Qbank 2.0 Flashcards

Question

The real value of property within the city limits is $100 million. The city uses a 50% assessment rate. A 10 mill tax rate will provide tax revenues of:

Answer 1

1 mill = $.001. 10 mills = .01 (10 X .001). $100 million × 50% assessment rate = $50 million. $50,000,000 X .01 = $500,000.

Answer 2

4; DPPs are used to defer present income into the future and take advantage of time.

Answer 3

Stockholders receive one right per share owned. Hence, Joe receives 200 rights. The purpose is to maintain shareholders' proportionate interest in the company. Since the number of shares outstanding will increase by 20%, Joe needs to purchase 40 new shares (200 / 40 = 5 rights per share).

Answer 4

2; Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share). Beta is a measure of volatility; money market funds have low betas.

Answer 5

A MIG rating is provided for short-term municipal debt commonly referred to as notes (revenue anticipation notes).

Answer 6

The buying power of a margin account is twice the amount of SMA. This account has equity of $80,000, and the Regulation T requirement is $70,000. Therefore, the excess equity is $10,000 or SMA purchasing power equal to $20,000.

Answer 7

1; Contributions to an ESA are not tax deductible.

Answer 8

1; SIPC protects each separate customer to a maximum of $500,000 in equity. This account has equity of $290,000 ($400,000 LMV minus $110,000 Dr).

Answer 9

2 & 4; Fixed unit trusts are not managed; the portfolio of securities does not change. As bonds mature or are called, the proceeds are distributed pro rata to the unit holders. These units are redeemable by the issuer or its agent.

Answer 10

Class C; Class A shares are purchased at NAV plus sales charge. Class B shares pay the sales charge upon redemption. Class D shares have a level load plus a redemption fee. Class C shares have only a level load (a 12b-1 fee) which is taken from net assets during the year.

Answer 11

Quotes, dealers, and sales representatives are regulated by the MSRB; issuers are not.

Answer 12

When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, it is the remaining 50% of the dividends received that are taxable.

Answer 13

Under Reg. A+ intended to facilitate small to medium size companies raise investment capital, venture capital firms, private equity funds and hedge funds are specifically excluded.

Answer 14

2 & 4; Customer portfolio margining (CPM) allows margin requirements to be calculated based on the net risk of a portfolio of securities rather than applying margin calculations separately to each position. While a number of criteria must be met before offering portfolio margining to a customer, generally it will result in lower margin requirements than when margin is calculated conventionally.

Answer 15

When investors believe that interest rates may decline soon, they seek to lock in the current rate of return by buying long-term bonds. Increased demand increases the price and causes the yields on long-term debt instruments to fall. In addition, selling short-term bonds depresses prices, causing yields to rise. As a result, the yield curve takes on a negative slope. Short-term yields are then higher than long-term yields, which is the definition of an inverted curve.

Answer 16

The discount on a corporate bond purchased in the secondary market must be accreted and is taxable as ordinary income, not as a capital gain. Furthermore, the interest income on corporate bonds is fully taxable.

Answer 17

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

Answer 18

MSRB Real Time Transaction Reporting System (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 19

Prior approval of the member firm's SRO is required when opening any office, including a private residence. The home address and telephone number may be advertised in any normal manner such as business cards, stationery, local newspapers, and so forth.

Answer 20

3; Issuer-directed sales are permitted if the persons to whom the new issue is sold are not restricted. Officers of the managing underwriter are restricted.

Answer 21

a member of the exchange

Answer 22

The priority of filling municipal orders is established by the managing underwriter in the release terms letter sent to the syndicate once the bid is won. This letter is an amendment to the agreement among underwriters. The priority is also disclosed in the official statement.

Answer 23

Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy.

Answer 24

U.S. government debt and listed options settle next day (T + 1); government agency debt and municipal bonds along with corporate securities are subject to regular way settlement of T + 2.

Answer 25

The official close is 4:00 pm ET on the 3rd Friday of the expiration month. Expiring options may be exercised until 5:30 pm ET on the same day.

Answer 26

The secondary trading of securities takes place in four markets: the first market is listed securities traded on an exchange floor; the second market deals with unlisted securities; the third market is where listed securities trade over the counter; and the fourth market is where financial institutions trade directly with each other, utilizing electronic communications networks (ECNs).

Answer 27

Higher taxes mean less net income. The allowance for bad debts is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings which have no effect on the net income the company reports.

