Top off Final Missed Flashcards

Question

A Japanese company has entered into a contract to deliver goods to New York, payable in U.S. dollars upon delivery. To hedge the position using the PHLX World Currency Options market, the Japanese company should: A. buy Japanese Yen calls B. buy Japanese Yen puts C. sell Japanese Yen calls D. sell Japanese Yen puts

Answer 1

The best answer is A. The Japanese exporter is being paid in U.S. dollars. If the dollar weakens against the Japanese Yen, then the exporter will receive fewer Japanese Yen when he or she converts the U.S. Dollars received into Yen. To protect against an adverse move, the exporter should buy U.S. Dollar Puts - however this is not a choice, since no U.S. Dollar options are traded on the PHLX! The risk here is that the Dollar will fall against the Yen; this is the same as the Yen strengthening against the Dollar. Thus, an equivalent hedge would be to buy Japanese Yen Calls. If the Yen appreciates against the Dollar, the gain on the Yen Calls would offset any loss on the Dollars received in payment. A currency index call or put would not move at the same rate as a single currency, making this less useful as a hedge. Furthermore, there are no PHLX traded currency index options. Instead of buying Yen calls, the exporter could sell Yen puts; and if the Yen appreciates, the puts would expire and the premium received could be used to offset any loss on the Dollars received in payment. However, this only hedges the importer to the extent of the premium collected; therefore, buying Japanese Yen calls is the better choice.

Answer 2

The best answer is D. Corporate bonds bought in the secondary market at a discount are termed "market discount bonds." There is an option of accreting the discount and paying tax annually on the accretion amount at full tax rates; or of waiting until the bond is redeemed or sold to pay the tax on the earned market discount at full tax rates. If the holder accretes the bond and holds it until maturity, there is no capital gain or loss, since the entire discount has been accreted and taxed over the bond's life. If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains).

Answer 3

The best answer is B. An issuer would consider tendering for its outstanding bonds when it has debt outstanding that is not callable, but it has excess funds that it believes would be best used to reduce the amount of debt outstanding. A tender offer is made to the bondholders, who have the choice of tendering or not. Unlike stock tender offers, where the initial offer must be held out for 20 business days, here the initial life of the offer is only 5 business days. (The life is shorter because this tender offer is being made by the issuer, not an outsider.) Unlike stock tender offers, where there is typically a contingency that a minimum number of shares be tendered, these are "any and all offers" - so if a bondholder tenders, he or she will receive the tender price for the bonds. If the issuer does not get enough bonds tendered, the issuer can "sweeten" the offer. This extends the offer by another 5 business days, and the sweetened price is given to all bonds tendered. (While the initial offer specifies a price to be paid, or a price based on a spread to a benchmark debt security, the actual price paid on the tendered bonds is not set until that last business day of the offer).

Answer 4

The best answer is D. Growth investors select investments based simply on growth in earnings or growth in market price; on the assumption that these will always be the best performing investments.

Answer 5

The best answer is B. The formula for yield to maturity is: Annual Income + Capital Gain (discount bond) / Average Bond Value = Yield to Maturity This bond has a coupon rate of 4% = 4% of $1,000 par = $40 of annual income. The bond is purchased at 98% of $1,000 par = $980; and will mature at $1,000 in 4 years, Thus, the $20 capital gain is earned over 4 years for an annual gain of $20 / 4 = $5 per year. The bond is purchased at $980 and matures at $1,000, for an average value of $980 + $1,000 / 2 = $990. The YTM is: $40 + $5 $990 = 4.545% = 4.55%

Answer 6

The best answer is A. A short straddle is the sale of a call and the sale of a put on the same stock at the same strike price and expiration. If the market moves up, the call will be exercised. If the market moves down, the put will be exercised. If the market stays at the strike price, then both contracts expire "at the money," and the premiums collected represent the maximum gain. Since $9 in premiums was collected, the market must move down by more than 9 points to lose on the put; or must move up by more than 9 points to lose on the call. Thus, the position is unprofitable if the market moves below $50 - $9 = $41 per share; or moves above $50 +$9 = $59 per share. The position would be profitable between $42 and $58 per share. To summarize, the breakeven formulas for a short straddle are: Upside Breakeven = Call Strike + Combined Premium Downside Breakeven = Put Strike - Combined Premium

Answer 7

The best answer is A. The maximum amount that can be invested in a single offering under Regulation Crowdfunding is $100,000. The maximum size of single offering under the rule is $1,000,000. (Test Note: The maximum investment amount and the maximum amount that can be raised are subject to an inflation adjustment every 5 years. In April 2017, the maximum investment amount was increased to $107,000 and the maximum amount that can be raised was adjusted to $1,070,000. For the exam, know the base amounts and the fact that they are indexed for inflation periodically.)

Answer 8

The best answer is C. The floor broker is used to execute transactions on CBOE for retail member firms. The floor broker can execute a trade with another floor broker, a Market Maker or an Order Book Official, earning a fee for each transaction. Floor brokers do not hold an inventory - this is the function of a market maker. They can accept all orders, and are obligated to find the best available market.

Answer 9

The best answer is C. The "alpha" coefficient is a measure of so-called stock specific risk, that is the relative risk of that stock's price moving positively or negatively, independent of general market movements. (The "beta" coefficient is a measure of a stock's price volatility relative to the market as a whole). Thus, the events that would affect "alpha" are those that relate solely to that company or industry, such as a change of corporate management. The other measures given are technical indicators of the market as a whole, and would have no impact on "alpha."

Answer 10

The best answer is B. Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries. American Depositary Receipts are vehicles for foreign securities to be traded in the United States. ADRs are only traded in the United States, and are denominated in U.S. dollars, so there is no direct effect of foreign currency price movements on ADR prices (though an argument can be made that the foreign stock held in trust pays dividends in the foreign currency; and that these dividends are converted to U.S. dollars to be paid to ADR holders; that currency price movements have some impact on ADR values).

Answer 11

The best answer is A. Listed securities (those listed on an exchange) are marginable under Regulation T. Under the Exchange Act of 1934, Regulation SHO requires that before any equity security (either listed or unlisted) can be sold short, the member firm must affirmatively determine that the security can be borrowed and delivered on settlement. This is called the "locate" requirement. Listed securities trade in the first (exchanges), third (OTC trading of exchange listed securities) and fourth (direct trades between institutions via ECNs) markets. The second market is trading of unlisted securities over-the-counter. These are OTCBB and Pink Sheet issues. Listed companies must register with, and report their results to, the SEC.

Answer 12

The best answer is B. As municipalities reached their debt limits with G.O. bond issuance, they found it harder and harder to get voter approval to raise limits to sell additional G.O. bonds (think of Proposition 13 in California that capped property taxes to almost no increase unless the property was sold). To get around this, the COP - Certificate of Participation - was invented and COP issuance is now greater than G.O. bond issuance in many states. A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison, municipal office building, municipal transit system, etc. The "difference" is that the lease payment is made based on the governing body making an annual appropriation from tax collections, and it is not "legally" obligated to do so, hence it is not really a bond. Rather, it is a security that gives the holder a share of "revenue" if the appropriation is made (which it will be, otherwise that issuer's credit rating would be trashed). COP issuance has increased greatly over the years because they are easier to issue than G.O. debt (no pesky debt limits or voter approval to deal with) - but they are sold at a slightly higher yield, because they have more credit risk.

