Exam 10- QA

rights offering

Preferred stockholders are not permitted to participate in a rights offering. Only the common stockholders are permitted.

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?

Prepayment risk measures the possibility that homeowners will refinance (prepay) their mortgages. Historically, the speed of prepayment increases when interest rates fall. If this happens, payments will flow into the CMOs at an accelerated rate, forcing investors to reinvest these monies at lower-than-anticipated rates. Therefore, the CMO with the higher interest rate will have higher prepayment risk. GNMA-backed CMOs are highly rated and, therefore, have little credit risk. Since both CMOs are backed by GNMAs, credit risk is minimal for both pools.

A 60-year-old individual has invested $30,000 in a nonqualified variable annuity. The annuity's value is currently $40,000. If the individual withdraws $20,000 and is in a 28% tax bracket, his tax liability will be:

A 60-year-old individual has invested $30,000 in a nonqualified variable annuity. The annuity's value is currently $40,000. If the individual withdraws $20,000 and is in a 28% tax bracket, his tax liability will be:

When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's:

A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type of transaction. When acting in a principal capacity, the client is charged a markup or markdown.

Which TWO of the following types of securities may a municipal securities representative sell?

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.

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 position trader is responsible for maintaining a broker-dealer's inventory as well as trading the firms account.

Which of the following option positions obligates the investor to sell shares if exercised?

A short call position obligates the investor to sell shares if the option is exercised.

In a limited partnership, a general partner's minimum participation in profits and losses is:

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.

Accrued interest for municipal bonds is computed on:

Accrued interest for municipal bonds is computed in the same manner as for corporate bonds, which is based on a 30-day month and a 360-day year. Accrued interest for U.S. government bonds is figured on a 365-day year counting actual days elapsed. Accrued interest on all bonds is calculated from the last interest payment, up to but not including the settlement date.

A company based in Europe with offices located in New Jersey would like to have its stock traded on the NYSE. This most likely will be accomplished through the issuance of:

American Depositary Receipts (ADRs) facilitate U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.

Which of the following statements is NOT TRUE about defined benefit plans?

An ERISA-qualified retirement plan is generally established as either a defined contribution or a defined benefit plan. In a defined contribution plan, a specific contribution is made each year and benefits are equal to the amounts provided by the total of contributions and earnings in the plan. A defined benefit plan promises specific benefits at retirement. Contributions to the plan are calculated to provide the promised benefits upon retirement and, therefore, the employee does not know the amount her employer will contribute each year. Distributions from a pension plan are not tax-free and are typically considered ordinary income.

An accountant earns $200,000 and wishes to make the maximum IRA contribution for himself and his nonworking spouse. He can contribute a maximum of:

An individual with earned income and a nonworking spouse may contribute a total of $11,000 for himself and his wife. However, the contribution must be made in two separate accounts, each housing $5,500.

Super Entertainment Inc., a publicly traded firm on the NYSE, spins off its domestic syndication division, creating 1,000,000 new shares. To receive the new shares, investors must exchange 25% of their old shares. Investors who receive shares of the new company will:

Be required to receive a prospectus under the Securities Act of 1933. This scenario is an example of an offering regulated by Rule 145. Rule 145 defines certain types of reclassifications of securities as sales subject to the registration and prospectus requirements of the Securities Act of 1933. Shares acquired through mergers, consolidations, and spinoffs involving exchanges of stock are all covered under the rule. The amount of shares is irrelevant.

Describe certificates of participation

Certificates of participation (COPs) are lease financing agreements, issued typically in the form of a tax-exempt or municipal revenue bond. COPs have been used traditionally as a method of monetizing existing surplus real estate. This financing technique provides long-term funding through a lease that does not legally constitute a loan, thus eliminating the need for a public referendum or vote.

