Test 5 Flashcards
Which of the following actions by the Federal Reserve Board results in a decrease in the money supply?
The purchase of securities in the open market
The sale of securities in the open market
A decrease in the discount rate
A decrease in the reserve requirements
The sale of securities by the Federal Reserve Board in the open market results in the withdrawal of reserves from the banking system, thereby decreasing the money supply. All the other actions by the FRB result in an increase in the money supply.
One of the major differences between an open-end and closed-end investment company is:
The composition of their portfolios
The types of securities that each may issue
The method of calculating net asset value
A closed-end investment company is exempt from new issue registration requirements
Both open and closed-end investment companies must register when they issue securities. A major difference between open-end and closed-end investment companies is their capitalization (i.e., the types of securities they issue to raise money). Open-end companies, also referred to as mutual funds, may only issue common stock. However, closed-end companies may issue common stock, preferred stock, or bonds
The value of an investor’s interest in a variable annuity during the accumulation period is subject to fluctuation according to the:
AIR Amount of money deposited Performance of the separate account I and II only I and III only II and III only I, II, and III
In a variable annuity, as investors add additional deposits to the separate account, the value of their investment will rise through the purchase of additional accumulation units. If the account performance is positive, the value of each accumulation unit will rise. The AIR is important in valuing a variable annuity only during the annuity (payout) period.
An investor is long 1,000 shares of XYZ at $32 per share and the current market value of XYZ is $38. The investor believes the stock is not likely to fluctuate over the next few months and actually has a long-term bullish outlook. Which of the following positions will allow the investor to increase the portfolio’s yield without increasing the downside risk?
Short 10 XYZ 40 calls
Long 10 XYZ 40 calls
Short 10 XYZ 40 puts
Long 10 XYZ 40 puts
This investor is a perfect candidate to establish a covered call position. Since she owns 1,000 shares of XYZ, 10 XYZ calls could be sold in her account without exposing her to the risk of having to enter the market and purchase stock in the event that the calls are exercised. The total premiums received will reduce the amount she needs in order to recover her initial investment ($32 per share) if she is obligated to sell XYZ shares. Also, since she believes the stock is not likely to fluctuate over the next few months, she is not overly concerned that XYZ will appreciate to a point at which the short calls will be exercised (at the $40 strike). If the investor had purchased either the calls, choice (b), or the puts, choice (d), it would have cost her money. Although selling the puts, choice (c), would generate income it would greatly increase her downside risk.
When raising capital, which TWO of the following securities are required to be registered with the SEC under the Securities Act of 1933?
An REIT that will be listed on the NYSE
Commercial paper with a one-month maturity that is issued by a finance company
A Eurodollar bond that is issued outside of the U.S. by a U.S corporation
An American Depositary Receipt (ADR) that is issued by a British company
I and III
I and IV
II and III
II and IV
Under the Securities Act of 1933, there is no specific registration exemption that is provided to either ADRs or REITs. They both issue shares of common stock and, if the shares are being sold to U.S. public investors, SEC registration is required. On the other hand, corporate debt with a maturity of 270 days or less (e.g., commercial paper) and securities that are initially offered outside of the U.S. (e.g., Eurodollar bonds) are exempt from registration.
Which of the following interest-rate environments makes call protection MOST valuable to a purchaser of bonds?
Increasing interest rates
Stable interest rates
Volatile interest rates
Decreasing interest rates
Call protection would be most valuable to a purchaser of bonds when interest rates decline. If interest rates fall, existing bond prices rise. A municipality or any issuer would likely call bonds when interest rates decline so it can issue new bonds with lower rates of interest. Although bonds may be callable at a small premium above par value, if the bonds are not callable, the investor may realize the full benefit of an increase in the market price of the bonds.
client has a brokerage account with a broker-dealer in New York City. She decides to move to Montana to retire. She still intends to maintain the account with the broker-dealer, which is registered only in New York. Which of the following statements is TRUE?
This is permitted provided the client maintains a P.O. Box in New York
This is permitted since the account was opened in New York prior to the client’s move to Montana
The client can maintain the brokerage account if the firm registers as an investment adviser in Montana
The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana
A broker-dealer must be registered in each state in which it conducts business. In addition, the securities and the registered representative must be registered in all states in which the issue is sold. Registration as an investment adviser is not the same as registration as a broker-dealer.
