Term
Which TWO of the following investors would NOT be permitted to purchase shares of an IPO of KMF?
I. An attorney involved in the new issue of KMF
II. An investment company registered under the Act of 1940 that has some restricted persons as shareholders
III. A portfolio manager of an investment company buying for his personal account
IV. The general account of an insurance company
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
A - I and III
Restricted persons include finders and fiduciaries (such as attorneys and accountants) involved in the new issue as well as portfolio managers who buy and sell securities on behalf of institutional investors. |
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Term
The Dow Theory states that a major trend is confirmed when which of the following indicators reach new highs or lows?
a. The S&P 500 Index and the NYSE Composite Average
b. The Dow Jones Industrial Average and the Dow Jones Transportation Average
c. The Dow Jones Industrial Average and the Dow Jones Utility Average
d. The Dow Jones Composite and the NYSE Composite Average |
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Definition
B
The Dow Theory holds that a confirmation of a bullish or bearish trend is made when the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction and reach new highs or new lows. |
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Term
A registered representative sends an electronic communication to 75 of her existing customers, explaining that account statements are now available online. Which TWO of the following statements are TRUE?
I. This is considered correspondence
II. This is considered a retail communication
III. This activity requires principal approval prior to use
IV. This activity should be reviewed
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
D - II and IV
If the retail communication does not make a recommendation, or promote a product or service, prior principal approval is not required.
FINRA does not consider announcing the availability of online account statements as promoting a product or service. This activity should, however, be reviewed and supervised by the broker-dealer. |
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Term
A corporation declares a 2-for-1 stock split payable on November 30 to holders of record on November 1. The ex-date is December 1. The first day that the stock will trade without a due bill attached is:
a. October 28
b. November 29
c. November 30
d. December 1 |
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Definition
D - December 1
The first day that the purchaser is not entitled to the additional shares is the ex-date, and this is the first day the stock will not trade with a due bill. |
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Term
Which TWO of the following new issues may be purchased by an employee of a broker-dealer under the New Issue Rule?
I. An exchange-traded fund
II. An initial public offering in which the RR's firm is not an underwriter
III. A new issue of common stock in which the broker-dealer is the managing underwriter
IV. Convertible debt
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
B
Exemptions from the definition of an IPO include all debt offerings, investment company offerings such as mutual funds and exchange-traded funds, and preferred stock.
Whether the broker-dealer is participating as an underwriter does not alter the restrictions. |
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Term
| A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 40 EXA convertible bonds at $1,150 that are convertible at $20. If the client is using the convertible bonds as a hedge, the maintenance requirement is: a. $4,400 b. $4,600 c. $11,500 d. $13,200 |
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Definition
| B - $4,600 If a client is long a security that is convertible into an equal number of shares of a short position carried by the same client, the maintenance requirement is 10% of the current market value of the long position. The maintenance requirement is 10% OF THE LONG POSITION, which is equal to $4,600 ($1,150 x 40 bonds x 10%). |
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Term
The Federal Intermediate Credit Bank (FICB) makes:
a. Agricultural loans to farmers
b. Loans to finance residential mortgages
c. Business loans to veterans
d. Loans to utility companies |
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Definition
A
The Federal Intermediate Credit Bank (FICB) makes agricultural loans to farmers. |
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Term
A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE?
a. The director is permitted to sell the shares if the trade is reported
b. The director is permitted to sell the shares only if they are held for three additional months and the trade is reported
c. The director is permitted to sell the shares and no report is required
d. The director is permitted to sell the shares only if the transaction will result in a loss |
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Definition
A
The director as an insider is required to report the transaction to the SEC within two business days.
Since the director owned the shares for nine months, there is no violation.
Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock, and are not subject to the six months' holding. |
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Term
Which of the following statements is TRUE regarding a defined contribution plan?
a. It is designed to provide employees with a fixed monthly payout at retirement
b. The employer bears all the investment risk
c. Employees may deduct all employer contributions
d. Each employee has a separate account within the plan |
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Definition
D
Each employee has a separate account within the plan to easily track the growth of his retirement assets.
Employer makes contributions on behalf of employees, and the size of the retirement benefit depends on the amount of the contributions and the investment performance of the assets in the plan. Employee assumes the investment risk. |
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Term
An investor is looking for an investment that will generate deductions but also provide the potential for future cash flow. Which of the following is NOT an appropriate investment?
a. A raw land program
b. An existing properties real estate program
c. An oil and gas drilling program
d. An oil and gas exploratory program |
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Definition
A
In a raw land program, deductions are negligible and the profit potential comes in the form of capital appreciation, not cash flow. |
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Term
Which of the following persons are entitled to participate in a Keogh plan?
I. A self-employed doctor
II. A security analyst who made $2,000 giving public lectures on technical analysis
III. An engineer of a corporation who made $5,000 making public speeches on his specialization
IV. An executive of a corporation who received $5,000 in stock options from his corporation
a. I and II only
b. II and III only
c. I, II, and III only
d. I, II, III, and IV |
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Definition
C - I, II, and III only
An executive of a corporation who received $5,000 in stock options may not participate because he is not self-employed.
