Mastery Exam
Investors who purchase callable bonds face what types of investment risk?
Call risk Reinvestment risk
A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into five shares of common stock. The conversion price of the common stock is
$20.
Joan purchased $10,000 worth of ABC Growth Fund five years ago, and during that time, she received $1,200 in dividends, which she reinvested, and $2,000 in long-term capital gains, which were also reinvested. The value of the fund as of today is $14,000. If she were to liquidate 50% of the shares and using the average share price method her profit or loss for tax purposes is a
$400 profit. - Joan began with a cost basis for the account at $10,000, and added to that are the reinvested dividends ($1,200) and capital gains ($2,000). Therefore, her adjusted cost basis is $13,200. If the total value of the fund is $14,000, half (50%) is $7,000. Half of her cost is $6,600. So her reported tax liability would be $400 as a capital gain.
A fundamental analyst is concerned with all of the following except
trading volumes.
If a customer requests to see the predispute arbitration agreement they have signed, a member firm must supply them with a copy within
10 business days of the request.
Which of the following statements regarding a Section 529 plan is true?
A beneficiary of a Coverdell Education Savings Account may also be a beneficiary of a 529 plan.
While employed as a representative at ABC Brokerage, one of John's younger clients has just been awarded a cash prize for her part in creating a new financial app. When asked what her objective was for the prize money, she told John she wasn't sure, but in the short-term, she needed a bit more life insurance and some income-producing investments. Which of the following should John not recommend?
A variable annuity Variable life insurance
How often does a variable life insurance policy adjust the variable portion of the death?
Annually
Under the intrastate offering rule (Rule 147), when may a resident purchaser of securities resell them to a nonresident?
At least six months after the date of purchase
Which of the following orders would be reduced by the specialist (designated market maker) on the ex-dividend date?
Buy limit order Sell stop order
A customer has expressed interest in exchange-traded funds (ETFs) and wishes to discuss them with you. You could tell her all of the following except
ETFs have a NAV, calculated at the end of the trading day, that serves as the trading price until the next NAV is calculated.
A mutual fund investor wants to know how closely your firm adheres to the industry's standardized breakpoint schedule and where he can find out more about breakpoints offered with the funds he is investing in. You tell him
II. there is no industry standard breakpoint schedule. IV. the complete breakpoint schedule for a fund is given in the prospectus.
At its annual compliance meeting (ACM), ABC Brokerage decided that an untapped marketing potential presented itself in the form of a targeted investment program for all individual customers with $50 million in total assets—a list of 120 customers. To implement the plan, a resource officer of the firm contacted a sample of 45 customers to answer a survey as to the least invasive and most impactful method to prove the program's worth. When asked by the CCO of the firm for the survey results, it was determined to be a winning plan and the go ahead was given. The next business day, the prospects were contacted about the plan. Which of the following were needed to be in compliance with FINRA?
If ABC believed no further use was to be made of the survey, it need not be approved prior to communicating the plan's first use.
A 65-year-old man called the branch manager to complain about a recent exchange of a deferred variable annuity proposed and performed by a new representative. The customer said he was unaware that there would be charges associated with the transaction and was shocked that the account value diminished substantially during a recent downturn in the market. The manager should do which of the following?
Interview the representative to ascertain whether firm procedures were followed with regard to suitability and disclosure of charges and risks associated with the exchange.
Joe, a registered representative for ABC broker-dealer, read a great article in the local newspaper about investing in the stock market. He would like to make a copy of it to send to 10 prospects who he feels are suitable recipients. How will this be treated under FINRA rules regarding communications with the public?
Joe may send the article, subject to prior principal approval.
During the cooling-off period, underwriters may not do which of the following?
Make offers to sell the securities Take orders via the red herring
A conservative customer is invested in a large-cap, value-managed equity fund. The stock market drops 10% due to a poor economic forecast for the country. Your customer is upset that his conservative mutual fund lost almost as much as the stock market. What risks does your customer need to understand?
Market risk Systematic risk
An active portfolio manager may position the portfolio in stocks within a few market sectors, frequently trading in and out of the individual stocks, and subsequently, sectors. This type of management style can be suitable for certain investors. When explaining this strategy, you can help your investor see this as which of the following?
Sector rotation - An active manager may change her sector focus to capitalize on relative performance of different sectors during different stages of the business cycle. This is known as sector rotation.
