practice questions from kaplan Flashcards

Question

Government agency securities settle

Answer 1

the second business day following the trade date.

Answer 2

Maximum gain is $300; maximum loss is unlimited; breakeven point is $93. The first step is to identify the position. This is a short sale of stock and a sale of a put option. The sale of the put provides some income and offers protection only to the extent of the premium. Short sellers want the stock's price to decline. They lose when it rises. The investor has received $9,300 ($9,000 from the sale of the stock and $300 from the sale of the option). That makes the breakeven point $93 per share. Once the price of the ROC stock goes above that, the investor loses money. Because there is no limit as to how high the stock's price can go, the maximum loss is unlimited. If, on the other hand, the stock's price declines into the 80s or lower, the owner of the 90 put will exercise and our investor will pay $9,000 to purchase the stock. That stock will be used to cover the short sale. That means the investor sold the stock (short) at $90 and bought it back at $90 for no gain. At that point, the investor's only profit is the $300 from the premium on the sale of the put. Why doesn't the breakeven follow the "put-down" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven

Answer 3

I and III All index option exercises are settled in cash. The amount a writer owes the holder is known as the intrinsic value of the option, and the settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is the next business day.

Answer 4

Business development companies (BDCs) were created in 1980 by an act of Congress. Their purpose is aiding small businesses. As you can tell, they are appropriately named. Although private equity funds and venture capital funds may do that, neither of them are registered investment companies under the Investment Company Act of 1940.

Answer 5

Maximum gain is $200; maximum loss is $3,800, breakeven point is $38. The first step is to identify the position. This long stock with a short call (i.e., a covered call position). Breakeven is the customer's net cost. The price of the stock ($40) minus the premium ($2) received equals the $38 per share breakeven point. The strategy is to generate some income with a little protection against a decline in the price of the CDL stock. The premium income is the most this client can make. If the stock should rise well above the cost of $40 per share, the short call will be exercised and the customer will deliver the stock purchased at $40 and receive $40. Regardless of how high the stock price rises, this customer can never make more than the $2 premium. If the stock's price should decline, the call will expire unexercised. That 2-point premium protects the long stock, but only for those 2 points. Once the market price falls below $38 (the breakeven point), it is all a loss for the customer, down to a maximum $3,800 if the price drops to zero. Why doesn't the breakeven follow the "call-up" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.

Answer 6

The public offering price for a quoted mutual fund includes the maximum sales charge the fund distributor can assess.

Answer 7

16,800 The statement from the trading desk indicates a firm quote. When the client is selling, the price received is the dealer's bid price. This quote indicates that the firm is willing to buy up to 600 shares at the bid price. Multiply 400 shares times the bid of $42 per share to arrive at $16,800. If the client was a buyer, the cost would be the ask price of $42.15 ($16,860). The other two choices are for students who didn't notice the client had 400 shares.

Answer 8

protection from both prepayment and extension risk. A PAC offers protection from both prepayment and extension risk. This protection is greater than that offered by a targeted amortization class CMO, which protects against prepayment risk only.

Answer 9

two points of ordinary income and one point of capital gain. When a municipal bond is purchased in the secondary market at a discount, the annual accretion is taxed as ordinary income. The annual accretion is one point per year (four points divided by four years to maturity). Therefore, when the bond is sold two years later, its cost basis is 98. If the bond is sold at 99, there is a long-term capital gain of one point per bond. Also, there is ordinary income taxation on the accretion of two points.

Answer 10

$8.30 The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. In this case, the NAV is $7.80 and we are told the sales load is $0.50. Adding the two numbers together equals the public offering price of $8.30. The underwriter's concession of $0.12 is part of the $0.50 as is the $0.15 administrative fee.

Answer 11

0 Municipal original issue discount bonds must be accreted. At maturity, the entire discount will be accreted, and the cost basis will be equal to the par value. No gain or loss will occur at maturity.

Answer 12

When a customer wants to buy a specific municipal bond and possesses all of the bond's material information, Municipal Securities Rulemaking Board Rule G-19 allows the representative to execute the order and mark it unsolicited. The representative may not recommend any municipal bond without first knowing the customer's financial objectives and tax status

Answer 13

140% of the debit balance in a customer's margin account. In a margin account, hypothecation is the pledging of customer securities as collateral for the margin loan the customer will receive. The broker-dealer repledges (rehypothecates) the securities as collateral to the lending bank. Broker-dealers are permitted to pledge up to 140% of the debit balance in the customer's account.

Answer 14

The indenture, sometimes also referred to as the deed of trust, states the issuer's obligation to pay back a specific amount of money on a specific date. A debenture is a debt security containing an indenture. The bond resolution is a term used for municipal bonds not corporate debt.

Answer 15

Net revenue divided by annual interest and principal expense

Answer 16

a pattern day trader. A day trader buys and sells the same security on the same day. Pattern day trading is a regulatory designation for a day trader who executes four or more day trades in a five-business-day period. And, yes, the exam can be this specific.

Answer 17

Bankers' acceptance

Answer 18

require the dissenting member to accept its prorated share of the offering.

Answer 19

in the secondary market.

Answer 20

The true interest cost (TIC) method takes into consideration the time value of money. The issuer discounts future interest payments to arrive at a present value.

Answer 21

Discretionary If the registered representative may decide the specific security, the transaction requires discretionary authority, and therefore, must be done in a discretionary account. Determining the time or price does not require discretionary authority.

Answer 22

0.8225 When hedging with puts, the breakeven point is the cost of the underlying investment plus premium paid ($0.81 plus $0.0125 equals $0.8225, or 82.25 cents).

Answer 23

$51,156.94. The full price of a bond includes the accrued interest. First, we calculate the number of days of accrued interest. Because this is a municipal bond, each month has 30 days. Accrued interest is always paid up to, but not including, the settlement date. That means 30 days each for March, April, and May (90 days). Because we do not pay accrued interest for June 30, (on settlement date, the new owner is entitled to the entire six months of interest), there are 29 more days, giving us a total of 119 days. You can set it up like this: 6/30 minus 3/01 = 3 months, 29 days = 119 days. The next step is computing the amount of accrued interest in dollars and cents. With a coupon of 7% and semi-annual payments, each payment is 3.5% of the $50,000 par value. That is $1,750 each six months. We are going to solve for 119/180 days' worth of accrued interest. With the test center calculator, multiply $1,750 times 119 and divide the product by 180. The result is accrued interest of $1,156.94. Alternatively, you could find the interest for each day by dividing the semiannual interest of $1,750 by 180 days = $9.72222 per day. Multiply that times 119 days and the product is $1,156.94. Finally, when a bond with a 7% coupon has a yield to maturity of 7%, that tells us the bond is selling at par. All we need to do now is add the accrued interest to the $50,000 par value to arrive at $51,156.94.

Answer 24

2:1 Under a net revenue pledge, bondholders are paid from net revenue, which equals gross revenue minus operating and maintenance expenses. In this example, net revenue is $12 million ($30 million − $18 million). Debt service is the combination of interest and principal repayment. Here, debt service is $6 million ($4 million + $2 million). To compute the debt service ratio, divide net revenue by debt service: $12 million divided by $6 million equals a ratio of 2:1.

Answer 25

its price should remain relatively stable. A variable-rate bond has no fixed coupon rate. The coupon is tied to a market rate (e.g., T-bond yields) and subject to change at regular intervals. Because the interest paid reflects changes in overall interest rates, the bond price remains relatively close to its par value. Its coupon is always representative of the current market rate. As rates rise, the coupon is adjusted upward. As rates fall, the coupon is adjusted downward.

Answer 26

selling group members.

Answer 27

the $25,000 breakpoint. There are several important points in this question. Rights of accumulation provide that a new purchase is added to the value of existing accounts to determine the breakpoint reached. However, only Class A shares count because the Class B shares never paid a front-end load. Of course, only shares in the same fund family are used – we cannot combine STU shares with TUV shares. As far as the math, we have $25,000 in one STU fund and are adding another $20,000. That brings the investor's account in STU funds to $45,000, which is enough to meet the $25,000 breakpoint, but not the breakpoint at $50,000. Finally, the sales charge is computed as a percentage of the public offering price (POP), not the NAV.

Answer 28

can be withdrawn anytime within the first 30 days of receipt. If a customer wishes to withdraw cash dividends, the customer must do so within 30 days of receipt. Otherwise, they become a permanent reduction of the debit balance. The customer does not lose the dividend; rather, the dividend amount is now reflected as increased equity in the account. As the debit balance falls, equity in the account goes up dollar for dollar.

