SIE Question Review
Alice buys Treasury Inflation-Protected Securities (TIPS) with an original principal value of $10,000. She wants to know what the principal will be if she holds to maturity. The answer is
It can be higher than $10,000 but not lower In TIPS, the interest payments and principal value at maturity are indexed to the Consumer Price Index for All Urban Consumers (CPI-U). At maturity, the TIPS holder can receive more than the original principal if inflation is positive. But he/she can't receive less than original principal if inflation is negative (deflation).
Which of the following statements about the municipal bond market is true?
It is very challenging to sell short municipal securities. The municipal bond market is illiquid as municipal bonds are not actively traded on an exchange. Therefore, it is very challenging to short municipal securities.
Which of the following statements does NOT apply to revenue bonds?
They have the least credit risk of all municipal bond issues Revenue bonds are more risky than general obligation bonds, which are backed by the taxing authority of the issuer. Tax collections are more certain than user fees.
What must be done with open limit orders at the close of business on the day before the ex-date for a reverse stock split?
They must be cancelled For reverse stock splits, all open orders must be cancelled before the ex-date.
ABC Corp. issues 4.5% preferred stock with a par value of $100. If the shares are currently trading at $90, the annual dividend each share can be expected to pay is
$4.50. Preferred stock dividends are quoted as a percentage of par value, not the market value of the shares. Therefore, it is calculated as par value multiplied by the dividend rate. $100 X 4.5% = $4.50.
DEF Corporate debenture is quoted at 103 and pays a $10 semiannual coupon. What is the current yield of this bond?
1.9% The current yield of a bond is found by dividing the annual interest by the bond's market price. In this case, we divide the annual interest, which is $20 ($10 semiannual coupon x2), by the market price of $1,030, to arrive at the current yield of 1.9%. Note that bonds are quoted as a percentage of par, which is $1,000. Therefore, a quote of 103, means 103% of par or $1,030.
The NAV of an open-end investment company is 14.25 and the public offer price is 14.75. The 12b - 1 fee of the investment company is 30 basis points. An investor order to redeem shares of this investment company will be filled at
14.25 An order to redeem shares of an open-end investment company (mutual fund) would be filled at the net asset value (NAV) of the fund. The NAV must be determined at least once each business day, typically done at the close of trading on the NYSE. The existence of a 12b-1 fee will have no bearing on this process.
Which of the following call dates would be MOST beneficial for an investor?
20 years Investors prefer a longer call date in order to better protect themselves from call and reinvestment rate risk.
A correspondence includes any written communication that is distributed or made available to
25 or fewer retail investors within any 30 calendar-day period A correspondence includes any written communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. Examples of correspondences include emails and instant messages. Correspondences do not need principal approval before first use.
Shares of an IPO become marginable
30 days following issuance Shares of an initial public offering (IPO) become marginable (or may be used as collateral) after 30 days.
A firm must report to FINRA a change in the person named as its Anti-Money Laundering Officer within
30 days of the change A firm must report a change in the person designated as it Anti-Money Laundering Officer within 30 days.
An investor has 100 shares of XYZ stock at $90 per share. After a 3-for-1 split, the investor can expect to own
300 shares at $30 per share A stock split doesn't affect the total value of stock owned. In this example, the shares are worth $9,000 before and after the split. But three times as many shares are owned. To calculate the new number of shares, multiply the shares by the first number of the split and divide by the second number of the split: 100 shares x 3 / 1 = 300 shares.
A money market instrument represents a time draft drawn on a deposit at a commercial bank. It has a maturity of 75 days and can be sold at any time on the secondary market. It is
A banker's acceptance A banker's acceptance is a short-term negotiable debt instrument issued by a borrower and guaranteed by a commercial bank, as a time draft drawn on the bank. Maturities typically fall between 30 and 180 days and issues usually can be sold on the secondary market at any time prior to maturity?
