When discussing a corporation's capitalization, each of the below would be included except:
A: non-voting class B preferred stock
B: subordinated debentures rated BB+ by Standard & Poor's
C: earned surplus
D: plant & equipment - ANSWER Plant and equipment
Capitalization includes Stockholders' Equity and Long-term Debt. Plant & Equipment are
Fixed Assets, which are assets purchased with the Capital raised by the business but are not
themselves considered Capital
Miami-Dade County currently has the following four GOs outstanding. All issues possess a
call feature and have coupons and maturities as shown below. Assume all issues have similar
principal amounts outstanding. In the event interest rates decline, and the County plans to
do a refunding of only one of the four outstanding GOs, which issue would most likely be
called?
A :6.25s31 callable at 100
B 5.50s33 callable at 100½
C 4.65s34 callable at 101
DZr29 callable at 100 - ANSWER A :6.25s31 callable at 100
f you were in charge of finances for the county and you were considering paying off only one
of your debts, wouldn't it be the debt that's costing the county the most (the highest inter-
est rate)? In this scenario, the county will retire/call the 6.25% callable bonds because those
are costing the county the most every year. Also notice that those bonds have an added ad-
vantage - they are callable at 100, which means at Par, meaning there is no call 'premium'
required to retire them.
1
,When viewing the latest quotes on T-bills, you note that the current quote on the new 3
month Bills, 0.50 − 0.55, is somewhat higher than the quote on new 3 month Bills at the pre-
vious auction.
A T-bill prices have risen
B The yield curve is inverting
C The Fed is easing the money supply
D T-bill discounts have increased - ANSWER D T-bill discounts have increased
T-bills are not quoted as a percentage of par, whereas notes and bonds are. Bill quotes rep-
resent the percentage of Discount from Par Value at which banks and dealers purchase T-
bills at the Fed Auction. If you're told that this week's quotes, which are discounts from par,
are HIGHER than the discounts from last week, that means T-Bill purchase prices have gotten
LOWER -----we all know that when department stores increase the DISCOUNT, the price in
dollars gets cheaper. It's the same with T-bills. For any of you who put answer A, it is wrong
because it says prices have gone up. When a discount gets higher/bigger, the sale price goes
down.
CPU Industries, Inc. (ticker symbol CPU) has $50,000,000 par value convertible debentures
outstanding with a 40 to 1 conversion ratio. If the bonds are currently trading at 110 and are
above parity, CPU common must be trading:
A at 27.50
B at 27.49 or below
C at 27.51 or above
D at 44.00 - ANSWER B at 27.49 or below
Step 1 is to determine the parity price of the stock. The bond is trading at 110, which is
$1,100. The bond is convertible into 40 shares: that's the 40 to 1 conversion ratio given in
the question.
2
,that at its current price of $1,100, the bond is WORTH MORE THAN the stock. Therefore, the
stock can't be AT $27.50, it must be at least 1 penny below $27.50. So 40 shares at $27.49
(or below) is less than $1,100.
All of the below represent bond sweeteners with the exception of:
A a put option
B cum-warrants
C a call feature
D convertibility - ANSWER C a call feature
A sweetener is a feature that is good for investors. Owning a callable bond exposes one to
call risk, which is not considered desirable by bond investors. Call risk is the risk of having
one's portfolio altered when the issuer chooses to call the bonds. Having a put feature, a
conversion feature, or warrants attached to a bond can be desirable and even highly profita-
ble
Stabilizing a new stock issue
I. may occur once the S-1 has been filed with the SEC
II. may only occur if disclosed in the final prospectus
IIII. may not occur at or above the POP
IV. if necessary, is normally a function performed by a syndicate manager
A I and III
B II and IV
C III and IV
D I, II, III and IV - ANSWER B II and IV
Stabilizing a new issue can only be done once the effective date of the new issue has arrived.
It isn't done during the cooling off period, which is prior to the effective date. Stabilizing is
normally done by the managing underwriting either at, or just below, the POP (public offer-
ing price). It cannot be done above the POP
3
, Lyon Technology is being quoted by 3 market makers as follows:
Market Maker A 42.22 - 42.72 10 by 15
Market Maker B 42.28 - 42.75 15 by 10
Market Maker C 42.20 - 42.68 5 by 5
If a member firm received and accepted a customer sell order for 500 shares of Lyon Tech
common, the mark-up or mark-down would be based upon:
A 42.68
B 42.75
C 42.20
D 42.28 - ANSWER D 42.28
Question 7 Explanation: The key words in this question are 'customer sell order.' Your client
is selling TO your firm. Your firm will give the client the BEST BID price available at this time,
then charge a fair reasonable mark-down in accordance with the FINRA 5% policy. The best
bid is the HIGHEST of all the bids on the NASDAQ screen, which in this case is $42.28, the bid
of Market Maker B.
Your firm is the lead underwriter of a $100,000,000 municipal general obligation offering of
New York City. One of the key elements in the list of disclosures to prospective investors is
the legal opinion. Pick from the below who prepares and issues the legal opinion for this
bond issue?
