NASAA Series 65 — All Questions

A corporation issues unsecured commercial paper to fund seasonal working capital. To qualify for the usual Securities Act registration exemption, the paper generally must mature in:

• a.90 days or less
• b.365 days or less
• c.two years or less
• d.270 days or less✓

Commercial paper is short-term, unsecured corporate debt typically sold at a discount. The Section 3(a)(3) exemption from registration is available for paper with a maturity of nine months (270 days) or less, so issuers commonly choose maturities up to 270 days. A one-year maturity would lose the exemption. The 90-day limit is too short and is not the statutory cutoff, and two years is far beyond the money market.Securities Act of 1933 Section 3(a)(3); CFA Institute, Fixed Income (money market instruments)

An importer arranges for its bank to guarantee payment of a time draft due in 90 days, and the draft is then sold at a discount in the money market. This instrument is a:

• a.Federal funds loan
• b.Negotiable certificate of deposit
• c.Repurchase agreement
• d.Banker's acceptance✓

A banker's acceptance is a time draft, often arising from international trade, that a bank has accepted and so guaranteed; it trades at a discount and matures at face value. A negotiable CD is a deposit issued by the bank itself and pays interest. A repurchase agreement is a sale of securities with an agreement to buy them back. Federal funds are overnight loans of reserves between banks.CFA Institute curriculum, Fixed Income (money market instruments)

A 91-day Treasury bill with a $1,000,000 face value is quoted at a bank discount yield of 4.80%, using a 360-day year. The price paid is closest to:

• a.approximately $952,000
• b.about $987,867✓
• c.around $988,012
• d.roughly $988,033

Discount = 1,000,000 x 0.048 x 91 / 360 = $12,133.33. Price = 1,000,000 - 12,133.33 = $987,866.67. Recheck: 0.048 x 91 = 4.368; 4.368 / 360 = 0.012133. Dividing by 365 gives $988,033, which does not match the bank discount convention. The $952,000 answer discounts a full year (4.8% x 1,000,000) and ignores the 91 days. The $988,012 answer treats 4.80% as an add-on yield and divides face value by 1.012133.U.S. Treasury, TreasuryDirect: Understanding Pricing and Interest Rates (Treasury bills)

A 91-day Treasury bill priced at $987,866.67 will pay $1,000,000 at maturity. Its bond-equivalent (investment) yield, on a 365-day year, is closest to:

• a.1.23%
• b.4.80%
• c.4.93%✓
• d.4.86%

Return over the holding period = (1,000,000 - 987,866.67) / 987,866.67 = 1.2282%. Annualize on 365 days: 1.2282% x 365 / 91 = 4.926%. The bond-equivalent yield is higher than the 4.80% discount yield because it divides by the price, not the face value, and uses 365 days. The 4.86% figure annualizes with 360 days. The 1.23% figure is the unannualized return for 91 days.U.S. Treasury, TreasuryDirect: Understanding Pricing and Interest Rates (investment rate)

A customer buys five 6% corporate bonds ($1,000 par each) paying interest March 1 and September 1. The trade date is Wednesday, June 10, and the trade settles on Thursday, June 11. Using the 30/360 convention, the accrued interest owed is closest to:

• a.$82.50
• b.$83.33✓
• c.$150.00
• d.$85.00

Accrued interest runs from the last coupon date up to, but not including, the settlement date. March 1 to June 11 on a 30/360 basis = 3 months x 30 + 10 days = 100 days. Per bond: 1,000 x 6% x 100 / 360 = $16.67. For five bonds: $83.33 (recheck: 16.667 x 5 = 83.33). The $85.00 figure counts actual days (102). The $82.50 figure stops at the trade date (99 days). The $150.00 figure is a full semiannual coupon for five bonds.FINRA Rule 11620; MSRB Rule G-33 (30/360 day count for corporate and municipal bonds)

A Treasury note pays 4% interest on February 15 and August 15 (181 days in the period beginning February 15). A buyer settles on May 16. There are 90 days from February 15 to May 16. Accrued interest per $1,000 par, using actual/actual, is closest to:

• a.$10.11
• b.$9.86
• c.$9.94✓
• d.$10.00

Semiannual coupon = 1,000 x 4% / 2 = $20. Accrued = 20 x (90 / 181) = $9.94 (recheck: 20 x 0.4972 = 9.945). Treasury notes use actual days elapsed over actual days in the coupon period. The $10.11 figure uses 30/360 (91 days over 180), the corporate and municipal convention. The $9.86 figure uses actual days over 365 on an annual coupon (40 x 90 / 365). The $10.00 figure assumes the period is exactly half of the coupon.MSRB Rule G-33; U.S. Treasury marketable securities day-count convention (actual/actual)

A five-year zero-coupon corporate bond has a 4% yield to maturity, quoted on a semiannual-compounding basis. Per $1,000 face value, its price is closest to:

