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47 Cards in this Set
- Front
- Back
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A trade takes place directly between a bank and an insurance company without the use of a broker. This trade took place in the:
A. First Market B. Second Market C. Third Market D. Fourth Market |
The best answer is D. The Fourth Market is direct trading of securities between institutions on ECNs (Electronic Communications Networks) such as Instinet or Archipelago. The systems bypass brokerage firms, and therefore brokerage commissions. Instead, the ECN charges a small matching fee.
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To take a second job, an employee of a FINRA member firm:
I must get written permission from his or her employer II is not required to get written permission from his or her employer III must amend his U-4 filing with FINRA and the SEC IV is not required to amend his U-4 filing with FINRA and the SEC A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A. To take a second job, FINRA requires that the individual obtain the written permission of his or her employer. In addition, any outside business activities must be disclosed on that individual's U-4 filing, so the U-4 must be amended promptly if the employer approves and outside work is taken. Finally, any outside business activities are shown on that registered representative's BrokerCheck report
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In October, a customer sells 1 ABC Jan 70 Call @ $4 when the market price of ABC is $71. The market price moves to $74 and the customer closes out the position just prior to expiration at intrinsic value. The gain or loss is?
A. no gain or loss B. $400 gain C. $400 loss D. $800 loss |
The best answer is A. The customer's contracts are not exercised. The customer initially sells the call at $4. Since he or she receives the $4, this is a credit. To close the position, the customer must buy back the option (opening sale is closed with a closing purchase). He or she buys back the position at "intrinsic value" - if the strike price of the call is $70 and the market price of the stock of $74, the call has "intrinsic value" of 4 points. If the call is purchased in a closing trade at $4, there is no gain or loss since the position was opened at a premium of $4.
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Which of the following do NOT have an equity position?
I Convertible preferred shareholders II Preferred shareholders III Convertible debenture holders IV Subordinated debentures A. I and II only B. III and IV only C. I and III only D. I, II, III, IV |
The best answer is B. Bondholders do not have an equity position - they are creditors of the corporation. Common and preferred shareholders have an equity position
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Which statements are TRUE regarding SMA in a margin account that is at 50% margin?
I For every $.50 increase in market value in a long account, SMA goes up by $1.00 II For every $1.00 increase in market value in a long account, SMA goes up by $.50 III For every $1.00 decrease in market value in a short account, SMA goes up by $1.50 IV For every $1.50 decrease in market value in a short account, SMA goes up by $1.00 A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C.
If a long account increases in value above 50%, SMA will increase by $.50 for every dollar increase. For example, assume an account shows: Long Market Value-Debit=Equity%SMA $20,000 $10,000 $10,000 50%0 If the market value increases to $30,000, the account will now show: -Debit=Equity%SMA$30,000 $10,000 $20,000 66% $5,000 With $30,000 of stock, 50%, or a total of $15,000 can be borrowed. Since this customer has only borrowed $10,000, another $5,000 can be lent to the customer - this is the SMA. Thus, for an account that increased $10,000 in market value (and the equity increased by $10,000), SMA increased by $5,000 (or 50%). If a short margin account decreases in value, SMA will increase by $1.50 for every dollar decline. For example, assume an account shows: Credits-Short Market Value=Equity%SMA$60,000 $40,000 $20,000 50%0 If the market value decreases to $30,000, the account will now show: Credits-Short Market Value=Equity%SMA$60,000 $30,000 $30,000 100% $15,000With $30,000 of stock, 50% or $15,000 is the required equity to support the position. Since there is $30,000 of equity in the account, there is $15,000 of excess equity. This is the SMA amount that can be borrowed. Thus, for a short account that decreased $10,000 in market value (and the equity increased by $10,000), SMA increased by $15,000 (or 150%). |
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Which statement is TRUE regarding a variable annuity offering a GMIB?
