Module 1 Securities Market and Money Market

Question 1

Which of these is NOT a characteristic of negotiable certificates of deposit (CDs)?

A)
Negotiable CDs are bought and sold in the secondary market at a market-determined price.
B)
They are used as short-term drafts drawn to finance imports and exports.
C)
Negotiable CDs are bought most often by institutional investors rather than by individuals.
D)
They are deposits of $100,000 or more placed with commercial banks at a specified interest rate.

Answer 1

b The answer is they are used as short-term drafts drawn to finance imports and exports. Banker’s acceptances, not Negotiable CDs, are short-term drafts drawn by a private company on a major bank used to finance imports and exports. The rest are characteristics of negotiable CDs.

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Question 2

Choose the risk that is attributable to cash and cash equivalents.

A)
Marketability risk
B)
Liquidity risk
C)
None of these because cash and cash equivalents are considered risk-free
D)
Purchasing power risk

Answer 2

d Cash and cash equivalents are subject to purchasing power (inflation) risk because they offer limited potential for growth.

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Question 3

Which of the following types of federal income tax treatment generally apply to municipal bonds?

Ordinary income
Tax-free income
Capital gains or losses
Tax-deferred income
A)
II and III
B)
II and IV
C)
I and IV
D)
I and III

Answer 3

The answer is II and III. Municipal bond interest is received federal income tax free by the bondholder. In addition, when a municipal bond is sold by the investor, the net proceeds above/below basis may be subject to capital gain/loss.

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Question 4

If an investor has a net short-term capital loss of $1,200 and a net long-term capital gain of $2,500, which of the following statements is true?

A)
The client pays tax on a long-term capital gain of $2,500 and carries over the net short-term capital loss to future years until it can offset a short-term capital gain.
B)
None of these statements are true.
C)
The client has an ordinary loss deduction of $1,200 and pays tax on a long-term capital gain of $2,500.
D)
The client pays tax on a net long-term capital gain of $1,300.

Answer 4

d Short-term gains and losses are netted with each other, then long-term gains and losses are netted with each other. Short-term losses are then netted with long-term gains, with ultimate tax treatment being determined by the result of the final netting. In this case, the final net is $1,300 and is treated as a net long-term capital gain for tax purposes.

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Question 4

Which of these statements pertaining to the various types of money market investments is CORRECT?

Commercial paper offers higher yields than T-bills.
Eurodollars are U.S. dollar-denominated deposits at banks outside of the United States.
Banker’s acceptances are short-term drafts drawn by a private company on a major bank to finance imports and exports.
T-bills are subject to default risk and a lack of marketability.
A)
I, II, and III
B)
IV only
C)
II and IV
D)
II, III, and IV

Answer 4

a Only statement IV is incorrect. T-bills are not subject to default risk and exhibit a high degree of marketability. As a result, the 90-day T-bill is often used as a proxy for the risk-free investment.

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Question 5

The market designed to facilitate the initial sale of securities to the public is referred to as the

A)
third market.
B)
fourth market.
C)
secondary market.
D)
primary market.

Answer 5

d The purpose of the primary market is to facilitate the sale of initial public offerings (IPOs) of securities to the public.

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Question 6

All of the following statements correctly assess the determination of cost basis when a taxpayer sells publicly traded securities such as stocks or bonds except

A)
if the taxpayer cannot specifically identify the shares sold, basis will be calculated using the average cost of all shares or units owned.
B)
if the taxpayer can adequately identify the actual shares or units being sold, then the basis of those specific shares or units can be used in calculating the realized gain or loss.
C)
if the taxpayer cannot specifically identify the shares sold, basis will be calculated using a first-in, first-out (FIFO) method of identification.
D)
when a taxpayer sells or redeems shares in a mutual fund, the taxpayer is permitted to use the average cost of all the mutual fund shares owned in determining the basis of the shares sold or redeemed.

