Final Exam 8 Flashcards
Kyle, a client at TLC brokerage firm, anticipates a decline in the earnings of LPOP. LPOP is a thinly traded issue. Which of the following statements BEST describes what the RR should disclose to Kyle?
QID: 1893011Mark For Review
A
The stock may be difficult to sell short because the shares may not be available to borrow
B
All securities may be sold short provided the client has a margin account
C
As long as the order ticket is marked sell long, the stock could be sold short
Exchange-traded put options are available on all securities and are a less risky method to profit
The stock may be difficult to sell short because the shares may not be available to borrow
A client may sell short or buy a put to profit from a decline if the value of a security is anticipated. In order to sell short, the broker-dealer is required to borrow the security. Although short sales may be executed only in a margin account, if an issue is thinly traded, it may be difficult or impossible to borrow the security. A put option may be an attractive alternative to selling short. However, put options are unlikely to be available on a thinly traded security.
For a broker-dealer to be permitted to use a customer’s securities as collateral, the customer must sign:
QID: 1892986Mark For Review
A A hypothecation agreement B A credit agreement C A loan consent agreement D A trust agreement
A hypothecation agreement
For a customer to be permitted to purchase securities on margin, she must sign a margin agreement. Within a margin agreement, there are three sections—the credit agreement (mandatory), the hypothecation agreement (mandatory), and the loan consent agreement (optional). A signed hypothecation agreement verifies that the customer has pledged the purchased securities as collateral to support the margin loan. The credit agreement explains the terms and conditions of the loan and establishes the customer’s responsibility to pay interest on the debit balance. If signed, the loan consent agreement allows the firm to loan a customer’s securities to another customer (e.g., to short sellers).
Which of the following statements is characteristic of a closed-end investment company?
QID: 1892897Mark For Review
A
Shares may not sell below the net asset value
B
The investment company must distribute all income to shareholders
C
Shares are redeemed at the net asset value minus a redemption fee
D
Shares may sell at a premium or discount to the net asset value
Shares may sell at a premium or discount to the net asset value
The market price for a closed-end investment company is based upon supply and demand for the shares in the marketplace. A closed-end investment company share may sell at, above, or below its net asset value. Open-end investment company shares may never sell below the current net asset value. Shares are sold at the current market price; they are not redeemed like in an open-end fund.
Which of the following organizations administers the Automated Customer Account Transfer Service? QID: 1892951Mark For Review A The SEC B The OCC C FINRA D The NSCC
The NSCC
A municipal tombstone ad shows bonds maturing serially from 2022 through 2040. The 2040 maturity is a 6.00% bond offered at a 6.75 basis. The bonds maturing in 2030 and thereafter are callable beginning in 2028 @ 102, at 101 in 2029, and at par on any interest date after 2029. The bonds maturing in 2040 should be priced to the: QID: 1892950Mark For Review A 2028 call date B 2029 call date C 2030 call date D Maturity date
Maturity date
The bonds are being offered at a discount since the yield to maturity (6.75%) is greater than the coupon rate (6.00%). A discount bond is always priced to maturity.
The most significant factor affecting the net asset value of a fund on a day-to-day basis is the: QID: 1892964Mark For Review A Number of trades executed B Mark to market of the portfolio C Number of profits realized for tax purposes D Level of the DJIA
Mark to market of the portfolio
Mutual funds are required to calculate their NAV at the close of business each day. The NAV is based on the price of each security in the portfolio at the close of business in the market(s) that day. This process is called “marking the portfolio to market”. Regardless of the number of trades executed or the amount of profits realized during the day, it is the closing prices that are used. The level of the DJIA (or any other index), impacts the daily NAV only to the extent that the portfolio owns the components of that index.
The Bond Buyer Municipal Bond Index is based on: QID: 1892985Mark For Review A A 40-Bond Index B Noncallable long-term bonds C A cross section of zero-coupon bonds D Diversified bonds with approximately 40 years to maturity
A 40-Bond Index
The Bond Buyer Municipal Bond Index represents the average of the prices of 40 long-term municipal bonds adjusted to a yield of 6%.
An investor has purchased 1,000 shares of XYZ stock. Which of the following option transactions will provide the most effective means of reducing the cost of the stock? QID: 1892916Mark For Review A Buying 10 XYZ puts B Selling 10 XYZ puts C Buying 10 XYZ calls D Selling 10 XYZ calls
Selling 10 XYZ calls
An issuing company has hired an investment banking firm to act as an agent in its initial public offering. Subject to certain terms and conditions, the investment banking firm has agreed to sell a minimum of 3,000,000 shares up to a maximum of 4,000,000 shares on a best-efforts basis. Which of the following statements is TRUE?
