TC

Question 1

Ex-Date

Answer 1

The Ex-Date is the cut-off date, where payment of dividend goes to owners of record.

The Ex-Date determines whether an investor is entitled to receive a dividend. If a buyer buys before the ex-date, they are entitled to the dividend. If the buyer buys on or after, then the seller is entitled. Other dates listed include the issue date, the record date, and the declared date.

Question 2

Current annual dividend yield

Answer 2

Current annual dividend / Current market value

The current annual dividend yield is equal to the current annual dividend ($1.00 x 4 = $4.00) divided by the current market value of the stock ($95.50). Therefore, $4.00 / $95.50 = 4.19%.

An investor buys 100 shares of ABC common stock at $85.50 per share. The stock pays a quarterly dividend of $1.00. If the common stock is currently trading at $95.50 per share, what is the current annual dividend yield?

Question 3

Treasury stock

Answer 3

Does not have voting rights
Does not receive dividends
Appears on the balance sheet as a deduction from issued stock
Treasury stock is not classified as outstanding stock. .

Question 4

Normally a stock will begin trading ex-dividend on the:

Answer 4

T+3 and 2 business days prior to record date)

Regular-way settlement is trade date plus 2 business days. For this reason, ex-date occurs on the business day prior to the record date. (Formerly T+3 and 2 business days prior to record date)

Question 5

Calculate Real Rate of return = Inflation-Adjusted Return

Answer 5

Return - Inflation
The percentage of profit after inflation.

The investor’s return was 3% and inflation was 2%, so the real rate of return, also known as the inflation-adjusted return, would be 1% (3% return - 2% inflation = 1% real rate of return).

Question 6

The Sharpe ratio measures the:

Answer 6

Risk-adjusted rate of return relative to portfolio volatility

The Sharpe Ratio measures whether the returns on a portfolio were due to smart investment decisions or excess risk which means that the risk-adjusted rate of return on the portfolio is relative to the portfolios volatility.

Question 7

A corporation has outstanding $5,000,000 of 9 1/2% 20-year debentures, with a conversion price of $40. If all the debentures were converted, how many shares of common stock would be issued?

Answer 7

Outstanding shares /conversion price

The $5,000,000 is the total par value for the number of bonds we own. So, we could take the $5,000,000 / 40 = $125,000.

Question 8

Treasury Inflation-Protected Securities (TIPs)

Answer 8

Principal is adjusted to CPI semi-annually.

Question 9

“duration” “convexity”

Answer 9

Duration is the present value of future cash flows. changes greater than 1%, “convexity”. Convexity measures the rate of change in duration

i.e. how quickly or slowly the price of the bond changes. The more convex a bond is, the more its duration changes with a change in interest rates. The duration and convexity numbers of bonds change daily.

Question 10

ABC Corporation wants to issue $20,000,000 of debentures each of which would be convertible in 20 shares of common stock. How many common shares are issued if all the debentures are converted?

Answer 10

Issues amount / Par value = Bonds , Shares X Bond = Common Shares

The question states that you get 20 shares of common stock per bond. The next step would be to figure out how many bonds are owned in total: $20,000,000 / $1,000 (par value) = 20,000 bonds. For each bond, you can receive 20 shares of stock and you have 20,000 bonds.: 20 X 20,000 = 400,000 common shares issued.

Question 11

When purchasing fund shares

Answer 11

Offer Price X Share

investors pay the next calculated Offer Price after the order is entered.

$6.08 Offer Price
x 300 Shares
*$1,824
* There is no commission on open end funds, but there may be a sales charge/load.

Question 12

A unit investment trust

Answer 12

1. investment company
2. purchases a fixed portfolio of securities
3. The trust expires when the bonds mature or are redeemed.
4. The portfolio is supervised but not managed.

Question 13

Calculate Net asset value for an open-end investment company’s shares

Answer 13

Total assets - total liabilities/divided by the number of shares outstanding

100-50/200

represents the net asset value for an open-end investment company’s shares.

