Practice Exam 1
Member Bank A wants to borrow from the Federal Reserve Bank's window. What would be the interest rate on this loan? A) The discount rate B) The federal funds rate C) The prime rate D) Zero percent, since members are prohibited from charging other members interest
A bc - Member banks borrow from the Fed's discount window at the discount rate. - Member-to-member borrowing and lending is made at the federal funds rate. - The Prime rate is set by individual banks and is the rate of interest charged to a bank's best customers.
Your customer owns 500 common shares of Seabird Airlines (ticker: SBRD). He purchased the shares three years ago at $45 a share. Seabird is currently trading at $92 a share. The customer is concerned that a recent drop in airline travel will negatively impact the price of the stock. However, he does not want to sell the shares as he believes the company's long-term prospects are good. What would you recommend to the customer? A) Buy 5 SBRD 90 puts B) Buy 5 SBRD 90 calls C) Sell 5 SBRD 95 puts D) Sell 5 SBRD 95 calls
A bc - by buying 90 puts, the customer has the right to sell the 500 shares by exercising the put at any time before expiration. - This would be the customer's best hedge because writing (selling) options provides little protection and buying a call is the right to buy a stock at a higher price.
Your customer owns 20 Government National Mortgage Association (GNMA) certificates. They receive a monthly payment of principal and interest. How is the interest taxed? A) The interest is taxable at both the federal and state level. B) The interest is subject to state income taxes only. C) The interest is not subject to income taxes at any level. D) The interest is subject to federal taxes only.
A bc GNMAs have no special privileges. Interest from GNMA certs is subject to income tax at all levels. Principal payments are not subject to tax because they represent a return of principal.
Index and foreign currency options must be settled in A) cash. B) the underlying security. C) banker's acceptances. D) securities comprising the index and the foreign currency.
A bc delivering all components of an index is not possible and delivering foreign currency would require exchanging one currency for another. settlement times for index and foreign currency options are t+1
The SEC can do all of the following except A) approve broker-dealers to participate in the securities business. B) revoke registration of broker-dealers. C) limit activities of broker-dealers. D) fine broker-dealers who violate SEC regulations.
A bc the SEC does not approve anyone; they "allow" them to become re-registered.
Under the Uniform Transfers to Minors Act (UTMA), Oscar wants to give some stock to his brother's son, a minor. The brother is the legal guardian of the child. If Oscar wants to name himself as custodian, which of the following needs to be done? A) Oscar must open the account and name himself as the custodian. B) Oscar must file the proper legal documents. C) Oscar must receive legal permission to act as custodian. D) Oscar must have the permission of the guardian.
A bc under the UTMA, no special documentation is required. The account is opened in the name of the minor, with the minor's social security number and the name of the adult listed as the custodian.
Which of the following best describes the trade execution of American depositary receipts (ADRs)? A) Trades are executed overseas in a foreign currency. B) Trades are executed domestically in U.S. dollars. C) Trades are executed overseas in U.S dollars. D) Trades are executed domestically in a foreign currency.
B bc - ADRs are often listed on a securities exchange such as the NYSE or Nasdaq and trade throughout the day. - Trades in these securities are dollar denominated. - ADRs trade and settle in the same fashion as a traditional US based common stock.
The Municipal Securities Rulemaking Board (MSRB) does not regulate A) the writing of municipal securities rules and regulations. B) municipalities issuing municipal securities. C) the trading of state or local municipal securities. D) the underwriting of municipal securities.
B bc MSRB writes its own rules and regulates all matters related to the underwriting and trading of state and local munis. MSRB does not regulate muni issuers. In addition, the MSRB has no enforcement powers for its own rules and regulations.
You are recommending the purchase of the XYZ Growth Fund to one of your clients, and you explain that the fund operates pursuant to a 12b-1 plan. Under the terms described in the prospectus, the fee is A) included in the sales charge when shares are purchased. B) part of the expense ratio of the fund. C) reduced on purchases that reach or exceed specified breakpoints. D) a part of the fee paid to the fund's investment manager.
