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5 Written questions

5 Matching questions

  1. A customer sells short 100 shares of XYZ at 34. The customer wishes to protect herself against a loss. Which of the following would prevent a loss on the short position?

    Buy stop at 34
    Purchase of an XYZ 30 call at 5
    Buy limit at 32
    The customer will be exposed to the possibility of loss no matter which of these additional positions or orders is used
  2. 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:

    $2,000
    $6,000
    $7,200
    $11,000
  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
  4. EASY MONEY
  5. A 65-year-old individual receives money from a qualified variable annuity. This payment would be:

    Subject to a 10% penalty

    Fully taxable at the investor's tax bracket

    Treated as a capital gain for tax purposes
    Partially taxable at the investor's tax bracket

    a II only
    IV only
    I and III only
    I and IV only
  1. a A.
    The premium paid on a municipal bond must be amortized over the life of the bond. If held to maturity, the cost basis is reduced to par value and there is no loss.
  2. b A.
    Since a qualified variable annuity is funded with pretax dollars, payments from a qualified annuity are fully taxable as ordinary income. Withdrawals made before age 59 1/2 are subject to a 10% penalty tax.
  3. c 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).
  4. d 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. e A period during which there is an ample supply of money available for loan purposes.

5 Multiple choice questions

  1. D.
    Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.
  2. B.
    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. B.
    The customer has the right to call the stock at $50. The customer paid a $600 premium per straddle. The breakeven point on the call is determined by adding the $50 strike price to the premium of $6. This equals a breakeven of $56. The customer also has the right to sell the stock to the writer at $50, but has paid a $600 premium. The breakeven point on the put would be six points below the strike price of $50, which equals $44. The buyer's breakeven points will therefore be $44 and $56.
  4. 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.
  5. C.
    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.

5 True/False questions

  1. A municipal bond pays interest on February 1st and August 1st. A customer purchasing the bond on Monday, April 30th would have to pay the seller the purchase price plus accrued interest for:

    91 days
    92 days
    93 days
    96 days
    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.

          

  2. A client would like to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations would be the most suitable?

    An S&P 500 index mutual fund
    A managed closed-end fund
    An S&P 500 index Exchange Traded fund
    An DJIA Exchange Traded Fund
    B.
    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. Which of the following are characteristics of GNMA pass-through certificates?

    Interest and principal payments are received monthly
    Timely payment of interest and principal is guaranteed by the U.S. government
    Interest is subject to federal tax but exempt from state and local tax
    Secured by commercial mortgages

    I and II only
    I, II, and IV only
    I, III, and IV only
    II, III, and IV only
    C.
    REITs manage a portfolio of real estate. They can have an equity position in real estate (own the buildings) or be involved in mortgage activities (lend money). They must distribute 90% of their income in order to qualify for preferential tax treatment. They are not limited partnerships; they do not have a flow through of losses. An investor's risk is limited to his or her investment.

          

  4. State governments receive the least amount of revenues from:

    Sales taxes
    Gasoline taxes
    Excise taxes
    Property taxes
    D.
    State governments receive the least amount of revenues from property taxes. States raise money primarily from income taxes, sales taxes, excise taxes, and license fees. Local municipalities raise most of their funds from property taxes (real estate taxes).

          

  5. 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
    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.