Greenlight 2 Flashcards
A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The debt-to-equity ratio is: QID: 1893486Mark For Review A 21% B 26% C 74% D 79%
B
26%
The debt-to-equity is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The debt-to-equity ratio is 26% ($225 million / [the par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million]). The debt-to-equity ratio is used to analyze the capital structure of a company.
All of the following actions may create a taxable event, EXCEPT?
QID: 1893462Mark For Review
A
An investor liquidates her mutual fund shares and reinvests the proceeds in a different fund in the same family
B
A dividend is paid but the investor forgoes the cash and chooses to reinvest the funds in additional shares of the same fund
C
An individual receives the death benefit from her father’s variable annuity
D
Rolling the funds of one annuity into another annuity
Rolling the funds of one annuity into another annuity
Switching from one mutual fund to another in the same family is considered by the IRS to be a sale of an existing asset and a new purchase. This would generate a taxable event. Reinvestments in the same fund are still taxable but add to a client’s cost basis. An annuity death benefit may generate a taxable event for the recipient if she receives an amount above the contributions put into the contract by the deceased. Section 1035 of the IRS code does allow the transferring of assets from one annuity contract into another annuity contract without tax liability.
An investor buys a 5% municipal bond at 102 1/2. The bond has a yield-to-maturity of 4 1/2%. If the investor holds the bond to maturity, he will have a loss for tax purposes of: QID: 1893404Mark For Review A 0 B $25 C $50 D $100
0
The IRS requires that a premium paid for a municipal bond be amortized 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 statements about a closed-end investment company is TRUE?
QID: 1893492Mark For Review
A
It is continuously issuing new shares
B
It may be redeemed by the issuing investment company
C
It is traded in the open market at its current market price
D
It may only issue common stock
It is traded in the open market at its current market price
The only true statement regarding a closed-end investment company is that it is traded in the open market at its current market price. All of the other statements apply to an open-end investment company.
All of the following statements are TRUE as far as call option writers are concerned, EXCEPT:
QID: 1893402Mark For Review
A
All profitable closing transactions are taxed as capital gains
B
Premiums received from unexercised options are treated as capital gains
C
All unprofitable closing transactions are allowed as an ordinary loss deduction from income
D
The dollar amount of the premium received is deducted from the cost price of the underlying security to determine the covered call writer’s breakeven point
All unprofitable closing transactions are allowed as an ordinary loss deduction from income
All of the statements concerning call option writers are true except all unprofitable closing transactions are allowed as an ordinary loss deduction from income. This is not true because they are subject to the maximum $3,000 capital loss restrictions
For investors who own agency-backed CMOs, which of the following risks are LEAST important in a rising interest-rate environment? QID: 1893414Mark For Review A Prepayment risk and credit risk B Extension risk and credit risk C Prepayment risk and interest-rate risk D Extension risk and interest-rate risk
Prepayment risk and credit risk
Prepayment risk is associated with a falling (not rising) interest-rate environment in which mortgage holders refinance or repay their mortgages at a faster rate. Therefore, the holder of a CMO receives a larger portion of the principal earlier than anticipated and is forced to reinvest at lower rates. Many CMOs are created from government agency mortgage-backed securities (MBS), which have a minimal amount of credit risk. However, for CMOs that are constructed without this backing, credit risk is a greater concern. As is true for most fixed-income securities, CMOs carry interest-rate risk. Extension risk, which is the opposite of prepayment risk, is prevalent when interest rates are rising and the CMO holders receive a smaller portion of their principal back. As a result, the LEAST important factors in a rising interest rate environment are prepayment risk and credit risk.
From the issuer’s perspective, when comparing serial bonds to term bonds, serial bonds have:
QID: 1893451Mark For Review
A
Declining interest payments and declining principal amounts
B
Increasing interest payments and increasing principal amounts
C
Stable interest payments and stable principal amounts
D
Stable interest payments and declining principal payments
Declining interest payments and declining principal amounts
Serial bonds have several (a series of) maturity dates with a lower amount of debt outstanding as time goes by. Each series of bonds will have declining interest payments and declining principal amounts. In comparison, term bonds have one maturity date (i.e., the entire principal balance is paid on one date) and have stable interest payments.
An auction rate security is a type of investment that has the interest rate or dividend rate reset periodically. The term net clearing rate refers to the: QID: 1893429Mark For Review A Average rate of all submitted bids B Highest rate to match supply and demand C Lowest rate to match supply and demand D Lowest rate of all submitted bids
Lowest rate to match supply and demand
Based on submitted bids from holders and prospective buyers, the net clearing rate set by the auction agent will be the lowest rate that matches supply and demand. After the deadline for submission of orders, the auction agent assembles all the orders from lowest to highest bid and determines the net clearing rate. The net clearing rate is the lowest rate bid sufficient to cover all the securities exposed for sale.
A customer bought an 8% debenture at a 7.20 basis. If the bonds are currently trading 15 basis points higher: QID: 1893441Mark For Review A The customer's yield to maturity has increased to 7.35% B The bond's coupon has increased to 8.15% C The bond's market price has decreased D The investment has not been affected
The bond’s market price has decreased
When the customer bought the bond, he established a yield to maturity of 7.20%. A 7.20 basis is used to quote a bond that is offered at a price equivalent to a YTM of 7.20%. This will remain the same over the life of his investment. The coupon rate was established when the bonds were issued and will never change. However, when yields in the market increase, the market price of outstanding bonds decreases. The bond is now trading at a price equivalent to a YTM of 7.35%.
