Exam #2 Missed Questions Flashcards
A corporation is attempting to sell additional shares to its existing shareholders through a rights distribution. A shareholder who wishes to subscribe must send the purchase amount with the rights certificate to the:
A transfer agent
B stand-by underwriter
C rights agent
D corporate controller
The best answer is C.
A rights agent is hired to handle the mechanics of a rights offering. To subscribe, the existing shareholders submit their rights with the subscription dollar amount to the rights agent.
Which of the following can initiate repurchase agreements with government and agency securities as collateral?
I Federal Home Loan Banks
II Commercial banks
III Federal Reserve Banks
IV Government securities dealers
A II, III, IV
B I, II, III
C I, III, IV
D I, II, III, IV
The best answer is A.
Government securities dealers, Commercial banks, and the Federal Reserve through its open market trading desk, all initiate repurchase agreements. Federal Home Loan Banks sell bonds to obtain funding. With the funds, it buys mortgages from Savings and Loans, making a secondary mortgage market and injecting fresh funds into the S&L’s.
The manager of a mutual fund is known as the:
A Sponsor
B Investment Adviser
C Custodian
D Underwriter
The best answer is B.
The investment adviser manages the fund within its stated objective, deciding which securities to buy into the portfolio; and which securities to sell from the portfolio. The custodian bank always safekeeps the assets and usually acts as both paying agent and transfer agent. The sponsor of a mutual fund establishes the fund and registers the fund with the SEC before the security can be sold.
An investor has a $1,000,000 portfolio that is split evenly between “blue chip” stocks and Treasury securities. The current economic environment is characterized by low interest rates and flat stock prices - and this is expected to remain unchanged for a number of years. However, the residential and commercial real estate market is expected to be strong. The investor would like to diversify the portfolio and enhance returns without adding much additional risk. Which of the following investment purchase recommendations would help achieve this objective?
A Mortgage REITs
B Mortgage Bonds
C Equity REITs
D Fannie Mae Pass-Through Certificates
The best answer is C.
During periods when financial assets such as stocks and bonds are not doing well, “hard” assets such as real estate and artwork tend to do better (since investors reallocate their investments away from financial assets into housing, etc.) A way that investors can participate in this is by investing in equity REITs. Since equity REITs own real estate, the share price movement of the REIT parallels the value of the real estate owned. Mortgage REITs invest in mortgages (essentially the same as investing in a bond) and thus are not the best choice when interest rates are low, since the yield is meager. And, if market interest rates rise, the value of the mortgages held drops. The same would be true for investments in mortgage bonds and Fannie Mae Pass-Through certificates.
Which statements are TRUE about option contracts?
I Long puts go “out the money” when the market price rises above the strike price
II Long puts go “out the money” when the market price falls below the strike price
III Short puts go “out the money” when the market price rises above the strike price
IV Short puts go “out the money” when the market price falls below the strike price
A I and III
B I and IV
C II and III
D II and IV
The best answer is A.
An “out the money” contract is one, that if exercised, would result in an unprofitable stock trade to the holder. These contracts are left to expire unexercised. Puts go “out the money” when the market price rises above the strike price - it makes no difference if the contract is “long” or “short.” Being “out the money” is bad for the contract holder and good for the contract writer. The put holder would not exercise and sell the stock at a strike price that is lower than the current market. Calls go “out the money” when the market price falls below the strike price. The call holder will not exercise and buy stock at the strike price that is higher than the current market price
A customer buys 1 ABC Apr 30 Call @ $6 and 1 ABC Jan 40 Put @ $8 when the market price of ABC is at $34. ABC goes to 36 and the customer closes the positions at intrinsic value. The customer has a:
A $400 loss
B $400 gain
C $1,400 loss
D $1,400 gain
The best answer is A.
The customer has bought a combination.
Buy 1 ABC Apr 30 Call @ $ 6
Buy 1 ABC Jan 40 Put @ $ 8
$14 Debit
If the market is at $36, the 40 Put is 4 points “in the money” while the 30 Call is 6 points “in the money.” Closing the contracts at these premiums results in:
Sell 1 ABC Apr 30 Call @ $ 6
Sell 1 ABC Jan 40 Put @ $ 4
$10 Credit
The net loss is: $10 Credit - $14 Debit = $4 or $400 on the positions.
Which statements are TRUE about the CBOE Order Support System?
I The order is directed to the brokerage firm’s communication post on the exchange floor
II The order is directed to the trading post
III Execution notices are sent directly from the trading post to the brokerage firm
A I and III
B II and III
C I only
D I, II, III
The best answer is B.
