STC Series 7 Greenlight #1
Which of the following choices is Moody's lowest rating for a municipal note?
A. MIG 1
B. MIG 3
C. Aaa
D. C - correct answer ✔✔B. MIG 3
MIG stands for Moody's Investment Grade and is used to rate municipal notes. There are three MIG
ratings, with the best rating being MIG 1 and the lowest rating being MIG 3. Aaa is Moody's best rating
for bonds, and C is its lowest rating for bonds.
An investor purchases 10 two-year ABC puts @ 12.25. The dollar amount the investor will pay is:
A. $122.50
B. $1,225.00
C. $12,250.00
D. $122,500.00 - correct answer ✔✔C. $12,250.00
The cost of a long-term equity option is found by multiplying the premium quote by $100. The cost of 10
puts quoted at 12.25 is, therefore, $12,250 (12.25 x $100 x 10 = $12,250).
According to Regulation T, when purchasing an option contract the transaction must be paid for within:
A. 1 business day
B. 3 business days
C. 4 business days
D. 7 business days - correct answer ✔✔C. 4 business days
According to Regulation T, securities must be paid for within 2 business days of the standard (regular-
way) settlement date. Since regular-way settlement is two business days, payment is required within four
business days from the trade date. Although option transactions settle next day, the customer has four
business days to pay for a purchase.
,If an issuer is seeking an exemption from the registration provisions of the Securities Act of 1933 under
Regulation D (the private placement exemption), which TWO of the following statements are TRUE?
I. The purchasers must sign an investment letter attesting to the fact that resales of the securities are
restricted
II. The size of the offering must be limited
III. The number of accredited buyers is unlimited
IV. The issuer must file a registration statement with the SEC
A. I and III
B. I and IV
C. II and III
D. II and IV - correct answer ✔✔A. I and III
According to the Regulation D private placement exemption, certain conditions must be met for the
securities to be exempt from the registration provisions of the Securities Act of 1933. The offering must
be restricted to persons who are knowledgeable and experienced in business and financial matters and
who are able to afford the economic risks involved. The issuer must provide the buyer with detailed
financial information (this offering document is not required to be filed with the SEC). In a private
placement, the number of non-accredited buyers must be limited to 35 and the offering must be directly
negotiated between the issuer and the buyer or his purchaser representative. Also, the buyer must sign
an investment letter which states that the purchase is being made for investment purposes and not for a
short-term resale. To answer this question correctly, it is important to note that the size of the offering is
unlimited and that there is no limit to the number of accredited buyers that are involved.
Which method of calculating taxes on an investment typically offers an investor the lowest amount of tax
on a capital gain when shares of stock are sold?
A. Specific identification
B. First in, first out (FIFO)
C. Last in, first out (LIFO)
D. Average cost - correct answer ✔✔A. Specific identification
The IRS only recognizes two methods for calculating gains or losses on stock transactions—FIFO and
specific identification (versus the purchase of). Many brokerage firms may allow alternative methods,
such as LIFO, which is a variation of specific identification. Average cost may only be used for sales of
mutual fund shares. Although LIFO could offer a lower gain if the price of a security was rising, that gain
may be considered short-term and taxed at a higher rate. Therefore, the specific identification method is
the best choice for an investor who's seeking the lowest amount of tax.
,Which of the following ratios would be used by an analyst examining the capital structure of an industrial
corporation?
A. The current ratio
B. The dividend payout ratio
C. The price/earnings ratio
D. The debt-to-equity ratio - correct answer ✔✔D. The debt-to-equity ratio
The capital structure of a corporation is the dollar amount of the corporation's capitalization (equity and
debt securities). An analyst will, therefore, be interested in the debt-to-equity ratio. This is actually the
ratio of those securities creating fixed charges (bonds plus preferred stock) to common stock.
Which of the following Moody's rated bonds are considered speculative?
A. Aaa
B. Aa
C. Baa
D. Ba - correct answer ✔✔D. Ba
The top-4 Moody's ratings, Aaa, Aa, A, and Baa, are termed investment-grade (basically nonspeculative
or high-grade). Ratings lower than Baa (such as Ba) are considered speculative or non-investment-grade.
The investment-grade category in S&P ratings includes AAA, AA, A, and BBB.
Which of the following statements is NOT TRUE for a bond trading at a premium?