An investor purchases a $100,000 face value municipal bond with a 5-year maturity at 105. After two years, the bond is sold at 95. For tax purposes, the investor has a(n): QID: 1893502Mark For Review A $2,000 loss B $4,000 loss A $8,000 loss D $10,000 loss
$8,000 loss
When a municipal bond is purchased at a premium, the bond’s premium must be amortized to find an adjusted cost basis. If the bond is sold above the adjusted cost basis, the result is a capital gain. If the bond is sold below the adjusted cost basis, the result is a capital loss. If the bond is held to maturity, there is neither a loss nor a gain for tax purposes. This is because the adjusted basis would equal the par value after the premium is amortized.
This bond is purchased at $105,000 with a 5-year maturity. The premium of $5,000 ($105,000 - $100,000 = $5,000) must be amortized over a 5-year period ($5,000 divided by 5 years equals $1,000 per year). Therefore, each year the original cost of the bond is reduced by $1,000.
If the bond is sold after 2 years, the adjusted cost basis is $103,000 ($105,000 - $2,000 = $103,000). Since the bond is sold at $95,000, there is a capital loss of $8,000 ($103,000 - $95,000).
XYZ Corporation’s common stock has the same beta as ABC Company’s common stock. However, XYZ stock, on average, produces better returns than ABC. Which of the following statements explains this difference?
QID: 1893467Mark For Review
A
XYZ stock has a higher alpha than ABC stock
B
ABC stock is more liquid than XYZ stock
C
XYZ Corporation is more highly leveraged than ABC Company
D
ABC Company has a smaller market capitalization than XYZ Corporation
XYZ stock has a higher alpha than ABC stock
While a stock’s beta measures its performance as it relates to the overall market, alpha measures that part of a stock’s return that is independent of the market. It is influenced by factors that are unique to that company and its industry group.
An RR’s client has recently finalized her divorce. For the RR to be able to change the name on her account to her maiden name, the client MUST provide:
QID: 1893455Mark For Review
A
Her reissued driver’s license with her updated name
B
A document that shows her residential address and maiden name
C
A credit card with her maiden name
D
Her divorce decree
Her divorce decree
In order to change the account to her maiden name, the client must provide a court or government issued document. The only acceptable document listed is a divorce decree. A reissued driver’s license is not acceptable due to the risk of fraud. Other acceptable documents include:
Marriage certificate
Passport
Government-issued ID (e.g., a Social Security card or certification of naturalization)
An investor has purchased a general obligation bond. Which of the following statements is TRUE concerning this investment?
QID: 1893387Mark For Review
A
Earnings from the bond are subject to federal taxes.
B
Payment of principal and interest is ultimately the responsibility of the issuing municipality.
C
If the revenue project that’s operated by the municipality goes bankrupt, the bonds will go into default.
D
The assets of the municipality are used to secure the bond.
Payment of principal and interest is ultimately the responsibility of the issuing municipality.
For a general obligation bond (a type of municipal bond), the interest is exempt from federal income tax. In addition, a general obligation bond is backed by the taxing authority of the issuer and the issuer’s general promise to repay the debt.
In this example, only the taxes that are collected by the municipality are used to back the bonds. If the municipality cannot produce enough tax dollars to pay the bond’s interest and/or principal, there will be a default.
A client’s market order to sell is executed at $21.35; however, the client is told that it was executed at $21.85. In this case, the customer will: QID: 1893493Mark For Review A Cancel and rebill the original order B Receive $21.85 C Receive $21.35 D File a complaint
Receive $21.35
When a market order is executed, the customer is responsible for the actual execution price, regardless of how it has been reported. If the order was reported to have been executed at one price, but was executed at another price that’s either higher or lower, the actual execution price must be accepted.
A customer buys a premium bond that is callable. Which of the following is LEAST beneficial for the customer?
QID: 1893392Mark For Review
A
The bond is called at its par value in five years
B
The bond is called at its par value in ten years
C
The bond is called at its par value in fifteen years
D
The bond is called at its par value in twenty years
The bond is called at its par value in five years
If the bonds are called in five years at par, the premium paid for the bond will be amortized over the shortest period. This results in the investor realizing a lower yield than if the bond were called after a longer period. It is important to note that rules require a firm to disclose to a customer the lowest possible yield that the customer can realize. On a premium bond (as in this example), the lowest yield will result from the bond being called at par in the shortest period.
Property in Boca Raton, Florida is assessed at 10 million dollars. If the millage rate is 7, what is the property tax? QID: 1893410Mark For Review A $70 B $700 C $7,000 D $70,000
$70,000
A mill (.001) is $1 per $1,000 of assessed value. Multiply .007 times $10,000,000. This will equal a property tax of $70,000.
A small company would like to raise capital through a private placement in order to expand its operations. As an investment banking representative working on the deal, you would be LEAST likely to target which of the following investors when offering these securities?
QID: 1893381Mark For Review
A
Hedge funds
B
Existing shareholders who are also employees of the company
C
Individual investors with a net worth exceeding $1,000,000
D
Senior executives at the company
Existing shareholders who are also employees of the company
A private placement would least likely appeal to the employees of the company. Under Regulation D, a private placement may be offered to an unlimited number of accredited investors but only 35 nonaccredited investors. Hedge funds and individual investors with a net worth exceeding $1,000,000 are considered accredited investors. Senior executives at the company are more likely to be accredited investors than employees of the company due to the income and net worth requirements of Regulation D. The fact that they are existing shareholders would not change that status since the company may have given or allowed the purchase of its stock to employees regardless of the income and net worth.
A long margin account with a market value of $20,000 and a debit balance of $12,000 is considered: QID: 1893506Mark For Review A Below minimum maintenance B Subject to a margin call B Restricted D To have excess equity
Restricted
Equity is the difference between long market value and debit balance, i.e., $20,000 - $12,000 = $8,000. If equity is less than 50% of market value, the account is considered restricted, but does not need to be rectified. Since $8,000 ÷ $20,000 = 40%, equity is 40% of market value.
