Final Exam 1 Flashcards
When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term rates compared to long-term rates?
QID: 1891961Mark For Review
A
Short-term rates fluctuate more sharply than long-term rates.
B
Long-term rates fluctuate more sharply than short-term rates.
C
Both long- and short-term rates fluctuate equally.
D
There is no relationship between the fluctuations in long-term and short-term rates.
Short-term rates fluctuate more sharply than long-term rates.
When interest rates are fluctuating, short-term rates will fluctuate more sharply than long-term rates. However, in terms of prices, when interest rates are fluctuating, long-term bond prices are affected more than short-term bond prices.
A research analyst at a broker-dealer is preparing a research report recommending ABC common stock. Which of the following situations need not be disclosed?
QID: 1892066Mark For Review
A
ABC Corp is an investment banking client of the broker-dealer
B
The broker-dealer has a 1% or greater beneficial ownership in ABC common stock
C
The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds
D
The broker-dealer makes a market in ABC common stock
The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds
The broker-dealer is required to make certain disclosures in its research reports, such as whether the firm has an investment banking relationship or makes a market in the common stock of ABC. It must also disclose its ownership in a subject security if the ownership is equal to or greater than 1% beneficial ownership in common equity. Since nonconvertible debt is not considered common equity, disclosure is not required.
A client with an options account takes the following position: Long GHI Nov 65 puts and Short GHI Nov 55 puts. Which of the following statements is TRUE regarding this position?
QID: 1892040Mark For Review
A
This position subjects the client to unlimited risk.
B
This position will be profitable if the market price of the security declines.
C
This position will be profitable if the market price of the security increases in value.
D
This position will only be profitable if the market price of the stock is trading between 55 and 65.
This position will be profitable if the market price of the security declines.
This position is referred to as a debit put spread. It’s a debit because the cost to purchase a put with a higher strike price will be more than the amount received for selling a put with a lower strike price. The investor will make money if the stock declines (bearish) in value since the long put will be exercised first (it has a higher strike price and thereby more intrinsic value). The fact that the premiums are not given is irrelevant since the cost of a put with the higher strike price will always be more valuable that a put with a lower strike price (if given the same expiration month). The position may be profitable if the stock price was trading between 65 and 55, but will also be profitable if the stock is trading below 55.
A customer sells 1,000 shares of stock and asks for the actual time of the execution. For a branch office manager, what is the appropriate action?
QID: 1891952Mark For Review
A
To state that the firm is able to provide this information on written request
B
To state that it is impossible to know the time of the trade
C
To send the customer a copy of the order ticket
D
To indicate that the customer should contact the equity trading desk
To state that the firm is able to provide this information on written request
According to the SEC’s confirmation rules, a broker-dealer must automatically disclose the time of execution or indicate that the time of execution is able to be furnished on written request by a customer.
An investor purchased stock at $50 per share and the stock is now trading between $75 and $77. The investor doesn’t want to eliminate the position unless the stock drops significantly. Which of the following orders is the MOST suitable for her to place? QID: 1892005Mark For Review A Buy limit at $70 B Sell limit at $70 C Sell stop at $75 D Sell stop at $70
Sell stop at $70
Although the customer has a significant unrealized gain, there’s still the possibility that it could trend higher. If the investor wants to protect a portion of the gain, he should enter a sell stop order, which will become a market order if the stop price is hit or traded through. Entering a sell stop at $70 will serve this purpose. If he enters the sell stop at $75, it may very easily be triggered by a small decrease in the stock’s price, thereby eliminating his position. For that reason, the sell stop at $70 is a better choice. A sell limit order is one that’s entered above the market price (i.e., not at $70). The customer is looking for an order that will result in selling his stock in the event that it declines significantly; therefore, a buy order is of no benefit.
An investor must pay accrued interest for a secondary market purchase of: QID: 1892025Mark For Review A Zero-coupon bonds B Series EE savings bonds C Tax anticipation notes D Treasury bills
Tax anticipation notes
Zero-coupon bonds and Treasury bills are original issue discount securities and trade without accrued interest. While Series EE bonds are also OID securities, they do not trade in the secondary market. Tax anticipation notes (TANs) are typically interest-bearing securities and trade with accrued interest.
