Green Light Missed Exam Questions with Revised Answers
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Green Light Missed
Institution
Green Light Missed
Green Light Missed Exam Questions with Revised Answers
Which method of calculating taxes on an investment typically offers an investor the lowest amount of tax on a capital gain when shares of stock are sold? - Answer-Specific identification
The IRS only recognizes two methods for calculating...
Green Light Missed Exam
Questions with Revised
Answers
Which method of calculating taxes on an investment typically offers an investor the
lowest amount of tax on a capital gain when shares of stock are sold? - Answer-Specific
identification
The IRS only recognizes two methods for calculating gains or losses on stock
transactions—FIFO and specific identification (versus the purchase of). Many brokerage
firms allow alternative methods, such as LIFO, which is a variation of specific
identification. Average cost may only be used for sales of mutual fund shares. Although
LIFO could offer a lower gain if the price of a security was rising, that gain may be
considered short-term and taxed at a higher rate, which makes the specific identification
method the best choice for an investor who is seeking the lowest amount of tax.
One of the major differences between an open-end and closed-end investment
company is: - Answer-The types of securities that each may issue
Both open and closed-end investment companies must register when they issue
securities. A major difference between open-end and closed-end investment companies
is their capitalization (i.e., the types of securities they issue to raise money). Open-end
companies, also referred to as mutual funds, may only issue common stock. However,
closed-end companies may issue common stock, preferred stock, or bonds
Which of the following ratios would be used by an analyst examining the capital
structure of an industrial corporation? - Answer-The debt-to-equity ratio
The capital structure of a corporation is the dollar amount of the corporation's
capitalization (equity and debt securities). An analyst will, therefore, be interested in the
debt-to-equity ratio. This is actually the ratio of those securities creating fixed charges
(bonds plus preferred stock) to common stock.
A client creates an opening sale in a LEAP and closes out the position 15 months later
by buying back the option. The tax consequence is a: - Answer-Short-term gain or loss
, A LEAP is a long-term option that can have an expiration of up to 39 months. The client
held the position for more than one year, but any gain or loss on a short position is
treated as short-term. The IRS does not recognize a holding period on a short sale of a
stock or an opening sale of an option. If the client created an opening purchase by
buying a LEAP and held the position for 15 months before closing it out, the resulting
gain or loss would be long-term.
Which of the following activities does NOT take place during the cooling-off period? -
Answer-Stabilizing the issue
When a new stock issue is going to be offered, a registration statement must be filed
with the SEC. After the filing, there is a period when the SEC reviews the information to
ensure full disclosure. During the cooling-off period, a preliminary prospectus (red
herring) is prepared to be used to receive indications of interest from the public. The
issue must be registered in each state in which it will be sold according to state (Blue-
Sky) laws. Prior to the completion of the final prospectus, a due diligence meeting is
held where all concerned parties (issuer and underwriter) meet to insure that everything
has been done properly. Stabilization of the issue takes place after the new security is
selling in the market.
A customer is concerned about an investment in his portfolio. He will be traveling for the
day and wants his registered rep to sell 500 shares of the stock whenever the rep feels
the time is right. Which of the following is true regarding these instructions? - Answer-
The registered rep can determine the time to sell the shares.
Once verbal authorization is received from a customer, an RR may select the price
and/or time of execution if the customer has specified (1) whether to buy or sell, (2) the
specific security, and (3) the amount to be bought or sold. Without these three details,
written discretionary authority is required. However this only applies to transactions on
one day. In order to initiate transactions for more than one day the registered
representative would have to have written discretionary authority.
Which of the following CMOs has the MOST prepayment risk? - Answer-Support or
companion tranches
The planned amortization class (PAC) is a type of CMO that is designed for more risk-
averse investors and provides a predetermined schedule of principal repayment, as
long as mortgage prepayment speeds are within a certain range. This greater
predictability of maturity is accomplished by establishing a sinking-fund type of
schedule. The PAC tranche has top priority and receives principal payments up to a
specified amount. Any excess principal goes to a companion or support tranche that
has lower priority. Holders of the companion tranche are generally compensated for this
risk with higher yields.
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