Chapter 9 Quiz Questions

1) When a customer sells a security in the secondary market, he will receive the a. Net asset value b. Offering price c. Bid price d. Ask price

Bid price i. The highest price a dealer will pay for a security is the bid price, which is the price the seller will receive.

1) A broker/dealer that charges a commission on a securities transaction is acting in the capacity of a. Agent b. Dealer c. Principal d. Market maker

Agent i. An Agent (or broker) acts on behalf of a customer and charges a commission. This is in direct contrast to a principal (dealer) acting on its own behalf and charging a markup

1) The type of risk that includes influences such as competitive pressures, market share and competence of mgmt. and us usually managed with a long-term focus is called a. Inflation risk b. Management risk c. Business risk d. Market risk

Business risk

1) An investor learns that he inherited a mutual fund that had a NAV of $50 per share on the date of the owner's death. Thirty days after the death of the owner, the NAV is $55. It is now 2 months since the owner died and the NAV is $60. The owner's cost basis was $20. What is the cost basis for the beneficiary? a. $20 b. $50 c. $55 d. $60

$50 i. When a security is inherited, the beneficiary's cost basis is the fair market value (in this case, the NAV) of the security on the day of the deceased's death. This is called a "stepped up" basis.

1) Sell ABC short 20 stop 20.50. the ticker tape shows: 19, 20, 21, 20.50, 20.25. At what price was the trade executed? a. 10 b. 20 c. 20.50 d. 21

21 i. Sell short 20 stop 20.50 (limit) is triggered or elected at 20 or below, and executed at or above 20.50. the order is triggered at 19 (20 or below), and execution occurs at 21 (the next price that is 20.50 or above

1) An investor could achieve diversification in his portfolio by holding a. Stocks of companies in different industries b. Stocks of companies in different geographic regions c. Stocks and bonds d. All of the above

All of the above

1) The Insider Trading Act of 1988 has set guidelines for imposing penalties including civil actions in a federal court. The maximum penalty a court can impose for insider trading violations is a. $500,000 b. $100,000 fine, 5 years imprisonment, or both c. The amount of profit gained or loss avoided d. An amount up to 3 times the profit gained or loss avoided

An amount up to 3 times the profit gained or loss avoided i. When the insider trading violations are subject to civil but not criminal penalties, the max fine cannot exceed 3 times the profit gained or loss avoided

1) Under which of the following circumstances could an employee of a public company trade on company-related info w/o violating the Insider Trading and Securities Fraud Enforcement Act of 1988? a. The emp's wife, who works for a cust of the co, tells him that his co will be receiving a contract for a substantial multi-year order b. An independent securities analyst that covers the co, shares w/ the emp the details of his latest published report detailing his downbeat earnings forecast for the next quarter c. The emp is friendly w/ a person in IT who tells him the company's computer systems may have been breached d. The emp has a coworker is the executive office who tells him that he heard that the co may be acquired

An independent securities analyst that covers the co, shares w/ the emp the details of his latest published report detailing his downbeat earnings forecast for the next quarter i. The only scenario under which this emp would be able to trade on the shared info w/o violating insider trading rules would be the one involving an independent securities analyst. Unlike the other situations, the conversations w/ the securities analyst does not involve material, nonpublic information

1) Which of the following stmts describes the market manipulation practice of "Pumping and Dumping"? a. Trading ahead of customer orders b. Buying and selling a security among traders to create a high level of activity to influence the price of a stock c. Purchasing a large enough number of shares of a security to be able to control the supply of stock d. Artificially increasing the price of a stock by making positive stmts that are false and misleading in order to sell the stock at a higher price

Artificially increasing the price of a stock by making positive stmts that are false and misleading in order to sell the stock at a higher price

1) When a customer buys a security in the secondary market, he will pay the a. Net asset value b. Public offering price c. Bid price d. Ask price

Ask price i. The lowest price a dealer will sell a security is the ask price, which is the price the buyer will pay when purchasing in the secondary market.

