Q&A 7
spinoff
Spinoff transactions occur when a company is seeking to divest a division. In a spinoff, each shareholder of the parent retains her original shares, but is also given shares in the newly created entity. There are no immediate tax consequences to the recipient of the new shares. Spinoffs are used by sellers in the hopes that the combined valuation assigned by the market to the two (now) separate companies will be greater than that of the single combined entity. A stock dividend is a situation where each shareholder is given additional shares of the existing company. When a company with no shares currently trading publicly begins trading in the public market, it is an initial public offering (IPO). In a reverse merger, a private company buys a public company with the acquirer's shareholders swapping their shares for a majority stake in the publicly traded shell corporation. This technique allows a private company to obtain publicly listed status quickly, and to avoid much of the regulatory expense incurred with an IPO.
TRACE
TRACE is a reporting system that was created to provide greater transparency in the corporate bond market. RTRS is the reporting system for municipal bonds and the TRF is the reporting system for stocks listed on Nasdaq.
In terms of the number of stocks in each category, rank the components of the Dow Jones Composite Index from greatest to least. I. Utilities II. Industrials III. Transportation a. I, III, II b. II, III, I c. III, I, II d. II, I, III
The Dow Composite is comprised of 30 industrial stocks, 20 transportation stocks, and 15 utility stocks. b. II, III, I
velocity of money
The velocity of money represents the number of times that a dollar is spent over a given period. It is a measure of business activity in the marketplace. The multiplier effect, created by the reserve requirements placed on members of the Federal Reserve System, refers to the fact that small changes in bank deposits result in large changes in the money supply.
L Shares
Variable annuity L shares, also referred to as short surrender annuities, generally have surrender periods of three to four years, after which no sales charges apply. B shares, the normal annuity shares with contingent deferred sales charges (CDSC) typically have surrender periods of seven to eight years before sales charges disappear. Suitability is the main consideration when deciding whether to purchase or exchange into an annuity. Generally, exchanges that are made within three years are considered unsuitable, especially if deferred sales charges apply. However, L shares offer an opportunity to avoid sales charges after the short surrender period.
An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is: a. $2,000 b. $3,000 c. $4,000 d. $6,000
a. $2,000 This is a debit spread since the investor is paying more (4) for the purchased call than he receives (2) for the call that was written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. This is the more valuable option contract and, therefore, defines the investment strategy. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).
A customer has two children and wants to set up educational savings plans to put aside funds for their college education. The customer is concerned that one of her children has no intention of going to college and may use the funds for other purposes. Which type of account is the BEST for this customer? a. A 529 account b. A Coverdell ESA c. A custodial account (UTMA) d. A trust account
a. A 529 account Coverdells and 529 plans have similar benefits in common that satisfy the concerns of customers. For example, the earnings from ESAs and 529 plans accumulate on a tax-free basis if the funds are used for qualified higher education expenses (only ESAs are permitted to be used for elementary school). ESAs and 529 plans allow for a change in the named beneficiary. Unique to a 529 plan, the owner or parent is permitted to take back or have the funds returned to them. If this should occur, the parent would be subject to taxes plus a 10% penalty on the earnings portion of the withdrawals. However, with an ESA, the parent is not permitted to take back the funds since the account must be administered for the benefit of the child (minor). In addition, some ESA plan providers may require that the control of the account be transferred when the minor reaches the age of majority, and some tax laws require that any remaining balance be withdrawn by no later than the beneficiary's 30th birthday.
Which choice BEST describes The Bond Buyer's Revenue Bond Index? a. Average yield on a list of bonds with 30-year maturities b. Average yield on a list of 11 bonds c. Average yield on a list of 20 bonds d. Average yield on a list of new revenue issues
a. Average yield on a list of bonds with 30-year maturities The Bond Buyer publishes different indexes. They include: The 20-Bond Index -- The average yield to maturity on a particular day of 20 specific GO bonds with 20-year maturities The 11-Bond Index -- The average yield to maturity on a particular day of 11 of the 20 specific GO bonds from the 20-Bond Index The Revenue Bond Index (Revdex) -- The average yield to maturity on a particular day of 25 specific revenue bonds with 30-year maturities
Accumulation Units
An accumulation unit in a variable annuity contract is an accounting measure used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts, with differing objectives and portfolios.
Spiders (SPDRs)
Spiders (SPDRs) is an investment that replicates the S&P 500 Index. The product is organized as a unit investment trust and is classified as an exchange-traded fund (ETF).
From the issuer's perspective, when comparing serial bonds to term bonds, serial bonds have: a. Declining interest payments and declining principal amounts b. Increasing interest payments and increasing principal amounts c. Stable interest payments and stable principal amounts d. Stable interest payments and declining principal payments
a. Declining interest payments and declining principal amounts Serial bonds have several (a series of) maturity dates with a lower amount of debt outstanding as time goes by. Each series of bonds will have declining interest payments and declining principal amounts. In comparison, term bonds have one maturity date (i.e., the entire principal balance is paid on one date) and have stable interest payments.
