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STC SERIES 7 FINAL EXAM 1 QUESTIONS AND
CORRECT ANSWERS.
1. Eurodollars are primarily used in:: Financing investments outside of the United
States
2. Which of the following statements is TRUE concerning electronic commu-
nication networks (ECNs)?: They can be used by investors who want to trade
anonymously.
3. The Dow Jones Industrial Average is considered an index of:: Large-capital-
ized stocks
4. An individual purchased stock for $10,000 and has written calls against the
stock over a two-year period. She received premiums totaling $1,500 in the
first year and $2,000 in the second year, with all of the options expiring. What's
her total cost basis on the stock after the second year?: $10,000
When covered calls expire (as in this question), the premium will be realized as a
short-term capital gain and the cost basis for the stock will generally remain the
same. If the options were closed out prior to expiration, the result is either a capital
gain or loss based on the difference in premiums. If an option was exercised, the
premium would be added to the option's strike price to determine the sales proceeds
and the gain/loss would be either short-term or long-term based on how long the
stock had been held prior to its sale.
Keep in mind, to find the breakeven point on a covered call, the premium received
is subtracted from the cost to purchase the stock.
5. A broker who transacts an order for a customer must send a confirmation
disclosing all of the following information, EXCEPT:: If it acted as principal and
that it prepares research on the security
6. Which of following option recommendations are suitable for a sophisticated
investor who expects the overall market to fall, but is bullish on mining
stocks?: Buying narrow-based index calls and buying broad-based index puts
7. On Tuesday May 1, XYX Corporation's Board of Directors announced a
dividend payable on Friday, May 25 to stockholders of record on Monday, May
14. The ex-dividend date is:: Friday, May 11
Stocks sell ex-dividend on the first business day preceding the record date. The
record date is Monday, May 14. Therefore, the ex-dividend date would be one
business day before, or Friday, May 11.
8. Which statement is NOT TRUE regarding the prospectus for a variable
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annuity contract?: It cannot be delivered electronically.
9. The tranche with the longest maturity and, therefore, the last to receive
interest and principal payments within a CMO, is known as the:: Z-tranche
10. Which of the following statements is TRUE regarding the disclosure of
back-end sales charges to customers?: A confirmation should be sent disclosing
that a sales charge may have to be paid upon redemption.
11. An investment banking principal has received a letter from a customer
complaining about a recent new issue that declined substantially on its first
day of trading. The client purchased the shares based on a recommendation by
an associated person of the firm. The customer contends that the recommen-
dation was unsuitable. Which of the following statements is TRUE?: A memo
must be prepared describing any action taken in response to the complaint
12. A company has $50,000,000 par value convertible bonds outstanding. The
coupon rate is 8%. The bonds are currently selling at 96. What is the current
yield?: 8.3%
13. In regard to recruitment advertising by member firms, which of the follow-
ing statements is TRUE?: Recruitment advertising may not contain exaggerated
claims about opportunities in the securities business
14. A customer is seeking a high risk, high reward investment. Given this
objective, which of the following is the MOST appropriate?: A stock with no
dividend and a beta of greater than 2.0
15. Logan has the following position in his account.
Long 1 DEF May 35 call.
Logan anticipates a slight bullish move in DEF from which he wants to benefit,
but he also wants some income generated to reduce the cost of the position
without adding additional risk. He could accomplish this by adding which of
the following positions to his account?: Short 1 DEF May 45 call
By selling (short) 1 DEF May 45 call, Logan will generate income through the
premium received and reduce the overall cost of the position. While the short call
allows the owner to purchase DEF from him at $45 per share until it expires in May,
Logan is long a DEF call that allows him to purchase the same stock at $35 per
share until May. Logan has established a debit call spread.
16. An investor in an equipment leasing DPP would NOT expect:: Appreciation
17. Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which
of the following bonds is most likely to be refunded?: 7 1/2% callable in 2023
@ 100
18. When a firm's customer exercises a call option, the firm will submit an
exercise notice to the Options Clearing Corporation. The Options Clearing
Corporation, in turn, will select a firm to receive the exercise notice based
STC SERIES 7 FINAL EXAM 1 QUESTIONS AND
CORRECT ANSWERS.
