Series 3 Study Terms

a bond quoted at 102.4% is trading at

$1024

Categories of preferred stock

- Straight preferred - Cumulative preferred - Convertible preferred - Participating preferred - Callable preferred - Adjustable Rate Preferred

Sovereign Debt Securities

- issued by national government - safety dependent on the nation's economy

Section 457 Plans

-deferred compensation plan (yearly deduction for deferred amount) -for employees of state, political subdivision of state, and any agency of a state -also allowed for hospitals, charities, unions etc -NOT allowed for churches Key Points: -exempt from ERISA, no NDR -Tax-exempt organizations: only highly compensated persons -Governmental: any employee/contractor may participate -distributions may NOT be rolled into an IRA -NO 10% early withdrawal penalty -Can have 457 and 403(b) and make max contr. to both -Loans only available to government plans, higher restrictions, not required to offer

Full power of attorney

-deposit or withdraw cash or securities -make investment decisions for the account owner

Are the following bonds trading at premium or a discount? 1. 7% bond, 6.25% basis 2. 7% bond, 7.64% basis 3. 5% bond, 4.85% basis 4. 6% bond, 6.45% basis

1. Premium; 2. Discount 3. Premium 4. Discount

if the yield on the previous bond quoted at a 3.78 basis should fall to a yield of 3.65%, we would say the yield has dropped by

13 basis points

US T Bills

4,8,13,26, and 52 week maturities - NEVER longer than 52 weeks

IRA Rollover

60 days. An IRA account owner may take temporary possession of the account funds to move the retirement account to another custodian

A debenture is issued with the backing of A. the general credit of the corporation. B. a pledge of real estate. C. a pledge of equipment. D. the ability to levy taxes

A

An individual's net worth is A. the difference between the individual's assets and the individual's liabilities. B. best determined by examining the individual's personal income statement. C. largely irrelevant in identifying the individual's investment objectives. D. another term for discretionary income

A

One of the most important characteristics of a profit-sharing plan is that A. the employer is not required to make a contribution if the company has no profits. B. it favors older employees. C. the employer may choose who participates and who doesn't. D. contributions are made with after-tax dollars and therefore only the growth is taxed at distribution.

A

The bond counsel's services in providing the legal opinion associated with a new issue of municipal bonds is the responsibility of A. the issuer. B. the underwriter. C. the investor. D. the MSRB.

A

Which of the following accounts could be opened without any legal documents? A. UTMA B. Trust C. Estate D. Pension plan

A

The BOD of DDC omitted dividends in 2017 on their $100 par 6% noncumulative preferred stock. In 2018, a $2 preferred dividend was paid. For DDC, 2019 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2019 to pay a common dividend? A. $6 B. $8 C. $12 D. $16

A A 6% dividend on a $100 par means a $6 dividend per share each year. Because this preferred stock is noncumulative, any missed dividends do not have to be paid before common dividends can be declared

A bond issue that may be retired in advance of maturity at the option of the issuer is said to have A. a callable feature. B. an optional reserve. C. a conversion feature. D. a cumulative feature

A A bond that is callable has a provision that the issuer, at its option, may redeem that bond at a specified price known as the call or redemption price.

If Alpha Enterprises, Inc., wants to open a cash account, a firm must have all of the following documents on file except A. a hypothecation agreement. B. a new account form. C. a copy of the corporate charter. D. a copy of the corporate resolution.

A A hypothecation agreement is only needed to open a margin account. Any cash account must have a new account form on file. For corporate account, the corporation's charter must be provided as proof that the corporation exists. In addition, a corporate resolution is needed to designate the officer(s) authorized to enter orders.

Cindy Castle purchased 100 shares of XYC common stock for $19 per share on February 12, 2019. She received a 10% stock dividend three months later on May 18. She sold all of her XYC at $13 per share in June of the same year. What are the tax consequences of her trades? A. $470 short-term loss B. $575 short-term loss; $105 long-term gain C. $575 long-term loss D. $575 long-term gain, $105 short-term loss

A Castle paid $1,900 for 100 shares. She received an additional 10 shares from the stock dividend. Then, she sold all 110 shares for $1,430 (110 at $13). Because the transactions all took place in less than a year, the transaction was a short-term loss.