The security analyst and the engineer could set up a plan for the income they derive from outside, self-employed activities. |
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Term
U.S.-denominated currency held in foreign banks is BEST defined as:
a. Eurodollars
b. An American Depositary Receipt
c. A Yankee bond
d. A structured product |
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Definition
A
Eurodollar - US currency held in banks outside the US
ADR - certificate representing a given number of shares of STOCK in a foreign corp.
Yankee Bond - bonds issued in the US bond market by a foreign entity. |
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Term
A registered representative is approached by an accountant who wants to receive a finder's fee for introducing her clients to the RR. Which of the following statements is TRUE?
a. The RR is not permitted to pay a finder's fee to the accountant
b. The RR is permitted to pay a maximum finder's fee of 5% to the accountant
c. The RR is permitted to pay a maximum finder's fee of 8.5% to the accountant
d. The RR is permitted to pay an annual referral fee to the accountant based on the amount of commissions generated by the referrals |
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Definition
A - Not permitted to pay a finder's fee
A broker-dealer is not permitted to compensate nonregistered persons in exchange for introducing clients to an RR or based on the amount of commissions or fees generated by the account. |
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Term
A customer purchases a municipal bond with 25 years remaining to maturity. The bond has been prerefunded to its first call date. The issue is callable in 7 years at 108, declining to par in 14 years. It also has a sinking fund call provision that begins in 17 years at par. For confirmation purposes, the bond should be priced to the:
a. First call date
b. First par call
c. Sinking fund date
d. Final maturity date |
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Definition
A - First call date
When a bond is prerefunded, the only applicable date is the first call feature. Therefore, the bond must be priced to the first call date. |
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Term
Which of the following statements regarding the opening of a new municipal account are TRUE according to MSRB rules?
I. An employee of a municipal securities firm may open a new account with another municipal securities firm without the employer being notified
II. An employee of a municipal securities firm may open a new account with another municipal securities firm as long as the employer is notified and duplicate confirmations are sent to the individual's employer
III. A bond attorney may open a new account without restriction
IV. An officer of a municipal issuer may open a new account without restriction
a. I and III only
b. II and IV only
c. III and IV only
d. II, III, and IV only |
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Definition
D - II, III, and IV only
MSRB rules only place restrictions on opening an account for an employee of another MSRB member firm.
SEE CARD #1 |
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Term
The NYSE Composite Index is composed of:
a. The common and preferred stocks listed on the NYSE
b. The common stocks, preferred stocks, and bonds listed on the NYSE
c. Only the common stocks listed on the NYSE
d. Preferred stocks and bonds listed on the NYSE |
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Definition
C
The NYSE Composite Index is composed of only the common stocks listed on the NYSE. |
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Term
ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer's buy order. ABC has acted as a:
a. Dealer
b. Designated market maker
c. Agent
d. Underwriter |
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Definition
C
When a broker-dealer buys a security from a market maker (dealer) on behalf of its customer, it is acting as a broker (agent). |
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Term
When evaluating numerous mutual funds, what is meant by NET INVESTMENT INCOME?
a. Interest only
b. Dividends only
c. Interest + dividends - expenses
d. Dividends + capital gains - expenses |
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Definition
C
Net investment income of a mutual fund is derived from the total interest plus dividends earned by the fund's portfolio minus the expenses of the fund. |
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Term
An investor has been making payments to a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE?
I. The investment risk is assumed by the insurance company
II. The investment risk is assumed by the customer
III. The amount of the payment to the customer is guaranteed by the insurance company
IV. The amount of the payment to the customer is not guaranteed
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
D - II and IV
Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity. The amount of the payment depends on the performance of the separate account.
In addition, since a straight-life settlement option was chosen, payments will stop when the investor dies, regardless of the amount left in the contract. |
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Term
Which of the following choices is NOT a reason for a broker-dealer to reject delivery of a municipal bearer bond?
a. A mutilated coupon
b. Lack of a legal opinion
c. No endorsement by the owner
d. Lack of a seal on the certificate |
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Definition
C - No endorsement
A municipal bearer bond does not require endorsement (signature) by the owner. |
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Term
A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at:
a. $28
b. $55
c. The same price as before the notice appeared
d. A price near $60 |
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Definition
D - A price near $60
Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price). |
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Term
Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond?
a. Approval by a majority of legal age voters
b. Approval by the state legislature
c. Approval by the bond trustee
d. Approval by the appropriate state agency |
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Definition
B
State legislative approval is required before a municipality can begin making payments on a moral obligation bond. |
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Term
A customer in her late 40s, who is currently in the 15% tax bracket has recently inherited $6,000,000. She informs you that she considers herself a conservative investor and wants your advice concerning investing the inheritance. Which of the following choices would be the BEST method of investing the funds?
a. 20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes
b. 40% in equities, a 30% mixture of in-state and out-of-state municipal bonds, 15% in Treasury bonds, 15% in revenue anticipation notes
c. 30% in-state municipal bonds, 30% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes
d. 25% in-state municipal bonds, 25% in out-of-state municipal bonds, 25% in corporate bonds, and 25% in Treasury bonds |
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Definition
B - 40% in equities, a 30% mixture of in-state and out-of-state municipal bonds, 15% in Treasury bonds, 15% in revenue anticipation notes
Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation.
