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

  3. Under MSRB rules, a broker or dealer participating in the distribution of a new issue of municipal securities must disclose which of the following to customers?

    I. The nature of any control relationship with the issuer
    II. Fees received by the managing underwriter
    III. The amount of any financial advisory fee received from the issuer in connection with the issue
    IV. The fact that no final official statement will be prepared by the issuer

    a. I and IV only
    b. II and III only
    c. I, III, and IV only
    d. I, II, III, and IV
  5. If ABC Corporation pays a $0.25 dividend to its shareholders, all of the following would result, EXCEPT:

    a. Retained earnings remains the same
    b. Working capital is decreased
    c. Current assets are decreased
    d. Current liabilities are decreased
  1. a D.
    Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.
  2. b 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).
  3. c B.
    When a cash dividend is paid, current assets (cash) and current liabilities (dividends payable) are decreased. Since both are reduced proportionately, working capital (current assets minus current liabilities) remains the same.
  4. d Securities that pool debt obligations and pass through the principal and interest payments made by debtors to the security holders. To create a mortgage pass-through, a group of mortgages are collected to form a pool. Interests in the pool are then sold to investors in the form of pass-through certificates. Each certificate represents an undivided interest in the pool.
  5. e A.
    The nature of any control relationship and the fact that no official statement will be prepared must be disclosed to customers. Fees would not normally be disclosed.

5 Multiple choice questions

  1. A.
    The investor bought the more expensive call; therefore, this is a debit spread. A call debit spread is a bullish strategy.
  2. D.
    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.
  3. A.
    Utilities are usually highly leveraged (a high percentage of capital is borrowed) and are therefore most affected by interest-rate swings.
  4. C.
    The underwriting spread includes the manager's fee, the additional takedown, and the concession. The additional takedown plus the concession equals the total takedown. A member of the syndicate is entitled to the total takedown for bonds it sells. The manager's fee always goes to the managing member of the syndicate.
  5. 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.

5 True/False questions

  1. 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
    All of the choices given should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction except the purchase price of securities held in inventory by the dealer. The commission charged should be based on the current market price, not the cost of the inventory position.


  2. To determine the yield on a municipal bond, all of the following are needed, EXCEPT:

    Dated date
    Settlement date
    Corporations may exclude a portion of the dividends received from investments in the common and preferred stocks of other corporations.


  3. A specialist can accept all of the following orders, EXCEPT a:

    Not-held order
    Market order
    Good-until-cancelled (open) order
    Day order
    A specialist can accept all of the orders listed except a "not-held" order which allows a floor broker to use discretion in executing an order. Open (GTC) and day orders may be accepted by the specialist and placed in the specialist book. A specialist can accept a market order but must execute it immediately and cannot place it in the specialist book.


  4. 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:

    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. 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
    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.