Answer 13

The best answer is C. Capital gains on municipal securities are taxable at the Federal, State and Local levels. Only the interest income from municipal securities is exempt from Federal income tax; it is still subject to State and Local tax unless the bond is purchased by a resident of that State.

Answer 14

The best answer is C. Rights are exercisable, negotiable (as they can be sold), and giftable (as they can be given to someone as a gift). Rights are not redeemable with the issuer.

Answer 15

The best answer is D. A "high-technology" fund could be hedged against loss by the purchase of index put contracts. A narrow-based index of high technology stocks would have a beta that more closely matches the fund's characteristics than a broad-based index (such as the OEX or XMI, which are principally composed of blue-chip stocks).

Answer 16

The best answer is D. This customer owns 1,000 shares of $25 par cumulative preferred, for a face value of $25,000. In order to have paid the common dividend,the company must have paid the preferred shareholder the 3 missed quarterly dividends in addition to the current quarterly dividend. Therefore, it must pay the annual dividend amount of 8% of $25,000 = $2,000 to this preferred shareholder.

Answer 17

The best answer is B. Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a bond anticipation note). Commercial paper cannot be used for long term financing such as a bond refunding.

Answer 18

The best answer is C. Initial margin for a short margin account is set by the Federal Reserve (FRB is the Federal Reserve Board) under Regulation T at 50%. Maintenance margin is set by FINRA at 30%.

Answer 19

The best answer is D. When the market price is at 40, both contracts will expire and the customer will receive a net credit of 6 points. When the market is at 44, the 40 call will be exercised, forcing the customer to buy stock at the market (44) and to deliver at 40 for a loss on the stock position of 4, but he still has a net credit from the option contracts of 6. So the customer still has a gain of: 6 - 4 = 2 point gain. When the market is at 46, the customer must deliver at 40 (once again, the 40 call is exercised). He or she has to go to the market to get the stock at 46. This is breakeven since he loses 6 points on the stock position, but he had a net credit from the premiums of 6. The customer starts to lose at any dollar price above $46. To summarize, the breakeven formula for a short call spread is: Short Call Pread Breakeven = Short Strike Price + Credit

Answer 20

The best answer is D. There is no tax due when a stock dividend is paid; instead the investor gets more shares; with each share worth proportionately less. The payment of a stock dividend increases the number of shares held by the investor and the cost basis must be reduced accordingly, since each share is theoretically worth less after the stock dividend is paid. The customer will have 1,000 shares x 1.20 = 1,200 shares after the stock dividend is paid. Each share originally had a cost basis of $60 ($58 price plus $2 commission). After the stock dividend is paid, the cost basis is adjusted to $60/1.20 = $50 per share.

Answer 21

The best answer is C. Because the shares that were sold have been "borrowed," they must be replaced. The former owner (lender) of the shares has no idea that they are gone. The lender has received dividends on the stock because the short seller has paid them to him. The lender will also receive the stock dividend he deserves because the short seller pays this to him as well. The short seller must deliver a total of 200 x 1.05 = 210 shares to cover when he or she buys in the position.

Answer 22

The best answer is D. Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, earnings per share increases. As earnings per share rises, this makes the stock more attractive to investors, who will bid up the stock's price in the market. The purchase of Treasury Stock has no effect on authorized shares.

Answer 23

The best answer is A. Negotiable CDs that mature in 1 year or less are issued at par and mature with accrued interest. Those issued for longer periods pay interest semi-annually and trade with accrued interest. The other choices are all original issue discount obligations, which trade flat.

Answer 24

The best answer is B. The customer has created a long stock/short straddle position. This is termed a "covered straddle," however this name is not really accurate. The short call is covered by the long stock position, however the short put is naked. This is a neutral to slightly bullish market strategy. If the market stays the same, both the short call and the short put expire, leaving the customer with a gain of $800 in total collected premiums. If the market rises, the short call is exercised and the customer delivers the stock bought at $60 for the same $60 price. The short put expires "out the money" and the customer keeps the $800 in collected premiums. If the market drops, the customer loses on both the long stock position and the short naked put (since the short put will be exercised, forcing the customer to buy another 100 shares of stock). The customer can lose the full value of the 200 shares owned if the market falls to "0," net of the premium collection.

Answer 25

The best answer is A. The declaration date is set by the Board of Directors of the company, not by the transfer agent. The transfer agent mails voting materials (proxies), annual reports, dividend payments to the shareholders, and cancels old shares and issues new shares.

Answer 26

The best answer is A. To sell a variable annuity, salespersons must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level).

Answer 27

The best answer is D. A person holding a limited power of attorney in a brokerage account can enter orders but cannot draw checks. A person holding a full power of attorney can do both - but any checks must be drawn to account name - not to the name of the third party.

Answer 28

The best answer is C. FINRA requires that associated persons give written notice to their employer and receive written approval from their employer, to serve as an officer, director, partner or employee of another business organization. In addition, such an OBA (Outside Business Activity) must be reported on that individual's U-4 Form. This information then flows into that registered representative's BrokerCheck report and shows as an OBA on the report. The intent of the OBA disclosure in BrokerCheck is that a potential customer can assess how much time a representative is devoting to his or her business as a representative, as opposed to how much time the representative is devoting to Outside Business Activities. Being compensated is not the sole determinant of whether an activity is an OBA. If the activity can reasonably be expected to lead to additional business for that representative, it is an OBA. Teaching a course in night school at a college could be a way to get new client leads, and hence is an OBA. Being on the Board of Directors of a cooperative apartment house, while not compensated, puts the representative in a position to "steer" the Board when it makes a decision as to investing the coop's reserve and operating funds, so it is an OBA. Working in the family restaurant for tips is clearly an OBA. Note that volunteer charitable work, where there is no "quid pro quo" arrangement, is not an OBA. Rather, it is simply doing a good thing!

Answer 29

The best answer is C. There is no tax deduction for contributions made to a variable annuity contract. The major advantage is the tax-deferred build-up of earnings in the separate account.

Answer 30

The best answer is B. If the bond could be trading at a premium, this means that yields have dropped. The issuer can call in the bonds at par and refund the issue at lower current market interest rates, and since the call is at par, the issuer has no cost in calling the bonds. The bondholder, on the other hand, is receiving par value for the bonds and now must reinvest those funds in new bonds to keep receiving income. The only problem is that yields have dropped, so the bondholder will now get less income. Furthermore, the bondholder gets no compensation for this because the bonds are called at par (there is no call premium).

Answer 31

The best answer is C. A purchase of a "put spread" is similar to simply buying a put. Both strategies are profitable in a falling market. The difference is that a long put gives ever increasing downside gain potential - all the way to "0." A long put spread gives limited downside gain potential (for a lower premium paid).

Answer 32

The best answer is A. In a reverse repurchase agreement, the Federal Reserve drains reserves from dealer banks, tightening credit. It does this by selling eligible securities to the banks, who buy them for cash. Thus the banks are drained of excess cash and credit levels are reduced.

Answer 33

The best answer is D. If a "Stop" order is elected, it becomes a market order to be filled at the first opportunity. Thus, the actual price at which the order is executed is not known. On the other hand, a "Limit" order specifies that the execution must comply with the limit price specified or better. Thus, limit orders are filled at that price or better.