• a.roughly $800.00
• b.$820.35✓
• c.about $821.93
• d.around $675.56

With semiannual compounding there are 10 periods at 2% each: price = 1,000 / 1.02^10 = 1,000 / 1.21899 = $820.35. Annual compounding (1,000 / 1.04^5) gives $821.93, which does not match the semiannual quote convention. The $800.00 figure subtracts 4% a year for 5 years from face value with no compounding. The $675.56 figure applies the 4% rate for 10 periods instead of 2%.CFA Institute curriculum, Fixed Income (bond valuation)

A 10-year, 6% semiannual-pay bond trades at 106 and is callable in 3 years at 103. Ignoring the small gap between approximate and exact methods, the yield to worst is closest to:

• a.5.2%, the yield to maturity
• b.6.0%, the coupon rate
• c.4.8%, the yield to the call date✓
• d.5.7%, the current yield

For a premium bond, a call at 103 gives up premium sooner, so yield falls the earlier redemption occurs. Approximate YTC = (60 + (1,030 - 1,060) / 3) / ((1,030 + 1,060) / 2) = 50 / 1,045 = 4.8% (a semiannual solution gives about 4.77%). YTM is about 5.2%, current yield = 60 / 1,060 = 5.7%, and the coupon rate is 6.0%. Yield to worst is the lowest yield across the possible redemption dates, which here is the yield to call.CFA Institute curriculum, Fixed Income (yield measures)

A two-year bond pays a 6% coupon semiannually ($30 per period) and has a 5% yield to maturity compounded semiannually. Its price per $1,000 face is closest to:

• a.$1,009.64
• b.$1,000.00
• c.$1,018.81✓
• d.$929.08

Use 4 periods at 2.5% per period: 30/1.025 + 30/1.025^2 + 30/1.025^3 + 1,030/1.025^4 = 29.27 + 28.55 + 27.86 + 933.13 = $1,018.81. The bond trades at a premium because its coupon is above the market yield, so it cannot be priced at par. The $1,009.64 figure uses only 2 periods, treating years as periods. The $929.08 figure discounts at 5% per half-year instead of 2.5%.CFA Institute curriculum, Fixed Income (bond valuation)

A bond priced at $1,000 would rise to $1,042 if market yields fell 50 basis points and fall to $961 if yields rose 50 basis points. Its effective duration is closest to:

• a.approximately 7.8
• b.roughly 4.1
• c.around 8.4
• d.about 8.1✓

Effective duration = (price if yields fall - price if yields rise) / (2 x original price x change in yield) = (1,042 - 961) / (2 x 1,000 x 0.005) = 81 / 10 = 8.1. The 4.1 answer leaves out the factor of 2 in the denominator. The 8.4 answer uses only the price gain (42 / 5), and the 7.8 answer uses only the price loss (39 / 5). The central formula uses both sides, which also reduces the error from convexity.CFA Institute curriculum, Fixed Income (effective duration)

A bond portfolio has modified duration 7 and convexity 60 (in the usual units). If yields rise by 1 percentage point, the estimated price change using duration and the convexity adjustment is closest to:

• a.about -7.0%
• b.around -6.4%
• c.roughly -6.7%✓
• d.-7.3%

Price change = -(modified duration x change in yield) + 1/2 x convexity x (change in yield)^2 = -7 x 0.01 + 0.5 x 60 x 0.0001 = -7.0% + 0.3% = -6.7%. Convexity always adds a positive amount, which cushions price declines. The -7.0% answer uses duration alone. The -7.3% answer subtracts the convexity term. The -6.4% answer forgets the one-half factor (60 x 0.0001 = 0.6%).CFA Institute curriculum, Fixed Income (duration and convexity approximation)

A client must pay $300,000 for a business obligation in exactly six years and wants to protect against both rising and falling rates. Which portfolio best immunizes the liability?

• a.Treasury bills rolled over every three months until the due date
• b.The highest-yielding bonds available regardless of their duration
• c.A bond portfolio whose Macaulay duration equals six years✓
• d.Coupon bonds that all have a stated maturity of six years

Immunization sets the portfolio's Macaulay duration equal to the investment horizon, so that a rate change's effect on bond prices offsets its effect on reinvested coupons. A coupon bond with six years to maturity has a duration below six, so reinvestment risk, not price risk, would dominate. Maximizing yield ignores the horizon and takes extra credit risk. Rolling bills leaves the client exposed to reinvestment risk at each new rate.CFA Institute curriculum, Fixed Income (immunization)

An investor buys a $1,000 municipal bond in the secondary market for $987.50 with exactly four years to maturity, and holds to maturity. The bond's interest is tax-exempt. How is the $12.50 market discount taxed at maturity?

