Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
46 Cards in this Set
- Front
- Back
|
Companies characterized by high price-earnings ratios and low dividend payout ratios are:
A. blue chip companies B. mature companies C. cyclical companies D. growth companies |
The best answer is D.
Growth companies are characterized by high price-earnings ratios and low dividend payout ratios. In contrast, mature companies are characterized by low price-earnings ratios and high dividend payout ratios. |
|
|
Under FINRA rules, fixed fee accounts should be reviewed for appropriateness for customers at a minimum:
A. monthly B. quarterly C. semi-annually D. annually |
The best answer is D.
Fixed fee account activity should be reviewed at least annually for appropriateness for each customer. |
|
|
The customer profile for Jack E. Chan is presented below:
Age:60 Marital Status:Married - Spouse is age 55 Dependents:2 Children - Ages 21 and 23, both graduated from college, still living at home Annual Income:$75,000 per year Investment Objective:Safety of Principal and Retirement Income Risk Tolerance:Low Investment Experience:New Client - No Pre-existing Brokerage Accounts Net Spendable Income Available For Investment:$10,000 Federal Tax Bracket:28% State Tax Bracket:5% Balance Sheet Cash On Hand:$60,000 Marketable Securities:0 Automobile:$24,000 Residence Owned:$250,000 Bills Payable:$10,000 Auto Loan Payable:$14,000 1st Mortgage: (6% interest rate 5 years left - monthly payment of $900)$52,000 Equity:$258,000 The customer is covered by a company defined benefit plan that will pay about $40,000 per year upon retirement at age 70. This customer wishes to maintain his current living standard upon retirement and intends on living in his current house. The customer will receive annual social security payments of about $8,000 per year. To meet the customer's goal of retiring in 10 years with an annual income of $72,000 per year, the best recommendation is to: B. invest $10,000 per year for the next 5 years in emerging markets growth stocks; and increase the annual investment in years 6-10 by another $10,800 per year since there are no more mortgage payments to be made C. pay off the current mortgage from the cash on hand; take out a new $100,000 mortgage at 7% and invest the proceeds in income bonds D. invest $10,000 per year for the next 5 years in Treasury Bonds and increase the annual investment in years 6-10 by another $10,800 per year since there are no more mortgage payments to be made |
The best answer is D.
This customer is 10 years from retirement, so making risky investments in emerging markets stocks or in income bonds that only pay if the issuer has enough earnings (otherwise no interest payments are made) are completely inappropriate. Taking out a loan at 8% to invest in a security yielding 5% is a fast way to lose money - so Choice A is bad as well. Choice D is clearly the best - investing in nice safe Treasury bonds will give the customer an assured stream of income to supplement the customer's pension and Social Security payments that will be received at retirement. |
|
|
A variable annuity is a(n):
I security regulated under the Investment Company Act of 1940 II insurance product that is not regulated under the Investment Company Act of 1940 III security that must be sold with a prospectus IV insurance product that has no prospectus requirement A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A.
Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus. Because these are structured as participating unit trusts, variable annuities are regulated under the Investment Company Act of 1940. |
|
|
Which index is the narrowest measure of the market?
A. Wilshire Index B. Value Line Index C. NYSE Composite Index D. Dow Jones Industrial Average |
The best answer is D.
The Dow Jones Industrial Average consists of 30 stocks (principally NYSE listed issues). This is the narrowest measure of the market. The Value Line Index is broader, including 1,700 issues. The NYSE Composite Index consists of the approximately 3,000 issues listed on the NYSE. The Wilshire Index is the broadest measure since it includes about 7,000 issues of companies headquartered in the United States that are listed on the NYSE, NYSE-MKT (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but companies have been added over the years to reflect the growth in listings on the NYSE, NYSE-MKT (AMEX), and NASDAQ markets. |
|
|
All of the following statements are true about a company that is highly leveraged EXCEPT:
A. the company has the greatest portion of its capitalization as debt B. if the company's operating earnings are highly variable, it may default in an economic downturn C. they "trade on the equity", producing a disproportionate increase in earnings per share once earnings cover debt service D. the more highly leveraged the company, the lower the credit risk of the issuer |
The best answer is D.