Because of its multiplier effect on the economy, the Federal Reserve Board is reluctant to change:

Changing bank reserve requirements has a multiplier effect. This means that a small change in the reserve requirement can have a large effect on the money supply and the economy. This makes the results of changing the reserve requirement difficult to control, and the FRB is hesitant to use this tool.

For tax purposes, corporations may exclude a portion of the dividends received from:

Corporations may exclude a portion of the dividends received from equity investments in other corporations. This includes common stock and preferred stock.

Warrants will most likely be issued to:

Debentures may be issued with warrants attached. This allows the corporation to pay a lower interest rate on the debentures.

Which TWO of the following activities are typically performed during the cooling-off period of an initial public offering (IPO)?

During the cooling-off period, the SEC will review the issuer's registration statement for completeness. The SEC does not evaluate (pass on) the investment merits of the issue. Also, during the cooling-off period, the issuer will blue-sky the issue, send out a preliminary prospectus, and hold a due diligence meeting. Research is not permitted to be published by a broker-dealer until after the effective date of an IPO.

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:

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.

When the economy is peaking, what will be the expected sequence of the next three stages of the business cycle?

Historically, the business cycle has moved sequentially through four stages. An expanding economy will peak once the supply of goods and services surpasses demand. As the economy contracts, demand for products decreases causing a reduction in business activity. The economy will bottom out (forming a trough), leading the way to expansion and the beginning of a new cycle. Thus, if the economy is at its peak, the next three stages in succession will be contraction (recession), trough, and expansion.

Which of the following objectives is the least suitable reason for investing in a mutual fund?

Investors use M.F. for

Which TWO of the following choices would be the most suitable purchasers of municipal zero-coupon bonds?

In a custodian account, the minor is technically liable for taxes. Depending on the amount of income generated in the account and the age of the minor, taxes are calculated at the parents' rate. Therefore, parents may consider the purchase of municipal bonds in the custodian account for tax advantages. The zero-coupon bond will not produce cash flow during the holding period. This would be desirable for those who do not need cash income. (Funds are needed at a later date in the custodian account.) The zero-coupon municipal bond would be suitable for other accounts besides the custodian account, such as upper tax bracket earners during their peak earning years. Zero-coupon bonds are subject to annual accretion of the investor's cost basis. As such, at maturity, the investor's cost basis equals the par value of the bond. (There are no capital gains.) The accretion of the municipal bond is treated as interest income which, in the case of the municipal bond, is federally tax-free. This is a tax advantage, but it is not a long-term capital gain.

An employee of a corporation is enrolled in a noncontributory pension plan. Relative to the plan, which of the following statements are TRUE?

In a noncontributory pension plan, the employee does not make contributions. Earnings in the plan accrue tax-deferred & benefits received are taxed as ordinary income.

A self-employed individual has total income of $120,000. If the individual wants to open a Keogh plan:

It must be opened by the end of the tax year. A self-employed individual may deduct 20% of self-employed income or $52,000, whichever is less, to a Keogh plan. 20% of $120,000 is $24,000 and would be the maximum allowable deductible contribution.

What is the SRO maintenance requirement on a $1 million purchase of a 2x Long Gold Index ETF?

Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverage factor by the standard SRO maintenance requirement. In this case, the standard long requirement is 25% multiplied by a factor of 2, so the client must maintain a 50% margin. $1,000,000 x 25% = $250,000. $250,000 x 2 = $500,000.

When determining the position limit, the member firm will aggregate which TWO of the following positions?

Long calls & short puts Short calls & long puts We will examine first the long side of the market. If investors are long calls, they have the option to call away stock. They would, therefore, acquire stock. If investors are short puts, they have the obligation to accept stock if the put is exercised. In both instances, they will acquire stock. Therefore, long calls and short puts are on the long side of the market and are aggregated to determine the total position. In regard to the short side of the market, if investors are long puts, they have the option to sell stock by exercising the puts. If investors are short calls, they have the obligation to sell stock if the calls are exercised. In both instances, they will sell stock. Therefore, long puts and short calls are on the short side of the market and are aggregated to determine the total position.

