Mastery 1 Missed
Mutual funds that have an automatic reinvestment provision will typically reinvest: I dividends at NAV II dividends at POP III capital gains at NAV IV capital gains at POP AI and III BI and IV CII and III DII and IV
The best answer is A. If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.
A customer buys 5M of 3 3/4% Treasury Bonds at 95-5. How much will the customer receive at each interest payment? A$93.75 B$187.50 C$325.00 D$375.00
The best answer is A. "5M" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). Annual interest on the bonds is 3.75% of $5,000 face amount equals $187.50. Since interest is paid semi-annually, each payment will be for $93.75. Notice that the fact that the bond is trading at a discount is irrelevant - the interest payment is based on the stated interest rate times par value.
Which of the following describes a position trade? ABuying a security into inventory directly from a customer with a mark-down BAfter receiving a buy order from a customer, the dealer then purchases the stock into inventory and resells it to the customer CSimultaneously buying and selling short the same or equivalent security DSelling stock at the direction of a customer and using the proceeds to buy another stock for that customer
The best answer is A. Position trading is trading for a firm's own account. This is either selling a security out of inventory direct to a customer with a mark-up; or buying a security into inventory direct from a customer with a mark-down. When the firm "position trades," the firm can take both long and short positions as it speculates in the market. Choice B describes a "riskless principal" transaction; Choice C describes an "arbitrage transaction;" and Choice D describes a "proceeds transaction."
A customer buys 10M of Allied Corporation 6 1/4% debentures, M '42, at 90 on Thursday, Oct 9th. The interest payment dates are Feb. 1st and Aug. 1st. The trade settled on Monday, October 13th. The next interest payment will be: A$62.50 B$312.50 C$625.00 D$3,125.00
The best answer is B. 10M stands for 10 - $1,000 bonds (M is Latin for $1,000) = $10,000 face amount of bonds. The bonds pay 6 1/4% interest annually. 6 1/4% of $10,000 is $625 annual interest. Since payments are made twice per year, each payment will be for $312.50
A declining rate of inflation would lead to A higher bond prices and higher bond yields B higher bond prices and lower bond yields C lower bond prices and lower bond yields D lower bond prices and higher bond yields
The best answer is B. A declining rate of inflation will lead to lower interest rates. If interest rates drop, then bond prices will rise.
All of the following statements are true regarding a bond that is "registered to principal only" EXCEPT Athe bond is negotiable Binterest coupons are detached from the corpus of the bond Cinterest payments can be redeemed by anyone Dat maturity, the registered owner receives the face amount of the bon
The best answer is B. A registered to principal only bond has a physical certificate with the bond's face amount registered in the owner's name, but interest coupons are attached which are payable to the "bearer." Bearer coupons can be redeemed by anyone. The bonds are negotiable. No new issues have been sold in the U.S. since 1983 - after this point only fully registered or book entry bonds have been issued. However, these bonds still trade in the market (at least until 2023, if the bond had 40 years to maturity).
The credit rating of a guaranteed corporate bond is based on the credit quality of the Acorporate issuer Bcorporate guarantor CFDIC DSIPC
The best answer is B. Guaranteed corporate bonds are guaranteed by another corporation (typically a parent company guaranteeing the debt of a wholly owned subsidiary). The guarantor will have the higher credit rating, so the bonds will be able to be issued at a lower interest cost. Such bonds take on the credit rating of the corporate guarantor, who is liable for payment if the issuer defaults. Agencies, such as Federal Deposit Insurance Corp. and Securities Investor Protection Corp. do not guarantee corporate bonds. They protect customer accounts if banks, or securities firms fail, respectively.
Who can invest in a hedge fund? ARetail investors BAccredited investors CSophisticated investors DExperienced investors
The best answer is B. Hedge funds are NOT mutual funds. They are private placement limited partnerships offered under Regulation D, typically limited to a maximum of 99 wealthy, accredited investors (once there are 100 investors, it must register as an investment company). Hedge funds use aggressive investment strategies to maximize returns (with a higher level of risk because of this). They require large minimum investment amounts (typically $1 million or more); have the right to assess investors for additional funds: and can limit redemptions. They are not meant for your average investor!
Ultimate payment of debt service on moral obligation bonds is dependent upon: AEarnings coverage BLegislative apportionment CJudicial edict DCourt validation
The best answer is B. Moral obligation bonds are political subdivision (such as a city) issues that obligate the city to pay debt service but additionally, are backed by the State's "moral" obligation to pay. If the city cannot pay, these moral obligation bonds are paid only if the State legislature apportions the funds to service the debt. There is a moral obligation on the part of the State to pay; but not a legal obligation to pay.
REITs are NOT permitted to distribute which of the following to their shareholders? I Income II Dividends III Capital Gains IV Capital Losses AI and III BI and IV CII and III DII and IV
The best answer is B. REITs cannot distribute capital losses to shareholders - they can only distribute capital gains. REITs cannot distribute "income" as such. Any net income must be distributed to shareholders as a dividend.