A highly leveraged company is one having a disproportionate amount of debt in its capital structure. Because interest on debt is a fixed annual amount, and is quite large in highly leveraged companies, if operating earnings drop in a bad year, debt service costs may not be covered. On the other hand, once debt service costs are covered, if earnings increase, all of the increase accrues to the shareholders. Because of this, leveraged companies are said to "trade on the equity" - meaning that once debt service costs are covered, reported earnings per share can rise dramatically. The more highly leveraged a company, the lower the credit rating because of increased default risk. |
|
|
All of the following are lagging economic indicators EXCEPT:
A. Building Permits B. Corporate Profits C. Commercial Loans Outstanding D. Employment Duration |
The best answer is A.
Lagging indicators include reported corporate profits (showing what was already earned in the last quarter); commercial loans outstanding (showing what has been borrowed and presumably spent); and employment duration (showing how long someone was employed before being terminated). Building permits are a leading indicator, showing planned future production. |
|
|
Variable annuity contracts contain which of the following guarantees?
I Interest Rate Guarantee II Investment Guarantee III Mortality Guarantee IV Expense Guarantee A. I and II B. III and IV C. II, III, IV D. I, II, III, IV |
The best answer is B.
Variable annuity contracts contain a mortality guarantee and an expense guarantee. If one dies later than expected, the company continues to pay the annuity. If expenses rise, the company absorbs them above a set percentage. However, no guarantee is given for the rate of return (investment guarantee or interest rate guarantee) - this is only given for a fixed annuity. |
|
|
All of the following are participants that offer municipal bonds in the secondary market EXCEPT:
A. bank dealers B. general securities dealers C. issuers D. municipal broker's brokers |
The best answer is C.
Municipal issuers offer bonds in the primary market. Issuers do not trade their outstanding debt. Bank dealers, general securities dealers and municipal broker's brokers all trade in the secondary market. |
|
|
The conversion price of a convertible debenture is set at issuance at $40 per share. The common stock is now trading at $42 while the bond is trading at 110. In order for the common stock to be trading at parity to the current market price of the bond, the stock price would be:
A. $40 B. $44 C. $46 D. $48 |
The best answer is B.
Since the bond is now trading at 110 ($1,100 per bond) and each bond is convertible into 25 common shares, the parity price of the common is $1,100 / 25 = $44. Since the common is currently trading at 42, it is below parity and it does not make sense to convert. It only makes sense to convert if the common is trading above parity. |
|
|
Which statements are TRUE?
I Contributions to a 529 plan are tax deductible II Contributions to a 529 plan are not tax deductible III Contributions to a Coverdell ESA are tax deductible IV Contributions to a Coverdell ESA are not tax deductible A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D.
Contributions to both Coverdell ESAs and 529 plans are not tax deductible. Earnings build tax-deferred in both. Distributions from both, when used to pay for appropriate educational expenses, are not taxable. (Note that Coverdell ESA distributions can be used to pay for elementary, middle and high school costs as well as higher education costs, whereas 529 plan distributions can only be used to pay for higher education). High earning individuals cannot open a Coverdell; there is no similar restriction on a 529 plan. Coverdell ESA contributions are limited to $2,000 per child per year; 529 plan contribution limits are set by each state and are much higher |
|
|
Which statements are TRUE about the VIX Index option contract?
I The contract value is based upon the price movement of the S&P 500 Index II The contract value is based upon the price volatility of the S&P 500 Index III The contract is offered in American style IV The contract is offered in European style A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D.
The VIX option is an up-to-the-minute market estimate of expected price volatility using real-time SPX (S&P 500 Index) option bid/ask quotes. The VIX calculates expected SPX price volatility over the next 30 days. The contracts are available in European style, not American style. (The very first index option, the OEX, is American style, since it was modeled after stock options. All of the later index options are European style). |
|
|
Which statements are TRUE regarding interest rate movements and their effect on bond prices?
