Exam 8
A registered representative is convicted of misdemeanor DUI; therefore, A) the employing broker-dealer is likely to suspend the registered representative. B) this must be updated on the Form U4 within 10 days. C) this must be updated on the Form U4 within 30 days. D) updating of the Form U4 is not required.
D) updating of the Form U4 is not required. When the conviction is for a misdemeanor, only if it involves a financial matter is it considered a material event requiring an update to the Form U4. If this were a reportable offense, the updating would have to be done within 30 days. It would be highly unusual for a firm to discipline an associated person for this infraction. Even then, regulators are the ones who suspend a registration, not the member firm.
Hedge funds
For a number of legal reasons, one of those being avoiding the need to register with the SEC, hedge funds are generally structured as limited partnerships with a maximum of 100 investors.
Which of the following factors is considered when determining whether underwriting compensation is fair and reasonable? The size of the offering The type of underwriting commitment The market conditions The profitability of the underwriter
I and II
Which of the following statements regarding Treasury receipts are true? Interest is paid annually. Interest is paid at maturity. Interest is taxed annually. Interest is taxed at maturity.
II and III Treasury receipts are zero-coupon bonds issued by broker-dealers. Zero-coupon bonds pay all of their interest at maturity. They are issued at a discount and redeemed at par, and the difference represents the interest earned. For zeroes with a maturity of more than one year, the interest (or discount) must be accreted each year—and is taxable that year as income. This is called imputed interest.
Intangible Drilling Costs
Labor, fuel, or drilling rig rental Intangible drilling costs are the noncapital costs of putting in a well. They are currently deductible expenses such as fuel, wages, and rent. An intangible drilling cost is one that, after expenditure, has no salvage value.
Money Market Fund
Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share). Beta is a measure of volatility; money market funds have low betas.
Which of the following securities can generate phantom income?
TIPS bonds TIPS bonds adjust the principal value each six months based on the inflation rate. If the inflation rate is positive, the value increases. Those increases are reported as income each year even though the investor does not receive the appreciation until the bonds mature (or are sold).
All of the following are required by limited partnerships
A) a partnership agreement. B) a subscription agreement. C) a certificate of limited partnership. The SEC does not approve limited partnerships or any other securities. In public offerings of limited partnerships (as opposed to private placements), federal registration and a prospectus are required.
current yield
a bond's annual coupon divided by its price
The amount paid into a defined contribution plan is set by A) the employee's age. B) the trust agreement. C) the ERISA-defined contribution requirements. D) the employer's profits.
B) the trust agreement. A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.
A significant increase in which of the following types of orders may cause a bull market to accelerate? A) Buy limits B) Short sales C) Buy stops D) Sell stops
C) Buy stops If the market is rising, only those orders on the order book above the current market will be executed. Buy stops and sell limits are both entered above the prevailing market price. Of these two, only buy orders (in this case buy stops) will accelerate a rise in the market.
Which of the following statements regarding Sallie Mae debentures are true? A) They are backed by the taxing power of the U.S. government. B) Interest is paid monthly. C) Interest is tax exempt at the state and local levels. D) Sallie Mae securities finance building public schools across the country.
C) Interest is tax exempt at the state and local levels. Interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation. As a general rule, debentures pay interest every six months. Sallie Mae is not backed by the taxing power of the U.S. government, and money is used for student loans for higher education.
All of the following are examples of short-term municipal obligations except A) tax and revenue anticipation note (TRAN). B) bond anticipation notes (BAN). C) tax anticipation note (TAN). D) state and local government securities (SLGS).
state and local government securities (SLGS). SLGS are issued not by a municipality, but by the U.S. Treasury Department to assist local governments in complying with arbitrage restrictions imposed by the IRS. The other choices are examples of short-term funding used by municipalities.
Listed options on U.S. exchanges are available on all of the following currencies except
the U.S. dollar. In the U.S., exchange-listed currency option contracts exist on foreign currencies, not on the U.S. dollar. With U.S. exchange-listed currency option contracts, the U.S. dollar is the base currency to which movements in the foreign currency is compared.
Current Ration Equation
Current Ratio = Current Assets / Current Liabilities
A customer sells 100 shares of ABC at $15 and uses the proceeds to purchase 200 shares of MNO for $7.50. In order to avoid a violation of FINRA's 5% markup policy, the member firm should not charge a commission of more than A) $15. B) $75. C) $125. D) $150.
75 This is an example of a proceeds transaction. In order to stay within compliance of FINRA's 5% markup policy, the member firm should treat this as a single transaction. The most the member firm should charge would be 5% of $1,500 (the principal value of one side of the trade), or $75.
