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5 Written questions

5 Matching questions

  1. In May a customer sells a STC July 40 listed Call for a $6 premium and buys a STC July 30 listed Call for $10. Near expiration, STC is selling at $39. The 40 Call expires and the customer closes out the 30 Call at its intrinsic value. The net result is:

    $100 loss
    $100 profit
    $500 profit
    $500 loss
  2. A client buys 100 shares of Miramar at $42/share. One week later she buys 1 Miramar Nov 40 put and pays a premium of $300. In November the stock is at $48/share and the put expires worthless. The tax consequences of these trades are:

    Miramar stock has a basis of 42
    Miramar stock has a basis of 45
    There is a capital loss of $300 on the put
    No loss is reported on the put until the stock is sold

    II only
    I and III only
    I and IV only
    II and III only
  3. Which of the following are characteristics of REITs?

    Formed as a limited partnership
    Provide limited liability for shareholders
    Invest in mortgage-related activities
    Distribute a minimum percentage of income
    I and III
    I, II, and IV
    II, III, and IV
    I, III, and IV
  4. A major difference between an open-end and closed-end investment company is:

    The composition of their portfolios
    The types of securities that each may issue
    The method of calculating Net Asset Value
    That a closed-end investment company is exempt from new issue registration requirements
  5. An investor purchases Swiss francs in the spot market at 61. As a hedge, the investor buys a Swiss franc June 60 put at 0.50. This strategy will be profitable if:

    The U.S. dollar weakens
    The U.S. dollar strengthens
    The spot price for the Swiss Franc is 61.75
    The spot price for the Swiss Franc is 59.25

    I and III only
    I and IV only
    II and III only
    II and IV only
  1. a B.
    A major difference between open-end and closed-end investment companies is their capitalization, the types of securities they issue to raise money. Open-end companies may only issue common stock. Closed-end companies may issue common stock, preferred stock, or bonds.
  2. b 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. c 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).
  4. d 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. e C.
    When the market price of STC is at $39, the July 30 call has intrinsic value of 9 points. Since the investor paid a debit of $400, this will result in a profit of $500 ($900 intrinsic value - $400 debit).

5 Multiple choice questions

  1. 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.
  2. A.
    The investor bought the more expensive call; therefore, this is a debit spread. A call debit spread is a bullish strategy.
  3. 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.
  4. A.
    When an index option is exercised, the writer must pay the buyer the in-the-money amount of the option in cash.
  5. C.
    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.

5 True/False questions

  1. MSRB rules require that a municipal securities principal must approve all of the following, EXCEPT:

    All municipal transactions
    Municipal advertising
    Finalized bid forms
    Correspondence sent to customers
    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.


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

    The Municipal Bond Investors Assurance Corporation (MBIAC) and AMBAC Indemnity Corporation (AMBAC) are two insurance companies that insure new municipal issues. The insurance policy guarantees that should the issuer fail to pay interest or principal, the insurance company will meet all interest and principal payments when due. S&P and Moody's typically assign an AAA rating to any insured issue. Another insurer is Financial Guarantee Insurance Company (FGIC).


  3. 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
    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. 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.


  5. A fundamental analyst, evaluating the common stock of a corporation, would examine all of the following, EXCEPT the:

    a. Sales of the corporation
    b. Management of the corporation
    c. Current amount of earnings paid out as dividends to the shareholders
    d. Current amount of short interest positions for the stock
    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.