Series 7 missed
A broker-dealer sending details of a trade to another broker-dealer would expect to receive either one of which TWO of the following in return? A confirmation A Regulation T margin call A DK notice A loan consent agreement I and III I and IV II and III II and IV
A A broker-dealer sending details of a trade (confirmation) to another broker-dealer would expect to receive either a confirmation or a signed don't know (DK) notice. In other words, either confirm the trade or send a notice regarding why the broker-dealer disagrees or otherwise has no knowledge of the trade.
A corporation wishes to open a cash account. Which of the following documents is required? A corporate resolution A copy of the corporate charter A hypothecation agreement A risk disclosure document
A A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account.
A designated market maker (DMM) may not accept which of the following orders? Not-held order Market order Good-'til-cancelled (open) order Day order
A A designated market maker (formerly known as a specialist) may accept all of the orders listed except a not-held order, which allows a floor broker to use discretion in executing an order. If the question asked which orders may be accepted and placed on his book, the answer would be open (GTC) and day orders only. A DMM may accept a market order but must execute it immediately and may not place it in his book.
A customer buys a premium bond that is callable. Which of the following is LEAST beneficial for the customer? The bond is called at its par value in five years The bond is called at its par value in ten years The bond is called at its par value in fifteen years The bond is called at its par value in twenty years
A If the bonds are called in five years at par, the premium paid for the bond will be amortized over the shortest period. This results in the investor realizing a lower yield than if the bond were called after a longer period. It is important to note that rules require a firm to disclose to a customer the lowest possible yield that the customer can realize. On a premium bond (as in this example), the lowest yield will result from the bond being called at par in the shortest period.
An investor writes an uncovered RST May 25 put for a premium of 4. When RST is at 16, the put option is exercised. If the stock is immediately sold at the current market price, what is the investor's profit or loss? $500 loss $500 profit $900 loss $900 profit
A If the stock is put to the writer, he would have to buy the stock for $2,500. His cost basis for tax purposes would be $2,100 ($2,500 strike price - $400 premium received). Since he then sold the stock for $1,600, he would have a net $500 loss ($2,100 - $1,600).
The tool most commonly used by the FRB to regulate the amount of money and credit in the banking system is: Open market operations The discount rate Margin requirements Reserve requirements
A Of all of the tools of the Federal Reserve Board listed, the one most commonly used is open market operations. This is the most flexible tool and can be changed or fine tuned very easily by buying or selling more or less U.S. government securities in the open market. The other choices are not as flexible, but are used to implement FRB policy. The margin requirement is another tool the FRB can use, but the margin requirement is the least likely tool the FRB would use since it only affects a small segment of the economy.
Which TWO of the following activities would require special disclosure documents? Penny stock trading Trading in high-yield bonds Day trading Online trading I and III I and IV II and III II and IV
A Regulators have singled out penny stock investing and day trading as presenting significant risks that warrant providing special risk disclosure documents.
The Bond Buyer's 30-day visible supply includes: Competitive municipal bond issues Negotiated municipal bond issues Treasury bill issues Corporate bond issues I and II only I and III only II and IV only I, II, III, and IV
A The Bond Buyer's 30-day visible supply is an indication used to reflect the amount of new offerings coming to the marketplace in the next 30 days. It carries figures for both competitive and negotiated municipal bond issues and notes maturing in 13 months or more.
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? Intrinsic value is 3 and the time value is 1.50 Intrinsic value is 3 and the time value is 4.50 Intrinsic value is 1.50 and the time value is 3 Intrinsic value is 4.50 and the time value is 0
A 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).
A newly issued bond has a provision that it cannot be called for five years after the issue date. This call protection would be MOST valuable to a recent purchaser of the bond if: Interest rates are falling Interest rates are rising Interest rates are stable The yield curve slopes downward
A The call protection provision of five years would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, outstanding bond prices will rise. Issuers of bonds will call or retire bonds when interest rates decline, and will issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.
Pennsylvania Power Company has announced that it will refund $800 million of its outstanding 6 1/4% bonds that were to mature in 2040. The bonds will be refunded at 106.75% of par value from the proceeds of an $800 million refunding issue. The refunding issue has a 4 1/2% coupon rate and matures in 2030. Bondholders who own 6 1/4% bonds maturing in 2040 will receive: $1,067.50 plus accrued interest The new 4 1/2% bonds being issued plus accrued interest $1,000 plus accrued interest The new 4 1/2% bonds being issued without accrued interes
A The company is refunding the bonds at 106.75% of its par value. The bondholders who own the 6 1/4% bonds will receive 106.75% of the $1,000 par value (106.75% x $1,000) for a total of $1,067.50 plus accrued interest.