Answer 28

Options at the same exercise price and expiration date for the same underlying security are known as a series of options.

Answer 29

Contributions to qualified plans are made with pretax dollars and earnings grow on a tax-deferred basis, so the cost basis is zero. Therefore, any distributions will be taxed as ordinary income. In addition, there is a 10% penalty on withdrawals made prior to reaching age 59-½.

Answer 30

Upon a partner's death, a partnership account is automatically frozen until a new or amended partnership agreement is received. The deceased partner's share usually goes to an estate, not to the other partners.

Answer 31

P/R means pre-refunded. These bonds would be rated AAA.

Answer 32

The prime broker would supply clearing services, lending services for marginable transaction, as well as back office support including cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker/dealers.

Answer 33

The FRB sets the initial margin requirements for nonexempt securities. The margin requirements for exempt securities, such as U.S. governments, are set by a firm's SRO or DEA (designated examining authority).

Answer 34

Series EE bonds are designed for individual investors, sold at face value, and redeemed at an amount that includes the interest income which is calculated and accrues every six months.

Answer 35

Writing a call will not necessarily lock in the profit. In the form of increased cash flow, it will improve the return on the portfolio.

Answer 36

Riskless transactions are covered by the 5% markup policy.

Answer 37

HOLDRs are exchange-traded investments and trade in round lots (100 shares). They are not redeemable by their issuer like mutual fund shares are. Additionally, HOLDRs distribute cash dividends generated by the companies held in the portfolio directly to the owners of the HOLDR shares. These exchange-traded products allow great flexibility in managing the tax consequences of the investment because the securities can be unbundled and traded individually, thus taking losses when advantageous and deferring gains when advantageous.

Answer 38

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

Answer 39

The term "flow of funds" relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts as specified in the trust indenture found in the bond contract.

Answer 40

U.S. government securities that are deposited with a trustee and against which certificates are sold representing principal payments only on the securities are referred to as Treasury STRIPS. These are zero-coupon bonds issued by the U.S. government and are subject to annual taxation on the per-year accreted amount.

Answer 41

Options trading is always halted when the trading of the underlying security is halted. Options rely primarily on the underlying market value for premium determination.

Answer 42

Begin by calculating how much of the net income is available for common stockholders (net income after taxes minus preferred dividends equals earnings available for common stockholders). The preferred stockholders received $600,000 in dividends (100,000 pfd shares × $6 per share dividends = $600,000). After subtracting $600,000 from the net income of $12 million, this leaves $11.4 million (earnings available for common stockholders). Compute EPS (earnings available for common ÷ number of common shares outstanding = $11.4 million / 5 million shares = $2.28 per share EPS).

Answer 43

In a TIC account, each party must specify a percentage of interest in the account. If one party dies, his percentage of ownership passes to his estate, not to any other party to the account.

Answer 44

2; The visible supply implies that the supply of bonds will be available for the visible future.

Answer 45

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

Answer 46

The maximum length of time a new issue municipal bond syndicate can exist is 30 calendar days after the issuer delivers the securities to the syndicate. At that time the account must be settled and allocation of unsold bonds be determined in accordance with each members original allocation and whether the syndicate was set up as divided (western) or undivided (eastern).

Answer 47

The IRS allows a step-up in basis for inherited stock. The customer's cost basis is the fair market value of the stock on the date that the decedent died.

Answer 48

Employees must be covered under a Keogh plan if they are at least 21 years old, have been employed a minimum of 1 year, and work full-time (at least 1,000 hours per year). Keogh plans do not include employees who are under 21 or have just started working with the employer

Answer 49

Under the Code of Arbitration, a respondent has 45 days to respond to both the director and the claimant.

Answer 50

A bid is the price at which a dealer states its willingness to purchase securities from another broker/dealer. A dealer soliciting a workable indication is often working to satisfy a customer's order to sell securities. A dealer giving a workable indication is free to revise its bid if market conditions change.

Answer 51

For every $1 decrease in market value in a short account, $1.50 of SMA is created. Therefore, if the market value falls by $5,000, the SMA balance would be $7,500.

Answer 52

"The Bond Buyer" is a daily trade publication containing news about new municipal bond issues.

Answer 53

Mixing a customer's securities in with the accounts of the broker/dealer is commingling and is prohibited by securities industry regulations.