I As interest rates move, the price of short term maturities will change faster than long term obligations II As interest rates move, the price of long term maturities will change faster than short term obligations III As interest rates move, the price of low coupon issues will change faster than high coupon issues IV As interest rates move, the price of high coupon issues will change faster than low coupon issues A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C.
The basic truths about interest rate movements and their effect on bond prices are: The longer the maturity, the greater the change in price for a given change in interest rates; The lower the coupon, the greater the change in price for a given change in interest rates. |
|
|
If an employee of a FINRA/NASD member firm wishes to open up an account with another FINRA/NASD firm, which of the following statements are TRUE?
I The member opening the account should determine if such action adversely affects the interest of the employer member firm II The employing firm must be notified in writing of the employee's intention to open an account III Duplicate confirmations and/or statements must be sent to the employing member, if requested in writing by the employer A. I only B. II only C. II and III D. I, II, III |
The best answer is D.
All of the statements are true regarding opening an account for an employee of another FINRA/NASD member firm. The FINRA/NASD firm opening the account must determine that this will not adversely affect the interests of the employer member; prior written notice must be given to the employer member; and duplicate confirmations and/or statements must be sent to the employer member, if requested. |
|
|
If a firm effects trades solely on an agency basis, the firm:
I carries inventory II does not carry inventory III is a market maker IV is not a market maker A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D.
If a firm effects trades solely on an agency basis, it carries no inventory and is not a market maker. |
|
|
A customer with a long margin account receives a call for minimum maintenance margin on Tuesday morning. The call notice states that the funds are to be deposited by Thursday. If the funds do not arrive, the firm has the right to sell out:
A. the entire account on Thursday at the market close B. the entire account on Friday at the market opening C. enough securities from the account to meet the call on Thursday at the market close D. enough securities from the account to meet the call on Friday at the market opening |
The best answer is D.
Calls for maintenance margin must be met "promptly." This call requires that the customer deposit the funds on Thursday. If the monies are not deposited on Thursday, at the opening on Friday morning, enough securities will be sold out of the account to satisfy the maintenance call. |
|
|
If an NYSE stock is dual listed, it would typically trade as well on the:
A. American Stock Exchange (NYSE-MKT) B. OTCBB C. Boston Stock Exchange D. CBOE |
The best answer is C.
Stocks that are listed on the NYSE are typically not listed on the AMEX or NASDAQ. Each one of these is a "national" stock exchange, trading companies where there is a "national interest" in trading those stocks. Stocks that are listed on the NYSE are typically NOT listed on the AMEX or NASDAQ. Each one of these is a "national" stock exchange, trading companies where there is a "national interest" in trading those stocks. A dual listed stock is one which trades in more than one marketplace, and the typical example is a company that listed on a regional exchange when it was small, and then grew large enough to list on a national exchange. For example, a young New England company might have listed on the Boston exchange when it was still small; and then listed on the NYSE when it became large enough; and it kept its Boston exchange listing to maintain its New England "ties." The CBOE trades options not stocks, so there are no dual listings between stock exchanges and the CBOE. The OTCBB provides quotes for penny stocks; these stocks are too small and speculative to meet exchange listing standards. |
|
|
Issuers of Federal tax exempt commercial paper include:
I Corporations II Federal Government III Municipal Governments A. I only B. II only C. III only D. I, II, III |
The best answer is C.
Only municipal issues are exempt from Federal income tax on interest income. Corporate and U.S. Government debt interest income is subject to Federal income tax. |
|
|
The designated Registered Options Principal is responsible for which of the following functions?
I Writing of procedures for supervision of options accounts II Review of procedures for supervision of options accounts III Approval of options advertising IV Approval of options accounts 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 designated Registered Options Principal resides in the main office of the firm and is responsible for creating and enforcing procedures for compliance with the rules of the O.C.C. and options exchanges. This person is also responsible for approving all options advertising and sales literature. Each branch must have a BOM - Branch Office Manager. This person is responsible for approving options accounts, options orders, options correspondence to fewer than 25 existing or prospective clients and for resolving options complaints. |
|
|
A customer buys 100 shares of XYZ stock at $43 per share. The customer then sells 1 XYZ $45 Call contract for a premium of $500. The call contract expires unexercised. After expiration, the customer's cost basis in the XYZ shares is:
A. $3,800 B. $4,000 C. $4,200 D. $4,300 |
The best answer is D.
