Random Subject Cards

Question 1

Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with

Answer 1

tax preference items.

For investors who are subject to the AMT, the benefits normally associated with tax preference items are lost because these items must be added back into the investor’s taxable income.

Question 2

When must a new options customer return a signed option agreement?

Answer 2

Within 15 days of the account approval

The option agreement must be signed and returned within 15 days of account approval. This agreement states the customer will abide by the rules of the options exchange and the OCC and will not violate position or exercise limits. If it has not been returned, the customer can only close out existing positions. No new positions may be opened.

Question 3

If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that

Answer 3

1. dividend distributions will be reinvested at net asset value.
2. capital gains distributions will be reinvested at net asset value.

Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at net asset value.

Question 4

When do currency and equity options expire?

Answer 4

the third Friday of the expiry month.

Question 5

When must a new options customer—who has not yet traded options—receive the Options Clearing Corporation’s (OCC’s) current disclosure document?

Answer 5

At or before the time the account receives approval for options trading

Question 6

Term Bonds are quoted in?

Answer 6

dollars as a percentage of par.

Term bonds are often called dollar bonds because they are quoted in a dollar price. That price is a percentage of par. Serial bonds are quoted on their basis (yield to maturity). A purchaser is going to be quoted based on the dealer’s ask price (the bid price is when the customer is selling). The 3s of 2050 means that the coupon is 3% and the maturity date is 2050.

Question 7

When do breakpoint sales occur?

Answer 7

just below a breakpoint where the customer could realize a reduced sales charge.

Selling mutual fund shares to a customer just below a breakpoint (to share in the higher sales charges applicable to those sales) is a rules violation.

Question 8

Which of the following purchasers of Class A shares are ineligible for sales charge reductions by reaching a breakpoint?

A) An individual serving as the trustee for a grantor trust

B) A married couple having separate investment accounts

C) An individual agent purchasing the shares on behalf of an investment club

D) An individual in her IRA

Answer 8

C) An individual agent purchasing the shares on behalf of an investment club

Breakpoints are available to any person. For a breakpoint qualification, person includes married couples, parents and their minor children, most trustees purchasing for the benefit of the trust, corporations, and certain other entities. Investment clubs or associations formed for the purpose of investing, do not qualify for breakpoints.

Question 9

When an investor owning an option contract liquidates the position, this liquidation is called?

Answer 9

a closing sale.

When an investor liquidates an existing option position that is owned, the investor is entering a sale that closes the existing position.

Question 10

The visible supply may be found in

Answer 10

The Bond Buyer.

The Bond Buyer, a daily publication dealing primarily with the new issue municipal market, publishes information on the visible supply—the estimated amount of new municipal bonds to be sold over the coming month.

Question 11

What is EBIT?

Answer 11

Earnings before Income Taxes

this is the amount of money a company has retained before paying taxes and interest on outstanding debt issues. This can be found by looking at the income statement for the company.

Question 12

What is a green shoe option?

Answer 12

Where a syndicate can oversell by up to 15% of the offering.

This happens when syndicate manager, based on anticipated demand, wants to sell more shares than initially registered with the SEC, and wants to invoke the green shoe clause on short selling.

Question 13

What is a green shoe clause?

Answer 13

a clause negotiated with and agreed to by the issuer, allows a syndicate to sell up to 15% more shares than initially registered within 30 days of the IPO beginning to trade. The additional shares are made available to the syndicate by the issuer. To be effective, a green shoe clause must be disclosed in both the registration statement filed with the SEC and the prospectus.

Question 14

The visible supply includes all of the following

Answer 14

revenue bonds,
general obligation bonds,
industrial development bonds

Short-term notes (e.g. municipal notes) are not part of the visible supply, which measures the dollar amount of new issues scheduled over the coming month.

Question 15

What is the visible supply?

Answer 15

The measurement of the dollar amount of new issues scheduled over the coming month.

Question 16

Your customer opens a Coverdell ESA for his niece. To meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be

Answer 16

taxable to the niece, the beneficiary of the plan.

Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.

Question 17

A brokers broker does what?

Answer 17

acts as an agent for dealers
assists in placing securities
conceals the identity of the principals

DOES NOT make a market in securities

Question 18

What is extension risk?

Answer 18

the uncertainty that mortgages will be paid off later than expected.

Typically happens when interest rates rise.

Question 19

What is prepayment risk?

Answer 19

The opposite of extension risk; mortgages might be paid off more quickly and income stream will cease; generally happens when interest rates decline

Question 20

What is the dated date?

Answer 20

the date on which the issue begins to accrue interest

Question 21

What are some characteristics of a variable annuity

Answer 21

has a separate account (this is the variable part)
has some similarity to a mutual fund because of this separate account
payments will vary based on the performance of that separate account
typically have surrender charges that can last a decade or longer
once annuitized, payments will continue for life (or the designated period certain)

Question 22

Exercised Index options settle in…?

Answer 22

Cash, with the value being based on the closing index value on the day exercise instructions are tendered.

and…

with settlement the next business day (T+1)

Question 23

If an index option is exercised, the holder’s account will be

Answer 23

credited the in-the-money amount.

When index options are exercised, settlement is in cash rather than stock. The option writer delivers cash to the option buyer equal to the amount that the option is in the money.

Question 24

When are options automatically exercised by the Options Clearing Corporation (OCC)?

Answer 24

At expiration, the OCC will automatically exercise open option positions if those positions are in the money by 0.01 or more.

Question 25

Which index does the VIX track

Answer 25

S&P 500

As reported by the CBOE, “The VIX Index measures the level of expected volatility of the S&P 500 Index over the next 30 days that is implied in the bid/ask quotations of SPX options. Thus, the VIX Index is a forward looking measure, in contrast to realized (or actual) volatility, which measures the variability of historical (or known) prices.”

Question 26

How do you calculate the Time Value of an options

Answer 26

Time Value = Premium - Intrinsic Value