During a deflationary period, interest rates: a. Decrease, causing bond prices to rise b. Increase, causing bond prices to fall c. Remain the same d. Are very unpredictable
a. Decrease, causing bond prices to rise A deflationary period is characterized by a sluggish economy where goods and services decline in value. Interest rates tend to trend downward, causing bond prices to rise.
When reading a research report on an automobile company, a registered representative's use of fundamental analysis determines that the stock is a good investment. When attempting to determine the best time to execute orders to buy the stock, the registered representative could refer to: a. A chart showing the price-earnings ratio for all automobile stocks b. A chart showing a recent history of the market price of the stock c. The company's dividend payout ratio d. The research report's past earning for the company
b. A chart showing a recent history of the market price of the stock The fundamental analyst will use the balance sheets and income statements of companies to determine which security to purchase but may use technical analysis (i.e., reviewing the chart pattern of the stock's market price) to assist in determining when to make a purchase (timing).
Which of the following calculations describes the payout on a variable annuity? a. A fixed number of annuity units multiplied by a fixed dollar amount b. A fixed number of annuity units multiplied by a variable dollar amount c. A variable number of annuity units multiplied by a fixed dollar amount d. A variable number of annuity units multiplied by a variable dollar amount
b. A fixed number of annuity units multiplied by a variable dollar amount When a variable annuity is annuitized, the annuitant will be assigned a fixed number of annuity units based on several factors, including the value of the investment, assumed interest rate, age and gender of the annuitant, and payout option chosen. This fixed number of annuity units is then multiplied by the net asset value of the separate account at each payout period to determine the dollar amount the annuitant will receive each pay period.
A municipal offering in which two or more issues of bonds have the same priority of claim against pledged revenues is referred to as: a. A double-barreled bond b. A parity bond c. A taxable bond d. An alternative minimum tax bond
b. A parity bond A parity bond is defined as a revenue bond in which two or more issues have the same claim to the pledged revenues. A double-barreled bond is one that is backed by a source of revenue as well as the full faith and credit of an issuer that has taxing power [i.e., a general obligation (GO) bond issuer].
Structured products may: I. Offer returns linked to equity securities II. Not offer returns linked to commodities III. Not offer returns linked to interest rates IV. Be formulated to provide principal protection a. I and III b. I and IV c. II and III d. II and IV
b. I and IV Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to equity securities, commodities, or interest rates. The products may also be structured to provide principal protection. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.
Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield. I. Current yield II. Nominal yield III. Yield to maturity IV. Yield to call a. I, II, III, IV b. II, I, III, IV c. IV, III, I, II d. II, I, IV, III
b. II, I, III, IV A bond trading at a discount, which is callable at par, has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity, and the yield to call is greater than the yield to maturity. A bond trading at a premium has a nominal yield, which is higher than the yield to maturity, with the current yield in between the other two yields. The yield to call is lower than the yield to maturity for a bond selling at a premium, which is callable at par.
A registered representative employed by the research department of a member firm is NOT permitted to be supervised by which department of a broker-dealer? a. Trading b. Investment banking c. Operations d. Sales
b. Investment banking Current regulations require a member firm's research department to be separate from its investment banking department to avoid conflicts of interest. An RR employed by the research department is not allowed to be supervised by the investment banking department. The rules do not specify which area of a broker-dealer must supervise an RR working in research, but they do state which department is not permitted to supervise.
According to SRO rules, an email message complaining about excessive commissions sent to an RR's personal electronic device: a. Does not constitute an official complaint since the electronic device is not an official broker-dealer contact channel and its use for business is typically prohibited b. Is a complaint and must be maintained by the broker-dealer c. Is a complaint and must be forwarded to the appropriate SRO d. Must be followed up within 10 business days by a written document from the client to be considered an official complaint
b. Is a complaint and must be maintained by the broker-dealer Records of customer complaints must be maintained according to SRO record-keeping rules. Complaints may be delivered in any written format, including letters, email, IMs, and text messages. There is no requirement to follow up an electronic communication with a paper document or to send the complaint to the appropriate SRO.
The provisions of Regulation FD apply to the disclosures of information that are made by: a. Retail customers b. Senior officials of the issuers of securities c. Institutional investors d. Broker-dealers
b. Senior officials of the issuers of securities The provisions of Regulation FD apply to the senior officials of the issuers of securities. Regulation FD requires that if any material, non-public information is being disclosed to analysts or other investors, it must be made public. If the disclosure is intentional, the information must be simultaneously disclosed to the public. On the other hand, if the disclosure is unintentional, the public disclosure must be made within 24 hours. The filing of a Form 8-K with the SEC is one acceptable method of meeting the public disclosure requirement.
Which of the following choices is NOT considered a tax-preference item when calculating the alternative minimum tax (AMT)? a. Accelerated depreciation in excess of straight-line depreciation b. Straight-line depreciation c. Excess intangible drilling costs d. Excess mining, exploration, and development costs
b. Straight-line depreciation Under AMT rules, taxpayers must compute their income taxes twice. An individual subject to the AMT must first calculate his taxes using the standard method, and then he must recalculate his tax liability using the AMT method. The taxes due are the greater of the two calculations. Tax-preference items are used in calculating the alternative minimum tax. Straight-line depreciation is not a tax-preference item.