The expiration of the call contracts results in a short term capital gain to the writer of $500, taxable in that year. The cost basis of the stock position is unaffected at $43 per share, for a total cost basis for 100 shares of $4,300. Notice that this tax treatment is the one that is most beneficial to the IRS; and worst for the investor. The call premium is taxed as a short term capital gain at expiration; it cannot be used to reduce the cost basis of the long stock position, which has the same effect as increasing the potential capital gain on the stock and deferring taxation to the time when the stock is sold. |
|
|
A percentage of par quote is also known as a:
A. firm quote B. yield quote C. dollar quote D. basis quote |
The best answer is C.
Dollar Bonds - most corporate, government, and any municipal issues which are term bonds - are quoted on a percentage of par basis. Anytime a bond is quoted as a percentage of par, it is quoted on a dollar basis. In contrast, municipal serial issues are quoted on a yield basis. |
|
|
All of the following are considered in determining a fair and reasonable price in a municipal principal transaction EXCEPT:
A. Price of the transaction B. Dollar amount of the transaction C. Best judgment of the dealer as to the value of the securities D. The fact that the municipal dealer is entitled to a profit in this transaction |
The best answer is A.
The MSRB Fair Pricing Rule states that the factors that should be considered when pricing a municipal bond for BOTH agency and principal transactions are the: * best judgment of the fair market value of the security;* expense of filling the order; * fact that the firm is entitled to a profit; * availability of the security; * value of services rendered in effecting the trade * maturity, rating and call features of the security; * nature of the dealer's business; and * existence of material information about the issuer. * price of the transaction; |
|
|
Which of the following would be considered when evaluating the credit risk of a municipal revenue bond?
I Management experience II The effect of competing facilities III Coverage ratios IV Collection ratios A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV |
The best answer is C.
Credit risk is the risk that the bond will default. To evaluate this risk for a revenue bond issue, one would examine coverage ratios; the effect of competing facilities; and the management of the facility. Collection ratios are only used to analyze G.O. bonds. The collection ratio shows the percentage of property taxes assessed that are actually collected by the municipality. |
|
|
A customer places an order to buy bonds. The order reads "Buy 5M ABC 9s M '45 @ 90 Stop GTC." After the order is elected, at which of the following prices may the order be executed?
I 89 II 90 III 91 IV 92 A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV |
The best answer is D.
The customer places a stop order to buy 5M - or 5 $1,000 par bonds at 90% of par. Buy stop orders are placed at a price that is higher than the current market. If the market price rises to 90 or higher, the buy stop order is elected (at 90% of par or higher), and the order is executed at the next available price - either at, above, or below the stop price. Thus, the order can be executed at any of the listed prices. |
|
|
Which statements are TRUE regarding Real Estate Investment Trusts?
I REITs must distribute at least 90% of Net Investment Income to shareholders II REITs must invest at least 90% of assets in other REIT securities III Interest expense paid by REITs is deductible to the REIT IV REITs are registered as investment companies under the Investment Company Act of 1940 A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A.
To be regulated, REITs must distribute at least 90% of their Net Investment Income to shareholders. REITs can invest in other REIT securities, but this can be no more than 25% of assets. Interest expense paid is tax deductible. Finally, REITs are not registered as investment companies because they are primarily investing in real estate assets, whereas investment companies invest in securities. |
|
|
Which of the following are considered to be "technical indicators"?
I Advance / Decline Ratio II Consumer Confidence Index III Dow Theory A. I only B. II only C. I and III D. I, II, III |
The best answer is C.
