Term
To make a public offering, a registered investment company must have a minimum net worth of:
A) 100000.
B) $1 million.
C) $100 million.
D) $10 million. |
|
Definition
A
Investment companies are not required to register an offering with the SEC unless they have a net worth of $100,000. |
|
|
Term
With bonds subject to a gross revenue pledge, the first priority will be to pay:
A) operation and maintenance .
B) the first lien on the property.
C) the sinking fund.
D) bond interest and principal. |
|
Definition
D
Bonds subject to a gross revenue pledge (gross lien revenue bonds) are backed by the gross revenues of the facility (meaning revenues before expenses). In this case, the first money disbursed is for payment of interest and principal. However, most revenue bonds only pledge net revenues to pay off revenue bonds. In the more common net revenue pledge, the first priority is operation and maintenance; the second priority is interest and principal. |
|
|
Term
All of the following statements regarding a closed-end investment company are true EXCEPT:
A) it differs from a mutual fund.
B) it is a type of management company.
C) it may redeem its own shares.
D) it sells at the market price plus a commission |
|
Definition
C
A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares. |
|
|
Term
All of the following characteristics are advantages of a REIT EXCEPT:
A) liquidity.
B) tax deferral.
C) diversification.
D) professional management. |
|
Definition
B
A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments. |
|
|
Term
Which of the following terms or phrases does NOT apply to REITs?
A) Dividends taxed at full ordinary income rates.
B) Redeemable.
C) Managed.
D) Secondary market. |
|
Definition
B
REITs trade in the secondary market and are not redeemable. The real estate portfolio is actively managed, and dividends paid by REITs do not meet the requirements to be taxed as qualified dividends and are, therefore, taxed as ordinary income. |
|
|
Term
Under MSRB rules, a final official statement must be:
A) delivered to customers on or before trade date.
B) delivered to customers on or before settlement date.
C) sent to customers on or before settlement date.
D) sent to customers on or before trade date. |
|
Definition
| MSRB Rule G-32 requires that a final official statement be delivered to buyers of the new issue on or before the settlement date. |
|
|
Term
Your broker/dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is
A) required to occur no later than the end of the month during which it was used
B) not required
C) required at least 10 business days prior to first use or publication
D) required within 10 business days of the time it is first used or published |
|
Definition
C
Filing with FINRA is required at least 10 business days prior to first use or publication for retail communications having to do with options. |
|
|
Term
All of the following are true regarding a fail to deliver EXCEPT
A) even though a fail to deliver has occurred and is still outstanding, FINRA mandates that the seller still be paid
B) the BD representing the seller can also be liable for buying in the securities if the BD's customer has not made good delivery on the securities sold
C) fail to deliver occurs when the selling BD does not deliver the securities in good deliverable form
D) the buyer may buy in the securities owed to him and charge the seller for any loss incurred |
|
Definition
D
The seller cannot be paid as long as the fail to deliver exists. Fail to deliver occurs when the selling BD does not deliver the securities in good deliverable form. The buyer or the selling BD can buy in the securities to complete the transaction, and any loss incurred to do so will become the responsibility of the seller who failed to deliver. |
|
|
Term
A self-employed individual has 2 full-time employees and makes the maximum allowable contribution to his own Keogh (HR-10 plan). What percentage of each employee's earned income must he contribute to their plans as eligible employees?
A) 25%
B) There is no requirement to contribute to the employees' plans
C) 10%
D) 15% |
|
Definition
A
When a self-employed individual makes the maximum contribution to his own Keogh (HR-10 plan), he must contribute 25% of any eligible employees' earned income to their plans. |
|
|
Term
In the sale of open-end investment company shares, the prospectus:
A) must be delivered at, or before, the delivery of the fund share certificate.
B) must be delivered before the sales solicitation .
C) must be delivered to the client either before or during the sales solicitation.
D) is not necessary. |
|
Definition
C
The sale of mutual fund shares requires that the client receive the prospectus before, or during, a sales solicitation. |
|
|
Term
A municipal revenue bond indenture contains a net revenue pledge. The following are reported for the year: $30 million of gross revenues, $18 million of operating expenses, $4 million of interest expenses, and $2 million of principal repayment. What is the debt service coverage ratio?
A) 3:1.
B) 2:1.
C) 5:1.
D) 9:1. |
|
Definition
B - 2:1
Under a net revenue pledge, bondholders are paid from net revenue, which equals gross revenue minus operating and maintenance expenses. In this example, net revenue is $12 million ($30 million − $18 million). Debt service is the combination of interest and principal repayment. Here, debt service is $6 million ($4 million + $2 million). To compute the debt service ratio, divide net revenue by debt service: $12 million / $6 million = a ratio of 2 to 1. |
|
|
Term
To which of the following firms could a member grant concessions or other allowances?
Another member firm.
A suspended member firm.
A foreign nonmember broker/dealer ineligible for FINRA membership.
A U.S. nonmember broker/dealer.
A) II and IV.
B) III and IV.
C) I and II.
D) I and III. |
|
Definition
D - I and III
A member can grant discounts and other concessions only to other member firms. A suspended member must be treated like a member of the general public (no discounts or concessions). The only exception is that a member firm can grant concessions to a foreign nonmember firm that is ineligible for FINRA membership. |
|
|
Term
The time value of an option that is at-the-money equals:
A) it's intrinsic value less premium.
B) zero.
C) its intrinsic value.
D) its premium. |
|
Definition
D
The option has no intrinsic value if the strike price equals the market price (at the money). The only value an option has is its time value, which equals the premium. |
|
|
Term
Which of the following are TRUE of an official statement?
It is required by the SEC for all new issues.
It is required by the MSRB for all new issues.
It is required to be delivered to purchasers at or before settlement.
It is generally used by underwriters to help sell the issue.
A) I and IV.
B) III and IV.
C) II and III.
D) I and II. |
|
Definition
B
An official statement is a document similar to a prospectus and is furnished in most cases to buyers of new issue municipal bonds. SEC Rules require that an official statement be prepared for most-but not all-new municipal issues. The MSRB has no such requirement, as it does not regulate issuers. |
|
|
Term
A customer has several accounts with a single brokerage firm. These include a single account in his own name, a joint account with his wife, and a custodial account for each of his two children. If this firm were to become insolvent, how would SIPC protect these accounts?
A) The single account would be treated first. If the maximum coverage were not reached, then the joint account would be covered and, finally, the two custodial accounts.
B) Only one account would be covered, but the client would be allowed to select which account would be covered.
C) Each account would be treated separately.
D) The single account and the two custodial accounts would receive the coverage for cash and securities. The joint account would not be covered. However, he and his wife would become general creditors of the firm. |
|
Definition
C
SIPC provides coverage on a per-customer basis in the event of broker/dealer default. In this situation, there are four separate customers: the customer's individual account in his own name, his joint account, and the two custodial accounts. Each of these four customers is eligible for SIPC maximum coverage of $500,000. |
|
|
Term
All of the following are reasons for entering a stop order EXCEPT to:
A) protect unrealized gains on a long position.
B) guarantee execution at a specified price.
C) limit losses in a long position.
D) protect profits in a short position. |
|
Definition
B
A stop (loss) order is entered to protect a profit or to limit a loss. Execution at a specific price can never be guaranteed because a stop order becomes a market order when the stop price is hit. |
|
|
Term
When may a variable annuity account be surrendered?
A) During the annuity period.
B) During the accumulation period.
C) Only during the payout period.
D) Any time before the accumulation period. |
|
Definition
B
A variable annuity may only be surrendered during the accumulation period. If the account is annuitized, the investor has chosen a payout option. |
|
|
Term
Which of the following is an effect of advance refunding on a municipal bond issue?
A) Lowered rating.
B) Defeasement.
C) Redemption.
D) Cancellation. |
|
Definition
B -
Defeasement Advance refunding (or pre-refunding) is in part the establishment of an escrow account in connection with an outstanding bond issue. Funds from a subsequent issue, deposited in the escrow account and generally invested in Treasury securities, will be used to call the bonds on the first available call date. When the bonds are escrowed to maturity, the outstanding debt is considered defeased.
Defeasement - A process to substitute collateral when looking to sell or refinance an existing property which was acquired through a real-estate loan.
Plainly speaking, the defeasement process involves the remainder of the amount owing on the loan being used to purchase government securities which are then given to the lender in exchange for releasing the property for refinance or sale by the borrower.
|
|
|
Term
Which of the following are required to be given to retail customers at settlement in municipal new issue transactions?
Confirmation showing the purchase price.
Official statement.
Names of syndicate members with their participation amounts.
Copy of the agreement among underwriters.
A) II and IV.
B) I and III.
C) I and II.
D) III and IV. |
|
Definition
C - I and II
MSRB rules state that a confirmation and an official statement must be sent to the investor no later than at settlement. |
|
|
Term
Options contracts known as mini-options
overly 50 shares of the underlying equity
overly 10 shares of the underlying equity
have premium multipliers of $100
have premium multipliers of $10
A) II and IV
B) II and III
C) I and III
D) I and IV |
|
Definition
A - II and IV
While each standard listed option contract represents 100 shares of the underlying equity and has a premium multiplier of $100 (premium of 2 = $200), a mini-option contract only represents 10 shares of the underlying equity and has a premium multiplier of $10 (premium of 2 = $20). |
|
|
Term
If LMN, Inc. has filed for bankruptcy, in what order would interested parties be paid?
Holders of secured debt.
Holders of subordinated debentures.
General creditors.
Preferred stockholders.
A) 1, 3, 2, 4.
B) 1, 2, 3, 4.
C) 3, 1, 2, 4.
D) 4, 1, 2, 3. |
|
Definition
A
The liquidation order is as follows: the IRS (and other government agencies), secured debt holders, unsecured debt holders and general creditors, holders of subordinated debt, preferred stockholders, and common stockholders. |
|
|
Term
All of the following statements regarding Nasdaq Level 3 are true EXCEPT that:
A) the system shows the inside quote.
B) quotes are entered by market makers.
C) actual interdealer quotes are displayed.
D) this level is used by registered representatives only. |
|
Definition
D
Nasdaq Level 3 is the interactive level of the Nasdaq system through which market makers enter and update their quotes. The best quote available (the inside market) is also shown on the Level 3. Registered representatives use the Nasdaq Level 1, which displays the inside market quote only. |
|
|
Term
All of the following are true concerning a Section 529 prepaid tuition plan EXCEPT:
A) prepaid tuition plans can be used to cover qualified tuition and room and board costs for the beneficiary of the plan.
B) monies distributed from the plan can only be used in a state-funded higher education institution.
C) eligibility to participate is specific to the state which regulates the plan.
