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125 Cards in this Set

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Which of the following statements is TRUE about treasury stock?
a. It receives dividends.
b. It is treated as a deduction from outstanding shares.
c. It has voting power.
d. It is part of unauthorized stock.
(b)
Treasury stock is issued stock that has been repurchased by the corporation and is retired. It is treated as a deduction from the outstanding shares of a corporation and is no longer part of the capitalization of the corporation. It has no voting rights and does not receive dividends.
Which of the following are typically done during the 20-day cooling-off period?
I. The issuer will blue sky the issue in the states where the underwriter plans to sell the securities
II. A preliminary prospectus is prepared and sent out to prospective investors
III. The SEC reviews the issuers registration statement and evaluates the investment merit of the issue
IV. The issuer and underwriter hold a due diligence meeting
a. I and II only
b. I, II, and III only
c. I, II, and IV only
d. I, II, III, and IV
. (c)
During the 20-day cooling-off period, the SEC will review the issuer'sregistration statement for completeness. The SEC does not evaluate (pass on) the investment merits of the issue. Also, during the cooling-off period, the issuer will blue sky the issue, send out preliminary prospectuses, and hold a due diligence meeting.
Which of the following would be considered nonexempt securities according to the Securities Act of 1933?
a. U.S. government and municipal securities
b. Securities of a publicly held finance company
c. Securities of a small business investment company
d. Securities of a nonprofit organization
. (b)
Nonexempt securities are securities that are subject to the registration requirements of the Securities Act of 1933. Securities of a publicly held finance company are the only nonexempt securities. All of the other securities listed would be exempt from the registration requirements of the Securities Act of 1933.
Which of the following are normally functions of an investment banker?
I. Underwriting new issues
II. Providing financing for industrial corporations
III. Making a secondary market for new issues
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
(a)
A corporation that wishes to raise capital will typically employ the services of an investment banker and engage in an underwritingprocess. Investment bankers provide financing for corporations by bringing an issue, whether debt or equity, to market for the issuer.Investment bankers do not make a secondary market for new issues. However, according to SEC rules, they may be allowed to stabilize a bid price for a limited period of time.
Which of the following statements is/are TRUE regarding the sale of restricted securities under SEC Rule 144?
I. The securities must be fully paid.
II. The sale can be made on an agency or principal basis.
III. A form 144 notice of sale must be filed with the SEC not later than 30 days after the sale.
IV. The securities must be owned for six months.
a. I only
b. I and II only
c. I, II, and III only
d. I, II, and IV only
.(b)
Restricted securities must be fully paid, owned for six months, and can be sold on an agency or principal basis. A 144 notice of sale, which is good for 90 days, must be filed with the SEC prior to, or at the time of, the sale. Control securities have no required holding period.
A client informs a registered representative that he will be purchasing securities today with five shipments of $9,500 in cash, each sent via federal express from either Moscow, Kiev, or St. Petersburg. The registered representative does not see any business purpose or rational explanation for paying for the transactions in this odd manner. The registered representative must contact her supervisor about filing a:
a. Currency Transaction Report (CTR) only
b. Suspicious Activity Report (SAR) only
c. Currency Transactions Report (CTR) and a Currency and Monetary Instrument Transportation Report (CMIR)
d. Currency Transactions Report (CTR), a Currency and Monetary Instrument Transportation Report (CMIR), and a Suspicious Activity Report (SAR)
(d)
The cash deposits exceeding $10,000 would require a Currency Transaction Report (CTR). The overseas nature requires a Currency and Monetary Instrument Transportation Report (CMIR). The suspicious nature of the transactions would call for an Suspicious Activity Report (SAR) since the amount is greater than $5,000.
The Securities Exchange Act of 1934 regulates:
I. Securities trading
II. Stock exchanges
III. Extension of credit for margin purchases
IV. New issues
a. IV only
b. I and II only
c. I, II, and III only
d. I, II, III, and IV
(c)
The Securities Exchange Act of 1934 regulates all of the items listed except the issuance of new securities which is regulated by theSecurities Act of 1933.
A customer owns stock of a corporation that has declared a $1 dividend to holders of record Monday, December 22nd. If the customer wishes to sell the stock but still be entitled to the dividend he should sell the stock on:
I. Wednesday, December 17th, regular-way settlement
II. Thursday, December 18th, regular-way settlement
III. Monday, December 22nd, "cash" settlement
IV. Tuesday, December 23rd, "cash" settlement
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
. (d)
The customer should sell the stock Thursday, December 18th on aregular-way settlement basis or Tuesday, December 23rd on a "cash" settlement basis. The ex-dividend date is Thursday, December 18th. This is two business days preceding the record date of December 22nd. This means that a buyer on the ex-dividend date will not receive the dividend because on this date the stock is selling without thedividend. If the stock is sold on December 23rd on a "cash" contract basis (which requires a same day payment, same day delivery), the seller would be entitled to receive the dividend. The buyer will not receive the dividend because the last day a buyer could receive the dividend on a "cash" contract would be the record day, which is December 22nd.
All of the following are required to be included in a preliminary prospectus according to the Securities Act of 1933, EXCEPT:
a. A written statement in red on the left border of a preliminary prospectus ("red herring") that states that the prospectus may be subject to changes
b. The purpose for which the funds are being raised
c. The final offering price
d. The financial status and history of the company
. (c)
All of the items listed are required in a preliminary prospectus (red herring) except the final offering price. Many preliminary prospectuses do include a proposed offering price range, but it is not required.
An individual wishes to sell restricted securities according to the Rule 144 exemption. There are 6,000,000 shares outstanding. The trading volume for the last 5 weeks prior to the sale is:
April 1 ....... 45,000
April 8 ....... 62,000
April 15 ....... 70,000
April 22 ....... 75,000
April 29 ....... 72,000
If the customer was to sell the securities as of May 6th, how many shares can he sell?
a. 60,000
b. 63,000
c. 69,750
d. 72,000
.(c)
The average weekly volume for the last four weeks prior to the sale equals 69,750 shares (add the weekly volume for the four weeks from 4/8 to 4/29 and divide by 4). One percent of the shares outstanding is 60,000. The individual can sell the greater of these two amounts which is 69,750 shares.
The third market is concerned with:
a. OTC securities only
b. Listed securities only
c. NYSE listed securities traded in the OTC market
d. U.S. government securities traded OTC
. (c)
The "third market" is the term used to describe a situation where a security listed on the NYSE is traded in the OTC market by a non-member of the NYSE.
Place the following brokerage firm operations departments in their correct order for processing a transaction.
I. Margin department
II. Purchase and sales department
III. Cashiering department
IV. Order department (wire room)
a. III, IV, II, I
b. IV, II, I, III
c. IV, II, III, I
d. I, II, IV, III
(b)
The accurate and timely processing of trades takes the collaboration of many operations departments within a brokerage firm:
1. Order Department (Order Room) -- Transmits buy and sell orders to a specific exchange or product area, such asmunicipal bonds or convertible bonds.
2. Purchase and Sales Department -- After an order is completed, the "P&S" department records the transaction and compares the trade details with the broker-dealer (contra-party) on the other side of the trade for the purpose of reconciling any trade discrepancies.
3. Margin Department -- Enforces customer account rules with regard to payment and delivery. This area maintains an account record for each customer and posts all trade activity.
4. Cashiering Department (Cage) -- Where funds and securities are received and disbursed.
A customer is currently short 100 shares of ABC common stock at 57.50 and, for protection, has entered a buy stop order at 60. Round lot trades that took place after these orders were entered were:
58 . 59.50 . 60.10 . 60.50 . 60 . 59.85
The round-lot trade that activated the order was:
a. 58
b. 59.50
c. 60.10
d. 61.50
. (c)
By entering the buy stop order, the client is attempting to limit any loss to around $250 (2 1/2 points on 100 shares). The buy stop is entered above the current market price. The stop will activate on the first round-lot trade which occurs at or through (above, since this is a buy stop) the stop price. That trade occurs at 60.10.
