Final Exam 5 Flashcards
Which of the following transactions are NOT exempt from the penny stock disclosure rules?
QID: 1892563Mark For Review
A
Transactions with established customers
B
Transactions that are not recommended by the broker-dealer
C
Transactions with institutional accredited investors
D
Tranasctions by a broker-dealer whose commissions and markups from penny stocks do not exceed 5% of its total commissions and markups
Transactions with established customers
Securities sold in the following transactions are NOT subject to the penny stock disclosure rules.
Transactions with an institutional accredited investor
Private placements
Transactions with the issuer, officers, directors, general partners, or 5% owners
Transactions that are not recommended by the broker-dealer
Transactions by a broker-dealer whose commissions and markups from penny stocks do not exceed 5% of its total commissions and markups
While transactions with established customers are exempt from the account approval requirements, they are not exempt from the penny stock disclosure rules.
If the auction for auction rate securities fails, the current holder will:
QID: 1892591Mark For Review
A
Receive the par value of the securities
B
Continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents
C
Continue to hold the securities and the interest rate will be set to the minimum rate allowed in the plan documents
D
Continue to hold the securities and the interest rate will be set to a rate of zero
Continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents
A failed auction occurs when there are an insufficient number of bids to cover the amount of auction rate securities being sold. If this happens, the holders will continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents. This rate is normally higher than the rate that would have cleared a successful auction
An investor purchased $100,000 face value of a 12% municipal bond that matures December 1, 2041. The transaction settles on August 1. The investor owes accrued interest of: QID: 1892536Mark For Review A $200 B $800 C $2,000 D $8,000
$2,000
The bonds purchased by the investor will generate yearly interest of $12,000 ($100,000 par multiplied by 12%). The fact that the bonds mature on December 1, 2041 indicates that interest payments are made every December 1 and June 1. The investor will owe 60 days of accrued interest (from June 1, the last coupon, up to but not including the settlement date of August 1). Since the yearly interest is $12,000, accrued interest would be $2,000 (60/360 x $12,000)
An investor buys 200 shares of TDX at $20 per share. TDX declares a 10% stock dividend. The investor's cost basis per share for tax purposes would be: QID: 1892510Mark For Review A $18.00 B $18.18 C $22.00 D $40.00
$18.18
An investor’s cost basis must be adjusted downward upon receiving additional shares when a stock dividend is paid. In this example, the investor receives 20 additional shares (10% x 200). The investor’s new cost basis per share would be found by dividing the initial cost of $4,000 by the total number of shares now owned (220). This equals a cost basis per share of $18.18.
A high net worth investor who's seeking safety of principal will MOST likely invest in: QID: 1892496Mark For Review A Corporate convertible bonds B Non-investment-grade corporate bonds C An investment-grade corporate bond fund D A variable annuity
An investment-grade corporate bond fund
Safety of principal refers to a customer’s desire to preserve or retain the initial amount of the investment over its life.
The higher a bond’s rating, the greater the likelihood the investor will achieve safety of principal. An investment-grade corporate bond fund offers more safety of principal than non-investment-grade and convertible corporate bonds.
descriptions regarding the Capital Asset Pricing Model (CAPM)
B
It was developed to explain the behavior of security prices
C
It provides a mechanism to assess risk and return
D
It is based on the efficient market theory and assumes investors act rationally
Yes
Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability? QID: 1892493Mark For Review A $680,000 B $686,800 C $697,000 D $714,000
$697,000
If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 50% of the dividends it receives on stock that it owns (remaining 50% is excluded). The company would need to add $50,000 (50% of $100,000) to its taxable income. The total taxable income, therefore, is $2,050,000. The tax liability is $697,000 ($2,050,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 35% of the dividends would be taxable (65% is excluded).
A bond secured by other bonds and securities is referred to as a: QID: 1892592Mark For Review A Collateralized mortgage obligation B Guaranteed bond C Mortgage bond D Collateral trust bond
Collateral trust bond
A bond issued by a corporation that is secured by other bonds and securities is called a collateral trust bond. A CMO is backed by mortgages that were purchased from banks and other lenders who originated loans to homeowners.
Which of the following situations BEST describes acting in a net basis capacity?
QID: 1892599Mark For Review
A
Prior to filling a customer’s buy order, a dealer buys stock into inventory and resells it to the client at the same price
B
Prior to filling a customer’s buy order, a dealer buys stock into inventory and resells it to the customer at a higher price
C
A dealer sells stock from inventory to a client and charges a markup
D
A broker-dealer sells stock to a client at the same price, without earning a markup or commission
Prior to filling a customer’s buy order, a dealer buys stock into inventory and resells it to the customer at a higher price
In a net basis transaction, a dealer holding a customer order to buy, acquires the stock on a principal basis and executes the customer’s order at a different price than the dealer’s acquisition price. If the dealer executes the transaction at the same price and charges the customer a markup, the capacity is disclosed on a riskless principal basis. The markup in a riskless principal transaction must be disclosed.
Private label mortgage-backed securities are issued by which of the following entities?
QID: 1892570Mark For Review
A
The Federal National Mortgage Association
B
Real estate investment trusts
C
The Government National Mortgage Association
D
Financial institutions
Financial institutions
Mortgage-backed securities are also issued by financial institutions such as commercial banks, investment banks, and home builders. These securities are referred to as private label MBS and may contain some agency securities, however, they typically contain other types of mortgage loans that are not agency securities. A private label MBS is not an obligation of the U.S. government or any GSE and its credit rating is assigned by an independent credit agency. A private label MBS has a higher degree of credit risk and is generally not given a AAA rating.
