Practice Exam 2

Question 1

The current yield on a bond with a coupon rate of 7.5% currently selling at 105-½ is approximately:

Answer 1

7.1%.
A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109%, or approximately 7.1%.

Question 2

Under Regulation T, action by the broker/dealer is NOT required when the:

Answer 2

amount due does not exceed $1,000.

Regulation T permits a broker/dealer to disregard any amounts due less than $1,000.

Question 3

All of the following statements regarding a 6% municipal bond that is puttable at par are true EXCEPT the:

Answer 3

bond is likely to trade at a discount in the secondary market when it is puttable.
Once a bond becomes puttable, the holder has the right to put the bond to the issuer at par. As a result, the bond would not trade below par in the secondary market. This effectively insulates the holder from interest rate risk-the risk that rising rates will force prices down.

Question 4

If a customer places an order to buy 200 shares of ABC stock at $25, and he wants to meet the margin call by depositing fully-paid listed stock currently trading at $10, how many shares must he deposit?

Answer 4

500.
To meet a margin call with marginable stock, an investor must deposit twice the value of the call. In this example, the margin call on the $5,000 purchase is $2,500. Because the customer must deposit $5,000 of marginable stock, at $10 per share, the customer must deposit 500 shares of the stock to meet the call.

Question 5

A May and November Treasury bond is traded the regular way on Wednesday, June 8th. The number of days of accrued interest is:

Answer 5

39.
Accrued interest on government bonds is based on actual days in a year. Settlement occurs on the next business day. This bond pays interest in May and November, with the most recent payment on May 1st. Interest has accrued on this bond for 31 days in May and 8 days in June, for a total of 39 days. Settlement date is Thursday, June 9th.

Question 6

Which of the following statements best describes a breakpoint sale?

Answer 6

Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission.

A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint.

Question 7

In safety of principal, general obligation municipal bonds are considered second only to:

Answer 7

U.S. government and agency bonds.

Question 8

A UK company exports sweaters to the U.S. and will be paid in U.S. dollars on delivery. To hedge foreign-exchange risk using listed currency options, the UK company should:

Answer 8

buy British pound calls.

Normally, exporters buy puts on foreign currency in order to hedge. There are no listed currency options available on the U.S. dollar, so the British company should buy calls on its own currency.

Question 9

The trust indenture of a revenue bond will show all of the following EXCEPT the:

Answer 9

reoffering yields.

Reoffering yields are unrelated to trust indentures. However, the trust indenture for a revenue bond issue does include covenants (or promises) between the issuer and the trustee for the bondholders’ benefit. Among these covenants are the flow of funds and the rate covenant.

Question 10

Which of the following individuals are eligible to participate in a tax-sheltered annuity?
Maintenance engineer at a state university.
Student in a public school system.
Minister.
Office clerk at a small corporation.

Answer 10

Maintenance engineer at a state university.
Minister.

Employees of 501(c)(3) and 403(b) organizations (which include charities, religious groups, sports organizations, and school systems) qualify for tax-sheltered annuities (TSAs).

Question 11

If a customer buys 100 XYZ at 49 and writes 1 XYZ Nov 50 call, receiving $350 in premiums, the breakeven point is:

Answer 11

45.5.
This is a covered call, so the investor is protected against declining stock prices to the extent of the premium received, and the breakeven is 45.50 (49 − 3.50).

Question 12

A Nasdaq market maker buys 1,000 shares of stock from a customer at its bid to satisfy a customer order. This is an example of a(n):

Answer 12

principal trade.

The market maker is acting in a principal (dealer) capacity.

Question 13

The capital structure of an open-end investment company can include:

Answer 13

one issue of common stock and limited bank borrowing.

Open-end investment companies may only issue redeemable common stock. Preferred stock, bonds, and other forms of senior securities are not allowed. Bank borrowing is allowed subject to certain limitations.

Question 14

The Options Clearing Corporation uses which of the following methods to assign exercise notices?

Answer 14

Random selection.

The OCC assigns exercise notices to member firms on a random basis; the members may choose the customers to be exercised on either a random basis or FIFO basis.

Question 15

The regular way ex-dividend date for cash dividends is the

Answer 15

1st business day preceding the record date

Question 16

Customers could pay a commission, rather than a sales charge, for shares of a(n):

Answer 16

closed-end investment company.
Sales charges could be paid on all types of open-end funds. Commissions are paid on securities traded in the secondary market, such as closed-end investment company shares.

Question 17

Which of the following order types are available to customers for use in NYSE equity markets?
Fill or kill. (FOK)
Immediate or cancel. (IOC)
All or none. (AON)
Order cancels other. (OCO)

Answer 17

Immediate or cancel. (IOC)
Order cancels other. (OCO)

IOC and OCO orders are available to customers for use in the NYSE equity markets. FOK and AON orders are no longer permitted in NYSE equity markets.

