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Practice Final Concepts > Final #1 > Flashcards

Final #1 Flashcards

1
Q

A customer buys 1 ABC Jan 55 Call @ $4 and exercises the contract. What is the cost basis for tax purposes?

A

When a call contract is exercised, the customer is buying the stock. The customer establishes a cost basis equal to all monies paid for the stock - $55 per share strike price plus $4 per share paid in premiums equals a $59 per share cost basis.

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2
Q

What type of risk are Treasury STRIPS most susceptible to?

A

Interest Rate Risk

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3
Q

What type of security are constitutional debt limits/debt ceilings applied to?

A

General Obligation Bonds (Municipal)

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4
Q

How does a rise in U.S. interest rates affect foreign investor’s sentiment about investing in the U.S.?

A

If U.S. interest rates are higher, this attracts investment from foreign countries

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5
Q

Do ADR’s distribute dividends?

A

Yes

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6
Q

Do REIT’s distribute dividends?

A

Yes, they make dividend distributions to shareholders

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7
Q

The separate account that an insurance company maintains for a variable annuity is invested in what?

A

Designated mutual funds

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8
Q

Define value investing

A

Value investing is the selection of equity investments based on finding securities that are fundamentally undervalued in the marketplace

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9
Q

What do value investors look for when making investment decisions?

A

Value investors look at fundamental factors such as the P/E ratio and Price/Book Value ratio to find companies that are undervalued relative to their market sector

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10
Q

What securities must be segregated by the brokerage firm and placed in safekeeping?

A

Fully paid customer securities. These securities cannot be commingled with customer margin securities; cannot be commingled with firm positions; and cannot be re-hypothecated to a bank

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11
Q

How do rising interest rates affect stock prices?

A

Rising interest rates are bad for stock prices. More investors will switch from investments in stocks to bond investments

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12
Q

What type of licenses are required to sell variable annuities?

A

Either a Series 6 OR Series 7, in combination with an insurance license in the relevant state(s)

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13
Q

What are the 2 key components to tax-qualified retirement plans?

A
  1. Contributions are tax-deductible

2. Earnings accumulate tax-deferred

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14
Q

What occurs after the bidding process of a Dutch Auction is complete?

A

The non-competitive (negotiated) bids are set aside, and are filled at the average winning interest rate.

Next, the remaining (competitive) bids are filled from lowest to highest yield until the issue is “sold out”.

Finally, all of the winning competitive bidders are filled at the highest interest rate bid that completed the sale. (All the winners get the same interest rate in a Dutch auction)

The remaining higher rate competitive bids are void.

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15
Q

Is Stabilization (Regulation M) for an offering allowed during the 20-day cooling off period?

A

No

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16
Q

What time stamps are required to be printed on an Order Ticket?

A
  • Entry
  • Execution
  • Cancellation (if cancelled)

Note that the confirmation time is NOT required to be printed on order tix

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17
Q

Which method of analysis is used to evaluate Direct Participation Programs that considers the time value of money?

A

The IRR (Internal Rate of Return) considers TVM

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18
Q

Who must sign the agreement among underwriters?

A

The syndicate members (only)

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19
Q

What type of issuance results in the proceeds from the offering go to selling shareholders, instead of the issuer?

A

A Secondary Distribution

20
Q

What TRF’s (Trade Reporting Facility) are run by ACT?

A
  • NASDAQ TRF
  • Third Market trades of NYSE listed issues
  • ORF (the Over-The-Counter Reporting Facility) which reports trades OTCBB and Pink Sheet issues
  • TRACS (Trade Reporting and Compliance Service) which reports trades of NYSE, NYSE-MKT (AMEX) and NASDAQ stocks that take place on ECNs that are not linked into an exchange
21
Q

What is the “death benefit” of a variable annuity contract?

A

This applies PRIOR to annuitization, and means that if the person who owns the variable annuity dies the beneficiary will be paid at least the amount invested in the contract

22
Q

What is a password protected website considered to be by FINRA, regarding their rules on communication?