Answer 54

The prime rate is the rate on corporate loans at large U.S. money center commercial banks. The federal funds rate is the rate for excess reserves traded among commercial banks for overnight use in amounts of $1 million or more. The discount rate is the charge on loans to member institutions by the New York FRB. The broker call loan rate is the charge on loans to brokers for margin investors.

Answer 55

Historically, municipalities get most of their revenues from property taxes (ad valorem taxes). Other sources of revenue include sales taxes, income taxes, gasoline taxes, license fees, fines, and assessments. User charges would be used to service revenue bonds.

Answer 56

A mutual fund prospectus may not contain information that is more than 16 months old.

Answer 57

Auction Rate Securities (ARSs) are long term securities issued by municipalities that use a Dutch auction to reset interest rates at short term intervals. The reset rate is known as the "clearing rate" and establishes the rate paid during the period following the auction.

Answer 58

Inverse floater CMO tranche types are considered to be highly volatile and suitable only for sophisticated investors willing to assume high levels of risk. As interest rates rise, principal payments to the investor may decrease. The reduction in repayment of principal extends the maturity date which is known as extension risk.

Answer 59

Prior written notice to the member firm from the employee is required. While no prior written permission of the firm is required, the member firm does have the right to reject or restrict and outside affiliations if they feel a conflict of interest exists.

Answer 60

The custodian bank performs bookkeeping and clerical functions and retains the fund's cash and securities for safekeeping. The adviser offers portfolio advice and management services. The custodian provides for safekeeping of fund securities, not investors' securities.

Answer 61

$160 + $160 + $100 = $420. This would all be taxable as ordinary income.

Answer 62

Spreads are deemed to be of the same class; class is defined as the same underlying security and the same type of option. Choices II and III would be a short straddle. The ABC call cannot be combined with anything, since you'd be combining ABC stock with XYZ stock.

Answer 63

When a reverse split takes place, the number of outstanding shares is reduced. Since the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.

Answer 64

customer claims are valued on the day a federal court is petitioned to appoint a trustee.

Answer 65

its price should remain relatively stable; A variable-rate bond has no fixed coupon rate. The coupon is tied to a market rate (for example, 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 66

Industrial revenue bonds (IRBs), sometimes called industrial development bonds (IDBs), may be nonpublic purpose bonds, and the proceeds are used to benefit private corporations. As such, the interest income from these bonds is a tax-preference item in the AMT calculation.

Answer 67

Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, etc. In less than 4 years, your client will have to begin making withdrawals regardless of any surrender charges the annuity may impose.

Answer 68

Build America Bonds (BABs) are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations.

Answer 69

In theory this position is just like ratio call writing where more calls are written (sold) than stock is owned. When a ratio spread is established a customer writes (sells) more contracts than are being purchased. In this case, the customer is buying 5 calls and selling 10 calls. In a ratio call spread, potential loss is unlimited because the additional calls sold are uncovered (naked).

Answer 70

The premium of the option affects the basis of the stock (bought or sold) as a result of exercise, adding the premium per share ($2) to the price per share ($60) for a total sales proceeds of $62. The original cost basis is not affected by the exercise, so it remains $56.50.

Answer 71

Term bonds, or dollar bonds, are quoted like corporate bonds as a percentage of par. All other municipals are quoted in basis.

Answer 72

Universal variable life policies are insurance company products that should be purchased primarily for the insurance features they offer rather than as an investment. Because they have a separate account in which the investor assumes the investment risk, they can only be sold by individuals with both insurance and securities licenses.

Answer 73

A broker's broker does not maintain an inventory of bonds. Therefore, they do not act as principals; they act as agents only in trades between dealers or between institutions. They do no retail business.

Answer 74

Charted price trends can be deceptive, so a trend must be confirmed by the Dow Jones Industrial Average and Transportation Average.

Answer 75

The syndicate letter lists the terms under which members will conduct the sale of the bonds. It also describes each member's sharing of profits and expenses, the type of business entity (i.e., joint venture or partnership), and the good faith deposit required.

Answer 76

The over-the-counter market is a negotiated market. Within it, market makers are broker/dealer firms that provide a source for stock that customers wish to buy and a repository for stock that customers wish to sell.

Answer 77

Tier 1 of Regulation A+ allows small to medium sized companies to raise up to a maximum of $20 million in a 12-month period

Answer 78

The liquidation order is as follows: the IRS (and other government agencies), secured debt holders, unsecured debt holders and general creditors, holders of subordinated debt, preferred stockholders, and common stockholders.