Many strategists recommend taking 100% and subtracting the investor's age as a guide to the percentage of the investor's portfolio that should be allocated to equities. |
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Term
Section 1035 of the Internal Revenue Code:
a. Permits the tax-free exchange of one annuity contract for another
b. Forbids the tax-free exchange of an insurance policy for a new life insurance policy
c. Forbids the tax-free exchange of an insurance policy for a new annuity contract
d. Permits the tax-free exchange of an annuity contract for a life insurance policy |
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Definition
A - YOU CAN EXCHANGE APPLES (annuities) for APPLES (annuities) TAX FREE
1035 exchanges permit an individual to exchange one variable annuity contract for another, during the accumulation period, without tax consequences. |
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Term
An equity security that is distributed under Regulation S may be resold by:
a. Immediate sale within the U.S. market
b. Immediate sale in a designated offshore market
c. Regulatory approval from SROs
d. Waiting six months, then selling within the U.S. market |
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Definition
B
An overseas investor who acquires securities pursuant to Regulation S may sell the securities overseas immediately through a designated offshore securities market.
There is a distribution compliance period (holding period) of 40 days for debt securities and a one-year period before an equity security sold pursuant to Regulation S may be resold in the U.S. |
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Term
A broker-dealer is preparing sales literature on CMOs. Which TWO of the following statements must be disclosed?
I. The term collateralized mortgage obligation must be included within the name of the product
II. The basis point spread above a comparable Treasury security the client will receive in interest must be included
III. The lower of the yield to call or yield to maturity must be included
IV. The government agency backing only applies to the face value of the securities
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
B - I and IV
The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the government agency backing only applies to the face value of the securities (not any premium paid). |
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Term
A municipal broker's broker may:
I. Deal with broker-dealers
II. Deal with dealer-banks
III. Underwrite new issues
IV. Trade from its own inventory
a. I and II only
b. I and III only
c. II, III, and IV only
d. I, II, III, and IV |
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Definition
A - I and II only
A municipal broker's broker is a broker (agent) that deals only with other municipal securities brokers or dealers. The broker's broker never deals with individual investors or establishes an inventory position, and is not involved in the underwriting of a new issue. |
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Term
Which of the following choices would be found in the subscription agreement for a direct participation program (DPP)?
a. The sharing arrangement between the limited and general partners
b. The amount of money that the general partner will contribute to the program
c. The provisions for dissolving the partnership
d. Who is required to sign this document |
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Definition
D
In order to purchase an interest in a direct participation program, the investor must complete the subscription agreement. It will specify who is required to sign the agreement. The other choices given are found in the offering documents. |
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Term
Which TWO of the following metrics can be calculated by examining the balance sheet statement of a company?
I. The earnings before interest and tax (EBIT)
II. The debt-to-equity ratio
III. The operating profit margin
IV. The amount of working capital
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
D - II and IV
EBIT and the operating profit margin can be calculated by examining the income statement. |
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Term
Municipal serial bonds are priced on the basis of:
a. Yield to maturity
b. Percentage of par
c. Dollar price
d. Current yield |
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Definition
A - YTM
Municipal SERIAL bonds are quoted on a yield-to-maturity basis.
Municipal TERM bonds are quoted on the basis of a dollar price. |
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Term
A registered representative is the owner of a marina on the North Shore of Long Island. She wants to build an apartment complex on this property in order to increase the property's cash flow. If she receives a loan from family members, which of the following statements is TRUE?
a. Her broker-dealer is required to approve the loan
b. She is required to notify her firm of the loan
c. She is required to notify FINRA
d. She is not required to notify her firm about the loan |
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Definition
D - Not required to notify about the loan.
If the loan is based on provision 1 (borrowing from family members), firm notification or firm approval is not required. If the conditions indicated in provisions 3, 4, or 5 apply, the firm must approve the lending activity prior to the execution of the loan.
1) The customer and the registered person are immediate family members.
2) The customer is a financial institution regularly involved in the business of extending credit or providing loans.
3) Both parties are registered with the same firm.
4) The loan is based on a personal relationship between the customer and the registered person.
