RN Domain 7: Psychosocial Integrity (Quiz 1) Welcome to your Series 7 Practice Exam 4 This test is designed to prepare you mentally for the actual Series 7 Exam with the same number of (125 questions) and the same time allowed (225 minutes) as the actual exam. The Series 7 Exam is breakdown into four (4) Parts. Here are the Four (4) Domains of the Series 7 Exam with the weightage and number of questions in this practice exam: 1. Seeks Business for the Broker Dealer from Customers and Potential Customers [09 Questions] - 07% 2. Opens Accounts after Obtaining and Evaluating Customers' Financial Profile and Investment Objectives [11 Questions] - 09% 3. Provides Customers with Information about Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records [91 Questions] - 73% 4. Obtains and Verifies Customers’ Purchase and Sales Instructions and Agreements; Processes, Completes, and Confirms Transactions [14 Questions] - 11% Please click NEXT to start your Free Series 7 PRACTICE EXAM right away. Best of Luck! 1. If another member broker-dealer has already received clearance from FINRA for a retail communication, filing the piece with FINRA so that your broker-dealer can now use it A) must be done 10 days before your broker-dealer can use it, even if unaltered. B) is not necessary if unaltered and used as originally intended. C) must be done before publication by your broker-dealer, whether it is altered or unaltered. D) must be done within three days after use by your broker-dealer, even if unaltered. None 2. All of the following communications are exempt from filing with FINRA except A) prospectuses and preliminary prospectuses. B) retail communications that make a financial or investment recommendation. C) communications that refer to an investment solely as part of a listing of products offered by the member. D) retail communications previously filed with FINRA. None 3. Which of the following statements is an accurate interpretation of FINRA Conduct Rules governing the use of communications with the public? A) Institutional communications need not be preapproved by a principal. B) Sales and product promotion materials distributed to registered representatives and other employees are retail communications and must be submitted for FINRA review, even though such materials are not intended for public distribution. C) All retail communications must be filed with FINRA before first use. D) All communications with individual clients are considered retail communications. None 4. Popular Investment Securities, a FINRA member firm, produces short videos describing the general characteristics of different types of securities. Periodically, an interstitial appears during the video. Under FINRA's rules on communications with the public, A) the appearance of the interstitial defines the video as retail communication requiring filing. B) video presentations of any kind must be filed with FINRA within 10 days after first use. C) as long as the presentation is strictly generic, filing with FINRA is not required. D) interstitials may not be used in public communication without the consent of the viewer. None 5. A registered representative may never A) act as a buyer's agent. B) approve advertising. C) act as a broker. D) act as a sales agent. None 6. Which of the following is not a factor when a communication to be distributed to the public is either being reviewed or approved within the broker-dealer? A) Whether the piece will be distributed in written form or via electronic media B) The nature of the audience to which the communication is intended to be distributed C) Whether achieving past performance results has been implied D) Whether statements of benefits are balanced with statements of potential risks None 7. Under FINRA's Rule 2210 on communications with the public, which of the following is excluded from the filing requirements? A) Correspondence with prospective clients that is delivered through electronic media B) Retail communications concerning public direct participation programs C) Retail communications that previously have been filed with FINRA and that are to be used with material change D) Retail communications concerning collateralized mortgage obligations registered under the Securities Act of 1933 None 8. Municipal securities advertisements must be approved by A) the Municipal Securities Rulemaking Board. B) a municipal securities or general securities principal. C) the Securities and Exchange Commission. D) a financial and operations principal. None 9. A registered representative is preparing a PowerPoint slide presentation, to be delivered in a live seminar, for a group of invited institutional clients. To use the slides, they may have to be A) reviewed by a principal of the broker-dealer. B) submitted to both FINRA and the SEC for preuse approval. C) submitted to the SEC for review