Answer 79

Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property and laws in states that recognize community property ownership differs from jurisdiction to jurisdiction.

Answer 80

In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc.

Answer 81

An official notice of sale is the issuer's method of inviting competitive bids on a new issue. It sets forth all of the information about the issue that a dealer would need in order to make a bid, including the size of the offering, the maturity dates, and the date, time, and place of the sale.

Answer 82

When the call is exercised the owner of the stock will be obligated to sell the shares owned at the strike price. The sales proceeds for the stock will be adjusted upwards by the amount of the premium received when the call was sold.

Answer 83

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 84

1 & 3; Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.

Answer 85

When a city needs short-term cash flow to meet ordinary operating expenses (e.g., to meet the payroll for city employees), it issues TANs. These notes are paid off when the city collects the expected tax revenues.

Answer 86

The dividend retention ratio is the reciprocal of the dividend payout ratio. If the company pays a $2 dividend on earnings of $10, it pays out 20% of the earnings available to common shareholders in the form of the dividend. That means it retains 80% of the available monies.

Answer 87

Earnings accumulate tax deferred if the plan is funded by an investment vehicle that offers tax deferral, such as an annuity contract. Tax has been paid on all amounts the employees and the employer contribute to the plan. Nonqualified plans need not comply with all ERISA requirements.

Answer 88

A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded.

Answer 89

Restricted purchasers include spouses, parents, children, siblings, and in-laws. Aunts and uncles, as well as grandparents, are excluded. A person supported by an employee of a member can never buy a new equity issue.

Answer 90

The Bond Buyer Revdex is computed weekly just like the Bond Buyer's 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.

Answer 91

The customer could withdraw cash equal to the SMA. A purchase of 200 shares at $60 per share would require an initial deposit of $6,000 on a market value of $12,000. The customer would have $6,000 in equity and a $6,000 debit. After a rise to $75 a share, the stock's market value would be $15,000. The customer's debit balance would remain unchanged at $6,000, but the equity would increase to $9,000 ($15,000 CMV − $6,000 DR). The customer needs to have 50% equity (50% × $15,000 = $7,500). Because the customer only needs $7,500 equity but now has $9,000, the excess equity of $1,500 is credited to SMA, which is the amount the customer can withdraw.

Answer 92

Options with expirations of less than 9 months must be fully paid without exception. With some exceptions, warrants, stocks, and bonds may be purchased on margin.

Answer 93

Municipal bonds are tax exempt for corporations as well as for individuals. Preferred stock dividends are taxable but at a reduced rate for corporations due to the 70% dividend exclusion. That break does not apply to the dividends on foreign securities. Regardless of the security, capital gains are taxable.

Answer 94

Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529 plan.

Answer 95

Life annuity has the largest payout because less risk is assumed by the insurance company; there is no beneficiary in the event the annuitant dies.

Answer 96

1; The interbank market deals primarily in currencies and is unregulated. It is an over-the-counter market whose participants are major currency dealers, such as banks. Central banks, such as the Federal Reserve, use the market to try to influence exchange rates.

Answer 97

Assuming the customer paid for the securities in full, he would generate $11,000 in SMA. Because the customer need pay only half of the securities' value ($11,000), the additional cash paid ($11,000) would be considered a nonrequired cash deposit and be credited to SMA. Another way to view the transaction is the customer has fully paid securities with a loan value of 50%, or $11,000.

Answer 98

Buying puts is the most effective strategy to hedge the risk of decline in a stock portfolio's market value. To determine the number of option contracts necessary to hedge, divide the portfolio value ($1.7 million) by the market value of the index (68,000). Multiply the result (25) by the beta of 1.20. The result is 30 contracts.

Answer 99

The bond is a 7% bond. The total amount paid each year on 10 bonds is $700. The amount paid for a 6 month's interest is $350.

Answer 100

The steps in opening an options account occur in the following order: obtain essential facts about the customer; give the customer an options disclosure document; have the manager approve the account; enter the initial order; and have the customer sign the options agreement within 15 days.

Answer 101

issue bonds; A mutual fund may not issue any senior securities, although it may purchase almost any type of security for its portfolio.

