STC Greenlight Exam 1 with complete solutions

An individual has annuitized her variable annuity contract and has begun receiving payments. She decides she would rather start a withdrawal program, no longer annuitizing the contract. As her registered representative, you may inform her that: She may make this change without restriction Once annuitized, she may no longer make a change Once annuitized, she may change only the settlement option She is limitied to a 1035 exchange - Answer- Once a variable annuity has been annuitized, changes are not permitted. A 1035 exchange is switching from one annuity to another during the accumulation period. Which of the following choices is NOT governed by MSRB rules? An issuer of general obligation bonds The head of the municipal finance department of a broker-dealer A bank that underwrites revenue bonds An online broker-dealer that accepts only unsolicited orders for municipal bonds - Answer- An issuer of general obligation bonds. The rules of the Municipal Securities Rulemaking Board apply to MSRB members and their associated persons. Members include broker-dealers and bank dealers that engage in municipal securities sales, trading, underwriting, or financial advice to issuers. MSRB rules do not apply to municipal issuers. Which of the following statements is TRUE if a yield-based call option is exercised? The writer delivers Treasury bonds The writer receives Treasury bonds The writer pays the in-the-money amount The writer receives the in-the-money amount - Answer- The writer pays the in-the-money amount The value of yield-based options is determined by the difference between the yield of a Treasury index and the strike price. Yield-based calls have intrinsic value when the Treasury index yield is above the strike price. Yield-based puts have intrinsic value when the Treasury index yield is below the strike price. If a yield-based call option is exercised, the writer pays the buyer the in-the-money amount. Which TWO of the following statements are TRUE regarding the Code of Arbitration? I. If a public customer is involved, all arbitrators must come from outsides the securities industry II. Arbitration decisions are binding and may not be appealed III. Rule violations will be settled between FINRA and a registered representative by arbitration IV. Arbitration is more cost-effective than litigating the matter in court - Answer- II and IV Disputes among members must be submitted to arbitration. However, if a dispute involves a customer, the customer may not be forced into arbitration. If a public customer does go to arbitration, a majority of arbitrators must come from outside the securities industry. All arbitration decisions are binding. Rule violations will be settled between FINRA and a registered representative through the Code of Procedure, not arbitration. Arbitration is usually chosen over litigation because arbitration is less costly. A U.S. corporation is exporting manufacturing equipment to Switzerland. The corporation will be paid in Swiss francs. The U.S. corporation could hedge by which two: I. Purchasing Swiss franc calls II. Selling Swiss franc calls III. Purchasing Swiss franc puts IV. Selling Swiss franc puts - Answer- II and III The corporation will be concerned that if the value of the Swiss franc declined, it will receive a lower payment for the equipment. To protect against a decline in the Swiss franc and, therefore, hedge its position, the corporation could either sell calls or buy puts. A guaranteed bond is: A. Insured B. One that has a mandatory sinking fund C. Backed by a pledge of another corporation to pay principal and interest D. Backed by a pledge of a federal agency to pay principal - Answer- C The definition of a guaranteed bond is a corporate bond guaranteed by a corporation other than the issuer. An example is a U.S subsidiary of a foreign corporation issuing debt that is backed by the parent company. Which of the following statements is NOT TRUE regarding dividends? A growth company normally has a low dividend payout ratio A stock dividend creates a current tax liability when received A blue-chip company has a long history of paying dividends The market price of a preferred stock is influenced by its dividend payout - Answer- B The only false statement of those listed is that stock dividends are taxable upon receipt. A stock dividend reduces the cost basis of an overall stock position for calculating gains or losses whenever the securities are sold. Blue-chip companies have a long history of making dividend payments. Growth companies tend to retain earnings to fuel growth, making their dividend payout ratios low. The market price of a preferred stock is influenced by the amount of dividends paid in addition to the current level of interest rates. Mrs. Smith owns 100 shares of DEF stock. She is concerned that the stock is going to decrease in price temporarily, but does not want to sell the stock. Which option position will give her the BEST downside protection? Buy 1 DEF put Sell 1 DEF put Buy 1 DEF call Sell 1 DEF call - Answer- A The best possible downside protection is accomplished with choice (a), buy 1 DEF put. If Mrs. Smith is long a put, this will allow her to put the stock to the writer if the stock decreases, thus protecting against the price decline. An investor purchases $10,000 face value of an 8-year municipal bond at a price of 108 and holds the bond to maturity. The investor will report: No loss or gain An $800 capital loss An $800 capital gain $800 accreted interest - Answer- A The premium paid on a municipal bond must be amortized over the life of the bond. If held to maturity, the cost basis is reduced to par value and there is no loss. If a security has a low beta, it will: Underperform the market when prices rise Underperform the market when prices fall Outperform the market when prices rise Outperform the market when prices fall - Answer- I and IV Beta measures a security's volatility in relation to the market. A stock with a low beta (less than 1) will be less sensitive to market movements. In a rising market, a low-beta security lags in performance. However, when prices are declining, this security does better since it will fall less than the market, in general. A stock with a high beta (greater than 1) will be more sensitive to market movements. A high-beta stock rises and falls faster than the overall market. Which of the following securities would be the LEAST appropriate for an IRA account? Growth stocks Investment-grade revenue bonds Exchange-traded funds (ETFs) High-yield corporate bonds - Answer- B IRAs are tax-advantaged retirement accounts. Municipal bonds (revenue bonds) would be the least appropriate because, when placed in an IRA, the interest becomes taxable at retirement. The main reason that investors buy municipal bonds is to take advantage of tax-exempt interest. If that characteristic is removed, municipal bonds are not as attractive. On the purchase of a new municipal issue, a dealer must provide a customer with: I. A final confirmation with the total money amount II. A copy of the official statement, if published III. A copy of the underwriting agreement IV. The names of the syndicate members - Answer- I and II only A purchaser of a new municipal issue must be provided with a final confirmation and a copy of the official statement. A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would pay is: $1,051.25 $1,052.40 $1,054.00 $1,057.50 - Answer- D U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer pays the offering price of 105.24. To convert 105.24 into a dollar price take the following steps. 105.24 is equal to 105 24/32 Convert 24/32 into a decimal, which is .75 Convert 105.75% into a dollar price (105.75% x $1,000 = $1,057.50) The customer pays $1,057.50. Which of the following agencies would NOT be used to back a CMO? FNMA GNMA SLMA FHLMC - Answer- C