Final Exam 2 Flashcards
If interest rates increase, which of the following securities has the LARGEST price change? QID: 1892165Mark For Review A A Treasury note trading at a discount B A Treasury note trading at a premium C A Treasury bond trading at a discount D A Treasury bond trading at a premium
A Treasury bond trading at a discount
When interest rates increase, outstanding bond prices will decline in value. The prices of bonds with longer-term maturities will fall more than those with shorter-term maturities. Treasury bonds have maturities of up to 30 years, whereas Treasury notes have maturities of up to 10 years. The prices of bonds that are selling at a discount will fall more sharply than those selling at a premium.
How would preferred stock most likely be affected by an increase in interest rates? QID: 1892189Mark For Review A Its market value would increase B Its market value would decrease C Its dividend would decrease D There would be no effect
Its market value would decrease
Since preferred stock is a fixed-income security paying a fixed dividend each quarter, it is affected by interest rates in the same way as bonds. If interest rates rise, the value of existing bonds and preferred stock will fall. If interest rates fall, the value of existing bonds and preferred stock will rise.
Which of the following issues will most likely have a mandatory sinking fund? QID: 1892119Mark For Review A Serial issues B Balloon issues C Term issues D Convertible issues
Term issues
A term bond issue is one in which all of the bonds mature in one specific year. In order to accumulate the funds that may be used to help retire the bonds, the issuer will deposit funds (above the amount that is used to pay interest) in a sinking fund. These funds will generally be used to retire some (if not all) of the bonds prior to maturity. A serial bond issue is one in which a portion of the bond offering is paid off each year.
On behalf of her firm, a registered representative is holding a seminar and the audience will consist of registered representatives from other member firms. This type of communication is considered: QID: 1892074Mark For Review A Institutional communication B Retail communication C Correspondence D Internal communication
Institutional communication
Any communication that is directed only to registered representatives is defined as institutional communication. As it relates to communication, the definition of an institutional investor includes a FINRA member firm and its registered persons. On the other hand, if the audience consisted of only employees of the member firm that is providing the seminar, it would be considered internal communication.
A municipal bond with 10 years to maturity was purchased at 105. If an investor sold the bond six years later at 103, which of the following is TRUE regarding the tax result?
QID: 1892073Mark For Review
A
The investor has a $20 long-term capital loss.
B
The investor has no gain or loss.
C
The investor has a $10 gain that’s taxed at the investor’s ordinary income rate.
D
The investor has a $10 long-term capital gain.
The investor has a $10 long-term capital gain.
For municipal bonds that are purchased at a premium, their cost basis must be amortized (reduced) to par value over their maturity. In this example, the bond is purchased at a $50 premium and it has 10 years to maturity. This means that the bond’s basis will be amortized by $5 per year ($50 ÷ 10 years). After six years, the bond’s basis will have been reduced by $30 ($5 x 6 years), which would bring the adjusted cost basis to $1,020 ($1,050 - $30). When the bond is sold for $1,030, the customer realized a $10 long-term capital gain ($1,030 - $1,020).
Which of the following positions/strategies is NOT bullish? QID: 1892112Mark For Review A A married put B A short put C A long 40 call and a short 50 call D Writing a straddle
Writing a straddle
Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of the other choices has an opportunity for a profit if the underlying security rises in value.
A registered representative is looking to sell a client Class B shares with a 7-year contingent deferred sales charge (CDSC). Which of the following representations is appropriate?
QID: 1892069Mark For Review
A
“These shares will outperform Class A shares because you don’t have to pay a sales charge.”
B
“These shares are just like a no-load as long as you hold them for at least 7 years.”
C
“All of your money goes to work since there is no up-front sales charge.”
D
“These are the best types of shares to buy.”
“All of your money goes to work since there is no up-front sales charge.”