On the day prior to the ex-dividend date for an ordinary cash dividend, a holder of a call tenders an exercise notice. The investor will be: Entitled to the dividend Required to pay the dividend to the writer only if the writer owns the underlying security Entitled to the dividend only if the holder owns the underlying stock Required to pay the dividend to the writer
A The holder of a call will get a dividend only if the option is exercised prior to the ex-dividend date. This will result in the buyer being listed as holder of record on the books of the transfer agent.
In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30 listed call for $10. The customer has created a: Bullish spread Bearish spread Debit spread Credit spread I and III I and IV II and III II and IV
A The investor bought the more expensive call. Therefore, this is a debit spread. A call debit spread is a bullish strategy.
An investor purchased $200,000 of 6% general obligation bonds on margin. The customer has a debit balance of $50,000 and is paying interest of 10% yearly on the debit balance from the purchase of the municipal bonds. How much interest expense may the investor use as a deduction for federal income tax purposes? None $5,000 $10,000 $12,000
A The investor may not use any of the interest expense as a deduction against ordinary income. Interest charges on money borrowed to purchase federally tax-exempt municipal securities may not be used as an interest expense deduction for federal income tax purposes. The investor is already receiving the benefit of tax-free interest income from the municipal bond and the IRS will, therefore, not allow the interest expense to be deducted as well.
Your client owns a portfolio of blue-chip equity securities and wants to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to: Write covered calls Buy calls Write covered puts Buy puts
A The most conservative strategy for the investor to achieve her objective is to write covered calls. The call premium received will increase the yield on her portfolio of stocks because it will add to the income generated by the dividends received from the stock.
A corporation calls for the redemption of 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock are $2.50 per share. The common stock is selling at 35.75. What will the market price of the preferred stock be if it is selling at parity with the common stock? 17.88 19 20 71.50
A The preferred stock is convertible into 1/2 share of common stock. The common stock is selling for 35.75. Parity (or equality in dollar value) for the preferred stock is 1/2 of 35.75 (17.88).
A customer opens a new margin account and buys 100 shares of XYZ Corporation at $40 per share. She then writes a call option against the position and receives a $2 premium. The customer must deposit cash in the account of: $1,800 $1,900 $2,000 $2,100
A The purchase of $4,000 worth of stock would require a $2,000 deposit (50% of $4,000 = $2,000). Since the call is covered, there is no margin requirement. The customer received $200 in premiums. This would be deducted from the $2,000 margin call, requiring a cash deposit of $1,800.
Which of the following factors is LEAST important when recommending a long-term brokered CD to a client? The CD was issued by a bank located in a different state from where the client lives The CD has a feature in which the interest rate is based on a percentage increase in an equity index The client will be purchasing the CD in a retirement account The firm may make a market in this CD, but is not obligated to do so
A The state in which the client or issuing bank is located is not an important factor when recommending a long-term brokered CD. The features that establish the interest rate of the security, such as an index of fixed-income or equity securities, is relevant to the client. The amount of FDIC insurance and tax considerations are different depending on whether the CD is purchased in a retirement account. In addition, a broker-dealer is not required to maintain a secondary market or act as a market maker in a CD that was sold to the client. This will limit the liquidity of the security if the client needs the funds prior to maturity.
A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield? A 6.25% in-state municipal bond A 6.65% out-of-state municipal bond A 9.95% investment-grade corporate bond A 10.35% mortgage bond
A The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 6.65% and the equivalent taxable yield is 10.23% (6.65% / 65%). The in-state municipal bond has the best or highest after-tax yield.
A municipal securities representative does an analysis of an official statement and prepares a summary report. The report must be approved by: A municipal securities principal FINRA The Issuer The MSRB I only I and III only II and IV only III and IV only
A The preliminary and final official statements are not considered advertising since they are prepared by or for the issuer. However, a summary of an official statement is considered advertising since it is prepared by the municipal representative and, therefore, must be approved by a municipal principal.
Someone who wants to hedge a portfolio of preferred stocks will buy: Yield-based call options Yield-based put options S&P 500 call options S&P 500 put options
A The prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. If the investor is concerned that rising interest rates will erode the value of the preferred stock portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based call options increase in value when interest rates rise, creating a viable hedge.
An investor reading the newspaper sees that yesterday's effective federal funds rate was 3.47%. On the previous day, the rate was 3.41%. This information indicates: The average rate charged on overnight loans throughout the country increased The Federal Reserve took measures to inject money into the banking system The Federal Reserve increased the federal funds rate Member banks that needed to obtain overnight loans from the Federal Reserve paid more than the previous day
Answer: A The effective federal funds rate is the daily average rate that commercial banks charge throughout the country for overnight loans. It is influenced, but not set by, the Federal Reserve Board. An increase in the federal funds rate normally signifies that the Fed has taken money out of the banking system.
