Final 1 Flashcards
To sell variable annuities, a salesperson must be registered with all of the following EXCEPT (the):
A.) FINRA
B.)STATE INSURANCE COMMISSION
C.)STATE BANKING COMMISSION
D.)SEC
The best answer is C. To sell a variable annuity, a salesperson must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. The salesperson must also be registered in the state to sell this non-exempt security under the state’s “Blue Sky” laws. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level). Banking regulators have nothing to do with securities.
An efficient trading market is one with.
A.) uniform trading procedures
B.) centralized trading floor
C.) small bid/ask spreads
D.)Publicly disseminated trade reporting
The best answer is C. Efficient markets are characterized by high trading volumes and narrow bid/ask spreads. Whether or not there is a centralized trading floor has no bearing on efficiency. For example, the U.S. Government debt trading market is an OTC screen-based trading system and it is highly efficient. Uniform trading procedures and public disclosure of trade prices help foster efficiency, but if trading volumes are low, the market will still be “inefficient.”
The Master Manufacturing Company has just announced a tender offer for its own common stock. Master is offering to buy up to 100% of the company’s stock at $20 per share contingent on at least 64% of the outstanding shares being tendered. After the announcement of the offer, the stock closed on the NYSE up 2.50 at $18.75. If a customer had 100 shares and sold at tomorrow’s opening price, what is the price that he would receive per share?
A.) 18.75
B.) 20.00
C.) 20.50
D.) 21.25
The best answer is A. If the customer sold at the opening, he would receive $18.75 per share. This deal of $20/share is contingent upon 64% of the shares tendered.
Customer Name: Joey Jones Age: 30 Marital Status: Single Dependents: None Occupation: VP - Marketing - ACCO Corp. Household Income: $250,000 Net Worth: $60,000 (excluding residence) Own Home: No - Rents Investment Objectives: Aggressive Growth / Early Retirement at Age 50 Investment Time Horizon: 20 years Investment Experience: 0 years Current Portfolio Composition: 401(k): $30,000
Cash in Bank:
$30,000
When reviewing this customer’s profile sheet, the most immediate question that should be considered is:
A.) Does the customer intend to buy a home?
B.) Does the customer intend to get married?
C.) since the customer earns 250,000 per year, how come he only has 60,000 in his portfolio
D.) Since the customer is age 30, why does he want to retire by age 50?
The best answer is C. This customer, age 30, is a high earner, yet he only has $60,000 put away in his 401(k) and in cash. It sure looks like he is a big spender! Beginning a systematic plan of putting away money for retirement is critical when formulating an investment plan for a customer - especially one that wants to retire in 20 years. The customer must be made aware of the fact that, probably, his current spending pattern needs to be curtailed. This customer needs to start socking away money now to meet his early retirement goal!
A municipal bond is purchased in the primary market at a discount and the bond is held to maturity. what is the tax consequence at maturity?
A.) No gain or loss
B.) A capital gain equal to the discount
C.) Part capital gain and part taxable interest income on the discount
D.) Taxable interest income equal to the discount
The best answer is A. Accretion of a discount on a municipal bond is a process whereby the book value of a bond purchased at a discount is increased over the holding period of that security. If the municipal bond is issued at a discount, the Internal Revenue Code mandates that the discount be accreted. Each year, the accretion amount is recognized as interest income earned on that bond (which is not taxable by the Federal Government), and the bond’s cost basis for tax purposes is increased. If the bond is held to maturity, the bond’s adjusted cost basis at redemption will be par; and there will be no capital gain or loss.
The best answer is A. Accretion of a discount on a municipal bond is a process whereby the book value of a bond purchased at a discount is increased over the holding period of that security. If the municipal bond is issued at a discount, the Internal Revenue Code mandates that the discount be accreted. Each year, the accretion amount is recognized as interest income earned on that bond (which is not taxable by the Federal Government), and the bond’s cost basis for tax purposes is increased. If the bond is held to maturity, the bond’s adjusted cost basis at redemption will be par; and there will be no capital gain or loss.
A. ) 100% of each payment will be taxable at ordinary income rates
B. )100% of each payment will be non-taxable
C.) Each payment received will be partially taxable but the 10% penalty tax will not be applied
D.) Each payment received will be partially taxable and the 10% penalty tax will be applied
Instead of taking a lump sum distribution, the owner of a variable annuity contract can “annuitize” and receive annuity payments for life. Each payment has 2 components - an earnings portion that is taxable and a return of capital portion (cost basis) that is not taxable. The non-taxable portion represents the return of the original investment that was made with “after tax” dollars.
IRS Rule 72t gives a way for payments to be taken from the annuity prior to age 59 1/2 without the 10% penalty tax being applied. Rule 72t basically requires that annual payments deplete the account over that individual’s expected life (the IRS has 3 approved methods for this). The rule also requires that a minimum of 5 annual “Substantially Equal Periodic Payments” (SEPPs) be taken, but that payments must continue until at least age 59 1/2.
$ 100 is the minimum denomination for all of the following except:
A.) Treasury Bills
B.) Treasury notes
C.) Treasury Bonds
D.) Treasury Stock
The best answer is D. The minimum denomination on a Treasury Bill, Treasury Note or Bond is $100 maturity amount. Treasury Stock has no standard par value, since it is common stock of an issuer.