and approval. D) approved by FINRA in writing. None 10. A hedge fund has contracted with your broker-dealer to handle all of its clearing functions and provide all back-office support functions while it is executing transactions through numerous other broker-dealers with whom your broker-dealer will have agreements. This type of account is known as A) a prime brokerage account. B) a custodial account. C) a joint account. D) a numbered account. None 11. If a customer wants to open an account in the name of her adult son and wants the account to be approved for uncovered option writing, her request should be refused because A) opening an account for a third party is prohibited without the consent of that party. B) discretionary authorization may not be granted with respect to writing uncovered options. C) writing uncovered options is not suitable for minors. D) uncovered options can only be written in margin accounts. None 12. If a new joint tenants with right of survivorship account is opened, all of the following statements are true except A) orders may be given by either party. B) in the event of death, the decedent's interest in the account goes to the other party. C) checks may be drawn in the name of either party. D) mail may be sent to either party (with the permission of each party). None 13. A broker-dealer has set up a prime brokerage account for one of its customers. This customer is most likely A) an investment club. B) two spouses, each having individual accounts and a joint account together. C) an individual retail customer. D) an institutional customer. None 14. On Monday, John bought and sold 1,000 shares each of MEDX and CETN stock. On Wednesday, he purchased an additional 500 shares of CETN and 1,600 shares of KRS, which he closed in two trades of 800 shares each, later that day. On Friday, John executed a trade to purchase 2,000 shares of BUV and sell 300 shares of the CETN he purchased on Wednesday. Under FINRA rules, John meets the definition of A) a designated expert. B) a frequent trader. C) a pattern day trader. D) a day trader. None 15. Tenants in common (TIC) ownership provides that a deceased tenant's fractional interest in an account is retained by which of the following? A) Will be decided during probate B) The registered representative for the account C) The surviving tenant D) The deceased tenant's estate None 16. A joint account could be opened for any of the following except A) two partners in a limited partnership. B) a parent and minor child. C) a corporation. D) three business associates. None 17. The type of brokerage account that does not pass assets to other participants at the death of a participant is A) transfer on death. B) joint tenants with rights of survivorship (JTWROS). C) tenants in common. D) community property. None 18. Under the Uniform Transfer to Minors Act (UTMA), how can stock subscription rights be handled in a custodial account? A) The custodian can exercise, sell, or allow the rights to expire as he deems prudent. B) The custodian cannot exercise rights; they can only be sold. C) The custodian can exercise or sell the rights as he deems prudent. D) The rights can be exercised or sold only if the custodian is also the donor. None 19. An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is A) a limited partnership. B) an S corporation. C) a C corporation. D) a general partnership. None 20. Which of the following businesses must have more than one owner? A) An S corporation B) An LLC C) A C corporation. D) A partnership None 21. A customer, concerned about a possible pull-back in XYZ stock, instructs her broker to "Sell my XYZ stock if it falls to 40, but I don't want less than 39.75 for my shares." The broker should enter A) a sell limit order. B) a market order to sell. C) a sell stop order. D) a sell stop limit order. None 22. An investor submits an immediate-or-cancel order to buy 500 shares of stock at 32.20. When the order reaches the trading floor, the quote is 32.18 – 32.26, 6 × 6. The investor A) bought 500 shares at 32.20. B) bought 500 shares at 32.18. C) did not buy any shares. D) bought 500 shares at 32.26. None 23. A buy stop order may be used for all of the following except A) to protect a profit in a long position. B) to protect against loss in a short position. C) to acquire a long position as a stock breaks through resistance. D) to protect a profit in a short position. None 24. A technical analyst has been charting ABC stock and notes that the support/resistance levels are $20 and $30, respectively. If the analyst expects ABC to fall through support, which of the following orders should he enter? A) Buy 100 ABC 20.50 stop B) Sell 100 ABC 19.50 stop C) Sell 100 ABC 29.75 stop D) Buy 100 ABC 30.25 stop None 25. Which of the following orders is reduced on the order book on the ex-dividend date for a cash