Lesson 3 - Types of Bonds

According to SEC rules, an issuer must give advance notice of a dividend distribution to the exchange where the security trades

10 business days prior to the record date; An issuer is required to give advance notice of a dividend distribution 10 business days prior to the record date. This notice is required for all such distributions, including stock dividends, stock splits, reverse stock splits and rights or other subscription offerings.

Commercial paper is issued by corporations for short term financial needs. It is unsecured and usually matures in

270 days or less. It is usually sold in minimum denominations of $100,000 and is highly liquid.

The computation of dollar prices and accrued interest on municipal bonds is normally on what calendar basis?

30 / 360

A preliminary prospectus must be delivered to a potential purchaser no later than

48 hours prior to the mailing of the confirmation of sale

A customer does not meet the Reg T call in a cash account. The broker-dealer has sold out securities in the account, and must freeze the account for

90 days. If a sell-out occurs, the broker-dealer is required to freeze the customer's account for 90 days.

ABC corporation declares a 4 for 1 stock split. After the split, a shareholder that currently has 200 shares will have

A 4 for 1 split means the investor will receive 4 shares of stock for every 1 share previously owned, so the investor will have 800 shares (200 shares x 4), and each share will be worth ¼ the original value.

Which of the following U4 reportable events results in statutory disqualification?

A felony convictino for driving under the influence charge

Which of the following best describes the OTC Bulletin Board?

A non-exchange equity quotation facility

Financing for which of the following is most likely supported by a revenue bond?

A public utility; User fee back revenue bond issues. Public utilities collect user fees which are used for payment of debt service.

A zero coupon municipal security is most appropriate for which of the following investors?

A working adult who would like funds available to pay off her mortgage in 10 years so that she can retire. Zero coupon bonds are purchased at a discount and mature to face value. They are most suitable for investors that would like to plan for a lump sum to be available at a defined date in the future.

A-share normally charge front-end sales charges that are paid at the time of the initial purchases. 12b-1 fees are in addition to these sales charges.

A-shares make sense for persons who plan to hold their shares for a long period of time. Breakpoints are often applied to large purchases of A-shares.

If ABC Corporation declares a quarterly cash dividend on its stock, when must price adjustments be made for open orders?

Before the open on the ex-dividend date; Adjustments in price and/or number of shares are made before the market opens on the day the security is quoted ex-dividend, ex-rights or ex-distribution.

Advantages of book entry form of ownership for U.S. government securities include all of the following EXCEPT

Faster regular way settlement terms than apply to government securities issued in other forms; All Treasury securities are issued in book entry form, which reduces printing costs for the U.S. government and supplies increased protection and ease of transfer for investors and the securities firms they do business with.

Moral obligation bonds provide the legislature the authority to redeem the bond from municipal taxes if the revenues from the facility are insufficient to do so.

However, the legislature has no legally binding obligation to do so.

Which two of the following have the greatest impact on the size of the budget deficit?

I. Fiscal policy of the U.S. Government II. Economic fluctuations

Investors in REITs can expect all of the following EXCEPT

Redemption at NAV; REITs trade in the secondary market at a premium or discount to their NAV. Investors sell their shares to other investors to through exchange transactions; REITs do not redeem their shares.

When determining a fair and reasonable price for a relatively illiquid security, a dealer must

Rely on its professional judgment and market expertise to determine a fair quote from recent market activity; Dealers are expected to establish market value as accurately as possible, but may rely on professional judgment and market expertise when establishing a price for a security for which there is a limited market.

Which of the following is equal to 100 basis points?

0.01

A quote of 95:07

Represents a T-bond trading at a discount; Reflects a price of $952.19; The quote 95:07 is read as 95 and 7/32nds - a discounted Treasury Note or Treasury Bond. T-notes and T-bonds are quoted in 32nds; Treasury bills are quoted on an annualized discount percentage, or basis. The price of a T-Bond quoted at 95 and 7/32nds of $1,000 = $952.19.

What type of communications with the public must be reviewed and approved by a registered principal no later than its first use?

Retail; All retail communications must be reviewed and approved by a qualified registered principal before the earlier of first use or filing with FINRA.

Which of the following corporate securities has the highest priority in a bankruptcy proceeding?