1) When a market maker does not honor a published quote, that could be considered a market manipulation practice of a. Marking the close b. Backing away c. Free riding d. Front running

Backing away

1) The highest price a dealer is willing to pay for a security is known as the a. Asked price b. Bid price c. Net asset value d. Offering price

Bid price i. A customer selling a secondary market security will receive the bid price, which is the highest price a dealer is willing to pay.

1) Which one of the following statements describes the market manipulation practice of painting the tape? a. Trading ahead of customer orders b. Purchasing a large enough # of shares of a security to be able to control the supply of stock c. Spreading false or misleading info about a company to impact the price of a security d. Buying and selling a security among traders to create a high level of activity to influence the price of a stock

Buying and selling a security among traders to create a high level of activity to influence the price of a stock

1) Internal procedures which limit and control the passing of sensitive, potentially nonpublic info between the departments of a corporation or firm to aid in protecting investors against violations of insider trading laws are known as a. Information barriers b. Internal command and control procedures c. Chinese walls d. Gatekeeper rules

Chinese walls

1) A corporation pays a stock dividend to a. Reduce the price of its stock b. Reduce accounts payable c. Conserve cash d. Promote its stock

Conserve cash

1) If the prime interest rate increases, bond prices will generally a. Move in parity with the prime rate b. Increase c. Decrease d. Remain the same

Decrease i. Bond prices are inversely related to interest rates; therefor, a rise in the prime rate will generally cause high-grade bond prices to fall

1) Which of the following factors will most likely create reinvestment risk? a. Short-term investments b. Decreasing asset values c. Opportunity cost d. Falling interest rates

Falling interest rates i. Reinvestment risk is the risk that, upon maturity, if interest rates have fallen, the income produced by the currently available bond yields may be much less

1) Jane bought 200 shares of Intec at 18 in March. When she died, the market price was 21. What's the taxation of her daughter, who inherited the shares? a. Her cost basis is 18 and the holding period short-term b. Her cost basis is 21 and the holding period is long-term c. Her cost basis is 21 and the holding period is short-term d. Her cost basis is 18 and the holding period is long-term

Her cost basis is 21 and the holding period is long-term i. Holding period is always long-term, no matter how long the securities were actually owned

1) The form of risk that affects one's purchasing power directly is called a. Inflation risk b. Consumption risk c. Supply and demand risk d. Regulatory risk

Inflation risk i. Inflation risk is the risk that purchasing power will decline over time.

1) Liability to contemporaneous traders for insider trading means a. The fact that b/d that enter cust trades for a cust based on insider info can be held liable, even if the b/d was unaware of the illegal nature of the trades b. Insider traders may be liable to the traders w/ no insider info who traded at the same time and lost money c. The rule those suspected of illegal insider trading must be charged w/in 90 days of the suspected violation d. The fact that anyone who is aware of inside info is subject t civil lawsuits, regardless of whether or not they acted on the info

Insider traders may be liable to the traders w/ no insider info who traded at the same time and lost money

1) What type of risk is involved when an investor may sustain a loss if a security must be sold quickly? a. Liquidity risk b. Purchasing power c. Business/credit risk d. Market risk

Liquidity risk

1) The ABC Euro Bond Fund invests in the debt of Euro corporations and other companies doing business in Europe. Investors in this fund are subject to all of the following except a. Inflation risk b. Interest rate risk c. Currency exchange risk d. Liquidity risk

Liquidity risk i. Redeemable securities, such as mutual fund, are liquid investments. Bonds are subject to both inflation and interest rate risk, and foreign investments are subject to currency exchange risk.

