Customer Disclosure and Settlement Flashcards
An OTC confirmation that discloses the remuneration to be received by the member and which makes available to the customer the name of the contra-broker is required for:
A. Non-NASDAQ principal trades
B. Non-NASDAQ agency trades
C. position trades
D. primary trades
The best answer is B.
Commissions must be disclosed for agency trades; also the name of the contra broker and time of the trade must be made available to the customer upon written request. In a principal transaction, the mark-up is included in a net price and is disclosed for NASDAQ securities transactions (but it is NOT disclosed for non-NASDAQ OTC securities transactions). The mark-up, or commission, must be fair and reasonable.
Which of the following is NOT disclosed on a customer confirmation?
A. Commission if an agency trade
B. Inventory position of the dealer
C. Mark-up if a principal transaction
D. Amount of accrued interest for a bond trade
The best answer is B.
The confirmation does not disclose the inventory position of the dealer - this has no bearing on the customer.
Customer confirmations must disclose the commission in an agency trade. The mark-up is disclosed on principal transactions in NASDAQ stocks. The amount of accrued interest on a bond trade must be on a confirmation, since the buyer pays this amount to the seller.
All of the following must be disclosed on municipal bond trade confirmation EXCEPT:
A. “In Whole” call dates
B. For revenue bonds, the source of revenue backing the issue
C. For industrial revenue bonds, the name of the corporation guaranteeing the issue
D. For general obligation bonds, the source of income backing the issue
The best answer is D.
There is no requirement to disclose the source of income backing a general obligation issue because it must be taxing power.
The MSRB does require that the type of revenue backing a revenue bond issue be disclosed, as well as the name of the corporate guarantor for industrial revenue bonds.
“In Whole” call dates must also be disclosed on customer confirmations, since they can affect the pricing of the issue under MSRB rules (the MSRB requires that if a bond quoted on a yield basis is trading at a premium, and if it is callable “in whole” at preset dates and prices, then the dollar price must be computed to the call date rather than to the maturity date, since it will most likely be called).
All of the following must be disclosed on a municipal agency confirmation EXCEPT:
A. commission
B. tax equivalent yield
C. yield basis
D. redemption date used to compute dollar price
The best answer is B.
There is no requirement that the tax equivalent yield be disclosed on a municipal confirmation. The commission in an agency trade, the yield basis upon which the trade was effected, and the redemption date used to compute the dollar price must all be disclosed.
All of the following information appears on a municipal bond trade confirmation EXCEPT:
A. Agency or principal capacity
B. Paying agent name
C. Broker-dealer name
D. Accrued interest
The best answer is B.
Paying agent name does not appear on a bond confirmation. The name of the broker-dealer, the accrued interest, and the capacity in which the transaction was executed, all appear.
All of the following must be disclosed on municipal bond trade confirmations EXCEPT:
A. In Whole call dates
B. For industrial revenue bonds, the name of the corporation guaranteeing the issue
C. For revenue bonds, the source of revenue backing the issue
D. For general obligation bonds, the source of income backing the issue
The best answer is D.
“In Whole” call dates, where the entire issue is callable at preset dates and prices, must be disclosed on customer confirmations under MSRB rules. The MSRB requires the corporate guarantor for industrial revenue bonds and that the type of revenue backing a revenue bond issue be disclosed. There is no requirement to disclose the source of income backing a general obligation issue because it must be taxing power.
All of the following information must be shown on a municipal bond trade confirmation EXCEPT:
A. Name, address, and telephone number of the municipal dealer
B. Whether the trade was effected on an agency or principal basis
C. Whether the bond was a General Obligation or a Revenue bond
D. The name, address, and telephone number of the underwriter for the initial bond offering
The best answer is D.
Much information must be included on a municipal bond trade confirmation - name, address, and telephone number of the municipal dealer; whether the trade was effected on an agency or principal basis; whether the bond was a General Obligation or a Revenue bond; and of course, the Trade date and Settlement date.
The name, address and telephone number of the issuer’s original underwriter is not relevant information on a bond trade confirmation.
Which of the following would NOT be needed to compute the total dollar price of a municipal bond traded on a yield basis in the secondary market?
A. Purchase price
B. Maturity date
C. Dated date
D. Call date
The best answer is C.
When pricing a municipal bond traded in the secondary market on a yield basis, the MSRB requires that the dollar price be computed on a “worst case” basis.