What adjustments are made to open orders in the event of a reverse stock split?
Orders above the market are increased
Orders above and below the market are increased
All orders are cancelled
Orders below the market are reduced
In the event of a reverse stock split all open orders are cancelled. This FINRA rule is specific to reverse stock splits.
A fundamental analyst, evaluating the common stock of a corporation, will examine all of the following choices, EXCEPT the:
Sales of the corporation
Management of the corporation
Current amount of earnings paid as dividends to shareholders
Current amount of short interest positions for the stock
A fundamental analyst will examine all the factors listed relating to a common stock except the current amount of short interest positions for the stock. Short interest is a statistic examined by a technical analyst. It represents the total amount of shares sold short that will be covered in the future.
A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the bond is sold six years later, what will be its cost basis?
100
101.50
104.50
106
When a bond is purchased at a premium (above par value), the premium must be amortized (reduced) over its life. The premium in this example is six points, which must be amortized over its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity). After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101 1/2 (106 original cost - 4 1/2 points amortized premium).
A client owns 400 shares of stock in a European company. The client receives a cash dividend and tax is withheld by the European country. Which TWO of the following statements are TRUE concerning the U.S. tax implications for the client?
The taxes paid may be used as a credit The dividends are considered a return of capital The taxes paid may be used as a deduction The dividend paid is exempt from taxes I and III I and IV II and III II and IV
U.S. citizens and corporations owning foreign stock may receive dividends from which foreign taxes have been withheld. The investor still owes U.S. income tax on the net dividend. The amount of the foreign tax, however, may be claimed by the investor as a deduction against income, or may be applied as a credit against U.S. income tax.
An investor who expects an increase in volatility in the equity markets will MOST likely adopt which of the following strategies?
Buying VIX call options
Creating a VIX credit call spread
Creating a VIX debit put spread
Buying VIX put options
The VIX is the CBOE’s Volatility Market Index option. It is a broad-based index option and is calculated using the S&P 500 Index option bid and ask quotes. The VIX (volatility index) is often referred to as the fear index since it is a gauge of investors’ fears of volatility. The index increases or decreases based on the expected volatility of the market. If an investor expects volatility to rise, she is bullish on the VIX. A bullish option strategy, such as long calls, put credit spreads (executed for a net credit), or call debit spreads (executed for a net debit) will enable the investor to profit if the VIX increases. Many investors buy VIX call options as a hedge against a possible decline in the market since the VIX usually moves in an inverse direction to the equity market.
The following four bonds have the same maturity. On a pre-tax basis, place them in their order of yield (during most economic times), from the highest to lowest.
Treasury bond Investment-grade corporate bond Investment-grade municipal general obligation bond Investment-grade municipal revenue bond I, II, III, IV II, I, IV, III II, IV, III, I III, I, IV, II
To answer this question, it is important to first recognize that corporate bonds (which have fully taxable yields and generally lower quality) offer the highest yield. This identification eliminates choices (a) and (d) since they do not list corporate bond yields as the highest. Corporate bond yields are followed by the yield on Treasuries (yields taxable at the federal level), and then finally the yield on municipal bonds (yields are federally tax-free). Municipal bonds typically have the lowest yield since they are exempt from federal income tax. When comparing the different types of municipal bonds, general obligation bonds are generally considered safer than revenue bonds and, therefore, carry a lower yield.
A customer will be taking a six-month trip to a foreign country and will not have access to her mail. If the customer provides written instructions and includes a valid reason:
The firm is not permitted to hold a customer’s mail under any conditions
The firm may hold the customer’s mail for the six-month period provided a power of attorney is signed in advance by the customer
The firm may hold the customer’s mail for only three months
The firm may hold the customer’s mail for the six-month period
A broker-dealer may hold mail for a customer who will not be receiving mail at his usual address provided the firm receives written instructions from the customer that include the time-period during which the mail is to be held. If the period exceeds three consecutive months, the customer’s instructions must also include a valid reason for the request.
A customer buys an ABC July 50 call, paying a $3 premium. Seven months later, the customer exercises the call when the market price of ABC stock is $60 per share. The customer immediately sells the stock for $6,000. When computing the profit, the customer will use a cost basis of:
$4,700
$5,000
$5,300
$6,000
$5,300
thats what she pd
