Final Exam 3 Flashcards
Which of the following terms is associated with the process of a customer instructing his bank to deliver securities against payment by the clearing firm? QID: 1892233Mark For Review A Receipt versus Payment (RVP) B Cash on Delivery (COD) C Delivery versus Payment (DVP) D Power of Attorney (POA)
Receipt versus Payment (RVP)
DVP (Delivery versus Payment) and COD (Cash on Delivery) are general acronyms used to describe a relationship in which a customer uses a bank to settle trades with executing firms. The firm delivers securities against the bank payment and pays against the bank delivery of securities. When discussing a given transaction, a DVP occurs when the dealer delivers securities to the bank in return for a cash payment from the bank. An RVP (Receipt versus Payment) occurs when the dealer receives securities from the bank and makes a cash payment to the bank. The transaction described in the question is an example of an RVP transaction in which the customer’s bank is delivering securities in return for payment by the broker-dealer. It is important to remember that customers (usually institutions) set up brokerage accounts and place orders at these firms. However, trades settle through custodian banks designated by the customers. The broker-dealer will contact the bank, which will send payment or receive securities on behalf of the customers. The broker-dealer will not hold the customer funds or securities.
A customer is short 100 ABC at $120. The market is moving up sharply and the customer decides to cover her short position. The customer instructs her registered representative to cover the short position at the market on the close. The order:
QID: 1892223Mark For Review
A
Will be executed only at the closing price of the day
B
Will be executed as close as possible to the closing price
C
Will be executed at any price within the last 15 minutes of trading
D
Is not permitted to be entered by a retail customer
Will be executed as close as possible to the closing price
A market-on-close (MOC) order will be executed as close as possible to the closing price of the day.
A customer has a restricted margin account with a debit balance of $7,500. The account is credited with $1,600 in cash dividends and debited with interest charges of $50. The debit balance after the adjustments is: QID: 1892203Mark For Review A $5,900 B $5,950 C $6,000 D $6,050
$5,950
The debit balance is reduced from $7,500 to $5,900 when the cash dividends of $1,600 are credited to the account ($7,500 - $1,600 = $5,900). Adding interest charges of $50 to the debit balance results in a final debit balance after adjustments of $5,950 ($5,900 + $50 interest charges = $5,950).
A customer who's in his late 20s wants capital appreciation and tax-deferred growth. He's willing to take a moderate degree of risk in his initial investment, but is concerned about the inflationary risk to his portfolio. Which of the following investments is MOST suitable? QID: 1892289Mark For Review A Equities B Corporate debt C Variable annuities D Municipal debt
Variable annuities
Since the investor is concerned about inflationary risk, wants tax-deferred growth, and is willing to accept a moderate degree of risk to his initial investment, variable annuities are the most appropriate investment. If the investor didn’t want a tax-deferred investment with the same objectives, equities would be the most suitable choice.
A bond on which a call notice has been issued is purchased by a customer. Which yield must be disclosed on the confirmation? QID: 1892264Mark For Review A None, since the bond is being called B The yield to call C The yield to maturity D The lower of the yield to call or the yield to maturity
The yield to call
When bonds are called, the yield to call must be disclosed on the confirmation. If a call notice has not been issued, the lower of the yield to call or the yield to maturity must be disclosed.
An investor purchases a 20-year 5.30% bond at par value that will yield 5.75% if called at the first call date in five years. The yield to maturity on the bond is: QID: 1892213Mark For Review A 5.30% B More than 5.30% C Between 5.30% and 5.75% D 5.75%
5.30%
The bond has a coupon rate (nominal yield) of 5.30%. If the bond is purchased at its par value and is not called, but held to maturity, the bond’s yield will be the same as the coupon rate, which is 5.30%.
A registered representative is reviewing a corporation’s financial statements. Which TWO of the following statements are TRUE concerning an issuer’s bond interest expense?
The annual interest payments are found on the balance sheet
The annual interest payments are found on the income statement
The interest payment is deducted from net income
The interest payment is deducted from EBIT
QID: 1892301Mark For Review
A
I and III
B
I and IV
C
II and III
D
II and IV
II and IV
The annual interest payment or bond interest expense may be found on a company’s income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars.