Registered representatives may never refer to Class B shares or any other loaded shares as “no load.” To claim one share class will outperform another is unacceptable since relative performance is based on market conditions and the effect of potentially differing ongoing expenses over the client’s holding period. An RR’s job is to explain all of the share classes available as opposed to simply recommending a certain type as best. The only factual statement is “there is no up-front sales charge.” The RR should explain that this feature comes with a price – potentially higher ongoing costs when compared to Class A shares.
A municipal securities broker-dealer has a control relationship with an issuer. When selling the bonds subject to the control relationship, the broker-dealer must disclose this relationship to customers: Prior to the trade In writing at or prior to settlement For discretionary accounts only For all accounts and for all types of transactions QID: 1892090Mark For Review A I and III only B II and III only C I, II, and III only D I, II, and IV only
I, II, and IV only
All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT:
QID: 1892098Mark For Review
A
Interest rates are set at specified intervals
B
They are often issued by municipalities
C
They are long-term securities with short-term trading features
D
They have a put feature allowing the holder to redeem the security at par
They have a put feature allowing the holder to redeem the security at par
Although they are both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARSs) do not have this feature and, if the auction fails, the investor may not have immediate access to her funds. In addition, ARSs use an auction process to reset the interest rate on the securities, whereas the interest rate on a VRDO is reset by the dealer at a rate that allows the securities to be sold at par value.
An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2% bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers: QID: 1892194Mark For Review A Maturity diversification B Coupon diversification C Geographical diversification D Type diversification
Geographical diversification
The portfolio offers the investor geographical diversification because the issues are from different municipalities throughout the country.
Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)?
QID: 1892191Mark For Review
A
It issues securities that can be redeemed to pay for college education
B
It issues securities that are not backed by the U.S. government
C
It purchases federally sponsored student loans
D
It provides loans to educational institutions
It issues securities that can be redeemed to pay for college education
The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.
A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at: QID: 1892140Mark For Review A $28 B $55 C The same price as before the notice appeared D A price near $60
A price near $60
Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).
A Regulation A exemption is allowed for an issuer that’s offering:
QID: 1892128Mark For Review
A
500,000 shares or less
B
Securities with a value not exceeding $10 million
C
Securities with a value not exceeding $75 million
D
Securities being sold to only residents of one specific state
Securities with a value not exceeding $75 million
A Regulation A offering is exempt from the registration and prospectus requirements under the Securities Act of 1933. The offering is limited to the issuance of $75 million (Tier 2) of securities during a 12-month period.
Which of the following statements is TRUE concerning Modern Portfolio Theory?
QID: 1892131Mark For Review
A
Portfolio management should be based on the risk and return of individual securities
B
Portfolio management should focus on diversification among different classes of assets
C
Portfolio management should focus only on the best performing securities
D
Portfolio management should always avoid securities with greater risk
Portfolio management should focus on diversification among different classes of assets
Modern Portfolio Theory creates optimal portfolios based on a client’s risk tolerance and investment objectives, by allocating the portfolios among various classes of securities. It does not focus on individual securities or avoid risk. Instead, it focuses on diversifying investments across a wide spectrum of securities.
A customer owns a JRF October 50 listed call option. JRF has declared a $1.00 cash dividend. When JRF sells ex-dividend, which of the following choices will reflect the price and the number of shares of the JRF October 50 option? QID: 1892141Mark For Review A $49 strike price, 100 shares B $50 strike price, 95 shares C $50 strike price, 100 shares D $50 strike price, 105 shares
$50 strike price, 100 shares
Listed call options are not reduced for cash dividends.
A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity, he will receive: QID: 1892188Mark For Review A $42,500 plus the last interest payment B $50,000 plus the last interest payment C $55,000 plus the last interest payment D $85,000 plus the last interest payment
$50,000 plus the last interest payment
At maturity, the holder of the bonds will receive the par value, which in this example is $50,000, plus the last interest payment.
A municipality borrowing for a short-term period to finance a capital project would issue: QID: 1892149Mark For Review A Commercial paper B Tax anticipation notes C Debentures D Bond anticipation notes
Bond anticipation notes
A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.