An investor purchases a two-year ABC call. Which of the following designations accurately describes the exercise of the option?

Long-term anticipation securities (LEAPS) may be exercised on any day prior to expiration (American style). Exercise settlement is in the underlying stock, in three business days.

When opening an account for a customer, MSRB rules do not require the dealer to obtain the customer's:

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.

All of the following statements are TRUE concerning marketwide circuit breakers, EXCEPT:

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.

The 5% markup policy applies to:

Nonexempt securities. The 5% markup policy does not apply to transactions requiring a prospectus (new issues, mutual funds, and registered secondaries) or transactions in certain exempt securities (such as municipal securities).

Regulation NMS

One of the provisions of Regulation NMS (National Market System) requires a broker-dealer to provide its clients with the best price available for listed equity trades available for electronic execution. The best price is defined as the highest bid or lowest offer (inside market) from all available market centers. Reg NMS does not apply to securities subject to manual execution. Nor does it apply to debt securities, whether electronically or manually executed.

How much margin must the purchaser of one RFQ Feb 60 call for a $3 premium deposit?

Options may not be purchased on margin. According to Regulation T, the full purchase price (the premium) must be deposited.

An investor whose portfolio consists of high-yield municipal bonds, equity securities, and futures and options MOST likely has an investment objective of:

Speculation

FINRA disseminates bond transaction information for all these securities, EXCEPT:

TRACE is a reporting system that was created to provide greater transparency in the corporate bond market. It is not a quotation system or an execution system. Broker-dealers provide quotes and will execute transactions in corporate bonds. There is no regulatory quote or execution system as there is for equity securities. FINRA disseminates bond transaction information for publicly traded, TRACE-eligible securities (which include investment-grade and non-investment-grade bonds, and debt securities issued by a government-sponsored enterprise). Although transactions for securities issued under Rule 144A are reported to TRACE, the information is not disseminated.

The Bond Buyer Revenue Bond Index is:

The Bond Buyer Revenue Bond Index (commonly referred to as the Revdex) is an index of the yields on 25 revenue bonds. It is compiled on a weekly basis by The Bond Buyer and contains 30-year maturity bonds with an average rating on S&P of A+ and on Moody's of A1.

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?

The Federal Reserve Board appoints primary dealers in government securities.

The MSRB performs all of the following functions, EXCEPT:

The MSRB does not set fixed commissions for municipal dealer agency transactions. MSRB rules regarding commissions state that they shall be fair & reasonable & negotiated between buyer & seller.

Which of the following actions must a municipal dealer disclose on a confirmation?

The MSRB requires a municipal dealer to indicate to a customer through a written confirmation the capacity in which the dealer acted. The municipal dealer must disclose if it acted as an agent for the customer, as a principal for its own account, or as an agent for a third party. If the municipal dealer acted as an agent for a third party, the municipal dealer must disclose the name or promise to provide the name of the third party. Also, the amount of money received from the third party by the municipal dealer is required. A bona fide market maker is one who makes a market in over-the-counter stocks.

An aunt wishes to give her niece securities as a gift. The niece's parents have recently died and a court has appointed a guardian other than the aunt. The aunt:

The aunt may give securities to the minor as a gift. There are no restrictions on a donor giving a gift.

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:

The calculation for earnings per share on a primary basis (before the possible dilution of convertible bonds, convertible preferred stock, stock options, or warrants) is computed based on the number of outstanding common shares 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.

he call feature on callable bonds is most relevant when the economy is

The call feature on callable bonds is most relevant when the general level of interest rates is declining. Rates will tend to decline when the FRB is trying to stimulate the economy by increasing the money supply. The goal is to bring down interest rates to allow the economy to grow. Rising inflation usually causes the FRB to decrease the money supply in order to drive up interest rates. If the economy is growing and inflation is stable, this is a beneficial situation and the FRB may simply leave rates unchanged.

