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Series 7 - Closed Book > Test 8 > Flashcards

Flashcards in Test 8 Deck (22):

Super Entertainment Inc., a publicly traded firm on the NYSE, spins off its domestic syndication division, creating 1,000,000 new shares. To receive the new shares, investors must exchange 25% of their old shares. Investors who receive shares of the new company will:

Be required to receive a prospectus under the Securities Act of 1933
Not receive a prospectus because the shares were sold through a private placement
Receive a prospectus only if they received 500 shares or more
Not receive a prospectus because this is a Rule 144A offering

This scenario is an example of an offering regulated by Rule 145. Rule 145 defines certain types of reclassifications of securities as sales subject to the registration and prospectus requirements of the Securities Act of 1933. Shares acquired through mergers, consolidations, and spinoffs involving exchanges of stock are all covered under the rule. The amount of shares is irrelevant.


All of the following statements are TRUE concerning preconditions for sale requirements under the New Issue Rule, EXCEPT:

The verification may be made through electronic communication
The verification may be made through oral communication
The verification must be conducted prior to the sale of new issues
After the initial verification, an annual negative consent letter will be permitted

Prior to selling a new issue to an account, a firm must meet certain preconditions for sale. A firm must obtain representation from an account holder or an authorized party of an account, stating that the account is eligible to purchase new issues in accordance with the New Issue Rule before distributing a new issue to that account. The representation from the account holder may be in the form of an affirmative statement that positively declares that the account is eligible. A firm may use electronic communications to verify account eligibility for new issues, but may not rely on oral statements. A member firm that sells new issues must reverify eligibility every 12 months and must retain copies of all information and records used in the verification for a minimum of three years. This is known as a negative consent letter which satisfies the pre-conditions for sale requirements.


f a customer's objectives are safety of principal and income, you as the registered representative would NOT suggest:

AA-rated corporate bonds
High-grade preferred stocks
A bond fund which invests in investment-grade municipal bonds
An Exchange-Traded Fund that tracks the S&P 500 Index

An ETF that tracks the S&P 500 Index invests in common stocks that will not pay a high dividend and will fluctuate in value with the general equity market. This customer wants income and safety of principal, which may be found in the other three investment choices.


Regulation NMS applies to which TWO of the following choices?

Listed equity trades
Listed debt trades
Quotes available for manual execution
Quotes available for electronic execution
I and III
I and IV
II and III
II and IV

One of the provisions of Regulation NMS (National Market System) requires a broker-dealer to provide its clients with the best price available for listed equity trades available for electronic execution. The best price is defined as the highest bid or lowest offer (inside market) from all available market centers. Reg NMS does not apply to securities subject to manual execution. Nor does it apply to debt securities, whether electronically or manually executed.


Which TWO of the following statements concerning The Bond Buyer 20-Bond Index are TRUE?

It is compiled weekly
It consists of revenue bonds
It is used to show trends in yields
It is used as an indication of the new issue market for municipal securities
I and III
I and IV
II and III
II and IV

The Bond Buyer 20-Bond Index is compiled each week and is calculated from the yields on 20 specific general obligation issues with an average rating of AA and its purpose is to show trends in municipal yields. The 20-Bond Index does not contain any revenue bonds. It is the Bond Buyer's Visible Supply and Placement Ratio statistics that are used as indicators of the new issue market for municipal securities.


Volume and holding-period restrictions do NOT apply to the resale of private placements when:

Purchasers' representatives assist investors
Both parties are accredited investors
The transaction is initiated by a registered principal
The purchaser is a qualified institutional buyer

Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144. Qualified institutional buyers must have at least $100 million dollars of investable assets.


Which of the following choices does NOT require additional documentation to transfer stock?

A partnership account signed by a general partner
A corporate account signed by an authorized officer
A custodial account signed by the custodian
An executor signing for an estate

The only authorized signature for a custodial account is that of the custodian. There is no further documentation required. In each of the other choices, the transfer agent requires additional documentation showing that the person signing the certificate is authorized to do so.


