5 Written questions
5 Matching questions
- Which of the following cannot delegate power of attorney to a third party for the purpose of making securities transactions?
- An insurance company has a portfolio of long-term government securities. The portfolio manager anticipates that interest rates will rise and would like to hedge the portfolio. He should sell:
- 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
- A customer wishes to establish a tax loss and sells 100 shares of XYZ Corporation. The loss would not be allowed if the customer, within 30 days:
Bought an XYZ Corporation put
Sold an XYZ Corporation put
Bought an XYZ Corporation call
Sold an XYZ Corporation call
- Your client owns a convertible bond which has been called at 104. The bond is convertible at 40 and is selling in the market at 107. The common stock is selling in the market at 41. Which would be the least attractive alternative to the client?
a. Allow the bond to be called
b. Sell the bond
c. Convert to common stock and sell the common stock
d. All of the alternatives are equally attractive
- a D.
Of the choices given, the only one that cannot delegate power of attorney to a third party for the purpose of making securities transactions is a custodian for a minor.
- b 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.
- c C.
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.
- d B.
The report must contain all of the items listed except the number of shares the firms owns of the stock. The firm does need to disclose that it owns shares of the stock, but not the actual number.
- e 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 Multiple choice questions
When a lump-sum withdrawal from a corporate pension plan, Keogh, or IRA is deposited into an IRA, it is referred to as a rollover. If the rollover is done within 60 days, the investor will avoid a taxable event. If the distribution is from a qualified plan other than an IRA, the distributing company must withhold 20% of the distribution for the IRS. Only one rollover is permitted each year.
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.
Three- and six-month T-bills are auctioned weekly. All T-bills are auctioned on a discount yield basis with noncompetitive tenders awarded first and receiving the highest yield of the accepted competitive tenders.
- A buyer of Cummings Corporation would not be entitled to receive the 50-cent quarterly dividend because the purchase was made on May 10th. This was after the stock had sold ex-dividend (without the dividend). The ex-dividend date is not given but the record date is April 10th. Stocks sell ex-dividend on the 2nd business day preceding the record date. This would be two business days prior to April 10th, which is more than one month before the customer bought the stock. Even if the purchase was made "for cash" which requires a same-day payment, it would still be one month too late for the buyer to receive the dividend.
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.
5 True/False questions
To determine the yield on a municipal bond, all of the following are needed, EXCEPT:
Settlement date → 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.
A customer buys 10 ABC January 50 Calls paying a $3 premium and 10 ABC January 50 Puts also paying a $3 premium when the market price of the stock is $49 per share. The buyer's breakeven points will be:
I and III only
I and IV only
II and III only
II and IV only → A.
The investor bought the more expensive call; therefore, this is a debit spread. A call debit spread is a bullish strategy.
A customer gives his registered representative the following instructions. Buy 100 shares of General Motors "whenever you think the price is right." Under current regulations the order:
Can be accepted
Must be marked "discretionary" and approved by a branch manager
Cannot be accepted
Must be executed as soon as possible after it is received → 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).
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 → A.
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).
Broker-dealers are permitted to:
I. Tell investors to buy mutual funds shortly before a dividend or capital gain distribution is to be paid
II. Arrange for a customer to obtain credit to buy open-end investment company (mutual fund) shares
III. Assign loan value to mutual fund shares owned by a customer for more than 30 days
IV. Continue to compensate a retired registered representatives for contractual plan sales if a contract is signed with the registered representative who has retired
a. I and IV only
b. II and III only
c. III and IV only
d. II, III, and IV only → D.
ERISA gave the government jurisdiction over private pension plans and protects employees from improper investments by their employers. It does not apply to government employer plans.