A customer is currently short 100 shares of ABC common stock at 57.50 and, for protection, has entered a buy stop order at 60. Round lot trades that took place after these orders were entered were:
58 . 59.50 . 60.10 . 60.50 . 60 . 59.85
At what price was the trade executed?
a. 58
b. 59.50
c. 60.10
d. 60.50
(d)
Buy stop orders, once activated (triggered), become market orders and are executed on the next available round-lot trade. Here, the trade following the trigger price is 60.50. The result to the customer is a loss of $300.
A customer enters a stop-limit order to sell 100 shares at 18.50. The last round-lot sale that took place before the offer was entered was 18.85. Round-lot sales that took place after the order was entered occurred at 18.25, 18.35, 18.50, and 18.60. The round-lot sale that activated the order was at:
a. 18.25
b. 18.35
c. 18.50
d. 18.60
(a)
In order for a sell-stop order to be activated, a round-lot must sell at or below the stop price. In this example, the stop was at 18.50. The round-lot sale at 18.25, which sold below the stop price of 18.50, was the sale that activated the order.
A customer enters a stop-limit order to sell 100 shares at 18.50. The last round-lot sale that took place before the offer was entered was 18.85. Round-lot sales that took place after the order was entered occurred at 18.25, 18.35, 18.50, and 18.60. The trade was executed at:
a. 18.25
b. 18.35
c. 18.50
d. 18.60
(c)
After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50. The round-lot sale at 18.50 satisfies the limit and is the execution price.
A stock closed at $44 on the NYSE on September 14th. It trades ex-dividend $.50 a share on the opening of trading on September 15th. The specialist will reduce which of the following G.T.C. orders on his book?
I. An open buy limit order
II. An open sell order
III. An open buy stop order
IV. An open sell stop order
a. I and III only
b. II and III only
c. I and IV only
d. II and IV only
. (c)
All GTC orders that are entered below the market (buy-limit orders, sell-stop orders, and sell stop-limit orders) are automatically reduced by the dollar amount of the dividend or right when the stock sells ex- (without the) dividend or right. These orders are reduced unless they are marked DNR (do not reduce) when they are entered. The open buy-limit order and open sell-stop order are entered below the market and will therefore be reduced.
The following appears on the NYSE ticker tape: X 67. 3s .10. This means that:
a. U.S. Steel is quoted at 67 to 67.10
b. Someone is bidding for 100 shares of U.S. Steel at 67 and someone else is offering 300 U.S. Steel at 67.10
c. 100 shares of U.S. Steel traded at 67, followed by a trade of 300 at 67.10
d. U.S. Steel opened at 67 followed by a trade of 300 shares at 67.10
.(c)
The answer is 100 shares of X (the symbol for U.S. Steel) traded at 67, followed by a trade of 300 shares at 67.10. When 100 shares of stock trade, only the symbol of the stock and price are printed. Then the amount is from 200 to 9,900, the last two zeros are omitted and the symbol for the 100 share round-lot is added. For example, it is shown as 2s for 200, 3s for 300, 10s for 1,000, and 99s for 9,900. When the amount traded is 10,000 shares or more, the entire amount is printed (for example, X 10,000s 67, X 11,000s 67, etc).
An order which becomes a market order when it sells at or below (or at or above) a particular price is called a:
a. Market order
b. Limit order
c. Stop order
d. Stop-limit order
. (c)
An order which becomes a market order when it sells at or below (or at or above) a particular price is called a stop order
A brokerage firm erroneously confirms to a customer a purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually made at 28.75. The customer:
a. Must pay 28.25
b. Must pay 28.75
c. Can accept the 28.75 or cancel the order
d. Can cancel the order
(b)
The customer must pay 28.75 which was the actual purchase price, even though the brokerage firm confirmed (erroneously) to the customer that the purchase was made at 28.25.
A specialist can accept all of the following orders, EXCEPT:
a. A not-held order
b. A market order
c. A GTC (open) order
d. A day order
(a)
A specialist can accept all of the orders listed except a "not-held" order, which allows a floor broker to use discretion in executing an order. If the question asked which orders can the specialist accept and place on his "book," the answer would be open (GTC) and day ordersonly. A specialist can accept a market order but must execute it immediately and cannot place it in his book.
Maintaining a fair and orderly market and acting as a broker for other brokers is the function of the:
a. Specialist
b. Odd-lot dealer
c. Floor trader
d. Two-dollar broker
(a)
Maintaining a fair and orderly market, and acting as a broker (agent) when executing orders for other brokers, is the function of thespecialist.
Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend?
I. A GTC order to sell 100 XYZ at $50
II. A GTC order to buy 100 XYZ at $50 stop
III. A GTC order to buy 100 XYZ at $50
IV. A GTC order to sell 100 XYZ at $50 stop
a. I and II
b. II and III
c. II and IV
d. III and IV
(d)
Open or good-until-cancelled orders (GTC) that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked do not reduce (DNR). Orders that are entered below the current market at the time they are entered are buy limit orders, sell-stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit order, buy-stop, and buy stop-limit orders. The GTC buy limit and sell-stop orders are entered below the market, and are reduced on the ex-dividend date.
Buy-stop orders or sell-stop orders can do all of the following, EXCEPT:
a. Provide price protection for a short position
b. Provide price protection for a long position
c. Give a broker discretion when the order is activated
d. Possibly cause a fluctuation in the market price of a stock
.(c)
Buy-stop or sell-stop orders do not give a broker discretion when the order is activated. When activated, the order becomes a market orderand should be executed immediately. All of the other choices are correct.
A customer sells 100 GM short. GM declares a 5% stock dividend. When the customer covers the short sale, the customer will have to deliver:
a. 5 shares of GM
b. 100 shares of GM
c. 105 shares of GM
d. None of the above
(c)
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, GM declared a 5% stock dividend. Therefore, a customer who sold 100 GM short would have to deliver 105 shares (100 shares x 5% = 5 additional shares) when he covers the short sale.
The trade VMO SLD 18 indicates:
a. 100 shares of VMO were sold
b. 100 shares of VMO were sold but were reported out of sequence
c. An exchange distribution in VMO took place
d. 1,800 shares of VMO were sold
(b)
The trade VMO SLD 18 indicates that 100 shares sold at 18 but was reported out of sequence. SLD is the symbol indicating that it is an out of sequence transaction. They are trades that occurred at a prior time, but for some reason were not printed at the time they occurred.
A NYSE-listed stock closed at $72. The next day the stock is ex-dividend 60 cents. To open that morning at a price equal to the close, the stock should open at:
a. 71.40
b. 71.50
c. 71.60
d. 72
a)
The stock will be reduced by $0.60 to account for the dividend. Therefore, if the stock opens at a price equal to the previous close, it should open at 71.40 (72 - .60 = 71.40).
Who cannot trade on the floor of the NYSE?
a. A two dollar broker
b. A specialist
c. An institutional block trader
d. A competitive trader
(c)
An institutional block trader forwards orders to the NYSE trading floor from the brokerage firm's trading desk and is not physically located and trading on the floor of the NYSE. The two dollar broker, specialist, andcompetitive trader all trade on the NYSE floor.
Which TWO of the following statements are TRUE regarding the trading restrictions placed on a director of a publicly traded company?
I. There is a limit on the amount of registered stock the director may purchase.
II. There is no limit on the amount of registered stock the director may purchase.
III. There is a limit on the amount of unregistered stock the director may sell.
IV. There is no limit on the amount of unregistered stock the director may sell.
a. I and III
b. I and IV
c. II and III
d. II and IV
. (c)
Restricted stock is stock that is not registered and is typically acquired by an individual through a private placement. With regard to restricted stock, the purchaser must hold the stock for six months before she may dispose of it. Control stock is registered stock that is acquired by an affiliate (control) person, such as an officer or director, in the secondary market. A control person who acquires stock through an open-market purchase may sell the stock anytime. There is no limit placed on the number of registered shares an insider may purchase. According to Rule 144, there is a restriction on the sale of both restricted and control stock.