Rank the following securities from the same issuer from most suitable to least suitable for a client whose primary objective is income with relative safety. I. Cumulative preferred stock II. Convertible preferred stock III. Common stock IV. Warrant A. I, II, III, IV B. I, III, II, IV C. III, I, IV, II D. II, III, IV, I

A For a client seeking income with some safety, preferred stock—especially one that is cumulative—would be the most suitable of the choices given. Convertible preferred stock generally pays a lower dividend rate than other preferred stocks

A mutual fund portfolio consists entirely of stocks of companies with either new products just released in the marketplace or companies holding patents pending. This mutual fund is best described as A) a special situation fund. B) an index fund. C) a combination fund. D) a Dow theory fund.

A Special situation funds buy securities of companies that are considered to be in a position to benefit from special nonrecurring situations. Those could be new management, new products, patents pending, takeover, or turnaround situations.

A general partner is considered to have a conflict of interest with the business of a limited partnership if she A) borrows money from the business. B) manages the business. C) loans money to the business. D) acts as agent for the business.

A The general partner manages the business and acts as agent for the business. The general partner may loan money to the partnership at a reasonable rate of interest but may not borrow from the partnership.

Eurodollar bond

A dollar-denominated bond issued outside the US. These bonds pay principal and interest in US dollars

403(B) plans

A tax-sheltered annuity, also known as a 403(b) plan, is a retirement plan used by employees of public schools and non-profits. Similar to a 401(k), it allows individuals to make pre-tax (tax-deductible) contributions. The investments in the plan grow tax-deferred and all distributions from the plan are taxed as ordinary income.

Generally speaking, nonqualified retirement plans A. are funded with after-tax dollars. B. must have a trust agreement. C. may not discriminate with regard to who can participate. D. must have IRS approval.

A. Generally speaking, nonqualified retirement plans are funded with aftertax dollars.

S&P Bond Ratings

AAA AA A BBB BB B CCC CC C

Moodys Ratings

Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C

Deferred Compensation Plan

Agreement between a company an an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement.

Term Maturity

All principal matures at a single date in the future. Term bonds are quoted by price, are called Dollar bonds

Contribution Limits for IRAs

An individual may contribute to both a traditional IRA and a Roth IRA. However, the maximum combined contribution is $6,000 (or $7,000, if 50 or older)

Balloon Maturity

An issuer pays part of a bond's maturity before the final maturity date, but the largest portion is paid off at maturity.

Before making a recommendation to a client, a registered representative is I. required to perform a reasonable-basis suitability analysis. II. not required to perform a reasonable-basis suitability analysis. III. required to perform a customer-specific suitability analysis. IV. not required to perform a customer-specific suitability analysis. A. I and III B. I and IV C. II and III D. II and IV

Answer: A FINRA requires members and their registered representative who wish to make recommendations to perform both a reasonable-basis suitability analysis and a customer-specific suitability analysis

An investor owning 400 shares of XYZ notices that the company will be engaging in a 3:2 stock split. As a result of this action, the investor will receive how many additional shares? A. 100 B. 200 C. 400 D. 600

B

The maximum amount that may be invested in a Coverdell ESA in one year is A. $500 per parent. B. $2,000 per child. C. $500 per couple. D. $2,000 per couple

B

When opening a margin account, it is mandatory that the customer sign A. the credit agreement and the loan consent agreement. B. the credit agreement and hypothecation agreement. C. the hypothecation agreement and the loan consent agreement. D. the credit agreement only.

B

Which of the following is properly referred to as an investment goal rather than objective? A. Current income B. Endowing a scholarship at your alma mater C. Conservative growth D. Speculation

B

Which of the following would be considered nonfinancial investment considerations on a customer profile? A. Total fixed assets B. Attitude toward risk C. Monthly income available for investment D. Amount saved in a 401(k) plan

B

A type of payroll deduction plan that allows employees to purchase the company stock at a discount from the purchase price is called A. a preemptive right. B. an employee stock purchase plan. C. a profit-sharing plan. D. a money purchase plan.

B A type of payroll deduction plan that allows employees to purchase the company stock at a discount from the purchase price is called an employee stock purchase plan. A preemptive right does permit the purchase of stock at a discount, but is offered to existing shareholders, not employees

Which of the following choices would be a suitable recommendation for an investor who likes a fixed dividend but also would like to take advantage of capital appreciation if the company's common stock rises? A. Cumulative preferred stock B. Convertible preferred stock C. Adjustable-rate preferred stock D. Participating preferred stock

B Convertible preferred stock has a fixed-stated dividend and can be converted to the company common stock if the price of the common stock appreciates

All of the following statements are generally true about dollar bonds except A. they are term bonds. B. they are serial bonds. C. they have a sinking fund provision. D. they are quoted as a percentage of par.