The Advance / Decline Theory measures the relative strength of the market by comparing the number of issues advanced to the number of issues declined. The Dow Theory states that market turns can be predicted if a downturn in the Dow Jones Industrial Average is confirmed by a downturn in the Dow Jones Transportation averages. Both of these are technical measures that attempt to predict future market movements by looking at current and prior market price movements and trading volumes. The Confidence Index is not a technical indicator - rather it is a fundamental indicator of consumer sentiment. If the confidence index is strong, consumers can be expected to spend money freely and the economy is likely to expand. If the confidence index is weak, consumers will be "belt tightening" and the economy may fall into recession. |
|
|
A $1,000 par Treasury Note is quoted at 100-2 - 100-7. The spread is:
A. 5 basis points B. $.015625 per $1,000 C. $.15625 per $1,000 D. $1.5625 per $1,000 |
The best answer is D.
The spread between the bid and ask is 5/32nds. Remember, government and agency securities are quoted in 32nds (with the exception of T-Bills, quoted on a yield basis). 5/32nds = .15625% of $1,000 par = $1.5625. |
|
|
An American manufacturer has contracted to deliver goods to Japan in 6 months, with payment to be made in Yen at the time of delivery. To hedge against an adverse movement in the Yen, the manufacturer can:
I buy Yen Calls II buy Yen Puts III buy Yen forward contracts IV sell Yen forward contracts A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D.
The American manufacturer will be paid in Yen in 6 months. Thus, the manufacturer will lose if the Yen falls in value during the 6 month period, since they will convert into fewer dollars than he expects. To protect against a drop in the Yen, the manufacturer can either buy Yen puts or can sell Yen forward contracts. If the Yen drops, the increase in the value of the put contracts will offset any loss on the physical currency received. Similarly, if the Yen drops, the forward contracts can be closed out by purchasing them in the market at the lower current value for a profit. This profit offsets any loss on the physical currency received. |
|
|
Under SEC Rule 605 of Regulation NMS, market centers, in their monthly reports on order execution, must disclose all of the following information EXCEPT:
A. trading volumes B. speed of executions C. rates of price improvement D. fill rates |
The best answer is A.
SEC Rule 605 of Regulation NMS requires that market centers prepare, and make available to the public, monthly standardized reports summarizing their order executions. Included in the report is data on: Effective spreads (narrow spreads are better!); How market orders of various sizes were executed relative to the public quote (executions at, or very close, to the public quote are better!); Speed of execution (fast execution is better!); Fill rates (a larger percentage of orders being filled is better!); and Price improvement or disimprovement (getting a better price than expected is better!). Trading volumes are not included in the monthly reports because they are reported every day by the exchanges. |
|
|
New U.S. Government agency securities are:
I underwritten via competitive bid II underwritten via negotiated offering III offered through the Federal Reserve IV offered through selling groups A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D.
Government agency securities are underwritten via negotiated offerings; not via competitive bid as is the case with U.S. Government issues. The agency assembles a selling group through which it offers the securities. It negotiates both the interest rate placed on the issue based upon the level of pre-sale orders received by the selling group; and the selling concession paid to the selling group for offering the securities to the public. |
|
|
Regarding the notification of a broker-dealer's financial condition to customers, a brokerage firm must send semi-annual statements which include the firm's:
I Balance sheet II Income statement III Net capital computation A. I only B. I and II C. I and III D. II and III |
The best answer is C.
Broker-dealers must send their customers a semi-annual balance sheet and Net Capital computation. There is no requirement that the customer be sent the income statement of the broker-dealer. |
|
|
All of the following statements about warrants are true EXCEPT:
A. warrants have a longer term than rights B. warrants are issued to make corporate senior securities offerings more attractive to investors C. warrants give the holder a perpetual interest in the issuer's underlying common stock D. warrants trade separately from the stock of the company |
The best answer is C.
