Midterm Q
A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where she works. The annuity contract is currently valued at $16,000, and she plans to retire. On what amount will the customer be taxed if she chooses a lump-sum withdrawal?
$6,000 Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000.
Commercial paper is defined as a money market security if its maturity does not exceed how many days?
270 days
An investor unaffiliated with the issuer is permitted to sell restricted stock without being subject to volume restrictions after having held the shares, fully paid, for a period of at least
6 months
Which of the following are included in the rules on retail communications?
A website
A customer with low net worth contacts you and wants to purchase penny stocks. Although the customer is willing to speculate you feel that penny stocks are not appropriate for this person. What would be your responsibility at this point?
A) Because the customer came to you with the trade, it is best to agree and mark the ticket as speculative. B) Inform the customer that in your opinion this is a trade that is not suitable. C) Your only responsibility at this point is to place the order. D) Refuse the trade and explain to the customer your reasons why. Answer = B.
The Securities Act of 1933 exempts all of the following securities EXCEPT
A) U.S. government debt issues B) municipal securities issues C) savings and loan issues D) real estate investment trusts Answer = D.
Given the following choices, the most suitable investment recommendation for a customer who wants monthly income is
A) utility stocks B) GNMAs C) T-bills D) income bonds Answer = B. GNMAs - Utility stocks = quarterly dividend Income bonds = issued by companies coming out of bankruptcy - not recommended to investors T-bills = do not pay interest
In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC announced a long-term capital gains distribution. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for tax purposes? I. The capital gain distribution is treated as long term. II. The capital gain from redemption is treated as long term. III. The capital gain from redemption is treated as short term. IV. The capital gain distribution is treated as short term.
Answer = I and III
To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes I. name II. verbal assurance that the customer is of legal age III. a street address, unless the primary mailing address is a post office box located in the state of residence IV. a taxpayer identification number
Answer = I and IV.
LMN Securities is the managing underwriter for a new issue of one million MIC common shares. LMN has agreed to sell as much stock as possible in the market, and MIC has agreed to take back any unsold shares. If MIC has not specified a minimum amount of capital for LMN to raise, this is what type of offering?
Best efforts in best efforts - In a best efforts underwriting, any stock that remains unsold is returned to the issuing corporation. Best efforts - sell as much as possible - agent capacity, no risk.
The market attitude of a customer who establishes a credit call spread is
Bearish
Liquidity ratios measure the solvency of a firm or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio?
Current asset / Current liabilities
An intrastate offering is exempt from
Federal registration
Moody's bond ratings are based primarily on an issuer's
Financial strength Bond ratings are credit ratings for an issuer and measure the issuer's ability to repay principal and interest and, thus, its financial strength.
ABC Company has issued $20,000,000 of convertible bonds with a coupon of 5% and a current market value of 120. The conversion price is $40. If all the bonds are converted, how many additional shares of common stock will ABC have outstanding?
Par value = $1,000 Conversion price = $40 Conversion ratio = 25 Issued = 20,000,000/1,000 = 20,000 were issued 20,000 x 25 = 500,000
Which investor has the greatest potential risk if the price of QRS goes up?
Short call - because max loss = unlimited
A stock has a beta of 1.5. If the market goes up 10%, how much would we expect this stock to increase in value?
Since the stock market has a beta of 1.0, a beta of 1.5 is 50% more than 1.0. The stock is 50% more volatile than the market is. Therefore, if the market goes up 10%, we would expect this stock to go up 15%.
If a customer writes 2 ABC Feb 90 puts at 8 and buys 2 ABC Feb 80 puts at 2, which of the following statements are TRUE? The spread is bullish. The spread is bearish. The breakeven point is 84. The breakeven point is 86.
This is an example of Put spread - Sell higher SP = debit - bearish - Breakeven point = PSH = 90- net premium of 6 = 84 Answer = I. and III.
A customer is very concerned about investments that may not keep pace with inflation. He asks about what securities would have the least exposure to inflation risk. Which of the following would be the best answer?