A block of bonds is offered firm by Dealer A to Dealer B for one hour with a five-minute recall. Dealer A calls Dealer B and says, fill or kill. Dealer B: Has five minutes to take the bonds Must take the bonds if he does not call Dealer A back within five minutes Has one hour to take the bonds Must take the bonds if he does not call Dealer A back within one hour
Answer:A When bonds are offered firm for one hour with a five-minute recall, the offering Dealer A cannot sell the bonds to anyone but Dealer B without giving Dealer B the first opportunity to take the bonds. When Dealer A called Dealer B and said, fill or kill, Dealer A was invoking the five minute recall. Dealer B would now have five-minutes to take the bonds or else Dealer A would be free to sell the bonds to someone else.
Which of the following statements is NOT TRUE regarding the similarities between variable annuities and mutual funds? Mutual funds and variable annuities are regulated under the Investment Company Act of 1940 Variable annuity companies will retain any dividends paid, but the owner of the variable annuity must pay taxes on the dividends each year Both mutual funds and variable annuities are considered securities The payout of both mutual funds and variable annuities will depend on the performance of the securities owned in the portfolio
B All of the statements listed are true regarding variable annuities and mutual funds except variable annuity companies will retain any dividends paid but the owner of the variable annuity must pay taxes on the dividends each year. This statement is not true, since an owner of a variable annuity has the income tax deferred. An owner of a mutual fund will have to pay taxes on dividends received that year.
Which of the following items is NOT found on a sell ticket? The customer's account number The customer's original purchase price of the stock The location of the securities Solicited or unsolicited
B All order tickets must contain the customer's account number and whether the registered representative solicited the order or it was unsolicited. A sell ticket must indicate if it is a short sale or a sale of securities owned by the client. The location of the securities must be indicated (long in the customer's account or held by the customer).
A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity, he will receive: $42,750 $50,000 $55,000 $85,500
B At maturity, the holder of the bonds will receive the par value, which in this example is $50,000. The call price and market value are not relevant.
Roundville Bank is considering an investment in Roundville County bonds. The bonds contain a provision that permits banks to deduct 80% of the interest cost being paid to depositors on the funds used to purchase the bonds. These securities are known as: Alternative minimum tax bonds Bank-qualified bonds Private activity bonds Moral obligation bonds
B Bank-qualified municipal bonds allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds. This is done to encourage banks to invest in municipal securities. To qualify, a municipality may only issue up to $10,000,000 annually.
An exercise limit is the maximum number of options contracts that a customer may exercise in a five-consecutive-business-day period for each: Account that she maintains at each brokerage firm Underlying stock on each side of the market Series of options in an underlying stock Underlying stock on the long side of the market only
B Exercise limits relate to the maximum number of contracts that an individual may exercise during a five-business-day period for each underlying stock on each side of the market. Exercise and position limits apply cumulatively to all accounts that a customer maintains at all brokerage firms, not for each account at each firm.
According to MSRB rules, which of the following statements is TRUE regarding a secondary market joint account? It is a violation of the rules if it contains less than three members Its members are not permitted to disseminate more than one quote relating to the account's securities It needs to submit an underwriting fee to the MSRB It is considered to have a control relationship with the issuer
B Members of a secondary market joint account must publish the same offering price.
A customer who has invested historically in mutual funds is considering an investment in a hedge fund for the first time. When comparing mutual funds to hedge funds, which of the following statements is NOT TRUE? Mutual funds are subject to more regulatory oversight than hedge funds Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately Hedge funds often use higher degrees of leverage than mutual funds Mutual funds may be suitable for many customers, whereas hedge funds are generally suitable for sophisticated, wealthy investors only
B Mutual funds and hedge funds both pool investors' money to manage the assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and often employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.
Which of the following statements is TRUE concerning Rule 144A transactions? The securities may be offered only to accredited investors The securities may be offered only to qualified institutional buyers An investor buying these securities must hold them for six months Only domestic issuers may offer securities under this type of offering
B Rule 144A provides an exemption for the purchase of restricted securities by qualified institutions. Qualified institutional buyers (QIBs) are defined as financial institutions that have at least $100 million invested in securities of issuers not affiliated with the entity. These institutions may buy and sell directly with one another without meeting the requirement of Rule 144. The securities offered under Rule 144A may be debt or equity, may be offered by either a domestic or foreign issuer, and may be resold immediately to another QIB. There is no 6-month holding period, as with restricted stock. A private placement under Regulation D may be offered to an unlimited number of accredited investors. An accredited investor is defined as a person with either a net worth of $1,000,000 or annual income of $200,000.
How would preferred stock most likely be affected by an increase in interest rates? Its market value would increase Its market value would decrease Its dividend would decrease There would be no effect
B Since preferred stock is a fixed-income security paying a fixed dividend each quarter, it is affected by interest rates in the same way as bonds. If interest rates rise, the value of existing bonds and preferred stock will fall. If interest rates fall, the value of existing bonds and preferred stock will rise.