What type of account allows for the irrevocable transfer of almost any kind of asset, including works of art and real estate, for the benefit of a minor? A) UTMA B) Coverdell ESA C) Tenants in common D) UGMA
A UTMA expanded the types of property that are transferable into a custodial account. One of the main differences between an UTMA and UGMA is the types of assets they can hold. Assets within an UGMA are limited to cash (bank deposits), stocks, bonds, mutual funds, and other securities and insurance policies. UTMAs allow almost any kind of asset, including works of art and real estate. As with other assets, the title is registered in the name of a custodian for the benefit of the minor. Although there are a few states that allow the custodial property to remain in an UTMA account until the minor reaches age 25, more than half of the states set the age of majority for UTMA at 21 instead of 18.
A registered representative of a FINRA member firm is going to present a seminar on retirement planning. It will be a slide show, and no specific advice will be given. The expected attendance is approximately 50 people. Under the FINRA rule on communications with the public, A) the slides are considered a retail communication and need principal approval before first use. B) a registered principal is required to attend to ensure that the standards of ethical conduct are maintained. C) this seminar can take place only if the recommendations are tailored to the specific needs of the audience. D) this is a public appearance and no approvals are necessary.
A Under the FINRA rule on communications with the public, it is only an unscripted presentation that needs no principal approval. The use of slides changes things, and once more than 25 individuals will see them within a 30-calendar-day period, those slides are retail communications. As such, principal approval is required. Because the question states that no specific advice will be given, suitability of recommendations is irrelevant. However, all presentations at seminars should consider the nature of the audience and keep the presentation at the appropriate level.
A customer opens the following options position: Long 1 KALE Oct 70 put @4¼; short 1 KALE Oct 80 put @10. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $575; maximum loss is $425; breakeven point is $74.25. B) Maximum gain is $425; maximum loss is $575; breakeven point is $74.25. C) Maximum gain is $575; maximum loss is $425; breakeven point is $75.75. D) Maximum gain is $425; maximum loss is $575; breakeven point is $75.75.
A) Maximum gain is $575; maximum loss is $425; breakeven point is $74.25. The first step is to identify the position. This is a credit put spread. It is a credit spread because the option sold brought in a higher premium than the one purchased. The credit of $575 is the most the investor can make. This is a bullish spread (the customer bought the low strike price and sold the high strike price). If the customer is correct and the stock rises above $80, the options will expire unexercised and the customer will keep that net credit of $575. If the customer is wrong and the price of the KALE stock falls below $70, the short put at 80 will be exercised, causing the customer to purchase the stock at $80. Then, the customer will exercise the long 70 put and sell that stock at $70. This results in a loss of $1,000 reduced by the $575 net credit, or $425 maximum loss. It is always easier to recognize that the maximum loss is the difference in strike prices minus the maximum profit. In this question, the spread is 10 points and the maximum profit is the credit of 5¾ points. That makes the maximum loss the remaining 4¼ points. Breakeven follows the put-down rule. Subtract the net premium from the higher strike price ($80 - 5.75 = $74.25).
FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. Which of the following is not one of those three? A) Qualitative-basis suitability B) Customer-specific suitability C) Quantitative suitability D) Reasonable-basis suitability
A) Qualitative-basis suitability The rule does not refer to qualitative-basis suitability. It does say that a recommendation may be suitable if at least some investors would benefit from it (reasonable-basis suitability). The recommendation should also take the specific customer's profile into consideration (customer-specific suitability). Finally, although a specific recommendation may be suitable, when looking at the quantity of trading, there could be a churning violation (quantitative suitability).
A key term in the SEC's lexicon is transparency. It is often said that "disclosure is the religion of the SEC." When investigating a security for a potential recommendation to a customer, it is likely that the least transparency exists when the stock trades in A) the grey market. B) the listed market. C) the OTC market. D) the secondary market.
A) the grey market. Securities trading on the "grey market" are not quoted on any U.S. quotation system. Broker-dealers are not willing or able to publicly quote these securities because of a lack of investor interest, company information availability, or regulatory compliance. Without quotes and reports to the SEC, there is little if any transparency. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
For the underwriting of a municipal bond issue, competitive bids are submitted by underwriters as A) a best efforts underwriting commitment. B) a firm commitment. C) a standby underwriting commitment. D) an all-or-none commitment.
B) a firm commitment. For new municipal bond issues, underwriters must submit bids for the entire bond offering—a firm commitment. Standby commitments are used only for corporate stock rights offerings. Best efforts commitments are used for corporate securities, and an all-or-none commitment is a type of best efforts commitment.