Answer 29

a capital gain of $20. The $400 discount is accreted over the 20 years to maturity. That is an annual accretion of $20. After 6 years, that is $120, making the tax basis of the bond $720. Because the sale at $740 is $20 more than the basis, the investor has a long-term capital gain.

Answer 30

Buy 100 shares of ABC at $50 per share and simultaneously buy one ABC 50 put A married put is a specific type of protective put. Anytime a put option is purchased while the investor is long the underlying stock, it is considered a protective put because it is a hedge against a move to the downside. When the put and stock are bought at the same time, the strategy is known as a married put and has a special tax benefit. Normally, purchasing a put option on stock held less than the long-term holding period causes the existing holding period on the stock to be erased. In the case of the married put, the holding period of the stock is not affected.

Answer 31

4,000,000 shares Shares outstanding are those that are in the hands of the public. To determine the number of outstanding shares, take the number issued minus the number in the treasury. In this question, that is 5 million minus 1 million = 4 million. If, at a later time, ADJ should decide to issue some of the authorized, but unissued shares, the number of outstanding shares will obviously increase. The same would happen if the company sold some of the treasury stock in the open market or used it to pay stock dividends to current shareholders.

Answer 32

$5,300 The cost basis of the 100 shares is the total amount the investor spent to acquire them. She paid $300 to purchase the call option. When she exercised the call, she purchased 100 shares of FLB at $50 per share for $5,000, so the cost basis is $5,300.

Answer 33

Buy calls on Japanese yen The U.S. company is concerned that the value of the Japanese yen will rise. Therefore, the company should buy calls on the yen to lock in the lowest possible price to buy yen for payment of the contract. Importers buy calls to hedge.

Answer 34

II and IV Created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and to stimulate the economy, BABs are taxable municipal securities. There are two types: direct payment BABs that provide the municipal issuer with payments from the U.S. Treasury and tax credit or issuer BABs that provide the bondholder with a federal income tax credit.

Answer 35

four day trades in five business days.

Answer 36

All of these can have primary market transactions. In the case of the closed-end investment company (CEF), it is the initial public offering and, if desired, an additional public offering. The CEF is the only one of these choices where shares trade in the secondary markets. Investors holding shares of a CEF can trade the shares freely, just like any other stock. However, owners of the other types of investment companies will find there is no market for their shares if they wish to sell. That is not a problem, though, because these investment companies stand ready to redeem shares continuously. Technically, when the UIT buys back its shares, it is considered a secondary market transaction. However, for exam purposes, because the trust is the only buyer in the marketplace and the price is not subject to negotiation, it is not a true secondary market transaction.

Answer 37

a price no higher than the public offering price. Stabilizing bids cannot be used to raise the market price of an issue. Stabilization may only be used to support a new issue security at or below the public offering price

Answer 38

buy the specified foreign currency for a fixed U.S. dollar amount. The holder of a call option has the right to buy the underlying asset. The asset in the case of foreign currency options is the specified foreign currency. Therefore, a foreign currency call option gives the holder the right to buy the specified foreign currency at the strike price. That strike price is expressed in U.S. dollars. For example, one BP 1.30 call option gives the holder the right to buy 10,000 British pounds at a price of $1.30 per pound, or $13,000.

Answer 39

Sell covered calls Selling calls will generate income and protect the downside to the extent of the premiums received.

Answer 40

pay current operating and maintenance expenses. When the flow of funds is described as a net revenue pledge, it means the operating and maintenance expenses are paid first. Following that is the debt service (interest and this year's principal). In a gross revenue pledge, the order is reversed.

Answer 41

$10,000 When a member of the syndicate sells a bond, the member is entitled to the total takedown. In this case, one point ($10) per bond (1,000 bonds sold × $10 per bond = $10,000 profit). Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead.

Answer 42

direct participation programs (DPPs).

Answer 43

for a maximum of 55 business days.

Answer 44

DRS stands for the Direct Registration System. DRS provides a book-entry service. The issuer keeps the records of ownership with no certificates issued. When there is a sale of securities in the account, the customer tells the DRS to deliver to the broker-dealer and there are no hassles with signature guarantees or mutilated certificates. Transfer and ship creates potential delivery issues because the customer will have to be sure to have everything in good deliverable form to the broker-dealer by T+2. DVP and RVP are for institutions and street name means in the name of the brokerage firm, something the customer specifically does not want. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Answer 45

In the money In this case, the strike price is less than the market price, so a call option would be in the money by the difference between the strike price and the market price (six points, in this case). At the money means the strike price and the market price are the same. At parity means the premium equals the intrinsic value.

Answer 46

ordinary income subject to federal income tax. Interest on Treasury bills, notes, and bonds is taxable as ordinary income at the federal level. It is exempt from state and local taxation.

Answer 47

A DPP rollup A DPP rollup is a transaction involving the combination or reorganization of one or more limited partnerships into securities of a successor corporation. The securities of the successor corporation would likely have greater liquidity. This would have the effect of turning the illiquid DPP into more liquid securities. Disclosure documents must be provided to investors prior to the transaction disclosing risk, the GPs opinion regarding fairness of transaction, and reports and appraisals in connection with the transaction.

Answer 48

The issuer The issuer hires a bond attorney to render an opinion on the prospective municipal offering.

Answer 49

20-year maturity, 4% coupon The longer the duration, the greater the decrease in price when interest rates go up. The bond with the longest duration will have the longest term to maturity and lowest coupon. Without getting into complicated math, assume that interest rates rose to 8%. Those investors holding a bond with a 4% coupon are going to be earning half of the going rate while those with the 6% coupon are earning 75% of the going rate of 8%. Presented with that information, you can ask what would be worth more to an investor: the 4% bond or the 6% bond? I think most would rather earn 6% and would pay a higher price for that bond. The next step is thinking about how long the investor will be stuck with that lower-than-market rate. Would you rather receive half the going rate for 10 years or for 20 years? Clearly, the sooner you can get your principal back and reinvest at the higher rates, the more attractive the bond. That makes the 4% bond with a 20-year maturity the least attractive investment, and its price will decline more than the others. That relates to our first two statements: the longer the duration, the more the price decline, and the longest term to maturity with the lowest coupon rate will have the longest duration.

Answer 50

the total takedown. The total takedown is that portion of the municipal underwriting spread that remains after the underwriting manager takes the management fee. The total takedown consists of the additional takedown and the concession.

Answer 51

Options Clearing Corporation (OCC) exercise limit rules. OCC exercise rules limit the maximum number of contracts in the same underlying security that can be exercised within a five-business-day period. Three customers—all related and all giving instructions to exercise their long calls in the same underlying security within three business days—should, at a minimum, raise the question of whether or not they are acting in concert to circumvent the OCC exercise limit rules.

Answer 52

$11,000 A margin account containing long and short positions is known as a combination or mixed margin account. In a mixed-margin account, it is generally easiest to figure the transactions separately. Whether a long purchase or a short sale, the initial margin requirements are the same: 50% of the transaction. The investor needs $6,000 ($12,000 times 50%) for the purchase and $5,000 ($10,000 times 50%) for the short sale.

Answer 53

the conversion price to approximately $22.73. When a $100 par value preferred stock is convertible into four shares of common stock, the conversion price is $25 per share, ($100 ÷ 4 = $25). The antidilution covenant means the investors will have the same conversion rights after a stock split or stock dividend as they had before. After a 10% stock dividend, each share of preferred stock will be convertible into 4.4 shares (4 shares x 110% = 4.4). The par value of the preferred stock does not change. Divide that $100 par value by the new number of shares to get the new conversion price. It looks like this: $100 ÷ 4.4 = 22.73. Alternatively, you can divide the original conversion price of $25 by 110% arrive at the same answer.

Answer 54

a long-term capital gain of $1,250. The investor purchased a protective put against a long position that had a long-term holding period (almost 13 months). That means that the holding period of the stock is not affected by the purchase of the put. Therefore, this investor's gain will be long term. The gain is the difference between the cost and the proceeds. When exercising a put, the cost of the stock is the investor's cost basis. The exercise price minus the option premium paid is the sale price. In our question, the cost is the $150 initial purchase price ($15,000 total). The sale price is the 165 strike minus the $2.50 premium, or $162.50 per share ($16,250). That results in a long-term capital gain of $1,250.