QID: 1892937Mark For Review
A
The offering proceeds will go directly to the investment banking firm
B
The offering proceeds will go directly to the issuing company
C
If the investment banking firm has not received subscriptions for a minimum of 4,000,000 shares, the firm will promptly return all of the funds placed in the escrow account back to the subscribers
D
If the investment banking firm has not received subscriptions for a minimum of 3,000,000 shares, the firm will promptly return all of the funds placed in the escrow account back to the subscribers
If the investment banking firm has not received subscriptions for a minimum of 3,000,000 shares, the firm will promptly return all of the funds placed in the escrow account back to the subscribers
A broker-dealer that manages any offering being sold on a contingency basis (e.g., all-or-none or mini-maxi) must promptly deposit the funds in a separate bank account. In contingency underwritings, the payment of sales commissions and underwriting expenses occur after the deal closes. Any release of funds to the underwriters earlier than the closing date of the offering is a violation of SEC rules. These rules were created to ensure that investors are refunded their entire subscription funds in the event the offering is unsuccessful. In this example, the investment banking firm needs to receive subscriptions (sales) based on the minimum of 3,000,000 shares, but may sell up to a maximum of 4,000,000 shares.
A position in which a customer is long 1,000 shares of DEP and short 5 DEP September 50 calls is considered: QID: 1892923Mark For Review A Both a covered and uncovered option position B A covered option position only C An uncovered option position only D A speculative option strategy
A covered option position only
A transaction for a stock that is not DTCC eligible, settles on a regular-way basis. This means that settlement occurs: In two business days In four business days At the buyer's premises At the seller's premises QID: 1892929Mark For Review A I and III only B I and IV only C II and III only D II and IV only
I and III only
Regular-way settlement for stock transactions is in two business days. In most cases, settlement occurs electronically through DTCC. In this case, since the seller must make physical delivery of the securities, settlement takes place at the buyer’s premises.
A company has a noncumulative preferred stock outstanding that pays a $5 dividend per year. If dividends on the preferred stock were not paid last year, but will be paid this year, how much will the preferred stockholder receive? QID: 1892924Mark For Review A $5 B $10 C $15 D $20
$5
A municipal revenue bond is secured by the revenues of a toll road system showing the following information.
Annual Debt Service $3,000,000
Annual Gross Revenues $6,000,000
Annual Operating/Maintenance Expenses $2,000,000
Based on this information, the annual debt service coverage ratio is:
QID: 1892998Mark For Review A .667 to 1 B 1.33 to 1 C 2 to 1 D 3 to 1
1.33 to 1
Step 1: Calculate the net revenue for the municipal revenue bond.
Annual Gross Revenues $6,000,000
- Annual O/M Expenses $2,000,000
Net Revenue $4,000,000
Step 2: Divide net revenue of $4,000,000 by the debt service of $3,000,000 to calculate the annual debt service coverage ratio which is 1.33 to 1.
Rockland County has issued industrial development revenue bonds for the benefit of the Hudson Nail and Screw Co. In evaluating the credit quality of these bonds, an investor should look primarily at:
QID: 1892905Mark For Review
A
The tax collection ratio of Rockland County
B
The general credit of Rockland County
C
The revenue stream of Hudson Nail and Screw that will be committed to meet the lease payment obligation to Rockland County
D
The yield differential between Rockland County Revenue bonds and Hudson Nail and Screw unsubordinated debentures
The revenue stream of Hudson Nail and Screw that will be committed to meet the lease payment obligation to Rockland County
The security backing the industrial development revenue bond is the lease payment made by the corporation. An investor must assess whether Hudson Nail and Screw can meet this obligation by generating sufficient revenues from its primary business
On September 1, an underwriter offers stock that has been registered with the SEC. This is the first offering of stock made by the issuing company. The issue will be listed on the New York Stock Exchange. A dealer that subsequently sells the stock in the secondary market will be required to furnish a prospectus:
QID: 1892977Mark For Review
A
Only if the dealer was a member of the underwriting syndicate or selling group
B
For a period of 25 days following the initial offering
C
For a period of 40 days following the initial offering
D
For a period of 90 days following the initial offering
For a period of 25 days following the initial offering
Non - listed IPO 90
Non - listed follow on offering 40
IPO - listed 25
NY and Nasdaq follow on offering - 0
What information would NOT need to be disclosed by a broker-dealer in a research report?