An investor wants to buy a foreign stock that’s trading at $540 per share and paying a $12.50 annual dividend. The investor’s registered representative instead suggests purchasing an ADR which represents 10% of the value of the foreign stock. If the customer commits to buying 500 shares, what’s his cost basis and his first semiannual dividend from the ADR?
QID: 1892049Mark For Review
A
Cost basis of $270,000 and $6,250 in semiannual dividends
B
Cost basis of $27,000 and $625 in semiannual dividends
C
Cost basis of $270,000 and $3,125 in semiannual dividends
D
Cost basis of $27,000 and $312.50 in semiannual dividends
Cost basis of $27,000 and $312.50 in semiannual dividends
The ADR represents 10% of the foreign stock’s value. As a result, the ADR per share value is $54 ($540 x 10%) and the annual dividend is $1.25 ($12.50 x 10%). If the customer purchases 500 shares of the ADR, the total investment will equal $27,000 (500 x $54) and the total annual dividend will be $625 (500 x $1.25). However, since the question asks about the semiannual dividend, the customer will receive $312.50 of dividends ($625 ÷ 2). Many foreign stocks and ADRs pay semiannual dividends rather than quarterly dividends.
Mr. Jones purchases 100 shares of IBM at $116 per share and writes an IBM June 115 call option at 5. Mr. Jones' breakeven point is: QID: 1892014Mark For Review A 110 B 111 C 120 D 121
111
The writer of a covered call will have a breakeven point equal to the purchase price of the stock (116) less the premium received (5). Therefore, his breakeven point is $111 ($116 - $5 = $111).
A client has established the following position:
Long 1 DEF May 50 call at 2
Short 1 DEF May 40 call at 6
In which of the following situations will the client have the maximum potential profit?
QID: 1891974Mark For Review
A
If the market price of the stock is trading above 48
B
If both options contracts expired unexercised
C
If the market price of the stock is trading below 52
D
If both option contracts are exercised
If both options contracts expired unexercised
This position is referred to as a credit call spread. It’s a credit because the client received more for the short call with the lower strike price than what was paid for the call with the higher strike price. If both calls expire unexercised, the client will keep the net premium (the maximum gain). This will occur If DEF remains at or below $40 per share, since neither call will be exercised. If the stock price is trading below 44 (the breakeven point), the client may have a profit, but the maximum profit is realized if both options expired unexercised.
The term that defines an arrangement in which an investment manager receives research or brokerage services in exchange for placing orders through that broker-dealer is called: QID: 1891947Mark For Review A Trading ahead of research B Front-running C Hard dollars D Soft-dollars
Soft-dollars
It is a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its customer. Hard dollars would be the practice of paying for the services separately. For example, paying for research and commissions.
Which of the following transactions would NOT take place on an exchange? QID: 1891954Mark For Review A The sale of an options contract B The purchase of a municipal bond C The short selling of an equity security D The purchase of an exchange-traded fund
The purchase of a municipal bond
The SEC definition of an exchange is a marketplace that brings buyers and sellers together. An exchange may be a physical location such as the NYSE or a purely electronic system such as Nasdaq. Most exchanges trade equities (common and preferred stock, closed-end or exchange-traded funds), equity derivatives (options, rights, and warrants). Some exchanges will also trade corporate debt. Most corporate debt and other types of fixed-income or debt securities (i.e., municipal bonds) are not traded on an exchange, but traded directly between broker-dealers.
A company, which has investors with registration rights, has recently conducted an initial public offering. Typically, how long must these investors wait to sell their shares after the IPO? QID: 1892017Mark For Review A One year B 180 days C Two years D Three years
180 days
A lock-up agreement dictates the amount of time that pre-IPO investors, such as private placement buyers (private equity investors) and other insiders, typically must wait to sell their shares once the company has gone public. Although a lock-up agreement will generally expire six months (180 days) following the closing of the company’s IPO, there’s no statutory time limit. The lock-up is designed to prohibit management and venture capitalists that initially funded the company from immediately liquidating their shares once the issue goes public. The shares will then be sold under a Rule 144 exemption. Registration rights allow, but don’t require, these holders to sell their shares along with the company when it conducts the IPO.