5) The loan is based on a business relationship independent of the customer-broker-dealer relationship. |
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Term
If a cash dividend is paid, how does it affect a margin account?
a. SMA is decreased
b. The debit balance is reduced
c. The market value is increased
d. The equity is reduced |
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Definition
B - The debit balance is reduced
When a cash dividend is paid, the debit balance is reduced by the amount of the dividend. The SMA is also increased by the amount of the dividend. The market value changes due to fluctuations in the price of the security. |
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Term
Which of the following individuals are NOT permitted to trade on the floor of the NYSE?
a. Independent brokers
b. Registered representatives
c. Floor brokers
d. Designated market makers |
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Definition
B - Registered Representatives
Registered representatives of a broker-dealer are not permitted to trade on the floor of the NYSE. |
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Term
Which of the following securities would NOT be found on the Consolidated Quotation System (CQS)?
a. An NYSE MKT stock
b. An NYSE MKT warrant
c. An NYSE-listed bond
d. A non-Nasdaq stock |
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Definition
D
The Consolidated Quotation System (CQS) displays quotations on all common stock, preferred stock, warrants, and rights that are listed on the New York Stock Exchange (NYSE) or the NYSE MKT (formerly NYSE Amex), and trading in the OTC market (third market). While an NYSE MKT stock, an NYSE MKT warrant, and a NYSE-listed bond typically appear on CQS, a non-Nasdaq stock does not appear. |
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Term
According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased?
a. The name of the beneficiary for the customer's account
b. Whether the customer is subject to IRS backup withholding rules
c. A written acknowledgment that the customer has received the fund's prospectus
d. The name of the RR responsible for the account and the manager who approved the account |
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Definition
D
The following items MUST be obtained when opening an account:
1) The customer's name and residence
2) Whether the customer is of legal age
3) The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account
4) If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity |
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Term
A customer has an existing margin account with equity of $36,000. If the FRB requirement is 50% and the customer sells short 100 shares at $15.00 a share, the required deposit is:
a. $450
b. $750
c. $1,500
d. $2,000 |
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Definition
B - $750
The FRB requirement is 50%, which is the same for purchases as it is for short sales. Therefore, the required deposit is $750 (50% x $1,500). Since this trade is executed in an existing account, the only requirement is the FRB's. If this had been the initial trade in the account, the required deposit under industry rules would be $2,000. |
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Term
A registered representative is using a social networking site that permits real-time communication. FINRA would BEST define this type of communication as a(n):
a. Correspondence
b. Public appearance
c. Institutional communication
d. Research report |
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Definition
B - Public Appearance
Social media sites that permit real-time communication or interactive, electronic forums fall under the guidelines of a public appearance, according to FINRA. Examples include Facebook, Twitter, and LinkedIn. |
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Term
Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return?
a. CAPM
b. Efficient frontier
c. Duration
d. Alpha |
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Definition
B
According to modern portfolio theory, a graph of optimal portfolios can be created known as an efficient frontier. |
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Term
Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as:
a. Open-end investment companies
b. Closed-end investment companies
c. Unit investment trusts
d. Face amount certificate companies |
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Definition
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Term
A customer owns an AMF October 30 call option. If AMF should split 2 for 1, the customer will own:
a. 1 AMF October 30 call for 100 shares
b. 1 AMF October 15 call for 200 shares
c. 2 AMF October 15 calls each for 100 shares
d. 2 AMF October 30 calls each for 100 shares |
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Definition
C - 2 AMF Oct 15 calls each for 100 shares
When a stock splits 2 for 1 (an even split), the number of contracts increases and the strike price is reduced proportionately. The number of shares representing each listed option remains at 100 shares. The customer will now have 2 calls for 100 shares each at the adjusted strike price of $15 or 2 AMF October 15 calls for 100 shares each of AMF. Listed options are adjusted for stock splits, stock dividends, and rights offerings, but are not adjusted for cash dividends. |
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Term
Morris Investments is working a leveraged buyout deal to purchase Simon Entertainment Group. The fundamental financing for the deal will consist mostly of:
a. Debt issued using the assets of Simon Entertainment Group as collateral
b. Debt issued using the assets of Morris Investments as collateral
c. Equity issued by Simon Entertainment Group
d. Equity issued by Morris Investments |
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Definition
A
The assets of the acquired company are generally used as collateral for the borrowed funds. |
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Term
The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of Depaul Corporation stock at $70 per share and makes the necessary deposit. If the stock increases in value to $78 per share and later declines to $67 a share, how much SMA would the customer have in the account?
a. 0
b. $4,000
c. $8,000
d. $16,000 |
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Definition
B- $4k
First, determine the amount of the debit balance. If the customer purchased $70,000 worth of stock at a 50% margin requirement and deposited $35,000, the debit balance is $35,000 ($70,000 market value - $35,000 margin requirement = $35,000 debit balance).
Depaul increased to $78 per share, making the market value $78,000. The equity increases to $43,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $39,000 (50% of $78,000) from the actual equity in the account, $43,000. The SMA is, therefore, $4,000. |
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Term
A registered representative has a dispute with his firm over compensation. This dispute will be resolved by:
a. A federal court
b. The SEC
c. The National Adjudicatory Council
d. An arbitration panel |
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Definition
D
Registered representatives agree to arbitrate any disputes with their employer, with the exception of statutory discrimination and harassment claims. |
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Term
Calculate the SMA for the following margin account.