Secured debt; Secured debt has the highest priority of corporate securities for repayment in a bankruptcy proceeding, followed by senior unsecured debt, mezzanine debt, and common stock.

Helen opened a Roth IRA last year and wants to know what part of this year's contributions she can deduct. The answer is

She can't deduct any amount; Roth contributions are always made with after-tax dollars and are never tax-deductible.

An option strategy that may permit an investor to purchase stock at a price below its current market value and receive a premium is

Short puts

Municipal improvements that benefit specific properties rather than the public at large are often funded by a special assessment to the property owners who benefit from these improvements.

Special assessment bonds are issued for this purpose.

A new issue is offered at $21.00 per share. Which of the following are MOST likely to be stabilization bids?

Stabilization bids can be entered when the price of a new issue is below the initial offering price. The bids can only be entered at or below the offering price, and must be close to the offering price in an effort to increase the price of the security.

Under federal anti-money laundering regulations, a Suspicious Activity Report (SAR) must be filed within how many days of the discovery of suspicious activity?

Under federal AML regulations, Suspicious Activity Reports must be filed within 30 calendar days of the discovery of the suspicious activity.

All Roth contributions are made with after-tax money.

Unlike a Traditional IRA, there is no federal income tax deduction available.

A security that entitles the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue is a(n)

Warrants, whether issued 'naked' or as a 'sweetener' added to a bond offering to make it more attractive to investors, are usually medium term to long term instruments that allow the holder to purchase the stock at a specified price, which is usually higher than the stock price at the time of issue. The warrant becomes valuable when the stock price appreciates beyond the exercise price.

The amount given up to a selling group firm is called the concession, which is the difference between the takedown and the

additional takedown

Upon expiration an in-the-money S&P 100 index call option are settled by delivery of what

cash

A bond that is trading flat

does not include accrued interest in its trading price

In general, yield spreads increase during periods of recession and decrease during periods of

expansion.

Ad valorem taxes are most likely used to support issues of

general obligation bonds issued by a city. Ad valorem taxes are taxes on real estate. Property taxes support bonds issued by cities and counties. State bond issues are backed by other taxes, such as sales and income taxes.

Jumbo CDs are usually issued with a minimum denomination of $100,000. These products are considered low-risk, stable investments for large investors. Due to their large denominations and longer time periods, jumbo CDs offer a

higher rate of interest than traditional CDs.

A standby underwriting is used

in a rights offering; A standby underwriting is used in a rights offering. In a standby underwriting, a bank stands ready to sell any unsold shares after all shareholders have exercised their right to maintain a proportionate interest in the company.

In a cash account, a customer purchases a security and sells the same security without first paying for the original purchase. This transaction

is a violation of Reg T and FINRA freeriding rules, and will cause the account to be frozen, and the broker-dealer will hold the sale proceeds until the original transaction has been paid for.

An investor purchases a T-Bond in the open market, paying 3% interest. The next day, the fed increases the discount rate. In this scenario, the investor would be immediately concerned with

market risk; When interest rates increase, the immediate impact will be a decline in bond prices. Interest rate risk is also referred to as market risk. It is possible that higher rates could also lead to higher inflation, but that would be a longer term concern.

DPP's provide exposure to...

non-correlated assets with steady returns.

On the "effective date," shares can first be offered to the public at the public offering price. Investors who purchase shares then are free to trade them in the secondary market - e.g.,

on securities exchanges or in the over-the-counter market.

A firm is a participant in a securities offering. to sell a substantial amount, the firm agrees to repurchase the shares at no less than original sales price. such agreements are

prohibited as fraudulent and manipulative.

The specific agreement governing a selling group's duties in a new issue is called the

selected dealer agreement; The specific agreement governing a selling group's duties in a new issue is called a selected dealer agreement. The underwriting agreement specifies terms between the issuer and the managing underwriter; the agreement among the underwriters addresses terms between all underwriting firms and the managing underwrite

Prior to an Initial Public Offering, a company enters a period when it is prohibited from releasing new material information to the public without amending its registration and prospectus. This time frame is known as

the cooling-off period. The SEC mandates a cooling-off to keep companies from building hype surrounding public offerings of securities, beyond information they disclose in public filings. Violating quiet-period requirements can result in disciplinary action, and it also can cause delays in the offering.