D) the plan is used to lock in future tuition costs at current rates. |
|
Definition
B
529 prepaid tuition plans are used to lock in higher education costs at current tuition rates. Eligibility for the plans is state specific. Monies distributed from the plan may be used to pay for tuition in a state funded institution in that state or you can use those monies to pay for a portion of an in-state private school or any out of state school. In these instances the amount available for use in tuition payments will be determined by the tuition that an in-state publicly funded college would charge. |
|
|
Term
Which of the following statements is TRUE regarding auctions of U.S. Treasury securities?
A) Noncompetitive bids are always filled.
B) Both competitive and noncompetitive bids are always filled.
C) Competitive bids are always filled.
D) Neither competitive nor noncompetitive bids are always filled. |
|
Definition
A
Noncompetitive bids are made by entities other than primary dealers. The total dollar amount of these bids is set aside (to be filled) and the amount remaining is auctioned to primary dealers (competitive bids) with the highest bid (lowest yield) filled first. |
|
|
Term
Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11-1/4% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include:
A) she should not be concerned as the bonds will be first in liquidation.
B) the new barges might sink, and the collateral would be gone.
C) the company might demand that she accept common stock for her bond.
D) the issue may be junior-in-lien to another security issue. |
|
Definition
D
The word "subordinated" is the key to the question. A subordinated bond has other debt holders ahead of it in the event of liquidation. The barges do not serve as collateral as the bonds are identified as debentures, and having to convert to common stock is not a threat since she is the one that will, if she desires, exercise the conversion privilege. |
|
|
Term
Which of the following statements regarding the international currency spot market is TRUE?
A) Currencies traded in the spot market settle in one or two business days.
B) Regular way settlement is three business days following execution of the trade.
C) It is regulated by the central banks of the participating countries.
D) It is centrally located. |
|
Definition
A
In the interbank spot market currency trades generally settle in one or two business days. The interbank market is not subject to the regulations of individual countries, nor does it have a central location. |
|
|
Term
At 2:15 pm EST, a customer gives his registered representative a market order to buy 100 shares of ABC at the close. What should the registered representative do with the order?
A) Hold it at his desk until just before market close.
B) Send the order to the floor immediately.
C) Execute the order at the closing price first thing next morning.
D) Send in the order after the close to ensure receiving the closing price. |
|
Definition
B
The registered representative should mark the order ticket at close. His firm's floor broker will take on the responsibility for proper execution. |
|
|
Term
| The economy has experienced several months of slow economic growth and rising unemployment. Market analysts would describe this as a period of A) deflation B) stagflation C) stagnation D) inflation |
|
Definition
C Economists define stagnation as prolonged periods of slow or little economic growth accompanied by high unemployment.
Stagflation - the economic growth rate slows, and unemployment remains steadily high. |
|
|
Term
An application to purchase a variable annuity need NOT be approved by a principal:
A. Under any circumstances
B. If permitted by the customer
C. If the application is not submitted through a broker-dealer
D. If the application is signed by the customer |
|
Definition
C
An application for the purchase of a variable annuity that is received directly from the customer need not be approved by a principal. If the application is submitted through a broker-dealer, it must be approved by a principal or rejected. |
|
|
Term
A term bond has a mandatory sinking fund call feature. What method will be used to determine which specific bonds will be called?
A. Investors with the largest position
B. Investors with the largest coupon
C. Investors with the longest maturity
D. Random selection |
|
Definition
D
Random selection is the method used to call term bonds. |
|
|
Term
Regulation T applies to:
I. Cash accounts
II. Margin accounts
III. Commodity accounts
IV. Municipal bond margin accounts
a. I and II only
b. II and III only
c. II and IV only
d. III and IV only |
|
Definition
A - I and II only
Regulation T of the Federal Reserve Board applies to cash accounts and margin accounts. Regulation T does not apply to commodity accounts or municipal bond margin accounts. For municipal bond accounts, industry rules require a margin deposit of 7% of the market value of the bond. Margin requirements for commodity accounts are set by the individual commodity exchanges. |
|
|
Term
A registered representative has a 33-year-old client with a stable income with no foreseeable need to access money. The client is looking for a long-term investment that will offer a guaranteed rate of return, that can also share in the performance of the stock market, and offers some form of death benefit. Which of the following investments is MOST suitable for this client?
A. A fixed annuity
B. An equity-indexed annuity
C. A variable annuity
D. A varialble life insurance policy |
|
Definition
B
An equity-indexed annuity will satisfy the objectives of this client. It is a hybrid investment which offers the benefits of a fixed annuity -- guaranteed rate of growth -- as well as those of a variable annuity -- growth potential in the market. These, like most annuities, are not designed as short-term investments. The variable life insurance policy is designed to provide death benefits that can increase because of growth in the market. |
|
|
Term
Which of the following statements is TRUE concerning the sale of restricted securities?
a. If the company is listed on Nasdaq, there is no holding period
b. The sale must conform to the provisions of SEC Rule 144
c. A brokerage firm may act only in an agency capacity
d. The sale must be at the bid price as determined by the current quote of the outstanding securities |
|
Definition
B
The sale of restricted securities must conform to the provisions of SEC Rule 144. There is a six-month holding period even if the securities are listed on Nasdaq or the NYSE. A brokerage firm may act in an agency or principal capacity. The sale does not need to be at the bid price as determined by the current quote of the outstanding securities. The sale can be made at whatever price is agreed upon between the buyer and seller. |
|
|
Term
A company has chosen accelerated depreciation instead of straight-line depreciation. Which of the following statements is TRUE?
a. Earnings are overstated in the early years and understated in later years
b. Earnings are understated in the early years and overstated in later years
c. Earnings are understated in both early and later years
d. Earnings are not impacted by the method of depreciation |
|
Definition
B
Accelerated depreciation allows a company to take a larger amount of the cost of an asset as a deduction in the early years and less in the later years. Since large deductions are taken, earnings will be understated (reduced) in the early years. Small deductions in later years will overstate earnings. |
|
|
Term
Which of the following descriptions regarding the Capital Asset Pricing Model (CAPM) is NOT TRUE?
a. It predicts future values for the stock
b. It was developed to explain the behavior of security prices
c. It provides a mechanism to assess risk and return
d. It is based on the efficient market theory and assumes investors act rationally |
|
Definition
A
CAPM does not establish a price objective for the stock. All of the other descriptions listed are correct. |
|
|
Term
Variable annuities sold by insurance companies must be registered with:
I. The SEC
II. The FRB
III. FINRA
IV. The State Insurance Commission
a. I and III only
b. I and IV only
c. III and IV only
d. I, II, III, and IV |
|
Definition
B - I and IV only
Variable annuities are generally sold by agents of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered securities by the SEC and, therefore, must be registered with the SEC. Variable annuities must also be registered with the State Insurance Commission. The agents that sell variable annuities must be registered representatives with a Series 6 or Series 7 registration and must be licensed insurance agents. |
|
|
Term
A customer sells 100 shares of GM short. GM pays a 5% stock dividend. When the customer covers the short position, the customer will need to deliver:
a. 5 shares of GM
b. 100 shares of GM
c. 105 shares of GM
d. None of the above |
|
Definition
C
When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends paid are the responsibility of the customer who sold the stock short. In this example, GM paid a 5% stock dividend. Therefore, a customer who sold 100 shares of GM short would need to deliver 105 shares (100 shares x 5% = 5 additional shares) to cover the short sale. |
|
|
Term
Which of the following activities does NOT take place during the cooling-off period?
a. The due diligence meeting
b. Issuing a red herring
c. Stabilizing the issue
d. Blue-Skying the issue |
|
Definition
C
When a new stock issue is going to be offered, a registration statement must be filed with the SEC. After the filing, there is a period when the SEC reviews the information to ensure full disclosure. During the cooling-off period, a preliminary prospectus (red herring) is prepared to be used to receive indications of interest from the public. The issue must be registered in each state in which it will be sold according to state (Blue-Sky) laws. Prior to the completion of the final prospectus, a due diligence meeting is held where all concerned parties (issuer and underwriter) meet to insure that everything has been done properly. Stabilization of the issue takes place after the new security is selling in the market. |
|
|
Term
A GNMA pass-through is quoted 98.10 to 98.18. This quote represents a spread per $1,000 face value of:
a. $0.08
b. $0.80
c. $2.50
d. $8.00 |
|
Definition
C
GNMA pass-through certificates (as with T-notes and T-bonds) are quoted in 32nds. The spread of .08 represents 8/32 or 1/4 (.25) and has a value of $2.50 per $1,000. |
|
|
Term
Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds?
a. Engineering reports
b. The ratio of the amount of net overall debt to assessed valuation
c. Debt service coverage ratio
d. Special taxes |
|
Definition
B
The ratio of the amount of net overall debt (both direct and overlapping) to assessed value is useful in analyzing the credit risk of an issuer of general obligation bonds. A special tax bond is a type of revenue bond and, therefore, the amount of special taxes may be useful in analyzing the credit risk of an issuer of a revenue bond. |
|
|
Term
XYZ Corporation is selling 10,000,000 shares of common stock through an underwriter, at $15 per share. The underwriting spread is as follows. The manager's fee is 20 cents, the underwriting risk 20 cents, and the selling concession 60 cents. Selling group members have been allocated 500,000 shares. If the selling group members sell their entire allocation, their compensation will be:
a. $300,000
b. $400,000
c. $500,000
d. $6,000,000 |
|
Definition
A - $300,000
Selling group members are broker-dealers who participate in the sale of the issue on a best-efforts basis (i.e., assuming no risk). They receive a selling concession (compensation) that is less than that received by syndicate members, who do assume risk. The selling concession is $.60. This is part of the $1.00 underwriting spread. If the selling group members sell their entire allocation, they will receive $300,000 (500,000 shares x $0.60 per share). Syndicate members receive the selling concession and the underwriting risk per share sold, or $.80. |
|
|
Term
Which of the following statements is NOT TRUE concerning a structured product offered by an RR?
a. They are usually registered with the SEC
b. The principal that the investor would receive may be based on the value of a stock traded on an exchange
c. The principal the investor would receive may be based on the value of a foreign currency
d. Since this product is usually sold by a bank, the principal will be protected by the FDIC |
|
Definition
D
Structured products may be linked to individual securities, commodities, foreign currencies, or indexes. These products are underwritten by most major financial services institutions and are usually registered as securities with the SEC. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients. |
|
|
Term
Pickette Financial Services is participating in the IPO of Swank Tanks, Inc., as the managing underwriter. If a research analyst at Pickette wants to initiate coverage on Swank Tanks, she:
a. Must wait 10 calendar days after the offering date
b. Must wait 25 calendar days after the offering date
c. Must wait 40 calendar days after the offering date
d. May not issue a research report due to a conflict of interest |
|
Definition
C
A research analyst of Pickette Financial Services must wait 40 days after the date of the offering to publish a research report, or make a public appearance. This quiet period is applied to members that have agreed to participate as a manager or comanager of the IPO. Other participants, such as syndicate and selling group members, must wait 25 days to publish a research report or make a public appearance after the IPO date. |
|
|
Term
According to CAPM, all of the following choices are examples of diversifiable, nonsystematic risk, EXCEPT:
a. Credit risk
b. Interest-rate risk
c. Business risk
d. Industry risk |
|
Definition
B
Interest-rate risk is the systematic risk for bonds just as beta measures the systematic risk for stocks. Systematic risk is market risk, which persists despite diversification. |
|
|
Term
Closing spot prices for foreign currencies are disseminated daily by the:
a. NYSE
b. IMM
c. FRB
d. FINRA |
|
Definition
C
The Federal Reserve Board disseminates closing spot prices of foreign currencies daily. |
|
|
Term
Use the following quote to answer this question.