Regulation SHO is a body of rules covering: Ashorting against the box in an arbitrage account Bshort sales of equities traded on an exchange or over-the-counter Cshort term capital gains treatment on securities transactions Dshorting of naked options by retail customers
The best answer is B. Regulation SHO is an SEC rule intended to apply a uniform short sale rule to both exchange listed and OTC equity issues; and to stop the illegal practice of "naked" short selling (selling short a security without the intention to borrow and deliver the securities on settlement).
The custodian bank usually performs all of the following functions EXCEPT: Asending dividends and capital gains distributions to shareholders Bselecting the investment manager Cpreparing and mailing proxies to shareholders Dholding the portfolio of investments in safekeeping
The best answer is B. The custodian bank always safekeeps the assets and usually acts as both paying agent and transfer agent. Therefore, sending dividends and proxies to shareholders would fall to the custodian. The custodian does not manage the fund, nor does it choose the manager. The manager's contract is voted on annually by the shareholders.
A mutual fund has a net asset value per share of $11.00. The maximum offering price per share is: A$11.85 B$12.02 C$12.42 D$12.56
The best answer is B. The maximum sales charge on a mutual fund is 8.5% under FINRA rules. The formula to find the offering price is: Net Asset Value 100% - Sales Charge %= $11.00 100% - 8.5%=$11.00.915 =$12.02
The nominal yield of a bond will? A increase as bond prices fall B remain unchanged as bond prices fluctuate C increase as bond prices rise D decrease as bond prices rise
The best answer is B. The nominal yield is the stated rate of interest as a percentage of par value. It does not change as bond prices move. However, the current yield and yield to maturity will be affected by changes in bond prices
The first use of funds under a "gross lien revenue pledge" is to pay the: Aoperation and maintenance fund Bdebt service fund Cdebt service reserve fund Dmaintenance reserve fund
The best answer is B. Under a gross revenue pledge, bondholders have claim to the gross revenues of the facility. After the debt service is paid, then operation and maintenance is paid. Contrast this with a "net revenue pledge." Under this pledge, bondholders only have claim to net revenues after operation and maintenance is paid. In this case, the first use of funds is to pay operation and maintenance.
Which of the following corporate obligations are NOT secured? I Collateral trust certificate II Subordinated debenture III Commercial paper IV Debenture AI only BII and IV only CII, III, IV DI, II, III, IV
The best answer is C. A secured bondholder has a lien on a specific asset of the company - such as securities given as collateral in the form of a collateral trust certificate. A debenture and subordinated debenture (a second layer of debentures issued after the first debenture offering of a company, where the second layer of debentures will be paid after the first layer - thus, they are "subordinate" to the first layer of debentures) are promises to pay without any liens on corporate assets. Commercial paper is a short term IOU and is only backed by the issuer's promise to pay.
The NYSE Specialist (DMM) and Floor Trader system is the model for trading used by which of the following markets? ANASDAQ BOTC CPHLX DBATS
The best answer is C. All of the regional stock exchanges, such as the Philadelphia Stock Exchanges (PHLX), as well as the American Stock Exchange (now renamed the NYSE American), model their trading after the NYSE Specialist/DMM and Floor Trader system. NASDAQ is an all electronic market, while BATS (Better Alternative Trading System) is an all electronic market that started as an ECN, but has grown so large that the SEC now recognizes it as an exchange. Note: The regional exchanges as independent entities are a dying breed. At the end of 2007, NASDAQ purchased the PHLX and the Boston stock exchanges. The NYSE has purchased the Pacific and American stock exchanges and has renamed the Pacific as the "ARCA" exchange and the American as the "NYSE American." These must still be known for the exam, since these are being run as separate subsidiaries of the major markets.
All of the following statements are true if a customer places an order for an NYSE listed issue EXCEPT the order: Amust be directed by the member firm to the NYSE trading floor for execution if the customer so requests Bcan be directed by the member firm to any trading venue if the customer does not direct the order to a specific market Ccan be matched internally by the member firm and is not required to be sent to a public trading venue Dcan be directed by the member firm to a trading venue that "pays for order flow" as long as this is disclosed to the customer
The best answer is C. FINRA member firms cannot match orders internally and cannot "privatize" their trades. All trades must be effected in a public venue - whether it be on the NYSE floor; in the Third Market; or through an ECN. Member firms are permitted to accept payment for order flow, but this must be disclosed to customers. Also remember that any trade price must be the "best" one available at that moment in the public markets.
All of the following statements are true about repurchase agreements initiated by the Federal Reserve EXCEPT: Athese are commonly called "repos" Bthey are used in open market operations Cthe Fed is selling securities to dealers which it promises to buy back at a later date Dit is used to ease credit and lower interest rates
The best answer is C. In a Fed-dealer repurchase agreement (a "repo"), the Federal Reserve buys (not sells) government securities from the primary dealers (mainly large commercial banks) with an agreement to sell them back the next day (at a slightly higher price). This gives the bank cash that it can lend out, easing credit and lowering interest rates. The New York Fed conducts "open market operations" with the primary dealers every day - using "repos" to loosen credit and "reverse repos" (where the Fed sells Treasury securities to the dealers, draining them of cash) to tighten credit.
