Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
46 Cards in this Set
- Front
- Back
|
Over-the-counter stock price quotes can be found in which of the following?
A. Red herring B. Yellow List C. Pink Sheets D. Black List |
The best answer is C.
Over-the-counter "penny" stock price quotes can be found in the Pink Sheets which are now only on the internet. The Yellow Sheets, now out of business, used to contain corporate bond quotes. A "red herring" is a preliminary prospectus that is used to collect indications of interest for a new securities issue that is in registration. The "Black List" is a generic term for a listing of undesirables. |
|
|
Which of the following stocks would be considered defensive?
A. Automobile manufacturer B. Pharmaceutical manufacturer C. Gold mining company D. Computer software developer |
The best answer is B.
Defensive stocks are unaffected by the business cycle. Pharmaceutical companies are defensive and are not affected by the business cycle; in good times or bad, people must take prescribed drugs. The performance of cyclical stocks follows the business cycle. In times of GDP expansion, they do well; in times of recession, they do poorly. The classic cyclical stocks are home building, automobile manufacturers and durable goods producers. All of these purchases are deferrable in hard times. Gold mining stocks are counter-cyclical. In bad economic times, people "flee to safety" and buy gold stocks. Computer software companies are growth companies. |
|
|
The Standard and Poor's 100 Index option contract is:
I traded on the NYSE II traded on the CBOE III broad based IV narrow based A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C.
The OEX contract (Standard and Poor's 100 Index option contract) is broad based, and is traded on the CBOE. It is one of the most actively traded options contracts in the world today - and is used extensively by institutional portfolio managers for "portfolio insurance" (buy OEX puts) and to generate extra income in flat markets (sell OEX calls). |
|
|
Rule 103 of Regulation M requires that a market maker in a stock that is also a syndicate member in an "add-on" offering of that issue, during the 20-day cooling off period:
I can continue to act as a market maker II must resign as a market maker III can act as a passive market maker IV can act as an active market maker A. I or III B. I or IV C. II or III D. II or IV |
The best answer is C.
Rule 103 of Regulation M covers the situation where a firm in the underwriting group for an add-on securities offering also happens to be a market maker in the stock. The worry of the SEC is that the market maker, during the 20-day cooling off period, would be tempted to aggressively buy the stock to push up the market price. This, in turn, would push up the POP when it is set just prior to the effective date, which would increase the underwriters' spread. To stop this, the SEC requires that either the market maker stop making a market until the effective date; or alternatively, the market maker must act as a "passive" market maker - meaning that it cannot buy the stock at a price higher than the current high bid. |
|
|
Which Collateralized Mortgage Obligation tranche has the MOST certain repayment date?
A. Planned Amortization Class B. Targeted Amortization Class C. Plain Vanilla Tranche D. Zero Tranche |
The best answer is A.
Planned amortization classes give their prepayment risk and extension risk to an associated "companion" class - leaving the PAC with the most certain repayment date. TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. Plain vanilla CMO tranches are subject to both risks, while zero-tranches are like "wild cards" - whatever is left over is what you get! |
|
|
A customer who purchases a "call spread" believes that the market will:
A. rise B. fall C. remain neutral D. be volatile |
The best answer is A.
A purchase of a "call spread" is similar to simply buying a call. The difference is that a long call gives unlimited upside gain potential; a long call spread gives limited upside gain potential (for a lower premium paid). |
|
|
All of the following may trade for their own account on the floor of an options exchange EXCEPT a
: A. market maker B. competitive option trader C. registered option trader D. floor broker |
The best answer is D.
On the Options Exchanges, floor brokers, and order book officials, handle trades as agent only. They accept orders from the public for execution but do not trade for their own account. Market makers on the exchange floor make markets in option contracts and are buying and selling for their own account. Registered options traders and competitive options traders are individuals that trade on the floor for themselves to add liquidity to the market. They can take positions and carry them. |
|
|
Which statements are TRUE about variable annuities?
