UNIT 01.01 004 Flashcards
Three years ago, your client invested $10,000 in the RIF Fund. During this time, the fund has distributed $700 in dividends and $1,100 in capital gains, all of which have been reinvested in additional shares. If the client decides to liquidate his position of 1,173.452 shares when the POP is $12.00 and the NAV is $11.52, the client’s cost base is
$11,800
A mutual fund investor’s cost base is the total of all investments, including reinvested distributions. In this case, the initial $10,000 is increased by the $1,800 total of distributions.
Tocoma Coffee 5% preferred stock trades at $95 a share. What is the current yield?
5.25%
A 5% preferred stock would pay $5 annually. To calculate current yield divide the annual dividend by the current market value. 5 / 95 = 5.25%
Which of the following terms apply to options?
Annual income
Strike price
Premium
Interest rate risk
Strike price
Premium
The premium is the cost of an option contract, expressed in dollars per share of the underlying stock. The strike price is the price at which the stock will be bought or sold if the contract is exercised, also expressed in dollars per share.
Your customer purchased 100 shares of DEF Corporation for $50 a share. The stock pays $2 in dividends annually. After the year the stock is trading at $55 a share. What is the total return for the holding period?
14%
The formula for calculating capital gains is income received plus gains (or minus losses) divided by cost basis equals total return. In this example, (2 + 5) / 50 = 14%.
A company has negative operating revenues for the year. It would not be required to make interest payments on which of its following issues?
A) Mortgage bonds
B) Subordinated convertible debentures
C) Adjustment bonds
D) Collateralized debt
Adjustment bonds
Adjustment bonds are sometimes called income bonds because they only pay interest when the company has sufficient income (as determined by the board of directors).
Which of the following is a characteristic shared by debentures and equipment trust bonds?
Both pay principal as it comes due.
Bonds must pay principal when due. Interest is generally paid semiannually. Debentures are unsecured and have no collateral backing the offering.
Which of the following regarding T-bills is true?
T-bills trade at a discount to par.
T-bills trade at a discount to par, are 52 weeks or less to maturity, and are a direct obligation of the U.S. government. T-bills are also noncallable.
All of the following entities may issue municipal bonds except
A) City of Little Rock, Arkansas.
B) Territory of Puerto Rico.
C) New York/New Jersey Port Authority.
D) Holy Name Cathedral Church, Chicago.
D) Holy Name Cathedral Church, Chicago.
Only U.S. territorial possessions, legally constituted taxing authorities, and public authorities may issue municipal debt securities. Churches may issue bonds, but they are not municipal bonds.
Duration would be considered in evaluating which of the following investments?
A) Equities
B) Variable annuities
C) Growth funds
D) Bonds
D) Bonds
Duration measures the time in years it takes for a bond or other debt instrument to repay its cost through internal cash flows (basically the interest).
All of the following statements regarding Treasury STRIPs are true except
A) the rate of return is locked in.
B) the interest is taxed as a capital gain.
C) there are no semiannual interest payments.
D) the interest is realized at maturity.
B) the interest is taxed as a capital gain.
The interest on the bond is paid at maturity, but it is taxed as interest income over the life of the bond, not as a capital gain.
TRUE
the rate of return is locked in.
there are no semiannual interest payments.
the interest is realized at maturity.
Which of the securities listed below is issued without a stated rate of return?
A) Treasury bond
B) Treasury note
C) Preferred stock
D) Treasury bill
D) Treasury bill
Treasury bills are not issued with a stated coupon rate. Instead, they are sold through auctions at a discount to their par value of $1,000. They mature at their face amount, and the discount represents the interest earned.
An investor’s portfolio includes an ABC 6% bond maturing in 2020 and 100 Shares of XYZ common stock. At market close, if the stock closed at $45.45 compared with yesterday’s $44.95, and the bond moved from 95 to 95½, the portfolio increased in value by
$55.
The gain would be $5 for the bonds (½ point for one bond is $5) and $50 for the stock ($0.50 × 100 shares) for a total of $55.
Your customer purchased 100 shares of Narcissist, Inc., stock at $15 a share. After holding the position for three years they sold the stock for $22 a share. What are the results of the trade?
$700 gain
To calculate a gain or loss subtract the cost basis ($15) from the sales proceeds ($22). 22 – 15 = 7. Remember to multiply the “per share” result by the number of shares if the question does not specify “per share.”
If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, the investor will pay
capital gains rates on capital gains distributions and ordinary income rates on dividends.
Capital gains distributions are taxed as capital gains, with their holding status depending on how long the fund has held the securities, not how long the investor has held the mutual fund shares. Dividend distributions are taxed as ordinary income.
A convertible bond of the KLP Corporation has a conversion ratio of 20. This means that
I. the conversion price of the bond is $20 per share.
II. one bond can be exchanged for 50 shares of KLP common stock.
III. one bond can be exchanged for 20 shares of KLP common stock.
IV. the conversion price of the bond is $50 per share.
one bond can be exchanged for 20 shares of KLP common stock.
the conversion price of the bond is $50 per share.
A conversion ratio of 20 means that one bond can be exchanged for 20 shares of common stock. Because the par value of the bond is $1,000, this corresponds to a conversion price of $50 per share.