Question 14

What is a Bid and ask on an open end fund.

Answer 14

BID = NAV = Redemption Price
ASK = NAV + Max Sales Load = Offering Price

Question 15

With the facts listed below, choose the closed-end funds:

Fund A has an ask price of $10.00 and the NAV per share is $9.50.
Fund B has an ask price of $8.50 and the NAV per share is $7.75.
Fund C has an ask price of $7.00 and the NAV per share is $7.50.
Fund D has an ask price of $9.00 and the NAV per share is $9.25.

Answer 15

If Net Asset Value (NAV) is greater than the Ask, the fund has to be Closed-End.

Question 16

Bid & Offer

Answer 16

Bid = Sell
Offer=Buy =Ask

If you want to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, the quote would have been the offer (ask) price.

Question 17

What is Cash flow

Answer 17

Net income plus depreciation expense for that year.

Question 18

Assume a $1,000 par value corporate convertible bond with a conversion price of $25 is currently trading at 80 and its common stock is trading at $23. The common stock is selling at what relationship to the convertible bond?

Answer 18

EXPLANATION
Premium above parity price

Par Value $1000
Conv. Px $ 25 = 40 Common Shares produced at Conversion

Mkt Px of Bond $800
Shares 40 = 20 Parity Price of Common

The common stock would be trading at parity if its market price were 20. Because it is currently trading at 23, it is trading at a premium above parity.

When discussing premium or discount, we are comparing the security to itself. For example, a bond’s market price is $800 and the bond’s par value is $1000. When discussing parity, we are comparing two different securities: a bond’s market price to a stock’s market price. Also, the term “deep value discount” is not a term used in convertible bonds.

Question 19

Beta

Answer 19

Measures systemic risk in the total market
b=1 Average risk investment
b+1 Above average risk investment
b-1 Below average risk investment

Question 20

Alpha

Answer 20

Compare the actual return in excess of the risk free rate of return
Higher + Alpha
Lower - Alpha
Same 0 Alpha

Question 21

Hedging Stocks

Answer 21

Short stock, a long call

Long stock, a long put

Question 22

An investor purchases stock for $25,000. Three years later, the investor sells the stock for $40,000. What is the investors after tax return on investment if the long term capital gains rate is 20%?

Answer 22

To find the answer to this question, we first start by finding Total Return, where we figure the capital gain and any additional gains from dividends or interest. Next, we apply the long-term capital gains rate of 20% to the capital gain found in our Total Return formula to arrive at the tax burden. We subtract this tax burden from the total capital gain, then divide this figure by the original amount invested to arrive at our after-tax return.

$40,000 Sale $15,000 gain $12,000 gain = 48%
-25,000 purchase - 3,000 tax $25,000 cost
$15,000 gain $12,000 after-tax gain
x .20 tax
$3,000 taxes owed

Question 23

A method of evaluating investments that measures all cash inflows and cash outflows is:

Answer 23

Net Present Value (NPV)

is a method used to evaluate investment that measures all inflow and outflows of cash using an established discount rate. An investment is acceptable if the NPV is positive or greater than zero.

Question 24

What is the current ratio formula?

Answer 24

Current Assets / Current Liabilities

Question 25

An investor purchases a 9% bond for $1000. How much would the investor be receiving in semi-annual interest payments?

Answer 25

If an investor purchases a 9% coupon bond, he would be receiving $90 in interest per year (.09 x 1,000 = $90). On a semi-annual basis, it would mean the investor gets two $45 payments a year.

Question 26

When you see R-squared, think of correlation.

Answer 26

R-Squared measures the correlation of the returns of a specific portfolio compared to the return of the market as a whole.

It attempts to explain how much of the return for a given portfolio is related to the movements of the benchmark index.

Question 27

Bond quotes

Answer 27

85. 04 and 95.08 are quotes on Government Bonds.