ABC 25.13 + .25 B 25 A 25.25
Excluding any markups, what price will a customer pay to purchase the security?
a. 25
b. 25.13
c. 25.25
d. 25.38 |
|
Definition
C
When purchasing stock, a customer will pay the ask (offer) price. A customer selling stock will receive the bid price. |
|
|
Term
Municipal term bond quotes are based on:
a. Yield to maturity
b. Current yield
c. Nominal yield
d. Dollar price |
|
Definition
D
Municipal term bonds (bond issues that have one maturity date) are quoted based on a dollar price. Term bonds are also known as dollar bonds. Municipal serial bonds (that have several maturity dates) are quoted on a yield-to-maturity basis. |
|
|
Term
Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) U.S. government security?
a. Each year the customer will pay both federal and state income tax
b. Each year the customer will pay only federal income tax
c. Each year the customer will not pay any tax
d. The customer will only pay tax at maturity |
|
Definition
B
The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amounted accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on U.S. government securities is subject to federal income tax, but exempt from state and local income taxes. |
|
|
Term
A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond.
When the issue is completely sold, the managing underwriter's fee will total:
a. $160,000
b. $260,000
c. $60,000
d. $600,000 |
|
Definition
C
The syndicate manager receives $1.50 for every bond. The manager will receive, in total, $60,000 (40,000 bonds x $1.50 per bond). |
|
|
Term
Which TWO of the following statements are TRUE concerning the auction process of Treasury bills?
The 4-week bill is offered every week
The 13-week and 26-week bills are auctioned every month
The 4-week-bill is auctioned on a Tuesday
The 13-week and 26-week bills are auctioned on a Thursday
I and III
I and IV
II and III
II and IV |
|
Definition
I and III
The 4-week Treasury bill is auctioned each week on Tuesday and is issued Thursday of that same week.
13-week and 26-week T-bills are auctioned weekly on Monday and are issued on Thursday of that same week.
All T-bills are issued (and traded) at a discount. Noncompetitive tenders are awarded first, but the price they will pay (the lowest accepted price of the competitive tenders) cannot be determined until after the competitive tenders are awarded. |
|
|
Term
A limited partner lends money to the partnership. The limited partner will:
a. Become a general creditor of the partnership
b. Be considered a general partner now
c. Lose his limited liability
d. Be violating his fiduciary responsibility |
|
Definition
A
A limited partner is permitted to lend money to the partnership. He will be considered a general creditor since he was a lender. |
|
|
Term
Which of the following risks for an agency-backed CMO is LEAST important to an investor in a rising interest-rate environment?
a. Prepayment risk
b. Credit risk
c. Interest-rate risk
d. Extension risk |
|
Definition
A
Prepayment risk is associated with a falling interest-rate environment in which mortgage holders refinance or repay their mortgages at a faster rate. The holder of a CMO, therefore, receives a larger portion of the principal earlier than anticipated and is forced to reinvest at lower rates. Many CMOs are created from government agency mortgage-backed securities (MBS), which have a minimal amount of credit risk. Some CMOs are constructed without this backing and, therefore, credit risk is a greater concern. CMOs, as with most fixed-income securities, carry interest-rate risk. Extension risk is the opposite of prepayment risk, where interest rates are rising and the CMO holder receives a smaller portion of her principal back. |
|
|
Term
Which of the following would increase a partner's basis in a limited partnership?
a. Cash distributions
b. Losses
c. A pro-rata portion of a recourse loan
d. Assessments not met by the partner |
|
Definition
C
A partner's basis in a limited partnership represents the maximum loss that the limited partner may sustain in the program. It is increased by income, additional contributions made by the partner, and the portion of a recourse loan for which the partner is responsible. The basis is reduced by cash distributions and losses. Assessments not met by the partner normally result in a dilution of the partner's ownership interest. |
|
|
Term
Rosewood Securities LLC has been accused of buying and selling securities for the purpose of creating artificial trading activity. Which of the following choices BEST describes this activity?
a. Churning
b. Matched orders
c. Capping
d. Stabilization |
|
Definition
B - Matched Orders
A matched order is also known as painting the Tape. It is an illegal activity based on a group of market manipulators buying and/or selling a security among themselves to create ARTIFICIAL TRADING ACTIVITY.
The intention of this activity is to lure unsuspecting investors into trading the stock because of the appearance of unusual trading volume. The manipulators have already taken a position in the stock, and hope to influence the market (illegally) to make their position profitable through this fake heavy trading volume. Churning is a violation in which a salesperson effects a series of transactions in a customer's account that are excessive in size and/or frequency in relation to the size and investment objectives of the account. A salesperson churning an account is normally seeking to maximize her income (in commissions, sales credits or markups) derived from the account. Capping is a situation where a manipulator is attempting to stop a securities price from rising. |
|
|
Term
All of the following documents must be accompanied or preceded by an OCC risk disclosure document, EXCEPT:
A. Options research reports
B. A standardized options worksheet discussing straddles
C. Options advertising that appears in the newspaper
D. Options sales materials discussing projections |
|
Definition
C
Options advertising is a type of retail communication, which must make the offer to send the OCC risk disclosure document upon the customer's request. Options retail communications must be approved by a registered options principal (ROP) prior to use. Options-related retail communications that discuss projections, must be approved by a ROP prior to use and preceded or accompanied by a risk disclosure document. |
|
|
Term
The Federal Reserve Board was given the authority to set margin requirements according to the provisions of the:
A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Securities Investor Protection Act of 1970
D. Investment Company Act of 1940 |
|
Definition
B
The Securities Exchange Act of 1934 gave the Federal Reserve Board the power to set margin requirements. This is done through Regulation T (for broker-dealers) and Regulation U (for banks and lenders other than broker-dealers). |
|
|
Term
When an investor purchases a municipal fund security, she will pay a sales load that is stated in the official statement. Which TWO of the following statements are TRUE regarding an advertisement for this municipal fund security?
I. The minimum sales load should be stated in the ad
II. The maximum sales load should be stated in the ad
III. Sales charges may not be reflected in performance data
IV. Sales charges may be reflected in performance data
A. I and III
B. I and IV
C. II and III
D. II and IV |
|
Definition
D - II & IV
A 529 College Savings Plan is a type of municipal fund security. If sales loads are depicted in municipal fund securities advertising, the maximum amount of the sales charge should be stated. Additionally, sales charges may be reflected in the performance data of the investment and, if they are not, a statement to that effect should be made. |
|
|
Term
Which TWO off the following sources of income would MOST likely be used by a school district to meet its debt service for general obligation bonds that it issued?
I. Income tax
II. Real estate tax
III. Sales tax
IV. Traffic fines
A. I and III
B. I and IV
C. II and III
D. II and IV |
|
Definition
D
General obligation bonds are backed by the full faith, credit, and taxing power of the municipality that issues the bonds. The income to pay debt service on these bonds is derived from taxes and other general revenues. For smaller local governments, such as school districts, it would include primarily real estate taxes (also called property or ad valorem tax). In addition, traffic and other types of local fines may also be used. Income taxes and sales taxes would most likely be used to meet the debt service of larger issuers, such as states and large cities. |
|
|
Term
An investor purchases $25,000 of a mutual fund when the price of the fund is $13.20. In the same year, the investor receives a $400 dividend distribution and a capital gain distribution of $700. Both distributions are reinvested in additional shares at a price of $12.80. If the fund has a current value of $14.50, what is the investor's cost basis using the average cost method?
A. $13.00
B. $13.18
C. $13.50
D. $13.85 |
|
Definition
B - $13.18
To calculate the cost basis using the average cost method, divide the total sum of all investments by the shares owned by the investor. The investor purchased $25,000 of the fund at a price of $13.20. The total number of shares purchased was 1,893.94. He also received a total of $1,100 in distributions, all reinvested in additional shares when the price was $12.80. The number of shares purchased is 85.94. The total amount invested is $26,100. The total number of shares owned is 1,979.88. Therefore, the average cost is $13.18. The current value of the fund is not relevant. |
|
|
Term
A customer purchased on margin 100 shares of ABC stock at 120 and sold short 100 shares of XYZ stock at 100. The customer also wrote an ABC 120 call @ 3 and an XYZ 100 put @ 2. What is the margin requirement for the combined transactions?
A. $10,500
B. $11,000
C. $11,500
D. $22,000 |
|
Definition
B
The FRB margin requirement for the purchase or short sale of stock is 50%. Therefore, the margin requirement for the stock purchase is $6,000 (50% of $12,000) and for the short sale is $5,000 (50% of $10,000). The call is covered since the customer owns the underlying stock and the put is covered since the customer is short the underlying stock. Since there is no margin requirement for a covered call or put, the total margin requirement is $11,000. If the question had asked for the cash deposit, subtract the total premiums received ($500) from the margin requirement of $11,000. |
|
|
Term
A customer has purchased a new municipal issue during the underwriting period. According to MSRB rules, the customer must receive which TWO of the following documents?
I. The final confirmation showing the aggregate price
II. A copy of the notice of sale
III. A copy of the official statement, if prepared
IV. A list of syndicate members
I and III
I and IV
II and III
II and IV |
|
Definition
A - I & III
MSRB rules require that a copy of the official statement be sent to each purchaser of a new issue. A confirmation must be sent on every transaction, whether a new issue or a secondary market trade. A copy of the indenture and a list of the syndicate members do not need to be sent. |
|
|
Term
A customer has purchased a new municipal issue during the underwriting period. According to MSRB rules, the customer must receive which TWO of the following documents?