dividend? A) Buy stop order B) Sell limit order C) Buy stop limit order D) Limit order to buy None 26. Which of the following order types is permitted in Nasdaq and NYSE equity markets? A) Stop orders. B) Fill or kill (FOK) C) Good til canceled (GTC) D) Market None 27. When a major decline occurs within a few minutes of the close, trading is halted on all markets for the remainder of the trading day. Under the market-wide circuit breaker (MWCB) rules, market-on-close (MOC) orders pending at the time trading is halted A) should be held for execution on the following trading day unless canceled by the customer. B) are converted to market orders and executed at the opening on the following trading day. C) should be held for execution on the following trading day. D) must be canceled. None 28. A customer has an order to buy 400 ABC at 60. ABC declares a 25% stock dividend. On the ex-date, the order on the order book will read A) buy 500 shares at 30. B) buy 425 shares at 50. C) buy 500 shares at 48. D) buy 400 shares at 60. None 29. All of the following statements about trading index options on the Chicago Board Options Exchange are true except A) market orders entered by a market maker have priority over public orders. B) market makers may trade for their own accounts. C) floor brokers may execute orders for others on a commission basis. D) limit orders are maintained in an order official's book. None 30. A representative enters a customer's immediate-or-cancel (IOC) order to sell 1,000 shares at $12. If only 500 shares can be sold at $12, which of the following will occur? A) Because 500 shares can be sold, the balance of the order will remain as a sell limit order for 500 shares at $12. B) None of these. C) Because the entire order cannot be filled, the entire order will be canceled unexecuted. D) The 500 shares will be sold at $12; the remainder of the order will be canceled unexecuted. None 31. Each of the following types of orders will remain open (working orders) until certain conditions are met, except A) market orders. B) stop orders. C) good-till-canceled orders. D) stop limit orders. None 32. A customer places an order to buy 300 DWQ at 140 stop, but not over 140.25. This is A) a buy stop order. B) a buy limit order. C) a market not-held order. D) a buy stop limit order. None 33. A designated market maker is permitted to do all of the following except A) accept a not-held order. B) represent a bid and offer simultaneously. C) buy and sell for a proprietary account. D) accept a limit order. None 34. All of the following kinds of orders may be turned over to the specialist (designated market maker) for execution except A) not-held orders. B) limit orders. C) stop orders. D) market orders. None 35. The SEC recognizes all of the following under the Credit Rating Agency Reform Act as being registered with the commission to rate debt instruments. Which of them historically has specialized in ratings for the insurance sector? A) Moody's B) Fitch Ratings C) A.M. Best D) Standard & Poor's None 36. Moody's Investment-Grade (MIG) rating would be applicable to A) a New York state revenue bond. B) a New York state university bond. C) a New York state revenue anticipation note. D) a New York state general obligation bond. None 37. A bond analyst plots the yields of AAA corporate bonds and compares them to the yields of U.S. Treasury bonds with similar maturities. This is known as A) inverse yield analysis. B) yield comparison analysis. C) yield curve analysis. D) yield plot analysis. None 38. One of your customers calls and asks you about a security with an S&P rating of SP-2. The customer is most likely asking about which of the following? A) Your firm's privacy notice B) A municipal note C) Commercial paper D) A municipal bond None 39. The term high-yield bond would apply to a bond with a Moody's rating of A) Ba. B) BBB. C) BB. D) Baa. None 40. The industry term "junk bond" applies to a bond with a Standard and Poor's rating no higher than A) C. B) BB. C) B. D) BBB. None 41. Which of the following choices is least similar to the others? A) Fitch. B) Standard & Poor's. C) Moody's. D) Financial Guaranty Insurance Corp. None 42. An issuer of a bond will apply to the rating services for a rating for the purpose of A) reducing liquidity risk. B) reducing interest rate risk. C) reducing the bond's duration. D) reducing credit risk. None 43. Which of the following debt instruments would likely be suitable for sophisticated investors only? A) Debentures B) Equity-linked notes C) Jumbo CDs D) First mortgage bonds None 44. All of the following are characteristics associated with equity-linked notes (ELNs) except A) they have final payments at maturity linked to the return of an underlying stock or basket of stocks. B) they are considered to be nonconventional structured investments. C) they can be exchange