A. The bond will trade with the current yield lower than the nominal yield.
B. The bond will trade at a basis below its coupon rate.
C. The bond will have a current yield that is higher than the yield basis.
D. The basis and coupon will be identical. - correct answer ✔✔D. The basis and coupon will be identical.
Basis is a different way of saying yield to maturity. In the case of a bond trading at a premium, the
nominal yield (coupon) will be higher than the current yield and the yield to maturity (basis).
Additionally, the current yield will be larger than the yield to maturity.
An investor purchasing a reverse convertible security would be MOST interested in:
A. Preservation of capital
B. High current income
, C. Capital appreciation
D. Conservative income - correct answer ✔✔B. High current income
An investor purchasing a reverse convertible security is seeking an above-market coupon rate. Reverse
convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon
rate above prevailing market rates. They are considered structured products because, in addition to the
coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The
underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The
issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the
price of the security falls below a specified value known as the knock-in level. If the price of the
underlying asset stays above the knock-in level, the investor will receive the high coupon and the full
return of her principal (the most beneficial option). The investor will not be able to participate if the
underlying asset increased. If the underlying asset falls below the knock-in level, the investor will be
obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have
depreciated below the knock-in level and the investor may receive substantially less than the original
principal.
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on
Friday, December 1. An owner of Foremost Corporation who sold the stock on November 30 for regular-
way settlement:
A. Would be entitled to receive the dividend
B. Would not be entitled to receive the dividend
C. Would be entitled to receive the dividend only if the stock was delivered before the ex-dividend date
D. None of the above - correct answer ✔✔A. Would be entitled to receive the dividend
The record date is given as December 1. The ex-dividend date is on the first business day preceding the
record date. Therefore, anyone who owned Foremost Corporation and sold it on November 30 for
regular-way settlement, is entitled to receive the dividend because the stock is selling ex-dividend
(without the dividend) and the buyer is not entitled to the dividend.
On Wednesday, March 11, a customer purchases 1,000 shares of an OTC equity security in a cash
account through an online brokerage firm. The transaction will settle:
A. By the close of business on March 11
B. Immediately
C. On March 12
D. On March 13 - correct answer ✔✔D. On March 13
Which of the following choices is Moody's lowest rating for a municipal note?
A. MIG 1
B. MIG 3
C. Aaa
D. C - correct answer ✔✔B. MIG 3
MIG stands for Moody's Investment Grade and is used to rate municipal notes. There are three MIG
ratings, with the best rating being MIG 1 and the lowest rating being MIG 3. Aaa is Moody's best rating
for bonds, and C is its lowest rating for bonds.
An investor purchases 10 two-year ABC puts @ 12.25. The dollar amount the investor will pay is:
A. $122.50
B. $1,225.00
C. $12,250.00
D. $122,500.00 - correct answer ✔✔C. $12,250.00
The cost of a long-term equity option is found by multiplying the premium quote by $100. The cost of 10
puts quoted at 12.25 is, therefore, $12,250 (12.25 x $100 x 10 = $12,250).
According to Regulation T, when purchasing an option contract the transaction must be paid for within:
A. 1 business day
B. 3 business days
C. 4 business days
D. 7 business days - correct answer ✔✔C. 4 business days
According to Regulation T, securities must be paid for within 2 business days of the standard (regular-
way) settlement date. Since regular-way settlement is two business days, payment is required within four
business days from the trade date. Although option transactions settle next day, the customer has four
business days to pay for a purchase.
,If an issuer is seeking an exemption from the registration provisions of the Securities Act of 1933 under
Regulation D (the private placement exemption), which TWO of the following statements are TRUE?
I. The purchasers must sign an investment letter attesting to the fact that resales of the securities are
restricted
II. The size of the offering must be limited
III. The number of accredited buyers is unlimited
IV. The issuer must file a registration statement with the SEC
A. I and III
B. I and IV
C. II and III
D. II and IV - correct answer ✔✔A. I and III
According to the Regulation D private placement exemption, certain conditions must be met for the
securities to be exempt from the registration provisions of the Securities Act of 1933. The offering must
be restricted to persons who are knowledgeable and experienced in business and financial matters and
who are able to afford the economic risks involved. The issuer must provide the buyer with detailed
financial information (this offering document is not required to be filed with the SEC). In a private
placement, the number of non-accredited buyers must be limited to 35 and the offering must be directly
negotiated between the issuer and the buyer or his purchaser representative. Also, the buyer must sign
an investment letter which states that the purchase is being made for investment purposes and not for a
short-term resale. To answer this question correctly, it is important to note that the size of the offering is
unlimited and that there is no limit to the number of accredited buyers that are involved.
