125 Question Quiz (5)

One of your customers has made periodic purchases of shares of the Castel Growth Fund over the past several years. The customer has decided to take a profit and sell some of those shares. When the investor's tax return is prepared for the year in which the sale of those shares occurs, it is necessary to establish a cost basis of the shares sold. Which of the following methods is available for mutual funds, that is not available for determining the cost basis of stock? A) Average cost basis B) Dollar cost averaging C) Share identification D) FIFO

A) Average cost basis The Internal Revenue Service allows using the average cost basis to determine the cost basis of redeemed mutual fund shares. Investors cannot use this method when selling shares of any security other than a mutual fund. The other methods of determining cost basis are FIFO and share identification. FIFO is the default method used by the IRS if an investor fails to choose. Share identification can frequently result in a lower tax bill, especially if the security was purchased at different intervals at varying prices. LO 13.h

Customer A and Customer B both have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? I. Receiving cash distributions may reduce Customer A's proportional interest in the fund. II. Customer A may use the cash distributions to purchase shares later at net asset value (NAV). III. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. IV. Due to compounding, Customer B's principal will be at greater risk. A) I and III B) II and III C) I and IV D) II and IV

A) I and III If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, the customer's proportional interest in the fund will decline. The option to have distributions automatically reinvested allows those purchases to be made at NAV, but a purchase made later would be made at the public offering price like any other new purchase. LO 8.f

Which of the following describes Nasdaq Level 3 service? A) It allows market makers to enter quotations into the system for a security in which they are registered. B) It displays the representative bid and ask quotations on a security in which a minimum of two market makers exist. C) It shows the quotations from all registered market makers entering quotes into the system. D) It displays the representative bid and ask quotations on a security in which a minimum of three market makers exist.

A) It allows market makers to enter quotations into the system for a security in which they are registered. Nasdaq Level 3 service allows market makers to enter and update quotations on securities in which the market makers are registered with FINRA. LO 17.b

Which of the following securities is typically sold with the legal opinion attached? A) Municipal bonds B) Corporate bonds sold under the Trust Indenture Act of 1939 C) Participating preferred stock D) U.S. Treasury issues

A) Municipal bonds Legal opinions are exclusive to municipal securities. The legal opinion is supplied by bond counsel, an attorney specializing in securities law. The opinion states that the municipal bond is legal and binding on the issuer. If the bond's interest is tax-exempt, that opinion is stated as well. LO 6.a

For an out-of-the-money equity option expiring in seven months, the time value of the option will most likely be A) equal to the option premium. B) less than the option premium. C) greater than the option premium. D) less than zero.

A) equal to the option premium. An option premium consists of two factors. First is the intrinsic value (the amount the option is in the money). The balance of the premium represents the time value. An out-of-the-money option, by definition, has no intrinsic value. Therefore, the entire premium represents time value. The time value of an option will never be less than zero; it can only be zero or positive. LO 10.c

Using a Rule 415 shelf registration, an issuer registered 40 million shares of common stock with the SEC. The registration is effective A) for the following two years unless the issuer qualifies as a well-known seasoned issuer (WKSI), where it is three years. B) a maximum of two years, unless investors are given preemptive rights. C) for one year, after which the registration statement must be renewed with payment of the appropriate fees. D) until the final shares are sold

A) for the following two years unless the issuer qualifies as a well-known seasoned issuer (WKSI), where it is three years. There is no need to file a new registration with the Securities and Exchange Commission if the issuer meets the two- or three-year requirement, whichever applies. Beyond these times, a new registration statement would be necessary. LO 20.f

A jewelry wholesaler imports Swiss watches. The importer could gain the most protection against currency risk by A) going long calls on the Swiss franc. B) going short puts on the Swiss franc. C) going short calls on the Swiss franc. D) going long puts on the Swiss franc.

A) going long calls on the Swiss franc. Remember the acronym EPIC, which stands for Exporters buy Puts and Importers buy Calls. EPIC Exporters buy Puts Importers buy Calls When it comes to using options as protection, the strongest protection comes from purchasing rather than selling. Options can be used as insurance, and to protect yourself, you buy insurance. Because this wholesaler is importing the watches, buying calls is the proper strategy. LO 10.g

An investor takes a short position in one XYZ Nov 140 put @7. Disregarding any commissions, on settlement date the investor A) receives $700. B) must pay $700. C) receives $14,000. D) must pay $14,000.