Which of the following statements is TRUE concerning Electronic Communication Networks (ECNs)?
a. They can only be used by retail investors.
b. They can only be used by institutional investors.
c. They can be used to obtain automatic execution.
d. They can be used by clients that do not want to use a broker-dealer.
(c)
Electronic communication networks or ECNs are trading systems designed to match buyers with sellers of securities. They can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another, but allow subscribers such as broker-dealers to use these systems to execute the orders sent to them by their clients.
The 5% markup policy applies when a member is acting as a:
a. Banker
b. Sponsor
c. Dealer
d. Underwriter
. (c)
A broker is an agent, acts for someone else and receives a commission when a trade is executed. A dealer is a principal, acts for his own account and adds a markup on a purchase. In both cases, they must conform to the 5% markup policy which is a guide broker-dealers must follow. The 5% markup policy covers all transactions except municipal bonds and those requiring a prospectus (i.e. the sale of a new issue, mutual fund, and registered secondary). If a member was acting as an underwriter, it would be involved in a new issue and if acting as a sponsor it would be involved in the sale of a mutual fund. Since both of these transactions required a prospectus, they would not be covered by the 5% markup policy.
An over-the-counter trader, when talking about the "spread," is referring to:
a. The difference between the bid and asked price of a stock at the current market
b. The difference of his cost price and his selling price
c. The amount of his markup from his cost price
d. The 5% markup which is allowable under the Conduct Rules
. (a)
The over-the-counter trader when referring to the "spread" is referring to the difference between the current bid and asked price of stock.
All of the following should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction, EXCEPT:
a. The costs involved in executing the trade
b. The dollar value of the security
c. The cost price of the securities held in inventory by the dealer
d. The availability of the security
. (c)
All of the choices given should be taken into consideration by an over-the-counter dealer when determining the commission to charge in anagency transaction except the cost price of securities held in inventory by the dealer. The price charged should be based on the current market price, not the cost of the inventory position.
Which of the following can be found on the Nasdaq Level III System?
a. The price of transactions as they occur
b. The cumulative volume of stocks traded as they occur
c. Firm quotes
d. All of the above
(c)
Of the choices given, only firm quotes would be found on the Nasdaq Level III. Nasdaq Level I shows the highest bid and lowest offer. This is known as the inside market. Level II shows firm quotes and the market makers who are making a market in the security. Level III shows firm quotes, the market makers in the securities, and allows the market makers to change their quotations in the system.
Decisions of the Board of Arbitration are:
a. Appealable
b. Not binding if either party contests the decision
c. Binding upon all parties to the arbitration
d. Not binding if both parties agree not to accept the decisions
(c)
Decisions of the Board of Arbitration are binding upon all parties to the arbitration. The parties agree to accept the findings of the arbitration board before submitting to arbitration.
Decisions of the District Business Conduct Committee regarding complaints:
a. Are final if between members
b. Are final if between member firms and their employees
c. Can be appealed to the National Adjudicatory Council.
d. Can be appealed to a Federal District Court
. (c)
Decisions of a Hearing Panel regarding complaints can be appealed to the National Adjudicatory Council. Arbitration decisions are final.
A broker-dealer wishes to give a gift to an account executive of another firm. Industry regulations would consider the gift to be of material value if it exceeded a value of:
a. $50
b. $100
c. $500
d. $1,000
(b)
According to the industry regulations, a gift of more than $100 would be considered substantial or of "material value."
When a market maker gives a quote for a stock without qualification, the quote is a:
a. Subject quote for 100 shares
b. Workout quote for 100 shares
c. Nominal quote for 100 shares
d. Firm quote for 100 shares
. (d)
When a market maker gives a quote for a stock without qualification, the quote is a firm quote for 100 shares. The market maker is obligated to buy or sell 100 shares at his quoted price. Subject, workout, or nominal quotes are given for informational purposes only.
Level I of Nasdaq indicates which of the following?
a. The cumulative trading volume of the security listed
b. The inside market for the security listed
c. The price of transactions as they occur
d. The market makers for the security listed
(b)
Nasdaq Level I provides subscribers with the highest bid and the lowestoffer for a security (the inside market) in which there are at least twomarket makers. Actual market makers are not listed. Level I will neither show cumulative trading volume nor the price of the transactions as they occur. Although nonmembers can also subscribe to Nasdaq Level I, it is typically used by branch offices of member firms.
The Pink Sheets show:
a. The market makers for stocks not listed on the Nasdaq system
b. All trades that occurred the previous day for non-Nasdaq stocks
c. The specialist assigned to each stock that trades of the NYSE
d. All trades that occurred the previous day for NYSE-listed stocks
(a)
The Pink Sheets list market makers and their bid and asked quotations for over-the-counter stocks which are not listed on Nasdaq. These securities are also known as non-Nasdaq stocks.
A customer has $535,000 of securities and $135,000 of cash in his account. If the firm was to go bankrupt, what amount would SIPC cover?
a. $535,000 securities and $135,000 cash
b. $365,000 securities and $135,000 cash
c. $535,000 securities and no cash
d. $400,000 securities and $135,000 cash
(b)
SIPC provides protection to a maximum of $500,000, of which $250,000 may be used for cash. In this example, the customer has exceeded SIPC coverage and would become a general creditor (for the excess) of the firm.
Which of the following statements applies when a registered representative is transacting business for a discretionary account?
I. The account executive must have written power of attorney authorizing him to act for the customer.
II. Each order must be marked discretionary.
III. Orders should not be excessive in size and transactions should not be excessively frequent.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
(d)
When transacting business for a discretionary account, the registered representative must have written power of attorney authorizing him to act for the customer. Each order must be marked discretionary. The registered representative should not enter orders which are excessive in size or frequency (in order to "churn" the account to generate commissions).
Which of the following employees of a broker-dealer must receive permission from his or her employer in order to open a securities account at another firm?
I. A registered representative
II. A principal
III. A secretary
IV. A janitor
a. I and II only
b. III and IV only
c. I, II, and III only
d. I, II, III, and IV
. (d)
Any employee of a broker-dealer must have the permission of his or her employer in order to open an account at another firm
Under the know your customer rule, when a registered representative opens a new account for a customer, the registered representative should determine, among other things, the customer's:
I. Financial condition and needs
II. Objectives
III. Ability to assume risk
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
. (d)
According to the know your customer rule, the registered representative should determine all of the items listed.
A customer gives his registered representative the following instructions: Buy 100 shares of General Motors "whenever you think the price is right." Under current regulations:
a. The order can be accepted
b. The order must be marked discretionary and approved by a branch manager
c. The order must be executed as soon as possible after it is received
d. The order may not be accepted
. (a)
The order can be accepted. It is not a discretionary order which requires written power of attorney. The customer told the registered representative which stock (GM) to buy and the amount (100 shares). The phrase "whenever you think the price is right" means the registered representative can use his judgment as to when the stock should be purchased.
Who approves an over-the-counter stock for purchase on margin?
a. A State Securities Commission
b. The Securities and Exchange Commission
c. The Federal Reserve Board
d. FINRA
. (c)
Under Regulation T the Federal Reserve Board is responsible not only for setting margin requirements but also determining which securities may be sold on margin.
The initial FRB margin requirement is 50%. A customer purchased 100 XRX at $100 per share ($10,000) depositing $5,000 in the account. If Xerox increased in value to $150 per share, how much excess (SMA) would the customer have in the account?
a. $1,000 excess
b. $1,500 excess
c. $2,500 excess
d. $5,000 excess
. (c)
First, determine the amount of the debit balance. If the customer purchased $10,000 worth of stock at a 50% margin requirement and deposited $5,000, the debit balance would have to be $5,000 ($10,000 market value - $5,000 margin requirement = $5,000 debit balance). XRX increased to $150 per share making the market value $15,000. Theequity would increase to $10,000. The excess equity (SMA) is found by subtracting the FRB required equity of the current market value in the account (50% x $15,000 = $7,500) from the actual equity in the account ($10,000). The excess equity is, therefore, $2,500.
