STC Series 7 Final Exam 1

Eurodollars are primarily used in:

Financing investments outside of the United States

Which of the following statements is TRUE concerning electronic communication networks (ECNs)?

They can be used by investors who want to trade anonymously.

The Dow Jones Industrial Average is considered an index of:

Large-capitalized stocks

An individual purchased stock for $10,000 and has written calls against the stock over a two-year period. She received premiums totaling $1,500 in the first year and $2,000 in the second year, with all of the options expiring. What’s her total cost basis on the stock after the second year?

$10,000

When covered calls expire (as in this question), the premium will be realized as a short-term capital gain and the cost basis for the stock will generally remain the same. If the options were closed out prior to expiration, the result is either a capital gain or loss based on the difference in premiums. If an option was exercised, the premium would be added to the option's strike price to determine the sales proceeds and the gain/loss would be either short-term or long-term based on how long the stock had been held prior to its sale.

Keep in mind, to find the breakeven point on a covered call, the premium received is subtracted from the cost to purchase the stock.

A broker who transacts an order for a customer must send a confirmation disclosing all of the following information, EXCEPT:

If it acted as principal and that it prepares research on the security

Which of following option recommendations are suitable for a sophisticated investor who expects the overall market to fall, but is bullish on mining stocks?

Buying narrow-based index calls and buying broad-based index puts

On Tuesday May 1, XYX Corporation's Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is:

Friday, May 11

Stocks sell ex-dividend on the first business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be one business day before, or Friday, May 11.

Which statement is NOT TRUE regarding the prospectus for a variable annuity contract?

It cannot be delivered electronically.

The tranche with the longest maturity and, therefore, the last to receive interest and principal payments within a CMO, is known as the:

Z-tranche

Which of the following statements is TRUE regarding the disclosure of back-end sales charges to customers?

A confirmation should be sent disclosing that a sales charge may have to be paid upon redemption.

An investment banking principal has received a letter from a customer complaining about a recent new issue that declined substantially on its first day of trading. The client purchased the shares based on a recommendation by an associated person of the firm. The customer contends that the recommendation was unsuitable. Which of the following statements is TRUE?

A memo must be prepared describing any action taken in response to the complaint

A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield?

8.3%

In regard to recruitment advertising by member firms, which of the following statements is TRUE?

Recruitment advertising may not contain exaggerated claims about opportunities in the securities business

A customer is seeking a high risk, high reward investment. Given this objective, which of the following is the MOST appropriate?

A stock with no dividend and a beta of greater than 2.0

Logan has the following position in his account.

Long 1 DEF May 35 call.

Logan anticipates a slight bullish move in DEF from which he wants to benefit, but he also wants some income generated to reduce the cost of the position without adding additional risk. He could accomplish this by adding which of the following positions to his account?

Short 1 DEF May 45 call

By selling (short) 1 DEF May 45 call, Logan will generate income through the premium received and reduce the overall cost of the position. While the short call allows the owner to purchase DEF from him at $45 per share until it expires in May, Logan is long a DEF call that allows him to purchase the same stock at $35 per share until May. Logan has established a debit call spread.

An investor in an equipment leasing DPP would NOT expect:

Appreciation

Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which of the following bonds is most likely to be refunded?

7 1/2% callable in 2023 @ 100

When a firm's customer exercises a call option, the firm will submit an exercise notice to the Options Clearing Corporation. The Options Clearing Corporation, in turn, will select a firm to receive the exercise notice based on:

A random selection basis

An accumulation unit in a variable annuity contract is:

An accounting measure that's used to determine the contract owner's interest in the separate account

Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT:

All are government guaranteed

Two similar companies issue bonds at the same time. One company issues convertible bonds, while the other issues non-convertible bonds. Which of the following statements is TRUE?

The non-convertible bonds will probably have a higher yield to maturity.

Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds?

The federal funds rate

Which of the following statements is TRUE regarding interval funds?

They offer limited liquidity due to the fact that clients are only able to redeem their shares at specified times.

A broker-dealer receives a confirmation for a trade that does not appear on its records. The broker-dealer should send a DK notice to:

The contrabroker

Portfolio margin permits an investor to:

Assume greater leverage

Under what circumstances will the payout from a variable annuity increase?

The performance of the separate account exceeds the AIR

A customer who purchases shares of an exchange-traded fund (ETF) may be extended credit by a broker-dealer:

Immediately

A customer buys two bonds, both have a par value of $1,000, and she pays 103 5/8 for each bond. The bonds are callable at 105. If the customer's bonds are called, she will receive:

$2,100

A customer sells 500 shares of stock to a broker-dealer, a registered market maker in this stock. The broker-dealer acted in a(n):

Principal capacity and charged the customer a markdown

An MIG rating applies to a(n):

BAN (Bond Anticipation Note)

If a New York resident is subject to the AMT and is considering the following bonds that have similar yields, which bond is MOST suitable?