I Contributions to the separate account are tax deductible II Contributions to the separate account are not tax deductible III Earnings in the separate account build tax-deferred IV Earnings in the separate account are taxable each year A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C.
There is no tax deduction for contributions made to a variable annuity contract. The major advantage is the tax-deferred build-up of earnings in the separate account. |
|
|
A 60-year old man that is living on social security payments inherits $250,000. He seeks an investment that gives growth and income. The BEST recommendation would be to:
A. buy a municipal bond fund B. write covered calls C. buy Treasuries and zero-coupon bonds D. buy stocks and bonds |
The best answer is D.
This customer seeks growth and income. A municipal bond fund gives income, but because this customer is in a low tax bracket, municipals are not suitable. This customer, living on social security, may not be sophisticated enough to sell calls against long stock positions (covered call writing). Furthermore, the sale of covered calls gives income, but is does not give growth. If the stock price appreciates, those shares will be called away. Treasury securities give safety and income; however zero-coupon bonds, while they appreciate based on the discount yield at which they are purchased, do not give "growth." Only equities give growth and bonds give income, so Choice D is the best one offered. This customer should be recommended a portfolio that consists of 60% bonds for income (the customer's age) and 40% stocks. |
|
|
Which of the following economic events would have a positive long term impact on common stock prices?
I Falling interest rates II Falling capital gains tax rates III Rising employment rates IV Rising inflation rates A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV |
The best answer is C.
Falling interest rates are good for stock prices. More investors will switch from low yielding bonds to stock investments. A falling capital gains tax rate also makes stocks attractive to investors. Rising employment indicates that the economy is expanding. This is bullish for corporate profits and hence, stock prices. Rising inflation means that interest rates are likely to rise. This makes long term debt unattractive due to their greater price volatility in response to market interest rate changes and also makes stocks unattractive since corporations are not able to increase prices in line with rising costs, hurting profits. In inflationary times, investors switch from stocks and long term bonds to money market instruments which are paying current high rates of interest; and "hard" assets such as gold and real estate that tend to keep up with inflation. |
|
|
All of the following statements are true regarding stop orders EXCEPT:
A. stop orders can protect a profit on a long stock position B. stop orders can limit a loss on a long stock position C. stop orders allow a specific execution price to be "locked-in" D. stop orders are placed "away" from the current market |
The best answer is C.
Stop orders do not allow a specific execution price. Once the "stop" price is reached, the order is elected and becomes a market order to be filled at the next price - which could be higher, lower, or the same as the stop price. Stop orders can be used to protect a profit on a long stock position (place a sell stop order just below the current market price of the stock). They can be used to limit a loss on a long stock position (place a sell stop order for execution if the market falls to a certain price). Stop orders are placed "away" from the current market - sell stop orders are placed below the current market price while buy stop orders are placed above the current market price. |
|
|
Which statements are TRUE regarding bids placed at the Treasury Auction?
I Non-competitive bids are always filled II Non-competitive bids are not always filled III Individuals may place non-competitive bids IV Individuals may not place non-competitive bids A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A.
At the weekly Treasury auction, non-competitive bids are always filled at the average winning yields of the competitive bids. Only the lowest interest rate competitive bids are filled; the higher rate competitive bids that exceed the amount of securities up for auction that week are rejected. Only primary government dealers place competitive bids; secondary dealers and individuals place non-competitive bids. |
|
|
On the same day, a customer buys 100 shares of ABC at $39 and sells short 100 shares of XYZ at $51. The customer then buys 1 ABC Jan 40 Put @ $4 and 1 XYZ Jan 50 Call @ $5. The breakeven points are:
A. ABC: $35 / XYZ: $46 B. ABC: $35 / XYZ: $55 C. ABC: $43 / XYZ: $46 D. ABC: $44 / XYZ: $55 |
The best answer is C.