A

Sales Literature

23
Q

At what tax rate are REIT dividends taxed?

A

They are taxed at the ordinary income tax rate, at a maximum of 39.6%. REIT taxation is “not that great”, as they do not qualify for the “regular” dividend tax rate of 15% or 20%

24
Q

Retail member firms that route orders to market makers in return for compensation earn what?

A

A payment for order flow

25
Q

What “Acts” is the SEC permitted to administrate?

A
  • Securities Act of 1933
  • Securities Act of 1934
  • Trust Indenture Act of 1939

Note that the SEC does NOT have the power to administrate the Uniform Securities Act. This act is related to Blue Sky state laws

26
Q

Homeowners pre-paying their mortgages may result in what happening to revenue bonds?

A

They may be called. For example, a mortgage revenue bond issue may be called if homeowners prepay their mortgages

27
Q

A customer buys 1 Euro Feb 142 Call and sells 1 Euro Jan 142 Call. The position is profitable if:

A

The February expiration must be later than the January expiration, with the February expiring 1 month after the January. The customer is buying the “far” expiration (February) and selling the “near” expiration (January) in this calendar spread. Because of its HIGHER TIME value, the FAR expiration must be MORE EXPENSIVE, so this is a debit spread. Debit spreads are profitable if the spread between the premiums widens. Then the positions can be closed out at a larger net credit.

28
Q

Payments received by the owner of a tax qualified variable annuity are subject to what tax?

A

The payments received are 100% taxable. This is because in a Variable annuity, the contributions are fully tax-deductible, and the earnings are tax deferred

29
Q

What are monetary aggregates?

A

The cash available in the economy. i.e. M1, M2, M3, L

30
Q

What registration and regulation are Intrastate offerings subject to?

A

State registration and FINRA regulation

31
Q

What customer records are Registered Representatives required to keep for a customer, per FINRA rules?

A
  • a record by customer name or account number of each security position
  • a record of the aggregate position maintained among all customers in each security
32
Q

What entities/persons are considered to be institutional investors?

A
  • a Bank, savings and loan, insurance company
  • registered investment company
  • registered investment adviser
  • employee benefit plan with at least 100 participants, -
  • government entity
  • person with at least $50 million of assets for investment
33
Q

Is investment income included in the calculation of a person’s max contribution to a Keogh (HR10) plan?

A

No. Only personal service income

34
Q

When is payment required under Regulation T?

A

Promptly! But this must be NO LATER than 4 business days

35
Q

What must Sales Literature be accompanied with or preceded by?

A

Options Disclosure Document (ODD)

36
Q

If a zero-coupon premium bond is called prior to maturity, at what value will it be called?

A

At the current accreted value plus any call premium listed in the contract

37
Q

What are 3 key advantages of ETF’s?

A
  • Low cost
  • Ease of buying and selling
  • tax efficiency
38
Q

What type of interest is exempt from STATE and LOCAL tax?

A
  • Interest from U.S. Government Securities (does not include agencies)
39
Q

What type of securities is high inflation really bad for?

A

Stocks and LONG term bonds

Investors will flee to short term money market instruments in periods of high inflation

40
Q

What is an SRO categorized as, in terms of its entity classification?

A

A Membership Organization

41
Q

Which type of negotiable certificate of deposit is non-callable?

A

Short term! In contrast, long term negotiable CD’s are callable. Negotiable CD’s trade in the secondary market

42
Q

What is the equivalent of an underwriter’s concession for a municipal underwriting?

A

The “takedown”

43
Q

What are t-bills most similar to?

A

Zero coupon bonds. Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity

44
Q

The Investment Company Act of 1940’s minimum requirement of capital to start a fund (management company) is?

A

$100,000

45
Q

How is accretion taken on a discount bond treated from a tax perspective?

A

The annual accretion amount is reported as taxable interest income for that year; and increases the bond’s cost basis

46
Q

In the OTC market, it is assumed that quotes, when given, are:

A

Firm. There is no identification given for a firm quote

If a different type of quote is being given, they must be identified as such when given

Practice Final Concepts (7 decks)

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