Study Question

Study Question of the Week: February 27, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 24, Series 62, Series 79, and Series 82. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 24, Series 62, Series 79, and Series 82):

A company may file an 8-K after the closing of a PIPE transaction for all of the following reasons except?

Answers:

A. To alert investors of the possible dilutive effects of the transaction

B. To disclose any material non-public information that was revealed to the PIPE investors so that they are not precluded from trading in the stock after the close of the deal

C. To comply with Regulation S-X

D. To comply with Regulation FD

*Fun fact: only 55% of people get this question right

Corrrect Answer: C

Rationale: PIPE (Private Investment in Public Equity) transactions are when public companies raise funds by selling shares in a private offering. Because a PIPE transaction is a private offering, the company does not need to file a registration statement before the deal closes. Most companies typically register the offering after the deal closes, however, so that investors will not be subject to resale restrictions.
After the PIPE transaction, a company typically files an 8-K form to alert their shareholders, the public, and the SEC of the transaction. This serves to inform the shareholders that the PIPE transaction may dilute their current holdings. A more common reason to file an 8-K is to comply with Regulation FD (Fair Disclosure) which requires a company to file an 8-K if the company reveals material, non-public information to people who may trade on the information in the future. A PIPE transaction may require this disclosure because a PIPE transaction is material, non-public information and PIPE investors are privy to this information before the public. A company will usually get investors to agree to keep the information confidential until the close of the transaction, but then an 8-K is filed so that PIPE investors are not precluded from trading in the stock after the close of the deal. Many PIPE investors will require assurance that the 8-K will be filed after the transaction closes before they will agree to invest.

SEC Regulation S-X states that financial statements must be filed with a registration statement and sets forth guidelines as to the type and format of those statements.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: February 19, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 6, Series 7, Series 24, Series 26, Series 62, Series 79, Series 82, and Series 99. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 6, Series 7, Series 24, Series 26, Series 62, Series 79, Series 82, and Series 99):

Richard had just returned to the States from his third tour of duty in Afghanistan. After relaxing with family and friends for a couple of months, he re-registers with his old employer where he had worked as a broker. In the meantime his license:

Answers:

A. Expired after his second year-long tour of duty

B. Expired ninety days after completing his second tour of duty

C. Remains current

D. Expires in 30 days unless Richard successfully completes his continuing education program

Correct Answer: C

Rationale: FINRA provides licensing relief to registered representatives who are called into or volunteer for active military service. Richard’s license will expire ninety days after completion of active service, unless he re-registers with a member firm before that time. Since he took only two months off before re-registering, Richard’s license is still current and will remain so.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: February 13, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 6, Series 7, Series 65, and Series 66. — ANSWER POSTED — Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 6, Series 7, Series 65, and Series 66):

Which of the following situations would avoid the 10% penalty on an early withdrawal from an annuity?

I. Setting up a SEPP program and staying on it for at least 5 years

II. Utilizing IRS rule 72(t)

III. Withdrawal for first time home purchase up to $10,000

IV. The annuitant turning 55 1/2 years old

Answers:

A. II

B. I and II

C. III and IV

D. I, II, and IV

Answer: B

Rationale: Setting up a SEPP (Substantially Equal Periodic Payment) program and staying on it for 5 years and utilizing IRS rule 72(t) are essentially the same thing. When an individual takes a series of substantially equal and periodic payments for a minimum of 5 years or until the individual turns 59 1/2, whichever comes last, he is not subject to the 10% penalty for an early withdrawal. An investor does not get a 10% penalty for withdrawing up to $10,000 for a first home purchase out of an IRA, but this is not true for a withdrawal from an annuity.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: February 7, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 62, Series 65, Series 66, and Series 99. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 7, Series 62, Series 65, Series 66, and Series 99):

Your client is short 100 XOM at $75, and wants to hedge his position. To protect him from the risk that XOM’s stock price may rise, you recommend that he:

Answers:

A. Buy a put

B. Sell a put

C. Sell a call

D. Buy a call

Correct Answer: D, Buy a call

“To hedge” means to put limits on how much you can gain or lose from an investment by taking the opposite position from your current position.

When it comes to options, an investor can hedge a position in two ways:

Buying an option to buy protection. In this specific question, buying a call buys protection from a rise in the share price. If it were a long position, the investor could buy a put to protect against a decline in the share price.
Selling an option to gain income. In this question, by selling an option the investor gains income, which may mitigate losses, but he also limits how much he can gain from the short sale.

If an exam question says “to hedge risk and get the best protection” go for buying an option (puts for long positions, calls for short positions)

If the exam questions says “to hedge risk and increase income” go for selling an option (calls for long positions, puts for short positions)

In this question, the investor is going for protection and is not seeking income so the best answer is to buy a call. While selling a put is a possible hedge it is not the most appropriate hedge for this investor’s goal.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: January 30, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 65 and Series 66. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 65, and Series 66):

Daredevil Dave, a famous skydiver, is your client. “Double D“ as he is known, comes to you and tells you that in 18 months he is planning on doing his most dangerous dive yet: a free fall from an orbiting space station. Double D says that he doesn’t have life insurance and in case he doesn’t survive this space dive, he wants to make sure his family will be provided for. He wants them to receive a monthly payment of $5,000 in perpetuity. He asks you how much money he will need to pay now in order to achieve this. Assuming a 2% rate of return, and assuming this is going to be Double D’s last dive, you tell him that he will need to contribute:

Answers:

A. $3 million

B. $6 million

C. $9 miillion

D. $12 million

Correct Answer: A. $3 million

Rationale: A perpetuity is an annuity or stream of payments without end. To calculate the present value of a perpetuity, you divide the periodic payment by the rate of return (also known as interest rate or yield). In this case there are two ways to reach the answer: (1) Divide the 2% rate of return by 12 to get the monthly rate of return: 0.001667, then divide the monthly payment by the monthly rate of return: $5,000/0.001667 = $2,999,400 or (2) Multiply $5,000 times 12 months to get a $60,000 annualized payment to the family and then divide that by the 2% yield or $60,000/.02 = $3 million.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: January 24, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 6, Series 7, Series 62, Series 65, and Series 82. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 6, Series 7, Series 62, Series 65, and Series 82):

“Phantom tax exposure“ is a characteristic of:

I. T-bonds

II. Treasury STRIPS

III. Zero-coupon bonds

IV. Municipal revenue bonds

Answers:

A. I, II and III

B. I and IV

C. II and III

D. None of the choices listed

Correct Answer: C. II and III

Rationale: Treasury STRIPS, which are sold at a discount and don’t pay annual interest to owners, are a type of zero coupon bond. Zeroes are taxed each year based upon the imputed annual value of the cumulative interest earned. “Phantom tax exposure“ means you pay taxes each year on interest you don’t receive. The trade-off is that you avoid reinvestment risk along the way.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: January 16, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 24, Series 55, and Series 62. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 7, Series 24, Series 55, and Series 62):
Which of the following is not true of an ECN?

Answers:

A: ECNs can act in an agency or a principal capacity

B: ECNs allow institutional investors to trade with other investors excluding the broker as a go-between

C: Subscribers to an ECN may include institutional investors, broker-dealers and market makers

D: ECN traders can remain anonymous

Correct Answer: A

Rationale: Some standard characteristics of ECNs include:

a. ECNs always act in an agency capacity and do not trade for their own account.
b. ECNs allow institutional investors to trade with other investors excluding the broker as a go-between. Fourth market participants rely on ECNs.
c. Subscribers to an ECN may include institutional investors, broker-dealers and market makers. Individuals that wish to trade through an ECN must have an account with a broker-dealer and their order can then be routed to the ECN for execution.
d. ECNs allow traders to remain anonymous.
e. ECNs are often open 24 hours a day, and are therefore often used by traders after regular market hours.
f. Subscribers pay a fee to the ECN to participate.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: January 3, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 62, Series 65, Series 66, Series 79, and Series 82. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 7, Series 62, Series 65, Series 66, Series 79, and Series 82):
Two corporate bonds have different durations, but are equivalent in other ways. Bond A has a duration of 6. Bond B has a duration of 4. Interest rates go down by 50 basis points. Which of the following is true?

Answers:

A: The price of Bond A will increase more than the price of Bond B

B: The price of Bond A will decrease more than the price of Bond B

C: The price of both bonds will increase by a similar amount

D: The price of both bonds will decrease by a similar amount

Correct Answer: A

Rationale: Duration is a measure of the sensitivity of a bond’s price to changes in interest rates. A price of a bond with a higher duration will be influenced more by a change in interest rates than a bond with a lower duration. Bond A has a higher duration so it will be influenced by a change in interest rates more than Bond B. When interest rates go down, the prices of existing bonds go up. Thus, a decline in interest rates will cause the price of both bonds to increase, but because Bond A has a higher duration than Bond B, its price will go up more than Bond B.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: December 26, 2012 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 24, Series 55, Series 62, Series 65, and Series 66. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 7, Series 24, Series 55, Series 62, Series 65, and Series 66):

ABCD is an actively traded security with an inside market of 19.25 – 19.95. A market maker receives an order to sell 100 shares and buys the security from the customer at a net price of ______________. Choose the net price that makes the most sense given what you know about markups, markdowns, and net prices.

Answers:

A: 18.75
B: 19.25
C: 19.95
D: 20.45

Correct Answer: A

Rationale: On a sell order in an active competitive market, the net price will contain a markdown from the best bid. In this case the only price that is lower than the best bid is the $18.75. The markdown amount is calculated by taking $19.25 – $18.75 = $.50. The markdown is $.50/$19.25 = 2.60%.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: December 20, 2012 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 6, Series 7, Series 62, Series 65, and Series 82):

A Oregon hazelnut farm exports all of their hazelnuts to China and a Chinese trampoline manufacturer exports all of their trampolines to the U.S. Which of the following is true?

Answers:

A: Both the hazelnut farm and the Chinese trampoline manufacturer prefer a strong dollar

B: Both the hazelnut farm and the Chinese trampoline manufacturer prefer a weak dollar

C: The hazelnut farm prefers a strong dollar and the Chinese trampoline manufacturer prefers a weak dollar

D: The hazelnut farm prefers a weak dollar and the Chinese trampoline manufacturer prefers a strong dollar

Correct Answer: D

Rationale: To get this kind of question correct, think about where the goods are being sold. Groups that sell goods in the U.S. prefer a strong dollar. Foreign exporters and U.S. importers both sell goods in the U.S. so they prefer a strong dollar. In contrast, groups that sell goods in a foreign country prefer a weak dollar. Foreign importers and U.S. exporters sell goods in a foreign country so they prefer a weak dollar. The hazelnut farm is selling their goods outside of the U.S. so they prefer a weak dollar. The Chinese trampoline manufacturer is selling their goods in the U.S. so they prefer a strong dollar.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.