Answer 6

a The average cost method is only allowed for the sale of mutual fund shares. Without specific identification, the FIFO method is used.

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Question 7

A money market mutual fund manager recently purchased negotiable, short-term, unsecured promissory notes issued by a number of large corporations for the portfolio. Select the type of investment the money manager purchased.

A)
Reverse repurchase agreements
B)
Repurchase agreements
C)
Banker’s acceptances
D)
Commercial paper

Answer 7

d Commercial paper is usually issued in denominations of $100,000 or more and is a substitute for short-term bank financing. Commercial paper is normally sold at a discount and is rated for quality by a rating service.

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Question 8

The Nelsons, a family of modest means, are preparing to implement their financial plan. As part of their plan, they need to place more cash into a convenient emergency fund. Determine which of the following investments would be most suitable for the Nelsons’ emergency fund.

A)
Banker’s acceptances
B)
Money market mutual fund
C)
Negotiable certificates of deposit (CDs)
D)
U.S. Treasury bills

Answer 8

b The answer is money market mutual funds. Money market mutual funds typically invest in high quality, short-term investments, such as Treasury bills, commercial paper, and negotiable CDs. The typical minimum investment is $1,000, and funds may be withdrawn from the account at any time without penalty by writing a check on the account. Money market mutual funds are heavily used by prudent investors as part of their emergency fund.

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Question 8

A strategy where investors with relatively large amounts of money to invest purchase multiple certificates with varying terms to maturity is

A)
staging.
B)
laddering.
C)
swapping.
D)
bulleting.

Answer 8

b Laddering is the process of purchasing multiple CDs with staggered maturities, that are equally spaced, and with varying interest rates. As each CD matures, a CD is purchased with a maturity equal to the longest in the ladder. This strategy is used to manage interest rate risk.

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Question 9

Jordan has the following gains and losses from the previous year:

$10,000 long-term capital gain
$6,000 long-term capital loss
$7,500 short-term capital gain
$15,000 short-term capital loss
What is the tax ramification of these transactions?

A)
$6,000 deductible loss, $1,500 carryover loss
B)
$3,000 deductible loss, $500 carryover loss
C)
$4,000 long-term capital gain
D)
$3,500 deductible loss

Answer 9

b The answer is $3,000 deductible loss, $500 carryover loss. First, net the long-term gains and losses, and the short-term gains and losses. A $10,000 long-term capital gain with a $6,000 long-term capital loss equals a net long-term capital gain of $4,000. For short-term capital gains and losses, net the $7,500 short-term capital gain with the $15,000 short-term capital loss, which comes to a $7,500 short-term capital loss. Then, take the $4,000 long-term capital gain, and offset it against the $7,500 short-term capital loss, for a net short-term capital loss of $3,500. When Jordan files his tax return he will be able to deduct $3,000 of the $3,500 loss, and will carry forward to the next tax year the remaining $500 short-term loss.

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Question 9

Greg calls his broker and tells her to sell his XYZ stock if it falls to $20, but he does not want less than $19.50 for his shares. What type of order should his broker recommend to sell the stock?

A)
Market order
B)
Limit order
C)
Stop limit order
D)
Good-till-canceled order

Answer 9

c The stop limit order turns into a limit order when triggered (both the stop order price and the limit order price are specified). However, this type of order will not guarantee execution if the stock leapfrogs below the $19.50 mark.

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Question 10

Which of these terms is considered early-stage business funding for the purpose of research and development of an idea?

A)
First-stage financing
B)
Bridge financing
C)
Seed financing
D)
Start-up financing

Answer 10

c The correct answer is seed financing. Seed financing (or seed capital) is for new companies without any products and it provides them cash for product development and market research. Bridge financing is for firms that expect to go public within approximately one year. First-stage financing is for initial manufacturing and sales. Start-up financing is for product development and marketing for firms who have not sold products or services commercially.

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Question 11

Which of the following statements best describes Eurodollars?