B Dollar bonds are quoted as a percentage of par. That means in dollars and cents (hence the reason for their name). These are invariably term bonds because serial bonds are quoted on yield basis. With the principal payout due in a lump sum at the end of the term, a sinking fund is usually added to provide for the ultimate payof

The term municipal fund security refers to A) an advance refunded municipal bond. B) a Section 529 savings plan. C) a municipal bond with a sinking fund. D) a mutual fund whose portfolio is exclusively municipal bonds.

B Section 529 plans, used primary for saving for college, are legally considered municipal fund securities.

An investor purchases a corporate zero coupon bond at a price of $510. The bond matures in seven years. Four years later, the bond is sold at a price of $690. What are the tax consequences of the sale? A. Gain of $180 B. Loss of $100 C. Loss of $310 D. No gain or loss until maturity

B The amount of the discount is $490 ($1,000 - $510). This must be accreted over the seven years until maturity. The annual accretion is $70 ($490 ÷ 7 years). After four years, there is $280 of accretion (4 × $70). Because the annual accretion is added to the investor's cost basis, the basis is now $790 ($510 + $280). The bond's sale price of $690 is $100 below the accreted basis. That means a loss of $100.

All of the following are financial considerations in a customer profile except A. the balance in the 401(k) plan. B. wanting to retire at age 65. C. annual income. D. the remaining balance on the home mortgage.

B Wanting to retire at 65 is a goal and a nonfinancial consideration

Florence Forte purchased 100 shares of YXC common stock for $22 per share on February 12, 2018. She received a 10% stock dividend on May 18, 2019. She sold all of her YXC at $25 per share in June of the same year. What are the tax consequences of her trades? A. $500 long-term gain B. $550 long-term gain C. $300 long-term gain; $250 short-term gain D. $500 long-term gain; $50 short-term gain

B We compare the cost to the proceeds. Florence paid $2,200 for 100 shares. She received an additional 10 shares from the stock dividend. Then, she sold all 110 shares for $25 per share—$2,750. The difference between the cost and the proceeds is $550

ABC Company has authorized 3 million shares of common stock. It issued 70% of those shares one year ago. It then purchased 600,000 shares for its treasury. How many shares of ABC stock are outstanding? A. 600,000 B. 1,500,000 C. 2,100,000 D. 3,000,000

B issued stock - treasury stock = outstanding stock Thus, 3,000,000 × 70% = 2,100,000 - 600,000 = 1,500,000

An ADR represents A. a U.S. security trading in a foreign market. B. a foreign security trading in the United States. C. a U.S. security trading in both the United States and a foreign market. D. a foreign security trading in both the United States and a foreign market.

B ADRs are receipts issued by U.S. banks. They represent ownership of a foreign security and trade in the U.S. securities markets.

Subordinated

Belonging to a lower or inferior class or rank - term describing securities with a lower claim

High Yield Bonds

Bonds with a rating of BB, Ba, or lower. Additional risk of default, higher risk higher return

Serial Maturity

Bonds within an issue mature on different dates according to a predetermined schedule.

. How often can an IRA be rolled over to another IRA? A. Once every 60 days B. Once every 90 days C. Once every 12 months D. There are no limits on how often a rollover can occur

C

In designing an investment portfolio for a new client, one of the first things to do is determine the client's A. home address. B. Social Security or tax ID number. C. risk tolerance. D. beneficiary

C

The OTC market is a negotiated market. This is best described by saying that buyers and sellers A. bid and offer in a public place. B. bid and offer continuously. C. arrive at an agreeable price by bargaining. D. must accept prices set by dealers.

C

When a registered representative opens a new options account for a client, in which order must the following actions take place? I. Obtain approval from a qualified supervisor. II. Obtain essential facts from the customer. III. Obtain a signed options agreement. IV. Enter the initial order. A. I, II, III, IV B. I, II, IV, III C. II, I, IV, III D. II, I, III, IV

C

A married 75-year-old employee, whose spouse is 55, works for a manufacturing firm and has $1 million in the firm's 401(k) plan. What is accurate regarding the RMD from the 401(k) at this point in time? A. RMDs should have begun by April 1 of the year following the year in which the participant turned 72. B. There is no required RMD at this time because the spouse is under age 59½. C. RMDs will begin after the employee retires. D. Any RMDs not taken at this time are subject to income taxes plus a 10% penalty

C A participant is not required to take minimum distributions from the employer's 401(k) while still working. After retirement starts, RMDs from a qualified retirement plan must begin by April 1 of the first year after the calendar year in which the plan participant retires from employment with the employer maintaining the plan.