QID: 1892880Mark For Review
A
The broker-dealer received compensation for assisting the company in an acquisition
B
The analyst provided a target price for the company
C
The analyst is a director of the company
D
The analyst had owned shares in the company one year before writing the report
The analyst had owned shares in the company one year before writing the report
A broker-dealer is required to make certain disclosures in its research reports. Any investment banking compensation paid during the last 12 months, the anticipated price target, and the fact that the analyst is a director of the company are all required disclosures. In addition, any ownership in the company held by the analyst or a member of the analyst’s immediate family at the time the report is issued must be disclosed. The fact that the analyst formerly owned shares that were sold does not need to be disclosed.
A corporation has $125,000,000 of convertible bonds outstanding. The conversion price is $50. The corporation refunds $75,000,000 of the bonds for nonconvertible bonds. How many additional shares of common stock will be outstanding if the remaining bonds are converted? QID: 1892881Mark For Review A 1,000,000 shares B 1,500,000 shares C 2,000,000 shares D 2,500,000 shares
1,000,000 shares
After the refunding, $50,000,000 of convertible bonds will remain outstanding. If these bonds are converted, there will be an additional 1,000,000 shares of common stock outstanding ($50,000,000 of bonds / the conversion price of $50 = 1,000,000 shares of common stock).
An investor purchases a municipal bond on Monday, June 6. The bond's interest payment dates are November 1 and May 1. The buyer will need to pay the seller of the bond the purchase price plus accrued interest for: QID: 1892970Mark For Review A 35 days B 36 days C 37 days D 39 days
37 days
Accrued interest is calculated from the last interest payment date (May 1) up to but not including the settlement date. The purchase is made Monday, June 6. The settlement date is two business days later, which is Wednesday, June 8. Accrued interest is calculated up to but not including the settlement date, which is from May 1 to June 7. This equals 37 days as follows.
May 1 to May 30 30 days
June 1 to June 7 7 days
Total 37 days
Which of the following new bond issues will MOST likely be purchased through competitive bidding? QID: 1892891Mark For Review A Corporate bonds B General obligation bonds C High-yield bonds D Revenue bonds
General obligation bonds
An individual has made before- and after-tax contributions to her traditional IRA. When she begins taking distributions after age 59 1/2, they would be taxed as:
QID: 1892962Mark For Review
A
Return as capital and not taxed
B
Ordinary income
C
First ordinary income and then return of capital
D
Part ordinary income and part return of capital
Part ordinary income and part return of capital
An individual's home has a resale value of $500,000 and an assessed value of $200,000. If the tax rate is 10 mills, the property tax is: QID: 1892882Mark For Review A $2,000 B $5,000 C $20,000 D $50,000
$2,000
Property tax is computed by multiplying the assessed value by the millage rate. A mill equals 0.001 or $1 per $1,000 assessed value. The tax is $2,000 ($200,000 x .001 x 10 mills).
The number of times the earnings of a municipal facility exceeds the interest charges and principal payments of a revenue bond for a period is called the: QID: 1892947Mark For Review A Working capital ratio B EBITDA ratio C Debt service coverage ratio D Price-earnings ratio
Debt service coverage ratio
The number of times the earnings of a revenue bond of a municipal facility exceeds the interest charges and principal payments (debt service) for a period is the debt service coverage. Earnings before interest, tax, depreciation, and amortization (EBITDA) is a term associated with corporate bond issuers, not municipal bond issuers.
Which of the following bonds has the most interest-rate risk? QID: 1892967Mark For Review A A three-month Treasury bill B A 30-year Treasury STRIP C A 6%-coupon, 30-year Treasury bond D A 3%-coupon, five-year Treasury note
A 30-year Treasury STRIP
The bond with the most interest-rate risk or price volatility is the bond with the longest maturity and the lowest coupon. This price sensitivity is based on the concept of duration. The first step is to identify the bond or bonds that have the longest maturity. In this question, there are two bonds with 30-year maturities, which eliminates the possibility of the three-month and five-year bonds as the answer. The second step is to find the long-term bond that offers the lowest coupon rate. Since a T-STRIP is a form of zero-coupon bond, it clearly has more interest-rate risk than another long-term bond that offers a 6% coupon. Remember, the greatest price sensitivity based on interest rate fluctuation is a long-term bond with a low coupon.