Which TWO of the following statements concerning convertible bonds are TRUE?
Coupon rates are usually higher than nonconvertible bonds of the same issuer
Convertible bondholders are considered creditors of the corporation
Convertible bonds are usually issued by companies with strong credit ratings
It is possible that a convertible bond will sell at a price based solely on its inherent value as a bond
QID: 1892260Mark For Review
A
I and III
B
I and IV
C
II and III
D
II and IV
II and IV
Convertible bondholders are considered creditors of a corporation and provide investors with the ability to convert their bonds into shares of common stock of the same issuer at a set price (conversion price). This feature links these types of bonds to the equity markets and the price of a convertible bond is affected by the price of the underlying stock. However, if the price of the underlying stock declines to the point where there is no advantage to the conversion feature, the bond may sell at a price based on its inherent value as a bond, disregarding the convertible feature.
Moreover, convertible bonds are issued by companies with weaker credit ratings and allow the issuer to sell debt at a lower cost. Since the conversion feature is a benefit to the bondholder, convertible bonds will have a lower coupon than similar nonconvertible bonds.
According to industry rules, all of the following are requirements for firms executing net basis trades, EXCEPT:
QID: 1892296Mark For Review
A
Noninstitutional customers must sign a blanket consent letter to permit dealers to act in a net basis capacity
B
Prior to executing each net basis trade, a dealer must obtain written consent from noninstitutional customers
C
Dealers may rely upon oral authorization from institutional customers, prior to executing a net basis trade
D
Dealers may rely upon a negative consent letter provided to institutional customers to conduct net basis trades
Noninstitutional customers must sign a blanket consent letter to permit dealers to act in a net basis capacity
Written consent must be obtained from noninstitutional customers on an order-by-order basis, prior to conducting a net basis trade. For institutional customers, the firm may obtain oral or written consent prior to each net basis transaction, or depend on a negative consent letter.
A company currently has $125,000,000 of 3 1/4% convertible bonds. The company is going to offer bondholders $125,000,000 of 3 1/4% nonconvertible bonds plus cash of $15,000,000 for the convertible bonds. How will this transaction, if successful, affect the company’s financial status?
QID: 1892284Mark For Review
A
It will reduce the cash and debt position and reduce the potential dilutive effect on the common stock
B
It will reduce the cash position and increase the debt position
C
It will increase the cash position and reduce the potential dilutive effect on the common stock
D
It will reduce the cash position and the potential dilutive effect on the common stock
It will reduce the cash position and the potential dilutive effect on the common stock
The effect of the transaction will be to reduce the cash position and the potential dilutive effect on the common stock. The company is paying out cash and is also issuing nonconvertible bonds in place of convertible bonds (which could have been converted into common stock). This will reduce the cash position and the potential dilutive effect on the common stock.
Entering orders with the intent to cancel them just prior to execution is referred to as: QID: 1892256Mark For Review A Churning B Spoofing C Frontrunning D Trading ahead
Spoofing
Which of the following choices is NOT a factor in secondary-market municipal joint accounts? QID: 1892243Mark For Review A Members may not publish different offering prices B They require a good faith deposit C There may be an order period D There may be a takedown
They require a good faith deposit
A good faith deposit is a sum of money given to the issuer of a new municipal bond issue along with a syndicate’s bid and is not a factor in secondary-market transactions. A secondary-market joint account exists when two or more dealers form an account to jointly offer a block of bonds in the secondary market. As with a new issue, there may be an order period as well as a takedown (member’s discount). MSRB rules prohibit members of the account from offering the bonds at different prices.
A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%. How much cash may the customer withdraw from the account? QID: 1892237Mark For Review A 0 B $10,000 C $17,000 D $23,000
0
The long account is restricted because the equity of $10,000 is less than the initial FRB requirement ($30,000 market value times 50% FRB requirement equals $15,000 required equity). There is no excess equity in the short account since the equity of $3,000 ($10,000 credit balance minus $7,000 market value) is less than the FRB requirement of $3,500 (50% of $7,000 market value).