I. The final confirmation showing the aggregate price
II. A copy of the notice of sale
III. A copy of the official statement, if prepared
IV. A list of syndicate members
I and III
I and IV
II and III
II and IV |
|
Definition
A - I & III
MSRB rules require that a copy of the official statement be sent to each purchaser of a new issue. A confirmation must be sent on every transaction, whether a new issue or a secondary market trade. A copy of the indenture and a list of the syndicate members do not need to be sent. |
|
|
Term
Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being offered by Briana Corporation. The effect of this offering will be:
A. A dilution in the earnings per share
B. An increase in the earnings per share
C. The number of shares outstanding will increase by 500,000
D. The number of shares outstanding will increase by 250,000
I and III only
I and IV only
II and III only
II and IV only |
|
Definition
B
After the offering is completed, there will be 250,000 new shares outstanding (The shares sold by the selling stockholders were already outstanding.) This will result in the earnings per share being diluted because the earnings will now be divided by a greater amount (250,000 shares) of new outstanding stock. |
|
|
Term
The security with the longest expiration date would normally be a:
A. Put
B. Call
C. Warrant
D. Right |
|
Definition
C
A warrant generally has an expiration date longer than a put, call, or right. There are some warrants which never expire. |
|
|
Term
According to MSRB rules, a municipal securities representative is NOT permitted to:
A. Trade securities
B. Supervise a branch office
C. Structure new issues of revenue bonds
D. Work in the syndicate department |
|
Definition
B
Under MSRB rules, any person in a supervisory position must qualify as a principal. |
|
|
Term
A REIT is NOT used for a tax shelter because it does NOT:
A. Allow flow-through of losses
B. Allow flow-through of income
C. Provide limited liability
D. Offer income potential |
|
Definition
A - Allowed flow-through of losses
A REIT allows the flow-through of income, but not losses. Shareholders have limited liability. While a REIT is similar in structure to a mutual fund, it is not defined as an investment company. Also, while it may invest in real estate properties, it is not considered to be a limited partnership. Partnerships can pass through losses. |
|
|
Term
An insider of XYZ Corp. buys company stock in the open market at $63/share. Ten months later, the insider wishes to sell the stock at the current market price of $68/share. Which TWO of the following statements are TRUE regarding this transaction?
I. The sale is subject to the six-month holding period under Rule 144
II. This sale is not subject to the six-month holding period under Rule 144
III. The sale is subject to the volume limitations under Rule 144
IV. The sale is not subject to the volume limitations under Rule 144
A. I and III
B. I and IV
C. II and III
D. II and IV |
|
Definition
C - II AND III
Rule 144 requires that restricted (unregistered) stock be held for six months before it may be resold. Control stock (registered stock purchased by insiders) is not subject to a holding period requirement under Rule 144. Both restricted and control stock are subject to the volume limitations under the rule. |
|
|
Term
Which of the following statements is TRUE about treasury stock?
A. It receives dividends
B. It is treated as a deduction from outstanding shares
C. It has voting power
D. It is part of unauthorized stock |
|
Definition
B
Treasury stock is issued stock that has been repurchased by the corporation and is retired. It is treated as a deduction from the outstanding shares of a corporation and is no longer part of the capitalization of the corporation. It has no voting rights and does not receive dividends. |
|
|
Term
The Bond Buyer's 30-day visible supply includes:
I. Competitive municipal bond issues
II. Negotiated municipal bond issues
III. Treasury bill issues
IV. Corporate bond issues
A. I and II only
B. I and III only
C. II and IV only
D. I, II, III, and IV |
|
Definition
A - I AND II ONLY
The Bond Buyer's 30-day visible supply is an indication used to reflect the amount of new offerings coming to the marketplace in the next 30 days. It carries figures for both competitive and negotiated municipal bond issues and notes maturing in 13 months or more. |
|
|
Term
Which TWO of the following securities will enable an investor to both receive interest income and have a maturity date allowing their principal to be returned in one lump sum?
I. A municipal bond fund containing mostly revenue bonds
II. Municipal bonds that are subject to the alternative minimum tax
III. A closed-end fund containing municipal bonds of one state
IV. A portfolio of municipal bonds, some which have call provisions
A. I and III
B. I and IV
C. II and III
D. II and IV |
|
Definition
D
All of the securities listed will pay interest income to investors. The municipal bond fund and the closed-end fund invest in municipal bonds that pay interest. The funds will then pass through these payments to the holders of these securities, either monthly, quarterly, or semiannually. Only by investing in actual bonds will an investor be able to have her principal returned in one lump sum when the bonds mature. The type of municipal bonds, whether they are callable, or whether they are subject to the AMT, is irrelevant. One of the major differences between investing in actual bonds versus bond funds is that bonds will have a maturity date and bond funds will not mature. If a 20-year bond is purchased, 19 years later it will mature in one year. A 20-year bond fund will always have in its portfolio bonds that mature in approximately 20 years. In order for an investor to receive her principal with a bond fund, the investor is required to sell or redeem her shares of the fund. |
|
|
Term
All of the following choices are characteristics of a Health Savings Account (HSA), EXCEPT:
A. The amount a person may contribute each year is limited
B. It is not open to individuals who are enrolled in their company's health insurance plan
C. The funds may be invested in mutual funds
D. The funds must be used each year and may not be carried over |
|
Definition
D
A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open only to persons who are not enrolled in any type of health plan other than a qualified, high-deductible health plan. Contributions are made in pretax dollars (which are limited under IRS guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. The funds may be invested in mutual funds, although the types of funds may be limited by an HSA trustee (a financial institution). The funds do not need to be used each year and may be carried over to be used in the future. Once you reach age 65, your funds can be withdrawn at any time and are subject only to ordinary income tax. (You avoid the 20% IRS penalty.) However, you may avoid any tax by continuing to use the funds for qualified medical expenses. |
|
|
Term
Which of the following bonds results in the highest real interest rate?
A. A bond yields 8% when inflation is at 3%
B. A bond yields 12% when inflation is at 8%
C. A bond yields 10% when inflation is at 7%
D. A bond yields 6% when inflation is at 4% |
|
Definition
A
The real interest rate, also called the real rate of return, refers to yields adjusted for inflation (yield minus inflation rate). Choice (a) provides the highest real interest rate (8% bond yield minus 3% inflation rate equals 5% real interest rate). |
|
|
Term
What is the maximum amount a customer may withdraw from a Special Memorandum Account?
A. 2 times the SMA
B. 3 times the SMA
C. 25% of the SMA
D. 100% of the SMA |
|
Definition
D - 100% OF SMA
The full amount or 100% of the SMA may be withdrawn. The buying power is 2 times the SMA. |
|
|
Term
A customer is considering an investment in a hedge fund since many of his business associates have been receiving high returns over the last few years. A registered representative may make which of the following statements?
A. Mutual funds are subject to less regulatory oversight than hedge funds
B. Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately
C. Hedge funds often use higher degrees of leverage than mutual funds
D. Hedge funds may be suitable for many customers, whereas mutual funds are generally suitable for sophisticated, wealthy investors only |
|
Definition
C
Mutual funds and hedge funds both pool investors' money to manage assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and often employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors. |
|
|
Term
Prior to being listed on an exchange, which of the following factors must be evaluated?
I. The number of shareholders
II. The dividend payout
III. The earnings record
IV. The current market price
I and III only
III and IV only
I, III, and IV only
I, II, III, and IV |
|
Definition
C
Listing requirements include: a minimum number of round-lot shareholders, a minimum number of shares publicly held, minimum market values, a positive earnings history, and national interest in the stock. The amount of dividends paid or the dividend payout ratio is not a factor. |
|
|
Term
SEC regulations state that a brokerage firm must provide a current financial statement (balance sheet) to:
A. A customer when requested by the customer
B. A noncustomer who requests it
C. Both of the above
D. Neither of the above |
|
Definition
A
SEC regulations states that a brokerage firm must provide a current financial statement (balance sheet with net capital computation) to a customer upon request. The customer has the right to know the financial condition of the company with which she is doing business. |
|
|
Term
Which item of the following information is NOT generally included on an options confirmation?
A. The contra broker
B. The price of the option
C. The month and the strike price of the contract
D. The name of the underlying security |
|
Definition
A
The contrabroker is the broker on the other side of the trade. The contrabroker's name is not generally included on a confirmation. All of the other items are included on an options confirmation. |
|
|
Term
A customer wants preservation of capital and safety of income. Which of the following securities would best meet the customer's objectives?
A. Income bonds
B. Debentures
C. Several municipal bonds rated AA or better
D. One AAA-rated municipal bond |
|
Definition
C
Purchasing several AA- or better-rated municipal bonds with various maturity dates is more advantageous than purchasing just one municipal bond. The investor is diversifying his portfolio. If the investor purchased one bond and it were to default, he would no longer receive interest payments. The market value of the bond would decline considerably, causing a severe loss for the investor. Income bonds and debentures are not as safe as municipal bonds. |
|
|
Term
Emily and her sister Lucy have the following accounts at a brokerage firm.
Emily has a cash account with $420,000 of securities.
Lucy has a margin account with $665,000 of securities and a debit balance of $365,000.
A cash account for Emily and Lucy as JTWROS with $290,000 in securities.
If the brokerage firm were to go bankrupt, SIPC would provide a maximum of:
A. $500,000 coverage for all the accounts combined
B. $1,000,000 coverage for all the accounts combined
C. $1,010,000 coverage for all the accounts combined
D. $1,210,000 coverage for all the accounts combined |
|
Definition
C - $1,010,000
SIPC provides protection of $500,000 for each customer (different account title). Since each account has a different title, each would receive coverage of $500,000 of securities. Emily's cash account would receive $420,000 and the joint account would receive $290,000. SIPC will cover Lucy's current equity in a margin account of $300,000. The total coverage is $1,010,000 ($420,000 + $300,000 + $290,000). |
|
|
Term
Cash dividends received from which of the following securities will be taxed as ordinary income?
A. Preferred stock issued by a bank
B. Common stock issued by an oil company
C. A real estate investment trust
D. Convertible preferred stock issued by a software company |
|
Definition
C
Currently, dividends paid on both common and preferred stock are taxed at a maximum rate of 20% if the stock is held for more than 60 days. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT does not pay corporate income tax if it distributes a minimum percentage of its income. The type of company that issued the shares is not relevant to the tax status of the cash dividend. |
|
|
Term
When a corporation seeks a bank loan, the bank will base its charge to the corporation on the:
A. Prime rate
B. Federal funds rate
C. Discount rate
D. Call rate |
|
Definition
A - PRIME RATE
A corporation pays the prime rate when borrowing from a bank if it is among the bank's best-credit-rated customers. Other corporations pay a higher rate, but it is based on the prime rate. |
|
|
Term
In an underwriting of a new issue by a syndicate, which of the following statements is TRUE?