Long Account Short Account
$150,000 Market Value $45,000 Market Value
$50,000 Debit Balance $75,000 Credit Balance
a. $7,500
b. $25,000
c. $32,500
d. $130,000 |
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Definition
C - $32,500
The formula for calculating SMA is:
Actual equity - Reg T Requirement = SMA
The equity in the long account is $100,000 ($150,000 LMV
- $50,000 DR).
The equity in the short account is $30,000 ($75,000 CR
- $45,000 SMV).
Total equity is $130,000.
The Reg T requirement for the long account is $75,000 ($150,000 LMV x 50%).
The Reg T requirement for the short account is $22,500 ($45,000 SMV x 50%).
The total Reg T requirement is $97,500.
The combined SMA is, therefore, $32,500 ($130,000 Actual equity - $97,500 Reg T requirement). |
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Term
If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be:
a. A capital loss at the time the option expires
b. A capital gain at the time the option expires
c. An ordinary loss at the time the option was purchased
d. An ordinary loss at the time the option expires |
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Definition
A- cap loss at time of expiration
If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be a capital loss at the time the option expires. |
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Term
A registered representative wants to open a new account for a client who is a resident of Mexico. Which TWO of the following statements are TRUE?
I. Customer verification of the client's personal information is not required if the customer was referred by an existing client
II. Customer verification of the client's personal information is required under any circumstances
III. The client may have either a taxpayer identification number or a passport number and country of origin
IV. The client must have a taxpayer identification number to open the account
a. I and III
b. II and IV
c. I and IV
d. II and III |
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Definition
D - II and III
If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its AML procedures under its customer identification program (CIP). For non-U.S. citizens, the firm must obtain the client's name, address, date of birth and one of the following: passport and country of issuance, taxpayer identification number, or any other government issued document with a photograph. An RR always needs to verify the client's personal information regardless of whether the customer was referred by an existing client. |
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Term
A broker-dealer appears on the Nasdaq system as a market maker for DCIR common stock. An employee of the firm responsible for maintaining the firm's inventory in DCIR is known as a:
a. Designated market maker
b. Floor broker
c. Compliance director
d. Position trader |
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Definition
D - Position trader
A position trader is responsible for maintaining a broker-dealer's inventory as well as trading the firm's account. |
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Term
A closed-end fund trading on the NYSE has a current bid price of $21.50 and an offer price of $21.70. A customer purchasing the fund would pay:
a. $21.50 plus a commission
b. $21.50 plus a sales charge
c. $21.70 plus a commission
d. $21.70 plus a sales charge |
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Definition
C - $21.70 plus commision
The term sales charge refers to the built-in compensation charged by an open-end (mutual fund) company when a customer buys shares of the fund.
CLOSED END = COMMISSION |
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Term
A bond is convertible into stock at $50 per share. The market price of the stock is 65. The market price of the bond is 120. To profit from this arbitrage opportunity, an investor should:
I. Buy 5 bonds
II. Buy 100 shares of stock
III. Sell 5 bonds short
IV. Sell 100 shares of stock short
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
B - I and IV
Since the bond is convertible into 20 shares of stock ($1,000 par divided by $50) and the bond is priced at 120, the parity for the stock is $60 per share ($1,200 bond price divided by 20 shares). An arbitrage situation exists because the stock is selling at a 5-point premium to parity (65 market price versus 60 parity price).
An investor can profit from this situation by purchasing bonds at 120 and shorting the stock at 65. Each bond may be converted into 20 shares of stock at a cost of $60 per share. These shares may then be used to cover the short sale, establishing a 5-point profit (65 short sale price - 60 cost). |
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Term
Foreign currency options:
I. Are quoted in U.S. dollars
II. Are quoted in the underlying foreign currency
III. Expire on the third Friday of the expiration month
IV. Expire on the last Friday of the expiration month
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only |
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Definition
A - I and III
Foreign currency options are quoted in U.S. dollars (U.S. currency).
The expiration date for foreign currency options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time. |
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Term
Which of the following methods is used by the Options Clearing Corporation in assigning exercise notices?
a. Random selection
b. First-in, first-out
c. To the member firm holding a long position that first requests an exercise
d. On the basis of the largest position |
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Definition
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Term
Which TWO of the following types of securities may a municipal securities representative sell?
I. General obligation bonds
II. Treasury notes
III. Variable-rate demand obligations (VRDOs)
IV. Municipal unit investment trusts
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
A - I and III
A municipal securities representative may sell municipal bonds. General obligation bonds and VRDOs are types of municipal securities. The municipal securities representative, according to the MSRB, is not properly registered to sell government bonds, municipal unit investment trusts, or any type of corporate securities. |
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Term
Which of the following statements is NOT TRUE about defined benefit plans?
a. Contributions are based on a predetermined distribution amount
b. The employee does not know the amount her employer will contribute each year
c. These plans provide tax-free distributions to participants
d. These plans are ERISA-qualified retirement plans |
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Definition
C - Tax free distributions
Distributions from a pension plan are not tax-free and are typically considered ordinary income. |
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Term
A corporation with an excellent earnings record has several issues of bonds outstanding. During a period of stable interest rates, which of the following securities are expected to fluctuate the most?
a. Mortgage bonds
b. Commercial paper
c. Debenture bonds
d. Convertible bonds |
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Definition
D - Convertible bonds
The convertible bonds will fluctuate the most because they are convertible into common stock. The price fluctuates with the price movements of the common stock.
