Final Exam 6 Flashcards
What type of risk do zero-coupon bonds eliminate? QID: 1892681Mark For Review A Credit risk B Purchasing power risk C Reinvestment risk D Market risk
Reinvestment risk
Zero-coupon bonds are issued at a discount and do not pay semiannual interest. Therefore, there are no interest payments to reinvest, eliminating reinvestment risk. When investing in fixed-income investments, one of the uncertainties is whether interest rates will allow an investor to realize the total return that was calculated at the time of the investment (yield to maturity). Zero-coupon bonds do not have reinvestment risk, but they do have extreme interest-rate risk because the bonds’ duration will equal the years to maturity.
A portfolio composed of five different state G.O. issues will NOT provide an investor with protection from: QID: 1892655Mark For Review A Economic downturns in specific geographical locations B Legislative changes in different states C Interest-rate fluctuations D Adverse decisions by state courts
Interest-rate fluctuations
A diversified portfolio will provide protection from a variety of risks, but cannot protect against fluctuating interest rates. All bonds, regardless of the issuer’s location, are subject to interest-rate risk.
Which of the following statements about technical analysis is TRUE?
QID: 1892644Mark For Review
A
The advance-decline index is a good indicator of the strength of a bull or bear market
B
The odd-lot theory states that the small investor is usually right
C
It is bullish when volume is heavy in a declining market and bearish when volume is light in an advancing market
D
A small short interest tends to make for a technically strong market
The advance-decline index is a good indicator of the strength of a bull or bear market
The advance-decline index is a measurement of advancing stocks versus declining stocks over a specified period. It is a good indicator of the strength of a bull or bear market. The other technical analysis theories are just the opposite of how they should be stated.
Which TWO of the following conditions apply and would permit the sale of securities outside the U.S., without registration with the SEC?
Any offer or sale is permitted to be made only to qualified institutional buyers
Any offer or sale must be made through an offshore transaction
No direct selling effort may occur in the U.S.
The issuer must be a publicly traded company headquartered outside the U.S.
QID: 1892625Mark For Review
A
I and III
B
I and IV
C
II and III
D
II and IV
II and III
Regulation S provides companies with certain guidelines through which securities may be sold outside the U.S., without SEC registration. There are two general conditions that must be met in order for this safe harbor to apply.
Any offer, sale, or resale is made in an offshore transaction.
No direct selling effort may be made in the U.S. in connection with the transaction.
The process of a customer instructing his bank to deliver cash when securities are received from the clearing firm, is referred to as: QID: 1892619Mark For Review A Receipt versus Payment (RVP) B Depository Trust Company (DTC) C Delivery versus Payment (DVP) D Power of Attorney (POA)
Delivery versus Payment (DVP)
A client buys 5 EW April 75 puts and sells 5 EW April 80 puts. This type of strategy is: QID: 1892703Mark For Review A Bullish B Bearish C Volatile D Neutral
Bullish
If a temporary hold has been placed on a customer’s account, the firm:
QID: 1892673Mark For Review
A
Must provide notice to the account owner and the trusted contact person within two business days
B
Must provide notice to the account owner and the trusted contact person within 15 business days
C
Must provide notice to the trusted contact person even if the broker-dealer reasonably believes that the trusted contact person has engaged, is engaged, or will engage in the financial exploitation of the specified adult
D
Must provide notice to FINRA
Must provide notice to the account owner and the trusted contact person within two business days
When a temporary hold is placed on a customer’s account (i.e., for a specified adult), a broker-dealer is required to notify both the account owner and the trusted contact person by no later than two business days after the hold has been placed. The broker-dealer is not required to provide notification to the trusted contact person if the trusted contact person has engaged, is engaged, or will engage in the financial exploitation of the specified adult.
A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is: QID: 1892666Mark For Review A $5,000 B $10,000 C $15,000 D $20,000
$15,000
The credit balance in a short margin account is determined by adding the short sale proceeds and the Reg T deposit. In this example, the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%). The credit balance is $15,000.
The written supervisory procedures (WSP) manual of a broker-dealer would NOT include the:
QID: 1892709Mark For Review
A
Nature of a firm’s business activities
B
Responsibilities of all supervisors
C
Procedures that must be followed in the event of a catastrophic business disruption
D
Identity of those responsible for implementing the procedures
Procedures that must be followed in the event of a catastrophic business disruption
The WSP manual includes the policies and procedures governing all aspects of a firm’s business as well as identifying those responsible for implementing the procedures. The procedures that must be followed in the event of an emergency or significant business disruption are included in the firm’s Business Continuity Plan.
An investor places an order to buy shares of a mutual fund after that investment company has determined its net asset value for the day. The RR instructs the fund company to purchase the shares at that day’s NAV for the investor. Which of the following statements concerning this potential trade is TRUE?