Question 18

For which of the following investments does SIPC provide coverage to customers?
Commodity futures contracts
Unregistered stock
Foreign currencies
Municipal bonds

Answer 18

Unregistered stock
Municipal bonds

SIPC coverage only applies to cash and securities. Commodity futures contracts and foreign currencies are not considered securities.

Question 19

If a Japanese exporter wants to hedge a recent sale of stereo equipment to a U.S. buyer, and the exporter will be paid in U.S. dollars upon delivery of the goods, the best hedge would be to:

Answer 19

buy Japanese yen calls.

The Japanese exporter will be paid in U.S. dollars upon delivery of the equipment. He would be adversely affected if the dollar dropped in value in relation to the yen. To protect his position he should buy calls on his own currency, the yen. Then, if the yen appreciates, his loss on the dollar is offset by his gain on the calls. Exporters buy puts on foreign currency to hedge, but there are no options on the U.S. dollar. The next best strategy is to buy calls on the home currency.

Question 20

A customer wishes to redeem 1,000 shares of a mutual fund. The NAV and POP are $10, and a redemption fee of 0.5% will be charged. How much will the customer pay in redemption fees?

Answer 20

50.
The question did not ask how much he would receive upon redemption, but how much he would pay in redemption fees. Mutual fund shares are redeemed at the NAV (bid): 1,000 shares × $10 each = $10,000. $10,000 × .005 (.5% redemption fee) = $50.

Question 21

Which of the following has unlimited risk if it is the only position in an account?

Answer 21

Short call.

Uncovered short calls carry unlimited risk.

Question 22

The interbank market is:

Answer 22

affected by international events.

The interbank market is the unregulated, decentralized market for currencies among banks and central banking authorities. Currency exchange rates are affected by economic and political events taking place in individual countries and on a global scale.

Question 23

A municipal bond is purchased at a discount in the secondary market at 90. The face amount is $10,000 and the bond has 10 years to maturity. If the bond is sold for 97 after 5 years, what is the taxable gain?

Answer 23

$200.

When a municipal bond is bought at a discount in the secondary market, the discount is accreted and taxable as ordinary income. Accretion increases cost basis. Therefore, 5 years later, the bond’s cost basis is 95. At that point, the customer has a 2-point capital gain. Had the bond been bought as an OID, the annual accretion is considered interest income and is not taxable.

Question 24

Which of the following organizations determines which OTC securities are eligible for purchase on margin?

Answer 24

FRB.

The Federal Reserve Board determines whether any security is marginable.

Question 25

A customer who is long 1 XYZ Sep 50 call could create a spread by combining it with which of the following positions?

Answer 25

Short 1 XYZ Sep 60 call. A spread involves two simultaneous positions in related options of the same type-one long and the other short of the same underlying security.

Question 26

Which of the following statements regarding the Code of Arbitration are TRUE? Simplified arbitration is available for claims of $50,000 or less. Simplified arbitration is available for claims of $25,000 or less. The statute of limitations for filing a claim is 3 years from the event. The statute of limitations for filing a claim is 6 years from the event.

Answer 26

Simplified arbitration is available for claims of $50,000 or less. The statute of limitations for filing a claim is 6 years from the event. Simplified arbitration is available for claims of $50,000 or less. The statute of limitations for filing a claim is 6 years from the event giving rise to the claim.

Question 27

Your clients' option position has been adjusted due to a 2 for 1 stock split. Which of the following regarding this 2 for 1 adjustment is TRUE?

Answer 27

The number of contracts owned will increase. For even splits (i.e., 2 for 1 or 3 for 1), the number of contracts owned will increase proportionately. The number of shares per contract will remain unchanged and the strike price will decrease proportionately.

Question 28

A member of the investment banking department of ABC securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make? The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.

Answer 28

All

Question 29

If a customer fails to return a proxy statement to a member firm by the 10th day before the annual meeting, the member may vote the shares:

Answer 29

provided the matters to be voted on are of minor importance. If a customer signs and returns a proxy statement and fails to indicate how the shares are to be voted, the member must vote the shares as recommended by management of the issuer. If, however, the customer does not return the proxy by the 10th day before the annual meeting, the member may vote the shares as it sees fit as long as the matters to be voted on are of minor importance. If the matters are of major importance (e.g., a merger or the issuance of additional shares), the member may never vote the shares.

Question 30

All of the following would flow through as a loss to limited partners EXCEPT:

Answer 30

principal repayment on recourse debt. Principal repayments are not deductible for tax purposes. The interest is deductible.