SIE Progress Exam #1

A company has a noncumulative preferred stock outstanding that pays a $5 dividend per year. If dividends on the preferred stock were not paid last year, but will be paid this year, how much will the preferred stockholder receive?

$5 The preferred stock is noncumulative, which means that if the dividend is not paid, it does not accumulate to the next year. Therefore, the preferred stockholder will receive only $5 for this year.

A 5% $1,000 par value bond sells at $900 and is maturing in 10 years. What is the amount of interest per year?

$50 The dollar amount of interest a bond pays is computed as a percentage of the par value. In this example, the coupon rate is 5%. The interest income per year is $50 (5% of $1,000 par value equals $50).

What is the maximum coverage afforded to an investor under SIPC?

$500,000 per separate customer of which $250,000 may be cash SIPC protects customers in the case of a brokerage firm's bankruptcy. The maximum coverage afforded to an investor under SIPC is $500,000 per separate customer of which $250,000 may be for cash.

A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is:

$958.75 U.S. government bonds are quoted as a percentage of par with a fraction in 32nds of a point. Therefore, a T-bond quoted at 95.28 is equal to 95 28/32. By converting the fraction to a decimal, the quote becomes which is 95.875% of the par value of $1,000. $1,000 x 95.875% = $958.75.

A convertible bond has a conversion price of $40 and is currently selling in the market at $950. The conversion ratio is:

25 To find the conversion ratio of a convertible bond, the bond's par value ($1,000) is divided by the conversion price ($40). In this question, the conversion ratio is $25 ($1,000 ÷ $40). To calculate the conversion ratio, the market price of the bond is irrelevant.

A financial services firm that charges customers based on a percentage of the assets under management is BEST defined as:

An investment adviser Investment advisers charge fees for providing advice to their clients. These fees are often based on a percentage of assets under management (AUM) and are charged regardless of whether any trades occurred in their clients' accounts. Broker-dealers earn compensation (e.g., commissions) for executing transactions and an exchange is a facility that brings together the buyers and sellers of securities.

A common shareholder is not entitled to:

Appoint officers of the corporation Shareholders have the right to vote for the board of directors, but not to appoint officers of the corporation.

Although most bonds are traded according to their maturity dates, which of the following investments are traded according to their average life?

Asset-backed securities Asset-backed securities (ABS) trade according to their average life. ABS are create using consumer loans (e.g., credit card and home equity loans) rather than mortgages. Since the assets in an ABS pool have varying maturities, the ABS investors typically prefer to know the average life of the pool. All of the other choices trade according to their maturity dates.

Which of the following statements is TRUE if interest rates rise?

Both bond and bond fund prices will fall. Bond prices and interest rates move in the opposite direction. When interest rates rise, bond prices will fall and vice versa. Bond funds are simply mutual funds that invest in bonds. Bond fund prices will also move in the opposite direction as interest rates fluctuate.

When a bond is called, the bondholder receives the:

Call price plus accrued interest The bondholder receives the call price (either at par or at a premium) plus accrued interest earned up to the call date.

The FDIC provides coverage for:

Certificates of deposit (CDs) The Federal Deposit Insurance Corporation (FDIC) provides coverage for deposits at a bank, in the event the bank has financial troubles. FDIC will cover CDs, but not insurance, or fixed and variable annuities.

Which of the following investments is the MOST suitable for a person who is interested in aggressive growth?

Common stock Of the choices listed, common stock has historically provided the greatest potential for growth. Bonds and preferred stock are typically suitable for investors who are seeking income.

A brokerage firm purchases 600 shares of stock from a customer and places the securities into its inventory. In this case, the firm likely acted as a(n):

Dealer When a broker-dealer buys a security from a customer by using its own funds and places the securities into its inventory, it has acted as a dealer (principal). In this situation, the customer is charged a markdown on the transaction. If the firm bought the security for a customer or sold a security to a customer without being the other side of the transaction, it would be acting as a broker (agent) and it would charge the customer a commission. An underwriter assists an issuer in raising capital in the primary market by purchasing the securities from the issuer and selling them to customers. The firm that controls trading on an exchange for a specific stock is referred to as a designated market maker (DMM).

An issuer includes warrants with a bond offering that it's conducting. This is done to:

Decrease the coupon rate on the bonds Warrants are generally considered a "sweetener," which gives holders the ability to purchase stock at a predetermined price for a long period. When issued with bonds, the issuer can typically lower the coupon rate and reduce its interest cost.

