Greenlight 1 Flashcards
A doctor receives an inheritance of $250,000. She is concerned how this may affect her tax situation. The doctor inquires about where she should park the money while she obtains professional tax advice. Which of the following recommendations is the MOST appropriate? QID: 1893318Mark For Review A A short-term municipal bond fund B A money-market account C A municipal money-market mutual fund D A U.S. government inflation-protected bond fund
A municipal money-market mutual fund
However, this question also has an extra dimension to it. The person in this question is a doctor, which implies a high income level. Furthermore, she is inheriting a large sum of money and expressly states she is worried about taxes. These are trigger phrases, which means you should be looking for something that provides some tax relief. In this case, the municipal money-market mutual fund is the BEST answer. It provides both the safety of principal and tax relief the doctor needs. The tax relief comes from the short-term municipal (federally tax-free) securities in the account. The money-market account, only offers principal safety.`
Which choice BEST describes The Bond Buyer’s Revenue Bond Index?
QID: 1893288Mark For Review
A
Average yield on a list of bonds with 30-year maturities
B
Average yield on a list of 11 bonds
C
Average yield on a list of 20 bonds
D
Average yield on a list of new revenue issues
Average yield on a list of bonds with 30-year maturities
The Bond Buyer publishes different indexes. They include:
The 20-Bond Index – The average yield to maturity on a particular day of 20 specific GO bonds with 20-year maturities
The 11-Bond Index – The average yield to maturity on a particular day of 11 of the 20 specific GO bonds from the 20-Bond Index
The Revenue Bond Index (Revdex) – The average yield to maturity on a particular day of 25 specific revenue bonds with 30-year maturities
Structured products are typically comprised of two components including:
QID: 1893362Mark For Review
A
A fixed-income note and common stock
B
A fixed-income note and a derivative product
C
A fixed-income note and a fixed-equity contract
D
Two different types of derivative products
A fixed-income note and a derivative product
A structured product is typically built around a fixed-income instrument and a derivative product. The note pays a specified rate of interest to the investor at defined intervals. The derivative component establishes the amount of payment at maturity.
A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond.
Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for its risk on selling group sales.
QID: 1893300Mark For Review A $2.50 per bond for a total of $50,000 B $2.50 per bond for a total of $100,000 C $4.00 per bond for a total of $80,000 D $4.00 per bond for a total of $160,000
$2.50 per bond for a total of $50,000
The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for its risk on those bonds ($2.50 per bond on 20,000 bonds).
Which method of calculating taxes on an investment typically offers an investor the lowest amount of tax on a capital gain when shares of stock are sold? QID: 1893322Mark For Review A Specific identification B First in, first out (FIFO) C Last in, first out (LIFO) D Average cost
Specific identification
The IRS only recognizes two methods for calculating gains or losses on stock transactions—FIFO and specific identification (versus the purchase of). Many brokerage firms may allow alternative methods, such as LIFO, which is a variation of specific identification. Average cost may only be used for sales of mutual fund shares. Although LIFO could offer a lower gain if the price of a security was rising, that gain may be considered short-term and taxed at a higher rate. Therefore, the specific identification method is the best choice for an investor who’s seeking the lowest amount of tax.
A customer is considering the purchase of a bond fund in hopes of profiting from appreciation in the bond market. The customer is LEAST likely to receive a capital gain distribution if: The bonds in the portfolio have short maturities The bonds in the portfolio have long maturities Interest rates are rising Interest rates are falling QID: 1893352Mark 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
A bond fund investor is MOST likely to receive a capital gain distribution when bonds are appreciating substantially in value. This would occur if interest rates were falling. When rates fall, long-term bonds appreciate more than short-term bonds. Therefore, the investor is LEAST likely to receive a capital gain distribution if rates are rising and the portfolio contains short-term bonds.
The real interest rate is best defined as the:
QID: 1893304Mark For Review
A
Interest earned by an investor after taxes
B
Interest earned that is less than the rate of inflation
C
Interest earned that exceeds the inflation rate
D
Amount that LIBOR exceeds the fed funds rate
Interest earned that exceeds the inflation rate
The real interest rate received by an investor is the amount of interest received minus the inflation rate. If an investor is receiving a 10% interest rate when inflation is at 6%, the real interest rate received is 4% (10% - 6%).
A customer's margin account has a market value of $40,000 and a debit balance of $10,000. What value of securities may the broker-dealer rehypothecate? QID: 1893323Mark For Review A $10,000 B $14,000 C $26,000 D $40,000
$14,000
A broker-dealer may use a customer’s securities valued at 140% of the debit balance as collateral for the customer’s loan at a bank. Therefore, the amount is $14,000 ($10,000 debit balance x 140%).
An investor purchases stock at $21 and pays a $1.05 commission. The stock is later sold for $19, paying a $.95 commission. In order to determine a gain or loss, the investor will use proceeds of: QID: 1893240Mark For Review A $18.05 B $19 C $21 D $22.05
$18.05
In order to determine a gain or loss on an investment, you must determine the cost basis and the proceeds. The proceeds are equal to what the stock was sold for less any commission. In this example, the proceeds would be $18.05 = $19.00 - $.95.