Answer 34

The best answer is A. A stock breaks a "support" level as the market falls. If the stock breaks this level ($75), the investor feels that the price will plummet. To profit, he wants to sell short if the market breaks $75 on the downside, so the order is to sell (short) @ $74 Stop. The order must be a sell stop because it is placed lower than the current market. If the market falls to $74, the order is triggered and becomes a market order to sell short. The order can then be executed on the next trade. Once the short stock position is established, the customer believes that the price will plummet, and that the stock can be purchased later to cover the short sale at a much lower price for a profit.

Answer 35

The best answer is A. A purchase of a "call spread" is similar to simply buying a call. The difference is that a long call gives unlimited upside gain potential; a long call spread gives limited upside gain potential (for a lower premium paid).

Answer 36

The best answer is B. Originally, the exchanges, such as the NYSE and NASD (National Association of Securities Dealers) were both marketplaces and regulators of their member firms. This changed when FINRA was created in 2006. Each exchange now only regulates its trading operation; and FINRA regulates the broker-dealer member firms and is its own SRO (Self Regulatory Organization). FINRA sets guidelines for fair dealing with the public with its Conduct Rules; it handles complaints against broker-dealers for securities law violations under the Code of Procedure; it can take administrative action against broker-dealers that violate industry regulations; and it establishes arbitration procedures to settle intra-industry disputes. Fixed commission rates are prohibited under the Securities Exchange Act of 1934 - these are set by the member firms.

Answer 37

The best answer is B. This customer believes that the stock will rise from its current price of $29, but will not rise above $45 per share. As the holder of a convertible bond, convertible at $50 per share, it would not make sense to convert, even if the price rose to $45. However, the customer can use the convertible bond to "cover" the sale of call contracts against the stock. Since each bond is convertible at 20:1, 5 bonds is the equivalent of 100 shares of stock. By selling an ABC Jan 45 Call, the customer collects the premium income, and has no capital outlay since the short call is covered. If the stock does rise above $45 and the call is exercised, the customer simply converts the bonds and delivers the converted shares. Any option buying strategy does not meet the customer's specifications, since it requires a money outlay. The sale of a put does not make sense, even though it would be profitable if the market rises. If the market falls, the put would be exercised, requiring the customer to buy the stock again! There is no "cover" if this occurs and a margin deposit is required. This customer wishes to minimize any additional capital outlay, so this strategy in not appropriate.

Answer 38

The best answer is A. Under MSRB Rule G-37, a Municipal Finance Professional can give up to $250 to an elected official's campaign in which the MFP is entitled to vote without any problems. If the amount given is more than $250, or if ANY dollar amount is given to an elected official's campaign in which the MFP is not entitled to vote (as in this case), then the municipal broker-dealer is banned from doing negotiated underwritings and municipal financial advisory work for that municipality for 2 years. Therefore, an MFP can give nothing to an elected official's campaign in which he or she is not entitled to vote, otherwise a ban will result. The idea here is simple - why would an MFP give any campaign contribution where he or she is not entitled to vote, other than to curry favor with that issuer official?

Answer 39

The best answer is A. A sinking fund call obligates an issuer to place monies periodically into a sinking fund; and at dates established in the bond resolution, to retire a portion of the outstanding bonds by either calling some of the issue by random choice; or by purchasing bonds in the open market (if it is cheaper to do so). These calls are mandatory, since the specifics of how the monies are to be deposited to the sinking fund; and at what dates, and in what amounts, bonds are to be retired, are all spelled out in the bond resolution.

Answer 40

The best answer is D. In a reverse stock split, the number of common shares outstanding is decreased and the market price per share is increased proportionately on the "ex" date. Because the corporations' earnings will be spread over fewer shares, earnings per share will increase. However, the company's Price / Earnings ratio will remain constant because both the stock market price and the earnings per share will increase in the same proportion keeping the Price / Earnings ratio unchanged.

Answer 41

The best answer is B. In competitive bid municipal underwritings, the offering price of each maturity must be disclosed, but there is not requirement to disclose the spread, which is typically very thin. There is no requirement to disclose the participation amounts of the underwriters (since this in no way affects the customer). However, the order priority provisions must be disclosed (the usual priority is Pre-Sale; Group Net; Designated; Member Takedown).

Answer 42

The best answer is A. Mutual funds are redeemed at NAV less a redemption fee (if any). No commissions are charged on purchases or redemptions. The redemption fee of 1/2% must be deducted to get the net proceeds. $14.30 NAV x .995 x 200 shares = $2,846

Answer 43

The best answer is A. When securities are delivered on settlement date, the buyer inspects the delivery to ensure that the proper securities are being delivered in "good form." If the buyer finds that the wrong securities are being delivered, or that there is a problem, such as the securities' not having a proper assignment; or a coupon bond missing coupons; then the buyer may reject the delivery. This is the right of rejection. If the buyer has failed to detect an irregularity upon settlement, and accepts a delivery that later proves to have a problem, the buyer may use the "right of reclamation" to correct the problem. The buyer completes a "reclamation form" detailing the error; attaches it to the securities with the problem; and returns both to the seller. Upon receipt of the securities with the reclamation form, the seller must correct the problem within stated time periods.

Answer 44

The best answer is A. If there is an exercise of a foreign currency option, settlement is the same as for exercise of index options. If a PHLX World Currency option is exercised, the writer must pay the holder the "in the money" amount the next business day. There is no delivery of the foreign currency upon exercise.

Answer 45

The best answer is C. An evolution of the ECN is the "dark pool." Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without displaying their orders in the ADF or in a display system such as the NASDAQ System. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape.

Answer 46

The best answer is A. Stock market prices (as measured by the Standard and Poor's 500 Index) are a leading indicator, since as stock prices rise, people spend more. Personal income, the index of industrial production, and the level of Gross Domestic Product show current levels of economic output and are all considered coincident indicators.

Answer 47

The best answer is D. To compute the number of bond years represented in a serial bond issue, the calculation is: Yrs to Maturity x # of $1000 Par Bonds = Bond Years Years To Maturity Number of $1,000 Par Bonds Bond Years 1 2,000 2,000 2 2,000 4,000 3 2,000 6,000 Total 6,000 12,000 Therefore, the total number of bond years is 12,000.

Answer 48

The best answer is D. Gross domestic product is the entire output of the U.S. economy. It includes individual consumption, government spending, and fixed investment.

Answer 49

The best answer is C. Interest rate option premium movements are based on the movement of market interest rates. The TYX index option is based on the interest rate movement of the most recently auctioned 30-year Treasury Bond. To speculate on market interest rates falling, puts should be purchased. As market interest rates keep falling, the put premium keeps increasing. Note that selling a TYX call will also produce a profit in a falling interest rate environment because the call will expire "out the money" and the premium will be earned. But this strategy produces a fixed profit in a period of falling interest rates, while buying an interest rate put gives an ever-increasing profit as market interest rates fall.

Answer 50

The best answer is A. The management fee is $.10 per share. The offering is for $10,000,000 of stock divided by $10 per share = 1,000,000 shares. The total management fee is 1,000,000 shares x $.10 = $100,000.