A floor broker goes to a trading post to execute an order. When told of the floor broker's order, the designated market maker replies, "you're stopped at 21." This means: a. The floor broker cannot trade the stock until it hits 21 b. The floor broker is guaranteed a price of 21 c. The stock stopped trading at 21 d. The floor broker will enter a limit order at 21
b. The floor broker is guaranteed a price of 21 When a designated market maker stops stock, the price is guaranteed. Stopping stock may be done only for a public order.
Which of the following statements is TRUE regarding the purchaser of a call option? a. The purchaser has an obligation to sell stock if exercised b. The purchaser limits the amount of money he could lose if the underlying stock declines c. The purchaser benefits if the underlying stock declines d. The only way to profit is to exercise the option
b. The purchaser limits the amount of money he could lose if the underlying stock declines The maximum loss that a purchaser of an option (call or put) can sustain is the amount of the premium paid. The purchaser of a call option will profit if the underlying stock increases in value, and exercises the call only if the stock is above the strike price. The investor can profit by either exercising or liquidating the call. A purchaser of a call option has the right to buy stock, not an obligation to sell stock.
A registered representative enters an order for a client. In error, the RR purchases shares of the wrong security. Which of the following statements is TRUE? a. The shares must be placed in the RR's error account b. The shares must be placed in the broker-dealer's error account c. The RR must contact the client and cancel the original transaction d. The firm is required to report the error to the market in which the order was executed
b. The shares must be placed in the broker-dealer's error account All broker-dealers are required to maintain an error account. It is used by a broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the wrong side of the market). RRs do not have an error account. It is maintained by the firm. The firm should execute the original transaction immediately and maintain a record of the error. The firm is not required to notify the market where the order entered in error was executed.
Which of the following option positions is an example of a spread? a. Buy an XYZ June 60 call and sell an XYZ June 65 call b. Buy an XYZ June 60 call and buy an XYZ June 60 put c. Buy an XYZ June 60 call and buy an XYZ June 65 put d. Sell an XYZ June 60 call and sell an XYZ June 60 put
a. Buy an XYZ June 60 call and sell an XYZ June 65 call A spread is defined as the simultaneous sale and purchase of two options of the same class (same stock and same type of option), but it will have different strike prices and/or expirations. A long straddle is defined as the simultaneous purchase of two options that have the same expiration and strike price, but consist of one call and one put. A short straddle is defined as the simultaneous sale of two options that have the same expiration and strike price, but consist of one call and one put. Choice (b) is a long straddle and choice (d) is a short straddle. A combination is similar to a straddle, however, the strike prices and/or expirations must be different. Choice (c) is a long combination.
Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are suitable for the same investors as exchange-traded REITs
b. They are required to distribute the same percentage of taxable income as exchange-traded REITs Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.
An individual purchases two BP (British pound) 150 calls @ 7.50. The contract size is 10,000 BP. The total cost for the contracts is: a. $15,000.00 b. $7,500.00 c. $1,500.00 d. $750.00
c. $1,500.00 British pound option premiums are quoted in cents per unit. To convert to dollars, the decimal point must be moved two places to the left. The total cost is calculated by multiplying the contract size (10,000) by the premium expressed in dollars ($0.0750), yielding $750.00 per contract. Since the individual purchased two contracts, the total cost is $1,500.00.
A customer sold short 1,000 shares of XYZ Corporation that is presently selling at $2 per share. Industry rules require a minimum maintenance margin of: a. $0.33 per share b. $2.00 per share c. $2.50 per share d. $2,000
c. $2.50 per share When a stock that has been sold short has a market value of less than $5, industry rules require a minimum maintenance margin of $2.50 per share or 100% of the value of the securities, whichever is greater. In this example, $2.50 per share is greater and the customer would have to deposit $2,500 in the account to meet the requirement.
An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25 and has a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, the cost basis per share for the newly acquired common stock is: a. $27.75 b. $27.50 c. $26.50 d. $28.00
c. $26.50 To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). The formula for calculating conversion ratio is the par value of the preferred stock ($100) divided by the conversion price ($25). As a result, four shares of common stock are received if the preferred stock is converted into common stock. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4) ($106 ÷ 4 = $26.50). Any future gains or losses on the sale of the common stock will be calculated by using the basis of $26.50.
The 30-Day Visible Supply of municipal securities refers to new municipal bonds that: a. Will be sold in the next 30 days through a negotiated sale of general obligation and revenue bonds b. Have been sold through a negotiated sale in the past 30 days c. Will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds d. Will be sold in the next 30 days through a competitive sale of general obligation and revenue bonds
c. Will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds
The minimum denomination for negotiable certificates of deposit is: a. $1,000 b. $5,000 c. $10,000 d. $100,000
d. $100,000 The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more.
ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC? a. $6.40 b. $7.72 c. $10.91 d. $11.80
d. $11.80 Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.
According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within: a. 3 days b. 5 days c. 10 days d. 7 days
d. 7 days Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.
A municipal bond trader who is looking for assistance in buying or selling a specific municipal bond issue in the secondary market will MOST likely use: a. The Wall Street Journal b. The Bond Buyer c. The OTC Pink Market d. A broker's broker
d. A broker's broker A broker's broker is a primary source for a quote in the secondary market and assists the trader in finding the best price on a specific issue. The Bond Buyer and The Wall Street Journal are publications and do not provide quotes or pricing information on specific municipal bonds traded in the secondary market. The OTC Pink Market provides quotes for securities not listed on the NYSE or Nasdaq.
A customer has realized a capital gain from the sale of a municipal bond. To reduce the customer's tax liability, the capital gain can be offset against a capital loss from which of the following investments? I. A general obligation bond II. An equity security III. A corporate bond IV. A real estate investment trust a. I only b. II or III only c. I, II, or III only d. I, II, III, and IV
d. I, II, III, and IV Since all of the investments are considered capital assets, a capital loss in any of these can offset a capital gain from the sale of a municipal bond. Capital assets include stocks, bonds, options, municipal securities, real estate, and interests or shares in partnerships.
A broker-dealer is acting as a principal in which of the following scenarios? I. Selling bonds from inventory to an individual II. Selling bonds from inventory to another broker-dealer III. Buying bonds from another broker-dealer for inventory IV. Buying 500 bonds to fill an insurance company's order for 250 bonds a. I and III only b. II and III only c. I, II, and III only d. I, II, III, and IV
d. I, II, III, and IV A broker-dealer is acting as a principal when buying for or selling from inventory. In choice (IV), the broker-dealer is buying 500 bonds to fill an order for 250 bonds. The remaining 250 bonds will be for inventory.
Duties of the ROP include: I. Reviewing selected customer accounts II. Establishing option training programs for registered representatives and ROPs III. Reviewing retail communications a. I and II only b. I and III only c. II and III only d. I, II, and III
d. I, II, and III All of the items indicated in the answer are duties of the registered options principal (ROP).
The State of North Carolina is offering $50,000,000 of 5 1/2% sewer improvement bonds. Which TWO of the following choices apply to the bonds? I. They are subject to the margin requirements of Regulation T II. They are subject to the antifraud provisions of the Securities Act of 1933 III. They are subject to the Trust Indenture Act of 1939 IV. They are exempt from the registration requirements of the Securities Act of 1933 a. I and III b. I and IV c. II and III d. II and IV
d. II and IV Municipal bonds are exempt from the registration provisions of the '33 Act, but are subject to the antifraud provisions. They are also exempt from Regulation T and the Trust Indenture Act of 1939.
Rule 145 applies to a(n): a. Stock split b. Stock dividend c. Adjustment in par value d. Merger or acquisition
d. Merger or acquisition rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.
All of the following can be bought on margin, EXCEPT: a. Common stocks listed on an exchange b. Preferred stocks listed on an exchange c. Stocks on Nasdaq d. Options with nine months or less to expiration
d. Options with nine months or less to expiration Options expiring in nine months or less may not be bought on margin. They do not have loan value and, therefore, must be paid in full. However, credit may be extended to purchase LEAPS with more than nine months to expiration.
A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%. What is the minimum equity requirement for the short position? a. 0 b. $2,100 c. $9,000 d. $11,000
b. $2,100 The SRO minimum maintenance requirement for a short position is 30% of the market value. The market value is $7,000, and 30% of $7,000 equals $2,100.
The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is: a. 4.15% b. 4.26% c. 4.46% d. 4.50%
b. 4.26% The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.
Which TWO of the following are suitable for an aggressive investor who wants a non-traditional investment as well as access to his capital? I. A business development company II. A hedge fund III. A liquid alternative investment IV. A private equity fund a. I and III b. I and IV c. II and III d. II and IV
a. I and III Both a business development company and a liquid alternative investment are non-traditional investments that are suitable for an aggressive investor. A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides an investor with access to his capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, as well as financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. The term alternative investments refers to non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage. These strategies differ from simply buying, holding, and selling securities and are often referred to as a way to diversify a portfolio through the use of securities other than equities and bonds. These are the types of strategies are used by hedge funds and private equity funds. One of the disadvantages of both hedge funds and private equity funds is their lack of liquidly. A liquid alternative investment combines the structure of an SEC-registered mutual fund (which is liquid) with a non-traditional or alternative investment.
Which TWO of the following choices are characteristics of GNMA pass-through certificates? I. Interest and principal payments are received monthly II. The investor will receive her principal back at maturity III. Timely payment of interest and principal is guaranteed by the U.S. government IV. Interest is subject to federal tax but exempt from state and local tax a. I and III b. I and IV c. II and III d. II and IV
a. I and III GNMA pass-through certificates are guaranteed by the U.S. government. Interest and principal payments are received monthly and, therefore, the investor will receive principal payments before, not at maturity. The interest is subject to federal, state, and local taxes.