A) Common stock B) Fixed annuity C) Preferred stock D) Cash Answer = A. Common stock Common stock - least inflation risk.
Which of the following securities would most likely have the lowest expense ratio?
A) Exchange-traded fund B) Hedge fund C) Balanced mutual fund D) Variable annuity Answer = A. ETF
Which of the following income investments would be most suitable if interest rates were expected to increase sharply within the next 2 years?
A) GNMAs B) Treasury bonds C) AAA corporate bonds D) Treasury bills Answer = D. Treasury bills Short-term debt instruments would be recommended.
If your client wished to purchase a preferred stock that would offer him the highest likelihood of assured income, plus the opportunity to take part in the growth of the company's common stock, which of these features might he consider? Callable Convertible Cumulative Straight
A) I and II B) II and IV C) II and III D) I and III Answer = II and III
A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable?
A) Investment-grade bond funds B) High-yield bond funds C) Municipal GOs D) Treasury STRIPS Answer = B. High yield bond funds
Each of the following is a defined contribution plan EXCEPT
A) a money-purchase pension plan B) a 401(k) plan C) a stock option plan D) a profit-sharing plan (qualified) Answer = D. profit sharing plan
A holder of an ADR assumes all of the following risks EXCEPT
A) political risk B) market risk C) liquidity risk D) foreign currency risk Answer = C. liquidity risk.
*****A corporation has determined that if it were to go bankrupt, common stockholders would receive $8.47 per share. This calculation is known as
A) retained earnings B) book value per share C) net asset value D) debt-to-equity ratio B. Book value per share
All of the following statements about variable annuities are true EXCEPT
A) such an annuity is designed to combat inflation risk B) a minimum rate of return is guaranteed C) the number of annuity units becomes fixed when the contract is annuitized D) the rate of return is determined by the underlying portfolio's value Answer = B. Variable annuities are not guaranteed.
Which of the following securities would match up well with an equity growth fund that a customer already owns when using modern portfolio theory to reduce risk and increase overall return of the newly created portfolio?
Corporate bond fund - MPT = Modern portfolio theory is designed to create portfolios with negative correlation. In other words, create a portfolio with securities that don't move in the same direction at the same time. The bond fund would be the best choice because bond funds behave differently than equity funds. The resulting mix would reduce the overall risk of the portfolio and (hopefully) increase returns over time.
Which of the following must be registered as investment companies under the Investment Company Act of 1940?
I. Closed-end investment companies. II. Separate accounts of insurance companies offering variable products. III. Variable annuity contracts. IV. Variable life insurance policies. Answer = C. I and II.
Your established firm wishes to promote a mutual fund it markets to the public. What approval and filing requirements apply to this communication? It must be filed with FINRA within 10 days of first use. It must be filed with FINRA at least 10 days before first use. It must be reviewed by a principal either before or after first use. It must be approved by a registered principal.
If it is established - then within If it is new - at least 10 days Answer = I and IV.
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 adhered to with regard to suitability and disclosure of charges and risks associated with exchanges
Ratio call writing exposes an options investor to limited loss unlimited loss limited gain unlimited gain
Limited gain and unlimited loss
Investors who purchase callable bonds face what type of investment risk?
Reinvestment risk
If a client who holds a convertible preferred stock believes the company may go bankrupt within the next 3 years, what would you advise the client to do with the stock?
Sell the stock- In the event of bankruptcy, all debt holders have priority over equity holders in claims on the assets of the corporation in liquidation. The safest alternative is to sell the stock. Buying puts on the underlying common stock would be an effective hedge, but with a 3-year wait, the position would have to be renewed several times, as the usual option only has a life of 9 months. This would lead to increased transaction costs.
A brother and sister would like to open an account together. Contributions to the account will be disproportionate. Both the brother and sister have children and they each want their children to get their proportionate shares when either the brother or sister dies. What type of account would you recommend?
Tenants in Common -- In a tenants in common account, a deceased tenant's fractional interest in the account is retained by that tenant's estate and can be passed to the deceased heirs, and not passed to the surviving tenant(s).
