Question 1

Bubba buys one XYZ June 40 call for $1,000 and sells one XYZ March 40 call for $600. Subsequently, the June call is closed for $1,200 and the March call for $900. What is Bubba’s net result?

Accepted Answer

A

Explanation: $100 profit. The long position in the June call is a $200 profit ($1,200 - $1,000). The short position in the March call is a $300 loss ($900 - $300). Combining the gain and loss results in a $100 loss.

Question 2

The definition of debentures is:

Accepted Answer

D

Explanation: securities backed by the general credit of the issuers but no specific collateral. And in the case of some issuers, that may be fairly worthless.

Question 3

Bubba wants to buy a US treasury bond with a bid of 97.28 and an asking of 98.2. How were these prices established?

Accepted Answer

C

Explanation: by competitive biding. The quoted prices for treasury bonds-as with all negotiable securities-is determined in the market by competitive biding.

Question 4

Which of the following municipal bonds may be grouped under the classification of “revenue bonds”?

Accepted Answer

A

Explanation: special tax. The other categories are not revenue bonds. Special tax is the only type that fits the general grouping.

Question 5

A mutual fund with an 8% load and a 1% redemption fee carries a current quote of $6.25 - $6.79. If
an investor has tendered his shares for redemption on that basis, the per share price he will receive
is approximately:

Accepted Answer

D

Explanation: $6.19. The fund has a redemption fee of 1%. This is about 6 cents based upon the bid price. Subtracting that from the $6.25 bid results in $6.19.

Question 6

Which of the following is a right for shareholders of common stock?

Accepted Answer

B

Explanation: the right to vote about important matters of the company. Shareholders have no expectation of stock price increase or dividends. They are entitled to receive dividends only if the board of directors declares them.

Question 7

Bubba buys one XYZ September 50 call at $7 and sells one XYZ September 60 call at $3. At that time, XYZ stock is at $55. Bubba has no other stock positions. What is Bubba’s maximum possible profit?

Accepted Answer

B

Explanation: $600. The maximum profit is the difference between strike prices less the debit amount. The debit amount is $4 ($7 - $3). The difference between strike prices is $10 ($60 - $50). Multiply the $6 difference by 100, which is the number of shares on one option.

Question 8

The price an investor pays for a listed option is called the

Accepted Answer

C

Explanation: premium. That’s the term for the option cost.

Question 9

Which of the following receives the highest priority of a municipal bond trustee when applying income and revenue derived from a financed toll facility?

Accepted Answer

B

Explanation: operation and maintenance fund. This receives the top priority followed by debt service, maintenance reserves, and lastly renewal and replacement.

Question 10

Under which of the following conditions are homeowners most likely to refinance existing mortgages?

Accepted Answer

B

Explanation: when interest rates fall. Homeowners are most likely to refinance when rates are lower than the past.

Question 11

Bubba opens a new account with a broker/dealer and asks for a copy of the firm’s financial
statement. If the firm has not been subject to a formal audit by an independent public accountant for
quite some time, what should it do in response to the request?

Accepted Answer

A

Explanation: give Bubba its latest available statement. Bubba, like any customer, must be provided with the most recent available information.

Question 12

The expiration date of a listed option is:

Accepted Answer

C

Explanation: the Saturday following the third Friday of the expiration month. It is NOT the third Saturday. The final day to trade options is the third Friday of the expiration month. The options expire the next da y.

Question 13

In order to determine the amount of estate tax due, if any, the assets of a decedent’s estate are valued as of the date of death. A second evaluation is then made:

Accepted Answer

B

Explanation: six months after the date of death. A second evaluation is made six months from the date of death. The estate may then use either value in determining estate tax.

Question 14

In mid-September, Bubba sells one XYZ February 50 call at $6. It subsequently expires without being exercised. How is the premium taxed?

Accepted Answer

B

Explanation: the $600 premium is capital gain. That’s simply how the tax law works.

Question 15

When depositors withdraw money from savings institutions to invest in US treasury securities, this is called:

Accepted Answer

B

Explanation: disintermediation. An easier word would be preferable, but that’s the correct term.

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