Answer 102

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

Answer 103

Under the multi-tiered market maker system employed by NYSE Euronext a Supplemental Liquidity Provider may compete with the on-floor Specialist (Designated Market Maker) and receive rebates of exchange transaction fees. Unlike a Designated Market Maker the Supplemental Liquidity Provider makes markets from an off-floor location and is permitted to make a one-sided market.

Answer 104

3; An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration.

Answer 105

Wednesday, January 21st; 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 OCC. Therefore, an investor who wishes to receive a dividend must exercise a call no later than the second business day prior to the record date (i.e., the day before the ex-date).

Answer 106

1 & 4; This is a put credit spread, and bulls sell puts. The 60 put is worth more because it has a higher strike price. Long the lower put is bullish; short the lower put is bearish.

Answer 107

Sell stop limits are placed below the current market and will be elected when the stock trades at or through (lower than) the stop price. Once elected, the order becomes a limit order to sell at 46 or better (higher).

Answer 108

If an investor purchases a corporate bond at a premium, the investor has the option of whether or not to amortize the premium. Amortization reduces both reported interest income and cost basis.

Answer 109

An employee age 50 or older is permitted to make catch-up contributions to a SEP.

Answer 110

Buying can only protect short positions, not long positions.

Answer 111

Any one of the three 80% test provisions can be met to qualify for a Rule 147 Intrastate exemption. One of the provisions states that at least 80% of an issuer's gross revenue must be derived from the company's home state.

Answer 112

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 113

Nasdaq Level 3 is the interactive level of the Nasdaq system through which market makers enter and update their quotes. The best quote available (the inside market) is also shown on the Level 3. Registered representatives use the Nasdaq Level 1, which displays the inside market quote only.

Answer 114

If more than 10% of a bond's proceeds go to private entities, the interest on the bond is a tax preference item for alternative minimum tax purposes.

Answer 115

FNMA is a publicly held corporation. The interest income on all mortgage-backed securities is fully taxable. Though a government agency, FNMA pass through certificates are not guaranteed by the US government. The only U.S. agency whose securities are considered direct obligations of the U.S. government is the Government National Mortgage Association (GNMA).

Answer 116

A stock dividend results in an increased number of outstanding shares, each with a lower value per share. The total value of stock outstanding is unchanged. There is no new capital generated from a stock dividend. Current assets are unchanged because there is no increase or decrease to the company's cash as a result of the stock dividend.

Answer 117

Fill-or-kill (FOK) and all-or-none (AON) orders may no longer be entered in the NYSE equity market but are still accepted in both the bond market and Nasdaq.

Answer 118

The notice of sale is the advertisement placed by a municipality soliciting bids from underwriters for an issue it wishes to sell. It does not include the bond's rating.

Answer 119

Trades in securities backed by the federal government are settled in federal funds, not clearinghouse funds.

Answer 120

A defeased issue is one in which the issuer placed U.S. government securities in the bank as collateral for the old issue.

Answer 121

Outstanding municipal general obligation bonds have been insured by the National Public Finance Guarantee Corp. and AMBAC. Insured bonds are typically AAA implied rated. SIPC protects customer accounts against broker/dealer failure. The FDIC protects customer deposits against bank failure.

Answer 122

Paid-in surplus, or capital surplus, is the excess over par value that investors pay for stock on its original issue. Generally, par value on common stock is a matter of record for accounting purposes.

Answer 123

Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member.

Answer 124

SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. In this account, maintenance equity is $3,000 (25% of $12,000) and the current equity in the account is $4,000 ($12,000 MV − $8,000 DB). Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000.

Answer 125

The bond contract describes the nature of the contract and the issuers' duties to bondholders. The bond contract is a more expansive document than a bond resolution. The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance.

Answer 126

The board's rules are enforced by FINRA for securities firms. The MSRB has rule-making authority but no enforcement or examination authority.

Answer 127

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

Answer 128

Choices I and III fit the definition of a call spread because each includes one long and one short option of the same type with different strike prices (I, a price spread) or different expiration dates (III, a time spread). Choice II involves options of the same type, but both are long. Choice IV involves options of different types.

Answer 129

A syndicate or joint account helps spread the risk of underwriting an issue among a number of underwriters. In this case, banks and broker/dealers who deal in municipal securities. The issuing municipality would not be a member of the syndicate (joint account) formed for the purpose of selling their municipal securities to the public.

Answer 130

Variable annuity salespeople must be registered with FINRA and the state insurance department. Registration with FINRA is de facto registration with the SEC; no registration is required by the state banking commission.