A) receives $700. When an investor takes a short position in an option, it means the investor has sold, or written the option. As a seller, the investor receives the premium on the settlement date. LO 10.a

Under SEC rules, firms must do all of the following except A) update customer account records within 36 months of a change in investment objectives. B) create a record containing the dated signature of each customer granting discretionary authority. C) provide a customer with an updated customer account record within 30 days of a change in investment objectives. D) create a record for each written agreement entered into with a client.

A) update customer account records within 36 months of a change in investment objectives. Under SEC rules, firms must provide a customer an updated account record reflecting any change in investment objectives within 30 days of the change. Firms must create a record for each written agreement entered into with a client and a record containing the dated signature of each customer granting discretionary authority. LO 15.c

An investor has a short margin account. The current market value of the stock is $1.50 per share, and the investor owns 1,000 shares. Compliance with SRO minimum maintenance requirements is met with account equity of A) $2,000. B) $2,500. C) $1,500. D) $1,950.

B) $2,500. For stock trading under $5 per share, a customer must maintain 100% of SMV or $2.50 per share, whichever is greater. $2,500 1,000 shares @$2.50 is greater than 100% of $1,500. LO 16.d

A J & J Treasury bond with a 5% coupon due July 1, 2019, is purchased in a cash transaction on February 24. What is the number of days of accrued interest? A) 63 B) 54 C) 55 D) 53

B) 54 A bond begins accruing interest on the prior interest payment date (January 1) and accrues up to, but not including, the settlement date (February 24). Did you notice that this was a cash transaction? That means the settlement date is the same day as the trade (February 24). Normally, Treasury securities settle T+1. If this was a regular-way trade, the accrued interest would be 55 days because settelment would have been February 25. Be careful reading the question; it is easy to skip over critical information. Because accrued interest on government bonds is computed actual days, actual year, 31 days for January plus 23 days for February, it equals 54 days. LO 6.e

In a competitive bid, which of the following would the issuer need to determine net interest cost? I. Coupon rates II. Basis III. Dollar price IV. Spread A) I and II B) I and III C) II and IV D) III and IV

B) I and III The coupon rate and dollar price are important to the issuer because they determine the actual cost of borrowing. The spread and basis at which the bonds will be resold are important to the underwriters but not to the issuer. LO 20.b

If an investor buys 300 shares of FLB, and one month, later buys 1 FLB Jul 50 put, how does this affect the holding period on his stock? A) It erases the holding period on 300 shares. B) It erases the holding period on 100 shares. C) It has no impact on the holding period for any of the shares owned by the investor. D) It ends the holding period on the put.

B) It erases the holding period on 100 shares. Because the stock has not been held more than 12 months, the put purchase erases the holding period for any shares the put subsequently allows the holder to sell. Because the holder owns one put, this erases the holding period on 100 shares owned. The other 200 shares are unaffected. LO 10.i

Under the 5% markup policy, which of the following determines the amount of markup in a principal transaction? A) Highest ask B) Lowest ask C) Highest bid D) Lowest bid

B) Lowest ask Markups are always based on the inside offer, which is the lowest ask price in a particular security. Markdowns are based on the inside bid, which is the highest bid price for a particular security. Markups => lowest ask Markdowns => highest bid LO 13.g

A customer holding 450 shares of XYZ common stock in registered form turns in a sell order on Monday for regular way delivery. Who has the initial responsibility to ensure that the security is in good deliverable form? A) The customer B) The registered representative C) The broker-dealer D) The transfer agent

B) The registered representative Although the final arbiter of deciding the good delivery status of certificates is that of the transfer agent, it is the registered representative's responsibility to communicate the requirements to the customer. Those include a reasonable expectation that the certificates will be delivered on time and in the proper form. LO 17.c

If your client expected short-term interest rates to fall, you might recommend that the client A) buy a Treasury bond yield-based put. B) buy a Treasury bill yield-based put. C) buy a Treasury bill yield-based call. D) write a Treasury bill yield-based call.