Which method of calculating taxes on an investment typically offers an investor the lowest amount of tax
on a capital gain when shares of stock are sold?
A. Specific identification
B. First in, first out (FIFO)
C. Last in, first out (LIFO)
D. Average cost - correct answer ✔✔A. Specific identification
The IRS only recognizes two methods for calculating gains or losses on stock transactions—FIFO and
specific identification (versus the purchase of). Many brokerage firms may allow alternative methods,
such as LIFO, which is a variation of specific identification. Average cost may only be used for sales of
mutual fund shares. Although LIFO could offer a lower gain if the price of a security was rising, that gain
may be considered short-term and taxed at a higher rate. Therefore, the specific identification method is
the best choice for an investor who's seeking the lowest amount of tax.
,Which of the following ratios would be used by an analyst examining the capital structure of an industrial
corporation?
A. The current ratio
B. The dividend payout ratio
C. The price/earnings ratio
D. The debt-to-equity ratio - correct answer ✔✔D. The debt-to-equity ratio
The capital structure of a corporation is the dollar amount of the corporation's capitalization (equity and
debt securities). An analyst will, therefore, be interested in the debt-to-equity ratio. This is actually the
ratio of those securities creating fixed charges (bonds plus preferred stock) to common stock.
Which of the following Moody's rated bonds are considered speculative?
A. Aaa
B. Aa
C. Baa
D. Ba - correct answer ✔✔D. Ba
The top-4 Moody's ratings, Aaa, Aa, A, and Baa, are termed investment-grade (basically nonspeculative
or high-grade). Ratings lower than Baa (such as Ba) are considered speculative or non-investment-grade.
The investment-grade category in S&P ratings includes AAA, AA, A, and BBB.
Which of the following statements is NOT TRUE for a bond trading at a premium?
A. The bond will trade with the current yield lower than the nominal yield.
B. The bond will trade at a basis below its coupon rate.
C. The bond will have a current yield that is higher than the yield basis.
D. The basis and coupon will be identical. - correct answer ✔✔D. The basis and coupon will be identical.
Basis is a different way of saying yield to maturity. In the case of a bond trading at a premium, the
nominal yield (coupon) will be higher than the current yield and the yield to maturity (basis).
Additionally, the current yield will be larger than the yield to maturity.
An investor purchasing a reverse convertible security would be MOST interested in:
A. Preservation of capital
B. High current income
, C. Capital appreciation
D. Conservative income - correct answer ✔✔B. High current income
An investor purchasing a reverse convertible security is seeking an above-market coupon rate. Reverse
convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon
rate above prevailing market rates. They are considered structured products because, in addition to the
coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The
underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The
issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the
price of the security falls below a specified value known as the knock-in level. If the price of the
underlying asset stays above the knock-in level, the investor will receive the high coupon and the full
return of her principal (the most beneficial option). The investor will not be able to participate if the
underlying asset increased. If the underlying asset falls below the knock-in level, the investor will be
obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have
depreciated below the knock-in level and the investor may receive substantially less than the original
principal.
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on
Friday, December 1. An owner of Foremost Corporation who sold the stock on November 30 for regular-
way settlement:
A. Would be entitled to receive the dividend
B. Would not be entitled to receive the dividend
C. Would be entitled to receive the dividend only if the stock was delivered before the ex-dividend date
D. None of the above - correct answer ✔✔A. Would be entitled to receive the dividend
The record date is given as December 1. The ex-dividend date is on the first business day preceding the
record date. Therefore, anyone who owned Foremost Corporation and sold it on November 30 for
regular-way settlement, is entitled to receive the dividend because the stock is selling ex-dividend
(without the dividend) and the buyer is not entitled to the dividend.
On Wednesday, March 11, a customer purchases 1,000 shares of an OTC equity security in a cash
account through an online brokerage firm. The transaction will settle:
A. By the close of business on March 11
B. Immediately
C. On March 12
D. On March 13 - correct answer ✔✔D. On March 13