Answer 131

The largest portion of the spread is the concession.

Answer 132

Disintermediation is the flow of deposits out of banks and savings and loans into alternative, higher paying investments. It occurs when money is tight and interest rates are high because these alternative investments may then offer higher yields than S&Ls and banks.

Answer 133

Dealers participating in a joint account (either syndicate or secondary) are not allowed to distribute quotes relating to the securities in the account that indicate more than one market for the same securities.

Answer 134

The purchase of machinery for cash will reduce current assets and working capital.

Answer 135

Regulation D offerings are exempt transactions and therefore no SEC registration is required. However, issuers must still file information with the SEC on Form D regarding the issue. This filing will contain all of the information a potential investor might want to know, similar to the information contained on a prospectus. There is no limit to the amount of capital that can be raised via a Regulation D private placement transaction.

Answer 136

NHAs are considered safe because, in addition to the backing of rental income, they are secured by a subsidy from an agency of the U.S. government. Thus, they are rated AAA.

Answer 137

Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.

Answer 138

1 & 4; A credit calendar spread occurs when premium received exceeds the amount paid out. An investor creates a credit spread by selling the distant expiration and buying the near expiration. The distant expiration has more time value, and therefore, a higher premium.

Answer 139

Interest from public purpose municipal bonds is exempt from federal income tax and most states have chosen to make interest on their municipal bonds exempt from state income tax to residents of their states.

Answer 140

The limited partner will not receive any return of his investment. In a failed program, the partnership's creditors are paid first with any sale proceeds, before the limited partners receive any money. Because the limited partners had not signed a recourse agreement, even though the partnership still owes $2 million on the mortgage, the limited partners are not liable for any money beyond their original investments.

Answer 141

Contributions are made with after-tax dollars. Withdrawals are tax free at the federal level if used for qualified higher education expenses.

Answer 142

$250 is the maximum political contribution allowed under MSRB rules for those eligible to vote in the municipality issuing debt on a negotiated basis.

Answer 143

1; The value of the stock dividend received will be offset by the decline in CMV of the long position on which the dividend is paid. The account's long CMV will not change; it will just be represented by more shares. There will be no change in the overall CMV, debit balance, or equity, and therefore no change in SMA. On the other hand, a cash dividend means that new money is coming into the account, which will reduce the debit balance and be credited to SMA so the customer may withdraw the dividend, if desired.

Answer 144

Of the four answer choices only the concession and the takedown would generally be found in the agreement among underwriters which is found in the syndicate agreement.

Answer 145

Because this account is below 50% margin, the account is restricted ($6,000 equity divided by $14,000 market value equals 42.8% equity). When securities are sold in a restricted account, 50% of the proceeds are released to SMA. Because $4,000 worth of securities were sold, $2,000 (50%) is credited to SMA.

Answer 146

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

Answer 147

4; All accounts must be approved by a principal, but FINRA is never notified regarding the opening of accounts. In a joint account involving a customer and a registered representative, profit and loss must be shared in proportion to the capital contributed by each party. The proportionate test does not apply if there is an immediate family relationship between the two.

Answer 148

Industrial development bonds are private purpose bonds, and the interest income could subject the holder to the alternative minimum tax. Thus, the interest income may not be completely tax free.

Answer 149

Nonqualified (ordinary) dividends are taxed at the investor’s ordinary income tax rate, while qualified dividends will be taxed at a maximum rate as specified by the IRS. Whether or not the qualified dividends are taxed at the maximum rate or a lower rate depends on the investor's income tax bracket. The higher the investor’s income tax bracket the higher the tax on qualified dividends will be, up to the maximum.

Answer 150

A straddle is an option strategy in which the investor holds a position in both a call and a put with the same strike price, expiration, and underlying security.

Answer 151

before the first order;

Answer 152

Rollovers from one states plan to another states plan are permitted but no more than once every twelve months.

Answer 153

Investment companies are not required to register an offering with the SEC unless they have a net worth of $100,000.

Answer 154

$53; The cost basis in the stock remains at the original purchase price. The premium received must be declared by the investor as a capital gain for tax purposes. Premiums on options will only affect the stock's cost basis or sales proceeds if the option is exercised, or if (on the same day) a customer buys stock and buys a put.

