DEBT
Which of the following statements regarding Treasury receipts are TRUE?
I. Interest is paid annually.
II. Interest is paid at maturity
III. They are sold at a discount.
IV. They are sold at par
A) II and IV
B) I and IV
C) II and III
D) I and III
C) II and III
Treasury receipts are issued at a discount and redeemed at par, and the difference represents the interest earned, which isn't received until maturity.
A) $60 and $72
B) $58 and $70
C) $63 and $67
D) $53 and $77
D) $53 and $77
Short straddle break even is the Call strike price +/combined premium
What are the MM margins for long and short accounts?
A) Long 25%, short 30% - answer
B) Long 30%, short 25%
C) Long 25%, short 25%
D) Long 30%, short 20%
A) Long 25%, short 30%
The minimum maintenance margin requirement for long stock positions is 25% and the minimum maintenance margin for short stock positions is 30%
A self employed client has an annual income of $200,000 and is in a high tax bracket. He is not covered by a retirement plan and would like to make a maximum contribution to one to reduce his taxable income. He believes he will be in a lower tax bracket when he retires. The BEST recommendation is to contribute to a:
A) Traditional IRA
B) Roth IRA
C) 401k
D) SEP IRA
D) SEP IRA
SEP IRA is designated for self employed individuals and small employers. It is easy to set up and administrate and it allows for maximum contributions equal to 20% of income or $57,000.
An investor having no affiliation with CDS Company has just purchased shares that were sold subject to Rule 144. This investor
A) must wait 6 months before selling shares subject to volume limits
B) can sell the shares unrestricted at any time
C) can only sell subject to volume limits
D) must wait 6 months before any sales can be made
B) can sell the shares unrestricted at any time
Selling shares under Rule 144 effectively registers the shares. In other words, buyers of stock being sold subject to Rule 144 are not subject to any restrictions if they choose to resell.
A customer buys a 10% bond with a current yield of 12% and holds the bond until 1 year before maturity. The bond is
sold when current interest rates are 8%. Which of the following statements are CORRECT?
I. The bond was purchased at a premium.
II. The bond was purchased at a discount.
III. The bond was sold at a premium.
IV. The bond was sold at a discount.
A) I and IV
B) II and III
C) I and III
D) II and IV
B) II and III
When the current yield (12%) is higher than the coupon (10%), it means the bond was purchased at a discount.
Because the question tells us that current interest rates are now 8%, the bond maturing within a year with a 10% coupon would now be able to be sold at a premium.
On the same day in a margin account a customer sells 1 abc jan 60 put @ 2 and buys 1 ABC Jan 70 put @6, when the market price is 67$. The maximum potential gain is...
A) $400
B) $600
C) $800
D) Unlimited
B) $600
Reason: The customer has created a long put spread resulting in a $400 debit, this position is profitable if the market should fall.
A client opens a new margin account and, as the initial trade, purchases 300 shares of MS Corporation common stock at $10 per share. The firm would send the client a margin call for
A) $1,500
B) $1,000
C) $2,000
D) $3,000
C) $2,000
No credit may be extended in a new margin account with less than $2,000 in equity. This purchase of $3,000 of stock would normally require 50% payment ($1,500) in accordance with Regulation T, but because it is the initial trade in the account, the $2,000 minimum must be met.
A mother, age 60, wishes to withdraw money from her variable annuity to pay for her son's college education, Which statement is true regarding taxation?
A The withdrawal is 100% taxable and subject to 10% early withdraw penalty
B The withdrawal is 100% taxable
C The withdrawal is partially taxable and partial tax free return of invested capital
D The withdrawal is not subject to tax
C) The withdrawal is partially taxable and partial tax free return of invested capital
Reason: Any earnings above contributed amount are taxed at the customer's tax bracket.
The Securities Act of 1933 protects investors who buy new issues by doing all of the following EXCEPT:
A) requiring the licensing of persons affiliated with broker-dealers
B) requiring an issuer to provide full and fair disclosure
C) regulating the underwriting and distribution of primary and secondary issues
D) providing criminal penalties for fraud in the issuance of new securities
A) requiring the licensing of persons affiliated with broker-dealers
Licensing of individuals associated with broker-dealers is mandated under the Securities Exchange Act of 1934. The Securities Act of 1933 protects investors who buy new issues regulating, among other things, registration of new issues, underwriting, full disclosure, and the potential for fraud in the issuance of securities.
Regarding different types of debt security maturities available to issuers, which of the following is accurate?
A) A serial maturity uses elements of both term and balloon maturities.
B) A balloon maturity uses elements of both serial and term maturities.
C) No maturity types incorporate the elements of any other.
D) A term maturity uses elements of both serial and balloon maturities.
D) A term maturity uses elements of both serial and balloon maturities.
An issuer can schedule its bond's maturity using elements of both serial and term maturities. This is known as a balloon maturity. The issuer repays part of the bond's principal before the final maturity date, as with a serial maturity, but pays off the major portion of the bond at maturity.
The short leg of a bear put spread
A) Increases risk
B) Reduces Risk
C) Limits potential gain
D) Limits potential loss
C) Limits potential gain
Reason: An example of a bear put spread is Buy 1 ABC Jan 60 put, Sell 1 ABC Jan 50 put. The 60 put allows the customer to sell the stock at $60 per share in a falling market, thus if the market falls below 60, this position gives increasing gain.