The customer paid $4 for the ABC put and $39 for ABC stock, for a total of $43. This is the breakeven on ABC stock. The customer sold XYZ stock short for $51, but paid $5 for the XYZ call, for a net receipt of $46. The customer must buy back XYZ at this price to break even. To summarize, the breakeven formulas for long stock / long put and short stock / long call positions are: |
|
|
Municipal bonds would be an appropriate investment for which of the following?
I Individuals II Individual Retirement Accounts III Bank Holding Companies IV Casualty Companies A. II, III, IV B. I, II, III C. I, II, IV D. I, III, IV |
The best answer is D.
It makes no sense to place "federally tax exempt" municipal bonds into a "tax deferred vehicle" such as an IRA or Keogh account. Since the account is tax deferred, one would place securities earning the highest "before tax" return, such as corporates or governments into the account. |
|
|
A customer buys a listed stock option in a regular way trade and exercises that same day. The Options Clearing Corporation will assign the exercise notice to a writer on:
A. that day B. the next business day C. the 3rd business day after exercise date D. the 5th business day after exercise date |
The best answer is B.
An exercise notice may be placed by a customer immediately upon the purchase of a call or put contract. However, the Options Clearing Corporation will not assign the exercise notice until the purchase of the option settles - and this occurs the next business day for a regular way options trade. Once the assignment occurs, the stock must be delivered to the holder of the call; or the stock must be delivered to the writer of the put; 3 business days after assignment. |
|
|
All of the following long positions are marginable EXCEPT:
A. corporate bonds B. preferred stock C. common stock D. stock options |
The best answer is D.
Long options have an initial deposit requirement of 100% and have no loan value. Common stock, preferred stock, and bonds are all marginable. |
|
|
Approval of new accounts for MSRB member firms can be performed by the:
I Branch Office Manager II Municipal Securities Principal III General Securities Principal IV Financial and Operations Principal A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV |
The best answer is C.
The Municipal Principal (Series #53 license) approves accounts at municipal securities firms. In addition, the MSRB permits the General Principal (Series #24 license) or the Branch Office Manager (Series #9/10 license) to approve new accounts. The Financial and Operations Principal (Series #27 license) is the firm's accountant, and cannot approve the opening of customer accounts. |
|
|
In 2015, a customer buys 5 GE 10% debentures, M '25, at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2017 at 103. If the bonds are called prior to maturity, which statement is TRUE?
A. The yield to call will be higher than the yield to maturity B. The yield to call will be lower than the yield to maturity C. The yield to call will be the same as the yield to maturity D. The yield to call will depend on the current market price of the bond at the time of the call |
The best answer is A.
If the bonds are called prior to maturity, the yield to call will be higher than the yield to maturity since the discount will be earned faster and the bondholder will receive the call premium. Assume that the bonds are called in 2017. Yield to call uses the same formula as YTM computed to the call date. The Yield to Call will be: $100 + $90 ($150 discount + $30 premium/2 years to call) ($850 + $1,030) / 2 =$190 $940= 20.21% |
|
|
A 60 year old customer desires an investment that will provide for retirement income when she reaches age 65. The customer is able to invest $1,000 per month over that time period. Which of the following recommendations is most suitable?
A. The purchase of income bonds B. The purchase of a variable annuity contract C. The purchase of government bonds in an IRA account D. The purchase of high yield bonds |
The best answer is B.
A variable annuity contract places no dollar limit on contributions; and the income earned on investments is tax deferred during the accumulation period. Thus, the customer would be allowed to contribute $12,000 per year; and would receive the benefit of the tax deferred build up. At age 65, she could annuitize and convert the value of the account into an annuity contract that would make payments for her life. This is the best choice offered. Income bonds only pay income if the corporation earns enough, so these are not suitable for retirement income. An IRA account only allows a $5,500 contribution for an individual in 2015, so this does not meet the customer's desire to invest $12,000 per year. Finally high yield bonds are speculative, and are not suitable for retirement income. |
|
|
Four revenue bonds have the same maturity. Which of the following will cost the greatest amount?