The PSA Model is used when pricing: QID: 1892202Mark For Review A Put options B Preferred stock C Collateralized mortgage obligations D Treasury notes
Collateralized mortgage obligations
The cash flows, future payments that a bondholder will receive, determine the market price of the bond. Collateralized mortgage obligations (CMOs) have uncertain cash flows due to the prepayments (early retirement) of mortgages. The Public Securities Association (now SIFMA), an association of financial services firms, created a standard model for estimating the prepayment rate for mortgage-backed securities including CMOs. This is called the PSA Model.
Which of the following statements is FALSE regarding a broker-dealer acting as a market maker in a stock?
QID: 1892181Mark For Review
A
It trades for its own account when buying and selling securities
B
It makes money by charging commissions for executing transactions
C
When making a market, it is acting as a principal
D
It must be prepared to honor the prices it quotes unless it clearly qualifies them
It makes money by charging commissions for executing transactions
A market maker is a broker-dealer that stands ready to buy or sell a specific stock for its own inventory (its own account). The price it is willing to pay for the stock is its bid price, while its ask or offer price represents the price at which it is willing to sell stock (to other dealers). The difference between the bid and offer prices is the spread, a source of market-maker profits.
As principals in transactions, market makers do not charge commissions. Commissions are charged when firms act as brokers (agents). However, in transactions with retail customers, market makers might charge a markup when selling (an increase in price above its offer price) and a markdown when buying from customers (a decrease below its bid price).
Under Regulation T, which of the following securities is NOT marginable? QID: 1892095Mark For Review A Mutual fund shares held for more than 30 days B Securities listed on the NYSE C Nasdaq securities D Securities quoted on the OTCBB
Securities quoted on the OTCBB
OTC equity securities, which are not listed on a national securities exchange such as the NYSE or Nasdaq, are not marginable. While Regulation T considers mutual funds marginable securities, the Securities Exchange Act of 1934 prohibits mutual fund dealers from extending credit on mutual fund shares until 30 days after their purchase.
A registered representative (RR) wants to open a new account for a client who is a resident of Mexico. Which of the following statements is TRUE?
QID: 1892114Mark For Review
A
Customer verification of the client’s personal information is not required if the customer was referred by an existing client.
B
Customer verification of the client’s personal information is required if the name is on the Office of Foreign Assets Control (OFAC) list.
C
The client can have either a taxpayer identification number or a passport number and country of origin.
D
The client must have a taxpayer identification number to open the account.
The client can have either a taxpayer identification number or a passport number and country of origin.
If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its anti-money laundering (AML) procedures under its customer identification program (CIP). For non-U.S. citizens, the firm must obtain the client’s name, address, date of birth, and one of the following: passport and country of issuance, taxpayer identification number, or any other government-issued document with a photograph. An RR would always need to verify the client’s personal information regardless of whether the customer was referred by an existing client. An account should not be opened if the person’s name is on the OFAC list.
A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. If the customer sold $1,000 of securities, what is the maximum amount the customer is permitted to withdraw after the sale? QID: 1892107Mark For Review A None B $1,000 C $1,500 D $2,000
$1,500
This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account’s market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer’s debit balance. The broker-dealer will also credit the customer’s SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer’s current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500.
A call premium is best described as the amount the:
QID: 1892199Mark For Review
A
Investor pays above the par value
B
Investor will receive if the bond is sold above the par value
C
Issuer pays above 100 to retire bonds prior to maturity
D
Bondholder receives at maturity
Issuer pays above 100 to retire bonds prior to maturity
A bond issue’s indenture will usually require that, if an issuer calls bonds (redeems prior to maturity), it must pay the bondholder a premium (above par value). For example, a bond that matures in 30 years is callable at 103.5 in 10 years. The issuer must pay a premium of $35 per bond (103.5% of $1,000 is $1,035) above par to retire the bonds prior to maturity.
