s 60

A broker-dealer may not act in which of the following capacities?

A broker-dealer may act as both an agent and a principal for a client in the same transaction

A market maker gives a firm quote of 15 - 15.50 for a stock. If the party on the other side decides to buy 800 shares, how many shares is the market maker obligated to sell at 15.50?

"100 shares" When a market maker gives a firm quote with no size indicated, the market maker is obligated to buy or sell at least 100 shares of the stock. The market maker has the option to sell more at that price if requested.

Which of the following registered representative statements regarding the sale of a mutual fund's Class B shares having a 7 year back-end load (CDSC) is appropriate?

"All of your money goes to work since there is no up-front sales charge" Registered representatives may never refer to Class B shares or any other loaded shares as no load. To claim one share class will outperform another is unacceptable since relative performance is based on market conditions and the effect of potentially differing ongoing expenses over the client's holding period. An RR's job is to explain all of the share classes available as opposed to simply recommending a certain type as best. The only factual statement is "there is no up-front sales charge." The RR should explain that this feature comes with a price- potentially higher ongoing costs when compared to Class A shares. Please note that after the 7-year period, all class B shares convert to class A shares.

In the OTC market, a market maker stands ready to purchase a security at its:

"Bid" A market maker in a security gives a quote consisting of a bid and an ask (offer). The bid is the price the market maker is willing to pay for the stock. The offer is the price at which the market maker is willing to sell the stock. Therefore, the customer pays the asked price (plus a transaction fee) when buying stock and receives the bid price (minus a transaction fee) when selling stock in the OTC market.

While the general level of equity values is on the rise, an equity mutual fund's NAV has fallen. As a result, an investor could surmise which of the following? I. The portfolio was not highly diversified II. The fund value was diluted through greater share issuance III. The fund had declared and paid dividends and capital gains IV. Fund expenses were rising

"I and III." The NAV of a mutual fund is computed at the close of each business day (forward priced) with the following formula: Assets of the fund - liabilities of the fund / outstanding shares of the fund = The NAV per share. Therefore, if the fund declared and paid dividends and capital gains, there would have been an outflow of cash thereby lowering total assets and resulting in a decreasing NAV. Remember, when new shares are issued, there is an inflow of cash and an increase of outstanding shares and NAV does not change. Also, if the fund was not highly diversified, it could have missed out on gains and, as a result, the value of the securities of the portfolio could have decreased, thereby decreasing NAV.

Which of the following is/are characteristic of selling short? I. Investors look for volatility II. Investors anticipate the price of the stock will decline III. Investors borrow shares from their broker and replace these borrowed shares at a later date IV. Investors make money when the price of the stock rises

"II and III only" An investor sells short with the hope that the price of the stock will fall. The investor borrows shares from the broker-dealer, sells the borrowed shares, and must replace those borrowed shares at a later date. If the price of the stock falls, the investor can purchase the stock at this lower price, replace the borrowed shares, and keep the difference in these prices as profit. However, if the stock starts to rise, the investor's potential loss is unlimited.

A market maker, according to the Securities Exchange Act of 1934, is defined as

"a registered broker-dealer firm that assumes the risks of holding securities in inventory in order to facilitate its trading." Market makers help satisfy the supply and demand of financial markets by facilitating buy and sell orders. They are compensated for the risk of holding assets in a principal capacity. The securities held in their inventory face a decline in value before being sold to a buyer. Therefore, they charge a spread for each security they offer, (aka the bid -ask spread), and high volume trading adds up to large daily profits. The NASDAQ is a prime example of market maker operation.

A "market" order to purchase shares of a closed end fund is quoted at 7.10 bid / 7.20 offered . It has a current NAV of 7.50. This represents a per share

$0.40 premium Closed end funds are traded in the secondary market and are priced at Bid (NAV) and Asked (POP). There are a limited number of shares, so to be purchased in the second market, someone else must sell their shares. As a result, the share price does not necessarily reflect the NAV. Any difference between the share price and the NAV is known as the premium or discount depending upon if the share price is lower (discount) or higher (premium) than NAV. Because the current price of $7.50 is $0.40 higher than NAV, it is trading at a premium. Many investors like to search for closed-end funds trading at a discount from NAV because they believe the price is almost certain to return to NAV. So they buy, hold, and wait.

Shareholders owning 8% cumulative preferred stock, where the issuing company paid 7% dividend in 2016 and 5% in 2017, will receive a 2018 dividend in what amount, before common shareholders can receive a dividend?