• a.As tax-exempt income, because it comes from a municipal bond
• b.As ordinary income on only the $2.50 above the de minimis amount
• c.As a long-term capital gain, because the bond was held more than a year
• d.As ordinary income, because it exceeds the de minimis amount of $10✓

The de minimis threshold is 0.25% of the redemption price times the full years to maturity: 0.25% x 4 = 1.0%, or $10. The discount of $12.50 exceeds it, so the accrued market discount is ordinary income (the whole $12.50, not just the excess). Had it been $10 or less, capital gain treatment would apply. Market discount on a municipal bond is not tax-exempt interest; only the stated interest is exempt. Treating only the $2.50 excess as ordinary misreads the rule.IRC Section 1278; IRS Publication 550 (market discount on tax-exempt bonds)

A toll-road revenue bond issuer has gross revenues of $13.0 million, operating and maintenance expenses of $4.0 million, and annual debt service of $7.2 million. Its debt service coverage ratio is:

• a.0.80x
• b.1.25x✓
• c.2.25x
• d.1.81x

Net revenues available for debt service = 13.0 - 4.0 = $9.0 million. Coverage = 9.0 / 7.2 = 1.25x. Recheck: 7.2 x 1.25 = 9.0. Revenue bond indentures usually pay operating expenses first, so net revenues (not gross) are tested. The 1.81x answer divides gross revenue by debt service. The 0.80x answer inverts the ratio. The 2.25x answer divides net revenues by operating expenses, which is not a debt service measure.CFA Institute curriculum, Fixed Income (revenue bond analysis)

A municipal bond is payable first from the revenues of a water utility and, if those are insufficient, from the issuer's general taxing power. This bond is a:

• a.A double-barreled bond✓
• b.Limited-tax general obligation bond
• c.Moral obligation bond
• d.Industrial development revenue bond

A double-barreled bond has two sources of repayment: the revenues of a project or enterprise and the issuer's full faith, credit and taxing power as a backup. A moral obligation bond depends on a nonbinding promise by a legislature to consider replenishing a reserve fund. An industrial development revenue bond is supported by lease or loan payments from a private company. A limited-tax GO bond is backed by taxes but with a cap on the rate or amount and no revenue first claim.MSRB glossary; CFA Institute curriculum, Fixed Income (municipal bonds)

A California resident buys a Florida general obligation bond paying 4%. In general, the interest is:

• a.Taxable federally but exempt from California, because Florida issued it
• b.Exempt from federal income tax but usually taxable by California✓
• c.Exempt from both federal and California income tax
• d.Taxable by both, because municipal interest from another state is not exempt

Section 103 excludes municipal bond interest from federal gross income regardless of the issuing state. State exemption normally applies only to bonds issued within the investor's own state (or certain territories), so California generally taxes interest on a Florida bond. The federal exemption does not depend on where the investor lives, so it is not taxable federally. 'Triple tax-free' benefits come from buying in-state bonds.IRC Section 103; state tax treatment of out-of-state municipal interest

A $1,000 convertible bond is convertible into 25 shares of common stock. The stock trades at $35 and the bond trades at $1,000. The bond's conversion premium, as a percentage of conversion value, is closest to:

• a.114.3%
• b.87.5%
• c.12.5%
• d.14.3%✓

Conversion value = 25 shares x $35 = $875. Premium = (1,000 - 875) / 875 = 14.3%. Check: the conversion price is 1,000 / 25 = $40 and (40 - 35) / 35 = 14.3%. The 12.5% figure divides the $125 premium by the bond price instead of conversion value. The 87.5% figure is the conversion value as a share of the bond price. The 114.3% figure is the bond price divided by conversion value, which includes the 100% base.CFA Institute curriculum, Fixed Income (convertible securities)

Which pair of ratings is the lowest investment-grade category on the S&P and Moody's scales?

• a.B+ and B1
• b.BB+ and Ba1
• c.BB- and Ba3
• d.BBB- and Baa3✓

Investment grade runs from AAA/Aaa down to BBB-/Baa3. The next step down, BB+/Ba1, is the highest speculative-grade (high-yield or junk) rating, which is why a one-notch downgrade across that line matters so much. BB-/Ba3 and B+/B1 are lower speculative-grade ratings. The Fitch scale matches S&P's.S&P Global Ratings and Moody's rating scales

An issuer's bonds are downgraded from BBB- to BB+. Which effect is most likely?

• a.Credit spreads widen, and funds restricted to investment grade may be forced to sell✓
• b.The coupon rate automatically resets to a higher level to reflect the lower rating
• c.The call price resets to par so that holders can redeem immediately
• d.The downgrade affects only new issues the company sells in the future

A move from investment grade to speculative grade (a 'fallen angel') often raises the yield spread demanded by buyers and can force sales by holders whose guidelines require investment-grade bonds, pressuring the price. Coupons on conventional bonds are fixed; only step-up bonds change with a downgrade, and those are the exception. A downgrade does not alter the call price or give holders a redemption right unless the indenture says so. Existing bonds are repriced by the market immediately.CFA Institute curriculum, Fixed Income (credit risk and ratings)

An investor in the 32% bracket buys a newly issued 10-year corporate zero-coupon bond in a taxable account. Which describes the annual tax treatment?