A deferred compensation plan A. must allow all eligible employees to participate. B. is funded through a trust agreement that protects the employee in the event the company goes out of business. C. might not protect the employee from losing the deferred compensation should the employee leave the company before retirement. D. typically benefits younger employees.

C A provision commonly found in deferred compensation plans is that the employee might forfeit some or all of the benefit if she leaves the company before retirement.

Which of the following governmental bodies receive the least amount of their revenues from property taxes? A) School districts B) County governments C) State governments D) Municipalities

C State governments generally do not assess property (ad valorem) taxes. These are assessed by local governments. Generally, state governments receive most of their income from sales and income taxes.

When a bond paying interest at the rate of $80 per year is quoted at 110, which of the following statements is correct? A. The nominal yield is lower than the coupon rate. B. The coupon rate is lower than the nominal yield. C. The current yield (CY) is higher than the yield to maturity. D. The yield to maturity is approximately 7.27%.

C The nominal yield and the coupon rate mean the same thing. In this case, it is 8% ($80 interest on a $1,000 bond is 8%). Therefore, choices A and B cannot be correct. The CY is the $80 in interest divided by the current price of $1,100. Remember, the quote of 110 means 110% of $1,000. That computes to 7.27%. That must be higher than the yield to maturity. This bond is selling at a premium

ABC Corporation has issued $100 million of convertible debentures having a nondilutive covenant. Each debenture is convertible into 40 shares of ABC's common stock. If ABC declares a 2:1 stock split, A. each debenture will be convertible into 20 shares. B. the conversion price of each debenture will be $25 per share. C. the conversion price of each debenture will be $12.50 per share. D. the total value of the debentures will increase to $200 million

C When a debenture is convertible into 40 shares, the conversion price is $25 per share ($1,000 divided by 40 shares). After a 2:1 stock split, the conversion rate will now be twice as many shares (80).

Banker's Acceptance (BA)

Certain corporations in the import-export business will often use BAs as a short term time draft with a specified payment date drawn on a bank. BAs are essentially a postdated check or line of credit. The payment date of a BA is normally between one and 180 days and never more than 270 days.

Financial Information For KYC

Customer Balance Sheet Customer Income Statement

A retail investor opens an account at your firm but only provides minimum information. She wants to invest for retirement in 20 years and is willing to take moderate risk. Which of the following statements best describes the responsibilities of the registered representative handling the account? A. Recommendations cannot be made because the customer refuses to provide income information, personal assets and liabilities, or how much can be invested. B. The account cannot be opened without financial and nonfinancial information. C. Only unsolicited trades can be made in this account. D. The representative is limited to what can be recommended to the customer based on the information that was provided.

D

Under SEC rules, for an unlisted non-Nasdaq stock to avoid being defined as a penny stock, it must have a market price of at least A. $1 per share. B. $2 per share. C. $2.50 per share. D. $5 per share.

D

If a corporation, whose stock is publicly traded, declares bankruptcy, holders of which of the following would be most likely to recover the greatest amount of their investment? A. Control stock B. Senior preferred stock C. Debentures D. Collateral trust certificates

D Creditors of the corporation have the first claim. Secured creditors— those with assets pledged as collateral—are at the "top of the heap." T

All of the following statements regarding RMDs from a 401(k) are true except A. minimum required distributions begin by April 1 of the year following the year in which the participant turns 72. B. RMDs are not required if the participant is still working for that employer. C. RMDs not taken are subject to a 50% penalty. D. RMDs taken after age 72 are taxed at a more favorable long-term capital gains rate

D Minimum required distributions taken after age 72 are taxed, as are all taxable distributions from retirement accounts, such as ordinary income.

Which of the following is an investment constraint? A. Retirement B. Income C. College education D. Time horizon

D One of the most important investment constraints is the investor's time horizon. If you start saving for retirement (a goal) at age 55, you don't have much time to accumulate funds. A short time horizon limits how aggressive the portfolio can be. If you started at age 25, with that long a time horizon, there are many more investment options available. Income is an objective and college education is a goal. That goal is also affected by time horizon. It is much better to start saving for college when a child is very young. You don't want to wait until the teenage years.

ABC Corporation's 4% bond is currently trading at 985/8. That would be price of A. $98.625. B. $980.625. C. $985.80. D. $986.25.

D We do this in two steps. First, the 98 is 98% of $1,000, or $980. Second, we add the 5/8, which is $6.25. That totals $986.25. Remember, the fraction is of $10.00, not $1.00.