Authorized stock is best described as common shares that
A corporation is permitted to sell to the public Authorized stock represents the number of shares a corporation may sell to the public in the future.
All of the following are permitted to open accounts with broker-dealers EXCEPT
A minor A minor is considered a legal non-individual and is not permitted to open an account with a broker-dealer.
Which of the following projects is most likely funded by a revenue bond issue?
A new bus depot Transit authorities that generate revenue from the sale of tickets or fares are funded by revenue bond issues. Projects that are free to the public, or for the good of the public, are backed by GO bonds, and include public golf courses, other sports and recreation complexes, public schools and municipal government buildings.
All of the following statements are true regarding mutual fund disclosure EXCEPT
A summary prospectus may be provided to customers only if they have already received the fund's full statutory prospectus Mutual fund companies must provide investor disclosure as required under the Securities Act of 1933. All investors must receive a prospectus, but they may receive a summary prospectus instead of the long and highly detailed statutory prospectus. If provided the summary prospectus, the full statutory prospectus must be available in written or electronic form for customer review. Summary prospectuses must seven key items to make it easy for investors to compare funds.
A share in a foreign corporation that underlies an ADR is known as a(n)
ADS An American Depositary Share (ADS) is the name given to the shares of the foreign corporation that are held by the depositary institution. These shares are packaged to create the ownership interests known as American Depositary Receipts. A Global Depositary Share (GDS) is the underlying for a Global Depositary Receipt (GDR)
The type of tax that most commonly backs the municipal bond issues of cities and countries is
Ad Valorem Tax Countries, cities, towns, and villages rely on ad valorem taxes to back their GO bond issues. These taxes are assessed on property owned by individuals or businesses that is within the municipality.
An investment in a direct participation program would be most appropriate for
An investor with significant savings and high risk tolerance DPPs such as limited partnerships are most appropriate for investors in a strong financial position who have a high risk tolerance. These are often speculative investments that are generally inappropriate for retail investors.
Transactions with individuals on the Specially Designated Nationals list
Are specifically prohibited by federal law The Specially Designated National List must be created pursuant to the USA Patriot Act, and transactions with parties on this list are strictly prohibited.
If FINRA or the SEC issues an order that imposes a suspension of the registration of a registered representative, the representative is prohibited from
Associating with the firm in any capacity whatsoever If FINRA or the SEC suspends a registered representative, the firm cannot allow the representatives to remain associated with it in any capacity, including a clerical or ministerial capacity. The firm is also unable to pay or credit any remuneration that results from any securities transaction that the representative might have earned during the period of suspension.
A customer plans to invest in mutual fund shares, but does not want to pay a high upfront sales charge. The investor intends to hold the funds for at least 10 years. Which is most appropriate for this investor?
B shares B-shares have a contingent deferred sales charge (CDSC), which is also called a back-end load. There is no front-end load on B-shares, and no CDSCs will apply if the shares are held for a long-time period. There is an ongoing 12b-1 charge that applies however. A shares have front-end loads, and C shares have level loads.
All of the following statements are true regarding bond trading markets EXCEPT
Bonds are usually traded at a centralized location or exchange Unlike equity trading, bond trading usually takes place between dealers in decentralized over-the-counter markets. Bonds are typically bought and sold by institutions; individuals are more likely to purchase bond funds. The spread between bid and offer price is typically the compensation for a bond trade, while equity trades are typically compensated by brokerage commissions.
The process that stirs up interest in an IPO among large institutions and helps the underwriter determine the public offering price is
Book-building The book-building process generates interest and enthusiasm in an offering ahead of its effective date, especially among large institutional investors. It also can help to determine the optimum public offering price for shares.
In a banker's acceptance (BA), who is liable for paying promised interest and repaying principal?
Both the bank and the borrower Both the borrower and bank are each liable for paying promised interest and repaying principal at maturity of a BA.
An investor sells 5 March 45 ABC put option contracts for a premium of $2.50. After the position turns bad, the investor wishes to cut losses and close out the contracts prior to maturity. How can this be done?