A)
Deposits of $100,000 or more placed with commercial banks at a specified interest rate
B)
U.S. dollar-denominated deposits at banks outside the United States
C)
Short-term drafts drawn by a private company on a major bank used to finance imports and exports
D)
Negotiable, short-term, unsecured promissory notes issued by large corporations

Answer 11

b Explanation
In addition, the average deposit is very large (in the millions) and has a maturity of less than six months.

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Question 12

Which of the following accurately describes the certificate of deposit investment strategy known as laddering?

A)
Purchasing certificates in progressively increasing deposit amounts
B)
Immediately purchasing another certificate as one certificate matures
C)
Purchasing multiple certificates, rather than just one, with differing terms of maturity
D)
Redeeming a certificate of deposit and reinvesting in a new certificate when interest rates increase

Answer 12

c Laddering is the procedure of purchasing multiple CDs with differing terms of maturity.

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Question 13

When investment bankers absorb the loss on an initial public offering, which one of the following terms represents this type of offering?

A)
Best efforts
B)
Green shoes
C)
Firm commitment
D)
Secondary offering

Answer 13

c When investment bankers absorb the loss on an initial public offering, which one of the following terms represents this type of offering?

A)
Best efforts
B)
Green shoes
C)
Firm commitment
D)
Secondary offering

Question 14

All of the following correctly identify advantages of U.S. Treasury bills except

A)
they are not subject to default risk.
B)
interest income is not subject to federal income tax.
C)
investors are provided a high degree of safety.
D)
investors can tailor purchases to meet short-term goals and obligations.

Answer 14

b

Remember: Mun bonds tax themselves at municipal level. Fed bonds tax themselves at fed level.
The reason munbonds are good in texas is because Mun bonds are taxed at a state and or local level (not sure which or if both) and texas has no state/local taxes, interest income is tax free.

The answer is interest income is not subject to federal income tax. Interest income from U.S. Treasury bills is taxed at ordinary federal income tax rates but is not subject to state income tax.

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Question 15

Robert owns 400 shares of Intel stock that he purchased several years ago for $60 per share. Intel’s current market price is $48 per share. On December 17, Robert decides to buy an additional 200 shares of Intel stock. On December 23, he decides to sell 200 shares that he purchased several years ago so that he can claim a loss on his current year’s tax return. Which of the following statements is true?

The loss will be disallowed, but Robert will have to reduce his tax basis in the shares he purchased on December 17 by the amount of the loss.
The loss will be disallowed; the transactions are illegal and tax penalties will be imposed.
The loss will be disallowed; the amount of the disallowed loss will be added to the cost basis of the shares purchased on December 17.
The transaction is called a wash sale; wash sale rules apply when shares are sold for a loss and repurchased within 30 days before or after the sale date.
A)
IV only
B)
III and IV
C)
I only
D)
II and IV

Answer 15

b The transaction is a wash sale; losses are disallowed when substantially identical shares are repurchased within 30 days before or after a sale. The transaction is not illegal and no tax penalties are imposed on the transaction itself. The basis of the stock is adjusted for the disallowed loss.

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Question 15

Alice uses a stockbroker to borrow shares of stock from another investor’s account and then sells the borrowed stock in the open market. She later repurchases the stock in the open market and replaces, or covers, the borrowed stock. Identify the type of transaction that she used in her account.

A)
Wash sale
B)
Protective put
C)
Short sale
D)
Zero-cost collar

Answer 15

c This type of transaction is known as a short sale. A short sale allows an investor to take advantage of falling stock prices.

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Question 16

The group of investment bankers that actually purchases the stocks to be resold to the investing public is called

A)
the standby group.
B)
the underwriting manager.
C)
the selling group.
D)
the syndicate.

Answer 16

The answer is the syndicate. Syndicate members purchase the securities issue being offered and are responsible for reselling to the public. The underwriting manager is the manager of that syndicate. Selling groups consist of brokerage firms that help distribute securities in an offering but that are not members of the syndicate.