All of the following may be included in investment company advertising EXCEPT: QID: 1892961Mark For Review A An application for a prospectus B Information that is contained in the full prospectus C A current yield quotation D An application to invest
An application to invest
Under SEC Rule 482, which addresses mutual fund advertising, an application to invest may not be contained within an advertisement. The investor must receive a prospectus before investing in funds.
The interest paid on special assessment bonds is derived from: QID: 1892946Mark For Review A Ad valorem taxes B Toll road revenues C Charges on the benefitted property D Excise taxes
Charges on the benefitted property
The interest paid by the issuer to holders of special assessment bonds is derived from charges made to the users of the benefitted property. These bonds are issued to finance the construction of water and sewer systems, sidewalks, and streets.
A customer purchased an initial public offering of stock at $38 a share. The current market price is $24 and the EPS is 19 cents. If the company has no plans to pay a cash dividend, what is the price/earnings ratio of the company? QID: 1892982Mark For Review A The company does not have a price/earnings ratio B 2 C 126.3 D 200
126.3
The price/earnings ratio is found by dividing the current market price of $24 by the earnings per share of 19 cents. This equals a price/earnings ratio of 126.3 ($24 / $.19). The IPO price and the amount of the dividend are not relevant in calculating the price/earnings ratio.
A customer owns shares of restricted stock and now intends to sell them. If the proper forms are filed with the SEC, the customer may sell these shares: QID: 1892928Mark For Review A At any time B Over a 35-day period C Over a 90-day period D Over a 180-day period
Over a 90-day period
A customer has purchased a new municipal issue during the underwriting period. According to MSRB rules, the customer must receive which TWO of the following documents? The final confirmation showing the aggregate price A copy of the notice of sale A copy of the official statement, if prepared A list of syndicate members QID: 1892980Mark For Review A I and III B I and IV C II and III D II and IV
I and III
Which of the following statements concerning duration is TRUE?
QID: 1892945Mark For Review
A
A well-diversified index stock fund will have duration of approximately 1.0.
B
Due to their extended holding period, long-duration funds are right only for young investors with a suitable time horizon.
C
Duration is the measurement of the period in which a CDSC will be assessed on a Class B share.
D
Duration is a measurement of a given bond’s sensitivity to interest-rate swings.
Duration is a measurement of a given bond’s sensitivity to interest-rate swings.
Duration is a measurement of a given bond’s sensitivity to interest-rate swings. Factors affecting a given bond’s duration include maturity and coupon. It is important to remember that a long-duration bond portfolio is much more price sensitive to interest-rate swings.
A CMO would be suitable for an investor seeking:
QID: 1892910Mark For Review
A
Monthly tax-free income, assuming he does need the principal returned at maturity
B
Quarterly income, assuming he does not need the principal returned at maturity
C
Monthly income, assuming he needs the entire principal returned at maturity
D
Monthly income, assuming he does not need the entire principal returned at maturity
Monthly income, assuming he does not need the entire principal returned at maturity
CMOs pay monthly income made up of interest, which is taxable, and principal, which is a tax-free return of capital. Due to the structure of a CMO, a fluctuating amount of principal is returned monthly, not at maturity, which makes CMOs different from most other fixed-income securities.
An investment contract that offers life insurance benefits plus participation in a portfolio of securities is called a: QID: 1892884Mark For Review A Variable annuity contract plan B Insurance sector based index fund C Spread load contractual plan D Variable life insurance contract
Variable life insurance contract
A variable life insurance contract offers life insurance benefits and participation in a separate portfolio of securities. A variable annuity offers a death benefit, but a death benefit is not considered life insurance.
What information is NOT found on a municipal bond confirmation?
QID: 1892954Mark For Review
A
The amount of accrued interest
B
Whether the bonds are subject to state income tax
C
The call features
D
The fact that the broker-dealer acted in a principal capacity
Whether the bonds are subject to state income tax
On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is: QID: 1892972Mark For Review A 24 B 27 C 30 D 31
30
When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor’s cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.
An individual purchased a 10-year municipal bond at a cost of $1,050. If the individual sells the bond in five years at its amortized value, the tax consequence will be: QID: 1892914Mark For Review A A $25 capital gain B A $25 capital loss C A $50 capital loss D No capital gain or loss
No capital gain or loss
When a municipal bond is purchased at a premium, the premium must be amortized over the life of the bond. When asked to amortize, the individual would use straight-line to calculate the amount. In this question, the $50 premium would be amortized equally over the 10 years at $5/year. After five years, $25 would be amortized and the adjusted cost basis would be $1,025.