A limited partnership account is being opened at your firm. The general partner has provided the partnership tax ID number and signed the appropriate paperwork. What other documentation is needed to open the account?
A) SSN of each limited partner
B) Signature of each limited partner
C) Certificate of limited partnership
D) Authorizing resolution
C) Certificate of limited partnership
Reason: a certificate of limited partnership must be filed with the state listing each partner and his or her ownership share
All of the following retirement plans require that a minimum distribution amount be taken once the participant reaches the age of 72 EXCEPT
A) 403B
B) 401K
C) Roth IRA
D) Traditional IRA
C) Roth IRA
Roth IRA contributions are not deductible, as long as they are held for 5 years and distributions start after the age of 59 1/2 they are tax free.
Which of the following is defined as options sales literature?
A Member firm options website
B Standard option worksheet
C Options memorandums for internal use
D Letters of an individual nature sent to customers
B Standard option worksheet
Reason: Options sales lit is any written communication distributed to the customers or public that contains any analysis, performance report, projection or recommendation
Bond quotes based on a percentage of par basis are generally
A Term
B Series
C Serial
D Short Term Maturities
A) Term
To create a credit time spread, which statement is true?
A) The near expiration is purchased and the far expiration is sold
B) The near expiration is sold and the far expiration is purchased
C) The near expiration is purchased and the far expiration is purchased
D) The near expiration is sold and the far expiration is sold
A) The near expiration is purchased and the far expiration is sold
Reason: The purchase and sale of either two calls or two puts with the same strike price and different expirations creates a time spread, the basic theory is that the contracts approaching expiration lose time value faster than contracts that are farther away from expiration.
Delivery of the privacy Notice required under regulation SP is required for:
A) retail customers --- answer
B) Institutional customers
C) Retirement plan customers
D) Any of the above
A) retail customers
Reg SP requires member firms to provide notice for retail customers only.
Which statement is true about the earning limitations on the following plans:
A) a Coverdell ESA can be opened by a high earning individual employed by a corporation
B) A 529 plan can be opened by a high earning individual employed by a corporation
C) A Roth IRA can be opened by a high earning individual employed by a corporation
D) A Keogh Plan can be opened by a high earning individual employed by a corporation
B) A 529 plan can be opened by a high earning individual employed by a corporation
Reason: 529 plans can be established by anyone with no income limits
A registered representative has managed the account of her client for over 10 years. The client recommends her mother to the registered representative as a potential client. Mom, age 65, has just moved out of her house into a smaller condominium, and has netted a $200,000 profit from doing this. The client tells the representative that her mother should invest conservatively. When the representative reaches out to the mother, she tells her that she is retired and that her current pension, plus social security that will be received in a few years, will give her more income that she needs. She wants to invest the $200,000 for growth, with the intention of leaving that money to her grandchildren when she dies. What would be the best recommendation?
A Zero-coupon bonds
B Aggressive growth fund
C Intermediate term bond fund
D Corporate income fund
B) Aggressive growth fund
Since it is the mother’s money and the mother’s account, the investment objective to be followed is that of the mother – she wants the money invested for growth, with that investment going to her grandchildren when she dies. The investments that provide growth are equities, and an aggressive growth fund would invest more heavily in technology and emerging industries. That is fine for long-term investing, with an investment time horizon that is actually determined by the grandchildren’s needs after the grandmother dies.
Choices C and D are fixed income funds - they do not offer growth. Zero coupon bonds are not a bad choice but the “imputed income” is taxable each year, even though no money is received from the issuer until maturity. These are really only suitable for retirement accounts, where the holding vehicle is tax deferred. That is not the case with this investment account.
The conversion price of a convertible debenture is set at issuance at $50 per share. The common stock is now trading at $46 while the bond is trading at 110. In order for the common stock to be trading at parity to the current market price of the bond, the stock price would be:
A $46.00
B $50.00
C $55.00
D $62.50
C $55.00
Since the bond is now trading at 110 ($1,100 per bond) and each bond is convertible into 20 common shares, the parity price of the common is $1,100 / 20 = $55. Since the common is currently trading at $46, it is below parity and it does not make sense to convert. It only makes sense to convert if the common is trading above parity.
A) Sell short 100 ABC at 69.45 Stop
B) Sell short 100 ABC at 69.50 Stop
C) Sell short 100 ABC at 69.55 Stop
D) Sell short 100 ABC at 70.00 Stop
A) Sell short 100 ABC at 69.45 Stop
Orders placed below the market are reduced for cash distributions on ex date. 70 - .55 = 69.45 adjusted.
When interest is charged on a margin account, which statements are true?
I The debit balance increases
II The debit balance decreases
III The Equity changes
IV Equity remains the same
A I and III
B I and IV
C II and III
D II and IV
A I and III
Interest is charged on the debit similar to a credit card loan, as a result the equity falls by the same amount.
Who makes the contributions in a Defined Benefit Plan? ___________
All of the following persons can be on securities industry arbitration panels EXCEPT:
A Disinterested persons who are affiliated with member firms
B Interested persons who are affiliated with member firms
C Members of the general public
D Attorneys who are members of the bar
B) Interested persons who are affiliated with member firms -- answer
Reason: All individuals must be disinterested meaning that they cannot have business, family or other connections to parties involved with arbitration