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Question 17

What is the highest long-term capital gains rate on collectibles?

A)
15%
B)
25%
C)
20%
D)
28%

Answer 17

d The answer is 28%. The long-term capital gains tax rate on collectibles (tangible assets other than real estate) is capped at 28%.

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Question 18

A wash sale is deemed to have occurred within which of the following time frames?

A)
30 days
B)
60 days
C)
31 days
D)
61 days

Answer 18

d The answer is 61 days. 30 days before + date of sale + 30 days after = 61 total days.

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Question 19

Lloyd is a dealer in government securities. He has purchased government securities from another dealer, Fred, and has agreed to sell them back at a later date. From Lloyd’s perspective, which transaction has been executed?

A)
Commercial paper investment
B)
Reverse repurchase agreement
C)
Repurchase agreement
D)
Promissory note

Answer 19

b

Repo - you SELL and you’re saying you’ll buy back later
Reverse Repo - you BUY and you’re saying you’ll sell back later

Seems backwards but ig think maybe “I’ll sell you this car knowing you’ll default, and i’ll REPO it later”. Obviously this has nothing to do with default it’s just a memory link.

Lloyd, as the buyer, has entered into a reverse repurchase agreement, and Fred, as the seller, has entered into a repurchase agreement.

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Question 19

Which of the following is both liquid and marketable?

A)
Blue chip stocks
B)
U.S. Treasury bills
C)
Passbook savings accounts
D)
Antique jewelry

Answer 19

b The answer is U.S. Treasury bills. U.S. Treasury bills are both liquid and marketable. Passbook savings accounts are liquid but not marketable. Neither blue chip stocks nor antique jewelry is assured of being both liquid and marketable.

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Question 20

Choose the characteristic that does not apply to Eurodollars.

A)
Maturities of less than six months
B)
Issued by the U.S. Treasury
C)
Dollar-denominated deposits
D)
Interest earned is taxed as ordinary income in the year received

Answer 20

b The answer is issued by the U.S. Treasury. Eurodollars are issued by banks outside of the United States, not the U.S. Treasury.

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Question 21

Which of the following is NOT a characteristic of negotiable CDs?

A)
Negotiable CDs are bought most often by institutional investors rather than by individuals.
B)
Negotiable CDs are bought and sold in the secondary market at a market-determined price.
C)
They are used as short-term drafts drawn to finance imports and exports.
D)
They are deposits of $100,000 or more placed with commercial banks at a specified interest rate.

Answer 21

c Banker’s acceptances are short-term drafts drawn by a private company on a major bank used to finance imports and exports.

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Question 22

Mike places a market order to sell short 200 shares of ABC stock. The order is filled at $23.45 per share. Assuming he can cover the short by purchasing the shares at $20 per share, calculate his gain or loss.

A)
Loss of $690
B)
Loss of $345
C)
Gain of $690
D)
Gain of $850

Answer 22

c

It’s basically saying this:
He placed a market order to sell 200 stock he borrowed. Market order was filled at 23.45, meaning this is the price they sold at. He bought them later at $20/share. So he made a profit of 3.45/share * 200 shares.

Mike will have a gain of $690 on the shares of XYZ stock.

$23.45 proceeds

– $20.00 cost

$3.45 gain × 200 shares = $690

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Question 22

What is an order to buy or sell at a specific price?

A)
Stop order
B)
Market order
C)
Limit order
D)
Day order

Answer 22

c

fair enough - ig you don’t give a price on a market order, it’s just whatever is the immediately available price.

The answer is limit order. A market order is an order to buy or sell at the current price. A day order is an order that is good just for the day and expires at the end of the day (if not executed). A stop order is an order to buy or sell if the price of the stock trades at or through the stop price.