For premium bonds, having the bond called early (losing the premium faster) is worst; so premium bonds must be priced to the nearest “in whole” call date.
For discount bonds, having the bond last until the maturity date is worst, earning the discount slower.
Thus, these dates are employed when pricing municipal bonds quoted on a yield basis. Of course, the purchase price of the issues would always be required.
The dated date has no meaning for pricing a bond trading in the secondary market. It is simply the legal date of issuance of the bond, and is the date from which interest started accruing on the issue.
All of the following dates are needed to compute the total purchase price of a municipal bond traded in the secondary market that is quoted on a yield basis EXCEPT:
A. dated date
B. maturity date
C. settlement date
D. in whole call date
The best answer is A.
When a municipal dealer gives a basis quote, he is promising the purchaser a certain yield on the bond. MSRB rules require that when the actual dollar price is determined, that the dollar price be computed to the lowest dollar amount of yield to call or yield to maturity. The only calls that are considered are optional calls, meaning the issuer has the option of calling in the entire issue at preset dates and prices, as set forth in the bond contract. This is an “in whole” call.
Settlement date is needed to compute the amount of accrued interest.
The dated date has no meaning for pricing a bond trading in the secondary market. It is simply the legal date of issuance of the bond, and is the date from which interest started accruing on the issue.
Under MSRB rules, yield to worst means that:
A. all municipal bonds quoted on a yield basis must be priced to the near-term in whole call date
B. municipal par bonds quoted on a yield basis must be priced to the near-term in whole call date
C. municipal discount bonds quoted on a yield basis must be priced to the near-term in whole call date
D. municipal premium bonds quoted on a yield basis must be priced to the near-term in whole call date
The best answer is D.
When municipal serial bonds are quoted on a yield basis, the dealer must compute the dollar price shown on the customer confirmation. This dollar price must assure, that at a minimum, the customer will receive the promised yield. This is known as pricing to the “worst case” scenario.
For a premium bond, the “worst case” scenario is having the bond called early (which is the likely case). Bonds trade at a premium because market interest rates have dropped, so the issuer can refund the issue at lower current market rates by calling in the bonds. In this case, the bond is priced based on giving the customer the promised yield using the near-term in whole call date as the redemption date. If the bond were not called, the customer’s actual yield would improve, because the annual loss of premium incorporated into the yield would be spread over a longer time frame.
For a discount bond, the “worst case” scenario is having the bond held to maturity (which is the likely case). Bonds trade at a discount because market interest rates have risen, so the issuer would not call these bonds. In this case, the bond is priced based on giving the customer the promised yield using the maturity date. If the bond were called early, the customer’s actual yield would improve, because the annual earning of the discount incorporated into the yield would be spread over a shorter time frame.
Under MSRB rules, yield to worst means that:
A. all municipal bonds quoted on a yield basis must be priced to maturity
B. municipal par bonds quoted on a yield basis must be priced to maturity
C. municipal discount bonds quoted on a yield basis must be priced to maturity
D. municipal premium bonds quoted on a yield basis must be priced to maturity
The best answer is C.
When municipal serial bonds are quoted on a yield basis, the dealer must compute the dollar price shown on the customer confirmation. This dollar price must assure, that at a minimum, the customer will receive the promised yield. This is known as pricing to the “worst case” scenario.
For a premium bond, the “worst case” scenario is having the bond called early (which is the likely case). Bonds trade at a premium because market interest rates have dropped, so the issuer can refund the issue at lower current market rates by calling in the bonds. In this case, the bond is priced based on giving the customer the promised yield using the near-term in whole call date as the redemption date. If the bond were not called, the customer’s actual yield would improve, because the annual loss of premium incorporated into the yield would be spread over a longer time frame.
For a discount bond, the “worst case” scenario is having the bond held to maturity (which is the likely case). Bonds trade at a discount because market interest rates have risen, so the issuer would not call these bonds. In this case, the bond is priced based on giving the customer the promised yield using the maturity date. If the bond were called early, the customer’s actual yield would improve, because the annual earning of the discount incorporated into the yield would be spread over a shorter time frame.
Under MSRB rules, pricing of callable municipal premium bonds quoted on a yield basis is based upon:
A. best case scenario
B. worst case scenario
C. yield to maturity
D. nominal yield
The best answer is B.
When municipal serial bonds are quoted on a yield basis, the dealer must compute the dollar price shown on the customer confirmation. This dollar price must assure, that at a minimum, the customer will receive the promised yield. This is known as pricing to the “worst case” scenario.
