S7: Greenlight Exam Missed Questions Flashcards
Which choice BEST describes The Bond Buyer’s Revenue Bond Index?
- Average yield on a list of bonds with 30-year maturities
- Average yield on a list of 11 bonds
- Average yield on a list of 20 bonds
- Average yield on a list of new revenue issues
The Bond Buyer publishes different indexes. They include:
- The 20-Bond Index – The average yield to maturity on a particular day of 20 specific GO bonds with 20-year maturities
- The 11-Bond Index – The average yield to maturity on a particular day of 11 of the 20 specific GO bonds from the 20-Bond Index
- The Revenue Bond Index (Revdex) – The average yield to maturity on a particular day of 25 specific revenue bonds with 30-year maturities
On September 14, a customer purchases an ABC December 60 call and sells an ABC November 60 call. The customer: I. Has engaged in a debit spread II. Has engaged in a credit spread III. Wants the spread to widen IV. Wants the spread to narrow 1. I and III only 2. I and IV only 3. II and III only 4. II and IV only
To determine whether the customer wants the spread to widen or narrow, it is necessary to determine whether the spread is a debit or credit spread. The premium for an option is determined by two factors: the in-the-money amount of the option (intrinsic value) and the time value. Since both options have the same strike price, the intrinsic values (in-the-money amount) are equal. Therefore, any difference in premium is the result of a difference in time value. Since the December contract has longer to go until expiration than the November contract, it has more time value. Therefore, the premium for the December contract will be larger than for the November contract. Since the customer purchased the December contract (higher premium), it is a debit spread and will profit if the spread widens.
A customer sells short 400 shares and the company declares a 10% stock dividend. When the customer covers the short position, the customer will be required to deliver:
- 40 shares
- 360 shares
- 400 shares
- 440 shares
When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declares a 10% stock dividend. Therefore, a customer who sold short 400 shares will be required to deliver 440 shares (400 shares x 10% = 40 additional shares) when he covers the short sale.
A convertible bond has a conversion price of $40 and is currently selling in the market at $950. The conversion ratio is: A. 25 B. 23.75 C. 40 D. 38
To find the conversion ratio of a convertible bond, the bond’s par value ($1,000) is divided by the conversion price ($40). In this question, the conversion ratio is $25 ($1,000 ÷ $40). To calculate the conversion ratio, the market price of the bond is irrelevant.
A customer owns 1,000 shares of LRR preferred stock and the company is in the process of conducting a rights offering for its common stock. Under the terms of the rights offering, two rights are required to buy one new share and the subscription price is $25 (the stock’s current market price is $26.50). This customer would be entitled to which of the following?
A. 1,000 shares if the customer pays $25 per share
B. 500 shares if the customer pays $25 per share
C. 500 shares if the customer pays $26.50 per share
D. No additional shares
As far as rights offerings are concerned, preferred stockholders do not have the right to subscribe to the offering. Instead, rights offerings are made available to common stockholders.
Treasury bills are issued to mature in all the following time frames, EXCEPT: A. One month B. Three months C. Six months D. Nine months
Treasury bills mature in one month, three months, six months, or twelve months. They do not have nine-month maturities at issuance.
Which of the following choices BEST describes the Bond Buyer’s Municipal Bond Index?
A. An indication of the average yield on 25 general obligation bonds with 30-year maturities
B. An indication of the average yield on 20 selected municipal revenue bonds with 20-year maturities
C. An estimate of the prices of 40 long-term municipal bonds
D. An indication of the average yield on 11 selected municipal revenue bonds with 20-year maturities
The Bond Buyer Municipal Bond Index provides an estimate of the prices of 40 recently issued, long-term general obligation and revenue bonds. Three other Bond Buyer indices provide an indication of the average yield on selected municipal bonds. The 25 Revenue Bond Index shows average yield on 25 revenue bonds with 30-year maturities, the 20 Bond Index shows average yield on 20 general obligation bonds with 20-year maturities, and the 11 Bond Index shows average yield on 11 general obligation bonds with 20-year maturities. These three choices each incorrectly described these other three Bond Buyer indices, which leaves the remaining choice as the correct answer.
Which of the following securities trade without accrued interest? A. Municipal bonds B. Treasury bills C. Debentures D. Convertible bonds
Treasury bills do not trade with accrued interest. They are issued at a discount and mature at par.
A pension fund manager wants to protect the fund's diversified stock portfolio against a market downturn. To best meet this objective, he should write: A. Yield-based calls B. Covered puts C. Uncovered calls D. Index options
Index options will move with the market as a whole and, therefore, provide a better hedge than the other choices.
A branch office has recently hired a group of RRs from another member firm. Some of the clients have mutual funds and annuities that are proprietary products of the carrying firm. If the client chooses to liquidate these assets, who has the responsibility to notify the clients of any surrender fees?
A. The receiving broker-dealer
B. The carrying broker-dealer
C. The mutual fund company
D. The principal located at the branch office
Firm-specific or proprietary products, such as mutual funds or annuities, are considered nontransferable assets. When a customer changes broker-dealers, the account is transferred to a new broker-dealer (the receiving firm), and the client may choose to liquidate these assets. Since the asset is a proprietary product, the carrying firm (the former broker-dealer) is required to notify the client of any fees (surrender charges) that may result if the client liquidates the assets.
A client currently has $75,000 in cash that he doesn't envision needing for the next 18 months. He's interested in seeing if he can receive a greater return on this cash than the money market fund in which it's currently invested. Which of the following choices is the MOST suitable? A. A municipal income fund B. A GNMA fund C. A short-term bond fund D. An equity income fund
This question represents one in which there’s not really enough information to answer it properly, at least in real life. So, the best way to answer this type of question is to start by taking apart the question to understand the customer’s intent. Let’s start with the facts.