Buy 5 March 45 ABC puts To close out a contract, an investor takes the opposite side (buy or sell) of the same put or call contract, in the same number of contracts. The opposite side of this trade (sell puts) is to buy puts.
The adverse impacts of prepayment and extension risk may be mitigated through the use of
CMOs (Collateralized Mortgage Obligation) CMOs were created to minimize the negative impacts of prepayment and extension risk.
When comparing 12b-1 fees across the different share classes of mutual funds, it would be found that
Class B and C shares carry higher 12b-1 fees than Class A shares. Class B & C shares tend to have higher 12b-1 fees than Class A shares.
An investment adviser is a person who provides advice or analysis for
Compensation An investment adviser provides certain services (analysis, advice) for compensation. The compensation may be asset-based, hourly, flat, or per-service.
In a period of stable interest rates, which of the following securities is MOST likely to fluctuate in value?
Convertible preferred stock The price of the convertible preferred stock is most likely to fluctuate in value because the price of the underlying common stock to which the preferred can be converted will influence the value of the preferred stock itself. Namely, if the price of the common stock increases, the price of the convertible preferred will also increase.
The proceeds from a corporation's sale of commercial paper must be used to finance
Current transactions Proceeds from the sale of commercial paper must be used to finance current transactions, not permanent obligations, fixed assets or long-term financing needs. The maximum maturity allowed is just 270 days.
If a bond declines in price, which of the following results in yield will occur?
Current yield will rise Coupon yield, or nominal yield, doesn't change over the life of the bond, so it isn't sensitive to price changes. Current yield is the sum of annual coupon (interest) payments divided by the bond's current price. It moves inversely with prices. As bond prices decline, the current yield rises; as bond prices increase, the current yield falls.
Treasury stock are shares
Repurchased by the company Treasury stock is outstanding stock that has been repurchased by the issuer.
A member bank of the federal reserve system borrows from the Federal Reserve Bank at the
Discount Rate The discount rate is charged by the Federal Reserve when funds are loaned to member banks.
Which of the following is not a short term municipal obligation?
ETN An ETN is not a short term municipal obligation. Instead, it is a structured product that combines unsecured corporate debt with equity market exposure. All the others are short term anticipation notes of a municipality.
In comparing trading of U.S. Treasury securities to trading of municipal securities issues, which two statements are TRUE? I. The market for U.S. government securities is more liquid II. The market for municipal securities is more liquid III. The trading market for U.S. government securities is larger IV. The trading market for municipal securities is larger
I and III The market for U.S. government securities is the largest in the world. It is also highly liquid. Although the municipal securities market is also very large, it does not have the same worldwide participation. It is not nearly as liquid, because many municipal issues are relatively small in size and may be issued by relatively small municipalities.
Interest on all of the following bonds is fully taxable at the federal, state and local level EXCEPT
Federal Farm Credit Banks Interest on bonds issued by the Federal Farm Credit Banks is taxed like interest on government securities. It is taxable at the federal level, but exempt at the state level.
The collection, analysis, and dissemination of financial data is carried out by which of these entities to help safeguard the U.S. financial system?
Financial Crimes Enforcement Network These are amongst the activities carried out by the Financial Crimes Enforcement Network (FinCEN) to safeguard the U.S. financial system from illegitimate use.
Which of the following activities would least likely raise a red flag within a broker-dealer of suspicious activity?
Frequent orders being placed by a day trading account A day trading account will place numerous orders throughout the trading day, and should not, in and of itself, be a cause for concern. The other listed activities are all potential signs of suspicious activity.
Ad valorem taxes would most likely back which of the following bond issues?
GO bond issues by the city of Seattle Ad valorem, or property, taxes back GO obligation issues. Property taxes back issues of local governments. IDRs are revenue bonds, so are not backed by taxes. Special tax bonds are backed by taxes like fuel taxes, hotel taxes, or license taxes (user taxes). State issues are generally backed by income or sales taxes.