A. The underwriting spread is larger than the selling concession
B. The selling concession is larger than the underwriting spread
C. The reallowance is larger than the underwriting spread
D. The reallowance is larger than the selling concession |
|
Definition
A
In the underwriting of a new issue, the underwriting spread is larger than the selling concession. The underwriting spread is larger because members of the underwriting syndicate assume the risks of the underwriting. The selling concession given to the selling group is less because the selling group acts in a best-efforts capacity and does not assume the risks involved in a firm-commitment underwriting. A reallowance is compensation given to broker-dealers who are nonmembers of the syndicate or selling group who would like to participate in the underwriting. The reallowance given is less than the amount members of the syndicate or selling group receive. |
|
|
Term
All of the following municipal bond transactions take place in the secondary market, EXCEPT:
A. Submitting an offer to sell bonds to a sinking fund
B. A tax swap
C. Two municipal securities broker-dealers purchasing a block of bonds jointly
D. The placing of a designated order |
|
Definition
D
All of the choices listed take place in the secondary market except the placing of a designated order. A designated order is an order directed to a syndicate manager by an institutional account designating two or more members of the underwriting account to receive credit for that order. This order is placed directly with the syndicate manager during the order period prior to the release of the bonds for secondary trading. |
|
|
Term
If QRS, Inc., makes a new offering not registered with the SEC to accredited investors, this arrangement is called a(n):
A) private placement.
B) Rule 144 offering.
C) secondary offering.
D) intrastate offering. |
|
Definition
A
A private placement, which is exempt from registration with the SEC, is an offering of a new issue to an unlimited number of accredited investors and, for larger offerings, a maximum of 35 nonaccredited investors. |
|
|
Term
If an open-end investment company wishes to change its investment objective, it may only do so with a:
A) unanimous vote of the board of directors.
B) majority vote of the outstanding shares.
C) two-thirds vote of the outstanding shareholders .
D) majority vote of the outstanding shareholders . |
|
Definition
B
The Investment Company Act of 1940 requires the fund to have a clearly defined investment objective. The only action that can be taken to change the investment objective is a majority vote of the outstanding shares
*****(shares vote, not shareholders)******* |
|
|
Term
A broker/dealer selling open-end investment company shares will be required to return its entire selling concession if the principal underwriter has to repurchase those shares from a customer within how many business days of trade date?
A) 15.
B) 60.
C) 30.
D) 7. |
|
Definition
D - 7
Any concession earned by the member selling the shares must be returned to the principal underwriter of the fund if the shares are redeemed within 7 business days of purchase. |
|
|
Term
A municipal bond is purchased in the secondary market at 102½. The bond has 5 years to maturity. Two years later, the bond is sold for 102. The tax consequence to the investor is:
A) a capital gain of $5 per bond.
B) a capital loss of $5 per bond.
C) no capital gain or loss.
D) a capital loss of $20 per bond. |
|
Definition
A
Municipal bonds bought at a premium, either in the new issue or secondary market, must be amortized. The amount of the premium is 2½ points or $25. As the bond has 5 years to maturity, the annual amortization amount is $5 per bond. After 2 years, the bond's basis has been amortized down to 101½. At that point, a sale at 102 generates a capital gain of $5 per bond. |
|
|
Term
A new client holds unregistered securities purchased offshore from a US issuer in an exempt Regulation S transaction. These securities
A) may not be resold in the United States no matter how long they have been held
B) must be held 1 year before they can be resold in the United States
C) must be held 9 months before they can be resold in the United States
D) may be resold in the United States unrestricted |
|
Definition
B - 1 YEAR
Securities offered under Regulation S in an exempt transaction (US issuers offering securities offshore to non-US residents) must be held for 12 months (1 year) before they can be resold in the United States. |
|
|
Term
All of the following will affect the working capital of a corporation EXCEPT:
A) an increase in assets.
B) payment of a cash dividend.
C) a decrease in liabilities.
D) declaration of a cash dividend. |
|
Definition
B
Working capital is defined as current assets minus current liabilities. Payment of a cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged. |
|
|
Term
| In the case of an unsolicited order, a prospectus must be delivered to the purchaser of a unit investment trust: A) between 45 days and 18 months following the initial deposit. B) before the purchase. C) before the month's end. D) with the purchase confirmation. |
|
Definition
D - WITH THE CONFIRMATION A purchaser of newly issued securities must receive a prospectus no later than by receipt of the purchase confirmation. However, any solicitation must be preceded or accompanied by a prospectus.
Think of old boss MIKE from Retro..."If a girl comes over and says 'let me suck your dick', you're not going to say 'Well first, let me introduce you to my parents'".
These people are already interested in the security, run the transaction and send prospectus with the confirmation |
|
|
Term
Current yield on an 8-1/4% Treasury bond at 104.24 is:
A) 7.75%.
B) 7.88%.
C) 7.91%.
D) 8.08%. |
|
Definition
B - 7.88%
Current yield on a bond is computed by dividing the annual interest by the market price. Here, the annual interest is $82.50 and the market price of the bond is $1,047.50. Therefore, $82.50 / $1,047.50 = 7.88%. A quote of 104.24 for a T-bond represents a price of $1,047.50 computed as a percentage of par in 32nds of one bond point as follows; 104.24 is 104% of par = $1,040 and 24/32nds of one bond point ($10) = $7.50. $1040 + $7.50 = $1047.50. |
|
|
Term
The Code of Arbitration Procedure would be mandatory to settle disputes between:
I. a member and a registered clearing corporation.
II. a member and one of its associated persons.
III. an associated person with a statutory discrimination claim against a member.
IV. a member and a client who has signed a predispute arbitration clause.
A) I and II.
B) II, III and IV.
C) II and IV.
D) I, II and IV. |
|
Definition
I, II, AND IV
Disputes between anyone in the industry, including registered clearing corporations, must go to arbitration, with the exception of statutory discrimination claims, which are claims alleging sexual harassment or discrimination on the basis of, among other things, age, sex, or ethnicity. Such claims may be taken to court instead of arbitration. When a client has signed a predispute arbitration agreement, arbitration is mandatory. |
|
|
Term
An affiliate or insider holding unregistered shares can sell under Rule 144:
A) 2 times a year.
B) 4 times a year.
C) 12 times a year.
D) 1 time a year. |
|
Definition
B - 4x/year
Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days, which would allow for as many as four filings per year. |
|
|
Term
The result of dollar cost averaging is to:
A) obtain a lower average price per share than average cost per share.
B) take advantage of a non-fluctuating market.
C) obtain a lower average cost per share than average price per share.
D) take advantage of a bullish market by buying more shares in a rising market. |
|
Definition
C
The result of dollar cost averaging is to obtain a lower average cost per share than the average price per share. This is accomplished by making regular investments of a fixed amount when prices are fluctuating. |
|
|
Term
The Federal Reserve sets which of the following?
I. The reserve requirement
II. The federal funds rate
III. The prime rate
IV. Initial margin requirements for nonexempt securities
A) II and III
B) III and IV
C) I and IV
D) I and II |
|
Definition
I AND IV
The Fed is responsible for setting the reserve requirement, the discount rate, and the initial margin requirement for nonexempt securities. The federal funds rate, charged in bank-to-bank borrowing, is a market rate of interest. While it is heavily influenced by Fed action, it is not set by the Fed. and neither is the prime rate, which is the rate large banks charge their most creditworthy customers for unsecured loans. |
|
|
Term
Programs allowing for the direct pass-through of losses and income to investors include all of the following EXCEPT:
A) new construction real estate direct participation programs.
B) S corporations.
C) oil and gas drilling direct participation programs.
D) REITs. |
|
Definition
D - REITS
REITs allow for the direct pass-through of income but not losses. The other choices are forms of business which allow for pass-through of income and losses. |
|
|
Term
A customer opens a new margin account, and the first trade is the short sale of 100 shares of ABC, at a price of $18 per share. What is the required margin deposit?
A) 1800.
B) 9000.
C) 2000.
D) 900. |
|
Definition
C - $2000
The minimum of $2,000 is never waived for short sale margin requirements. If the short sale calculation is less than $2,000 ($1,800 in this case), the customer is still required to deposit the $2,000 minimum. |
|
|
Term
The current yield of a callable bond selling at a premium is calculated:
A) to its maturity date.
B) as a percentage of its call price.
C) as a percentage of its market value.
D) as a percentage of its par value. |
|
Definition
C
Current yield for any security is always computed on the basis of the current market value. |
|
|
Term
Under the Code of Procedure, the maximum fine for a minor rule violation (MRV) is:
A) 1000.
B) 7500.
C) 2500.
D) 10000. |
|
Definition
C - $2500
According to the Code of Procedure, the maximum fine for a minor rule violation is $2,500. |
|
|
Term
A customer's long margin account has a market value of $60,000, a debit balance of $35,000, and SMA of $5,000. In order to eliminate the restriction, the customer can:
I. deposit $5,000 in cash.
II. borrow $5,000 from the account utilizing the SMA.
III. deposit $5,000 in fully-paid securities.
IV. sell $10,000 of securities in the account.
A) III and IV.
B) I and III.
C) I and IV.
D) I and II. |
|
Definition
C - I AND IV
When equity is between the initial (50% of LMV) requirement and the maintenance requirement (25% of LMV), an account is described as restricted. This account has $25,000 of equity which is $5,000 below the initial requirement. To bring the equity to 50% of the market value, the customer may deposit $5,000 in cash or sell $10,000 of securities. If $10,000 of securities are sold, LMV becomes $50,000, the debit falls to $25,000 and equity is at $25,000, exactly 50% of the LMV. However, if a customer is using securities to eliminate a restriction (either by selling or depositing fully-paid securities), the customer must sell or deposit an amount equal to twice the restriction. |
|
|
Term
Which of the following transactions would NOT be subject to the 5% markup policy?
A) Your firm agrees to do an agency cross-transaction between 2 of your clients. Each client has been charged a commission.
B) A client enters an order to purchase 1 share of a stock to be put in the name of her grandchild. You charge the client the minimum commission for your firm ($45) even though the stock is currently trading at $26 per share.
C) Your client enters trades to purchase 2 different mutual funds in the same fund family. The combined purchases do not qualify for any breakpoints. The client is charged a sales charge of 6.5%.
D) A client sells shares of an OTC stock and uses the proceeds to purchase shares from your firm's inventory account. |
|
Definition
C
Transactions in securities that are sold by a prospectus are not subject to the 5% markup policy. A mutual fund will disclose its cost to the client in the prospectus and is therefore not subject to the rule. Five percent is a guideline, and markups can exceed it. |
|
|
Term
Which of the following is TRUE of taxation of CMO interest?
A) Subject to federal, state, and local taxes.
B) Taxed only on the state level.
C) Exempt from all taxation.
D) Taxed only on the federal level. |
|
Definition
A - FEDERAL, STATE, AND LOCAL
Interest earned on all mortgage-backed securities is fully taxable. |
|
|
Term
Progressive taxes would include:
I personal income tax.
II. gift taxes.
III. estate taxes.
IV. excise taxes.
A) I and II.
B) I, II and III.
C) I and III.