1. Eurodollars are primarily used in:: Financing investments outside of the United
States
2. Which of the following statements is TRUE concerning electronic commu-
nication networks (ECNs)?: They can be used by investors who want to trade
anonymously.
3. The Dow Jones Industrial Average is considered an index of:: Large-capital-
ized stocks
4. An individual purchased stock for $10,000 and has written calls against the
stock over a two-year period. She received premiums totaling $1,500 in the
first year and $2,000 in the second year, with all of the options expiring. What's
her total cost basis on the stock after the second year?: $10,000
When covered calls expire (as in this question), the premium will be realized as a
short-term capital gain and the cost basis for the stock will generally remain the
same. If the options were closed out prior to expiration, the result is either a capital
gain or loss based on the difference in premiums. If an option was exercised, the
premium would be added to the option's strike price to determine the sales proceeds
and the gain/loss would be either short-term or long-term based on how long the
stock had been held prior to its sale.
Keep in mind, to find the breakeven point on a covered call, the premium received
is subtracted from the cost to purchase the stock.
5. A broker who transacts an order for a customer must send a confirmation
disclosing all of the following information, EXCEPT:: If it acted as principal and
that it prepares research on the security
6. Which of following option recommendations are suitable for a sophisticated
investor who expects the overall market to fall, but is bullish on mining
stocks?: Buying narrow-based index calls and buying broad-based index puts
7. On Tuesday May 1, XYX Corporation's Board of Directors announced a
dividend payable on Friday, May 25 to stockholders of record on Monday, May
14. The ex-dividend date is:: Friday, May 11
Stocks sell ex-dividend on the first business day preceding the record date. The
record date is Monday, May 14. Therefore, the ex-dividend date would be one
business day before, or Friday, May 11.
8. Which statement is NOT TRUE regarding the prospectus for a variable
,2|Page
annuity contract?: It cannot be delivered electronically.
9. The tranche with the longest maturity and, therefore, the last to receive
interest and principal payments within a CMO, is known as the:: Z-tranche
10. Which of the following statements is TRUE regarding the disclosure of
back-end sales charges to customers?: A confirmation should be sent disclosing
that a sales charge may have to be paid upon redemption.
11. An investment banking principal has received a letter from a customer
complaining about a recent new issue that declined substantially on its first
day of trading. The client purchased the shares based on a recommendation by
an associated person of the firm. The customer contends that the recommen-
dation was unsuitable. Which of the following statements is TRUE?: A memo
must be prepared describing any action taken in response to the complaint
12. A company has $50,000,000 par value convertible bonds outstanding. The
coupon rate is 8%. The bonds are currently selling at 96. What is the current
yield?: 8.3%
13. In regard to recruitment advertising by member firms, which of the follow-
ing statements is TRUE?: Recruitment advertising may not contain exaggerated
claims about opportunities in the securities business
14. A customer is seeking a high risk, high reward investment. Given this
objective, which of the following is the MOST appropriate?: A stock with no
dividend and a beta of greater than 2.0
15. Logan has the following position in his account.
Long 1 DEF May 35 call.
Logan anticipates a slight bullish move in DEF from which he wants to benefit,
but he also wants some income generated to reduce the cost of the position
without adding additional risk. He could accomplish this by adding which of
the following positions to his account?: Short 1 DEF May 45 call
By selling (short) 1 DEF May 45 call, Logan will generate income through the
premium received and reduce the overall cost of the position. While the short call
allows the owner to purchase DEF from him at $45 per share until it expires in May,
Logan is long a DEF call that allows him to purchase the same stock at $35 per
share until May. Logan has established a debit call spread.
16. An investor in an equipment leasing DPP would NOT expect:: Appreciation
17. Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which
of the following bonds is most likely to be refunded?: 7 1/2% callable in 2023
@ 100
18. When a firm's customer exercises a call option, the firm will submit an
exercise notice to the Options Clearing Corporation. The Options Clearing
Corporation, in turn, will select a firm to receive the exercise notice based