Answer 51

The best answer is B. If ABC declares and pays a 10% "common" stock dividend, the customer who holds convertible preferred stock still would have 100 shares. However, the conversion ratio which was initially 10 to 1 would reflect the stock dividend and would get adjusted to an 11 to 1 ratio (10% additional common shares into which the preferred is convertible). With a new conversion ratio of 11 to 1, the conversion price per share becomes: $100 par / 11 shares = $9.09 per share.

Answer 52

The best answer is D. Minimum margin is 25% of market value, or 25% of $120,000 = $30,000. This account will receive a maintenance call for $30,000 - this would be the cash deposit. If the customer wishes to deposit other fully paid stock to meet the call, the market value of securities needed in the account at minimum is the $120,000 Debit / .75 = $160,000. Since the account already has $120,000 of securities, another $40,000 of securities must be deposited.

Answer 53

The best answer is D. Special tax bonds are backed by taxes other than an ad valorem tax, such as liquor taxes, gasoline taxes, cigarette taxes or sales taxes. They are considered to be a non-self supporting debt since they are paid from tax collections. Self supporting debts are revenue bond issues that pay their own way from collected revenues. When ratings agencies such as Standard and Poor's look at the Debt Statement of a municipality to assign a credit rating, they will not deduct special tax bonds from Total Bonded Debt when calculating Net Direct Debt (All Bonded Debt Sold - Self Supporting Debt). They say that they treat Special Tax bonds as non-self supporting debt because, to be conservative, they consider ALL types of taxes paid by the population of a town to service its debt when calculating Net Bonded Debt.

Answer 54

The best answer is B. The premium on municipal premium bonds must be amortized over the bond's life, but is not deductible for tax purposes. The yield on this bond consists of 2 components: the annual 6.50% coupon rate and the annual 1% loss of the premium (20 point premium amortized over 20 years = 1 point loss per year). Since there is no tax deduction for the annual loss, the net return each year, after tax, is 5.50% (6.50% coupon - 1.00% annual loss = $55 per year). The bond's average value over its life is $1,100 ($1,200 purchase price + $1,000 redemption price / 2). The after-tax yield to maturity is: $55 / $1,100 = 5.00%. Thus, after considering all taxes, the basis quoted for a municipal premium bond will be the return received by the investor. In contrast, for a municipal discount bond, after considering all taxes, the return received by the investor will be lower than the stated basis because the portion of the investment return attributable to the market discount is taxable.

Answer 55

The best answer is A. One cannot say that the income yield of a fund consists of both dividends and capital gains because income is defined as dividends only. People cannot group together to get a breakpoint. Buying a fund just before a distribution results in taxes to the customer and nothing else because the shares are reduced on ex date for the full distribution. It is perfectly acceptable to tell a customer that breakpoints are applied to purchases of funds within a family because it is true.

Answer 56

The best answer is A. FINRA has 2 basic definitions of communications with the public: Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients

Answer 57

The best answer is B. For every 2 shares the customer had, she will now have 3 shares. After the 3:2 split, a customer who owned 200 shares will now have 300 shares or 100 additional shares.

Answer 58

The best answer is C. When a government dealer enters into a repurchase agreement with the public, the dealer is "getting liquid" by selling government securities to the customer, with an agreement to buy them back at a later date. Thus, the customer is lender of cash to the government dealer.

Answer 59

The best answer is A. “Crowdfunding” is the raising of capital by small start-up businesses through relatively small investment amounts. These are private placement securities that are exempt from registration with the SEC. The intent is to help early-stage companies raise investment capital with little regulatory burden, improving job formation and economic growth in the U.S. economy.

Answer 60

The best answer is C. A Municipal Finance Professional (MFP) is someone who is an associated person (that is, a registered representative) who solicits municipal securities business from issuers. Municipal securities business takes the form of underwritings for issuers, trading of securities for issuers, sales of securities for issuers, financial advisory work for issuers and consultant services for issuers. Also, the supervisors of these individuals are MFPs. Note that the key here is that there is a relationship between the MFP and the issuer. MFPs are prohibited from making political contributions in excess of $250 to the election campaigns of municipal officials for which they are entitled to vote. If this limit is exceeded, then the municipal securities firm is subject to a 2-year ban on doing business with that municipal issuer. The intent is to make sure that MFPs do not give big political contributions as a “quid pro quo” for getting future municipal business from that issuer. Associated persons who only sell securities to individual retail clients and that do not deal with issuers are not MFPs, making Choice B incorrect. Choice A defines a bond counsel, while Choice D defines a consultant for a broker-dealer.

Answer 61

The best answer is A. | Bullets, Bond Ladders, and Barbells are portfolio constructions that are used to limit interest rate risk.

Answer 62

a bond portfolio construction methods that seeks to minimize interest rate risk. Bonds are purchased with "laddered maturities" - typically 10 different maturities in 2-year intervals, ranging from 2 to 20 years. The resulting investment picture looks like a ladder. If market interest rates rise, any losses on the long term bonds held in the portfolio should be offset by the short term bonds that are maturing, where the proceeds can be reinvested at higher interest rates.

Answer 63

a bond portfolio construction method that phases in purchases over defined time intervals, where all bonds purchased in the portfolio have the same maturity, usually intermediate term (around 10 years). By phasing in purchases (say yearly), if market interest rates rise during the accumulation period, any losses on the bonds already purchased should be offset by the later phased-in purchases being made at higher interest rates.

Answer 64

a bond portfolio construction that attempts to minimize interest rate risk. The portfolio is constructed only of very short-term and very-long term maturities. Because there are only 2 maturities at the short end and long end of the yield curve, the pattern looks like a barbell. If market interest rates rise, the loss on the long term bonds held should be offset by the short term bonds maturing where the proceeds can be reinvested at higher interest rates.

Answer 65

Balloon maturity a feature of a bond with serial maturities in which an unusually large amount of an issue matures at one time. The balloon usually occurs in the later years of the issue's sequence of maturity dates

Answer 66

The best answer is D. Any exchange reports last sale information for securities traded there. Thus, the NYSE, NYSE American (AMEX), NASDAQ and regional exchanges, as well as the CBOE all report trades as they occur. Regarding the "over-the-counter" market, last sale reports are provided for all OTC equity issues - OTCBB, and Pink Sheets.

Answer 67

The best answer is D. A customer can participate in the private equity market by either investing in a BDC - Business Development Company - or a VC (Venture Capital) Fund. Both of these invest in privately-held start-up companies, with the ultimate goal of cashing out by taking them public years into the future. A BDC is a registered investment company under the 1940 Act that is listed and trades like any other stock. In contrast, a VC fund is a limited partnership that is only sold in private placements to very wealthy accredited investors. This customer is not wealthy enough to be accredited investor (minimum annual income of $200,000 per year or a liquid net worth of $1,000,000) and most VC funds require that the investors be much wealthier than this. So the way for this customer to participate in the private equity market is by investing in a publicly traded BDC.

Answer 68

The best answer is B. A sale of a "call spread" is similar to simply selling a call. In a falling market, the calls expire "out the money" and the profit is the premium received. The difference is that a short call gives unlimited upside loss potential in return for the premium received. A short call spread gives limited upside loss potential in return for a lower premium received.