QID: 1892621Mark For Review
A
This is a sales practice violation known as late trading
B
This is an acceptable practice known as market timing
C
The RR would need to have prior written approval by a principal of the firm to execute this order
D
The investor may only purchase Class B shares in this case, since Class A shares are not available under this arrangement
This is a sales practice violation known as late trading
If an analyst wants to determine a company's ability to pay its liabilities that will be maturing in one year with its liquid assets, he will be most interested in the: QID: 1892724Mark For Review A Current ratio B Acid-test ratio C Inventory turnover D Debt-to-equity ratio
Current ratio
The current ratio is a comparison of current assets to current liabilities for a one-year period and is used as an indicator of a company’s ability to pay those liabilities. On the other hand, the acid-test (quick asset) ratio excludes the company’s inventories and is usually for a one- to three-month period.
Which of the following statements is TRUE concerning the use of bond volatility ratings when marketing a mutual fund?
QID: 1892705Mark For Review
A
This practice is inherently deceptive and expressly prohibited under SEC regulations.
B
These ratings must comply with the uniform standard set by Standard & Poor’s and Moody’s rating agencies.
C
These ratings are often called risk ratings and are used for high yield funds exclusively.
D
These ratings may account for NAV changes due to currency fluctuations.
These ratings may account for NAV changes due to currency fluctuations.
Bond volatility ratings are independently produced ratings that attempt to quantify how sensitive a given bond fund’s NAV is to changes in the economy such as interest rate and/or currency fluctuations. There is no standardized scale for this measurement and these ratings may never be referred to as risk ratings.
Which of the following securities is NOT quoted on the Consolidated Quotation System (CQS)? QID: 1892676Mark For Review A A security on the Pink Sheets B A NYSE-listed convertible bond C A NYSE ARCA-listed warrant D An AMEX-listed right
A security on the Pink Sheets
The Consolidated Quotation System provides quotations for listed securities that are traded in markets outside the primary marketplace where the security is listed. For example, an NYSE- or AMEX-listed security trading in the OTC market is quoted on the CQS. A security that does not meet the listing requirements of Nasdaq is referred to as an OTC equity security and is quoted on either the OTC Bulletin Board (OTCBB) or on the Pink Sheets. These securities are not quoted on the CQS.
Which of the following choices would be the MOST advantageous tax benefit that an investor will receive from an oil and gas direct participation income program? QID: 1892740Mark For Review A Liquidity B Depreciation of equipment C Depletion D Depreciation of land
Depletion
The most advantageous tax benefit that an investor will receive from an oil and gas program is the depletion deduction. These deductions normally last for as long as the program produces oil and gas. Depreciation of equipment lasts a limited number of years and land may not be depreciated.
Which of the following choices will NOT affect the SMA in a long margin account?
QID: 1892718Mark For Review
A
Cash dividends paid on securities in a margin account
B
Cash deposited in the account to reduce the debit balance
C
Stock dividends paid on securities held in the margin account
D
Appreciation in market value of the securities in a margin account
Stock dividends paid on securities held in the margin account
Stock dividends paid on securities held in a margin account will not increase the SMA. The market value of the stock already in the account will be reduced by the amount of the stock dividend as the number of shares of the stock increases. The total dollar value will remain the same. All the other choices will have an effect on the SMA.
An official statement for a general obligation bond says that property taxes may not be raised above a certain level. This is known as a: QID: 1892704Mark For Review A Level debt service bond B Double-barreled bond C Limited tax bond D Moral obligation bond
Limited tax bond
A GO bond is backed by taxes. The issuer promises to raise taxes, if necessary, to pay principal and interest on the bonds. A limited-tax GO bond has a ceiling on how high the tax rate may be raised.
Which of the following is the lowest Moody's investment-grade bond rating? QID: 1892730Mark For Review A BBB B Baa C Ba D A
Baa
A U.S. corporation has contracted to buy machinery from a Japanese company and pay in Japanese yen. The payment date is in June. What basic option strategy will the U.S. corporation employ to protect itself against an increase in the yen? QID: 1892657Mark For Review A Buy JY calls B Sell JY calls C Buy U.S. dollar puts D Buy U.S. dollar calls
Buy JY calls
The U.S. corporation, in order to protect itself against an increase in the Japanese yen (which it currently does not own), would buy JY call options. If the Japanese yen should increase in value by payment date for the machinery, the U.S. corporation could either liquidate the call or exercise the options. The profit on the options will help to offset the loss on the rising value of the yen. The cost of this insurance to the U.S. corporation is the premium paid for the calls. If the yen does not increase in value, the most the corporation could lose is the premium paid.