Banks savings account are guaranteed and insured by the:

FDIC In the event that a bank is unable to pay its depositors, the Federal Deposit Insurance Corporation (FDIC) guarantees bank accounts up to $250,000. The Securities Investor Protection Corporation (SIPC) protects brokerage customers against broker-dealer bankruptcy.

Which of the following organizations enforces municipal securities regulations for broker-dealers?

FINRA Although the MSRB creates rules governing municipal securities broker-dealers, its rules are enforced by other regulatory bodies. The appropriate regulatory agencies are the: • The SEC or FINRA for broker-dealers • The comptroller of the currency for federal banks • The FRB for state banks that are members of the FRB • The FDIC for member banks of the FDIC

The purpose of a depository facility is to:

Hold securities in book-entry form The Depository Trust Corporation (DTC) is a subsidiary of the Depository Trust & Clearing Corporation (DTCC) and its primary function is to hold securities in book-entry form. This allows broker-dealers to buy and sell securities on behalf of their customers without the costs and time associated with physical certificates. A change of ownership is made from the account of the selling broker-dealer to the account of the buying broker-dealer. The DTC is not a clearing facility.

When purchasing Treasury notes, an investor should understand:

Interest is paid semi-annually Treasury notes and bonds pay interest semi-annually. Treasury securities are only issued in book entry form. Treasury Inflation Protected Securities (TIPS) are adjusted for inflation.

A bond is selling at a premium. This indicates that:

Interest rates have decreased since the bond was issued The amount that the market price exceeds the par value is known as a premium. One reason for selling at a premium is a decrease in interest rates after the bonds were issued. When looking at the yields for premium bonds, the nominal yield is the highest, followed by the current yield, with the yield to maturity being the lowest yield of the three.

An advantage a corporation receives when it issues a convertible bond is that:

It's able to borrow money at a lower rate of interest Convertible bonds allow corporations to borrow money at a lower rate of interest (lower coupon) since the convertible feature is an attraction for investors. Investors are willing to accept the lower interest rate in exchange for the opportunity to convert the bonds into common stock. In addition, the investor has some downside protection because, even if the price of the stock falls, the convertible bond still has inherent value as a bond.

Preemptive rights give a stockholder the right to

Maintain his proportionate interest in the corporation A stockholder's preemptive right gives the stockholder the right to maintain his proportionate interest in the corporation. For example, if a shareholder owns 1% of the corporation's common stock, and the corporation intends to issue additional shares, preemptive rights would give that shareholder the option of purchasing 1% of the new shares.

Which term is used for a member of a stock exchange that's responsible for providing liquidity by buying and selling throughout the trading day?

Market maker Market makers are exchange members that provide liquidity on stock exchanges by always standing ready to buy or sell. Transfer agents work for an issuer and are responsible for issuing its stock, paying dividends, and distributing voting materials. Underwriters are broker-dealers that sell newly issued securities to investors in the primary market.

A corporation wants to offer its shareholders the ability to obtain shares at a fixed price. Which security should the corporation issue?

Rights Rights (preemptive rights) are issued by corporations and offer existing shareholders the ability to purchase additional shares at a fixed price. Exchange-traded options (e.g., calls and puts) are not directly issued by an issuer as a means of raising capital.

Which of the following regulates the resale of restricted securities?

Rule 144 Rule 144 and 144A regulate the process by which restricted (unregistered) securities may be resold. Regulation D sets the regulations for raising capital through private placements. Rule 147/147A establish the requirements for intrastate offerings. Rule 145 establishes the registration requirements for the reclassification of securities.

How often do Treasury notes pay interest to investors?

Semiannually Both Treasury notes and Treasury bonds pay interest semiannually, just like corporate and municipal bonds. However, since Treasury bills are short-term instruments, they're issued as zero-coupon bonds and don't pay interest periodically. Instead, investors who buy Treasury bills receive their interest when the T-bills mature.

If an investor wants to build a bond portfolio that maintains a stable value, she should purchase bonds with:

Short maturities Although short-term bonds are influenced by changing interest rates, the effect is relatively minor due to their short-term nature. For that reason, investors who want stability in their bond portfolios should invest in short-term debt

What type of bond would MOST likely be secured by an excise tax, cigarette tax, or gasoline tax?

Special tax bond A special tax bond is a type of revenue bond and is usually financed by a tax on certain items such as cigarettes, liquor, or gasoline (excise taxes).