A. 5% bond quoted on a 5.25 basis B. 5 1/4% bond quoted on a 5.00 basis C. 5 1/2% bond quoted on a 5.50 basis D. 5 1/4% bond quoted on a 5.50 basis |
The best answer is B.
This choice is the only one where the nominal yield is higher than the basis. To lower the effective yield (basis) on the bond, the price must rise - this is the only premium bond of the four choices given. The other choices are either priced at par; or at a discount. |
|
|
A customer sells short 1,000 shares of ABC stock at $4 in a margin account. The customer must deposit:
A. $2,000 B. $2,500 C. $4,000 D. $5,000 |
The best answer is C.
Under the "cheap stock rule," if a customer wishes to short a stock under $5 a share, he or she must put up the greater of 100% or $2.50 per share. 100% of $4 per share x 1,000 shares = $4,000. $2.50 x 1,000 shares = $2,500. The greater amount is $4,000. |
|
|
An elderly customer that is currently invested in bonds for income is concerned about declining yields due to record low interest rates. He has contacted his registered representative and inquires about purchasing a reverse convertible note on a Blue Chip stock because it offers a higher yield. The customer should be informed about all of the following EXCEPT the:
A. note is not an obligation Blue Chip corporation B. note is subject to the credit risk of the issuing bank C. customer can potentially lose 100% of the principal amount due to a stock price decline D. "knock-in" price of the underlying security gives the customer the right to put the note back to the issuer at par at maturity |
The best answer is D. Reverse convertible notes were created for customers looking for enhanced yield in a low interest rate environment. Of course, any enhanced yield comes with higher risk. The note is linked to the price movements of an underlying stock (or very rarely, an underlying index). At maturity, the holder will receive par value, as long as the price of the reference stock is above the "knock-in" price (typically 70-80% of the initial reference price). On the other hand, if, at maturity, the reference stock falls below the "knock-in" price, then the holder will receive the shares of stock. Thus, if the market price of the reference stock declines below the "knock-in" price, the customer receives the stock at maturity and not par value. |
|
|
Which statements are TRUE about option contracts?
I Long puts go "in the money" when the market price rises above the strike price II Long puts go "in the money" when the market price falls below the strike price III Short puts go "in the money" when the market price rises above the strike price IV Short puts go "in the money" when the market price falls below the strike price A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D.
An "in the money" contract is one, that if exercised, would result in a profitable stock trade to the holder. Puts go "in the money" when the market price falls below the strike price - it makes no difference if the contract is "long" or "short." Being "in the money" is good for the contract holder and bad for the contract writer. The put holder will exercise and sell the stock at a strike price that is higher than the current market. Calls go "in the money" when the market price rises above the strike price. The call holder will exercise and buy stock at the strike price that is lower than the current market price. |
|
|
A customer has opened a NMFBA but is not trading very much and the cost of the account is higher than if the account was based on a per trade commission charge. Which statement is TRUE?
A. The account can be maintained as a NMFBA if the customer places a high value on aligning his interests with those of the broker B. The account can be maintained as a NMFBA if the customer receives a disclosure document that explains how the account fees are charged C. The account must be converted to one that charges a per trade commission D. No action can be taken unless the customer initiates a conversation about the relevant costs and services provided in the account |
The best answer is A.
A NMFBA is a "Non-Managed Fee Based Account." This type of account charges a flat annual fee for all trading, but the annual fee does not include recommendations or asset management. Typically, such an account is only suitable for an active trader. However, a customer that trades infrequently can still be suitable for such an account, if the customer places a high value on aligning his or her interests with those of the broker. (This means that the customer is happy to pay the flat annual fee because he knows that the broker does not have an incentive to churn the account!) |
|
|
A customer places an order to sell 100 shares of DEF at 79.38 Stop Limit. After the order is entered, the tape shows the following trades:
Which statement is correct about the disposition of the customer's order? B. The order will be elected at 79.38 but remains unexecuted C. The order will be elected at 79.38 and executed at 79.25 D. The order remains unelected |
The best answer is B.