The initial FRB margin requirement is 50%. A customer has a margin account with a market value of $20,000 and debit balance of $12,000 and an equity of $8,000. If the customer were to sell $1,000 worth of stock, the amount of the adjusted increase in the SMA would be:
a. $300
b. $400
c. $500
d. $1,000
. (c)
This account is restricted since the equity of $8000 is less than the initial FRB requirement (50% of the long market value in the account) of $10,000. When stock is sold from a restricted account, 100% of the sale proceeds goes to reduce the debit balance. In addition, SMA will be credited by an amount equal to half of the sale proceeds. In this example, the proceeds of $1,000 will be used to pay down the debit balance ($12,000 - $1,000 = $11,000). The market value in the account will decline by $1,000 because of the sale. The equity in the account will remain unchanged. SMA will be credited by $500 (0.5 x $1,000). The client can then withdraw the $500 in SMA.
A customer makes an initial purchase of 100 shares of XYZ on the NYSE at $30 per share. The Federal Reserve margin requirement according to Regulation T is 50%. The customer will have to deposit:
a. $1,500
b. $2,000
c. $2,500
d. $3,000
. (b)
Industry rules require minimum initial equity in a margin account of the lesser of $2,000, or 100% of the purchase price. If the customer already had an account with enough equity in it, the call would be for $1,500 (50% of $3,000). However, the question states that it is an initial purchase and we must assume that this is a new margin account. Therefore, $2,000 must be deposited.
A customer has a long margin account with the following securities in the account (assume a 50% FRB initial margin requirement).
Stock Market Price Market Value Debit Balance
100 A Co. $30 $3,000 $8,400
100 B Co. $25 $2,500
200 C Co. $15 $3,000
100 D Co. $35 $3,500
-----------
$12,000
The minimum maintenance requirement for the above account is:
a. $2,000
b. $2,200
c. $3,000
d. $5,000
. (c)
The minimum maintenance requirement states that the equity must equal at least 25% of the market value of the securities in the account. This would equal $3,000 (25% of $12,000 = $3,000).
A customer has a long margin account with the following securities in the account (assume a 50% FRB initial margin requirement).
Stock Market Price Market Value Debit Balance
100 A Co. $30 $3,000 $8,400
100 B Co. $25 $2,500
200 C Co. $15 $3,000
100 D Co. $35 $3,500
-----------
$12,000
How far could the market value of the securities in the account decline to, before a maintenance call would be sent?
a. $8,000
b. $11,200
c. $11,400
d. $12,500
(b)
To determine how far the securities worth $12,000 in the account could decline to before the customer received a maintenance call, multiply the debit balance of $8,400 by 4/3rds. $8,400 x 4 = $33,600 divided by 3 = $11,200. Another method that can be used is to take 1/3 of the debit balance which would be $2,800, and add it to the debit balance of $8,400. The result would be 4/3rds of the debit balance and would equal $11,200 ($8,400 + $2,800 = $11,200).
A customer has a long margin account with the following securities in the account (assume a 50% FRB initial margin requirement).
Stock Market Price Market Value Debit Balance
100 A Co. $30 $3,000 $8,400
100 B Co. $25 $2,500
200 C Co. $15 $3,000
100 D Co. $35 $3,500
-----------
$12,000
How much cash would the customer have to deposit in the account for the account to be nonrestricted?
a. $2,400
b. $4,200
c. $4,800
d. $5,200
. (a)
An account is considered restricted when the equity is less than the initial FRB margin requirement (50% of the current market value in the account). The market value of the account is $12,000 and the initial FRB requirement is $6,000 (50% of $12,000). The actual equity in the account is $3,600 ($12,000 market value minus $8,400 debit balance). To be nonrestricted, the customer would have to deposit $2,400, which is the difference between the initial FRB requirement of $6,000 and the actual equity of $3,600
A customer has the following accounts with a brokerage firm:
Cash Account $20,000 securities (market value)
$10,000 cash

Long Margin Account $60,000 securities (market value)
$30,000 debit balance
$10,000 SMA

Short Margin Account $40,000 securities (market value)
$60,000 credit balance
The Federal Reserve Board margin requirement is 50%. The total equity in all the accounts is:
a. $50,000
b. $60,000
c. $70,000
d. $80,000
(d)
The equity in the cash account would equal $20,000 market value of the securities plus $10,000 in cash, for a total of $30,000. The equity in the long margin account is the market value of the securities ($60,000) minus the debit balance ($30,000). This equals $30,000. The $10,000 SMA is not taken into account when computing equity. Equity in a short margin account is computed by subtracting the current market value of the securities ($40,000) from the credit balance ($60,000). This equals $20,000. Adding the equity in all of the accounts, the total equity is equal to $80,000 ($30,000 equity in the cash account + $30,000 equity in the long margin account + $20,000 equity in the short margin account = $80,000).
A customer has the following accounts with a brokerage firm:
Cash Account $20,000 securities (market value)
$10,000 cash

Long Margin Account $60,000 securities (market value)
$30,000 debit balance
$10,000 SMA

Short Margin Account $40,000 securities (market value)
$60,000 credit balance
The total amount of cash that can be withdrawn from all the accounts is:
a. $6,000
b. $15,000
c. $20,000
d. $40,000
(c)
The $10,000 in cash can be withdrawn from the cash account. The $10,000 SMA in the long margin account may also be withdrawn for a total of $20,000. The short margin account does not have any SMA. Therefore, in this example, nothing can be withdrawn from that account.
If a customer wants to purchase securities in an account that has been frozen, when must he deposit the required cash in the account?
a. On the same day of the purchase
b. No later than 3 business days after the purchase
c. No later than 5 business days after the purchase
d. Before the purchase transaction is made
(d)
A frozen account requires the full amount of money to be deposited in the account before the order is accepted in a cash account. If the client wanted to sell securities in a frozen account, the securities have to be in the account before the sale is made.
A vote of the common shareholders is required for a corporation to declare a:
a. Cash dividend
b. Stock dividend
c. Stock split
d. All of the above
(c)
A vote of the common shareholders is required for a corporation to declare a stock split. Shareholder approval is not required for cash andstock dividends which are decided by the Board of Directors.
Which of the following would be considered owners of a corporation?
I. Debenture holders
II. Mortgage bondholders
III. Common stockholders
IV. Preferred stockholders
a. I and II only
b. I and IV only
c. III and IV only
d. II, III, and IV only
(c)
Stockholders, both common and preferred, are owners of the corporation. Bondholders are creditors of a corporation; they have loaned the corporation money and have received bonds as evidence of the corporation's debt to them.
ABC Corporation has issued a new cumulative, convertible preferred stock. The provisions of the new issue provide that:
I. Dividends must be paid on the preferred stock before any dividends can be paid on the common stock
II. Omitted dividends will accumulate and must be paid before any dividends can be paid on the common stock
III. ABC Corporation can call the stock at its par value before the call protection period has expired
IV. The stock can be converted into common stock at any time by the preferred stockholder
a. I only
b. I and II only
c. I, II, and IV only
d. I, III, and IV only
. (c)
All of the choices are correct except (III). Preferred stock that is convertible usually has a call feature, but the preferred stock cannot be called until the call protection has expired.
ABC Corporation announces a 5-for-4 split. After the split the market price of ABC Corporation will be reduced by:
a. 15%
b. 20%
c. 25%
d. 50%
(b)
To find the market price of the stock after the split, multiply the original market price by the reciprocal of the split. In this example the reciprocal of a 5-for-4 split is 4/5ths. The stock will now sell at 4/5ths its original value. Therefore, it is selling for 1/5th less than its original value, which is a decrease of 20%.