A municipal dealer would violate MSRB rules if it gave a quote that is:

Specified as AON
Bona fide
Nominal and not specified as such
Identified as a subject quote

MSRB rules require that any quote be bona fide (firm at the time given). Nominal or subject quotes are permitted if they are identified as such at the time given.


Which TWO of the following statements are TRUE concerning the auction process for Treasury bills?

The four-week bill is auctioned every week
The 13-week and 26-week bills are auctioned every month
The auction for the four-week-bill is held on Tuesday
The auction for the 13-week and 26-week bills is held on Thursday
I and III
I and IV
II and III
II and IV

The four-week Treasury bill is auctioned on Tuesday of each week, with the issuance made on Thursday of that same week. Both the 13-week and 26-week T-bills are auctioned on Monday of each week, with the issuance on Thursday of that same week. All T-bills are issued (and traded) at a discount. At the auction, non-competitive tenders are awarded first; however, the price they will pay (the lowest price of the accepted competitive tenders) cannot be determined until after the competitive tenders have been awarded.


Which of the following option positions obligates the investor to sell shares if exercised?

Long a call
Long a put
Short a call
Short a put

A short call position obligates the investor to sell shares if the option is exercised.


Approval by a principal is NOT required when sending a customer which of the following documents?

An abstract from an Official Statement
A form letter
A research report
A red herring

An abstract from an Official Statement, a form letter, and a research report are considered advertising or sales literature and must be approved. A red herring (preliminary prospectus) is used to provide a potential investor with information and is regulated by the SEC.


registered representative has a 33-year-old client with a stable income with no foreseeable need to access money. The client is looking for a long-term investment that will offer a guaranteed rate of return, that can also share in the performance of the stock market, and offers some form of death benefit. Which of the following investments is MOST suitable for this client?

A fixed annuity
An equity-indexed annuity
A variable annuity
A variable life insurance policy

An equity-indexed annuity will satisfy the objectives of this client. It is a hybrid investment which offers the benefits of a fixed annuity—guaranteed rate of growth—as well as those of a variable annuity—growth potential in the market. These, like most annuities, are not designed as short-term investments. The variable life insurance policy is designed to provide death benefits that can increase because of growth in the market.


A customer purchased a municipal bond with a 6.50% coupon rate that was priced at a 6.95 basis. If the bond is currently trading at $945, the current yield is:


The current yield is found by dividing the yearly interest payment of $65 by the market price of $945. This equals 6.88%. The fact that the bond was purchased at a 6.95 basis is not relevant.


An investor purchases a municipal bond on Monday, June 6. The bond's interest payment dates are November 1 and May 1. The buyer will need to pay the seller of the bond the purchase price plus accrued interest for:

35 days
36 days
38 days
39 days

Accrued interest is calculated from the last interest payment date (May 1) up to but not including the settlement date. The purchase is made Monday, June 6. The settlement date is three business days later, which is Thursday, June 9. Accrued interest is calculated up to but not including the settlement date, which is from May 1 to June 8. This equals 38 days as follows.

May 1 to May 30 30 days
June 1 to June 8 8 days
Total 38 days

Municipal and corporate bond interest is computed on a 30-day month and a 360-day year. If the interest payment date is on the fifteenth of the month, the first month will have 16 days because the fifteenth of the month is counted. If the interest payment date is on the first of the month, the first month will have 30 days.


Which of the following statements is NOT TRUE about defined benefit plans?

Contributions are based on a predetermined distribution amount
The employee does not know the amount her employer will contribute each year
These plans provide tax-free distributions to participants
These plans are ERISA-qualified retirement plans

An ERISA-qualified retirement plan is generally established as either a defined contribution or a defined benefit plan. In a defined contribution plan, a specific contribution is made each year and benefits are equal to the amounts provided by the total of contributions and earnings in the plan. A defined benefit plan promises specific benefits at retirement. Contributions to the plan are calculated to provide the promised benefits upon retirement and, therefore, the employee does not know the amount her employer will contribute each year. Distributions from a pension plan are not tax-free and are typically considered ordinary income.