This is a sell stop limit order, to be executed if the market drops. The order is to sell 100 shares of DEF at 79.38, Stop Limit. If the market drops to 79.38 or lower, the order is elected, and becomes an order to sell for the limit price of 79.38. Thus, an execution is permitted only at 79.38 or better. The first trade on the tape after the placement of the order is 79.38. This activates the order to sell. The next trade is a 79.25 - this price is not high enough to sell. Remember, the customer will only sell for 79.38 or better. The next trade is at 79.13 - again not high enough. The last trade shows "SLD" - which is used to report stock that has been "sold" but the trade is being reported late (not within the required 10 seconds). This is not a current price. Thus, the order has been elected, but remains unexecuted. |
|
|
A partner in a law firm renders investment advice to a customer as part of an overall estate plan being prepared by that firm. Which statement is TRUE?
A. The lawyer must be registered with the Securities and Exchange Commission (SEC) as an investment adviser B. The lawyer must be registered with FINRA as a representative C. The lawyer must be registered with both the SEC as an investment adviser and with FINRA as a representative D. The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative |
The best answer is D.
Anyone who renders investment advice in the normal course of business for a fee is considered to be an investment adviser. An exemption is granted if a lawyer or other professional renders investment advice that is solely incidental to the regular business of that person. Thus, a lawyer who renders investment advice as part of an overall estate tax plan would be exempt from registration as an adviser. If the lawyer charged separately for giving advice about investing, then the lawyer would be defined as an investment adviser that must register. Registration with the SEC is required as a federal covered adviser if the adviser has $100 million or more of assets under management. If it does not meet the threshold, then it must register in the State and not with the SEC. |
|
|
ABC Corporation has recently completed a $20,000,000 offering of 10% debentures due in 2035. Each bond was sold with a warrant attached that allows the holder to buy 10 shares of ABC common stock at $50 per share. The market price of ABC is currently $42. Which statement(s) are TRUE?
I The warrants help to increase the issue's marketability II The warrants help to lower the interest cost on the issue III The warrants are "under water" IV The company will raise an additional $10,000,000 if the warrants are exercised A. I only B. I and II C. III and IV D. I, II, III, IV |
The best answer is D.
Warrants are "sweeteners" that are attached to bond and preferred stock offerings to make them more marketable. Because the warrants have potential value, the issue can typically be sold at a lower interest cost (higher price) than if the warrants were not attached. At issuance, the warrants are usually issued "out the money" - as in this example the warrants allow the stock to be purchased at $50 but the stock's current value is $42. Thus, these warrants are said to be "under water" and will not have real value until the stock price rises above $50. If the warrants are exercised, the 20,000 debentures issued ($20,000,000/ $1,000 par) can be converted into 10 shares of stock each for a total issuance of 200,000 shares. The company will receive $50 per share, for a total of $10,000,000. |
|
|
A customer places an order to sell 100 shares of ABC at the market. The initial execution report shows the trade occurring at $75.50. The firm later discovers that the trade occurred at $75.13. Which statement is TRUE?
A. The customer will receive $7,550 less any applicable commissions B. The customer will receive $7,513 less any applicable commissions C. The customer can DK the trade D. The customer will receive $7,513 and can submit a claim to arbitration for an additional $37 |
The best answer is B.
The customer placed a market order to sell which was executed at $75.13. The firm erroneously reported the trade as occurring at $75.50. If there is an error in confirmation (as happened in this case), the customer gets the actual trade price. All the firm must do is send a corrected confirmation to the customer. If the firm made an error in execution, any loss due to the firm's error must be absorbed by the firm. |
|
|
Which of the following are types of joint accounts?
I Partnership account II Tenancy in common account III Joint tenants with rights of survivorship account IV Custodian account A. I and IV B. II and III C. I, II, III D. I, II, III, IV |
The best answer is B.
