Final Exam 7 Flashcards
When determining whether a customer is suitable to invest in a direct participation program, which of the following is NOT required?
QID: 1892862Mark For Review
A
The customer is or will be in an appropriate financial position that will enable him to realize the tax benefits which are a significant aspect of the program.
B
The customer is or will be in an appropriate financial position that will enable him to benefit from passive losses which are significant aspect of the program.
C
The customer has a net worth that’s sufficient to sustain the risks inherent in the program, including lack of liquidity.
D
The customer has a net worth that’s sufficient to sustain the risks inherent in the program, including the loss of investment.
The customer is or will be in an appropriate financial position that will enable him to benefit from passive losses which are significant aspect of the program.
A person who has been granted power of attorney over a customer’s account contacts the RR and indicates that she wants to start receiving the trade confirmations. For the RR, what is the BEST action to take?
QID: 1892769Mark For Review
A
Contact the customer and receive written approval to send the confirms to the person who has power of attorney, but do not send copies to the customer
B
Contact the customer and receive written approval to send the confirms to the person who has power of attorney and provide duplicate copies to the customer
C
Follow the instructions that are given by the person who has power of attorney
D
Follow the instructions that are given by the person who has power of attorney as long as the authorization is in writing
Contact the customer and receive written approval to send the confirms to the person who has power of attorney and provide duplicate copies to the customer
A broker-dealer that is an MSRB member firm sells bonds to one of its customers. If the broker-dealer is a member of the syndicate, the firm is entitled to the: QID: 1892842Mark For Review A Takedown less the concession B Additional takedown plus the management fee C Total takedown less the management fee D Total takedown
Total takedown
A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the bond is sold six years later, what will be its cost basis? QID: 1892815Mark For Review A 100 B 101.50 C 104.50 D 106
101.50
When a bond is purchased at a premium (above par value), the premium must be amortized (reduced) over its life. The premium in this example is six points, which must be amortized over its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity). After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101 1/2 (106 original cost - 4 1/2 points amortized premium).
A GNMA pass-through is quoted 98.10 to 98.18. This quote represents a spread per $1,000 face value of: QID: 1892873Mark For Review A $0.08 B $0.80 C $2.50 D $8.00
$2.50
GNMA pass-through certificates (as well as T-notes and T-bonds) are quoted in 32nds of a point. The spread of .08 represents 8/32 or 1/4 (.25) of a point. One point (1%) for a bond is equal to $10 ($1,000 x 1%); therefore, 1/4 of a point is equal to $2.50 per $1,000.
The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called: QID: 1892844Mark For Review A Structured notes B Double-barreled bonds C Guaranteed bonds D Prerefunded bonds
Prerefunded bonds
ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC? QID: 1892869Mark For Review A $6.40 B $7.72 C $10.91 D $11.80
$11.80
Since the question gives ABC Corporation’s net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.
To be considered a regulated investment company, a mutual fund must:
QID: 1892830Mark For Review
A
Distribute a minimum amount of its net investment income to shareholders
B
Pay tax on all net investment income prior to making distributions to shareholders
C
Retain all net investment income to avoid paying tax
D
Distribute all of its net investment income to shareholders
Distribute a minimum amount of its net investment income to shareholders
To qualify as a regulated investment company, the company must distribute a minimum of 90% of its investment income to its shareholders. Meeting this requirement allows the investment company to pass on distributions to shareholders without the company having to first pay taxes on the income distributed.
If a portfolio manager is rebalancing a client's assets on a quarterly basis, this would be considered: QID: 1892798Mark For Review A Too aggressive B A strategic asset allocation strategy C A tactical asset allocation strategy D Churning
A strategic asset allocation strategy
A strategic asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions.
If a member firm brokers a customer purchase of a security, the member firm must disclose:
The amount of commission charged on the transaction
Either the name of the person who sold the security or the fact that such information will be furnished on request
Either the time when the transaction took place or the fact that such information will be furnished on request
The fact that the member acted as broker for the selling party, if that is the case
QID: 1892828Mark For Review
A
I only
B
I, II, and III only
C
I, II, III, and IV
D
None of the above
I, II, III, and IV
Before accepting a delivery versus payment (DVP) order from a customer, a broker-dealer must:
QID: 1892799Mark For Review
A
Notify FINRA
B
Obtain the name of the customer’s agent from the customer
C
Receive approval of the trade from the contrabroker
D
Notify the appropriate banking regulator
Obtain the name of the customer’s agent from the customer
An individual who’s interested in putting aside funds for retirement, opens an account and purchases a variable annuity. Two months later, the customer contacts his RR because he’s concerned that the variable annuity may not be the best product. During the discussion, the RR explains the surrender fees and, as a result, the customer states that he wants to transfer the variable annuity to another broker-dealer. What’s the BEST course of action for the RR to take?