The fact that interest rates are stable is another reason why convertible bonds is the best answer. If the question had stated that interest rates were moving sharply upward or downward, then all other bonds would fluctuate sharply in price to bring yields in line with interest rates. However, the question asks what will happen in a period of stable interest rates. Given that statement, the best answer is that convertible bonds will fluctuate the most. |
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Term
Which of the following choices is NOT a characteristic of a HOLDR?
a. Diversification
b. The right to vote
c. The ability to control when you are taxed
d. Once-a-day pricing |
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Definition
D - Once-a-day pricing
Holding Company Depository Receipts (HOLDRs) are created by depositing securities of a certain sector into a trust and selling interests in the trust to investors.
Unlike ETFs, the owner of a HOLDR has an ownership interest in the shares of the companies that the HOLDR is invested in and would retain the right to vote.. Investors have the ability to control when they are taxed, since they determine when to hold or sell the HOLDR. Benefits also include liquidity and pricing throughout the day (i.e., they are exchange-traded) as compared to an index or sector mutual fund, which has daily pricing and is purchased directly from the fund. |
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Term
When a corporation goes bankrupt, which of the following would be the last to be paid?
a. Internal Revenue Service
b. Debenture holders
c. Preferred stockholders
d. Holders of warrants |
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Definition
| A holder of common stock is usually the last to be paid in a bankruptcy. A holder of a warrant has the right to purchase common stock and is paid after a holder of common stock. |
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Term
An employee of a corporation is enrolled in a noncontributory pension plan. Relative to the plan, which of the following statements are TRUE?
I. Earnings in the plan accrue tax-deferred
II. Earnings in the plan are taxed each year
III. Benefits are taxed as a capital gain when received
IV. Benefits are taxed as ordinary income when received
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
B - I and IV
In a noncontributory pension plan, the employee does not make contributions. Earnings in the plan accrue tax-deferred (are not taxed until received by the employee) and benefits received are taxed as ordinary income. |
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Term
When evaluating two CMOs backed by GNMAs, one having a 6% yield and the other having a 10% yield, which TWO of the following statements are TRUE?
I. Prepayment risk is greater for the CMO with the 10% yield
II. Prepayment risk is greater for the CMO with the 6% yield
III. Credit risk is greater for the 10% CMO
IV. Credit risk is the same for both securities
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
B - I and IV
Prepayment risk measures the possibility that homeowners will refinance (prepay) their mortgages. Historically, the speed of prepayment increases when interest rates fall. |
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Term
The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called:
a. Structured notes
b. Double-barreled bonds
c. Guaranteed bonds
d. Prerefunded bonds |
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Definition
D - Prerefunded Bonds
The outstanding bonds are called prerefunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow funds at lower rates, thereby reducing its interest costs. |
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Term
A self-employed individual has total income of $120,000. If the individual wants to open a Keogh plan:
I. It must be opened by the time he files his tax return
II. It must be opened by the end of the tax year
III. A maximum deductible contribution of $24,000 is permitted
IV. A maximum deductible contribution of $53,000 is permitted
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
C - II and III
A Keogh plan must be opened by the end of the tax year (December 31). (However, contributions are permitted until the filing deadline for the tax return) (April 15).
A self-employed individual may deduct 20% of self-employed income or $53,000, whichever is less, to a Keogh plan.
KEOUGH = 20% OF INCOME OR $53k!!!!!!!!! |
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Term
All of the following statements are TRUE concerning marketwide circuit breakers, EXCEPT:
A. They are based on the S&P 500 Index
B. The levels are calculated on a monthly basis
C. A trading halt on one exchange applies to all exchanges
D. A 7% decline will halt trading for 15 minutes |
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Definition
B
Marketwide trading halts are based on the S&P 500 Index and are calculated daily (not monthly).
A trading halt on one exchange applies to all exchanges that trade the same security.
A Level 1 Market Decline (7%) and a Level 2 Market Decline (13%) will halt trading for 15 minutes. For a Level 3 Market Decline (20%), trading will be halted for the remainder of the day. |
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Term
When opening an account for a customer, MSRB rules do not require the dealer to obtain the customer's:
a. Financial condition
b. Investment history
c. Investment objectives
d. Date of birth |
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Definition
D - date of birth
MSRB rules specifically state that a dealer should make every effort to obtain all of the information listed EXCEPT the customer's date of birth.