In a joint account, each owner can trade the account and can draw checks in the account's name. The joint account ownership options are Tenants in Common - each person has a divided interest; and Joint Tenancy - each person has an undivided interest. Custodian accounts are not joint accounts - the minor is not authorized to trade the account nor can he or she draw checks from the account. Only the Custodian can perform these actions. Similarly, in a partnership account, only the designated partner(s) authorized in the partnership agreement can trade the account and draw checks - each individual partner is not permitted to do so. |
|
|
A potential customer has visited the registered representative's branch office and is ready to open an account. The representative asks to see the customer's driver's license and the customer says "I will show it to you, but you cannot photocopy it - I am worried about identity theft." Which statement is TRUE?
A. The account cannot be opened unless a photocopy of the driver's license is maintained in the customer's account file B. The account cannot be opened unless the branch manager signs a statement that he or she examined the customer's driver's license information and matched it to the new account form record C. The account cannot be opened unless the firm independently verifies the customer's identity using the driver's license information or another non-documentary method D. The account can be opened with no additional documentary procedures required |
The best answer is C.
There is no requirement to get a photocopy of a government issued I.D. to independently verify the customer's identity. The requirement is that the customer information be matched to either a government issued I.D. or to a database service. Some states actually prohibit the photocopying of driver's licenses and other such I.D.'s to stop identity theft. As long as the representative matches the customer information provided to the government issued I.D., the independent verification requirement is met. |
|
|
A customer owns 100 shares of ABC stock in a margin account, valued at $40 per share. The customer sells 3 ABC Jul 40 Calls @ $4. The stock moves to $60 and the calls are exercised. The customer has a:
A. $400 gain B. $2,800 loss C. $4,000 loss D. $4,800 loss |
The best answer is B.
If the stock moves to $60, all 3 calls will be exercised. Since 1 of the calls is covered, 100 shares of the stock that was bought at $40 will be delivered at $40, for no gain or loss. On the 2 remaining calls, 200 shares must be delivered at $40. Since the market price is $60, there is a 20 point loss times 2 contracts for a total of $4,000 loss. Because 12 points were collected in premiums, the net loss is 28 points or $2,800. This is an extremely difficult question. |
|
|
A delivery versus payment transaction would be used by a(n):
A. retail customer B. institutional customer C. pattern day trading customer D. portfolio margin account customer |
The best answer is B.
Regulation T does not cover "delivery versus payment" transactions. These are specified by mutual funds when they purchase securities. The fund specifies that the securities be delivered to the fund's custodian bank, which is authorized to pay upon delivery. FINRA requires that the funds to pay be on deposit at the custodian bank "promptly" (the same as the wording of Regulation T) and also requires that the transaction be settled no later than 35 days from trade date. |
|
|
This announcement is neither an offer to sell nor a solicitation of an offer to buy any of these Securities. This offer is made only by Prospectus $5,000,000 Toga County Tote That Barge Company10% Convertible Subordinated Debentures due August 1, 2035 Convertible at $10.50 per share Price 100% plus accrued interest Copies of the Prospectus may be obtained in any State in which this security may lawfully be offered Blair and BrownMorrill BunchSheer Brash HashPain GlassDawn WetterSeligmon Bros.E. F. EdwardsBear, SpawnsDilley, Rodd(Refer to the exhibit window to answer the following question) After the initial offering, the bonds are trading in the secondary market at 105, while the stock is trading at $10. Which statements are TRUE? II Each bond can be converted into 105 shares III The common stock is trading above parity to the current market price of the bond IV The common stock is trading below parity to the current market price of the bond A. I and III B. I and IV C. II and III D. II and IV
|
The best answer is B.
