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5 Written questions

5 Matching 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
  2. 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
  3. Choose from the items below, the one that is best described by the following.

    Tax credit

    The largest deduction generated by a DPP in real estate.

    Tax credit
  4. Which of the following insure municipal bonds?


    I and II only
    II, III, and IV only
    III and IV only
    I, II, III, and IV
  5. A member of a municipal syndicate is entitled to which of the following?

    Underwriting spread
    Additional takedown
    Manager's fee
    I and III only
    II and III only
    II and IV only
    I, II, III, and IV
  1. a 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).
  2. b 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.
  3. c 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.
  4. d C.
    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).
  5. e A.
    The largest deduction in a real estate program is generally depreciation.

5 Multiple choice questions

  1. 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).
  2. 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.
  3. 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.
  4. 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.
  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. The market price of which of the following types of stock is most affected by swings in the interest rate cycle?

    Soft drink
    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.


  2. 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
    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.


  3. 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
    The order can be accepted and is not a discretionary order which requires written power of attorney. The customer told the registered representative which stock to buy (GM) and the amount (100 shares). The phrase "whenever you think the price is right" means the registered representative can use his or her judgement as to when the stock should be purchased. The order is not a market order and does not have to be executed as soon as possible after it is received. The order, however, should be executed sometime during the day it was received.


  4. 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
    The trade date is Monday, April 30th. The bond pays interest on February 1st and August 1st. Accrued interest is calculated from the last interest payment date, up to but not including the settlement date. The settlement date is Thursday, May 3rd. The following calculation illustrates the answer:

    February 30 days
    March 30 days
    April 30 days
    May 2 days
    92 days


  5. A customer purchases a municipal bond with 25 years remaining to maturity. The bond has been pre-refunded to its first call date. The issue is callable in 7 years at 108, declining to par in 14 years. It also has a sinking fund call provision which begins in 17 years at par. For confirmation purposes, the bond should be priced to the:

    First par call
    First call date
    Sinking fund date
    Final maturity date
    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.