The customer has $75,000 in cash (i.e., a money-market fund or something similar).
He wants an investment that provides a better yield.
His time horizon is 18 months, which is relatively short.
In this case, let’s immediately eliminate the equity income fund as a choice. Stocks are never a good choice for an investor who has less than a four- to five-year time horizon. The municipal income fund can also be eliminated since there’s no mention of a tax concern or an occupation that implies a large income each year. That leaves the GNMA fund and the short-term bond fund. Both investments involve bond portfolios which subject investors to some principal risk. However, a GNMA fund is typically a better choice for an investor whose time horizon is two or more years. Since this investor’s time horizon is 18 months, the most suitable investment is the short-term bond fund.
Foreign currency options use:
A. European style exercise with delivery in the foreign currency
B. European style exercise with U.S. dollar settlement
C. American style exercise with delivery in the foreign currency
D. American style exercise with U.S. dollar settlement
Foreign currency options use European style exercise, which means that a buyer is only able to exercise her option on the day of expiration. Currency options also settle in U.S. dollars, rather than in the foreign currency. Investors who exercise currency options will receive U.S. dollars in an amount that is equal to the intrinsic value of their options on the day of exercise.
A municipal dealer gives another dealer a firm quote of par for a block of municipal bonds. The dealer that gave the quote:
A. Must do the trade at par
B. Must give the other dealer ten minutes to accept the quote
C. Has given a nominal quote to the other dealer
D. Has given a subject quote
The dealer that gave the firm quote must do the trade at par.
A client creates an opening sale in a LEAP and closes out the position 15 months later by buying back the option. The tax consequence is a:
A. Short-term gain or loss
B. Long-term gain or loss
C. Passive gain or loss
D. Gain or loss that may not offset other trading positions or ordinary income
A LEAP is a long-term option that can have an expiration of up to 39 months. The client held the position for more than one year, but any gain or loss on a short position is treated as short-term. The IRS does not recognize a holding period on a short sale of a stock or an opening sale of an option. If the client created an opening purchase by buying a LEAP and held the position for 15 months before closing it out, the resulting gain or loss would be long-term.
A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond.
Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for its risk on selling group sales.
A. $2.50 per bond for a total of $50,000
B. $2.50 per bond for a total of $100,000
C. $4.00 per bond for a total of $80,000
D. $4.00 per bond for a total of $160,000
The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for its risk on those bonds ($2.50 per bond on 20,000 bonds).
A registered representative has a dispute with his firm over compensation. This dispute will be resolved by: A. A federal court B. The SEC C. The National Adjudicatory Council D. An arbitration panel
Registered representatives agree to arbitrate any disputes with their employer, with the exception of statutory discrimination and harassment claims.
A municipal bond backed by an insurance company has gone into default. The insurance carrier will provide:
A. Immediate payment of interest and principal
B. Principal payment at maturity only
C. Timely payment of principal and interest
D. Accelerated principal only
Municipal bond insurance guarantees the timely payment of principal and interest. If a municipal bond has 10 years to maturity, the insurance company is obligated to make 20 interest payments as they come due and a lump sum at maturity.
State governments receive the LEAST amount of revenues from: A. Sales taxes B. Gasoline taxes C. Excise taxes D. Property taxes
State governments receive the least amount of revenues from property taxes. States raise money primarily from income taxes, sales taxes, excise taxes, and license fees. Very little is raised from property taxes. Local municipalities raise most of their funds from property taxes (real estate taxes).
An investor purchasing a reverse convertible security would be MOST interested in: A. Preservation of capital B. High current income C. Capital appreciation D. Conservative income
An investor purchasing a reverse convertible security is seeking an above-market coupon rate. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). The investor will not be able to participate if the underlying asset increased. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.
Confirmation statements must contain all of the following, EXCEPT the:
A. Date of the transaction
B. Date on which the order was entered
C. Date of settlement
D. Offer to disclose the name of the opposite party involved in the transaction
Transaction dates, settlement dates, and the offer to disclose the name of the contra-party in the transaction must be included on the confirmation statement. Although the date on which the order was entered is not required to be disclosed on the confirmation statement, it is included on the order ticket.
A 1/2-point dealer's concession in a municipal bond equals: A. .05 on a $1,000 par value bond B. .50 on a $1,000 par value bond C. $5.00 on a $1,000 par value bond D. $50.00 on a $1,000 par value bond
A 1/2-point dealer’s concession is the equivalent of 1/2 of 1% of the par value. This is the dollar equivalent of $5.00 on a $1,000 par value bond.
On Wednesday, March 11, a customer purchases 1,000 shares of an OTC equity security in a cash account through an online brokerage firm. The transaction will settle: A. By the close of business on March 11 B. Immediately C. On March 12 D. On March 13
For corporate securities, regular way settlement is two business days following the trade date. In this question, the settlement occurs on Friday, March 13. The key to this question is understanding that any corporate transactions which are being executed in either cash or margin accounts will settle on a regular way basis (T + 2). However, if a question references a cash trade, a cash transaction, or a trade settling for cash, it has special treatment and will settle on the same day as the trade.
If a customer is short RST call options, what other position would be considered when examining position limits? A. Long RST calls B. Long RST puts C. Short RST puts D. Long ABC puts
If the customer is short RST calls, he anticipates that the market price of RST stock will decline. Since he is bearish on the stock, he could also be long puts on RST. This is considered on the same side of the market.
