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STC Series 7 Final #2 with 100% correct answers graded A+
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STC Series 7 Final #2 with 100% correct answers graded A+
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STC Series 7 Final #2Which of the following positions/strategies is NOT bullish?
A. A married put
B. A short put
C. A long 40 call and a short 50 call
D. Writing a straddle - correct answer ✔✔D. Writing a straddle
Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of
the other choices has an opportunity for a profit if the underlying security rises in value.
Which of the following positions would be considered a covered option?
A. Long the stock, short a put
B. Long the stock, long a call
C. Short the stock, short a put
D. Short the stock, long a put - correct answer ✔✔C. Short the stock, short a put
The terms covered or uncovered (naked) refer only to the seller (writer) of an option (also known as
being short the option). If the seller of an option can fulfill the obligation of the contract without
additional risk, he is considered covered. For example, the seller of a put option is obligated to purchase
stock if the put option is exercised against the writer. If the customer is short the stock and the put is
exercised, the seller of the put option would buy the stock to cover or close out the short stock position.
A call option writer is covered if he is long or owns the stock since, if the call is exercised, the seller of the
call would be able to deliver the stock he is long.
Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association
(Sallie Mae)?
A. It issues securities that can be redeemed to pay for college education
B. It issues securities that are not backed by the U.S. government
C. It purchases federally sponsored student loans
D. It provides loans to educational institutions - correct answer ✔✔A. It issues securities that can be
redeemed to pay for college education
,The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student
loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational
institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but
the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can
be redeemed to pay for college education.
A new issue of municipal bonds has an aggregate par value of $10,000,000. The syndicate received
$5,000,000 in designated orders, $5,000,000 in group orders, and $5,000,000 in member orders. How
will the issue be allocated?
A. $5 MM group and $5 MM designated
B. $5 MM group and $5 MM member
C. $5 MM designated, $2 1/2 MM group, and $2 1/2 MM member
D. $3 1/3 MM designated, $3 1/3 MM group, and $3 1/3 MM member - correct answer ✔✔A. $5 MM
group and $5 MM designated
When allocating bonds in a new municipal issue, presale orders normally have first priority. This is
followed by group net, designated, and then member orders. The 5 MM in group orders and 5 MM in
designated orders will be allocated. There are no bonds left for member orders.
An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2%
bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne
County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers:
A. Maturity diversification
B. Coupon diversification
C. Geographical diversification
D. Type diversification - correct answer ✔✔C. Geographical diversification
The portfolio offers the investor geographical diversification because the issues are from different
municipalities throughout the country.
Two individuals hold $100,000 in assets in a JTWROS account. Each party's ownership in the account may
be described as:
A. Equal and divided
B. Equal and undivided
C. Unequal and divided
,D. Unequal and undivided - correct answer ✔✔B. Equal and undivided
In a JTWROS account, each holder's interest is equal and undivided. Each position in the account is
owned by both persons.
Which of the following statements is TRUE regarding spreads?
A. A put spread created for a net debit is bearish
B. A put spread created for a net credit is bearish
C. A call spread created for a net credit is bullish
D. A call spread created for a net debit is bearish - correct answer ✔✔A. A put spread created for a net
debit is bearish
A put spread created for a net debit is bearish. A bearish put (or call) spread involves selling the lower
exercise price and buying the higher exercise price. For a put spread, the lower exercise price will have
the lower premium and, therefore, the spread will be done at a debit.
In a large private placement, an investment banking firm has purchased securities directly from an oil
and gas company based in Houston, Texas. These securities may be resold immediately to:
A. Any type of investor
B. Only accredited investors
C. Only institutional accredited investors
D. Only qualified institutional buyers (QIBs) - correct answer ✔✔D. Only qualified institutional buyers
(QIBs)
This is an example of a Rule 144 A transaction. These transactions are usually structured as a private
placement between an issuer and an investment banking firm(s) and are exempt from SEC registration.
Due to the exemption provided under SEC Rule 144A, after acquiring the securities, the firm may then
immediately reoffer them exclusively to a purchaser that is a QIB. Securities offered under Regulation D
may be sold to accredited investors, but a holding period applies. An institutional accredited investor is
defined as a non-individual (e.g., a bank, trust, a pension or mutual fund). However, an institutional
accredited investor is only defined as a QIB if its portfolio is worth at least $100 million.
A Regulation A+ exemption is allowed for an issuer that's offering:
A. 500,000 shares or less
B. Securities with a value not exceeding $10,000,000
C. Securities with a value not exceeding $50,000,000
, D. Securities being sold to only residents of one specific state - correct answer ✔✔C. Securities with a
value not exceeding $50,000,000
A Regulation A+ offering is exempt from the registration and prospectus requirements under the
Securities Act of 1933. The offering is limited to the issuance of $50,000,000 worth of securities during a
12-month period.
Which TWO of the following statements are TRUE about real estate investment trusts (REITs)?
1. They must distribute 90% of their earnings to shareholders
2. They may invest only in short-term construction loans
3. They must invest in mortgages and securities
4. Their profits are derived from the difference between the payments made on outstanding mortgages
and the amount received in rental income
A. I and II
B. I and IV
C. II and III
D. II and IV - correct answer ✔✔B. I and IV
Real estate investment trusts (REITs) raise capital and invest the proceeds in real estate and mortgages.
Their profit is derived from the rental income they receive as well as the difference between the interest
they pay and the greater amount of interest they receive. In order to qualify for favorable tax treatment,
REITs must pay 90% of their income to shareholders.
A bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield-to-maturity increases by 40 basis
points, the yield would be:
A. 5.6%
B. 6.4%
C. 7.6%
D. 6.8% - correct answer ✔✔C. 7.6%
If a bond is priced at a 7.20 basis, this means that it is priced to yield 7.20 or has a YTM of 7.20%. If the
bond's basis increased by 40 basis points, the new yield-to-maturity is 7.60%. The fact that the bond has
a 6% coupon rate is relevant for determining whether the bond is trading at a premium or discount to
par value. Since the YTM is greater than 6%, the bond is trading at a discount.
Which of the following statements is TRUE concerning Modern Portfolio Theory?
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