Q&A Series 7 Flashcards
(20 cards)
A customer of a broker-dealer is long 1 MMS July 60 call and short 1 MMS July 70 call. Which of the following is true?
D) The position has a limited gain and loss potential.
This is a spread position. All spreads (debit or credit), whether put or call spreads, have a limited gain and loss potential.
You have a customer who is interested in reliable income. The customer recently added a bond maturing in 20 years to the portfolio. The bond has a duration of 1f years and four months, and the purchase price was $1,295.87. Which of the following statements is correct?
B) The coupon rate is lower than the yield to maturity, and the current yield should be higher than the coupon rate.
** Whenever a bond is purchased at a premium (a price above $1.000), the yield to maturity (YTM) is less than the current yield (CY) and the coupon rate (CR). Remember the relationship:
• Premium bonds: CR = CY - YTM
• Par bonds: CR = CY = YTM
• Discount bonds: CR < CY < YTM**
Information gathered to verify a customer’s identity must be maintained by a member firm for at least
C) 5 years.
ECN for aftermarket trading what are the potential risks to customers??
liquidity and volume
cannot be purchased on margin and cannot be used as collateral
-put and call options
- rights
-non -Nasdaq OTC issues not approved by the Federal Reserve Board, and insurance contracts.
may be purchased on margin and used as collateral
-exchange-listed stocks, bonds,
-Nasdaq stocks
-non-Nasdaq OTC issues approved by the Federal Reserve Board, and warrants.
cannot be bought on margin but can be used as collateral after 30 days:
• mutual funds, and new issues.
In addition to their tax advantages, municipal bonds are often purchased for their safety. Your client wishing to purchase municipal bonds with the utmost in safety should buy
B) New Housing Authority bonds.
** NAs, sometimes called Puplic Housing Authority Of PHA bands, have the backing of the federal government. As such, they are the safest of all
municipal securities **
Securities exempt from Regulation T
U.S. Treasury bills, notes, and bonds, government agency issues, and municipal securities.
It would be expected that your firm would employ heightened suitability standards when evaluating ?recommendations for
A) cumulative preferred stock.
B) nonvoting common stock.
C) structured products.
D) sovereign debt
C) structured products.
**The higher the risk of the investment, the greater the need for checking suitability. Structured products, such as equity-linked notes and exchange-traded notes, are considered complex products. In many cases, FINRA has discovered that registered representatives had inadequate understanding of the investment, leading to their making unsuitable recommendations.
If a customer does not pay for equity securities purchased within two business days of the regular way settlement date, the broker-dealer may request a time extension from
C) it’s designated examining authority
**A time extension may be requested from the broker-dealer’s designated examining authority, which could be FINRA or one of the exchanges.
The locate requirement of Regulation SHO for short sales does not apply to
A) A) nonconvertible bonds traded on the NYSE
When a client’s cash account is frozen, the client
A. must deposit the full purchase price no later than the settlement date for a purchase.
B. must deposit the full purchase price before a purchase order may be executed.
C. may make sales with the firm’s permission.
D. may not trade under any circumstances.
Answer: B When an account is frozen, funds equal to the full purchase price must be in the client’s account before a broker-dealer can accept any buy orders.
The market price of fixed-income securities, especially bonds, is susceptible to changes in market interest rates. The term duration is used to measure the sensitivity of a debt security when interest rates change in the marketplace. Which of the following statements concerning duration is correct?
C)The lower the coupon rate, the longer a bond’s duration; the higher the coupon rate, the shorter the
duration.
D) Duration
** Generally, characteristics of duration dictate that the lower the coupon rate, the longer a bond’s duration; the higher the coupon rate, the shorter the duration. The longer a bond’s maturity, the longer the bond’s duration. For coupon bonds, duration is always less than the bond’s maturity. Duration for a zero coupon bond is always equal to its maturity.**
If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered?
B) 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.)**
Paying a premium of $10 per bond, Tracey bought 10 municipal bonds with 20 years to maturity. Ten years later, she sold the bonds for 103. For tax purposes, she has?
A) a $250 gain.
** The cost per bond is $1,010. The amortization amount each year is 10/20 years, which equals $0.50 per year. $0.50 per year × 10 years = $5 per bond. After 10 years, the adjusted cost basis is $1,005 per bond. She sells the bonds for $1,030 per bond. $1,030 - $1,005 = $25 per bond 25 × 10 = $250 gain.**
A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments?
C)PSA
** The Public Securities Association (PSA) is the source of historical data for prepayment projections on CMOs.**
The risk that time value may erode the premium of an equity option, even while the underlying issuer remains financially sound, is an example of
A) interest rate risk.
B) market risk.
C) reinvestment risk.
D) decay risk.
D)decay risk
Time decay is the loss of time value as an option nears its expiration date. At the expiration date, the time value is zero. The only value to the option is intrinsic value, if any.
Which of the following regarding the Bond Buyer Revenue Bond Index (Revdex) are true?
1. It includes 30-year bonds.
Il. It includes 20 bonds.
Ill. It is compiled weekly.
IV. It is compiled monthly.
A) land III
B) Il and II
C) 1 and IV
D) 11 and IV
A) l and III
**The Bond Buyer Revdex is computed weekly just like The Bond Buyer’s general obligation (GO) index. Revdex consists of 25 revenue bonds with
30-year maturities. The GO index includes 20 bonds, each with approximately 20 years to maturity.
An Eastern account underwriting of $100 million in municipal bonds is established. ALFA Securities agrees to underwrite 10% of the issue and selli out its allotment of $10 million. However, some of the other firms participating in the deal are not as successful, and $15 million worth of bonds remain
unsold. What is ALFA Securities’ financial obligation?
A) $1.5 million