MSRB Rule G-37 prohibits a firm from engaging in certain municipal securities activities with an issuer for two years after political contributions are made to officials of the issuer by a municipal securities dealer's municipal finance professionals,

the dealer itself, or any political action committee (PAC) controlled by the broker-dealer or an MFP. A contribution by a family member of a municipal finance professional does not trigger this ban.

Moral obligation bonds can be revenue or GO bonds. Issuers can make a budget recommendation for additional funding if there are insufficient funds to pay debt service, but

the legislature is not obligated to approve the funding. Voter approval is not required for issuance of moral obligation bonds.

One test for interpositioning is

whether a second broker-dealer was used.

which of the following actions is required of a BD for its AML program

Designation an AML compliance officer

A member bank of the federal reserve system borrows from the Federal Reserve Bank at the

Discount Rate; The discount rate is charged by the Federal Reserve when funds are loaned to member banks.

Agency securities such as Ginnie Mae and Fannie Mae are second in credit quality to that of U.S. Treasuries.

Due to the underlying mortgages, they do carry pre-payment risk. Also, they are quoted in 1/32nds.

All of the following are investment benefits of real estate investment trust (REITs) EXCEPT:

Ability to pass through losses for investment tax deductions

The type of tax that most commonly backs the municipal bond issues of cities and counties is

Ad Valorem tax; Counties, cities, towns, and villages rely on ad valorem taxes to back their GO bond issues. These taxes are assessed on property owned by individuals or businesses that is within the municipality.

Alex has three Traditional IRAs. He is single and earns a salary of $90,000. He can contribute up to the annual dollar limit to

All of his Traditional IRAs, in the aggregate; If an individual has several Traditional IRAs, the contribution limits apply to all, in the aggregate. Contributions may be made to any, as long as the total doesn't exceed the annual dollar limit.

A financial prospectus must be delivered to any investor who purchases securities in an IPO, before the purchase is completed.

Also, a prospectus must be given to anyone who makes a written request after the registration becomes effective.

Variable annuities are designed for long-term growth and offer numerous investment choices to align with investor objectives. Their growth is not currently taxable, which helps them accumulate strong values.

Although many offer liquidity provisions that allow withdrawals of a certain percentage of the account value each year (often 10%), there are surrender charges associated with larger or more frequent withdrawals, so they do not provide substantial liquidity.

When a broker-dealer maintains a firm market in a stock it is committed to trading the stock at the quoted price, and for up to the quoted number of round lots.

Any amount greater than that must be negotiated with the broker-dealer. Quotes in the NASDAQ are firm quotes, whereas quotes on the pink sheets are workable indications, and are not binding.

All of the following statements about new account approvals are true EXCEPT

Approval must take place before any trading in the account.

Which of the following securities carries no reinvestment rate risk?

As an asset category, zero-coupon bonds do not have reinvestment rate risk, as these types of bonds do not make any regular interest payments to investors

When must the brokerage firm deliver a customer confirmation to the customer?

At or before completion of each transaction. Confirmations must be delivered to customers at or before completion of each transaction.

Which of the following money-market instruments is a time draft?

Banker's acceptance; A banker's acceptance is a time draft that facilitates the purchase of foreign goods.

All of the following statements are true regarding bond trading markets EXCEPT

Bonds are usually traded at a centralized location or exchange; Unlike equity trading, bond trading usually takes place between dealers in decentralized over-the-counter markets. Bonds are typically bought and sold by institutions; individuals are more likely to purchase bond funds. The spread between bid and offer price is typically the compensation for a bond trade, while equity trades are typically compensated by brokerage commissions.

An individual has made a trade based on material non-public information she learned from her neighbor. Which of the following statement are true?

Both the "tipper" and the "tippee" are in violation of insider trading rules. Violators are subject to criminal fines of up to $5 million and 20 years in prison.

The broker call rate is the rate of interest that

Broker-dealers are charged to borrow money from a bank, to support customer margin trading. The broker call rate is the interest rate that banks would charge broker-dealers for capital, which will in turn be loaned to the customers of the broker-dealer. This is the rate that customer interest charges are typically based on.