A vote of the common shareholders is required for a corporation to declare a:

Stock split A vote of the common shareholders is required for a corporation to declare a stock split. Shareholder approval is not required for cash and stock dividends, which are decided by the board of directors. A stock buyback would also be decided by the board of directors.

Interest on U.S. Treasury securities is:

Subject to federal income tax, but exempt from state income tax Interest on U.S. Treasury securities is subject to federal income tax, but exempt from state income tax. This is the opposite of the tax treatment on municipal (state) bond interest, which may be subject to state tax, but is exempt from federal tax.

State securities laws are also referred to as:

The Blue Sky laws State securities laws are also referred to as the "Blue Sky laws." The Securities Exchange Act of 1934 and the Investment Company Act of 1940 are both federal securities laws. Self-regulating organizations (e.g., FINRA) can create rules and regulations for their members, but they don't apply to individuals and firms that are outside of their industry.

Which of the following choices does NOT hold customer cash or securities?

The Depository Trust Company The Depository Trust Company (DTC) is a securities depository and national clearinghouse for the settlement of trades. The DTC holds broker-dealer (not customer) funds and securities in the name of member firms. An omnibus broker-dealer carries customer accounts, which means that it holds customer funds and securities. A prime broker performs centralized clearing and account maintenance functions for customers (often institutional) that execute transactions through several other broker-dealers. A broker-dealer carries customer accounts and receives or holds funds and securities.

The federal securities regulation that provides rules for the secondary market is:

The Securities Exchange Act of 1934 The Securities Exchange Act of 1934 establishes the rules for activities that are conducted in the secondary market. The two most recognized secondary markets are the New York Stock Exchange (NYSE) and Nasdaq. The Act of 1934 created the Securities and Exchange Commission (SEC) and gave it preeminent regulatory authority over domestic securities dealings in both the primary and secondary markets.

A decrease in which of the following would cause the price of a bond to increase?

The general level of interest rates Interest rates and bond prices are inversely related. When interest rates increase, bond prices will fall. When interest rates decrease, bond prices will rise. A decrease in a bond's rating choice (a), a bond's liquidity choice(b), or an issuer's financial strength choice (c), would usually have a negative effect on a bond's price.

If a municipal bond is backed by the revenues of a facility and the income is insufficient to make the debt service payment, which of the following statements is TRUE?

The issuer will default on its next payment. A municipal bond that's backed by revenues of a project or facility is referred to as a revenue bond. When the income is insufficient to make the debt service payments (i.e., interest and/or principal payments), the issuer will default on that bond.

Which of the following statements is TRUE concerning electronic communication networks (ECNs)?

They can be used by investors who want to trade anonymously. Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.

Which of the following sources of revenue is NOT used to pay the debt service on general obligation bonds?

Tolls collected at a tunnel located in the municipality A general obligation (GO) bond is backed by the full faith and credit of the municipality. Items that may be used to pay the debt service on GO bonds include fines, sales taxes, property taxes, income taxes, and licensing fees. Items such as tolls, concessions, and lease rental payments would be used to back a revenue bond.

Which of the following securities trades in fractional units of 1/32 of a point?

Treasury bonds Corporate and municipal bonds trade in increments of 1/8 of a point, while Treasury notes and Treasury bonds trade in increments of 1/32 of a point. A convertible bond is a type of corporate bond.

Which bonds are considered the most liquid?

Treasury bonds Liquidity represents the ability to buy and sell a stock or bond quickly. Since the U.S. Treasury is one of the largest issuers in the world, T-Bonds are extremely liquid with a significant number of buyers and sellers. Corporate bonds and municipal bond issuers are smaller than the U.S. government and their bonds will have less liquidity.

A type of bond in which the amount of interest paid to the investor may change is referred to as a:

Variable rate bond For most bonds, the interest rate or payment is set at the time of issuance and generally remains fixed for the life of the bond. However, in some cases, as interest rates move up or down, the coupon rate will be adjusted to reflect market conditions. These adjustable rate bonds are sometimes referred to as variable or floating rate securities. A zero-coupon bond is one that makes no periodic interest payments during its life. A convertible bond gives an investor the ability to convert the par value of the bond into predetermined number of shares of the company's common stock; however, the bond's interest payment is fixed.

Which of the following securities has the longest period until expiration?

Warrants Warrants are typically created with long-term expirations; in fact, some warrants never expire (i.e., they're perpetual). On the other hand, rights are short-term and typically expire in a few weeks or months after they're issued. Exchange-traded options often have nine-month expirations. Repurchase agreements are short-term loans (often overnight).