Howard is a corporate lawyer in New York earning $300,000 per year. He wants to add some tax-free income to his portfolio, but is very risk adverse. Which of following bonds would be best suited to meet his investment objectives?
General Obligation Bonds Of these options, general obligations bonds are the best answer choice as they are backed by the taxing power of the municipality and provide tax-free interest. Although, Treasury bonds are safer than GO bonds, the interest income provided by treasuries is taxable at the federal level.
An investor purchased a City of Seattle 4% municipal bond that matures 3-25-2019, at 98 3/8. From this information you can tell that the bond
Has a yield to maturity that greater than its nominal yield. Municipal bonds are priced in points, and 1 point is equal to $10. The price of this bond is $980 plus $3.75 (3/8 x $10) or $983.75. The bond is trading at a discount, so if it was called, its YTC would be greater than 4%. Bonds trading at a discount have YTM that is greater than their coupon, or nominal, yield.
Brunswick issues a Series A $2.40 cumulative convertible preferred voting stock. This stock I. is convertible into common stock II. pays dividends in arrears III. receives excess dividends on a pro rata basis with common stock
I and II only Cumulative convertible preferred stock can be converted into common stock. Additionally, all dividends in arrears from cumulative stock must be paid before any dividends are paid on the common stock. Participating preferred stock may receive excess dividends based on better than expected earnings for the company.
Bonds with long maturity offer I. stability of income II. stability of market value III. fluctuation of income IV. fluctuation of market value
I and IV Bonds with long maturities offer stability of income due to the constant, semi-annual interest payments made to the bondholder. They also fluctuate more in market value with a change in underlying interest rates than comparable short-term debt.
Which two of the following statements are TRUE regarding interest rates and bond maturities? I. Longer term bonds are more sensitive to interest rate risk II. Shorter term bonds are more sensitive to interest rate risk III. A small change in interest rates has a greater impact on the price of a short-term bond IV. A small change in interest rates has a greater impact on the price of a long-term bond.
I and IV Longer term bonds are more vulnerable to interest rate risk than short term bonds. The price impact of a small change in interest rates is greater on longer term bonds than on bonds with a short term maturity.
In which of the following ways may a company declare dividends? I. Cash II. Stock III. Stock of a subsidiary company
I, II and III A company may pay a dividend in cash, stock or stock of a subsidiary company.
Which of the following statements are true regarding the OTC market? I. It facilitates the trading of stock not listed on an exchange II. It is a connection of broker-dealers via computers III. There can be more than one market maker in a security
I, II and III The OTC market is a decentralized market connecting to broker-dealers electronically. It is a negotiated market place where various market makers enter bids and asks and facilitates the trading of stock not listed on an exchange.
Which of the following are types of underwritings? I. Firm commitment II. All or none III. Standby IV. Best efforts
I, II, III and IV All choices are types of underwritings. Under a firm commitment underwriting, the underwriter purchases the securities from the issuer and resells them to the public, marking up the securities and earning a spread. A standby offering is one where the underwriter is prepared to act as a principal and sell all shares that remain unsold from a preemptive rights offering or another secondary offering. A best efforts underwriting is one where the underwriter acts as agent and sells securities on behalf of the issuer, but is not financially responsible for any unsold shares. An all or none underwriting is a type of best efforts underwriting whereby the underwriter will attempt to sell all the shares being offered. If the entire allotment is not sold, the entire issue is cancelled.
Which of the following factors affect a debt obligation's coupon? I. Ratings II. Maturity III. Covenants IV. Security
I, II, III, and IV Coupon refers to the annual interest rate ("pricing") paid on a debt obligation's principal amount outstanding. It can be based on either a floating rate (typical for bank debt) or a fixed rate (typical for bonds). Bank debt generally pays interest on a quarterly basis, while bonds generally pay interest on a semiannual basis. There are a number of factors that affect a debt obligation's coupon, including the type of debt (and its investor class), ratings, security, seniority, maturity, covenants, and prevailing market conditions.