traded or traded over-the-counter (OTC). D) they are equity securities. None 45. A term used to define certain alternative forms of debt financing, such as equity-linked notes (ELNs) and exchange-traded notes (ETNs), is A) combination products. B) principal protected products. C) structured products. D) high-risk investments. None 46. It would be expected that your firm would employ heightened suitability standards when evaluating recommendations for A) structured products. B) cumulative preferred stock. C) sovereign debt. D) nonvoting common stock. None 47. Which of the following would be considered an equity security? A) A collateralized mortgage obligation B) A prior lien preferred stock C) An exchange-traded note D) An equity-linked note None 48. In recent years, much publicity has surrounded the rapid growth of start-up businesses. In most cases, the early financing was done privately. When private debt is used at the intermediate stage of a company's development, it is called A) middle-risk debt. B) mid-term debt. C) intermediate debt. D) mezzanine debt. None 49. During a period of sustained low interest rates, many investors, particularly institutions, look to increase their return through alternative debt investments. Examples of those would include all of the following except A) exchange-traded notes. B) leveraged ETFs. C) equity-linked notes. D) private placement debt. None 50. In a discussion with one of your customers, the topic of alternative debt instruments is brought up. It seems that the customer was competing in a duplicate bridge tournament in town and one of the other competitors mentioned that they have been obtaining higher income returns from ELNs. When the customer asks you for the meaning of that abbreviation, you would reply A) exchange-linked notes. B) equity-linked notes. C) exchange-leveraged notes. D) equity-leveraged notes. None 51. Which of the following would be most likely to issue an equipment trust certificate? A) A social media company installing new servers B) A company using specialized equipment on an oil drilling rig C) A user of farming equipment D) An airline company None 52. You have a client who is about to retire and wants to rearrange his portfolio to have predictable income. Which of the following would not be a good investment vehicle? A) U.S. Treasury note B) AA-rated debenture C) AA-rated IDB D) Income bonds None 53. Which of the following corporate bonds is backed by other securities? A) Debentures B) Mortgage bond C) Collateral trust bond D) Equipment trust certificate None 54. Corporate bonds that are guaranteed are A) insured by Assured Guaranty Corporation. B) guaranteed as to payment of principal and interest by another corporation. C) guaranteed as to payment of principal and interest by the U.S. government. D) required to maintain a self-liquidating sinking or surplus fund. None 55. An investor seeking income combined with a conservative level of risk would purchase A) AA-rated mortgage bonds. B) junk bonds. C) AAA-rated convertible debentures. D) unrated income bonds. None 56. Which of the following debt instruments is unsecured? A) Collateral trust certificates B) Equipment trust certificates C) AAA/AAA-rated debentures D) Junior lien mortgage bonds None 57. Which of the following best describes a debenture? A) A long-term corporate debt obligation with a claim against securities rather than against physical assets B) Unsecured corporate debt C) A corporate debt obligation that allows the holder to purchase shares of the company's common stock at specified dates before maturity D) An investment in the debt of another corporate party None 58. If a mutual fund's objective is income, it would not hold which of the following securities in its portfolio? A) Preferred stock B) U.S. T-notes C) Income bonds D) Corporate bonds None 59. Due to a sudden drop in earnings, the board of directors of Amalgamated Metal Industries (AMI) has voted to suspend all dividend payments this year. This would have the least effect on holders of AMI's A) cumulative preferred stock. B) callable preferred stock. C) subordinated debentures. D) senior claim preferred stock. None 60. Which of the following would be the most likely unsuitable recommendation for a client whose objective is steady income? A) A U.S. Treasury bond B) A bank CD C) A subordinated debenture D) An income bond None 61. An investor wants to maximize income using debt securities. Which of the following lists rank securities from the least suitable to the most suitable recommendation if income is the investment objective? A) Convertible bond, income bond, nonconvertible bond B) Treasury bills, convertible bond, income bond C) Income bond, convertible bond, nonconvertible bond D) Nonconvertible bond, convertible bond, income bond None 62. If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following