A customer wants to purchase a security that invests primarily in private companies that have difficulty raising capital in public markets. Which of of the following investments would you recommend? QID: 1892048Mark For Review A A real estate investment trust (REIT) B A collateralized mortgage obligation (CMO) C A direct participation program (DPP) D A business development company (BDC)
A business development company (BDC)
A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.
An accumulation unit in a variable annuity contract is:
QID: 1892044Mark For Review
A
An accounting measure that’s used to determine the contract owner’s interest in the separate account
B
An accounting measure that’s used to determine payments to the owner of the variable annuity
C
The same as a shareholder’s ownership interest in a mutual fund
D
The same as the insurance company’s profit from the separate account
An accounting measure that’s used to determine the contract owner’s interest in the separate account
An accumulation unit in a variable annuity contract is an accounting measure that’s used to determine the contract owner’s interest in the separate account. The separate account is the portfolio in which the customer’s contributions are invested. Some separate accounts consist of several subaccounts that each have different objectives and portfolios.
Which CMO tranche provides the greatest safety of principal? QID: 1892010Mark For Review A The A tranche B The Z tranche C The companion tranche D The floating rate tranche
The A tranche
Tranche A (the fast-pay tranche) is the first to receive principal, while the Z tranche only receives payments after all of the other tranches are paid. The companion or support tranche is considered a very volatile tranche. A floating rate tranche simply adjusts its interest rate based on an index
If a New York resident is subject to the AMT and is considering the following bonds that have similar yields, which bond is MOST suitable?
QID: 1891937Mark For Review
A
A Buffalo, NY bond that’s subject to the AMT
B
A triple exempt bond that’s subject to the AMT
C
An Albany, NY bond that’s not subject to the AMT
D
A corporate bond
An Albany, NY bond that’s not subject to the AMT
Municipal bonds that are subject to the alternative minimum tax (AMT) will no longer offer federally tax-free interest to individuals who are subject to the AMT. As a result, the Albany, NY bond that’s not subject to the AMT will provide federally tax-exempt interest. Since the yields are similar on each of these bonds, the Albany bond will provide a better yield than the corporate bond due to the corporate bond interest being subject to both federal and state tax.
Which of the following securities is NOT guaranteed by the U.S. government?
QID: 1892033Mark For Review
A
Treasury notes
B
Treasury bills
C
Government National Mortgage Association (Ginnie Mae) certificates
D
Federal National Mortgage Association (Fannie Mae) bonds
Federal National Mortgage Association (Fannie Mae) bonds
Of the choices given, the only obligations that are not guaranteed by the U.S. government are FNMA (Fannie Mae) bonds. FNMA was created as a government-chartered private corporation. It borrows funds and uses the proceeds to purchase conventional residential mortgages. Although FNMA can borrow funds from the U.S. government, the securities it issues are not directly backed by the U.S. government.
A municipal bond that was issued at par is purchased by an individual in the secondary market at a price of 90. What is the tax consequence if the bond is held to maturity? QID: 1891997Mark For Review A $100 capital gain B $100 capital loss C $100 tax-free interest D $100 ordinary income
$100 ordinary income
An investor purchasing a secondary market discount municipal bond will have ordinary income if the bond is held to maturity. Since the bond was purchased at 90 ($900) and held to maturity when the investor receives par ($1,000), the investor will have a $100 gain, which is reported as ordinary income.
Which of the following Moody's ratings is the most speculative in the investment-grade category? QID: 1892018Mark For Review A Aa B A C Baa D Ba
Baa
The top-4 ratings in both Moody’s and S&P are investment grade. The top-4 ratings are:
Moody's Aaa Aa A Baa
S&P AAA AA A BBB
If the question had asked for the most speculative, then Ba would be the answer.
When analyzing a mutual fund’s expenses, an analyst does NOT consider:
QID: 1891963Mark For Review
A
The management fees charged by the investment adviser
B
The fees charged by the fund’s custodian
C
The fund’s expense ratio
D
The sales load charged to buy fund shares
The sales load charged to buy fund shares
When analyzing a mutual fund’s expenses, an analyst is concerned about the amount of expenses as compared to the amount of money managed by the fund. This comparison is made by calculating the fund’s expense ratio (operating expenses divided by total net assets). The operating expenses include management fees (which is usually the largest expense) and the fee paid to the fund’s custodian. Total net assets are the fund’s assets minus liabilities. Sales charges are not considered expenses of the fund.