Which two of the following investment objectives are correctly matched with an appropriate investment choice? I. Federal income tax exemption through an investment in private activity bonds II. Reduced interest rate risk through an investment in municipal bond issues with different maturities III. Reduced risk of default through an investment in municipal bonds issued by the investor's state of residence IV. State and local tax exemption on interest income through an investment in municipal bonds issued by the investor's state of residence
II and IV Municipal bond investors generally receive an exemption from federal income tax. Interest is also typically exempt from state income tax if the owner is a resident of the state that issued the bonds. Investors in municipal bonds can achieve reduced interest rate risk by investing in issues with different maturities. Bonds react differently to interest rate changes based on their terms to maturity. Bonds with short-term maturities experience a small decline in price if the general level of interest rates increases, while bonds with longer maturities have a larger price decline. Interest from municipal private activity bonds is taxable if the investor is subject to the alternative minimum tax (AMT). The risk of default is minimized by the investment in multiple issuers and states, not through a concentration in a single state's issues.
An investor who purchases Treasury Bills can expect which of the following? I. Interest that is paid on a monthly basis II. The face value of the bill paid at maturity III. A minimum investment of $1,000 IV. A minimum investment of $100
II and IV Treasury Bills are purchased at a discount and mature to face value; no periodic interest is paid (i.e. they are zeroes). The minimum purchase amount of Treasury Bills is $100.
When must proxy materials be filed with the SEC?
In advance of the shareholder solicitation The information contained in proxy materials must be filed with the SEC in advance of the shareholder solicitation, and it must disclose all important facts upon which shareholders are asked to vote.
Advantages of the book-entry form of ownership for U.S. government securities include all of the following
In this format, the investor's ownership is recorded electronically by a central depository, replacing physical transfer. When a change of ownership occurs, the depository changes its records and provides a receipt or confirmation for the transaction. The difference between book-entry and fully registered bonds is that for book-entry, ownership is recorded by a central depository rather by the issuer.
Joe is a registered rep currently employed by Windy City Broker-Dealer, a Chicago based firm. Joe has quite the sweettooth. To satisfy his sugary cravings, he decides to open Joe & Josette's Cupcakery, a small bakery in a hip part of town. Joe's business partner, Josette, also happens to be a client of the firm and recently borrowed $5,000 from Joe. Which of the following is true regarding this action?
Lending money to Josette is permitted provided that the firm has written procedures permitting borrowing and lending with clients. Any outside business activity requires that the firm be notified of the full details of the activity. FINRA Rule 3240 permits a registered rep to borrow money from or lend money to a client provided that the firm has written supervisory procedures permitting such an activity. If the client happens to be a bank or family member, the firm may permit the activity without permission. If there is an outside personal or business relationship, the registered rep must receive permission from the firm to borrow or lend to a client.
Which one of the following is not an exception to the 10% penalty on IRA withdrawals prior to age 59 ½?
Loss of a full-time job Loss of a job is not one of the exceptions to the 10% penalty. However, a withdrawal to pay health insurance premiums while unemployed is an exception.
All of the following firms provide ratings credit ratings for bonds EXCEPT
Morningstar Moody's, S&P, and Fitch are well known rating services that are hired to provide credit ratings for bond issues. Morningstar is a research service but does not provide credit ratings for issues.
In which case can a position in listed options be held in a Traditional IRA?
Never Options positions are prohibited in IRAs, except for covered call-writing programs on listed options.
Which type of mutual fund is sold at net asset value?
No-load No-load funds are sold at net asset value. That means that the fund does not charge a sales charge above the net asset value and investors can purchase shares at the NAV.
During a period of falling interest rates which of the following is likely to occur?