What is the intrinsic value and the time value of the call premium if ABC is trading at 43 and the ABC April 40 call is trading at 4.50? a. Intrinsic value is 3 and the time value is 1.50 b. Intrinsic value is 3 and the time value is 4.50 c. Intrinsic value is 1.50 and the time value is 3 d. Intrinsic value is 4.50 and the time value is 0
a. Intrinsic value is 3 and the time value is 1.50 The call is in-the-money (has intrinsic value) since the market price is above the strike price. The in-the-money amount of 3 points is intrinsic value, and the balance of the premium is time value (1.50).
Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? a. It issues securities that can be redeemed to pay for college education b. It issues securities that are not backed by the U.S. government c. It purchases federally sponsored student loans d. It provides loans to educational institutions
a. It issues securities that can be redeemed to pay for college education The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.
Which of the following is considered a leading economic indicator? a. New orders for consumer goods and materials b. The index of industrial production c. The average prime rate charged by banks d. The average duration of unemployment
a. New orders for consumer goods and materials Economic indicators are classified as leading, coincident, or lagging. Leading indicators precede the change in the economy as a whole. Coincident indicators change with the economy as a whole, and lagging indicators change after the economy as a whole. New orders for consumer goods and materials (also referred to as new orders for durable goods) are a leading economic indicator, and industrial production is a coincident indicator. The average prime rate charged by banks and the average duration of unemployment are lagging indicators.
Municipal bearer bonds that are in default of interest, trade: a. With unpaid coupons attached b. Without unpaid coupons attached c. In registered form only d. Without a legal opinion attached
a. With unpaid coupons attached Municipal bonds that are in default, trade flat (without accrued interest) and must be delivered with all unpaid coupons attached. If the bonds begin paying interest, the present holder is entitled to the past interest payments.
An advertisement for municipal securities states the following: "15-year 10% tax-free bond priced to yield 12% to maturity. Call us now for more details." According to MSRB rules, this advertisement should also state that: a. The tax-free return is actually greater than 12% if the bond is held to maturity b. A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% c. The tax-free return is actually less than 10% if the bond is held to maturity d. A principal approved the advertisement
b. A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% According to MSRB rules, the advertisement must state that a portion of the yield to maturity for a discount bond may be subject to taxation and, therefore, does not represent a fully tax-free yield. In this question, the bond is being offered at a discount because the yield to maturity (12%) is greater than the nominal yield (coupon rate 10%). At maturity, the discount would be subject to taxation as ordinary income, causing the net yield to be between 10% and 12%.
Junius Arbor purchased stock in 2002 for $24,000. In April 20XX, Mr. Arbor passed away. His estate valued the stock at $82,000. The stock was willed in equal amounts to his daughter Cathy and his son Bob. Cathy sold her stock on September 2, 20XX for $48,000. Bob sold his stock on May 8, 20XX for $56,000. Which of the following statements is TRUE? a. Cathy has a short-term gain of $7,000 and Bob has a short-term gain of $15,000 b. Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 c. Cathy has a short-term gain of $36,000 and Bob has a short-term gain of $44,000 d. Cathy has a long-term gain of $36,000 and Bob has a long-term gain of $44,000
b. Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 In the case of inherited securities, the value of the securities is determined at the time of death. The heirs are always considered to have long-term holding periods.
If the auction for auction rate securities fails, the current holder will: a. Receive the par value of the securities b. Continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents c. Continue to hold the securities and the interest rate will be set to the minimum rate allowed in the plan documents d. Continue to hold the securities and the interest rate will be set to a rate of zero
b. Continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents A failed auction occurs when there are an insufficient number of bids to cover the amount of auction rate securities being sold. If this happens, the holders will continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents. This rate is normally higher than the rate that would have cleared a successful auction.
A charity has received restricted stock from the director of a corporation. The director owned the stock for two years before giving it to the charity. According to SEC Rule 144, the charity may sell the stock: a. Only if sold to a qualified institutional buyer b. Freely under Rule 144 c. After holding the stock for an additional six months, subject to the volume restrictions of Rule 144 d. After holding the stock for an additional six months, but not subject to the volume restrictions of Rule 144
b. Freely under Rule 144 The charity may sell the stock freely (immediately) since the required holding period for restricted stock has already been met by the director. Since the charity is a not affiliated with the issuer (a nonaffiliated person), it is not subject to the volume restrictions. However, the stock is still restricted (unregistered) and must be sold under Rule 144. Rule 144A, not Rule 144, requires the purchaser to be a qualified institutional buyer.
When a stock sells ex-rights, which of the following orders on a designated market maker's book will be reduced? I. Buy limit order II. Sell stop order III. Buy stop order IV. Sell limit order a. I only b. I and II only c. II and III only d. III and IV only
b. I and II only When a stock sells ex-rights (similar to ex-dividend), the designated market maker will reduce those orders on his book that were entered below the market. A buy limit order and a sell stop order will be reduced by the amount the stock sells ex-rights since these orders are entered below the market.