Which statements are TRUE regarding money market funds? I Money market funds are typically sold without a sales charge II Money market funds typically do not impose management fees III Fund dividends are not taxable if reinvested in additional shares IV Typical maturities of securities held in the portfolio are 30 days or less AI and II BIII and IV CI and IV DII and III
The best answer is C. Money market funds usually do not impose sales charges but all funds impose management fees. Fund dividends are taxable, whether or not they are automatically reinvested in additional fund shares. The reason why these funds are called "money" funds is that the securities held in the portfolios have very short maturities (less than 30 days) and turn over into cash quickly.
The ex date for a mutual fund is: I set by the Board of Directors of the Fund II 1 business day prior to the Record Date III the date on which the fund's NAV per share is reduced for any distributions AI and II BII and III CI and III DI, II, III
The best answer is C. The ex-date for a mutual fund is set by the Board of Directors. On that date, the price of the shares is reduced for any distributions. The normal ex-date of 1 business day prior to record date does NOT apply because there is no trading of mutual fund share
A $1,000 par Treasury Note is quoted at 100-1 - 100-9. The spread is: A$.025 per $1,000 B$.25 per $1,000 C$2.50 per $1,000 D$25 per $1,000
The best answer is C. The spread between the bid and ask is 8/32nds. Remember, government and agency securities are quoted in 32nds (with the exception of T-Bills, quoted on a yield basis). 8/32nds = 1/4th = .25% of $1,000 par = $2.50.
A customer redeems a mutual fund. The customer must be paid the money from the fund company within how many business days? A1 business day B3 business days C5 business days D10 business days
The best answer is C. Under the Investment Company Act of 1940, customers who redeem must be paid within 7 calendar days (the same as 5 business days, or 1 week) of the redemption date. Note that most funds process redemptions much more quickly than this.
A customer who invests in a "fund of hedge funds" should be made aware that: I there are 2 layers of fees associated with the investment - those of the fund manager; and those charged by the underlying hedge fund managers II the computation of NAV is difficult because investments may be made in highly illiquid securities that are infrequently traded III the level of risk associated with the investment is typically higher than that of a mutual fund IV fund distributions will generally consist of more highly taxed ordinary income and short term capital gains AI and II only BIII and IV only CI, II, III DI, II, III, IV
The best answer is D. A "fund of hedge funds" is a closed end fund registered under the Investment Company Act of 1940 (and therefore sold with a prospectus) that makes investments in selected hedge funds. These "funds of funds" allow smaller investors to participate in alternate investments like hedge funds, though they generally have a minimum $25,000 investment amount, cutting out the truly small investor. In addition, these closed end funds are not listed on an exchange - they do not trade. Rather, they are issued either monthly or quarterly, and they are redeemed through tender offer by the sponsor. Since the underlying investments are hedge funds, these "funds of funds" are characterized by aggressive trading, high risk, and potentially high reward. Many of the investments made by hedge fund managers are "exotic" and "illiquid," making the daily mutual fund NAV determination difficult. The underlying hedge fund manager is compensated with management fees, in addition to the mutual fund manager that selects the hedge fund investments earning management fees, so there is a double layer of fees to this investment. Because the underlying hedge funds are aggressively traded, resulting gains (and losses) tend to be short-term, making these tax-inefficient investment vehicles.
Which statements are TRUE regarding DK notices?I They are sent to customersII They are sent to contra-brokersIII They are used to confirm the details of the tradeIV They are used to reconcile unmatched trades AI and III BI and IV CII and III DII and IV
The best answer is D. DK or "Don't Know" notices are sent dealer to dealer to reconcile unmatched trades. The dealer knows that there is a problem when he or she receives a comparison from the contra broker that does not agree with the trading record.
A customer invests $1,000 in a money market fund. If the fund's assets appreciate by 10%, the customer will have: A100 shares @ $11.00 each B110 shares @ $10.00 each C1,000 shares @ $1.10 each D1,100 shares @ $1.00 each
The best answer is D. Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).
Series EE bonds: I are issued at a discount to face II are issued at face value III pay interest semi-annually IV pay interest at redemption AI and III BI and IV CII and III DII and IV
The best answer is D. Series EE bonds are "savings bonds" issued by the U.S. Government with a minimum purchase amount of $25 (or more). This is the face value of the bond, and any interest earned is added to the bond's value. The interest rate is set at the date of issuance. Interest is "earned" monthly and credited to the principal amount every 6 months. The bonds have no stated maturity - the holder can redeem at any time, however interest is only credited to the bonds for 30 years. Savings bonds do not trade - they are issued by the Treasury and are redeemed with the Treasury (a bank can act as agent for the Treasury issuing and redeeming Series EE bonds). No physical certificates are issued - the bonds are issued in electronic form.
Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is A5% of Net Asset Value B5% of the Public Offering Price C8 1/2% of Net Asset Value D8 1/2% of the Public Offering Price
The best answer is D. Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.