Which of the following occurs in a partnership account if one partner dies?
The account is frozen until an amended partnership agreement is received.
A fundamental analyst is reviewing the financials of a company. The company is highly leveraged. What does that mean?
The company has capitalized itself by issuing mostly debt.
Which of the following statements about a red herring is NOT true?
The final offering price does not appear in a red herring. B) A red herring is used to obtain indications of interest from investors. C) A registered representative may send a copy of a company's research report with it. D) Additional information may be added to a red herring at a later date. Answer = C. - that is incorrect
From chapter 2 - Under FINRA rules, the carrying member, after receiving account transfer instructions from the receiving member must validate the positions in the account within how many business days of receipt?
Within 1 business day following receipt of the transfer initiation form (TIF), the carrying firm must validate the positions in the account and within 3 business days following validation, the carrying firm must complete the transfer of the account. 1 DAY
A company without business operations that raises money through an IPO in order to have its shares publicly traded for the sole purpose of seeking out a business or combination of businesses is known as
a special purpose acquisition company (SPAC)
Fee-based accounts would tend to be most suitable for investors who follow:
a tactical approach to investing Strategic - long term, passive Tactical - short-term, active Fe--based = suitable for active traders, so TACTICAL.
If a registered representative opens a joint account for three people, the registered representative should obtain information on
all of the tenants
An individual younger than age 70½ may contribute to an IRA
if she has earned income
For U.S. investors holding American Depositary Receipts (ADRs), dividends received are
subject to a foreign withholding tax
A registered representative is hired by a broker-dealer on May 1. On June 2, the representative calls former customers at her previous firm in an attempt to move the assets in their accounts to her new firm. Which of the following statements regarding FINRA Rule 2273 are TRUE?
No disclosure is required if the contact by the representative is more than 30 days after hire by the new firm. B) When the contact is oral and made within three months of the hire, a disclosure of costs to transfer assets, financial incentives received by the representative, and differences in products and services must be sent to the customer within 3 business days of contact. C) FINRA Rule 2273 applies to both retail and institutional accounts. D) If the former customer reaches out to the representative or firm within 3 months after the hire to transfer assets, no educational material is required to be sent to the former customer. Answer = b.
In April, a customer buys 1 MCS Oct 50 call for 9 and sells 1 MCS Jul 50 call for 4. What will the customer's profit or loss be if he buys back the July call for $1 and sells the October call for $12?
$600 profit Call spread
An investor owns Blue Streak common stock. Blue Streak's latest earnings report beat estimates but the stock price dropped 12% when the S&P 500 dropped 10%. When discussing the markets drop and what it means to the investor, which of the following would be incorrect?
A diversified portfolio would all but eliminate the risk of negative returns should the market drop like this in the future. Market risk - is not removed by diversification
Which of the following statements best describes a hedge fund?
A private and unregistered investment pool that accepts investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets
Several investors open an account in joint tenancy. Which of the following statements regarding the account is TRUE?
A) Checks need not be endorsed by all parties to the account in order to be deposited. B) Mail need only be sent to one of the parties to the account. C) Only one designated account holder need sign a margin agreement or other forms pertinent to the account. D) Checks may be made payable to one tenant of the account. Answer = B. Checks --> all parties Mail --> one party Margin agreement --> all forms/margin agreement/options
An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for 3 years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer?
A) Class A shares of the MNO High-Yield Bond Fund B) Class C shares of the ABC Investment-Grade Bond Fund C) Class B shares of the ABC Investment-Grade Bond Fund D) Class B shares of the XYZ Growth Fund Answer = B. Class C shares of ABC Investment Grade Bond Fund The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best, because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the 3 years of his investment.
A sophisticated client has expressed an interest in becoming more aggressive with their investment strategy. Her current portfolio consists of $50,000 cash $200,000 in retirement accounts $100,000 in various individual stocks in different industries $100,000 in a balance fund She is willing to invest $25,000 for a minimum of 7 to 10 years and accepts that the investment can and will fluctuate in value over time. Which of the following investments would be the most appropriate?