5. 5% is a Municipal Bond quote, and 78 1/8 is either a quote on a Corporate Bond or a Municipal Bond.

Question 28

The pricing of zero-coupon bonds

Answer 28

takes into consideration the original yield, accreted value, face value, market conditions.

Question 29

Best protects the investor’s long position?

Answer 29

Investors who are long stock would buy puts for downside protection.

Buying a put gives the best protection because you are theoretically protected all the way down to a market price of zero.
Selling a call only gives you protection up to the amount of the premium received; therefore, you only have limited protection. Also, with selling a call, you run the risk of having the stock called away from you if the option is exercised.
Also, one option contract equals 100 hundred shares of the underlying stock. This investor has 1,000 shares so 10 option contracts are required to fully protect the long position.

Question 30

Forms

Answer 30

Form ADV is used to register investment advisers.
Form 10-Q is a quarterly report.
The Form 10-K is an annual report.
The Form 8-K is a report of important interim changes. has to be filed within four business days after the event.

Question 31

A corporate bond called at 108 1/8 would pay the bondholder:

Answer 31

The premium price of 108 1/8 would represent $1,081.25 (108 = $1080 1/8 x $10 = 1.25/$1081.25), and further the investor would be entitled to the accrued interest.

Question 32

ABC’s callable convertible 4% preferred stock ($100 par) is called for $70 per share. It is convertible into common stock at $25 per share. The current market value of the common stock is $15.50 per share. An ABC preferred stockholder should:

Answer 32

If the company calls the stock, the stockholder must tender it, unless the stockholder has already converted it to common stock. If the stockholder tenders the preferred, he will get $70 per share. If the stockholder converts, he will get 4 shares ($100/25=4) of common stock which he can sell for $15.50 per share thus receiving $62 for each preferred share. The $70 call price would give the investor a $8 profit over converting to common.

Question 33

All of the following options and option strategies either perform best or require any exercise to be performed at expiration

Answer 33

In a short straddle, the seller wants to let the options expire unexercised to profit from the premiums. American-Style options can be exercised early, prior to expiration. The Black-Scholes method is an options-trading strategy which uses European-Style options exclusively. European-style options can only be exercised at expiration.

Question 34

A retiree buys an equity indexed annuity from a life insurance company. The annuity contract credits an annual interest rate that is linked to the performance of the S&P 500 index. The contract specifications are as follows: the movement of the index is measured by the annual reset method; participation rate is 80%; the interest rate cap is 5% and the guaranteed minimum interest rate is 3%.The principal and credited interest are protected from loss. If the S&P 500 index increases by 5% using the annual reset method, how much will be credited to the retiree’s account?

Answer 34

Today’s equity indexed annuity products are structured like a fixed annuity with a fluctuating credited interest rate that is linked to the performance of an index. The performance of an index can be measured in three ways depending on the insurance company issuing the contract: annual reset, high water mark and point-to point. In this case, we assume the index has increased by 5%.based on whatever method was used. How much of the 5% increase will be credited to a client’s account depends on the participation rate, any subtracted “fees” and the cap rate. In this case, the participation rate is 80%. Therefore, 4% will be credited to the client’s account (5% x 80%). In this case, there are no ‘fees” to subtract and the interest rate cap (maximum) is 5%. The 4% credited rate is higher than the 3% guaranteed minimum interest rate..

Question 35

Nick is a corn farmer in Kansas. The harvest season is approaching, and Nick is worried that the price of corn will drop over the next few months.  Which of the following would be the best hedge against falling corn prices?

Answer 35

Nick should enter into a short hedge by selling corn futures to be protected against falling prices in corn. Sellers of commodities sell futures to protect against falling prices. 

Question 36

An instruction from a customer to a broker-dealer that is intended to protect a profit or limit a loss on an existing position is called a

Answer 36

A stop order is a memorandum order that becomes a market order if a trade hits the “trigger” price. A market order is an order to buy or sell at the best price available when the order reaches the marketplace. A limit order is an order to buy or sell a security at a specified price or better. A time order indicates how long an order is to remain in effect.