All automated trading systems function in a similar fashion. Orders are routed directly to the trading post, eliminating the need for the order to be wired to the communication post on the exchange floor and then written by hand to be given to a floor broker. The execution report is sent directly to the originating firm; it does not go through the firm’s communication post.
Under FINRA rules, orders can be effected for an account that is transferred from another brokerage firm when the:
A customer completes and signs the transfer form detailing account positions
B carrying firm receives the account transfer form
C carrying firm validates the account transfer form
D carrying firm physically transfers the securities
The best answer is C.
Under FINRA rules for transfer of accounts from firm to firm. The customer must complete an account transfer form detailing positions at the receiving firm. This is sent immediately to the “old” carrying firm, which has 1 business day to verify (validate) the positions. Upon verification, the receiving firm can now trade the account. The account positions are then transferred within the next 3 business days.
A customer shorts 1,000 shares of ABC stock @ $5 per share in a margin account. The customer must deposit:
A $2,000
B $2,500
C $4,000
D $5,000
The best answer is D.
To short a stock priced from $10 down to $5, the minimum is $5 per share. Thus, to short 1,000 shares at $5, $5,000 must be deposited. Note that this minimum set by FINRA is greater than the Regulation T requirement of 50%. Also note that to short a stock under $5, the minimum rule changes to the greater of 100% or $2.50 per share.
In order to recommend a variable annuity to a customer, the representative must inform the customer, in general terms, about any:
I potential surrender period and surrender charge
II potential tax penalty
III mortality and expense fees
IV charges for and features of enhanced riders
A I and II only
B III and IV only
C I, II, III
D I, II, III, IV
The best answer is D.
Consider this to be a learning question. To recommend a variable annuity, the representative must have a reasonable basis to believe that the customer has been informed, in general terms, about the material features of the variable annuity. These include the potential surrender period and surrender charge, potential tax penalty, mortality and expense fees, charges for and expenses of enhanced riders (a very popular rider, at a cost, is a GMIB - a Guaranteed Minimum Income Benefit), insurance and investment components and market risk.
Which of the following are characteristics of Defined Contribution Plans?
I Annual contribution amounts are fixed
II If the corporation has an unprofitable year, the contribution may be omitted
III The annual benefit varies dependent on the number of years that the employee is included
IV This type of plan is not subject to ERISA requirements
A I and II only
B I and III only
C II, III, and IV
D I, II, III, IV
The best answer is B.
Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. Thus, the ultimate benefit to be received by the employee depends on the number of years he or she has been included in the plan and the annual amounts contributed. If the corporation has an unprofitable year, it must still make the contributions. Such plans are subject to ERISA requirements.
If a corporation has an unfunded pension liability, this means that:
A the expected future value of fund assets is less than projected benefit claims
B the expected future value of fund assets is more than projected benefit claims
C inflation has eroded the value of the portfolio funding the plan
D existing retirees’ benefit claims are not being met
The best answer is A.
An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded, but the plan trustee is responsible to ensure that future funding is adequate as needed.
Contributions to qualified retirement plans, other than IRAs, must be made by:
A December 31st of the calendar year in which the contribution may be claimed on that person’s tax return
B April 15th of the calendar year in which the contribution may be claimed on that person’s tax return
C April 15th of the calendar year after which the contribution may be claimed on that person’s tax return
D The date on which the tax return is filed with the Internal Revenue Service
The best answer is D.
Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
Investment banks perform all of the following functions EXCEPT:
A distribute new issues on an agency basis
B assist issuers in publicizing new issue offerings
C accept time and demand deposits
D buy new securities offerings from issuers on a principal basis
The best answer is C.
Investment banks are prohibited from accepting time and demand deposits. These can only be accepted by commercial and savings banks. Investment banks can underwrite new issues on a principal basis, an agency basis, and can help publicize the issues underwritten.
A customer sells short 100 shares of ABC stock at $74 per share. The stock falls to $66, at which point the customer writes 1 ABC Sept 65 Put at $3. The stock falls to $58 and the put is exercised. The customer’s cost basis upon exercise of the put is:
A $62
B $68
C $71
D $74
The best answer is A.
The customer sold the stock short at $74 per share (sale proceeds). Later, the customer sold a Sept 65 Put @ $3 on this stock. If the short put is exercised, the customer is obligated to buy the stock at $65 per share. Since the customer received $3 in premiums when the put was sold, the net cost to the customer is $62 per share for the stock (this is the cost basis in the stock for tax purposes). The stock that has been purchased is delivered to cover the short sale, closing the transaction. The customer’s gain is: $74 sale proceeds - $62 cost basis = 12 point gain.