For a premium bond, the “worst case” scenario is having the bond called early (which is the likely case). Bonds trade at a premium because market interest rates have dropped, so the issuer can refund the issue at lower current market rates by calling in the bonds. In this case, the bond is priced based on giving the customer the promised yield using the near-term in whole call date as the redemption date. If the bond were not called, the customer’s actual yield would improve, because the annual loss of premium incorporated into the yield would be spread over a longer time frame.
For a discount bond, the “worst case” scenario is having the bond held to maturity (which is the likely case). Bonds trade at a discount because market interest rates have risen, so the issuer would not call these bonds. In this case, the bond is priced based on giving the customer the promised yield using the maturity date. If the bond were called early, the customer’s actual yield would improve, because the annual earning of the discount incorporated into the yield would be spread over a shorter time frame.
Which of the following call provisions must be considered when determining the purchase price of a municipal bond trade effected on a yield basis?
A. Optional Calls
B. Extraordinary Optional Calls
C. Mandatory Calls
D. Extraordinary Mandatory Calls
The best answer is A.
When a municipal dealer gives a basis quote, he or she is promising the purchaser a certain yield on the bond. MSRB rules require that when the actual dollar price is determined, that the dollar price be computed to the lowest dollar amount of yield to call or yield to maturity. The only calls that are considered are optional calls, meaning the issuer has the option of calling in the entire issue at preset dates and prices, as set forth in the bond contract.
Mandatory calls are not considered - an example of a mandatory call is a “sinking fund” call. In such a call, the issuer is obligated to deposit monies annually to a sinking fund, and then use the funds to call in bonds on a random pick method at specified dates. It is the luck of the draw as to whether a given bond is called or not. Since there is no reasonable certainty of a specific bond being called, this type of call is not considered when pricing municipal bonds.
Extraordinary calls (such as catastrophe calls, or calls of bonds backed by mortgages due to mortgage prepayments) are not considered, again because of the lack of any certainty as to their actually happening.
An 8% general obligation bond is issued with 20 years to maturity. A customer buys the bond on a 7.50% basis. The bond contract allows the issuer to call the bonds in 5 years at 102 1/2, with the call premium declining by 1/2 point a year thereafter. The bond is puttable in 5 years at par. The price of the bond to a customer would be calculated based on the:
A. 5 year call at 102 1/2
B. 5 year put at 100
C. 10 year call at 100
D. 20 year maturity
The best answer is A.
This is a very difficult question. Since the bond has a stated rate of interest of 8%, but is priced to yield 7.50%, the bond is being sold at a premium. The amount of the premium that this equates to is about $100 (you do not need to know how to do this, but you should understand the concept that follows). The dollar price of the bond would be $1,100 to yield 7.50% to maturity.
Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the premium ($100 in this case) is lost in the shortest time period. This premium will be lost in the shortest period of time if the bonds are called early. Thus, under MSRB rules, premium bonds must be priced to the near term call date. Then, the customer will get, at a minimum, the yield promised. If the bonds aren’t called, the yield actually improves on the bonds.
Put options are not considered when pricing municipal bonds, since it is up to the holder to decide whether he or she wishes to “put” the bond.
Under MSRB rules, if the yield to call is lower than the yield to maturity, the bond must be priced based on:
A. yield to maturity
B. yield to call
C. current yield
D. nominal yield
The best answer is B.
The MSRB requires that dollar prices of bonds quoted on a yield basis be computed to the lowest dollar amount of Yield to Maturity or Yield to Call.
If a municipal bond, callable at par, is quoted on a yield basis that is lower than the nominal yield, the price of the bond to a customer would be calculated based on:
A. nominal yield
B. current yield
C. yield to call
D. yield to maturity
The best answer is C.
If a bond is purchased at a premium, its yield to call will be the lowest effective yield. Under MSRB rules, bonds are priced on a worst case basis, meaning, in this case where the premium is lost in the shortest time period. This premium will be lost in the shortest period of time if the bonds are called early. Thus, under MSRB rules, premium bonds must be priced to the near term call date. Then, the customer gets, at a minimum, the yield promised. If the bonds aren’t called, the yield actually improves on the bonds.
Which callable municipal bonds quoted on a yield basis would be priced to the near term “in whole” call date?
A. par bonds
B. discount bonds
C. premium bonds
D. zero-coupon bonds
The best answer is C.