A. The contract guarantees a minimum death benefit if the contract holder dies before the separate account is depleted B. The contract guarantees a minimum growth rate for the separate account at the time of annuitization C. The contract guarantees a minimum number of annuity payments D. The contract guarantees a maximum rate at which the contract expenses can grow |
The best answer is B. A "GMIB" is a Guaranteed Minimum Income Benefit. It is an optional rider offered by many variable annuity contracts. It guarantees that when the separate account is annuitized, if the account has not grown at the guaranteed minimum rate, then the account will be annuitized as if it grew at that guaranteed minimum rate. So if the separate account grows by only 2% a year; and the GMIB is 5%; then the account will be valued at annuitization based on compounding at the 5% minimum benefit. Note that the GMIB does not apply during the accumulation phase; it only applies during the annuity phase. This is a very popular rider, but it does come at a cost
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When the investment performance of each asset class varies from the anticipated rate of return, the:
A. selection of the type and number of asset classes used for the portfolio must be changed B. target allocation percentages assigned to each asset class must be changed C. tactical limits on target allocation percentages for each asset class must be changed D. portfolio must be rebalanced by liquidating portions of overperforming classes and investing the proceeds in underperforming classes |
The best answer is D. When investment performance varies over time from one asset class to another, the target percentage allocations will shift from their optimal setting. To bring the portfolio back to these targets, it must be rebalanced - that is, a portion of the overperforming class(es) must be sold off and the proceeds reinvested in the underperforming class(es).
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Which of the following recommendations are "red-flags" that are usually unsuitable for seniors?
I Variable annuities II Structured products III Mortgaging home equity for investment purposes IV Using retirement savings to invest in high-risk investments A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV |
The best answer is D. FINRA has stated that it does not prohibit any particular recommendation to a senior citizen as long as it is suitable, however certain types of recommendations are "red-flags" - meaning that the firm must be able to strongly defend such a recommendation to a senior citizen. Included on the list of "no-no's" are recommendations to seniors to: purchase variable annuities, equity indexed annuities, and real estate limited partnerships purchase variable life settlements purchase complex structured products such as CDOs (Collateralized Debt Obligations) mortgage their residence to obtain funds for investment purposes use retirement savings, including early withdrawals from IRAs, to invest in high-risk investments
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A customer wants to switch between 2 different mutual funds within the same "family." You should tell the customer that:
A. there will be no tax liability B. there will be no tax liability if the switch is made within 60 days C. there will be no tax liability if all funds are reinvested D. taxes will be due if the fund shares that are sold have appreciated |
The best answer is D. When a switch is made between two funds, the IRS considers this to be the sale of one fund and the purchase of another fund. If the fund shares that are sold have appreciated, there is capital gains tax liability.
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All of the following are types of accounts under Regulation T EXCEPT:
A. Margin account B. Cash account C. Discretionary account D. Arbitrage account |
The best answer is C. Regulation T defines 3 types of accounts in which securities transactions can occur - a cash account where full payment is required; a margin account where partial payment is required; and an arbitrage account for going "short against the box." Discretionary accounts, and the rules for their operation, are defined by the regulations of the exchanges.
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MUTUAL FUNDS
FundNet Asset Value Offering Price ChangeKapital Kommon Korporate$9.01 $6.37 $7.72$9.59 $6.64 $8.44- - +.02 .04 .03
B. $844 C. $772 plus commission D. $844 plus commission |
The best answer is B. Open end mutual funds are purchased at the offering price, which is inclusive of any sales charges. This is a new issue prospectus offering, so no commissions are involved. The customer pays the offering price of $8.44 per share x 100 shares = $844.
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An open order is on the Specialist's book (DMM's book) to sell 800 XYZ at 50 Stop GTC. The company has declared a 25% stock dividend. On the morning of the ex date, the order on the book will be:
A. Sell 800 XYZ at 40 Stop GTC B. Sell 800 XYZ at 50 Stop GTC C. Sell 1,000 XYZ at 40 Stop GTC D. Sell 1,000 XYZ at 50 Stop GTC |
The best answer is C. To adjust the order for the 25% stock dividend, the number of shares is multiplied by a factor of 1.25 (since there are 25% extra shares) while the order price is divided by a factor of 1.25.