Answer 55

Earnings per share (EPS) Dividing net income after taxes, interest, and payment of preferred dividends by the number of common shares outstanding determines EPS.

Answer 56

$5 per $1,000 of par. A concession between broker-dealers on secondary market transactions is a discount from the yield that the broker-dealer is quoting. It is common for a broker-dealer to offer bonds to other broker-dealers at a price, less the concession. The net price becomes the purchase price for the buying broker-dealer. If simultaneously sold to a retail account, the markup is from the net price paid. If not simultaneously retailed but held in the broker-dealer's inventory, it is fair for the broker-dealer to market her inventory and mark up from there for retail sale.

Answer 57

$20. Par value divided by conversion price equals the number of shares into which the security is convertible. If this security is convertible into five shares, we need to know what number goes into $100 five times. That number is $20. The current market value of the preferred stock is unnecessary information.

Answer 58

a daily basis.

Answer 59

The highest bid and lowest ask for all market makers The basis of the fairness of markups and markdowns under the 5% markup policy is the highest bid and the lowest ask shown for all market makers making a market for that security. This is the inside quote or inside market price because it shows the narrowest spread. Comparing the inside market to the price charged (or paid) to the retail customer determines the actual percentage. Depending on the circumstances, it may be 5%, more than 5%, or less than 5%.

Answer 60

makes a market in securities. A broker's broker acts as the agent in transactions by facilitating the movement of blocks of bonds. The broker's broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker's broker does not make a market in securities.

Answer 61

General partnership Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. Although an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

Answer 62

A sell stop order Protecting a profit on a long position means getting out of the stock before its price declines below the original purchase price. That means selling the stock. The investor would enter the sell stop order with a stop price below the current market, but above the original cost. A sell limit order is placed above the market and that is of no help if the price drops. A market order is executed at once and buying the stock is not appropriate when the investor already owns it.

Answer 63

Capital surplus When new stock is issued, any funds paid for the stock in excess of the par or stated value is called capital surplus. In this case, it is the $10 above the $20 par. It might also appear on your exam as paid-in surplus.

Answer 64

determined by its board of directors.

Answer 65

$1,000 In this restricted account, half of the sales proceeds will be used to reduce the DB balance to $15,000 and half of the sales proceeds are released to the special memorandum account (SMA). Therefore, when $2,000 of stock is sold, $1,000 is credited to SMA. This is the amount that can be withdrawn from the account.

Answer 66

10 contracts @$40 for 150 shares The number of contracts is not adjusted—there are still 10. However, with a 3:2 split, the number of shares per contract increases to 150. Because the aggregate exercise price must remain the same as before the split ($6,000 per contract), the price per share is reduced to 2/3rds of the original, or $40 per share. We check that by multiplying the new contract size (150) by the new contract price ($40) and the result is the original $6,000 per contract.

Answer 67

rises above $60. The calculation to find the short margin account maintenance level is credit balance ÷ 130% (or 1.3). The price per share level will be the same whether it is 100 shares or 400 shares so we'll use 100 shares in our calculation. Keeping the math simple, the credit balance in a short account is the sale proceeds ($5,200 in our question) plus the 50% Regulation T requirement ($2,600) for a total of $7,800. Divide that credit balance by 1.3 and the quotient is $6,000 (or $60 per share). In a short margin account, things start turning bad as the price of the stock rises. This account will receive a maintenance call if the market price of FTS increases by more than $2 per share from its current trading level of $58. For those who find it easier to view the calculation using the full 400 shares, the math goes like this: The credit balance is the sales proceeds of $20,800 (400 shares times $52 per share) plus the 50% Regulation T requirements ($10,400) for a total of $31,200. Divide that credit balance by 1.3 and the quotient is $24,000. Because the question asks for the per-share price at which a maintenance call is issued, divide the $24,000 by 400 shares and the result is the same $60 per share we arrived at using 100 shares. Use whichever is easier for you to follow; the correct answer will always be the same.

Answer 68

Principal or agency trade The capacity of the firm, principal or agent, must be disclosed on all confirms. The settlement date, accrued interest, and total price would not appear on a when-issued confirm.

Answer 69

support levels. Technical analysts care about price and volume trends in the marketplace, such as support levels. A corporation's earnings, P/E ratio, and current ratio would be of most interest to a fundamental analyst who reviews a company's financial statements in more detail. LO 13.e

Answer 70

The Farm Credit System (FCS) is a national network of lending institutions that provides agricultural financing and credit. The federal FCS issues discount notes, floating rate bonds, and fixed-rate bonds. The maturities range from one day to 30 years. Unlike the mortgage agencies, these are not pass-through investments.

Answer 71

Amount of markdown or markup MSRB rules require that customer confirmations provide the name, address, and telephone number of the broker-dealer and the capacity of the firm in the trade (agent or principal). The amount of commission is required if the firm acted as agent, and the markup or markdown if the firm acted as principal.

Answer 72

a capital gain of $5 per bond. Municipal bonds bought at a premium, either in the new issue or secondary market, must be amortized. The amount of the premium is 2½ points, or $25. As the bond has five years to maturity, the annual amortization amount is $5 per bond. After two years, the bond's basis has been amortized down to 101½. At that point, a sale at 102 generates a capital gain of $5 per bond.

Answer 73

Closed-end management investment companies Closed-end funds trade in the secondary markets just like any common stock. Therefore, there is generally a commission charged when purchasing and when selling. Open-end fund Class B shares have no load on the way in, but they will have a back-end load if redeemed before the CDSC period ends. Similarly, Class A shares have a front-end load (always referred to as a sales charge, never a commission) to purchase, but no charge when redeeming. UITs may have a load on the way in and/or may have a redemption charge, but those a not referred to as commissions.

Answer 74

All members of the underwriting syndicate All members of the syndicate, including the managing underwriter, sign the agreement among underwriters. It is not signed by the issuer, bond counsel, or trustee.

Answer 75

After successful completion of the offering, the market price would rise slightly. Successful completion of a rights offering generally results in a slight decline in the market price of the stock. This is because the subscribers were able to purchase at a price below the current market. This would have a small dilutive effect, causing a slight reduction in the market price. The rights offering is of additional shares, so the number outstanding would increase. Most corporations use a standby underwriter who will buy any shares that were not exercised. Please note: From a test-taking skill point of view, when you have two answer choices that are the opposite of each other (the price would rise slightly or the price would decline slightly), in almost all cases, one of those two must be the correct answer.

Answer 76

the last day of trading. Yield-based options expire like stock options—on the third Friday of the expiration month, which is the last day of trading.

Answer 77

a calendar spread. Long a call and short a call is known as a call spread. If the strike prices are the same, and the expiration months are different (Oct and Dec), it is a calendar spread. Calendar spreads are sometimes called time spreads or horizontal spreads.

Answer 78

A municipal bond fund At least for purposes of selecting the correct answer on the exam, whenever you see high tax bracket, the choice is going to be municipal bonds. Because those bonds pay tax-free interest, they are highly attractive to those in high tax brackets. Even though the mutual fund is paying a dividend, the IRS treats the dividends from a bond fund the same as the interest paid by the individual bonds in the portfolio. Therefore, the dividends paid by a municipal bond fund carry tax-free treatment. Dividends paid by all the others are taxable. If the question had said the highest safety, then it would have been the U.S. Treasury bonds, but that would never be the question when a high tax bracket is in the question.

Answer 79

The 500 shares will be sold at $12; the remainder of the order will be canceled unexecuted. An IOC order will take a partial fill. Time is the limiting factor in an IOC.

Answer 80

the true interest cost. When an issuer discounts future interest payments to arrive at present value, the interest cost method being used is the true interest cost. This method takes into consideration the time value of money.

Answer 81

general obligation (GO) and revenue bonds.

Answer 82

Two 100-share certificates and three 90-share certificates The key to making good delivery is the ability to stack certificates in piles of 100 shares or multiples of 100 shares (such as a 200-share or 1,300-share certificate). If there is an odd lot (fewer than 100 shares) in the trade, that can be made up of one or any number of certificates totaling that odd lot. If delivery is attempted of two 100-share certificates plus three 90-share certificates, the two 100-share certificates are fine, but there is no way to stack those 90s into piles of 100 shares. Let's look at the choices that are good delivery. Four 100s and one 70 has gives us four stacks of 100 shares plus a stack for the complete odd lot of 70 shares. Eight 50s can be combined two at a time to make four piles of 100 shares; the 40 and the 30 add up to the odd lot of 70 shares so this is a good delivery. Although 47 10-share certificates is a bit awkward (reminds me of being in line at the supermarket when the person in front is paying for their groceries with nickels and dimes and taking forever), 10 shares taken 10 times is 100 shares, and there are enough to do that four times. Then the remaining seven 10-share certificates completes the odd lot. Remember, when using certificates smaller than 100 shares, you must be able to combine them into 100-share lots.