Warrants are long term options to buy a company's shares at a fixed price. They are typically attached to debt and preferred stock offerings (securities that are "senior" to the common stock of the issuer) to make the securities more attractive to purchasers. This is accomplished because the warrant gives growth potential to these senior security holders if the common stock price should rise in the future. Warrants typically have a fixed life of 5 years or less and then expire. Companies can issue perpetual warrants, but rarely do so. |
|
|
Trading in the Interbank market will affect all of the following EXCEPT:
A. foreign currency prices in terms of U.S. dollars B. future trade deficit or surplus figures C. future economic growth D. future inflation levels |
D. Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries. Inflation levels are determined by the relative balance of output of goods and services versus the U.S. dollars available to "pay" for these. If the money supply is allowed to grow too quickly by the Fed relative to real economic growth, then there will be inflation. Therefore, future inflation levels are basically determined by Federal Reserve actions, not by the interbank market. |
|
|
Which of the following statements about Treasury STRIPS are TRUE?
I Treasury STRIPS are suitable investments for individuals seeking a high level of safety II The interest income is accreted and taxed annually III At maturity, there is no capital gain IV The investor's interest rate is locked in at purchase, eliminating any reinvestment risk A. I and III only B. II and IV only C. I, III, IV D. I, II, III, IV |
The best answer is D.
Treasury STRIPS are government bonds that are "stripped" of coupons. They do not provide current income, but they do provide a high level of safety as the underlying securities are direct obligations of the U.S. Government. The discount on the bonds must be accredit annually, with the annual accretion amount being taxable as interest income. As the bond is accreted, its cost basis is adjusted upwards so that at maturity, the bond has an adjusted cost basis of par. Therefore, no taxable capital gain is realized at maturity. This is a zero coupon obligation with a "locked in" rate of return over the life of the bond (thus, it is not subject to reinvestment risk). |
|
|
A customer opens a long margin account with 1 position, consisting of 100 shares of ABC stock valued at $20 per share. There is no debit balance in the account. If the customer buys 100 shares of XYZ at $50 per share, the margin call will be:
A. $1,000 B. $1,500 C. $2,000 D. $3,000 |
The best answer is B.
Prior to making the new purchase, the margin account held 100 shares of ABC at $20, fully paid, for equity of $2,000 in the account. There is $1,000 of SMA from this position that cannot be used currently, since minimum margin to open an account is $2,000 of equity or the account being "fully paid," whichever is less. Now the customer wishes to buy another $5,000 of stock, which would generate a Regulation T call of $2,500. Since there is $1,000 of SMA in the account, the customer need only deposit $1,500. After all this, the account will show: Long Market Value-Debit=Equity $2,000 $2,000Original Position$5,000 $3,500 $1,500New Position$7,000 $3,500 $3,500 |
|
|
A customer holds 10 ABC Jan 60 Call contracts. ABC Corporation is paying a 20% stock dividend. On the ex date, the contracts will show as:
A. 10 ABC Jan 60 Calls B. 10 ABC Jan 50 Calls C. 12 ABC Jan 60 Calls D. 12 ABC Jan 50 Calls |
The best answer is A.
This is a stock dividend of 20%. The OCC does not adjust the contract on ex date. Only if there is an exercise, then the OCC adjusts the "deliverable." The contract holder owns 10 ABC Jan 60 Calls. If the contracts are exercised, the holder will receive 100 x 1.20 = 120 shares for each contract; at a price of $60/1.20 = $50. |
|
|
In a new issue underwriting, which of the following is the largest?
A. Underwriter's Concession B. Selling Concession C. Spread D. Management Fee |
The best answer is C.