Which of the following items is NOT found by reviewing a company's balance sheet? The dollar value of the inventory The amount of interest paid on the company's bonds outstanding The amount of short-term debt The value of the treasury stock
B The amount of interest paid on the company's bonds outstanding (interest expense) is found in a company's income statement. A company's assets (inventory), liabilities (debt or bonds), and shareholders' equity (treasury stock), are found on the balance sheet.
An investor buys 100 shares of XYZ at $50 per share and, at the same time, writes an XYZ May 50 call option for a $5 premium. Excluding commissions and dividends, at what price would XYZ need to be selling for the writer to break even? $42 $45 $50 $58
B The breakeven point for the writer of a covered call is the original cost of the stock minus the premium received on the option (50 - 5 = 45). If the market price were at 45 at expiration, the call would expire and the writer would keep the $500 premium. However, the stock purchased at $50 would be worth only $45, which is equal to the investor's cost.
RSR Corporation has earned $4 per share and has paid a 75 cent dividend per share. If the stock is selling at $38 a share, what is its price/earnings ratio? 2.02 9.5 12.6 50.7
B The price/earnings ratio is found by dividing the market price of $38 by the earnings per share of $4. This equals a price/earnings ratio of 9.5 ($38 / $4). The amount of the dividend is not relevant in calculating the price/earnings ratio.
Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) U.S. government security? Each year the customer will pay both federal and state income tax Each year the customer will pay only federal income tax Each year the customer will not pay any tax The customer will only pay tax at maturity
B The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amounted accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on U.S. government securities is subject to federal income tax, but exempt from state and local income taxes.
A client owns shares of stock purchased at $46 a share. If the current market price is now $70 and the client wants to protect her profit if the price should fall 10%, the RR should recommend which of the following orders? A market order Sell stop $63 Sell limit $63 Sell stop-limit $63
B This client only wants to sell her position if the stock declines by 10% or $7.00. The RR should recommend a sell stop at $63. A market order is not suitable since the client does not want to sell unless the price declines. A market order will not allow the client to receive further profits if the stock increases above $70. A sell limit is an order to sell at a specified price or higher and is usually placed above the current market price. Therefore, a sell limit at $63 is not suitable. Since the client never mentioned a specific limit selling price she is willing to accept, a stop limit order should not be recommended. In addition, a stop limit order may be activated but never executed, and the client would not be able to protect her profit.
An investor purchases $25,000 of a mutual fund when the price of the fund is $13.20. In the same year, the investor receives a $400 dividend distribution and a capital gain distribution of $700. Both distributions are reinvested in additional shares at a price of $12.80. If the fund has a current value of $14.50, what is the investor's cost basis using the average cost method? $13.00 $13.18 $13.50 $13.85
B To calculate the cost basis using the average cost method, divide the total sum of all investments by the shares owned by the investor. The investor purchased $25,000 of the fund at a price of $13.20. The total number of shares purchased was 1,893.94. He also received a total of $1,100 in distributions, all reinvested in additional shares when the price was $12.80. The number of shares purchased is 85.94. The total amount invested is $26,100. The total number of shares owned is 1,979.88. Therefore, the average cost is $13.18. The current value of the fund is not relevant.
Dividends paid by a corporation to its shareholders are NOT: Determined by a corporation's board of directors Voted upon by a corporation's shareholders In the form of cash or the corporation's stock In the form of stock owned in another corporation
B A corporation can pay a dividend to its stockholders in the form of its own stock, stock owned in another corporation, or in cash. The amount of dividend to be paid is determined by the board of directors. Shareholders do not vote on dividend payments.
Rosewood Securities LLC has been accused of buying and selling securities for the purpose of creating artificial trading activity. Which of the following choices BEST describes this activity? Churning Matched orders Capping Stabilization
B A matched order is also known as painting the Tape. It is an illegal activity based on a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity. The intention of this activity is to lure unsuspecting investors into trading the stock because of the appearance of unusual trading volume. The manipulators have already taken a position in the stock, and hope to influence the market (illegally) to make their position profitable through this fake heavy trading volume. Churning is a violation in which a salesperson effects a series of transactions in a customer's account that are excessive in size and/or frequency in relation to the size and investment objectives of the account. A salesperson churning an account is normally seeking to maximize her income (in commissions, sales credits or markups) derived from the account. Capping is a situation where a manipulator is attempting to stop a securities price from rising. Stabilization is a practice used in connection with certain public offerings in which an underwriter posts an open bid for securities at a stated price. Stabilization is intended to maintain an orderly market for the securities during the underwriting and to prevent sharp fluctuations in the market for the securities due simply to supply factors. Properly disclosed, this is an acceptable practice.