As far as rights offerings are concerned:
a. Common shareholders do not have the right to subscribe to rights offerings
b. Preferred shareholders do not have the right to subscribe to rights offerings
c. Both of the above are correct
d. None of the above are correct
. (b)
As far as rights offerings are concerned, preferred stockholders do not have the right to subscribe to rights offerings, but common stockholders do.
The transfer agent is responsible for which TWO of the following?
I. Forcing the issuer to file for bankruptcy in the event of bond default
II. Making sure that the number of outstanding shares never exceeds the number of authorized shares
III. Issuing new certificates
IV. Cancelling old certificates
a. I and II
b. I and III
c. II and IV
d. III and IV
(d)
The primary duties of the transfer agent are canceling old securitiescertificates and issuing new ones. The transfer agent may also maintain a record of current stockholders and the number of shares each stockholder owns, although, in some cases, these may be functions of the registrar. Choice I is a task performed by a trustee, and choice II is a job unique to the registrar.
A corporation has a 7% cumulative preferred stock issue outstanding. The company paid a $5 dividend in 1994, $6 in 1995, and $7 in 1996. If the company wants to pay a common stock dividend in 1997, the cumulative preferred stockholders must first receive a dividend of:
a. 0
b. $5
c. $7
d. $10
. (d)
The cumulative preferred stockholder should receive a yearly dividend of 7%. Since it is a cumulative issue, any dividend that is not paid must be made up prior to a common dividend being paid. If a common dividend is to be paid in 1997, the cumulative preferred stockholders must first receive $10 ($7 for 1997 plus $2 for 1994 plus $1 for 1995).
Which of the following would not be considered a defensive stock?
a. Construction company
b. Tobacco company
c. Food distributor
d. Clothing manufacturer
(a)
A defensive stock is the stock of a company that is not drastically effected by a downturn in the economy. Those companies involved in the necessary areas of life are considered defensive. In addition to the choices given; tobacco, food, and clothing, soft drink and candy companies are examples of defensive stock. Construction, mining, steel, and heavy equipment manufacturing companies are dramatically effected by an economic downturn.
The purpose of cumulative voting is to:
a. Give large stockholders greater voting power
b. Keep the existing management in office in the event of a proxy fight
c. Give the small stockholders the chance to gain representation on the Board of Directors
d. Give the small stockholder an opportunity to gain control of the corporation
. (c)
Cumulative voting allows a shareholder a total number of votes equal to the number of shares owned times the number of directors to be elected. The shareholder can cast the total number of votes in any manner he chooses, such as all for one director or split between two directors. This method of voting allows small stockholders to cast all their votes for one director and thereby gain representation on the Board of Directors.
Who of the following investors are considered equity owners of a corporation?
I. Holders of common stock
II. Holders of preferred stock
III. Holders of warrants
IV. Holders of rights
a. I and II only
b. I and IV only
c. I, II, and IV only
d. I, II, III, and IV
a)
Common and preferred shareholders are considered equity owners of a corporation. Rights and warrants are securities which represent an option to buy the underlying stock. Therefore, holders of these securities are not considered equity owners.
Concerning Moody's ratings, which is the most speculative in the investment grade category?
a. Aa
b. A
c. Baa
d. Ba
. (c)
The top four ratings in both Moody's and S&P are referred to as "investment grade" or "bank quality." The top 4 ratings are:
Moody's S&P
Aaa AAA
Aa AA
A A
Baa BBB
If the question had simply asked for the most speculative, then Ba would have been the answer.
A term bond has a mandatory sinking fund call feature. What method will be used to determine which specific bonds will be called?
a. Investors with the largest position
b. Investors with the largest coupon
c. Investors with the longest maturity
d. Random lot
(d)
Random selection is the method used to call bonds.
A customer purchases ten 7% $1,000 par value bonds selling at a discount that have a yield-to-maturity of 9%. The customer will receive a semiannual interest payment of:
a. $350
b. $450
c. $700
d. $900
. (a)
The customer will receive a semiannual interest payment of $350. The bond pays 7% interest based on the $1,000 par value. There are 10 bonds in this example which would have a par value of $10,000. Seven percent of $10,000 would be $700. Since interest is paid semiannually, the payment would equal $350.
When comparing long-term bonds to short-term bonds, all of the following are TRUE, EXCEPT:
a. They usually have higher yields than short-term bonds
b. They usually provide greater liquidity than short-term bonds
c. They are usually callable more often than short-term bonds
d. Their market prices are more sensitive to interest rate changes than short-term bonds
(b)
All of the statements listed about long-term bonds as compared to short-term bonds are true except they usually provide greater liquiditythan short-term bonds
The proceeds of the sale of a municipal bond issue are invested in U.S. Government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called:
a. Covered bonds
b. Safe bonds
c. Guaranteed bonds
d. Pre-refunded bonds
(d)
The outstanding bonds are called pre-refunded or advance refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow at lower rates and therefore save interest costs.
If an investor is primarily seeking capital gains, when would be the best time to buy bonds?
a. When interest rates are high and are expected to drop
b. When interest rates are low and are expected to rise
c. When interest rates are stable and are expected to remain stable
d. When bond prices are low and interest rates are expected to rise
. (a)
If an investor is primarily seeking capital gains, the best time to buy bonds would be when interest rates are high and expected to drop. Interest rates and bond prices have an inverse or opposite relationship. If interest rates decline, bond prices will go up to bring yields in line with the new lower coupon rates
A new convertible bond has a provision that it cannot be called for five years after the issue date. This call protection would be most valuable to a recent purchaser of the bond if:
a. Interest rates are falling
b. Interest rates are rising
c. Interest rates are stable
d. The yield curve slopes downward
(a)
The call protection would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, bond prices rise. Corporations will call back bonds when interest rates decline and issuenew bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.
The purpose of a sinking fund is for redeeming a corporations:
a. Common stock
b. Warrants
c. Rights
d. Bonds
. (d)
A sinking fund is setting aside monies to be used for the purpose of redeeming a corporation's bonds before or at maturity.
A corporate bond that has no specific collateral backing it and is guaranteed by the full faith and credit of the issuing corporation is called a(n):
a. Debenture
b. Guaranteed bond
c. Income bond
d. Equipment trust certificate
. (a)
A corporate bond that has no specific collateral backing it and is guaranteed by the full faith and credit of the issuing corporation is called a debenture. A strong, financially sound, well regarded company is able to borrow money backed by its full faith and credit and its reputation and does not have to provide collateral as a guarantee.
The Barge Towing Corporation has announced in a tombstone ad that it will issue $5,000,000 of 10% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2020 and are being issued at their $1,000 par value. Which of the following statements is CORRECT?
a. The bonds are being issued at a premium.
b. The bonds are being issued at a discount.
c. The bonds can be redeemed by holders before November 2020.
d. If the company should go bankrupt, the subordinated debenture holders would be paid after all other bondholders and general creditors but before common stockholders.
.(d)
The bonds are subordinated debenture bonds and are issued at theirpar value. Of the choices given, the correct answer is if the company should go bankrupt, the subordinated debenture holders would be paid after all other bondholders and general creditors but before common stockholders.
The Barge Towing Corporation has announced in a tombstone ad that it will issue $5,000,000 of 10% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2020 and are being issued at their $1,000 par value. The conversion ratio of the bonds is approximately:
a. 75 to 1
b. 85 to 1
c. 95 to 1
d. 100 to 1
(c)
The conversion price is given as $10.50. To find the conversion ratio, divide the par value ($1,000) of the bond by the conversion price of $10.50. This equals a conversion ratio of 95 to 1 ($1,000 divided by $10.50 equals 95).