Answer 69

The best answer is D. Regulation T does not cover "delivery versus payment" transactions. These are specified by mutual funds when they purchase securities. The fund specifies that the securities be delivered to the fund's custodian bank, which is authorized to pay upon delivery. FINRA requires that the funds to pay be on deposit at the custodian bank "promptly" (the same as the wording of Regulation T) and also requires that the transaction be settled no later than 35 days from trade date.

Answer 70

The best answer is A. Keogh contributions are tax deductible (up to $56,000 in 2019), so the original investment was made with "before tax" dollars. In addition, earnings on Keogh investments are tax deferred. Once distributions commence from the Keogh, they are 100% taxable at that person's income tax bracket.

Answer 71

The best answer is D. FINRA maintains a "BrokerCheck" website, where retail customers can input a registered representative's name and see that individual's employment history for the past 10 years, disciplinary record, licenses held, states in which that person is registered, and outside business activities. In addition, pending serious customer complaints that are not yet resolved are included. For customers without web access, a toll-free "hot line" to BrokerCheck is available.

Answer 72

The best answer is C. A head and shoulders top formation is bearish since the market has topped out and is trending down. It is an uptrend that has reversed itself.

Answer 73

The best answer is B. The "Monetary Environment" is a reflection of whether credit is easy or tight, as shown by interest rate levels, money supply levels, and current economic policies of the Government - that is, fiscal policy.

Answer 74

The best answer is B. The first step in determining a competitive bid is to write the scale - the interest rates at which the syndicate believes it can successfully reoffer the bonds. The spread is then factored into the interest rates to come up with the interest rates to be bid.

Answer 75

The best answer is D. An "overlapping debt" is the debt of another issuer, that is the ultimate responsibility of property taxpayer. Property taxes that are levied in a town consist of taxes to service that town's direct debt, plus taxes levied to service any larger districts or counties that "overlap" the town. State debt is not overlapping because it is paid from a different funding source (usually income or sales taxes); it is not paid from ad valorem taxes

Answer 76

The best answer is C. When a stock is selling at a "multiple" of 15, this means that the market price is 15 times the current earnings per share. Since the market price is at $10 and the P/E ratio is 15, earnings per share is $.67.

Answer 77

The best answer is B. The physical securities which are held in trust against the issuance of Treasury Receipts are either Treasury Notes or Treasury Bonds. Treasury Bills cannot be used because their maturities are too short; Series EE bonds (savings bonds) cannot be used because they are non-marketable.

Answer 78

The best answer is C. Dividends from ADRs are declared by the underlying issuer in the foreign currency, but are converted by the depositary bank and paid in U.S. dollars. The market price of ADRs will be influenced, therefore by not only the performance of the company's stock, but also by foreign currency exchange fluctuations.

Answer 79

The best answer is C. FINRA requires that suitability determinations include multiple levels of review, which must occur in the following order: Reasonable Basis Suitability: This is a review of the features, returns, costs and risks of the recommended product or strategy. Only those products with the best combination can be recommended to clients. In essence, this rule requires that firms have an internal "recommended list" that has completed this review. In addition, in order to recommend the product, the registered representative must understand, and be able to communicate, the investment's features, returns, costs, and risks. Customer-Specific Suitability: Once the recommendation has completed "reasonable basis" suitability, that does not mean that it can be recommended to all customers. To recommend it to a customer requires that "customer-specific" suitability be determined. Quantitative Suitability: A single recommendation might be suitable for a customer, however a large number of similar recommendations might not be. It all depends of the customer's objectives, needs, and ability to pay for the recommended transactions. Note that the "Suitability" rule only applies to recommended transactions. It explicitly does not apply to unsolicited trades; and it also does not apply to institutional customers - only to retail customers.

Answer 80

The best answer is B. Bank qualified municipal bonds are small dollar issues (less than $10,000,000) of General Obligation bonds. If a bank invests in these bonds, it is given a substantial tax break - 80% of the interest cost of carrying bank deposits that funded the purchase of those bonds is tax deductible to the bank, yet the interest income received from the bonds is free of Federal income tax. This benefit is only available on bank qualified issues.

Answer 81

The best answer is B. "Beta" is a measure of a security's price volatility relative to the overall market. "Alpha" is a measure of a security's price volatility independent of the overall market. The relevant measure to assess volatility relative to the market is "beta." The higher the "beta," the more volatile that security's price movements relative to the market. A stock with a "beta" of .5 will move 1/2 as fast as the overall market. A stock with a "beta" of 1.5 will move 1.5 times as fast as the overall market.

Answer 82

The best answer is A. Outstanding stock is: Issued stock (50,000,000 shares) minus Treasury stock (10,000,000 shares) = 40,000,000 shares outstanding at $.50 par = $20,000,000.

Answer 83

The best answer is C. A CMO (Collateralized Mortgage Obligation) passes-through the monthly mortgage payments to the certificate holders. The monthly mortgage payment is a combined payment of principal and interest, and the principal received reduces the outstanding principal (debt) amount. Only the interest component received is taxable; the principal component is a return of original investment.

Answer 84

The best answer is A. As one's income increases, permitted contributions to Roth IRAs and Coverdell Education Savings Accounts are phased out (so high earning persons cannot contribute to these accounts). However, there is no income limit for making a contribution to a Traditional IRA or spousal IRA (however, if the contributor is covered by another qualified retirement plan and earns too much, the permitted contribution may not be tax deductible).

Answer 85

The best answer is C. REITs are not tax shelter vehicles because they cannot distribute losses to shareholders through conduit tax treatment; they can only distribute income and capital gains through conduit tax treatment to shareholders.

Answer 86

The best answer is C. Estate and gift tax rates increase with the size of estate or gift, so these are progressive taxes. Sales and excise tax rates stay the same, whether the purchaser is rich or poor, so these are regressive taxes.

Answer 87

The best answer is C. Minimum margin to open a day trading account is set at $25,000; as opposed to $2,000 minimum margin to open a regular margin account.

Answer 88

The best answer is C. If a retail member firm chooses a market maker to execute its orders in return for compensation from that market maker, then the retail firm is earning so-called "payment for order flow." The SEC permits this practice, subject to the retail member firm always executing its trades at the best available price. And payments made for order flow must be disclosed on customer confirmations.

Answer 89

The best answer is B. REIT shares are not redeemable; they are negotiable and trade on exchanges. REITs are similar to closed end investment companies and must invest at least 75% of their assets in real estate activities to qualify as a "regulated" investment company under Subchapter M of the Internal Revenue Code.

Answer 90

The best answer is C. To protect the British Pound from falling, the Bank of Britain would buy British Pounds in the interbank market (raising the value of the Pound) and would sell U.S. Dollars (depressing the value of the dollar). Thus, two currency values would be driven closer to the desired level.

Answer 91

The best answer is C. New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the original offering of a closed-end fund or a unit trust. Both are made with a prospectus. However, once closed-end fund shares are listed on an exchange and begin trading in the market, they are marginable like any other listed stock.

Answer 92

in options, a person who has bought stock and then sells a call at a strike price just above the market price of the stock, and buys a put at a strike price just below the market price of the stock. If the stock rises, it is called away; if the stock falls, the put is exercised, limiting downside loss. Because a premium was received and a premium was paid, the cost of the downside protection is often "0.