D) II, III and IV. |
|
Definition
B - I, II, AND III
Progressive taxes are those taxes where the rate of taxation increases as the dollars being taxed increase. Personal income tax, while not as progressive as it was prior to the 1986 reform, is still considered a progressive tax since the highest tax rate is levied against the highest earnings. Gift taxes and estate taxes are highly progressive, but excise taxes, such as fuel tax and transportation tax, are a fixed rate and therefore would not be considered progressive. |
|
|
Term
The POP for a mutual fund as quoted in the financial press reflects:
A) the average sales charge for the preceding 3 months.
B) the minimum sales charge the fund distributor collects.
C) the maximum sales charge the fund distributor collects.
D) no sales charge because the offering price depends on the quantity purchased. |
|
Definition
C
The public offering price for a quoted mutual fund includes the maximum sales charge the fund distributor can assess. |
|
|
Term
An investment adviser representative may describe dollar cost averaging to a customer as:
A) a program for investing that will ensure profits even in a declining market.
B) a means of purchasing more shares when share prices are high.
C) a form of a mutual fund withdrawal plan.
D) a funding technique that will cause the average cost per share to be less than the average price per share. |
|
Definition
D
Dollar cost averaging is beneficial to the client because it achieves an average cost per share which is less than the average price per share over time. Using a fixed dollar amount each investment period it enables the investor to purchase more shares when prices are lower and fewer shares when prices are higher. While dollar cost averaging does not ensure profits in any market, nor does it ensure against losses, it is an economical and convenient method for acquiring shares. |
|
|
Term
Under the intrastate offering rule (Rule 147), when may a resident purchaser of securities resell them to a nonresident?
A) Three months after the first sale made in that state.
B) Six months after the last sale made in that state.
C) None of these.
D) Nine months from the end of the distribution. |
|
Definition
D - 9 MONTHS
In an intrastate offering, a purchaser of the issue may not sell the securities to a resident of another state for at least nine months from the end of the distribution. |
|
|
Term
Which items would change if a company buys equipment for cash?
I. The working capital.
II. The total assets.
III. The total liabilities.
IV. The shareholders' equity.
A) I and II.
B) II and IV.
C) I only.
D) IV only. |
|
Definition
I only
The general balance sheet formula is assets = liabilities + shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets since it is an exchange of one asset (cash) for another asset of equal value (equipment). Since no loan was needed, it does not affect total liabilities, nor does it affect equity. |
|
|
Term
A customer has a margin account which shows a market value of $190,000 and a debit balance of $90,000. In addition, the account has SMA of $5,000. The long market value at maintenance is:
A) 150000.
B) 115000.
C) 120000.
D) 95000. |
|
Definition
- $120,000
Long market value at maintenance is the point to where an account must fall (in market value) to reach minimum maintenance (25% of market value). To compute, divide the debit balance by .75 ($90,000 / .75 = $120,000). If the market value were to fall to $120,000, the account would look like this: $120,000 − $90,000 = $30,000 (25%) (MV − DB = EQ). |
|
|
Term
If a customer has a long-margin account with a market value of $12,000, a debit balance of $8,000 and SMA of $2,000, how much can the customer withdraw from the account?
A) 2000.
B) 1500.
C) 0.
D) 1000. |
|
Definition
D - $1,000
SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. In this account, maintenance equity is $3,000 (25% of $12,000) and the current equity in the account is $4,000 ($12,000 MV − $8,000 DB). Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000. |
|
|
Term
The smallest component of a corporate underwriting spread is usually the:
A) takedown.
B) manager's fee.
C) underwriter's fee.
D) selling concession. |
|
Definition
B - MANAGER'S FEE
The syndicate manager's fee is typically the smallest percentage of the underwriting spread. |
|
|
Term
All of the following would be considered when evaluating a municipal revenue bond's creditworthiness EXCEPT:
A) competing facilities.
B) management expense.
C) collection ratio.
D) coverage ratio. |
|
Definition
C - COLLECTION RATIO
The collection ratio = the percentage of property taxes that are actually collected.
This would be relevant in evaluating GO bonds, which are backed by the taxing authority of the issuer. Revenue bonds, however, are backed by user fees, not taxes. |
|
|
Term
Which of the following increases SMA?
A) Decline in market value of long positions.
B) Purchase of margin securities.
C) Withdrawal of margin securities.
D) Receipt of a cash dividend. |
|
Definition
D
Cash dividends are credited to SMA dollar for dollar. |
|
|
Term
Pursuant to Federal Reserve Board Regulation T, cash dividends received in a customer's margin account:
A) can be withdrawn at any time within the first 30 days of receipt.
B) can only be withdrawn if the account is not restricted.
C) must be removed within 30 days of receipt.
D) cannot be removed. |
|
Definition
C - within 30 days of receipt
If a customer wishes to withdraw cash dividends, the customer must do so within 30 days of receipt. Otherwise, they become a permanent reduction of the debit balance. The customer does not lose the dividend; rather, the dividend amount is now reflected as increased equity in the account. As the debit balance falls, equity in the account goes up dollar for dollar. |
|
|
Term
As an initial transaction in a margin account, a customer sells short 1,000 shares of a capital market stock at $2 per share. If Regulation T is 50%, how much money will the customer be required to deposit?
A) 1000.
B) 2500.
C) 2000.
D) 3000. |
|
Definition
B - $2500
The industry requirement to short stocks below $5 per share is 100% of market value or $2.50 per share (whichever is greater). |
|
|
Term
A customer has $12,000 of capital gains, $15,000 of capital losses, and $50,000 adjusted gross income. How much unused loss is carried forward to the following tax year?
A) $0.
B) $15,000.
C) $3,000.
D) $12,000. |
|
Definition
A- $0
After netting capital gain and losses, the customer has a net capital loss of $3,000. Since $3,000 of net losses can be deducted from income in any single tax year, there is no carry forward. |
|
|
Term
In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is
A) 5600
B) 2000
C) 5400
D) 2400 |
|
Definition
A - $5600
The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000, therefore the credit balance is $5,600 ($3,600 + $2,000 = $5,600). |
|
|
Term
Which of the following statements describe the conduit theory of taxation?
I. A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income.
II. Earnings distributed by a regulated investment company are taxed three times.
III. Dividends and interest are passed through to the investor without the fund being taxed.
IV. Dividends and interest accumulate tax free to the shareholder.
A) II and III.
B) I and IV.
C) I and III.
D) II and IV. |
|
Definition
I and III
Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder. |
|
|
Term
A customer's long margin account contains the following securities.
100 shares of DEF, CMV $40 per share
200 shares of AMF, CMV $50 per share
100 shares of KLP, CMV $80 per share
The current debit balance in the account is $10,800. If each of the securities held in the account were to appreciate by $5 per share, the equity in the account would be:
A) 11200.
B) 12700.
C) 13200.
D) 8200. |
|
Definition
B - $13,200
Before the $5 increase the total long market value in the account is $22,000 and therefore, the equity is $11,200. ($22,000 - $10,800 = $11,200) If each of the 400 shares in the account increases by $5, which represents an increase of $2,000 in long market value, the equity will increase by the same amount. After the increase the long market value is $24,000 and the equity is $13,200 ($24,000 - $10,800 = $13,200). |
|
|
Term
Which of the following exemption provisions of the Act of 1933 may NOT be used for an initial offering of securities?
A) Regulation A.
B) Rule 144.
C) Rule 147.
D) Regulation D. |
|
Definition
B
Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities. |
|
|
Term
The call premium on a municipal bond trading above par is best described as the difference between:
A) the amortized premium and the annual interest.
B) the market price and the call price.
C) par and the call price.
D) the market price and par. |
|
Definition
C
The call premium represents the difference between the call price and par. The farther away a call date, the lower the call premium. |
|
|
Term
Which of the following events will cause the special memorandum account to decrease?
An increase in the SMV.
A decrease in the LMV.
The purchase of long securities on margin.
The short sale of securities.
A) III and IV.
B) I and II.
C) I and III.
D) II and IV. |
|
Definition
A) III and IV
SMA, once created, does not go away until used. Using the SMA to buy more securities or sell more short will decrease the amount of SMA. |
|
|
Term
All of the following will cause a change in SMA in a long account EXCEPT:
A) sale of stock.
B) increase in market value.
C) purchase of stock.
D) decrease in market value. |
|
Definition
D
Once SMA is created in a long account, it is not reduced by a decline in market value. The SMA may still be taken out, provided it will not pull the account below the maintenance level. An increase in market value or a sale of stock increases SMA. The purchase of stock decreases available SMA. |
|
|
Term
A convertible bond has a conversion price of $40 per share. If the market value of the bond rises to a 12½ point premium over par, which of the following are TRUE?
Conversion ratio is 25:1.
Conversion ratio is 28:1.
Parity price of the common stock is $42.
Parity price of the common stock is $45.
A) I and IV.
B) I and III.
C) II and III.
D) II and IV. |
|
Definition
I and IV
The conversion ratio is computed by dividing par value by the conversion price ($1,000 par / $40 = 25). Parity price of the common stock is computed by dividing the market price of the convertible bond by the conversion ratio ($1,125 / 25 = $45). Or, 112½% × $40 = $45. |
|
|
Term
If a member wishes to appeal an adverse decision in a Code of Procedure hearing, the member first must appeal to the National Adjudicatory Council within how many days of the decision date?
A) 45.
B) 30.
C) 40.
D) 25 |
|
Definition
D - 25
If either side is displeased with a Code of Procedure decision, an appeal must be made within 25 days of the decision date. |
|
|
Term
A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. Which of the following statements are TRUE?
I. For gift-tax purposes, the value of the gift is $3,000.
II. For gift-tax purposes, the value of the gift is $7,000.
III. The son's cost basis on the stock is $3,000.
IV. The son's cost basis on the stock is $7,000.
A) II and IV.
B) I and III.
C) II and III.
D) I and IV. |
|
Definition
C - II and III
When making a gift of securities, the market value at date of gift is used to determine if any gift taxes are due. However, when making a noncharitable gift of securities, the donor's cost basis is passed to the recipient. |
|
|
Term
Which of the following balance sheet entries may be affected when a company pays a cash dividend?
Shareholders' equity.
Total assets.
Total liabilities.
Working capital.
A) II and III.
B) I and IV.
C) I and III.
D) II and IV. |
|
Definition
II and III
When a company pays a cash dividend, the dividends payable (a current liability) and the cash account (current assets) are reduced by the same amount. Because liabilities and assets are each reduced by the same amount, working capital is not affected. Shareholders' equity, or net worth, is also not affected when the dividend is paid. |
|
|
Term
A convertible bond callable at 101 is trading at 105. The bond is a 4% bond convertible at $25. The common stock is trading at $27. If an investor bought the bond and converted, his profit would be:
A) $20.
B) $40.
C) $75.