Answer 83

there are no minimum earning requirements to be an eligible participant. Eligibility to participate in a SEP IRA is limited to employees who have earned a minimum of $600 for the year in question.

Answer 84

t+1 bought ono 4/4, settlement date is 4/5

Answer 85

A.M. Best A.M. Best historically has specialized exclusively on the insurance marketplace. They issue financial strength ratings measuring insurance companies' ability to pay claims and rate financial instruments issued by insurance companies, such as bonds and notes. They can issue debt and financial strength ratings for other sectors as well under the Credit Rating Agency Reform Act.

Answer 86

they qualify for special tax treatment under Subchapter M of the Internal Revenue Code. The term regulated investment company refers to the Internal Revenue Code (IRC) section offering favorable tax treatment to qualifying investment companies. Triple taxation of investment income can be avoided if the mutual fund qualifies under Subchapter M of the IRC. To avoid taxation under Subchapter M, a fund must distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed amount. This rule applies to management companies (open-end and closed-end) and UITs. That means ETFs are also included. Although not investment companies registered under the Investment Company Act of 1940, REITs can also take advantage of Subchapter M's tax benefits. It is true that mutual funds register with the SEC under the Invesment Company Act of 1940 (their portfolio managers register as investment advisers under the Advisers Act) and their principal underwriter is a FINRA member, but those statement have nothing to do with the question.

Answer 87

II and III A variable annuity is a combination of two products: an insurance contract and a mutual fund. Therefore, variable annuities must be registered with the state insurance commission and the SEC.

Answer 88

She may not purchase a new issue because she is considered a restricted person. Under the rules regarding the purchase of new issues, bank officers would be characterized as restricted persons. They may not, therefore, purchase new issues.

Answer 89

Obtaining the names of the beneficiaries of the estate for the purpose of notifying all parties Upon being notified of the death of a client, the registered representative assigned to the account should cancel all open orders (GTC and day) and mark the account Deceased. The firm should not permit any trades until proper documents are received from the estate representative. There is no requirement, nor is it the responsibility of the firm to contact the decedent's attorney or beneficiaries.

Answer 90

Correspondence review by a principal can occur either before or after use, in accordance with the firm's written procedures. Filing of correspondence with FINRA is not required.

Answer 91

$5,000. Securities valued at twice the Regulation T cash call must be sold out if a customer fails to meet a Regulation T margin call ($2,500 × 2 = $5,000).

Answer 92

the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult's funds or securities.

Answer 93

On a no-par preferred stock, the dividend is a stated rate.

Answer 94

open-end investment companies. Municipal bonds, government and agency securities, and corporate securities (listed and unlisted) all trade in the OTC market. Foreign securities trade in the United States if the companies comply with SEC registration and disclosure requirements. Mutual fund shares (open-end companies) do not trade.

Answer 95

the last business days of April and October.

Answer 96

$66.75 per share This customer is looking for the price of the stock to decline. The proceeds of the sale were $70 per share and the cost of the "insurance" (the call option) was 3.25. That means that the customer will not start making money until the stock falls below proceeds minus cost or 66.75. In a question like this, the current market price of the stock and the strike price of the option are irrelevant. Breakeven on short stock and a long call position is the proceeds minus the premium. As is always the case when computing breakeven, the number of shares and number of option contracts is meaninglessbreakeven is the same price for one or one thousand.

Answer 97

buy 4 MMLJ puts. The customer is long the stock and so needs protection should the price of the stock fall, and a long put could give such protection. Buying a put on a long position is the strategy known as a protective put. Because the customer is long 400 shares, they need four puts to hedge the position. If the customer had been short the stock, they would use long calls to hedge.

Answer 98

only if notice is given in the prospectus. Stabilizing transactions are permitted if the SEC is notified in the registration statement and the investing public is notified in the prospectus.

Answer 99

A time spread Time spreads, also called calendar or horizontal spreads, consist of two options of the same type with the same strike price, but different expiration months. The strategy expects the market to stay relatively level. The profit arises from the time decay of the later expiration date. A long straddle is profitable only if there is market movement. The same is true with the long call – the market price must go up. A debit put spread is a bearish strategy, so this strategy requires the market price to decline.

Answer 100

$62 The consolidated tape is a high-speed, electronic system that reports the latest price and volume data on sales of exchange-listed stocks. The price shown does not include commission or other charges.

Answer 101

evidence of insurance. Delivery of certificates for securities traded as insured securities must be accompanied by evidence of insurance. Although noted on the confirmation, the evidence itself need not accompany or appear on the confirmation.

Answer 102

$150,000. An Eastern syndicate is an undivided account. That means that each member is responsible for its share of any unsold portion. This underwriter's commitment is 15%, so that percentage of the $1 million remaining is $150,000. If this were a Western syndicate (divided), the underwriter would have had no liability.

Answer 103

The receiving broker-dealer must go through the process of reclamation. The receiving broker-dealer would go through the process of reclamation. Once accepted, if securities are determined to be incorrect as delivered, reclamation is the correction process used. The receiving broker-dealer notifies the delivering broker-dealer (rather than the transfer agent). Rejection is the same process when the irregularity is noticed at the time of delivery (the delivery is not accepted in the first place).

Answer 104

A general securities principal or municipal securities principal According to MSRB rules, advertising (communications with the public) must be approved by either a municipal securities principal or a general securities principal.

Answer 105

A good faith deposit is required when the syndicate places a bid on a competitive offering. It is generally 1%–2% of the par value of the bonds offered for sale. If the bid is unsuccessful, the deposit is returned by the issuer to the syndicate manager.

Answer 106

II and III Call premiums tend to decrease over time. The longer a customer has to hold the bond (and receive semiannual interest), the less of a premium an issuer will pay to take away the bond before maturity. Call prices are always stated as a percentage of the principal amount (par) to be called. For example, a call price of 103 means the issuer will pay $1,030 for each bond called.

Answer 107

call risk. Call risk is the greatest when purchasing a bond at a premium. If the bond is called much earlier than its maturity date, the amount of loss realized is significantly more than the amount of the bond's adjusted cost basis. In this case, the adjusted cost basis is $1,177.78 (the $200 premium amortized over 18 years is $11.11 per year, or $22.22 for the two years). Legislative risk occurs when there is a change in the law that negatively affects the value of a security. Interest rate risk is if interest rates rise, bond prices fall. This was not evident in this example. The most common case for an issuer calling in bonds is when interest rates fall. This means that the issuer can borrow in the current market at a lower rate than the outstanding debt instrument. Inflation risk is not relevant to the event taking place in this question.

Answer 108

a $400 short-term capital loss. With the stock selling at 57, a 50 put is out of the money (put-down rule) and has no intrinsic value. Closing the position (selling the worthless put) generates zero proceeds. The cost is $400; the sale proceeds are zero resulting in a loss of the $400 premium. How do we know it is short term? Unless the question specifies LEAPS, all options have a maximum term of nine months.

Answer 109

January. Member firms must provide an IRS Form 1099 to the primary account holder of all the interest and dividends credited to the account in January. This form is used in the customer's tax return preparation.

Answer 110

the issuer has reached a statutory debt limit. Statutory debt limits only apply to general obligation bonds.

Answer 111

Sell a 35 call The client has two objectives: Generate income and benefit from a price decline. Selling the 35 call accomplishes both. The sale of the call option generates premium income and the writer of a call option benefits when the price of the underlying stock declines (the investor earns the premium because the option expires unexercised). Why not buy a call to protect the short stock position? Good idea, but note that the question states the investor would like to generate income. The only way one can generate income with options is to sell them (be a writer). Buying a put would be like "doubling down." The investor already made the bearish bet by selling short. Buying the put is the same bet (and does not generate income). Selling the 30 put meets the objective of receiving income but does not benefit from a decline in price. If the stock's price continues to fall, once it drops below 30, the likelihood of exercise increases and that is not what an option writer wants.