During periods of deflation, which of the following investments tends to perform the best? QID: 1892993Mark For Review A Common stock B Treasury inflation-protected securities C Long-term debt D Short-term debt
Long-term debt
A convertible bond has a conversion price of $50 and is currently selling in the market at $1,100. The conversion ratio is: QID: 1892887Mark For Review A 22 B 20 C 50 D 55
20
A bond is convertible into stock at $50 per share. The market price of the stock is 65. The market price of the bond is 120. To profit from this arbitrage opportunity, an investor should: Buy 5 bonds Buy 100 shares of stock Sell 5 bonds short Sell 100 shares of stock short QID: 1892893Mark For Review A I and III B I and IV C II and III D II and IV
II and III
A customer wants safety of income and preservation of capital. Which of the following securities is MOST suitable? QID: 1892917Mark For Review A Investment-grade corporate bonds B Convertible bonds C Collateralized mortgage obligations D High-yield corporate bonds
Investment-grade corporate bonds
The IPO of a new start-up company was registered on July 1, 20XX. If the co-manager of the offering wants to publish a research report on the issuing company, what's the earliest date on which it could publish the report? QID: 1892935Mark For Review A July 1, 20XX B July 2, 20XX C July 11, 20XX D July 12, 20XX
July 12, 20XX
Municipal serial bonds are priced on the basis of: QID: 1892958Mark For Review A Yield to maturity B Percentage of par C Dollar price D Current yield
Yield to maturity
When an issuer is raising additional capital and conducts a rights offering, it may enter into an arrangement whereby a syndicate agrees to purchase all of the shares that the issuing corporation may not be able to sell. This is referred to as a(n): QID: 1892975Mark For Review A Firm-commitment underwriting arrangement B Best-efforts underwriting arrangement C Standby underwriting arrangement D All-or-none underwriting arrangement
Standby underwriting arrangement
A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio? QID: 1892940Mark For Review A 6.5 times B 7.5 times C 8 times D 8.6 times
8 times
The price-earnings ratio is the market price ($56) of the stock divided by the earnings per share ($7), which equals 8 times. The earnings per share of $7.00 is found by dividing the $7,000,000 of available income to the common stockholders by the 1,000,000 shares of common stock outstanding.
In which of the following documents are bid limitations for a new municipal bond issue found? QID: 1892895Mark For Review A The official statement B The indenture C The notice of sale D The syndicate agreement
The notice of sale
The American Telephone Company announced in an ad in The Wall Street Journal that it intends to call for the redemption of all its outstanding 10% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. All of the following statements are TRUE about this redemption, EXCEPT:
QID: 1892955Mark For Review
A
The company’s outstanding debt will be reduced
B
The company’s interest expense will be reduced
C
Dividends to the stockholders will be increased
D
Investors redeeming the bonds receive a premium to the market price
Dividends to the stockholders will be increased
The effect of the redemption will be to reduce the company’s outstanding debt, thereby also reducing the interest expense. Investors will receive 103 1/4 for redeeming the bonds, which is a premium to the 102 3/4 market price. The redemption of the bonds will not affect dividends paid to stockholders.
On May 25, the president of MaxCo bought 3,000 shares of MaxCo stock in the open market at $33. Two months later, the stock has increased to $40. If the president now wants to sell the shares:
QID: 1892988Mark For Review
A
Permission must be granted by the MaxCo board of directors
B
The profit from the trade must be forfeited according to the short-swing profit rule
C
Notification must be made to the corporation’s legal counsel
D
Permission must be granted by FINRA
The profit from the trade must be forfeited according to the short-swing profit rule
The Securities Exchange Act of 1934 prohibits insiders from making short-swing profits. A short-swing profit is a profit made on stock held by insiders for less than six months. If the president of MaxCo sold stock two months after it was purchased, MaxCo could sue for recovery of the profit. Under Rule 144, the six-month holding period applies only to restricted stock and, since the stock was purchased in the open market, the shares would be considered control stock.
The advance-decline theory states that:
QID: 1892932Mark For Review
A
A bull market exists if the Dow industrials and transportations averages make new highs
B
A bear market exists if more put options have been purchased by investors than call options
C
It is bullish if more stocks go up than go down during the day
D
A large number of shares sold short is bullish
It is bullish if more stocks go up than go down during the day
A technical indicator that measures the strength of the market by comparing the number of stocks that increase and decrease is called the advance-decline theory. It shows the general direction and breadth of a market movement on a given day.