A GNMA pass-through is quoted 98.10 to 98.18. This quote represents a spread per $1,000 face value of:


GNMA pass-through certificates (as well as T-notes and T-bonds) are quoted in 32nds of a point. The spread of .08 represents 8/32 or 1/4 (.25) of a point. One point (1%) for a bond is equal to $10 ($1,000 x 1%); therefore, 1/4 of a point is equal to $2.50 per $1,000.


A 60-year-old investor has contributed $30,000 to a non-qualified variable annuity. The annuity's value has increased to $40,000. If the investor withdraws $20,000 and is in a 28% tax bracket, his tax liability is:


The amount contributed to a non-qualified variable annuity may not be deducted from income; in other words, the contribution is made after-tax. However, all of the earnings will accrue on a tax-deferred basis. Any withdrawal from the annuity will be taxed on a LIFO basis, which means that the earnings (last in) will be considered the first to be withdrawn and will be taxed. If being withdrawn, the earnings are taxed as ordinary income, but the invested amount is considered a return of capital and is not taxed.

In this question, the annuity has earnings of $10,000 (from $30,000 to $40,000), but the investor is withdrawing $20,000. Therefore, the first portion of the withdrawal is the $10,000 of earnings (which is taxable at the investor's ordinary rate) and the remaining $10,000 is considered a return of capital (which is untaxed). This results in tax liability of $2,800 ($10,000 of earnings x 28% tax bracket).


Someone who wants to hedge a portfolio of long-term bonds will buy:

Yield-based call options
Yield-based put options
VIX call options
VIX put options

The prices of bonds are inversely related to the movement of interest rates. If the investor is concerned that rising interest rates will erode the value of the bond portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based call options increase in value when interest rates rise, creating a viable hedge. The VIX (volatility index) tends to move inversely with the S&P 500 Index. The VIX usually rises when the S&P 500 Index falls, and falls when the S&P 500 Index increases. An investor will buy VIX call options when he expects the market to decline and volatility to increase. An investor will buy put options on the VIX if he expects the market to rise and volatility to decrease. Many investors will buy VIX call options as a hedge against a possible decline in the stock market. VIX options can be used by investors who expect either an increase or a decrease in volatility. It is not used to hedge a bond portfolio.


An investor with an investment objective of tax-exempt income will need access to the funds in four months. An RR should NOT recommend which of the following municipal securities?

A variable-rate demand obligation (VRDO)
An auction-rate security (ARS)
A tax-anticipation note (TAN)
A bond anticipation note (BAN)

A VRDO and an ARS are both long-term securities with short-term trading features. A VRDO has a put feature that permits the holder to sell the securities back to the issuer or third party. An auction rate security (ARS) does not have this feature and, if the auction fails, the investor may not have immediate access to his funds. TANs and BANs are short-term municipal notes and, if their maturities extend four months, these securities can easily be sold in the secondary market.


An investor owns 280 shares of XYZ Corporation. XYZ Corporation pays a 15-cent quarterly dividend. XYZ Corporation announces a 5-for-4 split. The dividend per share is adjusted to reflect the split. How much will the investor receive in dividends each quarter after the split?


After the split, the investor would own 350 shares (280 x 5/4 = (280 x 5) / 4 = 350) and would receive $42.00 each quarter (350 shares x $0.12 = $42.00) in dividends. To find the adjusted dividend per share, multiply the inverse of the split by the original dividend of $0.15 ([$0.15 x 4] / 5 = $0.12). Since the dividend is adjusted for the split, the investor would receive the same total dividends after the split as before (280 shares x $0.15 per share = $42).


ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC?


Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.


A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 2,000 shares of EXA at $24. The client's maintenance requirement is:


The answer to this question is determined by calculating the margin maintenance requirement of a short against the box position. If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. In this question, since the long position is equal to $48,000, the maintenance requirement is $2,400 ($48,000 x 5%).