Noncallable bonds will appreciate more than callable bonds Bond prices increase during periods of falling interest rates. Callable bonds are likely to be called when interest rates are falling so issuers can refinance at lower rates. An investor will lose future interest payments when the bonds are called and face reinvestment risk, so this is not favorable to the investor. Therefore, callable bonds will trade at less of a premium than noncallable bonds when interest rates are falling.
Prior to accepting a part-time job at a day-care center, RR Anna must
Notify her Firm A registered representative (RR) must provide advance written notification to her employer prior to accepting a part-time position outside of her firm.
If a registered representative wants to take a second job as a bartender, she must
Notify her employer Any outside business activities, such as bartending, requires prior written notice to the firm. Approval is not specifically required for this type of activity based on this FINRA rule.
Which of the following statements is TRUE regarding official statements for new issues of municipal securities?
Official statements are used by syndicates in the marketing of the issue Municipal issuers are exempt from the full disclosure and prospectus requirements of the Securities Act of 1933.The issuer will usually provide an official statement because it is used by the syndicate for marketing the new issue. If one is prepared, it does not have to be filed with the SEC.
What agency stands behind the promises of SIPC to protect assets held in customer accounts at brokerage firms?
Only SIPC The difference between FDIC and SIPC insurance is that only one has an "F" in the namei.e., is federally backed. SIPC is a not-for-profit corporation, and only SIPC's assets stand behind its promises. If necessary, SIPC can increase assessments against its members (brokerage firms) to meet obligations.
All of the following would be considered discretionary EXCEPT
Order that specifies the size of the security but leaves the choice of price and time up to the account executive Discretionary trades are trades where the customer does not specify the type of security, type of transaction or quantity. For a discretionary trade, a registered rep must have discretionary authority. An order that leaves the time and price open is not considered discretionary.
When a corporation goes bankrupt, subordinated debt holders are
Paid after unsecured bondholders and before shareholders Subordinated debt holders are paid after unsecured bondholders and before shareholders.
An investor seeking the highest yield being offered on a municipal bond would likely want to consider a
Port Authority Revenue bond The highest yield on a municipal bond would be available on a revenue bond, due to the higher risk the investor would be facing.
All of the following statements correctly describe quotations of U.S. Treasury Securities EXCEPT
Prices are quoted in 1/8ths Prices of U.S. Treasury securities are quoted in 32nds. Treasury Bills are quoted at a discount from their face value, while notes and bonds are quoted with a bid/ask. The customer buys at the ask price which is always higher than the bid. A narrow bid/ask price indicates a very active trading market.
When engaging in open market operations, the firms that the Open Market Trading Desk transacts business with are
Primary dealers The Open Market Trading Desk trades with a group of companies called Primary dealers that have agreements which obligate them to submit offers and sell securities to the Fed. SOMA (System Open Market Account) is the account through which transactions are effected.
Municipal bonds with taxable interest payments that are issued to fund a non-essential service are
Private activity bonds Private activity bonds are issued for the benefit of a private enterprise or a non-essential service. Their interest is taxable. While Build America Bonds have taxable interest, they are not for the benefit of private enterprise. They funded public infrastructure projects and jobs creation.
All of the following statements about the structure of a REIT are true EXCEPT
REITS must have a minimum of 90% of their total assets invested in real estate REITS are required to have a minimum of 75% of their asset invested in real estate and must derive at least 75% of their gross income from rents or mortgages.
What is the distinguishing characteristic of a high-yield bond?
Rating below investment-grade High-yield bonds, previously called junk bonds, have ratings below investment grade. Bonds rated below investment-grade often pay higher yields to compensate for the lack of quality, but they are not necessarily speculative or in default, and they can be attractive to investors with some risk tolerance and a need for high yield.
A company that believes its stock is undervalued might take which of the following actions?
Share repurchase program A company that believes its stock is undervalued may decide to buy their own shares in the open market.
An investor may consider which of the following factors least important when choosing a mutual fund to invest in?
Size of the fund The size of a particular fund is the least important factor amongst these items when choosing an appropriate mutual fund investment. Important: Investment objectives, fees, or investment policies. Generally, the customer's investment objectives are the primary consideration.