1) Settlement for government notes and bonds is a. Same day b. Next day c. 4 business days d. 7 business days

Next day

1) A customer placed a market order. This means a. The customer has stated the price he is willing to pay b. No price is set, and the order is to be filled at the best available market price c. The order may not be executed because the customer has not specified a price d. The customer has specified and price, and the order will not be filled unless the market reaches that price

No price is set, and the order is to be filled at the best available market price i. Market order has no specified price and is filled at the best available market price when executed

1) A reg rep has acquired a new customer w/ an existing portfolio that has five holdings that are equally weighted in the portfolio; technology, pharmaceuticals, energy, S&P 500 index fund, and money market fund. The RR notes that in addition to market risk, this portfolio is subject to which of the following risks? a. Political b. Liquidity c. Credit d. Nonsystematic

Nonsystematic i. Inherent in this portfolio is nonsystematic risk. Nonsystematic risks affect particular companies or sectors of the economy and can be reduced through further diversification. In other words, the reg rep could further reduce the risk in this portfolio by adding stocks that are in other industry sectors or investing in other asset classes, like bonds.

1) Why does a diversified portfolio tend to carry a lower degree of investor risk? a. A diversified portfolio is traded frequently to capture current market trends b. A div port includes equity from all the best performing industries c. A div port contains a broad representation of growth stocks d. Not all market segments or investment types in a diversified portfolio will move in tandem with one another

Not all market segments or investment types in a diversified portfolio will move in tandem with one another

1) Sustained inflation over time will erode the value of a dollar. This is known as a. Timing risk b. Purchasing power risk c. Market risk d. Business risk

Purchasing power risk i. Sustained inflation will erode the value of a dollar causing a decline in the purchasing power of future dollars

1) Which of the following is NOT true concerning physical safety of mutual fund holdings? a. Securities cannot exist as electronic records on computers b. If certificates are held, they must be surrendered in good order before shares can be redeemed c. Physical safety of a fund's assets is the responsibility of the custodian d. The shareholder needs to maintain share certificates since funds use "book entry" accounting

Securities cannot exist as electronic records on computers

1) The Act the requires financial institutions to develop, implement and monitor procedures that prevent its agents and associates from misusing nonpublic information is the a. Securities Act of 1933 b. Securities and Exchange Act of 1934 c. Investment Company Act of 1940 d. Investor Fraud Act of 1970

Securities and Exchange Act of 1934

1) Which of the following describes a tender offer? a. Investors selling into the tender offer may receive different prices b. Shareholders selling into the tender must deliver the shares net long c. A tender offer must remain open for a minimum of 45 days d. Usually offered at a discount to current market price

Shareholders selling into the tender must deliver the shares net long

1) In the over the counter market, the difference between the bid price and the ask price is referred to as the a. Spread b. New asset value c. Best execution d. Public offering price

Spread

1) Which of the following activities would not be considered to be insider info if shared between an individual who is an officer of a corp and the registered rep who manages his personal investments? a. Planned spin-off of a major division b. Stock dividend declared c. CEO planes to announce imminent retirement d. Loss of large contract

Stock dividend declared

1) Which of the following is synonymous with market risk? a. Capital risk b. Systematic risk c. Timing risk d. Inflation risk

Systematic risk i. Market risk is systematic risk and represents the risk that the overall market can be uncertain. This risk cannot be reduced through portfolio diversification

1) What is regular-way settlement for treasury Bonds? a. T b. T+1 c. T+2 d. Same day

T+1

1) A customer instructs his broker/dealer to purchase 200 shares of Dunham Corp. Two days after the trade date, the customer decides he no longer wants the shares. Which stmt is correct? a. Because the 23-hour grace period has expired, the customer must pay for the purchase. b. The customer has entered into a legally binding contract and is obligated to pay for the stock. c. A trade may be canceled any time up to settlement date. d. Because it is before settlement date, the customer is not obligated to pay for the trade.

The customer has entered into a legally binding contract and is obligated to pay for the stock. i. On trade date, the terms of the trade are set, and the customer has entered into a legally binding contract.