except A) adjustment bonds. B) variable-rate bonds. C) nonconvertible bonds. D) convertible bonds. None 63. A corporation coming out of a bankruptcy proceeding would probably find it most attractive to issue A) a subordinated debenture. B) a collateral trust certificate. C) a promissory note. D) an income bond. None 64. Bondholders may not take action against the corporation if it fails to make interest payments for A) subordinated debentures. B) income bonds. C) convertible bonds. D) debentures. None 65. Equipment trust certificates are commonly issued by A) the U.S. government. B) utilities. C) political subdivisions. D) transportation companies. None 66. Your new client lists income as the primary investment objective for an account with your broker-dealer. Which of the following investments would not be suitable? A) Corporate preferred shares B) Ginnie Mae government securities C) Zero-coupon bonds D) Corporate debt securities None 67. Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11¼% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include which of the following? A) The new barges might sink, and the collateral would be gone. B) She should not be concerned, as the bonds will be first in liquidation. C) The issue may have a junior claim to another security issue. D) The company might demand that she accept common stock for her bond. None 68. With the advent of the horseless carriage (a.k.a. the automobile), the Acme Buggy Whip Corporation's revenues fell to the point where it could no longer cover expenses. This led to an involuntary bankruptcy. The priority of payout was A) senior notes, preferred stock, common stock, general creditors. B) senior notes, general creditors, preferred stock, common stock. C) common stock, preferred stock, general creditors, senior notes. D) general creditors, senior notes, preferred stock, common stock. None 69. One of your customers owns 10 HBH Creations 4.5% convertible callable debentures. The conversion price into HBH common stock is $40. With the current market price of the HBH Creations stock at $44, the company publishes a notice that all of the debentures will be called in thirty days at a price of 104. When the customer calls for your advice, you would probably recommend A) selling the debenture. B) exercising the conversion privilege. C) accepting the call. D) selling the stock. None 70. A customer purchases 600 shares of the $100 par ABC 6.5% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading two points below parity, the price of ABC common is A) $12. B) $16. C) $18. D) $14. None 71. ABC Corporation has issued a convertible preferred stock with a par value of $100. The stock is convertible at $40. The current market price of the stock is $80. It would be correct to state that the conversion ratio is A) 2.5:1. B) 4:10. C) 4:5. D) 2:1. None 72. An investor owns ten ABC 6s of 2045. The debentures have a conversion price of $50 with an anti-dilution provision. After ABC distributes a 20% stock dividend, the investor's position will be A) ten ABC 6s of 2045 convertible into 16.67 shares. B) twelve ABC 6s of 2045 with conversion price of $50. C) ten ABC 6s of 2045 convertible into 20 shares plus forty additional shares. D) ten ABC 6s of 2045 with a conversion price of $41.67. None 73. DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be A) the stock's current market price. B) lower than $50. C) $50. D) higher than $50. None 74. The market price of a convertible bond depends on all of the following except A) the conversion prices of bonds from similar companies. B) the value of the underlying stock into which the bond can be converted. C) current interest rates. D) the rating of the bond. None 75. A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be A) $40.00. B) $25.25. C) $25.00. D) $43.91. None 76. A convertible bond callable at 101 is trading at 105. The bond is a 4% bond convertible at $25. The common stock is trading at $27. If an investor bought the bond and converted, her profit would be A) $75. B) $40. C) $20. D) $30. None 77. An investor purchases a PQR convertible bond at 98 on June 18, 1994. The bond is convertible at $25, and on June 19, 1995, when the common stock is trading at $26 per share, the investor converts his bond into the stock. For tax purposes, these transactions will result in A) a $40 capital gain. B) a $60 capital gain. C) neither gain nor loss. D) a $40 capital loss. None 78. An investor interested in acquiring a convertible bond as part of her investment portfolio would A) want the safety of a fixed-income investment along with potential capital appreciation. B) want the assurance of a guaranteed dividend on the underlying common stock. C) seek to minimize changes in the bond price during periods of steady interest rates. D) be interested in tax advantages available to