In an undivided (Eastern) municipal syndicate account, the remaining liability of an account member is computed: From the number of the bonds he has sold From the number of bonds that are unsold in the account By dividing the number of bonds in a single maturity year by the total number of account members By the syndicate manager who randomly selects a member to sell the remainder of the bonds
B An Eastern account is undivided as to liability. As long as any bonds in the account are still unsold, each member of the account is liable for his proportionate share of the unsold amount. If the member has a 10% participation in a $10,000,000 issue, originally his liability is for $1,000,000 of those bonds. If there is a balance of bonds unsold by other members, he will still have a liability of 10%, whether he sold all or none of his bonds.
In what order of priority do the following investors rank if a company declares bankruptcy? Convertible preferred shareholders Debenture holders Common shareholders Secured bondholders I, III, II, IV IV, II, I, III III, I, IV, II II, IV, III, I
B In the event a corporation declares bankruptcy and must liquidate its assets, bondholders (creditors) have the first claim, followed by shareholders (owners). For a corporation's bondholders, the first payment is made to its secured bondholders (i.e., owners of bonds that are backed by specific tangible assets), then payments are directed to its debentures holders (i.e., owners of bonds that are backed by the full faith and credit of the issuing corporation). For a corporation's stockholders, the preferred shareholders have a higher payment priority than the common shareholders. Ultimately, the order is (1) secured bondholders, (2) unsecured bondholders, (3) preferred shareholders, and (4) common shareholders.
Which TWO of the following choices are characteristics of reverse convertible securities? They are short-term securities They are usually long-term securities The investor is guaranteed to receive his original principal back at maturity The investor may receive less than the value of his original principal back at maturity I and III I and IV II and III II and IV
B Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.
Mr. Jones requests that his securities be held in street name. To honor his request, the broker-dealer must: Have the customer sign a hypothecation agreement Segregate the securities from the B/D's own securities Have the customer sign a margin agreement Not honor his request since securities may not be held in street name
B The only requirement for holding securities in street name is that they must be segregated. A customer signs a margin agreement and hypothecation agreement only when opening a margin account.
An individual owns 800 shares of stock at an original cost of $55 per share. If the company distributes a 15% stock dividend, what is the client's cost basis per share? $63.25 $55.00 $47.83 $47.75
C A stock dividend is not a taxable event when received. The investor must adjust her cost basis. The investor would now own 920 shares (800 shares x 1.15). The new cost basis would be $47.83 (original cost of $44,000 [800 shares x $55] divided by 920 shares).
The security with the longest expiration date would normally be a: Put Call Warrant Right
C A warrant generally has an expiration date longer than a put, call, or right. There are some warrants which never expire.
Your firm is the managing underwriter of an initial public offering. How many days must the firm's research analyst wait before issuing a research report on this IPO? There is no waiting period and research may begin anytime after the effective date 10 days 40 days 90 days
C If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 40 days following an IPO or 10 days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 25 days.
Which TWO of the following statements are TRUE regarding the trading restrictions placed on a director of a publicly traded company? There is a limit on the amount of registered stock the director may purchase There is no limit on the amount of registered stock the director may purchase There is a limit on the amount of unregistered stock the director may sell There is no limit on the amount of unregistered stock the director may sell I and III I and IV II and III II and IV
C 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.
The Modified Accelerated Cost Recovery System is used when: Depleting an oil well Valuing inventory Depreciating machinery Amortizing a bond's premium
C The Modified Accelerated Cost Recovery System (MACRS) is one method that may be used to depreciate an asset. It allows for larger deductions during the earlier life of an asset when compared to the straight-line method of depreciation.
A closed-end fund trading on the NYSE has a current bid price of $21.50 and an offer price of $21.70. A customer purchasing the fund would pay: $21.50 plus a commission $21.50 plus a sales charge $21.70 plus a commission $21.70 plus a sales charge
C The customer would pay $21.70 plus a commission. A closed-end fund is purchased and sold like any other stock traded on the NYSE. The customer would pay the offer price plus a commission or receive the bid price less a commission when selling the security. The term sales charge refers to the built-in compensation charged by an open-end (mutual fund) company when a customer buys shares of the fund.
A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. If the customer sold $1,000 of securities, what is the maximum amount the customer is permitted to withdraw after the sale? None $1,000 $1,500 $2,000
C This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500.
When calculating cost depletion for an oil program, all of the following items are necessary, EXCEPT the: Adjusted basis of the property Recoverable reserves Amount extracted and in storage Amount extracted and sold
C To calculate cost depletion, the adjusted basis, amount of recoverable reserves, and the amount extracted and sold are needed. Percentage depletion is based on a percentage of gross income from the property.
