Midterm Review

Question 1

What is the most sensitive/volatile short-term interest rate?

Answer 1

The Federal Funds Rate (vs. the Discount rate, Prime rate, and Broker call loan rate)

Question 2

What is a technical analyst interested in?

Answer 2

Forecasting market trends and general securities prices (as opposed to individual corps). They’re interested in market prices, trading volumes, DJIA changes, reversals, support and resistance levels, advance/decline lines, short interest, other factors that influence buying and selling decisions

Question 3

What is a fundamental analyst interested in?

Answer 3

They concentrate on a stock’s intrinsic quality and are more concerned with PE ratios and Earnings Per Share

Question 4

Who or what sets the amount paid into a defined contribution plan?

Answer 4

The trust agreement. not the contribution requirements

Question 5

Can a variable annuity lose money?

Answer 5

Yes because its investment portfolio, separate account, incurs investment risk and can lose value

Question 6

How is commercial paper quoted?

Answer 6

It is quoted on a discounted yield basis. It is short-term, unsecured corporate debt that is issued and traded at a discount of face value w/ no interest payments

Question 7

What defines a diversified investment company?

Answer 7

The 75-5-10 rule. At least 75% of the total assets must be invested in securities in other investment companies. Of that 75%, no more than 5% can be in any one company and you can’t own more than 10% of one company. Defined under Investment Company Act of 1940.

Question 8

What is the most conservative way for a company to raise capital?

Answer 8

Sell Common Stock. It’s adds to the capital of the corp and doesn’t add the cash flow demands of bonds.

Question 9

What is the minimum guaranteed interest rate on a variable annuity?

Answer 9

There is no guaranteed interest rate. The rate of return is subject to the underlying portfolio’s value. They’re designed to combat inflation risk but are still subject to capital risk.

Question 10

The risk of a bond decreasing in value during periods of inflation is known as:

Answer 10

Interest Rate Risk, not reinvestment risk

Question 11

If you sell shares of an investment company, when do you know the total received?

Answer 11

The following day. They are priced using forward pricing, which is calculated on the next day.

Question 12

Does a Jumbo CD make interest payments?

Answer 12

Yes, along with convertible bonds and T-bonds. Zero-coupon bonds do not make any interest payments

Question 13

rights of accumulation

Answer 13

Allows a customer to use stock growth towards a letter of intent. Reinvested dividends and changes in NAV do NOT count towards a breakpoint for a LOI

Question 14

Can you get a breakpoint in different accounts?

Answer 14

Yes if one person is investing in different custodial accounts with the same company.

Question 15

What type of risk should an investor purchasing long-term AAA rated bonds be most concerned with?

Answer 15

Inflation Risk (or purchasing power risk) because the rate of return on the investment may not keep pace with inflation.

Question 16

For a coveral call, what is the cost-basis of the stock if the call is exercised?

Answer 16

It is the amount paid for the stock and does NOT include the premium for the call

Question 17

For tax purposes of a covered call, what amount of the proceeds are you taxed on?

Answer 17

You are taxed on the proceeds (strike price) plus the premium.

Question 18

How do you find the parity price of common stock?

Answer 18

Find the conversion ratio and divide the market price by the conversion ratio. Ex: if covertible PS is trading at $80 and conversation price is $20, CS will trade at $16 (100/20=5; $80/5=$16)

Question 19

Describe ELNs

Answer 19

Equity-linked notes are debt-instruments that have a partial fixed return as well as a final payment due that is linked to the performance of an underlying asset or index. They can be traded on the OTC; FINRA considered them an ‘nonconventional structured instrument’

Question 20

How often are Treasury Bills issued?

Answer 20

Every, 4, 8, 13, 26, and 52 weeks. Treasury auctions for the 52-week note occur every 4-weeks. The rest occur every week.

Question 21

In the event of a bankruptcy, what is the liquidation order?

Answer 21

Wages, taxes, secured debt, unsecured debt (including general creditors), subordinated bonds, preferred stock, and common stock

Question 22

What does a fundamental analyst focus on?

Answer 22

a particular industry or company within an industry; that company’s relative health or market potential

Question 23

What does a technical analyst focus on?

Answer 23

timing of market activity and market trends; market price, price momentum, and volume