The Barge Towing Corporation has announced in a tombstone ad that it will issue $5,000,000 of 10% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2020 and are being issued at their $1,000 par value. If the bonds were subsequently trading in the market at 102 ($1,020), the market price of the common stock, to be on parity with the bond, would have to be approximately:
a. 9.50
b. 10
c. 10.75
d. 11.50
. (c)
To find parity (equality in dollar value) for the stock, divide the market price of the bond by the conversion ratio. The market price of the bond is 102 ($1,020) and the conversion ratio is 95 to 1. Therefore, $1,020 divided by 95 would equal approximately $10.75. This would be the parity price for the stock.
A bond secured by other bonds and securities is called a:
a. Secured bond
b. Guaranteed bond
c. Covered bond
d. Collateral trust certificate
(d)
A bond secured by other bonds and securities is called a collateral trust certificate.
A convertible bond selling at $1,200 is convertible into 50 shares of common stock. For the stock to be on parity with the bond, it would have to be selling at:
a. $24
b. $25
c. $40
d. $45
(a)
To find the price that the stock would have to be selling at to be onparity with the bond, divide the $1,200 market price of the bond by theconversion ratio of 50. This equals a parity price of $24 for the stock.
An XYZ Corporation convertible bond is selling in the market at $1,248. It is convertible at $30. XYZ common stocks market price is 37.50. The bond has been called at 103. Which of the following is the least attractive alternative for a holder of the bond?
a. Sell the bond
b. Convert to common and sell the common
c. Allow the bond to be called
d. Convert common stock to a bond
(c)
The holder could sell the bond and receive $1,248. If he converted, he would receive 33 1/3 shares ($1,000 par dividend by $30 per share conversion feature) with a total value of $1,249.88 (33 1/3 times $37.50). The least attractive alternative is to allow the bond to be called and receive $1,030.
A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity he will receive:
a. $42,500
b. $50,000
c. $55,000
d. $85,000
. (b)
At maturity, the holder of the bonds will receive the par value, which in this example is $50,000.
All of the following are guaranteed by the U.S. government, EXCEPT:
a. Treasury notes
b. Treasury bills
c. Government National Mortgage Association (Ginnie Mae) certificates
d. Federal National Mortgage Association (Fannie Mae) bonds
. (d)
Of the choices given, the only obligations that are not guaranteed by the U.S. government are FNMA (Fannie Mae) bonds. FNMA is a publicly owned corporation that purchases government-backed, as well as nongovernment-backed mortgages, from lenders and resells them to the public.
Which of the following money market securities assists in financing importing and exporting operations?
a. Bankers' acceptances
b. Treasury bills
c. Eurodollar CDs
d. Revenue anticipation notes
. (a)
Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt) which facilitates the trading of foreign securities in U.S. markets. A Eurodollarcertificate of deposit pays interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and are not used to finance importing and exporting operations.
An investor buys $10,000 par value of 8% Treasury bonds due July 1, 2014. For tax purposes, the interest earned on these bonds is:
I. Subject to federal income tax
II. Exempt from federal income tax
III. Subject to state income tax
IV. Exempt from state income tax
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
(b)
Interest on U.S. government bonds is subject to federal income tax but exempt from state income tax. This is just the opposite of the tax treatment on municipal (state) bonds where the interest is exempt from federal tax, but may be subject to state tax.
A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is:
a. $950.87
b. $952.80
c. $958.75
d. $9,528.00
. (c)
U.S. government bonds are quoted in 32nds. 95.28 would be equivalent to 95 28/32nds, which is 95 7/8. This is equivalent to 95.875 percent of the par value of $1,000, which is $958.75.
A Treasury bond has increased in value from 98.4 to 98.8. The bond has increased by:
a. $.40 per $1,000 par value
b. $.50 per $1,000 par value
c. $1.25 per $1,000 par value
d. $5.00 per $1,000 par value
. (c)
Treasury bonds are quoted in 32nds of a point, which are then calculated as a percentage of the par value ($1,000). The difference between 98.4 and 98.8 is 4/32. One point equals $10, therefore 4/32 or 1/8 of a point equals $1.25
An investor purchased T-bonds that mature January 1, 2012. He purchased the T-bonds on Friday, February 20 for regular way settlement. How many days of accrued interest did the investor owe?
a. 51
b. 53
c. 55
d. 56
(b)
Accrued interest is calculated from the last interest payment date up to but not including settlement date. The last interest payment was made January 1st (since maturity is January 1, 2012, interest payments are every January 1st and July 1st). The settlement date is Monday, February 23rd (a transaction for government securities settles on the next business day). Government securities accrue interest on actual days elapsed. The investor would therefore owe 31 days for January and 22 days for February (not including settlement date) for a total of 53 days.
An investor's goal is to buy a security that establishes a fixed return, for a long period of time, with no reinvestment risk. Which of the following best suits the investor's needs?
a. Treasury bills
b. Common stock
c. AAA corporate bonds
d. Treasury STRIPS
(d)
The typical yield-to-maturity calculation assumes that each interest payment is reinvested at the same yield. There would be no guarantee that the investor could reinvest at the same yield (reinvestment risk).Treasury STRIPS are zero-coupon bonds (long-term). Interest is automatically reinvested and compounded at the same yield and reinvestment risk is avoided.
All of the following are true regarding commercial paper, EXCEPT:
a. It is issued by a corporation for cash flow purposes
b. It is not backed by any of the corporation's specific assets
c. It is considered an exempt security if it matures in more than 270 days
d. It may be sold to the public by a broker-dealer or the issuer
. (c)
Commercial paper is unsecured corporate debt with a maximum maturity of 270 days. Commercial paper is usually marketed through certain dealers but some corporations directly market their paper. Some issues are interest bearing (have a stated interest rate) but most are discount instruments. Corporations issue commercial paper to satisfy a short-term need for cash.
If a municipal bond has a basis of 5.25 (5 1/4%) and the rate of interest on its face (nominal yield) is 4 3/4%, the bond is selling:
a. Above par
b. Below par
c. At par
d. Cannot be determined from the information given
(b)
Municipal bonds are quoted on a yield to maturity basis, which in this example is a 5.25 basis. This means the bond has a yield-to-maturity of 5 1/4%. If the nominal yield (coupon rate) is 4 3/4%, this would mean that the bond would have to be selling at a discount, or below the par value ($1,000). If the yield to maturity is greater than the nominal yield (4 3/4%), the bond sells at a discount.
Accrued interest for municipal bonds is computed on:
a. A 30-day month and a 360-day year
b. A 30-day month and a 365-day year
c. Actual days elapsed and a 360-day year
d. Actual days elapsed and a 365-day year
a)
Accrued interest for municipal bonds is computed in the same manner as corporate bonds which is based on a 30-day month and a 360-day year. Accrued interest for U.S. government bonds is figured on a 365-day year counting actual days elapsed. Accrued interest on ALL bonds is calculated from the last interest payment up to, but not includingsettlement date.
A legal opinion issued by a municipal bond attorney will state all of the following, EXCEPT:
a. Interest is exempt from federal income taxes
b. Information about maturities, coupon rates, and call features if the bond is callable
c. A statement that the bond constitutes a legal and binding debt of the issuing municipality
d. A guarantee by the bond attorney that the interest will be paid when due
(d)
A legal opinion will state all of the items listed except a guarantee by the bond attorney that the interest will be paid when due
What is the 20-Bond Buyer Index?
a. The yield of selected revenue bonds with 30-year maturities
b. The yield of selected general obligation bonds with 20-year maturities
c. The dollar amount of competitive bonds brought to market versus the dollar amount of what sold during the week
d. The total dollar volume of bonds expected to reach the market over the next 30 days
(b)
The 20-Bond Buyer Index is the estimation of the yield on 20 selected municipal bonds with 20-year maturities. Choice (a) is the 25-Revenue Bond Index. Choice (c) is the Placement Ratio. Choice (d) is the 30-Day Visible Supply.