A) DEF Asset allocation fund B) XYZ Value Equity fund C) MNO High-yield bond fund D) ABC Capital Appreciation Small-cap fund Answer = D. For someone that is willing to take the risk and invest for the long haul, a small or mid-cap growth fund would be appropriate.
If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? She will receive the annuity's entire value in a lump-sum payment. She may choose to receive monthly payments for the rest of her life. The accumulation unit's value is used to calculate the total value of the account. The annuity unit's value represents a guaranteed return.
A) II and IV B) I and III C) I and IV D) II and III Answer = D. II and III When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account's performance.
A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus were that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken?
A) Liquidate and begin to move into cash or cash equivalents B) Ladder the maturities C) Switch to short-term bonds D) No action would be taken Answer = D. One of the key distinctions of a UIT is its lack of management. Once the portfolio has been created, it is fixed until maturity, in the case of debt securities, or until some predetermined liquidation point, in the case of an equity trust.
An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA-rated bonds should his registered representative recommend?
A) XYZ zero-coupon bond maturing in five years B) MNO zero-coupon bond maturing in eight months C) DEF 10-year 8% bond maturing in eight months D) ABC 8% 10-year bond maturing in five years Answer = A. zero-coupon bond maturing in 5 years Because they make no interim payments, zero-coupon bonds have a duration equal to maturity. Of the choices offered, only XYZ is both long-term (over one year to maturity) and zero-coupon.
When an investment banker is successful on a competitive bid corporate underwriting in which they agree to purchase the shares from the issuer, the underwriters will be handling the offering as
A) a firm commitment B) a standby underwriter C) an all or none D) a best efforts Answer - Firm commitment
In portfolio theory, the alpha of a security or a portfolio is
A) a measure of the variance in returns of a portfolio divided by its average return B) the risk of the portfolio associated with the factors that affect all risky assets C) the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved D) a measurement of a portfolio's performance versus a standard benchmark such as the S&P 500 Answer = C.
A prospect is heavily invested in the common stock of an employer's company, ABC, relative to other investments. The stock has performed well over the last 15 years and the prospect is very happy with the investment. After reviewing financial and nonfinancial criteria, you have determined that
A) because ABC has performed well over a 15-year period, keep the stock but sell it if inside information indicates a fall in value is eminent B) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk C) owning too much ABC stock has increased credit risk to an unacceptable level D) he should begin to liquidate the ABC stock using the FIFO accounting method Answer = B.
A registered representative who learns of a customer's death should
A) cancel all open (unexecuted) orders currently working in the market B) liquidate all positions in the account immediately upon notification C) notify FINRA and the IRS that the account holder is deceased D) accept no orders to buy or sell securities unless coming from a third-party power of attorney Answer = A.
Each of the following securities are issued with a fixed rate of return EXCEPT
A) convertible preferred stock B) bonds C) common stock D) preferred stock Answer = C. Common stock Bonds and preferred stock are issued with a stated payment in interest or dividends, respectively. Common stockholders are entitled to receive a variable distribution of profits if a dividend is declared.
In an account opened by two individuals as joint tenants with rights of survivorship, all of the following are true EXCEPT
A) stock certificates may be delivered in the name of either party B) orders may be entered by either party C) mail may be directed to the joint owner agreed upon by both parties to the account D) in the event of death, the other party assumes full ownership of the account Answer = A. In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of one party in a two-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.
