Mock Exam 8 Flashcards
During a trading halt, an investor can
cancel an order placed before the halt.
If trading is halted in a security, investors cannot buy or sell the security. An open order can be canceled during a trading halt.
Shortly before the end of the cooling-off period, the underwriters and representatives of the issuer have a meeting to review the status of the new issue. This is called
a due diligence meeting.
The final meeting before the end of the cooling-off period is known as a due diligence meeting and is always held before the effective date of the new offering.
A 38-year-old investor places $25,000 into a single premium qualified deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $50,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is
$17,500.
Because this is a qualified annuity, the entire withdrawal is taxable. In this case, it is all $50,000. That $50,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $50,000.
When a company issues additional bonds, which of the following is true?
Leverage is increased.
Leverage is the use of someone else’s money at a fixed cost to benefit the common shareholders. Issuing additional bonds increases the company’s debt (money borrowed from someone else), and therefore, increases leverage for shareholders.
A registered representative (RR) recommends a variable annuity (VA) with an income rider to a client. The client’s investment objectives, tax bracket, investment experience, and risk tolerance all align well with a VA recommendation. The client agrees to purchase the contract and informs the RR that he will be cashing out a VA he purchased two years ago to fund the new contract and will forward the check as soon as he receives it. Based on this information, the RR should
reevaluate whether the recommendation for the VA contract is still suitable based on the client’s proposed funding of the investment.
Funding a VA contract by cashing out either life insurance policies or existing VA contracts, especially those held for a short time, is not suitable. These contracts come with high surrender charges. Suggesting that loans or drawing equity from a home to fund VA contracts have also been targeted as abusive sales practices. Of the answer choices given, the best would be to reevaluate the recommendation based on the new information tendered by the client.
Mutual fund shareholders are often advised to enroll in automatic dividend reinvestment programs. In those programs, the investor can elect to have all distributions, or just those from income or just those from capital gains, automatically reinvested in additional shares of the fund. Among the advantages to the investor would be
automatic compounding of the investment.
Similar in concept to the compounding of interest in a savings account, when distributions are reinvested rather than withdrawn, the capital has an opportunity to compound. Taxes are due in the year for which the distribution is paid (no tax break here). The shares are purchased at NAV; there are never cases where mutual fund shares are purchased below the NAV. If the fund has a 12b-1 charge, it would apply to the reinvested shares just as any other shares.
A customer purchases a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield that must be stated is the yield to
the 102 call
Municipal Securities Rulemaking Board rules require that when a call date has been fixed by a prerefunding, the resulting yield to call must be reflected on the confirmation. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event; therefore, it is appropriate to price the bond to the call date. The original maturity on the bond has no further significance.
If an investor sells 1 AMF Apr 50 put for 2.50 and buys 1 AMF May 60 put for 7.75, the investor has profit when
I. the spread narrows.
II. the spread widens.
III. both puts are exercised.
IV. both puts expire.
II and III
The investor created a debit spread, which is profitable when both sides are exercised or the spread widens. Conversely, credit spreads are profitable when both sides expire or the spread narrows.
If a customer believes the price of ABC is going to fall, which of the following option strategies would be appropriate?
I. Buy calls on ABC.
II. Write calls on ABC.
III. Buy puts on ABC.
IV. Write puts on ABC.
II and III
Buying puts and writing calls are bearish strategies.