Answer 93

The best answer is A. If a customer has a stock position that has appreciated over time, and the customer wishes to protect the position against a downward market move, the customer can buy a put against the stock, typically at a strike price a bit below the current market price of the stock (thus, the put is "out the money" and costs less). If the customer wishes to reduce the cost of this protection to "0," the customer can sell a call at a strike price just above the current market price of the stock. This call is also a bit "out the money" and will not be exercised unless the stock price rises above the call strike price. The premium collected on this "out the money" call can be used to offset the cost of the protective put. This is termed a "zero-cost collar." The customer has collared the stock position - if the price falls, the put is exercised and the stock is sold at the strike price; and if the price rises, the call is exercised and the stock is sold at the strike price - thus the stock's price has been "collared." A spread is the purchase and sale of a call or put at different strike prices or expirations. A strangle is a straddle with different strike prices. Condors are advanced options strategies that are not tested.

Answer 94

The best answer is B. Depreciation is a tax benefit. Recapture rules require that those benefits be "recaptured" and taxed as ordinary income if the asset that was the subject of the benefits is sold at a gain. Phantom income arises when a debt is forgiven by a lender - the amount of the forgiven debt is "phantom income" to the investor and is taxable. The alternative minimum tax (AMT) is the "tax on tax preferences." If someone uses tax benefits such as depreciation and depletion too heavily, reducing taxable income to very low levels; then the AMT kicks in and requires that a minimum tax be paid on income, adding back these tax preference items.

Answer 95

The best answer is D. Straight line amortization for municipal bonds is the annual reduction of the cost basis of a premium bond performed according to IRS rules. Straight line accretion for municipal bonds is the annual increase in the cost basis of a discount bond performed according to IRS rules.

Answer 96

The best answer is C. Both Roth IRAs and Coverdell ESAs are not available to high-earning individuals. There is an income phase-out range, above which contributions are prohibited to either of these. For 2019, the top end of the income phase out range for individuals is $110,000 and for couples it is $220,000.

Answer 97

The best answer is B. When selling a bond directly to the public, a selling group member earns the selling concession of $20.00.

Answer 98

The best answer is A. The transfer agent handles the mailings to shareholders - dividends, corporate reports, and voting materials. The registrar acts as a watchdog over the transfer agent and makes sure that any mistakes made by the transfer agent are corrected. The registrar also ensures that all shares are properly accounted for and verifies the integrity of the record of shareholders' names and addresses.

Answer 99

The best answer is B. To be profitable, debit spreads must be closed at a higher premium than paid (the spread between the premiums must widen; or both contracts must be exercised). This occurs when the market rises for calls; and when the market falls for puts.

Answer 100

The best answer is B. The highest speculative bond rating is BB or Ba. Any rating above that would be considered investment grade.

Answer 101

The best answer is C. Falling interest rates are good for stock prices. More investors will switch from low yielding bonds to stock investments. A falling capital gains tax rate also makes stocks attractive to investors. Rising employment indicates that the economy is expanding. This is bullish for corporate profits and hence, stock prices. Rising inflation means that interest rates are likely to rise. This makes long term debt unattractive due to their greater price volatility in response to market interest rate changes and also makes stocks unattractive since corporations are not able to increase prices in line with rising costs, hurting profits. In inflationary times, investors switch from stocks and long term bonds to money market instruments which are paying current high rates of interest; and "hard" assets such as gold and real estate that tend to keep up with inflation.

Answer 102

The best answer is C. Eurodollar bonds are only issued outside the U.S. and are purchased by foreigners. The bonds are not registered for sale in the U.S. The bonds are not subject to withholding taxes and are issued in bearer form.

Answer 103

The best answer is D. The public offering price is set by the manager based on his expectations of the highest price the issue can get in the markets. To determine this, he examines expectations about earnings, demand for the issue and share prices of similar companies. The spread is not a determinant in setting the market price.

Answer 104

The best answer is D. Capital risk is simply the risk of losing money. By increasing the number of stocks in a portfolio, this risk is reduced through diversification. This is a major advantage of investing in stock index funds. Call risk does not apply to stocks (because common stocks are non-callable). Stocks, whether held individually or in an index fund, are not as susceptible to inflation (purchasing power) risk as bonds. In times of inflation, corporations can raise prices and maintain profitability. Liquidity risk is the risk that a security can only be sold by incurring large transaction costs and is essentially not applicable to exchange listed securities because the market is so active.

Answer 105

The best answer is D. In an inflationary period, interest rates will rise dramatically, because the Fed will start tightening credit to get inflation under control. As interest rates rise, both preferred stock and long-term bond prices drop dramatically. Equity securities' prices drop as well, because companies are not able to increases their prices as fast as their costs are rising, so earnings suffer. Money market instruments, on the other hand, do well when short term rates are rising - because they give an increasing rate of return.

Answer 106

The best answer is B. Trades of foreign currency options settle either cash (same day) or regular way (next business day). Do not confuse this with trades of foreign currencies. Trades of foreign currencies settle either "spot" (1 or 2 business day settlement - the more actively traded currencies settle in 1 day; less actively traded currencies settle in 2 days) or forward (a mutually agreed date in the future).

Answer 107

The best answer is B. Dollar cost averaging requires that an investor make periodic payments (say monthly) of a fixed dollar amount (say $100 per month) to buy a given security. If the price of the security is fluctuating, the average purchase cost per share will be lower for the investor than the simple mathematical average price of the shares over the same period. Dollar cost averaging does not work if the price of the stock remains fixed, nor does it protect against loss in a falling market.

Answer 108

The best answer is C. If an individual wishes to redeem shares of a mutual fund under a "systematic withdrawal plan," he or she gets to elect a withdrawal option. He or she could elect to have a fixed number of shares liquidated each month (Choice A); could elect to have the account liquidated over a specified period of time (for college education) (Choice B); could elect to have a fixed percentage of the portfolio liquidated each month (Choice C); or could elect to have enough shares liquidated so that a specific dollar amount is received each month (Choice D). In this example, Choice C meets the customer's requirements.

Answer 109

The best answer is C. The minimum maintenance margin requirement is set by the exchanges at 30% of the short market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 30% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 30% minimum.

Answer 110

The best answer is B. The symbol s/s stands for round lot units of 10. These are the infrequently traded "cabinet stocks" - typically of companies whose shares are very highly priced compared to stocks that trade in 100 share units.

Answer 111

The best answer is D. Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings (this shows earnings added for the year and dividends paid from retained earnings for that year); and Statement of Sources and Uses of Cash (this shows cash received that year from income earned; stock and bond offerings; and disposals of equipment; and cash paid that year for equipment purchases, pay-down of debt; dividends, etc.) Net capital computations are only required for broker-dealers registered with the SEC.

Answer 112

$24 - $19 = $5 = $.50 Value "Ex Rights" 10 10 Notice that the market price of $24 was already adjusted on the ex date by the exchange where the stock trades. Do not try and reduce the price again!

Answer 113

The best answer is B. The Federal Funds Rate is set by member banks, and is the rate on overnight loans of reserves from member to member. FOMC (Federal Open Market Committee) actions influence the Fed Funds Rate. If the FOMC directs the Federal Reserve trading desk to loosen credit, the trading desk will engage in repo's with banks, injecting reserves into the banking system. This should lower the Fed Funds Rate between banks since there are more reserves available. If the FOMC directs the Federal Reserve trading desk to tighten credit, the trading desk will engage in reverse repo's with banks, draining reserves from the banking system. This should raise the Fed Funds Rate between banks, since there are less reserves available. The Fed Funds Rate will be lower than the discount rate. Members of the Federal Reserve system can borrow from the Fed itself at the discount rate. The "effective" Federal Funds Rate is the average rate charged by selected banks across the country on a given day.