The dealer should determine that the customer is not a minor, but not specifically his date of birth. |
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Term
When examining an earnings report for National Corporation, a registered representative sees that earnings per share is reported on both a primary and fully diluted basis. This indicates that:
I. The company has convertible bonds or convertible preferred stock outstanding
II. The company has cumulative and participating preferred stock outstanding
III. Earnings per share is calculated using current shares outstanding and also assuming that all convertible securities were converted
IV. Earnings per share is calculated on a pretax and after-tax basis
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only |
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Definition
A - I and III only
The calculation for earnings per share on a FULLY DILUTED basis includes the outstanding shares if convertible bonds and preferred stock are converted into common stock. |
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Term
A bank or brokerage firm is applying to become a primary dealer in government securities. Which government body appoints the financial institution as a primary dealer?
a. The Treasury Department
b. The SEC
c. FINRA
d. The Federal Reserve Board |
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Definition
D - The FRB
The Federal Reserve Board appoints primary dealers in GOVERNMENT securities. |
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Term
Dynasty Corporation is planning to acquire Regal Corporation. If a trader purchased 12,000 shares of Regal Corporation and sold short 4,000 shares of Dynasty Corporation, the trader is:
a. Creating an optional hedge
b. Engaging in a risk arbitrage
c. Creating a reverse hedge
d. Creating a bullish spread |
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Definition
B - Engaging in a risk arbitrage
The trader or risk arbitrageur will go long the company being acquired and sell short the shares of the acquiring company.
This process is known as risk arbitrage. If the acquisition is successful, Regal Corporation's stock will increase and Dynasty Corporation's stock will decline. |
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Term
An investor purchases a two-year ABC call. Which of the following designations accurately describes the exercise of the option?
A. European style, next business day settlement
B. European style, three business days' settlement
C. American style, next business day settlement
D. American style, three business days' settlement |
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Definition
| D - AMERICAN STYLE, 3 BUSINESS DAYS' SETTLEMENT |
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Term
Which of the following choices best describes certificates of participation?
a. A form of equity financing for a corporation.
b. A type of REIT
c. A type of bond, typically created through a lease agreement
d. A type of bond based on payments from residential mortgages |
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Definition
| C - type of bond created through a lease agreee |
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Term
Chris is a customer who has very little understanding of financial markets. Chris has custodial power over his children's accounts and is concerned that his lack of investment experience could hurt his children's investment returns. He is considering allowing a third party to assume control of the accounts through a limited power of attorney. Under the UPIA, which of the following statements is TRUE?
a. This practice is prohibited in all cases
b. This practice is prohibited unless the custodian obtains the written consent of each child
c. Custodians may delegate discretion only to licensed advisers and/or attorneys
d. Custodians may delegate discretion to any competent person |
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Definition
D - Custodians may delegate discretion to ANY competent person.
Under the UPIA, a custodian is permitted to delegate investment functions to any competent third party. Minors have no say in this decision. Note: In the past, the UPIA specifically prohibited a custodian from delegating discretion to a third party. This is no longer the case. |
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Term
In order to have an issuer of securities exempt from the provisions of the Securities Act of 1933 under Regulation D, which TWO of the following statements are TRUE?
I. The purchasers must sign an investment letter restricting the resale of the securities
II. The size of the offering must be limited
III. The number of accredited buyers is unlimited
IV. The issuer must file an offering document with the SEC
a. I and III
b. I and IV
c. II and III
d. II and IV |
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Definition
A - I and II
The offering must be restricted to persons who are knowledgeable and experienced in business and financial matters and who are able to afford the economic risks involved. The issuer must provide the buyer with detailed financial information (this offering document does not need to be filed with the SEC). The number of nonaccredited purchasers must be limited to 35, and the offering must be made in direct negotiations between the issuer and the buyer or his purchaser representative.
Also, the buyer must sign an investment letter stating that the purchase was made for investment and not for short-term trading purposes. The size of the offering is not limited and there is no limit as to the number of accredited investors. |
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Term
The MSRB performs all of the following functions, EXCEPT:
a. Regulate municipal securities dealers
b. Regulate municipal securities representatives
c. Regulate municipal securities advertising
d. Set fixed commissions for municipal dealer agency transactions |
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Definition
D - Set fixed commissions
The MSRB does not set fixed commissions for municipal dealer agency transactions. MSRB rules regarding commissions state that they shall be fair and reasonable and negotiated between buyer and seller. |
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Term
In a limited partnership, a general partner's minimum participation in profits and losses is:
a. 1%
b. 5%
c. 10%
d. 15% |
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Definition
A - 1%
According to tax law, a general partner must have at least a 1% participation in profits and losses for a business to maintain limited partnership status. |
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Term
A registered representative has limited discretion over a customer's account. The registered representative may:
a. Remove money freely from the account
b. Place orders before the order has been approved by a principal
c. Not enter buy stop orders
d. Have all confirmations of transactions sent only to himself |
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Definition
B - Place orders prior to principal approval
Limited discretion does not permit free withdrawal of funds. The account owner must receive confirmations. Buy stop orders are permitted. The RR may place orders which can be approved promptly afterward. |
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Term
Which of the following actions must a municipal dealer disclose on a confirmation?