convertible debt securities. None 79. In active trading, a bond of standard size rises in price from 98 5/8 to 101¾. This represents a dollar change of A) $0.3125. B) $31.25. C) $312.50. D) $3.125. None 80. An investor owns 100 shares of the 4% $80 par convertible, callable, cumulative preferred stock issued by HBH Creations. With a conversion price of $20 and a current market price of $84, HBH issues a call of all of the outstanding preferred shares at $82. If the HBH Creations common stock is currently selling at $18 per share, what is likely the wisest choice for the investor? A) Hold on to the preferred stock B) Sell the preferred stock C) Convert the preferred into the common at the stated conversion rate D) Accept the call at $82 None 81. Under what circumstances will a dilution of equity occur? A) The conversion of convertible bonds into common stocks B) Stock dividend C) Issue of mortgage bonds to replace debentures D) Stock splits. None 82. A 7% convertible debenture is selling at 101, and it is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. What is the parity price of the debenture? A) $910 B) $920 C) $929 D) $850 None 83. ABC Company issues a 10% bond due in 10 years. The bond is convertible into ABC common stock at a conversion price of $25 per share. The ABC bond is quoted at 90. Parity of the common stock is A) $100.00. B) $36.00. C) $25.00. D) $22.50. None 84. An investor owns a convertible debenture with a conversion price of $10. If a 10% stock dividend is paid on the company's common stock, which of the following is true? A) The investor will receive 10 shares of the common stock. B) The investor will receive 1 share of the common stock. C) The conversion price will be adjusted to $9.09. D) The conversion price will be adjusted to $11.00. None 85. A DMF convertible bond (convertible into 25 shares) has increased 20% above par in market value. Which of the following would you expect the price of the DMF's common stock to be? A) $32 B) $40. C) $42 D) $48 None 86. A customer owns a 7.5% ABC convertible bond currently trading at 115. The conversion price is $40. What is the parity price of the common? A) $46.00 B) $28.75 C) $34.00 D) $44.00 None 87. A bond convertible at $50 is selling at 105% of parity, while the common stock has a current market value of $45. What is the market value of the bond? A) $900 B) $1,045 C) $945 D) $1,000 None 88. ABC Corporation has outstanding a 7.75% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is true? A) To profit in this situation, the investor should buy the bonds and short the stock. B) An arbitrage opportunity does not exist in this situation. C) To profit in this situation, the investor should buy the stock and short the bonds. D) The bond is at parity with the stock. None 89. A customer purchased 10 ABC 9s of 2045 convertible debentures at 99. The debentures are callable at 101. The conversion ratio is 40. Some time later, the debentures are called while the common is trading at $24 and the debenture is trading at 98. Which of the following options would be most beneficial to the customer? A) Tender the bonds to the corporation B) Convert the bonds and sell the common stock C) Wait for a better offer from the corporation D) Sell the bonds None 90. One of your customers owns five JLO 5s of 2042. The debentures have a conversion price of $15. When the market price of the convertible is 80, the parity price of the stock is A) $18.00. B) $12.00. C) $15.00. D) $5.33. None 91. What action could a corporation take that would result in the forced conversion of an outstanding convertible debt security? A) Exercise the call feature when the debt security’s conversion value exceeds the call price B) Reduce the dividends on the common stock to a rate lower than the interest on the debt security C) Exercise the conversion feature when the debt security’s conversion value exceeds the call price D) Reduce the coupon rate below the dividend rate on the common stock None 92. With a bearish outlook on the market, an investor would like to purchase something that will generate income now during current bearish conditions but would also be able to take advantage of capital appreciation should market sentiment turn bullish. Which of the following would be a suitable purchase recommendation that puts the investor in a position to do both? A) Nonconvertible bonds B) Cumulative preferred stocks C) Convertible bonds. D) Common stock None 93. Convertible debentures offer which of the following benefits to investors? A) Highest priority in the event of dissolution B) A higher coupon rate than comparable non-convertible debt C) Forced conversion when the underlying stock price increases D) The upside potential of a common stockholder with less downside risk None 94. An investor viewing a stock market video is particularly interested in the discussion