• a.No tax is due until maturity, when the entire discount is reported as one gain
• b.The gain is taxed only if the bond is sold before maturity as a capital gain
• c.Accrued discount is taxable interest each year though no cash is paid✓
• d.The accretion is tax-exempt because a zero-coupon bond pays no stated interest

A zero-coupon bond is issued at a discount, and the discount (original issue discount) is treated as interest earned over the life of the bond using the constant yield method. The holder reports it as ordinary income each year (phantom income), and the tax basis rises by the amount reported. Deferring everything to maturity or sale is not allowed for taxable corporate OID. The lack of cash coupons does not make the accretion tax-exempt. This is why zeros are often held in tax-deferred accounts.IRC Section 1272; IRS Publication 550 (original issue discount)

Under the PSA benchmark, 100% PSA assumes a conditional prepayment rate (CPR) that rises 0.2% per month of loan age until it reaches 6% at month 30. A pool of loans 25 months old is assumed to prepay at 150% PSA. The annualized CPR is:

• a.approximately 3.3%
• b.around 5.0%
• c.about 9.0%
• d.7.5%✓

At 100% PSA, a 25-month-old pool prepays at 0.2% x 25 = 5.0% CPR. The pool is assumed to prepay at 1.5 times the benchmark: 5.0% x 1.5 = 7.5%. The 5.0% answer is the benchmark speed itself. The 9.0% answer applies 150% to the 6% ceiling, which applies only once loans are at least 30 months old. The 3.3% answer divides by 1.5 instead of multiplying.SIFMA Standard Prepayment Model (PSA benchmark); CFA Institute, Fixed Income (MBS)

An auto-loan ABS has a $100 million pool financed by a $80 million senior tranche, a $12 million mezzanine tranche and an $8 million equity (first-loss) tranche. Credit losses on the pool total $15 million. How much of the loss is absorbed by the senior tranche?

• a.$12 million, because the senior tranche is 80% of the pool and shares losses pro rata
• b.$7 million, the amount of the loss beyond the equity tranche
• c.None, because the junior tranches absorb the whole $15 million first✓
• d.$3 million, the part of the loss left after the mezzanine tranche is used up

In a senior-subordinated structure, losses hit the first-loss tranche first, then the mezzanine, and only afterwards the senior tranche. The equity tranche absorbs $8 million, and the mezzanine absorbs the remaining $7 million (15 - 8), leaving $5 million of its $12 million still intact. The senior tranche absorbs nothing. A pro rata share of $12 million ignores subordination. The $7 million answer is the loss borne by the mezzanine tranche, not the senior. The $3 million answer subtracts the mezzanine size from the loss and ignores the equity tranche.CFA Institute curriculum, Fixed Income (asset-backed securities, credit enhancement)

An investor owns mortgage pass-through certificates with an original face value of $200,000. The pool factor is now 0.7325. The investor's remaining principal balance is:

• a.$7,325,000
• b.$146,500✓
• c.$53,500
• d.$273,038

Current principal = original face x pool factor = 200,000 x 0.7325 = $146,500. Check: 200,000 x 0.7 = 140,000, plus 200,000 x 0.0325 = 6,500. The $53,500 answer is the principal already repaid, 200,000 x (1 - 0.7325). The $273,038 answer divides by the factor instead of multiplying. The $7,325,000 answer applies the factor to a $10 million figure not given in the question.CFA Institute curriculum, Fixed Income (mortgage pass-through securities)

A Brazilian corporation registers with the SEC and sells U.S.-dollar-denominated bonds to investors in the United States. These are called:

• a.Yankee bonds✓
• b.Eurobonds
• c.Brady bonds
• d.Samurai bonds

A Yankee bond is issued in the U.S. market by a foreign issuer, in U.S. dollars, and registered with the SEC. A Samurai bond is a yen-denominated bond issued in Japan by a non-Japanese issuer. A Eurobond is sold outside the country of its currency. Brady bonds were restructured sovereign loans of emerging-market governments, not corporate issues.CFA Institute curriculum, Fixed Income (global bond markets)

A London bank accepts a deposit denominated in U.S. dollars. This deposit is best described as a:

• a.Eurodollar deposit, a dollar deposit held at a bank outside the United States✓
• b.Eurobond, a long-term euro-denominated bond sold to investors in London
• c.Domestic time deposit, a dollar deposit that a foreign bank placed in a U.S. bank
• d.Federal funds deposit, an overnight reserve loan between U.S. banks

Eurodollars are U.S.-dollar deposits held in banks outside the United States (the term is not limited to Europe), and are not subject to U.S. reserve requirements. A domestic time deposit is held inside the U.S. banking system. A Eurobond is a bond, not a deposit, and its currency need not be the euro. Federal funds are reserve balances lent between banks that hold accounts at the Federal Reserve.Federal Reserve and BIS definitions (Eurocurrency deposits)

A Japanese company issues yen-denominated bonds sold primarily to investors in London and other markets outside Japan. This is a:

• a.Eurobond (a Euroyen bond)✓
• b.Yankee bond
• c.Bulldog bond
• d.Samurai bond

A Eurobond is issued in a currency different from the currency of the country where it is mainly sold, so a yen bond sold outside Japan is a Eurobond, here a Euroyen bond. A Samurai bond is a yen bond issued in Japan by a foreign borrower, which does not fit because the issuer is Japanese and the sale is outside Japan. A Yankee bond is a foreign issue sold in the U.S. dollar market. A Bulldog bond is a sterling-denominated bond issued in the United Kingdom by a foreign borrower.CFA Institute curriculum, Fixed Income (global bond markets)

