Finra Series-7 Exam - Topic 6 Question 89 Discussion

Actual exam question for Finra's Series-7 exam

Question #: 89
Topic #: 6

The preferred stock of Greatest Technology Corporation has a $100 par and is convertible into four shares of common stock. The preferred is trading at 104.50. The preferred is callable at 101. If the common stock price is presently 27.89, which of the following actions would be a successful arbitrage:

Apurchase 400 shares of common stock and sell 100 shares of preferred stock as ''short exempt'' (that is, the sale is exempt from the uptick rule)

Bpurchase the preferred stock and sell an appropriate amount of the common stock ''short exempt''

Cpurchase both the common and the preferred stocks as a hedge against further market risk

Dpurchase the preferred stock and let it be called, which is inevitable at these market prices

Show Suggested Answer

Suggested Answer: A

$0.45. Since treasury stock does not receive dividends, divide $450,000 by the outstanding 100,000 shares to arrive at $0.45 per share.

by Lacey at Jun 02, 2024, 11:45 PM

Limited Time Offer

25%

Off

Get Premium Series-7 Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Tegan

4 months ago

Really? Is it guaranteed that they'll call it?

upvoted 0 times

...

Cora

5 months ago

Wow, I didn't realize the preferred could be called at 101!

upvoted 0 times

...

Buffy

5 months ago

Not so sure about that, option D seems risky.

upvoted 0 times

...

Darrel

5 months ago

I think option B makes the most sense here.

upvoted 0 times

...

Joesph

5 months ago

Preferred stock is at 104.50, common stock at 27.89.

upvoted 0 times

...

Brittni

6 months ago

I’m leaning towards option C, but I’m not confident. It seems like hedging could be a safer approach, even if it’s not strictly arbitrage.

upvoted 0 times

...

Launa

6 months ago

I practiced a similar question where we had to analyze the conversion value. I feel like option A could be risky since it involves shorting the common stock.

upvoted 0 times

...

Verda

6 months ago

I'm not entirely sure, but I remember something about the conversion feature of preferred stock being important. Maybe option D could work if the stock gets called?

upvoted 0 times

...

Tina

6 months ago

I think option B might be the right choice since it involves buying the preferred stock and shorting the common stock, which could lock in some profits.

upvoted 0 times

...

Emile

6 months ago

Okay, I think I've got it. The preferred stock is trading at a premium to the value of the underlying common stock, so buying the preferred and shorting the common should be a winning strategy. Time to put my finance skills to the test!

upvoted 0 times

...

Reta

6 months ago

I'm not totally sure about this one. There are a lot of moving parts to consider. I'll need to review the concepts and formulas to make sure I understand it fully.

upvoted 0 times

...

Goldie

6 months ago

Option B seems like the way to go - purchase the preferred stock and sell the appropriate amount of common stock short. That should lock in a risk-free profit.

upvoted 0 times

...

Helene

6 months ago

Hmm, I'm a bit confused by the details here. I'll need to carefully work through the numbers to figure out the best approach.

upvoted 0 times

...

Hillary

6 months ago

This looks like a classic arbitrage opportunity. I think the key is to focus on the relationship between the preferred stock and the common stock.

upvoted 0 times

...

Elbert

6 months ago

I'm a bit confused by all the identity provider and authentication protocol options. I'll need to review my notes on Salesforce identity management to make sure I understand the differences between these approaches.

upvoted 0 times

...