Under the Securities Act of 1933, an accredited investor is defined as one having an annual income of at least $1 million for the last two years an annual income of at least $200,000 for the last two years and anticipating an income of $200,000 in the current year a net worth of $1 million not including net equity in a primary residence a net worth of $200,000
Answer = Net worth of $ 1 million Annual income of at least $200,000
ABC Corp. has outstanding a 10% noncumulative preferred stock. Two years ago, ABC omitted its preferred dividend. Last year, it paid a dividend of $5 per share. In order to pay a dividend to common shareholders, each preferred share must be paid a dividend of
Answer = $10 In order for a common dividend to be paid when the issuer has noncumulative preferred stock outstanding, the preferred dividend must be satisfied. In this case the stated dividend is 10% or $10. 10% x par of $100. Preferred must be paid before common
The stock market has been in a bullish trend for several months. However, a NYSE stock your customer owns recently reported an accounting scandal, and it has lost 20% of its value in the last week. The customer calls and wants to sell the security. What kind of risk was the customer exposed to?
Business risk Business risk is an unsystematic risk in that it affects companies individually. The company made a poor business decision, and it impacted the price of its common stock.
Which of the following attributes best describes a tactical asset allocation portfolio style?
Employs an active management style Tactica = Active
A customer has just opened a new account at your firm and given her lawyer limited power of attorney. Which of the following statements are TRUE? I. Confirmations of trades will be sent to the account owner. II. Confirmations will be sent to the party given the power of attorney only. III. The POA ceases upon the death of either party. IV. The POA must be renewed annually.
I and III.
A member of the board of directors of ABC Co. has received ABC stock. The stock was issued last July through a private placement and not a public offering. It is now March of the following year. If the board member wants to sell the ABC stock, what would be the most important disclosure prior to the sale?
The stock can be sold, but paperwork must be filed, and the sale is subject to volume restrictions during a 90 day window that will be opened.
A technical analyst is charting a stock and notices a trading pattern of head and shoulders—top. What does this indicate to the analyst?
The stock is heading into a bearish trend. Answer = Head and shoulders top --> bearish
An investor is somewhat risk averse and wants to invest in industries that are steady, no matter what phase of the business cycle the economy is in. Which of the following industries would be best suited for your recommendation?
The tobacco industry is considered defensive in nature because even when the economy goes down, people still use tobacco products. The tobacco industry should do well in a contracting economy, and it should do well in an expanding economy.
An affiliate holding restricted stock wishes to sell under Rule 144. The shares have been held fully paid for one year. The issuer has 2.4 million shares outstanding. Form 144 is filed on Monday, April 10, and the following is the weekly trading volume for the stock. Week Ending Trading Volume April 7: 23,000 March 31: 25,000 March 24: 26,000 March 17: 24,000 March 10: 22,000
Under Rule 144, either the weekly of past 4 weeks or 1% Under Rule 144, having held the fully paid restricted shares for at least 6 months, the affiliate can begin selling subject to the volume restrictions of Rule 144. The affiliate can sell the greater of 1% of the total shares outstanding or the weekly average of the prior 4 weeks' trading volume (the 4 weeks preceding the Form 144 filing). In this case, 1% of the total shares outstanding equals 24,000, (1% × 2.4 million). The weekly average of the prior 4 weeks' trading volume is 24,500. Therefore, the most the affiliate can sell during the 90 days following the form filing is 24,500 shares. ------- 1% = 24,000 or 4 weeks average = (23+25+26+24_/4 = 24,500
An investor owns a 6% bond issued by ABC Corporation that is callable at 102 ($1,020) next May 1. All of the following statements are true regarding the call EXCEPT
it is likely that once the bond is called, the investor will also be exposed to reinvestment risk B) up until May 1, the investor has call protection C) when bonds are called, they are usually called at a premium to par D) the bond is probably being called by the issuer because interest rates went up Answer = D.
When a customer, who is at least 59½, withdraws money from a traditional IRA that has been funded totally with deductible contributions
unless qualifying for an exception, the entire amount withdrawn is subject to taxation at ordinary income tax rates with an additional 10% penalty B) the basis is taxed as ordinary income, the gains are taxed at the capital gains rate C) the withdrawal causes the entire IRA balance to be subject to taxation at ordinary income tax rates D) the entire amount withdrawn is subject to taxation at ordinary income tax rates Answer = D. All withdrawals from IRA are subject to taxation at ordinary income tax free. There is no penalty after age 59 1/2.
