S7: Greenlight Exam 2 Missed Questions

Question 1

Regarding a company’s financial statements, total assets are equal to:
A. Total Liabilities + Stockholders’ Equity
B. Total Liabilities - Stockholders’ Equity
C. Total Liabilities + Stockholders’ Equity - Depreciation
D. Stockholders’ Equity + Goodwill

Answer 1

The balance sheet formula is Total Assets = Total Liabilities + Stockholders’ Equity. Total Assets is, therefore, equal to Total Liabilities + Stockholders’ Equity.

Question 2

If a CMO has a PSA of 150, which of the following events most likely has occurred?
A. Interest rates have increased
B. Interest rates have decreased
C. The credit rating of the issuer has been lowered
D. There has been an increase in the secondary market trading of the securities

Answer 2

The PSA Model is used for CMOs and estimates the speed of prepayments as measured against a benchmark. A PSA of 100 assumes that the prepayment speed will remain stable, while a PSA greater than 100 assumes faster prepayments. Conversely, a PSA that is less than 100 indicates slower-than-normal prepayment speed. If interest rates decline, homeowners often refinance and prepayments of mortgages increase. The credit rating or trading activity does not influence the PSA Model.

Question 3

A customer has a long margin account with the following securities in the account. (Assume a 50% FRB initial margin requirement.)
Stock
Market Value: $12,000
Debit Balance: $8,400

How far could the market value of the securities in the account decline, before a maintenance call will be sent?
A. $8,000
B. $11,200
C. $11,400
D. $12,500

Answer 3

To determine how far the securities worth $12,000 in the account can decline before the customer receives a maintenance call, multiply the debit balance of $8,400 by 4/3. $8,400 x 4 = $33,600 divided by 3 = $11,200. Another method that can be used is to take 1/3 of the debit balance, which is $2,800, and add it to the debit balance of $8,400. The result would be 4/3rds of the debit balance and would equal $11,200. ($8,400 + $2,800 = $11,200.)

Question 4

A customer whose securities have been lent to another customer for a short sale would like those securities returned. If the broker-dealer cannot locate the securities from another source, the borrowing customer:
A. Would be required to return the securities
B. Would not be required to return the securities
C. Could return similar securities
D. Could deposit 50% of the securities’ value

Answer 4

If the lender requests a return of securities that cannot be borrowed from another source, the borrower must return the securities.

Question 5

A municipality is issuing 50,000 bonds at a public offerings price of $1,000. The manager of the underwriting syndicate receives $1.25 per bond. The total takedown is $8.75 per bond and the selling concession is $5.00 per bond.
What amount will the issuer receive?

A. $991.25 per bond for a total of $49,562,500
B. $990.00 per bond for a total of $49,500,000
C. $985.00 per bond for a total of $49,250,000
D. $1,000.00 per bond for a total of $50,000,000

Answer 5

In a new municipal bond offering, the underwriting syndicate assumes the risk and is, therefore, entitled to make a profit on all bonds sold. Members of the selling group do not assume any risk and make a profit on only the bonds they sell (selling concession). The members of the underwriting syndicate receive $8.75 for bonds they sell. This is the total takedown which is composed of a selling concession of $5.00 per bond and an additional takedown of $3.75 per bond for their risk. The total spread is $10.00 ($1.25 manager’s fee plus $3.75 to the syndicate for risk plus a $5.00 profit for the sale of the bonds). The issuer will receive $990 per bond ($1,000 offering price minus $10.00 underwriting spread) for a total of $49,500,000 ($990 x 50,000 bonds).

Question 6

Stocks are considered in good deliverable form if:
A. Both the certificates and the stock power are included with a signature guarantee
B. The stock power has been notarized
C. The stockholder endorses the certificate with his legal name without a signature guarantee
D. Validated by the broker-dealer

Answer 6

Stock certificates are considered in good deliverable form if both the certificates and the stock power are presented with a signature guarantee. Notarized signatures are not required. Instead the client’s signature must be authorized or stamped with a medallion. If securities are presented and the name on the certificates does not match the name on the stock power, even if it is the client’s legal name, it will not be considered in good deliverable form.

Question 7

From the issuer’s perspective, when comparing serial bonds to term bonds, serial bonds have:
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

Answer 7

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.

Question 8

The funds removed as a result of a qualified withdrawal from which of the following were tax-deferred?
A. 529 plan
B. Roth 401(k)
C. UTMA account
D. IRA

Answer 8

Traditional IRAs provide investors with the tax-deferral of earnings. In other words, an investor is not required to pay taxes on their bond interest, cash dividends, or capital gains until he withdraws the funds from his IRA. Uniform Transfer to Minors Act (UTMA) accounts are set up for children, but don’t offer tax-deferral of earnings. In both 529 plans and Roth 401(k) accounts, qualified withdrawals are tax-free, but contributions are made on a non-deductible (after-tax) basis.