$12

An investor purchased stock with an initial investment of $10,000. One year later, its market value is reported at $10,500. The investment paid a dividend of $500 during the year. Since this investor is in the combined 30% tax bracket, the after-tax yield is approximately

3.5%

M places an order with his broker to buy 100 shares of ABC.com at 33.35. Mr. M's order may be executed at:

33.10 Limit orders must be executed at the specified price or better. Since Mr. M wanted to buy at 33.35, his order would be executed at that price or any price lower than 33.35. If the order were to sell at 33.35, the order would be executed at that price or any price higher than 33.35.

An investor is 28 years old with limited investment experience and would like to create an income stream from a large inheritance. Which of the following investment vehicles would best meet his objective?

A mutual fund that invests in high quality corporate bonds

Ms. B sells short 100 shares of ABC at 95. Two weeks later, the stock drops to a price of 89. In an attempt to protect her profit, Ms. B would enter a:

Buy stop order at 90

After examining a broker-dealer, the Administrator sanctioned the firm for keeping stock owned by customers and stock owned by the broker-dealer together in a way that did not clearly indicate who owned which shares. This prohibited practice is called:

Commingling

Currency exchange risk is borne by mutual fund investors in each of the following funds EXCEPT:

Domestic growth fund Funds that invest in foreign securities, either stocks or bonds, have exchange-rate or currency risk. This is the risk that the value of income or gains from the security will be adversely affected by changes in the value of the foreign currency. Funds that invest only in domestic (U.S.) securities do not carry this risk for U.S. investors.

Which of these investment adviser firm's employees, according to the Uniform Securities Act, is considered an investment adviser representative?

Employee making investment recommendations

XYZ has $100 million of 4% convertible debentures outstanding, currently trading at a premium, with a current yield of 3%. The bond's indenture contains a nondilutive clause and has a conversion price of $50 per share. The board of directors of XYZ declared a 10% stock dividend payable to owners of record as of March 15, 2012. The ex-dividend date is also March 15. On the ex-dividend date, owners of the debenture will:

Have the conversion price of the bond adjusted to $45.45 Since the investor owns a bond and not the stock, the stock dividend will not have an impact on the amount of interest received, nor will the investor receive additional shares. However, the conversion price will be adjusted downward, due to the nondilutive covenant in the bond's indenture. The conversion ratio is calculated as the par value divided by the conversion price. The conversion ratio is 20 shares ($1,000 / $50). This must be adjusted upward to 22 shares to reflect the 10% stock dividend (20 x 110% = 22). To calculate the conversion price, the par value is divided by the new ratio ($1,000 / 22) for a new conversion price of $45.45.

Which TWO of the following statements are TRUE? I. A customer will sell at the ask. II. A customer will sell at the bid. III. A customer will buy at the bid. IV. A customer will buy at the ask.

II and IV

Which TWO of the following are TRUE when a firm executing a trade acts as an agent? I. A markup is charged II. The firm buys or sells on a client's behalf III. The firm buys or sells for its own account IV. A commission is charged

II and IV When a firm acts as an agent, it buys or sells on a client's behalf and charges a commission for this service. The firm takes no risk when acting in this middleman or matchmaker capacity.

K and C have been friends since high school. C is an agent of a broker-dealer, while K is a wealthy musician. Together they open a joint brokerage account. They each deposit $30,000 and agree to split any profits equally. What are the regulations for this arrangement?

It is acceptable if K, C, and C's broker-dealer agree to it in writing In order to share in a customer's account, an agent must obtain permission from her employer and the customer. Since the agent will be investing, she is also considered a customer and will also be required to give permission. Additionally, profits and losses must be shared proportionately, based on the amounts both parties contribute to the account.

A market order to buy should be executed at the:

Lowest offer available

A broker-dealer acting as a market maker will:

Mark down the stock from the bid when buying

Which of the following best describes an entity that sells from an inventory of maintained securities, acts as an auctioneer in certain market structures, keeps a limit order book, and processes numerous orders in a short time?

Market Maker. This is a textbook definition of what activities a market maker engages in.