Answer 112

the Options Clearing Corporation (OCC).

Answer 113

their voting privilege. In an odd play on words, the only similarity here is that neither of them have voting rights. Warrants are long-term while rights are short-term. The exercise price of a right is below the current market while that of a warrant is above. Only rights are distributed to existing shareholders in proportion to the investor's current stock ownership. Warrants are not sent to shareholders; they are most often part of another issue.

Answer 114

47 per share. This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share.

Answer 115

a loss of $400. The 50 put expires because it is out of the money. The customer can close the position in the 65 put by purchasing it for its intrinsic value ($1,300) or, because the option is thirteen points in the money, it will be exercised. If exercised, the stock is purchased for $6,500 but is only worth $5,200. In either case, the investor loses $1,300. Because the account was credited $900 when the spread was established, there is a net $400 loss ($1,300 − $900). Please note that in test questions like this, the put writer who is exercised never buys and holds the stock; it is immediately sold at the current market price. Alternately, breakeven is 56 (65 − 9), and the spread is bullish. Therefore, the customer makes money above 56 and loses below 56. Because the stock is at 52 at expiration, the customer has a $400 loss (56 to 52). Let's look at this on a t-chart. the 50 put is 0.00 on the right of the t chart close out the b-6500 with s+5200 that's where i missed it.

Answer 116

pay operations and maintenance. Under a net revenue pledge, operations and maintenance are paid first, with debt service following. In a gross revenue pledge, debt service is paid before operations and maintenance. Net revenue pledges are the more common of the two.

Answer 117

Working capital You are calculating working capital (current assets − current liabilities). There are three liquidity calculations using the balance sheet. They are as follows: Working capital = current assets − current liabilities Current ratio = current assets / current liabilities Quick asset ratio (acid-test ratio) = (current assets − inventory) / current liabilities

Answer 118

the total of both sides. The firm must consider the entire transaction (a proceeds transaction) when calculating the markup.

Answer 119

a $50 capital gain. The premium on the municipal bonds must be amortized. The tax rules require that when you purchase a bond at a premium, you have to reduce the cost basis of the bond each year. Even though there are five bonds in the question, here's the math on one bond and then we'll multiply by five to get the total amount. The investor buys the bond at 104 or $1,040 and the bond is due to mature in 20 years. Take the $40 premium divided by the 20 years to maturity and that will tell us the amount that we amortize/reduce the cost basis by each year. $40/20=$2. It then tells us that the bond is sold after 10 years. Ten years of amortization is $2 per year x 10 years = $20. That lowers the basis of the bond to $1,020 ( $1,040 - $20 = $1,020). The bonds are sold at 103 or $1,030, so the gain is $10 per bond times five bonds for a total gain of $50.

Answer 120

$1.25 Treasury notes and bonds are quoted in fractions of 32nds. The spread between the bid and the ask is 4/32nds. In simpler terms, that is 1/8th. Each point is $10.00, so this 1/8th of $10.00 is equal to $1.25.

Answer 121

beta Beta measures the systematic risk of a stock by comparing the variability between a particular stock's (or portfolio's) movement and that of the market in general. It only measures systematic risk not total risk. The beta coefficient of the market is set at 1.0. If the beta of the stock (or portfolio) is higher than 1.0, it is more volatile than the market. If it is less than 1.0, it is less volatile than the market. Alpha is the tool used to measure how a stock (or an asset manager) performed compared with the investment's expected rate of return based on its beta. Standard deviation measures the total risk of an investment (systematic risk + unsystematic risk). The correlation coefficient measures how two investments move in correlation with each other. A high correlation means they move in step with each other. A negative correlation means they move in opposite directions.

Answer 122

$14 The purchaser of a bond pays the seller the interest that has accrued since the last interest payment date. A purchaser in August will pay the interest that has accrued since May 1. Then, on November 1, the investor will receive the entire six months of interest. We are told that the investor paid $16 in accrued interest. That is income to the seller. Then, when the November payment of $30 (6% coupon is $30 semiannually) is made, the investor must report the amount over the accrued interest paid out as income. In our question, that is $30 minus $16 = $14.

Answer 123

tender the bonds. The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50). Once the call date passes, the issuer ceases interest payments making it unattractive to continue to hold the bonds.

Answer 124

as a percentage of par. Although municipal bonds are usually quoted on a yield basis, actively traded bonds known as dollar bonds are often quoted as a percentage of par (price). The term dollar bond comes from the quote being made in dollars. Remember that a percentage of par value ($1,000) equals a dollar price.

Answer 125

buy yen puts. The exporter does not want to see the value of the yen fall. If she owns yen puts, and the yen does fall, her profit on the puts would help compensate for the decrease in the value of the yen. Selling yen calls would also provide protection if the yen fell in value, but only to the extent of the premium received. Exporters buy puts to hedge; importers buy calls on the foreign currency to hedge.

Answer 126

The upside potential of a common stockholder with less downside risk If the price of the underlying stock increases, the holder of the debenture can exercise the conversion privilege and capture that growth. Unlike the stock, as a debt security, the regular periodic interest payments tend to provide a floor below which the price of the debenture will not fall. In exchange for this benefit, the coupon rate is lower than a comparable non-convertible security. Many of these convertibles have a call feature. If the price of the stock rises, the issuer may decide to call it in and the investor's best option is to convert. This is known as forced conversion and forces the investor in a debt security to own an equity security. Debentures have a lower priority in dissolution than secured bonds.

Answer 127

a time when liquidation of fund shares is prohibited by the fund, meaning there is an element of illiquidity to be considered.

Answer 128

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.

Answer 129

Purchase index option puts Selling options to hedge adds income to the account (premiums received), but the protection is limited. The best hedging protection is to purchase options, and to hedge long stocks, purchasing puts is the most suitable. With so many stocks to hedge, doing so individually would not be cost effective due to commissions. On the other hand, hedging the entire portfolio with index options allows the hedge to be done in fewer—if not a single—transaction.

Answer 130

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%.

Answer 131

Agreement among underwriters The agreement among underwriters (or syndicate letter) details the participation and obligations of each syndicate member. Cooling-off period, registration period, and effective date are terms that apply to nonexempt issues that must be registered with the SEC in accordance with the Securities Act of 1933. Municipal issues are exempt from these registration requirements.

Answer 132

3.95% A bond's basis is its yield to maturity (YTM). It is not necessary to do the YTM calculation because it could only be one choice. We can easily compute the current yield by dividing the $50 annual interest by the $1,150 current market price. That is about 4.35%. The YTM must be lower than that because it includes the eventual loss realized when the bond matures at par. There is only one selection that is lower than 4.35%. The calculation would follow our formula of: Annual interest - (premium ÷ number of years to maturity) (Current market price + par) ÷ 2) Plugging in the numbers, we have: ($50 - $7.50) divided by $1,075. That is 3.95%

Answer 133

the spread. The only party in an underwriting who makes the entire spread is the syndicate manager (or managers if jointly managed). The manager's fee is what the manager makes on sales by everyone else. When a syndicate member makes a sale, the compensation is the total takedown (everything other than the manager's fee). When a selling group member makes a sale, the compensation is the selling concession. For example, in an underwriting of muncipal bonds with a face value of $100 million, the spread might be 1%. That means the underwriters will pay the municipal issuer $99 million and re-offer the bonds to the public at par. That $1 million spread ($10 per $1,000 bond) could be split as follows: Manager's fee $150,000 Total takedown (syndicate members) $850,000 Selling concession (selling group) $500,000 When any of the bonds are sold by the syndicate manager, the compensation is the entire spread ($10.00 per bond). When any of the bonds are sold by a member of the syndicate, that member receives $8.50 per bond and the syndicate manager receives the other $1.50. When any of the bonds are sold by member of the selling group, that member receives $5.00 per bond, the syndicate member who brought that selling group into the deal receives $3.50 per bond, and the syndicate manager receives the remaining $1.50 per bond.

Answer 134

are traded in the secondary markets. The ET in ETF stands for exchange-traded (not the movie character). That is a solid hint that these trade on the exchanges. Stock exchanges are secondary markets. Because mutual funds are always part of a continuous new issue, their sale takes place in the primary market. Redemptions are back through the fund, not on any securities marketplace. There are mutual funds that track indexes just as ETFs do. Both compute their NAV as of the 4 pm close of the markets. No open-end investment company can issue preferred stock.

