the transaction for ABC wt, which of the following statements is TRUE?

520 shares of ABC will trade at a price of 5
5,200 shares of ABC will trade at a price of 5
520 ABC warrants traded at a price of 5
5,200 ABC warrants traded at a price of 5

D.
ABC wt indicates ABC warrants. The "s" after the 52 indicates round-lots of 100. Therefore, the volume is 5,200. (11-29)

Under a functional allocation sharing arrangement in an oil and gas drilling program, the sponsor would pay:

All deductible expenses
All nondeductible expenses
Some deductible and some nondeductible expenses
No expenses

B.
Under a functional sharing arrangement, the sponsor pays all the nondeductible (tangible) expenses and the limited partners pay all the deductible (intangible) expenses. (20-17)

Mr. Brown is a 15% owner of SamCo, a company whose stock is listed on the New York Stock Exchange. His wife also owns 4% of SamCo. If Mrs. Brown wishes to sell some of her SamCo shares, she:

Must do so according to Rule 144
May only do so with the permission of her husband
May do so provided that her husband also sells shares
May sell the shares without restriction

A.
Rule 144 specifies procedures for the sale of restricted stock and control stock. Restricted stock is stock that is not registered and acquired through a private placement. Control stock is stock acquired by affiliated persons. This includes officers, directors, owners of more than 10% of the stock of a corporation, and their immediate families. Since Mr. Brown owns 15% of SamCo, Mrs. Brown is selling her shares as an affiliated person. (9-20, 11-5)

A customer fails to pay for securities by payment date. Which of the following is TRUE?

The account is frozen for 90 days
The customer is prohibited from opening another account for 90 days
The customer can trade after 30 days
The account is closed because it is in violation

When a customer fails to pay for securities, the account is restricted (frozen) for 90 days. Before the customer can buy additional securities, the customer must deposit the full purchase price of the securities in the account. This is a Regulation T requirement. The other choices are incorrect. (11-3)

A customer purchases a municipal bond at $960 in the secondary market that will mature in four years. All of the following statements regarding the purchase are true EXCEPT:

The interest is exempt from federal income tax
The customer will have taxable income if the bond is held to maturity
The customer will have to pay a tax on the prorated amount of the discount each year
If the bond was a new issue when purchased, and held to maturity, the customer would not have to pay any federal tax

C.
If a municipal bond is purchased at a discount in the secondary market and held to maturity, there would be reportable taxable income. The investor may pay the tax each year or elect to report the entire gain at maturity. If a municipal bond is purchased at an original issue discount and held to maturity, there will be no federal tax liability. The IRS requires that the discount be accreted each year and be used to increase the cost basis of the bond. However, the amount of the accretion is considered interest and is therefore exempt from federal tax. (21-11)

An investor purchased $200,000 of 6% general obligation bonds on margin. The customer has a debit balance of $50,000 and is paying interest of 10% yearly on the debit balance from the purchase of the municipal bonds. How much interest expense can the investor use as a deduction for federal income tax purposes?

None
$5,000
$10,000
$12,000

A.
The investor cannot use any of the interest expense as a deduction against ordinary income. Interest charges on money borrowed to purchase federally tax-exempt municipal securities cannot be used as an interest expense deduction for federal income tax purposes. The investor is already getting the benefit of tax-free interest income from the municipal bond and the IRS will therefore not allow the interest expense to be deducted as well. (13-2)

All of the following must appear on a confirmation to a customer in a municipal trade EXCEPT:

The capacity in which the broker-dealer acted
The par value of the bonds
A description of the bond
The bond rating

D.
MSRB rules require that a customer confirmation contains the par value and complete description of the bonds including coupon, maturity, and pertinent call features. The principal amount, accrued interest, and total amount must also be included. The firm must disclose whether it acted as a principal or agent and if acting as an agent, the firm must disclose the amount of the commission. Although some firms include the rating of the bond, it is not required. (12-30)

All of the following are true of U.S. Treasury bills EXCEPT:

They do not have a stated rate of interest
They mature in one year or less
They are sold in $5,000 amounts
They are issued at a discount

C.
All of the statements regarding Treasury bills are true except they are sold in $5,000 amounts. They are sold in minimum amounts of $100. Currently, Treasury bills are issued with maturities of 4, 13, and 26 weeks. (7-3)

The market value of a margin account is $12,000. The debit balance is $6,000. A cash dividend of $100 is credited to the account. What is the new debit balance?