of convertible debt securities. Those are issued by A) municipalities. B) foreign governments. C) corporations. D) the U.S. Treasury. None 95. A corporation with an outstanding convertible debenture issue could force conversion by A) publishing an announcement that the debenture holders have thirty days to tender their bonds at the call price. B) soliciting proxies from the common shareholders asking them to vote for mandatory conversion. C) decreasing the coupon rate on the debenture to a level where the dividend on the common stock provides a higher return. D) issuing new debentures with a higher coupon rate. None 96. Reggie owns a convertible bond that converts into 20 shares of common stock. The current market value of the bond was 118½ at the close on Friday, April 1. A 30-day call is announced before the opening on Monday, April 4, at a price of 102. The stock is trading at $57.75. What should Reggie do? A) Sell the bond B) Convert the bond into the stock C) Redeem the bond at the call price D) Hold the bond to maturity None 97. KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an antidilution feature. If KLM declares a 10% stock dividend, the new conversion price will be A) $22.50. B) $45.45. C) $22.73. D) $50.00. None 98. Which of the following statements regarding convertible bonds is not true? A) Coupon rates are usually lower than nonconvertible bond rates of the same issuer. B) Convertible bondholders are creditors of the corporation. C) If there is no advantage to converting the bonds into common stock, they would sell at a price based on their market value without the convertible feature. D) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. None 99. XYZ Corporation has outstanding a 7% convertible bond currently trading at 102. The bond, which has a conversion price of $50, was issued with an antidilution covenant. If XYZ declares a 10% stock dividend, the new conversion price, as of the ex-date, will be A) $55.55. B) $45.45. C) $45.00. D) $55.00. None 100. PDQ Corporation has a 6.25% $100 par value convertible preferred stock (conversion ratio of 4) outstanding. The stock has an antidilution covenant. If PDQ declares a 10% stock dividend, the antidilution covenant will adjust A) the par to $90. B) the conversion price to approximately $27.50. C) the conversion price to approximately $22.73. D) the par to $110. None 101. A convertible corporate bond with a conversion price of $20 is trading at 115. The parity price of the common stock is A) $20. B) $17. C) $26. D) $23. None 102. A corporation has an outstanding issue of 8% convertible debentures with a conversion price of $25. The bond indenture contains an antidilutive clause guaranteeing the debt holders the right to maintain proportionate equity conversion in the corporation. If the company pays a 10% stock dividend to its common shareholders, how will that affect the debenture holders? A) Each debenture holder will receive a check for $100. B) The interest rate on the debentures will increase to 8.8%. C) The bonds will now be convertible at approximately 22.73. D) They will receive four shares of the common stock. None 103. All of the following statements regarding convertible bonds are true except A) the issuer pays a lower interest rate. B) holders receive a fixed interest rate. C) holders may share in the growth of the common stock. D) holders receive a higher interest rate. None 104. ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should A) sell the bonds at the current market price. B) convert the bonds into common and sell the converted shares. C) continue to hold the bonds and receive interest payments. D) tender the bonds. None 105. Phantom income is a characteristic of A) zero-coupon bonds. B) convertible bonds. C) American depositary receipts. D) preferred stock. None 106. An investor purchased a new issue corporate zero-coupon bond for $600. The bond has a maturity of 20 years. Six years later, the investor sells the bond for $740. For tax purposes, this would result in A) a capital gain of $100. B) a capital loss of $280. C) a capital gain of $20. D) a capital loss of $20. None 107. An investor purchases a newly issued convertible bond at par. The bond is convertible at $40. Three years later, the underlying common stock is trading at $50 per share. If the investor sells the bond at a $50 premium over the parity price, there is A) a long-term capital gain of $1,050. B) a long-term capital gain of $10 per share. C) a long-term capital gain of $200. D) a long-term capital gain of $300. None 108. An investor purchases a newly issued convertible bond at par. The bond is convertible at $25. Three years later, the underlying common stock is trading at $33 per share. If the investor sells the bond at the parity price, A) there is a long-term capital gain of $8 per share. B) there is a long-term capital