Answer 114

The best answer is B. SEC Regulation M (Rules 101-105) covers secondary market activities related to registered public offerings, and addresses such items as prohibitions or limits on syndicate members buying the stock in the secondary market during the 20-day cooling off period (this is for add-on offerings); stabilization rules (because stabilizing bids are placed in the secondary market); and also, under Rule 105, addresses a rather nasty market manipulation that occurred in secondary offerings. Prior to the adoption of this rule, a common trading practice was for overly aggressive independent traders to short that stock in the market - pushing the price down during the 20-day cooling off period. The fall in the market price would force the underwriters to lower the Public Offering Price of the issue. Thus, when registration became effective, the independent trading firms could buy the issue from the underwriters at the lower P.O.P., cover their short positions, and have a nice profit. The problem was, however, that this activity was clearly manipulative. The SEC took a dim view of this activity, and under Rule 105, prohibits broker-dealers from purchasing shares of stock from the underwriters at the offering price to cover short positions established within 5 business days of the effective date.

Answer 115

The best answer is D. Regulation A is intended to make it easier for start-up companies to raise capital. It gives an "E-Z" registration method for offerings of up to $50 million within a 12 month period. The rule is split into Tier 1 and Tier 2. Tier 1 offerings, up to a maximum amount of $20 million, are given the easiest registration method and do not require audited financial statements. Tier 2 offerings allow a maximum of $50 million to be raised, but require audited financial statements. An abbreviated registration statement is filed with the SEC (Form S1-A) and the issue must go through a 20 day review period, similar to a regular registered offering. Disclosure to investors is made through an Offering Circular rather than a Prospectus.

Answer 116

a call provision in a bond contract that gives the issuer the option of calling in the bonds at predetermined dates and prices, if the issuer wishes to do so. Such a provision would be used by the issuer if interest rates dropped substantially after issuance of the bonds. (compare Mandatory call)

Answer 117

a call covenant that gives the issuer the option of calling in bonds if an extraordinary event occurs. An example is a call covenant on a housing bond issue that allows the issuer to call in bonds if the mortgages are paid off earlier than expected. Note, however, that the issuer is not required to call in the bonds.

Answer 118

The best answer is A. When a municipal dealer gives a basis quote, he or she is promising the purchaser a certain yield on the bond. MSRB rules require that when the actual dollar price is determined, that the dollar price be computed to the lowest dollar amount of yield to call or yield to maturity. The only calls that are considered are optional calls, meaning the issuer has the option of calling in the entire issue at preset dates and prices, as set forth in the bond contract. Mandatory calls are not considered - an example of a mandatory call is a "sinking fund" call. In such a call, the issuer is obligated to deposit monies annually to a sinking fund, and then use the funds to call in bonds on a random pick method at specified dates. It is the luck of the draw as to whether a given bond is called or not. Since there is no reasonable certainty of a specific bond being called, this type of call is not considered when pricing municipal bonds. Extraordinary calls (such as catastrophe calls, or calls of bonds backed by mortgages due to mortgage prepayments) are not considered, again because of the lack of any certainty as to their actually happening.

Answer 119

The best answer is C. GNMA pass-through certificates represent an ownership interest in a pool of underlying mortgages. Each month, the mortgage payments made into the pool are "passed through" to the certificate holders. If interest rates drop, then the homeowners in the pool will refinance their mortgages and prepay their old higher rate mortgages. These prepayments are passed through to the certificate holders, who are paid off much earlier than expected. If these payments are reinvested, since interest rates have fallen, the overall rate of return falls, and the anticipated monies needed to fund the college education will not be available. Prepayment risk does not exist with conventional debt securities.

Answer 120

The best answer is D. This one is special! A bond that is escrowed to maturity (ETM) is backed by escrowed U.S. Government securities – so it becomes the “safest” municipal bond because it becomes government backed. A PHA bond is a Public Housing Authority revenue bond – this is backed by the rental income from subsidized housing, and also backed by the full faith and credit of the U.S. Government to make it marketable. Again, this is another “safest” municipal bond because it is government backed. AAA rated general obligation bonds are extremely safe – they are backed by unlimited tax collections and have a top credit rating. Finally, a double-barreled bond is a revenue bond that is additionally backed by a municipality’s “full faith and credit” if the revenues fall short, so it has a back-up G.O. backing. It is also extremely safe – just not as safe as the other choices. Note that this choice does not have a credit rating as a guide - if it did, it would be much easier to answer this question!

Answer 121

The best answer is C. Preferred stock prices are based on market interest rates. Preferred stock is a fixed income security, and hence, when market interest rates move, the yield on the security adjusts to the market rate. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security.

Answer 122

The best answer is D. Since the homeowners are prepaying their mortgages faster than expected, the issuer will use the excess monies to call in outstanding bonds, rather than continue to pay interest on them. This call results from an extraordinary event, and is at the option of the issuer. Hence, it is an extraordinary optional call.

Answer 123

The best answer is C. A nominal quote is an approximation of a market price for a bond, given for informational purposes only. The dealer giving such a quote is under no obligation to trade at that price; or even near to that price.

Answer 124

The best answer is D. SEC Rule 606 of Regulation NMS requires broker-dealers to do the following: The fact that the firm received a payment for order flow must be disclosed on the customer trade confirmation. The firm, on request of the customer, must disclose the identity of the market to which the customer's orders were routed for execution in the preceding 6 months along with the time of execution. (These are known as "non-directed" orders, since the customer did not tell the broker the specific market where the order was to be executed, so the member firm could route the order to wherever it wanted.) The firm must notify customers, in writing, at least annually, of the availability of this information. In addition, the rule requires member firms to prepare a quarterly report that is publicly available that details the: Percentage of customer orders that were "non-directed;" Identity of the 10 largest markets or market makers, to whom non-directed orders were routed and any other venue that received 5% or more of the firm's orders; Member firm's relationship with that market maker (for example, many larger retail member firms own their own market maker subsidiaries to whom they route orders); and Arrangement, if any, for payment for order flow or profit-sharing. Because of this rule, member firms cannot have "hidden" arrangements with market makers to favor them in return for "payment for order flow" - everything is out in the open and is fully disclosed. Thus, customers can make informed decisions about how retail member firms are routing and executing their orders. Note that Rule 606 does not apply to "directed orders" where the customer specified the market venue to which the order was sent. The rule applies to "non-directed" orders for exchange listed stocks and exchange listed options and NASDAQ securities. It does not apply to executions of trades of OTCBB or Pink Sheet stocks.

Answer 125

The best answer is A. All municipal premium bonds, whether original issue premium or trading market premium bonds, are subject to straight line amortization. The 5 point premium must be amortized over 5 years, so 1 point per year is amortized (with no tax deduction allowed for the annual amortization amount). After 2 years, the bond has an adjusted cost basis of 103 (105 purchase - 2 points total amortization). Since the bond is being sold at 103, there is no taxable gain or loss.