Answer 135

buy 1 ABC Jul 50 call, write 1 ABC Jul 60 call. Starting at the beginning, a spread is always a long and a short position in the same option class (two puts or two calls on the same underlying security). That is, the investor buys a call and sells a call (a call spread) or buys a put and sells a put (a put spread). In the case of a credit spread, the premium received for the option sold is higher than the premium paid for the option bought. That is why there is a credit to the investor's account. The opposite is true with a debit spread. The premium paid for the option purchased is higher than the premium received for the option sold. Therefore, there is a debit (a charge) against the investor's account. The lower the strike price, the higher the premium for a call option. In the case of the long 50 call and the short 60 call, the investor has purchased the option with the lower strike price (50) and sold the option with the higher strike price (60). Investors will pay more for the right to be able to buy stock at 50 than at 60, so this is a debit spread; the exception the question is looking for. With puts, the higher the strike price is, the more expensive the option premium will be. Specifically looking at our four choices: Buy 1 ABC Jul 50 call, write 1 ABC Jul 60 call - Debit, because buying the lower priced call costs more than selling the higher priced call. Net debit to the account. Write 1 ABC Nov 35 put, buy 1 ABC Nov 30 put - Credit to the account, because as the writer I receive more for the put I sold (wrote) than the put I bought (investors will pay more for the right to be able to sell stock at 35 than at 30). Buy 1 ABC Apr 40 call, write 1 ABC Apr 30 call - Credit to the account, because selling the lower priced call generates more of a credit than buying the higher priced call. Buy 1 ABC Jan 50 put, write 1 ABC Jan 60 put - Credit to the account, because selling the higher priced put generates more credit to the account than buying the lower priced put.

Answer 136

increase retained earnings. Retained earnings represent income that has not been paid out to shareholders.

Answer 137

$0.45 Because the stock is trading with rights (before the ex-rights date), the formula is (M ‒ S ) divided by (N + 1). Plugging the numbers in, we have ($40 ‒ $35) divided by (10 + 1) = $5.00 ÷ 11 = $0.45.

Answer 138

II and III The process used to reset the interest rate each period for ARS is called a Dutch auction, which is the lowest bid rate at which all of the bonds can be reset—or sold for new issues—at par. This newly established rate is known as the clearing rate, and bidders who bid at or below the clearing rate will now pay that rate. This means that those who bid above the established clearing rate will have their orders go unfilled.

Answer 139

A spread order A spread involves the simultaneous purchase and sale of different option contracts of the same type. A spread incurs a gain or loss depending on what happens to the difference in the premiums between the two contracts. Because this investor wants to limit his risk to $300, he would buy the spread at a net debit of $300 or less. (This is one order, not two.)

Answer 140

The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly issued securities.

Answer 141

Sell stop Sell stops, placed below the current market, become market orders to sell when the stock trades at or through (below) the stop price. Market sell orders can accelerate declines in the price of the stock.

Answer 142

any 12b-1 charge does not exceed .25%.

Answer 143

It will require two rights to buy one new share. The number of rights necessary to acquire one new share is computed by dividing the number of outstanding shares of common stock by the number of new shares being issued. In this question, that is 1,000,000 ÷ 500,000 = 2. Preferred stock does not receive preemptive rights; the information about the 100,000 shares is included as irrelevant information (makes the question more difficult for some and is something the test loves to do).

Answer 144

Market Market orders are permitted on both of these major trading markets. Fill or kill, GTC, and stop orders may no longer be entered in the Nasdaq and NYSE equity markets. Most large broker-dealers provide the service of handling these orders.

Answer 145

3 years or more. Municipal notes have a maximum maturity of less than three years. Once the municipal security is issued with a maturity of 3 years or longer, it is considered a municipal bond.

Answer 146

I and III To be in good delivery form, a municipal bond must be accompanied by all unpaid coupons: past due, currently due, and subsequently due. Insurance or letters of guarantee do not constitute good delivery.

Answer 147

The breakeven on a call spread is determined by adding the difference in premiums (6 − 2 = 4) to the lower strike price. In this case, the net debit is four points. Therefore, 4 plus 40 equals 44.

Answer 148

Long Jun 55 put For a long put to cover a short put, it must have the same or higher strike price and the same or longer expiration. This ensures the investor may sell the stock without financial loss if the short put is exercised, and she is forced to buy.

Answer 149

a long-term capital gain of $300. Immediately after the stock split, the total investment of the initial position remains unchanged at $5,100 (100 shares at $51 per share). After the stock split, the customer owns 150 shares (3/2 times 100 = 150 shares). Therefore, the adjusted cost basis per share is $34 ($5,100 divided by 150 shares). Those 50 shares were sold for $2,000 and have a cost basis of $1,700 ($34 times 50). That is a profit of $300. Alternatively, you could say that 50 shares sold for $2,000 represents a selling price of $40 per share ($2,000 divided by 50 shares), which is a $6 per-share profit ($40 minus the $34 cost basis). Fifty shares times $6 equals a profit of $300. The gain is long-term because the holding period of securities received through a stock split (or stock dividend) is that of the original purchase. If you have to guess, or are running out of time, when you see two identical numbers with the only difference being short- or long-term gain, in almost all questions, one of those two is the correct answer. Now you have a 50% change of guessing correctly and, if you remember that the holding period always begins with the initial purchase, then the odds are 100% in your favor.

Answer 150

within four business days. The Regulation T payment date is the fourth business day from the trade date. Regular way settlement, according to FINRA rules, is two business days from the trade date, and Regulation T allows for two additional business days after settlement date—four business days total.

Answer 151

stock dividends. Stock dividends do not affect total equity in an account, only the number of shares contained (but at a lower per-share price). Cash dividends increase equity, while withdrawal of SMA and interest charges assessed against the account decrease equity.

Answer 152

$196 The 10M means $10,000. (Remember your Roman numerals? M equals 1,000). His tax liability is as follows: $1,000 times 7% equals $70 annual interest per bond; $70 times 10 equals $700 annual interest, which is taxable only by the federal government; and $700 times 28% equals a $196 tax liability.

Answer 153

Declining interest rates A call protection feature is an advantage to bondholders in periods of declining interest rates. When interest rates are falling, issuers are more likely to call in bonds previously issued at higher interest rates. For bondholders, calling bonds creates reinvestment risk, as they are unlikely to be able to reinvest at the rate they had been earning. Call protection gives the bond holder a specified length of time during which the bond cannot be called.

Answer 154

Regulation D of the Securities Act of 1933 deals with private placements. There are two options. Rule 506 (c) permits advertising, but only if 100% of the investors are accredited investors. Rule 506(b) does not permit advertising, but it does allow up to 35 nonaccredited investors. Rule 144 covers the sale of restricted or control stock, and Rule 147 is the intrastate exemption. Neither of them makes any mention of accredited investors.

Answer 155

III and IV If a registered representative chooses price or timing of an order only, that order is not a discretionary order, and a power of attorney is not required. The order is a not held order. To be discretionary, the representative must choose one or more of the following: the action (buy or sell), the security, or the amount (number of shares).

Answer 156

A selling group member When a selling group member is part of the underwriting, their compensation is the selling concession. The manager earns the management fee. The syndicate members earn the takedown.

Answer 157

the dividend payout ratio was 60%. The dividend payout ratio is the percentage of the net income (after preferred stock dividends) paid out to the common shareholders. The net income is $10 million. The preferred dividend is $2 per share ($50 par times 4% = $2). With one million shares, the total preferred dividend is $2 million (1 million shares at $2 per share). Because the preferred dividend must be paid before any earnings are available to common stockholders, we subtract that $2 million from the net income. That leaves $8 million in earnings available to common. There are 2 million shares receiving an annual dividend of $2.40 ($0.60 quarterly). That means $4.8 million of the $8 million available is paid, or a ratio of 60% ($4.8 million ÷ $8 million = 60%). Or, the earnings per share is $4.00 ($8 million divided by 2 million shares) and $2.40 in dividends paid out of $4.00 earnings made is 60%. The preferred stock is paying a dividend of 4% of the par value, but that does not tell us the current yield. To know the current yield, we must know the current market price of the stock and the question does not supply that value.

Answer 158

Regulation SHO. Naked short selling is when the broker-dealer accepts an order to sell stock short but is not able to ascertain the location of stock to deliver.

Answer 159

that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker.