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Question 23

An investor holding a Treasury bill as of the date of maturity includes

A)
the face value as a capital gain.
B)
the discounted sales price as ordinary income.
C)
the amount of the discount as a capital gain.
D)
the amount of the discount as ordinary income.

Answer 23

d

So it’s weird but think about it for a sec. Tbills are zero coupon, you buy them at a discount from face value, and at maturity you get the full amount .

An investor holding a Treasury bill as of the date of maturity includes the amount of the discount as ordinary income. An investor who sells the bill before maturity includes as ordinary income only a portion of the acquisition discount based on the total time he held the bill. The remaining portion is capital gain income.

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Question 23

Galen has come to his financial planner with questions about dividends he received on some of his stock this year. He has received $1,000 in qualified dividends paid in cash. He also has received stock dividends of $4,000, but without a cash dividend option. How much will Galen have to report as dividend income for the current year?

A)
$4,000
B)
$0
C)
$5,000
D)
$1,000

Answer 23

D

Okay so, stock dividends are not taxable, all they do is adjust your basis. $4000 worth of stock means nothing, that’s simply (I believe) the market price of those stock at the time of the dividend. But he would’ve gotten a number of stock that spreads his basis a little thinner. Example: He had 100 stock before that he paid $100 for. The div gave him another 100 stock. His basis was $100/100 = $1/share, now it’s $100/200 = $0.50/share. He didn’t PAY for the dividend so his basis stays the same it just spreads a little further. It’s like bread, you just add another slice and then take the butter that was on the original and spread it further.

The answer is $1,000. Only the dividends paid in cash to Galen that are reported as income. The stock dividends did not have a cash-dividend option and are not taxable.

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Question 23

Select the arrangement that is commonly used by dealers in government securities to satisfy short-term liquidity needs.

A)
Negotiable CDs
B)
Banker’s acceptance
C)
Commercial paper
D)
Repurchase agreement

Answer 23

d

Remember:
Repo to me is: I’ll SELL you this car now, but Imma get it back later.
Reverse repo is the opposite of that.

Dealers in government securities use repurchase agreements, or repos, to satisfy short-term liquidity needs.

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Question 24

The principal functions of an investment banker are to

distribute securities to the public.
provide a secondary market.
provide financing for an individual.
advise the issuer about alternatives in raising capital.
A)
I and IV
B)
III and IV
C)
I and II
D)
II and III

Answer 24

a The answer is I and IV. The principal functions of the underwriter are to advise the issuer about the financial alternatives and to sell securities to the public.

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Question 25

Which of the following statements best describes banker’s acceptances?

A)
Short-term drafts drawn by a private company on a major bank used to finance imports and exports
B)
Negotiable, short-term, unsecured promissory notes issued by large corporations
C)
Promissory notes traded at a premium from their face value in the secondary market
D)
U.S. dollar-denominated deposits at banks outside the United States

Answer 25

a Banker’s acceptances are typically traded at a discount from their face value in the secondary market. Eurodollars are U.S. dollar-denominated deposits at banks outside the United States.

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Question 26

What are the advantages of a private placement to the issuing firm?

Avoidance of disclosure requirements
Reduction in the time needed to raise the capital
Avoidance of some costs associated with publicly selling securities
Limited to 25 unaccredited investors, but is available to an unlimited number of accredited investors
A)
I, III, and IV
B)
I, II, and III
C)
II and IV
D)
I and II

Answer 26

b The answer is I, II, and III. A private placement is limited to 35 unaccredited investors but is available to an unlimited number of accredited investors and eliminates the need for full disclosure and SEC registration. In addition, costs associated with the sale of securities to the public are avoided. Because there is no need for SEC registration, the company can quickly raise the needed capital. However, a private placement usually means a higher, not lower, cost of capital to the issuing firm.

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Question 27

Which of the following statements regarding U.S. Treasury bills is CORRECT?