Question 9

Which of the following individuals are NOT permitted to trade on the floor of the NYSE?
A. Independent brokers
B. Registered representatives
C. Floor brokers
D. Designated market makers

Answer 9

Registered representatives of a broker-dealer are not permitted to trade on the floor of the NYSE.

Question 10

All of the following statements are TRUE as far as call option writers are concerned, EXCEPT:
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

Answer 10

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

Question 11

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:
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

Answer 11

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.

Question 12

A customer bought an 8% debenture at a 7.20 basis. If the bonds are currently trading 15 basis points higher:
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

Answer 12

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%.

Question 13

Eliminating a bond issuer's responsibility to pay back bondholders from an offering, and also relieving their obligation to bondholder's rights, is referred to as:
A. Defeasance
B. Refunding
C. A sinking fund
D. A put provision

Answer 13

When a bond is prerefunded, (advance refunded), the proceeds from a new bond offering are invested and the securities are placed in escrow. If these funds will be used only to retire the outstanding issue, that issue is considered to be defeased. The responsibility to pay the interest and principal on the outstanding issue is now of the escrow account. In addition the bondholder’s rights as described in the indenture agreement from the prerefunded issue, are eliminated.

Question 14

A high put/call ratio would MOST likely be associated with a(n):
A. Bullish indicator
B. Bearish indicator
C. Indicator that the market will trade within a narrow range
D. Indicator that the trading volume will be increasing

Answer 14

The put/call ratio is a technical market indicator and is found by dividing the volume of all put transactions by the volume of all call transactions on a daily basis. Technical analysts view the put/call ratio as a contrarian indicator. The higher the ratio, the more oversold the market, and the higher the probability that the market will reverse course and turn bullish. The opposite is true for a low put/call ratio, which is viewed as a bearish indicator.

Question 15

You are seeking information on insider purchases. Which of the following filings would be the BEST source for such information?
A. Form 4
B. Form 144
C. Form 13F
D. Schedule 13D

Answer 15

Form 4 is filed by any insider of a corporation who buys or sells shares of his company. The form must be filed no later than the second business day following the transaction. Form 3 is filed when a person initially becomes an insider. Form 5 is an annual filing by insiders. An insider is defined as any person who is an officer, director, or owner of more than 10% of the equity. The filings apply to insiders of an SEC registered company. Form 144 would only be filed in the sale (not purchase) of securities. Schedule 13D is used to report acquisitions of more than 5% of the equity of a company. Rule 13f-1 of the Securities Exchange Act of 1934 requires quarterly filings (13F) by institutional investment managers who exercise investment discretion over at least $100,000,000 in equity securities.

Question 16

There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities of XYZ Corporation, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks was:
1 week ago	25,000 shares
2 weeks ago	26,000 shares
3 weeks ago	27,000 shares
4 weeks ago	28,000 shares
5 weeks ago	27,000 shares
6 weeks ago	27,000 shares
How many shares of XYZ Corporation is Mr. Smith able to sell according to Rule 144?

A.26,000 shares
B. 26,500 shares
C. 27,250 shares
D. 30,000 shares

Answer 16

Mr. Smith would be able to sell 26,500 shares. Under Rule 144, the amount that may be sold during any 90-day period is 1% of the outstanding shares, or the average weekly volume of trading for the four weeks prior to the sale, whichever is greater. One percent of the outstanding shares is 26,000. The average weekly volume from the prior four weeks was 26,500 shares

Question 17

A long margin account with a market value of $20,000 and a debit balance of $12,000 is considered:
A. Below minimum maintenance
B. Subject to a margin call
C. Restricted
D. To have excess equity

Answer 17

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.

Question 18

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit?
A. 90
B. 92
C. 94
D. 95

Answer 18

The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices).

Question 19

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?
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

Answer 19

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.

Question 20

Listed options are issued and guaranteed by:
A. FINRA
B. The company whose stock underlies the contract
C. The exchange where the options trade
D. The Options Clearing Corporation

Answer 20

Options that are listed on exchanges are issued and guaranteed by the Options Clearing Corporation. The exchange on which the option trades sets the terms of the option contract.

Question 21

According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within:
 A. 3 days
B. 5 days
C. 10 days
D. 7 days

Answer 21

Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.