An investor buys $10,000 of a TIPS with a 1.5% coupon. By the first interest date the index ratio is 1.03, so the principal has been adjusted to $10,300. The first semiannual interest payment is closest to:

• a.$75.00
• b.$225.00
• c.$154.50
• d.$77.25✓

TIPS pay the fixed coupon rate on the inflation-adjusted principal: 10,300 x 1.5% = $154.50 per year, so the semiannual payment is $77.25. Check: 10,300 x 0.0075 = 77.25. The $75.00 figure applies the coupon to the original principal. The $154.50 figure is a full year of interest, not a half-year payment. The $225.00 figure adds the 3% inflation to the 1.5% coupon rate and applies it to original principal (10,000 x 4.5% / 2).U.S. Treasury, TreasuryDirect: Treasury Inflation-Protected Securities

An individual holds a TIPS in a taxable brokerage account. The principal is adjusted upward for inflation during the year but is not paid until maturity. How is the adjustment taxed?

• a.Taxable only at maturity, when the adjusted principal is paid back to the holder
• b.Taxed federally each year it accrues; exempt from state and local tax✓
• c.Taxable by the federal, state and local governments in the year it occurs
• d.Exempt from federal income tax, because the increase is a return of principal

For a taxable holder, the annual increase in a TIPS' principal is taxable federal income in the year it occurs, even though cash is not received until sale or maturity (phantom income). Interest on U.S. Treasury securities, including the inflation adjustment, is exempt from state and local income taxes. Deferring tax to maturity is not allowed, and the adjustment is not tax-free principal. State and local taxes do not apply to Treasury interest.IRS Publication 550; 31 U.S.C. 3124 (state tax exemption of Treasury interest)

At a Treasury note auction, one bidder submits a noncompetitive bid and another submits a competitive bid. Which statement is accurate?

• a.The competitive bidder is guaranteed the amount bid, and the noncompetitive bidder is filled last
• b.The noncompetitive bidder gets the full amount at the auction rate; the competitive bidder may get nothing✓
• c.Both bidders name the yield they will accept, and both are filled at that yield
• d.The noncompetitive bidder names a yield, but the competitive bidder accepts whatever the auction sets

A noncompetitive bidder agrees to accept the rate or yield determined at the auction close and is awarded the full amount of the bid (the limit is $10 million per auction). A competitive bidder specifies the desired yield (the discount rate for bills), and if that yield is higher than the one at which the auction clears, the bid is not filled. Naming a yield is what makes a bid competitive; the roles are not reversed.U.S. Treasury, TreasuryDirect: Auction FAQs (competitive and noncompetitive bids)

A company declares a dividend with a record date of Friday, October 16, 2026. Assuming regular-way T+1 settlement, what is the last day on which a new buyer can purchase the stock and still receive the dividend?

• a.Thursday, October 15✓
• b.Monday, October 19
• c.Wednesday, October 14
• d.Friday, October 16

With T+1 settlement, a trade settles one business day after the trade date. To be the holder of record on Friday, October 16, the purchase must settle by then, so it must be made on Thursday, October 15. Because the ex-dividend date equals the record date under T+1, a buyer on Friday, October 16 trades ex-dividend, settles on Monday, October 19, and does not receive the dividend. Wednesday, October 14 reflects the old two-day settlement cycle and is earlier than necessary. Monday, October 19 is the settlement date for a Friday trade, which is too late.FINRA Rule 11140 / SEC Rule 15c6-1 (T+1 settlement; ex-dividend date equals record date)

A foreign company wants to list its shares in the U.S. through an ADR program and also raise new capital by offering shares to U.S. investors. Which ADR level is needed?

• a.Level III, which permits a public offering of new shares✓
• b.Level I, which trades over the counter and permits capital raising
• c.Level II, which requires an exchange listing and permits capital raising
• d.Sponsored ADRs of any level, because the sponsor can sell new shares

Level I ADRs trade over the counter with minimal SEC disclosure and cannot be used to raise capital. Level II ADRs can list on a U.S. exchange and require registration (Form F-6 and Form 20-F) but still do not involve a public offering. Level III ADRs allow the foreign company to make a public offering of new shares in the U.S. and carry the fullest registration and reporting. Being sponsored does not by itself determine whether new capital may be raised.SEC Form F-6 and Form 20-F; CFA Institute, Equity Investments (depositary receipts)

A U.S. investor in a taxable account owns ADRs of a United Kingdom company. The foreign government withholds tax from the dividend before the depositary pays the investor. How can the investor generally recover the foreign tax?