D) $30. |
|
Definition
D - $30
First, calculate the number of shares each bond will convert to: $1,000 (par) / $25 per share = 40 shares per bond. With market value at 105, each bond costs $1,050. What is the stock parity price? $1,050 / 40 shares = $26.25 per share stock parity price. CMV of the stock minus stock parity price equals profit (or loss). $27.00 − $26.25 = $.75 per share × 40 shares = $30. |
|
|
Term
If a corporation begins a nonqualified retirement plan, which of the following statements is TRUE?
A) Employee contributions are tax deductible.
B) Employer contributions are tax deductible.
C) The employer must abide by all ERISA requirements.
D) Employee contributions grow tax deferred if they are invested in an annuity. |
|
Definition
D
Earnings accumulate tax deferred if the plan is funded by an investment vehicle that offers tax deferral, such as an annuity contract. Tax has been paid on all amounts the employees and the employer contribute to the plan. Nonqualified plans need not comply with all ERISA requirements. |
|
|
Term
If your 60-year-old customer purchases a nonqualified variable annuity and withdraws some of her funds before the contract is annuitized, what are the consequences of this action?
A) Capital gains tax on earnings exceeding basis.
B) Ordinary income tax on earnings exceeding basis.
C) 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis.
D) 10% penalty plus payment of ordinary income tax on all funds withdrawn. |
|
Definition
B
Distributions from a nonqualified plan represent both a return of the original investment made in the plan with after-tax dollars (a nontaxable return of capital) and the income from that investment. The income was deferred from tax over the plan's life, so it is taxable as ordinary income once distributed. A 10% penalty applies only if distributions begin before age 59-½. |
|
|
Term
ABC Corporation is offering 500,000 units to the public at $5 per unit. Each unit consists of 2 shares of ABC preferred stock and 1 perpetual warrant for ½ common share of ABC exercisable at $5. How much capital was raised by the initial sale of the issue?
A) $5 million.
B) $1.25 million.
C) $2.5 million.
D) $7.5 million. |
|
Definition
C - $2.5m
Since the issuing corporation is offering 500,000 units to the public at $5 per unit, the total amount of capital to be raised by this sale will be $2.5 million (500,000 units x $5 per unit). |
|
|
Term
The MSRB is authorized under the Securities Exchange Act of 1934 to make rules about all of the following EXCEPT:
A) municipal dealer recordkeeping.
B) information provided by municipal issuers.
C) the dissemination of price and yield quotes by municipal dealers.
D) dealers obtaining fair and reasonable prices for customers. |
|
Definition
B
The MSRB governs the practices of underwriting and trading municipal bonds. It does not govern municipal issuers. |
|
|
Term
Your broker/dealer has received a written complaint from a customer. FINRA rules require that a record of the written complaint be kept on file by the BD for how long?
A) Until the complaint is resolved
B) As long as the broker/dealer is in existence or a continues to be a FINRA member firm
C) 3 years
D) 4 years |
|
Definition
D - 4 years
FINRA rules require that records of written complaints be preserved or kept on file for a period of 4 years. |
|
|
Term
Interest income from all of the following are exempt from state and local taxation EXCEPT:
A) Treasury bonds.
B) Treasury bills.
C) FNMA mortgage-backed issues.
D) Series EE savings bonds. |
|
Definition
D - Series EE savings bonds
As a general rule, the interest income from U.S. government and agency securities is subject to federal taxation only; it is generally exempt from state and local taxation. However, the interest income from mortgage-backed securities is fully taxable. |
|
|
Term
In a restricted account, a customer bought $5,000 worth of securities and sold $7,000 worth of securities on the same day. The customer may:
A) withdraw $2,000.
B) be required to deposit $2,500 on the purchase because his account is restricted.
C) withdraw $7,000, the proceeds of the sale.
D) withdraw $1,000. |
|
Definition
| The customer may withdraw 50% of the net sale proceeds ($1,000). Keep in mind that withdrawal of the sale proceeds in a restricted account is restricted to 50%. In this case, there is a same day substitution regarding $5,000 of the sale because of the $5,000 purchase. The net sale proceeds are $2,000, of which he may only withdraw $1,000 because of the restricted account rule. |
|
|
Term
A general partner may do all of the following EXCEPT:
A) make general management decisions regarding the partnership.
B) sell property to the limited partnership.
C) act as an agent for the partnership in managing partnership assets.
D) borrow money from the partnership. |
|
Definition
D
All these situations offer the potential for conflicts of interest. However, the general partner is not forbidden by law to engage in any of these acts, except for borrowing money-the general partner may never borrow money from the partnership. |
|
|
Term
Under FINRA rules, a registered representative must complete the regulatory element of continuing education within how many days of a registration anniversary date?
A) 60.
B) 30.
C) 90.
D) 120. |
|
Definition
D - 120
The regulatory element requires that all registered persons complete a computer-based training session within 120 days of their second registration anniversary and every third anniversary thereafter. |
|
|
Term
Your customer owns a leveraged ETF having a performance goal of 200% of the underlying Index. When purchased two weeks ago the ETF was priced at 50. If the index was up 10% the first week and down 20% the second week, what is the value of the ETF today if it performed as it was intended to?
A) 36
B) 40
C) 44
D) 45 |
|
Definition
A - 36
Priced at 50 when purchased, after the first weeks 10% increase in the index the 2X leveraged ETF would be up 20% (20% X 50 = 10 point increase) to 60. After the second week 20% decline in the index the 2X leveraged ETF would be down 40% (40% X 60 = 24 point decrease) to 36. |
|
|
Term
Which statements are TRUE regarding contribution limits?
I. The contribution limit to a Coverdell ESA can be reduced or eliminated for high-income individuals.
II. The contribution limit to a Coverdell ESA cannot be reduced or eliminated for high-income individuals.
III. The contribution limit to a Section 529 plan can be reduced or eliminated for high-income individuals.
IV. The contribution limit to a Section 529 plan cannot be reduced or eliminated for high-income individuals.
A) II and IV.
B) I and III.
C) II and III.
D) I and IV. |
|
Definition
I and IV
The after-tax contribution limit of $2,000 can be reduced or eliminated for high-income taxpayers. However, there are no income limitations placed on individuals opening Section 529 plans. |
|
|
Term
A confirmation of each customer trade must be given or sent:
A) on the trade date.
B) before the trade date.
C) on or before the settlement date.
D) before the settlement date. |
|
Definition
C
A confirmation must be sent to a customer on or before the completion of the transaction (the settlement date). |
|
|
Term
All of the following must be part of a registration statement EXCEPT:
A) a prospectus.
B) identification of investors who own 5% or more of the company.
C) a statement as to whether the company is involved in any legal proceedings.
D) the signatures of CEO, CFO, CAO, and majority of the board. |
|
Definition
B
The registration statement must identify investors who own 10% or more of the company. |
|
|
Term
One of your customers notices that the short interest on the NYSE is high. When she asks you for an interpretation, you should tell her that this signals a:
A) period of volatility in the market.
B) bullish market.
C) period of stability in the market.
D) bearish market. |
|
Definition
| B - bullish market Even though short interest represents the number of shares sold short, many investors consider it a bullish indicator when this number is high. Each share that has been sold short must be replaced (covered) at some point. To replace the stock shorted, an investor must go into the market to buy that stock. When all of those short sellers have to buy back stock they shorted, it puts upward pressure on the prices of those stocks. |
|
|
Term
Under Keogh plan provisions, a full-time employee is defined as one working at least how many hours per year?
A) 100.
B) 500.
C) 1000.
D) 2000. |
|
Definition
C - 1000
Full time employment is defined as 1,000 hours or more per year, regardless of the number of days, weeks, or months worked. |
|
|
Term
Priority and precedence rules of bids and offers manage trading activity on the:
A) NYSE.
B) OTC market.
C) third market.
D) NYSE and the OTC. |
|
Definition
A - NYSE
The auction rules of priority, precedence, and parity allow for the efficient execution of orders when several bids or offers are made at the same price at a given time on the NYSE floor. |
|
|
Term
Your firm is bidding on a new general obligation bond issue. As the issuer weighs and evaluates the competitive bids, what factor will be most important in deciding who will be awarded the winning bid?
A) Scale.
B) Concession.
C) Takedown.
D) Net interest cost. |
|
Definition
D - Net interest cost
Net interest cost measures an issuer's overall cost of borrowing for a particular bond issue. It is, therefore, the most important item an issuer considers when evaluating competing bids. |
|
|
Term
Revenue bond rate covenants require the user fees to be high enough to cover all of the following obligations of the issuing authority EXCEPT:
A) the operations and maintenance.
B) the debt service.
C) the debt service reserve fund.
D) the optional call provisions. |
|
Definition
D - optional call provisions
Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require enough to be collected to cover a call on the bonds. |
|
|
Term
The longest initial maturity for U.S. T-bills is:
A) 26 weeks.
B) 13 weeks.
C) 2 years.
D) 39 weeks. |
|
Definition
A - 26 weeks
Maximum initial maturity for T-bills is subject to change. Though T-bills have been issued in 1 yr (52 weeks) maturities, historically the longest initial maturity of T-bills has been 6 months (26 weeks); the shortest initial maturity is 4 weeks. |
|
|
Term
Which statements are TRUE regarding the purchase of new equity issues by restricted persons?
I. An investment club is permitted to buy a new equity issue at the POP.
II. An investment club is not permitted to buy a new equity issue at the POP.
III. An investment club that has a registered representative as a member is permitted to buy a new equity issue at the POP.
IV. An investment club that has a registered representative as a member is not permitted to buy a new equity issue at the POP.
A) II and IV.
B) I and IV.
C) I and III.
D) II and III. |
|
Definition
B - I and IV
As long as an investment club has no restricted persons as members, they may purchase new equity issues. A registered representative is a restricted person regarding the purchase of new equity issues. |
|
|
Term
SEC regulation SHO mandates a locate requirement for short sales that is applicable to
I. corporate bonds.
II. NYSE issues.
III. Nasdaq securities.
IV. Municipal bonds.
A) II and IV.
B) I and III.
C) I and IV.
D) II and III. |
|
Definition
D - II and III
This regulation mandates a locate requirement: before the short sale of any equity security, firms must locate the securities for borrowing to ensure that delivery will be made on settlement date. |
|
|
Term
Amortization of a municipal bond premium does which of the following?
I. Increases cost basis.
II. Decreases cost basis.
III. Increases reported interest income.
IV. Decreases reported interest income.
A) II and IV.
B) II and III.
C) I and III.
D) I and IV. |
|
Definition
A - II and IV
Tax law requires municipal bond premiums to be amortized. The effect of amortization is to decrease reported interest income and cost basis. If held to maturity, the cost basis will have been amortized down to par. Therefore, at maturity, there is no reported capital loss. |
|
|
Term
A customer buys 1 XYZ Aug 60 call at 4 and 1 XYZ Aug 60 put at 2 when XYZ is at 61.25. If the stock rises to 68 and the customer lets the put expire and closes out the call at intrinsic value, the result is a:
A) loss of $200.
