Order Me Around
If a customer gives his broker/dealer an order to sell his stock if it falls to or below 69 and will not accept a price below 69, the order is:
A. Stop Order
B. Limit Order
C. Market Order
D. Stop Limit Order
What is D a stop limit order?
A corporate bond is quoted at 102-5. A customer buying 10 bonds would pay:
A. $1,026.25
B. $1,025
C. $10,262.50
D. $10,250
What is C, $10,262.50?
Corporate bond so it is 5/8
5/8 = .625
102.625 x 10 = 1,026.25 (price of 1 bond)
1,026.25 x 10 = 10,262.50
In early September, a customer buys 100 shares of QRS stock for $83 per share and simultaneously buys 1 QRS Mar 80 put @ 4. The customer has:
A. Bearish Outlook
B. Covered Put
C. Married Put
D. Naked Put
What is C, married put?
When an investor buys a stock and a protective put at the same time, it is a married put.
A bond that is backed by a specified revenue source and the full faith, credit and taxing power of a municipality would be:
A. Revenue Bond
B. Special Tax Bond
C. General Obligation Bond
D. Double Barrel Bond
What is D, double barrel bond?
The revenue source is the main funding for this, but the munis full faith, credit and taxing power steps in if there is not enough revenue.
An open-end investment company has increased in value because of a rise in the market. This is best characterized as:
A. Capital Gain
B. Profit
C. Appreciation
D. Ordinary Income
What is C, Appreciation?
Explanation: An increase in the market price of an open-end investment company or other security from the purchase price is appreciation. There is only a capital gain when the security is sold and the appreciation is realized.
Which of the following order types will guarantee the investor an exact price?
A. Stop Limit Order
B. Limit Order
C. All of the above
D. None of the above
What is D, none of the above?
This is because you can never guarantee a price an investor will receive/pay you can only set min or max (limit)
What is the main risk to investors when a bond is called early by the issuer?
A.Default risk
B. Reinvestment risk
C. Inflation risk
D. Liquidity risk
What is B, Reinvestment risk?
When bonds are called early, investors may have to reinvest their funds in a lower-yield environment, which is known as reinvestment risk
If a customer writes one uncovered in-the-money put, the maximum gain would be:
A. Strike Price Less the Premium
B. Strike Price
C. Unlimited
D. Premium Received
What is D, premium received?
You max gain when selling an option is the premium received and the writing is hoping the option expires.
Which municipal security would most likely be subject to the Alternative Minimum Tax (AMT)?
A. General Obligation bond
B. Revenue bond for a public school
C. Private activity bond
D. Tax anticipation note
What is C, private activity bond?
If you see private, think AMT!
ABC Corporation is paying a $5 yearly dividend on its preferred stock. The market price of the preferred stock is $80. The current yield is:
A. 5%
B. 6.25%
C. 5.5%
D. 7.15%
What is B, 6.25%?
You calculate current yield for preferred stock just like a bond. Annual Interest Payment/Current Market Value of Stock.
5/80 = .0625 or 6.25%
A customer enters an order to buy 100 ABC at 47 stop GTC. After the order is triggered, the order may be executed at what price?
A. $47
B. The next available price
C. The next available price below $47
D. The next available price above $47
What is B, the next available price?
Once a stop order is triggered, it becomes a market order, so the stock is bought at the next available price.
Which bond is most likely to be called?
A. 3% bond, callable at par
B. 3% bond, callable at 102
C. 4% bond, callable at 101
D. 6% bond, callable at 102
What is D, 6% bond callable at 102?
Higher coupon callable bonds are called first when interest rates decline, even if the call price is slightly higher
A customer is short a DMF 50 call @ 4. Seven months later, the call was exercised when the current market for DMF was 56. Under the Internal Revenue Code, what were the proceeds of his sale?
A. $5,600
B. $5,400
C. $4,600
D. $5,200
What is B, $5400?
Explanation: He wrote a call and received a premium of 4. He later sold the security at $50, which made his total receipts for the stock $54. Proceeds in this case refer to the total amount he took in (a $400 premium plus $5,000 upon the sale).
Interest rates are low and the City of Charlotte wants to take advantage of lower rates. If they issue new bonds at the lower rate in January and pay off their old bonds at the first call date in February, what is this an example of?
A. Advance Refunding
B. Cross Over Refunding
C. Current Refunding
D. Mandatory Refunding
What is C, current refunding?
The bonds are being paid off within 90 days so it is current refunding.
Advanced refunding is when the old bonds (refunded bonds) are paid off more than 90 days after the new bonds (refunding bonds) are issued
Which of the following choices is NOT a typical characteristic of a 401(k) plan?