Ezekiel, a 50-year-old investor, has entered your book of business through a transfer from another representative within your firm. According to Ezekiel's profile, he is approved for trading covered options. Getting to know him, you remind him he could profit from taking an income using calls. Because he is bullish on the market, which of the following would you recommend to accomplish your recommendation?
Selling covered calls - There are two main strategies for trading call options. One will produce protection (a hedge) and the other strategy can produce income (selling). When selling calls, to minimize risk, make sure the call is covered by the corresponding underlying security. Details on covered call writing are part of the SIE.
If an underwriter of a rights issue exercises any unexercised rights on the ex-rights date, this is an example of what type of issue?
Standby - This is the definition of standby underwriting. It will also be important to know that in both firm commitment and standby commitment, the underwriter actually purchases the securities for resale. He is a principal in the deal. In a best efforts or all-or-none underwriting, the underwriter is acting as an agent. He does not have the financial liability of ownership. This topic is part of the SIE material.
A customer wishes to buy a security providing periodic interest payments, safety of principal, and protection from purchasing power risk. The customer should purchase
TIPS.
When examining a new municipal bond fund that your firm just informed you it was adding to the list of approved offerings, you felt certain your list of suitable customers was very strong. After taking your first order of this fund and presenting the order ticket to your principal, she informed you to re-examine the conditions of suitability. Which condition would be most important to ensure suitability was paramount?
Tax bracket of the customer
A call to a referred contact presented the representative with a potential client of some size, financially speaking. The prospect informed the representative of the need for a prime account. In order to land them as a client, and in asking for the firm's help in establishing this relationship, the representative was informed of which of the following?
The client will be receiving trade confirmations only from the prime broker.
The tax theory that allows investment companies to avoid triple taxation on dividend distributions made to shareholders is called
The conduit theory.
A bank customer, concerned about the low savings rate of a CD, stepped up to the teller window and asked about moving money from the soon-maturing CD into a money market mutual fund. Because of Rule 3160, which of the following is allowed?
The customer is instructed to follow the signs and see the representative located on the second floor.
FINRA Rule 2330, dealing with members' responsibilities regarding variable annuities, applies under which of the following circumstances?
The initial subaccount allocations The initial purchase of a deferred variable annuity
Three years ago, a customer purchased 300 shares of ACE Fund. He sold the shares on August 15 for a loss of $400. If he then purchased 300 shares of ACE Fund on September 4 of the same year, how would he record the loss for tax purposes?
The loss is not deductible.
A client of yours, Natalia, has been using dollar cost averaging to invest in the XYZ open-end management company family for 20 years and has an average cost of $21.40. During the last six months, she has refrained from making any more contributions into the fund due to poor health. According to her will, upon her death, the fund, which held 8,670.436 shares, passed into the possession and ownership of her 30-year old daughter. The fund carried, at the time of her passing, a NAV of $30.00 with an asking price of $31.50. Based on the facts stated, which of the following is true?
The new cost basis of the inheritance will be stepped up to the next computed NAV.
A customer in her 40s, with ample income to meet her needs, has unexpectedly received $250,000 and would like to invest it in mutual funds. She emphasizes that she is interested in long-term growth and is willing to accept moderate risk. She proposes to her registered representative that the investment be split among three funds: the XYZ Balanced Fund, whose portfolio includes stocks and bonds of many old and successful companies; the KPL Growth and Income Fund, which has shown excellent performance over the past several years; and the NYF International SmallCap Stock Fund, which she feels will provide diversification by investing in foreign companies. In discussing the customer's proposal, the registered representative must make which of the following points?
The proposal does not address the customer's objective: long-term, moderate-risk growth. Also, by splitting the investment among different fund families, she will probably pay higher sales charges.
Jane was excited when you told her you were watching for an opportunity to acquire an equity position in a five-year old, publicly traded growth company you recently heard about, which recently released a report on a new analytical computer program it created to more accurately predict weather-related crop impacts. While insisting on patience, Jane told you to "get in now." Which of the following risks should Jane be made aware of? A)
Timing risk
Which of the following account types would best suit the holder if the account holder wanted to maintain the property but would ensure the account's avoidance of probate?
Transfer on death (TOD)
A client expresses the desire to invest in income securities that have minimal credit risk. Which of the following would be appropriate to recommend?
Treasury bills General obligation municipal bonds
You are the representative for three individuals who have a tenants in common account with your firm. If one individual dies, which of the following statements is true?
Two survivors continue as cotenants with the decedent's estate.