800 shares x 1.25 = 1,000 shares on the adjusted order $50 price / 1.25 = $40 adjusted order price Please note that if the adjustment resulted in the number of shares covering an "odd" amount, the number of shares would not be adjusted. Note that the NYSE has renamed the Specialist the "DMM" - the Designated Market Maker. |
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A customer bought 100 shares of DEF stock at $23 per share. The stock has appreciated to $41 per share, and the customer would like to protect the gain at minimal cost. Which of the following options positions would "collar" the position at the lowest cost?
A. Buy 1 DEF Jan 40 Call and Sell 1 DEF Jan 45 Put B. Buy 1 DEF Jan 40 Put and Sell 1 DEF Jan 45 Call C. Sell 1 DEF Jan 40 Call and Buy 1 DEF Jan 45 Put D. Sell 1 DEF Jan 40 Put and Buy 1 DEF Jan 45 Call |
The best answer is B. To protect the stock position from a downside move, a put must be purchased. To keep the cost of the put low, the put should be "out of the money." Since the stock is currently worth $41, the purchase of a 40 put, which is 1 point "out of the money", would be the cheapest. To further reduce the cost of protection, the customer would sell an "out of the money" call to collect a premium that could be used to offset the cost of the put premium. Since the stock is at $41, the sale of a 45 call would give the customer 4 points of additional upside gain if the market should rise. If the market rises above this, the call will be exercised, and the customer would deliver the stock at $45 per share. In exchange for giving up any further upside gain above $45 per share, the customer collects the premium income from the sale of the call (and this offsets the cost of buying the put). Thus, the customer has "collared" the stock position, either selling the stock at $40 by exercising the long put if the stock price should fall below $40; or by selling the stock at $45 if the market should rise above this, since the short call will be exercised.
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Revenue Anticipation Notes are a(n):
I funded debt II unfunded debt III source of permanent financing IV source of temporary financing A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D. A Revenue Anticipation Note (RAN) is issued by a municipality that wishes to borrow short-term against revenues that are expected to be received in the near future. Thus, this is a source of temporary financing and it is an unfunded (short term) debt.
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A young couple wishes to save $50,000 as the down payment on a new house that they plan to purchase in the next 6 months. Which of the following are suitable investment vehicles to recommend to the couple?
I Money market funds II Bank certificates of deposit III Blue chip stocks IV Commercial paper A. I only B. II and III C. I, II and IV D. I, II, III, IV |
The best answer is C. This couple needs $50,000 cash in 6 months. Clearly, money market funds and bank certificates of deposit are suitable. Blue chip stocks are not suitable, since they are subject to market risk. Commercial paper is usually not marketed to individuals; it is mainly an institutional market. However, some corporations sell commercial paper directly to customers in minimum $10,000 units via their websites. This is another very safe short term investment, and is suitable.
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A customer has an existing margin account that shows the following: Debit Balance: $30,000 The market value declines to $30,000, the customer is sent a maintenance call, which the customer wishes to meet by depositing fully paid stock. The amount of stock that must be deposited is: A. $2,500 B. $5,000 C. $7,500 D. $10,000 |
The best answer is D. This customer account sets up as: Long Market Value-Debit=Equity%$50,000 $30,000 $20,00040%If the market value declines to $30,000, the account will now show:Long Market Value-Debit=Equity%$30,000 $30,000 $00%Minimum margin is 25% of market value, or 25% of $30,000 = $7,500. This account will receive a maintenance call for $7,500 - this would be the cash deposit. If the customer wishes to deposit other fully paid stock to meet the call, the market value of securities needed in the account at minimum is the $30,000 Debit / .75 = $40,000. Since the account already has $30,000 of securities, another $10,000 of securities must be deposited. After the fully paid securities deposit is made, the account will show:Long Market Value-Debit=Equity%$30,000 $30,000 $00%+10,000 +10,000$40,000 $30,000 $10,00025%
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Under MSRB rules, municipal securities traders that participate in secondary market joint accounts may:
I disseminate quotes severally for the securities II not disseminate quotes severally for the securities III indicate that only one market exists for the securities IV not indicate that only one market exists for the securities A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C. Municipal secondary market joint accounts are formed by municipal firms to purchase, and subsequently resell, large blocks of bonds. Any quotes disseminated for those bonds must appear as one quote (they are actually grouped and bracketed in Bloomberg to show that they represent a single source for the quote). It cannot appear that there are multiple markets for the bonds when in fact there is only one (the joint account).