They are purchased at 50% of face value.
They are sold at auction in denominations ranging from $50 to $10,000.
They are not subject to the original issue discount (OID) taxation rules.
They are sold with maturities up to two years.
A)
III only
B)
I, II, and III
C)
I and II
D)
II and IV

Answer 27

a U.S. Treasury bills are purchased at a discount to face value determined at auction. The lowest purchase amount is $100. They are not subject to the OID rules. T-bills have a maturity date of no more than one year.

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Question 28

Distributions of dividend and capital gains in cash to mutual fund investors

are fully taxable to the investor.
are added to the tax basis of the shares once taxes on the distributions are paid.
decrease the taxable gain or increase the loss on sale of the shares after taxes are paid.
decrease the cost basis of the shares whether or not taxes are paid.
A)
I and II
B)
I, II, and III
C)
I only
D)
IV only

Answer 28

c The answer is I only. If the dividends and capital gains are reinvested, the individual receives an increased tax basis. If the distributions are made in cash, there is no increase in the tax basis of the underlying securities.

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Question 28

Which of the following statements best describes banker’s acceptances?

A)
Promissory notes traded at a premium from their face value in the secondary market
B)
U.S. dollar-denominated deposits at banks outside the United States
C)
Negotiable, short-term, unsecured promissory notes issued by large corporations
D)
Short-term drafts drawn by a private company on a major bank used to finance imports and exports

Answer 28

d The answer is short-term drafts drawn by a private company on a major bank used to finance imports and exports. Banker’s acceptances are typically traded at a discount from their face value in the secondary market. Eurodollars are U.S. dollar-denominated deposits at banks outside the United States.

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Question 29

Which of the following best describes the term marketability?

A)
The ability to sell an investment quickly in a readily identifiable market.
B)
The ability to sell an investment quickly at a specific price.
C)
The ability to sell an investment with a significant loss in principal.
D)
The ability to sell an investment quickly without transaction costs.

Answer 29

a The answer is the ability to sell an investment quickly in a readily identifiable market. Liquidity is the ability to sell or redeem an investment quickly and at a known price, without a significant loss of principal.

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Question 30

Which of the following is not a type of money market mutual fund?

A)
Tax-exempt money market fund- state
B)
Tax-exempt money market fund - national
C)
Taxable money market fund
D)
Federally insured money market mutual fund

Answer 30

d The answer is federally insured money market mutual fund. Money market mutual finds are not federally insured. All of the other funds are types of money market mutual funds.

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Question 31

Richard is considering the purchase of an additional 500 shares of Stock E in a new investment which is currently trading for $18.02. He intends to purchase these shares on margin. The new brokerage firm has an initial margin percentage requirement of 50% and a maintenance margin percentage requirement of 35%. Calculate the market price at which Richard would expect a margin call if the shares decline in value after purchase. Assume he makes the purchase at the stock’s current market price.

A)
$23.42
B)
$6.31
C)
$13.86
D)
$9.01

Answer 31

c

Basically, the firm’s $9.01 investment does not change, your investment does. If the value of the stock falls, your side falls not the 9.01 that the BD put in. So you could cheese the system and do this for each one till you get the right answer: $13.86 (value of stock) - $9.01 (firm investment) = $4.85 (your investment after fall). For that 35% margin to trigger, your investment has to be worth at or less than 35% of the value of stock in account, $13.86. So take your portion of investment $4.85 / $1386 and you get a lil under 35%, which triggers the margin call.

The answer is $13.86. With a current market price of $18.02, Richard would expect a margin call if the market price of Stock E falls to $13.86 per share. (1 – initial margin percentage) ÷ (1 – maintenance margin) × purchase price of stock = margin call: (0.50 ÷ 0.65) × $18.02 = $13.86.

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Question 32

The use of borrowed money to attain an individual’s investment objectives is described as

A)
laddering.
B)
indexing.
C)
leveraging.
D)
hedging.

Answer 32

c Explanation
Using borrowed money to attain one’s investment objectives is known as leveraging. The advantage of leveraging is that the investor can control property that has greater value than the amount of cash invested.