QID: 1892748Mark For Review
A
Fill out a 1035 exchange form and purchase a new variable annuity prior to transferring the account.
B
Fill out the necessary forms to transfer the account to the other broker-dealer.
C
Discuss the situation with a principal of her firm to ensure that a suitable recommendation was made.
D
Refuse to transfer the account to a new broker-dealer.
Fill out the necessary forms to transfer the account to the other broker-dealer.
The taxing power of an issuer of a limited tax bond is limited to a specified: QID: 1892855Mark For Review A Minimum rate B Maximum rate C Tax source D Collateral
Maximum rate
The taxing power of an issuer of a limited tax bond is limited to a specified maximum rate. A special tax bond is a type of revenue bond backed by a specific tax source, such as an excise tax on gasoline.
During a period of stable interest rates, which bond has the most potential to show a significant change in price? QID: 1892834Mark For Review A A 7%, 30-year U.S. Treasury Bond B An 8%, 5-year high-grade corporate bond C A 6%, 6-month Revenue Anticipation Note D A 7 1/2%, 10-year convertible subordinated debenture
A 7 1/2%, 10-year convertible subordinated debenture
The key to this question is to recognize that if interest rates are stable, then most bond prices will experience little movement. However, to identify the bond that is still expected to fluctuate the most, find the answer that is the most unique. In this question, the convertible debenture may still experience a significant change in price based on the changing value of the underlying equity (i.e., the security into which the bond may be converted). For example, if the value of the underlying stock increases, the value of the bond will also increase to keep the bond’s price in the vicinity of conversion parity. Parity is achieved when the value of the bond is equal to the value of the common stock which is able to be obtained at conversion.
Which of the following statements concerning a fund of funds is TRUE?
QID: 1892861Mark For Review
A
These products typically offer superior investment returns.
B
These products typically offer lower-than-average expense ratios.
C
These products are exempt from SEC registration.
D
These products are designed to increase diversification.
These products are designed to increase diversification.
If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's: QID: 1892807Mark For Review A Expense ratio B Alpha C Rating D Beta
Alpha
A revenue bond is backed by a pledge of net revenues. This indicates that:
QID: 1892838Mark For Review
A
All revenues are pledged to pay debt service on the bonds
B
Net revenues are pledged to pay operating and maintenance expenses
C
The first use of net revenues is to pay the debt service on the bonds
D
The issuer guarantees that net revenues from the facility will be sufficient to pay debt service on the bond
The first use of net revenues is to pay the debt service on the bonds
The issue requires that operation and maintenance expenses are paid first from gross revenues. Gross revenues minus operating and maintenance expenses leaves net revenues. Debt service (also called bond service) would then be the first item paid from net revenues.
When buying listed put options compared to selling the underlying stock short, which of the following choices is NOT an advantage?
QID: 1892792Mark For Review
A
Buying a put requires a smaller capital commitment
B
Buying a put has a smaller dollar loss potential than selling the stock short
C
The put has a time value beyond any intrinsic value that gradually dissipates
D
Buying a put is not subject to Regulation SHO
The put has a time value beyond any intrinsic value that gradually dissipates
When doing a municipal bond swap, which of the following items is NOT a factor when trying to avoid the wash sale rule? QID: 1892784Mark For Review A The issuer B Maturity date C The rating D The coupon
The rating
If a security is sold at a loss, and within 30 days (prior to and after the sale), substantially the same security is purchased, the IRS, considers it a wash sale and will disallow the loss. To avoid purchasing a security that the IRS will consider substantially the same as the security sold, you should purchase bonds either by a different issuer or with a different coupon or maturity. The rating of the bonds would not be a factor.
A broker-dealer is preparing a client’s monthly statement and realizes that, due to market volatility, the account shows a significant decline in value. The market has corrected itself and the account values have appreciated significantly. The firm would like to delay sending the statement in order to reflect the appreciated value. This practice is:
QID: 1892829Mark For Review
A
Not permitted because the broker-dealer is withholding sending the monthly statement
B
Not permitted unless the client is notified
C
Permitted since statements are normally sent quarterly
D
Permitted since it will provide the client with a more accurate portfolio valuation
Not permitted because the broker-dealer is withholding sending the monthly statement
A corporation's earnings per share on its common stock, after paying preferred dividends of $3.00 per share, is $5.00 per share. The corporation also paid a dividend of $2.00 per share on the common stock. The dividend payout ratio is: QID: 1892800Mark For Review A 25% B 40% C 60% D 100%
40%
Since the earnings per share on the common stock is given, the $3.00 preferred dividend can be disregarded. To find the dividend payout ratio, divide the yearly dividend on the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%.