Municipal bonds trading in the secondary market at a premium must be priced to give the customer the promised yield based upon yield to call - this is the worst case basis. Using the call date assumes that the premium will be lost over the shortest time period - if the bond is not called, then the customer’s yield improves.
If a par bond is called early, the customer’s yield stays the same (or improves, if there is a call premium paid). If a discount bond (or zero-coupon bond) is called early, then the customer’s yield improves. For both of these, the “worst case” is for the bonds to be held to maturity - earning the discount over the slowest period of time.
A 7% general obligation bond is issued with 20 years to maturity. A customer buys the bond on a 7.50% basis. The bond contract allows the issuer to call the bonds in 5 years at 102 1/2, with the call premium declining by 1/2 point a year thereafter. The bond is puttable in 5 years at par. The price of the bond to a customer would be calculated based on the:
A. 5 year call at 102 1/2
B. 5 year put at 100
C. 10 year call at 100
D. 20 year maturity
The best answer is D.
This is a very difficult question. Since the bond has a stated rate of interest of 7%, but is priced to yield 7.50%, the bond is being sold at a discount. The amount of the discount to which this equates is about $140 (you do not need to know how to do this, but you do need to understand the concept that follows). The dollar price of the bond would be $860 to yield 7.50% to maturity.
Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the discount ($140 in this case) is earned over the longest period of time. This occurs if the bonds are held to maturity. If the bonds are called earlier, the yield actually improves on the bonds, since the customer earns the discount faster.
If a municipal bond, callable at par, is quoted on a yield basis that is higher than the nominal yield, the price of the bond to a customer would be calculated based on:
A. yield to call
B. yield to put
C. current yield
D. yield to maturity
The best answer is D.
Regarding a bond purchased at a discount: the yield to call will be the highest effective yield. Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the discount is earned over the longest period of time. This occurs if the bonds are held to maturity. If the bonds are called, the yield actually improves on the bonds, since the customer earns the discount faster.
For municipal transactions effected on a yield basis, how are these bonds generally priced?
A. All bonds are priced to their highest possible yield
B. Premium bonds are priced to the near-term call date
C. All bonds are priced to maturity date
D. All bonds are priced to the initial near-term call date
The best answer is B.
For transactions in callable issues effected on a yield basis, discount bonds are priced to maturity while premium bonds are priced to the near term call date. Thus, the customer is always given a dollar price that ensures he will, at a minimum, get the promised yield. In essence all bonds are priced at their “yield to worst.”
Which statement is TRUE about a stock trade effected for cash in a margin account?
A. Payment is required prior to placing the trade with settlement occurring by the end of the same day
B. Payment is required prior to placing the trade with settlement occurring by the end of the next business day
C. Payment is required in part or in full with settlement occurring by the end of the same day
D. Payment is required in part or in full with settlement occurring by the end of the next business day
The best answer is C.
Trades effected for cash settle the same day. If the trade is effected in a margin account, payment is required either in part (the margin requirement) or in full on settlement. Cash settlement is same day settlement, before 2:30 PM ET.
Cash settlement is:
A. same day settlement before 2:30 PM
B. same day settlement after 2:30 PM
C. next day settlement before 2:30 PM
D. next day settlement after 2:30 PM
The best answer is A.
Cash settlement is same day settlement, before 2:30 PM.
Regular way trades of which of the following securities settles “next business day”?
A. Corporate debt
B. Listed options
C. Municipal debt
D. Listed stock
The best answer is B.
Government debt and listed options trades settle regular way the next business day. Listed corporate stock/debt and municipal bond trades settle regular way (2 business days after trade date).
Which statement is TRUE about a regular way stock trade effected in a cash account?
A. Payment in full is required in 1 business day
B. Payment in full is required in 2 business days
C. Payment in part or in full is required in 1 business day
D. Payment in part or in full is required in 2 business days
The best answer is B.
Regular way trades settle in 2 business days. In a cash account, full payment is required.
A client sells stock in a regular way trade in a listed stock on Thursday. The client knows that settlement takes place in 2 days and asks the representative if the funds will show in his account on Saturday. The representative should tell the client that the settlement date when the proceeds will be reflected in the account will be:
A. that Saturday
B. the Monday following that Saturday
C. the Tuesday following that Saturday
D. the Wednesday following that Saturday
The best answer is B.
Regular way settlement is 2 business days following trade date. If a regular way trade takes place on a Thursday, 2 days later is Saturday. However, 2 business days later is Monday, and that is the date the trade would settle.