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Which statements are TRUE regarding the annuitization of a variable annuity contract? II Life Annuity-Period Certain may be elected by the policy holder III The number of annuity units will vary IV The annuity payment will vary A. I and III B. II and III C. I and IV D. II and IV |
The best answer is D.
Variable annuity contracts allow the holder to elect a payout option that meets that person's individual requirements. The statement that a life annuity payout option must be elected is erroneous - the choice of payout method depends on the needs of the annuitant. Once the contract is annuitized, the number of annuity units is fixed. However, the value of each unit varies with the performance of the underlying securities, hence the monthly annuity payment will vary. |
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A registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must:
I Ascertain the location of the stock II Ascertain that the securities can be delivered in 3 business days III Validate that the securities are in "good form" IV Obtain physical possession of the securities A. I and II B. II and III C. IV only D. I, II, III, IV |
The best answer is A. FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 3 business days. There is no requirement to obtain physical possession of the securities before placing the sell order, nor is there a requirement to validate the securities as "good for delivery."
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A municipal dealer places an order for $100,000 of new issue G.O. bonds, M '35 with the syndicate manager. The bonds will be placed in an "accumulation account" for a unit investment trust being established by the syndicate member. Which statement(s) is (are) TRUE?
I The syndicate member must disclose to the manager that the bonds are being purchased for an accumulation account II The manager will disclose the order to the other syndicate members when the syndicate account is closed III The order will be treated as a "syndicate" order by the manager A. I only B. I and II C. II and III D. I, II, III |
The best answer is B. An order placed with the syndicate by a member for an "accumulation account" being managed by that member is unusual in that the bonds are not being sold to the general public. They really are being retained by a syndicate member for his own use. The syndicate member must disclose this to the manager when the order is placed; the manager will disclose any of these orders that have been filled to the other syndicate members when the account is closed; and the manager will fill these orders last- meaning they get priority after pre-sale, group (syndicate), and designated orders. They are treated as member takedown orders, and if there is sufficient interest in the issue, would not be filled because of the other orders with higher priority. |
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Customers A, B, C and D have their portfolio assets allocated as follows:
A B C D Money Markets 15% 5% 5% 0% Treasury Bonds 40% 10% 20% 20% Speculative Bonds 10% 30% 10% 30% Blue Chip Equities 15% 15% 20% 10% Small Cap. Equities 10% 10% 30% 5% Emerging Markets 10% 20% 10% 30% REITs0%10%5%5% Which asset allocation is MOST appropriate for a risk-tolerant young customer with a long investment time horizon? B. Customer B C. Customer C D. Customer D |
The best answer is C. Over the long term, equities provide the greatest overall return, along with higher risk, than fixed income securities. For an investor that is young and risk tolerant, a portfolio allocation that is heavily weighted in equities is the best recommendation (which is the case with Customer C with 60% of the portfolio in equities).
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A customer owns a real estate limited partnership interest, with an adjusted cost basis of $25,000. This interest has generated unused passive losses totaling $15,000. The partnership interest is sold for $25,000. Regarding the cost basis and capital gain or loss which of the following statements are TRUE?
I The adjusted cost basis is $10,000 II The adjusted cost basis is $40,000 III The customer has a capital gain of $10,000 IV The customer has a capital loss of $15,000 A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D. The tax treatment of unused passive losses when a partnership interest is sold, is to add them to the cost basis. In this example, the customer has a partnership basis of $25,000 and $15,000 of unused passive losses, for an adjusted cost basis of $40,000. Since the sale proceeds from disposing of the partnership interest are $25,000, the customer has a capital loss of $15,000 on this investment for tax purposes. The end result is that the unused passive loss is converted into a capital loss when the partnership unit is sold.