A technical analyst is concerned with all of the following trends except A) reversals. B) price-to-earnings (P/E) ratios. C) changes in the DJIA. D) support levels.
B) price-to-earnings (P/E) ratios. Technical analysts are more interested in forecasting market trends and securities prices than in studying individual corporations. Therefore, they are concerned with market prices, trading volumes, changes in the Dow Jones Industrial Average, reversals, support and resistance levels, advance/decline lines, short interest, and many other factors that might help them with buying and selling decisions. Fundamental analysts, on the other hand, concentrate on a stock's intrinsic quality and are concerned with P/E ratios and earnings per share.
A FINRA member firm wishes to encourage its registered representatives to sell more limited partnership DPPs. As an incentive, the firm offers an all-expenses-paid trip to a popular vacation resort for those reaching certain sales targets. FINRA rules provide that A) the target must be based on the total production of associated persons with respect to specific investment company securities distributed by the member. B) the target must be based on the total production of associated persons with respect to all direct participation programs offered by the member. C) sales incentives are limited to gifts that do not exceed $100 in value. D) the member can weight the credits differently for different investment companies.
B) the target must be based on the total production of associated persons with respect to all direct participation programs offered by the member. FINRA made a slight modification to its rules on noncash compensation because of the SEC's Regulation BI (best interest). Specifically, if there is to be any kind of sales contest or other method of incentivizing registered representatives, sales of the particular product type must give equal weighting to all of those investments sold by the firm. This applies largely, but not exclusively, to sales of investment companies, variable products of life insurance companies, and direct participation programs. Previously, firms could give higher weighting to sales of proprietary products, but that ended on June 30, 2020. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
If a new joint tenants with right of survivorship account is opened, all of the following statements are true except A) in the event of death, the decedent's interest in the account goes to the other party. B) mail may be sent to either party (with the permission of each party). C) checks may be drawn in the name of either party. D) orders may be given by either party.
C) checks may be drawn in the name of either party. While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.
An issuer may be able to diversify a single municipal bond issue by maturity because A) many municipal securities are very marketable. B) municipal securities are mostly long term. C) many municipal bonds are serial issues. D) every state issues municipal bonds.
C) many municipal bonds are serial issues. Serial maturity means that within a single issue, portions of the issue mature at intervals. Municipal bonds typically mature serially.
Excluded from filing with FINRA. Included in the list of exclusions would be retail communications A) dealing with specific index funds that previously have been filed with FINRA and that are to be used, with the only change being a recommendation of index exchange-traded funds from the same sponsoring organization. B) that do no more than identify and recommend a specific registered investment company or family of registered investment companies. C) that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker. D) that do not make any financial or investment recommendation, but only promote a service offered by the member.
C) that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker. Explanation A communication limited to identifying the member's exchange or market-maker symbol is excluded from the FINRA filing requirements. A communication that identifies and recommends a specific investment company or companies must be filed. When previously filed material is used, no filing is necessary as long as there is no material change. However, changing from recommending specific funds to specific ETFs is a material change and would require filing. A retail communication promoting a service offered by a member firm is a communication that would likely need filing with FINRA.
A 38-year-old investor places $25,000 into a qualified single premium deferred variable annuity. Twenty-two years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $11,750. B) $16,450. C) $25,200. D) $18,000.
D) $18,000. Because this is a qualified annuity, the entire withdrawal is taxable. The surrender value of $72,000 has a cost basis of $0.00. That $72,000 is taxed at the marginal rate of 25%. Because the investor is older than 59½ (38 + 22 = 60), there is no additional 10% penalty tax. Effectively, this is a 25% tax on $72,000.
A corporation with an outstanding convertible debenture issue could force conversion by A) issuing new debentures with a higher coupon rate. B) soliciting proxies from the common shareholders asking them to vote for mandatory conversion. C) decreasing the coupon rate on the debenture to a level where the dividend on the common stock provides a higher return. D) publishing an announcement that the debenture holders have thirty days to tender their bonds at the call price.