Question 22

ABC Corporation has issued $100,000,000 worth of bonds at a $1,000 par value. The effect of the issuance of the bonds is:
I. An increase in working capital
II. An increase in total liabilities
III. No change in total assets
IV. An increase in stockholders' equity
A. I and II only
B. I and III only
C. II and III only
D. II and IV only

Answer 22

Working capital equals current assets minus current liabilities. The cash received from the sale increases current assets. The bonds are not a current liability. Therefore, working capital increases. There is an increase in current assets from the cash received on the sale of the bonds, therefore, increasing total assets. The long-term liabilities of the company will increase because of the amount of debt incurred. There will be no increase or decrease in stockholders’ equity as the money received will be exactly offset by the amount of money owed.

Question 23

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of Depaul Corporation stock at $70 per share and makes the necessary deposit. If the stock increases in value to $78 per share and later declines to $67 a share, how much SMA would the customer have in the account?
A. 0
B. $4,000
C. $8,000
D. $16,000

Answer 23

First, determine the amount of the debit balance. If the customer purchased $70,000 worth of stock at a 50% margin requirement and deposited $35,000, the debit balance is $35,000 ($70,000 market value - $35,000 margin requirement = $35,000 debit balance).
Depaul increased to $78 per share, making the market value $78,000. The equity increases to $43,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $39,000 (50% of $78,000) from the actual equity in the account, $43,000. The SMA is, therefore, $4,000. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increases in value can create excess equity (SMA). However, if these securities later decline in value, this will not decrease SMA.

Question 24

If interest rates are increasing, the PSA Model will show that prepayment speeds on mortgages are:
A. Increasing
B. Decreasing
C. Staying the same
D. Fluctuating

Answer 24

The PSA Model is used to estimate the prepayment rate for mortgage-backed securities. If interest rates are increasing, borrower’s would be less inclined to refinance and mortgages would take longer to get repaid. If interest rates are falling, borrower’s would be more likely to refinance and mortgages would be paid faster.

Question 25

An investor has been making payments to a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE?
The investment risk is assumed by the insurance company
The investment risk is assumed by the customer
The amount of the payment to the customer is guaranteed by the insurance company
The amount of the payment to the customer is not guaranteed
A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 25

Unlike a fixed annuity, the investment risk in a variable annuity is assumed by the customer. The amount of the payment depends on the performance of the separate account. The payment can increase, decrease, or remain the same. The amount is not guaranteed.

Question 26

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?
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

Answer 26

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.

Question 27

An investor purchases $200,000 of an inverse ETF. If the underlying index appreciates by 10% on the first day, but then depreciates by 5% on the second day, the value of the investment will be:
A. $189,000
B. $190,000
C. $210,000
D. $209,000

Answer 27

An inverse ETF is designed to return the inverse (opposite) of the performance of an underlying index. In this case, the first day’s 10% increase in the underlying index should result in a 10% decrease in the value of the investment ($200,000 x 10% = a $20,000 decline to $180,000). The second day’s 5% decrease in the index will result in a 5% increase in the value of the investment ($180,000 x 5% = a $9,000 increase to $189,000).

Question 28

Which of the following statements is not a characteristic of a 529 plan?
A. Withdrawals from 529 plans used for educational purposes are not subject to federal taxation
B. There are no income limits placed on contributors
C. Contributions are unlimited
D. Earnings in the account are tax-deferred

Answer 28

Although contribution limits are considerably higher than for a Coverdell Education Savings Account (limited to $2,000 per year), contributions to a 529 plan are not unlimited.

Question 29

An investor in a qualified variable annuity had invested $30,000. The annuity has now grown to $50,000. The tax treatment of the distributions during the payout period would be:
A. Capital gains on the entire amount
B. Ordinary income on the amount in excess of the original investment
C. Ordinary income on the entire amount
D. Tax-free on the entire distribution

Answer 29

A qualified variable annuity is used as a retirement vehicle. Contributions are made using pretax dollars and appreciate tax-deferred. All withdrawals are taxed as ordinary income.

Question 30

A member firm is required to indicate which of the following items on a purchase confirmation sent to a customer?
A. Whether the member firm prepares research reports on the security
B. Whether the broker-dealer has an investment banking relationship with the issuer
C. The firm’s lack of membership in SIPC
D. If the member firm acted as a market maker, the amount of profit earned on the transaction

Answer 30

Broker-dealers are required to indicate on a confirmation to a customer whether they acted in an agency or principal capacity. If the member acted in an agency capacity, it must disclose or offer to disclose the name of the other party to the transaction. In addition, the broker-dealer must disclose the amount of commission charged. Market makers who act in a dealer capacity generally are not required to disclose the amount of profit that they earn on a transaction. There is no requirement to disclose whether the firm prepares research reports on the security or if there is an investment banking relationship. A firm typically must disclose that it is not a member of the Securities Investor Protection Corporation (SIPC), or that the broker or dealer clearing or carrying the customer account is not a member of SIPC