B) buy a Treasury bill yield-based put. The key to debt options is that the investor is betting on the movement of interest rates, not the price of the security. As with any other investment based on downward movement (put down), the strategy called for here is buying a U.S. Treasury bill put option. Why not the Treasury bond put? Because the question refers to short-term rates and Treasury bonds are a play on long-term ones. LO 10.g

The SEC has just declared the registration of XYZ Corporation's IPO effective for sale. If XYZ wanted to run a tombstone ad, it would not include A) the name of the lead underwriter. B) the dated date. C) the type of security. D) the public offering price.

B) the dated date. A tombstone ad for a stock offering, published on or after the effective date, will always include the effective date. It will not include the dated date. That is only relevant to bonds and represents the date from which interest begins to accrue. How did we know this was not a debt issue? An IPO can only be of stock. That is, a company can only "go public" once and that is with the issuance of stock. LO 20.c

All of the following statements regarding Section 529 plans are true except A) states impose very high overall contribution limits. B) the income level of the contributor can affect the annual contribution amount. C) the assets in the account are controlled by the account owner, not the child. D) contributions to a 529 plan may be subject to gift taxation

B) the income level of the contributor can affect the annual contribution amount. Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529 plan. LO 6.g

XYZ Corporation, whose common stock is currently selling for $40 per share, is having a rights offering. The terms of the offering require 10 rights plus $35 to subscribe to one share of stock. Compute the theoretical value of a right before the ex-rights date. A) $0.50 B) $0.55 C) $0.45 D) $3.50

C) $0.45 Because the stock is trading with rights (before the ex-rights date), the formula is (M ‒ S ) divided by (N + 1). Plugging the numbers in, we have ($40 ‒ $35) divided by (10 + 1) = $5.00 ÷ 11 = $0.45. LO 3.f

Your customer is interested in long-term corporate bonds. Which of the following interest rate environments makes a call protection feature most valuable to your customer? A) Stable interest rates B) Rising interest rates C) Declining interest rates D) Volatile interest rates

C) Declining interest rates A call protection feature is an advantage to bondholders in periods of declining interest rates. When interest rates are falling, issuers are more likely to call in bonds previously issued at higher interest rates. For bondholders, calling bonds creates reinvestment risk, as they are unlikely to be able to reinvest at the rate they had been earning. Call protection gives the bond holder a specified length of time during which the bond cannot be called. LO 4.b

Municipal Securities Rulemaking Board (MSRB) rules for NYSE member firms are enforced by A) the SEC. B) the MSRB. C) FINRA. D) the NYSE.

C) FINRA. The board's rules are enforced by FINRA for securities firms. The MSRB has rulemaking authority but no enforcement or examination authority. LO 6.h

Arbitration and mediation are two services provided by FINRA to settle disputes between members. Regarding these services, which of the following statements are not true? I. Mediation is mandatory; arbitration is not. II. Arbitration always results in a binding decision; mediation may not. III. If arbitration is unsuccessful, the dispute moves on to mediation. IV. A mediator in a dispute may not serve as an arbitrator in the same dispute. A) II and III B) I and IV C) I and III D) II and IV

C) I and III Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may NOT be an arbitrator in the same dispute. LO 18.c

A taxable gain or loss on a long call option transaction would be recognized when I. the option is purchased. II. the option expires. III. the option is sold. IV. the option is exercised. A) III and IV B) I and IV C) II and III D) I and II

C) II and III In addition to being exercised, call options can either be sold or allowed to expire. If either of these situations occurs, the owner of the call would determine hers gain or loss (for tax purposes) at the time of expiration or sale. This would be determined by comparing what she paid for the call versus the price at which she sold the call. If it expires, the entire amount of the premium originally paid is considered a loss. Gains or losses are not determined at the time that calls are exercised. Once exercised, the underlying security must then be sold at the current market value. Then the owner of the call would calculate her profit or loss, taking into account the premium paid, what she paid for the stock, and what she subsequently sold the stock for. LO 10.i

An example of a taxable bond issued by a municipal government is A) a tax anticipation note (TAN). B) Series EE bonds. C) a Build America Bond (BAB). D) a general obligation bond (GO).