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When comparing Specialists (DMMs) on the NYSE to market makers on NASDAQ, which statements are TRUE?
I The Specialist/DMM is obligated to make a continuous competitive market in the stock II The Specialist/DMM is not obligated to make a continuous competitive market in the stock III The market maker is obligated to make a continuous competitive market in the stock IV The market maker is not obligated to make a continuous competitive market in the stock A. I and III B. I and IV C. II and III D. II and IV |
The best answer is B. Specialists (now renamed DMMs - Designated Market Makers) are obligated, under NYSE rules, to make a continuous competitive market in the assigned stock during the entire trading session. NASDAQ Market Makers, on the other hand, once they have traded the amount that they show in the market at a competitive firm price, are not obligated to renew that quote at the current market. They can renew at a price that is "away" from the current market, thus assuring that they will not have to trade! (Of course, it is in their best interests to actively trade that stock and maintain competitive quotes - that is how NASDAQ market makers maintain a good reputation that attracts future business.)
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MCR Corp.NYSE Symbol MCR Options on CBOE (Mar-Jun-Sept-Dec)
PriceRangeP-E RatioDividendYieldS & P RankingJul 30 '09200923 1/233-239.753.2%A Per Share Data ($) Yr. End Dec. 312008200720062005200420032002Book Value (1)18.1616.9216.1714.7212.9812.359.69Earnings (2)2.642.192.38 (3)2.201.81 (3)1.340.88 (3)Dividends0.650.600.550.400.250.200.18Payout Ratio24%27%28%21%18%14%15%Prices -High34 1/424 3/818 7/820 3/820 1/216 7/811 7/8 Low20 1/29 3/49 7/812 7/814 1/49 1/49 7/8P-E Ratio13-811-410-59-59-69-59-6Data as orig. reptd. Adj. for stk. div(s) of 300% May 2002. 1. Reflects merger or acquisition. 2. Bef. results of discont. opers. of +1.16 in 2003. 3. Ful. dil. 2.17 in 2006, 1.70 in 2004, .72 in 2002 B. mature company C. cyclical company D. deteriorating company |
The best answer is B. Growth companies are characterized by high P-E ratios and very low dividend payout ratios. Mature companies trade at lower P-E ratios and pay out a reasonable proportion of the earnings as dividends. MCR's P-E ratio is close to the market average of 10, and its dividend payout ratio averages about 24% - slightly lower than the NYSE average. This is a mature company.
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If an analyst makes a public appearance, under Regulation AC, the analyst MUST:
A. make a verbal certification to the group being addressed B. distribute a written certification to each person in the group addressed C. give a blanket certification to all appearances made each month D. give a blanket certification to all appearances made each quarter |
The best answer is D. Regulation AC (Analyst Certification) requires research analysts to certify each published research report; and to make a quarterly certification covering all public appearances made during that quarter. The certification basically states that the analyst gave his or her honest view at that time; and that the analyst's compensation was not tied to the recommendation or views expressed. If an analyst fails to make the required certification, FINRA must be notified; and for the next 120 days, any research reports authored by that analyst must include the disclosure that the analyst did not provide the required certification.
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Under the provisions of ERISA (Employee Retirement Income Security Act), the use of index options is:
A. prohibited because of the speculative nature of these instruments B. allowed only if the strategies followed are in compliance with the objectives and restrictions of the plan C. allowed only if the plan trustee maintains physical possession of the underlying securities D. allowed without restriction as long as the investment manager acts in a prudent manner |
The best answer is B. Index options can be a useful tool for portfolio managers to hedge in a declining market (by purchasing index puts) or to enhance income from the portfolio (by writing index calls). ERISA does not prohibit their use in portfolios that fund retirement plans. However, any strategies that are used must be in compliance with any restrictions set in the plan documents.