Which of the following parties states that a municipality may legally issue bonds? QID: 1892534Mark For Review A FINRA B The MSRB C The SEC D The issuer's bond counsel
The issuer’s bond counsel
The issuer’s bond counsel writes the legal opinion. It states that the interest is exempt from federal taxation and that the issue is valid and legal. Prior to giving an opinion as to the validity and tax exemption of the issue, the issuer’s bond counsel examines all federal, state, and local legislation to be sure that the issue meets all requirements. Neither the MSRB, the SEC, nor any other regulatory agency states that a municipality may legally issue bonds.
A customer sells two LRR March 40 puts at 10 and sells two LRR March 40 calls at 5. At expiration, if LRR is trading at $28 and the puts are exercised, while the calls expire, the customer will realize a: QID: 1892518Mark For Review A Profit of $600 B Profit of $900 C Loss of $400 D Loss of $900
Profit of $600
This customer has created a short straddle. With a strike price of 40 and a combined premium of 15 (10 on the puts and 5 on the calls), the breakeven points are 55 and 25 (40 + 15 and 40 - 15). In other words, the customer can afford having the stock moving 15 points above or below 40 and not lose any money. Remember, the seller (writer) of the straddle expects stability (little or no market movement). However, if the stock declines to 28 and action is taken, this is 3 points above the breakeven point of 25. Therefore, the investors profit is 300 x 2 contracts = $600.
For a new municipal issue, which of the following choices is the responsibility of the underwriting syndicate?
QID: 1892481Mark For Review
A
To file the official statement with the SEC
B
To submit the final official statement to FINRA
C
To hire the bond counsel that provides the legal opinion
D
To submit the official statement to the MSRB’s EMMA system
To submit the official statement to the MSRB’s EMMA system
Municipal securities are exempt from the registration and filing requirements of the SEC. However, the underwriting syndicate must submit the official statement to the MSRB’s Electronic Municipal Market Access (EMMA) system and must also provide the official statement to customers. It is the responsibility of the issuer to hire the bond counsel.
Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)?
QID: 1892573Mark For Review
A
They offer investors the same amount of liquidity as exchange-traded REITs
B
They are required to distribute the same percentage of taxable income as exchange-traded REITs
C
They are not required to make periodic disclosures that are required of exchange-traded REITs
D
They are suitable for the same investors as exchange-traded REITs
They are required to distribute the same percentage of taxable income as exchange-traded REITs
Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.
An individual purchases two BP (British pound) 150 calls @ 7.50. The contract size is 10,000 BP. The total cost for the contracts is: QID: 1892530Mark For Review A $15,000.00 B $7,500.00 C $1,500.00 D $750.00
$1,500.00
British pound option premiums are quoted in cents per unit. To convert to dollars, the decimal point must be moved two places to the left. The total cost is calculated by multiplying the contract size (10,000) by the premium expressed in dollars ($0.0750), yielding $750.00 per contract. Since the individual purchased two contracts, the total cost is $1,500.00.
All of the following are characteristics of sponsored ADRs,
B They're created with cooperation from the foreign issuer. C They pay dividends in U.S. dollars. D They're liquid securities.
Yes
Which of the following statements is TRUE concerning a customer who purchases an out-of-state original issue discount (OID) general obligation bond?
QID: 1892504Mark For Review
A
Each year the customer will pay both federal and state income tax
B
Each year the customer will pay only federal income tax
C
Each year the customer will pay only state and local income tax
D
The customer will not pay any tax
Each year the customer will pay only state and local income tax
An advertisement for municipal securities states the following:
“15-year 10% tax-free bond priced to yield 12% to maturity. Call us now for more details.”
According to MSRB rules, this advertisement should also state that:
QID: 1892477Mark For Review
A
The tax-free return is actually greater than 12% if the bond is held to maturity
B
A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12%
C
The tax-free return is actually less than 10% if the bond is held to maturity
D
A principal approved the advertisement
A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12%
Treasury arbitrage restrictions generally prohibit issuers of municipal securities from:
QID: 1892544Mark For Review
A
Selling municipal securities with coupon rates that are lower than Treasury securities
B
Selling municipal securities with coupon rates that are higher than Treasury securities
C
Investing bond proceeds in higher-yielding Treasury securities
D
Investing bond proceeds in lower-yielding Treasury securities
Investing bond proceeds in higher-yielding Treasury securities
Because of the tax exemption allowed on municipal bond interest, municipalities are normally able to issue bonds with coupon rates below those of Treasury securities. This presents an excellent arbitrage opportunity. A municipality can borrow at a low rate of interest and invest the money in higher-yielding risk-free Treasury securities. Congress has enacted laws, known as Treasury arbitrage restrictions, that prevent state and local governments from misusing the tax exemption.
Which of the following is considered a TRACE-eligible security? QID: 1892497Mark For Review A A U.S. government bond B A municipal bond C A foreign government bond D Common stock
A U.S. government bond
TRACE-eligible securities include U.S. dollar denominated foreign and U.S. corporate bonds, debt securities issued by the U.S. government and U.S. government-sponsored enterprises (GSE). Foreign government securities, municipal securities and corporate money-market instruments are not TRACE-eligible.