An Albany, NY bond that’s not subject to the AMT

A client buys a security and receives a trade confirmation showing a price of $11.20 net. What does this mean?

That the broker-dealer sold this security to the client in a dealer capacity and the $11.20 includes a markup

A municipal bond that was issued at par is purchased by an individual in the secondary market at a price of 90. What is the tax consequence if the bond is held to maturity?

$100 ordinary income

An investor must pay accrued interest for a secondary market purchase of:

Tax anticipation notes

In an undivided (Eastern) municipal syndicate account, the remaining liability of an account member is computed:

From the number of bonds that are unsold in the account

A woman recently got married and changed her legal name. Before updating the account information, what does a registered representative need?

Approval from a principal

Which of the following funds would typically have the LEAST amount of stability in NAV?

A sector fund

Which CMO tranche provides the greatest safety of principal?

The A tranche

Mr. Jones purchases 100 shares of IBM at $116 per share and writes an IBM June 115 call option at 5. Mr. Jones' breakeven point is:

$111

A customer’s niece has third party authorization and has recently been appointed to be the customer’s trusted contact person. Although the customer seemed disoriented when she appointed her niece, the paperwork was still signed. The niece begins making cash withdrawals and changing investments in the account. When the registered representative contacts the customer to confirm the transactions, the customer sounds surprised; however, she states, "since it's my niece, just go along with it." What action should the registered representative take?

Contact a principal of the firm to discuss the niece's withdrawals.

Penny stock rules apply under which of the following conditions?

The stock is not listed on an exchange and priced below $5.00 per share

A corporation has a significant amount of cash on hand and is seeking your advice regarding income-producing equity investments. Which of the following investments pay a dividend, but is NOT eligible for the corporate dividend exclusion?

Real estate investment trusts (REITs)

A conservative investor has a long-term time horizon. He wants an investment that will provide him with long-term capital appreciation, and will not be too volatile. Which of the following funds would be the MOST suitable for him?

A value fund

A firm is not permitted to accept an exercise notice from a customer for a listed equity option after:

5:30 p.m. Eastern Time on the expiration date of the option

A small, private, non-reporting firm is about to conduct a reverse merger with a publicly traded corporation. What's the most likely reason for this transaction?

The private company wants to bypass the IPO process and become public immediately.

Junius Arbor purchased stock in 2002 for $24,000. In April 20XX, Mr. Arbor passed away. His estate valued the stock at $82,000. The stock was willed in equal amounts to his daughter Cathy and his son Bob. Cathy sold her stock on September 2, 20XX for $48,000. Bob sold his stock on May 8, 20XX for $56,000. Which of the following statements is TRUE?

Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000

All of the following factors are of importance with regard to debt structure when analyzing a municipal bond, EXCEPT:

Matured debt

The determination of when the NAV of a mutual fund is calculated, is stipulated by:

The prospectus

Windsor Corporation has 7,000,000 shares of common stock ($.01 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price is $20. The market capitalization of Windsor Corporation's common stock is:

$90,000,000

Market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. Outstanding shares include those held by institutions, retail investors, and restricted shares held by insiders, but does not include treasury stock (shares repurchased by the company). Therefore, there are 4,500,000 shares outstanding at a $20.00 market price for a total of $90,000,000.

A customer wants to purchase a security that invests primarily in private companies that have difficulty raising capital in public markets. Which of of the following investments would you recommend?

A business development company (BDC)

When comparing long-term bonds and short-term bonds, all of the following statements are TRUE, EXCEPT:

Long-term bonds generally provide greater liquidity than short-term bonds

OTCQX companies have all of the following characteristics, EXCEPT:

They're listed on a U.S. registered stock exchange

XYZ Corporation has issued $50 million 7% bonds at a premium. The bonds have a current yield of 6% and a yield to maturity of 5%. An investor purchasing $1,000,000 face value of bonds at the offering will receive a yearly income of:

$70,000

Which of the following is included on an income statement?

Gross revenues

Which of the following indexes is the broadest equity market indicator?

The Wilshire Index

Which of the following securities is NOT guaranteed by the U.S. government?

Federal National Mortgage Association (Fannie Mae) bonds

Accrued interest on new municipal bonds is calculated from the:

Dated date

Which of the following municipal bonds requires a feasibility study to determine the issuer's ability to pay interest when due?

A revenue bond

Which of the following is NOT TRUE of private label CMOs?