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Question 33

Explanation
Using borrowed money to attain one’s investment objectives is known as leveraging. The advantage of leveraging is that the investor can control property that has greater value than the amount of cash invested.

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Answer 33

c All of these statements are correct. Limited partnerships are characterized by a partnership entity that consists of a general partner and limited partners.

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Question 34

Which of the following statements best describes Eurodollars?

A)
Short-term drafts drawn by a private company on a major bank used to finance imports and exports
B)
Negotiable, short-term, unsecured promissory notes issued by large corporations
C)
Deposits of $100,000 or more placed with commercial banks at a specified interest rate
D)
U.S. dollar-denominated deposits at banks outside the United States

Answer 34

d The answer is U.S. dollar-denominated deposits in banks outside the United States. In addition, the average deposit is very large (in the millions) and has a maturity of less than six months.

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Question 35

Which of the following correctly identifies the role of a limited partner in a limited partnership?

A)
the limited partners may not participate in the management of the partnership.
B)
the limited partner controls the business activities of the partnership.
C)
the limited partners have unlimited liability.
D)
the limited partner determines when distributions are made to the limited partners.

Answer 35

a The limited partners have limited liability. The general partner controls the business activities of the partnership. The general partner determines when distributions are made to the limited partners.

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Question 35

All of the following statements correctly describe certificates of deposit (CDs) except

A)
redemption prior to maturity typically results in an early withdrawal penalty.
B)
CDs typically pay a variable interest rate.
C)
CDs are commonly referred to as time deposits.
D)
CDs are eligible for FDIC coverage.

Answer 35

b The answer is CDs typically pay a variable interest rate based on the term of the certificate. CDs typically pay a fixed interest rate, with higher interest rates offered for longer-term certificates.

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Question 35

Choose the risk that is attributable to cash and cash equivalents.

A)
Liquidity risk
B)
Marketability risk
C)
Purchasing power risk
D)
None of these because cash and cash equivalents are considered risk-free

Answer 35

c The answer is purchasing power risk. Cash and cash equivalents are subject to purchasing power (inflation) risk because they offer limited potential for growth.

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Question 35

When a taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities, this transaction is classified as

A)
an equity swap.
B)
a repurchase agreement.
C)
a wash sale.
D)
a substitution swap.

Answer 35

c The wash sale rule is intended to prevent a claim of a tax-loss on specific security transactions. This rule will postpone the capital loss if a substantially identical security is purchased within 30 days before or after the sale. If this event occurs, the basis of the new stock or securities will include the unrecovered portion of the basis of the formerly held stock or securities.

LO 1.4.1

Question 35

Jack sells short 200 shares of ABC stock at $38.50 with a 50% initial margin. ABC pays a dividend of $0.50 per share after he sells the stock. Jack then buys back the stock for $32. Calculate his percent gain or loss.

A)
31.17% gain
B)
33.77% gain
C)
16.21% gain
D)
16.88% loss

Answer 35

A

I don’t understand it either, with the dividends.

Jack had a total percent gain of 31.17%, calculated as follows:

Jack’s investment: 200 × $38.50 × 0.50 = $3,850

Proceeds:

$7,700

Cost:

(6,400)

Gain:

$1,300

Less dividend payment:

(100)

Net gain:

$1,200

$1,200 ÷ $3,850 = 31.17% gain

LO 1.2.1

Question 35

An investor holding a Treasury bill as of the date of maturity includes

A)
the face value as a capital gain.
B)
the amount of the discount as a capital gain.
C)
the discounted sales price as ordinary income.
D)
the amount of the discount as ordinary income.

Answer 35

d The answer is the amount of the discount as ordinary income. An investor holding a Treasury bill as of the date of maturity includes the amount of the discount as ordinary income. An investor who sells the bill before maturity includes as ordinary income only a portion of the acquisition discount based on the total time he held the bill. The remaining portion is capital gain income.