If a broker-dealer is publishing both bid and ask prices for securities in the secondary market, it is acting as a:

Market maker

An order for execution in which the client only indicates the desire to buy or sell, the quantity, and the name of the company is called a:

Market order

Broker-dealers are required to keep a copy of all orders, EXCEPT:

Orders to subscribe to a rights offering

In a declining market, the type of order that would potentially contribute to the decline is a:

Sell stop. Orders to sell at the market have the potential of worsening a market decline. This eliminates choice (a), a buy order. Sell limit orders (choice d) are placed above the current market price and would be executed only in a rising market. The sell stop limit, choice (b), is placed below the market and is activated when there is a trade at or below the stop price. However, the order will be executed only if the market subsequently moves up. The sell stop order, choice (c), will be triggered when the security trades at or below (through) the stop price and then becomes a market order to sell, potentially pushing the market further down.

Two individuals are separately registered as agents for unaffiliated broker-dealers in State B. They have been friends since childhood and have both been contacted by a former high school classmate who is looking to open an account. Unsure of who should take on the new client, they agree to split commissions equally regardless of which firm is chosen. How would NASAA view this arrangement?

Since the agents work for unaffiliated broker-dealers, the arrangement is prohibited

Common shareholders have the right to vote their shares at all annual and special meetings with respect to important corporate issues like voting for members of the Board of Directors, stock splits and changes of business objectives. Which of the following voting methods give shareholders with significant holdings a greater degree of power over those with fewer shares?

Statutory voting rights

All of the following choices are required to be included in a trade blotter, EXCEPT:

The amount of interest or dividends the investor will receive

At what price does a market specialist buy stock?

The bid price. " The spread between the highest bid price and the lowest bid price among various market makers in a particular security is known as the inside market spread. Price quotes between market makers feature a lower ask and higher bid than quotes made to retail investors in the same security. The "inside market" ensures liquidity and facilitates trading in the market. Please note that only FINRA members can purchase stock at the bid price. Retail clients (non-members) always purchase at the ask price. The market maker spread is the difference between the price at which the market maker is willing to buy a security and the price at which it is willing to sell for. The spread represents the profit that the market maker earns from trading the security.

An over-the-counter trader, when talking about the spread, is referring to:

The difference between the bid and asked price of a stock The over-the-counter trader, when referring to the spread, is referring to the difference between the current bid and asked price of a stock.

A bond's duration measures which of the following?

The interest rate sensitivity of a bond Duration measures the interest rate sensitivity of a bond. It can be used to predict how a small change in interest rates would affect the bond's market price. Remember, the lower the nominal rate and the longer the maturity, the greater the duration. Also, the greater the duration, the more susceptible the bond is to interest rate fluctuations.

A broker-dealer owns 100 shares of ABCO stock which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base the markup on:

The lowest offer on the Nasdaq system

An OTC market maker would justify the amount of its markup based on all of the following, EXCEPT:

The market maker's cost

Eligibility to vote in shareholder elections is determined by which of the following dates?

The record date

Broker-Dealer A is a publicly traded company listed on the New York Stock Exchange. Which of the following statements is TRUE regarding an agent of Broker-Dealer A who wants to sell securities of his company to a client?

This is acceptable if the agent discloses the relationship verbally prior to the transaction and in writing before the settlement date

A client requests that her agent display a quote in a thinly traded security. The client is the majority shareholder in this security and the broker-dealer honors the request and displays the quote. Which of the following statements is TRUE?

This would be permissible if the broker-dealer believed the quote was bona fide A broker-dealer is permitted to publish quotes (bid and ask prices) on behalf of its clients or for its own account. The broker-dealer must believe the quotes are bona fide and not intended to manipulate the market price of a security. If the quotes are not bona fide and the broker-dealer publishes them, they would have engaged in an unethical business practice.

With a prior written customer agreement, confirmations for buy-sell money-market funds may be delivered to the client

Within 5 business days before the transaction month. With the client's prior written agreement, the B/D' may send a confirmation to a client within 5 business days of the end of the month that the transaction took place.

The rate of return that will be earned on a bond purchased today and held until the end of its term is called

Yield-to-maturity

As compared to corporate bonds, Treasury bonds

provide yields that are exempt from state and local taxes

As opposed to a speculator, a hedger's main goal is

to reduce the risk associated with a long position

As opposed to a speculator, a hedger's main goal is

to reduce the risk associated with a long position Market risk is a type of systematic risk, as it affects securities across the board. It is the risk that the investor will lose value due to a market decline. Unfortunately, diversification does not help. If the overall market is in a freefall, they are all going down. That is why we would bet a percentage of the portfolio against the market to protect against systematic risk. Investors use options, futures, and ETF's to protect against overall market declines. In an effort to reduce the risk of holding stocks long, an investor will hedge by betting against the market with a percentage of his portfolio.