A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The common stock ratio is:

The common stock ratio is found by dividing total shareholder equity by a company's total capital. Shareholder equity is equal to the par value of the common stock + paid-in capital + retained earnings, and the total capital is found by adding the debt to shareholder equity. The common stock ratio is 79% [par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million / $1,085 million ($225 million + $860 million)]. The common stock ratio is used to analyze the capital structure of a company.

A corporation has raised money to use for expansion of its plant within the next six months. In which of the following securities should the corporation invest the funds until they are used?

The corporation intends to use the money in a short period and does not want to assume undue investment risks. Of the choices given, the most suitable investment is high-quality commercial paper since it is extremely safe and can be purchased with a short maturity to match the corporation's needs.

A customer purchased a municipal bond with a 6.50% coupon rate that was priced at a 6.95 basis. If the bond is currently trading at $945, the current yield is:

The current yield is found by dividing the yearly interest payment of $65 by the market price of $945. This equals 6.88%. The fact that the bond was purchased at a 6.95 basis is not relevant.

An investor purchases a zero-coupon municipal bond maturing in 15 years that is callable in five years at 102. If the bond is called, the investor will receive:

The investor would receive 102% of the compound accreted value since the security is a zero-coupon bond or original issue discount (OID) bond. The compound accreted value is equal to the original value of the bond plus the annual accretion as of the call date. If the bond was not an OID bond and was called, the investor would receive 102% of par or $1,020.

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:

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.

Which of the following statements is TRUE regarding a registered representative who has not completed the Continuing Education Regulatory Element training within 120 days of his registration anniversary?

The representative will be placed in inactive status. FINRA will notify a representative within 30 days of the second anniversary date of initial registration, and every three years thereafter. If the representative then fails to complete the required training within 120 days of the anniversary date, that person's registration will become inactive and any activity that requires registration, including receipt of commissions, will be prohibited.

f the S&P 500 has been increasing on high volume for several days, what term would BEST define this situation?

The term market momentum is used to describe a situation where prices are moving in a certain direction and there is a high level of trading volume. There is also an expectation that this pattern will continue in the near future. For example, if the S&P 500 Index has been trading up or down significantly over a period of days along with heavy trading volume, some traders will anticipate this pattern may continue for a few more days. Market neutral is used to describe attempting to profit by buying some securities while at the same time selling short others. A resistance level is a point on a chart where the price of a security stops increasing. Efficient market is a term used to define that stock prices already represent all available information and there is no benefit that may be gained by using professional analysis.

Which of the following statements is TRUE concerning a customer who purchases an out-of-state original issue discount (OID) general obligation bond?

The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amount accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on an out-of-state municipal security is exempt from federal tax, but subject to state and local income tax. The tax rate is based on the state in which the customer maintains his primary residence.

If interest rates decline, which of the following securities will probably have the greatest increase in market value?

Treasury Bonds- when interest rates decline, the securities with the longest maturities will most likely have the greatest price increase.

broker-dealer is underwriting an initial public offering (IPO) for a company that is not eligible to be listed on an exchange. The broker-dealer is required to deliver prospectuses:

When a company that is the subject of an IPO is listed, on the effective date of the offering, prospectuses must continue to be delivered on all purchases in the aftermarket for 25 days. The prospectus delivery requirement for an IPO that will not be listed on an exchange continues for 90 days after the effective date.

When a stock sells ex-dividend, which TWO of the following orders on a designated market maker's (DMM's or specialist's) book will be reduced?

When a stock sells ex-dividend, the DMM (specialist) will reduce those orders on his book that were entered below the market. A buy-limit order and a sell-stop order will be reduced by the amount the stock sells ex-dividend since these orders are entered below the market.

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:

When there is an acquisition or merger taking place, traders will try to take advantage of the activity between the common stocks of the two companies. 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.