Answer 160

$35,000. Bring out your middle school algebra book. $15,000 is 30% of what number? Divide $15,000 by 0.30 and the market value is $50,000. With a market value of $50,000 and equity of $15,000, the debit balance is the other $35,000. Perhaps this method is easier for you. If $15,000 is 30% of the market, then the debit must be the other 70%. 70% is 2⅓ times 30%, so $15,000 times 2⅓ = $35,000.

Answer 161

All decisions regarding initial margin eligibility are the role of the Federal Reserve Board.

Answer 162

the earnings per share.

Answer 163

below 45. A put is in the money when the underlying stock trades below the exercise price of the put. The put is in the money by two points.

Answer 164

$3,600 The investment value would be $3,600 at the beginning of the third period. In a leverage ETF, the investment result of the portfolio is a multiple of the performance of the index it is measured against. In this question, the ETF value will increase or decrease by 200% (2 times) of the performance of the index. In the first period, the index rose by 10%; therefore, the ETF rose by 20%. The $5,000 investment would have risen to a value of $6,000 ($5,000 times 20% = $1,000 + $5,000). During the second period, the index fell by 20%. The ETF value would have declined by 40% ($6,000 times 40% = $2,400); therefore, the $6,000 investment value would have declined by $2,400 to $3,600.

Answer 165

487.805 There are several steps required to answer this question correctly. The first is to understand that the term open-end investment company always means a mutual fund, at least on the exam. Although most exchange-traded funds (ETFs) are structured as open-end companies, any question about them will always be clear that the subject is an ETF. The second is to recognize that mutual funds use the forward pricing rule to determine purchase or redemption prices. That is, the price is determined after the close of the trading day (4 pm ET). Therefore, this purchase will use the price that appears in the Friday morning financial pages. That purchase price will be the public offering price (POP). The POP is $10.25 per share. Divide the $5,000 purchase by the $10.25 and the result is 487.805 shares. Would you like to know how to do this question in seconds? As long as you realized the forward pricing rule and you know the new POP is higher than the previous one of $10.00 per share, it's a snap. At $10.00 per share, $5,000 buys 500 shares. With a POP above that, the choice must be lower than 500 shares and there is only one choice that is. All of the other choices use the NAV instead of the POP. That is the way the exam does things.

Answer 166

either competitive bid or negotiated underwritings.

Answer 167

-5 With a beta of 1.7, an investor would expect ABC stock to be 70% more volatile than the general market as measured by the S&P 500. Remember, the beta of the market is 1.0. Therefore, we would expect to see the stock return 17% based on the S&P 500's 10% return. However, the actual return on ABC was only 12%. Alpha measures the difference in the actual return vs. the expected return. The difference between the expected return (sometimes referred to as the required return) of 17% and the actual return of 12% is a negative 5%. That represents an alpha of -5% for ABC stock.

Answer 168

5% Current yield is defined as the annual income (or coupon rate) from a bond divided by the bond's current market price. Accordingly, $60 / $1,200 = 0.05 × 100 = 5%. The current yield will be lower than the coupon rate when the bond is trading at a premium.

Answer 169

Buy XYZ 42 Stop GTC A breakout through the resistance ($41) signifies, at least to a technical analyst, that the stock will continue to increase in price. This is a bullish sign. A buy stop order is placed above a resistance level. It is triggered if and when the stock trades at or above the stop price. This allows an investor to participate in a bullish breakout through the resistance. Why not enter "Buy XYZ 42 GTC"? That order calls for the stock to be purchased at a price of 42 or better (lower). With the current price at $39 per share, this is, in essence, a market order, and the stock is bought at the best price in the market. That defeats the purpose of not buying until the breakout is

Answer 170

$245.10 long-term capital gain. The total value of the initial position is unchanged, remaining at $24,012 (200 times $120.06). After the stock dividend the investor owns 230 shares (200 times 15% = 30 + 200 = 230). Therefore, the adjusted cost basis is $104.40 per share ($24,012 divided by 230 = $104.40). The question tells us that the investor sells those 30 additional shares at $112.57 per share. That is a difference of $8.17 per share. Multiply that gain by 30 shares and the result is a profit of $245.10. It is a long-term gain because the holding period of shares received from a stock dividend or stock split begins with the initial purchase, not the receipt of the new shares. It is important to remember that anytime there is a distribution resulting in additional shares (stock split, stock dividend), the cost basis per share is reduced while the total account value remains the same. If you have to guess, or are running out of time, when you see two identical numbers with the only difference being short- or long-term gain, in almost all questions, one of those two is the correct answer. Now you have a 50% chance of guessing correctly and, if you remember that the holding period always begins with the initial purchase, then the odds are 100% in your favor.

Answer 171

$2,410.00 If a mutual fund has no redemption fee, the investor will receive the bid price per share (net asset value) multiplied by the number of shares being redeemed. In this case, the investor would receive $2,410 ($12.05 × 200 shares).

Answer 172

spreads in new stock offerings. The 5% markup policy applies to markups, markdowns, and commissions. New offerings sold by prospectus are exempt from this rule.

Answer 173

a diagonal spread. The investor has created a diagonal spread. An investor that buys and sells the same type of option has created a spread. If the strike prices and/or the expiration months of the options are different, it is a diagonal spread.

Answer 174

a closed-end investment company

Answer 175

Pricing of closed-end investment company shares is based on supply and demand. That is because they trade in the secondary markets. Therefore, the investor's buying price and selling price could be a premium or discount to the net asset value per share (NAV). All the other investments here are redeemable at the NAV. As a consequence, the ask price would not be a discount to the NAV nor could the redemption price (the bid) be at a discount to the net asset value.

Answer 176

Real-Time Transaction Reporting System (RTRS) The Municipal Securities Rulemaking Board RTRS captures transaction data for municipal bonds and makes it available to the market place via numerous third-party vendors available to the public.

Answer 177

An employee of the company selling registered shares purchased in the open market Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file Form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply.

Answer 178

60%. As with many computational problems, there is some unnecessary information given. The current ratio is irrelevant, and so is the information on the debentures. What is needed is the amount available to pay the common so that we can compare that to the amount actually paid. We see that $0.75 in quarterly dividends are paid. That is equal to $3 per year. The next key is determining the earnings. With a market price of $60 per share and a price-to-earnings ratio of 12:1, the earnings per share must be $5. The dividend payout ratio should be thought of as "dividends paid out of earnings made." The dividends paid are $3; the earnings made are $5. That is a 3 to 5 ratio, or, as usually expressed in percentage form, 60%.

Answer 179

100 shares Like a standard options contract, the size of a LEAPs contract is 100 shares.

Answer 180

marked as either long or short.

Answer 181

$95 per share Purchasing a put option on an existing long position is a protective put. It does not offer the same tax benefits as a married put (the option and long security position are purchased on the same day). That is, if the long position is not more than 12 months old when the put is purchased, the holding period is erased and does not begin again until disposition of the put. In addition, if the option expires or is sold, the transaction is a loss or a gain and does not affect the cost basis of the long position. That is why the cost basis of the SLP stock is the original $95 per share.

Answer 182

the county. Overlapping debt is the issuer's proportionate share of the debt of other local governmental units that either overlap it (the issuer is located either wholly or partly within the geographic limits of the other units) or underlie it (the other units are located within the geographic limits of the issuer). The debt is generally apportioned based upon relative assessed values. The state is never a party to overlapping debt and, because overlapping debt applies only to general obligation (GO) bonds, there is no revenue authority.

Answer 183

no taxable loss for 2019 because of the wash sale rule. The investor in WASH has violated the wash sale rule. Anytime a security is sold at a loss and then repurchased within 30 days of the sale (before or after), the loss cannot be taken at that time. The rule includes the purchase of substantially identical securities, such as call options, warrants, and convertibles, when determining if a violation has taken place. Because the question asks for the 2019 tax consequences, the disposition of the option expiring in Jan 2020 is irrelevant.

Answer 184

Syndicator A syndicator handles the registration of the limited partnership units.

Answer 185

Wednesday, January 21. Dividends are paid to investors who are owners of record as of the close of business on the record date. When a call option is exercised, money and stock are exchanged (settlement) on the second business day after notice is given to the Options Clearing Corporation. Therefore, an investor who wishes to receive a dividend must exercise a call no later than the second business day before the record date (i.e., the day before the ex-date). This is no different from anyone else purchasing stock before the ex-date.