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An older customer, age 63, that is in the lowest tax bracket, seeks an investment that will give him an income stream. The BEST recommendation would be:
A. Variable annuity B. Municipal bond C. Certificate of deposit D. AAA Corporate bond |
The best answer is D. Because the customer is in a low tax bracket, you would not recommend the municipal bond. Most variable annuity separate accounts are invested in equities for growth to supplement other forms of retirement income. Because they are equity funds, they do give much of an income stream. The CD and the AAA Corporate bond both provide income, which is the stated objective. However, the AAA corporate bond is top-rated and will give a higher income stream than a CD. This is the best choice. Note that the question tells us nothing about risk tolerance, which would certainly be helpful, but this is typical of "test-like" questions!
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Regulation NMS requires:
A. market centers to accept automated executions that do not discriminate against any class of users of their systems B. ECNs to register with FINRA as broker-dealers and to electronically display their quotes if they are responsible for 5% of the trades in that issue C. broker-dealers to charge commissions to customers that are fair and reasonable D. market makers to stop trading all equity securities in the United States if a circuit breaker is triggered |
The best answer is A. Rule 610 of Regulation NMS requires all market centers to electronically link and provide automated execution within 1 second for orders that are executable. It also mandates that market centers cannot discriminate against customers who access their quotes. Regulation ATS requires ECNs to register with FINRA as broker-dealers and to electronically display their quotes if they are responsible for 5% of the trades in that issue. FINRA sets rules for fair and reasonable commissions. The "circuit breaker" that shuts U.S. securities markets first kicks in if the S&P 500 Index falls by 7%.
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In 2015, a self-employed individual earns $180,000 for the year, and contributes the maximum amount to an HR10 plan. If this individual wished to make a contribution to a self-directed Individual Retirement Account for this year, which statement is TRUE?
A. A contribution is prohibited because this person is already covered under a qualified retirement plan B. A maximum contribution of $5,500 is permitted, which is an adjustment to that year's taxable income C. A maximum contribution of $5,500 is permitted, but no adjustment is allowed to that year's taxable income for that amount D. A contribution is permitted only if the HR10 contribution is reduced by the same amount |
The best answer is C. Any individual, whether or not he is covered by another retirement plan, can make an annual contribution to an Individual Retirement Account. However, if that person's income is high (above $71,000 in 2015 for an individual) and that person is covered by another qualified retirement plan, the contribution is not tax deductible. This person makes $180,000 per year and contributes to a Keogh plan, so the IRA contribution is not tax deductible. |
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Listed REITs offer all of the following benefits to purchasers EXCEPT:
A. diversification of investments B. ready marketability of shares C. capital gains potential D. preferential taxation of dividends received |
The best answer is D. REITs offer diversification of investments similar to investment companies, except that the investments are being made in various types of real estate. REIT shares are listed and trade on an exchange (like a closed-end fund), so they are readily marketable. If real estate does well as an investment, the shares will appreciate, giving the investor a capital gain. Finally, REIT dividend taxation is truly "not that great." While dividends received from common stock investments, including mutual funds, qualify for the lower 15% or 20% tax rate, the tax law specifically denies this benefit to REIT dividend distributions. These are taxed at ordinary income tax rates of up to 39.6%.
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If a customer buys a pre-refunded bond, the yield shown on the confirmation will be computed based upon the:
A. current yield B. yield to maturity C. yield to call D. yield to put |
The best answer is C. When a municipal bond is pre-refunded, the issuer escrows sufficient government securities to pay the interest on the bonds until the earliest call date, at which point the bonds are called (with any applicable call premiums being paid) and paid off with the escrowed governments. A customer who buys advance refunded bonds knows they will be called. Any yield that is shown must be computed to the call date, including any call premiums, if any. In essence, the call date becomes the new maturity date for the issue.
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Exercise limits on stock option contracts cover a time period of:
A. one business day B. one calendar day C. one calendar week D. one calendar month |
The best answer is C. Exercise limits are applied to all exercises occurring within a 5 business day period - the same as 1 calendar week.