D) publishing an announcement that the debenture holders have thirty days to tender their bonds at the call price. Most convertible debt securities are callable, usually at a price slightly above the par value. When the price of the underlying common stock rises to a point where the converted value of the bond is worth more than the par value, issuers will frequently exercise their call privilege. Because the call price is usually significantly less than the converted value, it is only common sense that the debenture holders will exercise their conversion privilege. For example, when the market price of the common stock is $25 per share, a $1,000 convertible debenture with a conversion ratio of 50 shares per bond, has a conversion value of $1,250 (50 shares time $25 per share). By calling the bonds at the stated call price, perhaps 102 or 103, the company can force the bond holders to convert the bonds. Using our example, why would investors hold on to the bonds knowing that, within about 30 days, they're going to get a check for $1,020 or so for each bond when they could convert and own shares worth $1,250 per bond. This is known as forced conversion. Shareholders do note vote on a management decision to call in debt. The coupon rate on the debenture is fixed; the issuer doesn't have the ability to change it. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback
All of the following statements regarding over-the-counter (OTC) markets are true except A) a bid is the highest price a dealer will pay when buying. B) an offer is the lowest price a dealer will accept when selling. C) securities traded OTC include American depositary receipts (ADRs) and municipal bonds. D) the OTC market is an auction market.
D) the OTC market is an auction market. The OTC market is a negotiated market in which market makers post their quotes to facilitate negotiating price. A bid is the highest price a buyer is willing to pay, and an offer is the lowest price a seller is willing to accept. Among the securities traded OTC, both ADRs and municipal securities would be included.
Which of the following statements regarding Treasury bills T-bills are true? hich of the following statements regarding Treasury bills T-bills are true? The government auctions T-bills at a discount. The difference between the cost of a T-bill and its value at maturity is treated as a capital gain. T-bills have longer maturities than T-notes. The minimum denomination of a T-bill is $100 face amount.
I and IV T-bills are sold at a discount and can be purchased in minimum denominations of $100. The difference between the purchase price and the maturity value is taxed as interest income, not as a capital gain. Treasury bills are short-term investments maturing in 1 year or less. T-notes have maturities of 2 to 10 years. T-bonds have maturities of longer than 10 years.
An investor purchases five Mount Vernon Port Authority J & J 1 bonds in a regular way transaction on Wednesday, October 18. How many days of accrued interest are added to the bond's price? A) 110 B) 108 C) 114 D) 109
Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. This bond pays interest on January and July 1 (J & J 1). Therefore, July, August, and September each have 30 days of accrued interest, and October has 19 days of accrued interest; this totals 109 days. Settlement date is Friday, October 20. The easiest way to do these accrued interest questions is to set the dates up numerically. That is, the settlement date is 10/20 and the previous interest payment date is 7/01. Do the subtraction: 10/20 -7/01 3/19 3 times 30 = 90 +19 = 109
A customer, age 62, wants to retire at age 64 and has accumulated investments in an IRA currently valued at $500,000. The IRA portfolio consisting of all mutual funds is allocated as follows: 70% growth funds, 10% corporate bond funds, and 20% sector funds. Still wanting to use mutual funds, which might be the most suitable reallocation of the portfolio as this customer nears retirement? A) 80% broad market index funds, 10% corporate bond funds, 10% U.S. government bond funds B) 30% municipal bond funds, 30% corporate bond funds, 40% growth funds C) 70% municipal bond funds, 20% broad market index funds, 10% sector funds D) 60% U.S. government bond funds, 30% broad market index funds, 10% growth funds
Moving toward retirement, the reallocation should move the portfolio away from equities and sector funds toward fixed-income funds. U.S. government securities funds accommodate that, and the U.S. government securities within the fund are considered safe with no default risk. Coupling the U.S. government bond funds with smaller percentages in broad market index and growth funds that mirror the market can help the portfolio keep pace with inflation. Remember that utilizing municipal securities in a tax-favored account, such as an IRA, would be considered unsuitable because the interest paid by municipal bonds is already tax free.
REITS A) invest at least 75% of their assets in real estate-related activities. B) distribute at least 90% of their investment income to shareholders. C) be organized as trusts.
REITs engage in real estate activities and can qualify for favorable tax treatment if they invest at least 75% of their assets in real estate-related activities and pass through at least 90% of their net investment income to their shareholders. Although they can pass through income, they cannot pass through any losses. dividends paid by REITs to their shareholders are not recognized as qualified and are therefore taxable to the investor at their full ordinary income tax rate. The shares are traded on exchanges or over the counter and are considered liquid, and having professionally managed assets should be a plus. While real estate valuation and price movements are subject to many forces, historically, real estate has provided some hedge against the movements of other equity securities.
Depletion allowances in oil and gas programs are based on the amount of oil A) in reserve. B) lost to shrinkage. C) sold. D) extracted.