All of the following are true about revenue bonds, EXCEPT:
a. Interest is paid from the earnings of the facility for which the bond was issued
b. Interest is exempt from federal taxes
c. Revenue bonds are considered riskier than general obligation bonds
d. The state public utility commission must approve each interest payment
(d)
All of the facts mentioned regarding revenue bonds are true except the state public utility commission must approve each interest payment. State public utility commissions set utility rates within the state but does not apply to municipal revenue issues.
The interest paid on special assessment bonds is derived from:
a. Ad Valorem taxes
b. Toll road revenues
c. Charges on the benefited property
d. Excise taxes
(c)
The interest paid by the issuer to holders of special assessment bondsare derived from charges made to the users of the benefited property. These bonds are issued to finance the construction of water and sewer systems, sidewalks, and streets.
When considering the credit strength of a municipal issuer, one should include in the analysis:
I. The condition of the local economy
II. The current financial status of the municipality
III. Money supply figures
IV. The general capability of the fiscal officers of the municipality
a. I and II only
b. I, II and III only
c. I, II and IV only
d. I, II, III and IV
(c)
The state of the local economy is an important factor in determining a municipality's worthless. For example, communities at different stages of growth may require more of less debt and this must be understood in the analysis. The current financial status is also important to determine the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures which are published by the Federal Reserve Board are irrelevant with regard to the credit strength of a municipality
A new municipal underwriting is shown as 1/4 additional takedown and 1/8 concession (1/4 + 1/8). What is the discount to the member?
a. $1.25
b. $2.50
c. $3.75
d. $5.00
.(c)
In a new municipal securities offering, a member of the syndicate will receive a discount, from the public offering price, equal to the totaltakedown. The total takedown is broken into two parts, the additional takedown and the concession. The additional takedown will be shown first (1/4) and the concession second (1/8). A member is entitled to both and would therefore receive a discount of 3/8 point ($3.75 per $1,000). A non-member of the syndicate would buy bonds less theconcession ($1.25 per $1,000).
A double-barrelled security is a municipal security that:
a. Is exempt from federal and state taxes
b. Is exempt from state and local taxes
c. Can be paid from the revenues of a project and is a general obligation of the U.S. government
d. Can be paid from the revenues of a project and is a general obligation of a municipal government
(d)
A double-barrelled security is a municipal security that can be paid from the revenues of a project and is also a general obligation of a municipal government.
All of the following may be used to pay the debt service on general obligation bonds, EXCEPT:
a. Tolls collected at a tunnel located in the municipality
b. Property taxes
c. Licensing fees and traffic fines
d. Income taxes
. (a)
A general obligation (GO) bond is backed by the full faith and credit of the municipality. Items that may be used to pay the debt service on GO bonds include fines, sales taxes, property taxes, income taxes, and licensing fees. Items such as tolls, concessions, and lease rental payments would be used to back a revenue bond.
A municipality borrowing for a short-term period to finance a capital project would issue:
a. Commercial paper
b. Tax anticipation notes
c. Debentures
d. Bond anticipation notes
. (d)
A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.
When a municipal bond is to be advance refunded (pre-refunded), an escrow account is set up to insure the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are:
a. Revenue bonds
b. General obligation bonds
c. Federal agency bonds
d. Treasury bonds
(d)
Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded
The conditions of an Eastern account provide that syndicate members:
a. Have no liability if they have sold their allotted commitment
b. Have a liability in proportion to their participation even though they have sold their allotted commitment
c. Have the same percentage liability as all other members of the syndicate
d. Belong to the New York Stock Exchange
(b)
The conditions of an Eastern account provide that syndicate members have a liability in proportion to their participation although they have sold their allotted commitment.
A Water & Sewer revenue project has $15,000,000 in total revenues. The operating and maintenance expenses are $9,000,000, bond interest is $2,000,000, and principal repayment is $1,000,000. How much is available for debt service?
a. $3,000,000
b. $6,000,000
c. $9,000,000
d. $15,000,000
. (b)
Revenue issues are referred to as being net revenue issues since expenses are deducted from income prior to paying debt service. (The one exception to this are hospital revenue issues which are gross revenue issues). The amount available to pay debt service (interest andprincipal due) is $6,000,000 ($15,000,000 gross income minus $9,000,000 operating and maintenance expenses).
All of the following statements about municipal revenue bonds are TRUE, EXCEPT:
a. There is no debt limitation set by the issuing municipality
b. The maturity of the revenue bond usually coincides with the useful life of the facility being built
c. They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities
d. The interest and principal are paid from the revenue received from the facility
(b)
Municipal revenue bonds. do not have maturity schedules that coincide with the usefulness of the facility being built. They mature prior to the useful life of the facility. Municipal revenue bonds do not have debt limitations as do general obligation bonds. A debt limitation is the statutory or constitutional maximum debt that an issuer can legally incur. Revenue bonds can be issued by states, political subdivisions (such as counties or townships), interstate authorities and intrastate authorities. The interest and principal are paid from the revenue received from the facility.
When a manager of a municipal underwriting syndicate determines the priority of orders to be allocated, the orders would include all of the following, EXCEPT:
a. Group net
b. Designated
c. Member
d. Opening purchase
. (d)
An opening purchase is an order to establish an option position and is not related to municipals. The priority of orders in a municipalsyndicate becomes important when marketing the bonds. If the offering is oversubscribed, low priority orders may not get filled. The priority of orders from the highest to the lowest is as follows:
1. Pre-sale
2. Group net
3. Designated
4. Member
The bond counsel for a new municipal issue renders an opinion on which of the following issue(s)?
I. The legal authority of the issuer to issue the bonds
II. The tax implications of the issue for federal tax purposes
III. The investment merits of the issue
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
(a)
In order to determine whether the issuer has the legal authority to issue municipal bonds, the bond counsel will check voter records (for G.O. bonds), or the feasibility study (for revenue bonds). If the majority of the constituency voted in favor of the issuance, or the feasibility study is approved, then the issuer has the legal authority to issue the bonds. The counsel will also comment on the federal tax consequences of the interest payments. The counsel will never evaluate the investment merits of the issue.
An ad valorem tax is based upon:
a. Property values
b. Population growth
c. Family income
d. Debt per capita
(a)
An ad valorem tax is based upon property values. The tax is based on the assessed value of the property and the millage rate (tax rate).
All of the following are true about a bond issue having serial maturities EXCEPT:
a. All of the bonds mature on one date in the future
b. The bonds are priced on a yield-to-maturity basis
c. The issue has a decreasing outstanding principal
d. The issue has decreasing total interest payments
(a)
Serial bonds mature in successive years and are priced on a yield-to-maturity basis. As a serial issue nears its final maturity, the outstanding principal and total interest payments decrease. Term bonds all mature at one date in the future and are priced at a dollar price (percentage of par).
The City of Richmond, Virginia is issuing 8.25% general obligation bonds at 100% of their par value. The bonds will mature in 20 years. An investor purchasing a bond at its offering price and holding the bond for 20 years will receive a yield-to-maturity of:
a. 8.25%
b. Less than 8.25%
c. More than 8.25%
d. Cannot be determined
. (a)
When a bond is purchased at its par value, the yield to maturity will be the same as the nominal yield or coupon rate. In this example, thecoupon rate is 8.25%. Therefore, the yield-to-maturity would also be 8.25%. When a bond is issued or purchased at a discount (below par value), the yield-to-maturity will be greater than the coupon rate. When a bond is issued or purchased at a premium (above par value), the yield-to-maturity will be lower than the coupon rate.
A revenue bond is backed by a pledge of net revenues. This indicates that:
a. All revenues are pledged to pay debt service on the bonds
b. Net revenues are pledged to pay operating and maintenance expenses
c. The first use of net revenues is to pay the debt service on the bonds
d. The issuer guarantees that net revenues from the facility will be sufficient to pay debt service on the bonds
. (c)
The flow of funds for a municipal net revenue issue requires that operation and maintenance expenses are paid first from gross revenues. Gross revenues minus operating and maintenance expenses leaves net revenues. Debt service (also called bond service) would then be the first item paid from net revenues.