A customer sells 2 ABC Jan 45 Puts @ $5 when the market price of ABC is $44. If ABC stock falls to $42 and the customer closes the positions at $7, the gain or loss is:
A.) $400 gain
B.)$400 loss
C.) $600 gain
D.) $800 loss
The best answer is B. The puts were sold in an opening sale at $5 and bought in a closing purchase at $7 for a loss of 2 points ($200 per contract). Since 2 contracts are involved, the net loss is $400.
Which of the following economic events would have a positive long term impact on common stock prices?
I.Falling interest rates
II. Falling capital gains tax rates
III. Rising employment rates
IV. Rising inflation rates
A.) 1 and 2 only
B.) 3 and 4 only
C.) 1,2,and 3
D.) All of the above
The best answer is C.
Falling interest rates are good for stock prices. More investors will switch from low yielding bonds to stock investments.
A falling capital gains tax rate also makes stocks attractive to investors.
Rising employment indicates that the economy is expanding. This is bullish for corporate profits and hence, stock prices.
Rising inflation means that interest rates are likely to rise. This makes long term debt unattractive due to their greater price volatility in response to market interest rate changes and also makes stocks unattractive since corporations are not able to increase prices in line with rising costs, hurting profits. In inflationary times, investors switch from stocks and long term bonds to money market instruments which are paying current high rates of interest; and “hard” assets such as gold and real estate that tend to keep up with inflation.
A call premium on a bond is the:
A.) Amount by which the purchase price of the bond exceeds par
B.) Amount by which the redemption price prior to maturity exceeds par
C.) Amount which the redemption price at maturity exceeds par
D.) Maximum premium at which the bond can trade over its life
The best answer is B. A call premium is the excess over par value that the issuer will pay the bondholder to call in the bonds prior to maturity.
Which statements are TRUE regarding the weekly Treasury Bill auction?
I. The minimum non-competitive bid has no dollar limit
II. The minimum non-competitive bid amount is $100
III. The maximum non-competitive bid has no dollar limit
IV. The maximum non-competitive bid amount is $5,000,000
A.) 1 and 3
B.) 1 and 4
C.) 2 and 3
D.) 2 and 4
The best answer is D. The minimum non-competitive bid amount in the weekly Treasury Bill auction is $100; the maximum non-competitive bid amount is $5,000,000.
The discount on market discount corporate and government bonds:
A.) must be amortized annually
B.) may be amortized annually
C.) must be accreted annually
D.) may be accreted annually
The best answer is D. Corporate bonds bought in the secondary market at a discount are termed “market discount bonds.” There is an option of accreting the discount and paying tax annually on the accretion amount at full tax rates; or of waiting until the bond is redeemed or sold to pay the tax on the earned market discount at full tax rates. If the holder accretes the bond and holds it until maturity, there is no capital gain or loss, since the entire discount has been accreted and taxed over the bond’s life. If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains).
All of the following statements are true regarding collateralized mortgage obligations EXCEPT:
A.) CMOs are issued by local government agencies
B.) CMOs are backed by agency pass-through securities held in trust
C.) CMOs have the highest investment grade credit ratings
D.) CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations
he best answer is A.
The last 3 statements are true. Collateralized mortgage obligations are backed by mortgage pass-through certificates that are held in trust. The underlying mortgage backed pass-through certificates are issued by agencies such as FNMA, GNMA and FHLMC, all of whom have an “AAA” (Moody’s or Fitch’s) or “AA” (Standard and Poor’s) credit rating. The CMO takes on the credit rating of the underlying collateral.
CMOs take the payment flow from the underlying pass-through certificates and allocate them to so-called “tranches.” A CMO backed by 30 year mortgages might be divided into 15-30 separate tranches. As payments are received from the underlying mortgages, interest is paid pro-rata to all tranches; but principal repayments are paid sequentially to the first, then second, then third tranche, etc. Thus, the earlier tranches are retired first.
The CMO purchaser buys a specific tranche. Because of the sequencing of principal repayments from the underlying mortgages, the holder has a more definite maturity date on the issue, as compared to actually buying a mortgage backed pass-through certificate. This is true because prepayments on pass-through certificates are allocated pro-rata. During periods of falling rates, all certificate holders receive their share of those repayments pro-rata. The holder of a specific tranche of a CMO will only receive prepayments after all earlier tranche holders are repaid. Thus, CMOs give holders a form of “call protection” not available in regular pass-through certificates.
CMOs are not issued by government agencies; the agency issues the underlying pass-through certificates. CMOs are packaged and issued by broker-dealers.
Covered call Writing is an appropriate strategy in a:
A.) declining market
B.) rising market
C.) stable market
D.) fluctuating
The best answer is C. A covered call writer owns the underlying stock position. The customer sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If the customer expects the market to rise, he or she would not write the call against the stock position because the stock will be “called away” in a rising market. If the customer expects the market to fall, he or she would sell the stock or buy a put as a hedge.
U.S. Government Agency securities are:
1) QUOTED IN 1/8THS
2) QUOTED IN 1/32NDS
3) Traded with accrued interest computed on an actual day month/ actual day year basis
4) Traded with accrued interest computed on 30 day month/ 360 day year basis
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
The best answer is D. Government agency securities are quoted in 32nds, similar to U.S. Government securities. Unlike U.S. Governments, on which accrued interest is computed on an actual day month / actual day year basis, Agency securities’ accrued interest is computed on a 30 day month/360 day year basis.
