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5 Written questions

5 Matching questions

  1. 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
  2. A municipal bond which is issued at par, is purchased at a discount and later sold at par or above. This transaction would result in:

    A taxable gain
    A tax-deductible loss
    A tax-free gain
    No gain or loss
  3. EASY MONEY
  4. All of the following are TRUE about "stopping stock" on the NYSE, EXCEPT that it:

    Is permitted only for public orders
    Requires permission of an exchange official
    Is done by the specialist
    Will guarantee a price for the order
  5. A customer shorts 100 shares of ABC at 16 in a new margin account. How much must he deposit?

    $2.50 per share
    $800.00
    $1,600.00
    $2,000.00
  1. a A period during which there is an ample supply of money available for loan purposes.
  2. b A.
    If a municipal bond is purchased at a discount in the secondary market (not an original issue discount), there will be a taxable gain at maturity. A taxable gain would also result if the bond was sold prior to maturity, above the original cost.
  3. c A.
    Although all of these investments would be suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund would be the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were purchasing a large dollar amount at one time any of these funds may be appropriate.
  4. d D.
    The minimum equity requirement for a short account is $2,000. Since this is a new account, the customer must deposit $2,000.
  5. e B.
    Stopping stock is done by the specialist to guarantee a price for a public order. The specialist does not need the permission of an exchange official to do so.

5 Multiple choice questions

  1. B.
    To find the new number of shares, multiply the shares owned by the ratio of the split (280 x 5/4 = 350). To find the new dividend per share, multiply the dividend by the reciprocal of the split ($.15 x 4/5 = $.12). The investor would receive a 12 cent dividend on 350 shares for a total of $42.00. Note that the stock split did not alter the total dividend received.
  2. 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.
  3. B.
    When a bond is pre-refunded, the only applicable date is the first call feature. Therefore, the bond must be priced to the first call date.
  4. 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.
  5. C.
    T-bills, BAs, and CDs are money-market instruments (short-term debt securities). ADRs represent a claim to foreign securities and are used to facilitate the trading of foreign stocks in the United States.

5 True/False questions

  1. Which of the following Moody's ratings is the most speculative?

    Aa
    A
    Baa
    Ba
    D.
    Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.

          

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

    Slope upward from the shorter to the longer maturities
    Slope downward from the shorter to the longer maturities
    Remain flat
    Do none of the above
    A.
    In periods of "easy money" when interest rates are declining, yields on shorter maturities would be less than those of longer maturities. Yield curves would tend to slope upward from the shorter to the longer maturities.

          

  3. 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
    B.
    When a bond is pre-refunded, the only applicable date is the first call feature. Therefore, the bond must be priced to the first call date.

          

  4. 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
    A.
    GNMA pass-through certificates are guaranteed by the U.S. government. Interest and principal payments are received monthly. The interest is subject to federal, state, and local taxes. GNMAs are secured by residential, not commercial mortgages.

          

  5. DISCRETIONARYA period during which there is an ample supply of money available for loan purposes.

          

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