According to Standard and Poor's (S&P) rating system, the four highest grades of bonds (from best to lowest grade) are A. Aaa, Aa, A, Baa. B. A, Aa, Aaa, B. C. B, A, AA, AAA. D. AAA, AA, A, BBB

D. Choice A would be correct if the question referred to Moody's.

Investment Grade Debt

Debt obligation with a credit rating of AAA, AA, A, or BBB

Bonds

Debt, represents the issuers indebtedness

ERISA

Employee Retirement Income Security Act Applies to private sector plans(corporate) only. It does not apply to plans for federal or state government workers (public sector plans), nor is it applicable to nonqualified plans..

Negative Response Letter

Generally informs the recipient of the letter of an impending action, and requires the recipient to respond ot act within a specified time frame if the recipient objects to the action. if the recipient does not respond, he is deemed to have consented to the action.

Terms of a bond

Indenture

Penny Stock Risks

Lack of transparency Lack of liquidity No Track Record Pump & Dump

Nonqualified Plans

May be used to favor certain employees, plans do not have to comply with ERISA

Negotiable Certificate of Deposit

Minimum size is $100,000. The most common size is $1 million and they can be more than that. Unsecured time deposits and the money is being loaned to the bank for a spceified period.

Qualified Plans

Offer several specific tax benefits differing from those in nonqualified ones. employer contributions are a current deductible expense, employee contributions are generally made with pretax money, all earnings and growth in the account is tax-deferred until withdrawal, and certain protections are offered to employees under ERISA.

Everytime there is a stock dividend

Prices go down

Rule 2111

Reasonable Basis Suitability Customer Specific Suitability Quantitative Suitability

Keogh Plan

Retirement plans for self-employed people.

Reverse repo

Reverse of a REPO. In this case, the purchaser, not the seller initiates the deal. This is a purchase of securities with an attendant agreement to resell them at a higher price on an agreed upon future date

Preemptive Rights

Rights that entitle shareholders to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered to outside buyers.

Penny Stock Rules

Risk disclosure document Disclosure of quotations Disclosure of compensation Frequency of customer account statements Customer suitability determination

Repurchase Agreements (Repo)

Sale of securities with an agreement to repurchase them at a higher price on an agreed upon future date. Overnight repos are those where the repurchase date is the next day.

Commercial Paper

Short term unsecured paper issued by corporations primarily to raise working capital. Maturities range from 1-270 days although most mature within 90 days

durable power of attorney

Specifically designated person maintains power over the account even upon the grantors incapacitation. Upon death, power is terminated

antidilution feature

The issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend

Call protection

The number of years into the issue before the issuer may exercise the call provision

Customer Identification Program (CIP

Under provisions of the USA patriot act of 2001, financial institutions such as Broker-dealers are required to institute a CIP designed to - Verify the identity of new customers; -maintain records of the information used to verify identity - determine whether the person appears on the Office of foreign assets control (OFAC) list of known or suspected terrorists or terrorist organizations

Debenture

a debt obligation of a corporation backed only by its word and general creditworthiness, written promises of the corporation to pay the principal at its due date and interest on a regular basis.

If the yield to maturity is higher than the coupon the bond is trading at

a discount

Payroll Deduction Plan

allows employees to authorize their employer to deduct specified amounts for retirement savings from their paychecks; the money is deducted after taxes are paid and may be invested in any number of retirement vehicles as the employee's option.

Coupon rates with a conversion feature are

always lower

Guaranteed Bonds

backed by a company other than the issuer, such as a parent company

Eurobond

bond denominated in a currency other than that of the country in which it is sold

Zero Coupon Bonds

bonds that pay no annual interest but are sold at a discount below par, thus compensating investors in the form of capital appreciation

Dark Pools

electronic trading networks where participants can anonymously buy or sell large blocks of securities

Senior Bond

has a higher priority claim to the firm's earnings and/or assets in the event of liquidation

Accrued Interest

interest revenue or expense that is recognized before cash has been exchanged

Duration

measure the sensitivity of a debt security when interest rates change. It is a measurement of time it takes for the cash flow to repay the invested principal. The higher the coupon rate, the shorter the duration, and the lower the coupon, the longer the duration.

FINRA Rule 2165

permits firms to place a temporary hold (15 business days) on disbursements from the accounts of individuals aged 65 or older, and individuals aged 18 or older whom firms reasonably believe have an impairment that prevents them from protecting their own interests (a specified adult). Up to 55 days

Nominal Yield

the interest rate, also known as the "coupon rate" which is named on the bond certificate