Which of the following types of debt BEST defines a municipal issuer's total bonded debt? Long-term debt only Both short-term and long-term debt Both long-term and short-term debt plus overlapping debt Long-term debt plus overlapping debt
C Total bonded debt is the sum of both long-term and short-term debt of a municipality plus its applicable share of overlapping debt. Overlapping debt is that portion of the debt of other government units for which residents of a particular municipality are responsible, such as services or facilities shared by several municipalities.
A customer sells short 1,000 shares of stock. A few weeks later the company declares a 5% stock dividend. When the customer covers the short sale, the customer will be required to deliver: 50 shares 1,000 shares 1,050 shares 950 shares
C When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declared a 5% stock dividend. Therefore, a customer who sold short 1,000 shares would be required to deliver 1,050 shares (1,000 shares x 5% = 50 additional shares) when covering the short sale.
A broker-dealer receives a confirmation for a trade that does not appear on its records. The broker-dealer should send a DK notice to: The SEC FINRA The contrabroker The customer represented in the transaction
C A DK notice is sent to the contrabroker upon receipt of the confirmation for an uncompared trade. The broker-dealer sending the DK notice states that the trade does not appear on its records and, therefore, denies any responsibility for the settlement of the trade unless the contraparty can prove that the trade did indeed take place.
The penny stock rules would apply under which of the following circumstances? The stock is listed on the NYSE The broker-dealer is not a market maker in the stock The transaction is recommended by the broker-dealer The customer is an active trader in penny stocks
C A penny stock, according to SEC rules, is a stock that sells for less than $5.00 that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions. The customer is defined as an existing customer, which is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks) In nonrecommended or unsolicited transactions In transactions by a broker-dealer that is not a market maker in that security In transactions by an institutional accredited investor
Crossway Shopping Centers, a REIT, is making a public offering of 3,000,000 units at $20/share. An investor who buys the issue in the primary market must receive: An offering memorandum An offering circular A prospectus An educational brochure explaining the general nature of REITs
C REITs are regulated as securities under the Securities Act of 1933. An investor purchasing a REIT in the primary market must receive a prospectus.
Which of the following statements concerning a tax-qualified annuity is TRUE? It has a zero cost basis and grows tax-free It is not subject to contribution limits It has a zero cost basis and grows tax-deferred It may be subject to tax-free distributions, if qualified
C 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.
The amount of new issues sold, compared to those offered for sale, as of the close of business each Friday is reported in the The Bond Buyer's: Visible supply 20-Bond Index Placement ratio Notices of sale
C The placement ratio is a means of gauging the amount of bonds that have been underwritten recently on a new-issue basis that have moved into the hands of the ultimate investor. In other words, it is the percentage of new bonds that were sold compared to those that were originally available for sale. The higher the placement ratio, the more bonds there are moving into the hands of investors. The visible supply is the total par value of all negotiated and competitive issues scheduled to come to market during the next 30 days. The 20-Bond Index is the average yield on 20 selected municipal bonds.
Which TWO of the following securities are typically sold at a discount? TIPS Treasury bills Bankers' acceptances Collateralized mortgage obligations I and III I and IV II and III II and IV
C Treasury bills and bankers' acceptances are typically sold at a discount. The amount of interest is based on the difference between the purchase price and the face value.
An investor purchases a $100,000 face value municipal bond with a 5-year maturity at 105. After two years, the bond is sold at 95. For tax purposes, the investor has a(n): $2,000 loss $4,000 loss $8,000 loss $10,000 loss
C When a municipal bond is purchased at a premium, the bond's premium must be amortized to find an adjusted cost basis. If the bond is sold above the adjusted cost basis, the result is a capital gain. If the bond is sold below the adjusted cost basis, the result is a capital loss. If the bond is held to maturity, there is neither a loss nor a gain for tax purposes. This is because the adjusted basis would equal the par value after the premium is amortized. This bond is purchased at $105,000 with a 5-year maturity. The premium of $5,000 ($105,000 - $100,000 = $5,000) must be amortized over a 5-year period ($5,000 divided by 5 years equals $1,000 per year). Therefore, each year the original cost of the bond is reduced by $1,000. If the bond is sold after 2 years, the adjusted cost basis is $103,000 ($105,000 - $2,000 = $103,000). Since the bond is sold at $95,000, there is a capital loss of $8,000 ($103,000 - $95,000).
Which of the following companies would probably be MOST leveraged? Software Biotech Consumer electronics Utilities
D A leveraged company has a large amount of outstanding debt (bonds) and would be the most leveraged. Of the choices given, utilities are the heaviest users of debt and have the greatest amount of interest charges (fixed charges). The percentage of debt in a utility company's capitalization is usually greater than that of the other companies listed.