C) a Build America Bond (BAB). BABs are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing the cost of issuing municipalities and to stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations. LO 6.b

Regarding the sale of a new issue, a customer becomes a restricted person if he is A) the grandfather of an associated person of a member firm. B) a private investigator collecting information on one of the issuing firm's officers. C) a salesperson who works for the issuing firm's underwriter. D) a salesperson who works for a supplier of the issuing corporation.

C) a salesperson who works for the issuing firm's underwriter. Restricted persons include FINRA member firms and their associated persons, plus immediate family members. LO 20.f

In performing their natural job functions, all of the following may act in a principal capacity in a transaction with customers except A) OTC market makers. B) designated market makers (DMM) on the NYSE. C) branch managers of FINRA member firms. D) broker-dealers.

C) branch managers of FINRA member firms. When acting as a principal in a transaction, you are buying for or selling from inventory. Although branch managers of member firms are generally required to be registered as principals, that is different from acting in a principal capacity in a transaction. DMMs facilitate trading on the floor of the NYSE. Doing that sometimes requires them to buy or sell as principals. OTC market makers, by definition, act as principals. The term broker-dealer means that the firm can act either as a broker or a dealer. There are a number of words used in this exam than can have multiple meanings. Principal is one of those. LO 16.b

The SEC requires that all sell orders be identified as either long or short. A person is not considered to be long a security if he A) has purchased the security but the trade has not yet settled. B) has title to it. C) has sold an in-the-money put option on that security simultaneously with entering the short sale order. D) owns a security convertible into or exchangeable for the security and has tendered such security for conversion or exchange.

C) has sold an in-the-money put option on that security simultaneously with entering the short sale order. The question asks, "A person is NOT considered to be long a security if he" Key Word: NOT Selling a put only obligates the investor to buy the stock when the option is exercised. Merely writing the option does not result in possession of the stock. Having title to it does. Once purchased, the investor is long the stock even if the trade has not yet settled. Turning in a convertible security with conversion instruction has the same effect as entering a purchase order and waiting for settlement. LO 14.b

One of your clients purchased shares of the Ajax Mutual Fund several months ago. At that time, the net asset value (NAV) of the fund was $17.20. Today, the NAV is $17.56, and your client wants to know what accounts for the difference. You should advise her that the difference likely represents A) capital gains. B) capital losses. C) unrealized appreciation. D) realized appreciation.

C) unrealized appreciation. The NAV of mutual funds is marked to the market daily; the increase reflects higher market prices for the securities in the fund's portfolio. LO 8.c

A company has filed for an IPO at $20 par value. The IPO is priced at $30 per share. Where on the balance sheet is the extra $10 recorded? A) Excess par value B) Retained earnings C) Distributed dividends D) Capital surplus

D) Capital surplus When new stock is issued, any funds paid for the stock in excess of the par or stated value is called CAPITAL SURPLUS In this case, it is the $10 above the $20 par. It might also appear on your exam as paid-in surplus. LO 13.d

The financial statements of a corporation include the balance sheet and the income statement. The major components of a balance sheet are assets, liabilities, and net worth. Which of the following would be a major component of an income statement? A) Bonded indebtedness B) Cash on hand C) Work in process D) Cost of goods sold

D) Cost of goods sold Cost of goods sold (COGS) is one of the major components of an income statement. In addition to COGS are -revenues (or sales), -interest expense (if any), and -pretax income. Some accountants include depreciation in COGS, while others show it as a separate nonoperating expense. Current assets on a balance sheet include cash on hand and inventory, such as work in process. Bonds are long-term liabilities also appearing on a corporate balance sheet. LO 13.c

When must a Regulation T call be met? I. Immediately II. Within 4 business days in a margin account III. Within 4 business days in a cash account IV. Within 10 business days if both a cash and a margin account are maintained A) III and IV B) I and II C) I and IV D) II and III

D) II and III Under Regulation T, the initial margin requirement on purchases in a margin account, and the full payment on purchases in a cash account, must be made within four business days of trade date. LO 16.d