The spread is the gross compensation earned by the syndicate. Out of this gross amount, portions can be earned by the members of the underwriting group. The syndicate manager earns the management fee - typically the smallest portion of the spread. Once the management fee is deducted from the spread, this leaves the underwriter's concession. This is the amount earned by a syndicate member who sells the issue to the public. Out of the underwriter's concession, the syndicate member can give up a selling concession to a selling group member for helping find a customer for the issue. |
|
|
Customer Name:Charlie Customer
Age:69 Marital Status:Single - Widowed Dependents:None Occupation:Retired Household Income:$31,000 (Social Security and Pension) Net Worth:$130,000 (excluding residence) Own Home:Yes $220,000 Value, No Mortgage Investment Objective: Current IncomeRisk Tolerance:Low Investment Time Horizon: 20 yearsInvestment Experience: 0 yearsCurrent Portfolio Composition: Cash in Bank:$130,000 After reviewing this customer's profile sheet, which recommendation would be most appropriate? B. The customer should take at least $100,000 of cash from the bank and invest the proceeds in 20-year STRIPS to meet the customer's desire for current income and his low risk tolerance requirements C. The customer should mortgage his house for $100,000 at current market interest rates and use the proceeds to buy 20 year income bonds to provide current income D. The customer should take at least $100,000 of cash from the bank and invest the proceeds in 20-year Treasury Bonds to meet the customer's desire for current income and his low risk tolerance requirements |
The best answer is D.
This customer is age 69, with no current investments or investment experience. The customer has a fairly low retirement income and needs additional current income to live comfortably. This customer really only has 2 assets to tap for potential current income. He owns a fully paid house worth $220,000; and has $130,000 of cash in the bank. One way to supplement income is for the customer to get a reverse mortgage on the house, but this is not a banking exam, so we will not go near that possibility! The other way to supplement income is to invest the cash in the bank in an investment that is safe and that gives current income. Treasury Bonds pay interest semi-annually at a higher rate than that earned on bank deposits, and are really safe, so these would be the best recommendation. STRIPS do not provide current income since they are a zero-coupon Treasury obligation so these will not work. TIPS give a lower current interest rate than regular Treasury bonds, in return for protecting the investor against inflation - however the inflation protection is not "paid" until maturity, so again, these will not give the greatest additional current income. |
|
|
An open order is on the Specialist's book (DMM's book) to sell 500 XYZ at 60 Stop GTC. The company has declared a 20% stock dividend. On the morning of the ex date, the order on the book will be:
A. Sell 500 XYZ at 50 Stop GTC B. Sell 500 XYZ at 60 Stop GTC C. Sell 600 XYZ at 50 Stop GTC D. Sell 600 XYZ at 60 Stop GTC |
The best answer is C.
To adjust the order for the 20% stock dividend, the number of shares is multiplied by a factor of 1.20 (since there are 20% extra shares) while the order price is divided by a factor of 1.20. 500 shares x 1.20 = 600 The price would change to: $60 price / 1.20 = $50 adjusted order price Note that the NYSE has renamed the Specialist the "DMM" - the Designated Market Maker. |
|
|
In a limited partnership investment, the cross-over point will occur as the program's:
A. income increases at a faster rate than losses B. losses increase at a faster rate than income C. investments increase in market value at a faster rate than their tax basis D. investments increase in tax basis at a faster rate than their market value |
The best answer is A.
The cross-over point in a tax advantaged investment is the point where income begins to exceed losses; so that no tax "shelter" is left. The cross-over point happens when either income increases from the program; or tax deductions fall off from the program (or some combination of both). When a program "crosses-over," the general partner may refinance any outstanding debt to a larger principal balance to increase interest deductions; and can return the extra cash borrowed to the partners as a cash distribution. Or the general partner can invest in more properties that will generate losses. |
|
|
Which statements are TRUE about non-managed fee based accounts?
I The customer must be provided with a disclosure document prior to account opening II The customer must be provided with a disclosure document within 15 business days of account opening III The account must be reviewed at least annually for its appropriateness as a fee based account IV The account must be reviewed at least bi-annually for its appropriateness as a fee based account A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A.
To open a non-managed fee based account (NMFBA) for a customer, a disclosure document must be provided, at, or prior to, account opening. Each account must be reviewed at least annually for its appropriateness for the customer. |
|
|
The OTCBB includes quotes for:
A. NASDAQ stocks B. Non-NASDAQ Stocks C. NYSE listed stocks D. All of the above |
The best answer is B.
Over-the-counter stocks that are too small for NASDAQ are found on the OTCBB - the "Over-The-Counter Bulletin Board" (run by FINRA) or can be found in the privately run "Pink Sheets" - now renamed the Pink OTC Markets |
|
|
Which of the following are characteristics of municipal primary market underwritings?