I. The municipal dealer acted as a agent
II. The municipal dealer acted as a principal
III. The municipal dealer acted as an agent for a third party
IV. The municipal dealer acted as a bona fide market maker
a. I and II only
b. I, II, and III only
c. I, II, and IV only
d. I, II, III, and IV |
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Definition
B - I, II, and III only
A bona fide market maker is one who makes a market in over-the-counter stocks. |
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Term
Mr. Grey just phoned to notify you that his nephew Rodney has died in an accident. Mr. Grey is custodian for the Uniform Transfers to Minors Act (UTMA) account that he set up for Rodney, to which he gifted $20,000 two years ago. Mr. Grey asks you to transfer the assets from Rodney's account to a UTMA account he has set up for his daughter Azure. Which of the following statements is TRUE about moving the assets?
a. Assets can be transferred from Rodney's UTMA account directly to Azure's UTMA account, once the broker-dealer has received the required documents and a letter of authorization, with transfer instructions, signed by the custodian
b. Mr. Grey will have to provide Azure's birth certificate to prove she is still a minor before any assets can be moved from Rodney's UTMA account to Azure's UTMA account
c. As custodian, Mr. Grey can transfer assets from Rodney's UTMA account directly back into his own account, by producing the required documents and a letter of authorization
d. Assets may be transferred from Rodney's UTMA account to an estate account opened for Rodney, once the broker-dealer receives the required documents and a letter of authorization with transfer instructions signed by the custodian |
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Definition
D
Upon the death of a minor, assets do not become the property of the custodian. The assets remain the property of the minor and transfer to the minor's estate.
Once the required documentation, assets can be moved into an estate account established for the decedent.
Once an estate account has been established, assets can be dispersed from the estate account based on instructions in the will, or by order of the probate court in the absence of a will. |
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Term
The call feature on callable bonds is most relevant when the economy is:
a. Experiencing a slowdown and the FRB is trying to stimulate growth
b. Experiencing a slowdown and inflation is increasing
c. Growing and the FRB is trying to slow down the economy
d. Growing and inflation is stable |
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Definition
A - experiencing a slowdown
Interest rates will decline when the FRB stimulates the economy via money supply (less demand for $). SO, companies BUY BACK bonds from us to give us more money |
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Term
A registered representative wants to take on a second job working part-time as a waiter in a restaurant. This is allowed as long as the individual notifies:
a. The MSRB
b. The FRB
c. FINRA
d. His employer |
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Definition
| D - Must tell your employer |
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Term
When the economy is PEAKING, what will be the expected sequence of the next three stages of the business cycle?
I. Trough
II. Expansion
III. Contraction
a. I, II, III
b. II, III, I
c. III, I, II
d. III, II, I |
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Definition
C - III, I, II
Contraction ---> Trough ----> Expansion
Expanding economy PEAKS once supply exceeds demand.
Economy then CONTRACTS, and demand decreases
Economy then BOTTOMS OUT (TROUGH) |
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Term
A registered representative discovers that one of her customers is on the Office of Foreign Assets Control (OFAC) list. The RR or someone else at her firm must notify:
a. The Office of the Comptroller of the Currency
b. The Treasury Department
c. The SEC
d. FINRA |
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Definition
B
Firms are prohibited from transacting business with individuals and entities on the Office of Foreign Assets Control (OFAC) list. If a registered representative discovers that one of the owners or beneficiaries of an account is on the OFAC list (or if someone on the list tries to open an account with his firm), the RR or someone else from her firm should contact the U.S. Treasury Department immediately. The Financial Crimes Enforcement Network (FinCEN) and OFAC are part of the Treasury Department. |
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Term
Warrants will most likely be issued to:
a. Replace outstanding common shares
b. Reduce the interest rate on an issue of debentures
c. Compensate the underwriting syndicate
d. Reduce the issue price of securities |
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Definition
B - Reduce the interest rate on an issue of debentures
Debentures may be issued with warrants attached. This allows the corporation to pay a lower interest rate on the debentures. |
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Term
Interest paid on I bonds is:
A) Exempt from state and local taxation.
B) Exempt at the federal level only.
C) Taxable at all levels.
D) Exempt at all levels. |
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Definition
A - Exempt from state and local taxation
Interest paid on I bonds is exempt from state and local taxes but is taxable at the federal level. Although, federal income taxes can be deferred for up to 30 years or until the bonds are redeemed, whichever comes first. |
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Term
XYZ corporation has income before taxes of $2 million and received $100,000 in preferred dividends from a company in which it owns 25% of the outstanding shares. If XYZ corporation is in the 34% tax bracket, it will pay taxes of:
a. $686,800
b. $926,900
c. $966,000
d. $1,050,000 |
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Definition
A - $686,800
Since XYZ corporation owns 25% of the outstanding shares, it is exempt from paying taxes on 80% of dividends received from the stock. The corporation would need to pay taxes on only $20,000 of the dividends received (20% of the $100,000 in preferred dividends) plus the $2,000,000 of income the corporation earned. Since the corporation is in the 34% tax bracket, the tax would be $686,800. (34% of $2,020,000 = $686,800.)
LESS THAN 20% = 70% EXCLUDED
MORE THAN 20% = 80% EXCLUDED |
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