• a.By treating the amount as a return of capital that reduces the ADR's cost basis
• b.It cannot be recovered, because a dividend paid in dollars is not foreign income
• c.By claiming a foreign tax credit (or deduction) on the U.S. return✓
• d.By asking the SEC for a refund of the amount withheld

Foreign withholding on dividends is a foreign income tax, and a U.S. taxpayer may generally claim a credit against U.S. tax (or take an itemized deduction) for it, avoiding double taxation. The SEC does not refund taxes. Receiving the dividend in dollars after the depositary converts it does not change its foreign source. Taxes withheld are not a return of capital, and the investor's basis does not change.IRC Section 901 and Section 27; IRS Form 1116 instructions

A C corporation owns 10% of the stock of an unaffiliated company and receives $40,000 of dividends. The corporate tax rate is 21%. Ignoring the taxable-income limitation, the federal tax on the dividend is:

• a.$8,400
• b.$4,200✓
• c.$2,940
• d.$2,520

A corporation owning less than 20% of the payer gets a 50% dividends-received deduction. Taxable dividend = 40,000 x 50% = 20,000; tax = 20,000 x 21% = $4,200. The $8,400 figure ignores the deduction. The $2,940 figure uses the 65% deduction that applies to 20% to under 80% ownership (14,000 x 21%). The $2,520 figure uses the 70% deduction that applied before 2018 (12,000 x 21%).IRC Section 243 (dividends received deduction); IRC Section 11 (21% corporate rate)

A $100 par convertible preferred stock is convertible into 4 shares of common stock. The common trades at $27 and the preferred trades at $105. What is available to an arbitrageur?

• a.No gain exists, because the preferred already trades above its $100 par value
• b.Buy the preferred and convert, selling the common for about $8 profit per share
• c.Sell the preferred short and buy four common shares to earn about $3 per share
• d.Buy the preferred, convert, and sell the common for about $3 per preferred share✓

Conversion value = 4 x $27 = $108. The preferred costs $105, so converting and selling the common nets 108 - 105 = $3 per preferred share (before costs). The reverse trade (short the preferred, buy the common) would lose $3. Trading above par is irrelevant to parity, which compares market prices. The $8 figure measures conversion value against par ($100), not against the price actually paid.CFA Institute curriculum, Equity Investments (convertible preferred)

A preferred stock has a $100 par value and a 6% stated dividend rate. It trades at $120 in the market. Its current yield is:

• a.7.2%
• b.20.0%
• c.5.0%✓
• d.6.0%

The annual dividend is 6% x $100 = $6. Current yield = dividend / market price = 6 / 120 = 5.0%. The 6.0% figure is the stated rate on par, not the yield on the price paid. The 7.2% figure multiplies the dividend by the price ratio (6 x 1.2) instead of dividing. The 20.0% figure is the premium of price over par.CFA Institute curriculum, Equity Investments (preferred stock yield)

An affiliate of a reporting company wants to sell restricted stock under Rule 144. The class has 8,000,000 shares outstanding, and the average weekly reported trading volume over the four calendar weeks before filing Form 144 is 90,000 shares. What is the most the affiliate may sell in any three-month period?

• a.80,000 shares
• b.90,000 shares✓
• c.360,000 shares
• d.170,000 shares

The affiliate's limit in a three-month period is the greater of 1% of the class outstanding (8,000,000 x 1% = 80,000) or the average weekly volume over the four preceding calendar weeks (90,000). The greater is 90,000. The 80,000 answer picks the 1% test even though it is lower. The 170,000 answer adds the two tests together. The 360,000 answer multiplies the weekly average by four weeks.17 CFR 230.144(e) (volume limitation for affiliates)

An affiliate of a reporting company plans to sell 4,000 shares at $15 a share (with no other sales in three months). Is Form 144 required?

• a.No, because Form 144 is required only for sales of more than 10,000 shares
• b.Yes, but only if both the share count and the sale price exceed their limits
• c.No, because 4,000 shares is under the 5,000-share threshold that triggers the form
• d.Yes, because the $60,000 price exceeds the $50,000 limit✓

An affiliate must file a notice of proposed sale (Form 144) if the securities sold in any three-month period exceed 5,000 shares or have an aggregate sale price above $50,000. The test is either/or, and 4,000 x $15 = $60,000 passes the dollar test. The share test alone is not what decides it. The form is aimed at affiliates, and there is no 10,000-share threshold.17 CFR 230.144(h) (notice of proposed sale, Form 144)

A person who is not an affiliate of a reporting company has held restricted shares, acquired from the issuer, for eight months. Under Rule 144, which condition still applies to a sale?

• a.The one-year holding period must run before any sale is allowed
• b.Only the current public information requirement applies✓
• c.No conditions apply, because eight months is longer than six
• d.The volume limit and manner-of-sale conditions apply

For a non-affiliate of a reporting issuer, the holding period is six months. After six months but before one year, the only condition is that current public information about the issuer be available. After one year, no conditions apply. Volume limits, manner of sale and Form 144 are aimed at affiliates. The one-year period applies to non-reporting issuers. Eight months is not yet one year, so the current public information requirement still applies.17 CFR 230.144(b)(1) (conditions for non-affiliates)

An employee was granted incentive stock options on March 1, 2023 and exercised them on June 15, 2024 at a price below that day's market value. She sold the shares on April 20, 2025 for more than their exercise-date value. How is the sale taxed?