SOLD
Which of the following is least likely to be a risk concern to an investor in an oil and gas DPP? A) Lack of liquidity B) Risk of an IRS audit C) Deductions for intangible drilling costs D) Legislative risk
The deductions for intangible drilling costs are a benefit rather than a risk. If the choice said excess intangible drilling costs, then the investor might be subject to the alternative minimum tax (AMT). On the exam, you can count on DPPs having liquidity risk. It is generally believed that tax returns showing ownership of a DPP have a greater audit risk. Because one of the features of a DPP is the tax treatment, a potential change to the tax laws by the Congress constitutes legislative risk
The partnership agreement
The partnership agreement describes the roles of the general partners (GPs) and the limited partners (LPs). The certificate of limited partnership is a document filed with the limited partnership's home state for legal recognition. The LPs complete the subscription agreement (essentially the request to purchase) disclosing important personal information. The most important is the financial information, such as income and net worth. The GPs use that in determining suitability. The subscription agreement is not effective, and the LPs are not accepted into the partnership, until it is signed by the GPs. The prospectus is a document that discloses all material facts regarding the investment to investors. Note that if the program is a private placement, in lieu of a prospectus, the investor receives a private placement memorandum containing essentially the same information.
Which of the followin g permits the highest annual contributions?A) A traditional nondeductible IRA B) A SEP IRA C) A traditional spousal IRA for which the contribution has been deducted D) A Coverdell Education Savings Account
Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for education savings accounts or traditional or Roth IRAs.
Regular way settlement must occur on the second business day after the trade date for all of the following transactions except A) a broker-dealer buying a corporate bond from another dealer. B) a broker-dealer buying a Treasury bond for its own account. C) a customer selling a municipal bond through a broker-dealer. D) a customer buying closed-end fund shares through a broker-dealer.
a broker-dealer buying a Treasury bond for its own account. Regular way settlement for U.S. government bonds occurs on the business day after the trade date (T+1). Corporate bonds and closed-end funds settle regular way (T+2). Municipal Securities Rulemaking Board rules also require two-day settlement (T+2) of municipal bond secondary transactions.
A municipal bond dealer gives your firm's trading desk an estimate of a municipal security's market value. This is A) a firm quote. B) a workable indication. C) holding a quote. D) a nominal quote.
a nominal quote. A nominal, or subject, quotation indicates a dealer's estimate of a security's market value. Nominal quotations are provided for informational purposes only and are permitted if the quotes are clearly labeled as such. A workable indication is usually a firm bid price from a dealer and holding a quote is one that is firm for a specified time.
It is not uncommon for one company to attempt to take over another by acquiring a significant percentage of its voting shares. This is called
a tender offer.
Each of the following persons is accredited under Rule 501 of Regulation D
an officer of the issuer. an institution. an individual with annual income of $200,000 or more in the past two years. Accredited investors include individuals with annual incomes of $200,000 or more; individuals with a net worth of $1 million or more, not including net equity in a primary residence; officers or directors of the issuer; and institutions.
Why do hedge funds tend to limit the participation to a maximum of 100 investors? A) Keeping it to 100 or less avoids the need to give the investors voting rights. B) Keeping it to 100 or less avoids the need to register with the SEC. C) The more investors in the fund, the greater the likelihood that some may want their money back before the end of the lockup period. D) Having more than 100 investors makes the fund more difficult to control.
b) Keeping it to 100 or less avoids the need to register with the SEC. Under SEC rules, once the number of investors in a hedge fund exceeds 100, the fund will most likely have to register with the SEC. That puts many restrictions on the fund manager's flexibility.
Working Capital
current assets - current liabilities
All of the following statements regarding a transfer on death (TOD) account are correct except A) the owner of the account may change beneficiaries at will. B) only those assets held at the broker-dealer are transferred. C) probate is avoided. D) estate taxes are reduced.
estate taxes are reduced. A TOD account avoids probate but not estate taxes. The owner of the account may change beneficiaries and their percentages as she wishes. The TOD account is an account at a specific broker-dealer and only relates to the assets in that account.
When compared to statutory voting, cumulative voting gives an advantage to A) management rather than the board of directors. B) majority stockholders. C) participating preferred stockholders. D) minority stockholders.
minority stockholders. Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board.
Variable annuities generally include an assumed interest rate. This is A) the annual rate at which annuity payments will increase. B) the annual dividend rate that will be paid to contract holders. C) the rate used to illustrate the future growth prospects of the contract. D) the annual rate of return required to maintain the level of annuity payments.
the annual rate of return required to maintain the level of annuity payments. The assumed interest rate (AIR) is the rate the insurance company assumes the separate account will earn during the payout period. If the assumption is wrong, the monthly payments will be adjusted accordingly. If the separate account earns more than the AIR, the next month's payment is increased. If the separate account earns less than the AIR, the next month's payment is reduced. If the account earns the assumed rate, monthly payments will not change.