When a margin requirement is designed to consider that the risk of one position is offset by another position, i.e., having a long S&P 400 position offset by a short S&P 100 position, this approach to calculating a margin requirement is considered: QID: 1892270Mark For Review A Portfolio-based B Strategy-based C Derivative-based D Inversely correlated
Portfolio-based
Portfolio margin produces significantly lower margin requirements than strategy-based margin, affording an investor greater leverage. In a strategy-based margin account, directly hedged positions such as long stock and long puts are considered separately. In portfolio management these hedges are considered as well as the interrelationship between existing positions. For example, a client could be long an S&P 500 index option and short S&P 500 futures. These positions would be viewed as interrelated. Using a portfolio-based rationale, margin allows a broker-dealer to align the amount of margin money required to be maintained in the account to the risk of the portfolio as a whole. This approach considers simulated market activity and considers offsetting positions in an account that are positively correlated. Portfolio margining examines the net risk to the entire portfolio.
Cash dividends received from which of the following securities will be taxed as ordinary income? QID: 1892267Mark For Review A Preferred stock issued by a bank B Common stock issued by an oil company C A real estate investment trust D Convertible preferred stock issued by a software company
A real estate investment trust
Currently, qualified dividends paid on both common and preferred stock are taxed at a maximum rate of 20%. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT doesn’t pay corporate income tax if it distributes a minimum percentage of its income. The type of company that issued the shares is NOT relevant to the tax status of the cash dividend.
A new municipal bond issue has a dated date of January 1 and pays interest each April 1 and Oct. 1. An investor purchased bonds from the issuer with a Thursday, January 31 settlement date. How many days of accrued interest does the investor owe? QID: 1892252Mark For Review A 29 B 30 C 33 D 34
30
Accrued interest on a new municipal issue is calculated from the dated date up to, but not including the settlement date. Since the investor’s settlement date was January 31, he owes accrued interest from January 1 to January 30 (30 days). The buyer of a new issue must pay the issuer interest that accrues between the dated date and the settlement date, in addition to the principal amount purchased.
A Form 3 must be filed:
QID: 1892295Mark For Review
A
Within two business days of becoming a director
B
Within two business days of the date on which a director buys or sells securities
C
Within 10 days of becoming a director
D
Within 10 days of the date on which a director buys or sells securities
Within 10 days of becoming a director
A person must file Form 3 with the SEC within 10 days of becoming an insider. An insider is defined as any director or officer of a corporation or any person with beneficial ownership of more than 10% of issuer’s equity securities. Form 4 must be filed within two business days of the date on which an insider changes his ownership position (i.e., buys or sells).
The major disadvantage to a limited partner in a direct participation program (DPP) is: QID: 1892324Mark For Review A Lack of control B Lack of liquidity C Flow through of income and expense D Limited liability
Lack of liquidity
A collateralized debt obligation (CDO) is BEST defined as a type of: QID: 1892286Mark For Review A REIT B Asset-backed security C Closed-end investment company
Municipal revenue bond
Asset-backed security
Which of the following choices will eliminate a short position in a listed option? QID: 1892335Mark For Review A Opening sale B Opening purchase C Closing sale D Closing purchase
Closing purchase
If an investor has an open short position that he wishes to liquidate, he will do so through a closing purchase. The following table indicates the different opening and closing transactions.
Opening Purchase Establishes a long position
Opening Sale Establishes a short position
Closing Purchase. Liquidates an existing short position
Closing Sale Liquidates an existing long position
The VIX (volatility index) is based on the: QID: 1892257Mark For Review A S&P 100 Index B S&P 500 Index C Russell 2000 Index D Dow Jones Industrial Average (DJIA)
S&P 500 Index
VIX is the abbreviation for the CBOE’s Volatility Index. The VIX is a broad-based index and is calculated using the S&P 500 Index option bid and ask quotes. The VIX is often referred to as the fear index since it is a gauge of investors’ fears regarding market volatility. The index increases or decreases based on the expected volatility of the market, not the direction in which the market is expected to move. Volatility typically increases after an abrupt drop in the market. Therefore, if an investor expects volatility to increase, she is bullish on the VIX and will likely purchase a VIX call option.