• a.A qualifying disposition, because more than two years passed between the grant and the sale
• b.A disqualifying disposition: the spread at exercise is ordinary income and any further gain is capital gain✓
• c.A disqualifying disposition, and all of the gain over the exercise price is ordinary income
• d.A disqualifying disposition, and the entire gain is a short-term capital gain with no ordinary income

A qualifying disposition needs the sale to fall more than two years after the grant and more than one year after the exercise. The two-year test is met, but April 20, 2025 is only about ten months after the June 15, 2024 exercise, so the sale is disqualifying. Treating the grant-date test alone as enough is the usual error. In a disqualifying sale the spread at exercise is ordinary income and only the appreciation after exercise is capital gain, so neither an all-ordinary nor an all-capital-gain result is right.IRC s.422(a)(1); IRC s.421; IRC s.83

An employee exercises 1,000 nonqualified stock options with a $20 exercise price when the stock is worth $50. She holds the shares for 18 months and sells at $65. Which tax result is correct?

• a.$45,000 of ordinary income, all taxed in the year of exercise
• b.$30,000 of ordinary income at exercise, then a $45,000 long-term capital gain at sale
• c.$30,000 of ordinary income at exercise, then a $15,000 long-term capital gain at sale✓
• d.No tax at exercise, then a $45,000 long-term capital gain at sale

For a nonqualified option the spread at exercise (($50 - $20) x 1,000 = $30,000) is ordinary compensation income, and the basis in the shares becomes $50. The later move from $50 to $65 is a $15,000 capital gain, long term after more than a year. Deferring all tax to the sale describes an incentive option, not a nonqualified one. Reporting $45,000 as ordinary income ignores that post-exercise appreciation is capital gain, and adding a $45,000 capital gain on top of the $30,000 counts the spread twice.IRC s.83; IRS Topic 427

An employer grants an employee incentive stock options on 10,000 shares at an exercise price of $25, the stock's fair market value on the grant date. All of the options first become exercisable in 2027, when the stock trades at $40. How many shares can qualify as incentive stock options?

• a.10,000 shares, since the exercise price equals the grant-date value
• b.6,667 shares, measured by the $15 spread at that time
• c.4,000 shares, measured at the $25 grant-date value✓
• d.2,500 shares, measured at the $40 value when exercisable

Section 422(d) caps incentive-option treatment at $100,000 of stock, valued at grant-date fair market value, that first becomes exercisable in a calendar year. $100,000 / $25 = 4,000 shares; the other 6,000 are treated as nonqualified options. The value when the options become exercisable ($40) is irrelevant to the cap, and so is the spread. Pricing the options at fair market value on the grant date is what makes the options eligible, but it does not lift the dollar limit.IRC s.422(d)

A company just paid a $2.00 dividend. Analysts expect dividends to grow 10% a year for the next two years and 4% a year forever after that. If investors require a 9% return, the stock's value today is closest to:

• a.$42.92
• b.$54.39
• c.$44.79
• d.$46.42✓

Dividends are $2.20 in year 1, $2.42 in year 2 and $2.5168 in year 3. At the end of year 2 the stock is worth $2.5168 / (0.09 - 0.04) = $50.34, and the present value is $2.20 / 1.09 + ($2.42 + $50.34) / 1.09^2 = $2.02 + $44.40 = $46.42. $54.39 leaves the year-2 terminal value undiscounted. $44.79 capitalizes the year-2 dividend instead of the year-3 dividend, skipping the first 4% step. $42.92 discounts the terminal value for three years even though it is measured at year 2.Multistage dividend discount model (CFA Institute curriculum, Equity Valuation)

An analyst forecasts free cash flow of $12 million in year 6, growing 2% a year indefinitely. Using a 10% discount rate and valuing the business at the end of year 5, the present value of the terminal value is closest to:

• a.$150.0 million
• b.$74.5 million
• c.$102.5 million
• d.$93.1 million✓

The terminal value at year 5 is $12 million / (0.10 - 0.02) = $150 million. Discounting it five years at 10% gives $150 / 1.10^5 = $93.1 million. $150.0 million forgets to discount. $74.5 million capitalizes the cash flow at the full 10% instead of the 8% spread between the discount rate and growth, then discounts. $102.5 million discounts for only four years.Discounted cash flow terminal-value valuation (CFA Institute curriculum, Equity Valuation)

On Tuesday the Dow Jones Industrial Average closes at a new high, but the Transportation average stays below its earlier high. A follower of Dow theory would view the uptrend as:

• a.Confirmed, because the Industrial average is the leading indicator
• b.Confirmed once trading volume tops its 50-day average
• c.Unconfirmed, because the two averages are not rising together✓
• d.Reversed, because any divergence signals a primary downtrend

Dow theory requires the Industrial and Transportation averages to confirm one another before a primary trend is considered intact. A new high in only one average is a non-confirmation, a warning rather than a signal. Counting the Industrial average alone ignores the confirmation requirement, and a volume threshold is not a substitute for it. A divergence does not by itself declare a reversal either; a reversal also needs confirmation by both averages.NASAA Series 65 Exam Content Outline, Section II (Investment Vehicle Characteristics); technical analysis (Dow theory)

A company's founders sell 4 million of their own shares to the public in a registered offering, and the company issues no new shares. Which statement is correct?