While trying to plan for retirement, your client, who just celebrated their 70th birthday in June, stated they plan to start withdrawals from their IRA three years from now. Which of the following should your client be made aware of?
Waiting two-and-a-half years will mandate that an extra RMD be withdrawn before April 1.
Which of the following insurance instruments do not offer inflation protection?
Whole life insurance Fixed annuities
A new registered representative in your firm was excited to be placing orders in a very fast-paced office and, when filling out the fifth order of the day, inadvertently omitted the designation of the account. The principal, when placing the order, made sure to remind the new representative to call with the designation as soon as they got back to their desk. Was this a problem, and if so, why?
Yes, this was a problem because the principal placed the order without the account designation.
A final prospectus must include all of the following except
a statement indicating that the SEC has approved the issue.
Patsy's Party Supplies is based in Baton Rouge, Louisiana. The company has stores in the Baton Rouge and New Orleans metro areas. Patsy's would like to sell stock in a primary offering (worth $20 million) without registering the offer with the SEC. Patsy's may do this under any of the following offering types except
an S-1 form offer.
All of the following are true of a municipality wishing to raise money through a debt offering except
an offering circular is submitted to the MSRB for approval. - The MSRB does not approve the issue, nor does it receive the offering circular.
A Regulation A exemption covers
an offering of $50 million or less in 12 months.
All of the following statements regarding municipal bond official statements are true except
an official statement must be delivered only upon customer request.
Which of the following formulas determines a customer's net worth?
assets - liabilities
All of the following are terms for different types of underwritings except
closed end.
Your client, working for a local municipality, tells you that they have the opportunity to participate in a Section 457 plan. Explaining some of the characteristics and features of this type of plan, you could tell your client all of the following except
earnings are taxable on an annual basis.
Mary wants to open a cash account with ABC broker-dealer. She does not have a Social Security number but has applied for one. According to the USA PATRIOT Act's customer identification program (CIP), all of the following are required when opening the account except
her applied-for Social Security number.
In order for a customer complaint to have regulatory standing, it must be delivered
in writing.
A prospect has primary investment objectives of current income and safety of principal. During the initial public offering of a closed-end government bond fund, an agent explains to the prospect that the fund invests in U.S. government-backed bonds, which keeps principal safe, and plans to make monthly distributions. Therefore, little could go wrong. Taken as a whole, this representation is
misleading because closed-end fund shares are subject to market pricing.
FINRA has established rules designed to improve the objectivity of research reports and provide investors with more useful and reliable information when making investment decisions. To ensure the investing public receives objective information from the media and publications, the rule requires all of the following except
n adviser or a broker-dealer may not base a recommendation on reports or analyses prepared by others, as long as these reports are represented as the adviser's or broker-dealer's own.
Gary, a registered representative, would like to start a weekly blog on different topics of interest to investors with the purpose of attracting new business. The blog entries would require
prior principal approval and filing with FINRA.
As part of a well-diversified portfolio, your client is examining a potential new investment. Currently, the portfolio contains five secured, corporate bonds that will be maturing in two weeks. The plans are to potentially purchase three unsecured bonds and to replace two secured bonds identified in the secondary market, all of which have a 6% coupon rate. If overall interest ra
remain at $60 per year.
The provisions of Regulation T
require that payment be made two business days after settlement date.
Modern portfolio theory is an approach that attempts to quantify and control portfolio risk. It differs from traditional securities analysis in that it emphasizes determining the relationship between risk and reward in the total portfolio rather than analyzing specific securities. This is derived from the capital asset pricing model, which states that the pricing of a stock must take into account two types of risk. Those risks are
systematic. nonsystematic.
An open-end investment company seeks to achieve maximum income with little or no pursuit of appreciation. The fund invests in preferred stocks of small- and medium-sized companies that are just below investment grade, as well as bonds rated from B to BBB. The fund's management believes that, despite the risks involved with the individual securities, adequate diversification can result in superior investment returns. This information would most likely be describing
the NavCo High Yield Fund - Only the high yield fund fits the fund characteristics. The objective of the fund described is income that is derived from both preferred shares and debt. Because the portfolio's risk characteristics are such that a higher element of risk is present, higher yields would be expected.
When an option is trading, all of the following are fixed except
the premium.
Your new client, Miguel, is eager to start investing. However, you still consider his retirement account too highly concentrated in equities. You explain to him that, in general, all of the following should be considered when positioning his investments except
value stream investing.