In interest-bearing corporate bonds, accrued interest that is due the seller must be included in settlement. According to industry rules, the accrued interest must be calculated up to what date?
T + 1 For interest-bearing fixed income securities, interest is accrues up to (but not including) the settlement date, which is the second business day following the trade date (T+2). Put differently, accrued interest includes the trade date and T+1, but not on T+2 (settlement). On T+2, the interest accrues to the buyer of the bond.
When does settlement normally occur for government securities?
T+1 Settlement for government securities usually occurs on the day after trade date (T+1).
All of the following information is required when submitting a Form U-4 for a registered representative EXCEPT
Tax returns for the past 3 years Form U-4 must include the following personal information: -name; -SSN, -physical characteristics, -5 years of residential address history, -10 years of employment experience; and -education It must also report information relating to customer complaints, arbitration claims, regulatory proceedings, bankruptcies, certain criminal history, certain civil litigation and liens and judgments.
Which of the following requires a fiduciary to be appointed to act for the benefit of bondholders?
The Trust Indenture Act of 1939 The Trust Indenture Act of 1939 requires that a trustee be appointed to act for the benefit of bondholders. The Glass-Steagall Act of 1933 (officially the Banking Act of 1933) was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms. The Securities Exchange Act of 1934 governs the trading of U.S. securities in the secondary market. The SarbanesOxley Act of 2002, also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) is commonly known as SarbanesOxley, Sarbox or SOX.
All of the following statements are true when shares of a mutual fund are redeemed EXCEPT
The shareholder will receive the POP next calculated Mutual fund shares are redeemed at the NAV next calculated. They are purchased at the POP.
Which of the following statements is not accurate with respect to a warrant?
There is no secondary market available for these securities. There is an active secondary market for warrants, as well as for rights and other equity related instruments.
Which statement about industrial development revenue bonds is false?
They are based on the municipality's credit quality Industrial development revenue bonds are a type of taxable municipal security that is issued by a municipality on behalf of a corporation. Specifically, the municipality will issue debt to build a facility on behalf of a corporation and then lease that facility to the corporation. Because the bonds are backed by lease payments made by the corporation, the debt is the responsibility and credit quality of the corporation.
Which of the following debt instruments is always issued at a discount?
Treasury Bills Treasury Bills are always issued at a discount and mature to their face value, as they are zero coupon securities. All zeroes are issued at a discount.
Which of the following could be issued in conjunction with a debt instrument to entice investor interest and offer equity upside potential?
Warrants A warrant is a security typically issued in conjunction with a debt instrument that entitles the purchaser of that instrument to buy shares of the issuer's common stock at a set price during a given time period. In this context, warrants serve to entice investor interest (usually as a detachable equity "sweetener") in riskier classes of securities such as non-investment grade bonds and mezzanine debt, by providing an increase to the security's overall return.
Final settlement of a municipal syndicate account must be completed
Within 30 calendar days The final settlement of the municipal syndicate account must be effected within 30 calendar days. Settlement of designated credits must be disclosed and paid within 10 business days.
A registered representative sends 10 clients a letter recommending that they sell shares of ABC Pharmaceuticals before the company declares bankruptcy. This is based on the rep's own opinion and research, and the firm has not investigated the potential for bankruptcy. Is this a compliance problem?
Yes, because it violates suitability requirements This is a suitability violation. Specifically, it violates the requirement that the firm perform reasonable basis suitability before any recommendation is made. The client to whom communication containing a recommendation is sent has a right to request information supporting the recommendation. This will be the information uncovered in the firm's reasonable basis suitability investigation. It must reflect views of the firm, not a specific rep.
Saving for the future is a primary investment goal for many people. Which of the following products may help an investor achieve this goal?
Zero-coupon bonds Zero-coupon bonds may be beneficial to help people save for future events, such as a child's college education, or retirement. Zero-coupon bonds are usually long term with maturities of 10 or more years. Because of this structure, zero-coupon bonds are useful to investors planning for a long-range goal, such as retirement or a child's college education.