• a.It is a secondary offering, but the company gets the proceeds because it filed the registration statement
• b.It is a secondary offering: the selling shareholders get the proceeds and the company's share count is unchanged✓
• c.It is a secondary offering that dilutes existing holders, because 4 million more shares become outstanding
• d.It is a primary offering, because the shares are sold under a registration statement, so the company gets the proceeds

In a secondary offering existing holders sell shares they already own, so the proceeds go to them and no new shares are created. The company may bear registration costs but receives no proceeds. A primary offering is one in which the issuer sells newly issued shares and receives the money. Dilution comes from newly issued shares, which these are not, so the outstanding share count does not change.Securities Act of 1933 s.5

A special purpose acquisition company holds its IPO proceeds in a trust account. Its shareholders are asked to vote on a merger with a target they dislike. Which right do SPAC shareholders typically have?

• a.Redeeming their shares for a pro rata portion of the trust account, whether they vote for or against✓
• b.Redeeming only if they vote against, since redemption rights end once a merger is announced
• c.Rescinding their purchase and recovering the IPO price from the sponsor
• d.Putting their shares to the target company at the merger exchange ratio

SPAC charters usually let public shareholders redeem for a pro rata share of the trust, plus interest, in connection with the vote on a business combination, and they can do so even if they vote in favor. The sponsor is not an insurer of the IPO price, and no right of rescission arises from the vote. Shares are not put to the target at an exchange ratio; shareholders who do not redeem simply receive target-company shares. Redemption is not tied to a no vote, nor does it lapse when a deal is announced.SEC Release 33-11265 (SPAC rules, January 2024)

A development-stage penny-stock company whose only business plan is to acquire an unidentified company registers an offering under Rule 419. What must happen to the offering proceeds?

• a.At least 50% is held in escrow and returned if no acquisition closes within 12 months
• b.At least 90% is held in escrow and returned to purchasers if no acquisition closes within 18 months✓
• c.All of it goes to the company at once, but purchasers can demand repayment after 18 months
• d.At least 90% is held in escrow and returned if no acquisition closes within 36 months

Rule 419 protects investors in blank check offerings by penny-stock issuers: the issuer may receive only up to 10% of the proceeds (net of underwriting commissions) before an acquisition, and the rest stays in escrow. If no qualifying acquisition occurs within 18 months of the effective date the funds go back to purchasers, and after an acquisition is found purchasers get a reconfirmation window of 20 to 45 business days. The other choices change either the escrowed share or the time limit, or leave the money with the company.17 CFR 230.419

A fund's Class A shares charge a 6% front-end load on the amount invested and a 0.25% annual 12b-1 fee. Class C shares have no front-end load, no deferred sales charge and a 1.00% annual 12b-1 fee. Ignoring compounding and breakpoints, about how long must an investor hold the fund before Class A becomes the cheaper class?

• a.About 6 years, because Class C's 1.00% fee adds up to the 6% load
• b.About 1 year, because Class C's annual fee exceeds Class A's load
• c.About 24 years, because the 6% load is recovered at Class A's 0.25% fee
• d.About 8 years, because Class C costs 0.75% more each year✓

The cumulative extra cost of Class C is 1.00% - 0.25% = 0.75% a year, so it overtakes the 6% load after 6 / 0.75 = 8 years. Dividing the load by Class C's whole fee (6 years) forgets that Class A also pays 0.25% annually. Dividing by Class A's fee (24 years) uses the wrong fee entirely. A single year of Class C fees (1.00%) is nowhere near the 6% load.FINRA Rule 2341; mutual fund prospectus fee tables

An investor sends $10,000 to buy Class A shares. The fund's sales charge is 5.75% of the public offering price. How much of the $10,000 is invested in fund shares?

• a.$9,425✓
• b.$10,000, with the load charged on top of the check
• c.$9,575
• d.$9,456

The load is a percentage of the public offering price, which is the amount the investor pays: 5.75% x $10,000 = $575, leaving $10,000 - $575 = $9,425 to buy shares at net asset value. $9,456 divides $10,000 by 1.0575 as though the load were added to the investment. $9,575 transposes the digits of the 94.25% that remains after the charge. A load is deducted from the amount sent, not added to it.FINRA Rule 2341

A plan sponsor placing $25 million in a mutual fund wants the share class with no load, no 12b-1 fee and the lowest expense ratio, and can meet a high minimum. Which class fits best?

• a.Class R shares, aimed at retirement plans, with a 12b-1 fee for plan servicing
• b.Class A shares at the top breakpoint, with a reduced load and an annual 12b-1 fee
• c.Institutional shares, with no load or 12b-1 fee in exchange for a large minimum✓
• d.Class C shares, with no front-end load and a level 12b-1 fee

Institutional classes are priced for large accounts: they generally carry neither a sales charge nor a 12b-1 fee, but require a high minimum. Class R shares are built for employer plans and normally bear a 12b-1 fee to pay for plan administration. Class A shares keep a 12b-1 fee even when the load is reduced or waived at high breakpoints. Class C shares avoid a front-end load but carry the highest annual 12b-1 fee.Investment Company Act Rule 12b-1; mutual fund prospectus