Treasury bills are issued to mature in all the following time frames, EXCEPT: QID: 1893245Mark For Review A One month B Three months C Six months D Nine months
Nine months
Treasury bills mature in one month, three months, six months, or twelve months. They do not have nine-month maturities at issuance.
A customer owns 1,000 shares of LRR preferred stock and the company is in the process of conducting a rights offering for its common stock. Under the terms of the rights offering, two rights are required to buy one new share and the subscription price is $25 (the stock’s current market price is $26.50). This customer would be entitled to which of the following?
QID: 1893363Mark For Review
A
1,000 shares if the customer pays $25 per share
B
500 shares if the customer pays $25 per share
C
500 shares if the customer pays $26.50 per share
D
No additional shares
No additional shares
As far as rights offerings are concerned, preferred stockholders do not have the right to subscribe to the offering. Instead, rights offerings are made available to common stockholders.
What information would an analyst be MOST concerned with when evaluating a revenue bond? QID: 1893238Mark For Review A The population growth of the municipality B Debt to assessed valuation C A rate covenant D Property taxes
A rate covenant
An analyst would be most concerned with rate covenants. This is an agreement made by the municipal issuer to maintain rates high enough to cover maintenance and operating charges and to meet annual debt service requirements. The other terms are applicable to general obligation bonds.
A customer sells short 400 shares and the company declares a 10% stock dividend. When the customer covers the short position, the customer will be required to deliver: QID: 1893252Mark For Review A 40 shares B 360 shares C 400 shares D 440 shares
440 shares
When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declares a 10% stock dividend. Therefore, a customer who sold short 400 shares will be required to deliver 440 shares (400 shares x 10% = 40 additional shares) when he covers the short sale.
An investor buys a 4.5% municipal bond at 103 1/4. The bond has a yield-to-maturity of 3 3/4%. If the investor holds the bond to maturity, he will have a loss for tax purposes of: QID: 1893351Mark For Review A 0 B $25 C $50 D $100
0
The IRS requires that a premium paid for a municipal bond be amortized (written-off) over the life of the bond. At maturity, the investor will have an adjusted cost (after amortization) of par ($1,000). Since this is the amount received at maturity, there is no loss for tax purposes.
Which of the following CMOs has the MOST prepayment risk? QID: 1893354Mark For Review A Sequential pay tranches B Accrual or Z tranches C Planned amortization class (PAC) tranches D Support or companion tranches
Support or companion tranches
The planned amortization class (PAC) is a type of CMO that is designed for more risk-averse investors and provides a predetermined schedule of principal repayment, as long as mortgage prepayment speeds are within a certain range. This greater predictability of maturity is accomplished by establishing a sinking-fund type of schedule. The PAC tranche has top priority and receives principal payments up to a specified amount. Any excess principal goes to a companion or support tranche that has lower priority. Holders of the companion tranche are generally compensated for this risk with higher yields.
Which of the following choices need NOT be preapproved by the firm? QID: 1893291Mark For Review A Sales literature B Advertising C A public appearance D Research reports
A public appearance
Unscripted participation in live events is considered a public appearance and is not subject to preapproval or filing with FINRA. Advertising and sales literature is considered retail communication and needs approval by the firm. Research reports also require firm approval.
A client creates an opening sale in a LEAP and closes out the position 15 months later by buying back the option. The tax consequence is a: QID: 1893280Mark For Review A Short-term gain or loss B Long-term gain or loss C Passive gain or loss D Gain or loss that may not offset other trading positions or ordinary income
Short-term gain or loss\
A LEAP is a long-term option that can have an expiration of up to 39 months. The client held the position for more than one year, but any gain or loss on a short position is treated as short-term. The IRS does not recognize a holding period on a short sale of a stock or an opening sale of an option. If the client created an opening purchase by buying a LEAP and held the position for 15 months before closing it out, the resulting gain or loss would be long-term.
A 1/2-point dealer's concession in a municipal bond equals: QID: 1893247Mark For Review A $ .05 on a $1,000 par value bond B $ .50 on a $1,000 par value bond C $5.00 on a $1,000 par value bond D $50.00 on a $1,000 par value bond
$5.00 on a $1,000 par value bond
A 1/2-point dealer’s concession is the equivalent of 1/2 of 1% of the par value. This is the dollar equivalent of $5.00 on a $1,000 par value bond.
A corporation has $10,000,000 of a 5% preferred stock issue outstanding. If the corporation is able to replace the preferred stock with $10,000,000 of 5% subordinated debentures, what effect will it have on earnings per share (EPS)? QID: 1893309Mark For Review A EPS will increase B EPS will decrease C EPS will remain the same D The effect cannot be determined
EPS will increase
Which of the following securities would you LEAST likely recommend to an investor requiring a fixed sum of funds to be received in 10 years?
QID: 1893305Mark For Review
A
A zero-coupon municipal bond
B
A high-yield corporate bond
C
Collateralized mortgage obligations (CMOs)
D
Treasury Inflation-Protected Securities (TIPS)
Collateralized mortgage obligations (CMOs)
The risk that an investor will receive her principal earlier than projected instead of at one time (i.e., prepayment risk) is the most important risk pertaining to mortgage-backed securities such as CMOs. Since the investor wants to receive a fixed amount of funds in 10 years, a CMO would be the least suitable of the securities listed.