All of the following would result in a statutory disqualification except
a conviction for a securities related felony 11 years ago A statutory disqualifcation will occur if a registered representative is conviction of any felony or a securities or fraud related misdemeanor in the past 10 years. Once statutory disqualified, the individual cannot be associated with a FINRA member firm unless they receive a waiver from FINRA.
Mutual fund investors generally are given a disclosure document before they make their first investment. It is called
a summary prospectus. Mutual fund investors must be given a summary prospectus at or prior to the time of the first purchase in a fund. It is a compilation of highlights from the longer prospectus. A summary prospectus includes the fund's investment objectives, fee structure, and other pertinent information.
The net asset value (NAV) of Investment Company X is 23.00. A recent trade occurred at 21.50. This is most likely an example of a
closed end fund A closed end investment company may trade at a premium or a discount to its net asset value.
Edgar is about to receive his first distribution from a non-qualified variable annuity that he began funding several years ago. He asks you if he will have to pay any taxes on this distribution. You should tell Edgar that
he will have to pay taxes on all funds received in excess of his original contribution Distributions from non-qualified variable annuities are subject to tax liability on the amount in excess of the original contribution (which was funded with after-tax dollars).
To earn a profit on a short sale position, the short sale transaction price must be
higher than the buy-to-cover price. A short sale is a bet that a stock's price will fall i.e., the price at which the short sale is covered (buy-to-cover price) is lower than the short sale transaction price.
Losses from direct participation programs can be used to offset
income from limited partnerships Losses from DPP's can be used to offset passive gains, such as income from limited partnerships.
The agreement between a municipal bondholder and the issuer is found in the
indenture The agreement between the issuer of the municipal bond and the investor is contained in the bond indenture.
All of the following risks are common with ADR ownership EXCEPT
interest rate risk. Interest rate risk is typically more common with debt instruments; ADRs are equity investments. Political risk, exchange rate risk and inflationary risk are all risks that must be evaluated by ADR owners. Inflationary risk can be significant because it can cause devaluation of the currency in the home country of the ADR.
Call options can be beneficial if an investor
is trying to protect a short position in an equity position Call options are commonly used to hedge (or protect) a short position in an underlying security. If the value of the security that has been sold short increases (thereby producing a potential loss), the value of the call option would increase, providing an offset to the total position.
A Real Estate Investment Trust (REIT) is a security that is categorized as a(n)
neither an investment company nor a direct participation program (DPP). A Real Estate Investment Trust is legally structured as a trust; it is not a type of investment company or direct participation program.
An investor considering making a bond purchase in a deflationary environment may be more attracted to a(n)
outstanding issue of debt In a deflationary environment, investors may be more attracted to outstanding debt, which will likely carry higher interest rates than newly issued debt, given that interest rates are likely lower in the current economic landscape.
The interest income on federal agency securities is
taxed at all levels The interest income on federal agency securities (GNMA, FNMA) is taxed at the federal, state, and local level. As a reminder, the interest income on treasury securities is taxed at the federal level only.
All of the following statements are true of a callable convertible preferred issue EXCEPT that
the stockholder must surrender the preferred when called or lose the right to par value The advantage of convertible preferred stock is the opportunity to participate in any appreciation in the value of the common stock. In return for this potential benefit, the preferred pays a lower rate than nonconvertible preferred. Stockholders are always required to surrender the stock when it is called, but they will usually be paid a premium over par value. Additionally, dividends cease on the call date. Note that this is an "except" question.
An investor sells a call option for a premium of $3 and a strike price of $85. If the market value of the underlying stock is $83, the option has an intrinsic value of
zero. Intrinsic value is the amount an option is in-the-money, which is the current market value strike price for calls and strike price current market value for puts. If an option is out-of-the-money, as in this example, then intrinsic value is zero.