An investor would NOT purchase an oil and gas limited partnership for which of the following reasons? The oil depletion allowance Intangible drilling costs Tax incentives Recapture provisions
D All of the choices would be reasons for investing in an oil and gas limited partnership except recapture. Recapture is the amount added back to income for tax purposes that was allowed as a deduction in a prior period.
Which TWO of the following statements are TRUE concerning bank-qualified municipal bonds? To qualify, the municipality may only issue up to $10,000,000 every six months To qualify, the municipality may only issue up to $10,000,000 annually Commercial banks may receive a 70% tax deduction of the interest costs Commercial banks may receive an 80% tax deduction of the interest costs I and III I and IV II and III II and IV
D Bank-qualified bonds are issued by small municipalities and, to qualify, a municipality may only issue up to $10,000,000 annually. This is done to encourage commercial banks to invest in locally issued municipal securities. Commercial banks that purchase this type of security are permitted to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds.
Which of the following companies is LEAST affected by changes in the business cycle? A construction company A machine tool company An automobile manufacturer A pharmaceutical company
D Changes in the business cycle will have the least effect on a defensive company (such as pharmaceuticals or utilities). The demand for the products produced by defensive companies will not be hurt by a downturn in the economy. The other choices are examples of cyclical companies. These companies tend to parallel the economy of the country. If the economy is expected to prosper, then you can expect a cyclical company to prosper. If the economy is expected to decline, then you can expect a cyclical company to be less prosperous.
Which of the following statements is NOT TRUE regarding the purchaser of a put option? The purchaser has a right to sell stock The purchaser limits the amount of money he could lose if the value of the underlying stock increases The purchaser benefits if the value of the underlying stock declines The only way to realize a profit is to exercise the option
D Choice (d) is not true. The investor could profit by either exercising or liquidating the put. The other choices are true statements. The purchaser of a put has a right to sell stock. The maximum loss that a purchaser of an option (put or call) can sustain is the amount of the premium paid. The purchaser of a put can profit if the underlying stock declines in value.
A company in France will be importing California wines. The company must pay in U.S. dollars and is, therefore, concerned that the U.S. dollar will appreciate in value. To provide protection in the event that the U.S. dollar does appreciate, the company could buy: U.S. dollar calls U.S. dollar puts Euro calls Euro puts
D France is one of the countries that has agreed to use the euro as its currency. If the U.S. dollar appreciates, the value of the euro declines. The company should, therefore, buy puts on the euro. The company cannot buy U.S. dollar calls since there are no options on the U.S. dollar (trading on an options exchange in the United States). If the fear was that the U.S. dollar would decline, the company could buy euro calls.
A customer owns a mutual fund that invests primarily in foreign securities. Which TWO of the following amounts will be reported to the customer concerning the tax treatment of interest and dividends? The net amount of dividends and interest The gross amount of interest and dividends The amount of tax paid to the Internal Revenue Service (IRS) The amount of tax withheld by the foreign government I and III I and IV II and III II and IV
D If an investor owns a mutual fund that invests in foreign securities, and dividends and interest are paid to a U.S. investor, these earnings may be subject to withholding tax by the country from which they were paid. The broker-dealer will send the investor a form that will report the gross amount of the dividends or interest, and the amount of tax withheld by the foreign government.
Which of the following securities is MOST appropriate for an investor seeking to buy a new home within the next year? A long-term CD purchased in the secondary market with 2 years to maturity but callable in 6 months A newly issued 20-year bond callable in 6 months A newly issued noncallable 5-year Treasury note A long-term CD purchased in the secondary market, that matures in 12 months
D In general, the most liquid securities are money-market securities (those that mature in a year or less). Securities with longer maturities tend to be more volatile. Even if a security is callable, there is no guarantee that the call will take place. If interest rates are rising, bond prices will fall, and call features are unlikely to be exercised by issuers.
A registered representative tells a municipal bond fund manager that, in return for purchasing bonds for the fund, the representative will sell that bond fund exclusively to clients. This arrangement is: Permitted provided that it is disclosed to customers Permitted without restriction Permitted if approved by a principal Prohibited according to MSRB rules
D MSRB rules prohibit a broker-dealer or registered representative from having reciprocal dealings with investment companies. A registered representative may promote the services of the firm (such as timely executions and quality research) to solicit business from a municipal bond fund manager, but may not offer to sell fund shares in return for brokerage business from the fund.
A client is interested in obtaining the expense ratio of a mutual fund recommended by the RR. Which of the following actions would be BEST for the RR to take? Instruct the client to obtain the information from FINRA Refer the client to the fund's sponsor since the RR may not be authorized to release this information Instruct the client to obtain that information from the SEC database of mutual fund prospectuses Inform the client that this information may be obtained by reviewing the front of the fund's prospectus
D Mutual funds are required to disclose in the front of a prospectus a standardized fee table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio.