loss of $175. C) there is a long-term capital gain of $320. D) the investor has no gain and no loss. None 109. An investor purchases a zero coupon bond at a price of 64. The bond matures in nine years. Five years later, the investor sells the bond at a price of 80. This would result in A) no gain and no loss. B) a long-term capital gain of $160. C) a long-term capital loss of $200. D) a long-term capital loss of $40. None 110. If a customer sells a zero coupon bond before maturity, gain or loss will be the difference between sales proceeds and A) accreted value. B) original cost. C) discounted value. D) par value. None 111. An investor purchased a new issue corporate zero-coupon bond for $600. The bond has a maturity of 20 years. Six years later, the investor sells the bond for $700. For tax purposes, this would result in A) a capital loss of $280. B) a capital gain of $100. C) a capital loss of $20. D) a capital gain of $20. None 112. An issuer may be able to diversify a single municipal bond issue by maturity because A) every state issues municipal bonds. B) many municipal securities are very marketable. C) municipal securities are mostly long term. D) many municipal bonds are serial issues. None 113. All of the following would be found in a bond resolution for a new municipal issue except A) covenants to which the issuer must adhere. B) the costs to be incurred by the issuer in connection with the offering. C) a description of the issue. D) the issuer's obligations to bondholders. None 114. The unqualified legal opinion on a municipal bond states that A) the issuer has the authority to issue bonds that are legal, valid, and enforceable obligations of the issuer. B) the bond has passed the additional bonds test (parity test). C) the issuer is creditworthy. D) the bond is marketable. None 115. The bond resolution includes all covenants between A) the issuer and the trustee acting for the bondholders. B) the issuer and the bond counsel. C) the bond counsel and the bondholders. D) the issuer and the Municipal Securities Rulemaking Board. None 116. Municipal bonds—known as dollar bonds—are generally quoted A) as a percentage of par. B) yield to call. C) yield to maturity. D) net yield. None 117. Which of the following documents would include information about the issuer's financial condition? A) Bond resolution B) Official statement C) Trust indenture D) Notice of sale None 118. A municipal bond dealer is making a bona fide quote. Which of the following statements regarding such a quote is true? A) The quote cannot represent an offer to sell bonds that the dealer does not currently own. B) The quote may not take into consideration any anticipated market movement. C) The quote need not be one that the dealer is prepared to act upon (buy or sell). D) The quote must have a reasonable relationship to fair market value. None 119. Investor information about the financial condition of a municipal issuer is most likely found in A) the official notice of sale. B) The Bond Buyer. C) the official statement. D) the legal opinion. None 120. A legal opinion that has restrictions placed on it by the municipality's bond counsel is called A) a restricted opinion. B) an unqualified opinion. C) a qualified opinion. D) a contingent opinion. None 121. In most cases, new municipal bond issues are accompanied by a legal opinion. That legal opinion is drafted by bond counsel hired by A) the MSRB. B) the municipal issuer. C) the syndicate. D) the managing underwriter. None 122. A municipal securities principal must approve all of the following except A) legal opinions. B) each transaction in municipal securities. C) the handling of written customer complaints. D) the opening of new customer accounts. None 123. Which of the following would be most likely to require a mandatory sinking or surplus fund? A) A public housing authority. B) A water and sewer revenue bond C) A tax anticipation note D) A general obligation None 124. All of the following statements regarding municipal bond official statements are true except A) all retail purchasers of a new municipal bond issue must receive a final official statement. B) a retail customer must receive an official statement no later than the settlement date. C) an official statement must be delivered only upon request of a retail customer. D) a municipal securities broker-dealer may satisfy the delivery requirements by providing a notice advising the customer how to obtain the official statement from Electronic Municipal Market Access (EMMA). None 125. An institutional investor is seeking a quote on $2 million of term bonds issued by the City Water Authority. These are the 3s of 2050 and would be quoted A) by yield to maturity. B) using the dealer's bid price. C) by current yield. D) in dollars as a percentage of par. None 1 out of 125 Time is Up! Time's upTime is Up!