Answer 155

Functional allocation is a sharing arrangement in which the general partner pays for all tangible drilling costs (capitalized costs) and the limited partners pay for all intangible drilling costs (deductible costs).

Answer 156

Because the interest received from municipal bond investments is tax-free, the IRS does not allow interest paid for loans to purchase municipal bonds as a deductible item on one's tax return, as it would for other securities purchased with loans (margin).

Answer 157

Funded debt is simply another name for medium- to long-term corporate debt. If a corporate bond has 5 or more years to maturity, it is said to be funded debt of the issuer.

Answer 158

These bonds are convertible into 20 shares for each $1,000, making a total of 2,000 shares. That's enough stock to cover 20 calls.

Answer 159

MSRB rules require that an MSRB manual be on-site at all municipal firms. Customers are entitled to see the manual without restriction.

Answer 160

US exchange listed currency options are settled in cash (US dollars) and expire on the third Friday of the expiration month, just like equity options do.

Answer 161

A TOD account avoids probate, but not estate taxes. The owner of the account may change beneficiaries and their percentages as he wishes. The TOD account is an account at a specific broker/dealer and only relates to the assets in that account.

Answer 162

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 / $6 million = a ratio of 2 to 1.

Answer 163

12b-1 fees may be used only to cover promotional and other distribution expenses for funds that are distributors of their own shares; fee amounts must be disclosed in the prospectus. The fund may not use the term" no-load "in any communications with the public if the 12b-1 fee and other service fees exceed .25% of average net assets.

Answer 164

Certificates of participation (COPs) are considered revenue issues and, therefore, do not require voter approval. They are a form of lease revenue bond that allow the holders of the certificates to participate in some revenue stream (lease or loan payments) associated with land, equipment, or facilities purchased or built by the municipality. They are unique in that in the case of default, the holders of the COPs could foreclose on the asset associated with the certificate.

Answer 165

The standard order priority for allocation of municipal bond issues is (as stated within the syndicate letter): presale, syndicate, designated, and member. Orders that benefit all syndicate members have the highest priority.

Answer 166

The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. An example would be if a life annuity with 10-year period certain contract holder died after 5 years, payments would continue for 5 more years to the beneficiary and then stop.

Answer 167

1 & 2; A bona fide quote is one the dealer is prepared to buy or sell on, as opposed to a workable, nominal or subject quote. A bona fide quote must have a reasonable relationship to fair market value and can be made in consideration of any anticipated market movement. On the offer side of a bona fide quote a dealer may make an offer to sell bonds that it does not hold in its own inventory but must know where to obtain the bonds if they are needed to complete the transaction.

Answer 168

A defined benefit plan is a form of qualified tax-deferred corporate pension plan. Tax-free municipal bonds would never be considered suitable for a tax-deferred account. An individual investor, a mutual fund portfolio and a corporate investment account could call benefit from receiving tax-free municipal bond interest.

Answer 169

Coverdell ESAs and 529 plans are the only choices here specifically associated with saving for education. Because the Coverdell ESA can only accept $2,000 per child, per year, and the couple can currently invest more than twice that amount, the 529 plan is the better choice. Additionally, being concerned about inflation and not comfortable with market risk, investing in a 529 prepaid tuition plan enables them to purchase tomorrow’s tuition at today’s prices.

Answer 170

If a qualification exam is failed three consecutive times, a fourth attempt may not be made for 6 months.

Answer 171

Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.

Answer 172

Under the Federal Dodd-Frank legislation, tippers or "whistle blowers" may be awarded up to 10–30% of amounts recovered for original information leading to successful prosecution of anyone who violates securities industry law. There are no limitations regarding securities industry professionals qualifying for the reward. While no bounty is guaranteed, when awarded it is based upon the monies recovered and the value of the information.

Answer 173

Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash.

Answer 174

2 & 4; Created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and stimulate the economy, Build America Bonds (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 175

3; A municipal group net order is credited to syndicate members according to their percentage participation in the account. This order type is given priority over designated or member takedown orders (but not over presale orders). The normal order of priority is presale orders, group or syndicate orders, designated orders, and member orders.

Answer 176

Unlike listed options, unlisted options do not trade continuously in an organized secondary market; trades are negotiated between individuals.

Answer 177

Because the quoted yield is higher than the nominal yield, the bond is offered at a discount; the lower of YTM or YTC is the bond's yield to maturity.

Answer 178

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

Answer 179

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

Qbank 2.0 Flashcards

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