I Order Period II Underwriting Agreement III Good Faith Deposit IV Concession and Takedown 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.
Municipal "primary market" underwritings are initial public offerings that are performed on either a competitive bid or negotiated basis. There is always an underwriting agreement between the issuer and the underwriters. In a competitive bid, the underwriting agreement is the signed and accepted "Proposal to Buy Bonds" on which the underwriters submitted the winning bid. In a negotiated underwriting, the underwriter and the issuer negotiate the terms of the formal underwriting agreement, which can be either a firm commitment or best efforts basis. In any underwriting, the issuer demands a good faith deposit from the underwriters at the time that the agreement is submitted to the issuer for signing. This "secures" the agreement, and assures the issuer that the underwriters are "bona-fide" and will complete the terms of the agreement. If not, the issuer keeps the good faith amount as liquidated damages. An "order period" is typically specified in a competitive bid underwriting. This is set by the manager, usually during a time period of about an hour just after the "bid" is won. During this time period, the manager will accept orders contingent upon winning the bid, but does not allocate the orders on a "first in-first out" basis. Instead, the orders are accumulated and then tallied up at the end of the "order period." The manager then fills the accumulated orders, either on a "discretionary basis" or he will start with the highest order prices obtained for each maturity and then continue to fill orders at successively lower prices until the maturity is either "sold out" or a minimum "floor" price is reached, below which no more orders will be filled during the "order period." After the "order period" is complete and the bid has been won, the manager accepts orders according to the established priority provisions. Typically, these are Pre-Sale orders; Group Net orders; Designated orders; and Member Orders at the Takedown. Any firms that place these orders will either earn the selling concession (as a selling group member); the additional takedown (as a syndicate member that has one of its bonds sold by a selling group member); or the total takedown - that is, the total of the selling concession and additional takedown when a bond is sold directly to the public by a syndicate member. |
|
|
A customer places an order to buy 1 ABC Jan 60 Call and buy 1 ABC Jan 60 Put, at a maximum debit of $8. This order should be:
A. rejected because it is uneconomic B. written on 2 separate order tickets, 1 for the buy order; and another for the sell order C. written on 1 ticket and market as a spread D. written on 1 ticket and marked as a straddle |
The best answer is D.
This customer is specifying that a straddle be purchased at a net debit not to exceed $8. The successful execution of this order requires that both "legs" of the straddle be executed at the same time within the customer's limit (the debit). To facilitate the handling of such "one-on-one" orders (the same is also true for spread and combination orders), the CBOE has the "spread priority rule." This rule states that a spread, straddle or combination order has priority over equivalent single sided orders on the trading floor. In this manner, it is easier for traders to successfully execute spread, straddle and combination orders. |
|
|
On the same day in a margin account, a customer buys 5 ABC January 40 Calls @ $6 and sells 10 ABC January 50 Calls @ $1 when the market price of ABC is at $43. The customer has created a:
A. short combination B. long combination C. ratio spread D. back spread |
The best answer is C.
This is a very difficult question. The customer is taking the following positions: Buy 5 ABC Jan 40 Calls@ $6Sell 5 ABC Jan 50 Calls@ $1 $5DebitSell 5 ABC Jan 50 Calls@ $1Credit
|
|
|
"PSA" stands for:
A. Prepayment Speed Assumption B. Planned Securitization Algorithm C. Predicted Standardized Amortization D. Privatized Syndicated Asset |
The best answer is A.
Mortgage backed pass-through certificates are "paid off" in a shorter time frame than the full life of the underlying mortgages. For example, 30 year mortgages are now typically paid off in 10 years - because people move. This "prepayment speed assumption" is used to "guesstimate" the expected life of a mortgage backed pass-through certificate. Note, however, that the "PSA" can change over time. If interest rates fall rapidly after the mortgage is issued, prepayment rates speed up; if they rise rapidly after issuance, prepayment rates fall. |