A. Employee contributions are fully and immediately vested
B. Employers must match employee contributions
C. An employee's taxable income is reduced by employee contributions
D. Employee contributions grow on a tax-deferred basis
What is B, employers must match employee contributions?
There is no requirement for employers to match employee's contributions though many companies do!
On the order book, all of the following orders are reduced on the ex-date for a cash dividend EXCEPT:
A. Buy Stop
B. Sell Stop
C. Sell Stop Limit
D. Buy Limit
What is A. buy stop?
All orders placed under the CMV (BLuSS) will be reduced to prevent accidental execution/trigger
KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an anti-dilution feature. If KLM declares a 10% stock dividend, the new conversion price will be:
A. $22.73
B. $45.45
C. $50.00
D. $22.50
What is A, $22.73? Explanation:
Before the stock dividend, an investor would have received 40 shares of stock (conv. ratio) for each $1,000 bond ($1,000 / $25). A 10% stock dividend would now give an investor 44 shares on conversion (40 shares + 10% = 4 shares more). $1,000 / 44 shares = $22.73 per share for the new conversion price.
John purchased a DMF May 90 call. How would he create a bull debit spread?
A. Buy DMF May 95 call
B. Sell DMF May 85 call
C. Sell DMF May 90 call
D. Sell DMF May 95 call
What is D, Sell DMF May 95 call?
The lower XP for a call is dominant (right to buy) therefore the May 90 call needs to be dominant for the contract to be a debit and bullish since Long calls are bullish.
A syndicate member takes a 10% participation in $20,000,000 issue set up as a western syndicate. At the termination of the syndicate $2,000,000 remains unsold. The syndicate member sold $1,500,000. What is their remaining liability?
A. $500,000
B. $2,000,000
C. $200,000
D. No liability
What is A, $500,000?
Western syndicate is every man for himself. The syndicate member was responsible for $2,000,000 and nothing more. There is no sharing in liability.
In a margin account a customer buys 1 ABC Apr 40 call @ 6 and sells 1 ABC Apr 50 call @ 2. What is the Reg-T required deposit?
A. $400
B. $800
C. $600
D. $200
What is A, $400?
Since this is a debit spread, our net debit is our max loss. When creating a spread in a margin account, the max potential lost must be deposited for Reg-T.
A technical analyst has been charting XYZ stock and notes that it fluctuates between $36 and $41. If the analyst expects a breakout through resistance, which of the following orders should be placed?
A. Buy XYZ 35 GTC
B. Buy XYZ 42 GTC
C. Buy XYZ 35 Stop GTC
D. Buy XYZ 42 Stop GTC
What is D, Buy XYZ 42 Stop GTC?
A breakout through resistance is a bullish indicator. Meaning we think the price will continue to rise, so we want in!
Which CMO tranche has the lowest extension risk?
A. TAC
B. Z Tranche
C. PAC
D. Companion
What is C, PAC?
Planned amortization class - better to have a plan than a target (TAC). PACs have the most protection from prepayment AND extension risk while TACs only have prepayment protection.
If a client purchases a May 50 call, what contract would create a bearish diagonal spread?
A. Short May 60 call
B. Short Jun 55 call
C. Short Jun 60 call
D. Short Jun 40 call
What is D, Short Jun 40 call?
The lower XP for a call is the mor expensive option. For a bear spread the short call needs to be dominant. For diagonal spreads we need a different XP and different expiration.
An individual in the 28% tax bracket can purchase an 8 1/2% municipal bond at par. What taxable yield would be required to equal the yield on the municipal bond?
A. 11.2%
B. 7.78%
C. 11.8%
D. 8.5%
What is C, 11.8%?
Explanation: Tax equivalent yield = Muni Yield/ (100%-tax bracket)
8.5/ (100%-28%)
8.5/.72 = 11.8%
A married couple in their late 50’s are nearing retirement with $400,000 to invest. They are concerned about losing money, but also realize their savings will need to grow to ensure a long and happy retirement. What is the most suitable asset allocation?
A. 90% stocks / 10% bonds
B. 70% stocks / 30% bonds
C. 40% stocks / 60% bonds
D. 10% stocks / 90% bonds
What is C, 40% stocks and 60% bonds
As investors get older, time horizons become shorter and their risk tolerance becomes more conservative. Per Modern Portfolio Theory when seeking moderate growth 40% in stocks and 60% in bonds is an acceptable allocation. Risk is an inherent part of higher reward so some percentage of stocks would want to be maintained in order to get the return and growth they are looking for.