Question 31

Which of the following choices BEST describes a municipal security that is referred to as a certificate of participation (COP)?
A. A type of bond that is backed by a special tax
B. A type of bond that is typically created to fund a project for a corporation
C. A type of bond that is typically created through a lease agreement
D. A type of bond that is based on payments from residential mortgages

Answer 31

A certificate of participation (COP) is a lease financing agreement which is typically issued in the form of a tax-exempt or municipal revenue bond. COPs have traditionally been used as a method of monetizing existing surplus real estate. This financing technique provides long-term funding through a lease that does not legally constitute a loan, thereby eliminating the need for a public referendum or vote.

Question 32

Property in Boca Raton, Florida is assessed at 10 million dollars. If the millage rate is 7, what is the property tax?
A. $70
B. $700
C. $7,000
D. $70,000

Answer 32

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.

Question 33

A company in Japan will be importing California wines. The company must pay in U.S. dollars and is, therefore, concerned that the U.S. dollar will appreciate in value. To provide protection in the event that the U.S. dollar does appreciate, the company can buy:
A. U.S. dollar calls
B. U.S. dollar puts
C. Yen calls
D. Yen puts

Answer 33

If the U.S. dollar appreciates, the value of the yen declines. Therefore, the company should buy puts on the yen. The company cannot buy U.S. dollar calls since there are no options on the U.S. dollar (trading on an options exchange in the United States). If the expectation is that the U.S. dollar will decline, the company could buy yen calls.

Question 34

Which TWO of the following securities may be included in the STRIPS program to create zero-coupon securities?
Treasury bills
Treasury notes
TIPS
Treasury bonds
A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 34

Treasury STRIPS are created when Treasury notes and Treasury bonds are separated (stripped) of their coupons. Treasury bills and Treasury Inflation-Protected Securities (TIPS) are not permitted to be stripped.

Question 35

A stock index call option is exercised. The writer must:
A. Deliver cash
B. Deliver the underlying index
C. Purchase the underlying index
D. Close out his position

Answer 35

When an index option is exercised, the writer must pay the buyer the in-the-money amount of the option in cash.

Question 36

Mr. Jones purchases 100 shares of XYZ at $80 per share and writes an XYZ June 85 call receiving a $3 premium. If XYZ increased to $90 and the call option is exercised, Mr. Jones' profit is:
A. $300
B. $500
C. $800
D. $1,800

Answer 36

If the option is exercised, Mr. Jones will need to deliver his stock to the option holder at the 85 strike price. The IRS considers the proceeds of the sale to be the strike price (85) plus the initial premium received (3). Mr. Jones would, therefore, receive $8,800 for the stock that initially cost $8,000. His profit would be $800 ($8,800 - $8,000 = $800).

Question 37

Which of the following persons establishes positions in secondary market municipal bonds for a broker-dealer?
A. Underwriter
B. Trader
C. Agent
D. Principal

Answer 37

A trader is responsible for positioning (carrying inventory) secondary market municipal bonds. An underwriter is involved in the distribution of new issues.

Question 38

The manager of a new issue municipal syndicate wants to allocate securities in a different manner than specified in the syndicate agreement. He may do this if he:
A. Notifies the SEC
B. Amends the syndicate agreement
C. Is prepared to justify the change to the syndicate members
D. Assumes any losses incurred by the syndicate members

Answer 38

The syndicate manager is permitted to change the priority of orders if, in his opinion, it is in the syndicate’s best interest. He must be able to justify the change to the syndicate members.

Question 39

All of the following documents must be accompanied or preceded by an OCC risk disclosure document, EXCEPT:
A. Options research reports
B. A standardized options worksheet discussing straddles
C. Options advertising that appears in the newspaper
D. Options sales materials discussing projections

Answer 39

Options advertising is a type of retail communication, which must make the offer to send the OCC risk disclosure document upon the customer’s request. Options retail communications must be approved by a registered options principal (ROP) prior to use. Options-related retail communications that discuss projections, must be approved by a ROP prior to use and preceded or accompanied by a risk disclosure document.

Question 40

A customer entered a market order to sell 100 shares of ABC corporation on the NYSE. The trade was reported to be executed at 39.50. It was later determined that the sale was actually executed at 39.25. The customer:
A. May cancel the transaction
B. Is entitled to execution at 39.50
C. Must accept the execution at 39.25
D. May choose the execution price

Answer 40

The erroneous report rule states that should a discrepancy exist between the reported execution price and the actual execution price, the actual execution price shall prevail. Therefore, the customer must accept the actual execution price of 39.25.