A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I. The bid price is equal to the net asset value II. The bid price is equal to the net asset value minus the redemption fee III. The offer price is equal to the net asset value plus a commission IV. The offer price is equal to the net asset value plus the sales charge a. I and III b. I and IV c. II and III d. II and IV
b. I and IV The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund. The term commission is not used in the mutual fund industry as the term sales charge or sales load is used, and is built into the price the customer pays for the fund.
When considering the credit strength of a municipal issuer, which TWO of the following choices are the MOST important? I. The condition of the local economy II. The current financial status of the U.S. economy III. Money supply figures IV. The general capability of the fiscal officers of the municipality a. I and III b. I and IV c. II and III d. II and IV
b. I and IV The state of the local economy is an important factor in determining a municipality's creditworthiness. For example, communities at different stages of growth may require more or less debt, and this must be understood in the analysis. The current financial status of the U.S. economy is not as important as the local economy in determining the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures, which are published by the Federal Reserve Board, are irrelevant with regard to the credit strength of a municipality.
Which TWO of the following statements are TRUE concerning the tax consequences of investing in a limited partnership or direct participation program (DPP)? I. Tax credits will reduce a customer's taxes directly II. Tax deductions will reduce a customer's taxes directly III. Tax credits will reduce a customer's taxable income IV. Tax deductions will reduce a customer's taxable income a. I and III b. I and IV c. II and III d. II and IV
b. I and IV A tax credit will reduce the amount of taxes owed by a customer directly. A tax deduction reduces the customer's taxable income. A tax credit is more beneficial and may be found in a DPP, which specialized in low income housing. An example of a tax deduction is depreciation and depletion.
One of your clients, Kona Okemo, has a long-term objective of capital appreciation. Which of the following investment strategies will MOST closely achieve this goal? a. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund b. 50% in an ETF that follows the S&P 500 and 50% in a diversified bond fund c. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund d. 20% in an oil and gas fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund
c. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund The investor is seeking long-term capital appreciation (also referred to as capital growth). The best answer is based on the asset allocation mix. An investor seeking capital appreciation would want a large percentage of his assets invested in equities. Choice (c) has a mix of 80% equities and 20% fixed-income.
According to Regulation T, when purchasing an option contract the transaction must be paid for within: a. 1 business day b. 3 business days c. 4 business days d. 7 business days
c. 4 business days According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is two business days, payment is required within four business days from the trade date. Although option transactions settle next day, the customer has four business days to pay for a purchase.
Which of the following persons may contribute to a 457 plan? a. A computer programmer employed by IBM b. A federal government employee c. A local government employee d. A self-employed IT consultant
c. A local government employee A Section 457 plan is a type of retirement plan used by many public sector workers (state and local, not federal). These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Each has similar tax features and contribution allowances. The difference is in who may use them. 401(k) plans are used by for-profit employees, 403(b) plans by nonprofit and public school employees, while 457 plans are designed for the benefit of some local government workers.
The 5% Markup Policy applies when a member firm: a. Underwrites debt securities b. Underwrites equity securities c. Acts as a dealer in a transaction with a customer d. Sells a mutual fund to a customer
c. Acts as a dealer in a transaction with a customer A broker is an agent who acts for someone else and receives a commission when a trade is executed. A dealer is a principal who acts for his own account and adds a markup on a purchase. In both cases, they must conform to the 5% Markup Policy, which is a guide broker-dealers must follow. The 5% Markup Policy covers all transactions except municipal bonds and those requiring a prospectus (i.e., the sale of a new issue, mutual fund, and registered secondary). If a member was acting as an underwriter, the firm would be involved in a new issue and, if acting as a sponsor would be involved in the sale of a mutual fund. Since these transactions require a prospectus, they would not be covered by the 5% Markup Policy.
Which of the following securities is an example of a collateralized time draft? a. Commercial paper b. American Depositary Receipts c. Bankers' acceptances d. Eurodollars
c. Bankers' acceptances A BA (banker's acceptance) is used to facilitate foreign trade. It is a time draft that has been guaranteed (collateralized) by a bank.
Which of the following choices may write calls covered by XYZ stock? I. The president of XYZ Corporation II. The trustee of XYZ Corporation's pension fund III. XYZ Corporation IV. ABC Corporation a. II and IV only b. I, II, and III only c. I, II, and IV only d. I, III, and IV only
c. I, II, and IV only Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock.
The federal funds rate may be described as: I. A money-market rate II. A long-term rate III. The most stable rate IV. The most volatile rate a. I and III b. I and IV c. II and III d. II and IV
c. II and III Federal funds are excess reserves that one bank loans to another (usually overnight) when the borrowing bank must make up a deficit reserve position. The rate of interest charged is called the federal funds rate. The federal funds rate fluctuates daily, making it the most volatile money-market (short-term) rate.