They are subject to less credit risk than agency CMOs

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the:

Par value plus accrued interest

XYZ Corporation has a 6 1/2% convertible bond outstanding that's convertible into 40 shares of common stock. The bond is currently selling in the market at 85 ($850) and the common stock is selling at $21. XYZ Corporation is offering its existing bondholders a new non-convertible bond which will pay 6 1/2% and matures at the same time as the convertible bond. The effect of the successful completion of the proposal would be to:

Reduce potential dilution

Which type of bond is MOST likely secured by an excise tax, cigarette tax, or gasoline tax?

Special tax bond

To compute equity in a margin account with both short and long positions, the formula is:

The long market value plus the credit balance minus the short market value minus the debit balance

A company, which has investors with registration rights, has recently conducted an initial public offering. Typically, how long must these investors wait to sell their shares after the IPO?

180 days

A broker-dealer's privacy notice must include all the following information, EXCEPT the:

Names of any other financial institutions with which the firm is affiliated

The subscription agreement for a limited partnership does NOT specify:

Priority provisions upon liquidation

A customer's margin account is as follows.

Long Market Value $45,000

Debit Balance $20,000

SMA $5,000

Credit Balance $15,000

Short Market Value $9,000

What is the total equity in this account?

$31,000

The equity in the long margin account is $25,000 ($45,000 LMV - $20,000 DR). The equity in the short margin account is $6,000 ($15,000 CR - $9,000 SMV). The total equity is $31,000. SMA is not considered part of the equity.

A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling currently trading at par and the stock is selling at $39.00. If the bond increased in value by 20 points, what is parity of the stock?

$48.00

If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity price for the stock is found by dividing the market value of the bond ($1,200) by the conversion ratio of 25 ($1,000 or par value ÷ $40). This is equal to $48 ($1,200 ÷ 25 = $48). The current price of the stock is not relevant.

A customer would like to open an account designated by number. The registered representative should:

Open the account if the customer signs a written statement acknowledging the account is the customer's

Which of the following choices is NOT a type of overlapping debt?

Debt issued between two states

Which of the following agencies would NOT be used to back a CMO?

SLMA

A syndicate is formed on an undivided (Eastern) account basis to sell $10 million of a new municipal bond issue. A dealer has committed to sell $1 million (10% of the issue). The dealer sells the $1,000,000 committed for, but $2 million of the issue remains unsold. The dealer is:

Liable to sell 10% of the unsold bonds

An investor wants to buy a foreign stock that’s trading at $540 per share and paying a $12.50 annual dividend. The investor’s registered representative instead suggests purchasing an ADR which represents 10% of the value of the foreign stock. If the customer commits to buying 500 shares, what’s his cost basis and his first semiannual dividend from the ADR?

Cost basis of $27,000 and $312.50 in semiannual dividends

The ADR represents 10% of the foreign stock's value. As a result, the ADR per share value is $54 ($540 x 10%) and the annual dividend is $1.25 ($12.50 x 10%). If the customer purchases 500 shares of the ADR, the total investment will equal $27,000 (500 x $54) and the total annual dividend will be $625 (500 x $1.25). However, since the question asks about the semiannual dividend, the customer will receive $312.50 of dividends ($625 ÷ 2). Many foreign stocks and ADRs pay semiannual dividends rather than quarterly dividends.

For its most recent fiscal year, ABC Corporation had $20 million in net income. The company also paid a $5 million dividend to its preferred shareholders. The corporation has 7.5 million shares outstanding, but has warrants that permit holders to buy 2.5 million shares. What's the corporation's diluted earnings per share?

$1.50

To find a company's earnings per share (EPS), start with its net income, then subtract any preferred dividends, and divided by the common shares outstanding (i.e., EPS = (Net Income - Preferred Dividends) ÷ Common Shares Outstanding). Fully diluted earnings assumes that all convertible securities, rights, and warrants have been converted or exercised. This will typically increase the shares outstanding and lower the EPS. In this question, the net income is $20 million and the company pays out $5 million in preferred dividends; therefore, earnings available to common is $15 million. After the warrants are exercised into common shares, the shares outstanding is 10 million (7.5 million + 2.5 million). The resulting diluted earnings per share $1.50 ($15 million ÷ 10 million).

Python Industries has previously issued 5.0% bonds ($1,000 par value). The bonds mature in 12 years and are selling at a 20% discount to par. What is the current yield on the Python bonds?

6.25%

A margin account with 50% equity has a long market value of $15,000. If $80 of interest is charged on the debit balance and $110 is credited in dividends, what’s the revised debit balance?