B bc A 12b-1 fee is deducted each quarter from a mutual fund's assets to cover the costs of marketing and distributing the fund to investors.
If an investor purchases $1,000 face amount of an 8% corporate bond at 93, and the bond is scheduled to mature in 2028, what will the investor receive at maturity? A) $1,000 B) $1,040 C) $1,080 D) $930, plus 8% on the invested funds
B bc its a semi-annual payment with corporate bonds.
A client buys stock on Monday, May 2, in a cash account. Under Regulation T, when is the client's payment due? A) At or prior to the time of order placement B) In four business days C) In two business days D) The same day
B bc regular way firm-to-firm settlement is two business days after the trade date (T+2). Under Regulation T, payment must be made two business days after the settlement date (S+2 or T+4).
Supply-side economists believe that the government should A) use taxation to increase or decrease the money supply. B) allow market forces to determine prices of all goods. C) manipulate the money supply to bring about stability in prices. D) use fiscal policy to control the demand for goods and services.
B bc supply-side economists believe that the government should allow market forces to determine prices of all goods.
Achieving a Better Life Experience (ABLE) accounts may be opened for beneficiaries at what age? A) Before the beneficiary reaches the age of majority in their home state B) Any age C) On or after the beneficiary's 26th birthday D) Before the beneficiary's 26th birthday
B bc the age limit for ABLE accounts is based on the onset of disability, not their current age. The onset must be before they turn 26 years old.
A client and her spouse own shares in the ACE Fund as tenants in common. If each has a 50% ownership interest in the account, and the client dies, what happens to the shares in the account? A) Her spouse would automatically own all the shares. B) Half of the shares would belong to her spouse, and the remaining half would be distributed to her estate. C) The account would be liquidated. D) Ownership of the shares would be determined by probate court.
B bc with TIC, securities pass to the deceased owner's estate.
Describe the gifts and gratuities rule (unit 12F)
BDs may not distribute business-related compensation to the employees of other member firms except as provided in the exceptions listed here: - the comp is not conditional on sales or promises of sales - it has the employing member's prior approval - the comp's total value does not exceed the annual limit set by the regulatory bodies ($100/year)
Your customer, Cecelia, is 40 years old. She is married and has four sons. Her third child, age 13, has committed to going to college at the prestigious Bookworm Institute of Los Angeles in Southern California. Cecelia and her spouse have noted the rapid increase in the school's tuition over the past few years and are worried about their savings keeping pace with tuition costs. They also express discomfort with the uncertainties in market returns. Which of the following is the most suitable recommendation for the customer. A) A 529 college savings plan B) A custodial account in the name of the minor C) A 529 prepaid tuition plan D) A Coverdell ESA account
C bc 529 college savings plans are exposed to market risk. A 529 prepaid tuition plan is designed to protect against inflation in tuition costs.
In a prime brokerage account, the prime broker A) provides execution services only, while another broker clears transactions and provides any other account services required. B) provides custody, clearing, and all execution services. C) provides custody and clearing services and may share execution services with other broker-dealers. D) subcontracts out all services to other brokers.
C bc In a prime brokerage account, the prime broker provides custody and clearing services and may share execution services with other broker-dealers.
All of the following accounts would be fully covered by the Securities Investor Protection Corporation (SIPC) in the event of a broker-dealer's failure except A) $250,000 in cash and $100,000 in Jim's favorites technology fund. B) $200,000 in Seabird Coffee Company stock and $300,000 in the Alfs Money Market Fund. C) $200,000 of Windmill Advisors Growth Fund and $300,000 in steel futures. D) $200,000 in an index ETF in an account with 100 30-year T-bonds.
C bc futures are not a security and not covered by the SIPC
An investor owns a municipal bond fund. What is the tax status of distributions from the fund? A) Both income and capital gains distributions are taxable. B) Both income and capital gains distributions are tax free. C) Income is tax free, but capital gains distributions are taxable. D) Income is taxable, but capital gains distributions are tax free.