Each bond can be converted at $10.50 per share into common stock based on its par value. Therefore, each bond is equivalent to $1,000 par / $10.50 conversion price = 95 shares. The bond is currently trading at $1,050. Based on this price, each share would have to be priced at $1,050 / 95 = $11.05 to be trading at parity. Since the common stock is trading at $10, the stock is below parity and it does not make sense to convert. |
|
|
Delivery of which of the following options communications containing a recommendation must be accompanied or preceded by an Options Disclosure Document? I Options AdvertisingII Options CorrespondenceIII Options Sales Literature A. I onlyB. I and IIC. II and IIID. I, II, III
|
The best answer is D. A customer who receives any options communication that makes a recommendation; shows past performance; or includes a performance projection; must get the latest Options Disclosure Document (ODD) at or prior to the receipt of the material.
|
|
|
LimitCustomer NameSmithAccount Number01487RR Number333Date3/7/XXManager Approval
|
The best answer is B. This trade took place on Tuesday, March 7th. Regular way settlement for corporate bonds is 3 business days, so the trade will settle on Friday, March 10th. Interest accrues up to, but not including the 10th. The number of days is (computed on a 30 day month/360 day year basis): Jan.30daysFeb.30daysMar.9daysTotal69days
|
|
|
Which of the following will NOT affect SMA in a short margin account?
A. A purchase of securities B. A sale of securities C. An increase in market value D. A decrease in market value |
The best answer is C.
Similar to a long account, SMA "locks" in a short account if the market value moves adversely, and in a short account, this occurs when the market value increases. If the market value drops, SMA will increase as equity rises. A purchase of securities adds to SMA; and an additional short sale of securities uses SMA. |
|
|
All of the following are purchase and payout options for variable annuity contracts EXCEPT:
A. Lump sum payment; Deferred annuity B. Periodic payments; Immediate annuity C. Periodic payments; Deferred annuity D. Lump sum payment; Immediate annuity |
The best answer is B.
An investor can buy a variable annuity contract with a lump sum payment. Once the moneys are used to purchase accumulation units, annuitization can occur immediately or can occur years in the future. An investor can also make periodic payments into a variable annuity contract, but cannot annuitize until payments stop. Thus, there is no option of periodic payments with an immediate annuity. The annuity must be deferred until the payments are completed. |
|
|
A customer sells 1 ABC Jan 45 Call @ $7 and sells 1 ABC Jan 45 Put @ $3 on the same day when the market price of ABC stock is $49. Assume that the market price falls to $44 and the call premium falls to $5, while the put premium rises to $7. The customer closes the positions. The gain or loss is:
A. $200 gain B. $200 loss C. $1,000 gain D. $1,200 loss |
The best answer is B. The customer established two positions with a credit of $10 x 1 contract = $1,000 credit. When the market is at $44, the customer closes the call at $5 and closes the put at $7. Thus, the positions are closed at:
Buy1 ABC Jan 45 Call @ $ 5Buy 1 ABC Jan 45 Put @ $ 7 $12debit = $1,200 debit The customer closed for a debit of $1,200. Since the initial credit was $1,000, the customer has a $200 loss. |
|
|
A client, age 67, owns his own home free and clear. The customer has an annual income of $25,000, mainly from social security and interest on funds held in a bank savings account. The customer has never invested and is told by his nephew that the technology company that he works for is coming out with a hot new product that will really increase the company's stock price. The BEST recommendation to be made to this client is to:
A. do nothing B. only invest enough of his savings account in the technology company's stock so that his reduced income still covers his bills as they come due C. take out a mortgage on his fully paid house and use the proceeds to make the investment in the technology company and then pay off the mortgage from the profits on the investment D. liquidate the entire savings account and use the proceeds to make the technology company investment because the customer can still live on this social security |
The best answer is A.
This customer is age 67 and has very little income and no other liquid assets. He cannot afford to lose a bunch of money and he should do nothing! |
|
|
Regulation NMS required market centers to do all of the following EXCEPT:
A. electronically link and make quotes accessible in real time B. provide for automated execution at the best price within 1 second C. execute all short sales on stocks that are declining in price on an up bid D. put procedures in place to prevent trade-throughs |
The best answer is C.