LO 1.3.1

Question 35

Your client has just opened a margin account with your brokerage firm and purchased 500 shares of stock for $60 per share. The firm has a 55% initial margin and 35% maintenance margin policy. Calculate the stock price at which your client will receive a margin call.

A)
$50.76
B)
$41.54
C)
$27.00
D)
$31.43

Answer 35

B

The firm’s investment has to equal 65% or greater than the total investment. SO 27 HAS TO BE AT LEAST 65% OF THE TOTAL VALUE OF STOCK. That means just fucking take 27$ and divide by 65%!

The client will receive a margin call when the price of the stock drops to $41.54, calculated as follows:

margin call = ($60 × 0.45) ÷ (1 – 0.35)

margin call = $27.00 ÷ 0.65 = $41.5385, or $41.54

LO 1.2.1

Question 35

All of the following correctly identify advantages of U.S. Treasury bills except

A)
interest income is not subject to federal income tax.
B)
investors are provided a high degree of safety.
C)
they are not subject to default risk.
D)
investors can tailor purchases to meet short-term goals and obligations.

Answer 35

a

Mun bonds and fed bonds tax themselves at their level. Mun bonds taxed at municipal level (good in texas bc no municipal level) and fed bonds tax at federal income level.

Interest income from U.S. Treasury bills is taxed at ordinary federal income tax rates but is not subject to state income tax.

LO 1.3.1

Question 35

All of the following correctly identify features of limited partnerships except

A)
the limited partners may participate in the management of the partnership.
B)
the limited partners have limited liability.
C)
the general partner determines when distributions are made to the limited partners.
D)
the general partner controls the business activities of the partnership.

Answer 35

a The answer is the limited partners may participate in the management of the partnership. Disadvantages of limited partnerships include the following: (1) they are generally riskier than bonds or exchange-traded equities; (2) they are generally illiquid; (3) limited partners cannot participate in the management; and (4) the sale of partnership interest may be restricted. In addition, the general partner has unlimited liability.

LO 1.1.1

Question 35

Cosmo has a margin account with a balance of $50,000 with a national broker-dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Aardvark Inc., which is currently selling at $40 per share.

Given the above information, calculate the number of shares of Aardvark that Cosmo can purchase using margin.

A)
2,500
B)
2,000
C)
1,250
D)
625

Answer 35

A The answer is 2,500. Cosmo can purchase 2,500 shares calculated as follows: $50,000 ÷ 50% initial margin = $100,000 of buying power. $100,000 ÷ $40/share = 2,500 shares.

LO 1.2.1

Question 35

Which of the following would be held in a money market portfolio?

Treasury bill
Negotiable CDs
Commercial paper
A)
II and III
B)
I, II, and III
C)
I only
D)
I and II

Answer 35

b The answer is I, II, and III. All of these financial instruments would be held in a money market portfolio.

LO 1.3.1

Question 35

Which of these statements regarding Eurodollar CDs is CORRECT?

Eurodollar CDs are obligations of non-U.S. banks.
Eurodollar CDs are more liquid than domestic CDs.
Eurodollar CDs offer a slightly higher yield than domestic CDs.
Eurodollar CDs are only used to settle transactions in the U.S.
A)
I only
B)
II and IV
C)
I and III
D)
I, II, and III

Answer 35

c Statements II and IV are incorrect. Eurodollar CDs are less liquid than domestic CDs and are used to settle international transactions.

LO 1.3.1

Question 35

Which of the following is considered to be both liquid and marketable?

A)
Passbook savings accounts
B)
Blue-chip stocks
C)
U.S. Treasury bills
D)
Antique jewelry

Answer 35

c U.S. Treasury bills are both liquid and marketable. Passbook savings accounts are liquid but not marketable. Neither blue-chip stocks nor antique jewelry is assured of being both liquid and marketable.

LO 1.3.1