Which TWO of the following statements are TRUE concerning revenue bonds? I. Revenue bonds may be issued only with voter approval II. Revenue bonds may be issued even though local debt limits have been reached III. Revenue bonds usually pay higher interest than general obligation bonds IV. Revenue bonds are not exempt from federal income taxes a. I and III b. I and IV c. II and III d. II and IV
c. II and III Revenue bonds may be issued without voter approval and may be issued even though a local debt limit has been reached. They are backed by the revenue derived from a project and not the taxing power of a municipality. They usually pay higher rates of interest than general obligation bonds since they have no taxing power as do general obligation bonds. The interest from both GO and revenue bonds is exempt from federal income taxes.
Which TWO of the following choices are types of securities that are issued by the Federal Home Loan Bank? I. Discount notes with maturities that range between two and 10 years II. Discount notes with maturities of one year or less III. Consolidated bonds with maturities of up to 30 years IV. Consolidated bonds with maturities that range from 20 to 40 years a. I and III b. I and IV c. II and III d. II and IV
c. II and III The Federal Home Loan Bank issues two types of securities to raise capital—discount notes with maturities of one year or less and consolidated bonds with maturities of up to 30 years. These funds that are raised are used to provide funds to FHLB member banks that, in turn, lend these funds to their customers.
In a custodian account, which of the following choices would determine when a minor takes control of the account? a. FINRA b. The Internal Revenue Service c. The state in which the minor is a resident d. The state in which the account is held by the broker-dealer
c. The state in which the minor is a resident In a custodian account, the minor would take control of the account when the child reaches the age of majority. This is determined by the state in which the minor is a resident. This is part of the Uniform Transfers to Minors Act (UTMA). Where the account is being held is not relevant.
Which TWO of the following statements are TRUE regarding the trading restrictions placed on a director of a publicly traded company? I. There is a limit on the amount of registered stock the director may purchase II. There is no limit on the amount of registered stock the director may purchase III. There is a limit on the amount of unregistered stock the director may sell IV. There is no limit on the amount of unregistered stock the director may sell a. I and III b. I and IV c. II and III d. II and IV
c. II and III Restricted stock is stock that is not registered and is typically acquired by an individual through a private placement. With regard to restricted stock, the purchaser must hold the stock for six months before she may dispose of it. Control stock is registered stock that is acquired by an affiliate (control) person, such as an officer or director, in the secondary market. A control person who acquires stock through an open-market purchase may sell the stock anytime. There is no limit placed on the number of registered shares an insider may purchase. According to Rule 144, there is a restriction on the sale of both restricted and control stock.
When computing the dollar price of a municipal bond sold on a yield basis, which of the following call features will be used? I. Sinking fund call II. Catastrophe call III. In-whole call a. I only b. II only c. III only d. I, II, and III
c. III only When pricing a bond, only a call feature that allows the issuer to call the entire issue is used.
Under MSRB rules, which of the following documents do NOT need to be retained for a specific period? a. Customer confirmations b. Written customer complaints c. Issuers' official statements d. Customer related correspondence
c. Issuers' official statements Copies of official statements need not be retained since the MSRB does not have the authority to regulate issuers and, therefore, may not require the preparation of an official statement.
Which of the following statements concerning a tax-qualified annuity is TRUE? a. It has a zero cost basis and grows tax-free b. It is not subject to contribution limits c. It has a zero cost basis and grows tax-deferred d. It may be subject to tax-free distributions, if qualified
c. It has a zero cost basis and grows tax-deferred Tax-qualified annuities are employer-sponsored plans that are available to certain nonprofit organizations, public school, and/or state/city university/college employees. These annuities, sometimes referred to as TSAs may be placed into a 403(b) or a 501(c)(3) plan. Since these plans are funded on a pretax basis, contributions are deducted from an individual's taxable income. An investor's cost basis is considered to be zero since none of the contributions have been recognized for tax purposes. Income grows tax-deferred not tax-free. Upon distribution, every dollar is taxable as unearned ordinary income. Tax-free growth means that none of the distributions will be subject to taxation. This is not the case with these types of plans.
When must a customer sign an agreement to abide by the rules of the exchanges and the rules of the Options Clearing Corporation with regard to position limits? a. Not later than one month following the approval of the account b. At least five business days prior to the first transaction c. Not later than 15 days following the approval of the account d. Not later than the time the account is approved for option transactions
c. Not later than 15 days following the approval of the account The investor must sign an agreement to abide by the position limit rules of the exchanges and of the Options Clearing Corporation no later than 15 days following the approval of the account.
A customer believes a stock will have a wide fluctuation in price over a short period. If he wants to engage in an option strategy that will be profitable from a sharp movement either on the upside or downside, he will buy a: a. Put b. Call c. Straddle d. Spread
c. Straddle The customer will buy a straddle, which is the simultaneous purchase of a put and a call with the same expiration dates and the same strike prices. If the market moved up sharply, the call could be exercised and if it moved down sharply, the put could be exercised, resulting in a profit.