Regulation NMS requires all market centers to electronically link and provide automated execution at the best price of all markets within 1 second for orders that are executable. It mandates that market centers cannot discriminate against customers who access their quotes. It requires that markets have procedures in place to prevent trade-throughs - which is "trading through" another market's better priced quote (the same thing as executing an order at an inferior price in that market). The rules surrounding short sales are covered under Regulation SHO - not Regulation NMS. |
|
|
A hospital revenue bond issue is being underwritten on a negotiated basis. The offering consists of $20,000,000 par value of term bonds. The underwriter has agreed to a spread of $30 for each $5,000 bond. The manager has set the additional takedown at $12.00 per bond and the selling concession at $15.00 per bond. After the offering is completed, the issuer will receive:
A. $19,880,000 B. $19,892,000 C. $19,940,000 D. $20,000,000 |
The best answer is A.
The spread is $30 per $5,000 of bonds, so the issuer receives $4,970. There are $20,000,000/$5,000 = 4,000 bonds in the offering. 4,000 bonds x $4,970 per bond = $19,880,000. Note that the additional takedown and the selling concession are unneeded pieces of information here. These are included within the spread. The spread is the gross compensation to the syndicate ($30 in this example). The total takedown is the amount of the spread that is given to a syndicate member who sells a bond to the public. It is the total of the additional takedown plus the selling concession = $12 + $15 = $27. Thus, the manager retains $3 of the spread as a management fee for each bond sold by the syndicate. If a selling group member finds a customer, out of the total takedown of $27, the syndicate member gives up the $15 selling concession to the selling group member, leaving the syndicate member to earn $12 on that sale (the additional takedown). |
|
|
On the same day in a margin account, a customer sells 1 ABC Jan 60 Put @ $2 and buys 1 ABC Jan 70 Put @ $6 when the market price of ABC is $67. The maximum potential loss is:
A. $400 B. $600 C. $1,000 D. unlimited |
The best answer is A.
The customer has created a long put spread resulting in a $400 debit. If the market rises, both positions expire "out the money" and the debit is lost. If the market falls, the position become profitable. |
|
|
All of the following are types of preferred stock EXCEPT:
A. Performance B. ParticipatingC. Cumulative D. Refundable |
The best answer is D.
There is no such thing as refundable preferred stock. Participating preferred (also known as performance preferred) allows the holder to receive additional dividend distributions from the issuer if the issuer is having a good year. Cumulative preferred "accumulates" any unpaid dividends. Before a common dividend may be paid, all accumulated dividends must be paid to cumulative preferred shareholders. |
|
|
Variable annuities are:
A. exempt securities that are sold without a prospectus B. non-exempt securities that must be sold with a prospectus C. insurance products that are sold without a prospectus D. futures products that are sold without a prospectus |
The best answer is B.
Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus. |
|
|
SPDRs are based on the:
A. Standard and Poor's 100 Index B. Standard and Poor's 500 Index C. Standard and Poor's 1000 Index D. Standard and Poor's 5000 Index |
The best answer is B. SPDR is the acronym for the Standard and Poor's 500 Index Depository Receipt. This is an Exchange Traded Fund traded - an ETF. |
|
|
Trading halts in National Market System stocks will occur if the Standard and Poor's 500 Index drops by all of the following EXCEPT:
A. 5% B. 7% C. 13% D. 20% |
The best answer is A.
Under the circuit breaker rule, if the Standard and Poor's 500 Index moves down by 7% or more from the prior day's closing price, the listed equity markets will be shut down for 15 minutes. After reopening, if the index falls by a total of 13% or more from the prior day's closing price, the markets will close again for 15 minutes. This is intended to allow investors to calmly evaluate market conditions, so that a "domino effect" of panic selling does not occur. Finally, after reopening, if the index falls by a total of 20%, the markets will close until the next day. Also note that any 7% or 13% drop that occurs after 3:25 PM will not close the markets - they will stay open until the 4:00 PM close. This is the case because funds base their NAVs on closing prices, and it was felt that having a lack of pricing to investors would be overly disruptive. On the other hand, any 20% drop at any time will shut the markets until the next day, since such a dramatic price drop is usually caused by a major news event. |