Answer 186

immediately and in its entirety.

Answer 187

the excess securities above 140% of the accounts debit balance. A broker-dealer may hypothecate (pledge) 140% of a customer's debit balance. Any customer securities in excess of 140% of the debit balance must be physically segregated.

Answer 188

the second business day following the trade date.

Answer 189

a bullish market. Even though short interest represents the number of shares sold short, many investors consider it a bullish indicator when this number is high. Each share that has been sold short must be replaced (covered) at some point. To replace the stock shorted, an investor must go into the market to buy that stock. When all of those short sellers have to buy back stock they shorted, it puts upward pressure on the prices of those stocks.

Answer 190

write an uncovered straddle. An investor who expects prices to remain stable writes an uncovered straddle (short straddle). In selling the put and call at the same terms, the writer collects double premiums. Both expire if the price remains stable, but if the price moves, one side loses money. Short straddles carry unlimited loss potential because of the uncovered call.

Answer 191

$300 To establish a debit spread, an investor buys a 40 call at the ask price of 4.50 and sells a 45 call at the bid price of 1.50. The net premium paid is (4.50 minus 1.50) times 100 shares, which equals $300.

Answer 192

additional issues will have junior liens.

Answer 193

$4,000 net capital gains The first thing to remember is that there is no limitation on the amount of capital loss that may be carried over to use against capital gain. The $3,000 limitation is against income. In determining an investor's capital gain or loss for the tax year, all gains and losses must be aggregated and offset against each other. In this situation, all of the prior year's loss carryover of $9,000 is added to the current year's loss of $2,000. The total loss of $11,000 is offset against the total capital gains of $15,000, for a net capital gain of $4,000.

Answer 194

subordinated debentures. Regardless of the level of seniority of a preferred stock, it comes behind any debt security. More importantly, interest on a debenture, subordinated or not, is a contractual obligation. Unlike the dividends on stock, the decision to pay or not to pay interest is not an optional one. Failure to pay interest on a debt security can lead to foreclosure and bankruptcy proceedings.

Answer 195

in a footnote to the balance sheet.

Answer 196

Never with a nonqualified annuity On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates.

Answer 197

$34.28 per share. Mutual funds sell at the public offering price (POP). That POP includes the sales charge—in this case, 4.5%. The sales charge is a percentage of the POP, not the NAV. The computation is the NAV divided by (100% – the sales charge). In our question, that is $32.74 ÷ 0.955, or $34.28 per share.

Answer 198

a market maker. Market makers maintain an inventory of securities and profit from a bid-ask spread. They are acting in a principal (dealer) capacity as either the buyer or the seller. Brokers locate counterparties for buyers and sellers. They act in an agency capacity. Arbitrageurs seek to earn a riskless profit by buying an asset in one market and simultaneously selling the same asset for a higher price in another market. The function of investment advisers is rendering advice. They do not maintain quotes to buy and sell a security.

Answer 199

a buy stop order. A buy stop order can be placed above the current market to protect the short stock position. If the stock trades at or above the stop price, the order is elected and becomes a market order to buy the stock, which will be used to cover the short position.

Answer 200

a debit bull spread. We have to answer two questions: is this a bull or bear spread, and is it a debit or credit spread? Looking at the first question, the goal of a bull is to always buy low and sell high. In the case of options, that refers to the strike prices (not the premiums). In this question, the purchased option has a 50 strike, and the sold option has a 60. That looks like buy low/sell high, so this is a bull call spread. But how can we determine if this is a debit (more money out than in) or a credit spread (the reverse) when the premiums are not shown? Simple. What would you pay more for? The option to buy stock at $50 per share or buy it at $60 per share? When it comes to a call option, the cheaper it can be exercised, the more valuable the option. So, the premium for the $50 call must be higher than the $60. If that is so (as it must be), then the investor is spending more to buy the 50 than is being received when selling the 60. More money out than in is a debit spread.

Answer 201

$2,500 When a margin account is restricted, any new purchase must meet the 50% Regulation T requirement. Therefore, a purchase of $10,000 of stock will require a margin call of $5,000. The $2,500 of SMA is, in essence, a line of credit and represents the sum that may be applied to a margin call. By using that SMA of $2,500, the customer need only deposit an additional $2,500.

Answer 202

the total debt minus self-supporting debt minus sinking fund accumulations plus overlapping debt. The net total debt of a municipality is the net overall debt (total debt minus self-supporting debt minus sinking fund accumulations) plus overlapping debt (shared with other municipalities). States cannot have overlapping debt; it is their municipalities that can.

Answer 203

does not enforce its own rules. The MSRB writes the rules for the municipal bond market, but is not an enforcement authority. The rules are enforced by other regulatory bodies depending on who the bond dealer making the trade is. If it was completed by a community bank, the FDIC is the enforcement body. If it is done by a member bank of the Federal Reserve, the regulator is the Federal Reserve Board (FRB). If the trade is made through a FINRA member firm, then FINRA is the enforcer. The SEC has regulatory authority over the MSRB and all other self-regulatory organizations (SROs) not the IRS.

Answer 204

noncallable bonds. If rates fall, bonds are likely to be called.

Answer 205

is suitable for at least some investors. The reasonable-basis obligation requires a member or associated person to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.

Answer 206

Maximum gain is $525; maximum loss is unlimited; breakeven points are $24.75 and $40.25. The first step is to identify the position. This is a short combination; a short put and a short call with different terms. That means we are going to have two breakeven points. The maximum loss is unlimited because one of the positions is an uncovered call. The maximum profit is the premiums (credit) received of $525. Breakeven points follow the call-up and put-down rule. That is, add the premiums of $5¼ to the strike price of the call ($35 + $5.25= $40.25) and subtract the premiums of $5¼ from the strike price of the put ($30 ‒ $5.25 = $24.75).

Answer 207

sovereign debt. Although it is highly unlikely that you would ever see any of these terms on the exam, you might need to know what sovereign debt is. For the United States, the sovereign debt (the debt issued by the sovereign nation) is Treasury securities. The safety of sovereign debt depends on the economy of the specific nation. You would probably not recommend the debt of a third-world country to a customer wishing to avoid risk.

Answer 208

11:59 pm ET on the third Friday of the expiration month.

Answer 209

considered an electronic communication and must be reviewed by a principal. Although many member firms do not permit use of personal devices, that is a firm's decision, not a FINRA rule. When permitted, a single message like this is considered correspondence delivered electronically. As with all correspondence, review by a principal is required. This review may be on a pre- or post-use basis. A text message sent to more than 25 persons within a 30-day period becomes retail communication.

Answer 210

Short 1 ABC Jan 50 put; short 100 shares of ABC An investor faces unlimited dollar risk when short stock, short a naked call, or when a short stock position is combined with a short put. In this position, the unlimited risk of the stock is only protected on the upside by the premium received.

Answer 211

It will be higher. If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment

Answer 212

send a statement of additional information (SAI) within three business days of the investor’s request. The statement of additional information (SAI) is appropriately named. That is, it contains information not found in the statutory (effective) prospectus. Although the annual and semiannual reports will have information not in the prospectus, any question asking about more information will always be referring to the SAI. By law, there cannot be anything in the summary prospectus that is not in the statutory prospectus. Funds allow access to the SAI on their website's because the SEC says so, not because a specific investor asks the fund to do it.

Answer 213

$56.50. At exercise, the premium of the contract affects the cost basis of the stock acquired. Because the premium of 3.50 was received when the put was written, the cost basis of the stock will be $60 per share less the premium, or 56.50.

Answer 214

a stable market. Covered call writing normally occurs in a stable market. In a rising market, writing calls against a long stock position limits upside potential. In a falling market, the calls only provide downside protection to the extent of the premium received.

Answer 215

is $0. Municipal original issue discount bonds must be accreted. At maturity, the entire discount will be accreted, and the cost basis will be equal to the par value. No gain or loss will occur at maturity.

Answer 216

bearish. In a put spread, a customer is buying one put and selling another with different strike prices and/or expirations. In any spread, one of the options is dominant. In a long put spread, the long put position is dominant because it has the higher premium. Buying puts is bearish.

Answer 217

Lease-rental bonds Certain revenue bonds—called lease-rental bonds—are secured by a leaseback arrangement. For example, the state may set up an agency to construct a new office complex to house all state agencies. This authority issued the bonds. Once the facility is built, the state leases the complex from that authority. The bonds are backed by the lease payments.