Rule 145 applies to a(n): Stock split Stock dividend Adjustment in par value Merger or acquisition
D 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.
Which of the following is NOT monitored by a technical analyst? Advance/decline data Chart patterns Market momentum Dividend payout ratios
D Technical analysts use price and trading volume information. Advance/decline data, chart patterns, and market momentum calculations are all methods used in analyzing this type of information. Dividend payout ratios would be important to a fundamental analyst.
A person maintains an IRA account and has contributed only pretax dollars. Withdrawals from this account will be treated as which of the following? A return of capital A portion will be taxable as ordinary income and a portion will be tax-free A portion will be taxable as a capital gain and a portion will be tax-free The entire withdrawal will be taxable as ordinary income
D The earnings on an IRA account grow tax-deferred. If only pretax contributions are made, the entire withdrawal is taxable as ordinary income. Withdrawals from a tax-deferred account are never taxable as a capital gain. If an investor maintains an IRA account that has pretax and after-tax contributions and makes withdrawals, the IRS considers withdrawals to come from both sources. Therefore, a portion of the withdrawal is taxable and the other portion is tax-free.
What is the maximum amount a customer may withdraw from a Special Memorandum Account? 2 times the SMA 3 times the SMA 25% of the SMA 100% of the SMA
D The full amount or 100% of the SMA may be withdrawn. The buying power is 2 times the SMA.
What is the margin requirement when purchasing options? 20% 30% 50% 100%
D When purchasing options, the margin requirement is 100% of the premium.
Bud Jones purchased 100 shares of DEF at 20 on June 16 and passed away on July 27 when the market value of DEF was 25. If the 100 shares of DEF are inherited by Mr. Jones's daughter Mary, what are the tax implications? Mary assumes a cost basis of 20 Mary assumes a cost basis of 25 The holding period for the stock is short-term The holding period for the stock is long-term I and III only I and IV only II and III only II and IV only
D When securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period.
A customer sells $1,000 worth of stock in a restricted margin account. All of the following statements are TRUE, EXCEPT the: Market value of the account will be reduced SMA will be increased Debit balance will be decreased Equity will be increased
D When securities are sold in a restricted account, the customer is permitted to withdraw an amount equal to the FRB initial margin requirement (currently 50%). This amount is first credited to the SMA and may then be withdrawn. The full amount of the sale is used to reduce the debit balance. The market value will decrease since securities were sold. The equity will remain the same since the market price and debit balance were reduced by the amount of the sale. If the customer withdraws the amount credited to the SMA, the debit balance will increase and the equity will decrease.
Private label mortgage-backed securities are issued by which of the following entities? The Federal National Mortgage Association Real estate investment trusts The Government National Mortgage Association Financial institutions
D Mortgage-backed securities (MBS) may be issued by a U.S. government agency, such as the Government National Mortgage Association (GNMA or Ginne Mae), or a government-sponsored enterprise (GSE), such as the Federal National Mortgage Association (FNMA or Fannie Mae) or the Federal Home Loan Mortgage Association (FHLMC or Freddie Mac). The securities issued by these three entities are commonly referred to as agency securities and receive high ratings (e.g., AAA). A collateralized mortgage obligation (CMO) is an example of this form of MBS. Mortgage-backed securities are also issued by financial institutions such as commercial banks, investment banks, and home builders. These securities are referred to as private label MBS and may contain some agency securities, however, they typically contain other types of mortgage loans that are not agency securities. A private label MBS is not an obligation of the U.S. government or any GSE and its credit rating is assigned by an independent credit agency. A private label MBS has a higher degree of credit risk and is generally not given a AAA rating.
The provisions for the flow of funds of a revenue bond issue appear in the: Syndicate letter Account summary statement Notice of sale Indenture
D The indenture contains all the agreements and covenants pertaining to a bond issue, and also contains the provisions for the application and allocation of funds of a revenue bond.
A municipal broker's broker may : Deal with broker-dealers Deal with dealer-banks Underwrite new issues Trade from its own inventory I and II only I and III only II, III, and IV only I, II, III, and IV
a. 1 and 2 only A municipal broker's broker is a broker (agent) that deals only with other municipal securities brokers or dealers. The broker's broker never deals with individual investors or establishes an inventory position, and is not involved in the underwriting of a new issue.
An investor purchased stock at $40/share that currently has a market price of $60/share. The investor thinks that the long-term prospects for the stock are attractive, but that the price will decline temporarily. The customer could take advantage of the temporary decline, by: Selling a call Buying a call Selling a put Setting up a spread in the underlying stock
aNSWER: A If the investor were to sell a call and the price declined, the call will expire and he will generate premium income. The long stock position will still be maintained, and the investor will profit if the anticipated price advance occurs.
