STOCKBROKER Test 2

Question 1

Convertible preferred stock's price is more influenced by _______________ and less by _______________ than other types of preferred stock.

Accepted Answer

The price of the common stock; interest rates

Answer

Explanation:
Convertible preferred stock includes a feature that permits investors to convert their shares into a specific number of common stock shares. Due to this convertible characteristic, convertible preferred stock is subject to many hazards as common stock, including market risk and company risk. Because the stock price is also related to the price of the underlying common stock that it can be swapped for, convertible preferred is less susceptible to interest rate risk than other preferred stocks. Because it is a fixed-income asset, convertible preferred stock is susceptible to interest rate risk.

Question 2

Randy has suggested a particularly complicated collateralized debt obligation (CDO). He doesn't comprehend the CDO, but it has provided excellent returns in its five years of existence. According to Roger, customers with a high-risk tolerance should buy and hold the CDO. He proposes allocating up to 10% of a customer's portfolio depending on the individual.
Which of the following assertions about Roger's suitability duties is correct?

Accepted Answer

Randy has not met his reasonable-basis suitability obligation

Answer

Explanation:
Randy has failed to meet his reasonable-basis suitability responsibility since he does not understand his suggested product. Randy must utilize his investment knowledge to decide whether it is appropriate for at least some clients.
Under the quantitative suitability mandate, Randy is prohibited from coercing consumers into excessively large or frequent trading activity. This appropriateness obligation primarily aims to artificially inflate commissions by exploiting clients' trust or by misusing discretionary accounts.
The third component of appropriateness is not mentioned above: the customer-specific suitability duty. Randy attempted to meet this commitment by limiting his recommendations to consumers willing to take on more risk. He doesn't know whether the CDO is suitable for anyone because he doesn't grasp it. He failed to meet the customer-specific appropriateness obligation as well.

Question 3

Andrew has 200 ABC Corp shares at $60 each, with a long market value of $12,000. He has a $6,000 equity. What price will Andrew receive a margin call if ABC Corp falls?

Accepted Answer

$40

Answer

Explanation:
A minimum of 25% equity is required for maintenance. Andrew's debt register (DR) is $6,000; consequently, if his DR reaches 75%, his equity will be 25%. $6,000 / .75 Equals $8,000. The Long Market Value (LMV) in this situation would be $8,000. Divide $8,000 by 200 shares to get $40.

Question 4

Which of the following measures is the greatest for a bond investor to decrease credit risk while also guarding against buying power risk?

Accepted Answer

Invest in bonds from many different issuers

Answer

Explanation:
Diversifying a bond portfolio is the most common approach for a bond investor to guard against credit risk while retaining yield. This means he should buy bonds from a variety of different issuers. Depending on the issuer, municipal bonds can be safe or dangerous. While investing primarily in Treasuries will shield an investor from credit risk, the low yield on Treasuries may not protect against inflation risk. Finally, because high-yield bonds have a higher level of credit risk, investing solely in them would not be a viable strategy for a bond investor looking to lower credit risk.

Question 5

Jane currently resides in the state of Minnesota. She's thinking about investing in a 5% Washington municipal bond. She pays 20% federal and 4% state taxes. To be similar to a municipal bond, what yield will the corporate bond have to pay?

Accepted Answer

6.25%

Answer

Explanation:
Jane's municipal bond interest will be tax-free at the federal level but not at the state level because she lives in Minnesota. To calculate the tax-equivalent yield of a municipal bond, divide the bond's rate by 1 minus the total tax rate from which the bond is exempt. That's merely the federal rate of 20% in this scenario. As a result, the tax-equivalent yield is.05/(1-.20) =.0625, or 6.25 percent.

Stock Broker Practice Test

Stock Broker Practice Test

STOCKBROKER Test 2