Options
A customer buys 1 XYZ 50 call at $4. What is the customer's maximum possible loss?
What is the $400 premium paid.
What happens to the price of an existing bond when market interest rates rise?
What is the bond's price falls.
What are the two major types of municipal bonds?
What are General obligation (GO) bonds and revenue bonds?
What type of account allows a customer to buy securities using money borrowed from the broker-dealer?
What is a Margin account.
A 30-year-old customer with a stable income, long time horizon, and high risk tolerance wants long-term growth. Which type of investment would generally be MOST suitable?
What are Growth Stocks?
A customer buys 1 ABC 60 put at $5. At expiration, ABC is trading at $52. What is the customer's profit or loss?
What is $300?
The put is worth $8 ($60 − $52), minus the $5 premium = $3 × 100 = $300.
What is the difference between a secured bond and an unsecured bond?
What is A secured bond is backed by specific assets, while an unsecured bond is backed only by the issuer's creditworthiness.
What is the primary source of repayment for a general obligation bond?
What is The municipality's taxing power?
What is the primary difference between a cash account and a margin account?
In a cash account, the customer must pay the full purchase price. In a margin account, the broker-dealer can lend the customer money to purchase securities.
A retired customer depends on their investments for monthly income and has a low risk tolerance. Which investment would generally be MOST suitable?
What are high quality bonds, Preferred stocks.
Which options position gives an investor the right, but not the obligation, to buy the underlying security at a specified price?
What is A long call?
Which type of municipal bond is backed by the full faith and credit and taxing power of the municipality?
What is A General Obligation (GO) bond.
What is the primary source of repayment for a revenue bond?
What is Revenues generated by the specific project or facility being financed, such as a toll road, airport, or water system.
A married couple wants an account where either spouse can withdraw funds or sell securities without obtaining the other's permission. What type of account is most appropriate?
What are Joint tenants with rights of survivorship (JTWROS).
A customer is in a very high tax bracket and wants tax-exempt income while preserving capital. Which investment would generally be MOST suitable?
What are Municipal bonds.
An investor buys 1 ABC 50 call for $7 and sells 1 ABC 60 call for $3. What is the investor's maximum profit?
What is $600?
This is a bull call spread. Maximum profit = $10 spread − $4 net premium = $6 × 100 = $600.
An investor purchases a corporate bond at a premium. If the bond is held to maturity, what generally happens to the bond's market value and yield as it approaches maturity?
What is The bond's market value moves toward par, and its yield to maturity increases toward the stated coupon rate.
A customer in a high tax bracket is considering a municipal bond with a lower yield than a corporate bond. Why might the municipal bond still provide a higher after-tax return?
What is the Municipal bond interest is generally exempt from federal income tax, so the investor keeps more of the interest compared with taxable corporate bond interest.
A customer gives a registered representative written authority to decide which securities to buy and sell in the customer's account. What type of authorization is required?
What is Written discretionary authorization?
which must be approved by a principal before the representative exercises discretion.
A 65-year-old customer has $500,000 in retirement savings, needs the money to cover living expenses, has a short time horizon, and has low risk tolerance. A representative recommends a highly speculative small-cap stock because the customer says they "want to make as much money as possible." Is the recommendation suitable?
What is No?
The rep obviously has lost their mind. The customer's age, financial situation, need for income, short time horizon, and low risk tolerance make a highly speculative investment inappropriate despite the customer's desire for higher returns.
An investor owns 100 shares of XYZ and is concerned that the stock may decline in value over the next several months, but does not want to sell the stock. Which options strategy would BEST protect the investor against a significant decline?
What is Buy a Put?
The put gives the investor the right to sell the stock at the strike price, limiting the downside risk while allowing the investor to continue owning the shares.
A municipal bond is issued by a city to finance the construction of a new toll road. The bonds will be repaid primarily from the revenues generated by the toll road. The toll road experiences significantly lower-than-expected usage. What is the primary risk to investors?
What is Revenue risk.
This is a revenue bond, so repayment depends primarily on the revenues generated by the specific project. Lower toll collections could make it more difficult for the issuer to meet debt-service obligations.
A customer living in Texas purchases a New York municipal bond. The customer is in a high tax bracket and is primarily concerned with maximizing tax-free income. What is an important tax consideration when comparing this bond with a Texas municipal bond?
What is State and local tax treatment.
While municipal bond interest is generally exempt from federal income tax, interest on an out-of-state municipal bond may be subject to the investor's state/local income taxes. For a Texas resident, however, Texas has no individual state income tax, so this particular consideration would not create a Texas state income-tax advantage for owning a Texas muni.
A customer opens a joint account as tenants in common with another person. One of the owners dies. What generally happens to the deceased owner's interest in the account?
What is The deceased owner's interest passes to their estate/heirs, rather than automatically passing to the surviving account owner(s).
A 70-year-old customer with a low risk tolerance wants to invest a large portion of their retirement savings in a leveraged ETF because they believe the market will rise. The customer has limited investment experience and needs the money to cover living expenses. What is the MOST important reason this recommendation would likely be unsuitable?
The recommendation is inconsistent with the customer's risk tolerance, investment experience, and need for income/capital preservation. A leveraged ETF involves significant risk and is generally inappropriate for a conservative investor relying on their retirement assets.