Industrial development revenue bonds are backed by: a. The local municipal district in which the facility is domiciled b. The state in which the facility is domiciled c. The corporate guarantor d. Both the corporate guarantor and municipality
c. The corporate guarantor The corporation that uses the facility that was built by the industrial development revenue bond becomes the party that is backing the bonds. The credit rating of these bonds is dependent on that corporation, not on the municipality issuing the bonds.
Upon written request, duplicate account statements would be required in all of the following circumstances, EXCEPT: a. The customer works in the operations area of a broker-dealer b. The customer works on the trading desk of a broker-dealer c. The customer is a senior executive of an investment advisory firm d. The customer is a principal of a broker-dealer
c. The customer is a senior executive of an investment advisory firm Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens an account at another member, investment adviser, bank, or other financial institution. The rule applies to any person employed by a member firm (broker-dealer). There is no requirement to send duplicate statements if the customer is an employee at a bank, investment adviser, or other financial institution.
in a Rule 144A transaction, which of the following statements is NOT TRUE? a. The seller, or any person acting on its behalf, such as a broker-dealer, must reasonably believe that the purchaser is a qualified institutional buyer (QIB) b. The buyer must be able to establish its credentials as a QIB, through relevant documentation c. The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers) d. If the seller has no reason to question the accuracy of documentation provided by the purchaser, it has no duty to inquire further about the purchaser's status as a QIB
c. The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers) The SEC has provided several examples of documents that can be relied on by the seller when establishing its belief that a purchaser is a qualified institutional buyer. Audited financial statements and a certification from the issuer are common methods of demonstrating that the purchaser is a QIB.
When buying listed put options versus selling the underlying stock short, which of the following choices is NOT an advantage? a. Buying a put would require a smaller capital commitment b. Buying a put has a smaller dollar loss potential than selling the stock short c. The put has a time value beyond an intrinsic value that gradually dissipates d. Buying a put is not subject to Regulation SHO
c. The put has a time value beyond an intrinsic value that gradually dissipates
A customer contacts a registered representative and wants to invest a large sum of money in four different mutual fund families. Which of the following statements is the MOST important disclosure the RR should make to the client? a. The customer will not be able to diversify his assets b. The customer will not be able to switch mutual funds within each family c. The customer will not be able to receive a single account statement d. The customer will not be able to receive sales breakpoints
d. The customer will not be able to receive sales breakpoints The term fund family or fund complex is used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase. The objective is to provide a large number of mutual funds providing a broad range of suitability for investors. A customer may be able to invest a large sum of money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his assets, and have the ability to switch between mutual funds. The most important disclosure that should be made to the client is that there is no advantage to allocating his investment in four different fund families, thereby losing the possibility of receiving a reduced sales charge (sales breakpoints). The ability to receive a single account statement is not an important disclosure and this information is usually provided to clients that have different fund families with a single broker-dealer.
The Founders Income Fund has declared a dividend that is payable to stockholders of record on Thursday, May 29. This mutual fund's ex-dividend will typically be on: a. Monday, May 26 b. Tuesday, May 27 c. Wednesday, May 28 d. The date that is set by the fund or its principal underwriter (sponsor)
d. The date that is set by the fund or its principal underwriter (sponsor) Mutual fund shares do not trade on exchanges and do not have a fixed settlement date. For this reason, the ex-dividend date for a mutual fund will not automatically be one day before the record date, as it is for common stock. Instead, a mutual fund's ex-dividend date is on a date that is determined by the fund or its principal underwriter (sponsor). In practice, mutual funds will often use the day after the record date as the ex-dividend date.
Which of the following choices is a violation of federal laws with regard to tender offers? a. The tender of stock from a cash account b. The tender of stock from a long margin account c. The tender of a minor's stock from a custodian account d. The tender of stock in a short margin account that has been borrowed by a customer
d. The tender of stock in a short margin account that has been borrowed by a customer It is a violation of federal law for anyone to tender the stock that a customer borrowed in a short margin account. The stock has been temporarily borrowed and does not belong to the customer and may not be tendered.
Equity options will expire on: a. The last Friday of the expiration month, at 5:30 p.m. Eastern Time b. The last Friday of the expiration month, at 11:59 p.m. Eastern Time c. The third Friday of the expiration month, at 5:30 p.m. Eastern Time d. The third Friday of the expiration month, at 11:59 p.m. Eastern Time
d. The third Friday of the expiration month, at 11:59 p.m. Eastern Time Beginning February 15, 2015, the expiration date for equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.
When a municipal bond is to be advance-refunded (prerefunded), an escrow account is set up to insure that the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are: a. Revenue bonds b. General obligation bonds c. Federal agency bonds d. Treasury bonds
d. Treasury bonds Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded.
When purchasing a straddle, an investor's maximum profit is: a. The premium b. The strike price minus the premium c. Limited to the narrowing of the spread d. Unlimited
d. Unlimited A long straddle consists of purchasing both a call and put with the same expiration and strike price. Since it involves purchasing a call, there is an unlimited profit potential.