In which type of underwriting is a securities issuer most likely to get the best price with the least risk?

Competitive bid, firm commitment

Balance of trade is the difference between a country's exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad.

Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

From the perspective of analysts who rate the credit quality of general obligation bonds, which two of the following are considered more safe?

I. Unlimited taxing authority; IV. Low debt limits; Unlimited taxing authority permits issuers to back their debt with their total taxing authority, not a specific, narrowly defined tax. A low debt limit potentially signifies less outstanding debt. It is perceived that the issuer's debt is safer from default if the municipality has a low debt limit.

Rule 144 applies to the sale of securities that

I. were acquired by investors through unregistered, private transactions II. are considered control securities because they are held by an affiliate of the issuer

If a limit order is specified as "good til cancelled" (GTC), it will remain in effect until cancelled.

If it is specified as a day order and isn't filled during the same trading day, it will be cancelled automatically at the close of trading.

An investor that wishes to liquidate ETF shares will receive cash

In the amount of the market value of the shares at the time the order is executed

A standby commitment is a type of firm commitment underwriting that applies when additional shares are issued, and current shareholders have pre-emptive rights.

In this arrangement, the securities are offered to the public for a 2- to 4- week standby period. The underwriter will purchase for resale any of the shares that are not subscribed to during the standby period.

Under Rule 144, a corporate insider can seller the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks.

In this case, 1% of the outstanding shares = 150,000 while the average weekly trading volume over the previous four weeks = 214,250. Therefore, a corporate insider could sell 214,250 shares.

A speculative investor has a strong bearish outlook on ABC stock. Which of the following positions is most suitable for this investor?

Long ABC put; A long put is the most bearish of the options strategies. When not used to protect a stock position it allows an investor to benefit from a declining market.

A banker's acceptance is a short-term negotiable debt instrument issued by a borrower and guaranteed by a commercial bank, as a time draft drawn on the bank.

Maturities typically fall between 30 and 180 days and issues usually can be sold on the secondary market at any time prior to maturity?

UTMA accounts are opened under the tax ID of the minor or custodian.

Minor

Your client Horton placed an order today to purchase the new Able County Port Authority revenue bonds, being priced to yield 3.50% to maturity. You must deliver the official statement to Horton

No later than the settlement date; When purchasing a new issue of municipal bonds, your client must receive a copy of the final official statement no later than the settlement date of the transaction.

For a direct participation program, what is the consequence of being a tax pass-through entity?

No tax at the partnership level; When organized as limited partnerships, DPPs are pass-through tax entities. They do not pay income tax at the entity or partnership level. All profits, losses and tax consequences are passed through to the partners.

No-load mutual funds may have lower expense rations than load mutual funds for which of the following reasons

No-load funds are permitted to charge a 12b-1 fee greater than 25 basis points

To avoid influencing behavior, municipal securities firms may not give gifts of more than $100 per year in connection with the business of the recipient's employer.

Occasional meals and tickets to shows and sporting events, and reimbursement of reasonable amounts of deductible business expenses do not violate the gift rule. However, season tickets to a sports team would be considered excessive.

For a public offering of securities, when does the cooling-off period begin?

On the filing date; The filing date is when the issuer or lead underwriter delivers the registration to the SEC. The minimum cooling-off period is 20 days.

Serial bonds are those which are repaid

Over the course of regular time intervals, usually coinciding with income streams from projects funded by the bond issue.

Which of the following considerations should a RR explain to a customer when recommending 529 college savings plan?

Potential deductibility of contributions from state taxes.

An investor who has an investment objective of income would be most likely to purchase a(n)

REIT; A REIT would be a suitable investment for an individual seeking current income.

Municipal taxing authority and statutes that address types and amounts of taxes vary considerably. Most local government bond issues require voter approval or referendums before they can be issued.

States typically rely on sales or income taxes for backing of bond issues. A low debt limit is typically viewed more favorably because the municipality potentially has less outstanding debt to service.

Structured products offer a limit on downside risk. The tradeoff for this protection is a limit on the upside potential.

Structured products are not highly liquid. Secondary market trading is limited - they are generally held until maturity.