A the City Attorney for NYC
B the Attorney General for NY State
C the lead underwriter's chief counsel
D independent bond counsel - ANSWER D independent bond counsel
4
A: non-voting class B preferred stock
B: subordinated debentures rated BB+ by Standard & Poor's
C: earned surplus
D: plant & equipment - ANSWER Plant and equipment
Capitalization includes Stockholders' Equity and Long-term Debt. Plant & Equipment are
Fixed Assets, which are assets purchased with the Capital raised by the business but are not
themselves considered Capital
Miami-Dade County currently has the following four GOs outstanding. All issues possess a
call feature and have coupons and maturities as shown below. Assume all issues have similar
principal amounts outstanding. In the event interest rates decline, and the County plans to
do a refunding of only one of the four outstanding GOs, which issue would most likely be
called?
A :6.25s31 callable at 100
B 5.50s33 callable at 100½
C 4.65s34 callable at 101
DZr29 callable at 100 - ANSWER A :6.25s31 callable at 100
f you were in charge of finances for the county and you were considering paying off only one
of your debts, wouldn't it be the debt that's costing the county the most (the highest inter-
est rate)? In this scenario, the county will retire/call the 6.25% callable bonds because those
are costing the county the most every year. Also notice that those bonds have an added ad-
vantage - they are callable at 100, which means at Par, meaning there is no call 'premium'
required to retire them.
1
,When viewing the latest quotes on T-bills, you note that the current quote on the new 3
month Bills, 0.50 − 0.55, is somewhat higher than the quote on new 3 month Bills at the pre-
vious auction.
A T-bill prices have risen
B The yield curve is inverting
C The Fed is easing the money supply
D T-bill discounts have increased - ANSWER D T-bill discounts have increased
T-bills are not quoted as a percentage of par, whereas notes and bonds are. Bill quotes rep-
resent the percentage of Discount from Par Value at which banks and dealers purchase T-
bills at the Fed Auction. If you're told that this week's quotes, which are discounts from par,
are HIGHER than the discounts from last week, that means T-Bill purchase prices have gotten
LOWER -----we all know that when department stores increase the DISCOUNT, the price in
dollars gets cheaper. It's the same with T-bills. For any of you who put answer A, it is wrong
because it says prices have gone up. When a discount gets higher/bigger, the sale price goes
down.
CPU Industries, Inc. (ticker symbol CPU) has $50,000,000 par value convertible debentures
outstanding with a 40 to 1 conversion ratio. If the bonds are currently trading at 110 and are
above parity, CPU common must be trading:
A at 27.50
B at 27.49 or below
C at 27.51 or above
D at 44.00 - ANSWER B at 27.49 or below
Step 1 is to determine the parity price of the stock. The bond is trading at 110, which is
$1,100. The bond is convertible into 40 shares: that's the 40 to 1 conversion ratio given in
the question.
2
,that at its current price of $1,100, the bond is WORTH MORE THAN the stock. Therefore, the
stock can't be AT $27.50, it must be at least 1 penny below $27.50. So 40 shares at $27.49
(or below) is less than $1,100.
All of the below represent bond sweeteners with the exception of:
A a put option
B cum-warrants
C a call feature
D convertibility - ANSWER C a call feature
A sweetener is a feature that is good for investors. Owning a callable bond exposes one to
call risk, which is not considered desirable by bond investors. Call risk is the risk of having
one's portfolio altered when the issuer chooses to call the bonds. Having a put feature, a
conversion feature, or warrants attached to a bond can be desirable and even highly profita-
ble
Stabilizing a new stock issue
I. may occur once the S-1 has been filed with the SEC
II. may only occur if disclosed in the final prospectus
IIII. may not occur at or above the POP
IV. if necessary, is normally a function performed by a syndicate manager
A I and III
B II and IV
C III and IV
D I, II, III and IV - ANSWER B II and IV
Stabilizing a new issue can only be done once the effective date of the new issue has arrived.
It isn't done during the cooling off period, which is prior to the effective date. Stabilizing is
normally done by the managing underwriting either at, or just below, the POP (public offer-
ing price). It cannot be done above the POP
3
, Lyon Technology is being quoted by 3 market makers as follows:
Market Maker A 42.22 - 42.72 10 by 15
Market Maker B 42.28 - 42.75 15 by 10
Market Maker C 42.20 - 42.68 5 by 5
If a member firm received and accepted a customer sell order for 500 shares of Lyon Tech
common, the mark-up or mark-down would be based upon:
A 42.68
B 42.75
C 42.20
D 42.28 - ANSWER D 42.28
Question 7 Explanation: The key words in this question are 'customer sell order.' Your client
is selling TO your firm. Your firm will give the client the BEST BID price available at this time,
then charge a fair reasonable mark-down in accordance with the FINRA 5% policy. The best
bid is the HIGHEST of all the bids on the NASDAQ screen, which in this case is $42.28, the bid
of Market Maker B.
Your firm is the lead underwriter of a $100,000,000 municipal general obligation offering of
New York City. One of the key elements in the list of disclosures to prospective investors is
the legal opinion. Pick from the below who prepares and issues the legal opinion for this
bond issue?
A the City Attorney for NYC
B the Attorney General for NY State
C the lead underwriter's chief counsel
D independent bond counsel - ANSWER D independent bond counsel
4