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Which of the following can result in the establishment of a short position?
I Arbitrage transaction II Sale of a security "against the box" III Position trades of borrowed shares A. I only B. I and III C. II and III D. I, II, III |
The best answer is D. Short positions are established in arbitrage transactions (the simultaneous purchase and short sale of a security in two different markets to lock in a temporary price difference). A short position is taken when a security is sold "against the box" - meaning that the long position is being held and an equivalent number of shares are being borrowed and sold to lock in a profit. Finally, position trades (position trading is trading for the firm account, using the firm's "positions") of borrowed shares are short sales.
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Trading in a stock is suspended. Which statement is TRUE regarding the trading of listed options on that stock?
A. Only opening transactions are permitted B. Only closing transactions are permitted C. Both opening and closing transactions are permitted until the contracts expire D. Trading will be halted in options contracts on the suspended stock |
The best answer is D. If trading in a stock is suspended, say on the New York Stock Exchange, the exchange where the option trades will also stop trading in the option contracts. This must occur because there is no longer any way to price the option contracts if there is no current market for the underlying stock. Any holders of outstanding options can still exercise their contracts during a trading halt, since this is performed through the Options Clearing Corporation and does not occur on the exchange floor.
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If an index option is exercised, the writer's account will be:
A. credited the "in the money" amount B. credited the "out the money" amount C. debited the "in the money amount" D. debited the "out the money" amount |
The best answer is C. An option will only be exercised if it is in the money. Index options settle in cash. The holder's account is credited the in the money amount while the writer's account is debited the "in the money" amount.
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The city of Jacksonville, Florida is issuing $100,000,000 of general obligation bonds paying interest on January 1st and July 1st of each year until maturity. The dated date of the issue is June 1, 2015. The first payment will be made on January 1st, 2016. A bondholder purchases the issue at the offering. The first interest payment is a(n):
A. level first interest payment B. even first interest payment C. odd first interest payment D. odd-lot first interest payment |
The best answer is C. Since the issue is dated on June 1st, interest starts accruing from this date forward. The first interest payment is made on January 1st, covering the prior 7 months. This is an "odd" first interest payment. Afterwards, interest payments are made regularly every 6 months.
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Under a gross revenue pledge, bondholders have a first lien on:
A. gross revenues B. gross revenues minus operations and maintenance C. gross revenues minus debt service reserve fund D. gross revenues minus deposits to the sinking fund |
The best answer is A. Under a gross revenue pledge, bondholders have claim to the gross revenues of the facility. After the debt service is paid, then operation and maintenance is paid. Contrast this with a "net revenue pledge." Under this pledge, bondholders only have claim to net revenues after operation and maintenance is paid. In this case, the first use of funds is to pay operation and maintenance.
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Buy
Sell 40.08200 GS Day 40.07100 SL Day 40.06 40.05 100 DB GTC 100 GS Day40.04 100 SL GTC40.03 300 DW Day40.02 200 PB GTC40.01 300 ML GTC40.00
B. 40.04 C. 40.05 D. 40.06 |
The best answer is B. The "open" area on the book is where the stock is currently trading since any orders that were there would have been filled by the Specialist/DMM (Designated Market Maker). Therefore, the stock is trading around 40.05 - 40.06. If the market drops, the Specialist/DMM will have to buy for the customers on the book. The first order to buy as the market drops is at 40.04. The Specialist/DMM can buy HIGHER than this price for his own account, but cannot buy at 40.04 until the customer order is cleared.
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Which of the following can be purchased on margin?
I Mutual Funds II Initial public offerings of Closed End Funds III Closed End Funds trading on the NYSE A. I onlyB. III only C. II and III D. None of the above |
The best answer is B. New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the initial public offering of a closed-end fund. Both are made with a prospectus. However, once closed-end fund shares trade in the market, they are marginable like any other listed stock.