The principal and interest of most certificates of deposit is insured by

The Federal Deposit Insurance Corp.; Individuals are attracted to certificates of deposit (CDs) largely because their principal and interest is insured up to a limit by the Federal Deposit Insurance Corp. (FDIC). The limit currently is $250,000 per depositor.

Listing requirements of the NYSE include specified minimum thresholds for the number of publicly traded shares, total market value, stock price, and number of shareholders.

The SEC does not approve the trading of a company's shares on an exchange.

A confirmation of a municipal securities transaction is required to include all of the following EXCEPT

The amount of markup charged by the dealer; Confirmations must be sent to specify the terms of every trade. The mark up or mark down charged by the issuer is not required to be separately identified. The total amount of the transaction is required.

Which of the following statements is true about a callable bond that is trading at a premium?

The bond is most likely to be called to save interest expense. Bonds are most likely to be called to save interest expense. It is most advantageous to an issuer to call bonds that are paying more interest than bonds that are already outstanding. Such bonds would be trading at a premium. Bonds are called at par, although at times a call premium is paid. Interest is no longer paid after a call.

An investor has established the following position: Buy 100 ABC at 76 Sell 1 ABC 80 call at 1.75. At expiration ABC is 72. Which of the following best describes the impact to this investor?

The call will expire so the premium received will reduce the cost basis of the ABC stock to $74.25 per share. This is an example of covered call writing. When the call expires, the premium received on writing the call can reduce the price of the stock. Worst case, the investor would deliver the stock and profit on the difference between the stock price and the exercise price, plus the premium received.

Which of the following statements is true regarding the concept of an annuity contract?

The kind of annuity selected partly determines the payment amounts to the annuitant

Under SEC Regulation S-P which must a firm include in its customer privacy and opt-out notices

The policies to protect the security of nonpublic information.

A customer sells short 200 shares of XYZ stock for 43 and buys 2 XYZ 47 calls for 2.50. The stock price rises to 50 and the option is exercised. The profit or loss to the investor is

The stock is sold short for $8,600. To protect the position the investor buys 2 calls for $500. The calls are exercised when the market price of the stock rises, so the investor buys the stock to cover the short position for $9,400. The customer received $8,600 from the short sale, but paid a total of $9,900 (premium + stock purchase price) for a loss of $1,300.

Who maintains records of the change in ownership of securities, whenever they are transferred or sold?

The transfer agent

How do the investment options in a Roth IRA differ from those available in a Traditional IRA?

There are no differences; The investment options and prohibited transactions in Roth IRAs are the same as in Traditional IRAs.

What adjustment will be made in the price of a limit order to sell 200 shares of stock, if the company declares a cash dividend of 25 cents per share?

There is no adjustment; No adjustment is made to open sell limit or buy stop-limit orders. Only orders at or below the current market price are adjusted on the ex-dividend date.

MLPs have a limited partnership structure but their units trade actively on stock exchanges.

They help investors participate in several industries including oil and gas drilling, energy distribution and storage, and shipping facilities.

Member firms must retain records of retail communications for three years.

This includes the piece itself and also dated, signed records of the principal's review and approval.

Double barreled bonds are general obligation bonds that have a secondary source of revenue, if it is needed, from revenues generated by the facility they were issued to fund.

Toll roads and airports are examples of projects funded by these bonds, which are often considered among the safest municipal bonds because of this form of backing. Interest on these bonds is tax exempt.

The registrar is best characterized as the entity

Who maintains records of ownership of securities

Customer background and financial information must be sent to an options customer for verification

Within 15 days after the customer account has been approved for options trading; The background and financial information provided by every new options customer for account approval must be sent to the customer for verification within fifteen days after the account has been approved for options trading.

MSRB Rules require final settlement of a syndicate account to occur

Within 30 calendar days following the date all securities have been delivered by the issuer to the syndicate; Final settlement of the syndicate account must occur within 30 calendar days following the date all securities have been delivered by the issuer to the syndicate.

Kevin is a registered rep who advises clients on investment strategies and asset allocation. He is paid a fee of 1% of assets advised, plus commissions on trades placed. Must he register as an investment adviser?

Yes, because he receives an asset-based fee; He may not receive special compensation for these services - anything other than commissions, markups or markdowns. An asset-based fee usually is considered special compensation.