B) loss of $600.
C) gain of $600.
D) gain of $200. |
|
Definition
D - gain of $200
The customer has established a long straddle. To determine profit or loss, compute the breakeven points by both adding and subtracting the combined premiums (6 points) from strike (the breakeven points are 54 and 66). Because the customer profits if the stock moves outside these points, at 68, the customer has a 2-point ($200) gain. |
|
|
Term
If an investment representative hosts an investment seminar and intends to discuss general investment concepts and a specific mutual fund for which he has performance charts, which of the following are TRUE?
I. He may discuss the investment returns of the mutual fund in general, provided he does not use a specific time frame.
II. He may discuss the investment returns of the mutual fund using a specific time frame.
III. He must disclose all material facts regarding the mutual fund to the audience.
IV. He may emphasize the positive aspects of the mutual fund and refer prospective investors to the prospectus for further details.
A) II and IV.
B) II and III.
C) I and IV.
D) I and III. |
|
Definition
B - II and III
He may discuss the investment returns of the mutual fund as long as he uses a specific time frame. When discussing an investment, he must disclose all material facts pertaining to the investment, both negative and positive. |
|
|
Term
The Trust Indenture Act of 1939 covers all of the following securities transactions EXCEPT:
A) a sale of an equipment trust bond issue worth $6 million.
B) a corporate bond issue worth $10 million sold interstate.
C) a sale of an issue of $5 billion worth of Treasury bonds maturing in 2011.
D) a public issue of debentures worth $5.5 million sold by a single member firm throughout the United States. |
|
Definition
C
The Trust Indenture Act of 1939 requires all corporate debt issues of $5 million or more sold interstate to have a trust indenture; U.S. governments are exempt. |
|
|
Term
An investor acquires limited partner status in a direct participation program when:
A) the certificate of limited partnership is filed in its home state.
B) his money is received by the general partner.
C) he submits a signed copy of the subscription agreement.
D) he and the general partner have both signed the subscription agreement. |
|
Definition
D
The investor must sign a copy of the subscription agreement, but he is not considered a limited partner until the agreement is also signed by the general partner indicating acceptance of the limited partner. |
|
|
Term
All of the following information must be on an order ticket EXCEPT:
A) number of shares.
B) stock symbol.
C) time stamp.
D) price of a market order. |
|
Definition
D
Price would not be included on a ticket for a market order, but it would be on the ticket for a limit, stop, or stop limit order. |
|
|
Term
Variable rate municipal bonds are subject to all of the following risks EXCEPT:
A) market.
B) default.
C) interest rate.
D) liquidity. |
|
Definition
C - interest rate
A variable rate bond is one whose coupon is adjusted periodically (semiannually or annually) to reflect current interest rates. Therefore, if rates rise, forcing prices down, the coupon on a variable rate bond will be adjusted upward, thereby tending to keep the bond's price at or near par. Therefore, no interest rate risk is associated with these bonds. However, if rates fall, the coupon will be adjusted downward, keeping the bond's price at or around par. Normally, a fall in rates will force prices up, but not with variable rate bonds. |
|
|
Term
A member firm broker/dealer wishing to go public may sell a new equity issue of its own securities to all of the following EXCEPT:
A) employees of other full-service member firms.
B) owners, officers, and employees of the firm.
C) family members of owners, officers, and employees of the firm.
D) public customers. |
|
Definition
A
Rules regarding restricted persons generally prohibit member firms from selling new issue securities to employees of member firms including their own. However, when member firms sell their own securities, rules regarding restricted persons do not apply to the issuer's own employees but still apply to the employees of other full-service member firms. |
|
|
Term
The Fed is making purchases in the open market. What are the effects of this action?
The money supply will become tighter.
The federal funds rate is likely to go down.
Bank reserves are likely to decrease.
Bond prices are likely to rise.
A) I and IV.
B) II and IV.
C) II and III.
D) I and III. |
|
Definition
B - II and IV
When the Federal Reserve Board purchases securities in the open market, money flows into the economy. Because there is more money available, interest rates such as the federal funds rate are likely to fall. When interest rates fall, bond prices rise. |
|
|
Term
A FINRA member broker/dealer trading in shares of an open-end investment company may NOT buy shares of the fund:
A) for the firm's own investment purposes.
B) at a discount from the public offering price.
C) for the purpose of resale at a later date.
D) to cover existing orders. |
|
Definition
C
For the purpose of resale at a later date. A broker/dealer may buy shares only to fulfill existing orders or for its own investment account, not for inventory. |
|
|
Term
If LEAPS options positions are maintained for more than 12 months, which of the following statements are TRUE?
The LEAPS writer's gains are taxed as short-term gains.
The LEAPS writer's gains are taxed as long-term gains.
The LEAPS buyer's gains are taxed as short-term gains.
The LEAPS buyer's gains are taxed as long-term gains.
A) II and IV.
B) II and III.
C) I and III.
D) I and IV. |
|
Definition
D - I and IV
The LEAPS writer's premium is taxed as a short-term gain. The LEAPS buyer took a position for longer than 12 months, so any profits are considered long-term capital gains. The writer's gain is short term because by opening with a sale, a holding period is never established. |
|
|
Term
A customer seeks a significant long-term investment in the Ajax fund, a growth-oriented mutual fund. To take advantage of breakpoints applicable to large investments, the customer should purchase:
A) Class A shares.
B) Class B shares.
C) Class C shares.
D) Class D shares. |
|
Definition
A - Class A shares
For initial purchases, breakpoints are only available if the customer purchases Class A shares, which are sold with a front-end load deducted from the initial investment. A substantial purchase can often reduce the sales charge to zero. Class-B and Class-C shares are sold with annual 12b-1 fees as well as a contingent deferred sales charge. Class D shares are sold with a level sales load plus a redemption fee. |
|
|
Term
If a customer wishes to change a day order to a GTC order in the middle of the day, the registered representative should:
A) enter a change notice immediately.
B) allow the day order to expire at the end of the day and put in the GTC order before the next day's opening.
C) enter the new order as GTC and immediately cancel the day order.
D) enter the new GTC order immediately and do nothing about the day order. |
|
Definition
B
The GTC order is treated as a new order. The registered representative should wait until the close of trading so as not to lose the time priority of the original order that day. |
|
|
Term
The reoffering yield on a new municipal bond issue is the:
A) tax-equivalent yield of the new issue.
B) interest rate minus any premiums that underwriters are willing to pay.
C) coupon rate on the new issue.
D) yield at which the bonds are offered to the public. |
|
Definition
D - yield at which the bonds are offered to the public
In a competitive bidding situation, each underwriter submits a sealed written bid. Once the bid has been awarded, the bonds are repriced to give the underwriters a profit when selling them to the public. The yield at which the bonds are sold is called the reoffering yield. |
|
|
Term
A customer is long 100 XYZ currently trading at $40 per share. To generate income, the customer writes 2 XYZ Aug 40 calls at 4 for a maximum loss potential of:
A) 4000.
B) unlimited.
C) 3200.
D) 3600. |
|
Definition
B - unlimited (2 CALLS, only ONE COVERED)
This is an example of ratio writing where a customer writes more calls than he has stock to cover. Because only one of the calls is covered, the other is uncovered and loss potential is unlimited. |
|
|
Term
Which of the following would make an employee ineligible to participate in a company's qualified retirement plan?
A) He works only 1,200 hours a year for the company.
B) He has been with the company for only 2 years.
C) He is only 20 years old.
D) He is not a member of the company's management team. |
|
Definition
C - He is only 20 years old
Under the Employee Retirement Income Security Act, anyone over the age of 21, management or not, who has been with the company for at least 1 year, and who works 1,000 or more hours per year for the company, must be allowed to participate in the company's qualified plan. |
|
|
Term
All of the following will affect SMA in a short account EXCEPT:
A) a decline in CMV.
B) the sale of securities.
C) the purchase of securities.
D) appreciation of CMV. |
|
Definition
D - appreciation of CMV
In a short account, the customer benefits if the CMV falls. If the CMV is falling, the equity is increasing, thus increasing SMA. If the CMV is rising, the equity is falling, with no effect on SMA. |
|
|
Term
An investor who has purchased a nonqualified variable annuity has the right to:
vote on proposed changes in investment policy.
approve changes in the plan portfolio.
vote for the investment adviser.
withdraw funds without any tax consequences.
A) II and III.
B) II and IV.
C) I and IV.
D) I and III. |
|
Definition
D - I and III
Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. |
|
|
Term
If a customer's margin account shows a long market value of $6,000 and a debit balance of $5,000, the maintenance margin call will be for:
A) 3000.
B) 2000.
C) 500.
D) 1000. |
|
Definition
C - 500
The account equity is $1,000 which is below the minimum maintenance requirements of 25% of market value. The maintenance call will be an amount necessary to bring the account back to minimum, which is $1,500 (25% × $6,000), therefore, the call will be for $500. |
|
|
Term
The Act of 1933 applies to all of the following EXCEPT:
A) prospectus preparation.
B) registration of new issues .
C) full and fair disclosure.
D) regulation of insider trading. |
|
Definition
D - regulation of insider trading
The regulation of insider trading is covered under the Act of 1934. The Act of 1933 deals with new issues and related disclosures. |
|
|
Term
Your broker/dealer acts as a prime broker for ABC fund. In this arrangement, your broker/dealer is likely to be providing which of the following services?
Execution of all transactions for the fund portfolio
Clearing services
Lending for trades done on margin
Ensuring that all exchange-trading rules are complied by
A) I and III
B) II and III
C) II and IV
D) I and IV |
|
Definition
B - II and III
The prime broker would supply clearing services, lending services for marginable transaction, as well as back office support including cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker/dealers. |
|
|
Term
ABC corporation trading at $80 per share has just bid $50 per share for XYZ corporation, currently trading at $40 per share in a hostile takeover attempt. The most common risk or takeover arbitrage strategy would be to
A) there can never be an arbitrage opportunity in a hostile takeover scenario
B) buy shares of the aggressor company (ABC)
C) sell shares of the target company (XYZ)
D) buy shares of the target company (XYZ) and short shares of the aggressor (ABC) |
|
Definition
D
The most common form of risk or takeover arbitrage is to purchase the shares of the target company and short the shares of the aggressor, believing that the potential acquisition will raise the target company's share price and decrease the share price of the aggressor. |
|
|
Term
A shelf registration statement is good for two years, but once effective with the SEC, it allows shares to be sold over a maximum period of:
A) 90 days.
B) 3 years.
C) 30 days.
D) 1 year. |
|
Definition
B - 3 years
Shelf offerings provide an issuer with the flexibility to raise money as needed throughout a 3-year period. |
|
|