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The "right of reclamation" in a municipal bond sale refers to the:
A. refusal by a municipal dealer to accept a delivery of bonds tendered to that firm by another municipal securities dealer B. return of municipal securities that have been previously accepted on a delivery C. procedure where a municipal dealer that bought securities, but has not yet received them, can close-out the trade D. settlement method where payment is made on delivery, or, if the dealer does not have the monies, the delivery may be rejected |
The best answer is B. When securities are delivered on settlement date, the buyer inspects the delivery to ensure that the proper securities are being delivered in "good form." If the buyer finds that the wrong securities are being delivered, or that there is a problem, such as the securities' not having a proper assignment; or a coupon bond missing coupons; then the buyer may reject the delivery. This is the right of rejection.
If the buyer has failed to detect an irregularity upon settlement, and accepts a delivery that later proves to have a problem, the buyer may use the "right of reclamation" to correct the problem. The buyer completes a "reclamation form" detailing the error; attaches it to the securities with the problem; and returns both to the seller. Upon receipt of the securities with the reclamation form, the seller must correct the problem within stated time periods |
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Customer "A" buys a Credit Default Swap (CDS) from Customer "B," with the reference loan being one made to Corporation "C." If Corporation "C" continues to pay interest and principal on a timely basis, then:
A. Customer A benefits B. Customer B benefits C. Customer C benefits D. any benefit to a specific party is based on the terms of the contract |
The best answer is B. In a Credit Default Swap (CDS), the buyer pays a premium to the seller, where the seller agrees that if the reference loan defaults, the seller will pay the face amount of the loan to the buyer. The buyer pays an annual "insurance-like" premium for this. If the loan does not default, the seller wins - collecting the premiums without having to make a payout. If the loan does default, the buyer wins - since the seller must pay the buyer the face amount of the loan in cash.
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Which of the following statements are TRUE about new stock offerings?
I New issues are sold under a prospectus II New issues are not sold under a prospectus III New issues are sold at the Public Offering Price IV New issues are sold at the Public Offering Price plus a commission or mark-up A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A. New stock issues are sold under a prospectus that states the Public Offering Price, which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.
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Commercial paper is a(n):
I Money Market Instrument II Capital Market Instrument III Exempt Security IV Non-Exempt Security A. I and IIIB. I and IVC. II and IIID. II and IV |
The best answer is A. Commercial paper is a money market instrument issued by corporations. It is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed 270 days and can be sold without a prospectus.
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SEC Regulation SP covers:
A. notification to customers of a member firm's privacy policies and practices B. selective disclosure of material non-public information by issuers C. standardization of disclosure of financial and non-financial information by issuers D. registration filings with the SEC by small business issuers |
The best answer is A. Regulation SP ("Statement of Privacy"), passed in 2000, requires financial institutions to provide customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to "opt out" of any such disclosures.
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The owner of a variable annuity has which of the following rights?
I Right to vote for distributions of income and capital gains II Right to vote to change the separate account's investment objective III Right to vote for the Board of Trustees IV Right to vote for dissolution of the trust A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV |
The best answer is C. Distributions of dividends and capital gains are decided by the variable annuity's Board of Trustees. The unit holder can vote for the Board of Trustees and can vote to change the investment objective of the separate account. In addition, terminating the trust (a very unlikely event) would require unit holder approval as well.
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Which of the following individuals trades on the New York Stock Exchange Floor?
I Specialist (DMM) II Floor Broker III Two Dollar Broker IV Registered Representative 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 Specialist (now renamed the DMM - Designated Market Maker) is the assigned market maker in a security on the NYSE floor. The Floor Broker handles orders as agent for retail member firms. The Two Dollar Broker executes orders for retail member firms, usually when its Floor Brokers are too busy. Registered representatives cannot trade on the NYSE floor.
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A customer has $10,000 in passive losses from a limited partnership investment. If the customer has $3,000 of passive income for that tax year, the customer may deduct:
A. 0 B. $3,000 C. $5,000 D. $10,000 |
The best answer is B. Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. Since there is $3,000 of passive income for this tax year, only $3,000 of passive losses can be deducted. The unused $7,000 of passive losses are carried forward and can be offset in later years against passive income generated in those years.
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