$7,470

The term that's used when a company sells stock to the public above par value is:

Paid-in capital

Which of the following statements is TRUE regarding separate accounts and general accounts?

The subaccounts of a variable annuity may include both types of accounts.

XYZ Corporation earned $4 per share and paid out $2 per share in dividends. XYZ Corporation is selling at $56 in the market. The price/earnings ratio of XYZ Corporation is:

14 to 1

The price/earnings ratio is computed by dividing the market price of $56 by the earnings per share of $4. This equals a price/earnings ratio of 14 to 1 ($56 divided by $4 equals 14).

An investor purchases a fund that has a contingent deferred sales charge. The customer has traditionally purchased load funds in which the sales charge is deducted up front. In order to clarify the sales charge procedure, the customer should be told:

By means of a written disclosure: "On selling your shares you may pay a sales charge. For the charge and other fees, see the prospectus"

A client with an options account takes the following position: Long GHI Nov 65 puts and Short GHI Nov 55 puts. Which of the following statements is TRUE regarding this position?

This position will be profitable if the market price of the security declines.

Ms. Jones reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows:

1. 10 rights plus $10.50 are required to subscribe to one new share of stock

2. Fractional shares become whole shares

3. The record date is Friday, October 17

4. JPMorgan Chase and Bank of America are the transfer agents

5. Goldman Sachs and Morgan Stanley are the standby underwriters

If Ms. Jones currently owns 87 shares of the preferred stock of the XYZ Corporation, how many additional shares can she subscribe to and at what cost?

Preferred stockholders are not permitted to participate in a rights offering

Which of the following would be considered the most volatile mutual fund?

An emerging markets fund

Which of the following is a benefit of purchasing variable life insurance?

The death benefit can exceed the guaranteed minimum based on the value of the subaccount products.

An investor's portfolio has increased by 2%, while the overall market has increased by 8%. What's the beta of the investor's portfolio?

0.25

XYZ convertible debentures are convertible into 20 shares of XYZ Corporation common stock. If the bonds were selling in the market at $960, what would the common stock need to be selling for to be on parity?

$48

Lyle, Molly, and Seena have a joint account registered as Tenants in Common. In the event that Seena dies, which of the following statements is TRUE?

Seena's estate has a claim on her portion of the account's assets

A bond has a 5% coupon and is trading at a 5.55% basis. The bond is trading at which of the following price levels?

A discount

Which of the following indicators is bullish?

The bottom of a saucer pattern

The additional bonds covenant is:

A financial test that ensures a project's revenue is sufficient to make the debt service payments on both existing and proposed bond issues

Which of the following is a positive factor for a municipality that's issuing a GO bond?

Housing prices increasing

A brokerage customer is long 100 shares of ABC Company 6% cumulative preferred stock ($100 par). Over the last three years, ABC Company has had negative net income and the customer hasn't received any dividends during that period. How much must the customer receive in dividend income this year before common stockholders can receive a cash dividend?

$2,400

Although the stated dividend is 6%, the board of directors for ABC Company must decide whether to declare it. Without sufficient earnings for the previous three years, the dividend could not be paid and, therefore, no common dividends were paid during the same period. Currently, there's $1,800 (6% x $100 par x 100 preferred shares x three years) of preferred dividends in arrears that must be paid to this customer before a dividend can be paid to common shareholders. Also, the $600 that the customer will need to be paid for the current year must be added to the $1,800 from past years. As a result, $2,400 must be paid to the customer before a common dividend can be paid.

An employee of a broker-dealer owns shares of XYZ in his personal account. His spouse is a director of XYZ Corporation. If XYZ is engaged in a secondary offering of stock, can shares be purchased in a joint account that's owned by the employee and his spouse?

Yes, because secondary offerings are permitted to be sold to restricted persons.

A fundamental analyst is NOT interested in which TWO of the following metrics?

Short interest and trading volume

Which of the following is a characteristic of a reverse convertible security?

The coupon rate is typically above prevailing market rates.

An investor purchased stock at $50 per share and the stock is now trading between $75 and $77. The investor doesn’t want to eliminate the position unless the stock drops significantly. Which of the following orders is the MOST suitable for her to place?

Sell stop at $70

Which of the following statements is NOT a feature of GNMA pass-through certificates?

Interest is subject to federal tax but is exempt from state tax

When an option contract is assigned, the writer:

Must fulfill the obligation to buy or sell the underlying instrument

A broker-dealer is distributing talking points to its registered representatives for them to use when discussing an investment product being sold to institutional investors. How should this document be marked?

Since this communication is not being sent to institutional investors, it should be marked "For internal use only."

Which of the following municipal entities would NOT issue overlapping debt?

A turnpike authority