One of the critical terms used in the discussion of a wash sale is substantially identical. Not wishing to run afoul of the wash sale rule, an investor selling shares of XYZ common stock at a loss would need to avoid purchasing which of the following securities within the 30-day restricted period? A) XYX convertible debentures B) XYZ callable preferred stock C) XYZ cumulative preferred stock D) XYZ convertible preferred stock

D) XYZ convertible preferred stock Substantially identical securities include those convertible or exchangeable into the common stock sold at a loss. That would be case with the XYZ convertible preferred stock. XYZ convertible debentures would also be in that category, but did you notice these were XYX not XYZ? Will the exam be that tricky? Could be, so it pays to read carefully. LO 13.h

With respect to municipal discretionary accounts, all of the following statements are true except A) all activity in the account must be reviewed at frequent intervals by a municipal securities principal. B) unless a customer gives her express authorization, the broker-dealer cannot effect transactions to the customer's account for securities in which it has a control relationship with the securities' issuer. C) a municipal securities principal must approve all transactions in the account promptly after execution. D) if a control relationship exists between the broker-dealer and issuer, that relationship must first be terminated in order for the broker-dealer to effect transactions of the issuer's securities in their customer's discretionary account.

D) if a control relationship exists between the broker-dealer and issuer, that relationship must first be terminated in order for the broker-dealer to effect transactions of the issuer's securities in their customer's discretionary account. As with all discretionary accounts, a principal must approve transactions promptly after execution, and the account must be reviewed frequently by a principal. Because this is a discretionary account that allows municipal securities to be traded in it, these functions must be performed by a municipal securities principal. Without the customer's consent, the broker-dealer cannot effect transactions in the customer's account for municipal securities in which a control relationship exists between the broker-dealer and the issuer. To effect such transactions, the broker-dealer must make full disclosure of the relationship and obtain the customer's consent, but termination of the relationship is not required. LO 6.h

Under FINRA policies, a breakpoint sale is the sale of A) investment company shares in a dollar amount reaching the point at which the sales charge is reduced. B) investment company shares in a dollar amount just below the point at which the conditional deferred sales charge is reduced. C) a security at the point where the proceeds equal the investor's cost causing the investor to breakeven. D) investment company shares in a dollar amount just below the point at which the sales charge is reduced.

D) investment company shares in a dollar amount just below the point at which the sales charge is reduced. FINRA considers breakpoint sales to be a violation. This is when a registered representative fails to inform investors that they may obtain a sales charge reduction with a small additional investment or the signing of a letter of intent. This is not following high standards of conduct and can lead to disciplinary action. Breakpoints apply to Class A shares only; the CDSC is for Class B and Class C shares. LO 8.d

On Wednesday, April 22, 2020, your customer purchased a block of City Y 4% Recreation Authority term revenue bonds quoted at 22. The bond's stated interest payment dates are J/J 1. After receiving the confirmation, the customer called you and asked why there was no additional cost for accrued interest. The most likely reason for that is A) the trade settled on an interest payment date. B) there was a mistake on the confirmation and it will be rectified shortly. C) the accrued interest is paid by the seller. D) the bonds are trading flat.

D) the bonds are trading flat. Bonds trading without accrued interest are trading flat. Every bond trades flat twice a year: when the bond settles on an interest payment date. However, that is not the case here because this trade would settle on April 24 and interest payment dates are January and July 1. The price is a hint. A 4% bond selling at 22% of par indicates that this bond is likely in default of interest and that is why it is trading flat. LO 6.e

A registered representative is convicted of misdemeanor DUI; therefore, A) the employing broker-dealer is likely to suspend the registered representative. B) this must be updated on the Form U4 within 10 days. C) this must be updated on the Form U4 within 30 days. D) updating of the Form U4 is not required.

D) updating of the Form U4 is not required. When the conviction is for a misdemeanor, only if it involves a financial matter is it considered a material event requiring an update to the Form U4. If this were a reportable offense, the updating would have to be done within 30 days. It would be highly unusual for a firm to discipline an associated person for this infraction. Even then, regulators are the ones who suspend a registration, not the member firm. LO 18.a