All of the following would affect an outstanding airport revenue bond, EXCEPT:
a. Tourism
b. Debt per capita
c. Airport traffic
d. Energy costs
(b)
Debt per capita is used when analyzing a general obligation bond and would not be considered for a revenue issue.
Which of the following would not be available to pay interest on a revenue bond issue?
a. Tolls
b. Lease payments
c. Ad valorem taxes
d. User fees
. (c)
Ad valorem taxes secure a G.O., not a revenue bond.
The 30-day "visible supply" of municipal securities refers to new municipal bonds that:
a. Will be sold in the next 30 days through a negotiated sale of general obligation and revenue bonds
b. Have been sold through a negotiated sale in the past 30 days
c. Will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds
d. Will be sold in the next 30 days through a competitive sale of general obligation and revenue bonds
. (c)
The 30-day visible supply of municipal securities refers to the face amount of new municipal bonds that will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds. It is an indication of expected supply in the new issue market and is published each day in The Bond Buyer.
The Daily Bond Buyer's 30-day visible supply includes:
I. Competitive municipal bond issues
II. Negotiated municipal bond issues
III. Treasury bill issues
IV. Corporate bond issues
a. I and II only
b. I and III only
c. II and IV only
d. I, II, III, and IV
(a)
The Daily Bond Buyer's 30-day visible supply is an indication used to reflect the amount of new offerings coming to the marketplace in the next 30 days. It carries figures for both competitive and negotiated municipal bond issues and notes maturing in 13 months or more.
A woman will be retiring in 2020. She is interested in income and having her principal available at retirement. Which of the following municipal bonds would you recommend?
a. Aaa-rated 8.5% G.O. maturing in 2015
b. Aa-rated 10% G.O. maturing in 2039 which is callable in 2018 at 105
c. Aa-rated 8.5% G.O. maturing in 2020
d. Ba-rated revenue bond maturing in 2023
(c)
Since the woman wants her principal available at retirement, a bond maturing in 2020 (the year of her retirement), regardless of the yield, would be the best choice
An employee of a municipal securities firm would like to open an account with another municipal securities firm. All of the following statements regarding the employee and the account are TRUE, EXCEPT:
a. The employer must receive duplicate copies of all transactions made in the account
b. The employee must abide by all trading instructions from the employer regarding the account
c. The employer must be notified in writing of the employee's intention to open the account
d. According to MSRB rules, the employee will not be able to open an account at a competing securities firm
d)
MSRB member firm employees may open an account with a competing firm provided that they abide by the requirements addressed in choices (a), (b), and (c).
MSRB rules state that subject or nominal quotes may be given for:
a. Revenue bonds only
b. General obligation bonds only
c. Informational purposes
d. Municipal notes only
(c)
MSRB rules state that a dealer who does not wish to buy or sell securities based on a quote given, must identify the quote as a subjector nominal quote. Such quotes can be given for informational purposes only.
Which of the following would not be a violation of MSRB rules?
I. A gift to a customer of $100
II. A yearly magazine subscription given to a customer worth $50
III. A gift of basketball tickets to a customer worth $75
IV. A business lunch with a customer that costs $125
a. IV only
b. I and II only
c. I, II, and III only
d. I, II, III, and IV
. (d)
MSRB rules allow gifts of $100 or less to customers. There is no limit on legitimate business expenses so the business lunch of $125 would not be a violation even though it is more than $100. Therefore, all of the choices listed would not violate MSRB rules.
Under MSRB rules, all of the following are true regarding customer confirmations, EXCEPT the confirmation:
a. Must show commissions in an agency transaction
b. Need not show the markup in a principal transaction
c. Must disclose the third party to the trade in an agency transaction or offer to furnish such information upon request
d. Need not disclose if the broker-dealer acted as a principal or agent in the transaction
(d)
All of the choices given regarding customer confirmations are true under MSRB rules except that they need not disclose if the dealer is acting as a principal or agent in the transaction. This is not true since the broker-dealer must disclose the capacity in which it acted.
According to MSRB rules, which statement(s) is/are CORRECT regarding written complaints?
I. Send a report immediately to the MSRB
II. The complaint must be properly recorded and retained by the firm
III. Send a notice immediately to the SEC
IV. A principal must take appropriate action
a. I only
b. I and II only
c. II and IV only
d. I and III only
(c)
Any written complaint must be administered to by a principal and be retained along with a record of what the principal did to rectify the complaint.
A municipal tombstone advertisement must be approved by:
a. The MSRB
b. A Municipal Securities Principal
c. A Municipal Securities Principal and the Branch Manager
d. A Municipal Securities Financial and Operations Principal
.(b)
MSRB rules require that an advertisement must be approved prior to its first use by a municipal securities principal.
According to MSRB rules, all of the following must be approved by a principal prior to being sent to a customer, EXCEPT:
a. An abstract of an official statement
b. A preliminary official statement
c. An advertisement regarding the firms products and services
d. A research report
(b)
A preliminary official statement is prepared by or for the issuer. Since the MSRB does not have the power to regulate issuers, a preliminary official statement cannot be considered advertising under MSRB rules. However, an abstract (summary) of the official statement is prepared by a dealer and is therefore considered advertising. A final official statement and a firm's offering list are also not considered advertising.
The MSRB does all of the following, EXCEPT:
a. Regulate municipal securities dealers
b. Regulate municipal securities salesmen
c. Regulate municipal securities advertising
d. Set fixed commissions for municipal dealer agency transactions
. (d)
The MSRB does not set fixed commissions for municipal dealer agency transactions. MSRB rules regarding commissions state that they shall be "fair and reasonable" and negotiated between buyer and seller.
The role of the MSRB is to do all of the following, EXCEPT:
I. Formulate rules for the municipal securities industry
II. Interpret its rules for broker-dealers and dealer-banks
III. Inspect member firms at least once each year
IV. Enforce its rules when violations occur
a. I and II only
b. III and IV only
c. I, II and III only
d. I, II, III, and IV
(b)
The MSRB was formed as the rulemaking body for the municipal securities industry. It formulates and interprets rules in the areas of recordkeeping, qualification, and business conduct. However, the MSRB does not enforce its rules or inspect members for compliance with the rules. Enforcement and inspection is done by the SEC and FINRA for brokerage firms and by the FRB, FDIC and the Office of the Comptroller of the Currency for dealer banks. Also, the MSRB does not set commissions rates or regulate new issues (municipals are exempt from new issue regulations).
Which of the following statements is TRUE under MSRB rules?
a. A broker-dealer is not permitted to act as a financial adviser to an issuer of municipal securities.
b. A broker-dealer is permitted to act as a financial adviser and underwriter for the same issuer if the securities are sold on a negotiated basis.
c. A broker-dealer is permitted to provide advice to an issuer relating to the issuance of municipal securities in the capacity of acting as an underwriter and not as a financial adviser.
d. A broker-dealer is not permitted to act as an underwriter for the same issuer on both negotiated and competitive offerings.
(c)
Under MSRB rules, a financial advisory relationship exists when a municipal securities broker or dealer gives, or enters into an agreement with an issuer to give, financial advisory or consultant services regarding the issuance of municipal securities. A broker-dealer is permitted to provide advice to an issuer relating to the issuance of municipal securities in the capacity of acting as an underwriter and not as a financial adviser. A financial adviser usually charges an issuer a fee, whereas an underwriter's profit comes from the underwriting spread. A broker-dealer that has a financial advisory relationship is prohibited from acting as an underwriter with respect to the same issuer of municipal securities. The rule applies whether the issue is sold on a negotiated or competitive bid basis. There is no restriction on a broker-dealer acting as an underwriter for the same issuer on both negotiated and competitive offerings.