Answer 126

The best answer is C. The beginning basis is $300,000 ($100,000 cash contribution plus $200,000 recourse note). The income of $80,000 increases the basis to $380,000. The total losses of $125,000 then reduce the basis to $255,000. The principal pay down of the loan reduces the basis by another $10,000 to $245,000.

Answer 127

The best answer is D. The account will be at maintenance if equity equals 25% of long market value. Since long market value minus the debit equals equity in a long account, at maintenance, the debit must be 75% of market value. Thus, with a $9,600 debit, the account will be at maintenance when the market value falls to $9,600 / .75 = $12,800. At this point, equity will be $3,200 in the account and the margin percentage would be $3,200 equity / $12,800 market value = 25%.

Answer 128

The best answer is D. GNMA securities are guaranteed by the U.S. Government. Dealers typically quote agency securities, including Ginnie Maes, on a basis point differential to equivalent maturing U.S. Governments. Reinvestment risk is greater for Ginnie Maes than for U.S. Governments. If the mortgages backing a Ginnie Mae Pass Through Certificate are prepaid (if interest rates have dropped), the certificate holder receives payments that are a return of principal, and that, when reinvested at lower current rates, produce a lower return (this is reinvestment risk). There is little reinvestment risk with U.S. Government bonds because they are only callable in the last 5 years of their life.

Answer 129

part of a brokerage firm's operations or "back office" that is responsible for processing and reconciling executed orders. The P&S department records order executions, computes monies due or payable, sends out confirmations to customers, and compares trades with contra-brokers.

Answer 130

The best answer is A. If a short put is exercised, the writer is required to buy the stock at the strike price ($50). Since $7 per share was received in premiums, the writer's cost of the stock is $43 per share for tax purposes. The writer sells the stock later in the market for $49 per share, for a $6 per share capital gain.

Answer 131

The best answer is A. The dealer's Ask price is too low - that is why the buyers are pouring in! The dealer will raise the Ask price - this will discourage buyers. If the dealer were to decrease the Bid price, this would discourage sellers to the dealer - and this dealer needs to buy to cover the current short inventory position. Therefore, the dealer is likely to increase the bid price as well. Decreasing the mark-up charged to customers would encourage more buyers at the Ask, which the dealer does not want. Placing a "BW" in the OTCBB is a "Bids Wanted." This indicates that the dealer wants to sell more of the stock to any willing buyers, which is not the case - the dealer wants to buy the stock, not sell it! Rather, he or she would want to place an "OW" - Offers Wanted - in the OTCBB, telling potential sellers that the dealer is interested in buying.

Answer 132

The best answer is B. Effective methods of diversifying away the unsystematic risk of a portfolio would be to diversify among different issuers, different states, and different industries. Thus, if one issuer, industry or economic region has problems, this would only affect a small portion of the portfolio. Diversification among differing maturities also provides a measure of risk management. If market interest rates rise, short term maturities (under 1 year) will decline in price by a minimal amount compared with longer maturities. Thus, a mix of maturities helps to minimize capital risk. Bond denominations have no bearing on diversification.

Answer 133

The best answer is C. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated. What is not eliminated, however, is credit risk. These products are only as good as the guarantee of the issuing bank. They typically have a 7 year life - and a lot can go wrong in 7 years (just ask anyone who purchased Lehman Brothers structured products or ETNs).

Answer 134

The best answer is B. Government agency securities are underwritten via negotiated offerings; not via competitive bid as is the case with U.S. Government issues. The agency assembles a selling group through which it offers the securities. It negotiates both the interest rate placed on the issue based upon the level of pre-sale orders received by the selling group; and the selling concession paid to the selling group for offering the securities to the public.

Answer 135

The best answer is C. To open an account for a non-resident alien, there is no requirement to get a driver's license number (remember, some people don't drive). The customer's passport number, tax identification number, and telephone contact number are all required.

Answer 136

The best answer is B. To short the stock, Regulation T initial margin is 50% of $4,200 = $2,100. The short stock position covers the short put, so no margin is required to sell the put. Since $300 in premiums is received in the account from selling the put, the net deposit is $2,100 - $300 = $1,800. Because this is an existing account, the customer must already be meeting the minimum maintenance requirement and thus, his deposit can be less than $2,000.

Answer 137

The best answer is D. Cabinet trades on the CBOE, also called "accommodation liquidations," are a means for customers to close out worthless contracts. If a contract is left to expire worthless, the customer does not have a printed record of this event. With a cabinet trade, the customer can close out worthless long or short positions at a premium of $.01 per share ($1 per contract). This results in a printed closing trade confirmation for the customer's records. For executing the trade, the broker will charge a commission - which will surely be more than $1!

Answer 138

The best answer is B. The Trust Indenture Act of 1939 protects corporate bondholders from being taken advantage of by the issuing corporation. It provides for the appointment of a substantial independent trustee to protect the interests of the bondholders. Since we tend to trust our government (plus, the legislators write the laws!), issues of governments and municipalities are exempt from this Act.

Answer 139

The best answer is D. The Official Statement is the disclosure document, similar to a Prospectus, for new municipal issues. There is no legal requirement for issuers to prepare an Official Statement, but underwriters require them from issuers in order to perform due diligence on the issue; and to have a disclosure document that can be given to potential investors.

Answer 140

The best answer is B. Index options are issued for each of the next 4 upcoming months. Stock options are issued for this month, next month, and the next 2 months in that options assigned cycle. Stock LEAPs (Long Term Equity AnticiPation Options) are issued in either Sep, Oct, or Nov all expiring in Jan 28 months later (for the Sep contract). Index LEAPs are issued in January with an expiration 35 months later in December (Note, however, that this may be tested as 36 months).

Answer 141

The best answer is A. A "straddle" is the purchase of a call and put; or the sale of a call and put; with the same strike prices and expirations. A "combination" is the same as a straddle, except that the strike prices and/or expirations are different.

Answer 142

The best answer is C. Similar to a long account, SMA "locks" in a short account if the market value moves adversely, and in a short account, this occurs when the market value increases. If the market value drops, SMA will increase as equity rises. A purchase of securities adds to SMA; and an additional short sale of securities uses SMA.

Answer 143

The best answer is A. The formula for the sales charge percentage is: Mutual Fund % = Ask - Bid / Ask

Answer 144

The best answer is D. A "breakpoint sale" might sound like a good thing, but it is not! It is selling a mutual fund to a customer in an amount that does not give the customer the benefit of the breakpoint. This is a violation of FINRA rules.

Answer 145

The best answer is A. On this day, 1,002 issues advanced; while 2,103 issues declined; for an advance/decline ratio of 1,002/2,103 = 1:2.

Answer 146

The best answer is C. M in this instance means maturing in the year 2019. Since the bonds are currently offered at a price to yield 1.50%, which is lower than the coupon of 3.20%, the bond is trading at a premium.

Answer 147

The best answer is B. If a company has the same number of issued shares as the number of shares outstanding, then no shares have been repurchased for the company's Treasury. However, if the company repurchases shares, the number of outstanding shares decreases. Thus, the definition of Treasury stock is issued shares minus outstanding shares.

Answer 148

The best answer is B. If a bond is puttable at par in the near future, any price decline due to rising interest rates will be suppressed since the holder is able to put the bond back to the issuer sooner. Thus, the bond puttable in 10 years will depreciate more than the bond that is puttable in 5 years if interest rates rise.

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