Question 37

An investor bought 100 shares of ABC for $20,000 on January 1. On December 31, the shares are worth $23,000. During the year, the investor received a dividend check for $500. What was the holding period rate of return?

Answer 37

Holding period return is calculated using income plus appreciation during the specific time divided by the cost of the investment. $23,000 CMV - 20,000 cost = 3,000 gain + 500 dividend = 3,500 / 20,000 = .175 or 17.5%

Question 38

An analyst adjusts Net Income with figures for amortization and depreciation. Which of the following is the analyst seeking?

Answer 38

The analyst here is seeking a version of Cash Flow from Operations.
The formula is: Cash Flow from Operations = Net Income + Depreciation + Amortization
Cash Flow from Operations is an analytical tool that is used to give a different perspective on the net income of a company. Adjustments are made to net income including adjustments for depreciation, amortization, inventory, etc. All of this is an attempt to see the cash position of the company and determine whether the company has stable cash flows and adequate cash for operations, versus needing financing, etc.

Question 39

An American Depositary Receipt ADRS

Answer 39

Is a receipt traded in the U. S. representing foreign securities which are held in bearer form by an American bank in foreign country.

Question 40

Futures & Forwards

Answer 40

Futures are standardized contracts and trade on an exchange. Forwards are private party agreements and do not trade on an exchange.

Question 41

The expected rate of return

Answer 41

On a portfolio is the weighted average of the expected annual returns for all of the components of the portfolio.

Question 42

To avoid double taxation, REITs must satisfy four conditions,

Answer 42

One of which is the REIT must have at least 100 shareholders and less than 50% of the outstanding shares can be concentrated in the hands of 5 or fewer shareholders.

Question 43

What amount must Sue invest per person in order to receive the $2,000 per month indefinitely?

Answer 43

Here, Sue will have to invest approximately $800,000 per person to ensure a perpetual or indefinite payment of $2,000.
2000 x 12 /3 = 8000
We can also simply multiply the monthly figure by 12 months to find the annual payout of $24,000. We can then divide this by 0.03 (or 3%) in order to arrive at the same $800,000 figure.

Question 44

Chad has an idea of how he thinks his portfolio will perform over the next 12 months. His current portfolio consists of 50% equities which he expects to appreciate 7%, 30% in bonds which he expects to appreciate 3%, and 20% money market funds which he expects to appreciate 1%. If this information is accurate, Chad would expect to see which of the following?

Answer 44

In order to determine Chad’s return on his portfolio with the appropriate weighting to equities, bonds, and money market funds, we would figure the following :
Equities 50% X .07 = .035
Bonds 30% X .03 = .009
MMF 20% X .01 = .002
.046 = 4.6% return on his portfolio

Question 45

An investor is concerned with the rate of inflation in relation to a portfolio of bonds that the investor holds. The investor’s concern stems from the fact that the bond portfolio has an annual return of 3%, while the rate of inflation has increased to 2%. If the investor adjusts the return for inflation and finds that the return was only 1%, which of the following is TRUE?

Answer 45

The investor’s return was 3% and inflation was 2%, so the real rate of return, also known as the inflation-adjusted return, would be 1% (3% return - 2% inflation = 1% real rate of return).
Taxes would be paid on the actual return of 3%, depending on the type of bonds in the portfolio. Total return, expected return, and IRR are all calculated differently and would be unlikely to be 1% with the information provided.

Question 46

Internal Rate of Return

Answer 46

refers to the fact that the calculation excludes external factors, risk free rate, inflation, the cost of capital, financial risk.

Question 47

Total Rate of Return

Answer 47

Capital Gains + Dividend / Original Coast
50 + 1 /100
Actual rate of return over a given evaluation period.

Question 48

Risk Adjusted Return

Answer 48

Measures the profit your investment has made relative to the amount of risk the investment has represented throughout a given period of time.