C bc income from munis is tax free, but capital gains distros are taxable.
An investor is selling shares of Rule 144 restricted stock after holding it the required length of time. The buyers of these shares are purchasing shares of stock that A) are now considered registered but will still be subject to a holding period. B) will still be unregistered and will still be subject to a holding period. C) are now considered registered and no longer held to a holding period. D) will still be unregistered but no longer subject to a holding period.
C bc shares being sold subject to rule 144 after having met the required holding period are now effectively considered registered.
If representative Jamison sends a flyer introducing an exciting new investment opportunity to 30 existing middle market customers, this communication would be considered which of these? A) Institutional communication B) Correspondence C) Retail communication D) Educational communication
C bc the limit for correspondence is 25 retail customers. The limit for correspondence is 25 retail customers. A middle market customer is not a financial institution. It may be educational in nature, but that is not one of FINRA's classifications for communications.
Paula has applied for a representative position with Great Sky Securities, a broker-dealer firm and FINRA member. While in college, she was a bit of a trouble maker. Since completing her education four years ago, she's been a model citizen. Which of the following issues from her past may result in her disqualification from becoming a registered representative? A) A conviction seven years ago for misdemeanor assault for hitting a guy with a pool cue B) A charge six years ago of grand theft auto for the time she went joyriding in the dean's car in celebration of making the dean's list C) Her history of multiple speeding tickets D) A conviction eight years ago for misdemeanor larceny for selling her classmates an interest in the Bay Bridge
D bc disqualifying events include convictions (not charges) of a felony or misdemeanor "involving investments and related to fraud" Infractions like speeding tickers are not a disqualifying event.
A new registered representative working for a broker-dealer is taking a part-time job at a restaurant on evenings and weekends to supplement current income. Regarding this activity, A) no prior notice is required, but the rules allow the firm to retain the right to prohibit all paid activity unrelated to the broker-dealer's business. B) no prior written notice must be made to the member firm because the firm has no authority to reject or restrict the affiliation. C) prior written notice must be made to the member firm, and the firm must expressly grant permission, in writing, prior to acceptance of the position. D) prior written notice must be made to the member firm, who could reject or restrict the affiliation.
D bc if a registered person wants to be employed by or accept compensation from an entity other than the member firm, that person must provide written notice to the member. Note that although the employing member's permission is not required, the firm does have the right to reject or restrict any outside affiliation if it feels a conflict of interest exists.
A customer enters an order to buy 1,000 shares of XYZ at 21. Which of the following is true regarding these order instructions? A) The order can only be executed at 21. B) The order must be executed immediately. C) The order can be executed at 21 or higher. D) The order can be executed at 21 or lower.
D bc the customer is buying, so the cust wants to buy at the lowest price possible.
A common shareholder's preemptive right is the right to A) vote for board members when vacancies arise. B) share in earnings of the corporation via dividends when declared. C) any increase in share value between the time purchased and sold. D) maintain a proportionate share of ownership in the corporation.
D maintain a proportionate share of ownership in the corporation
The regulation enacted by the Securities and Exchange Commission (SEC) to protect the privacy of customer information is known as A) Regulation D. B) the trust indenture act. C) the Bank Secrecy Act. D) Regulation S-P.
Privacy requirements are mandated in Regulation S-P enacted by the SEC to protect the privacy of customer information.
All registered persons must complete a computer-based training session within 120 days of the person's second registration anniversary and every three years thereafter to comply with A) FINRA's firm element regulation. B) FINRA's regulatory element regulation. C) both continuing education (CE) regulatory requirements. D) the Uniform Securities Act state regulation requirements.
the Continuing Education requirement (CE) consists of two elements: regulatory and firm. It is the regulatory element requirement that must be completed within 120 days of the person's second registration anniversary and every three years thereafter.