1) Which of the following best describes cash settlement? a. Cash settlement may not be done in a margin account b. The trade involves a very liquid money market security with a maturity of less than 30 days c. The customer pays for the securities on the trade date d. The customer must pay for the securities with cash or a cashier's check

The customer pays for the securities on the trade date i. For cash settlement trades, the trade date and the settlement date are the same. Everything takes place on the same day

1) A customer purchased 200 shares of XYZ 2 years ago at $40. The current market price is $50. If the customer gifts these shares to his daughter today, which statements describe the tax consequences? a. The daughter will not have a tax liability if she sells the shares at the current market price. b. The customer will not have a tax liability if she sells the shares instead of gifting them c. The cost basis to the daughter is $50 a share d. The daughter will have a tax liability if she sells the shares at the current market price

The daughter will have a tax liability if she sells the shares at the current market price i. the daughter has the tax liability if she sells any shares following the gift, and the basis is the donor's original cost basis or $40 a share, unless the current market price of the shares at the time of the gift are less than the donor's original cost basis.

1) A cust purchased 100 shares at $30 per share. 2 yrs later, the cust donated the shares to charity. At the time of donations, they were $50 per share. What are the tax consequences for the customer? a. The donor will have a $5,000 income tax deduction b. The recipient's cost basis is $3,000 c. The donor must pay capital gains tax on the appreciation d. The donor will have a $3,000 income tax deduction

The donor will have a $5,000 income tax deduction i. Subject to certain restrictions, charitable donations of stock are tax deductible at their market value at the time of the donation.

1) A customer has purchased $15k worth of XYZ Corp over a period of time. Which of the following is true about his subsequent sale of $5k of XYZ stock? a. The IRS requires that LIFO be sued to identify the shares sold in order to maximize the customer's tax liability b. The IRS requires the FIFO be used to identify the shares sold in order to maximize the customer's tax liability c. The investor is allowed to specify which shares are being sold to minimize his capital gain d. His capital gain is $5k

The investor is allowed to specify which shares are being sold to minimize his capital gain i. In the absence of a specified method, the IRS will use FIFO. Therefore, the share, or specific, identification method is most common.

1) Rhonda wants to give her daughter all of the shares in her growth mutual fund. Since the initial purchase of the shares, the value of the shares has increased steadily over the life of the investment. When the shares are gifted, the daughter's cost basis will be a. The NAV of the shares on the day they are "gifted" to her b. The same cost basis that Rhonda had for the shares c. The difference between the initial purchase price for the shares and the current NAV of the shares d. The initial NAV price Rhonda paid for the shares originally

The same cost basis that Rhonda had for the shares i. When a security is received as a gift, the cost basis depends on the relationship of the market value of the securities to the donor's cost basis. If the market value is higher than the donor's basis, the recipient's cost basis is equal to the donor's. if the market value is lower that the donor's cost basis, the recipient's basis is equal the market value of the securities at the time of the gift.

1) Of the following examples, which would be exempt from liability under insider trading laws? a. Printers of financial periodicals b. Clerical employees of corporations c. There are no exceptions from liability under insider trading laws d. Accountants for publicly traded companies

There are no exceptions from liability under insider trading laws

1) Which of the following stmts regarding limit orders is true? a. A limit order is executed immediately b. There is no guarantee a limit order will be filled c. A buy limit is placed above current market value d. A limit order may not be left with the specialist

There is no guarantee a limit order will be filled

2) A registered representative with verbal authority from the customer can decide which of the following? a. Security and price b. Time and price c. Quantity and time d. Price and quantity

Time and price i. Time and price are nondiscretionary elements of an order. Quantity, security, and action require discretionary auth.

1) The liquidity of an investment is best described as a. Whether trading activity is heavy or light on a given trading day b. The extent to which the investment is composed of cash or cash equivalents c. Whether the investment can be sold as quickly and profitably as expected, should the investor wish to sell d. Whether the investment can be traded on an exchange (auction market) or must be negotiated over the counter

Whether the investment can be sold as quickly and profitably as expected, should the investor wish to sell i. To liquidate is to sell an investment and turn it into cash. In common usage, however, liquidity relates more to volatility and how easy it is to sell a security. In other words, should on want to sell, will there be market demand and favorable price on a given day.