$5,900
$5,950
$6,000
$6,100

A.
When a cash dividend is paid, it reduces the debit balance. The entire cash dividend of $100 will be allocated to reduce the debit balance of $6,000. The new debit balance equals $5,900. (13-8)

Relative to a municipal bond purchased at a discount, place the following in the proper sequence from lowest to highest.

Current yield
Nominal yield
Yield-to-maturity

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

B.
A bond trading at a discount has a nominal yield that is less than its yield-to-maturity. Current yield falls between the nominal yield and yield-to-maturity. A bond trading at a premium has a nominal yield which is higher than the yield-to-maturity, with the current yield in between the other two yields. (5-9)

A 42-year-old war veteran wants to withdraw money from his IRA to cover living expenses due to financial difficulties. This withdrawal:

Will result in a 50% penalty
Is not permitted
Will result in a 10% penalty and will be added to income for tax purposes
Will be taxed at the individual's bracket but will not result in a penalty

C.
Withdrawals from an IRA prior to age 59 1/2 will result in a 10% penalty and be added to income for tax purposes. The penalty will not be incurred if the withdrawal is made due to physical disability or death. Additionally, under specific circumstances, withdrawals used to pay medical expenses and medical insurance premiums may be made penalty free prior to the attainment of age 59 1/2. (17-2)

Which of the following would increase a partner's basis in a limited partnership?

Cash distributions
Losses
A pro-rata portion of a recourse loan
Assessments not met by the partner

C.
A partner's basis in a limited partnership represents the maximum loss that the limited partner may sustain in the program. It is increased by income, additional contributions made by the partner, and the portion of a recourse loan for which the partner is responsible. The basis is reduced by cash distributions and losses. Assessments not met by the partner normally result in a dilution of the partner's ownership interest. (20-6)

According to MSRB rules, a municipal bond dealer may not consider which of the following factors when determining a markup?

Expenses
Profit
Coupon
Total dollar amount of the transaction

C.
All of the choices given would affect the markup except the coupon rate of the securities. (12-30)

A reverse repurchase agreement is sometimes called a(n):

Repo
Arbitrage
Matched sale
Treasury sale

C.
A reverse repurchase agreement (matched sale) occurs when the FOMC sells securities to dealers with the intention of buying the securities back at a future date. This has the short-term effect of absorbing (removing) funds from the money supply. (22-11)

An investor establishes a short margin account and sells 1,000 shares of ABC short at 30. The value of the securities declines and SMA is created. All of the following would affect SMA EXCEPT:

The value of the securities continues to decrease
The value of the securities increases
Cash is withdrawn from the account
Using the selling power of the account

B.
An increase in the market value of securities would not affect the SMA in a short account since, once created, SMA is reduced only if used. The decrease in the market value of the securities would increase SMA since equity would increase, creating additional excess equity. The withdrawal of cash and the selling short of additional securities in the account would reduce the SMA since the SMA would be used. (13-15, 13-18)

An investor purchases a U.S. Treasury bond in the secondary market. When is settlement?

Next business day
3 business days
5 calendar days
5 business days

A.
Transactions for Treasury securties will settle on the next business day. (12-24)

An investor purchases a U.S. Treasury bond in the secondary market. When is settlement?

Next business day
3 business days
5 calendar days
5 business days

A.
Transactions for Treasury securties will settle on the next business day. (12-24)

An investor has the following gains and losses on securities transactions:


20XX . . .

$15,000 loss
$ 6,000 gain
How much of the loss can the investor carry forward into the next year?

$3,000
$4,000
$5,000
$6,000

D.
The net loss sustained last year was $9,000. Since the investor can deduct $3,000 from ordinary income in one tax year, the remaining $6,000 must be carried forward into the next year. (21-16)

The individual who distributes interest in a DPP is known as the:

Distributor
Syndicator
Managing partner
Limited partner

B.
A syndicator distributes a DPP. (20-2)

If an investor was primarily interested in safety of principal, which of the following would you least likely recommend?

State GO Bond
GNMA Security
Railroad Equipment Trust Bond
Industrial Development Revenue Bond

D.
Industrial Development Revenue bonds are secured by a lease agreement with a corporation and are only as secure as the corporation. State GOs are generally of high quality and GNMA is secured by the U.S. government. The holder of an Equipment Trust bond has a lien on the equipment that secures the issue. (8-10)

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